Agencies re-issue proposal on incentive-based compensation; seek more risk-sensitive approach

Incentive-based compensation arrangements are addressed in a proposal to make those more sensitive to risk was issued – or scheduled to be adopted — Monday by federal banking and credit union regulators, among others. The proposal was first advanced nearly eight years ago, the agencies said.

The board of the Federal Deposit Insurance Corp. (FDIC) approved the proposal by notational vote Monday, the agency said. The National Credit Union Administration (NCUA) said it would act on the proposal “in the near future.” The Office of the Comptroller of the Currency (OCC) also issued the proposal.

The Federal Housing Finance Agency (FHFA) has also approved the proposal, according to NCUA in a release; the Securities and Exchange Commission (SEC) is also considering the proposal as part of its rulemaking agenda, according to the credit union regulator’s release.

The Federal Reserve, according to a memorandum published by the FDIC Board, is not joining the proposal; no reason was given.

According to the FDIC memo, the proposal prescribes regulations or guidelines with respect to incentive-based compensation practices at some financial institutions that have $1 billion or more in assets. This is a re-proposal of one made in June 2016, along with proposing certain alternatives and questions, for public comment.

“The proposed rule includes prohibitions intended to make incentive-based compensation arrangements more sensitive to risk, such as a prohibition on incentive-based compensation arrangements that do not include risk adjustment of awards, deferral of payments, and forfeiture and clawback provisions,” the FDIC memo said.

The memo also said the prohibitions emphasize “the important role of sound governance and risk management control mechanisms.” It asserts that the prohibitions would safeguard covered institutions from types and features of incentive-based compensation arrangements that encourage inappropriate risks. “The recordkeeping and disclosure requirements in the proposed regulatory text would assist the appropriate Federal regulator in monitoring and identifying areas of potential concern at covered institutions,” the memo stated.

According to the regulators, the proposal fulfills a requirement of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), under section 956.

Although the proposal was first adopted in 2016 by the same regulators, the agencies are now saying a re-proposal can provide a consistent set of enforceable standards that “can play an important role in helping ensure that incentive compensation practices at covered financial institutions do not threaten their safety and soundness, are not excessive, and do not lead to material financial loss.”

NCUA release: Agencies Issue Proposal on Incentive-Based Compensation

FDIC memo: Notice of Proposed Rulemaking on Incentive-based Compensation Arrangements

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