Samantha: Hello, this is Samantha Shares.
This episode covers N C U Aâs Proposed Incentive-based Compensation Rule
The following is a summary of that 200 page proposal.
This podcast is educational and is not legal advice.
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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.
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This is Samantha Shares and we Thank you for listening.