Alert February 15, 2011

FDIC Board of Directors Approves Proposed Rule on Incentive-Based Compensation

The FDIC Board of Directors voted to issue a rule proposal (the “Proposed Rule”) to be issued jointly by the OCC, FRB, FDIC, OTS, NCUA, SEC and FHFA (the “Agencies”).  The Proposed Rule would require the reporting of incentive-based compensation arrangements at a covered financial institution and prohibit incentive-based compensation arrangements at a covered financial institution that provide excessive compensation or that could expose the institution to inappropriate risks that could lead to a material financial loss.  “Incentive-based compensation” is defined as “any variable compensation that serves as an incentive for performance.”  “Covered financial institution” includes the following institutions with $1 billion or more in assets: a depository institution or depository institution holding company, a registered broker-dealer, a credit union, an investment adviser, Fannie Mae, Freddie Mac, the Federal Home Loan Banks, the Office of Finance of the Federal Home Loan Bank System, 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.

The Proposed Rule would:

  • Require a covered financial institution to submit a report annually to its appropriate regulator or supervisor in a format specified by its appropriate Federal regulator that describes the structure of the covered financial institution’s incentive-based compensation arrangements for covered persons.
  • Prohibit incentive-based compensation arrangements at a covered financial institution that encourage “covered persons,” defined as executive officers, employees, directors, or principal shareholders, to expose the institution to inappropriate risks by providing to the covered person compensation that is “excessive,” as determined by standards set forth in the Proposed Rule.
  • Prohibit a covered financial institution from establishing or maintaining any incentive-based compensation arrangements for covered persons that encourage inappropriate risks by the covered financial institution that could lead to a material financial loss, as determined by standards set forth in the Proposed Rule.
  • Require a covered financial institution to maintain policies and procedures appropriate to its size, complexity and use of incentive compensation to ensure compliance with the above requirements and prohibitions.
  • Require a covered financial institution to document its processes for establishing, implementing, modifying and monitoring its incentive compensation arrangements.
  • Require deferral of at least 50% of incentive-based compensation for a minimum of three years for executive officers of “larger covered financial institutions,” defined generally as covered financial institutions with total consolidated assets of at least $50 billion, and adjustments of the deferred amounts to reflect losses during the deferral period.  The Proposed Rule gives institutions flexibility in administering deferral programs.  For example, deferred amounts may be released in a lump-sum at the end of the deferral period or in equal increments, pro rata, for each year of the deferral period.
  • Require that, at larger covered financial institutions, the board of directors or a board committee (a) identify those covered persons, other than executive officers, that 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; and (b) approve the incentive-based compensation arrangement for such individuals.

The Proposed Rule would be effective six months after publication of the final rule in the Federal Register, with annual reports due within 90 days of the end of each covered financial institution’s fiscal year. 

Public Comment.  Comments must be submitted by 45 days after the date of publication of the Proposed Rule in the Federal Register following approval of the Proposed Rule by all of the Agencies.