Federal Reserve chair Janet Yellen said Wednesday that it was “very challenging” to implement a Dodd-Frank rule that regulators were ordered to formulate to stop the encouragement of risky behavior through pay incentives.
Yellen noted that multiple agencies have been “involved in trying to come up with this,” and said other actions taken by the Fed have stopped destabilizing activity.
She was asked about the lack of rule-making during a House Financial Services Committee hearing by Rep. Michael Capuano (D-Mass.) in an exchange that got somewhat heated at times.
“It’s now 2015. Seven years. Seven years,” he said, referring to the 2008 financial collapse, “and we do not have a regulation on this issue.”
Yellen replied that “guidelines pertaining to incentive compensation and our supervision” have diminished the prevalence of risky behavior, to which Capuano replied: “that is not the regulation called for by law.”
“What’s the hold-up?” he later asked. “How do we help? Who do I have to kick to get this done?”
Yellen, who often is asked questions about appropriate policy on a range of issues outside of her purview, declined to give her opinions on lobbying. “I can’t give you a good answer,” she replied.
“At some point, regulators have to regulate,” he later said, after she stressed that the Fed is working with other entities and officials on the matter.
“If it’s not you, tell me who it is,” Caupano then added. “If it’s my friends at the SEC, first of all, I would not be shocked,” he said, theorizing that the Fed may have done all it can on the rule—Section 956 of the Dodd-Frank bill.
The provision forced “appropriate Federal regulators” to “jointly prescribe regulations or guidelines that prohibit any types of incentive-based payment arrangement….that the regulators determine encourages inappropriate risks by covered financial institutions.”
Although the Congressman repeatedly said the law gave them 90 days to formulate the rule, it states they had “nine months after the date of enactment.”
“We have tried to work constructively with the other agencies,” Yellen said before again being interrupted by Capuano.
“I love the way Fed chairs never give answers,” he said.
Yellen responded with a subtle smile that seemed to concede this is typically true—at least in open hearings (Statements by the Fed Chair often cause stock markets to move in real time).
“I think the Fed has done a pretty good job. I’m not complaining about the Fed. But this one is long overdue,” Capuano said.
“I care that the incentives are appropriately placed so that the American taxpayer doesn’t get put on the hook again on an item that we have already identified as a problem—that everybody agrees was a problem,” he added. “And what should be relatively easy to fix.”
Yellen said she agreed that reckless action encouraged by executive pay “was an important problem” and “that it is essential to address it.”
The interaction between the Obama nominee and the Democratic legislator inspired at least one Republican to take on a role usually reserved for members of the President’s party.
“I’m happy, Chair Yellen, to rescue you from the hostile questioning of my Democrat friend over there,” Rep. Bill Huizenga (R-Mich.) said, flashing a smile. “Don’t take it personally he’s like that way with everybody.”
Appropriate regulators mentioned by the law include the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National Credit Union Administration, the Federal Housing Finance Agency, and, as Capuano noted, the Securities and Exchange Commission.
The SEC has been repeatedly accused of dragging its feet on Dodd-Frank rule implementation. Last June, Sen. Elizabeth Warren (D-Mass.) complained that a rule on CEO-median pay disclosure did not appear forthcoming until April 2016, and said SEC chair Mary Jo White had given her “misinformation” when the key regulator said a rule would be forthcoming in the fall.
“I cannot understand how and why this rule has been delayed for so long,” Warren said.
In August, the rule was implemented.
Although throughout her Wednesday testimony, Yellen hailed new rules formulated since 2008, she noted that there remain “substantial compliance and risk management issues” at the largest entities overseen by the Fed.
