[Federal Register Volume 76, Number 72 (Thursday, April 14, 2011)]
[Proposed Rules]
[Pages 21170-21219]
[FR Doc No: 2011-7937]

Vol. 76

Thursday,

No. 72

April 14, 2011

Part III

Department of the Treasury
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Office of the Comptroller of the Currency

12 CFR Part 42

Federal Reserve System
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12 CFR Part 236

Federal Deposit Insurance Corporation
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12 CFR Part 272

Department of the Treasury
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Office of Thrift Supervision

12 CFR Part 563h

National Credit Union Administration
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12 CFR Parts 741 and 751

Securities and Exchange Commission
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17 CFR Part 248

Federal Housing Finance Agency
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12 CFR Part 1232

Incentive-Based Compensation Arrangements; Proposed Rule

Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 /
Proposed Rules

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 42

[Docket No. OCC-2011-0001]
RIN 1557-AD39

FEDERAL RESERVE SYSTEM

12 CFR Part 236

[Docket No. R-1410]
RIN 7100-AD69

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 372

RIN 3064-AD56

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 563h

[Docket No. OTS-2011-0004]
RIN 1550-AC49

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 741 and 751

RIN 3133-AD88

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 248

[Release No. 34-64140; File no. S7-12-11]
RIN 3235-AL06

FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1232

RIN 2590-AA42

Incentive-Based Compensation Arrangements

AGENCY: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); Federal
Deposit Insurance Corporation (FDIC); Office of Thrift Supervision,
Treasury (OTS); National Credit Union Administration (NCUA); U.S.
Securities and Exchange Commission (SEC); and Federal Housing Finance
Agency (FHFA).

ACTION: Proposed Rule.

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SUMMARY: The OCC, Board, FDIC, OTS, NCUA, SEC, and FHFA (the Agencies)
are proposing rules to implement section 956 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act. The proposed rule would
require the reporting of incentive-based compensation arrangements by a
covered financial institution and prohibit incentive-based compensation
arrangements at a covered financial institution that provide excessive
compensation or that could expose the institution to inappropriate
risks that could lead to material financial loss.

DATES: Comments must be received by May 31, 2011.

ADDRESSES: Although the Agencies will jointly review all the comments
submitted, it would facilitate review of the comments if interested
parties send comments to the Agency that is the appropriate Federal
regulator, as defined in section 956(e) of the Dodd-Frank Act for the
type of covered financial institution addressed in the comments.
Commenters are encouraged to use the title ``Incentive-based
Compensation Arrangements'' to facilitate the organization and
distribution of comments among the Agencies. Interested parties are
invited to submit written comments to:
    Office of the Comptroller of the Currency: Because paper mail in
the Washington, DC area and at the OCC is subject to delay, commenters
are encouraged to submit comments by the Federal eRulemaking Portal or
e-mail, if possible. Please use the title ``Incentive-based
Compensation Arrangements'' to facilitate the organization and
distribution of the comments. You may submit comments by any of the
following methods:
     Federal eRulemaking Portal--Regulations.gov: Go to http://www.regulations.gov. Select ``Document Type'' of ``Proposed Rule'', and
in ``Enter Keyword or ID Box'', enter Docket ID ``OCC-2011-0001'', and
click ``Search.'' On ``View By Relevance'' tab at bottom of screen, in
the ``Agency'' column, locate the proposed rule for OCC, in the
``Action'' column, click on ``Submit a Comment'' or ``Open Docket
Folder'' to submit or view public comments and to view supporting and
related materials for this proposed rule.
     Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
submitting or viewing public comments, viewing other supporting and
related materials, and viewing the docket after the close of the
comment period.
     E-mail<EMAIL_ADDRESS>     Mail: Office of the Comptroller of the Currency, 250 E
Street, SW., Mail Stop 2-3, Washington, DC 20219.
     Fax:<PHONE_NUMBER>.
     Hand Delivery/Courier: 250 E Street, SW., Mail Stop 2-3,
Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2011-0001'' in your comment. In general, OCC will enter
all comments received into the docket and publish them on the
Regulations.gov Web site without change, including any business or
personal information that you provide such as name and address
information, e-mail addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to
this proposed rule by any of the following methods:
     Viewing Comments Electronically: Go to http://www.regulations.gov. Select ``Document Type'' of ``Public Submission,''
in ``Enter Keyword or ID Box,'' enter Docket ID ``OCC-2011-0001'', and
click ``Search.'' Comments will be listed under ``View By Relevance''
tab at bottom of screen. If comments from more than one agency are
listed, the ``Agency'' column will indicate which comments were
received by the OCC.
     Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 250 E Street, SW., Washington, DC.
For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid
government-issued photo identification and to submit to security
screening in order to inspect and photocopy comments.
     Docket: You may also view or request available background
documents and project summaries using the methods described above.
    Board of Governors of the Federal Reserve System: You may submit
comments, identified by Docket No. R-1410 and RIN No. 7100-AD69, by any
of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

     Federal eRulemaking Portal:http://www.regulations.gov.
Follow the instructions for submitting comments.
     E-mail<EMAIL_ADDRESS>Include the
docket number and RIN number in the subject line of the message.
     Fax:<PHONE_NUMBER> or<PHONE_NUMBER>.
     Mail: Address to Jennifer J. Johnson, Secretary, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue, NW., Washington, DC 20551.
    All public comments will be made available on the Board's Web site
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, comments
will not be edited to remove any identifying or contact information.
Public comments may also be viewed electronically or in paper in Room
MP-500 of the Board's Martin Building (20th and C Streets, NW.) between
9 a.m. and 5 p.m. on weekdays.
    Federal Deposit Insurance Corporation: You may submit comments,
identified by RIN number, by any of the following methods:
     Agency Web Site: http://www.FDIC.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on
the Agency Web Site.
     E-mail<EMAIL_ADDRESS>Include the RIN number on the
subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
     Hand Delivery: Comments may be hand delivered to the guard
station at the rear of the 550 17th Street Building (located on F
Street) on business days between 7 a.m. and 5 p.m.
    Instructions: All comments received must include the agency name
and RIN for this rulemaking and will be posted without change to http:/
/www.fdic.gov/regulations/laws/Federal/propose.html, including any
personal information provided.
    Office of Thrift Supervision: You may submit comments, identified
by OTS-2011-0004, by any of the following methods:
     Federal eRulemaking Portal--Regulations.gov: Go to http://www.regulations.gov and follow the directions.
     E-mail<EMAIL_ADDRESS>Please include OTS-
2011-0004 in the subject line of the message and include your name and
telephone number in the message.
     Mail: Regulation Comments, Chief Counsel's Office, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: OTS-2011-0004.
     Facsimile:<PHONE_NUMBER>.
     Hand Delivery/Courier: Guard's Desk, East Lobby Entrance,
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
Regulation Comments, Chief Counsel's Office, Attention: OTS-2011-0004.
     Instructions: All submissions received must include the
agency name and docket number for this rulemaking. All comments
received will be entered into the docket and posted on Regulations.gov
without change, including any personal information provided. Comments,
including attachments and other supporting materials received, are part
of the public record and subject to public disclosure. Do not enclose
any information in your comment or supporting materials that you
consider confidential or inappropriate for public disclosure.
     Viewing Comments On-Site: You may inspect comments at the
Public Reading Room, 1700 G Street, NW., by appointment. To make an
appointment for access, call<PHONE_NUMBER>, send an e-mail to
public.info<EMAIL_ADDRESS>or send a facsimile transmission to (202)
906-6518. (Prior notice identifying the materials you will be
requesting will assist us in serving you.) We schedule appointments on
business days between 10 a.m. and 4 p.m. In most cases, appointments
will be available the next business day following the date we receive a
request.
    National Credit Union Administration: You may submit comments by
any of the following methods (please send comments by one method only):
Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments.
     Agency Web site: http://www.ncua.gov/Resources/RegulationsOpinionsLaws/ProposedRegulations.aspx. Follow the
instructions for submitting comments.
     E-mail: Address to<EMAIL_ADDRESS>Include ``[Your
name] Comments on ``Notice of Proposed Rulemaking for Incentive-based
Compensation Arrangements'' in the e-mail subject line.
     Fax:<PHONE_NUMBER>. Use the subject line described above
for e-mail.
     Mail: Address to Mary Rupp, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.
     Public Inspection: All public comments are available on
the agency's Web site at http://www.ncua.gov/Resources/RegulationsOpinionsLaws/ProposedRegulations.aspx as submitted, except
when not possible for technical reasons. Public comments will not be
edited to remove any identifying or contact information. Paper copies
of comments may be inspected in NCUA's law library at 1775 Duke Street,
Alexandria, Virginia 22314, by appointment weekdays between 9 a.m. and
3 p.m. To make an appointment, call<PHONE_NUMBER> or send an e-mail to
<EMAIL_ADDRESS>    Securities and Exchange Commission: You may submit comments by the
following method:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/exorders.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number S7-12-11 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549.

All submissions should refer to File Number S7-12-11. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F St., NE., Washington, DC
20549 on official business days between the hours of 10 a.m. and 3 p.m.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly.
    Federal Housing Finance Agency: You may submit your written
comments on the proposed rulemaking, identified by RIN number 2590-
AA42, by any of the following methods:

     E-mail: Comments to Alfred M. Pollard, General Counsel,
may be sent by e-mail at<EMAIL_ADDRESS>Please include ``RIN
2590-AA42'' in the subject line of the message.
     Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by e-
mail to FHFA at<EMAIL_ADDRESS>to ensure timely receipt by the
Agency. Please include ``RIN 2590-AA42'' in the subject line of the
message.
     U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Alfred M.
Pollard, General Counsel, Attention: Comments/RIN 2590-AA42, Federal
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington,
DC 20552.
     Hand Delivery/Courier: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA42,
Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW.,
Washington, DC 20552. A hand-delivered package should be logged at the
Guard Desk, First Floor, on business days between 9 a.m. and 5 p.m.
    All comments received by the deadline will be posted for public
inspection on the FHFA Web site at http://www.fhfa.gov. Copies of all
comments timely received will be available for public inspection and
copying at the address above on government-business days between the
hours of 10 a.m. and 3 p.m. To make an appointment to inspect comments
please call the Office of General Counsel at<PHONE_NUMBER>.

FOR FURTHER INFORMATION CONTACT:
OCC: Michele Meyer, Assistant Director, and Patrick Tierney, Counsel,
Legislative and Regulatory Activities,<PHONE_NUMBER>, and Karen
Kwilosz, Director, Operational Risk Policy,<PHONE_NUMBER>, Office of
the Comptroller of the Currency, 250 E Street, SW., Washington, DC
20219.
Board: Michael Waldron, Counsel,<PHONE_NUMBER>, or Amanda Allexon,
Counsel,<PHONE_NUMBER>, Legal Division; William F. Treacy, Advisor,
(202) 452-3859, or Meg Donovan, Supervisory Financial Analyst, (202)
452-7542, Division of Banking Supervision and Regulation; Board of
Governors of the Federal Reserve System, 20th and C Streets, NW.,
Washington, DC 20551.
FDIC: Steven D. Fritts, Associate Director, Risk Management Policy
Branch, DSC,<PHONE_NUMBER>; Melinda West, Chief, Policy & Program
Development, DSC,<PHONE_NUMBER>, George Parkerson, Senior Policy
Analyst,<PHONE_NUMBER>; Rose Kushmeider, Senior Financial Economist,
(202) 898-3861; Daniel Lonergan, Counsel,<PHONE_NUMBER>, Rodney Ray,
Counsel,<PHONE_NUMBER>, Federal Deposit Insurance Corporation, 550
17th Street, NW., Washington, DC 20429.
OTS: Mary Jo Johnson, Senior Project Manager, Examination Programs,
(202) 906-5739, Richard Bennett, Senior Compliance Counsel, Regulations
and Legislation Division,<PHONE_NUMBER>; Robyn Dennis, Director,
Examination Programs,<PHONE_NUMBER>; James Caton, Managing Director,
Economic and Industry Analysis,<PHONE_NUMBER>, Office of Thrift
Supervision, 1700 G Street, NW., Washington, DC 20552.
NCUA: Regina Metz, Staff Attorney, Office of General Counsel, (703)
518-6561; or Vickie Apperson, Program Officer, Office of Examination &
Insurance,<PHONE_NUMBER>, National Credit Union Administration, 1775
Duke Street, Alexandria, Virginia 22314.
SEC: Raymond A. Lombardo, Branch Chief, Division of Trading & Markets,
(202) 551-5755; Timothy C. Fox, Special Counsel, Division of Trading &
Markets,<PHONE_NUMBER>; Nadya B. Roytblat, Assistant Chief Counsel,
Division of Investment Management,<PHONE_NUMBER>; or Jennifer R.
Porter, Attorney-Advisor, Division of Investment Management, (202) 551-
6787, United States Securities and Exchange Commission, 100 F Street
NE., Washington, DC 20549.
FHFA: Alfred M. Pollard, General Counsel,<PHONE_NUMBER> or Patrick J.
Lawler, Associate Director and Chief Economist<PHONE_NUMBER>, Federal
Housing Finance Agency, Fourth Floor, 1700 G Street NW., Washington, DC
20552. The telephone number of the Telecommunications Device for the
Deaf is<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

I. Background

Dodd-Frank Act

    The Dodd-Frank Wall Street Reform and Consumer Protection Act (the
``Dodd-Frank Act'' or the ``Act'') (Pub. L. 111-203, section 956, 124
Stat. 1376, 2011-2018 (2010)), which was signed into law on July 21,
2010, requires the Agencies to jointly prescribe regulations or
guidelines with respect to incentive-based compensation practices at
covered financial institutions. Specifically, section 956 of the Dodd-
Frank Act (codified at 12 U.S.C. 5641) requires that the Agencies
prohibit incentive-based payment arrangements, or any feature of any
such arrangement, at a covered financial institution that the Agencies
determine encourages inappropriate risks by a financial institution by
providing excessive compensation or that could lead to material
financial loss. Under the Act, a covered financial institution also
must disclose to its appropriate Federal regulator the structure of its
incentive-based compensation arrangements sufficient to determine
whether the structure provides ``excessive compensation, fees, or
benefits'' or ``could lead to material financial loss'' to the
institution. The Dodd-Frank Act does not require a covered financial
institution to report the actual compensation of particular individuals
as part of this requirement.
    The Act defines ``covered financial institution'' to include any of
the following types of institutions that have $1 billion or more in
assets: (A) A depository institution or depository institution holding
company, as such terms are defined in section 3 of the Federal Deposit
Insurance Act (``FDIA'') (12 U.S.C. 1813); (B) a broker-dealer
registered under section 15 of the Securities Exchange Act of 1934 (15
U.S.C. 78o); (C) a credit union, as described in section
19(b)(1)(A)(iv) of the Federal Reserve Act; (D) an investment adviser,
as such term is defined in section 202(a)(11) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-2(a)(11)); (E) the Federal National
Mortgage Association (Fannie Mae); (F) the Federal Home Loan Mortgage
Corporation (Freddie Mac); and (G) any other financial institution that
the appropriate Federal regulators, jointly, by rule, determine should
be treated as a covered financial institution for these purposes.
    The Act also requires the Agencies to ensure that any standards
adopted with regard to excessive compensation under section 956 of the
Act are comparable to the compensation-related safety and soundness
standards applicable to insured depository institutions under section
39 of the FDIA (12 U.S.C. 1831p- 1(c)),\1\ and to take the compensation
standards described in section 39 of the FDIA into consideration in
establishing

compensation standards under section 956 of the Act.
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    \1\ The Federal banking agencies each have adopted guidelines
implementing the compensation-related and other safety and soundness
standards in section 39 of the FDIA. See 12 CFR part 30, Appendix A
(OCC); 12 CFR part 208, Appendix D-1 (Board); 12 CFR part 364,
Appendix A (FDIC); 12 CFR part 570, Appendix A (OTS).
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    Compensation arrangements are critical tools in the successful
management of financial institutions. These arrangements serve several
important objectives, including attracting and retaining skilled staff,
promoting better organizational and individual employee performance,
and providing retirement security to employees.
    At the same time, improperly structured compensation arrangements
can provide executives and employees with incentives to take imprudent
risks that are not consistent with the long-term health of the
organization. The Agencies believe that flawed incentive compensation
practices in the financial industry were one of many factors
contributing to the financial crisis that began in 2007.
    Shareholders and, for a credit union, members of a covered
financial institution have an interest in aligning the interests of
managers and other employees of the institution with its long-term
health. Aligning the interests of shareholders or members and
employees, however, is not always sufficient to protect the safety and
soundness of an organization, deter excessive compensation, or deter
behavior that could lead to material financial loss at the
organization. Managers and employees of a covered financial institution
may be willing to tolerate a degree of risk that is inconsistent with
broader public policy goals. In addition, particularly at larger
institutions, shareholders or members may have difficulty effectively
monitoring and controlling the incentive-based compensation
arrangements throughout the institution that may materially affect the
institution's risk profile, even with increased disclosure provisions.
As a result, supervision and regulation of incentive compensation, as
with other aspects of financial oversight, can play an important role
in helping ensure that incentive compensation practices at covered
financial institutions do not threaten their safety and soundness, are
not excessive, or do not lead to material financial loss.

II. Overview of the Proposed Rule

    The Agencies have elected to propose rules, rather than guidelines,
in order to establish general requirements applicable to the incentive-
based compensation arrangements of all covered financial institutions
(``Proposed Rule''). The Proposed Rule would supplement existing rules,
guidance, and ongoing supervisory efforts of the Agencies.
    The Proposed Rule has the following components:
     The Proposed Rule would prohibit incentive-based
compensation arrangements at a covered financial institution that
encourage executive officers, employees, directors, or principal
shareholders (``covered persons'') to expose the institution to
inappropriate risks by providing the covered person excessive
compensation. As described further below, consistent with the directive
of section 956, the Agencies propose to use standards comparable to
those developed under section 39 of the FDIA for purposes of
determining whether incentive-based compensation is ``excessive'' in a
particular case.
     The Proposed Rule would prohibit a covered financial
institution from establishing or maintaining any incentive-based
compensation arrangements for covered persons that encourage
inappropriate risks by the covered financial institution that could
lead to material financial loss. The Agencies propose to adopt
standards for determining whether an incentive-based compensation
arrangement may encourage inappropriate risk-taking that are consistent
with the key principles established for incentive compensation in the
Interagency Guidance on Sound Incentive Compensation Policies
(``Banking Agency Guidance'') adopted by the Federal banking
agencies.\2\ The Proposed Rule would also require deferral of a portion
of incentive-based compensation for executive officers of larger
covered financial institutions. The Proposed Rule would also require
that, at larger covered financial institutions, the board of directors
or a committee of such a board identify those covered persons (other
than executive officers) that have the ability to expose the
institution to possible losses that are substantial in relation to the
institution's size, capital, or overall risk tolerance. The Proposed
Rule would require that the board of directors, or a committee thereof,
of the institution approve the incentive-based compensation arrangement
for such individuals, and maintain documentation of such approval. The
term ``larger covered financial institution'' for the Federal banking
agencies and the SEC means those covered financial institutions with
total consolidated assets of $50 billion or more. For the NCUA, all
credit unions with total consolidated assets of $10 billion or more are
larger covered financial institutions. For the FHFA, all Federal Home
Loan Banks with total consolidated assets of $1 billion or more are
larger covered financial institutions.
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    \2\ Guidance on Sound Incentive Compensation Policies, 75 FR
36395 (June 25, 2010), adopted by the Federal banking agencies,
meaning the OCC, Board, FDIC, and OTS.
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     In connection with these restrictions, the Proposed Rule
would require covered financial institutions to maintain policies and
procedures appropriate to their size, complexity, and use of incentive-
based compensation to help ensure compliance with these requirements
and prohibitions.
     The Proposed Rule also would require covered financial
institutions to provide certain information to their appropriate
Federal regulator(s) concerning their incentive-based compensation
arrangements for covered persons.
    The Proposed Rule would supplement existing rules and guidance
adopted by the Agencies regarding compensation and incentive-based
compensation.\3\ These include the Banking Agency Guidance, the
Standards for Safety and Soundness adopted by the Federal banking
agencies,\4\ the compensation-related disclosure requirements adopted
by the SEC for public companies,\5\ the rules and guidance adopted by
the FHFA for regulatory oversight of the executive compensation
practices of its regulated entities \6\ and the compensation rules
adopted by the NCUA for institutions under its supervision.\7\ Each
Agency may issue

supplemental guidance specific to their regulated entities, including
guidance as necessary to clarify the regulatory requirements proposed
in this rulemaking. Covered financial institutions supervised by the
Federal banking agencies should continue to consult the Banking Agency
Guidance for additional information on how to balance risk and
financial rewards.
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    \3\ See, e.g., Banking Agency Guidance, supra note 2.
    \4\ 60 FR 35674 (July 10, 1995), as amended at 61 FR 43948 (Aug.
27, 1996).
    \5\ See, e.g., Item 402(s) of Regulation S-K, 17 CFR 229.402(s),
adopted in Securities Act Release No. 9089 (Dec. 16, 2009), 74 FR
68334 (Dec. 23, 2009).
    \6\ 12 CFR 1770.1 (b) (1) requires the FHFA Director to prohibit
the excessive compensation of executive officers. Section 1770.4
provides specific details as to the categories of information that
are required to be submitted to the FHFA pertaining to the
prohibition of excessive compensation (Sept. 12, 2001). FHFA's
examination guidance (PG-06-002), ``Examination for Compensation
Practices,'' sets forth the disclosure requirements pertaining to
the compensation and benefits programs of Fannie Mae and Freddie Mac
(together, the Enterprises) (Nov. 8, 2006). In carrying out its
corporate governance requirements, the FHFA is guided by the
provisions set forth in 12 CFR 1710.13. FHFA's Advisory Bulletin
(2009-AB-02), ``Principles for Executive Compensation at the Federal
Home Loan Banks and the Office of Finance,'' provides guidance to
the Home Loan Banks on reporting requirements (Oct. 27, 2009).
FHFA's proposed rule on executive compensation, 74 FR 26989 (June 5,
2009), includes incentive compensation in its prohibition on
excessive compensation. For the FHFA, the regulated entities are,
collectively: the Enterprises, the Federal Home Loan Banks, and the
Office of Finance.
    \7\ See, e.g., 12 U.S.C. 1761a; 12 CFR 701.2 & 12 CFR part 701
App. A, Art. VII. Sec.  8; 12 CFR 701.21(c)(8)(i); 12 CFR 701.23(g)
(1); 12 CFR 701.33; 12 CFR 702.203 & 702.204; 12 CFR 703.17; 12 CFR
704.19 & 704.20; 12 CFR part 708a; 12 CFR 712.8; 12 CFR 721.7; 12
CFR part 750; and NCUA Examiners Guide Ch. 7 at http://www.ncua.gov/GenInfo/GuidesManuals/examiners_guide/chapters/Chapter07.pdf.
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    The Agencies propose to make the terms of the Proposed Rule, if
adopted, effective six months after publication of the final rule in
the Federal Register, with annual reports due within 90 days of the end
of each covered financial institution's fiscal year. The Agencies
request specific comment on whether these dates will provide sufficient
time for covered financial institutions to comply with the rule and, if
not, why. Commenters are also asked to address whether the Agencies
should designate different compliance dates for different types of
covered financial institutions, or consider designating different
compliance dates for different parts of the Proposed Rule (e.g.,
disclosure, prohibition, and policies and procedures).
    A detailed description of the Proposed Rule with a request for
comments is set forth below. Although this is a joint-interagency
rulemaking, each Agency will codify its version of the rule in its
specified portion of the Code of Federal Regulations in order to
accommodate differences between regulated entities as well as other
applicable statutory and regulatory requirements. Any significant
differences between the Proposed Rules issued by individual agencies
are noted below.\8\
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    \8\ Since the Agencies' proposed rules use consistent section
numbering, relevant sections are cited, for example, as ``Sec.  --
--.1.''
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III. Section-By-Section Description of the Proposed Rule

    Sec.  ----.1 Authority. Section ----.1 provides that this rule is
issued pursuant to section 956 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Pub. L. 111-203). Certain Agencies also have
listed their general rulemaking authority in their respective authority
citations.
    Sec.  ----.2 Scope and Purpose. Section ----.2 provides that this
rule applies to a covered financial institution that has total
consolidated assets of $1 billion or more that offers incentive-based
compensation arrangements to covered persons. This section also notes
that this rule would in no way limit the authority of any Agency under
other provisions of applicable law and regulations.
    Sec.  ----.3 Definitions. Section ----.3 defines the various terms
used in the Proposed Rule. If a term is defined in section 956 of the
Dodd-Frank Act, the Proposed Rule generally incorporates that
definition.\9\
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    \9\ These definitions are proposed for purposes of administering
Section 956 and are not intended to affect the interpretation or
construction of the same or similar terms for purposes of any other
statute or regulation administered by the Agencies.
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    Compensation. The Proposed Rule defines ``compensation'' to mean
all direct and indirect payments, fees or benefits, 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
financial institution, including, but not limited to, payments or
benefits pursuant to an employment contract, compensation or benefit
agreement, fee arrangement, perquisite, stock option plan,
postemployment benefit, or other compensatory arrangement. For credit
unions, the definition of compensation specifically excludes
reimbursement for reasonable and proper costs incurred by covered
persons in carrying out official credit union business; provision of
reasonable health, accident and related types of personal insurance
protection; and indemnification. This is consistent with NCUA's
regulations at 12 CFR 701.33. The Agencies seek comment on this
proposed definition.
    Covered Financial Institution. As noted above, only ``covered
financial institutions'' that have total consolidated assets of $1
billion or more would be subject to the Proposed Rule. Under the
Proposed Rule, a ``covered financial institution'' would include:
     In the case of the OCC, a national bank and Federal branch
and agency of a foreign bank;
     In the case of the Board, a state member bank; a bank
holding company; a state-licensed uninsured branch or agency of a
foreign bank; and the U.S. operations of a foreign bank with more than
$1 billion of U.S. assets that is treated as a bank holding company
pursuant to section 8(a) of the International Banking Act of 1978 (12
U.S.C. 3106(a)). A covered financial institution includes the
subsidiaries of the institution;
     In the case of the FDIC, a state nonmember bank and an
insured U.S. branch of a foreign bank;
     In the case of the OTS, a savings association as defined
in 12 U.S.C. 1813(b) and a savings and loan holding company as defined
in 12 U.S.C. 1467a(a). (A covered financial institution also includes
an operating subsidiary of a Federal savings association as defined in
12 CFR 559.2.) The Board, OCC, and FDIC will assume supervisory and
rulemaking responsibility for these entities on the transfer date
provided in Title III of the Dodd-Frank Act. These agencies expect to
adopt, or incorporate, as appropriate, any final rule adopted by OTS as
part of this rulemaking for relevant covered financial institutions
that come under their respective supervisory authority after the
transfer date;
     In the case of the NCUA, a credit union, as described in
section 19(b)(1)(A)(iv) of the Federal Reserve Act, meaning an insured
credit union as defined under 12 U.S.C. 1752(7) or credit union
eligible to make application to become an insured credit union under 12
U.S.C. 1781. Instead of the term ``covered financial institution'', the
NCUA uses the term ``credit union'' throughout its proposed rule;
     In the case of the SEC, a broker-dealer registered under
section 15 of the Securities Exchange Act of 1934, 15 U.S.C. 78o; and
an investment adviser, as such term is defined in section 202(a)(11) of
the Investment Advisers Act of 1940, 15 U.S.C. 80b-2(a)(11); \10\
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    \10\ By its terms, the definition of ``covered financial
institution'' in section 956 includes any firm that meets the
definition of ``investment adviser'' under the Investment Advisers
Act of 1940 (``Investment Advisers Act''), regardless of whether the
firm is registered as an investment adviser under that Act. Banks
and bank holding companies are generally excluded from the
definition of ``investment adviser'' under section 202(a)(11) of the
Investment Advisers Act.
---------------------------------------------------------------------------

     The FHFA, because it proposes to extend the requirements
of the rule to the Federal Home Loan Bank System's Office of
Finance,\11\ which is not a financial institution, is not proposing to
use the term ``covered financial institution,'' but rather the term
``covered entity,'' defined to mean Fannie Mae, Freddie Mac, the
Federal Home Loan Banks, and the Office of Finance.
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    \11\ The Office of Finance is a joint agency of the twelve
Federal Home Loan Banks and is described and regulated in the FHFA's
rules at 12 CFR part 1273.
---------------------------------------------------------------------------

    As indicated in the above listing, the Agencies propose to expand
the definition of a covered financial institution beyond those
specifically identified in section 956, as authorized by section
956(e)(2)(G) of the Dodd-Frank Act. Consistent with the principle of
national treatment and equality of competitive opportunity, the
Agencies propose to include as covered financial institutions the
uninsured branches and

agencies of a foreign bank, as well as the other U.S. operations of
foreign banking organizations that are treated as bank holding
companies pursuant to section 8(a) of the International Banking Act of
1978. These offices and operations currently are subject to the Banking
Agency Guidance, and are subject to section 8 of the FDIA, which
prohibits institutions from engaging in unsafe or unsound practices to
the same extent as insured depository institutions and bank holding
companies.\12\
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    \12\ See 12 U.S.C. 1813(c)(3) and 1818(b)(4).
---------------------------------------------------------------------------

    The Agencies also propose including the Federal Home Loan Banks
because they pose similar risks and should be subject to the same
regulatory regime. FHFA also proposes to subject the Office of Finance
to the Proposed Rule, using authority other than section 956.\13\
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    \13\ The Office of Finance is an agent of the Federal Home Loan
Banks in issuing the hundreds of billions of dollars' worth of
Federal Home Loan Bank System obligations that are outstanding at
any time. It is not a financial institution, but because of its
critical role in the mortgage finance system, it is proposed to be
made subject to the provisions of the Proposed Rule that apply to
financial institutions with assets of over $50 billion. Because it
is not a financial institution and hence not within the scope of
section 956, FHFA bases its authority over the Office of Finance for
this purpose not on section 956 but on the Federal Housing
Enterprises Financial Safety and Soundness Act, which in section
1311(b)(2) (12 U.S.C. 4511(b)(2)) grants FHFA general regulatory
authority over the Office of Finance.
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    Commenters are specifically asked to address whether there are
there other types of financial institutions, such as a credit union
service organization (``CUSO''), that the Agencies should treat as a
covered financial institution to better promote the purpose of section
956 and competitive equity. Currently no CUSOs wholly owned by a
federally insured credit union have total consolidated assets of $1
billion or more.
    Covered Person. Only incentive-based compensation paid to ``covered
persons'' would be subject to the requirements of this Proposed Rule. A
``covered person'' would be any executive officer, employee, director,
or principal shareholder of a covered financial institution. No
specific categories of employees are excluded from the scope of the
Proposed Rule, although it is the underlying purpose of this rulemaking
to address those incentive-based compensation arrangements for covered
persons or groups of covered persons that encourage inappropriate risk
because they provide excessive compensation or pose a risk of material
financial loss to a covered financial institution. Accordingly, as will
be discussed later in this SUPPLEMENTARY INFORMATION section, certain
prohibitions in the Proposed Rule apply only to a subset of covered
persons. As a result, the proposal contains separate definitions of
director, executive officer, and principal shareholder. For Federal
credit unions, only one director, if any, may be considered a covered
person since, under the Federal Credit Union Act section 112 (12 U.S.C.
1761a) and NCUA's regulations at 12 CFR 701.33, only one director may
be compensated as an officer of the board.
    Director and Board of Directors. The Proposed Rule defines
``director'' of a covered financial institution as a member of the
board of directors of the covered financial institution or of a board
or committee performing a similar function to a board of directors. For
NCUA's proposed rule, the director is always a member of the credit
union's board of directors so the definition is omitted. The Proposed
Rule also defines ``board of directors'' as the governing body of any
covered financial institution performing functions similar to a board
of directors. For a foreign banking organization, ``board of
directors'' refers to the relevant senior management or oversight body
for the firm's U.S. branch, agency or operations, consistent with the
foreign banking organization's overall corporate and management
structure. The Agencies seek comment on these proposed definitions.
    Executive Officer. As discussed in more detail later in this
Supplementary Information, the Proposed Rule would apply certain
restrictions to the incentive-based compensation of ``executive
officers'' of larger covered financial institutions.\14\ The Proposed
Rule defines ``executive officer'' of a covered financial institution
as a person who holds the title or performs the function (regardless of
title, salary or compensation) of one or more of the following
positions: President, chief executive officer, executive chairman,
chief operating officer, chief financial officer, chief investment
officer, chief legal officer, chief lending officer, chief risk
officer, or head of a major business line.\15\
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    \14\ As discussed previously, the term ``larger covered
financial institution'' for the Federal banking agencies and the SEC
means those covered financial institutions with total consolidated
assets of $50 billion or more. For the NCUA, all credit unions with
total consolidated assets of $10 billion or more are larger covered
financial institutions. For the FHFA, Fannie Mae, Freddie Mac, and
all of the Federal Home Loan Banks with total consolidated assets of
$1 billion or more are larger covered financial institutions. In
addition, the FHFA proposes to make the same requirements applicable
to the Office of Finance.
    \15\ For the FHFA, the Safety and Soundness Act of 1992, as
reflected in 12 CFR 1770.3 (g)-(1), defines the term Executive
Officer to mean, for Fannie Mae and Freddie Mac: The Chairman of the
Board of Directors, chief executive officer, chief financial
officer, chief operating officer, president, vice chairman, any
executive vice president, and any individual who performs functions
similar to such positions whether or not the individual has an
official title; and any senior vice president or other individual
with similar responsibilities, without regard to title: (A) Who is
in charge of a principal business unit, division or function, or (B)
who reports directly to the chairman of the board of directors, vice
chairman, president or chief operating officer. The Proposed Rule
adopts a modified version of the definitions for Fannie Mae and
Freddie Mac, and a definition for the Federal Home Loan Banks and
for the Office of Finance that the FHFA has determined is
appropriate for them.
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     The Agencies seek comment on whether the types of
positions identified in this proposed definition are appropriate,
whether additional positions should be included, or if certain
positions should be removed.
     Should the Agencies define ``head of a major business
line?''
    Incentive-based Compensation. Consistent with section 956 of the
Dodd-Frank Act, the Proposed Rule would apply only to incentive-based
compensation arrangements. The Proposed Rule defines ``incentive-based
compensation'' to mean any variable compensation that serves as an
incentive for performance. The definition is broad and principles-based
to address the objectives of section 956 in a manner that provides for
flexibility as forms of compensation evolve. The form of payment,
whether it is cash, an equity award, or other property, does not affect
whether compensation meets the definition of ``incentive-based
compensation.''
    There are types of compensation that would not fall within the
scope of this definition. Generally, compensation that is awarded
solely for, and the payment of which is solely tied to, continued
employment (e.g., salary) would not be considered incentive-based
compensation. Similarly, a compensation arrangement that provides
rewards solely for activities or behaviors that do not involve risk-
taking (for example, payments solely for achieving or maintaining a
professional certification or higher level of educational achievement)
would not be considered incentive-based compensation under the
proposal. In addition, the Agencies do not envision that this
definition would include compensation arrangements that are determined
based solely on the covered person's level of fixed compensation and do
not vary based on one or more performance metrics (e.g., employer
contributions to a 401(k) retirement savings plan computed based on a
fixed percentage of an employee's salary). The

proposed definition also would not include dividends paid and
appreciation realized on stock or other equity instruments that are
owned outright by a covered person. However, stock or other equity
instruments awarded to a covered person under a contract, arrangement,
plan, or benefit would not be considered owned outright while subject
to any vesting or deferral arrangement (irrespective of whether such
deferral is mandatory).
    The Agencies request comment generally on this proposed definition.
Comment is also requested on the following questions:
     Is the definition of incentive-based compensation
sufficiently broad to include all types of compensation that should be
covered under the rule?
     Are there any particular forms of compensation that should
be specifically designated as incentive-based compensation?
     Are there any other forms of compensation that the
Agencies should clarify are not incentive-based compensation?
    Principal Shareholder. Under the Proposed Rule, a ``principal
shareholder'' means an individual that 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 financial institution.\16\ The Agencies request
comment on this proposed definition. The NCUA's proposed rule does not
include this definition since credit unions are not-for-profit
financial cooperatives with member owners.
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    \16\ The 10 percent threshold used in the definition of
``principal shareholder'' is also used in a number of bank
regulatory contexts. See e.g., 12 CFR 215.2(m), 12 CFR 225.2(n)(2),
12 CFR 225.41(c)(2).
---------------------------------------------------------------------------

    Total Consolidated Assets. As provided in section 956, the Proposed
Rule would apply to all covered financial institutions that have total
consolidated assets of $1 billion or more. Additional requirements
would apply to certain larger covered financial institutions. With the
exception of the FHFA, the Agencies have specified how total
consolidated assets should be calculated in their agency specific rule
text.
     OCC: Total consolidated assets means (i) for a national
bank, calculating the average of the total assets reported in the
bank's four most recent Consolidated Reports of Condition and Income
(``Call Report'') and (ii) for a Federal branch and agency, calculating
the average of the total assets reported in the Federal branch or
agency's four most recent Reports of Assets and Liabilities of U.S.
Branches and Agencies of Foreign Banks--FFIEC 002.
     Board: For a state member bank, total consolidated assets
as determined based on the average of the bank's four most recent
Consolidated Reports of Condition and Income (``Call Report''); for a
bank holding company, total consolidated assets as determined based on
the average of the company's four most recent Consolidated Financial
Statements for Bank Holding Companies (``FR Y-9C''); for a state-
licensed uninsured branch or agency of a foreign bank, total
consolidated assets as determined based on the average of the branch or
agency's four most recent Reports of Assets and Liabilities of U.S.
Branches and Agencies of Foreign Banks--FFIEC 002; and for the U.S.
operations of a foreign bank, total consolidated U.S. assets as
determined by the Board.
     FDIC: For state nonmember banks, asset size would be
determined by calculating the average of the total assets reported in
the institution's four most recent Call Reports. For insured U.S.
branches of foreign banks, asset size will be determined by calculating
the average of the total assets reported in the branch's four most
recent Reports of Assets and Liabilities of U.S. Branches and Agencies
of Foreign Banks.
     OTS: For covered financial institutions regulated by the
OTS, asset size will be determined by calculating the average of total
assets reported in the institution's four most recent Thrift Financial
Reports.
     NCUA: For credit unions, asset size will be determined by
calculating the average of the total assets reported in the credit
union's four most recent 5300 Call Reports.
     SEC: For brokers or dealers registered with the SEC, asset
size would be determined by the total consolidated assets reported in
the firm's most recent year-end audited Consolidated Statement of
Financial Condition filed pursuant to Rule 17a-5 under the Securities
Exchange Act of 1934. For investment advisers, asset size would be
determined by the adviser's total assets shown on the balance sheet for
the adviser's most recent fiscal year end. The proposed method of
calculation for investment advisers is consistent with the SEC's recent
proposal that each investment adviser filing Form ADV Part 1A indicate
whether the adviser had $1 billion or more in ``assets,'' defined as
the total assets shown on the balance sheet for the adviser's most
recent fiscal year end.\17\ In connection with that proposal, the SEC
requested comment on the reporting requirement and the proposed method
that advisers would use to determine the amount of their assets (i.e.,
total assets as shown on the adviser's balance sheet). Commenters are
asked to provide additional comments on the proposed method of
determining asset size for investment advisers, and specifically to
address whether the determination of total assets should be further
tailored for certain types of advisers, such as advisers to hedge funds
or private equity funds, and if so, why and in what manner.
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    \17\ See Rules Implementing Amendments to the Investment
Advisers Act of 1940, Investment Advisers Release No. 3110, nn. 194-
196 and related text (Nov. 19, 2010) 75 FR 77052 (Dec. 10, 2010).
---------------------------------------------------------------------------

     FHFA: The FHFA is not including a definition of total
consolidated assets in its proposed rule because it is proposing to
make all requirements of the rule applicable to all the entities it
regulates without regard to asset size.\18\
---------------------------------------------------------------------------

    \18\ Fannie Mae, Freddie Mac, and the Federal Home Loan Banks
are all far larger than the $1 billion asset threshold in section
956, while the FHFA is basing its regulatory authority over the
Office of Finance on a different statute. And, for policy reasons,
the FHFA is proposing not to distinguish ``larger'' entities from
others for purposes of this rule.
---------------------------------------------------------------------------

    The Agencies believe that by generally establishing a rolling
average for asset size (with the exception of the SEC and the FHFA),
the frequency that an institution may fall in or out of covered
financial institution status would be minimized. If a covered financial
institution has fewer than four reports, the institution must average
total assets from its existing reports for purposes of determining
total consolidated assets. If a covered financial institution has a mix
of two or more different types of reports covering the relevant period,
those should be averaged for purposes of determining asset size (e.g.,
an institution with two Call Reports and two Thrift Financial Reports
as its four most recent reports would have its total assets from all
four reports averaged).
    Should all of the Agencies use a uniform method to determine
whether an institution has $1 billion or more in assets? If so, what
would commenters suggest as such a uniform method? If different
calculations are required for each type of institution, should any of
the Agencies define total consolidated assets differently than the
proposed calculations described above?
    Sec.  ----.4 Required Reports. Section 956(a)(1) of the Dodd-Frank
Act requires that a covered financial institution submit an annual
report to its

appropriate Federal regulator disclosing the structure of its
incentive-based compensation arrangements that is sufficient to
determine whether the incentive-based compensation structure provides
covered persons with excessive compensation, fees, or benefits, or
could lead to material financial loss to the covered financial
institution. In order to fulfill this requirement, the Proposed Rule
would establish the general rule that a covered financial institution
must submit a report annually to its appropriate regulator or
supervisor in a format specified by its appropriate Federal regulator
that describes the structure of the covered financial institution's
incentive-based compensation arrangements for covered persons. The
report must contain:
    (1) A clear narrative description of the components of the covered
financial institution's incentive-based compensation arrangements
applicable to covered persons and specifying the types of covered
persons to which they apply;
    (2) A succinct description of the covered financial institution's
policies and procedures governing its incentive-based compensation
arrangements for covered persons;
    (3) For larger covered financial institutions, a succinct
description of any specific incentive compensation policies and
procedures for the institution's executive officers, and other covered
persons who the board, or a committee thereof determines under Sec.  --
--.5(b)(3)(ii) of the Proposed Rule individually have the ability to
expose the institution to possible losses that are substantial in
relation to the institution's size, capital, or overall risk tolerance;
    (4) Any material changes to the covered financial institution's
incentive-based compensation arrangements and policies and procedures
made since the covered financial institution's last report was
submitted; and
    (5) The specific reasons why the covered financial institution
believes the structure of its incentive-based compensation plan does
not encourage inappropriate risks by the covered financial institution
by providing covered persons with excessive compensation or incentive-
based compensation that could lead to material financial loss to the
covered financial institution.
    In developing the proposed reporting provisions, the Agencies have
taken into account that substantially all the covered financial
institutions are already supervised and/or subject to examination by
one or more of the Agencies. Accordingly, in the Proposed Rule, the
Agencies have tailored the annual reporting requirement to the types of
information that would most efficiently assist the relevant Agency in
determining whether there are any areas of potential concern with
respect to the structure of the covered financial institution's
incentive-based compensation arrangements. Generally, each Agency has
reporting, examination and enforcement authority for substantially all
of the covered financial institutions under its respective jurisdiction
that the Agency may use if the information provided under section 956
were to indicate that the structure of a covered financial
institution's incentive-based compensation arrangements may provide
excessive compensation or encourage inappropriate risk-taking.\19\ In
this way, the Proposed Rule seeks to achieve the objective of section
956 in a manner that limits unnecessary reporting burden on covered
financial institutions and leverages the existing supervisory framework
for institutions.
---------------------------------------------------------------------------

    \19\ NCUA would likely consult with the appropriate state
regulator in cases involving a state-chartered credit union.
---------------------------------------------------------------------------

    The Agencies note that they have intentionally chosen phrases like
``clear narrative description'' and ``succinct description'' to
describe the disclosures being sought. The Agencies also note that the
use of the word ``specific'' in the Proposed Rule is designed to elicit
statements that are direct and meaningful explanations of why a covered
financial institution believes its incentive-based compensation plan
properly addresses the ``excessive compensation'' and ``material
financial loss'' components of section 956. These provisions are
designed to help ensure that covered financial institutions will
provide the Agencies with a streamlined set of materials that will help
the Agencies promptly and effectively identify and address any areas of
concern, rather than with voluminous materials that may obfuscate the
actual structure and likely effects of an institution's incentive-based
compensation arrangements. Further, in light of the nature of the
information that will be provided to the Agencies under Sec.  ----.4 of
the Proposed Rule, and the purposes for which the Agencies are
requiring the information, the Agencies generally will maintain the
confidentiality of the information submitted to the Agencies, and the
information will be nonpublic, to the extent permitted by law.\20\ The
nature of the reported information likely will be sensitive for a
variety of reasons, including competitive reasons.
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    \20\ The Freedom of Information Act (``FOIA'') provides at least
two pertinent exemptions under which the Agencies have authority to
withhold certain information. FOIA Exemption 4 provides an exemption
for ``trade secrets and commercial or financial information obtained
from a person and privileged or confidential.'' 5 U.S.C. 552(b)(4).
FOIA Exemption 8 provides an exemption for matters that are
``contained in or related to examination, operating, or condition
reports prepared by, on behalf of, or for the use of an agency
responsible for the regulation or supervision of financial
institutions.'' 5 U.S.C. 552(b)(8).
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    The volume and detail of information provided annually by a covered
financial institution should be commensurate with the size and
complexity of the institution, as well as the scope and nature of its
incentive-based compensation arrangements. As such, the Agencies expect
that the volume and detail of information provided by a large, complex
institution that uses incentive-based arrangements to a significant
degree would be substantially greater than that submitted by a smaller
institution that has only a few incentive-based compensation
arrangements or arrangements that affect only a limited number of
covered persons.
    The Agencies request comment on all aspects of the reporting
provisions in the Proposed Rule. Specifically, the Agencies request
comment on the following:
     Does the Proposed Rule fulfill the requirement to obtain
meaningful and useful descriptions of incentive-based compensation
arrangements for supervisory and compliance purposes?
     Does the Proposed Rule impose a reasonable burden and
minimize the potential for voluminous boilerplate disclosure?
     Is the language in the Proposed Rule sufficiently clear in
describing the kinds of information the Agencies intend to solicit from
covered financial institutions?
     Are there simpler and less burdensome methods of reporting
to the Agencies that would still be sufficiently robust to help the
Agencies assess whether the institution's compensation arrangements
appropriately balance risk and financial rewards? For example, would
setting up an electronic means of filing the required disclosure lessen
the burden on covered financial institutions, and are there specific
factors the Agencies should consider in developing such a disclosure
mechanism?
     Are there any additional types of information that the
Agencies should solicit in order to more accurately assess whether
incentive-based compensation

arrangements are consistent with the objectives of section 956?
     Should the Agencies consider modifying the Proposed Rule
to require covered financial institutions to update their incentive-
based compensation disclosure--between annual disclosure cycles--if any
material changes to their respective incentive-based compensation plans
occur?
    Sec.  ----.5 Prohibitions. Section ----.5 of the Proposed Rule
would implement section 956(b) of the Dodd-Frank Act by prohibiting a
covered financial institution from having incentive-based compensation
arrangements that may encourage inappropriate risks (a) by providing
excessive compensation or (b) that could lead to material financial
loss to the covered financial institution. Consistent with section
956(c), the Proposed Rule also would establish standards for
determining whether an incentive-based compensation arrangement
violates these prohibitions.
    Excessive Compensation. The Proposed Rule would establish a general
rule that a covered financial institution must not establish or
maintain any type of incentive-based compensation arrangement, or any
feature of any such arrangement, that encourages inappropriate risks by
the covered financial institution by providing a covered person with
excessive compensation. As noted previously, section 956 requires the
Agencies to ensure that any compensation standards established under
section 956 are comparable to those established under section 39 of the
FDIA. In light of this directive, the Proposed Rule includes standards
for determining whether an incentive-based compensation arrangement
provides excessive compensation that are comparable to, and based on,
the standards established under section 39 of the FDIA. Specifically,
under the Proposed Rule, incentive-based compensation for a covered
person would be considered excessive when amounts paid are unreasonable
or disproportionate to, among other things, the amount, nature,
quality, and scope of services performed by the covered person. In
making such a determination, the Agencies will consider:
    (1) The combined value of all cash and non-cash benefits provided
to the covered person;
    (2) The compensation history of the covered person and other
individuals with comparable expertise at the covered financial
institution;
    (3) The financial condition of the covered financial institution;
    (4) Comparable compensation practices at comparable institutions,
based upon such factors as asset size, geographic location, and the
complexity of the institution's operations and assets;
    (5) For postemployment benefits, the projected total cost and
benefit to the covered financial institution;
    (6) Any connection between the individual and any fraudulent act or
omission, breach of trust or fiduciary duty, or insider abuse with
regard to the covered financial institution; and
    (7) Any other factors the Agency determines to be relevant.
    The Agencies request comment on these standards, including comment
on the appropriate factors to consider when evaluating comparable
compensation practices at comparable institutions. Should additional
factors be included, such as the nature of the operations at the
comparable institutions?
    Inappropriate Risks that May Lead to Material Financial Loss.
Section 956(b)(2) of the Act requires the Agencies to adopt regulations
or guidelines that prohibit any type of incentive-based payment
arrangement, or any feature of any such arrangement, that the Agencies
determine encourages inappropriate risks by a covered financial
institution that could lead to material financial loss to the covered
institution. Section 39 of the FDIA does not include standards for
determining whether compensation arrangements may encourage
inappropriate risks that could lead to material financial loss.
Accordingly the Agencies have considered the language and purpose of
section 956, existing supervisory guidance that addresses incentive-
based compensation arrangements that may encourage excessive risk-
taking,\21\ the Principles for Sound Compensation Practices and the
related Implementation Standards adopted by the Financial Stability
Board,\22\ and other relevant material in considering how to implement
this aspect of section 956.
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    \21\ See, e.g., Banking Agency Guidance.
    \22\ Financial Stability Board, FSF Principles for Sound
Compensation Practices, Basel, Switzerland (April 2009); Financial
Stability Board, FSB Principles for Sound Compensation Practices:
Implementation Standards, Basel, Switzerland (September 2009).
---------------------------------------------------------------------------

    As an initial matter, the Agencies note that section 956 is focused
on incentive-based compensation arrangements that could lead to
material financial loss to a covered financial institution.
Accordingly, this prohibition would apply only to those incentive-based
compensation arrangements for individual covered persons, or groups of
covered persons, whose activities may expose the covered financial
institution to material financial loss. Such covered persons include:
     Executive officers and other covered persons who are
responsible for oversight of the covered financial institution's firm-
wide activities or material business lines;
     Other individual covered persons, including non-executive
employees, whose activities may expose the covered financial
institution to material financial loss (e.g., traders with large
position limits relative to the covered financial institution's overall
risk tolerance); and
     Groups of covered persons who are subject to the same or
similar incentive-based compensation arrangements and who, in the
aggregate, could expose the covered financial institution to material
financial loss, even if no individual covered person in the group could
expose the covered financial institution to material financial loss
(e.g., loan officers who, as a group, originate loans that account for
a material amount of the covered financial institution's credit risk).
    To implement section 956(b)(2) of the Act, Sec.  ----.5(b)(1) of
the Proposed Rule would prohibit a covered financial institution from
establishing or maintaining any type of incentive compensation
arrangement, or any feature of any such arrangement, for these covered
persons or groups of covered persons, that could lead to material
financial loss to the covered financial institution. Section --
--.5(b)(2) of the Proposed Rule provides that an incentive-based
compensation arrangement established or maintained by a covered
financial institution for one or more covered persons does not comply
with Sec.  ----.5(b)(1) unless it:
     Balances risk and financial rewards, for example by using
deferral of payments, risk adjustment of awards, reduced sensitivity to
short-term performance, or longer performance periods;
     Is compatible with effective controls and risk management;
and
     Is supported by strong corporate governance.

These three standards are consistent with the principles for sound
compensation practices in the Banking Agency Guidance.

    The following describes these proposed standards in greater detail.
In order to help ensure that the incentive-based compensation
arrangements of covered financial institutions are consistent with
their standards, Sec.  ----.6 of the Proposed Rule would require that
covered financial institutions establish and maintain policies and
procedures related to these standards.

Balance of Risk and Financial Rewards

    Incentive-based compensation arrangements typically attempt to
encourage actions that result in greater revenue or profit for the
covered financial institution. However, short-run revenue or profit can
often diverge sharply from actual long-run profit because risk outcomes
may become clear only over time. Activities that carry higher risk
typically yield higher short-term revenue, and a covered person who is
given incentives to increase short-term revenue or profit, without
regard to risk, will naturally be attracted to opportunities to expose
the institution to more risk.\23\
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    \23\ See Banking Agency Guidance at 36407.
---------------------------------------------------------------------------

    Accordingly, to be consistent with section 956, incentive-based
compensation arrangements at a covered financial institution should
balance risk and financial rewards in a manner that does not provide
covered persons with incentives to take inappropriate risks that could
lead to material financial loss at the covered financial institution.
The Agencies would deem an incentive-based compensation arrangement to
be balanced when the amounts paid to a covered person appropriately
take into account the risks, as well as the financial benefits, from
the covered person's activities and the impact of those activities on
the covered financial institution.
    In assessing whether incentive-based compensation arrangements are
balanced, the Agencies will consider the full range of risks associated
with a covered person's activities, as well as the time horizon over
which those risks may be realized. The activities of a covered person
may create a wide range of risks for a covered financial institution,
including credit, market, liquidity, operational, legal, compliance,
and reputational risks. Some of these risks may be realized in the
short term, while others may become apparent only over the long term.
    The Proposed Rule identifies four methods that currently are often
used to make compensation more sensitive to risk. These methods are:
    Risk Adjustment of Awards: Under this method of making a covered
person's incentive-based compensation appropriately risk-sensitive, the
amount of the person's incentive-based compensation award is adjusted
based on measures that take into account the risk the covered person's
activities pose to the covered financial institution. Such measures may
be quantitative, or the size of a risk adjustment may be set based on
managerial judgment, subject to appropriate oversight.
    Deferral of Payment: Under this method, the actual payout of an
award to a covered person is delayed significantly beyond the end of
the performance period, and the amounts paid are adjusted for actual
losses to the covered financial institution or other aspects of
performance that become clear only during the deferral period. Deferred
payouts may be altered according to risk outcomes either formulaically
or based on managerial judgment, though extensive use of judgment might
make it more difficult to execute deferral arrangements in a
sufficiently predictable fashion to influence the risk-taking behavior
of a covered person. To be most effective in ensuring balance, the
deferral period should be sufficiently long to allow for the
realization of a substantial portion of the risks from the covered
person's activities, and the measures of loss should be clearly
explained to covered persons and closely tied to their activities
during the relevant performance period.
    Longer Performance Periods: Under this method of making incentive-
based compensation risk sensitive, the time period covered by the
performance measures used in determining a covered person's award is
extended (for example, from one year to two years). Longer performance
periods and deferral of payment are related in that both methods allow
awards or payments to be made after some or all risk outcomes
associated with a covered person's activities are realized or better
known.
    Reduced Sensitivity to Short-Term Performance: A covered financial
institution using this method reduces the rate at which awards increase
as a covered person achieves higher levels of the relevant performance
measure(s) used in the person's incentive-based compensation
arrangement. Rather than offsetting risk-taking incentives associated
with the use of short-term performance measures, this method reduces
the magnitude of such incentives.
    The Agencies recognize that these methods for achieving balance are
not exclusive, and additional methods or variations of these approaches
may exist or be developed.\24\ Methods and practices for making
compensation sensitive to risk-taking are likely to evolve during the
next few years. Moreover, each method has its own advantages and
disadvantages that may differ depending upon the situation in which
they are used. For example, where reliable risk measures exist, risk
adjustment of awards may be more effective than deferral of payment in
reducing incentives for inappropriate risk-taking. This is because risk
adjustment potentially can take account of the full range and time
horizon of risks, rather than just those risk outcomes that occur or
become evident during the deferral period. On the other hand, deferral
of payment may be more effective than risk adjustment in mitigating
incentives to take hard-to-measure risks (such as the risks of new
activities or products, or certain risks such as reputational or
operational risk that may be difficult to measure with respect to
particular activities), especially if such risks are likely to be
realized during the deferral period. In some cases, two or more methods
may be needed in combination for an incentive-based compensation
arrangement to be balanced. The greater the potential incentives that
an arrangement creates for a covered person to increase the risks borne
by the covered financial institution, the stronger the effect should be
of the methods applied to achieve balance.\25\
---------------------------------------------------------------------------

    \24\ See Banking Agency Guidance at 36407.
    \25\ See Banking Agency Guidance at 36409.
---------------------------------------------------------------------------

Compatibility With Effective Controls and Risk Management

    A covered financial institution's risk management processes and
internal controls should reinforce and support the development and
maintenance of balanced incentive-based compensation arrangements.\26\
In particular, under this proposed standard, the Agencies would expect
a covered financial institution to have strong controls governing its
processes for designing, implementing and monitoring incentive-based
compensation arrangements, and for ensuring that risk-management
personnel have an appropriate role in the institution's processes for
designing incentive-based compensation arrangements, monitoring their
use, and assessing whether they achieve balance. Covered financial
institutions should have appropriate controls to ensure that their
processes for achieving balanced compensation arrangements are followed
and to maintain the integrity of their risk management and other
functions. Such controls are important because covered persons may seek
to evade or weaken an institution's processes to achieve balanced
incentive-based compensation arrangements in order to increase their
own compensation. For example, in order to increase his or her own
incentive

compensation, a covered person may seek to influence inappropriately
the risk measures, information, or judgments used to balance the
covered person's compensation. These activities can have additional
damaging effects on the institution's financial health if they result
in the weakening of the information or processes that the institution
uses for other risk management, internal control, or financial
purposes.\27\
---------------------------------------------------------------------------

    \26\ See Banking Agency Guidance at 36410-11.
    \27\ See Banking Agency Guidance at 36411.
---------------------------------------------------------------------------

Strong Corporate Governance

    Strong and effective corporate governance is critical to the
establishment and maintenance of sound compensation practices.\28\ The
board of directors of a covered financial institution, or committee
thereof, should actively oversee incentive-based compensation
arrangements and is ultimately responsible for ensuring that the
covered financial institution's incentive compensation arrangements are
appropriately balanced. Accordingly, the board of directors, or a
committee thereof, should actively oversee the development and
operation of a covered financial institution's incentive-based
compensation systems and related control processes. For example, the
board of directors, or a committee thereof, should review and approve
the overall goals and purposes of the covered financial institution's
incentive-based compensation system and ensure its consistency with the
institution's overall risk tolerance. In addition, the board of
directors, or committee thereof, should receive data and analysis to
assess whether the overall design, as well as the performance, of the
institution's incentive compensation arrangements are consistent with
section 956.
---------------------------------------------------------------------------

    \28\ See Banking Agency Guidance at 36412.
---------------------------------------------------------------------------

    The Agencies request comment on all aspects of Sec.  ----.5 of the
Proposed Rule. The Agencies also request comment on whether there are
additional factors that should be considered in evaluating whether
compensation is excessive or could lead to material financial loss and
whether the Proposed Rule should include additional details about each
of these standards.

Larger Covered Financial Institutions

Deferral Arrangements Required for Executive Officers
    Paragraph (b)(3) of Sec.  ----.5 of the Proposed Rule would
establish a deferral requirement for larger covered financial
institutions (i.e., generally those with $50 billion or more in total
consolidated assets).\29\ At these larger covered financial
institutions, at least 50 percent of the incentive-based compensation
of an ``executive officer'' (as previously defined), would have to be
deferred over a period of at least three years. The Proposed Rule also
would require that deferred amounts paid be adjusted for actual losses
of the covered financial institution or other measures or aspects of
performance that are realized or become better known during the
deferral period.
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    \29\ As noted above, the FHFA is proposing to adopt this
requirement for all the entities it regulates--Fannie Mae, Freddie
Mac, the twelve Federal Home Loan Banks, and the Office of Finance,
without regard to asset size, except for covered entities in
conservatorship, receivership, or bridge status. FHFA, as
conservator of Fannie Mae and Freddie Mac, requires that one-third
of incentive pay for named executive officers be deferred over a
two-year period. This deferred pay is based on corporate and
individual performance. In addition, deferred pay is paid to Senior
Vice Presidents and above in quarterly installments in the year
following the performance year. One-half of this one-year deferral
of payments is based on the Board of Directors' determination of
corporate performance. As a result, more than one-half of the annual
incentive-based compensation is deferred for senior executives.
---------------------------------------------------------------------------

    The Agencies believe that incentive-based compensation arrangements
for executive officers at larger covered financial institutions are
likely to be better balanced if they involve the deferral of a
substantial portion of the executives' incentive compensation over a
multi-year period in a way that reduces the amount received in the
event of poor performance. The decisions of executive officers have a
significant impact on the entire organization and often involve
substantial strategic or other risks that are difficult to measure and
model--particularly at larger covered financial institutions--and
therefore difficult to address adequately by ex ante risk adjustments.
    Requiring deferral for executive officers is consistent with
international standards \30\ that establish the expectation that large
interconnected firms require the deferral of a substantial portion of
incentive-based compensation (identified as 40 to 60 percent of the
incentive award, or more) for certain employees for a fixed period of
time not less than three years and that incentives be correctly aligned
with the nature of the business, its risks, and the activities of the
employees in question. Because the risks of strategic and other high-
level decisions of executive officers may not be apparent or become
better known for many years, the Proposed Rule would require that the
deferral arrangement for executive officers at these larger covered
financial institutions extend for at least three years. Larger covered
financial institutions tend to have more diverse business operations,
which can make it more difficult to immediately recognize and assess
risks for the organization as a whole. Furthermore, in enacting the
Dodd-Frank Act, Congress recognized that larger organizations may pose
a greater risk to the financial system by requiring the creation of
enhanced prudential standards for certain bank holding companies with
total consolidated assets greater than $50 billion.\31\
---------------------------------------------------------------------------

    \30\ See supra note 22.
    \31\ 12 U.S.C. 5635.
---------------------------------------------------------------------------

    The Proposed Rule recognizes that requiring deferral for this
discrete group of individuals at larger covered institutions, where ex
ante risk adjustment measures are less likely to be effective in and of
themselves, is likely to be a useful balancing tool that allows a
period of time for risks not previously discerned or quantifiable to
ultimately materialize, and concurrently provides for adjustment of
unreleased (or ``unvested'') deferral payments on the basis of observed
consequences and actual performance as opposed to only predicted
results.
    If a covered financial institution is required to use deferral, the
Proposed Rule provides it with flexibility in administering its
specific deferral program. A covered financial institution may decide
to release (or allow vesting of) the full deferred amount in a lump-sum
only at the conclusion of the deferral period; alternatively, the
institution may release the deferred amounts (or allow vesting) in
equal increments, pro rata, for each year of the deferral period.
However, in no event may the release or vesting of amounts required to
be deferred under Sec.  ----.5(b)(3) of the Proposed Rule be faster
than a pro rata equal-annual-increments distribution. For instance, an
institution required to apply a three-year deferral to a $150,000
deferral amount could release a maximum of $50,000 each year or could
withhold the entire sum for the entire period and distribute it as a
lump-sum at the conclusion of the three-year period. The institution
could also employ an alternate distribution that is less rapid than a
pro-rata equal-annual-increments schedule, such as releasing no amount
after the first year, releasing a maximum of $100,000 the second year,
and then $50,000 for the third year.
    Specific comment is solicited on all aspects of the scope, and
specific requirements, of this proposed deferral requirement. In
particular, commenters

are asked to address whether it is appropriate to mandate deferral for
executive officers at larger covered financial institutions to promote
the alignment of employees' incentives with the risk undertaken by such
employees. For example, comment is solicited on whether deferral is
generally an appropriate method for achieving balanced incentive
compensation arrangements for each type of executive officer at these
institutions or whether there are alternative or more effective ways to
achieve such balance. Commenters are also asked to address the possible
impact that the required minimum deferral provisions for senior
executives may have on larger covered financial institutions and
whether the proposed or different deferral requirements should apply to
senior executives at institutions other than larger covered financial
institutions. For example, would it be prudent to mandate deferred
incentive-based compensation for certain types of covered financial
institutions but not require such deferral for other institutions
(e.g., investment advisers) based on the business, risks inherent to
that business, or other relevant factors? Are there additional
considerations, such as tax or accounting considerations, that may
affect the ability of larger covered financial institutions to comply
with the proposed deferral requirement or that the Agencies should
consider in designing this provision in the rule? Comment is also
sought on whether the mandatory deferral provisions of the rule should
apply to a differently defined group of individuals at larger covered
financial institutions, such as the institution's top 25 earners of
incentive-based compensation? Commenters also are asked to address
whether the three-year and 50 percent of incentive-based compensation
minimums are appropriate? Should the minimum required deferral period
be extended to, for example, five years?

Special Review and Approval Requirement for Other Designated
Individuals

    Other individuals at a larger covered financial institution, beyond
the institution's executive officers may have the ability to expose the
institution to possible losses that are substantial in relation to the
institution's size, capital, or overall risk tolerance. In order to
help ensure that the incentive compensation arrangements for these
individuals are appropriately balanced, and do not encourage the
individual to expose the institution to risks that could pose a risk of
material financial loss to the covered financial institution, the
Proposed Rule would require that, at a larger covered financial
institution, the board of directors, or a committee thereof, identify
those covered persons (other than executive officers) that individually
have the ability to expose the institution to possible losses that are
substantial in relation to the institution's size, capital, or overall
risk tolerance.\32\ The proposal notes that these covered persons may
include, for example, traders with large position limits relative to
the institution's overall risk tolerance and other individuals that
have the authority to place at risk a substantial part of the capital
of the covered financial institution. In addition, the Proposed Rule
would require that the board of directors, or a committee thereof, of
the institution approve the incentive-based compensation arrangement
for such individuals, and maintain documentation of such approval.
---------------------------------------------------------------------------

    \32\ In addition to the compensation-deferral requirement
described above, the FHFA proposes to apply this requirement to all
of the entities it regulates without regard to asset size.
---------------------------------------------------------------------------

    Under the proposal, the board of directors, or committee thereof,
of a larger covered financial institution may not approve the
incentive-based compensation arrangement for an individual identified
by the board of directors, or committee thereof, unless the board (or
committee) determines that the arrangement, including the method of
paying compensation under the arrangement, effectively balances the
financial rewards to the covered person and the range and time horizon
of risks associated with the covered person's activities, employing
appropriate methods for ensuring risk sensitivity. The proposal
recognizes that the methods used to balance the rewards and risks of
the individual's activities may include deferral of payments, risk
adjustment of awards, reduced sensitivity to short-term performance, or
longer performance periods, or other appropriate methods. However, the
board of directors, or committee thereof, must determine that the
method(s) used effectively balance the financial rewards to the covered
person and the range and time horizons of the risks associated with the
covered person's activities. In performing its duties in this regard,
the board, or committee thereof, must evaluate the overall
effectiveness of the balancing methods used in the identified covered
person's incentive compensation arrangements in reducing incentives for
inappropriate risk taking by the identified covered person, as well as
the ability of the methods used to make payments sensitive to the full
range of risks presented by that covered person's activities, including
those risks that may be difficult to predict, measure, or model.
    The Agencies request comment on these proposed additional
identification, review, and approval requirements for larger covered
financial institutions with respect to individuals that have the
ability to expose the institution to possible losses that are
substantial in relation to the institution's size, capital, or overall
risk tolerance. Is the proposed special treatment of these covered
persons necessary or appropriate, or is their incentive compensation
adequately addressed by the prohibitions applicable to all other
covered persons (other than executive officers at larger covered
financial institutions) under the proposal? Is it sufficient that, as
under the proposal, such covered persons are not subject to mandatory
deferral but instead are separately identified by the institution's
board and the board is required to approve the incentive-based
compensation arrangement for the covered person after ensuring it is
balanced and sensitive to risk? Should further guidance be provided as
to the meaning of the phrase ``substantial in relation to the
institution's size, capital, or overall risk tolerance''?
    Sec.  ----.6 Policies and Procedures. As noted above, the Agencies
believe that the incentive-based compensation practices of covered
financial institutions should be supported by policies and procedures,
appropriate to the size and complexity of the covered financial
institution, to foster transparency of each covered financial
institution's incentive-based compensation practices and to promote
compliance and accountability regarding the practices that the Agencies
propose to prohibit. Accordingly, the Proposed Rule would require
covered financial institutions to have policies and procedures
governing the award of incentive-based compensation as a way to help
ensure the full implementation of the prohibitions in the Proposed
Rule.
    The Agencies believe that the policies and procedures developed by
each covered financial institution in this area should be appropriately
tailored to balance risk and reward for an institution of its size,
complexity, and business activity, as well as the scope and nature of
the covered financial institution's incentive-based compensation
arrangements. Therefore, the policies and procedures of smaller covered
financial institutions with less

complex incentive-based compensation programs would be expected to be
less extensive than those of larger covered financial institutions with
relatively complex programs and business activities. The Agencies note,
however, that no categories of covered financial institutions using
incentive-based compensation would be systematically or completely
exempt from developing, maintaining, and documenting their incentive-
based compensation policies and procedures.
    As noted above, the prohibition on incentive-based compensation
arrangements that could lead to material financial loss would affect
only those arrangements for covered persons that, either individually
or as a group, may expose the institution to material financial loss.
Accordingly, the policies and procedures of an institution related to
this prohibition should be focused on these covered persons. Depending
on the facts and circumstances of the individual covered financial
institution, certain jobs and classes of jobs may not have the ability
to expose the organization to material financial loss and, as a result,
incentive-based compensation arrangements for these covered persons
within these job classes may be outside the scope of these
restrictions. Examples of jobs and classes of jobs that may be unlikely
to expose the institution to material risk include tellers,
bookkeepers, couriers, or data processing personnel.
    Paragraph (b)(1) of Sec.  ----.6 of the Proposed Rule would require
that the policies and procedures, at a minimum, be designed to address
the Sec.  ----.4 reporting requirements and the Sec.  ----.5
prohibitions.\33\ Requiring such policies and procedures of covered
financial institutions that award incentive-based compensation would
promote compliance with the prohibitions in practice.
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    \33\ In addition, for U.S. operations of foreign banking
organizations (``FBOs''), the organization's policies, including
management, review, and approval requirements for its U.S.
operations, should be coordinated with the FBO's group-wide policies
developed in accordance with the rules of the FBO's home country
supervisor. The policies of the FBO's U.S. operations should also be
consistent with the FBO's overall corporate and management
structure, as well as its framework for risk-management and internal
controls.
---------------------------------------------------------------------------

    In order to help ensure that the risks inherent in a covered
person's actions are appropriately captured, the Agencies believe that
risk-management, risk-oversight, and internal-control personnel should
be involved in all phases of the process for designing incentive-based
compensation arrangements. Risk-management and risk-oversight personnel
also should have responsibility for ongoing assessment of incentive-
based compensation policies to help to ensure that the covered
financial institution's processes remain up-to-date and effective
relative to its incentive compensation practices. The ongoing
involvement of such personnel in the evaluation of incentive-based
compensation arrangements also helps to ensure that risks are properly
understood and evaluated as such risks change over time in light of a
continuously changing business environment. Accordingly, paragraph
(b)(2) of Sec.  ----.6 of the Proposed Rule would make such a
requirement part of the covered financial institution's policies and
procedures governing incentive-based compensation.
    Paragraph (b)(3) of Sec.  ----.6 would require that a covered
financial institution's policies and procedures provide for the
monitoring by a group or person independent of the covered person,
where practicable in light of the institution's size and complexity, of
incentive-based compensation awards and payments, risks taken, and
actual risk outcomes to determine whether incentive-based compensation
payments are reduced to reflect adverse risk outcomes or high levels of
risk taken. To be considered independent under the Proposed Rule, the
group or person at the covered financial institution monitoring or
assessing incentive-based compensation awards must have a separate
reporting line to senior management from the covered person who is
creating the risks so as to help ensure that the analysis of risk is
unbiased. Given the dynamic nature of risk management, the Proposed
Rule also provides for incentive-based compensation awards to be
monitored in light of risks taken and outcomes to determine whether
incentive-based payments should be modified. The Agencies contemplate
that the procedures relating to the adjustment of deferred amounts
would be used by covered financial institutions required to defer a
portion of their incentive-based compensation under Sec.  ----.6 of
this Rule to augment their compliance with the deferral obligation.
    Paragraph (b)(4) of Sec.  ----.6 would require a covered financial
institution to develop and maintain policies and procedures designed to
ensure that the covered financial institution's board of directors, or
a committee thereof, receive data and analysis from management and
other sources sufficient to allow it to assess whether the overall
design and performance of the firm's incentive-based compensation
arrangements are consistent with section 956 of the Act. As with other
provisions of the Proposed Rule, the scope and nature of the data and
analysis should be appropriate to the size and complexity of the
covered financial institution and its use of incentive-based
compensation. The Agencies expect that the board of directors, or
committee thereof, would take into consideration the firm's overall
risk management policies and procedures and the requirements of section
956(b) of the Act when assessing compliance with the Act.
    Paragraph (b)(5) of Sec.  ----.6 of the Proposed Rule would specify
that the policies and procedures of a covered financial institution
must provide that the institution maintains sufficient documentation of
the institution's processes for establishing, implementing, modifying,
and monitoring incentive-based compensation arrangements sufficient to
enable the institution's appropriate Federal regulator to determine the
covered financial institution's compliance with section 956 of the Act
and the Proposed Rule. Given that the determinations to be made
regarding incentive-based compensation are fact-specific, the Agencies
believe that effective documentation of the covered financial
institution's policies, procedures and actions related to incentive-
based compensation is essential both to help promote the risk-based
discipline that section 956 of the Act seeks to foster with respect to
covered financial institutions and to facilitate meaningful oversight
and examination. In this context, the Agencies would expect the
documentation maintained by a covered financial institution under the
Proposed Rule to include, but not be limited to, the following:
    (1) A copy of the covered financial institution's incentive-based
compensation arrangement(s) or plan(s);
    (2) The names and titles of individuals covered by such
arrangement(s) or plan(s);
    (3) A record of the incentive-based compensation awards made under
the arrangement(s) or plan(s); and
    (4) Records reflecting the persons or units involved in the
approval and ongoing monitoring of the arrangement(s) or plan(s).
    Paragraph (b)(6) of Sec.  ----.6 of the Proposed Rule would provide
that, where a covered financial institution uses deferral in connection
with an incentive-based compensation arrangement, the institution's
policies and procedures provide for deferral of any such payments in
amounts and for periods of time appropriate to the duties

and responsibilities of the covered financial institution's covered
persons, the risks associated with those duties and responsibilities,
and the size and complexity of the covered financial institution.\34\
Further, proposed paragraph (b)(6) would require that any such deferred
amounts paid be adjusted for actual losses or other measures or aspects
of performance that are realized or become better known during the
deferral period. The Agencies believe that risk-management personnel at
the covered financial institution would play a substantial role in
identifying and evaluating risks that become better known with the
passage of time. The Agencies contemplate that the procedures relating
to the adjustment of deferred amounts would be used by covered
financial institutions required to defer a portion of their incentive-
based compensation under Sec.  ----.5 of the Proposed Rule to
facilitate their compliance with the deferral obligation.
---------------------------------------------------------------------------

    \34\ The Proposed Rule would require deferral for at least three
years of at least 50 percent of the incentive-based compensation for
executive officers of larger covered financial institutions
(generally those with $50 billion or more in total consolidated
assets). Most covered financial institutions with total consolidated
assets under $50 billion would be required to adopt procedures
applicable to deferred compensation only when the firm elects to use
deferral in its incentive-based compensation program.
---------------------------------------------------------------------------

    Given the importance of incentive-based compensation arrangements
to a covered financial institution's safety and soundness, paragraph
(b)(7) of Sec.  ----.6 would require the policies and procedures to
subject any incentive-based compensation arrangement or component
thereof to a corporate governance framework that provides for ongoing
oversight by the board of directors or a committee of the board of
directors. As discussed above, covered financial institutions should
have strong and effective corporate governance to help ensure sound
compensation practices, including active and effective oversight by the
board of directors. The Agencies believe that the board of directors or
a committee thereof is ultimately responsible for a covered
institution's incentive-based compensation arrangements, which should
appropriately balance risk and rewards. Therefore, the board or its
committee should engage in regular oversight of the covered financial
institution's incentive-based compensation arrangements.
    The Agencies are aware that covered persons at certain covered
financial institutions who have been awarded equity as part of a
deferred incentive-based compensation arrangement may wish to use
personal hedging strategies as a way to lock in value for equity
compensation that is vested over time. The Agencies are concerned that
undertaking such hedging strategies during deferral periods could
diminish the alignment between risk and financial rewards that may be
achieved through these types of deferral arrangements. The Agencies
have not included policies and procedures regarding such personal
hedging strategies in the Proposed Rule, but the Agencies are concerned
that, to the extent personal hedging strategies may be widespread, such
practices would serve to diminish the effectiveness of a covered
financial institution's policies and procedures. Thus, the Agencies are
considering whether a covered financial institution's policies and
procedures should be required to specifically include limits on
personal hedging strategies. To assist in the evaluation of such a
provision, in addition to requesting comment on all aspects of Sec.  --
--.6 of the Proposed Rule, the Agencies are requesting commenters to
describe the extent to which covered financial institutions prohibit
such practices among their covered persons today. Would prohibiting the
use of financial derivatives, insurance contracts or other similar
mechanisms to hedge against the market risk of equity-based incentive-
based compensation be an effective means to help to ensure that
incentive-based compensation arrangements remain aligned with the risk
assumed by covered persons? Are there other factors the Agencies should
take into account when considering if, or how, to address personal
hedging activity by covered persons?
    Sec.  ----.7 Evasion. Section ----.7 of the Proposed Rule would
prohibit a covered financial institution from evading the restrictions
of the rule by doing any act or thing indirectly, or through or by any
other person, that would be unlawful for the covered institution to do
directly under the Proposed Rule. This anti-evasion provision is
designed to prevent covered financial institutions from, for example,
making substantial numbers of its covered persons independent
contractors for the purpose of evading this subpart. The Agencies do
not intend, however, to disrupt bona fide independent contractor
relationships of covered financial institutions. Comments are invited
on whether greater specificity is required in identifying possible
evasion tactics, and on all aspects of Sec.  ----.7.

IV. Request for Comments

    The Agencies encourage comment on any aspect of this proposal and
especially on those issues specifically noted in this preamble.

Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, sec.
722, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking
agencies to use plain language in all proposed and final rules
published after January 1, 2000. The Federal banking agencies invite
your comments on how to make this proposal easier to understand. For
example:
     Have we organized the material to suit your needs? If not,
how could this material be better organized?
     Are the requirements in the proposed regulation clearly
stated? If not, how could the regulation be more clearly stated?
     Does the proposed regulation contain language or jargon
that is not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes to the format would make the regulation
easier to understand?
     What else could we do to make the regulation easier to
understand?

NCUA Agency Regulatory Goal

    NCUA's goal is to promulgate clear and understandable regulations
that impose minimal regulatory burden. We request your comments on
whether the proposed rule is understandable and minimally intrusive if
implemented as proposed.

V. Regulatory Analysis

A. Regulatory Flexibility Act

    OCC: Pursuant to section 605(b) of the Regulatory Flexibility Act,
5 U.S.C. 605(b) (RFA), the regulatory flexibility analysis otherwise
required under section 603 of the RFA is not required if the agency
certifies that the proposed rule will not, if promulgated, have a
significant economic impact on a substantial number of small entities
(defined for purposes of the RFA to include banks and Federal branches
and agencies with assets less than or equal to $175 million) and
publishes its certification and a short, explanatory statement in the
Federal Register along with its proposed rule.
    Consistent with section 956(f) of the Dodd-Frank Act, the OCC's
proposed rule only would apply to national banks and Federal branches
and agencies that have total consolidated assets of $1 billion or more.
The Proposed Rule

would not apply to any small national banks and Federal branches and
agencies, as defined by the RFA. Therefore, the OCC certifies that the
Proposed Rule would not, if promulgated, have a significant economic
impact on a substantial number of small entities.
    Board: The Board has considered the potential impact of the
Proposed Rule on small banking organizations in accordance with the
Regulatory Flexibility Act (5 U.S.C. 603(b)). As discussed in the
SUPPLEMENTARY INFORMATION above, section 956 of the Dodd-Frank Act
(codified at 12 U.S.C. 5641) requires that the Agencies prohibit any
incentive-based payment arrangement, or any feature of any such
arrangement, at a covered financial institution that the Agencies
determine encourages inappropriate risks by a financial institution by
providing excessive compensation or that could lead to material
financial loss. In addition, under the Act a covered financial
institution also must disclose to its appropriate Federal regulator the
structure of its incentive-based compensation arrangements. The Board
and the other Agencies have issued the Proposed Rule in response to
these requirements of the Dodd-Frank Act.
    The Proposed Rule would apply to ``covered financial institutions''
as defined in section 956 of the Dodd-Frank Act. Covered financial
institutions as so defined include specifically listed types of
institutions, as well as other institutions added by the Agencies
acting jointly by rule. In every case, however, covered financial
institutions must have at least $1 billion in total consolidated assets
pursuant to section 956(f). Thus the Proposed Rule is not expected to
apply to any small banking organizations (defined as banking
organizations with $175 million or less in total assets). See 13 CFR
121.201.
    The Proposed Rule would implement section 956(a) of the Dodd-Frank
act by requiring a covered financial institution to submit a report
annually to its appropriate regulator or supervisor in a format
specified by its appropriate Federal regulator that describes the
structure of the covered financial institution's incentive-based
compensation arrangements for covered persons. The volume and detail of
information provided annually by a covered financial institution should
be commensurate with the size and complexity of the institution, as
well as the scope and nature of its incentive-based compensation
arrangements. As such, the Board expects that the volume and detail of
information provided by a large, complex institution that uses
incentive-based arrangements to a significant degree would be
substantially greater than that submitted by a smaller institution that
has only a few incentive-based compensation arrangements or
arrangements that affect only a limited number of covered persons.
    The Proposed Rule would implement section 956(b) of the Dodd-Frank
Act by prohibiting a covered financial institution from having
incentive-based compensation arrangements that may encourage
inappropriate risks (i) by providing excessive compensation or (ii)
that could lead to material financial loss. The Proposed Rule would
establish standards for determining whether an incentive-based
compensation arrangement violates these prohibitions. These standards
would include deferral and other requirements for certain covered
persons at covered financial institutions with total consolidated
assets of more than $50 billion. Consistent with section 956(c), the
standards adopted under section 956 are comparable to the compensation-
related safety and soundness standards applicable to insured depository
institutions under section 39 of the FDIA. The Proposed Rule also would
supplement existing guidance adopted by the Board and the other Federal
banking agencies regarding incentive-based compensation (i.e., the
Banking Agency Guidance, as defined in the ``Supplementary
Information'' above).
    The Proposed Rule would require covered financial institutions to
have policies and procedures governing the award of incentive-based
compensation as a way to help ensure the full implementation of the
prohibitions in the Proposed Rule. The Board believes that the policies
and procedures developed by each covered financial institution in this
area should be appropriately tailored to balance risk and reward for an
institution of its size, complexity, and business activity, as well as
the scope and nature of the covered financial institution's incentive-
based compensation arrangements. Therefore, the policies and procedures
of smaller covered financial institutions with less complex incentive-
based compensation programs would be expected to be less extensive than
those of larger covered financial institutions with relatively complex
programs and business activities.
    As noted above, because the Proposed Rule applies to institutions
that have more than $1 billion in total consolidated assets, if adopted
in final form it is not expected to apply to any small banking
organizations for purposes of the Regulatory Flexibility Act. In light
of the foregoing, the Board does not believe that the Proposed Rule, if
adopted in final form, would have a significant economic impact on a
substantial number of small entities supervised by the Board. The Board
specifically seeks comment on whether the Proposed Rule would impose
undue burdens on, or have unintended consequences for, small
organizations and whether there are ways such potential burdens or
consequences could be addressed in a manner consistent with section 956
of the Dodd-Frank Act.
    FDIC: In accordance with the Regulatory Flexibility Act, 5 U.S.C.
601-612 (RFA), an agency must publish an initial regulatory flexibility
analysis with its Proposed Rule, unless the agency certifies that the
rule will not have a significant economic impact on a substantial
number of small entities. For purposes of the RFA, small entities are
defined to include banks with less than $175 million in assets.
    Consistent with section 956 of the Dodd-Frank Act, the FDIC's
Proposed Rule would only apply to a State nonmember bank and an insured
U.S. branch of a foreign bank that has total consolidated assets of $1
billion or more and offers incentive compensation. The Proposed Rule
would not apply to any small banks as defined by the RFA. Thus, the
FDIC certifies that the Proposed Rule, if promulgated, would not have a
significant economic impact on a substantial number of small entities.
    OTS: Pursuant to section 605(b) of the Regulatory Flexibility Act,
5 U.S.C. 605(b) (RFA), the regulatory flexibility analysis otherwise
required under section 603 of the RFA is not required if the agency
certifies that the proposed rule, if promulgated, will not have a
significant economic impact on a substantial number of small entities
and publishes its certification and a short, explanatory statement in
the Federal Register along with its proposed rule. OTS certifies that
the Proposed Rule would not have a significant impact on a substantial
number of small entities. The Small Business Administration has defined
``small entities'' for banking purposes as a bank or savings
association with $175 million or less in assets. 13 CFR 121.201. Since
OTS's Proposed Rule only applies to savings associations and savings
and loan holding companies with $1 billion or more of assets, it will
not apply to any small entities.
    FHFA: The Regulatory Flexibility Act (5 U.S.C. 601 et seq.)
requires that a rule that has a significant economic impact

on a substantial number of small entities, small businesses, or small
organizations must include an initial regulatory flexibility analysis
describing the rule's impact on small entities. Such an analysis need
not be undertaken if the agency has certified that the rule will not
have a significant economic impact on a substantial number of small
entities. 5 U.S.C. 605(b). FHFA has considered the impact of the final
rule under the Regulatory Flexibility Act. FHFA certifies that the
final rule is not likely to have a significant economic impact on a
substantial number of small business entities because the rule is
applicable only to FHFA's covered entities, which are not small
entities for purposes of the Regulatory Flexibility Act.
    NCUA: In accordance with the Regulatory Flexibility Act, 5 U.S.C.
601-612 (RFA), NCUA must publish an initial regulatory flexibility
analysis with its proposed rule, unless NCUA certifies that the
proposed rule would not have a significant economic impact on a
substantial number of small entities, meaning those credit unions under
$10 million in assets. NCUA Interpretive Ruling and Policy Statement
03-2, 68 FR 31949 (May 29, 2003). The Dodd-Frank Act section 956 and
the NCUA's proposed rule only apply to credit unions of $1 billion in
assets or more. Accordingly, NCUA certifies that the proposed rule
would not have a significant economic impact on a substantial number of
small entities since the credit unions covered under NCUA's proposed
rule are not small entities for RFA purposes.
    SEC: The Commission has prepared the following Initial Regulatory
Flexibility Analysis (IRFA), in accordance with the provisions of the
Regulatory Flexibility Act \35\ regarding proposed Sections 248.201
through 248.207. The Commission encourages comments with respect to any
aspect of this IRFA, including comments with respect to the number of
small entities that may be affected by the proposed rules. Comments
should specify the costs of compliance with the proposed rules and
suggest alternatives that would accomplish the goals of the rules.
Comments will be considered in determining whether a Final Regulatory
Flexibility Analysis is required and will be placed in the same public
file as comments on the proposed rules. Comments should be submitted to
the Commission at the addresses previously indicated.
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    \35\ 5 U.S.C. 603.
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1. Small Entities Subject to the Rule
    As described in more detail above, the proposed rules would
implement section 956 of the Dodd-Frank Act, codified as 12 U.S.C.
5641. For purposes of Commission rulemaking in connection with the RFA,
a small entity includes a broker-dealer: (i) With total capital (net
worth plus subordinated liabilities) of less than $500,000 on the date
in the prior fiscal year as of which its audited financial statements
were prepared pursuant to Rule 17a-5(d) under the Exchange Act, and
(ii) is not affiliated with any person (other than a natural person)
that is not a small business or small organization as defined in this
section.\36\ Commission rules further provide that, for the purposes of
the Investment Advisers Act of 1940, an investment adviser generally is
a small entity if it: (i) Has assets under management having a total
value of less than $25 million; (ii) did not have total assets of $5
million or more on the last day of its most recent fiscal year; and
(iii) does not control, is not controlled by, and is not under common
control with another investment adviser that has assets under
management of $25 million or more, or any person (other than a natural
person) that had $5 million or more on the last day of its most recent
fiscal year (``small adviser'').\37\
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    \36\ 17 CFR 240.0-10(c). See 17 CFR 240.17a-5(d).
    \37\ Rule 0-7(a). 17 CFR 275.0-7(a).
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    Section 956 of the Dodd-Frank Act requires regulators, including
the Commission, to jointly promulgate rules that apply to covered
financial institutions with assets of at least $1 billion. The
Commission believes that broker-dealers and investment advisers that
would be subject to the proposed rule would either have $1 billion in
assets or be affiliated with a firm that is characterized by at least
$1 billion in assets. Therefore, the Commission preliminarily believes
that there should not be any small broker-dealers or investment
advisers impacted by this proposed rule.
2. Duplicative, Overlapping, or Conflicting Federal Rules
    The Commission believes that there are no Federal rules that
duplicate, overlap, or conflict with the proposed rules.
3. Significant Alternatives
    Pursuant to section 3(c) of the RFA,\38\ the Commission must
consider certain types of alternatives, including (1) The establishment
of differing compliance or reporting requirements or timetables that
take into account the resources available to small entities, (2) the
clarification, consolidation, or simplification of compliance and
reporting requirements under the rule for small entities, (3) the use
of performance rather than design standards, and (4) an exemption from
coverage of the rule, or any part of the rule, for small entities.
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    \38\ 5 U.S.C. 603(c).
---------------------------------------------------------------------------

    The Commission does not believe it is necessary or appropriate to
establish different compliance or reporting requirements or timetables;
clarify, consolidate, or simplify compliance and reporting requirements
under the rule for small entities; or summarily exempt small entities
from coverage of the rule, or any part of the rule because the proposed
rule will not apply to any small entities.
4. Request for Comments
    The Commission encourages the submission of comments to any aspect
of this portion of the IRFA. In particular, comments are encouraged on
whether any small entities would be subject to the terms of the
proposed rule. Comments should specify costs of compliance with the
proposed rules and suggest alternatives that would accomplish the
objective of the proposed rules.

B. Paperwork Reduction Act

Request for Comment on Proposed Information Collection
    In accordance with section 3512 of the Paperwork Reduction Act
(PRA) of 1995 (44 U.S.C. 3501-3521), agencies may not conduct or
sponsor, and a respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management
and Budget (OMB) control number. The information collection
requirements contained in this joint notice have been submitted by the
FDIC, OCC, OTS, NCUA, and SEC to OMB for review and approval under
section 3506 of the PRA and Sec.  1320.11 of OMB's implementing
regulations (5 CFR 1320). For the FHFA, the proposed rule does not
contain any information collected from Fannie Mae, Freddie Mac and the
Federal Home Loan Banks, including the Office of Finance, that requires
the approval of OMB under the Paperwork Reduction Act (44 U.S.C. 3501
et seq.). The Board reviewed the proposed rule under the authority
delegated to the Board by OMB. The proposed rule contains requirements
subject to the PRA. The reporting requirements are found in Sec.  --
--.4 and the recordkeeping requirements are found in

Sec. Sec.  ----.5(b)(3)(ii)(B), ----.6(a), and ----.6(b)(5).
    Comments are invited on:
    (a) Whether the collection of information is necessary for the
proper performance of the agencies' functions, including whether the
information has practical utility;
    (b) The accuracy of the estimate of the burden of the information
collection, including the validity of the methodology and assumptions
used;
    (c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
    (d) Ways to minimize the burden of information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
    (e) Estimates of capital or startup costs and costs of operation,
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Comments should
be addressed to:
    FDIC: You may submit written comments, identified by the RIN, by
any of the following methods:
     Agency Web Site: http://www.fdic.gov/regulations/laws/
federal/propose.html. Follow the instructions for submitting comments
on the FDIC Web site.
     Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
     E-mail<EMAIL_ADDRESS>Include RIN 3064-AD56 on the
subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, FDIC, 550 17th Street, NW., Washington, DC 20429.
     Hand Delivery/Courier: Comments may be hand delivered to
the guard station at the rear of the 550 17th Street Building (located
on F Street) on business days between 7 a.m. and 5 p.m.
    Public Inspection: All comments received will be posted without
change to http://www.fdic.gov/regulations/laws/federal/propose.html
including any personal information provided. Comments may be inspected
at the FDIC Public Information Center, Room E-1002, 3501 Fairfax Drive,
Arlington, VA 22226, between 9 a.m. and 5 p.m. on business days.
    OCC: You should direct all written comments to: Communications