Compensation Committee Given Duties under TARP Regime set up by Emergency Economic Stabilization Act

The Treasury regulations for financial institutions participating in the troubled asset relief program (TARP) under the Emergency Economic Stabilization Act require compensation committees to meet, within 90 days after a purchase under the program, with senior risk officers to ensure that the firm’s incentive compensation arrangements do not encourage senior executive officers to take unnecessary and excessive risks that might threaten the value of the financial institution. After that, the compensation committee must meet annually with senior risk officers to review the relationship between the financial institution’s risk management policies and the executive compensation arrangements. Also, the compensation committee must certify in the firm’s Compensation Disclosure & Analysis required by the SEC that they have done so in order to assure investors and taxpayers that the institutions are complying with the requirements.

Because each financial institution faces different material risks given the unique nature of its business and the markets in which it operates, Treasury advises that the compensation committee should discuss with the senior risk officers the risks that the firm faces that could threaten the value of the financial institution. The compensation committee should identify the features in the financial institution's executive incentive compensation arrangements that could lead covered executive to take such risks. Any such features should be limited in order to ensure that the covered executives are not encouraged to take risks that are unnecessary or excessive.

As noted, the compensation committee must certify that it has reviewed, with the financial institution's senior risk officers, the executive incentive compensation arrangements to ensure that they do not encourage the executives to take unnecessary and excessive risks. According to Treasury, the following statement would satisfy this standard: ``The compensation committee certifies that it has reviewed with senior risk officers the SEO incentive compensation arrangements and has made reasonable efforts to ensure that such arrangements do not encourage SEOs to take unnecessary and excessive risks that threaten the value of the financial institution.''