Congressman Barney Frank today announced that he has introduced legislation that would prevent officers, directors and employees of financial firms from purchasing insurance to prevent them from having to pay a compensation clawback or a civil penalty when their actions harm their companies. Congressman Henry A. Waxman, Ranking Member of the House Committee on Energy and Commerce, and Congressman Collin C. Peterson, Ranking Member of the Committee on Agriculture, are original cosponsors of this legislation.

The Executive Compensation Clawback Full Enforcement Act of 2012 would require any officer, director, or employee of a financial firm who is required under a federal financial regulatory law to repay previously earned compensation or to pay a civil penalty to be personally liable for the amounts owed.  These individuals would be prevented from using insurance or other forms of hedging to protect their personal assets under these laws, and their employers could not procure such protection on their behalf.

This bill would protect the intent of provisions of the Wall Street Reform and Consumer Protection Act of 2010, the Sarbanes Oxley Act, and other federal financial regulatory laws that directly require, or authorize regulators to require, clawbacks of compensation or imposition of civil penalties when an individual’s actions result in violations of law, unsafe or unsound conduct. 

In introducing the new legislation, Congressman Frank and his colleagues hope to prevent circumventing provisions of federal law that are designed to hold individuals personally responsible when their actions negatively affect their financial firms.

“The provision of the financial reform bill mandating that compensation systems for financial executives which include bonuses also make possible clawbacks is an important step forward in our efforts to avoid the terrible mistakes of the past,” said Congressman Frank.  “The creation of insurance policies to insulate financial executives from clawbacks is one more effort by some in the industry to perpetuate a lack of accountability.”

Congressman Waxman said, “We should have a financial system where there are real consequences for failure.  Towards this end, executives who preside over billions of dollars in losses should not be protected from the results of their decisions, especially if those decisions run afoul of our securities laws or involve inappropriate risk-taking.  The 2008 financial crisis taught us that when executives have incentives to maximize their earnings, they will do so, often with little regard for long-term consequences.  One of the critical reforms in the Wall Street Reform and Consumer Protection Act was to discourage reckless risk-taking by allowing companies to recover payments to executives that acted improperly.  This was a common sense measure, critical to help avoid another financial crisis.  The Executive Compensation Clawback Full Enforcement Act of 2012 will ensure that Wall Street executives are not allowed to undermine this reform through creative insurance and hedging schemes.”

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