CUNA Comment Letter

Notice and Request for Comments on Proposed Changes to NCUA’s FCU Bylaws and Related Issues

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

Re:	Notice and Request for Comments on Proposed Changes to NCUA’s FCU Bylaws and Related Issues

Dear Ms. Rupp:

The Credit Union National Association (CUNA) appreciates the opportunity to respond to NCUA’s notice and request for comments on ways to update, clarify, and simplify the Federal Credit Union (FCU) Bylaws, as well as other suggestions to improve the bylaws. CUNA represents 90% of our nation’s 9,300 state and federal credit unions. The following comments were developed under the auspices of CUNA’s Federal Credit Union Subcommittee, with input from other credit union and league officials.

Summary of CUNA’s Position

CUNA commends the NCUA Board for reviewing the Federal Credit Union Bylaws.
However, while the proposal raises issues for consideration regarding the bylaws, it does not go far enough in providing flexibility to federal credit union boards in determining how to operate their institutions.
CUNA believes NCUA has the legal authority to provide more options to federal credit unions to draft their own bylaws, consistent with statutory and regulatory requirements, as well as sound principles of good corporate governance.
More specifically, CUNA recommends that NCUA adopt a new approach to the bylaws. Under this recommendation, NCUA should allow federal credit unions to draft their own bylaws, as long as essential and necessary provisions, as determined by the agency, are included.
For those credit unions that do not choose to write their own bylaws, NCUA should maintain and update a standard set of bylaws, as it does now. It should also continue to allow credit union to seek approval for nonstandard bylaws and publish the list of such bylaws that it has approved.
This would mean that for any given bylaw provision, a federal credit union could utilize a standard bylaw, submit a nonstandard bylaw to NCUA for approval, or develop its own language as long as it complies with NCUA’s requirements.
The key element is that an established federal credit union would not have to obtain prior approval for bylaws that deviate from the provisions of NCUA’s standard or preapproved nonstandard bylaws.
If the agency’s current approach to the bylaws is not changed, the existing process of requiring approval for nonstandard bylaw amendments should be revised to facilitate a federal credit union’s ability to incorporate such amendments.
Regarding the specific issues NCUA’s proposal raises:

CUNA supports NCUA’s proposed change providing an alternative bylaw provision allowing a federal credit union to require each accountholder to open and maintain a separate account in order to qualify for membership.
We believe that federal credit unions should have the option to include a list of items of business that must be addressed at an annual meeting but should not be required to do so.
The proposal would require credit unions that allow electronic voting in elections to deliver mail ballots along with the instruction sheet for voting to allow members without electronic devices to vote without having to request a ballot. We believe a credit union should have the option to continue to the current process or include the mail ballot with the instruction sheet based on what it believes is best for its membership.
We do not support NCUA’s proposed change allowing an alphabetical ordering of names on the ballot. While we believe credit unions should be able to choose any process they wish for placing names on the ballot, as long as it is fair and equitable, we do not believe such directives need to be detailed in the bylaws. (A number of credit union officials who weighed-in on this issue generally recognized that the order of names on a ballot should be random.)
We believe that a federal credit union should have the option to establish minimum age requirements for voting and to hold office, either in its bylaws or by a Board resolution.

While we agree that a credit union should address issues relating to good corporate governance through Board policies and procedures, we do not think such practices need to be detailed in the bylaws. CUNA, through its Federal Credit Union Subcommittee and its Examination and Supervision Subcommittee, will be reviewing corporate governance issues further to develop possible best practices in this area, and we welcome the opportunity to work with NCUA on this endeavor.
In our comments to the bylaw changes in 1999, we recommended other bylaw changes, some of which were not adopted at that time. We reiterate them here, including identifying some current bylaw provisions that we recommend be removed because they cover operational matters that should not be addressed in the bylaws.

Federal Credit Unions Should Have More Options When It Comes to the Bylaws

CUNA commends the agency for reviewing its bylaws for federal credit unions. We appreciate the opportunity to share our views not only on the specific issues NCUA has raised but also on broader issues that, while relating to the bylaws, really address operational flexibility for federal credit unions.

The last revisions to the FCU Bylaws occurred in 1999. It is widely acknowledged among federal credit unions that the 1999 bylaw revisions were a tremendous improvement over the previous bylaws. The Supplementary Information accompanying the bylaws published then laid out the options for federal credit unions in developing bylaws. The document stated:

An issue that has not been addressed is whether FCUs will be allowed to adopt just part of the revised bylaws. This is particularly important for FCUs that have nonstandard amendments that are not addressed in the revised bylaws. The Board, in an effort to achieve maximum participation by FCUs, will allow them to adopt portions of the revised bylaws, if an FCU finds that adoption of the entire revised bylaws is impracticable. The Board cautions FCUs adopting only a portion of the revised bylaws to use extreme care because they run the risk of having inconsistent or conflicting bylaw provisions.

The document reiterated “the revised FCU Bylaws are not mandatory.” It further stated, “the Act requires FCUs to use the bylaws published by NCUA,” although it pointed out that “FCUs will continue to have the flexibility to request a nonstandard bylaw amendment if the need arises.”

We believe that, consistent with the language of the FCU Act, as well as the 1999 revisions and Supplementary Information, additional options for federal credit unions in crafting their own bylaws could be provided and that federal credit unions could have more latitude to tailor their bylaws to meet their specific operational needs than what is permitted under the current system. Detractors of credit unions, which have challenged virtually every new regulatory authority for credit unions, may want credit unions to have little additional flexibility to develop their own bylaws. In light of that, we discuss our analysis of why we believe more leeway is called for and supported by the statute, briefly below.

As you know, the Federal Credit Union Act (Act) expressly addresses the subject of bylaws for federal credit unions, stating:

Bylaws. – In order to simplify the organization of Federal credit unions the Board shall from time to time cause to be prepared a form of organization certification and form of bylaws, consistent with this chapter, which shall be used by Federal credit union incorporators, and shall be supplied to them on request. At the time of presenting the organization certificate the incorporators shall also submit proposed bylaws to the Board for its approval. (12 USC 1758)

This language has remained virtually unchanged from the inception of the Act (except to change the word, “Governor,” (referring to the head of the of the Farm Credit Administration which originally regulated federal credit unions) to (NCUA) Board.

When this provision was adopted, many credit unions were fledgling institutions, and it would have been very useful to them to be able to rely on bylaws developed by the federal regulator, rather than having to draft such a document for themselves.

Today, a number of established federal credit unions do not find it necessary to rely on NCUA for help in drafting bylaws. As a result, we question the need for NCUA to address the level of detail that is contained in the current standard bylaws.

Bylaws, in order to be both accurate and useful to a credit union, must be viewed as an organic document, which change as the needs of the organization evolve. While the Act makes it clear that a credit union in the process of obtaining a charter must submit its bylaws to NCUA for approval, we believe established federal credit unions have the authority to draft adjustments to their bylaws without prior NCUA approval, drawing on appropriate resources from NCUA and elsewhere, as long as the provisions are consistent with legal and regulatory requirements as determined by the agency.

Thus, we recommend that NCUA:

Retain the current standard bylaws, along with the options NCUA has approved;
Continue to permit federal credit unions to submit nonstandard bylaws for approval, if they wish; and add a new option to
Allow federal credit unions to draft their own bylaws, or portions of their bylaws, consistent with a list that NCUA would develop containing specific issues and content requirements that a federal credit union must include.

Our recommendation recognizes that a sizeable group of federal credit unions, particularly smaller ones, may generally want to use the bylaws NCUA develops and thus, be assured their bylaws conform to legal requirements. We believe this course of action should remain available to federal credit unions.

CUNA’s recommendation, however, would also permit a federal credit union to employ other bylaws that it drafts on its own without agency approval, consistent with a list of required topics NCUA could develop. Additionally, an established federal credit union could draft its own complete set of bylaws, following NCUA’s guidelines, and not have to obtain NCUA approval. NCUA would, nonetheless, be able to check a credit union’s bylaws during the examination process.

We believe this additional approach will satisfy Section 1758 of the Federal Credit Union Act (FCUA) that requires NCUA to prepare a “form of bylaws.” These provisions do not specifically require NCUA’s prior approval of bylaws for credit unions that are already chartered.

For those FCUs electing to develop their own bylaws, the specific contents of the bylaws should in large measure be based on the requirements of the Act. For example, the power to levy late charges is addressed in Section 1757(10) of the Act, member meetings are addressed in Section 1760, and the sizes of the board and supervisory committee are addressed in Sections 1761(a) and (b). These and other relevant topics would be included in the list that NCUA would develop regarding the content requirements for the bylaws.

The Supplementary Information accompanying the current notice and request for comments indicates NCUA will develop a proposal and again seek input on that document. As part of that action, we recommend NCUA develop the content requirements and request specific comments on those requirements. CUNA’s Federal Credit Union Subcommittee would welcome the opportunity to work with NCUA in developing the list.

If additional options for federal credit unions regarding the bylaws are not adopted, we urge NCUA, at a minimum, to review the process by which existing bylaws can be amended by individual credit unions to reflect operational needs. A number of credit unions has informed us that the current process of requiring approval for nonstandard bylaw amendments is cumbersome. Some credit union boards have indicated that this process discourages them from pursuing such amendments. We urge NCUA to amend and simplify this process in a manner that facilitates a credit union’s ability to incorporate nonstandard bylaw amendments. We also suggest NCUA make it easier to use its website to locate and utilize approved nonstandard bylaws.

CUNA’s Comments on Specific Proposed Bylaw Provisions

Article III, Section 7 – Joint Accounts — In the request for comment, NCUA has proposed an alternative bylaw provision allowing an FCU to require each accountholder to open and maintain a separate account in order to qualify for membership. We believe such an alternative is appropriate and will provide flexibility to those FCUs with information systems that are not capable of recording multiple memberships associated with a single account.

Article IV, Section 2 – Plurality Vote — CUNA supports adding the language, “All elections are determined by plurality vote” to this section, to conform to the language in the other three election options.

Article IV, Section 4 – Required Items of Business — NCUA is requesting comment as to whether the bylaws should include the required items of business that should be addressed at the annual meeting. We believe that adding these items of business should be an option for a federal credit union, although not a requirement.

Article V, Option A4 – Election by Electronic Device or Mail Ballot — In the request for comment, NCUA has proposed amending this election option to require that a federal credit union include a mail ballot with its electronic election procedure instructions. This is in contrast to the current process of requiring a member to request a mail ballot if he or she does not have the required electronic device needed to vote.

Some of our members felt it was unclear whether NCUA intended that a mail ballot must be delivered to every member during each election process or only to members who have not previously indicated that they are able to vote by electronic means.

In any event, we believe a federal credit union should be able to decide for itself whether to send the ballot with the election instructions or retain the current process of requiring members to request a mail ballot. Requiring federal credit unions to deliver a mail ballot to all or a substantial number of members may be costly and burdensome for some credit unions.

Further, we believe this is the kind of issue for which NCUA should not mandate a particularly course of action but allow credit union boards to determine for themselves the option that is preferable, taking into account their own membership.

For mail ballots, the bylaws allow one form to be used for both the ballot and identification form, as long as it is “properly designed,” which requires secrecy in the balloting process. NCUA has requested comment as to whether this provision regarding the secrecy requirement should be revised. We believe FCUs should continue to have the flexibility to determine how best to communicate to their members.

Alphabetical order of names on the ballot — With regard to the ballot, NCUA is also requesting comment on a change allowing names to be printed on ballots in alphabetical order, as an alternative to determining the order by drawing lots. We agree credit unions should be permitted to use any process they wish with regard to placing names on the ballot, whether that be by drawing lots or other means. However, credit unions believe the process should result in a random placing of the names on the ballot, which would not include other processes that are not random, such as the placing of names in alphabetical order.

Article V, Section 7 – Minimum Age for Voting — NCUA has requested comment as to whether the bylaws should include a provision specifying a minimum age as a qualification to vote and hold office as an option to the current provision that allows the FCU’s board to establish the age by resolution. Members of our Federal Credit Union Subcommittee supported the option, noting that an FCU should be able to continue to leave it out if it chose to do so, as each FCU is currently allowed to establish its own minimum age criteria by board resolution.

FCUs Should Decide For Themselves What Their Bylaws Should Address Relating to Corporate Governance

Although the NCUA Board has not at this time proposed specific changes to the bylaws to address corporate governance, the Board has requested comments on whether particular corporate governance practices or related issues should be included in the FCU Bylaws, such as board training and ethics.

We agree that credit unions should seriously review their corporate governance practices, but we believe these issues should be addressed in the credit unions’ policies and procedures. The bylaws could address this through a general provision simply indicating that a credit union should have a policy addressing corporate governance issues.

CUNA’s Federal Credit Union Subcommittee will be reviewing this issue more closely in an effort to develop possible best practices in the corporate governance area that could be included with a credit union’s policies and procedures. Although the Subcommittee has not at this time adopted any recommendations, a number of ideas have been discussed, including the following:

Conflict of interest disclosures for board and executive staff.
Confidentiality agreements for board and executive staff.
A code of ethics for board and executive staff.
A whistleblower protection policy.
Orientation, training, and support for the board and committees.
Review of board, officer, and committee structure to improve communication and the decision-making process.
Possible term limits for board directors, officers, and supervisory committee members.

Again, these and other corporate governance provisions should not be mandated, either in the bylaws or otherwise. The goal of the Federal Credit Union Subcommittee is to develop a list of possible practices that each credit union may review for possible inclusion within its policies and procedures. We urge NCUA to adopt a similar approach, and we would welcome the opportunity to work with NCUA on this issue.

CUNA Recommends Additional Suggested Changes

The following are additional suggested bylaw changes that were not specifically addressed in NCUA’s recent request for comments:

Article III, Section 4, of the bylaws permits the transfer of shares from one member to another. This provision is confusing because membership shares generally cannot be transferred. If this provision applies to other types of shares, we suggest that it be permitted under a non-standard bylaw provision for those FCUs that may have a need for it.
Article IV, Section 2, of the bylaws requires that notice of an annual meeting to members must be sent between 30 and 75 days before the date of the meeting. We would prefer the previous provision in effect prior to 1999 that simply required notice at least seven days before the date of the meeting.
Article IV, Section 3, sets at 500 the minimum number of members that may request a special meeting. A preferable alternative may be to set the number based on the percentage of total members, as this will have a similar impact on large and small credit unions.
Article V of the bylaws provides four options regarding the elections process. We suggest an additional option. Under this option, the nominating committee would be required to send a notice at least 120 days prior to the election informing members that nominations are being solicited for certain vacancies. Any member could place his or her name in nomination, and that nominee would be listed on the ballot, as long as the necessary qualifications are met. The nominating committee would be required to assure that there is at least one candidate for each vacancy. There would be no nominations from the floor or by petition, unlike the other alternatives. This option is provided under general corporate law. The option is fair, efficient, and prevents the disruptions that may occur when nominations are submitted from the floor at the last minute.
We encourage NCUA to consider updating the maximum number of members required to sign a petition for nomination. Currently, FCU Bylaws Article V, Options A2-A4, Section 1, states “...nominations for vacancies may also be made by petition signed by 1% of the members with a minimum of 20 and a maximum of 500.” This language does not allow an FCU to require more than 500 signatures on a petition for nomination. Five hundred members represents less than one percent of the total membership of an FCU that has more than 50,000 members. As of June 2004, there were over 150 FCUs with more than 50,000 members. A number of FCUs have significantly more than 50,000 members, in which case 500 would represent only a fraction of one percent. We believe that only serious candidates should be placed in nomination for credit union elections. We also believe reasonable provisions should be available for qualified candidates to be placed on ballots by petition. However, the current maximum of 500 petitioners could jeopardize, for larger FCUs, the objective of placing only serious, qualified nominees on the ballot. We urge NCUA to significantly increase the maximum number of petitioners required to place a name on an election ballot.
For all of the election options under Article V, we suggest the nominating committee be given the responsibility to ascertain whether the nominees meet the criteria established for the position. This should avoid vacancies resulting from an elected nominee’s disqualification.
The language in Article VI, Section 4, allowing vacancies on the board of directors, credit committee, and supervisory committee to be filled “within a reasonable time” is vague and should be removed.
Article XV allows shares to be issued in the name of a minor. This provision is unnecessary as the FCUA already permits this.
Article XVI, Section 3, allows directors, committee members, or officers to be removed by a majority of members voting at a special meeting. Because under Article IV, Section 5, only 15 members constitute a quorum at an annual or special meeting, this provision can place removal powers into the hands of a small number of members. We suggest that a higher minimum number may be appropriate to address this concern.
The bylaws would be more user-friendly if the definitions were in the front, instead of at the end of the bylaws.

The FCU Bylaws can also be improved by removing a number of detailed, operational provisions that should instead be included within the credit union’s policies and procedures. As a result, the bylaws would be a simpler and more usable document, without adversely impacting FCUs or their members. The following are a number of operational issues that could be removed, which is by no means intended to represent an exhaustive list:

Article II, Sections 2 and 3, provisions requiring the signing of applications by members, providing reasons for membership rejections, and entrance fees for members and for those who are terminated from membership and then readmitted.
Article III, Section 5, provisions regarding payroll deduction plans, continuation of share accounts of deceased members, and prohibitions on the withdrawal of shares below the amount of the member’s primary or contingent liability to the credit union.
Article VII, Section 6, provisions requiring the financial officer to post a copy of the current financial statement in a conspicuous place in the credit union.
Article XIII provisions requiring FCUs to set deadlines for depositing funds into a qualified depository.
Article XVI, Section 7, provisions requiring each member to keep the credit union informed of his or her address.

Thank you for the opportunity to respond to NCUA’s notice and request for comments on the FCU Bylaws. This is an important undertaking and CUNA’s Federal Credit Union Subcommittee would welcome the opportunity to meet with agency officials to discuss CUNA’s views. In the meantime, if Board members or agency staff have any questions about our comments, please contact me or Assistant General Counsel Jeffrey Bloch, who contributed to this letter, at (202) 638-5777.

Sincerely,

Mary Mitchell Dunn
Senior Vice President and Associate General Counsel