Reproposed Regulations Regarding Incentive Compensation at Financial Institutions

Nearly five years after they were first proposed, regulations with respect to incentive compensation arrangements of financial institutions have been reproposed under section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). These regulations implement the section 956 mandate that such arrangements not encourage inappropriate risks. The reproposed regulations will result in changes to many, if not most, incentive compensation plans at covered institutions (i.e., regulated financial institutions with assets over $1 billion).

While most commentary to date has focused on the rules applicable to entities with assets of $50 billion or more (Level 1 and Level 2 entities), the rules that affect Level 3 entities ($1 billion to $50 billion in assets) are also far reaching and will substantially affect the design and administration of their incentive compensation programs. In particular, it appears impermissible for any incentive compensation plan for any employee to provide payment based solely on quantitative criteria.

Since Level 3 entities greatly outnumber Level 1 and Level 2 entities, this summary primarily focuses on the rules applicable to them, but also provides a high level overview of the more prescriptive rules applicable to Level 1 and 2 entities (i.e., institutions with assets exceeding $50 billion).

The proposed regulations have a delayed effective date that will result in most cases in their not applying to compensation arrangements in place prior to 2019.