Seven federal financial regulatory agencies, including the SEC, issued a joint proposed rule for that would require regulated financial institutions to account for risk in their incentive compensation arrangements.  The rule is mandated by the Dodd-Frank Act.  The SEC previously approved this rule proposal on 3/2.  Public comment is requested.

As proposed, the rule would apply to those financial institutions with over $1 billion in assets.  The largest of these institutions also would be required to follow heightened standards.  In prohibiting incentive compensation arrangements that could encourage inappropriate risks, the proposal would require compensation practices at regulated financial institutions to be consistent with 3 key principles, in which incentive comp arrangements should:  (i) appropriately balance risk and financial rewards, (ii) be compatible with effective controls and risk management, and (iii) be supported by strong corporate governance.

    Covered Institutions.   As proposed, financial institutions with $1 billion or more in assets be required to have pols and procedures to ensure compliance with the requirements of the rule.  They must submit an annual report to their federal regulator describing the structure of their incentive compensation arrangements. 

Larger financial institutions - generally those with $50 billion or more in assets - must defer at least 50% of the incentive compensation of certain officers for at least 3 years and that the amounts ultimately paid reflect losses or other aspects of performance over time.  For purposes of credit unions, large financial institutions would be defined as those with $10 billion or more in assets.  For further details, go to:   [SEC Release 11-77, 12/30]

    N.B.  The seven agencies are:

• Board of Governors of the Federal Reserve System
• Federal Deposit Insurance Corporation
• Federal Housing Finance Agency
• National Credit Union Administration
• Office of the Comptroller of the Currency
• Office of Thrift Supervision
• Securities and Exchange Commission