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NCUA proposes enhanced incentive-compensation rules
ALEXANDRIA, Va. (2/18/11)--The National Credit Union Administration (NCUA) Thursday issued for a 45-day comment period a plan that would require enhanced disclosure and reporting requirements for compensation arrangements, as well as prohibit incentive-based payment plans that can serve to encourage “inappropriate risk taking.”
Click to view larger image At the NCUA meeting Thursday, board members consider new rules for incentive-based compensation as required by the Dodd-Frank Wall Street Reform Act. In the foreground from left to right are board member Michael Fryzel, Chairman Debbie Matz, and board member Gigi Hyland. (CUNA Photo)
The NCUA proposal seeks to implement a provision of the Dodd-Frank Wall Street Reform Act, which requires all the federal financial institutions regulators to adopt a rule to weed out incentive-based compensation practices that could expose an institution to great losses. Dodd-Frank defines incentive-based compensation to mean any variable compensation, in any form, that serves as an incentive for performance. Under the NCUA proposal, all credit unions with more than $1 billion in assets would have to disclose executive incentive plans annually. There are further requirements for credit unions with greater than $10 billion in assets, termed “larger covered financial institutions” by the NCUA. Larger-covered financial institutions must meet certain provisions on deferral of incentive-based compensation for executive officers. For instance, they must require a 50% deferral of all cash bonuses for at least three years. At the end of that period, the credit union must adjust the bonus to reflect any losses suffered by the institution. Credit union above $10 billion-in-assets also must identify additional personnel, other than executive officers, “who have the ability to expose the institution to possible losses that are substantial.” During the NCUA comment period, credit unions could conceivably focus on the lack of equal treatment the NCUA rule poses for credit unions compared to banks. While the NCUA proposes to apply the deferral rules to $10-billion institutions, a Federal Deposit Insurance Corp. rule for banks, unveiled earlier this month, proposes to apply the stricter rules to institutions of $50 billion in assets or greater. Credit Union National Association General Counsel Eric Richard said of the discrepancy, “This is an area that the NCUA needs to consider further. Credit unions are not known to have engaged in the kind of sketchy incentive-compensation practices that the Dodd-Frank law seeks to address. “Does it make sense then to hold credit unions, which represent greater adherence to safe and sound practice, to more stringent standards than the perpetrators of the problem?” The NCUA, in its proposal document, maintained that the rule’s burden would be minimized by granting “covered financial institutions” flexibility to use “a variety of means to mitigate the risks posed by their current incentive-based compensation programs.” For more on the proposed rule, use the resource link below.
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