INTRODUCTION

Recent economic turmoil has brought unprecedented attention to the incentive compensation practices of financial institutions. In addition to the pervasive media coverage and public scrutiny of compensation arrangements, these concerns have given rise to new federal oversight of financial institutions’ compensation arrangements. Enforcement action may be taken by a financial institution’s federal supervisor if its incentive compensation arrangements are considered to create a risk to the safety and financial soundness of the organization. In addition, the Dodd-Frank Act requires disclosures of incentive compensation arrangements that may increase a company’s exposure to risk.

DODD-FRANK ACT

President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act") on July 21, 2010. The Act contains amendments to the Securities Exchange Act of 1934 that impose new executive compensation requirements for public companies. Among other new rules, the Act requires companies to disclose to shareholders whether they permit any employee or board member to purchase financial instruments that are designed to hedge or offset any decrease in the market value of their equity-related compensation. In addition, regulations will be promulgated under the Act requiring disclosure of any incentive-based compensation arrangements that could lead to material financial loss to the company. Thus, the Act seeks to encourage risk mitigation for all public companies.

THE FEDERAL RESERVE GUIDANCE

On June 21, 2010, the Federal Reserve, the Department of the Treasury, and the FDIC issued final guidance (the “Federal Reserve Guidance” or the “Guidance”) regarding incentive compensation policies.1