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Client Alert: Bank Regulatory & Legal Developments - Part III

A Client Alert Series For Changes In 2014

You should be aware of certain significant regulatory and legal developments affecting the banking industry, and prepare your institution to comply with new guidelines. In Part III of the “Bank Regulatory & Legal Developments” Client Alert Series, we will cover:

  1. Compensation Practices
  2. Incentive Compensation For Product Sales
  3. The EEOC & Severance Agreements

Point Of Interest
Examiners are starting to ask our clients more probing questions about their compliance with outstanding regulatory compensation guidance.

Compensation Practices

It is widely believed certain compensation practices led to inappropriate behavior leading up to the global financial crisis. Examiners are starting to ask our clients more probing questions about their compliance with outstanding regulatory compensation guidance. Specifically, they are asking banks whether they are maintaining:

Point Of Interest
Consider whether your incentive compensation plans for product sales and referrals should include a deferral period.

Incentive Compensation For Product Sales

The bank regulatory agencies and the Consumer Financial Protection Bureau continue to provide guidance that sweeps broadly across incentive compensation practices in connection with product sales. In addition to the existing requirements, the newer guidance, and in the case of the CFPB, its enforcement actions have focused on an additional recommendation. They recommend incentive plans include “balancing elements,” such as risk adjustments or deferral periods, within the incentive compensation arrangements that are reasonably designed to ensure that the arrangement will be balanced in light of the size, type, and time horizon of the inherent risks of employee activities; and do not create incentives for employees to provide consumers inaccurate information about products. The CFPB, in an enforcement action related to credit card add-on products, required the seller to adopt a policy providing that any incentive compensation based directly on the sale of products would not be payable unless the customer remained enrolled in the product for at least three billing cycles. In light of the recent regulatory focus, consider whether your incentive compensation plans for product sales and referrals should include a deferral period to help ensure that customers continue using the product.

Point Of Interest
Small changes to standard severance agreements can be made to address the issues highlighted in the EEOC’s recent litigation.

The EEOC & Severance Agreements

The Equal Employment Opportunity Commission has for several years considered unlawful any action by an employer that interferes with an employee’s right to file a charge of discrimination or to communicate with and participate in EEOC proceedings. But what if the employee or former employee has signed a severance agreement releasing all claims, including those within the jurisdiction of the EEOC? The EEOC recently sued a national company, alleging that five of its separation agreement provisions were unlawful.

Each of the criticized provisions is a standard provision in many severance agreements. They include:

Although the lawsuit has not yet created new law, there are small changes to standard severance agreements that can be made to address the issues highlighted in the EEOC’s recent litigation.

Point Of Interest
We are assisting many clients to ensure that their compensation practices and severance agreements comport with applicable legal and regulatory guidance.

Resources

As with any new guidelines, implementation of the required changes and thorough planning for their impact will take time. We urge you to begin the process of understanding how these changes will impact your organization.

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