21170 Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 / Proposed Rules 

DEPARTMENT OF THE TREASURY 

Office of the Comptroller of the 

Currency 

12 CFR Part 42 

[Docket No. OCC–2011–0001] 

RIN 1557–AD39 

FEDERAL RESERVE SYSTEM 

12 CFR Part 236 

[Docket No. R–1410] 

RIN 7100–AD69 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Part 372 

RIN 3064–AD56 

DEPARTMENT OF THE TREASURY 

Office of Thrift Supervision 

12 CFR Part 563h 

[Docket No. OTS–2011–0004] 

RIN 1550–AC49 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Parts 741 and 751 

RIN 3133–AD88 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 248 

[Release No. 34–64140; File no. S7–12–11] 

RIN 3235–AL06 

FEDERAL HOUSING FINANCE 

AGENCY 

12 CFR Part 1232 

RIN 2590–AA42 

Incentive-Based Compensation 

Arrangements 

AGENCY: Office of the Comptroller of the 

Currency, Treasury (OCC); Board of 

Governors of the Federal Reserve 

System (Board); Federal Deposit 

Insurance Corporation (FDIC); Office of 

Thrift Supervision, Treasury (OTS); 

National Credit Union Administration 

(NCUA); U.S. Securities and Exchange 

Commission (SEC); and Federal Housing 

Finance Agency (FHFA). 

ACTION: Proposed Rule. 

SUMMARY: The OCC, Board, FDIC, OTS, 

NCUA, SEC, and FHFA (the Agencies) 

are proposing rules to implement 

section 956 of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act. The proposed rule would require 

the reporting of incentive-based 

compensation arrangements by a 

covered financial institution and 

prohibit incentive-based compensation 

arrangements at a covered financial 

institution that provide excessive 

compensation or that could expose the 

institution to inappropriate risks that 

could lead to material financial loss. 

DATES: Comments must be received by 

May 31, 2011. 

ADDRESSES: Although the Agencies will 

jointly review all the comments 

submitted, it would facilitate review of 

the comments if interested parties send 

comments to the Agency that is the 

appropriate Federal regulator, as 

defined in section 956(e) of the DoddFrank Act for the type of covered 

financial institution addressed in the 

comments. Commenters are encouraged 

to use the title ‘‘Incentive-based 

Compensation Arrangements’’ to 

facilitate the organization and 

distribution of comments among the 

Agencies. Interested parties are invited 

to submit written comments to: 

Office of the Comptroller of the 

Currency: Because paper mail in the 

Washington, DC area and at the OCC is 

subject to delay, commenters are 

encouraged to submit comments by the 

Federal eRulemaking Portal or e-mail, if 

possible. Please use the title ‘‘Incentivebased Compensation Arrangements’’ to 

facilitate the organization and 

distribution of the comments. You may 

submit comments by any of the 

following methods: 

• Federal eRulemaking Portal— 

Regulations.gov: Go to http:// 

www.regulations.gov. Select ‘‘Document 

Type’’ of ‘‘Proposed Rule’’, and in ‘‘Enter 

Keyword or ID Box’’, enter Docket ID 

‘‘OCC–2011–0001’’, and click ‘‘Search.’’ 

On ‘‘View By Relevance’’ tab at bottom 

of screen, in the ‘‘Agency’’ column, 

locate the proposed rule for OCC, in the 

‘‘Action’’ column, click on ‘‘Submit a 

Comment’’ or ‘‘Open Docket Folder’’ to 

submit or view public comments and to 

view supporting and related materials 

for this proposed rule. 

• Click on the ‘‘Help’’ tab on the 

Regulations.gov home page to get 

information on using Regulations.gov, 

including instructions for submitting or 

viewing public comments, viewing 

other supporting and related materials, 

and viewing the docket after the close 

of the comment period. 

• E-mail: 

regs.comments@occ.treas.gov. 

• Mail: Office of the Comptroller of 

the Currency, 250 E Street, SW., Mail 

Stop 2–3, Washington, DC 20219. 

• Fax: (202) 874–5274. 

• Hand Delivery/Courier: 250 E 

Street, SW., Mail Stop 2–3, Washington, 

DC 20219. 

Instructions: You must include ‘‘OCC’’ 

as the agency name and ‘‘Docket ID 

OCC–2011–0001’’ in your comment. In 

general, OCC will enter all comments 

received into the docket and publish 

them on the Regulations.gov Web site 

without change, including any business 

or personal information that you 

provide such as name and address 

information, e-mail addresses, or phone 

numbers. Comments received, including 

attachments and other supporting 

materials, are part of the public record 

and subject to public disclosure. Do not 

enclose any information in your 

comment or supporting materials that 

you consider confidential or 

inappropriate for public disclosure. 

You may review comments and other 

related materials that pertain to this 

proposed rule by any of the following 

methods: 

• Viewing Comments Electronically: 

Go to http://www.regulations.gov. Select 

‘‘Document Type’’ of ‘‘Public 

Submission,’’ in ‘‘Enter Keyword or ID 

Box,’’ enter Docket ID ‘‘OCC–2011– 

0001’’, and click ‘‘Search.’’ Comments 

will be listed under ‘‘View By 

Relevance’’ tab at bottom of screen. If 

comments from more than one agency 

are listed, the ‘‘Agency’’ column will 

indicate which comments were received 

by the OCC. 

• Viewing Comments Personally: You 

may personally inspect and photocopy 

comments at the OCC, 250 E Street, 

SW., Washington, DC. For security 

reasons, the OCC requires that visitors 

make an appointment to inspect 

comments. You may do so by calling 

(202) 874–4700. Upon arrival, visitors 

will be required to present valid 

government-issued photo identification 

and to submit to security screening in 

order to inspect and photocopy 

comments. 

• Docket: You may also view or 

request available background 

documents and project summaries using 

the methods described above. 

Board of Governors of the Federal 

Reserve System: You may submit 

comments, identified by Docket No. R– 

1410 and RIN No. 7100–AD69, by any 

of the following methods: 

• Agency Web Site: http:// 

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm. 


kgrant on DSK8KYBLC1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 / Proposed Rules 21171 

• Federal eRulemaking Portal:http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: 

regs.comments@federalreserve.gov. 

Include the docket number and RIN 

number in the subject line of the 

message. 

• Fax: (202) 452–3819 or (202) 452– 

3102. 

• Mail: Address to Jennifer J. Johnson, 

Secretary, Board of Governors of the 

Federal Reserve System, 20th Street and 

Constitution Avenue, NW., Washington, 

DC 20551. 

All public comments will be made 

available on the Board’s Web site at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm as 

submitted, unless modified for technical 

reasons. Accordingly, comments will 

not be edited to remove any identifying 

or contact information. Public 

comments may also be viewed 

electronically or in paper in Room MP– 

500 of the Board’s Martin Building (20th 

and C Streets, NW.) between 9 a.m. and 

5 p.m. on weekdays. 

Federal Deposit Insurance 

Corporation: You may submit 

comments, identified by RIN number, 

by any of the following methods: 

• Agency Web Site: http:// 

www.FDIC.gov/regulations/laws/ 

federal/propose.html. Follow 

instructions for submitting comments 

on the Agency Web Site. 

• E-mail: Comments@FDIC.gov. 

Include the RIN number on the subject 

line of the message. 

• Mail: Robert E. Feldman, Executive 

Secretary, Attention: Comments, Federal 

Deposit Insurance Corporation, 550 17th 

Street, NW., Washington, DC 20429. 

• Hand Delivery: Comments may be 

hand delivered to the guard station at 

the rear of the 550 17th Street Building 

(located on F Street) on business days 

between 7 a.m. and 5 p.m. 

Instructions: All comments received 

must include the agency name and RIN 

for this rulemaking and will be posted 

without change to http://www.fdic.gov/ 

regulations/laws/Federal/propose.html, 

including any personal information 

provided. 

Office of Thrift Supervision: You may 

submit comments, identified by OTS– 

2011–0004, by any of the following 

methods: 

• Federal eRulemaking Portal— 

Regulations.gov: Go to http:// 

www.regulations.gov and follow the 

directions. 

• E-mail: 

regs.comments@ots.treas.gov. Please 

include OTS–2011–0004 in the subject 

line of the message and include your 

name and telephone number in the 

message. 

• Mail: Regulation Comments, Chief 

Counsel’s Office, Office of Thrift 

Supervision, 1700 G Street, NW., 

Washington, DC 20552, Attention: OTS– 

2011–0004. 

• Facsimile: (202) 906–6518. 

• Hand Delivery/Courier: Guard’s 

Desk, East Lobby Entrance, 1700 G 

Street, NW., from 9 a.m. to 4 p.m. on 

business days, Attention: Regulation 

Comments, Chief Counsel’s Office, 

Attention: OTS–2011–0004. 

• Instructions: All submissions 

received must include the agency name 

and docket number for this rulemaking. 

All comments received will be entered 

into the docket and posted on 

Regulations.gov without change, 

including any personal information 

provided. Comments, including 

attachments and other supporting 

materials received, are part of the public 

record and subject to public disclosure. 

Do not enclose any information in your 

comment or supporting materials that 

you consider confidential or 

inappropriate for public disclosure. 

• Viewing Comments On-Site: You 

may inspect comments at the Public 

Reading Room, 1700 G Street, NW., by 

appointment. To make an appointment 

for access, call (202) 906–5922, send an 

e-mail to public.info@ots.treas.gov, or 

send a facsimile transmission to (202) 

906–6518. (Prior notice identifying the 

materials you will be requesting will 

assist us in serving you.) We schedule 

appointments on business days between 

10 a.m. and 4 p.m. In most cases, 

appointments will be available the next 

business day following the date we 

receive a request. 

National Credit Union 

Administration: You may submit 

comments by any of the following 

methods (please send comments by one 

method only): Federal eRulemaking 

Portal: http://www.regulations.gov. 

Follow the instructions for submitting 

comments. 

• Agency Web site: http:// 

www.ncua.gov/Resources/ 

RegulationsOpinionsLaws/ 

ProposedRegulations.aspx. Follow the 

instructions for submitting comments. 

• E-mail: Address to 

regcomments@ncua.gov. Include ‘‘[Your 

name] Comments on ‘‘Notice of 

Proposed Rulemaking for Incentivebased Compensation Arrangements’’ in 

the e-mail subject line. 

• Fax: (703) 518–6319. Use the 

subject line described above for e-mail. 

• Mail: Address to Mary Rupp, 

Secretary of the Board, National Credit 

Union Administration, 1775 Duke 

Street, Alexandria, Virginia 22314– 

3428. 

• Hand Delivery/Courier: Same as 

mail address. 

• Public Inspection: All public 

comments are available on the agency’s 

Web site at http://www.ncua.gov/ 

Resources/RegulationsOpinionsLaws/ 

ProposedRegulations.aspx as submitted, 

except when not possible for technical 

reasons. Public comments will not be 

edited to remove any identifying or 

contact information. Paper copies of 

comments may be inspected in NCUA’s 

law library at 1775 Duke Street, 

Alexandria, Virginia 22314, by 

appointment weekdays between 9 a.m. 

and 3 p.m. To make an appointment, 

call (703) 518–6546 or send an e-mail to 

OGCMail@ncua.gov. 

Securities and Exchange Commission: 

You may submit comments by the 

following method: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/exorders.shtml); or 

• Send an e-mail to rulecomments@sec.gov Please include File 

Number S7–12–11 on the subject line; 

or 

• Use the Federal eRulemaking Portal 

(http://www.regulations.gov). Follow the 

instructions for submitting comments. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549. 

All submissions should refer to File 

Number S7–12–11. This file number 

should be included on the subject line 

if e-mail is used. To help us process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Internet Web site 

(http://www.sec.gov/rules/ 

proposed.shtml). Comments are also 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F St., NE., 

Washington, DC 20549 on official 

business days between the hours of 10 

a.m. and 3 p.m. All comments received 

will be posted without change; the 

Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. 

Federal Housing Finance Agency: You 

may submit your written comments on 

the proposed rulemaking, identified by 

RIN number 2590–AA42, by any of the 

following methods: 


kgrant on DSK8KYBLC1PROD with PROPOSALS2
21172 Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 / Proposed Rules 

1The Federal banking agencies each have 

adopted guidelines implementing the 

compensation-related and other safety and 

soundness standards in section 39 of the FDIA. See 

12 CFR part 30, Appendix A (OCC); 12 CFR part 

208, Appendix D–1 (Board); 12 CFR part 364, 

Appendix A (FDIC); 12 CFR part 570, Appendix A 

(OTS). 

• E-mail: Comments to Alfred M. 

Pollard, General Counsel, may be sent 

by e-mail at RegComments@fhfa.gov. 

Please include ‘‘RIN 2590–AA42’’ in the 

subject line of the message. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. If 

you submit your comment to the 

Federal eRulemaking Portal, please also 

send it by e-mail to FHFA at 

RegComments@fhfa.gov to ensure 

timely receipt by the Agency. Please 

include ‘‘RIN 2590–AA42’’ in the subject 

line of the message. 

• U.S. Mail, United Parcel Service, 

Federal Express, or Other Mail Service: 

The mailing address for comments is: 

Alfred M. Pollard, General Counsel, 

Attention: Comments/RIN 2590–AA42, 

Federal Housing Finance Agency, 

Fourth Floor, 1700 G Street, NW., 

Washington, DC 20552. 

• Hand Delivery/Courier: The hand 

delivery address is: Alfred M. Pollard, 

General Counsel, Attention: Comments/ 

RIN 2590–AA42, Federal Housing 

Finance Agency, Fourth Floor, 1700 G 

Street, NW., Washington, DC 20552. A 

hand-delivered package should be 

logged at the Guard Desk, First Floor, on 

business days between 9 a.m. and 5 p.m. 

All comments received by the 

deadline will be posted for public 

inspection on the FHFA Web site at 

http://www.fhfa.gov. Copies of all 

comments timely received will be 

available for public inspection and 

copying at the address above on 

government-business days between the 

hours of 10 a.m. and 3 p.m. To make an 

appointment to inspect comments 

please call the Office of General Counsel 

at (202) 414–6924. 

FOR FURTHER INFORMATION CONTACT: 

OCC: Michele Meyer, Assistant Director, 

and Patrick Tierney, Counsel, 

Legislative and Regulatory Activities, 

(202) 874–5090, and Karen Kwilosz, 

Director, Operational Risk Policy, 

(202) 874–5350, Office of the 

Comptroller of the Currency, 250 E 

Street, SW., Washington, DC 20219. 

Board: Michael Waldron, Counsel, (202) 

452–2798, or Amanda Allexon, 

Counsel, (202) 452–3818, Legal 

Division; William F. Treacy, Advisor, 

(202) 452–3859, or Meg Donovan, 

Supervisory Financial Analyst, (202) 

452–7542, Division of Banking 

Supervision and Regulation; Board of 

Governors of the Federal Reserve 

System, 20th and C Streets, NW., 

Washington, DC 20551. 

FDIC: Steven D. Fritts, Associate 

Director, Risk Management Policy 

Branch, DSC, (202) 898–3723; 

Melinda West, Chief, Policy & 

Program Development, DSC, (202) 

898–7221, George Parkerson, Senior 

Policy Analyst, (202) 898–3648; Rose 

Kushmeider, Senior Financial 

Economist, (202) 898–3861; Daniel 

Lonergan, Counsel, (202) 898–6791, 

Rodney Ray, Counsel, (202) 898–3556, 

Federal Deposit Insurance 

Corporation, 550 17th Street, NW., 

Washington, DC 20429. 

OTS: Mary Jo Johnson, Senior Project 

Manager, Examination Programs, 

(202) 906–5739, Richard Bennett, 

Senior Compliance Counsel, 

Regulations and Legislation Division, 

(202) 906–7409; Robyn Dennis, 

Director, Examination Programs, (202) 

906–5751; James Caton, Managing 

Director, Economic and Industry 

Analysis, (202) 906–5680, Office of 

Thrift Supervision, 1700 G Street, 

NW., Washington, DC 20552. 

NCUA: Regina Metz, Staff Attorney, 

Office of General Counsel, (703) 518– 

6561; or Vickie Apperson, Program 

Officer, Office of Examination & 

Insurance, (703) 518–6385, National 

Credit Union Administration, 1775 

Duke Street, Alexandria, Virginia 

22314. 

SEC: Raymond A. Lombardo, Branch 

Chief, Division of Trading & Markets, 

(202) 551–5755; Timothy C. Fox, 

Special Counsel, Division of Trading 

& Markets, (202) 551–5687; Nadya B. 

Roytblat, Assistant Chief Counsel, 

Division of Investment Management, 

(202) 551–6823; or Jennifer R. Porter, 

Attorney-Advisor, Division of 

Investment Management, (202) 551– 

6787, United States Securities and 

Exchange Commission, 100 F Street 

NE., Washington, DC 20549. 

FHFA: Alfred M. Pollard, General 

Counsel, (202) 414–3788 or Patrick J. 

Lawler, Associate Director and Chief 

Economist (202) 414–3746, Federal 

Housing Finance Agency, Fourth 

Floor, 1700 G Street NW., 

Washington, DC 20552. The telephone 

number of the Telecommunications 

Device for the Deaf is (800) 877–8339. 

SUPPLEMENTARY INFORMATION: 

I. Background 

Dodd-Frank Act 

The Dodd-Frank Wall Street Reform 

and Consumer Protection Act (the 

‘‘Dodd-Frank Act’’ or the ‘‘Act’’) (Pub. L. 

111–203, section 956, 124 Stat. 1376, 

2011–2018 (2010)), which was signed 

into law on July 21, 2010, requires the 

Agencies to jointly prescribe regulations 

or guidelines with respect to incentivebased compensation practices at 

covered financial institutions. 

Specifically, section 956 of the DoddFrank Act (codified at 12 U.S.C. 5641) 

requires that the Agencies prohibit 

incentive-based payment arrangements, 

or any feature of any such arrangement, 

at a covered financial institution that 

the Agencies determine encourages 

inappropriate risks by a financial 

institution by providing excessive 

compensation or that could lead to 

material financial loss. Under the Act, a 

covered financial institution also must 

disclose to its appropriate Federal 

regulator the structure of its incentivebased compensation arrangements 

sufficient to determine whether the 

structure provides ‘‘excessive 

compensation, fees, or benefits’’ or 

‘‘could lead to material financial loss’’ to 

the institution. The Dodd-Frank Act 

does not require a covered financial 

institution to report the actual 

compensation of particular individuals 

as part of this requirement. 

The Act defines ‘‘covered financial 

institution’’ to include any of the 

following types of institutions that have 

$1 billion or more in assets: (A) A 

depository institution or depository 

institution holding company, as such 

terms are defined in section 3 of the 

Federal Deposit Insurance Act (‘‘FDIA’’) 

(12 U.S.C. 1813); (B) a broker-dealer 

registered under section 15 of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78o); (C) a credit union, as 

described in section 19(b)(1)(A)(iv) of 

the Federal Reserve Act; (D) an 

investment adviser, as such term is 

defined in section 202(a)(11) of the 

Investment Advisers Act of 1940 (15 

U.S.C. 80b-2(a)(11)); (E) the Federal 

National Mortgage Association (Fannie 

Mae); (F) the Federal Home Loan 

Mortgage Corporation (Freddie Mac); 

and (G) any other financial institution 

that the appropriate Federal regulators, 

jointly, by rule, determine should be 

treated as a covered financial institution 

for these purposes. 

The Act also requires the Agencies to 

ensure that any standards adopted with 

regard to excessive compensation under 

section 956 of the Act are comparable to 

the compensation-related safety and 

soundness standards applicable to 

insured depository institutions under 

section 39 of the FDIA (12 U.S.C. 

1831p– 1(c)),1 and to take the 

compensation standards described in 

section 39 of the FDIA into 

consideration in establishing 


kgrant on DSK8KYBLC1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 / Proposed Rules 21173 

2 Guidance on Sound Incentive Compensation 

Policies, 75 FR 36395 (June 25, 2010), adopted by 

the Federal banking agencies, meaning the OCC, 

Board, FDIC, and OTS. 

3See, e.g., Banking Agency Guidance, supra note 

2. 4 60 FR 35674 (July 10, 1995), as amended at 61 

FR 43948 (Aug. 27, 1996). 5See, e.g., Item 402(s) of Regulation S–K, 17 CFR 

229.402(s), adopted in Securities Act Release No. 

9089 (Dec. 16, 2009), 74 FR 68334 (Dec. 23, 2009). 6 12 CFR 1770.1 (b) (1) requires the FHFA 

Director to prohibit the excessive compensation of 

executive officers. Section 1770.4 provides specific 

details as to the categories of information that are 

required to be submitted to the FHFA pertaining to 

the prohibition of excessive compensation (Sept. 

12, 2001). FHFA’s examination guidance (PG–06– 

002), ‘‘Examination for Compensation Practices,’’ 

sets forth the disclosure requirements pertaining to 

the compensation and benefits programs of Fannie 

Mae and Freddie Mac (together, the Enterprises) 

(Nov. 8, 2006). In carrying out its corporate 

governance requirements, the FHFA is guided by 

the provisions set forth in 12 CFR 1710.13. FHFA’s 

Advisory Bulletin (2009–AB–02), ‘‘Principles for 

Executive Compensation at the Federal Home Loan 

Banks and the Office of Finance,’’ provides 

guidance to the Home Loan Banks on reporting 

requirements (Oct. 27, 2009). FHFA’s proposed rule 

on executive compensation, 74 FR 26989 (June 5, 

2009), includes incentive compensation in its 

prohibition on excessive compensation. For the 

FHFA, the regulated entities are, collectively: the 

Enterprises, the Federal Home Loan Banks, and the 

Office of Finance. 

7See, e.g., 12 U.S.C. 1761a; 12 CFR 701.2 & 12 

CFR part 701 App. A, Art. VII. § 8; 12 CFR 

Continued 

compensation standards under section 

956 of the Act. 

Compensation arrangements are 

critical tools in the successful 

management of financial institutions. 

These arrangements serve several 

important objectives, including 

attracting and retaining skilled staff, 

promoting better organizational and 

individual employee performance, and 

providing retirement security to 

employees. 

At the same time, improperly 

structured compensation arrangements 

can provide executives and employees 

with incentives to take imprudent risks 

that are not consistent with the longterm health of the organization. The 

Agencies believe that flawed incentive 

compensation practices in the financial 

industry were one of many factors 

contributing to the financial crisis that 

began in 2007. 

Shareholders and, for a credit union, 

members of a covered financial 

institution have an interest in aligning 

the interests of managers and other 

employees of the institution with its 

long-term health. Aligning the interests 

of shareholders or members and 

employees, however, is not always 

sufficient to protect the safety and 

soundness of an organization, deter 

excessive compensation, or deter 

behavior that could lead to material 

financial loss at the organization. 

Managers and employees of a covered 

financial institution may be willing to 

tolerate a degree of risk that is 

inconsistent with broader public policy 

goals. In addition, particularly at larger 

institutions, shareholders or members 

may have difficulty effectively 

monitoring and controlling the 

incentive-based compensation 

arrangements throughout the institution 

that may materially affect the 

institution’s risk profile, even with 

increased disclosure provisions. As a 

result, supervision and regulation of 

incentive compensation, as with other 

aspects of financial oversight, can play 

an important role in helping ensure that 

incentive compensation practices at 

covered financial institutions do not 

threaten their safety and soundness, are 

not excessive, or do not lead to material 

financial loss. 

II. Overview of the Proposed Rule 

The Agencies have elected to propose 

rules, rather than guidelines, in order to 

establish general requirements 

applicable to the incentive-based 

compensation arrangements of all 

covered financial institutions 

(‘‘Proposed Rule’’). The Proposed Rule 

would supplement existing rules, 

guidance, and ongoing supervisory 

efforts of the Agencies. 

The Proposed Rule has the following 

components: 

• The Proposed Rule would prohibit 

incentive-based compensation 

arrangements at a covered financial 

institution that encourage executive 

officers, employees, directors, or 

principal shareholders (‘‘covered 

persons’’) to expose the institution to 

inappropriate risks by providing the 

covered person excessive compensation. 

As described further below, consistent 

with the directive of section 956, the 

Agencies propose to use standards 

comparable to those developed under 

section 39 of the FDIA for purposes of 

determining whether incentive-based 

compensation is ‘‘excessive’’ in a 

particular case. 

• The Proposed Rule would prohibit 

a covered financial institution from 

establishing or maintaining any 

incentive-based compensation 

arrangements for covered persons that 

encourage inappropriate risks by the 

covered financial institution that could 

lead to material financial loss. The 

Agencies propose to adopt standards for 

determining whether an incentive-based 

compensation arrangement may 

encourage inappropriate risk-taking that 

are consistent with the key principles 

established for incentive compensation 

in the Interagency Guidance on Sound 

Incentive Compensation Policies 

(‘‘Banking Agency Guidance’’) adopted 

by the Federal banking agencies.2 The 

Proposed Rule would also require 

deferral of a portion of incentive-based 

compensation for executive officers of 

larger covered financial institutions. 

The Proposed Rule would also require 

that, at larger covered financial 

institutions, the board of directors or a 

committee of such a board identify 

those covered persons (other than 

executive officers) that 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 Proposed Rule 

would require that the board of 

directors, or a committee thereof, of the 

institution approve the incentive-based 

compensation arrangement for such 

individuals, and maintain 

documentation of such approval. The 

term ‘‘larger covered financial 

institution’’ for the Federal banking 

agencies and the SEC means those 

covered financial institutions with total 

consolidated assets of $50 billion or 

more. For the NCUA, all credit unions 

with total consolidated assets of $10 

billion or more are larger covered 

financial institutions. For the FHFA, all 

Federal Home Loan Banks with total 

consolidated assets of $1 billion or more 

are larger covered financial institutions. 

• In connection with these 

restrictions, the Proposed Rule would 

require covered financial institutions to 

maintain policies and procedures 

appropriate to their size, complexity, 

and use of incentive-based 

compensation to help ensure 

compliance with these requirements 

and prohibitions. 

• The Proposed Rule also would 

require covered financial institutions to 

provide certain information to their 

appropriate Federal regulator(s) 

concerning their incentive-based 

compensation arrangements for covered 

persons. 

The Proposed Rule would supplement 

existing rules and guidance adopted by 

the Agencies regarding compensation 

and incentive-based compensation.3

These include the Banking Agency 

Guidance, the Standards for Safety and 

Soundness adopted by the Federal 

banking agencies,4 the compensationrelated disclosure requirements adopted 

by the SEC for public companies,5 the 

rules and guidance adopted by the 

FHFA for regulatory oversight of the 

executive compensation practices of its 

regulated entities 6 and the 

compensation rules adopted by the 

NCUA for institutions under its 

supervision.7 Each Agency may issue 


kgrant on DSK8KYBLC1PROD with PROPOSALS2
21174 Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 / Proposed Rules 

701.21(c)(8)(i); 12 CFR 701.23(g) (1); 12 CFR 701.33; 

12 CFR 702.203 & 702.204; 12 CFR 703.17; 12 CFR 

704.19 & 704.20; 12 CFR part 708a; 12 CFR 712.8; 

12 CFR 721.7; 12 CFR part 750; and NCUA 

Examiners Guide Ch. 7 at http://www.ncua.gov/ 

GenInfo/GuidesManuals/examiners_guide/ 

chapters/Chapter07.pdf. 

8Since the Agencies’ proposed rules use 

consistent section numbering, relevant sections are 

cited, for example, as ‘‘§ __.1.’’ 

9These definitions are proposed for purposes of 

administering Section 956 and are not intended to 

affect the interpretation or construction of the same 

or similar terms for purposes of any other statute 

or regulation administered by the Agencies. 

10By its terms, the definition of ‘‘covered 

financial institution’’ in section 956 includes any 

firm that meets the definition of ‘‘investment 

adviser’’ under the Investment Advisers Act of 1940 

(‘‘Investment Advisers Act’’), regardless of whether 

the firm is registered as an investment adviser 

under that Act. Banks and bank holding companies 

are generally excluded from the definition of 

‘‘investment adviser’’ under section 202(a)(11) of the 

Investment Advisers Act. 

11The Office of Finance is a joint agency of the 

twelve Federal Home Loan Banks and is described 

and regulated in the FHFA’s rules at 12 CFR part 

1273. 

supplemental guidance specific to their 

regulated entities, including guidance as 

necessary to clarify the regulatory 

requirements proposed in this 

rulemaking. Covered financial 

institutions supervised by the Federal 

banking agencies should continue to 

consult the Banking Agency Guidance 

for additional information on how to 

balance risk and financial rewards. 

The Agencies propose to make the 

terms of the Proposed Rule, if adopted, 

effective six months after publication of 

the final rule in the Federal Register, 

with annual reports due within 90 days 

of the end of each covered financial 

institution’s fiscal year. The Agencies 

request specific comment on whether 

these dates will provide sufficient time 

for covered financial institutions to 

comply with the rule and, if not, why. 

Commenters are also asked to address 

whether the Agencies should designate 

different compliance dates for different 

types of covered financial institutions, 

or consider designating different 

compliance dates for different parts of 

the Proposed Rule (e.g., disclosure, 

prohibition, and policies and 

procedures). 

A detailed description of the 

Proposed Rule with a request for 

comments is set forth below. Although 

this is a joint-interagency rulemaking, 

each Agency will codify its version of 

the rule in its specified portion of the 

Code of Federal Regulations in order to 

accommodate differences between 

regulated entities as well as other 

applicable statutory and regulatory 

requirements. Any significant 

differences between the Proposed Rules 

issued by individual agencies are noted 

below.8

III. Section-By-Section Description of 

the Proposed Rule 

§ __.1 Authority. Section __.1 provides 

that this rule is issued pursuant to 

section 956 of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (Pub. L. 111–203). Certain Agencies 

also have listed their general rulemaking 

authority in their respective authority 

citations. 

§ __.2 Scope and Purpose. Section 

__.2 provides that this rule applies to a 

covered financial institution that has 

total consolidated assets of $1 billion or 

more that offers incentive-based 

compensation arrangements to covered 

persons. This section also notes that this 

rule would in no way limit the authority 

of any Agency under other provisions of 

applicable law and regulations. 

§ __.3 Definitions. Section __.3 defines 

the various terms used in the Proposed 

Rule. If a term is defined in section 956 

of the Dodd-Frank Act, the Proposed 

Rule generally incorporates that 

definition.9

Compensation. The Proposed Rule 

defines ‘‘compensation’’ to mean all 

direct and indirect payments, fees or 

benefits, both cash and non-cash, 

awarded to, granted to, or earned by or 

for the benefit of, any covered person in 

exchange for services rendered to the 

covered financial institution, including, 

but not limited to, payments or benefits 

pursuant to an employment contract, 

compensation or benefit agreement, fee 

arrangement, perquisite, stock option 

plan, postemployment benefit, or other 

compensatory arrangement. For credit 

unions, the definition of compensation 

specifically excludes reimbursement for 

reasonable and proper costs incurred by 

covered persons in carrying out official 

credit union business; provision of 

reasonable health, accident and related 

types of personal insurance protection; 

and indemnification. This is consistent 

with NCUA’s regulations at 12 CFR 

701.33. The Agencies seek comment on 

this proposed definition. 

Covered Financial Institution. As 

noted above, only ‘‘covered financial 

institutions’’ that have total consolidated 

assets of $1 billion or more would be 

subject to the Proposed Rule. Under the 

Proposed Rule, a ‘‘covered financial 

institution’’ would include: 

• In the case of the OCC, a national 

bank and Federal branch and agency of 

a foreign bank; 

• In the case of the Board, a state 

member bank; a bank holding company; 

a state-licensed uninsured branch or 

agency of a foreign bank; and the U.S. 

operations of a foreign bank with more 

than $1 billion of U.S. assets that is 

treated as a bank holding company 

pursuant to section 8(a) of the 

International Banking Act of 1978 (12 

U.S.C. 3106(a)). A covered financial 

institution includes the subsidiaries of 

the institution; 

• In the case of the FDIC, a state 

nonmember bank and an insured U.S. 

branch of a foreign bank; 

• In the case of the OTS, a savings 

association as defined in 12 U.S.C. 

1813(b) and a savings and loan holding 

company as defined in 12 U.S.C. 

1467a(a). (A covered financial 

institution also includes an operating 

subsidiary of a Federal savings 

association as defined in 12 CFR 559.2.) 

The Board, OCC, and FDIC will assume 

supervisory and rulemaking 

responsibility for these entities on the 

transfer date provided in Title III of the 

Dodd-Frank Act. These agencies expect 

to adopt, or incorporate, as appropriate, 

any final rule adopted by OTS as part 

of this rulemaking for relevant covered 

financial institutions that come under 

their respective supervisory authority 

after the transfer date; 

• In the case of the NCUA, a credit 

union, as described in section 

19(b)(1)(A)(iv) of the Federal Reserve 

Act, meaning an insured credit union as 

defined under 12 U.S.C. 1752(7) or 

credit union eligible to make 

application to become an insured credit 

union under 12 U.S.C. 1781. Instead of 

the term ‘‘covered financial institution’’, 

the NCUA uses the term ‘‘credit union’’ 

throughout its proposed rule; 

• In the case of the SEC, a brokerdealer registered under section 15 of the 

Securities Exchange Act of 1934, 15 

U.S.C. 78o; and an investment adviser, 

as such term is defined in section 

202(a)(11) of the Investment Advisers 

Act of 1940, 15 U.S.C. 80b–2(a)(11); 10

• The FHFA, because it proposes to 

extend the requirements of the rule to 

the Federal Home Loan Bank System’s 

Office of Finance,11 which is not a 

financial institution, is not proposing to 

use the term ‘‘covered financial 

institution,’’ but rather the term 

‘‘covered entity,’’ defined to mean 

Fannie Mae, Freddie Mac, the Federal 

Home Loan Banks, and the Office of 

Finance. 

As indicated in the above listing, the 

Agencies propose to expand the 

definition of a covered financial 

institution beyond those specifically 

identified in section 956, as authorized 

by section 956(e)(2)(G) of the DoddFrank Act. Consistent with the principle 

of national treatment and equality of 

competitive opportunity, the Agencies 

propose to include as covered financial 

institutions the uninsured branches and 


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12See 12 U.S.C. 1813(c)(3) and 1818(b)(4). 

13The Office of Finance is an agent of the Federal 

Home Loan Banks in issuing the hundreds of 

billions of dollars’ worth of Federal Home Loan 

Bank System obligations that are outstanding at any 

time. It is not a financial institution, but because of 

its critical role in the mortgage finance system, it 

is proposed to be made subject to the provisions of 

the Proposed Rule that apply to financial 

institutions with assets of over $50 billion. Because 

it is not a financial institution and hence not within 

the scope of section 956, FHFA bases its authority 

over the Office of Finance for this purpose not on 

section 956 but on the Federal Housing Enterprises 

Financial Safety and Soundness Act, which in 

section 1311(b)(2) (12 U.S.C. 4511(b)(2)) grants 

FHFA general regulatory authority over the Office 

of Finance. 

14As discussed previously, the term ‘‘larger 

covered financial institution’’ for the Federal 

banking agencies and the SEC means those covered 

financial institutions with total consolidated assets 

of $50 billion or more. For the NCUA, all credit 

unions with total consolidated assets of $10 billion 

or more are larger covered financial institutions. For 

the FHFA, Fannie Mae, Freddie Mac, and all of the 

Federal Home Loan Banks with total consolidated 

assets of $1 billion or more are larger covered 

financial institutions. In addition, the FHFA 

proposes to make the same requirements applicable 

to the Office of Finance. 

15For the FHFA, the Safety and Soundness Act 

of 1992, as reflected in 12 CFR 1770.3 (g)–(1), 

defines the term Executive Officer to mean, for 

Fannie Mae and Freddie Mac: The Chairman of the 

Board of Directors, chief executive officer, chief 

financial officer, chief operating officer, president, 

vice chairman, any executive vice president, and 

any individual who performs functions similar to 

such positions whether or not the individual has an 

official title; and any senior vice president or other 

individual with similar responsibilities, without 

regard to title: (A) Who is in charge of a principal 

business unit, division or function, or (B) who 

reports directly to the chairman of the board of 

directors, vice chairman, president or chief 

operating officer. The Proposed Rule adopts a 

modified version of the definitions for Fannie Mae 

and Freddie Mac, and a definition for the Federal 

Home Loan Banks and for the Office of Finance that 

the FHFA has determined is appropriate for them. 

agencies of a foreign bank, as well as the 

other U.S. operations of foreign banking 

organizations that are treated as bank 

holding companies pursuant to section 

8(a) of the International Banking Act of 

1978. These offices and operations 

currently are subject to the Banking 

Agency Guidance, and are subject to 

section 8 of the FDIA, which prohibits 

institutions from engaging in unsafe or 

unsound practices to the same extent as 

insured depository institutions and 

bank holding companies.12

The Agencies also propose including 

the Federal Home Loan Banks because 

they pose similar risks and should be 

subject to the same regulatory regime. 

FHFA also proposes to subject the 

Office of Finance to the Proposed Rule, 

using authority other than section 956.13

Commenters are specifically asked to 

address whether there are there other 

types of financial institutions, such as a 

credit union service organization 

(‘‘CUSO’’), that the Agencies should treat 

as a covered financial institution to 

better promote the purpose of section 

956 and competitive equity. Currently 

no CUSOs wholly owned by a federally 

insured credit union have total 

consolidated assets of $1 billion or 

more. 

Covered Person. Only incentive-based 

compensation paid to ‘‘covered persons’’ 

would be subject to the requirements of 

this Proposed Rule. A ‘‘covered person’’ 

would be any executive officer, 

employee, director, or principal 

shareholder of a covered financial 

institution. No specific categories of 

employees are excluded from the scope 

of the Proposed Rule, although it is the 

underlying purpose of this rulemaking 

to address those incentive-based 

compensation arrangements for covered 

persons or groups of covered persons 

that encourage inappropriate risk 

because they provide excessive 

compensation or pose a risk of material 

financial loss to a covered financial 

institution. Accordingly, as will be 

discussed later in this SUPPLEMENTARY

INFORMATION section, certain 

prohibitions in the Proposed Rule apply 

only to a subset of covered persons. As 

a result, the proposal contains separate 

definitions of director, executive officer, 

and principal shareholder. For Federal 

credit unions, only one director, if any, 

may be considered a covered person 

since, under the Federal Credit Union 

Act section 112 (12 U.S.C. 1761a) and 

NCUA’s regulations at 12 CFR 701.33, 

only one director may be compensated 

as an officer of the board. 

Director and Board of Directors. The 

Proposed Rule defines ‘‘director’’ of a 

covered financial institution as a 

member of the board of directors of the 

covered financial institution or of a 

board or committee performing a similar 

function to a board of directors. For 

NCUA’s proposed rule, the director is 

always a member of the credit union’s 

board of directors so the definition is 

omitted. The Proposed Rule also defines 

‘‘board of directors’’ as the governing 

body of any covered financial 

institution performing functions similar 

to a board of directors. For a foreign 

banking organization, ‘‘board of 

directors’’ refers to the relevant senior 

management or oversight body for the 

firm’s U.S. branch, agency or operations, 

consistent with the foreign banking 

organization’s overall corporate and 

management structure. The Agencies 

seek comment on these proposed 

definitions. 

Executive Officer. As discussed in 

more detail later in this Supplementary 

Information, the Proposed Rule would 

apply certain restrictions to the 

incentive-based compensation of 

‘‘executive officers’’ of larger covered 

financial institutions.14 The Proposed 

Rule defines ‘‘executive officer’’ of a 

covered financial institution as a person 

who holds the title or performs the 

function (regardless of title, salary or 

compensation) of one or more of the 

following positions: President, chief 

executive officer, executive chairman, 

chief operating officer, chief financial 

officer, chief investment officer, chief 

legal officer, chief lending officer, chief 

risk officer, or head of a major business 

line.15

• The Agencies seek comment on 

whether the types of positions identified 

in this proposed definition are 

appropriate, whether additional 

positions should be included, or if 

certain positions should be removed. 

• Should the Agencies define ‘‘head 

of a major business line?’’ 

Incentive-based Compensation. 

Consistent with section 956 of the 

Dodd-Frank Act, the Proposed Rule 

would apply only to incentive-based 

compensation arrangements. The 

Proposed Rule defines ‘‘incentive-based 

compensation’’ to mean any variable 

compensation that serves as an 

incentive for performance. The 

definition is broad and principles-based 

to address the objectives of section 956 

in a manner that provides for flexibility 

as forms of compensation evolve. The 

form of payment, whether it is cash, an 

equity award, or other property, does 

not affect whether compensation meets 

the definition of ‘‘incentive-based 

compensation.’’ 

There are types of compensation that 

would not fall within the scope of this 

definition. Generally, compensation that 

is awarded solely for, and the payment 

of which is solely tied to, continued 

employment (e.g., salary) would not be 

considered incentive-based 

compensation. Similarly, a 

compensation arrangement that 

provides rewards solely for activities or 

behaviors that do not involve risk-taking 

(for example, payments solely for 

achieving or maintaining a professional 

certification or higher level of 

educational achievement) would not be 

considered incentive-based 

compensation under the proposal. In 

addition, the Agencies do not envision 

that this definition would include 

compensation arrangements that are 

determined based solely on the covered 

person’s level of fixed compensation 

and do not vary based on one or more 

performance metrics (e.g., employer 

contributions to a 401(k) retirement 

savings plan computed based on a fixed 

percentage of an employee’s salary). The 


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16The 10 percent threshold used in the definition 

of ‘‘principal shareholder’’ is also used in a number 

of bank regulatory contexts. See e.g., 12 CFR 

215.2(m), 12 CFR 225.2(n)(2), 12 CFR 225.41(c)(2). 

17See Rules Implementing Amendments to the 

Investment Advisers Act of 1940, Investment 

Advisers Release No. 3110, nn. 194–196 and related 

text (Nov. 19, 2010) 75 FR 77052 (Dec. 10, 2010). 

18Fannie Mae, Freddie Mac, and the Federal 

Home Loan Banks are all far larger than the $1 

billion asset threshold in section 956, while the 

FHFA is basing its regulatory authority over the 

Office of Finance on a different statute. And, for 

policy reasons, the FHFA is proposing not to 

distinguish ‘‘larger’’ entities from others for 

purposes of this rule. 

proposed definition also would not 

include dividends paid and 

appreciation realized on stock or other 

equity instruments that are owned 

outright by a covered person. However, 

stock or other equity instruments 

awarded to a covered person under a 

contract, arrangement, plan, or benefit 

would not be considered owned 

outright while subject to any vesting or 

deferral arrangement (irrespective of 

whether such deferral is mandatory). 

The Agencies request comment 

generally on this proposed definition. 

Comment is also requested on the 

following questions: 

• Is the definition of incentive-based 

compensation sufficiently broad to 

include all types of compensation that 

should be covered under the rule? 

• Are there any particular forms of 

compensation that should be 

specifically designated as incentivebased compensation? 

• Are there any other forms of 

compensation that the Agencies should 

clarify are not incentive-based 

compensation? 

Principal Shareholder. Under the 

Proposed Rule, a ‘‘principal 

shareholder’’ means an individual that 

directly or indirectly, or acting through 

or in concert with one or more persons, 

owns, controls, or has the power to vote 

10 percent or more of any class of voting 

securities of a covered financial 

institution.16 The Agencies request 

comment on this proposed definition. 

The NCUA’s proposed rule does not 

include this definition since credit 

unions are not-for-profit financial 

cooperatives with member owners. 

Total Consolidated Assets. As 

provided in section 956, the Proposed 

Rule would apply to all covered 

financial institutions that have total 

consolidated assets of $1 billion or 

more. Additional requirements would 

apply to certain larger covered financial 

institutions. With the exception of the 

FHFA, the Agencies have specified how 

total consolidated assets should be 

calculated in their agency specific rule 

text. 

• OCC: Total consolidated assets 

means (i) for a national bank, 

calculating the average of the total assets 

reported in the bank’s four most recent 

Consolidated Reports of Condition and 

Income (‘‘Call Report’’) and (ii) for a 

Federal branch and agency, calculating 

the average of the total assets reported 

in the Federal branch or agency’s four 

most recent Reports of Assets and 

Liabilities of U.S. Branches and 

Agencies of Foreign Banks—FFIEC 002. 

• Board: For a state member bank, 

total consolidated assets as determined 

based on the average of the bank’s four 

most recent Consolidated Reports of 

Condition and Income (‘‘Call Report’’); 

for a bank holding company, total 

consolidated assets as determined based 

on the average of the company’s four 

most recent Consolidated Financial 

Statements for Bank Holding Companies 

(‘‘FR Y–9C’’); for a state-licensed 

uninsured branch or agency of a foreign 

bank, total consolidated assets as 

determined based on the average of the 

branch or agency’s four most recent 

Reports of Assets and Liabilities of U.S. 

Branches and Agencies of Foreign 

Banks—FFIEC 002; and for the U.S. 

operations of a foreign bank, total 

consolidated U.S. assets as determined 

by the Board. 

• FDIC: For state nonmember banks, 

asset size would be determined by 

calculating the average of the total assets 

reported in the institution’s four most 

recent Call Reports. For insured U.S. 

branches of foreign banks, asset size will 

be determined by calculating the 

average of the total assets reported in 

the branch’s four most recent Reports of 

Assets and Liabilities of U.S. Branches 

and Agencies of Foreign Banks. 

• OTS: For covered financial 

institutions regulated by the OTS, asset 

size will be determined by calculating 

the average of total assets reported in 

the institution’s four most recent Thrift 

Financial Reports. 

• NCUA: For credit unions, asset size 

will be determined by calculating the 

average of the total assets reported in 

the credit union’s four most recent 5300 

Call Reports. 

• SEC: For brokers or dealers 

registered with the SEC, asset size 

would be determined by the total 

consolidated assets reported in the 

firm’s most recent year-end audited 

Consolidated Statement of Financial 

Condition filed pursuant to Rule 17a–5 

under the Securities Exchange Act of 

1934. For investment advisers, asset size 

would be determined by the adviser’s 

total assets shown on the balance sheet 

for the adviser’s most recent fiscal year 

end. The proposed method of 

calculation for investment advisers is 

consistent with the SEC’s recent 

proposal that each investment adviser 

filing Form ADV Part 1A indicate 

whether the adviser had $1 billion or 

more in ‘‘assets,’’ defined as the total 

assets shown on the balance sheet for 

the adviser’s most recent fiscal year 

end.17 In connection with that proposal, 

the SEC requested comment on the 

reporting requirement and the proposed 

method that advisers would use to 

determine the amount of their assets 

(i.e., total assets as shown on the 

adviser’s balance sheet). Commenters 

are asked to provide additional 

comments on the proposed method of 

determining asset size for investment 

advisers, and specifically to address 

whether the determination of total 

assets should be further tailored for 

certain types of advisers, such as 

advisers to hedge funds or private 

equity funds, and if so, why and in what 

manner. 

• FHFA: The FHFA is not including 

a definition of total consolidated assets 

in its proposed rule because it is 

proposing to make all requirements of 

the rule applicable to all the entities it 

regulates without regard to asset size.18

The Agencies believe that by 

generally establishing a rolling average 

for asset size (with the exception of the 

SEC and the FHFA), the frequency that 

an institution may fall in or out of 

covered financial institution status 

would be minimized. If a covered 

financial institution has fewer than four 

reports, the institution must average 

total assets from its existing reports for 

purposes of determining total 

consolidated assets. If a covered 

financial institution has a mix of two or 

more different types of reports covering 

the relevant period, those should be 

averaged for purposes of determining 

asset size (e.g., an institution with two 

Call Reports and two Thrift Financial 

Reports as its four most recent reports 

would have its total assets from all four 

reports averaged). 

Should all of the Agencies use a 

uniform method to determine whether 

an institution has $1 billion or more in 

assets? If so, what would commenters 

suggest as such a uniform method? If 

different calculations are required for 

each type of institution, should any of 

the Agencies define total consolidated 

assets differently than the proposed 

calculations described above? 

§ ll.4 Required Reports. Section 

956(a)(1) of the Dodd-Frank Act requires 

that a covered financial institution 

submit an annual report to its 


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19NCUA would likely consult with the 

appropriate state regulator in cases involving a 

state-chartered credit union. 

20The Freedom of Information Act (‘‘FOIA’’) 

provides at least two pertinent exemptions under 

which the Agencies have authority to withhold 

certain information. FOIA Exemption 4 provides an 

exemption for ‘‘trade secrets and commercial or 

financial information obtained from a person and 

privileged or confidential.’’ 5 U.S.C. 552(b)(4). FOIA 

Exemption 8 provides an exemption for matters that 

are ‘‘contained in or related to examination, 

operating, or condition reports prepared by, on 

behalf of, or for the use of an agency responsible 

for the regulation or supervision of financial 

institutions.’’ 5 U.S.C. 552(b)(8). 

appropriate Federal regulator disclosing 

the structure of its incentive-based 

compensation arrangements that is 

sufficient to determine whether the 

incentive-based compensation structure 

provides covered persons with 

excessive compensation, fees, or 

benefits, or could lead to material 

financial loss to the covered financial 

institution. In order to fulfill this 

requirement, the Proposed Rule would 

establish the general rule that a covered 

financial institution must submit a 

report annually to its appropriate 

regulator or supervisor in a format 

specified by its appropriate Federal 

regulator that describes the structure of 

the covered financial institution’s 

incentive-based compensation 

arrangements for covered persons. The 

report must contain: 

(1) A clear narrative description of the 

components of the covered financial 

institution’s incentive-based 

compensation arrangements applicable 

to covered persons and specifying the 

types of covered persons to which they 

apply; 

(2) A succinct description of the 

covered financial institution’s policies 

and procedures governing its incentivebased compensation arrangements for 

covered persons; 

(3) For larger covered financial 

institutions, a succinct description of 

any specific incentive compensation 

policies and procedures for the 

institution’s executive officers, and 

other covered persons who the board, or 

a committee thereof determines under 

§ __.5(b)(3)(ii) of the Proposed Rule 

individually 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; 

(4) Any material changes to the 

covered financial institution’s incentivebased compensation arrangements and 

policies and procedures made since the 

covered financial institution’s last 

report was submitted; and 

(5) The specific reasons why the 

covered financial institution believes 

the structure of its incentive-based 

compensation plan does not encourage 

inappropriate risks by the covered 

financial institution by providing 

covered persons with excessive 

compensation or incentive-based 

compensation that could lead to 

material financial loss to the covered 

financial institution. 

In developing the proposed reporting 

provisions, the Agencies have taken into 

account that substantially all the 

covered financial institutions are 

already supervised and/or subject to 

examination by one or more of the 

Agencies. Accordingly, in the Proposed 

Rule, the Agencies have tailored the 

annual reporting requirement to the 

types of information that would most 

efficiently assist the relevant Agency in 

determining whether there are any areas 

of potential concern with respect to the 

structure of the covered financial 

institution’s incentive-based 

compensation arrangements. Generally, 

each Agency has reporting, examination 

and enforcement authority for 

substantially all of the covered financial 

institutions under its respective 

jurisdiction that the Agency may use if 

the information provided under section 

956 were to indicate that the structure 

of a covered financial institution’s 

incentive-based compensation 

arrangements may provide excessive 

compensation or encourage 

inappropriate risk-taking.19 In this way, 

the Proposed Rule seeks to achieve the 

objective of section 956 in a manner that 

limits unnecessary reporting burden on 

covered financial institutions and 

leverages the existing supervisory 

framework for institutions. 

The Agencies note that they have 

intentionally chosen phrases like ‘‘clear 

narrative description’’ and ‘‘succinct 

description’’ to describe the disclosures 

being sought. The Agencies also note 

that the use of the word ‘‘specific’’ in the 

Proposed Rule is designed to elicit 

statements that are direct and 

meaningful explanations of why a 

covered financial institution believes its 

incentive-based compensation plan 

properly addresses the ‘‘excessive 

compensation’’ and ‘‘material financial 

loss’’ components of section 956. These 

provisions are designed to help ensure 

that covered financial institutions will 

provide the Agencies with a streamlined 

set of materials that will help the 

Agencies promptly and effectively 

identify and address any areas of 

concern, rather than with voluminous 

materials that may obfuscate the actual 

structure and likely effects of an 

institution’s incentive-based 

compensation arrangements. Further, in 

light of the nature of the information 

that will be provided to the Agencies 

under § __.4 of the Proposed Rule, and 

the purposes for which the Agencies are 

requiring the information, the Agencies 

generally will maintain the 

confidentiality of the information 

submitted to the Agencies, and the 

information will be nonpublic, to the 

extent permitted by law.20 The nature of 

the reported information likely will be 

sensitive for a variety of reasons, 

including competitive reasons. 

The volume and detail of information 

provided annually by a covered 

financial institution should be 

commensurate with the size and 

complexity of the institution, as well as 

the scope and nature of its incentivebased compensation arrangements. As 

such, the Agencies expect that the 

volume and detail of information 

provided by a large, complex institution 

that uses incentive-based arrangements 

to a significant degree would be 

substantially greater than that submitted 

by a smaller institution that has only a 

few incentive-based compensation 

arrangements or arrangements that affect 

only a limited number of covered 

persons. 

The Agencies request comment on all 

aspects of the reporting provisions in 

the Proposed Rule. Specifically, the 

Agencies request comment on the 

following: 

• Does the Proposed Rule fulfill the 

requirement to obtain meaningful and 

useful descriptions of incentive-based 

compensation arrangements for 

supervisory and compliance purposes? 

• Does the Proposed Rule impose a 

reasonable burden and minimize the 

potential for voluminous boilerplate 

disclosure? 

• Is the language in the Proposed 

Rule sufficiently clear in describing the 

kinds of information the Agencies 

intend to solicit from covered financial 

institutions? 

• Are there simpler and less 

burdensome methods of reporting to the 

Agencies that would still be sufficiently 

robust to help the Agencies assess 

whether the institution’s compensation 

arrangements appropriately balance risk 

and financial rewards? For example, 

would setting up an electronic means of 

filing the required disclosure lessen the 

burden on covered financial 

institutions, and are there specific 

factors the Agencies should consider in 

developing such a disclosure 

mechanism? 

• Are there any additional types of 

information that the Agencies should 

solicit in order to more accurately assess 

whether incentive-based compensation 


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21178 Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 / Proposed Rules 

21See, e.g., Banking Agency Guidance. 

22Financial Stability Board, FSF Principles for 

Sound Compensation Practices, Basel, Switzerland 

(April 2009); Financial Stability Board, FSB 

Principles for Sound Compensation Practices: 

Implementation Standards, Basel, Switzerland 

(September 2009). 

arrangements are consistent with the 

objectives of section 956? 

• Should the Agencies consider 

modifying the Proposed Rule to require 

covered financial institutions to update 

their incentive-based compensation 

disclosure—between annual disclosure 

cycles—if any material changes to their 

respective incentive-based 

compensation plans occur? 

§ __.5 Prohibitions. Section __.5 of the 

Proposed Rule would implement 

section 956(b) of the Dodd-Frank Act by 

prohibiting a covered financial 

institution from having incentive-based 

compensation arrangements that may 

encourage inappropriate risks (a) by 

providing excessive compensation or (b) 

that could lead to material financial loss 

to the covered financial institution. 

Consistent with section 956(c), the 

Proposed Rule also would establish 

standards for determining whether an 

incentive-based compensation 

arrangement violates these prohibitions. 

Excessive Compensation. The 

Proposed Rule would establish a general 

rule that a covered financial institution 

must not establish or maintain any type 

of incentive-based compensation 

arrangement, or any feature of any such 

arrangement, that encourages 

inappropriate risks by the covered 

financial institution by providing a 

covered person with excessive 

compensation. As noted previously, 

section 956 requires the Agencies to 

ensure that any compensation standards 

established under section 956 are 

comparable to those established under 

section 39 of the FDIA. In light of this 

directive, the Proposed Rule includes 

standards for determining whether an 

incentive-based compensation 

arrangement provides excessive 

compensation that are comparable to, 

and based on, the standards established 

under section 39 of the FDIA. 

Specifically, under the Proposed Rule, 

incentive-based compensation for a 

covered person would be considered 

excessive when amounts paid are 

unreasonable or disproportionate to, 

among other things, the amount, nature, 

quality, and scope of services performed 

by the covered person. In making such 

a determination, the Agencies will 

consider: 

(1) The combined value of all cash 

and non-cash benefits provided to the 

covered person; 

(2) The compensation history of the 

covered person and other individuals 

with comparable expertise at the 

covered financial institution; 

(3) The financial condition of the 

covered financial institution; 

(4) Comparable compensation 

practices at comparable institutions, 

based upon such factors as asset size, 

geographic location, and the complexity 

of the institution’s operations and 

assets; 

(5) For postemployment benefits, the 

projected total cost and benefit to the 

covered financial institution; 

(6) Any connection between the 

individual and any fraudulent act or 

omission, breach of trust or fiduciary 

duty, or insider abuse with regard to the 

covered financial institution; and 

(7) Any other factors the Agency 

determines to be relevant. 

The Agencies request comment on 

these standards, including comment on 

the appropriate factors to consider when 

evaluating comparable compensation 

practices at comparable institutions. 

Should additional factors be included, 

such as the nature of the operations at 

the comparable institutions? 

Inappropriate Risks that May Lead to 

Material Financial Loss. Section 

956(b)(2) of the Act requires the 

Agencies to adopt regulations or 

guidelines that prohibit any type of 

incentive-based payment arrangement, 

or any feature of any such arrangement, 

that the Agencies determine encourages 

inappropriate risks by a covered 

financial institution that could lead to 

material financial loss to the covered 

institution. Section 39 of the FDIA does 

not include standards for determining 

whether compensation arrangements 

may encourage inappropriate risks that 

could lead to material financial loss. 

Accordingly the Agencies have 

considered the language and purpose of 

section 956, existing supervisory 

guidance that addresses incentive-based 

compensation arrangements that may 

encourage excessive risk-taking,21 the 

Principles for Sound Compensation 

Practices and the related 

Implementation Standards adopted by 

the Financial Stability Board,22 and 

other relevant material in considering 

how to implement this aspect of section 

956. 

As an initial matter, the Agencies note 

that section 956 is focused on incentivebased compensation arrangements that 

could lead to material financial loss to 

a covered financial institution. 

Accordingly, this prohibition would 

apply only to those incentive-based 

compensation arrangements for 

individual covered persons, or groups of 

covered persons, whose activities may 

expose the covered financial institution 

to material financial loss. Such covered 

persons include: 

• Executive officers and other 

covered persons who are responsible for 

oversight of the covered financial 

institution’s firm-wide activities or 

material business lines; 

• Other individual covered persons, 

including non-executive employees, 

whose activities may expose the covered 

financial institution to material 

financial loss (e.g., traders with large 

position limits relative to the covered 

financial institution’s overall risk 

tolerance); and 

• Groups of covered persons who are 

subject to the same or similar incentivebased compensation arrangements and 

who, in the aggregate, could expose the 

covered financial institution to material 

financial loss, even if no individual 

covered person in the group could 

expose the covered financial institution 

to material financial loss (e.g., loan 

officers who, as a group, originate loans 

that account for a material amount of 

the covered financial institution’s credit 

risk). 

To implement section 956(b)(2) of the 

Act, § __.5(b)(1) of the Proposed Rule 

would prohibit a covered financial 

institution from establishing or 

maintaining any type of incentive 

compensation arrangement, or any 

feature of any such arrangement, for 

these covered persons or groups of 

covered persons, that could lead to 

material financial loss to the covered 

financial institution. Section __.5(b)(2) 

of the Proposed Rule provides that an 

incentive-based compensation 

arrangement established or maintained 

by a covered financial institution for 

one or more covered persons does not 

comply with § __.5(b)(1) unless it: 

• Balances risk and financial rewards, 

for example by using deferral of 

payments, risk adjustment of awards, 

reduced sensitivity to short-term 

performance, or longer performance 

periods; 

• Is compatible with effective 

controls and risk management; and 

• Is supported by strong corporate 

governance. 

These three standards are consistent 

with the principles for sound 

compensation practices in the Banking 

Agency Guidance. 

The following describes these 

proposed standards in greater detail. In 

order to help ensure that the incentivebased compensation arrangements of 

covered financial institutions are 

consistent with their standards, § __.6 of 

the Proposed Rule would require that 

covered financial institutions establish 

and maintain policies and procedures 

related to these standards. 


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23See Banking Agency Guidance at 36407. 24See Banking Agency Guidance at 36407. 

25See Banking Agency Guidance at 36409. 

26See Banking Agency Guidance at 36410–11. 

Balance of Risk and Financial Rewards 

Incentive-based compensation 

arrangements typically attempt to 

encourage actions that result in greater 

revenue or profit for the covered 

financial institution. However, short-run 

revenue or profit can often diverge 

sharply from actual long-run profit 

because risk outcomes may become 

clear only over time. Activities that 

carry higher risk typically yield higher 

short-term revenue, and a covered 

person who is given incentives to 

increase short-term revenue or profit, 

without regard to risk, will naturally be 

attracted to opportunities to expose the 

institution to more risk.23

Accordingly, to be consistent with 

section 956, incentive-based 

compensation arrangements at a covered 

financial institution should balance risk 

and financial rewards in a manner that 

does not provide covered persons with 

incentives to take inappropriate risks 

that could lead to material financial loss 

at the covered financial institution. The 

Agencies would deem an incentivebased compensation arrangement to be 

balanced when the amounts paid to a 

covered person appropriately take into 

account the risks, as well as the 

financial benefits, from the covered 

person’s activities and the impact of 

those activities on the covered financial 

institution. 

In assessing whether incentive-based 

compensation arrangements are 

balanced, the Agencies will consider the 

full range of risks associated with a 

covered person’s activities, as well as 

the time horizon over which those risks 

may be realized. The activities of a 

covered person may create a wide range 

of risks for a covered financial 

institution, including credit, market, 

liquidity, operational, legal, compliance, 

and reputational risks. Some of these 

risks may be realized in the short term, 

while others may become apparent only 

over the long term. 

The Proposed Rule identifies four 

methods that currently are often used to 

make compensation more sensitive to 

risk. These methods are: 

Risk Adjustment of Awards: Under 

this method of making a covered 

person’s incentive-based compensation 

appropriately risk-sensitive, the amount 

of the person’s incentive-based 

compensation award is adjusted based 

on measures that take into account the 

risk the covered person’s activities pose 

to the covered financial institution. 

Such measures may be quantitative, or 

the size of a risk adjustment may be set 

based on managerial judgment, subject 

to appropriate oversight. 

Deferral of Payment: Under this 

method, the actual payout of an award 

to a covered person is delayed 

significantly beyond the end of the 

performance period, and the amounts 

paid are adjusted for actual losses to the 

covered financial institution or other 

aspects of performance that become 

clear only during the deferral period. 

Deferred payouts may be altered 

according to risk outcomes either 

formulaically or based on managerial 

judgment, though extensive use of 

judgment might make it more difficult 

to execute deferral arrangements in a 

sufficiently predictable fashion to 

influence the risk-taking behavior of a 

covered person. To be most effective in 

ensuring balance, the deferral period 

should be sufficiently long to allow for 

the realization of a substantial portion of 

the risks from the covered person’s 

activities, and the measures of loss 

should be clearly explained to covered 

persons and closely tied to their 

activities during the relevant 

performance period. 

Longer Performance Periods: Under 

this method of making incentive-based 

compensation risk sensitive, the time 

period covered by the performance 

measures used in determining a covered 

person’s award is extended (for 

example, from one year to two years). 

Longer performance periods and 

deferral of payment are related in that 

both methods allow awards or payments 

to be made after some or all risk 

outcomes associated with a covered 

person’s activities are realized or better 

known. 

Reduced Sensitivity to Short-Term 

Performance: A covered financial 

institution using this method reduces 

the rate at which awards increase as a 

covered person achieves higher levels of 

the relevant performance measure(s) 

used in the person’s incentive-based 

compensation arrangement. Rather than 

offsetting risk-taking incentives 

associated with the use of short-term 

performance measures, this method 

reduces the magnitude of such 

incentives. 

The Agencies recognize that these 

methods for achieving balance are not 

exclusive, and additional methods or 

variations of these approaches may exist 

or be developed.24 Methods and 

practices for making compensation 

sensitive to risk-taking are likely to 

evolve during the next few years. 

Moreover, each method has its own 

advantages and disadvantages that may 

differ depending upon the situation in 

which they are used. For example, 

where reliable risk measures exist, risk 

adjustment of awards may be more 

effective than deferral of payment in 

reducing incentives for inappropriate 

risk-taking. This is because risk 

adjustment potentially can take account 

of the full range and time horizon of 

risks, rather than just those risk 

outcomes that occur or become evident 

during the deferral period. On the other 

hand, deferral of payment may be more 

effective than risk adjustment in 

mitigating incentives to take hard-tomeasure risks (such as the risks of new 

activities or products, or certain risks 

such as reputational or operational risk 

that may be difficult to measure with 

respect to particular activities), 

especially if such risks are likely to be 

realized during the deferral period. In 

some cases, two or more methods may 

be needed in combination for an 

incentive-based compensation 

arrangement to be balanced. The greater 

the potential incentives that an 

arrangement creates for a covered 

person to increase the risks borne by the 

covered financial institution, the 

stronger the effect should be of the 

methods applied to achieve balance.25

Compatibility With Effective Controls 

and Risk Management 

A covered financial institution’s risk 

management processes and internal 

controls should reinforce and support 

the development and maintenance of 

balanced incentive-based compensation 

arrangements.26 In particular, under this 

proposed standard, the Agencies would 

expect a covered financial institution to 

have strong controls governing its 

processes for designing, implementing 

and monitoring incentive-based 

compensation arrangements, and for 

ensuring that risk-management 

personnel have an appropriate role in 

the institution’s processes for designing 

incentive-based compensation 

arrangements, monitoring their use, and 

assessing whether they achieve balance. 

Covered financial institutions should 

have appropriate controls to ensure that 

their processes for achieving balanced 

compensation arrangements are 

followed and to maintain the integrity of 

their risk management and other 

functions. Such controls are important 

because covered persons may seek to 

evade or weaken an institution’s 

processes to achieve balanced incentivebased compensation arrangements in 

order to increase their own 

compensation. For example, in order to 

increase his or her own incentive 


kgrant on DSK8KYBLC1PROD with PROPOSALS2
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27See Banking Agency Guidance at 36411. 

28See Banking Agency Guidance at 36412. 

29As noted above, the FHFA is proposing to 

adopt this requirement for all the entities it 

regulates—Fannie Mae, Freddie Mac, the twelve 

Federal Home Loan Banks, and the Office of 

Finance, without regard to asset size, except for 

covered entities in conservatorship, receivership, or 

bridge status. FHFA, as conservator of Fannie Mae 

and Freddie Mac, requires that one-third of 

incentive pay for named executive officers be 

deferred over a two-year period. This deferred pay 

is based on corporate and individual performance. 

In addition, deferred pay is paid to Senior Vice 

Presidents and above in quarterly installments in 

the year following the performance year. One-half 

of this one-year deferral of payments is based on the 

Board of Directors’ determination of corporate 

performance. As a result, more than one-half of the 

annual incentive-based compensation is deferred 

for senior executives. 

30See supra note 22. 31 12 U.S.C. 5635. 

compensation, a covered person may 

seek to influence inappropriately the 

risk measures, information, or 

judgments used to balance the covered 

person’s compensation. These activities 

can have additional damaging effects on 

the institution’s financial health if they 

result in the weakening of the 

information or processes that the 

institution uses for other risk 

management, internal control, or 

financial purposes.27

Strong Corporate Governance 

Strong and effective corporate 

governance is critical to the 

establishment and maintenance of 

sound compensation practices.28 The 

board of directors of a covered financial 

institution, or committee thereof, should 

actively oversee incentive-based 

compensation arrangements and is 

ultimately responsible for ensuring that 

the covered financial institution’s 

incentive compensation arrangements 

are appropriately balanced. 

Accordingly, the board of directors, or a 

committee thereof, should actively 

oversee the development and operation 

of a covered financial institution’s 

incentive-based compensation systems 

and related control processes. For 

example, the board of directors, or a 

committee thereof, should review and 

approve the overall goals and purposes 

of the covered financial institution’s 

incentive-based compensation system 

and ensure its consistency with the 

institution’s overall risk tolerance. In 

addition, the board of directors, or 

committee thereof, should receive data 

and analysis to assess whether the 

overall design, as well as the 

performance, of the institution’s 

incentive compensation arrangements 

are consistent with section 956. 

The Agencies request comment on all 

aspects of § __.5 of the Proposed Rule. 

The Agencies also request comment on 

whether there are additional factors that 

should be considered in evaluating 

whether compensation is excessive or 

could lead to material financial loss and 

whether the Proposed Rule should 

include additional details about each of 

these standards. 

Larger Covered Financial Institutions 

Deferral Arrangements Required for 

Executive Officers 

Paragraph (b)(3) of §ll.5 of the 

Proposed Rule would establish a 

deferral requirement for larger covered 

financial institutions (i.e., generally 

those with $50 billion or more in total 

consolidated assets).29 At these larger 

covered financial institutions, at least 50 

percent of the incentive-based 

compensation of an ‘‘executive officer’’ 

(as previously defined), would have to 

be deferred over a period of at least 

three years. The Proposed Rule also 

would require that deferred amounts 

paid be adjusted for actual losses of the 

covered financial institution or other 

measures or aspects of performance that 

are realized or become better known 

during the deferral period. 

The Agencies believe that incentivebased compensation arrangements for 

executive officers at larger covered 

financial institutions are likely to be 

better balanced if they involve the 

deferral of a substantial portion of the 

executives’ incentive compensation over 

a multi-year period in a way that 

reduces the amount received in the 

event of poor performance. The 

decisions of executive officers have a 

significant impact on the entire 

organization and often involve 

substantial strategic or other risks that 

are difficult to measure and model— 

particularly at larger covered financial 

institutions—and therefore difficult to 

address adequately by ex ante risk 

adjustments. 

Requiring deferral for executive 

officers is consistent with international 

standards 30 that establish the 

expectation that large interconnected 

firms require the deferral of a 

substantial portion of incentive-based 

compensation (identified as 40 to 60 

percent of the incentive award, or more) 

for certain employees for a fixed period 

of time not less than three years and that 

incentives be correctly aligned with the 

nature of the business, its risks, and the 

activities of the employees in question. 

Because the risks of strategic and other 

high-level decisions of executive 

officers may not be apparent or become 

better known for many years, the 

Proposed Rule would require that the 

deferral arrangement for executive 

officers at these larger covered financial 

institutions extend for at least three 

years. Larger covered financial 

institutions tend to have more diverse 

business operations, which can make it 

more difficult to immediately recognize 

and assess risks for the organization as 

a whole. Furthermore, in enacting the 

Dodd-Frank Act, Congress recognized 

that larger organizations may pose a 

greater risk to the financial system by 

requiring the creation of enhanced 

prudential standards for certain bank 

holding companies with total 

consolidated assets greater than $50 

billion.31

The Proposed Rule recognizes that 

requiring deferral for this discrete group 

of individuals at larger covered 

institutions, where ex ante risk 

adjustment measures are less likely to 

be effective in and of themselves, is 

likely to be a useful balancing tool that 

allows a period of time for risks not 

previously discerned or quantifiable to 

ultimately materialize, and concurrently 

provides for adjustment of unreleased 

(or ‘‘unvested’’) deferral payments on the 

basis of observed consequences and 

actual performance as opposed to only 

predicted results. 

If a covered financial institution is 

required to use deferral, the Proposed 

Rule provides it with flexibility in 

administering its specific deferral 

program. A covered financial institution 

may decide to release (or allow vesting 

of) the full deferred amount in a lumpsum only at the conclusion of the 

deferral period; alternatively, the 

institution may release the deferred 

amounts (or allow vesting) in equal 

increments, pro rata, for each year of the 

deferral period. However, in no event 

may the release or vesting of amounts 

required to be deferred under 

§ ll.5(b)(3) of the Proposed Rule be 

faster than a pro rata equal-annualincrements distribution. For instance, 

an institution required to apply a threeyear deferral to a $150,000 deferral 

amount could release a maximum of 

$50,000 each year or could withhold the 

entire sum for the entire period and 

distribute it as a lump-sum at the 

conclusion of the three-year period. The 

institution could also employ an 

alternate distribution that is less rapid 

than a pro-rata equal-annual-increments 

schedule, such as releasing no amount 

after the first year, releasing a maximum 

of $100,000 the second year, and then 

$50,000 for the third year. 

Specific comment is solicited on all 

aspects of the scope, and specific 

requirements, of this proposed deferral 

requirement. In particular, commenters 


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32 In addition to the compensation-deferral 

requirement described above, the FHFA proposes to 

apply this requirement to all of the entities it 

regulates without regard to asset size. 

are asked to address whether it is 

appropriate to mandate deferral for 

executive officers at larger covered 

financial institutions to promote the 

alignment of employees’ incentives with 

the risk undertaken by such employees. 

For example, comment is solicited on 

whether deferral is generally an 

appropriate method for achieving 

balanced incentive compensation 

arrangements for each type of executive 

officer at these institutions or whether 

there are alternative or more effective 

ways to achieve such balance. 

Commenters are also asked to address 

the possible impact that the required 

minimum deferral provisions for senior 

executives may have on larger covered 

financial institutions and whether the 

proposed or different deferral 

requirements should apply to senior 

executives at institutions other than 

larger covered financial institutions. For 

example, would it be prudent to 

mandate deferred incentive-based 

compensation for certain types of 

covered financial institutions but not 

require such deferral for other 

institutions (e.g., investment advisers) 

based on the business, risks inherent to 

that business, or other relevant factors? 

Are there additional considerations, 

such as tax or accounting 

considerations, that may affect the 

ability of larger covered financial 

institutions to comply with the 

proposed deferral requirement or that 

the Agencies should consider in 

designing this provision in the rule? 

Comment is also sought on whether the 

mandatory deferral provisions of the 

rule should apply to a differently 

defined group of individuals at larger 

covered financial institutions, such as 

the institution’s top 25 earners of 

incentive-based compensation? 

Commenters also are asked to address 

whether the three-year and 50 percent of 

incentive-based compensation 

minimums are appropriate? Should the 

minimum required deferral period be 

extended to, for example, five years? 

Special Review and Approval 

Requirement for Other Designated 

Individuals 

Other individuals at a larger covered 

financial institution, beyond the 

institution’s executive officers may 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. In order to help 

ensure that the incentive compensation 

arrangements for these individuals are 

appropriately balanced, and do not 

encourage the individual to expose the 

institution to risks that could pose a risk 

of material financial loss to the covered 

financial institution, the Proposed Rule 

would require that, at a larger covered 

financial institution, the board of 

directors, or a committee thereof, 

identify those covered persons (other 

than executive officers) that 

individually 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.32 The proposal notes that 

these covered persons may include, for 

example, traders with large position 

limits relative to the institution’s overall 

risk tolerance and other individuals that 

have the authority to place at risk a 

substantial part of the capital of the 

covered financial institution. In 

addition, the Proposed Rule would 

require that the board of directors, or a 

committee thereof, of the institution 

approve the incentive-based 

compensation arrangement for such 

individuals, and maintain 

documentation of such approval. 

Under the proposal, the board of 

directors, or committee thereof, of a 

larger covered financial institution may 

not approve the incentive-based 

compensation arrangement for an 

individual identified by the board of 

directors, or committee thereof, unless 

the board (or committee) determines 

that the arrangement, including the 

method of paying compensation under 

the arrangement, effectively balances 

the financial rewards to the covered 

person and the range and time horizon 

of risks associated with the covered 

person’s activities, employing 

appropriate methods for ensuring risk 

sensitivity. The proposal recognizes that 

the methods used to balance the 

rewards and risks of the individual’s 

activities may include deferral of 

payments, risk adjustment of awards, 

reduced sensitivity to short-term 

performance, or longer performance 

periods, or other appropriate methods. 

However, the board of directors, or 

committee thereof, must determine that 

the method(s) used effectively balance 

the financial rewards to the covered 

person and the range and time horizons 

of the risks associated with the covered 

person’s activities. In performing its 

duties in this regard, the board, or 

committee thereof, must evaluate the 

overall effectiveness of the balancing 

methods used in the identified covered 

person’s incentive compensation 

arrangements in reducing incentives for 

inappropriate risk taking by the 

identified covered person, as well as the 

ability of the methods used to make 

payments sensitive to the full range of 

risks presented by that covered person’s 

activities, including those risks that may 

be difficult to predict, measure, or 

model. 

The Agencies request comment on 

these proposed additional 

identification, review, and approval 

requirements for larger covered 

financial institutions with respect to 

individuals that 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. Is the proposed special 

treatment of these covered persons 

necessary or appropriate, or is their 

incentive compensation adequately 

addressed by the prohibitions 

applicable to all other covered persons 

(other than executive officers at larger 

covered financial institutions) under the 

proposal? Is it sufficient that, as under 

the proposal, such covered persons are 

not subject to mandatory deferral but 

instead are separately identified by the 

institution’s board and the board is 

required to approve the incentive-based 

compensation arrangement for the 

covered person after ensuring it is 

balanced and sensitive to risk? Should 

further guidance be provided as to the 

meaning of the phrase ‘‘substantial in 

relation to the institution’s size, capital, 

or overall risk tolerance’’? 

§ ll.6 Policies and Procedures. As 

noted above, the Agencies believe that 

the incentive-based compensation 

practices of covered financial 

institutions should be supported by 

policies and procedures, appropriate to 

the size and complexity of the covered 

financial institution, to foster 

transparency of each covered financial 

institution’s incentive-based 

compensation practices and to promote 

compliance and accountability 

regarding the practices that the Agencies 

propose to prohibit. Accordingly, the 

Proposed Rule would require covered 

financial institutions to have policies 

and procedures governing the award of 

incentive-based compensation as a way 

to help ensure the full implementation 

of the prohibitions in the Proposed 

Rule. 

The Agencies believe that the policies 

and procedures developed by each 

covered financial institution in this area 

should be appropriately tailored to 

balance risk and reward for an 

institution of its size, complexity, and 

business activity, as well as the scope 

and nature of the covered financial 

institution’s incentive-based 

compensation arrangements. Therefore, 

the policies and procedures of smaller 

covered financial institutions with less 


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21182 Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 / Proposed Rules 

33 In addition, for U.S. operations of foreign 

banking organizations (‘‘FBOs’’), the organization’s 

policies, including management, review, and 

approval requirements for its U.S. operations, 

should be coordinated with the FBO’s group-wide 

policies developed in accordance with the rules of 

the FBO’s home country supervisor. The policies of 

the FBO’s U.S. operations should also be consistent 

with the FBO’s overall corporate and management 

structure, as well as its framework for riskmanagement and internal controls. 

complex incentive-based compensation 

programs would be expected to be less 

extensive than those of larger covered 

financial institutions with relatively 

complex programs and business 

activities. The Agencies note, however, 

that no categories of covered financial 

institutions using incentive-based 

compensation would be systematically 

or completely exempt from developing, 

maintaining, and documenting their 

incentive-based compensation policies 

and procedures. 

As noted above, the prohibition on 

incentive-based compensation 

arrangements that could lead to material 

financial loss would affect only those 

arrangements for covered persons that, 

either individually or as a group, may 

expose the institution to material 

financial loss. Accordingly, the policies 

and procedures of an institution related 

to this prohibition should be focused on 

these covered persons. Depending on 

the facts and circumstances of the 

individual covered financial institution, 

certain jobs and classes of jobs may not 

have the ability to expose the 

organization to material financial loss 

and, as a result, incentive-based 

compensation arrangements for these 

covered persons within these job classes 

may be outside the scope of these 

restrictions. Examples of jobs and 

classes of jobs that may be unlikely to 

expose the institution to material risk 

include tellers, bookkeepers, couriers, or 

data processing personnel. 

Paragraph (b)(1) of §ll.6 of the 

Proposed Rule would require that the 

policies and procedures, at a minimum, 

be designed to address the §ll.4 

reporting requirements and the §ll.5 

prohibitions.33 Requiring such policies 

and procedures of covered financial 

institutions that award incentive-based 

compensation would promote 

compliance with the prohibitions in 

practice. 

In order to help ensure that the risks 

inherent in a covered person’s actions 

are appropriately captured, the Agencies 

believe that risk-management, riskoversight, and internal-control 

personnel should be involved in all 

phases of the process for designing 

incentive-based compensation 

arrangements. Risk-management and 

risk-oversight personnel also should 

have responsibility for ongoing 

assessment of incentive-based 

compensation policies to help to ensure 

that the covered financial institution’s 

processes remain up-to-date and 

effective relative to its incentive 

compensation practices. The ongoing 

involvement of such personnel in the 

evaluation of incentive-based 

compensation arrangements also helps 

to ensure that risks are properly 

understood and evaluated as such risks 

change over time in light of a 

continuously changing business 

environment. Accordingly, paragraph 

(b)(2) of § ll.6 of the Proposed Rule 

would make such a requirement part of 

the covered financial institution’s 

policies and procedures governing 

incentive-based compensation. 

Paragraph (b)(3) of §ll.6 would 

require that a covered financial 

institution’s policies and procedures 

provide for the monitoring by a group or 

person independent of the covered 

person, where practicable in light of the 

institution’s size and complexity, of 

incentive-based compensation awards 

and payments, risks taken, and actual 

risk outcomes to determine whether 

incentive-based compensation payments 

are reduced to reflect adverse risk 

outcomes or high levels of risk taken. To 

be considered independent under the 

Proposed Rule, the group or person at 

the covered financial institution 

monitoring or assessing incentive-based 

compensation awards must have a 

separate reporting line to senior 

management from the covered person 

who is creating the risks so as to help 

ensure that the analysis of risk is 

unbiased. Given the dynamic nature of 

risk management, the Proposed Rule 

also provides for incentive-based 

compensation awards to be monitored 

in light of risks taken and outcomes to 

determine whether incentive-based 

payments should be modified. The 

Agencies contemplate that the 

procedures relating to the adjustment of 

deferred amounts would be used by 

covered financial institutions required 

to defer a portion of their incentivebased compensation under §ll.6 of 

this Rule to augment their compliance 

with the deferral obligation. 

Paragraph (b)(4) of §ll.6 would 

require a covered financial institution to 

develop and maintain policies and 

procedures designed to ensure that the 

covered financial institution’s board of 

directors, or a committee thereof, 

receive data and analysis from 

management and other sources 

sufficient to allow it to assess whether 

the overall design and performance of 

the firm’s incentive-based compensation 

arrangements are consistent with 

section 956 of the Act. As with other 

provisions of the Proposed Rule, the 

scope and nature of the data and 

analysis should be appropriate to the 

size and complexity of the covered 

financial institution and its use of 

incentive-based compensation. The 

Agencies expect that the board of 

directors, or committee thereof, would 

take into consideration the firm’s overall 

risk management policies and 

procedures and the requirements of 

section 956(b) of the Act when assessing 

compliance with the Act. 

Paragraph (b)(5) of §ll.6 of the 

Proposed Rule would specify that the 

policies and procedures of a covered 

financial institution must provide that 

the institution maintains sufficient 

documentation of the institution’s 

processes for establishing, 

implementing, modifying, and 

monitoring incentive-based 

compensation arrangements sufficient to 

enable the institution’s appropriate 

Federal regulator to determine the 

covered financial institution’s 

compliance with section 956 of the Act 

and the Proposed Rule. Given that the 

determinations to be made regarding 

incentive-based compensation are factspecific, the Agencies believe that 

effective documentation of the covered 

financial institution’s policies, 

procedures and actions related to 

incentive-based compensation is 

essential both to help promote the riskbased discipline that section 956 of the 

Act seeks to foster with respect to 

covered financial institutions and to 

facilitate meaningful oversight and 

examination. In this context, the 

Agencies would expect the 

documentation maintained by a covered 

financial institution under the Proposed 

Rule to include, but not be limited to, 

the following: 

(1) A copy of the covered financial 

institution’s incentive-based 

compensation arrangement(s) or plan(s); 

(2) The names and titles of 

individuals covered by such 

arrangement(s) or plan(s); 

(3) A record of the incentive-based 

compensation awards made under the 

arrangement(s) or plan(s); and 

(4) Records reflecting the persons or 

units involved in the approval and 

ongoing monitoring of the 

arrangement(s) or plan(s). 

Paragraph (b)(6) of §ll.6 of the 

Proposed Rule would provide that, 

where a covered financial institution 

uses deferral in connection with an 

incentive-based compensation 

arrangement, the institution’s policies 

and procedures provide for deferral of 

any such payments in amounts and for 

periods of time appropriate to the duties 


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34The Proposed Rule would require deferral for 

at least three years of at least 50 percent of the 

incentive-based compensation for executive officers 

of larger covered financial institutions (generally 

those with $50 billion or more in total consolidated 

assets). Most covered financial institutions with 

total consolidated assets under $50 billion would be 

required to adopt procedures applicable to deferred 

compensation only when the firm elects to use 

deferral in its incentive-based compensation 

program. 

and responsibilities of the covered 

financial institution’s covered persons, 

the risks associated with those duties 

and responsibilities, and the size and 

complexity of the covered financial 

institution.34 Further, proposed 

paragraph (b)(6) would require that any 

such deferred amounts paid be adjusted 

for actual losses or other measures or 

aspects of performance that are realized 

or become better known during the 

deferral period. The Agencies believe 

that risk-management personnel at the 

covered financial institution would play 

a substantial role in identifying and 

evaluating risks that become better 

known with the passage of time. The 

Agencies contemplate that the 

procedures relating to the adjustment of 

deferred amounts would be used by 

covered financial institutions required 

to defer a portion of their incentivebased compensation under §ll.5 of 

the Proposed Rule to facilitate their 

compliance with the deferral obligation. 

Given the importance of incentivebased compensation arrangements to a 

covered financial institution’s safety 

and soundness, paragraph (b)(7) of 

§ ll.6 would require the policies and 

procedures to subject any incentivebased compensation arrangement or 

component thereof to a corporate 

governance framework that provides for 

ongoing oversight by the board of 

directors or a committee of the board of 

directors. As discussed above, covered 

financial institutions should have strong 

and effective corporate governance to 

help ensure sound compensation 

practices, including active and effective 

oversight by the board of directors. The 

Agencies believe that the board of 

directors or a committee thereof is 

ultimately responsible for a covered 

institution’s incentive-based 

compensation arrangements, which 

should appropriately balance risk and 

rewards. Therefore, the board or its 

committee should engage in regular 

oversight of the covered financial 

institution’s incentive-based 

compensation arrangements. 

The Agencies are aware that covered 

persons at certain covered financial 

institutions who have been awarded 

equity as part of a deferred incentivebased compensation arrangement may 

wish to use personal hedging strategies 

as a way to lock in value for equity 

compensation that is vested over time. 

The Agencies are concerned that 

undertaking such hedging strategies 

during deferral periods could diminish 

the alignment between risk and 

financial rewards that may be achieved 

through these types of deferral 

arrangements. The Agencies have not 

included policies and procedures 

regarding such personal hedging 

strategies in the Proposed Rule, but the 

Agencies are concerned that, to the 

extent personal hedging strategies may 

be widespread, such practices would 

serve to diminish the effectiveness of a 

covered financial institution’s policies 

and procedures. Thus, the Agencies are 

considering whether a covered financial 

institution’s policies and procedures 

should be required to specifically 

include limits on personal hedging 

strategies. To assist in the evaluation of 

such a provision, in addition to 

requesting comment on all aspects of 

§ ll.6 of the Proposed Rule, the 

Agencies are requesting commenters to 

describe the extent to which covered 

financial institutions prohibit such 

practices among their covered persons 

today. Would prohibiting the use of 

financial derivatives, insurance 

contracts or other similar mechanisms 

to hedge against the market risk of 

equity-based incentive-based 

compensation be an effective means to 

help to ensure that incentive-based 

compensation arrangements remain 

aligned with the risk assumed by 

covered persons? Are there other factors 

the Agencies should take into account 

when considering if, or how, to address 

personal hedging activity by covered 

persons? 

§ ll.7 Evasion. Section ll.7 of the 

Proposed Rule would prohibit a covered 

financial institution from evading the 

restrictions of the rule by doing any act 

or thing indirectly, or through or by any 

other person, that would be unlawful for 

the covered institution to do directly 

under the Proposed Rule. This antievasion provision is designed to prevent 

covered financial institutions from, for 

example, making substantial numbers of 

its covered persons independent 

contractors for the purpose of evading 

this subpart. The Agencies do not 

intend, however, to disrupt bona fide 

independent contractor relationships of 

covered financial institutions. 

Comments are invited on whether 

greater specificity is required in 

identifying possible evasion tactics, and 

on all aspects of § ll.7. 

IV. Request for Comments 

The Agencies encourage comment on 

any aspect of this proposal and 

especially on those issues specifically 

noted in this preamble. 

Solicitation of Comments on Use of 

Plain Language 

Section 722 of the Gramm-LeachBliley Act, Public Law 106–102, sec. 

722, 113 Stat. 1338, 1471 (Nov. 12, 

1999), requires the Federal banking 

agencies to use plain language in all 

proposed and final rules published after 

January 1, 2000. The Federal banking 

agencies invite your comments on how 

to make this proposal easier to 

understand. For example: 

• Have we organized the material to 

suit your needs? If not, how could this 

material be better organized? 

• Are the requirements in the 

proposed regulation clearly stated? If 

not, how could the regulation be more 

clearly stated? 

• Does the proposed regulation 

contain language or jargon that is not 

clear? If so, which language requires 

clarification? 

• Would a different format (grouping 

and order of sections, use of headings, 

paragraphing) make the regulation 

easier to understand? If so, what 

changes to the format would make the 

regulation easier to understand? 

• What else could we do to make the 

regulation easier to understand? 

NCUA Agency Regulatory Goal 

NCUA’s goal is to promulgate clear 

and understandable regulations that 

impose minimal regulatory burden. We 

request your comments on whether the 

proposed rule is understandable and 

minimally intrusive if implemented as 

proposed. 

V. Regulatory Analysis 

A. Regulatory Flexibility Act 

OCC: Pursuant to section 605(b) of the 

Regulatory Flexibility Act, 5 U.S.C. 

605(b) (RFA), the regulatory flexibility 

analysis otherwise required under 

section 603 of the RFA is not required 

if the agency certifies that the proposed 

rule will not, if promulgated, have a 

significant economic impact on a 

substantial number of small entities 

(defined for purposes of the RFA to 

include banks and Federal branches and 

agencies with assets less than or equal 

to $175 million) and publishes its 

certification and a short, explanatory 

statement in the Federal Register along 

with its proposed rule. 

Consistent with section 956(f) of the 

Dodd-Frank Act, the OCC’s proposed 

rule only would apply to national banks 

and Federal branches and agencies that 

have total consolidated assets of $1 

billion or more. The Proposed Rule 


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would not apply to any small national 

banks and Federal branches and 

agencies, as defined by the RFA. 

Therefore, the OCC certifies that the 

Proposed Rule would not, if 

promulgated, have a significant 

economic impact on a substantial 

number of small entities. 

Board: The Board has considered the 

potential impact of the Proposed Rule 

on small banking organizations in 

accordance with the Regulatory 

Flexibility Act (5 U.S.C. 603(b)). As 

discussed in the SUPPLEMENTARY

INFORMATION above, section 956 of the 

Dodd-Frank Act (codified at 12 U.S.C. 

5641) requires that the Agencies 

prohibit any incentive-based payment 

arrangement, or any feature of any such 

arrangement, at a covered financial 

institution that the Agencies determine 

encourages inappropriate risks by a 

financial institution by providing 

excessive compensation or that could 

lead to material financial loss. In 

addition, under the Act a covered 

financial institution also must disclose 

to its appropriate Federal regulator the 

structure of its incentive-based 

compensation arrangements. The Board 

and the other Agencies have issued the 

Proposed Rule in response to these 

requirements of the Dodd-Frank Act. 

The Proposed Rule would apply to 

‘‘covered financial institutions’’ as 

defined in section 956 of the DoddFrank Act. Covered financial 

institutions as so defined include 

specifically listed types of institutions, 

as well as other institutions added by 

the Agencies acting jointly by rule. In 

every case, however, covered financial 

institutions must have at least $1 billion 

in total consolidated assets pursuant to 

section 956(f). Thus the Proposed Rule 

is not expected to apply to any small 

banking organizations (defined as 

banking organizations with $175 million 

or less in total assets). See 13 CFR 

121.201. 

The Proposed Rule would implement 

section 956(a) of the Dodd-Frank act by 

requiring a covered financial institution 

to submit a report annually to its 

appropriate regulator or supervisor in a 

format specified by its appropriate 

Federal regulator that describes the 

structure of the covered financial 

institution’s incentive-based 

compensation arrangements for covered 

persons. The volume and detail of 

information provided annually by a 

covered financial institution should be 

commensurate with the size and 

complexity of the institution, as well as 

the scope and nature of its incentivebased compensation arrangements. As 

such, the Board expects that the volume 

and detail of information provided by a 

large, complex institution that uses 

incentive-based arrangements to a 

significant degree would be 

substantially greater than that submitted 

by a smaller institution that has only a 

few incentive-based compensation 

arrangements or arrangements that affect 

only a limited number of covered 

persons. 

The Proposed Rule would implement 

section 956(b) of the Dodd-Frank Act by 

prohibiting a covered financial 

institution from having incentive-based 

compensation arrangements that may 

encourage inappropriate risks (i) by 

providing excessive compensation or (ii) 

that could lead to material financial 

loss. The Proposed Rule would establish 

standards for determining whether an 

incentive-based compensation 

arrangement violates these prohibitions. 

These standards would include deferral 

and other requirements for certain 

covered persons at covered financial 

institutions with total consolidated 

assets of more than $50 billion. 

Consistent with section 956(c), the 

standards adopted under section 956 are 

comparable to the compensation-related 

safety and soundness standards 

applicable to insured depository 

institutions under section 39 of the 

FDIA. The Proposed Rule also would 

supplement existing guidance adopted 

by the Board and the other Federal 

banking agencies regarding incentivebased compensation (i.e., the Banking 

Agency Guidance, as defined in the 

‘‘Supplementary Information’’ above). 

The Proposed Rule would require 

covered financial institutions to have 

policies and procedures governing the 

award of incentive-based compensation 

as a way to help ensure the full 

implementation of the prohibitions in 

the Proposed Rule. The Board believes 

that the policies and procedures 

developed by each covered financial 

institution in this area should be 

appropriately tailored to balance risk 

and reward for an institution of its size, 

complexity, and business activity, as 

well as the scope and nature of the 

covered financial institution’s incentivebased compensation arrangements. 

Therefore, the policies and procedures 

of smaller covered financial institutions 

with less complex incentive-based 

compensation programs would be 

expected to be less extensive than those 

of larger covered financial institutions 

with relatively complex programs and 

business activities. 

As noted above, because the Proposed 

Rule applies to institutions that have 

more than $1 billion in total 

consolidated assets, if adopted in final 

form it is not expected to apply to any 

small banking organizations for 

purposes of the Regulatory Flexibility 

Act. In light of the foregoing, the Board 

does not believe that the Proposed Rule, 

if adopted in final form, would have a 

significant economic impact on a 

substantial number of small entities 

supervised by the Board. The Board 

specifically seeks comment on whether 

the Proposed Rule would impose undue 

burdens on, or have unintended 

consequences for, small organizations 

and whether there are ways such 

potential burdens or consequences 

could be addressed in a manner 

consistent with section 956 of the DoddFrank Act. 

FDIC: In accordance with the 

Regulatory Flexibility Act, 5 U.S.C. 601– 

612 (RFA), an agency must publish an 

initial regulatory flexibility analysis 

with its Proposed Rule, unless the 

agency certifies that the rule will not 

have a significant economic impact on 

a substantial number of small entities. 

For purposes of the RFA, small entities 

are defined to include banks with less 

than $175 million in assets. 

Consistent with section 956 of the 

Dodd-Frank Act, the FDIC’s Proposed 

Rule would only apply to a State 

nonmember bank and an insured U.S. 

branch of a foreign bank that has total 

consolidated assets of $1 billion or more 

and offers incentive compensation. The 

Proposed Rule would not apply to any 

small banks as defined by the RFA. 

Thus, the FDIC certifies that the 

Proposed Rule, if promulgated, would 

not have a significant economic impact 

on a substantial number of small 

entities. 

OTS: Pursuant to section 605(b) of the 

Regulatory Flexibility Act, 5 U.S.C. 

605(b) (RFA), the regulatory flexibility 

analysis otherwise required under 

section 603 of the RFA is not required 

if the agency certifies that the proposed 

rule, if promulgated, will not have a 

significant economic impact on a 

substantial number of small entities and 

publishes its certification and a short, 

explanatory statement in the Federal 

Register along with its proposed rule. 

OTS certifies that the Proposed Rule 

would not have a significant impact on 

a substantial number of small entities. 

The Small Business Administration has 

defined ‘‘small entities’’ for banking 

purposes as a bank or savings 

association with $175 million or less in 

assets. 13 CFR 121.201. Since OTS’s 

Proposed Rule only applies to savings 

associations and savings and loan 

holding companies with $1 billion or 

more of assets, it will not apply to any 

small entities. 

FHFA: The Regulatory Flexibility Act 

(5 U.S.C. 601 et seq.) requires that a rule 

that has a significant economic impact 


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35 5 U.S.C. 603. 

36 17 CFR 240.0–10(c). See 17 CFR 240.17a–5(d). 

37Rule 0–7(a). 17 CFR 275.0–7(a). 

38 5 U.S.C. 603(c). 

on a substantial number of small 

entities, small businesses, or small 

organizations must include an initial 

regulatory flexibility analysis describing 

the rule’s impact on small entities. Such 

an analysis need not be undertaken if 

the agency has certified that the rule 

will not have a significant economic 

impact on a substantial number of small 

entities. 5 U.S.C. 605(b). FHFA has 

considered the impact of the final rule 

under the Regulatory Flexibility Act. 

FHFA certifies that the final rule is not 

likely to have a significant economic 

impact on a substantial number of small 

business entities because the rule is 

applicable only to FHFA’s covered 

entities, which are not small entities for 

purposes of the Regulatory Flexibility 

Act. 

NCUA: In accordance with the 

Regulatory Flexibility Act, 5 U.S.C. 601– 

612 (RFA), NCUA must publish an 

initial regulatory flexibility analysis 

with its proposed rule, unless NCUA 

certifies that the proposed rule would 

not have a significant economic impact 

on a substantial number of small 

entities, meaning those credit unions 

under $10 million in assets. NCUA 

Interpretive Ruling and Policy 

Statement 03–2, 68 FR 31949 (May 29, 

2003). The Dodd-Frank Act section 956 

and the NCUA’s proposed rule only 

apply to credit unions of $1 billion in 

assets or more. Accordingly, NCUA 

certifies that the proposed rule would 

not have a significant economic impact 

on a substantial number of small entities 

since the credit unions covered under 

NCUA’s proposed rule are not small 

entities for RFA purposes. 

SEC: The Commission has prepared 

the following Initial Regulatory 

Flexibility Analysis (IRFA), in 

accordance with the provisions of the 

Regulatory Flexibility Act 35 regarding 

proposed Sections 248.201 through 

248.207. The Commission encourages 

comments with respect to any aspect of 

this IRFA, including comments with 

respect to the number of small entities 

that may be affected by the proposed 

rules. Comments should specify the 

costs of compliance with the proposed 

rules and suggest alternatives that 

would accomplish the goals of the rules. 

Comments will be considered in 

determining whether a Final Regulatory 

Flexibility Analysis is required and will 

be placed in the same public file as 

comments on the proposed rules. 

Comments should be submitted to the 

Commission at the addresses previously 

indicated. 

1. Small Entities Subject to the Rule 

As described in more detail above, the 

proposed rules would implement 

section 956 of the Dodd-Frank Act, 

codified as 12 U.S.C. 5641. For purposes 

of Commission rulemaking in 

connection with the RFA, a small entity 

includes a broker-dealer: (i) With total 

capital (net worth plus subordinated 

liabilities) of less than $500,000 on the 

date in the prior fiscal year as of which 

its audited financial statements were 

prepared pursuant to Rule 17a–5(d) 

under the Exchange Act, and (ii) is not 

affiliated with any person (other than a 

natural person) that is not a small 

business or small organization as 

defined in this section.36 Commission 

rules further provide that, for the 

purposes of the Investment Advisers Act 

of 1940, an investment adviser generally 

is a small entity if it: (i) Has assets under 

management having a total value of less 

than $25 million; (ii) did not have total 

assets of $5 million or more on the last 

day of its most recent fiscal year; and 

(iii) does not control, is not controlled 

by, and is not under common control 

with another investment adviser that 

has assets under management of $25 

million or more, or any person (other 

than a natural person) that had $5 

million or more on the last day of its 

most recent fiscal year (‘‘small 

adviser’’).37

Section 956 of the Dodd-Frank Act 

requires regulators, including the 

Commission, to jointly promulgate rules 

that apply to covered financial 

institutions with assets of at least $1 

billion. The Commission believes that 

broker-dealers and investment advisers 

that would be subject to the proposed 

rule would either have $1 billion in 

assets or be affiliated with a firm that is 

characterized by at least $1 billion in 

assets. Therefore, the Commission 

preliminarily believes that there should 

not be any small broker-dealers or 

investment advisers impacted by this 

proposed rule. 

2. Duplicative, Overlapping, or 

Conflicting Federal Rules 

The Commission believes that there 

are no Federal rules that duplicate, 

overlap, or conflict with the proposed 

rules. 

3. Significant Alternatives 

Pursuant to section 3(c) of the RFA,38

the Commission must consider certain 

types of alternatives, including (1) The 

establishment of differing compliance or 

reporting requirements or timetables 

that take into account the resources 

available to small entities, (2) the 

clarification, consolidation, or 

simplification of compliance and 

reporting requirements under the rule 

for small entities, (3) the use of 

performance rather than design 

standards, and (4) an exemption from 

coverage of the rule, or any part of the 

rule, for small entities. 

The Commission does not believe it is 

necessary or appropriate to establish 

different compliance or reporting 

requirements or timetables; clarify, 

consolidate, or simplify compliance and 

reporting requirements under the rule 

for small entities; or summarily exempt 

small entities from coverage of the rule, 

or any part of the rule because the 

proposed rule will not apply to any 

small entities. 

4. Request for Comments 

The Commission encourages the 

submission of comments to any aspect 

of this portion of the IRFA. In particular, 

comments are encouraged on whether 

any small entities would be subject to 

the terms of the proposed rule. 

Comments should specify costs of 

compliance with the proposed rules and 

suggest alternatives that would 

accomplish the objective of the 

proposed rules. 

B. Paperwork Reduction Act 

Request for Comment on Proposed 

Information Collection 

In accordance with section 3512 of 

the Paperwork Reduction Act (PRA) of 

1995 (44 U.S.C. 3501–3521), agencies 

may not conduct or sponsor, and a 

respondent is not required to respond 

to, an information collection unless it 

displays a currently valid Office of 

Management and Budget (OMB) control 

number. The information collection 

requirements contained in this joint 

notice have been submitted by the FDIC, 

OCC, OTS, NCUA, and SEC to OMB for 

review and approval under section 3506 

of the PRA and § 1320.11 of OMB’s 

implementing regulations (5 CFR 1320). 

For the FHFA, the proposed rule does 

not contain any information collected 

from Fannie Mae, Freddie Mac and the 

Federal Home Loan Banks, including 

the Office of Finance, that requires the 

approval of OMB under the Paperwork 

Reduction Act (44 U.S.C. 3501 et seq.). 

The Board reviewed the proposed rule 

under the authority delegated to the 

Board by OMB. The proposed rule 

contains requirements subject to the 

PRA. The reporting requirements are 

found in § __.4 and the recordkeeping 

requirements are found in 


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§§ __.5(b)(3)(ii)(B), __.6(a), and 

__.6(b)(5). 

Comments are invited on: 

(a) Whether the collection of 

information is necessary for the proper 

performance of the agencies’ functions, 

including whether the information has 

practical utility; 

(b) The accuracy of the estimate of the 

burden of the information collection, 

including the validity of the 

methodology and assumptions used; 

(c) Ways to enhance the quality, 

utility, and clarity of the information to 

be collected; 

(d) Ways to minimize the burden of 

information collection on respondents, 

including through the use of automated 

collection techniques or other forms of 

information technology; and 

(e) Estimates of capital or startup costs 

and costs of operation, maintenance, 

and purchase of services to provide 

information. 

All comments will become a matter of 

public record. Comments should be 

addressed to: 

FDIC: You may submit written 

comments, identified by the RIN, by any 

of the following methods: 

• Agency Web Site: http:// 

www.fdic.gov/regulations/laws/federal/ 

propose.html. Follow the instructions 

for submitting comments on the FDIC 

Web site. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: Comments@FDIC.gov. 

Include RIN 3064–AD56 on the subject 

line of the message. 

• Mail: Robert E. Feldman, Executive 

Secretary, Attention: Comments, FDIC, 

550 17th Street, NW., Washington, DC 

20429. 

• Hand Delivery/Courier: Comments 

may be hand delivered to the guard 

station at the rear of the 550 17th Street 

Building (located on F Street) on 

business days between 7 a.m. and 5 p.m. 

Public Inspection: All comments 

received will be posted without change 

to http://www.fdic.gov/regulations/laws/ 

federal/propose.html including any 

personal information provided. 

Comments may be inspected at the FDIC 

Public Information Center, Room E– 

1002, 3501 Fairfax Drive, Arlington, VA 

22226, between 9 a.m. and 5 p.m. on 

business days. 

OCC: You should direct all written 

comments to: Communications 

Division, Office of the Comptroller of 

the Currency, Public Information Room, 

Mailstop 2–3, Attention: 1557–NEW, 

250 E Street, SW., Washington, DC 

20219. In addition, comments may be 

sent by fax to 202–874–5274, or by 

electronic mail to 

regs.comments@occ.treas.gov. You may 

personally inspect and photocopy 

comments at the OCC, 250 E Street, 

SW., Washington, DC 20219. For 

security reasons, the OCC requires that 

visitors make an appointment to inspect 

comments. You may do so by calling 

202–874–4700. Upon arrival, visitors 

will be required to present valid 

government-issued photo identification 

and submit to security screening in 

order to inspect and photocopy 

comments. 

OTS: Information Collection 

Comments, Chief Counsel’s Office, 

Office of Thrift Supervision, 1700 G 

Street, NW., Washington, DC 20552; 

send a facsimile transmission to 202– 

906–6518; or send an e-mail to 

infocollection.comments@ots.treas.gov. 

OTS will post comments and the related 

index on the OTS Internet site at 

http://www.ots.treas.gov. In addition, 

interested persons may inspect the 

comments at the Public Reading Room, 

1700 G Street, NW., by appointment. To 

make an appointment, call 202–906– 

5922, send an e-mail to 

public.info@ots.treas.gov, or send a 

facsimile transmission to 202–906– 

7755. 

NCUA: You may submit comments by 

any of the following methods (Please 

send comments by one method only): 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Agency Web site: http:// 

www.ncua.gov/ 

RegulationsOpinionsLaws/ 

proposedregs/proposedregs.html. 

Follow the instructions for submitting 

comments. 

• E-mail: Address to 

regcomments@ncua.gov. Include ‘‘[Your 

name] Comments on Notice of Proposed 

Rulemaking Incentive-based 

Compensation Arrangements’’ in the email subject line. 

• Fax: 703–518–6319. Use the subject 

line described above for e-mail. 

• Mail: Address to David Chow, 

Deputy Chief Information Officer, 

National Credit Union Administration, 

1775 Duke Street, Alexandria, VA 

22314–3428. 

• Hand Delivery/Courier: Same as 

mail address. 

Additionally, you should send a copy 

of your comments to the OMB Desk 

Officer for the NCUA, by mail to U.S. 

Office of Management and Budget, 725 

17th Street, NW., 10235, Washington, 

DC 20503, or by fax to 202–395–6974. 

The Paperwork Reduction Act requires 

OMB to make a decision concerning the 

collection of information contained in 

the proposed regulation between 30 and 

60 days after publication of this 

document in the Federal Register. 

Therefore, a comment to OMB is best 

assured of having its full effect if OMB 

receives it within 30 days of 

publication. This does not affect the 

deadline for the public to comment to 

the NCUA on the proposed regulation. 

SEC: Comments should be directed to 

the Office of Management and Budget, 

Attention: Desk Officer for the 

Securities and Exchange Commission, 

Office of Information and Regulatory 

Affairs, Room 10102, New Executive 

Office Building, Washington, DC 20503, 

and commenters also should send a 

copy of their comments to Elizabeth M. 

Murphy, Secretary, Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549–1090, and 

refer to File No. S7–12–11. We will post 

all public comments we receive without 

change, including any personal 

information you provide, such as your 

name and address, on the SEC Web site 

at http://www.sec.gov. Requests for 

materials submitted to OMB by the 

Commission with regard to this 

collection of information should be in 

writing, refer to File No. S7–12–11, and 

be submitted to the Securities and 

Exchange Commission, Office of 

Investor Education and Advocacy, 100 F 

Street, NE., Washington, DC 20549– 

0213. OMB is required to make a 

decision concerning the collection of 

information between 30 and 60 days 

after publication of this release in the 

Federal Register. A comment to OMB is 

best assured of having full effect if OMB 

receives it within 30 days after 

publication of this release. 

Board: You may submit comments, 

identified by Docket No. R–1410, by any 

of the following methods: 

• Agency Web site: http:// 

www.federalreserve.gov. Follow the 

instructions for submitting comments 

on the http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: 

regs.comments@federalreserve.gov. 

Include docket number in the subject 

line of the message. 

• FAX: 202–452–3819 or 202–452– 

3102. 

• Mail: Jennifer J. Johnson, Secretary, 

Board of Governors of the Federal 

Reserve System, 20th Street and 

Constitution Avenue, NW., Washington, 

DC 20551. 

All public comments are available 

from the Board’s Web site at http:// 

www.federalreserve.gov/generalinfo/ 

foia/ProposedRegs.cfm as submitted, 

unless modified for technical reasons. 

Accordingly, your comments will not be 


kgrant on DSK8KYBLC1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 / Proposed Rules 21187 

39 15 U.S.C. 78o. 

40 15 U.S.C. 80b–2(a)(11). By its terms, the 

definition of ‘‘covered financial institution’’ in 

Section 956 includes any firm that meets the 

definition of ‘‘investment adviser’’ under the 

Investment Advisers Act of 1940 (‘‘Investment 

Advisers Act’’), regardless of whether the firm is 

registered as an investment adviser under the Act. 

Banks and bank holding companies are generally 

excluded from the definition of ‘‘investment 

adviser’’ under section 202(a)(11) of the Investment 

Advisers Act. 39For credit unions, $10 billion or more. 

edited to remove any identifying or 

contact information. Public comments 

may also be viewed electronically or in 

paper in Room MP–500 of the Board’s 

Martin Building (20th and C Streets, 

NW.) between 9 a.m. and 5 p.m. on 

weekdays. 

Proposed Information Collection 

Title of Information Collection: 

Reporting and Recordkeeping 

Requirements Associated with 

Incentive-based Compensation 

Arrangements. 

Frequency of Response: Annual. 

Affected Public: Businesses or other 

for-profit. 

Respondents: 

FDIC: State nonmember banks or an 

insured U.S. branch of a foreign bank 

that has total consolidated assets of $1 

billion or more. 

OCC: National banks and Federal 

branches and agencies of foreign banks 

with $1 billion or more in total assets. 

OTS: Savings associations and savings 

and loan holding companies with $1 

billion or more in total assets. 

NCUA: Credit unions with $1 billion 

or more in total assets. 

SEC: Broker-dealers registered under 

section 15 of the Securities Exchange 

Act of 1934 39 with $1 billion or more 

in total assets and investment advisers, 

as such term is defined in section 

202(a)(11) of the Investment Advisers 

Act of 1940, with $1 billion or more in 

total assets 40 (collectively ‘‘covered BDs 

and IAs’’). 

Board: State member banks, bank 

holding companies, and state-licensed 

uninsured branches and agencies of 

foreign banks with more than $1 billion 

in total assets, and the U.S. operations 

of foreign banking organizations with $1 

billion or more in U.S. assets. 

Abstract: Section 956 of the DoddFrank Act requires that the agencies 

prohibit incentive-based payment 

arrangements at a covered financial 

institution that encourage inappropriate 

risks by a financial institution by 

providing excessive compensation or 

that could lead to material financial 

loss. Under the Dodd-Frank Act, a 

covered financial institution also must 

disclose to its appropriate Federal 

regulator the structure of its incentivebased compensation arrangements 

sufficient to determine whether the 

structure provides ‘‘excessive 

compensation, fees, or benefits’’ or 

‘‘could lead to material financial loss’’ to 

the institution. The Dodd-Frank Act 

does not require a covered financial 

institution to disclose compensation of 

individuals as part of this requirement. 

Section __.4(a) would require covered 

financial institutions that have total 

consolidated assets of $1 billion or more 

to submit a report annually to the 

Agency that describes the structure of 

the covered financial institution’s 

incentive-based compensation 

arrangements for covered persons and 

that is sufficient to allow an assessment 

of whether the structure or features of 

those arrangements provide or are likely 

to provide covered persons with 

excessive compensation, fees, or 

benefits to covered persons or could 

lead to material financial loss to the 

institution. Section __.4(b) would 

require the following minimum 

standards: 

(1) A clear narrative description of the 

components of the covered financial 

institution’s incentive-based 

compensation arrangements applicable 

to covered persons; 

(2) A succinct description of the 

covered financial institution’s policies 

and procedures governing its incentivebased compensation arrangements; 

(3) If the covered financial institution 

has total consolidated assets of $50 

billion or more,39 an additional succinct 

description of incentive-based 

compensation policies and procedures 

specific to the covered financial 

institution’s: 

(i) Executive officers; and 

(ii) Other covered persons who the 

board of directors, or a committee 

thereof, of the institution has identified 

and determined under § ___.5(b)(3)(ii) of 

this part individually 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; 

(4) Any material changes to the 

covered financial institution’s incentivebased compensation arrangements and 

policies and procedures made since the 

covered financial institution’s last 

report submitted under paragraph (a)(1) 

of this section; and 

(5) The specific reasons why the 

covered financial institution believes 

the structure of its incentive-based 

compensation plan: (i) Does not provide 

covered persons incentives to engage in 

behavior that is likely to cause the 

covered financial institution to suffer 

material financial loss; and (ii) does not 

provide covered persons with excessive 

compensation. 

Section __.5(b)(3)(ii)(B) would require 

the board of directors of covered 

financial institutions that have total 

consolidated assets of $50 billion or 

more to approve and document the 

identification of those covered persons 

that individually 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. 

Section __.6(b)(5) would ensure that 

documentation of the institution’s 

processes for establishing, 

implementing, modifying, and 

monitoring incentive-based 

compensation arrangements is 

maintained that is sufficient to enable 

the Agency to determine the 

institution’s compliance with 12 U.S.C. 

5641. 

Estimated Burden: 

FDIC 

Number of respondents: 301 (12 

institutions with total consolidated 

assets of $50 billion or more and 289 

institutions with total consolidated 

assets between $1 billion and $50 

billion; 4,466 institutions with total 

consolidated assets below $1 billion are 

exempt). 

Burden per respondent for initial set 

up: 180 hours for institutions with $50 

billion or more in total assets (80 hours 

for reporting requirements and 100 

hours for recordkeeping requirements) 

and 70 hours for institutions between $1 

billion and $50 billion in total assets (30 

hours for reporting requirements and 40 

hours for recordkeeping requirements). 

Burden per respondent for ongoing 

compliance: 70 hours for institutions 

with $50 billion or more in total assets 

(40 hours for reporting requirements 

and 30 hours for recordkeeping 

requirements) and 25 hours for 

institutions between $1 billion and $50 

billion in total assets (15 hours for 

reporting requirements and 10 hours for 

recordkeeping requirements). 

Total FDIC annual burden: 30,455 

hours (22,390 hours for initial set-up 

and 8,065 hours for ongoing 

compliance). 

OCC 

Number of respondents: 158 (18 

institutions with total consolidated 

assets of $50 billion or more and 140 

institutions with total consolidated 

assets between $1 billion and $50 

billion; 1,215 institutions and 67 trust 

companies with total consolidated 

assets below $1 billion are exempt). 


kgrant on DSK8KYBLC1PROD with PROPOSALS2
21188 Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 / Proposed Rules 

40Each Federal regulator has proposed how to 

calculate a firm’s ‘‘total consolidated assets’’. For 

broker-dealers, the determination of whether the 

broker-dealer had $1 billion in assets would be 

made by reference to the broker-dealer’s year-end 

audited consolidated statement of financial 

condition filed with the Commission pursuant to 

Rule 17a–5. For investment advisers, asset size 

would be determined by the adviser’s total assets 

shown on the balance sheet for the adviser’s most 

recent fiscal year end. Data from the SEC’s Office 

of Risk, Strategy and Financial Innovation indicates 

that there are 132 registered broker-dealers with 

assets of $1 billion or more and 18 broker-dealers 

with assets of at least $50 billion. Most investment 

advisers currently do not report to the Commission 

the amount of their own assets, so the Commission 

is unable to determine how many have $1 billion 

or more in assets and $50 billion or more in total 

consolidated assets. See Form ADV, Part 1A, Item 

12. The Commission estimates that advisers with 

assets under management of $100 billion or more 

would have total consolidated assets of $1 billion 

or more. Based on data from the Investment Adviser 

Registration Depository (‘‘IARD’’), the SEC’s 

Division of Investment Management estimates that 

68 registered advisers with assets under 

management of at least $100 billion would have 

assets of $1 billion or more, and 7 registered 

advisers with assets under management of at least 

$500 billion would have total consolidated assets of 

at least $50 billion. The Commission has rounded 

these numbers to 70 and 10 for purposes of its 

analysis. 

41The Commission estimated that public 

company respondents would incur approximately 

95 hours of annual burden in connection with the 

adoption of Item 402 of Regulation S–K. See 

Securities Act of 1933 Release No. 8432A and 

Securities Exchange Act Release No. 

54302A.(August 29, 2006), 71 FR 53158, 53217 

Burden per respondent for initial set 

up: 180 hours for institutions with $50 

billion or more in total assets (80 hours 

for reporting requirements and 100 

hours for recordkeeping requirements) 

and 70 hours for institutions between $1 

billion and $50 billion in total assets (30 

hours for reporting requirements and 40 

hours for recordkeeping requirements). 

Burden per respondent for ongoing 

compliance: 70 hours for institutions 

with $50 billion or more in total assets 

(40 hours for reporting requirements 

and 30 hours for recordkeeping 

requirements) and 25 hours for 

institutions between $1 billion and $50 

billion in total assets (15 hours for 

reporting requirements and 10 hours for 

recordkeeping requirements). 

Total OCC annual burden: 17,800 

hours (13,040 hours for initial set-up 

and 4,760 hours for ongoing 

compliance). 

OTS 

Number of respondents: 163 (17 

institutions with total consolidated 

assets of $50 billion or more and 146 

institutions with total consolidated 

assets between $1 billion and $50 

billion. 

Burden per respondent for initial set 

up: 180 hours for institutions with $50 

billion or more in total assets (80 hours 

for reporting requirements and 100 

hours for recordkeeping requirements) 

and 70 hours for institutions between $1 

billion and $50 billion in total assets (30 

hours for reporting requirements and 40 

hours for recordkeeping requirements). 

Burden per respondent for ongoing 

compliance: 70 hours for institutions 

with $50 billion or more in total assets 

(40 hours for reporting requirements 

and 30 hours for recordkeeping 

requirements) and 25 hours for 

institutions between $1 billion and $50 

billion in total assets (15 hours for 

reporting requirements and 10 hours for 

recordkeeping requirements). 

Total OTS annual burden: 18,120 

hours (13,280 hours for initial set-up 

and 4,840 hours for ongoing 

compliance). 

NCUA 

Number of respondents: 184 (6 

institutions with total consolidated 

assets of $10 billion or more and 178 

institutions with total consolidated 

assets between $1 billion and $10 

billion). 

Burden per respondent for initial set 

up: 180 hours for institutions with $10 

billion or more in total assets (80 hours 

for reporting requirements and 100 

hours for recordkeeping requirements) 

and 70 hours for institutions between $1 

billion and $10 billion in total assets (30 

hours for reporting requirements and 40 

hours for recordkeeping requirements). 

Burden per respondent for ongoing 

compliance: 70 hours for institutions 

with $10 billion or more in total assets 

(40 hours for reporting requirements 

and 30 hours for recordkeeping 

requirements) and 25 hours for 

institutions between $1 billion and $10 

billion in total assets (15 hours for 

reporting requirements and 10 hours for 

recordkeeping requirements). 

Total NCUA annual burden: 18,410 

hours (13,540 hours for initial set-up 

and 4,870 hours for ongoing 

compliance). 

SEC 

Number of respondents: The proposed 

rule would establish additional 

reporting and recordkeeping burdens for 

broker-dealers that are covered financial 

institutions (‘‘covered BDs and IAs’’) 

with assets of at least $50 billion, as 

compared to covered BDs and IAs with 

assets between $1 billion and $50 

billion. The Commission estimates that 

approximately 200 respondents 

(approximately 130 broker-dealers and 

approximately 70 investment advisers) 

would be affected generally by the 

proposed rules, and that approximately 

30 of the 200 respondents would be 

affected by proposed §§ 248.204(c)(3) 

and 248.205(b)(3)(ii)(B).40

(A) Proposed Section 248.204 (Required 

Reports) 

The Commission, jointly with the 

other Agencies, proposes that covered 

BDs and IAs be required to describe the 

structure of the firms’ incentive-based 

compensation arrangements for covered 

persons in a manner that is sufficient to 

allow an assessment of whether the 

structure or features of those 

arrangements provide or are likely to 

provide covered persons with excessive 

compensation, fees, or benefits to 

covered persons or could lead to 

material financial loss to the firm. 

Proposed § 248.204(c)(1) would require 

a narrative description of the 

components of the incentive-based 

compensation arrangements applicable 

to covered persons, specifying the types 

of covered persons to which they apply. 

Proposed § 248.204(c)(2) would require 

that covered BDs and IAs provide a 

succinct description of their incentivebased compensation policies and 

procedures. Proposed § 248.204(c)(3) 

would require that covered BDs and IAs 

with total consolidated assets of $50 

billion or more provide the Commission 

with a succinct description of incentivebased compensation policies and 

procedures applicable to executive 

officers and other covered persons 

whom the board of directors, or a 

committee thereof, has identified as 

having the ability to expose the 

institution to possible losses that are 

substantial in relation to the firm’s size, 

capital, or overall risk tolerance. 

Proposed § 248.204(c)(4) would require 

covered BDs and IAs to describe the 

material changes to the firm’s incentive 

based compensation arrangements. 

Proposed § 248.204(c)(5) would require 

each covered BD and IA to describe the 

specific reasons why it believes the 

structure of its incentive-based 

compensation does not encourage 

inappropriate risks by the covered 

financial institution by providing 

covered persons with excessive 

compensation or incentive-based 

compensation that could lead to 

material financial loss to the covered 

financial institution. 

Based on the initial and ongoing 

burden the Commission estimated in 

connection with the adoption of the 

executive compensation reporting 

requirements for public companies 

filing Form 10–Ks under the Exchange 

Act (i.e. Item 402 of Regulation S–K), 

the Commission estimates that the 

burden for the covered BD and IA 

respondents imposed by the proposed 

reporting requirements would be 100 

hours.41 Since the proposed rule does 


kgrant on DSK8KYBLC1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 / Proposed Rules 21189 

(September 8, 2006) (S7–03–06). The Commission 

is rounding this number up to 100 for the instant 

proposed rule estimate. 

42 200 covered BDs and IAs x 100 hours = 20,000 

hours. 

43 30 covered BDs and IAs with assets of at least 

$50 billion × 20 hours = 600 hours. 

44 30 covered BDs and IAs with assets of at least 

$50 billion × 10 hours = 300 hours. 

45See Guidance 75 FR at 36398. 

46The Commission estimates that there are 

approximately 20 covered bank BDs with assets of 

at least $50 billion and 35 covered bank BDs with 

assets between $1 billion and $50 billion. The 

Commission bases the estimates for covered bank 

BDs upon data submitted to the Commission in 

FOCUS reports (i.e. Form X–17A–5 Part II). The 

Commission estimates that there are approximately 

5 covered bank IAs with assets of at least $50 

billion and 50 covered bank IAs with assets 

between $1 billion and $50 billion. The estimates 

for covered bank IAs are based upon data submitted 

to the Commission in Form ADV (i.e. Form ADV 

Part 1A, Items 6.A.(6) and 7.A.(5)). 

not provide for different reporting 

requirements for smaller covered BDs 

and IAs with assets between $1 billion 

and $50 billion and for larger firms with 

assets of at least $50 billion, the 

Commission has not estimated separate 

reporting burdens for larger covered BDs 

and IAs. Therefore, the Commission 

estimates a collective reporting burden 

of 20,000 hours for covered BDs and 

IAs.42

(B) Documentation of Determining 

Designated Persons (Section 

248.205(b)(3)(ii)(B)) 

For covered BDs and IAs with assets 

of at least $50 billion, proposed 

§ 248.205(b)(3)(ii)(B) would require a 

firm’s board of directors, or a committee 

thereof, to identify those covered 

persons (other than executive officers) 

that individually 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. These covered persons may 

include, for example, traders with large 

position limits relative to the 

institution’s overall risk tolerance and 

other individuals that have the authority 

to place at risk a substantial part of the 

capital of the covered financial 

institution. The Agencies propose that 

the compensation decisions applicable 

to such persons must be approved by 

the firm’s board of directors or a 

committee of the board and that the 

covered BD or IA document the 

compensation decisions made by the 

board or its committee. 

The Commission estimates that each 

covered BD and IA with assets of at least 

$50 billion would incur 20 hours of 

burden initially to comply with the 

proposed recordkeeping requirements 

associated with the proposed rule and 

10 hours of burden on an ongoing basis. 

Therefore, the Commission estimates an 

initial collective recordkeeping burden 

in connection with the documentation 

requirement provided in 

§ 248.205(b)(3)(ii)(B) is 600 hours for 

covered BDs and IAs with assets of at 

least $50 billion.43 The Commission 

estimates the ongoing collective 

recordkeeping burden in connection 

with this requirement to be 300 hours 

for covered BDs and IAs with assets of 

at least $50 billion.44

(C) Required Policies and Procedures 

Proposed § 248.206(a) would require 

covered financial institutions to adopt 

and maintain policies and procedures 

reasonably designed to ensure and 

monitor compliance with 12 U.S.C. 

5641, commensurate with the size and 

complexity of the organization and the 

scope and nature of its use of incentivebased compensation. As described in 

further detail above, proposed 

§ 248.206(b) would require that the 

policies and procedures, at a minimum, 

are consistent with the disclosure 

requirements and prohibitions in other 

parts of the proposed rule, ensure that 

risk management or oversight personnel 

have a role in designing and assessing 

incentive-based compensation 

arrangements, provide for independent 

monitoring of the incentive-based 

compensation awards, risks taken and 

actual outcomes, require that a covered 

financial institution’s board receive data 

and analysis from management and 

other sources sufficient to enable the 

board to assess whether the incentivebased compensation arrangements are 

consistent with 12 U.S.C. 5641, and 

require sufficient documentation of the 

covered financial institution’s incentivebased compensation arrangements to 

enable the Commission to determine the 

covered BDs or IAs compliance with 12 

U.S.C. 5641. In addition, the proposal 

would require that the covered BDs’ and 

IAs’ policies and procedures include 

certain features when a firm uses 

deferral in connection with an 

incentive-based compensation 

arrangement, and that the policies and 

procedures subject incentive-based 

compensation arrangements to a 

corporate governance framework. 

Many covered BDs and IAs are 

already conforming to the incentivebased compensation standards reflected 

in the Guidance because they are 

affiliated with banking organizations 

supervised by the FRB, OCC, OTS or 

FDIC that have already altered their 

incentive-based compensation 

arrangements and policies and 

procedures following the publication of 

the Guidance. The Guidance applies to 

all banking organizations supervised by 

the FRB, OCC, OTS or FDIC, including 

national banks, State member banks, 

State nonmember banks, savings 

associations, U.S. bank holding 

companies, savings and loan holding 

companies, the U.S. operations of 

foreign banks with a branch, agency or 

commercial lending company in the 

United States, and Edge and agreement 

corporations (collectively ‘‘banking 

organizations’’).45 Based upon 

information filed with the Commission 

and the staff’s discussions with a 

number of BDs and its review of the 

public filings of covered BDs, IAs and 

certain parent companies, the 

Commission believes that covered BDs 

and IAs affiliated with banking 

organizations (‘‘covered bank BDs and 

IAs’’) have already altered their 

incentive-based compensation policies 

and procedures and corresponding 

arrangements in conjunction with their 

affiliated banking organizations that are 

subject to the Guidance. Based on 

public filings with the Commission, the 

SEC estimates that there are 

approximately 25 covered bank BDs and 

IAs with total consolidated assets of at 

least $50 billion and approximately 85 

covered bank BDs and IAs with total 

consolidated assets between $1 billion 

and $50 billion.46 Therefore, covered 

bank BDs and IAs should bear 

significantly less burden than those 

covered BDs and IAs not already subject 

to the Guidance (‘‘covered non-bank BDs 

and IAs’’) to develop and maintain 

policies and procedures as required in 

the proposed rules. The Commission 

requests comment on its estimated 

number of covered bank BDs and IAs. 

The Commission believes that the 

covered bank BDs and IAs would incur 

approximately the same recordkeeping 

burden as the banking organizations. 

Based on the initial estimates of 

recordkeeping burden provided by FRB, 

OCC, FDIC and OTS for proposed 

§ 248.206, the Commission estimates an 

initial recordkeeping burden of 80 hours 

for each covered bank BD and IA with 

$50 billion or more in total consolidated 

assets and 40 hours of initial 

recordkeeping burden for each covered 

bank BD and IA with total consolidated 

assets between $1 billion and $50 

billion. Based on the ongoing estimates 

of recordkeeping burden provided by 

FRB, OCC, FDIC and OTS, the 

Commission believes that each covered 

bank BD and IA respondent with total 

consolidated assets of at least $50 

billion would incur approximately 30 

hours of ongoing recordkeeping burden 


kgrant on DSK8KYBLC1PROD with PROPOSALS2
21190 Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 / Proposed Rules 

47See Guidance, 75 FR at 36403. 

48The Commission estimates that there are 

approximately 75 covered non-bank BDs with assets 

between $1 billion and $50 billion . The 

Commission estimates that there are approximately 

5 covered non-bank IAs with assets of at least $50 

billion and 10 covered non-bank IAs with assets 

between $1 billion and $50 billion. The 

Commission bases these estimates upon data 

submitted to the Commission in FOCUS reports (i.e. 

Form X–17A–5 Part II) and in Form ADV (i.e. Form 

ADV Part 1A, Items 6.A.(6) and 7.A.(5)). See supra 

note 46. It is difficult to determine whether any 

unregistered advisers are non-bank IAs that are not 

subject to the Guidance. 

49 500 hours (from Guidance) + 80 hours (from 

the estimate provided by the Fed, OCC, FDIC and 

OTS in instant proposed rule) = 580 hours. 

50 500 hours (from Guidance) + 40 hours (from 

the estimate provided by the Fed, OCC, FDIC and 

OTS in instant proposed rule) = 540 hours. 

51 40 hours (from Guidance) + 30 hours (from the 

estimate provided by the Fed, OCC, FDIC and OTS 

in instant proposed rule) = 70 hours. 

52 40 hours (from Guidance) + 10 hours (from the 

estimate provided by the Fed, OCC, FDIC and OTS 

in instant proposed rule) = 50 hours. 

53 (20 covered bank BDs with assets of at least 

$50B + 5 covered bank IAs with assets of at least 

$50B) × 100 hours = 2,500 hours. 

54 (35 covered bank BDs with assets between $1B 

and $50B + 50 covered bank IAs with assets 

between $1B and $50B) × 100 hours = 8,500 hours. 

55 5 covered non-bank IAs with assets of at least 

$50B × 100 hours = 500 hours. 

56 (75 covered non-bank BDs with assets between 

$1B and $50B + 10 covered non-bank IAs with 

assets between $1B and $50B) × 100 hours = 8,500 

hours. 

57 (20 covered bank BDs with assets of at least 

$50B + 5 covered bank IAs with assets of at least 

$50B) × 80 hours + ((20 covered bank BDs + 5 

covered bank IAs) × 20 hours in connection with 

proposed Section 248.205(b)(3)(ii)(B)) = 2,500 

hours. 

58 (35 covered bank BDs with assets between $1B 

and $50B + 50 covered bank IAs with assets 

between $1B and $50B) × 40 hours = 3,400 hours. 

59 5 covered non-bank IAs with assets of at least 

$50B × 580 hours + ((5 covered non-bank IAs with 

assets of at least $50B) × 20 hours in connection 

with proposed Section 248.205(b)(3)(ii)(B)) = 3,000 

hours. 

60 (75 covered non-bank BDs with assets between 

$1B and $50B + 10 covered non-bank IAs with 

assets between $1B and $50B) × 540 hours = 45,900 

hours. 

61 (20 covered bank BDs with assets of at least 

$50B + 5 covered bank IAs with assets of at least 

$50B) × 100 hours = 2,500 hours. 

62 (35 covered bank BDs with assets between $1B 

and $50B + 50 covered bank IAs with assets 

between $1B and $50B) × 100 hours = 8,500 hours. 

63 5 covered non-bank IAs with assets of at least 

$50B × 100 hours = 500 hours. 

64 (75 covered non-bank BDs with assets between 

$1B and $50B + 10 covered non-bank IAs with 

assets between $1B and $50B) × 100 hours = 8,500 

hours. 

65 (20 covered bank BDs with assets of at least 

$50B + 5 covered bank IAs with assets of at least 

$50B) × 30 hours + ((20 covered bank BDs + 5 

covered bank IAs) × 10 hours in connection with 

proposed Section 248.205(b)(3)(ii)(B)) = 900 hours. 

66 (35 covered bank BDs with assets between $1B 

and $50B + 50 covered bank IAs with assets 

between $1B and $50B) × 10 hours = 850 hours. 

67 5 covered non-bank IAs with assets of at least 

$50B × 70 hours + ((5 covered non-bank IAs with 

assets of at least $50B) × 10 hours in connection 

with proposed Section 248.205(b)(3)(ii)(B)) = 400 

hours. 

68 (75 covered non-bank BDs with assets between 

$1B and $50B + 10 covered non-bank IAs with 

assets between $1B and $50B) × 50 hours = 4,250 

hours. 

69An outside attorney’s salary range is estimated 

at $400 an hour based on industry sources. See 

Securities Exchange Act Release No. 62174 (May 

26, 2010) at note 510, 75 FR 32556 (June 8, 2010) 

(S7–15–09). The Commission requests comment on 

this estimate. 

and each covered bank BD and IA 

respondent with total consolidated 

assets between $1 billion and $50 

billion would incur approximately 10 

hours of recordkeeping burden on an 

ongoing basis. 

For covered non-bank BDs and IAs, 

the Commission estimates a 

significantly higher burden, namely the 

amount of burden that the banking 

agencies originally estimated in the 

Guidance (480 hours of initial burden, 

rounded up to 500 in the instant 

proposal and 40 hours of ongoing 

burden) 47 in addition to the amounts 

that the FRB, OTS, FDIC and OCC 

estimated in connection with the instant 

proposed rule. The Commission 

estimates that there are approximately 

75 covered non-bank BDs with assets 

between $1 billion and $50 billion, 10 

covered non-bank IAs with assets 

between $1 billion and $50 billion and 

5 covered non-bank IAs with assets of 

at least $50 billion.48

Therefore, for covered non-bank BDs 

and IAs, the Commission estimates an 

initial recordkeeping burden estimate of 

580 hours 49 for covered BDs and IAs 

with $50 billion or more in total 

consolidated assets and 540 hours 50 of 

recordkeeping burden for covered BDs 

and IAs with total consolidated assets 

between $1 billion and $50 billion. The 

Commission estimates that covered nonbank BD and IA respondents with total 

consolidated assets of at least $50 

billion would incur approximately 70 

hours 51 of ongoing recordkeeping 

burden while those covered non-Bank 

BDs and IAs with total consolidated 

assets between $1 billion and $50 

billion would incur approximately 50 

hours 52 of ongoing recordkeeping 

burden. 

Total SEC initial and annual 

recordkeeping and reporting burdens 

(from proposed Section 

248.205(b)(iii)(2)(B) and proposed 

Section 248.206): 

Covered bank 

BDs and IAs 

($50B +) 

(hours) 

Covered bank 

BDs and IAs 

($1B–$50B) 

(hours) 

Covered nonbank BDs and 

IAs ($50B +) 

(hours) 

Covered nonbank BDs and 

IAs ($1B–$50B) 

(hours) 

Initial Reporting ............................................................................................ 53 2,500 54 8,500 55 500 56 8,500 

Initial Recordkeeping ................................................................................... 57 2,500 58 3,400 59 3,000 60 46,000 

Ongoing Reporting ....................................................................................... 61 2,500 62 8,500 63 500 64 8,500 

Ongoing Recordkeeping .............................................................................. 65 1,000 66 1,000 67 400 68 4,300 

D. External Costs 

The Commission also believes that the 

proposed rules would likely generate 

external costs to the covered BDs and 

IAs, particularly at the stage of 

preparing the initial reports required by 

§ 248.204 and initially developing and 

implementing the policies and 

procedures in compliance with 

§ 248.206. Covered BDs and IAs may 

elect to hire various types of 

professionals, including attorneys, 

benefits consultants, and accountants. 

The Commission estimates that the 

covered BDs and IAs would hire 

professionals to prepare the necessary 

reports and develop and maintain the 

necessary policies and procedures at 

approximately the same hourly level as 

the covered BDs and IAs assume 

internally (e.g. covered bank BDs and 

IAs with at least $50 billion in assets 

would collectively use approximately 

the equivalent of 2,500 hours worth of 

professionals’ time to prepare the 

required reports, in addition to the 

covered bank BDs’ and IAs’ internal 

burden to prepare them). 

The Commission believes that there 

would be approximately an equal 

balance of attorneys,69 benefits 


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70An outside management consultant’s salary 

range (national averages) is available from http:// 

www.payscale.com. Using their data from the 75th 

percentile, adjusting it for an 1800-hour work year, 

and multiplying by the 5.35 factor which normally 

is used to include benefits but here is used as an 

approximation to offset the fact that New York 

salaries are typically higher than the rest of the 

country, the result is $596 per hour (rounded to 

$600). The Commission requests comment on this 

estimate. 

71An outside actuary’s salary range (national 

averages) is available from http:// 

www.payscale.com. Using their data from the 75th 

percentile, adjusting it for an 1800-hour work year, 

and multiplying by the 5.35 factor which normally 

is used to include benefits but here is used as an 

approximation to offset the fact that New York 

salaries are typically higher than the rest of the 

country, the result is $330 per hour. The 

Commission requests comment on this estimate. 

72An outside accountant’s salary range is 

available from the U.S. Bureau of Labor Statistics, 

Occupational Employment Statistics Web site. 

Using their data for median salaries from New York 

State, which has the highest rates in the country, 

and multiplying by the 5.35 factor which is used 

to include benefits, the result is $250 per hour. The 

Commission requests comment on this estimate. 

73 2,500 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $987,500. 

74 8,500 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $3,357,500. 

75 500 hours × [(25% × $400/hour) + (25% × $600/ 

hour) + (25% × $330/hour) + (25% × $250/hour)] 

= $197,500. 

76 8,500 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $3,357,500. 

77 2,500 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $987,500. 

78 3,400 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $1,343,000. 

79 3,000 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $1,185,000. 

80 46,000 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $18,170,000. 

81 2,500 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $987,500. 

82 8,500 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $3,357,500. 

83 500 hours × [(25% × $400/hour) + (25% × $600/ 

hour) + (25% × $330/hour) + (25% × $250/hour)] 

= $197,500. 

84 8,500 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $3,357,500. 

85 1,000 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $395,000. 

86 1,000 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $395,000. 

87 400 hours × [(25% × $400/hour) + (25% × $600/ 

hour) + (25% × $330/hour) + (25% × $250/hour)] 

= $158,000. 

88 4,300 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $1,698,500. 

89See 58 FR 51735 (Oct. 4, 1993), as amended. 

consultants,70 actuaries 71 and 

accountants 72 that are hired at each 

covered BD or IA. The chart below 

summarizes the external costs that the 

Commission estimates covered BDs and 

IAs would assume collectively in 

connection with the proposed rule. The 

Commission requests comments on 

these external cost estimates, including 

the hourly rate that the Commission 

estimates for external attorneys, benefits 

consultants, actuaries and accountants. 

Total SEC estimated external 

recordkeeping costs: 

Covered bank 

BDs and IAs 

($50B +) 

(million) 

Covered bank 

BDs and IAs 

($1B–$50B) 

(million) 

Covered nonbank BDs and 

IAs ($50B +) 

(million) 

Covered nonbank BDs and 

IAs ($1B–$50B) 

(million) 

Initial Reporting ............................................................................................ 73 $1 74 $3.4 75 $200,000 76 $3.4 

Initial Recordkeeping ................................................................................... 77 1 78 1.3 79 1.2 80 18 

Ongoing Reporting ....................................................................................... 81 1 82 3.4 83 200,000 84 3.4 

Ongoing Recordkeeping .............................................................................. 85 400,000 86 400,000 87 150,000 88 1.7 

Board 

Number of respondents: 664 (59 

institutions with total consolidated 

assets of $50 billion or more and 605 

institutions with total consolidated 

assets between $1 billion and $50 

billion). 

Burden per respondent for initial set 

up: 180 hours for institutions with $50 

billion or more in total consolidated 

assets (80 hours for reporting 

requirements and 100 hours for 

recordkeeping requirements) and 70 

hours for institutions between $1 billion 

and $50 billion in total consolidated 

assets (30 hours for reporting 

requirements and 40 hours for 

recordkeeping requirements). 

Burden per respondent for ongoing 

compliance: 70 hours for institutions 

with $50 billion or more in total 

consolidated assets (40 hours for 

reporting requirements and 30 hours for 

recordkeeping requirements) and 25 

hours for institutions between $1 billion 

and $50 billion in total consolidated 

assets (15 hours for reporting 

requirements and 10 hours for 

recordkeeping requirements). 

Total Board annual burden: 72,225 

hours (52,970 hours for initial set-up 

and 19,255 hours for ongoing 

compliance). 

C. OTS Executive Orders 12866 and 

13563 Determination 

Executive Order 13563, ‘‘Improving 

Regulation and Regulatory Review,’’ 

affirms and supplements Executive 

Order 12866, ‘‘Regulatory Planning and 

Review,’’ which requires Federal 

agencies to prepare a regulatory impact 

analysis for agency actions that are 

found to be ‘‘significant regulatory 

actions.’’ Significant regulatory action 

means any regulatory action that is 

likely to result in a rule that may: 

(1) Have an annual effect on the 

economy of $100 million or more or 

adversely affect in a material way the 

economy, a sector of the economy, 

productivity, competition, jobs, the 

environment, public health or safety, or 

State, local, or tribal governments or 

communities; 

(2) Create a serious inconsistency or 

otherwise interfere with an action taken 

or planned by another agency; 

(3) Materially alter the budgetary 

impact of entitlements, grants, user fees, 

or loan programs or the rights and 

obligations of recipients thereof; or 

(4) Raise novel legal or policy issues 

arising out of legal mandates, the 

President’s priorities, or the principles 

set forth in the Executive order.89

Based on its initial assessment, OTS 

anticipates that the proposed rule (if the 

final rule is the same as the proposed 

rule) would not be economically 

significant. Nonetheless, OTS solicits 

comment on the economic impact. 

OTS does not anticipate that the 

proposal would create a serious 

inconsistency or otherwise interfere 

with an action taken or planned by 

another agency. OTS’s proposal is 

essentially the same as the proposal of 

every other Federal agency regulating 

the financial services industry. Thus, 

rather than creating any inconsistency, 

by being part of this joint interagency 

proposal, OTS’s portion adds to the 

consistency of regulations on incentivebased compensation that will 

encompass the financial services 

industry. 


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90See H.R. Rep. 111–236, Corporate and 

Financial Institution Compensation Fairness Act of 

2009, at 6 (2009). For additional legislative history, 

see Compensation Structure and Systemic Risk: 

Hearing Before the H. Comm. on Financial Services, 

111th Cong. (2009). 

91Final Report of the National Commission on 

the Causes of the Financial and Economic Crisis in 

the United States, January 2011, available at 

http:// 

c0182732.cdn1.cloudfiles.rackspacecloud.com/ 

fcic_final_report_full.pdf. The report contains 

discussion of financial sector executive 

compensation practices, including on pages 61–65. 

OTS does not anticipate that the 

proposal would materially alter the 

budgetary impact of entitlements, 

grants, user fees, or loan programs or the 

rights and obligations of recipients 

thereof. The proposal does not have any 

provisions related to those subjects. 

The Office of Management and 

Budget’s Office of Information and 

Regulatory Affairs has designated this 

proposed rule to be a significant 

regulatory action that is likely to result 

in a rule that may raise novel legal or 

policy issues arising out of legal 

mandates, the President’s priorities, or 

the principles set forth in Executive 

Orders 12866 and 13563. OTS notes that 

the proposal does raise some similar 

issues as were raised by the Banking 

Agency Guidance issued June 25, 2010, 

and the 1995 Federal banking agency 

guidelines implementing the 

compensation-related and other safety 

and soundness standards in section 39 

of the FDIA (codified at 12 CFR pt. 570, 

App. A). 

Need for Regulatory Action 

The proposed rule is required by 

section 956 of the Dodd-Frank Act. 

Thus, the proposal is needed to fulfill 

the statutory mandate that OTS and the 

other agencies participating in this joint 

rulemaking prescribe regulations or 

guidelines that: 

1. Prohibit incentive-based payment 

arrangements, or any feature of any such 

arrangement, at a covered financial 

institution that the Agencies determine 

encourage inappropriate risks by a 

financial institution by providing 

excessive compensation or that could 

lead to a material financial loss. 

2. Require covered financial 

institutions to disclose to its appropriate 

Federal regulator the structure of its 

incentive-based compensation 

arrangements sufficient to determine 

whether the structure provides 

‘‘excessive compensation, fees, or 

benefits’’ or ‘‘could lead to material 

financial loss’’ to the institution. 

3. Are comparable to the existing 

compensation-related safety and 

soundness standards applicable to 

insured depository institutions under 

section 39 of the FDIA (12 U.S.C. 

1831p–1(c)) (12 CFR pt. 570, App. A for 

OTS). 

The legislative history of the DoddFrank Act describes the reasons 

Congress believed section 956 of the 

Dodd-Frank Act was needed.90 Further 

information and analysis is contained in 

the Final Report of the Financial Crisis 

Inquiry Commission.91 OTS’s portion of 

the proposed rule is intended to 

enhance the regulatory oversight of 

incentive compensation schemes at 

larger OTS-regulated savings 

associations and savings and loan 

holding companies so as to help ensure 

that compensation at such institutions is 

neither excessive in itself nor 

encourages excessive risk taking. 

Scope of Proposed Rule 

Section 956 of the Dodd-Frank Act 

defines ‘‘covered financial institutions’’ 

to include depository institutions and 

depository institution holding 

companies, as defined in section 3 of 

the FDIA, with assets of $1 billion or 

more. OTS’s portion of the proposed 

rule applies to savings associations and 

savings and loan holding companies 

with $1 billion or more in total 

consolidated assets that have incentivebased compensation programs. 

With regard to savings associations, as 

of December 31, 2010, OTS supervised 

731 savings associations with a 

combined total of $932 billion in assets. 

The largest savings association had 

assets of $88 billion. Only three other 

savings associations had assets greater 

than $50 billion. The smallest savings 

association had assets of $3.5 million. 

Of the 731 savings associations, 103 

have more than a $1 billion each in total 

assets and thus are covered by the 

proposed rule (assuming they all have 

incentive-based compensation 

programs). Those 103 savings 

associations represent 85% of all thrift 

industry assets ($793 billion of the total 

$932 billion). To put this in context, 

however, the latest available data on 

commercial banks (dated September 30, 

2010) show 508 commercial banks with 

assets of $1 billion or more, but with 

combined total assets of $11 trillion, 

more than eleven times the amount of 

assets compared to OTS supervised 

savings associations of $1 billion or 

more. 

With regard to savings and loan 

holding companies, as of December 31, 

2010, OTS supervised 102 savings and 

loan holding companies. Savings and 

loan holding companies are companies 

that own or control one or more savings 

associations. Excluding 42 shell holding 

companies that do not have incentivebased compensation programs, there are 

60 savings and loan holding companies 

with aggregate consolidated assets of 

$3.1 trillion dollars that are covered by 

the proposed rule (assuming they all 

have incentive-based compensation 

programs). Individually, these 

companies have consolidated assets 

ranging from $1 billion to over $750 

billion, and vary in complexity as well 

as size. They conduct a wide range of 

activities beyond those conducted by 

the saving association(s) they control. 

These range from activities closely 

related to banking, such as insurance 

and securities brokerage, to activities 

conducted by large, multinational 

corporations, such as retailing and 

manufacturing. 

Therefore, altogether, OTS’s portion 

of the proposed rule would affect a 

maximum of 163 OTS-supervised 

institutions (103 savings associations 

and 60 savings and loan holding 

companies). 

OTS further notes that the Board, 

OCC, and FDIC will assume supervisory 

and rulemaking responsibility for 

entities currently supervised and 

regulated by OTS on the transfer date 

provided in Title III of the Dodd-Frank 

Act. That date is expected to be July 21, 

2011. These agencies expect to adopt, or 

incorporate, as appropriate, any final 

rule adopted by OTS as part of this 

rulemaking for relevant covered 

financial institutions that come under 

their respective supervisory authority 

after the transfer date. 

Types of Impact of Proposed Rule 

OTS reviewed existing practices at a 

subset of these 163 institutions to 

determine how much the rule would 

add to the current cost of administering 

incentive-based compensation 

programs. A covered financial 

institution would have to: 

1. Submit an annual report to OTS 

describing the structure of its incentivebased compensation program in 

sufficient detail for OTS to determine 

whether the program provides excessive 

compensation or compensation that 

could lead to material loss to the 

institution. The annual report would 

have to include an analysis of the 

characteristics of the incentive-based 

compensation program that prevent 

excessive compensation and/or mitigate 

risk of material financial loss. 

2. Review and, if necessary, redesign 

its incentive-based compensation 

system to ensure it has the elements 

necessary to adequately manage the 

risks arising from incentive-based 

compensation. The rule would contain 

a list of the minimum elements to be 

included in the policies and procedures. 


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92The Federal Banking Agency Guidance 

presents and discusses these measures. 

93See section 39(c) of FDIA, 12 U.S.C. 1831p– 

1(c). 

94See 12 CFR part 570, App. A, paragraph II.I. 

95See 12 CFR part 570, App. A, paragraph III.B. 

96See 12 CFR part 570, App. A, paragraph III.A. 

97 75 FR at 36405. 

98BCBS Consultative paper: Range of 

Methodologies for Risk and Performance Alignment 

of Remuneration, available at http://www.bis.org/ 

publ/bcbs178.pdf. 

99SEC regulation 17 CFR 229.402(a)(2) requires 

listed companies to disclose all elements of the 

compensation provided to ‘‘named executive 

officers’’ and ‘‘directors.’’ 

3. Conduct ongoing monitoring and, 

as appropriate, auditing of the 

incentive-based compensation program 

to ensure that it does, in fact, allocate 

incentive-based compensation in a way 

that is not excessive and does not 

encourage inappropriate risks. 

In estimating the implementation 

costs to covered financial institutions, 

OTS assumed that costs would generally 

fall in four areas: 

1. Initially reviewing incentive-based 

compensation programs to determine 

whether program modifications are 

needed; 

2. Modifying incentive-based 

compensation programs, where needed; 

3. Ongoing monitoring of incentivebased compensation programs to ensure 

continued compliance; and 

4. Preparing and submitting required 

annual reports on the programs to OTS. 

Almost all of the covered financial 

institutions have incentive-based 

compensation programs. Each covered 

financial institution, therefore, would 

need to perform an initial review to 

determine whether modifications would 

be needed. This initial review would 

also include the analysis necessary to 

prepare the first report to OTS. 

Those institutions needing 

modifications would have to expend 

further resources to design and 

implement compliant systems that fit 

the institution’s business strategy and 

internal structure. The complexity and 

length of this process would vary 

depending on the size of the institution, 

the scope of the institution’s incentivebased compensation program, and the 

extent of necessary modifications. 

The rule’s burden would be 

minimized by granting covered financial 

institutions the latitude to employ a 

variety of means to mitigate the risks 

posed by their current incentive-based 

compensation programs. While 

institutions would have to develop 

policies and procedures that provide 

clear expectations, institutions could 

choose the incentive-based 

compensation risk balancing measures 

that best address their employees and 

their risks.92

OTS’s provisional assessment is that 

most covered financial institutions 

would have to make minimal changes to 

their systems covering: 

1. Compensation to executives; 

2. The oversight exercised by the 

board and compensation committee; 

3. The scope of risk management; and 

4. The role of internal audit. 

Some of the key restrictions in the 

proposed rule are restrictions that 

covered financial institutions are 

already observing. Section 563h.5(a) 

would provide that a covered financial 

institution must not establish or 

maintain any type of incentive-based 

compensation arrangement, or any 

feature of any such arrangement, that 

encourages inappropriate risks by the 

covered financial institution by 

providing a covered person with 

excessive compensation. Section 

563h.5(b) would provide that a covered 

financial institution must not establish 

or maintain any type of incentive-based 

compensation arrangement, or any 

feature of any such arrangement, that 

encourages inappropriate risks by the 

covered financial institution, by 

providing incentive-based 

compensation to covered persons, either 

individually or as part of a group of 

persons who are subject to the same or 

similar incentive-based compensation 

arrangements, that could lead to 

material financial loss to the covered 

financial institution. 

OTS and the other Federal banking 

regulators have long required depository 

institutions to conform their 

compensation practices to principles of 

safety and soundness.93 Since 1995, 

OTS and the other Federal banking 

regulators have specifically prohibited 

depository institutions from paying 

compensation, fees, and benefits that are 

excessive or that could lead to material 

financial loss to the institutions.94 Since 

1995, OTS and the other Federal 

banking regulators have also specified 

that compensation that could lead to 

material financial loss to an institution 

is prohibited as an unsafe and unsound 

practice.95 The standards specified in 

§ 563h.5(a)(2) for determining whether 

an incentive-based compensation 

arrangement provides excessive 

compensation are taken directly from 

the existing 1995 guidelines.96

Since June 25, 2010, OTS and the 

other Federal banking regulators have 

maintained guidance designed to help 

ensure that incentive-based 

compensation policies at banking 

organizations do not encourage 

imprudent risk-taking and are consistent 

with the safety and soundness of the 

organization, including guidance on 

methods such as deferral that make 

compensation more sensitive to risk. 

The requirements specified in 

§ 563h.5(b)(2) for avoiding incentivebased compensation arrangements that 

could lead to material financial loss are 

taken directly from the guidance.97 Most 

covered financial institutions, therefore, 

already have the listed elements in 

place. Further, a recent report of the 

Basel Committee on Banking 

Supervision (BCBS) noted that most 

larger institutions already use 

management accounting to map 

company performance to business units, 

and largely employ risk-adjusted return 

to capital and other economic efficiency 

measures to assess performance when 

making incentive-based compensation 

allocation decisions.98

Even the reporting requirements of 

§ 563h.4 of the proposed rule would not 

be completely new for many 

institutions. Publicly listed institutions 

already disclose their incentive-based 

compensation systems.99

As a group, covered financial 

institutions are likely to make more 

significant changes to incentive-based 

compensation programs for nonexecutive employees and, to some 

degree, principal shareholders. While 

institutions have in place most of the 

internal policies and procedures 

necessary to run an incentive-based 

compensation program for these two 

groups, modifications would likely be 

necessary to ensure full compliance. 

Larger institutions, defined as having 

total consolidated assets of $50 billion 

or more, would have to defer at least 50 

percent of the annual incentive-based 

compensation of executive officers for at 

least three years. These institutions 

would also apply special review and 

approval requirements for the incentivebased compensation arrangements for 

material risk takers. Among OTSsupervised institutions, 13 holding 

companies and 4 thrifts would be 

subject to this requirement. These 17 

institutions would likely need to make 

changes to their compensation 

programs, as it appears that none of 

them currently defers the required 

percentage of incentive-based 

compensation for the required amount 

of time. 

Finally, institutions have an ongoing 

requirement to prepare annual reports 

and administer their incentive-based 

compensation program in compliance 

with the rule. The administration of the 

program would include calculating the 

amount of compensation subject to riskbased adjustment (e.g., deferral), 


kgrant on DSK8KYBLC1PROD with PROPOSALS2
21194 Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 / Proposed Rules 

100OTS estimates that legal and administrative 

expenses would average, at most, $150 per hour. 

calculating the performance metrics 

upon which incentive compensation are 

based, ensuring that independent 

review of compensation awards is 

conducted, and assessing the 

effectiveness of risk-based adjustments 

to incentive-based compensation 

payouts. As previously mentioned, 

institutions generally take these actions 

to comply with existing safety and 

soundness regulations and guidance. 

To assist the public in understanding 

how OTS’s proposed rule (12 CFR part 

563h) compares with Federal Banking 

Agency Guidelines from 1995 (12 CFR 

part 570, App. A), and the Federal 

Banking Agency Guidance from 2010 

(75 FR 36395), OTS provides the 

following summary in bullet form: 

1. Applicability 

• Proposed Rule—Applies to those 

savings associations and savings and 

loan holding companies that have total 

consolidated assets of $1 billion or more 

and offer incentive-based compensation 

arrangements to covered persons 

(§§ 563h.2 and 563h.3). 

• 1995 Guidelines—Applies to all 

savings associations (¶ I.i). 

• 2010 Guidance—Applies to all 

savings associations (p. 36405 n.2). 

2. Reports 

• Proposed Rule—Requires annual 

reports to OTS describing the structure 

of incentive-based compensation 

arrangements; sets minimum standards 

for the reports. (§ 563h.4) 

• 1995 Guidelines—No comparable 

provision. 

• 2010 Guidance—No comparable 

provision. 

3. Excessive compensation 

• Proposed Rule—Prohibits 

establishing or maintaining any type of 

incentive-based compensation 

arrangement, or any feature of any such 

arrangement, for covered persons that 

encourages inappropriate risks by 

providing excessive compensation 

(§ 563h.5(a)(1)). Sets a standard that an 

incentive-based compensation 

arrangement provides excessive 

compensation when amounts paid are 

unreasonable or disproportionate to the 

services performed, taking into 

consideration seven factors listed in the 

proposed rule (§ 563h.5(a)(2)). 

• 1995 Guidelines—Prohibits 

excessive compensation as an unsafe 

and unsound practice. Sets a standard 

that compensation is excessive when 

amounts paid are unreasonable or 

disproportionate to the services 

performed by taking into consideration 

seven factors listed in the guidelines. 

Covers the same categories of persons 

and lists the same seven factors as the 

proposed rule. (¶ III.A) 

• 2010 Guidance—No comparable 

provision. 

4. Material financial loss 

Generally; Requirements for all 

covered financial institutions 

• Proposed Rule—Prohibits 

establishing or maintaining any type of 

incentive-based compensation 

arrangement, or any feature of any such 

arrangement, that encourages 

inappropriate risks by the covered 

financial institution, by providing 

incentive-based compensation to 

covered persons, either individually or 

as part of a group of persons who are 

subject to the same or similar incentivebased compensation arrangements, that 

could lead to material financial loss to 

the covered financial institution 

(§ 563h.5(b)(1)). Specifies that an 

incentive-based compensation 

arrangement established or maintained 

by a covered financial institution for 

one or more covered persons must meet 

three criteria listed in the proposed rule 

(§ 563h.5(b)(2)). 

• 1995 Guidelines—Prohibits 

compensation that could lead to 

material financial loss as an unsafe and 

unsound practice (¶ III.B). 

• 2010 Guidance—Provides that 

incentive compensation arrangements, 

to be consistent with safety and 

soundness, should meet three criteria 

(p. 36405). The criteria listed are the 

same as in the proposed rule. 

Specific requirements for covered 

financial institutions with $50 billion or 

more in total consolidated assets; 

Deferral required for executive officers 

• Proposed Rule—Specifies that at 

least 50% of the incentive-based 

compensation for an executive officer at 

an institution with total consolidated 

assets of $50 billion or more must be 

deferred over a period of no less than 

three years, with the release of deferred 

amounts to occur no faster than on a pro 

rata basis, and with the adjustment of 

the deferred amount to reflect actual 

losses or other measures or aspects of 

performance that are realized or become 

better known during the deferral period 

(§ 563h.5(b)(3)(i)). 

• 1995 Guidelines—No comparable 

provision. 

• 2010 Guidance—No comparable 

provision. 

Specific requirements for covered 

financial institutions with $50 billion or 

more in total consolidated assets; 

additional requirement for covered 

persons presenting particular loss 

exposure 

• Proposed Rule—Contains special 

procedures and restrictions on the 

incentive-based compensation of 

covered persons (other than executive 

officers) who the institution’s board 

identifies as having the ability to expose 

the institution to possible losses that are 

substantial in relation to the 

institution’s size, capital, or overall risk 

tolerance (§ 563h.5(b)(3)(ii)). 

• 1995 Guidelines—No comparable 

provision. 

• 2010 Guidance—No comparable 

provision. 

5. Policies and procedures 

• Proposed Rule—Sets minimum 

standards for policies and procedures 

on incentive compensation (§ 563h.6). 

• 1995 Guidelines—No comparable 

provision. 

• 2010 Guidance—No comparable 

provision. But see discussion of other 

policy and procedure requirements (pp. 

36403–05). 

6. Evasions 

• Proposed Rule—Anti-evasion 

provision prohibits, doing indirectly or 

through or by any other person, any act 

or thing that would be unlawful to do 

directly (§ 563h.7). 

• 1995 Guidelines—No comparable 

provision. 

• 2010 Guidance—No comparable 

provision. 

Assessment of Impact of Proposed Rule 

OTS believes that an institution 

would spend several hundred person 

hours conducting an initial review of its 

incentive-based compensation program 

and making any necessary 

modifications. All institutions of $1 

billion in total consolidated assets or 

more would have to conduct the review, 

and most institutions would have to 

make some modification to their 

incentive-based compensation 

programs. 

OTS estimates that smaller 

institutions (those with less than $50 

billion in assets) would spend, at most, 

eight weeks (320 person hours) to 

perform the initial steps necessary to 

comply. Among the covered financial 

institutions, 146 fall into this category. 

Using $150 as an estimate of hourly 

cost,100 the total cost to the smaller 

institutions as a group would be $7 

million ($150 × 320 hours × 146 

institutions). At larger institutions, these 

modifications would be more extensive 

because of the number of individuals 

involved and the amount the institution 

would have to expand and/or adjust risk 

sensitivity measures. The larger 

institutions may require as much as 

twice the time as smaller institutions to 

implement the rule, for an estimated 

cost of $1.6 million ($150 × 640 hours 

× 17 institutions). The total initial 


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101OTS estimates that for institutions with assets 

between $1 billion and $50 billion, the costs of 

managing the additional elements of the program 

would entail some personnel and Information 

Technology (IT) support. As institutions already 

have personnel management software systems in 

place, either in house or contracted out, the 

incremental costs of IT support would be negligible. 

implementation costs, therefore, should 

come to approximately $8.6 million. 

The subsequent ongoing costs 

associated with monitoring and 

managing incentive-based compensation 

programs, once established, are unlikely 

to be significantly greater than the costs 

associated with the administration of 

current incentive-based programs. OTS, 

therefore, believes that the ongoing 

annual costs of the rule would not 

exceed $100 million. As previously 

discussed, institutions already have in 

place most of the mechanisms necessary 

to implement the rule’s requirements. 

Once the institution makes adjustments 

indicated by its initial analysis, these 

mechanisms would continue to function 

as they do now. 

Any ongoing costs in addition to 

those already incurred would be for: 

1. Production of an annual report; 

2. Administration of incentive-based 

compensation for a broader range of 

employees; 

3. Administration of a more complex 

deferral scheme at some institutions; 

and 

4. More sophisticated risk sensitivity 

mechanisms. 

With respect to item 1, OTS believes 

that the costs of the annual report would 

be minimal. Reports after the first 

submitted would only need to 

document significant changes to the 

incentive-based compensation program. 

Human resource departments maintain 

descriptions of their incentive-based 

compensation programs for internal 

administrative purposes; these 

descriptions could serve as the basis for 

regulatory reporting. 

With respect to items 2, 3, and 4, OTS 

anticipates that institutions would use 

some additional human resources and 

risk management expertise to administer 

the programs. For the 17 larger 

institutions, OTS estimates that the cost 

of these additional resources would be 

about $24,000 per institution annually. 

For the 146 smaller institutions, the 

additional resources would entail 

additional personnel and other expenses 

of less than $12,000 per institution per 

year.101 Therefore, OTS estimates the 

annual cost to be about $2.2 million (17 

larger institutions × $24,000 = $0.4 

million; 146 smaller institutions × 

$12,000 = $1.8 million). 

In summary, OTS estimates the costs 

to the institutions of implementing the 

rule as proposed as follow: 

First year: $8.6 million + $2.2 million 

= $10.8 million. 

Second and subsequent years: $2.2 

million. 

Beyond the costs of implementation, 

OTS assumes that the broader economic 

impact of the rule would be negligible. 

The overall level of compensation, as set 

by the forces of supply and demand in 

the labor market, is unlikely to change. 

Any variations in compensation levels 

that may occur would be minimal and, 

given the small number of covered 

financial institutions, have no effect on 

overall demand in the economy. 

If the rule has its desired effect, 

institutions will take a more measured 

approach in their assessment of risk and 

return. As a result, the amount of 

lending in some excessively risky 

business areas may be reduced, which 

in turn may have an economic impact 

on the areas served by the 163 OTSsupervised covered financial 

institutions. Incentive-based 

compensation programs that 

appropriately balance risk and reward 

will entail reductions only of economic 

activity that is unsound and which, 

ultimately, entails more cost than 

benefit to the economy as a whole. Any 

reduction in inappropriately risky 

lending brought about by the rule, 

therefore, would be a benefit of the rule. 

The recent crisis in financial markets 

demonstrated the significant costs that 

can arise from financial instability; the 

purpose of the rule is to enhance the 

financial stability of the financial sector 

by diminishing incentives for 

inappropriate risk taking. Because the 

benefits of financial stability are largely 

intangible, OTS made no attempt to 

quantify them here. 

Conclusion 

OTS’s preliminary estimates of the 

annualized cost of this rule to the 163 

OTS-supervised covered financial 

institutions as a group would be 

substantially less than $100 million. 

Moreover, the overall annual economic 

impact would not be significant. OTS 

seeks comment on this economic impact 

assessment. 

D. OCC Unfunded Mandates Reform Act 

of 1995 Determination 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (2 U.S.C. 

1532), requires the OCC to prepare a 

budgetary impact statement before 

promulgating a rule that includes a 

Federal mandate that may result in the 

expenditure by State, local, and tribal 

governments, in the aggregate, or by the 

private sector, of $100 million or more 

in any one year (adjusted annually for 

inflation). OCC has determined that this 

proposed rule will not result in 

expenditures by State, local, and tribal 

governments, or the private sector, of 

$100 million or more in any one year. 

Accordingly, OCC has not prepared a 

budgetary impact statement. 

E. OTS Unfunded Mandates Reform Act 

of 1995 Determination 

Section 202 of the Unfunded 

Mandates Reform Act of 1995, Public 

Law 104–4 (Unfunded Mandates Act) 

requires that an agency prepare a 

budgetary impact statement before 

promulgating a rule that includes a 

Federal mandate that may result in 

expenditure by State, local, and tribal 

governments, in the aggregate, or by the 

private sector, of $100 million or more 

(adjusted annually for inflation) in any 

one year. (The inflation adjusted 

threshold for 2011 is $142 million or 

more.) If a budgetary impact statement 

is required, section 205 of the Unfunded 

Mandates Act also requires an agency to 

identify and consider a reasonable 

number of regulatory alternatives before 

promulgating a rule. 

OTS has determined that this 

proposed rule will not result in 

expenditures by State, local, and tribal 

governments, or the private sector, in 

excess of the threshold. Accordingly, 

OTS has not prepared a budgetary 

impact statement. 

F. NCUA Executive Order 13132 

Determination 

Executive Order 13132 encourages 

independent regulatory agencies to 

consider the impact of their actions on 

state and local interests. In adherence to 

fundamental federalism principles, the 

NCUA, an independent regulatory 

agency as defined in 44 U.S.C. 3502(5) 

voluntarily complies with the Executive 

Order. The Proposed Rule applies to 

credit unions with $1 billion in assets 

and over and would not have 

substantial direct effects on the states, 

on the connection between the national 

government and the states, or on the 

distribution of power and 

responsibilities among the various 

levels of government. The NCUA has 

determined that the Proposed Rule does 

not constitute a policy that has 

federalism implications for purposes of 

the Executive Order. 

G. NCUA and FDIC: The Treasury and 

General Government Appropriations 

Act, 1999—Assessment of Federal 

Regulations and Policies on Families 

The NCUA and FDIC have determined 

that this Proposed Rule would not affect 

family well-being within the meaning of 

section 654 of the Treasury and General 

Government Appropriations Act, 1999, 


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102 12 U.S.C. 5641(a). 

103 12 U.S.C. 5641(b). 

Public Law 105–277, 112 Stat. 2681 

(1998). 

H. SEC Economic Analysis 

Economic Analysis 

As discussed above, 12 U.S.C. 5641 

requires the Commission, jointly with 

other appropriate Federal regulators, to 

prescribe regulations or guidelines to 

require covered financial institutions to 

disclose information about their 

incentive-based compensation 

arrangements sufficient for the Agencies 

to determine whether their 

compensation structure provides an 

executive officer, employee, director or 

principal shareholder with excessive 

compensation, fees or benefits or could 

lead to material financial loss to the 

firm.102 12 U.S.C. 5641 also requires the 

Agencies to prescribe joint regulations 

or guidelines that prohibit any type of 

incentive-based compensation 

arrangements that the Agencies 

determine encourages inappropriate 

risks by covered financial institutions 

by providing excessive compensation to 

officers, employees, directors, or 

principal shareholders (‘‘covered 

persons’’) or that could lead to material 

financial loss to the covered financial 

institution.103

The Agencies have determined that it 

is appropriate to propose rules, instead 

of guidelines, as permitted under 12 

U.S.C. 5641. The Commission believes 

that broker-dealers and investment 

advisers would benefit from the greater 

predictability afforded by rules. Such 

greater predictability would facilitate 

broker-dealers’ and investment advisers’ 

ability to design compliance policies 

and procedures. The rule being 

proposed by the Agencies consists of a 

reporting section, a prohibition section, 

and a policies and procedures section. 

The reporting section requires enhanced 

reporting of incentive-based 

compensation arrangements for covered 

persons by a covered financial 

institution to such institution’s 

appropriate Federal regulator. The 

prohibition section forbids incentivebased compensation arrangements that 

encourage covered persons to expose 

the institution to inappropriate risks by 

providing the covered person excessive 

compensation and prohibits incentivebased compensation arrangements that 

encourage covered persons to expose 

the covered financial institutions to 

inappropriate risks that could lead to a 

material financial loss. The policies and 

procedures section requires that the 

covered financial institutions maintain 

policies and procedures to ensure 

compliance with these requirements 

and prohibitions. The Commission is 

sensitive to the costs and benefits 

imposed on broker-dealers registered 

with the Commission under section 15 

of the Securities Exchange Act 

(‘‘registered broker-dealers’’) and 

investment advisers, as defined in 

section 202(a)(11) of the Investment 

Advisers Act of 1940 (‘‘investment 

advisers’’). The discussion below 

focuses on the costs and benefits 

applicable to registered broker-dealers 

and investment advisers that meet the 

definition of ‘‘covered financial 

institution’’ under the proposed rule 

(collectively ‘‘covered BDs and IAs’’). 

The discussion addresses the decisions 

made jointly by the Agencies to fulfill 

the mandates of the Dodd-Frank Act 

within the Agencies’ permitted 

discretion, rather than the costs and 

benefits of the mandates of the DoddFrank-Act itself. However, to the extent 

that the Commission’s discretion is 

exercised to realize the benefits 

intended by the Dodd-Frank Act or to 

impose the costs associated with the 

Dodd-Frank Act, the two types of 

benefits and costs are not entirely 

separable. Therefore, the Paperwork 

Reduction Act (‘‘PRA’’) hourly burden 

estimates made in accordance with the 

requirements of the PRA, and their 

corresponding dollar cost estimates, are 

included in the calculations below. 

A. Report of Incentive-Based 

Compensation Arrangements 

In order to fulfill the requirement 

imposed by 12 U.S.C. 5641(a) relating to 

the disclosure of incentive-based 

compensation arrangements, the 

proposal would require a covered 

financial institution to submit a report 

annually to, and in the format directed 

by, its regulator, that describes the 

structure of the covered financial 

institution’s incentive-based 

compensation arrangements for covered 

persons. Similar to the policies and 

procedures requirements under the 

proposed rule, the annual report would 

be commensurate with the size and 

complexity of the organization, as well 

as the scope and nature of its use of 

incentive-based compensation 

arrangements. As such, institutions with 

no incentive-based compensation 

arrangements or arrangements that affect 

only a few covered persons, would need 

to submit only limited information. The 

report would be required to contain: 

• A clear narrative description of the 

components of the covered financial 

institution’s incentive-based 

compensation arrangements applicable 

to covered persons, specifying the 

categories of covered persons to which 

they apply; 

• A succinct description of the 

covered financial institution’s policies 

and procedures governing its incentivebased compensation arrangements; 

• For covered financial institutions 

with total consolidated assets of at least 

$50 billion, an additional succinct 

description of incentive-based 

compensation policies and procedures 

specific to the covered financial 

institution’s executive officers and other 

covered persons who the institution’s 

board of directors (or a committee of the 

board) has identified and determined 

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; 

• A description of any material 

changes to the covered financial 

institution’s incentive-based 

compensation arrangements and 

policies and procedures made since the 

covered financial institution’s last 

report submitted this section; and 

• The specific reasons the covered 

financial institution believes the 

structure of its incentive-based 

compensation arrangements does not 

provide covered persons incentives to 

engage in behavior that is likely to cause 

the covered financial institution to 

suffer a material financial loss and does 

not provide covered persons with 

excessive compensation. 

1. Benefits 

The Commission believes that the 

information that would be required to 

be reported to the Commission under 

proposed § 248.205 would assist 

Commission examiners to determine 

whether covered BDs and IAs are 

fulfilling the requirements of section 

956 of the Dodd-Frank Act. The report 

is designed to elicit pointed, succinct 

explanations about issues that would 

likely be of high interest to an examiner, 

such as a clear narrative description of 

the firm’s incentive-based compensation 

plan, a succinct description of the firm’s 

incentive-based compensation policies 

and procedures and any changes 

thereto, and reasons that the 

compensation structure will not 

encourage behavior that violates the 

principles of 12 U.S.C. 5641. The 

Commission anticipates that examiners 

would find these descriptions a useful 

starting point in an examination to make 

a risk-assessment as to which areas of a 

firm’s incentive-based compensation 

arrangements merit further examination. 

Persons within covered BDs and IAs 

responsible for determining 

compensation levels, as well as persons 

receiving incentive-based compensation 


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104The Commission estimates $354 per hour for 

a securities attorney, based on SIFMA’s 

Management & Professional Earnings in the 

Securities Industry 2010, modified by Commission 

staff to account for an 1800-hour work-year and 

multiplied by 5.35 to account for bonuses, firm size, 

employee benefits and overhead. 

would be able to review the incentivebased compensation policies, which 

should promote the balance of the 

incentive-based compensation process 

at covered BDs and IAs. The 

Commission also believes that the 

reporting of incentive-based 

compensation information would foster 

a climate of accountability at covered 

BDs and IAs by raising the profile of 

incentive-based compensation at firms, 

and thereby improving the care with 

which the firms design their incentivebased compensation programs. By 

including persons who individually 

have the ability to expose a firm with 

total consolidated assets of at least $50 

billion to possible losses that are 

substantial in relation to the firm’s size, 

capital, or overall risk tolerance as 

persons whose compensation should be 

subject to the requirements of the statute 

(designated risk takers), the proposed 

rule should encourage executives to 

consider more carefully those 

compensation arrangements that could 

potentially lead to activities that could 

expose the covered institution to 

significant risks. Properly incentivizing 

designated risk takers could limit the 

risk exposure of covered financial 

institutions. 

The reporting provisions of the 

proposed rule are designed to elicit 

qualitative statements from the covered 

financial institution, including covered 

BDs and IAs, regarding, among other 

things, the specific reasons the covered 

financial institution believes the 

structure of its incentive-based 

compensation plan does not provide 

covered persons incentives to engage in 

behavior that is likely to cause the 

covered financial institution to suffer a 

material financial loss and does not 

provide covered persons with excessive 

compensation. The proposed rule is 

designed to elicit a meaningful 

discussion of the firm’s incentive-based 

compensation arrangements. In all 

cases, covered BDs and IAs should 

report to the Commission the 

comprehensive descriptions relating to 

each of the required disclosures 

described below. 

2. Costs 

The Commission is aware that 

requiring companies to file reports on 

the structure of their incentive-based 

compensation arrangements could 

impose costs on covered financial 

institutions. For example, by requiring 

covered financial institutions to report 

the information in the proposed rule, it 

is possible that this could serve as a 

disincentive for covered financial 

institutions to re-visit or otherwise 

revise their incentive-based 

compensation plans, because doing so 

would create additional regulatory 

burdens for the covered financial 

institution. Further, while the 

Commission intends to keep the 

reported information confidential to the 

full extent it is permitted to do so under 

the Freedom of Information Act 

(‘‘FOIA’’), the Commission understands 

that firms may nonetheless have 

concerns about potential disclosure of 

information that could be competitively 

sensitive, as incentive-based 

compensation plans and arrangements 

are. The Commission believes that not 

including information regarding the 

individual compensation levels of 

covered persons may mitigate some 

confidentiality concerns. Accordingly, 

the Commission is aware of these 

potential costs and seeks comment on 

them generally, as well as on any 

specific methods that could be used to 

minimize these costs and concerns. 

The Commission is also aware that 

the proposed rule would generate 

compliance-related costs associated 

with, among other things, collecting the 

necessary information and preparing the 

reports, as well as hiring outside 

professionals, such as attorneys, 

compensation or benefits consultants, 

accountants and/or actuaries. In the 

charts below, the Commission estimates 

the internal and external costs 

associated with the proposed reporting 

requirements. In order to arrive at the 

internal cost estimates, the Commission 

multiplied the hourly burden estimates 

provided in the PRA Section by the 

estimated hourly rate for a securities 

attorney.104 The Commission is using 

the same external cost estimates for the 

reporting requirement that it used in the 

PRA Section of this proposed rule. The 

Commission seeks comment on all these 

cost estimates. 

INTERNAL COSTS

Covered bank 

BDs and IAs 

($50B +) 

Covered bank 

BDs and IAs 

($1B–$50B) 

Covered non-bank 

BDs and IAs 

($50B +) 

Covered non-bank 

BDs and IAs 

($1B–$50B) 

Initial Reporting .............................................................. $900,000 105 ........... $3 million 106 .......... $175,000 107 ........... $3 million.108

Ongoing Reporting ......................................................... 900,000 109 ............. 3 million 110 ............ 175,000 111 ............. 3 million.112


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105 2,500 hours × $354/hour = $885,000. 106 8,500 hours × $354/hour = $3,009,000. 107 500 hours × $354 = $177,000. 108 8,500 hours × $354/hour = $3,009,000. 109 2,500 hours × $354/hour = $885,000. 110 8,500 hours × $354/hour = $3,009,000. 111 500 hours × $354 = $177,000. 112 8,500 hours × $354/hour = $3,009,000. 113 2,500 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $987,500. 

114 8,500 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $3,357,500. 

115 500 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $197,500. 

116 8,500 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $3,357,500. 

117 2,500 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $987,500. 

118 8,500 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $3,357,500. 

119 500 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $197,500. 

120 8,500 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $3,357,500. 

121Under Section 248.205(a)(2) of the proposed 

rule, an incentive-based compensation arrangement 

provides excessive compensation when amounts 

paid are unreasonable or disproportionate to the 

services performed by a covered person, taking into 

consideration: 

(i) The combined value of all cash and non-cash 

benefits provided to the covered person; 

(ii) The compensation history of the covered 

person and other individuals with comparable 

expertise at the covered financial institution; 

(iii) The financial condition of the covered 

financial institution; 

(iv) Comparable compensation practices at 

comparable institutions, based upon such factors as 

asset size, geographic location, and the complexity 

of the institution’s operations and assets; 

(v) For postemployment benefits, the projected 

total cost and benefit to the covered financial 

institution; 

(vi) Any connection between the individual and 

any fraudulent act or omission, breach of trust or 

fiduciary duty, or insider abuse with regard to the 

covered financial institution; and 

(vii) Any other factors the Commission 

determines to be relevant. 

122See Guidance on Sound Incentive 

Compensation Policies, 75 FR 36395 (June 25, 2010) 

(jointly adopted by the OCC, the FRB, the FDIC and 

OTS). 

EXTERNAL COSTS

Covered bank 

BDs and IAs 

($50B +) 

Covered bank 

BDs and IAs 

($1B–$50B) 

Covered non-bank 

BDs and IAs 

($50B +) 

Covered non-bank 

BDs and IAs 

($1B–$50B) 

Initial Reporting .............................................................. $1 million 113 .......... $3.4 million 114 ....... $200,000 115 ........... $3.4 million.116

Ongoing Reporting ......................................................... 1 million 117 ............ 3.4 million 118 ......... 200,000 119 ............. 3.4 million.120

B. Prohibition on Certain IncentiveBased Compensation Arrangements 

The proposed rule states that a 

covered financial institution may not 

establish or maintain any incentivebased compensation arrangement, or 

any feature of any such arrangement, 

that encourages a covered person to 

expose the institution to inappropriate 

risks by providing that person with 

excessive compensation. Under the 

proposed rule, compensation would be 

considered excessive when amounts 

paid are unreasonable or 

disproportionate to the services 

performed by a covered person. In 

determining whether incentive-based 

compensation is unreasonable or 

disproportionate to the services 

performed, the covered BDs and IAs 

would consider those factors set forth in 

the section 39(c) of the FDIA.121

To address the prohibition against 

arrangements that potentially encourage 

inappropriate risks that could lead to a 

material financial loss at the covered 

financial institution, the Agencies 

propose to deem incentive-based 

compensation arrangements for all 

covered persons to encourage 

inappropriate risks that could lead to 

material financial loss at the institution 

unless the arrangement or feature: 

(i) Balances risk and financial results, 

for example, by using deferral of 

payments, risk adjustment of awards, 

longer performance periods, or reduced 

sensitivity to short-term performance; 

(ii) is compatible with effective controls 

and risk management; and (iii) is 

supported by strong oversight by a 

covered BD’s or IA’s board of directors. 

These principles are substantially 

identical to the principles published in 

the Guidance.122

The proposed rule would require 

additional measures for certain covered 

persons working for covered financial 

institutions with total consolidated 

assets of $50 billion or more. For 

executive officers and heads of major 

business lines of such firms, at least 

50% of their incentive-based 

compensation would be required to be 

deferred on a pro-rata basis over a 

period of at least three years. Such 

executive officers’ and business line 

heads’ deferred incentive-based 

compensation would be required to be 

adjusted downward to reflect actual 

losses or other measures or aspects of 

performance that are realized or become 

better known during the deferral period 

(the ‘‘look-back’’). 

The Agencies also propose for a 

covered financial institution with $50 

billion or more in assets that for certain 

classes of covered person whose 

activities, by their nature, expose the 

covered financial institution to a risk of 

significant loss (designated risk takers), 

that such firm’s board of directors, or a 

committee thereof, perform individual 

review of each such person’s incentivebased compensation against certain 

factors and that each such person’s 

incentive-based compensation be 

approved by the board of directors, or 

committee thereof. 

1. Benefits 

The Commission believes that the 

proposed prohibitions related to the 

incentive-based compensation 

arrangements would help ensure that 

covered financial institutions avoid 

incentive-based compensation 

arrangements that would threaten the 

safety and soundness of the covered 

financial institution or otherwise have 

serious adverse effects on economic 

conditions or financial stability of 

covered BDs and IAs. In order to 

address the adverse effects that 

incentive-based compensation 

arrangements may have on covered 

financial institutions’ financial 

condition, the proposed rules would 

mandate the application of the 

principles described in the Guidance 

(provide incentives that appropriately 

balance risk and reward, compatibility 

with effective controls and riskmanagement, and the support of strong 

corporate governance) to all covered 

financial institutions, including covered 

BDs and IAs. The Commission believes 

that applying these principles to 

covered BDs and IAs should promote 

sound incentive-based compensation 

practices and discourage incentivebased compensation arrangements that 

contributed to the recent financial crisis. 

The proposed elements defining when 

an incentive-based compensation 

arrangement provides excessive 

compensation or could result in a 

material financial loss would benefit 

covered financial institutions by 

identifying specific factors to determine 

whether certain arrangements are 

prohibited. Abiding by the standards 

reflected in section 39(c) of the FDIA 


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123Certain recent studies provide empirical 

evidence consistent with deferred compensation 

helping reduce the probability of corporate default. 

See e.g. Wei and Yermack (2010). In one study, the 

authors conclude that bank CEOs with large 

amounts of inside debt in the form of pensions and 

deferred compensation exposed their firms to less 

risk and obtained greater performance during the 

recent financial crisis. (http://papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=1519252). 

and the principles described in the 

Guidance, which already apply to 

banking institutions, should help to 

promote the safety and soundness of the 

covered BD or IA and by extension 

protect investors and promote the 

public interest. The proposed rule also 

should give firms the discretion to 

reward the most productive employees 

because the definition of ‘‘excessive 

compensation’’ should be sufficiently 

broad so as to permit covered financial 

institutions the flexibility to reward 

productive employees. 

Moreover, by not prescribing 

mandatory deferral for covered BDs and 

IAs with assets under $50 billion, but 

rather by requiring non-specific 

standards for these arrangements (i.e., 

that they balance risk and return, are 

compatible with effective controls and 

risk management, etc.), the proposed 

rule would provide smaller covered BDs 

and IAs with significant flexibility to 

tailor their compensation packages to 

their covered persons. The proposed 

rule would permit covered BDs and IAs 

with assets below $50 billion to 

determine their respective incentivebased compensation arrangements 

within the parameters of meeting certain 

goals (i.e., that the payments balance 

risk and return, are compatible with 

effective risk controls and risk 

management) set forth in the proposed 

rule. 

The Commission believes that the 

proposed rule should curb excessive 

risk taking, which should lead to more 

effective capital allocation. The rule 

should discourage compensation 

incentives that encouraged capital flow 

into investments that were unprofitable 

on the whole. Hereafter, the flow of 

capital into less risky investments 

should result in capital being put to 

more effective use. More efficient 

capital allocation, in turn, should 

improve the quality of the firms’ 

financial services and products, as firms 

employ capital to its most productive 

use. Since higher quality service and 

products are ordinarily associated with 

increased competition, it is possible that 

competition among covered BDs and 

IAs would be more robust. 

By requiring that the incentive-based 

compensation arrangements of covered 

BDs and IAs with more than $50 billion 

in total assets defer at least 50% of the 

compensation of covered executives and 

chiefs of major business lines for at least 

three years, and requiring firms to adjust 

any amount deferred to reflect actual 

losses or other measures of performance 

that are realized or become better 

known only during the deferral period, 

the proposed rule should help align the 

interests of those covered persons with 

the greatest ability to influence the risk 

profile of the covered financial 

institution with the interests of the 

covered financial institution. The 

deferral requirement for executive 

officers and chiefs of major business 

lines at the largest covered financial 

institutions reflects the previously 

acknowledged benefit for deferral of 

certain high-level employees whose 

activities present broad, and potentially 

lengthy, risk exposure to an institution, 

and whose activities do not lend 

themselves as easily to risk 

quantification and assessment through 

ex ante or other predictive risk 

adjustment measures. Requiring deferral 

for this discrete group of individuals at 

particularly large institutions, where upfront or ex ante risk adjustment 

measures are less likely to be effective, 

is a useful risk adjustment tool. It 

permits time for risks not previously 

discerned or quantifiable to ultimately 

materialize and permits adjustment of 

unreleased deferral payments on the 

basis of observed consequences as 

opposed to mere predicted results. The 

Commission believes that the 

heightened standards for the largest 

covered BDs and IAs is particularly 

appropriate because decisions made at 

the largest covered BDs and IAs can 

greatly impact the fair and orderly 

operation of the financial markets. 

These deferral restrictions should 

weaken the incentive for executive 

officers and chiefs of major business 

lines to make decisions that create short 

term gain at the expense of increased 

long term risk. The Commission also 

expects that by example, an express 

deferral requirement for executive 

officers and heads of major business 

lines would have a broader beneficial 

impact on the structure of compensation 

used throughout a company.123 The 

required look-back mechanism included 

in the proposed rule is a means by 

which the covered financial institution 

may reduce previously awarded 

compensation over the deferred period 

of time. Thus, the required look-back 

adds to the power of deferring 

compensation in that previously 

awarded compensation may actually not 

be awarded if the firm finds that such 

compensation does not reflect actual 

losses or other measures better realized 

during the deferral period. 

As with the deferral requirement and 

the look-back mechanism, the 

Commission preliminarily believes that 

these provisions of the proposed rule 

relating to designated risk takers would 

help to strengthen board oversight of 

covered persons’ incentive-based 

compensation. The Commission 

believes that promoting strong corporate 

governance oversight of a covered BD’s 

or IA’s incentive-based compensation 

arrangements would promote sound 

practices and foster a high quality 

process regarding incentive-based 

compensation decisions at a covered 

financial institution. Moreover, the 

additional oversight of designated risk 

takers’ incentive-based compensation 

should help to provide proper 

incentives to these persons and thus 

limit the risk exposure of covered BDs 

and IAs. In addition, requiring the board 

of directors, or a committee of the board, 

to identify designated risk takers other 

than executive officers and to approve 

their incentive-based compensation 

should help to improve the board’s 

understanding of the risk profile of 

certain firm activities or divisions that 

have the ability to expose the institution 

to possible substantial losses. It would 

also encourage the board to spend more 

time considering the compensation 

arrangements of important employees 

who are not executives but who have 

the ability to materially impact the risk 

profile of the firm. The proposed rule 

also provides covered financial 

institutions the flexibility to determine 

who the relevant potential excessive 

risk takers are. 

2. Costs 

a. All Covered BDs and IAs 

The Commission also anticipates that 

the proposed rule may entail certain 

costs. For example, in a case where a 

firm elects to defer an excessive portion 

of covered persons’ compensation, such 

deferral may reduce effort expended by 

covered persons and the willingness of 

covered persons to take even measured 

risks. The Commission understands that 

it is necessary for covered financial 

institutions to take a certain amount of 

risk in order to operate their businesses. 

Accordingly, the Commission desires to 

carefully balance the need for covered 

financial institutions to take risk against 

the possibility that if the wrong 

regulatory balance is struck, covered 

persons may have the incentive to 

actually take less risk than is optimal in 

order to ensure that, on a personal level, 

the covered employee has sufficient 

cash flow. In the event that employees 


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are induced to take less than optimal 

risk, then there might be a negative 

effect on the efficiency of capital 

allocation. The Commission 

preliminarily believes that the proposed 

rule strikes an appropriate balance in 

this regard but requests comment 

generally on this issue. 

Based on its experience in the area, 

staff conversations with covered BDs 

and filings by publicly-traded covered 

BDs, IAs and certain parent companies, 

the Commission believes that the 

elements of the prohibition applicable 

to all covered BDs and IAs related to 

excessive compensation and material 

financial loss to the firms already 

generally represent the practices of 

many covered BDs and IAs. Therefore, 

the Commission believes that covered 

BDs and IAs generally already consider 

factors consistent with those referenced 

in section 39(c) of the FDIA and the 

principles in the Guidance in designing 

and administering their incentive-based 

compensation programs. Nonetheless, 

the Commission recognizes that some 

covered BDs and IAs may not conform 

to incentive-based compensation 

standards consistent with section 39(c) 

of the FDIA and the principles in the 

Guidance. 

In addition, the Commission 

acknowledges the possibility that the 

proposed rules may reduce the 

incentive for certain covered persons to 

switch jobs because would-be new 

employers that are covered financial 

institutions would be bound to offer 

such covered persons compensation 

packages that comply with the proposed 

rules. If a lack of turnover results, it 

might adversely impact competitiveness 

among firms, but it may also promote 

institutional stability within firms. The 

Commission believes the proposed rule 

strikes an appropriate balance in this 

regard, but requests comment generally 

on this issue. 

The Commission seeks comment on 

whether the proposed prohibitions 

applicable to covered BDs and IAs 

(which include only those brokerdealers and investment advisers with 

assets of more than $1 billion) may 

disadvantage covered financial 

institutions as compared to financial 

institutions not covered under the 

proposed rules because covered 

financial institutions would be required 

to assume costs in designing, 

implementing, monitoring and 

maintaining a regulatory program 

reasonably designed to address the 

requirements of the proposed rules, 

whereas broker-dealers and investment 

advisers with total consolidated assets 

less than $1 billion would not be subject 

to such costs. The Commission also 

seeks comment on whether it is possible 

that covered BDs and IAs would have 

more difficulty recruiting qualified 

individuals to work for their firms if 

such individuals fear that added 

scrutiny of their incentive-based 

compensation may lead to lower 

aggregate pay. 

b. Covered BDs and IAs With Assets of 

$50 Billion or More 

In addition to the costs imposed upon 

all covered BDs and IAs, described 

above, the proposed rule would impose 

additional costs on firms with assets of 

$50 billion or more. The Commission 

anticipates that it is possible that 

covered BDs and IAs with assets of $50 

billion or more may have to pay more 

in base salary to compensate their 

executive officers and heads of a major 

business line for the uncertainty 

associated with the ultimate receipt of 

deferred compensation. However, it is 

also possible that increases in salaries 

would be offset by decreases in deferred 

incentive-based compensation. The 

Commission requests comment on 

whether covered BDs and IAs should 

expect to incur the cost of increased 

salaries that may result from the 

implementation of required deferred 

compensation and look-back policies for 

certain covered persons. 

As stated above, the Commission also 

recognizes that the firms with assets of 

at least $50 billion may have more 

difficulty recruiting individuals for 

those positions than a firm not subject 

to the deferral requirement. In addition, 

such firms may have difficulty 

recruiting individuals who object to 

having their compensation specifically 

approved and monitored by the covered 

BD’s or IA’s board of directors or 

committee thereof. To the extent that 

this adversely affects the quality of 

employees that firms of that size are 

able to attract, it may negatively affect 

the business of larger covered financial 

institutions. 

To the extent that the proposal relies 

on an assumption that a covered person 

understands the risks inherent in a 

particular business decision but chooses 

to disregard them because the covered 

person would not bear the costs 

associated with those risks being 

realized, the proposal may not be 

effective at promoting a more accurate 

or realistic assessment of a business 

decision as to which neither the 

executive officer nor the covered 

financial institution grasps the inherent 

risk. To the extent, however, that the 

proposal relies on an assumption that 

covered persons do not always fully 

understand the risks inherent in 

particular business decisions and have 

had inadequate incentives to ensure that 

they comprehend these risks, the 

proposal would be more effective. It is 

not clear what, if any, other regulatory 

steps could be taken to promote a better 

comprehension of risk, and mandatory 

deferral as provided in the proposed 

rule would at least provide some 

required measure of risk adjustment in 

cases where such risks are understood 

by executive officers at large covered 

financial institutions. If, however, the 

risks that covered persons take are very 

long term (i.e., beyond 5 years), the 

proposed compensation deferral might 

not prove to be effective at deferring 

covered persons’ taking on 

inappropriate risk for the firm. 

As stated above, the Commission also 

believes there would be compliancerelated costs associated with the 

proposed rule. Based upon experience 

of the Commission staff, the 

Commission understands that although 

mandatory deferral of a significant 

percentage of firms’ incentive-based 

compensation to executive officers and 

chiefs of major business lines is the 

existing practice among many covered 

BDs and IAs, it would represent a new 

practice for some firms. Even for firms 

with existing deferral practices, there 

would be costs to conform their deferral 

practices to the requirements of 

proposed § 248.205(b)(3). For example, 

based on staff’s discussions with the 

industry, its review of information in 

public filings, and its experience in the 

area, the Commission believes that the 

practice of adjusting deferred amounts 

of compensation to reflect actual losses 

or other measures that are realized or 

become known during the deferral 

period (administering a look-back) 

exists in comparatively fewer firms than 

does the practice of deferral itself. The 

Commission also believes that many 

firms may provide deferral or vesting 

periods of less than the three years 

under the proposed rule. The 

Commission believes, based upon its 

experience and the filings submitted by 

publicly-traded covered BDs, IAs and 

certain public companies, that some, but 

not all boards or board committees of 

covered BDs and IAs with assets of at 

least $50 billion already have a role in 

approving the compensation for highlypaid individuals, including most people 

that would be defined as designated risk 

takers under the proposed rule. 

Accordingly, the Commission 

anticipates that covered BDs and IAs 

would experience costs in 

implementing the deferral, look-back 

and designated risk takers components 

of the requirements for firms with assets 

of $50 billion or more. 


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The requirement under proposed 

§ 248.205(b)(3)(ii)(B) to require the 

board of directors (or committee of the 

board) of covered financial institutions 

that have total consolidated assets of 

$50 billion or more to approve and 

document the identification of those 

covered persons that individually 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 would create 

new burden for such larger covered 

financial institutions. Based on staff 

experience and conversations with 

larger covered BDs and the filings 

submitted by publicly-traded covered 

IAs and certain parent companies, the 

Commission does not believe that the 

boards of larger covered BDs and IAs 

generally identify and approve the 

compensation of such designated risk 

takers. 

The Commission believes that the 

most significant ongoing cost that 

covered BDs and IAs would assume to 

comply with proposed 

§ 248.205(b)(3)(ii)(B) is the cost of 

having appropriate senior personnel 

administer the deferred compensation, 

look-back and designated risk takers 

provisions. As with all matters related 

to incentive-based compensation, 

covered BDs and IAs would be required 

to administer their incentive-based 

compensation arrangements in a manner 

that is compatible with effective 

controls and risk management and is 

supported by strong corporate 

governance, including active and 

effective oversight by the covered 

financial institution’s board of directors. 

The Commission anticipates that firms 

would use an appropriate mix of senior 

risk management personnel along with 

the firms’ board of directors, or 

committee thereof, to administer the 

identification of designated risk takers 

and approval of their compensation, as 

required under the proposed rule. 

Larger covered financial institutions 

with total consolidated assets of at least 

$50 billion may experience a 

disadvantage relative to smaller 

financial institutions on account of the 

proposed required deferral for executive 

officers and board-level review of the 

incentive-based compensation of 

designated risk takers. In addition to the 

added costs that such larger financial 

institutions would incur to implement 

the deferral and board-level review of 

designated risk takers’ compensation, 

the Commission believes that some 

executive officers may have 

disincentives from working for a 

covered financial institution whereby 

their compensation would be required 

to be deferred or in firms where their 

incentive-based compensation is subject 

to board-level scrutiny. 

In order to help the Commission 

better understand all the costs 

associated with this aspect of the 

proposed rule, the Commission requests 

comment on them generally. The 

Commission is also soliciting comment 

on the following specific issues: 

• Do commenters believe that 

requiring a minimum deferral period of 

three years for at least 50% of the 

compensation for executive officers and 

chiefs of major business lines at large 

covered financial institutions would 

place such financial institutions at an 

unjustified disadvantage in the hiring of 

and retaining qualified personnel as 

compared to smaller covered financial 

institutions? If commenters believe that 

this is the case, what would commenters 

do to modify the proposed rule while 

reasonably ensuring that there is useful 

and meaningful risk adjustment of 

incentive-based compensation for 

executives at large covered financial 

institutions? Do commenters believe 

that requiring a different minimum 

deferral period or minimum deferred 

percentage would promote better 

incentive-based compensation 

practices? Should the required 

minimum deferral provisions be 

extended to smaller covered financial 

institutions? 

• Do commenters believe that there is 

a substantial risk that covered financial 

institutions would reconfigure their 

operations, structure, or assets in such 

a manner so as to circumvent being 

classified as a large covered financial 

institution? 

• Do commenters believe that 

mandating deferral as a risk adjustment 

tool for executive officers at large 

covered financial institutions would 

inhibit the development of other 

potentially more effective risk 

adjustment tools? Are there other risk 

adjustment tools that are more effective 

than deferral, and why are those tools 

more effective? 

C. Required Policies and Procedures 

and Documentation of the 

Compensation of Certain Covered 

Persons 

The proposal would require covered 

financial institutions to adopt policies 

and procedures reasonably designed to 

ensure and monitor compliance with 12 

U.S.C. 5641 commensurate with the size 

and complexity of the organization and 

the scope and nature of its use of 

incentive-based compensation. As 

described in further detail above, the 

proposed rule would require that the 

policies and procedures, at a minimum, 

be consistent with the disclosure 

requirements and prohibitions in other 

parts of the proposed rule, ensure that 

risk management or oversight personnel 

have a role in designing and assessing 

incentive-based compensation 

arrangements, provide for independent 

monitoring of the incentive-based 

compensation awards, risks taken and 

actual outcomes, require that a covered 

financial institution’s board receive data 

and an analysis to enable the board to 

assess whether the incentive-based 

compensation arrangements are 

consistent with 12 U.S.C. 5641, and 

require sufficient documentation of the 

covered financial institution’s incentivebased compensation arrangements to 

enable the Commission to determine the 

covered BDs’ or IAs’ compliance with 

12 U.S.C. 5641. In addition, the 

proposal would require that the covered 

BDs’ and IAs’ policies and procedures 

include certain features for when a firm 

uses deferral in connection with an 

incentive-based compensation 

arrangement, and that the policies and 

procedures subject incentive-based 

compensation arrangements to an 

appropriate corporate governance 

framework. 

In addition, for covered BDs and IAs 

with assets of at least $50 billion, 

proposed § 248.205(b)(3)(ii)(B) would 

require a firm’s board of directors, or a 

committee thereof, to identify those 

covered persons (other than executive 

officers) that individually 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. These covered 

persons may include, for example, 

traders with large position limits 

relative to the institution’s overall risk 

tolerance and other individuals that 

have the authority to place at risk a 

substantial part of the capital of the 

covered financial institution. The 

Agencies propose that the compensation 

decisions applicable to such persons 

must be approved by the firm’s board of 

directors or a committee of the board 

and that the covered BD or IA document 

the compensation decisions made by the 

board or its committee. 

1. Benefits 

The Commission believes that 

requiring covered financial institutions 

to adopt and enforce the policies and 

procedures described above would 

foster the Agencies’ understanding of 

the covered financial institutions’ 

incentive-based compensation practices 

and would promote compliance and 

accountability regarding the practices 

that the Agencies propose to prohibit. 

The rule is designed to ensure that 

covered BDs and IAs establish adequate 


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124The Commission estimates $354 per hour for 

a securities attorney, based on SIFMA’s 

Management & Professional Earnings in the 

Securities Industry 2010, modified by Commission 

staff to account for an 1800-hour work-year and 

multiplied by 5.35 to account for bonuses, firm size, 

employee benefits and overhead. 

125 2,500 hours × $354 = $885,000. 

126 3,400 hours × $354 = $1,203,600. 

127 3,000 hours × $354 = $1,062,000. 

128 46,000 hours × $354 = $16,284,000. 

129 1,000 hours × $354 = $354,000. 

130 1,000 hours × $354 = $354,000. 

131 400 hours × $354 = $141,600. 

132 4,300 hours × $354 = $1,522,200. 

133 2,500 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $987,500. 

134 3,400 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $1,343,000. 

135 3,000 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $1,185,000. 

136 46,000 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $18,170,000. 

137 1,000 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $395,000. 

procedures and controls to ensure 

compliance with 12 U.S.C 5641. The 

Commission preliminarily believes that 

the policies and procedures section of 

the proposed rule would help to ensure 

that boards receive data to monitor 

incentive-based compensation 

arrangements. Further, the Commission 

believes that, at a minimum, the 

proposed rule should help to ensure 

that incentive-based compensation 

arrangements would be designed with 

more careful consideration of its effects 

on risk. The Commission also believes 

that the proposed rule would provide 

greater board of director and risk 

management/risk oversight personnel 

supervision of incentive-based 

compensation arrangements and 

practices at the covered financial 

institution because boards would 

receive data and analysis from 

management to support a finding that 

the incentive-based compensation 

arrangements are consistent with 12 

U.S.C. 5641. Moreover, riskmanagement/risk-oversight personnel 

would help to design and assess the 

effectiveness of the covered BD’s or IA’s 

incentive-based compensation 

arrangement. The Commission believes 

that these provisions of the proposed 

rule would help to strengthen the 

supervision of covered persons’ 

incentive-based compensation 

arrangements by the board of directors. 

The proposed rule would help increase 

the importance of the compensationsetting function at covered financial 

institutions, including covered BDs and 

IAs. The Commission preliminarily 

believes that this increased internal 

importance would result in a higher 

quality process regarding incentivebased compensation decisions at a 

covered financial institution. For 

example, the proposed rule would help 

to ensure that information is received by 

the relevant decision makers and other 

persons acting in an internal 

supervisory role within the covered 

financial institution. This development 

should strengthen the supervision of the 

board with respect to incentive-based 

compensation arrangements. 

The recordkeeping requirement in 

proposed in § 248.206(b)(5) should 

ensure that Commission staff members 

are able to properly examine covered 

BDs’ and IAs’ incentive-based 

compensation practices in the context of 

an examination. The proposal also 

would require that a covered BD or IA 

have policies and procedures that 

provide that compensation payments 

are reduced to reflect adverse risk 

outcomes or high levels of risk taken. 

This should help ensure that the 

compensation contracts are accurately 

followed and diminish the adverse 

effect of deferred compensation that 

proves to be unwarranted once the risks 

associated with the covered person’s 

activities are realized over time. 

2. Costs 

As described more fully in the PRA 

Section, the Commission believes that 

covered individual bank BDs and IAs 

would be subject to significantly less 

initial and ongoing costs than non-bank 

BDs and IAs because bank BDs and IAs 

are already subject to the Guidance. The 

Commission is also aware that the 

proposed rule would generate 

compliance-related costs associated 

with, among other things, collecting the 

necessary information and preparing the 

reports, as well as hiring outside 

professionals, such as attorneys, 

compensation or benefits consultants, 

accountants and/or actuaries. In the 

chart below, the Commission estimates 

the internal costs associated with the 

proposed recordkeeping requirements. 

In order to arrive at these internal cost 

estimates, the Commission multiplied 

the hourly burden estimates provided in 

the PRA Section by the estimated hourly 

rate for a securities attorney.124 The 

Commission is using the same external 

cost estimates for the recordkeeping 

requirement that it used in the PRA 

Section of this proposed rule. The 

Commission seeks comment on all these 

cost estimates. 

TOTAL INTERNAL RECORDKEEPING COST

Covered bank 

BDs and IAs 

($50B +) 

Covered bank 

BDs and IAs 

($1B–$50B) 

Covered non-bank 

BDs and IAs 

($50B +) 

Covered non-bank 

BDs and IAs 

($1B–$50B) 

Initial Recordkeeping ...................................................... $900,000 125 ........... $1.2 million 126 ....... $1.1 million 127 ....... $16 million.128

Ongoing Recordkeeping ................................................. $400,000 129 ........... $400,000 130 ........... $150,000 131 ........... $1.5 million.132

TOTAL EXTERNAL RECORDKEEPING COST

Covered bank 

BDs and IAs 

($50B +) 

Covered bank 

BDs and IAs 

($1B–$50B) 

Covered non-bank 

BDs and IAs 

($50B +) 

Covered non-bank 

BDs and IAs 

($1B–$50B) 

Initial Recordkeeping ...................................................... $1 million 133 .......... $1.3 million 134 ....... $1.2 million 135 ....... $18 million.136

Ongoing Recordkeeping ................................................. $400,000 137 ........... $400,000 138 ........... $250,000 139 ........... $1.7 million.140

Solicitation of Comment 

In enacting this section of the DoddFrank Act, Congress has made the 


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138 1,000 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $395,000. 

139 600 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $237,000. 

140 4,300 hours × [(25% × $400/hour) + (25% × 

$600/hour) + (25% × $330/hour) + (25% × $250/ 

hour)] = $1,698,500. 

141See Joint Explanatory Statement of the 

committee of Conference Accompanying H.R. 4173, 

H.R. Rep. No. 111–517, at 873. 

142Pub. L. 104–121, Title II, 110 Stat. 857 (1996) 

(codified in various sections of 5 U.S.C., 15 U.S.C. 

and as a note to 5 U.S.C. 601). 

judgment that regulation entailing 

potential burdens and impacts of the 

type discussed below is justified so as 

to prevent covered financial institutions 

from utilizing incentive-based 

compensation arrangements that could 

threaten the health of financial 

institutions or have serious effects on 

economic conditions or financial 

stability.141 The Commission generally 

solicits comment on all the costs, 

benefits, and analyses set forth in this 

economic analysis. The Commission 

also specifically requests comment on 

the following issues: 

• The Commission requests 

comments on the anticipated impact of 

the proposal on the competitiveness of 

covered financial institutions as 

compared to broker-dealers and 

investment advisers that do not meet the 

definition of covered financial 

institution as well as the impact of the 

proposal on the competitiveness of 

covered BDs and IAs with assets of at 

least $50 billion as compared to covered 

BDs and IAs with assets between 

$1 billion and $50 billion. 

• Could the proposed rule be 

modified so as to implement the 

mandate of 12 U.S.C. 5641 in a manner 

that improves the efficiency of covered 

financial institution and imposes less of 

a burden on competition? If so, what 

specific changes would commenters 

suggest? Would the impact be improved 

with a different deferral threshold 

(currently 50% of incentive-based 

compensation) or deferral period 

(currently no faster than pro rata over 

3 years)? Is there a better way to design 

or apply the ‘‘look-back’’ period? 

• The Commission solicits public 

comment on the degree to which 

commenters believe that the proposal 

would encourage covered employees to 

take optimal risk and/or discourage 

covered employees from taking 

inappropriate levels of risk. If 

commenters believe the proposal would 

lead to covered employees undertaking 

less than optimal risk (e.g., make 

decisions that are too conservative for 

the firm), then please elaborate why that 

is the case. 

• If commenters believe a different 

approach is warranted, do commenters 

believe that a different approach would 

be equally effective at helping to ensure, 

particularly at large covered financial 

institutions, that incentive-based 

compensation arrangements do not 

result in excessive compensation or a 

material financial loss to the covered 

financial institution? What alternative 

would commenters propose and why do 

commenters believe that it would be as 

effective, or more effective? 

• Does the proposed rule promote 

greater internal discipline and controls 

by covered financial institutions with 

respect to incentive-based compensation 

arrangements? Similarly, does the 

proposed rule help to promote that 

discipline upon a greater number of 

persons at the covered financial 

institution, including not only the 

executive officers (or comparable 

persons) at a covered financial 

institution, but also those persons 

whose activities subject the covered 

financial institution to significant risk? 

I. SEC Consideration of Impact on the 

Economy 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996, or ‘‘SBREFA,’’ 142 the Commission 

must advise OMB whether a proposed 

regulation constitutes a major rule. 

Under SBREFA, a rule is ‘‘major’’ if it 

has resulted in, or is likely to result in: 

• An annual effect on the economy of 

$100 million or more 

• a major increase in costs or prices 

for consumers or individual industries; 

or 

• a significant adverse effect on 

competition, investment, or innovation. 

If a rule is ‘‘major,’’ its effectiveness will 

generally be delayed for 60 days 

pending Congressional review. The 

Commission requests comment on the 

potential impact of each of the proposed 

rules and rule amendments on the 

economy on an annual basis, on the 

costs or prices for consumers or 

individual industries, and on 

competition, investment, or innovation. 

Commenters are requested to provide 

empirical data and other factual support 

for their views to the extent possible. 

List of Subjects 

12 CFR Part 42 

Compensation, Banks, Banking, 

National banks, Reporting and 

recordkeeping requirements. 

12 CFR Part 236 

Compensation, Banks, Bank Holding 

Companies, Reporting and 

recordkeeping requirements. 

12 CFR Part 372 

Banks, Banking, Compensation, 

Foreign Banking. 

12 CFR Part 563h 

Compensation, Holding companies, 

Reporting and recordkeeping 

requirements, Savings associations. 

12 CFR Parts 741 and 751 

Compensation, Credit Unions, 

Reporting and recording requirements. 

12 CFR Part 1232 

Administrative practice and 

procedure, Banks, Compensation, 

Confidential business information, 

Government-sponsored enterprises, 

Reporting and recordkeeping 

requirements. 

17 CFR Part 248 

Incentive-based Compensation 

Arrangements, Reporting and 

recordkeeping requirements; Securities. 

Department of the Treasury 

Office of the Comptroller of the 

Currency 

12 CFR Chapter I 

Authority and Issuance 

For the reasons set forth in the joint 

preamble, the OCC proposes to amend 

12 CFR Chapter I of the Code of Federal 

Regulations as follows: 

1. Add part 42 to read as follows: 

PART 42—INCENTIVE-BASED 

COMPENSATION ARRANGEMENTS 

Sec. 

42.1 Authority. 

42.2 Scope and purpose. 

42.3 Definitions. 

42.4 Required reports to regulators. 

42.5 Prohibitions. 

42.6 Policies and procedures. 

42.7 Evasion. 

Authority: 12 U.S.C. 1 et seq. 1, 93a, and 

5641. 

§ 42.1 Authority. 

This part is issued pursuant to section 

956 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(12 U.S.C. 5641). 

§ 42.2 Scope and purpose. 

This part applies to a covered 

financial institution that has total 

consolidated assets of $1 billion or more 

and offers incentive-based 

compensation arrangements to covered 

persons. Nothing in this part in any way 

limits the authority of the OCC under 

other provisions of applicable law and 

regulations. 


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§ 42.3 Definitions. 

For purposes of this part, the 

following definitions apply unless 

otherwise specified: 

(a) Board of directors means the 

governing body of any covered financial 

institution performing functions similar 

to a board of directors. For Federal 

branches and agencies, ‘‘board of 

directors’’ means parent foreign bank 

senior management. 

(b) Compensation means all direct 

and indirect payments, fees or benefits, 

both cash and non-cash, awarded to, 

granted to, or earned by or for the 

benefit of, any covered person in 

exchange for services rendered to the 

covered financial institution, including, 

but not limited to, payments or benefits 

pursuant to an employment contract, 

compensation or benefit agreement, fee 

arrangement, perquisite, stock option 

plan, postemployment benefit, or other 

compensatory arrangement. 

(c) Covered financial institution 

means a national bank or a Federal 

branch or agency of a foreign bank that 

has total consolidated assets of $1 

billion or more. 

(d) Covered person means any 

executive officer, employee, director, or 

principal shareholder of a covered 

financial institution. 

(e) Director of a covered financial 

institution means a member of the board 

of directors of the covered financial 

institution, or of a board or committee 

performing a similar function to a board 

of directors. 

(f) Executive officer of a covered 

financial institution means a person 

who holds the title or, without regard to 

title, salary, or compensation, performs 

the function of one or more of the 

following positions: president, chief 

executive officer, executive chairman, 

chief operating officer, chief financial 

officer, chief investment officer, chief 

legal officer, chief lending officer, chief 

risk officer, or head of a major business 

line. 

(g) Incentive-based compensation 

means any variable compensation that 

serves as an incentive for performance. 

(h) Principal shareholder means an 

individual who directly or indirectly, or 

acting through or in concert with one or 

more persons, owns, controls, or has the 

power to vote 10 percent or more of any 

class of voting securities of a covered 

financial institution. 

(i) Total consolidated assets means: 

(1) For a national bank, calculating 

the average of the total assets reported 

in the bank’s four most recent 

Consolidated Reports of Condition and 

Income (‘‘Call Report’’); and 

(2) For a Federal branch and agency, 

calculating the average of the total assets 

reported in the Federal branch or 

agency’s four most recent Reports of 

Assets and Liabilities of U.S. Branches 

and Agencies of Foreign Banks—FFIEC 

002. 

§ 42.4 Required reports to regulators. 

(a) In general. A covered financial 

institution must submit a report 

annually to, and in the format directed 

by, the OCC, that describes the structure 

of the covered financial institution’s 

incentive-based compensation 

arrangements for covered persons and 

that is sufficient to allow an assessment 

of whether the structure or features of 

those arrangements provide or are likely 

to provide covered persons with 

excessive compensation, fees, or 

benefits to covered persons or could 

lead to material financial loss to the 

covered financial institution. 

(b) Individual compensation. A 

covered financial institution is not 

required to report the actual 

compensation of particular covered 

persons as part of the report required by 

paragraph (a) of this section. 

(c) Minimum standards. The 

information submitted by the covered 

financial institution pursuant to 

paragraph (a) of this section must 

include the following: 

(1) A clear narrative description of the 

components of the covered financial 

institution’s incentive-based 

compensation arrangements applicable 

to covered persons and specifying the 

types of covered persons to which they 

apply; 

(2) A succinct description of the 

covered financial institution’s policies 

and procedures governing its incentivebased compensation arrangements for 

covered persons; 

(3) If the covered financial institution 

has total consolidated assets of $50 

billion or more, an additional succinct 

description of incentive-based 

compensation policies and procedures 

specific to the covered financial 

institution’s: 

(i) Executive officers; and 

(ii) Other covered persons who the 

board of directors, or a committee 

thereof, of the covered financial 

institution has identified and 

determined under § 42.5(b)(3)(ii) of this 

part individually have the ability to 

expose the covered financial institution 

to possible losses that are substantial in 

relation to the institution’s size, capital, 

or overall risk tolerance; 

(4) Any material changes to the 

covered financial institution’s incentivebased compensation arrangements and 

policies and procedures made since the 

covered financial institution’s last 

report submitted under paragraph (a) of 

this section; and 

(5) The specific reasons why the 

covered financial institution believes 

the structure of its incentive-based 

compensation plan does not encourage 

inappropriate risks by the covered 

financial institution by providing 

covered persons with: 

(i) Excessive compensation; or 

(ii) Incentive-based compensation that 

could lead to a material financial loss to 

the covered financial institution. 

§ 42.5 Prohibitions. 

(a) Excessive compensation 

prohibition. (1) In general. A covered 

financial institution must not establish 

or maintain any type of incentive-based 

compensation arrangement, or any 

feature of any such arrangement, that 

encourages inappropriate risks by the 

covered financial institution by 

providing a covered person with 

excessive compensation. 

(2) Standards. An incentive-based 

compensation arrangement provides 

excessive compensation when amounts 

paid are unreasonable or 

disproportionate to the services 

performed by a covered person, taking 

into consideration: 

(i) The combined value of all cash and 

non-cash benefits provided to the 

covered person; 

(ii) The compensation history of the 

covered person and other individuals 

with comparable expertise at the 

covered financial institution; 

(iii) The financial condition of the 

covered financial institution; 

(iv) Comparable compensation 

practices at comparable institutions, 

based upon such factors as asset size, 

geographic location, and the complexity 

of the covered financial institution’s 

operations and assets; 

(v) For postemployment benefits, the 

projected total cost and benefit to the 

covered financial institution; 

(vi) Any connection between the 

individual and any fraudulent act or 

omission, breach of trust or fiduciary 

duty, or insider abuse with regard to the 

covered financial institution; and 

(vii) Any other factors the OCC 

determines to be relevant. 

(b) Material financial loss prohibition. 

(1) Generally. A covered financial 

institution must not establish or 

maintain any type of incentive-based 

compensation arrangement, or any 

feature of any such arrangement, that 

encourages inappropriate risks by the 

covered financial institution, by 

providing incentive-based 

compensation to covered persons, either 

individually or as part of a group of 

persons who are subject to the same or 


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similar incentive-based compensation 

arrangements, that could lead to 

material financial loss to the covered 

financial institution. 

(2) Requirements for all covered 

financial institutions. An incentivebased compensation arrangement 

established or maintained by a covered 

financial institution for one or more 

covered persons does not comply with 

paragraph (b)(1) of this section unless it: 

(i) Balances risk and financial 

rewards, for example by using deferral 

of payments, risk adjustment of awards, 

reduced sensitivity to short-term 

performance, or longer performance 

periods; 

(ii) Is compatible with effective 

controls and risk management; and 

(iii) Is supported by strong corporate 

governance, including active and 

effective oversight by the covered 

financial institution’s board of directors 

or a committee thereof. 

(3) Specific requirements for covered 

financial institutions with $50 billion or 

more in total consolidated assets. (i) 

Deferral required for executive officers. 

As part of appropriately balancing risk 

and financial rewards pursuant to 

paragraph (b)(2)(i) of this section, any 

incentive-based compensation 

arrangement for any executive officer 

established or maintained by a covered 

financial institution that has total 

consolidated assets of $50 billion or 

more must provide for: 

(A) At least 50 percent of the annual 

incentive-based compensation of the 

executive officer to be deferred over a 

period of no less than three years, with 

the release of deferred amounts to occur 

no faster than on a pro rata basis; and 

(B) The adjustment of the amount 

required to be deferred under paragraph 

(b)(3)(i)(A) of this section to reflect 

actual losses or other measures or 

aspects of performance that are realized 

or become better known during the 

deferral period. 

(ii) Additional requirement for 

covered persons presenting particular 

loss exposure. As part of appropriately 

balancing risk and financial rewards 

pursuant to paragraph (b)(2)(i) of this 

section, if a covered financial institution 

has total consolidated assets of $50 

billion or more— 

(A) The board of directors, or a 

committee thereof, of the covered 

financial institution shall identify those 

covered persons (other than executive 

officers) who individually 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. These covered 

persons may include, for example, 

traders with large position limits 

relative to the institution’s overall risk 

tolerance and other individuals who 

have the authority to place at risk a 

substantial part of the capital of the 

covered financial institution; 

(B) The incentive-based compensation 

arrangement for any covered person 

identified pursuant to paragraph 

(b)(3)(ii)(A) of this section must be 

approved by the board of directors, or a 

committee thereof, of the covered 

financial institution and such approval 

must be documented; 

(C) The board of directors, or 

committee thereof, may not approve the 

incentive-based compensation 

arrangement for any covered person 

identified pursuant to paragraph 

(b)(3)(ii)(A) of this section unless the 

board or committee determines that the 

arrangement, including the method of 

paying compensation under the 

arrangement, effectively balances the 

financial rewards to the covered person 

and the range and time horizon of risks 

associated with the covered person’s 

activities, employing appropriate 

methods for ensuring risk sensitivity 

such as deferral of payments, risk 

adjustment of awards, reduced 

sensitivity to short-term performance, or 

longer performance periods; and 

(D) In fulfilling its duties under 

paragraph (b)(3)(ii)(C) of this section, 

the board of directors or committee 

thereof must evaluate the overall 

effectiveness of the balancing methods 

used in the identified covered person’s 

incentive-based compensation 

arrangements in reducing incentives for 

inappropriate risk taking by the 

identified covered person considering 

the methods’ suitability for balancing 

the full range of risks presented by that 

covered person’s activities, and the 

methods’ ability to make payments 

sensitive to all the risks arising from the 

covered person’s activities, including 

those that may be difficult to predict, 

measure or model. 

§ 42.6 Policies and procedures. 

(a) In general. Any incentive-based 

compensation arrangement, or any 

feature of any such arrangement, is 

prohibited under § 42.5 of this part, 

unless adopted pursuant to policies and 

procedures developed and maintained 

by each covered financial institution 

and approved by its board of directors, 

or a committee thereof, reasonably 

designed to ensure and monitor 

compliance with the requirements set 

forth in 12 U.S.C. 5641 and this part and 

commensurate with the size and 

complexity of the organization, as well 

as the scope and nature of its use of 

incentive-based compensation. 

(b) Standards. The policies and 

procedures must, at a minimum: 

(1) Be consistent with the reporting 

requirements in § 42.4 of this part and 

prohibitions in § 42.5 of this part; 

(2) Ensure that risk-management, riskoversight, and internal control 

personnel have an appropriate role in 

the covered financial institution’s 

processes for designing incentive-based 

compensation arrangements and for 

assessing their effectiveness in 

restraining inappropriate risk-taking; 

(3) Provide for the monitoring by a 

group or person independent of the 

covered person, where practicable in 

light of the covered financial 

institution’s size and complexity, of 

incentive-based compensation awards 

and payments, risks taken, and actual 

risk outcomes to determine whether 

incentive-based compensation payments 

for covered persons, or groups of 

covered persons, are reduced to reflect 

adverse risk outcomes or high levels of 

risk taken; 

(4) Provide for the covered financial 

institution’s board of directors, or 

committee thereof, to receive data and 

analysis from management and other 

sources sufficient to allow the board, or 

committee thereof, to assess whether the 

overall design and performance of the 

institution’s incentive-based 

compensation arrangements are 

consistent with 12 U.S.C. 5641; 

(5) Ensure that documentation of the 

covered financial institution’s processes 

for establishing, implementing, 

modifying, and monitoring incentivebased compensation arrangements is 

maintained that is sufficient to enable 

the OCC to determine the institution’s 

compliance with 12 U.S.C. 5641 and 

this part; 

(6) Consistent with § 42.5(b)(3) of this 

part, where deferral is used in 

connection with an incentive-based 

compensation arrangement, provide for 

deferral of incentive-based 

compensation awards in amounts and 

for periods of time appropriate to the 

duties and responsibilities of the 

covered financial institution’s covered 

persons, the risks associated with those 

duties and responsibilities, and the size 

and complexity of the covered financial 

institution and provide that the deferral 

amounts paid are adjusted to reflect 

actual losses or other measures or 

aspects of performance that are realized 

or become better known during the 

deferral period; and 

(7) Subject any incentive-based 

compensation arrangement to a 

corporate governance framework that 

provides for ongoing oversight by the 

board of directors or a committee 

thereof, including the approval by the 


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board of directors or a committee 

thereof of incentive-based compensation 

to executive officers. 

§ 42.7 Evasion. 

A covered financial institution is 

prohibited, for the purpose of evading 

the restrictions of this part, from doing 

indirectly or through or by any other 

person, any act or thing that it would be 

unlawful for such covered financial 

institution to do directly under this part. 

Federal Reserve Board 

12 CFR Chapter II 

Authority and Issuance 

For the reasons set forth in the joint 

preamble, the Board proposes to amend 

12 CFR Chapter II as follows: 

2. Add new part 236 to read as 

follows: 

PART 236—Incentive-Based 

Compensation Arrangements 

(Regulation JJ) 

Sec. 

236.1 Authority. 

236.2 Scope and purpose. 

236.3 Definitions. 

236.4 Required reports to regulators. 

236.5 Prohibitions. 

236.6 Policies and procedures. 

236.7 Evasion. 

Authority: 12 U.S.C. 24, 321–338a, 1818, 

1844(b), 3108 and 5641. 

§ 236.1 Authority. 

This part is issued pursuant to section 

956 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(12 U.S.C. 5641). 

§ 236.2 Scope and purpose. 

This part applies to a covered 

financial institution that has total 

consolidated assets of $1 billion or more 

and offers incentive-based 

compensation arrangements to covered 

persons. Nothing in this part in any way 

limits the authority of the Board under 

other provisions of applicable law and 

regulations. 

§ 236.3 Definitions. 

For purposes of this part, the 

following definitions apply unless 

otherwise specified: 

(a) Board of directors means the 

governing body of any covered financial 

institution performing functions similar 

to a board of directors. For a foreign 

banking organization, ‘‘board of 

directors’’ refers to the relevant oversight 

body for the firm’s U.S. branch, agency 

or operations, consistent with the 

foreign banking organization’s overall 

corporate and management structure. 

(b) Compensation means all direct 

and indirect payments, fees or benefits, 

both cash and non-cash, awarded to, 

granted to, or earned by or for the 

benefit of, any covered person in 

exchange for services rendered to the 

covered financial institution, including, 

but not limited to, payments or benefits 

pursuant to an employment contract, 

compensation or benefit agreement, fee 

arrangement, perquisite, stock option 

plan, postemployment benefit, or other 

compensatory arrangement. 

(c) Covered financial institution (1) In 

general. The term ‘‘covered financial 

institution’’ means: 

(i) A state member bank, as defined in 

12 CFR 208.2(g), that has total 

consolidated assets of $1 billion or 

more; 

(ii) A bank holding company, as 

defined in 12 CFR 225.2(c), that has 

total consolidated assets of $1 billion or 

more; 

(iii) A state-licensed uninsured 

branch or agency of a foreign bank, as 

such terms are defined in section 3 of 

the Federal Deposit Insurance Act (12 

USC 1813), that has total consolidated 

assets of $1 billion or more; and 

(iv) The U.S. operations of a foreign 

bank that is treated as a bank holding 

company pursuant to section 8(a) of the 

International Banking Act of 1978 (12 

USC 3106(a)) that has total consolidated 

U.S. assets of $1 billion or more. 

(2) Scope of term. A covered financial 

institution includes the subsidiaries of 

the institution. 

(d) Covered person means any 

executive officer, employee, director, or 

principal shareholder of a covered 

financial institution. 

(e) Director of a covered financial 

institution means a member of the board 

of directors of the covered financial 

institution, or of a board or committee 

performing a similar function to a board 

of directors. 

(f) Executive officer of a covered 

financial institution means a person 

who holds the title or, without regard to 

title, salary, or compensation, performs 

the function of one or more of the 

following positions: president, chief 

executive officer, executive chairman, 

chief operating officer, chief financial 

officer, chief investment officer, chief 

legal officer, chief lending officer, chief 

risk officer, or head of a major business 

line. 

(g) Incentive-based compensation 

means any variable compensation that 

serves as an incentive for performance. 

(h) Principal shareholder means an 

individual who directly or indirectly, or 

acting through or in concert with one or 

more persons, owns, controls, or has the 

power to vote 10 percent or more of any 

class of voting securities of a covered 

financial institution. 

(i) Total consolidated assets means: 

(1) For a state member bank, total 

consolidated assets as determined based 

on the average of the bank’s four most 

recent Consolidated Reports of 

Condition and Income (‘‘Call Report’’); 

(2) For a bank holding company, total 

consolidated assets as determined based 

on the average of the company’s four 

most recent Consolidated Financial 

Statements for Bank Holding Companies 

(‘‘FR Y–9C’’); 

(3) For a state-licensed uninsured 

branch or agency of a foreign bank, total 

consolidated assets as determined based 

on the average of the branch or agency’s 

four most recent Call Reports; and 

(4) For the U.S. operations of a foreign 

bank total consolidated U.S. assets as 

determined by the Board. 

§ 236.4 Required reports to regulators. 

(a) In general. A covered financial 

institution must submit a report 

annually to, and in the format directed 

by, the Board, that describes the 

structure of the covered financial 

institution’s incentive-based 

compensation arrangements for covered 

persons and that is sufficient to allow an 

assessment of whether the structure or 

features of those arrangements provide 

or are likely to provide covered persons 

with excessive compensation, fees, or 

benefits to covered persons or could 

lead to material financial loss to the 

covered financial institution. 

(b) Individual compensation. A 

covered financial institution is not 

required to report the actual 

compensation of particular covered 

persons as part of the report required by 

paragraph (a) of this section. 

(c) Minimum standards. The 

information submitted by the covered 

financial institution pursuant to 

paragraph (a) of this section must 

include the following: 

(1) A clear narrative description of the 

components of the covered financial 

institution’s incentive-based 

compensation arrangements applicable 

to covered persons and specifying the 

types of covered persons to which they 

apply; 

(2) A succinct description of the 

covered financial institution’s policies 

and procedures governing its incentivebased compensation arrangements for 

covered persons; 

(3) If the covered financial institution 

has total consolidated assets of $50 

billion or more, an additional succinct 

description of incentive-based 

compensation policies and procedures 

specific to the covered financial 

institution’s: 

(i) Executive officers; and 


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(ii) Other covered persons who the 

board of directors, or a committee 

thereof, of the covered financial 

institution has identified and 

determined under § 236.5(b)(3)(ii) of 

this part individually have the ability to 

expose the covered financial institution 

to possible losses that are substantial in 

relation to the institution’s size, capital, 

or overall risk tolerance; 

(4) Any material changes to the 

covered financial institution’s incentivebased compensation arrangements and 

policies and procedures made since the 

covered financial institution’s last 

report submitted under paragraph (a) of 

this section; and 

(5) The specific reasons why the 

covered financial institution believes 

the structure of its incentive-based 

compensation plan does not encourage 

inappropriate risks by the covered 

financial institution by providing 

covered persons with: 

(i) Excessive compensation; or 

(ii) Incentive-based compensation that 

could lead to a material financial loss to 

the covered financial institution. 

§ 236.5 Prohibitions. 

(a) Excessive compensation 

prohibition. (1) In general. A covered 

financial institution must not establish 

or maintain any type of incentive-based 

compensation arrangement, or any 

feature of any such arrangement, that 

encourages inappropriate risks by the 

covered financial institution by 

providing a covered person with 

excessive compensation. 

(2) Standards. An incentive-based 

compensation arrangement provides 

excessive compensation when amounts 

paid are unreasonable or 

disproportionate to the services 

performed by a covered person, taking 

into consideration: 

(i) The combined value of all cash and 

non-cash benefits provided to the 

covered person; 

(ii) The compensation history of the 

covered person and other individuals 

with comparable expertise at the 

covered financial institution; 

(iii) The financial condition of the 

covered financial institution; 

(iv) Comparable compensation 

practices at comparable institutions, 

based upon such factors as asset size, 

geographic location, and the complexity 

of the covered financial institution’s 

operations and assets; 

(v) For postemployment benefits, the 

projected total cost and benefit to the 

covered financial institution; 

(vi) Any connection between the 

individual and any fraudulent act or 

omission, breach of trust or fiduciary 

duty, or insider abuse with regard to the 

covered financial institution; and 

(vii) Any other factors the Board 

determines to be relevant. 

(b) Material financial loss prohibition. 

(1) Generally. A covered financial 

institution must not establish or 

maintain any type of incentive-based 

compensation arrangement, or any 

feature of any such arrangement, that 

encourages inappropriate risks by the 

covered financial institution, by 

providing incentive-based 

compensation to covered persons, either 

individually or as part of a group of 

persons who are subject to the same or 

similar incentive-based compensation 

arrangements, that could lead to 

material financial loss to the covered 

financial institution. 

(2) Requirements for all covered 

financial institutions. An incentivebased compensation arrangement 

established or maintained by a covered 

financial institution for one or more 

covered persons does not comply with 

paragraph (b)(1) of this section unless it: 

(i) Balances risk and financial 

rewards, for example by using deferral 

of payments, risk adjustment of awards, 

reduced sensitivity to short-term 

performance, or longer performance 

periods; 

(ii) Is compatible with effective 

controls and risk management; and 

(iii) Is supported by strong corporate 

governance, including active and 

effective oversight by the covered 

financial institution’s board of directors 

or a committee thereof. 

(3) Specific requirements for covered 

financial institutions with $50 billion or 

more in total consolidated assets. (i) 

Deferral required for executive officers. 

As part of appropriately balancing risk 

and financial rewards pursuant to 

paragraph (b)(2)(i) of this section, any 

incentive-based compensation 

arrangement for any executive officer 

established or maintained by a covered 

financial institution that has total 

consolidated assets of $50 billion or 

more must provide for: 

(A) At least 50 percent of the annual 

incentive-based compensation of the 

executive officer to be deferred over a 

period of no less than three years, with 

the release of deferred amounts to occur 

no faster than on a pro rata basis; and 

(B) The adjustment of the amount 

required to be deferred under paragraph 

(b)(3)(i)(A) of this section to reflect 

actual losses or other measures or 

aspects of performance that are realized 

or become better known during the 

deferral period. 

(ii) Additional requirement for 

covered persons presenting particular 

loss exposure. As part of appropriately 

balancing risk and financial rewards 

pursuant to paragraph (b)(2)(i) of this 

section, if a covered financial institution 

has total consolidated assets of $50 

billion or more— 

(A) The board of directors, or a 

committee thereof, of the covered 

financial institution shall identify those 

covered persons (other than executive 

officers) who individually 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. These covered 

persons may include, for example, 

traders with large position limits 

relative to the institution’s overall risk 

tolerance and other individuals who 

have the authority to place at risk a 

substantial part of the capital of the 

covered financial institution; 

(B) The incentive-based compensation 

arrangement for any covered person 

identified pursuant to paragraph 

(b)(3)(ii)(A) of this section must be 

approved by the board of directors, or a 

committee thereof, of the covered 

financial institution and such approval 

must be documented; 

(C) The board of directors, or 

committee thereof, may not approve the 

incentive-based compensation 

arrangement for any covered person 

identified pursuant to paragraph 

(b)(3)(ii)(A) of this section unless the 

board or committee determines that the 

arrangement, including the method of 

paying compensation under the 

arrangement, effectively balances the 

financial rewards to the covered person 

and the range and time horizon of risks 

associated with the covered person’s 

activities, employing appropriate 

methods for ensuring risk sensitivity 

such as deferral of payments, risk 

adjustment of awards, reduced 

sensitivity to short-term performance, or 

longer performance periods; and 

(D) In fulfilling its duties under 

paragraph (b)(3)(ii)(C) of this section, 

the board of directors or committee 

thereof must evaluate the overall 

effectiveness of the balancing methods 

used in the identified covered person’s 

incentive-based compensation 

arrangements in reducing incentives for 

inappropriate risk taking by the 

identified covered person considering 

the methods’ suitability for balancing 

the full range of risks presented by that 

covered person’s activities, and the 

methods’ ability to make payments 

sensitive to all the risks arising from the 

covered person’s activities, including 

those that may be difficult to predict, 

measure or model. 


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§ 236.6 Policies and procedures. 

(a) In general. Any incentive-based 

compensation arrangement, or any 

feature of any such arrangement, is 

prohibited under § 236.5 of this part, 

unless adopted pursuant to policies and 

procedures developed and maintained 

by each covered financial institution 

and approved by its board of directors, 

or a committee thereof, reasonably 

designed to ensure and monitor 

compliance with the requirements set 

forth in 12 U.S.C. 5641 and this part and 

commensurate with the size and 

complexity of the organization, as well 

as the scope and nature of its use of 

incentive-based compensation. 

(b) Standards. The policies and 

procedures must, at a minimum: 

(1) Be consistent with the reporting 

requirements in § 236.4 of this part and 

prohibitions in § 236.5 of this part; 

(2) Ensure that risk-management, riskoversight, and internal control 

personnel have an appropriate role in 

the covered financial institution’s 

processes for designing incentive-based 

compensation arrangements and for 

assessing their effectiveness in 

restraining inappropriate risk-taking; 

(3) Provide for the monitoring by a 

group or person independent of the 

covered person, where practicable in 

light of the covered financial 

institution’s size and complexity, of 

incentive-based compensation awards 

and payments, risks taken, and actual 

risk outcomes to determine whether 

incentive compensation payments for 

covered persons, or groups of covered 

persons, are reduced to reflect adverse 

risk outcomes or high levels of risk 

taken; 

(4) Provide for the covered financial 

institution’s board of directors, or 

committee thereof, to receive data and 

analysis from management and other 

sources sufficient to allow the board, or 

committee thereof, to assess whether the 

overall design and performance of the 

institution’s incentive-based 

compensation arrangements are 

consistent with 12 U.S.C. 5641; 

(5) Ensure that documentation of the 

covered financial institution’s processes 

for establishing, implementing, 

modifying, and monitoring incentivebased compensation arrangements is 

maintained that is sufficient to enable 

the Board to determine the institution’s 

compliance with 12 U.S.C. 5641 and 

this part; 

(6) Consistent with § 236.5(b)(3) of 

this part, where deferral is used in 

connection with an incentive-based 

compensation arrangement, provide for 

deferral of incentive-based 

compensation awards in amounts and 

for periods of time appropriate to the 

duties and responsibilities of the 

covered financial institution’s covered 

persons, the risks associated with those 

duties and responsibilities, and the size 

and complexity of the covered financial 

institution and provide that the deferral 

amounts paid are adjusted to reflect 

actual losses or other measures or 

aspects of performance that are realized 

or become better known during the 

deferral period; and 

(7) Subject any incentive-based 

compensation arrangement to a 

corporate governance framework that 

provides for ongoing oversight by the 

board of directors or a committee 

thereof, including the approval by the 

board of directors or a committee 

thereof of incentive-based compensation 

to executive officers. 

§ 236.7 Evasion. 

A covered financial institution is 

prohibited, for the purpose of evading 

the restrictions of this part, from doing 

indirectly or through or by any other 

person, any act or thing that it would be 

unlawful for such covered financial 

institution to do directly under this part. 

Federal Deposit Insurance Corporation 

12 CFR CHAPTER III 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Federal Deposit Insurance 

Corporation proposes to amend chapter 

III of title 12 of the Code of Federal 

Regulations as follows: 

3. Add new part 372 to read as 

follows: 

PART 372—INCENTIVE-BASED 

COMPENSATION ARRANGEMENTS 

Sec. 

372.1 Authority. 

372.2 Scope and purpose. 

372.3 Definitions. 

372.4 Required reports to regulators. 

372.5 Prohibitions. 

372.6 Policies and procedures. 

372.7 Evasion. 

Authority: 12 U.S.C. 1819 Tenth, 12 U.S.C. 

5641. 

§ 372.1 Authority. 

This part is issued pursuant to section 

956 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(12 U.S.C. 5641). 

§ 372.2 Scope and purpose. 

This part applies to a covered 

financial institution that has total 

consolidated assets of $1 billion or more 

and offers incentive-based 

compensation arrangements to covered 

persons. Nothing in this part in any way 

limits the authority of the Corporation 

under other provisions of applicable law 

and regulations. 

§ 372.3 Definitions. 

For purposes of this part, the 

following definitions apply unless 

otherwise specified: 

(a) Board of directors means the 

governing body of any covered financial 

institution performing functions similar 

to a board of directors. For an insured 

U.S. branch of a foreign bank, ‘‘board of 

directors’’ means the senior management 

of its parent foreign bank. 

(b) Compensation means all direct 

and indirect payments, fees or benefits, 

both cash and non-cash, awarded to, 

granted to, or earned by or for the 

benefit of, any covered person in 

exchange for services rendered to the 

covered financial institution, including, 

but not limited to, payments or benefits 

pursuant to an employment contract, 

compensation or benefit agreement, fee 

arrangement, perquisite, stock option 

plan, postemployment benefit, or other 

compensatory arrangement. 

(c) Covered financial institution 

means a state nonmember bank and an 

insured U.S. branch of a foreign bank 

that has total consolidated assets of $1 

billion or more. 

(d) Covered person means any 

executive officer, employee, director, or 

principal shareholder of a covered 

financial institution. 

(e) Director of a covered financial 

institution means a member of the board 

of directors of the covered financial 

institution, or of a board or committee 

performing a similar function to a board 

of directors. 

(f) Executive officer of a covered 

financial institution means a person 

who holds the title or, without regard to 

title, salary, or compensation, performs 

the function of one or more of the 

following positions: President, chief 

executive officer, executive chairman, 

chief operating officer, chief financial 

officer, chief investment officer, chief 

legal officer, chief lending officer, chief 

risk officer, or head of a major business 

line. 

(g) Incentive-based compensation 

means any variable compensation that 

serves as an incentive for performance. 

(h) Principal shareholder means an 

individual who directly or indirectly, or 

acting through or in concert with one or 

more persons, owns, controls, or has the 

power to vote 10 percent or more of any 

class of voting securities of a covered 

financial institution. 

(i) Total consolidated assets means: 

(1) For a state nonmember bank, the 

average of the total assets reported in 

the bank’s four most recent 


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Consolidated Reports of Condition and 

Income; and 

(2) For an insured U.S. branch of a 

foreign bank, the average of the total 

assets reported in the branch’s four most 

recent Reports of Assets and Liabilities 

of U.S. Branches and Agencies of 

Foreign Banks. 

§ 372.4 Required reports to regulators. 

(a) In general. A covered financial 

institution must submit a report 

annually to, and in the format directed 

by, the Corporation, that describes the 

structure of the covered financial 

institution’s incentive-based 

compensation arrangements for covered 

persons and that is sufficient to allow an 

assessment of whether the structure or 

features of those arrangements provide 

or are likely to provide covered persons 

with excessive compensation, fees, or 

benefits to covered persons or could 

lead to material financial loss to the 

covered financial institution. 

(b) Individual compensation. A 

covered financial institution is not 

required to report the actual 

compensation of particular covered 

persons as part of the report required by 

paragraph (a) of this section. 

(c) Minimum standards. The 

information submitted by the covered 

financial institution pursuant to 

paragraph (a) of this section must 

include the following: 

(1) A clear narrative description of the 

components of the covered financial 

institution’s incentive-based 

compensation arrangements applicable 

to covered persons and specifying the 

types of covered persons to which they 

apply; 

(2) A succinct description of the 

covered financial institution’s policies 

and procedures governing its incentivebased compensation arrangements for 

covered persons; 

(3) If the covered financial institution 

has total consolidated assets of $50 

billion or more, an additional succinct 

description of incentive-based 

compensation policies and procedures 

specific to the covered financial 

institution’s: 

(i) Executive officers; and 

(ii) Other covered persons who the 

board of directors, or a committee 

thereof, of the covered financial 

institution has identified and 

determined under § 372.5(b)(3)(ii) of 

this part individually have the ability to 

expose the covered financial institution 

to possible losses that are substantial in 

relation to the institution’s size, capital, 

or overall risk tolerance; 

(4) Any material changes to the 

covered financial institution’s incentivebased compensation arrangements and 

policies and procedures made since the 

covered financial institution’s last 

report submitted under paragraph (a) of 

this section; and 

(5) The specific reasons why the 

covered financial institution believes 

the structure of its incentive-based 

compensation plan does not encourage 

inappropriate risks by the covered 

financial institution by providing 

covered persons with: 

(i) Excessive compensation; or 

(ii) Incentive-based compensation that 

could lead to a material financial loss to 

the covered financial institution. 

§ 372.5 Prohibitions. 

(a) Excessive compensation 

prohibition. (1) In general. A covered 

financial institution must not establish 

or maintain any type of incentive-based 

compensation arrangement, or any 

feature of any such arrangement, that 

encourages inappropriate risks by the 

covered financial institution by 

providing a covered person with 

excessive compensation. 

(2) Standards. An incentive-based 

compensation arrangement provides 

excessive compensation when amounts 

paid are unreasonable or 

disproportionate to the services 

performed by a covered person, taking 

into consideration: 

(i) The combined value of all cash and 

non-cash benefits provided to the 

covered person; 

(ii) The compensation history of the 

covered person and other individuals 

with comparable expertise at the 

covered financial institution; 

(iii) The financial condition of the 

covered financial institution; 

(iv) Comparable compensation 

practices at comparable institutions, 

based upon such factors as asset size, 

geographic location, and the complexity 

of the covered financial institution’s 

operations and assets; 

(v) For postemployment benefits, the 

projected total cost and benefit to the 

covered financial institution; 

(vi) Any connection between the 

individual and any fraudulent act or 

omission, breach of trust or fiduciary 

duty, or insider abuse with regard to the 

covered financial institution; and 

(vii) Any other factors the Corporation 

determines to be relevant. 

(b) Material financial loss prohibition. 

(1) Generally. A covered financial 

institution must not establish or 

maintain any type of incentive-based 

compensation arrangement, or any 

feature of any such arrangement, that 

encourages inappropriate risks by the 

covered financial institution, by 

providing incentive-based 

compensation to covered persons, either 

individually or as part of a group of 

persons who are subject to the same or 

similar incentive-based compensation 

arrangements, that could lead to 

material financial loss to the covered 

financial institution. 

(2) Requirements for all covered 

financial institutions. An incentivebased compensation arrangement 

established or maintained by a covered 

financial institution for one or more 

covered persons does not comply with 

paragraph (b)(1) of this section unless it: 

(i) Balances risk and financial 

rewards, for example by using deferral 

of payments, risk adjustment of awards, 

reduced sensitivity to short-term 

performance, or longer performance 

periods; 

(ii) Is compatible with effective 

controls and risk management; and 

(iii) Is supported by strong corporate 

governance, including active and 

effective oversight by the covered 

financial institution’s board of directors 

or a committee thereof. 

(3) Specific requirements for covered 

financial institutions with $50 billion or 

more in total consolidated assets. (i) 

Deferral required for executive officers. 

As part of appropriately balancing risk 

and financial rewards pursuant to 

paragraph (b)(2)(i) of this section, any 

incentive-based compensation 

arrangement for any executive officer 

established or maintained by a covered 

financial institution that has total 

consolidated assets of $50 billion or 

more must provide for: 

(A) At least 50 percent of the annual 

incentive-based compensation of the 

executive officer to be deferred over a 

period of no less than three years, with 

the release of deferred amounts to occur 

no faster than on a pro rata basis; and 

(B) The adjustment of the amount 

required to be deferred under paragraph 

(b)(3)(i)(A) of this section to reflect 

actual losses or other measures or 

aspects of performance that are realized 

or become better known during the 

deferral period. 

(ii) Additional requirement for 

covered persons presenting particular 

loss exposure. As part of appropriately 

balancing risk and financial rewards 

pursuant to paragraph (b)(2)(i) of this 

section, if a covered financial institution 

has total consolidated assets of $50 

billion or more— 

(A) The board of directors, or a 

committee thereof, of the covered 

financial institution shall identify those 

covered persons (other than executive 

officers) who individually 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. These covered 


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persons may include, for example, 

traders with large position limits 

relative to the institution’s overall risk 

tolerance and other individuals who 

have the authority to place at risk a 

substantial part of the capital of the 

covered financial institution; 

(B) The incentive-based compensation 

arrangement for any covered person 

identified pursuant to paragraph 

(b)(3)(ii)(A) of this section must be 

approved by the board of directors, or a 

committee thereof, of the covered 

financial institution and such approval 

must be documented; 

(C) The board of directors, or 

committee thereof, may not approve the 

incentive-based compensation 

arrangement for any covered person 

identified pursuant to paragraph 

(b)(3)(ii)(A) of this section unless the 

board or committee determines that the 

arrangement, including the method of 

paying compensation under the 

arrangement, effectively balances the 

financial rewards to the covered person 

and the range and time horizon of risks 

associated with the covered person’s 

activities, employing appropriate 

methods for ensuring risk sensitivity 

such as deferral of payments, risk 

adjustment of awards, reduced 

sensitivity to short-term performance, or 

longer performance periods; and 

(D) In fulfilling its duties under 

paragraph (b)(3)(ii)(C) of this section, 

the board of directors or committee 

thereof must evaluate the overall 

effectiveness of the balancing methods 

used in the identified covered person’s 

incentive compensation arrangements in 

reducing incentives for inappropriate 

risk taking by the identified covered 

person considering the methods’ 

suitability for balancing the full range of 

risks presented by that covered person’s 

activities, and the methods’ ability to 

make payments sensitive to all the risks 

arising from the covered person’s 

activities, including those that may be 

difficult to predict, measure or model. 

§ 372.6 Policies and procedures. 

(a) In general. Any incentive-based 

compensation arrangement, or any 

feature of any such arrangement, is 

prohibited under § 372.5 of this part, 

unless adopted pursuant to policies and 

procedures developed and maintained 

by each covered financial institution 

and approved by its board of directors, 

or a committee thereof, reasonably 

designed to ensure and monitor 

compliance with the requirements set 

forth in 12 U.S.C. 5641 and this part and 

commensurate with the size and 

complexity of the organization, as well 

as the scope and nature of its use of 

incentive-based compensation. 

(b) Standards. The policies and 

procedures must, at a minimum: 

(1) Be consistent with the reporting 

requirements in § 372.4 of this part and 

prohibitions in § 372.5 of this part; 

(2) Ensure that risk-management, riskoversight, and internal control 

personnel have an appropriate role in 

the covered financial institution’s 

processes for designing incentive-based 

compensation arrangements and for 

assessing their effectiveness in 

restraining inappropriate risk-taking; 

(3) Provide for the monitoring by a 

group or person independent of the 

covered person, where practicable in 

light of the covered financial 

institution’s size and complexity, of 

incentive-based compensation awards 

and payments, risks taken, and actual 

risk outcomes to determine whether 

incentive compensation payments for 

covered persons, or groups of covered 

persons, are reduced to reflect adverse 

risk outcomes or high levels of risk 

taken; 

(4) Provide for the covered financial 

institution’s board of directors, or 

committee thereof, to receive data and 

analysis from management and other 

sources sufficient to allow the board, or 

committee thereof, to assess whether the 

overall design and performance of the 

covered financial institution’s incentivebased compensation arrangements are 

consistent with 12 U.S.C. 5641; 

(5) Ensure that documentation of the 

covered financial institution’s processes 

for establishing, implementing, 

modifying, and monitoring incentivebased compensation arrangements is 

maintained that is sufficient to enable 

the Corporation to determine the 

institution’s compliance with 12 U.S.C. 

5641 and this part; 

(6) Consistent with § 372.5(b)(3) of 

this part, where deferral is used in 

connection with an incentive-based 

compensation arrangement, provide for 

deferral of incentive-based 

compensation awards in amounts and 

for periods of time appropriate to the 

duties and responsibilities of the 

covered financial institution’s covered 

persons, the risks associated with those 

duties and responsibilities, and the size 

and complexity of the covered financial 

institution and provide that the deferral 

amounts paid are adjusted to reflect 

actual losses or other measures or 

aspects of performance that are realized 

or become better known during the 

deferral period; and 

(7) Subject any incentive-based 

compensation arrangement to a 

corporate governance framework that 

provides for ongoing oversight by the 

board of directors or a committee 

thereof, including the approval by the 

board of directors or a committee 

thereof of incentive-based compensation 

to executive officers. 

§ 372.7 Evasion. 

A covered financial institution is 

prohibited, for the purpose of evading 

the restrictions of this part, from doing 

indirectly or through or by any other 

person, any act or thing that it would be 

unlawful for such covered financial 

institution to do directly under this part. 

Department of the Treasury 

12 CFR Chapter V 

For the reasons set forth in the joint 

preamble, the Office of Thrift 

Supervision proposes to amend chapter 

V of title 12 of the Code of Federal 

Regulations as follows: 

4. Add part 563h to read as follows: 

PART 563h—INCENTIVE-BASED 

COMPENSATION ARRANGEMENTS 

Sec. 

563h.1 Authority. 

563h.2 Scope and purpose. 

563h.3 Definitions. 

563h.4 Required reports to regulators. 

563h.5 Prohibitions. 

563h.6 Policies and procedures. 

563h.7 Evasion. 

Authority: 12 U.S.C. 1462a, 1463, 1464, 

1467a, and 5641. 

§ 563h.1 Authority. 

This part is issued pursuant to section 

956 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(12 U.S.C. 5641). 

§ 563h.2 Scope and purpose. 

This part applies to a covered 

financial institution that has total 

consolidated assets of $1 billion or more 

and offers incentive-based 

compensation arrangements to covered 

persons. Nothing in this part in any way 

limits the authority of the OTS under 

other provisions of applicable law and 

regulations. 

§ 563h.3 Definitions. 

For purposes of this part, the 

following definitions apply unless 

otherwise specified: 

(a) Board of directors means the 

governing body of any covered financial 

institution performing functions similar 

to a board of directors. 

(b) Compensation means all direct 

and indirect payments, fees or benefits, 

both cash and non-cash, awarded to, 

granted to, or earned by or for the 

benefit of, any covered person in 

exchange for services rendered to the 

covered financial institution, including, 

but not limited to, payments or benefits 

pursuant to an employment contract, 


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compensation or benefit agreement, fee 

arrangement, perquisite, stock option 

plan, postemployment benefit, or other 

compensatory arrangement. 

(c) Covered financial institution 

means a savings association as defined 

in 12 U.S.C. 1813(b) and a savings and 

loan holding company as defined in 12 

U.S.C. 1467a(a), that has total 

consolidated assets of $1 billion or 

more. 

(d) Covered person means any 

executive officer, employee, director, or 

principal shareholder of a covered 

financial institution. 

(e) Director of a covered financial 

institution means a member of the board 

of directors of the covered financial 

institution, or of a board or committee 

performing a similar function to a board 

of directors. 

(f) Executive officer of a covered 

financial institution means a person 

who holds the title or, without regard to 

title, salary, or compensation, performs 

the function of one or more of the 

following positions: president, chief 

executive officer, executive chairman, 

chief operating officer, chief financial 

officer, chief investment officer, chief 

legal officer, chief lending officer, chief 

risk officer, or head of a major business 

line. 

(g) Incentive-based compensation 

means any variable compensation that 

serves as an incentive for performance. 

(h) Principal shareholder means an 

individual who directly or indirectly, or 

acting through or in concert with one or 

more persons, owns, controls, or has the 

power to vote 10 percent or more of any 

class of voting securities of a covered 

financial institution. 

(i) Total consolidated assets means 

total consolidated assets determined 

based on the average of the covered 

financial institution’s four most recent 

Thrift Financial Reports. 

§ 563h.4 Required reports to regulators. 

(a) In general. A covered financial 

institution must submit a report 

annually to, and in the format directed 

by, the OTS, that describes the structure 

of the covered financial institution’s 

incentive-based compensation 

arrangements for covered persons and 

that is sufficient to allow an assessment 

of whether the structure or features of 

those arrangements provide or are likely 

to provide covered persons with 

excessive compensation, fees, or 

benefits to covered persons or could 

lead to material financial loss to the 

covered financial institution. 

(b) Individual compensation. A 

covered financial institution is not 

required to report the actual 

compensation of particular covered 

persons as part of the report required by 

paragraph (a) of this section. 

(c) Minimum standards. The 

information submitted by the covered 

financial institution pursuant to 

paragraph (a) of this section must 

include the following: 

(1) A clear narrative description of the 

components of the covered financial 

institution’s incentive-based 

compensation arrangements applicable 

to covered persons and specifying the 

types of covered persons to which they 

apply; 

(2) A succinct description of the 

covered financial institution’s policies 

and procedures governing its incentivebased compensation arrangements for 

covered persons; 

(3) If the covered financial institution 

has total consolidated assets of $50 

billion or more, an additional succinct 

description of incentive-based 

compensation policies and procedures 

specific to the covered financial 

institution’s: 

(i) Executive officers; and 

(ii) Other covered persons who the 

board of directors, or a committee 

thereof, of the covered financial 

institution has identified and 

determined under § 563h.5(b)(3)(ii) of 

this part individually have the ability to 

expose the covered financial institution 

to possible losses that are substantial in 

relation to the institution’s size, capital, 

or overall risk tolerance; 

(4) Any material changes to the 

covered financial institution’s incentivebased compensation arrangements and 

policies and procedures made since the 

covered financial institution’s last 

report submitted under paragraph (a) of 

this section; and 

(5) The specific reasons why the 

covered financial institution believes 

the structure of its incentive-based 

compensation plan does not encourage 

inappropriate risks by the covered 

financial institution by providing 

covered persons with: 

(i) Excessive compensation; or 

(ii) Incentive-based compensation that 

could lead to material financial loss to 

the covered financial institution. 

§ 563h.5 Prohibitions. 

(a) Excessive compensation 

prohibition. (1) In general. A covered 

financial institution must not establish 

or maintain any type of incentive-based 

compensation arrangement, or any 

feature of any such arrangement, that 

encourages inappropriate risks by the 

covered financial institution by 

providing a covered person with 

excessive compensation. 

(2) Standards. An incentive-based 

compensation arrangement provides 

excessive compensation when amounts 

paid are unreasonable or 

disproportionate to the services 

performed by a covered person, taking 

into consideration: 

(i) The combined value of all cash and 

non-cash benefits provided to the 

covered person; 

(ii) The compensation history of the 

covered person and other individuals 

with comparable expertise at the 

covered financial institution; 

(iii) The financial condition of the 

covered financial institution; 

(iv) Comparable compensation 

practices at comparable institutions, 

based upon such factors as asset size, 

geographic location, and the complexity 

of the covered financial institution’s 

operations and assets; 

(v) For postemployment benefits, the 

projected total cost and benefit to the 

covered financial institution; 

(vi) Any connection between the 

individual and any fraudulent act or 

omission, breach of trust or fiduciary 

duty, or insider abuse with regard to the 

covered financial institution; and 

(vii) Any other factors the OTS 

determines to be relevant. 

(b) Material financial loss prohibition. 

(1) Generally. A covered financial 

institution must not establish or 

maintain any type of incentive-based 

compensation arrangement, or any 

feature of any such arrangement, that 

encourages inappropriate risks by the 

covered financial institution, by 

providing incentive-based 

compensation to covered persons, either 

individually or as part of a group of 

persons who are subject to the same or 

similar incentive-based compensation 

arrangements, that could lead to 

material financial loss to the covered 

financial institution. 

(2) Requirements for all covered 

financial institutions. An incentivebased compensation arrangement 

established or maintained by a covered 

financial institution for one or more 

covered persons does not comply with 

paragraph (b)(1) of this section unless it: 

(i) Balances risk and financial 

rewards, for example by using deferral 

of payments, risk adjustment of awards, 

reduced sensitivity to short-term 

performance, or longer performance 

periods; 

(ii) Is compatible with effective 

controls and risk management; and 

(iii) Is supported by strong corporate 

governance, including active and 

effective oversight by the covered 

financial institution’s board of directors 

or a committee thereof. 

(3) Specific requirements for covered 

financial institutions with $50 billion or 

more in total consolidated assets. (i) 


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Deferral required for executive officers. 

As part of appropriately balancing risk 

and financial rewards pursuant to 

paragraph (b)(2)(i) of this section, any 

incentive-based compensation 

arrangement for any executive officer 

established or maintained by a covered 

financial institution that has total 

consolidated assets of $50 billion or 

more must provide for: 

(A) At least 50 percent of the annual 

incentive-based compensation of the 

executive officer to be deferred over a 

period of no less than three years, with 

the release of deferred amounts to occur 

no faster than on a pro rata basis; and 

(B) The adjustment of the amount 

required to be deferred under paragraph 

(b)(3)(i)(A) of this section to reflect 

actual losses or other measures or 

aspects of performance that are realized 

or become better known during the 

deferral period. 

(ii) Additional requirement for 

covered persons presenting particular 

loss exposure. As part of appropriately 

balancing risk and financial rewards 

pursuant to paragraph (b)(2)(i) of this 

section, if a covered financial institution 

has total consolidated assets of $50 

billion or more— 

(A) The board of directors, or a 

committee thereof, of the covered 

financial institution shall identify those 

covered persons (other than executive 

officers) who individually 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. These covered 

persons may include, for example, 

traders with large position limits 

relative to the institution’s overall risk 

tolerance and other individuals who 

have the authority to place at risk a 

substantial part of the capital of the 

covered financial institution; 

(B) The incentive-based compensation 

arrangement for any covered person 

identified pursuant to paragraph 

(b)(3)(ii)(A) of this section must be 

approved by the board of directors, or a 

committee thereof, of the covered 

financial institution and such approval 

must be documented; 

(C) The board of directors, or 

committee thereof, may not approve the 

incentive-based compensation 

arrangement for any covered person 

identified pursuant to paragraph 

(b)(3)(ii)(A) of this section unless the 

board or committee determines that the 

arrangement, including the method of 

paying compensation under the 

arrangement, effectively balances the 

financial rewards to the covered person 

and the range and time horizon of risks 

associated with the covered person’s 

activities, employing appropriate 

methods for ensuring risk sensitivity 

such as deferral of payments, risk 

adjustment of awards, reduced 

sensitivity to short-term performance, or 

longer performance periods; and 

(D) In fulfilling its duties under 

paragraph (b)(3)(ii)(C) of this section, 

the board of directors, or committee 

thereof, must evaluate the overall 

effectiveness of the balancing methods 

used in the identified covered person’s 

incentive-based compensation 

arrangements in reducing incentives for 

inappropriate risk taking by the 

identified covered person considering 

the methods’ suitability for balancing 

the full range of risks presented by that 

covered person’s activities, and the 

methods’ ability to make payments 

sensitive to all the risks arising from the 

covered person’s activities, including 

those that may be difficult to predict, 

measure, or model. 

§ 563h.6 Policies and procedures. 

(a) In general. Any incentive-based 

compensation arrangement, or any 

feature of any such arrangement, is 

prohibited under § 563h.5 of this part, 

unless adopted pursuant to policies and 

procedures developed and maintained 

by each covered financial institution 

and approved by its board of directors, 

or a committee thereof, reasonably 

designed to ensure and monitor 

compliance with the requirements set 

forth in 12 U.S.C. 5641 and this part and 

commensurate with the size and 

complexity of the organization, as well 

as the scope and nature of its use of 

incentive-based compensation. 

(b) Standards. The policies and 

procedures must, at a minimum: 

(1) Be consistent with the reporting 

requirements in § 563h.4 of this part and 

prohibitions in § 563h.5 of this part; 

(2) Ensure that risk-management, riskoversight, and internal control 

personnel have an appropriate role in 

the covered financial institution’s 

processes for designing incentive-based 

compensation arrangements and for 

assessing their effectiveness in 

restraining inappropriate risk-taking; 

(3) Provide for the monitoring by a 

group or person independent of the 

covered person, where practicable in 

light of the covered financial 

institution’s size and complexity, of 

incentive-based compensation awards 

and payments, risks taken, and actual 

risk outcomes to determine whether 

incentive compensation payments for 

covered persons, or groups of covered 

persons, are reduced to reflect adverse 

risk outcomes or high levels of risk 

taken; 

(4) Provide for the covered financial 

institution’s board of directors, or 

committee thereof, to receive data and 

analysis from management and other 

sources sufficient to allow the board, or 

committee thereof, to assess whether the 

overall design and performance of the 

institution’s incentive-based 

compensation arrangements are 

consistent with 12 U.S.C. 5641; 

(5) Ensure that documentation of the 

covered financial institution’s processes 

for establishing, implementing, 

modifying, and monitoring incentivebased compensation arrangements is 

maintained that is sufficient to enable 

the OTS to determine the institution’s 

compliance with 12 U.S.C. 5641 and 

this part; 

(6) Consistent with § 563h.5(b)(3) of 

this part, where deferral is used in 

connection with an incentive-based 

compensation arrangement, provide for 

deferral of incentive-based 

compensation awards in amounts and 

for periods of time appropriate to the 

duties and responsibilities of the 

covered financial institution’s covered 

persons, the risks associated with those 

duties and responsibilities, and the size 

and complexity of the covered financial 

institution and provide that the deferral 

amounts paid are adjusted to reflect 

actual losses or other measures or 

aspects of performance that are realized 

or become better known during the 

deferral period; and 

(7) Subject any incentive-based 

compensation arrangement to a 

corporate governance framework that 

provides for ongoing oversight by the 

board of directors or a committee 

thereof, including the approval by the 

board of directors or a committee 

thereof of incentive-based compensation 

to executive officers. 

§ 563h.7 Evasion. 

A covered financial institution is 

prohibited, for the purpose of evading 

the restrictions of this part, from doing 

indirectly or through or by any other 

person, any act or thing that it would be 

unlawful for such covered financial 

institution to do directly under this part. 

National Credit Union Administration 

12 CFR Chapter VII 

Authority and Issuance 

For the reasons stated in the 

preamble, the National Credit Union 

Administration proposes to amend 

chapter VII of title 12 of the Code of 

Federal Regulations as follows: 

PART 741—REQUIREMENTS FOR 

INSURANCE 

5. The authority citation for part 741 

continues to read as follows: 


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Authority: 12 U.S.C. 1757, 1766, 1781– 

1790, and 1790d. 

6. Add a new § 741.225 to read as 

follows: 

§ 741.225 Incentive-based compensation 

arrangements. 

Any credit union which is insured 

pursuant to Title II of the Act must 

adhere to the requirements stated in part 

751 of this chapter. 

7. Add a new part 751 to subchapter 

A to read as follows: 

Part 751 Incentive-Based 

Compensation Arrangements 

Sec. 

751.1 Authority. 

751.2 Scope and purpose. 

751.3 Definitions. 

751.4 Required reports to regulators. 

751.5 Prohibitions. 

751.6 Policies and procedures. 

751.7 Evasion. 

Authority: 12 U.S.C. 1751 et seq. and 

5641. 

§ 751.1 Authority. 

This part is issued pursuant to section 

956 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(12 U.S.C. 5641). 

§ 751.2 Scope and purpose. 

This part applies to any federally 

insured credit union, or credit union 

eligible to make application to become 

an insured credit union under 12 U.S.C. 

1781, with total consolidated assets of 

$1 billion or more, and offers incentivebased compensation arrangements to 

covered persons. Nothing in this part in 

any way limits the authority of the 

NCUA under other provisions of 

applicable law and regulations. 

§ 751.3 Definitions. 

For purposes of this part, the 

following definitions apply unless 

otherwise specified: 

(a) Board of directors means the 

governing body of any credit union. 

(b) Compensation means all direct 

and indirect payments, fees or benefits, 

both cash and non-cash, awarded to, 

granted to, or earned by or for the 

benefit of, any covered person in 

exchange for services rendered to the 

credit union, including, but not limited 

to, payments or benefits pursuant to an 

employment contract, compensation or 

benefit agreement, fee arrangement, 

perquisite, post-employment benefit, or 

other compensatory arrangement. 

Consistent with § 701.33 of this chapter, 

the term compensation specifically 

excludes reimbursement for reasonable 

and proper costs incurred by covered 

persons in carrying out official credit 

union business; provision of reasonable 

health, accident and related types of 

personal insurance protection; and 

indemnification. 

(c) [Reserved] 

(d) Covered person means any 

executive officer, employee, or director 

of a credit union. 

(e) [Reserved] 

(f) Executive officer of a credit union 

means a person who holds the title or, 

without regard to title, salary, or 

compensation, performs the function of 

one or more of the following positions: 

president, chief executive officer, 

executive chairman, chief operating 

officer, chief financial officer, chief 

investment officer, chief legal officer, 

chief lending officer, chief risk officer, 

or head of a major business line. 

(g) Incentive-based compensation 

means any variable compensation that 

serves as an incentive for performance. 

(h) [Reserved] 

(i) Total consolidated assets means 

calculating the average of the total assets 

reported in the credit union’s four most 

recent 5300 Call Reports. 

§ 751.4 Required reports to regulators. 

(a) In general. A credit union must 

submit a report annually to, and in the 

format directed by, the NCUA, that 

describes the structure of the credit 

union’s incentive-based compensation 

arrangements for covered persons and 

that is sufficient to allow an assessment 

of whether the structure or features of 

those arrangements provide or are likely 

to provide covered persons with 

excessive compensation, fees, or 

benefits to covered persons or could 

lead to material financial loss to the 

credit union. 

(b) Individual compensation. A credit 

union is not required to report the 

actual compensation of particular 

covered persons as part of the report 

required by paragraph (a) of this section. 

(c) Minimum standards. The 

information submitted by the credit 

union pursuant to paragraph (a) of this 

section must include the following: 

(1) A clear narrative description of the 

components of the credit union’s 

incentive-based compensation 

arrangements applicable to covered 

persons and specifying the types of 

covered persons to which they apply; 

(2) A succinct description of the 

credit union’s policies and procedures 

governing its incentive-based 

compensation arrangements for covered 

persons; 

(3) If the credit union has total 

consolidated assets of $10 billion or 

more, an additional succinct description 

of incentive-based compensation 

policies and procedures specific to the 

credit union’s: 

(i) Executive officers; and 

(ii) Other covered persons who the 

board of directors, or a committee 

thereof, of the credit union has 

identified and determined under 

§ 751.5(b)(3)(ii) of this part individually 

have the ability to expose the credit 

union to possible losses that are 

substantial in relation to the credit 

union’s size, capital, or overall risk 

tolerance; 

(4) Any material changes to the credit 

union’s incentive-based compensation 

arrangements and policies and 

procedures made since the credit 

union’s last report submitted under 

paragraph (a) of this section; and 

(5) The specific reasons why the 

credit union believes the structure of its 

incentive-based compensation plan does 

not encourage inappropriate risks by the 

credit union by providing covered 

persons with: 

(i) Excessive compensation; or 

(ii) Incentive-based compensation that 

could lead to material financial loss to 

the credit union. 

§ 751.5 Prohibitions. 

(a) Excessive compensation 

prohibition. (1) In general. A credit 

union must not establish or maintain 

any type of incentive-based 

compensation arrangement, or any 

feature of any such arrangement, that 

encourages inappropriate risks by the 

credit union by providing a covered 

person with excessive compensation. 

(2) Standards. An incentive-based 

compensation arrangement provides 

excessive compensation when amounts 

paid are unreasonable or 

disproportionate to the services 

performed by a covered person, taking 

into consideration: 

(i) The combined value of all cash and 

non-cash benefits provided to the 

covered person; 

(ii) The compensation history of the 

covered person and other individuals 

with comparable expertise at the credit 

union; 

(iii) The financial condition of the 

credit union; 

(iv) Comparable compensation 

practices at comparable institutions, 

based upon such factors as asset size, 

geographic location, and the complexity 

of the credit union’s operations and 

assets; 

(v) For postemployment benefits, the 

projected total cost and benefit to the 

credit union; 

(vi) Any connection between the 

individual and any fraudulent act or 

omission, breach of trust or fiduciary 

duty, or insider abuse with regard to the 

credit union; and 

(vii) Any other factors the NCUA 

determines to be relevant. 


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(b) Material financial loss prohibition. 

(1) Generally. A credit union must not 

establish or maintain any type of 

incentive-based compensation 

arrangement, or any feature of any such 

arrangement, that encourages 

inappropriate risks by the credit union, 

by providing incentive-based 

compensation to covered persons, either 

individually or as part of a group of 

persons who are subject to the same or 

similar incentive-based compensation 

arrangements, that could lead to 

material financial loss to the credit 

union. 

(2) Requirements for all credit unions. 

An incentive-based compensation 

arrangement established or maintained 

by a credit union for one or more 

covered persons does not comply with 

paragraph (b)(1) of this section unless it: 

(i) Balances risk and financial 

rewards, for example by using deferral 

of payments, risk adjustment of awards, 

reduced sensitivity to short-term 

performance, or longer performance 

periods; 

(ii) Is compatible with effective 

controls and risk management; and 

(iii) Is supported by strong corporate 

governance, including active and 

effective oversight by the credit union’s 

board of directors or a committee 

thereof. 

(3) Specific requirements for credit 

unions with $10 billion or more in total 

consolidated assets. 

(i) Deferral required for executive 

officers. As part of appropriately 

balancing risk and financial rewards 

pursuant to paragraph (b)(2)(i) of this 

section, any incentive-based 

compensation arrangement for any 

executive officer, established or 

maintained by a credit union that has 

total consolidated assets of $10 billion 

or more, must provide for: 

(A) At least 50 percent of the annual 

incentive-based compensation of the 

executive officer to be deferred over a 

period of no less than three years, with 

the release of deferred amounts to occur 

no faster than on a pro rata basis; and 

(B) The adjustment of the amount 

required to be deferred under paragraph 

(b)(3)(i)(A) of this section to reflect 

actual losses or other measures or 

aspects of performance that are realized 

or become better known during the 

deferral period. 

(ii) Additional requirement for 

covered persons presenting particular 

loss exposure. As part of appropriately 

balancing risk and financial rewards 

pursuant to paragraph (b)(2)(i) of this 

section, if a credit union has total 

consolidated assets of $10 billion or 

more— 

(A) The board of directors, or a 

committee thereof, of the credit union 

shall identify those covered persons 

(other than executive officers) who 

individually have the ability to expose 

the credit union to possible losses that 

are substantial in relation to the credit 

union’s size, capital, or overall risk 

tolerance. These covered persons may 

include, for example, individuals who 

have the authority to place at risk a 

substantial part of the credit union’s 

capital; 

(B) The incentive-based compensation 

arrangement for any covered person 

identified pursuant to paragraph 

(b)(3)(ii)(A) of this section must be 

approved by the board of directors, or a 

committee thereof, of the credit union 

and such approval must be documented; 

(C) The board of directors, or 

committee thereof, may not approve the 

incentive-based compensation 

arrangement for any covered person 

identified pursuant to paragraph 

(b)(3)(ii)(A) of this section unless the 

board or committee determines that the 

arrangement, including the method of 

paying compensation under the 

arrangement, effectively balances the 

financial rewards to the covered person 

and the range and time horizon of risks 

associated with the covered person’s 

activities, employing appropriate 

methods for ensuring risk sensitivity, 

such as deferral of payments, risk 

adjustment of awards, reduced 

sensitivity to short-term performance, or 

longer performance periods; and 

(D) In fulfilling its duties under 

paragraph (b)(3)(ii)(C) of this section, 

the board of directors, or committee 

thereof, must evaluate the overall 

effectiveness of the balancing methods 

used in the identified covered person’s 

incentive-based compensation 

arrangements in reducing incentives for 

inappropriate risk taking by the 

identified covered person considering 

the methods’ suitability for balancing 

the full range of risks presented by that 

covered person’s activities, and the 

methods’ ability to make payments 

sensitive to all the risks arising from the 

covered person’s activities, including 

those that may be difficult to predict, 

measure, or model. 

§ 751.6 Policies and procedures. 

(a) In general. Any incentive-based 

compensation arrangement, or any 

feature of any such arrangement, is 

prohibited under § 751.5 of this part, 

unless adopted pursuant to policies and 

procedures developed and maintained 

by each credit union and approved by 

its board of directors, or a committee 

thereof, reasonably designed to ensure 

and monitor compliance with the 

requirements set forth in 12 U.S.C. 5641 

and this part and commensurate with 

the size and complexity of the credit 

union, as well as the scope and nature 

of its use of incentive-based 

compensation. 

(b) Standards. The policies and 

procedures must, at a minimum: 

(1) Be consistent with the reporting 

requirements in § 751.4 of this part and 

prohibitions in § 751.5 of this part; 

(2) Ensure that risk-management, riskoversight, and internal control 

personnel have an appropriate role in 

the credit union’s processes for 

designing incentive-based compensation 

arrangements and for assessing their 

effectiveness in restraining 

inappropriate risk-taking; 

(3) Provide for the monitoring by a 

group or person independent of the 

covered person, where practicable in 

light of the credit union’s size and 

complexity, of incentive-based 

compensation awards and payments, 

risks taken, and actual risk outcomes to 

determine whether incentive 

compensation payments for covered 

persons, or groups of covered persons, 

are reduced to reflect adverse risk 

outcomes or high levels of risk taken; 

(4) Provide for the credit union’s 

board of directors, or committee thereof, 

to receive data and analysis from 

management and other sources 

sufficient to allow the board, or 

committee thereof, to assess whether the 

overall design and performance of the 

credit union’s incentive-based 

compensation arrangements are 

consistent with 12 U.S.C. 5641; 

(5) Ensure that documentation of the 

credit union’s processes for establishing, 

implementing, modifying, and 

monitoring incentive-based 

compensation arrangements is 

maintained that is sufficient to enable 

the NCUA to determine the credit 

union’s compliance with 12 U.S.C. 5641 

and this part; 

(6) Consistent with § 751.5(b)(3) of 

this part, where deferral is used in 

connection with an incentive-based 

compensation arrangement, provide for 

deferral of incentive-based 

compensation awards in amounts and 

for periods of time appropriate to the 

duties and responsibilities of the credit 

union’s covered persons, the risks 

associated with those duties and 

responsibilities, and the size and 

complexity of the credit union, and 

provide that the deferral amounts paid 

are adjusted to reflect actual losses or 

other measures or aspects of 

performance that are realized or become 

better known during the deferral period; 

and 


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(7) Subject any incentive-based 

compensation arrangement to a 

corporate governance framework that 

provides for ongoing oversight by the 

board of directors or a committee 

thereof, including the approval by the 

board of directors or a committee 

thereof of incentive-based compensation 

to executive officers. 

§ 751.7 Evasion. 

A credit union is prohibited, for the 

purpose of evading the restrictions of 

this part, from doing indirectly or 

through or by any other person, any act 

or thing that it would be unlawful for 

such credit union to do directly under 

this part. 

Securities and Exchange Commission 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Commission proposes to 

amend Title 17, Chapter II of the Code 

of Federal Regulations as follows: 

PART 248—REGULATION S–P, 

REGULATION S–AM, AND INCENTIVEBASED COMPENSATION 

ARRANGEMENTS 

8. The authority citation for part 248 

is revised to read as follows: 

Authority: 15 U.S.C. 78q, 78q–1, 78w, 

78mm, 80a–30, 80a–37, 80b–4, 80b–11, 

1681s–3 and note, 1681w(a)(1), 6801–6809, 

and 6825, and 12 U.S.C. 5641. 

9. Add a new subpart C (consisting of 

§§ 248.201 through § 248.207) to read as 

follows: 

Subpart C—Incentive-based Compensation 

Arrangements 

Sec. 

248.201 Authority. 

248.202 Scope and purpose. 

248.203 Definitions. 

248.204 Required reports to the 

Commission. 

248.205 Prohibitions. 

248.206 Policies and procedures. 

248.207 Evasion. 

Subpart C—Incentive-based 

Compensation Arrangements 

§ 248.201 Authority. 

This subpart is issued pursuant to 

section 956 of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (12 U.S.C. 5641). 

§ 248.202 Scope and purpose. 

This subpart applies to a covered 

financial institution that has total 

consolidated assets of $1 billion or more 

and offers incentive-based 

compensation arrangements to covered 

persons. Nothing in this subpart in any 

way limits the authority of the 

Commission under other provisions of 

applicable law and regulations. 

§ 248.203 Definitions. 

For purposes of this subpart, the 

following definitions apply unless 

otherwise specified: 

(a) Board of directors means the 

governing body of any covered financial 

institution performing functions similar 

to a board of directors. 

(b) Compensation means all direct 

and indirect payments, fees or benefits, 

both cash and non-cash, awarded to, 

granted to, or earned by or for the 

benefit of, any covered person in 

exchange for services rendered to the 

covered financial institution, including, 

but not limited to, payments or benefits 

pursuant to an employment contract, 

compensation or benefit agreement, fee 

arrangement, perquisite, stock option 

plan, postemployment benefit, or other 

compensatory arrangement. 

(c) Covered financial institution 

means: a broker or dealer registered 

under Section 15 of the Securities 

Exchange Act of 1934 (15 U.S.C. 78o) 

and an investment adviser as such term 

is defined in section 202(a)(11) of the 

Investment Advisers Act of 1940 (15 

U.S.C. 80b–2(a)(11)) that has total 

consolidated assets of $1 billion or 

more. 

(d) Covered person means any 

executive officer, employee, director, or 

principal shareholder of a covered 

financial institution. 

(e) Director of a covered financial 

institution means a member of the board 

of directors of the covered financial 

institution, or of a board or committee 

performing a similar function to a board 

of directors. 

(f) Executive officer of a covered 

financial institution means a person 

who holds the title or, without regard to 

title, salary, or compensation, performs 

the function of one or more of the 

following positions: president, chief 

executive officer, executive chairman, 

chief operating officer, chief financial 

officer, chief investment officer, chief 

legal officer, chief lending officer, chief 

risk officer, or head of a major business 

line. 

(g) Incentive-based compensation 

means any variable compensation that 

serves as an incentive for performance. 

(h) Principal shareholder means an 

individual who directly or indirectly, or 

acting through or in concert with one or 

more persons, owns, controls, or has the 

power to vote 10 percent or more of any 

class of voting securities of a covered 

financial institution. 

(i) Total consolidated assets means: 

(1) For a broker or dealer registered 

under Section 15 of the Securities 

Exchange Act of 1934 (15 U.S.C. 78o) 

total assets reported in the firm’s most 

recent year-end audited Consolidated 

Statement of Financial Condition filed 

pursuant to Rule 17a–5 under the 

Securities Exchange Act of 1934; and 

(2) For an investment adviser, as such 

term is defined in section 202(a)(11) of 

the Investment Advisers Act of 1940 (15 

U.S.C. 80b–2(a)(11)) the adviser’s total 

assets shown on the balance sheet for 

the adviser’s most recent fiscal year end. 

§ 248.204 Required reports to the 

Commission. 

(a) In general. A covered financial 

institution must submit a report 

annually to, and in the format directed 

by, the Commission, that describes the 

structure of the covered financial 

institution’s incentive-based 

compensation arrangements for covered 

persons and that is sufficient to allow an 

assessment of whether the structure or 

features of those arrangements provide 

or are likely to provide covered persons 

with excessive compensation, fees, or 

benefits to covered persons or could 

lead to material financial loss to the 

covered financial institution. 

(b) Individual compensation. A 

covered financial institution is not 

required to report the actual 

compensation of particular covered 

persons as part of the report required by 

paragraph (a) of this section. 

(c) Minimum standards. The 

information submitted by the covered 

financial institution pursuant to 

paragraph (a) of this section must 

include the following: 

(1) A clear narrative description of the 

components of the covered financial 

institution’s incentive-based 

compensation arrangements applicable 

to covered persons and specifying the 

types of covered persons to which they 

apply; 

(2) A succinct description of the 

covered financial institution’s policies 

and procedures governing its incentivebased compensation arrangements for 

covered persons; 

(3) If the covered financial institution 

has total consolidated assets of $50 

billion or more, an additional succinct 

description of incentive-based 

compensation policies and procedures 

specific to the covered financial 

institution’s: 

(i) Executive officers; and 

(ii) Other covered persons who the 

board of directors, or a committee 

thereof, of the covered financial 

institution has identified and 

determined under § 248.205(b)(3)(ii) of 

subpart C of this part individually have 

the ability to expose the covered 

financial institution to possible losses 


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that are substantial in relation to the 

covered financial institution’s size, 

capital, or overall risk tolerance; 

(4) Any material changes to the 

covered financial institution’s incentivebased compensation arrangements and 

policies and procedures made since the 

covered financial institution’s last 

report submitted under paragraph (a) of 

this section; and 

(5) The specific reasons why the 

covered financial institution believes 

the structure of its incentive-based 

compensation plan does not encourage 

inappropriate risks by the covered 

financial institution by providing 

covered persons with: 

(i) Excessive compensation; or 

(ii) Incentive-based compensation that 

could lead to a material financial loss to 

the covered financial institution. 

§ 248.205 Prohibitions. 

(a) Excessive compensation 

prohibition. 

(1) In general. A covered financial 

institution must not establish or 

maintain any type of incentive-based 

compensation arrangement, or any 

feature of any such arrangement, that 

encourages inappropriate risks by the 

covered financial institution by 

providing a covered person with 

excessive compensation. 

(2) Standards. An incentive-based 

compensation arrangement provides 

excessive compensation when amounts 

paid are unreasonable or 

disproportionate to the services 

performed by a covered person, taking 

into consideration: 

(i) The combined value of all cash and 

non-cash benefits provided to the 

covered person; 

(ii) The compensation history of the 

covered person and other individuals 

with comparable expertise at the 

covered financial institution; 

(iii) The financial condition of the 

covered financial institution; 

(iv) Comparable compensation 

practices at comparable covered 

financial institutions, based upon such 

factors as asset size, geographic location, 

and the complexity of the covered 

financial institution’s operations and 

assets; 

(v) For postemployment benefits, the 

projected total cost and benefit to the 

covered financial institution; 

(vi) Any connection between the 

individual and any fraudulent act or 

omission, breach of trust or fiduciary 

duty, or insider abuse with regard to the 

covered financial institution; and 

(vii) Any other factors the 

Commission determines to be relevant. 

(b) Material financial loss prohibition. 

(1) Generally. A covered financial 

institution must not establish or 

maintain any type of incentive-based 

compensation arrangement, or any 

feature of any such arrangement, that 

encourages inappropriate risks by the 

covered financial institution, by 

providing incentive-based 

compensation to covered persons, either 

individually or as part of a group of 

persons who are subject to the same or 

similar incentive-based compensation 

arrangements, that could lead to 

material financial loss to the covered 

financial institution. 

(2) Requirements for all covered 

financial institutions. An incentivebased compensation arrangement 

established or maintained by a covered 

financial institution for one or more 

covered persons does not comply with 

paragraph (b)(1) of this section unless it: 

(i) Balances risk and financial 

rewards, for example by using deferral 

of payments, risk adjustment of awards, 

reduced sensitivity to short-term 

performance, or longer performance 

periods; 

(ii) Is compatible with effective 

controls and risk management; and 

(iii) Is supported by strong corporate 

governance, including active and 

effective oversight by the covered 

financial institution’s board of directors 

or a committee thereof. 

(3) Specific requirements for covered 

financial institutions with $50 billion or 

more in total consolidated assets. 

(i) Deferral required for executive 

officers. As part of appropriately 

balancing risk and financial rewards 

pursuant to paragraph (b)(2)(i) of this 

section, any incentive-based 

compensation arrangement for any 

executive officer established or 

maintained by a covered financial 

institution that has total consolidated 

assets of $50 billion or more must 

provide for: 

(A) At least 50 percent of the annual 

incentive-based compensation of the 

executive officer to be deferred over a 

period of no less than three years, with 

the release of deferred amounts to occur 

no faster than on a pro rata basis; and 

(B) The adjustment of the amount 

required to be deferred under paragraph 

(b)(3)(i)(A) of this section to reflect 

actual losses or other measures or 

aspects of performance that are realized 

or become better known during the 

deferral period. 

(ii) Additional requirement for 

covered persons presenting particular 

loss exposure. As part of appropriately 

balancing risk and financial rewards 

pursuant to paragraph (b)(2)(i) of this 

section, if a covered financial institution 

has total consolidated assets of $50 

billion or more— 

(A) The board of directors, or a 

committee thereof, of the covered 

financial institution shall identify those 

covered persons (other than executive 

officers) who individually have the 

ability to expose the covered financial 

institution to possible losses that are 

substantial in relation to the covered 

financial institution’s size, capital, or 

overall risk tolerance. These covered 

persons may include, for example, 

traders with large position limits 

relative to the covered financial 

institution’s overall risk tolerance and 

other individuals who have the 

authority to place at risk a substantial 

part of the capital of the covered 

financial institution; 

(B) The incentive-based compensation 

arrangement for any covered person 

identified pursuant to paragraph 

(b)(3)(ii)(A) of this section must be 

approved by the board of directors, or a 

committee thereof, of the covered 

financial institution and such approval 

must be documented; 

(C) The board of directors, or 

committee thereof, may not approve the 

incentive-based compensation 

arrangement for any covered person 

identified pursuant to paragraph 

(b)(3)(ii)(A) of this section unless the 

board or committee determines that the 

arrangement, including the method of 

paying compensation under the 

arrangement, effectively balances the 

financial rewards to the covered person 

and the range and time horizon of risks 

associated with the covered person’s 

activities, employing appropriate 

methods for ensuring risk sensitivity 

such as deferral of payments, risk 

adjustment of awards, reduced 

sensitivity to short-term performance, or 

longer performance periods; and 

(D) In fulfilling its duties under 

paragraph (b)(3)(ii)(C) of this section, 

the board of directors or committee 

thereof must evaluate the overall 

effectiveness of the balancing methods 

used in the identified covered person’s 

incentive-based compensation 

arrangements in reducing incentives for 

inappropriate risk taking by the 

identified covered person considering 

the methods’ suitability for balancing 

the full range of risks presented by that 

covered person’s activities, and the 

methods’ ability to make payments 

sensitive to all the risks arising from the 

covered person’s activities, including 

those that may be difficult to predict, 

measure or model. 

§ 248.206 Policies and procedures. 

(a) In general. Any incentive-based 

compensation arrangement, or any 

feature of any such arrangement, is 

prohibited under § 248.205 of this 


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subpart, unless adopted pursuant to 

policies and procedures developed and 

maintained by each covered financial 

institution and approved by its board of 

directors, or a committee thereof, 

reasonably designed to ensure and 

monitor compliance with the 

requirements set forth in 12 U.S.C. 5641 

and subpart C of this part and 

commensurate with the size and 

complexity of the organization, as well 

as the scope and nature of its use of 

incentive-based compensation. 

(b) Standards. The policies and 

procedures must, at a minimum: 

(1) Be consistent with the reporting 

requirements in § 248.204 of subpart C 

of this part and prohibitions in 

§ 248.205 of subpart C of this part; 

(2) Ensure that risk-management, riskoversight, and internal control 

personnel have an appropriate role in 

the covered financial institution’s 

processes for designing incentive-based 

compensation arrangements and for 

assessing their effectiveness in 

restraining inappropriate risk-taking; 

(3) Provide for the monitoring by a 

group or person independent of the 

covered person, where practicable in 

light of the covered financial 

institution’s size and complexity, of 

incentive-based compensation awards 

and payments, risks taken, and actual 

risk outcomes to determine whether 

incentive-based compensation payments 

for covered persons, or groups of 

covered persons, are reduced to reflect 

adverse risk outcomes or high levels of 

risk taken; 

(4) Provide for the covered financial 

institution’s board of directors, or 

committee thereof, to receive data and 

analysis from management and other 

sources sufficient to allow the board, or 

committee thereof, to assess whether the 

overall design and performance of the 

covered financial institution’s incentivebased compensation arrangements are 

consistent with 12 U.S.C. 5641; 

(5) Ensure that documentation of the 

covered financial institution’s processes 

for establishing, implementing, 

modifying, and monitoring incentivebased compensation arrangements is 

maintained that is sufficient to enable 

the Commission to determine the 

covered financial institution’s 

compliance with 12 U.S.C. 5641 and 

subpart C of this part; 

(6) Consistent with § 248.205(b)(3) of 

subpart C, where deferral is used in 

connection with an incentive-based 

compensation arrangement, provide for 

deferral of incentive-based 

compensation awards in amounts and 

for periods of time appropriate to the 

duties and responsibilities of the 

covered financial institution’s covered 

persons, the risks associated with those 

duties and responsibilities, and the size 

and complexity of the covered financial 

institution and provide that the deferral 

amounts paid are adjusted to reflect 

actual losses or other measures or 

aspects of performance that are realized 

or become better known during the 

deferral period; and 

(7) Subject any incentive-based 

compensation arrangement to a 

corporate governance framework that 

provides for ongoing oversight by the 

board of directors or a committee 

thereof, including the approval by the 

board of directors or a committee 

thereof of incentive-based compensation 

to executive officers. 

§ 248.207 Evasion. 

A covered financial institution is 

prohibited, for the purpose of evading 

the restrictions of this subpart, from 

doing indirectly or through or by any 

other person, any act or thing that it 

would be unlawful for such covered 

financial institution to do directly under 

this subpart. 

Federal Housing Finance Agency 

Authority and Issuance 

Accordingly, for the reasons stated in 

the preamble, under the authority of 12 

U.S.C. 4526 and 5641, FHFA proposes 

to amend Chapter XII of title 12 of the 

Code of Federal Regulations as follows: 

10. Add part 1232 to read as follows: 

PART 1232—INCENTIVE-BASED 

COMPENSATION AGREEMENTS 

Sec. 

1232.1 Authority. 

1232.2 Scope and purpose. 

1232.3 Definitions. 

1232.4 Required reports to regulators. 

1232.5 Prohibitions. 

1232.6 Policies and procedures. 

1232.7 Evasion. 

Authority: 12 U.S.C. 4511(b), 4513, 4514, 

4526, and 5641. 

§ 1232.1 Authority. 

This part is issued pursuant to section 

956 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(12 U.S.C. 5641), and, with respect to 

the Office of Finance, under section 

1311(b)(2) of the Federal Housing 

Enterprises Financial Safety and 

Soundness Act (12 U.S.C. 4511(b)(2)). 

§ 1232.2 Scope and purpose. 

This part applies to a covered entity 

that offers incentive-based 

compensation arrangements to covered 

persons. Nothing in this part in any way 

limits the authority of the Federal 

Housing Finance Agency under other 

provisions of applicable law and 

regulations. 

§ 1232.3 Definitions. 

For purposes of this part, the 

following definitions apply unless 

otherwise specified: 

Board of directors means the 

governing body of any covered entity 

performing functions similar to a board 

of directors. 

Compensation means all direct and 

indirect payments, fees or benefits, both 

cash and non-cash, awarded to, granted 

to, or earned by or for the benefit of, any 

covered person in exchange for services 

rendered to the covered entity, 

including, but not limited to, payments 

or benefits pursuant to an employment 

contract, compensation or benefit 

agreement, fee arrangement, perquisite, 

stock option plan, postemployment 

benefit, or other compensatory 

arrangement. 

Covered entity means the Federal 

National Mortgage Association (Fannie 

Mae); the Federal Home Loan Mortgage 

Corporation (Freddie Mac); any Federal 

Home Loan Bank (Bank); and the 

Federal Home Loan Bank System’s 

Office of Finance. 

Covered person means any executive 

officer, employee, director, or principal 

shareholder of a covered entity. 

Director of a covered entity means a 

member of the board of directors of the 

covered entity, or of a board or 

committee performing a similar function 

to a board of directors. 

Executive officer of a covered entity 

means: 

(1) With respect to Fannie Mae or 

Freddie Mac: 

(i) The chairman of the board of 

directors, chief executive officer, chief 

financial officer, chief operating officer, 

president, vice chairman, any executive 

vice president, any senior vice president 

in charge of a principal business unit, 

division, or function and any individual 

who performs functions similar to such 

positions whether or not the individual 

has an official title; and 

(ii) Any other officer as identified by 

the Director. 

(2) With respect to a Bank: 

(i) The president, the chief financial 

officer, and the three other most highly 

compensated officers; and 

(ii) Any other officer as identified by 

the Director. 

(3) With respect to the Office of 

Finance: 

(i) The chief executive officer, chief 

financial officer, and chief operating 

officer; and 

(ii) Any other officer identified by the 

Director. 


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Incentive-based compensation means 

any variable compensation that serves 

as an incentive for performance. 

Principal shareholder means an 

individual who directly or indirectly, or 

acting through or in concert with one or 

more persons, owns, controls, or has the 

power to vote 10 percent or more of any 

class of voting securities of a covered 

entity. 

§ 1232.4 Required reports to regulators. 

(a) In general. A covered entity must 

submit a report annually to, and in the 

format directed by, the Federal Housing 

Finance Agency that describes the 

structure of the covered entity’s 

incentive-based compensation 

arrangements for covered persons and 

that is sufficient to allow an assessment 

of whether the structure or features of 

those arrangements provide or are likely 

to provide covered persons with 

excessive compensation, fees, or 

benefits to covered persons or could 

lead to material financial loss to the 

covered entity. 

(b) Individual compensation. A 

covered entity is not required to report 

the actual compensation of particular 

covered persons as part of the report 

required by paragraph (a) of this section. 

(c) Minimum standards. The 

information submitted by the covered 

entity pursuant to paragraph (a) of this 

section must include the following: 

(1) A clear narrative description of the 

components of the covered entity’s 

incentive-based compensation 

arrangements applicable to covered 

persons specifying the types of covered 

persons to which they apply; 

(2) A succinct description of the 

covered entity’s policies and procedures 

governing its incentive-based 

compensation arrangements for covered 

persons; 

(3) A succinct description of 

incentive-based compensation policies 

and procedures specific to the covered 

entity’s: 

(i) Executive officers; and 

(ii) Other covered persons who the 

board of directors, or a committee 

thereof, of the entity has identified and 

determined under § 1232.5(b)(3)(ii) of 

this part individually have the ability to 

expose the entity to possible losses that 

are substantial in relation to the entity’s 

size, capital, or overall risk tolerance; 

(4) Any material changes to the 

covered entity’s incentive-based 

compensation arrangements and 

policies and procedures made since the 

covered entity’s last report submitted 

under paragraph (a) of this section; and 

(5) The specific reasons why the 

covered entity believes the structure of 

its incentive-based compensation plan 

does not encourage inappropriate risks 

by the covered entity by providing 

covered persons with: 

(i) Excessive compensation; or 

(ii) Incentive-based compensation that 

could lead to material financial loss to 

the covered entity. 

§ 1232.5 Prohibitions. 

(a) Excessive compensation 

prohibition. (1) In general. A covered 

entity must not establish or maintain 

any type of incentive-based 

compensation arrangement, or any 

feature of any such arrangement, that 

encourages inappropriate risks by the 

covered entity by providing a covered 

person with excessive compensation. 

(2) Standards. An incentive-based 

compensation arrangement provides 

excessive compensation when amounts 

paid are unreasonable or 

disproportionate to the services 

performed by a covered person, taking 

into consideration: 

(i) The combined value of all cash and 

non-cash benefits provided to the 

covered person; 

(ii) The compensation history of the 

covered person and other individuals 

with comparable expertise at the 

covered entity; 

(iii) The financial condition of the 

covered entity; 

(iv) Comparable compensation 

practices at comparable institutions, 

based upon such factors as asset size, 

geographic location, and the complexity 

of the institution’s operations and 

assets; 

(v) For postemployment benefits, the 

projected total cost and benefit to the 

covered entity; 

(vi) Any connection between the 

individual and any fraudulent act or 

omission, breach of trust or fiduciary 

duty, or insider abuse with regard to the 

covered entity; and 

(vii) Any other factors that the Federal 

Housing Finance Agency determines to 

be relevant. 

(b) Material financial loss prohibition. 

(1) Generally. A covered entity must not 

establish or maintain any type of 

incentive-based compensation 

arrangement, or any feature of any such 

arrangement, that encourages 

inappropriate risks by the covered 

entity, by providing incentive-based 

compensation to covered persons, either 

individually, or as part of a group of 

persons who are subject to the same or 

similar incentive-based compensation 

arrangements, that could lead to 

material financial loss to the covered 

entity. 

(2) Requirements for all incentivebased compensation arrangements. An 

incentive-based compensation 

arrangement established or maintained 

by a covered entity for one or more 

covered persons does not comply with 

paragraph (b)(1) of this section unless it: 

(i) Balances risk and financial 

rewards, for example by using deferral 

of payments, risk adjustment of awards, 

reduced sensitivity to short-term 

performance, or longer performance 

periods; 

(ii) Is compatible with effective 

controls and risk management; and 

(iii) Is supported by strong corporate 

governance, including active and 

effective oversight by the covered 

entity’s board of directors, or a 

committee thereof. 

(3) Requirements for executive officers 

and covered persons presenting 

particular loss exposure. 

(i) Deferral required for executive 

officers. As part of appropriately 

balancing risk and financial rewards 

pursuant to paragraph (b)(2)(i) of this 

section, any incentive-based 

compensation arrangement for any 

executive officer established or 

maintained by a covered entity (except 

for covered entities in conservatorship 

or receivership, and limited-life 

regulated entities) must provide for: 

(A) At least 50 percent of the annual 

incentive-based compensation of the 

executive officer to be deferred over a 

period of no less than three years, with 

the release of deferred amounts to occur 

no faster than on a pro rata basis; and 

(B) The adjustment of the amount 

required to be deferred under paragraph 

(b)(3)(i)(A) of this section to reflect 

actual losses or other measures or 

aspects of performance that are realized 

or become better known during the 

deferral period. 

(ii) Additional requirement for 

covered persons presenting particular 

loss exposure. As part of appropriately 

balancing risk and financial rewards 

pursuant to paragraph (b)(2)(i) of this 

section: 

(A) The board of directors, or a 

committee thereof, of the covered entity 

shall identify those covered persons 

(other than executive officers) who 

individually have the ability to expose 

the entity to possible losses that are 

substantial in relation to the entity’s 

size, capital, or overall risk tolerance. 

These covered persons may include, for 

example, traders with large position 

limits relative to the entity’s overall risk 

tolerance and other individuals who 

have the authority to place at risk a 

substantial part of the capital of the 

covered entity; 

(B) The incentive-based compensation 

arrangement for any covered person 

identified pursuant to paragraph 

(b)(3)(ii)(A) of this section must be 


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approved by the board of directors, or a 

committee thereof, of the covered entity 

and such approval must be documented; 

(C) The board of directors, or a 

committee thereof, may not approve the 

incentive-based compensation 

arrangement for any covered person 

identified pursuant to paragraph 

(b)(3)(ii)(A) of this section unless the 

board or committee determines that the 

arrangement, including the method of 

paying compensation under the 

arrangement, effectively balances the 

financial rewards to the covered person 

and the range and time horizon of risks 

associated with the covered person’s 

activities, employing appropriate 

methods for ensuring risk sensitivity 

such as deferral of payments, risk 

adjustment of awards, reduced 

sensitivity to short-term performance, or 

longer performance periods; and 

(D) In fulfilling its duties under 

paragraph (b)(3)(ii)(C) of this section, 

the board of directors, or a committee 

thereof, must evaluate the overall 

effectiveness of the balancing methods 

used in the identified covered person’s 

incentive compensation arrangements in 

reducing incentives for inappropriate 

risk taking by the identified covered 

person considering the methods’ 

suitability for balancing the full range of 

risks presented by that covered person’s 

activities, and the methods’ ability to 

make payments sensitive to all the risks 

arising from the covered person’s 

activities, including those that may be 

difficult to predict, measure or model. 

§ 1232.6 Policies and procedures. 

(a) In general. Any incentive-based 

compensation arrangement, or any 

feature of any such arrangement, is 

prohibited under § 1232.5 of this part, 

unless adopted pursuant to policies and 

procedures developed and maintained 

by each covered entity and approved by 

its board of directors, or a committee 

thereof, reasonably designed to ensure 

and monitor compliance with the 

requirements set forth in 12 U.S.C. 5641 

and this part and commensurate with 

the size and complexity of the 

organization, as well as the scope and 

nature of its use of incentive-based 

compensation. 

(b) Standards. The policies and 

procedures must, at a minimum: 

(1) Be consistent with the reporting 

requirements in § 1232.4 of this part and 

prohibitions in § 1232.5 of this part; 

(2) Ensure that risk-management, riskoversight, and internal control 

personnel have an appropriate role in 

the covered entity’s processes for 

designing incentive-based compensation 

arrangements and for assessing their 

effectiveness in restraining 

inappropriate risk-taking; 

(3) Provide for the monitoring by a 

group or person independent of the 

covered person, where practicable in 

light of the covered entity’s size and 

complexity, of incentive-based 

compensation awards and payments, 

risks taken, and actual risk outcomes to 

determine whether incentive 

compensation payments for covered 

persons, or groups of covered persons, 

are reduced to reflect adverse risk 

outcomes or high levels of risk taken; 

(4) Provide for the covered entity’s 

board of directors, or committee thereof, 

to receive data and analysis from 

management and other sources 

sufficient to allow the board, or 

committee thereof, to assess whether the 

overall design and performance of the 

entity’s incentive-based compensation 

arrangements are consistent with 12 

U.S.C. 5641; 

(5) Ensure that documentation of the 

entity’s processes for establishing, 

implementing, modifying, and 

monitoring incentive-based 

compensation arrangements is 

maintained that is sufficient to enable 

the Federal Housing Finance Agency to 

determine the entity’s compliance with 

12 U.S.C. 5641 and this part; 

(6) Consistent with § 1232.5(b)(3) of 

this part, where deferral is used in 

connection with an incentive-based 

compensation arrangement, provide for 

deferral of incentive-based 

compensation awards in amounts and 

for periods of time appropriate to the 

duties and responsibilities of the 

covered entity’s covered persons, the 

risks associated with those duties and 

responsibilities, and the size and 

complexity of the covered entity and 

provide that the deferral amounts paid 

are adjusted to reflect actual losses or 

other measures or aspects of 

performance that are realized or become 

better known during the deferral period; 

and 

(7) Subject any incentive-based 

compensation arrangement to a 

corporate governance framework that 

provides for ongoing oversight by the 

board of directors, or a committee 

thereof, including the approval by the 

board of directors, or a committee 

thereof, of incentive-based 

compensation to executive officers. 

§ 1232.7 Evasion. 

A covered entity is prohibited, for the 

purpose of evading the restrictions of 

this part, from doing indirectly or 

through or by any other person, any act 

or thing that it would be unlawful for 

such covered entity to do directly under 

this part. 

Dated: 

John Walsh, 

Acting Comptroller of the Currency. 

By order of the Board of Governors of the 

Federal Reserve System, March 30, 2011. 

Jennifer J. Johnson, 

Secretary of the Board. 

Dated at Washington, DC, this 7th day of 

February 2011. 

Federal Deposit Insurance Corporation. 

Robert E. Feldman, 

Executive Secretary. 

Dated: February 18, 2011. 

By the Office of Thrift Supervision, 

John E. Bowman, 

Acting Director. 

By the National Credit Union 

Administration Board on February 17, 2011. 

Mary F. Rupp, 

Secretary of the Board. 

By the Securities and Exchange 

Commission. 

Dated: March 29, 2011. 

Elizabeth M. Murphy, 

Secretary. 

Edward J. Demarco, 

Acting Director, Federal Housing Finance 

Agency. 

[FR Doc. 2011–7937 Filed 4–13–11; 8:45 am] 

BILLING CODE 6741–01–P; 7535–01–P; 8070–01–P 


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