On Monday, February 7, 2011, the Office of the Comptroller of the Currency, Treasury (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), Office of Thrift Supervision, Treasury (OTS), National Credit Union Administration (NCUA), U.S. Securities and Exchange Commission (SEC), and Federal Housing Finance Agency (FHFA) (collectively, the "Agencies") jointly issued proposed rules pursuant to Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The proposed rules would apply to a financial institution that has total consolidated assets of $1 billion or more and offers incentive-based compensation arrangements to covered persons. "Incentive-based compensation includes any variable compensation that serves as an incentive for performance. Base salary ordinarily would not be incentive-based compensation, whereas, equity-based awards ordinarily would be incentive-based compensation.

The proposed rules would define "covered person" to include any executive officer, employee, director, or principal shareholder of a covered financial institution. The proposed rules do not excluded any categories of employees from their scope. However, because the purpose of the Rule is to address incentive-based compensation arrangements for covered persons or groups of covered persons that encourage inappropriate risk because they provide excessive compensation or pose a risk of material financial loss to a covered financial institution, certain prohibitions in the proposed rules apply only to a subset of covered persons.

I will cover all of the gory details of these proposed rules in subsequent Blog posts. However, the most alarming provision of the rules is one that mandates the deferral of compensation by some executives at certain institutions. The proposed rules establish general requirements for all covered financial institutions and specific requirements for institutions with $50 billion or more in total consolidated assets. The proposed rules provide that, an incentive-based compensation arrangement established or maintained by a covered financial institution for one or more covered persons does not comply with the rules unless it "balances risk and financial rewards, for example, by using deferral of payments, risk adjustment of awards, reduced sensitivity to short-term performance, or extended performance periods.

The proposed rules go on to provide that, for institutions with $50 billion or more in total consolidated assets, as part of appropriately balancing risk and financial rewards pursuant to the rules, any incentive-based compensation arrangement for any executive officer established or maintained by a covered financial institution that has total consolidated assets of $50 billion or more must provide for:

  • (A) At least 50% of the annual incentive-based compensation of the executive officer to be deferred over a period of no less than three years, with the release of deferred amounts to occur no faster than on a pro rata basis; and
  • (B) The adjustment of the amount required to be deferred under paragraph (A) to reflect actual losses or other measures or aspects of performance that are realized or become better known during the deferral period.

I didn't think that a government agency (or agencies) could impose a rule like that in the United States, but I guess the times they are a-changin'.

On February 8, 1693, The College of William and Mary in Williamsburg, Virginia was granted a charter by King William III and Queen Mary II.