CUNA Comment Letter

Conversion of Insured Credit Unions to Mutual Savings Banks

October 1, 2004

Ms. Mary Rupp
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314-3428

Re:	NCUA’s Proposal on Conversions of Insured Credit Unions to Mutual Savings Banks, 12 CFR Part 708a

Dear Ms. Rupp:

The Credit Union National Association is pleased to comment on the National Credit Union Administration Board’s proposal regarding increased disclosure requirements for federal credit unions seeking to convert to a thrift charter. By way of background, CUNA represents approximately 90% of the nation’s approximately 9,400 state and federal credit unions. CUNA’s letter was developed under the auspices of our Examination and Supervision Subcommittee and our Governmental Affairs Committee.

Summary of CUNA’s Position

Last September, NCUA issued a proposed rule regarding new disclosure requirements for federal credit unions seeking to convert to mutual savings banks. The disclosures were designed to address concerns the agency, some credit union members, and other raised regarding deficiencies in disclosures that institutions provide to their members as part of the conversion process. CUNA strongly supported that proposal and recommended additional steps NCUA should take to address concerns regarding conversions to mutual savings banks. The agency did not adopt those changes as part of its final rule, but developed a new proposal to ensure members are fully informed regarding the conversion and what is at stake. CUNA supports the new proposal as discussed below and offers some further suggestions for the Board’s consideration.

Background

In February, CUNA revisited its policies regarding conversions and reaffirmed the principle that, of the different types of ownership and control a financial institution may have, the credit union charter is the most advantageous for consumers, recognizing that the decision regarding conversions rests with a credit union’s board and membership. CUNA’s policy also supports full and fair disclosures to all members of the credit union regarding decisions to convert as well as during the conversion process. This policy notwithstanding, as with all regulatory proposals, CUNA seriously considered whether this rule, if adopted, would be unnecessarily restrictive. To that end, CUNA’s Examination and Supervision Subcommittee as well as its Governmental Affairs Committee reviewed the proposal and developed CUNA’s position.

NCUA’s current proposal on conversions is intended to make it easier for members to understand the conversion process. The Board indicated that every member has the right to vote for conversion to a mutual savings bank, but the members should be fully informed, which is wholly consistent with CUNA’s policy.

Some of the proposed requirements are similar to those included in the pending proposal regarding private insurance, and NCUA has indicated that this proposal is parallel to the one regarding private insurance. While parallels between these two proposals exist, they address fundamentally different processes within a credit union. Under conversion to a mutual savings bank, the charter of the credit union is terminated while under conversion to private insurance, the credit union remains intact, as do the rights and privileges that are universally afforded to credit union members. Such a different outcome, with such a different impact on the credit union’s members, supports different regulatory treatment.

The proposal on private insurance addresses a process under which a credit union remains a credit union, only the insurer of its accounts changes. This step does not affect the ownership and control of the credit union. While disclosures to members must be complete, fair, and timely, we believe several of the proposed substantive changes regarding the private insurance proposal, such as the third-party voting administration requirements, were not well-tailored to address specific documented instances of abuse.

The proposal on conversions to mutual savings banks governs a process under which a credit union ceases to exist and changes into another form of financial institution altogether, resulting in different if not lesser, democratic membership control and participation. Because the fundamental nature of the institution is changed, it is imperative that members be provided with timely, balanced disclosures. We believe this proposal, if implemented, would accomplish this goal, and we support it.

The primary concern is that credit unions may not be providing some important conversion- related information effectively to their members, thus limiting members’ ability to make informed decisions about a conversion. In addition, there is a concern that many credit unions may not be equipped to conduct a proper member vote on conversion.

However, the supplementary information may not sufficiently address the abuses NCUA seeks to correct, and we suggest the agency consider whether the record needs to be enhanced with specific examples of problems, without citing individual institutions.

Disclosures

In order to prevent members from being overwhelmed by a vast amount of information sent to them in connection with the conversion, while avoiding undue limits on the flow of information, the converting credit union would be required to send specific disclosures developed by NCUA.

The disclosure requirements address:

Ownership and control of the credit union;
Operating expenses and their effect on rates and services;
The effect of a subsequent conversion to a stock institution; and
The costs of conversion (including printing fees, postage fees, advertising, consulting and professional fees, legal fees, staff time, the costs of holding a special meeting, etc.).

In our comments on the previous amendments to the agency’s conversion rule, CUNA noted that it is important to facilitate the ability of members to focus on key information concerning the conversion so they are not distracted by other information from the converting credit union. We believe the requirement that a converting credit union must include the required disclosures in a prominent place in each written communication it sends regarding the conversion will facilitate that objective.

The converting credit union must offset the required disclosures from the other text by use of a border, and such disclosures must be at least one font size larger than any other text (excluding headings) used in the communication. While some have raised concerns about the necessity of regulating the size of type in the disclosures, we support highlighting and segregating the disclosures in order to assist members to understand the consequences of a conversion.

Requirement to Use Secret Ballots and Independent Entity to Conduct Vote

In order to protect the privacy of members’ votes as well as to heighten the integrity of the voting process, the proposal would require a converting credit union to use a secret ballot and an independent entity to conduct the vote. Converting credit unions would have to use a third- party teller. The third-party teller’s duties would include: sending ballots, receipt and safekeeping of ballots, verification of ballots, and tabulation of the vote.

NCUA’s current conversion rule requires a converting credit union to provide for NCUA’s review a copy of all written materials concerning the conversion that the credit union sends or intends to send to members. The proposal would clarify that this rule applies to all written materials, including electronic communications posted on web sites. CUNA does not oppose these provisions.

Guidelines for Conducting a Membership Vote

NCUA is proposing voting guidelines to help converting credit unions better understand how they can satisfy the regulatory requirement that the membership vote on conversion be conducted in a fair and legal manner. Guidelines can be extremely useful, and we support those addressed in the proposal. However, because they are included within the body of the proposed rule as opposed to being contained elsewhere such as in an appendix, questions have arisen as to the extent to which the guidelines would be enforced. We request that NCUA clarify this issue.

Relationship Between State and Federal Law

The proposal would require a federally insured state chartered credit union to notify NCUA if the state law under which it is chartered permits it to convert to a mutual savings bank. The credit union must also inform NCUA if it relies for its authority to convert on a state law parity provision and if its state agency agrees that it may rely on the parity provision for that purpose. If a federally insured state credit union relies on a state parity provision, it must indicate its state supervisory agency’s position as to whether federal law and regulations or state law will control internal governance issues in the conversion, such as the requisite membership vote for conversion and the determination of a member’s eligibility to vote. We urge NCUA to coordinate with the state regulators on these issues and to clarify how such coordination will occur.

NCUA’s Proposal Compared to Requirements of Other Regulators

Finally, the Federal Credit Union Act (12 USC 1785(b)(2)(G)(i) requires that charter conversions by an insured credit union be subject to regulation “that is no more or less restrictive than that applicable to charter conversions by other financial institutions.” Because in the past potential challengers have raised concerns about that provision, we recommend that the supplementary information to the final rule address how the new requirements conform to that statutory directive.

Thank you for the opportunity to express our views on the proposal.

Sincerely,

Mary Mitchell Dunn
CUNA Senior Vice President and
Associate General Counsel