Wells Fargo Scandal Hurts Wall Street’s Bonus Rule BattleBy
Bank’s settlement could influence agencies writing regulations
Wells Fargo critics clamoring for clawbacks from executives
Lobbyists who’ve been bashing away at Washington’s latest effort to regulate Wall Street bonuses may find the Wells Fargo & Co. scandal just grabbed the hammer from their hands.
The lender’s turmoil over fake accounts, fees that shouldn’t have been charged and thousands of firings comes at a bad time. It created an awkward backdrop for House Republicans this week, as some of them hyped a bill that would repeal much of the Dodd-Frank Act. Wells Fargo’s settlement with regulators also emerged just as banks are arguing that a proposed pay rule meant to rein in excessively risky behavior went way too far.
Facing allegations that demanding sales targets incentivized employees to break the law, Wells Fargo’s conduct in many ways underscores exactly what the Federal Reserve and other agencies were trying to tackle in April when they issued their proposal on Wall Street compensation. In addition to forcing executives to wait longer before they can spend their bonuses, it says big banks would have as long as seven years to take back pay from employees tied to major misconduct or enforcement actions, even if the bonus is already vested or the person no longer works for the firm.
“This Wells Fargo scandal has become Exhibit No. 1 for those who support a tough clawback rule,” said Ian Katz, who tracks regulatory developments at Capital Alpha Partners in Washington. He said public outrage over the $185 million of fines imposed on the San Francisco-based bank makes softening the proposal less likely.
Brian Gardner, an analyst at Keefe Bruyette & Woods, agreed, saying in a Thursday note to clients that Wells Fargo’s settlement might actually pressure regulators to “toughen proposed rules on executive compensation.”
An array of consumer advocates and lawmakers already started calling for the bank to take back bonuses.
Carrie Tolstedt -- the 56-year-old former head of Wells Fargo’s community-banking arm whose retirement was announced two months before the government settlement -- has drawn a spotlight because of the millions she still stands to receive. Though news accounts may have inflated the bonus money at stake, figures pulled from regulatory filings show Tolstedt has at least $17 million in unvested stock that could be vulnerable to clawbacks.
A March proxy statement from Wells Fargo praised Tolstedt for record deposit levels and “continued success in increasing online and mobile banking customers.”
U.S. Representative Elijah Cummings, the top Democrat on the House Committee on Oversight and Government Reform, met with Wells Fargo President and Chief Operating Officer Tim Sloan this week, asking him for documents explaining how the company had used quotas and bonuses that encouraged front-line employees to open more than 2 million deposit and credit-card accounts that customers didn’t authorize. Regulators said 5,300 employees and managers were fired.
Cummings noted: “It is unclear whether the executives who orchestrated this scheme will be held accountable.”
Senator Elizabeth Warren, the Massachusetts Democrat who is among the Banking Committee’s most dedicated Wall Street critics, said Thursday that Chief Executive Officer John Stumpf and other senior executives shouldn’t be able to keep their jobs and “keep raking in millions of dollars in bonuses.” Warren argued in a Bloomberg Television interview that Tolstedt got bonuses based on the amount of fraud in her division, and she said there should “absolutely” be clawbacks at Wells Fargo.
Mark Folk, a Wells Fargo spokesman, declined to comment on Warren’s remarks.
The bank has “strong” policies in place for snatching back bonuses that are meant to “discourage our executives from taking imprudent or excessive risks,” the company said in its proxy. Maintaining such broad clawback procedures -- even if they fall short of what regulators are pursuing -- has become common practice across the industry.
“I think the tools are already there,” said Kelly Malafis, a partner at Compensation Advisory Partners.
But nothing forces banks to adopt the tougher restrictions regulators are working on. The rule has been a long time coming, now six years after Dodd-Frank required it. Meanwhile, lobbyists have been circling.
In June, officials from Goldman Sachs Group Inc., Morgan Stanley, Bank of New York Mellon Corp., Barclays Plc and other firms carried their incentive-compensation wish list to a meeting at the Securities and Exchange Commission -- one of six agencies writing the rule. And in July, a letter from financial-industry lobbyists said the proposal would be expensive to implement, undermine what the industry is already doing to address pay and “place the regulated financial services industry at a harmful competitive disadvantage.”
Wells Fargo weighed in with its own letter in July. The lender argued the proposal is “not appropriately tied to risk.” The bank praised its own approach to bonuses, saying it’s effective in “promoting and rewarding appropriate behaviors.”
If the regulators finish the rule soon, the Wells Fargo incident will be fresh in their minds. Marcus Stanley, policy director for Americans for Financial Reform, is counting on Wells Fargo acting as a shield against bank lobbying.
“I think it will make it more difficult,” Stanley said. “What I’m hoping is that it’ll make it easier for us to lobby to make it tougher.”
— With assistance by Caleb Melby, and Alicia Ritcey