The Securities and Exchange Commission took steps Wednesday toward curbing risk-taking at big Wall Street firms and reducing the influence of credit-rating agencies, two factors that contributed to the financial crisis.
The commission voted to back a proposed rule that would make top executives at big firms wait at least three years to be paid at least half of their annual bonuses. The rule would apply to financial firms with $50 billion or more in assets. The Federal Deposit Insurance Corp. advanced the rule last month.
The SEC is also proposing the elimination of a requirement that money-market funds invest only in securities that have credit ratings. The funds would assess the securities themselves.
Both rules were outlined in the financial regulatory law enacted last summer.
In addition, the five SEC commissioners voted to propose requirements for the operations of clearinghouses, the intermediaries that derivatives will be traded through for the first time. The new financial law dictates that derivatives, the complex investments blamed for hastening the financial crisis, be subjected to new oversight. They now are traded in an opaque $600 trillion market worldwide.
Clearinghouses settle trades and their member firms must back them. Clearinghouses will require derivatives sellers to set aside money for each contract in case their bets go bad.
The SEC proposal would require clearinghouses to meet certain standards of risk management, to have procedures to prevent conflicts of interest among members and to protect the confidentiality of trading data.
The financial overhaul law calls for reducing the influence of the big three rating agencies -- Moody's, Standard & Poor's and Fitch Ratings. They were discredited in the financial crisis for giving high ratings to risky securities tied to subprime mortgages. The securities sank in value as home-loan delinquencies soared, causing tens of billions of dollars in losses for major banks and helping set off the crisis.
The rating agencies' grades can affect a company's ability to raise or borrow money and how much investors will pay for securities it issues.
The new proposal for money-market funds is intended "to eliminate over-reliance on credit ratings by both regulators and investors, and to encourage an independent assessment of creditworthiness rather than a potentially misguided reliance on a credit rating," SEC Chairman Mary Schapiro said before the vote.
Money-market funds are a mainstay of financial management for U.S. families and companies, holding themselves out as safe and easily accessible investments that offer returns exceeding those of conventional savings accounts.
The delayed compensation requirement seeks to tie executives' bonuses with financial performance over a longer time period. It would apply to major financial institutions, such as Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., Goldman Sachs Group Inc., and Wells Fargo & Co.
In addition, financial firms with at least $1 billion in assets would be required to submit a report each year to regulators describing in detail their bonus arrangements. If the regulators consider the pay to be excessive and encouraging risk, they could prohibit the arrangements.
Lawmakers and government officials have said outsize bonuses encouraged short-term risk-taking, helping to fuel the financial crisis. The financial overhaul law directed regulators to put in rules to prohibit incentive-based payments that encourage the taking of excessive risks.
Other financial regulators, including the Federal Reserve and two Treasury Department agencies, also must vote to send out the compensation rule for public comment before it is made final. A final rule could take effect by fall, officials have said.
The proposed rules on rating agencies and derivatives now are subject to public comment before the SEC may formally adopt them, possibly with some changes.
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