Clarification sought for incentive-based compensation plan rule

Impact on non-federally insured CUs, ‘grandfathered’ plans, and scope of proposal noted in comment letter

ARLINGTON, Va . — A proposed NCUA rule on incentive-based compensation plans must be clear on whether it covers non-federally insured credit unions, NASCUS has written in a comment letter to the agency.

Additionally, NASCUS urged the agency to clarify whether a “grandfathered” compensation plan may be re-enacted or extended while retaining its exempt status, and to provide “greater insight” into the threshold for applying provisions in the regulation for very large financial institutions (those with $50 billion or more in assets) to credit unions with only $1 billion or more in assets.

The proposal was issued for comment by the NCUA Board April 21. At the time, the agency estimated it would affect 258 large federally insured credit unions, both state and federally chartered. The NCUA proposal – mandated as part of the Dodd-Frank legislation passed in the wake of the 2008 financial crisis – is the credit union part of a rule that is being promulgated jointly by federal financial institution regulators, including NCUA and the FDIC, the Federal Housing Finance Agency (FHFA), the Fed, the OCC, and the SEC.

This is the second proposal on this subject, the first being released for comment (but not implemented) five years ago.

In its comment letter filed Friday (July 22), NASCUS noted it is unclear from the text of the proposed rule what exactly is meant by a credit union “eligible to make an application” for federal share insurance. “The provisions referenced in the proposed rule may be fairly read to define the scope of the rule to include any credit union, regardless of whether it is federally insured,” NASCUS wrote. “We do not believe this was NCUA’s intent,” the association stated, adding that the agency should amend the provision to explicitly clarify that the rules “only apply to federally insured credit unions.” On the other hand, if it is the agency’s intent to include non-federally insured credit unions, NCUA should include provisions codifying consultation with the prudential state regulator, NASCUS wrote.

NASCUS also recommended that NCUA clarify the scope of the “grandfather provision” in the proposal (which NASCUS supports) to spell out if a credit union would be able to add employees to a grandfathered plan after the “Compliance Date” referred to in the proposal, or whether additional employees would require a separate compliance plan.

Finally, NASCUS requested “greater insight” into both the threshold for applying “Levels 1 and 2” regulations to a Level 3 credit union, and the process by which the NCUA Board would make the determination.

The proposal would establish a three-tiered system for covered financial institutions: $250 billion or greater in assets (Level 1), $50 billion up to $250 billion in assets (Level 2), and $1 billion up to $50 billion in assets (Level 3). Only one credit union is above the $50 billion threshold, and (at the time the rule was proposed) 257 federally insured credit unions were within the Level 3 category.

The proposal has rigorous requirements for financial institutions in Levels 1 and 2, and does not affect the base salary or base benefits for credit unions in Level 3. The proposed rule provides NCUA discretion to apply the more rigorous provisions applicable to Levels 1 and 2 credit unions to Level 3 credit unions that have complexities and compensation practices “consistent” with those of Level 1 and 2 credit unions.

NASCUS pointed out that little in the proposed regulation establishes a framework that would allow a Level 3 credit union to understand the parameters of what might trigger application of the more advanced rules. “The proposal states that the NCUA will establish procedures to administer this provision,” NASCUS wrote. In this area, NASCUS made two recommendations: that the agency include in its procedures consultation with a state regulator in the case of a federally insured, state-chartered credit union, and; an opportunity for the credit union to rebut NCUA’s initial determination that discretionary rules should be applied.

“In addition, NCUA should consult with the appropriate state regulators before extending Level 1 and 2 provisions to a level 3 credit union,” NASCUS wrote. “Given the subjective nature of the determination, and lack of concrete parameters, consultation with the state regulator will be essential in ensuring a balanced and informed decision.”


Complete text of the NASCUS comment letter/incentive-based compensation plans

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