AALU Proposes Major Revision of FDIC Rules on Financial Institution Sponsorship of Nonqualified Deferred Compensation Plans

Friday, 06 December 1991                                                                                        WRM#91-115

TOPIC: AALU Proposes Major Revision of FDIC Rules on Financial Institution Sponsorship of Nonqualified Deferred Compensation Plans

AALU filed extensive comments today with the Federal Deposit Insurance Corporation (FDIC) calling for the revision of proposed regulations that would seriously restrict the ability of federally regulated banks and thrifts to sponsor unfunded nonqualified deferred compensation plans. AALU asked the FDIC to modify the proposal to delete the limitations imposed on unfunded plans and permit institutions to make payments to terminated executives under nonabusive supplemental retirement and other deferred compensation plans so long as the institution’s obligation to make the payment was previously reflected on its financial statements in accordance with accepted accounting principles.

The AALU submission followed extensive consideration of the FDIC proposal by the Nonqualified Plans Steering Committee. In addition, AALU representatives met with the drafters of the regulations at the FDIC headquarters in Washington, D.C. to explore the agency’s concerns and detail our own difficulties with the proposed rules.

As described in our Bulletin 91-96, the FDIC proposal, which was authorized by the 1990 bank fraud legislation, would treat payments from unfunded plans as prohibited golden parachute payments once an institution is “troubled” under federal banking rules. While providing exceptions for funded plans designed to restore benefits lost under the Code §415 limits and funded tophat plans, the FDIC determined that payments from unfunded plans represented a drain on the dwindling resources of troubled institutions that might have to be made up from federal deposit insurance funds in the event of the institution’s collapse. In addition, the FDIC gave the proposed regulations retroactive effect, thereby, limiting payments to long-retired bank and thrift executives unless they sought relief from federal regulators under a separate administrative procedure.

Noting that sizeable percentages of banks and thrifts sponsor unfunded arrangements, AALU advised the FDIC that the proposed regulations would place these institutions at a competitive disadvantage in the search for competent management at a time when the banking sector is at its lowest ebb. In addition, the AALU comments ask the FDIC to eliminate the proposal’s retroactive features so that payment of vested and accrued benefits may be made to individuals who left the employ of an institution at least one year prior to its troubled condition. Finally, AALU made the following specific proposals:

1. Any arrangement (or any payment made pursuant to an arrangement) which is designed to supplement a qualified retirement plan should not be treated as a golden parachute plan (or payment) if (a) distributions are made under the terms of the arrangement as in effect at least one year prior to the sponsoring institution’s troubled condition and (b) the institution’s obligation to provide benefits under the arrangement is reflected on the institution’s financial accounting statements for at least one year preceding the year in which the institution became troubled. This “retirement plan” exception would allow institutions to honor the terms of arrangements whose sole purpose is to provide retirement income, whether or not such arrangements are funded.

2. Any other deferred compensation arrangement with respect to which (a) the institution’s obligation to provide future benefits is reflected on the institution’s financial accounting statements for at least one year preceding the year in which the institution became troubled and (b) the executive is vested at the time of termination of employment, should not be treated as a golden parachute.

3. Any voluntary elective deferral plan should, in all events, not be treated as a golden parachute.

AALU counsel understand that the FDIC staff’s consideration of comments on the golden parachute regulations is likely to continue into early 1992. Therefore, it is unlikely that the regulations will be finalized much before the end of the first quarter of 1992.

It is noteworthy that, even as the process of revising these regulations begins, President Bush has signed into law a new round of banking legislation which authorizes the federal banking agencies to promulgate “compensation standards” to regulate the ability of federally insured depository institutions to pay excessive current or deferred compensation to their employees. While the interrelationship between these “compensation standards” and the golden parachute proposal is not yet clear, the new legislation once again highlights the heightened interest in executive compensation practices on the part of federal regulators following the virtual collapse of the banking sector in some parts of the country. We will be following the implementation of the new “compensation standards” rule to assess its potential impact on AALU members with current or potential clients among the nation’s banks and thrifts.