The FDIC Board of Directors approved a Notice of Proposed Rulemaking on Incentive-Based Compensation arrangements through a notational vote last week. It was joined by the OCC, NCUA and FHFA. The Proposal aims to implement section 956 of the Dodd-Frank act to help mitigate against inappropriate risks that can stem from incentive-based compensation arrangements.
Initially proposed by federal regulators in 2016, section 956 requires the FDIC, Federal Reserve, OCC, NCUA, FHFA, and the SEC to jointly establish guidelines for compensation-based practices for financial institutions with $1 billion or more in assets. However, it has remained in suspension since then because of the difficulty of implementing a system to regulate the reasonableness of compensation.
Neither the SEC nor the Federal Reserve Board joined in the proposal.
Institutions that meet or exceed the $1 billion threshold will be divided into three categories: Level 1 ($1 billion to $50 billion), Level 2 ($50 billion to $250 billion), and Level 3 ($250 billion or more). The categories will apply to banks, bank holding companies, credit unions, Fannie Mae, Freddie Mac, and Federal Home Loan Banks.
While the $1 billion size threshold would exempt most mutual institutions, their unique compensation profile makes the Proposal unnecessarily burdensome without regulatory acknowledgement of the necessity for mutuals to rely on cash compensation. We are concerned that the peculiar governance structure of mutual banks would invite intrusive regulatory oversight of compensation amounts and practices which are appropriate for public rather than mutual institutions. Moreover, compensation practices have not been shown to have been the contributing cause of the recent bank failures, a stated reason by some proponents of the regulation.
Since the SEC and Federal Reserve Board did not join the other agencies in the Proposal, it is not clear whether it is merely advisory in nature rather than an APA preliminary step in adopting a final joint rule. This is yet another action by the FDIC which has commentators pondering the agency’s internal politics. Comments from the public on the proposed rule will be accepted for 60 days once all six agencies have reached a joint proposal.
