The NCUA board on Thursday unanimously passed an interagency incentive income compensation proposal that will impact only a small percentage of credit unions – a total of 258, which is nearly 5% of all credit unions.
The rule prohibits incentive-based compensation arrangements that would encourage inappropriate risks by providing excessive compensation or that could lead to material financial loss.
Affected institutions will be required to annually create and retain records documenting the structure of incentive-based compensation arrangements for seven years.
Further, the proposal requires board members to provide direct oversight of compensation, including approval of all senior executive compensation plans and any material adjustments.
Covered institutions will be divided into the following three categories based on assets: Level 1 – $250 billion and above, Level 2 – $50 billion to $250 billion and Level 3 – $1 billion to $50 billion. Credit unions with fewer than $1 billion in assets will be exempt from the rule.
No federally insured credit unions will be required to submit their records for all new incentive compensations to the NCUA; however, Level 2 and 3 institutions will be required to allow NCUA examiners to review their records maintained onsite for all new incentive compensation plans.
Any current plans will be grandfathered under the new rule.
The proposal will be made available for a 90-day comment period ending July 22. It will apply to all financial institutions, including credit unions, with total assets of $1 billion or more.
This joint proposal will satisfy a requirement under Section 956 of the Dodd-Frank Act. The agencies involved, in addition to the NCUA, include the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency and the Securities and Exchange Commission. Additionally, the proposed rule replaced a proposed rule issued by the group in 2011. The NCUA was the first financial regulator to address the rule.
Board member J. Mark McWatters cited numerous concerns he had with the proposal and asked that the board consider his list of issues, adding that he would not vote against the proposal.
Among his list of concerns was whether the agency should issue a regulation or a guideline, as Section 956 provides that the agencies may consider both in the implementation of the act.
He also questioned if the proposal would survive an objective, transparent cost-benefit analysis.
NAFCU President/CEO Dan Berger said the proposal is onerous and burdensome for credit unions.
"We will carefully analyze today's proposed rule for its full impact on credit unions," he said. "There have already been 1,280 credit unions lost – 17% of the industry – due to the crushing burden of Dodd-Frank Act rules, and we urge the NCUA to help relieve regulatory burden, not compound it."
NCUA Vice Chairman Rick Metsger cited the failure of Cal State 9 Credit Union as having cost the share insurance fund more than $170 million as another reason to address the incentive compensation rule.
The NCUA board also unanimously passed a proposed rule that lowered a requirement for abandoned and acquired premises to 50% occupancy.
Matz said the rule would remove outdated regulatory limits and empower credit union boards to make their own decisions about how to use the incidental portion of each property without the interference of regulatory micromanagement.
The board also heard the first quarter share insurance fund report. The report showed a net income for the quarter of $24 million and an estimated loss of $13 million due to a decrease in operating expenses.
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