In recent remarks, Securities and Exchange Commission Commissioner Lizarraga called on the SEC to move forward to implement the rulemaking mandate in Section 956 of the Dodd-Frank Act.  The Commissioner was speaking at an Americans for Financial Reform event.  Section 956 required six regulators (the banking agencies, the Federal Housing Finance Agency and the SEC) to propose regulations that would prohibit incentive-based compensation arrangements that encourage inappropriate risks by a covered financial institution that has assets of $1 billion or more by providing an executive officer, employee, director, or principal stockholder of the institution with excessive compensation, fees or benefits, or that could lead to a material financial loss to the institution.  The agencies jointly proposed rules in 2011 and 2016.  In April this year, three of the banking agencies proposed a new rulemaking essentially reproposing the 2016 rules with some modifications (to account for the passage of time and other changes).  In part, the reproposal was prompted by the failures of Silicon Valley Bank and a few others.  The Commissioner contends in his remarks that in connection with the global financial crisis “pay structures often encouraged big bets that maximized short-term profits but ignored bigger longer-term risks that threatened to take down our entire financial system.”  He points out that this particular Dodd-Frank Act rulemaking is mandatory and had a deadline.  He argues that “Section 956 is about ensuring sound compensation practices that ensure there is sensitivity to downside risks. It will benefit investors and contribute to the financial stability of our very interconnected system.”

Action on this is included on the SEC’s rulemaking agenda, though it remains to be seen whether this will be taken up in the near future.  See the full text of the Commissioner’s comments here, https://www.sec.gov/news/speech/lizarraga-remarks-section-956-webinar-061724.

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