On April 21, 2016, the National Credit Union Administration re-proposed a rule that would establish incentive-based compensation restrictions on certain financial institutions. The OCC, the FDIC and the Federal Housing Finance Agency followed with their own versions of the proposed rule on April 26, 2016, and the Federal Reserve Board approved its version of the rule on May 2, 2016. The OCC, FDIC, FHFA and Federal Reserve Board proposed rules are substantially similar to the NCUA proposal. The proposed rule, issued pursuant to Section 956 of the Dodd-Frank Act, will ultimately take the form of a joint rulemaking among these agencies and the Securities and Exchange Commission, and replaces an earlier proposal issued in 2011.
The proposed rule applies to “covered institutions”, defined generally to mean financial institutions with total consolidated assets greater than or equal to $1 billion. Covered institutions are divided into three tiers, based on asset size, with the most stringent requirements, including requirements that incentive-based compensation arrangements for certain persons include deferred payments, risk of downward adjustment and forfeiture, and clawbacks, applying to the largest institutions (those having total consolidated assets greater than or equal to $250 billion). The revised proposal would prohibit incentive-based compensation arrangements for all covered institutions that encourage inappropriate risks by providing excessive compensation or that could lead to a material financial loss for the covered institutions. The proposed rule clarifies that compensation, fees and benefits will be considered “excessive” when amounts paid are unreasonable or disproportionate to the value of the services performed by a covered person, taking into account all relevant factors. Further, the board of directors of each covered institution would be required to conduct oversight of the institution’s incentive-based compensation program and approve incentive-based compensation arrangements for senior executive officers. Additionally, all covered institutions would be required to create and maintain records demonstrating compliance with the proposed rule.
In a statement issued together with the OCC’s approval of the proposed rule, Comptroller of the Currency Thomas J. Curry stated that the rule seeks to re-align compensation incentives with a financial institution’s risk profile, and to discourage unsound practices by executives.
Comments on the proposed rule are due by July 22, 2016. The proposed rule would take effect no later than the beginning of the first calendar quarter that begins at least 540 days after a final rule is published in the Federal Register.
The full text of the Federal Reserve Board’s proposed rule is available at: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160502a2.pdf, the full text of the OCC’s proposed rule is available at: http://www.occ.gov/news-issuances/news-releases/2016/nr-occ-2016-49a.pdf and Comptroller Curry’s statement is available at: http://www.occ.gov/news-issuances/news-releases/2016/nr-occ-2016-49.html.
The full text of the FDIC’s proposed rule is available at: https://www.fdic.gov/news/board/2016/2016-04-26_notice_dis_a_fr.pdf.
The full text of the FHFA’s proposed rule is available at: https://www.fhfa.gov/SupervisionRegulation/Rules/RuleDocuments/Incentive-Based%20Compensation%20NPR_4-26-16.pdf.
The full text of the NCUA’s proposed rule is available at: https://www.ncua.gov/About/Documents/Agenda%20Items/AG20160421Item2b.pdf.