WASHINGTON (CN) – Financial institutions including banks and brokerage houses would have to prove to federal regulators that their incentive-based pay packages do not encourage excessive risk taking by employees, under new rules proposed by federal financial agencies.
The proposal has been issued jointly by the Comptroller of the Currency; Federal Reserve System; Federal Deposit Insurance Corporation; Office of Thrift Supervision; National Credit Union Administration; U.S. Securities and Exchange Commission and the Federal Housing Finance Agency.
The agencies intend to use standards already established by federal banking regulators, known as the Interagency Guidance on Sound Incentive Compensation Policies.
In addition, the proposed rules would require deferral of a portion of any incentive-based pay for a significant period of time beyond the period for which the bonus was awarded to make sure that the apparent gains made during the compensation period do not result in greater long-term loses.
Before seeking the approval of regulators, the board of directors of covered institutions would have to go on the public record as having approved their company’s incentive bonus programs.
The regulations kick in at different thresholds of financial worth depending on the type of entity regulated. For instance only banks and brokerages worth more than $50 billion must have their compensation packages approved, while for credit unions the threshold is only $10 billion, while the threshold for Federal Home Loan Banks is $1 billion or more in assets.
The rules are proposed to implement section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The agencies are seeking public input on the proposed rule.