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    If BDs and IAs have similar policies as their parent institutions,
and the risk management structure of private institutions is similar to
that of public institutions, the implementation of the proposed rule in
its part related to risk management and control is unlikely to lead to
significant compliance costs for the majority of covered BDs and IAs
because, as mentioned in the previous paragraph, a large percentage of
the parent institutions already have fully independent risk committees.
Some BDs with Level 2 parent institutions and some IAs with Level 1 and
Level 2 parent institutions may face high compliance costs because
their parent institutions currently do not employ risk management and
compensation monitoring practices similar to the one prescribed by the
proposed rule. On the other hand, if the risk management practices of
parent institutions are significantly different from those at their
subsidiaries (e.g., BDs and IAs do not have risk management and control
functions), covered BDs and IAs could experience significant compliance
costs when implementing the proposed rule. Since the SEC does not have
data on how many covered IAs have parent institutions, it is also
possible that a significant number of these IAs may be stand-alone
companies and therefore could have higher costs to comply with this
specific requirement of the proposed rule compared to covered IAs and
BDs that are part of reporting parent institutions. BDs and IAs could
also incur direct economic costs such as decrease in firm value if the
proposed

rule requirements regarding risk management lead to less risk-taking
than is optimal. The same holds true if the risk management and
controls of BDs and IAs is generally different than that of banking
institutions, which most of their parent institutions are.
    Lastly, because some BDs and IAs are subsidiaries of private parent
institutions, if there is a significant difference in the risk
management practices of public and private covered institutions such
BDs and IAs could face large compliance costs and direct economic
costs. The SEC does not have data for the risk management and control
functions at subsidiaries of Level 1 or Level 2 parents, and thus
cannot quantify the impact of the rule on those institutions. To better
assess the effects of these rule requirements on compliance costs for
BDs and IAs the SEC requests comments below.
    The SEC has attempted to quantify the potential compliance costs
for BDs and IAs associated with the proposed rule's requirements
regarding the existence and structure of compensation committees and
risk committees. BDs and IAs that are currently not in compliance with
the proposed committee requirements, either because such a committee
does not exist or because the composition of such committee is not
consistent with the rule requirements, may have to elect additional
individuals in order to either establish the required committees or
alter the structure of such committees to be in compliance with the
rule's requirements. Table 15 provides estimates of the average annual
total compensation of non-employee (i.e. independent) directors for
Level 1 and Level 2 parents of BDs and Level 1 and Level 2 parents of
IAs covered by the proposed rule.\454\ Assuming that the cost estimates
in the table approximate the compensation requirements for independent
members of compensation and/or risk committees, the incremental
compliance costs of electing an additional non-employee director to
comply with this specific provision of the rule for BDs and IAs that
currently do not meet the rule's requirements could be approximately
$333,086 and $309,513 annually per independent director for a Level 1
BDs and IAs, respectively, and approximately $208,009 and $194,563
annually per independent director for unconsolidated Level 2 BDs and
IAs, respectively.
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    \454\ Data is taken from 2015 proxy statements.

 Table 15--Average Total Annual Compensation of a Non-Employee Director
              for Level 1 and Level 2 Covered Institutions
------------------------------------------------------------------------
                                                           Average total
                                                              annual
                                                           compensation
                                                             of a non-
                                                             employee
                                                             director
------------------------------------------------------------------------
BD parents:
  Level 1 covered institutions..........................        $333,086
  Level 2 covered institutions..........................         208,009
IA parents:
  Level 1 covered institutions..........................         309,513
  Level 2 covered institutions..........................         194,563
------------------------------------------------------------------------

    The SEC considers these estimates an upper bound of potential costs
that BDs and IAs may incur to comply with these requirements of the
proposed rule. It is possible that some BDs and IAs are able to
reshuffle existing personnel in order to comply with the rule's
requirements (e.g., use existing directors to create a risk committee
or fully independent compensation committee) and as such would not
incur any of the costs described in the analysis.
12. Governance, Policies and Procedures
    For Level 1 and Level 2 covered institutions, the proposed rule
would include specific corporate governance requirements to support the
design and implementation of compensation arrangements that provide
balanced risk-taking incentives to affected individuals. More
specifically, the proposed rule would require the existence of a
compensation committee composed solely of directors who are not senior
executive officers, input from the corresponding risk and audit
committees and risk management on the effectiveness of risk measures
and adjustments used to balance incentive-based compensation
arrangements, and a written assessment, submitted at least annually to
the compensation committee from the management of the covered
institution, regarding the effectiveness of the covered institution's
incentive-based compensation program and related compliance and control
processes and an independent written assessment of the effectiveness of
the covered institution's incentive-based compensation program and
related compliance and control processes in providing risk-taking
incentives that are consistent with the risk profile of the covered
institution, submitted on an annual or more frequent basis by the
internal audit or risk management function of the covered institution,
developed independently of the covered institution's management.
    The proposed governance requirements would benefit covered BDs and
IAs by further ensuring that the design of compensation arrangements is
independent of the persons receiving compensation under these
arrangements, thus curbing potential conflicts of interest. It could
also facilitate the optimal design of compensation arrangements by
incorporating relevant information from committees whose mandate is
risk oversight. For example, by having a fully independent compensation
committee that designs compensation arrangements and a risk committee
that reviews those compensation arrangements to make sure they are
consistent with the institution's optimal risk policy, a BD or IA may
be able to devise compensation arrangements that provide a better link
between pay and performance for covered persons.
    Based on the SEC's baseline analysis, it appears that the majority
of Level 1 and Level 2 covered parent institutions already have a fully
independent compensation committee. The SEC does not have information
whether BDs and IAs that are subsidiaries have compensation committees
and boards of directors. In 2012, the SEC adopted rules requiring
exchanges to adopt listing standards requiring a board compensation
committee that satisfies independence standards that are more stringent
than those in the proposed rule.\455\ Therefore, all covered parent
institutions with listed securities on national exchanges, or any
covered BDs and IAs with listed securities, should have compensation
committees that would satisfy the proposed rule's compensation
committee independence requirements. Thus, this proposed requirement
should place no additional burden on those IAs and BDs that have listed
securities on national exchanges, or have governance structures similar
to those of their listed parent institutions.
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    \455\ 17 CFR parts 229 and 240.
---------------------------------------------------------------------------

    For those BDs and IAs that have compensation committees, the SEC
does not have information whether management of the covered BDs and IAs
submits to the compensation committee on an annual or more frequent
basis a written assessment of the effectiveness of the covered
institution's incentive-based compensation program and related
compliance and control processes in providing risk-taking incentives
that are consistent with the risk profile of the covered institution.

Additionally, the SEC does not have information on whether the
compensation committee obtains input from the covered institution's
risk and audit committees, or groups performing similar functions. If
covered BDs and IAs have already instituted similar policies with
respect to the proposed rule's governance requirements, the SEC does
not expect this proposed requirement to generate significant compliance
costs for them.
    On the other hand, if covered BDs and IAs' governance practices are
significantly different (e.g., they do not have independent
compensation committees, or the compensation committees do not obtain
input from the risk and audit committees), then covered BDs and IAs
could experience significant compliance costs when implementing the
proposed rule. Similarly, for BDs and IAs that do not have securities
listed on a national exchange or have governance structures different
from those of their parent institutions with listed securities, this
rule proposal may result in significant costs. Also, since the SEC does
not have data on how many covered IAs have parent institutions, or
whether the IAs themselves or their parents have listed securities, it
is also possible that a significant number of these IAs may be stand-
alone companies that do not have independent compensation committees,
and therefore could have higher costs to comply with the proposed rule
compared to covered IAs and BDs that are part of reporting parent
institutions with independent compensation committees. To better assess
the effects of the proposed rule requirement on compliance costs for
BDs and IAs, the SEC requests comments below.
    For Level 1 and Level 2 covered BDs and IAs, the proposed rule
would require the development and implementation of policies and
procedures relating to its incentive-based compensation programs that
would require among other things, specifying the substantive and
procedural criteria for the application of the various policies such as
forfeiture and clawback, identifying and describing the role of
employees, committees, or groups with authority to make incentive-based
compensation decisions, and description of the monitoring mechanism
over incentive-based compensation arrangements.
    The SEC does not have information about whether covered BDs and IAs
have policies and procedures in place as required by the proposed rule.
If BDs and IAs have already instituted similar policies, the SEC does
not expect this rule requirement to generate significant compliance
costs for them. On the other hand, if the covered BDs and IAs do not
have such policies and procedures, or if their policies and procedures
are significantly different than what the proposed rule requires, then
covered BDs and IAs could experience significant compliance costs when
implementing the proposed rule. To better assess the effects of these
rule requirements on compliance costs for BDs and IAs the SEC requests
comments below.
13. Additional Disclosure and Recordkeeping
    All covered institutions would be required to create annually and
maintain for a period of at least 7 years records that document the
structure of all incentive-based compensation arrangements and
demonstrate compliance with the proposed rules. Level 1 and Level 2
covered institutions would be required to create annually and maintain
for at least 7 years records that document additional information, such
as identification of the senior executive officers and significant
risk-takers within the covered institution, the incentive-based
compensation arrangements of these individuals including deferral
details, and any material changes in incentive-based compensation
arrangements and policies. Level 1 and Level 2 covered institutions
must create and maintain such records in a manner that allows for an
independent audit of incentive-based compensation arrangements,
policies, and procedures.
    The SEC is proposing an amendment to Exchange Act Rule 17a-4(e)
\456\ and Investment Advisers Act Rule 204-2 \457\ to require that
registered broker-dealers and investment advisers maintain the records
required by the proposed rule for registered Level 1 and Level 2
broker-dealers and investment advisers, in accordance with the
recordkeeping requirements of Exchange Act Rule 17a-4 and Investment
Advisers Act Rule 204-2, respectively. Exchange Act Rule 17a-4 and
Investment Advisers Act Rule 204-2 establish the general formatting and
storage requirements for records that registered broker-dealers and
investment advisers are required to keep. For the sake of consistency
with other broker-dealer and investment adviser records, the SEC
believes that registered broker-dealers and investment advisers should
also keep the records required by the proposed rule for registered
Level 1 and Level 2 broker-dealers and investment advisers, in
accordance with these requirements.
---------------------------------------------------------------------------

    \456\ 17 CFR 240.17a-4(e).
    \457\ 17 CFR 275.204-2.
---------------------------------------------------------------------------

    Such recordkeeping requirements would provide information
availability to the SEC in examining and confirming the design and
implementation of compensation arrangements for a prolonged period of
time. This may enhance compliance and facilitate oversight.
    The proposed requirement may increase compliance costs for covered
BDs and IAs. The SEC expects that the magnitude of the compliance costs
would depend on whether covered BDs and IAs are part of reporting
companies or not. Most Level 1 and Level 2 BDs are subsidiaries of
reporting parent institutions. Reporting covered institutions provide
compensation and disclosure analysis and compensation tables for their
named executive officers in their annual reports, and disclose the
incentive-based compensation arrangements for named executive officers
in the annual proxy statement. In addition, reporting companies have to
make an assessment each year whether they need to make Item 402(s)
disclosure, which, among other things includes disclosure of
compensation policies and practices that present material risks to the
company and the board of directors' role in risk oversight. Thus, given
that reporting covered institutions create certain records and provide
certain disclosures for their annual reports and proxy statements and
for internal purposes (e.g., for reports to the board of directors or
the compensation committee) that are similar to those required by the
proposed rule, the BDs and IAs that are subsidiaries of such parent
institutions may experience lower disclosure and recordkeeping compared
to BDs and IAs of non-reporting parent institutions or institutions
that do not provide such disclosures. Even BDs and IAs of reporting
companies, however, would have to incur costs associated with
disclosure and recordkeeping of information required by the proposed
rule that currently is not disclosed by their parent institutions, such
as identification of significant risk-takers details on deferral of
incentive-based compensation. The SEC also notes that because it does
not have information on the compensation reporting and recordkeeping at
the subsidiary level, the SEC may be underestimating compliance costs
for BDs with reporting parent institutions. For example, even if the
parent institution reports and keeps records of the incentive-based
compensation arrangements, this might not be done on the same scale and
detail at the subsidiary level.

    The compliance costs associated with this particular rule
requirement may be higher for non-reporting covered institutions, since
they may not be disclosing such information and as such may not be
keeping the type of records required. However, according to 2010
Federal Banking Agency Guidance, a banking institution should provide
an appropriate amount of information concerning its incentive
compensation arrangements for executive and non-executive employees and
related risk-management, control, and governance processes to
shareholders to allow them to monitor and, where appropriate, take
actions to restrain the potential for such arrangements and processes
to encourage employees to take imprudent risks. Such disclosures should
include information relevant to employees other than senior executives.
The scope and level of the information disclosed by the institution
should be tailored to the nature and complexity of the institution and
its incentive-based compensation arrangements. The SEC expects the
compliance costs to be lower for such covered institutions. Since the
SEC does not have data on how many covered IAs have parent
institutions, it is also possible that a significant number of these
IAs may be stand-alone companies and therefore could have higher costs
to comply with this specific requirement of the proposed rule compared
to covered IAs and BDs that are part of reporting parent institutions.
    By requiring Level 1 and Level 2 covered institutions to create and
maintain records of incentive-based compensation arrangements for
covered persons, the proposed recordkeeping requirement is expected to
facilitate the SEC's ability to monitor incentive-based compensation
arrangements and could potentially strengthen incentives for covered
institutions to comply with the proposed rule. As a consequence, an
increase in investor confidence that covered institutions are less
likely to be incentivizing inappropriate actions through compensation
arrangements may occur and potentially result to greater market
participation and allocative efficiency, thereby potentially
facilitating capital formation. As discussed above, it is difficult for
the SEC to estimate compliance costs related to the specific provision.
However, for covered institutions that do not currently have a similar
reporting system in place, there could be significant fixed costs that
could disproportionately burden smaller covered BDs and IAs and hinder
competition. Overall, the SEC does not expect that the effects of the
proposed recordkeeping requirements on efficiency, competition and
capital formation to be significant.
H. Request for Comment
    The SEC requests comments regarding its analysis of the potential
economic effects of the proposed rule. With regard to any comments, the
SEC notes that such comments are of particular assistance to the SEC if
accompanied by supporting data and analysis of the issues addressed in
those comments. For example, the SEC is interested in receiving
estimates, data, or analyses on incentive-based compensation at BDs and
IAs for all aspects of the proposed rule, including thresholds, on the
overall economic impact of the proposed rule, and on any other aspect
of this economic analysis. The SEC also is interested in comments on
the benefits and costs it has identified and any benefits and costs it
may have overlooked.
    1. In the SEC's baseline analysis, the SEC uses data from publicly
held covered institutions as a proxy for incentive-based compensation
arrangements at privately held institutions. The SEC requests comment
on the validity of the assumption that privately held institutions
employ similar compensation practices to publicly held institutions.
The SEC also requests data or analysis with respect to incentive-based
compensation arrangements of covered persons at privately held covered
institutions.
    2. The SEC does not have comprehensive data on incentive-based
compensation arrangements for affected individuals, other than those
senior executive officers who are named executive officers (NEOs) and
some significant risk-takers, for either public or privately held
covered institutions. The SEC requests data or analysis related to
compensation practices of all senior executive officers and significant
risk-takers at covered BDs and IAs as defined in the proposed rule.
    3. The SEC uses incentive-based compensation arrangements of NEOs
at the parent level as a proxy for incentive-based compensation
arrangements of covered persons at covered BDs and IAs that are
subsidiaries. The SEC requests comment on the validity of the
assumption that incentive-based compensation arrangements for senior
executive officers at the parent level is similar to incentive-based
compensation arrangements followed at the subsidiary level for other
senior executive officers or for significant risk-takers. The SEC also
requests any data or related analysis on this issue.
    4. Are the economic effects with respect to the asset thresholds
($50 billion and $250 billion) utilized to scale the proposed
requirements for covered BDs and IAs adequately outlined in the
analysis? The SEC also invites comment on the economic consequences of
any alternative asset thresholds, as well as economic consequences of
potential alternative measures.
    5. The proposed consolidation approach would impose restrictions on
covered persons' incentive-based compensation arrangements in BDs and
IAs that are subsidiaries of depositary institution holding companies
based on the size of their parent institution. Are the economic effects
from the proposed consolidation approach adequately described in the
analysis? Are there specific circumstances, such as certain
organizational structures, that would deem such a consolidation
approach more or less effective?
    6. Are there additional effects with respect to the proposed
definition of significant risk-takers to be considered? Are there
alternative ways to identify significant risk-takers and what would be
the economic consequences of alternative ways to identify significant
risk-takers?
    7. Are the economic effects on the proposed minimum deferral
periods and the proposed minimum deferral percentage amounts adequately
described in the analysis? What would be the economic effects of any
alternative? The SEC also requests literature or evidence regarding the
length and amount of deferral of incentive-based compensation that
would lead to incentive-based compensation arrangements that best
address the underlying risks at covered institutions.
    8. Are the economic effects from the proposed vesting schedule for
deferred incentive-based compensation adequately described in the
analysis? What would be the economic effects from any alternatives?
    9. Are there additional economic effects to be considered from the
proposed prohibition of increasing a senior executive officer or
significant risk-taker's unvested deferred incentive-based
compensation? What would be the economic effects of any alternatives?
    10. The proposed rule would require deferred qualifying incentive-
based compensation to be composed of substantial amounts of both
deferred cash and equity-like instruments for covered persons. Are the
economic effects of the proposed rule adequately described in the
analysis? Would explicitly specifying the mix between

cash and equity-like instruments to be included in the deferral amount
be preferred? What would be the economic effects of such an
alternative? Are there additional alternatives to be considered?
    11. For senior executive officers and significant risk-takers at
Level 1 and Level 2 covered institutions, the total amount of options
that may be used to meet the minimum deferral amount requirements is
limited to no more than 15 percent of the amount of total incentive-
based compensation awarded for a given performance period. Indirectly,
this policy choice would place a cap on the amount of options that
covered BDs and IAs may provide to affected persons as part of their
incentive-based compensation arrangement. Are the economic effects of
the provision adequately described in the analysis? What would be the
economic effects from any alternatives?
    12. Are the triggers for forfeiture or downward adjustment review
effective for both senior executive officers and significant risk-
takers? Are some of the triggers more effective for significant risk-
takers while others are more effective for senior executive officers?
What other triggers would be effective for forfeiture or downward
adjustment review?
    13. Are the economic effects from the 125 percent (150 percent)
limit on the amount by which incentive-based compensation may exceed
the target amount for senior executive officers (significant risk-
takers) at covered BDs and IAs adequately described in the analysis?
Are there alternatives to be considered? What would be the economic
effect of such alternatives?
    14. Are the economic effects regarding the prohibition of the sole
use of industry peer performance benchmarks for incentive-based
compensation performance measurement adequately described in the
analysis? The SEC also requests data on relative performance measures
used by covered BDs and IAs and/or related analysis that may further
inform this policy choice.
    15. The SEC requests any relevant data or analysis regarding the
potential effect of the proposed rule on the ability of covered BDs and
IAs to attract and retain managerial talent.
    16. In general, are there alternative courses of action to be
considered that would enhance accountability and limit the potential
for inappropriate risk-taking by covered persons at BDs and IAs? What
would be the economic effects of such alternatives? Are there specific
circumstances, such as certain types of shareholders and other
stakeholders, that would make these alternative approaches more or less
effective? For example, should such alternative approaches distinguish
between the effects on short-term shareholders and the effects on long-
term shareholders?
    17. In recent years, several foreign regulators have implemented
regulations concerning incentive-based compensation similar to those in
the proposed rule. The SEC requests data or analysis regarding the
economic effects of those regulations and whether they are similar to
or different from the likely economic effects of the proposed rule.

J. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA'') \458\ the SEC must advise the OMB whether the
proposed regulation constitutes a ``major'' rule. Under SBREFA, a rule
is considered ``major'' where, if adopted, it results or is likely to
result in: (1) An annual effect on the economy of $100 million or more;
(2) a major increase in costs or prices for consumers or individual
industries; or (3) significant adverse effect on competition,
investment or innovation.
---------------------------------------------------------------------------

    \458\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C. and 15 U.S.C. and as a
note to 5 U.S.C. 601).
---------------------------------------------------------------------------

    The SEC requests comment on the potential impact of the proposed
amendment on the economy on an annual basis. Commenters are requested
to provide empirical data and other factual support for their views to
the extent possible.

List of Subjects

12 CFR Part 42

    Banks, banking, Compensation, National banks, Reporting and
recordkeeping requirements.

12 CFR Part 236

    Banks, Bank holding companies, Compensation, Foreign banking
organizations, Reporting and recordkeeping requirements, Savings and
loan holding companies.

12 CFR Part 372

    Banks, banking, Compensation, Foreign banking.

12 CFR Parts 741 and 751

    Compensation, Credit unions, Reporting and recording requirements.

12 CFR Part 1232

    Administrative practice and procedure, Banks, Compensation,
Confidential business information, Government-sponsored enterprises,
Reporting and recordkeeping requirements.

17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

17 CFR Part 275

    Reporting and recordkeeping requirements, Securities.

17 CFR Part 303

    Incentive-based compensation arrangements, Reporting and
recordkeeping requirements, Securities.

Department of the Treasury: Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

    For the reasons set forth in the joint preamble, the OCC proposes
to amend 12 CFR chapter I of the Code of Federal Regulations as
follows:

0
1. Add part 42 to read as follows:

PART 42--INCENTIVE-BASED COMPENSATION ARRANGEMENTS

Sec.
42.1 Authority, scope, and initial applicability.
42.2 Definitions.
42.3 Applicability.
42.4 Requirements and prohibitions applicable to all covered
institutions.
42.5 Additional disclosure and recordkeeping requirements for Level
1 and Level 2 covered institutions.
42.6 Reservation of authority for Level 3 covered institutions.
42.7 Deferral, forfeiture and downward adjustment, and clawback
requirements for Level 1 and Level 2 covered institutions.
42.8 Additional prohibitions for Level 1 and Level 2 covered
institutions.
42.9 Risk management and controls requirements for Level 1 and Level
2 covered institutions.
42.10 Governance requirements for Level 1 and Level 2 covered
institutions.
42.11 Policies and procedures requirements for Level 1 and Level 2
covered institutions.
42.12 Indirect actions.
42.13 Enforcement.

    Authority:  12 U.S.C. 1 et seq. 1, 93a, 1462a, 1463, 1464, 1818,
1831p-1, and 5641.

Sec.  42.1  Authority, scope, and initial applicability.

    (a) Authority. This part is issued pursuant to section 956 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C.
5641), sections 8 and 39 of the Federal Deposit Insurance Act (12
U.S.C. 1818 and 1831p-1), sections 3, 4, and 5 of the Home Owners' Loan
Act (12 U.S.C. 1462a, 1463, and 1464), and section

5239A of the Revised Statutes (12 U.S.C. 93a).
    (b) Scope. This part applies to a covered institution with average
total consolidated assets greater than or equal to $1 billion that
offers incentive-based compensation to covered persons.
    (c) Initial applicability--(1) Compliance date. A covered
institution must meet the requirements of this part no later than [Date
of the beginning of the first calendar quarter that begins at least 540
days after a final rule is published in the Federal Register]. Whether
a covered institution is a Level 1, Level 2, or Level 3 covered
institution at that time will be determined based on average total
consolidated assets as of [Date of the beginning of the first calendar
quarter that begins after a final rule is published in the Federal
Register].
    (2) Grandfathered plans. A covered institution is not required to
comply with the requirements of this part with respect to any
incentive-based compensation plan with a performance period that begins
before [Compliance Date as described in Sec.  42.1(c)(1)].
    (d) Preservation of authority. Nothing in this part in any way
limits the authority of the OCC under other provisions of applicable
law and regulations.

Sec.  42.2  Definitions.

    For purposes of this part only, the following definitions apply
unless otherwise specified:
    (a) Affiliate means any company that controls, is controlled by, or
is under common control with another company.
    (b) Average total consolidated assets means the average of the
total consolidated assets of a national bank; a Federal savings
association; a Federal branch or agency of a foreign bank; a subsidiary
of a national bank, Federal savings association, or Federal branch or
agency; or a depository institution holding company, as reported on the
national bank's, Federal savings association's, Federal branch or
agency's, subsidiary's, or depository institution holding company's
regulatory reports, for the four most recent consecutive quarters. If a
national bank, Federal savings association, Federal branch or agency,
subsidiary, or depository institution holding company has not filed a
regulatory report for each of the four most recent consecutive
quarters, the national bank, Federal savings association, Federal
branch or agency, subsidiary, or depository institution holding
company's average total consolidated assets means the average of its
total consolidated assets, as reported on its regulatory reports, for
the most recent quarter or consecutive quarters, as applicable. Average
total consolidated assets are measured on the as-of date of the most
recent regulatory report used in the calculation of the average.
    (c) To award incentive-based compensation means to make a final
determination, conveyed to a covered person, of the amount of
incentive-based compensation payable to the covered person for
performance over a performance period.
    (d) Board of directors means the governing body of a covered
institution that oversees the activities of the covered institution,
often referred to as the board of directors or board of managers. For a
Federal branch or agency of a foreign bank, ``board of directors''
refers to the relevant oversight body for the Federal branch or agency,
consistent with its overall corporate and management structure.
    (e) Clawback means a mechanism by which a covered institution can
recover vested incentive-based compensation from a covered person.
    (f) Compensation, fees, or benefits means all direct and indirect
payments, both cash and non-cash, awarded to, granted to, or earned by
or for the benefit of, any covered person in exchange for services
rendered to a covered institution.
    (g) Control means that any company has control over a bank or over
any company if--
    (1) The company directly or indirectly or acting through one or
more other persons owns, controls, or has power to vote 25 percent or
more of any class of voting securities of the bank or company;
    (2) The company controls in any manner the election of a majority
of the directors or trustees of the bank or company; or
    (3) The OCC determines, after notice and opportunity for hearing,
that the company directly or indirectly exercises a controlling
influence over the management or policies of the bank or company.
    (h) Control function means a compliance, risk management, internal
audit, legal, human resources, accounting, financial reporting, or
finance role responsible for identifying, measuring, monitoring, or
controlling risk-taking.
    (i) Covered institution means:
    (1) A national bank, Federal savings association, or Federal branch
or agency of a foreign bank with average total consolidated assets
greater than or equal to $1 billion; and
    (2) A subsidiary of a national bank, Federal savings association,
or Federal branch or agency of a foreign bank that:
    (i) Is not a broker, dealer, person providing insurance, investment
company, or investment adviser; and
    (ii) Has average total consolidated assets greater than or equal to
$1 billion.
    (j) Covered person means any executive officer, employee, director,
or principal shareholder who receives incentive-based compensation at a
covered institution.
    (k) Deferral means the delay of vesting of incentive-based
compensation beyond the date on which the incentive-based compensation
is awarded.
    (l) Deferral period means the period of time between the date a
performance period ends and the last date on which the incentive-based
compensation awarded for such performance period vests.
    (m) Depository institution holding company means a top-tier
depository institution holding company, where ``depository institution
holding company'' has the same meaning as in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813).
    (n) Director of a covered institution means a member of the board
of directors.
    (o) Downward adjustment means a reduction of the amount of a
covered person's incentive-based compensation not yet awarded for any
performance period that has already begun, including amounts payable
under long-term incentive plans, in accordance with a forfeiture and
downward adjustment review under Sec.  42.7(b).
    (p) Equity-like instrument means:
    (1) Equity in the covered institution or of any affiliate of the
covered institution; or
    (2) A form of compensation:
    (i) Payable at least in part based on the price of the shares or
other equity instruments of the covered institution or of any affiliate
of the covered institution; or
    (ii) That requires, or may require, settlement in the shares of the
covered institution or of any affiliate of the covered institution.
    (q) Forfeiture means a reduction of the amount of deferred
incentive-based compensation awarded to a covered person that has not
vested.
    (r) Incentive-based compensation means any variable compensation,
fees, or benefits that serve as an incentive or reward for performance.
    (s) Incentive-based compensation arrangement means an agreement
between a covered institution and a covered person, under which the
covered institution provides incentive-

based compensation to the covered person, including incentive-based
compensation delivered through one or more incentive-based compensation
plans.
    (t) Incentive-based compensation plan means a document setting
forth terms and conditions governing the opportunity for and the
payment of incentive-based compensation payments to one or more covered
persons.
    (u) Incentive-based compensation program means a covered
institution's framework for incentive-based compensation that governs
incentive-based compensation practices and establishes related
controls.
    (v) Level 1 covered institution means:
    (1) A covered institution that is a subsidiary of a depository
institution holding company with average total consolidated assets
greater than or equal to $250 billion;
    (2) A covered institution with average total consolidated assets
greater than or equal to $250 billion that is not a subsidiary of a
covered institution or of a depository institution holding company; and
    (3) A covered institution that is a subsidiary of a covered
institution with average total consolidated assets greater than or
equal to $250 billion.
    (w) Level 2 covered institution means:
    (1) A covered institution that is a subsidiary of a depository
institution holding company with average total consolidated assets
greater than or equal to $50 billion but less than $250 billion;
    (2) A covered institution with average total consolidated assets
greater than or equal to $50 billion but less than $250 billion that is
not a subsidiary of a covered institution or of a depository
institution holding company; and
    (3) A covered institution that is a subsidiary of a covered
institution with average total consolidated assets greater than or
equal to $50 billion but less than $250 billion.
    (x) Level 3 covered institution means:
    (1) A covered institution with average total consolidated assets
greater than or equal to $1 billion but less than $50 billion; and
    (2) A covered institution that is a subsidiary of a covered
institution with average total consolidated assets greater than or
equal to $1 billion but less than $50 billion.
    (y) Long-term incentive plan means a plan to provide incentive-
based compensation that is based on a performance period of at least
three years.
    (z) Option means an instrument through which a covered institution
provides a covered person the right, but not the obligation, to buy a
specified number of shares representing an ownership stake in a company
at a predetermined price within a set time period or on a date certain,
or any similar instrument, such as a stock appreciation right.
    (aa) Performance period means the period during which the
performance of a covered person is assessed for purposes of determining
incentive-based compensation.
    (bb) Principal shareholder means a natural person who, directly or
indirectly, or acting through or in concert with one or more persons,
owns, controls, or has the power to vote 10 percent or more of any
class of voting securities of a covered institution.
    (cc) Qualifying incentive-based compensation means the amount of
incentive-based compensation awarded to a covered person for a
particular performance period, excluding amounts awarded to the covered
person for that particular performance period under a long-term
incentive plan.
    (dd) [Reserved].
    (ee) Regulatory report means:
    (1) For a national bank or Federal savings association, the
consolidated Reports of Condition and Income (``Call Report'');
    (2) For a Federal branch or agency of a foreign bank, the Reports
of Assets and Liabilities of U.S. Branches and Agencies of Foreign
Banks--FFIEC 002;
    (3) For a depository institution holding company--
    (i) The Consolidated Financial Statements for Bank Holding
Companies (``FR Y-9C'');
    (ii) In the case of a savings and loan holding company that is not
required to file an FR Y-9C, the Quarterly Savings and Loan Holding
Company Report (``FR 2320''), if the savings and loan holding company
reports consolidated assets on the FR 2320, as applicable; or
    (iii) In the case of a savings and loan holding company that does
not file an FRY-9C or report consolidated assets on the FR2320, a
report submitted to the Board of Governors of the Federal Reserve
System pursuant to 12 CFR 236.2(ee); and
    (4) For a covered institution that is a subsidiary of a national
bank, Federal savings association, or Federal branch or agency of a
foreign bank, a report of the subsidiary's total consolidated assets
prepared by the subsidiary, national bank, Federal savings association,
or Federal branch or agency in a form that is acceptable to the OCC.
    (ff) Section 956 affiliate means an affiliate that is an
institution described in Sec.  42.2(i), 12 CFR 236.2(i), 12 CFR
372.2(i), 12 CFR 741.2(i), 12 CFR 1232.2(i), or 17 CFR 303.2(i).
    (gg) Senior executive officer means a covered person who holds the
title or, without regard to title, salary, or compensation, performs
the function of one or more of the following positions at a covered
institution for any period of time in the relevant performance period:
President, chief executive officer, executive chairman, chief operating
officer, chief financial officer, chief investment officer, chief legal
officer, chief lending officer, chief risk officer, chief compliance
officer, chief audit executive, chief credit officer, chief accounting
officer, or head of a major business line or control function.
    (hh) Significant risk-taker means:
    (1) Any covered person at a Level 1 or Level 2 covered institution,
other than a senior executive officer, who received annual base salary
and incentive-based compensation for the last calendar year that ended
at least 180 days before the beginning of the performance period of
which at least one-third is incentive-based compensation and is--
    (i) A covered person of a Level 1 covered institution who received
annual base salary and incentive-based compensation for the last
calendar year that ended at least 180 days before the beginning of the
performance period that placed the covered person among the highest 5
percent in annual base salary and incentive-based compensation among
all covered persons (excluding senior executive officers) of the Level
1 covered institution together with all individuals who receive
incentive-based compensation at any section 956 affiliate of the Level
1 covered institution;
    (ii) A covered person of a Level 2 covered institution who received
annual base salary and incentive-based compensation for the last
calendar year that ended at least 180 days before the beginning of the
performance period that placed the covered person among the highest 2
percent in annual base salary and incentive-based compensation among
all covered persons (excluding senior executive officers) of the Level
2 covered institution together with all individuals who receive
incentive-based compensation at any section 956 affiliate of the Level
2 covered institution; or
    (iii) A covered person of a covered institution who may commit or
expose 0.5 percent or more of the common equity tier 1 capital, or in
the case of a registered securities broker or dealer, 0.5 percent or
more of the tentative net capital, of the covered institution or of any
section 956 affiliate of the covered

institution, whether or not the individual is a covered person of that
specific legal entity; and
    (2) Any covered person at a Level 1 or Level 2 covered institution,
other than a senior executive officer, who is designated as a
``significant risk-taker'' by the OCC because of that person's ability
to expose a covered institution to risks that could lead to material
financial loss in relation to the covered institution's size, capital,
or overall risk tolerance, in accordance with procedures established by
the OCC, or by the covered institution.
    (3) For purposes of this part, an individual who is an employee,
director, senior executive officer, or principal shareholder of an
affiliate of a Level 1 or Level 2 covered institution, where such
affiliate has less than $1 billion in total consolidated assets, and
who otherwise would meet the requirements for being a significant risk-
taker under paragraph (hh)(1)(iii) of this section, shall be considered
to be a significant risk-taker with respect to the Level 1 or Level 2
covered institution for which the individual may commit or expose 0.5
percent or more of common equity tier 1 capital or tentative net
capital. The Level 1 or Level 2 covered institution for which the
individual commits or exposes 0.5 percent or more of common equity tier
1 capital or tentative net capital shall ensure that the individual's
incentive compensation arrangement complies with the requirements of
this part.
    (4) If the OCC determines, in accordance with procedures
established by the OCC, that a Level 1 covered institution's
activities, complexity of operations, risk profile, and compensation
practices are similar to those of a Level 2 covered institution, the
Level 1 covered institution may apply paragraph (hh)(1)(i) of this
section to covered persons of the Level 1 covered institution by
substituting ``2 percent'' for ``5 percent''.
    (ii) Subsidiary means any company that is owned or controlled
directly or indirectly by another company
    (jj) Vesting of incentive-based compensation means the transfer of
ownership of the incentive-based compensation to the covered person to
whom the incentive-based compensation was awarded, such that the
covered person's right to the incentive-based compensation is no longer
contingent on the occurrence of any event.

Sec.  42.3  Applicability.

    (a) When average total consolidated assets increase--(1) In
general--(A) Covered institution subsidiaries of depository institution
holding companies. A national bank or Federal savings association that
is a subsidiary of a depository institution holding company shall
become a Level 1, Level 2, or Level 3 covered institution when the
depository institution holding company's average total consolidated
assets increase to an amount that equals or exceeds $250 billion, $50
billion, or $1 billion, respectively.
    (B) Covered institutions that are not subsidiaries of a depository
institution holding company. A national bank, Federal savings
association, or Federal branch or agency of a foreign bank that is not
a subsidiary of a national bank, Federal savings association, Federal
branch or agency, or depository institution holding company shall
become a Level 1, Level 2, or Level 3 covered institution when the
national bank, Federal savings association, or Federal branch or
agency's average total consolidated assets increase to an amount that
equals or exceeds $250 billion, $50 billion, or $1 billion,
respectively.
    (C) Subsidiaries of covered institutions. A subsidiary of a
national bank, Federal savings association, or Federal branch or agency
of a foreign bank that is not a broker, dealer, person providing
insurance, investment company, or investment adviser shall become a
Level 1, Level 2, or Level 3 covered institution when the national
bank, Federal savings association, or Federal branch or agency becomes
a Level 1, Level 2, or Level 3 covered institution, respectively,
pursuant to paragraph (a)(1)(A) or (B) of this section.
    (2) Compliance date. A national bank, Federal savings association,
Federal branch or agency of a foreign bank, or a subsidiary thereof,
that becomes a Level 1, Level 2, or Level 3 covered institution
pursuant to paragraph (a)(1) of this section shall comply with the
requirements of this part for a Level 1, Level 2, or Level 3 covered
institution, respectively, not later than the first day of the first
calendar quarter that begins not later than 540 days after the date on
which the national bank, Federal savings association, Federal branch or
agency, or subsidiary becomes a Level 1, Level 2, or Level 3 covered
institution, respectively. Until that day, the Level 1, Level 2, or
Level 3 covered institution will remain subject to the requirements of
this part, if any, that applied to the institution on the day before
the date on which it became a Level 1, Level 2, or Level 3 covered
institution.
    (3) Grandfathered plans. A national bank, Federal savings
association, Federal branch or agency of a foreign bank, or a
subsidiary thereof, that becomes a Level 1, Level 2, or Level 3 covered
institution under paragraph (a)(1) of this section is not required to
comply with requirements of this part applicable to a Level 1, Level 2,
or Level 3 covered institution, respectively, with respect to any
incentive-based compensation plan with a performance period that begins
before the date described in paragraph (a)(2) of this section. Any such
incentive-based compensation plan shall remain subject to the
requirements under this part, if any, that applied to the national
bank, Federal savings association, Federal branch or agency of a
foreign bank, or subsidiary at the beginning of the performance period.
    (b) When total consolidated assets decrease--(1) Covered
institutions that are subsidiaries of depository institution holding
companies. A Level 1, Level 2, or Level 3 covered institution that is a
subsidiary of a depository institution holding company will remain
subject to the requirements applicable to such covered institution at
that level under this part unless and until the total consolidated
assets of the depository institution holding company, as reported on
the depository institution holding company's regulatory reports, fall
below $250 billion, $50 billion, or $1 billion, respectively, for each
of four consecutive quarters.
    (2) Covered institutions that are not subsidiaries of depository
institution holding companies. A Level 1, Level 2, or Level 3 covered
institution that is a not subsidiary of a depository institution
holding company will remain subject to the requirements applicable to
such covered institution at that level under this part unless and until
the total consolidated assets of the covered institution, as reported
on the covered institution's regulatory reports, fall below $250
billion, $50 billion, or $1 billion, respectively, for each of four
consecutive quarters.
    (3) Subsidiaries of covered institutions. A Level 1, Level 2, or
Level 3 covered institution that is a subsidiary of a national bank,
Federal savings association, or Federal branch or agency of a foreign
bank that is a covered institution will remain subject to the
requirements applicable to such national bank, Federal savings
association, or Federal branch or agency at that level under this part
unless and until the total consolidated assets of the national bank,
Federal savings association, Federal branch or agency, or depository
institution holding company of the national bank, Federal savings
association, or Federal branch or agency, as reported on its regulatory
reports, fall below $250 billion, $50

billion, or $1 billion, respectively, for each of four consecutive
quarters.
    (4) Calculations. The calculations under this paragraph (b) of this
section will be effective on the as-of date of the fourth consecutive
regulatory report.
    (c) Compliance of covered institutions that are subsidiaries of
covered institutions. A covered institution that is a subsidiary of
another covered institution may meet any requirement of this part if
the parent covered institution complies with that requirement in a way
that causes the relevant portion of the incentive-based compensation
program of the subsidiary covered institution to comply with that
requirement.

Sec.  42.4  Requirements and prohibitions applicable to all covered
institutions.

    (a) In general. A covered institution must not establish or
maintain any type of incentive-based compensation arrangement, or any
feature of any such arrangement, that encourages inappropriate risks by
the covered institution:
    (1) By providing a covered person with excessive compensation,
fees, or benefits; or
    (2) That could lead to material financial loss to the covered
institution.
    (b) Excessive compensation. Compensation, fees, and benefits are
considered excessive for purposes of paragraph (a)(1) of this section
when amounts paid are unreasonable or disproportionate to the value of
the services performed by a covered person, taking into consideration
all relevant factors, including, but not limited to:
    (1) The combined value of all compensation, fees, or benefits
provided to the covered person;
    (2) The compensation history of the covered person and other
individuals with comparable expertise at the covered institution;
    (3) The financial condition of the covered institution;
    (4) Compensation practices at comparable institutions, based upon
such factors as asset size, geographic location, and the complexity of
the covered institution's operations and assets;
    (5) For post-employment benefits, the projected total cost and
benefit to the covered institution; and
    (6) Any connection between the covered person and any fraudulent
act or omission, breach of trust or fiduciary duty, or insider abuse
with regard to the covered institution.
    (c) Material financial loss. An incentive-based compensation
arrangement at a covered institution encourages inappropriate risks
that could lead to material financial loss to the covered institution,
unless the arrangement:
    (1) Appropriately balances risk and reward;
    (2) Is compatible with effective risk management and controls; and
    (3) Is supported by effective governance.
    (d) Performance measures. An incentive-based compensation
arrangement will not be considered to appropriately balance risk and
reward for purposes of paragraph (c)(1) of this section unless:
    (1) The arrangement includes financial and non-financial measures
of performance, including considerations of risk-taking, that are
relevant to a covered person's role within a covered institution and to
the type of business in which the covered person is engaged and that
are appropriately weighted to reflect risk-taking;
    (2) The arrangement is designed to allow non-financial measures of
performance to override financial measures of performance when
appropriate in determining incentive-based compensation; and
    (3) Any amounts to be awarded under the arrangement are subject to
adjustment to reflect actual losses, inappropriate risks taken,
compliance deficiencies, or other measures or aspects of financial and
non-financial performance.
    (e) Board of directors. A covered institution's board of directors,
or a committee thereof, must:
    (1) Conduct oversight of the covered institution's incentive-based
compensation program;
    (2) Approve incentive-based compensation arrangements for senior
executive officers, including the amounts of all awards and, at the
time of vesting, payouts under such arrangements; and
    (3) Approve any material exceptions or adjustments to incentive-
based compensation policies or arrangements for senior executive
officers.
    (f) Disclosure and recordkeeping requirements. A covered
institution must create annually and maintain for a period of at least
seven years records that document the structure of all its incentive-
based compensation arrangements and demonstrate compliance with this
part. A covered institution must disclose the records to the OCC upon
request. At a minimum, the records must include copies of all
incentive-based compensation plans, a record of who is subject to each
plan, and a description of how the incentive-based compensation program
is compatible with effective risk management and controls.
    (g) Rule of construction. A covered institution is not required to
report the actual amount of compensation, fees, or benefits of
individual covered persons as part of the disclosure and recordkeeping
requirements under this part.

Sec.  42.5  Additional disclosure and recordkeeping requirements for
Level 1 and Level 2 covered institutions.

    (a) A Level 1 or Level 2 covered institution must create annually
and maintain for a period of at least seven years records that
document:
    (1) The covered institution's senior executive officers and
significant risk-takers, listed by legal entity, job function,
organizational hierarchy, and line of business;
    (2) The incentive-based compensation arrangements for senior
executive officers and significant risk-takers, including information
on percentage of incentive-based compensation deferred and form of
award;
    (3) Any forfeiture and downward adjustment or clawback reviews and
decisions for senior executive officers and significant risk-takers;
and
    (4) Any material changes to the covered institution's incentive-
based compensation arrangements and policies.
    (b) A Level 1 or Level 2 covered institution must create and
maintain records in a manner that allows for an independent audit of
incentive-based compensation arrangements, policies, and procedures,
including, those required under Sec.  42.11.
    (c) A Level 1 or Level 2 covered institution must provide the
records described in paragraph (a) of this section to the OCC in such
form and with such frequency as requested by the OCC.

Sec.  42.6  Reservation of authority for Level 3 covered institutions.

    (a) In general. The OCC may require a Level 3 covered institution
with average total consolidated assets greater than or equal to $10
billion and less than $50 billion to comply with some or all of the
provisions of Sec. Sec.  42.5 and 42.7 through 42.11 if the OCC
determines that the Level 3 covered institution's complexity of
operations or compensation practices are consistent with those of a
Level 1 or Level 2 covered institution.
    (b) Factors considered. Any exercise of authority under this
section will be in writing by the OCC in accordance with procedures
established by the OCC and will consider the activities,

complexity of operations, risk profile, and compensation practices of
the Level 3 covered institution, in addition to any other relevant
factors.

Sec.  42.7  Deferral, forfeiture and downward adjustment, and clawback
requirements for Level 1 and Level 2 covered institutions.

    An incentive-based compensation arrangement at a Level 1 or Level 2
covered institution will not be considered to appropriately balance
risk and reward, for purposes of Sec.  42.4(c)(1), unless the following
requirements are met.
    (a) Deferral. (1) Qualifying incentive-based compensation must be
deferred as follows:
    (i) Minimum required deferral amount. (A) A Level 1 covered
institution must defer at least 60 percent of a senior executive
officer's qualifying incentive-based compensation awarded for each
performance period.
    (B) A Level 1 covered institution must defer at least 50 percent of
a significant risk-taker's qualifying incentive-based compensation
awarded for each performance period.
    (C) A Level 2 covered institution must defer at least 50 percent of
a senior executive officer's qualifying incentive-based compensation
awarded for each performance period.
    (D) A Level 2 covered institution must defer at least 40 percent of
a significant risk-taker's qualifying incentive-based compensation
awarded for each performance period.
    (ii) Minimum required deferral period. (A) For a senior executive
officer or significant risk-taker of a Level 1 covered institution, the
deferral period for deferred qualifying incentive-based compensation
must be at least 4 years.
    (B) For a senior executive officer or significant risk-taker of a
Level 2 covered institution, the deferral period for deferred
qualifying incentive-based compensation must be at least 3 years.
    (iii) Vesting of amounts during deferral period--(A) Pro rata
vesting. During a deferral period, deferred qualifying incentive-based
compensation may not vest faster than on a pro rata annual basis
beginning no earlier than the first anniversary of the end of the
performance period for which the amounts were awarded.
    (B) Acceleration of vesting. A Level 1 or Level 2 covered
institution must not accelerate the vesting of a covered person's
deferred qualifying incentive-based compensation that is required to be
deferred under this part, except in the case of death or disability of
such covered person.
    (2) Incentive-based compensation awarded under a long-term
incentive plan must be deferred as follows:
    (i) Minimum required deferral amount. (A) A Level 1 covered
institution must defer at least 60 percent of a senior executive
officer's incentive-based compensation awarded under a long-term
incentive plan for each performance period.
    (B) A Level 1 covered institution must defer at least 50 percent of
a significant risk-taker's incentive-based compensation awarded under a
long-term incentive plan for each performance period.
    (C) A Level 2 covered institution must defer at least 50 percent of
a senior executive officer's incentive-based compensation awarded under
a long-term incentive plan for each performance period.
    (D) A Level 2 covered institution must defer at least 40 percent of
a significant risk-taker's incentive-based compensation awarded under a
long-term incentive plan for each performance period.
    (ii) Minimum required deferral period. (A) For a senior executive
officer or significant risk-taker of a Level 1 covered institution, the
deferral period for deferred long-term incentive plan amounts must be
at least 2 years.
    (B) For a senior executive officer or significant risk-taker of a
Level 2 covered institution, the deferral period for deferred long-term
incentive plan amounts must be at least 1 year.
    (iii) Vesting of amounts during deferral period--(A) Pro rata
vesting. During a deferral period, deferred long-term incentive plan
amounts may not vest faster than on a pro rata annual basis beginning
no earlier than the first anniversary of the end of the performance
period for which the amounts were awarded.
    (B) Acceleration of vesting. A Level 1 or Level 2 covered
institution must not accelerate the vesting of a covered person's
deferred long-term incentive plan amounts that is required to be
deferred under this part, except in the case of death or disability of
such covered person.
    (3) Adjustments of deferred qualifying incentive-based compensation
and deferred long-term incentive plan compensation amounts. A Level 1
or Level 2 covered institution may not increase deferred qualifying
incentive-based compensation or deferred long-term incentive plan
amounts for a senior executive officer or significant risk-taker during
the deferral period. For purposes of this paragraph, an increase in
value attributable solely to a change in share value, a change in
interest rates, or the payment of interest according to terms set out
at the time of the award is not considered an increase in incentive-
based compensation amounts.
    (4) Composition of deferred qualifying incentive-based compensation
and deferred long-term incentive plan compensation for Level 1 and
Level 2 covered institutions--(i) Cash and equity-like instruments. For
a senior executive officer or significant risk-taker of a Level 1 or
Level 2 covered institution that issues equity or is an affiliate of a
covered institution that issues equity, any deferred qualifying
incentive-based compensation or deferred long-term incentive plan
amounts must include substantial portions of both deferred cash and
equity-like instruments throughout the deferral period.
    (ii) Options. If a senior executive officer or significant risk-
taker of a Level 1 or Level 2 covered institution receives incentive-
based compensation for a performance period in the form of options, the
total amount of such options that may be used to meet the minimum
deferral amount requirements of paragraph (a)(1)(i) or (a)(2)(i) of
this section is limited to no more than 15 percent of the amount of
total incentive-based compensation awarded to the senior executive
officer or significant risk-taker for that performance period.
    (b) Forfeiture and downward adjustment--(1) Compensation at risk--
(i) A Level 1 or Level 2 covered institution must place at risk of
forfeiture all unvested deferred incentive-based compensation of any
senior executive officer or significant risk-taker, including unvested
deferred amounts awarded under long-term incentive plans.
    (ii) A Level 1 or Level 2 covered institution must place at risk of
downward adjustment all of a senior executive officer's or significant
risk-taker's incentive-based compensation amounts not yet awarded for
the current performance period, including amounts payable under long-
term incentive plans.
    (2) Events triggering forfeiture and downward adjustment review. At
a minimum, a Level 1 or Level 2 covered institution must consider
forfeiture and downward adjustment of incentive-based compensation of
senior executive officers and significant risk-takers described in
paragraph (b)(3) of this section due to any of the following adverse
outcomes at the covered institution:
    (i) Poor financial performance attributable to a significant
deviation from the risk parameters set forth in the covered
institution's policies and procedures;

    (ii) Inappropriate risk taking, regardless of the impact on
financial performance;
    (iii) Material risk management or control failures;
    (iv) Non-compliance with statutory, regulatory, or supervisory
standards that results in:
    (A) Enforcement or legal action against the covered institution
brought by a federal or state regulator or agency; or
    (B) A requirement that the covered institution report a restatement
of a financial statement to correct a material error; and
    (v) Other aspects of conduct or poor performance as defined by the
covered institution.
    (3) Senior executive officers and significant risk-takers affected
by forfeiture and downward adjustment. A Level 1 or Level 2 covered
institution must consider forfeiture and downward adjustment for a
senior executive officer or significant risk-taker with direct
responsibility, or responsibility due to the senior executive officer's
or significant risk-taker's role or position in the covered
institution's organizational structure, for the events related to the
forfeiture and downward adjustment review set forth in paragraph (b)(2)
of this section.
    (4) Determining forfeiture and downward adjustment amounts. A Level
1 or Level 2 covered institution must consider, at a minimum, the
following factors when determining the amount or portion of a senior
executive officer's or significant risk-taker's incentive-based
compensation that should be forfeited or adjusted downward:
    (i) The intent of the senior executive officer or significant risk-
taker to operate outside the risk governance framework approved by the
covered institution's board of directors or to depart from the covered
institution's policies and procedures;
    (ii) The senior executive officer's or significant risk-taker's
level of participation in, awareness of, and responsibility for, the
events triggering the forfeiture and downward adjustment review set
forth in paragraph (b)(2) of this section;
    (iii) Any actions the senior executive officer or significant risk-
taker took or could have taken to prevent the events triggering the
forfeiture and downward adjustment review set forth in paragraph (b)(2)
of this section;
    (iv) The financial and reputational impact of the events triggering
the forfeiture and downward adjustment review set forth in paragraph
(b)(2) of this section to the covered institution, the line or sub-line
of business, and individuals involved, as applicable, including the
magnitude of any financial loss and the cost of known or potential
subsequent fines, settlements, and litigation;
    (v) The causes of the events triggering the forfeiture and downward
adjustment review set forth in paragraph (b)(2) of this section,
including any decision-making by other individuals; and
    (vi) Any other relevant information, including past behavior and
past risk outcomes attributable to the senior executive officer or
significant risk-taker.
    (c) Clawback. A Level 1 or Level 2 covered institution must include
clawback provisions in incentive-based compensation arrangements for
senior executive officers and significant risk-takers that, at a
minimum, allow the covered institution to recover incentive-based
compensation from a current or former senior executive officer or
significant risk-taker for seven years following the date on which such
compensation vests, if the covered institution determines that the
senior executive officer or significant risk-taker engaged in:
    (1) Misconduct that resulted in significant financial or
reputational harm to the covered institution;
    (2) Fraud; or
    (3) Intentional misrepresentation of information used to determine
the senior executive officer or significant risk-taker's incentive-
based compensation.

Sec.  42.8  Additional prohibitions for Level 1 and Level 2 covered
institutions.

    An incentive-based compensation arrangement at a Level 1 or Level 2
covered institution will be considered to provide incentives that
appropriately balance risk and reward for purposes of Sec.  42.4(c)(1)
only if such institution complies with the following prohibitions.
    (a) Hedging. A Level 1 or Level 2 covered institution must not
purchase a hedging instrument or similar instrument on behalf of a
covered person to hedge or offset any decrease in the value of the
covered person's incentive-based compensation.
    (b) Maximum incentive-based compensation opportunity. A Level 1 or
Level 2 covered institution must not award incentive-based compensation
to:
    (1) A senior executive officer in excess of 125 percent of the
target amount for that incentive-based compensation; or
    (2) A significant risk-taker in excess of 150 percent of the target
amount for that incentive-based compensation.
    (c) Relative performance measures. A Level 1 or Level 2 covered
institution must not use incentive-based compensation performance
measures that are based solely on industry peer performance
comparisons.
    (d) Volume driven incentive-based compensation. A Level 1 or Level
2 covered institution must not provide incentive-based compensation to
a covered person that is based solely on transaction revenue or volume
without regard to transaction quality or compliance of the covered
person with sound risk management.

Sec.  42.9  Risk management and controls requirements for Level 1 and
Level 2 covered institutions.

    An incentive-based compensation arrangement at a Level 1 or Level 2
covered institution will be considered to be compatible with effective
risk management and controls for purposes of Sec.  42.4(c)(2) only if
such institution meets the following requirements.
    (a) A Level 1 or Level 2 covered institution must have a risk
management framework for its incentive-based compensation program that:
    (1) Is independent of any lines of business;
    (2) Includes an independent compliance program that provides for
internal controls, testing, monitoring, and training with written
policies and procedures consistent with Sec.  42.11; and
    (3) Is commensurate with the size and complexity of the covered
institution's operations.
    (b) A Level 1 or Level 2 covered institution must:
    (1) Provide individuals engaged in control functions with the
authority to influence the risk-taking of the business areas they
monitor; and
    (2) Ensure that covered persons engaged in control functions are
compensated in accordance with the achievement of performance
objectives linked to their control functions and independent of the
performance of those business areas.
    (c) A Level 1 or Level 2 covered institution must provide for the
independent monitoring of:
    (1) All incentive-based compensation plans in order to identify
whether those plans provide incentives that appropriately balance risk
and reward;
    (2) Events related to forfeiture and downward adjustment reviews
and decisions of forfeiture and downward adjustment reviews in order to
determine consistency with Sec.  42.7(b); and
    (3) Compliance of the incentive-based compensation program with the
covered institution's policies and procedures.

Sec.  42.10  Governance requirements for Level 1 and Level 2 covered
institutions.

    An incentive-based compensation arrangement at a Level 1 or Level 2
covered institution will not be considered to be supported by effective
governance for purposes of Sec.  42.4(c)(3), unless:
    (a) The covered institution establishes a compensation committee
composed solely of directors who are not senior executive officers to
assist the board of directors in carrying out its responsibilities
under Sec.  42.4(e); and
    (b) The compensation committee established pursuant to paragraph
(a) of this section obtains:
    (1) Input from the risk and audit committees of the covered
institution's board of directors, or groups performing similar
functions, and risk management function on the effectiveness of risk
measures and adjustments used to balance risk and reward in incentive-
based compensation arrangements;
    (2) A written assessment of the effectiveness of the covered
institution's incentive-based compensation program and related
compliance and control processes in providing risk-taking incentives
that are consistent with the risk profile of the covered institution,
submitted on an annual or more frequent basis by the management of the
covered institution and developed with input from the risk and audit
committees of its board of directors, or groups performing similar
functions, and from the covered institution's risk management and audit
functions; and
    (3) An independent written assessment of the effectiveness of the
covered institution's incentive-based compensation program and related
compliance and control processes in providing risk-taking incentives
that are consistent with the risk profile of the covered institution,
submitted on an annual or more frequent basis by the internal audit or
risk management function of the covered institution, developed
independently of the covered institution's management.

Sec.  42.11  Policies and procedures requirements for Level 1 and Level
2 covered institutions.

    A Level 1 or Level 2 covered institution must develop and implement
policies and procedures for its incentive-based compensation program
that, at a minimum:
    (a) Are consistent with the prohibitions and requirements of this
part;
    (b) Specify the substantive and procedural criteria for the
application of forfeiture and clawback, including the process for
determining the amount of incentive-based compensation to be clawed
back;
    (c) Require that the covered institution maintain documentation of
final forfeiture, downward adjustment, and clawback decisions;
    (d) Specify the substantive and procedural criteria for the
acceleration of payments of deferred incentive-based compensation to a
covered person, consistent with Sec.  42.7(a)(1)(iii)(B) and
(a)(2)(iii)(B));
    (e) Identify and describe the role of any employees, committees, or
groups authorized to make incentive-based compensation decisions,
including when discretion is authorized;
    (f) Describe how discretion is expected to be exercised to
appropriately balance risk and reward;
    (g) Require that the covered institution maintain documentation of
the establishment, implementation, modification, and monitoring of
incentive-based compensation arrangements, sufficient to support the
covered institution's decisions;
    (h) Describe how incentive-based compensation arrangements will be
monitored;
    (i) Specify the substantive and procedural requirements of the
independent compliance program consistent with Sec.  42.9(a)(2); and
    (j) Ensure appropriate roles for risk management, risk oversight,
and other control function personnel in the covered institution's
processes for:
    (1) Designing incentive-based compensation arrangements and
determining awards, deferral amounts, deferral periods, forfeiture,
downward adjustment, clawback, and vesting; and
    (2) Assessing the effectiveness of incentive-based compensation
arrangements in restraining inappropriate risk-taking.

Sec.  42.12  Indirect actions.

    A covered institution must not indirectly, or through or by any
other person, do anything that would be unlawful for such covered
institution to do directly under this part.

Sec.  42.13  Enforcement.

    The provisions of this part shall be enforced under section 505 of
the Gramm-Leach-Bliley Act and, for purposes of such section, a
violation of this part shall be treated as a violation of subtitle A of
title V of such Act.

Federal Reserve Board

12 CFR Chapter II

Authority and Issuance

    For the reasons set forth in the joint preamble, the Board proposes
to amend 12 CFR chapter II as follows:
0
2. Add part 236 to read as follows:

PART 236--INCENTIVE-BASED COMPENSATION ARRANGEMENTS (REGULATION JJ)

Sec.
236.1 Authority, scope, and initial applicability.
236.2 Definitions.
236.3 Applicability.
236.4 Requirements and prohibitions applicable to all covered
institutions.
236.5 Additional disclosure and recordkeeping requirements for Level
1 and Level 2 covered institutions.
236.6 Reservation of authority for Level 3 covered institutions.
236.7 Deferral, forfeiture and downward adjustment, and clawback
requirements for Level 1 and Level 2 covered institutions.
236.8 Additional prohibitions for Level 1 and Level 2 covered
institutions.
236.9 Risk management and controls requirements for Level 1 and
Level 2 covered institutions.
236.10 Governance requirements for Level 1 and Level 2 covered
institutions.
236.11 Policies and procedures requirements for Level 1 and Level 2
covered institutions.
236.12 Indirect actions.
236.13 Enforcement.

    Authority: 12 U.S.C. 24, 321-338a, 1462a, 1467a, 1818, 1844(b),
3108, and 5641.

Sec.  236.1  Authority, scope, and initial applicability.

    (a) Authority. This part is issued pursuant to section 956 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C.
5641), section 5136 of the Revised Statutes (12 U.S.C. 24), the Federal
Reserve Act (12 U.S.C. 321-338a), section 8 of the Federal Deposit
Insurance Act (12 U.S.C. 1818), section 5 of the Bank Holding Company
Act of 1956 (12 U.S.C. 1844(b)), sections 3 and 10 of the Home Owners'
Loan Act of 1933 (12 U.S.C. 1462a and 1467a), and section 13 of the
International Banking Act of 1978 (12 U.S.C. 3108).
    (b) Scope. This part applies to a covered institution with average
total consolidated assets greater than or equal to $1 billion that
offers incentive-based compensation to covered persons.
    (c) Initial applicability--(1) Compliance date. A covered
institution must meet the requirements of this part no later than [Date
of the beginning of the first calendar quarter that begins at least 540
days after a final rule is published in the Federal Register]. Whether
a covered institution is a Level 1, Level 2, or Level 3 covered
institution at that time will be determined based on average total
consolidated assets as of [Date of the beginning of the first calendar
quarter that begins after a final

rule is published in the Federal Register].
    (2) Grandfathered plans. A covered institution is not required to
comply with the requirements of this part with respect to any
incentive-based compensation plan with a performance period that begins
before [Compliance Date as described in Sec.  236.1(c)(1)].
    (d) Preservation of authority. Nothing in this part in any way
limits the authority of the Board under other provisions of applicable
law and regulations.

Sec.  236.2  Definitions.

    For purposes of this part only, the following definitions apply
unless otherwise specified:
    (a) Affiliate means any company that controls, is controlled by, or
is under common control with another company.
    (b) Average total consolidated assets means the average of a
regulated institution's total consolidated assets, as reported on the
regulated institution's regulatory reports, for the four most recent
consecutive quarters. If a regulated institution has not filed a
regulatory report for each of the four most recent consecutive
quarters, the regulated institution's average total consolidated assets
means the average of its total consolidated assets, as reported on its
regulatory reports, for the most recent quarter or consecutive
quarters, as applicable. Average total consolidated assets are measured
on the as-of date of the most recent regulatory report used in the
calculation of the average.
    (c) To award incentive-based compensation means to make a final
determination, conveyed to a covered person, of the amount of
incentive-based compensation payable to the covered person for
performance over a performance period.
    (d) Board of directors means the governing body of a covered
institution that oversees the activities of the covered institution,
often referred to as the board of directors or board of managers. For a
foreign banking organization, ``board of directors'' refers to the
relevant oversight body for the firm's U.S. branch, agency or
operations, consistent with the foreign banking organization's overall
corporate and management structure.
    (e) Clawback means a mechanism by which a covered institution can
recover vested incentive-based compensation from a covered person.
    (f) Compensation, fees, or benefits means all direct and indirect
payments, both cash and non-cash, awarded to, granted to, or earned by
or for the benefit of, any covered person in exchange for services
rendered to a covered institution.
    (g) Control means that any company has control over a bank or over
any company if--
    (1) The company directly or indirectly or acting through one or
more other persons owns, controls, or has power to vote 25 percent or
more of any class of voting securities of the bank or company;
    (2) The company controls in any manner the election of a majority
of the directors or trustees of the bank or company; or
    (3) The Board determines, after notice and opportunity for hearing,
that the company directly or indirectly exercises a controlling
influence over the management or policies of the bank or company.
    (h) Control function means a compliance, risk management, internal
audit, legal, human resources, accounting, financial reporting, or
finance role responsible for identifying, measuring, monitoring, or
controlling risk-taking.
    (i) Covered institution means a regulated institution with average
total consolidated assets greater than or equal to $1 billion.
    (j) Covered person means any executive officer, employee, director,
or principal shareholder who receives incentive-based compensation at a
covered institution.
    (k) Deferral means the delay of vesting of incentive-based
compensation beyond the date on which the incentive-based compensation
is awarded.
    (l) Deferral period means the period of time between the date a
performance period ends and the last date on which the incentive-based
compensation awarded for such performance period vests.
    (m) [Reserved].
    (n) Director of a covered institution means a member of the board
of directors.
    (o) Downward adjustment means a reduction of the amount of a
covered person's incentive-based compensation not yet awarded for any
performance period that has already begun, including amounts payable
under long-term incentive plans, in accordance with a forfeiture and
downward adjustment review under Sec.  236.7(b).
    (p) Equity-like instrument means:
    (1) Equity in the covered institution or of any affiliate of the
covered institution; or
    (2) A form of compensation:
    (i) Payable at least in part based on the price of the shares or
other equity instruments of the covered institution or of any affiliate
of the covered institution; or
    (ii) That requires, or may require, settlement in the shares of the
covered institution or of any affiliate of the covered institution.
    (q) Forfeiture means a reduction of the amount of deferred
incentive-based compensation awarded to a covered person that has not
vested.
    (r) Incentive-based compensation means any variable compensation,
fees, or benefits that serve as an incentive or reward for performance.
    (s) Incentive-based compensation arrangement means an agreement
between a covered institution and a covered person, under which the
covered institution provides incentive-based compensation to the
covered person, including incentive-based compensation delivered
through one or more incentive-based compensation plans.
    (t) Incentive-based compensation plan means a document setting
forth terms and conditions governing the opportunity for and the
payment of incentive-based compensation payments to one or more covered
persons.
    (u) Incentive-based compensation program means a covered
institution's framework for incentive-based compensation that governs
incentive-based compensation practices and establishes related
controls.
    (v) Level 1 covered institution means a covered institution with
average total consolidated assets greater than or equal to $250 billion
and any subsidiary of a Level 1 covered institution that would itself
be a covered institution.
    (w) Level 2 covered institution means a covered institution with
average total consolidated assets greater than or equal to $50 billion
that is not a Level 1 covered institution and any subsidiary of a Level
2 covered institution that would itself be a covered institution.
    (x) Level 3 covered institution means a covered institution with
average total consolidated assets greater than or equal to $1 billion
that is not a Level 1 covered institution or Level 2 covered
institution.
    (y) Long-term incentive plan means a plan to provide incentive-
based compensation that is based on a performance period of at least
three years.
    (z) Option means an instrument through which a covered institution
provides a covered person the right, but not the obligation, to buy a
specified number of shares representing an ownership stake in a company
at a predetermined price within a set time period or on a date certain,
or any similar instrument, such as a stock appreciation right.

    (aa) Performance period means the period during which the
performance of a covered person is assessed for purposes of determining
incentive-based compensation.
    (bb) Principal shareholder means a natural person who, directly or
indirectly, or acting through or in concert with one or more persons,
owns, controls, or has the power to vote 10 percent or more of any
class of voting securities of a covered institution.
    (cc) Qualifying incentive-based compensation means the amount of
incentive-based compensation awarded to a covered person for a
particular performance period, excluding amounts awarded to the covered
person for that particular performance period under a long-term
incentive plan.
    (dd) Regulated institution means:
    (1) A state member bank, as defined in 12 CFR 208.2(g);
    (2) A bank holding company, as defined in 12 CFR 225.2(c), that is
not a foreign banking organization, as defined in 12 CFR 211.21(o), and
a subsidiary of such a bank holding company that is not a depository
institution, broker-dealer, or investment adviser;
    (3) A savings and loan holding company, as defined in 12 CFR
238.2(m), and a subsidiary of a savings and loan holding company that
is not a depository institution, broker-dealer, or investment adviser;
    (4) An organization operating under section 25 or 25A of the
Federal Reserve Act (``Edge or Agreement Corporation'');
    (5) A state-licensed uninsured branch or agency of a foreign bank,
as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C.
1813); and
    (6) The U.S. operations of a foreign banking organization, as
defined in 12 CFR 211.21(o), excluding any Federal branch or agency and
any state insured branch of the foreign banking organization, and a
U.S. subsidiary of such foreign banking organization that is not a
depository institution, broker-dealer, or investment adviser.
    (ee) Regulatory report means:
    (1) For a state member bank, Consolidated Reports of Condition and
Income (``Call Report'');
    (2) For a bank holding company that is not a foreign banking
organization, Consolidated Financial Statements for Bank Holding
Companies (``FR Y-9C'');
    (3) For a savings and loan holding company, FR Y-9C; if a savings
and loan holding company is not required to file an FR Y-9C, Quarterly
Savings and Loan Holding Company Report (``FR 2320''), if the savings
and loan holding company reports consolidated assets on the FR 2320;
    (4) For a savings and loan holding company that does not file a
regulatory report within the meaning of Sec.  236.2(ee)(3), a report of
average total consolidated assets filed with the Board on a quarterly
basis.
    (5) For an Edge or Agreement Corporation, Consolidated Report of
Condition and Income for Edge and Agreement Corporations (``FR
2886b'');
    (6) For a state-licensed uninsured branch or agency of a foreign
bank, Reports of Assets and Liabilities of U.S. Branches and Agencies
of Foreign Banks--FFIEC 002;
    (7) For the U.S. operations of a foreign banking organization, a
report of average total consolidated U.S. assets filed with the Board
on a quarterly basis; and
    (8) For a regulated institution that is a subsidiary of a bank
holding company, savings and loan holding company, or a foreign banking
organization, a report of the subsidiary's total consolidated assets
prepared by the bank holding company, savings and loan holding company,
or subsidiary in a form that is acceptable to the Board.
    (ff) Section 956 affiliate means an affiliate that is an
institution described in Sec.  236.2(i), 12 CFR 42.2(i), 12 CFR
372.2(i), 12 CFR 741.2(i), 12 CFR 1232.2(i), or 17 CFR 303.2(i).
    (gg) Senior executive officer means a covered person who holds the
title or, without regard to title, salary, or compensation, performs
the function of one or more of the following positions at a covered
institution for any period of time in the relevant performance period:
President, chief executive officer, executive chairman, chief operating
officer, chief financial officer, chief investment officer, chief legal
officer, chief lending officer, chief risk officer, chief compliance
officer, chief audit executive, chief credit officer, chief accounting
officer, or head of a major business line or control function.
    (hh) Significant risk-taker means:
    (1) Any covered person at a Level 1 or Level 2 covered institution,
other than a senior executive officer, who received annual base salary
and incentive-based compensation for the last calendar year that ended
at least 180 days before the beginning of the performance period of
which at least one-third is incentive-based compensation and is--
    (i) A covered person of a Level 1 covered institution who received
annual base salary and incentive-based compensation for the last
calendar year that ended at least 180 days before the beginning of the
performance period that placed the covered person among the highest 5
percent in annual base salary and incentive-based compensation among
all covered persons (excluding senior executive officers) of the Level
1 covered institution together with all individuals who receive
incentive-based compensation at any section 956 affiliate of the Level
1 covered institution;
    (ii) A covered person of a Level 2 covered institution who received
annual base salary and incentive-based compensation for the last
calendar year that ended at least 180 days before the beginning of the
performance period that placed the covered person among the highest 2
percent in annual base salary and incentive-based compensation among
all covered persons (excluding senior executive officers) of the Level
2 covered institution together with all individuals who receive
incentive-based compensation at any section 956 affiliate of the Level
2 covered institution; or
    (iii) A covered person of a covered institution who may commit or
expose 0.5 percent or more of the common equity tier 1 capital, or in
the case of a registered securities broker or dealer, 0.5 percent or
more of the tentative net capital, of the covered institution or of any
section 956 affiliate of the covered institution, whether or not the
individual is a covered person of that specific legal entity; and
    (2) Any covered person at a Level 1 or Level 2 covered institution,
other than a senior executive officer, who is designated as a
``significant risk-taker'' by the Board because of that person's
ability to expose a covered institution to risks that could lead to
material financial loss in relation to the covered institution's size,
capital, or overall risk tolerance, in accordance with procedures
established by the Board, or by the covered institution.
    (3) For purposes of this part, an individual who is an employee,
director, senior executive officer, or principal shareholder of an
affiliate of a Level 1 or Level 2 covered institution, where such
affiliate has less than $1 billion in total consolidated assets, and
who otherwise would meet the requirements for being a significant risk-
taker under paragraph (hh)(1)(iii) of this section, shall be considered
to be a significant risk-taker with respect to the Level 1 or Level 2
covered institution for which the individual may commit or expose 0.5
percent or more of common equity tier 1 capital or tentative net
capital. The Level 1 or Level 2 covered institution for which the
individual commits or exposes 0.5 percent or more of common equity tier
1 capital or tentative net capital shall ensure that

the individual's incentive compensation arrangement complies with the
requirements of this part.
    (4) If the Board determines, in accordance with procedures
established by the Board, that a Level 1 covered institution's
activities, complexity of operations, risk profile, and compensation
practices are similar to those of a Level 2 covered institution, the
Level 1 covered institution may apply paragraph (hh)(1)(i) of this
section to covered persons of the Level 1 covered institution by
substituting ``2 percent'' for ``5 percent''.
    (ii) Subsidiary means any company that is owned or controlled
directly or indirectly by another company; provided that the following
are not subsidiaries for purposes of this part:
    (1) Any merchant banking investment that is owned or controlled
pursuant to 12 U.S.C. 1843(k)(4)(H) and subpart J of the Board's
Regulation Y (12 CFR part 225); and
    (2) Any company with respect to which the covered institution
acquired ownership or control in the ordinary course of collecting a
debt previously contracted in good faith.
    (jj) Vesting of incentive-based compensation means the transfer of
ownership of the incentive-based compensation to the covered person to
whom the incentive-based compensation was awarded, such that the
covered person's right to the incentive-based compensation is no longer
contingent on the occurrence of any event.

Sec.  236.3  Applicability.

    (a) When average total consolidated assets increase--(1) In
general. A regulated institution shall become a Level 1, Level 2, or
Level 3 covered institution when its average total consolidated assets
or the average total consolidated assets of any affiliate of the
regulated institution equals or exceeds $250 billion, $50 billion, or
$1 billion, respectively.
    (2) Compliance date. A regulated institution that becomes a Level
1, Level 2, or Level 3 covered institution pursuant to paragraph (a)(1)
of this section shall comply with the requirements of this part for a
Level 1, Level 2, or Level 3 covered institution, respectively, not
later than the first day of the first calendar quarter that begins at
least 540 days after the date on which the regulated institution
becomes a Level 1, Level 2, or Level 3 covered institution,
respectively. Until that day, the Level 1, Level 2, or Level 3 covered
institution will remain subject to the requirements of this part, if
any, that applied to the regulated institution on the day before the
date on which it became a Level 1, Level 2, or Level 3 covered
institution.
    (3) Grandfathered plans. A regulated institution that becomes a
Level 1, Level 2, or Level 3 covered institution under paragraph (a)(1)
of this section is not required to comply with requirements of this
part applicable to a Level 1, Level 2, or Level 3 covered institution,
respectively, with respect to any incentive-based compensation plan
with a performance period that begins before the date described in
paragraph (a)(2) of this section. Any such incentive-based compensation
plan shall remain subject to the requirements under this part, if any,
that applied to the regulated institution at the beginning of the
performance period.
    (b) When total consolidated assets decrease. A Level 1, Level 2, or
Level 3 covered institution will remain subject to the requirements
applicable to such covered institution under this part unless and until
the total consolidated assets of such covered institution, or the total
consolidated assets of another Level 1, Level 2, or Level 3 covered
institution of which the first covered institution is a subsidiary, as
reported on the covered institution's regulatory reports, fall below
$250 billion, $50 billion, or $1 billion, respectively, for each of
four consecutive quarters. The calculation will be effective on the as-
of date of the fourth consecutive regulatory report.
    (c) Compliance of covered institutions that are subsidiaries of
covered institutions. A covered institution that is a subsidiary of
another covered institution may meet any requirement of this part if
the parent covered institution complies with that requirement in such a
way that causes the relevant portion of the incentive-based
compensation program of the subsidiary covered institution to comply
with that requirement.

Sec.  236.4  Requirements and prohibitions applicable to all covered
institutions.

    (a) In general. A covered institution must not establish or
maintain any type of incentive-based compensation arrangement, or any
feature of any such arrangement, that encourages inappropriate risks by
the covered institution:
    (1) By providing a covered person with excessive compensation,
fees, or benefits; or
    (2) That could lead to material financial loss to the covered
institution.
    (b) Excessive compensation. Compensation, fees, and benefits are
considered excessive for purposes of paragraph (a)(1) of this section
when amounts paid are unreasonable or disproportionate to the value of
the services performed by a covered person, taking into consideration
all relevant factors, including, but not limited to:
    (1) The combined value of all compensation, fees, or benefits
provided to the covered person;
    (2) The compensation history of the covered person and other
individuals with comparable expertise at the covered institution;
    (3) The financial condition of the covered institution;
    (4) Compensation practices at comparable institutions, based upon
such factors as asset size, geographic location, and the complexity of
the covered institution's operations and assets;
    (5) For post-employment benefits, the projected total cost and
benefit to the covered institution; and
    (6) Any connection between the covered person and any fraudulent
act or omission, breach of trust or fiduciary duty, or insider abuse
with regard to the covered institution.
    (c) Material financial loss. An incentive-based compensation
arrangement at a covered institution encourages inappropriate risks
that could lead to material financial loss to the covered institution,
unless the arrangement:
    (1) Appropriately balances risk and reward;
    (2) Is compatible with effective risk management and controls; and
    (3) Is supported by effective governance.
    (d) Performance measures. An incentive-based compensation
arrangement will not be considered to appropriately balance risk and
reward for purposes of paragraph (c)(1) of this section unless:
    (1) The arrangement includes financial and non-financial measures
of performance, including considerations of risk-taking, that are
relevant to a covered person's role within a covered institution and to
the type of business in which the covered person is engaged and that
are appropriately weighted to reflect risk-taking;
    (2) The arrangement is designed to allow non-financial measures of
performance to override financial measures of performance when
appropriate in determining incentive-based compensation; and
    (3) Any amounts to be awarded under the arrangement are subject to
adjustment to reflect actual losses, inappropriate risks taken,
compliance deficiencies, or other measures or aspects of financial and
non-financial performance.

    (e) Board of directors. A covered institution's board of directors,
or a committee thereof, must:
    (1) Conduct oversight of the covered institution's incentive-based
compensation program;
    (2) Approve incentive-based compensation arrangements for senior
executive officers, including the amounts of all awards and, at the
time of vesting, payouts under such arrangements; and
    (3) Approve any material exceptions or adjustments to incentive-
based compensation policies or arrangements for senior executive
officers.
    (f) Disclosure and recordkeeping requirements. A covered
institution must create annually and maintain for a period of at least
seven years records that document the structure of all its incentive-
based compensation arrangements and demonstrate compliance with this
part. A covered institution must disclose the records to the Board upon
request. At a minimum, the records must include copies of all
incentive-based compensation plans, a record of who is subject to each
plan, and a description of how the incentive-based compensation program
is compatible with effective risk management and controls.
    (g) Rule of construction. A covered institution is not required to
report the actual amount of compensation, fees, or benefits of
individual covered persons as part of the disclosure and recordkeeping
requirements under this part.

Sec.  236.5  Additional disclosure and recordkeeping requirements for
Level 1 and Level 2 covered institutions.

    (a) A Level 1 or Level 2 covered institution must create annually
and maintain for a period of at least seven years records that
document:
    (1) The covered institution's senior executive officers and
significant risk-takers, listed by legal entity, job function,
organizational hierarchy, and line of business;
    (2) The incentive-based compensation arrangements for senior
executive officers and significant risk-takers, including information
on percentage of incentive-based compensation deferred and form of
award;
    (3) Any forfeiture and downward adjustment or clawback reviews and
decisions for senior executive officers and significant risk-takers;
and
    (4) Any material changes to the covered institution's incentive-
based compensation arrangements and policies.
    (b) A Level 1 or Level 2 covered institution must create and
maintain records in a manner that allows for an independent audit of
incentive-based compensation arrangements, policies, and procedures,
including, those required under Sec.  236.11.
    (c) A Level 1 or Level 2 covered institution must provide the
records described in paragraph (a) of this section to the Board in such
form and with such frequency as requested by the Board.

Sec.  236.6  Reservation of authority for Level 3 covered institutions.

    (a) In general. The Board may require a Level 3 covered institution
with average total consolidated assets greater than or equal to $10
billion and less than $50 billion to comply with some or all of the
provisions of Sec. Sec.  236.5 and 236.7 through 236.11 if the Board
determines that the Level 3 covered institution's complexity of
operations or compensation practices are consistent with those of a
Level 1 or Level 2 covered institution.
    (b) Factors considered. Any exercise of authority under this
section will be in writing by the Board in accordance with procedures
established by the Board and will consider the activities, complexity
of operations, risk profile, and compensation practices of the Level 3
covered institution, in addition to any other relevant factors.

Sec.  236.7  Deferral, forfeiture and downward adjustment, and clawback
requirements for Level 1 and Level 2 covered institutions.

    An incentive-based compensation arrangement at a Level 1 or Level 2
covered institution will not be considered to appropriately balance
risk and reward, for purposes of Sec.  236.4(c)(1), unless the
following requirements are met.
    (a) Deferral. (1) Qualifying incentive-based compensation must be
deferred as follows:
    (i) Minimum required deferral amount. (A) A Level 1 covered
institution must defer at least 60 percent of a senior executive
officer's qualifying incentive-based compensation awarded for each
performance period.
    (B) A Level 1 covered institution must defer at least 50 percent of
a significant risk-taker's qualifying incentive-based compensation
awarded for each performance period.
    (C) A Level 2 covered institution must defer at least 50 percent of
a senior executive officer's qualifying incentive-based compensation
awarded for each performance period.
    (D) A Level 2 covered institution must defer at least 40 percent of
a significant risk-taker's qualifying incentive-based compensation
awarded for each performance period.
    (ii) Minimum required deferral period. (A) For a senior executive
officer or significant risk-taker of a Level 1 covered institution, the
deferral period for deferred qualifying incentive-based compensation
must be at least 4 years.
    (B) For a senior executive officer or significant risk-taker of a
Level 2 covered institution, the deferral period for deferred
qualifying incentive-based compensation must be at least 3 years.
    (iii) Vesting of amounts during deferral period--(A) Pro rata
vesting. During a deferral period, deferred qualifying incentive-based
compensation may not vest faster than on a pro rata annual basis
beginning no earlier than the first anniversary of the end of the
performance period for which the amounts were awarded.
    (B) Acceleration of vesting. A Level 1 or Level 2 covered
institution must not accelerate the vesting of a covered person's
deferred qualifying incentive-based compensation that is required to be
deferred under this part, except in the case of death or disability of
such covered person.
    (2) Incentive-based compensation awarded under a long-term
incentive plan must be deferred as follows:
    (i) Minimum required deferral amount. (A) A Level 1 covered
institution must defer at least 60 percent of a senior executive
officer's incentive-based compensation awarded under a long-term
incentive plan for each performance period.
    (B) A Level 1 covered institution must defer at least 50 percent of
a significant risk-taker's incentive-based compensation awarded under a
long-term incentive plan for each performance period.
    (C) A Level 2 covered institution must defer at least 50 percent of
a senior executive officer's incentive-based compensation awarded under
a long-term incentive plan for each performance period.
    (D) A Level 2 covered institution must defer at least 40 percent of
a significant risk-taker's incentive-based compensation awarded under a
long-term incentive plan for each performance period.
    (ii) Minimum required deferral period. (A) For a senior executive
officer or significant risk-taker of a Level 1 covered institution, the
deferral period for deferred long-term incentive plan amounts must be
at least 2 years.
    (B) For a senior executive officer or significant risk-taker of a
Level 2 covered institution, the deferral period for deferred long-term
incentive plan amounts must be at least 1 year.
    (iii) Vesting of amounts during deferral period--(A) Pro rata
vesting.

During a deferral period, deferred long-term incentive plan amounts may
not vest faster than on a pro rata annual basis beginning no earlier
than the first anniversary of the end of the performance period for
which the amounts were awarded.
    (B) Acceleration of vesting. A Level 1 or Level 2 covered
institution must not accelerate the vesting of a covered person's
deferred long-term incentive plan amounts that is required to be
deferred under this part, except in the case of death or disability of
such covered person.
    (3) Adjustments of deferred qualifying incentive-based compensation
and deferred long-term incentive plan compensation amounts. A Level 1
or Level 2 covered institution may not increase deferred qualifying
incentive-based compensation or deferred long-term incentive plan
amounts for a senior executive officer or significant risk-taker during
the deferral period. For purposes of this paragraph, an increase in
value attributable solely to a change in share value, a change in
interest rates, or the payment of interest according to terms set out
at the time of the award is not considered an increase in incentive-
based compensation amounts.
    (4) Composition of deferred qualifying incentive-based compensation
and deferred long-term incentive plan compensation for Level 1 and
Level 2 covered institutions--(i) Cash and equity-like instruments. For
a senior executive officer or significant risk-taker of a Level 1 or
Level 2 covered institution that issues equity or is an affiliate of a
covered institution that issues equity, any deferred qualifying
incentive-based compensation or deferred long-term incentive plan
amounts must include substantial portions of both deferred cash and
equity-like instruments throughout the deferral period.
    (ii) Options. If a senior executive officer or significant risk-
taker of a Level 1 or Level 2 covered institution receives incentive-
based compensation for a performance period in the form of options, the
total amount of such options that may be used to meet the minimum
deferral amount requirements of paragraph (a)(1)(i) or (a)(2)(i) of
this section is limited to no more than 15 percent of the amount of
total incentive-based compensation awarded to the senior executive
officer or significant risk-taker for that performance period.
    (b) Forfeiture and downward adjustment--(1) Compensation at risk.
(i) A Level 1 or Level 2 covered institution must place at risk of
forfeiture all unvested deferred incentive-based compensation of any
senior executive officer or significant risk-taker, including unvested
deferred amounts awarded under long-term incentive plans.
    (ii) A Level 1 or Level 2 covered institution must place at risk of
downward adjustment all of a senior executive officer's or significant
risk-taker's incentive-based compensation amounts not yet awarded for
the current performance period, including amounts payable under long-
term incentive plans.
    (2) Events triggering forfeiture and downward adjustment review. At
a minimum, a Level 1 or Level 2 covered institution must consider
forfeiture and downward adjustment of incentive-based compensation of
senior executive officers and significant risk-takers described in
paragraph (b)(3) of this section due to any of the following adverse
outcomes at the covered institution:
    (i) Poor financial performance attributable to a significant
deviation from the risk parameters set forth in the covered
institution's policies and procedures;
    (ii) Inappropriate risk taking, regardless of the impact on
financial performance;
    (iii) Material risk management or control failures;
    (iv) Non-compliance with statutory, regulatory, or supervisory
standards that results in:
    (A) Enforcement or legal action against the covered institution
brought by a federal or state regulator or agency; or
    (B) A requirement that the covered institution report a restatement
of a financial statement to correct a material error; and
    (v) Other aspects of conduct or poor performance as defined by the
covered institution.
    (3) Senior executive officers and significant risk-takers affected
by forfeiture and downward adjustment. A Level 1 or Level 2 covered
institution must consider forfeiture and downward adjustment for a
senior executive officer or significant risk-taker with direct
responsibility, or responsibility due to the senior executive officer's
or significant risk-taker's role or position in the covered
institution's organizational structure, for the events related to the
forfeiture and downward adjustment review set forth in paragraph (b)(2)
of this section.
    (4) Determining forfeiture and downward adjustment amounts. A Level
1 or Level 2 covered institution must consider, at a minimum, the
following factors when determining the amount or portion of a senior
executive officer's or significant risk-taker's incentive-based
compensation that should be forfeited or adjusted downward:
    (i) The intent of the senior executive officer or significant risk-
taker to operate outside the risk governance framework approved by the
covered institution's board of directors or to depart from the covered
institution's policies and procedures;
    (ii) The senior executive officer's or significant risk-taker's
level of participation in, awareness of, and responsibility for, the
events triggering the forfeiture and downward adjustment review set
forth in paragraph (b)(2) of this section;
    (iii) Any actions the senior executive officer or significant risk-
taker took or could have taken to prevent the events triggering the
forfeiture and downward adjustment review set forth in paragraph (b)(2)
of this section;
    (iv) The financial and reputational impact of the events triggering
the forfeiture and downward adjustment review set forth in paragraph
(b)(2) of this section to the covered institution, the line or sub-line
of business, and individuals involved, as applicable, including the
magnitude of any financial loss and the cost of known or potential
subsequent fines, settlements, and litigation;
    (v) The causes of the events triggering the forfeiture and downward
adjustment review set forth in paragraph (b)(2) of this section,
including any decision-making by other individuals; and
    (vi) Any other relevant information, including past behavior and
past risk outcomes attributable to the senior executive officer or
significant risk-taker.
    (c) Clawback. A Level 1 or Level 2 covered institution must include
clawback provisions in incentive-based compensation arrangements for
senior executive officers and significant risk-takers that, at a
minimum, allow the covered institution to recover incentive-based
compensation from a current or former senior executive officer or
significant risk-taker for seven years following the date on which such
compensation vests, if the covered institution determines that the
senior executive officer or significant risk-taker engaged in:
    (1) Misconduct that resulted in significant financial or
reputational harm to the covered institution;
    (2) Fraud; or
    (3) Intentional misrepresentation of information used to determine
the senior executive officer or significant risk-taker's incentive-
based compensation.

Sec.  236.8  Additional prohibitions for Level 1 and Level 2 covered
institutions.

    An incentive-based compensation arrangement at a Level 1 or Level 2
covered institution will be considered to provide incentives that
appropriately balance risk and reward for purposes of Sec.  236.4(c)(1)
only if such institution complies with the following prohibitions.
    (a) Hedging. A Level 1 or Level 2 covered institution must not
purchase a hedging instrument or similar instrument on behalf of a
covered person to hedge or offset any decrease in the value of the
covered person's incentive-based compensation.
    (b) Maximum incentive-based compensation opportunity. A Level 1 or
Level 2 covered institution must not award incentive-based compensation
to:
    (1) A senior executive officer in excess of 125 percent of the
target amount for that incentive-based compensation; or
    (2) A significant risk-taker in excess of 150 percent of the target
amount for that incentive-based compensation.
    (c) Relative performance measures. A Level 1 or Level 2 covered
institution must not use incentive-based compensation performance
measures that are based solely on industry peer performance
comparisons.
    (d) Volume driven incentive-based compensation. A Level 1 or Level
2 covered institution must not provide incentive-based compensation to
a covered person that is based solely on transaction revenue or volume
without regard to transaction quality or compliance of the covered
person with sound risk management.

Sec.  236.9  Risk management and controls requirements for Level 1 and
Level 2 covered institutions.

    An incentive-based compensation arrangement at a Level 1 or Level 2
covered institution will be considered to be compatible with effective
risk management and controls for purposes of Sec.  236.4(c)(2) only if
such institution meets the following requirements.
    (a) A Level 1 or Level 2 covered institution must have a risk
management framework for its incentive-based compensation program that:
    (1) Is independent of any lines of business;
    (2) Includes an independent compliance program that provides for
internal controls, testing, monitoring, and training with written
policies and procedures consistent with Sec.  236.11; and
    (3) Is commensurate with the size and complexity of the covered
institution's operations.
    (b) A Level 1 or Level 2 covered institution must:
    (1) Provide individuals engaged in control functions with the
authority to influence the risk-taking of the business areas they
monitor; and
    (2) Ensure that covered persons engaged in control functions are
compensated in accordance with the achievement of performance
objectives linked to their control functions and independent of the
performance of those business areas.
    (c) A Level 1 or Level 2 covered institution must provide for the
independent monitoring of:
    (1) All incentive-based compensation plans in order to identify
whether those plans provide incentives that appropriately balance risk
and reward;
    (2) Events related to forfeiture and downward adjustment reviews
and decisions of forfeiture and downward adjustment reviews in order to
determine consistency with Sec.  236.7(b); and
    (3) Compliance of the incentive-based compensation program with the
covered institution's policies and procedures.

Sec.  236.10  Governance requirements for Level 1 and Level 2 covered
institutions.

    An incentive-based compensation arrangement at a Level 1 or Level 2
covered institution will not be considered to be supported by effective
governance for purposes of Sec.  236.4(c)(3), unless:
    (a) The covered institution establishes a compensation committee
composed solely of directors who are not senior executive officers to
assist the board of directors in carrying out its responsibilities
under Sec.  236.4(e); and
    (b) The compensation committee established pursuant to paragraph
(a) of this section obtains:
    (1) Input from the risk and audit committees of the covered
institution's board of directors, or groups performing similar
functions, and risk management function on the effectiveness of risk
measures and adjustments used to balance risk and reward in incentive-
based compensation arrangements;
    (2) A written assessment of the effectiveness of the covered
institution's incentive-based compensation program and related
compliance and control processes in providing risk-taking incentives
that are consistent with the risk profile of the covered institution,
submitted on an annual or more frequent basis by the management of the
covered institution and developed with input from the risk and audit
committees of its board of directors, or groups performing similar
functions, and from the covered institution's risk management and audit
functions; and
    (3) An independent written assessment of the effectiveness of the
covered institution's incentive-based compensation program and related
compliance and control processes in providing risk-taking incentives
that are consistent with the risk profile of the covered institution,
submitted on an annual or more frequent basis by the internal audit or
risk management function of the covered institution, developed
independently of the covered institution's management.

Sec.  236.11  Policies and procedures requirements for Level 1 and
Level 2 covered institutions.

    A Level 1 or Level 2 covered institution must develop and implement
policies and procedures for its incentive-based compensation program
that, at a minimum:
    (a) Are consistent with the prohibitions and requirements of this
part;
    (b) Specify the substantive and procedural criteria for the
application of forfeiture and clawback, including the process for
determining the amount of incentive-based compensation to be clawed
back;
    (c) Require that the covered institution maintain documentation of
final forfeiture, downward adjustment, and clawback decisions;
    (d) Specify the substantive and procedural criteria for the
acceleration of payments of deferred incentive-based compensation to a
covered person, consistent with Sec.  236.7(a)(1)(iii)(B) and
(a)(2)(iii)(B));
    (e) Identify and describe the role of any employees, committees, or
groups authorized to make incentive-based compensation decisions,
including when discretion is authorized;
    (f) Describe how discretion is expected to be exercised to
appropriately balance risk and reward;
    (g) Require that the covered institution maintain documentation of
the establishment, implementation, modification, and monitoring of
incentive-based compensation arrangements, sufficient to support the
covered institution's decisions;
    (h) Describe how incentive-based compensation arrangements will be
monitored;
    (i) Specify the substantive and procedural requirements of the
independent compliance program consistent with Sec.  236.9(a)(2); and
    (j) Ensure appropriate roles for risk management, risk oversight,
and other control function personnel in the covered institution's
processes for:

    (1) Designing incentive-based compensation arrangements and
determining awards, deferral amounts, deferral periods, forfeiture,
downward adjustment, clawback, and vesting; and
    (2) Assessing the effectiveness of incentive-based compensation
arrangements in restraining inappropriate risk-taking.

Sec.  236.12  Indirect actions.

    A covered institution must not indirectly, or through or by any
other person, do anything that would be unlawful for such covered
institution to do directly under this part.

Sec.  236.13  Enforcement.

    The provisions of this part shall be enforced under section 505 of
the Gramm-Leach-Bliley Act and, for purposes of such section, a
violation of this part shall be treated as a violation of subtitle A of
title V of such Act.

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority and Issuance

    For the reasons set forth in the joint preamble, the Federal
Deposit Insurance Corporation proposes to amend chapter III of title 12
of the Code of Federal Regulations as follows:
0
3. Add part 372 to read as follows: