Agencies propose Incentive-Based Compensation Arrangements rule

The FDIC, Federal Housing Finance Agency, NCUA, and OCC have issued a Joint Press Release announcing that the FDIC, the OCC, and the FHFA have adopted a Notice of Proposed Rulemaking (NPR) to address incentive-based compensation arrangements, as required under section 956 of the Dodd-Frank Act (section 956). The NCUA is expected to take action on the NPR in the near future. The U.S. Securities and Exchange Commission (SEC) has included a rulemaking to implement section 956 on its rulemaking agenda. This NPR is intended to advance stakeholder engagement needed to develop a final incentive-based compensation rule.

The NPR re-proposes the regulatory text previously proposed in June 2016, and seeks public comment in the preamble on certain alternatives and questions.

Section 956 requires the appropriate Federal regulators—the FDIC, the Board of Governors of the Federal Reserve System (FRB), the OCC, the NCUA, the FHFA, and the SEC—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. Once the NPR 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 agency acting on the NPR will make it available on their respective website, and will accept comments. If any of the six regulators specified by section 956 fails to join in the rulemaking, the rulemaking will not go forward.

The proposed rule includes prohibitions intended to make incentive-based compensation arrangements more sensitive to risk. These include a prohibition on incentive-based compensation arrangements that do not include risk adjustment of awards, deferral of payments, and forfeiture and clawback provisions. The prohibitions also 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. 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.

Comments received on this NPR and those previously submitted on the 2016 NPR will further inform efforts to address incentive-based compensation arrangements, as required under section 956.