Subscribe
Share
Share
Embed
This podcast provides you the ability to listen to new regulatory guidance issued by the National Credit Union Administration, and occasionally the F D I C, the O C C, the F F I E C, or the C F P B. We will focus on new and material agency guidance, and historically important and still active guidance from past years that NCUA cites in examinations or conversations. This podcast is educational only and is not legal advice. We are sponsored by Credit Union Exam Solutions Incorporated. We also have another podcast called With Flying Colors where we provide tips for achieving success with the N C U A examination process and discuss hot topics that impact your credit union.
Samantha: Hello, this is Samantha Shares.
This episode covers N C U Aâs new
proposed rule on Proposed Rule Incentive
Based Compensation Arrangements voted
on at the July 18th Board Meeting.
The proposed rule passed
by a vote of 2 to 1.
The following is a word for
word real audio of that item.
This podcast is educational
and is not legal advice.
We are sponsored by Credit Union
Exam Solutions Incorporated, whose
team has over two hundred and
Forty years of National Credit
Union Administration experience.
We assist our clients with N C
U A so they save time and money.
If you are worried about a recent,
upcoming or in process N C U A
examination, reach out to learn how they
can assist at Mark Treichel DOT COM.
Also check out our other podcast called
With Flying Colors where we provide tips
on how to achieve success with N C U A.
And now the N C U A Board.
The second item of business today is
Proposed Rule Incentive Based Compensation
Arrangements 12 CFR Parts 741 and 751.
Staff presenting are John Barry, Policy
Officer, Office of Examination and
Insurance, and Ghira Bose, Senior Staff
Attorney, Office of General Counsel.
Staff available for questions include
Amanda Parkhill, Deputy Director,
Office of Examination and Insurance
and Ariel Pereira, uh, Senior Staff
Attorney, Office of General Counsel.
Good morning, John and Kira, Amanda
and Ariel, uh, John and Kira.
Uh, you may begin whenever you are ready.
Staff 2: Thank you, Chairman.
Good morning, everyone.
Chairman Harper, Vice Chairman Hopman, and
Board Member Otsuka, we are here today to
present for your consideration a proposed
rule entitled Incentive Based Compensation
Arrangements to fulfill NCUA's obligations
under Section 956 of the Dodd Frank Wall
Street Reform and Consumer Protection Act.
Section 956 requires NCUA and five other
agencies, the Federal Reserve Board,
Federal Deposit Office of the Comptroller
of the Currency, Securities and Exchange
Commission, and Federal Housing Finance
Agency to jointly prescribe regulations
or guidelines With respect to incentive
based compensation practices at
certain covered financial institutions.
Specifically, Section 956 requires
that the agencies Prohibit at types of
incentive based payment arrangement or
any feature of any such arrangements.
that the regulators determine
encourage inappropriate risks by
covered financial institutions.
One, by providing an executive
officer, employee, director, or
principal shareholder of the covered
financial institution with excessive
compensation, fees, or benefits.
Or two, that could lead to
material financial loss to the
covered financial institution.
Section 956 does not apply to institutions
with less than 1 billion in assets.
It does not require a financial
institution that does not have an
incentive based payment arrangement
to make the disclosures required
by Section 956, and it does not
require the reporting of the actual
compensation of particular individuals.
To date, the agencies have
issued two proposed rules.
One in 2011 and the second in 2016,
neither of which were finalized.
This 2024 action is being taken
by NCUA, FDIC, OCC, and FHFA.
It involves reissuing the 2016
proposal for public notice and
comment and requesting comment or
input on alternatives that may be
incorporated into a final rule.
I'll now turn it over to
John to discuss the proposal.
Staff 1: Thank you, Gera.
Good morning again, Chairman Harper, Vice
Chairman Hoffman, and Board Member Otsuka.
I would like to briefly summarize
the contents of this proposed rule.
The proposed rule identifies
three levels of covered
institutions subject to the rule.
Level 1 institutions are those with assets
equal to or greater than 250 billion.
Level 2 institutions are those with
assets greater than or equal to 50
billion, but less than 250 billion.
And level 3 institutions are those with
assets greater than or equal to 1 billion,
but less than 50 billion in assets.
At this time, there are 449 federally
insured credit unions that would be
covered by this rule, with 447 being
a level 3 and 2 being a level 2.
We would have no level 1 credit unions.
As noted earlier, this proposed
rule prohibits, uh, incentive based
compensation plans that provide
excessive compensation or could lead
to material loss at the credit union.
The proposed rule contains six factors
for determining whether compensation
is excessive or unreasonable or
disproportionate to the value of
services performed by a covered person.
These factors apply to
institutions at all three levels.
The factors must be considered are
the combined value of all compensation
and fees or benefits provided to
the covered person, the compensation
history of the covered person and
others with comparable expertise at the
credit union, the financial condition
of the credit union, compensation
practices at comparable credit unions
based on such factors as asset size.
geographic location, and the complexity
of that credit union's operations, and for
post employment benefits, the projected
total cost and benefit to the credit
union, and any connection that covered
person, um, has with any fraudulent act
or remission, breach of trust, or insider
abuse with regard to that credit union.
The proposed rule contains three key
principles that must be considered
when determining if incentive based
compensation, uh, plays poses a
material risk of loss to the crediting.
The principles applied to this institution
at all three levels and include whether
the incentive based compensation
arrangement appropriately balances
risk and financial reward, whether the
incentive based compensation arrangement
is compatible with effective risk
management and controls, and whether the
incentive based compensation arrangement
is supported by effective governance.
With this proposal, the agencies
expect that a covered institution would
tailor its incentive based compensation
program to its size, complexity, risk
tolerance, business model and the business
model of the institution consistent
with the previously listed factors.
The proposal requires that an
institution's board of directors
or a committee thereof be directly
involved in the oversight of the
incentive based compensation program.
Specifically, the Board of Directors,
or the committee thereof, must approve
all incentive based compensation plans
for senior executive officers, including
awards and payouts, and approve all
material exceptions or adjustments to
plans covering senior executive officers.
The last core requirement of the
proposed rule involves recordkeeping.
All covered institutions will
have to document their incentive
based compensation plans.
Maintain them for seven years
and provide them to the regulator
upon request at a minimum.
Records must include copies of all
incentive based compensation plans,
a record of who is subject to the
plan, and a description of how the
plan is consistent with effective
risk management and controls.
The proposed rule applies additional, more
rigorous prohibitions and requirements to
incentive-based compensation arrangements
at level one and level two credit unions.
These enhanced requirements include
coverage of individuals considered to
be significant risk takers, as well
as the senior executive officers,
enhanced disclosure and record keeping
requirements, deferral of a portion of
qualifying incentive based compensation
in accordance with the rule, the
requirement that unvested deferred
incentive based compensation be at risk
of downward adjustment or forfeiture
under certain circumstances set forth
in the rule, and inclusion of clawback
provisions in qualifying incentive
based compensation arrangements.
An independent risk management
and control requirements, and
enhanced requirements relating to
governance, policies, and procedures.
Finally, the rule provides an
implementation timeline of 18 months.
It grandfathers existing plans for the
life of those plans, and it also provides
an 18 month window for institutions
newly subject to the rule to comply.
In other words, if a credit union
surpasses 1 billion in total assets
at a later point in time, that credit
union will be afforded the same 18
month period for implementing the
required provisions of the rule.
This concludes our comments.
We are glad to answer any
questions that you have.
Thank you.
Chairman Todd Harper: Thank you so much,
Ghira and John, for your presentation
on this proposed rule to implement the
incentive based compensation requirements
of Section 956 of the Dodd Frank Wall
Street Reform and Consumer Protection Act.
More importantly, thank you for
your work on the interagency team.
of federal regulators that
developed this proposed rule.
And thank you Amanda and Ariel
for being available to respond to
any questions that we may have.
I know that this is a complex topic.
In just three days, we will mark the
14th anniversary of the enactment
into law of the Dodd Frank Wall Street
Reform and Consumer Protection Act.
And this September, we will
mark the 16th anniversary of the
collapse of Lehman Brothers and AIG.
Both prominent events in
the financial crisis and the
Great Recession that followed.
The Dodd Frank Act responded to those
events and, among other things, called
upon financial regulators to act on
the issue of incentive compensation
within nine months of enactment.
So it's an understatement to say
that this rulemaking is long overdue.
It's actually an incomplete
assignment about which lawmakers
frequently inquire of me at hearings.
They want to know when we are
going to finish our homework.
For me, the time to act is now.
Specifically, Section 956 of the Dodd
Frank Act requires federal financial
regulators, including the National
Credit Union Administration, to
issue joint regulations or guidelines
requiring disclosure and reporting
of incentive based compensation.
For senior executive officers
and significant risk takers at
financial institutions with more
than one billion dollars in assets.
It also requires us to establish
a mechanism for deferring income
and clawing back improper gains
resulting from excessive risk
taking when an institution fails.
As noted earlier, the proposed rule
we are considering today is identical
to the proposed rule recently approved
by the Federal Deposit Insurance
Corporation, the Federal Housing
Finance Agency, and the Office of the
Comptroller of the Currency in May.
This rule also re proposes the regulatory
text issued in June 2016 and seeks
public comment in the preamble on
certain alternatives and questions.
As in 2016, the proposed rule would
establish a three-tiered system for
covered, uh, financial institutions.
Level one would cover institutions
with $250 billion or greater in assets.
Level two would cover those
institutions between 50 billion
and 1 billion, um, $250 billion.
And level three would cover
institutions between $1 billion
and $50 billion in assets.
From the perspective of federally
insured credit unions, the proposed
rules impact is relatively small.
As of the end of the first quarter
of 2024, there were no federally
insured credit unions in level 1, uh,
as, uh, John noted in his remarks.
There were two credit unions that
were level 2, uh, one had, uh, 50
some billion dollars and one was,
uh, At 170 some billion dollars.
And then there were 440 some
credit unions in level three.
As such the vast majority of
credit unions, in fact, more
than 90 percent of credit unions
would be exempt from this rule.
Critics of this proposed rule will
say that it shouldn't apply to credit
unions, but the statute is clear.
The rule must apply to credit unions
with 1 billion in assets or more.
Critics of the rule might also claim that
credit unions were not responsible for the
financial crisis or the Great Recession.
The agency, however, cannot
change what Congress required.
Credit unions with more than 1 billion
in assets are covered by the law.
That point is clear.
Some may also claim that credit union
compensation practices are different
from other financial providers.
That may largely be true, but there are
clear examples of excessive incentive
based compensation contributing
to the failures of consumer and
corporate credit unions nearly 16
years ago during the financial crisis.
A prime example of that is the
failure of Cal State 9 Credit Union.
That failure cost the Share
Insurance Fund more than 1 billion.
170 million.
Moreover, the material loss review
of Cal State nine found that quote an
incentive compensation program that paid
it nearly 400, 000 in bonuses to the
credit union's CFO between 2006 and 2007,
based on net income generated by the
credit union's home equity loan program.
was one of two factors that contributed
significantly to Cal State 9's
excessive concentration of assets and
indirect home equity lines of credit
that eventually led to its demise.
In another example, Western Corporate
Federal Credit Union pursued a strategy
of generating more interest income than
would be available from deposits it held.
WestCorp used this income to pay high
rates on its member certificates and
to generate increased net interest
income to support operational expenses,
including providing substantial
compensation increases for its executives.
Between 2002 and 2008, the total
annual compensation for the leadership
team increased by an average of 88%.
These executives pocketed enormous
profits while the corporate, uh,
corporate's members and ultimately
the credit union system wore
the cost of Westcorp's failure.
To help avoid similar situations in
the future, the NCOA is required by
Congress to issue a joint incentive based
compensation regulation or guidelines
and that is what we are doing here today.
Some may also assert that we have
learned our lessons and what happened
in 2008 cannot happen again in 2024.
For I wish that were true.
But it is not.
Just last year, we saw how excessive
risk taking by certain banks
walked our financial markets.
As noted in the proposed rule, a report
on the failure of Silicon Valley Bank,
for example, noted that the compensation
packages of senior management were
tied to short term earnings and equity
returns did not include risk metrics.
That same report concluded that
the bank's managers had a financial
incentive to focus on short term profit.
Over sound risk management.
A consistent set of enforceable
standards across financial regulators
would level the playing field, avoid
regulatory arbitrage, and help ensure
that incentive-based compensation
arrangements at covered financial
institutions are not excessive and do
not lead to material financial losses.
Lastly, some may assert that in
passing Section 9 56, Congress
allowed the agencies to issue
joint guidelines instead of a rule.
That is correct, but guidelines
are an imperfect solution in this
instance, as they are unenforceable.
We cannot cite guidelines in documents
of resolution, and in the event
of future failures resulting from
excessive greed, we will lack the
regulatory structure and authority
needed to claw back excessive gains.
I know the need from these three reports.
for these reforms from
first hand experience.
As part of my work in helping to
draft the financial, this financial
reform provision, it was clear then,
and it's clear now, that Congress
and the American people want senior
executives, wrongdoers, and fat cats
at large financial institutions held
accountable for any irresponsible
and damaging business practices.
Greedy executives should not
earn excessive bonuses while
taxpayers foot the bill.
When their institutions fail.
This rulemaking effort is about providing
transparency and accountability.
This regulatory effort will better focus
the leaders of financial firms on the
long term health of the company instead
of just their short term personal gain.
That's good for the credit union system,
it's good for our financial markets, and
it's good for the share insurance fund.
For these reasons, I strongly
support this proposed rule.
That concludes my remarks.
I now recognize the Vice Chairman.
Vice Chairman Kyle Hauptman: You bet.
Uh, thanks for the presentation.
Uh, quite a bit of effort.
Uh, can I ask this, for here,
how many folks were involved
in general in preparing for
this, uh, presentation today?
Yeah, I can answer that.
For the board meeting?
Staff 1: Um, for the board meeting, well,
there's, there were, uh, four individuals
that were involved, um, in the, in the
interagency meetings and in assisting
with the development of the rule.
Uh, three, uh, three from the Office of
General Counsel and one from, uh, the
Office of Examination and Insurance.
And then our work was subject to
higher level supervisory reviews.
Well, for the board meeting
Vice Chairman Kyle Hauptman:
specifically, not just the rule itself.
The same, same individual.
Same group.
I remember when I had a briefing on this
there were 11 staff members, uh, besides
my staff, there were 11 on the call.
Um, I say that because I want to note
that work for this meeting
could have been avoided.
I offered to address this
item via notation vote.
If my colleagues would support halting
the publication of each credit union's,
uh, total income from overdraft
and NSF fees, with their quick name
of the credit union next to it.
I suggest that NCA examiners could
still have access to that data, and
we could publish various forms of
aggregate data, you know, 20th and
80th percentiles, that sort of thing.
Uh, my suggestion was rejected, all
to maintain a policy that still, as of
today, lacks any legitimate justification.
As you might expect, law firms
are already positioning themselves
to extract more settlements.
from the institutions we insure, which
is a very odd thing for NCUA to promote.
Uh, to today's rule on
incentive compensation.
Um, I can't support it because it
exceeds what Congress mandated and does
so in an intrusive and harmful manner.
There was a better way to do this.
I want to quote FDIC Vice
Chairman Travis Hill, who already
voted against this same rule.
Proposed rule, as his comments echo my
own, begin quote, In 2010, the banking
agencies issued guidance and adopted a
principles based approach to help ensure
that incentive compensation policies
do not encourage imprudent risk taking.
Notably, the 2010 guidance asserted
that a principles based approach is the
most effective way to address incentive
compensation practices, given the
differences in the size and complexity
of banking organizations covered by the
guidance and the complexity, diversity,
and range of Incentive compensation
arrangements by those organizations.
The guidance established as expectations
that incentive comp would balance risk
and financial results in a manner that
does not encourage employees to expose
their organizations, to imprudent risk,
and have provided different options
that banks can use to make compensation
more sensitive to risk overall.
Implementation of the 2010 guidance
along with other supervisory engagements
around that time contributed to
meaningful change in incentive
compensation practices across the
industry, and the incentive compensation
arrangements that were cited by some
as a factor in the financial crisis
are far less common today, end quote.
One of the reasons, if you notice,
the dates of that 2010 guidance
was the agencies, including this
one, were, uh, trying to head off
Congress mandating something clunkier.
Congress did at least, we can't say
guidelines, we didn't have to do a rule.
Um, the agencies, including NCUA,
could have used that guidance as the
foundation for a six agency effort
to satisfy Congress directives.
Let me ask you this, if we compare this
proposed rule today, To the principles
based approach in the 2010 guidance,
which method is likely to create
more opportunities for enforcement
Staff 1: actions?
Thank you, Mr.
Vice Chair.
I can answer that.
Um, so just as initially I would
just note that, um, the NCUA was
not a party to the 2010 guidelines.
It was the banking
Vice Chairman Kyle Hauptman: regulators.
That's right.
The other banking agencies.
I want to correct my remark.
It was the banking agencies on that.
Staff 1: But to, but to answer your
question, um, in general, guidelines
or the standards set by guidelines
are not directly enforceable, uh,
whereas those contained in a rule are.
So, by the fact that this is a
proposed rule, um, and if it's
finalized, it would establish binding
requirements, uh, the rule, the final
rule would be enforceable in a way
that, that the guidelines are not.
Vice Chairman Kyle Hauptman: Well,
obviously rules are important.
Uh, can create enforcement actions
in a way that guidance doesn't, but
particularly going from a principles
based approach, uh, to this one with a lot
more paperwork has to be done correctly.
Remember, you can get dinged just for
not doing the paperwork right, uh,
regardless of any actual harm done.
But if you, put it this way, if you are
one of the agencies on this and you wanted
all else equal enforcement actions, You
wanted the press releases, you wanted
to report the dollar amount collected.
Which approach would yield
more, uh, number of enforcement
actions and dollar amount?
The principal's 2010
approach or this prescriptive
Staff 1: rule today?
It's hard to say, Mr.
Vice Chair.
Um, you know, the fact that we
weren't part of the 2010 guidelines,
I mean, we haven't No, I'm not asking
Vice Chairman Kyle Hauptman: whether you
were part of it or not, but we know they
exist and we know they significantly
reduce the type of incentive comp that
some say contribute to the crisis.
Staff 1: It, it can vary.
Sometimes a principles based approach
can, can lead to less enforcement
actions, but sometimes it's just by their
very nature, principles based can be,
uh, less specific, um, and so they're
much more open to subjectivity and
interpretation, and so it's hard to say.
Uh, without looking at the specifics
and doing that sort of side by side
comparison, um, it's hard to say that
one necessarily would lead to less
enforcement actions than, than another.
Vice Chairman Kyle Hauptman: I would say
the history of, uh, financial regulation,
especially from non insurers is the more
rules and the more prescriptive they are,
the number of enforcement actions goes up.
What I'm getting at is the
incentive problem here.
Government agencies face incentives
and we're not examining those today
and I'll talk about that in a minute.
Uh, we're not mandated by Congress either.
But it doesn't mean it's not
something to think about.
The incentive to have enforcement actions.
If you don't have profit, it's power,
publicity, prestige, and in some agencies,
post employment job opportunities.
The harsher your enforcement actions, and
the harder it is to follow, the higher
the market value for former regulators.
I would say that if you look at, in
the long run, you can predict exactly
what agencies do if you look at
those incentives in front of them.
So we have an incentive problem here that
is, I think, harming the American public.
Um, um, Uh, let me go back to this.
There's unnecessary language about
extending these burdensome requirements to
credit union service organizations, CUSOs,
question, did Congress mandate that?
Staff 2: I can take that question.
No, Congress does not mandate that the
rule or regulations or guidelines or
however the want to implement the statute
applied to QCIS, but what Congress does
say is that the agencies should decide,
they have discretion to apply the rule to
any other financial institution that they
determine should be treated as a covered
financial institution under the rule.
And to be clear, QSOs are
not included under this rule.
As covered financial institutions.
Vice Chairman Kyle Hauptman: Software
providers are not considered.
Because if you consider them
financial institutions, then boy,
there's a whole lot of financial
institutions in this country.
Staff 2: Financially insured credit unions
would be regulated under this proposal.
Vice Chairman Kyle Hauptman: Right.
But, uh, it mentions credit union service
organizations and we are not there.
Staff 2: And they're not
covered under this rule.
Vice Chairman Kyle Hauptman: Uh, but there
is language, the word QSO is in there.
Staff 2: You cannot do through a
CUSO or any other entity, if you are
a credit union, what you cannot do
directly under this rule, so there
is an anti evasion provision, and
I think you may also be getting at
the fact that there is a question in
the preamble with regard to CUSOs.
It's a long standing question.
A similar question was also asked back in
2011, and that's an opportunity for the
agency to get feedback on CUSOs and to
Vice Chairman Kyle Hauptman: But the, the
Staff 2: word
Vice Chairman Kyle Hauptman: credit
union service organization is not in.
No,
Staff 2: it's not.
And it's not in the regulation either.
Vice Chairman Kyle Hauptman: Um, I asked
our staff to eat our own cooking here.
Because remember, we can't
say we're here to do this.
Well, Congress mandated it.
No, they did.
But we know there's other ways to do it.
When this agency and the other
agencies are party to it.
And by the way, this will not become
law probably anytime, while I'm here.
Because the Fed opposes it.
Uh, hasn't not approved it yet.
Flat out opposes it that's why this is
not going to go in a federal register
since we went well beyond what
Congress said We can't complain
that it's too burdensome.
I asked the staff to eat our own
cooking I said let's put ourselves
in the in the shoes of a large
credit union and Mock it up.
See what you would do, right?
How long does it take?
You know, etc I've large credit union
have to comply with this and actually
write up what you expect them to report
to us just to get a Handle on it right
remember no one on earth understands this
more and, and doesn't have to interpret
it more than the people who wrote it.
They're the only people as of
today that actually have to know
exactly how to do it, right?
We don't have to interpret it.
There are words.
So this should be the easiest
possible thing, right?
Uh, the only people who know exactly
what it means, no interpretation, no
guidelines, and don't actually have to
get in trouble for doing it since it was
just an exercise, uh, for doing it poorly.
Um, I think it's crucial for government
to understand what it demands of others.
I've said it before, the only people
who think compliance is easy are
the people who don't have to do it.
Here's what I received after some
time was spent in this exercise.
Altogether, this exercise took
three team members approximately
20 hours to complete, including
drafting, revising, and clearing
the materials for one employee.
Creating the initial template
for the annual incentive based
compensation plan for the CEO It
took three hours and completing the
annual review took one hour, which
we believe is accurate for similar.
This is for one human being.
And remember, we're the ones
who know the rules the best.
We wrote it.
Zero interpretation needed on it.
So that's quite a bit of time and effort.
And it doesn't even include the stress
level associated with you actually
having to submit it to your regulator.
Finally, the incentives for
regulators need examination.
I've mentioned this before.
In the long run, the agencies will
act according to its incentives.
Those incentives, in the absence of a
profit motive, are power, publicity,
prestige, and at some agencies, are
post regulator job opportunities.
The harder the regulations are to
comply with, and the harsher the
enforcement, the higher the market
value is for former regulators.
Government agencies should examine
their own incentives and ensure they
align with that of the American public.
I would extend the same thing to
government as a whole, not just agencies.
Since political interference in the
housing market was a leading cause of
the crisis, people got political benefits
for themselves, forcing everyone in this
room to back over half of the subprime
mortgages that existed via government
entities, whether we asked for him or not.
They got benefits for themselves,
and the rest of us paid the cost.
Government interference in the
housing market was key, and that is
an incentive issue that some might
consider important, uh, as well.
That concludes my remarks.
Chairman Todd Harper: Thank you so much.
Thank you so much, Board Member Otsuka.
Board Member Tanya Otsuka: Thank you.
Um, thank you to the staff
for your presentation and
all your work on this rule.
Um, I really appreciate it.
Finalizing this rule
is a long time coming.
As Chair Harper noted, this Sunday
marks the 14th anniversary of the
passage of the Dodd Frank Act.
In other words, um, for over a
decade, the financial, uh, federal
financial regulators have failed to
implement this crucial regulatory
tool that Congress passed.
Specifically tasked us with doing.
Hopefully we are on the way to changing
this as the NCAA joins the FHFA, OCC
and FDIC in re proposing this role.
Today, I urge our colleagues at the sec
and the federal reserve to do the same
as many of you have heard me say, it.
Two of the defining moments of my
career were working in the aftermath
of the global financial crisis and
dealing with the failure of Silicon
Valley Bank and, uh, the other
two banks that failed that spring.
In both cases, we saw bank CEOs
get paid millions as their banks
failed, often in the form of
bonuses or incentive based pay.
If your institution fails on your watch
and you still receive your incentive
based pay, I am not sure what exactly
you're being incentivized to do.
At the time of its collapse,
SVB had the Uh, over 30
unresolved supervisory warnings.
Still, its CEO, Greg Becker, received a 1.
5 million bonus as part of his
2022 compensation package that was
worth about 10 million in total.
Many of us also vividly remember when
Wall Street CEOs still got their bonuses
even as their companies needed billions of
dollars of taxpayer, excuse me, billions
of taxpayer rescue dollars to stop them
leaving during the financial crisis.
We, as regulators, need to be able to
ensure that incentive based pay Actually
incentivizes prudent management and aligns
with safe and sound banking practices.
In the credit union space, we
are seeing both a rise in total
executive pay and incentive-based
pay data from the 2023 EQs.
Executive Compensation survey show
that executive pay among credit
unions has increased on average
by 8% from the previous year.
Industry experts have noted that
historically, credit union CEO
pay grew annually by three to 4%.
The survey also showed that
bonuses account for 20 to 25
percent of the total compensation
for executives at credit unions.
Another industry survey published in
2022 showed that 25 percent of CEOs at
credit unions with over a billion dollars
in assets received long term incentives
from just 10 percent of CEOs in 2017.
And the number of credit unions with
assets equal to or greater than a
billion are increasing at a steady rate.
Between the year 2000 and
March of this year, the U.
S.
has gone from having 43 credit unions
with over a billion in assets to 443.
In the last five years alone, we have
seen 133 credit unions across the U.
S.
Uh, excuse me, across the one
billion dollar asset mark.
Given these trends, it makes perfect
sense that the rule would only apply to
the largest credit unions, those with
a billion dollars in assets or more.
These are not necessarily small
credit unions with just a handful
of employees and volunteers.
Frankly, the leadership at many
very small credit unions are
probably not getting paid enough.
This rule would apply to some of the most
complex credit unions whose mismanagement
or failure could send shockwaves
through the entire credit union system.
And, you know, this, we are not
just required to do this, uh, rule.
The reason we're not, we're doing
this rule is not just because
Congress required us to do it.
It is because we do have a duty to
protect the share insurance fund.
And, uh, We need to, we need to issue
rules, not because we are worried
that institutions might get dinged
or might have to do more paperwork.
Those are considerations, but it is
important for us as a regulator and
insurer to have enforceable rules
that protect the share insurance fund.
It's good for the system and it's good
for the American people and taxpayers.
This coincides, this rulemaking
coincides with the fact that we are
experiencing a wave of retirements
in our leadership ranks among credit
unions and those credit unions need to
be able to attract and retain talent.
Offering incentive based pay is one
way to do so and in that sense it
is fitting that we're voting on both
the succession planning and incentive
based pay proposal today as both rules
provide additional stewardship as our
credit union system continues to grow.
To that end, the proposed rule aims
to put more safeguards in place
to ensure incentive based pay is
aligned with the proper incentives,
such as sound governance practices
and risk management controls.
It includes prohibitions intended to
make these compensation arrangements
more sensitive to risk, such as
banning incentive pay that does
not include risk adjustment of
awards, deferral of payments, and
forfeiture and clawback provisions.
These provisions would help Safeguard
credit unions from the types
and features of incentive-based
compensation arrangements that
encourage inappropriate risks.
We want credit union management to
be adequately compensated and be
able to attract and retain talent.
I do think that's important.
I think it's important for leaders of
financial institutions, including credit.
To be adequately compensated for what are
very hard and increasingly complex jobs.
That however, is, excuse me, however,
it is our job as a regulator to
ensure that credit unions are doing
that in a prudent way to protect
our system of cooperative credit.
So for these reasons, I strongly support
the re proposal and I really thank staff
for all the hard work that went into it.
Chairman Todd Harper: Thank you very much.
Um, board member ska, is there a motion.
Board Member Tanya Otsuka: I move
that the board approve proposed
rule incentive based compensation
arrangements 12 CFR parts 741 and
751 for a 60 day comment period as
attached to the board action memorandum.
Chairman Todd Harper: Is there a second?
Hearing none, I second the motion.
All those in favor say aye.
Aye.
Aye.
All those opposed say nay.
Nay.
The ayes have it and let the record
show that the motion passes 2 to 1.
Samantha: This concludes this item.
If your Credit union could use assistance
with your exam, reach out to Mark Treichel
on LinkedIn, or at mark Treichel dot com.
This is Samantha Shares and
we Thank you for listening.