Fed is Latest to Approve Incentive-Based Pay Proposal

The Federal Reserve Board announced on Monday that it has unanimously approved a joint agency notice of proposed rulemaking (NPR) which would prohibit incentive-based compensation that puts financial institutions at risk as prescribed by Section 956 of Dodd-Frank, according to an announcement from the Fed.

The NPR is being developed jointly with the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC), and the Federal Housing Finance Agency (FHFA). The Fed is accepting public comment on the NPR until July 22.

According to the Fed, each agency is expected to have completed internal review and approval procedures by early May.

Section 956 of Dodd-Frank requires federal regulatory agencies to jointly establish guidelines with respect to inventive-based compensation practices at certain financial institutions, according to the rule’s executive summary. The agencies originally proposed a rule along with the now-defunct Office of Thrift Supervision in 2011, but due to the evolution of incentive-based practices in the financial industry and the gaining of additional supervisory experience by the agencies, it was necessary to revise to include more specific and stringent guidelines—particularly for the larger financial institutions.

The revised NPR applies to covered institutions with $1 billion or more in total consolidated assets and applies different requirements to three levels of institutions based on asset size: institutions with assets of $250 billion or more (level 1), between $50 billion and $250 billion (level 2), and between $1 billion and $50 billion (level 3).

“The proposed rule would prohibit all covered institutions from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risk by providing covered persons with excessive compensation, fees, or benefits or that could lead to material financial loss to the covered institution,” the rule stated. “These are the standards imposed by section 956.”

The rule further states that compensation, fees, and benefits are considered excessive “when amounts paid are unreasonable or disproportionate to the value of the services performed by a covered person.”

Last week, Comptroller of the Currency Thomas Curry voted to approve the NPR, saying that the rule “recognizes the important role that compensation plays in the risks that banks and other financial institutions assume. By requiring proper alignment of compensation incentives with an organization’s risk appetite, the rule calls on lending officers and other employees to put the interests of their institution above their own.”

Curry continued, “The rule will play an important role in helping safeguard financial institutions against practices that threaten safety and soundness, or could lead to material financial loss for the institution. It will also complement the OCC’s Heightened Standards guidelines, which address risk governance at large national banks and federal savings associations.”

Click here to view the proposed rule.