CFPB Director Rohit Chopra has released a statement about the proposal issued by the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Federal Housing Finance Agency to address incentive-based compensation arrangements.  The rulemaking is required by Section 956 of the Dodd-Frank Act, which directed the FDIC, OCC, FHA, as well as the Federal Reserve Board, National Credit Union Administration, and U.S. Securities and Exchange Commission, to jointly prescribe regulations with respect to incentive-based compensation practices at certain financial institutions that have $1 billion or more in assets.  The proposal re-proposes regulatory text that was previously proposed in June 2016, and seeks public comment on certain alternatives and questions.

In his statement about the proposal, Director Chopra takes aim at the other agencies for the pace of the rulemaking, calling it “highly delayed” and commenting that “[w]hen Congress enacts legislation ordering a regulatory agency to issue rules, this is not simply a suggestion” and that “[t]he rules were supposed to be completed thirteen years ago.”  We find Director Chopra’s comments quite ironic, given that the CFPB was directed by Dodd-Frank to issue a small business lending regulation implementing Section 1071 of Dodd-Frank and the CFPB did not finalize that regulation until 2023.  In fact, the CFPB did not move forward on the Section 1071 rulemaking until it was required to do so pursuant to court-imposed deadlines.

In his statement, Director Chopra indicates that he “want[s] to highlight a few aspects of the proposal, along with some considerations that would strengthen the rule for the largest financial firms, many of whom were the beneficiaries of emergency actions and public bailouts.”  Director Chopra highlights the following:

  • The proposal requires the deferral of a portion of an executive’s or employee’s bonus package.  Director Chopra suggests that consideration be given to “whether a larger portion of these bonuses should be delayed and whether it should pay out over a longer period of time.”
  • The proposal requires firms to consider lowering or forfeiting deferred compensation in a range of negative scenarios, such as big losses or misconduct and to consider clawing back compensation that was already paid out within seven years if negative scenarios later played out.  Director Chopra suggests that instead of having firms simply “consider” these actions, consideration be given to making the recovery or lowering of bonuses mandatory.
  • The proposal prohibits firms from buying hedges for employees, which would render many of the rule’s provisions useless.  Director Chopra suggests that consideration be given to prohibiting highly paid employees from acquiring hedges or other financial instruments to blunt the effect of the rule.
  • The proposal prohibits incentive compensation arrangements based solely on revenue or volume metrics.  Director Chopra suggests that consideration be given to expanding that prohibition to cover all compensation arrangements that are based on revenue or volume targets without regard to quality of performance or risk management considerations.

We find it disappointing that, in suggesting that that agencies should consider imposing even stronger restrictions than those that have been proposed, Director Chopra makes no mention of the need for the agencies to also consider the rule’s impact on the ability of insured financial institutions to attract highly qualified employees and to not make the rule so restrictive as to impede that ability.  The proposal, including the decision to move forward without the Federal Reserve Board and SEC, has been criticized by the banking industry.