From the Regulators

The proposed requirements aim to discourages inappropriate risk-taking in financial institutions

By James Langton |

U.S. regulators released proposed rules on Monday that aim to curb compensation structures that may encourage excessive risk-taking.

Six federal agencies (including the U.S. Federal Reserve and the U.S. Securities and Exchange Commission) proposed a rule for public comment that would prohibit incentive-based compensation arrangements that "encourage inappropriate risks" at large U.S. financial firms, the agencies say in a statement.

The proposed rules would apply to firms with total assets of at least US$1 billion, and the requirements are tailored based on assets into three tiers (firms with US$1 billion to US$50 billion, US$50 billion to US$250 billion, and above US$250 billion).

The rules aim to set requirements for senior executive officers and other "significant risk-takers" at the bigger firms, including a general prohibition on "incentive-based compensation arrangements that could encourage inappropriate risk-taking by providing excessive compensation or that could lead to a material financial loss."

The proposals also require firms to document the structure of their incentive-based compensation arrangements; and requires boards to oversee those arrangements.

Regulators' efforts to curb excessive risk taking stems from the financial crisis. "There is evidence that flawed incentive-based compensation packages in the financial industry were one of the contributing factors" in the crisis, the agencies's statement says.

The deadline for comments on the proposed rules is July 22.