Last year Mary Shapiro started talking about bonuses on Wall Street and how bad they were. (That's almost funny given the source) and the SEC has finally gotten around to addressing the boss' concern.
On Wednesday, the SEC proposed new rules aimed at reigning in incentive comp. The rules, which stem from Section 956 of the Dodd-Frank Act, would prohibit incentive-based compensation arrangements that encourage “inappropriate” risk-taking or could lead to “material financial loss” at broker-dealers and investment advisers with $1 billion or more of assets.
The current proposal would not affect most investment advisors, and so far, recruiting bonuses are safe - so long as they do not provide additional bonuses for performance, and according to one source, so long as there are no claw-backs based on performance.
However, the traditional recruiting bonus does have a claw-back provision of sorts - if the broker leaves the firm before the term of the note and the additional compensation agreement, he has to pay back the note. In reality, the broker is paying back the bonus, and that is a claw back provision. Couple that with a termination for lack of production, and you have a true performance based bonus, which the SEC is going to ban.
The rule is not final yet, but if it is approved as is, we are going to have an interesting situation. Firms will be forced to restructure their bonus and notes, and are going to have to address the termination for lack of performance issue. There is certainly no way that firms are going to remove that clause, and they cannot realistically remove recruiting bonuses, which puts them in a bit of a bind.
My money is on the third choice - an exemption for repayment of loans on termination for lack of production. I'll update as events move forward.
On Wednesday, the SEC proposed new rules aimed at reigning in incentive comp. The rules, which stem from Section 956 of the Dodd-Frank Act, would prohibit incentive-based compensation arrangements that encourage “inappropriate” risk-taking or could lead to “material financial loss” at broker-dealers and investment advisers with $1 billion or more of assets.
The current proposal would not affect most investment advisors, and so far, recruiting bonuses are safe - so long as they do not provide additional bonuses for performance, and according to one source, so long as there are no claw-backs based on performance.
However, the traditional recruiting bonus does have a claw-back provision of sorts - if the broker leaves the firm before the term of the note and the additional compensation agreement, he has to pay back the note. In reality, the broker is paying back the bonus, and that is a claw back provision. Couple that with a termination for lack of production, and you have a true performance based bonus, which the SEC is going to ban.
The rule is not final yet, but if it is approved as is, we are going to have an interesting situation. Firms will be forced to restructure their bonus and notes, and are going to have to address the termination for lack of performance issue. There is certainly no way that firms are going to remove that clause, and they cannot realistically remove recruiting bonuses, which puts them in a bit of a bind.
My money is on the third choice - an exemption for repayment of loans on termination for lack of production. I'll update as events move forward.
