---------------------------------------------------------------------------

    Moreover, in the experience of the Federal Banking Agencies,
incentive-based compensation programs generally are designed at the
holding company level and are applied throughout the consolidated
organization. Many holding companies establish incentive-based
compensation programs in this manner because it can help maintain
effective risk management and controls for the entire consolidated
organization. More broadly, the expectations and incentives established
by the highest levels of corporate leadership set the tone for the
entire organization and are important factors of whether an
organization is capable of maintaining fully effective risk management
and internal control processes. The Board has observed that some large,
complex depository institution holding companies have evolved toward
comprehensive, consolidated risk management to measure and assess the
range of their exposures and the way these exposures interrelate,
including in the context of incentive-based compensation programs. In
supervising the activities of depository institution holding companies,
the Board has adopted and continues to follow the principle that
depository institution holding companies should serve as a source of
financial and managerial strength for their subsidiary depository
institutions.\59\
---------------------------------------------------------------------------

    \59\ See 12 U.S.C. 1831o-1; 12 CFR 225.4(a)(1).
---------------------------------------------------------------------------

    The proposed rule is designed to reinforce the ability of
institutions to establish and maintain effective risk management and
controls for the entire consolidated organization with respect to the
organization's incentive-based compensation program. Moreover, the
structure of the proposed rule is also consistent with the reality that
within many large depository institution holding companies, covered
persons may be employed by one legal entity but may do work for one or
more of that entity's affiliates. For example, an employee of a
national bank might also perform certain responsibilities on behalf of
an affiliated broker-dealer. Applying the same requirements to all
subsidiary covered institutions may reduce the possibility of evasion
of the more specific standards applicable to certain individuals at
Level 1 or Level 2 covered institutions. Finally, this approach may
enable holding company structures to more effectively manage

human resources, because applying the same requirements to all
subsidiary covered institutions would treat similarly the incentive-
based compensation arrangements for similar positions at different
subsidiaries within a holding company structure.\60\
---------------------------------------------------------------------------

    \60\ For example, requirements that apply to certain job
functions in one part of a consolidated organization but not to the
same job function in another operating unit of the same holding
company structure could create uneven treatment across the legal
entities.
---------------------------------------------------------------------------

    The proposed rule would also be consistent with the requirements of
overseas regulators who have examined the role that incentive-based
compensation plays in institutions. After examining the risks posed by
certain incentive-based compensation programs, many foreign regulators
are now requiring that the rules governing incentive-based compensation
be applied at the group, parent, and subsidiary operating levels
(including those in offshore financial centers).\61\
---------------------------------------------------------------------------

    \61\ See, e.g., Article 92 of the CRD IV (2013/36/EU).
---------------------------------------------------------------------------

    The Agencies are cognizant that the approach being proposed may
have some disadvantages for smaller subsidiaries within a larger
depository institution holding company structure by applying the more
specific provisions of the proposed rule to these smaller institutions
that would not otherwise apply to them but for being a subsidiary of a
depository institution holding company. As further discussed below, in
an effort to reduce burden, the Board's proposed rule would permit
institutions that are subsidiaries of depository institution holding
companies and that are subject to the Board's proposed rule to meet the
requirements of the proposed rule if the parent covered institution
complies with the requirements in such a way that causes the relevant
portion of the incentive-based compensation program of the subsidiary
covered institution to comply with the requirements.\62\
---------------------------------------------------------------------------

    \62\ See section __.3(c) of the proposed rule.
---------------------------------------------------------------------------

    Similarly, the OCC's proposed rule would allow a covered
institution subject to the OCC's proposed rule that is a subsidiary of
another covered institution subject to the OCC's proposed rule to meet
a requirement of the OCC's proposed rule if the parent covered
institution complies with that requirement in a way that causes the
relevant portion of the incentive-based compensation program of the
subsidiary covered institution to comply with that requirement.
    The FDIC's proposed rule would similarly allow a covered
institution subject to the FDIC's proposed rule that is a subsidiary of
another covered institution subject to the FDIC's proposed rule to meet
a requirement of the FDIC's proposed rule if the parent covered
institution complies with that requirement in a way that causes the
relevant portion of the incentive-based compensation program of the
subsidiary covered institution to comply with that requirement.
    The SEC is not proposing to require a covered institution under its
proposed rule that is a subsidiary of another covered institution under
that proposed rule to be subject to the same requirements, and defined
to be the same levels, as the parent covered institution. In general,
the operations, services, and products of broker-dealers and
investments advisers are not typically effected through subsidiaries
\63\ and it is expected that their incentive-based compensation
arrangements are typically derived from the activities of the broker-
dealers and investment advisers themselves. Because of this, any
inappropriate risks for which the incentive-based compensation programs
at these firms may encourage should be localized, and the management of
these risks similarly should reside at the broker-dealer or investment
adviser. Where that is not the case, individuals that are employed by
subsidiaries of a broker-dealer or investment adviser may still be
considered to be a ``significant risk-taker'' for the covered
institution and, therefore, subject to the proposed rule.\64\ In
addition, broker-dealers and investment advisers that are subsidiaries
of depository institution holding companies would be consolidated on
the basis of such depository institution holding companies generally,
where there is often a greater integration of products and operations,
public interest, and assessment and management of risk (including those
related to incentive-based compensation) across the depository
institution holding companies and their subsidiaries.\65\
---------------------------------------------------------------------------

    \63\ In addition, the SEC's regulatory regime with respect to
broker-dealers and investment advisers generally applies on an
entity-by-entity basis. For example, subject to certain exclusions,
any person that for compensation is engaged in the business of
providing advice, making recommendations, issuing reports, or
furnishing analyses on securities, either directly or through
publications is subject to the Investment Advisers Act. See 15
U.S.C. 80b-2(a)(11).
    \64\ The proposed rule also prohibits a covered institution from
doing indirectly, or through or by any other person, anything that
would be unlawful for such covered institution to do directly. See
section 303.12. For example, the SEC has stated that it will, based
on facts and circumstances, treat as a single investment adviser two
or more affiliated investment advisers that are separate legal
entities but are operationally integrated. See Exemptions for
Advisers to Venture Capital Funds, Private Fund Advisers With Less
Than $150 Million in Assets Under Management, and Foreign Private
Advisers, Investment Advisers Act Release No. 3222 (June 22, 2011)
76 FR 39,646 (July 6, 2011); In the Matter of TL Ventures, Inc.,
Investment Advisers Act Release No. 3859 (June 20, 2014) (settled
action); section 15 U.S.C. 80b-8.
    \65\ As discussed above in this Supplementary Information, the
Agencies propose that covered institutions that are subsidiaries of
covered institutions that are depository institution holding
companies would be subject to the same requirements, and defined to
be the same level, as the parent covered institutions. Because the
failure of a depository institution may cause losses to the deposit
insurance fund, there is a heightened interest in the safety and
soundness of depository institutions and their holding companies.
Moreover, as noted above, depository institution holding companies
should serve as a source of financial and managerial strength for
their subsidiary depository institutions. Additionally, in the
experience of the Federal Banking Agencies, incentive-based
compensation programs generally are designed at the holding company
level and are applied throughout the consolidated organization. The
Board has observed that complex depository institution holding
companies have evolved toward comprehensive, consolidated risk
management to measure and assess the range of their exposures and
the way these exposures interrelate, including in the context of
incentive-based compensation programs.
---------------------------------------------------------------------------

Level 1, Level 2, and Level 3 Covered Institutions
    For purposes of the proposed rule, the Agencies have specified the
three levels of covered institutions as:
     In the case of the OCC:
    [cir] A ``Level 1 covered institution'' means: (i) A covered
institution that is a subsidiary of a depository institution holding
company with average total consolidated assets greater than or equal to
$250 billion; (ii) a covered institution with average total
consolidated assets greater than or equal to $250 billion that is not a
subsidiary of a covered institution or of a depository institution
holding company; and (iii) a covered institution that is a subsidiary
of a covered institution with average total consolidated assets greater
than or equal to $250 billion.
    [cir] A ``Level 2 covered institution'' means: (i) A covered
institution that is a subsidiary of a depository institution holding
company with average total consolidated assets greater than or equal to
$50 billion but less than $250 billion; (ii) a covered institution with
average total consolidated assets greater than or equal to $50 billion
but less than $250 billion that is not a subsidiary of a covered
institution or of a depository institution holding company; and (iii) a
covered institution that is a subsidiary of a covered institution with
average total consolidated assets greater than or equal to $50 billion
but less than $250 billion.
    [cir] A ``Level 3 covered institution'' means: (i) A covered
institution with average total consolidated assets greater

than or equal to $1 billion but less than $50 billion; and (ii) a
covered institution that is a subsidiary of a covered institution with
average total consolidated assets greater than or equal to $1 billion
but less than $50 billion.
     In the case of the Board:
    [cir] A ``Level 1 covered institution'' means a covered institution
with average total consolidated assets greater than or equal to $250
billion and any subsidiary of a Level 1 covered institution that is a
covered institution.
    [cir] A ``Level 2 covered institution'' means a covered institution
with average total consolidated assets greater than or equal to $50
billion that is not a Level 1 covered institution and any subsidiary of
a Level 2 covered institution that is a covered institution.
    [cir] A ``Level 3 covered institution'' means a covered institution
with average total consolidated assets greater than or equal to $1
billion that is not a Level 1 or Level 2 covered institution.
     In the case of the FDIC:
    [cir] A ``Level 1 covered institution'' means: (i) A covered
institution that is a subsidiary of a depository institution holding
company with average total consolidated assets greater than or equal to
$250 billion; (ii) a covered institution with average total
consolidated assets greater than or equal to $250 billion that is not a
subsidiary of a depository institution holding company; and (iii) a
covered institution that is a subsidiary of a covered institution with
average total consolidated assets greater than or equal to $250
billion.
    [cir] A ``Level 2 covered institution'' means: (i) A covered
institution that is a subsidiary of a depository institution holding
company with average total consolidated assets greater than or equal to
$50 billion but less than $250 billion; (ii) a covered institution with
average total consolidated assets greater than or equal to $50 billion
but less than $250 billion that is not a subsidiary of a depository
institution holding company; and (iii) a covered institution that is a
subsidiary of a covered institution with average total consolidated
assets greater than or equal to $50 billion but less than $250 billion.
    [cir] A ``Level 3 covered institution'' means: (i) A covered
institution that is a subsidiary of a depository institution holding
company with average total consolidated assets greater than or equal to
$1 billion but less than $50 billion; (ii) a covered institution with
average total consolidated assets greater than or equal to $1 billion
but less than $50 billion that is not a subsidiary of a depository
institution holding company; and (iii) a covered institution that is a
subsidiary of a covered institution with average total consolidated
assets greater than or equal to $1 billion but less than $50 billion.
     In the case of the NCUA:
    [cir] A ``Level 1 credit union'' means a credit union with average
total consolidated assets of $250 billion or more.
    [cir] A ``Level 2 credit union'' means a credit union with average
total consolidated assets greater than or equal to $50 billion that is
not a Level 1 credit union.
    [cir] A ``Level 3 credit union'' means a credit union with average
total consolidated assets greater than or equal to $1 billion that is
not a Level 1 or Level 2 credit union.
     In the case of the SEC:
    [cir] A ``Level 1 covered institution'' means: (i) A covered
institution with average total consolidated assets greater than or
equal to $250 billion; or (ii) a covered institution that is a
subsidiary of a depository institution holding company that is a Level
1 covered institution pursuant to 12 CFR 236.2.
    [cir] A ``Level 2 covered institution'' means: (i) A covered
institution with average total consolidated assets greater than or
equal to $50 billion that is not a Level 1 covered institution; or (ii)
a covered institution that is a subsidiary of a depository institution
holding company that is a Level 2 covered institution pursuant to 12
CFR 236.2.
    [cir] A ``Level 3 covered institution'' means a covered institution
with average total consolidated assets greater than or equal to $1
billion that is not a Level 1 covered institution or Level 2 covered
institution.
     In the case of FHFA:
    [cir] A ``Level 1 covered institution'' means a covered institution
with average total consolidated assets greater than or equal to $250
billion that is not a Federal Home Loan Bank.
    [cir] A ``Level 2 covered institution'' means a covered institution
with average total consolidated assets greater than or equal to $50
billion that is not a Level 1 covered institution and any Federal Home
Loan Bank that is a covered institution.
    [cir] A ``Level 3 covered institution'' means a covered institution
with average total consolidated assets greater than or equal to $1
billion that is not a Level 1 covered institution or Level 2 covered
institution.
    The Agencies considered the varying levels of complexity and risks
across covered institutions that would be subject to this proposed
rule, as well as the general correlation of asset size with those
potential risks, in proposing to distinguish covered institutions by
their asset size.\66\ In general, larger financial institutions have
more complex structures and operations. These more complex structures
make controlling risk-taking more difficult. Moreover, these larger,
more complex institutions also tend to be significant users of
incentive-based compensation. Significant use of incentive-based
compensation combined with more complex business operations can make it
more difficult to immediately recognize and assess risks for the
institution as a whole. Therefore, the requirements of the proposed
rule are tailored to reflect the size and complexity of each of the
three levels of covered institutions identified in the proposed rule.
The proposed rule assigns covered institutions to one of three levels,
based on each institution's average total consolidated assets.
---------------------------------------------------------------------------

    \66\ But see earlier discussion regarding consolidation.
---------------------------------------------------------------------------

    Additionally, the Agencies considered the exemption in section 956
for institutions with less than $1 billion in assets along with other
asset-level thresholds in the Dodd-Frank Act \67\ as an indication that
Congress views asset size as an appropriate basis for the requirements
and prohibitions established under this proposed rule. Consistent with
this approach, the Agencies also looked to asset size to determine the
types of prohibitions that would be necessary to discourage
inappropriate risks at covered institutions that could lead to material
financial loss.
---------------------------------------------------------------------------

    \67\  See, e.g., section 116 of the Dodd-Frank Act (12 U.S.C.
5326) (allowing the Financial Stability Oversight Council to require
a bank holding company with total consolidated assets of $50 billion
or more to submit reports); section 163 of the Dodd-Frank Act (12
U.S.C. 5363) (requiring prior notice to the Board for certain
acquisitions by bank holding companies with total consolidated
assets of $50 billion or more); section 165 of the Dodd-Frank Act
(12 U.S.C. 5365) (requiring enhanced prudential standards for bank
holding companies with total consolidated assets of $50 billion or
more); section 318(c) of the Dodd-Frank Act (12 U.S.C. 16)
(authorizing the Board to collect assessments, fees, and other
charges from bank holding companies and savings and loan holding
companies with total consolidated assets of $50 billion or more).
---------------------------------------------------------------------------

    The Agencies are proposing that more rigorous requirements apply to
institutions with $50 billion or more in assets. These institutions
with assets of $50 billion or more tend to be significantly more
complex and, the risk-taking of these institutions, and their potential
failure, implicates greater risks for the financial system and the
overall economy. Tailoring application of the requirements of the
proposed rule is consistent with other provisions of the Dodd-Frank
Act, which distinguish requirements for institutions with $50

billion or more in total consolidated assets. For example, the enhanced
supervision and prudential standards for nonbank financial companies
and bank holding companies under section 165 \68\ apply to bank holding
companies with total consolidated assets of $50 billion or greater. It
is also consistent with the definitions of advanced approaches
institutions under the Federal Banking Agencies' domestic capital
rules,\69\ which are linked to the total consolidated assets of an
institution. Other statutory and regulatory provisions recognize this
difference.\70\
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    \68\ 12 U.S.C. 5365.
    \69\ See 12 CFR 3.100(b)(1) (advanced approaches national banks
and Federal savings associations); 12 CFR 324.100(b)(1) (advanced
approaches state nonmember banks, state savings associations, and
insured branches of foreign banks); 12 CFR 217.100(b)(1) (advanced
approaches bank holding companies, savings and loan holding
companies, and state member banks).
    \70\ See, e.g., Board, ``Regulatory Capital Rules:
Implementation of Risk-Based Capital Surcharges for Global
Systemically Important Bank Holding Companies,'' 80 FR 49081 (August
14, 2015); Board, ``Single-Counterparty Credit Limits for Large
Banking Organizations; Proposed Rule,'' 81 FR 14327 (March 4, 2016);
Board, ``Debit Card Interchange Fees and Routing; Final Rule,'' 76
FR 43393 (July 20, 2011); Board, ``Supervision and Regulation
Assessments for Bank Holding Companies and Savings and Loan Holding
Companies With Total Consolidated Assets of $50 Billion or More and
Nonbank Financial Companies Supervised by the Federal Reserve,'' 78
FR 52391 (August 23, 2013); OCC, Board, FDIC, ``Supplementary
Leverage Ratio; Final Rule,'' 79 FR 57725 (September 26, 2014).
---------------------------------------------------------------------------

    Most of the requirements of the proposed rule would apply to Level
1 and Level 2 covered institutions in a similar manner. Deferral
requirements, however, would be different for Level 1 and Level 2
covered institutions, as discussed further below: Incentive-based
compensation for senior executive officers and significant risk-takers
at covered institutions with average total consolidated assets equal to
or greater than $250 billion would be subject to a higher percentage of
deferral, and longer deferral periods. In the experience of the
Agencies, covered institutions with assets of $250 billion or more tend
to be significantly more complex and thus exposed to a higher level of
risk than those with assets of less than $250 billion. The risk-taking
of these institutions, and their potential failure, implicates the
greatest risks for the broader economy and financial system. Other
statutory and regulatory provisions recognize this difference. For
example, the definitions of advanced approaches institutions under the
Federal Banking Agencies' domestic capital rules establish a $250
billion threshold for coverage. This approach is similar to that used
in the international standards published by the Basel Committee on
Banking Supervision, and rules implementing such capital standards,
under which banks with consolidated assets of $250 billion or more are
subject to enhanced capital and leverage standards.
    As noted above, the Agencies propose to designate the Federal Home
Loan Banks as covered institutions. Under FHFA's proposed rule, each
Federal Home Loan Bank would be a Level 2 covered institution by
definition, as opposed to by total consolidated assets. As long as a
Federal Home Loan Bank is a covered institution under this part, with
average total consolidated assets greater than or equal to $1 billion,
it is a Level 2 covered institution. FHFA proposes this approach
because generally for the Federal Home Loan Banks, asset size is not a
meaningful indicator of risk. The Federal Home Loan Banks all operate
in a similar enough manner that treating them differently based on
asset size is not justifiable. Because of the scalability of the
Federal Home Loan Bank business model, it is possible for a Federal
Home Loan Bank to pass back and forth over the asset-size threshold
without any meaningful change in risk profile. FHFA proposes to
designate the Federal Home Loan Banks as Level 2 covered institutions
instead of Level 3 covered institutions because at the time of the
proposed rule, at least one Federal Home Loan Bank would be a Level 2
covered institution if determined by asset size, and the regulatory
requirements under the proposed rule that seem most appropriate for the
Federal Home Loan Banks are those of Level 2 covered institutions.
    Similar to the approach used by the Federal Banking Agencies in
their general supervision of banking organizations, if the proposed
rule were adopted, the Agencies would generally expect to coordinate
oversight and, to the extent applicable, supervision for consolidated
organizations in order to assess compliance throughout the consolidated
organization with any final rule. The Agencies are cognizant that
effective and consistent supervision generally requires coordination
among the Agencies that regulate the various entities within a
consolidated organization. The supervisory authority of each
appropriate Federal regulator to examine and review its covered
institutions for compliance with the proposed rule would not be
affected under this approach.
    Affiliate. For the OCC, the Board, the FDIC, and the SEC, the
proposed rule would define ``affiliate'' to mean any company that
controls, is controlled by, or is under common control with another
company. FHFA's proposed rule would not include a definition of
``affiliate.'' The Federal Home Loan Banks have no affiliates, and
affiliates of the Enterprises are included as part of the definition of
Enterprise in the Safety and Soundness Act, which is referenced in the
definition of regulated entity. The NCUA's proposed rule also would not
include a definition of ``affiliate.'' While in some cases, credit
union service organizations (``CUSOs'') might be considered affiliates
of a credit union, NCUA has determined that this rule would not apply
to CUSOs.
    Average total consolidated assets. Consistent with section 956, the
proposed rule would not apply to institutions with less than $1 billion
in assets. Additionally, as discussed above, under the proposed rule,
more specific requirements would apply to institutions with higher
levels of assets. The Agencies propose to use average total
consolidated assets to measure assets for the purposes of determining
applicability of the requirements of this rule. Whether a covered
institution that is a subsidiary of a depository institution holding
company is a Level 1, Level 2, or Level 3 covered institution would be
based on the average total consolidated assets of the top-tier
depository institution holding company. Whether that subsidiary has at
least $1 billion will be based on the subsidiary's average total
consolidated assets.
    For an institution that is not an investment adviser, average total
consolidated assets would be determined with reference to the average
of the total consolidated assets reported on regulatory reports for the
four most recent consecutive quarters. This method is consistent with
those used to calculate total consolidated assets for purposes of other
rules that have $50 billion thresholds,\71\ and it may reduce
administrative burden on institutions--particularly Level 3 covered
institutions that become Level 2 covered institutions--if average total
consolidated assets are calculated in the same way for the proposed
rule. For an institution that does not have a regulatory report for
each of the four most recent consecutive quarters to reference, average
total consolidated assets would mean the average of total consolidated
assets, as reported on the relevant regulatory reports, for the most
recent quarter or consecutive quarters available, as applicable.
Average total

consolidated assets would be measured on the as-of date of the most
recent regulatory report used in the calculation of the average. For a
covered institution that is an investment adviser, average 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.\72\
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    \71\ See, e.g., OCC's Heightened Standards (12 CFR part 30,
Appendix D); 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.
    \72\ This proposed method of calculation for investment advisers
corresponds to the reporting requirement in Item 1.O. of Part 1A of
Form ADV, which currently requires an investment adviser to check a
box to indicate if it has assets of $1 billion or more. See Form
ADV, Part IA, Item 1.O.; SEC, ``Rules Implementing Amendments to the
Investment Advisers Act of 1940, Investment Advisers Release No. IA-
3221,'' 76 FR 42950 (July 19, 2011). Many commenters to the first
notice of proposed rulemaking indicated that they understood that
the SEC did not intend ``total consolidated assets'' to include non-
proprietary assets, such as client assets under management; others
requested clarification that this understanding is correct. The SEC
is clarifying in the proposed rule that investment advisers should
include only proprietary assets in the calculation--that is, non-
proprietary assets, such as client assets under management would not
be included, regardless of whether they appear on an investment
adviser's balance sheet. The SEC notes that this method is drawn
directly from section 956. See section 956(f) (referencing
``assets'' only).
---------------------------------------------------------------------------

    The Board's proposed rule would require that savings and loan
holding companies that do not file a regulatory report within the
meaning of section __.2(ee)(3) of the Board's proposed rule report
their average total consolidated assets to the Board on a quarterly
basis. In addition, foreign banking organizations with U.S. operations
would be required to report their total consolidated U.S. assets to the
Board on a quarterly basis. These regulated institutions would be
required to report their average total consolidated assets to the Board
either because they do not file reports of their total consolidated
assets with the Board (in the case of savings and loan holding
companies that do not file a regulatory report with the Board within
the meaning of section __.2(ee)(3) of the Board's proposed rule), or
because the reports filed do not encompass the full range of assets (in
the case of foreign banking organizations with U.S. operations). Asset
information concerning the U.S. operations of foreign banking
organizations is filed on form FRY-7Q, but the information does not
include U.S. assets held pursuant to section 2(h)(2) of the Bank
Holding Company Act. Foreign banking organizations with U.S. operations
would report their average total consolidated U.S. assets including
assets held pursuant to section 2(h)(2) of the Bank Holding Company Act
for purposes of complying with the requirements of section __.2(ee)(3)
of the Board's proposed rule. The Board would propose that reporting
forms be created or modified as necessary for these institutions to
meet these reporting requirements.
    The proposed rule does not specify a method for determining the
total consolidated assets of some types of subsidiaries that would be
considered covered institutions under the proposed rule, because those
subsidiaries do not currently submit regular reports of their asset
size to the Agencies. For the subsidiary of a national bank, Federal
savings association, or Federal branch or agency of a foreign bank, the
OCC would rely on 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. Similarly, for a regulated institution subsidiary of a bank
holding company, savings and loan holding company, or foreign banking
organization the Board would rely on a report of the subsidiary's total
consolidated assets prepared by the bank holding company or savings and
loan holding company in a form that is acceptable to the Board.
    Control. The definition of control in the proposed rule is similar
to the definition of the same term in the Bank Holding Company Act.\73\
Any company would have control over a bank or any company if: (1) The
company directly or indirectly or acting through one or more other
persons owns, controls, or has power to vote 25 percent or more of any
class of voting securities of the bank or company; (2) the company
controls in any manner the election of a majority of the directors or
trustees of the bank or company; or (3) the appropriate Federal
regulator determines, after notice and opportunity for hearing, that
the company directly or indirectly exercises a controlling influence
over the management or policies of the bank or company.
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    \73\ 12 U.S.C. 1841(a)(2).
---------------------------------------------------------------------------

    Depository institution holding company. The OCC's, the FDIC's, and
the SEC's proposed rules define ``depository institution holding
company'' to mean a top-tier depository institution holding company,
where ``depository institution holding company'' would have the same
meaning as in section 3 of the FDIA.\74\ In a multi-tiered depository
institution holding company, references in the OCC's, FDIC's and SEC's
proposed rules to the ``depository institution holding company'' would
mean the top-tier depository institution holding company of the multi-
tiered holding company only.
---------------------------------------------------------------------------

    \74\ See 12 U.S.C. 1813(w).
---------------------------------------------------------------------------

    For example, for the purpose of determining whether a state
nonmember bank that is a subsidiary of a depository institution holding
company and is within a multi-tiered depository institution holding
company structure is a Level 1, Level 2, or Level 3 covered institution
under the FDIC's proposed rule, the state nonmember would look to the
top-tier depository institution holding company's average total
consolidated assets. Thus, in a situation in which a state nonmember
bank with average total consolidated assets of $35 billion is a
subsidiary of a depository institution holding company with average
total consolidated assets of $45 billion that is itself a subsidiary of
a depository institution holding company with $75 billion in average
total consolidated assets, the state nonmember bank would be treated as
a Level 2 covered institution because the top-tier depository
institution holding company has average total consolidated assets of
$75 billion (which is greater than or equal to $50 billion but less
than $250 billion). Similarly, state member banks and national banks
within multi-tiered depository institution holding company structures
would look to the top-tier depository institution holding company's
average total consolidated assets when determining if they are a Level
1, Level 2 or Level 3 covered institution under the Board's and the
OCC's proposed rules.
    Subsidiary. For the OCC, the Board, the FDIC, and the SEC, the
proposed rule would define ``subsidiary'' to mean any company which is
owned or controlled directly or indirectly by another company. The
Board proposes to exclude from its definition of ``subsidiary'' any
merchant banking investment that is owned or controlled pursuant to 12
U.S.C. 1843(k)(4)(H) and subpart J of the Board's Regulation Y (12 CFR
part 225) and any company with respect to which the covered institution
acquired ownership or control in the ordinary course of collecting a
debt previously contracted in good faith. Depository institution
holding companies may hold such investments only for limited periods of
time by law. Application of the proposed rule to these institutions
directly would not further the purpose of the proposed rule under
section 956. The holding company and any nonbanking subsidiary holding
these investments would be subject to the proposed rule. For these
reasons, the Board is proposing to exclude from the definition

of subsidiary companies owned by a holding company as merchant banking
investments or through debt previously contracted in good faith. These
companies would, therefore, not be required to conform their incentive-
based compensation programs to the requirements of the proposed rule.
    FHFA's proposed rule would not include a definition of
``subsidiary.'' The Federal Home Loan Banks have no subsidiaries, and
any subsidiaries of the Enterprises as defined by other Agencies under
the proposed rule would be included as affiliates as part of the
definition of Enterprise in the Safety and Soundness Act, which is
referenced in the definition of regulated entity. The NCUA's proposed
rule also would not include a definition of ``subsidiary.'' While in
some cases, CUSOs might be considered subsidiaries of a credit union,
NCUA has determined that this rule would not apply to CUSOs.
    2.1. The Agencies invite comment on whether other financial
institutions should be included in the definition of ``covered
institution'' and why.
    2.2. The Agencies invite comment on whether any additional
financial institutions should be included in the proposed rule's
definition of subsidiary and why.
    2.3. The Agencies invite comment on whether any additional
financial institutions (such as registered investment companies) should
be excluded from the proposed rule's definition of subsidiary and why.
    2.4. The Agencies invite comment on the definition of average total
consolidated assets.
    2.5. The Agencies invite comment on the proposed rule's approach to
consolidation. Are there any additional advantages to the approach? For
example, the Agencies invite comment on the advantages of the proposed
rule's approach for reinforcing the ability of an institution to
establish and maintain effective risk management and controls for the
entire consolidated organization and enabling holding company
structures to more effectively manage human resources. Are there
advantages to the approach of the proposed rule in helping to reduce
the possibility of evasion of the more specific standards applicable to
certain individuals at Level 1 or Level 2 covered institutions? Are
there any disadvantages to the proposed rule's approach to
consolidation? For example, the Agencies invite comment on any
disadvantages smaller subsidiaries of a larger covered institution may
have by applying the more specific provisions of the proposed rule to
these smaller institutions that would not otherwise apply to them but
for being a subsidiary of a larger institution. Is there another
approach that the proposed rule should take? The Agencies invite
comment on any advantages and disadvantages of the SEC's proposal to
not consolidate subsidiaries of broker-dealers and investment advisers
that are not themselves subsidiaries of depository institution holding
companies. Are the operations, services, and products of broker-dealers
and investment advisers not typically effected through subsidiaries?
Should the SEC adopt an express requirement to treat two or more
affiliated investment advisers or broker-dealers that are separate
legal entities (e.g., investment advisers that are operationally
integrated) as a single investment adviser or broker-dealer for
purposes of the proposed rule's thresholds?
    2.6. The Agencies invite comment on whether the three-level
structure would be a workable approach for categorizing covered
institutions by asset size and why.
    2.7. The Agencies invite comment on whether the asset thresholds
used in these definitions would divide covered institutions into
appropriate groups based on how they view the competitive marketplace.
If asset thresholds are not the appropriate methodology for determining
which requirements apply, which other alternative methodologies would
be appropriate and why?
    2.8. Are there instances where it may be appropriate to modify the
requirements of the proposed rule where there are multiple covered
institutions subsidiaries within a single parent organization based
upon the relative size, complexity, risk profile, or business model,
and use of incentive-based compensation of the covered institution
subsidiaries within the consolidated organization? In what situations
would that be appropriate and why?
    2.9. Is the Agencies' assumption that incentive-based compensation
programs are generally designed and administered at the holding company
level for the organization as a whole correct? Why or why not? To what
extent do broker-dealers or investment advisers within a holding
company structure apply the same compensation standards as other
subsidiaries in the parent company?
    2.10. Bearing in mind that section 956 by its terms seeks to
address incentive-based compensation arrangements that could lead to
material financial loss to a covered institution, commenters are asked
to provide comments on the proposed method of determining asset size
for investment advisers. Are there instances where it may be
appropriate to determine asset size differently, by for example,
including client assets under management for investment advisers? In
what situations would that be appropriate and why?
    2.11. Should the determination of average total consolidated assets
for investment advisers exclude non-proprietary assets that are
included on a balance sheet under accounting rules, such as certain
types of client assets under management required to be included on an
investment adviser's balance sheet? Why or why not?
    2.12. Should the determination of average total consolidated assets
be further tailored for certain types of investment advisers, such as
charitable advisers, non-U.S.-domiciled advisers, or insurance
companies and, if so, why and in what manner?
    2.13. The Agencies invite comment on the methods for determining
whether foreign banking organizations and Federal branches and agencies
are Level 1, Level 2, or Level 3 covered institutions. Should the same
method be used for both foreign banking organizations and Federal
branches and agencies? Why or why not?
Definitions Pertaining to Covered Persons
    Covered person. The proposed rule defines ``covered person'' as any
executive officer, employee, director, or principal shareholder who
receives incentive-based compensation at a covered institution.\75\ The
term ``executive officer'' would include individuals who are senior
executive officers, as defined in the proposed rule, as well as other
individuals designated as executive officers by the covered
institution. As described further below, section __.4 of the proposed
rule would apply requirements and prohibitions on all incentive-based
compensation arrangements for covered persons at covered institutions.
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    \75\ Section 956 requires the Agencies to jointly prescribe
regulations or guidelines that prohibit certain incentive-based
compensation arrangements or features of such arrangements that
encourage inappropriate risk by providing an executive officer,
employee, director, or principal shareholder with excessive
compensation, fees, or benefits or that could lead to material
financial loss to the covered financial institution.
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    Included in the class of covered persons are senior executive
officers and significant risk-takers, discussed further below. Senior
executive officers and significant risk-takers are covered persons that
may have the ability to expose a covered institution to significant
risk through their positions or actions. Accordingly, the proposed rule
would prohibit the incentive-based

compensation arrangements for senior executive officers and significant
risk-takers from including certain features that encourage
inappropriate risk, consistent with the approach under sections __.5,
__.9, __.10, and __.11 of the proposed rule of requiring risk-
mitigating features for the incentive-based compensation programs at
larger and more complex covered institutions.
    For Federal credit unions, only one director, if any, would be
considered a covered person because, under section 112 of the Federal
Credit Union Act \76\ and NCUA's regulations at 12 CFR 701.33, only one
director may be compensated as an officer of the board of directors.
The insurance and indemnification benefits that are excluded from the
definition of ``compensation'' for purposes of 12 CFR 701.33 would not
cause a non-compensated director of a credit union to be included under
the definition of ``covered person'' because these benefits would not
be ``incentive-based compensation'' under the proposed rule.
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    \76\ 12 U.S.C. 1761a.
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    Director. The proposed rule defines ``director'' as a member of the
board of directors of a covered institution. Any member of a covered
institution's governing body would be included within this definition.
    Principal shareholder. Section 956 applies to principal
shareholders as well as executive officers, employees, and directors.
The proposed rule defines ``principal shareholder'' as a natural person
who, directly or indirectly, or acting through or in concert with one
or more persons, owns, controls, or has the power to vote 10 percent or
more of any class of voting securities of a covered institution. The 10
percent threshold for identifying principal shareholders is used in a
number of bank regulatory contexts.\77\ The NCUA's proposed rule does
not include this definition because credit unions are not-for-profit
financial cooperatives with member owners. The Agencies recognize that
some other types of covered institutions, for example, mutual savings
associations, mutual savings banks, and some mutual holding companies,
do not have principal shareholders.
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    \77\ See, e.g., 12 CFR 215.2(m), 12 CFR 225.2(n)(2), and 12 CFR
225.41(c)(2).
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    2.14. The Agencies invite comment on whether the definition of
``principal shareholder'' reflects a common understanding of who would
be a principal shareholder of a covered institution.
    Senior executive officer. The proposed rule defines ``senior
executive officer'' as a covered person who holds the title or, without
regard to title, salary, or compensation, performs the function of one
or more of the following positions at a covered institution for any
period of time in the relevant performance period: President, chief
executive officer (CEO), executive chairman, chief operating officer,
chief financial officer, chief investment officer, chief legal officer,
chief lending officer, chief risk officer, chief compliance officer,
chief audit executive, chief credit officer, chief accounting officer,
or head of a major business line or control function. As described
below, a Level 1 or Level 2 covered institution would be required to
defer a portion of the incentive-based compensation of a senior
executive officer and subject the incentive-based compensation to
forfeiture, downward adjustment, and clawback. The proposed rule would
also limit the extent to which options could be used to meet the
proposed rule's minimum deferral requirements for senior executive
officers. The proposed rule would require a covered institution's board
of directors, or a committee thereof, to approve incentive-based
compensation arrangements for senior executive officers and any
material exceptions or adjustments to incentive-based compensation
policies or arrangements for senior executive officers. Additionally,
Level 1 and Level 2 covered institutions would be required to create
and maintain records listing senior executive officers and to document
forfeiture, downward adjustment, and clawback decisions for senior
executive officers. The proposed rule would limit the extent to which a
Level 1 or Level 2 covered institution may award incentive-based
compensation to a senior executive officer in excess of the target
amount for the incentive-based compensation. Senior executive officers
also would not be eligible to serve on the compensation committee of a
Level 1 or Level 2 covered institution under the proposed rule.
    The 2011 Proposed Rule contained a definition of ``executive
officer'' that included the positions of president, CEO, executive
chairman, chief operating officer, chief financial officer, chief
investment officer, chief legal officer, chief lending officer, chief
risk officer, and head of a major business line. It did not include the
positions of chief compliance officer, chief audit executive, chief
credit officer, chief accounting officer, or head of a control
function. One commenter asserted that the term ``executive officer''
should not be defined with reference to specific position, but, rather,
should be identified by the board of directors of a covered
institution. Other commenters asked the Agencies for additional
specificity about the types of executive officers that would be covered
at large and small covered institutions, particularly with respect to
the heads of major business lines. Some commenters encouraged the
Agencies to align the definition of ``executive officer'' with the
Securities Exchange Act of 1934 by focusing on individuals with
significant policymaking functions. In the alternative, some of these
commenters suggested that the definition be revised to conform to the
2010 Federal Banking Agency Guidance.
    The definition of ``senior executive officer'' in the proposed rule
retains the list of positions included in the 2011 Proposed Rule and is
consistent with other rules and agency guidance. The list includes the
minimum positions that are considered ``senior executives'' under the
Federal Banking Agency Safety and Soundness Guidelines.\78\ The
Agencies also took into account the positions that would be considered
``officers'' under section 16 of the Securities Exchange Act of
1934.\79\
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    \78\ These minimum positions include ``executive officers,''
within the meaning of Regulation O (12 CFR 215.2(e)(1)) and ``named
officers'' within the meaning of the SEC's rules on disclosure of
executive compensation (17 CFR 229.402). In addition to these
minimum positions, the Federal Banking Agency Safety and Soundness
Guidelines also apply to individuals ``who are responsible for
oversight of the organization's firm-wide activities or material
business lines.'' 75 FR at 36407.
    \79\ See 17 CFR 240.16a-1.
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    In addition to the positions listed in the 2011 Proposed Rule, the
proposed definition of ``senior executive officer'' includes the
positions of chief compliance officer, chief audit executive, chief
credit officer, chief accounting officer, and other heads of a control
function. Individuals in these positions do not generally initiate
activities that generate risk of material financial loss, but they play
an important role in identifying, addressing, and mitigating that risk.
Individuals in these positions have the ability to influence the risk
measures and other information and judgments that a covered institution
uses for risk management, internal control, or financial purposes.\80\
Improperly structured incentive-based compensation arrangements could
create incentives for individuals in these positions to use their
authority in ways that increase, rather than mitigate, risk of material
financial loss. Some larger institutions have designated

individuals in these positions as ``covered persons'' for purposes of
the 2010 Federal Banking Agency Guidance.
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    \80\ See 2010 Federal Banking Agency Guidance, 75 FR at 36411.
---------------------------------------------------------------------------

    The definition of ``senior executive officer'' also includes a
covered person who performs the function of a senior executive officer
for a covered institution, even if the covered person's formal title
does not reflect that role or the covered person is employed by a
different entity. For example, under the proposed rule, a covered
person who is an employee of a bank holding company and also performs
the functions of a chief financial officer for the subsidiary bank
would, in addition to being a covered person of the bank holding
company, also be a senior executive officer of the bank holding
company's subsidiary bank. This approach would address attempts to
evade being included within the definition of ``senior executive
officer'' by changing an individual's title but not that individual's
responsibilities. In some instances, the determination of senior
executive officers and compliance with relevant requirements of the
proposed rule may be influenced by the covered institution's
organizational structure.\81\ If a covered institution does not have
any covered person who holds the title or performs the function of one
or more of the positions listed in the definition of ``senior executive
officer,'' the proposed rule would not require the covered institution
to designate a covered person to fill such position for purposes of the
proposed rule. Similarly, if a senior executive officer at one covered
institution also holds the title or performs the function of one of
more of the positions listed for a subsidiary that is also a covered
institution, then that individual would be a senior executive officer
for both the parent and the subsidiary covered institutions.
---------------------------------------------------------------------------

    \81\ See section __.3(c) of the proposed rule.
---------------------------------------------------------------------------

    The list of positions in the proposed definition sets forth the
types of positions whose incumbents would be considered senior
executive officers. The Agencies are proposing this list to aid covered
institutions in identifying their senior executive officers while
allowing the covered institutions some degree of flexibility in
determining which business lines are major business lines.
    2.15. The Agencies invite comment on whether the types of positions
identified in the proposed definition of senior executive officer are
appropriate, whether additional positions should be included, whether
any positions should be removed, and why.
    2.16. The Agencies invite comment on whether the term ``major
business line'' provides enough information to allow a covered
institution to identify individuals who are heads of major business
lines. Should the proposed rule refer instead to a ``core business
line,'' as defined in FDIC and FRB rules relating to resolution
planning (12 CFR 381.2(d)), to a ``principal business unit, division or
function,'' as described in SEC definitions of the term ``executive
officer'' (17 CFR 240.3b-7), or to business lines that contribute
greater than a specified amount to the covered institution's total
annual revenues or profit? Why?
    2.17. Should the Agencies include the chief technology officer
(``CTO''), chief information security officer, or similar titles as
positions explicitly listed in the definition of ``senior executive
officer''? Why or why not? Individuals in these positions play a
significant role in information technology management.\82\ The CTO is
generally responsible for the development and implementation of the
information technology strategy to support the institution's business
strategy in line with its appetite for risk. In addition, these
positions are generally responsible for implementing information
technology architecture, security, and business resilience.
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    \82\ See generally Federal Financial Institutions Examination
Council (``FFIEC'') Information Technology Examination Handbook,
available at http://ithandbook.ffiec.gov/it-booklets.aspx.
---------------------------------------------------------------------------

    Significant risk-taker. The proposed rule's definition of
``significant risk-taker'' is intended to include individuals who are
not senior executive officers but are in the position to put a Level 1
or Level 2 covered institution at risk of material financial loss so
that the proposed rule's requirements and prohibitions on incentive-
based compensation arrangements apply to such individuals. In order to
ensure that incentive-based compensation arrangements for significant
risk-takers appropriately balance risk and reward, most of the proposed
rule's requirements for Level 1 and Level 2 covered institutions
relating to senior executive officers would also apply to significant
risk-takers to some degree. These requirements include the disclosure
and recordkeeping requirements of section __.5; the deferral,
forfeiture, downward adjustment, and clawback requirements of section
__.7 (including the related limitation on options); and the maximum
incentive-based compensation opportunity limit of section __.8.
    The proposed definition of ``significant risk-taker'' incorporates
two tests for determining whether a covered person is a significant
risk-taker. A covered person would be a significant risk-taker if
either test was met. The first test is based on the amounts of annual
base salary and incentive-based compensation of a covered person
relative to other covered persons working for the covered institution
and its affiliate covered institutions (the ``relative compensation
test''). This test is intended to determine whether the individual is
among the top 5 percent (for Level 1 covered institutions) or top 2
percent (for Level 2 covered institutions) of highest compensated
covered persons in the entire consolidated organization, including
affiliated covered institutions. The second test is based on whether
the covered person has authority to commit or expose 0.5 percent or
more of the capital of the covered institution or an affiliate that is
itself a covered institution (the ``exposure test'').\83\
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    \83\ In the proposed rule, the Agencies have tailored the
measure of capital to the type of covered institution. For most
covered institutions, the exposure test would be based on common
equity tier 1 capital. For depository institution holding companies,
foreign banking organizations, and affiliates of those institutions
that do not report common equity tier 1 capital, the Board would
work with covered institutions to determine the appropriate measure
of capital. For registered securities brokers or dealers, the
exposure test would be based on tentative net capital. See 17 CFR
240.15c3-1(c)(15). For Federal Home Loan Banks, the exposure test
would be based on regulatory capital. For the Enterprises, the
exposure test would be based on minimum capital. For credit unions,
the exposure test would be based on net worth or total capital. For
simplicity in describing the exposure test in this Supplementary
Information section, common equity tier 1 capital, tentative net
capital, regulatory capital, minimum capital, net worth, and total
capital are referred to generally as ``capital.'' The Agencies
expect that a covered institution that is an investment adviser will
use common equity tier 1 capital or tentative net capital to the
extent it would be a covered institution in another capacity (e.g.,
if the investment adviser also is a depository institution holding
company, a bank, a broker-dealer, or a subsidiary of a depository
institution holding company). For an investment adviser that would
not be a covered institution in any other capacity, the proposed
rule's exposure test would not be measured against the investment
adviser's capital. For a covered person of such an investment
adviser that can commit or expose capital of an affiliated covered
institution, the exposure test would be based on common equity tier
1 capital or tentative net capital of that affiliated covered
institution. For other covered persons of any investment adviser
that would not be a covered institution in any other capacity, no
exposure test is proposed to apply. Comment is requested below
regarding what measure would be appropriate for an exposure test.
---------------------------------------------------------------------------

    The definition of significant risk-taker applies to only Level 1
and Level 2 covered institutions. The definition of significant risk-
taker does not apply to senior executive officers. Senior

executive officers of Level 1 and Level 2 covered institutions would be
separately subject to the proposed rule, as discussed earlier in this
Supplemental Information section.
    The significant risk-taker definition under either test would be
applicable only to covered persons who received annual base salary and
incentive-based compensation of which at least one-third is incentive-
based compensation (one-third threshold), based on the covered person's
annual base salary paid and incentive-based compensation awarded during
the last calendar year that ended at least 180 days before the
beginning of the performance period for which significant risk-takers
are being identified.\84\ For example, an individual who received
$180,000 in annual base salary during calendar year 2019 and was
awarded incentive-based compensation of $120,000 for performance
periods that ended during calendar year 2019 could be a significant
risk-taker because one-third of the individual's compensation was
incentive-based. Specifically, the individual would be a significant
risk-taker for a performance period beginning on or after June 28, 2020
if the individual also met the relative compensation test or the
exposure test.\85\
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    \84\ Incentive-based compensation awarded in a particular
calendar year would include any incentive-based compensation awarded
with respect to a performance period that ended during that calendar
year.
    \85\ In this example, incentive-based compensation awarded
($120,000) would be 40 percent of the total $300,000 received in
annual base salary ($180,000) and incentive-based compensation
awarded ($120,000).
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    Under the proposed rule, in order for covered persons to be
designated as significant risk-takers, the covered persons would have
to be awarded a level of incentive-based compensation that would be
sufficient to influence their risk-taking behavior. In order to ensure
that significant risk-takers are only those covered persons who have
incentive-based compensation arrangements that could provide incentives
to engage in inappropriate risk-taking, only covered persons who meet
the one-third threshold could be significant risk-takers.
    The proposed one-third threshold is consistent with the more
conservative end of the range identified in industry practice.
Institutions in the Board's 2012 LBO Review that would be Level 2
covered institutions under the proposed rule reported that they
generally rewarded their self-identified individual risk-takers with
incentive-based compensation in the range of 8 percent to 90 percent of
total compensation, with an average range of 32 percent to 71 percent.
The proposed threshold of one-third or more falls within the lower end
of that average range.
    The one-third threshold would also be consistent with other
standards regarding compensation. Under the Emergency Economic
Stabilization Act of 2008 (as amended by section 7001 of the American
Recovery and Reinvestment Act of 2009), recipients of financial
assistance under Treasury's Troubled Asset Relief Program (``TARP'')
were prohibited from paying or accruing any bonus, retention award, or
incentive compensation except for the payment of long-term restricted
stock if that stock had a value that was not greater than one third of
the total amount of annual compensation of the employee receiving the
stock.\86\ In addition, some international regulators also use a
threshold of one-third incentive-based compensation for determining the
scope of application for certain compensation standards.\87\
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    \86\ 12 U.S.C. 5221(b)(3)(D).
    \87\ PRA, ``Supervisory Statement LSS8/13, Remuneration
Standards: The Application of Proportionality'' (April 2013), at 11,
available at http://www.bankofengland.co.uk/publications/Documents/other/pra/policy/2013/remunerationstandardslss8-13.pdf.
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    The Agencies included the 180-day period in the one-third threshold
of annual base salary and incentive-based compensation because, based
upon the supervisory experience of the Federal Banking Agencies and
FHFA, this period would allow covered institutions an adequate period
of time to calculate the total compensation of their covered persons
and, for purposes of the relative compensation test, the individuals
receiving incentive-based compensation from their affiliate covered
institutions over a full calendar year. The Agencies expect, based on
the experience of exceptional assistance recipients under TARP,\88\
that 180 days would be a reasonable period of time for Level 1 and
Level 2 covered institutions to finalize compensation paid to and
awarded to covered persons and to perform the necessary calculations to
determine which covered persons are significant risk-takers. This time
period would allow covered institutions to make awards following the
end of the performance period, calculate the annual base salary and
incentive-based compensation for all employees in the consolidated
organization, including affiliated covered institutions, and then
implement new compensation arrangements for the significant risk-takers
identified, if necessary.
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    \88\ The institutions that accepted ``exceptional assistance''
under TARP were required to submit to the Office of the Special
Master for approval the compensation levels and structures for the
five named executive officers and the next 20 most highly
compensated executive officers (``Top 25'') and the compensation
structures for the next 75 most highly compensated employees. The
requirement for submission of the Top 25 necessitated the collection
of the compensation data for executives worldwide and took
considerable time and effort on the part of the institutions.
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    The Agencies recognize that the relative compensation test and the
exposure test, combined with the one-third threshold, may not identify
all covered persons at Level 1 and Level 2 covered institutions who
have the ability to expose a covered institution or its affiliated
covered institutions to material financial loss. Accordingly, paragraph
(2) of the proposed rule's definition of significant risk-taker would
allow covered institutions or the Agencies the flexibility to designate
additional persons as significant risk-takers. An Agency would be able
to designate a covered person as a significant risk-taker if the
covered person has the ability to expose the covered institution to
risks that could lead to material financial loss in relation to the
covered institution's size, capital, or overall risk tolerance. Each
Agency would use its own procedures for making such a designation. Such
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 person and covered
institution to respond.
Relative Compensation Test
    The relative compensation test in paragraphs (1)(i) and (ii) of the
proposed definition of ``significant risk-taker'' would require a
covered institution to determine which covered persons received the
most annual base salary and incentive-based compensation among all
individuals receiving incentive-based compensation from the covered
institution and any affiliates of the covered institution that are also
subject to the proposed rule.\89\ The

definition contains two percentage thresholds for measuring whether an
individual is a significant risk-taker. For a Level 1 covered
institution, a covered person would be a significant risk-taker if the
person receives annual base salary and incentive-based compensation for
the last calendar year that ended at least 180 days before the
performance period that places the person among the highest 5 percent
of all covered persons in salary and incentive-based compensation
(excluding senior executive officers) of the Level 1 covered
institution and, in the cases of the OCC, the Board, the FDIC, and the
SEC, any section 956 affiliates of the Level 1 covered institution. For
Level 2 covered institutions, the threshold would be 2 percent rather
than 5 percent.
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    \89\ The OCC, Board, FDIC, and SEC's proposed rules include a
defined term, ``section 956 affiliate,'' that is intended to
function as shorthand for the types of entities that are considered
``covered institutions'' under the six Agencies' proposed rules. The
term ``section 956 affiliate'' is used only in the definition of
``significant risk-taker,'' and it is not intended to affect the
scope of any Agency's rule or the entities considered ``covered
institutions'' under any Agency's rule. Given the proposed location
of each Agency's proposed rule in the Code of Federal Regulations,
the cross-references used in each of the OCC, Board, FDIC, and SEC's
proposed rule differ slightly. NCUA's proposed rule does not include
a definition of ``section 956 affiliate,'' because credit unions are
not affiliated with the entities that are considered ``covered
institutions'' under the other Agencies' rules. Similarly, FHFA's
proposed rule does not include a definition of ``section 956
affiliate'' because its regulated institutions are not affiliated
with other Agencies' covered institutions.
---------------------------------------------------------------------------

    For example, if a hypothetical bank holding company were a Level 1
covered institution and had $255 billion in average total consolidated
assets might have a subsidiary national bank with $253 billion in
average total consolidated assets, a mortgage subsidiary with $1.9
billion in average total consolidated assets, and a wealth management
subsidiary with $100 million in average total consolidated assets.\90\
The relative compensation test would analyze the annual base salary and
incentive-based compensation of all covered persons (other than senior
executive officers) who receive incentive-based compensation at the
bank holding company, the subsidiary national bank, and the mortgage
subsidiary, which are all covered institutions with assets greater than
or equal to $1 billion. Individuals at the wealth management subsidiary
would not be included because that subsidiary has less than $1 billion
in average total consolidated assets. Thus, if the bank holding
company, state member bank, and mortgage subsidiary collectively had
150,000 covered persons (excluding senior executive officers), then the
covered institution should identify the 7,500 or 5 percent of covered
persons (other than senior executive officers) who receive the most
annual base salary and incentive-based compensation out of those
150,000 covered persons, and identify as significant risk-takers any of
those 7,500 persons who received annual base salary and incentive-based
compensation for the last calendar year that ended at least 180 days
before the beginning of the performance period of which at least one-
third is incentive-based compensation.\91\ Some of those 7,500 covered
persons might receive incentive-based compensation from the bank
holding company; others might receive incentive-based compensation from
the national bank or the mortgage subsidiary. Each covered person that
satisfies all requirements would be considered a significant risk-taker
of the covered institution from which they receive incentive-based
compensation. This example is provided solely for the purpose of
illustrating the calculation of the number of significant risk-takers
under the relative compensation test as proposed. It does not reflect
any specific institution, nor does it reflect the experience or
judgment of the Agencies of the number of covered persons or
significant risk-takers at any institution that would be a Level 1
covered institution under the proposed rule.
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    \90\ Under the proposed rule, all of these subsidiaries in this
example other than the wealth management subsidiary would be subject
to the same requirements as the bank holding company, including the
specific requirements applying to identification of significant
risk-takers. The wealth management subsidiary would not be subject
to the requirements of the proposed rule because it has less than $1
billion in average total consolidated assets.
    \91\ The Agencies anticipate that covered institutions that are
within a depository institution holding company structure would work
together to ensure that significant risk-takers are correctly
identified under the relative compensation test.
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    Annual base salary and incentive-based compensation would be
measured based on the last calendar year that ended at least 180 days
before the beginning of the performance period for the reasons
discussed above.
    The Agencies propose that Level 1 and Level 2 covered institutions
generally should consider a covered person's annual base salary
actually paid during the calendar year. If, for example, a covered
person was a manager during the first half of the year, with an annual
salary of $100,000, and was then promoted to a senior manager with an
annual salary of $150,000 on July 1 of that year, the annual base
salary would be the $50,000 that person received as manager for the
first half of the year plus the $75,000 received as a senior manager
for the second half of the year, for a total of $125,000.
    For the purposes of determining significant risk-takers, covered
institutions should consider the incentive-based compensation that was
awarded for any performance period that ended during a particular
calendar year, regardless of when the performance period began. For
example, if a covered person is awarded incentive-based compensation
relating to (i) a plan with a three-year performance period that began
on January 1, 2017, (ii) a plan with a two-year performance period that
began on January 1, 2018, and (iii) a plan with a one-year performance
period that began on January 1, 2019, then all three of these awards
would be included in the calculation of incentive-based compensation
for calendar year 2019 because all three performance periods would end
on December 31, 2019. The amount of previously deferred incentive-based
compensation that vests in a particular year would not affect the
measure of a covered person's incentive-based compensation for purposes
of the relative compensation test.\92\
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    \92\ Level 1 and Level 2 covered institutions would also use
this method of calculating a covered person's incentive-based
compensation for a particular calendar year for purposes of
determining (1) whether such person received annual base salary and
incentive-based compensation of which at least one third was
incentive-based compensation and (2) the amount of a covered
person's annual base salary and incentive-based compensation under
the dollar threshold test.
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    To reduce the administrative burden of calculating annual base
salary and incentive-based compensation, the calculation would not
include fringe benefits such as the value of medical insurance or the
use of a company car. For purposes of such calculation, any non-cash
compensation, such as stock or options, should be valued as of the date
of the award.
    In the Agencies' supervisory experience, the amount of a covered
person's annual base salary and incentive-based compensation can
reasonably be expected to relate to the amount of responsibility that
the covered person has within an organization, and covered persons with
a higher level of responsibility generally either (1) have a greater
ability to expose a covered institution to financial loss or (2)
supervise covered persons who have a greater ability to expose a
covered institution to financial loss. For this reason, the Agencies
are proposing to use the relative compensation test as one basis for
identifying significant risk-takers.
    Although a large number of covered persons may be able to expose a
covered institution to a financial loss, the Agencies have limited the
relative compensation test to the most highly compensated individuals
in order to focus on those covered persons whose behavior can directly
or indirectly expose a Level 1 or Level 2 covered institution to a
financial loss that is material. Based on an analysis of public
disclosures of large, international banking organizations \93\ and on
the

Agencies' own supervision of incentive-based compensation, the top 5
percent most highly compensated covered persons among the covered
institutions in the consolidated structure of Level 1 covered
institutions are the most likely to have the potential to encourage
inappropriate risk-taking by the covered institution because their
compensation is excessive (the first test in section 956) or be the
personnel who are able to expose the organization to risk of material
financial loss (the second test in section 956).
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    \93\ Agencies examined information available through various
public reports, including the FSB's annual Compensation Progress
Report. For instance, many international jurisdictions require firms
to identify a population of employees who can expose a firm to
material amounts of risk (sometimes called material risk takers or
key risk takers), who are subject to specific requirements including
deferral. In 2014 the FSB published information indicating that the
average percentage of total global employees identified as risk-
takers under these various jurisdictions' requirements at a sample
of large firms ranged from 0.01 percent of employees of the global
consolidated organization to more than 5 percent. The number varied
between, but also within, individual jurisdictions and institutions
as a result of factors such as specific institutions surveyed, the
size of institution, and the nature of business conducted. See FSB,
Implementing the FSB Principles for Sound Compensation Practices and
their Implementation Standards Third Progress Report (November
2014), at 19, available at http://www.fsb.org/2014/11/fsb-publishes-third-progress-report-on-compensation-practices.
    In addition, the Agencies relied to a certain extent on
information disclosed on a legal entity basis as a result of Basel
Pillar 3 remuneration disclosure requirements, for instance those
required under implementing regulations such as Article 450 of the
Capital Requirements Regulation (EU No 575/2013) in the European
Union. See, e.g., Morgan Stanley, Article 450 of CRR Disclosure:
Remuneration Policy (December 31, 2014), available at http://www.morganstanley.com/about-us-ir/pillar3/2014_CRR_450_Disclosure.pdf. Remuneration disclosure requirements
apply to ``significant'' firms. CRD IV defines institutions that are
significant ``in terms of size, internal organisation and nature,
scope and complexity of their activities.'' Under the EBA Guidance
on Sound Remuneration Policies, significant institutions means
institutions referred to in Article 131 of Directive 2013/36/EU
(global systemically important institutions or `G-SIIs,' and other
systemically important institutions or `O-SIIs'), and, as
appropriate, other institutions determined by the competent
authority or national law, based on an assessment of the
institutions' size, internal organization and the nature, the scope
and the complexity of their activities. Some, but not all, national
regulators have provided further guidance on interpretation of that
term, including the United Kingdom's FCA which provides a form of
methodology to determine if a firm is ``significant''--based on
quantitative tests of balance sheet assets, liabilities, annual fee
commission income, client money and client assets.
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    The Board and the OCC, as a part of their supervisory efforts,
reviewed a limited sample of banking organizations with total
consolidated assets of $50 billion or more to better understand what
types of positions within these organizations would be captured by
various thresholds for highly compensated employees. In the review, the
Board and the OCC also considered how far below the CEO within the
organizational hierarchy the selected thresholds would reach.
Generally, at banking organizations that would be Level 1 covered
institutions under the proposed rule, a 5 percent threshold would
include positions such as managing directors, directors, senior vice
presidents, relationship and sales managers, mortgage brokers,
financial advisors, and product managers. Such positions generally have
the ability to expose the organization to the risk of material
financial loss. Based on this review, the Agencies believe it is
reasonable to propose a 5 percent threshold under the relative
compensation test for Level 1 covered institutions.
    At banking organizations that would be Level 2 covered institutions
under the proposed rule, a 5 percent threshold yielded results that
went much deeper into the organization and identified roles with
individuals who might not individually take significant risks for the
organization. Additional review of a limited sample of these banking
organizations that would be Level 2 covered institutions under the
proposed rule showed that, on average, the institutions in the limited
sample identified approximately 2 percent of their total global
employees as individual employees whose activities may expose the
organization to material amounts of risk, as consistent with the 2010
Federal Banking Agency Guidance. A lower percentage threshold for Level
2 covered institutions relative to Level 1 covered institutions also is
consistent with the observation that larger covered institutions
generally have more complex structures and use incentive-based
compensation more significantly than relatively smaller covered
institutions. Based on this analysis, the Agencies chose to propose a 2
percent threshold for Level 2 covered institutions. A lower percentage
threshold for Level 2 covered institutions relative to Level 1 covered
institutions would reduce the burden on relatively smaller covered
institutions.
    Under the proposed rule, if an Agency determines, in accordance
with procedures established by the Agency, that a Level 1 covered
institution's activities, complexity of operations, risk profile, and
compensation practices are similar to those of a Level 2 covered
institution, then the Agency may apply a 2 percent threshold under the
relative compensation test rather than the 5 percent threshold that
would otherwise apply. This provision is intended to allow an Agency
the flexibility to adjust the number of covered persons who are
significant risk-takers with respect to a Level 1 covered institution
if the Agency determines that, notwithstanding the Level 1 covered
institution's average total consolidated assets, its actual activities
and risks are similar to those of a Level 2 covered institution, and
therefore it would be appropriate for the Level 1 covered institution
to have fewer significant risk-takers.
Exposure Test
    Under the exposure test, a covered person would be a significant
risk-taker with regard to a Level 1 or Level 2 covered institution if
the individual may commit or expose \94\ 0.5 percent or more of capital
of the covered institution or, and, in the cases of the OCC, the Board,
the FDIC, and the SEC, any section 956 affiliates of the covered
institution, whether or not the individual is employed by that specific
legal entity.
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    \94\ An individual may commit or expose capital of a covered
institution or affiliate if the individual has the ability to put
the capital at risk of loss due to market risk or credit risk.
---------------------------------------------------------------------------

    The exposure test relates to a covered person's authority to commit
or expose significant amounts of an institution's capital, regardless
of whether or not such exposures or commitments are realized. The
exposure test would relate to a covered person's authority to cause the
covered institution to be subject to credit risk or market risk. The
exposure test would not relate to the ability of a covered person to
expose a covered institution to other types of risk that may be more
difficult to measure or quantify, such as compliance risk.
    The measure of capital would relate to a covered person's authority
over the course of the most recent calendar year, in the aggregate, and
would be based on the maximum amount that the person has authority to
commit or expose during the year. For example, a Level 1 or Level 2
covered institution might allocate $10 million to a particular covered
person as an authorized level of lending for a calendar year. For
purposes of the exposure test in the proposed rule, the covered
person's authority to commit or expose would be $10 million. This would
be true even if the individual only made $8 million in loans during the
year or if the covered institution reduced the authorized amount to
$7.5 million at some point during the year. It would also be true even
if the covered person did not have the authority through any single
transaction to lend $10 million, so long as over the course of the year
the covered person could lend up to $10 million in the aggregate. If,
however, in

the course of the year the covered person received authorization for an
additional $5 million in lending, $15 million would become the
authorization amount for purposes of the exposure test. If a covered
person had no specific maximum amount of lending for the year, but
instead his or her lending was subject to approval on a rolling basis,
then the covered person would be assumed to have an authorized annual
lending amount in excess of the 0.5 percent threshold.
    As an additional example, a Level 1 or Level 2 covered institution
could authorize a particular covered person to trade up to $5 million
per day in a calendar year. For purposes of the exposure test, the
covered person's authorized annual lending amount would be $5 million
times the number of trading days in the year (for example, $5 million
times 260 days or $1.3 billion). This would be true even if the covered
person only traded $1 million per day during the year or if the covered
institution reduced the authorized trading amount to $2.5 million per
day at some point during the year. If, however, in the course of the
year the covered person received authorization for an additional $2
million in trading per day, the covered person's authority to commit or
expose capital for purposes of the exposure test would be $1.82 billion
($7 million times 260 days). The Agencies are aware that institutions
may not calculate their exposures in this manner and are requesting
comment upon it, as set forth below.
    The exposure test would also include individuals who are voting
members of a committee that has the decision-making authority to commit
or expose 0.5 percent or more of the capital of a covered institution
or of a section 956 affiliate of a covered institution. For example, if
a committee that is comprised of five covered persons has the authority
to make investment decisions with respect to 0.5 percent or more of a
state member bank's capital, then each voting member of such committee
would have the authority to commit or expose 0.5 percent or more of the
state member bank's capital for purposes of the exposure test. However,
individuals who participate in the meetings of such a committee but who
do not have the authority to exercise voting, veto, or similar rights
that lead to the committee's decision would not be included.
    The exposure test would also cause a covered person to be
considered a significant risk-taker if he or she can commit or expose
0.5 percent or more of the capital of any section 956 affiliate of the
covered institution by which the covered person is employed. For
example, if a covered person of a nonbank subsidiary of a bank holding
company has the authority to commit 0.5 percent or more of the bank
holding company's capital or the capital of the bank holding company's
subsidiary national bank (and received annual base salary and
incentive-based compensation for the last calendar year that ended at
least 180 days before the beginning of the performance period of which
at least one-third is incentive-based compensation), then the covered
person would be considered a significant risk-taker of the bank holding
company or national bank, whichever is applicable. This would be true
even if the covered person is not employed by the bank holding company
or the bank holding company's subsidiary national bank, and even if the
covered person does not have the authority to commit or expose the
capital of the nonbank subsidiary that employs the covered person.
    The exposure test would require a Level 1 or Level 2 covered
institution to consider the authority of an individual to take an
action that could result in significant credit or market risk exposures
to the covered institution. The Agencies are proposing the exposure
test because individuals who have the authority to expose covered
institutions to significant amounts of risk can cause material
financial losses to covered institutions. For example, in proposing the
exposure test, the Agencies were cognizant of the significant losses
caused by actions of individuals, or a trading group, at some of the
largest financial institutions during and after the financial crisis
that began in 2007.\95\
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    \95\ See supra note 14.
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    The exposure test would identify significant risk-takers based on
the extent of an individual's authority to expose an institution to
market risk or credit risk, measured by reference to 0.5 percent of the
covered institution's regulatory capital. Measuring this authority by
reference to an existing capital standard would provide a uniform and
clearly defined metric to apply among covered persons at Level 1 and
Level 2 covered institutions. The Agencies have selected credit and
market risks as the most relevant types of exposures because the
majority of assets on a covered institution's balance sheet generally
give rise to market or credit risk exposure.
    In proposing a threshold of 0.5 percent of relevant capital, the
Agencies considered both the absolute and relative amount of losses
that the threshold would represent for covered institutions, and the
fact that incentive-based compensation programs generally apply to
numerous employees at a covered institution. In the Agencies' view, the
proposed threshold represents a material financial loss within the
meaning of section 956 for any institution and multiple losses at the
same firm incentivized by a single incentive-based compensation program
could impair the firm.
    The Agencies considered the cumulative effect of incentive-based
compensation arrangements across a covered institution. The Agencies
recognize that many covered persons who have the authority to expose a
covered institution to risk are subject to similar incentive-based
compensation arrangements. The effect of an incentive-based
compensation arrangement on a covered institution would be the
cumulative effect of the behavior of all covered persons subject to the
incentive-based compensation arrangement. If multiple covered persons
are incented to take inappropriate risks, their combined risk-taking
behavior could lead to a financial loss at the covered institution that
is significantly greater than the financial loss that could be caused
by any one individual.\96\ Although many institutions already have
governance and risk management systems to help ensure the commitment of
significant amounts of capital is subject to appropriate controls, as
noted above, incentive-based compensation arrangements that provide
inappropriate risk-taking incentives can weaken those governance and
risk management systems. These considerations about the cumulative
effect of incentive-based compensation arrangements weigh in favor of a
conservative threshold under the exposure test so that large groups of
covered persons with the authority to commit a covered institution's
capital are not subject to flawed incentive-based compensation
arrangements which would incentivize them to subject the covered
institution to inappropriate risks.
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    \96\ See, e.g., the Subcommittee Report.
---------------------------------------------------------------------------

    The Agencies also considered that in another regulatory context, a
relatively small decrease in a large institution's capital requires
additional safeguards for safety and soundness. Under the capital plan
rule in the Board's Regulation Y, well-capitalized bank holding
companies with average total consolidated assets of $50 billion or more
are subject to prior approval requirements on incremental capital

distributions if those distributions, as measured over a one-year
period, would exceed pre-approved amounts by more than 1 percent of the
bank holding company's tier 1 capital.\97\ Relative to the capital plan
rule, a lower threshold of capital is appropriate in the context of
incentive-based compensation in light of the potential cumulative
effect of multiple covered persons with incentives to take
inappropriate risks and the possibility that correlated inappropriate
risk-taking incentives could, in the aggregate, significantly erode
capital buffers at Level 1 and Level 2 covered institutions.
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    \97\ See 12 CFR 225.8(g). Bank holding companies that are well-
capitalized and that meet other requirements under the rule must
provide the Board with prior notice for incremental capital
distributions, as measured over a one-year period, that represent
more than 1 percent of their tier 1 capital. Id.
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    Taking into consideration the cumulative impact of incentive-based
compensation arrangements described above, the Agencies have proposed a
threshold level for the exposure test of 0.5 percent of capital. The
exposure test would be measured on an annual basis to align with the
common practice at many institutions of awarding incentive-based
compensation on an annual basis, taking into account a covered person's
performance and risk-taking over 12 months.
    The Agencies also considered international compensation regulations
that also use a 0.5 percent threshold, but on a per transaction
basis.\98\ The Agencies are proposing to apply the threshold on an
aggregate annual basis because a per transaction basis could permit an
individual to evade designation as a significant risk-taker and the
related incentive-based compensation restrictions by keeping his or her
individual transactions below the threshold, but completing multiple
transactions during the course of the year that, in the aggregate, far
exceed the threshold.
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    \98\ See, e.g., EBA, ``Regulatory Technical Standards on
Criteria to Identify Categories of Staff Whose Professional
Activities Have a Material Impact on an Institution's Risk Profile
under Article 94(2) of Directive 2013/36/EU'' (December 16, 2013),
available athttps://www.eba.europa.eu/documents/10180/526386/EBA-RTS-2013-11+%28On+identified+staff%29.pdf/c313a671-269b-45be-a748-29e1c772ee0e.
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Exposure Test at Certain Affiliates
    Paragraph (3) of the definition of significant risk-taker is
intended to address potential evasion of the exposure test by a Level 1
or Level 2 covered institution that authorizes an employee of one of
its affiliates that is not a covered institution because it has less
than $1 billion in average total consolidated assets or is not
considered a covered institution under one of the six Agencies'
proposed rules, to commit or expose 0.5 percent or more of capital of
the Level 1 or Level 2 covered institution. The Agencies are concerned
that in such a situation, the employee would be functioning as a
significant risk-taker at the affiliated Level 1 or Level 2 covered
institution but would not be subject to the requirements of the
proposed rule that would be applicable to a significant risk-taker at
the affiliated Level 1 or Level 2 covered institution. To address this
circumstance, the proposed rule would treat such employee as a
significant risk-taker with respect to the affiliated Level 1 or Level
2 covered institution for which the employee may commit or expose
capital. That Level 1 or Level 2 covered institution would be required
to ensure that the employee's incentive-based compensation arrangement
complies with the proposed rule.
Dollar Threshold Test
    As an alternative to the relative compensation test, the Agencies
also considered using a specific absolute compensation threshold,
measured in dollars, to determine whether an individual is a
significant risk-taker. Under this test, a covered person who receives
annual base salary and incentive-based compensation \99\ in excess of a
specific dollar threshold would be a significant risk-taker, regardless
of how that covered person's annual base salary and incentive-based
compensation compared to others in the consolidated organization (the
``dollar threshold test''). A dollar threshold test would include
adjustments such as for inflation. If the dollar threshold test
replaced the relative compensation test, the definition of
``significant risk-taker'' would still include only covered persons who
received annual base salary and incentive-based compensation of which
at least one-third was incentive-based compensation, based on the
covered person's annual base salary paid and incentive-based
compensation awarded during the last calendar year that ended at least
180 days before the beginning of the performance period.
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    \99\ For purposes of the dollar threshold test, the measure of
annual base salary and incentive-based compensation would be
calculated in the same way as the measure for the one-third
threshold discussed above.
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    One advantage of a dollar threshold test compared to the relative
compensation test is that it could be less burdensome to implement and
monitor. With a dollar threshold test covered institutions can
determine whether an individual covered person meets the dollar
threshold test of the significant risk-taker definition by reviewing
the compensation of only that single individual. The dollar threshold
test would also allow an institution to implement incentive-based
compensation structures, policies, and procedures with some
foreknowledge of which employees would be covered by them. However,
even with adjustment for inflation, a dollar threshold put in place by
regulation would assume that a certain dollar threshold is an
appropriate level for all Level 1 and Level 2 covered institutions and
covered persons. On the other hand, a dollar threshold could set
expectations so that individual employees would know based on their own
compensation if they are significant risk-takers.
    Based on FHFA's supervisory experience analyzing compensation both
at FHFA's regulated entities and at other financial institutions, a
dollar threshold would be an appropriate approach to identify
individuals with the ability to put the covered institution at risk of
material loss. FHFA must prohibit its regulated entities from providing
compensation to any executive officer of the regulated entity that is
not reasonable and comparable with compensation for employment in other
similar businesses (including publicly held financial institutions or
major financial services companies) involving similar duties and
responsibilities.\100\ In order to meet this statutory mandate, FHFA
analyzes, assesses, and compares the compensation paid to employees of
its regulated entities and compensation paid to employees of other
financial institutions of various asset sizes. In performing this
analysis, FHFA has observed that the amount of a covered person's
annual base salary and incentive-based compensation reasonably relates
to the level of responsibility that the covered person has within an
organization. A dollar threshold test, if set at the appropriate level,
would identify covered persons who either (1) have a greater ability to
expose a covered institution to financial loss or (2) supervise covered
persons who have a greater ability to expose a covered institution to
financial loss.
---------------------------------------------------------------------------

    \100\ 12 U.S.C. 4518(a).
---------------------------------------------------------------------------

    One disadvantage of the dollar threshold test is that it may not
appropriately capture all individuals who subject the firm to
significant risks. A dollar threshold put in place by regulation that
is static across all Level 1 and Level 2 covered institutions also is
not sensitive to the compensation

practices of an individual organization. The relative compensation
test, while not as easy to implement, could be more sensitive to the
compensation structure of an organization because it is based on the
relative compensation of individuals that the organization concludes
should be the mostly highly compensated.
    2.18. For purposes of a designation under paragraph (2) of the
definition of significant risk-taker, should the Agencies provide a
specific standard for what would constitute ``material financial loss''
and/or ``overall risk tolerance''? If so, how should these terms be
defined and why?
    2.19. The Agencies specifically invite comment on the one-third
threshold in the proposed rule. Is one-third of the total of annual
base salary and incentive-based compensation an appropriate threshold
level of incentive-based compensation that would be sufficient to
influence risk-taking behavior? Is using compensation from the last
calendar year that ended at least 180 days before the beginning of the
performance period for calculating the one-third threshold appropriate?
    2.20. The Agencies specifically invite comment on the percentages
of employees proposed to be covered under the relative compensation
test. Are 5 percent and 2 percent reasonable levels? Why or why not?
Would 5 percent and 2 percent include all of the significant risk-
takers or include too many covered persons who are not significant
risk-takers?
    2.21. The Agencies specifically invite comment on the time frame
needed to identify significant risk-takers under the relative
compensation test. Is using compensation from the last calendar year
that ended at least 180 days before the beginning of the performance
period appropriate? The Agencies invite comment on whether there is
another measure of total compensation that would be possible to measure
closer in time to the performance period for which a covered person
would be identified as a significant risk-taker.
    2.22. The Agencies invite comment on all aspects of the exposure
test, including potential costs and benefits, the appropriate exposure
threshold and capital equivalent, efficacy at identifying those non-
senior executive officers who have the authority to place the capital
of a covered institution at risk, and whether an exposure test is a
useful complement to the relative compensation test. If so, what
specific types of activities or transactions, and at what level of
exposure, should the exposure test cover? The Agencies also invite
comment on whether the exposure test is workable and why. What, if any,
additional details would need to be specified in order to make the
exposure test workable, such as further explanation of the meanings of
``commit'' or ``expose''? In addition to committees, should the
exposure test apply to groups of persons, such as traders on a desk? If
so, how should it be applied?
    2.23. With respect to the exposure test, the Agencies specifically
invite comment on the proposed capital commitment levels. Is 0.5
percent of capital of a covered institution a reasonable proxy for
material financial loss, or are there alternative levels or dollar
thresholds that would better achieve the statutory objectives? If
alternative methods would better achieve the statutory objectives, what
are the advantages and disadvantages of those alternatives compared to
the proposed level? For depository institution holding company
organizations with multiple covered institutions, should the capital
commitment level be consistent across all such institutions or should
it vary depending on specified factors and why? For example, should the
levels for covered institutions that are subsidiaries of a parent who
is also a covered institution vary depending on: (1) The size of those
subsidiaries relative to the parent; and/or (2) whether the entity
would be subject to comparable restrictions if it were not affiliated
with the parent? What are the advantages and disadvantages of any such
variation, and what would be the appropriate levels? The Agencies
recognize that certain covered institutions under the Board's, the
OCC's, the FDIC's, and the SEC's proposed rules, such as Federal and
state branches and agencies of foreign banks and investment advisers
that are not also depository institution holding companies, banks, or
broker-dealers or subsidiaries of those institutions, are not otherwise
required to calculate common equity tier 1 capital or tentative net
capital, as applicable. How should the capital commitment level be
determined under the Board's, the OCC's, the FDIC's, and the SEC's
proposed rules for those covered institutions? Is there a capital or
other measure that the Agencies should consider for those covered
institutions that would achieve similar objectives to common equity
tier 1 capital or tentative net capital? If so, what are the advantages
and disadvantages of such a capital or other measure?
    2.24. The Agencies invite comment on whether it is appropriate to
limit the exposure test to market risk and credit risk and why. What
other types of risk should be included, if any and how would such
exposures be measured? Should the Agencies prescribe a method for
measurement of market risk and credit risk? Should exposures be
measured as notional amounts or is there a more appropriate measure? If
so, what would it be? Should the exposure test take into account
hedging? How should the exposure test be applied to an individual in a
situation where a firm calculates an exposure limit for a trading desk
comprised of a group of people? Should a de minimis threshold be
introduced for any transaction counted toward the 0.5 percent annual
exposure test?
    2.25. Should the exposure test consider the authority of a covered
person to initiate or structure proposed product offerings, even if the
covered person does not have final decision-making authority over such
product offerings? Why or why not? If so, are there specific types of
products with respect to which this approach would be appropriate and
why?
    2.26. Should the exposure test measure a covered person's authority
to commit or expose (a) through one transaction or (b) as currently
proposed, through multiple transactions in the aggregate over a period
of time? What would be the benefits and disadvantages of applying the
test on a per-transaction versus aggregate basis over a period of time?
If measured on an aggregate basis, what period of time is appropriate
and why? For example, should paragraph (1)(iii) of the definition of
significant risk-taker read: ``A covered person of a covered
institution who had the authority to commit or expose in any single
transaction during the previous calendar year 0.5 percent or more of
the capital \101\ of the covered institution or of any section 956
affiliate of the covered institution, whether or not the individual is
a covered person of that specific legal entity''? Why or why not?
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    \101\ Under this alternative language, each Agency's rule text
would include the relevant capital metrics for its covered
institutions.
---------------------------------------------------------------------------

    2.27. If the exposure test were based on a single transaction,
would 0.5 percent of capital be the appropriate threshold for
significant risk-taker status? Why or why not? If not, what would be
the appropriate percentage of capital to include in the exposure test
and why?
    2.28. Should the Agencies introduce an absolute exposure threshold
in addition to a percentage of capital test if a per-transaction test
was introduced instead of the annual exposure test? Why or why not? For
example, would a threshold formulated as ``the lesser of 0.5 percent of
capital or $100 million''

help to level the playing field across Level 1 covered institutions and
the smallest Level 2 covered institutions and better ensure that the
right set of activities is being considered by all institutions? The
Agencies' supervisory experience indicates that many large
institutions, for example, require additional scrutiny of significant
transactions, which helps to ensure that the potential risks posed by
large transactions are adequately considered before such transactions
are approved. Would $100 million be the appropriate level at which
additional approval procedures are required before a transaction is
approved, or would a lower threshold be appropriate if an absolute
dollar threshold were combined with the capital equivalent threshold?
    2.29. Should the exposure test measure exposures or commitments
actually made, or should the authority to make an exposure or
commitment be sufficient to meet the test and why? For example, should
paragraph (1)(iii) of the definition of significant risk-taker read:
``A covered person of a covered institution who committed or exposed in
the aggregate during the previous calendar year 0.5 percent or more of
the common equity tier 1 capital, or in the case of a registered
securities broker or dealer, 0.5 percent or more of the tentative net
capital, of the covered institution or of any section 956 affiliate of
the covered institution, whether or not the individual is a covered
person of that specific legal entity''?
    2.30. Would a dollar threshold test, as described above, achieve
the statutory objectives better than the relative compensation test?
Why or why not? If using a dollar threshold test, and assuming a
mechanism for inflation adjustment, would $1 million be the right
threshold or should it be higher or lower? For example, would a
threshold of $2 million dollars be more appropriate? Why or why not?
How should the threshold be adjusted for inflation? Are there other
adjustments that should be made to ensure the threshold remains
appropriate? What are the advantages and disadvantages of a dollar
threshold test compared to the proposed relative compensation test?
    2.31. The Agencies specifically invite comment on replacement of
the relative compensation test in paragraphs (1)(i) and (ii) of the
definition of significant risk-taker with a dollar threshold test, as
follows: ``a covered person of a Level 1 or Level 2 covered institution
who receives annual base salary and incentive-based compensation of $1
million or more in the last calendar year that ended at least 180 days
before the beginning of the performance period.'' Under this
alternative, the remaining language in the definition of ``significant
risk-taker'' would be unchanged.
    2.32. The Agencies invite comment on all aspects of a dollar
threshold test, including potential costs and benefits, the appropriate
amount, efficacy at identifying those non-senior executive officers who
have the ability to place the institution at risk, time frame needed to
identify significant risk-takers, and comparison to a relative
compensation test such as the one proposed. Is the last calendar year
that ended at least 180 days before the beginning of the performance
period an appropriate time frame or for the dollar threshold test or
would using compensation from the performance period that ended in the
most recent calendar year be appropriate? The Agencies specifically
invite comment on whether to use an exposure test if a dollar threshold
test replaces the relative compensation test and why.
    2.33. The Agencies invite comment on all aspects of the definition
of ``significant risk-taker.'' The Agencies specifically invite comment
on whether the definition should rely solely on the relative
compensation test, solely on the exposure test, or on both tests, as
proposed. What are the advantages and disadvantages of each of these
options?
    2.34. In addition to the tests outlined above, are there
alternative tests of, or proxies for, significant risk-taking that
would better achieve the statutory objectives? What are the advantages
and disadvantages of alternative approaches? What are the
implementation burdens of any of the approaches, and how could they be
addressed?
    2.35. How many covered persons would likely be identified as
significant risk-takers under the proposed rule? How many covered
persons would likely be identified under only the relative compensation
test with the one-third threshold? How many covered persons would
likely be identified under only the exposure test as measured on an
annual basis with the one-third threshold? How many covered persons
would be identified under only an exposure test formulated on a per
transaction basis with the one-third threshold? How many covered
persons would be identified under only the dollar threshold test,
assuming the dollar threshold is $1 million, with the one-third
threshold? How many covered persons would be identified under each test
individually without a one-third threshold?
Other Definitions
    To award. The proposed rule defines ``to award'' as to make a final
determination, conveyed to a covered person, of the amount of
incentive-based compensation payable to the covered person for
performance over a performance period.
    The Agencies acknowledge that some covered institutions use the
term ``award'' to refer to the decisions that covered institutions make
about incentive-based compensation structures and performance measure
targets before or soon after the relevant performance period begins.
However, in the interest of clarity and consistency, the proposed rule
uses the phrase ``to award'' only with reference to final
determinations about incentive-based compensation amounts that an
institution makes and communicates to the covered person who could
receive the award under an incentive-based compensation arrangement for
a given performance period.
    In most cases, incentive-based compensation will be awarded near
the end of the performance period. Neither the length of the
performance period nor the decision to defer some or all incentive-
based compensation would affect the determination of when incentive-
based compensation is awarded for purposes of the proposed rule. For
example, at the beginning of a one-year performance period, a covered
institution might inform a covered person of the amount of incentive-
based compensation that the covered person could earn at the end of the
performance period if certain measures and other criteria are met. The
covered institution might also inform the covered person that a portion
of the covered person's incentive-based compensation will be deferred
for a four-year period. The covered person's incentive-based
compensation for that performance period--including both the portion
that is deferred and the portion that vests immediately--would be
``awarded'' when the covered institution determines what amount of
incentive-based compensation the covered person has earned based on his
or her performance during the performance period.
    For equity-like instruments, such as stock appreciation rights and
options, the date when incentive-based compensation is awarded may be
different than from the date when the instruments vest, are paid out,
or can be exercised. For example, a covered institution could determine
at the end of a performance period that a covered person has earned
options on the basis of performance during that performance

period, and the covered institution could provide that the covered
person cannot exercise the options for another five years. The options
would be considered to have been ``awarded'' at the end of the
performance period, even if they cannot be exercised for five years.
    Under the proposed rule, covered institutions would have the
flexibility to decide how the determination of the amount of incentive-
based compensation would be conveyed to a covered person. For example,
some covered institutions may choose to inform covered persons of their
award amounts in writing or by electronic message. Others may choose to
allow managers to orally inform covered persons of their award amounts.
    2.36. The Agencies invite comment on whether the proposed rule's
definition of ``to award'' should include language on when incentive-
based compensation is awarded for purposes of the proposed rule.
Specifically, the Agencies invite comment on whether the definition
should read: ``To award incentive-based compensation means to make a
final determination, conveyed to a covered person, at the end of the
performance period, of the amount of incentive-based compensation
payable to the covered person for performance over that performance
period.'' Why or why not?
    Board of directors. The proposed rule defines ``board of
directors'' as the governing body of a covered institution that
oversees the activities of the covered institution, often referred to
as the board of directors or board of managers. Under the Board's
proposed rule, for a foreign banking organization, ``board of
directors'' would mean the relevant oversight body for the
institution's state insured or uninsured branch, agency, or operations,
consistent with the foreign banking organization's overall corporate
and management structure. Under the FDIC's proposed rule, for a state
insured branch of a foreign bank, ``board of directors'' would refer to
the relevant oversight body for the state insured branch consistent
with the foreign bank's overall corporate and management structure.
Under the OCC's proposed rule, for a Federal branch or agency of a
foreign bank, ``board of directors'' would refer to the relevant
oversight body for the Federal branch or agency, consistent with its
overall corporate and management structure. The OCC would work closely
with Federal branches and agencies to determine the appropriate person
or committee to undertake the responsibilities assigned to the
oversight body. NCUA's proposed rule defines ``board of directors'' as
the governing body of a credit union.
    Clawback. The term ``clawback'' under the proposed rule refers
specifically to a mechanism that allows a covered institution to
recover from a senior executive officer or significant risk-taker
incentive-based compensation that has vested if the covered institution
determines that the senior executive officer or significant risk-taker
has engaged in fraud or the types of misconduct or intentional
misrepresentation described in section __.7(c) of the proposed rule.
Clawback would not apply to incentive-based compensation that has been
awarded but is not yet vested. As used in the proposed rule, the term
``clawback'' is distinct from the terms ``forfeiture'' and ``downward
adjustment,'' in that clawback provisions allow covered institutions to
recover incentive-based compensation that has already vested. In
contrast, forfeiture applies only after incentive-based compensation is
awarded but before it vests. Downward adjustment occurs only before
incentive-based compensation is awarded.
    Compensation, fees, or benefits. The proposed rule defines
``compensation, fees, or benefits'' to mean all direct and indirect
payments, both cash and non-cash, awarded to, granted to, or earned by
or for the benefit of, any covered person in exchange for services
rendered to the covered institution. The form of payment would not
affect whether such payment meets the definition of ``compensation,
fees, or benefits.'' The term would include, among other things,
payments or benefits pursuant to an employment contract, compensation,
pension, or benefit agreements, fee arrangements, perquisites, options,
post-employment benefits, and other compensatory arrangements. The term
is defined broadly under the proposed rule in order to include all
forms of incentive-based compensation.
    The term ``compensation, fees, or benefits'' would exclude
reimbursement for reasonable and proper costs incurred by covered
persons in carrying out the covered institution's business.
    Control function. The proposed rule defines ``control function'' as
a compliance, risk management, internal audit, legal, human resources,
accounting, financial reporting, or finance role responsible for
identifying, measuring, monitoring, or controlling risk-taking.\102\
The term would include loan review and Bank Secrecy Act roles. Section
__.9(b) of the proposed rule would require a Level 1 or Level 2 covered
institution to provide individuals engaged in control functions with
the authority to influence the risk-taking of the business areas they
monitor and ensure that covered persons engaged in control functions
are compensated in accordance with the achievement of performance
objectives linked to their control functions and independent of the
performance of the business areas they monitor. As described below,
section __.11 of the proposed rule would also require that a Level 1 or
Level 2 covered institution's policies and procedures provide an
appropriate role for control function personnel in the covered
institution's incentive-based compensation program. The heads of
control functions would also be considered senior executive officers
for purposes of the proposed rule, because such employees can
individually affect the risk profile of a covered institution.
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    \102\ The term ``control function'' would serve a different
purpose than, and is not intended to affect the interpretation of,
the term ``front line unit,'' as used in the OCC's Heightened
Standards.
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    Although covered persons in control functions generally do not
perform activities designed to generate revenue or reduce expenses,
they may nonetheless have the ability to expose covered institutions to
risk of material financial loss. For example, individuals in human
resources and risk management roles contribute to the design and review
of performance measures used in incentive-based compensation
arrangements, which may allow them to influence the activities of risk-
takers in a covered institution. For that reason, the proposed rule
would treat covered persons who are the heads of control functions as
senior executive officers who would be subject to certain additional
requirements under the proposed rule as described further below.
    2.37. The Agencies invite comment on whether and in what
circumstances, the proposed definition of ``control function'' should
include additional individuals and organizational units that (a) do not
engage in activities designed to generate revenue or reduce expenses;