New York DFS Issues Guidance on Monitoring Incentive Compensation Arrangements: State-Regulated Banking Institutions Advised to Ensure that Incentive Compensation Tied to Employee Performance Indicators Is Subject to Effective Risk Management, Oversight and Control

Sullivan & Cromwell LLP - October 13, 2016

On October 11, the New York Department of Financial Services (the “NYDFS”) issued guidance, announced in a press release by Governor Andrew Cuomo, emphasizing that its regulated banking institutions must ensure that any incentive compensation arrangements tied to employee performance indicators are subject to effective risk management, oversight and control.

The NYDFS release provided that the guidance was prompted by the recent joint enforcement actions by the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and the Los Angeles City Attorney’s Office against Wells Fargo Bank for unsafe or unsound sales practices, including the unauthorized opening of deposit or credit card accounts. According to the NYDFS, the action against Wells Fargo demonstrates that misaligned incentive compensation, coupled with a lack of effective oversight and internal risk controls, may harm customers and adversely affect a banking institution’s safety and soundness.