Treasury issues new executive compensation rules under TARP

The U.S. Department of the Treasury has issued interim final rules for reporting and recordkeeping requirements under the executive compensation standards of the Troubled Asset Relief Program's (TARP) Capital Purchase Program (CPP).

The new rule requires the chief executive officer (CEO) to certify annually within 135 days after the financial institution's fiscal year end that the financial institution and its compensation committee have complied with these executive compensation standards.

In addition, within 120 days of the closing date of the Securities Purchase Agreement between the financial institution and the Treasury, the CEO is required to certify that the compensation committee has reviewed the senior executives' incentive compensation arrangements with the senior risk officers to ensure that these arrangements do not encourage senior executives to take unnecessary and excessive risks that could threaten the value of the financial institution.

The CEO must provide the 120-day and annual certifications to the TARP Chief Compliance Officer.

The financial institution is also required to keep records to substantiate these certifications for at least six years following each certification and provide these records to the TARP Chief Compliance Officer upon request.

Treasury originally published executive compensation standards for CPP last October. The rules generally apply to the chief executive officer, chief financial officer, plus the next three most highly compensated executive officers.

These standards include:

  • Ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution;
  • Requiring clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate;
  • Prohibiting the financial institution from making any golden parachute payment (based on the Internal Revenue Code provision) to a senior executive; and
  • Agreeing not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive.

The rule also makes a few clarifications and a technical amendment to the October interim final rule.

Treasury also issued a revised version of the executive compensation guidelines applicable to financial institutions participating in programs for Systemically Significant Failing Institutions (Treasury Notice 2008-PSSFI) to add similar compliance reporting and recordkeeping requirements as in today's Interim Final Rule.

In addition, Treasury is also issuing Frequently Asked Questions relating to the executive compensation standards to assist financial institutions' compliance with these standards.

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