Financial Regulators Begin Rollout of New Proposed Rule on Incentive Pay at Large Financial Institutions: For Executives at America’s Biggest Financial Institutions, Proposal Contemplates 60% of Incentive Pay at Risk for Up to 11 Years

Sullivan & Cromwell LLP - April 21, 2016
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Earlier today, the National Credit Union Administration issued a notice of proposed rulemaking for a new interagency rule on incentive-based compensation that applies to financial institutions with consolidated assets of at least $1 billion.  Today’s new proposal replaces one originally issued 5 years ago in the first half of 2011.  The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency and the Securities and Exchange Commission are all expected to propose the same new rule.

The new proposed rule establishes general qualitative requirements applicable to all covered companies, additional specific requirements for institutions with total consolidated assets of at least $50 billion and further, more stringent requirements for those with total consolidated assets of at least $250 billion.  The general qualitative requirements applicable to all covered institutions include (1) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation, (2) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss, (3) establishing requirements for performance measures to appropriately balance risk and reward, (4) requiring board of director oversight of incentive arrangements and (5) mandating appropriate recordkeeping (which replaces the annual reporting contemplated by the 2011 proposal).

This memorandum provides initial highlights of the substantive requirements of the new proposed rule.  A more detailed memorandum discussing the full scope of the proposed rule will be forthcoming.