NCUA Board Acts on Dodd-Frank Act Directives on Executive Compensation, Credit Rating References

Feb. 17, 2011 - The National Credit Union Administration (NCUA) Board approved two proposed rules on Feb. 17 stemming from directives in the Dodd-Frank Act regarding incentive-based executive compensation disclosure and removing references to credit ratings in financial regulations.

Incentive-Based Compensation Disclosures
Section 956 of the Dodd-Frank Act requires the federal regulators to establish regulations for disclosure of incentive-based compensation arrangements for financial institutions with more than $1 billion in assets. NCUA's proposed rule requires credit unions with more than $1 billion in assets to disclose to the agency the structures of all incentive-based compensation arrangements to determine whether the structure provides excessive compensation or could lead to material loss to the institution.

In addition, for those credit unions with more than $10 billion in assets, they will have to comply with certain provisions that require a three-year deferral of incentive-based compensation for executive officers and other identified personnel that have the ability to expose the institution to substantial possible losses. As of Dec. 31, 2010, 184 credit unions were over $1 billion in assets (including 15 corporate credit unions) and six were over $10 billion in assets (three are corporate credit unions.) This proposed rule requires disclosure of the structure of incentive-based compensation arrangements, but not the actual compensation in numbers.

The proposed rule was approved with a 45-day comment period after publication in the Federal Register. The Federal Deposit Insurance Corporation (FDIC) has also published its similar proposed rule for banks as required by the Dodd-Frank Act.

References to Credit Ratings
Also from the Dodd-Frank Act, Section 939A requires the federal agencies to review 1) any regulation that requires the use of an assessment of the creditworthiness of a security or money market instrument; and 2) remove any references to reliance on credit ratings and replace them with such standards of creditworthiness as determined by the respective agencies. The NCUA identified 24 general areas of its regulations that contain references to national recognized statistical rating organization (NRSRO) credit ratings. The proposed rule takes three approaches to addressing this issue:

  • For investments, the proposal generally replaces the minimum credit rating requirement with a requirement that the credit union do an internal credit analysis of the investment pursuant to a particular narrative standard.
  • For counter party transactions, the proposal generally replaces the minimum credit rating requirement with a requirement that the credit union do an internal credit analysis of the counter party pursuant to an internal standard set by the credit union's board.
  • For ratings usage outside of investment and counter party suitability, the proposal generally removes the ratings reference without requiring some substitute analysis.

The proposed rule was approved with a 60 day comment period. At the meeting, the NCUA Board stated that after this rule is final, guidance to credit unions will be provided regarding the changes.

Other Actions from Feb. 17 Board Meeting

  • The NCUA Board continued the 18 percent interest rate ceiling for federal credit unions (FCU) loans. The rate was set to expire without this NCUA board action. The 18 percent rate for FCUs remains effective until Sept. 10, 2012.
  • The NCUA Board approved a Final Interpretive Ruling and Policy Statement (IRPS) revising Corporate FCU Chartering Guidelines. Prior to approving this IRPS, no guidelines existing for chartering a corporate FCU, except for a corporate FCU guidance issued in September 1982.
  • NCUA Chief Financial Officer Mary Ann Woodson briefed the NCUA Board on the National Credit Union Share Insurance Fund (NCUSIF). As of Jan. 31, 2011, the equity ratio was 1.28 percent. She reported that CAMEL code 4/5 credit unions represent five percent of total insured shares (369 credit unions) and CAMEL code 3/5 account for 17.80 percent of insured shares (1,819 credit unions).

The material from this meeting can be accessed at this link. NASCUS' Regulatory Affairs Department will prepare summaries of these proposed rules for NASCUS members. When available, they will be posted on the Regulatory Resources page.