Financial Regulators Again Propose Incentive-Based Compensation Rule

Regulators proposed rule in 2011, 2016, but it never was finalized

Thirteen years after the rule was supposed to be finalized, on Monday federal banking regulators again proposed a rule governing incentive-based compensation practices at financial institutions.

The proposed rule was issued by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Housing Finance Agency. The National Credit Union Administration is expected to sign on to the proposal in the coming days. After the NCUA signs on, the 200-page proposal will be published in The Federal Register.

Section 956 of the Dodd-Frank Act required the regulators to issue the rule by May 2011. The agencies issued proposals in 2011 and 2016, but they never were finalized. The proposal issued Monday is identical to the one proposed in 2016.

The proposed rule includes prohibitions intended to make incentive-based compensation arrangements at financial institutions with more than $1 billion in assets more sensitive to risk.

“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 said.

“These include a prohibition on incentive-based compensation arrangements that do not include risk adjustment of awards, deferral of payments, and forfeiture and claw-back provisions,” the agencies said, in explaining the proposal. “These prohibitions would help safeguard covered institutions from the types and features of incentive-based compensation arrangements that encourage inappropriate risks.”

Recent events show that without specific prohibitions, some financial institutions offer incentive-based compensation that encourages inappropriate risks, the agencies said. The announcement does not mention Silicon Valley Bank, but Democratic lawmakers have said that the failure of that financial institution demonstrated the need for the rule.

“The recent bank failure of Silicon Valley Bank and reported bonuses issued to its leadership further underscore the urgency and importance of this rule’s implementation,” Sen. Gary Peters, D-Mich., wrote in a letter to regulators last year. “Given how incentive-based compensation can continue to lead to certain financial institutions and professionals taking excessive and reckless risks, implementation of this long-delayed rule is an important reform to ensure reckless financial risks and financial mismanagement do not put our banking system at risk.”

The agencies said that since the new proposal is identical to the 2016 one, they will review comments that were submitted then, as well as new comments that are filed now.

Commenting on the 2016 proposal, Credit Union National Association officials lamented the fact that credit unions were being subjected to rules that should only apply to a “few bad actors.”

‘Unfortunately, the Dodd-Frank Act lumped financial institutions of all sizes and structures together for regulatory requirements designed to curtail the actions of a few bad actors before and during the financial crisis,” Lance Noggle, who was CUNA’s senior director of advocacy and counsel at the time, wrote in a comment letter.

Jim Nussle, who was then CUNA’s president/CEO also criticized the 2016 proposal. “We are very concerned that the incentive-based compensation rule gives the NCUA far too much supervisory authority over how credit unions pay their employees,” he said.