[Federal Register Volume 81, Number 112 (Friday, June 10, 2016)]
[Proposed Rules]
[Pages 37669-37838]
[FR Doc No: 2016-11788]

Vol. 81

Friday,

No. 112

June 10, 2016

Part II

 Department of the Treasury

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Office of the Comptroller of the Currency

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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 372

National Credit Union Administration

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12 CFR Parts 741 and 751

Federal Housing Finance Agency

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12 CFR Part 1232

Securities and Exchange Commission

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17 CFR Parts 240, 275, and 303

Incentive-Based Compensation Arrangements; Proposed Rule

Federal Register / Vol. 81 , No. 112 / Friday, June 10, 2016 /
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-1536]
RIN 7100 AE-50

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 372

RIN 3064-AD86

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 741 and 751

RIN 3133-AE48

FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1232

RIN 2590-AA42

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 275, and 303

[Release No. 34-77776; IA-4383; File No. S7-07-16]
RIN 3235-AL06

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); Federal Housing Finance Agency
(FHFA); National Credit Union Administration (NCUA); and U.S.
Securities and Exchange Commission (SEC).

ACTION: Notice of proposed rulemaking and request for comment.

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SUMMARY: The OCC, Board, FDIC, FHFA, NCUA, and SEC (the Agencies) are
seeking comment on a joint proposed rule (the proposed rule) to revise
the proposed rule the Agencies published in the Federal Register on
April 14, 2011, and to implement section 956 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Dodd-Frank Act). Section 956
generally requires that the Agencies jointly issue regulations or
guidelines: (1) Prohibiting incentive-based payment arrangements that
the Agencies determine encourage inappropriate risks by certain
financial institutions by providing excessive compensation or that
could lead to material financial loss; and (2) requiring those
financial institutions to disclose information concerning incentive-
based compensation arrangements to the appropriate Federal regulator.

DATES: Comments must be received by July 22, 2016.

ADDRESSES: Although the Agencies will jointly review 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 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
email, 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
www.regulations.gov. Enter ``Docket ID OCC-2011-0001'' in the Search
Box and click ``Search.'' Click on ``Comment Now'' to submit public
comments.
     Click on the ``Help'' tab on the Regulations.govhome page
to get information on using Regulations.gov, including instructions for
submitting public comments.
     Email<EMAIL_ADDRESS>     Mail: Legislative and Regulatory Activities Division,
Office of the Comptroller of the Currency, 400 7th Street SW., Suite
3E-218, Mail Stop 9W-11, Washington, DC 20219.
     Fax:<PHONE_NUMBER>.
     Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218,
Mail Stop 9W-11, 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, email 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
www.regulations.gov. Enter ``Docket ID OCC-2011-0001'' in the Search
box and click ``Search.'' Click on ``Open Docket Folder'' on the right
side of the screen and then ``Comments.'' Comments can be filtered by
clicking on ``View All'' and then using the filtering tools on the left
side of the screen.
     Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov. Supporting materials may
be viewed by clicking on ``Open Docket Folder'' and then clicking on
``Supporting Documents.'' The docket may be viewed after the close of
the comment period in the same manner as during the comment period.
     Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 400 7th 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) 649-
6700 or, for persons who are deaf or hard of hearing, TTY, (202) 649-
5597. 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.
    Board of Governors of the Federal Reserve System: You may submit
comments, identified by Docket No. 1536 and RIN No. 7100 AE-50, 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.
     Email<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 Robert deV. Frierson, 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 form in
Room 3515, 1801 K Street NW. (between 18th and 19th Streets NW.),
Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays.
    Federal Deposit Insurance Corporation: You may submit comments,
identified by RIN 3064-AD86, 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.
     Email<EMAIL_ADDRESS>Include the RIN 3064-AD86 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 7:00 a.m. and 5:00 p.m.
     Public Inspection: All comments received, including any
personal information provided, will be posted generally without change
to http://www.fdic.gov/regulations/laws/federal.
    Federal Housing Finance Agency: You may submit your written
comments on the proposed rulemaking, identified by RIN number, by any
of the following methods:
     Agency Web site: www.fhfa.gov/open-for-comment-or-input.
     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 email
to FHFA at<EMAIL_ADDRESS>to ensure timely receipt by the Agency.
Please include ``RIN 2590-AA42'' in the subject line of the message.
     Hand Delivery/Courier: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA42,
Federal Housing Finance Agency, Eighth Floor, 400 7th Street SW.,
Washington, DC 20219. The package should be delivered at the 7th Street
entrance Guard Desk, First Floor, on business days between 9 a.m. and 5
p.m.
     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, 400 7th Street SW., Washington, DC 20219.
Please note that all mail sent to FHFA via U.S. Mail is routed through
a national irradiation facility, a process that may delay delivery by
approximately two weeks.
    All comments received by the deadline will be posted without change
for public inspection on the FHFA Web site at http://www.fhfa.gov, and
will include any personal information provided, such as name, address
(mailing and email), and telephone numbers. 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
10:00 a.m. and 3:00 p.m. To make an appointment to inspect comments
please call the Office of General Counsel at<PHONE_NUMBER>.
    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. Follow the
instructions for submitting comments.
     Email: Address to<EMAIL_ADDRESS>Include ``[Your
name] Comments on ``Notice of Proposed Rulemaking for Incentive-based
Compensation Arrangements'' in the email subject line.
     Fax:<PHONE_NUMBER>. Use the subject line described above
for email.
     Mail: Address to Gerard S. Poliquin, 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/Legal/Regs/Pages/PropRegs.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 9:00 a.m. and 3:00 p.m. To make an
appointment, call<PHONE_NUMBER> or send an email to<EMAIL_ADDRESS>    Securities and Exchange Commission: You may submit comments by the
following method:

Electronic Comments

     Use the SEC's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-07-16 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 Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549.

All submissions should refer to File Number S7-07-16. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The SEC will post all comments on the SEC's Internet Web site
(http://www.sec.gov/rules/proposed.shtml). Comments are also available
for Web site viewing and printing in the SEC's Public Reference Room,
100 F Street NE., Washington, DC 20549 on official business days
between the hours of 10:00 a.m. and 3:00 p.m. All comments received
will be posted without change; the SEC does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly.
    Studies, memoranda or other substantive items may be added by the
SEC or staff to the comment file during this rulemaking. A notification
of the inclusion in the comment file of any such materials will be made
available on the SEC's Web site. To ensure direct electronic receipt of
such notifications, sign up through the ``Stay Connected'' option at
www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:
    OCC: Patrick T. Tierney, Assistant Director, Alison MacDonald,
Senior Attorney, and Melissa Lisenbee, Attorney, Legislative and
Regulatory Activities,<PHONE_NUMBER>, and Judi McCormick, Analyst,
Operational Risk Policy,<PHONE_NUMBER>, Office of the Comptroller of
the Currency, 400 7th Street SW., Washington, DC 20219.
    Board: Teresa Scott, Manager,<PHONE_NUMBER>, Meg Donovan, Senior
Supervisory Financial Analyst, (202)

872-7542, or Joe Maldonado, Supervisory Financial Analyst, (202) 973-
7341, Division of Banking Supervision and Regulation; or Laurie
Schaffer, Associate General Counsel,<PHONE_NUMBER>, Michael Waldron,
Special Counsel,<PHONE_NUMBER>, Gillian Burgess, Counsel, (202) 736-
5564, Flora Ahn, Counsel,<PHONE_NUMBER>, or Steve Bowne, Senior
Attorney,<PHONE_NUMBER>, Legal Division, Board of Governors of the
Federal Reserve System, 20th and C Streets NW., Washington, DC 20551.
    FDIC: Rae-Ann Miller, Associate Director, Risk Management Policy,
Division of Risk Management Supervision<PHONE_NUMBER>, Catherine
Topping, Counsel, Legal Division,<PHONE_NUMBER>, and Nefretete Smith,
Counsel, Legal Division,<PHONE_NUMBER>.
    FHFA: Mary Pat Fox, Manager, Executive Compensation Branch, (202)
649-3215; or Lindsay Simmons, Assistant General Counsel, (202) 649-
3066, Federal Housing Finance Agency, 400 7th Street SW., Washington,
DC 20219. The telephone number for the Telecommunications Device for
the Hearing Impaired is<PHONE_NUMBER>.
    NCUA: Vickie Apperson, Program Officer, and Jeffrey Marshall,
Program Officer, Office of Examination & Insurance,<PHONE_NUMBER>; or
Elizabeth Wirick, Senior Staff Attorney, Office of General Counsel,
(703) 518-6540, National Credit Union Administration, 1775 Duke Street,
Alexandria, Virginia 22314.
    SEC: Raymond A. Lombardo, Branch Chief, Kevin D. Schopp, Special
Counsel, Division of Trading & Markets,<PHONE_NUMBER> or
<EMAIL_ADDRESS>Sirimal R. Mukerjee, Senior Counsel, Melissa
R. Harke, Branch Chief, Division of Investment Management, (202) 551-
6787 or<EMAIL_ADDRESS>U.S. Securities and Exchange Commission, 100 F
Street NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Background
    B. Supervisory Experience
    C. Overview of the 2011 Proposed Rule and Public Comment
    D. International Developments
    E. Overview of the Proposed Rule
II. Section-by-Section Description of the Proposed Rule
    Sec.  __.1 Authority, Scope and Initial Applicability
    Sec.  __.2 Definitions
    Definitions Pertaining to Covered Institutions
    Consolidation
    Level 1, Level 2, and Level 3 Covered Institutions
    Definitions Pertaining to Covered Persons
    Relative Compensation Test
    Exposure Test
    Exposure Test at Certain Affiliates
    Dollar Threshold Test
    Other Definitions
    Relationship Between Defined Terms
    Sec.  __.3 Applicability
    (a) When Average Total Consolidated Assets Increase
    (b) When Total Consolidated Assets Decrease
    (c) Compliance of Covered Institutions That Are Subsidiaries of
Covered Institutions
    Sec.  __.4 Requirements and Prohibitions Applicable to All
Covered Institutions
    (a) In General
    (b) Excessive Compensation
    (c) Material Financial Loss
    (d) Performance Measures
    (e) Board of Directors
    (f) Disclosure and Recordkeeping Requirements and (g) Rule of
Construction
    Sec.  __.5 Additional Disclosure and Recordkeeping Requirements
for Level 1 and Level 2 Covered Institutions
    Sec.  __.6 Reservation of Authority for Level 3 Covered
Institutions
    Sec.  __.7 Deferral, Forfeiture and Downward Adjustment, and
Clawback Requirements for Level 1 and Level 2 Covered Institutions
    Sec.  __.7(a) Deferral
    Sec.  __.7(a)(1) and Sec.  __.7(a)(2) Minimum Deferral Amounts
and Deferral Periods for Qualifying Incentive-Based Compensation and
Incentive-Based Compensation Awarded Under a Long-Term Incentive
Plan
    Pro Rata Vesting
    Acceleration of Payments
    Qualifying Incentive-Based Compensation and Incentive-Based
Compensation Awarded Under a Long-Term Incentive Plan
    Sec.  __.7(a)(3) Adjustments of Deferred Qualifying Incentive-
Based Compensation and Deferred Long-Term Incentive Plan
Compensation Amounts
    Sec.  __.7(a)(4) Composition of Deferred Qualifying Incentive-
Based Compensation and Deferred Long-Term Incentive Plan
Compensation for Level 1 and Level 2 Covered Institutions
    Cash and Equity-Like Instruments
    Options
    Sec.  __.7(b) Forfeiture and Downward Adjustment
    Sec.  __.7(b)(1) Compensation at Risk
    Sec.  __.7(b)(2) Events Triggering Forfeiture and Downward
Adjustment Review
    Sec.  __.7(b)(3) Senior Executive Officers and Significant Risk-
Takers Affected by Forfeiture and Downward Adjustment
    Sec.  __.7(b)(4) Determining Forfeiture and Downward Adjustment
Amounts
    Sec.  __.7(c) Clawback
    Sec.  __.8 Additional Prohibitions for Level 1 and Level 2
Covered Institutions
    Sec.  __.8(a) Hedging
    Sec.  __.8(b) Maximum Incentive-Based Compensation Opportunity
    Sec.  __.8(c) Relative Performance Measures
    Sec.  __.8(d) Volume-Driven Incentive-Based Compensation
    Sec.  __.9 Risk Management and Controls Requirements for Level 1
and Level 2 Covered Institutions
    Sec.  __.10 Governance Requirements for Level 1 and Level 2
Covered Institutions
    Sec.  __.11 Policies and Procedures Requirements for Level 1 and
Level 2 Covered Institutions
    Sec.  __.12 Indirect Actions
    Sec.  __.13 Enforcement
    Sec.  __.14 NCUA and FHFA Covered Institutions in
Conservatorship, Receivership, or Liquidation
    SEC Amendment to Exchange Act Rule 17a-4
    SEC Amendment to Investment Advisers Act Rule 204-2
III. Appendix to the Supplementary Information: Example Incentive-
Based Compensation Arrangement and Forfeiture and Downward
Adjustment Review
    Ms. Ledger: Senior Executive Officer at Level 2 Covered
Institution Balance
    Award of Incentive-Based Compensation for Performance Periods
Ending December 31, 2024
    Vesting Schedule
    Use of Options in Deferred Incentive-Based Compensation
    Other Requirements Specific to Ms. Ledger's Incentive-Based
Compensation Arrangement
    Risk Management and Controls and Governance
    Recordkeeping
    Mr. Ticker: Forfeiture and Downward Adjustment Review
IV. Request for Comments
V. Regulatory Analysis
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. The Treasury and General Government Appropriations Act,
1999--Assessment of Federal Regulations and Policies on Families
    D. Riegle Community Development and Regulatory Improvement Act
of 1994
    E. Solicitation of Comments on Use of Plain Language
    F. OCC Unfunded Mandates Reform Act of 1995 Determination
    G. Differences Between the Federal Home Loan Banks and the
Enterprises
    H. NCUA Executive Order 13132 Determination
    I. SEC Economic Analysis
    J. Small Business Regulatory Enforcement Fairness Act
    List of Subjects

I. Introduction

    Section 956 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the ``Dodd-Frank Act'' or the ``Act'') \1\ requires the
Agencies to jointly prescribe regulations or guidelines with respect to
incentive-based compensation practices at certain financial
institutions (referred to as ``covered financial

institutions'').\2\ Specifically, section 956 of the Dodd-Frank Act
(``section 956'') requires that the Agencies prohibit any types of
incentive-based compensation \3\ arrangements, or any feature of any
such arrangements, that the Agencies determine encourage inappropriate
risks by a covered financial institution: (1) By providing an executive
officer, employee, director, or principal shareholder of the covered
financial institution with excessive compensation, fees, or benefits;
or (2) that could lead to material financial loss to the covered
financial institution. 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.
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ 12 U.S.C. 5641.
    \3\ Section 956(b) uses the term ``incentive-based payment
arrangement.'' It appears that Congress used the terms ``incentive-
based payment arrangement'' and ``incentive-based compensation
arrangement'' interchangeably. The Agencies have chosen to use the
term ``incentive-based compensation arrangement'' throughout the
proposed rule and this SUPPLEMENTARY INFORMATION section for the
sake of clarity.
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    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 that any compensation standards adopted under
section 956 be comparable to the safety and soundness standards
applicable to insured depository institutions under section 39 of the
FDIA \4\ and that the Agencies take the compensation standards
described in section 39 of the FDIA into consideration in establishing
compensation standards under section 956.\5\ As explained in greater
detail below, the standards established by the proposed rule are
comparable to the standards established under section 39 of the FDIA.
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    \4\ 12 U.S.C. 1831p-1. The OCC, Board, and FDIC (collectively,
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 Interagency Guidelines
Establishing Standards for Safety and Soundness (the ``Federal
Banking Agency Safety and Soundness Guidelines''), 12 CFR part 30,
Appendix A (OCC); 12 CFR part 208, Appendix D-1 (Board); 12 CFR part
364, Appendix A (FDIC).
    \5\ 12 U.S.C. 1831p-1(c).
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    In April 2011, the Agencies published a joint notice of proposed
rulemaking that proposed to implement section 956 (2011 Proposed
Rule).\6\ Since the 2011 Proposed Rule was published, incentive-based
compensation practices have evolved in the financial services industry.
The Board, the OCC, and the FDIC have gained experience in applying
guidance on incentive-based compensation,\7\ FHFA has gained
supervisory experience in applying compensation-related rules \8\
adopted under the authority of the Safety and Soundness Act,\9\ and
foreign jurisdictions have adopted incentive-based compensation
remuneration codes, regulations, and guidance.\10\ In light of these
developments and the comments received on the 2011 Proposed Rule, the
Agencies are publishing a new proposed rule to implement section 956.
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    \6\ 76 FR 21170 (April 14, 2011).
    \7\ OCC, Board, FDIC, and Office of Thrift Supervision,
``Guidance on Sound Incentive Compensation Policies'' (``2010
Federal Banking Agency Guidance''), 75 FR 36395 (June 25, 2010).
    \8\ These include the Executive Compensation Rule (12 CFR part
1230), the Golden Parachute Payments Rule (12 CFR part 1231), and
the Federal Home Loan Bank Directors' Compensation and Expenses Rule
(12 CFR part 1261 subpart C).
    \9\ The Safety and Soundness Act means the Federal Housing
Enterprises Financial Safety and Soundness Act of 1992, as amended
(12 U.S.C. 4501 et seq.). 12 CFR 1201.1.
    \10\ See, e.g., the European Union, Directive 2013/36/EU
(effective January 1, 2014); United Kingdom Prudential Regulation
Authority (``PRA'') and Financial Conduct Authority (``FCA''), ``PRA
PS12/15/FCA PS15/16: Strengthening the Alignment of Risk and Reward:
New Remuneration Rules'' (June 25, 2015) (``UK Remuneration
Rules''), available at http://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps1215.pdf; Australian Prudential Regulation
Authority (``APRA''), Prudential Practice Guide SPG 511--
Remuneration (November 2013), available at http://www.apra.gov.au/Super/Documents/Prudential-Practice-Guide-SPG-511-Remuneration.pdf;
Canada, The Office of the Superintendent of Financial Institutions
(``OSFI'') Corporate Governance Guidelines (January 2013) (``OSFI
Corporate Governance Guidelines''), available at http://www.osfi-bsif.gc.ca/eng/fi-if/rg-ro/gdn-ort/gl-ld/pages/cg_guideline.aspx and
Supervisory Framework (December 2010) (``OSFI Supervisory
Framework''), available at http://www.osfi-bsif.gc.ca/Eng/Docs/sframew.pdf; Switzerland, Financial Market Supervisory Authority
(``FINMA''), 2010/01 FINMA Circular on Remuneration Schemes (October
2009) (``FINMA Remuneration Circular''), available at https://www.finma.ch/en/documentation/circulars/#Order=2.
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    The first part of this SUPPLEMENTARY INFORMATION section provides
background information on the proposed rule, including a summary of the
2011 Proposed Rule and areas in which the proposed rule differs from
the 2011 Proposed Rule. The second part contains a section-by-section
description of the proposed rule.\11\ To help explain how the
requirements of the proposed rule would work in practice, the Appendix
to this SUPPLEMENTARY INFORMATION section sets out an example of an
incentive-based compensation arrangement for a hypothetical senior
executive officer at a hypothetical large banking organization and an
example of how a forfeiture and downward adjustment review might be
conducted for a senior manager at a hypothetical large banking
organization.
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    \11\ This section-by-section description also includes certain
examples of how the proposed rule would work in practice. These
examples are intended solely for purposes of illustration and do not
cover every aspect of the proposed rule. They are provided as an aid
to understanding the proposed rule and do not carry the force and
effect of law or regulation.
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    For ease of reference, the proposed rules of the Agencies are
referenced in this Supplementary Information section using a common
designation of section __.1 to section __.14 (excluding the title and
part designations for each agency). Each agency would codify its rule,
if adopted, within its respective title of the Code of Federal
Regulations.\12\
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    \12\ Specifically, the Agencies propose to codify the rules as
follows: 12 CFR part 42 (OCC); 12 CFR part 236 (the Board); 12 CFR
part 372 (FDIC); 17 CFR part 303 (SEC); 12 CFR parts 741 and 751
(NCUA); and 12 CFR part 1232 (FHFA).
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A. Background

    Incentive-based compensation arrangements are critical tools in the
management of financial institutions. These arrangements serve several
important objectives, including attracting and retaining skilled staff
and promoting better performance of the institution and individual
employees. Well-structured incentive-based compensation arrangements
can promote the health of a financial institution by aligning the
interests of executives and employees with those of

the institution's shareholders and other stakeholders. At the same
time, poorly structured incentive-based compensation arrangements can
provide executives and employees with incentives to take inappropriate
risks that are not consistent with the long-term health of the
institution and, in turn, the long-term health of the U.S. economy.
Larger financial institutions in particular are interconnected with one
another and with many other companies and markets, which can mean that
any negative impact from inappropriate risk-taking can have broader
consequences. The risk of these negative externalities may not be fully
taken into account in incentive-based compensation arrangements, even
arrangements that otherwise align the interests of shareholders and
other stakeholders with those of executives and employees.
    There is evidence that flawed incentive-based compensation
practices in the financial industry were one of many factors
contributing to the financial crisis that began in 2007. Some
compensation arrangements rewarded employees--including non-executive
personnel like traders with large position limits, underwriters, and
loan officers--for increasing an institution's revenue or short-term
profit without sufficient recognition of the risks the employees'
activities posed to the institutions, and therefore potentially to the
broader financial system.\13\ Traders with large position limits,
underwriters, and loan officers are three examples of non-executive
personnel who had the ability to expose an institution to material
amounts of risk. Significant losses caused by actions of individual
traders or trading groups occurred at some of the largest financial
institutions during and after the financial crisis.\14\
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    \13\ See, e.g., Financial Crisis Inquiry Commission, ``Financial
Crisis Inquiry Report'' (January 2011), at 209, 279, 291, 343,
available at https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf; Senior Supervisors Group, ``Observations on Risk
Management Practices during the Recent Market Turbulence'' (March 6,
2008), available at https://www.newyorkfed.org/medialibrary/media/newsevents/news/banking/2008/SSG_Risk_Mgt_doc_final.pdf.
    \14\ A large financial institution suffered losses in 2012 from
trading by an investment office in its synthetic credit portfolio.
These losses amounted to approximately $5.8 billion, which was
approximately 3.6 percent of the holding company's tier 1 capital.
https://www.sec.gov/Archives/edgar/data/19617/000001961713000221/0000019617-13-000221-index.htm Form 10-K 2013, Pages 69 and 118. In
2007, a proprietary trading group at another large institution
caused losses of an estimated $7.8 billion (approximately 25 percent
of the firm's total stockholder's equity). http://www.morganstanley.com/about-us-ir/shareholder/10k113008/10k1108.pdf
Form 10-K 2008, Pages 45 and 108. Between 2005 and 2008, one futures
trader at a large financial institution engaged in activities that
caused losses of an estimated EUR4.9 billion in 2007, which was
approximately 23 percent of the firm's 2007 tier 1 capital. http://www.societegenerale.com/sites/default/files/03%20March%202008%202008%20Registration%20Document.pdf, Pages, 52,
159-160; http://www.societegenerale.com/sites/default/files/12%20May%202008%20The%20report%20by%20the%20General%20Inspection%20of%20Societe%20Generale.pdf, Pages 1-71. In 2011, one trader at
another large financial institution caused losses of an estimated
$2.25 billion, which represented approximately 5.4 percent of the
firm's tier 1 capital. https://www.fca.org.uk/news/press-releases/fca-bans-kweku-mawuli-adoboli-from-the-financial-services-industry,
Page 1; https://www.ubs.com/global/en/about_ubs/investor_relations/other_filings/sec.html. 2012 SEC Form 20-F, Page 34. In 2007, one
trader caused losses of an estimated $264 million at a large
financial institution, which represented approximately 1.7 percent
of its tier 1 capital. http://www.federalreserve.gov/newsevents/press/enforcement/20081118a.htm, Page 1; https://www.bmo.com/ci/ar2008/downloads/bmo_ar2008.pdf, Page 61.
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    Of particular note were incentive-based compensation arrangements
for employees in a position to expose the institution to substantial
risk that failed to align the employees' interests with those of the
institution. For example, some institutions gave loan officers
incentives to write a large amount of loans or gave traders incentives
to generate high levels of trading revenues, without sufficient regard
for the risks associated with those activities. The revenues that
served as the basis for calculating bonuses were generated immediately,
while the risk outcomes might not have been realized for months or
years after the transactions were completed. When these, or similarly
misaligned incentive-based compensation arrangements, are common in an
institution, the foundation of sound risk management can be undermined
by the actions of employees seeking to maximize their own compensation.
    The effect of flawed incentive-based compensation practices is
demonstrated by the arrangements implemented by Washington Mutual
(WaMu). According to the Senate Permanent Subcommittee on
Investigations Staff's report on the failure of WaMu ``[l]oan officers
and processors were paid primarily on volume, not primarily on the
quality of their loans, and were paid more for issuing higher risk
loans. Loan officers and mortgage brokers were also paid more when they
got borrowers to pay higher interest rates, even if the borrower
qualified for a lower rate--a practice that enriched WaMu in the short
term, but made defaults more likely down the road.'' \15\
---------------------------------------------------------------------------

    \15\ Staff of S. Permanent Subcomm. on Investigations, Wall
Street and the Financial Crisis: Anatomy of a Financial Collapse at
143 (Comm. Print 2011).
---------------------------------------------------------------------------

    Flawed incentive-based compensation arrangements were evident in
not just U.S. financial institutions, but also major financial
institutions worldwide.\16\ In a 2009 survey of banking organizations
engaged in wholesale banking activities, the Institute of International
Finance found that 98 percent of respondents recognized the
contribution of incentive-based compensation practices to the financial
crisis.\17\
---------------------------------------------------------------------------

    \16\ See Financial Stability Forum, ``FSF Principles for Sound
Compensation Practices'' (April 2009) (the ``FSB Principles''),
available at http://www.financialstabilityboard.org/publications/r_0904b.pdf; Senior Supervisors Group, ``Risk-management Lessons
from the Global Banking Crisis of 2008'' (October 2009), available
at http://www.newyorkfed.org/newsevents/news/banking/2009/ma091021.html. The Financial Stability Forum was renamed the
Financial Stability Board (``FSB'') in April 2009.
    \17\ See Institute of International Finance, Inc.,
``Compensation in Financial Services: Industry Progress and the
Agenda for Change'' (March 2009), available at http://www.oliverwyman.com/ow/pdf_files/OW_En_FS_Publ_2009_CompensationInFS.pdf. See also UBS, ``Shareholder
Report on UBS's Write-Downs,'' (April 18, 2008), at 41-42
(identifying incentive effects of UBS compensation practices as
contributing factors in losses suffered by UBS due to exposure to
the subprime mortgage market), available at http://www.ubs.com/1/ShowMedia/investors/agm?contentId=140333&name=080418ShareholderReport.pdf.
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    Shareholders and other stakeholders in a covered institution \18\
have an interest in aligning the interests of executives, managers, and
other employees with the institution's long-term health. However,
aligning the interests of shareholders (or members, in the case of
credit unions, mutual savings associations, mutual savings banks, some
mutual holding companies, and Federal Home Loan Banks) and other
stakeholders with employees may not always be sufficient to protect the
safety and soundness of an institution, deter excessive compensation,
or deter behavior or inappropriate risk-taking that could lead to
material financial loss at the institution. Executive officers and
employees of a covered institution may be willing to tolerate a degree
of risk that is inconsistent with the interests of stakeholders, as
well as broader public policy goals.
---------------------------------------------------------------------------

    \18\ As discussed below, the proposed rule uses the term
``covered institution'' rather than the statutory term ``covered
financial institution.''
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    Generally, the incentive-based compensation arrangements of a
covered institution should reflect the interests of the shareholders
and other stakeholders, to the extent that the incentive-based
compensation makes those covered persons demand more or less reward for
their risk-taking at the covered institution, and to the extent that
incentive-based compensation

changes those covered persons' risk-taking. However, risks undertaken
by a covered institution--particularly a larger institution--can spill
over into the broader economy, affecting other institutions and
stakeholders. Therefore, there may be reasons why the preferences of
all of the stakeholders are not fully reflected in incentive-based
compensation arrangements. Hence, there is a public interest in
curtailing the inappropriate risk-taking incentives provided by
incentive-based compensation arrangements. Without restrictions on
incentive-based compensation arrangements, covered institutions may
engage in more risk-taking than is optimal from a societal perspective,
suggesting that regulatory measures may be required to cut back on the
risk-taking incentivized by such arrangements. Particularly at larger
institutions, shareholders and other stakeholders may have difficulty
effectively monitoring and controlling the impact of incentive-based
compensation arrangements throughout the institution that may affect
the institution's risk profile, the full range of stakeholders, and the
larger economy.
    As a result, supervision and regulation of incentive-based
compensation can play an important role in helping safeguard covered
institutions against incentive-based compensation practices that
threaten safety and soundness, are excessive, or could lead to material
financial loss. In particular, such supervision and regulation can help
address the negative externalities affecting the broader economy or
other institutions that may arise from inappropriate risk-taking by
large financial institutions.

B. Supervisory Experience

    To address such practices, the Federal Banking Agencies proposed,
and then later adopted, the 2010 Federal Banking Agency Guidance
governing incentive-based compensation programs, which applies to all
banking organizations regardless of asset size. This Guidance uses a
principles-based approach to ensure that incentive-based compensation
arrangements appropriately tie rewards to longer-term performance and
do not undermine the safety and soundness of banking organizations or
create undue risks to the financial system. In addition, to foster
implementation of improved incentive-based compensation practices, the
Board, in cooperation with the OCC and FDIC, initiated in late 2009 a
multidisciplinary, horizontal review (``Horizontal Review'') of
incentive-based compensation practices at 25 large, complex banking
organizations, which is still ongoing.\19\ One goal of the Horizontal
Review is to help improve the Federal Banking Agencies' understanding
of the range and evolution of incentive-based compensation practices
across institutions and categories of employees within institutions.
The second goal is to provide guidance to each institution in
implementing the 2010 Federal Banking Agency Guidance. The supervisory
experience of the Federal Banking Agencies in this area is also
relevant to the incentive-based compensation practices at broker-
dealers and investment advisers.
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    \19\ The financial institutions in the Horizontal Review are
Ally Financial Inc.; American Express Company; Bank of America
Corporation; The Bank of New York Mellon Corporation; Capital One
Financial Corporation; Citigroup Inc.; Discover Financial Services;
The Goldman Sachs Group, Inc.; JPMorgan Chase & Co.; Morgan Stanley;
Northern Trust Corporation; The PNC Financial Services Group, Inc.;
State Street Corporation; SunTrust Banks, Inc.; U.S. Bancorp; and
Wells Fargo & Company; and the U.S. operations of Barclays plc, BNP
Paribas, Credit Suisse Group AG, Deutsche Bank AG, HSBC Holdings
plc, Royal Bank of Canada, The Royal Bank of Scotland Group plc,
Societe Generale, and UBS AG.
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    As part of the Horizontal Review, the Board conducted reviews of
line of business operations in the areas of trading, mortgage, credit
card, and commercial lending operations as well as senior executive
incentive-based compensation awards and payouts. The institutions
subject to the Horizontal Review have made progress in developing
practices that would incorporate the principles of the 2010 Federal
Banking Agency Guidance into their risk management systems, including
through better recognition of risk in incentive-based compensation
decision-making and improved practices to better balance risk and
reward. Many of those changes became evident in the actual compensation
arrangements of the institutions as the review progressed. In 2011, the
Board made public its initial findings from the Horizontal Review,
recognizing the steps the institutions had made towards improving their
incentive-based compensation practices, but also noting that each
institution needed to do more.\20\ In early 2012, the Board initiated a
second, cross-firm review of 12 additional large banking organizations
(``2012 LBO Review''). The Board also monitors incentive-based
compensation as part of ongoing supervision. Supervisory oversight
focuses most intensively on large banking organizations because they
are significant users of incentive-based compensation and because
flawed approaches at these organizations are more likely to have
adverse effects on the broader financial system. As part of that
supervision, the Board also conducts targeted incentive-based
compensation exams and considers incentive-based compensation in the
course of wider line of business and risk-related reviews.
---------------------------------------------------------------------------

    \20\ Board, ``Incentive Compensation Practices: A Report on the
Horizontal Review of Practices at Large Banking Organizations''
(October 2011) (``2011 FRB White Paper), available at http://www.federalreserve.gov/publications/other-reports/files/incentive-compensation-practices-report-201110.pdf.
---------------------------------------------------------------------------

    For the past several years, the Board also has been actively
engaged in international compensation, governance, and conduct working
groups that have produced a variety of publications aimed at further
improving incentive-based compensation practices.\21\
---------------------------------------------------------------------------

    \21\ See, e.g., FSB Principles; FSB, ``FSB Principles for Sound
Compensation Practices: Implementation Standards, Basel,
Switzerland'' (September 2009), available at http://www.fsb.org/wp-content/uploads/r_090925c.pdf?page_moved=1 (together with the FSB
Principles, the ``FSB Principles and Implementation Standards'');
Basel Committee on Banking Supervision, ``Report on Range of
Methodologies for Risk and Performance Alignment of Remuneration''
(May 2011); Basel Committee on Banking Supervision, ``Principles for
the Effective Supervision of Financial Conglomerates'' (September
2012); FSB, ``Implementing the FSB Principles for Sound Compensation
Practices and their Implementation Standards--First, Second, Third,
and Fourth Progress Reports'' (June 2012, August 2013, November
2014, November 2015), available at http://www.fsb.org/publications/?policy_area%5B%5D=24.
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    The FDIC reviews incentive-based compensation practices as part of
its safety and soundness examinations of state nonmember banks, most of
which are smaller community institutions that would not be covered by
the proposed rule. FDIC incentive-based compensation reviews are
conducted in the context of the 2010 Federal Banking Agency Guidance
and Section 39 of the FDIA. Of the 518 bank failures resolved by the
FDIC between 2007 and 2015, 65 involved banks with total assets of $1
billion or more that would have been covered by the proposed rule. Of
the 65 institutions that failed with total assets of $1 billion or
more, 18 institutions or approximately 28 percent, were identified as
having some level of issues or concerns related to compensation
arrangements, many of which involved incentive-based compensation.
Overall, most of the compensation issues related to either excessive
compensation or tying financial incentives to metrics such as corporate
performance or loan production without adequate consideration of
related risks. Also, several cases involved poor governance practices,
most commonly, dominant

management influencing improper incentives.\22\
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    \22\ The Inspector General of the appropriate federal banking
agency must conduct a Material Loss Review (``MLR'') when losses to
the Deposit Insurance Fund from failure of an insured depository
institution exceed certain thresholds. See FDIC MLRs, available at
https://www.fdicig.gov/mlr.shtml; Board MLRs available at http://oig.federalreserve.gov/reports/audit-reports.htm; and OCC MLRs,
available at https://www.treasury.gov/about/organizational-structure/ig/Pages/audit_reports_index.aspx. See also the
Subcommittee Report.
---------------------------------------------------------------------------

    The OCC reviews and assesses compensation practices at individual
banks as part of its normal supervisory activities. For example, the
OCC identifies matters requiring attention (MRAs) relating to
compensation practices, including matters relating to governance and
risk management and controls for compensation. The OCC's Guidelines
Establishing Heightened Standards for Certain Large Insured National
Banks, Insured Federal Savings Associations, and Insured Federal
Branches \23\ (the ``OCC's Heightened Standards'') require covered
banks to establish and adhere to compensation programs that prohibit
incentive-based payment arrangements that encourage inappropriate risks
by providing excessive compensation or that could lead to material
financial loss. The OCC includes an assessment of the banks'
compensation practices when determining compliance with the OCC's
Heightened Standards.
---------------------------------------------------------------------------

    \23\ 12 CFR part 30, appendix D.
---------------------------------------------------------------------------

    In addition to safety and soundness oversight, FHFA has express
statutory authorities and mandates related to compensation paid by its
regulated entities. FHFA reviews compensation arrangements before they
are implemented at Fannie Mae, Freddie Mac, the Federal Home Loan
Banks, and the Office of Finance of the Federal Home Loan Bank System.
By statute, FHFA must prohibit its regulated entities from providing
compensation to any executive officer of a regulated entity that is not
reasonable and comparable with compensation for employment in other
similar businesses (including publicly held financial institutions or
major financial services companies) involving similar duties and
responsibilities.\24\ FHFA also has additional authority over the
Enterprises during conservatorship, and has established compensation
programs for Enterprise executives.\25\
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    \24\ 12 U.S.C. 4518(a).
    \25\ As conservator, FHFA succeeded to all rights, titles,
powers and privileges of the Enterprises, and of any shareholder,
officer or director of each company with respect to the company and
its assets. The Enterprises have been under conservatorship since
September 2008.
---------------------------------------------------------------------------

    In early 2014, FHFA issued two final rules related to compensation
pursuant to its authority over compensation under the Safety and
Soundness Act.\26\ The Executive Compensation Rule sets forth
requirements and processes with respect to compensation provided to
executive officers by the Enterprises, the Federal Home Loan Banks, and
the Federal Home Loan Bank System's Office of Finance.\27\ Under the
rule, those entities may not enter into an incentive plan with an
executive officer or pay any incentive compensation to an executive
officer without providing advance notice to FHFA.\28\ FHFA's Golden
Parachute Payments Rule governs golden parachute payments in the case
of a regulated entity's insolvency, conservatorship, or troubled
condition.\29\
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    \26\ 12 CFR parts 1230 and 1231, under the authority of the
Safety and Soundness Act (12 U.S.C. 4518), as amended by the Housing
and Economic Recovery Act of 2008. Congress enacted HERA, including
new or amended provisions addressing compensation at FHFA's
regulated entities, at least in part in response to the financial
crisis that began in 2007.
    \27\ 12 CFR part 1230.
    \28\ 12 CFR 1230.3(d).
    \29\ 12 CFR part 1231.
---------------------------------------------------------------------------

    In part because of the work described above, incentive-based
compensation practices and the design of incentive-based compensation
arrangements at banking organizations supervised by the Federal Banking
Agencies have improved significantly in the years since the recent
financial crisis. However, the Federal Banking Agencies have continued
to evaluate incentive-based compensation practices as a part of their
ongoing supervision responsibilities, with a particular focus on the
design of incentive-based compensation arrangements for senior
executive officers; deferral practices (including compensation at risk
through forfeiture and clawback mechanisms); governance and the use of
discretion; ex ante risk adjustment; and control function participation
in incentive-based compensation design and risk evaluation. The Federal
Banking Agencies' supervision has been focused on ensuring robust risk
management and governance practices rather than on prescribing levels
of pay.
    Generally, the supervisory work of the Federal Banking Agencies and
FHFA has promoted more risk-sensitive incentive-based compensation
practices and effective risk governance. Incentive-based compensation
decision-making increasingly leverages underlying risk management
frameworks to help ensure better risk identification, monitoring, and
escalation of risk issues. Prior to the recent financial crisis, many
institutions had no effective risk adjustments to incentive-based
compensation at all. Today, the Board has observed that incentive-based
compensation arrangements at the largest banking institutions reflect
risk adjustments, the largest banking institutions take into
consideration adverse outcomes, more pay is deferred, and more of the
deferred amount is subject to reduction based on failure to meet
assigned performance targets or as a result of adverse outcomes that
trigger forfeiture and clawback reviews.\30\
---------------------------------------------------------------------------

    \30\ See generally 2011 FRB White Paper. The 2011 FRB White
Paper provides specific examples of how compensation practices at
the institutions involved in the Board's Horizontal Review of
Incentive Compensation have changed since the recent financial
crisis.
---------------------------------------------------------------------------

    Similarly, prior to the recent financial crisis, institutions
rarely involved risk management and control personnel in incentive-
based compensation decision-making. Today, control functions frequently
play an increased role in the design and operation of incentive-based
compensation, and institutions have begun to build out frameworks to
help validate the effectiveness of risk adjustment mechanisms. Risk-
related performance objectives and ``risk reviews'' are increasingly
common. Prior to the recent financial crisis, boards of directors had
begun to consider the relationship between incentive-based compensation
and risk, but were focused on incentive-based compensation for senior
executives. Today, refined policies and procedures promote some
consistency and effectiveness across incentive-based compensation
arrangements. The role of boards of directors has expanded and the
quality of risk information provided to those boards has improved.
Finance and audit committees work together with compensation committees
with the goal of having incentive-based compensation result in prudent
risk-taking.
    Notwithstanding the recent progress, incentive-based compensation
practices are still in need of improvement, including better targeting
of performance measures and risk metrics to specific activities, more
consistent application of risk adjustments, and better documentation of
the decision-making process. Congress has required the Agencies to
jointly prescribe regulations or guidelines that cover not only
depository institutions and depository institution holding companies,
but also other financial institutions. While the Federal Banking
Agencies' supervisory approach based on the 2010 Federal Banking Agency

Guidance and the work of FHFA have resulted in improved incentive-based
compensation practices, there are even greater benefits possible under
rule-based supervision. Using their collective supervisory experiences,
the Agencies are proposing a uniform set of enforceable standards
applicable to a larger group of institutions supervised by all of the
Agencies. The proposed rule would promote better incentive-based
compensation practices, while still allowing for some flexibility in
the design and operation of incentive-based compensation arrangements
among the varied institutions the Agencies supervise, including through
the tiered application of the proposed rule's requirements.

C. Overview of the 2011 Proposed Rule and Public Comment

    The Agencies proposed a rule in 2011, rather than guidelines, to
establish requirements applicable to the incentive-based compensation
arrangements of all covered institutions. The 2011 Proposed Rule would
have supplemented existing rules, guidance, and ongoing supervisory
efforts of the Agencies.
    The 2011 Proposed Rule would have prohibited incentive-based
compensation arrangements that could encourage inappropriate risks. It
would have required compensation practices at regulated financial
institutions to be consistent with three key principles--that
incentive-based compensation arrangements should appropriately balance
risk and financial rewards, be compatible with effective risk
management and controls, and be supported by strong corporate
governance. The Agencies proposed that financial institutions with $1
billion or more in assets be required to have policies and procedures
to ensure compliance with the requirements of the rule, and submit an
annual report to their Federal regulator describing the structure of
their incentive-based compensation arrangements.
    The 2011 Proposed Rule included two additional requirements for
``larger financial institutions.'' \31\ The first would have required
these larger financial institutions to defer 50 percent of the
incentive-based compensation for executive officers for a period of at
least three years. The second would have required the board of
directors (or a committee thereof) to identify and approve the
incentive-based compensation for those covered persons who 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, such as traders with large position limits and other
individuals who have the authority to place at risk a substantial part
of the capital of the covered institution.
---------------------------------------------------------------------------

    \31\ In the 2011 Proposed Rule, the term ``larger covered
financial institution'' for the Federal Banking Agencies and the SEC
meant those covered 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 would have been larger
covered institutions. For FHFA, Fannie Mae, Freddie Mac, and all
Federal Home Loan Banks with total consolidated assets of $1 billion
or more would have been larger covered institutions.
---------------------------------------------------------------------------

    The Agencies received more than 10,000 comments on the 2011
Proposed Rule, including from private individuals, community groups,
several members of Congress, pension funds, labor federations, academic
faculty, covered institutions, financial industry associations, and
industry consultants.
    The vast majority of the comments were substantively identical form
letters of two types. The first type of form letter urged the Agencies
to minimize the incentives for short-term risk-taking by executives by
requiring at least a five-year deferral period for executive bonuses at
big banks, banning executives' hedging of their pay packages, and
requiring specific details from banks on precisely how they ensure that
executives will share in the long-term risks created by their
decisions. These commenters also asserted that the final rule should
apply to the full range of important financial institutions and cover
all the key executives at those institutions. The second type of form
letter stated that the commenter or the commenter's family had been
affected by the financial crisis that began in 2007, a major cause of
which the commenter believed to be faulty pay practices at financial
institutions. These commenters suggested various methods of improving
these practices, including basing incentive-based compensation on
measures of a financial institution's safety and stability, such as the
institution's bond price or the spread on credit default swaps.
    Comments from community groups, members of Congress, labor
federations, and pension funds generally urged the Agencies to
strengthen the proposed rule and many cited evidence suggesting that
flawed incentive-based compensation practices in the financial industry
were a major contributing factor to the recent financial crisis. Their
suggestions included: Revising the 2011 Proposed Rule's definition of
``incentive-based compensation''; defining ``excessive compensation'';
increasing the length of time for or amount of compensation subject to
the mandatory deferral provision; requiring financial institutions to
include quantitative data in their annual incentive-based compensation
reports; providing for the annual public reporting by the Agencies of
information quantifying the overall sensitivity of incentive-based
compensation to long-term risks at major financial institutions;
prohibiting stock ownership by board members; and prohibiting hedging
strategies used by highly-paid executives on their own incentive-based
compensation.
    The academic faculty commenters submitted analyses of certain
compensation issues and recommendations. These recommendations
included: Adopting a corporate governance measure tied to stock
ownership by board members; regulating how deferred compensation is
reduced at future payment dates; requiring covered institutions'
executives to have ``skin in the game'' for the entire deferral period;
and requiring disclosure of personal hedging transactions rather than
prohibiting them.
    A number of covered institutions and financial industry
associations favored the issuance of guidelines instead of rules to
implement section 956. Others expressed varying degrees of support for
the 2011 Proposed Rule but also requested numerous clarifications and
modifications. Many of these commenters raised questions concerning the
2011 Proposed Rule's scope, suggesting that certain types of
institutions be excluded from the coverage of the final rule. Some of
these commenters questioned the need for the excessive compensation
prohibition or requested that the final rule provide specific standards
for determining when compensation is excessive. Many of these
commenters also opposed the 2011 Proposed Rule's mandatory deferral
provision, and some asserted that the provision was unsupported by
empirical evidence and potentially harmful to a covered institution's
ability to attract and retain key employees. In addition, many of these
commenters asserted that the material risk-taker provision in the 2011
Proposed Rule was unclear or imposed on the boards of directors of
covered institutions duties more appropriately undertaken by the
institutions' management. Finally, these commenters expressed concerns
about the burden and timing of the 2011 Proposed Rule.

D. International Developments

    The Agencies considered international developments in

developing the 2011 Proposed Rule, mindful that some covered
institutions operate in both domestic and international competitive
environments.\32\ Since the release of the 2011 Proposed Rule, a number
of foreign jurisdictions have introduced new compensation regulations
that require certain financial institutions to meet certain standards
in relation to compensation policies and practices. In June 2013, the
European Union adopted the Capital Requirements Directive (``CRD'') IV,
which sets out requirements for compensation structures, policies, and
practices that apply to all banks and investment firms subject to the
CRD.\33\ The rules require that up to 100 percent of the variable
remuneration shall be subject to malus \34\ or clawback arrangements,
among other requirements.\35\ The PRA's and the FCA's Remuneration Code
requires covered companies to defer 40 to 60 percent of a covered
person's variable remuneration--and recently updated their implementing
regulations to extend deferral periods to seven years for senior
executives and to five years for certain other covered persons.\36\ The
PRA also implemented, in July 2014, a policy requiring firms to set
specific criteria for the application of malus and clawback. The PRA's
clawback policy requires that variable remuneration be subject to
clawback for a period of at least seven years from the date on which it
is awarded.\37\
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    \32\ See 76 FR at 21178. See, e.g., FSB Principles and
Implementation Standards.
    \33\ Directive 2013/36/EU of the European Parliament and of the
Council of 26 June 2013 (effective January 1, 2014). The
remuneration rules in CRD IV were carried over from CRD III with a
few additional requirements. CRD III directed the Committee of
European Bank Supervisors (``CEBS''), now the European Banking
Authority (``EBA''), to develop guidance on how it expected the
compensation principles under CRD III to be implemented. See CEBS
Guidelines on Remuneration Policies and Practices (December 10,
2010) (``CEBS Guidelines''), available at http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32010L0076&from=EN.
    \34\ Malus is defined by the European Union as ``an arrangement
that permits the institution to prevent vesting of all or part of
the amount of a deferred remuneration award in relation to risk
outcomes or performance.'' See, PRA expectations regarding the
application of malus to variable remuneration--SS2/13 UPDATE,
available at: http://www.bankofengland.co.uk/pra/Documents/publications/ss/2015/ss213update.pdf.
    \35\ CRD IV provides that at least 50 percent of total variable
remuneration should consist of equity-linked interests and at least
40 percent of any variable remuneration must be deferred over a
period of three to five years. In the case of variable remuneration
of a particularly high amount, the minimum amount required to be
deferred is increased to 60 percent.
    \36\ See UK Remuneration Rules.
    \37\ See PRA, ``PRA PS7/14: Clawback'' (July 2014), available at
http://www.bankofengland.co.uk/pra/Pages/publications/ps/2014/ps714.aspx.
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    Also in 2013, the EBA finalized the process and criteria for the
identification of categories of staff who have a material impact on the
institution's risk profile (``Identified Staff'').\38\ These Identified
Staff are subject to provisions related, in particular, to the payment
of variable compensation. The standards cover remuneration packages for
Identified Staff categories and aim to ensure that appropriate
incentives for prudent, long-term oriented risk-taking are provided.
The criteria used to determine who is identified are both qualitative
(i.e., related to the role and decision-making authority of staff
members) and quantitative (i.e., related to the level of total gross
remuneration in absolute or in relative terms).
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    \38\ EBA Regulatory Technical Standards on criteria to identify
categories of staff whose professional activities have a material
impact on an institution's risk profile under Article 94(2) of
Directive 2013/36/EU. Directive 2013/36/EU of the European
Parliament and of the Council of 26 June 2013 (December 16, 2013),
available at https://www.eba.europa.eu/documents/10180/526386/EBA-RTS-2013-11+%28On+identified+staff%29.pdf/c313a671-269b-45be-a748-29e1c772ee0e.
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    More recently, in December 2015, the EBA released its final
Guidelines on Sound Remuneration Policies.\39\ The final Guidelines on
Sound Remuneration Policies set out the governance process for
implementing sound compensation policies across the European Union
under CRD IV, as well as the specific criteria for categorizing all
compensation components as either fixed or variable pay. The final
Guidelines on Sound Remuneration Policies also provide guidance on the
application of deferral arrangements and pay-out instruments to ensure
that variable pay is aligned with an institution's long-term risks and
that any ex-post risk adjustments can be applied as appropriate. These
Guidelines will apply as of January 1, 2017, and will replace the
Guidelines on Remuneration Policies and Practices that were published
by the CEBS in December 2010.
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    \39\ EBA, ``Guidelines for Sound Remuneration Policies under
Articles 74(3) and 75(2) of Directive 2013/36/EU and Disclosures
under Article 450 of Regulation (EU) No 575/2013'' (December 21,
2015) (``EBA Remuneration Guidelines''), available at https://www.eba.europa.eu/documents/10180/1314839/EBA-GL-2015-22+Guidelines+on+Sound+Remuneration+Policies.pdf/1b0f3f99-f913-461a-b3e9-fa0064b1946b.
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    Other regulators, including those in Canada, Australia, and
Switzerland, have taken either a guidance-based approach to the
supervision and regulation of incentive-based compensation or an
approach that combines guidance and regulation that is generally
consistent with the FSB Principles and Implementation Standards. In
Australia,\40\ all deposit-taking institutions and insurers are
expected to comply in full with all the requirements in the APRA's
Governance standard (which includes remuneration provisions). APRA also
supervises according to its Remuneration Prudential Practice Guide
(guidance). In Canada,\41\ all federally regulated financial
institutions (domestic and foreign) are expected to comply with the FSB
Principles and Implementation Standards, and the six Domestic
Systemically Important Banks and three largest life insurance companies
are expected to comply with the FSB's Principles and Implementation
Standards. OSFI has also issued a Corporate Governance Guideline that
contain compensation provisions.\42\ Switzerland's Swiss Financial
Markets Supervisory Authority has also published a principles-based
rule on remuneration consistent with the FSB Principles and
Implementation Standards that applies to major banks and insurance
companies.\43\
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    \40\ See APRA, ``Prudential Standard CPS 510 Governance''
(January 2015), available at http://www.apra.gov.au/CrossIndustry/Documents/Final-Prudential-Standard-CPS-510-Governance-%28January-2014%29.pdf; APRA, Prudential Practice Guide PPG 511--Remuneration
(November 30, 2009), available at http://www.apra.gov.au/adi/PrudentialFramework/Pages/adi-prudential-framework.aspx.
    \41\ See OSFI Corporate Governance Guidelines and OSFI
Supervisory Framework.
    \42\ See OSFI Corporate Governance Guidelines.
    \43\ See FINMA Remuneration Circular.
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    As compensation practices continue to evolve, the Agencies
recognize that international coordination in this area is important to
ensure that internationally active financial organizations are subject
to consistent requirements. For this reason, the Agencies will continue
to work with their domestic and international counterparts to foster
sound compensation practices across the financial services industry.
Importantly, the proposed rule is consistent with the FSB Principles
and Implementation Standards.

E. Overview of the Proposed Rule

    The Agencies are re-proposing a rule, rather than proposing
guidelines, to establish general requirements applicable to the
incentive-based compensation arrangements of all covered institutions.
Like the 2011 Proposed Rule, the proposed rule would prohibit
incentive-based compensation arrangements at covered institutions that
could encourage inappropriate risks by providing excessive compensation
or that could lead to a material financial

loss. However, the proposed rule reflects the Agencies' collective
supervisory experiences since they proposed the 2011 Proposed Rule.
These supervisory experiences, which are described above, have allowed
the Agencies to propose a rule that incorporates practices that
financial institutions and foreign regulators have adopted to address
the deficiencies in incentive-based compensation practices that helped
contribute to the financial crisis that began in 2007. For that reason,
the proposed rule differs in some respects from the 2011 Proposed Rule.
This section provides a general overview of the proposed rule and
highlights areas in which the proposed rule differs from the 2011
Proposed Rule. A more detailed, section-by-section description of the
proposed rule and the reasons for the proposed rule's requirements is
provided later in this Supplementary Information section.
    Scope and Initial Applicability. Similar to the 2011 Proposed Rule,
the proposed rule would apply to any covered institution with average
total consolidated assets greater than or equal to $1 billion that
offers incentive-based compensation to covered persons.
    The compliance date of the proposed rule would be no later than the
beginning of the first calendar quarter that begins at least 540 days
after a final rule is published in the Federal Register. The proposed
rule would not apply to any incentive-based compensation plan with a
performance period that begins before the compliance date.
    Definitions. The proposed rule includes a number of new definitions
that were not included in the 2011 Proposed Rule. These definitions are
described later in the section-by-section analysis in this
Supplementary Information section. Notably, the Agencies have added a
definition of significant risk-taker, which is intended to include
individuals who are not senior executive officers but who are in the
position to put a Level 1 or Level 2 covered institution at risk of
material financial loss. This definition is explained in more detail
below.
    Applicability. The proposed rule distinguishes covered institutions
by asset size, applying less prescriptive incentive-based compensation
program requirements to the smallest covered institutions within the
statutory scope and progressively more rigorous requirements to the
larger covered institutions. Although the 2011 Proposed Rule contained
specific requirements for covered financial institutions with at least
$50 billion in total consolidated assets, the proposed rule creates an
additional category of institutions with at least $250 billion in
average total consolidated assets. These larger institutions are
subject to the most rigorous requirements under the proposed rule.
    The proposed rule identifies three categories of covered
institutions based on average total consolidated assets: \44\
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    \44\ For covered institutions that are subsidiaries of other
covered institutions, levels would generally be determined by
reference to the average total consolidated assets of the top-tier
parent covered institution. A detailed explanation of consolidation
under the proposed rule is included under the heading ``Definitions
pertaining to covered institutions'' below in this Supplementary
Information section.
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     Level 1 (greater than or equal to $250 billion);
     Level 2 (greater than or equal to $50 billion and less
than $250 billion); and
     Level 3 (greater than or equal to $1 billion and less than
$50 billion).\45\
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    \45\ As explained later in this Supplementary Information
section, the proposed rule includes a reservation of authority that
would allow the appropriate Federal regulator of a Level 3 covered
institution with average total consolidated assets greater than or
equal to $10 billion and less than $50 billion to require the Level
3 covered institution to comply with some or all of the provisions
of sections __.5 and __.7 through __.11 of the proposed rule if the
agency determines that the complexity of operations or compensation
practices of the Level 3 covered institution are consistent with
those of a Level 1 or Level 2 covered institution.
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    Upon an increase in average total consolidated assets, a covered
institution would be required to comply with any newly applicable
requirements under the proposed rule no later than the first day of the
first calendar quarter that begins at least 540 days after the date on
which the covered institution becomes a Level 1, Level 2, or Level 3
covered institution. The proposed rule would grandfather any incentive-
based compensation plan with a performance period that begins before
such date. Upon a decrease in total consolidated assets, a covered
institution would remain subject to the provisions of the proposed rule
that applied to it before the decrease until total consolidated assets
fell below $250 billion, $50 billion, or $1 billion, as applicable, for
four consecutive regulatory reports (e.g., Call Reports).
    A covered institution under the Board's, the OCC's, or the FDIC's
proposed rule that is a subsidiary of another covered institution under
the Board's, the OCC's, or the FDIC's proposed rule, respectively, may
meet any requirement of the Board's, OCC's, or the FDIC's proposed rule
if the parent covered institution complies with that requirement in
such a way that causes the relevant portion of the incentive-based
compensation program of the subsidiary covered institution to comply
with that requirement.
    Requirements and Prohibitions Applicable to All Covered
Institutions. Similar to the 2011 Proposed Rule, the proposed rule
would prohibit all covered institutions from establishing or
maintaining incentive-based compensation arrangements that encourage
inappropriate risk by providing covered persons with excessive
compensation, fees, or benefits or that could lead to material
financial loss to the covered institution.
    Also consistent with the 2011 Proposed Rule, the proposed rule
provides that compensation, fees, and benefits will be considered
excessive when amounts paid are unreasonable or disproportionate to the
value of the services performed by a covered person, taking into
consideration all relevant factors, including:
     The combined value of all compensation, fees, or benefits
provided to a covered person;
     The compensation history of the covered person and other
individuals with comparable expertise at the covered institution;
     The financial condition of the covered institution;
     Compensation practices at comparable institutions, based
upon such factors as asset size, geographic location, and the
complexity of the covered institution's operations and assets;
     For post-employment benefits, the projected total cost and
benefit to the covered institution; and
     Any connection between the covered person and any
fraudulent act or omission, breach of trust or fiduciary duty, or
insider abuse with regard to the covered institution.
    The proposed rule is also similar to the 2011 Proposed Rule in that
it provides that an incentive-based compensation arrangement will be
considered to encourage inappropriate risks that could lead to material
financial loss to the covered institution, unless the arrangement:
     Appropriately balances risk and reward;
     Is compatible with effective risk management and controls;
and
     Is supported by effective governance.
    However, unlike the 2011 Proposed Rule, the proposed rule
specifically provides that an incentive-based compensation arrangement
would not be considered to appropriately balance risk and reward unless
it:
     Includes financial and non-financial measures of
performance;

     Is designed to allow non-financial measures of performance
to override financial measures of performance, when appropriate; and
     Is subject to adjustment to reflect actual losses,
inappropriate risks taken, compliance deficiencies, or other measures
or aspects of financial and non-financial performance.
    The proposed rule also contains requirements for the board of
directors of a covered institution that are similar to requirements
included in the 2011 Proposed Rule. Under the proposed rule, the board
of directors of each covered institution (or a committee thereof) would
be required to:
     Conduct oversight of the covered institution's incentive-
based compensation program;
     Approve incentive-based compensation arrangements for
senior executive officers, including amounts of awards and, at the time
of vesting, payouts under such arrangements; and
     Approve material exceptions or adjustments to incentive-
based compensation policies or arrangements for senior executive
officers.
    The 2011 Proposed Rule contained an annual reporting requirement,
which has been replaced by a recordkeeping requirement in the proposed
rule. Covered institutions would be required to create annually and
maintain for at least seven years records that document the structure
of incentive-based compensation arrangements and that demonstrate
compliance with the proposed rule. The records would be required to be
disclosed to the covered institution's appropriate Federal regulator
upon request.
    Disclosure and Recordkeeping Requirements for Level 1 and Level 2
Covered Institutions. The proposed rule includes more detailed
disclosure and recordkeeping requirements for larger covered
institutions than the 2011 Proposed Rule. The proposed rule would
require all Level 1 and Level 2 covered institutions to create annually
and maintain for at least seven years records that document: (1) The
covered institution's senior executive officers and significant risk-
takers, listed by legal entity, job function, organizational hierarchy,
and line of business; (2) the incentive-based compensation arrangements
for senior executive officers and significant risk-takers, including
information on the percentage of incentive-based compensation deferred
and form of award; (3) any forfeiture and downward adjustment or
clawback reviews and decisions for senior executive officers and
significant risk-takers; and (4) any material changes to the covered
institution's incentive-based compensation arrangements and policies.
Level 1 and Level 2 covered institutions would be required to create
and maintain records in a manner that would allow for an independent
audit of incentive-based compensation arrangements, policies, and
procedures, and to provide the records described above in such form and
frequency as the appropriate Federal regulator requests.
    Deferral, Forfeiture and Downward Adjustment, and Clawback
Requirements for Level 1 and Level 2 Covered Institutions. The proposed
rule would require incentive-based compensation arrangements that
appropriately balance risk and reward. For Level 1 and Level 2 covered
institutions, the proposed rule would require that incentive-based
compensation arrangements for certain covered persons include deferral
of payments, risk of downward adjustment and forfeiture, and clawback
to appropriately balance risk and reward. The 2011 Proposed Rule
required deferral for three years of 50 percent of annual incentive-
based compensation for executive officers of covered financial
institutions with $50 billion or more in total consolidated assets. The
proposed rule would apply deferral requirements to significant risk-
takers as well as senior executive officers, and, as described below,
would require 40, 50, or 60 percent deferral depending on the size of
the covered institution and whether the covered person receiving the
incentive-based compensation is a senior executive officer or a
significant risk-taker. Unlike the 2011 Proposed Rule, the proposed
rule would explicitly require a shorter deferral period for incentive-
based compensation awarded under a long-term incentive plan. The
proposed rule also provides more detailed requirements and prohibitions
than the 2011 Proposed Rule with respect to the measurement,
composition, and acceleration of deferred incentive-based compensation;
the manner in which deferred incentive-based compensation can vest;
increases to the amount of deferred incentive-based compensation; and
the amount of deferred incentive-based compensation that can be in the
form of options.
    Deferral. Under the proposed rule, the mandatory deferral
requirements for Level 1 and Level 2 covered institutions for
incentive-based compensation awarded each performance period would be
as follows:
     A Level 1 covered institution would be required to defer
at least 60 percent of a senior executive officer's ``qualifying
incentive-based compensation'' (as defined in the proposed rule) and 50
percent of a significant risk-taker's qualifying incentive-based
compensation for at least four years. A Level 1 covered institution
also would be required to defer for at least two years after the end of
the related performance period at least 60 percent of a senior
executive officer's incentive-based compensation awarded under a
``long-term incentive plan'' (as defined in the proposed rule) and 50
percent of a significant risk-taker's incentive-based compensation
awarded under a long-term incentive plan. Deferred compensation may
vest no faster than on a pro rata annual basis, and, for covered
institutions that issue equity or are subsidiaries of covered
institutions that issue equity, the deferred amount would be required
to consist of substantial amounts of both deferred cash and equity-like
instruments throughout the deferral period. Additionally, if a senior
executive officer or significant risk-taker receives incentive-based
compensation in the form of options for a performance period, the
amount of such options used to meet the minimum required deferred
compensation may not exceed 15 percent of the amount of total
incentive-based compensation awarded for that performance period.
     A Level 2 covered institution would be required to defer
at least 50 percent of a senior executive officer's qualifying
incentive-based compensation and 40 percent of a significant risk-
taker's qualifying incentive-based compensation for at least three
years. A Level 2 covered institution also would be required to defer
for at least one year after the end of the related performance period
at least 50 percent of a senior executive officer's incentive-based
compensation awarded under a long-term incentive plan and 40 percent of
a significant risk-taker's incentive-based compensation awarded under a
long-term incentive plan. Deferred compensation may vest no faster than
on a pro rata annual basis, and, for covered institutions that issue
equity or are subsidiaries of covered institutions that issue equity,
the deferred amount would be required to consist of substantial amounts
of both deferred cash and equity-like instruments throughout the
deferral period. Additionally, if a senior executive officer or
significant risk-taker receives incentive-based compensation in the
form of options for a performance period, the amount of such options
used to meet the minimum required deferred compensation may not exceed
15 percent of the amount of total incentive-based compensation awarded
for that performance period.

    The proposed rule would also prohibit Level 1 and Level 2 covered
institutions from accelerating the payment of a covered person's
deferred incentive-based compensation, except in the case of death or
disability of the covered person.
    Forfeiture and Downward Adjustment. Compared to the 2011 Proposed
Rule, the proposed rule provides more detailed requirements for Level 1
and Level 2 covered institutions to reduce (1) incentive-based
compensation that has not yet been awarded to a senior executive
officer or significant risk-taker, and (2) deferred incentive-based
compensation of a senior executive officer or significant risk-taker.
Under the proposed rule, ``forfeiture'' means a reduction of the amount
of deferred incentive-based compensation awarded to a person that has
not vested. ``Downward adjustment'' means a reduction of the amount of
a covered person's incentive-based compensation not yet awarded for any
performance period that has already begun. The proposed rule would
require a Level 1 or Level 2 covered institution to make subject to
forfeiture all unvested deferred incentive-based compensation of any
senior executive officer or significant risk-taker, including unvested
deferred amounts awarded under long-term incentive plans. This
forfeiture requirement would apply to all unvested, deferred incentive-
based compensation for those individuals, regardless of whether the
deferral was required by the proposed rule. Similarly, a Level 1 or
Level 2 covered institution would also be required to make subject to
downward adjustment all incentive-based compensation amounts not yet
awarded to any senior executive officer or significant risk-taker for
the current performance period, including amounts payable under long-
term incentive plans. A Level 1 or Level 2 covered institution would be
required to consider forfeiture or downward adjustment of incentive-
based compensation if any of the following adverse outcomes occur:
     Poor financial performance attributable to a significant
deviation from the covered institution's risk parameters set forth in
the covered institution's policies and procedures;
     Inappropriate risk-taking, regardless of the impact on
financial performance;
     Material risk management or control failures;
     Non-compliance with statutory, regulatory, or supervisory
standards resulting in enforcement or legal action brought by a federal
or state regulator or agency, or a requirement that the covered
institution report a restatement of a financial statement to correct a
material error; and
     Other aspects of conduct or poor performance as defined by
the covered institution.
    Clawback. In addition to deferral, downward adjustment, and
forfeiture, the proposed rule would require a Level 1 or Level 2
covered institution to include clawback provisions in the incentive-
based compensation arrangements for senior executive officers and
significant risk-takers. The term ``clawback'' refers to a mechanism by
which a covered institution can recover vested incentive-based
compensation from a senior executive officer or significant risk-taker
if certain events occur. The proposed rule would require clawback
provisions that, at a minimum, allow the covered institution to recover
incentive-based compensation from a current or former senior executive
officer or significant risk-taker for seven years following the date on
which such compensation vests, if the covered institution determines
that the senior executive officer or significant risk-taker engaged in
misconduct that resulted in significant financial or reputational harm
to the covered institution, fraud, or intentional misrepresentation of
information used to determine the senior executive officer or
significant risk-taker's incentive-based compensation. The 2011
Proposed Rule did not include a clawback requirement.
    Additional Prohibitions. The proposed rule contains a number of
additional prohibitions for Level 1 and Level 2 covered institutions
that were not included in the 2011 Proposed Rule. These prohibitions
would apply to:
     Hedging;
     Maximum incentive-based compensation opportunity (also
referred to as leverage);
     Relative performance measures; and
     Volume-driven incentive-based compensation.
    Risk Management and Controls. The proposed rule's risk management
and controls requirements for large covered institutions are generally
more extensive than the requirements contained in the 2011 Proposed
Rule. The proposed rule would require all Level 1 and Level 2 covered
institutions to have a risk management framework for their incentive-
based compensation programs that is independent of any lines of
business; includes an independent compliance program that provides for
internal controls, testing, monitoring, and training with written
policies and procedures; and is commensurate with the size and
complexity of the covered institution's operations. In addition, the
proposed rule would require Level 1 and Level 2 covered institutions
to:
     Provide individuals in control functions with appropriate
authority to influence the risk-taking of the business areas they
monitor and ensure covered persons engaged in control functions are
compensated independently of the performance of the business areas they
monitor; and
     Provide for independent monitoring of: (1) Incentive-based
compensation plans to identify whether the plans appropriately balance
risk and reward; (2) events related to forfeiture and downward
adjustment and decisions of forfeiture and downward adjustment reviews
to determine consistency with the proposed rule; and (3) compliance of
the incentive-based compensation program with the covered institution's
policies and procedures.
    Governance. Unlike the 2011 Proposed Rule, the proposed rule would
require each Level 1 or Level 2 covered institution to establish a
compensation committee composed solely of directors who are not senior
executive officers to assist the board of directors in carrying out its
responsibilities under the proposed rule. The compensation committee
would be required to obtain input from the covered institution's risk
and audit committees, or groups performing similar functions, and risk
management function on the effectiveness of risk measures and
adjustments used to balance incentive-based compensation arrangements.
Additionally, management would be required to submit to the
compensation committee on an annual or more frequent basis a written
assessment of the effectiveness of the covered institution's incentive-
based compensation program and related compliance and control processes
in providing risk-taking incentives that are consistent with the risk
profile of the covered institution. The compensation committee would
also be required to obtain an independent written assessment from the
internal audit or risk management function of the effectiveness of the
covered institution's incentive-based compensation program and related
compliance and control processes in providing risk-taking incentives
that are consistent with the risk profile of the covered institution.
    Policies and Procedures. The proposed rule would require all Level
1 and Level 2 covered institutions to have policies and procedures
that, among other requirements:
     Are consistent with the requirements and prohibitions of
the proposed rule;

     Specify the substantive and procedural criteria for
forfeiture and clawback;
     Document final forfeiture, downward adjustment, and
clawback decisions;
     Specify the substantive and procedural criteria for the
acceleration of payments of deferred incentive-based compensation to a
covered person;
     Identify and describe the role of any employees,
committees, or groups authorized to make incentive-based compensation
decisions, including when discretion is authorized;
     Describe how discretion is exercised to achieve balance;
     Require that the covered institution maintain
documentation of its processes for the establishment, implementation,
modification, and monitoring of incentive-based compensation
arrangements;
     Describe how incentive-based compensation arrangements
will be monitored;
     Specify the substantive and procedural requirements of the
independent compliance program; and
     Ensure appropriate roles for risk management, risk
oversight, and other control personnel in the covered institution's
processes for designing incentive-based compensation arrangements and
determining awards, deferral amounts, deferral periods, forfeiture,
downward adjustment, clawback, and vesting and assessing the
effectiveness of incentive-based compensation arrangements in
restraining inappropriate risk-taking.
    These policies and procedures requirements for Level 1 and Level 2
covered institutions are generally more detailed than the requirements
in the 2011 Proposed Rule.
    Indirect Actions. The proposed rule would prohibit covered
institutions from doing indirectly, or through or by any other person,
anything that would be unlawful for the covered institution to do
directly under the proposed rule. This prohibition is similar to the
evasion provision contained in the 2011 Proposed Rule.
    Enforcement. For five of the Agencies, the proposed rule would be
enforced under section 505 of the Gramm-Leach-Bliley Act, as specified
in section 956. For FHFA, the proposed rule would be enforced under
subtitle C of the Safety and Soundness Act.
    Conservatorship or Receivership for Certain Covered Institutions.
FHFA's and NCUA's proposed rules contain provisions that would apply to
covered institutions that are managed by a government agency or a
government-appointed agent, or that are in conservatorship or
receivership or are limited-life regulated entities under the Safety
and Soundness Act or the Federal Credit Union Act.\46\
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    \46\ The FDIC's proposed rule would not apply to institutions
for which the FDIC is appointed receiver under the FDIA or Title II
of the Dodd-Frank Act, as appropriate, as those statutes govern such
cases.
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    A detailed description of the proposed rule and requests for
comments are set forth below.

II. Section-by-Section Description of the Proposed Rule

Sec.  __.1 Authority, Scope and Initial Applicability

    Section __.1 provides that the proposed rule is issued pursuant to
section 956. The Agencies also have listed applicable additional
rulemaking authority in their respective authority citations.
    The OCC is issuing the proposed rule under its general rulemaking
authority, 12 U.S.C. 93a and the Home Owners' Loan Act, 12 U.S.C. 1461
et seq., its safety and soundness authority under 12 U.S.C. 1818, and
its authority to regulate compensation under 12 U.S.C. 1831p-1.
    The Board is issuing the proposed rule under its safety and
soundness authority under section 5136 of the Revised Statutes (12
U.S.C. 24), the Federal Reserve Act (12 U.S.C. 321-338a), the FDIA (12
U.S.C. 1818), the Bank Holding Company Act (12 U.S.C. 1844(b)), the
Home Owners' Loan Act (12 U.S.C. 1462a and 1467a), and the
International Banking Act (12 U.S.C. 3108).
    The FDIC is issuing the proposed rule under its general rulemaking
authority, 12 U.S.C. 1819 Tenth, as well as its general safety and
soundness authority under 12 U.S.C. 1818 and authority to regulate
compensation under 12 U.S.C. 1831p-1.
    FHFA is issuing the proposed rule pursuant to its authority under
the Safety and Soundness Act (particularly 12 U.S.C. 4511(b), 4513,
4514, 4518, 4526, and ch. 46 subch. III.).
    NCUA is issuing the proposed rule under its general rulemaking and
safety and soundness authorities in the Federal Credit Union Act, 12
U.S.C. 1751 et seq.
    The SEC is issuing the proposed rule pursuant to its rulemaking
authority under the Securities Exchange Act of 1934 and the Investment
Advisers Act of 1940 (15 U.S.C. 78q, 78w, 80b-4, and 80b-11).
    The approach taken in the proposed rule is within the authority
granted by section 956. The proposed rule would prohibit types and
features of incentive-based compensation arrangements that encourage
inappropriate risks. As explained more fully below, incentive-based
compensation arrangements that result in payments that are unreasonable
or disproportionate to the value of services performed could encourage
inappropriate risks by providing excessive compensation, fees, and
benefits. Further, incentive-based compensation arrangements that do
not appropriately balance risk and reward, that are not compatible with
effective risk management and controls, or that are not supported by
effective governance are the types of incentive-based compensation
arrangements that could encourage inappropriate risks that could lead
to material financial loss to covered institutions. Because these types
of incentive-based compensation arrangements encourage inappropriate
risks, they would be prohibited under the proposed rule.
    The Federal Banking Agencies have found that any incentive-based
compensation arrangement at a covered institution will encourage
inappropriate risks if it does not sufficiently expose the risk-takers
to the consequences of their risk decisions over time, and that in
order to do this, it is necessary that meaningful portions of
incentive-based compensation be deferred and placed at risk of
reduction or recovery. The proposed rule reflects the minimums that are
required to be effective for that purpose, as well as minimum standards
of robust governance, and the disclosures that the statute requires.
The Agencies' position in this respect is informed by the country's
experience in the recent financial crisis, as well as by their
experience supervising their respective institutions and their
observation of the experience and judgments of regulators in other
countries.
    Consistent with section 956, section __.1 provides that the
proposed rule would apply to a covered institution with average total
consolidated assets greater than or equal to $1 billion that offers
incentive-based compensation arrangements to covered persons.
    The Agencies propose the compliance date of the proposed rule to be
the beginning of the first calendar quarter that begins at least 540
days after the final rule is published in the Federal Register. Any
incentive-based compensation plan with a performance period that begins
before such date would not be required to comply with the requirements
of the proposed rule. Whether a covered institution is a Level 1, Level
2, or Level 3 covered

institution \47\ on the compliance date would be determined based on
average total consolidated assets as of the beginning of the first
calendar quarter that begins after a final rule is published in the
Federal Register. For example, if the final rule is published in the
Federal Register on November 1, 2016, then the compliance date would be
July 1, 2018. In that case, any incentive-based compensation plan with
a performance period that began before July 1, 2018 would not be
required to comply with the rule. Whether a covered institution is a
Level 1, Level 2, or Level 3 covered institution on July 1, 2018 would
be determined based on average total consolidated assets as of the
beginning of the first quarter of 2017.
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    \47\ As discussed below, the proposed rule includes baseline
requirements for all covered institutions and additional
requirements for Level 1 and Level 2 covered institutions, which are
larger covered institutions.
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    The Agencies recognize that most incentive-based compensation plans
are implemented at the beginning of the fiscal or calendar year.
Depending on the date of publication of a final rule, the proposed
compliance date would provide at least 18 months, and in most cases
more than two years, for covered institutions to develop and approve
new incentive-based compensation plans and 18 months for covered
institutions to develop and implement the supporting policies,
procedures, risk management framework, and governance that would be
required under the proposed rule.
    1.1. The Agencies invite comment on whether this timing would be
sufficient to allow covered institutions to implement any changes
necessary for compliance with the proposed rule, particularly the
development and implementation of policies and procedures. Is the
length of time too long or too short and why? What specific changes
would be required to bring existing policies and procedures into
compliance with the rule? What constraints exist on the ability of
covered institutions to meet the proposed deadline?
    1.2. The Agencies invite comment on whether the compliance date
should instead be the beginning of the first performance period that
starts at least 365 days after the final rule is published in the
Federal Register in order to have the proposed rule's policies,
procedures, risk management, and governance requirements begin when the
requirements applicable to incentive-compensation plans and
arrangements begin. Why or why not?
    Section __.1 also specifies that the proposed rule is not intended
to limit the authority of any Agency under other provisions of
applicable law and regulations. For example, the proposed rule would
not affect the Federal Banking Agencies' authority under section 39 of
the FDIA and the Federal Banking Agency Safety and Soundness
Guidelines. The Board's Enhanced Prudential Standards under 12 CFR part
252 (Regulation YY) would not be affected. The OCC's Heightened
Standards also would continue to be in effect. The NCUA's authority
under 12 U.S.C. 1761a, 12 CFR 701.2, part 701 App. A, Art. VII. section
8, 701.21(c)(8)(i), 701.23(g) (1), 701.33, 702.203, 702.204, 703.17,
704.19, 704.20, part 708a, 712.8, 721.7, and part 750, and the NCUA
Examiners Guide, Chapter 7,\48\ would not be affected. Neither would
the proposed rule affect the applicability of FHFA's executive
compensation rule, under section 1318 of the Safety and Soundness Act
(12 U.S.C. 4518), 12 CFR part 1230.
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    \48\ The NCUA Examiners Guide, Chapter 7, available at https://www.ncua.gov/Legal/GuidesEtc/ExaminerGuide/Chapter07.pdf.
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    The Agencies acknowledge that some individuals who would be
considered covered persons, senior executive officers, or significant
risk-takers under the proposed rule are subject to other Federal
compensation-related requirements. Further, some covered institutions
may be subject to SEC rules regarding the disclosure of executive
compensation,\49\ and mortgage loan originators are subject to the
Consumer Financial Protection Bureau's restrictions on compensation.
This rule is not intended to affect the application of these other
Federal compensation-related requirements.
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    \49\ See Item 402 of Regulation S-K. 17 CFR 229.402.
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Sec.  __.2 Definitions

    Section __.2 defines the various terms used in the proposed rule.
Where the proposed rule uses a term defined in section 956, the
proposed rule generally adopts the definition included in section
956.\50\
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    \50\ The definitions in the proposed rule would be for purposes
of administering section 956 and would not 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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Definitions Pertaining to Covered Institutions
    Section 956(e)(2) of the Dodd-Frank Act defines the term ``covered
financial institution'' to mean a depository institution; a depository
institution holding company; a registered broker-dealer; a credit
union; an investment adviser; the Federal National Mortgage Association
(``Fannie Mae'') and the Federal Home Loan Mortgage Corporation
(``Freddie Mac'') (together, the ``Enterprises''); and any other
financial institution that the Agencies determine, jointly, by rule,
should be treated as a covered financial institution for purposes of
section 956. Section 956(f) provides that the requirements of section
956 do not apply to covered financial institutions with assets of less
than $1 billion.
    The Agencies propose to jointly, by rule, designate additional
financial institutions as covered institutions. The Agencies propose to
include the Federal Home Loan Banks as covered institutions because
they pose risks similar to those of some institutions covered under the
proposed rule and should be subject to the same regulatory regime. The
Agencies also propose to include as covered institutions the state-
licensed uninsured branches and agencies of a foreign bank,
organizations operating under section 25 or 25A of the Federal Reserve
Act (i.e., Edge and Agreement Corporations), 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 (12 U.S.C. 3106). Applying the same requirements to these
institutions would be consistent with other regulatory requirements
that are applicable to foreign banking organizations operating in the
United States and would not distort competition for human resources
between U.S. banking organizations and foreign banking organizations
operating in the United States. These offices and operations currently
are referenced in the Federal Banking Agency Guidance and are subject
to section 8 of the FDIA (12 U.S.C. 1818), which prohibits institutions
from engaging in unsafe or unsound practices to the same extent as
insured depository institutions and bank holding companies.\51\
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    \51\ See 12 U.S.C. 1813(c)(3) and 1818(b)(4).
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    In addition, the Agencies propose to jointly, by rule, designate
state-chartered non-depository trust companies that are members of the
Federal Reserve System as covered institutions. The definition of
``covered financial institution'' under section 956 of the Dodd-Frank
Act includes a depository institution as such term is defined in
section 3 of the FDIA (12 U.S.C. 1813); that term includes all national
banks and any state banks, including trust companies, that are engaged
in the business of receiving deposits other than trust funds. As a
consequence of these definitions, all

national banks, including national banks that are non-depository trust
companies, are ``depository institutions'' within the meaning of
section 956, but non-FDIC insured state non-depository trust companies
that are members of the Federal Reserve System are not. In order to
achieve equal treatment across similar entities with different
charters, the Agencies propose to include state-chartered non-
depository member trust companies as covered institutions. These
institutions would be ``regulated institutions'' under the definition
of ``state member bank'' in the Board's rule.
    Each Agency's proposed rule contains a definition of the term
``covered institution'' that describes the covered financial
institutions the Agency regulates.
    The Agencies have tailored the requirements of the proposed rule to
the size and complexity of covered institutions, and are proposing to
designate covered institutions as Level 1, Level 2, or Level 3 covered
institutions to effectuate this tailoring. The Agencies have observed
through their supervisory experience that large financial institutions
typically have complex business activities in multiple lines of
business, distinct subsidiaries, and regulatory jurisdictions, and
frequently operate and manage their businesses in ways that cross those
lines of business, subsidiaries, and jurisdictions. Level 3 covered
institutions would generally be subject to only the basic set of
prohibitions and disclosure requirements. The proposed rule would apply
additional prohibitions and requirements to incentive-based
compensation arrangements at Level 1 and Level 2 covered institutions,
as discussed below. Whether a covered institution that is a subsidiary
of a depository institution holding company is a Level 1, Level 2, or
Level 3 covered institution would be based on the average total
consolidated assets of the top-tier depository institution holding
company. Whether that subsidiary has at least $1 billion will be based
on the subsidiary's average total consolidated assets.
    The Agency definitions of covered institution, Level 1, Level 2,
and Level 3 covered institution, and related terms are summarized
below.
    Covered Institution and Regulated Institution. Each Agency has set
forth text for its Agency-specific definition of the term ``covered
institution'' that specifies the entities to which that Agency's rule
applies.\52\ Under the proposed rule, a ``covered institution'' would
include all of the following:
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    \52\ The Agency-specific definitions are intended to be applied
only for purposes of administering a final rule under section 956.
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     In the case of the OCC:
    [cir] A national bank, Federal savings association, or Federal
branch or agency of a foreign bank \53\ with average total consolidated
assets greater than or equal to $1 billion; and
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    \53\ The term ``Federal branch or agency of a foreign bank''
refers to both insured and uninsured Federal branches and agencies
of foreign banks.
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    [cir] A subsidiary of a national bank, Federal savings association,
or Federal branch or agency of a foreign bank, if the subsidiary (A) is
not a broker, dealer, person providing insurance, investment company,
or investment adviser; and (B) has average total consolidated assets
greater than or equal to $1 billion.
     In the case of the Board, the proposed definition of the
term ``covered institution'' is a ``regulated institution'' with
average total consolidated assets greater than or equal to $1 billion,
and the Board's definition of the term ``regulated institution''
includes:
    [cir] A state member bank, as defined in 12 CFR 208.2(g);
    [cir] A bank holding company, as defined in 12 CFR 225.2(c), that
is not a foreign banking organization, as defined in 12 CFR 211.21(o),
and a subsidiary of such a bank holding company that is not a
depository institution, broker-dealer or investment adviser;
    [cir] A savings and loan holding company, as defined in 12 CFR
238.2(m), and a subsidiary of a savings and loan holding company that
is not a depository institution, broker-dealer or investment adviser;
    [cir] An organization operating under section 25 or 25A of the
Federal Reserve Act (Edge and Agreement Corporation);
    [cir] A state-licensed uninsured branch or agency of a foreign
bank, as defined in section 3 of the FDIA (12 U.S.C. 1813); and
    [cir] The U.S. operations of a foreign banking organization, as
defined in 12 CFR 211.21(o), and a U.S. subsidiary of such foreign
banking organization that is not a depository institution, broker-
dealer, or investment adviser.
     In the case of the FDIC, ``covered institution'' means a:
    [cir] State nonmember bank, state savings association, and a state
insured branch of a foreign bank, as such terms are defined in section
3 of the FDIA, 12 U.S.C. 1813, with average total consolidated assets
greater than or equal to $1 billion; and
    [cir] A subsidiary of a state nonmember bank, state savings
association, or a state insured branch of a foreign bank, as such terms
are defined in section 3 of the FDIA, 12 U.S.C. 1813, that: (i) Is not
a broker, dealer, person providing insurance, investment company, or
investment adviser; and (ii) Has average total consolidated assets
greater than or equal to $1 billion.
     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, as
credit unions are the only type of covered institution NCUA regulates.
The scope section of the rule defines the credit unions that will be
subject to this rule--that is, credit unions with $1 billion or more in
total consolidated assets.
     In the case of the SEC, a broker or 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).\54\ The proposed rule would not apply to persons excluded
from the definition of investment adviser contained in section
202(a)(11) of the Investment Advisers Act nor would it apply to such
other persons not within the intent of section 202(a)(11) of the
Investment Advisers Act, as the SEC may designate by rules and
regulations or order. Section 956 does not contain exceptions or
exemptions for investment advisers based on registration.\55\
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    \54\ By its terms, the definition of ``covered financial
institution'' in section 956 includes any institution that meets the
definition of ``investment adviser'' under the Investment Advisers
Act of 1940 (``Investment Advisers Act''), regardless of whether the
institution 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, although they would still be ``covered
institutions'' under the relevant Agency's proposed rule.
    \55\ Commenters to the 2011 Proposed Rule requested
clarification with respect to those entities that are excluded from
the definition of ``investment adviser'' under the Investment
Advisers Act and those that are exempt from registration as an
investment adviser under the Investment Advisers Act. Section 956
expressly includes any institution that meets the definition of
investment adviser regardless of whether the institution is
registered under the Investment Advisers Act. See supra note 54.
Thus, the proposed rule would apply to institutions that meet the
definition of investment adviser under section 202(a)(11) of the
Investment Advisers Act and would not exempt any such institutions
that may be prohibited or exempted from registering with the SEC
under the Investment Advisers Act.

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     In the case of FHFA, the proposed definition of the term
``covered institution'' is a ``regulated institution'' with average
total consolidated assets greater than or equal to $1 billion, and
FHFA's definition of the term ``regulated institution'' means an
Enterprise, as defined in 12 U.S.C. 4502(10), and a Federal Home Loan
Bank.
    Level 1, Level 2, and Level 3 covered institutions. The Agencies
have tailored the requirements of the proposed rule to the size and
complexity of covered institutions. All covered institutions would be
subject to a basic set of prohibitions and disclosure requirements, as
described in section __.4 of the proposed rule.
    The Agencies are proposing to group covered institutions into three
levels. The first level, Level 1 covered institutions, would generally
be covered institutions with average total consolidated assets of
greater than $250 billion and subsidiaries of such institutions that
are covered institutions. The next level, Level 2 covered institutions,
would generally be covered institutions with average total consolidated
assets between $50 billion and $250 billion and subsidiaries of such
institutions that are covered institutions. The smallest covered
institutions, those with average total consolidated assets between $1
and $50 billion, would be Level 3 covered institutions and generally
would be subject to only the basic set of prohibitions and
requirements.\56\
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    \56\ As discussed later in this Supplemental Information
section, under section __.6 of the proposed rule, an Agency would be
able to require a covered institution with average total
consolidated assets greater than or equal to $10 billion and less
than $50 billion to comply with some or all of the provisions of
section __.5 and sections __.7 through__.11, if the Agency
determines that the activities, complexity of operations, risk
profile, or compensation practices of the covered institution are
consistent with those of a Level 1 or Level 2 covered institution.
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    The proposed rule would apply additional prohibitions and
requirements to incentive-based compensation arrangements at Level 1
and Level 2 covered institutions, as described in section __.5 and
sections __.7 through __.11 of the proposed rule and further discussed
below. The specific requirements of the proposed rule that would apply
to Level 1 and Level 2 covered institutions are the same, with the
exception of the deferral amounts and deferral periods described in
section __.7(a)(1) and section __.7(a)(2).
Consolidation
    Generally, the Agencies also propose that covered institutions that
are subsidiaries of other covered institutions would be subject to the
same requirements, and defined to be the same level, as the parent
covered institution,\57\ even if the subsidiary covered institution is
smaller than the parent covered institution.\58\ This approach of
assessing risks at the level of the holding company for a consolidated
organization recognizes that financial stress or the improper
management of risk in one part of an organization has the potential to
spread rapidly to other parts of the organization. Large depository
institution holding companies increasingly operate and manage their
businesses in such a way that risks affect different subsidiaries
within the consolidated organization and are managed on a consolidated
basis. For example, decisions about business lines including management
and resource allocation may be made by executives and employees in
different subsidiaries. Integrating products and operations may offer
significant efficiencies but can also result in financial stress or the
improper management of risk in one part of a consolidated organization
and has the potential to spread risk rapidly to other parts of the
consolidated organization. Even when risk is assessed at the level of
the holding company, risk will also be assessed at individual
institutions within that consolidated organization. For example, a bank
subsidiary of a large, complex bank holding company might have a
different risk profile than the bank holding company. In that
situation, a risk assessment would have different results when
conducted at the level of the bank and at the level of the bank holding
company.
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    \57\ Commenters on the 2011 Proposed Rule questioned how the
requirements would apply in the context of consolidated
organizations where a parent holding company structure may include
one or more subsidiary banks, broker-dealers, or investment advisers
each with total consolidated assets either above or below, or
somewhere in between, the relevant thresholds. They also expressed
concern that the 2011 Proposed Rule could lead to ``regulatory
overlap'' where the parent holding company and individual
subsidiaries are regulated by different agencies.
    \58\ For the U.S. operations of a foreign banking organization,
level would be determined by the total consolidated U.S. assets of
the foreign banking organization, including the assets of any U.S.
branches or agencies of the foreign banking organization, any U.S.
subsidiaries of the foreign banking organization, and any U.S.
operations held pursuant to section 2(h)(2) of the Bank Holding
Company Act. In contrast, the level of an OCC-regulated Federal
branch or agency of a foreign bank would be determined with
reference to the assets of the Federal branch or agency. This
treatment is consistent with the determination of the level of a
national bank or Federal savings association that is not a
subsidiary of a holding company and the OCC's approach to regulation
of Federal branches and agencies.