FR4027_20190405_omb

Supporting Statement for the
Recordkeeping Provisions Associated with the
Guidance on Sound Incentive Compensation Policies
(FR 4027; OMB No. 7100-0327)
Summary
The Board of Governors of the Federal Reserve System (Board), under authority
delegated by the Office of Management and Budget (OMB), proposes to extend for three years,
without revision, the Recordkeeping Provisions Associated with the Guidance on Sound
Incentive Compensation Policies (FR 4027; OMB No. 7100-0327). The Guidance on Sound
Incentive Compensation Policies1 (the Guidance) is an interagency publication that is intended to
assist banking organizations in designing and implementing incentive compensation
arrangements that do not encourage imprudent risk-taking and that are consistent with the safety
and soundness of the organization. The Guidance contains voluntary recordkeeping collections
of information. There are no required reporting forms associated with this information collection
(the FR 4027 designation is for internal purposes only). The estimated total annual burden for
the FR 4027 is 228,960 hours.
Background and Justification
The Board, along with the Office of the Comptroller of the Currency (OCC), Federal
Deposit Insurance Corporation (FDIC), and subsequently abolished Office of Thrift Supervision
(collectively, the agencies), promulgated the Guidance in 2010. With respect to organizations
regulated by the Board, the voluntary Guidance applies to U.S. bank holding companies, savings
and loan holding companies, state member banks, Edge Act and agreement corporations, and the
U.S. operations of foreign banks with a branch, agency, or commercial lending company
subsidiary in the United States (collectively, banking organizations).
In the Federal Register notice announcing the Guidance, the agencies noted that the
financial services industry’s incentive compensation practices contributed to the financial crisis
that began in 2007. Banking organizations often rewarded employees for increasing the firm’s
short-term revenue or profit without adequate recognition of the risks the employees’ activities
posed for the firm. Such problematic compensation practices were not limited to the most senior
executives at financial firms. The agencies noted that certain compensation practices can
encourage employees at various levels of a banking organization to undertake imprudent risks
that adversely affect the risk profile of the firm.
The Guidance aims to help protect the safety and soundness of banking organizations and
promote the prompt improvement of incentive compensation practices throughout the banking
industry. In addition, the Guidance is consistent with the Principles for Sound Compensation

1

75 FR 36395 (June 25, 2010).

Practices adopted by the Financial Stability Board (FSB) in April 2009,2 as well as the
Implementation Standards for those principles issued by the FSB in September 2009.3
Description of Information Collection
Compatibility with Effective Controls and Risk Management
Pursuant to Principle 2 of the Guidance, a banking organization’s risk-management
processes and internal controls should reinforce and support the development and maintenance of
balanced incentive compensation arrangements. Principle 2 states that banking organizations
should create and maintain sufficient documentation to permit an audit of the organization’s
processes for establishing, modifying, and monitoring incentive compensation arrangements.
Additionally, large banking organizations should maintain policies and procedures that
(1) identify and describe the role(s) of the personnel, business units, and control units authorized
to be involved in the design, implementation, and monitoring of incentive compensation
arrangements, (2) identify the source of significant risk-related inputs into these processes and
establish appropriate controls governing the development and approval of these inputs to help
ensure their integrity, and (3) identify the individual(s) and control unit(s) whose approval is
necessary for the establishment of new incentive compensation arrangements or modification of
existing arrangements.
Strong Corporate Governance
Pursuant to Principle 3 of the Guidance, banking organizations should have strong and
effective corporate governance to help ensure sound compensation practices. The Guidance
states that a banking organization’s board of directors should approve and document any material
exceptions or adjustments to the organization’s incentive compensation arrangements established
for senior executives.
Time Schedule for Information Collection
The recordkeeping provisions are ongoing. The documentation associated with the
Guidance is maintained by each institution; therefore, it is not collected or published by the
Federal Reserve System.
Legal Status
The recordkeeping provisions of the Guidance are authorized pursuant to sections 9,
11(a), 25, and 25A of the Federal Reserve Act (12 U.S.C. 248(a), 325, 602, and 625); section 5
of the Bank Holding Company Act of 1956 (12 U.S.C. 1844); section 10(b)(2) of the Home
Owners’ Loan Act (12 U.S.C. 1467a(b)(2)); section 7(c) of the International Banking Act of
1978 (12 U.S.C. 3105(c)); and section 39 of the Federal Deposit Insurance Act (12 U.S.C.
2

See FSF Principles for Sound Compensation Practices (April 2, 2009), available at http://www.fsb.org/wpcontent/uploads/r_0904b.pdf.
3
See FSB Principles for Sound Compensation Practices: Implementation Standards (September 25, 2009),
available at http://www.fsb.org/wp-content/uploads/r_090925c.pdf.

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1831p-1(c)). Because the recordkeeping provisions are contained within guidance, which is
nonbinding, they are voluntary.4 There are no reporting forms associated with this information
collection.
Because the incentive compensation records would be maintained at each banking
organization, the Freedom of Information Act (FOIA) would only be implicated if the Board
obtained such records as part of the examination or supervision of a banking organization. In the
event the records are obtained by the Board as part of an examination or supervision of a
financial institution, this information is considered confidential pursuant to exemption 8 of the
FOIA, which protects information contained in “examination, operating, or condition reports”
obtained in the bank supervisory process (5 U.S.C. 552(b)(8)). In addition, the information may
also be kept confidential under exemption 4 for the FOIA, which protects commercial or
financial information obtained from a person that is privileged or confidential (5 U.S.C.
552(b)(4)).
Consultation Outside the Agency
There has been no consultation outside the agency.
Public Comments
On November 30, 2018, the Board published an initial notice in the Federal Register
(83 FR 61637) requesting public comment for 60 days on the extension, without revision, of the
FR 4027. The comment period for this notice expired on January 29, 2019. The Board did not
receive any comments. On February 28, 2019, the Board published a final notice in the Federal
Register (84 FR 6787).
Estimate of Respondent Burden
As shown in the table below, the estimated total annual burden for the FR 4027 is
228,960 hours. The Board estimates that respondents would take, on average, 40 hours each
year to maintain policies and procedures to monitor incentive compensation arrangements. The
Board also estimates that in the case of a new institution becoming subject to the guidance, it
would take 480 hours each year for large institutions and 80 hours each year for small
institutions. These recordkeeping provisions represent 2.07 percent of the Board’s total
paperwork burden.

4

See SR 18-5 / CA 18-7: Interagency Statement Clarifying the Role of Supervisory Guidance (September 11,
2018).

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Estimated
number of
respondents5

FR 4027
One-time Implementation:
Large institutions
Small institutions
Ongoing maintenance

Annual
frequency

Estimated
average hours
per response

1
1

1
1

480
80

480
80

5,710

1

40

228,400

Total

Estimated
annual burden
hours

228,960

The estimated total annual cost to the public for this information collection is $13,188,096.6
Sensitive Questions
This collection of information contains no questions of a sensitive nature, as defined by
OMB guidelines.
Estimate of Cost to the Federal Reserve System
Since records are maintained at the banking organization, the estimated cost to the
Federal Reserve System is negligible.

5

Of these respondents, 3,953 are considered small entities as defined by the Small Business Administration (i.e.,
entities with less than $550 million in total assets), www.sba.gov/document/support--table-size-standards.
6
Total cost to the public was estimated using the following formula: percent of staff time, multiplied by annual
burden hours, multiplied by hourly rates (30% Office & Administrative Support at $19, 45% Financial Managers at
$71, 15% Lawyers at $69, and 10% Chief Executives at $96). Hourly rates for each occupational group are the
(rounded) mean hourly wages from the Bureau of Labor and Statistics (BLS), Occupational Employment and Wages
May 2018, published March 29, 2019, www.bls.gov/news.release/ocwage.t01.htm. Occupations are defined using
the BLS Occupational Classification System, www.bls.gov/soc/.

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