(b) provide operational support or servicing to any organizational unit
or function; or (c) provide technology services.
    Deferral. The proposed rule defines ``deferral'' as the delay of
vesting of incentive-based compensation beyond the date on which the
incentive-based compensation is awarded. As discussed below in this
Supplementary Information section, under the proposed

rule, a Level 1 or Level 2 covered institution would be required to
defer a portion of the incentive-based compensation of senior executive
officers and significant risk-takers. The Agencies would not consider
compensation that has vested, but that the covered person then chooses
to defer, e.g., for tax reasons, to be deferred incentive-based
compensation for purposes of the proposed rule because it would not be
subject to forfeiture.
    The Agencies note that the deferral period under the proposed rule
would not include any portion of the performance period, even for
incentive-based compensation plans that have longer performance
periods. Deferral involves a ``look-back'' period that is intended as a
stand-alone interval that follows the performance period and allows
time for ramifications (such as losses or other adverse consequences)
of, and other information about, risk-taking decisions made during the
performance period to become apparent.
    If incentive-based compensation is paid in the form of options, the
period of time between when an option vests and when the option can be
exercised would not be considered deferral under the proposed rule. As
with other types of incentive-based compensation, an option would count
toward the deferral requirement only if it has been awarded but has not
yet vested, regardless of when the option could be exercised.\103\
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    \103\ Section __.7(a)(4)(ii) of the proposed rule limits the
portion of the proposed rule's minimum deferral requirements that
can be met in the form of options.
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    2.38. To the extent covered institutions are already deferring
incentive-based compensation, does the proposed definition of deferral
reflect current practice? If not, in what way does it differ?
    Deferral period. The proposed rule defines ``deferral period'' as
the period of time between the date a performance period ends and the
last date on which the incentive-based compensation that is awarded for
such performance period vests. A deferral period and a performance
period that both relate to the same incentive-based compensation award
could not occur concurrently. Because sections__.7(a)(1)(iii) and
(a)(2)(iii) of the proposed rule would allow for pro rata vesting of
deferred amounts during a deferral period, some deferred incentive-
based compensation awarded for a performance period could vest before
the end of the deferral period following that performance period. As a
result, the deferral period would be considered to end on the date that
the last tranche of incentive-based compensation awarded for a
performance period vests.
    Downward adjustment. The proposed rule defines ``downward
adjustment'' as 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 section __7(b) of the proposed rule. As
explained above, downward adjustment is distinct from clawback and
forfeiture because downward adjustment affects incentive-based
compensation that has not yet been awarded. It is also distinct from
performance-based adjustments that covered institutions might make in
determining the amount of incentive-based compensation to award to a
covered person, absent or separate from a forfeiture or downward
adjustment review. Depending on the results of a forfeiture and
downward adjustment review under section __.7(b) of the proposed rule,
a covered institution could adjust downward incentive-based
compensation that has not yet been awarded to a senior executive
officer or significant risk-taker such that the senior executive
officer or significant risk-taker is awarded none, or only some, of the
incentive-based compensation that could otherwise have been awarded to
such senior executive officer or significant risk-taker.
    Equity-like instrument. The proposed rule defines ``equity-like
instrument'' as (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 any affiliate of
the covered institution. The value of an equity-like instrument would
be related to the value of the covered institution's shares.\104\ The
definition includes three categories. Shares are an example of the
first category, ``equity.'' Examples of the second category, ``a form
of compensation payable at least in part based on the price of the
shares or other equity instruments of the covered institution or any
affiliate of the covered institution,'' include restricted stock units
(RSUs), stock appreciation rights, and other derivative instruments
that settle in cash. Examples of the third category, ``a form of
compensation that requires, or may require, settlement in the shares of
the covered institution or of any affiliate of the covered
institution,'' include options and derivative securities that settle,
either mandatorily or permissively, in shares. An RSU that offers a
choice of settlement in either cash or shares is also an example of
this third category. The definition of equity-like instrument would
include shares in the holding company of a covered institution, or
instruments the value of which is dependent on the value of shares in
the holding company of a covered institution. For example, the
definition would include incentive-based compensation paid in the form
of shares in a bank holding company, even if that incentive-based
compensation were provided by a national bank subsidiary of that bank
holding company. Covered institutions would determine the specific
terms and conditions of the equity-like instruments they award to
covered persons.
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    \104\ The definition of ``equity-like instrument'' in the
proposed rule is similar to ``share-based payment'' in Topic 718 of
the Financial Accounting Standards Board (FASB) Accounting Standards
Codification (formerly FAS 123(R)). Paragraph 718-10-30-20, FASB
Accounting Standards Codification.
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    NCUA's proposed rule does not include the definition of ``equity-
like instrument'' because credit unions do not have these types of
instruments.
    2.39. Are there any financial instruments that are used for
incentive-based compensation and have a value that is dependent on the
performance of a covered institution's shares, but are not captured by
the definition of ``equity-like instrument''? If so, what are they, and
should such instruments be added to the definition? Why or why not?
    Forfeiture. The proposed rule defines ``forfeiture'' as a reduction
of the amount of deferred incentive-based compensation awarded to a
covered person that has not vested.\105\

Depending on the results of a forfeiture and downward adjustment review
under section __.7(b) of the proposed rule, a covered institution could
reduce a significant risk-taker or senior executive officer's unvested
incentive-based compensation such that none, or only some, of the
deferred incentive-based compensation vests. As discussed below in this
Supplementary Information section, a Level 1 or Level 2 covered
institution would be required to place at risk of forfeiture all
unvested deferred incentive-based compensation, including amounts that
have been awarded and deferred under long-term incentive plans.
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    \105\ Forfeiture is similar to the concept of ``malus'' common
at some covered institutions. Malus is defined in the CEBS
Guidelines as ``an arrangement that permits the institution to
prevent vesting of all or part of the amount of a deferred
remuneration award in relation to risk outcomes or performance.''
See CEBS Guidelines. The 2011 Proposed Rule did not define the term
``forfeiture,'' but the concept was implicit in the discussion of
adjustments during the deferral period. See 76 FR at 21179,
``Deferred payouts may be altered according to risk outcomes either
formulaically or based on managerial judgment, though extensive use
of judgment might make it more difficult to execute deferral
arrangements in a sufficiently predictable fashion to influence the
risk-taking behavior of a covered person. To be most effective in
ensuring balance, the deferral period should be sufficiently long to
allow for the realization of a substantial portion of the risks from
the covered person's activities, and the measures of loss should be
clearly explained to covered persons and closely tied to their
activities during the relevant performance period.''
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    Incentive-based compensation. The proposed rule defines
``incentive-based compensation'' as any variable compensation, fees, or
benefits that serve as an incentive or reward for performance. The
Agencies propose a broad definition to provide flexibility as forms of
compensation evolve. Compensation earned under an incentive plan,
annual bonuses, and discretionary awards are all examples of
compensation that could be incentive-based compensation. The form of
payment, whether cash, an equity-like instrument, or any other thing of
value, would not affect whether compensation, fees, or benefits meet
the definition of ``incentive-based compensation.''
    In response to a similar definition in the 2011 Proposed Rule,
commenters asked for clarification about the components of incentive-
based compensation. The proposed definition clarifies that
compensation, fees, and benefits that are paid for reasons other than
to induce performance would not be included. For example, compensation,
fees, or benefits that are awarded solely for, and the payment of which
is solely tied to, continued employment (e.g., salary or a retention
award that is conditioned solely on continued employment) would not be
considered incentive-based compensation. Likewise, payments to new
employees at the time of hiring (signing or hiring bonuses) that are
not conditioned on performance achievement would not be considered
incentive-based compensation because they generally are paid to induce
a prospective employee to join the institution, not to influence future
performance of such employee.
    Similarly, a compensation arrangement that provides payments solely
for achieving or maintaining a professional certification or higher
level of educational achievement would not be considered incentive-
based compensation under the proposed rule. In addition, the Agencies
do not intend for this definition to include compensation arrangements
that are determined based solely on the covered person's level of fixed
compensation and that do not vary based on one or more performance
measures (e.g., employer contributions to a 401(k) retirement savings
plan computed based on a fixed percentage of an employee's salary).
Neither would the proposed definition include dividends paid and
appreciation realized on stock or other equity-like instruments that
are owned outright by a covered person. However, stock or other equity-
like instruments awarded to a covered person under a contract,
arrangement, plan, or benefit would not be considered owned outright
while subject to any vesting or deferral arrangement (regardless of
whether such deferral is mandatory).
    2.40. The Agencies invite comment on the proposed definition of
incentive-based compensation. Should the definition be modified to
include additional or fewer forms of compensation and in what way? Is
the definition sufficiently broad to capture all forms of incentive-
based compensation currently used by covered institutions? Why or why
not? If not, what forms of incentive-based compensation should be
included in the definition?
    2.41. The Agencies do not expect that most pensions would meet the
proposed rule's definition of ``incentive-based compensation'' because
pensions generally are not conditioned on performance achievement.
However, it may be possible to design a pension that would meet the
proposed rule's definition of ``incentive-based compensation.'' The
Agencies invite comment on whether the proposed rule should contain
express provisions addressing the status of pensions in relation to the
definition of ``incentive-based compensation.'' Why or why not?
    Incentive-based compensation arrangement, incentive-based
compensation plan, and incentive-based compensation program. The
proposed rule defines three separate, but related, terms describing how
covered institutions provide incentive-based compensation.\106\ Under
the proposed rule, ``incentive-based compensation arrangement'' would
mean 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. An individual employment agreement would be an incentive-based
compensation arrangement.
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    \106\ The use of these terms under the proposed rule is
consistent with how the same terms are used in the 2010 Federal
Banking Agency Guidance.
---------------------------------------------------------------------------

    ``Incentive-based compensation plan'' is defined as a document
setting forth terms and conditions governing the opportunity for and
the delivery of incentive-based compensation payments to one or more
covered persons. An incentive-based compensation plan may cover, among
other things, specific roles or job functions, categories of
individuals, or forms of payment. A covered person may be compensated
under more than one incentive-based compensation plan.
    ``Incentive-based compensation program'' means a covered
institution's framework for incentive-based compensation that governs
incentive-based compensation practices and establishes related
controls. A covered institution's incentive-based compensation program
would include all of the covered institution's incentive-based
compensation arrangements and incentive-based compensation plans.
    Long-term incentive plan. The proposed rule defines ``long-term
incentive plan'' as a plan to provide incentive-based compensation that
is based on a performance period of at least three years. Any
incentive-based compensation awarded to a covered person for a
performance period of less than three years would not be awarded under
a long-term incentive plan, but instead would be considered
``qualifying incentive-based compensation'' as that term is defined
under the proposed rule.\107\
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    \107\ In the 2011 Proposed Rule, the Agencies did not define the
term ``long-term incentive plan,'' but the 2011 Proposed Rule
discussed ``longer performance periods'' as one of four methods used
to make compensation more sensitive to risk. 76 FR at 21179 (``Under
this method of making incentive-based compensation risk sensitive,
the time period covered by the performance measures used in
determining a covered person's award is extended (for example, from
one year to two years). Longer performance periods and deferral of
payment are related in that both methods allow awards or payments to
be made after some or all risk outcomes associated with a covered
person's activities are realized or better known.'').
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    Long-term incentive plans are forward-looking plans designed to
reward employees for performance over a multi-year period. These plans
generally provide an award of cash or equity at the end of a
performance period if the employee meets certain individual or
institution-wide performance measures. Because they have longer
performance periods, long-term incentive plans allow more time

for information about a covered person's performance and risk-taking to
become apparent, and covered institutions can take that information
into account to balance risk and reward. Under current practice, the
performance period for a long-term incentive plan is typically three
years.\108\
---------------------------------------------------------------------------

    \108\ See Compensation Advisory Partners, ``Large Complex
Banking Organizations: Trends, Practices, and Outlook'' (June 2012),
available at http://www.capartners.com/uploads/news/id90/capartners.com-capflash-issue31.pdf; Pearl Meyer & Partners,
``Trends in Incentive Compensation: How the Federal Reserve is
Influencing Pay'' (2013), available at https://pearlmeyer.com/pearl/media/pearlmeyer/articles/pmp-art-fedreserveinfluencingpay-so-bankdirector-5-14-2013.pdf; Meridian Compensation Partners, LLC,
``Executive Compensation in the Banking Industry: Emerging Trends
and Best Practices, 2014-2015'' (June 22, 2015), available at
https://www.meridiancp.com/wp-content/uploads/Executive-Compensation-in-the-Banking-Industry.pdf; Compensation Advisory
Partners, ``Influence of Federal Reserve on Compensation Design in
Financial Services: An Analysis of Compensation Disclosures of 23
Large Banking Organizations'' (April 24, 2013), available at http://www.capartners.com/uploads/news/id135/capartners.com-capflash-issue45.pdf; ``The 2014 Top 250 Report: Long-term Incentive Grant
Practices for Executives'' (``Cook Report'') (October 2014),
available at http://www.fwcook.com/alert_letters/The_2014_Top_250_Report_Long-Term_Incentive_Grant_Practices_for_Executives.pdf; ``Study of 2013
Short- and Long-term Incentive Design Criterion Among Top 200 S&P
500 Companies'' (December 2014), available at http://www.ajg.com/media/1420659/study-of-2013-short-and-long-term-incentive-design-criterion-among-top-200.pdf.
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    2.42. The Agencies invite comment on whether the proposed
definition of ``long-term incentive plan'' is appropriate for purposes
of the proposed rule. Are there incentive-based compensation
arrangements commonly used by financial institutions that would not be
included within the definition of ``long-term incentive plan'' under
the proposed rule but that, given the scope and purposes of section
956, should be included in such definition? If so, what are the
features of such incentive-based compensation arrangements, why should
the definition include such arrangements, and how should the definition
be modified to include such arrangements?
    Option. The proposed rule defines an ``option'' as an instrument
through which a covered institution provides a covered person with 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. Typically, covered
persons must wait for a specified time period to conclude before
obtaining the right to exercise an option.\109\ The definition of
option would also include option-like instruments that mirror some or
all of the features of an option. For example, the proposed rule would
include stock appreciation rights under the definition of option
because the value of a stock appreciation right is based on a stock's
price on a future date. As mentioned above, an option would be
considered an equity-like instrument, as that term is defined in the
proposed rule. NCUA's proposed rule does not include a definition of
``option'' because credit unions do not issue options.
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    \109\ As explained above in the definition of ``deferral,'' the
time period after the option vests but before it may be exercised is
not considered part of the deferral period.
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    Performance period. The proposed rule defines ``performance
period'' as the period during which the performance of a covered person
is assessed for purposes of determining incentive-based compensation.
The Agencies intend for the proposed rule to provide covered
institutions with flexibility in determining the length and the start
and end dates of their employees' performance periods. For example,
under the proposed rule, a covered institution could choose to have a
performance period that coincided with a calendar year or with the
covered institution's fiscal year (if the calendar year and fiscal year
were different). A covered institution could also choose to have a
performance period of one year for some incentive-based compensation
and a performance period of three years for other incentive-based
compensation.
    2.43. Does the proposed rule's definition of ``performance period''
meet the goal of providing covered institutions with flexibility in
determining the length and start and end dates of performance periods?
Why or why not? Would a prescribed performance period, for example,
periods that correspond to calendar years, be preferable? Why or why
not?
    Qualifying incentive-based compensation. The proposed rule defines
``qualifying incentive-based compensation'' as the amount of incentive-
based compensation awarded to a covered person for a particular
performance period, excluding amounts awarded to such covered person
for that particular performance period under a long-term incentive
plan. With the exception of long-term incentive plans, all forms of
compensation, fees, and benefits that qualify as ``incentive-based
compensation,'' including annual bonuses, would be included in the
amount of qualifying incentive-based compensation. The deferral
requirements of section __.7(a) of the proposed rule would require a
Level 1 or Level 2 covered institution to defer a specified percentage
of any qualifying incentive-based compensation awarded to a significant
risk-taker or senior executive officer for each performance period.
    Regulatory report. Each Agency has included a definition of
``regulatory report'' in its version of the proposed rule that explains
which regulatory reports would be required to be used by each of that
Agency's covered institutions for the purposes of measuring average
total consolidated assets under the proposed rule.
    For a national bank, state member bank, state nonmember bank,
federal savings association, and state savings association,
``regulatory report'' would mean the consolidated Reports of Condition
and Income (``Call Report'').\110\ For a U.S. branch or agency of a
foreign bank, ``regulatory report'' would mean the Reports of Assets
and Liabilities of U.S. Branches and Agencies of Foreign Banks--FFIEC
002. For a bank holding company, ``regulatory report'' would mean
Consolidated Financial Statements for Bank Holding Companies (``FR Y-
9C''). For a savings and loan holding company, ``regulatory report''
would mean 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. For a savings and loan holding
company that does not file a regulatory report within the meaning of
the preceding sentence, ``regulatory report'' would mean a report of
average total consolidated assets filed with the Board on a quarterly
basis. For an Edge or Agreement Corporation, ``regulatory report''
would mean the Consolidated Report of Condition and Income for Edge and
Agreement Corporations (``FR 2886b''). For the U.S. operations of a
foreign banking organization, ``regulatory report'' would mean a report
of average total consolidated U.S. assets filed with the Board on a
quarterly basis. For subsidiaries of national banks, Federal savings
associations, and Federal branches or agencies of foreign banking
organizations that are not brokers, dealers, persons providing
insurance, investment companies, or investment advisers, ``regulatory
report'' would mean 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. For a regulated institution that is a subsidiary
of a bank holding company, savings and loan holding company, or a
foreign banking organization, ``regulatory report'' would mean 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.
---------------------------------------------------------------------------

    \110\ Specifically, the OCC will refer to item RCFD 2170 of
Schedule RC.
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    For FHFA's proposed rule, ``regulatory report'' would mean the Call
Report Statement of Condition.
    For a natural person credit union, ``regulatory report'' would mean
the 5300 Call Report. For corporate credit unions, ``regulatory
report'' would mean the 5310 Call Report.
    For a broker or dealer registered under section 15 of the
Securities Exchange Act of 1934 (15 U.S.C. 78o), ``regulatory report''
would mean the FOCUS Report.\111\ For an investment adviser, as such
term is defined in section 202(a)(11) of the Investment Advisers Act,
and as discussed above, total consolidated assets would be determined
by the investment adviser's total assets (exclusive of non-proprietary
assets) shown on the balance sheet for the adviser's most recent fiscal
year end.\112\
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    \111\ 17 CFR 240.17a-5(a); 17 CFR 249.617.
    \112\ The proposed rule would not apply the concept of a
regulatory report and the attendant mechanics provided in section
__.3 of the proposed rule to covered institutions that are
investment advisers because such institutions are not currently
required to report the amount of total consolidated assets to any
Federal regulators in their capacities as investment advisers. See
proposed definition of ``average total consolidated assets'' for the
proposed method by which an investment adviser would determine its
asset level for purposes of the proposed rule.
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    Vesting. Under the proposed rule, ``vesting'' of incentive-based
compensation means the transfer of ownership \113\ 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. Amounts awarded under an incentive-based compensation
arrangement may vest immediately--for example, when the amounts are
paid out to a covered person immediately and are not subject to
deferral and forfeiture. As explained above, before amounts awarded to
a covered person vest, the amounts could also be deferred and at risk
of forfeiture. After amounts awarded to a covered person vest, the
amounts could be subject to clawback, but they would not be at risk of
forfeiture.
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    \113\ Compensation awarded to a trust or other entity at the
direction of, or for the benefit of, a covered person would be
treated as compensation awarded to that covered person. If
incentive-based compensation awarded to the entity cannot be reduced
by forfeiture, the amounts would be treated as having vested at the
time of the award.
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    As described below in this SUPPLEMENTARY INFORMATION section, for
incentive-based compensation to be counted toward the minimum deferral
amount as discussed in section __.7(a) of the proposed rule, a
sufficient amount of time must elapse between the end of the
performance period and the time when the deferred incentive-based
compensation vests (and is no longer subject to forfeiture). During
that deferral period, the award would be at risk of forfeiture.
    If, after the award date, the covered institution had the right to
require forfeiture of the shares or units awarded, then the award would
not be considered vested. If, after the award date, the covered
institution does not have the right to require forfeiture of the shares
or units awarded, then the award would be vested and therefore would
not be able to be counted toward the minimum deferral amount even if
the shares or units have not yet been transferred to the covered
person. For example, a covered institution could award an employee 100
shares of stock appreciation rights that pay out five years after the
award date. In other words, five years after the award date, the
covered institution will pay the employee the difference between the
value of 100 shares of the covered institution's stock on the award
date and the value of 100 shares of the covered institution's stock
five years later. The amount the covered institution pays the employee
could vary based on the value of the institution's shares. If the
covered institution does not have the right to adjust the number of
shares of stock appreciation rights before the payout, the stock
appreciation rights would be considered vested as of the award date
(even if the amount paid out could vary based on the value of the
institution's shares). If, however, the covered institution has the
right to adjust the number of shares of stock appreciation rights until
payout to account for risk outcomes that occur after the award date
(for example, by reducing the number of shares of stock appreciation
rights from 100 to 50 based on a failure to comply with the
institution's risk management policies), the stock appreciation rights
would not be considered vested until payout. Similarly, amounts paid to
a covered person pursuant to a dividend equivalent right would vest
when the number of dividend equivalent rights cannot be adjusted by the
covered institution on the basis of risk outcomes.
    2.44. The Agencies invite comment generally on the proposed rule's
definitions.
Relationship Between Defined Terms
    The relationship between some of these defined terms can best be
explained chronologically. Under the proposed rule, a covered
institution's incentive-based compensation timeline would be as
follows:
     Performance period. A covered person may have incentive-
based compensation targets based on performance measures that would
apply during a performance period. A covered person's performance or
the performance of the covered institution during this period would
influence the amount of incentive-based compensation awarded to the
covered person. Before incentive-based compensation is awarded to a
covered person, it should be subject to risk adjustments to reflect
actual losses, inappropriate risks taken, compliance deficiencies, or
other measures or aspects of financial and non-financial performance,
as described in section __.4(d) of the proposed rule. In addition, at
any time during the performance period, incentive-based compensation
could be subject to downward adjustment, as described in section
__.7(b) of the proposed rule.
     Downward adjustment (if needed). Downward adjustment could
occur at any time during a performance period if a Level 1 or Level 2
covered institution conducts a forfeiture and downward adjustment
review under section __.7(b) of the proposed rule and the Level 1 or
Level 2 covered institution determines that incentive-based
compensation not yet awarded for the current performance period should
be reduced. In other words, downward adjustment applies to plans where
the performance period has not yet ended.
     Award. At or near the end of a performance period, a
covered institution would evaluate the covered person's or
institution's performance, taking into account adjustments described in
section __.4(d)(3) of the proposed rule, and determine the amount of
incentive-based compensation, if any, to be awarded to the covered
person for that performance period. At that time, the covered
institution would determine what portion of the incentive-based
compensation that is awarded will be deferred, as well as the vesting
schedule for that deferred incentive-based compensation. A Level 1 or
Level 2

covered institution could reduce the amount of incentive-based
compensation payable to a senior executive officer or significant risk-
taker depending on the outcome of a forfeiture and downward adjustment
review, as described in section __.7(b) of the proposed rule.
     Deferral period. The deferral period for incentive-based
compensation awarded for a particular performance period would begin at
the end of such performance period, regardless of when a covered
institution awards incentive-based compensation to a covered person for
that performance period. At any time during a deferral period, a
covered institution could require forfeiture of some or all of the
incentive-based compensation that has been awarded to the covered
person but has not yet vested.
     Forfeiture (if needed). Forfeiture could occur at any time
during the deferral period (after incentive-based compensation has been
awarded but before it vests). A Level 1 or Level 2 covered institution
could require forfeiture of unvested deferred incentive-based
compensation payable to a senior executive officer or significant risk-
taker based on the result of a forfeiture and downward adjustment
review, as described in section __.7(b) of the proposed rule. Depending
on the outcome of a forfeiture and downward adjustment review under
section __.7(b) of the proposed rule, a covered institution could
reduce, or eliminate, the unvested deferred incentive-based
compensation of a senior executive officer or significant risk-taker.
     Vesting. Vesting could occur annually, on a pro rata
basis, throughout a deferral period. Vesting could also occur at a
slower than pro rata schedule, such as entirely at the end of a
deferral period (vesting entirely at the end of a deferral period is
sometimes called ``cliff vesting''). The deferral period for a
particular performance period would end when all incentive-based
compensation awarded for that performance period has vested. A covered
institution may also evaluate information that has arisen over the
deferral period about financial losses, inappropriate risks taken,
compliance deficiencies, or other measures or aspects of financial and
non-financial performance of the covered person at the time of vesting
to determine if the amount that has been deferred should vest in full
or should be reduced through forfeiture.
     Clawback (if needed). Clawback could be used to recover
incentive-based compensation that has already vested. Clawback could be
used after a deferral period has ended, and it also could be used to
recover any portion of incentive-based compensation that vests before
the end of a deferral period. A Level 1 or Level 2 covered institution
would be required to include clawback provisions in incentive-based
compensation arrangements for senior executive officers and significant
risk-takers, as described in section __.7(c) of the proposed rule.
    2.45. Is the interplay of the award date, vesting date, performance
period, and deferral period clear? If not, why not?
    2.46. Have the Agencies made clear the distinction between the
proposed definitions of clawback, forfeiture, and downward adjustment?
Do these definitions align with current industry practice? If not, in
what way do they differ and what are the implications of such
differences for both the operations of covered institutions and the
effective supervision of compensation practices?

Sec.  __.3 Applicability

    Section __.3 describes which provisions of the proposed rule would
apply to an institution that is subject to the proposed rule when an
increase or decrease in average total consolidated assets causes it to
become a covered institution, transition to another level, or no longer
meet the definition of covered institution. This process may differ
somewhat depending on whether the institution is a subsidiary of, or
affiliated with, another covered institution.
    As discussed above, for an institution that is not an investment
adviser, average total consolidated assets would be determined by
reference to the average of the total consolidated assets reported on
regulatory reports for the four most recent consecutive quarters. The
Agencies are proposing this calculation method because it is also used
to calculate total consolidated assets for purposes of other rules that
have $50 billion thresholds,\114\ and it is therefore expected to
result in lower administrative burden on some institutions--
particularly when those institutions move from Level 3 to Level 2--if
the proposed rule requires total consolidated assets to be calculated
in the same way as existing rules.
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    \114\ See, e.g., OCC's Heightened Standards; 12 CFR 46.3; 12 CFR
225.8; 12 CFR 243.2; 12 CFR 252.30; 2 CFR 252.132; 12 CFR 325.202;
12 CFR 381.2.
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    As discussed above, average total consolidated assets for a covered
institution that is an investment adviser would be determined by the
investment adviser's total assets (exclusive of non-proprietary assets)
shown on the balance sheet for the adviser's most recent fiscal year
end. The proposed rule would not apply the concept of a regulatory
report and the attendant mechanics provided in section __.3 of the
proposed rule to covered institutions that are investment advisers
because such institutions are not currently required to report the
amount of total consolidated assets to any Federal regulators in their
capacities as investment advisers.
(a) When Average Total Consolidated Assets Increase
    Section __.3(a) of the proposed rule describes how the proposed
rule would apply to institutions that are subject to the proposed rule
when average total consolidated assets increase. It generally provides
that an institution that is not a subsidiary of another covered
institution becomes a Level 1, Level 2, or Level 3 covered institution
when its average total consolidated assets increase to an amount that
equals or exceeds $250 billion, $50 billion, or $1 billion,
respectively. For subsidiaries of other covered institutions, the
Agencies would generally look to the average total consolidated assets
of the top-tier parent holding company to determine whether average
total consolidated assets have increased.
    Given the unique characteristics of the different types of covered
institutions subject to each Agency's proposed rule, each Agency's
proposed rule contains specific language for subsidiaries that is
consistent with the same general approach. For example, under the
Board's proposed rule, a regulated institution would 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 of
its affiliates, equals or exceeds $250 billion, $50 billion, or $1
billion, respectively. Under the OCC's proposed rule, a national bank
that is a subsidiary of a bank holding company would become a Level 1,
Level 2, or Level 3 covered institution when the top-tier bank holding
company's average total consolidated assets equals or exceeds $250
billion, $50 billion, or $1 billion, respectively. Because the Federal
Home Loan Banks have no subsidiaries, and subsidiaries of the
Enterprises are included as affiliates as part of the definition of the
Enterprises, FHFA's proposed rule does not include specific language to
address subsidiaries. Because the NCUA's rule does not cover
subsidiaries of credit unions and credit unions are not subsidiaries of
other types of institutions, NCUA's proposed

rule does not include specific language to address subsidiaries. More
detail on each Agency's proposed approach to subsidiaries is provided
in the above discussion of definitions relating to covered
institutions.
    For covered institutions other than investment advisers and the
Federal Home Loan Banks, using a rolling average for asset size, rather
than measuring asset size at a single point in time, should minimize
the frequency with which an institution may fall into or out of a
covered institution level. As explained above, if a covered institution
has fewer than four regulatory reports, the institution would be
required to use the average of its total consolidated assets from its
existing regulatory reports for purposes of determining average total
consolidated assets. If a covered institution has a mix of two or more
different types of regulatory reports covering the relevant period,
those would be averaged for purposes of determining average total
consolidated assets.
    Section __.3(a)(2) of the proposed rule provides a transition
period for institutions that were not previously considered covered
institutions and for covered institutions moving from a lower level to
a higher level due to an increase in average total consolidated assets.
Such covered institutions would be required to comply with the
requirements for their new level not later than the first day of the
first calendar quarter that begins at least 540 days after the date on
which they become Level 1, Level 2, or Level 3 covered institutions.
Prior to such date, the institutions would be required to comply with
the requirements of the proposed rule, if any, that were applicable to
them on the day before they became Level 1, Level 2, or Level 3 covered
institutions as a result of the increase in assets. For example, if a
Level 3 covered institution that is not a subsidiary of a depository
institution holding company has average total consolidated assets that
increase to more than $50 billion on December 31, 2015, then such
institution would become a Level 2 covered institution on December 31,
2015. However, the institution would not be required to comply with the
requirements of the proposed rule that are applicable to a Level 2
covered institution until July 1, 2017. Prior to July 1, 2017, (the
compliance date), the institution would remain subject to the
requirements of the proposed rule that are applicable to a Level 3
covered institution. The covered institution's controls, risk
management, and corporate governance also would be required to comply
with the provisions of the proposed rule that are applicable to a Level
2 covered institution no later than July 1, 2017. The Agencies are
proposing this delay between the date when a covered institution's
average total consolidated assets increase and the date when the
covered institution becomes subject to the requirements related to its
new level to provide covered institutions with sufficient time to
comply with the new requirements.
    The same general rule would apply to covered institutions that are
subsidiaries (or, in the case of the Board's proposed rule, affiliates)
of other covered institutions. For example, a Level 3 state savings
association that is a subsidiary of a Level 3 savings and loan holding
company, and a Level 3 subsidiary of that state savings association,
would become a Level 2 covered institution on December 31, 2015, if the
average total consolidated assets of the savings and loan holding
company increased to more than $50 billion on December 31, 2015, and
would not be required to comply with the requirements of the proposed
rule that are applicable to a Level 2 covered institution until July 1,
2017.
    Section __.3(a)(3) of the proposed rule provides that incentive-
based compensation plans with performance periods that begin before the
compliance date described in section __.3(a)(2) would not be required
to comply with the requirements of the proposed rule that become
applicable to the covered institution on the compliance date as a
result of the change in its status as a Level 1, Level 2, or Level 3
covered institution. Incentive-based compensation plans with a
performance period that begins on or after the compliance date
described in section __.3(a)(2) would be required to comply with the
rules for the covered institution's new level. In the example described
in the previous paragraph, any incentive-based compensation plan with a
performance period that begins before July 1, 2017, would not be
required to comply with the requirements of the proposed rule that are
applicable to a Level 2 covered institution (although any such plan
would be required to comply with the requirements of the proposed rule
that are applicable to a Level 3 covered institution).
    The Agencies have included this grandfathering provision so that
covered institutions would not be required to modify incentive-based
compensation plans that are already in place when a covered
institution's average total consolidated assets increase such that it
moves to a higher level. However, incentive-based compensation plans
with performance periods that begin after the compliance date would be
subject to the rules that apply to the covered institution's new level.
In the previous example, any incentive-based compensation plan for a
senior executive officer with a performance period that begins on or
after July 1, 2017, would be required to comply with the requirements
of the proposed rule that are applicable to a Level 2 covered
institution, such as the deferral, forfeiture, downward adjustment, and
clawback requirements contained in section __.7 of the proposed rule.
    Because institutions that would be covered institutions under the
proposed rule commonly use long-term incentive plans with overlapping
performance periods or incentive-based compensation plans with
performance periods of one year, the Agencies do not anticipate that
the grandfathering provision would unduly delay the application of the
proposed rule to individual incentive-based compensation arrangements.
    3.1. The Agencies invite comment on whether a covered institution's
average total consolidated assets (a rolling average) is appropriate
for determining a covered institution's level when its total
consolidated assets increase. Why or why not? Will 540 days provide
covered institutions with adequate time to adjust incentive-based
compensation programs to comply with different requirements? If not,
why not? In the alternative, is 540 days too long to give covered
institutions time to comply with the requirements of the proposed rule?
Why or why not?
    3.2. The Agencies invite comment on whether the date described in
section __.3(a)(2) should instead be the beginning of the first
performance period that begins at least 365 days after the date on
which the regulated institution becomes a Level 1, Level 2, or Level 3
covered institution in order to have the date on which the proposed
rule's corporate governance, policies, and procedures requirements
begin coincide with the date on which the requirements applicable to
plans begin. Why or why not?
(b) When Total Consolidated Assets Decrease
    Section __.3(b) of the proposed rule describes how the proposed
rule would apply to an institution when assets decrease. A covered
institution (other than an investment adviser) that is not a subsidiary
of another covered institution would cease to be a Level 1, Level 2, or
Level 3 covered institution

if its total consolidated assets, as reported on its regulatory
reports, fell below the relevant total consolidated assets threshold
for Level 1, Level 2, or Level 3 covered institutions, respectively,
for four consecutive quarters. The calculation would be effective on
the as-of date of the fourth consecutive regulatory report. For
example, a bank holding company that is a Level 2 covered institution
with total consolidated assets of $55 billion on January 1, 2016, might
report total consolidated assets of $48 billion for the first quarter
of 2016, $49 billion for the second quarter of 2016, $49 billion for
the third quarter of 2016, and $48 billion for the fourth quarter of
2016. On the as-of date of the Y-9C submitted for the fourth quarter of
2016, that bank holding company would become a Level 3 covered
institution because its total consolidated assets were less than $50
billion for four consecutive quarters. In contrast, if that same bank
holding company reported total consolidated assets of $48 billion for
the first quarter of 2016, $49 billion for the second quarter of 2016,
$49 billion for the third quarter of 2016, and $51 billion for the
fourth quarter of 2016, it would still be considered a Level 2 covered
institution on the as-of date of the Y-9C submitted for the fourth
quarter of 2016 because it had total consolidated assets of less than
$50 billion for only 3 consecutive quarters. If the bank holding
company had total consolidated assets of $49 billion in the first
quarter of 2017, it still would not become a Level 3 covered
institution at that time because it would not have four consecutive
quarters of total consolidated assets of less than $50 billion. The
bank holding company would only become a Level 3 covered institution if
it had four consecutive quarters with total consolidated assets of less
than $50 billion after the fourth quarter of 2016.
    As with section __.3(a), a Level 1, Level 2, or Level 3 covered
institution that is a subsidiary of another Level 1, Level 2, or Level
3 covered institution would cease to be a Level 1, Level 2, or Level 3
covered institution when the top-tier parent covered institution ceases
to be a Level 1, Level 2, or Level 3 covered institution. As with
section __.3(a), each Agency's proposed rule takes a slightly different
approach that is consistent with the same general principle. For
example, if a broker-dealer with less than $50 billion in average total
consolidated assets is a Level 2 covered institution because its parent
bank holding company has more than $50 billion in average total
consolidated assets, the broker-dealer would become a Level 3 covered
institution if its parent bank holding company had less than $50
billion in total consolidated assets for four consecutive quarters,
thus causing the parent bank holding company itself to become a Level 3
covered institution.
    The proposed rule would not require any transition period when a
decrease in a covered institution's total consolidated assets causes it
to become a Level 2 or Level 3 covered institution or to no longer be a
covered institution. The Agencies are not proposing to include a
transition period in this case because the new requirements would be
less stringent than the requirements that were applicable to the
covered institution before its total consolidated assets decreased, and
therefore a transition period should be unnecessary. Instead, the
covered institution would immediately be subject to the provisions of
the proposed rule, if any, that are applicable to it as a result of the
decrease in its total consolidated assets. For example, if as a result
of having four consecutive regulatory reports with total consolidated
assets less than $50 billion, a bank holding company that was
previously a Level 2 covered institution becomes a Level 3 covered
institution as of June 30, 2017, then as of June 30, 2017 that bank
holding company would no longer be subject to the requirements of the
proposed rule that are applicable to Level 2 covered institutions. It
would instead be subject to the requirements of the proposed rule that
are applicable to Level 3 covered institutions.
    A covered institution that is an investment adviser would cease to
be a Level 1, Level 2, or Level 3 covered institution effective as of
the most recent fiscal year end in which its total consolidated assets
fell below the relevant asset threshold for Level 1, Level 2, or Level
3 covered institutions, respectively. For example, an investment
adviser that is a Level 1 covered institution during 2015 would cease
to be a Level 1 covered institution effective on December 31, 2015 if
its total assets (exclusive of non-proprietary assets) shown on its
balance sheet for the year ended December 31, 2015 (assuming the
investment adviser had a calendar fiscal year) were less than $250
billion.
    3.3. The Agencies invite comment on whether four consecutive
quarters is an appropriate period for determining a covered
institution's level when its total consolidated assets decrease. Why or
why not?
    3.4. Should the determination of total consolidated assets for
covered institutions that are investment advisers be by reference to a
periodic report or similar concept? Why or why not? Should there be a
concept of a rolling average for asset size for covered institutions
that are investment advisers and, if so, how should this be structured?
    3.5. Should the transition period for an institution that changes
levels or becomes a covered institution due to a merger or acquisition
be different than an institution that changes levels or becomes a
covered institution without a change in corporate structure? If so,
why? If so, what transition period would be appropriate and why?
    3.6. The Agencies invite comment on whether covered institutions
transitioning from Level 1 to Level 2 or Level 2 to Level 3 should be
permitted to modify incentive-based compensation plans with performance
periods that began prior to their transition in level in such a way
that would cause the plans not to meet the requirements of the proposed
rule that were applicable to the covered institution at the time when
the performance periods for the plans commenced. Why or why not?
(c) Compliance of Covered Institutions That Are Subsidiaries of Covered
Institutions
    Section __.3(c) of the Board's, OCC's, or FDIC's proposed rules
provide that a covered institution that is subject to the Board's,
OCC's, or FDIC's proposed rule, respectively, and that is a subsidiary
of another covered institution may meet any requirement of the proposed
rule if the parent covered institution complies with such requirement
in a way that causes the relevant portion of the incentive-based
compensation program of the subsidiary covered institution to comply
with the requirement. The Board, the OCC, and the FDIC have included
this provision in their proposed rules in order to reduce the
compliance burden on subsidiaries that would be subject to the Board's,
OCC's, and FDIC's proposed rules and in recognition of the fact that
holding companies, national banks, Federal savings associations, state
nonmember banks, and state savings associations may perform certain
functions on behalf of such subsidiaries.
    Subsidiary covered institutions subject to the Board's, OCC's, or
FDIC's proposed rule could rely on this provision to comply with, for
example, the corporate governance or policies and procedures
requirements of the proposed rule. For example, if a parent bank
holding company has a compensation committee that performs the
requirements of section __.4(e) of

the proposed rule with respect to a subsidiary of the parent bank
holding company that is a covered institution under the Board's rule by
(1) conducting oversight of the subsidiary's incentive-based
compensation program, (2) approving incentive-based compensation
arrangements for senior executive officers of the subsidiary (including
any individuals who are senior executive officers of the subsidiary but
not senior executive officers of the parent bank holding company), and
(3) approving any material exceptions or adjustments to incentive-based
compensation policies or arrangements for such senior executive
officers of the subsidiary, then the subsidiary would be deemed to have
complied with the requirements of section __.4(e) of the proposed rule.
Similarly, under the OCC's proposed rule, if an operating subsidiary of
a national bank that is a Level 1 or Level 2 covered institution
subject to the OCC's proposed rule uses the policies and procedures for
its incentive-based compensation program of its parent national bank
that is also a Level 1 or Level 2 covered institution subject to the
OCC's proposed rule, and such policies and procedures satisfy the
requirements of section __.11 of the proposed rule, then the OCC would
consider the subsidiary to have satisfied section __.11 of the proposed
rule. Under the FDIC's proposed rule, if a subsidiary of a state
nonmember bank or state savings association that is a covered
institution subject to the FDIC's proposed rule uses the policies and
procedures for its incentive-based compensation program of its parent
state nonmember bank or state savings association that is a Level 1 or
Level 2 covered institution subject to the FDIC's proposed rule, and
such policies and procedures satisfy the requirements of section __.11
of the proposed rule, then the FDIC would consider the subsidiary to
have satisfied section __.11 of the proposed rule.
    Many parent holding companies, particularly larger banking
organizations, design and administer incentive-based compensation
programs and associated policies and procedures. Smaller covered
institutions that operate within a larger holding company structure may
realize efficiencies by incorporating or relying upon their parent
company's incentive-based compensation program or certain components of
the program, to the extent that the program or its components establish
governance, risk management, and recordkeeping frameworks that are
appropriate to the smaller covered institutions and support incentive-
based compensation arrangements that appropriately balance risks to the
smaller covered institution and rewards for its covered persons.
Therefore, it may be less burdensome for covered institution
subsidiaries with risk profiles that are similar to those of their
parent holding companies to use their parent holding companies' program
rather than their own.
    The Agencies recognize that the authority of each appropriate
Federal regulator to examine and review compliance with the proposed
rule, along with requiring corrective action when they deem
appropriate, would not be affected by section __.3(c) of the Board's,
OCC's, or FDIC's proposed rule. Each appropriate Federal regulator
would be responsible for examining, reviewing, and enforcing compliance
with the proposed rule by their covered institutions, including any
that are owned or controlled by a depository institution holding
company. For example, in the situation where a parent holding company
controls a subsidiary national bank, state nonmember bank, or broker-
dealer, it would be expected that the board of directors of the
subsidiary will ensure that the subsidiary is in compliance with the
proposed rule. Likewise, the board of directors of a broker-dealer
operating subsidiary of a national bank would be expected to ensure
that the broker-dealer operating subsidiary is in compliance with the
proposed rule.

Sec.  __.4 Requirements and Prohibitions Applicable to All Covered
Institutions

    Section __.4 sets forth the general requirements that would be
applicable to all covered institutions. Later sections establish more
specific requirements that would be applicable for Level 1 and Level 2
covered institutions.
    Under the proposed rule, all covered institutions would be
prohibited from establishing or maintaining incentive-based
compensation arrangements, or any features of any such arrangements,
that encourage inappropriate risks by the covered institution (1) by
providing covered persons with excessive compensation, fees, or
benefits or (2) that could lead to material financial loss to the
covered institution. Section __.4 includes considerations for
determining whether an incentive-based compensation arrangement
provides excessive compensation, fees, or benefits, as required by
section 956(a)(1). Section __.4 also establishes requirements that
would apply to all covered institutions designed to prevent
inappropriate risks that could lead to material financial loss, as
required by section 956(a)(2).\115\ The general standards and
requirements set forth in sections __.4(a), (b), and (c) of the
proposed rule would be consistent with the general standards and
requirements set forth in sections __.5(a) and (b) of the 2011 Proposed
Rule.
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    \115\ In addition to the requirements outlined in section __.4,
Level 1 and Level 2 covered institutions would have to meet
additional requirements set forth in section __.5 and sections __.7
through __.11.
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    The Agencies do not intend to establish a rigid, one-size-fits-all
approach to the design of incentive-based compensation arrangements.
Thus, under the proposed rule, the structure of incentive-based
compensation arrangements at covered institutions would be expected to
reflect the proposed requirements set forth in section __.4 of the
proposed rule in a manner tailored to the size, complexity, risk
tolerance, and business model of the covered institution. Subject to
supervisory oversight, as applicable, each covered institution would be
responsible for ensuring that its incentive-based compensation
arrangements appropriately balance risk and reward. The methods by
which this is achieved at one covered institution may not be effective
at another, in part because of the importance of integrating incentive-
based compensation arrangements and practices into the covered
institution's own risk-management systems and business model. The
effectiveness of methods may differ across business lines and operating
units as well, so the proposed rule would provide for considerable
flexibility in how individual covered institutions approach the design
and implementation of incentive-based compensation arrangements that
appropriately balance risk and reward.
(a) In General
    Section __.4(a) of the proposed rule is derived from the text of
section 956(b) which requires the Agencies to jointly prescribe
regulations or guidelines that prohibit any type of incentive-based
payment arrangement, or any feature of any such arrangement, that the
Agencies determine encourages inappropriate risks by covered
institutions (1) by providing an executive officer, employee, director,
or principal shareholder of the covered institution with excessive
compensation, fees, or benefits or (2) that could lead to material
financial loss to the covered institution.
(b) Excessive Compensation
    Section __.4(b) of the proposed rule specifies that compensation,
fees, and

benefits would be considered excessive for purposes of section
__.4(a)(1) when amounts paid are unreasonable or disproportionate to
the value of the services performed by a covered person, taking into
account all relevant factors. Section 956(c) directs the Agencies to
``ensure that any standards for compensation established under
subsections (a) or (b) are comparable to the standards established
under section [39] of the Federal Deposit Insurance Act (12 U.S.C. 2
[sic] 1831p-1) for insured depository institutions.'' Under the
proposed rule, the factors for determining whether an incentive-based
compensation arrangement provides excessive compensation would be
comparable to the Federal Banking Agency Safety and Soundness
Guidelines that implement the requirements of section 39 of the
FDIA.\116\ The proposed factors would include: (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 covered 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. The inclusion of these factors is
consistent with the requirement under section 956(c) that any standards
for compensation under section 956(a) or (b) must be comparable to the
standards established for insured depository institutions under the
FDIA and that the Agencies must take into consideration the
compensation standards described in section 39(c) of the FDIA.
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    \116\ The Federal Banking Agency Safety and Soundness Guidelines
provide: Compensation shall be considered excessive when amounts
paid are unreasonable or disproportionate to the services performed
by an executive officer, employee, director, or principal
shareholder, considering the following: (1) The combined value of
all cash and non-cash benefits provided to the individual; (2) The
compensation history of the individual and other individuals with
comparable expertise at the institution; (3) The financial condition
of the institution; (4) Comparable compensation practices at
comparable institutions, based upon such factors as asset size,
geographic location, and the complexity of the loan portfolio or
other assets; (5) For postemployment benefits, the projected total
cost and benefit to the institution; (6) Any connection between the
individual and any fraudulent act or omission, breach of trust or
fiduciary duty, or insider abuse with regard to the institution; and
(7) Any other factors the Agencies determines to be relevant. See 12
CFR part 30, Appendix A, III.A; 12 CFR part 364, Appendix A, III.A;
12 CFR part 208, Appendix D-1. These factors are drawn directly from
section 39(c)(2) of the FDIA (12 U.S.C. 1831p-1(c)(2)).
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    In response to similar language in the 2011 Proposed Rule, some
commenters indicated that this list of factors should include
additional factors or allow covered institutions to consider other
factors that they deem appropriate. The proposed rule clarifies that
all relevant factors would be taken into consideration, and that the
list of factors in section __.4(b) would not be exclusive.
    Commenters on the 2011 Proposed Rule expressed concern that it
would be difficult for some types of institutions, such as
grandfathered unitary savings and loan holding companies with retail
operations, mutual savings associations, mutual savings banks, and
mutual holding companies, to identify comparable covered institutions.
Those commenters also expressed concern that it would be difficult for
these institutions to identify the compensation practices of comparable
institutions that are not public companies or that do not otherwise
make public information about their compensation practices. The
Agencies intend to work closely with these institutions to identify
comparable institutions to help ensure compliance with the proposed
rule.
(c) Material Financial Loss
    Section 956(b)(2) of the Act requires the Agencies to adopt
regulations or guidelines that prohibit any type of incentive-based
payment arrangement, or any feature of any such arrangement, that the
Agencies determine encourages inappropriate risks by a covered
financial institution that could lead to material financial loss to the
covered institution. In adopting such regulations or guidelines, the
Agencies are required to ensure that any standards established under
this provision of section 956 are comparable to the standards under
Section 39 of the FDIA, including the compensation standards. However,
section 39 of the FDIA does not include standards for determining
whether compensation arrangements may encourage inappropriate risks
that could lead to material financial loss.\117\ Accordingly, as in the
2011 Proposed Rule, the Agencies have considered the language and
purpose of section 956, existing supervisory guidance that addresses
incentive-based compensation arrangements that may encourage
inappropriate risk-taking,\118\ the FSB Principles and Implementation
Standards, and other relevant material in considering how to implement
this aspect of section 956.
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    \117\ Section 39 of the FDIA requires only that the Federal
banking agencies prohibit as an unsafe and unsound practice any
employment contract, compensation or benefit agreement, fee
arrangement, perquisite, stock option plan, postemployment benefit,
or other compensatory arrangement that could lead to a material
financial loss. See 12 U.S.C. 1831p-1(c)(1)(B). The Federal Banking
Agency Safety and Soundness Guidelines satisfy this requirement.
    \118\ 2010 Federal Banking Agency Guidance.
---------------------------------------------------------------------------

    A commenter argued that the provisions of the 2011 Proposed Rule
relating to incentive-based compensation arrangements that could
encourage inappropriate risks that could lead to material financial
loss were not comparable to the standards established under section 39
of the FDIA. More specifically, the commenter believed that the
requirements of the 2011 Proposed Rule, including the mandatory
deferral requirement, were more ``detailed and prescriptive'' than the
standards established under section 39 of the FDIA.
    The Agencies intend that the requirements of the proposed rule
implementing section 956(b)(2) of the Act would be comparable to the
standards established under section 39 of the FDIA. Section 956(b)(2)
of the Act requires that the Agencies prohibit incentive-based
compensation arrangements that encourage inappropriate risks by covered
institutions that could lead to material financial loss, a requirement
that is not discussed in the standards established under section 39 of
the FDIA, which, as discussed above, provide guidelines to determine
when compensation paid to a particular executive officer, employee,
director or principal shareholder would be excessive. In enacting
section 956, Congress referred specifically to the standards
established under section 39 of the FDIA, and was presumably aware that
in the statute there were no such standards articulated that provide
guidance for determining whether compensation arrangements could lead
to a material financial loss. The provisions of the proposed rule
implementing section 956(b)(2) reflect the Agencies' intent to comply
with the statutory mandate under section 956, while ensuring that the
proposed rule is comparable to section 39 of the FDIA, which states
that compensatory arrangements that could lead to a material financial
loss are an unsafe and unsound practice.

    Section __.4(c) of the proposed rule sets forth minimum
requirements for incentive-based compensation arrangements that would
be permissible under the proposed rule, because arrangements without
these attributes could encourage inappropriate risks that could lead to
material financial loss to a covered institution. These requirements
reflect the three principles for sound incentive-based compensation
policies contained in the 2010 Federal Banking Agency Guidance: (1)
Balanced risk-taking incentives; (2) compatibility with effective risk
management and controls; and (3) effective corporate governance.\119\
Similarly, section __.4(c) of the proposed rule provides that an
incentive-based compensation arrangement at a covered institution could
encourage 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.
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    \119\ See 75 FR 36407-36413.
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    An example of a feature that could encourage inappropriate risks
that could lead to material financial loss would be the use of
performance measures that are closely tied to short-term revenue or
profit of business generated by a covered person, without any
adjustments for the longer-term risks associated with the business
generated. Similarly, if there is no mechanism for factoring risk
outcomes over a longer period of time into compensation decisions,
traders who have incentive-based compensation plans with performance
periods that end at the end of the calendar year, could have an
incentive to take large risks towards the end of the calendar year to
either make up for underperformance earlier in the performance period
or to maximize their year-end profits. The same result could ensue if
the performance measures themselves are poorly designed or can be
manipulated inappropriately by the covered persons receiving incentive-
based compensation.
    Incentive-based compensation arrangements typically attempt to
encourage actions that result in greater revenue or profit for a
covered institution. However, short-run revenue or profit can often
diverge sharply from actual long-run profit because risk outcomes may
become clear only over time. Activities that carry higher risk
typically have the potential to yield higher short-term revenue, and a
covered person who is given incentives to increase short-term revenue
or profit, without regard to risk, would likely be attracted to
opportunities to expose the covered institution to more risk that could
lead to material financial loss.
    Section __.4(c)(1) of the proposed rule would require all covered
institutions to ensure that incentive-based compensation arrangements
appropriately balance risk and reward. Incentive-based compensation
arrangements achieve balance between risk and financial reward when the
amount of incentive-based compensation ultimately received by a covered
person depends not only on the covered person's performance, but also
on the risks taken in achieving this performance. Conversely, an
incentive-based compensation arrangement that provides financial reward
to a covered person without regard to the amount and type of risk
produced by the covered person's activities would not be considered to
appropriately balance risk and reward under the proposed rule.\120\
Incentive-based compensation arrangements should balance risk and
financial rewards in a manner that does not encourage covered persons
to expose a covered institution to inappropriate risk that could lead
to material financial loss.
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    \120\ For example, a covered person who makes a high-risk loan
may generate more revenue in the short run than one who makes a low-
risk loan. Incentive-based compensation arrangements that reward
covered persons solely on the basis of short-term revenue might pay
more to the covered person taking more risk, thereby incentivizing
employees to take more, and sometimes inappropriate, risk. See 2011
FRB Report at 11.
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    The incentives provided by an arrangement depend on how all
features of the arrangement work together. For instance, how
performance measures are combined, whether they take into account both
current and future risks, which criteria govern the use of risk
adjustment before the awarding and vesting of incentive-based
compensation, and what form incentive-based compensation takes (i.e.,
equity-based vehicles or cash-based vehicles) can all affect risk-
taking incentives and generally should be considered when covered
institutions create such arrangements.
    The 2010 Federal Banking Agency Guidance outlined four methods that
can be used to make compensation more sensitive to risk--risk
adjustments of awards, deferral of payment, longer performance periods,
and reduced sensitivity to short-term performance.\121\ Consistent with
the 2010 Federal Banking Agency Guidance, under the proposed rule, an
incentive-based compensation arrangement generally would have to take
account of the full range of current and potential risks that a covered
person's activities could pose for a covered institution. Relevant
risks would vary based on the type of covered institution, but could
include credit, market (including interest rate and price), liquidity,
operational, legal, strategic, and compliance risks. Performance and
risk measures generally should align with the broader risk management
objectives of the covered institution and could be incorporated through
use of a formula or through the exercise of judgment. Performance and
risk measures also may play a role in setting amounts of incentive-
based compensation pools (bonus pools), in allocating pools to
individuals' incentive-based compensation, or both. The effectiveness
of different types of adjustments varies with the situation of the
covered person and the covered institution, as well as the thoroughness
with which the measures are implemented.
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    \121\ See 2010 Federal Banking Agency Guidance, 75 FR at 36396.
---------------------------------------------------------------------------

    The analysis and methods for ensuring that incentive-based
compensation arrangements appropriately balance risk and reward should
also be tailored to the size, complexity, business strategy, and risk
tolerance of each institution. The manner in which a covered
institution seeks to balance risk and reward in incentive-based
compensation arrangements should account for the differences between
covered persons--including the differences between senior executive
officers and significant risk-takers and other covered persons.
Activities and risks may vary significantly both among covered
institutions and among covered persons within a particular covered
institution. For example, activities, risks, and incentive-based
compensation practices may differ materially among covered institutions
based on, among other things, the scope or complexity of activities
conducted and the business strategies pursued by the institutions.
These differences mean that methods for achieving incentive-based
compensation arrangements that appropriately balance risk and reward at
one institution may not be effective in restraining incentives to
engage in imprudent risk-taking at another institution.
    The proposed rule would require that incentive-based compensation
arrangements contain certain features. Section __.4(d) sets out
specific requirements that would be applicable to arrangements for all
covered persons at all covered institutions and that are intended to
result in incentive-based compensation arrangements that

appropriately balance risk and reward. Sections __.7 and __.8 of the
proposed rule provide more specific requirements that would be
applicable to arrangements at Level 1 and Level 2 covered institutions.
    While the proposed rule would require incentive-based compensation
arrangements for senior executive officers and significant risk-takers
at Level 1 and Level 2 covered institutions to have certain features
(such as a certain percentage of the award deferred), those features
alone would not be sufficient to balance risk-taking incentives with
reward. The extent to which additional balancing methods are required
would vary with the size and complexity of a covered institution and
with the nature of a covered person's activities.
    Section __.4(c)(2) of the proposed rule provides that an incentive-
based compensation arrangement at a covered institution would encourage
inappropriate risks that could lead to material financial loss to the
covered institution unless the arrangement is compatible with effective
risk management and controls. A covered institution's risk management
processes and internal controls would have to reinforce and support the
development and maintenance of incentive-based compensation
arrangements that appropriately balance risk and reward required under
section __.4(c)(1) of the proposed rule.
    One of the reasons risk management is important is that covered
persons may seek to evade the processes established by a covered
institution to achieve incentive-based compensation arrangements that
appropriately balance risk and reward in an effort to increase their
own incentive-based compensation. For example, a covered person might
seek to influence the risk measures or other information or judgments
that are used to make the covered person's incentive-based compensation
sensitive to risk. Such actions may significantly weaken the
effectiveness of a covered institution's incentive-based compensation
arrangements in restricting inappropriate risk-taking and could have a
particularly damaging effect if they result in the manipulation of
measures of risk, information, or judgments that the covered
institution uses for other risk-management, internal control, or
financial purposes. In such cases, the covered person's actions may
weaken not only the balance of the covered institution's incentive-
based compensation arrangements but also the risk-management, internal
controls, and other functions that are supposed to act as a separate
check on risk-taking.
    All covered institutions would have to have appropriate controls
surrounding the design, implementation, and monitoring of incentive-
based compensation arrangements to ensure that processes for achieving
incentive-based compensation arrangements that appropriately balance
risk and reward are followed, and to maintain the integrity of their
risk-management and other control functions. The nature of controls
likely would vary by size and complexity of the covered institution as
well as the activities of the covered person. For example, under the
proposed rule, controls surrounding incentive-based compensation
arrangements at smaller covered institutions likely would be less
extensive and less formalized than at larger covered institutions.
Level 1 and Level 2 covered institutions would be more likely to have a
systematic approach to designing and implementing their incentive-based
compensation arrangements, and their incentive-based compensation
programs would more likely be supported by formalized and well-
developed policies, procedures, and systems. Level 3 covered
institutions, on the other hand, might maintain less extensive and
detailed incentive-based compensation programs. Section __.9 of the
proposed rule provides additional, specific requirements that would be
applicable to Level 1 and Level 2 covered institutions designed to
result in incentive-based compensation arrangements at Level 1 and
Level 2 covered institutions that are compatible with effective risk
management and controls.
    Incentive-based compensation arrangements also would have to be
supported by an effective governance framework. Section __.4(e) sets
forth more detail on requirements for boards of directors of all
covered institutions that would be designed to result in incentive-
based compensation arrangements that are supported by effective
governance, while section __.10 of the proposed rule provides more
specific requirements that would be applicable to Level 1 and Level 2
covered institutions.
    The proposed requirement for effective governance is an important
foundation of incentive-based compensation arrangements that
appropriately balance risk and reward. The involvement of the board of
directors in oversight of the covered institution's overall incentive-
based compensation program should be scaled appropriately to the scope
of the covered institution's incentive-based compensation arrangements
and the number of covered persons who have incentive-based compensation
arrangements.
(d) Performance Measures
    The performance measures used in an incentive-based compensation
arrangement have an important effect on the incentives provided to
covered persons and thus affect the potential for the incentive-based
compensation arrangement to encourage inappropriate risk-taking that
could lead to material financial loss. Under section __.4(d) of the
proposed rule, an incentive-based compensation arrangement would not be
considered to appropriately balance risk and reward unless: (1) It
includes financial and non-financial measures of performance that are
relevant to a covered person's role and to the type of business in
which the covered person is engaged and that are appropriately weighted
to reflect risk-taking; (2) it is designed to allow non-financial
measures of performance to override financial measures when
appropriate; 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. Each of these requirements is
described more fully below.
    First, the arrangements would be required to include both financial
and non-financial measures of performance. Financial measures of
performance generally are measures tied to the attainment of strategic
financial objectives of the covered institution, or one of its
operating units, or to the contributions by covered persons towards
attainment of such objectives, such as measures related to corporate
sales, profit, or revenue targets. Non-financial measures of
performance, on the other hand, could be assessments of a covered
person's risk-taking or compliance with limits on risk-taking. These
may include assessments of compliance with the covered institution's
policies and procedures, adherence to the covered institution's risk
framework and conduct standards, or compliance with applicable laws.
These financial and non-financial measures of performance should
include considerations of risk-taking, and be relevant to a covered
person's role within the covered institution and to the type of
business in which the covered person is engaged. They also should be
appropriately weighted to

reflect the nature of such risk-taking. The requirement to include both
financial and non-financial measures of performance would apply to
forms of incentive-based compensation that set out performance measure
goals and related amounts near the beginning of a performance period
(such as long-term incentive plans) and to forms that do not
necessarily specify performance measure goals and related amounts in
advance of performance (such as certain bonuses). For example, a senior
executive officer may have his or her performance evaluated based upon
quantitative financial measures, such as return on equity, and on
qualitative, non-financial measures, such as the extent to which the
senior executive officer promoted sound risk management practices or
provided strategic leadership through a difficult merger. The senior
executive officer's performance also may be evaluated on several
qualitative non-financial measures that in some instances span multiple
calendar and performance years.
    Incentive-based compensation should support prudent risk-taking,
but should also allow covered institutions to hold covered persons
accountable for inappropriate behavior. Reliable quantitative measures
of risk and risk outcomes, where available, may be particularly useful
in both developing incentive-based compensation arrangements that
appropriately balance risk and reward and assessing the extent to which
incentive-based compensation arrangements properly balance risk and
reward. However, reliable quantitative measures may not be available
for all types of risk or for all activities, and in many cases may not
be sufficient to fully assess the risks that the activities of covered
persons may pose to covered institutions. Poor performance, as assessed
by non-financial measures such as quality of risk management, could
pose significant risks for the covered institution and may itself be a
source of potential material financial loss at a covered institution.
For this reason, non-financial performance measures play an important
role in reinforcing expectations on appropriate risk, control, and
compliance standards and should form a significant part of the
performance assessment process.
    Under certain circumstances, it may be appropriate for non-
financial performance measures, which are the primary measures that
relate to risk-taking behavior, to override considerations of financial
performance measures. An override might be appropriate when, for
example, a covered person conducts trades or other transactions that
increase the covered institution's profit but that create an
inappropriate compliance risk for the covered institution. In such a
case, an incentive-based compensation arrangement should allow for the
possibility that the non-financial measure of compliance risk could
override the financial measure of profit when the amount of incentive-
based compensation to be awarded to the covered person is determined.
    The effective balance of risks and rewards may involve the use of
both formulaic arrangements and discretion. At most covered
institutions, management retains a significant amount of discretion
when awarding incentive-based compensation. Although the use of
discretion has the ability to reinforce risk balancing, when improperly
utilized, discretionary decisions can undermine the goal of incentive-
based compensation arrangements to appropriately balance risk and
reward. For example, an incentive-based compensation arrangement that
has a longer performance period that could allow risk events to
manifest and for awards to be adjusted to reflect risk could be less
effective if management makes a discretionary award decision that does
not account for, or mitigates, the future impact of those risk
events.\122\
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    \122\ For Level 1 and Level 2 covered institutions, section
__.11 of the proposed rule would require policies and procedures
that address the institution's use of discretion.
---------------------------------------------------------------------------

    Section __.4(d)(3) of the proposed rule would also require that any
amounts to be awarded under an incentive-based compensation arrangement
be subject to adjustment to reflect actual losses, inappropriate risks
taken, compliance deficiencies, or other measures or aspects of
financial and non-financial performance. It is important that
incentive-based compensation arrangements be balanced in design and
implemented so that awards and actual amounts that vest actually vary
based on risks or risk outcomes. If, for example, covered persons are
awarded or paid substantially all of their potential incentive-based
compensation even when they cause a covered institution to take a risk
that is inappropriate given the institution's size, nature of
operations, or risk profile, or cause the covered institution to fail
to comply with legal or regulatory obligations, then covered persons
will have less incentive to avoid activities with substantial risk of
financial loss or non-compliance with legal or regulatory obligations.
(e) Board of Directors
    Under section __.4(e) of the proposed rule, the board of directors,
or a committee thereof, would be required to: (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.
    Section __.4(e)(1) of the proposed rule would require the board of
directors, or a committee thereof, of a covered institution to conduct
oversight of the covered institution's incentive-based compensation
program. Such oversight generally should include overall goals and
purposes. For example, boards of directors, or a committee thereof, of
covered institutions generally should oversee senior management in the
development of an incentive-based compensation program that
incentivizes behaviors consistent with the long-term health of the
covered institution, and provide sufficient detail to enable senior
management to translate the incentive-based compensation program into
objectives, plans, and arrangements for each line of business and
control function. Such oversight also generally should include holding
senior management accountable for effectively executing the covered
institution's incentive-based compensation program and for
communicating expectations regarding acceptable behaviors and business
practices to covered persons. Boards of directors should actively
engage with senior management, including challenging senior
management's incentive-based compensation assessments and
recommendations when warranted.
    In addition to the general program oversight requirement set forth
in section __.4(e)(1) of the proposed rule, a board of directors, or a
committee thereof, would also be required by sections __.4(e)(2) and
__.4(e)(3) to approve incentive-based compensation arrangements for
senior executive officers, including the amounts of all awards and
payouts, at the time of vesting, under such arrangements, and to
approve any material exceptions or adjustments to those arrangements.
    Although risk-adjusting incentive-based compensation for senior
executive officers responsible for the covered institution's overall
risk posture and

performance may be challenging given that quantitative measures of
institution-wide risk are difficult to produce and allocating
responsibility among the senior executive team for achieving risk
objectives can be a complex task, the role of senior executive officers
in managing the overall risk-taking activities of an institution is
important. Accordingly the proposed rule would require the board of
directors, or a committee thereof, to approve compensation arrangements
involving senior executive officers. When a board of directors, or a
committee thereof, is considering an award or a payout, it should
consider risks to ensure that the award or payout is consistent with
broader risk management and strategic objectives.
(f) Disclosure and Recordkeeping Requirements and (g) Rule of
Construction
    Section __.4(f) of the proposed rule would establish disclosure and
recordkeeping requirements for all covered institutions, as required by
section 956(a)(1).\123\ Under the proposed rule, each covered
institution would be required to create and maintain records that
document the structure of all of the institution's incentive-based
compensation arrangements and demonstrate compliance with the proposed
rule, and to disclose these records to the appropriate Federal
regulator upon request. The proposed rule would require covered
institutions to create such records on an annual basis and to maintain
such records for at least seven years after they are created. The
Agencies recognize that the exact timing for recordkeeping will vary
from institution to institution, but this requirement would ensure that
covered institutions create such records for their incentive-based
compensation arrangements at least once every 12 months. The
requirement to maintain records for at least seven years generally
aligns with the clawback period described in section __.7(c) of the
proposed rule.
---------------------------------------------------------------------------

    \123\ 12 U.S.C. 5641(a)(1).
---------------------------------------------------------------------------

    The proposed rule would require that the records maintained by a
covered institution, at a minimum, include copies of all incentive-
based compensation plans, a list of who is subject to each plan, and a
description of how the covered institution's incentive-based
compensation program is compatible with effective risk management and
controls. These records would be the minimum required information to
determine whether the structure of the covered institution's incentive-
based compensation arrangements provide covered persons with excessive
compensation or could lead to material financial loss to the covered
institution. As specified in section 956(a)(2) and section __.4(g) of
the proposed rule, a covered institution would not be required to
report the actual amount of compensation, fees, or benefits of
individual covered persons as part of this requirement.\124\
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    \124\ The Agencies note that covered institutions may be
required to report actual compensation under other provisions of
law. For example, corporate credit unions must disclose compensation
of certain executive officers to their natural person credit union
members under NCUA's corporate credit union rule. 12 CFR 704.19. The
proposed rule would not affect the requirements in 12 CFR 704.19 or
in any other reporting provision under any other law or regulation.
    The SEC requires an issuer that is subject to the requirements
of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15
U.S.C. 78m or 78o(d)) to disclose information regarding the
compensation of its principal executive officer, principal financial
officer, and three other most highly compensated executive officers,
as well as its directors, in the issuer's proxy statement, its
annual report on Form 10-K, and registration statements for
offerings of securities. The requirements are generally found in
Item 402 of Regulation S-K (17 CFR 229.402).
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    The 2011 Proposed Rule would have implemented section 956(a)(1) by
requiring all covered financial institutions to submit an annual report
to their appropriate Federal regulator, in a format specified by their
appropriate Federal regulator, that described in narrative form the
structure of the covered financial institution's incentive-based
compensation arrangements for covered persons and the policies
governing such arrangements.\125\ Some commenters on the 2011 Proposed
Rule favored annual reporting requirements, while other commenters
opposed any requirement for institutions to make periodic submissions
of information about incentive-based compensation arrangements to
regulators, noting concerns about burden, particularly for smaller
covered financial institutions. A few commenters requested an annual
certification requirement instead of a reporting requirement. While
there is value in receiving reports, the burden of producing them would
potentially be great on smaller covered institutions. Accordingly, the
Agencies determined not to include a requirement for covered
institutions to submit annual narrative reports.
---------------------------------------------------------------------------

    \125\ See 2011 Proposed Rule, at 21177. The 2011 Proposed Rule
also would have set forth additional more detailed requirements for
covered financial institutions with total consolidated assets of $50
billion or more.
---------------------------------------------------------------------------

    Given the variety of covered institutions and asset sizes, the
Agencies are not proposing a specific format or template for the
records that must be maintained by all covered institutions. According
to the Agencies' supervisory experience, as discussed further above,
many covered institutions already maintain information about their
incentive-based compensation programs comparable to the types of
information described above (e.g., in support of public company
filings).
    Several commenters on the 2011 Proposed Rule expressed concern
regarding the confidentiality of the reported compensation information.
In light of the nature of the information that would be provided to the
Agencies under section __.4(f) of the proposed rule, and the purposes
for which the Agencies are requiring the information, the Agencies
would view the information disclosed to the Agencies as nonpublic and
expect to maintain the confidentiality of that information, to the
extent permitted by law.\126\ When providing information to one of the
Agencies pursuant to the proposed rule, covered institutions should
request confidential treatment by that Agency.
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    \126\ For example, Exemption 4 of the Freedom of Information Act
(``FOIA'') provides an exemption for ``trade secrets and commercial
or financial information obtained from a person and privileged or
confidential.'' 5 U.S.C. 552(b)(4). FOIA Exemption 6 provides an
exemption for information about individuals in ``personnel and
medical files and similar files'' when the disclosure of such
information ``would constitute a clearly unwarranted invasion of
personal privacy.'' 5 U.S.C. 552(b)(6). FOIA Exemption 8 provides an
exemption for matters that are ``contained in or related to
examination, operating, or condition reports prepared by, on behalf
of, or for the use of an agency responsible for the regulation or
supervision of financial institutions.'' 5 U.S.C. 552(b)(8).
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    4.1. The Agencies invite comment on the requirements for
performance measures contained in section __.4(d) of the proposed rule.
Are these measures sufficiently tailored to allow for incentive-based
compensation arrangements to appropriately balance risk and reward? If
not, why?
    4.2. The Agencies invite comment on whether the terms ``financial
measures of performance'' and ``non-financial measures of performance''
should be defined. If so, what should be included in the defined terms?
    4.3. Would preparation of annual records be appropriate or should
another method be used? Would covered institutions find a more specific
list of topics and quantitative information for the content of required
records helpful? Should covered institutions be required to maintain an
inventory of all such records and to maintain such records in a
particular format? If so, why? How would such specific requirements
increase or decrease burden?

    4.4. Should covered institutions only be required to create new
records when incentive-based compensation arrangements or policies
change? Should the records be updated more frequently, such as promptly
upon a material change? What should be considered a ``material
change''?
    4.5. Is seven years a sufficient time to maintain the records
required under section __.4(f) of the proposed rule? Why or why not?
    4.6. Do covered institutions generally maintain records on
incentive-based compensation arrangements and programs? If so, what
types of records and related information are maintained and in what
format? What are the legal or institutional policy requirements for
maintaining such records?
    4.7. For covered institutions that are investment advisers or
broker-dealers, is there particular information that would assist the
SEC in administering the proposed rule? For example, should the SEC
require its reporting entities to report whether they utilize
incentive-based compensation or whether they are Level 1, Level 2 or
Level 3 covered institutions?

Sec.  __.5 Additional Disclosure and Recordkeeping Requirements for
Level 1 and Level 2 Covered Institutions

    Section __.5 of the proposed rule would establish additional and
more detailed recordkeeping requirements for Level 1 and Level 2
covered institutions.
    Under section __.5(a) of the proposed rule, a Level 1 or Level 2
covered institution would be required to create annually, and maintain
for at least seven years, records that document: (1) Its 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.
    The proposed recordkeeping and disclosure requirements at Level 1
and Level 2 covered institutions would assist the appropriate Federal
regulator in monitoring whether incentive-based compensation
structures, and any changes to such structures, could result in Level 1
and Level 2 covered institutions maintaining incentive-based
compensation structures that encourage inappropriate risks by providing
excessive compensation, fees, or benefits or could lead to material
financial loss. The more detailed reporting requirement for Level 1 and
Level 2 covered institutions under section __.5(a) of the proposed rule
reflects the information that would assist the appropriate Federal
regulator in most effectively evaluating the covered institution's
compliance with the proposed rule and identifying areas of potential
concern with respect to the structure of the covered institution's
incentive-based compensation arrangements.
    For example, the recordkeeping requirement in section __.5(a)(2) of
the proposed rule regarding amounts of incentive-based compensation
deferred and the form of payment of incentive-based compensation for
senior executive officers and significant risk-takers would help
Federal regulators determine compliance with the requirement in section
__.7(a) of the proposed rule for certain amounts of incentive-based
compensation of senior executive officers and significant risk-takers
to be deferred for specific periods of time. Similarly, the
recordkeeping requirement in section __.5(a)(3) of the proposed rule
would require Level 1 and Level 2 covered institutions to document the
rationale for decisions under forfeiture and downward adjustment
reviews and to keep timely and accurate records of the decision. This
documentation would provide information useful to Federal regulators
for determining compliance with the requirements in sections__.7(b) and
(c) of the proposed rule regarding specific forfeiture and clawback
policies at Level 1 and Level 2 covered institutions that are further
discussed below.
    The proposed recordkeeping requirements in section __.5(a) of the
proposed rule relate to the proposed substantive requirements in
section __.7 of the proposed rule and would help the appropriate
Federal regulator to closely monitor incentive-based compensation
payments to senior executive officers and significant risk-takers and
to determine whether those payments have been adjusted to reflect risk
outcomes. This approach also would be responsive to comments received
on the 2011 Proposed Rule suggesting that specific qualitative and
quantitative information, instead of a narrative description, be the
basis of a reporting requirement for larger covered institutions.
    Section __.5(b) of the proposed rule would require a Level 1 or
Level 2 covered institution to create and maintain records sufficient
to allow for an independent audit of incentive-based compensation
arrangements, policies, and procedures, including those required under
section __.11 of the proposed rule. A standard which reflects the level
of detail required in order to perform an independent audit of
incentive-based compensation would be appropriate given the importance
of regular monitoring of incentive-based compensation programs by
independent control functions. Such a standard also would be consistent
with the monitoring requirements set out in section __.11 of the
proposed rule.
    As with the requirements applicable to all covered institutions
under section __.4(f) of the proposed rule, the Agencies are not
proposing to require that a Level 1 or Level 2 covered institution
annually file a report with the appropriate Federal regulator. Instead,
section __.5(c) of the proposed rule would require a Level 1 or Level 2
covered institution to disclose its records to the appropriate Federal
regulator in such form and with such frequency as requested by the
appropriate Federal regulator. The required form and frequency of
recordkeeping may vary among the Agencies and across categories of
covered institutions, although the records described in section __.5(a)
of the proposed rule, along with any other records a covered
institution creates to satisfy the requirements of section __.5(f) of
the proposed rule, would be required to be created at least annually.
Some Agencies may require Level 1 and Level 2 covered institutions to
provide their records on an annual basis, alone or with a standardized
form of report. Level 1 and Level 2 covered institutions should seek
guidance concerning the reporting requirement from their appropriate
Federal regulator.
    Generally, the Agencies would expect the volume and detail of
information disclosed by a covered institution under section __.5 of
the proposed rule to be tailored to the nature and complexity of
business activities at the covered institution, and to the scope and
nature of its use of incentive-based compensation arrangements. The
Agencies recognize that smaller covered institutions with less complex
and less extensive incentive-based compensation arrangements likely
would not create or retain records that are as extensive as those that
larger covered institutions with relatively complex programs and
business activities would likely create. The tailored recordkeeping and

disclosure provisions for Level 1 and Level 2 covered institutions in
the proposed rule are designed to provide the Agencies with streamlined
and well-focused records that would allow the Agencies to promptly and
effectively identify and address any areas of concern.
    Similar to the provision of information under section __.4(f) of
the proposed rule, the Agencies expect to treat the information
provided to the Agencies under section __.5 of the proposed rule as
nonpublic and to maintain the confidentiality of that information to
the extent permitted by law.\127\ When providing information to one of
the Agencies pursuant to the proposed rule, covered institutions should
request confidential treatment by that Agency.
---------------------------------------------------------------------------

    \127\ See supra note 126.
---------------------------------------------------------------------------

    5.1. Should the level of detail in records created and maintained
by Level 1 and Level 2 covered institutions vary among institutions
regulated by different Agencies? If so, how? Or would it be helpful to
use a template with a standardized information list?
    5.2. In addition to the proposed records, what types of information
should Level 1 and Level 2 covered institutions be required to create
and maintain related to deferral and to forfeiture, downward
adjustment, and clawback reviews?

Sec.  __.6 Reservation of Authority for Level 3 Covered Institutions

    Section __.6 of the proposed rule would allow the appropriate
Federal regulator to require certain Level 3 covered institutions to
comply with some or all of the more rigorous requirements applicable to
Level 1 and Level 2 covered institutions. Specifically, an Agency would
be able to require a 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 more rigorous provisions
of section __.5 and sections __.7 through __.11 of the proposed rule,
if the appropriate Federal regulator determined that the covered
institution's complexity of operations or compensation practices are
consistent with those of a Level 1 or Level 2 covered institution,
based on the covered institution's activities, complexity of
operations, risk profile, or compensation practices. In such cases, the
Agency that is the Level 3 covered institution's appropriate Federal
regulator, in accordance with procedures established by the Agency,
would notify the institution in writing that it must satisfy the
requirements and other standards contained in section __.5 and sections
__.7 through __.11 of the proposed rule. As with the designation of
significant risk-takers discussed above, each Agency's procedures
generally would include reasonable advance written notice of the
proposed action, including a description of the basis for the proposed
action, and opportunity for the covered institution to respond.
    As noted previously, the Agencies have determined that it may be
appropriate to apply only basic prohibitions and disclosure
requirements to Level 3 covered institutions, in part because these
institutions generally have less complex operations, incentive-based
compensation practices, and risk profiles than Level 1 and Level 2
covered institutions.\128\ However, the Agencies recognize that there
is a wide spectrum of business models and risk profiles within the $10
to $50 billion range and believe that some Level 3 covered institutions
with between $10 and $50 billion in total consolidated assets may have
incentive-based compensation practices and operational complexity
comparable to those of a Level 1 or Level 2 covered institution. In
such cases, it may be appropriate for the Agencies to provide a process
for determining that such institutions should be held to the more
rigorous standards.
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    \128\ See section 3 of Part II of this Supplementary Information
for more discussions on Level 1, Level 2, and Level 3 covered
institutions.
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    The Agencies are proposing $10 billion as the appropriate threshold
for the low end of this range based upon the general complexity of
covered institutions above this size. The threshold is also used in
other statutory and regulatory requirements. For example, the stress
testing provisions of the Dodd-Frank Act require banking organizations
with total consolidated assets of more than $10 billion to conduct
annual stress tests.\129\ For deposit insurance assessment purposes,
the FDIC distinguishes between small and large banks based on a $10
billion asset size.\130\ For supervisory purposes, the Board defines
community banks by reference to the $10 billion asset size
threshold.\131\
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    \129\ 12 U.S.C. 5365(i)(2).
    \130\ See 12 CFR 327.8(e) and (f).
    \131\ See Federal Reserve SR Letter 12-7, ``Supervisory Guidance
on Stress Testing for Banking Organizations with More Than $10
Billion in Total Consolidated Assets'' (May 14, 2012).
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    The Agencies would consider the activities, complexity of
operations, risk profile, and compensation practices to determine
whether a Level 3 covered institution's operations or compensation
practices warrant application of additional standards pursuant to the
proposed rule. For example, a Level 3 covered institution could have
significant levels of off-balance sheet activities, such as derivatives
that may entail complexities of operations and greater risk than
balance sheet measures would indicate, making the institution's risk
profile more akin to that of a Level 1 or Level 2 covered institution.
Additionally, a Level 3 covered institution might be involved in
particular high-risk business lines, such as lending to distressed
borrowers or investing or trading in illiquid assets, and make
significant use of incentive-based compensation to reward risk-takers.
Still other Level 3 covered institutions might have or be part of a
complex organizational structure, such as operating with multiple legal
entities in multiple foreign jurisdictions.
    Section __.6 of the proposed rule would permit the appropriate
Federal regulator of a Level 3 covered institution with total
consolidated assets of between $10 and $50 billion to require the
institution to comply with some or all of the provisions of section
__.5 and sections __.7 through __.11 of the proposed rule. This
approach would allow the Agencies to take a flexible approach in the
proposed rule provisions applicable to all Level 3 covered institutions
while retaining authority to apply more rigorous standards where the
Agencies determine appropriate based on the Level 3 covered
institution's complexity of operations or compensation practices. The
Agencies expect they only would use this authority on an infrequent
basis. This approach has been used in other rules for purposes of
tailoring the application of requirements and providing flexibility to
accommodate the variations in size, complexity, and overall risk
profile of financial institutions.\132\
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    \132\ For example, the OCC, FDIC, and Board's domestic capital
rules include a reservation of authority whereby the agency may
require an institution to hold an amount of regulatory capital
greater than otherwise required under the capital rules. 12 CFR
3.1(d) (OCC); 12 CFR 324.1(d)(1) through (6) (FDIC); 12 CFR 217.1(d)
(Board). The OCC, FDIC, and the Board's Liquidity Coverage Ratio
rule includes a reservation of authority whereby each agency may
impose heightened standards on an institution. 12 CFR 50.2 (OCC); 12
CFR 329.2 (FDIC); 12 CFR 249.2 (Board). The FDIC's stress testing
rules include a reservation of authority to require a $10 billion to
$50 billion covered bank to use reporting templates for larger
banks. 12 CFR 325.201.
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    6.1. The Agencies invite general comment on the reservation of
authority in section __.6 of the proposed rule.

    6.2. The Agencies based the $10 billion dollar floor of the
reservation of authority on existing similar reservations of authority
that have been drawn at that level. Did the Agencies set the correct
threshold or should the floor be set lower or higher than $10 billion?
If so, at what level and why?
    6.3. Are there certain provisions in section __.5 and sections __.7
through __.11 of the proposed rule that would not be appropriate to
apply to a covered institution with total consolidated assets of $10
billion or more and less than $50 billion regardless of its complexity
of operations or compensation practices? If so, which provisions and
why?
    6.4. The Agencies invite comment on the types of notice and
response procedures the Agencies should use in determining that the
reservation of authority should be used. The SEC invites comment on
whether notice and response procedures based on the procedures for a
proceeding initiated upon the SEC's own motion under Advisers Act rule
0-5 would be appropriate for this purpose.
    6.5. What specific features of incentive-based compensation
programs or arrangements at a Level 3 covered institution should the
Agencies consider in determining such institution should comply with
some or all of the more rigorous requirements within the rule and why?
What process should be followed in removing such institution from the
more rigorous requirements?

Sec.  __.7 Deferral, Forfeiture and Downward Adjustment, and Clawback
Requirements for Level 1 and Level 2 Covered Institutions

    As discussed above, allowing covered institutions time to measure
results with the benefit of hindsight allows for a more accurate
assessment of the consequences of risks to which the institution has
been exposed. This approach may be particularly relevant, for example,
where performance is difficult to measure because performance results
and risks take time to observe (e.g., assessing the future repayment
prospects of loans written during the current year).
    In order to achieve incentive-based compensation arrangements that
appropriately balance risk and reward, including closer alignment
between the interests of senior executive officers and significant
risk-takers within the covered institution and the longer-term
interests of the covered institution itself, it is important for
information on performance, including information on misconduct and
inappropriate risk-taking, to affect the incentive-based compensation
amounts received by covered persons. Covered institutions may use
deferral, forfeiture and downward adjustment, and clawback to address
information about performance that comes to light after the conclusion
of the performance period, so that incentive-based compensation
arrangements are able to appropriately balance risk and reward. Section
__.7 of the proposed rule would require Level 1 and Level 2 covered
institutions to incorporate these tools into the incentive-based
compensation arrangements of senior executive officers and significant
risk-takers.
    Under the proposed rule, an incentive-based compensation
arrangement at a Level 1 or Level 2 covered institution would not be
considered to appropriately balance risk and reward, as would be
required by section __.4(c)(1), unless the deferral, forfeiture,
downward adjustment, and clawback requirements of section __.7 are met.
These requirements would apply to incentive-based compensation
arrangements provided to senior executive officers and significant
risk-takers at Level 1 and Level 2 covered institutions. Institutions
may, of course, take additional steps to address risks that may mature
after the performance period.
    The requirements of section __.7 of the proposed rule would apply
to Level 1 and Level 2 covered institutions; that is, to covered
institutions with $50 billion or more in average total consolidated
assets. The requirements of section __.7 would not be applicable to
Level 3 covered institutions.\133\ As discussed above, the Agencies
recognize that larger covered institutions have more complex business
activities and generally rely more on incentive-based compensation
programs, and, therefore, it is appropriate to impose specific
deferral, forfeiture and downward adjustment reviews and clawback
requirements on these institutions. It has been recognized that larger
financial institutions can present greater potential systemic risks.
The Board, for example, has expressed the view that institutions with
more than $250 billion in total consolidated assets are more likely
than other institutions to pose systemic risk to U.S. financial
stability.\134\ Because of these risks that could be created by
excessive risk-taking at the largest covered institutions, additional
safeguards are needed against inappropriate risk-taking at Level 1
covered institutions. For these reasons, the Agencies are proposing a
required minimum deferral percentage and a required minimum deferral
period for Level 1 covered institutions that are greater than those for
Level 2 covered institutions.
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    \133\ As explained earlier in this Supplementary Information
section, the appropriate Federal regulator of a Level 3 covered
institution with average total consolidated assets greater than or
equal to $10 billion and less than $50 billion may require the
covered institution to comply with some or all of the provisions of
section __.5 and sections __.7 through __.11 of the proposed rule if
the Agency determines that the complexity of operations or
compensation practices of the Level 3 covered institution are
consistent with those of a Level 1 or 2 covered institution.
    \134\ Board, Regulatory Capital Rules: Implementation of Risk-
Based Capital Surcharges for Global Systemically Important Bank
Holding Companies, 80 FR 49082, 49084 (August 14, 2015).
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    The requirements of section __.7 of the proposed rule would apply
to incentive-based compensation arrangements for senior executive
officers and significant risk-takers of Level 1 and Level 2 covered
institutions. The decisions of senior executive officers can have a
significant impact on the entire consolidated organization and often
involve substantial strategic or other risks that can be difficult to
measure and model--particularly at larger covered institutions--during
or at the end of the performance period, and therefore can be difficult
to address adequately by risk adjustments in the awarding of incentive-
based compensation.\135\ Supervisory experience and a review of the
academic literature \136\ suggest that incentive-based compensation
arrangements for the most senior decision-makers and risk-takers at the
largest institutions appropriately balance risk and reward when a