This week a group of 14 Senate Democrats including Elizabeth Warren (D-MA), Robert Menendez (D-NJ) and Richard Blumenthal (D-CT) sent a letter to the six regulatory entities charged with implementing Dodd-Frank Section 956, the Financial Services Incentive Compensation Rules, calling for the prompt completion and implementation of the rules and that the regulators strengthen far-reaching deferral and clawback windows included in the 2016 re-proposal. Although the letter leverages the Wells Fargo cross selling scandal to target requirements that apply to banks, as discussed below, it may be just a first volley foreshadowing a protracted public policy debate over mandates targeted at addressing risk in both executive and non-executive incentive plans even outside the financial services industry.
The letter, sent to agencies including the Federal Reserve Board, Office of the Comptroller, and SEC seeks to subject banks to more stringent requirements, including:
- Lengthening of the Deferral Period: The letter characterizes the proposed requirements that banks defer 60% of short-term incentives for four years as too short, noting that it took over four years for the Wells Fargo scandal to come to light. Interestingly, the letter does not suggest what a correct deferral period should be. Perhaps the authors do so implicitly by noting that "financial crisis penalties were not levied until approximately a decade after the fraudulent activities occurred."
- Make Clawbacks and Downward Adjustments Mandatory In All Circumstances: As proposed, Section 956 requires that companies include provisions in incentive plans allowing for the execution of downward adjustments and clawbacks. However, the rules, although providing an extensive framework for events and even how to calculate amounts, recognized that there may be cases where adjustments are not in the best interest of the company. Thus the proposed rule provides boards discretion over whether to ultimately exercise the adjustment, but requires detailed disclosure of the decision if discretion is exercised. The clawbacks provision has a similar discretion and disclosure element. The letter however, asks regulators to remove any discretion from the downward adjustment and clawback mechanisms in the rule, thus removing Board judgement from situations that are contextual and highly fact specific.
- Expand the Clawback Triggers: Out of concern that the clawback provision in 956 only covers individual misconduct, the letter calls for an expanded trigger that would cover "failures in risk management" or "culpable negligence in employee oversight" or similar circumstances.
Meanwhile, several Senate Democrats, including Elizabeth Warren and Bernie Sanders sent a separate letter to Wells Fargo's auditor, KPMG, noting "none of KPMG's audits identified any concerns with illegal behavior that resulted in the creation of over two million unauthorized accounts by thousands of employees - and that ultimately resulted in the resignation of Wells Fargo's CE0 and a decline in the company's stock price of more than 10% in the days after the settlement with federal regulators." The letter raises questions about the effectiveness of Sarbanes-Oxley as well as the Public Company Accounting Oversight Board which requires independent audits of public company SEC Filings. The letter also asks KPMG as series of questions about its auditing findings at Wells Fargo and its communications with the company, asking for a response no later than November 28.