The FDIC has proposed a rule to be issued jointly with the other federal banking agencies, the SEC and the Federal Housing Finance Agency that would limit certain types of incentive-based compensation arrangements. The proposal issued on February 7 would implement Section 956 of the Dodd-Frank Act, which prohibits incentive-based compensation arrangements that are deemed to be excessive, may lead to material losses, or encourage inappropriate risk taking by certain financial institutions, including banks, thrifts and their holding companies. The proposed rule would not apply to banks with total consolidated assets of less than $1 billion, and contains heightened standards for institutions with $50 billion or more in total consolidated assets. The proposed rule would prohibit incentive-based compensation arrangements that provide excessive compensation and incentive-based compensation arrangements that provide compensation that could lead to a material financial loss. The proposed rule would also require covered institutions to adopt and implement policies and procedures for incentive-based compensation arrangements that are commensurate with the size and complexity of the institution and require annual reports on incentive compensation structures to the institution’s primary federal regulator. Comments on the proposed rule will be due within 45 days after publication in the Federal Register, which will not occur until the other federal agencies adopt the proposal.

Notes: Under the proposed rule, annual reporting of incentive-based compensation would have to disclose the structure of incentive-based compensation arrangements sufficient to allow the agency to determine whether the structure provides “excessive compensation, fees, or benefits” or “could lead to material financial loss” to the institution. The Dodd-Frank Act does not require a covered financial institution to report the actual compensation of particular executives as part of the reporting requirement. The proposed rule includes standards for determining whether an incentive-based compensation arrangement provides “excessive compensation” that are comparable to, and based on, the standards established under Section 39 of the Federal Deposit Insurance Act. Compensation would be considered excessive when amounts paid are unreasonable or disproportionate to, among other things, the amount, nature, quality, and scope of services performed by a covered person (which includes executive officers, employees, directors, and principal shareholders). In making a determination about whether incentive-based compensation arrangements provide excessive compensation to a covered person, the federal agencies would consider the combined value of all cash and non-cash benefits, the compensation history of the person and other individuals with comparable expertise, and the financial condition of the institution. The agencies would also consider comparable compensation practices at comparable institutions, the projected total cost and benefit to the institution for post-employment benefits, and any connection between the individual and any fraudulent act or omission, breach of trust or fiduciary duty, or insider abuse with regard to the institution. Each agency would also be permitted to consider any other factor the agency determines to be relevant.