July 27, 2021

Volume XI, Number 208

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July 27, 2021

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July 26, 2021

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Financial Regulatory Agencies to Issue New Proposed Compensation Rules

On April 21, the National Credit Union Administration issued proposed prototype regulations with other financial institution regulatory agencies (Agencies) to likely follow suit. Required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act), the rule is intended to (1) prohibit incentive-based payment arrangements that the Agencies determine encourage inappropriate risks by certain financial institutions by providing excessive compensation or that could lead to material financial loss; and (2) require those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate federal regulator. The Act defines “covered financial institution” to include any of the following types of institutions that have $1 billion or more in assets:

  • 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);

  • a broker-dealer registered under section 15 of the Securities Exchange Act of 1934 (15 U.S.C. 78o);

  • a credit union, as described in section 19(b)(1)(A)(iv) of the Federal Reserve Act;

  • an investment adviser, as such term is defined in section 202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(11));

  • the Federal National Mortgage Association (Fannie Mae);

  • the Federal Home Loan Mortgage Corporation (Freddie Mac); and

  • any other financial institution that the appropriate federal regulators, jointly, by rule, determine should be treated as a covered financial institution for these purposes.

Generally, the regulations would control the amount and timing of incentive compensation received by certain employees of the nation’s financial institutions, with the largest effect on those institutions with $250 billion or more in assets (Level 1). Employees of a second category of institution, with $50 billion or more of assets (Level 2), would also be subject to similar rules. A third category, covering institutions that have assets equaling or in excess of $1 billion (Level 3), subjects covered institutions to more general provisions of the rule, which prohibit “excessive compensation, fees, or benefits” or any compensation arrangement that “could lead to material financial loss.” Other agencies expected to join in the rulemaking include the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission.

The rule covers “senior executive officers” and “significant risk takers” as defined at Level 1 and 2 institutions. Generally, senior executive officers include the president, chief executive officer, executive chairman, chief operating officer, chief financial officer, chief investment officer, chief legal officer, chief lending officer, chief risk officer, chief compliance officer, chief audit executive, chief credit officer, chief accounting officer, or head of a major business line or control function. Significant risk takers are generally employees who receive at least one-third of total compensation in the form of incentive-based compensation and who are (1) highly compensated employees (upper five percent (Level 1) or upper two percent (Level 2) of compensation), or (2) any employee who may commit or expose 0.5 percent or more of the net worth or total capital of the institution.

Generally, those persons covered by the rule would be subject to deferrals periods of up to two years for incentive-based income in amounts ranging from 60 percent to 40 percent, to vesting requirements of up to two years, to non-acceleration requirements, and also to downward adjustment, forfeiture and clawback provisions extending up to seven years. Standards for risk management and effective governance also will be imposed under the proposed rule, as will record-keeping and monitoring requirements.

The proposal, available here, is 279 pages; and comments are due by July 22.

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume VI, Number 113
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