CUNA Regulatory Comment Call

January 24, 2008

EXECUTIVE SUMMARY

The National Credit Union Administration Board is seeking comments through April 30, 2008 on an Advance Notice of Proposed Rulemaking under Parts 708a and 708b of its regulations regarding mergers, conversions to another type of financial institution, and terminations of federal share insurance. The ANPR was approved for comments at the Board’s January meeting. Click here for a copy of the ANPR. Click here for notice of time extension.

CUNA’s Examination and Supervision Subcommittee, along with our Federal Credit Union Subcommittee, will be reviewing the ANPR and helping to develop CUNA’s comment letter.

EXECUTIVE SUMMARY

• NCUA is asking credit unions whether it should develop new regulations that would address situations in which a federally insured credit union merges or converts to another type of financial institution, other than a mutual savings bank.
• NCUA is also asking for comments on whether it should amend its current rules on mergers, charters conversions and changes in account insurance.
• More specifically, the agency is raising questions about whether its current rules in these areas adequately protect members’ interests.
• Issues NCUA has targeted for comments include communications to members, voting integrity, fiduciary duties of board and managements; and merger dividends.
• However, comments on related issues not raised by NCUA can also be included in letters to the agency on the ANPR.

Comments may be submitted to NCUA through the agency’s website or through regcomments@ncua.gov. Commenters should include their names and “Comments on Advance Notice of Proposed Rulemaking for Parts 708a and 708b” in the email subject line. Letters may also be faxed to 703-518-6319 or mailed to Ms. Mary Rupp, NCUA Board Secretary, 1775 Duke Street, Alexandria, VA 22314-3428.

Please share your letters with us and send them to CUNA’s Regulatory Research Counsel Luke Martone at lmartone@cuna.coop. If you have questions about this Comment Call or the ANPR, contact Mary Dunn, CUNA’s SVP and Deputy General Counsel at mdunn@cuna.coop.

BACKGROUND

According to NCUA, the agency is seeking to protect the interests of members when their credit union is considering transactions that would significantly affect members’ rights, such as a change in the ownership of the credit union, termination of a credit union’s charter or its federal share insurance.

More specifically, NCUA is focusing on six types of transactions:

• a merger of a federally insured credit union (FICU) into another FICU;
• merger of a FICU into a privately insured credit union (PICU);
• conversion of a federally insured state credit union (FISCU) into a PICU;
• merger of a FICU into a financial institution other than a mutual savings bank; and
• conversion of a FICU into a financial institution other than an MSB.

NCUA states that while these transactions are permissible, they may result in diminishing member ownership or removing federal share insurance. Also, while the agency has issued rules on a number of these transactions, it has not developed regulations on the merger or conversion of a FICU into an institution other than an MSB. NCUA states that its legal authority to regulate these transactions is derived from the Federal Credit Union Act, 12 USC 1766(a), 1785(b), 1785(c), and 1789(a).

CU MERGER OR CONVERSION TO AN INSTITUTION OTHER THAN AN MSB

NCUA has not issued a rule on mergers or conversion of a FICU to an institution other than an MSB because there have been just a few of these transactions and such transactions approved by the Board generally followed the agency’s requirements, the ANPR states. Factors that NCUA considers in such transactions include:

• The history, financial condition and management policies of the credit union;
• The adequacy of the credit union’s reserves;
• The economic advisability of the transaction;
• The general character and fitness of the credit unions’ management;
• The convenience and needs of the members to be served; and
• Whether the credit union is a cooperative association organized for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes (12 USC 1785s).

NCUA is now considering whether a regulatory framework rather than the case-by-case process it uses now would be more appropriate for these types of transactions. The agency points out that the downsides to such a rule are that it might actually encourage such transactions. On the other hand, it could set forth the appropriate safeguards for members’ interests and benefit all parties by knowing what is expected of them in the process. NCUA notes that such a rule could be modeled after 708b, the rule that governs credit union into credit union mergers.

FIDUCIARY DUTIES

NCUA is also requesting comment on whether there is a need for a regulation to address the fiduciary duty credit union directors owe to members and the need for additional regulatory provisions to guard against insider enrichment in any of the six types of transactions mentioned above.

The ANPR notes that the NCUA Board has a number of specific responsibilities to protect members' interests, such as when it reviews applications for directors or senior management at a newly chartered or troubled credit union or when it acts as the conservator or liquidating agent of a FICU. The ANPR also notes these provisions support the view that credit union directors have a fiduciary duty to their credit union members.

Such a duty has not been regulated by NCUA, and the agency is considering establishing a duty of care for directors that would apply when they are making decisions regarding the six types of transactions above. Currently, credit union board members must rely on state law to guide them on fiduciary duty issues and such law can vary from jurisdiction to jurisdiction. The standard of care ranges from a low standard that only requires a rational basis for certain actions to one that requires decisions to be made based on a full consideration of all alternatives.

• Considering the unique interests, concerns and structure of credit unions as financial cooperatives, NCUA believes having a uniform federal standard may be useful to eliminate confusion… and make it easier for credit union boards to fulfill their duties to members,” the ANPR states.

INSIDER ENRICHMENT

The ANPR notes that in some cases of FICU to MSB conversions, credit union officials have pursued personal enrichment to the detriment of the membership. NCUA has adopted disclosure requirements to address this concern but additional requirements may be needed to guard against such enrichment.

In that connection, the agency is considering whether new requirements to set a record date for voting which would provide a disincentive for family members of a credit union’s officials from joining a credit union to take advantage of the conversion.

NCUA is also considering whether a merger dividend or other return of shares or shares should be required in mergers and conversions. The other option NCUA is considering is whether such a dividend should be considered by the Board as part of its due diligence as opposed to a specific requirement from NCUA.

The ANPR notes that not imposing such a dividend allows credit unions flexibility to decide for themselves whether it is appropriate. It also notes that requiring such a dividend has advantages such as rewarding the merging credit union’s members, and equalizing the net worth between the two credit unions.

COMMUNICATING TO MEMBERS

NCUA notes that there have been improper communications to members during some conversion transactions. The communicators implied that NCUA endorsed the conversion or conversion-related materials. NCUA is considering whether there should be a specific prohibition against stating or implying such an endorsement. NCUA is also considering whether a statement should be included that NCUA has not endorsed the transaction.

Another concern that has arisen is when a credit union seeking to convert provides misleading information regarding the location of continuing branches or other services. The ANPR cites two examples of such communications. In that connection NCUA is considering requiring converting credit unions to research whether the transaction will result in closing or moving branches or losing access to services. NCUA is also considering whether to issue a more general rule regarding the need to disclose such information.

NCUA is also requesting comments on whether a credit union seeking an unfriendly merger with another credit union should be precluded from communicating with the target credit unions’ members. The agency notes that it does not have direct jurisdiction over such communications by noncredit unions. Another approach, the ANPR notes would be to establish communication standards that would have to be met as part of the merger.

MEMBER VOTING

The ANPR notes that NCUA has found irregularities in a number of close member votes in recent years on conversion or merger issues. To address concerns, the agency is seeking comments on whether members should be allowed to request a recount when there is enough evidence to show that the original tally is not reliable. NCUA is also considering several prohibitions imposed on the board or management regarding the voting process which would include disallowing:

• Interim voting tallies;
• Lists of members who have not voted;
• The soliciting of specific members to vote; and
• CU personnel from completing or handling members’ ballots.

SPECIFIC QUESTIONS

Here are the particular issues on which NCUA is seeking comments:

• Should the agency’s rules be amended to address issues relevant to members’ interests in charter changes or federal share insurance termination?
  
  

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• Should NCUA promulgate new rules for credit union mergers or conversions into an institution other than a mutual savings bank or should it continue to address these issues on a case-by case basis?
  
  

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• If a new rule is in order, what should it cover?
  
  

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• Should NCUA develop a rule to address the fiduciary duties that credit union directors owe to members?
  
  

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• If a federal fiduciary standard is advisable, what elements of care should it address? Should there be a separate standard for directors to uphold when the transaction involves a charter change to another type of institution?
  
  

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• Should NCUA regulate against insider enrichment?
  
  

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• If yes, should there be requirements regarding the record date for members voting on a conversion proposal or other transaction that would result in a different type of financial institution?
  
  

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• Should credit unions merging or converting to another type of institution be required to provide a merger dividend to their members as part of the process?
  
  

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• If not, should the directors be required to consider this issue as part of its due diligence and then justify their decision to the membership?
  
  

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• Should NCUA prohibit communications from credit union officials that state or imply NCUA has endorsed a charter change or charter materials provided to members?
  
  

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• Should NCUA require a credit union to include a statement in its materials that NCUA has not endorsed the transaction?
  
  

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• Should credit unions seeking to convert or merge be required to conduct research to determine if they will close branches or modify other services available to members when the transaction is completed and then disclose that information to the members?
  
  

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• Alternatively, should NCUA adopt a more general rule regarding the need for full and accurate information to members?
  
  

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• Should NCUA issue a new rule on “hostile” mergers and what should it adders to protect members’ interests?
  
  

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• Should credit union management be prohibited from obtaining interim voting tallies from the election teller during the voting process in a merger or conversion to another type of institution?
  
  

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• Should credit union management be prohibited from obtaining lists from the election teller of members who have not voted?
  
  

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• Should credit union employees be prohibited from soliciting members to vote?
  
  

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• Should employees be prohibited from completing member ballots or handling ballots?
  
  

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• Do members have the right to a recount if sufficient evidence exists that the original vote is unreliable? Under what circumstances should a recount be undertaken? What procedures should be followed for a member to exercise such a right?
  
  

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• Are there any other relevant issues that NCUA should consider?
  
  

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Copyright © 2008 - Credit Union National Association, Inc.