WASHINGTON — Finalizing the Dodd-Frank Act's unfinished executive compensation rule might be a
To avoid at least some of those, several progressive groups are urging financial regulators to finish the Dodd-Frank executive compensation rule, which would give the Federal Deposit Insurance Corp. the ability to claw back the compensation of some failed-bank executives — a growing priority for the Biden administration. Congress required the agencies to finalize the rule by May 2011, but while a rule was proposed in 2016, it
The groups — which include Americans for Financial Reform Education Fund, Public Citizen, the Revolving Door Project, Governing for Impact, and the Center for LGBTQ Advancement & Research — asked financial regulators in a letter to be sent Tuesday to finish that 2016 plan rather than restart the rulemaking process. Beginning that process over again could leave the Biden administration vulnerable to more legal challenges than if the executive branch finalized a rule out of the one proposed in 2016, the groups argue.
Six agencies are involved in the rulemaking, including the Office of the Comptroller of the Currency, the Federal Reserve, the FDIC, the National Credit Union Administration, the Securities and Exchange Commission and the Federal Housing Finance Agency.
"More than a decade after the [Dodd-Frank Act's] 2011 deadline, and after several failed starts — the most recent of which was the 2016 proposal — your agencies have yet to finalize a rule under section 956, leaving the financial system at risk," the groups say in the letter. "Without it, covered institutions are subject to different requirements depending on their primary regulator, leading to regulatory arbitrage. And without having finalized a regulation, your agencies have potentially opened themselves up to litigation."
Specifically, the agencies should finalize the rule before the middle of 2024 to avoid a Congressional Review Act challenge, the letter says, should Democrats do poorly in the 2024 elections.
"The 2024 election could usher in a new President, Senate, and House, allowing them to overturn rules finalized by the Biden regulatory agencies within 60 legislative days of Congress's adjournment in December," the groups said in the letter. "This special look-back period has traditionally begun running somewhere between May and September."
Revisiting the 2016 rule should also not pose a risk under the Administrative Procedure Act, especially if the agencies introduce a brief comment period before finalizing the rule, the progressive groups argue. However, courts have in the past decided that an additional comment period is unnecessary if the original record is "still fresh."
"There is an argument that the 2016 rulemaking record is still fresh, even after seven years; after all, the basic dynamics of inappropriate financial incentives do not change," the groups said.
Instead, the agencies could face litigation should they fail to finalize a rule, according to the Administrative Procedure Act, the groups argue.
"Competitors to institutions who would be subject to the rule have standing to sue; and those competitors would be likely to prevail," according to the letter.
In fact, policy watchers say the unfinished state of the executive compensation rule is one of the outstanding legal questions about the rulemaking going forward. Under Republican and Democratic administrations, regulators have prioritized other elements of Dodd-Frank, such as the Fed's focus on
But while the executive compensation rule has lingered at the agencies due to a combination of attrition and turnover among top policymakers, experts said, the recent bank failures have made it more likely that regulators will complete it.
Karen Petrou, managing partner at Federal Financial Analytics, said that the wide range of financial regulators required to approve the final rule, from banking agencies to market cops, has historically made it difficult for the rule to be finalized. Currently the Biden administration has control of all of the agencies except for the NCUA, which still has two of three board seats allocated to Republican members.
"Sec. 956 required all the financial regulators to write a single rule," Petrou said in an email. "That proved impossible not only due to the difficulty of doing so in general, but also the very different missions of each agency subsequently complicated by Trump appointees after the election."
Ian Katz, managing director of Capital Alpha Partners, said that regulators nominated by both parties have simply had issues that have seemed more urgent compared with the executive compensation rule, but that the recent bank failures have made it more of a priority.
"It's hard to explain how it's taken this long except to say it clearly hasn't been a very high priority for the regulators," he said in an email. "I think there's more interest in this issue now than there has been in many years. So I believe the chances for action on this have improved significantly and there's a good chance this finally gets done."
