On Wednesday, the Securities and Exchange Commission (SEC) took a few steps to reinforce the country’s ability to combat economic crisis. The SEC proposed to curb bankers’ pay and limit the reliance on the credit rating agencies.
These two proposals, along with the new governance rules for clearinghouses, show SEC’s efforts to implement various provisions of the Dodd-Frank Wall Street Reform Law, which was passed in July 2010.
Curb on Hefty Bonuses
Last month, the Federal Deposit Insurance Corp. (FDIC) had also proposed a rule limiting the bankers’ pay. According to the rule, top executives at mega banks will now have to wait for at least three years in order to get half their annual bonuses.
Now, the SEC is also backing the FDIC on the proposed rule to limit compensations to executives of large institutions. According to the SEC, the executives of companies with assets of $50 billion or more will be under consideration.
The proposed rule also requires the big banks (with assets of $1 billion or more) to disclose their incentive based compensation structures in their filings with the SEC. The large brokerage and financial advisory firms that are expected to be affected by this rule include JPMorgan Chase & Co. (JPM), Morgan Stanley (MS) and Bank of America Corporation (BAC).
This measure intends to lower incentives for the executives and will prevent them from taking excessive risks. It will also encourage the executives to take care of their company’s long-term prospects.
Less Dependence on Credit Ratings
Another measure the SEC plans to take in order to strengthen the economic stability is to remove over-dependence on the ratings of major rating agencies – Moody’s, Standard & Poor’s and Fitch Ratings – on the money market funds. During the financial crisis, the rating agencies had given high ratings to many risky securities tied to subprime mortgages.
The new rule proposes that the securities must be highly rated and the company must ensure through an independent evaluator that the securities are of high quality. The rule also encourages independent assessment of the creditworthiness by both the regulators and investors.
Clearing Clearinghouse Issue
The SEC is proposing new governance standards for clearinghouses. The new standards would place a limit on the voting powers that the large banks and financial firms can have in the trading facilities and derivatives clearinghouses.
Also, the rule would require various clearinghouses and trading platforms – LCH Clearnet, IntercontinentalExchange Inc. (ICE) and Tradeweb, a trading platform majority owned by Thomson Reuters Corporation (TRI) – to have financial strength to withstand defaults by one or two of its largest clearing member firms.
Overall, the rule aims to prevent these big clearinghouses from denying memberships to small firms.
A Better Road Ahead
The daredevilry of many executives led to the financial catastrophe we have landed in. As these executives had already pocketed most of their awards in the short term, they did not care much about the echoing problems of their risk taking. Moreover, various investors had to face losses running into billions of dollars due to faulty high ratings given to risky securities.
It is our belief that the new rules to curb pay structure, promote less dependence on the credit ratings, and manage clearing houses will surely guide the economy out of the woods.
BANK OF AMER CP (BAC): Free Stock Analysis Report
INTERCONTINENTL (ICE): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
THOMSON REUTERS (TRI): Free Stock Analysis Report
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