Incentive-Based Compensation Faces New Restrictions

In long awaited Dodd-Frank requirements aimed at limiting excessive risk-taking behavior, U.S. Financial Regulators released proposed restrictions on incentive-based compensation for top executives at financial firms.

The proposal introduces a tiered system with varying restrictions based on the size of the assets of the financial firm. Firms with more than $250 billion in assets will face the strictest restrictions, followed by firms with assets between $50 billion and $250 billion. Risk-management, record-keeping and other monitoring tools must be put in place for firms between $1 billion and $50 billion, while institutions with less than $1 billion in assets would not be subject to the new regulations.

The restrictions include deferment of incentive-based compensation, forfeiture provisions, and the power of financial institutions to claw back incentive pay for up to seven years.

As asset thresholds are based on assets that firms have on their own balance sheets, most hedge funds, private equity funds and mutual funds that manage client assets will either not be included in the rule when it goes final or be in the lowest tier. The comment period for the new proposal closes on July 22, 2016. Click here to see proposal.

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