Federal regulators propose rule dealing with incentive-based compensation

A new rule has been proposed by federal regulators that addresses incentive-based compensation arrangements for large financial institutions.

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Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires Federal regulators to jointly prescribe regulations or guidelines with respect to incentive-based compensation practices at certain financial institutions that have $1 billion or more in assets.

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 claw back provisions.

Further, the prohibitions emphasize the important role of sound governance and risk management control mechanisms. These prohibitions would help safeguard covered institutions from the types and features of incentive-based compensation arrangements that encourage inappropriate risks. Also, 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 federal regulators in this case include the Federal Deposit Insurance Corp., the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of the Currency, the National Credit Union Administration, the Federal Housing Finance Agency (FHFA), and the Securities and Exchange Commission (SEC).

This notice of proposed rulemaking (NPR) is intended to advance stakeholder engagement needed to develop a final incentive-based compensation rule. It re-proposes the regulatory text previously proposed in June 2016, and seeks public comment in the preamble on certain alternatives and questions.

Once the rule is adopted by all six agencies, it will be published in the Federal Register with a comment period of 60 days following publication. Until then, each of these agencies will make it available on their respective websites and will accept comments.

SIFMA, the Securities Industry and Financial Markets Association, has voiced some concerns with the proposal.

“SIFMA agrees with the policy objective to ensure that incentive-based compensation arrangements do not undermine the safety and soundness of financial institutions by encouraging inappropriate risk-taking. We have deep concerns, however, with re-proposing a flawed eight-year-old rule without changes and the failure to act jointly with, or seek input from, all other relevant regulatory bodies, as required while also failing to take into account the dramatic changes that have occurred in the ensuing years,” SIFMA president and CEO Kenneth Bentsen, Jr. said.

Bentsen added that SIFMA is also troubled that the proposed rule appears to exceed its statutory mandate and could have wide-reaching consequences.

“Specifically, we believe that the regulations implementing Section 956 of the Dodd-Frank Act, if adopted as reproposed by the agencies today, will undercut the U.S. financial services industry’s ability to recruit and retain talent in order to responsibly manage risk and operate the industry’s businesses. We look forward to submitting detailed comments upon closely reviewing the proposal,” Bentsen said.