Federal financial services regulators have proposed rules that are supposed to keep “covered financial institutions” from adopting compensation systems that encourage executives, employees, directors and principal shareholders from taking excessive risk.
The regulators want to bar incentive-based compensation that is excessive or that “could expose the institution to inappropriate risks that could lead to material financial loss,” according to a version of the proposed incentive compensation rule that appears on the Federal Deposit Insurance Corp. (FDIC) website.
In addition to the FDIC, agencies that plan to propose similar rules include the Office of the Comptroller of the Currency, the Federal Reserve System, the Office of Thrift Supervision, the National Credit Union Administration, the U.S. Securities and Exchange Commission and the Federal Housing Finance Agency.
The proposed rule requires disclosure of incentive-based compensation arrangements for top executives.
It also establishes special rules for institutions with assets of more than $50 billion, and it requires the boards, or committees of boards of large financial institutions, to monitor and oversee such compensation. It also requires deferral of parts of large compensation packages.
The agencies are proposing the rule to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The provision would require boards of institutions with more than $50 billion in assets to identify individuals other than top executives who have the ability to expose the institution to possible losses “that are substantial in relation to the institution’s size, capital, or overall risk tolerance.”
The proposal would require that the board of directors, or a committee thereof, of an institution approve the incentive-based compensation arrangements for non-top executives and maintain documentation of the approvals.
The proposal would be a formal rule, rather than a collection of informal guidance. That status means regulators would have the authority to take enforcement action against an institution if the institution violated the provisions of the regulation.