Large brokerage firms that are part of bank holding companies could be forced to review their compensation arrangements for brokers and advisers as a result of a new pay proposal introduced Thursday by the Federal Reserve Board.
“Firms will have to assess whether their incentive-compensation arrangements are balanced, taking into account the potential risks,” Liz Varley, managing director of government affairs at the Securities Industry and Financial Markets Association, said in an interview Friday. “That is going to be an individual firm-by-firm assessment based on their business model.”
The guidance on compensation from the Fed aims to ensure that financial services firms do not have compensation practices that would encourage them to take excessive risk.
In a statement yesterday after the Fed released the details of its pay proposal, Timothy Ryan, SIFMA's president and CEO, noted that the Fed's proposal will likely affect “hundreds, if not thousands, of professionals working in our industry.”
Mr. Ryan noted that SIFMA will work with the Fed on the regulatory proposal. “Ensuring pay is tied to sufficient risk management, long-term performance and shareholder interests are goals we share,” he stated.
The Fed guidance has two parts. In one part, the Fed will review the policies of 28 large complex banking organizations to determine if their compensation policies are risk-appropriate.
In the second part, the Fed will review compensation practices at regional, community and other banking organizations. Those reviews will be tailored to take into account the size, complexity and characteristics of the banking organization.
Inappropriate practices regarding bonuses and compensation can give incentives to both senior executives or lower-level employees such as traders or mortgage officers to take imprudent risks that significantly hurt the firm, the Fed said in a release announcing the proposal.
The reviews will cover all employees who have the ability to affect materially the riskiness of the organization, either individually or as part of a group, the Fed said. “Compensation practices at some banking organizations have led to misaligned incentives and excessive risk taking,” Federal Reserve Chairman Ben Bernanke said in a release yesterday.
While the Fed will accept public comments on the proposal for 30 days after it is published in the Federal Register, firms are expected to begin acting on the guidance immediately.