Pub. 1 2010 Issue 3

www.wvbankers.org 10 Although the Agencies state that the impact of the Guidance will vary based on an organization’s size, the complexity, and use of incentive compensation, smaller financial institutions should be particularly aware of the following sections of the Guidance that are generally applicable to all financial institutions: • during examinations the regulatory agencies will evaluate whether the banking organization has incorporated the recommendations contained in the final guidance into its incentive compensation practices; • banking organizations should develop risk management processes, and internal controls to support development and maintenance of balanced incentive compensation arrangements; • risk management personnel should be involved in designing incentive compensation arrangements and assessing the arrangement’s effectiveness in restraining imprudent risk taking; • banking organizations should continuously monitor incentive compensation arrangements, particularly incentive compensation awards and actual risk outcomes to determine whether these awards appropriately reflect the associated risk to the organization; • the board of directors should actively oversee incentive compensation arrangements, evaluate whether these arrangements jeopardize the banking organization’s safety and soundness, and regularly review the design and function of incentive compensation arrangements; • directors of banking organizations should possess or have access to expertise in risk management and incentive compensation practices in the financial services industry that is appropriate in light of the risk faced by the banking organization; and • a banking organization’s federal supervisor may initiate enforcement action if the organization’s incentive compensation arrangements or related risk management control or governance processes pose a risk to the safety and soundness of the organization. In addition to the new Guidance, under Dodd-Frank, West Virginia banks may be subject to enhanced reporting and dis- closure requirements relating to their incentive compensation programs, and to a new prohibition on arrangements with exces- sive risk. Dodd-Frank requires that within nine months after its enactment, appropriate federal regulators issue rules requiring the disclosure of incentive-based compensation arrangements sufficient to determine whether a “covered financial institu- tion” compensation structure (i) provides an executive officer, employee director or principal shareholder with excessive compensation, fees or benefits; or (ii) could lead to material loss to the “covered financial institution.” This does not require the reporting of actual compensation of any individual nor does it require disclosure by any “covered financial institution” that does not have an incentive-based compensation arrangement. A “covered financial institution” is defined as an entity that has assets of greater than $1 billion and is either (i) a deposi- tory institution or depository institution holding company, (ii) a broker-dealer, (iii) a credit union, (iv) an investment advisor, (v) the Federal National Mortgage Association, (vi) the federal home loan mortgage association, or (vii) any other financial institution that the appropriate federal regulators determine should be treated as a “covered financial institution.” The Act also provides that within nine months after its enactment appropriate federal regulators must issue rules prohibiting any type of incentive-based compensation arrange- ment that (i) encourages inappropriate risk taking by providing excessive compensation fees or benefit, or (ii) could lead to material loss to the covered financial institution. What To Do Now West Virginia banks that have adopted incentive compensa- tion plans and arrangements should immediately review their compensation programs to determine if their plans incorporate the three guiding principles articulated in the final Guidance. Among other things, the bank should consider adopting a for- mal policy governing incentive compensation arrangements. Banks should also implement risk management processes and internal controls to support development and maintenance of balanced incentive compensation arrangements. Finally, the Board of Directors should examine its role in actively over- seeing incentive compensation arrangements and determine whether the Board should take additional steps to evaluate and monitor the bank’s programs to be sure they do not jeopardize the bank’s safety and soundness. Q Should you require more information concerning the legal and busi- ness aspects of the above, please feel free to contact the author, Sandra Murphy, directly at (304) 347-1131 or via e-mail at smurphy@ bowlesrice.com . Ms. Murphy is a partner in Bowles Rice McDavid Graff & Love LLP spe- cializing in banking and commercial law. Bowles Rice McDavid Graff & Love LLP is general counsel to the West Virginia Bankers Association. Banks that have adopted incentive compensation plans should immediately review their compensation programs to determine if their plans incorporate the guiding principles in the final Guidance. Q Risky Business — continued from page 9