House panel okays executive pay controls by regulators

The House Financial Services Committee, chaired by Barney Frank (D-Mass), cleared a bill on Tuesday giving regulators the right to ban certain forms of compensation at financial firms.

Approved by a 40-28 vote, the bill would allow federal regulators to prohibit inappropriate or imprudently risky compensation practices as part of solvency regulation of all financial institutions. It would also require financial firms to disclose any compensation structures that include incentive-based elements.

“This bill is the first step towards comprehensive financial regulatory reform,” Frank said. “I look forward to having this bill on the House floor soon, and I also look forward to changing the status quo.”

The House could vote on the bill as early as Friday. It would also have to be passed by the Senate before going to President Obama to sign.

The bill, the Corporate and Financial Institution Compensation Fairness Act, also directs the Securities and Exchange Commission to set rules and standards for compensation committees of boards of directors.

The measure which passed on Tuesday incorporates some parts of the Obama Administration’s white paper on regulatory reform. The House committee announcement of the vote said that “a broad consensus of leading finance experts,” including Paul Volcker, the Group of 30 and the chairman of the UK’s Financial Services Authority, believe that compensation structures were a factor in the financial crisis. Both the UK and the European Union are contemplating similar rules, the committee said.

The bill as passed included last-minute amendments from Republican lawmakers to exempt financial institutions with less than $1 billion in assets from the compensation regulation and disclosure requirements so as not to burden credit unions and other small banks.