Compliance Blog

Posted by Anthony Demangone

Last week, NCUA issued its proposal to implement sections of Dodd-Frank regarding incentive-based compensation agreements.  NCUA is one of several agencies required to issue regulations on this issue.  The others are the: OCC, Federal Reserve Board, FDIC, OTS, SEC, and FHFA. 

NCUA's proposal would prohibit incentive-based compensation arrangements at credit unions with $1 billion in assets or more that encourage executive officers, employees, or directors to expose the credit union to inappropriate risks by providing excessive compensation.  Incentive-based compensation for a covered person would be considered excessive when amounts paid are unreasonable or disproportionate to the amount, nature, quality and scope of services performed by that person.  Under the proposal, NCUA would consider a number of factors to determine whether the compensation is excessive, including the compensation provided, the financial condition of the credit union, and compensation practices at comparable institutions.  In addition, under the proposal, the compensation arrangements may not encourage inappropriate risks by the credit unions that could lead to material financial loss. 

For credit unions with $10 billion in assets and above (this is an improvement, we thought there was a chance this number would have been at $1 billion), credit union would have to disclose additional information (incentive-related policies and procedures) to NCUA regarding its executive officers and any other covered person that have the ability to expose the institution to possible losses that are substantial in relation to the institution’s size, capital or overall risk tolerance. In addition, for credit unions with $10 billion in assets or more, the proposal would mandate the deferment of at least 50 percent of incentive-based compensation over a period of at least three years. 

I'll repeat a few points I made a few weeks ago when I saw a similar proposal from another regulator.

• This is just a proposal. NAFCU will prepare a comment letter and a handy dandy Regulatory Alert.  All credit unions will have the ability to comment as well.
• This is a broad-based requirement mandated by Dodd-Frank and implemented by many different regulators.  To some degree, NCUA and other regulators were dealt their marching orders by Dodd-Frank. Whether they went further than they had to is one thing.  But to try to argue that NCUA should scrap the entire requirement will go nowhere.  It would be like asking Senator Durbin to bring reason and logic into his views on interchange fees.  It is simply asking the impossible.
• There's no requirement to disclose any specific compensation levels based on my reading of this rule. In addition there's no public disclosure at all.  Any required disclosure would go to NCUA.  The issue, as I see it, is this: NCUA will now be able to second-guess your compensation policy if it feels it creates undue risk to your credit union.
• If the rule goes into effect as written, it very well may require your credit union (assuming it is covered) to rework its compensation policies and practices. 

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 Dodd-Frank.  Speaking of Dodd-Frank, check out this "Dodd-Frank Tracker" that we found with our Google Machine. (Hat tip to Dillon.) Pretty slick.

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