• Federal Banking Agencies to Propose Rules on Incentive Compensation Structure and Reporting
  • January 31, 2011 | Authors: Jacob "Jake" A. Lutz; Thomas "Tom" O. Powell; Jerome Walker; Seth A. Winter
  • Law Firms: Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Atlanta Office ; Troutman Sanders LLP - New York Office ; Troutman Sanders LLP - Richmond Office
  • The Federal Deposit Insurance Corporation announced during its January 18, 2011 board meeting that the federal banking agencies were “very close” to jointly proposing rules to implement the incentive compensation reporting system and prohibitions required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). Section 956 of the Dodd-Frank Act requires the federal banking agencies to adopt incentive compensation rules that will: (1) implement a reporting system through which financial institutions report the structures of their incentive-based compensation arrangements to the appropriate federal regulator; and (2) prohibit incentive compensation structures or payments that encourage inappropriate risks (i) by providing excessive compensation to an executive officer, director, employee or principal shareholder of a financial institution, or (ii) that could lead to material financial loss by a financial institution.

    Some community banks will likely be exempt from the upcoming incentive compensation rules. Section 956 of the Dodd-Frank Act does not apply to financial institutions with less than $1 billion in assets. However, even if the federal banking agencies do not impose additional incentive compensation regulations on community banks, the rulemaking process may provide valuable insights regarding how banking regulators may view and address incentive compensation issues during examinations of all banks.

    The incentive compensation reporting system and prohibitions are the next steps in the federal banking agencies’ recent focus on compensation at financial institutions. We anticipate that the impending incentive compensation rules will be consistent with the guidance provided by the federal banking agencies on sound incentive compensation policies, which was jointly issued in June, 2010. For a summary of the June 2010 guidance please see our Advisory found here. We expect the federal banking agencies to jointly release these proposed rules in the next few weeks. Section 956 of the Dodd-Frank Act requires these rules be effective by April 21, 2011.