Déjà vu All Over Again: Incoming Proposed Rule on Incentive Compensation

UPDATE: We posted an original version of this post this morning previewing a possible new proposed rule. Shortly after we posted, the new proposed rule was published. We’ve updated the post to reflect the new proposed rule being published today.

A few weeks ago, several media outlets began reporting that banking regulators were preparing to re-attempt a rulemaking on incentive compensation. The rulemaking - an outstanding requirement of the 2010 Dodd-Frank Act - had been previously attempted twice but never made it to a final rule. The last effort was in 2016. Late last week, a financial regulation newsletter account, @CapitolAccount, posted on X/Twitter that the proposed rulemaking could be coming this week:

So what is this rulemaking about? How does it impact credit unions? What happened the last time? Let's dive in.

The rulemaking and the Dodd-Frank Act requirement

Section 956 of the Dodd-Frank Act requires banking regulatory agencies to jointly prescribe regulations or guidelines with respect to incentive-based compensation practices at certain financial institutions. Specifically, the section requires banking regulators to prohibit any types of incentive-based compensation arrangements that would encourage inappropriate risks:

1. By providing an executive officer, employee, director, or principal shareholder of the covered financial institution with excessive compensation, fees, or benefits; or 
2. that could lead to material financial loss to the covered financial institution.

The Act defines "covered financial institution" as those with over $1 billion in total assets. While the Act requires FIs to disclose to their regulators the structure of its incentive-based compensation arrangements, it does not require reporting of actual compensation of particular individuals.

The two false starts for implementation

The regulatory agencies published a joint notice of proposed rulemaking in April of 2011 to implement Section 956. They received numerous comments - over 10,000 of them - on the proposed rulemaking. At the same time, industry practices on incentive-based compensation were changing. Ultimately, the proposed rulemaking never progressed to a final rule and was shelved for a few years.

In April of 2016, another proposed rule was published. The 2016 proposed rule kept some elements of the 2011 proposed rule while making some changes as well. Like in 2011, regulatory agencies received a flood of comments from industry stakeholders, and ultimately the 2016 proposed rule met the same fate as the 2011 proposed rule.

Round 3?

A new proposed rule was released today, May 6th. Coming in at over 200 pages, we are still reviewing and analyzing it here at the League. However, it appears that the 2024 proposed rule looks very similar to the 2016 proposed rule. In fact, in the introduction to the 2024 proposed rule, the agencies write:

“In this notice of proposed rulemaking (the “proposal”, “proposed rule”, or the “2024 Proposed Rule”), the FDIC, OCC, FHFA, and NCUA (referred to collectively as “the Agencies” for purposes of this proposal) are re-proposing the regulatory text of the 2016 Proposed Rule.”

We’ll continue to analyze and post about this proposed rulemaking and others here at the REGular blog.