7 May 2024

New Rules Aim to Curb Risky Banker Pay

Federal regulators have proposed new rules that would overhaul how bankers are paid to curb excessive risk-taking and prevent future financial crises. 

Four agencies released the long-awaited proposal, aiming to align compensation with long-term performance better and discourage inappropriate risks.

Here’s what you need to know about the plan: 

Interagency Collaboration and Public Engagement

The NPR re-proposes the regulatory text proposed in June 2016 and seeks public comment on specific alternatives and questions. Comments received on this NPR and those previously submitted on the 2016 NPR will further inform efforts to address incentive-based compensation arrangements.

Scope and Applicability

The proposed rules would apply to banks, credit unions, and other financial institutions with over $1 billion in assets, using a tiered approach based on asset size. Level 1 institutions have $250 billion or more in assets, Level 2 has between $50 billion and $250 billion, and Level 3 has between $1 billion and $50 billion.

Key Provisions for All Covered Institutions

The proposed rule would prohibit the types and features of incentive-based compensation arrangements that encourage inappropriate risks. It would also require a commitment to basic principles of risk and reward balance and establish effective risk management governance. 

The rule would also mandate appropriate board oversight, recordkeeping, and disclosures to the appropriate agency.

Additional Requirements for Level 1 and 2 Institutions

For larger institutions, the proposed rule requires deferral of awards for senior executive officers (SEOs) and significant risk-takers (SRTs), consideration of forfeiture or downward adjustment of awards, clawback of paid awards, establishment of a board compensation committee, appropriate risk management and control framework, additional recordkeeping for SEOs and SRTs, and policies and procedures to ensure compliance.

It also prohibits or limits excessive award leveraging, using only relative performance measures, use of options, volume-driven incentive-based compensation without regard to risk, and purchasing hedging instruments to offset decreases in compensation value.

Prohibited Compensation Arrangements

The proposed rule would prohibit incentive-based compensation arrangements that encourage inappropriate risks by providing excessive compensation or could lead to material financial loss. This includes arrangements that do not include risk adjustment of awards, deferral of payments, and forfeiture and clawback provisions.

Ensuring Effective Risk Management Governance

The proposed rule emphasizes the important role of sound governance and risk management control mechanisms to ensure effective risk management governance. It requires appropriate board of directors (or committee) oversight, recordkeeping, and disclosures to the appropriate agency. It also mandates establishing a board compensation committee and a proper risk management and control framework for larger institutions.

Potential Alternatives to the Proposed Rule

The NPR seeks feedback on potential alternatives to the proposal’s regulatory provisions, including:

1. Shortening the compliance date from 540 days to 365 days.

2. Establishing a two-level structure for covered institutions based on asset size rather than the proposed three-level structure. 

3. Simplifying the “significant risk-taker” definition by replacing the relative compensation and exposure tests with a more flexible, risk-based approach.

4. Performance measures and targets are required to be established before the performance period begins rather than allowed to be adjusted during the performance period.

Other potential alternatives include:

  • Modifying the limits on options.
  • Requiring (instead of considering) forfeiture and downward adjustments.
  • Expanding the scope of prohibited hedging activities.
  • Revising the risk management and control requirements for larger institutions.

These alternatives aim to streamline and simplify the proposed rule, provide more flexibility in certain areas, and strengthen the risk management and governance requirements in others. The public comment period allows stakeholders to provide input on these alternatives and suggest other modifications to the proposed rule.

Recent posts
23 May 2024
FDIC Releases 2024 Risk Review: 5 Key Points
The Federal Deposit Insurance Corporation (FDIC) has released its 2024 Risk Review, a comprehensive analysis of the current state of the U.S. banking industry. MBK Search has looked through this year's report and highlighted five key points.
22 May 2024
FinCEN and the SEC's proposed customer ID rule
FinCEN and the SEC have proposed a new rule targeting money laundering and terrorist financing. Here's our breakdown and what it means for talent attraction.
21 May 2024
A quick guide to the ESMA's ESG Fund Name rule
The European Securities and Markets Authority (ESMA) has released its long-awaited final report on guidelines for investment funds using ESG or sustainability-related terms in their names. Here's our quickfire take on what the report says.
16 May 2024
Explainer: The PCAOB’s New Quality Control Standard
Here, we break down the key elements of the new standard, QC 1000, and its implications for governance, risk, and compliance (GRC) professionals.