NEWS: The League wrote to the NCUA last week to express our opposition to proposed rules on incentive-based compensation. The proposal was issued jointly by the NCUA and other federal financial regulators. The rules would apply only to federally insured credit unions with at least $1 billion in assets.
For a summary of the proposal, please see this Aug. 8, 2024, Comment Call.
This is a re-proposal of incentive-based compensation rules that the federal regulators jointly proposed in 2016. The new proposal repeats the text proposed in 2016 but offers certain alternatives and questions.
The League wrote to the NCUA Board in July of 2016, opposing those rules, and we continue to oppose this new version. “That is because concerns we raised eight years ago still have not been addressed,” we wrote. Our letter listed several areas of concern:
- NCUA guidance would be preferable to prescriptive joint rules. We believe that the NCUA should not participate in this joint proposal. We asked the NCUA to withdraw it and issue guidance, instead. “Such guidance could better serve our industry by establishing best practices in a format that allows the NCUA to expand on and fully explain its expectations,” we said. “These regulations are a solution in search of a problem, because the NCUA has offered no evidence that credit unions award the kinds of irresponsible incentives these rules are meant to prohibit.”
- The proposal is impermissibly vague. As in 2016, the new version of the proposal is so vague that it may not pass Constitutional muster. The U.S. Supreme Court has consistently upheld the “fundamental principle” that laws must give fair notice of what conduct they require or prohibit.
The proposal would prohibit an incentive-based compensation arrangement that “encourages inappropriate risks” either by paying “excessive compensation” or that “could lead to material financial loss.” Those terms – inappropriate, excessive, and material – are not clearly defined, and would leave credit unions guessing what sorts of incentives they’d be allowed to pay staff.
“The NCUA and other regulators still need to provide more clarity in this proposal, or they risk issuing a final rule that will simply be subject to litigation, judicial scrutiny, and potential injunction,” we wrote.
- The rules would be new & unnecessary government intrusion. “We appreciate that Congress and the regulators are taking steps to control the imprudent incentives paid by some big banks and mortgage companies,” we told the NCUA, “but this proposal is unnecessary when it comes to credit unions.” That’s because credit unions’ member-elected boards can adequately oversee their CEOs, and management can adequately assess the risks of credit unions’ compensation plans, without the need for a regulator’s scrutiny.
- These rules would harm credit unions and the communities they serve. We told the NCUA that the proposal would stifle not-for-profit credit unions’ ability to attract and retain talented staff, putting them at a competitive disadvantage vs. banks.
We quoted a comment from one Wisconsin credit union about the potential harm to credit unions’ bottom lines and to the financial well-being of the communities they serve: “This proposal would create significant additional fixed costs that poses financial risks when incentive compensation plans are not based on transactions. … This could pose a significant risk to mission-focused lending and community investments. If we shy away from risks, then some communities will not get served.”
- The rules do not address existing contracts. We pointed out that the new proposal fails to address what would happen to existing employment agreements that include incentives if examiners find that they violate the new rule (which would be an entirely subjective opinion). After all, credit unions cannot just breach their contracts or fail to pay incentives they promised to their employees.
The League will let you know about further developments on these proposed rules.