CUNA Regulatory Comment Call

May 31, 2007

Executive Summary

• The National Credit Union Administration is seeking comments on a proposal concerning federal credit union bylaws. A copy of the proposal is here.
• Under the proposal, NCUA would reincorporate the FCU Bylaws into its regulations. This action would make it clear that the agency can use a range of enforcement actions to enforce bylaws. The Supplementary Information accompanying the proposal clarifies that NCUA plans to use such authority only to enforce certain bylaws that address “fundamental, material rights” of members. /li>

• The proposal would establish a new standard bylaw regarding the responsibility of the Supervisory Committee to assume responsibilities of the credit union’s board of directors temporarily if the entire board is simultaneously removed, such as at a special meeting, or unable to serve.
• The proposal includes a procedural change regarding bylaw amendments that use identical language to nonstandard bylaws that the agency has already approved. While the proposed amendment must still be filed with the appropriate NCUA regional office, the NCUA regional director would have to respond to the request within 15 business days.
• The proposal includes a new introduction to the bylaws that reflects their incorporation into the regulations and clarifies that for bylaw amendments that are identical to ones previously permitted by NCUA, the credit union should expect approval from its NCUA regional official within 15 days.
• NCUA has extended its comment period for this proposal to August 20, 2007. Click here for a copy of NCUA's notice. Please submit your comments to CUNA by July 31, 2007.
Please feel free to fax your responses to CUNA at 202-638-7052 or e-mail them to CUNA Deputy General Counsel Mary Dunn at mdunn@cuna.com. You may also contact her at 800-356-9655, ext. 6736.

Key Points Regarding the Proposal

• NCUA has issued a new proposal on the bylaws for federal credit unions. CUNA’s Federal Credit Union Subcommittee will be developing CUNA’s comment letter on the proposal, coordinating with the work of the CUNA Examination and Supervision Subcommittee on guidelines on the enforcement of bylaws.

• The proposal addresses several issues regarding bylaws: federal bylaw enforcement; a new introduction to the FCU bylaws; a shortened process for the adoption of amendments already approved for another FCU; and a new FCU bylaw on how to handle director successions when the entire board has been removed or is unable to perform its duties.

Enforcement

• The Supplementary Information accompanying NCUA’s proposal states that when NCUA deregulated the bylaws in 1982, it did not address the issue of whether the agency would enforce bylaws because it did not foresee current problems members may face in trying to have the bylaws enforced. (In 1982, the agency deleted two sections incorporating the bylaws by reference as well as the regulation requiring NCUA approval of amendments.)

• Rather, the agency’s current position has been that it should not intervene in disputes between members and credit union boards regarding bylaw compliance; this position was addressed in legal opinions and other policies from the agencies since 1982.

• A recent example of a problem with bylaw enforcement has been the situation when a credit union’s board sought to convert and dissenting members requested that the board comply with a bylaw and hold a special meeting, the purpose of which was to remove the board. When the board refused, the dissenting members turned to NCUA which took the position that since it had deregulated the bylaws in 1982, the most appropriate action for the members would be to go to court. This remedy, however, can be costly and time consuming and may not provide the needed relief.

• As a result of such problems, and based on the agency’s analysis that it has the authority to enforce the bylaws, the agency is proposing to reincorporate the bylaws into NCUA’s rules.

• NCUA is also proposing to add language to the introduction of the bylaws which states:

  NCUA has discretion to take administrative actions when a credit union is not in compliance with its bylaws. If a potential violation is identified, NCUA will carefully consider all the facts and circumstances in deciding whether to take enforcement action. NCUA will not take action against every minor or technical violation, but emphasizes that it retains discretion to enforce the bylaws in appropriate cases, which may include, but are not limited to, safety and soundness concerns or threats to fundamental, material credit union member rights.

• NCUA’s authority to enforce the bylaws in based on provisions in the FCU Act that require bylaws for federal credit unions and that permit NCUA to cancel or suspend a federal credit union’s charter or place it into liquidation for failure to comply with bylaws (12 USC 1758 and 12 USC 1766(b)(1)).

• Even though the agency believes reincorporation is the least burdensome way for FCUs and their members to be aware of NCUA’s authority over the bylaws and that incorporating the bylaws will impose no new burden on FCUs as they are already required to maintain bylaws that NCUA has approved, a significant result of the incorporation will be that NCUA will be able to use a range of enforcement sanctions at its disposal to enforce the bylaws.

• Also, while the agency states that it does not intend to enforce all bylaw disputes, the proposed language would seem to permit enforcement for a range of bylaws it determines are related to “safety and soundness” as well as “fundamental, material credit union member rights.”

• NCUA’s explanation of the proposal restates its current process for bylaw approvals. The latest version of the bylaws permits check off or fill in the blank options that a credit union may adopt without further NCUA action. Also, while NCUA regional directors must still approve other FCU bylaw amendments, the agency says it will approve all proposed bylaw amendments to the standard bylaws that do not conflict with the FCU Act, agency rules or guidance, present a safety and soundness concern, or limit members’ rights.

• NCUA’s proposal states that its proposed bylaw regulation is patterned after the approach of the Office of Thrift Supervision. OTS, like NCUA, uses model bylaws and institutions are permitted to adopt variations and optional provisions.

• OTS requires all thrifts to file bylaw amendments with the agency. NCUA is not proposing that approach. Rather, NCUA is proposing to incorporate its bylaws by reference into the regulations which it views as a less burdensome approach than the one OTS has taken. This approach will clarify that NCUA has authority to enforce the bylaws.

• NCUA emphasizes that incorporating the bylaws “will not mean that NCUA will become involved as a matter of course in all bylaw disputes. The Board believes that credit union officials and members should be able to work together to resolve the vast majority of bylaw and internal governance disputes.”

• NCUA adds that the management should not be able to “ignore the bylaws unilaterally” and that the agency “already has the authority to exercise its administrative enforcement authority, when a credit union violates the Act, NCUA regulations or a threat to the safety and soundness of the institution exists.”

• NCUA further states that “it should have the ability to institute an enforcement action when a bylaw violation poses a threat to fundamental, material credit union member rights…that go to the very heart of the cooperative principles that serve as the cornerstone of the credit union system.”

• Under the risk-based examination system, NCUA adds, “examiners do not currently, nor will they under this proposed rule, inquire into an FCU’s bylaws unless the FCU’s management raises the issue.”

• If a bylaw dispute cannot be resolved at the credit union, credit union officials or members would contact the appropriate regional office of NCUA, which will try to resolve the differences.

• “However, if a matter involves fundamental, material credit union member rights, NCUA will have clear discretion to take administrative action as warranted.”

Supervisory Committee Responsibilities for Board Succession

• Under the proposal, a new Section to Article IX to clarify the Supervisory Committee’s responsibilities would be added for situations in which an FCU has no remaining directors.

• In situations in which the entire board has resigned, is removed simultaneously or is unable to serve, the bylaw clarifies that the Supervisory Committee must act as a temporary board. As such, the Supervisory Committee must schedule a special meeting to elect an interim board, or if the credit union’s next annual meeting will occur within 45 days, the Supervisory Committee must serve as the temporary board until the meeting.

• The proposal cross references the new language in Article XVI, Section 3, Article VI, Section 4.

• NCUA notes that the new provisions do not automatically become part of an FCU’s bylaws and that FCUs are not required to adopted them. If an FCU does not adopt the new provisions, NCUA will follow its legal opinion (OGC Opinion 06-0446 (April 27, 2006) which addresses the duties of the Supervisory Committee when the board has been removed.

Special Meeting

• The NCUA Board has considered whether to permit more latitude in the bylaws concerning how many members it takes to request a special meeting and the timing of when the meeting will be held. Rather than propose a new standard bylaw on this, NCUA has taken the position that an individual credit union interested in such changes should seek a bylaw amendment.

Bylaw Amendment Process

• NCUA is adopting minor changes to improve its bylaw amendment process. The agency will continue to post all bylaw amendment opinion letters on its website. Letters issued since April 2006, the last major review of the bylaws, will include the language for the amendment approved or a link to the language.

• Credit unions that seek to adopt identical language to that of a previously approved amendment would still file with the regional office but will be notified within 15 business days of the region’s action. The new bylaw introduction will also address this process.

Questions to Consider

• Should NCUA reincorporate the bylaws into the agency’s regulations, thereby clarifying its authority to enforce them?
  
  

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• If so, should the agency set limits on what it will enforce, such as bylaws that deal with member rights, which would include the right to:
  • maintain a share account;
  • maintain credit union membership;
  • have access to credit union facilities;
  • participate in the director election process;
  • attend annual and special meetings; and
  • petition for removal of directors and committee members?
  
  
  

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• Are bylaws related to safety and soundness, and should NCUA establish the right to enforce bylaws based on safety and soundness?
  
  

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• If disputes between boards and members over bylaw provisions occur, should the parties first attempt to settle disputes through internal procedures before NCUA is involved?
  
  

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• Should standard bylaws address how disputes on bylaw provisions between members and the credit union’s board should be handled internally?
  
  

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• Should examiners be precluded from looking into bylaw issues?
  
  

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• Do you agree with the new bylaw on the duties of Supervisory Committees in board succession? Do you have recommendations for improvements?
  
  

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• Do you agree with NCUA’s proposal on the processing of bylaw amendments that are identical to previously adopted amendments?
  
  

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• Do you agree that NCUA should not propose a standard bylaw on the requirements for calling a special meeting? If you do not agree, what provisions would you suggest regarding the number of members needed to request a special meeting and the timing of when such a meeting should be held?
  
  

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