On April 21, 2016, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, US regulators proposed an interagency rule (the “Proposed Rule”) that would impose requirements on incentive-based compensation arrangements at covered financial institutions (including banks, broker-dealers, investment advisers and credit unions) that have at least $1 billion in consolidated, proprietary assets. The Proposed Rule would impose three tiers of regulation with the more stringent requirements being reserved for covered institutions with assets in excess of $50 billion (so-called Level 1 and Level 2 institutions). These requirements would apply to incentive-based compensation arrangements with senior executive officers and “significant risk-takers” at the institutions (the latter being employees whose jobs place them in a position to subject the covered institution to material financial risk and identified either by way of compensation level or ability to put the institution’s capital at risk).
Under the Proposed Rule, incentive-based compensation arrangements at all covered institutions must not encourage inappropriate risk taking by providing excessive compensation or lead to a material financial loss. The incentive-based compensation arrangement must: (i) balance risk and reward; (ii) be compatible with effective risk management and internal controls; and (iii) be supported by effective corporate governance.
In addition, Level 1 and Level 2 institutions must include deferrals, forfeitures, downward adjustments and clawbacks for their incentive-based compensation arrangement for significant risk-takers and senior executive officers. Among other requirements, the deferral, forfeiture and downward adjustment provisions would apply to incentive-based compensation payments for up to four years after the performance period ends, and the clawback provisions would apply for a period of seven years after vesting.
The Proposed Rule also requires covered institutions to implement corporate governance and recordkeeping procedures with respect to incentive-based compensation arrangements. Among other requirements, all covered institutions must establish board-level oversight of such arrangements, and Level 1 and Level 2 institutions must establish an independent compensation committee to oversee the arrangements and obtain independent assessments of the arrangements.
Covered institutions would not be subject to the Proposed Rule until approximately 18 months after its effective date.
The Proposed Rule is currently under public comment.
Click here to see the full memo on the Proposed Rule from Paul, Weiss, Rifkind, Wharton & Garrison LLP.