Notice of Proposed Rulemaking, Incentive-Based Compensation Arrangements

285 Pages·2016·1.67 MB·English

Vol. 81 Friday,
No. 112 June 10, 2016
Part II
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 42
Federal Reserve System
12 CFR Part 236
Federal Deposit Insurance Corporation
12 CFR Part 372
National Credit Union Administration
12 CFR Parts 741 and 751
Federal Housing Finance Agency
ALS2 12 CFR Part 1232
S
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with
OD 17 CFR Parts 240, 275, and 303
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T082 Incentive-Based Compensation Arrangements; Proposed Rule
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37670 Federal Register/Vol. 81, No. 112/Friday, June 10, 2016/Proposed Rules
DEPARTMENT OF THE TREASURY Act). Section 956 generally requires that In general, OCC will enter all comments
the Agencies jointly issue regulations or received into the docket and publish
Office of the Comptroller of the guidelines: (1) Prohibiting incentive- them on the Regulations.gov Web site
Currency based payment arrangements that the without change, including any business
Agencies determine encourage or personal information that you
12 CFR Part 42 inappropriate risks by certain financial provide such as name and address
institutions by providing excessive information, email addresses, or phone
[Docket No. OCC–2011–0001]
compensation or that could lead to numbers. Comments received, including
RIN 1557–AD39 material financial loss; and (2) requiring attachments and other supporting
those financial institutions to disclose materials, are part of the public record
FEDERAL RESERVE SYSTEM information concerning incentive-based and subject to public disclosure. Do not
compensation arrangements to the enclose any information in your
12 CFR Part 236 appropriate Federal regulator. comment or supporting materials that
[Docket No. R–1536] DATES: Comments must be received by you consider confidential or
inappropriate for public disclosure.
July 22, 2016.
RIN 7100 AE–50 You may review comments and other
ADDRESSES: Although the Agencies will
related materials that pertain to this
jointly review the comments submitted,
FEDERAL DEPOSIT INSURANCE proposed rule by any of the following
it would facilitate review of the
CORPORATION methods:
comments if interested parties send • Viewing Comments Electronically:
comments to the Agency that is the
12 CFR Part 372 Go to www.regulations.gov. Enter
appropriate Federal regulator, as
‘‘Docket ID OCC–2011–0001’’ in the
RIN 3064–AD86 defined in section 956(e) of the Dodd-
Search box and click ‘‘Search.’’ Click on
Frank Act, for the type of covered
‘‘Open Docket Folder’’ on the right side
NATIONAL CREDIT UNION institution addressed in the comments.
of the screen and then ‘‘Comments.’’
ADMINISTRATION Commenters are encouraged to use the
Comments can be filtered by clicking on
title ‘‘Incentive-based Compensation
‘‘View All’’ and then using the filtering
12 CFR Parts 741 and 751 Arrangements’’ to facilitate the
tools on the left side of the screen.
RIN 3133–AE48 organization and distribution of • Click on the ‘‘Help’’ tab on the
comments among the Agencies. Regulations.gov home page to get
FEDERAL HOUSING FINANCE Interested parties are invited to submit information on using Regulations.gov.
AGENCY written comments to: Supporting materials may be viewed by
Office of the Comptroller of the clicking on ‘‘Open Docket Folder’’ and
12 CFR Part 1232 Currency: Because paper mail in the then clicking on ‘‘Supporting
Washington, DC area and at the OCC is Documents.’’ The docket may be viewed
RIN 2590–AA42 subject to delay, commenters are after the close of the comment period in
SECURITIES AND EXCHANGE encouraged to submit comments by the the same manner as during the comment
COMMISSION Federal eRulemaking Portal or email, if period.
possible. Please use the title ‘‘Incentive- • Viewing Comments Personally: You
17 CFR Parts 240, 275, and 303 based Compensation Arrangements’’ to may personally inspect and photocopy
facilitate the organization and comments at the OCC, 400 7th Street
[Release No. 34–77776; IA–4383; File No. distribution of the comments. You may SW., Washington, DC. For security
S7–07–16] submit comments by any of the reasons, the OCC requires that visitors
following methods: make an appointment to inspect
RIN 3235–AL06 • Federal eRulemaking Portal— comments. You may do so by calling
Incentive-Based Compensation Regulations.gov: Go to (202) 649–6700 or, for persons who are
Arrangements www.regulations.gov. Enter ‘‘Docket ID deaf or hard of hearing, TTY, (202) 649–
OCC–2011–0001’’ in the Search Box and 5597. Upon arrival, visitors will be
AGENCY: Office of the Comptroller of the click ‘‘Search.’’ Click on ‘‘Comment required to present valid government-
Currency, Treasury (OCC); Board of Now’’ to submit public comments. issued photo identification and to
Governors of the Federal Reserve • Click on the ‘‘Help’’ tab on the submit to security screening in order to
System (Board); Federal Deposit Regulations.govhome page to get inspect and photocopy comments.
Insurance Corporation (FDIC); Federal information on using Regulations.gov, Board of Governors of the Federal
Housing Finance Agency (FHFA); including instructions for submitting Reserve System: You may submit
National Credit Union Administration public comments. comments, identified by Docket No.
(NCUA); and U.S. Securities and • Email: regs.comments@ 1536 and RIN No. 7100 AE–50, by any
Exchange Commission (SEC). occ.treas.gov. of the following methods:
ACTION: Notice of proposed rulemaking • Mail: Legislative and Regulatory • Agency Web site: http://
and request for comment. Activities Division, Office of the www.federalreserve.gov. Follow the
Comptroller of the Currency, 400 7th instructions for submitting comments at
S2 SUMMARY: The OCC, Board, FDIC, FHFA, Street SW., Suite 3E–218, Mail Stop http://www.federalreserve.gov/
SAL NCUA, and SEC (the Agencies) are 9W–11, Washington, DC 20219. generalinfo/foia/ProposedRegs.cfm.
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OP seeking comment on a joint proposed • Fax: [phone]. • Federal eRulemaking Portal: http://
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K3 Consumer Protection Act (Dodd-Frank ID OCC–2011–0001’’ in your comment. line of the message.
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Federal Register/Vol. 81, No. 112/Friday, June 10, 2016/Proposed Rules 37671
• Fax: [phone] or (202) 452– Street SW., Washington, DC 20219. The appointment weekdays between 9:00
3102. package should be delivered at the 7th a.m. and 3:00 p.m. To make an
• Mail: Address to Robert deV. Street entrance Guard Desk, First Floor, appointment, call (703) 518–6546 or
Frierson, Secretary, Board of Governors on business days between 9 a.m. and 5 send an email to [email protected].
of the Federal Reserve System, 20th p.m. Securities and Exchange Commission:
Street and Constitution Avenue NW., • U.S. Mail, United Parcel Service, You may submit comments by the
Washington, DC 20551. Federal Express, or Other Mail Service: following method:
All public comments will be made The mailing address for comments is:
Electronic Comments
available on the Board’s Web site at Alfred M. Pollard, General Counsel,
http://www.federalreserve.gov/ Attention: Comments/RIN 2590–AA42, • Use the SEC’s Internet comment
generalinfo/foia/ProposedRegs.cfm as Federal Housing Finance Agency, 400 form (http://www.sec.gov/rules/
submitted, unless modified for technical 7th Street SW., Washington, DC 20219. proposed.shtml);
reasons. Accordingly, comments will Please note that all mail sent to FHFA • Send an email to rule-comments@
not be edited to remove any identifying via U.S. Mail is routed through a sec.gov. Please include File Number S7–
or contact information. Public national irradiation facility, a process 07–16 on the subject line; or
comments may also be viewed that may delay delivery by • Use the Federal eRulemaking Portal
electronically or in paper form in Room approximately two weeks. (http://www.regulations.gov). Follow the
3515, 1801 K Street NW. (between 18th All comments received by the instructions for submitting comments.
and 19th Streets NW.), Washington, DC deadline will be posted without change
Paper Comments
20006 between 9:00 a.m. and 5:00 p.m. for public inspection on the FHFA Web
on weekdays. site at http://www.fhfa.gov, and will • Send paper comments in triplicate
Federal Deposit Insurance include any personal information to Brent J. Fields, Secretary, Securities
Corporation: You may submit provided, such as name, address and Exchange Commission, 100 F Street
comments, identified by RIN 3064– (mailing and email), and telephone NE., Washington, DC 20549.
AD86, by any of the following methods: numbers. Copies of all comments timely All submissions should refer to File
• Agency Web site: http:// received will be available for public Number S7–07–16. This file number
www.FDIC.gov/regulations/laws/ inspection and copying at the address should be included on the subject line
federal/propose.html. Follow above on government-business days if email is used. To help us process and
instructions for submitting comments between the hours of 10:00 a.m. and review your comments more efficiently,
on the Agency Web site. 3:00 p.m. To make an appointment to please use only one method. The SEC
• Email: [email protected]. inspect comments please call the Office will post all comments on the SEC’s
Include the RIN 3064–AD86 on the of General Counsel at (202) 649–3804. Internet Web site (http://www.sec.gov/
subject line of the message. National Credit Union rules/proposed.shtml). Comments are
• Mail: Robert E. Feldman, Executive Administration: You may submit also available for Web site viewing and
Secretary, Attention: Comments, Federal comments by any of the following printing in the SEC’s Public Reference
Deposit Insurance Corporation, 550 17th methods (please send comments by one Room, 100 F Street NE., Washington, DC
Str•eeHt aNnWd .D, Weliavsehriyn: gCtoomn,m DeCn 2ts0 m42a9y. be me•thFoedd eornally e):R ulemaking Portal: http:// 20549 on official business days between
the hours of 10:00 a.m. and 3:00 p.m.
hand delivered to the guard station at www.regulations.gov. Follow the
All comments received will be posted
the rear of the 550 17th Street Building instructions for submitting comments.
without change; the SEC does not edit
(located on F Street) on business days • Agency Web site: http://
personal identifying information from
between 7:00 a.m. and 5:00 p.m. www.ncua.gov. Follow the instructions
• Public Inspection: All comments for submitting comments. submissions. You should submit only
received, including any personal • Email: Address to regcomments@ information that you wish to make
available publicly.
information provided, will be posted ncua.gov. Include ‘‘[Your name]
Studies, memoranda or other
generally without change to http:// Comments on ‘‘Notice of Proposed
substantive items may be added by the
www.fdic.gov/regulations/laws/federal. Rulemaking for Incentive-based
SEC or staff to the comment file during
Federal Housing Finance Agency: You Compensation Arrangements’’ in the
this rulemaking. A notification of the
may submit your written comments on email subject line.
the proposed rulemaking, identified by • Fax: [phone]. Use the inclusion in the comment file of any
such materials will be made available
RIN number, by any of the following subject line described above for email.
methods: • Mail: Address to Gerard S. Poliquin, on the SEC’s Web site. To ensure direct
• Agency Web site: www.fhfa.gov/ Secretary of the Board, National Credit electronic receipt of such notifications,
sign up through the ‘‘Stay Connected’’
open-for-comment-or-input. Union Administration, 1775 Duke
• Federal eRulemaking Portal: http:// Street, Alexandria, Virginia 22314– option at www.sec.gov to receive
www.regulations.gov. Follow the 3428. notifications by email.
instructions for submitting comments. If • Hand Delivery/Courier: Same as FORFURTHERINFORMATIONCONTACT:
you submit your comment to the mail address. OCC: Patrick T. Tierney, Assistant
Federal eRulemaking Portal, please also • Public Inspection: All public Director, Alison MacDonald, Senior
send it by email to FHFA at comments are available on the agency’s Attorney, and Melissa Lisenbee,
S2 [email protected] to ensure Web site at http://www.ncua.gov/Legal/ Attorney, Legislative and Regulatory
SAL timely receipt by the Agency. Please Regs/Pages/PropRegs.aspx as submitted, Activities, (202) 649–5490, and Judi
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K3 Finance Agency, Eighth Floor, 400 7th Alexandria, Virginia 22314, by Supervisory Financial Analyst, (202)
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37672 Federal Register/Vol. 81, No. 112/Friday, June 10, 2016/Proposed Rules
872–7542, or Joe Maldonado, Level 1, Level 2, and Level 3 Covered §ll.8(c) Relative Performance Measures
Supervisory Financial Analyst, (202) Institutions §ll.8(d) Volume-Driven Incentive-Based
973–7341, Division of Banking Definitions Pertaining to Covered Persons Compensation
Relative Compensation Test §ll.9 Risk Management and Controls
Supervision and Regulation; or Laurie
Exposure Test Requirements for Level 1 and Level 2
Schaffer, Associate General Counsel,
Exposure Test at Certain Affiliates Covered Institutions
(202) 452–2272, Michael Waldron, Dollar Threshold Test §ll.10 Governance Requirements for
Special Counsel, (202) 452–2798, Other Definitions Level 1 and Level 2 Covered Institutions
Gillian Burgess, Counsel, (202) 736– Relationship Between Defined Terms §ll.11 Policies and Procedures
5564, Flora Ahn, Counsel, (202) 452– §ll.3 Applicability Requirements for Level 1 and Level 2
2317, or Steve Bowne, Senior Attorney, (a) When Average Total Consolidated Covered Institutions
(202) 452–3900, Legal Division, Board of Assets Increase §ll.12 Indirect Actions
(b) When Total Consolidated Assets §ll.13 Enforcement
Governors of the Federal Reserve
Decrease §ll.14 NCUA and FHFA Covered
System, 20th and C Streets NW.,
(c) Compliance of Covered Institutions Institutions in Conservatorship,
Washington, DC 20551.
That Are Subsidiaries of Covered Receivership, or Liquidation
FDIC: Rae-Ann Miller, Associate Institutions SEC Amendment to Exchange Act Rule
Director, Risk Management Policy, §ll.4 Requirements and Prohibitions 17a–4
Division of Risk Management Applicable to All Covered Institutions SEC Amendment to Investment Advisers
Supervision (202) 898–3898, Catherine (a) In General Act Rule 204–2
(b) Excessive Compensation III. Appendix to the Supplementary
Topping, Counsel, Legal Division, (202)
(c) Material Financial Loss Information: Example Incentive-Based
898–3975, and Nefretete Smith,
(d) Performance Measures Compensation Arrangement and
Counsel, Legal Division, (202) 898–
(e) Board of Directors Forfeiture and Downward Adjustment
6851. (f) Disclosure and Recordkeeping Review
FHFA: Mary Pat Fox, Manager, Requirements and (g) Rule of Ms. Ledger: Senior Executive Officer at
Executive Compensation Branch, (202) Construction Level 2 Covered Institution Balance
649–3215; or Lindsay Simmons, §ll.5 Additional Disclosure and Award of Incentive-Based Compensation
Assistant General Counsel, (202) 649– Recordkeeping Requirements for Level 1 for Performance Periods Ending
and Level 2 Covered Institutions December 31, 2024
3066, Federal Housing Finance Agency,
§ll.6 Reservation of Authority for Vesting Schedule
400 7th Street SW., Washington, DC
Level 3 Covered Institutions Use of Options in Deferred Incentive-Based
20219. The telephone number for the §ll.7 Deferral, Forfeiture and Compensation
Telecommunications Device for the Downward Adjustment, and Clawback Other Requirements Specific to Ms.
Hearing Impaired is (800) 877–8339. Requirements for Level 1 and Level 2 Ledger’s Incentive-Based Compensation
NCUA: Vickie Apperson, Program Covered Institutions Arrangement
Officer, and Jeffrey Marshall, Program §ll.7(a) Deferral Risk Management and Controls and
Officer, Office of Examination & §ll.7(a)(1) and §ll.7(a)(2) Minimum Governance
Deferral Amounts and Deferral Periods Recordkeeping
Insurance, (703) 518–6360; or Elizabeth
for Qualifying Incentive-Based Mr. Ticker: Forfeiture and Downward
Wirick, Senior Staff Attorney, Office of
Compensation and Incentive-Based Adjustment Review
General Counsel, (703) 518–6540, Compensation Awarded Under a Long- IV. Request for Comments
National Credit Union Administration, Term Incentive Plan V. Regulatory Analysis
1775 Duke Street, Alexandria, Virginia Pro Rata Vesting A. Regulatory Flexibility Act
22314. Acceleration of Payments B. Paperwork Reduction Act
SEC: Raymond A. Lombardo, Branch Qualifying Incentive-Based Compensation C. The Treasury and General Government
Chief, Kevin D. Schopp, Special and Incentive-Based Compensation Appropriations Act, 1999—Assessment
Awarded Under a Long-Term Incentive of Federal Regulations and Policies on
Counsel, Division of Trading & Markets,
Plan Families
(202) 551–5777 or tradingandmarkets@
§ll.7(a)(3) Adjustments of Deferred D. Riegle Community Development and
sec.gov; Sirimal R. Mukerjee, Senior Qualifying Incentive-Based Regulatory Improvement Act of 1994
Counsel, Melissa R. Harke, Branch Compensation and Deferred Long-Term E. Solicitation of Comments on Use of
Chief, Division of Investment Incentive Plan Compensation Amounts Plain Language
Management, (202) 551–6787 or §ll.7(a)(4) Composition of Deferred F. OCC Unfunded Mandates Reform Act of
[email protected], U.S. Securities and Qualifying Incentive-Based 1995 Determination
Exchange Commission, 100 F Street NE., Compensation and Deferred Long-Term G. Differences Between the Federal Home
Washington, DC 20549. Incentive Plan Compensation for Level 1 Loan Banks and the Enterprises
and Level 2 Covered Institutions H. NCUA Executive Order 13132
SUPPLEMENTARYINFORMATION: Cash and Equity-Like Instruments Determination
Options I. SEC Economic Analysis
Table of Contents
§ll.7(b) Forfeiture and Downward J. Small Business Regulatory Enforcement
I. Introduction Adjustment Fairness Act
A. Background §ll.7(b)(1) Compensation at Risk List of Subjects
B. Supervisory Experience §ll.7(b)(2) Events Triggering Forfeiture
I. Introduction
C. Overview of the 2011 Proposed Rule and and Downward Adjustment Review
Public Comment §ll.7(b)(3) Senior Executive Officers and Section 956 of the Dodd-Frank Wall
S2 D. International Developments Significant Risk-Takers Affected by Street Reform and Consumer Protection
SAL E. Overview of the Proposed Rule Forfeiture and Downward Adjustment Act (the ‘‘Dodd-Frank Act’’ or the
OPO II. Section-by-Section Description of the §ll.7(b)(4) Determining Forfeiture and ‘‘Act’’)1requires the Agencies to jointly
R Proposed Rule Downward Adjustment Amounts
D with P §lAlpp.1licaAbiulitthyo rity, Scope and Initial §§llll..78(c)A Cdldawitiboancakl Prohibitions for Level prersepscercitb teo riengcuelnattiivoen-sb oasre gdu cidoemlipneens swatiitohn
PRO §ll.2 Definitions 1 and Level 2 Covered Institutions practices at certain financial institutions
T082 Definitions Pertaining to Covered §ll.8(a) Hedging (referred to as ‘‘covered financial
G9 Institutions §ll.8(b) Maximum Incentive-Based
SK3 Consolidation Compensation Opportunity 1Public Law 111–203, 124 Stat. 1376 (2010).
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Federal Register/Vol. 81, No. 112/Friday, June 10, 2016/Proposed Rules 37673
institutions’’).2Specifically, section 956 section 39 of the FDIA4and that the light of these developments and the
of the Dodd-Frank Act (‘‘section 956’’) Agencies take the compensation comments received on the 2011
requires that the Agencies prohibit any standards described in section 39 of the Proposed Rule, the Agencies are
types of incentive-based compensation3 FDIA into consideration in establishing publishing a new proposed rule to
arrangements, or any feature of any such compensation standards under section implement section 956.
arrangements, that the Agencies 956.5As explained in greater detail The first part of this SUPPLEMENTARY
determine encourage inappropriate risks below, the standards established by the INFORMATIONsection provides
by a covered financial institution: (1) By proposed rule are comparable to the background information on the
providing an executive officer, standards established under section 39 proposed rule, including a summary of
employee, director, or principal of the FDIA. the 2011 Proposed Rule and areas in
shareholder of the covered financial In April 2011, the Agencies published which the proposed rule differs from the
institution with excessive a joint notice of proposed rulemaking 2011 Proposed Rule. The second part
compensation, fees, or benefits; or (2) that proposed to implement section 956 contains a section-by-section
that could lead to material financial loss (2011 Proposed Rule).6Since the 2011 description of the proposed rule.11To
to the covered financial institution. Proposed Rule was published, help explain how the requirements of
Under the Act, a covered financial incentive-based compensation practices the proposed rule would work in
institution also must disclose to its have evolved in the financial services practice, the Appendix to this
appropriate Federal regulator the industry. The Board, the OCC, and the SUPPLEMENTARYINFORMATIONsection sets
structure of its incentive-based FDIC have gained experience in out an example of an incentive-based
compensation arrangements sufficient to applying guidance on incentive-based compensation arrangement for a
determine whether the structure compensation,7FHFA has gained hypothetical senior executive officer at
provides excessive compensation, fees, supervisory experience in applying a hypothetical large banking
or benefits or could lead to material compensation-related rules8adopted organization and an example of how a
financial loss to the institution. The under the authority of the Safety and forfeiture and downward adjustment
Dodd-Frank Act does not require a Soundness Act,9and foreign review might be conducted for a senior
covered financial institution to report jurisdictions have adopted incentive- manager at a hypothetical large banking
the actual compensation of particular based compensation remuneration organization.
individuals. codes, regulations, and guidance.10In For ease of reference, the proposed
The Act defines ‘‘covered financial rules of the Agencies are referenced in
institution’’ to include any of the 412 U.S.C. 1831p–1. The OCC, Board, and FDIC this SUPPLEMENTARYINFORMATIONsection
following types of institutions that have (collectively, the ‘‘Federal Banking Agencies’’) each using a common designation of section
have adopted guidelines implementing the
$1 billion or more in assets: (A) A compensation-related and other safety and ll.1 to section ll.14 (excluding the
depository institution or depository soundness standards in section 39 of the FDIA. See title and part designations for each
institution holding company, as such Interagency Guidelines Establishing Standards for agency). Each agency would codify its
Safety and Soundness (the ‘‘Federal Banking
terms are defined in section 3 of the Agency Safety and Soundness Guidelines’’), 12 CFR rule, if adopted, within its respective
Federal Deposit Insurance Act (‘‘FDIA’’) part 30, Appendix A (OCC); 12 CFR part 208, title of the Code of Federal
(12 U.S.C. 1813); (B) a broker-dealer Appendix D–1 (Board); 12 CFR part 364, Appendix Regulations.12
A (FDIC).
registered under section 15 of the
512 U.S.C. 1831p–1(c). A. Background
Securities Exchange Act of 1934 (15
676 FR 21170 (April 14, 2011). Incentive-based compensation
U.S.C. 78o); (C) a credit union, as
7OCC, Board, FDIC, and Office of Thrift
arrangements are critical tools in the
described in section 19(b)(1)(A)(iv) of Supervision, ‘‘Guidance on Sound Incentive
the Federal Reserve Act; (D) an Compensation Policies’’ (‘‘2010 Federal Banking management of financial institutions.
Agency Guidance’’), 75 FR 36395 (June 25, 2010). These arrangements serve several
investment adviser, as such term is
8These include the Executive Compensation Rule important objectives, including
defined in section 202(a)(11) of the
(12 CFR part 1230), the Golden Parachute Payments attracting and retaining skilled staff and
Investment Advisers Act of 1940 (15 Rule (12 CFR part 1231), and the Federal Home
promoting better performance of the
U.S.C. 80b–2(a)(11)); (E) the Federal Loan Bank Directors’ Compensation and Expenses
National Mortgage Association (Fannie Rule (12 CFR part 1261 subpart C). institution and individual employees.
9The Safety and Soundness Act means the Well-structured incentive-based
Mae); (F) the Federal Home Loan
Federal Housing Enterprises Financial Safety and compensation arrangements can
Mortgage Corporation (Freddie Mac); Soundness Act of 1992, as amended (12 U.S.C. 4501
promote the health of a financial
and (G) any other financial institution et seq.). 12 CFR 1201.1.
that the appropriate Federal regulators, 10See, e.g., the European Union, Directive 2013/ institution by aligning the interests of
36/EU (effective January 1, 2014); United Kingdom executives and employees with those of
jointly, by rule, determine should be
Prudential Regulation Authority (‘‘PRA’’) and
treated as a covered financial institution Financial Conduct Authority (‘‘FCA’’), ‘‘PRA PS12/
for these purposes. 15/FCA PS15/16: Strengthening the Alignment of Financial Market Supervisory Authority
(‘‘FINMA’’), 2010/01 FINMA Circular on
The Act also requires that any Risk and Reward: New Remuneration Rules’’ (June
25, 2015) (‘‘UK Remuneration Rules’’), available at Remuneration Schemes (October 2009) (‘‘FINMA
compensation standards adopted under http://www.bankofengland.co.uk/pra/Documents/ Remuneration Circular’’), available at https://
section 956 be comparable to the safety publications/ps/2015/ps1215.pdf; Australian www.finma.ch/en/documentation/circulars/
and soundness standards applicable to Prudential Regulation Authority (‘‘APRA’’), #Order=2.
insured depository institutions under Prudential Practice Guide SPG 511—Remuneration 11This section-by-section description also
(November 2013), available at http:// includes certain examples of how the proposed rule
S2 www.apra.gov.au/Super/Documents/Prudential- would work in practice. These examples are
SAL 212 U.S.C. 5641. Practice-Guide-SPG-511-Remuneration.pdf; Canada, intended solely for purposes of illustration and do
PO 3Section 956(b) uses the term ‘‘incentive-based The Office of the Superintendent of Financial not cover every aspect of the proposed rule. They
RO payment arrangement.’’ It appears that Congress Institutions (‘‘OSFI’’) Corporate Governance are provided as an aid to understanding the
D with P uarsreadn gtheem teenrmt’’s a ‘n‘idn c‘‘einnctievnet-ibvaes-ebda speady cmoemnpt ensation GGuovideernliannecse ( JGanuuidaerlyi n2e0s1’’3)), a(‘v‘OaiSlaFbI lCe oartp hotrtapt:e/ / pofr olapwos oerd rreugluel aatnidon d.o not carry the force and effect
RO arrangement’’ interchangeably. The Agencies have www.osfi-bsif.gc.ca/eng/fi-if/rg-ro/gdn-ort/gl-ld/ 12Specifically, the Agencies propose to codify the
T082P cchomospeenn tsoa tuisoen tahrer atnergmem ‘‘einnct’e’ nthtirvoeu-bghasoeudt the pFraagmese/wcgo_rgku (iDdeelcienme.baesrp 2x0 a1n0d) (S‘‘uOpSeFrvI iSsourpye rvisory r2u3l6e s(t ahse fBololaorwds);: 1122 CCFFRR ppaarrtt 34722 ( O(FCDCI)C; )1; 21 7C FCRF Rp art
G9 proposed rule and this SUPPLEMENTARYINFORMATION Framework’’), available at http://www.osfi- part 303 (SEC); 12 CFR parts 741 and 751 (NCUA);
SK3 section for the sake of clarity. bsif.gc.ca/Eng/Docs/sframew.pdf; Switzerland, and 12 CFR part 1232 (FHFA).
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37674 Federal Register/Vol. 81, No. 112/Friday, June 10, 2016/Proposed Rules
the institution’s shareholders and other Of particular note were incentive- Flawed incentive-based compensation
stakeholders. At the same time, poorly based compensation arrangements for arrangements were evident in not just
structured incentive-based employees in a position to expose the U.S. financial institutions, but also
compensation arrangements can provide institution to substantial risk that failed major financial institutions
executives and employees with to align the employees’ interests with worldwide.16In a 2009 survey of
incentives to take inappropriate risks those of the institution. For example, banking organizations engaged in
that are not consistent with the long- some institutions gave loan officers wholesale banking activities, the
term health of the institution and, in incentives to write a large amount of Institute of International Finance found
turn, the long-term health of the U.S. loans or gave traders incentives to that 98 percent of respondents
economy. Larger financial institutions generate high levels of trading revenues, recognized the contribution of
in particular are interconnected with without sufficient regard for the risks incentive-based compensation practices
one another and with many other associated with those activities. The to the financial crisis.17
companies and markets, which can revenues that served as the basis for Shareholders and other stakeholders
mean that any negative impact from calculating bonuses were generated in a covered institution18have an
inappropriate risk-taking can have immediately, while the risk outcomes interest in aligning the interests of
broader consequences. The risk of these might not have been realized for months executives, managers, and other
negative externalities may not be fully or years after the transactions were employees with the institution’s long-
taken into account in incentive-based completed. When these, or similarly term health. However, aligning the
compensation arrangements, even misaligned incentive-based interests of shareholders (or members,
arrangements that otherwise align the compensation arrangements, are in the case of credit unions, mutual
interests of shareholders and other common in an institution, the savings associations, mutual savings
stakeholders with those of executives foundation of sound risk management banks, some mutual holding companies,
and employees. can be undermined by the actions of and Federal Home Loan Banks) and
There is evidence that flawed employees seeking to maximize their other stakeholders with employees may
incentive-based compensation practices own compensation. not always be sufficient to protect the
The effect of flawed incentive-based safety and soundness of an institution,
in the financial industry were one of
compensation practices is demonstrated deter excessive compensation, or deter
many factors contributing to the
by the arrangements implemented by behavior or inappropriate risk-taking
financial crisis that began in 2007. Some
Washington Mutual (WaMu). According that could lead to material financial loss
compensation arrangements rewarded
to the Senate Permanent Subcommittee at the institution. Executive officers and
employees—including non-executive
on Investigations Staff’s report on the employees of a covered institution may
personnel like traders with large
failure of WaMu ‘‘[l]oan officers and be willing to tolerate a degree of risk
position limits, underwriters, and loan
processors were paid primarily on that is inconsistent with the interests of
officers—for increasing an institution’s
volume, not primarily on the quality of stakeholders, as well as broader public
revenue or short-term profit without
their loans, and were paid more for policy goals.
sufficient recognition of the risks the
issuing higher risk loans. Loan officers Generally, the incentive-based
employees’ activities posed to the
and mortgage brokers were also paid compensation arrangements of a
institutions, and therefore potentially to
more when they got borrowers to pay covered institution should reflect the
the broader financial system.13Traders
higher interest rates, even if the interests of the shareholders and other
with large position limits, underwriters,
borrower qualified for a lower rate—a stakeholders, to the extent that the
and loan officers are three examples of
practice that enriched WaMu in the incentive-based compensation makes
non-executive personnel who had the
short term, but made defaults more those covered persons demand more or
ability to expose an institution to
likely down the road.’’15 less reward for their risk-taking at the
material amounts of risk. Significant
covered institution, and to the extent
losses caused by actions of individual
at a large financial institution engaged in activities that incentive-based compensation
traders or trading groups occurred at
that caused losses of an estimated EUR4.9 billion
some of the largest financial institutions in 2007, which was approximately 23 percent of the
16See Financial Stability Forum, ‘‘FSF Principles
during and after the financial crisis.14 firm’s 2007 tier 1 capital. http://
for Sound Compensation Practices’’ (April 2009)
www.societegenerale.com/sites/default/files/
(the ‘‘FSB Principles’’), available at http://
13See, e.g., Financial Crisis Inquiry Commission, 0R3e%gis2t0raMtiaornc%h%202D02o0c0u8m%en2t0.2p0d0f,8 P%a2ge0s, 52, 159–160; www.financialstabilityboard.org/publications/r_
‘‘Financial Crisis Inquiry Report’’ (January 2011), at http://www.societegenerale.com/sites/default/files/ 0904b.pdf; Senior Supervisors Group, ‘‘Risk-
209, 279, 291, 343, available at https:// 12%20May%202008%20The%20report%20by management Lessons from the Global Banking
www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO- %20the%20General%20Inspection%20of%20 Crisis of 2008’’ (October 2009), available at http://
FCIC.pdf; Senior Supervisors Group, ‘‘Observations Societe%20Generale.pdf, Pages 1–71. In 2011, one www.newyorkfed.org/newsevents/news/banking/
on Risk Management Practices during the Recent trader at another large financial institution caused 2009/ma091021.html. The Financial Stability
Market Turbulence’’ (March 6, 2008), available at losses of an estimated $2.25 billion, which Forum was renamed the Financial Stability Board
https://www.newyorkfed.org/medialibrary/media/ represented approximately 5.4 percent of the firm’s (‘‘FSB’’) in April 2009.
newsevents/news/banking/2008/SSG_Risk_Mgt_ tier 1 capital. https://www.fca.org.uk/news/press- 17See Institute of International Finance, Inc.,
doc_final.pdf. releases/fca-bans-kweku-mawuli-adoboli-from-the- ‘‘Compensation in Financial Services: Industry
14A large financial institution suffered losses in financial-services-industry, Page 1; https:// Progress and the Agenda for Change’’ (March 2009),
2012 from trading by an investment office in its www.ubs.com/global/en/about_ubs/investor_ available at http://www.oliverwyman.com/ow/pdf_
synthetic credit portfolio. These losses amounted to relations/other_filings/sec.html. 2012 SEC Form 20– files/OW_En_FS_Publ_2009_
approximately $5.8 billion, which was F, Page 34. In 2007, one trader caused losses of an CompensationInFS.pdf. See also UBS, ‘‘Shareholder
S2 approximately 3.6 percent of the holding company’s estimated $264 million at a large financial Report on UBS’s Write-Downs,’’ (April 18, 2008), at
SAL tier 1 capital. https://www.sec.gov/Archives/edgar/ institution, which represented approximately 1.7 41–42 (identifying incentive effects of UBS
PO data/19617/000001961713000221/0000019617-13- percent of its tier 1 capital. http:// compensation practices as contributing factors in
RO 000221-index.htm Form 10–K 2013, Pages 69 and www.federalreserve.gov/newsevents/press/ losses suffered by UBS due to exposure to the
D with P 1la1r8g.e I inn 2st0it0u7t,i oan p croapursieedta lroys streasd oifn agn g reosutipm aatt eadn o$t7h.e8r ewnwfowr.cbemmoe.ncot/m20/c0i8/1a1r21080a8.h/dtmow, Pnalogae d1s;/ hbtmtpos_:// swuwbwpr.uimbse. cmoomr/tg1a/Sgeh omwaMrkeedt)i,a a/ivnavielastbolers a/t http://
RO billion (approximately 25 percent of the firm’s total ar2008.pdf, Page 61. agm?contentId=140333&name=080418Shareholder
T082P swtwocwk.hmooldrgear’nss etaqnulietyy)..c ohmttp/a:/b/out-us-ir/shareholder/ Inv15esSttiagfaft oiof nSs., PWeramll aSnterenet tS aunbdc othmem F.i noann cial Crisis: Re1p8oArts. pddisf.c ussed below, the proposed rule uses the
G9 10k113008/10k1108.pdf Form 10–K 2008, Pages 45 Anatomy of a Financial Collapse at 143 (Comm. term ‘‘covered institution’’ rather than the statutory
SK3 and 108. Between 2005 and 2008, one futures trader Print 2011). term ‘‘covered financial institution.’’
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Federal Register/Vol. 81, No. 112/Friday, June 10, 2016/Proposed Rules 37675
changes those covered persons’ risk- which is still ongoing.19One goal of the focuses most intensively on large
taking. However, risks undertaken by a Horizontal Review is to help improve banking organizations because they are
covered institution—particularly a the Federal Banking Agencies’ significant users of incentive-based
larger institution—can spill over into understanding of the range and compensation and because flawed
the broader economy, affecting other evolution of incentive-based approaches at these organizations are
institutions and stakeholders. Therefore, compensation practices across more likely to have adverse effects on
there may be reasons why the institutions and categories of employees the broader financial system. As part of
preferences of all of the stakeholders are within institutions. The second goal is that supervision, the Board also
not fully reflected in incentive-based to provide guidance to each institution conducts targeted incentive-based
compensation arrangements. Hence, in implementing the 2010 Federal compensation exams and considers
there is a public interest in curtailing Banking Agency Guidance. The incentive-based compensation in the
the inappropriate risk-taking incentives supervisory experience of the Federal course of wider line of business and
provided by incentive-based Banking Agencies in this area is also risk-related reviews.
compensation arrangements. Without relevant to the incentive-based
For the past several years, the Board
restrictions on incentive-based compensation practices at broker-
also has been actively engaged in
compensation arrangements, covered dealers and investment advisers.
international compensation,
institutions may engage in more risk- As part of the Horizontal Review, the
governance, and conduct working
taking than is optimal from a societal Board conducted reviews of line of
groups that have produced a variety of
perspective, suggesting that regulatory business operations in the areas of
publications aimed at further improving
measures may be required to cut back trading, mortgage, credit card, and
incentive-based compensation
on the risk-taking incentivized by such commercial lending operations as well
practices.21
arrangements. Particularly at larger as senior executive incentive-based
institutions, shareholders and other compensation awards and payouts. The The FDIC reviews incentive-based
stakeholders may have difficulty institutions subject to the Horizontal compensation practices as part of its
effectively monitoring and controlling Review have made progress in safety and soundness examinations of
the impact of incentive-based developing practices that would state nonmember banks, most of which
compensation arrangements throughout incorporate the principles of the 2010 are smaller community institutions that
the institution that may affect the Federal Banking Agency Guidance into would not be covered by the proposed
institution’s risk profile, the full range their risk management systems, rule. FDIC incentive-based
of stakeholders, and the larger economy. including through better recognition of compensation reviews are conducted in
As a result, supervision and risk in incentive-based compensation the context of the 2010 Federal Banking
regulation of incentive-based decision-making and improved Agency Guidance and Section 39 of the
compensation can play an important practices to better balance risk and FDIA. Of the 518 bank failures resolved
role in helping safeguard covered reward. Many of those changes became by the FDIC between 2007 and 2015, 65
institutions against incentive-based evident in the actual compensation involved banks with total assets of $1
compensation practices that threaten arrangements of the institutions as the billion or more that would have been
safety and soundness, are excessive, or review progressed. In 2011, the Board covered by the proposed rule. Of the 65
could lead to material financial loss. In made public its initial findings from the institutions that failed with total assets
particular, such supervision and Horizontal Review, recognizing the of $1 billion or more, 18 institutions or
regulation can help address the negative steps the institutions had made towards approximately 28 percent, were
externalities affecting the broader improving their incentive-based identified as having some level of issues
economy or other institutions that may compensation practices, but also noting or concerns related to compensation
arise from inappropriate risk-taking by that each institution needed to do arrangements, many of which involved
large financial institutions. more.20In early 2012, the Board incentive-based compensation. Overall,
B. Supervisory Experience initiated a second, cross-firm review of most of the compensation issues related
12 additional large banking to either excessive compensation or
To address such practices, the Federal organizations (‘‘2012 LBO Review’’). tying financial incentives to metrics
Banking Agencies proposed, and then The Board also monitors incentive- such as corporate performance or loan
later adopted, the 2010 Federal Banking based compensation as part of ongoing production without adequate
Agency Guidance governing incentive- supervision. Supervisory oversight consideration of related risks. Also,
based compensation programs, which
several cases involved poor governance
applies to all banking organizations 19The financial institutions in the Horizontal practices, most commonly, dominant
regardless of asset size. This Guidance Review are Ally Financial Inc.; American Express
uses a principles-based approach to Company; Bank of America Corporation; The Bank
ensure that incentive-based of New York Mellon Corporation; Capital One 21See, e.g., FSB Principles; FSB, ‘‘FSB Principles
Financial Corporation; Citigroup Inc.; Discover for Sound Compensation Practices: Implementation
compensation arrangements Financial Services; The Goldman Sachs Group, Inc.; Standards, Basel, Switzerland’’ (September 2009),
appropriately tie rewards to longer-term JPMorgan Chase & Co.; Morgan Stanley; Northern available at http://www.fsb.org/wp-content/
performance and do not undermine the Trust Corporation; The PNC Financial Services uploads/r_090925c.pdf?page_moved=1 (together
safety and soundness of banking Group, Inc.; State Street Corporation; SunTrust with the FSB Principles, the ‘‘FSB Principles and
Banks, Inc.; U.S. Bancorp; and Wells Fargo & Implementation Standards’’); Basel Committee on
organizations or create undue risks to Company; and the U.S. operations of Barclays plc, Banking Supervision, ‘‘Report on Range of
S2 the financial system. In addition, to BNP Paribas, Credit Suisse Group AG, Deutsche Methodologies for Risk and Performance Alignment
SAL foster implementation of improved Bank AG, HSBC Holdings plc, Royal Bank of of Remuneration’’ (May 2011); Basel Committee on
ROPO incentive-based compensation practices, CSoanciaedtea ,G Tehnee rRaoley,a al nBda nUkB oSf AScGo. tland Group plc, BSuanpkerinvgis Siounp oerf vFiisnioann,c i‘‘aPl rCinocnigplloems feorra ttehse’ ’E ffective
P the Board, in cooperation with the OCC
D with and FDIC, initiated in late 2009 a Re2p0oBrot aornd ,t h‘‘eIn Hcoenritziovne tCalo mRepveinewsa toiof nP rParcatcictiecse ast: A (PSreinpcteipmlebse rf o2r0 S1o2u);n FdS CBo, m‘‘Ipmepnlseamtieonnt iPnrga ctthiec eFsS aBn d
RO multidisciplinary, horizontal review Large Banking Organizations’’ (October 2011) their Implementation Standards—First, Second,
G9T082P (b‘a‘Hseodr iczoomntpael nRseavtiieown ’p’)r aocf tiincceesn atti v2e5- (wf‘i‘lw2e0sw/1.if1ne cFdeRenrBtai lvWree-hsceiotremv ePp.ageponves/rap)t,iu oabnvla-ipcilaraatbicolteni csae/tso h-trhteteppro:-/rr/et-p orts/ TAavhuaigriuldas,b ta l2ne0 da1 tF3 ho, tuNtprot:hv//e Pwmrwobwgerr.e f2ss0bs 1.Ro4re,gp N/oporutvsbe’l’mi c(Jbauetniro e2n 20s01/152),,
SK3 large, complex banking organizations, 201110.pdf. ?policy_area%5B%5D=24.
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37676 Federal Register/Vol. 81, No. 112/Friday, June 10, 2016/Proposed Rules
management influencing improper In early 2014, FHFA issued two final recent financial crisis, many institutions
incentives.22 rules related to compensation pursuant had no effective risk adjustments to
The OCC reviews and assesses to its authority over compensation incentive-based compensation at all.
compensation practices at individual under the Safety and Soundness Act.26 Today, the Board has observed that
banks as part of its normal supervisory The Executive Compensation Rule sets incentive-based compensation
activities. For example, the OCC forth requirements and processes with arrangements at the largest banking
identifies matters requiring attention respect to compensation provided to institutions reflect risk adjustments, the
(MRAs) relating to compensation executive officers by the Enterprises, the largest banking institutions take into
practices, including matters relating to Federal Home Loan Banks, and the consideration adverse outcomes, more
governance and risk management and Federal Home Loan Bank System’s pay is deferred, and more of the
controls for compensation. The OCC’s Office of Finance.27Under the rule, deferred amount is subject to reduction
Guidelines Establishing Heightened those entities may not enter into an based on failure to meet assigned
Standards for Certain Large Insured incentive plan with an executive officer performance targets or as a result of
National Banks, Insured Federal Savings or pay any incentive compensation to an adverse outcomes that trigger forfeiture
Associations, and Insured Federal executive officer without providing and clawback reviews.30
Branches23(the ‘‘OCC’s Heightened advance notice to FHFA.28FHFA’s Similarly, prior to the recent financial
Standards’’) require covered banks to Golden Parachute Payments Rule crisis, institutions rarely involved risk
establish and adhere to compensation governs golden parachute payments in management and control personnel in
programs that prohibit incentive-based the case of a regulated entity’s incentive-based compensation decision-
payment arrangements that encourage insolvency, conservatorship, or troubled making. Today, control functions
inappropriate risks by providing condition.29 frequently play an increased role in the
excessive compensation or that could In part because of the work described design and operation of incentive-based
lead to material financial loss. The OCC above, incentive-based compensation compensation, and institutions have
includes an assessment of the banks’ practices and the design of incentive- begun to build out frameworks to help
compensation practices when based compensation arrangements at validate the effectiveness of risk
determining compliance with the OCC’s banking organizations supervised by the adjustment mechanisms. Risk-related
Heightened Standards. Federal Banking Agencies have performance objectives and ‘‘risk
In addition to safety and soundness improved significantly in the years reviews’’ are increasingly common.
oversight, FHFA has express statutory since the recent financial crisis. Prior to the recent financial crisis,
authorities and mandates related to However, the Federal Banking Agencies boards of directors had begun to
compensation paid by its regulated have continued to evaluate incentive- consider the relationship between
entities. FHFA reviews compensation based compensation practices as a part incentive-based compensation and risk,
arrangements before they are of their ongoing supervision but were focused on incentive-based
implemented at Fannie Mae, Freddie responsibilities, with a particular focus compensation for senior executives.
Mac, the Federal Home Loan Banks, and on the design of incentive-based Today, refined policies and procedures
the Office of Finance of the Federal compensation arrangements for senior promote some consistency and
Home Loan Bank System. By statute, executive officers; deferral practices effectiveness across incentive-based
FHFA must prohibit its regulated (including compensation at risk through compensation arrangements. The role of
entities from providing compensation to forfeiture and clawback mechanisms); boards of directors has expanded and
any executive officer of a regulated governance and the use of discretion; ex the quality of risk information provided
entity that is not reasonable and ante risk adjustment; and control to those boards has improved. Finance
comparable with compensation for function participation in incentive- and audit committees work together
employment in other similar businesses based compensation design and risk with compensation committees with the
(including publicly held financial evaluation. The Federal Banking goal of having incentive-based
institutions or major financial services Agencies’ supervision has been focused compensation result in prudent risk-
companies) involving similar duties and on ensuring robust risk management taking.
Notwithstanding the recent progress,
responsibilities.24FHFA also has and governance practices rather than on
incentive-based compensation practices
additional authority over the Enterprises prescribing levels of pay.
are still in need of improvement,
during conservatorship, and has Generally, the supervisory work of the
including better targeting of
established compensation programs for Federal Banking Agencies and FHFA
performance measures and risk metrics
Enterprise executives.25 has promoted more risk-sensitive
to specific activities, more consistent
incentive-based compensation practices
application of risk adjustments, and
22The Inspector General of the appropriate and effective risk governance. Incentive-
better documentation of the decision-
federal banking agency must conduct a Material
based compensation decision-making
Loss Review (‘‘MLR’’) when losses to the Deposit making process. Congress has required
Insurance Fund from failure of an insured increasingly leverages underlying risk the Agencies to jointly prescribe
depository institution exceed certain thresholds. management frameworks to help ensure regulations or guidelines that cover not
See FDIC MLRs, available at https:// better risk identification, monitoring, only depository institutions and
www.fdicig.gov/mlr.shtml; Board MLRs available at
http://oig.federalreserve.gov/reports/audit- and escalation of risk issues. Prior to the depository institution holding
reports.htm; and OCC MLRs, available at https:// companies, but also other financial
OSALS2 wiSguw/Pbwca.ogtmeresma/asiuuttdreyie.tg _Roreevpp/aoobrrttos.u _ti/nodregxa.naiszpaxti.o Sneael -asltsrou cthtuer e/ aUu.2St6h.C1o2r. i 4tCy5F 1oR8f )pt,h aaers t Ssa am1f2ee3tny0d aeandnd db Sy1o 2tuh3ne1 d,H unoneusdsse iArn gtch ta e(n 1d2 iAngsetintuciteios’n ssu. pWehrvilies otrhye aFpepdreoraacl hB banaskeidn g
ROP 2312 CFR part 30, appendix D. Economic Recovery Act of 2008. Congress enacted on the 2010 Federal Banking Agency
T082PROD with P tocioft l22mae45nsp1Ay, a2sp ns Uochywoa. Swnree.sriChetsh.ro av4 lrnda5edte1so rp8pr,(e ,ro acFi)fvt.fH iitlcoFee Agtrhe osseru o ccdfoc itmreheepecd atEeondnry tot eaofrn peadarlli ci shrtesi sg ,h atsn,d HaecdnrEi2dtsR7iirts1Aiee 2st,shs ,iCia nnaFtctg Rb l luce epodgaamasinrtnt pgi i1ne nnn2 p e3s2waa00rt.0 ti o o7irnn. a armet seFpnHodFneAsde ’ pst orro etvghiuesl iafoitnnesad n cial FhinRov3wB0o SlWcveoeehmd ig tpieenen P netahsrpaaetle iBlroy on p2a r0rpod1rv’a1iscd FHteiRcso eBrssi pz Waeotcnh titihfatieecl RPienxaespavtmieietrupw. tlTi eoohsfn e os 2f 011
G9 assets. The Enterprises have been under 2812 CFR 1230.3(d). Incentive Compensation have changed since the
SK3 conservatorship since September 2008. 2912 CFR part 1231. recent financial crisis.
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Federal Register/Vol. 81, No. 112/Friday, June 10, 2016/Proposed Rules 37677
Guidance and the work of FHFA have executive officers for a period of at least amount of compensation subject to the
resulted in improved incentive-based three years. The second would have mandatory deferral provision; requiring
compensation practices, there are even required the board of directors (or a financial institutions to include
greater benefits possible under rule- committee thereof) to identify and quantitative data in their annual
based supervision. Using their collective approve the incentive-based incentive-based compensation reports;
supervisory experiences, the Agencies compensation for those covered persons providing for the annual public
are proposing a uniform set of who individually have the ability to reporting by the Agencies of information
enforceable standards applicable to a expose the institution to possible losses quantifying the overall sensitivity of
larger group of institutions supervised that are substantial in relation to the incentive-based compensation to long-
by all of the Agencies. The proposed institution’s size, capital, or overall risk term risks at major financial
rule would promote better incentive- tolerance, such as traders with large institutions; prohibiting stock
based compensation practices, while position limits and other individuals ownership by board members; and
still allowing for some flexibility in the who have the authority to place at risk prohibiting hedging strategies used by
design and operation of incentive-based a substantial part of the capital of the highly-paid executives on their own
compensation arrangements among the covered institution. incentive-based compensation.
varied institutions the Agencies The Agencies received more than The academic faculty commenters
supervise, including through the tiered 10,000 comments on the 2011 Proposed submitted analyses of certain
application of the proposed rule’s Rule, including from private compensation issues and
requirements. individuals, community groups, several recommendations. These
members of Congress, pension funds, recommendations included: Adopting a
C. Overview of the 2011 Proposed Rule
labor federations, academic faculty, corporate governance measure tied to
and Public Comment
covered institutions, financial industry stock ownership by board members;
The Agencies proposed a rule in 2011, associations, and industry consultants. regulating how deferred compensation
rather than guidelines, to establish The vast majority of the comments is reduced at future payment dates;
requirements applicable to the were substantively identical form letters requiring covered institutions’
incentive-based compensation of two types. The first type of form letter executives to have ‘‘skin in the game’’
arrangements of all covered institutions. urged the Agencies to minimize the for the entire deferral period; and
The 2011 Proposed Rule would have incentives for short-term risk-taking by requiring disclosure of personal hedging
supplemented existing rules, guidance, executives by requiring at least a five- transactions rather than prohibiting
and ongoing supervisory efforts of the year deferral period for executive them.
Agencies. bonuses at big banks, banning A number of covered institutions and
The 2011 Proposed Rule would have executives’ hedging of their pay financial industry associations favored
prohibited incentive-based packages, and requiring specific details the issuance of guidelines instead of
compensation arrangements that could from banks on precisely how they rules to implement section 956. Others
encourage inappropriate risks. It would ensure that executives will share in the expressed varying degrees of support for
have required compensation practices at long-term risks created by their the 2011 Proposed Rule but also
regulated financial institutions to be decisions. These commenters also requested numerous clarifications and
consistent with three key principles— asserted that the final rule should apply modifications. Many of these
that incentive-based compensation to the full range of important financial commenters raised questions
arrangements should appropriately institutions and cover all the key concerning the 2011 Proposed Rule’s
balance risk and financial rewards, be executives at those institutions. The scope, suggesting that certain types of
compatible with effective risk second type of form letter stated that the institutions be excluded from the
management and controls, and be commenter or the commenter’s family coverage of the final rule. Some of these
supported by strong corporate had been affected by the financial crisis commenters questioned the need for the
governance. The Agencies proposed that that began in 2007, a major cause of excessive compensation prohibition or
financial institutions with $1 billion or which the commenter believed to be requested that the final rule provide
more in assets be required to have faulty pay practices at financial specific standards for determining when
policies and procedures to ensure institutions. These commenters compensation is excessive. Many of
compliance with the requirements of the suggested various methods of improving these commenters also opposed the
rule, and submit an annual report to these practices, including basing 2011 Proposed Rule’s mandatory
their Federal regulator describing the incentive-based compensation on deferral provision, and some asserted
structure of their incentive-based measures of a financial institution’s that the provision was unsupported by
compensation arrangements. safety and stability, such as the empirical evidence and potentially
The 2011 Proposed Rule included two institution’s bond price or the spread on harmful to a covered institution’s ability
additional requirements for ‘‘larger credit default swaps. to attract and retain key employees. In
financial institutions.’’31The first Comments from community groups, addition, many of these commenters
would have required these larger members of Congress, labor federations, asserted that the material risk-taker
financial institutions to defer 50 percent and pension funds generally urged the provision in the 2011 Proposed Rule
of the incentive-based compensation for Agencies to strengthen the proposed was unclear or imposed on the boards
rule and many cited evidence suggesting of directors of covered institutions
S2 31In the 2011 Proposed Rule, the term ‘‘larger that flawed incentive-based duties more appropriately undertaken
SAL covered financial institution’’ for the Federal compensation practices in the financial by the institutions’ management.
OPO Banking Agencies and the SEC meant those covered industry were a major contributing Finally, these commenters expressed
R institutions with total consolidated assets of $50
D with P bwiiltlhio tno toarl mcoonrseo. lFidora ttehde aNsCseUtsA o, fa $ll1 c0r ebdililti ounn ioorn ms ore fTahcetoirr stou gtghees rtieocnesn ti nficnluandceida:l Rcerivsiissi.n g the cthoen c2e0r1n1s Parboopuots tehde Rbuulred.e n and timing of
RO would have been larger covered institutions. For 2011 Proposed Rule’s definition of
G9T082P FH$1Ho mbFiAell ,iL oFonaan nonr B imea nMokraese ww, Foitruhel ddtod htiaeal v Mceo abnces,e oanlni lddaa ratgleeld rF acesodsveeertarsel o df ‘d‘ienficneinntgiv ‘e‘e-xbcaesessdi vceo mcopmenpseantsioatni’o’;n ’’; D. TInhtee rAngaetniocnieasl cDoenvseildoeprmede nts
SK3 institutions. increasing the length of time for or international developments in
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37678 Federal Register/Vol. 81, No. 112/Friday, June 10, 2016/Proposed Rules
developing the 2011 Proposed Rule, Also in 2013, the EBA finalized the is generally consistent with the FSB
mindful that some covered institutions process and criteria for the Principles and Implementation
operate in both domestic and identification of categories of staff who Standards. In Australia,40all deposit-
international competitive have a material impact on the taking institutions and insurers are
environments.32Since the release of the institution’s risk profile (‘‘Identified expected to comply in full with all the
2011 Proposed Rule, a number of Staff’’).38These Identified Staff are requirements in the APRA’s Governance
foreign jurisdictions have introduced subject to provisions related, in standard (which includes remuneration
new compensation regulations that particular, to the payment of variable provisions). APRA also supervises
require certain financial institutions to compensation. The standards cover according to its Remuneration
meet certain standards in relation to remuneration packages for Identified Prudential Practice Guide (guidance). In
compensation policies and practices. In Staff categories and aim to ensure that Canada,41all federally regulated
June 2013, the European Union adopted appropriate incentives for prudent, financial institutions (domestic and
the Capital Requirements Directive long-term oriented risk-taking are foreign) are expected to comply with the
(‘‘CRD’’) IV, which sets out provided. The criteria used to determine FSB Principles and Implementation
requirements for compensation who is identified are both qualitative Standards, and the six Domestic
structures, policies, and practices that (i.e., related to the role and decision- Systemically Important Banks and three
apply to all banks and investment firms making authority of staff members) and largest life insurance companies are
subject to the CRD.33The rules require quantitative (i.e., related to the level of expected to comply with the FSB’s
that up to 100 percent of the variable total gross remuneration in absolute or Principles and Implementation
remuneration shall be subject to in relative terms). Standards. OSFI has also issued a
malus34or clawback arrangements, More recently, in December 2015, the Corporate Governance Guideline that
among other requirements.35The PRA’s EBA released its final Guidelines on contain compensation provisions.42
and the FCA’s Remuneration Code Sound Remuneration Policies.39The Switzerland’s Swiss Financial Markets
requires covered companies to defer 40 final Guidelines on Sound Supervisory Authority has also
to 60 percent of a covered person’s Remuneration Policies set out the published a principles-based rule on
variable remuneration—and recently governance process for implementing remuneration consistent with the FSB
updated their implementing regulations sound compensation policies across the Principles and Implementation
to extend deferral periods to seven years European Union under CRD IV, as well Standards that applies to major banks
for senior executives and to five years as the specific criteria for categorizing and insurance companies.43
for certain other covered persons.36The all compensation components as either As compensation practices continue
PRA also implemented, in July 2014, a fixed or variable pay. The final to evolve, the Agencies recognize that
policy requiring firms to set specific international coordination in this area is
Guidelines on Sound Remuneration
criteria for the application of malus and important to ensure that internationally
Policies also provide guidance on the
clawback. The PRA’s clawback policy active financial organizations are subject
application of deferral arrangements and
requires that variable remuneration be to consistent requirements. For this
pay-out instruments to ensure that
subject to clawback for a period of at reason, the Agencies will continue to
variable pay is aligned with an
least seven years from the date on which work with their domestic and
institution’s long-term risks and that
it is awarded.37 international counterparts to foster
any ex-post risk adjustments can be
sound compensation practices across
applied as appropriate. These
32See 76 FR at 21178. See, e.g., FSB Principles Guidelines will apply as of January 1, the financial services industry.
and Implementation Standards. Importantly, the proposed rule is
2017, and will replace the Guidelines on
33Directive 2013/36/EU of the European consistent with the FSB Principles and
Parliament and of the Council of 26 June 2013 Remuneration Policies and Practices
Implementation Standards.
(effective January 1, 2014). The remuneration rules that were published by the CEBS in
in CRD IV were carried over from CRD III with a December 2010. E. Overview of the Proposed Rule
few additional requirements. CRD III directed the
Committee of European Bank Supervisors Other regulators, including those in The Agencies are re-proposing a rule,
(‘‘CEBS’’), now the European Banking Authority Canada, Australia, and Switzerland, rather than proposing guidelines, to
(‘‘EBA’’), to develop guidance on how it expected have taken either a guidance-based
the compensation principles under CRD III to be establish general requirements
approach to the supervision and
implemented. See CEBS Guidelines on applicable to the incentive-based
Remuneration Policies and Practices (December 10, regulation of incentive-based compensation arrangements of all
2010) (‘‘CEBS Guidelines’’), available at http://eur- compensation or an approach that
covered institutions. Like the 2011
lex.europa.eu/legal-content/EN/TXT/PDF/?uri= combines guidance and regulation that
CELEX:32010L0076&from=EN. Proposed Rule, the proposed rule would
34Malus is defined by the European Union as ‘‘an prohibit incentive-based compensation
arrangement that permits the institution to prevent 38EBA Regulatory Technical Standards on arrangements at covered institutions
vesting of all or part of the amount of a deferred criteria to identify categories of staff whose
remuneration award in relation to risk outcomes or professional activities have a material impact on an that could encourage inappropriate risks
performance.’’ See, PRA expectations regarding the institution’s risk profile under Article 94(2) of by providing excessive compensation or
application of malus to variable remuneration— Directive 2013/36/EU. Directive 2013/36/EU of the that could lead to a material financial
SS2/13 UPDATE, available at: http://www.bankof European Parliament and of the Council of 26 June
england.co.uk/pra/Documents/publications/ss/ 2013 (December 16, 2013), available at https://
2015/ss213update.pdf. www.eba.europa.eu/documents/10180/526386/ 40See APRA, ‘‘Prudential Standard CPS 510
35CRD IV provides that at least 50 percent of total EBA-RTS-2013-11+%28On+identified+ Governance’’ (January 2015), available at http://
S2 variable remuneration should consist of equity- staff%29.pdf/c313a671-269b-45be-a748-29e1c www.apra.gov.au/CrossIndustry/Documents/Final-
POSAL lvianrkiaebdl ein rteemreustnse arantdio ant mleausstt 4b0e pdeerfceerrnetd o of vaenry a 77329eEeB0eA. , ‘‘Guidelines for Sound Remuneration P%r2u8dJeanntuiaalr-yS-t2a0n1d4a%rd2-C9.PpSd-f5; 1A0P-GRoAv,e Prnruadnecnet-ial
RO period of three to five years. In the case of variable Policies under Articles 74(3) and 75(2) of Directive Practice Guide PPG 511—Remuneration (November
ROD with P rminemicnruiemanseuermda t tiaoom n6o 0ou fp naet r prceaeqrntuitc.i ruelda rtloy bhei gdhe faemrroeudn its, the 2R(‘0‘eE1gBu3A/la3 t6Ri/oeEnmU (u EanUned)r a NDtioios n5c7 lGo5su/u2idr0ee1sl3 iun’’n e(sdD’e’e)rc, Aeamvrtabiicellare b2 4l1e5, 0a2 t0o 1f 5) 3fPr0rau,m d2e0ewn09toi)ra,k laF.avrsaapmilxae.b wleo rakt/ hPtatgpe:/s//wadwiw-p.raupdraen.gtoiavl.-au/adi/
T082P 3367SSeeee UPRKA R, e‘‘mPRunAe PraSt7io/n14 R: uClleasw. back’’ (July 2014), h13tt1p4s8:/3/9w/wEBwA.e-bGaL.e-2u0ro1p5-a2.e2u+/Gduoicduemlinenests+/10180/ an4d1 OSeSeF OI SSuFpI eCrovripsoorrya tFe rGamoveewrnoarkn.c e Guidelines
G9 available at http://www.bankofengland.co.uk/pra/ on+Sound+Remuneration+Policies.pdf/1b0f3f99- 42See OSFI Corporate Governance Guidelines.
SK3 Pages/publications/ps/2014/ps714.aspx. f913-461a-b3e9-fa0064b1946b. 43See FINMA Remuneration Circular.
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