# FDIC FIL-34-2016: Incentive-Based Compensation Arrangements

> Federal · Agency guidance · In force

URL: https://www.frixlaw.com/law-library/statutes/FDIC_FIL16034

## Section

- **Citation:** FDIC FIL-34-2016
- **Heading:** Incentive-Based Compensation Arrangements
- **Jurisdiction:** Federal
- **Kind:** Agency guidance
- **Status:** In force
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** FDIC Financial Institution Letters / Incentive-Based Compensation Arrangements

## Text

Vol. 81
Friday,
No. 112
June 10, 2016
Part II
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 42
Federal Reserve System
12 CFR Part 236
Federal Deposit Insurance Corporation
12 CFR Part 372
National Credit Union Administration
12 CFR Parts 741 and 751
Federal Housing Finance Agency
12 CFR Part 1232
Securities and Exchange Commission
17 CFR Parts 240, 275, and 303
Incentive-Based Compensation Arrangements; Proposed Rule
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Federal Register / Vol. 81, No. 112 / Friday, June 10, 2016 / Proposed Rules
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 42
[Docket No. OCC–2011–0001]
RIN 1557–AD39
FEDERAL RESERVE SYSTEM
12 CFR Part 236
[Docket No. R–1536]
RIN 7100 AE–50
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 372
RIN 3064–AD86
NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Parts 741 and 751
RIN 3133–AE48
FEDERAL HOUSING FINANCE
AGENCY
12 CFR Part 1232
RIN 2590–AA42
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 240, 275, and 303
[Release No. 34–77776; IA–4383; File No.
S7–07–16]
RIN 3235–AL06
Incentive-Based Compensation
Arrangements
AGENCY: Office of the Comptroller of the
Currency, Treasury (OCC); Board of
Governors of the Federal Reserve
System (Board); Federal Deposit
Insurance Corporation (FDIC); Federal
Housing Finance Agency (FHFA);
National Credit Union Administration
(NCUA); and U.S. Securities and
Exchange Commission (SEC).
ACTION: Notice of proposed rulemaking
and request for comment
nsation
Arrangements
AGENCY: Office of the Comptroller of the
Currency, Treasury (OCC); Board of
Governors of the Federal Reserve
System (Board); Federal Deposit
Insurance Corporation (FDIC); Federal
Housing Finance Agency (FHFA);
National Credit Union Administration
(NCUA); and U.S. Securities and
Exchange Commission (SEC).
ACTION: Notice of proposed rulemaking
and request for comment.
SUMMARY: The OCC, Board, FDIC, FHFA,
NCUA, and SEC (the Agencies) are
seeking comment on a joint proposed
rule (the proposed rule) to revise the
proposed rule the Agencies published in
the Federal Register on April 14, 2011,
and to implement section 956 of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank
Act). Section 956 generally requires that
the Agencies jointly issue regulations or
guidelines: (1) Prohibiting incentive-
based payment arrangements that the
Agencies determine encourage
inappropriate risks by certain financial
institutions by providing excessive
compensation or that could lead to
material financial loss; and (2) requiring
those financial institutions to disclose
information concerning incentive-based
compensation arrangements to the
appropriate Federal regulator.
DATES: Comments must be received by
July 22, 2016.
ADDRESSES: Although the Agencies will
jointly review the comments submitted,
it would facilitate review of the
comments if interested parties send
comments to the Agency that is the
appropriate Federal regulator, as
defined in section 956(e) of the Dodd-
Frank Act, for the type of covered
institution addressed in the comments.
Commenters are encouraged to use the
title ‘‘Incentive-based Compensation
Arrangements’’ to facilitate the
organization and distribution of
comments among the Agencies
the
comments if interested parties send
comments to the Agency that is the
appropriate Federal regulator, as
defined in section 956(e) of the Dodd-
Frank Act, for the type of covered
institution addressed in the comments.
Commenters are encouraged to use the
title ‘‘Incentive-based Compensation
Arrangements’’ to facilitate the
organization and distribution of
comments among the Agencies.
Interested parties are invited to submit
written comments to:
Office of the Comptroller of the
Currency: Because paper mail in the
Washington, DC area and at the OCC is
subject to delay, commenters are
encouraged to submit comments by the
Federal eRulemaking Portal or email, if
possible. Please use the title ‘‘Incentive-
based Compensation Arrangements’’ to
facilitate the organization and
distribution of the comments. You may
submit comments by any of the
following methods:
• Federal eRulemaking Portal—
Regulations.gov: Go to
www.regulations.gov. Enter ‘‘Docket ID
OCC–2011–0001’’ in the Search Box and
click ‘‘Search.’’ Click on ‘‘Comment
Now’’ to submit public comments.
• Click on the ‘‘Help’’ tab on the
Regulations.govhome page to get
information on using Regulations.gov,
including instructions for submitting
public comments.
• Email: regs.comments@
occ.treas.gov.
• Mail: Legislative and Regulatory
Activities Division, Office of the
Comptroller of the Currency, 400 7th
Street SW., Suite 3E–218, Mail Stop
9W–11, Washington, DC 20219.
• Fax: (571) 465–4326.
• Hand Delivery/Courier: 400 7th
Street SW., Suite 3E–218, Mail Stop
9W–11, Washington, DC 20219.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
ID OCC–2011–0001’’ in your comment.
In general, OCC will enter all comments
received into the docket and publish
them on the Regulations.gov Web site
without change, including any business
or personal information that you
provide such as name and address
information, email addresses, or phone
numbers
ngton, DC 20219.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
ID OCC–2011–0001’’ in your comment.
In general, OCC will enter all comments
received into the docket and publish
them on the Regulations.gov Web site
without change, including any business
or personal information that you
provide such as name and address
information, email addresses, or phone
numbers. Comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
enclose any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
You may review comments and other
related materials that pertain to this
proposed rule by any of the following
methods:
• Viewing Comments Electronically:
Go to www.regulations.gov. Enter
‘‘Docket ID OCC–2011–0001’’ in the
Search box and click ‘‘Search.’’ Click on
‘‘Open Docket Folder’’ on the right side
of the screen and then ‘‘Comments.’’
Comments can be filtered by clicking on
‘‘View All’’ and then using the filtering
tools on the left side of the screen.
• Click on the ‘‘Help’’ tab on the
Regulations.gov home page to get
information on using Regulations.gov.
Supporting materials may be viewed by
clicking on ‘‘Open Docket Folder’’ and
then clicking on ‘‘Supporting
Documents.’’ The docket may be viewed
after the close of the comment period in
the same manner as during the comment
period.
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC, 400 7th Street
SW., Washington, DC. For security
reasons, the OCC requires that visitors
make an appointment to inspect
comments. You may do so by calling
on ‘‘Supporting
Documents.’’ The docket may be viewed
after the close of the comment period in
the same manner as during the comment
period.
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC, 400 7th Street
SW., Washington, DC. For security
reasons, the OCC requires that visitors
make an appointment to inspect
comments. You may do so by calling
(202) 649–6700 or, for persons who are
deaf or hard of hearing, TTY, (202) 649–
5597. Upon arrival, visitors will be
required to present valid government-
issued photo identification and to
submit to security screening in order to
inspect and photocopy comments.
Board of Governors of the Federal
Reserve System: You may submit
comments, identified by Docket No.
1536 and RIN No. 7100 AE–50, by any
of the following methods:
• Agency Web site: http://
www.federalreserve.gov. Follow the
instructions for submitting comments at
http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• Email: regs.comments@
federalreserve.gov. Include the docket
number and RIN number in the subject
line of the message.
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Federal Register / Vol. 81, No. 112 / Friday, June 10, 2016 / Proposed Rules
• Fax: (202) 452–3819 or (202) 452–
3102.
• Mail: Address to Robert deV.
Frierson, Secretary, Board of Governors
of the Federal Reserve System, 20th
Street and Constitution Avenue NW.,
Washington, DC 20551.
All public comments will be made
available on the Board’s Web site at
http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical
reasons. Accordingly, comments will
not be edited to remove any identifying
or contact information
Board of Governors
of the Federal Reserve System, 20th
Street and Constitution Avenue NW.,
Washington, DC 20551.
All public comments will be made
available on the Board’s Web site at
http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical
reasons. Accordingly, comments will
not be edited to remove any identifying
or contact information. Public
comments may also be viewed
electronically or in paper form in Room
3515, 1801 K Street NW. (between 18th
and 19th Streets NW.), Washington, DC
20006 between 9:00 a.m. and 5:00 p.m.
on weekdays.
Federal Deposit Insurance
Corporation: You may submit
comments, identified by RIN 3064–
AD86, by any of the following methods:
• Agency Web site: http://
www.FDIC.gov/regulations/laws/
federal/propose.html. Follow
instructions for submitting comments
on the Agency Web site.
• Email: Comments@FDIC.gov.
Include the RIN 3064–AD86 on the
subject line of the message.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments, Federal
Deposit Insurance Corporation, 550 17th
Street NW., Washington, DC 20429.
• Hand Delivery: Comments may be
hand delivered to the guard station at
the rear of the 550 17th Street Building
(located on F Street) on business days
between 7:00 a.m. and 5:00 p.m.
• Public Inspection: All comments
received, including any personal
information provided, will be posted
generally without change to http://
www.fdic.gov/regulations/laws/federal.
Federal Housing Finance Agency: You
may submit your written comments on
the proposed rulemaking, identified by
RIN number, by any of the following
methods:
• Agency Web site: www.fhfa.gov/
open-for-comment-or-input.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments. If
you submit your comment to the
Federal eRulemaking Portal, please also
send it by email to FHFA at
RegComments@fhfa.gov to ensure
timely receipt by the Agency
identified by
RIN number, by any of the following
methods:
• Agency Web site: www.fhfa.gov/
open-for-comment-or-input.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments. If
you submit your comment to the
Federal eRulemaking Portal, please also
send it by email to FHFA at
RegComments@fhfa.gov to ensure
timely receipt by the Agency. Please
include ‘‘RIN 2590–AA42’’ in the
subject line of the message.
• Hand Delivery/Courier: The hand
delivery address is: Alfred M. Pollard,
General Counsel, Attention: Comments/
RIN 2590–AA42, Federal Housing
Finance Agency, Eighth Floor, 400 7th
Street SW., Washington, DC 20219. The
package should be delivered at the 7th
Street entrance Guard Desk, First Floor,
on business days between 9 a.m. and 5
p.m.
• U.S. Mail, United Parcel Service,
Federal Express, or Other Mail Service:
The mailing address for comments is:
Alfred M. Pollard, General Counsel,
Attention: Comments/RIN 2590–AA42,
Federal Housing Finance Agency, 400
7th Street SW., Washington, DC 20219.
Please note that all mail sent to FHFA
via U.S. Mail is routed through a
national irradiation facility, a process
that may delay delivery by
approximately two weeks.
All comments received by the
deadline will be posted without change
for public inspection on the FHFA Web
site at http://www.fhfa.gov, and will
include any personal information
provided, such as name, address
(mailing and email), and telephone
numbers. Copies of all comments timely
received will be available for public
inspection and copying at the address
above on government-business days
between the hours of 10:00 a.m. and
3:00 p.m. To make an appointment to
inspect comments please call the Office
of General Counsel at (202) 649–3804.
National Credit Union
Administration: You may submit
comments by any of the following
methods (please send comments by one
method only):
• Federal eRulemaking Portal: http://
www.regulations.gov
e address
above on government-business days
between the hours of 10:00 a.m. and
3:00 p.m. To make an appointment to
inspect comments please call the Office
of General Counsel at (202) 649–3804.
National Credit Union
Administration: You may submit
comments by any of the following
methods (please send comments by one
method only):
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• Agency Web site: http://
www.ncua.gov. Follow the instructions
for submitting comments.
• Email: Address to regcomments@
ncua.gov. Include ‘‘[Your name]
Comments on ‘‘Notice of Proposed
Rulemaking for Incentive-based
Compensation Arrangements’’ in the
email subject line.
• Fax: (703) 518–6319. Use the
subject line described above for email.
• Mail: Address to Gerard S. Poliquin,
Secretary of the Board, National Credit
Union Administration, 1775 Duke
Street, Alexandria, Virginia 22314–
3428.
• Hand Delivery/Courier: Same as
mail address.
• Public Inspection: All public
comments are available on the agency’s
Web site at http://www.ncua.gov/Legal/
Regs/Pages/PropRegs.aspx as submitted,
except when not possible for technical
reasons. Public comments will not be
edited to remove any identifying or
contact information. Paper copies of
comments may be inspected in NCUA’s
law library at 1775 Duke Street,
Alexandria, Virginia 22314, by
appointment weekdays between 9:00
a.m. and 3:00 p.m. To make an
appointment, call (703) 518–6546 or
send an email to OGCMail@ncua.gov.
Securities and Exchange Commission:
You may submit comments by the
following method:
Electronic Comments
• Use the SEC’s Internet comment
form (http://www.sec.gov/rules/
proposed.shtml);
• Send an email to rule-comments@
sec.gov. Please include File Number S7–
07–16 on the subject line; or
• Use the Federal eRulemaking Portal
(http://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments
• Send paper comments in triplicate
to Brent J
thod:
Electronic Comments
• Use the SEC’s Internet comment
form (http://www.sec.gov/rules/
proposed.shtml);
• Send an email to rule-comments@
sec.gov. Please include File Number S7–
07–16 on the subject line; or
• Use the Federal eRulemaking Portal
(http://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549.
All submissions should refer to File
Number S7–07–16. This file number
should be included on the subject line
if email is used. To help us process and
review your comments more efficiently,
please use only one method. The SEC
will post all comments on the SEC’s
Internet Web site (http://www.sec.gov/
rules/proposed.shtml). Comments are
also available for Web site viewing and
printing in the SEC’s Public Reference
Room, 100 F Street NE., Washington, DC
20549 on official business days between
the hours of 10:00 a.m. and 3:00 p.m.
All comments received will be posted
without change; the SEC does not edit
personal identifying information from
submissions. You should submit only
information that you wish to make
available publicly.
Studies, memoranda or other
substantive items may be added by the
SEC or staff to the comment file during
this rulemaking. A notification of the
inclusion in the comment file of any
such materials will be made available
on the SEC’s Web site. To ensure direct
electronic receipt of such notifications,
sign up through the ‘‘Stay Connected’’
option at www.sec.gov to receive
notifications by email.
FOR FURTHER INFORMATION CONTACT:
OCC: Patrick T. Tierney, Assistant
Director, Alison MacDonald, Senior
Attorney, and Melissa Lisenbee,
Attorney, Legislative and Regulatory
Activities, (202) 649–5490, and Judi
McCormick, Analyst, Operational Risk
Policy, (202) 649–6415, Office of the
Comptroller of the Currency, 400 7th
Street SW., Washington, DC 20219
to receive
notifications by email.
FOR FURTHER INFORMATION CONTACT:
OCC: Patrick T. Tierney, Assistant
Director, Alison MacDonald, Senior
Attorney, and Melissa Lisenbee,
Attorney, Legislative and Regulatory
Activities, (202) 649–5490, and Judi
McCormick, Analyst, Operational Risk
Policy, (202) 649–6415, Office of the
Comptroller of the Currency, 400 7th
Street SW., Washington, DC 20219.
Board: Teresa Scott, Manager, (202)
973–6114, Meg Donovan, Senior
Supervisory Financial Analyst, (202)
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Federal Register / Vol. 81, No. 112 / Friday, June 10, 2016 / Proposed Rules
1 Public Law 111–203, 124 Stat. 1376 (2010).
872–7542, or Joe Maldonado,
Supervisory Financial Analyst, (202)
973–7341, Division of Banking
Supervision and Regulation; or Laurie
Schaffer, Associate General Counsel,
(202) 452–2272, Michael Waldron,
Special Counsel, (202) 452–2798,
Gillian Burgess, Counsel, (202) 736–
5564, Flora Ahn, Counsel, (202) 452–
2317, or Steve Bowne, Senior Attorney,
(202) 452–3900, Legal Division, Board of
Governors of the Federal Reserve
System, 20th and C Streets NW.,
Washington, DC 20551.
FDIC: Rae-Ann Miller, Associate
Director, Risk Management Policy,
Division of Risk Management
Supervision (202) 898–3898, Catherine
Topping, Counsel, Legal Division, (202)
898–3975, and Nefretete Smith,
Counsel, Legal Division, (202) 898–
6851.
FHFA: Mary Pat Fox, Manager,
Executive Compensation Branch, (202)
649–3215; or Lindsay Simmons,
Assistant General Counsel, (202) 649–
3066, Federal Housing Finance Agency,
400 7th Street SW., Washington, DC
20219. The telephone number for the
Telecommunications Device for the
Hearing Impaired is (800) 877–8339
02)
898–3975, and Nefretete Smith,
Counsel, Legal Division, (202) 898–
6851.
FHFA: Mary Pat Fox, Manager,
Executive Compensation Branch, (202)
649–3215; or Lindsay Simmons,
Assistant General Counsel, (202) 649–
3066, Federal Housing Finance Agency,
400 7th Street SW., Washington, DC
20219. The telephone number for the
Telecommunications Device for the
Hearing Impaired is (800) 877–8339.
NCUA: Vickie Apperson, Program
Officer, and Jeffrey Marshall, Program
Officer, Office of Examination &
Insurance, (703) 518–6360; or Elizabeth
Wirick, Senior Staff Attorney, Office of
General Counsel, (703) 518–6540,
National Credit Union Administration,
1775 Duke Street, Alexandria, Virginia
22314.
SEC: Raymond A. Lombardo, Branch
Chief, Kevin D. Schopp, Special
Counsel, Division of Trading & Markets,
(202) 551–5777 or tradingandmarkets@
sec.gov; Sirimal R. Mukerjee, Senior
Counsel, Melissa R. Harke, Branch
Chief, Division of Investment
Management, (202) 551–6787 or
IARules@SEC.gov, U.S. Securities and
Exchange Commission, 100 F Street NE.,
Washington, DC 20549.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Background
B. Supervisory Experience
C. Overview of the 2011 Proposed Rule and
Public Comment
D. International Developments
E. Overview of the Proposed Rule
II. Section-by-Section Description of the
Proposed Rule
§ ll.1
Authority, Scope and Initial
Applicability
§ ll.2
Definitions
Definitions Pertaining to Covered
Institutions
Consolidation
Level 1, Level 2, and Level 3 Covered
Institutions
Definitions Pertaining to Covered Persons
Relative Compensation Test
Exposure Test
Exposure Test at Certain Affiliates
Dollar Threshold Test
Other Definitions
Relationship Between Defined Terms
§ ll.3
Applicability
(a) When Average Total Consolidated
Assets Increase
(b) When Total Consolidated Assets
Decrease
itutions
Consolidation
Level 1, Level 2, and Level 3 Covered
Institutions
Definitions Pertaining to Covered Persons
Relative Compensation Test
Exposure Test
Exposure Test at Certain Affiliates
Dollar Threshold Test
Other Definitions
Relationship Between Defined Terms
§ ll.3
Applicability
(a) When Average Total Consolidated
Assets Increase
(b) When Total Consolidated Assets
Decrease
(c) Compliance of Covered Institutions
That Are Subsidiaries of Covered
Institutions
§ ll.4
Requirements and Prohibitions
Applicable to All Covered Institutions
(a) In General
(b) Excessive Compensation
(c) Material Financial Loss
(d) Performance Measures
(e) Board of Directors
(f) Disclosure and Recordkeeping
Requirements and (g) Rule of
Construction
§ ll.5
Additional Disclosure and
Recordkeeping Requirements for Level 1
and Level 2 Covered Institutions
§ ll.6
Reservation of Authority for
Level 3 Covered Institutions
§ ll.7
Deferral, Forfeiture and
Downward Adjustment, and Clawback
Requirements for Level 1 and Level 2
Covered Institutions
§ ll.7(a) Deferral
§ ll.7(a)(1) and § ll.7(a)(2) Minimum
Deferral Amounts and Deferral Periods
for Qualifying Incentive-Based
Compensation and Incentive-Based
Compensation Awarded Under a Long-
Term Incentive Plan
Pro Rata Vesting
Acceleration of Payments
Qualifying Incentive-Based Compensation
and Incentive-Based Compensation
Awarded Under a Long-Term Incentive
Plan
§ ll.7(a)(3) Adjustments of Deferred
Qualifying Incentive-Based
Compensation and Deferred Long-Term
Incentive Plan Compensation Amounts
§ ll.7(a)(4) Composition of Deferred
Qualifying Incentive-Based
Compensation and Deferred Long-Term
Incentive Plan Compensation for Level 1
and Level 2 Covered Institutions
Cash and Equity-Like Instruments
Options
§ ll.7(b) Forfeiture and Downward
Adjustment
§ ll.7(b)(1) Compensation at Risk
§ ll.7(b)(2) Events Triggering Forfeiture
and Downward Adjustment Review
§ ll.7(b)(3) Senior Executive Officers and
Significant Risk-Takers Affected
tive-Based
Compensation and Deferred Long-Term
Incentive Plan Compensation for Level 1
and Level 2 Covered Institutions
Cash and Equity-Like Instruments
Options
§ ll.7(b) Forfeiture and Downward
Adjustment
§ ll.7(b)(1) Compensation at Risk
§ ll.7(b)(2) Events Triggering Forfeiture
and Downward Adjustment Review
§ ll.7(b)(3) Senior Executive Officers and
Significant Risk-Takers Affected by
Forfeiture and Downward Adjustment
§ ll.7(b)(4) Determining Forfeiture and
Downward Adjustment Amounts
§ ll.7(c) Clawback
§ ll.8
Additional Prohibitions for Level
1 and Level 2 Covered Institutions
§ ll.8(a) Hedging
§ ll.8(b) Maximum Incentive-Based
Compensation Opportunity
§ ll.8(c) Relative Performance Measures
§ ll.8(d) Volume-Driven Incentive-Based
Compensation
§ ll.9
Risk Management and Controls
Requirements for Level 1 and Level 2
Covered Institutions
§ ll.10
Governance Requirements for
Level 1 and Level 2 Covered Institutions
§ ll.11
Policies and Procedures
Requirements for Level 1 and Level 2
Covered Institutions
§ ll.12
Indirect Actions
§ ll.13
Enforcement
§ ll.14
NCUA and FHFA Covered
Institutions in Conservatorship,
Receivership, or Liquidation
SEC Amendment to Exchange Act Rule
17a–4
SEC Amendment to Investment Advisers
Act Rule 204–2
III. Appendix to the Supplementary
Information: Example Incentive-Based
Compensation Arrangement and
Forfeiture and Downward Adjustment
Review
Ms. Ledger: Senior Executive Officer at
Level 2 Covered Institution Balance
Award of Incentive-Based Compensation
for Performance Periods Ending
December 31, 2024
Vesting Schedule
Use of Options in Deferred Incentive-Based
Compensation
Other Requirements Specific to Ms.
Ledger’s Incentive-Based Compensation
Arrangement
Risk Management and Controls and
Governance
Recordkeeping
Mr. Ticker: Forfeiture and Downward
Adjustment Review
IV. Request for Comments
V. Regulatory Analysis
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C
1, 2024
Vesting Schedule
Use of Options in Deferred Incentive-Based
Compensation
Other Requirements Specific to Ms.
Ledger’s Incentive-Based Compensation
Arrangement
Risk Management and Controls and
Governance
Recordkeeping
Mr. Ticker: Forfeiture and Downward
Adjustment Review
IV. Request for Comments
V. Regulatory Analysis
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. The Treasury and General Government
Appropriations Act, 1999—Assessment
of Federal Regulations and Policies on
Families
D. Riegle Community Development and
Regulatory Improvement Act of 1994
E. Solicitation of Comments on Use of
Plain Language
F. OCC Unfunded Mandates Reform Act of
1995 Determination
G. Differences Between the Federal Home
Loan Banks and the Enterprises
H. NCUA Executive Order 13132
Determination
I. SEC Economic Analysis
J. Small Business Regulatory Enforcement
Fairness Act
List of Subjects
I. Introduction
Section 956 of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act (the ‘‘Dodd-Frank Act’’ or the
‘‘Act’’) 1 requires the Agencies to jointly
prescribe regulations or guidelines with
respect to incentive-based compensation
practices at certain financial institutions
(referred to as ‘‘covered financial
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2 12 U.S.C. 5641.
3 Section 956(b) uses the term ‘‘incentive-based
payment arrangement.’’ It appears that Congress
used the terms ‘‘incentive-based payment
arrangement’’ and ‘‘incentive-based compensation
arrangement’’ interchangeably. The Agencies have
chosen to use the term ‘‘incentive-based
compensation arrangement’’ throughout the
proposed rule and this SUPPLEMENTARY INFORMATION
section for the sake of clarity.
4 12 U.S.C. 1831p–1
m ‘‘incentive-based
payment arrangement.’’ It appears that Congress
used the terms ‘‘incentive-based payment
arrangement’’ and ‘‘incentive-based compensation
arrangement’’ interchangeably. The Agencies have
chosen to use the term ‘‘incentive-based
compensation arrangement’’ throughout the
proposed rule and this SUPPLEMENTARY INFORMATION
section for the sake of clarity.
4 12 U.S.C. 1831p–1. The OCC, Board, and FDIC
(collectively, the ‘‘Federal Banking Agencies’’) each
have adopted guidelines implementing the
compensation-related and other safety and
soundness standards in section 39 of the FDIA. See
Interagency Guidelines Establishing Standards for
Safety and Soundness (the ‘‘Federal Banking
Agency Safety and Soundness Guidelines’’), 12 CFR
part 30, Appendix A (OCC); 12 CFR part 208,
Appendix D–1 (Board); 12 CFR part 364, Appendix
A (FDIC).
5 12 U.S.C. 1831p–1(c).
6 76 FR 21170 (April 14, 2011).
7 OCC, Board, FDIC, and Office of Thrift
Supervision, ‘‘Guidance on Sound Incentive
Compensation Policies’’ (‘‘2010 Federal Banking
Agency Guidance’’), 75 FR 36395 (June 25, 2010).
8 These include the Executive Compensation Rule
(12 CFR part 1230), the Golden Parachute Payments
Rule (12 CFR part 1231), and the Federal Home
Loan Bank Directors’ Compensation and Expenses
Rule (12 CFR part 1261 subpart C).
9 The Safety and Soundness Act means the
Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, as amended (12 U.S.C. 4501
et seq.). 12 CFR 1201.1
.
8 These include the Executive Compensation Rule
(12 CFR part 1230), the Golden Parachute Payments
Rule (12 CFR part 1231), and the Federal Home
Loan Bank Directors’ Compensation and Expenses
Rule (12 CFR part 1261 subpart C).
9 The Safety and Soundness Act means the
Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, as amended (12 U.S.C. 4501
et seq.). 12 CFR 1201.1.
10 See, e.g., the European Union, Directive 2013/
36/EU (effective January 1, 2014); United Kingdom
Prudential Regulation Authority (‘‘PRA’’) and
Financial Conduct Authority (‘‘FCA’’), ‘‘PRA PS12/
15/FCA PS15/16: Strengthening the Alignment of
Risk and Reward: New Remuneration Rules’’ (June
25, 2015) (‘‘UK Remuneration Rules’’), available at
http://www.bankofengland.co.uk/pra/Documents/
publications/ps/2015/ps1215.pdf; Australian
Prudential Regulation Authority (‘‘APRA’’),
Prudential Practice Guide SPG 511—Remuneration
(November 2013), available at http://
www.apra.gov.au/Super/Documents/Prudential-
Practice-Guide-SPG-511-Remuneration.pdf; Canada,
The Office of the Superintendent of Financial
Institutions (‘‘OSFI’’) Corporate Governance
Guidelines (January 2013) (‘‘OSFI Corporate
Governance Guidelines’’), available at http://
www.osfi-bsif.gc.ca/eng/fi-if/rg-ro/gdn-ort/gl-ld/
pages/cg_guideline.aspx and Supervisory
Framework (December 2010) (‘‘OSFI Supervisory
Framework’’), available at http://www.osfi-
bsif.gc.ca/Eng/Docs/sframew.pdf; Switzerland,
Financial Market Supervisory Authority
(‘‘FINMA’’), 2010/01 FINMA Circular on
Remuneration Schemes (October 2009) (‘‘FINMA
Remuneration Circular’’), available at https://
www.finma.ch/en/documentation/circulars/
#Order=2.
11 This section-by-section description also
includes certain examples of how the proposed rule
would work in practice. These examples are
intended solely for purposes of illustration and do
not cover every aspect of the proposed rule
NMA Circular on
Remuneration Schemes (October 2009) (‘‘FINMA
Remuneration Circular’’), available at https://
www.finma.ch/en/documentation/circulars/
#Order=2.
11 This section-by-section description also
includes certain examples of how the proposed rule
would work in practice. These examples are
intended solely for purposes of illustration and do
not cover every aspect of the proposed rule. They
are provided as an aid to understanding the
proposed rule and do not carry the force and effect
of law or regulation.
12 Specifically, the Agencies propose to codify the
rules as follows: 12 CFR part 42 (OCC); 12 CFR part
236 (the Board); 12 CFR part 372 (FDIC); 17 CFR
part 303 (SEC); 12 CFR parts 741 and 751 (NCUA);
and 12 CFR part 1232 (FHFA).
institutions’’).2 Specifically, section 956
of the Dodd-Frank Act (‘‘section 956’’)
requires that the Agencies prohibit any
types of incentive-based compensation 3
arrangements, or any feature of any such
arrangements, that the Agencies
determine encourage inappropriate risks
by a covered financial institution: (1) By
providing an executive officer,
employee, director, or principal
shareholder of the covered financial
institution with excessive
compensation, fees, or benefits; or (2)
that could lead to material financial loss
to the covered financial institution.
Under the Act, a covered financial
institution also must disclose to its
appropriate Federal regulator the
structure of its incentive-based
compensation arrangements sufficient to
determine whether the structure
provides excessive compensation, fees,
or benefits or could lead to material
financial loss to the institution. The
Dodd-Frank Act does not require a
covered financial institution to report
the actual compensation of particular
individuals
ose to its
appropriate Federal regulator the
structure of its incentive-based
compensation arrangements sufficient to
determine whether the structure
provides excessive compensation, fees,
or benefits or could lead to material
financial loss to the institution. The
Dodd-Frank Act does not require a
covered financial institution to report
the actual compensation of particular
individuals.
The Act defines ‘‘covered financial
institution’’ to include any of the
following types of institutions that have
$1 billion or more in assets: (A) A
depository institution or depository
institution holding company, as such
terms are defined in section 3 of the
Federal Deposit Insurance Act (‘‘FDIA’’)
(12 U.S.C. 1813); (B) a broker-dealer
registered under section 15 of the
Securities Exchange Act of 1934 (15
U.S.C. 78o); (C) a credit union, as
described in section 19(b)(1)(A)(iv) of
the Federal Reserve Act; (D) an
investment adviser, as such term is
defined in section 202(a)(11) of the
Investment Advisers Act of 1940 (15
U.S.C. 80b–2(a)(11)); (E) the Federal
National Mortgage Association (Fannie
Mae); (F) the Federal Home Loan
Mortgage Corporation (Freddie Mac);
and (G) any other financial institution
that the appropriate Federal regulators,
jointly, by rule, determine should be
treated as a covered financial institution
for these purposes.
The Act also requires that any
compensation standards adopted under
section 956 be comparable to the safety
and soundness standards applicable to
insured depository institutions under
section 39 of the FDIA 4 and that the
Agencies take the compensation
standards described in section 39 of the
FDIA into consideration in establishing
compensation standards under section
956.5 As explained in greater detail
below, the standards established by the
proposed rule are comparable to the
standards established under section 39
of the FDIA
insured depository institutions under
section 39 of the FDIA 4 and that the
Agencies take the compensation
standards described in section 39 of the
FDIA into consideration in establishing
compensation standards under section
956.5 As explained in greater detail
below, the standards established by the
proposed rule are comparable to the
standards established under section 39
of the FDIA.
In April 2011, the Agencies published
a joint notice of proposed rulemaking
that proposed to implement section 956
(2011 Proposed Rule).6 Since the 2011
Proposed Rule was published,
incentive-based compensation practices
have evolved in the financial services
industry. The Board, the OCC, and the
FDIC have gained experience in
applying guidance on incentive-based
compensation,7 FHFA has gained
supervisory experience in applying
compensation-related rules 8 adopted
under the authority of the Safety and
Soundness Act,9 and foreign
jurisdictions have adopted incentive-
based compensation remuneration
codes, regulations, and guidance.10 In
light of these developments and the
comments received on the 2011
Proposed Rule, the Agencies are
publishing a new proposed rule to
implement section 956.
The first part of this SUPPLEMENTARY
INFORMATION section provides
background information on the
proposed rule, including a summary of
the 2011 Proposed Rule and areas in
which the proposed rule differs from the
2011 Proposed Rule. The second part
contains a section-by-section
description of the proposed rule.11 To
help explain how the requirements of
the proposed rule would work in
practice, the Appendix to this
SUPPLEMENTARY INFORMATION section sets
out an example of an incentive-based
compensation arrangement for a
hypothetical senior executive officer at
a hypothetical large banking
organization and an example of how a
forfeiture and downward adjustment
review might be conducted for a senior
manager at a hypothetical large banking
organization
ule would work in
practice, the Appendix to this
SUPPLEMENTARY INFORMATION section sets
out an example of an incentive-based
compensation arrangement for a
hypothetical senior executive officer at
a hypothetical large banking
organization and an example of how a
forfeiture and downward adjustment
review might be conducted for a senior
manager at a hypothetical large banking
organization.
For ease of reference, the proposed
rules of the Agencies are referenced in
this SUPPLEMENTARY INFORMATION section
using a common designation of section
ll.1 to section ll.14 (excluding the
title and part designations for each
agency). Each agency would codify its
rule, if adopted, within its respective
title of the Code of Federal
Regulations.12
A. Background
Incentive-based compensation
arrangements are critical tools in the
management of financial institutions.
These arrangements serve several
important objectives, including
attracting and retaining skilled staff and
promoting better performance of the
institution and individual employees.
Well-structured incentive-based
compensation arrangements can
promote the health of a financial
institution by aligning the interests of
executives and employees with those of
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13 See, e.g., Financial Crisis Inquiry Commission,
‘‘Financial Crisis Inquiry Report’’ (January 2011), at
209, 279, 291, 343, available at https://
www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-
FCIC.pdf; Senior Supervisors Group, ‘‘Observations
on Risk Management Practices during the Recent
Market Turbulence’’ (March 6, 2008), available at
https://www.newyorkfed.org/medialibrary/media/
newsevents/news/banking/2008/SSG_Risk_Mgt_
doc_final.pdf
sion,
‘‘Financial Crisis Inquiry Report’’ (January 2011), at
209, 279, 291, 343, available at https://
www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-
FCIC.pdf; Senior Supervisors Group, ‘‘Observations
on Risk Management Practices during the Recent
Market Turbulence’’ (March 6, 2008), available at
https://www.newyorkfed.org/medialibrary/media/
newsevents/news/banking/2008/SSG_Risk_Mgt_
doc_final.pdf.
14 A large financial institution suffered losses in
2012 from trading by an investment office in its
synthetic credit portfolio. These losses amounted to
approximately $5.8 billion, which was
approximately 3.6 percent of the holding company’s
tier 1 capital. https://www.sec.gov/Archives/edgar/
data/19617/000001961713000221/0000019617-13-
000221-index.htm Form 10–K 2013, Pages 69 and
118. In 2007, a proprietary trading group at another
large institution caused losses of an estimated $7.8
billion (approximately 25 percent of the firm’s total
stockholder’s equity). http://
www.morganstanley.com/about-us-ir/shareholder/
10k113008/10k1108.pdf Form 10–K 2008, Pages 45
and 108. Between 2005 and 2008, one futures trader
at a large financial institution engaged in activities
that caused losses of an estimated EUR4.9 billion
in 2007, which was approximately 23 percent of the
firm’s 2007 tier 1 capital. http://
www.societegenerale.com/sites/default/files/
03%20March%202008%202008%20
Registration%20Document.pdf, Pages, 52, 159–160;
http://www.societegenerale.com/sites/default/files/
12%20May%202008%20The%20report%20by
%20the%20General%20Inspection%20of%20
Societe%20Generale.pdf, Pages 1–71. In 2011, one
trader at another large financial institution caused
losses of an estimated $2.25 billion, which
represented approximately 5.4 percent of the firm’s
tier 1 capital. https://www.fca.org.uk/news/press-
releases/fca-bans-kweku-mawuli-adoboli-from-the-
financial-services-industry, Page 1; https://
www.ubs.com/global/en/about_ubs/investor_
relations/other_filings/sec.html. 2012 SEC Form 20–
F, Page 34
r at another large financial institution caused
losses of an estimated $2.25 billion, which
represented approximately 5.4 percent of the firm’s
tier 1 capital. https://www.fca.org.uk/news/press-
releases/fca-bans-kweku-mawuli-adoboli-from-the-
financial-services-industry, Page 1; https://
www.ubs.com/global/en/about_ubs/investor_
relations/other_filings/sec.html. 2012 SEC Form 20–
F, Page 34. In 2007, one trader caused losses of an
estimated $264 million at a large financial
institution, which represented approximately 1.7
percent of its tier 1 capital. http://
www.federalreserve.gov/newsevents/press/
enforcement/20081118a.htm, Page 1; https://
www.bmo.com/ci/ar2008/downloads/bmo_
ar2008.pdf, Page 61.
15 Staff of S. Permanent Subcomm. on
Investigations, Wall Street and the Financial Crisis:
Anatomy of a Financial Collapse at 143 (Comm.
Print 2011).
16 See Financial Stability Forum, ‘‘FSF Principles
for Sound Compensation Practices’’ (April 2009)
(the ‘‘FSB Principles’’), available at http://
www.financialstabilityboard.org/publications/r_
0904b.pdf; Senior Supervisors Group, ‘‘Risk-
management Lessons from the Global Banking
Crisis of 2008’’ (October 2009), available at http://
www.newyorkfed.org/newsevents/news/banking/
2009/ma091021.html. The Financial Stability
Forum was renamed the Financial Stability Board
(‘‘FSB’’) in April 2009.
17 See Institute of International Finance, Inc.,
‘‘Compensation in Financial Services: Industry
Progress and the Agenda for Change’’ (March 2009),
available at http://www.oliverwyman.com/ow/pdf_
files/OW_En_FS_Publ_2009_
CompensationInFS.pdf. See also UBS, ‘‘Shareholder
Report on UBS’s Write-Downs,’’ (April 18, 2008), at
41–42 (identifying incentive effects of UBS
compensation practices as contributing factors in
losses suffered by UBS due to exposure to the
subprime mortgage market), available at http://
www.ubs.com/1/ShowMedia/investors/
agm?contentId=140333&name=080418Shareholder
Report.pdf
n_FS_Publ_2009_
CompensationInFS.pdf. See also UBS, ‘‘Shareholder
Report on UBS’s Write-Downs,’’ (April 18, 2008), at
41–42 (identifying incentive effects of UBS
compensation practices as contributing factors in
losses suffered by UBS due to exposure to the
subprime mortgage market), available at http://
www.ubs.com/1/ShowMedia/investors/
agm?contentId=140333&name=080418Shareholder
Report.pdf.
18 As discussed below, the proposed rule uses the
term ‘‘covered institution’’ rather than the statutory
term ‘‘covered financial institution.’’
the institution’s shareholders and other
stakeholders. At the same time, poorly
structured incentive-based
compensation arrangements can provide
executives and employees with
incentives to take inappropriate risks
that are not consistent with the long-
term health of the institution and, in
turn, the long-term health of the U.S.
economy. Larger financial institutions
in particular are interconnected with
one another and with many other
companies and markets, which can
mean that any negative impact from
inappropriate risk-taking can have
broader consequences. The risk of these
negative externalities may not be fully
taken into account in incentive-based
compensation arrangements, even
arrangements that otherwise align the
interests of shareholders and other
stakeholders with those of executives
and employees.
There is evidence that flawed
incentive-based compensation practices
in the financial industry were one of
many factors contributing to the
financial crisis that began in 2007
may not be fully
taken into account in incentive-based
compensation arrangements, even
arrangements that otherwise align the
interests of shareholders and other
stakeholders with those of executives
and employees.
There is evidence that flawed
incentive-based compensation practices
in the financial industry were one of
many factors contributing to the
financial crisis that began in 2007. Some
compensation arrangements rewarded
employees—including non-executive
personnel like traders with large
position limits, underwriters, and loan
officers—for increasing an institution’s
revenue or short-term profit without
sufficient recognition of the risks the
employees’ activities posed to the
institutions, and therefore potentially to
the broader financial system.13 Traders
with large position limits, underwriters,
and loan officers are three examples of
non-executive personnel who had the
ability to expose an institution to
material amounts of risk. Significant
losses caused by actions of individual
traders or trading groups occurred at
some of the largest financial institutions
during and after the financial crisis.14
Of particular note were incentive-
based compensation arrangements for
employees in a position to expose the
institution to substantial risk that failed
to align the employees’ interests with
those of the institution. For example,
some institutions gave loan officers
incentives to write a large amount of
loans or gave traders incentives to
generate high levels of trading revenues,
without sufficient regard for the risks
associated with those activities. The
revenues that served as the basis for
calculating bonuses were generated
immediately, while the risk outcomes
might not have been realized for months
or years after the transactions were
completed
incentives to write a large amount of
loans or gave traders incentives to
generate high levels of trading revenues,
without sufficient regard for the risks
associated with those activities. The
revenues that served as the basis for
calculating bonuses were generated
immediately, while the risk outcomes
might not have been realized for months
or years after the transactions were
completed. When these, or similarly
misaligned incentive-based
compensation arrangements, are
common in an institution, the
foundation of sound risk management
can be undermined by the actions of
employees seeking to maximize their
own compensation.
The effect of flawed incentive-based
compensation practices is demonstrated
by the arrangements implemented by
Washington Mutual (WaMu). According
to the Senate Permanent Subcommittee
on Investigations Staff’s report on the
failure of WaMu ‘‘[l]oan officers and
processors were paid primarily on
volume, not primarily on the quality of
their loans, and were paid more for
issuing higher risk loans. Loan officers
and mortgage brokers were also paid
more when they got borrowers to pay
higher interest rates, even if the
borrower qualified for a lower rate—a
practice that enriched WaMu in the
short term, but made defaults more
likely down the road.’’ 15
Flawed incentive-based compensation
arrangements were evident in not just
U.S. financial institutions, but also
major financial institutions
worldwide.16 In a 2009 survey of
banking organizations engaged in
wholesale banking activities, the
Institute of International Finance found
that 98 percent of respondents
recognized the contribution of
incentive-based compensation practices
to the financial crisis.17
Shareholders and other stakeholders
in a covered institution 18 have an
interest in aligning the interests of
executives, managers, and other
employees with the institution’s long-
term health
ale banking activities, the
Institute of International Finance found
that 98 percent of respondents
recognized the contribution of
incentive-based compensation practices
to the financial crisis.17
Shareholders and other stakeholders
in a covered institution 18 have an
interest in aligning the interests of
executives, managers, and other
employees with the institution’s long-
term health. However, aligning the
interests of shareholders (or members,
in the case of credit unions, mutual
savings associations, mutual savings
banks, some mutual holding companies,
and Federal Home Loan Banks) and
other stakeholders with employees may
not always be sufficient to protect the
safety and soundness of an institution,
deter excessive compensation, or deter
behavior or inappropriate risk-taking
that could lead to material financial loss
at the institution. Executive officers and
employees of a covered institution may
be willing to tolerate a degree of risk
that is inconsistent with the interests of
stakeholders, as well as broader public
policy goals.
Generally, the incentive-based
compensation arrangements of a
covered institution should reflect the
interests of the shareholders and other
stakeholders, to the extent that the
incentive-based compensation makes
those covered persons demand more or
less reward for their risk-taking at the
covered institution, and to the extent
that incentive-based compensation
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nd other
stakeholders, to the extent that the
incentive-based compensation makes
those covered persons demand more or
less reward for their risk-taking at the
covered institution, and to the extent
that incentive-based compensation
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19 The financial institutions in the Horizontal
Review are Ally Financial Inc.; American Express
Company; Bank of America Corporation; The Bank
of New York Mellon Corporation; Capital One
Financial Corporation; Citigroup Inc.; Discover
Financial Services; The Goldman Sachs Group, Inc.;
JPMorgan Chase & Co.; Morgan Stanley; Northern
Trust Corporation; The PNC Financial Services
Group, Inc.; State Street Corporation; SunTrust
Banks, Inc.; U.S. Bancorp; and Wells Fargo &
Company; and the U.S. operations of Barclays plc,
BNP Paribas, Credit Suisse Group AG, Deutsche
Bank AG, HSBC Holdings plc, Royal Bank of
Canada, The Royal Bank of Scotland Group plc,
Societe Generale, and UBS AG.
20 Board, ‘‘Incentive Compensation Practices: A
Report on the Horizontal Review of Practices at
Large Banking Organizations’’ (October 2011)
(‘‘2011 FRB White Paper), available at http://
www.federalreserve.gov/publications/other-reports/
files/incentive-compensation-practices-report-
201110.pdf
s plc, Royal Bank of
Canada, The Royal Bank of Scotland Group plc,
Societe Generale, and UBS AG.
20 Board, ‘‘Incentive Compensation Practices: A
Report on the Horizontal Review of Practices at
Large Banking Organizations’’ (October 2011)
(‘‘2011 FRB White Paper), available at http://
www.federalreserve.gov/publications/other-reports/
files/incentive-compensation-practices-report-
201110.pdf.
21 See, e.g., FSB Principles; FSB, ‘‘FSB Principles
for Sound Compensation Practices: Implementation
Standards, Basel, Switzerland’’ (September 2009),
available at http://www.fsb.org/wp-content/
uploads/r_090925c.pdf?page_moved=1 (together
with the FSB Principles, the ‘‘FSB Principles and
Implementation Standards’’); Basel Committee on
Banking Supervision, ‘‘Report on Range of
Methodologies for Risk and Performance Alignment
of Remuneration’’ (May 2011); Basel Committee on
Banking Supervision, ‘‘Principles for the Effective
Supervision of Financial Conglomerates’’
(September 2012); FSB, ‘‘Implementing the FSB
Principles for Sound Compensation Practices and
their Implementation Standards—First, Second,
Third, and Fourth Progress Reports’’ (June 2012,
August 2013, November 2014, November 2015),
available at http://www.fsb.org/publications/
?policy_area%5B%5D=24.
changes those covered persons’ risk-
taking. However, risks undertaken by a
covered institution—particularly a
larger institution—can spill over into
the broader economy, affecting other
institutions and stakeholders. Therefore,
there may be reasons why the
preferences of all of the stakeholders are
not fully reflected in incentive-based
compensation arrangements. Hence,
there is a public interest in curtailing
the inappropriate risk-taking incentives
provided by incentive-based
compensation arrangements
nstitution—can spill over into
the broader economy, affecting other
institutions and stakeholders. Therefore,
there may be reasons why the
preferences of all of the stakeholders are
not fully reflected in incentive-based
compensation arrangements. Hence,
there is a public interest in curtailing
the inappropriate risk-taking incentives
provided by incentive-based
compensation arrangements. Without
restrictions on incentive-based
compensation arrangements, covered
institutions may engage in more risk-
taking than is optimal from a societal
perspective, suggesting that regulatory
measures may be required to cut back
on the risk-taking incentivized by such
arrangements. Particularly at larger
institutions, shareholders and other
stakeholders may have difficulty
effectively monitoring and controlling
the impact of incentive-based
compensation arrangements throughout
the institution that may affect the
institution’s risk profile, the full range
of stakeholders, and the larger economy.
As a result, supervision and
regulation of incentive-based
compensation can play an important
role in helping safeguard covered
institutions against incentive-based
compensation practices that threaten
safety and soundness, are excessive, or
could lead to material financial loss. In
particular, such supervision and
regulation can help address the negative
externalities affecting the broader
economy or other institutions that may
arise from inappropriate risk-taking by
large financial institutions.
B. Supervisory Experience
To address such practices, the Federal
Banking Agencies proposed, and then
later adopted, the 2010 Federal Banking
Agency Guidance governing incentive-
based compensation programs, which
applies to all banking organizations
regardless of asset size
oader
economy or other institutions that may
arise from inappropriate risk-taking by
large financial institutions.
B. Supervisory Experience
To address such practices, the Federal
Banking Agencies proposed, and then
later adopted, the 2010 Federal Banking
Agency Guidance governing incentive-
based compensation programs, which
applies to all banking organizations
regardless of asset size. This Guidance
uses a principles-based approach to
ensure that incentive-based
compensation arrangements
appropriately tie rewards to longer-term
performance and do not undermine the
safety and soundness of banking
organizations or create undue risks to
the financial system. In addition, to
foster implementation of improved
incentive-based compensation practices,
the Board, in cooperation with the OCC
and FDIC, initiated in late 2009 a
multidisciplinary, horizontal review
(‘‘Horizontal Review’’) of incentive-
based compensation practices at 25
large, complex banking organizations,
which is still ongoing.19 One goal of the
Horizontal Review is to help improve
the Federal Banking Agencies’
understanding of the range and
evolution of incentive-based
compensation practices across
institutions and categories of employees
within institutions. The second goal is
to provide guidance to each institution
in implementing the 2010 Federal
Banking Agency Guidance. The
supervisory experience of the Federal
Banking Agencies in this area is also
relevant to the incentive-based
compensation practices at broker-
dealers and investment advisers.
As part of the Horizontal Review, the
Board conducted reviews of line of
business operations in the areas of
trading, mortgage, credit card, and
commercial lending operations as well
as senior executive incentive-based
compensation awards and payouts
l
Banking Agencies in this area is also
relevant to the incentive-based
compensation practices at broker-
dealers and investment advisers.
As part of the Horizontal Review, the
Board conducted reviews of line of
business operations in the areas of
trading, mortgage, credit card, and
commercial lending operations as well
as senior executive incentive-based
compensation awards and payouts. The
institutions subject to the Horizontal
Review have made progress in
developing practices that would
incorporate the principles of the 2010
Federal Banking Agency Guidance into
their risk management systems,
including through better recognition of
risk in incentive-based compensation
decision-making and improved
practices to better balance risk and
reward. Many of those changes became
evident in the actual compensation
arrangements of the institutions as the
review progressed. In 2011, the Board
made public its initial findings from the
Horizontal Review, recognizing the
steps the institutions had made towards
improving their incentive-based
compensation practices, but also noting
that each institution needed to do
more.20 In early 2012, the Board
initiated a second, cross-firm review of
12 additional large banking
organizations (‘‘2012 LBO Review’’).
The Board also monitors incentive-
based compensation as part of ongoing
supervision. Supervisory oversight
focuses most intensively on large
banking organizations because they are
significant users of incentive-based
compensation and because flawed
approaches at these organizations are
more likely to have adverse effects on
the broader financial system. As part of
that supervision, the Board also
conducts targeted incentive-based
compensation exams and considers
incentive-based compensation in the
course of wider line of business and
risk-related reviews
they are
significant users of incentive-based
compensation and because flawed
approaches at these organizations are
more likely to have adverse effects on
the broader financial system. As part of
that supervision, the Board also
conducts targeted incentive-based
compensation exams and considers
incentive-based compensation in the
course of wider line of business and
risk-related reviews.
For the past several years, the Board
also has been actively engaged in
international compensation,
governance, and conduct working
groups that have produced a variety of
publications aimed at further improving
incentive-based compensation
practices.21
The FDIC reviews incentive-based
compensation practices as part of its
safety and soundness examinations of
state nonmember banks, most of which
are smaller community institutions that
would not be covered by the proposed
rule. FDIC incentive-based
compensation reviews are conducted in
the context of the 2010 Federal Banking
Agency Guidance and Section 39 of the
FDIA. Of the 518 bank failures resolved
by the FDIC between 2007 and 2015, 65
involved banks with total assets of $1
billion or more that would have been
covered by the proposed rule. Of the 65
institutions that failed with total assets
of $1 billion or more, 18 institutions or
approximately 28 percent, were
identified as having some level of issues
or concerns related to compensation
arrangements, many of which involved
incentive-based compensation. Overall,
most of the compensation issues related
to either excessive compensation or
tying financial incentives to metrics
such as corporate performance or loan
production without adequate
consideration of related risks. Also,
several cases involved poor governance
practices, most commonly, dominant
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compensation or
tying financial incentives to metrics
such as corporate performance or loan
production without adequate
consideration of related risks. Also,
several cases involved poor governance
practices, most commonly, dominant
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37676
Federal Register / Vol. 81, No. 112 / Friday, June 10, 2016 / Proposed Rules
22 The Inspector General of the appropriate
federal banking agency must conduct a Material
Loss Review (‘‘MLR’’) when losses to the Deposit
Insurance Fund from failure of an insured
depository institution exceed certain thresholds.
See FDIC MLRs, available at https://
www.fdicig.gov/mlr.shtml; Board MLRs available at
http://oig.federalreserve.gov/reports/audit-
reports.htm; and OCC MLRs, available at https://
www.treasury.gov/about/organizational-structure/
ig/Pages/audit_reports_index.aspx. See also the
Subcommittee Report.
23 12 CFR part 30, appendix D.
24 12 U.S.C. 4518(a).
25 As conservator, FHFA succeeded to all rights,
titles, powers and privileges of the Enterprises, and
of any shareholder, officer or director of each
company with respect to the company and its
assets. The Enterprises have been under
conservatorship since September 2008.
26 12 CFR parts 1230 and 1231, under the
authority of the Safety and Soundness Act (12
U.S.C. 4518), as amended by the Housing and
Economic Recovery Act of 2008. Congress enacted
HERA, including new or amended provisions
addressing compensation at FHFA’s regulated
entities, at least in part in response to the financial
crisis that began in 2007.
27 12 CFR part 1230.
28 12 CFR 1230.3(d).
29 12 CFR part 1231.
30 See generally 2011 FRB White Paper. The 2011
FRB White Paper provides specific examples of
how compensation practices at the institutions
involved in the Board’s Horizontal Review of
Incentive Compensation have changed since the
recent financial crisis
t least in part in response to the financial
crisis that began in 2007.
27 12 CFR part 1230.
28 12 CFR 1230.3(d).
29 12 CFR part 1231.
30 See generally 2011 FRB White Paper. The 2011
FRB White Paper provides specific examples of
how compensation practices at the institutions
involved in the Board’s Horizontal Review of
Incentive Compensation have changed since the
recent financial crisis.
management influencing improper
incentives.22
The OCC reviews and assesses
compensation practices at individual
banks as part of its normal supervisory
activities. For example, the OCC
identifies matters requiring attention
(MRAs) relating to compensation
practices, including matters relating to
governance and risk management and
controls for compensation. The OCC’s
Guidelines Establishing Heightened
Standards for Certain Large Insured
National Banks, Insured Federal Savings
Associations, and Insured Federal
Branches 23 (the ‘‘OCC’s Heightened
Standards’’) require covered banks to
establish and adhere to compensation
programs that prohibit incentive-based
payment arrangements that encourage
inappropriate risks by providing
excessive compensation or that could
lead to material financial loss. The OCC
includes an assessment of the banks’
compensation practices when
determining compliance with the OCC’s
Heightened Standards.
In addition to safety and soundness
oversight, FHFA has express statutory
authorities and mandates related to
compensation paid by its regulated
entities. FHFA reviews compensation
arrangements before they are
implemented at Fannie Mae, Freddie
Mac, the Federal Home Loan Banks, and
the Office of Finance of the Federal
Home Loan Bank System
compliance with the OCC’s
Heightened Standards.
In addition to safety and soundness
oversight, FHFA has express statutory
authorities and mandates related to
compensation paid by its regulated
entities. FHFA reviews compensation
arrangements before they are
implemented at Fannie Mae, Freddie
Mac, the Federal Home Loan Banks, and
the Office of Finance of the Federal
Home Loan Bank System. By statute,
FHFA must prohibit its regulated
entities from providing compensation to
any executive officer of a regulated
entity that is not reasonable and
comparable with compensation for
employment in other similar businesses
(including publicly held financial
institutions or major financial services
companies) involving similar duties and
responsibilities.24 FHFA also has
additional authority over the Enterprises
during conservatorship, and has
established compensation programs for
Enterprise executives.25
In early 2014, FHFA issued two final
rules related to compensation pursuant
to its authority over compensation
under the Safety and Soundness Act.26
The Executive Compensation Rule sets
forth requirements and processes with
respect to compensation provided to
executive officers by the Enterprises, the
Federal Home Loan Banks, and the
Federal Home Loan Bank System’s
Office of Finance.27 Under the rule,
those entities may not enter into an
incentive plan with an executive officer
or pay any incentive compensation to an
executive officer without providing
advance notice to FHFA.28 FHFA’s
Golden Parachute Payments Rule
governs golden parachute payments in
the case of a regulated entity’s
insolvency, conservatorship, or troubled
condition.29
In part because of the work described
above, incentive-based compensation
practices and the design of incentive-
based compensation arrangements at
banking organizations supervised by the
Federal Banking Agencies have
improved significantly in the years
since the recent financial crisis
te payments in
the case of a regulated entity’s
insolvency, conservatorship, or troubled
condition.29
In part because of the work described
above, incentive-based compensation
practices and the design of incentive-
based compensation arrangements at
banking organizations supervised by the
Federal Banking Agencies have
improved significantly in the years
since the recent financial crisis.
However, the Federal Banking Agencies
have continued to evaluate incentive-
based compensation practices as a part
of their ongoing supervision
responsibilities, with a particular focus
on the design of incentive-based
compensation arrangements for senior
executive officers; deferral practices
(including compensation at risk through
forfeiture and clawback mechanisms);
governance and the use of discretion; ex
ante risk adjustment; and control
function participation in incentive-
based compensation design and risk
evaluation. The Federal Banking
Agencies’ supervision has been focused
on ensuring robust risk management
and governance practices rather than on
prescribing levels of pay.
Generally, the supervisory work of the
Federal Banking Agencies and FHFA
has promoted more risk-sensitive
incentive-based compensation practices
and effective risk governance. Incentive-
based compensation decision-making
increasingly leverages underlying risk
management frameworks to help ensure
better risk identification, monitoring,
and escalation of risk issues. Prior to the
recent financial crisis, many institutions
had no effective risk adjustments to
incentive-based compensation at all
incentive-based compensation practices
and effective risk governance. Incentive-
based compensation decision-making
increasingly leverages underlying risk
management frameworks to help ensure
better risk identification, monitoring,
and escalation of risk issues. Prior to the
recent financial crisis, many institutions
had no effective risk adjustments to
incentive-based compensation at all.
Today, the Board has observed that
incentive-based compensation
arrangements at the largest banking
institutions reflect risk adjustments, the
largest banking institutions take into
consideration adverse outcomes, more
pay is deferred, and more of the
deferred amount is subject to reduction
based on failure to meet assigned
performance targets or as a result of
adverse outcomes that trigger forfeiture
and clawback reviews.30
Similarly, prior to the recent financial
crisis, institutions rarely involved risk
management and control personnel in
incentive-based compensation decision-
making. Today, control functions
frequently play an increased role in the
design and operation of incentive-based
compensation, and institutions have
begun to build out frameworks to help
validate the effectiveness of risk
adjustment mechanisms. Risk-related
performance objectives and ‘‘risk
reviews’’ are increasingly common.
Prior to the recent financial crisis,
boards of directors had begun to
consider the relationship between
incentive-based compensation and risk,
but were focused on incentive-based
compensation for senior executives.
Today, refined policies and procedures
promote some consistency and
effectiveness across incentive-based
compensation arrangements. The role of
boards of directors has expanded and
the quality of risk information provided
to those boards has improved. Finance
and audit committees work together
with compensation committees with the
goal of having incentive-based
compensation result in prudent risk-
taking
icies and procedures
promote some consistency and
effectiveness across incentive-based
compensation arrangements. The role of
boards of directors has expanded and
the quality of risk information provided
to those boards has improved. Finance
and audit committees work together
with compensation committees with the
goal of having incentive-based
compensation result in prudent risk-
taking.
Notwithstanding the recent progress,
incentive-based compensation practices
are still in need of improvement,
including better targeting of
performance measures and risk metrics
to specific activities, more consistent
application of risk adjustments, and
better documentation of the decision-
making process. Congress has required
the Agencies to jointly prescribe
regulations or guidelines that cover not
only depository institutions and
depository institution holding
companies, but also other financial
institutions. While the Federal Banking
Agencies’ supervisory approach based
on the 2010 Federal Banking Agency
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31 In the 2011 Proposed Rule, the term ‘‘larger
covered financial institution’’ for the Federal
Banking Agencies and the SEC meant those covered
institutions with total consolidated assets of $50
billion or more. For the NCUA, all credit unions
with total consolidated assets of $10 billion or more
would have been larger covered institutions. For
FHFA, Fannie Mae, Freddie Mac, and all Federal
Home Loan Banks with total consolidated assets of
$1 billion or more would have been larger covered
institutions.
Guidance and the work of FHFA have
resulted in improved incentive-based
compensation practices, there are even
greater benefits possible under rule-
based supervision
llion or more
would have been larger covered institutions. For
FHFA, Fannie Mae, Freddie Mac, and all Federal
Home Loan Banks with total consolidated assets of
$1 billion or more would have been larger covered
institutions.
Guidance and the work of FHFA have
resulted in improved incentive-based
compensation practices, there are even
greater benefits possible under rule-
based supervision. Using their collective
supervisory experiences, the Agencies
are proposing a uniform set of
enforceable standards applicable to a
larger group of institutions supervised
by all of the Agencies. The proposed
rule would promote better incentive-
based compensation practices, while
still allowing for some flexibility in the
design and operation of incentive-based
compensation arrangements among the
varied institutions the Agencies
supervise, including through the tiered
application of the proposed rule’s
requirements.
C. Overview of the 2011 Proposed Rule
and Public Comment
The Agencies proposed a rule in 2011,
rather than guidelines, to establish
requirements applicable to the
incentive-based compensation
arrangements of all covered institutions.
The 2011 Proposed Rule would have
supplemented existing rules, guidance,
and ongoing supervisory efforts of the
Agencies.
The 2011 Proposed Rule would have
prohibited incentive-based
compensation arrangements that could
encourage inappropriate risks. It would
have required compensation practices at
regulated financial institutions to be
consistent with three key principles—
that incentive-based compensation
arrangements should appropriately
balance risk and financial rewards, be
compatible with effective risk
management and controls, and be
supported by strong corporate
governance
rangements that could
encourage inappropriate risks. It would
have required compensation practices at
regulated financial institutions to be
consistent with three key principles—
that incentive-based compensation
arrangements should appropriately
balance risk and financial rewards, be
compatible with effective risk
management and controls, and be
supported by strong corporate
governance. The Agencies proposed that
financial institutions with $1 billion or
more in assets be required to have
policies and procedures to ensure
compliance with the requirements of the
rule, and submit an annual report to
their Federal regulator describing the
structure of their incentive-based
compensation arrangements.
The 2011 Proposed Rule included two
additional requirements for ‘‘larger
financial institutions.’’ 31 The first
would have required these larger
financial institutions to defer 50 percent
of the incentive-based compensation for
executive officers for a period of at least
three years. The second would have
required the board of directors (or a
committee thereof) to identify and
approve the incentive-based
compensation for those covered persons
who individually have the ability to
expose the institution to possible losses
that are substantial in relation to the
institution’s size, capital, or overall risk
tolerance, such as traders with large
position limits and other individuals
who have the authority to place at risk
a substantial part of the capital of the
covered institution.
The Agencies received more than
10,000 comments on the 2011 Proposed
Rule, including from private
individuals, community groups, several
members of Congress, pension funds,
labor federations, academic faculty,
covered institutions, financial industry
associations, and industry consultants.
The vast majority of the comments
were substantively identical form letters
of two types
titution.
The Agencies received more than
10,000 comments on the 2011 Proposed
Rule, including from private
individuals, community groups, several
members of Congress, pension funds,
labor federations, academic faculty,
covered institutions, financial industry
associations, and industry consultants.
The vast majority of the comments
were substantively identical form letters
of two types. The first type of form letter
urged the Agencies to minimize the
incentives for short-term risk-taking by
executives by requiring at least a five-
year deferral period for executive
bonuses at big banks, banning
executives’ hedging of their pay
packages, and requiring specific details
from banks on precisely how they
ensure that executives will share in the
long-term risks created by their
decisions. These commenters also
asserted that the final rule should apply
to the full range of important financial
institutions and cover all the key
executives at those institutions. The
second type of form letter stated that the
commenter or the commenter’s family
had been affected by the financial crisis
that began in 2007, a major cause of
which the commenter believed to be
faulty pay practices at financial
institutions. These commenters
suggested various methods of improving
these practices, including basing
incentive-based compensation on
measures of a financial institution’s
safety and stability, such as the
institution’s bond price or the spread on
credit default swaps.
Comments from community groups,
members of Congress, labor federations,
and pension funds generally urged the
Agencies to strengthen the proposed
rule and many cited evidence suggesting
that flawed incentive-based
compensation practices in the financial
industry were a major contributing
factor to the recent financial crisis
institution’s bond price or the spread on
credit default swaps.
Comments from community groups,
members of Congress, labor federations,
and pension funds generally urged the
Agencies to strengthen the proposed
rule and many cited evidence suggesting
that flawed incentive-based
compensation practices in the financial
industry were a major contributing
factor to the recent financial crisis.
Their suggestions included: Revising the
2011 Proposed Rule’s definition of
‘‘incentive-based compensation’’;
defining ‘‘excessive compensation’’;
increasing the length of time for or
amount of compensation subject to the
mandatory deferral provision; requiring
financial institutions to include
quantitative data in their annual
incentive-based compensation reports;
providing for the annual public
reporting by the Agencies of information
quantifying the overall sensitivity of
incentive-based compensation to long-
term risks at major financial
institutions; prohibiting stock
ownership by board members; and
prohibiting hedging strategies used by
highly-paid executives on their own
incentive-based compensation.
The academic faculty commenters
submitted analyses of certain
compensation issues and
recommendations. These
recommendations included: Adopting a
corporate governance measure tied to
stock ownership by board members;
regulating how deferred compensation
is reduced at future payment dates;
requiring covered institutions’
executives to have ‘‘skin in the game’’
for the entire deferral period; and
requiring disclosure of personal hedging
transactions rather than prohibiting
them.
A number of covered institutions and
financial industry associations favored
the issuance of guidelines instead of
rules to implement section 956. Others
expressed varying degrees of support for
the 2011 Proposed Rule but also
requested numerous clarifications and
modifications
ntire deferral period; and
requiring disclosure of personal hedging
transactions rather than prohibiting
them.
A number of covered institutions and
financial industry associations favored
the issuance of guidelines instead of
rules to implement section 956. Others
expressed varying degrees of support for
the 2011 Proposed Rule but also
requested numerous clarifications and
modifications. Many of these
commenters raised questions
concerning the 2011 Proposed Rule’s
scope, suggesting that certain types of
institutions be excluded from the
coverage of the final rule. Some of these
commenters questioned the need for the
excessive compensation prohibition or
requested that the final rule provide
specific standards for determining when
compensation is excessive. Many of
these commenters also opposed the
2011 Proposed Rule’s mandatory
deferral provision, and some asserted
that the provision was unsupported by
empirical evidence and potentially
harmful to a covered institution’s ability
to attract and retain key employees. In
addition, many of these commenters
asserted that the material risk-taker
provision in the 2011 Proposed Rule
was unclear or imposed on the boards
of directors of covered institutions
duties more appropriately undertaken
by the institutions’ management.
Finally, these commenters expressed
concerns about the burden and timing of
the 2011 Proposed Rule.
D. International Developments
The Agencies considered
international developments in
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ly undertaken
by the institutions’ management.
Finally, these commenters expressed
concerns about the burden and timing of
the 2011 Proposed Rule.
D. International Developments
The Agencies considered
international developments in
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32 See 76 FR at 21178. See, e.g., FSB Principles
and Implementation Standards.
33 Directive 2013/36/EU of the European
Parliament and of the Council of 26 June 2013
(effective January 1, 2014). The remuneration rules
in CRD IV were carried over from CRD III with a
few additional requirements. CRD III directed the
Committee of European Bank Supervisors
(‘‘CEBS’’), now the European Banking Authority
(‘‘EBA’’), to develop guidance on how it expected
the compensation principles under CRD III to be
implemented. See CEBS Guidelines on
Remuneration Policies and Practices (December 10,
2010) (‘‘CEBS Guidelines’’), available at http://eur-
lex.europa.eu/legal-content/EN/TXT/PDF/?uri=
CELEX:32010L0076&from=EN.
34 Malus is defined by the European Union as ‘‘an
arrangement that permits the institution to prevent
vesting of all or part of the amount of a deferred
remuneration award in relation to risk outcomes or
performance.’’ See, PRA expectations regarding the
application of malus to variable remuneration—
SS2/13 UPDATE, available at: http://www.bankof
england.co.uk/pra/Documents/publications/ss/
2015/ss213update.pdf.
35 CRD IV provides that at least 50 percent of total
variable remuneration should consist of equity-
linked interests and at least 40 percent of any
variable remuneration must be deferred over a
period of three to five years. In the case of variable
remuneration of a particularly high amount, the
minimum amount required to be deferred is
increased to 60 percent.
36 See UK Remuneration Rules
5 CRD IV provides that at least 50 percent of total
variable remuneration should consist of equity-
linked interests and at least 40 percent of any
variable remuneration must be deferred over a
period of three to five years. In the case of variable
remuneration of a particularly high amount, the
minimum amount required to be deferred is
increased to 60 percent.
36 See UK Remuneration Rules.
37 See PRA, ‘‘PRA PS7/14: Clawback’’ (July 2014),
available at http://www.bankofengland.co.uk/pra/
Pages/publications/ps/2014/ps714.aspx.
38 EBA Regulatory Technical Standards on
criteria to identify categories of staff whose
professional activities have a material impact on an
institution’s risk profile under Article 94(2) of
Directive 2013/36/EU. Directive 2013/36/EU of the
European Parliament and of the Council of 26 June
2013 (December 16, 2013), available at https://
www.eba.europa.eu/documents/10180/526386/
EBA-RTS-2013-11+%28On+identified+
staff%29.pdf/c313a671-269b-45be-a748-29e1c
772ee0e.
39 EBA, ‘‘Guidelines for Sound Remuneration
Policies under Articles 74(3) and 75(2) of Directive
2013/36/EU and Disclosures under Article 450 of
Regulation (EU) No 575/2013’’ (December 21, 2015)
(‘‘EBA Remuneration Guidelines’’), available at
https://www.eba.europa.eu/documents/10180/
1314839/EBA-GL-2015-22+Guidelines+
on+Sound+Remuneration+Policies.pdf/1b0f3f99-
f913-461a-b3e9-fa0064b1946b.
40 See APRA, ‘‘Prudential Standard CPS 510
Governance’’ (January 2015), available at http://
www.apra.gov.au/CrossIndustry/Documents/Final-
Prudential-Standard-CPS-510-Governance-
%28January-2014%29.pdf; APRA, Prudential
Practice Guide PPG 511—Remuneration (November
30, 2009), available at http://www.apra.gov.au/adi/
PrudentialFramework/Pages/adi-prudential-
framework.aspx.
41 See OSFI Corporate Governance Guidelines
and OSFI Supervisory Framework.
42 See OSFI Corporate Governance Guidelines.
43 See FINMA Remuneration Circular
Prudential-Standard-CPS-510-Governance-
%28January-2014%29.pdf; APRA, Prudential
Practice Guide PPG 511—Remuneration (November
30, 2009), available at http://www.apra.gov.au/adi/
PrudentialFramework/Pages/adi-prudential-
framework.aspx.
41 See OSFI Corporate Governance Guidelines
and OSFI Supervisory Framework.
42 See OSFI Corporate Governance Guidelines.
43 See FINMA Remuneration Circular.
developing the 2011 Proposed Rule,
mindful that some covered institutions
operate in both domestic and
international competitive
environments.32 Since the release of the
2011 Proposed Rule, a number of
foreign jurisdictions have introduced
new compensation regulations that
require certain financial institutions to
meet certain standards in relation to
compensation policies and practices. In
June 2013, the European Union adopted
the Capital Requirements Directive
(‘‘CRD’’) IV, which sets out
requirements for compensation
structures, policies, and practices that
apply to all banks and investment firms
subject to the CRD.33 The rules require
that up to 100 percent of the variable
remuneration shall be subject to
malus 34 or clawback arrangements,
among other requirements.35 The PRA’s
and the FCA’s Remuneration Code
requires covered companies to defer 40
to 60 percent of a covered person’s
variable remuneration—and recently
updated their implementing regulations
to extend deferral periods to seven years
for senior executives and to five years
for certain other covered persons.36 The
PRA also implemented, in July 2014, a
policy requiring firms to set specific
criteria for the application of malus and
clawback
covered companies to defer 40
to 60 percent of a covered person’s
variable remuneration—and recently
updated their implementing regulations
to extend deferral periods to seven years
for senior executives and to five years
for certain other covered persons.36 The
PRA also implemented, in July 2014, a
policy requiring firms to set specific
criteria for the application of malus and
clawback. The PRA’s clawback policy
requires that variable remuneration be
subject to clawback for a period of at
least seven years from the date on which
it is awarded.37
Also in 2013, the EBA finalized the
process and criteria for the
identification of categories of staff who
have a material impact on the
institution’s risk profile (‘‘Identified
Staff’’).38 These Identified Staff are
subject to provisions related, in
particular, to the payment of variable
compensation. The standards cover
remuneration packages for Identified
Staff categories and aim to ensure that
appropriate incentives for prudent,
long-term oriented risk-taking are
provided. The criteria used to determine
who is identified are both qualitative
(i.e., related to the role and decision-
making authority of staff members) and
quantitative (i.e., related to the level of
total gross remuneration in absolute or
in relative terms).
More recently, in December 2015, the
EBA released its final Guidelines on
Sound Remuneration Policies.39 The
final Guidelines on Sound
Remuneration Policies set out the
governance process for implementing
sound compensation policies across the
European Union under CRD IV, as well
as the specific criteria for categorizing
all compensation components as either
fixed or variable pay. The final
Guidelines on Sound Remuneration
Policies also provide guidance on the
application of deferral arrangements and
pay-out instruments to ensure that
variable pay is aligned with an
institution’s long-term risks and that
any ex-post risk adjustments can be
applied as appropriate
as the specific criteria for categorizing
all compensation components as either
fixed or variable pay. The final
Guidelines on Sound Remuneration
Policies also provide guidance on the
application of deferral arrangements and
pay-out instruments to ensure that
variable pay is aligned with an
institution’s long-term risks and that
any ex-post risk adjustments can be
applied as appropriate. These
Guidelines will apply as of January 1,
2017, and will replace the Guidelines on
Remuneration Policies and Practices
that were published by the CEBS in
December 2010.
Other regulators, including those in
Canada, Australia, and Switzerland,
have taken either a guidance-based
approach to the supervision and
regulation of incentive-based
compensation or an approach that
combines guidance and regulation that
is generally consistent with the FSB
Principles and Implementation
Standards. In Australia,40 all deposit-
taking institutions and insurers are
expected to comply in full with all the
requirements in the APRA’s Governance
standard (which includes remuneration
provisions). APRA also supervises
according to its Remuneration
Prudential Practice Guide (guidance). In
Canada,41 all federally regulated
financial institutions (domestic and
foreign) are expected to comply with the
FSB Principles and Implementation
Standards, and the six Domestic
Systemically Important Banks and three
largest life insurance companies are
expected to comply with the FSB’s
Principles and Implementation
Standards
to its Remuneration
Prudential Practice Guide (guidance). In
Canada,41 all federally regulated
financial institutions (domestic and
foreign) are expected to comply with the
FSB Principles and Implementation
Standards, and the six Domestic
Systemically Important Banks and three
largest life insurance companies are
expected to comply with the FSB’s
Principles and Implementation
Standards. OSFI has also issued a
Corporate Governance Guideline that
contain compensation provisions.42
Switzerland’s Swiss Financial Markets
Supervisory Authority has also
published a principles-based rule on
remuneration consistent with the FSB
Principles and Implementation
Standards that applies to major banks
and insurance companies.43
As compensation practices continue
to evolve, the Agencies recognize that
international coordination in this area is
important to ensure that internationally
active financial organizations are subject
to consistent requirements. For this
reason, the Agencies will continue to
work with their domestic and
international counterparts to foster
sound compensation practices across
the financial services industry.
Importantly, the proposed rule is
consistent with the FSB Principles and
Implementation Standards.
E. Overview of the Proposed Rule
The Agencies are re-proposing a rule,
rather than proposing guidelines, to
establish general requirements
applicable to the incentive-based
compensation arrangements of all
covered institutions. Like the 2011
Proposed Rule, the proposed rule would
prohibit incentive-based compensation
arrangements at covered institutions
that could encourage inappropriate risks
by providing excessive compensation or
that could lead to a material financial
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roposed Rule, the proposed rule would
prohibit incentive-based compensation
arrangements at covered institutions
that could encourage inappropriate risks
by providing excessive compensation or
that could lead to a material financial
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44 For covered institutions that are subsidiaries of
other covered institutions, levels would generally
be determined by reference to the average total
consolidated assets of the top-tier parent covered
institution. A detailed explanation of consolidation
under the proposed rule is included under the
heading ‘‘Definitions pertaining to covered
institutions’’ below in this Supplementary
Information section.
45 As explained later in this Supplementary
Information section, the proposed rule includes a
reservation of authority that would allow the
appropriate Federal regulator of a Level 3 covered
institution with average total consolidated assets
greater than or equal to $10 billion and less than
$50 billion to require the Level 3 covered
institution to comply with some or all of the
provisions of sections ll.5 and ll.7 through
ll.11 of the proposed rule if the agency
determines that the complexity of operations or
compensation practices of the Level 3 covered
institution are consistent with those of a Level 1 or
Level 2 covered institution.
loss. However, the proposed rule
reflects the Agencies’ collective
supervisory experiences since they
proposed the 2011 Proposed Rule.
These supervisory experiences, which
are described above, have allowed the
Agencies to propose a rule that
incorporates practices that financial
institutions and foreign regulators have
adopted to address the deficiencies in
incentive-based compensation practices
that helped contribute to the financial
crisis that began in 2007
sory experiences since they
proposed the 2011 Proposed Rule.
These supervisory experiences, which
are described above, have allowed the
Agencies to propose a rule that
incorporates practices that financial
institutions and foreign regulators have
adopted to address the deficiencies in
incentive-based compensation practices
that helped contribute to the financial
crisis that began in 2007. For that
reason, the proposed rule differs in
some respects from the 2011 Proposed
Rule. This section provides a general
overview of the proposed rule and
highlights areas in which the proposed
rule differs from the 2011 Proposed
Rule. A more detailed, section-by-
section description of the proposed rule
and the reasons for the proposed rule’s
requirements is provided later in this
SUPPLEMENTARY INFORMATION section.
Scope and Initial Applicability.
Similar to the 2011 Proposed Rule, the
proposed rule would apply to any
covered institution with average total
consolidated assets greater than or equal
to $1 billion that offers incentive-based
compensation to covered persons.
The compliance date of the proposed
rule would be no later than the
beginning of the first calendar quarter
that begins at least 540 days after a final
rule is published in the Federal
Register. The proposed rule would not
apply to any incentive-based
compensation plan with a performance
period that begins before the
compliance date.
Definitions. The proposed rule
includes a number of new definitions
that were not included in the 2011
Proposed Rule. These definitions are
described later in the section-by-section
analysis in this Supplementary
Information section. Notably, the
Agencies have added a definition of
significant risk-taker, which is intended
to include individuals who are not
senior executive officers but who are in
the position to put a Level 1 or Level 2
covered institution at risk of material
financial loss. This definition is
explained in more detail below.
Applicability
-section
analysis in this Supplementary
Information section. Notably, the
Agencies have added a definition of
significant risk-taker, which is intended
to include individuals who are not
senior executive officers but who are in
the position to put a Level 1 or Level 2
covered institution at risk of material
financial loss. This definition is
explained in more detail below.
Applicability. The proposed rule
distinguishes covered institutions by
asset size, applying less prescriptive
incentive-based compensation program
requirements to the smallest covered
institutions within the statutory scope
and progressively more rigorous
requirements to the larger covered
institutions. Although the 2011
Proposed Rule contained specific
requirements for covered financial
institutions with at least $50 billion in
total consolidated assets, the proposed
rule creates an additional category of
institutions with at least $250 billion in
average total consolidated assets. These
larger institutions are subject to the
most rigorous requirements under the
proposed rule.
The proposed rule identifies three
categories of covered institutions based
on average total consolidated assets: 44
• Level 1 (greater than or equal to
$250 billion);
• Level 2 (greater than or equal to $50
billion and less than $250 billion); and
• Level 3 (greater than or equal to $1
billion and less than $50 billion).45
Upon an increase in average total
consolidated assets, a covered
institution would be required to comply
with any newly applicable requirements
under the proposed rule no later than
the first day of the first calendar quarter
that begins at least 540 days after the
date on which the covered institution
becomes a Level 1, Level 2, or Level 3
covered institution. The proposed rule
would grandfather any incentive-based
compensation plan with a performance
period that begins before such date
ly
with any newly applicable requirements
under the proposed rule no later than
the first day of the first calendar quarter
that begins at least 540 days after the
date on which the covered institution
becomes a Level 1, Level 2, or Level 3
covered institution. The proposed rule
would grandfather any incentive-based
compensation plan with a performance
period that begins before such date.
Upon a decrease in total consolidated
assets, a covered institution would
remain subject to the provisions of the
proposed rule that applied to it before
the decrease until total consolidated
assets fell below $250 billion, $50
billion, or $1 billion, as applicable, for
four consecutive regulatory reports (e.g.,
Call Reports).
A covered institution under the
Board’s, the OCC’s, or the FDIC’s
proposed rule that is a subsidiary of
another covered institution under the
Board’s, the OCC’s, or the FDIC’s
proposed rule, respectively, may meet
any requirement of the Board’s, OCC’s,
or the FDIC’s proposed rule if the parent
covered institution complies with that
requirement in such a way that causes
the relevant portion of the incentive-
based compensation program of the
subsidiary covered institution to comply
with that requirement.
Requirements and Prohibitions
Applicable to All Covered Institutions.
Similar to the 2011 Proposed Rule, 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
Applicable to All Covered Institutions.
Similar to the 2011 Proposed Rule, 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.
Also consistent with the 2011
Proposed Rule, the proposed rule
provides that compensation, fees, and
benefits will be considered excessive
when amounts paid are unreasonable or
disproportionate to the value of the
services performed by a covered person,
taking into consideration all relevant
factors, including:
• The combined value of all
compensation, fees, or benefits provided
to a covered person;
• The compensation history of the
covered person and other individuals
with comparable expertise at the
covered institution;
• The financial condition of the
covered institution;
• Compensation practices at
comparable institutions, based upon
such factors as asset size, geographic
location, and the complexity of the
covered institution’s operations and
assets;
• For post-employment benefits, the
projected total cost and benefit to the
covered institution; and
• Any connection between the
covered person and any fraudulent act
or omission, breach of trust or fiduciary
duty, or insider abuse with regard to the
covered institution.
The proposed rule is also similar to
the 2011 Proposed Rule in that it
provides that an incentive-based
compensation arrangement will be
considered to encourage inappropriate
risks that could lead to material
financial loss to the covered institution,
unless the arrangement:
• Appropriately balances risk and
reward;
• Is compatible with effective risk
management and controls; and
• Is supported by effective
governance
to
the 2011 Proposed Rule in that it
provides that an incentive-based
compensation arrangement will be
considered to encourage inappropriate
risks that could lead to material
financial loss to the covered institution,
unless the arrangement:
• Appropriately balances risk and
reward;
• Is compatible with effective risk
management and controls; and
• Is supported by effective
governance.
However, unlike the 2011 Proposed
Rule, the proposed rule specifically
provides that an incentive-based
compensation arrangement would not
be considered to appropriately balance
risk and reward unless it:
• Includes financial and non-
financial measures of performance;
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• Is designed to allow non-financial
measures of performance to override
financial measures of performance,
when appropriate; and
• Is subject to adjustment to reflect
actual losses, inappropriate risks taken,
compliance deficiencies, or other
measures or aspects of financial and
non-financial performance.
The proposed rule also contains
requirements for the board of directors
of a covered institution that are similar
to requirements included in the 2011
Proposed Rule. Under the proposed
rule, the board of directors of each
covered institution (or a committee
thereof) would be required to:
• Conduct oversight of the covered
institution’s incentive-based
compensation program;
• Approve incentive-based
compensation arrangements for senior
executive officers, including amounts of
awards and, at the time of vesting,
payouts under such arrangements; and
• Approve material exceptions or
adjustments to incentive-based
compensation policies or arrangements
for senior executive officers
uct oversight of the covered
institution’s incentive-based
compensation program;
• Approve incentive-based
compensation arrangements for senior
executive officers, including amounts of
awards and, at the time of vesting,
payouts under such arrangements; and
• Approve material exceptions or
adjustments to incentive-based
compensation policies or arrangements
for senior executive officers.
The 2011 Proposed Rule contained an
annual reporting requirement, which
has been replaced by a recordkeeping
requirement in the proposed rule.
Covered institutions would be required
to create annually and maintain for at
least seven years records that document
the structure of incentive-based
compensation arrangements and that
demonstrate compliance with the
proposed rule. The records would be
required to be disclosed to the covered
institution’s appropriate Federal
regulator upon request.
Disclosure and Recordkeeping
Requirements for Level 1 and Level 2
Covered Institutions. The proposed rule
includes more detailed disclosure and
recordkeeping requirements for larger
covered institutions than the 2011
Proposed Rule. The proposed rule
would require all Level 1 and Level 2
covered institutions to create annually
and maintain for at least seven years
records that document: (1) The covered
institution’s senior executive officers
and significant risk-takers, listed by
legal entity, job function, organizational
hierarchy, and line of business; (2) the
incentive-based compensation
arrangements for senior executive
officers and significant risk-takers,
including information on the percentage
of incentive-based compensation
deferred and form of award; (3) any
forfeiture and downward adjustment or
clawback reviews and decisions for
senior executive officers and significant
risk-takers; and (4) any material changes
to the covered institution’s incentive-
based compensation arrangements and
policies
e
officers and significant risk-takers,
including information on the percentage
of incentive-based compensation
deferred and form of award; (3) any
forfeiture and downward adjustment or
clawback reviews and decisions for
senior executive officers and significant
risk-takers; and (4) any material changes
to the covered institution’s incentive-
based compensation arrangements and
policies. Level 1 and Level 2 covered
institutions would be required to create
and maintain records in a manner that
would allow for an independent audit of
incentive-based compensation
arrangements, policies, and procedures,
and to provide the records described
above in such form and frequency as the
appropriate Federal regulator requests.
Deferral, Forfeiture and Downward
Adjustment, and Clawback
Requirements for Level 1 and Level 2
Covered Institutions. The proposed rule
would require incentive-based
compensation arrangements that
appropriately balance risk and reward.
For Level 1 and Level 2 covered
institutions, the proposed rule would
require that incentive-based
compensation arrangements for certain
covered persons include deferral of
payments, risk of downward adjustment
and forfeiture, and clawback to
appropriately balance risk and reward.
The 2011 Proposed Rule required
deferral for three years of 50 percent of
annual incentive-based compensation
for executive officers of covered
financial institutions with $50 billion or
more in total consolidated assets. The
proposed rule would apply deferral
requirements to significant risk-takers as
well as senior executive officers, and, as
described below, would require 40, 50,
or 60 percent deferral depending on the
size of the covered institution and
whether the covered person receiving
the incentive-based compensation is a
senior executive officer or a significant
risk-taker
l consolidated assets. The
proposed rule would apply deferral
requirements to significant risk-takers as
well as senior executive officers, and, as
described below, would require 40, 50,
or 60 percent deferral depending on the
size of the covered institution and
whether the covered person receiving
the incentive-based compensation is a
senior executive officer or a significant
risk-taker. Unlike the 2011 Proposed
Rule, the proposed rule would explicitly
require a shorter deferral period for
incentive-based compensation awarded
under a long-term incentive plan. The
proposed rule also provides more
detailed requirements and prohibitions
than the 2011 Proposed Rule with
respect to the measurement,
composition, and acceleration of
deferred incentive-based compensation;
the manner in which deferred incentive-
based compensation can vest; increases
to the amount of deferred incentive-
based compensation; and the amount of
deferred incentive-based compensation
that can be in the form of options.
Deferral. Under the proposed rule, the
mandatory deferral requirements for
Level 1 and Level 2 covered institutions
for incentive-based compensation
awarded each performance period
would be as follows:
• A Level 1 covered institution would
be required to defer at least 60 percent
of a senior executive officer’s
‘‘qualifying incentive-based
compensation’’ (as defined in the
proposed rule) and 50 percent of a
significant risk-taker’s qualifying
incentive-based compensation for at
least four years. A Level 1 covered
institution also would be required to
defer for at least two years after the end
of the related performance period at
least 60 percent of a senior executive
officer’s incentive-based compensation
awarded under a ‘‘long-term incentive
plan’’ (as defined in the proposed rule)
and 50 percent of a significant risk-
taker’s incentive-based compensation
awarded under a long-term incentive
plan
institution also would be required to
defer for at least two years after the end
of the related performance period at
least 60 percent of a senior executive
officer’s incentive-based compensation
awarded under a ‘‘long-term incentive
plan’’ (as defined in the proposed rule)
and 50 percent of a significant risk-
taker’s incentive-based compensation
awarded under a long-term incentive
plan. Deferred compensation may vest
no faster than on a pro rata annual basis,
and, for covered institutions that issue
equity or are subsidiaries of covered
institutions that issue equity, the
deferred amount would be required to
consist of substantial amounts of both
deferred cash and equity-like
instruments throughout the deferral
period. Additionally, if a senior
executive officer or significant risk-taker
receives incentive-based compensation
in the form of options for a performance
period, the amount of such options used
to meet the minimum required deferred
compensation may not exceed 15
percent of the amount of total incentive-
based compensation awarded for that
performance period.
• A Level 2 covered institution would
be required to defer at least 50 percent
of a senior executive officer’s qualifying
incentive-based compensation and 40
percent of a significant risk-taker’s
qualifying incentive-based
compensation for at least three years. A
Level 2 covered institution also would
be required to defer for at least one year
after the end of the related performance
period at least 50 percent of a senior
executive officer’s incentive-based
compensation awarded under a long-
term incentive plan and 40 percent of a
significant risk-taker’s incentive-based
compensation awarded under a long-
term incentive plan
least three years. A
Level 2 covered institution also would
be required to defer for at least one year
after the end of the related performance
period at least 50 percent of a senior
executive officer’s incentive-based
compensation awarded under a long-
term incentive plan and 40 percent of a
significant risk-taker’s incentive-based
compensation awarded under a long-
term incentive plan. Deferred
compensation may vest no faster than
on a pro rata annual basis, and, for
covered institutions that issue equity or
are subsidiaries of covered institutions
that issue equity, the deferred amount
would be required to consist of
substantial amounts of both deferred
cash and equity-like instruments
throughout the deferral period.
Additionally, if a senior executive
officer or significant risk-taker receives
incentive-based compensation in the
form of options for a performance
period, the amount of such options used
to meet the minimum required deferred
compensation may not exceed 15
percent of the amount of total incentive-
based compensation awarded for that
performance period.
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The proposed rule would also
prohibit Level 1 and Level 2 covered
institutions from accelerating the
payment of a covered person’s deferred
incentive-based compensation, except
in the case of death or disability of the
covered person.
Forfeiture and Downward
Adjustment. Compared to the 2011
Proposed Rule, the proposed rule
provides more detailed requirements for
Level 1 and Level 2 covered institutions
to reduce (1) incentive-based
compensation that has not yet been
awarded to a senior executive officer or
significant risk-taker, and (2) deferred
incentive-based compensation of a
senior executive officer or significant
risk-taker
d Downward
Adjustment. Compared to the 2011
Proposed Rule, the proposed rule
provides more detailed requirements for
Level 1 and Level 2 covered institutions
to reduce (1) incentive-based
compensation that has not yet been
awarded to a senior executive officer or
significant risk-taker, and (2) deferred
incentive-based compensation of a
senior executive officer or significant
risk-taker. Under the proposed rule,
‘‘forfeiture’’ means a reduction of the
amount of deferred incentive-based
compensation awarded to a person that
has not vested. ‘‘Downward adjustment’’
means a reduction of the amount of a
covered person’s incentive-based
compensation not yet awarded for any
performance period that has already
begun. The proposed rule would require
a Level 1 or Level 2 covered institution
to make subject to forfeiture all
unvested deferred incentive-based
compensation of any senior executive
officer or significant risk-taker,
including unvested deferred amounts
awarded under long-term incentive
plans. This forfeiture requirement
would apply to all unvested, deferred
incentive-based compensation for those
individuals, regardless of whether the
deferral was required by the proposed
rule. Similarly, a Level 1 or Level 2
covered institution would also be
required to make subject to downward
adjustment all incentive-based
compensation amounts not yet awarded
to any senior executive officer or
significant risk-taker for the current
performance period, including amounts
payable under long-term incentive
plans
ardless of whether the
deferral was required by the proposed
rule. Similarly, a Level 1 or Level 2
covered institution would also be
required to make subject to downward
adjustment all incentive-based
compensation amounts not yet awarded
to any senior executive officer or
significant risk-taker for the current
performance period, including amounts
payable under long-term incentive
plans. A Level 1 or Level 2 covered
institution would be required to
consider forfeiture or downward
adjustment of incentive-based
compensation if any of the following
adverse outcomes occur:
• Poor financial performance
attributable to a significant deviation
from the covered institution’s risk
parameters set forth in the covered
institution’s policies and procedures;
• Inappropriate risk-taking, regardless
of the impact on financial performance;
• Material risk management or
control failures;
• Non-compliance with statutory,
regulatory, or supervisory standards
resulting in enforcement or legal action
brought by a federal or state regulator or
agency, or a requirement that the
covered institution report a restatement
of a financial statement to correct a
material error; and
• Other aspects of conduct or poor
performance as defined by the covered
institution.
Clawback. In addition to deferral,
downward adjustment, and forfeiture,
the proposed rule would require a Level
1 or Level 2 covered institution to
include clawback provisions in the
incentive-based compensation
arrangements for senior executive
officers and significant risk-takers. The
term ‘‘clawback’’ refers to a mechanism
by which a covered institution can
recover vested incentive-based
compensation from a senior executive
officer or significant risk-taker if certain
events occur
uire a Level
1 or Level 2 covered institution to
include clawback provisions in the
incentive-based compensation
arrangements for senior executive
officers and significant risk-takers. The
term ‘‘clawback’’ refers to a mechanism
by which a covered institution can
recover vested incentive-based
compensation from a senior executive
officer or significant risk-taker if certain
events occur. The proposed rule would
require clawback provisions that, at a
minimum, allow the covered institution
to recover incentive-based
compensation from a current or former
senior executive officer or significant
risk-taker for seven years following the
date on which such compensation vests,
if the covered institution determines
that the senior executive officer or
significant risk-taker engaged in
misconduct that resulted in significant
financial or reputational harm to the
covered institution, fraud, or intentional
misrepresentation of information used
to determine the senior executive officer
or significant risk-taker’s incentive-
based compensation. The 2011
Proposed Rule did not include a
clawback requirement.
Additional Prohibitions. The
proposed rule contains a number of
additional prohibitions for Level 1 and
Level 2 covered institutions that were
not included in the 2011 Proposed Rule.
These prohibitions would apply to:
• Hedging;
• Maximum incentive-based
compensation opportunity (also referred
to as leverage);
• Relative performance measures; and
• Volume-driven incentive-based
compensation.
Risk Management and Controls. The
proposed rule’s risk management and
controls requirements for large covered
institutions are generally more extensive
than the requirements contained in the
2011 Proposed Rule
• Hedging;
• Maximum incentive-based
compensation opportunity (also referred
to as leverage);
• Relative performance measures; and
• Volume-driven incentive-based
compensation.
Risk Management and Controls. The
proposed rule’s risk management and
controls requirements for large covered
institutions are generally more extensive
than the requirements contained in the
2011 Proposed Rule. The proposed rule
would require all Level 1 and Level 2
covered institutions to have a risk
management framework for their
incentive-based compensation programs
that is independent of any lines of
business; includes an independent
compliance program that provides for
internal controls, testing, monitoring,
and training with written policies and
procedures; and is commensurate with
the size and complexity of the covered
institution’s operations. In addition, the
proposed rule would require Level 1
and Level 2 covered institutions to:
• Provide individuals in control
functions with appropriate authority to
influence the risk-taking of the business
areas they monitor and ensure covered
persons engaged in control functions are
compensated independently of the
performance of the business areas they
monitor; and
• Provide for independent monitoring
of: (1) Incentive-based compensation
plans to identify whether the plans
appropriately balance risk and reward;
(2) events related to forfeiture and
downward adjustment and decisions of
forfeiture and downward adjustment
reviews to determine consistency with
the proposed rule; and (3) compliance of
the incentive-based compensation
program with the covered institution’s
policies and procedures.
Governance. Unlike the 2011
Proposed Rule, the proposed rule would
require each Level 1 or Level 2 covered
institution to establish a compensation
committee composed solely of directors
who are not senior executive officers to
assist the board of directors in carrying
out its responsibilities under the
proposed rule
nsation
program with the covered institution’s
policies and procedures.
Governance. Unlike the 2011
Proposed Rule, the proposed rule would
require each Level 1 or Level 2 covered
institution to establish a compensation
committee composed solely of directors
who are not senior executive officers to
assist the board of directors in carrying
out its responsibilities under the
proposed rule. The compensation
committee would be required to obtain
input from the covered institution’s risk
and audit committees, or groups
performing similar functions, and risk
management function on the
effectiveness of risk measures and
adjustments used to balance incentive-
based compensation arrangements.
Additionally, management would be
required to submit to the compensation
committee on an annual or more
frequent basis a written assessment of
the effectiveness of the covered
institution’s incentive-based
compensation program and related
compliance and control processes in
providing risk-taking incentives that are
consistent with the risk profile of the
covered institution. The compensation
committee would also be required to
obtain an independent written
assessment from the internal audit or
risk management function of the
effectiveness of the covered institution’s
incentive-based compensation program
and related compliance and control
processes in providing risk-taking
incentives that are consistent with the
risk profile of the covered institution.
Policies and Procedures. The
proposed rule would require all Level 1
and Level 2 covered institutions to have
policies and procedures that, among
other requirements:
• Are consistent with the
requirements and prohibitions of the
proposed rule;
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Procedures. The
proposed rule would require all Level 1
and Level 2 covered institutions to have
policies and procedures that, among
other requirements:
• Are consistent with the
requirements and prohibitions of the
proposed rule;
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37682
Federal Register / Vol. 81, No. 112 / Friday, June 10, 2016 / Proposed Rules
46 The FDIC’s proposed rule would not apply to
institutions for which the FDIC is appointed
receiver under the FDIA or Title II of the Dodd-
Frank Act, as appropriate, as those statutes govern
such cases.
• Specify the substantive and
procedural criteria for forfeiture and
clawback;
• Document final forfeiture,
downward adjustment, and clawback
decisions;
• Specify the substantive and
procedural criteria for the acceleration
of payments of deferred incentive-based
compensation to a covered person;
• Identify and describe the role of any
employees, committees, or groups
authorized to make incentive-based
compensation decisions, including
when discretion is authorized;
• Describe how discretion is
exercised to achieve balance;
• Require th

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## Nearby sections

- [FDIC FIL-1-2002 FOREIGN ASSETS CONTROL ACT](https://www.frixlaw.com/law-library/statutes/FDIC_FIL02001.md)
- [FDIC FIL-1-2010 Employee Compensation Advance Notice of Proposed Rulemaking](https://www.frixlaw.com/law-library/statutes/FDIC_FIL10001.md)
- [FDIC FIL-1-2024 Consolidated Reports of Condition and Income for Fourth Quarter 2023](https://www.frixlaw.com/law-library/statutes/FDIC_FIL24001.md)
- [FDIC FIL-2-2004 Foreign Assets Control Act](https://www.frixlaw.com/law-library/statutes/FDIC_FIL04002.md)
- [FDIC FIL-2-2020 Consolidated Reports of Condition and Income for Fourth Quarter 2019](https://www.frixlaw.com/law-library/statutes/FDIC_FIL20002.md)
- [FDIC FIL-3-2003 FILING PROCEDURES](https://www.frixlaw.com/law-library/statutes/FDIC_FIL03003.md)
- [FDIC FIL-4-2006 Commercial Real Estate Lending Proposed Interagency Guidance](https://www.frixlaw.com/law-library/statutes/FDIC_FIL06004.md)
- [FDIC FIL-4-2021 Revised Guidelines for Appeals of Material Supervisory Determinations](https://www.frixlaw.com/law-library/statutes/FDIC_FIL21004.md)
- [FDIC FIL-4-2023 Guidance to Help Financial Institutions and Facilitate Recovery in Areas of California Affected by Severe Winter Storms, Flooding, Landslides and Mudslides](https://www.frixlaw.com/law-library/statutes/FDIC_FIL23004.md)
- [FDIC FIL-4-2025 FDIC Statement of Policy on Bank Merger Transactions](https://www.frixlaw.com/law-library/statutes/FDIC_FIL25004.md)
- [FDIC FIL-5-2000 Consumer Credit Reporting Practices](https://www.frixlaw.com/law-library/statutes/FDIC_FIL00005.md)
- [FDIC FIL-5-2003 LETTER TO STAKEHOLDERS](https://www.frixlaw.com/law-library/statutes/FDIC_FIL03005.md)
- [FDIC FIL-5-2021 Frequently Asked Questions Regarding Suspicious Activity Reporting and Other Anti-Money Laundering (AML) Considerations](https://www.frixlaw.com/law-library/statutes/FDIC_FIL21005.md)
- [FDIC FIL-6-2000 Special Alert](https://www.frixlaw.com/law-library/statutes/FDIC_FIL00006.md)

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Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/FDIC_FIL16034. Check the current official text before relying on it. Not legal advice.