On February 7, 2011, federal regulators jointly issued proposed rules on incentive-based compensation arrangements under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed rules generally apply to financial institutions with $1 billion or more in assets that maintain incentive-based compensation arrangements for certain covered persons, such as executive officers, directors, and employees.

Key provisions of the proposed rules would:  

  • Prohibit incentive-based compensation arrangements that encourage covered persons to expose the institution to inappropriate risk by providing the covered person with "excessive" compensation.
  • Prohibit covered financial institutions from establishing or maintaining incentive based compensation arrangements for covered persons who encourage inappropriate risks that could lead to a material financial loss.
  • Require covered financial institutions to provide disclosures to regulators regarding their incentive-based compensation arrangements for covered persons within 90 days after the end of each fiscal year.
  • Require covered financial institutions to maintain policies and procedures appropriate to their size, complexity and use of incentive-based compensation.
  • Require the board of directors, or a committee of the board, of covered financial institutions to approve any incentive-based compensation arrangement.
  • Require large covered financial institutions (covered financial institutions with total assets of $50 billion or more) to defer at least 50% of the incentive-based compensation paid to executive officers for at least three years.  

The proposed rules will be effective six months after publication of the final rule in the Federal Register.