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Federal Register / Vol. 86, No. 44 / Tuesday, March 9, 2021 / Rules and Regulations
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Alternatively, an ECIP recipient may use other forms or existing policies relating to excessive or luxury expenditures, but such other forms or policies must satisfy all the requirements of the interim final rule.
iv. Material Changes to Policies or Procedures An ECIP recipient must obtain prior approval from Treasury before making any material change to the policies or procedures that it maintains for purposes of compliance with the compensation, severance pay and excessive or luxury expenditures requirements described in the preceding discussion.16 A change to such policies or procedures will be considered material if the change is likely to have a negative effect on the financial condition of the ECIP recipient, limit the ability of the ECIP recipient to make payments under the terms of an ECIP
instrument, or otherwise impair the ECIP recipients ability to meet its obligations to Treasury under the Program. An ECIP recipient would bear the initial responsibility for determining whether a change in policy or procedures is material; however, Treasury would retain the authority to take enforcement as appropriate i.e., an ECIP recipient should not revise its compensation policy to permit or pay excessive compensation if its cash is insufficient to pay dividends on ECIP
instruments. A request by an ECIP
recipient to make a material change to its compensation, severance pay, or excessive or luxury expenditures policies or procedures must be submitted to Treasury in writing at least 30 days prior to the effective date of the policy change. The notice will be deemed approved 30 days after the ECIP
submits the notice to Treasury unless prior to the expiration of the 30-day period Treasury i objects to the proposed change or ii notifies the ECIP
recipient that additional time is required in order to better evaluate the impact of the proposed change to policy or procedures.
Treasury specifically solicits comments from members of the public concerning the following issues:
Question 1: Are the restrictions on compensation sufficiently tailored to facilitate the ECIP Program objectives without discouraging participation in the program?
Question 2: Are there other reasonable alternatives to the Programs 16 Disclosures by ECIP recipients of any proposed material changes to any such policies or procedures will be subject to their Federal regulators applicable restrictions in respect of the disclosure of confidential supervisory information.

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excessive or luxury expenditures policy requirement that would be as effective in ensuring that funds provided under the Program are used to provide loans, grants, and forbearance, without restricting ECIP participant discretion to establish policies and procedures that are tailored to meet the needs and business objectives of their respective organizations?
Question 3: What additional guidance or clarification regarding the compensation and expenditure restrictions would help facilitate compliance with these restrictions and ensure that the restrictions are working as intended?
2. Restrictions on Dividends, Share Buybacks, and Other Capital Distributions The restrictions on dividends, share buybacks, and other capital distributions under the interim final rule include two components. The first is a prohibition on discretionary dividends, share buybacks and other capital distributions on non-senior securities if an ECIP recipient has not i for preferred stock issued to Treasury, paid in full the dividends for the last completed dividend period, or ii for instruments issued to Treasury other than in the form of preferred stock, such as subordinated debt, paid all amounts due and payable and all amounts previously deferred under the terms of the instruments. The second is a limit on dividends, share buybacks, and other capital distributions based on separate earnings-based tests for i insured depository institutions, bank holding companies and savings and loan holding companies, on the one hand, and ii federally insured credit unions, on the other.
However, the interim final rule provides an exception from these restrictions for ECIP recipients that are S corporations or other pass-through entities for purposes of the Internal Revenue Code of 1986. The interim final rule will permit S corporations and other pass-through entities to make capital distributions to the extent reasonably required to cover its owners tax obligations in respect of the entitys earnings. Such distributions shall be subject to an annual reconciliation, with any surplus or deficiency to be deducted or added to distributions, as applicable, in the following year.
The exemption for tax-related distributions in the interim final rule does not supersede otherwise applicable limitations or determinations with respect to distributions established by an ECIP recipients Federal regulators.
Accordingly, tax-related distributions
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permitted under the interim final rule must also comply with any applicable limitations or determinations established by an ECIP recipients Federal regulators.
Similar to the restrictions on executive compensation described above, these limitations on capital distributions are intended to ensure that the funds provided under ECIP have the effect intended by Section 104A of the Act, and are not to provide undue compensation to an ECIP recipients shareholders or owners. In addition, these restrictions serve to protect the taxpayers financial interest in connection with the instruments issued by an ECIP recipient to Treasury in connection with the Program.
i. Restriction on Dividends, Share Buybacks and Other Capital Distributions The interim final rule defines nonsenior securities as any equity interests in or other instruments issued by an ECIP recipient that are pari passu with or junior to Treasurys investment, or equity interests in or other instruments issued by a depository institution holding company of which the ECIP
recipient is a subsidiary. Under the interim final rule, an ECIP recipient will be prohibited from making capital distributions, such as declaring or paying any dividend on, or purchasing or redeeming, any non-senior securities unless i if Treasury holds shares of preferred stock, the company has paid in full dividends on the preferred stock with respect to the last completed dividend period prior to the current dividend period; or ii if Treasury holds an instrument other than preferred stock e.g., subordinated debt, all amounts due and payable on the instrument have been paid in full, and no deferred amounts are unpaid. These restrictions reflect customary contractual protections to prevent an ECIP recipient from making discretionary distributions on nonsenior securities if payments are not being made to Treasury on its investment. These restrictions would not prevent an ECIP recipient from making required, non-discretionary payments on non-senior securities, such as payments required at stated maturity in accordance with an instruments terms, or payments of interest that may not be deferred.17
For these purposes, a capital distributions are defined as i dividends, including discretionary 17 Such payments may be subject to limitations established by an ECIP recipients primary Federal regulator.

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