Update 702 — The Long Arm of the Claw
When Bank CEO Share Sales Sink Firms
This morning, the Senate Committee on Banking, Housing and Urban Affairs made a major stride and approved a bill to claw back pay and increase penalties for executives of failed banks, in the Committee’s first legislative markup since 2019. Today’s consideration of and vote on the RECOUP Act, came shortly after President Biden called on Congress to strengthen accountability for senior bank executives in response to the collapses of Silicon Valley Bank and Signature Bank in March, and represents one of Congress’ biggest steps forward in the longstanding effort to strengthen accountability for senior bank executives via compensation clawbacks.
The RECOUP Act was reported favorably out of the Committee in a 21-2 vote, with critical support from Sen. Elizabeth Warren, who had previously offered her own bill. We discuss the markup, explore some of the key differences in the bills at hand, and preview what the House has in store for executive compensation reform below.
Senate Banking Approves the RECOUP Act
This morning, the Senate Banking Committee passed the Recovering Executive Compensation from Unaccountable Practices (RECOUP) Act to strengthen penalties against the executives of failed banks. The bill, led by Committee Chair Sherrod Brown (D-OH) and Ranking Member Tim Scott (R-SC), was approved with overwhelming bipartisan support within the committee, passing with a 21-2 margin. The only holdouts were Senators Thom Tillis (R-NC) and Bill Hagerty (R-TN). The bill is the first legislative response to recent turmoil in the banking sector to pass through the Committee.
In the cases of all three recently failed banks – Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank – bank executives loaded up on risk, prioritizing short-term personal returns over the long-term health of the banks they were charged with leading. They made millions in compensation in the years leading up to their banks being taken into receivership or crashing mere days thereafter. Eleven days before SVB went into receivership, then-CEO Greg Becker sold over $3.5 million in stock, and former chief financial officer Daniel Beck sold just over $575,000 worth of shares. The sales were executed under 10b5-1 plans filed 30 days earlier, allowing insiders to book share sales in advance to avoid liability for trading on nonpublic information.
Since then, President Biden has called for congressional action to strengthen accountability for senior bank executives and several pieces of legislation have been introduced to do just that. The RECOUP Act is just the latest.
Earlier this month, Senator Elizabeth Warren (D-MA) introduced the Failed Bank Executives Clawback Act of 2023 with support from members of the Senate Banking Committee on both sides of the aisle, including Senators J.D. Vance (R-OH) and Josh Hawley (R-MO). Their bill would provide stronger accountability than the unamended text of the RECOUP Act in key ways.
|RECOUP Act||Failed Bank Executives Clawback Act|
|Allows/Requires Clawbacks||Allows clawbacks based on discretion||Requires clawbacks|
|Period of Retrospective Coverage||Covers executive compensation over 24 months prior to a bank’s failure||Covers executive compensation over 36 months prior to a bank’s failure|
|Compensation||Covers incentive-based compensation, equity-based compensation, and profits realized from selling the bank’s stock||Covers all compensation|
The RECOUP Act strengthens regulators’ ability to impose penalties against a senior executive who not just “knowingly,” but “recklessly,” commits violations of law, engages in unsafe and unsound practices, or breaches any fiduciary duty. It also increases the maximum penalty for violations laid out in the Federal Deposit Insurance Act from one to three million dollars.
The Warren-Vance bill would have extended clawback authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act to apply to any bank brought into FDIC receivership, not only those resolved under the FDIC’s Orderly Liquidation Authority. Under Warren’s bill, funds that are directly clawed back from executives would be placed into the Federal Deposit Insurance Corporation’s Deposit Insurance Fund, which is used to make depositors whole when the banks that held their deposits fail.
Another bill led by Senators Reed (D-RI) and Chuck Grassley (R-IA), the Bank Management Accountability Act, introduced in early May, would make it easier for banking regulators to claw back compensation from negligent bank directors and senior executives at failed systemically important banks.
Today’s markup represented a compromise in which the leaders and cosponsors on both sides of the aisle worked to include, through bipartisan amendments, the strongest parts of their respective bills in a final text palatable to the vast majority. The final version of the bill is not yet clear following amendments approved during the markup. While the Warren-Hawley bill provided strong clawback requirements, a broad period of retrospective coverage, and comprehensive coverage of compensation that would provide the accountability we would like to see in such legislation, the RECOUP Act remains a powerful potential tool and one that has a better chance of making it through the often-contentious House Financial Services Committee.
House Bills Targeting Bank Exec. Compensation
As the Senate Banking Committee marked up the RECOUP Act this morning, Ranking Member of the House Financial Services Committee Maxine Waters (D-CA) announced the introduction of a series of bills led by Committee Democrats in response to recent bank failures. Of the eleven bills announced – which include several offered by Committee Democrats at a recent markup – one bill is quite similar to the RECOUP Act.
- H.R. 4208, the Failed Bank Executives Accountability and Consequences Act – The bill would expand bank regulatory authority with respect to clawing back compensation, imposing fines, and banning future work in the industry for bank executives that negligently contribute to their bank’s failure. It would also includes a Sense of Congress that urges regulators and law enforcement to use all available tools to hold culpable executives of recently failed banks accountable for any misdeeds, and it urges regulators to complete incentive-based compensation requirements pursuant to Section 956 of the Dodd-Frank Act with strong clawback provisions. The bill was introduced by Ranking Member Waters with ten Committee Democrats as original cosponsors.
Another bill targets a specific aspect of executive compensation: stock buybacks.
- H.R. 4209, Incentivizing Safe and Sound Banking Act – The bill would expand bank regulator authority to prohibit stock sales of bank executives when issuing a cease-and-desist order to a bank for not complying with the law. It would automatically restrict such stock sales by senior executives of large banks that receive poor exam ratings or fail to resolve supervisory citations, such as a matter requiring immediate attention, in a timely manner. The bill was introduced by Ranking Member Waters with eight Committee Democrats as original cosponsors.
Clawbacks Don’t Fix Incentive-Based Compensation
These clawback bills are a step in the right direction. But regulators could do much more to prevent recklessness by bank executives.
Executives of the recently failed banks were paid millions under incentive compensation agreements that pegged their bonuses to the profitability of their banks. Congress saw the problem with incentive-based compensation structures after the 2008 financial crisis and tried to remedy the issue back then. Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act required a rule to ban incentive-based executive compensation that encourages “inappropriate” risk-taking.
Banning compensation packages that encourage high-risk behavior would be a more powerful tool in protecting society from the harms of banking crises than mechanisms to claw back that compensation after bankers have caused a crisis. But the May 2011 deadline set by Congress to put Section 956 rules into force passed roughly 12 years ago, and still, a final rule has yet to be finalized.
20/20 Vision has joined with a coalition of organizations to call on the Federal Reserve, Federal Housing Finance Agency, Federal Deposit Insurance Corporation, Securities & Exchange Commission, Office of the Comptroller of the Currency, and National Credit Union Administration to finalize a rule this year. Finalizing rules required under Section 956 is crucial. Without delinking executive compensation and risky bank management that endangers the stability of the broader banking sector and financial system as a whole, the incentive for bank leaders to ignore basic principles of responsible bank management behind their own self interest will persist.