In a joint release, Office of the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation; Federal Housing Finance Agency; National Credit Union Administration; and U.S. Securities and Exchange Commission, (collectively “Regulators”), have issued their long-anticipated Proposed Rule limiting incentive-based compensation for bankers Thursday. This 2016 Proposed Rule is stronger and broader than the one Regulators initially proposed in 2011. The Rule largely mirrors the industry trends in executive compensation the banks have been implementing over the last few years, but the breadth of the Rule means it will impact more employees than just the top executives.
The Rule would require the largest banks to withhold 60% of all incentive-based pay for covered persons for four years and it includes a 7 year clawback provision for bonuses paid if it is later determined that an employee’s actions caused losses or if an institution has to restate financial results.
Regulators are aiming at executives in positions, regardless of title, who initiate activities generating risk of material financial loss and who receive incentive-based compensation sufficient to influence their risk-taking behavior. At the largest banks, this would include the top 5% of highest paid employees who receive more than a third of their compensation based on incentives or bonuses. According to the Wall Street Journal, the top 5% of employees by pay at the six largest U.S. banks is almost 52,000 employees. The percentage of those employees who would be impacted due to incentive level is not publically known.
The Act applies to Fannie Mae, Freddie Mac, and depositories, broker-dealers, and credit unions with $1 billion or more in non-client assets. There is a catch-all provision which includes “any other financial institution that the appropriate Federal regulators . . . determine should be treated as a covered financial institution.” (12 CFR Parts 741 and 751). The Rule has tiered regulations based on asset level. The most stringent of the requirements will be applied to financial firms with non-client assets of $250 billion or more. Institutions whose assets are largely those of clients, such as mutual fund and hedge fund firms, will see minimal change from the Rule.
The deadline for public comments on the Proposed Rule is July 22, 2016.