To date, five of the six federal regulators (the “Agencies”) charged with promulgating rules under Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) have approved a joint proposed rule (the “2016 Proposal”) intended to curb inappropriate risk-taking at covered financial institutions. Section 956 of Dodd-Frank requires the Agencies to issue jointly regulations or guidelines prohibiting at certain financial institutions incentive-based payment arrangements that the Agencies determine encourage inappropriate risks by certain financial institutions (1) through the provision of excessive compensation or (2) that could lead to material financial loss. In addition, Section 956 requires those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate Agency.

The 2016 Proposal’s restrictions apply to banks and a broader range of financial institutions, including investment advisers, broker-dealers and credit unions. The 2016 Proposal will be applicable to these and other “covered institutions” with average total consolidated assets of over $1 billion. More prescriptive requirements will apply to those institutions with average total consolidated assets greater than or equal to $50 billion but less than $250 billion, and the most rigorous requirements will apply to those covered institutions with average total consolidated assets of $250 billion or more. The 2016 Proposal refers to these larger institutions as Level 2 and Level 1 covered institutions, respectively. Compliance with the 2016 Proposal will be required no later than the beginning of the first calendar quarter that begins 540 days after a final rule is published in the Federal Register, but the rule, as proposed, would not apply to any incentive-based compensation plan with a performance period that began prior to that date. Comments on the 2016 Proposal must be received by the appropriate Agency by July 22, 2016. This publication highlights significant provisions of the 2016 Proposal and some of the challenges covered institutions may face when designing an incentive-based compensation program that balances the rule’s focus on safety and soundness with the desires of shareholders to see pay for performance.

View full memo, The Re-Proposed Rule on Incentive-Based Compensation at Financial Institutions: Overview and Observations