Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 / Proposed Rules

21170 Federal Register / Vol. 76, No.
72 / Thursday, April 14, 2011 / Proposed Rules
DEPARTMENT OF THE TREASURY are proposing rules to implement • Mail: Office of the Comptroller of
section 956 of the Dodd-Frank Wall the Currency, 250 E Street, SW., Mail
Office of the Comptroller of the Street Reform and Consumer Protection Stop 2–3, Washington, DC 20219.
Currency Act. The proposed rule would require • Fax: (202) 874–5274.
the reporting of incentive-based • Hand Delivery/Courier: 250 E
12 CFR Part 42 compensation arrangements by a Street, SW., Mail Stop 2–3, Washington,
[Docket No. OCC–2011–0001] covered financial institution and DC 20219.
prohibit incentive-based compensation Instructions: You must include ‘‘OCC’’
RIN 1557–AD39 arrangements at a covered financial as the agency name and ‘‘Docket ID
institution that provide excessive OCC–2011–0001’’ in your comment. In
FEDERAL RESERVE SYSTEM compensation or that could expose the general, OCC will enter all comments
institution to inappropriate risks that received into the docket and publish
12 CFR Part 236 could lead to material financial loss. them on the Regulations.gov Web site
[Docket No. R–1410] DATES: Comments must be received by without change, including any business
May 31, 2011. or personal information that you
RIN 7100–AD69
provide such as name and address
ADDRESSES: Although the Agencies will
FEDERAL DEPOSIT INSURANCE information, e-mail addresses, or phone
jointly review all the comments numbers. Comments received, including
CORPORATION submitted, it would facilitate review of attachments and other supporting
the comments if interested parties send materials, are part of the public record
12 CFR Part 372 comments to the Agency that is the and subject to public disclosure. Do not
RIN 3064–AD56 appropriate Federal regulator, as enclose any information in your
defined in section 956(e) of the Dodd- comment or supporting materials that
DEPARTMENT OF THE TREASURY Frank Act for the type of covered you consider confidential or
financial institution addressed in the inappropriate for public disclosure.
Office of Thrift Supervision comments. Commenters are encouraged You may review comments and other
to use the title ‘‘Incentive-based related materials that pertain to this
12 CFR Part 563h Compensation Arrangements’’ to proposed rule by any of the following
[Docket No. OTS–2011–0004]
facilitate the organization and methods:
distribution of comments among the • Viewing Comments Electronically:
RIN 1550–AC49 Agencies. Interested parties are invited Go to http://www.regulations.gov. Select
to submit written comments to: ‘‘Document Type’’ of ‘‘Public
NATIONAL CREDIT UNION Office of the Comptroller of the
ADMINISTRATION Submission,’’ in ‘‘Enter Keyword or ID
Currency: Because paper mail in the Box,’’ enter Docket ID ‘‘OCC–2011–
Washington, DC area and at the OCC is 0001’’, and click ‘‘Search.’’ Comments
12 CFR Parts 741 and 751 subject to delay, commenters are will be listed under ‘‘View By
RIN 3133–AD88 encouraged to submit comments by the Relevance’’ tab at bottom of screen. If
Federal eRulemaking Portal or e-mail, if comments from more than one agency
SECURITIES AND EXCHANGE possible. Please use the title ‘‘Incentive- are listed, the ‘‘Agency’’ column will
COMMISSION based Compensation Arrangements’’ to indicate which comments were received
facilitate the organization and by the OCC.
17 CFR Part 248 distribution of the comments. You may • Viewing Comments Personally: You
[Release No. 34–64140; File no. S7–12–11] submit comments by any of the may personally inspect and photocopy
following methods: comments at the OCC, 250 E Street,
RIN 3235–AL06 • Federal eRulemaking Portal— SW., Washington, DC. For security
Regulations.gov: Go to http:// reasons, the OCC requires that visitors
FEDERAL HOUSING FINANCE
www.regulations.gov. Select ‘‘Document make an appointment to inspect
AGENCY
Type’’ of ‘‘Proposed Rule’’, and in ‘‘Enter comments. You may do so by calling
Keyword or ID Box’’, enter Docket ID (202) 874–4700. Upon arrival, visitors
12 CFR Part 1232
‘‘OCC–2011–0001’’, and click ‘‘Search.’’ will be required to present valid
RIN 2590–AA42 On ‘‘View By Relevance’’ tab at bottom government-issued photo identification
of screen, in the ‘‘Agency’’ column, and to submit to security screening in
Incentive-Based Compensation locate the proposed rule for OCC, in the order to inspect and photocopy
Arrangements ‘‘Action’’ column, click on ‘‘Submit a comments.
AGENCY: Office of the Comptroller of the Comment’’ or ‘‘Open Docket Folder’’ to • Docket: You may also view or
Currency, Treasury (OCC); Board of submit or view public comments and to request available background
Governors of the Federal Reserve view supporting and related materials documents and project summaries using
System (Board); Federal Deposit for this proposed rule. the methods described above.
Insurance Corporation (FDIC); Office of • Click on the ‘‘Help’’ tab on the Board of Governors of the Federal
Thrift Supervision, Treasury (OTS); Regulations.gov home page to get Reserve System: You may submit
kgrant on DSK8KYBLC1PROD with PROPOSALS2
National Credit Union Administration information on using Regulations.gov, comments, identified by Docket No. R–
(NCUA); U.S. Securities and Exchange including instructions for submitting or 1410 and RIN No. 7100–AD69, by any
Commission (SEC); and Federal Housing viewing public comments, viewing of the following methods:
Finance Agency (FHFA). other supporting and related materials, • Agency Web Site: http://
ACTION: Proposed Rule.
and viewing the docket after the close www.federalreserve.gov. Follow the
of the comment period. instructions for submitting comments at
SUMMARY:The OCC, Board, FDIC, OTS, • E-mail: http://www.federalreserve.gov/
NCUA, SEC, and FHFA (the Agencies) regs.comments@occ.treas.gov. generalinfo/foia/ProposedRegs.cfm.
VerDate Mar<15>2010 21:35 Apr 13, 2011 Jkt 223001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 E:\FR\FM\14APP2.SGM 14APP2
Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 / Proposed Rules 21171
• Federal eRulemaking Portal:http:// name and telephone number in the Street, Alexandria, Virginia 22314–
www.regulations.gov. Follow the message. 3428.
instructions for submitting comments. • Mail: Regulation Comments, Chief • Hand Delivery/Courier: Same as
• E-mail: Counsel’s Office, Office of Thrift mail address.
regs.comments@federalreserve.gov. Supervision, 1700 G Street, NW., • Public Inspection: All public
Include the docket number and RIN Washington, DC 20552, Attention: OTS– comments are available on the agency’s
number in the subject line of the 2011–0004. Web site at http://www.ncua.gov/
message. • Facsimile: (202) 906–6518. Resources/RegulationsOpinionsLaws/
• Fax: (202) 452–3819 or (202) 452– • Hand Delivery/Courier: Guard’s ProposedRegulations.aspx as submitted,
3102. Desk, East Lobby Entrance, 1700 G except when not possible for technical
• Mail: Address to Jennifer J. Johnson, Street, NW., from 9 a.m. to 4 p.m. on reasons. Public comments will not be
Secretary, Board of Governors of the business days, Attention: Regulation edited to remove any identifying or
Federal Reserve System, 20th Street and Comments, Chief Counsel’s Office, contact information. Paper copies of
Constitution Avenue, NW., Washington, Attention: OTS–2011–0004. comments may be inspected in NCUA’s
DC 20551. • Instructions: All submissions law library at 1775 Duke Street,
All public comments will be made received must include the agency name Alexandria, Virginia 22314, by
available on the Board’s Web site at and docket number for this rulemaking. appointment weekdays between 9 a.m.
http://www.federalreserve.gov/ All comments received will be entered and 3 p.m. To make an appointment,
generalinfo/foia/ProposedRegs.cfm as into the docket and posted on call (703) 518–6546 or send an e-mail to
submitted, unless modified for technical Regulations.gov without change, OGCMail@ncua.gov.
reasons. Accordingly, comments will including any personal information Securities and Exchange Commission:
not be edited to remove any identifying provided. Comments, including You may submit comments by the
or contact information. Public attachments and other supporting following method:
comments may also be viewed materials received, are part of the public Electronic Comments
electronically or in paper in Room MP– record and subject to public disclosure. • Use the Commission’s Internet
500 of the Board’s Martin Building (20th Do not enclose any information in your comment form (http://www.sec.gov/
and C Streets, NW.) between 9 a.m. and comment or supporting materials that rules/exorders.shtml); or
5 p.m. on weekdays. you consider confidential or • Send an e-mail to rule-
Federal Deposit Insurance inappropriate for public disclosure. comments@sec.gov Please include File
Corporation: You may submit • Viewing Comments On-Site: You Number S7–12–11 on the subject line;
comments, identified by RIN number, may inspect comments at the Public or
by any of the following methods: Reading Room, 1700 G Street, NW., by • Use the Federal eRulemaking Portal
• Agency Web Site: http:// appointment. To make an appointment (http://www.regulations.gov). Follow the
www.FDIC.gov/regulations/laws/ for access, call (202) 906–5922, send an instructions for submitting comments.
federal/propose.html. Follow e-mail to public.info@ots.treas.gov, or
instructions for submitting comments send a facsimile transmission to (202) Paper Comments
on the Agency Web Site. 906–6518. (Prior notice identifying the • Send paper comments in triplicate
• E-mail: Comments@FDIC.gov. materials you will be requesting will to Elizabeth M. Murphy, Secretary,
Include the RIN number on the subject assist us in serving you.) We schedule Securities and Exchange Commission,
line of the message. appointments on business days between 100 F Street, NE., Washington, DC
• Mail: Robert E. Feldman, Executive 10 a.m. and 4 p.m. In most cases, 20549.
Secretary, Attention: Comments, Federal appointments will be available the next All submissions should refer to File
Deposit Insurance Corporation, 550 17th business day following the date we Number S7–12–11. This file number
Street, NW., Washington, DC 20429. receive a request. should be included on the subject line
• Hand Delivery: Comments may be National Credit Union if e-mail is used. To help us process and
hand delivered to the guard station at Administration: You may submit review your comments more efficiently,
the rear of the 550 17th Street Building comments by any of the following please use only one method. The
(located on F Street) on business days methods (please send comments by one Commission will post all comments on
between 7 a.m. and 5 p.m. method only): Federal eRulemaking the Commission’s Internet Web site
Instructions: All comments received Portal: http://www.regulations.gov. (http://www.sec.gov/rules/
must include the agency name and RIN Follow the instructions for submitting proposed.shtml). Comments are also
for this rulemaking and will be posted comments. available for Web site viewing and
without change to http://www.fdic.gov/ • Agency Web site: http:// printing in the Commission’s Public
regulations/laws/Federal/propose.html, www.ncua.gov/Resources/ Reference Room, 100 F St., NE.,
including any personal information RegulationsOpinionsLaws/ Washington, DC 20549 on official
provided. ProposedRegulations.aspx. Follow the business days between the hours of 10
Office of Thrift Supervision: You may instructions for submitting comments. a.m. and 3 p.m. All comments received
submit comments, identified by OTS– • E-mail: Address to will be posted without change; the
2011–0004, by any of the following regcomments@ncua.gov. Include ‘‘[Your Commission does not edit personal
methods: name] Comments on ‘‘Notice of identifying information from
• Federal eRulemaking Portal— Proposed Rulemaking for Incentive- submissions. You should submit only
Regulations.gov: Go to http:// based Compensation Arrangements’’ in information that you wish to make
www.regulations.gov and follow the the e-mail subject line. available publicly.
directions. • Fax: (703) 518–6319. Use the Federal Housing Finance Agency: You
• E-mail: subject line described above for e-mail. may submit your written comments on
regs.comments@ots.treas.gov. Please • Mail: Address to Mary Rupp, the proposed rulemaking, identified by
include OTS–2011–0004 in the subject Secretary of the Board, National Credit RIN number 2590–AA42, by any of the
line of the message and include your Union Administration, 1775 Duke following methods:
21172 Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 / Proposed Rules
• E-mail: Comments to Alfred M. Program Development, DSC, (202) requires that the Agencies prohibit
Pollard, General Counsel, may be sent 898–7221, George Parkerson, Senior incentive-based payment arrangements,
by e-mail at RegComments@fhfa.gov. Policy Analyst, (202) 898–3648; Rose or any feature of any such arrangement,
Please include ‘‘RIN 2590–AA42’’ in the Kushmeider, Senior Financial at a covered financial institution that
subject line of the message. Economist, (202) 898–3861; Daniel the Agencies determine encourages
• Federal eRulemaking Portal: http:// Lonergan, Counsel, (202) 898–6791, inappropriate risks by a financial
www.regulations.gov. Follow the Rodney Ray, Counsel, (202) 898–3556, institution by providing excessive
instructions for submitting comments. If Federal Deposit Insurance compensation or that could lead to
you submit your comment to the Corporation, 550 17th Street, NW., material financial loss. Under the Act, a
Federal eRulemaking Portal, please also Washington, DC 20429. covered financial institution also must
send it by e-mail to FHFA at OTS: Mary Jo Johnson, Senior Project disclose to its appropriate Federal
RegComments@fhfa.gov to ensure Manager, Examination Programs, regulator the structure of its incentive-
timely receipt by the Agency. Please (202) 906–5739, Richard Bennett, based compensation arrangements
include ‘‘RIN 2590–AA42’’ in the subject Senior Compliance Counsel, sufficient to determine whether the
line of the message. Regulations and Legislation Division, structure provides ‘‘excessive
• U.S. Mail, United Parcel Service, (202) 906–7409; Robyn Dennis, compensation, fees, or benefits’’ or
Federal Express, or Other Mail Service: Director, Examination Programs, (202) ‘‘could lead to material financial loss’’ to
The mailing address for comments is: 906–5751; James Caton, Managing the institution. The Dodd-Frank Act
Alfred M. Pollard, General Counsel, Director, Economic and Industry does not require a covered financial
Attention: Comments/RIN 2590–AA42, Analysis, (202) 906–5680, Office of institution to report the actual
Federal Housing Finance Agency, Thrift Supervision, 1700 G Street, compensation of particular individuals
Fourth Floor, 1700 G Street, NW., NW., Washington, DC 20552. as part of this requirement.
Washington, DC 20552. NCUA: Regina Metz, Staff Attorney, The Act defines ‘‘covered financial
• Hand Delivery/Courier: The hand Office of General Counsel, (703) 518– institution’’ to include any of the
delivery address is: Alfred M. Pollard, 6561; or Vickie Apperson, Program following types of institutions that have
General Counsel, Attention: Comments/ Officer, Office of Examination & $1 billion or more in assets: (A) A
RIN 2590–AA42, Federal Housing Insurance, (703) 518–6385, National depository institution or depository
Finance Agency, Fourth Floor, 1700 G Credit Union Administration, 1775 institution holding company, as such
Street, NW., Washington, DC 20552. A Duke Street, Alexandria, Virginia terms are defined in section 3 of the
hand-delivered package should be 22314. Federal Deposit Insurance Act (‘‘FDIA’’)
logged at the Guard Desk, First Floor, on SEC: Raymond A. Lombardo, Branch
(12 U.S.C. 1813); (B) a broker-dealer
business days between 9 a.m. and 5 p.m. Chief, Division of Trading & Markets,
registered under section 15 of the
All comments received by the (202) 551–5755; Timothy C. Fox,
Securities Exchange Act of 1934 (15
deadline will be posted for public Special Counsel, Division of Trading
U.S.C. 78o); (C) a credit union, as
inspection on the FHFA Web site at & Markets, (202) 551–5687; Nadya B.
described in section 19(b)(1)(A)(iv) of
http://www.fhfa.gov. Copies of all Roytblat, Assistant Chief Counsel,
the Federal Reserve Act; (D) an
comments timely received will be Division of Investment Management,
investment adviser, as such term is
available for public inspection and (202) 551–6823; or Jennifer R. Porter,
defined in section 202(a)(11) of the
copying at the address above on Attorney-Advisor, Division of
Investment Advisers Act of 1940 (15
government-business days between the Investment Management, (202) 551–
U.S.C. 80b-2(a)(11)); (E) the Federal
hours of 10 a.m. and 3 p.m. To make an 6787, United States Securities and
National Mortgage Association (Fannie
appointment to inspect comments Exchange Commission, 100 F Street
Mae); (F) the Federal Home Loan
please call the Office of General Counsel NE., Washington, DC 20549.
Mortgage Corporation (Freddie Mac);
at (202) 414–6924. FHFA: Alfred M. Pollard, General
and (G) any other financial institution
Counsel, (202) 414–3788 or Patrick J.
FOR FURTHER INFORMATION CONTACT: that the appropriate Federal regulators,
Lawler, Associate Director and Chief
OCC: Michele Meyer, Assistant Director, jointly, by rule, determine should be
Economist (202) 414–3746, Federal
and Patrick Tierney, Counsel, treated as a covered financial institution
Housing Finance Agency, Fourth
Legislative and Regulatory Activities, for these purposes.
Floor, 1700 G Street NW.,
(202) 874–5090, and Karen Kwilosz, The Act also requires the Agencies to
Washington, DC 20552. The telephone
Director, Operational Risk Policy, ensure that any standards adopted with
number of the Telecommunications
(202) 874–5350, Office of the regard to excessive compensation under
Device for the Deaf is (800) 877–8339.
Comptroller of the Currency, 250 E section 956 of the Act are comparable to
Street, SW., Washington, DC 20219. SUPPLEMENTARY INFORMATION:
the compensation-related safety and
Board: Michael Waldron, Counsel, (202) I. Background soundness standards applicable to
452–2798, or Amanda Allexon, insured depository institutions under
Counsel, (202) 452–3818, Legal Dodd-Frank Act
section 39 of the FDIA (12 U.S.C.
Division; William F. Treacy, Advisor, The Dodd-Frank Wall Street Reform 1831p– 1(c)),1 and to take the
(202) 452–3859, or Meg Donovan, and Consumer Protection Act (the compensation standards described in
Supervisory Financial Analyst, (202) ‘‘Dodd-Frank Act’’ or the ‘‘Act’’) (Pub. L. section 39 of the FDIA into
452–7542, Division of Banking 111–203, section 956, 124 Stat. 1376, consideration in establishing
Supervision and Regulation; Board of 2011–2018 (2010)), which was signed

Governors of the Federal Reserve into law on July 21, 2010, requires the 1 The Federal banking agencies each have
System, 20th and C Streets, NW., Agencies to jointly prescribe regulations adopted guidelines implementing the
Washington, DC 20551. or guidelines with respect to incentive- compensation-related and other safety and
FDIC: Steven D. Fritts, Associate based compensation practices at soundness standards in section 39 of the FDIA. See
12 CFR part 30, Appendix A (OCC); 12 CFR part
Director, Risk Management Policy covered financial institutions. 208, Appendix D–1 (Board); 12 CFR part 364,
Branch, DSC, (202) 898–3723; Specifically, section 956 of the Dodd- Appendix A (FDIC); 12 CFR part 570, Appendix A
Melinda West, Chief, Policy & Frank Act (codified at 12 U.S.C. 5641) (OTS).
compensation standards under section guidance, and ongoing supervisory more. For the NCUA, all credit unions
956 of the Act. efforts of the Agencies. with total consolidated assets of $10
Compensation arrangements are The Proposed Rule has the following billion or more are larger covered
critical tools in the successful components: financial institutions. For the FHFA, all
management of financial institutions. • The Proposed Rule would prohibit Federal Home Loan Banks with total
These arrangements serve several incentive-based compensation consolidated assets of $1 billion or more
important objectives, including arrangements at a covered financial are larger covered financial institutions.
attracting and retaining skilled staff, institution that encourage executive • In connection with these
promoting better organizational and officers, employees, directors, or restrictions, the Proposed Rule would
individual employee performance, and principal shareholders (‘‘covered require covered financial institutions to
providing retirement security to persons’’) to expose the institution to maintain policies and procedures
employees. inappropriate risks by providing the appropriate to their size, complexity,
At the same time, improperly covered person excessive compensation. and use of incentive-based
structured compensation arrangements As described further below, consistent compensation to help ensure
can provide executives and employees with the directive of section 956, the compliance with these requirements
with incentives to take imprudent risks Agencies propose to use standards and prohibitions.
comparable to those developed under • The Proposed Rule also would
that are not consistent with the long-
section 39 of the FDIA for purposes of require covered financial institutions to
term health of the organization. The
determining whether incentive-based provide certain information to their
Agencies believe that flawed incentive
compensation is ‘‘excessive’’ in a appropriate Federal regulator(s)
compensation practices in the financial
particular case. concerning their incentive-based
industry were one of many factors
• The Proposed Rule would prohibit compensation arrangements for covered
contributing to the financial crisis that
a covered financial institution from persons.
began in 2007. The Proposed Rule would supplement
Shareholders and, for a credit union, establishing or maintaining any
incentive-based compensation existing rules and guidance adopted by
members of a covered financial the Agencies regarding compensation
institution have an interest in aligning arrangements for covered persons that
encourage inappropriate risks by the and incentive-based compensation.3
the interests of managers and other These include the Banking Agency
employees of the institution with its covered financial institution that could
lead to material financial loss. The Guidance, the Standards for Safety and
long-term health. Aligning the interests Soundness adopted by the Federal
of shareholders or members and Agencies propose to adopt standards for
determining whether an incentive-based banking agencies,4 the compensation-
employees, however, is not always related disclosure requirements adopted
sufficient to protect the safety and compensation arrangement may
encourage inappropriate risk-taking that by the SEC for public companies,5 the
soundness of an organization, deter rules and guidance adopted by the
excessive compensation, or deter are consistent with the key principles
established for incentive compensation FHFA for regulatory oversight of the
behavior that could lead to material executive compensation practices of its
financial loss at the organization. in the Interagency Guidance on Sound
Incentive Compensation Policies regulated entities 6 and the
Managers and employees of a covered compensation rules adopted by the
financial institution may be willing to (‘‘Banking Agency Guidance’’) adopted
by the Federal banking agencies.2 The NCUA for institutions under its
tolerate a degree of risk that is supervision.7 Each Agency may issue
inconsistent with broader public policy Proposed Rule would also require
goals. In addition, particularly at larger deferral of a portion of incentive-based 3 See, e.g., Banking Agency Guidance, supra note
institutions, shareholders or members compensation for executive officers of 2.
may have difficulty effectively larger covered financial institutions. 4 60 FR 35674 (July 10, 1995), as amended at 61
The Proposed Rule would also require FR 43948 (Aug. 27, 1996).
monitoring and controlling the 5 See, e.g., Item 402(s) of Regulation S–K, 17 CFR
incentive-based compensation that, at larger covered financial
229.402(s), adopted in Securities Act Release No.
arrangements throughout the institution institutions, the board of directors or a 9089 (Dec. 16, 2009), 74 FR 68334 (Dec. 23, 2009).
that may materially affect the committee of such a board identify 6 12 CFR 1770.1 (b) (1) requires the FHFA
institution’s risk profile, even with those covered persons (other than Director to prohibit the excessive compensation of
executive officers) that have the ability executive officers. Section 1770.4 provides specific
increased disclosure provisions. As a details as to the categories of information that are
result, supervision and regulation of to expose the institution to possible required to be submitted to the FHFA pertaining to
incentive compensation, as with other losses that are substantial in relation to the prohibition of excessive compensation (Sept.
the institution’s size, capital, or overall 12, 2001). FHFA’s examination guidance (PG–06–
aspects of financial oversight, can play 002), ‘‘Examination for Compensation Practices,’’
an important role in helping ensure that risk tolerance. The Proposed Rule sets forth the disclosure requirements pertaining to
incentive compensation practices at would require that the board of the compensation and benefits programs of Fannie
covered financial institutions do not directors, or a committee thereof, of the Mae and Freddie Mac (together, the Enterprises)
institution approve the incentive-based (Nov. 8, 2006). In carrying out its corporate
threaten their safety and soundness, are governance requirements, the FHFA is guided by
not excessive, or do not lead to material compensation arrangement for such the provisions set forth in 12 CFR 1710.13. FHFA’s
financial loss. individuals, and maintain Advisory Bulletin (2009–AB–02), ‘‘Principles for
documentation of such approval. The Executive Compensation at the Federal Home Loan
II. Overview of the Proposed Rule Banks and the Office of Finance,’’ provides
term ‘‘larger covered financial guidance to the Home Loan Banks on reporting
institution’’ for the Federal banking
The Agencies have elected to propose requirements (Oct. 27, 2009). FHFA’s proposed rule
rules, rather than guidelines, in order to agencies and the SEC means those on executive compensation, 74 FR 26989 (June 5,
covered financial institutions with total 2009), includes incentive compensation in its
establish general requirements prohibition on excessive compensation. For the
applicable to the incentive-based consolidated assets of $50 billion or FHFA, the regulated entities are, collectively: the
compensation arrangements of all Enterprises, the Federal Home Loan Banks, and the
2 Guidance on Sound Incentive Compensation Office of Finance.
covered financial institutions Policies, 75 FR 36395 (June 25, 2010), adopted by 7 See, e.g., 12 U.S.C. 1761a; 12 CFR 701.2 & 12
(‘‘Proposed Rule’’). The Proposed Rule the Federal banking agencies, meaning the OCC, CFR part 701 App. A, Art. VII. § 8; 12 CFR
would supplement existing rules, Board, FDIC, and OTS. Continued
supplemental guidance specific to their compensation arrangements to covered company as defined in 12 U.S.C.
regulated entities, including guidance as persons. This section also notes that this 1467a(a). (A covered financial
necessary to clarify the regulatory rule would in no way limit the authority institution also includes an operating
requirements proposed in this of any Agency under other provisions of subsidiary of a Federal savings
rulemaking. Covered financial applicable law and regulations. association as defined in 12 CFR 559.2.)
institutions supervised by the Federal § __.3 Definitions. Section __.3 defines The Board, OCC, and FDIC will assume
banking agencies should continue to the various terms used in the Proposed supervisory and rulemaking
consult the Banking Agency Guidance Rule. If a term is defined in section 956 responsibility for these entities on the
for additional information on how to of the Dodd-Frank Act, the Proposed transfer date provided in Title III of the
balance risk and financial rewards. Rule generally incorporates that Dodd-Frank Act. These agencies expect
The Agencies propose to make the definition.9 to adopt, or incorporate, as appropriate,
terms of the Proposed Rule, if adopted, Compensation. The Proposed Rule any final rule adopted by OTS as part
effective six months after publication of defines ‘‘compensation’’ to mean all of this rulemaking for relevant covered
the final rule in the Federal Register, direct and indirect payments, fees or financial institutions that come under
with annual reports due within 90 days benefits, both cash and non-cash, their respective supervisory authority
of the end of each covered financial awarded to, granted to, or earned by or after the transfer date;
institution’s fiscal year. The Agencies for the benefit of, any covered person in • In the case of the NCUA, a credit
request specific comment on whether exchange for services rendered to the union, as described in section
these dates will provide sufficient time covered financial institution, including, 19(b)(1)(A)(iv) of the Federal Reserve
for covered financial institutions to but not limited to, payments or benefits Act, meaning an insured credit union as
comply with the rule and, if not, why. pursuant to an employment contract, defined under 12 U.S.C. 1752(7) or
Commenters are also asked to address compensation or benefit agreement, fee credit union eligible to make
whether the Agencies should designate arrangement, perquisite, stock option application to become an insured credit
different compliance dates for different plan, postemployment benefit, or other union under 12 U.S.C. 1781. Instead of
types of covered financial institutions, compensatory arrangement. For credit the term ‘‘covered financial institution’’,
or consider designating different unions, the definition of compensation the NCUA uses the term ‘‘credit union’’
compliance dates for different parts of specifically excludes reimbursement for throughout its proposed rule;
the Proposed Rule (e.g., disclosure, reasonable and proper costs incurred by • In the case of the SEC, a broker-
prohibition, and policies and covered persons in carrying out official dealer registered under section 15 of the
procedures). credit union business; provision of Securities Exchange Act of 1934, 15
A detailed description of the reasonable health, accident and related U.S.C. 78o; and an investment adviser,
Proposed Rule with a request for types of personal insurance protection; as such term is defined in section
comments is set forth below. Although and indemnification. This is consistent 202(a)(11) of the Investment Advisers
this is a joint-interagency rulemaking, with NCUA’s regulations at 12 CFR Act of 1940, 15 U.S.C. 80b–2(a)(11); 10
each Agency will codify its version of 701.33. The Agencies seek comment on • The FHFA, because it proposes to
the rule in its specified portion of the this proposed definition. extend the requirements of the rule to
Code of Federal Regulations in order to Covered Financial Institution. As the Federal Home Loan Bank System’s
accommodate differences between noted above, only ‘‘covered financial Office of Finance,11 which is not a
regulated entities as well as other institutions’’ that have total consolidated financial institution, is not proposing to
applicable statutory and regulatory assets of $1 billion or more would be use the term ‘‘covered financial
requirements. Any significant subject to the Proposed Rule. Under the institution,’’ but rather the term
differences between the Proposed Rules Proposed Rule, a ‘‘covered financial ‘‘covered entity,’’ defined to mean
issued by individual agencies are noted institution’’ would include: Fannie Mae, Freddie Mac, the Federal
below.8 • In the case of the OCC, a national
Home Loan Banks, and the Office of
bank and Federal branch and agency of
III. Section-By-Section Description of Finance.
a foreign bank;
the Proposed Rule As indicated in the above listing, the
• In the case of the Board, a state
Agencies propose to expand the
§ __.1 Authority. Section __.1 provides member bank; a bank holding company;
definition of a covered financial
that this rule is issued pursuant to a state-licensed uninsured branch or
institution beyond those specifically
section 956 of the Dodd-Frank Wall agency of a foreign bank; and the U.S.
Street Reform and Consumer Protection identified in section 956, as authorized
operations of a foreign bank with more
Act (Pub. L. 111–203). Certain Agencies by section 956(e)(2)(G) of the Dodd-
than $1 billion of U.S. assets that is
also have listed their general rulemaking Frank Act. Consistent with the principle
treated as a bank holding company
authority in their respective authority of national treatment and equality of
pursuant to section 8(a) of the
citations. competitive opportunity, the Agencies
International Banking Act of 1978 (12
§ __.2 Scope and Purpose. Section propose to include as covered financial
U.S.C. 3106(a)). A covered financial
__.2 provides that this rule applies to a institutions the uninsured branches and
institution includes the subsidiaries of
covered financial institution that has the institution; 10 By its terms, the definition of ‘‘covered
total consolidated assets of $1 billion or • In the case of the FDIC, a state financial institution’’ in section 956 includes any
more that offers incentive-based nonmember bank and an insured U.S. firm that meets the definition of ‘‘investment
branch of a foreign bank; adviser’’ under the Investment Advisers Act of 1940
• In the case of the OTS, a savings
701.21(c)(8)(i); 12 CFR 701.23(g) (1); 12 CFR 701.33; (‘‘Investment Advisers Act’’), regardless of whether
12 CFR 702.203 & 702.204; 12 CFR 703.17; 12 CFR the firm is registered as an investment adviser
association as defined in 12 U.S.C. under that Act. Banks and bank holding companies
704.19 & 704.20; 12 CFR part 708a; 12 CFR 712.8;
12 CFR 721.7; 12 CFR part 750; and NCUA 1813(b) and a savings and loan holding are generally excluded from the definition of
Examiners Guide Ch. 7 at http://www.ncua.gov/ ‘‘investment adviser’’ under section 202(a)(11) of the
GenInfo/GuidesManuals/examiners_guide/ 9 These definitions are proposed for purposes of Investment Advisers Act.
chapters/Chapter07.pdf. administering Section 956 and are not intended to 11 The Office of Finance is a joint agency of the
8 Since the Agencies’ proposed rules use affect the interpretation or construction of the same twelve Federal Home Loan Banks and is described
consistent section numbering, relevant sections are or similar terms for purposes of any other statute and regulated in the FHFA’s rules at 12 CFR part
cited, for example, as ‘‘§ __.1.’’ or regulation administered by the Agencies. 1273.
agencies of a foreign bank, as well as the prohibitions in the Proposed Rule apply • The Agencies seek comment on
other U.S. operations of foreign banking only to a subset of covered persons. As whether the types of positions identified
organizations that are treated as bank a result, the proposal contains separate in this proposed definition are
holding companies pursuant to section definitions of director, executive officer, appropriate, whether additional
8(a) of the International Banking Act of and principal shareholder. For Federal positions should be included, or if
1978. These offices and operations credit unions, only one director, if any, certain positions should be removed.
currently are subject to the Banking may be considered a covered person • Should the Agencies define ‘‘head
Agency Guidance, and are subject to since, under the Federal Credit Union of a major business line?’’
section 8 of the FDIA, which prohibits Act section 112 (12 U.S.C. 1761a) and Incentive-based Compensation.
institutions from engaging in unsafe or NCUA’s regulations at 12 CFR 701.33, Consistent with section 956 of the
unsound practices to the same extent as only one director may be compensated Dodd-Frank Act, the Proposed Rule
insured depository institutions and as an officer of the board. would apply only to incentive-based
bank holding companies.12 Director and Board of Directors. The compensation arrangements. The
The Agencies also propose including Proposed Rule defines ‘‘director’’ of a Proposed Rule defines ‘‘incentive-based
the Federal Home Loan Banks because covered financial institution as a compensation’’ to mean any variable
they pose similar risks and should be member of the board of directors of the compensation that serves as an
subject to the same regulatory regime. covered financial institution or of a incentive for performance. The
FHFA also proposes to subject the board or committee performing a similar definition is broad and principles-based
Office of Finance to the Proposed Rule, function to a board of directors. For to address the objectives of section 956
using authority other than section 956.13 NCUA’s proposed rule, the director is in a manner that provides for flexibility
Commenters are specifically asked to always a member of the credit union’s as forms of compensation evolve. The
address whether there are there other board of directors so the definition is form of payment, whether it is cash, an
types of financial institutions, such as a omitted. The Proposed Rule also defines equity award, or other property, does
credit union service organization ‘‘board of directors’’ as the governing not affect whether compensation meets
(‘‘CUSO’’), that the Agencies should treat body of any covered financial the definition of ‘‘incentive-based
as a covered financial institution to institution performing functions similar compensation.’’
better promote the purpose of section to a board of directors. For a foreign There are types of compensation that
956 and competitive equity. Currently banking organization, ‘‘board of would not fall within the scope of this
no CUSOs wholly owned by a federally directors’’ refers to the relevant senior definition. Generally, compensation that
insured credit union have total management or oversight body for the is awarded solely for, and the payment
consolidated assets of $1 billion or firm’s U.S. branch, agency or operations, of which is solely tied to, continued
more. consistent with the foreign banking employment (e.g., salary) would not be
Covered Person. Only incentive-based organization’s overall corporate and considered incentive-based
compensation paid to ‘‘covered persons’’ management structure. The Agencies compensation. Similarly, a
would be subject to the requirements of seek comment on these proposed compensation arrangement that
this Proposed Rule. A ‘‘covered person’’ definitions. provides rewards solely for activities or
would be any executive officer, Executive Officer. As discussed in behaviors that do not involve risk-taking
employee, director, or principal more detail later in this Supplementary (for example, payments solely for
shareholder of a covered financial Information, the Proposed Rule would achieving or maintaining a professional
institution. No specific categories of apply certain restrictions to the certification or higher level of
employees are excluded from the scope incentive-based compensation of educational achievement) would not be
of the Proposed Rule, although it is the ‘‘executive officers’’ of larger covered considered incentive-based
underlying purpose of this rulemaking financial institutions.14 The Proposed compensation under the proposal. In
to address those incentive-based addition, the Agencies do not envision
Rule defines ‘‘executive officer’’ of a
compensation arrangements for covered that this definition would include
covered financial institution as a person
persons or groups of covered persons compensation arrangements that are
who holds the title or performs the
that encourage inappropriate risk determined based solely on the covered
function (regardless of title, salary or
because they provide excessive person’s level of fixed compensation
compensation) of one or more of the
compensation or pose a risk of material and do not vary based on one or more
following positions: President, chief
financial loss to a covered financial performance metrics (e.g., employer
executive officer, executive chairman,
institution. Accordingly, as will be contributions to a 401(k) retirement
chief operating officer, chief financial
discussed later in this SUPPLEMENTARY savings plan computed based on a fixed
officer, chief investment officer, chief
INFORMATION section, certain percentage of an employee’s salary). The
legal officer, chief lending officer, chief
12 See
risk officer, or head of a major business
12 U.S.C. 1813(c)(3) and 1818(b)(4). defines the term Executive Officer to mean, for
13 The Office of Finance is an agent of the Federal
line.15 Fannie Mae and Freddie Mac: The Chairman of the
Home Loan Banks in issuing the hundreds of Board of Directors, chief executive officer, chief
14 As discussed previously, the term ‘‘larger
billions of dollars’ worth of Federal Home Loan financial officer, chief operating officer, president,
Bank System obligations that are outstanding at any covered financial institution’’ for the Federal vice chairman, any executive vice president, and
time. It is not a financial institution, but because of banking agencies and the SEC means those covered any individual who performs functions similar to
its critical role in the mortgage finance system, it financial institutions with total consolidated assets such positions whether or not the individual has an
is proposed to be made subject to the provisions of of $50 billion or more. For the NCUA, all credit official title; and any senior vice president or other
the Proposed Rule that apply to financial unions with total consolidated assets of $10 billion individual with similar responsibilities, without
institutions with assets of over $50 billion. Because or more are larger covered financial institutions. For regard to title: (A) Who is in charge of a principal
it is not a financial institution and hence not within the FHFA, Fannie Mae, Freddie Mac, and all of the business unit, division or function, or (B) who
the scope of section 956, FHFA bases its authority Federal Home Loan Banks with total consolidated reports directly to the chairman of the board of
over the Office of Finance for this purpose not on assets of $1 billion or more are larger covered directors, vice chairman, president or chief
section 956 but on the Federal Housing Enterprises financial institutions. In addition, the FHFA operating officer. The Proposed Rule adopts a
Financial Safety and Soundness Act, which in proposes to make the same requirements applicable modified version of the definitions for Fannie Mae
section 1311(b)(2) (12 U.S.C. 4511(b)(2)) grants to the Office of Finance. and Freddie Mac, and a definition for the Federal
FHFA general regulatory authority over the Office 15 For the FHFA, the Safety and Soundness Act Home Loan Banks and for the Office of Finance that
of Finance. of 1992, as reflected in 12 CFR 1770.3 (g)–(1), the FHFA has determined is appropriate for them.
proposed definition also would not Liabilities of U.S. Branches and end.17 In connection with that proposal,
include dividends paid and Agencies of Foreign Banks—FFIEC 002. the SEC requested comment on the
appreciation realized on stock or other • Board: For a state member bank, reporting requirement and the proposed
equity instruments that are owned total consolidated assets as determined method that advisers would use to
outright by a covered person. However, based on the average of the bank’s four determine the amount of their assets
stock or other equity instruments most recent Consolidated Reports of (i.e., total assets as shown on the
awarded to a covered person under a Condition and Income (‘‘Call Report’’); adviser’s balance sheet). Commenters
contract, arrangement, plan, or benefit for a bank holding company, total are asked to provide additional
would not be considered owned comments on the proposed method of
consolidated assets as determined based
outright while subject to any vesting or determining asset size for investment
on the average of the company’s four
deferral arrangement (irrespective of advisers, and specifically to address
most recent Consolidated Financial
whether such deferral is mandatory). whether the determination of total
Statements for Bank Holding Companies
The Agencies request comment assets should be further tailored for
(‘‘FR Y–9C’’); for a state-licensed certain types of advisers, such as
generally on this proposed definition.
uninsured branch or agency of a foreign advisers to hedge funds or private
Comment is also requested on the
bank, total consolidated assets as equity funds, and if so, why and in what
following questions:
determined based on the average of the
• Is the definition of incentive-based manner.
branch or agency’s four most recent • FHFA: The FHFA is not including
compensation sufficiently broad to
Reports of Assets and Liabilities of U.S. a definition of total consolidated assets
include all types of compensation that
Branches and Agencies of Foreign in its proposed rule because it is
should be covered under the rule?
• Are there any particular forms of Banks—FFIEC 002; and for the U.S. proposing to make all requirements of
compensation that should be operations of a foreign bank, total the rule applicable to all the entities it
specifically designated as incentive- consolidated U.S. assets as determined regulates without regard to asset size.18
based compensation? by the Board. The Agencies believe that by
• Are there any other forms of • FDIC: For state nonmember banks, generally establishing a rolling average
compensation that the Agencies should asset size would be determined by for asset size (with the exception of the
clarify are not incentive-based calculating the average of the total assets SEC and the FHFA), the frequency that
compensation? reported in the institution’s four most an institution may fall in or out of
Principal Shareholder. Under the recent Call Reports. For insured U.S. covered financial institution status
Proposed Rule, a ‘‘principal branches of foreign banks, asset size will would be minimized. If a covered
shareholder’’ means an individual that be determined by calculating the financial institution has fewer than four
directly or indirectly, or acting through average of the total assets reported in reports, the institution must average
or in concert with one or more persons, the branch’s four most recent Reports of total assets from its existing reports for
owns, controls, or has the power to vote Assets and Liabilities of U.S. Branches purposes of determining total
10 percent or more of any class of voting and Agencies of Foreign Banks. consolidated assets. If a covered
securities of a covered financial financial institution has a mix of two or
• OTS: For covered financial more different types of reports covering
institution.16 The Agencies request institutions regulated by the OTS, asset
comment on this proposed definition. the relevant period, those should be
size will be determined by calculating averaged for purposes of determining
The NCUA’s proposed rule does not the average of total assets reported in
include this definition since credit asset size (e.g., an institution with two
the institution’s four most recent Thrift Call Reports and two Thrift Financial
unions are not-for-profit financial Financial Reports.
cooperatives with member owners. Reports as its four most recent reports
Total Consolidated Assets. As • NCUA: For credit unions, asset size would have its total assets from all four
provided in section 956, the Proposed will be determined by calculating the reports averaged).
Rule would apply to all covered average of the total assets reported in Should all of the Agencies use a
financial institutions that have total the credit union’s four most recent 5300 uniform method to determine whether
consolidated assets of $1 billion or Call Reports. an institution has $1 billion or more in
assets? If so, what would commenters
more. Additional requirements would • SEC: For brokers or dealers suggest as such a uniform method? If
apply to certain larger covered financial registered with the SEC, asset size
institutions. With the exception of the different calculations are required for
would be determined by the total each type of institution, should any of
FHFA, the Agencies have specified how consolidated assets reported in the
total consolidated assets should be the Agencies define total consolidated
firm’s most recent year-end audited assets differently than the proposed
calculated in their agency specific rule Consolidated Statement of Financial
text. calculations described above?
Condition filed pursuant to Rule 17a–5 § ll.4 Required Reports. Section
• OCC: Total consolidated assets under the Securities Exchange Act of 956(a)(1) of the Dodd-Frank Act requires
means (i) for a national bank, 1934. For investment advisers, asset size that a covered financial institution
calculating the average of the total assets would be determined by the adviser’s submit an annual report to its
reported in the bank’s four most recent total assets shown on the balance sheet
Consolidated Reports of Condition and for the adviser’s most recent fiscal year 17 See Rules Implementing Amendments to the
Income (‘‘Call Report’’) and (ii) for a end. The proposed method of Investment Advisers Act of 1940, Investment
Federal branch and agency, calculating
calculation for investment advisers is Advisers Release No. 3110, nn. 194–196 and related
the average of the total assets reported consistent with the SEC’s recent text (Nov. 19, 2010) 75 FR 77052 (Dec. 10, 2010).
18 Fannie Mae, Freddie Mac, and the Federal
in the Federal branch or agency’s four proposal that each investment adviser Home Loan Banks are all far larger than the $1
most recent Reports of Assets and filing Form ADV Part 1A indicate billion asset threshold in section 956, while the
whether the adviser had $1 billion or FHFA is basing its regulatory authority over the
16 The 10 percent threshold used in the definition Office of Finance on a different statute. And, for
more in ‘‘assets,’’ defined as the total
of ‘‘principal shareholder’’ is also used in a number policy reasons, the FHFA is proposing not to
of bank regulatory contexts. See e.g., 12 CFR
assets shown on the balance sheet for distinguish ‘‘larger’’ entities from others for
215.2(m), 12 CFR 225.2(n)(2), 12 CFR 225.41(c)(2). the adviser’s most recent fiscal year purposes of this rule.
appropriate Federal regulator disclosing Agencies. Accordingly, in the Proposed the reported information likely will be
the structure of its incentive-based Rule, the Agencies have tailored the sensitive for a variety of reasons,
compensation arrangements that is annual reporting requirement to the including competitive reasons.
sufficient to determine whether the types of information that would most The volume and detail of information
incentive-based compensation structure efficiently assist the relevant Agency in provided annually by a covered
provides covered persons with determining whether there are any areas financial institution should be
excessive compensation, fees, or of potential concern with respect to the commensurate with the size and
benefits, or could lead to material structure of the covered financial complexity of the institution, as well as
financial loss to the covered financial institution’s incentive-based the scope and nature of its incentive-
institution. In order to fulfill this compensation arrangements. Generally, based compensation arrangements. As
requirement, the Proposed Rule would each Agency has reporting, examination such, the Agencies expect that the
establish the general rule that a covered and enforcement authority for volume and detail of information
financial institution must submit a substantially all of the covered financial provided by a large, complex institution
report annually to its appropriate institutions under its respective that uses incentive-based arrangements
regulator or supervisor in a format jurisdiction that the Agency may use if to a significant degree would be
specified by its appropriate Federal the information provided under section substantially greater than that submitted
regulator that describes the structure of 956 were to indicate that the structure by a smaller institution that has only a
the covered financial institution’s of a covered financial institution’s few incentive-based compensation
incentive-based compensation incentive-based compensation arrangements or arrangements that affect
arrangements for covered persons. The arrangements may provide excessive only a limited number of covered
report must contain: compensation or encourage persons.
(1) A clear narrative description of the inappropriate risk-taking.19 In this way, The Agencies request comment on all
components of the covered financial the Proposed Rule seeks to achieve the aspects of the reporting provisions in
institution’s incentive-based objective of section 956 in a manner that the Proposed Rule. Specifically, the
compensation arrangements applicable limits unnecessary reporting burden on Agencies request comment on the
to covered persons and specifying the covered financial institutions and following:
types of covered persons to which they leverages the existing supervisory • Does the Proposed Rule fulfill the
apply; framework for institutions. requirement to obtain meaningful and
(2) A succinct description of the The Agencies note that they have useful descriptions of incentive-based
covered financial institution’s policies intentionally chosen phrases like ‘‘clear compensation arrangements for
and procedures governing its incentive- narrative description’’ and ‘‘succinct supervisory and compliance purposes?
based compensation arrangements for description’’ to describe the disclosures • Does the Proposed Rule impose a
covered persons;
being sought. The Agencies also note reasonable burden and minimize the
(3) For larger covered financial
that the use of the word ‘‘specific’’ in the potential for voluminous boilerplate
institutions, a succinct description of
any specific incentive compensation Proposed Rule is designed to elicit disclosure?
policies and procedures for the statements that are direct and • Is the language in the Proposed
institution’s executive officers, and meaningful explanations of why a Rule sufficiently clear in describing the
other covered persons who the board, or covered financial institution believes its kinds of information the Agencies
a committee thereof determines under incentive-based compensation plan intend to solicit from covered financial
§ __.5(b)(3)(ii) of the Proposed Rule properly addresses the ‘‘excessive institutions?
individually have the ability to expose compensation’’ and ‘‘material financial • Are there simpler and less
the institution to possible losses that are loss’’ components of section 956. These burdensome methods of reporting to the
substantial in relation to the provisions are designed to help ensure Agencies that would still be sufficiently
institution’s size, capital, or overall risk that covered financial institutions will robust to help the Agencies assess
tolerance; provide the Agencies with a streamlined whether the institution’s compensation
(4) Any material changes to the set of materials that will help the arrangements appropriately balance risk
covered financial institution’s incentive- Agencies promptly and effectively and financial rewards? For example,
based compensation arrangements and identify and address any areas of would setting up an electronic means of
policies and procedures made since the concern, rather than with voluminous filing the required disclosure lessen the
covered financial institution’s last materials that may obfuscate the actual burden on covered financial
report was submitted; and structure and likely effects of an institutions, and are there specific
(5) The specific reasons why the institution’s incentive-based factors the Agencies should consider in
covered financial institution believes compensation arrangements. Further, in developing such a disclosure
the structure of its incentive-based light of the nature of the information mechanism?
compensation plan does not encourage that will be provided to the Agencies • Are there any additional types of
inappropriate risks by the covered under § __.4 of the Proposed Rule, and information that the Agencies should
financial institution by providing the purposes for which the Agencies are solicit in order to more accurately assess
covered persons with excessive requiring the information, the Agencies whether incentive-based compensation
compensation or incentive-based generally will maintain the
compensation that could lead to confidentiality of the information which the Agencies have authority to withhold
material financial loss to the covered submitted to the Agencies, and the certain information. FOIA Exemption 4 provides an
information will be nonpublic, to the exemption for ‘‘trade secrets and commercial or
financial institution. financial information obtained from a person and
In developing the proposed reporting extent permitted by law.20 The nature of privileged or confidential.’’ 5 U.S.C. 552(b)(4). FOIA
provisions, the Agencies have taken into Exemption 8 provides an exemption for matters that
19 NCUA would likely consult with the
account that substantially all the are ‘‘contained in or related to examination,
appropriate state regulator in cases involving a operating, or condition reports prepared by, on
covered financial institutions are state-chartered credit union. behalf of, or for the use of an agency responsible
already supervised and/or subject to 20 The Freedom of Information Act (‘‘FOIA’’) for the regulation or supervision of financial
examination by one or more of the provides at least two pertinent exemptions under institutions.’’ 5 U.S.C. 552(b)(8).
arrangements are consistent with the based upon such factors as asset size, to material financial loss. Such covered
objectives of section 956? geographic location, and the complexity persons include:
• Should the Agencies consider of the institution’s operations and • Executive officers and other
modifying the Proposed Rule to require assets; covered persons who are responsible for
covered financial institutions to update (5) For postemployment benefits, the oversight of the covered financial
their incentive-based compensation projected total cost and benefit to the institution’s firm-wide activities or
disclosure—between annual disclosure covered financial institution; material business lines;
cycles—if any material changes to their (6) Any connection between the • Other individual covered persons,
respective incentive-based individual and any fraudulent act or including non-executive employees,
compensation plans occur? omission, breach of trust or fiduciary whose activities may expose the covered
§ __.5 Prohibitions. Section __.5 of the duty, or insider abuse with regard to the financial institution to material
Proposed Rule would implement covered financial institution; and financial loss (e.g., traders with large
section 956(b) of the Dodd-Frank Act by (7) Any other factors the Agency position limits relative to the covered
prohibiting a covered financial determines to be relevant. financial institution’s overall risk
institution from having incentive-based The Agencies request comment on tolerance); and
compensation arrangements that may these standards, including comment on • Groups of covered persons who are
encourage inappropriate risks (a) by the appropriate factors to consider when subject to the same or similar incentive-
providing excessive compensation or (b) evaluating comparable compensation based compensation arrangements and
that could lead to material financial loss practices at comparable institutions. who, in the aggregate, could expose the
to the covered financial institution. Should additional factors be included, covered financial institution to material
Consistent with section 956(c), the such as the nature of the operations at financial loss, even if no individual
Proposed Rule also would establish the comparable institutions? covered person in the group could
standards for determining whether an Inappropriate Risks that May Lead to expose the covered financial institution
incentive-based compensation Material Financial Loss. Section to material financial loss (e.g., loan
arrangement violates these prohibitions. 956(b)(2) of the Act requires the officers who, as a group, originate loans
Excessive Compensation. The Agencies to adopt regulations or that account for a material amount of
Proposed Rule would establish a general guidelines that prohibit any type of the covered financial institution’s credit
rule that a covered financial institution incentive-based payment arrangement, risk).
must not establish or maintain any type or any feature of any such arrangement, To implement section 956(b)(2) of the
of incentive-based compensation that the Agencies determine encourages Act, § __.5(b)(1) of the Proposed Rule
arrangement, or any feature of any such inappropriate risks by a covered would prohibit a covered financial
arrangement, that encourages financial institution that could lead to institution from establishing or
inappropriate risks by the covered material financial loss to the covered maintaining any type of incentive
financial institution by providing a institution. Section 39 of the FDIA does compensation arrangement, or any
covered person with excessive not include standards for determining feature of any such arrangement, for
compensation. As noted previously, whether compensation arrangements these covered persons or groups of
section 956 requires the Agencies to may encourage inappropriate risks that covered persons, that could lead to
ensure that any compensation standards could lead to material financial loss. material financial loss to the covered
established under section 956 are Accordingly the Agencies have financial institution. Section __.5(b)(2)
comparable to those established under considered the language and purpose of of the Proposed Rule provides that an
section 39 of the FDIA. In light of this section 956, existing supervisory incentive-based compensation
directive, the Proposed Rule includes guidance that addresses incentive-based arrangement established or maintained
standards for determining whether an compensation arrangements that may by a covered financial institution for
incentive-based compensation encourage excessive risk-taking,21 the one or more covered persons does not
arrangement provides excessive Principles for Sound Compensation comply with § __.5(b)(1) unless it:
compensation that are comparable to, Practices and the related • Balances risk and financial rewards,
and based on, the standards established Implementation Standards adopted by for example by using deferral of
under section 39 of the FDIA. the Financial Stability Board,22 and payments, risk adjustment of awards,
Specifically, under the Proposed Rule, other relevant material in considering reduced sensitivity to short-term
incentive-based compensation for a how to implement this aspect of section performance, or longer performance
covered person would be considered 956. periods;
excessive when amounts paid are As an initial matter, the Agencies note • Is compatible with effective
that section 956 is focused on incentive- controls and risk management; and
unreasonable or disproportionate to,
based compensation arrangements that • Is supported by strong corporate
among other things, the amount, nature,
could lead to material financial loss to governance.
quality, and scope of services performed
by the covered person. In making such a covered financial institution. These three standards are consistent
a determination, the Agencies will Accordingly, this prohibition would with the principles for sound
consider: apply only to those incentive-based compensation practices in the Banking
(1) The combined value of all cash compensation arrangements for Agency Guidance.
and non-cash benefits provided to the individual covered persons, or groups of The following describes these
covered person; covered persons, whose activities may proposed standards in greater detail. In
(2) The compensation history of the expose the covered financial institution order to help ensure that the incentive-
covered person and other individuals based compensation arrangements of
with comparable expertise at the 21 See,e.g., Banking Agency Guidance. covered financial institutions are
covered financial institution; 22 Financial Stability Board, FSF Principles for consistent with their standards, § __.6 of
(3) The financial condition of the Sound Compensation Practices, Basel, Switzerland the Proposed Rule would require that
(April 2009); Financial Stability Board, FSB
covered financial institution; Principles for Sound Compensation Practices:
covered financial institutions establish
(4) Comparable compensation Implementation Standards, Basel, Switzerland and maintain policies and procedures
practices at comparable institutions, (September 2009). related to these standards.
Balance of Risk and Financial Rewards based on managerial judgment, subject which they are used. For example,
to appropriate oversight. where reliable risk measures exist, risk
Incentive-based compensation Deferral of Payment: Under this adjustment of awards may be more
arrangements typically attempt to method, the actual payout of an award effective than deferral of payment in
encourage actions that result in greater to a covered person is delayed reducing incentives for inappropriate
revenue or profit for the covered significantly beyond the end of the risk-taking. This is because risk
financial institution. However, short-run performance period, and the amounts adjustment potentially can take account
revenue or profit can often diverge paid are adjusted for actual losses to the of the full range and time horizon of
sharply from actual long-run profit covered financial institution or other risks, rather than just those risk
because risk outcomes may become aspects of performance that become outcomes that occur or become evident
clear only over time. Activities that clear only during the deferral period. during the deferral period. On the other
carry higher risk typically yield higher Deferred payouts may be altered hand, deferral of payment may be more
short-term revenue, and a covered according to risk outcomes either effective than risk adjustment in
person who is given incentives to formulaically or based on managerial mitigating incentives to take hard-to-
increase short-term revenue or profit, judgment, though extensive use of measure risks (such as the risks of new
without regard to risk, will naturally be judgment might make it more difficult activities or products, or certain risks
attracted to opportunities to expose the to execute deferral arrangements in a such as reputational or operational risk
institution to more risk.23 sufficiently predictable fashion to that may be difficult to measure with
Accordingly, to be consistent with influence the risk-taking behavior of a respect to particular activities),
section 956, incentive-based covered person. To be most effective in especially if such risks are likely to be
compensation arrangements at a covered ensuring balance, the deferral period realized during the deferral period. In
financial institution should balance risk should be sufficiently long to allow for some cases, two or more methods may
and financial rewards in a manner that the realization of a substantial portion of be needed in combination for an
does not provide covered persons with the risks from the covered person’s incentive-based compensation
incentives to take inappropriate risks activities, and the measures of loss arrangement to be balanced. The greater
that could lead to material financial loss should be clearly explained to covered the potential incentives that an
at the covered financial institution. The persons and closely tied to their arrangement creates for a covered
Agencies would deem an incentive- activities during the relevant person to increase the risks borne by the
based compensation arrangement to be performance period. covered financial institution, the
balanced when the amounts paid to a Longer Performance Periods: Under stronger the effect should be of the
covered person appropriately take into this method of making incentive-based methods applied to achieve balance.25
account the risks, as well as the compensation risk sensitive, the time
period covered by the performance Compatibility With Effective Controls
financial benefits, from the covered
measures used in determining a covered and Risk Management
person’s activities and the impact of
those activities on the covered financial person’s award is extended (for A covered financial institution’s risk
institution. example, from one year to two years). management processes and internal
In assessing whether incentive-based Longer performance periods and controls should reinforce and support
compensation arrangements are deferral of payment are related in that the development and maintenance of
balanced, the Agencies will consider the both methods allow awards or payments balanced incentive-based compensation
full range of risks associated with a to be made after some or all risk arrangements.26 In particular, under this
covered person’s activities, as well as outcomes associated with a covered proposed standard, the Agencies would
the time horizon over which those risks person’s activities are realized or better expect a covered financial institution to
may be realized. The activities of a known. have strong controls governing its
Reduced Sensitivity to Short-Term processes for designing, implementing
covered person may create a wide range
Performance: A covered financial and monitoring incentive-based
of risks for a covered financial
institution using this method reduces compensation arrangements, and for
institution, including credit, market,
the rate at which awards increase as a ensuring that risk-management
liquidity, operational, legal, compliance,
covered person achieves higher levels of personnel have an appropriate role in
and reputational risks. Some of these
the relevant performance measure(s) the institution’s processes for designing
risks may be realized in the short term,
used in the person’s incentive-based incentive-based compensation
while others may become apparent only
compensation arrangement. Rather than arrangements, monitoring their use, and
over the long term.
offsetting risk-taking incentives assessing whether they achieve balance.
The Proposed Rule identifies four associated with the use of short-term Covered financial institutions should
methods that currently are often used to performance measures, this method have appropriate controls to ensure that
make compensation more sensitive to reduces the magnitude of such their processes for achieving balanced
risk. These methods are: incentives. compensation arrangements are
Risk Adjustment of Awards: Under The Agencies recognize that these followed and to maintain the integrity of
this method of making a covered methods for achieving balance are not their risk management and other
person’s incentive-based compensation exclusive, and additional methods or functions. Such controls are important
appropriately risk-sensitive, the amount variations of these approaches may exist because covered persons may seek to
of the person’s incentive-based or be developed.24 Methods and evade or weaken an institution’s
compensation award is adjusted based practices for making compensation processes to achieve balanced incentive-
on measures that take into account the sensitive to risk-taking are likely to based compensation arrangements in
risk the covered person’s activities pose evolve during the next few years. order to increase their own
to the covered financial institution. Moreover, each method has its own compensation. For example, in order to
Such measures may be quantitative, or advantages and disadvantages that may increase his or her own incentive
the size of a risk adjustment may be set differ depending upon the situation in
25 See Banking Agency Guidance at 36409.
23 See Banking Agency Guidance at 36407. 24 See Banking Agency Guidance at 36407. 26 See Banking Agency Guidance at 36410–11.
compensation, a covered person may consolidated assets).29 At these larger officers at these larger covered financial
seek to influence inappropriately the covered financial institutions, at least 50 institutions extend for at least three
risk measures, information, or percent of the incentive-based years. Larger covered financial
judgments used to balance the covered compensation of an ‘‘executive officer’’ institutions tend to have more diverse
person’s compensation. These activities (as previously defined), would have to business operations, which can make it
can have additional damaging effects on be deferred over a period of at least more difficult to immediately recognize
the institution’s financial health if they three years. The Proposed Rule also and assess risks for the organization as
result in the weakening of the would require that deferred amounts a whole. Furthermore, in enacting the
information or processes that the paid be adjusted for actual losses of the Dodd-Frank Act, Congress recognized
institution uses for other risk covered financial institution or other that larger organizations may pose a
management, internal control, or measures or aspects of performance that greater risk to the financial system by
financial purposes.27 are realized or become better known requiring the creation of enhanced
during the deferral period. prudential standards for certain bank
Strong Corporate Governance holding companies with total
The Agencies believe that incentive-
Strong and effective corporate based compensation arrangements for consolidated assets greater than $50
governance is critical to the executive officers at larger covered billion.31
establishment and maintenance of financial institutions are likely to be The Proposed Rule recognizes that
sound compensation practices.28 The better balanced if they involve the requiring deferral for this discrete group
board of directors of a covered financial deferral of a substantial portion of the of individuals at larger covered
institution, or committee thereof, should executives’ incentive compensation over institutions, where ex ante risk
actively oversee incentive-based a multi-year period in a way that adjustment measures are less likely to
compensation arrangements and is reduces the amount received in the be effective in and of themselves, is
ultimately responsible for ensuring that event of poor performance. The likely to be a useful balancing tool that
the covered financial institution’s decisions of executive officers have a allows a period of time for risks not
incentive compensation arrangements significant impact on the entire previously discerned or quantifiable to
are appropriately balanced. organization and often involve ultimately materialize, and concurrently
Accordingly, the board of directors, or a substantial strategic or other risks that provides for adjustment of unreleased
committee thereof, should actively are difficult to measure and model— (or ‘‘unvested’’) deferral payments on the
oversee the development and operation particularly at larger covered financial basis of observed consequences and
of a covered financial institution’s institutions—and therefore difficult to actual performance as opposed to only
incentive-based compensation systems address adequately by ex ante risk predicted results.
and related control processes. For adjustments. If a covered financial institution is
example, the board of directors, or a required to use deferral, the Proposed
Requiring deferral for executive
committee thereof, should review and Rule provides it with flexibility in
officers is consistent with international
approve the overall goals and purposes administering its specific deferral
standards 30 that establish the
of the covered financial institution’s program. A covered financial institution
expectation that large interconnected
incentive-based compensation system may decide to release (or allow vesting
firms require the deferral of a
and ensure its consistency with the of) the full deferred amount in a lump-
substantial portion of incentive-based
institution’s overall risk tolerance. In sum only at the conclusion of the
compensation (identified as 40 to 60
addition, the board of directors, or deferral period; alternatively, the
percent of the incentive award, or more)
committee thereof, should receive data institution may release the deferred
for certain employees for a fixed period
and analysis to assess whether the amounts (or allow vesting) in equal
of time not less than three years and that increments, pro rata, for each year of the
overall design, as well as the incentives be correctly aligned with the deferral period. However, in no event
performance, of the institution’s nature of the business, its risks, and the may the release or vesting of amounts
incentive compensation arrangements activities of the employees in question. required to be deferred under
are consistent with section 956. Because the risks of strategic and other § ll.5(b)(3) of the Proposed Rule be
The Agencies request comment on all high-level decisions of executive faster than a pro rata equal-annual-
aspects of § __.5 of the Proposed Rule. officers may not be apparent or become increments distribution. For instance,
The Agencies also request comment on better known for many years, the an institution required to apply a three-
whether there are additional factors that Proposed Rule would require that the year deferral to a $150,000 deferral
should be considered in evaluating deferral arrangement for executive amount could release a maximum of
whether compensation is excessive or $50,000 each year or could withhold the
could lead to material financial loss and 29 As noted above, the FHFA is proposing to
entire sum for the entire period and
whether the Proposed Rule should adopt this requirement for all the entities it
regulates—Fannie Mae, Freddie Mac, the twelve distribute it as a lump-sum at the
include additional details about each of Federal Home Loan Banks, and the Office of conclusion of the three-year period. The
these standards. Finance, without regard to asset size, except for institution could also employ an
covered entities in conservatorship, receivership, or
Larger Covered Financial Institutions bridge status. FHFA, as conservator of Fannie Mae
alternate distribution that is less rapid
and Freddie Mac, requires that one-third of than a pro-rata equal-annual-increments
Deferral Arrangements Required for incentive pay for named executive officers be schedule, such as releasing no amount
Executive Officers deferred over a two-year period. This deferred pay after the first year, releasing a maximum
is based on corporate and individual performance.

Paragraph (b)(3) of § ll.5 of the In addition, deferred pay is paid to Senior Vice
of $100,000 the second year, and then
Proposed Rule would establish a Presidents and above in quarterly installments in $50,000 for the third year.
deferral requirement for larger covered the year following the performance year. One-half Specific comment is solicited on all
financial institutions (i.e., generally of this one-year deferral of payments is based on the aspects of the scope, and specific
Board of Directors’ determination of corporate
those with $50 billion or more in total performance. As a result, more than one-half of the
requirements, of this proposed deferral
annual incentive-based compensation is deferred requirement. In particular, commenters
27 See Banking Agency Guidance at 36411. for senior executives.
28 See Banking Agency Guidance at 36412. 30 See supra note 22. 31 12 U.S.C. 5635.
are asked to address whether it is financial institution, the Proposed Rule ability of the methods used to make
appropriate to mandate deferral for would require that, at a larger covered payments sensitive to the full range of
executive officers at larger covered financial institution, the board of risks presented by that covered person’s
financial institutions to promote the directors, or a committee thereof, activities, including those risks that may
alignment of employees’ incentives with identify those covered persons (other be difficult to predict, measure, or
the risk undertaken by such employees. than executive officers) that model.
For example, comment is solicited on individually have the ability to expose The Agencies request comment on
whether deferral is generally an the institution to possible losses that are these proposed additional
appropriate method for achieving substantial in relation to the identification, review, and approval
balanced incentive compensation institution’s size, capital, or overall risk requirements for larger covered
arrangements for each type of executive tolerance.32 The proposal notes that financial institutions with respect to
officer at these institutions or whether these covered persons may include, for individuals that have the ability to
there are alternative or more effective example, traders with large position expose the institution to possible losses
ways to achieve such balance. limits relative to the institution’s overall that are substantial in relation to the
Commenters are also asked to address risk tolerance and other individuals that institution’s size, capital, or overall risk
the possible impact that the required have the authority to place at risk a tolerance. Is the proposed special
minimum deferral provisions for senior substantial part of the capital of the treatment of these covered persons
executives may have on larger covered covered financial institution. In necessary or appropriate, or is their
financial institutions and whether the addition, the Proposed Rule would incentive compensation adequately
proposed or different deferral require that the board of directors, or a addressed by the prohibitions
requirements should apply to senior committee thereof, of the institution applicable to all other covered persons
executives at institutions other than approve the incentive-based (other than executive officers at larger
larger covered financial institutions. For compensation arrangement for such covered financial institutions) under the
example, would it be prudent to individuals, and maintain proposal? Is it sufficient that, as under
mandate deferred incentive-based documentation of such approval. the proposal, such covered persons are
compensation for certain types of Under the proposal, the board of not subject to mandatory deferral but
covered financial institutions but not directors, or committee thereof, of a instead are separately identified by the
require such deferral for other larger covered financial institution may institution’s board and the board is
institutions (e.g., investment advisers) not approve the incentive-based required to approve the incentive-based
based on the business, risks inherent to compensation arrangement for an compensation arrangement for the
that business, or other relevant factors? individual identified by the board of covered person after ensuring it is
Are there additional considerations, directors, or committee thereof, unless balanced and sensitive to risk? Should
such as tax or accounting the board (or committee) determines further guidance be provided as to the
considerations, that may affect the that the arrangement, including the meaning of the phrase ‘‘substantial in
ability of larger covered financial method of paying compensation under relation to the institution’s size, capital,
institutions to comply with the the arrangement, effectively balances or overall risk tolerance’’?
proposed deferral requirement or that the financial rewards to the covered § ll.6 Policies and Procedures. As
the Agencies should consider in person and the range and time horizon noted above, the Agencies believe that
designing this provision in the rule? of risks associated with the covered the incentive-based compensation
Comment is also sought on whether the person’s activities, employing practices of covered financial
mandatory deferral provisions of the appropriate methods for ensuring risk institutions should be supported by
rule should apply to a differently sensitivity. The proposal recognizes that policies and procedures, appropriate to
defined group of individuals at larger the methods used to balance the the size and complexity of the covered
covered financial institutions, such as rewards and risks of the individual’s financial institution, to foster
the institution’s top 25 earners of activities may include deferral of transparency of each covered financial
incentive-based compensation? payments, risk adjustment of awards, institution’s incentive-based
Commenters also are asked to address compensation practices and to promote
reduced sensitivity to short-term
whether the three-year and 50 percent of compliance and accountability
performance, or longer performance
incentive-based compensation regarding the practices that the Agencies
periods, or other appropriate methods.
minimums are appropriate? Should the propose to prohibit. Accordingly, the
However, the board of directors, or
minimum required deferral period be Proposed Rule would require covered
committee thereof, must determine that
extended to, for example, five years? financial institutions to have policies
the method(s) used effectively balance
and procedures governing the award of
Special Review and Approval the financial rewards to the covered
incentive-based compensation as a way
Requirement for Other Designated person and the range and time horizons
to help ensure the full implementation
Individuals of the risks associated with the covered
of the prohibitions in the Proposed
Other individuals at a larger covered person’s activities. In performing its Rule.
financial institution, beyond the duties in this regard, the board, or The Agencies believe that the policies
institution’s executive officers may have committee thereof, must evaluate the and procedures developed by each
the ability to expose the institution to overall effectiveness of the balancing covered financial institution in this area
possible losses that are substantial in methods used in the identified covered should be appropriately tailored to
person’s incentive compensation
relation to the institution’s size, capital, balance risk and reward for an
or overall risk tolerance. In order to help arrangements in reducing incentives for institution of its size, complexity, and
ensure that the incentive compensation inappropriate risk taking by the business activity, as well as the scope
arrangements for these individuals are identified covered person, as well as the and nature of the covered financial
appropriately balanced, and do not 32 In addition to the compensation-deferral
institution’s incentive-based
encourage the individual to expose the requirement described above, the FHFA proposes to
compensation arrangements. Therefore,
institution to risks that could pose a risk apply this requirement to all of the entities it the policies and procedures of smaller
of material financial loss to the covered regulates without regard to asset size. covered financial institutions with less
complex incentive-based compensation have responsibility for ongoing section 956 of the Act. As with other
programs would be expected to be less assessment of incentive-based provisions of the Proposed Rule, the
extensive than those of larger covered compensation policies to help to ensure scope and nature of the data and
financial institutions with relatively that the covered financial institution’s analysis should be appropriate to the
complex programs and business processes remain up-to-date and size and complexity of the covered
activities. The Agencies note, however, effective relative to its incentive financial institution and its use of
that no categories of covered financial compensation practices. The ongoing incentive-based compensation. The
institutions using incentive-based involvement of such personnel in the Agencies expect that the board of
compensation would be systematically evaluation of incentive-based directors, or committee thereof, would
or completely exempt from developing, compensation arrangements also helps take into consideration the firm’s overall
maintaining, and documenting their to ensure that risks are properly risk management policies and
incentive-based compensation policies understood and evaluated as such risks procedures and the requirements of
and procedures. change over time in light of a section 956(b) of the Act when assessing
As noted above, the prohibition on continuously changing business compliance with the Act.
incentive-based compensation environment. Accordingly, paragraph Paragraph (b)(5) of § ll.6 of the
arrangements that could lead to material (b)(2) of § ll.6 of the Proposed Rule Proposed Rule would specify that the
financial loss would affect only those would make such a requirement part of policies and procedures of a covered
arrangements for covered persons that, the covered financial institution’s financial institution must provide that
either individually or as a group, may policies and procedures governing the institution maintains sufficient
expose the institution to material incentive-based compensation. documentation of the institution’s
financial loss. Accordingly, the policies Paragraph (b)(3) of § ll.6 would processes for establishing,
and procedures of an institution related require that a covered financial implementing, modifying, and
to this prohibition should be focused on institution’s policies and procedures monitoring incentive-based
these covered persons. Depending on provide for the monitoring by a group or compensation arrangements sufficient to
the facts and circumstances of the person independent of the covered enable the institution’s appropriate
individual covered financial institution, person, where practicable in light of the Federal regulator to determine the
certain jobs and classes of jobs may not institution’s size and complexity, of covered financial institution’s
have the ability to expose the incentive-based compensation awards compliance with section 956 of the Act
organization to material financial loss and payments, risks taken, and actual and the Proposed Rule. Given that the
and, as a result, incentive-based risk outcomes to determine whether determinations to be made regarding
compensation arrangements for these incentive-based compensation payments incentive-based compensation are fact-
covered persons within these job classes are reduced to reflect adverse risk specific, the Agencies believe that
may be outside the scope of these outcomes or high levels of risk taken. To effective documentation of the covered
restrictions. Examples of jobs and be considered independent under the financial institution’s policies,
classes of jobs that may be unlikely to Proposed Rule, the group or person at procedures and actions related to
expose the institution to material risk the covered financial institution incentive-based compensation is
include tellers, bookkeepers, couriers, or monitoring or assessing incentive-based essential both to help promote the risk-
data processing personnel. compensation awards must have a based discipline that section 956 of the
Paragraph (b)(1) of § ll.6 of the separate reporting line to senior Act seeks to foster with respect to
Proposed Rule would require that the management from the covered person covered financial institutions and to
policies and procedures, at a minimum, who is creating the risks so as to help facilitate meaningful oversight and
be designed to address the § ll.4 ensure that the analysis of risk is examination. In this context, the
reporting requirements and the § ll.5 unbiased. Given the dynamic nature of Agencies would expect the
prohibitions.33 Requiring such policies risk management, the Proposed Rule documentation maintained by a covered
and procedures of covered financial also provides for incentive-based financial institution under the Proposed
institutions that award incentive-based compensation awards to be monitored Rule to include, but not be limited to,
compensation would promote in light of risks taken and outcomes to the following:
compliance with the prohibitions in determine whether incentive-based (1) A copy of the covered financial
practice. payments should be modified. The institution’s incentive-based
In order to help ensure that the risks Agencies contemplate that the compensation arrangement(s) or plan(s);
inherent in a covered person’s actions procedures relating to the adjustment of (2) The names and titles of
are appropriately captured, the Agencies deferred amounts would be used by individuals covered by such
believe that risk-management, risk- covered financial institutions required arrangement(s) or plan(s);
oversight, and internal-control to defer a portion of their incentive- (3) A record of the incentive-based
personnel should be involved in all based compensation under § ll.6 of compensation awards made under the
phases of the process for designing this Rule to augment their compliance arrangement(s) or plan(s); and
incentive-based compensation with the deferral obligation. (4) Records reflecting the persons or
arrangements. Risk-management and Paragraph (b)(4) of § ll.6 would units involved in the approval and
risk-oversight personnel also should require a covered financial institution to ongoing monitoring of the
develop and maintain policies and arrangement(s) or plan(s).
33 In addition, for U.S. operations of foreign
procedures designed to ensure that the Paragraph (b)(6) of § ll.6 of the
banking organizations (‘‘FBOs’’), the organization’s covered financial institution’s board of Proposed Rule would provide that,
policies, including management, review, and
approval requirements for its U.S. operations,
directors, or a committee thereof, where a covered financial institution
should be coordinated with the FBO’s group-wide receive data and analysis from uses deferral in connection with an
policies developed in accordance with the rules of management and other sources incentive-based compensation
the FBO’s home country supervisor. The policies of sufficient to allow it to assess whether arrangement, the institution’s policies
the FBO’s U.S. operations should also be consistent
with the FBO’s overall corporate and management
the overall design and performance of and procedures provide for deferral of
structure, as well as its framework for risk- the firm’s incentive-based compensation any such payments in amounts and for
management and internal controls. arrangements are consistent with periods of time appropriate to the duties
and responsibilities of the covered as a way to lock in value for equity especially on those issues specifically
financial institution’s covered persons, compensation that is vested over time. noted in this preamble.
the risks associated with those duties The Agencies are concerned that
Solicitation of Comments on Use of
and responsibilities, and the size and undertaking such hedging strategies
Plain Language
complexity of the covered financial during deferral periods could diminish
institution.34 Further, proposed the alignment between risk and Section 722 of the Gramm-Leach-
paragraph (b)(6) would require that any financial rewards that may be achieved Bliley Act, Public Law 106–102, sec.
such deferred amounts paid be adjusted through these types of deferral 722, 113 Stat. 1338, 1471 (Nov. 12,
for actual losses or other measures or arrangements. The Agencies have not 1999), requires the Federal banking
aspects of performance that are realized included policies and procedures agencies to use plain language in all
or become better known during the regarding such personal hedging proposed and final rules published after
deferral period. The Agencies believe strategies in the Proposed Rule, but the January 1, 2000. The Federal banking
that risk-management personnel at the Agencies are concerned that, to the agencies invite your comments on how
covered financial institution would play extent personal hedging strategies may to make this proposal easier to
a substantial role in identifying and be widespread, such practices would understand. For example:
evaluating risks that become better serve to diminish the effectiveness of a • Have we organized the material to
known with the passage of time. The covered financial institution’s policies suit your needs? If not, how could this
Agencies contemplate that the and procedures. Thus, the Agencies are material be better organized?
procedures relating to the adjustment of considering whether a covered financial • Are the requirements in the
deferred amounts would be used by institution’s policies and procedures proposed regulation clearly stated? If
covered financial institutions required should be required to specifically not, how could the regulation be more
to defer a portion of their incentive- include limits on personal hedging clearly stated?
based compensation under § ll.5 of strategies. To assist in the evaluation of • Does the proposed regulation
the Proposed Rule to facilitate their such a provision, in addition to contain language or jargon that is not
compliance with the deferral obligation. requesting comment on all aspects of clear? If so, which language requires
Given the importance of incentive- § ll.6 of the Proposed Rule, the clarification?
based compensation arrangements to a Agencies are requesting commenters to • Would a different format (grouping
covered financial institution’s safety describe the extent to which covered and order of sections, use of headings,
and soundness, paragraph (b)(7) of financial institutions prohibit such paragraphing) make the regulation
§ ll.6 would require the policies and practices among their covered persons easier to understand? If so, what
procedures to subject any incentive- today. Would prohibiting the use of changes to the format would make the
based compensation arrangement or financial derivatives, insurance regulation easier to understand?
component thereof to a corporate contracts or other similar mechanisms • What else could we do to make the
governance framework that provides for to hedge against the market risk of regulation easier to understand?
ongoing oversight by the board of equity-based incentive-based
directors or a committee of the board of compensation be an effective means to NCUA Agency Regulatory Goal
directors. As discussed above, covered help to ensure that incentive-based NCUA’s goal is to promulgate clear
financial institutions should have strong compensation arrangements remain and understandable regulations that
and effective corporate governance to aligned with the risk assumed by impose minimal regulatory burden. We
help ensure sound compensation covered persons? Are there other factors request your comments on whether the
practices, including active and effective the Agencies should take into account proposed rule is understandable and
oversight by the board of directors. The when considering if, or how, to address minimally intrusive if implemented as
Agencies believe that the board of personal hedging activity by covered proposed.
directors or a committee thereof is persons?
ultimately responsible for a covered § ll.7 Evasion. Section ll.7 of the V. Regulatory Analysis
institution’s incentive-based Proposed Rule would prohibit a covered A. Regulatory Flexibility Act
compensation arrangements, which financial institution from evading the
should appropriately balance risk and restrictions of the rule by doing any act OCC: Pursuant to section 605(b) of the
rewards. Therefore, the board or its or thing indirectly, or through or by any Regulatory Flexibility Act, 5 U.S.C.
committee should engage in regular other person, that would be unlawful for 605(b) (RFA), the regulatory flexibility
oversight of the covered financial the covered institution to do directly analysis otherwise required under
institution’s incentive-based under the Proposed Rule. This anti- section 603 of the RFA is not required
compensation arrangements. evasion provision is designed to prevent if the agency certifies that the proposed
The Agencies are aware that covered covered financial institutions from, for rule will not, if promulgated, have a
persons at certain covered financial example, making substantial numbers of significant economic impact on a
institutions who have been awarded its covered persons independent substantial number of small entities
equity as part of a deferred incentive- contractors for the purpose of evading (defined for purposes of the RFA to
based compensation arrangement may this subpart. The Agencies do not include banks and Federal branches and
wish to use personal hedging strategies intend, however, to disrupt bona fide agencies with assets less than or equal
independent contractor relationships of to $175 million) and publishes its
34 The Proposed Rule would require deferral for
covered financial institutions. certification and a short, explanatory
at least three years of at least 50 percent of the statement in the Federal Register along
incentive-based compensation for executive officers
Comments are invited on whether
of larger covered financial institutions (generally greater specificity is required in with its proposed rule.
those with $50 billion or more in total consolidated identifying possible evasion tactics, and Consistent with section 956(f) of the
assets). Most covered financial institutions with on all aspects of § ll.7. Dodd-Frank Act, the OCC’s proposed
total consolidated assets under $50 billion would be rule only would apply to national banks
required to adopt procedures applicable to deferred IV. Request for Comments and Federal branches and agencies that
compensation only when the firm elects to use
deferral in its incentive-based compensation The Agencies encourage comment on have total consolidated assets of $1
program. any aspect of this proposal and billion or more. The Proposed Rule
would not apply to any small national large, complex institution that uses purposes of the Regulatory Flexibility
banks and Federal branches and incentive-based arrangements to a Act. In light of the foregoing, the Board
agencies, as defined by the RFA. significant degree would be does not believe that the Proposed Rule,
Therefore, the OCC certifies that the substantially greater than that submitted if adopted in final form, would have a
Proposed Rule would not, if by a smaller institution that has only a significant economic impact on a
promulgated, have a significant few incentive-based compensation substantial number of small entities
economic impact on a substantial arrangements or arrangements that affect supervised by the Board. The Board
number of small entities. only a limited number of covered specifically seeks comment on whether
Board: The Board has considered the persons. the Proposed Rule would impose undue
potential impact of the Proposed Rule The Proposed Rule would implement burdens on, or have unintended
on small banking organizations in section 956(b) of the Dodd-Frank Act by consequences for, small organizations
accordance with the Regulatory prohibiting a covered financial and whether there are ways such
Flexibility Act (5 U.S.C. 603(b)). As institution from having incentive-based potential burdens or consequences
discussed in the SUPPLEMENTARY compensation arrangements that may could be addressed in a manner
INFORMATION above, section 956 of the encourage inappropriate risks (i) by consistent with section 956 of the Dodd-
Dodd-Frank Act (codified at 12 U.S.C. providing excessive compensation or (ii) Frank Act.
5641) requires that the Agencies that could lead to material financial FDIC: In accordance with the
prohibit any incentive-based payment loss. The Proposed Rule would establish Regulatory Flexibility Act, 5 U.S.C. 601–
arrangement, or any feature of any such standards for determining whether an 612 (RFA), an agency must publish an
arrangement, at a covered financial incentive-based compensation initial regulatory flexibility analysis
institution that the Agencies determine arrangement violates these prohibitions. with its Proposed Rule, unless the
encourages inappropriate risks by a These standards would include deferral agency certifies that the rule will not
financial institution by providing and other requirements for certain have a significant economic impact on
excessive compensation or that could covered persons at covered financial a substantial number of small entities.
lead to material financial loss. In institutions with total consolidated For purposes of the RFA, small entities
addition, under the Act a covered assets of more than $50 billion. are defined to include banks with less
financial institution also must disclose Consistent with section 956(c), the than $175 million in assets.
to its appropriate Federal regulator the standards adopted under section 956 are Consistent with section 956 of the
structure of its incentive-based comparable to the compensation-related Dodd-Frank Act, the FDIC’s Proposed
compensation arrangements. The Board safety and soundness standards Rule would only apply to a State
and the other Agencies have issued the applicable to insured depository nonmember bank and an insured U.S.
Proposed Rule in response to these institutions under section 39 of the branch of a foreign bank that has total
requirements of the Dodd-Frank Act. FDIA. The Proposed Rule also would consolidated assets of $1 billion or more
The Proposed Rule would apply to supplement existing guidance adopted and offers incentive compensation. The
‘‘covered financial institutions’’ as by the Board and the other Federal Proposed Rule would not apply to any
defined in section 956 of the Dodd- banking agencies regarding incentive- small banks as defined by the RFA.
Frank Act. Covered financial based compensation (i.e., the Banking Thus, the FDIC certifies that the
institutions as so defined include Agency Guidance, as defined in the Proposed Rule, if promulgated, would
specifically listed types of institutions, ‘‘Supplementary Information’’ above). not have a significant economic impact
as well as other institutions added by The Proposed Rule would require on a substantial number of small
the Agencies acting jointly by rule. In covered financial institutions to have entities.
every case, however, covered financial policies and procedures governing the OTS: Pursuant to section 605(b) of the
institutions must have at least $1 billion award of incentive-based compensation Regulatory Flexibility Act, 5 U.S.C.
in total consolidated assets pursuant to as a way to help ensure the full 605(b) (RFA), the regulatory flexibility
section 956(f). Thus the Proposed Rule implementation of the prohibitions in analysis otherwise required under
is not expected to apply to any small the Proposed Rule. The Board believes section 603 of the RFA is not required
banking organizations (defined as that the policies and procedures if the agency certifies that the proposed
banking organizations with $175 million developed by each covered financial rule, if promulgated, will not have a
or less in total assets). See 13 CFR institution in this area should be significant economic impact on a
121.201. appropriately tailored to balance risk substantial number of small entities and
The Proposed Rule would implement and reward for an institution of its size, publishes its certification and a short,
section 956(a) of the Dodd-Frank act by complexity, and business activity, as explanatory statement in the Federal
requiring a covered financial institution well as the scope and nature of the Register along with its proposed rule.
to submit a report annually to its covered financial institution’s incentive- OTS certifies that the Proposed Rule
appropriate regulator or supervisor in a based compensation arrangements. would not have a significant impact on
format specified by its appropriate Therefore, the policies and procedures a substantial number of small entities.
Federal regulator that describes the of smaller covered financial institutions The Small Business Administration has
structure of the covered financial with less complex incentive-based defined ‘‘small entities’’ for banking
institution’s incentive-based compensation programs would be purposes as a bank or savings
compensation arrangements for covered expected to be less extensive than those association with $175 million or less in
persons. The volume and detail of of larger covered financial institutions assets. 13 CFR 121.201. Since OTS’s
information provided annually by a with relatively complex programs and Proposed Rule only applies to savings
covered financial institution should be business activities. associations and savings and loan
commensurate with the size and As noted above, because the Proposed holding companies with $1 billion or
complexity of the institution, as well as Rule applies to institutions that have more of assets, it will not apply to any
the scope and nature of its incentive- more than $1 billion in total small entities.
based compensation arrangements. As consolidated assets, if adopted in final FHFA: The Regulatory Flexibility Act
such, the Board expects that the volume form it is not expected to apply to any (5 U.S.C. 601 et seq.) requires that a rule
and detail of information provided by a small banking organizations for that has a significant economic impact
on a substantial number of small 1. Small Entities Subject to the Rule that take into account the resources
entities, small businesses, or small As described in more detail above, the available to small entities, (2) the
organizations must include an initial proposed rules would implement clarification, consolidation, or
regulatory flexibility analysis describing section 956 of the Dodd-Frank Act, simplification of compliance and
the rule’s impact on small entities. Such codified as 12 U.S.C. 5641. For purposes reporting requirements under the rule
an analysis need not be undertaken if of Commission rulemaking in for small entities, (3) the use of
the agency has certified that the rule connection with the RFA, a small entity performance rather than design
will not have a significant economic includes a broker-dealer: (i) With total standards, and (4) an exemption from
impact on a substantial number of small capital (net worth plus subordinated coverage of the rule, or any part of the
entities. 5 U.S.C. 605(b). FHFA has liabilities) of less than $500,000 on the rule, for small entities.
considered the impact of the final rule date in the prior fiscal year as of which The Commission does not believe it is
under the Regulatory Flexibility Act. its audited financial statements were necessary or appropriate to establish
FHFA certifies that the final rule is not prepared pursuant to Rule 17a–5(d) different compliance or reporting
likely to have a significant economic under the Exchange Act, and (ii) is not requirements or timetables; clarify,
impact on a substantial number of small affiliated with any person (other than a consolidate, or simplify compliance and
business entities because the rule is natural person) that is not a small reporting requirements under the rule
applicable only to FHFA’s covered business or small organization as for small entities; or summarily exempt
entities, which are not small entities for defined in this section.36 Commission small entities from coverage of the rule,
purposes of the Regulatory Flexibility rules further provide that, for the or any part of the rule because the
Act. purposes of the Investment Advisers Act proposed rule will not apply to any
NCUA: In accordance with the of 1940, an investment adviser generally small entities.
Regulatory Flexibility Act, 5 U.S.C. 601– is a small entity if it: (i) Has assets under
management having a total value of less 4. Request for Comments
612 (RFA), NCUA must publish an
initial regulatory flexibility analysis than $25 million; (ii) did not have total The Commission encourages the
assets of $5 million or more on the last submission of comments to any aspect
with its proposed rule, unless NCUA
day of its most recent fiscal year; and of this portion of the IRFA. In particular,
certifies that the proposed rule would
(iii) does not control, is not controlled comments are encouraged on whether
not have a significant economic impact
by, and is not under common control any small entities would be subject to
on a substantial number of small
with another investment adviser that the terms of the proposed rule.
entities, meaning those credit unions
has assets under management of $25
under $10 million in assets. NCUA Comments should specify costs of
million or more, or any person (other
Interpretive Ruling and Policy compliance with the proposed rules and
than a natural person) that had $5
Statement 03–2, 68 FR 31949 (May 29, suggest alternatives that would
million or more on the last day of its
2003). The Dodd-Frank Act section 956 accomplish the objective of the
most recent fiscal year (‘‘small
and the NCUA’s proposed rule only proposed rules.
adviser’’).37
apply to credit unions of $1 billion in Section 956 of the Dodd-Frank Act B. Paperwork Reduction Act
assets or more. Accordingly, NCUA requires regulators, including the
certifies that the proposed rule would Commission, to jointly promulgate rules Request for Comment on Proposed
not have a significant economic impact that apply to covered financial Information Collection
on a substantial number of small entities institutions with assets of at least $1 In accordance with section 3512 of
since the credit unions covered under billion. The Commission believes that the Paperwork Reduction Act (PRA) of
NCUA’s proposed rule are not small broker-dealers and investment advisers 1995 (44 U.S.C. 3501–3521), agencies
entities for RFA purposes. that would be subject to the proposed may not conduct or sponsor, and a
SEC: The Commission has prepared rule would either have $1 billion in respondent is not required to respond
the following Initial Regulatory assets or be affiliated with a firm that is to, an information collection unless it
Flexibility Analysis (IRFA), in characterized by at least $1 billion in displays a currently valid Office of
accordance with the provisions of the assets. Therefore, the Commission Management and Budget (OMB) control
Regulatory Flexibility Act 35 regarding preliminarily believes that there should number. The information collection
proposed Sections 248.201 through not be any small broker-dealers or requirements contained in this joint
248.207. The Commission encourages investment advisers impacted by this notice have been submitted by the FDIC,
comments with respect to any aspect of proposed rule. OCC, OTS, NCUA, and SEC to OMB for
this IRFA, including comments with 2. Duplicative, Overlapping, or review and approval under section 3506
respect to the number of small entities Conflicting Federal Rules of the PRA and § 1320.11 of OMB’s
that may be affected by the proposed implementing regulations (5 CFR 1320).
The Commission believes that there
rules. Comments should specify the For the FHFA, the proposed rule does
are no Federal rules that duplicate,
costs of compliance with the proposed not contain any information collected
overlap, or conflict with the proposed
rules and suggest alternatives that from Fannie Mae, Freddie Mac and the
rules.
would accomplish the goals of the rules. Federal Home Loan Banks, including
Comments will be considered in 3. Significant Alternatives the Office of Finance, that requires the
determining whether a Final Regulatory Pursuant to section 3(c) of the RFA,38 approval of OMB under the Paperwork
Flexibility Analysis is required and will the Commission must consider certain Reduction Act (44 U.S.C. 3501 et seq.).
be placed in the same public file as types of alternatives, including (1) The The Board reviewed the proposed rule
comments on the proposed rules. establishment of differing compliance or under the authority delegated to the
Comments should be submitted to the reporting requirements or timetables Board by OMB. The proposed rule
Commission at the addresses previously contains requirements subject to the
indicated. 36 17 CFR 240.0–10(c). See 17 CFR 240.17a–5(d). PRA. The reporting requirements are
37 Rule 0–7(a). 17 CFR 275.0–7(a). found in § __.4 and the recordkeeping
35 5 U.S.C. 603. 38 5 U.S.C. 603(c). requirements are found in
§§ __.5(b)(3)(ii)(B), __.6(a), and regs.comments@occ.treas.gov. You may document in the Federal Register.
__.6(b)(5). personally inspect and photocopy Therefore, a comment to OMB is best
Comments are invited on: comments at the OCC, 250 E Street, assured of having its full effect if OMB
(a) Whether the collection of SW., Washington, DC 20219. For receives it within 30 days of
information is necessary for the proper security reasons, the OCC requires that publication. This does not affect the
performance of the agencies’ functions, visitors make an appointment to inspect deadline for the public to comment to
including whether the information has comments. You may do so by calling the NCUA on the proposed regulation.
practical utility; 202–874–4700. Upon arrival, visitors SEC: Comments should be directed to
(b) The accuracy of the estimate of the will be required to present valid the Office of Management and Budget,
burden of the information collection, government-issued photo identification Attention: Desk Officer for the
including the validity of the and submit to security screening in Securities and Exchange Commission,
methodology and assumptions used; order to inspect and photocopy Office of Information and Regulatory
(c) Ways to enhance the quality, comments. Affairs, Room 10102, New Executive
utility, and clarity of the information to OTS: Information Collection Office Building, Washington, DC 20503,
be collected; Comments, Chief Counsel’s Office, and commenters also should send a
(d) Ways to minimize the burden of Office of Thrift Supervision, 1700 G copy of their comments to Elizabeth M.
information collection on respondents, Street, NW., Washington, DC 20552; Murphy, Secretary, Securities and
including through the use of automated send a facsimile transmission to 202– Exchange Commission, 100 F Street,
collection techniques or other forms of 906–6518; or send an e-mail to NE., Washington, DC 20549–1090, and
information technology; and infocollection.comments@ots.treas.gov. refer to File No. S7–12–11. We will post
(e) Estimates of capital or startup costs OTS will post comments and the related all public comments we receive without
and costs of operation, maintenance, index on the OTS Internet site at change, including any personal
and purchase of services to provide http://www.ots.treas.gov. In addition, information you provide, such as your
information. interested persons may inspect the name and address, on the SEC Web site
All comments will become a matter of comments at the Public Reading Room, at http://www.sec.gov. Requests for
public record. Comments should be 1700 G Street, NW., by appointment. To materials submitted to OMB by the
addressed to: make an appointment, call 202–906– Commission with regard to this
FDIC: You may submit written 5922, send an e-mail to collection of information should be in
comments, identified by the RIN, by any public.info@ots.treas.gov, or send a writing, refer to File No. S7–12–11, and
of the following methods: facsimile transmission to 202–906– be submitted to the Securities and
• Agency Web Site: http:// 7755. Exchange Commission, Office of
www.fdic.gov/regulations/laws/federal/ NCUA: You may submit comments by Investor Education and Advocacy, 100 F
propose.html. Follow the instructions any of the following methods (Please Street, NE., Washington, DC 20549–
for submitting comments on the FDIC send comments by one method only): 0213. OMB is required to make a
Web site. • Federal eRulemaking Portal: http:// decision concerning the collection of
• Federal eRulemaking Portal: http:// www.regulations.gov. Follow the information between 30 and 60 days
www.regulations.gov. Follow the instructions for submitting comments. after publication of this release in the
instructions for submitting comments. • Agency Web site: http:// Federal Register. A comment to OMB is
• E-mail: Comments@FDIC.gov. www.ncua.gov/ best assured of having full effect if OMB
Include RIN 3064–AD56 on the subject RegulationsOpinionsLaws/ receives it within 30 days after
line of the message. proposedregs/proposedregs.html. publication of this release.
• Mail: Robert E. Feldman, Executive Follow the instructions for submitting Board: You may submit comments,
Secretary, Attention: Comments, FDIC, comments. identified by Docket No. R–1410, by any
550 17th Street, NW., Washington, DC • E-mail: Address to of the following methods:
20429. regcomments@ncua.gov. Include ‘‘[Your • Agency Web site: http://
• Hand Delivery/Courier: Comments name] Comments on Notice of Proposed www.federalreserve.gov. Follow the
may be hand delivered to the guard Rulemaking Incentive-based instructions for submitting comments
station at the rear of the 550 17th Street Compensation Arrangements’’ in the e- on the http://www.federalreserve.gov/
Building (located on F Street) on mail subject line. generalinfo/foia/ProposedRegs.cfm.
business days between 7 a.m. and 5 p.m. • Fax: 703–518–6319. Use the subject • Federal eRulemaking Portal: http://
Public Inspection: All comments line described above for e-mail. www.regulations.gov. Follow the
received will be posted without change • Mail: Address to David Chow, instructions for submitting comments.
to http://www.fdic.gov/regulations/laws/ Deputy Chief Information Officer, • E-mail:
federal/propose.html including any National Credit Union Administration, regs.comments@federalreserve.gov.
personal information provided. 1775 Duke Street, Alexandria, VA Include docket number in the subject
Comments may be inspected at the FDIC 22314–3428. line of the message.
Public Information Center, Room E– • Hand Delivery/Courier: Same as • FAX: 202–452–3819 or 202–452–
1002, 3501 Fairfax Drive, Arlington, VA mail address. 3102.
22226, between 9 a.m. and 5 p.m. on Additionally, you should send a copy • Mail: Jennifer J. Johnson, Secretary,
business days. of your comments to the OMB Desk Board of Governors of the Federal
OCC: You should direct all written Officer for the NCUA, by mail to U.S. Reserve System, 20th Street and
comments to: Communications Office of Management and Budget, 725 Constitution Avenue, NW., Washington,
Division, Office of the Comptroller of 17th Street, NW., 10235, Washington, DC 20551.
the Currency, Public Information Room, DC 20503, or by fax to 202–395–6974. All public comments are available
Mailstop 2–3, Attention: 1557–NEW, The Paperwork Reduction Act requires from the Board’s Web site at http://
250 E Street, SW., Washington, DC OMB to make a decision concerning the www.federalreserve.gov/generalinfo/
20219. In addition, comments may be collection of information contained in foia/ProposedRegs.cfm as submitted,
sent by fax to 202–874–5274, or by the proposed regulation between 30 and unless modified for technical reasons.
electronic mail to 60 days after publication of this Accordingly, your comments will not be
edited to remove any identifying or based compensation arrangements material financial loss; and (ii) does not
contact information. Public comments sufficient to determine whether the provide covered persons with excessive
may also be viewed electronically or in structure provides ‘‘excessive compensation.
paper in Room MP–500 of the Board’s compensation, fees, or benefits’’ or Section __.5(b)(3)(ii)(B) would require
Martin Building (20th and C Streets, ‘‘could lead to material financial loss’’ to the board of directors of covered
NW.) between 9 a.m. and 5 p.m. on the institution. The Dodd-Frank Act financial institutions that have total
weekdays. does not require a covered financial consolidated assets of $50 billion or
institution to disclose compensation of more to approve and document the
Proposed Information Collection individuals as part of this requirement. identification of those covered persons
Title of Information Collection: Section __.4(a) would require covered that individually have the ability to
Reporting and Recordkeeping financial institutions that have total expose the institution to possible losses
Requirements Associated with consolidated assets of $1 billion or more that are substantial in relation to the
Incentive-based Compensation to submit a report annually to the institution’s size, capital, or overall risk
Arrangements. Agency that describes the structure of tolerance.
Frequency of Response: Annual. the covered financial institution’s Section __.6(b)(5) would ensure that
Affected Public: Businesses or other incentive-based compensation documentation of the institution’s
for-profit. arrangements for covered persons and processes for establishing,
Respondents: that is sufficient to allow an assessment implementing, modifying, and
FDIC: State nonmember banks or an of whether the structure or features of monitoring incentive-based
insured U.S. branch of a foreign bank those arrangements provide or are likely compensation arrangements is
that has total consolidated assets of $1 to provide covered persons with maintained that is sufficient to enable
billion or more. excessive compensation, fees, or the Agency to determine the
OCC: National banks and Federal benefits to covered persons or could institution’s compliance with 12 U.S.C.
branches and agencies of foreign banks lead to material financial loss to the 5641.
with $1 billion or more in total assets. institution. Section __.4(b) would
OTS: Savings associations and savings Estimated Burden:
require the following minimum
and loan holding companies with $1 standards: FDIC
billion or more in total assets. (1) A clear narrative description of the
NCUA: Credit unions with $1 billion Number of respondents: 301 (12
components of the covered financial institutions with total consolidated
or more in total assets. institution’s incentive-based
SEC: Broker-dealers registered under assets of $50 billion or more and 289
compensation arrangements applicable institutions with total consolidated
section 15 of the Securities Exchange to covered persons;
Act of 1934 39 with $1 billion or more assets between $1 billion and $50
(2) A succinct description of the billion; 4,466 institutions with total
in total assets and investment advisers, covered financial institution’s policies
as such term is defined in section consolidated assets below $1 billion are
and procedures governing its incentive- exempt).
202(a)(11) of the Investment Advisers based compensation arrangements;
Act of 1940, with $1 billion or more in (3) If the covered financial institution Burden per respondent for initial set
total assets 40 (collectively ‘‘covered BDs has total consolidated assets of $50 up: 180 hours for institutions with $50
and IAs’’). billion or more,39 an additional succinct billion or more in total assets (80 hours
Board: State member banks, bank description of incentive-based for reporting requirements and 100
holding companies, and state-licensed compensation policies and procedures hours for recordkeeping requirements)
uninsured branches and agencies of specific to the covered financial and 70 hours for institutions between $1
foreign banks with more than $1 billion institution’s: billion and $50 billion in total assets (30
in total assets, and the U.S. operations (i) Executive officers; and hours for reporting requirements and 40
of foreign banking organizations with $1 (ii) Other covered persons who the hours for recordkeeping requirements).
billion or more in U.S. assets. board of directors, or a committee Burden per respondent for ongoing
Abstract: Section 956 of the Dodd- thereof, of the institution has identified compliance: 70 hours for institutions
Frank Act requires that the agencies and determined under § ___.5(b)(3)(ii) of with $50 billion or more in total assets
prohibit incentive-based payment this part individually have the ability to (40 hours for reporting requirements
arrangements at a covered financial expose the institution to possible losses and 30 hours for recordkeeping
institution that encourage inappropriate that are substantial in relation to the requirements) and 25 hours for
risks by a financial institution by institution’s size, capital, or overall risk institutions between $1 billion and $50
providing excessive compensation or tolerance; billion in total assets (15 hours for
that could lead to material financial (4) Any material changes to the reporting requirements and 10 hours for
loss. Under the Dodd-Frank Act, a covered financial institution’s incentive- recordkeeping requirements).
covered financial institution also must based compensation arrangements and Total FDIC annual burden: 30,455
disclose to its appropriate Federal policies and procedures made since the hours (22,390 hours for initial set-up
regulator the structure of its incentive- covered financial institution’s last and 8,065 hours for ongoing
report submitted under paragraph (a)(1) compliance).
39 15 U.S.C. 78o. of this section; and OCC
40 15 U.S.C. 80b–2(a)(11). By its terms, the (5) The specific reasons why the
definition of ‘‘covered financial institution’’ in covered financial institution believes Number of respondents: 158 (18
Section 956 includes any firm that meets the
definition of ‘‘investment adviser’’ under the the structure of its incentive-based institutions with total consolidated
Investment Advisers Act of 1940 (‘‘Investment compensation plan: (i) Does not provide assets of $50 billion or more and 140
Advisers Act’’), regardless of whether the firm is covered persons incentives to engage in institutions with total consolidated
registered as an investment adviser under the Act. behavior that is likely to cause the assets between $1 billion and $50
Banks and bank holding companies are generally
excluded from the definition of ‘‘investment covered financial institution to suffer billion; 1,215 institutions and 67 trust
adviser’’ under section 202(a)(11) of the Investment companies with total consolidated
Advisers Act. 39 For credit unions, $10 billion or more. assets below $1 billion are exempt).
Burden per respondent for initial set hours for reporting requirements and 40 structure of the firms’ incentive-based
up: 180 hours for institutions with $50 hours for recordkeeping requirements). compensation arrangements for covered
billion or more in total assets (80 hours Burden per respondent for ongoing persons in a manner that is sufficient to
for reporting requirements and 100 compliance: 70 hours for institutions allow an assessment of whether the
hours for recordkeeping requirements) with $10 billion or more in total assets structure or features of those
and 70 hours for institutions between $1 (40 hours for reporting requirements arrangements provide or are likely to
billion and $50 billion in total assets (30 and 30 hours for recordkeeping provide covered persons with excessive
hours for reporting requirements and 40 requirements) and 25 hours for compensation, fees, or benefits to
hours for recordkeeping requirements). institutions between $1 billion and $10 covered persons or could lead to
Burden per respondent for ongoing billion in total assets (15 hours for material financial loss to the firm.
compliance: 70 hours for institutions reporting requirements and 10 hours for Proposed § 248.204(c)(1) would require
with $50 billion or more in total assets recordkeeping requirements). a narrative description of the
(40 hours for reporting requirements Total NCUA annual burden: 18,410 components of the incentive-based
and 30 hours for recordkeeping hours (13,540 hours for initial set-up compensation arrangements applicable
requirements) and 25 hours for and 4,870 hours for ongoing to covered persons, specifying the types
institutions between $1 billion and $50 compliance). of covered persons to which they apply.
billion in total assets (15 hours for SEC Proposed § 248.204(c)(2) would require
reporting requirements and 10 hours for that covered BDs and IAs provide a
recordkeeping requirements). Number of respondents: The proposed succinct description of their incentive-
Total OCC annual burden: 17,800 rule would establish additional based compensation policies and
hours (13,040 hours for initial set-up reporting and recordkeeping burdens for procedures. Proposed § 248.204(c)(3)
and 4,760 hours for ongoing broker-dealers that are covered financial would require that covered BDs and IAs
compliance). institutions (‘‘covered BDs and IAs’’) with total consolidated assets of $50
with assets of at least $50 billion, as billion or more provide the Commission
OTS compared to covered BDs and IAs with with a succinct description of incentive-
Number of respondents: 163 (17 assets between $1 billion and $50 based compensation policies and
institutions with total consolidated billion. The Commission estimates that procedures applicable to executive
assets of $50 billion or more and 146 approximately 200 respondents officers and other covered persons
institutions with total consolidated (approximately 130 broker-dealers and whom the board of directors, or a
assets between $1 billion and $50 approximately 70 investment advisers) committee thereof, has identified as
billion. would be affected generally by the having the ability to expose the
Burden per respondent for initial set proposed rules, and that approximately institution to possible losses that are
up: 180 hours for institutions with $50 30 of the 200 respondents would be substantial in relation to the firm’s size,
billion or more in total assets (80 hours affected by proposed §§ 248.204(c)(3) capital, or overall risk tolerance.
for reporting requirements and 100 and 248.205(b)(3)(ii)(B).40 Proposed § 248.204(c)(4) would require
hours for recordkeeping requirements) (A) Proposed Section 248.204 (Required covered BDs and IAs to describe the
and 70 hours for institutions between $1 Reports) material changes to the firm’s incentive
billion and $50 billion in total assets (30 based compensation arrangements.
hours for reporting requirements and 40 The Commission, jointly with the
Proposed § 248.204(c)(5) would require
hours for recordkeeping requirements). other Agencies, proposes that covered
each covered BD and IA to describe the
Burden per respondent for ongoing BDs and IAs be required to describe the
specific reasons why it believes the
compliance: 70 hours for institutions 40 Each Federal regulator has proposed how to
structure of its incentive-based
with $50 billion or more in total assets calculate a firm’s ‘‘total consolidated assets’’. For compensation does not encourage
(40 hours for reporting requirements broker-dealers, the determination of whether the inappropriate risks by the covered
and 30 hours for recordkeeping broker-dealer had $1 billion in assets would be financial institution by providing
requirements) and 25 hours for made by reference to the broker-dealer’s year-end
audited consolidated statement of financial
covered persons with excessive
institutions between $1 billion and $50 condition filed with the Commission pursuant to compensation or incentive-based
billion in total assets (15 hours for Rule 17a–5. For investment advisers, asset size compensation that could lead to
reporting requirements and 10 hours for would be determined by the adviser’s total assets material financial loss to the covered
recordkeeping requirements). shown on the balance sheet for the adviser’s most
recent fiscal year end. Data from the SEC’s Office
financial institution.
Total OTS annual burden: 18,120 of Risk, Strategy and Financial Innovation indicates Based on the initial and ongoing
hours (13,280 hours for initial set-up that there are 132 registered broker-dealers with burden the Commission estimated in
and 4,840 hours for ongoing assets of $1 billion or more and 18 broker-dealers connection with the adoption of the
compliance). with assets of at least $50 billion. Most investment
advisers currently do not report to the Commission
executive compensation reporting
NCUA the amount of their own assets, so the Commission requirements for public companies
is unable to determine how many have $1 billion filing Form 10–Ks under the Exchange
Number of respondents: 184 (6 or more in assets and $50 billion or more in total Act (i.e. Item 402 of Regulation S–K),
institutions with total consolidated consolidated assets. See Form ADV, Part 1A, Item
12. The Commission estimates that advisers with
the Commission estimates that the
assets of $10 billion or more and 178 assets under management of $100 billion or more burden for the covered BD and IA
institutions with total consolidated would have total consolidated assets of $1 billion respondents imposed by the proposed
assets between $1 billion and $10 or more. Based on data from the Investment Adviser reporting requirements would be 100
billion). Registration Depository (‘‘IARD’’), the SEC’s

Division of Investment Management estimates that hours.41 Since the proposed rule does
Burden per respondent for initial set 68 registered advisers with assets under
up: 180 hours for institutions with $10 management of at least $100 billion would have 41 The Commission estimated that public
billion or more in total assets (80 hours assets of $1 billion or more, and 7 registered company respondents would incur approximately
for reporting requirements and 100 advisers with assets under management of at least 95 hours of annual burden in connection with the
$500 billion would have total consolidated assets of adoption of Item 402 of Regulation S–K. See
hours for recordkeeping requirements) at least $50 billion. The Commission has rounded Securities Act of 1933 Release No. 8432A and
and 70 hours for institutions between $1 these numbers to 70 and 10 for purposes of its Securities Exchange Act Release No.
billion and $10 billion in total assets (30 analysis. 54302A.(August 29, 2006), 71 FR 53158, 53217
not provide for different reporting (C) Required Policies and Procedures organizations’’).45 Based upon
requirements for smaller covered BDs information filed with the Commission
and IAs with assets between $1 billion Proposed § 248.206(a) would require and the staff’s discussions with a
and $50 billion and for larger firms with covered financial institutions to adopt number of BDs and its review of the
assets of at least $50 billion, the and maintain policies and procedures public filings of covered BDs, IAs and
Commission has not estimated separate reasonably designed to ensure and certain parent companies, the
reporting burdens for larger covered BDs monitor compliance with 12 U.S.C. Commission believes that covered BDs
and IAs. Therefore, the Commission 5641, commensurate with the size and and IAs affiliated with banking
estimates a collective reporting burden complexity of the organization and the organizations (‘‘covered bank BDs and
of 20,000 hours for covered BDs and scope and nature of its use of incentive- IAs’’) have already altered their
IAs.42 based compensation. As described in incentive-based compensation policies
further detail above, proposed and procedures and corresponding
(B) Documentation of Determining § 248.206(b) would require that the arrangements in conjunction with their
Designated Persons (Section policies and procedures, at a minimum, affiliated banking organizations that are
248.205(b)(3)(ii)(B))
are consistent with the disclosure subject to the Guidance. Based on
For covered BDs and IAs with assets requirements and prohibitions in other public filings with the Commission, the
of at least $50 billion, proposed parts of the proposed rule, ensure that SEC estimates that there are
§ 248.205(b)(3)(ii)(B) would require a risk management or oversight personnel approximately 25 covered bank BDs and
firm’s board of directors, or a committee have a role in designing and assessing IAs with total consolidated assets of at
thereof, to identify those covered incentive-based compensation least $50 billion and approximately 85
persons (other than executive officers) arrangements, provide for independent covered bank BDs and IAs with total
that individually have the ability to monitoring of the incentive-based consolidated assets between $1 billion
expose the institution to possible losses compensation awards, risks taken and and $50 billion.46 Therefore, covered
that are substantial in relation to the actual outcomes, require that a covered bank BDs and IAs should bear
institution’s size, capital, or overall risk financial institution’s board receive data significantly less burden than those
tolerance. These covered persons may and analysis from management and covered BDs and IAs not already subject
include, for example, traders with large other sources sufficient to enable the to the Guidance (‘‘covered non-bank BDs
position limits relative to the board to assess whether the incentive- and IAs’’) to develop and maintain
institution’s overall risk tolerance and based compensation arrangements are policies and procedures as required in
other individuals that have the authority consistent with 12 U.S.C. 5641, and the proposed rules. The Commission
to place at risk a substantial part of the require sufficient documentation of the requests comment on its estimated
capital of the covered financial covered financial institution’s incentive- number of covered bank BDs and IAs.
institution. The Agencies propose that based compensation arrangements to The Commission believes that the
the compensation decisions applicable enable the Commission to determine the covered bank BDs and IAs would incur
to such persons must be approved by covered BDs or IAs compliance with 12 approximately the same recordkeeping
the firm’s board of directors or a U.S.C. 5641. In addition, the proposal burden as the banking organizations.
committee of the board and that the would require that the covered BDs’ and Based on the initial estimates of
covered BD or IA document the IAs’ policies and procedures include recordkeeping burden provided by FRB,
compensation decisions made by the certain features when a firm uses OCC, FDIC and OTS for proposed
board or its committee. deferral in connection with an § 248.206, the Commission estimates an
The Commission estimates that each incentive-based compensation initial recordkeeping burden of 80 hours
covered BD and IA with assets of at least arrangement, and that the policies and for each covered bank BD and IA with
$50 billion would incur 20 hours of procedures subject incentive-based $50 billion or more in total consolidated
burden initially to comply with the assets and 40 hours of initial
compensation arrangements to a
proposed recordkeeping requirements recordkeeping burden for each covered
corporate governance framework.
associated with the proposed rule and bank BD and IA with total consolidated
Many covered BDs and IAs are assets between $1 billion and $50
10 hours of burden on an ongoing basis. already conforming to the incentive-
Therefore, the Commission estimates an billion. Based on the ongoing estimates
based compensation standards reflected of recordkeeping burden provided by
initial collective recordkeeping burden in the Guidance because they are
in connection with the documentation FRB, OCC, FDIC and OTS, the
affiliated with banking organizations Commission believes that each covered
requirement provided in supervised by the FRB, OCC, OTS or
§ 248.205(b)(3)(ii)(B) is 600 hours for bank BD and IA respondent with total
FDIC that have already altered their consolidated assets of at least $50
covered BDs and IAs with assets of at
incentive-based compensation billion would incur approximately 30
least $50 billion.43 The Commission
arrangements and policies and hours of ongoing recordkeeping burden
estimates the ongoing collective
procedures following the publication of
recordkeeping burden in connection
the Guidance. The Guidance applies to 45 See Guidance 75 FR at 36398.
with this requirement to be 300 hours
all banking organizations supervised by 46 The Commission estimates that there are
for covered BDs and IAs with assets of approximately 20 covered bank BDs with assets of
the FRB, OCC, OTS or FDIC, including
at least $50 billion.44 at least $50 billion and 35 covered bank BDs with
national banks, State member banks, assets between $1 billion and $50 billion. The
State nonmember banks, savings
Commission bases the estimates for covered bank

(September 8, 2006) (S7–03–06). The Commission
is rounding this number up to 100 for the instant
associations, U.S. bank holding BDs upon data submitted to the Commission in
companies, savings and loan holding FOCUS reports (i.e. Form X–17A–5 Part II). The
proposed rule estimate. Commission estimates that there are approximately
42 200 covered BDs and IAs x 100 hours = 20,000 companies, the U.S. operations of 5 covered bank IAs with assets of at least $50
hours. foreign banks with a branch, agency or billion and 50 covered bank IAs with assets
43 30 covered BDs and IAs with assets of at least
commercial lending company in the between $1 billion and $50 billion. The estimates
$50 billion × 20 hours = 600 hours. for covered bank IAs are based upon data submitted
44 30 covered BDs and IAs with assets of at least
United States, and Edge and agreement to the Commission in Form ADV (i.e. Form ADV
$50 billion × 10 hours = 300 hours. corporations (collectively ‘‘banking Part 1A, Items 6.A.(6) and 7.A.(5)).
and each covered bank BD and IA proposed rule. The Commission Commission estimates that covered non-
respondent with total consolidated estimates that there are approximately bank BD and IA respondents with total
assets between $1 billion and $50 75 covered non-bank BDs with assets consolidated assets of at least $50
billion would incur approximately 10 between $1 billion and $50 billion, 10 billion would incur approximately 70
hours of recordkeeping burden on an covered non-bank IAs with assets hours 51 of ongoing recordkeeping
ongoing basis. between $1 billion and $50 billion and burden while those covered non-Bank
For covered non-bank BDs and IAs, 5 covered non-bank IAs with assets of BDs and IAs with total consolidated
the Commission estimates a at least $50 billion.48 assets between $1 billion and $50
significantly higher burden, namely the Therefore, for covered non-bank BDs billion would incur approximately 50
amount of burden that the banking and IAs, the Commission estimates an
hours 52 of ongoing recordkeeping
agencies originally estimated in the initial recordkeeping burden estimate of
burden.
Guidance (480 hours of initial burden, 580 hours 49 for covered BDs and IAs
rounded up to 500 in the instant with $50 billion or more in total Total SEC initial and annual
proposal and 40 hours of ongoing consolidated assets and 540 hours 50 of recordkeeping and reporting burdens
burden) 47 in addition to the amounts recordkeeping burden for covered BDs (from proposed Section
that the FRB, OTS, FDIC and OCC and IAs with total consolidated assets 248.205(b)(iii)(2)(B) and proposed
estimated in connection with the instant between $1 billion and $50 billion. The Section 248.206):
Covered bank Covered bank Covered non- Covered non-

BDs and IAs BDs and IAs bank BDs and bank BDs and
($50B +) ($1B–$50B) IAs ($50B +) IAs ($1B–$50B)
(hours) (hours) (hours) (hours)
Initial Reporting ............................................................................................ 53 2,500 54 8,500 55 500 56 8,500
Initial Recordkeeping ................................................................................... 57 2,500 58 3,400 59 3,000 60 46,000
Ongoing Reporting ....................................................................................... 61 2,500 62 8,500 63 500 64 8,500
Ongoing Recordkeeping .............................................................................. 65 1,000 66 1,000 67 400 68 4,300
D. External Costs benefits consultants, and accountants. required reports, in addition to the
The Commission estimates that the covered bank BDs’ and IAs’ internal
The Commission also believes that the covered BDs and IAs would hire burden to prepare them).
proposed rules would likely generate professionals to prepare the necessary
external costs to the covered BDs and The Commission believes that there
reports and develop and maintain the
IAs, particularly at the stage of would be approximately an equal
necessary policies and procedures at
preparing the initial reports required by balance of attorneys,69 benefits
approximately the same hourly level as
§ 248.204 and initially developing and the covered BDs and IAs assume
implementing the policies and internally (e.g. covered bank BDs and
procedures in compliance with IAs with at least $50 billion in assets
§ 248.206. Covered BDs and IAs may would collectively use approximately
elect to hire various types of the equivalent of 2,500 hours worth of
professionals, including attorneys, professionals’ time to prepare the
47 See Guidance, 75 FR at 36403. 54 (35 covered bank BDs with assets between $1B 62 (35 covered bank BDs with assets between $1B
48 The Commission estimates that there are and $50B + 50 covered bank IAs with assets and $50B + 50 covered bank IAs with assets
approximately 75 covered non-bank BDs with assets between $1B and $50B) × 100 hours = 8,500 hours. between $1B and $50B) × 100 hours = 8,500 hours.
55 5 covered non-bank IAs with assets of at least 63 5 covered non-bank IAs with assets of at least
between $1 billion and $50 billion . The
Commission estimates that there are approximately $50B × 100 hours = 500 hours. $50B × 100 hours = 500 hours.
64 (75 covered non-bank BDs with assets between
5 covered non-bank IAs with assets of at least $50 56 (75 covered non-bank BDs with assets between
billion and 10 covered non-bank IAs with assets $1B and $50B + 10 covered non-bank IAs with $1B and $50B + 10 covered non-bank IAs with
assets between $1B and $50B) × 100 hours = 8,500
between $1 billion and $50 billion. The assets between $1B and $50B) × 100 hours = 8,500
Commission bases these estimates upon data hours.
hours. 65 (20 covered bank BDs with assets of at least
submitted to the Commission in FOCUS reports (i.e. 57 (20 covered bank BDs with assets of at least
$50B + 5 covered bank IAs with assets of at least
Form X–17A–5 Part II) and in Form ADV (i.e. Form $50B + 5 covered bank IAs with assets of at least $50B) × 30 hours + ((20 covered bank BDs + 5
ADV Part 1A, Items 6.A.(6) and 7.A.(5)). See supra $50B) × 80 hours + ((20 covered bank BDs + 5 covered bank IAs) × 10 hours in connection with
note 46. It is difficult to determine whether any covered bank IAs) × 20 hours in connection with proposed Section 248.205(b)(3)(ii)(B)) = 900 hours.
unregistered advisers are non-bank IAs that are not proposed Section 248.205(b)(3)(ii)(B)) = 2,500 66 (35 covered bank BDs with assets between $1B
subject to the Guidance. hours. and $50B + 50 covered bank IAs with assets
49 500 hours (from Guidance) + 80 hours (from 58 (35 covered bank BDs with assets between $1B between $1B and $50B) × 10 hours = 850 hours.
the estimate provided by the Fed, OCC, FDIC and and $50B + 50 covered bank IAs with assets 67 5 covered non-bank IAs with assets of at least
OTS in instant proposed rule) = 580 hours. between $1B and $50B) × 40 hours = 3,400 hours. $50B × 70 hours + ((5 covered non-bank IAs with
50 500 hours (from Guidance) + 40 hours (from 59 5 covered non-bank IAs with assets of at least assets of at least $50B) × 10 hours in connection
the estimate provided by the Fed, OCC, FDIC and $50B × 580 hours + ((5 covered non-bank IAs with with proposed Section 248.205(b)(3)(ii)(B)) = 400
OTS in instant proposed rule) = 540 hours. assets of at least $50B) × 20 hours in connection hours.
51 40 hours (from Guidance) + 30 hours (from the 68 (75 covered non-bank BDs with assets between
with proposed Section 248.205(b)(3)(ii)(B)) = 3,000
estimate provided by the Fed, OCC, FDIC and OTS $1B and $50B + 10 covered non-bank IAs with
hours.
in instant proposed rule) = 70 hours. 60 (75 covered non-bank BDs with assets between
assets between $1B and $50B) × 50 hours = 4,250
52 40 hours (from Guidance) + 10 hours (from the
hours.
$1B and $50B + 10 covered non-bank IAs with 69 An outside attorney’s salary range is estimated
estimate provided by the Fed, OCC, FDIC and OTS assets between $1B and $50B) × 540 hours = 45,900 at $400 an hour based on industry sources. See
in instant proposed rule) = 50 hours. hours. Securities Exchange Act Release No. 62174 (May
53 (20 covered bank BDs with assets of at least 61 (20 covered bank BDs with assets of at least
26, 2010) at note 510, 75 FR 32556 (June 8, 2010)
$50B + 5 covered bank IAs with assets of at least $50B + 5 covered bank IAs with assets of at least (S7–15–09). The Commission requests comment on
$50B) × 100 hours = 2,500 hours. $50B) × 100 hours = 2,500 hours. this estimate.
consultants,70 actuaries 71 and IAs would assume collectively in estimates for external attorneys, benefits
accountants 72 that are hired at each connection with the proposed rule. The consultants, actuaries and accountants.
covered BD or IA. The chart below Commission requests comments on Total SEC estimated external
summarizes the external costs that the these external cost estimates, including recordkeeping costs:
Commission estimates covered BDs and the hourly rate that the Commission
Covered bank Covered bank Covered non- Covered non-

BDs and IAs BDs and IAs bank BDs and bank BDs and
($50B +) ($1B–$50B) IAs ($50B +) IAs ($1B–$50B)
(million) (million) (million) (million)
Initial Reporting ............................................................................................ 73 $1 74 $3.4 75 $200,000 76 $3.4
Initial Recordkeeping ................................................................................... 77 1 78 1.3 79 1.2 80 18
Ongoing Reporting ....................................................................................... 81 1 82 3.4 83 200,000 84 3.4
Ongoing Recordkeeping .............................................................................. 85 400,000 86 400,000 87 150,000 88 1.7
Board Total Board annual burden: 72,225 (3) Materially alter the budgetary
Number of respondents: 664 (59 hours (52,970 hours for initial set-up impact of entitlements, grants, user fees,
institutions with total consolidated and 19,255 hours for ongoing or loan programs or the rights and
assets of $50 billion or more and 605 compliance). obligations of recipients thereof; or
institutions with total consolidated C. OTS Executive Orders 12866 and (4) Raise novel legal or policy issues
assets between $1 billion and $50 13563 Determination arising out of legal mandates, the
billion). President’s priorities, or the principles
Burden per respondent for initial set Executive Order 13563, ‘‘Improving set forth in the Executive order.89
up: 180 hours for institutions with $50 Regulation and Regulatory Review,’’ Based on its initial assessment, OTS
billion or more in total consolidated affirms and supplements Executive anticipates that the proposed rule (if the
assets (80 hours for reporting Order 12866, ‘‘Regulatory Planning and final rule is the same as the proposed
requirements and 100 hours for Review,’’ which requires Federal rule) would not be economically
recordkeeping requirements) and 70 agencies to prepare a regulatory impact significant. Nonetheless, OTS solicits
hours for institutions between $1 billion analysis for agency actions that are comment on the economic impact.
and $50 billion in total consolidated found to be ‘‘significant regulatory OTS does not anticipate that the
assets (30 hours for reporting actions.’’ Significant regulatory action proposal would create a serious
requirements and 40 hours for means any regulatory action that is inconsistency or otherwise interfere
recordkeeping requirements). likely to result in a rule that may: with an action taken or planned by
Burden per respondent for ongoing (1) Have an annual effect on the another agency. OTS’s proposal is
compliance: 70 hours for institutions economy of $100 million or more or essentially the same as the proposal of
with $50 billion or more in total adversely affect in a material way the every other Federal agency regulating
consolidated assets (40 hours for economy, a sector of the economy, the financial services industry. Thus,
reporting requirements and 30 hours for productivity, competition, jobs, the rather than creating any inconsistency,
recordkeeping requirements) and 25 environment, public health or safety, or by being part of this joint interagency
hours for institutions between $1 billion State, local, or tribal governments or proposal, OTS’s portion adds to the
and $50 billion in total consolidated communities; consistency of regulations on incentive-
assets (15 hours for reporting (2) Create a serious inconsistency or based compensation that will
requirements and 10 hours for otherwise interfere with an action taken encompass the financial services
recordkeeping requirements). or planned by another agency; industry.
70 An outside management consultant’s salary to include benefits, the result is $250 per hour. The 81 2,500 hours × [(25% × $400/hour) + (25% ×
range (national averages) is available from http:// Commission requests comment on this estimate. $600/hour) + (25% × $330/hour) + (25% × $250/
www.payscale.com. Using their data from the 75th 73 2,500 hours × [(25% × $400/hour) + (25% × hour)] = $987,500.
percentile, adjusting it for an 1800-hour work year, $600/hour) + (25% × $330/hour) + (25% × $250/ 82 8,500 hours × [(25% × $400/hour) + (25% ×
and multiplying by the 5.35 factor which normally hour)] = $987,500. $600/hour) + (25% × $330/hour) + (25% × $250/
is used to include benefits but here is used as an 74 8,500 hours × [(25% × $400/hour) + (25% ×
hour)] = $3,357,500.
approximation to offset the fact that New York $600/hour) + (25% × $330/hour) + (25% × $250/ 83 500 hours × [(25% × $400/hour) + (25% × $600/
salaries are typically higher than the rest of the hour)] = $3,357,500.
country, the result is $596 per hour (rounded to hour) + (25% × $330/hour) + (25% × $250/hour)]
75 500 hours × [(25% × $400/hour) + (25% × $600/
$600). The Commission requests comment on this = $197,500.
hour) + (25% × $330/hour) + (25% × $250/hour)] 84 8,500 hours × [(25% × $400/hour) + (25% ×
estimate.
= $197,500.
71 An outside actuary’s salary range (national
76 8,500 hours × [(25% × $400/hour) + (25% ×
$600/hour) + (25% × $330/hour) + (25% × $250/
averages) is available from http:// hour)] = $3,357,500.
$600/hour) + (25% × $330/hour) + (25% × $250/ 85 1,000 hours × [(25% × $400/hour) + (25% ×
www.payscale.com. Using their data from the 75th
hour)] = $3,357,500.
percentile, adjusting it for an 1800-hour work year,
77 2,500 hours × [(25% × $400/hour) + (25% ×
$600/hour) + (25% × $330/hour) + (25% × $250/
and multiplying by the 5.35 factor which normally hour)] = $395,000.
is used to include benefits but here is used as an $600/hour) + (25% × $330/hour) + (25% × $250/ 86 1,000 hours × [(25% × $400/hour) + (25% ×
hour)] = $987,500.
approximation to offset the fact that New York $600/hour) + (25% × $330/hour) + (25% × $250/
78 3,400 hours × [(25% × $400/hour) + (25% ×
salaries are typically higher than the rest of the
$600/hour) + (25% × $330/hour) + (25% × $250/ hour)] = $395,000.
country, the result is $330 per hour. The 87 400 hours × [(25% × $400/hour) + (25% × $600/
Commission requests comment on this estimate. hour)] = $1,343,000.
72 An outside accountant’s salary range is 79 3,000 hours × [(25% × $400/hour) + (25% × hour) + (25% × $330/hour) + (25% × $250/hour)]
available from the U.S. Bureau of Labor Statistics, $600/hour) + (25% × $330/hour) + (25% × $250/ = $158,000.
88 4,300 hours × [(25% × $400/hour) + (25% ×
Occupational Employment Statistics Web site. hour)] = $1,185,000.
Using their data for median salaries from New York 80 46,000 hours × [(25% × $400/hour) + (25% × $600/hour) + (25% × $330/hour) + (25% × $250/
State, which has the highest rates in the country, $600/hour) + (25% × $330/hour) + (25% × $250/ hour)] = $1,698,500.
and multiplying by the 5.35 factor which is used hour)] = $18,170,000. 89 See 58 FR 51735 (Oct. 4, 1993), as amended.
OTS does not anticipate that the information and analysis is contained in based compensation programs, there are
proposal would materially alter the the Final Report of the Financial Crisis 60 savings and loan holding companies
budgetary impact of entitlements, Inquiry Commission.91 OTS’s portion of with aggregate consolidated assets of
grants, user fees, or loan programs or the the proposed rule is intended to $3.1 trillion dollars that are covered by
rights and obligations of recipients enhance the regulatory oversight of the proposed rule (assuming they all
thereof. The proposal does not have any incentive compensation schemes at have incentive-based compensation
provisions related to those subjects. larger OTS-regulated savings programs). Individually, these
The Office of Management and associations and savings and loan companies have consolidated assets
Budget’s Office of Information and holding companies so as to help ensure ranging from $1 billion to over $750
Regulatory Affairs has designated this that compensation at such institutions is billion, and vary in complexity as well
proposed rule to be a significant neither excessive in itself nor as size. They conduct a wide range of
regulatory action that is likely to result encourages excessive risk taking. activities beyond those conducted by
in a rule that may raise novel legal or the saving association(s) they control.
policy issues arising out of legal Scope of Proposed Rule These range from activities closely
mandates, the President’s priorities, or Section 956 of the Dodd-Frank Act related to banking, such as insurance
the principles set forth in Executive defines ‘‘covered financial institutions’’ and securities brokerage, to activities
Orders 12866 and 13563. OTS notes that to include depository institutions and conducted by large, multinational
the proposal does raise some similar depository institution holding corporations, such as retailing and
issues as were raised by the Banking companies, as defined in section 3 of manufacturing.
Agency Guidance issued June 25, 2010, the FDIA, with assets of $1 billion or Therefore, altogether, OTS’s portion
and the 1995 Federal banking agency more. OTS’s portion of the proposed of the proposed rule would affect a
guidelines implementing the rule applies to savings associations and maximum of 163 OTS-supervised
compensation-related and other safety savings and loan holding companies institutions (103 savings associations
and soundness standards in section 39 with $1 billion or more in total and 60 savings and loan holding
of the FDIA (codified at 12 CFR pt. 570, consolidated assets that have incentive- companies).
App. A). based compensation programs. OTS further notes that the Board,
With regard to savings associations, as OCC, and FDIC will assume supervisory
Need for Regulatory Action and rulemaking responsibility for
of December 31, 2010, OTS supervised
The proposed rule is required by 731 savings associations with a entities currently supervised and
section 956 of the Dodd-Frank Act. combined total of $932 billion in assets. regulated by OTS on the transfer date
Thus, the proposal is needed to fulfill The largest savings association had provided in Title III of the Dodd-Frank
the statutory mandate that OTS and the assets of $88 billion. Only three other Act. That date is expected to be July 21,
other agencies participating in this joint savings associations had assets greater 2011. These agencies expect to adopt, or
rulemaking prescribe regulations or than $50 billion. The smallest savings incorporate, as appropriate, any final
guidelines that: association had assets of $3.5 million. rule adopted by OTS as part of this
1. Prohibit incentive-based payment Of the 731 savings associations, 103 rulemaking for relevant covered
arrangements, or any feature of any such have more than a $1 billion each in total financial institutions that come under
arrangement, at a covered financial assets and thus are covered by the their respective supervisory authority
institution that the Agencies determine proposed rule (assuming they all have after the transfer date.
encourage inappropriate risks by a incentive-based compensation Types of Impact of Proposed Rule
financial institution by providing programs). Those 103 savings
excessive compensation or that could associations represent 85% of all thrift OTS reviewed existing practices at a
lead to a material financial loss. industry assets ($793 billion of the total subset of these 163 institutions to
2. Require covered financial $932 billion). To put this in context, determine how much the rule would
institutions to disclose to its appropriate however, the latest available data on add to the current cost of administering
Federal regulator the structure of its commercial banks (dated September 30, incentive-based compensation
incentive-based compensation 2010) show 508 commercial banks with programs. A covered financial
arrangements sufficient to determine assets of $1 billion or more, but with institution would have to:
whether the structure provides 1. Submit an annual report to OTS
combined total assets of $11 trillion,
‘‘excessive compensation, fees, or describing the structure of its incentive-
more than eleven times the amount of
benefits’’ or ‘‘could lead to material based compensation program in
assets compared to OTS supervised
financial loss’’ to the institution. sufficient detail for OTS to determine
savings associations of $1 billion or
3. Are comparable to the existing whether the program provides excessive
more.
compensation-related safety and With regard to savings and loan compensation or compensation that
soundness standards applicable to holding companies, as of December 31, could lead to material loss to the
insured depository institutions under 2010, OTS supervised 102 savings and institution. The annual report would
section 39 of the FDIA (12 U.S.C. loan holding companies. Savings and have to include an analysis of the
1831p–1(c)) (12 CFR pt. 570, App. A for loan holding companies are companies characteristics of the incentive-based
OTS). that own or control one or more savings compensation program that prevent
The legislative history of the Dodd- associations. Excluding 42 shell holding excessive compensation and/or mitigate
Frank Act describes the reasons companies that do not have incentive- risk of material financial loss.
Congress believed section 956 of the 2. Review and, if necessary, redesign

Dodd-Frank Act was needed.90 Further 91 Final Report of the National Commission on its incentive-based compensation
the Causes of the Financial and Economic Crisis in system to ensure it has the elements
90 See H.R. Rep. 111–236, Corporate and the United States, January 2011, available at necessary to adequately manage the
Financial Institution Compensation Fairness Act of http:// risks arising from incentive-based
2009, at 6 (2009). For additional legislative history, c0182732.cdn1.cloudfiles.rackspacecloud.com/
see Compensation Structure and Systemic Risk: fcic_final_report_full.pdf. The report contains
compensation. The rule would contain
Hearing Before the H. Comm. on Financial Services, discussion of financial sector executive a list of the minimum elements to be
111th Cong. (2009). compensation practices, including on pages 61–65. included in the policies and procedures.
3. Conduct ongoing monitoring and, covered financial institutions are taken directly from the guidance.97 Most
as appropriate, auditing of the already observing. Section 563h.5(a) covered financial institutions, therefore,
incentive-based compensation program would provide that a covered financial already have the listed elements in
to ensure that it does, in fact, allocate institution must not establish or place. Further, a recent report of the
incentive-based compensation in a way maintain any type of incentive-based Basel Committee on Banking
that is not excessive and does not compensation arrangement, or any Supervision (BCBS) noted that most
encourage inappropriate risks. feature of any such arrangement, that larger institutions already use
In estimating the implementation encourages inappropriate risks by the management accounting to map
costs to covered financial institutions, covered financial institution by company performance to business units,
OTS assumed that costs would generally providing a covered person with and largely employ risk-adjusted return
fall in four areas: excessive compensation. Section to capital and other economic efficiency
1. Initially reviewing incentive-based 563h.5(b) would provide that a covered measures to assess performance when
compensation programs to determine financial institution must not establish making incentive-based compensation
whether program modifications are or maintain any type of incentive-based allocation decisions.98
needed; compensation arrangement, or any Even the reporting requirements of
2. Modifying incentive-based feature of any such arrangement, that § 563h.4 of the proposed rule would not
compensation programs, where needed; encourages inappropriate risks by the be completely new for many
3. Ongoing monitoring of incentive- covered financial institution, by institutions. Publicly listed institutions
based compensation programs to ensure providing incentive-based already disclose their incentive-based
continued compliance; and compensation to covered persons, either compensation systems.99
4. Preparing and submitting required individually or as part of a group of As a group, covered financial
annual reports on the programs to OTS. persons who are subject to the same or institutions are likely to make more
Almost all of the covered financial similar incentive-based compensation significant changes to incentive-based
institutions have incentive-based arrangements, that could lead to compensation programs for non-
compensation programs. Each covered material financial loss to the covered executive employees and, to some
financial institution, therefore, would financial institution. degree, principal shareholders. While
need to perform an initial review to OTS and the other Federal banking institutions have in place most of the
determine whether modifications would regulators have long required depository internal policies and procedures
be needed. This initial review would institutions to conform their necessary to run an incentive-based
also include the analysis necessary to compensation practices to principles of compensation program for these two
prepare the first report to OTS. safety and soundness.93 Since 1995, groups, modifications would likely be
Those institutions needing OTS and the other Federal banking necessary to ensure full compliance.
modifications would have to expend regulators have specifically prohibited Larger institutions, defined as having
further resources to design and depository institutions from paying total consolidated assets of $50 billion
implement compliant systems that fit compensation, fees, and benefits that are or more, would have to defer at least 50
the institution’s business strategy and excessive or that could lead to material percent of the annual incentive-based
internal structure. The complexity and financial loss to the institutions.94 Since compensation of executive officers for at
length of this process would vary 1995, OTS and the other Federal least three years. These institutions
depending on the size of the institution, banking regulators have also specified would also apply special review and
the scope of the institution’s incentive- that compensation that could lead to approval requirements for the incentive-
based compensation program, and the material financial loss to an institution based compensation arrangements for
extent of necessary modifications. is prohibited as an unsafe and unsound material risk takers. Among OTS-
The rule’s burden would be practice.95 The standards specified in supervised institutions, 13 holding
minimized by granting covered financial § 563h.5(a)(2) for determining whether companies and 4 thrifts would be
institutions the latitude to employ a an incentive-based compensation subject to this requirement. These 17
variety of means to mitigate the risks arrangement provides excessive institutions would likely need to make
posed by their current incentive-based compensation are taken directly from changes to their compensation
compensation programs. While the existing 1995 guidelines.96 programs, as it appears that none of
institutions would have to develop Since June 25, 2010, OTS and the them currently defers the required
policies and procedures that provide other Federal banking regulators have percentage of incentive-based
clear expectations, institutions could maintained guidance designed to help compensation for the required amount
choose the incentive-based ensure that incentive-based of time.
compensation risk balancing measures compensation policies at banking Finally, institutions have an ongoing
that best address their employees and organizations do not encourage requirement to prepare annual reports
their risks.92 imprudent risk-taking and are consistent and administer their incentive-based
OTS’s provisional assessment is that with the safety and soundness of the compensation program in compliance
most covered financial institutions organization, including guidance on with the rule. The administration of the
would have to make minimal changes to methods such as deferral that make program would include calculating the
their systems covering: compensation more sensitive to risk. amount of compensation subject to risk-
1. Compensation to executives; The requirements specified in based adjustment (e.g., deferral),
2. The oversight exercised by the § 563h.5(b)(2) for avoiding incentive-
board and compensation committee; based compensation arrangements that 97 75 FR at 36405.

3. The scope of risk management; and could lead to material financial loss are 98 BCBS Consultative paper: Range of
4. The role of internal audit. Methodologies for Risk and Performance Alignment
of Remuneration, available at http://www.bis.org/
Some of the key restrictions in the 93 See section 39(c) of FDIA, 12 U.S.C. 1831p– publ/bcbs178.pdf.
proposed rule are restrictions that 1(c). 99 SEC regulation 17 CFR 229.402(a)(2) requires
94 See 12 CFR part 570, App. A, paragraph II.I. listed companies to disclose all elements of the
92 The 95 See 12 CFR part 570, App. A, paragraph III.B.
Federal Banking Agency Guidance compensation provided to ‘‘named executive
presents and discusses these measures. 96 See 12 CFR part 570, App. A, paragraph III.A. officers’’ and ‘‘directors.’’
calculating the performance metrics • 2010 Guidance—No comparable identifies as having the ability to expose
upon which incentive compensation are provision. the institution to possible losses that are
based, ensuring that independent 4. Material financial loss substantial in relation to the
review of compensation awards is Generally; Requirements for all institution’s size, capital, or overall risk
conducted, and assessing the covered financial institutions tolerance (§ 563h.5(b)(3)(ii)).
effectiveness of risk-based adjustments • Proposed Rule—Prohibits • 1995 Guidelines—No comparable
to incentive-based compensation establishing or maintaining any type of provision.
payouts. As previously mentioned, incentive-based compensation • 2010 Guidance—No comparable
institutions generally take these actions arrangement, or any feature of any such provision.
to comply with existing safety and arrangement, that encourages 5. Policies and procedures
soundness regulations and guidance. inappropriate risks by the covered • Proposed Rule—Sets minimum
To assist the public in understanding financial institution, by providing standards for policies and procedures
how OTS’s proposed rule (12 CFR part incentive-based compensation to on incentive compensation (§ 563h.6).
563h) compares with Federal Banking covered persons, either individually or • 1995 Guidelines—No comparable
Agency Guidelines from 1995 (12 CFR as part of a group of persons who are provision.
subject to the same or similar incentive-
part 570, App. A), and the Federal • 2010 Guidance—No comparable
Banking Agency Guidance from 2010 based compensation arrangements, that
provision. But see discussion of other
(75 FR 36395), OTS provides the could lead to material financial loss to
policy and procedure requirements (pp.
following summary in bullet form: the covered financial institution
36403–05).
1. Applicability (§ 563h.5(b)(1)). Specifies that an
6. Evasions
• Proposed Rule—Applies to those incentive-based compensation
• Proposed Rule—Anti-evasion
savings associations and savings and arrangement established or maintained
provision prohibits, doing indirectly or
loan holding companies that have total by a covered financial institution for
through or by any other person, any act
consolidated assets of $1 billion or more one or more covered persons must meet
or thing that would be unlawful to do
and offer incentive-based compensation three criteria listed in the proposed rule
directly (§ 563h.7).
arrangements to covered persons (§ 563h.5(b)(2)).
• 1995 Guidelines—Prohibits • 1995 Guidelines—No comparable
(§§ 563h.2 and 563h.3). provision.
• 1995 Guidelines—Applies to all compensation that could lead to
material financial loss as an unsafe and • 2010 Guidance—No comparable
savings associations (¶ I.i). provision.
• 2010 Guidance—Applies to all unsound practice (¶ III.B).
• 2010 Guidance—Provides that Assessment of Impact of Proposed Rule
savings associations (p. 36405 n.2).
incentive compensation arrangements,
2. Reports OTS believes that an institution
to be consistent with safety and
• Proposed Rule—Requires annual would spend several hundred person
soundness, should meet three criteria
reports to OTS describing the structure hours conducting an initial review of its
(p. 36405). The criteria listed are the
of incentive-based compensation incentive-based compensation program
same as in the proposed rule.
arrangements; sets minimum standards Specific requirements for covered and making any necessary
for the reports. (§ 563h.4) financial institutions with $50 billion or modifications. All institutions of $1
• 1995 Guidelines—No comparable more in total consolidated assets; billion in total consolidated assets or
provision. Deferral required for executive officers more would have to conduct the review,
• 2010 Guidance—No comparable • Proposed Rule—Specifies that at and most institutions would have to
provision. least 50% of the incentive-based make some modification to their
3. Excessive compensation compensation for an executive officer at incentive-based compensation
• Proposed Rule—Prohibits an institution with total consolidated programs.
establishing or maintaining any type of assets of $50 billion or more must be OTS estimates that smaller
incentive-based compensation deferred over a period of no less than institutions (those with less than $50
arrangement, or any feature of any such three years, with the release of deferred billion in assets) would spend, at most,
arrangement, for covered persons that amounts to occur no faster than on a pro eight weeks (320 person hours) to
encourages inappropriate risks by rata basis, and with the adjustment of perform the initial steps necessary to
providing excessive compensation the deferred amount to reflect actual comply. Among the covered financial
(§ 563h.5(a)(1)). Sets a standard that an losses or other measures or aspects of institutions, 146 fall into this category.
incentive-based compensation performance that are realized or become Using $150 as an estimate of hourly
arrangement provides excessive better known during the deferral period cost,100 the total cost to the smaller
compensation when amounts paid are (§ 563h.5(b)(3)(i)). institutions as a group would be $7
unreasonable or disproportionate to the • 1995 Guidelines—No comparable million ($150 × 320 hours × 146
services performed, taking into provision. institutions). At larger institutions, these
consideration seven factors listed in the • 2010 Guidance—No comparable modifications would be more extensive
proposed rule (§ 563h.5(a)(2)). provision. because of the number of individuals
• 1995 Guidelines—Prohibits Specific requirements for covered involved and the amount the institution
excessive compensation as an unsafe financial institutions with $50 billion or would have to expand and/or adjust risk
and unsound practice. Sets a standard more in total consolidated assets; sensitivity measures. The larger
that compensation is excessive when additional requirement for covered institutions may require as much as
amounts paid are unreasonable or persons presenting particular loss twice the time as smaller institutions to
disproportionate to the services exposure implement the rule, for an estimated
performed by taking into consideration • Proposed Rule—Contains special cost of $1.6 million ($150 × 640 hours
seven factors listed in the guidelines. procedures and restrictions on the × 17 institutions). The total initial
Covers the same categories of persons incentive-based compensation of
and lists the same seven factors as the covered persons (other than executive 100 OTS estimates that legal and administrative
proposed rule. (¶ III.A) officers) who the institution’s board expenses would average, at most, $150 per hour.
implementation costs, therefore, should First year: $8.6 million + $2.2 million proposed rule will not result in
come to approximately $8.6 million. = $10.8 million. expenditures by State, local, and tribal
The subsequent ongoing costs Second and subsequent years: $2.2 governments, or the private sector, of
associated with monitoring and million. $100 million or more in any one year.
managing incentive-based compensation Beyond the costs of implementation, Accordingly, OCC has not prepared a
programs, once established, are unlikely OTS assumes that the broader economic budgetary impact statement.
to be significantly greater than the costs impact of the rule would be negligible.
associated with the administration of The overall level of compensation, as set E. OTS Unfunded Mandates Reform Act
current incentive-based programs. OTS, by the forces of supply and demand in of 1995 Determination
therefore, believes that the ongoing the labor market, is unlikely to change. Section 202 of the Unfunded
annual costs of the rule would not Any variations in compensation levels Mandates Reform Act of 1995, Public
exceed $100 million. As previously that may occur would be minimal and, Law 104–4 (Unfunded Mandates Act)
discussed, institutions already have in given the small number of covered requires that an agency prepare a
place most of the mechanisms necessary financial institutions, have no effect on budgetary impact statement before
to implement the rule’s requirements. overall demand in the economy. promulgating a rule that includes a
Once the institution makes adjustments If the rule has its desired effect, Federal mandate that may result in
indicated by its initial analysis, these institutions will take a more measured expenditure by State, local, and tribal
mechanisms would continue to function approach in their assessment of risk and governments, in the aggregate, or by the
as they do now. return. As a result, the amount of private sector, of $100 million or more
Any ongoing costs in addition to lending in some excessively risky (adjusted annually for inflation) in any
those already incurred would be for: business areas may be reduced, which one year. (The inflation adjusted
1. Production of an annual report; in turn may have an economic impact threshold for 2011 is $142 million or
2. Administration of incentive-based on the areas served by the 163 OTS- more.) If a budgetary impact statement
compensation for a broader range of supervised covered financial is required, section 205 of the Unfunded
employees; institutions. Incentive-based Mandates Act also requires an agency to
3. Administration of a more complex compensation programs that identify and consider a reasonable
deferral scheme at some institutions; appropriately balance risk and reward number of regulatory alternatives before
and will entail reductions only of economic promulgating a rule.
4. More sophisticated risk sensitivity activity that is unsound and which, OTS has determined that this
mechanisms. ultimately, entails more cost than proposed rule will not result in
With respect to item 1, OTS believes expenditures by State, local, and tribal
benefit to the economy as a whole. Any
that the costs of the annual report would governments, or the private sector, in
reduction in inappropriately risky
be minimal. Reports after the first excess of the threshold. Accordingly,
lending brought about by the rule,
submitted would only need to OTS has not prepared a budgetary
therefore, would be a benefit of the rule.
document significant changes to the The recent crisis in financial markets impact statement.
incentive-based compensation program. demonstrated the significant costs that
Human resource departments maintain F. NCUA Executive Order 13132
can arise from financial instability; the
descriptions of their incentive-based Determination
purpose of the rule is to enhance the
compensation programs for internal Executive Order 13132 encourages
financial stability of the financial sector
administrative purposes; these independent regulatory agencies to
by diminishing incentives for
descriptions could serve as the basis for consider the impact of their actions on
inappropriate risk taking. Because the
regulatory reporting. state and local interests. In adherence to
With respect to items 2, 3, and 4, OTS benefits of financial stability are largely
intangible, OTS made no attempt to fundamental federalism principles, the
anticipates that institutions would use NCUA, an independent regulatory
some additional human resources and quantify them here.
agency as defined in 44 U.S.C. 3502(5)
risk management expertise to administer Conclusion voluntarily complies with the Executive
the programs. For the 17 larger OTS’s preliminary estimates of the Order. The Proposed Rule applies to
institutions, OTS estimates that the cost annualized cost of this rule to the 163 credit unions with $1 billion in assets
of these additional resources would be OTS-supervised covered financial and over and would not have
about $24,000 per institution annually. institutions as a group would be substantial direct effects on the states,
For the 146 smaller institutions, the
substantially less than $100 million. on the connection between the national
additional resources would entail
Moreover, the overall annual economic government and the states, or on the
additional personnel and other expenses
impact would not be significant. OTS distribution of power and
of less than $12,000 per institution per
seeks comment on this economic impact responsibilities among the various
year.101 Therefore, OTS estimates the
assessment. levels of government. The NCUA has
annual cost to be about $2.2 million (17
determined that the Proposed Rule does
larger institutions × $24,000 = $0.4 D. OCC Unfunded Mandates Reform Act
not constitute a policy that has
million; 146 smaller institutions × of 1995 Determination
federalism implications for purposes of
$12,000 = $1.8 million). Section 202 of the Unfunded
In summary, OTS estimates the costs the Executive Order.
Mandates Reform Act of 1995 (2 U.S.C.
to the institutions of implementing the 1532), requires the OCC to prepare a G. NCUA and FDIC: The Treasury and
rule as proposed as follow: General Government Appropriations
budgetary impact statement before

promulgating a rule that includes a Act, 1999—Assessment of Federal
101 OTS estimates that for institutions with assets
Federal mandate that may result in the Regulations and Policies on Families
between $1 billion and $50 billion, the costs of
managing the additional elements of the program expenditure by State, local, and tribal The NCUA and FDIC have determined
would entail some personnel and Information governments, in the aggregate, or by the that this Proposed Rule would not affect
Technology (IT) support. As institutions already
have personnel management software systems in
private sector, of $100 million or more family well-being within the meaning of
place, either in house or contracted out, the in any one year (adjusted annually for section 654 of the Treasury and General
incremental costs of IT support would be negligible. inflation). OCC has determined that this Government Appropriations Act, 1999,
Public Law 105–277, 112 Stat. 2681 policies and procedures to ensure categories of covered persons to which
(1998). compliance with these requirements they apply;
and prohibitions. The Commission is • A succinct description of the
H. SEC Economic Analysis covered financial institution’s policies
sensitive to the costs and benefits
Economic Analysis imposed on broker-dealers registered and procedures governing its incentive-
with the Commission under section 15 based compensation arrangements;
As discussed above, 12 U.S.C. 5641 • For covered financial institutions
of the Securities Exchange Act
requires the Commission, jointly with with total consolidated assets of at least
(‘‘registered broker-dealers’’) and
other appropriate Federal regulators, to $50 billion, an additional succinct
investment advisers, as defined in
prescribe regulations or guidelines to description of incentive-based
section 202(a)(11) of the Investment
require covered financial institutions to compensation policies and procedures
Advisers Act of 1940 (‘‘investment
disclose information about their specific to the covered financial
advisers’’). The discussion below
incentive-based compensation institution’s executive officers and other
focuses on the costs and benefits
arrangements sufficient for the Agencies covered persons who the institution’s
applicable to registered broker-dealers
to determine whether their board of directors (or a committee of the
and investment advisers that meet the
compensation structure provides an definition of ‘‘covered financial board) has identified and determined
executive officer, employee, director or institution’’ under the proposed rule have the ability to expose the institution
principal shareholder with excessive (collectively ‘‘covered BDs and IAs’’). to possible losses that are substantial in
compensation, fees or benefits or could The discussion addresses the decisions relation to the institution’s size, capital,
lead to material financial loss to the made jointly by the Agencies to fulfill or overall risk tolerance;
firm.102 12 U.S.C. 5641 also requires the the mandates of the Dodd-Frank Act • A description of any material
Agencies to prescribe joint regulations within the Agencies’ permitted changes to the covered financial
or guidelines that prohibit any type of discretion, rather than the costs and institution’s incentive-based
incentive-based compensation benefits of the mandates of the Dodd- compensation arrangements and
arrangements that the Agencies Frank-Act itself. However, to the extent policies and procedures made since the
determine encourages inappropriate that the Commission’s discretion is covered financial institution’s last
risks by covered financial institutions exercised to realize the benefits report submitted this section; and
by providing excessive compensation to intended by the Dodd-Frank Act or to • The specific reasons the covered
officers, employees, directors, or impose the costs associated with the financial institution believes the
principal shareholders (‘‘covered Dodd-Frank Act, the two types of structure of its incentive-based
persons’’) or that could lead to material benefits and costs are not entirely compensation arrangements does not
financial loss to the covered financial separable. Therefore, the Paperwork provide covered persons incentives to
institution.103 Reduction Act (‘‘PRA’’) hourly burden engage in behavior that is likely to cause
The Agencies have determined that it estimates made in accordance with the the covered financial institution to
is appropriate to propose rules, instead requirements of the PRA, and their suffer a material financial loss and does
of guidelines, as permitted under 12 corresponding dollar cost estimates, are not provide covered persons with
U.S.C. 5641. The Commission believes included in the calculations below. excessive compensation.
that broker-dealers and investment
A. Report of Incentive-Based 1. Benefits
advisers would benefit from the greater
predictability afforded by rules. Such Compensation Arrangements The Commission believes that the
greater predictability would facilitate In order to fulfill the requirement information that would be required to
broker-dealers’ and investment advisers’ imposed by 12 U.S.C. 5641(a) relating to be reported to the Commission under
ability to design compliance policies the disclosure of incentive-based proposed § 248.205 would assist
and procedures. The rule being compensation arrangements, the Commission examiners to determine
proposed by the Agencies consists of a proposal would require a covered whether covered BDs and IAs are
reporting section, a prohibition section, financial institution to submit a report fulfilling the requirements of section
and a policies and procedures section. annually to, and in the format directed 956 of the Dodd-Frank Act. The report
The reporting section requires enhanced by, its regulator, that describes the is designed to elicit pointed, succinct
reporting of incentive-based structure of the covered financial explanations about issues that would
compensation arrangements for covered institution’s incentive-based likely be of high interest to an examiner,
persons by a covered financial compensation arrangements for covered such as a clear narrative description of
institution to such institution’s persons. Similar to the policies and the firm’s incentive-based compensation
appropriate Federal regulator. The procedures requirements under the plan, a succinct description of the firm’s
prohibition section forbids incentive- proposed rule, the annual report would incentive-based compensation policies
based compensation arrangements that be commensurate with the size and and procedures and any changes
encourage covered persons to expose complexity of the organization, as well thereto, and reasons that the
the institution to inappropriate risks by as the scope and nature of its use of compensation structure will not
providing the covered person excessive incentive-based compensation encourage behavior that violates the
compensation and prohibits incentive- arrangements. As such, institutions with principles of 12 U.S.C. 5641. The
based compensation arrangements that no incentive-based compensation Commission anticipates that examiners
encourage covered persons to expose arrangements or arrangements that affect would find these descriptions a useful
the covered financial institutions to only a few covered persons, would need starting point in an examination to make
inappropriate risks that could lead to a to submit only limited information. The a risk-assessment as to which areas of a
material financial loss. The policies and report would be required to contain: firm’s incentive-based compensation
procedures section requires that the • A clear narrative description of the arrangements merit further examination.
covered financial institutions maintain components of the covered financial Persons within covered BDs and IAs
institution’s incentive-based responsible for determining
102 12 U.S.C. 5641(a). compensation arrangements applicable compensation levels, as well as persons
103 12 U.S.C. 5641(b). to covered persons, specifying the receiving incentive-based compensation
would be able to review the incentive- structure of its incentive-based that firms may nonetheless have
based compensation policies, which compensation plan does not provide concerns about potential disclosure of
should promote the balance of the covered persons incentives to engage in information that could be competitively
incentive-based compensation process behavior that is likely to cause the sensitive, as incentive-based
at covered BDs and IAs. The covered financial institution to suffer a compensation plans and arrangements
Commission also believes that the material financial loss and does not are. The Commission believes that not
reporting of incentive-based provide covered persons with excessive including information regarding the
compensation information would foster compensation. The proposed rule is individual compensation levels of
a climate of accountability at covered designed to elicit a meaningful covered persons may mitigate some
BDs and IAs by raising the profile of discussion of the firm’s incentive-based confidentiality concerns. Accordingly,
incentive-based compensation at firms, compensation arrangements. In all the Commission is aware of these
and thereby improving the care with cases, covered BDs and IAs should potential costs and seeks comment on
which the firms design their incentive- report to the Commission the them generally, as well as on any
based compensation programs. By comprehensive descriptions relating to specific methods that could be used to
including persons who individually each of the required disclosures minimize these costs and concerns.
have the ability to expose a firm with described below.
total consolidated assets of at least $50 The Commission is also aware that
2. Costs the proposed rule would generate
billion to possible losses that are
substantial in relation to the firm’s size, The Commission is aware that compliance-related costs associated
capital, or overall risk tolerance as requiring companies to file reports on with, among other things, collecting the
persons whose compensation should be the structure of their incentive-based necessary information and preparing the
subject to the requirements of the statute compensation arrangements could reports, as well as hiring outside
(designated risk takers), the proposed impose costs on covered financial professionals, such as attorneys,
rule should encourage executives to institutions. For example, by requiring compensation or benefits consultants,
consider more carefully those covered financial institutions to report accountants and/or actuaries. In the
compensation arrangements that could the information in the proposed rule, it charts below, the Commission estimates
potentially lead to activities that could is possible that this could serve as a the internal and external costs
expose the covered institution to disincentive for covered financial associated with the proposed reporting
significant risks. Properly incentivizing institutions to re-visit or otherwise requirements. In order to arrive at the
designated risk takers could limit the revise their incentive-based internal cost estimates, the Commission
risk exposure of covered financial compensation plans, because doing so multiplied the hourly burden estimates
institutions. would create additional regulatory provided in the PRA Section by the
The reporting provisions of the burdens for the covered financial estimated hourly rate for a securities
proposed rule are designed to elicit institution. Further, while the attorney.104 The Commission is using
qualitative statements from the covered Commission intends to keep the the same external cost estimates for the
financial institution, including covered reported information confidential to the reporting requirement that it used in the
BDs and IAs, regarding, among other full extent it is permitted to do so under PRA Section of this proposed rule. The
things, the specific reasons the covered the Freedom of Information Act Commission seeks comment on all these
financial institution believes the (‘‘FOIA’’), the Commission understands cost estimates.
INTERNAL COSTS
Covered bank Covered bank Covered non-bank Covered non-bank
BDs and IAs BDs and IAs BDs and IAs BDs and IAs
($50B +) ($1B–$50B) ($50B +) ($1B–$50B)
Initial Reporting .............................................................. $900,000 105 ........... $3 million 106 .......... $175,000 107 ........... $3 million.108
Ongoing Reporting ......................................................... 900,000 109 ............. 3 million 110 ............ 175,000 111 ............. 3 million.112
104 The Commission estimates $354 per hour for Securities Industry 2010, modified by Commission multiplied by 5.35 to account for bonuses, firm size,
a securities attorney, based on SIFMA’s staff to account for an 1800-hour work-year and employee benefits and overhead.
Management & Professional Earnings in the
EXTERNAL COSTS
($50B +) ($1B–$50B) ($50B +) ($1B–$50B)
Initial Reporting .............................................................. $1 million 113 .......... $3.4 million 114 ....... $200,000 115 ........... $3.4 million.116
Ongoing Reporting ......................................................... 1 million 117 ............ 3.4 million 118 ......... 200,000 119 ............. 3.4 million.120
B. Prohibition on Certain Incentive- To address the prohibition against The Agencies also propose for a
Based Compensation Arrangements arrangements that potentially encourage covered financial institution with $50
The proposed rule states that a inappropriate risks that could lead to a billion or more in assets that for certain
covered financial institution may not material financial loss at the covered classes of covered person whose
establish or maintain any incentive- financial institution, the Agencies activities, by their nature, expose the
based compensation arrangement, or propose to deem incentive-based covered financial institution to a risk of
any feature of any such arrangement, compensation arrangements for all significant loss (designated risk takers),
that encourages a covered person to covered persons to encourage that such firm’s board of directors, or a
expose the institution to inappropriate inappropriate risks that could lead to committee thereof, perform individual
risks by providing that person with material financial loss at the institution review of each such person’s incentive-
excessive compensation. Under the unless the arrangement or feature: based compensation against certain
proposed rule, compensation would be (i) Balances risk and financial results, factors and that each such person’s
considered excessive when amounts for example, by using deferral of incentive-based compensation be
paid are unreasonable or payments, risk adjustment of awards, approved by the board of directors, or
disproportionate to the services longer performance periods, or reduced committee thereof.
performed by a covered person. In sensitivity to short-term performance;
1. Benefits
determining whether incentive-based (ii) is compatible with effective controls
compensation is unreasonable or and risk management; and (iii) is The Commission believes that the
disproportionate to the services supported by strong oversight by a proposed prohibitions related to the
performed, the covered BDs and IAs covered BD’s or IA’s board of directors. incentive-based compensation
would consider those factors set forth in These principles are substantially arrangements would help ensure that
the section 39(c) of the FDIA.121 identical to the principles published in covered financial institutions avoid
the Guidance.122 incentive-based compensation
105 2,500 hours × $354/hour = $885,000. The proposed rule would require arrangements that would threaten the
106 8,500 hours × $354/hour = $3,009,000. additional measures for certain covered safety and soundness of the covered
107 500 hours × $354 = $177,000. persons working for covered financial financial institution or otherwise have
108 8,500 hours × $354/hour = $3,009,000.
institutions with total consolidated serious adverse effects on economic
109 2,500 hours × $354/hour = $885,000.
assets of $50 billion or more. For conditions or financial stability of
110 8,500 hours × $354/hour = $3,009,000.
111 500 hours × $354 = $177,000.
executive officers and heads of major covered BDs and IAs. In order to
112 8,500 hours × $354/hour = $3,009,000. business lines of such firms, at least address the adverse effects that
113 2,500 hours × [(25% × $400/hour) + (25% × 50% of their incentive-based incentive-based compensation
$600/hour) + (25% × $330/hour) + (25% × $250/ compensation would be required to be arrangements may have on covered
hour)] = $987,500. deferred on a pro-rata basis over a financial institutions’ financial
114 8,500 hours × [(25% × $400/hour) + (25% ×
period of at least three years. Such condition, the proposed rules would
$600/hour) + (25% × $330/hour) + (25% × $250/
hour)] = $3,357,500. executive officers’ and business line mandate the application of the
115 500 hours × [(25% × $400/hour) + (25% × heads’ deferred incentive-based principles described in the Guidance
$600/hour) + (25% × $330/hour) + (25% × $250/ compensation would be required to be (provide incentives that appropriately
hour)] = $197,500. adjusted downward to reflect actual balance risk and reward, compatibility
116 8,500 hours × [(25% × $400/hour) + (25% ×
$600/hour) + (25% × $330/hour) + (25% × $250/

losses or other measures or aspects of with effective controls and risk-
hour)] = $3,357,500. performance that are realized or become management, and the support of strong
117 2,500 hours × [(25% × $400/hour) + (25% × better known during the deferral period corporate governance) to all covered
$600/hour) + (25% × $330/hour) + (25% × $250/ (the ‘‘look-back’’). financial institutions, including covered
hour)] = $987,500. BDs and IAs. The Commission believes
118 8,500 hours × [(25% × $400/hour) + (25% ×
$600/hour) + (25% × $330/hour) + (25% × $250/ (iii) The financial condition of the covered that applying these principles to
hour)] = $3,357,500. financial institution; covered BDs and IAs should promote
119 500 hours × [(25% × $400/hour) + (25% × (iv) Comparable compensation practices at sound incentive-based compensation
$600/hour) + (25% × $330/hour) + (25% × $250/ comparable institutions, based upon such factors as
asset size, geographic location, and the complexity practices and discourage incentive-
hour)] = $197,500.
120 8,500 hours × [(25% × $400/hour) + (25% × of the institution’s operations and assets; based compensation arrangements that
$600/hour) + (25% × $330/hour) + (25% × $250/ (v) For postemployment benefits, the projected contributed to the recent financial crisis.
hour)] = $3,357,500. total cost and benefit to the covered financial The proposed elements defining when
121 Under Section 248.205(a)(2) of the proposed institution; an incentive-based compensation
(vi) Any connection between the individual and
rule, an incentive-based compensation arrangement arrangement provides excessive

provides excessive compensation when amounts any fraudulent act or omission, breach of trust or
paid are unreasonable or disproportionate to the fiduciary duty, or insider abuse with regard to the compensation or could result in a
services performed by a covered person, taking into covered financial institution; and material financial loss would benefit
consideration: (vii) Any other factors the Commission covered financial institutions by
(i) The combined value of all cash and non-cash determines to be relevant. identifying specific factors to determine
benefits provided to the covered person; 122 See Guidance on Sound Incentive
(ii) The compensation history of the covered Compensation Policies, 75 FR 36395 (June 25, 2010)
whether certain arrangements are
person and other individuals with comparable (jointly adopted by the OCC, the FRB, the FDIC and prohibited. Abiding by the standards
expertise at the covered financial institution; OTS). reflected in section 39(c) of the FDIA
and the principles described in the the greatest ability to influence the risk losses or other measures better realized
Guidance, which already apply to profile of the covered financial during the deferral period.
banking institutions, should help to institution with the interests of the As with the deferral requirement and
promote the safety and soundness of the covered financial institution. The the look-back mechanism, the
covered BD or IA and by extension deferral requirement for executive Commission preliminarily believes that
protect investors and promote the officers and chiefs of major business these provisions of the proposed rule
public interest. The proposed rule also lines at the largest covered financial relating to designated risk takers would
should give firms the discretion to institutions reflects the previously help to strengthen board oversight of
reward the most productive employees acknowledged benefit for deferral of covered persons’ incentive-based
because the definition of ‘‘excessive certain high-level employees whose compensation. The Commission
compensation’’ should be sufficiently activities present broad, and potentially believes that promoting strong corporate
broad so as to permit covered financial lengthy, risk exposure to an institution, governance oversight of a covered BD’s
institutions the flexibility to reward and whose activities do not lend or IA’s incentive-based compensation
productive employees. themselves as easily to risk arrangements would promote sound
Moreover, by not prescribing practices and foster a high quality
quantification and assessment through
mandatory deferral for covered BDs and process regarding incentive-based
ex ante or other predictive risk
IAs with assets under $50 billion, but compensation decisions at a covered
rather by requiring non-specific adjustment measures. Requiring deferral
for this discrete group of individuals at financial institution. Moreover, the
standards for these arrangements (i.e., additional oversight of designated risk
that they balance risk and return, are particularly large institutions, where up-
front or ex ante risk adjustment takers’ incentive-based compensation
compatible with effective controls and should help to provide proper
risk management, etc.), the proposed measures are less likely to be effective,
incentives to these persons and thus
rule would provide smaller covered BDs is a useful risk adjustment tool. It
limit the risk exposure of covered BDs
and IAs with significant flexibility to permits time for risks not previously
and IAs. In addition, requiring the board
tailor their compensation packages to discerned or quantifiable to ultimately
of directors, or a committee of the board,
their covered persons. The proposed materialize and permits adjustment of
to identify designated risk takers other
rule would permit covered BDs and IAs unreleased deferral payments on the
than executive officers and to approve
with assets below $50 billion to basis of observed consequences as their incentive-based compensation
determine their respective incentive- opposed to mere predicted results. The should help to improve the board’s
based compensation arrangements Commission believes that the understanding of the risk profile of
within the parameters of meeting certain heightened standards for the largest certain firm activities or divisions that
goals (i.e., that the payments balance covered BDs and IAs is particularly have the ability to expose the institution
risk and return, are compatible with appropriate because decisions made at to possible substantial losses. It would
effective risk controls and risk the largest covered BDs and IAs can also encourage the board to spend more
management) set forth in the proposed greatly impact the fair and orderly time considering the compensation
rule. operation of the financial markets. arrangements of important employees
The Commission believes that the These deferral restrictions should who are not executives but who have
proposed rule should curb excessive weaken the incentive for executive the ability to materially impact the risk
risk taking, which should lead to more officers and chiefs of major business profile of the firm. The proposed rule
effective capital allocation. The rule lines to make decisions that create short also provides covered financial
should discourage compensation term gain at the expense of increased institutions the flexibility to determine
incentives that encouraged capital flow long term risk. The Commission also who the relevant potential excessive
into investments that were unprofitable expects that by example, an express risk takers are.
on the whole. Hereafter, the flow of deferral requirement for executive
capital into less risky investments officers and heads of major business 2. Costs
should result in capital being put to lines would have a broader beneficial a. All Covered BDs and IAs
more effective use. More efficient impact on the structure of compensation
capital allocation, in turn, should The Commission also anticipates that
used throughout a company.123 The the proposed rule may entail certain
improve the quality of the firms’ required look-back mechanism included
financial services and products, as firms costs. For example, in a case where a
in the proposed rule is a means by firm elects to defer an excessive portion
employ capital to its most productive
which the covered financial institution of covered persons’ compensation, such
use. Since higher quality service and
may reduce previously awarded deferral may reduce effort expended by
products are ordinarily associated with
compensation over the deferred period covered persons and the willingness of
increased competition, it is possible that
of time. Thus, the required look-back covered persons to take even measured
competition among covered BDs and
adds to the power of deferring risks. The Commission understands that
IAs would be more robust.
By requiring that the incentive-based compensation in that previously it is necessary for covered financial
compensation arrangements of covered awarded compensation may actually not institutions to take a certain amount of
BDs and IAs with more than $50 billion be awarded if the firm finds that such risk in order to operate their businesses.
in total assets defer at least 50% of the compensation does not reflect actual Accordingly, the Commission desires to
compensation of covered executives and carefully balance the need for covered
123 Certain recent studies provide empirical

chiefs of major business lines for at least financial institutions to take risk against
evidence consistent with deferred compensation
three years, and requiring firms to adjust helping reduce the probability of corporate default.
the possibility that if the wrong
any amount deferred to reflect actual See e.g. Wei and Yermack (2010). In one study, the regulatory balance is struck, covered
losses or other measures of performance authors conclude that bank CEOs with large persons may have the incentive to
that are realized or become better amounts of inside debt in the form of pensions and actually take less risk than is optimal in
deferred compensation exposed their firms to less
known only during the deferral period, risk and obtained greater performance during the
order to ensure that, on a personal level,
the proposed rule should help align the recent financial crisis. (http://papers.ssrn.com/sol3/ the covered employee has sufficient
interests of those covered persons with papers.cfm?abstract_id=1519252). cash flow. In the event that employees
are induced to take less than optimal seeks comment on whether it is possible had inadequate incentives to ensure that
risk, then there might be a negative that covered BDs and IAs would have they comprehend these risks, the
effect on the efficiency of capital more difficulty recruiting qualified proposal would be more effective. It is
allocation. The Commission individuals to work for their firms if not clear what, if any, other regulatory
preliminarily believes that the proposed such individuals fear that added steps could be taken to promote a better
rule strikes an appropriate balance in scrutiny of their incentive-based comprehension of risk, and mandatory
this regard but requests comment compensation may lead to lower deferral as provided in the proposed
generally on this issue. aggregate pay. rule would at least provide some
Based on its experience in the area, required measure of risk adjustment in
staff conversations with covered BDs b. Covered BDs and IAs With Assets of
$50 Billion or More cases where such risks are understood
and filings by publicly-traded covered by executive officers at large covered
BDs, IAs and certain parent companies, In addition to the costs imposed upon financial institutions. If, however, the
the Commission believes that the all covered BDs and IAs, described risks that covered persons take are very
elements of the prohibition applicable above, the proposed rule would impose long term (i.e., beyond 5 years), the
to all covered BDs and IAs related to additional costs on firms with assets of proposed compensation deferral might
excessive compensation and material $50 billion or more. The Commission not prove to be effective at deferring
financial loss to the firms already anticipates that it is possible that covered persons’ taking on
generally represent the practices of covered BDs and IAs with assets of $50 inappropriate risk for the firm.
many covered BDs and IAs. Therefore, billion or more may have to pay more
in base salary to compensate their As stated above, the Commission also
the Commission believes that covered
executive officers and heads of a major believes there would be compliance-
BDs and IAs generally already consider
business line for the uncertainty related costs associated with the
factors consistent with those referenced
associated with the ultimate receipt of proposed rule. Based upon experience
in section 39(c) of the FDIA and the
deferred compensation. However, it is of the Commission staff, the
principles in the Guidance in designing
also possible that increases in salaries Commission understands that although
and administering their incentive-based
would be offset by decreases in deferred mandatory deferral of a significant
compensation programs. Nonetheless,
incentive-based compensation. The percentage of firms’ incentive-based
the Commission recognizes that some
Commission requests comment on compensation to executive officers and
covered BDs and IAs may not conform
whether covered BDs and IAs should chiefs of major business lines is the
to incentive-based compensation
standards consistent with section 39(c) expect to incur the cost of increased existing practice among many covered
of the FDIA and the principles in the salaries that may result from the BDs and IAs, it would represent a new
Guidance. implementation of required deferred practice for some firms. Even for firms
In addition, the Commission compensation and look-back policies for with existing deferral practices, there
acknowledges the possibility that the certain covered persons. would be costs to conform their deferral
proposed rules may reduce the As stated above, the Commission also practices to the requirements of
incentive for certain covered persons to recognizes that the firms with assets of proposed § 248.205(b)(3). For example,
switch jobs because would-be new at least $50 billion may have more based on staff’s discussions with the
employers that are covered financial difficulty recruiting individuals for industry, its review of information in
institutions would be bound to offer those positions than a firm not subject public filings, and its experience in the
such covered persons compensation to the deferral requirement. In addition, area, the Commission believes that the
packages that comply with the proposed such firms may have difficulty practice of adjusting deferred amounts
rules. If a lack of turnover results, it recruiting individuals who object to of compensation to reflect actual losses
might adversely impact competitiveness having their compensation specifically or other measures that are realized or
among firms, but it may also promote approved and monitored by the covered become known during the deferral
institutional stability within firms. The BD’s or IA’s board of directors or period (administering a look-back)
Commission believes the proposed rule committee thereof. To the extent that exists in comparatively fewer firms than
strikes an appropriate balance in this this adversely affects the quality of does the practice of deferral itself. The
regard, but requests comment generally employees that firms of that size are Commission also believes that many
on this issue. able to attract, it may negatively affect firms may provide deferral or vesting
The Commission seeks comment on the business of larger covered financial periods of less than the three years
whether the proposed prohibitions institutions. under the proposed rule. The
applicable to covered BDs and IAs To the extent that the proposal relies Commission believes, based upon its
(which include only those broker- on an assumption that a covered person experience and the filings submitted by
dealers and investment advisers with understands the risks inherent in a publicly-traded covered BDs, IAs and
assets of more than $1 billion) may particular business decision but chooses certain public companies, that some, but
disadvantage covered financial to disregard them because the covered not all boards or board committees of
institutions as compared to financial person would not bear the costs covered BDs and IAs with assets of at
institutions not covered under the associated with those risks being least $50 billion already have a role in
proposed rules because covered realized, the proposal may not be approving the compensation for highly-
financial institutions would be required effective at promoting a more accurate paid individuals, including most people
to assume costs in designing, or realistic assessment of a business that would be defined as designated risk
implementing, monitoring and decision as to which neither the takers under the proposed rule.
maintaining a regulatory program executive officer nor the covered Accordingly, the Commission
reasonably designed to address the financial institution grasps the inherent anticipates that covered BDs and IAs
requirements of the proposed rules, risk. To the extent, however, that the would experience costs in
whereas broker-dealers and investment proposal relies on an assumption that implementing the deferral, look-back
advisers with total consolidated assets covered persons do not always fully and designated risk takers components
less than $1 billion would not be subject understand the risks inherent in of the requirements for firms with assets
to such costs. The Commission also particular business decisions and have of $50 billion or more.
The requirement under proposed incentive-based compensation is subject requirements and prohibitions in other
§ 248.205(b)(3)(ii)(B) to require the to board-level scrutiny. parts of the proposed rule, ensure that
board of directors (or committee of the In order to help the Commission risk management or oversight personnel
board) of covered financial institutions better understand all the costs have a role in designing and assessing
that have total consolidated assets of associated with this aspect of the incentive-based compensation
$50 billion or more to approve and proposed rule, the Commission requests arrangements, provide for independent
document the identification of those comment on them generally. The monitoring of the incentive-based
covered persons that individually have Commission is also soliciting comment compensation awards, risks taken and
the ability to expose the institution to on the following specific issues: actual outcomes, require that a covered
possible losses that are substantial in • Do commenters believe that financial institution’s board receive data
relation to the institution’s size, capital, requiring a minimum deferral period of and an analysis to enable the board to
or overall risk tolerance would create three years for at least 50% of the assess whether the incentive-based
new burden for such larger covered compensation for executive officers and compensation arrangements are
financial institutions. Based on staff chiefs of major business lines at large consistent with 12 U.S.C. 5641, and
experience and conversations with covered financial institutions would require sufficient documentation of the
larger covered BDs and the filings place such financial institutions at an covered financial institution’s incentive-
submitted by publicly-traded covered unjustified disadvantage in the hiring of based compensation arrangements to
IAs and certain parent companies, the and retaining qualified personnel as enable the Commission to determine the
Commission does not believe that the compared to smaller covered financial covered BDs’ or IAs’ compliance with
boards of larger covered BDs and IAs institutions? If commenters believe that 12 U.S.C. 5641. In addition, the
generally identify and approve the this is the case, what would commenters proposal would require that the covered
compensation of such designated risk do to modify the proposed rule while BDs’ and IAs’ policies and procedures
takers. reasonably ensuring that there is useful include certain features for when a firm
The Commission believes that the and meaningful risk adjustment of uses deferral in connection with an
most significant ongoing cost that incentive-based compensation for incentive-based compensation
covered BDs and IAs would assume to executives at large covered financial arrangement, and that the policies and
comply with proposed institutions? Do commenters believe procedures subject incentive-based
§ 248.205(b)(3)(ii)(B) is the cost of that requiring a different minimum compensation arrangements to an
having appropriate senior personnel deferral period or minimum deferred appropriate corporate governance
administer the deferred compensation, percentage would promote better framework.
look-back and designated risk takers incentive-based compensation In addition, for covered BDs and IAs
provisions. As with all matters related practices? Should the required with assets of at least $50 billion,
to incentive-based compensation, minimum deferral provisions be proposed § 248.205(b)(3)(ii)(B) would
covered BDs and IAs would be required extended to smaller covered financial require a firm’s board of directors, or a
to administer their incentive-based institutions? committee thereof, to identify those
compensation arrangements in a manner • Do commenters believe that there is covered persons (other than executive
that is compatible with effective a substantial risk that covered financial officers) that individually have the
controls and risk management and is institutions would reconfigure their ability to expose the institution to
supported by strong corporate operations, structure, or assets in such possible losses that are substantial in
governance, including active and a manner so as to circumvent being relation to the institution’s size, capital,
effective oversight by the covered classified as a large covered financial or overall risk tolerance. These covered
financial institution’s board of directors. institution? persons may include, for example,
The Commission anticipates that firms • Do commenters believe that traders with large position limits
would use an appropriate mix of senior mandating deferral as a risk adjustment relative to the institution’s overall risk
risk management personnel along with tool for executive officers at large tolerance and other individuals that
the firms’ board of directors, or covered financial institutions would have the authority to place at risk a
committee thereof, to administer the inhibit the development of other substantial part of the capital of the
identification of designated risk takers potentially more effective risk covered financial institution. The
and approval of their compensation, as adjustment tools? Are there other risk Agencies propose that the compensation
required under the proposed rule. adjustment tools that are more effective decisions applicable to such persons
Larger covered financial institutions than deferral, and why are those tools must be approved by the firm’s board of
with total consolidated assets of at least more effective? directors or a committee of the board
$50 billion may experience a and that the covered BD or IA document
C. Required Policies and Procedures
disadvantage relative to smaller the compensation decisions made by the
financial institutions on account of the and Documentation of the
board or its committee.
proposed required deferral for executive Compensation of Certain Covered
officers and board-level review of the Persons 1. Benefits
incentive-based compensation of The proposal would require covered The Commission believes that
designated risk takers. In addition to the financial institutions to adopt policies requiring covered financial institutions
added costs that such larger financial and procedures reasonably designed to to adopt and enforce the policies and
institutions would incur to implement ensure and monitor compliance with 12 procedures described above would
the deferral and board-level review of U.S.C. 5641 commensurate with the size foster the Agencies’ understanding of
designated risk takers’ compensation, and complexity of the organization and the covered financial institutions’
the Commission believes that some the scope and nature of its use of incentive-based compensation practices
executive officers may have incentive-based compensation. As and would promote compliance and
disincentives from working for a described in further detail above, the accountability regarding the practices
covered financial institution whereby proposed rule would require that the that the Agencies propose to prohibit.
their compensation would be required policies and procedures, at a minimum, The rule is designed to ensure that
to be deferred or in firms where their be consistent with the disclosure covered BDs and IAs establish adequate
procedures and controls to ensure arrangements by the board of directors. proves to be unwarranted once the risks
compliance with 12 U.S.C 5641. The The proposed rule would help increase associated with the covered person’s
Commission preliminarily believes that the importance of the compensation- activities are realized over time.
the policies and procedures section of setting function at covered financial
institutions, including covered BDs and 2. Costs
the proposed rule would help to ensure
that boards receive data to monitor IAs. The Commission preliminarily As described more fully in the PRA
incentive-based compensation believes that this increased internal Section, the Commission believes that
arrangements. Further, the Commission importance would result in a higher covered individual bank BDs and IAs
believes that, at a minimum, the quality process regarding incentive- would be subject to significantly less
proposed rule should help to ensure based compensation decisions at a
initial and ongoing costs than non-bank
that incentive-based compensation covered financial institution. For
BDs and IAs because bank BDs and IAs
arrangements would be designed with example, the proposed rule would help
are already subject to the Guidance. The
more careful consideration of its effects to ensure that information is received by
Commission is also aware that the
on risk. The Commission also believes the relevant decision makers and other
persons acting in an internal proposed rule would generate
that the proposed rule would provide compliance-related costs associated
supervisory role within the covered
greater board of director and risk with, among other things, collecting the
financial institution. This development
management/risk oversight personnel necessary information and preparing the
should strengthen the supervision of the
supervision of incentive-based reports, as well as hiring outside
board with respect to incentive-based
compensation arrangements and compensation arrangements. professionals, such as attorneys,
practices at the covered financial The recordkeeping requirement in compensation or benefits consultants,
institution because boards would proposed in § 248.206(b)(5) should accountants and/or actuaries. In the
receive data and analysis from ensure that Commission staff members chart below, the Commission estimates
management to support a finding that are able to properly examine covered the internal costs associated with the
the incentive-based compensation BDs’ and IAs’ incentive-based proposed recordkeeping requirements.
arrangements are consistent with 12 compensation practices in the context of In order to arrive at these internal cost
U.S.C. 5641. Moreover, risk- an examination. The proposal also estimates, the Commission multiplied
management/risk-oversight personnel would require that a covered BD or IA the hourly burden estimates provided in
would help to design and assess the have policies and procedures that the PRA Section by the estimated hourly
effectiveness of the covered BD’s or IA’s provide that compensation payments rate for a securities attorney.124 The
incentive-based compensation are reduced to reflect adverse risk Commission is using the same external
arrangement. The Commission believes outcomes or high levels of risk taken. cost estimates for the recordkeeping
that these provisions of the proposed This should help ensure that the requirement that it used in the PRA
rule would help to strengthen the compensation contracts are accurately Section of this proposed rule. The
supervision of covered persons’ followed and diminish the adverse Commission seeks comment on all these
incentive-based compensation effect of deferred compensation that cost estimates.
TOTAL INTERNAL RECORDKEEPING COST

($50B +) ($1B–$50B) ($50B +) ($1B–$50B)
Initial Recordkeeping ...................................................... $900,000 125 ........... $1.2 million 126 ....... $1.1 million 127 ....... $16 million.128
Ongoing Recordkeeping ................................................. $400,000 129 ........... $400,000 130 ........... $150,000 131 ........... $1.5 million.132
TOTAL EXTERNAL RECORDKEEPING COST

($50B +) ($1B–$50B) ($50B +) ($1B–$50B)
Initial Recordkeeping ...................................................... $1 million 133 .......... $1.3 million 134 ....... $1.2 million 135 ....... $18 million.136
Ongoing Recordkeeping ................................................. $400,000 137 ........... $400,000 138 ........... $250,000 139 ........... $1.7 million.140
Solicitation of Comment
In enacting this section of the Dodd-
Frank Act, Congress has made the
124 The Commission estimates $354 per hour for 129 1,000hours × $354 = $354,000. 135 3,000 hours × [(25% × $400/hour) + (25% ×
a securities attorney, based on SIFMA’s hours × $354 = $354,000. $600/hour) + (25% × $330/hour) + (25% × $250/
130 1,000
Management & Professional Earnings in the 131 400 hours × $354 = $141,600. hour)] = $1,185,000.
Securities Industry 2010, modified by Commission 136 46,000 hours × [(25% × $400/hour) + (25% ×
132 4,300 hours × $354 = $1,522,200.
staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, 133 2,500 hours × [(25% × $400/hour) + (25% × $600/hour) + (25% × $330/hour) + (25% × $250/
employee benefits and overhead. $600/hour) + (25% × $330/hour) + (25% × $250/ hour)] = $18,170,000.
125 2,500 hours × $354 = $885,000. 137 1,000 hours × [(25% × $400/hour) + (25% ×
hour)] = $987,500.
126 3,400 hours × $354 = $1,203,600. 134 3,400 hours × [(25% × $400/hour) + (25% × $600/hour) + (25% × $330/hour) + (25% × $250/
127 3,000 hours × $354 = $1,062,000. $600/hour) + (25% × $330/hour) + (25% × $250/ hour)] = $395,000.
128 46,000 hours × $354 = $16,284,000. hour)] = $1,343,000.
judgment that regulation entailing be equally effective at helping to ensure, 12 CFR Part 372
potential burdens and impacts of the particularly at large covered financial
type discussed below is justified so as institutions, that incentive-based Banks, Banking, Compensation,
to prevent covered financial institutions compensation arrangements do not Foreign Banking.
from utilizing incentive-based result in excessive compensation or a 12 CFR Part 563h
compensation arrangements that could material financial loss to the covered
threaten the health of financial financial institution? What alternative Compensation, Holding companies,
institutions or have serious effects on would commenters propose and why do Reporting and recordkeeping
economic conditions or financial commenters believe that it would be as requirements, Savings associations.
stability.141 The Commission generally effective, or more effective? 12 CFR Parts 741 and 751
solicits comment on all the costs, • Does the proposed rule promote
benefits, and analyses set forth in this greater internal discipline and controls Compensation, Credit Unions,
economic analysis. The Commission by covered financial institutions with Reporting and recording requirements.
also specifically requests comment on respect to incentive-based compensation 12 CFR Part 1232
the following issues: arrangements? Similarly, does the
• The Commission requests proposed rule help to promote that Administrative practice and
comments on the anticipated impact of discipline upon a greater number of procedure, Banks, Compensation,
the proposal on the competitiveness of persons at the covered financial Confidential business information,
covered financial institutions as institution, including not only the Government-sponsored enterprises,
compared to broker-dealers and executive officers (or comparable Reporting and recordkeeping
investment advisers that do not meet the persons) at a covered financial requirements.
definition of covered financial institution, but also those persons
institution as well as the impact of the 17 CFR Part 248
whose activities subject the covered
proposal on the competitiveness of financial institution to significant risk? Incentive-based Compensation
covered BDs and IAs with assets of at Arrangements, Reporting and
least $50 billion as compared to covered I. SEC Consideration of Impact on the
recordkeeping requirements; Securities.
BDs and IAs with assets between Economy
$1 billion and $50 billion. For purposes of the Small Business Department of the Treasury
• Could the proposed rule be Regulatory Enforcement Fairness Act of Office of the Comptroller of the
modified so as to implement the 1996, or ‘‘SBREFA,’’ 142 the Commission Currency
mandate of 12 U.S.C. 5641 in a manner must advise OMB whether a proposed
that improves the efficiency of covered 12 CFR Chapter I
regulation constitutes a major rule.
financial institution and imposes less of Under SBREFA, a rule is ‘‘major’’ if it Authority and Issuance
a burden on competition? If so, what has resulted in, or is likely to result in:
specific changes would commenters • An annual effect on the economy of For the reasons set forth in the joint
suggest? Would the impact be improved $100 million or more preamble, the OCC proposes to amend
with a different deferral threshold • a major increase in costs or prices 12 CFR Chapter I of the Code of Federal
(currently 50% of incentive-based for consumers or individual industries; Regulations as follows:
compensation) or deferral period or 1. Add part 42 to read as follows:
(currently no faster than pro rata over • a significant adverse effect on
3 years)? Is there a better way to design competition, investment, or innovation. PART 42—INCENTIVE-BASED
or apply the ‘‘look-back’’ period? If a rule is ‘‘major,’’ its effectiveness will COMPENSATION ARRANGEMENTS
• The Commission solicits public generally be delayed for 60 days Sec.
comment on the degree to which pending Congressional review. The 42.1 Authority.
commenters believe that the proposal Commission requests comment on the 42.2 Scope and purpose.
would encourage covered employees to potential impact of each of the proposed 42.3 Definitions.
take optimal risk and/or discourage rules and rule amendments on the 42.4 Required reports to regulators.
covered employees from taking economy on an annual basis, on the 42.5 Prohibitions.
inappropriate levels of risk. If 42.6 Policies and procedures.
costs or prices for consumers or
commenters believe the proposal would 42.7 Evasion.
individual industries, and on
lead to covered employees undertaking competition, investment, or innovation. Authority: 12 U.S.C. 1 et seq. 1, 93a, and
less than optimal risk (e.g., make Commenters are requested to provide 5641.
decisions that are too conservative for empirical data and other factual support
the firm), then please elaborate why that § 42.1 Authority.
for their views to the extent possible.
is the case. This part is issued pursuant to section
• If commenters believe a different List of Subjects 956 of the Dodd-Frank Wall Street
approach is warranted, do commenters 12 CFR Part 42 Reform and Consumer Protection Act
believe that a different approach would (12 U.S.C. 5641).
Compensation, Banks, Banking,
138 1,000 hours × [(25% × $400/hour) + (25% × National banks, Reporting and § 42.2 Scope and purpose.
$600/hour) + (25% × $330/hour) + (25% × $250/ recordkeeping requirements. This part applies to a covered
hour)] = $395,000.
139 600 hours × [(25% × $400/hour) + (25% × 12 CFR Part 236 financial institution that has total
$600/hour) + (25% × $330/hour) + (25% × $250/ Compensation, Banks, Bank Holding consolidated assets of $1 billion or more
hour)] = $237,000.
Companies, Reporting and and offers incentive-based
140 4,300 hours × [(25% × $400/hour) + (25% ×
recordkeeping requirements. compensation arrangements to covered
$600/hour) + (25% × $330/hour) + (25% × $250/ persons. Nothing in this part in any way
hour)] = $1,698,500.
141 See Joint Explanatory Statement of the 142 Pub. L. 104–121, Title II, 110 Stat. 857 (1996) limits the authority of the OCC under
committee of Conference Accompanying H.R. 4173, (codified in various sections of 5 U.S.C., 15 U.S.C. other provisions of applicable law and
H.R. Rep. No. 111–517, at 873. and as a note to 5 U.S.C. 601). regulations.
§ 42.3 Definitions. reported in the Federal branch or report submitted under paragraph (a) of
For purposes of this part, the agency’s four most recent Reports of this section; and
following definitions apply unless Assets and Liabilities of U.S. Branches (5) The specific reasons why the
otherwise specified: and Agencies of Foreign Banks—FFIEC covered financial institution believes
(a) Board of directors means the 002. the structure of its incentive-based
governing body of any covered financial compensation plan does not encourage
institution performing functions similar § 42.4 Required reports to regulators. inappropriate risks by the covered
to a board of directors. For Federal (a) In general. A covered financial financial institution by providing
branches and agencies, ‘‘board of institution must submit a report covered persons with:
directors’’ means parent foreign bank annually to, and in the format directed (i) Excessive compensation; or
senior management. by, the OCC, that describes the structure (ii) Incentive-based compensation that
(b) Compensation means all direct of the covered financial institution’s could lead to a material financial loss to
and indirect payments, fees or benefits, incentive-based compensation the covered financial institution.
both cash and non-cash, awarded to, arrangements for covered persons and
that is sufficient to allow an assessment § 42.5 Prohibitions.
granted to, or earned by or for the
benefit of, any covered person in of whether the structure or features of (a) Excessive compensation
exchange for services rendered to the those arrangements provide or are likely prohibition. (1) In general. A covered
covered financial institution, including, to provide covered persons with financial institution must not establish
but not limited to, payments or benefits excessive compensation, fees, or or maintain any type of incentive-based
pursuant to an employment contract, benefits to covered persons or could compensation arrangement, or any
compensation or benefit agreement, fee lead to material financial loss to the feature of any such arrangement, that
arrangement, perquisite, stock option covered financial institution. encourages inappropriate risks by the
plan, postemployment benefit, or other (b) Individual compensation. A covered financial institution by
compensatory arrangement. covered financial institution is not providing a covered person with
(c) Covered financial institution required to report the actual excessive compensation.
means a national bank or a Federal compensation of particular covered (2) Standards. An incentive-based
branch or agency of a foreign bank that persons as part of the report required by compensation arrangement provides
has total consolidated assets of $1 paragraph (a) of this section. excessive compensation when amounts
billion or more. (c) Minimum standards. The paid are unreasonable or
(d) Covered person means any information submitted by the covered disproportionate to the services
executive officer, employee, director, or financial institution pursuant to performed by a covered person, taking
principal shareholder of a covered paragraph (a) of this section must into consideration:
financial institution. include the following: (i) The combined value of all cash and
(e) Director of a covered financial non-cash benefits provided to the
(1) A clear narrative description of the
institution means a member of the board covered person;
components of the covered financial
of directors of the covered financial (ii) The compensation history of the
institution’s incentive-based
institution, or of a board or committee covered person and other individuals
compensation arrangements applicable
performing a similar function to a board with comparable expertise at the
to covered persons and specifying the
of directors. covered financial institution;
types of covered persons to which they (iii) The financial condition of the
(f) Executive officer of a covered
apply; covered financial institution;
financial institution means a person
(2) A succinct description of the (iv) Comparable compensation
who holds the title or, without regard to
covered financial institution’s policies practices at comparable institutions,
title, salary, or compensation, performs
and procedures governing its incentive- based upon such factors as asset size,
the function of one or more of the
based compensation arrangements for geographic location, and the complexity
following positions: president, chief
covered persons; of the covered financial institution’s
executive officer, executive chairman,
(3) If the covered financial institution operations and assets;
has total consolidated assets of $50 (v) For postemployment benefits, the
officer, chief investment officer, chief
billion or more, an additional succinct projected total cost and benefit to the
legal officer, chief lending officer, chief
description of incentive-based covered financial institution;
risk officer, or head of a major business
compensation policies and procedures (vi) Any connection between the
line.
(g) Incentive-based compensation specific to the covered financial individual and any fraudulent act or
means any variable compensation that institution’s: omission, breach of trust or fiduciary
serves as an incentive for performance. (i) Executive officers; and duty, or insider abuse with regard to the
(h) Principal shareholder means an (ii) Other covered persons who the covered financial institution; and
individual who directly or indirectly, or board of directors, or a committee (vii) Any other factors the OCC
acting through or in concert with one or thereof, of the covered financial determines to be relevant.
more persons, owns, controls, or has the institution has identified and (b) Material financial loss prohibition.
power to vote 10 percent or more of any determined under § 42.5(b)(3)(ii) of this (1) Generally. A covered financial
class of voting securities of a covered part individually have the ability to institution must not establish or
financial institution. expose the covered financial institution maintain any type of incentive-based
(i) Total consolidated assets means: to possible losses that are substantial in compensation arrangement, or any
(1) For a national bank, calculating relation to the institution’s size, capital, feature of any such arrangement, that
the average of the total assets reported or overall risk tolerance; encourages inappropriate risks by the
in the bank’s four most recent (4) Any material changes to the covered financial institution, by
Consolidated Reports of Condition and covered financial institution’s incentive- providing incentive-based
Income (‘‘Call Report’’); and based compensation arrangements and compensation to covered persons, either
(2) For a Federal branch and agency, policies and procedures made since the individually or as part of a group of
calculating the average of the total assets covered financial institution’s last persons who are subject to the same or
similar incentive-based compensation relative to the institution’s overall risk (b) Standards. The policies and
arrangements, that could lead to tolerance and other individuals who procedures must, at a minimum:
material financial loss to the covered have the authority to place at risk a (1) Be consistent with the reporting
financial institution. substantial part of the capital of the requirements in § 42.4 of this part and
(2) Requirements for all covered covered financial institution; prohibitions in § 42.5 of this part;
financial institutions. An incentive- (B) The incentive-based compensation (2) Ensure that risk-management, risk-
based compensation arrangement arrangement for any covered person oversight, and internal control
established or maintained by a covered identified pursuant to paragraph personnel have an appropriate role in
financial institution for one or more (b)(3)(ii)(A) of this section must be the covered financial institution’s
covered persons does not comply with approved by the board of directors, or a processes for designing incentive-based
paragraph (b)(1) of this section unless it: committee thereof, of the covered compensation arrangements and for
(i) Balances risk and financial financial institution and such approval assessing their effectiveness in
rewards, for example by using deferral must be documented; restraining inappropriate risk-taking;
of payments, risk adjustment of awards, (3) Provide for the monitoring by a
(C) The board of directors, or
reduced sensitivity to short-term group or person independent of the
committee thereof, may not approve the covered person, where practicable in
performance, or longer performance incentive-based compensation
periods; light of the covered financial
arrangement for any covered person institution’s size and complexity, of
(ii) Is compatible with effective
identified pursuant to paragraph incentive-based compensation awards
controls and risk management; and
(iii) Is supported by strong corporate (b)(3)(ii)(A) of this section unless the and payments, risks taken, and actual
governance, including active and board or committee determines that the risk outcomes to determine whether
effective oversight by the covered arrangement, including the method of incentive-based compensation payments
financial institution’s board of directors paying compensation under the for covered persons, or groups of
or a committee thereof. arrangement, effectively balances the covered persons, are reduced to reflect
(3) Specific requirements for covered financial rewards to the covered person adverse risk outcomes or high levels of
financial institutions with $50 billion or and the range and time horizon of risks risk taken;
more in total consolidated assets. (i) associated with the covered person’s (4) Provide for the covered financial
Deferral required for executive officers. activities, employing appropriate institution’s board of directors, or
As part of appropriately balancing risk methods for ensuring risk sensitivity committee thereof, to receive data and
and financial rewards pursuant to such as deferral of payments, risk analysis from management and other
paragraph (b)(2)(i) of this section, any adjustment of awards, reduced sources sufficient to allow the board, or
incentive-based compensation sensitivity to short-term performance, or committee thereof, to assess whether the
arrangement for any executive officer longer performance periods; and overall design and performance of the
established or maintained by a covered (D) In fulfilling its duties under institution’s incentive-based
financial institution that has total paragraph (b)(3)(ii)(C) of this section, compensation arrangements are
consolidated assets of $50 billion or the board of directors or committee consistent with 12 U.S.C. 5641;
more must provide for: thereof must evaluate the overall (5) Ensure that documentation of the
(A) At least 50 percent of the annual effectiveness of the balancing methods covered financial institution’s processes
incentive-based compensation of the used in the identified covered person’s for establishing, implementing,
executive officer to be deferred over a incentive-based compensation modifying, and monitoring incentive-
period of no less than three years, with arrangements in reducing incentives for based compensation arrangements is
the release of deferred amounts to occur inappropriate risk taking by the maintained that is sufficient to enable
no faster than on a pro rata basis; and identified covered person considering the OCC to determine the institution’s
(B) The adjustment of the amount the methods’ suitability for balancing compliance with 12 U.S.C. 5641 and
required to be deferred under paragraph the full range of risks presented by that this part;
(b)(3)(i)(A) of this section to reflect covered person’s activities, and the (6) Consistent with § 42.5(b)(3) of this
actual losses or other measures or methods’ ability to make payments part, where deferral is used in
aspects of performance that are realized sensitive to all the risks arising from the connection with an incentive-based
or become better known during the covered person’s activities, including compensation arrangement, provide for
deferral period. those that may be difficult to predict, deferral of incentive-based
(ii) Additional requirement for measure or model. compensation awards in amounts and
covered persons presenting particular for periods of time appropriate to the
loss exposure. As part of appropriately § 42.6 Policies and procedures. duties and responsibilities of the
balancing risk and financial rewards (a) In general. Any incentive-based covered financial institution’s covered
pursuant to paragraph (b)(2)(i) of this compensation arrangement, or any persons, the risks associated with those
section, if a covered financial institution feature of any such arrangement, is duties and responsibilities, and the size
has total consolidated assets of $50 prohibited under § 42.5 of this part, and complexity of the covered financial
billion or more— unless adopted pursuant to policies and institution and provide that the deferral
(A) The board of directors, or a procedures developed and maintained amounts paid are adjusted to reflect
committee thereof, of the covered by each covered financial institution actual losses or other measures or
financial institution shall identify those and approved by its board of directors, aspects of performance that are realized
covered persons (other than executive or a committee thereof, reasonably or become better known during the
officers) who individually have the designed to ensure and monitor deferral period; and
ability to expose the institution to compliance with the requirements set (7) Subject any incentive-based
possible losses that are substantial in forth in 12 U.S.C. 5641 and this part and compensation arrangement to a
relation to the institution’s size, capital, commensurate with the size and corporate governance framework that
or overall risk tolerance. These covered complexity of the organization, as well provides for ongoing oversight by the
persons may include, for example, as the scope and nature of its use of board of directors or a committee
traders with large position limits incentive-based compensation. thereof, including the approval by the
board of directors or a committee both cash and non-cash, awarded to, (i) Total consolidated assets means:
thereof of incentive-based compensation granted to, or earned by or for the (1) For a state member bank, total
to executive officers. benefit of, any covered person in consolidated assets as determined based
exchange for services rendered to the on the average of the bank’s four most
§ 42.7 Evasion. covered financial institution, including, recent Consolidated Reports of
A covered financial institution is but not limited to, payments or benefits Condition and Income (‘‘Call Report’’);
prohibited, for the purpose of evading pursuant to an employment contract, (2) For a bank holding company, total
the restrictions of this part, from doing compensation or benefit agreement, fee consolidated assets as determined based
indirectly or through or by any other arrangement, perquisite, stock option on the average of the company’s four
person, any act or thing that it would be plan, postemployment benefit, or other most recent Consolidated Financial
unlawful for such covered financial compensatory arrangement. Statements for Bank Holding Companies
institution to do directly under this part. (c) Covered financial institution (1) In (‘‘FR Y–9C’’);
Federal Reserve Board general. The term ‘‘covered financial (3) For a state-licensed uninsured
institution’’ means: branch or agency of a foreign bank, total
12 CFR Chapter II (i) A state member bank, as defined in consolidated assets as determined based
Authority and Issuance 12 CFR 208.2(g), that has total on the average of the branch or agency’s
consolidated assets of $1 billion or four most recent Call Reports; and
For the reasons set forth in the joint
more; (4) For the U.S. operations of a foreign
preamble, the Board proposes to amend (ii) A bank holding company, as
12 CFR Chapter II as follows: bank total consolidated U.S. assets as
defined in 12 CFR 225.2(c), that has determined by the Board.
2. Add new part 236 to read as
total consolidated assets of $1 billion or
follows:
more; § 236.4 Required reports to regulators.
PART 236—Incentive-Based (iii) A state-licensed uninsured (a) In general. A covered financial
Compensation Arrangements branch or agency of a foreign bank, as institution must submit a report
(Regulation JJ) such terms are defined in section 3 of annually to, and in the format directed
the Federal Deposit Insurance Act (12 by, the Board, that describes the
Sec. USC 1813), that has total consolidated structure of the covered financial
236.1 Authority. assets of $1 billion or more; and institution’s incentive-based
236.2 Scope and purpose. (iv) The U.S. operations of a foreign
236.3 Definitions. compensation arrangements for covered
bank that is treated as a bank holding persons and that is sufficient to allow an
236.4 Required reports to regulators. company pursuant to section 8(a) of the
236.5 Prohibitions. assessment of whether the structure or
236.6 Policies and procedures.
International Banking Act of 1978 (12 features of those arrangements provide
236.7 Evasion. USC 3106(a)) that has total consolidated or are likely to provide covered persons
U.S. assets of $1 billion or more. with excessive compensation, fees, or
Authority: 12 U.S.C. 24, 321–338a, 1818, (2) Scope of term. A covered financial
1844(b), 3108 and 5641. benefits to covered persons or could
institution includes the subsidiaries of
lead to material financial loss to the
§ 236.1 Authority. the institution.
covered financial institution.
This part is issued pursuant to section (d) Covered person means any
executive officer, employee, director, or (b) Individual compensation. A
956 of the Dodd-Frank Wall Street covered financial institution is not
Reform and Consumer Protection Act principal shareholder of a covered
financial institution. required to report the actual
(12 U.S.C. 5641). compensation of particular covered
(e) Director of a covered financial
§ 236.2 Scope and purpose. institution means a member of the board persons as part of the report required by
of directors of the covered financial paragraph (a) of this section.
This part applies to a covered
institution, or of a board or committee (c) Minimum standards. The
financial institution that has total
performing a similar function to a board information submitted by the covered
consolidated assets of $1 billion or more
of directors. financial institution pursuant to
and offers incentive-based
(f) Executive officer of a covered paragraph (a) of this section must
compensation arrangements to covered
financial institution means a person include the following:
persons. Nothing in this part in any way
who holds the title or, without regard to (1) A clear narrative description of the
limits the authority of the Board under
title, salary, or compensation, performs components of the covered financial
other provisions of applicable law and
the function of one or more of the institution’s incentive-based
regulations.
following positions: president, chief compensation arrangements applicable
§ 236.3 Definitions. executive officer, executive chairman, to covered persons and specifying the
For purposes of this part, the chief operating officer, chief financial types of covered persons to which they
following definitions apply unless officer, chief investment officer, chief apply;
otherwise specified: legal officer, chief lending officer, chief (2) A succinct description of the
(a) Board of directors means the risk officer, or head of a major business covered financial institution’s policies
governing body of any covered financial line. and procedures governing its incentive-
institution performing functions similar (g) Incentive-based compensation based compensation arrangements for
to a board of directors. For a foreign means any variable compensation that covered persons;
banking organization, ‘‘board of serves as an incentive for performance. (3) If the covered financial institution
directors’’ refers to the relevant oversight (h) Principal shareholder means an has total consolidated assets of $50
body for the firm’s U.S. branch, agency individual who directly or indirectly, or billion or more, an additional succinct
or operations, consistent with the acting through or in concert with one or description of incentive-based
foreign banking organization’s overall more persons, owns, controls, or has the compensation policies and procedures
corporate and management structure. power to vote 10 percent or more of any specific to the covered financial
(b) Compensation means all direct class of voting securities of a covered institution’s:
and indirect payments, fees or benefits, financial institution. (i) Executive officers; and
(ii) Other covered persons who the duty, or insider abuse with regard to the balancing risk and financial rewards
board of directors, or a committee covered financial institution; and pursuant to paragraph (b)(2)(i) of this
thereof, of the covered financial (vii) Any other factors the Board section, if a covered financial institution
institution has identified and determines to be relevant. has total consolidated assets of $50
determined under § 236.5(b)(3)(ii) of (b) Material financial loss prohibition. billion or more—
this part individually have the ability to (1) Generally. A covered financial
institution must not establish or (A) The board of directors, or a
expose the covered financial institution committee thereof, of the covered
to possible losses that are substantial in maintain any type of incentive-based
compensation arrangement, or any financial institution shall identify those
relation to the institution’s size, capital, covered persons (other than executive
or overall risk tolerance; feature of any such arrangement, that
encourages inappropriate risks by the officers) who individually have the
(4) Any material changes to the ability to expose the institution to
covered financial institution’s incentive- covered financial institution, by
providing incentive-based possible losses that are substantial in
based compensation arrangements and
compensation to covered persons, either relation to the institution’s size, capital,
policies and procedures made since the
individually or as part of a group of or overall risk tolerance. These covered
covered financial institution’s last
persons who are subject to the same or persons may include, for example,
report submitted under paragraph (a) of
similar incentive-based compensation traders with large position limits
this section; and
arrangements, that could lead to relative to the institution’s overall risk
(5) The specific reasons why the
material financial loss to the covered tolerance and other individuals who
covered financial institution believes
the structure of its incentive-based financial institution. have the authority to place at risk a
compensation plan does not encourage (2) Requirements for all covered substantial part of the capital of the
inappropriate risks by the covered financial institutions. An incentive- covered financial institution;
financial institution by providing based compensation arrangement (B) The incentive-based compensation
covered persons with: established or maintained by a covered arrangement for any covered person
(i) Excessive compensation; or financial institution for one or more identified pursuant to paragraph
(ii) Incentive-based compensation that covered persons does not comply with (b)(3)(ii)(A) of this section must be
could lead to a material financial loss to paragraph (b)(1) of this section unless it: approved by the board of directors, or a
(i) Balances risk and financial committee thereof, of the covered
the covered financial institution.
rewards, for example by using deferral financial institution and such approval
§ 236.5 Prohibitions. of payments, risk adjustment of awards,
must be documented;
(a) Excessive compensation reduced sensitivity to short-term
performance, or longer performance (C) The board of directors, or
prohibition. (1) In general. A covered
periods; committee thereof, may not approve the
financial institution must not establish
(ii) Is compatible with effective incentive-based compensation
or maintain any type of incentive-based
controls and risk management; and arrangement for any covered person
compensation arrangement, or any
(iii) Is supported by strong corporate identified pursuant to paragraph
feature of any such arrangement, that
governance, including active and (b)(3)(ii)(A) of this section unless the
encourages inappropriate risks by the
effective oversight by the covered board or committee determines that the
covered financial institution by
financial institution’s board of directors arrangement, including the method of
providing a covered person with
or a committee thereof. paying compensation under the
excessive compensation. (3) Specific requirements for covered
(2) Standards. An incentive-based arrangement, effectively balances the
financial institutions with $50 billion or financial rewards to the covered person
compensation arrangement provides more in total consolidated assets. (i)
excessive compensation when amounts and the range and time horizon of risks
Deferral required for executive officers. associated with the covered person’s
paid are unreasonable or As part of appropriately balancing risk
disproportionate to the services activities, employing appropriate
and financial rewards pursuant to methods for ensuring risk sensitivity
performed by a covered person, taking paragraph (b)(2)(i) of this section, any
into consideration: such as deferral of payments, risk
incentive-based compensation adjustment of awards, reduced
(i) The combined value of all cash and arrangement for any executive officer
non-cash benefits provided to the sensitivity to short-term performance, or
established or maintained by a covered longer performance periods; and
covered person; financial institution that has total
(ii) The compensation history of the consolidated assets of $50 billion or (D) In fulfilling its duties under
covered person and other individuals more must provide for: paragraph (b)(3)(ii)(C) of this section,
with comparable expertise at the (A) At least 50 percent of the annual the board of directors or committee
covered financial institution; incentive-based compensation of the thereof must evaluate the overall
(iii) The financial condition of the executive officer to be deferred over a effectiveness of the balancing methods
covered financial institution; period of no less than three years, with used in the identified covered person’s
(iv) Comparable compensation the release of deferred amounts to occur incentive-based compensation
practices at comparable institutions, no faster than on a pro rata basis; and arrangements in reducing incentives for
based upon such factors as asset size, (B) The adjustment of the amount inappropriate risk taking by the
geographic location, and the complexity required to be deferred under paragraph identified covered person considering
of the covered financial institution’s (b)(3)(i)(A) of this section to reflect the methods’ suitability for balancing
operations and assets; actual losses or other measures or the full range of risks presented by that
(v) For postemployment benefits, the aspects of performance that are realized covered person’s activities, and the
projected total cost and benefit to the or become better known during the methods’ ability to make payments
covered financial institution; deferral period. sensitive to all the risks arising from the
(vi) Any connection between the (ii) Additional requirement for covered person’s activities, including
individual and any fraudulent act or covered persons presenting particular those that may be difficult to predict,
omission, breach of trust or fiduciary loss exposure. As part of appropriately measure or model.
§ 236.6 Policies and procedures. duties and responsibilities of the under other provisions of applicable law
(a) In general. Any incentive-based covered financial institution’s covered and regulations.
compensation arrangement, or any persons, the risks associated with those
duties and responsibilities, and the size § 372.3 Definitions.
feature of any such arrangement, is
prohibited under § 236.5 of this part, and complexity of the covered financial For purposes of this part, the
unless adopted pursuant to policies and institution and provide that the deferral following definitions apply unless
procedures developed and maintained amounts paid are adjusted to reflect otherwise specified:
by each covered financial institution actual losses or other measures or (a) Board of directors means the
and approved by its board of directors, aspects of performance that are realized governing body of any covered financial
or a committee thereof, reasonably or become better known during the institution performing functions similar
designed to ensure and monitor deferral period; and to a board of directors. For an insured
compliance with the requirements set (7) Subject any incentive-based U.S. branch of a foreign bank, ‘‘board of
forth in 12 U.S.C. 5641 and this part and compensation arrangement to a directors’’ means the senior management
commensurate with the size and corporate governance framework that of its parent foreign bank.
complexity of the organization, as well provides for ongoing oversight by the (b) Compensation means all direct
as the scope and nature of its use of board of directors or a committee and indirect payments, fees or benefits,
incentive-based compensation. thereof, including the approval by the both cash and non-cash, awarded to,
(b) Standards. The policies and board of directors or a committee granted to, or earned by or for the
procedures must, at a minimum: thereof of incentive-based compensation benefit of, any covered person in
(1) Be consistent with the reporting to executive officers. exchange for services rendered to the
requirements in § 236.4 of this part and covered financial institution, including,
prohibitions in § 236.5 of this part; § 236.7 Evasion. but not limited to, payments or benefits
(2) Ensure that risk-management, risk- A covered financial institution is pursuant to an employment contract,
oversight, and internal control prohibited, for the purpose of evading compensation or benefit agreement, fee
personnel have an appropriate role in the restrictions of this part, from doing arrangement, perquisite, stock option
the covered financial institution’s indirectly or through or by any other plan, postemployment benefit, or other
processes for designing incentive-based person, any act or thing that it would be compensatory arrangement.
compensation arrangements and for unlawful for such covered financial (c) Covered financial institution
assessing their effectiveness in institution to do directly under this part. means a state nonmember bank and an
restraining inappropriate risk-taking; insured U.S. branch of a foreign bank
(3) Provide for the monitoring by a Federal Deposit Insurance Corporation
that has total consolidated assets of $1
group or person independent of the 12 CFR CHAPTER III billion or more.
covered person, where practicable in
light of the covered financial Authority and Issuance (d) Covered person means any
institution’s size and complexity, of executive officer, employee, director, or
For the reasons set forth in the principal shareholder of a covered
incentive-based compensation awards preamble, the Federal Deposit Insurance
and payments, risks taken, and actual financial institution.
Corporation proposes to amend chapter (e) Director of a covered financial
risk outcomes to determine whether III of title 12 of the Code of Federal
incentive compensation payments for institution means a member of the board
Regulations as follows: of directors of the covered financial
covered persons, or groups of covered 3. Add new part 372 to read as
persons, are reduced to reflect adverse institution, or of a board or committee
follows: performing a similar function to a board
risk outcomes or high levels of risk
taken; PART 372—INCENTIVE-BASED of directors.
(4) Provide for the covered financial COMPENSATION ARRANGEMENTS (f) Executive officer of a covered
institution’s board of directors, or financial institution means a person
committee thereof, to receive data and Sec. who holds the title or, without regard to
analysis from management and other 372.1 Authority. title, salary, or compensation, performs
372.2 Scope and purpose. the function of one or more of the
sources sufficient to allow the board, or 372.3 Definitions.
committee thereof, to assess whether the following positions: President, chief
372.4 Required reports to regulators. executive officer, executive chairman,
overall design and performance of the 372.5 Prohibitions.
institution’s incentive-based 372.6 Policies and procedures.
compensation arrangements are 372.7 Evasion. officer, chief investment officer, chief
consistent with 12 U.S.C. 5641; legal officer, chief lending officer, chief
Authority: 12 U.S.C. 1819 Tenth, 12 U.S.C. risk officer, or head of a major business
(5) Ensure that documentation of the 5641.
covered financial institution’s processes line.
for establishing, implementing, § 372.1 Authority. (g) Incentive-based compensation
modifying, and monitoring incentive- This part is issued pursuant to section means any variable compensation that
based compensation arrangements is 956 of the Dodd-Frank Wall Street serves as an incentive for performance.
maintained that is sufficient to enable Reform and Consumer Protection Act (h) Principal shareholder means an
the Board to determine the institution’s (12 U.S.C. 5641). individual who directly or indirectly, or
compliance with 12 U.S.C. 5641 and acting through or in concert with one or
this part; § 372.2 Scope and purpose. more persons, owns, controls, or has the
(6) Consistent with § 236.5(b)(3) of This part applies to a covered power to vote 10 percent or more of any
this part, where deferral is used in financial institution that has total class of voting securities of a covered
connection with an incentive-based consolidated assets of $1 billion or more financial institution.
compensation arrangement, provide for and offers incentive-based (i) Total consolidated assets means:
deferral of incentive-based compensation arrangements to covered (1) For a state nonmember bank, the
compensation awards in amounts and persons. Nothing in this part in any way average of the total assets reported in
for periods of time appropriate to the limits the authority of the Corporation the bank’s four most recent
Consolidated Reports of Condition and policies and procedures made since the individually or as part of a group of
Income; and covered financial institution’s last persons who are subject to the same or
(2) For an insured U.S. branch of a report submitted under paragraph (a) of similar incentive-based compensation
foreign bank, the average of the total this section; and arrangements, that could lead to
assets reported in the branch’s four most (5) The specific reasons why the material financial loss to the covered
recent Reports of Assets and Liabilities covered financial institution believes financial institution.
of U.S. Branches and Agencies of the structure of its incentive-based (2) Requirements for all covered
Foreign Banks. compensation plan does not encourage financial institutions. An incentive-
inappropriate risks by the covered based compensation arrangement
§ 372.4 Required reports to regulators. established or maintained by a covered
financial institution by providing
(a) In general. A covered financial covered persons with: financial institution for one or more
institution must submit a report (i) Excessive compensation; or covered persons does not comply with
annually to, and in the format directed (ii) Incentive-based compensation that paragraph (b)(1) of this section unless it:
by, the Corporation, that describes the could lead to a material financial loss to (i) Balances risk and financial
structure of the covered financial the covered financial institution. rewards, for example by using deferral
institution’s incentive-based of payments, risk adjustment of awards,
compensation arrangements for covered § 372.5 Prohibitions. reduced sensitivity to short-term
persons and that is sufficient to allow an (a) Excessive compensation performance, or longer performance
assessment of whether the structure or prohibition. (1) In general. A covered periods;
features of those arrangements provide financial institution must not establish (ii) Is compatible with effective
or are likely to provide covered persons or maintain any type of incentive-based controls and risk management; and
with excessive compensation, fees, or compensation arrangement, or any (iii) Is supported by strong corporate
benefits to covered persons or could feature of any such arrangement, that governance, including active and
lead to material financial loss to the encourages inappropriate risks by the effective oversight by the covered
covered financial institution. covered financial institution by financial institution’s board of directors
(b) Individual compensation. A providing a covered person with or a committee thereof.
covered financial institution is not excessive compensation. (3) Specific requirements for covered
required to report the actual (2) Standards. An incentive-based financial institutions with $50 billion or
compensation of particular covered compensation arrangement provides more in total consolidated assets. (i)
persons as part of the report required by excessive compensation when amounts Deferral required for executive officers.
paragraph (a) of this section. paid are unreasonable or As part of appropriately balancing risk
(c) Minimum standards. The disproportionate to the services and financial rewards pursuant to
information submitted by the covered performed by a covered person, taking paragraph (b)(2)(i) of this section, any
financial institution pursuant to into consideration: incentive-based compensation
paragraph (a) of this section must (i) The combined value of all cash and arrangement for any executive officer
include the following: non-cash benefits provided to the established or maintained by a covered
(1) A clear narrative description of the covered person; financial institution that has total
components of the covered financial (ii) The compensation history of the consolidated assets of $50 billion or
institution’s incentive-based covered person and other individuals more must provide for:
compensation arrangements applicable with comparable expertise at the (A) At least 50 percent of the annual
to covered persons and specifying the covered financial institution; incentive-based compensation of the
types of covered persons to which they (iii) The financial condition of the executive officer to be deferred over a
apply; covered financial institution; period of no less than three years, with
(2) A succinct description of the (iv) Comparable compensation the release of deferred amounts to occur
covered financial institution’s policies practices at comparable institutions, no faster than on a pro rata basis; and
and procedures governing its incentive- based upon such factors as asset size, (B) The adjustment of the amount
based compensation arrangements for geographic location, and the complexity required to be deferred under paragraph
covered persons; of the covered financial institution’s (b)(3)(i)(A) of this section to reflect
(3) If the covered financial institution operations and assets; actual losses or other measures or
has total consolidated assets of $50 (v) For postemployment benefits, the aspects of performance that are realized
billion or more, an additional succinct projected total cost and benefit to the or become better known during the
description of incentive-based covered financial institution; deferral period.
compensation policies and procedures (vi) Any connection between the (ii) Additional requirement for
specific to the covered financial individual and any fraudulent act or covered persons presenting particular
institution’s: omission, breach of trust or fiduciary loss exposure. As part of appropriately
(i) Executive officers; and duty, or insider abuse with regard to the balancing risk and financial rewards
(ii) Other covered persons who the covered financial institution; and pursuant to paragraph (b)(2)(i) of this
board of directors, or a committee (vii) Any other factors the Corporation section, if a covered financial institution
thereof, of the covered financial determines to be relevant. has total consolidated assets of $50
institution has identified and (b) Material financial loss prohibition. billion or more—
determined under § 372.5(b)(3)(ii) of (1) Generally. A covered financial (A) The board of directors, or a
this part individually have the ability to institution must not establish or committee thereof, of the covered
expose the covered financial institution maintain any type of incentive-based financial institution shall identify those
to possible losses that are substantial in compensation arrangement, or any covered persons (other than executive
relation to the institution’s size, capital, feature of any such arrangement, that officers) who individually have the
or overall risk tolerance; encourages inappropriate risks by the ability to expose the institution to
(4) Any material changes to the covered financial institution, by possible losses that are substantial in
covered financial institution’s incentive- providing incentive-based relation to the institution’s size, capital,
based compensation arrangements and compensation to covered persons, either or overall risk tolerance. These covered
persons may include, for example, (b) Standards. The policies and board of directors or a committee
traders with large position limits procedures must, at a minimum: thereof of incentive-based compensation
relative to the institution’s overall risk (1) Be consistent with the reporting to executive officers.
tolerance and other individuals who requirements in § 372.4 of this part and
have the authority to place at risk a prohibitions in § 372.5 of this part; § 372.7 Evasion.
substantial part of the capital of the (2) Ensure that risk-management, risk- A covered financial institution is
covered financial institution; oversight, and internal control prohibited, for the purpose of evading
(B) The incentive-based compensation personnel have an appropriate role in the restrictions of this part, from doing
arrangement for any covered person the covered financial institution’s indirectly or through or by any other
identified pursuant to paragraph processes for designing incentive-based person, any act or thing that it would be
(b)(3)(ii)(A) of this section must be compensation arrangements and for unlawful for such covered financial
approved by the board of directors, or a assessing their effectiveness in institution to do directly under this part.
committee thereof, of the covered restraining inappropriate risk-taking;
(3) Provide for the monitoring by a Department of the Treasury
financial institution and such approval
must be documented; group or person independent of the 12 CFR Chapter V
(C) The board of directors, or covered person, where practicable in For the reasons set forth in the joint
committee thereof, may not approve the light of the covered financial preamble, the Office of Thrift
incentive-based compensation institution’s size and complexity, of Supervision proposes to amend chapter
arrangement for any covered person incentive-based compensation awards V of title 12 of the Code of Federal
identified pursuant to paragraph and payments, risks taken, and actual Regulations as follows:
(b)(3)(ii)(A) of this section unless the risk outcomes to determine whether 4. Add part 563h to read as follows:
board or committee determines that the incentive compensation payments for
arrangement, including the method of covered persons, or groups of covered PART 563h—INCENTIVE-BASED
paying compensation under the persons, are reduced to reflect adverse COMPENSATION ARRANGEMENTS
arrangement, effectively balances the risk outcomes or high levels of risk
financial rewards to the covered person taken; Sec.
and the range and time horizon of risks (4) Provide for the covered financial 563h.1 Authority.
institution’s board of directors, or 563h.2 Scope and purpose.
associated with the covered person’s 563h.3 Definitions.
activities, employing appropriate committee thereof, to receive data and
563h.4 Required reports to regulators.
methods for ensuring risk sensitivity analysis from management and other 563h.5 Prohibitions.
such as deferral of payments, risk sources sufficient to allow the board, or 563h.6 Policies and procedures.
adjustment of awards, reduced committee thereof, to assess whether the 563h.7 Evasion.
sensitivity to short-term performance, or overall design and performance of the
Authority: 12 U.S.C. 1462a, 1463, 1464,
longer performance periods; and covered financial institution’s incentive- 1467a, and 5641.
(D) In fulfilling its duties under based compensation arrangements are
paragraph (b)(3)(ii)(C) of this section, consistent with 12 U.S.C. 5641; § 563h.1 Authority.
the board of directors or committee (5) Ensure that documentation of the This part is issued pursuant to section
thereof must evaluate the overall covered financial institution’s processes 956 of the Dodd-Frank Wall Street
effectiveness of the balancing methods for establishing, implementing, Reform and Consumer Protection Act
used in the identified covered person’s modifying, and monitoring incentive- (12 U.S.C. 5641).
incentive compensation arrangements in based compensation arrangements is
reducing incentives for inappropriate maintained that is sufficient to enable § 563h.2 Scope and purpose.
risk taking by the identified covered the Corporation to determine the This part applies to a covered
person considering the methods’ institution’s compliance with 12 U.S.C. financial institution that has total
suitability for balancing the full range of 5641 and this part; consolidated assets of $1 billion or more
risks presented by that covered person’s (6) Consistent with § 372.5(b)(3) of and offers incentive-based
activities, and the methods’ ability to this part, where deferral is used in compensation arrangements to covered
make payments sensitive to all the risks connection with an incentive-based persons. Nothing in this part in any way
arising from the covered person’s compensation arrangement, provide for limits the authority of the OTS under
activities, including those that may be deferral of incentive-based other provisions of applicable law and
difficult to predict, measure or model. compensation awards in amounts and regulations.
for periods of time appropriate to the
§ 372.6 Policies and procedures. duties and responsibilities of the § 563h.3 Definitions.
(a) In general. Any incentive-based covered financial institution’s covered For purposes of this part, the
compensation arrangement, or any persons, the risks associated with those following definitions apply unless
feature of any such arrangement, is duties and responsibilities, and the size otherwise specified:
prohibited under § 372.5 of this part, and complexity of the covered financial (a) Board of directors means the
unless adopted pursuant to policies and institution and provide that the deferral governing body of any covered financial
procedures developed and maintained amounts paid are adjusted to reflect institution performing functions similar
by each covered financial institution actual losses or other measures or to a board of directors.
and approved by its board of directors, aspects of performance that are realized (b) Compensation means all direct
or a committee thereof, reasonably or become better known during the and indirect payments, fees or benefits,
designed to ensure and monitor deferral period; and both cash and non-cash, awarded to,
compliance with the requirements set (7) Subject any incentive-based granted to, or earned by or for the
forth in 12 U.S.C. 5641 and this part and compensation arrangement to a benefit of, any covered person in
commensurate with the size and corporate governance framework that exchange for services rendered to the
complexity of the organization, as well provides for ongoing oversight by the covered financial institution, including,
as the scope and nature of its use of board of directors or a committee but not limited to, payments or benefits
incentive-based compensation. thereof, including the approval by the pursuant to an employment contract,
compensation or benefit agreement, fee persons as part of the report required by excessive compensation when amounts
arrangement, perquisite, stock option paragraph (a) of this section. paid are unreasonable or
plan, postemployment benefit, or other (c) Minimum standards. The disproportionate to the services
compensatory arrangement. information submitted by the covered performed by a covered person, taking
(c) Covered financial institution financial institution pursuant to into consideration:
means a savings association as defined paragraph (a) of this section must (i) The combined value of all cash and
in 12 U.S.C. 1813(b) and a savings and include the following: non-cash benefits provided to the
loan holding company as defined in 12 (1) A clear narrative description of the covered person;
U.S.C. 1467a(a), that has total components of the covered financial (ii) The compensation history of the
consolidated assets of $1 billion or institution’s incentive-based covered person and other individuals
more. compensation arrangements applicable with comparable expertise at the
(d) Covered person means any to covered persons and specifying the covered financial institution;
executive officer, employee, director, or types of covered persons to which they (iii) The financial condition of the
principal shareholder of a covered apply; covered financial institution;
financial institution. (2) A succinct description of the (iv) Comparable compensation
(e) Director of a covered financial covered financial institution’s policies practices at comparable institutions,
institution means a member of the board and procedures governing its incentive- based upon such factors as asset size,
of directors of the covered financial based compensation arrangements for geographic location, and the complexity
institution, or of a board or committee covered persons; of the covered financial institution’s
performing a similar function to a board (3) If the covered financial institution operations and assets;
of directors. has total consolidated assets of $50 (v) For postemployment benefits, the
(f) Executive officer of a covered billion or more, an additional succinct projected total cost and benefit to the
financial institution means a person description of incentive-based covered financial institution;
who holds the title or, without regard to compensation policies and procedures (vi) Any connection between the
title, salary, or compensation, performs specific to the covered financial individual and any fraudulent act or
the function of one or more of the institution’s: omission, breach of trust or fiduciary
following positions: president, chief (i) Executive officers; and duty, or insider abuse with regard to the
executive officer, executive chairman, (ii) Other covered persons who the covered financial institution; and
chief operating officer, chief financial board of directors, or a committee (vii) Any other factors the OTS
officer, chief investment officer, chief thereof, of the covered financial determines to be relevant.
legal officer, chief lending officer, chief institution has identified and (b) Material financial loss prohibition.
risk officer, or head of a major business determined under § 563h.5(b)(3)(ii) of (1) Generally. A covered financial
line. this part individually have the ability to institution must not establish or
(g) Incentive-based compensation expose the covered financial institution maintain any type of incentive-based
means any variable compensation that to possible losses that are substantial in compensation arrangement, or any
serves as an incentive for performance. relation to the institution’s size, capital, feature of any such arrangement, that
(h) Principal shareholder means an or overall risk tolerance; encourages inappropriate risks by the
individual who directly or indirectly, or (4) Any material changes to the covered financial institution, by
acting through or in concert with one or covered financial institution’s incentive- providing incentive-based
more persons, owns, controls, or has the based compensation arrangements and compensation to covered persons, either
power to vote 10 percent or more of any policies and procedures made since the individually or as part of a group of
class of voting securities of a covered covered financial institution’s last persons who are subject to the same or
financial institution. report submitted under paragraph (a) of similar incentive-based compensation
(i) Total consolidated assets means this section; and arrangements, that could lead to
total consolidated assets determined (5) The specific reasons why the material financial loss to the covered
based on the average of the covered covered financial institution believes financial institution.
financial institution’s four most recent the structure of its incentive-based (2) Requirements for all covered
Thrift Financial Reports. compensation plan does not encourage financial institutions. An incentive-
inappropriate risks by the covered based compensation arrangement
§ 563h.4 Required reports to regulators. established or maintained by a covered
financial institution by providing
(a) In general. A covered financial covered persons with: financial institution for one or more
institution must submit a report (i) Excessive compensation; or covered persons does not comply with
annually to, and in the format directed (ii) Incentive-based compensation that paragraph (b)(1) of this section unless it:
by, the OTS, that describes the structure could lead to material financial loss to (i) Balances risk and financial
of the covered financial institution’s the covered financial institution. rewards, for example by using deferral
incentive-based compensation of payments, risk adjustment of awards,
arrangements for covered persons and § 563h.5 Prohibitions. reduced sensitivity to short-term
that is sufficient to allow an assessment (a) Excessive compensation performance, or longer performance
of whether the structure or features of prohibition. (1) In general. A covered periods;
those arrangements provide or are likely financial institution must not establish (ii) Is compatible with effective
to provide covered persons with or maintain any type of incentive-based controls and risk management; and
excessive compensation, fees, or compensation arrangement, or any (iii) Is supported by strong corporate
benefits to covered persons or could feature of any such arrangement, that governance, including active and
lead to material financial loss to the encourages inappropriate risks by the effective oversight by the covered
covered financial institution. covered financial institution by financial institution’s board of directors
(b) Individual compensation. A providing a covered person with or a committee thereof.
covered financial institution is not excessive compensation. (3) Specific requirements for covered
required to report the actual (2) Standards. An incentive-based financial institutions with $50 billion or
compensation of particular covered compensation arrangement provides more in total consolidated assets. (i)
Deferral required for executive officers. methods for ensuring risk sensitivity committee thereof, to receive data and
As part of appropriately balancing risk such as deferral of payments, risk analysis from management and other
and financial rewards pursuant to adjustment of awards, reduced sources sufficient to allow the board, or
paragraph (b)(2)(i) of this section, any sensitivity to short-term performance, or committee thereof, to assess whether the
incentive-based compensation longer performance periods; and overall design and performance of the
arrangement for any executive officer (D) In fulfilling its duties under institution’s incentive-based
established or maintained by a covered paragraph (b)(3)(ii)(C) of this section, compensation arrangements are
financial institution that has total the board of directors, or committee consistent with 12 U.S.C. 5641;
consolidated assets of $50 billion or thereof, must evaluate the overall (5) Ensure that documentation of the
more must provide for: effectiveness of the balancing methods covered financial institution’s processes
(A) At least 50 percent of the annual used in the identified covered person’s for establishing, implementing,
incentive-based compensation of the incentive-based compensation modifying, and monitoring incentive-
executive officer to be deferred over a arrangements in reducing incentives for based compensation arrangements is
period of no less than three years, with inappropriate risk taking by the maintained that is sufficient to enable
the release of deferred amounts to occur identified covered person considering the OTS to determine the institution’s
no faster than on a pro rata basis; and the methods’ suitability for balancing compliance with 12 U.S.C. 5641 and
(B) The adjustment of the amount the full range of risks presented by that this part;
required to be deferred under paragraph covered person’s activities, and the (6) Consistent with § 563h.5(b)(3) of
(b)(3)(i)(A) of this section to reflect methods’ ability to make payments this part, where deferral is used in
actual losses or other measures or sensitive to all the risks arising from the connection with an incentive-based
aspects of performance that are realized covered person’s activities, including compensation arrangement, provide for
or become better known during the those that may be difficult to predict, deferral of incentive-based
deferral period. measure, or model. compensation awards in amounts and
(ii) Additional requirement for
for periods of time appropriate to the
covered persons presenting particular § 563h.6 Policies and procedures.
duties and responsibilities of the
loss exposure. As part of appropriately (a) In general. Any incentive-based
covered financial institution’s covered
balancing risk and financial rewards compensation arrangement, or any
pursuant to paragraph (b)(2)(i) of this persons, the risks associated with those
feature of any such arrangement, is
section, if a covered financial institution duties and responsibilities, and the size
prohibited under § 563h.5 of this part,
has total consolidated assets of $50 and complexity of the covered financial
unless adopted pursuant to policies and
billion or more— institution and provide that the deferral
procedures developed and maintained
(A) The board of directors, or a amounts paid are adjusted to reflect
by each covered financial institution
committee thereof, of the covered actual losses or other measures or
and approved by its board of directors,
financial institution shall identify those aspects of performance that are realized
or a committee thereof, reasonably
covered persons (other than executive or become better known during the
designed to ensure and monitor
officers) who individually have the deferral period; and
compliance with the requirements set
ability to expose the institution to (7) Subject any incentive-based
forth in 12 U.S.C. 5641 and this part and
possible losses that are substantial in compensation arrangement to a
commensurate with the size and
relation to the institution’s size, capital, corporate governance framework that
complexity of the organization, as well
or overall risk tolerance. These covered provides for ongoing oversight by the
as the scope and nature of its use of
persons may include, for example, board of directors or a committee
incentive-based compensation.
traders with large position limits (b) Standards. The policies and thereof, including the approval by the
relative to the institution’s overall risk procedures must, at a minimum: board of directors or a committee
tolerance and other individuals who (1) Be consistent with the reporting thereof of incentive-based compensation
have the authority to place at risk a requirements in § 563h.4 of this part and to executive officers.
substantial part of the capital of the prohibitions in § 563h.5 of this part; § 563h.7 Evasion.
covered financial institution; (2) Ensure that risk-management, risk-
(B) The incentive-based compensation oversight, and internal control A covered financial institution is
arrangement for any covered person personnel have an appropriate role in prohibited, for the purpose of evading
identified pursuant to paragraph the covered financial institution’s the restrictions of this part, from doing
(b)(3)(ii)(A) of this section must be processes for designing incentive-based indirectly or through or by any other
approved by the board of directors, or a compensation arrangements and for person, any act or thing that it would be
committee thereof, of the covered assessing their effectiveness in unlawful for such covered financial
financial institution and such approval restraining inappropriate risk-taking; institution to do directly under this part.
must be documented; (3) Provide for the monitoring by a National Credit Union Administration
(C) The board of directors, or group or person independent of the
committee thereof, may not approve the 12 CFR Chapter VII
incentive-based compensation light of the covered financial Authority and Issuance
arrangement for any covered person institution’s size and complexity, of
identified pursuant to paragraph For the reasons stated in the
incentive-based compensation awards
(b)(3)(ii)(A) of this section unless the preamble, the National Credit Union
and payments, risks taken, and actual
Administration proposes to amend
board or committee determines that the risk outcomes to determine whether

arrangement, including the method of chapter VII of title 12 of the Code of
incentive compensation payments for
paying compensation under the Federal Regulations as follows:
covered persons, or groups of covered
arrangement, effectively balances the persons, are reduced to reflect adverse PART 741—REQUIREMENTS FOR
financial rewards to the covered person risk outcomes or high levels of risk INSURANCE
and the range and time horizon of risks taken;
associated with the covered person’s (4) Provide for the covered financial 5. The authority citation for part 741
activities, employing appropriate institution’s board of directors, or continues to read as follows:
Authority: 12 U.S.C. 1757, 1766, 1781– health, accident and related types of (i) Executive officers; and
1790, and 1790d. personal insurance protection; and (ii) Other covered persons who the
6. Add a new § 741.225 to read as indemnification. board of directors, or a committee
follows: (c) [Reserved] thereof, of the credit union has
§ 741.225 Incentive-based compensation
(d) Covered person means any identified and determined under
arrangements. executive officer, employee, or director § 751.5(b)(3)(ii) of this part individually
of a credit union. have the ability to expose the credit
Any credit union which is insured
(e) [Reserved] union to possible losses that are
pursuant to Title II of the Act must
(f) Executive officer of a credit union substantial in relation to the credit
adhere to the requirements stated in part
means a person who holds the title or, union’s size, capital, or overall risk
751 of this chapter.
without regard to title, salary, or tolerance;
7. Add a new part 751 to subchapter
compensation, performs the function of (4) Any material changes to the credit
A to read as follows:
one or more of the following positions: union’s incentive-based compensation
Part 751 Incentive-Based president, chief executive officer, arrangements and policies and
Compensation Arrangements executive chairman, chief operating procedures made since the credit
officer, chief financial officer, chief union’s last report submitted under
Sec. investment officer, chief legal officer, paragraph (a) of this section; and
751.1 Authority. chief lending officer, chief risk officer, (5) The specific reasons why the
751.2 Scope and purpose. or head of a major business line. credit union believes the structure of its
751.3 Definitions. (g) Incentive-based compensation incentive-based compensation plan does
751.4 Required reports to regulators. not encourage inappropriate risks by the
751.5 Prohibitions.
means any variable compensation that
serves as an incentive for performance. credit union by providing covered
751.6 Policies and procedures.
751.7 Evasion. (h) [Reserved] persons with:
(i) Total consolidated assets means (i) Excessive compensation; or
Authority: 12 U.S.C. 1751 et seq. and calculating the average of the total assets (ii) Incentive-based compensation that
5641. could lead to material financial loss to
reported in the credit union’s four most
§ 751.1 Authority. recent 5300 Call Reports. the credit union.
This part is issued pursuant to section § 751.4 Required reports to regulators. § 751.5 Prohibitions.
956 of the Dodd-Frank Wall Street (a) Excessive compensation
(a) In general. A credit union must
Reform and Consumer Protection Act prohibition. (1) In general. A credit
submit a report annually to, and in the
(12 U.S.C. 5641). union must not establish or maintain
format directed by, the NCUA, that
§ 751.2 Scope and purpose. describes the structure of the credit any type of incentive-based
union’s incentive-based compensation compensation arrangement, or any
This part applies to any federally feature of any such arrangement, that
insured credit union, or credit union arrangements for covered persons and
that is sufficient to allow an assessment encourages inappropriate risks by the
eligible to make application to become credit union by providing a covered
an insured credit union under 12 U.S.C. of whether the structure or features of
those arrangements provide or are likely person with excessive compensation.
1781, with total consolidated assets of (2) Standards. An incentive-based
$1 billion or more, and offers incentive- to provide covered persons with
compensation arrangement provides
based compensation arrangements to excessive compensation, fees, or
excessive compensation when amounts
covered persons. Nothing in this part in benefits to covered persons or could
paid are unreasonable or
any way limits the authority of the lead to material financial loss to the
disproportionate to the services
NCUA under other provisions of credit union.
performed by a covered person, taking
applicable law and regulations. (b) Individual compensation. A credit
into consideration:
union is not required to report the (i) The combined value of all cash and
§ 751.3 Definitions. actual compensation of particular non-cash benefits provided to the
For purposes of this part, the covered persons as part of the report covered person;
following definitions apply unless required by paragraph (a) of this section. (ii) The compensation history of the
otherwise specified: (c) Minimum standards. The covered person and other individuals
(a) Board of directors means the information submitted by the credit with comparable expertise at the credit
governing body of any credit union. union pursuant to paragraph (a) of this union;
(b) Compensation means all direct section must include the following: (iii) The financial condition of the
and indirect payments, fees or benefits, (1) A clear narrative description of the credit union;
both cash and non-cash, awarded to, components of the credit union’s (iv) Comparable compensation
granted to, or earned by or for the incentive-based compensation practices at comparable institutions,
benefit of, any covered person in arrangements applicable to covered based upon such factors as asset size,
exchange for services rendered to the persons and specifying the types of geographic location, and the complexity
credit union, including, but not limited covered persons to which they apply; of the credit union’s operations and
to, payments or benefits pursuant to an (2) A succinct description of the assets;
employment contract, compensation or credit union’s policies and procedures (v) For postemployment benefits, the
benefit agreement, fee arrangement, governing its incentive-based projected total cost and benefit to the
perquisite, post-employment benefit, or compensation arrangements for covered credit union;

other compensatory arrangement. persons; (vi) Any connection between the
Consistent with § 701.33 of this chapter, (3) If the credit union has total individual and any fraudulent act or
the term compensation specifically consolidated assets of $10 billion or omission, breach of trust or fiduciary
excludes reimbursement for reasonable more, an additional succinct description duty, or insider abuse with regard to the
and proper costs incurred by covered of incentive-based compensation credit union; and
persons in carrying out official credit policies and procedures specific to the (vii) Any other factors the NCUA
union business; provision of reasonable credit union’s: determines to be relevant.
(b) Material financial loss prohibition. (A) The board of directors, or a requirements set forth in 12 U.S.C. 5641
(1) Generally. A credit union must not committee thereof, of the credit union and this part and commensurate with
establish or maintain any type of shall identify those covered persons the size and complexity of the credit
incentive-based compensation (other than executive officers) who union, as well as the scope and nature
arrangement, or any feature of any such individually have the ability to expose of its use of incentive-based
arrangement, that encourages the credit union to possible losses that compensation.
inappropriate risks by the credit union, are substantial in relation to the credit (b) Standards. The policies and
by providing incentive-based union’s size, capital, or overall risk procedures must, at a minimum:
compensation to covered persons, either tolerance. These covered persons may (1) Be consistent with the reporting
individually or as part of a group of include, for example, individuals who requirements in § 751.4 of this part and
persons who are subject to the same or have the authority to place at risk a prohibitions in § 751.5 of this part;
similar incentive-based compensation substantial part of the credit union’s (2) Ensure that risk-management, risk-
arrangements, that could lead to capital; oversight, and internal control
material financial loss to the credit (B) The incentive-based compensation personnel have an appropriate role in
union. arrangement for any covered person the credit union’s processes for
(2) Requirements for all credit unions. identified pursuant to paragraph designing incentive-based compensation
An incentive-based compensation (b)(3)(ii)(A) of this section must be arrangements and for assessing their
arrangement established or maintained approved by the board of directors, or a effectiveness in restraining
by a credit union for one or more committee thereof, of the credit union inappropriate risk-taking;
covered persons does not comply with and such approval must be documented; (3) Provide for the monitoring by a
paragraph (b)(1) of this section unless it: (C) The board of directors, or
group or person independent of the
(i) Balances risk and financial committee thereof, may not approve the
rewards, for example by using deferral incentive-based compensation
light of the credit union’s size and
of payments, risk adjustment of awards, arrangement for any covered person
complexity, of incentive-based
reduced sensitivity to short-term identified pursuant to paragraph
compensation awards and payments,
(b)(3)(ii)(A) of this section unless the
performance, or longer performance risks taken, and actual risk outcomes to
board or committee determines that the
periods; determine whether incentive
arrangement, including the method of
(ii) Is compatible with effective compensation payments for covered
paying compensation under the
controls and risk management; and persons, or groups of covered persons,
arrangement, effectively balances the
(iii) Is supported by strong corporate are reduced to reflect adverse risk
financial rewards to the covered person
governance, including active and outcomes or high levels of risk taken;
and the range and time horizon of risks
effective oversight by the credit union’s (4) Provide for the credit union’s
associated with the covered person’s
board of directors or a committee board of directors, or committee thereof,
activities, employing appropriate
thereof. to receive data and analysis from
methods for ensuring risk sensitivity,
(3) Specific requirements for credit management and other sources
such as deferral of payments, risk
unions with $10 billion or more in total sufficient to allow the board, or
adjustment of awards, reduced
consolidated assets. committee thereof, to assess whether the
sensitivity to short-term performance, or
(i) Deferral required for executive longer performance periods; and overall design and performance of the
officers. As part of appropriately (D) In fulfilling its duties under credit union’s incentive-based
balancing risk and financial rewards paragraph (b)(3)(ii)(C) of this section, compensation arrangements are
pursuant to paragraph (b)(2)(i) of this the board of directors, or committee consistent with 12 U.S.C. 5641;
section, any incentive-based thereof, must evaluate the overall (5) Ensure that documentation of the
compensation arrangement for any effectiveness of the balancing methods credit union’s processes for establishing,
executive officer, established or used in the identified covered person’s implementing, modifying, and
maintained by a credit union that has incentive-based compensation monitoring incentive-based
total consolidated assets of $10 billion arrangements in reducing incentives for compensation arrangements is
or more, must provide for: inappropriate risk taking by the maintained that is sufficient to enable
(A) At least 50 percent of the annual identified covered person considering the NCUA to determine the credit
incentive-based compensation of the the methods’ suitability for balancing union’s compliance with 12 U.S.C. 5641
executive officer to be deferred over a the full range of risks presented by that and this part;
period of no less than three years, with covered person’s activities, and the (6) Consistent with § 751.5(b)(3) of
the release of deferred amounts to occur methods’ ability to make payments this part, where deferral is used in
no faster than on a pro rata basis; and sensitive to all the risks arising from the connection with an incentive-based
(B) The adjustment of the amount covered person’s activities, including compensation arrangement, provide for
required to be deferred under paragraph those that may be difficult to predict, deferral of incentive-based
(b)(3)(i)(A) of this section to reflect measure, or model. compensation awards in amounts and
actual losses or other measures or for periods of time appropriate to the
aspects of performance that are realized § 751.6 Policies and procedures. duties and responsibilities of the credit
or become better known during the (a) In general. Any incentive-based union’s covered persons, the risks
deferral period. compensation arrangement, or any associated with those duties and
(ii) Additional requirement for feature of any such arrangement, is responsibilities, and the size and
covered persons presenting particular prohibited under § 751.5 of this part, complexity of the credit union, and
loss exposure. As part of appropriately unless adopted pursuant to policies and provide that the deferral amounts paid
balancing risk and financial rewards procedures developed and maintained are adjusted to reflect actual losses or
pursuant to paragraph (b)(2)(i) of this by each credit union and approved by other measures or aspects of
section, if a credit union has total its board of directors, or a committee performance that are realized or become
consolidated assets of $10 billion or thereof, reasonably designed to ensure better known during the deferral period;
more— and monitor compliance with the and
(7) Subject any incentive-based Commission under other provisions of Exchange Act of 1934 (15 U.S.C. 78o)
compensation arrangement to a applicable law and regulations. total assets reported in the firm’s most
corporate governance framework that recent year-end audited Consolidated
provides for ongoing oversight by the § 248.203 Definitions. Statement of Financial Condition filed
board of directors or a committee For purposes of this subpart, the pursuant to Rule 17a–5 under the
thereof, including the approval by the following definitions apply unless Securities Exchange Act of 1934; and
board of directors or a committee otherwise specified: (2) For an investment adviser, as such
thereof of incentive-based compensation (a) Board of directors means the term is defined in section 202(a)(11) of
to executive officers. governing body of any covered financial the Investment Advisers Act of 1940 (15
institution performing functions similar U.S.C. 80b–2(a)(11)) the adviser’s total
§ 751.7 Evasion. to a board of directors. assets shown on the balance sheet for
A credit union is prohibited, for the (b) Compensation means all direct the adviser’s most recent fiscal year end.
purpose of evading the restrictions of and indirect payments, fees or benefits,
this part, from doing indirectly or both cash and non-cash, awarded to, § 248.204 Required reports to the
granted to, or earned by or for the Commission.
through or by any other person, any act
or thing that it would be unlawful for benefit of, any covered person in (a) In general. A covered financial
such credit union to do directly under exchange for services rendered to the institution must submit a report
this part. covered financial institution, including, annually to, and in the format directed
but not limited to, payments or benefits by, the Commission, that describes the
Securities and Exchange Commission pursuant to an employment contract, structure of the covered financial
Authority and Issuance compensation or benefit agreement, fee institution’s incentive-based
arrangement, perquisite, stock option compensation arrangements for covered
For the reasons set forth in the plan, postemployment benefit, or other persons and that is sufficient to allow an
preamble, the Commission proposes to compensatory arrangement. assessment of whether the structure or
amend Title 17, Chapter II of the Code (c) Covered financial institution features of those arrangements provide
of Federal Regulations as follows: means: a broker or dealer registered or are likely to provide covered persons
under Section 15 of the Securities with excessive compensation, fees, or
PART 248—REGULATION S–P,
Exchange Act of 1934 (15 U.S.C. 78o) benefits to covered persons or could
REGULATION S–AM, AND INCENTIVE-
and an investment adviser as such term lead to material financial loss to the
BASED COMPENSATION
is defined in section 202(a)(11) of the covered financial institution.
ARRANGEMENTS (b) Individual compensation. A
Investment Advisers Act of 1940 (15
8. The authority citation for part 248 U.S.C. 80b–2(a)(11)) that has total covered financial institution is not
is revised to read as follows: consolidated assets of $1 billion or required to report the actual
more. compensation of particular covered
Authority: 15 U.S.C. 78q, 78q–1, 78w, (d) Covered person means any persons as part of the report required by
78mm, 80a–30, 80a–37, 80b–4, 80b–11,
1681s–3 and note, 1681w(a)(1), 6801–6809,
executive officer, employee, director, or paragraph (a) of this section.
and 6825, and 12 U.S.C. 5641. principal shareholder of a covered (c) Minimum standards. The
9. Add a new subpart C (consisting of financial institution. information submitted by the covered
(e) Director of a covered financial financial institution pursuant to
§§ 248.201 through § 248.207) to read as
institution means a member of the board paragraph (a) of this section must
follows:
of directors of the covered financial include the following:
Subpart C—Incentive-based Compensation institution, or of a board or committee (1) A clear narrative description of the
Arrangements performing a similar function to a board components of the covered financial
Sec. of directors. institution’s incentive-based
248.201 Authority. (f) Executive officer of a covered compensation arrangements applicable
248.202 Scope and purpose. financial institution means a person to covered persons and specifying the
248.203 Definitions. who holds the title or, without regard to types of covered persons to which they
248.204 Required reports to the title, salary, or compensation, performs apply;
Commission.
the function of one or more of the (2) A succinct description of the
248.205 Prohibitions.
248.206 Policies and procedures. following positions: president, chief covered financial institution’s policies
248.207 Evasion. executive officer, executive chairman, and procedures governing its incentive-
chief operating officer, chief financial based compensation arrangements for
Subpart C—Incentive-based officer, chief investment officer, chief covered persons;
Compensation Arrangements legal officer, chief lending officer, chief (3) If the covered financial institution
risk officer, or head of a major business has total consolidated assets of $50
§ 248.201 Authority. line. billion or more, an additional succinct
This subpart is issued pursuant to (g) Incentive-based compensation description of incentive-based
section 956 of the Dodd-Frank Wall means any variable compensation that compensation policies and procedures
Street Reform and Consumer Protection serves as an incentive for performance. specific to the covered financial
Act (12 U.S.C. 5641). (h) Principal shareholder means an institution’s:
individual who directly or indirectly, or (i) Executive officers; and
§ 248.202 Scope and purpose. acting through or in concert with one or (ii) Other covered persons who the
This subpart applies to a covered more persons, owns, controls, or has the board of directors, or a committee
financial institution that has total power to vote 10 percent or more of any thereof, of the covered financial
consolidated assets of $1 billion or more class of voting securities of a covered institution has identified and
and offers incentive-based financial institution. determined under § 248.205(b)(3)(ii) of
compensation arrangements to covered (i) Total consolidated assets means: subpart C of this part individually have
persons. Nothing in this subpart in any (1) For a broker or dealer registered the ability to expose the covered
way limits the authority of the under Section 15 of the Securities financial institution to possible losses
that are substantial in relation to the institution must not establish or (A) The board of directors, or a
covered financial institution’s size, maintain any type of incentive-based committee thereof, of the covered
capital, or overall risk tolerance; compensation arrangement, or any financial institution shall identify those
(4) Any material changes to the feature of any such arrangement, that covered persons (other than executive
covered financial institution’s incentive- encourages inappropriate risks by the officers) who individually have the
based compensation arrangements and covered financial institution, by ability to expose the covered financial
policies and procedures made since the providing incentive-based institution to possible losses that are
covered financial institution’s last compensation to covered persons, either substantial in relation to the covered
report submitted under paragraph (a) of individually or as part of a group of financial institution’s size, capital, or
this section; and persons who are subject to the same or overall risk tolerance. These covered
(5) The specific reasons why the similar incentive-based compensation persons may include, for example,
covered financial institution believes arrangements, that could lead to traders with large position limits
the structure of its incentive-based material financial loss to the covered relative to the covered financial
compensation plan does not encourage financial institution. institution’s overall risk tolerance and
inappropriate risks by the covered (2) Requirements for all covered other individuals who have the
financial institution by providing financial institutions. An incentive- authority to place at risk a substantial
covered persons with: based compensation arrangement part of the capital of the covered
(i) Excessive compensation; or established or maintained by a covered financial institution;
(ii) Incentive-based compensation that financial institution for one or more (B) The incentive-based compensation
could lead to a material financial loss to covered persons does not comply with arrangement for any covered person
the covered financial institution. paragraph (b)(1) of this section unless it: identified pursuant to paragraph
(i) Balances risk and financial (b)(3)(ii)(A) of this section must be
§ 248.205 Prohibitions. rewards, for example by using deferral approved by the board of directors, or a
(a) Excessive compensation of payments, risk adjustment of awards, committee thereof, of the covered
prohibition. reduced sensitivity to short-term financial institution and such approval
(1) In general. A covered financial performance, or longer performance must be documented;
institution must not establish or periods; (C) The board of directors, or
maintain any type of incentive-based (ii) Is compatible with effective committee thereof, may not approve the
compensation arrangement, or any controls and risk management; and incentive-based compensation
feature of any such arrangement, that (iii) Is supported by strong corporate arrangement for any covered person
encourages inappropriate risks by the governance, including active and identified pursuant to paragraph
covered financial institution by effective oversight by the covered (b)(3)(ii)(A) of this section unless the
providing a covered person with financial institution’s board of directors board or committee determines that the
excessive compensation. or a committee thereof. arrangement, including the method of
(2) Standards. An incentive-based (3) Specific requirements for covered paying compensation under the
compensation arrangement provides financial institutions with $50 billion or arrangement, effectively balances the
excessive compensation when amounts more in total consolidated assets. financial rewards to the covered person
paid are unreasonable or (i) Deferral required for executive and the range and time horizon of risks
disproportionate to the services officers. As part of appropriately associated with the covered person’s
performed by a covered person, taking balancing risk and financial rewards activities, employing appropriate
into consideration: pursuant to paragraph (b)(2)(i) of this methods for ensuring risk sensitivity
(i) The combined value of all cash and section, any incentive-based such as deferral of payments, risk
non-cash benefits provided to the compensation arrangement for any adjustment of awards, reduced
covered person; executive officer established or sensitivity to short-term performance, or
(ii) The compensation history of the maintained by a covered financial longer performance periods; and
covered person and other individuals institution that has total consolidated (D) In fulfilling its duties under
with comparable expertise at the assets of $50 billion or more must paragraph (b)(3)(ii)(C) of this section,
covered financial institution; provide for: the board of directors or committee
(iii) The financial condition of the (A) At least 50 percent of the annual thereof must evaluate the overall
covered financial institution; incentive-based compensation of the effectiveness of the balancing methods
(iv) Comparable compensation executive officer to be deferred over a used in the identified covered person’s
practices at comparable covered period of no less than three years, with incentive-based compensation
financial institutions, based upon such the release of deferred amounts to occur arrangements in reducing incentives for
factors as asset size, geographic location, no faster than on a pro rata basis; and inappropriate risk taking by the
and the complexity of the covered (B) The adjustment of the amount identified covered person considering
financial institution’s operations and required to be deferred under paragraph the methods’ suitability for balancing
assets; (b)(3)(i)(A) of this section to reflect the full range of risks presented by that
(v) For postemployment benefits, the actual losses or other measures or covered person’s activities, and the
projected total cost and benefit to the aspects of performance that are realized methods’ ability to make payments
covered financial institution; or become better known during the sensitive to all the risks arising from the
(vi) Any connection between the deferral period. covered person’s activities, including
individual and any fraudulent act or (ii) Additional requirement for those that may be difficult to predict,
omission, breach of trust or fiduciary covered persons presenting particular measure or model.
duty, or insider abuse with regard to the loss exposure. As part of appropriately
covered financial institution; and balancing risk and financial rewards § 248.206 Policies and procedures.
(vii) Any other factors the pursuant to paragraph (b)(2)(i) of this (a) In general. Any incentive-based
Commission determines to be relevant. section, if a covered financial institution compensation arrangement, or any
(b) Material financial loss prohibition. has total consolidated assets of $50 feature of any such arrangement, is
(1) Generally. A covered financial billion or more— prohibited under § 248.205 of this
subpart, unless adopted pursuant to persons, the risks associated with those provisions of applicable law and
policies and procedures developed and duties and responsibilities, and the size regulations.
maintained by each covered financial and complexity of the covered financial
institution and approved by its board of institution and provide that the deferral § 1232.3 Definitions.
directors, or a committee thereof, amounts paid are adjusted to reflect For purposes of this part, the
reasonably designed to ensure and actual losses or other measures or following definitions apply unless
monitor compliance with the aspects of performance that are realized otherwise specified:
requirements set forth in 12 U.S.C. 5641 or become better known during the Board of directors means the
and subpart C of this part and deferral period; and governing body of any covered entity
commensurate with the size and (7) Subject any incentive-based performing functions similar to a board
complexity of the organization, as well compensation arrangement to a of directors.
as the scope and nature of its use of corporate governance framework that Compensation means all direct and
incentive-based compensation. provides for ongoing oversight by the indirect payments, fees or benefits, both
(b) Standards. The policies and board of directors or a committee cash and non-cash, awarded to, granted
procedures must, at a minimum: thereof, including the approval by the to, or earned by or for the benefit of, any
(1) Be consistent with the reporting board of directors or a committee covered person in exchange for services
requirements in § 248.204 of subpart C thereof of incentive-based compensation rendered to the covered entity,
of this part and prohibitions in to executive officers. including, but not limited to, payments
§ 248.205 of subpart C of this part; or benefits pursuant to an employment
(2) Ensure that risk-management, risk- § 248.207 Evasion. contract, compensation or benefit
oversight, and internal control A covered financial institution is agreement, fee arrangement, perquisite,
personnel have an appropriate role in prohibited, for the purpose of evading stock option plan, postemployment
the covered financial institution’s the restrictions of this subpart, from benefit, or other compensatory
processes for designing incentive-based doing indirectly or through or by any arrangement.
compensation arrangements and for Covered entity means the Federal
other person, any act or thing that it
assessing their effectiveness in National Mortgage Association (Fannie
would be unlawful for such covered
restraining inappropriate risk-taking; Mae); the Federal Home Loan Mortgage
(3) Provide for the monitoring by a financial institution to do directly under
this subpart. Corporation (Freddie Mac); any Federal
group or person independent of the
Home Loan Bank (Bank); and the
covered person, where practicable in Federal Housing Finance Agency Federal Home Loan Bank System’s
light of the covered financial
Authority and Issuance Office of Finance.
institution’s size and complexity, of
Covered person means any executive
incentive-based compensation awards Accordingly, for the reasons stated in
officer, employee, director, or principal
and payments, risks taken, and actual the preamble, under the authority of 12
shareholder of a covered entity.
risk outcomes to determine whether U.S.C. 4526 and 5641, FHFA proposes
to amend Chapter XII of title 12 of the Director of a covered entity means a
incentive-based compensation payments
Code of Federal Regulations as follows: member of the board of directors of the
for covered persons, or groups of
covered entity, or of a board or
covered persons, are reduced to reflect 10. Add part 1232 to read as follows:
committee performing a similar function
adverse risk outcomes or high levels of
PART 1232—INCENTIVE-BASED to a board of directors.
risk taken;
(4) Provide for the covered financial COMPENSATION AGREEMENTS Executive officer of a covered entity
institution’s board of directors, or means:
Sec. (1) With respect to Fannie Mae or
committee thereof, to receive data and 1232.1 Authority.
analysis from management and other Freddie Mac:
1232.2 Scope and purpose. (i) The chairman of the board of
sources sufficient to allow the board, or 1232.3 Definitions.
committee thereof, to assess whether the 1232.4 Required reports to regulators.
directors, chief executive officer, chief
overall design and performance of the 1232.5 Prohibitions. financial officer, chief operating officer,
covered financial institution’s incentive- 1232.6 Policies and procedures. president, vice chairman, any executive
based compensation arrangements are 1232.7 Evasion. vice president, any senior vice president
consistent with 12 U.S.C. 5641; Authority: 12 U.S.C. 4511(b), 4513, 4514,
in charge of a principal business unit,
(5) Ensure that documentation of the 4526, and 5641. division, or function and any individual
covered financial institution’s processes who performs functions similar to such
for establishing, implementing, § 1232.1 Authority. positions whether or not the individual
modifying, and monitoring incentive- This part is issued pursuant to section has an official title; and
based compensation arrangements is 956 of the Dodd-Frank Wall Street (ii) Any other officer as identified by
maintained that is sufficient to enable Reform and Consumer Protection Act the Director.
the Commission to determine the (12 U.S.C. 5641), and, with respect to (2) With respect to a Bank:
covered financial institution’s the Office of Finance, under section (i) The president, the chief financial
compliance with 12 U.S.C. 5641 and 1311(b)(2) of the Federal Housing officer, and the three other most highly
subpart C of this part; Enterprises Financial Safety and compensated officers; and
(6) Consistent with § 248.205(b)(3) of Soundness Act (12 U.S.C. 4511(b)(2)). (ii) Any other officer as identified by
subpart C, where deferral is used in the Director.

connection with an incentive-based § 1232.2 Scope and purpose. (3) With respect to the Office of
compensation arrangement, provide for This part applies to a covered entity Finance:
deferral of incentive-based that offers incentive-based (i) The chief executive officer, chief
compensation awards in amounts and compensation arrangements to covered financial officer, and chief operating
for periods of time appropriate to the persons. Nothing in this part in any way officer; and
duties and responsibilities of the limits the authority of the Federal (ii) Any other officer identified by the
covered financial institution’s covered Housing Finance Agency under other Director.
Incentive-based compensation means does not encourage inappropriate risks arrangement established or maintained
any variable compensation that serves by the covered entity by providing by a covered entity for one or more
as an incentive for performance. covered persons with: covered persons does not comply with
Principal shareholder means an (i) Excessive compensation; or paragraph (b)(1) of this section unless it:
individual who directly or indirectly, or (ii) Incentive-based compensation that (i) Balances risk and financial
acting through or in concert with one or could lead to material financial loss to rewards, for example by using deferral
more persons, owns, controls, or has the the covered entity. of payments, risk adjustment of awards,
power to vote 10 percent or more of any reduced sensitivity to short-term
§ 1232.5 Prohibitions.
class of voting securities of a covered performance, or longer performance
entity. (a) Excessive compensation periods;
prohibition. (1) In general. A covered (ii) Is compatible with effective
§ 1232.4 Required reports to regulators. entity must not establish or maintain controls and risk management; and
(a) In general. A covered entity must any type of incentive-based (iii) Is supported by strong corporate
submit a report annually to, and in the compensation arrangement, or any governance, including active and
format directed by, the Federal Housing feature of any such arrangement, that effective oversight by the covered
Finance Agency that describes the encourages inappropriate risks by the entity’s board of directors, or a
structure of the covered entity’s covered entity by providing a covered committee thereof.
incentive-based compensation person with excessive compensation. (3) Requirements for executive officers
arrangements for covered persons and (2) Standards. An incentive-based and covered persons presenting
that is sufficient to allow an assessment compensation arrangement provides particular loss exposure.
of whether the structure or features of excessive compensation when amounts (i) Deferral required for executive
those arrangements provide or are likely paid are unreasonable or officers. As part of appropriately
to provide covered persons with disproportionate to the services balancing risk and financial rewards
excessive compensation, fees, or performed by a covered person, taking pursuant to paragraph (b)(2)(i) of this
benefits to covered persons or could into consideration: section, any incentive-based
lead to material financial loss to the (i) The combined value of all cash and compensation arrangement for any
covered entity. non-cash benefits provided to the executive officer established or
(b) Individual compensation. A covered person; maintained by a covered entity (except
covered entity is not required to report (ii) The compensation history of the for covered entities in conservatorship
the actual compensation of particular covered person and other individuals or receivership, and limited-life
covered persons as part of the report with comparable expertise at the regulated entities) must provide for:
required by paragraph (a) of this section. covered entity; (A) At least 50 percent of the annual
(c) Minimum standards. The (iii) The financial condition of the incentive-based compensation of the
information submitted by the covered covered entity; executive officer to be deferred over a
entity pursuant to paragraph (a) of this (iv) Comparable compensation period of no less than three years, with
section must include the following: practices at comparable institutions, the release of deferred amounts to occur
(1) A clear narrative description of the based upon such factors as asset size, no faster than on a pro rata basis; and
components of the covered entity’s geographic location, and the complexity (B) The adjustment of the amount
incentive-based compensation of the institution’s operations and required to be deferred under paragraph
arrangements applicable to covered assets; (b)(3)(i)(A) of this section to reflect
persons specifying the types of covered (v) For postemployment benefits, the actual losses or other measures or
persons to which they apply; projected total cost and benefit to the aspects of performance that are realized
(2) A succinct description of the covered entity; or become better known during the
covered entity’s policies and procedures (vi) Any connection between the deferral period.
governing its incentive-based individual and any fraudulent act or (ii) Additional requirement for
compensation arrangements for covered omission, breach of trust or fiduciary covered persons presenting particular
persons; duty, or insider abuse with regard to the loss exposure. As part of appropriately
(3) A succinct description of covered entity; and balancing risk and financial rewards
incentive-based compensation policies (vii) Any other factors that the Federal pursuant to paragraph (b)(2)(i) of this
and procedures specific to the covered Housing Finance Agency determines to section:
entity’s: be relevant. (A) The board of directors, or a
(i) Executive officers; and (b) Material financial loss prohibition. committee thereof, of the covered entity
(ii) Other covered persons who the (1) Generally. A covered entity must not shall identify those covered persons
board of directors, or a committee establish or maintain any type of (other than executive officers) who
thereof, of the entity has identified and incentive-based compensation individually have the ability to expose
determined under § 1232.5(b)(3)(ii) of arrangement, or any feature of any such the entity to possible losses that are
this part individually have the ability to arrangement, that encourages substantial in relation to the entity’s
expose the entity to possible losses that inappropriate risks by the covered size, capital, or overall risk tolerance.
are substantial in relation to the entity’s entity, by providing incentive-based These covered persons may include, for
size, capital, or overall risk tolerance; compensation to covered persons, either example, traders with large position
(4) Any material changes to the individually, or as part of a group of limits relative to the entity’s overall risk
covered entity’s incentive-based persons who are subject to the same or tolerance and other individuals who
compensation arrangements and similar incentive-based compensation have the authority to place at risk a
policies and procedures made since the arrangements, that could lead to substantial part of the capital of the
covered entity’s last report submitted material financial loss to the covered covered entity;
under paragraph (a) of this section; and entity. (B) The incentive-based compensation
(5) The specific reasons why the (2) Requirements for all incentive- arrangement for any covered person
covered entity believes the structure of based compensation arrangements. An identified pursuant to paragraph
its incentive-based compensation plan incentive-based compensation (b)(3)(ii)(A) of this section must be
approved by the board of directors, or a (b) Standards. The policies and are adjusted to reflect actual losses or
committee thereof, of the covered entity procedures must, at a minimum: other measures or aspects of
and such approval must be documented; (1) Be consistent with the reporting performance that are realized or become
(C) The board of directors, or a requirements in § 1232.4 of this part and better known during the deferral period;
committee thereof, may not approve the prohibitions in § 1232.5 of this part; and
incentive-based compensation (2) Ensure that risk-management, risk- (7) Subject any incentive-based
arrangement for any covered person oversight, and internal control compensation arrangement to a
identified pursuant to paragraph personnel have an appropriate role in corporate governance framework that
(b)(3)(ii)(A) of this section unless the the covered entity’s processes for provides for ongoing oversight by the
board or committee determines that the designing incentive-based compensation board of directors, or a committee
arrangement, including the method of arrangements and for assessing their thereof, including the approval by the
paying compensation under the effectiveness in restraining board of directors, or a committee
arrangement, effectively balances the inappropriate risk-taking; thereof, of incentive-based
financial rewards to the covered person (3) Provide for the monitoring by a compensation to executive officers.
and the range and time horizon of risks group or person independent of the
associated with the covered person’s covered person, where practicable in § 1232.7 Evasion.
activities, employing appropriate light of the covered entity’s size and A covered entity is prohibited, for the
methods for ensuring risk sensitivity complexity, of incentive-based purpose of evading the restrictions of
such as deferral of payments, risk compensation awards and payments, this part, from doing indirectly or
adjustment of awards, reduced risks taken, and actual risk outcomes to through or by any other person, any act
sensitivity to short-term performance, or determine whether incentive or thing that it would be unlawful for
longer performance periods; and compensation payments for covered such covered entity to do directly under
(D) In fulfilling its duties under persons, or groups of covered persons, this part.
paragraph (b)(3)(ii)(C) of this section, are reduced to reflect adverse risk
the board of directors, or a committee outcomes or high levels of risk taken; Dated:
thereof, must evaluate the overall (4) Provide for the covered entity’s John Walsh,
effectiveness of the balancing methods board of directors, or committee thereof, Acting Comptroller of the Currency.
used in the identified covered person’s to receive data and analysis from By order of the Board of Governors of the
incentive compensation arrangements in management and other sources Federal Reserve System, March 30, 2011.
reducing incentives for inappropriate sufficient to allow the board, or
Jennifer J. Johnson,
risk taking by the identified covered committee thereof, to assess whether the
Secretary of the Board.
person considering the methods’ overall design and performance of the
suitability for balancing the full range of entity’s incentive-based compensation Dated at Washington, DC, this 7th day of
risks presented by that covered person’s arrangements are consistent with 12 February 2011.
activities, and the methods’ ability to U.S.C. 5641; Federal Deposit Insurance Corporation.
make payments sensitive to all the risks (5) Ensure that documentation of the Robert E. Feldman,
arising from the covered person’s entity’s processes for establishing, Executive Secretary.
activities, including those that may be implementing, modifying, and Dated: February 18, 2011.
difficult to predict, measure or model. monitoring incentive-based
By the Office of Thrift Supervision,
compensation arrangements is
§ 1232.6 Policies and procedures. maintained that is sufficient to enable John E. Bowman,
(a) In general. Any incentive-based the Federal Housing Finance Agency to Acting Director.
compensation arrangement, or any determine the entity’s compliance with By the National Credit Union
feature of any such arrangement, is 12 U.S.C. 5641 and this part; Administration Board on February 17, 2011.
prohibited under § 1232.5 of this part, (6) Consistent with § 1232.5(b)(3) of Mary F. Rupp,
unless adopted pursuant to policies and this part, where deferral is used in Secretary of the Board.
procedures developed and maintained connection with an incentive-based
By the Securities and Exchange
by each covered entity and approved by compensation arrangement, provide for Commission.
its board of directors, or a committee deferral of incentive-based
Dated: March 29, 2011.
thereof, reasonably designed to ensure compensation awards in amounts and
and monitor compliance with the for periods of time appropriate to the Elizabeth M. Murphy,
requirements set forth in 12 U.S.C. 5641 duties and responsibilities of the Secretary.
and this part and commensurate with covered entity’s covered persons, the Edward J. Demarco,
the size and complexity of the risks associated with those duties and Acting Director, Federal Housing Finance
organization, as well as the scope and responsibilities, and the size and Agency.
nature of its use of incentive-based complexity of the covered entity and [FR Doc. 2011–7937 Filed 4–13–11; 8:45 am]
compensation. provide that the deferral amounts paid BILLING CODE 6741–01–P; 7535–01–P; 8070–01–P

Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 / Proposed Rules

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21170 Federal Register / Vol. 76, No.

72 / Thursday, April 14, 2011 / Proposed Rules

Supervision and Regulation; Board of 2011–2018 (2010)), which was signed

is based on corporate and individual performance.

billion). Registration Depository (‘‘IARD’’), the SEC’s

Commission bases the estimates for covered bank

Covered bank Covered bank Covered non- Covered non-

Initial Reporting ............................................................................................ 53 2,500 54 8,500 55 500 56 8,500

Initial Recordkeeping ................................................................................... 57 2,500 58 3,400 59 3,000 60 46,000

Ongoing Reporting ....................................................................................... 61 2,500 62 8,500 63 500 64 8,500

Ongoing Recordkeeping .............................................................................. 65 1,000 66 1,000 67 400 68 4,300

Covered bank Covered bank Covered non- Covered non-

Initial Reporting ............................................................................................ 73 $1 74 $3.4 75 $200,000 76 $3.4

Initial Recordkeeping ................................................................................... 77 1 78 1.3 79 1.2 80 18

Ongoing Reporting ....................................................................................... 81 1 82 3.4 83 200,000 84 3.4

Ongoing Recordkeeping .............................................................................. 85 400,000 86 400,000 87 150,000 88 1.7

Congress believed section 956 of the 2. Review and, if necessary, redesign

board and compensation committee; based compensation arrangements that 97 75 FR at 36405.

budgetary impact statement before

$600/hour) + (25% × $330/hour) + (25% × $250/

rule, an incentive-based compensation arrangement arrangement provides excessive

123 Certain recent studies provide empirical

TOTAL INTERNAL RECORDKEEPING COST

TOTAL EXTERNAL RECORDKEEPING COST

board or committee determines that the risk outcomes to determine whether

perquisite, post-employment benefit, or compensation arrangements for covered credit union;

subpart C, where deferral is used in the Director.

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