Proposed Incentive-based Compensation Rule
Samantha: Hello, this is Samantha Shares.
This episode covers N C U Aâs Proposed
Incentive-based Compensation Rule
The following is a summary
of that 200 page proposal.
This podcast is educational
and is not legal advice.
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And now the summary.
The proposed rule implements Section
956 of the Dodd-Frank Act, addressing
concerns about flawed incentive-based
compensation practices that contributed
to the 2008 financial crisis.
It builds on previous proposals
from 2011 and 2016, incorporating
supervisory experience and
industry developments since then.
This regulation covers financial
institutions with $1 billion or
more in assets, including banks,
credit unions, Federal Home Loan
Banks, Fannie Mae, Freddie Mac, and
certain subsidiaries, but excludes
functionally regulated subsidiaries like
broker-dealers and investment advisers.
The rule establishes a tiered structure
with Level 1 institutions having $250
billion or more in assets, Level 2
with $50 billion to $250 billion,
and Level 3 with $1 billion to $50
billion, applying more stringent
requirements to larger institutions.
Key definitions in the rule include
"covered persons" (executive officers,
employees, directors, and principal
shareholders), "senior executive
officers" (defined roles such as
CEO and CFO), and "significant
risk-takers" (determined by compensation
level and risk exposure ability).
All covered institutions must prohibit
excessive compensation, ensure
incentive-based compensation appropriately
balances risk and reward, maintain board
oversight of compensation programs,
and comply with specific disclosure
and recordkeeping requirements.
Level 1 and Level 2 institutions face
additional requirements including
mandatory deferral of a portion of
incentive-based compensation, forfeiture
and downward adjustment policies,
clawback provisions, prohibitions on
certain practices like hedging, and
enhanced risk management, governance,
and policy documentation requirements.
The rule provides regulatory flexibility,
allowing regulators to apply stricter
standards to Level 3 institutions if
warranted and providing for modifications
as institutions change in size.
Implementation is proposed for 540 days
after the final rule's publication,
with grandfathering provisions for
existing compensation arrangements.
The proposal considers international
context, discussing related developments
in the European Union and United
Kingdom and aiming for alignment
with international standards.
Extensive regulatory analysis is
included, covering economic impact,
paperwork reduction, and regulatory
flexibility considerations.
The agencies are seeking public
comments on numerous aspects of the
proposal, including consideration of
alternative approaches in certain areas.
The rule is jointly proposed by the
Office of the Comptroller of the Currency,
Federal Deposit Insurance Corporation,
Federal Housing Finance Agency, and
National Credit Union Administration, with
the Federal Reserve and SEC noted as not
participating in this specific proposal.
Enforcement provisions are included,
along with considerations for how
the rules apply to institutions in
conservatorship or receivership.
Overall, this proposed rule represents
a comprehensive attempt to regulate
incentive-based compensation in the
financial sector, balancing the need
for effective compensation practices
with concerns about potential abuse
and systemic risk, with the ultimate
goal of promoting financial stability
and preventing excessive risk-taking.
This concludes the summary.
If your Credit union could use assistance
with your exam, reach out to Mark Treichel
on LinkedIn, or at mark Treichel dot com.
This is Samantha Shares and
we Thank you for listening.
