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Regulators Incentive compensation proposal coming
ALEXANDRIA, Va. (3/31/11)—The National Credit Union Administration (NCUA) has joined other federal financial regulatory agencies to release for public comment a joint proposed rule that would ensure that financial institutions account for risk when they design their individual incentive compensation arrangements, such as bonuses or commissions. The Federal Reserve, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Securities and Exchange Commission also took part in the release. The joint proposal would implement a portion of the Dodd-Frank Wall Street Reform Act that requires financial regulators to adopt a rule to weed out incentive-based compensation practices that could expose an institution to great losses. The Dodd-Frank Act defines incentive-based compensation to mean any variable compensation, in any form, that serves as an incentive for performance. This compensation is in addition to any salary that is paid to executives or other certain staff members, such as loan officers. The proposal will be open for comment for 45 days after it is published in the Federal Register, and should be released soon, the regulators said. Under the joint agency proposal, financial institutions with $1 billion or more in assets would be required to ensure that their incentive-based compensation arrangements “appropriately balance risk and financial rewards,” are “compatible with effective controls and risk management,” and are “supported by strong corporate governance.” For-profit financial institutions with $50 billion or more in assets, and credit unions with $10 billion or more in assets, would be required to defer a minimum of 50% of their incentive-based compensation for at least three years, according to a joint agency release. The deferred amounts, when paid, should also “reflect losses or other aspects of performance over time,” the agencies added. Entities covered by the proposal would be required to cover the structure of their incentive compensation arrangements in yearly reports to their respective regulator. The proposal is part of the Dodd-Frank Act, and complements previously issued guidance and policies on incentive-based compensation. The NCUA released its own proposal in February. The Credit Union National Association at that time said that the NCUA should reconsider the proposed $10 billion asset threshold for credit unions, noting that credit unions are not known to have engaged in the kind of sketchy incentive-compensation practices that the Dodd-Frank Act seeks to address. (See related Feb. 18 story: NCUA proposes enhanced incentive-compensation rules) For the joint proposal, use the resource link.
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