WEBVTT NOTE This file was generated by Descript 00:00:05.460 --> 00:00:07.350 Samantha: Hello, this is Samantha Shares. 00:00:07.939 --> 00:00:12.660 This episode covers N C U A’s new proposed rule on Proposed Rule Incentive 00:00:12.690 --> 00:00:16.770 Based Compensation Arrangements voted on at the July 18th Board Meeting. 00:00:17.350 --> 00:00:19.990 The proposed rule passed by a vote of 2 to 1. 00:00:20.697 --> 00:00:23.757 The following is a word for word real audio of that item. 00:00:24.247 --> 00:00:27.437 This podcast is educational and is not legal advice. 00:00:27.867 --> 00:00:31.857 We are sponsored by Credit Union Exam Solutions Incorporated, whose 00:00:31.857 --> 00:00:34.967 team has over two hundred and Forty years of National Credit 00:00:34.967 --> 00:00:36.797 Union Administration experience. 00:00:37.317 --> 00:00:40.997 We assist our clients with N C U A so they save time and money. 00:00:41.347 --> 00:00:45.367 If you are worried about a recent, upcoming or in process N C U A 00:00:45.367 --> 00:00:49.727 examination, reach out to learn how they can assist at Mark Treichel DOT COM. 00:00:50.197 --> 00:00:54.547 Also check out our other podcast called With Flying Colors where we provide tips 00:00:54.547 --> 00:00:57.147 on how to achieve success with N C U A. 00:00:57.867 --> 00:00:59.447 And now the N C U A Board. 00:00:59.787 --> 00:01:03.937 The second item of business today is Proposed Rule Incentive Based Compensation 00:01:03.937 --> 00:01:08.497 Arrangements 12 CFR Parts 741 and 751. 00:01:08.627 --> 00:01:13.957 Staff presenting are John Barry, Policy Officer, Office of Examination and 00:01:13.957 --> 00:01:18.537 Insurance, and Ghira Bose, Senior Staff Attorney, Office of General Counsel. 00:01:19.207 --> 00:01:23.447 Staff available for questions include Amanda Parkhill, Deputy Director, 00:01:23.667 --> 00:01:28.277 Office of Examination and Insurance and Ariel Pereira, uh, Senior Staff 00:01:28.297 --> 00:01:29.967 Attorney, Office of General Counsel. 00:01:29.977 --> 00:01:34.437 Good morning, John and Kira, Amanda and Ariel, uh, John and Kira. 00:01:34.787 --> 00:01:36.707 Uh, you may begin whenever you are ready. 00:01:37.097 --> 00:01:37.797 Staff 2: Thank you, Chairman. 00:01:37.797 --> 00:01:38.767 Good morning, everyone. 00:01:38.777 --> 00:01:43.557 Chairman Harper, Vice Chairman Hopman, and Board Member Otsuka, we are here today to 00:01:43.557 --> 00:01:48.857 present for your consideration a proposed rule entitled Incentive Based Compensation 00:01:48.857 --> 00:01:54.907 Arrangements to fulfill NCUA's obligations under Section 956 of the Dodd Frank Wall 00:01:54.907 --> 00:01:57.217 Street Reform and Consumer Protection Act. 00:01:57.767 --> 00:02:03.237 Section 956 requires NCUA and five other agencies, the Federal Reserve Board, 00:02:03.397 --> 00:02:08.897 Federal Deposit Office of the Comptroller of the Currency, Securities and Exchange 00:02:08.897 --> 00:02:13.697 Commission, and Federal Housing Finance Agency to jointly prescribe regulations 00:02:13.697 --> 00:02:18.017 or guidelines With respect to incentive based compensation practices at 00:02:18.017 --> 00:02:20.507 certain covered financial institutions. 00:02:20.977 --> 00:02:25.927 Specifically, Section 956 requires that the agencies Prohibit at types of 00:02:25.927 --> 00:02:29.807 incentive based payment arrangement or any feature of any such arrangements. 00:02:30.217 --> 00:02:33.567 that the regulators determine encourage inappropriate risks by 00:02:33.567 --> 00:02:35.557 covered financial institutions. 00:02:35.917 --> 00:02:39.527 One, by providing an executive officer, employee, director, or 00:02:39.527 --> 00:02:43.427 principal shareholder of the covered financial institution with excessive 00:02:43.427 --> 00:02:45.297 compensation, fees, or benefits. 00:02:45.932 --> 00:02:49.432 Or two, that could lead to material financial loss to the 00:02:49.432 --> 00:02:51.032 covered financial institution. 00:02:51.722 --> 00:02:56.522 Section 956 does not apply to institutions with less than 1 billion in assets. 00:02:56.942 --> 00:03:00.102 It does not require a financial institution that does not have an 00:03:00.102 --> 00:03:03.552 incentive based payment arrangement to make the disclosures required 00:03:03.562 --> 00:03:07.752 by Section 956, and it does not require the reporting of the actual 00:03:07.772 --> 00:03:10.012 compensation of particular individuals. 00:03:10.922 --> 00:03:13.822 To date, the agencies have issued two proposed rules. 00:03:14.177 --> 00:03:18.897 One in 2011 and the second in 2016, neither of which were finalized. 00:03:19.637 --> 00:03:26.117 This 2024 action is being taken by NCUA, FDIC, OCC, and FHFA. 00:03:26.482 --> 00:03:30.902 It involves reissuing the 2016 proposal for public notice and 00:03:30.902 --> 00:03:34.802 comment and requesting comment or input on alternatives that may be 00:03:34.802 --> 00:03:37.032 incorporated into a final rule. 00:03:37.272 --> 00:03:40.122 I'll now turn it over to John to discuss the proposal. 00:03:40.312 --> 00:03:40.922 Staff 1: Thank you, Gera. 00:03:41.112 --> 00:03:45.042 Good morning again, Chairman Harper, Vice Chairman Hoffman, and Board Member Otsuka. 00:03:45.392 --> 00:03:47.842 I would like to briefly summarize the contents of this proposed rule. 00:03:48.002 --> 00:03:50.212 The proposed rule identifies three levels of covered 00:03:50.212 --> 00:03:51.762 institutions subject to the rule. 00:03:52.062 --> 00:03:55.992 Level 1 institutions are those with assets equal to or greater than 250 billion. 00:03:56.347 --> 00:03:59.387 Level 2 institutions are those with assets greater than or equal to 50 00:03:59.387 --> 00:04:01.587 billion, but less than 250 billion. 00:04:01.737 --> 00:04:05.257 And level 3 institutions are those with assets greater than or equal to 1 billion, 00:04:05.437 --> 00:04:06.887 but less than 50 billion in assets. 00:04:07.407 --> 00:04:10.597 At this time, there are 449 federally insured credit unions that would be 00:04:10.597 --> 00:04:16.077 covered by this rule, with 447 being a level 3 and 2 being a level 2. 00:04:16.447 --> 00:04:18.277 We would have no level 1 credit unions. 00:04:18.862 --> 00:04:22.752 As noted earlier, this proposed rule prohibits, uh, incentive based 00:04:22.772 --> 00:04:25.822 compensation plans that provide excessive compensation or could lead 00:04:25.822 --> 00:04:27.192 to material loss at the credit union. 00:04:27.522 --> 00:04:30.902 The proposed rule contains six factors for determining whether compensation 00:04:30.922 --> 00:04:34.202 is excessive or unreasonable or disproportionate to the value of 00:04:34.202 --> 00:04:36.152 services performed by a covered person. 00:04:36.592 --> 00:04:38.992 These factors apply to institutions at all three levels. 00:04:39.292 --> 00:04:43.672 The factors must be considered are the combined value of all compensation 00:04:43.672 --> 00:04:46.812 and fees or benefits provided to the covered person, the compensation 00:04:46.812 --> 00:04:49.992 history of the covered person and others with comparable expertise at the 00:04:49.992 --> 00:04:53.562 credit union, the financial condition of the credit union, compensation 00:04:53.562 --> 00:04:57.182 practices at comparable credit unions based on such factors as asset size. 00:04:57.797 --> 00:05:01.507 geographic location, and the complexity of that credit union's operations, and for 00:05:01.507 --> 00:05:05.267 post employment benefits, the projected total cost and benefit to the credit 00:05:05.267 --> 00:05:10.837 union, and any connection that covered person, um, has with any fraudulent act 00:05:10.847 --> 00:05:14.497 or remission, breach of trust, or insider abuse with regard to that credit union. 00:05:15.037 --> 00:05:18.097 The proposed rule contains three key principles that must be considered 00:05:18.097 --> 00:05:23.562 when determining if incentive based compensation, uh, plays poses a 00:05:23.602 --> 00:05:25.362 material risk of loss to the crediting. 00:05:25.622 --> 00:05:29.442 The principles applied to this institution at all three levels and include whether 00:05:29.442 --> 00:05:32.432 the incentive based compensation arrangement appropriately balances 00:05:32.432 --> 00:05:36.242 risk and financial reward, whether the incentive based compensation arrangement 00:05:36.262 --> 00:05:39.822 is compatible with effective risk management and controls, and whether the 00:05:39.822 --> 00:05:43.692 incentive based compensation arrangement is supported by effective governance. 00:05:43.912 --> 00:05:47.162 With this proposal, the agencies expect that a covered institution would 00:05:47.172 --> 00:05:51.232 tailor its incentive based compensation program to its size, complexity, risk 00:05:51.252 --> 00:05:54.692 tolerance, business model and the business model of the institution consistent 00:05:54.732 --> 00:05:56.352 with the previously listed factors. 00:05:56.752 --> 00:05:59.292 The proposal requires that an institution's board of directors 00:05:59.332 --> 00:06:02.422 or a committee thereof be directly involved in the oversight of the 00:06:02.422 --> 00:06:03.942 incentive based compensation program. 00:06:04.317 --> 00:06:07.837 Specifically, the Board of Directors, or the committee thereof, must approve 00:06:07.857 --> 00:06:12.417 all incentive based compensation plans for senior executive officers, including 00:06:12.497 --> 00:06:16.267 awards and payouts, and approve all material exceptions or adjustments to 00:06:16.277 --> 00:06:18.557 plans covering senior executive officers. 00:06:18.917 --> 00:06:21.747 The last core requirement of the proposed rule involves recordkeeping. 00:06:22.567 --> 00:06:25.057 All covered institutions will have to document their incentive 00:06:25.057 --> 00:06:26.027 based compensation plans. 00:06:26.477 --> 00:06:29.237 Maintain them for seven years and provide them to the regulator 00:06:29.297 --> 00:06:31.217 upon request at a minimum. 00:06:31.367 --> 00:06:34.667 Records must include copies of all incentive based compensation plans, 00:06:34.907 --> 00:06:37.937 a record of who is subject to the plan, and a description of how the 00:06:37.937 --> 00:06:41.147 plan is consistent with effective risk management and controls. 00:06:41.537 --> 00:06:45.857 The proposed rule applies additional, more rigorous prohibitions and requirements to 00:06:45.857 --> 00:06:49.247 incentive-based compensation arrangements at level one and level two credit unions. 00:06:50.272 --> 00:06:53.462 These enhanced requirements include coverage of individuals considered to 00:06:53.462 --> 00:06:56.582 be significant risk takers, as well as the senior executive officers, 00:06:56.862 --> 00:07:00.782 enhanced disclosure and record keeping requirements, deferral of a portion of 00:07:00.782 --> 00:07:03.962 qualifying incentive based compensation in accordance with the rule, the 00:07:03.962 --> 00:07:07.392 requirement that unvested deferred incentive based compensation be at risk 00:07:07.392 --> 00:07:10.902 of downward adjustment or forfeiture under certain circumstances set forth 00:07:10.912 --> 00:07:14.112 in the rule, and inclusion of clawback provisions in qualifying incentive 00:07:14.112 --> 00:07:15.282 based compensation arrangements. 00:07:15.982 --> 00:07:18.522 An independent risk management and control requirements, and 00:07:18.522 --> 00:07:22.042 enhanced requirements relating to governance, policies, and procedures. 00:07:22.812 --> 00:07:26.382 Finally, the rule provides an implementation timeline of 18 months. 00:07:26.492 --> 00:07:30.022 It grandfathers existing plans for the life of those plans, and it also provides 00:07:30.322 --> 00:07:34.052 an 18 month window for institutions newly subject to the rule to comply. 00:07:34.272 --> 00:07:37.912 In other words, if a credit union surpasses 1 billion in total assets 00:07:37.912 --> 00:07:41.382 at a later point in time, that credit union will be afforded the same 18 00:07:41.382 --> 00:07:43.862 month period for implementing the required provisions of the rule. 00:07:44.527 --> 00:07:45.787 This concludes our comments. 00:07:45.827 --> 00:07:47.537 We are glad to answer any questions that you have. 00:07:48.157 --> 00:07:48.717 Thank you. 00:07:50.017 --> 00:07:52.677 Chairman Todd Harper: Thank you so much, Ghira and John, for your presentation 00:07:52.697 --> 00:07:57.257 on this proposed rule to implement the incentive based compensation requirements 00:07:57.257 --> 00:08:01.867 of Section 956 of the Dodd Frank Wall Street Reform and Consumer Protection Act. 00:08:02.317 --> 00:08:05.477 More importantly, thank you for your work on the interagency team. 00:08:05.742 --> 00:08:08.692 of federal regulators that developed this proposed rule. 00:08:08.982 --> 00:08:12.442 And thank you Amanda and Ariel for being available to respond to 00:08:12.442 --> 00:08:14.682 any questions that we may have. 00:08:14.682 --> 00:08:16.972 I know that this is a complex topic. 00:08:17.682 --> 00:08:21.992 In just three days, we will mark the 14th anniversary of the enactment 00:08:22.022 --> 00:08:26.442 into law of the Dodd Frank Wall Street Reform and Consumer Protection Act. 00:08:26.842 --> 00:08:30.472 And this September, we will mark the 16th anniversary of the 00:08:30.472 --> 00:08:33.382 collapse of Lehman Brothers and AIG. 00:08:33.707 --> 00:08:36.497 Both prominent events in the financial crisis and the 00:08:36.497 --> 00:08:37.907 Great Recession that followed. 00:08:38.417 --> 00:08:42.597 The Dodd Frank Act responded to those events and, among other things, called 00:08:42.597 --> 00:08:46.867 upon financial regulators to act on the issue of incentive compensation 00:08:47.047 --> 00:08:50.037 within nine months of enactment. 00:08:50.457 --> 00:08:54.337 So it's an understatement to say that this rulemaking is long overdue. 00:08:54.777 --> 00:08:58.477 It's actually an incomplete assignment about which lawmakers 00:08:58.477 --> 00:09:01.087 frequently inquire of me at hearings. 00:09:01.397 --> 00:09:03.847 They want to know when we are going to finish our homework. 00:09:04.217 --> 00:09:06.417 For me, the time to act is now. 00:09:06.567 --> 00:09:11.497 Specifically, Section 956 of the Dodd Frank Act requires federal financial 00:09:11.497 --> 00:09:15.927 regulators, including the National Credit Union Administration, to 00:09:15.927 --> 00:09:19.777 issue joint regulations or guidelines requiring disclosure and reporting 00:09:19.797 --> 00:09:21.457 of incentive based compensation. 00:09:21.757 --> 00:09:25.767 For senior executive officers and significant risk takers at 00:09:25.767 --> 00:09:29.687 financial institutions with more than one billion dollars in assets. 00:09:30.067 --> 00:09:34.197 It also requires us to establish a mechanism for deferring income 00:09:34.437 --> 00:09:38.007 and clawing back improper gains resulting from excessive risk 00:09:38.037 --> 00:09:40.332 taking when an institution fails. 00:09:40.802 --> 00:09:45.032 As noted earlier, the proposed rule we are considering today is identical 00:09:45.232 --> 00:09:48.512 to the proposed rule recently approved by the Federal Deposit Insurance 00:09:48.512 --> 00:09:52.482 Corporation, the Federal Housing Finance Agency, and the Office of the 00:09:52.482 --> 00:09:54.572 Comptroller of the Currency in May. 00:09:55.072 --> 00:10:00.752 This rule also re proposes the regulatory text issued in June 2016 and seeks 00:10:00.752 --> 00:10:04.732 public comment in the preamble on certain alternatives and questions. 00:10:05.642 --> 00:10:10.322 As in 2016, the proposed rule would establish a three-tiered system for 00:10:10.322 --> 00:10:12.842 covered, uh, financial institutions. 00:10:13.112 --> 00:10:18.602 Level one would cover institutions with $250 billion or greater in assets. 00:10:18.922 --> 00:10:22.192 Level two would cover those institutions between 50 billion 00:10:22.192 --> 00:10:24.802 and 1 billion, um, $250 billion. 00:10:24.862 --> 00:10:28.342 And level three would cover institutions between $1 billion 00:10:28.522 --> 00:10:30.022 and $50 billion in assets. 00:10:30.897 --> 00:10:34.397 From the perspective of federally insured credit unions, the proposed 00:10:34.397 --> 00:10:37.217 rules impact is relatively small. 00:10:37.697 --> 00:10:41.587 As of the end of the first quarter of 2024, there were no federally 00:10:41.587 --> 00:10:47.027 insured credit unions in level 1, uh, as, uh, John noted in his remarks. 00:10:47.177 --> 00:10:52.647 There were two credit unions that were level 2, uh, one had, uh, 50 00:10:52.657 --> 00:10:57.007 some billion dollars and one was, uh, At 170 some billion dollars. 00:10:57.317 --> 00:11:01.607 And then there were 440 some credit unions in level three. 00:11:02.137 --> 00:11:05.477 As such the vast majority of credit unions, in fact, more 00:11:05.477 --> 00:11:09.547 than 90 percent of credit unions would be exempt from this rule. 00:11:10.457 --> 00:11:14.037 Critics of this proposed rule will say that it shouldn't apply to credit 00:11:14.037 --> 00:11:16.327 unions, but the statute is clear. 00:11:16.717 --> 00:11:20.677 The rule must apply to credit unions with 1 billion in assets or more. 00:11:21.177 --> 00:11:25.147 Critics of the rule might also claim that credit unions were not responsible for the 00:11:25.147 --> 00:11:27.557 financial crisis or the Great Recession. 00:11:27.957 --> 00:11:31.047 The agency, however, cannot change what Congress required. 00:11:31.437 --> 00:11:35.087 Credit unions with more than 1 billion in assets are covered by the law. 00:11:35.567 --> 00:11:36.827 That point is clear. 00:11:37.427 --> 00:11:41.417 Some may also claim that credit union compensation practices are different 00:11:41.657 --> 00:11:43.247 from other financial providers. 00:11:43.842 --> 00:11:48.612 That may largely be true, but there are clear examples of excessive incentive 00:11:48.742 --> 00:11:52.442 based compensation contributing to the failures of consumer and 00:11:52.442 --> 00:11:57.362 corporate credit unions nearly 16 years ago during the financial crisis. 00:11:57.452 --> 00:12:02.072 A prime example of that is the failure of Cal State 9 Credit Union. 00:12:02.522 --> 00:12:05.117 That failure cost the Share Insurance Fund more than 1 billion. 00:12:05.357 --> 00:12:07.647 170 million. 00:12:08.027 --> 00:12:12.677 Moreover, the material loss review of Cal State nine found that quote an 00:12:12.677 --> 00:12:18.217 incentive compensation program that paid it nearly 400, 000 in bonuses to the 00:12:18.217 --> 00:12:24.367 credit union's CFO between 2006 and 2007, based on net income generated by the 00:12:24.367 --> 00:12:26.807 credit union's home equity loan program. 00:12:27.017 --> 00:12:32.337 was one of two factors that contributed significantly to Cal State 9's 00:12:32.337 --> 00:12:36.927 excessive concentration of assets and indirect home equity lines of credit 00:12:37.137 --> 00:12:39.167 that eventually led to its demise. 00:12:39.807 --> 00:12:44.487 In another example, Western Corporate Federal Credit Union pursued a strategy 00:12:44.487 --> 00:12:48.677 of generating more interest income than would be available from deposits it held. 00:12:49.062 --> 00:12:53.682 WestCorp used this income to pay high rates on its member certificates and 00:12:53.682 --> 00:12:57.862 to generate increased net interest income to support operational expenses, 00:12:58.092 --> 00:13:02.302 including providing substantial compensation increases for its executives. 00:13:02.682 --> 00:13:07.702 Between 2002 and 2008, the total annual compensation for the leadership 00:13:07.702 --> 00:13:09.792 team increased by an average of 88%. 00:13:11.692 --> 00:13:15.542 These executives pocketed enormous profits while the corporate, uh, 00:13:16.072 --> 00:13:19.612 corporate's members and ultimately the credit union system wore 00:13:19.612 --> 00:13:21.782 the cost of Westcorp's failure. 00:13:22.542 --> 00:13:26.562 To help avoid similar situations in the future, the NCOA is required by 00:13:26.562 --> 00:13:31.462 Congress to issue a joint incentive based compensation regulation or guidelines 00:13:31.592 --> 00:13:33.722 and that is what we are doing here today. 00:13:34.282 --> 00:13:38.132 Some may also assert that we have learned our lessons and what happened 00:13:38.132 --> 00:13:41.092 in 2008 cannot happen again in 2024. 00:13:41.102 --> 00:13:43.242 For I wish that were true. 00:13:43.592 --> 00:13:44.512 But it is not. 00:13:44.902 --> 00:13:48.802 Just last year, we saw how excessive risk taking by certain banks 00:13:48.842 --> 00:13:50.572 walked our financial markets. 00:13:50.902 --> 00:13:56.092 As noted in the proposed rule, a report on the failure of Silicon Valley Bank, 00:13:56.302 --> 00:14:00.692 for example, noted that the compensation packages of senior management were 00:14:00.692 --> 00:14:05.572 tied to short term earnings and equity returns did not include risk metrics. 00:14:05.912 --> 00:14:10.102 That same report concluded that the bank's managers had a financial 00:14:10.102 --> 00:14:12.452 incentive to focus on short term profit. 00:14:12.682 --> 00:14:14.512 Over sound risk management. 00:14:15.022 --> 00:14:18.892 A consistent set of enforceable standards across financial regulators 00:14:19.102 --> 00:14:23.602 would level the playing field, avoid regulatory arbitrage, and help ensure 00:14:23.602 --> 00:14:27.082 that incentive-based compensation arrangements at covered financial 00:14:27.082 --> 00:14:31.527 institutions are not excessive and do not lead to material financial losses. 00:14:33.462 --> 00:14:37.212 Lastly, some may assert that in passing Section 9 56, Congress 00:14:37.212 --> 00:14:40.122 allowed the agencies to issue joint guidelines instead of a rule. 00:14:40.962 --> 00:14:44.692 That is correct, but guidelines are an imperfect solution in this 00:14:44.692 --> 00:14:46.972 instance, as they are unenforceable. 00:14:47.412 --> 00:14:51.492 We cannot cite guidelines in documents of resolution, and in the event 00:14:51.492 --> 00:14:55.062 of future failures resulting from excessive greed, we will lack the 00:14:55.062 --> 00:14:58.992 regulatory structure and authority needed to claw back excessive gains. 00:14:59.562 --> 00:15:01.117 I know the need from these three reports. 00:15:01.277 --> 00:15:03.827 for these reforms from first hand experience. 00:15:04.027 --> 00:15:07.367 As part of my work in helping to draft the financial, this financial 00:15:07.367 --> 00:15:11.357 reform provision, it was clear then, and it's clear now, that Congress 00:15:11.587 --> 00:15:16.177 and the American people want senior executives, wrongdoers, and fat cats 00:15:16.217 --> 00:15:20.267 at large financial institutions held accountable for any irresponsible 00:15:20.287 --> 00:15:22.167 and damaging business practices. 00:15:22.557 --> 00:15:25.597 Greedy executives should not earn excessive bonuses while 00:15:25.597 --> 00:15:26.877 taxpayers foot the bill. 00:15:27.047 --> 00:15:28.527 When their institutions fail. 00:15:29.097 --> 00:15:33.437 This rulemaking effort is about providing transparency and accountability. 00:15:33.737 --> 00:15:38.127 This regulatory effort will better focus the leaders of financial firms on the 00:15:38.127 --> 00:15:42.607 long term health of the company instead of just their short term personal gain. 00:15:42.927 --> 00:15:47.297 That's good for the credit union system, it's good for our financial markets, and 00:15:47.297 --> 00:15:48.987 it's good for the share insurance fund. 00:15:49.337 --> 00:15:52.187 For these reasons, I strongly support this proposed rule. 00:15:52.187 --> 00:15:53.887 That concludes my remarks. 00:15:54.107 --> 00:15:55.587 I now recognize the Vice Chairman. 00:15:56.692 --> 00:15:57.132 Vice Chairman Kyle Hauptman: You bet. 00:15:57.222 --> 00:15:58.462 Uh, thanks for the presentation. 00:15:58.862 --> 00:16:00.152 Uh, quite a bit of effort. 00:16:00.212 --> 00:16:03.902 Uh, can I ask this, for here, how many folks were involved 00:16:03.902 --> 00:16:07.172 in general in preparing for this, uh, presentation today? 00:16:07.192 --> 00:16:07.902 Yeah, I can answer that. 00:16:07.902 --> 00:16:08.422 For the board meeting? 00:16:08.572 --> 00:16:11.522 Staff 1: Um, for the board meeting, well, there's, there were, uh, four individuals 00:16:11.532 --> 00:16:15.952 that were involved, um, in the, in the interagency meetings and in assisting 00:16:15.952 --> 00:16:17.412 with the development of the rule. 00:16:17.707 --> 00:16:21.097 Uh, three, uh, three from the Office of General Counsel and one from, uh, the 00:16:21.097 --> 00:16:22.717 Office of Examination and Insurance. 00:16:22.717 --> 00:16:27.117 And then our work was subject to higher level supervisory reviews. 00:16:27.477 --> 00:16:28.957 Well, for the board meeting 00:16:28.957 --> 00:16:30.737 Vice Chairman Kyle Hauptman: specifically, not just the rule itself. 00:16:30.917 --> 00:16:32.077 The same, same individual. 00:16:32.077 --> 00:16:32.427 Same group. 00:16:32.457 --> 00:16:36.697 I remember when I had a briefing on this there were 11 staff members, uh, besides 00:16:36.707 --> 00:16:38.277 my staff, there were 11 on the call. 00:16:38.897 --> 00:16:42.117 Um, I say that because I want to note 00:16:44.927 --> 00:16:46.847 that work for this meeting could have been avoided. 00:16:46.847 --> 00:16:49.227 I offered to address this item via notation vote. 00:16:50.027 --> 00:16:53.637 If my colleagues would support halting the publication of each credit union's, 00:16:53.687 --> 00:16:57.037 uh, total income from overdraft and NSF fees, with their quick name 00:16:57.037 --> 00:16:58.017 of the credit union next to it. 00:16:58.427 --> 00:17:01.247 I suggest that NCA examiners could still have access to that data, and 00:17:01.257 --> 00:17:04.397 we could publish various forms of aggregate data, you know, 20th and 00:17:04.397 --> 00:17:05.667 80th percentiles, that sort of thing. 00:17:06.037 --> 00:17:09.537 Uh, my suggestion was rejected, all to maintain a policy that still, as of 00:17:09.537 --> 00:17:11.707 today, lacks any legitimate justification. 00:17:12.157 --> 00:17:14.757 As you might expect, law firms are already positioning themselves 00:17:14.757 --> 00:17:15.987 to extract more settlements. 00:17:16.412 --> 00:17:20.972 from the institutions we insure, which is a very odd thing for NCUA to promote. 00:17:21.622 --> 00:17:24.302 Uh, to today's rule on incentive compensation. 00:17:24.322 --> 00:17:27.902 Um, I can't support it because it exceeds what Congress mandated and does 00:17:27.902 --> 00:17:29.632 so in an intrusive and harmful manner. 00:17:30.412 --> 00:17:31.702 There was a better way to do this. 00:17:32.112 --> 00:17:35.122 I want to quote FDIC Vice Chairman Travis Hill, who already 00:17:35.132 --> 00:17:36.272 voted against this same rule. 00:17:36.532 --> 00:17:42.442 Proposed rule, as his comments echo my own, begin quote, In 2010, the banking 00:17:42.442 --> 00:17:47.282 agencies issued guidance and adopted a principles based approach to help ensure 00:17:47.282 --> 00:17:51.232 that incentive compensation policies do not encourage imprudent risk taking. 00:17:51.582 --> 00:17:55.362 Notably, the 2010 guidance asserted that a principles based approach is the 00:17:55.362 --> 00:17:59.332 most effective way to address incentive compensation practices, given the 00:17:59.332 --> 00:18:02.942 differences in the size and complexity of banking organizations covered by the 00:18:02.942 --> 00:18:06.962 guidance and the complexity, diversity, and range of Incentive compensation 00:18:07.712 --> 00:18:09.632 arrangements by those organizations. 00:18:10.012 --> 00:18:13.852 The guidance established as expectations that incentive comp would balance risk 00:18:13.902 --> 00:18:17.372 and financial results in a manner that does not encourage employees to expose 00:18:17.372 --> 00:18:21.082 their organizations, to imprudent risk, and have provided different options 00:18:21.082 --> 00:18:25.562 that banks can use to make compensation more sensitive to risk overall. 00:18:25.947 --> 00:18:29.837 Implementation of the 2010 guidance along with other supervisory engagements 00:18:29.837 --> 00:18:33.667 around that time contributed to meaningful change in incentive 00:18:33.667 --> 00:18:37.757 compensation practices across the industry, and the incentive compensation 00:18:37.757 --> 00:18:41.137 arrangements that were cited by some as a factor in the financial crisis 00:18:41.947 --> 00:18:43.867 are far less common today, end quote. 00:18:45.157 --> 00:18:48.147 One of the reasons, if you notice, the dates of that 2010 guidance 00:18:48.147 --> 00:18:51.647 was the agencies, including this one, were, uh, trying to head off 00:18:52.387 --> 00:18:54.237 Congress mandating something clunkier. 00:18:54.637 --> 00:18:57.637 Congress did at least, we can't say guidelines, we didn't have to do a rule. 00:18:58.497 --> 00:19:02.037 Um, the agencies, including NCUA, could have used that guidance as the 00:19:02.037 --> 00:19:05.527 foundation for a six agency effort to satisfy Congress directives. 00:19:07.557 --> 00:19:11.427 Let me ask you this, if we compare this proposed rule today, To the principles 00:19:11.427 --> 00:19:15.477 based approach in the 2010 guidance, which method is likely to create 00:19:15.557 --> 00:19:17.847 more opportunities for enforcement 00:19:17.847 --> 00:19:18.297 Staff 1: actions? 00:19:18.667 --> 00:19:19.157 Thank you, Mr. 00:19:19.157 --> 00:19:19.537 Vice Chair. 00:19:19.537 --> 00:19:20.477 I can answer that. 00:19:20.827 --> 00:19:24.447 Um, so just as initially I would just note that, um, the NCUA was 00:19:24.447 --> 00:19:27.027 not a party to the 2010 guidelines. 00:19:27.347 --> 00:19:27.967 It was the banking 00:19:27.967 --> 00:19:28.387 Vice Chairman Kyle Hauptman: regulators. 00:19:28.457 --> 00:19:28.817 That's right. 00:19:28.817 --> 00:19:29.557 The other banking agencies. 00:19:29.557 --> 00:19:31.537 I want to correct my remark. 00:19:31.537 --> 00:19:32.807 It was the banking agencies on that. 00:19:33.362 --> 00:19:37.022 Staff 1: But to, but to answer your question, um, in general, guidelines 00:19:37.022 --> 00:19:41.082 or the standards set by guidelines are not directly enforceable, uh, 00:19:41.092 --> 00:19:43.342 whereas those contained in a rule are. 00:19:43.462 --> 00:19:47.592 So, by the fact that this is a proposed rule, um, and if it's 00:19:47.592 --> 00:19:51.442 finalized, it would establish binding requirements, uh, the rule, the final 00:19:51.442 --> 00:19:55.022 rule would be enforceable in a way that, that the guidelines are not. 00:19:55.512 --> 00:19:56.607 Vice Chairman Kyle Hauptman: Well, obviously rules are important. 00:19:56.807 --> 00:19:59.697 Uh, can create enforcement actions in a way that guidance doesn't, but 00:19:59.707 --> 00:20:05.607 particularly going from a principles based approach, uh, to this one with a lot 00:20:05.607 --> 00:20:07.247 more paperwork has to be done correctly. 00:20:07.277 --> 00:20:10.467 Remember, you can get dinged just for not doing the paperwork right, uh, 00:20:10.477 --> 00:20:12.547 regardless of any actual harm done. 00:20:13.197 --> 00:20:19.787 But if you, put it this way, if you are one of the agencies on this and you wanted 00:20:19.867 --> 00:20:23.212 all else equal enforcement actions, You wanted the press releases, you wanted 00:20:23.212 --> 00:20:25.152 to report the dollar amount collected. 00:20:25.722 --> 00:20:29.502 Which approach would yield more, uh, number of enforcement 00:20:29.502 --> 00:20:30.592 actions and dollar amount? 00:20:30.892 --> 00:20:34.012 The principal's 2010 approach or this prescriptive 00:20:34.012 --> 00:20:34.552 Staff 1: rule today? 00:20:34.672 --> 00:20:36.292 It's hard to say, Mr. 00:20:36.292 --> 00:20:36.802 Vice Chair. 00:20:36.842 --> 00:20:40.192 Um, you know, the fact that we weren't part of the 2010 guidelines, 00:20:40.222 --> 00:20:41.582 I mean, we haven't No, I'm not asking 00:20:41.582 --> 00:20:42.952 Vice Chairman Kyle Hauptman: whether you were part of it or not, but we know they 00:20:42.952 --> 00:20:46.492 exist and we know they significantly reduce the type of incentive comp that 00:20:46.492 --> 00:20:47.882 some say contribute to the crisis. 00:20:48.227 --> 00:20:49.307 Staff 1: It, it can vary. 00:20:49.387 --> 00:20:52.977 Sometimes a principles based approach can, can lead to less enforcement 00:20:52.977 --> 00:20:57.487 actions, but sometimes it's just by their very nature, principles based can be, 00:20:57.797 --> 00:21:01.937 uh, less specific, um, and so they're much more open to subjectivity and 00:21:01.937 --> 00:21:04.267 interpretation, and so it's hard to say. 00:21:04.627 --> 00:21:08.417 Uh, without looking at the specifics and doing that sort of side by side 00:21:08.417 --> 00:21:13.487 comparison, um, it's hard to say that one necessarily would lead to less 00:21:13.497 --> 00:21:15.657 enforcement actions than, than another. 00:21:15.757 --> 00:21:18.457 Vice Chairman Kyle Hauptman: I would say the history of, uh, financial regulation, 00:21:18.497 --> 00:21:23.937 especially from non insurers is the more rules and the more prescriptive they are, 00:21:24.627 --> 00:21:26.427 the number of enforcement actions goes up. 00:21:26.697 --> 00:21:28.977 What I'm getting at is the incentive problem here. 00:21:29.167 --> 00:21:32.397 Government agencies face incentives and we're not examining those today 00:21:32.397 --> 00:21:33.437 and I'll talk about that in a minute. 00:21:33.967 --> 00:21:35.787 Uh, we're not mandated by Congress either. 00:21:36.077 --> 00:21:38.197 But it doesn't mean it's not something to think about. 00:21:38.447 --> 00:21:40.117 The incentive to have enforcement actions. 00:21:41.077 --> 00:21:44.397 If you don't have profit, it's power, publicity, prestige, and in some agencies, 00:21:44.397 --> 00:21:45.917 post employment job opportunities. 00:21:46.227 --> 00:21:48.967 The harsher your enforcement actions, and the harder it is to follow, the higher 00:21:48.967 --> 00:21:50.817 the market value for former regulators. 00:21:51.127 --> 00:21:56.487 I would say that if you look at, in the long run, you can predict exactly 00:21:56.487 --> 00:21:59.577 what agencies do if you look at those incentives in front of them. 00:21:59.637 --> 00:22:02.707 So we have an incentive problem here that is, I think, harming the American public. 00:22:03.347 --> 00:22:06.787 Um, um, Uh, let me go back to this. 00:22:06.917 --> 00:22:09.657 There's unnecessary language about extending these burdensome requirements to 00:22:09.657 --> 00:22:13.467 credit union service organizations, CUSOs, question, did Congress mandate that? 00:22:14.357 --> 00:22:15.557 Staff 2: I can take that question. 00:22:15.557 --> 00:22:19.617 No, Congress does not mandate that the rule or regulations or guidelines or 00:22:19.637 --> 00:22:24.442 however the want to implement the statute applied to QCIS, but what Congress does 00:22:24.442 --> 00:22:30.202 say is that the agencies should decide, they have discretion to apply the rule to 00:22:30.202 --> 00:22:34.022 any other financial institution that they determine should be treated as a covered 00:22:34.022 --> 00:22:35.772 financial institution under the rule. 00:22:35.772 --> 00:22:40.052 And to be clear, QSOs are not included under this rule. 00:22:40.052 --> 00:22:41.962 As covered financial institutions. 00:22:41.962 --> 00:22:43.462 Vice Chairman Kyle Hauptman: Software providers are not considered. 00:22:43.572 --> 00:22:45.862 Because if you consider them financial institutions, then boy, 00:22:45.862 --> 00:22:47.602 there's a whole lot of financial institutions in this country. 00:22:47.792 --> 00:22:52.262 Staff 2: Financially insured credit unions would be regulated under this proposal. 00:22:53.102 --> 00:22:53.382 Vice Chairman Kyle Hauptman: Right. 00:22:53.452 --> 00:22:56.292 But, uh, it mentions credit union service organizations and we are not there. 00:22:58.182 --> 00:22:59.702 Staff 2: And they're not covered under this rule. 00:22:59.792 --> 00:23:02.602 Vice Chairman Kyle Hauptman: Uh, but there is language, the word QSO is in there. 00:23:03.942 --> 00:23:08.332 Staff 2: You cannot do through a CUSO or any other entity, if you are 00:23:08.332 --> 00:23:11.632 a credit union, what you cannot do directly under this rule, so there 00:23:11.632 --> 00:23:14.462 is an anti evasion provision, and I think you may also be getting at 00:23:14.532 --> 00:23:18.882 the fact that there is a question in the preamble with regard to CUSOs. 00:23:19.312 --> 00:23:20.572 It's a long standing question. 00:23:20.572 --> 00:23:24.962 A similar question was also asked back in 2011, and that's an opportunity for the 00:23:24.962 --> 00:23:29.332 agency to get feedback on CUSOs and to 00:23:30.402 --> 00:23:30.972 Vice Chairman Kyle Hauptman: But the, the 00:23:31.932 --> 00:23:32.202 Staff 2: word 00:23:32.202 --> 00:23:33.912 Vice Chairman Kyle Hauptman: credit union service organization is not in. 00:23:33.967 --> 00:23:35.877 No, 00:23:36.057 --> 00:23:36.477 Staff 2: it's not. 00:23:36.477 --> 00:23:38.687 And it's not in the regulation either. 00:23:40.017 --> 00:23:43.277 Vice Chairman Kyle Hauptman: Um, I asked our staff to eat our own cooking here. 00:23:43.507 --> 00:23:47.147 Because remember, we can't say we're here to do this. 00:23:47.207 --> 00:23:48.457 Well, Congress mandated it. 00:23:48.667 --> 00:23:49.317 No, they did. 00:23:49.507 --> 00:23:50.687 But we know there's other ways to do it. 00:23:50.727 --> 00:23:53.207 When this agency and the other agencies are party to it. 00:23:53.207 --> 00:23:56.277 And by the way, this will not become law probably anytime, while I'm here. 00:23:56.457 --> 00:23:57.677 Because the Fed opposes it. 00:23:58.557 --> 00:24:00.217 Uh, hasn't not approved it yet. 00:24:00.532 --> 00:24:03.782 Flat out opposes it that's why this is not going to go in a federal register 00:24:06.822 --> 00:24:11.042 since we went well beyond what Congress said We can't complain 00:24:11.342 --> 00:24:12.202 that it's too burdensome. 00:24:12.822 --> 00:24:16.322 I asked the staff to eat our own cooking I said let's put ourselves 00:24:16.342 --> 00:24:20.652 in the in the shoes of a large credit union and Mock it up. 00:24:20.702 --> 00:24:21.762 See what you would do, right? 00:24:22.182 --> 00:24:22.992 How long does it take? 00:24:23.012 --> 00:24:26.552 You know, etc I've large credit union have to comply with this and actually 00:24:26.552 --> 00:24:29.262 write up what you expect them to report to us just to get a Handle on it right 00:24:29.262 --> 00:24:33.442 remember no one on earth understands this more and, and doesn't have to interpret 00:24:33.442 --> 00:24:34.522 it more than the people who wrote it. 00:24:34.542 --> 00:24:37.342 They're the only people as of today that actually have to know 00:24:37.352 --> 00:24:38.742 exactly how to do it, right? 00:24:38.742 --> 00:24:39.542 We don't have to interpret it. 00:24:39.542 --> 00:24:40.162 There are words. 00:24:41.302 --> 00:24:43.812 So this should be the easiest possible thing, right? 00:24:43.852 --> 00:24:47.862 Uh, the only people who know exactly what it means, no interpretation, no 00:24:47.862 --> 00:24:51.372 guidelines, and don't actually have to get in trouble for doing it since it was 00:24:51.372 --> 00:24:53.752 just an exercise, uh, for doing it poorly. 00:24:54.392 --> 00:24:57.702 Um, I think it's crucial for government to understand what it demands of others. 00:24:57.982 --> 00:25:00.132 I've said it before, the only people who think compliance is easy are 00:25:00.132 --> 00:25:01.362 the people who don't have to do it. 00:25:02.507 --> 00:25:05.017 Here's what I received after some time was spent in this exercise. 00:25:05.667 --> 00:25:09.057 Altogether, this exercise took three team members approximately 00:25:09.077 --> 00:25:12.127 20 hours to complete, including drafting, revising, and clearing 00:25:12.127 --> 00:25:14.277 the materials for one employee. 00:25:14.877 --> 00:25:17.307 Creating the initial template for the annual incentive based 00:25:17.317 --> 00:25:21.432 compensation plan for the CEO It took three hours and completing the 00:25:21.432 --> 00:25:25.342 annual review took one hour, which we believe is accurate for similar. 00:25:25.372 --> 00:25:26.432 This is for one human being. 00:25:27.282 --> 00:25:29.172 And remember, we're the ones who know the rules the best. 00:25:29.172 --> 00:25:29.602 We wrote it. 00:25:30.232 --> 00:25:31.772 Zero interpretation needed on it. 00:25:32.862 --> 00:25:34.282 So that's quite a bit of time and effort. 00:25:34.372 --> 00:25:37.392 And it doesn't even include the stress level associated with you actually 00:25:37.402 --> 00:25:38.692 having to submit it to your regulator. 00:25:39.492 --> 00:25:43.062 Finally, the incentives for regulators need examination. 00:25:43.202 --> 00:25:44.102 I've mentioned this before. 00:25:44.622 --> 00:25:47.692 In the long run, the agencies will act according to its incentives. 00:25:47.732 --> 00:25:52.252 Those incentives, in the absence of a profit motive, are power, publicity, 00:25:52.252 --> 00:25:55.972 prestige, and at some agencies, are post regulator job opportunities. 00:25:56.452 --> 00:25:59.242 The harder the regulations are to comply with, and the harsher the 00:25:59.242 --> 00:26:02.122 enforcement, the higher the market value is for former regulators. 00:26:03.202 --> 00:26:07.222 Government agencies should examine their own incentives and ensure they 00:26:07.222 --> 00:26:08.972 align with that of the American public. 00:26:09.422 --> 00:26:12.592 I would extend the same thing to government as a whole, not just agencies. 00:26:13.122 --> 00:26:18.192 Since political interference in the housing market was a leading cause of 00:26:18.192 --> 00:26:22.262 the crisis, people got political benefits for themselves, forcing everyone in this 00:26:22.262 --> 00:26:26.032 room to back over half of the subprime mortgages that existed via government 00:26:26.032 --> 00:26:27.652 entities, whether we asked for him or not. 00:26:28.072 --> 00:26:31.252 They got benefits for themselves, and the rest of us paid the cost. 00:26:31.292 --> 00:26:34.882 Government interference in the housing market was key, and that is 00:26:34.882 --> 00:26:39.492 an incentive issue that some might consider important, uh, as well. 00:26:39.602 --> 00:26:40.612 That concludes my remarks. 00:26:41.452 --> 00:26:42.082 Chairman Todd Harper: Thank you so much. 00:26:43.532 --> 00:26:45.052 Thank you so much, Board Member Otsuka. 00:26:47.012 --> 00:26:47.632 Board Member Tanya Otsuka: Thank you. 00:26:47.662 --> 00:26:49.932 Um, thank you to the staff for your presentation and 00:26:49.932 --> 00:26:51.722 all your work on this rule. 00:26:51.722 --> 00:26:53.557 Um, I really appreciate it. 00:26:53.687 --> 00:26:56.047 Finalizing this rule is a long time coming. 00:26:56.677 --> 00:26:59.467 As Chair Harper noted, this Sunday marks the 14th anniversary of the 00:26:59.467 --> 00:27:00.857 passage of the Dodd Frank Act. 00:27:01.467 --> 00:27:05.767 In other words, um, for over a decade, the financial, uh, federal 00:27:05.767 --> 00:27:08.947 financial regulators have failed to implement this crucial regulatory 00:27:08.947 --> 00:27:09.987 tool that Congress passed. 00:27:10.412 --> 00:27:12.242 Specifically tasked us with doing. 00:27:13.072 --> 00:27:17.212 Hopefully we are on the way to changing this as the NCAA joins the FHFA, OCC 00:27:17.212 --> 00:27:19.172 and FDIC in re proposing this role. 00:27:19.172 --> 00:27:24.332 Today, I urge our colleagues at the sec and the federal reserve to do the same 00:27:26.192 --> 00:27:28.222 as many of you have heard me say, it. 00:27:28.587 --> 00:27:31.887 Two of the defining moments of my career were working in the aftermath 00:27:31.967 --> 00:27:35.397 of the global financial crisis and dealing with the failure of Silicon 00:27:35.397 --> 00:27:39.177 Valley Bank and, uh, the other two banks that failed that spring. 00:27:39.987 --> 00:27:43.637 In both cases, we saw bank CEOs get paid millions as their banks 00:27:43.637 --> 00:27:47.067 failed, often in the form of bonuses or incentive based pay. 00:27:48.107 --> 00:27:52.337 If your institution fails on your watch and you still receive your incentive 00:27:52.337 --> 00:27:56.767 based pay, I am not sure what exactly you're being incentivized to do. 00:27:58.347 --> 00:28:01.907 At the time of its collapse, SVB had the Uh, over 30 00:28:01.907 --> 00:28:03.397 unresolved supervisory warnings. 00:28:03.837 --> 00:28:06.017 Still, its CEO, Greg Becker, received a 1. 00:28:06.017 --> 00:28:10.387 5 million bonus as part of his 2022 compensation package that was 00:28:10.387 --> 00:28:11.727 worth about 10 million in total. 00:28:12.877 --> 00:28:17.157 Many of us also vividly remember when Wall Street CEOs still got their bonuses 00:28:17.537 --> 00:28:21.727 even as their companies needed billions of dollars of taxpayer, excuse me, billions 00:28:21.797 --> 00:28:25.507 of taxpayer rescue dollars to stop them leaving during the financial crisis. 00:28:26.217 --> 00:28:30.882 We, as regulators, need to be able to ensure that incentive based pay Actually 00:28:30.882 --> 00:28:35.322 incentivizes prudent management and aligns with safe and sound banking practices. 00:28:36.342 --> 00:28:39.012 In the credit union space, we are seeing both a rise in total 00:28:39.012 --> 00:28:43.672 executive pay and incentive-based pay data from the 2023 EQs. 00:28:43.732 --> 00:28:47.452 Executive Compensation survey show that executive pay among credit 00:28:47.452 --> 00:28:50.422 unions has increased on average by 8% from the previous year. 00:28:51.032 --> 00:28:54.152 Industry experts have noted that historically, credit union CEO 00:28:54.152 --> 00:28:56.247 pay grew annually by three to 4%. 00:28:57.652 --> 00:29:00.312 The survey also showed that bonuses account for 20 to 25 00:29:00.322 --> 00:29:03.172 percent of the total compensation for executives at credit unions. 00:29:04.012 --> 00:29:08.182 Another industry survey published in 2022 showed that 25 percent of CEOs at 00:29:08.182 --> 00:29:12.012 credit unions with over a billion dollars in assets received long term incentives 00:29:12.542 --> 00:29:14.842 from just 10 percent of CEOs in 2017. 00:29:15.652 --> 00:29:18.752 And the number of credit unions with assets equal to or greater than a 00:29:18.752 --> 00:29:21.052 billion are increasing at a steady rate. 00:29:21.757 --> 00:29:26.357 Between the year 2000 and March of this year, the U. 00:29:26.357 --> 00:29:26.527 S. 00:29:26.527 --> 00:29:32.527 has gone from having 43 credit unions with over a billion in assets to 443. 00:29:33.217 --> 00:29:37.177 In the last five years alone, we have seen 133 credit unions across the U. 00:29:37.177 --> 00:29:37.187 S. 00:29:37.947 --> 00:29:40.947 Uh, excuse me, across the one billion dollar asset mark. 00:29:42.467 --> 00:29:45.227 Given these trends, it makes perfect sense that the rule would only apply to 00:29:45.237 --> 00:29:47.977 the largest credit unions, those with a billion dollars in assets or more. 00:29:48.627 --> 00:29:51.527 These are not necessarily small credit unions with just a handful 00:29:51.557 --> 00:29:52.947 of employees and volunteers. 00:29:53.777 --> 00:29:56.917 Frankly, the leadership at many very small credit unions are 00:29:56.957 --> 00:29:58.647 probably not getting paid enough. 00:29:59.637 --> 00:30:03.837 This rule would apply to some of the most complex credit unions whose mismanagement 00:30:03.847 --> 00:30:08.287 or failure could send shockwaves through the entire credit union system. 00:30:09.712 --> 00:30:16.922 And, you know, this, we are not just required to do this, uh, rule. 00:30:17.142 --> 00:30:20.012 The reason we're not, we're doing this rule is not just because 00:30:20.322 --> 00:30:22.262 Congress required us to do it. 00:30:22.262 --> 00:30:26.382 It is because we do have a duty to protect the share insurance fund. 00:30:27.112 --> 00:30:33.952 And, uh, We need to, we need to issue rules, not because we are worried 00:30:33.992 --> 00:30:38.652 that institutions might get dinged or might have to do more paperwork. 00:30:38.752 --> 00:30:43.592 Those are considerations, but it is important for us as a regulator and 00:30:43.592 --> 00:30:49.052 insurer to have enforceable rules that protect the share insurance fund. 00:30:49.362 --> 00:30:53.542 It's good for the system and it's good for the American people and taxpayers. 00:30:54.787 --> 00:30:58.447 This coincides, this rulemaking coincides with the fact that we are 00:30:58.447 --> 00:31:01.687 experiencing a wave of retirements in our leadership ranks among credit 00:31:01.707 --> 00:31:05.777 unions and those credit unions need to be able to attract and retain talent. 00:31:06.427 --> 00:31:10.527 Offering incentive based pay is one way to do so and in that sense it 00:31:10.527 --> 00:31:13.627 is fitting that we're voting on both the succession planning and incentive 00:31:13.627 --> 00:31:18.217 based pay proposal today as both rules provide additional stewardship as our 00:31:18.427 --> 00:31:20.267 credit union system continues to grow. 00:31:21.442 --> 00:31:24.482 To that end, the proposed rule aims to put more safeguards in place 00:31:24.482 --> 00:31:27.502 to ensure incentive based pay is aligned with the proper incentives, 00:31:28.062 --> 00:31:31.102 such as sound governance practices and risk management controls. 00:31:31.762 --> 00:31:35.232 It includes prohibitions intended to make these compensation arrangements 00:31:35.232 --> 00:31:38.582 more sensitive to risk, such as banning incentive pay that does 00:31:38.582 --> 00:31:42.492 not include risk adjustment of awards, deferral of payments, and 00:31:42.492 --> 00:31:44.172 forfeiture and clawback provisions. 00:31:45.092 --> 00:31:48.347 These provisions would help Safeguard credit unions from the types 00:31:48.347 --> 00:31:51.767 and features of incentive-based compensation arrangements that 00:31:51.767 --> 00:31:53.657 encourage inappropriate risks. 00:31:54.227 --> 00:31:57.557 We want credit union management to be adequately compensated and be 00:31:57.557 --> 00:31:59.147 able to attract and retain talent. 00:31:59.507 --> 00:32:00.947 I do think that's important. 00:32:00.947 --> 00:32:07.327 I think it's important for leaders of financial institutions, including credit. 00:32:08.022 --> 00:32:13.122 To be adequately compensated for what are very hard and increasingly complex jobs. 00:32:15.172 --> 00:32:21.572 That however, is, excuse me, however, it is our job as a regulator to 00:32:21.572 --> 00:32:25.982 ensure that credit unions are doing that in a prudent way to protect 00:32:25.982 --> 00:32:27.692 our system of cooperative credit. 00:32:28.232 --> 00:32:31.892 So for these reasons, I strongly support the re proposal and I really thank staff 00:32:31.892 --> 00:32:33.482 for all the hard work that went into it. 00:32:36.192 --> 00:32:37.362 Chairman Todd Harper: Thank you very much. 00:32:37.452 --> 00:32:39.612 Um, board member ska, is there a motion. 00:32:44.647 --> 00:32:46.277 Board Member Tanya Otsuka: I move that the board approve proposed 00:32:46.277 --> 00:32:50.227 rule incentive based compensation arrangements 12 CFR parts 741 and 00:32:50.227 --> 00:32:55.217 751 for a 60 day comment period as attached to the board action memorandum. 00:32:55.787 --> 00:32:56.627 Chairman Todd Harper: Is there a second? 00:32:57.617 --> 00:32:59.357 Hearing none, I second the motion. 00:32:59.387 --> 00:33:00.777 All those in favor say aye. 00:33:01.587 --> 00:33:01.907 Aye. 00:33:02.937 --> 00:33:03.247 Aye. 00:33:03.867 --> 00:33:05.167 All those opposed say nay. 00:33:05.287 --> 00:33:05.567 Nay. 00:33:06.177 --> 00:33:09.437 The ayes have it and let the record show that the motion passes 2 to 1. 00:33:09.847 --> 00:33:11.247 Samantha: This concludes this item. 00:33:11.947 --> 00:33:16.117 If your Credit union could use assistance with your exam, reach out to Mark Treichel 00:33:16.117 --> 00:33:18.827 on LinkedIn, or at mark Treichel dot com. 00:33:19.377 --> 00:33:22.097 This is Samantha Shares and we Thank you for listening.