Asking Banks to Reveal Where Their High Rollers Are

For investors who held stakes in large and complex financial institutions in 2008, the perils lurking inside these behemoths came as a costly shock.

Chief among those perils was the possibility that a bank could lose billions on trades executed by employees who were driven, at least in part, by the promise of fatter bonuses.

Yet, even now, shareholders remain in the dark about where the risk-takers are at these institutions and whether their pay packages encourage them to swing dangerously for the fences.

The New York State Common Retirement Fund, the $161 billion pension overseen by Thomas P. DiNapoli, the state comptroller, is trying to do something about this.

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The comptroller has put together a proposal intended to fix this disclosure flaw, and he hopes that the plan will be put to a vote at Wells Fargo’s annual shareholder meeting later this year.

The proposal is relatively simple. It asks the company’s board to prepare a report disclosing whether Wells Fargo has identified employees who, by virtue of the size and riskiness of their portfolios, could expose the bank to material losses. It also asks the bank to disclose the number of such risk-takers, broken down by division. If it has decided not to enumerate these employees, the proposal asks the board to explain why.

“As we continue to move away from the depths of the market collapse,” Mr. DiNapoli said in an interview last week, “a logical step is to have companies identify employees, not just top executives, that could pose a risk of material loss to shareholders because of the activities they’re involved in.”

The proposal does not ask the bank to name the individual risk-takers, but it does ask for details on their compensation, such as how much of their pay is based on short-term performance metrics.

But Wells Fargo’s shareholders may not get the chance to vote on Mr. DiNapoli’s proposal, because the bank has objected to it. While Wells Fargo has discussed the proposal with officials in the comptroller’s office, the bank recently told the Securities and Exchange Commission that it intends to omit the proposal from its proxy materials. The S.E.C., which adjudicates such disputes, must now decide whether it concurs with the bank’s view.

Lawyers for Wells Fargo argue that S.E.C. rules allow it to omit the proposal. Those rules allow companies to exclude proposals dealing with a “matter relating to the company’s ordinary business operations.”

In its letter to the S.E.C., Wells Fargo contends that a report of risk-takers and their compensation like the one requested in the proposal qualifies as ordinary business. It “relates to day-to-day management decisions about controls on employee behavior to manage potential losses and liabilities,” the bank told the S.E.C.

“We’ve appreciated the dialogue we’ve had with the comptroller’s office,” Mary Eshet, a Wells Fargo spokeswoman, said last week. “But we have extensive disclosure in our proxy on compensation and risk management practices.”

The S.E.C. has not issued a ruling on the Wells Fargo matter, but the idea proposed by the New York State fund has already been embraced in several regulatory circles.

One of the rules required by the Dodd-Frank law, for example, is a disclosure of incentive-based pay that could lead to material financial loss at a company. In 2011, bank and securities regulators proposed a rule that would require the board of each regulated bank to identify employees who could expose the institutions to substantive losses and disclose the structure of their pay to regulators. The rule has not received final approval.

Back in 2011, European regulators actually passed rules directing banks to make such reports available. The disclosure requirements of the Basel Committee on Banking Supervision ask for, among other things, a description of the types of employees considered as material risk-takers at a bank, the number of such employees in each of its units and details of their pay deals.

Responding to this directive, Wells Fargo issued a disclosure document at the end of 2012, stating that there were only seven such risk-takers who were not top executives at the bank. Wells Fargo also noted in the filing that the human resources committee of its board closely monitors pay practices for employees who might expose it to material risk.

But shareholders have learned that boards can’t always be counted upon to ask tough questions about risk in their companies’ operations. They point to the London Whale episode at JPMorgan Chase as Exhibit A.

Wells Fargo is not the only bank that Mr. DiNapoli has approached with his proposal. Bank of America is another. He said his office might put forward proposals at other banks, depending on how the S.E.C. rules in the coming weeks.

The S.E.C. has signaled that it supports the idea of giving shareholders more information on risk-takers operating under the radar at banks. In 2011, the New York State Common Retirement Fund issued a shareholder proposal in which it asked for disclosures relating to incentive pay awarded to Wells Fargo’s 100 highest-paid employees.

That proposal was excluded from the bank’s proxy materials because the S.E.C. said the requested disclosures should have been limited to employees in a position to incur material losses. Nevertheless, the commission acknowledged the importance of the matter, calling it “a significant policy issue.”

Mr. DiNapoli says he hopes that the S.E.C. rules against Wells Fargo this time, requiring the proposal to be put to a vote at its annual meeting.

“I think generally Wells and other financial institutions still need a change in the mind-set and change in the culture,” he said. “They often need to be prodded, and that’s the purpose of the engagement we have. I’m hoping they will see the light on this.”

Source : http://www.nytimes.com

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