Proposal brings new scrutiny to executives’ incentives

Six federal agencies proposed a prohibition on incentive-based compensation arrangements that encourage inappropriate risks at financial institutions with assets of more than $1 billion.

The proposal was made to fulfill requirements of Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203. The proposed rules are intended to address a concern that incentive-based compensation packages encouraging excessive risk taking may have contributed to the financial crisis that began in 2007.

All covered institutions would be required to comply with general prohibitions on incentive pay that could encourage inappropriate risks or could lead to a material financial loss. In addition, a requirement to annually document the structure of incentive-based arrangements and retain those records for seven years would apply to all covered institutions. Boards of directors would be required to conduct oversight of the arrangements.

Senior executive officers and employees who are significant risk takers at institutions with assets of $50 billion or more would be subject to additional rules.

The proposal was issued by the SEC, the Federal Reserve, the FDIC, the Federal Housing Finance Agency, the National Credit Union Administration, and the Office of the Comptroller of the Currency.

Comments on the proposal are due by July 22 and can be made at regulations.gov.