New Wall Street compensation rules will wreck havoc for divorcing spouses

So. Financial reform is pretty much a done deal. Even though former Fed chairman Paul Volcker isn’t totally happy with how his Rule was incorporated into the scheme, he has said he is happy enough to give the bill at least a B minus. The Bill as it now reads appears to give banks a bit more “wiggle room” with respect to the handling of “high octane” products such as derivatives and their investments in hedge funds, mortgage backed securities and credit default swaps.
According to the website, the Financial Reform Act (Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) addresses

various aspects of the U.S. financial regulatory system, including regulatory oversight, derivative products, troubled “too big to fail” banks and enhanced consumer protection. The Act was previously approved by the U.S. House of Representatives on June 30, 2010, and President Obama is expected to sign the bill into law. The act establishes new rules related to:

  • shareholder “say on pay” voting;
  • independence of compensation committees and their advisors;
  • increased disclosure related to executive compensation;
  • clawback requirements for incentive compensation;
  • hedging disclosure;
  • shareholder use of proxy materials to nominate directors; and
  • restrictions on broker discretionary voting.
  • My big question is, what does this all mean in English? And what impact do the new rules (not just the Volcker Rule but the whole shebang) have on Wall Street executives and their wives when a divorce transpires between the two?
    One of the changes is the way executive compensation is handled. Banks are now required to give more of the bonus in equity as opposed to cash. So whereas an executive may have been inclined to receive a $1 million cash bonus in the past, now his compensation package would be more stock heavy, a form of deferred compensation scheme, and less up front cash.
    The trouble with this is that there is a difference in the way the courts treat “income” and “assets” for purposes of a divorce. Alimony and child support, for example, are normally taken from income. Bonuses (cash bonuses specifically) have traditionally been treated as income, in part because it was easy to count when it was in cash; it was easy to understand it and see how much was there in the bank account. But now that executives’ bonuses are largely “restricted” and/or “deferred” and more stock than cash (stock interest which may even vest post-divorce), this is creating valuation challenges for accountants, lawyers and financial analysts who don’t have exact dollar amounts from which to calculate the alimony and support. In other words, the new compensation scheme will result in more litigation for affected couples because there is more room to argue about what is the value of a stock portfolio (that is slavishly dependent on market mood) than there would be if one were looking at the balance of cash on a bank account.
    Plus, it allows the earning spouse to swindle the non-earning spouse by dumbing down their income; in other words, this scheme allows an executive to knowingly under-report his or her bonus or maybe even engage in behavior that would cause the employer to rescind the bonus (or the board to veto the bonus under the “say on pay” provisions of the Act), just so that the executive wouldn’t have to pay the former spouse a fair percentage of said bonus.
    Children of these marriages will obviously be caught holding the short end of the stick. Executives will not only be able to get out of paying full scale child support based on their true incomes, but they can even get out of paying for college expenses as well and their offspring may be forced to attend State or community colleges. Can you imagine the horror?