TO: NCUA Board
FROM:
Office of Examination and Insurance
Office of General Counsel
DATE: July 5, 2024
SUBJ: Proposed Rule – Incentive Compensation Arrangements (12 C.F.R. Parts 741 and 751)
ACTION REQUESTED: Board approval to issue the attached proposed rule to implement the incentive-based compensation requirements of section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Section 956).1
DATE ACTION REQUESTED: July 18, 2024.
OTHER OFFICES CONSULTED: Office of the Chief Economist.
VIEWS OF OTHER OFFICES CONSULTED: Concur.
BUDGET IMPACT, IF ANY: None.
SUBMITTED TO INSPECTOR GENERAL FOR REVIEW: Yes.
RESPONSIBLE STAFF MEMBERS: Summer Chapman, Policy Division Director, and John Berry, Policy Officer, Office of Examination and Insurance; Ariel Pereira and Gira Bose, Senior Staff Attorneys, Office of General Counsel.
SUMMARY: Section 956 requires the Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), Securities and Exchange Commission (SEC), and Federal Housing Finance Agency (FHFA) (collectively “the Agencies”) to jointly prescribe regulations or guidelines prohibiting 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. The regulations must also require those financial institutions to disclose information about such arrangements to their regulator. Section 956 does not apply to financial institutions with less than $1 billion in assets. Section 956 does not require a financial institution that does not have an incentive-based payment arrangement to make the disclosures required under Section 956.
Under the proposed regulation, covered institutions would be divided into three categories based on assets: $250 billion and above (Level 1); $50 billion to $250 billion (Level 2) and $1 billion to $50 billion (Level 3). Much of the proposed rule addresses requirements for the structure of incentive-based compensation arrangements for senior executive officers and significant risk takers at Level 1 and Level 2 institutions. In addition, all covered institutions must annually create and retain for 7 years records documenting the structure of incentive-based compensation arrangements and receive appropriate oversight of the institution’s incentive-based compensation arrangements from its board of directors.
To date, the Agencies have issued two proposed rules to implement Section 956, neither of which were finalized. The first proposed rule was published in the Federal Register on April 14, 2011.2 The second proposed rule was published on June 10, 2016.3 The attached proposed rule would constitute a third effort to implement the statutory incentive-based compensation requirements. This 2024 rulemaking involves reissuing the 2016 proposal and requesting public input on potential changes that could be made at the final rule stage.
The proposed rule is being jointly issued by the OCC, FDIC, NCUA, and FHFA. The proposed rule would not be published in the Federal Register until such time as the FRB and the SEC are ready to proceed with the rulemaking. Public comments, however, would be accepted prior to publication in the Federal Register. To ensure compliance with the directive in Section 956 that the regulations be “jointly prescribed,” all the Agencies would join in issuance of the final rule.
RECOMMENDED ACTION: The NCUA Board issue the attached proposed rule.
ATTACHMENT: Proposed rule.