Incentive-Based Compensation Arrangements
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 42
[Docket ID OCC-2011-0001]
RIN 1557-AD39
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 372
RIN 3064–AD86
FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1232
RIN-2590-AA42
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 741 and 751
RIN 3133-AE48
Incentive-Based Compensation Arrangements
AGENCY:
Office of the Comptroller of the Currency, Treasury; Federal Deposit Insurance
Corporation; Federal Housing Finance Agency; and National Credit Union Administration.
ACTION: Notice of proposed rulemaking and request for public comment.
SUMMARY: The Office of the Comptroller of the Currency, Federal Deposit Insurance
Corporation, Federal Housing Finance Agency, and National Credit Union Administration seek
comment on a proposed rule to implement section 956 of the Dodd-Frank Wall Street Reform and
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Consumer Protection Act. The statute requires that the appropriate Federal regulators, jointly issue
regulations or guidelines: (1) prohibiting incentive-based compensation arrangements at covered
financial institutions that encourage inappropriate risks by providing excessive compensation or
that could lead to material financial loss; and (2) requiring those covered financial institutions to
disclose information concerning incentive-based compensation arrangements to the appropriate
Federal regulator.
DATES: Comments are due on or before [INSERT DATE 60 DAYS AFTER DATE OF
PUBLICATION IN THE FEDERAL REGISTER].
OCC: Commenters are encouraged to submit comments through the Federal eRulemaking
Portal. 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 https://regulations.gov/
PUBLICATION IN THE FEDERAL REGISTER].
OCC: Commenters are encouraged to submit comments through the Federal eRulemaking
Portal. 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 https://regulations.gov/. Enter
“Docket ID OCC-2011-0001” in the Search Box and click “Search.” Public comments can
be submitted via the “Comment” box below the displayed document information or by
clicking on the document title and then clicking the “Comment” box on the top-left side of
the screen. For help with submitting effective comments, please click on “Commenter’s
Checklist.” For assistance with the Regulations.gov site, please call 1-866-498-2945 (toll
free) Monday-Friday, 8am-7pm ET, or e-mail regulationshelpdesk@gsa.gov.
Mail: Chief Counsel’s Office, Attention: Comment Processing, Office of the Comptroller
of the Currency, 400 7th Street, SW, Suite 3E-218, Washington, DC 20219.
Hand Delivery/Courier: 400 7th Street, SW, Suite 3E-218, Washington, DC 20219.
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Instructions: You must include “OCC” as the agency name and “Docket ID OCC-
2011-0001” in your comment. In general, the OCC will enter all comments received into
the docket and publish the comments on the Regulations.gov website without change,
including any business or personal information provided such as name and address
information, e-mail 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 include 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 action by the
following methods:
Viewing Comments Electronically – Regulations.gov:
Go to https://regulations.gov/
part of the public record and subject to
public disclosure. Do not include 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 action by the
following methods:
Viewing Comments Electronically – Regulations.gov:
Go to https://regulations.gov/. Enter “Docket ID OCC-2011-0001” in the Search Box and
click “Search.” Click on the “Dockets” tab and then the document’s title. After clicking the
document’s title, click the “Browse All Comments” tab. Comments can be viewed and filtered by
clicking on the “Sort By” drop-down on the right side of the screen or the “Refine Comments
Results” options on the left side of the screen. Supporting materials can be viewed by clicking on
the “Browse Documents” tab. Click on the “Sort By” drop-down on the right side of the screen or
the “Refine Results” options on the left side of the screen checking the “Supporting & Related
Material” checkbox. For assistance with the Regulations.gov site, please call 1-866-498-2945 (toll
free) Monday-Friday, 8am-7pm ET, or e-mail regulationshelpdesk@gsa.gov. The docket may be
viewed after the close of the comment period in the same manner as during the comment period.
FDIC: You may submit comments, identified by RIN 3064–AD86, by any of the following
methods:
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FDIC Website: https://www.fdic.gov/regulations/laws/publiccomments/. Follow
instructions for submitting comments on the agency website.
Email: [IncentiveCompProposal2024@fdic.gov]. Include RIN 3064– AD86 on the subject
line of the message.
Mail: James P. Sheesley, Assistant Executive Secretary, Attention: Comments RIN 3064–
AD86, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC
20429.
Hand Delivery to FDIC: Comments may be hand-delivered to the guard station at the rear
of the 550 17th Street NW building (located on F Street NW) on business days between 7
a.m. and 5 p.m
ubject
line of the message.
Mail: James P. Sheesley, Assistant Executive Secretary, Attention: Comments RIN 3064–
AD86, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC
20429.
Hand Delivery to FDIC: Comments may be hand-delivered to the guard station at the rear
of the 550 17th Street NW building (located on F Street NW) on business days between 7
a.m. and 5 p.m. Please include your name, affiliation, address, email address, and telephone
number(s) in your comment. All statements received, including attachments and other
supporting materials, are part of the public record and are subject to public disclosure.
Public Inspection: Comments received, including any personal information provided, may
be posted without change to https://www.fdic.gov/regulations/laws/publiccomments/.
Commenters should submit only information that the commenter wishes to make available
publicly. The FDIC may review, redact, or refrain from posting all or any portion of any
comment that it may deem to be inappropriate for publication, such as irrelevant or obscene
material. The FDIC may post only a single representative example of identical or
substantially identical comments, and in such cases will generally identify the number of
identical or substantially identical comments represented by the posted example. All
comments that have been redacted, as well as those that have not been posted, that contain
comments on the merits of this document will be retained in the public comment file and
le representative example of identical or
substantially identical comments, and in such cases will generally identify the number of
identical or substantially identical comments represented by the posted example. All
comments that have been redacted, as well as those that have not been posted, that contain
comments on the merits of this document will be retained in the public comment file and
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will be considered as required under all applicable laws. All comments may be accessible
under the Freedom of Information Act.
NCUA: You may submit comments, identified by RIN 3133-AE48, by any of the following
methods (please send comments by one method only):
Federal eRulemaking Portal: https://www.regulations.gov. The docket number for this
proposed rule is 2024-0038. Follow the instructions for submitting comments. A plain
language summary of the proposed rule is also available on the docket website.
Mail: Address to Melane Conyers-Ausbrooks, Secretary of the Board, National Credit
Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428.
Hand Delivery/Courier: Same as mailing address.
Public Inspection: You may view all public comments on the Federal eRulemaking Portal
at https://www.regulations.gov, as submitted, except for those we cannot post for technical
reasons. The NCUA will not edit or remove any identifying or contact information from
the public comments submitted. If you are unable to access public comments on the
internet, you may contact the NCUA for alternative access by calling (703) 518-6540 or
emailing OGCMail@ncua.gov.
FHFA: You may submit your comments on the proposed rule, identified by regulatory
information number (RIN) 2590–AA42, by any one of the following methods:
Agency Website: www.fhfa.gov/open-for-comment-or-input.
Federal eRulemaking Portal: https://www.regulations.gov. Follow the instructions for
submitting comments
rnative access by calling (703) 518-6540 or
emailing OGCMail@ncua.gov.
FHFA: You may submit your comments on the proposed rule, identified by regulatory
information number (RIN) 2590–AA42, by any one of the following methods:
Agency Website: www.fhfa.gov/open-for-comment-or-input.
Federal eRulemaking Portal: https://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
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receipt by FHFA. Include the following information in the subject line of your
submission: Comments/RIN 2590–AB30.
Hand Delivered/Courier: The hand delivery address is: Clinton Jones, General
Counsel, Attention: Comments/ RIN 2590–AB30, Federal Housing Finance Agency,
400 Seventh Street SW, Washington, DC 20219. Deliver the package at the Seventh
Street SW 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: Clinton Jones, General Counsel, Attention: Comments/RIN
2590–AB30, Federal Housing Finance Agency, 400 Seventh 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. For time sensitive correspondence, please plan accordingly.
Public Comments and Access: Copies of all comments received by the deadline will be
posted on the FHFA website at http://www.fhfa.gov, and will include any personal
information you provide, such as your name, address, email address, and telephone
number. In addition, copies of all comments received by the deadline will be available
for examination by the public through the electronic rulemaking docket for this
proposed rule, also located on the FHFA website
deadline will be
posted on the FHFA website at http://www.fhfa.gov, and will include any personal
information you provide, such as your name, address, email address, and telephone
number. In addition, copies of all comments received by the deadline will be available
for examination by the public through the electronic rulemaking docket for this
proposed rule, also located on the FHFA website.
FOR FURTHER INFORMATION CONTACT:
OCC: Alison MacDonald, Senior Counsel, (202) 649-7314, or Melissa Lisenbee, Counsel,
(202) 649-7392, Chief Counsel’s Office; Tamara Culler, Director for Governance and
Operational Risk Policy, Bank Supervision Policy, (202) 649-7866; or Heather Gilmore,
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Lead Expert for Governance and Operational Risk, Supervision Risk and Analysis, (215)
494-7686, Office of the Comptroller of the Currency, 400 7th Street, SW, Washington, DC
20219. If you are deaf, hard of hearing, or have a speech disability, please dial 7–1–1 to
access telecommunications relay services.
FDIC: Thomas Lyons, Associate Director, Risk Management Policy, (202) 898-6850,
Nefretete Smith, Supervisory Counsel, Legal Division, (202) 898– 6851,
NefSmith@FDIC.gov, Catherine Topping, Counsel, Legal Division, (202) 898–3975,
CTopping@FDIC.gov, Amy Ledig, Senior Attorney, Legal Division, (202) 898-7261,
ALedig@fdic.gov, Chantal Hernandez, Counsel, Legal Division, (202) 898-7388,
ChHernandez@FDIC.gov.
NCUA: Office of Examination and Insurance: Summer Chapman, Policy Division Director,
upervisory Counsel, Legal Division, (202) 898– 6851,
NefSmith@FDIC.gov, Catherine Topping, Counsel, Legal Division, (202) 898–3975,
CTopping@FDIC.gov, Amy Ledig, Senior Attorney, Legal Division, (202) 898-7261,
ALedig@fdic.gov, Chantal Hernandez, Counsel, Legal Division, (202) 898-7388,
ChHernandez@FDIC.gov.
NCUA: Office of Examination and Insurance: Summer Chapman, Policy Division Director,
(703) 203-6262, schapman@ncua.gov, and John Berry, Policy Officer, (571) 451-7264,
jberry@ncua.gov; Office of General Counsel: Senior Staff Attorneys, Ariel Pereira, (703)
548-2778, apereira@ncua.gov, and Gira Bose, (703) 518-6562, gbose@ncua.gov.
FHFA: Richard Oettinger, Policy Manager, Executive Compensation and Benefits, (202)
649-3797, richard.oettinger@fhfa.gov; or Dinah Knight, Assistant General Counsel, Office
of General Counsel, (202) 748-7801, dinah.knight@fhfa.gov, Federal Housing Finance
Agency, 400 Seventh Street, SW, Washington, DC 20219. These are not toll-free numbers.
For TTY/TRS users with hearing and speech disabilities, dial 711 and ask to be connected
to any of the contact numbers above.
SUPPLEMENTARY INFORMATION:
Table of Contents
I.
INTRODUCTION ..................................................................................................................... 8
Overview of Previous Issuances .................................................................................................. 12
Relevant Supervisory Experience and Developments ................................................................. 27
Contents
I.
INTRODUCTION ..................................................................................................................... 8
Overview of Previous Issuances .................................................................................................. 12
Relevant Supervisory Experience and Developments ................................................................. 27
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II.
OVERVIEW OF THE 2024 PROPOSED RULE ................................................................... 44
III.
REQUESTS FOR COMMENT .................................................................................... 47
A.
Requests for Comment ................................................................................................. 47
B.
Specific alternatives ..................................................................................................... 64
IV.
ADMINISTRATIVE LAW MATTERS ...................................................................... 73
A.
Regulatory Flexibility Act ............................................................................................ 74
B.
Paperwork Reduction Act ............................................................................................ 77
C.
Providing Accountability Through Transparency Act of 2023 .................................... 82
D.
Riegle Community Development and Regulatory Improvement Act of 1994 ............. 83
E.
Plain Language ............................................................................................................. 84
F.
OCC Unfunded Mandates Reform Act of 1995 Determination ................................... 85
G.
Differences Between the Federal Home Loan Banks and the Enterprises ................... 86
H.
NCUA Executive Order 13132 Determination ............................................................ 86
I.
Assessment of Federal Regulations and Policies on Families ..................................... 87
I
d Mandates Reform Act of 1995 Determination ................................... 85
G.
Differences Between the Federal Home Loan Banks and the Enterprises ................... 86
H.
NCUA Executive Order 13132 Determination ............................................................ 86
I.
Assessment of Federal Regulations and Policies on Families ..................................... 87
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 appropriate Federal regulators,” defined as the
Federal Deposit Insurance Corporation (“FDIC”), the Office of the Comptroller of the Currency
(“OCC”), the Board of Governors of the Federal Reserve System (“Board”), the Federal Housing
Finance Agency (“FHFA”), the National Credit Union Administration (“NCUA”), and the
Securities and Exchange Commission (“SEC”),2 to jointly prescribe regulations or guidelines with
respect to incentive-based compensation practices at certain financial institutions (referred to as
“covered financial institutions”).3 Specifically, section 956 of the Dodd-Frank Act (“section 956”)
requires that the appropriate Federal regulators prohibit any types of incentive-based compensation
1 Public Law 111–203, 124 Stat. 1376 (2010), codified at 12 U.S.C. 5641.
2 The Act also lists the Office of Thrift Supervision, which was abolished in 2011.
3 12 U.S.C. 5641(b).
Specifically, section 956 of the Dodd-Frank Act (“section 956”)
requires that the appropriate Federal regulators prohibit any types of incentive-based compensation
1 Public Law 111–203, 124 Stat. 1376 (2010), codified at 12 U.S.C. 5641.
2 The Act also lists the Office of Thrift Supervision, which was abolished in 2011.
3 12 U.S.C. 5641(b).
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arrangements,4 or any feature of any such arrangements, that the appropriate Federal regulators
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.
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
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 Act5; (D) an investment adviser, as such term is defined in
4 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
regulatory text and preamble for the sake of clarity, except when referencing or citing other sources.
5 This definition encompasses “any insured credit union as defined in section 101 of the Federal Credit Union Act [12
U.S.C. 1752] or any credit union which is eligible to make application to become an insured credit union pursuant to
section 201 of such Act [12 U.S.C.1781].” Under section 201 of the Federal Credit Union Act, state-chartered credit
unions are eligible to apply for Federal insurance at any time. Accordingly, the requirements of section 956 apply to
all credit unions, regardless of whether they are Federally insured. The NCUA’s supervisory authority in this area,
however, is limited to Federally insured credit unions. Section 956(d) provides that the “provisions of this section and
the regulations issued under this section shall be enforced under section 505 of the Gramm-Leach-Bliley Act [15
U.S.C
he requirements of section 956 apply to
all credit unions, regardless of whether they are Federally insured. The NCUA’s supervisory authority in this area,
however, is limited to Federally insured credit unions. Section 956(d) provides that the “provisions of this section and
the regulations issued under this section shall be enforced under section 505 of the Gramm-Leach-Bliley Act [15
U.S.C. 6805] and, for purposes of such section, a violation of this section or such regulations shall be treated as a
violation of subtitle A of title V of such Act.” Section 505 of the Gramm-Leach-Bliley Act grants the Federal Trade
Commission enforcement authority “for any other financial institution or other person that is not subject to the
jurisdiction” of another agency under the act. This same provision refers to the NCUA’s authority over “federally
insured credit unions” only. Accordingly, compliance with section 956 and this proposed rule by state-chartered credit
unions that are not Federally-insured is subject to enforcement by the Federal Trade Commission.
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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
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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
(“IDIs”) under section 39 of the FDIA6 and that the appropriate Federal regulators take the
compensation standards described in section 39 of the FDIA into consideration in establishing
compensation standards under section 956.7
On April 14, 2011, the FDIC, OCC, Board, FHFA, NCUA, and SEC published in the
Federal Register a proposal to implement section 956 of the Dodd-Frank Act (the “2011 Proposed
Rule”).8
On June 10, 2016, the FDIC, OCC, Board, FHFA, NCUA, and SEC published in the
Federal Register a subsequent proposal to implement section 956 of the Dodd-Frank Act (the
“2016 Proposed Rule”). 9
Section 956 was enacted by Congress to address certain types of incentive-based
compensation arrangements that could lead to significant risks for financial institutions. Recent
events and supervisory experience with industry practices show that, absent specific prohibitions,
6 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).
7 12 U.S.C. 5641(c)
ve 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).
7 12 U.S.C. 5641(c).
8 76 FR 21170 (April 14, 2011).
9 81 FR 37673 (June 10, 2016).
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some covered institutions offer incentive-based compensation arrangements that encourage
inappropriate risks. In this notice of proposed rulemaking (the “proposal”, “proposed rule”, or the
“2024 Proposed Rule”), the FDIC, OCC, FHFA, and NCUA (referred to collectively as “the
Agencies” for purposes of this proposal) are re-proposing the regulatory text of the 2016 Proposed
Rule.10 The 2016 Proposed Rule’s approach would provide a consistent set of enforceable
standards and help safeguard covered financial institutions from certain types and features of
incentive-based compensation arrangements that encourage inappropriate risks.
The Agencies have reviewed and continue to consider the comments on the 2016 Proposed
Rule.11 In consideration of the passage of time since the 2016 Proposed Rule was issued,
additional supervisory experience, changes in industry practice, and other developments, the
Agencies are seeking additional feedback from commenters on the re-proposed regulatory text as
well as on potential alternatives discussed in the preamble. Comments received on this proposal,
as well as those submitted on the 2016 Proposed Rule, will further inform the Agencies’ efforts to
implement section 956’s mandate.
The first part of this Supplementary Information section provides background information
on the proposed rule, including a description of the Agencies’ supervisory experience and other
developments since the issuance of the 2016 Proposed Rule. The second part contains a discussion
of the 2024 Proposed Rule
ed Rule, will further inform the Agencies’ efforts to
implement section 956’s mandate.
The first part of this Supplementary Information section provides background information
on the proposed rule, including a description of the Agencies’ supervisory experience and other
developments since the issuance of the 2016 Proposed Rule. The second part contains a discussion
of the 2024 Proposed Rule. The third part contains requests for comments, including descriptions
10 The Board has not acted to join this proposal. Rulemaking to implement section 956 is on the SEC’s rulemaking
agenda. See Agency Rule List – Fall 2023, Securities Exchange Commission, available at
https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST¤tP
ub=true&agencyCode&showStage=active&agencyCd=3235.
11 Comments received on the 2016 Proposed Rule are available here:
https://www.federalreserve.gov/apps/foia/ViewComments.aspx?doc_id=R-1536&doc_ver=1 (Board);
https://www.fdic.gov/resources/regulations/federal-register-publications/2016/2016-compensation-arrangements-
3064-ad86.html (FDIC); https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Comment-List.aspx?RuleID=555
(FHFA); https://www.regulations.gov/docket/NCUA-2016-0033/comments (NCUA);
https://www.regulations.gov/document/OCC-2011-0001-2367 (OCC); https://www.sec.gov/comments/s7-07-
16/s70716.htm (SEC).
ic.gov/resources/regulations/federal-register-publications/2016/2016-compensation-arrangements-
3064-ad86.html (FDIC); https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Comment-List.aspx?RuleID=555
(FHFA); https://www.regulations.gov/docket/NCUA-2016-0033/comments (NCUA);
https://www.regulations.gov/document/OCC-2011-0001-2367 (OCC); https://www.sec.gov/comments/s7-07-
16/s70716.htm (SEC).
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of alternative regulatory provisions under consideration by the Agencies based on experiences in
reviewing and supervising incentive-based compensation at some covered institutions. The final
part contains the regulatory analysis sections.
For ease of reference, the proposed rules of the Agencies are referenced in this
Supplementary Information section using a common designation of section ___.1 to section ___.14
(excluding the title and part designations for each agency). Each agency would codify its rule, if
adopted, within its respective title and part of the Code of Federal Regulations.12
Overview of Previous Issuances
1.
2011 Proposed Rule
In 2011, the FDIC, OCC, Board, FHFA, NCUA, and SEC issued a notice of proposed
rulemaking to implement section 956 of the Dodd-Frank Act.13
The 2011 Proposed Rule would have provided seven factors for determining whether
compensation paid is unreasonable or disproportionate to the services performed by a “covered
person.”14 The 2011 Proposed Rule also would have required incentive-based compensation
arrangements at covered financial institutions to meet three key principles-based requirements—
that incentive-based compensation arrangements appropriately balance risk and financial rewards,
be compatible with effective risk management and controls, and be supported by strong corporate
governance.
12 Specifically, the Agencies propose to codify the rules as follows: 12 CFR part 42 (OCC); 12 CFR part 372 (FDIC);
12 CFR part 1232 (FHFA); and 12 CFR parts 741 and 751 (NCUA)
angements appropriately balance risk and financial rewards,
be compatible with effective risk management and controls, and be supported by strong corporate
governance.
12 Specifically, the Agencies propose to codify the rules as follows: 12 CFR part 42 (OCC); 12 CFR part 372 (FDIC);
12 CFR part 1232 (FHFA); and 12 CFR parts 741 and 751 (NCUA).
13 76 FR 21170 (April 14, 2011).
14 The 2011 Proposed Rule provided that a “covered person” would be any executive officer, employee, director, or
principal shareholder of a “covered institution.”
13
The 2011 Proposed Rule included two additional requirements for “larger covered financial
institutions.”15 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 financial
institution.
The FDIC, OCC, Board, FHFA, NCUA, and SEC received more than 10,000 comments on
the 2011 Proposed Rule, including comments from private individuals, community groups, several
Members of Congress, pension funds, labor federations, academic faculty, covered financial
institutions, financial industry associations, and industry consultants.16
2.
2016 Proposed Rule
In 2016, the FDIC, OCC, Board, FHFA, NCUA, and SEC issued a second proposed rule
more than 10,000 comments on
the 2011 Proposed Rule, including comments from private individuals, community groups, several
Members of Congress, pension funds, labor federations, academic faculty, covered financial
institutions, financial industry associations, and industry consultants.16
2.
2016 Proposed Rule
In 2016, the FDIC, OCC, Board, FHFA, NCUA, and SEC issued a second proposed rule.
15 In the 2011 Proposed Rule, the term “larger covered financial institution” for the Federal Banking Agencies and the
SEC meant those covered financial 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 financial
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 financial institutions.
16 Comments received on the 2011 Proposed Rule are available here:
https://www.federalreserve.gov/apps/foia/ViewComments.aspx?doc_id=R%2D1410&doc_ver=1 (Board);
https://www.fdic.gov/regulations/laws/federal/2011/11comad56.html
(FDIC); https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Comment-List.aspx?RuleID=187 (FHFA);
http://web.archive.org/web/20120916130332/http:/www.ncua.gov/Legal/Pages/PRs20110217Comp.aspx (NCUA);
https://www.regulations.gov/document?D=OCC-2011-0001-0001 (OCC); https://www.sec.gov/comments/s7-12-
11/s71211.shtml (SEC). A summary of the comments received in connection with the 2011 Proposed Rule was
included in the 2016 Proposed Rule.
ion/Rules/Pages/Comment-List.aspx?RuleID=187 (FHFA);
http://web.archive.org/web/20120916130332/http:/www.ncua.gov/Legal/Pages/PRs20110217Comp.aspx (NCUA);
https://www.regulations.gov/document?D=OCC-2011-0001-0001 (OCC); https://www.sec.gov/comments/s7-12-
11/s71211.shtml (SEC). A summary of the comments received in connection with the 2011 Proposed Rule was
included in the 2016 Proposed Rule.
14
With respect to the prohibition on excessive compensation, the 2016 Proposed Rule
provided six factors17 for determining whether compensation paid is unreasonable or
disproportionate to the services performed by the “covered person.”18 As required by section 956,
these factors were comparable to the excessive compensation factors in section 39 of the FDIA.
The 2016 Proposed Rule would have prohibited incentive-based compensation
arrangements at covered financial institutions that did not meet three key principles—that
incentive-based compensation arrangements appropriately balance risk and financial rewards, be
compatible with effective risk management and controls, and be supported by strong corporate
governance. The 2016 Proposed Rule specifically provided that an incentive-based compensation
arrangement would not have been considered to appropriately balance risk and reward unless it
included financial and non-financial measures of performance; was designed to allow non-
financial measures of performance to override financial measures of performance, when
appropriate; and was subject to adjustment to reflect actual losses, inappropriate risks taken,
compliance deficiencies, or other measures or aspects of financial and non-financial performance
nce risk and reward unless it
included financial and non-financial measures of performance; was designed to allow non-
financial measures of performance to override financial measures of performance, when
appropriate; and was subject to adjustment to reflect actual losses, inappropriate risks taken,
compliance deficiencies, or other measures or aspects of financial and non-financial performance.
The 2016 Proposed Rule also would have required covered financial institutions to create
and maintain for at least seven years records documenting the structure of their incentive-based
17 Under the 2016 Proposed Rule, compensation would have been considered excessive when amounts paid were
unreasonable or disproportionate to the value of the services performed by a covered person, taking into consideration
all relevant factors, including, but not limited to: (1) The combined value of all compensation, fees, or benefits
provided to the covered person; (2) the compensation history of the covered person and other individuals with
comparable expertise at the covered institution; (3) the financial condition of the covered institution; (4) 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; (5) for post-employment benefits, the projected total cost and benefit to
the covered institution; and (6) 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 2016 Proposed Rule did not
include the seventh factor that appeared in the 2011 Proposed Rule, “Any other factors that the [Agency] determines to
be relevant.”
18 The 2016 Proposed Rule defines “covered person” to mean “any executive officer, employee, director, or principal
shareholder who receives incentive-based compensation at a covered institution.”
egard to the covered institution. The 2016 Proposed Rule did not
include the seventh factor that appeared in the 2011 Proposed Rule, “Any other factors that the [Agency] determines to
be relevant.”
18 The 2016 Proposed Rule defines “covered person” to mean “any executive officer, employee, director, or principal
shareholder who receives incentive-based compensation at a covered institution.”
15
compensation arrangements and demonstrating compliance with the rule, and that such records be
disclosed to an institution’s primary Federal regulator upon request.
The 2016 Proposed Rule would have defined “covered institution” to include the covered
financial institutions defined in section 956, as described above: depository institutions,
depository institution holding companies, credit unions, Fannie Mae, and Freddie Mac. In
addition, the proposal would have included Federal Home Loan Banks as covered institutions.
Moreover, the 2016 Proposed Rule distinguished covered financial institutions by asset
size, applying less prescriptive incentive-based compensation program requirements to the smallest
covered financial institutions within the statutory scope and progressively more rigorous
requirements to the larger covered financial institutions. The 2016 Proposed Rule identified three
categories of covered financial institutions based on average total consolidated assets:19
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)
equirements to the larger covered financial institutions. The 2016 Proposed Rule identified three
categories of covered financial institutions based on average total consolidated assets:19
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).
The 2016 Proposed Rule also contained a reservation of authority allowing the appropriate
Federal regulator to require a Level 3 covered institution to comply with some or all of the
provisions applicable to Level 1 and Level 2 institutions if the appropriate Federal regulator
determined that the Level 3 covered institution’s complexity of operations or compensation
practices were consistent with those of a Level 1 or Level 2 covered institution.
19 For covered financial institutions that are subsidiaries of other covered financial institutions, levels would generally
have been determined by reference to the average total consolidated assets of the top-tier parent covered financial
institution.
16
Level 1 and Level 2 institutions would have been subject to the following additional
requirements, many of which would expressly apply to certain covered persons, “senior executive
officers” and “significant risk takers.”
Disclosure and Recordkeeping Requirements. All Level 1 and Level 2 covered institutions
would have been required 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;
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.
Deferral, Forfeiture and Downward Adjustment, and Clawback Requirements. For Level 1
and Level 2 covered institutions, the 2016 Proposed Rule would have required that incentive-based
compensation arrangements for certain covered persons be subject to deferral of payments and risk
of downward adjustment, forfeiture, and clawback. Deferral requirements would have applied to
significant risk-takers as well as senior executive officers, and would have required 40, 50, or 60
percent deferral depending on the size of the covered institution and whether the covered person
receiving the incentive-based compensation was a senior executive officer or a significant risk-
taker. Deferral periods ranged from one to four years depending on the type of incentive-based
compensation arrangement, the size of the covered institution, and whether the covered person
receiving the incentive-based compensation was a senior executive officer or a significant risk-
taker.
erson
receiving the incentive-based compensation was a senior executive officer or a significant risk-
taker. Deferral periods ranged from one to four years depending on the type of incentive-based
compensation arrangement, the size of the covered institution, and whether the covered person
receiving the incentive-based compensation was a senior executive officer or a significant risk-
taker.
17
A Level 1 or Level 2 covered institution would have been required 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. Similarly, a Level 1 or Level 2 covered institution also would have been 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
have been required to consider forfeiture or downward adjustment of incentive-based
compensation if any of the following adverse outcomes occurred:
• 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
nt 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.
A Level 1 or Level 2 covered institution would have been required to include clawback
provisions in the incentive-based compensation arrangements for senior executive officers and
significant risk-takers 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 determined
18
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.
Additional Prohibitions. The 2016 Proposed Rule contained a number of additional
prohibitions for Level 1 and Level 2 covered institutions, including:
Hedging: The 2016 Proposed Rule would have prohibited a Level 1 or Level 2 covered
institution from purchasing a hedging instrument on behalf of a covered person to hedge
or offset any decrease in the value of the covered person’s incentive-based compensation.
Maximum incentive-based compensation opportunity (also referred to as leverage): The
2016 Proposed Rule would have prohibited a Level 1 or Level 2 covered institution from
awarding incentive-based compensation to a senior executive officer in excess of 125
percent of the target amount for that incentive-based compensation
e in the value of the covered person’s incentive-based compensation.
Maximum incentive-based compensation opportunity (also referred to as leverage): The
2016 Proposed Rule would have prohibited a Level 1 or Level 2 covered institution from
awarding incentive-based compensation to a senior executive officer in excess of 125
percent of the target amount for that incentive-based compensation. For a significant
risk-taker the limit would have been 150 percent of the target amount for that incentive-
based compensation.
Relative performance measures: The 2016 Proposed Rule would have prohibited a Level
1 or Level 2 covered institution from using performance measures that are based solely
on industry peer performance comparisons.
Volume-driven incentive-based compensation: The 2016 Proposed Rule would have
prohibited a Level 1 or Level 2 covered institution from providing incentive-based
compensation to a covered person based solely on transaction revenue or volume without
regard to transaction quality or compliance with sound risk management.
19
Risk Management and Controls. The 2016 Proposed Rule would have required 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, and is commensurate with the size and complexity of the covered
institution’s operations
ement.
19
Risk Management and Controls. The 2016 Proposed Rule would have required 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, and is commensurate with the size and complexity of the covered
institution’s operations. In addition, the 2016 Proposed Rule would have required 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 in accordance with the achievement of performance objectives
linked to their control functions and 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. The 2016 Proposed Rule would have required each Level 1 or Level 2 covered
institution to establish a compensation committee composed solely of directors who are not senior
executive officers. The compensation committee would have been required to obtain input from
the covered institution’s risk and audit committees, and risk management function, including an
independent written assessment, on the effectiveness of risk measures and adjustments used to
balance incentive-based compensation arrangements. Additionally, management would have been
required to submit to the compensation committee on an annual or more frequent basis a written
obtain input from
the covered institution’s risk and audit committees, and risk management function, including an
independent written assessment, on the effectiveness of risk measures and adjustments used to
balance incentive-based compensation arrangements. Additionally, management would have been
required to submit to the compensation committee on an annual or more frequent basis a written
20
assessment of the effectiveness of the covered institution’s incentive-based compensation program.
The internal audit or risk management function of the covered institution also would have been
required to submit an independent written assessment, developed independently of the covered
institution’s management, to the compensation committee on an annual or more frequent basis.
Policies and Procedures. The 2016 Proposed Rule would have required 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;
Specify the procedures 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;
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;
Document processes for the establishment, implementation, modification, and
monitoring of incentive-based compensation arrangements;
Describe how incentive-based compensation arrangements will be monitored;
Describe procedures for the independent compliance program; and
Ensure appropriate roles for risk management, risk oversight, and other control
functions
d to achieve balance;
Document processes for the establishment, implementation, modification, and
monitoring of incentive-based compensation arrangements;
Describe how incentive-based compensation arrangements will be monitored;
Describe procedures for the independent compliance program; and
Ensure appropriate roles for risk management, risk oversight, and other control
functions.
The 2016 Proposed Rule also proposed a new defined term, “significant risk-taker,” which
included two tests for determining whether a covered person would be a significant risk-taker. The
“relative compensation test” in paragraphs (1)(i) and (ii) of the proposed definition would have
21
required a covered institution to determine which covered persons are among the top 5 percent (for
Level 1 covered institutions) or 2 percent (for Level 2 covered institutions) of highest compensated
covered persons (excluding senior executive officers) in the entire consolidated organization,
including affiliated covered institutions. The second test was based on whether the covered person
has the authority to commit or expose 0.5 percent or more of the capital of the covered institution
or an affiliate that is itself a covered institution (the “exposure test”). The significant risk-taker
definition under either test would be applicable only to covered persons at a Level 1 or Level 2
covered institution who received annual base salary and incentive-based compensation for the last
calendar year that ended at least 180 days before the beginning of the performance period of which
at least one-third is incentive-based compensation (one-third threshold)
. The significant risk-taker
definition under either test would be applicable only to covered persons at a Level 1 or Level 2
covered institution who received annual base salary and incentive-based compensation for the last
calendar year that ended at least 180 days before the beginning of the performance period of which
at least one-third is incentive-based compensation (one-third threshold). In addition, the proposed
rule’s definition of significant risk-taker would have allowed the FDIC, OCC, Board, FHFA,
NCUA, and SEC the flexibility to designate additional covered persons as significant risk-takers if
the covered person has the ability to expose the covered institution to risks that could lead to
material financial loss in relation to the covered institution’s size, capital, or overall risk tolerance.
Significant risk-takers at Level 1 and Level 2 institutions would have been subject to additional
requirements, including mandatory deferral.
Under the 2016 Proposed Rule, covered institutions that are subsidiaries of other covered
institutions would have been subject to the same requirements, and defined to be the same level, as
the parent covered institution, even if the subsidiary covered institution is smaller than the parent
covered institution. This feature of the 2016 Proposed Rule was referred to as “consolidation,” and
it was designed to reinforce the ability of institutions to establish and maintain effective risk
management and controls for the entire consolidated organization with respect to the organization's
incentive-based compensation program.
subsidiary covered institution is smaller than the parent
covered institution. This feature of the 2016 Proposed Rule was referred to as “consolidation,” and
it was designed to reinforce the ability of institutions to establish and maintain effective risk
management and controls for the entire consolidated organization with respect to the organization's
incentive-based compensation program.
22
The 2016 Proposed Rule specified that risk would need to be assessed at both the holding
company level and at the level of individual covered institutions within the consolidated
organization. However, the rules proposed in 2016 by the Board, OCC, and FDIC, would have
permitted the covered institutions they supervised that are subsidiaries of another covered
institution to meet the requirements of the proposed rule if the parent covered institution complied
with the requirements in a way that caused the relevant portion of the incentive-based
compensation program of the subsidiary covered institution to comply with the requirements.
Overview of Public Comments on the 2016 Proposed Rule
The FDIC, OCC, Board, FHFA, NCUA, and SEC received more than one hundred
comments on the 2016 Proposed Rule from private individuals, state officials, Members of
Congress, community groups, pension funds, labor federations, academic faculty, covered
institutions, financial industry associations, industry consultants, and other interested parties. In
addition, agency staff members held a number of meetings to obtain supplementary information.20
The following paragraphs provide a brief overview of comments received on the 2016 Proposed
Rule. However, the Agencies emphasize that they will consider all comments received on the
2016 Proposed Rule, including any comments not specifically described in this overview, and all
comments received in connection with the 2024 Proposed Rule when determining how to
implement section 956
ation.20
The following paragraphs provide a brief overview of comments received on the 2016 Proposed
Rule. However, the Agencies emphasize that they will consider all comments received on the
2016 Proposed Rule, including any comments not specifically described in this overview, and all
comments received in connection with the 2024 Proposed Rule when determining how to
implement section 956.
20 Comments received on the 2016 Proposed Rule are available here:
https://www.federalreserve.gov/apps/foia/ViewComments.aspx?doc_id=R-1536&doc_ver=1 (Board);
https://www.fdic.gov/resources/regulations/federal-register-publications/2016/2016-compensation-arrangements-
3064-ad86.html (FDIC); https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Comment-List.aspx?RuleID=555
(FHFA); https://www.regulations.gov/document/NCUA-2016-0033-0001/comment (NCUA);
https://www.regulations.gov/document/OCC-2011-0001-2367 (OCC); https://www.sec.gov/comments/s7-07-
16/s70716.htm (SEC).
23
Many commenters recommended strengthening the 2016 Proposed Rule, stating that
flawed incentive-based compensation practices were a major contributing factor to the 2008
financial crisis and continue to have negative implications for the financial services industry.
A significant number of commenters expressed concerns regarding the 2016 Proposed Rule
overall or criticized specific aspects of it
commenters recommended strengthening the 2016 Proposed Rule, stating that
flawed incentive-based compensation practices were a major contributing factor to the 2008
financial crisis and continue to have negative implications for the financial services industry.
A significant number of commenters expressed concerns regarding the 2016 Proposed Rule
overall or criticized specific aspects of it.
For example, the FDIC, OCC, Board, FHFA, NCUA, and SEC received many comments
on the definitions included in the 2016 Proposed Rule, such as the definitions of “senior executive
officer” and “significant risk-taker.” With regard to the definition of “senior executive officer,”
some commenters recommended that the rule define senior executive officers on a consolidated
basis (e.g., only those executives at the top-tier covered institution), using a definition similar to
the “executive officer” definition under Section 16 of the Securities Exchange Act of 1934, or
based on the Guidance on Sound Incentive Compensation Policies (“2010 Federal Banking
Agency Guidance.”)21 The FDIC, OCC, Board, FHFA, NCUA, and SEC received a range of
comments on the definition of the term “significant risk-takers,” including, for example,
recommendations that the rule identify significant risk-takers in a manner similar to how material
risk-takers are identified under the 2010 Federal Banking Guidance, that the rule apply a dollar
threshold rather than a percentage threshold for the relative compensation test, and that the rule
eliminate the exposure test.
Several commenters stated that the definition of “incentive-based compensation” was
overly broad and should exclude compensation that does not encourage inappropriate risk taking,
such as employees’ ownership interests, qualified pensions and profit sharing plans, and equity
with multi-year vesting that is not based on performance measures.
21 75 FR 36395 (June 25, 2010).
the definition of “incentive-based compensation” was
overly broad and should exclude compensation that does not encourage inappropriate risk taking,
such as employees’ ownership interests, qualified pensions and profit sharing plans, and equity
with multi-year vesting that is not based on performance measures.
21 75 FR 36395 (June 25, 2010).
24
The FDIC, OCC, Board, FHFA, NCUA, and SEC received a significant number of
comments on the deferral provisions of the 2016 Proposed Rule. For example, some commenters
argued that the deferral requirements were too complicated and recommended simplification, such
as a requirement for deferral of a fixed percentage of all incentive-based compensation, both short-
term and long-term, to be deferred for the same set period of time. Many commenters also stated
that the deferral requirements would negatively affect institutions’ ability to attract and retain
talent, and that covered persons would seek employment at institutions where they would not be
subject to deferral requirements. Some commenters suggested that covered institutions would be
forced to offer higher base salaries in lieu of the incentive-based compensation subject to deferral.
Some commenters asserted that the deferral provisions in the 2016 Proposed Rule would
mean that outcomes of inappropriate risk-taking may not be discovered until a majority of
incentive-based compensation vests, and they urged that the rule establish stricter deferral
requirements and longer deferral periods. For example, some commenters suggested deferral
periods of up to seven years to either be consistent with the average length of a business cycle or to
align with the U.K.’s deferral requirement for senior managers, recommended that a substantial
portion of incentive-based compensation be held through retirement age, and suggested that the
rule permit only “cliff” vesting
ger deferral periods. For example, some commenters suggested deferral
periods of up to seven years to either be consistent with the average length of a business cycle or to
align with the U.K.’s deferral requirement for senior managers, recommended that a substantial
portion of incentive-based compensation be held through retirement age, and suggested that the
rule permit only “cliff” vesting.
The FDIC, OCC, Board, FHFA, NCUA, and SEC received a significant number of
comments on the forfeiture and downward adjustment provisions for Level 1 and Level 2 covered
institutions. For example, some commenters recommended that forfeiture be mandatory in certain
circumstances, while others stated that the board of directors should retain discretion to consider
relevant facts and circumstances in making a final determination. Other commenters suggested
changes to the triggers and proposed decision-making factors for forfeiture and downward
25
adjustment, with some suggesting that the provisions were too prescriptive and others that they
were not prescriptive enough.
The FDIC, OCC, Board, FHFA, NCUA, and SEC also received comments on the 2016
Proposed Rule’s requirement that Level 1 and Level 2 covered institutions include clawback
provisions in incentive-based compensation arrangements for senior executive officers and
significant risk-takers. For example, some commenters recommended that covered institutions
should be required, rather than have discretion, to exercise clawback remedies; suggested that
institutions should be required to publicly disclose the identities of senior executive officers and
significant risk-takers whose pay was clawed back and the amounts involved; or recommended
expanding and/or clarifying the types of conduct that would trigger the imposition of the clawback.
The FDIC, OCC, Board, FHFA, NCUA, and SEC also received comments on the 2016
Proposed Rule’s risk management and controls, governance and policies, and procedural
requirements
enior executive officers and
significant risk-takers whose pay was clawed back and the amounts involved; or recommended
expanding and/or clarifying the types of conduct that would trigger the imposition of the clawback.
The FDIC, OCC, Board, FHFA, NCUA, and SEC also received comments on the 2016
Proposed Rule’s risk management and controls, governance and policies, and procedural
requirements. For example, some commenters suggested that these provisions of the rule should
be in the form of guidelines rather than requirements. Others suggested that the rule further clarify
the independence requirements for members of the compensation committee, while others
recommended that the compensation committee should not be required to obtain two separate,
written assessments of the effectiveness of its incentive-based compensation program. Some
commenters also questioned the application of these sections to subsidiaries, raising concerns
about redundancy in the case of compliance programs and the need to manage risk on a
consolidated basis. Some commenters asserted that the recordkeeping requirements that apply to
all incentive-based compensation plans and awards (and not just those of senior executive officers
and significant risk-takers) were overly burdensome, the proposal would increase burdens on
boards of directors to oversee and approve the incentive-based compensation plans and awards for
26
all senior executive officers, and the tests for determining excessive compensation were
unworkable because of, among other reasons, anticipated difficulty in obtaining the market data
that would be required to perform the required analysis.
A number of commenters expressed concerns about the 2016 Proposed Rule’s overall
approach, with many recommending that the Board, OCC, FDIC, FHFA, SEC, and NCUA adopt
the 2010 Federal Banking Agency Guidance or a similar, principles-based approach
rkable because of, among other reasons, anticipated difficulty in obtaining the market data
that would be required to perform the required analysis.
A number of commenters expressed concerns about the 2016 Proposed Rule’s overall
approach, with many recommending that the Board, OCC, FDIC, FHFA, SEC, and NCUA adopt
the 2010 Federal Banking Agency Guidance or a similar, principles-based approach. Some
commenters indicated that the more prescriptive approach in the 2016 Proposed Rule was
impractical, would reduce flexibility, would create unintended consequences and complications,
and would not adequately account for the risks posed by different individuals and types of
institutions. For example, several commenters specifically opposed the use of prescriptive
requirements or bright-line tests to identify significant risk-takers. Some of these commenters also
opposed the use of prescriptive requirements to distinguish among covered financial institutions
based on asset size, or opposed specific requirements related to deferral, forfeiture, downward
adjustment, and clawback.
Other commenters offered a number of specific recommendations covering a broad range
of issues, including tax and accounting implications; recordkeeping and disclosure requirements;
specific definitions; proposed compliance periods and effective dates; and the additional
prohibitions related to hedging, leverage, the use of relative performance measures, and volume-
driven incentive-based compensation.
menters offered a number of specific recommendations covering a broad range
of issues, including tax and accounting implications; recordkeeping and disclosure requirements;
specific definitions; proposed compliance periods and effective dates; and the additional
prohibitions related to hedging, leverage, the use of relative performance measures, and volume-
driven incentive-based compensation.
27
Relevant Supervisory Experience and Developments
There is evidence that flawed incentive-based compensation practices in the financial
industry may have contributed to the 2008 financial crisis (“the financial crisis”).22 Some
compensation arrangements rewarded employees—including non-executive personnel such as
traders, 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, their
customers, and to the broader financial system.23 In considering earlier legislation that formed the
basis for section 956, the majority members of the Committee on Financial Services of the House
of Representatives found that “a broad consensus has developed that executive and financial
institution compensation structures relate directly to both the safety and soundness of individual
financial institutions and the health of the broader financial system.”24 More recent supervisory
experience continues to demonstrate the potential negative impact of misaligned incentive-based
compensation arrangements on financial institutions.
22 E.g., Financial Crisis Inquiry Commission, “Financial Crisis Inquiry Report” (Jan
f individual
financial institutions and the health of the broader financial system.”24 More recent supervisory
experience continues to demonstrate the potential negative impact of misaligned incentive-based
compensation arrangements on financial institutions.
22 E.g., Financial Crisis Inquiry Commission, “Financial Crisis Inquiry Report” (Jan. 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. See
also Institute of International Finance, Inc., Compensation in Financial Services: Industry Progress and the Agenda for
Change (2009); Financial Stability Forum, FSF Principles for Sound Compensation Practices (87 KB PDF) (Basel,
Switzerland: FSF, April 2009), available at http://www.financialstabilityboard.org/publications/r_0904b.pdf; and
Senior Supervisors Group, Risk-management Lessons from the Global Banking Crisis of 2008 (Basel, Switzerland:
SSG, Oct. 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.
23 One example of the effect of flawed incentive-based compensation practices also 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 Washington Mutual “[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. Such
arrangements “enriched WaMu in the short term but made defaults more likely down the road.” See Staff of S.
Permanent Subcomm
to the Senate Permanent Subcommittee on
Investigations Staff’s report on the failure of Washington Mutual “[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. Such
arrangements “enriched WaMu in the short term but made defaults more likely down the road.” See Staff of S.
Permanent Subcomm. on Investigations, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse at 143
(Comm. Print 2011) (hereinafter Senate Subcommittee Report).
24 See H.R. Rep. 111-236, Corporate and Financial Institution Compensation Fairness Act of 2009, at 6 (2009). See
also Compensation Structure and Systemic Risk: Hearing Before the H. Comm. on Financial Services, 111th Cong.
(2009).
28
For example, in September 2016, flawed incentive-based compensation practices
contributed to the sales practices misconduct at Wells Fargo that resulted in harm to customers and
fines, penalties and enormous reputational damage to the financial institution.25 Wells Fargo’s
compensation structure provided branch employees financial incentives to meet sales volume
goals, without sufficient controls and oversight.
The bank failures in March 2023 also highlighted the importance of a financial institution’s
risk management practices and governance arrangements, including the incentives provided by
senior management compensation schemes. A report on the failure of Silicon Valley Bank noted
that compensation packages of senior management through 2022 were tied to short-term earnings
and equity returns and did not include risk metrics. As such, the report concluded that managers
had a financial incentive to focus on short-term profit over sound risk management.26
25 On September 8, 2016, the OCC assessed Wells Fargo a $35 million civil money penalty and issued a cease and
desist order
2022 were tied to short-term earnings
and equity returns and did not include risk metrics. As such, the report concluded that managers
had a financial incentive to focus on short-term profit over sound risk management.26
25 On September 8, 2016, the OCC assessed Wells Fargo a $35 million civil money penalty and issued a cease and
desist order. See OCC, New Release 2016-106, OCC Assesses Penalty Against Wells Fargo, Orders Restitution for
Unsafe or Unsound Sales Practices, (Sept. 8, 2016), available at https://www.occ.gov/news-issuances/news-
releases/2016/nr-occ-2016-106.html (citing Wells Fargo Bank, N.A., Consent Order for a Civil Money Penalty, AA-
EC-2016-67 (OCC, Sept. 6, 2016); Wells Fargo Bank, N.A., Consent Order, AA-EC-2016-66 (OCC, Sept. 6, 2016)).
Further, on September 8, 2016, the Consumer Financial Protection Bureau (CFPB) issued a consent order to Wells
Fargo that required the bank to (1) pay full refunds to consumers, (2) ensure proper sales practices, and (3) pay a $100
million fine. See CFPB, Consumer Financial Protection Bureau Fines Wells Fargo $100 Million for Widespread
Illegal Practices of Secretly Opening Unauthorized Accounts, (Sept. 8, 2016) available at
https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-
million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/ (citing Wells Fargo Bank, N.A., Consent
Order, 2016-CFPB-0015 (Sept. 8, 2016)). On January 23, 2020, the OCC issued a notice of charges against five
former senior Wells Fargo bank executives and announced settlements with the bank’s former Chief Executive Officer
and other members of the bank’s operating committee. On March 15, 2023, the OCC announced that it had settled
with eight former Wells Fargo senior bank executives to date, including the bank’s former general counsel and former
head of its Community Bank
ce of charges against five
former senior Wells Fargo bank executives and announced settlements with the bank’s former Chief Executive Officer
and other members of the bank’s operating committee. On March 15, 2023, the OCC announced that it had settled
with eight former Wells Fargo senior bank executives to date, including the bank’s former general counsel and former
head of its Community Bank. See OCC, News Release 2020-6, OCC Issues Notice of Charges Against Five Former
Senior Wells Fargo Bank Executives, Announces Settlement with Others (Jan. 23, 2020), available at
https://www.occ.gov/news-issuances/news-releases/2020/nr-occ-2020-6.html (citing Carrie Tolstedt, et al., Notice of
Charges for Orders of Prohibition and Orders to Cease and Desist and Notice of Assessments of a Civil Money
Penalty, AA-EC-2019-82, AA-EC-2019-81, AA-EC-2019-70, AA-EC-2019-71, AA-EC-2019-72 (OCC, Jan. 23,
2020); John Stumpf, Consent Order, AA-EC-2019-83 (OCC Jan. 22, 2020); Hope Hardison, Consent Order, AA-EC-
2019-69 (OCC, Jan. 21, 2020); and Michael Loughlin, Consent Order, AA-EC-2019-86 (OCC, Jan. 8, 2020)).
26 See the Bank for International Settlements (BIS) Basel Committee on Banking Supervision, Report on the 2023
banking turmoil (Oct. 2023), at 7-8.
29
The Agencies continue to focus on this critical area and work with financial institutions to
develop incentive-based compensation policies that tie pay to longer-term performance, as
discussed below. Since issuing the 2016 Proposed Rule, the Agencies have continued to address
incentive-based compensation practices at supervised financial institutions as part of their ongoing
supervision or other statutory responsibilities
on this critical area and work with financial institutions to
develop incentive-based compensation policies that tie pay to longer-term performance, as
discussed below. Since issuing the 2016 Proposed Rule, the Agencies have continued to address
incentive-based compensation practices at supervised financial institutions as part of their ongoing
supervision or other statutory responsibilities. A consistent set of enforceable standards as
proposed in this rulemaking would complement regulatory developments and supervisory efforts
since 2016 and could play an important role in helping ensure that incentive-based compensation
arrangements at covered financial institutions are not excessive and do not lead to material
financial loss.
Federal Banking Agencies27
The Federal Banking Agencies have used sections 8 and 39 of the FDIA to supervise for,
and address, unsafe and unsound compensation practices at their respective institutions.28 Section
39 of the FDIA includes specific standards related to compensation and directs the Federal
Banking Agencies to prescribe standards for all IDIs that would prohibit, as an unsafe and unsound
practice, compensation that would be excessive or could lead to material financial loss to the
institution.29 The Federal Banking Agencies’ work in this area is also informed by the 2010
Federal Banking Agency Guidance.30 In the 2010 Federal Banking Agency Guidance, the Federal
27 The “Federal Banking Agencies” refer to the FDIC, OCC, and the Board.
28 See 12 U.S.C. 1818 and 1831p-1.
29 See 12 U.S.C. 1831p-1(c)(1)
ncial loss to the
institution.29 The Federal Banking Agencies’ work in this area is also informed by the 2010
Federal Banking Agency Guidance.30 In the 2010 Federal Banking Agency Guidance, the Federal
27 The “Federal Banking Agencies” refer to the FDIC, OCC, and the Board.
28 See 12 U.S.C. 1818 and 1831p-1.
29 See 12 U.S.C. 1831p-1(c)(1). Section 39 provides that compensation is excessive when the amounts are
unreasonable or disproportionate to the services actually performed by the individual taking into consideration: (A) the
combined value of all cash and noncash benefits provided to the individual; (B) the compensation history of the
individual and other individuals with comparable expertise at the institution; (C) the financial condition of the
institution; (D) comparable compensation practices at comparable institutions, based upon such factors as asset size,
geographic location, and the complexity of the loan portfolio or other assets; (E) for postemployment benefits, the
projected total cost and benefit to the institution; (F) any connection between the individual and any fraudulent act or
omission, breach of trust or fiduciary duty, or insider abuse with regard to the institution; and (G) other factors that the
agency determines to be relevant.
30 75 FR 36395 (June 25, 2010).
30
Banking Agencies identified practices that could constitute unsafe and unsound practices
otal cost and benefit to the institution; (F) any connection between the individual and any fraudulent act or
omission, breach of trust or fiduciary duty, or insider abuse with regard to the institution; and (G) other factors that the
agency determines to be relevant.
30 75 FR 36395 (June 25, 2010).
30
Banking Agencies identified practices that could constitute unsafe and unsound practices. The
Federal Banking Agencies also identified risk management and controls practices, as well as other
practices, that would assist banking organizations in operating in a safe and sound manner with
respect to incentive-based compensation.31 The 2010 Federal Banking Agency Guidance uses a
principles-based approach designed to encourage incentive-based compensation arrangements that
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.32
In addition, to foster implementation of improved incentive-based compensation practices,
the Board, in cooperation with the OCC and FDIC, initiated in late 2009 an ongoing
multidisciplinary, horizontal review (“Horizontal Review”) of incentive-based compensation
practices at 25 large, complex banking organizations.33 The goals of the Horizontal Review were
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, and to provide guidance to each institution regarding ways to improve their incentive-
based compensation practices. As part of the Horizontal Review, the Board conducted
compensation reviews of line of business operations in the areas of trading, mortgage, credit card,
sales compensation, and commercial lending as well as senior executive incentive-based
31 75 FR at 36398, n.4
stitution regarding ways to improve their incentive-
based compensation practices. As part of the Horizontal Review, the Board conducted
compensation reviews of line of business operations in the areas of trading, mortgage, credit card,
sales compensation, and commercial lending as well as senior executive incentive-based
31 75 FR at 36398, n.4.
32 To the extent that the proposed rule uses terms and concepts similar to the 2010 Federal Banking Agency Guidance,
such as methods for appropriately balancing risk and reward, the FDIC and OCC intend for such terms to have
meanings consistent with the 2010 Federal Banking Agency Guidance.
33 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.
31
compensation awards and payouts
rn
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.
31
compensation awards and payouts. 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.34
FDIC supervisory activities
The FDIC reviews incentive-based compensation practices as part of its safety and
soundness examinations of state nonmember banks and state savings associations, most of which
are smaller community institutions that would not be covered by the proposed rule because they or
their parent holding company have average total consolidated assets of less than $1 billion. The
FDIC’s incentive-based compensation reviews are conducted in the context of supervising
institutions’ compliance with section 39 of the FDIA. As noted above, IDIs are subject to Section
39(c) of the FDIA that prohibits as an unsafe and unsound practice compensation arrangements
that provide executive officers, employees, directors, and principal shareholders with excessive
compensation, fees, or benefits and compensation arrangements that could lead to material
financial loss to the institution. The implementing guidelines are found within the 12 CFR Part
364, Appendix A, Interagency Guidelines Establishing Standards for Safety and
Soundness. Appendix A, Section II, requires financial institutions to maintain safeguards that
prevent excessive compensation or compensation that could lead to material financial
loss. Section III of the Appendix A addresses excessive compensation and prohibits compensation
that constitutes an unsafe and unsound practice
pendix A, Interagency Guidelines Establishing Standards for Safety and
Soundness. Appendix A, Section II, requires financial institutions to maintain safeguards that
prevent excessive compensation or compensation that could lead to material financial
loss. Section III of the Appendix A addresses excessive compensation and prohibits compensation
that constitutes an unsafe and unsound practice.
In addition, the FDIC issued for public comment a new Appendix C to its existing
standards for safety and soundness in 12 CFR part 364, which proposes, among other things,
34 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.
32
certain corporate governance and risk management guidelines for FDIC-supervised institutions
with total consolidated assets of $10 billion or more that address risk management practices for
incentive-based compensation programs.35
The FDIC employs an ongoing risk-based supervision approach focused on evaluating risk,
identifying material and emerging concerns, and issuing Supervisory Recommendations (SR),
including Matters Requiring Board Attention (MRBA),36 instructing banks to take timely
corrective action before deficiencies compromise their safety and soundness. The FDIC conducts
targeted reviews and assessments of overall incentive-based compensation programs at FDIC-
supervised institutions as part of normal supervisory activities, and has identified SRs and MRBAs
related to incentive-based compensation practices, including governance, risk management, and
controls for compensation
ve action before deficiencies compromise their safety and soundness. The FDIC conducts
targeted reviews and assessments of overall incentive-based compensation programs at FDIC-
supervised institutions as part of normal supervisory activities, and has identified SRs and MRBAs
related to incentive-based compensation practices, including governance, risk management, and
controls for compensation. In considering supervisory ratings assigned under the Uniform
Financial Institutions Rating System (UFIRS),37 FDIC examiners assess the board of directors’ and
management’s capability in, among other things, identifying, measuring, monitoring, and
controlling the risks of an institution’s activities; ensuring the financial institution’s safe, sound
and efficient operations are in compliance with applicable laws and regulations; and assessing the
reasonableness of compensation policies and avoidance of self-dealing. Beginning in 2016 and
concluding in 2017, the FDIC conducted a comprehensive horizontal review of sales practices at
17 FDIC-supervised institutions with total assets greater than $10 billion. As backup supervisor
35 See Guidelines Establishing Standards for Corporate Governance and Risk Management for Covered Institutions
with Total Consolidated Assets of $10 Billion or More, 88 FR 70391 (Oct. 11, 2023). Under the proposed Guidelines,
the board of directors of covered institutions would be expected to establish a Compensation and Performance
Management Program that ensures adherence to effective risk management and does not incentivize imprudent risk-
taking or noncompliance with laws and regulations. In addition, a Compensation Committee of the board must
comply with all applicable laws and regulations and, among other things, ensure adherence to the Compensation and
Performance Management Program and review compensation packages for executives
gram that ensures adherence to effective risk management and does not incentivize imprudent risk-
taking or noncompliance with laws and regulations. In addition, a Compensation Committee of the board must
comply with all applicable laws and regulations and, among other things, ensure adherence to the Compensation and
Performance Management Program and review compensation packages for executives.
36 See Statement of FDIC Board of Directors on the Development and Communication of Supervisory
Recommendations (July 27, 2016), available at
https://www.fdic.gov/regulations/examinations/supervisory/guidance/recommendations.html.
37 FDIC, Uniform Financial Institutions Rating System, 62 FR 752.
33
for all IDIs, the FDIC also participated in similar reviews at institutions supervised by the OCC
and Board. These reviews were prompted, in part, by issues with incentive-based compensation
tied to retail sales practices at Wells Fargo.
FDIC experience resolving failed institutions
Of the 543 bank failures resolved by the FDIC between 2007 and 2023, 69 involved banks
with total assets of $1 billion or more that would have been covered by the proposed rule.38 Of the
69 institutions that failed with total assets of $1 billion or more, 21 institutions or approximately 30
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
volume-based metrics such as corporate performance or loan production without adequate
consideration of related risks. Also, several cases involved poor governance practices, most
commonly, dominant management influencing improper incentives.39
Reports concerning the 2023 bank failures of Silicon Valley Bank, Signature Bank of New
York, and First Republic Bank in Spring 2023 identified common weaknesses
metrics such as corporate performance or loan production without adequate
consideration of related risks. Also, several cases involved poor governance practices, most
commonly, dominant management influencing improper incentives.39
Reports concerning the 2023 bank failures of Silicon Valley Bank, Signature Bank of New
York, and First Republic Bank in Spring 2023 identified common weaknesses. These weaknesses
included an excessive focus on growth and short-term profitability, and a lack of risk metrics in the
banks’ compensation policies and practices that may have encouraged excessive risk taking, such
38 Of note, there was one large state member bank that voluntarily self-liquidated in March 2023.
39 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 IDI exceed certain thresholds. See FDIC MLRs,
available at https://www.fdicoig.gov/reports-publications/bank-failures; 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 Senate
Subcommittee Report, supra note 23, at 3, 25, 49, 143-155. In 2011, the Federal Reserve’s Office of Inspector
General (OIG) reviewed 35 state member bank failures that occurred between 2009 and 2011 to identify common
themes related to the cause of failure and the role of Federal Reserve supervision. The OIG’s findings included
incentive compensation programs that inappropriately encouraged risk taking. See Board of Governors of the Federal
Reserve System, Office of Inspector General, Summary Analysis of Failed Bank Reviews (Washington: Board of
Governors, September 2011), 1, https://oig.federalreserve.gov/reports/Cross_ Cutting_Final_Report_9-30-11.pdf.
le of Federal Reserve supervision. The OIG’s findings included
incentive compensation programs that inappropriately encouraged risk taking. See Board of Governors of the Federal
Reserve System, Office of Inspector General, Summary Analysis of Failed Bank Reviews (Washington: Board of
Governors, September 2011), 1, https://oig.federalreserve.gov/reports/Cross_ Cutting_Final_Report_9-30-11.pdf.
34
as rapid deposit and loan growth, and funding concentrations.40 Despite elevated risks,
unaddressed audit and supervisory issues, and deteriorating financial conditions at both Silicon
Valley Bank and Signature Bank, the executives continued to receive cash bonuses, in some cases
right up until the bank’s failure.41
OCC supervisory activities
In carrying out its mission, the OCC employs an ongoing risk-based supervision approach
focused on evaluating risk, identifying material and emerging concerns, and requiring banks to
take timely corrective action before deficiencies compromise their safety and soundness. The
OCC reviews and assesses compensation practices at individual banks as part of its normal
supervisory activities. For example, the OCC may identify matters requiring attention (“MRAs”)
relating to compensation practices, including matters relating to governance and risk management
and controls for compensation. As part of its rating system, the OCC assesses the capability of a
bank’s board and management, in their respective roles, to identify, measure, monitor, and control
the risks of their bank’s activities and to ensure the bank’s safe, sound, and efficient operation in
compliance with applicable laws and regulations. This includes an assessment of the
reasonableness of compensation policies
n. As part of its rating system, the OCC assesses the capability of a
bank’s board and management, in their respective roles, to identify, measure, monitor, and control
the risks of their bank’s activities and to ensure the bank’s safe, sound, and efficient operation in
compliance with applicable laws and regulations. This includes an assessment of the
reasonableness of compensation policies.
Beginning in 2016, the OCC undertook a comprehensive review of sales practices at large
and midsize banks, including incentive-based compensation related to sales at all employee levels,
40 See BIS, Report on the 2023 Banking Turmoil, supra note 27. See also Review of the Federal Reserve’s Supervision
and Regulation of Silicon Valley Bank, Michael Barr, Board Vice Chairman for Supervision (Apr. 28, 2023), available
at https://www.federalreserve.gov/publications/review-of-the-federal-reserves-supervision-and-regulation-of-silicon-
valley-bank.htm; Office of Inspector General for the Board of Governors of the Federal Reserve System, “Material
Loss Review of Silicon Valley Bank,” 2023-SR-B-013 (Sept. 25, 2023), available at
https://oig.federalreserve.gov/reports/board-material-loss-review-silicon-valley-bank-sep2023.pdf; Government
Accountability Office, Report to the Committee on Financial Services, House of Representatives: Preliminary Review
of Agency Actions Related to March 2023 Bank Failures (April 28, 2023), available at
https://www.gao.gov/assets/gao-23-106736.pdf.
41 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank, supra note 41, at 74-75.
n-valley-bank-sep2023.pdf; Government
Accountability Office, Report to the Committee on Financial Services, House of Representatives: Preliminary Review
of Agency Actions Related to March 2023 Bank Failures (April 28, 2023), available at
https://www.gao.gov/assets/gao-23-106736.pdf.
41 Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank, supra note 41, at 74-75.
35
not just executives. This review included an examination of incentive-based compensation plan
design and risk management at the banks. The boards and senior executives of many of the
institutions examined increased their attention to sales practices, as well as to culture and conduct
risk. Overall, the banks examined strengthened their policies, procedures, and controls over sales
practices, as well as the design and execution of the sales and incentive programs. The OCC
expects that each bank’s governance program addressing sales practices be commensurate with the
risk presented by the bank’s sales culture, the composition of products and services, the nature and
design of incentive compensation programs, the presence of sales goals or quotas, and any other
relevant bank-specific considerations.
Reviews of incentive compensation are supported by OCC regulations including 12 CFR
30, Appendix A, Interagency Guidelines Establishing Standards for Safety and Soundness and 12
CFR 30, Appendix D, OCC Guidelines Establishing Heightened Standards for Certain Large
Insured Banks, Insured Federal Savings Associations, and Insured Federal Branches42 (the “OCC’s
Heightened Standards”). Appendix A prohibits compensation that is excessive or that could lead
to material financial loss. Appendix D requires 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
nches42 (the “OCC’s
Heightened Standards”). Appendix A prohibits compensation that is excessive or that could lead
to material financial loss. Appendix D requires 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. OCC publications also address incentive-based compensation, including the Corporate and
Risk Governance Booklet of the Comptroller’s Handbook (published July 2016, rev. 2019). The
Corporate and Risk Governance Booklet addresses board oversight and implementation of risk
42 The OCC’s Heightened Standards applies to any insured national bank, insured Federal savings association, or
insured Federal branch of a foreign bank: “(a) With average total consolidated assets, as calculated according to
paragraph I.A. of these Guidelines, equal to or greater than $50 billion; (b) With average total consolidated assets less
than $50 billion if that bank’s parent company controls at least one covered bank; or (c) With average total
consolidated assets less than $50 billion, if the OCC determines such bank's operations are highly complex or
otherwise present a heightened risk as to warrant the application of these Guidelines pursuant to paragraph I.C. of
these Guidelines.” 12 CFR Part 30, Appendix D, § I.E.
less
than $50 billion if that bank’s parent company controls at least one covered bank; or (c) With average total
consolidated assets less than $50 billion, if the OCC determines such bank's operations are highly complex or
otherwise present a heightened risk as to warrant the application of these Guidelines pursuant to paragraph I.C. of
these Guidelines.” 12 CFR Part 30, Appendix D, § I.E.
36
governance frameworks including culture, risk appetite, and the three lines of defense. The
booklet specifically discusses performance and talent management and board oversight of
compensation. The OCC also updated several booklets of the Comptroller’s Handbook since 2016
to include discussion of banks’ implementation, management, and oversight of consumer
complaints, including complaints received by a bank’s third parties.
FHFA
FHFA has express statutory authorities and mandates related to compensation paid by its
regulated entities, in addition to overall responsibility for safety and soundness oversight. By
statute, FHFA must prohibit Fannie Mae and Freddie Mac (together, “the Enterprises”) and the
Federal Home Loan Banks from providing compensation to any of their executive officers 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.43 FHFA has additional authority over its regulated entities
during conservatorship, and, under this authority, has established compensation programs for the
Enterprises’ executives.44
Since 2014, FHFA has issued three final rules related to compensation pursuant to the
Safety and Soundness Act.45 The Executive Compensation Rule implements the statutory directive
that FHFA prohibit its regulated entities from providing compensation to an executive officer that
43 12 U.S.C. 4518(a)
programs for the
Enterprises’ executives.44
Since 2014, FHFA has issued three final rules related to compensation pursuant to the
Safety and Soundness Act.45 The Executive Compensation Rule implements the statutory directive
that FHFA prohibit its regulated entities from providing compensation to an executive officer that
43 12 U.S.C. 4518(a). This mandate extends to Common Securitizations Solutions, LLC, a joint venture of Fannie Mae
and Freddie Mac, as an affiliate of the Enterprises and to the Office of Finance of the Federal Home Loan Bank
System. See 12 U.S.C. 4502(20) and 12 U.S.C. 4511(b)(2).
44 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.
45 See 12 CFR parts 1230, 1231, and 1239, each authorized by the Safety and Soundness Act, as amended by the
Housing and Economic Recovery Act of 2008 (HERA). Congress enacted HERA in large part to strengthen
supervisory oversight of FHFA’s regulated entities, including oversight of compensation, in response to the financial
crisis that began in 2007.
37
is not reasonable and comparable, and sets forth requirements and processes for compensation
provided to executive officers by the Enterprises, the Federal Home Loan Banks, and the Federal
Home Loan Bank System’s Office of Finance.46 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.47 FHFA’s Golden Parachute Payments Rule
governs golden parachute payments in the case of a regulated entity’s insolvency, conservatorship,
or other troubled condition.48 These two rules implement FHFA’s specific authority over
compensation at its regulated entities
an with an executive officer or pay any incentive compensation to an executive
officer without providing advance notice to FHFA.47 FHFA’s Golden Parachute Payments Rule
governs golden parachute payments in the case of a regulated entity’s insolvency, conservatorship,
or other troubled condition.48 These two rules implement FHFA’s specific authority over
compensation at its regulated entities. The third rule, on Responsibilities of Boards of Directors,
Corporate Practices, and Corporate Governance Matters, requires the risk management program at
each FHFA-regulated entity to include, among other things, provisions integrating risk
management with management’s goals and the compensation structure. The proposed rule would
enhance FHFA’s focus on compensation below the executive level, including bringing additional
attention to overall compensation structures, and disclosure of those structures.
NCUA
The NCUA reviews compensation practices at federally insured credit unions to ensure
compliance with applicable regulations and to assess whether the compensation presents a material
safety and soundness risk to the credit union. The NCUA has regulations that address
compensation matters and periodically reviews them for ways to enhance their effectiveness. For
example, the NCUA has historically prohibited, by regulation, credit unions from compensating
employees, directors, and their immediately family members directly for loans made by the credit
46 12 CFR Part 1230; see also 12 U.S.C. 4518(a) and 12 U.S.C. 4511(b)(2).
47 12 CFR 1230.3(d).
48 12 CFR Part 1231; see also 12 U.S.C. 4518(e).
For
example, the NCUA has historically prohibited, by regulation, credit unions from compensating
employees, directors, and their immediately family members directly for loans made by the credit
46 12 CFR Part 1230; see also 12 U.S.C. 4518(a) and 12 U.S.C. 4511(b)(2).
47 12 CFR 1230.3(d).
48 12 CFR Part 1231; see also 12 U.S.C. 4518(e).
38
union.49 The NCUA’s regulations prohibit credit union officials and senior management from
receiving anything of value in connection with investment transactions.50
The NCUA’s regulations related to corporate credit unions require these institutions to
disclose the compensation of their most highly compensated employees.51 This transparency gives
member-owners of corporate credit unions the opportunity to assess the reasonableness of
executive compensation in relation to the financial performance of the corporate credit union.
Other regulatory developments
After publication of the Proposed Rule in 2016, the SEC adopted rules to implement the
clawback provision contained in Section 954 of the Dodd-Frank Act, which added Section 10D to
the Securities Exchange Act of 1934.52 Specifically, Section 10D(a) of the Securities Exchange
Act requires the SEC to adopt rules directing the national securities exchanges53 and the national
securities associations54 to prohibit the listing of any security of an issuer that is not in compliance
with the requirements of Section 10D(b), which requires the recovery of incentive-based
compensation from an issuer’s current or former executive officers if the issuer prepares an
accounting restatement due to its material noncompliance with any financial reporting requirement
under the securities laws (the “954 clawback rules”).55 In July 2015, the SEC proposed rules and
49 12 CFR 701.21(c)(8)(i).
50 12 CFR 703.17.
51 12 CFR 704.19.
52 15 U.S.C. 78a et seq
urrent or former executive officers if the issuer prepares an
accounting restatement due to its material noncompliance with any financial reporting requirement
under the securities laws (the “954 clawback rules”).55 In July 2015, the SEC proposed rules and
49 12 CFR 701.21(c)(8)(i).
50 12 CFR 703.17.
51 12 CFR 704.19.
52 15 U.S.C. 78a et seq.
53 A “national securities exchange” is an exchange registered as such under section 6 of the Exchange Act (15 U.S.C.
78f).
54 A “national securities association” is an association of brokers and dealers registered as such under Section 15A of
the Exchange Act (15 U.S.C. 78o-3). The Financial Industry Regulatory Authority (“FINRA”) is the only association
registered with the SEC under section 15A(a) of the Exchange Act, but FINRA does not list securities.
55 Section 10D(b) requires the SEC to adopt rules directing the exchanges to establish listing standards to require each
issuer to develop and implement a policy providing: (1) for the disclosure of the issuer’s policy on incentive-based
compensation that is based on financial information required to be reported under the securities laws; and (2) that, in
the event that the issuer is required to prepare an accounting restatement due to the issuer’s material noncompliance
with any financial reporting requirement under the securities laws, the issuer will recover from any of the issuer’s
of the issuer’s policy on incentive-based
compensation that is based on financial information required to be reported under the securities laws; and (2) that, in
the event that the issuer is required to prepare an accounting restatement due to the issuer’s material noncompliance
with any financial reporting requirement under the securities laws, the issuer will recover from any of the issuer’s
39
rule amendments to implement the 954 clawback rules.56 In October 2022, the SEC adopted final
rules to implement the requirements of Exchange Act Section 10D57 through new Exchange Act
Rule 10D-158 and related amendments.59 Under the rules and related amendments, the national
securities exchanges have adopted listing standards that require listed issuers to recover incentive-
based compensation from an executive officer60 if it was received during the three years preceding
the date a restatement is required. A listed issuer must recover the amount of incentive-based
compensation received by an executive officer that exceeds the amount the executive officer would
have received had the incentive-based compensation been determined based on the accounting
restatement, except to the extent that such recovery is impracticable.61
Such recovery must be on a “no fault” basis, without regard to whether any misconduct
occurred or an executive officer’s responsibility for the erroneous financial statements. In addition,
current or former executive officers incentive-based compensation (including stock options awarded as compensation)
during the three-year period preceding the date that the issuer is required to prepare the accounting restatement, based
on the erroneous data, in excess of what would have been paid to the executive officer under the accounting
restatement.
56 Listing Standards for Recovery of Erroneously Awarded Compensation, Release No. 33-9861 (July 1, 2015), 80 FR
41144 (July 14, 2015)
d as compensation)
during the three-year period preceding the date that the issuer is required to prepare the accounting restatement, based
on the erroneous data, in excess of what would have been paid to the executive officer under the accounting
restatement.
56 Listing Standards for Recovery of Erroneously Awarded Compensation, Release No. 33-9861 (July 1, 2015), 80 FR
41144 (July 14, 2015).
57 Listing Standards for Recovery of Erroneously Awarded Compensation, Release No. 33-11126 (Oct. 26, 2022), 87
FR 73076 (Nov. 28, 2022). The rules and amendments became effective January 27, 2023, and required the exchanges
to file proposed listing standards no later than February 27, 2023, and required the listing standards to be effective no
later than November 28, 2023.
58 See 17 CFR 240.10D-1(a).
59 These include amendments to Items 402 [17 CFR 229.402] and 601 [17 CFR 229.601] of Regulation S-K, the
addition of Item 22(b)(20) to Schedule 14A [17 CFR 240.14a-101], and amendments to Form 40-F [17 CFR 249.240f]
and Form 20-F [17 CFR 249.220f] (and for listed funds, Form N-CSR [17 CFR 249.331 and 17 CFR 274.128]).
60 An executive officer is the company’s president; principal financial officer; principal accounting officer (or if there
is no such accounting officer, the controller); any vice president of the company in charge of a principal business unit,
division, or function (such as sales, administration or finance); any other officer who performs a policymaking
function; or any other person who performs similar significant policymaking functions for the listed company
ial officer; principal accounting officer (or if there
is no such accounting officer, the controller); any vice president of the company in charge of a principal business unit,
division, or function (such as sales, administration or finance); any other officer who performs a policymaking
function; or any other person who performs similar significant policymaking functions for the listed company.
61 Recovery might be impracticable because (1) the direct expense paid to a third party to assist in enforcing the policy
would exceed the amount to be recovered, (2) recovery would violate home country law, where that law was adopted
prior to the November 28, 2022 due date set forth in Rule 10D(1)(a)(2) for effectiveness of the listing standards, based
on an opinion of counsel acceptable to the national securities exchange, or (3) recovery would cause a broad-based
qualified retirement plan to fail to meet the tax-qualification requirements of Section 401(a) of the Internal Revenue
Code and regulations thereunder.
40
the standards require a listed issuer to file its compensation recovery policy as an exhibit in its
Exchange Act annual report.
As discussed in the SEC’s 954 clawback rules adopting release, these rules and rule
amendments, as well as the resulting listing standards, were designed to implement the proposition
underlying Section 10D of the Dodd-Frank Act, which noted that “executive officers of exchange-
listed companies should not be entitled to retain incentive-based compensation that was
erroneously awarded on the basis of materially misreported financial information that requires an
accounting restatement.”62
International Developments
The Agencies also have considered and reviewed international developments regarding
compensation and governance since developing the 2016 Proposed Rule to understand the
international context for the regulation of incentive-based compensation, especially as it applies to
cross-border institutions the Agencies supervise
that requires an
accounting restatement.”62
International Developments
The Agencies also have considered and reviewed international developments regarding
compensation and governance since developing the 2016 Proposed Rule to understand the
international context for the regulation of incentive-based compensation, especially as it applies to
cross-border institutions the Agencies supervise. The Agencies continue to consider whether any
of these developments should inform the Agencies’ determinations regarding the regulation of
U.S. covered institutions. The Agencies welcome comment on whether and, if so, how, these
developments should be considered relevant to the covered institutions subject to this rulemaking.
Following the 2008 financial crisis, in 2009, the Financial Stability Board (“FSB”)
published the “Principles for Sound Compensation Practices: Implementation Standards” (“FSB
Principles”).63 The FSB’s Principles mainly concern the design of executive compensation, and in
general the remuneration of all Material Risk Takers (“MRTs”) in banks, including CEOs.
62 See supra note 58 at 87 FR 73077.
63 See supra note 23.
41
Furthermore, the FSB called for executive compensation to be tied more closely to the risks
assumed in the core business of banking.64
For the past several years, the Agencies that belong to the FSB, have been actively engaged
in the development of international compensation and governance principles, as well as conducting
working groups that have produced a variety of publications aimed at further improving incentive-
based compensation practices.65
European Union
The European Union (EU) implemented the FSB Principles through the adoption of the
Capital Requirements Directives (“CRD”), which require member states’ national regulators to
establish and implement remuneration policies for institutions including banks.66 The CRD was
first issued in 2013 and became effective in January 2014
roving incentive-
based compensation practices.65
European Union
The European Union (EU) implemented the FSB Principles through the adoption of the
Capital Requirements Directives (“CRD”), which require member states’ national regulators to
establish and implement remuneration policies for institutions including banks.66 The CRD was
first issued in 2013 and became effective in January 2014. The European Banking Authority
64 See, e.g., Vittoria Cerasi et al., How Post-Crisis regulation has affected bank CEO compensation, 104 JOURNAL OF
INTERNATIONAL MONEY & FINANCE at § 2 (2020).
65 See, e.g., FSB, Climate-Related Financial Risk Factors in Compensation Frameworks (Apr. 20, 2023), available at
https://www.fsb.org/wp-content/uploads/P204023.pdf; FSB, Effective Implementation of FSB Principles for Sound
Compensation Practices and Implementation Standards, 2021 Progress Report (Nov. 4, 2021), available at
https://www.fsb.org/wp-content/uploads/P041121.pdf; FSB, FSB Workshop on Compensation Practices 2021:
Summary of Discussion (August 9, 2021), available at https://www.fsb.org/wp-content/uploads/P090821.pdf; FSB,
FSB Compensation Workshop 2019: Key Takeaways (May 8, 2020), available at https://www.fsb.org/wp-
content/uploads/P080520.pdf; FSB, FSB Member Jurisdictions’ National Regulation and Supervisory Guidance on
Compensation (June 17, 2019), available at https://www.fsb.org/wp-content/uploads/P170619-2.pdf; FSB,
Implementing the FSB Principles for Sound Compensation Practices and Their Implementation Standards: Sixth
Progress Report (June 17, 2019), available at https://www.fsb.org/wp-content/uploads/P170619-1.pdf; FSB, FSB
Member Jurisdictions’ National Regulation and Supervisory Guidance on Compensation (June 17, 2019), available at
https://www.fsb.org/wp-content/uploads/P170619-2.pdf; FSB, Implementing the FSB Principles for Sound
Compensation Practices and Their Implementation Standards: Fifth Progress Report (July 4, 2017), available at
lable at https://www.fsb.org/wp-content/uploads/P170619-1.pdf; FSB, FSB
Member Jurisdictions’ National Regulation and Supervisory Guidance on Compensation (June 17, 2019), available at
https://www.fsb.org/wp-content/uploads/P170619-2.pdf; FSB, Implementing the FSB Principles for Sound
Compensation Practices and Their Implementation Standards: Fifth Progress Report (July 4, 2017), available at
https://www.fsb.org/wp-content/uploads/P040717-6.pdf; FSB, Implementing the FSB Principles for Sound
Compensation Practices and their Implementation Standards: Fourth Progress Report (Nov. 10, 2015), available at
https://www.fsb.org/wp-content/uploads/FSB-Fourth-progress-report-on-compensation-practices.pdf; FSB,
Implementing the FSB Principles for Sound Compensation Practices and Their Implementation Standards: Third
Progress Report (Nov. 4, 2014), available at https://www.fsb.org/wp-content/uploads/r_141104.pdf; FSB,
Implementing the FSB Principles for Sound Compensation Practices and Their Implementation Standards: Second
Progress Report (Aug. 26, 2013), available at https://www.fsb.org/wp-content/uploads/r_130826.pdf; FSB,
Implementing the FSB Principles for Sound Compensation Practices and Their Implementation Standards: Progress
Report (June 13, 2012), available at https://www.fsb.org/wp-content/uploads/r_120613.pdf.
66 Directive 2013/36/EU (CRD), as amended by Directive 2019/878/EU (CRD V). The directive addresses institutions
including credit institutions and investment firms, which includes banks.
df; FSB,
Implementing the FSB Principles for Sound Compensation Practices and Their Implementation Standards: Progress
Report (June 13, 2012), available at https://www.fsb.org/wp-content/uploads/r_120613.pdf.
66 Directive 2013/36/EU (CRD), as amended by Directive 2019/878/EU (CRD V). The directive addresses institutions
including credit institutions and investment firms, which includes banks.
42
(EBA) is responsible for promulgating prudential regulations via the Single Rulebook,67 and has
issued guidelines related to compensation. The Guidelines on Sound Remuneration Policies were
first published by the EBA in 201568 and were most recently revised in 2021.69 The requirements
“aim to ensure that remuneration policies are consistent with and promote sound and effective risk
management, do not provide incentives for excessive risk taking, and are aligned with the long-
term interests of the institutions across the EU.”70
Under the Guidelines, compensation policies must be in place for identified staff at
institutions subject to the CRD, including banks. Identified staff subject to the compensation
policies include those whose “professional activities have a material impact on the institution’s
individual or the group’s risk profile.”71 Staff with a material impact on the institution’s risk
profile include, at a minimum, all members of the management body and senior management; staff
with managerial responsibility over control functions or material business units; and staff entitled
to significant remuneration the prior year - at least € 500,000 and equal to or greater to the
remuneration of certain management figures - and whose professional activity in a material
business unit is of a kind that has a significant impact on its risk profile.72 In keeping with the
67 The Single Rulebook is intended “[t]o contribute to the stability and effectiveness of the European financial system,
the EBA develops harmonised rules for financial institut
management figures - and whose professional activity in a material
business unit is of a kind that has a significant impact on its risk profile.72 In keeping with the
67 The Single Rulebook is intended “[t]o contribute to the stability and effectiveness of the European financial system,
the EBA develops harmonised rules for financial institutions, promotes convergence of supervisory practices,
monitors, and advises on the impact of financial innovation and the transition to sustainable finance.” European
Banking Agency, Single Rulebook, https://www.eba.europa.eu/activities/single-rulebook. The Single Rulebook aims
to assist EU member countries in consistently implementing directives issued by the European Parliament and the
Council of the EU.
68 EBA, Guidelines on 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),
https://www.eba.europa.eu/sites/default/files/documents/10180/1314839/1b0f3f99-f913-461a-b3e9-
fa0064b1946b/EBA-GL-2015-
22%20Final%20report%20on%20Guidelines%20on%20Sound%20Remuneration%20Policies.pdf.
69 EBA, Guidelines on Sound Remuneration Policies Under Directive 2013/36/EU (July 2, 2021),
https://www.eba.europa.eu/sites/default/files/document_library/Publications/Guidelines/2021/1016720/Draft%20Final
%20report%20on%20GL%20on%20remuneration%20policies%20under%20CRD.pdf [hereinafter Guidelines].
70 Id. at ⁋ 3.
71 Id.at ⁋ 11.
72 CRD Article 92(3).
%20Sound%20Remuneration%20Policies.pdf.
69 EBA, Guidelines on Sound Remuneration Policies Under Directive 2013/36/EU (July 2, 2021),
https://www.eba.europa.eu/sites/default/files/document_library/Publications/Guidelines/2021/1016720/Draft%20Final
%20report%20on%20GL%20on%20remuneration%20policies%20under%20CRD.pdf [hereinafter Guidelines].
70 Id. at ⁋ 3.
71 Id.at ⁋ 11.
72 CRD Article 92(3).
43
principle of proportionality, the Guidelines set forth a bonus cap limiting the maximum ratio
between the variable and fixed components of remuneration to 100 percent, or 200 percent with
shareholder approval.73 Policies must address clawback and other restrictions, including a
minimum deferral period of four to five years for the management body of significant
institutions.74 There are also governance requirements including the establishment of a
compensation committee, as well as transparency and reporting requirements.75
The EBA issued a 2021 update to the Guidelines. One notable change was that in light of
retention bonuses and severance payments being used to circumvent compensation requirements,
revisions were made to limit circumstances for and require more documentation of the
circumstances surrounding such payments.76 The revisions also clarified a number of other
aspects, including that the Guidelines apply on a group, parent, and subsidiary level, even for
subsidiaries that are not otherwise subject to the CRDs, unless they are already subject to other
compensation regulatory requirements.77
United Kingdom
The United Kingdom (UK) implemented its remuneration rules for the banking sector
along with the EU member states through the adoption of the CRD, and its current framework and
requirements remain relatively similar following the UK’s separation from the EU
t are not otherwise subject to the CRDs, unless they are already subject to other
compensation regulatory requirements.77
United Kingdom
The United Kingdom (UK) implemented its remuneration rules for the banking sector
along with the EU member states through the adoption of the CRD, and its current framework and
requirements remain relatively similar following the UK’s separation from the EU.
The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA)
Remuneration Code requires minimum deferral periods of four years for non-managerial “material
73 Guidelines ⁋ 91.
74 Id. at ⁋ 260. Institutions should defer a minimum of 40 percent of remuneration for a category of identified staff or a
single identified staff member, and a minimum of 60 percent of remuneration for cases involving particularly high
amounts of variable remuneration. Id. at ⁋ 262.
75 Id. at ⁋ 28 et seq.
76 Id. at 5.
77 Id. at ⁋⁋ 8-9.
44
risk takers,” five years for management of a significant firm, and seven years for higher paid
material risk takers who perform senior management functions.78 However, one significant change
came in October 2023, when the PRA and the FCA amended the cap on bonuses for the banking
sector. The regulators removed the provision limiting bonuses for certain staff to 100 percent of
fixed compensation, or up to 200 percent with shareholder approval.79 The regulators noted that
bonus caps are not routinely imposed in non-EU international financial centers, and that the caps
had been identified as impacting competitiveness of UK institutions, driving up fixed
compensation, and limiting labor mobility
emoved the provision limiting bonuses for certain staff to 100 percent of
fixed compensation, or up to 200 percent with shareholder approval.79 The regulators noted that
bonus caps are not routinely imposed in non-EU international financial centers, and that the caps
had been identified as impacting competitiveness of UK institutions, driving up fixed
compensation, and limiting labor mobility. The change impacted banks, building societies, and
designated investment firms, but not credit unions, insurers, and certain other investment firms.80
The regulators also stressed that their other rules regarding, for example, mandatory deferrals, the
composition of variable pay, and risk adjustment mechanisms, remain in place and aim to better
align remuneration with prudent risk taking.81
II.
OVERVIEW OF THE 2024 PROPOSED RULE
The Agencies believe that the developments discussed above continue to demonstrate the
need to prohibit types and features of incentive-based compensation arrangements that encourage
inappropriate risks, as required by section 956. The Agencies are re-proposing the regulatory text
of the 2016 Proposed Rule without change, along with proposing certain alternatives, for
consideration by the public.
78 See UK PRUDENTIAL REGULATION AUTHORITY, PRA RULEBOOK § 11.
79 Prudential Regulation Authority & Financial Conduct Authority, PS9/23 Remuneration: Ratio between fixed and
variable components of total remuneration (‘bonus cap’) (Oct. 24, 2023),
https://www.bankofengland.co.uk/prudential-regulation/publication/2023/october/remuneration-ratio-between-fixed-
and-variable-components-of-total-remuneration.
80 Id.
81 Id.
TION AUTHORITY, PRA RULEBOOK § 11.
79 Prudential Regulation Authority & Financial Conduct Authority, PS9/23 Remuneration: Ratio between fixed and
variable components of total remuneration (‘bonus cap’) (Oct. 24, 2023),
https://www.bankofengland.co.uk/prudential-regulation/publication/2023/october/remuneration-ratio-between-fixed-
and-variable-components-of-total-remuneration.
80 Id.
81 Id.
45
The Agencies, along with the Board and the SEC, jointly developed and issued the 2016
Proposed Rule. As stated above, the Board has not acted to join this proposal. Rulemaking to
implement section 956 is on the SEC’s rulemaking agenda. This proposal continues to include the
provisions of the regulatory text from the 2016 Proposed Rule that address covered institutions on
a consolidated basis. The Agencies recognize that this may implicate Board-supervised entities –
namely depository institution holding companies – and SEC-regulated entities, and the Agencies
will continue to coordinate with the Board and the SEC on these and other issues, consistent with
the requirements of section 956.
As more fully described in the 2016 Proposed Rule,82 incentive-based compensation
arrangements that result in payments that are unreasonable or disproportionate to the value of
services performed could encourage inappropriate risks by providing excessive compensation,
fees, and benefits. Further, incentive-based compensation arrangements that do not appropriately
balance risk and reward, that are not compatible with effective risk management and controls, or
that are not supported by effective governance are types of incentive-based compensation
arrangements that could encourage inappropriate risks that could lead to material financial loss to
covered institutions. Because these types of incentive-based compensation arrangements
encourage inappropriate risks, they would be prohibited under the proposed rule
ective risk management and controls, or
that are not supported by effective governance are types of incentive-based compensation
arrangements that could encourage inappropriate risks that could lead to material financial loss to
covered institutions. Because these types of incentive-based compensation arrangements
encourage inappropriate risks, they would be prohibited under the proposed rule.
As more fully described in the 2016 Proposed Rule,83 the proposed regulatory text includes
prohibitions intended to make incentive-based compensation arrangements more sensitive to risk,
such as a prohibition on incentive-based compensation arrangements that do not include risk
adjustment of awards, deferral of payments, and forfeiture and clawback provisions. The
82 See 81 FR 37670.
83 See Section II of the 2016 Proposed Rule, 81 FR at 37682-37743, which contains a section-by section description of
the proposed regulatory text.
46
prohibitions also emphasize the important role of sound governance and risk management control
mechanisms. The recordkeeping and disclosure requirements in the proposed regulatory text
would assist the appropriate Federal regulator in monitoring and identifying areas of potential
concern at covered institutions.
The Agencies invite further comment on the proposed regulatory text. The Agencies
acknowledge that, given the passage of time, commenters may have additional or different views
about the proposed regulatory text. To provide greater opportunity for comment, including up-to-
date input on current data and practices across the range of proposed covered institutions, the
Agencies will consider comments received in response to the 2016 Proposed Rule as well as any
comments received in response to this re-proposal when determining how to implement section
956
ferent views
about the proposed regulatory text. To provide greater opportunity for comment, including up-to-
date input on current data and practices across the range of proposed covered institutions, the
Agencies will consider comments received in response to the 2016 Proposed Rule as well as any
comments received in response to this re-proposal when determining how to implement section
956. Comments are particularly helpful to the Agencies if accompanied by detailed analysis and
supporting data regarding the issues addressed in those comments. Those who submitted
comments in response to the 2016 Proposed Rule are welcome to submit new or updated
comments in response to this re-proposal. To assist with reconciling comments from parties who
submitted comments to the 2016 Proposed Rule and who again submit comments to this re-
proposal that reflect changes to their previous viewpoints, the Agencies invite such commenters to
clarify the relationship between their two comments. Specifically, the Agencies invite commenters
to clarify whether their comments to the 2024 Proposed Rule in part or in whole supersede their
previously submitted comments.
The Agencies are also inviting comment on alternatives to the proposed regulatory text,
discussed below.
47
III.
REQUESTS FOR COMMENT
A.
Requests for Comment
As described above, there have been various developments in incentive-based
compensation, risk management, and governance practices at financial institutions since the
public submitted comments in response to the 2016 Proposed Rule. In light of these
developments, the Agencies are inviting comment on all aspects of this proposal. Additionally,
the Agencies have listed specific requests for comment below organized by section number.
These include revised versions of questions posed in the 2016 Proposed Rule along with new
questions
institutions since the
public submitted comments in response to the 2016 Proposed Rule. In light of these
developments, the Agencies are inviting comment on all aspects of this proposal. Additionally,
the Agencies have listed specific requests for comment below organized by section number.
These include revised versions of questions posed in the 2016 Proposed Rule along with new
questions.
Based on the comments received, and further consideration by the Agencies of the issues
involved, a future action implementing section 956 may include changes raised in the requests for
comment set forth below or the alternatives set forth in section III.B. As discussed previously,
the agencies continue to consider comments submitted on the 2016 Proposed Rule.
Section 1 – Authority, Scope, and Initial Applicability
Question 1.1: The Agencies invite comment on whether the proposed compliance date
would be sufficient to allow covered institutions to implement any changes necessary for
compliance with the proposed rule, particularly the development and implementation of policies
and procedures. What specific changes would be required to bring existing policies and
procedures into compliance with the rule? What constraints exist on the ability of covered
institutions to meet the proposed deadline?
Section 2 – Definitions
Question 2.1: The Agencies invite comment on whether other financial institutions should
be included in the definition of “covered institution” and why.
edures. What specific changes would be required to bring existing policies and
procedures into compliance with the rule? What constraints exist on the ability of covered
institutions to meet the proposed deadline?
Section 2 – Definitions
Question 2.1: The Agencies invite comment on whether other financial institutions should
be included in the definition of “covered institution” and why.
48
Question 2.2: The Agencies invite comment on the proposed rule’s approach to
consolidation. What are the advantages to or disadvantages of the approach? For example, the
Agencies invite comment on whether the proposed rule’s approach would reinforce the ability of
an institution to establish and maintain effective risk management and controls for the entire
consolidated organization and enabling holding company structures to more effectively manage
human resources. Are there advantages or disadvantages to the approach of the proposed rule in
helping to reduce the possibility of evasion of the more specific standards applicable to certain
individuals at Level 1 or Level 2 covered institutions? The Agencies also invite comment on any
challenges smaller subsidiaries of a larger covered institution may have by applying the more
specific provisions of the proposed rule to these smaller institutions that would not otherwise apply
to them but for being a subsidiary of a larger institution. Is there another approach that the
proposed rule should take?
Question 2.3: The Agencies invite commenters to discuss whether the asset thresholds used
in these definitions are appropriate for determining which requirements apply. Would other
alternative methodologies be more appropriate and why?
Question 2.4: The Agencies invite comment on the methods for determining whether
Federal branches and agencies are Level 1, Level 2, or Level 3 covered institutions
ion 2.3: The Agencies invite commenters to discuss whether the asset thresholds used
in these definitions are appropriate for determining which requirements apply. Would other
alternative methodologies be more appropriate and why?
Question 2.4: The Agencies invite comment on the methods for determining whether
Federal branches and agencies are Level 1, Level 2, or Level 3 covered institutions. Should the
same method be used for Federal branches and agencies? Why or why not?
Question 2.5: The Agencies invite comment on whether the definition of “principal
shareholder” reflects a common understanding of who would be a principal shareholder of a
covered institution.
Question 2.6: The Agencies invite comment on whether the types of positions identified in
the proposed definition of senior executive officer are appropriate, whether additional positions
49
should be included, whether any positions should be removed, and why. For example, should the
Agencies include the chief technology officer (“CTO”), chief information security officer, or
similar titles as positions explicitly listed in the definition of “senior executive officer”? Why or
why not?
Question 2.7: The Agencies invite comment on whether the term “major business line”
provides enough information to allow a covered institution to identify individuals who are heads of
major business lines. Should the proposed rule refer instead to a “core business line,” as defined in
FDIC and Board rules relating to resolution planning (12 CFR 381.2), to a “principal business unit,
division or function,” as described in SEC definitions of the term “executive officer” (17 CFR
240.3b-7), or to business lines that contribute greater than a specified amount to the covered
institution’s total annual revenues or profit? Why?
Question 2.8: For purposes of a designation under paragraph (2) of the definition of
significant risk-taker, should the Agencies provide a specific standard for what would constitute
“material financial loss” and/or “over
xecutive officer” (17 CFR
240.3b-7), or to business lines that contribute greater than a specified amount to the covered
institution’s total annual revenues or profit? Why?
Question 2.8: For purposes of a designation under paragraph (2) of the definition of
significant risk-taker, should the Agencies provide a specific standard for what would constitute
“material financial loss” and/or “overall risk tolerance”? If so, how should these terms be defined
and why? Should certain distributions be excluded from the calculation of a material financial
loss, such as certain incentive-based compensation distributions, and if so, why?
Question 2.9: The Agencies specifically invite comment on the one-third threshold in the
proposed rule. Is one-third of the total of annual base salary and incentive-based compensation an
appropriate threshold level of incentive-based compensation that would be sufficient to influence
risk-taking behavior? Is using compensation from the last calendar year that ended at least 180
days before the beginning of the performance period for calculating the one-third threshold
appropriate?
50
Question 2.10: The Agencies specifically invite comment on the time frame needed to
identify significant risk-takers under the relative compensation test. Is using compensation from
the last calendar year that ended at least 180 days before the beginning of the performance period
appropriate? The Agencies invite comment on whether there is another measure of total
compensation that would be possible to measure closer in time to the performance period for
which a covered person would be identified as a significant risk-taker
compensation test. Is using compensation from
the last calendar year that ended at least 180 days before the beginning of the performance period
appropriate? The Agencies invite comment on whether there is another measure of total
compensation that would be possible to measure closer in time to the performance period for
which a covered person would be identified as a significant risk-taker.
Question 2.11: How many covered persons would likely be identified as significant risk-
takers under the proposed rule and the alternatives described above?
Question 2.12: To the extent covered institutions are already deferring incentive-based
compensation, does the proposed definition of deferral reflect current practice? If not, in what way
does it differ?
Question 2.13: Are there any financial instruments that are used for incentive-based
compensation and have a value that is dependent on the performance of a covered institution’s
shares, but are not captured by the definition of “equity-like instrument”? If so, what are they, and
should such instruments be added to the definition? Why or why not?
Question 2.14: The Agencies invite comment on the proposed definition of incentive-based
compensation. Should the definition be modified to include additional or fewer forms of
compensation, and in what way? Is the definition sufficiently broad to capture all forms of
incentive-based compensation currently used by covered institutions? Why or why not? If not,
what forms of incentive-based compensation should be included in the definition? What forms of
incentive-based compensation should be excluded in the definition, and why?
Question 2.15: The Agencies do not expect that most pensions would meet the proposed
rule’s definition of “incentive-based compensation” because pensions generally are not
by covered institutions? Why or why not? If not,
what forms of incentive-based compensation should be included in the definition? What forms of
incentive-based compensation should be excluded in the definition, and why?
Question 2.15: The Agencies do not expect that most pensions would meet the proposed
rule’s definition of “incentive-based compensation” because pensions generally are not
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conditioned on performance achievement. However, it may be possible to design a pension that
would meet the proposed rule’s definition of “incentive-based compensation.” The Agencies
invite comment on whether the proposed rule should contain express provisions addressing the
status of pensions in relation to the definition of “incentive-based compensation.” Why or why
not?
Question 2.16: The Agencies invite comment on whether the proposed definition of “long-
term incentive plan” is appropriate for purposes of the proposed rule. Are there incentive-based
compensation arrangements commonly used by financial institutions that would not be included
within the definition of “long-term incentive plan” under the proposed rule but that, given the
scope and purposes of section 956, should be included in such definition? If so, what are the
features of such incentive-based compensation arrangements, why should the definition include
such arrangements, and how should the definition be modified to include such arrangements?
Question 2.17: Does the proposed rule’s definition of “performance period” meet the goal
of providing covered institutions with flexibility in determining the length and start and end dates
of performance periods? Why or why not? Should the rule establish a fixed length for a
performance period, for example, one calendar year? Why or why not?
Question 2.18: Is the interplay of the award date, vesting date, performance period, and
deferral period clear? If not, why not?
Question 2.19: Have the Agencies made clear the distinctions between the proposed
definitions of clawback, for
performance periods? Why or why not? Should the rule establish a fixed length for a
performance period, for example, one calendar year? Why or why not?
Question 2.18: Is the interplay of the award date, vesting date, performance period, and
deferral period clear? If not, why not?
Question 2.19: Have the Agencies made clear the distinctions between the proposed
definitions of clawback, forfeiture, and downward adjustment? Do these definitions align with
current industry practice? If not, in what ways do they differ and what are the implications of such
differences for both the operations of covered institutions and the effective supervision of
compensation practices?
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Section 3 – Applicability
Question 3.1: The Agencies invite comment on whether a covered institution’s average
total consolidated assets (a rolling average) is appropriate for determining a covered institution’s
level when its total consolidated assets increase. Why or why not?
Question 3.3: The Agencies invite comment on whether four consecutive quarters is an
appropriate period for determining a covered institution’s level when its total consolidated assets
decrease. Why or why not?
Question 3.4: Should the transition period for an institution that changes levels or becomes
a covered institution due to a merger or acquisition be different than an institution that changes
levels or becomes a covered institution without a change in corporate structure? If so, why? If so,
what transition period would be appropriate and why?
Question 3.5: The Agencies invite comment on whether covered institutions transitioning
from Level 1 to Level 2 or Level 2 to Level 3 should be permitted to modify incentive-based
compensation plans with performance periods that began prior to their transition in level in such a
way that would cause the plans not to meet the requirements of the proposed rule that were
applicable to the covered institution at the time when the performance periods for the plans
commenced
sitioning
from Level 1 to Level 2 or Level 2 to Level 3 should be permitted to modify incentive-based
compensation plans with performance periods that began prior to their transition in level in such a
way that would cause the plans not to meet the requirements of the proposed rule that were
applicable to the covered institution at the time when the performance periods for the plans
commenced. Why or why not?
Section 4 – Requirements and Prohibitions Applicable to All Covered Institutions
Question 4.1: The Agencies invite comment on the requirements for performance measures
contained in section __.4(d) of the proposed rule. Are these measures sufficiently tailored to allow
for incentive-based compensation arrangements to appropriately balance risk and reward? If not,
why?
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Question 4.2: The Agencies invite comment on whether the terms “financial measures of
performance” and “non-financial measures of performance” should be defined. If so, what should
be included in the defined terms?
Question 4.3: Would preparation of annual records be appropriate or should another
method be used? Would covered institutions find a more specific list of topics and quantitative
information for the content of required records helpful? Should covered institutions be required to
maintain an inventory of all such records and to maintain such records in a particular format? If
so, why? How would such specific requirements increase or decrease burden? Should covered
institutions only be required to create new records when incentive-based compensation
arrangements or policies change? Should the records be updated more frequently, such as
promptly upon a material change? What should be considered a “material change”?
Question 4.4: Is seven years a sufficient time to maintain the records required under section
___.4(f) of the proposed rule? Why or why not?
Section 5 – Additional Disclosure and Recordkeeping Requirements for Level 1 and
Level 2 Covered Institutions
Question 5.1: Should the level o
d more frequently, such as
promptly upon a material change? What should be considered a “material change”?
Question 4.4: Is seven years a sufficient time to maintain the records required under section
___.4(f) of the proposed rule? Why or why not?
Section 5 – Additional Disclosure and Recordkeeping Requirements for Level 1 and
Level 2 Covered Institutions
Question 5.1: Should the level of detail in records created and maintained by Level 1 and
Level 2 covered institutions vary among institutions regulated by different Agencies? If so, how?
Or would it be helpful to use a template with a standardized information list?
Question 5.2: In addition to the proposed records, what types of information should Level 1
and Level 2 covered institutions be required to create and maintain related to deferral and to
forfeiture, downward adjustment, and clawback reviews?
Section 6 – Reservation of Authority for Level 3 Covered Institutions
54
Question 6.1: The Agencies based the $10 billion dollar floor of the reservation of authority
on existing similar reservations of authority that have been drawn at that level.84 Did the Agencies
set the correct threshold or should the floor be set lower or higher than $10 billion? If so, at what
level and why?
Question 6.2: Are there certain provisions in section ___.5 and sections___.7
through___.11 of the proposed rule that would not be appropriate to apply to a covered institution
with total consolidated assets of $10 billion or more and less than $50 billion regardless of its
complexity of operations or compensation practices? If so, which provisions and why?
Question 6.3: The Agencies invite comment on the types of notice and response procedures
the Agencies should use in determining that the reservation of authority should be used
e to apply to a covered institution
with total consolidated assets of $10 billion or more and less than $50 billion regardless of its
complexity of operations or compensation practices? If so, which provisions and why?
Question 6.3: The Agencies invite comment on the types of notice and response procedures
the Agencies should use in determining that the reservation of authority should be used.
Question 6.4: What specific features of incentive-based compensation programs or
arrangements at a Level 3 covered institution should the Agencies consider in determining whether
the institution should comply with some or all of the more rigorous requirements within the rule
and why? What process should be followed in removing such institution from the more rigorous
requirements?
Section 7 – Deferral, Forfeiture and Downward Adjustment, and Clawback
Requirements for Level 1 and Level 2 Covered Institutions
Question 7.1: The Agencies invite comment on the proposed minimum required deferral
periods and percentages. Should Level 1 and Level 2 covered institutions be subject to different
deferral requirements, as in the proposed rule, or should they be treated more similarly for this
purpose and why?
84 See, e.g., 12 CFR 3.12, 12 CFR 217.12, and 12 CFR 324.12 (community bank leverage ratio in the Federal banking
regulators’ domestic capital rule).
ages. Should Level 1 and Level 2 covered institutions be subject to different
deferral requirements, as in the proposed rule, or should they be treated more similarly for this
purpose and why?
84 See, e.g., 12 CFR 3.12, 12 CFR 217.12, and 12 CFR 324.12 (community bank leverage ratio in the Federal banking
regulators’ domestic capital rule).
55
Question 7.2: Commenters are invited to address the possible impact that the required
minimum deferral provisions for senior executive officers and significant risk-takers may have on
covered institutions.
Question 7.3: What implications do the minimum deferral requirements under the proposed
rule have on “level playing fields” between covered institutions and non-covered institutions?
Question 7.4: The Agencies invite comment on whether longer performance periods can
provide risk balancing benefits similar to those provided by deferral. Are the shorter deferral
periods for incentive-based compensation awarded under long-term incentive plans appropriate?
Question 7.5: Would the proposed distinction between the deferral requirements for
qualifying incentive-based compensation and incentive-based compensation awarded under a long-
term incentive plan pose practical difficulties for covered institutions or increase compliance
burdens? Why or why not?
Question 7.6: Would the requirement in the proposed rule that amounts awarded under
long-term incentive plans be deferred result in covered institutions offering fewer long-term
incentive plans? If so, why and what other compensation plans will be used in place of long-term
incentive plans and what negative or positive consequences might result?
Question 7.7: Are there additional considerations, such as tax or accounting considerations,
that may affect the ability of Level 1 or Level 2 covered institutions to comply with the proposed
deferral requirement or that the Agencies should consider in connection with this provision in the
final rule?
ce of long-term
incentive plans and what negative or positive consequences might result?
Question 7.7: Are there additional considerations, such as tax or accounting considerations,
that may affect the ability of Level 1 or Level 2 covered institutions to comply with the proposed
deferral requirement or that the Agencies should consider in connection with this provision in the
final rule? Should the determination of required deferral amounts under the proposed rule be
adjusted for certain covered institutions and, if so, how? Could the tax liabilities immediately
payable on deferred amounts be paid from the compensation that is not deferred?
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Question 7.8: Agencies invite comment on whether the proposed deferral, forfeiture,
downward adjustment, and clawback requirements in section __.7 of the proposed rule are
consistent with, more lenient, or more stringent than current practices at Level 1 and Level 2
covered institutions.
Question 7.9: The Agencies invite comment on the circumstances under which acceleration
of payment should be permitted. Should accelerated vesting be allowed in cases where employees
are terminated without cause or cases where there is a change in control and the covered institution
ceases to exist and why? Are there other situations for which acceleration should be allowed? If
so, how can such situations be limited to those of necessity?
Question 7.10: Should practices such as paying personnel in a manner as to enable the
recipients to make tax payments on unrealized income as they became due, including tax liabilities
payable on unrealized amounts of incentive-based compensation, be permissible under the
proposed rule, including, for example, as a permissible acceleration of vesting under the proposed
rule? Why or why not?
Question 7.11: In order to allow Level 1 and Level 2 covered institutions sufficient
flexibility in designing their incentive-based compensation arrangements, the Agencies are not
proposing a specific definition of “substantial”
ed compensation, be permissible under the
proposed rule, including, for example, as a permissible acceleration of vesting under the proposed
rule? Why or why not?
Question 7.11: In order to allow Level 1 and Level 2 covered institutions sufficient
flexibility in designing their incentive-based compensation arrangements, the Agencies are not
proposing a specific definition of “substantial” for the purposes of this section. Should the
Agencies more precisely define the term “substantial” (for example, one-third or 40 percent) and if
so, should the definition vary among covered institutions and why? Should the term “substantial”
be interpreted differently for senior executive officers or significant risk-takers and why? Are
there particular tax or accounting implications attached to use of particular forms of incentive-
based compensation, such as those related to debt or equity?
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Question 7.12: The Agencies invite commenters’ views on whether the proposed rule
should include a requirement that a certain portion of incentive-based compensation be structured
with debt-like attributes. Do debt instruments (as opposed to equity-like instruments or deferred
cash) meaningfully influence the behavior of senior executive officers and significant risk-takers?
If so, how? How could the specific attributes of deferred cash be structured, if at all, to limit the
amount of interest that can be paid? How should such an interest rate be determined, and h
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