NEW YORK — U.S. regulators proposed new rules Thursday to overhaul the way Wall Street executives are paid, addressing years of complaints that excessive bonuses helped lead to the 2008 financial crisis.
The long-awaited rules are aimed at stopping executives from making risky financial bets to boost their pay and then collecting large bonuses before the fallout is clear. Under the proposed rules, big banks could demand the return of executives’ bonuses if their gambles didn’t pay off.
The regulations could potentially affect the pay of thousands of bankers and senior executives at some of the country’s largest financial institutions, but public advocates quickly said that regulators likely didn’t go far enough.
“I think the key question to ask about this regulation is this: If it had been in place in the years leading up to the financial crisis, would it have significantly reduced the reckless behavior that led us into that crisis?” said Sarah Anderson, the global economy project director at the Institute for Policy Studies. “Unfortunately, while there are some areas of improvement, I think the answer to this question is still no.”
The proposal comes at a time when Wall Street has been thrust into the presidential campaign amid calls by Sen. Bernie Sanders to break up the big banks. Asked about bankers on NBC’s “Today Show” Thursday morning, Republican Donald Trump described the executives as “good people like everybody else. They’ve got a lot of money. I think they’re paid too much money, but what are you going to do? I mean, you know, it’s one of those things.”
Under the proposed rules, the nation’s largest banks would have up to seven years to “claw back” executives’ bonuses if it turns out their actions hurt the institution. Also, instead of handing over all of a person’s bonus in one year, the payments would be spread over four, according to the proposed rules.
Reining in Wall Street pay has been one of the most complicated, and controversial, parts of 2010’s financial reform package approved by Congress, known as the Dodd-Frank Act. A team of regulators, including those from the Securities and Exchange Commission and the Federal Reserve, initially proposed limits to pay and bonuses given to top executives at financial institutions in 2011.
Critics pounced on that proposal as weak, noting that it did not address the compensation of traders who can draw some of the biggest bonuses. It has taken five years for regulators to emerge with a new proposal, and it comes after President Obama called twice for the rules to be completed before he left office.
“It has been a long time in coming, because on this controversial issue, it is challenging to develop a rule, which both meets the mandate of the law and at the same time is focused and fair,” Debbie Matz, chair of the National Credit Union Administration, one of the agencies involved in developing the rules, said in a statement.
The rules are “slightly” stronger than those proposed in 2011 but still leave the industry some wiggle room, said Bart Naylor, financial policy advocate for Public Citizen. The clawback provision, for example, covers a relatively long period of time — seven years — but banks will be able to determine when to use it, he said.
They could determine that an executive was not specifically responsible for the actions that led to a fine from the government or a significant financial losses and leave the executive’s bonus untouched, he said. “We think senior executives should pay for [those losses] no matter what. It would presumably force them all to look over each other’s shoulders,” Naylor said.
Large bonuses have long been a key motivator on Wall Street, but they drew new scrutiny in the wake of the financial crisis after American International Group, the massive insurance company, took a taxpayer-funded lifeline of more than $100 billion. The company faced a backlash for setting aside millions of dollars for employee bonuses and retention pay, despite its bailout. Lawmakers were incredulous. AIG eventually agreed to revise some executive payouts.
Many banks have already made changes to the way they hand out bonuses, said John Trentacoste, a director with Farient Advisors, an executive compensation firm. “It was not lost on the boards of these financial institutions that there was a lot of public ire focused on them,” he said.
The proposed rules arrive at a time when Wall Street has become stingier with its bonuses amid an industry slowdown. The average bonus tumbled last year by 9 percent, to $146,200, according to the New York State Comptroller’s Office. But, compensation experts have said, bonuses at hedge funds and private equity firms can still reach millions of dollars a year.
And some of Wall Street’s top executives are still receiving hefty pay packages. JPMorgan Chase boosted the pay of its chief executive, Jamie Dimon, by 35 percent last year, to $27 million.
The National Credit Union Administration approved the executive compensation rules Thursday, but five more agencies still must act before they become binding. It is unclear when those agencies will take up the proposal.