Reckless Financial Decisions

The SEC is attempting to RESTRICT incentive pay used by many investment advisory firms, broker-dealers and other “certain financial institutions” with more than $1 billion dollars in assets. Incentive pay is defined as anything above and beyond one’s STANDARD compensation agreement. Incentive pay may be the form of additional stock options, higher commission payouts when selling an investment firm’s products, or any other compensation awarded to an employee that is “forward looking,” and used as an incentive to “promote” their firm’s future sales goals. An example of incentive-based compensation would be if a rep or financial advisor sold IN-HOUSE mutual funds or newly issued stock or equity in a company the firm was promoting and underwriting. A BONUS, by comparison, is “backward looking” and is based on the prior year’s achievements.

This proposed law is mandated by the Dodd-Frank Act, which says that the 7 different financial regulators must collaborate to develop rules and guidelines to govern pay incentives. The 7 regulators include: the Securities and Exchange Commission, the FDIC, the Federal Reserve, the Office of Comptroller of Currency, the Office of Thrift Supervision, the Federal Housing Financial Agency and the National Credit Union Administration. They have all been charged with reining in pay incentives that promote “reckless financial decisions,” that could harm investors and the American public, and potentially destabilize our markets.

The proposed law requires “covered financial institutions,” to file annual disclosures about their incentive-based compensation agreements, which would include: the structure of their incentive-based compensation arrangements, so that regulators can determine whether such additional compensation is EXCESSIVE; a description of the firm’s policies and procedures that govern its incentive-based compensation agreements; and a statement on the SPECIFIC reasons as to WHY the firm believes the incentive based compensation arrangement will HELP prevent the financial institution from suffering a material financial loss, or the reasons WHY they do NOT believe the compensation is excessive.
Although there seems to be a resurgence of Ponzi schemes in recent years in the U.S., the concept is NOT a new one. Ponzi schemes are named after Charles Ponzi, an Italian immigrant who ran an infamous money scheme in the early 1900s. He came up with a moneymaking idea, which involved speculating on postage stamps. He realized that he could take advantage of the difference betwee
U.S. and foreign currencies, that were used to BUY and SELL international mail coupons. He told his investors that he could provide a “50% return” in just 45 days, compared to a 5% return from a bank savings account. Investors took the bait, and soo
Ponzi became a millionaire. As with all Ponzi schemes, he kept the scam going by using the money he took in from NEW investors to pay off EARLIER investors. However, it wasn't long before the authorities became suspicious of his business dealings, and he was eventually arrested on 86 counts of mail fraud.