Letter to Janet Yellen, Chair, Board of Governors Of the Federal Reserve, Thomas Curry, Comptroller, Office of the Comptroller of the Currency System, Martin Gruenberg, Chairman, Federal Deposit Insurance Corporation, Rick Metsger, Chairman, National Credit Union Administration, Melvin Watt, Director, Federal Housing Finance Agency and Mary Jo White, chair, Securities and Exchange Commission - Strengthen the Proposed Notice of Proposed Rulemaking Against Incentive Based Compensation Arrangments

Letter

Recently, the Consumer Financial Protection Bureau ("CFPB"), Office of the Comptroller of the Currency ("OCC"), and the City and County of Los Angeles settled for a collective $185 million with Wells Fargo Bank, N.A. ("Wells Fargo") over the illegal practice of secretly opening more than two million unauthorized deposit and credit accounts on behalf of unsuspecting consumers. Since the September 8th, 2016 settlement, and in the wake of unprecedented public scrutiny and Congressional testimony before the U.S. Senate and House of Representatives, the Board of Directors at Wells Fargo has rescinded some of the compensation of Chairman and CEO John Stumpf and Senior Executive Vice President for Community Banking Carrie Tolstedt. However, the executives still have benefited from millions of dollars in compensation and stock awards during the relevant period covered by the settlement.

With the revelation of this shocking scandal in mind, we write today to request that you strengthen the Proposed Notice of Proposed Rulemaking ("Proposal") issued by your Agencies regarding incentive-based compensation arrangements pursuant to Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank").

Specifically, we are concerned about the excessive level of discretion granted to covered institutions in terms of when the institution must exercise a "clawback" provision -- or a contractual clause that would trigger when the institution would withhold, reduce or recoup senior executive bonus pay. The Proposal provides that clawbacks can, but not must, be triggered by: 1) misconduct that resulted in significant financial or reputational harm to the covered institution; 2) fraud; or 3) intentional misrepresentation of information used to determine the individual's incentive-based compensation. We do not believe that strong public policy goals are served by giving large banks and other financial institutions the choice as to whether to clawback executive bonuses in the face of widespread misconduct such as the opening of more than 2 million unauthorized deposit and credit accounts. Given the reluctance of many boards of directors to punish peer-group members within the senior executive class, we believe that your Agencies should require clawbacks in these instances. Moreover, there is precedent for your Agencies moving away from a more discretionary approach, as the United Kingdom Prudential Regulation Authority's ("PRA") policy statement regarding clawbacks requires that "a firm must make all reasonable efforts to recover an appropriate amount corresponding to some or all vested variable remuneration" in cases involving employee misbehavior or a failure of risk management within the employee's business unit.

Further, with regard to clawback provisions related to the first aforementioned instance of "misconduct that resulted in significant financial or reputational harm to the institution," the Proposal should be expanded to cover instances where the executive "participated in or was responsible for" that misconduct. Again, this language is drawn from the existing standard used in the United Kingdom by the PRA. Indeed, as the Wells Fargo scandal from this month demonstrates, it is important to hold senior executives responsible even if they may not have directly engage in the misconduct, but if their failure of oversight contributed to significant harm being caused by the covered institution, to the detriment of shareholders.

We understand that Wells Fargo, and other large financial institutions, have written to your agencies and advocated for a lighter-touch approach as you work to finalize the Proposal. Indeed, Wells Fargo in particular has argued for the "ability to use discretion in applying the principles behind Section 956" and cautioned against a "prescriptive approach that is unrelated to risk-taking and that has unintended consequences." However, we believe it is in the best interest of shareholders, consumers and our wider economy for your Agencies to adopt a final Proposal that provides less optionality to covered institutions when it comes to holding senior executives accountable both for their actions and their failure of oversight over the employees that report to them. As this recent scandal emphasizes, stronger incentives are needed to ensure that financial institutions respond quickly and forcefully to illegal behavior within their workforce.