You should be aware of certain significant regulatory and legal developments affecting the banking industry, and prepare your institution to comply with new guidelines. In Part III of the “Bank Regulatory & Legal Developments” Client Alert Series, we will cover:

  1. Compensation Practices
  2. Incentive Compensation For Product Sales
  3. The EEOC & Severance Agreements

Point Of Interest

Examiners are starting to ask our clients more probing questions about their compliance with outstanding regulatory compensation guidance.

Compensation Practices

It is widely believed certain compensation practices led to inappropriate behavior leading up to the global financial crisis. Examiners are starting to ask our clients more probing questions about their compliance with outstanding regulatory compensation guidance. Specifically, they are asking banks whether they are maintaining:

  • balance in risk-taking incentives, taking into account the full range of risk over time;
  • compatibility with effective controls and risk management, such as by revising payments that do not reflect applicable risk;
  • strong corporate governance, including active oversight and monitoring by directors; and
  • how and where is this documented.

Point Of Interest

Consider whether your incentive compensation plans for product sales and referrals should include a deferral period.

Incentive Compensation For Product Sales

The bank regulatory agencies and the Consumer Financial Protection Bureau continue to provide guidance that sweeps broadly across incentive compensation practices in connection with product sales. In addition to the existing requirements, the newer guidance, and in the case of the CFPB, its enforcement actions have focused on an additional recommendation. They recommend incentive plans include “balancing elements,” such as risk adjustments or deferral periods, within the incentive compensation arrangements that are reasonably designed to ensure that the arrangement will be balanced in light of the size, type, and time horizon of the inherent risks of employee activities; and do not create incentives for employees to provide consumers inaccurate information about products. The CFPB, in an enforcement action related to credit card add-on products, required the seller to adopt a policy providing that any incentive compensation based directly on the sale of products would not be payable unless the customer remained enrolled in the product for at least three billing cycles. In light of the recent regulatory focus, consider whether your incentive compensation plans for product sales and referrals should include a deferral period to help ensure that customers continue using the product.

Point Of Interest

Small changes to standard severance agreements can be made to address the issues highlighted in the EEOC’s recent litigation.

The EEOC & Severance Agreements

The Equal Employment Opportunity Commission has for several years considered unlawful any action by an employer that interferes with an employee’s right to file a charge of discrimination or to communicate with and participate in EEOC proceedings. But what if the employee or former employee has signed a severance agreement releasing all claims, including those within the jurisdiction of the EEOC? The EEOC recently sued a national company, alleging that five of its separation agreement provisions were unlawful.

Each of the criticized provisions is a standard provision in many severance agreements. They include:

  • Confidential Information - Prohibiting disclosure of personnel, wage and benefit information.
  • Non-Disparagement Clauses - Prohibiting disparaging statements about the company and its employees.
  • General Release of Claims - Prohibiting initiating a lawsuit.
  • Cooperation Clauses - Requiring cooperation with administrative investigations.

Although the lawsuit has not yet created new law, there are small changes to standard severance agreements that can be made to address the issues highlighted in the EEOC’s recent litigation.