
[Federal Register Volume 76, Number 72 (Thursday, April 14, 2011)]
[Proposed Rules]
[Pages 21170-21219]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-7937]



[[Page 21169]]

Vol. 76

Thursday,

No. 72

April 14, 2011

Part III

Department of the Treasury
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Office of the Comptroller of the Currency



12 CFR Part 42



Federal Reserve System
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12 CFR Part 236



Federal Deposit Insurance Corporation
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12 CFR Part 272



Department of the Treasury
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Office of Thrift Supervision

12 CFR Part 563h



National Credit Union Administration
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12 CFR Parts 741 and 751



Securities and Exchange Commission
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17 CFR Part 248



Federal Housing Finance Agency
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12 CFR Part 1232



Incentive-Based Compensation Arrangements; Proposed Rule

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

[[Page 21170]]


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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.

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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 Dodd-Frank 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 ``Incentive-based 
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.

[[Page 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">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 Incentive-based 
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 rule-comments@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:

[[Page 21172]]

     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 incentive-based compensation practices at 
covered financial institutions. Specifically, section 956 of the Dodd-
Frank 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 
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. 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

[[Page 21173]]

compensation standards under section 956 of the Act.
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    \1\ The 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).
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    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 long-term 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.
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    \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.
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     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 compensation-related 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

[[Page 21174]]

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.
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    \3\ See, e.g., Banking Agency Guidance, supra note 2.
    \4\ 60 FR 35674 (July 10, 1995), as amended at 61 FR 43948 (Aug. 
27, 1996).
    \5\ See, 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.
    \7\ See, e.g., 12 U.S.C. 1761a; 12 CFR 701.2 & 12 CFR part 701 
App. A, Art. VII. Sec.  8; 12 CFR 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.
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    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\
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    \8\ Since the Agencies' proposed rules use consistent section 
numbering, relevant sections are cited, for example, as ``Sec.  --
--.1.''
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III. Section-By-Section Description of the Proposed Rule

    Sec.  ----.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.
    Sec.  ----.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.
    Sec.  ----.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\
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    \9\ These 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.
---------------------------------------------------------------------------

    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 broker-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); \10\
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    \10\ 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 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.
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     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.
---------------------------------------------------------------------------

    \11\ The 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.
---------------------------------------------------------------------------

    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 Dodd-Frank 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

[[Page 21175]]

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\
---------------------------------------------------------------------------

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

    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\
---------------------------------------------------------------------------

    \13\ The 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.
---------------------------------------------------------------------------

    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\
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    \14\ As 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.
    \15\ For 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.
---------------------------------------------------------------------------

     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

[[Page 21176]]

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 incentive-based 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.
---------------------------------------------------------------------------

    \16\ The 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \17\ See 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).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \18\ Fannie 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.
---------------------------------------------------------------------------

    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?
    Sec.  ----.4 Required Reports. Section 956(a)(1) of the Dodd-Frank 
Act requires that a covered financial institution submit an annual 
report to its

[[Page 21177]]

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 incentive-based 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 Sec.  --
--.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 
incentive-based 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.
---------------------------------------------------------------------------

    \19\ NCUA would likely consult with the appropriate state 
regulator in cases involving a state-chartered credit union.
---------------------------------------------------------------------------

    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 Sec.  ----.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.
---------------------------------------------------------------------------

    \20\ The 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).
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    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 
incentive-based 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

[[Page 21178]]

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?
    Sec.  ----.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.
---------------------------------------------------------------------------

    \21\ See, e.g., Banking Agency Guidance.
    \22\ Financial 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).
---------------------------------------------------------------------------

    As an initial matter, the Agencies note that section 956 is focused 
on incentive-based 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 incentive-based 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, Sec.  ----.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 Sec.  ----.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 incentive-based compensation 
arrangements of covered financial institutions are consistent with 
their standards, Sec.  ----.6 of the Proposed Rule would require that 
covered financial institutions establish and maintain policies and 
procedures related to these standards.

[[Page 21179]]

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\
---------------------------------------------------------------------------

    \23\ See Banking Agency Guidance at 36407.
---------------------------------------------------------------------------

    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 incentive-based 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-to-measure 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\
---------------------------------------------------------------------------

    \24\ See Banking Agency Guidance at 36407.
    \25\ See Banking Agency Guidance at 36409.
---------------------------------------------------------------------------

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 
incentive-based compensation arrangements in order to increase their 
own compensation. For example, in order to increase his or her own 
incentive

[[Page 21180]]

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\
---------------------------------------------------------------------------

    \26\ See Banking Agency Guidance at 36410-11.
    \27\ See Banking Agency Guidance at 36411.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \28\ See Banking Agency Guidance at 36412.
---------------------------------------------------------------------------

    The Agencies request comment on all aspects of Sec.  ----.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 Sec.  ----.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.
---------------------------------------------------------------------------

    \29\ As 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.
---------------------------------------------------------------------------

    The Agencies believe that incentive-based 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\
---------------------------------------------------------------------------

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

    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 lump-sum 
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 Sec.  ----.5(b)(3) of the Proposed Rule be faster 
than a pro rata equal-annual-increments distribution. For instance, an 
institution required to apply a three-year 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

[[Page 21181]]

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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''?
    Sec.  ----.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

[[Page 21182]]

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 Sec.  ----.6 of the Proposed Rule would require 
that the policies and procedures, at a minimum, be designed to address 
the Sec.  ----.4 reporting requirements and the Sec.  ----.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.
---------------------------------------------------------------------------

    \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 risk-management and internal 
controls.
---------------------------------------------------------------------------

    In order to help ensure that the risks inherent in a covered 
person's actions are appropriately captured, the Agencies believe that 
risk-management, risk-oversight, 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 Sec.  ----.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 Sec.  ----.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 incentive-based compensation under Sec.  ----.6 of 
this Rule to augment their compliance with the deferral obligation.
    Paragraph (b)(4) of Sec.  ----.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 Sec.  ----.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 fact-specific, 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 risk-based 
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 Sec.  ----.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

[[Page 21183]]

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 incentive-
based compensation under Sec.  ----.5 of the Proposed Rule to 
facilitate their compliance with the deferral obligation.
---------------------------------------------------------------------------

    \34\ The 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.
---------------------------------------------------------------------------

    Given the importance of incentive-based compensation arrangements 
to a covered financial institution's safety and soundness, paragraph 
(b)(7) of Sec.  ----.6 would require the policies and procedures to 
subject any incentive-based 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 incentive-based 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 Sec.  --
--.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?
    Sec.  ----.7 Evasion. Section ----.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 anti-evasion 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 Sec.  ----.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-Leach-Bliley 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

[[Page 21184]]

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 Dodd-Frank 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 incentive-based 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 incentive-based 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 incentive-
based 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 Dodd-Frank 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

[[Page 21185]]

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.
---------------------------------------------------------------------------

    \35\ 5 U.S.C. 603.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \36\ 17 CFR 240.0-10(c). See 17 CFR 240.17a-5(d).
    \37\ Rule 0-7(a). 17 CFR 275.0-7(a).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

    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 Sec.  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 Sec.  --
--.4 and the recordkeeping requirements are found in

[[Page 21186]]

Sec. Sec.  ----.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">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 e-mail 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

[[Page 21187]]

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'').
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 Dodd-Frank 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 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. 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 incentive-based 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:
---------------------------------------------------------------------------

    \39\ For credit unions, $10 billion or more.
---------------------------------------------------------------------------

    (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 Sec.  ------.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 
incentive-based 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).

[[Page 21188]]

    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 Sec. Sec.  248.204(c)(3) and 
248.205(b)(3)(ii)(B).\40\
---------------------------------------------------------------------------

    \40\ Each 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.
---------------------------------------------------------------------------

(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 Sec.  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 Sec.  248.204(c)(2) would 
require that covered BDs and IAs provide a succinct description of 
their incentive-based compensation policies and procedures. Proposed 
Sec.  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 incentive-based 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 Sec.  248.204(c)(4) would require covered BDs 
and IAs to describe the material changes to the firm's incentive based 
compensation arrangements. Proposed Sec.  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

[[Page 21189]]

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\
---------------------------------------------------------------------------

    \41\ The 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 (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.
---------------------------------------------------------------------------

(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 Sec.  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 Sec.  
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\
---------------------------------------------------------------------------

    \43\ 30 covered BDs and IAs with assets of at least $50 billion 
x 20 hours = 600 hours.
    \44\ 30 covered BDs and IAs with assets of at least $50 billion 
x 10 hours = 300 hours.
---------------------------------------------------------------------------

(C) Required Policies and Procedures
    Proposed Sec.  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 incentive-based compensation. As 
described in further detail above, proposed Sec.  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 incentive-based compensation arrangements are consistent 
with 12 U.S.C. 5641, and require sufficient documentation of the 
covered financial institution's incentive-based 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 incentive-
based 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.
---------------------------------------------------------------------------

    \45\ See Guidance 75 FR at 36398.
    \46\ The 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)).
---------------------------------------------------------------------------

    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 Sec.  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

[[Page 21190]]

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\
---------------------------------------------------------------------------

    \47\ See Guidance, 75 FR at 36403.
    \48\ The 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.
---------------------------------------------------------------------------

    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 non-bank 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    Covered bank    Covered non-     Covered non-
                                                  BDs and IAs     BDs and IAs    bank BDs and   bank BDs and IAs
                                                   ($50B +)       ($1B-$50B)     IAs ($50B +)      ($1B-$50B)
                                                    (hours)         (hours)         (hours)          (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 Sec.  248.204 and 
initially developing and implementing the policies and procedures in 
compliance with Sec.  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).
---------------------------------------------------------------------------

    \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) x 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) x 100 hours = 
8,500 hours.
    \55\ 5 covered non-bank IAs with assets of at least $50B x 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) x 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) x 80 hours + ((20 
covered bank BDs + 5 covered bank IAs) x 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) x 40 hours = 
3,400 hours.
    \59\ 5 covered non-bank IAs with assets of at least $50B x 580 
hours + ((5 covered non-bank IAs with assets of at least $50B) x 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) x 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) x 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) x 100 hours = 
8,500 hours.
    \63\ 5 covered non-bank IAs with assets of at least $50B x 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) x 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) x 30 hours + ((20 
covered bank BDs + 5 covered bank IAs) x 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) x 10 hours = 850 
hours.
    \67\ 5 covered non-bank IAs with assets of at least $50B x 70 
hours + ((5 covered non-bank IAs with assets of at least $50B) x 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) x 50 hours 
= 4,250 hours.
---------------------------------------------------------------------------

    The Commission believes that there would be approximately an equal 
balance of attorneys,\69\ benefits

[[Page 21191]]

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.
---------------------------------------------------------------------------

    \69\ An 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.
    \70\ An 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.
    \71\ An 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.
    \72\ An 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.
---------------------------------------------------------------------------

    Total SEC estimated external recordkeeping costs:
---------------------------------------------------------------------------

    \73\ 2,500 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% 
x $330/hour) + (25% x $250/hour)] = $987,500.
    \74\ 8,500 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% 
x $330/hour) + (25% x $250/hour)] = $3,357,500.
    \75\ 500 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% x 
$330/hour) + (25% x $250/hour)] = $197,500.
    \76\ 8,500 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% 
x $330/hour) + (25% x $250/hour)] = $3,357,500.
    \77\ 2,500 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% 
x $330/hour) + (25% x $250/hour)] = $987,500.
    \78\ 3,400 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% 
x $330/hour) + (25% x $250/hour)] = $1,343,000.
    \79\ 3,000 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% 
x $330/hour) + (25% x $250/hour)] = $1,185,000.
    \80\ 46,000 hours x [(25% x $400/hour) + (25% x $600/hour) + 
(25% x $330/hour) + (25% x $250/hour)] = $18,170,000.
    \81\ 2,500 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% 
x $330/hour) + (25% x $250/hour)] = $987,500.
    \82\ 8,500 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% 
x $330/hour) + (25% x $250/hour)] = $3,357,500.
    \83\ 500 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% x 
$330/hour) + (25% x $250/hour)] = $197,500.
    \84\ 8,500 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% 
x $330/hour) + (25% x $250/hour)] = $3,357,500.
    \85\ 1,000 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% 
x $330/hour) + (25% x $250/hour)] = $395,000.
    \86\ 1,000 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% 
x $330/hour) + (25% x $250/hour)] = $395,000.
    \87\ 400 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% x 
$330/hour) + (25% x $250/hour)] = $158,000.
    \88\ 4,300 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% 
x $330/hour) + (25% x $250/hour)] = $1,698,500.

----------------------------------------------------------------------------------------------------------------
                                                 Covered bank    Covered bank    Covered non-     Covered non-
                                                  BDs and IAs     BDs and IAs    bank BDs and     bank BDs and
                                                   ($50B +)       ($1B-$50B)     IAs ($50B +)    IAs ($1B-$50B)
                                                   (million)       (million)       (million)        (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\
---------------------------------------------------------------------------

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

    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 incentive-based compensation that will 
encompass the financial services industry.

[[Page 21192]]

    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 Dodd-Frank 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.
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    \90\ See 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).
    \91\ Final 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.
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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 
incentive-based 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 incentive-based 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 
incentive-based 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.

[[Page 21193]]

    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 incentive-based 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 incentive-based 
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\
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    \92\ The Federal Banking Agency Guidance presents and discusses 
these measures.
---------------------------------------------------------------------------

    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 Sec.  563h.5(a)(2) 
for determining whether an incentive-based compensation arrangement 
provides excessive compensation are taken directly from the existing 
1995 guidelines.\96\
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    \93\ See section 39(c) of FDIA, 12 U.S.C. 1831p-1(c).
    \94\ See 12 CFR part 570, App. A, paragraph II.I.
    \95\ See 12 CFR part 570, App. A, paragraph III.B.
    \96\ See 12 CFR part 570, App. A, paragraph III.A.
---------------------------------------------------------------------------

    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 Sec.  563h.5(b)(2) for avoiding incentive-based 
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\
---------------------------------------------------------------------------

    \97\ 75 FR at 36405.
    \98\ BCBS Consultative paper: Range of Methodologies for Risk 
and Performance Alignment of Remuneration, available at http://www.bis.org/publ/bcbs178.pdf.
---------------------------------------------------------------------------

    Even the reporting requirements of Sec.  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\
---------------------------------------------------------------------------

    \99\ SEC regulation 17 CFR 229.402(a)(2) requires listed 
companies to disclose all elements of the compensation provided to 
``named executive officers'' and ``directors.''
---------------------------------------------------------------------------

    As a group, covered financial institutions are likely to make more 
significant changes to incentive-based compensation programs for non-
executive 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 incentive-based compensation arrangements 
for material risk takers. Among OTS-supervised 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 risk-based 
adjustment (e.g., deferral),

[[Page 21194]]

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 (Sec. Sec.  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. (Sec.  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 (Sec.  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 (Sec.  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 incentive-based compensation 
arrangements, that could lead to material financial loss to the covered 
financial institution (Sec.  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 (Sec.  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 (Sec.  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 (Sec.  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 (Sec.  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 (Sec.  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 x 320 hours x 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 x 640 hours x 17 institutions). 
The total initial

[[Page 21195]]

implementation costs, therefore, should come to approximately $8.6 
million.
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    \100\ OTS estimates that legal and administrative expenses would 
average, at most, $150 per hour.
---------------------------------------------------------------------------

    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 x $24,000 = $0.4 million; 146 smaller 
institutions x $12,000 = $1.8 million).
---------------------------------------------------------------------------

    \101\ OTS 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.
---------------------------------------------------------------------------

    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 OTS-supervised 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,

[[Page 21196]]

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\
---------------------------------------------------------------------------

    \102\ 12 U.S.C. 5641(a).
    \103\ 12 U.S.C. 5641(b).
---------------------------------------------------------------------------

    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 incentive-based compensation arrangements 
that encourage covered persons to expose the institution to 
inappropriate risks by providing the covered person excessive 
compensation and prohibits incentive-based 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 Dodd-Frank-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 incentive-based 
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 Sec.  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

[[Page 21197]]

would be able to review the incentive-based 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 incentive-based 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.
---------------------------------------------------------------------------

    \104\ The 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.

                                                                     Internal Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                    Covered bank  BDs and IAs     Covered bank  BDs and IAs   Covered non-bank BDs and IAs  Covered non-bank BDs and IAs
                                            ($50B +)                     ($1B-$50B)                      ($50B +)                     ($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\
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 21198]]


                                                                     External Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                    Covered bank  BDs and IAs     Covered bank  BDs and IAs   Covered non-bank BDs and IAs  Covered non-bank BDs and IAs
                                            ($50B +)                     ($1B-$50B)                      ($50B +)                     ($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 Incentive-Based Compensation Arrangements
---------------------------------------------------------------------------

    \105\ 2,500 hours x $354/hour = $885,000.
    \106\ 8,500 hours x $354/hour = $3,009,000.
    \107\ 500 hours x $354 = $177,000.
    \108\ 8,500 hours x $354/hour = $3,009,000.
    \109\ 2,500 hours x $354/hour = $885,000.
    \110\ 8,500 hours x $354/hour = $3,009,000.
    \111\ 500 hours x $354 = $177,000.
    \112\ 8,500 hours x $354/hour = $3,009,000.
    \113\ 2,500 hours x [(25% x $400/hour) + (25% x $600/hour) + 
(25% x $330/hour) + (25% x $250/hour)] = $987,500.
    \114\ 8,500 hours x [(25% x $400/hour) + (25% x $600/hour) + 
(25% x $330/hour) + (25% x $250/hour)] = $3,357,500.
    \115\ 500 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% 
x $330/hour) + (25% x $250/hour)] = $197,500.
    \116\ 8,500 hours x [(25% x $400/hour) + (25% x $600/hour) + 
(25% x $330/hour) + (25% x $250/hour)] = $3,357,500.
    \117\ 2,500 hours x [(25% x $400/hour) + (25% x $600/hour) + 
(25% x $330/hour) + (25% x $250/hour)] = $987,500.
    \118\ 8,500 hours x [(25% x $400/hour) + (25% x $600/hour) + 
(25% x $330/hour) + (25% x $250/hour)] = $3,357,500.
    \119\ 500 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% 
x $330/hour) + (25% x $250/hour)] = $197,500.
    \120\ 8,500 hours x [(25% x $400/hour) + (25% x $600/hour) + 
(25% x $330/hour) + (25% x $250/hour)] = $3,357,500.
---------------------------------------------------------------------------

    The proposed rule states that a covered financial institution may 
not establish or maintain any incentive-based 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\
---------------------------------------------------------------------------

    \121\ Under 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.
    \122\ See Guidance on Sound Incentive Compensation Policies, 75 
FR 36395 (June 25, 2010) (jointly adopted by the OCC, the FRB, the 
FDIC and OTS).
---------------------------------------------------------------------------

    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 incentive-based 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 risk-management, 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 incentive-based 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

[[Page 21199]]

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 incentive-
based 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 up-front 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.
---------------------------------------------------------------------------

    \123\ Certain 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).
---------------------------------------------------------------------------

    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

[[Page 21200]]

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 broker-
dealers 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 
compliance-related 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 Sec.  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 highly-paid 
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.

[[Page 21201]]

    The requirement under proposed Sec.  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 Sec.  
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 incentive-based 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 Sec.  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

[[Page 21202]]

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, risk-management/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 compensation-setting 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 incentive-based 
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 Sec.  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.
---------------------------------------------------------------------------

    \124\ The 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.

                                                            Total Internal Recordkeeping Cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                    Covered bank  BDs and IAs     Covered bank  BDs and IAs   Covered non-bank BDs and IAs  Covered non-bank BDs and IAs
                                            ($50B +)                     ($1B-$50B)                      ($50B +)                     ($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     Covered bank  BDs and IAs   Covered non-bank BDs and IAs  Covered non-bank BDs and IAs
                                            ($50B +)                     ($1B-$50B)                      ($50B +)                     ($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
---------------------------------------------------------------------------

    \125\ 2,500 hours x $354 = $885,000.
    \126\ 3,400 hours x $354 = $1,203,600.
    \127\ 3,000 hours x $354 = $1,062,000.
    \128\ 46,000 hours x $354 = $16,284,000.
    \129\ 1,000 hours x $354 = $354,000.
    \130\ 1,000 hours x $354 = $354,000.
    \131\ 400 hours x $354 = $141,600.
    \132\ 4,300 hours x $354 = $1,522,200.
    \133\ 2,500 hours x [(25% x $400/hour) + (25% x $600/hour) + 
(25% x $330/hour) + (25% x $250/hour)] = $987,500.
    \134\ 3,400 hours x [(25% x $400/hour) + (25% x $600/hour) + 
(25% x $330/hour) + (25% x $250/hour)] = $1,343,000.
    \135\ 3,000 hours x [(25% x $400/hour) + (25% x $600/hour) + 
(25% x $330/hour) + (25% x $250/hour)] = $1,185,000.
    \136\ 46,000 hours x [(25% x $400/hour) + (25% x $600/hour) + 
(25% x $330/hour) + (25% x $250/hour)] = $18,170,000.
    \137\ 1,000 hours x [(25% x $400/hour) + (25% x $600/hour) + 
(25% x $330/hour) + (25% x $250/hour)] = $395,000.
    \138\ 1,000 hours x [(25% x $400/hour) + (25% x $600/hour) + 
(25% x $330/hour) + (25% x $250/hour)] = $395,000.
    \139\ 600 hours x [(25% x $400/hour) + (25% x $600/hour) + (25% 
x $330/hour) + (25% x $250/hour)] = $237,000.
    \140\ 4,300 hours x [(25% x $400/hour) + (25% x $600/hour) + 
(25% x $330/hour) + (25% x $250/hour)] = $1,698,500.
---------------------------------------------------------------------------

    In enacting this section of the Dodd-Frank Act, Congress has made 
the

[[Page 21203]]

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:
---------------------------------------------------------------------------

    \141\ See Joint Explanatory Statement of the committee of 
Conference Accompanying H.R. 4173, H.R. Rep. No. 111-517, at 873.
---------------------------------------------------------------------------

     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:
---------------------------------------------------------------------------

    \142\ Pub. 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).
---------------------------------------------------------------------------

     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.


Sec.  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).


Sec.  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.

[[Page 21204]]

Sec.  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.


Sec.  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 incentive-based 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 Sec.  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 
incentive-based 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.


Sec.  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

[[Page 21205]]

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 
incentive-based 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.


Sec.  42.6  Policies and procedures.

    (a) In general. Any incentive-based compensation arrangement, or 
any feature of any such arrangement, is prohibited under Sec.  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 Sec.  42.4 of 
this part and prohibitions in Sec.  42.5 of this part;
    (2) Ensure that risk-management, risk-oversight, 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 incentive-based 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 Sec.  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

[[Page 21206]]

board of directors or a committee thereof of incentive-based 
compensation to executive officers.


Sec.  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.


Sec.  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).


Sec.  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.


Sec.  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.


Sec.  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 incentive-based 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

[[Page 21207]]

    (ii) Other covered persons who the board of directors, or a 
committee thereof, of the covered financial institution has identified 
and determined under Sec.  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 
incentive-based 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.


Sec.  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 
incentive-based 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.

[[Page 21208]]

Sec.  236.6  Policies and procedures.

    (a) In general. Any incentive-based compensation arrangement, or 
any feature of any such arrangement, is prohibited under Sec.  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 Sec.  236.4 of 
this part and prohibitions in Sec.  236.5 of this part;
    (2) Ensure that risk-management, risk-oversight, 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 incentive-based 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 Sec.  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.


Sec.  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.


Sec.  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).


Sec.  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.


Sec.  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

[[Page 21209]]

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.


Sec.  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 incentive-based 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 Sec.  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 
incentive-based 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.


Sec.  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 
incentive-based 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

[[Page 21210]]

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.


Sec.  372.6  Policies and procedures.

    (a) In general. Any incentive-based compensation arrangement, or 
any feature of any such arrangement, is prohibited under Sec.  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 Sec.  372.4 of 
this part and prohibitions in Sec.  372.5 of this part;
    (2) Ensure that risk-management, risk-oversight, 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 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 incentive-based 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 Sec.  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.


Sec.  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.


Sec.  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).


Sec.  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.


Sec.  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,

[[Page 21211]]

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.


Sec.  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 incentive-based 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 Sec.  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 
incentive-based 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.


Sec.  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 
incentive-based 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)

[[Page 21212]]

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.


Sec.  563h.6  Policies and procedures.

    (a) In general. Any incentive-based compensation arrangement, or 
any feature of any such arrangement, is prohibited under Sec.  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 Sec.  563h.4 
of this part and prohibitions in Sec.  563h.5 of this part;
    (2) Ensure that risk-management, risk-oversight, 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 incentive-based 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 Sec.  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.


Sec.  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:


[[Page 21213]]


    Authority:  12 U.S.C. 1757, 1766, 1781-1790, and 1790d.
    6. Add a new Sec.  741.225 to read as follows:


Sec.  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.


Sec.  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).


Sec.  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 incentive-based 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.


Sec.  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 Sec.  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.


Sec.  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 Sec.  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.


Sec.  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.

[[Page 21214]]

    (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.


Sec.  751.6  Policies and procedures.

    (a) In general. Any incentive-based compensation arrangement, or 
any feature of any such arrangement, is prohibited under Sec.  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 Sec.  751.4 of 
this part and prohibitions in Sec.  751.5 of this part;
    (2) Ensure that risk-management, risk-oversight, 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 Sec.  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

[[Page 21215]]

    (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.


Sec.  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 INCENTIVE-BASED 
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 Sec. Sec.  248.201 through 
Sec.  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


Sec.  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).


Sec.  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.


Sec.  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.


Sec.  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 incentive-based 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 Sec.  248.205(b)(3)(ii) of subpart C of this part 
individually have the ability to expose the covered financial 
institution to possible losses

[[Page 21216]]

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 
incentive-based 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.


Sec.  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 
incentive-based 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.


Sec.  248.206  Policies and procedures.

    (a) In general. Any incentive-based compensation arrangement, or 
any feature of any such arrangement, is prohibited under Sec.  248.205 
of this

[[Page 21217]]

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 Sec.  248.204 
of subpart C of this part and prohibitions in Sec.  248.205 of subpart 
C of this part;
    (2) Ensure that risk-management, risk-oversight, 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 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 incentive-based 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 Sec.  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.


Sec.  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.


Sec.  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)).


Sec.  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.


Sec.  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.

[[Page 21218]]

    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.


Sec.  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 
Sec.  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.


Sec.  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 incentive-based 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

[[Page 21219]]

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.


Sec.  1232.6  Policies and procedures.

    (a) In general. Any incentive-based compensation arrangement, or 
any feature of any such arrangement, is prohibited under Sec.  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 Sec.  1232.4 
of this part and prohibitions in Sec.  1232.5 of this part;
    (2) Ensure that risk-management, risk-oversight, 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 Sec.  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.


Sec.  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


