Client Alert: Proposed Incentive Compensation Rules
Monitor the proposed rules as regulators continue to issue new proposals.
Watch for our updates in the coming weeks.
The National Credit Union Association ("NCUA") last week became the first of six regulators to issue its new proposed rules under §956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed rules are open to comments until July 2016, and cannot be finalized until the other five regulators – including the OCC, the Federal Reserve, the FDIC, the SEC, and the Federal Housing Finance Agency – issue their own versions of the proposed rules, which are expected to be substantially similar to the NCUA proposal, in the coming weeks.
Proposed rules will not be final and effective for at least 20 months.
The proposed rules issued by the NCUA appear to be significantly more focused and restrictive than the rules that were originally proposed by the regulators in 2011. The preamble to the proposed rules suggests this is a result of the regulators "getting smart" on incentive compensation. While the 2011 proposal seemed to have been proposed in a vacuum, the new rules are based on the regulators collective supervisory experiences gained over the last several years. The rules incorporate practices that institutions and foreign regulators have adopted to address compensation practices that may have contributed to the financial crisis.
The proposed rules are comprehensive and include the following key provisions:
- For purposes of applying the requirements, institutions are divided into three categories:
- Level 1 (consolidated assets greater than or equal to $250 billion);
- Level 2 (consolidated assets greater than or equal to $50 billion and less than $250 billion);
- Level 3 (consolidated assets greater than or equal to $1 billion and less than $50 billion).
- The group of individuals covered by the requirements has been expanded to include senior executives as well as "significant risk-takers" – a new category designed to target employees whose actions could serve to increase the risk undertaken by an institution.
- For Levels 1 and 2 (and certain Level 3s, if determined in the discretion of their regulators):
- From 40 – 60% of incentive compensation for senior executives and significant risk-takers must be deferred for up to four years following the end of the incentive period.
- A seven-year "clawback" provision must be included as a term of incentive compensation arrangements.
- Other provisions include prohibitions on accelerated vesting of deferred awards, caps on incentive compensation payouts, and minimum performance vesting requirements.
- For Levels 1, 2 and 3 - New recordkeeping and disclosure requirements, as well as corporate governance procedures.
Further Updates to Come
In the coming weeks, we will continue to monitor proposals from the remaining five regulators. We will provide a series of updates, in smaller pieces, to describe the detail of the new proposed rules and, hopefully, to confirm that each of the regulators intends to propose substantially similar rules.
We Can Help You
Please contact any of the key contacts listed below or another member of the Firm, if you have any questions or would like additional information concerning these issues.
Compensation & Employment Group Key Contacts
Financial Institutions Group Key Contacts
- John E. Freechack
- Dennis R. Wendte
- John M. Geiringer
- Robert M. Fleetwood
- Joseph T. Ceithaml
- Karol K. Sparks
- J. Brent McCauley
- Stanley F. Orszula
- Andrea L. Sill
- Bill Fay
Barack Ferrazzano Financial Institutions Group
Our 30-attorney Group has represented more than 250 financial institutions across the country. Our M&A experience is unparalleled—over the past decade, our Group ranked #1 in the Midwest region by number of announced bank and thrift merger and acquisition transactions—according to SNL Financial. The Financial Institutions Group was again named as one of the top financial institution groups in the nation in the U.S. News & Best Lawyers 2016 report.