Banking and housing regulators today reintroduced a 2016 proposed rule to establish new limits on incentive compensation at institutions with at least $1 billion in assets. However, the Federal Reserve and the Securities and Exchange Commission did not join the other agencies in proposing the rule despite the Dodd-Frank Act requirement that all the agencies must jointly work on the effort. In addition, FDIC Chairman Martin Gruenberg said the proposal won’t advance unless all of the required agencies sign on.
Section 956 of the Dodd-Frank Act requires the Fed, FDIC, Office of the Comptroller of the Currency, National Credit Union Administration, SEC and Federal Housing Finance Agency to jointly issue regulations or guidelines to prohibit incentive-based compensation arrangements that encourage excessive risk-taking at financial institutions with at least $1 billion in assets. The 2016 draft being re-proposed creates a three-tiered approach based on the size of the institution, from $1 billion to $50 billion, $50 billion to $250 billion and more than $250 billion, with larger institutions subject to stricter requirements. ABA at the time raised multiple concerns about how the proposal failed to consider individual banks’ business models and risk profiles. The rulemaking failed to advance.
Gruenberg said that the FDIC and other banking agencies have continued to address incentive-based compensation practices at supervised institutions since the rule was first proposed in 2016. “Despite these supervisory efforts and other regulatory developments, however, the mandate under Section 956 to prohibit any types or features of incentive-based compensation arrangements that encourage inappropriate risks to re-enforce those efforts is clear,” Gruenberg said. “The agencies are proposing to meet that mandate under this proposal by applying a consistent set of enforceable standards to covered institutions.”
Gruenberg also acknowledged the absence of the Fed and SEC, saying the proposal would only move forward once it is adopted by all six agencies. In an accompanying statement, FDIC Vice Chairman Travis Hill said he opposed the proposal, calling the decision to advance it “extremely odd” when the Dodd-Frank Act states that the rulemaking must include participation by all the agencies. “Should commenters invest time and resources to respond to this proposal, or wait until all the relevant agencies are in agreement?” Hill asked.
The decision by the FDIC and other regulators to issue a notice of proposed rulemaking on incentive compensation without all the relevant agencies participating is a disappointing political exercise, American Bankers Association President and CEO Rob Nichols said.
“The Dodd-Frank Act required that this regulation be a six-agency effort, but as key officials have made clear in recent public statements, significant disagreements remain,” Nichols said. “While we continue to review the 200-page proposal, we are concerned that the agencies seem to be ignoring the numerous and significant concerns raised by the industry when a nearly identical proposal was introduced in 2016.”
