Incentive compensation agreements: notice of proposed regulation

Summary

The Office of the Comptroller of the Currency (OCC) has approved a notice of proposed rulemaking to implement Section 956 of the DoddFrank Wall Street Reform and Consumer Protection Act (DoddFrank). The proposal would establish new requirements for incentive compensation at certain covered institutions. Institutions supervised by the OCC that would be subject to the proposed rule include national banks, federal savings associations, and federal branches and agencies, as well as subsidiaries of such institutions (other than broker-dealers, broker-dealers, insurers , investment companies and investment advisors), which offer incentive compensation and whose average total consolidated assets are at least $1 billion.

The proposed rule would prohibit incentive compensation arrangements that encourage inappropriate risk on the part of a covered institution (1) by providing an officer, employee, director, or principal shareholder of the covered institution with compensation, fees, or excessive benefits; or (2) that could result in a significant financial loss to the covered financial institution.

As is generally the case in interagency notices of proposed rulemaking, the close of the comment period will be calculated based on the date of publication of the notice in the journal. Federal Register. Stakeholders may submit comments to the OCC electronically using Regulations.gov, as described in the Notice of Proposed Rulemaking.

Strong points

• Covered institutions would be prohibited from providing excessive incentive compensation.
• Certain individuals working at covered institutions that have at least $50 billion in average consolidated total assets or that are subsidiaries of covered institutions (including bank holding companies and savings and loan holding companies) with at least $50 billion in average consolidated total assets would be subject to additional restrictions on their incentive compensation. These individuals would have certain portions of their incentive compensation mandatorily deferred and subject to forfeiture and would be at risk of having their incentive compensation clawed back if certain triggers were to occur.
• Covered institutions that have at least $50 billion in average consolidated total assets or are subsidiaries of covered institutions with at least $50 billion in average consolidated total assets would be subject to additional coverage prohibitions, the maximum incentive compensation they could grant in relation to that established incentive compensation targets, the use of relative performance measures and volume-based incentive compensation.
• The proposed rule includes requirements for recordkeeping, policies and procedures, risk management, and governance.

Background

Section 956 of the Dodd-Frank Act¹requires the OCC, as well as the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Finance Agency (FHFA), the National Credit Union Administration (NCUA), the Federal Reserve Board of Governors and the La Securities and Exchange Commission (SEC) (collectively, the Agencies), to jointly prescribe regulations or guidelines regarding incentive compensation practices at certain financial institutions.² Specifically, Section 956 of DoddFrank requires the agencies to prohibit any type of incentive compensation arrangement, or any feature of such arrangements, that the agencies determine encourages inappropriate risks by a covered financial institution (1) in providing to an officer, employee, director or principal shareholder of the covered financial institution with excessive compensation, fees or benefits; or (2) that could result in a significant financial loss to the covered financial institution. Under the Act, a covered financial institution must also disclose to its applicable federal regulator the structure of its incentive compensation arrangements, sufficiently to determine whether the structure provides excessive compensation, fees, or benefits or whether it could result in a significant financial loss for the institution. DoddFrank does not require a covered financial institution to report the actual compensation of certain individuals.

On April 14, 2011, the FDIC, OCC, Federal Reserve Board, FHFA, NCUA and SEC published in the Federal Register a proposal to implement Section 956 of DoddFrank.³ On June 10, 2016, the FDIC, OCC, Federal Reserve Board, FHFA, NCUA and SEC published in the Federal Register a subsequent proposal to implement Section 956 of DoddFrank.⁴

In this Notice of Proposed Rulemaking, the OCC reproposes the regulatory text of the 2016 Proposed Rule and requests comments on specific alternatives and general questions, taking into account the length of time since publication of the 2016 Proposed Rule, as well as as experience in additional monitoring, changes. in industrial practice and other developments.

Further information

Please contact Alison MacDonald, Senior Counsel, Banking Advice, or Melissa Lisenbee, Attorney, Banking Advice, at (202) 649-5490; Tamara Culler, Director, Governance and Operational Risk Policy, at (202) 649-7866; or Heather Gilmore, Senior Expert in Systemic Risk Identification Support and Specialized Oversight for Governance and Operational Risk, Monitoring Risk and Analysis, at (215) 494-7686.

Theodore J. Dowd
Acting Principal Deputy Comptroller and Chief Counsel

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