Proposed Incentive-based Compensation Rule

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NCUA's Proposed Incentive-based Compensation Rule

This episode, hosted by Samantha Shares, provides a detailed summary of the NCUA's proposed incentive-based compensation rule, which implements Section 956 of the Dodd-Frank Act. This regulation is designed to address flawed compensation practices contributing to the 2008 financial crisis, covering financial institutions with $1 billion or more in assets.

 Introduction
 Overview of the Proposed Rule
 Scope of the Regulation
 Tiered Structure and Definitions
 Requirements for Covered Institutions
 Additional Requirements for Level 1 and Level 2 Institutions
 Regulatory Flexibility and International Context
 Public Comments and Enforcement Provisions
 Conclusion and Contact Information

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Samantha: Hello, this is Samantha Shares.

This episode covers N C U A’s Proposed
Incentive-based Compensation Rule

The following is a summary
of that 200 page proposal.

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.

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With Flying Colors where we provide tips

on how to achieve success with N C U A.

And now the summary.

The proposed rule implements Section
956 of the Dodd-Frank Act, addressing

concerns about flawed incentive-based
compensation practices that contributed

to the 2008 financial crisis.

It builds on previous proposals
from 2011 and 2016, incorporating

supervisory experience and
industry developments since then.

This regulation covers financial
institutions with $1 billion or

more in assets, including banks,
credit unions, Federal Home Loan

Banks, Fannie Mae, Freddie Mac, and
certain subsidiaries, but excludes

functionally regulated subsidiaries like
broker-dealers and investment advisers.

The rule establishes a tiered structure
with Level 1 institutions having $250

billion or more in assets, Level 2
with $50 billion to $250 billion,

and Level 3 with $1 billion to $50
billion, applying more stringent

requirements to larger institutions.

Key definitions in the rule include
"covered persons" (executive officers,

employees, directors, and principal
shareholders), "senior executive

officers" (defined roles such as
CEO and CFO), and "significant

risk-takers" (determined by compensation
level and risk exposure ability).

All covered institutions must prohibit
excessive compensation, ensure

incentive-based compensation appropriately
balances risk and reward, maintain board

oversight of compensation programs,
and comply with specific disclosure

and recordkeeping requirements.

Level 1 and Level 2 institutions face
additional requirements including

mandatory deferral of a portion of
incentive-based compensation, forfeiture

and downward adjustment policies,
clawback provisions, prohibitions on

certain practices like hedging, and
enhanced risk management, governance,

and policy documentation requirements.

The rule provides regulatory flexibility,
allowing regulators to apply stricter

standards to Level 3 institutions if
warranted and providing for modifications

as institutions change in size.

Implementation is proposed for 540 days
after the final rule's publication,

with grandfathering provisions for
existing compensation arrangements.

The proposal considers international
context, discussing related developments

in the European Union and United
Kingdom and aiming for alignment

with international standards.

Extensive regulatory analysis is
included, covering economic impact,

paperwork reduction, and regulatory
flexibility considerations.

The agencies are seeking public
comments on numerous aspects of the

proposal, including consideration of
alternative approaches in certain areas.

The rule is jointly proposed by the
Office of the Comptroller of the Currency,

Federal Deposit Insurance Corporation,
Federal Housing Finance Agency, and

National Credit Union Administration, with
the Federal Reserve and SEC noted as not

participating in this specific proposal.

Enforcement provisions are included,
along with considerations for how

the rules apply to institutions in
conservatorship or receivership.

Overall, this proposed rule represents
a comprehensive attempt to regulate

incentive-based compensation in the
financial sector, balancing the need

for effective compensation practices
with concerns about potential abuse

and systemic risk, with the ultimate
goal of promoting financial stability

and preventing excessive risk-taking.

This concludes the summary.

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.