CLS Blue Sky Blog

Sullivan & Cromwell Discusses Agency Proposals for More Restrictive Rules on Incentive Compensation

On May 6, 2024, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Federal Housing Finance Agency re-proposed their joint rule to implement Section 956 of the Dodd-Frank Act, which requires federal financial regulators to prohibit, at any financial institution with consolidated assets of at least $1 billion, incentive-based compensation that encourages inappropriate risks. The re-proposed rule is the same as the agencies proposed in 2016, but is accompanied by alternative regulatory provisions that reflect the agencies’ thinking since that time and are potentially much more stringent than the proposed rule. This memorandum summarizes these potential alternatives.

The National Credit Union Administration is expected to re-propose the same rule in the near future, and the Securities and Exchange Commission has included a rulemaking to implement Section 956 of Dodd-Frank on its rulemaking agenda. The Board of Governors of the Federal Reserve System has not joined the proposal. For further details with respect to the 2024 re-proposal and the 2016 proposal, please refer to our May 6, 2024 memorandum, FDIC, OCC and FHFA Re-Propose Incentive Compensation Rule, and our April 27, 2016 memorandum, Details Emerge: Proposed Regulation of Incentive Compensation at Large Financial Institutions.


Forfeiture and Downward Adjustment.


Compliance Date.

Asset Thresholds.

Asset size would generally be determined based on the average total consolidated assets reported on regulatory reports for the four most recent consecutive quarters (e.g., Call Reports). As discussed further below, certain covered persons at Level 1 and Level 2 covered institutions are subject to mandatory deferral requirements ranging from 40% to 60% for three to four years depending on the level of covered institution and status as a senior executive officer or significant risk-taker.

Significant Risk-Taker.

Setting Performance Measures and Targets Before Performance Period Begins.



Volume-Driven Incentive-Based Compensation.

Risk Management and Controls Requirement for Level 1 and Level 2 Covered Institutions.

Including CUSOs.


The notice of proposed rulemaking will not be published in the Federal Register, and a formal comment period will not commence, unless and until all six agencies propose the same rule. However, the FDIC, OCC and FHFA have each made the proposed rule available on their respective websites and will accept comments on the re-proposed regulatory text as well as on the specific regulatory alternatives.


[1]           In the 2016 proposed rulemaking, the Agencies discussed an alternative dollar threshold test, which is not mentioned in the 2024 re-proposal. This test would have used a specific absolute compensation threshold, measured in dollars, to determine whether an individual is a significant risk-taker (without regard to how that covered person’s annual base salary and incentive-based compensation compared to others in the consolidated organization).

This post comes to us from Sullivan & Cromwell LLP. It is based on the firm’s memorandum, “Agencies to Consider Variety of Restrictive Alternatives as Part of Incentive Compensation Rule Re-Proposal,” dated May 13, 2024, and available here. 

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