Section 956 of the Dodd-Frank Act requires the National Credit Union Administration (NCUA), the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Securities and Exchange Commission (Agencies) to jointly prescribe rules with respect to incentive compensation practices at certain financial institutions (covered financial institutions). On April 21, 2016, the NCUA issued a proposed rule.

Update: All of the Agencies have approved the proposed rule which will soon be published in the Federal Register with a public comment period to close on July 22, 2016. A copy of the interagency notice of proposed rulemaking can be found here.

The proposed rule is a re-proposal of a rule that was issued in April 2011 (the 2011 Proposal) but was widely viewed as inadequate. The new proposal reflects the Agencies' collective supervisory experiences since the 2011 Proposal and incorporates many of the practices that financial institutions and foreign regulators have adopted following the financial crisis that began in 2007.

The proposed rule would establish a uniform set of enforceable standards that apply to a larger group of financial institutions than the 2011 Proposal. Institutions covered under this rule include:

The proposed rule identifies three categories of covered institutions based on average total consolidated assets:

The determination of category of covered institution would be made based on average total consolidated assets as of the beginning of the first quarter that starts after final rules are published in the Federal Register (see Effective Date).

The Agencies have tailored the requirements of the proposed rule to the size and complexity of the covered institutions. While the basic set of prohibitions and disclosure requirements apply to all covered institutions, the most stringent requirements apply only to Level 1 and Level 2 covered institutions.

The proposed rule would apply to "covered persons" which is defined as any executive officer, employee, director, or principal shareholder who receives incentive compensation at a covered institution. However, some of the requirements apply only to certain covered persons.

The proposed rule would require all covered institutions to ensure that their incentive compensation arrangements meet the following minimum requirements:

The proposed rule would therefore prohibit all covered institutions from establishing or maintaining incentive compensation arrangements that encourage inappropriate risk:

Before the financial crisis, many large financial institutions' incentive compensation arrangements rewarded individuals for short-term gains without regard for long-term performance, thereby encouraging inappropriate risk-taking. Because these flawed arrangements are believed to have been a significant factor in the financial crisis, a major emphasis of the proposed rule would be to subject incentive compensation of covered persons at Level 1 and Level 2 covered institutions to adjustment or forfeiture or clawback until long-term performance can be measured.

Under the proposed rule, an incentive compensation arrangement at a Level 1 or Level 2 covered institution would not be considered to balance risk and reward unless it satisfies deferral, forfeiture, downward adjustment and clawback requirements.

The proposed rule would contain an anti-abuse provision, prohibiting all covered institutions from doing indirectly what they cannot do directly.

Section 956 of the Dodd-Frank Act provides that rules adopted under that section shall be enforced under section 505 of the Gramm-Leach-Bliley Act.

The effective date of the proposed rule would be no later than the beginning of the first calendar quarter that begins at least 540 days after a final rule is published in the Federal Register. Any plan with a performance period that began before the effective date would be grandfathered.