NCUA Proposes Incentive-Based Compensation Rule

The National Credit Union Administration (NCUA) Board members unanimously approved a proposed rule (Parts 741 and 751), mandated by section 956 of the Dodd-Frank Act, that would require federally insured credit unions with assets of $1 billion or more to provide NCUA with information about the structure of future incentive-based executive compensation programs.

The Dodd-Frank Act requires NCUA and five other federal financial regulators to act jointly to prohibit incentive-based compensation payment arrangements in financial institutions with $1 billion or more in assets that the agencies determine encourage inappropriate risks by providing excessive compensation or that could lead to material financial loss.

The proposed rule supersedes an earlier rule proposed by regulators in 2011.

The proposed rule creates a tiered system by dividing financial institutions covered under the rule into three categories, each with separate requirements:
Level 1: institutions with assets of $250 billion and above;
Level 2: institutions with assets of at least $50 billion and below $250 billion; and
Level 3: institutions with assets of at least $1 billion and below $50 billion.

Only 258 federally insured credit unions have assets above $1 billion at the end of 2015. Of those, only one federally insured credit union, Navy Federal Credit Union, falls into Level 2. No federally insured credit union is classified as a Level 1 institution under the proposed rule.

The proposed rule does not affect base salary or base benefit plans. Incentive-based compensation plans that existed before the effective date of the final rule will not be affected. The rule would not affect newly created incentive compensation plans at a covered credit union until the first day of the first calendar quarter beginning 18 months after the final rule has become effective.

Institutions covered by the proposed rule would be required to create records documenting the structure of all incentive-based compensation plans, retain those records for seven years, and provide them to NCUA upon the agency's request.

Boards of directors of covered credit unions or a committee thereof would be required to exercise oversight of such compensation plans. The proposed rule includes a provision to address equitable tax treatment for incentive-based compensation plans in covered credit unions.

Both Level 1 and 2 institutions would be required to defer a percentage of qualifying incentive-based compensation for executives and significant risk takers for a specified amount of time. Level 1 institutions would be required to defer 60 percent for executives and 50 percent for significant risk takers for a minimum of four years, while Level 2 institutions would be required to defer 50 percent for senior executives and 40 percent for significant risk-takers for a period of at least three years. Regulators would have discretion over requirements for Level 3 institutions.

In cases of employee fraud, intentional misrepresentation or misconduct resulting in significant financial or reputational harm to the institution, some or all of the compensation would be subject to claw-back recovery.

Read the proposed rule. Read the two page guide.