Wall Street Bonus Rules Seen as Urgent Ahead of Trump Takeover

  • Regulators rushing to finish compensation limits by January
  • Incentive pay rule targets excessive risk taking at banks

What Are President-Elect Trump's Plans for Wall Street?

U.S. regulators are rushing to issue sweeping limits on Wall Street pay by January, said people familiar with the effort, before President-elect Donald Trump begins replacing officials installed by Barack Obama.

The rule on finance industry bonuses is the last major unfinished piece of the Dodd-Frank Act, which was created to strengthen regulations and prevent a repeat of the 2008 economic crisis. The government agencies are making last-minute adjustments to the measure to complete it within the next two months, according to two people who asked not to be named because the process isn’t public.

Trump promised on the campaign trail that he would tear up Dodd-Frank and issue a temporary moratorium on new U.S. regulations, so it’s unclear what the financial agencies will be able to accomplish next year. Regulators are under increased pressure to do something about Wall Street pay after senior executives at Wells Fargo & Co. were awarded big compensation packages while unauthorized accounts were being created for customers.

The incentive compensation rule, meant to rein in excessively risky behavior across a wide swath of the financial industry, would force executives to wait longer to cash out their bonuses. It would also give companies as long as seven years to take back pay tied to misconduct, even if the bonus is already vested or the person no longer works for the firm. The measure, which could take more than a year to implement, was proposed in April by six agencies including the Federal Reserve and Securities and Exchange Commission.

Forgoing Money

The compensation measure, as proposed, could also make it harder for Trump to hire people from the banking industry for his administration because it prevents executives at financial firms from receiving multi-million dollar windfalls when they leave for government jobs. It’s been customary for Wall Street, when one of its own gets tapped for a public post, to accelerate payments of stock options and other awards that may not be due for years. So, if it’s approved, the rule could mean any bankers or financiers taking a job in the Trump Administration leave money on the table.

There are arcane ways that a president and Congress can kill new regulations, including the rarely used Congressional Review Act, which lets lawmakers overturn administrative actions within a certain period of time. However, it’s unclear how the Trump administration would react to the compensation changes -- the president-elect has bashed Wall Street and the tax advantages of hedge fund managers, but his circle of advisers is partially populated by people from that world.

Skewed incentives had a hand in the economic meltdown. Some critics contend that finance executives exposed their companies to excessive risks when racing to take home the biggest possible payouts. So Dodd-Frank demanded that regulators reduce those kinds of incentives as a way to help safeguard the financial system. Delaying bonuses has become common on Wall Street, though not all firms defer them for as long as the four years proposed.

The ban on bonus practices that reward inappropriate risk-taking would strike hardest at senior executives and key employees at financial companies with more than $250 billion in assets, but the rule would also impact compensation at asset managers and smaller banks.

Regional Banks

In a July letter to regulators, some large regional banks including U.S. Bancorp and PNC Financial Services Group Inc. complained the rule “does not account for the variations that exist among our business models and risk profiles.”

Spokesmen for the pay rule regulators, which also include the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, National Credit Union Administration and Federal Housing Finance Agency, declined to comment on finalizing the rule.

Many of the top officials at those agencies will likely remain in office into next year. The term for FDIC Chairman Martin Gruenberg doesn’t expire until November 2017, and OCC chief Thomas Curry can stay on until at least April. The term for the most prominent of the bank regulators, Fed Governor Daniel Tarullo, doesn’t end until 2022, but there’s been speculation by industry analysts that he may leave soon. SEC Chair Mary Jo White also hasn’t made her plans public.

Though some of Obama’s appointments may ride out much of 2017 at their agencies, there are openings on the boards of the Fed and FDIC, and commission spots at the SEC, which Trump can seek to fill right away. Those new officials would be able to weigh in on pending rules.

Regulators at the six agencies were summoned by Obama to the White House 10 months ago. He urged them to move faster on their Dodd-Frank mandate to stamp out pay practices that encourage what he called “big, reckless risks."

— With assistance by Joe Light, and Benjamin Bain

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE