Monthly LRA Update: June 2024

REGULATORY DEVELOPMENTS

Re-Proposed Rule Regarding Incentive-Based Compensation Arrangements On May 3 the FDIC approved a Notice of Proposed Rulemaking on Incentive-Based Compensation Arrangements. This is largely a re-proposal of a 2016 proposed rule, with some additional discussion in the preamble. The OCC and other regulatory agencies also approved the re-proposal; however, not all of the applicable agencies have formally approved the re-proposal yet. It is our understanding that the re-proposal cannot be published in the Federal Register until all the applicable agencies approve the re-proposal.

We covered the prior proposed rule in our May 2016 LRA Update. As a reminder, this rulemaking stems from section 956 of the Dodd-Frank Act, which prohibits covered financial institutions from encouraging inappropriate risks through incentive-based compensation arrangements.

Based on several of the new questions posed for comments, it appears that certain agencies may be interested in strengthening the 2016 proposed rule.

Banking Regulators Release Guide for Community Banks Regarding Third-Party Risk Management

On May 3 the FDIC, OCC, and Federal Reserve Board jointly released a guide intended as a resource for community banks in managing third-party risks. The agencies had previously released final guidance on third-party relationships in June 2023 (which rescinded and replaced previous guidance, including OCC 2013-29). More details on that final guidance can be found in our June 2023 LRA update.

The guide does not introduce any new material in addition to the previously released final guidance. Instead, it is “intended to assist community banks when developing and implementing their third-party risk management practices.” It is not meant as a comprehensive checklist and doesn’t include specific suggested practices, but it is a useful summary of the following topics:

• Risk Management: considering appropriate level of risk for each third-party relationship, and adjusting and updating risk-management practices to be in line with the applicable size, complexity, and risk profile
• Third-Party Relationship Life Cycle:
• Planning
• Due Diligence and Third-Party Selection
• Contract Negotiation
• Ongoing Monitoring
• Termination
• Governance: ongoing practices through-out relationship life cycle
• Oversight and Accountability
• Independent Reviews
• Documentation and Reporting