{"id":1035,"date":"2016-11-04T09:19:12","date_gmt":"2016-11-04T13:19:12","guid":{"rendered":"https:\/\/www2.law.temple.edu\/10q\/?p=1035"},"modified":"2016-11-04T09:19:12","modified_gmt":"2016-11-04T13:19:12","slug":"incentive-compensation-regulatory-spotlight","status":"publish","type":"post","link":"https:\/\/law.temple.edu\/10q\/incentive-compensation-regulatory-spotlight\/","title":{"rendered":"Incentive Compensation Under the Regulatory Spotlight"},"content":{"rendered":"

Six U.S. federal financial regulatory agencies[1]<\/a> in May 2016 revised and re-proposed rules that were originally proposed in 2011, to govern the incentive compensation practices at financial institutions with consolidated assets of at least $1\u00a0billion (covered institutions). The proposed rules include new \u2013 and more stringent \u2013 requirements, especially for the largest institutions. The rules will impact the compensation practices at a wide variety of financial institutions, including banks, broker-dealers and investment advisers, as well as the U.S. operations of foreign banking organizations.<\/p>\n

The timeliness of the proposed rules is underscored by the recent enforcement action by the Consumer Financial Protection Bureau and the Comptroller of the Currency against Wells Fargo involving the creation of unauthorized deposit and credit card accounts of customers. The incentive compensation practices of Wells Fargo have been spotlighted as a key factor in encouraging employees to engage in these practices and are at the heart of additional government inquiries into the matter. In testimony before the Senate Banking Committee on September 20, Comptroller of the Currency Thomas Curry urged adoption of the proposed incentive compensation rules as a step that can be taken to address unacceptable sales practices of the type that occurred at Wells Fargo.<\/p>\n

Applicability<\/strong><\/p>\n

The proposed rules would govern the incentive-based compensation practices of covered institutions with respect to executive officers, employees, directors and principal shareholders (covered persons) \u2013 with progressively more rigorous and prescriptive requirements applying to \u201csenior executive officers\u201d and \u201csignificant risk-takers\u201d at the largest institutions. As a general matter, the Agencies have found that incentive-based compensation programs may encourage inappropriate risk-taking at covered institutions if such entities do not sufficiently expose covered persons to the consequences of their risk decisions over time.<\/p>\n

What compensation would be \u201cincentive-based?\u201d\u00a0<\/em><\/strong>Under the proposed rules, \u201cincentive-based compensation\u201d would include any variable compensation, fees, or benefits that serve as an incentive or reward for performance, whether in the form of cash or non-cash payments. This definition does not include compensation that is paid \u201cfor reasons other than to induce performance,\u201d such as signing bonuses, compensation for continued employment, compensation related to the achievement of professional certifications, and dividends paid or appreciation realized on stock owned outright by an employee.<\/p>\n

Which institutions would be \u201ccovered institutions?\u201d\u00a0<\/em><\/strong>As a general matter, covered institutions would include following entities but only if they have greater than $1 billion in average total consolidated assets on their balance sheet: (i) all FDIC-insured banks and bank holding companies, (ii) the U.S. operations of foreign banks, including U.S. branches and agencies, (iii) credit unions, (iv) Fannie Mae, Freddie Mac and the Federal Home Loan Banks and (v) investment advisers and registered broker-dealers.<\/p>\n

How would the proposed rules distinguish between different sizes of covered institutions?<\/em><\/strong> The proposed rules would distinguish between smaller and larger institutions based on their asset size. Specifically, the proposed rules would divide institutions into three asset levels as follows:<\/p>\n\n\n\n\n\n\n
\u00a0<\/strong><\/td>\nAverage total consolidated asset amounts<\/u><\/strong><\/td>\n<\/tr>\n
Level 1<\/strong><\/td>\n$250 billion or more<\/td>\n<\/tr>\n
Level 2<\/strong><\/td>\nAt least $50 billion and less than $250 billion<\/td>\n<\/tr>\n
Level 3<\/strong><\/td>\nAt least $1 billion and less than $50 billion<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Many of the more detailed and rigorous requirements under the proposed rules would be reserved for larger institutions that fit within Level 1 or Level 2, including mandatory deferral, forfeiture and clawback requirements, as described in further detail below.<\/p>\n

While the proposed rules would not apply to institutions with assets of less than $1 billion, over time the rules are likely to become viewed by the Agencies as \u201cbest practices\u201d and, as often happens with size-based regulation, eventually may be applied on a de facto<\/em> basis to smaller, community institutions.<\/p>\n

Basic Prohibitions Applicable to All Covered Institutions<\/strong><\/p>\n

The proposed rules would prohibit any covered institution from establishing or maintaining incentive-based compensation arrangements (arrangements) that encourage inappropriate risks at the covered institution (i)\u00a0by providing a covered person with \u201cexcessive\u201d compensation or (ii)\u00a0that could lead to \u201cmaterial financial loss\u201d at the institution.<\/p>\n

When is compensation \u201cexcessive?\u201d\u00a0<\/em><\/strong>An arrangement would be considered excessive when amounts paid are unreasonable or disproportionate to the value of the covered person\u2019s services, taking into consideration all relevant factors, including, but not limited to:<\/p>\n