WASHINGTON — President Biden
But policy observers say there's another route for regulators to bypass Congress, if they want to take it.
A lingering and incomplete section of Dodd-Frank — Section 956 — was meant to curb compensation plans that encourage bankers and other finance executives from taking excessive and reckless risks. Congress required the agencies to finalize the rule by May 2011, but while a rule was
"People really just stopped asking about it," said Michele Alt, a partner at Klaros Group and former lawyer at the Office of the Comptroller of the Currency, where she led several Dodd-Frank rulemakings for the agency, including the executive compensation piece. "It became a distant memory and just left quietly."
Biden didn't reference the unfinished rule when he pushed for Congress to grant the FDIC more powers to punish the executives of failed institutions. As a central piece of that speech, he asked Congress to strengthen the FDIC's authority to claw back compensation — including from stock sales — from the executives of failed banks of a similar size to Silicon Valley Bank and Signature Bank.
The congressional outlook
In a rare point of bipartisan agreement in Congress, both House Financial Services Committee Chairman Patrick McHenry, R-N.C., and Rep. Maxine Waters of California, the panel's ranking Democrat, have suggested that regulators should be doing more with existing laws to deal with executive compensation.
McHenry hasn't ruled out the idea of strengthened executive compensation rules, whereas he's been more negative on other Democratic-led policy responses to the bank failures, such as expanding deposit insurance and strengthening rules around midsize bank regulation.
"All options are on the table," he said in response to a question from American Banker. "I'm reviewing the president's proposals, and that's where I'm at at this stage."
McHenry also alluded to Dodd-Frank compensation rules. There are rules, he said, "that may appropriately apply to bank executives in failed institutions, so that's a natural thing for us to review in that connectivity."
Waters more explicitly called out the unfinished rulemaking.
"It has been more than 12 years since Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, but regulators have failed to implement Section 956 regarding incentive-based compensation arrangements," Waters
Waters reiterated her position Wednesday that regulators should complete the rules. She told reporters that legislators are looking at a range of executive compensation rules in response to the Silicon Valley Bank and Signature Bank failures.
"We're looking at clawbacks, we're looking at bank compensation, we're looking at bonuses, we're looking at everything," she said.
Some policy watchers said the intervention by federal regulators in the Signature and Silicon Valley Bank failures could motivate lawmakers to more aggressively direct the issue.
Bartlett Naylor, a financial policy advocate for Public Citizen and former chief of investigations for the Senate Banking Committee, said that shifting attention from S.2155 — a 2018 law led by Senate Republicans that nonetheless got bipartisan support from moderate Democratic lawmakers, that allowed regulators to weaken rules around midsize banks — could be appealing to the lawmakers that voted for that bill.
"I assume that the Congress that voted for 2155 wants to argue that wasn't the mistake," he said. "They'll say the mistake was something else, let's fix that."
But other experts say there's still a limited chance that agreement on this point could manifest into actual law at this political moment. While there's broad agreement that executives of failed banks shouldn't be allowed to profit off their failing, the specifics could be more complicated.
"I can see some on the left wanting to go very far with provisions like this," said Aaron Cutler, a partner at Hogan Lovells and former financial policy advisor for Eric Cantor when he was House majority leader. "So finding compromise language would be difficult."
To that end, the easiest path forward for the Biden administration might be completing the Dodd-Frank rulemaking that could give the FDIC the ability to claw back the pay of those involved in the Silicon Valley Bank or Signature Bank failures.
"If the agencies dusted off their laptops and got to work on 956 they could make sure the FDIC had those abilities," Alt said.
How the Dodd-Frank executive compensation rule works
The rule has stagnated under both Republican and Democratic administrations.
Section 956 was meant to be a joint rulemaking by the Treasury Department, the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., Federal Housing Finance Agency and National Credit Union Administration.
Treasury, Fed and FHFA did not respond to a request for comment on the status of rulemaking or an official timeline. The FDIC and the OCC declined to comment.
"The executive compensation rule required under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act has been pending since 2016. I look forward to working with my counterparts at the other agencies to move these critical rules forward in the near future," said NCUA Chairman Todd M. Harper in a statement.
Naylor said he believes the Biden administration hasn't had the personnel in place to work on the rule, but in the wake of the Silicon Valley Bank and Signature failures, that might change.
"The Biden administration hadn't done it yet because the stars have not aligned," he said. "But now they're engaged. We've been meeting with the agencies, and we believe they've begun to work on it."
Growing concern about the unfinished rule comes as Washington shifts from containing the damage from the failures of Silicon Valley Bank and Signature Bank to considering political and policy responses to the crisis. Former chief executive of Silicon Valley Bank Greg Becker sold $3.6 million of stock in late February, and received tens of millions in options and stock grants from 2019 and 2022, not including salary and cash bonuses, according to SEC filings, moves that have highlighted executive compensation, particularly among Democrats.
Alt, who left the OCC in 2015, said a 2016 draft of the executive compensation rule would have allowed banks to claw back incentive-based compensation of senior executive officers and "significant risk takers" for up to seven years following vesting.
While that provision would have allowed banks to claw back compensation — not the FDIC — Alt said that in the event of a failed bank, it's a distinction without a difference.
"When a bank fails, the FDIC — as the receiver of the bank — appoints new bank management," she said. "In that role, the FDIC can direct the new bank management to determine whether it is appropriate to cancel or lessen the deferred amount, or claw back all or some of recent payouts."
Regulators made two attempts at writing a rule, one in 2011 and another in 2016. The depth of the disagreement between stakeholders — and the advances that shareholders and banks themselves
"This one was extremely controversial," Alt said. "There was a tremendous amount of disagreement among agency principles about how to go about this."
