Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) instructed six federal financial regulatory agencies—the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), the US Securities and Exchange Commission (SEC), the Federal Housing Finance Authority (FHFA), and the National Credit Union Administration (NCUA) (collectively, the Agencies)—to jointly issue rules or guidelines limiting incentive-based executive compensation for certain financial institution senior officers and employees. Such guidelines must (1) prohibit incentive-based payment arrangements that the Agencies determine encourage inappropriate risks by providing excessive compensation or that could lead to a material financial loss and (2) require “covered financial institutions” (in general, financial institutions with $1 billion or more in total assets) to disclose information regarding the structure of their incentive-based compensation arrangements to their federal regulator.
So far, four of the Agencies (OCC, FDIC, SEC, and NCUA) have approved the proposed rule (Proposed Rule), and the Board and the FHFA are expected to approve the Proposed Rule shortly. The Proposed Rule is actually a reproposal of an April 2011 proposed rule that was never issued in final form, and according to the draft release, reflects the numerous comments on the 2011 proposal as well as experience that the Agencies have gained in applying prior guidance on incentive-based compensation. The Proposed Rule has an effective date of at least 18 months after the final rule is published, and as proposed, would not apply to any incentive-based compensation plan with a performance period that begins before the effective date.