5 federal regulators join NCUA on proposed exec pay rule
May 17, 2016 -- Following up on action taken by NCUA in late April, five other federal financial regulators have issued an interagency proposed rule to prohibit incentive-based compensation arrangements that encourage inappropriate risks at large financial institutions.
The proposal was issued Monday (May 16) by the FDIC, OCC, Federal Reserve, Federal Housing Finance Agency and the SEC (in addition to NCUA). Comments are due by July 22. NCUA issued the proposal April 21, largely because the agency's board was meeting before scheduled meetings of other agencies’ ruling bodies.
According to NCUA, the proposal would affect 258 large federally insured credit unions – both federal and state chartered – who would be required to report certain executive compensation in “sufficient detail” to allow regulators to gauge whether it is excessive or could lead to material loss. This is the second time a proposed rule on executive compensation – required by the Dodd-Frank Act of 2010 – has been issued for comment. The first proposal was issued in 2011; this year’s proposal supersedes that one, according to NCUA.
The proposal establishes a three-tiered system for covered financial institutions: $250 billion or greater in assets (Level 1), $50 billion up to $250 billion in assets (Level 2), and $1 billion up to $50 billion in assets (Level 3). However, NCUA added, as of the end of 2015, there were no federally insured credit unions in Level 1, one in Level 2 and 257 in Level 3. Much of the rule, according to NCUA, addresses requirements for pay arrangements for senior executive officers and “significant risk takers” at Level 1 and Level 2 institutions.
However, all levels of institutions must annually create and retain for seven years records which document the structure of pay arrangements and appropriate oversight of the arrangements from boards of directors. Also, all covered institutions are subject to the proposed rule’s general prohibition on incentive-based compensation arrangements that would encourage “inappropriate risks by providing excessive compensation or that could lead to material financial loss.”
Additionally, CUSOs are not covered by the NCUA portion of the proposed rule. The agency plans to issue guidance for credit unions about the rule once it is finalized.