FNCE 5343 LEGAL & ETHICAL ISSUES IN FINANCIAL RISK MANAGEMENT SUMMER

GROUP ROLE SIMULATION #2 INSTRUCTIONS

Facts:

U.S. Securities and Exchange Commission

Press Release

For Immediate Release

Statement by the Commission regarding Establishment of

the Working Group on Risk and Compensation

Washington D.C., July 25, 2021 The U.S. Securities and Exchange Commission (SEC) and the Board of Governors in the Federal Reserve System (Federal Reserve) announce the establishment of a joint working group to advise the U.S. federal government on the regulation of compensation practices in the financial services industry (the Working Group on Risk and Compensation). The Working Group on Risk and Compensation will identify and analyze financial and non-financial risks that result from the compensation practices of global financial institutions.

The Working Group on Risk and Compensation will consist of three groups: (1) members of boards of directors (Directors Alliance); (2) chief executive officers (CEOs) and chief financial officers (CFOs) of global banks (Executives Forum), and (3) institutional investors, such as managers of pension funds and mutual funds (United Funds).

The Working Group on Risk and Compensation will address the following three issues:

• what is the relationship between incentive-based compensation and risk (Risk and Compensation.)
• how financial institutions should determine employee compensation (Compensation Metrics), and
• to what extent should shareholders participate in the process to determine, approve, and/or reject executive officer compensation (Say on Pay).

The three groups composing the Working Group on Risk and Compensation will work together to negotiate and write a Statement of Principles that addresses these three issues. The Statement of Principles will consist of principles, rules, and/or standards that will guide the SEC and the Federal Reserve in their rulemaking and enforcement.

Description and Requirements:

• This role simulation is devoted to the relationship between corporate governance, various types of financial and non-financial risk, and the compensation policies and practices of global financial institutions that are subject to U.S. financial regulation.
• You will work in a group of 3 students to represent either Directors Alliance, Executives Forum, or United Funds. Your group will work with the other two groups as part of the Working Group on Risk and Compensation to negotiate and write a Statement of Principles.
• Each student, as a member of his/her group, is required to:
• Attend and participate in the class session devoted to the role simulation. Any absences must be excused.
• The role simulation is worth 10% of your course grade. Grading will be based on the

FNCE 5343 LEGAL & ETHICAL ISSUES IN FINANCIAL RISK MANAGEMENT SUMMER

quality of the Statement of Principles. Each student will receive the same grade, unless particular circumstances warrant otherwise.

• Before class:
• Together with your group, you should review the following sources: (1) relevant international standards (including the Basel Committees Range of Methodologies for Risk and Performance Alignment of Remuneration); (2) U.S. regulations on compensation under the Dodd-Frank Act (including Sections 951, 952, 953, and 954); and (3) current practices of global financial institutions (including the Compensation Discussion and Analysis (CD&A) section of various banks respective annual proxy statements). Many of these sources are posted on the course site; you should also do independent online research.
• Prior to class, you may not discuss this role simulation with the other groups or with any other students.
• During class:
• During class, your group will negotiate and write a Statement of Principles with the other two groups. The Statement of Principles should be no longer than 5 pages (Times New Roman font, single-spaced, one-inch margins).
• By the end of the class session, your Working Group must submit the Statement of Principles (as a Microsoft Word document) on the course site.