Incentive-Based Compensation Arrangements: Notice of Proposed Rulemaking

Summary

The Office of the Comptroller of the Currency (OCC) approved a notice of proposed rulemaking to implement section 956 of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank). The proposal would establish new requirements for incentive-based compensation at certain covered institutions. OCC-supervised institutions that would be subject to the proposed rule include national banks, federal savings associations, and federal branches and agencies, as well as these institutions’ subsidiaries (other than brokers, dealers, insurance providers, investment companies, and investment advisers), that offer incentive-based compensation and have average total consolidated assets of at least $1 billion.

The proposed rule would prohibit incentive-based compensation arrangements that encourage inappropriate risks by a covered institution (1) by providing an executive officer, employee, director, or principal shareholder of the covered institution with excessive compensation, fees, or benefits; or (2) that could lead to material financial loss to the covered financial institution.

As is typically the case in interagency notices of proposed rulemaking, the close of the comment period will be calculated based on the date the notice is published in the Federal Register. Stakeholders may submit comments to the OCC electronically using regulations.gov, as described in the notice of proposed rulemaking.

Highlights

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

Background

Section 956 of Dodd–Frank¹ requires the OCC, along with the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Finance Agency (FHFA), the National Credit Union Administration (NCUA), the Board of Governors of the Federal Reserve System (Federal Reserve Board), and the Securities and Exchange Commission (SEC) (collectively, the agencies), to jointly prescribe regulations or guidelines with respect to incentive-based compensation practices at certain financial institutions.² Specifically, section 956 of Dodd–Frank requires that the agencies prohibit any type of incentive-based compensation arrangements, or any feature of any such arrangements, that the agencies determine encourage inappropriate risks by a covered financial institution (1) by providing an executive officer, employee, director, or principal shareholder of the covered financial institution with excessive compensation, fees, or benefits; or (2) that could lead to material financial loss to the covered financial institution. Under the act, a covered financial institution also must disclose to its appropriate federal regulator the structure of its incentive-based compensation arrangements sufficient to determine whether the structure provides excessive compensation, fees, or benefits or could lead to material financial loss to the institution. Dodd–Frank does not require a covered financial institution to report the actual compensation of particular individuals.

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

In this notice of proposed rulemaking, the OCC is reproposing the regulatory text of the 2016 proposed rule and requesting comment on specific alternatives and general questions, given the passage of time since the 2016 proposed rule was issued, as well as additional supervisory experience, changes in industry practice, and other developments.

Further Information

Please contact Alison MacDonald, Senior Counsel, Bank Advisory, or Melissa Lisenbee, Counsel, Bank Advisory, at (202) 649-5490; Tamara Culler, Director, Governance and Operational Risk Policy, at (202) 649-7866; or Heather Gilmore, Systemic Risk Identification Support and Specialty Supervision Lead Expert for Governance and Operational Risk, Supervision Risk and Analysis, at (215) 494-7686.

Theodore J. Dowd
Acting Senior Deputy Comptroller and Chief Counsel

Related Link

• Notice of Proposed Rulemaking: Incentive-Based Compensation Arrangements (PDF)