FDIC Proffers on Exec Pay
Large credit unions and banks may face additional restrictions on executive compensation as a result of regulations that will be issued by the NCUA and other financial regulators.
The FDIC on Feb. 7 voted to send out for comment a proposal for public comment that would require "larger covered financial institutions," in the case of credit unions those with assets of $1 billion or more, to report compensation information to their regulators who will then rule if it is "excessive." There are 154 credit unions with assets of $1 billion or more.
According to the FDIC summary, the rule "would prohibit a covered financial institution from establishing or maintaining any incentive-based compensation arrangements for covered persons that encourage inappropriate risks by the covered financial institution that could lead to a material financial loss."
But the rule asks those submitting comments to address the question of whether there are other financial institutions, such as a CUSO, that regulators should treat as a covered institution to "better promote" competitive equity. The rule does note that there are no CUSOs owned by federally insured credit unions with assets of $1 billion or more.
The proposed rule also requests feedback on whether the language is sufficiently clear and whether there are simpler and less burdensome methods of reporting that would still be sufficiently robust.
The rule defines a covered person as an executive, employee, board member or principal shareholder of a covered financial institution.
The financial overhaul bill passed last year requires a covered financial institution to submit an annual report to its regulator disclosing its compensation structure so the regulator can determine whether the structure encourages risky behavior that could cause losses.
The NCUA is scheduled to be briefed on the issue at its Feb. 17 meeting and possibly send the proposed rule out for comment on that day. Once all seven financial regulators send the proposed rule out for comment, there will be a 45-day comment period.
The proposed rule requires financial institutions with $50 billion or more in assets to keep half of bonuses paid for three years in order to tie them to the employees' long-term performance.
The NCUA already places restrictions on certain types of compensation, designed to avoid the types of pay packages that for-profit financial institutions use. The agency's regulations ban executives and volunteers of federal credit unions from receiving commissions from loans or salary, commissions, investment income, or other income or compensation from a CUSO.
In 2008, the agency's outreach task force concluded that the compensation of the three top executives at each credit union should be collected and released publicly in aggregate. However, the NCUA board did not vote on a task force recommendation to disclose the actual compensation of the top three to the credit union membership.
FDIC Chairman Sheila Bair said the proposed rule would "help address a key safety and soundness issue which contributed to the recent financial crisis-that poorly designed compensation structures can misalign incentives and induce excessive risk-taking."