Federal Agencies Propose Interagency Rule on Financial Institution Compensation

Editor’s Note: Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk client memorandum by Kyoko Takahashi Lin and Nora M. Jordan summarizing a proposed rule on incentive compensation under the Dodd-Frank Act, which is available here.

My partners Kyoko Lin and Nora Jordan have written a memorandum that analyzes a proposed interagency rule issued under Section 956 of the Dodd-Frank Act. The proposed rule would impose significant new requirements relating to incentive-based compensation that would apply to a wide range of financial institutions, including some, such as broker-dealers and investment advisers, that have never had their compensation subject to governmental requirements, and others, such as uninsured branches and agencies of a foreign bank, that are not listed in the statute.

We expect that the impact will vary among financial institutions. Some financial institutions may find that they already have the compliance structures in place but others will likely find that they would be required to modify their compensation policies and practices. After discussing the proposed rule, my partners suggest a number of practical action items to help affected financial institutions comment on the rule and anticipate the new requirements. Although all of the agencies are asking for comments, the SEC, which released its version of the proposed rule on March 3rd, after a 3-2 split vote, has particularly requested comment on issues relating to broker-dealers and investment advisers.

The proposed rule will be issued jointly by seven federal agencies. To date, three agencies (the FDIC, NCUA and SEC) have issued their versions of the rule. The proposed rule will stay in draft form until the remaining four agencies, including the Federal Reserve and the OCC, propose their version of the rule and only when all seven agencies have proposed it, will the proposed rule be published in the Federal Register. Until then, the rule remains under interagency discussion and changes continue to be possible. Official Federal Register publication will trigger the 45-day comment period.

The complete memorandum is available here.

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