Tuesday, July 28, 2009

H.R. 3269 Executive Pay Rule Bill Passes Committee

H.R. 3269 "Corporate and Financial Institution Compensation Fairness Act of 2009" was passed today by the House Financial Services Committee (chaired by Barney Frank) in a 40-28 vote, and headed for the House vote on Friday right before Congress adjourn for the summer.

House Panel Passes Bill to Set Rules on Executive Compensation
(7/28/09 Wall Street Journal)

"U.S. lawmakers, responding to public outrage about outsize Wall Street pay packages, took the first steps on Tuesday toward setting new compensation standards for U.S. companies.

"The vote in favor of executive compensation legislation by the House Financial Services Committee gives lawmakers the chance to partially advance at least a portion of President Barack Obama's ambitious financial regulatory revamp before adjourning for the August recess. The House of Representatives is scheduled to vote on the measure on Friday.

"The bill, approved in a 40-28 vote, authorizes federal regulators to restrict "inappropriate or imprudently risky" pay packages at financial companies, though firms with under $1 billion in assets would be exempted.

"The legislation also gives shareholders a greater ability to weigh in on executive compensation packages and ensures that board compensation committees are made up of independent directors."

Public outrage?? What outrage? I thought the witch hunt over AIG bonuses were long time ago.

Apparently, "outrage" the article refers to is over a trader at Citigroup who is set to receive his $100 million bonus as stipulated in his employment contract.

Let's go to the bill itself and see what (else) is in it:

First, the purpose of the bill: "To amend the Securities Exchange Act of 1934 to provide shareholders with an advisory vote on executive compensation and to prevent perverse incentives in the compensation practices of financial institutions."

Section 2 gives shareholders greater say in executive compensations. A sop to shareholders, just like lawmakers are fond of invoking "taxpayers" and "Americans".

Section 3 specifies standards for Compensation Committee at corporate level. If a corporation is found to be in non-compliance with the standards set in this section, there's a penalty clause in Section 10B (a) (1): listing of a security of such a corporation will be prohibited.

[emphasis is mine]

SEC. 3. COMPENSATION COMMITTEE INDEPENDENCE. (a) Standards Relating to Compensation Committees- The Securities Exchange Act of 1934 (15 U.S.C. 78f) is amended by inserting after section 10A the following new section:
`(a) Commission Rules-
`(1) IN GENERAL- Effective not later than 270 days after the date of enactment of the Corporate and Financial Institution Compensation Fairness Act of 2009, the Commission shall, by rule, direct the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with the requirements of any portion of subsections (b) through (f).

Now, Section 4 is what the article of Wall Street Journal is focused on: authorizing federal regulators to "reduce perverse incentives" in compensations.

(a) Enhanced Disclosure and Reporting of Compensation Arrangements- Not later than 270 days after the date of enactment of this Act, the appropriate Federal regulators jointly shall prescribe regulations to require each covered financial institution to disclose to the appropriate Federal regulator the structures of the incentive-based compensation arrangements for officers and employees of such institution sufficient to determine whether the compensation structure--
(1) is aligned with sound risk management;
(2) is structured to account for the time horizon of risks; and
(3) meets such other criteria as the appropriate Federal regulators jointly may determine to be appropriate to reduce unreasonable incentives for officers and employees to take undue risks that--
(A) could threaten the safety and soundness of covered financial institutions; or
(B) could have serious adverse effects on economic conditions or financial stability.

(b) Prohibition on Certain Compensation Structures- Not later than 270 days after the date of enactment of this Act, and taking into account the factors described in paragraphs (1), (2), and (3) of subsection (a), the appropriate Federal regulators shall jointly prescribe regulations that prohibit any compensation structure or incentive-based payment arrangement, or any feature of any such compensation structure or arrangement, that the regulators determine encourages inappropriate risks by financial institutions or officers or employees of covered financial institutions that--
(1) could threaten the safety and soundness of covered financial institutions; or
(2) could have serious adverse effects on economic conditions or financial stability.

(c) Enforcement- The provisions of this section shall be enforced under section 505 of the Gramm-Leach-Bliley Act and, for purposes of such section, a violation of this section shall be treated as a violation of subtitle A of title V of such Act.
The Gramm-Leach-Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999, (Pub.L. 106-102, 113 Stat. 1338, enacted November 12, 1999) is an act of the 106th United States Congress (1999-2001) which repealed part of the Glass-Steagall Act of 1933, opening up the market among banking companies, securities companies and insurance companies. (Wikipedia.org)

And who are these "appropriate Federal regulators?
  • Board of Governors of the Federal Reserve System;
  • Office of the Comptroller of the Currency;
  • Board of Directors of the Federal Deposit Insurance Corporation;
  • Director of the Office of Thrift Supervision;
  • National Credit Union Administration Board; and
  • Securities and Exchange Commission.

So these bureaucrats will decide what "sound risk management" is, and what "appropriate" compensation scheme is for private institutions.

And who are the "covered financial institutions"?

  • a depository institution or depository institution holding company, as such terms are defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813);
  • a broker-dealer registered under section 15 of the Securities Exchange Act of 1934 (15 U.S.C. 78o);
  • a credit union, as described in section 19(b)(1)(A)(iv) of the Federal Reserve Act;
  • an investment advisor, as such term is defined in section 202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(11)); and
  • any other financial institution that the appropriate Federal regulators, jointly, by rule, determine should be treated as a covered financial institution for purposes of this section.

So they can be any institution if the appropriate Federal regulators say it is a financial institution.

Note also the word "corporate" in the title of the bill. For now the bill is supposed to apply to financial institutions, but with putting in the word "corporate", they seem to have left a future possibility of applying the bill to all corporations.

Much was I horrified when the stock market suddenly careened off the cliff last September and took a huge chunk of my investment porfolio value with it, I do not believe in the government benevolent and omniscient. Particularly when it eagerly wants to force what it says is good for us the hapless citizens. Maybe all I have now is an illusion that this is still America, and not Soviet Union with the Politburo.

For the Board of governors of the Federal Reserve to decide what's appropriate risk, it's a farce. Two decades of reckless risk-taking (super easy monetary policy) by the Federal Reserve caused the credit bubble that led directly to the bust and recession we've been in since the end of 2007. That the bill came out of the committee chaired by a Congressman who vouched for the soundness of Fannie and Freddie up until they spectacularly collapsed is another joke.

If a Citigroup's trader made the company tons of money and his legal contract says $100 million bonus, by all means pay him $100 million. Money is fungible.


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