Financial Regulators Propose Rules for Incentive Pay at Large Financial Institutions: For America’s Biggest Financial Institutions, Deferral and Clawback of Executive Incentive Pay Required; For All Covered Institutions with Consolidated Assets of $1 Billion, Expanded Board Oversight of Incentive Pay, Required Implementation of Interagency Guidance on Sound Incentive Pay and Enhanced Pay Reporting to Regulators

Sullivan & Cromwell LLP - February 17, 2011

Last week, the Federal Deposit Insurance Corporation issued a notice of proposed rulemaking for a joint rule to implement the Dodd-Frank Act requirement that the federal financial regulators prohibit, at any financial institution with consolidated assets of at least $1 billion, incentive pay that they determine encourages inappropriate risks. The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Office of Thrift Supervision, the National Credit Union Administration, the Securities and Exchange Commission and the Federal Housing Finance Agency are all expected to propose the same rule.

The Proposed Joint Rule has four main components: (1) prohibiting incentive arrangements that would encourage inappropriate risks by providing excessive compensation; (2) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss; (3) requiring policies and procedures commensurate with the institution’s size, complexity and use of incentive arrangements; and (4) requiring annual reports on incentive structures to the appropriate Agency.

This memorandum summarizes the compensation arrangements, financial institutions and persons covered by the Proposed Joint Rule, highlighting the Proposed Joint Rule’s additional requirements for larger financial institutions and the impact of the Proposed Joint Rule on board oversight of and reporting requirements for incentive-based compensation arrangements.