Incentive-Based Compensation Arrangements

Summary:

On May 3, 2024, the FDIC Board of Directors approved a Notice of Proposed Rulemaking (NPR) and request for comment entitled Incentive-Based Compensation Arrangements, a rule to implement Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).  In this NPR, the FDIC, the Office of Comptroller of the Currency (OCC), the National Credit Union Administration (NCUA), and the Federal Housing Finance Agency (FHFA) (collectively the “Agencies” for purposes of this NPR) are re-proposing the regulatory text previously proposed in June 2016, along with certain alternatives and questions, for public comment.1  The NPR would provide a consistent set of enforceable standards and help safeguard covered financial institutions from certain types and features of incentive-based compensation arrangements that encourage inappropriate risks by providing excessive compensation or that could lead to material financial loss to the institution.

Statement of Applicability: This proposed rulemaking does not apply to FDIC-supervised institutions with less than $1 billion in average total consolidated assets.

Key Details:

• On June 10, 2016, an NPR to implement Section 956 of the Dodd-Frank Act was published in the Federal Register (2016 NPR).2
• In consideration of the passage of time since the 2016 NPR, as well as additional supervisory experience, changes in industry practices and other developments, the Agencies are issuing this NPR and seeking additional feedback from commenters by re-proposing the 2016 regulatory text and proposing potential alternatives for consideration.
• Comments received on this NPR as well as those previously submitted on the 2016 NPR will further inform efforts to implement Section 956 of the Dodd-Frank Act.
• The NPR uses a tiered approach that would apply provisions to covered financial institutions according to three categories of average total consolidated assets: Level 1 ($250 billion or more), Level 2 ($50 billion to $250 billion), and Level 3 ($1 billion to $50 billion).
• For all covered institutions, the proposed rule would:
  • Prohibit types and features of incentive-based compensation arrangements that encourage inappropriate risks.
  • Require adherence to basic principles for incentive-based compensation arrangements to balance between risk and reward and establish effective risk management governance.
  • Require appropriate board of directors (or committee) oversight, recordkeeping, and disclosures to the appropriate agency.
• For Level 1 and Level 2 institutions, the proposed rule would:
  • Require the following: deferral of awards for senior executive officers (SEOs) and significant risk-takers (SRTs); consideration of forfeiture or downward adjustment of awards; provide for clawback of paid awards; establishment of a board compensation committee; appropriate risk management and control framework; additional recordkeeping requirements for SEOs and SRTs; and policies and procedures to ensure rule compliance.  
  • Prohibit or limit: excessive award leveraging; using only relative (peer) performance measures; use of options; volume-driven incentive-based compensation without regard to transaction quality or compliance with sound risk management; and the purchasing of hedging instruments by an institution on behalf of a covered person to offset any decrease in the value of incentive-based compensation.
• Potential Alternatives to Regulatory Provisions:
  • The NPR is also seeking feedback on potential alternatives to the proposal’s regulatory provisions including, but not limited to, shortening the compliance date; establishing a two-level structure for covered institutions; simplifying the SRT definition; and requiring performance measures and targets be established before the performance period.   
  • Comments on potential alternatives are also being sought on topics such as options; requiring, instead of requiring consideration of, forfeiture and downward adjustments; clawback; hedging; volume driven incentive-based compensation; and risk management and control requirements for Level 1 and Level 2 covered institutions.
• Until this proposed rulemaking is published in the Federal Register, comments on the proposed rule and alternatives in the preamble can be sent to IncentiveCompProposal2024@fdic.gov and will be posted on the FDIC website at https://www.fdic.gov/regulations/laws/publiccomments/. 

• 1

  The Board of Governors of the Federal Reserve System (Board) has not acted to join this NPR.  Rulemaking to implement section 956 is on the Securities and Exchange Commission’s (SEC) rulemaking agenda.

• 2

  The 2016 NPR was issued by the FDIC, the OCC, the NCUA, the FHFA, SEC and the Board.  See 81 Federal Register 37670 (June 10, 2016).