View source for SEC, Prudential Regulators Joint Proposed Rule: Incentive-Based Compensation Arrangements

===Background===

There is evidence that flawed incentive-based compensation practices in the financial industry were one of many factors contributing to the financial crisis that began in 2007. Some compensation arrangements rewarded employees – including non-executive personnel like traders with large position limits, underwriters, and loan officers – for increasing an institution’s revenue or short-term profit without sufficient recognition of the risks the employees’ activities posed to the institutions, and therefore potentially to the broader financial system. 

In 2010, the [[Dodd-Frank Act]] included section 956, which required certain agencies to set rules on incentive-based compensation arrangements for any "cevered financial institution."

In 2011, the joint [[Prudential Regulators]], along with the [[Securities and Exchange Commission]], approved proposed rules on incentive-based compensation arrangements, per the requirement of Section 956.<ref>{{cite web|url=http://www.sec.gov/news/press/2011/2011-57.htm|name=SEC Proposes Rules on Disclosure of Incentive-Based Compensation Arrangements at Financial Institutions|org=SEC|date=March 2, 2011}}</ref> Final rules were added to the Federal Register on April 14, 2011. Among the proposed rules:

*Incentive-based compensation annual reports would be required of qualifying institutions.
*Excessive compensation encouraging inappropriate risk-taking on the part of executives and/or resulting in losses by the institution would be prohibited.
*Compliance policies and procedures regarding incentive-based compensation would be created and enforced.

Since the 2011 Proposed Rule was published, incentive-based compensation practices have evolved in the financial services industry. The Board, the OCC, and the FDIC have gained experience in applying guidance on incentive-based compensation, FHFA has gained supervisory experience in applying compensation-related rules8 adopted under the authority of the Safety and Soundness Act, and foreign jurisdictions have adopted incentive-based compensation remuneration codes, regulations, and guidance. In light of these developments and the comments received on the 2011 Proposed Rule, the Agencies are publishing a new proposed rule to implement section 956.