Recoupment Under Dodd-Frank: Punishing Financial Executives and Perpetuating 'Too Big to Fail'
14 Pages Posted: 13 Mar 2012 Last revised: 28 Jan 2013
Date Written: November 15, 2012
In July 2011, the Federal Deposit Insurance Corporation (FDIC) promulgated new rules implementing Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules permit recouping compensation paid to senior executives and directors of failed nonbank financial institutions placed into the FDIC’s “orderly liquidation authority” receivership. An action for recoupment is based on a negligence theory of liability, but does not require establishing causation. The rules impose liability even if an executive can establish the total absence of any causal link between his or her conduct and the firm's failure.
This Comment argues that disconnecting recoupment from causation leads to over-deterrence and would perpetuate “too big to fail.” Without the safeguard of causation, the threat of hindsight bias will cause talented executives to gravitate towards institutions that have the lowest risk of failure. The liquidation of massive firms under Title II may be so improbable that they can credibly offer executive compensation with little to no risk of recoupment. Making causation a rebuttable presumption would lead executives to discount recoupment liability by the likelihood of causing actual harm. This would promote healthy competition among financial institutions while easing the evidentiary burden of holding executives accountable for reckless behavior.
Keywords: law, financial regulation, Dodd-Frank, FDIC, recoupment, executive compensation,orderly liquidation authority
JEL Classification: K22
Suggested Citation: Suggested Citation