FDIC Rules Yield Search for Loopholes, Subterfuge... and "Clawback" Insurance
It seems a bit early to undermine the FDIC's efforts to make financial executives accountable for serious wrongdoing by putting their own compensation on the line, but some appear ready to do just that.
Newly adopted FDIC rules now dictate that financial companies can "claw back" or recoup two years of an executive's compensation if the company has failed and that the executive was to blame for that downfall.
The new guidelines authorize the FDIC to recover compensation for the two years preceding its appointment as receiver for a failed institution from senior executives and directors who have acted in strategic decision-making roles and who are viewed as "substantially responsible'' for the failure of a so-called "covered company"-one satisfying criteria for FDIC receivership under the Dodd-Frank law.
So, what is a banker to do? Use whatever means possible to circumvent the rules, is the strategy suggested by of human capital expert James Hatch of EisnerAmper, who makes several creative recommendations in a new article entitled: "Five Ways to Beat Dodd-Frank and Keep Your Bonus."
He suggests getting your bank to set up an irrevocable "grantor trust" for you in your name into which you can put your pay and shelter the money from bankruptcy courts, getting your firm to issue restricted stock in lieu of cash compensation, or getting your employer to buy you a life insurance policy instead of paying you.
No guarantees here, of course, its just that "The details of the compensation clawback don't mention what happens if the firm has bought a life insurance policy for the executive," says the accounting expert, so one can try, at least.
The D&O Alternative-Exclusions and All
One idea that does have merit and deserves some attention: Hope your employer decides to buy a new directors and officers (D&O) insurance endorsement that's designed to insure against the clawback.
Anyone who knows a thing or two about liability insurance knows there's almost always
a catch by way of unexpected or undetected exclusions. Here, there's a very obvious exclusion insurance experts predicted might preclude meaningful coverage for a senior financial executive considered responsible for a company's demise.
It is quite common, you see, for D&O insurance coverage to exclude coverage for a loss that's related to any "profit or advantage or remuneration" to which the insured is not legally entitled. "With an aggressive claims handler, the 'remuneration' exclusion could be read broadly to suggest the executive was not entitled to his or her bonus," given the FDIC assertion that this executive substantially responsible for the company's failure, says Machua Millett, a senior vice president in Marsh's financial and professional liability practice (FINPRO)
That exclusion does not exist in the newest policy language on the street-one created by Marsh Inc., the insurance brokerage unit of the ubiquitous Marsh & McLennan Cos, which has been broadly adopted by many major insurance carriers since it was unveiled back in April, says Millett, who is also an executive with FINPRO's private equity merger and acquisition practice.
"This was certainly something we thought about," Millett says of the remuneration clause, but his company decided "it was too close to the line" to include the exclusion in this case, he told eFinancial Careers News.
The bottom line is that your employer may indeed decide to protect you using the new FDIC Receivership Endorsement in question. Millett says that the language is now available from all major D&O insurance carriers and can be purchased as part of a company's "Side A" differences-in-conditions premium endorsement for roughly an extra 5% to 10% of a company's pre-existing D&O premium.
Marsh says its new program is designed to protect senior management of covered financial companies, as defined under Dodd-Frank, that end up in receivership. Such "covered" organizations include bank holding companies, hedge funds, alternative investment funds, private equity funds, and venture capital funds.
"The endorsement provides for reimbursement of costs incurred in responding to and defending against FDIC efforts under Dodd-Frank to repudiate and recoup compensation and benefits. It also provides for indemnification for amounts repudiated and recouped by the FDIC in the form of earned salaries, wages, commissions, benefits and/or other compensation obligations," says the insurance brokerage.
Sally Roberts. a Marsh spokesperson, says that "Dozens of financial institutions, from bank holding companies to hedge funds to private equity firms, have purchased the coverage or are seriously considering it as part of their annual D&O renewals."
Of course, even this policy has a critical exclusion: Financial executives considered to have committed deliberately fraudulent or criminal acts simply will not be reimbursed by the insurance in question-though including the word "deliberately" will certainly make it easier for banks and their senior managers to obtain such coverage.
Under some policies, fraudulent acts are enough to call it quits: you needn't have committed such crimes "deliberately."
All in all, it makes sense to state the obvious: it's not clear how D&O insurance will mesh with the brand-new FDIC rules the next time an executive is accused of negligence.
Another observation-last but not least: Hatch is pretty cheeky about recommending ways to skirt the clawback rules, but isn't it reasonable to make executives accountable for their actions by putting two years of bonus money at risk?
Seems fair enough. Especially when insurance may cover all but the most egregious acts.