By Joanne Cursinella, J.D.
The Business Roundtable, an association of chief executive officers of leading U.S. companies, has submitted its views to the SEC just before the comment period expires on the joint rulemaking proposal dealing with incentive-based compensation arrangements pursuant to Section 956 of the Dodd-Frank Act. The roundtable expressed a number of concerns about the proposal, including that it is “overly prescriptive, could create additional tax compliance difficulties for the individuals and institutions to which it applies, and would make U.S. financial institutions less globally competitive,” and then provided its own recommendations.
The SEC, along with the Office of the Comptroller of Currency, the Department of Treasury, the Fed, the FDIC, the Federal Housing Finance Agency, and the National Credit Union Administration jointly proposed the changes earlier this year.
Recommendations. In its letter, the roundtable provided a number of suggestions which it said “are intended to realize the goals of Section 956 of the Dodd-Frank Act while minimizing negative consequences for U.S. companies and the U.S. economy.”
Covered persons. The roundtable first suggested that the definition of “covered persons” should be revised to be limited to senior executive officers and significant risk-takers because, under the current proposal, the definition is too broad. The proposal would expand oversight, governance, and record keeping requirements for employees, placing entities at a competitive disadvantage when it comes to talent recruitment and retention.
Bright line requirements limit flexibility. Next, the roundtable said that the “bright line” minimum deferral requirements that would mandate deferral of at least 40 percent to 60 percent of incentive compensation for senior executive officers and significant risk-takers at Level 1 and Level 2 covered institutions would leave those institutions with “little flexibility to create incentive arrangements that reflect their business goals, compensation philosophies, and cultures.” It suggested instead that the bright line deferral requirement should be removed. If it remains, then the deferral requirement should only apply to awards granted under a long-term incentive plan, or the deferral requirement should apply to annual bonuses on a reduced basis.
Tax consequences. Under the proposal, all incentive compensation awarded by Level 1 and Level 2 covered institutions to senior executive officers and significant risk-takers must be subject to recoupment, under certain circumstances, for at least seven years from the vesting date. As a consequence, an employee who is required to repay compensation that was paid in a prior tax year faces complex tax consequences and employees who are required to repay incentive compensation could end up in a worse position than if they had never received the compensation in the first place, the roundtable noted. It recommended that if an employee must repay amounts under the proposal’s clawback requirement, those amounts should be limited to the actual amount received by the employee.
Excessive written reporting requirements. Finally, the roundtable said that “excessive” written reporting requirements should be reduced. Each covered institution should have the flexibility to create a review process that fits within its existing governance framework and that is considered by the institution’s governance team as an efficient way to monitor compliance with the proposals, it said.