	Introduction

Section 956 of Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) requires financial regulators to adopt new rules placing certain limitations on the use of incentive or incentive-based compensation at financial firms. Section 956 was a response to the widely held but contested notion that incentive-based compensation (i.e., variable performance-based compensation) at financial firms, including commercial and investment banking firms, helped encourage executives and various operatives to take excessive risks that ultimately contributed to financial setbacks at individual firms, which contributed to the 2007-2009 financial crisis and since. As an example, in September 2016, Wells Fargo Bank, N.A. was fined $185 million for illegal sales practices, which might have been motivated by incentive-based compensation arrangements. In addition to the fine, at issue is whether the Wells Fargo incident highlights the potential usefulness of the Dodd-Frank incentive-based compensation clawback provision. An initial 2011 proposal to implement Section 956 was issued by financial regulators (collectively, the Agencies ): the National Credit Union Association (NCUA), the Board of Governors of the Federal Reserve System (Fed), the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Finance Agency (FHFA), the Office of the Comptroller of the Currency (OCC), the Securities and Exchange Commission (SEC), and the Office of Thrift Supervision (OTS, later disbanded and merged into the OCC). Incentive Compensation and the Financial Crisis

Incentive compensation or incentive-based compensation refers to the portion of an employee's pay that is not guaranteed (as is the salary). Incentive compensation takes the form of variable compensation that is contingent on the performance of designated metrics with respect to the employing firm, the employee's departmental unit, the employee, or some combination of these. The section requires the Agencies to jointly prescribe regulations or guidelines aimed at prohibiting incentive-based payment arrangements in financial institutions that they determine encourage inappropriate risks by providing excessive compensation or that could lead to a material financial loss. To be finalized and adopted, the proposal will require the approval of each of them. The CFIs are grouped into three categories based on average total consolidated assets: 
Level 1—$250 billion or more in consolidated assets; Level 2—$50 billion or more and less than $250 billion in consolidated assets; and Level 3—$1 billion or more and less than $50 billion in consolidated assets. There are specific requirements for how the records should be maintained:
the CFI's senior executive officers and significant risk-takers, listed by legal entity, job function, organizational hierarchy, and line of business; the incentive-based compensation arrangements for senior executive officers and significant risk-takers, including information on the percentage of incentive-based compensation deferred and form of award; any forfeiture and downward adjustment or clawback reviews and decisions for senior executive officers and significant risk-takers; and any material changes to the CFI's incentive-based compensation arrangements and policies. Deferrals

Under the proposed rules, a Level 1 institution would be required to defer at least 60% of a senior executive officer's and 50% of a significant risk-taker's qualifying incentive-based compensation for at least four years. Further, senior executive officers' and significant risk-takers' incentive-based compensation awarded under the long-term incentive plan would be deferred by 60% and 50%, respectively, for at least two years. A Level 2 institution would be required to defer at least 50% of a senior executive officer's and 40% of a significant risk-taker's qualifying incentive-based compensation for at least three years. Downward Adjustments and Forfeitures

Under the proposal, Level 1 and Level 2 CFIs would also have to consider adopting corporate protocols that would allow for the downward adjustment and forfeiture of senior executives' and significant risk-takers' incentive compensation when certain events occur, including 
poor financial performance that is attributable to a significant deviation from risk parameters in the CFI's policies and procedures; inappropriate risk-taking; material risk management or control failures; and failure to comply with statutory, regulatory or supervisory standards resulting in an enforcement or legal action or a requirement that the CFI report a financial restatement to correct a material error; other trigger events as defined by the CFI. Comments on the Potential Impact of the Proposal

The Agencies will accept formal public comments on the perceived impact of the incentive-compensation proposal through July 22, 2016.
Incentive compensation or incentive-based compensation refers to the portion of an employee's pay that is not fixed in contrast to an annual or monthly salary. Incentive compensation takes the form of variable contingent compensation, particularly cash bonuses, that are based on the attainment of certain firm or employee performance metrics. Such pay has been a significant component of compensation for executives and other key personnel at many firms in the financial sector. Many argue that such compensation contributed to the 2007-2009 financial crisis by incentivizing pivotal financial firm personnel to take excessive, and in retrospect, dangerous risks that were financially problematic for their firms. They argue that such compensation could still potentially pose problems and encourage firm personnel to take excessive risks. As an example, in September 2016, Wells Fargo Bank, N.A. was fined $185 million for illegal sales practices, which might have been motivated by incentive-based compensation arrangements. In addition to the fine, at issue is whether the Wells Fargo incident highlights the potential usefulness of the Dodd-Frank incentive-based compensation clawback provision.
In July 2010, in response to the financial crisis of 2007 to 2009, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act, P.L. 111-203). Section 956 of the law directed financial regulators to adopt new rules that jointly prescribe regulations or guidelines aimed at prohibiting incentive compensation arrangements that might encourage inappropriate risks at financial institutions. These regulators, the Agencies, are the National Credit Union Association, 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.
In April 2016, after releasing an ultimately unimplemented proposal in 2011, the Agencies proposed new rules to implement Section 956. The proposal has a three-tiered protocol in which the stringency of incentive compensation limits grow as an entity's consolidated asset total increases: Level 1, $250 billion and up; Level 2, $50 billion to $250 billion; and Level 3, $1 billion to $50 billion. Public comment period for the proposal was through July 22, 2016. The proposal will then require the approval of each agency in order to be finalized and adopted.
Level 1 and Level 2 institutions must comply with enhanced requirements as to the structure of their incentive compensation for senior executive officers (i.e., various top corporate leaders, including the president, the chief executive officer, and the chief operating officer) and significant risk-takers (i.e., top paid non-senior employees). For example, a Level 1 institution would be required to defer at least 60% of a senior executive officer's qualifying incentive-based compensation and 50% of a significant risk-taker's qualifying incentive-based compensation for up to four years. Senior executive officers' and significant risk-takers' incentive-based compensation awarded under the long-term incentive plan would be deferred by 60% and 50%, respectively, for at least two years. A Level 2 institution would be required to defer at least 50% of a senior executive officer's qualifying incentive-based compensation and 40% of a significant risk-taker's qualifying incentive-based compensation for at least three years.
Senior executives and significant risk-takers at Level 1 and 2 institutions would also be subject to reductions in previously earned incentive compensation (i.e., forfeiture and downward adjustment) in the event of certain behaviors, including when (1) deviation from risk parameters causes a firm's poor financial performance, or (2) inappropriate risk-taking occurs regardless of the impact on the firm's financial performance. Those employees could also have their vested incentive compensation clawed back by their employer under conditions determined by the employer, including (1) the existence of significant financial or reputational harm caused by the employee's actions; (2) fraudulent conduct by the employee; or (3) intentional misrepresentations on the part of the employee.