CUNA Regulatory Comment Call


August 2, 2004

Conversion of Insured CUs to Mutual Savings Banks

(Major Rule)

EXECUTIVE SUMMARY

  • The NCUA Board issued a proposed rule that would amend its regulation regarding conversion of insured credit unions to mutual savings banks. This proposal 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.

  • The proposal would require:
    • A converting credit union to provide its members with additional disclosures about the conversion before conducting a member vote. This disclosure must address: 1) ownership and control of the credit union; 2) operating expenses and their effect on rates and services; 3) the effect of a subsequent conversion to a stock institution; and 4) the costs of conversion. This information will have to be placed in a prominent place with each written communication that a credit union sends
    • The membership vote on conversion be by secret ballot and be conducted by an independent entity. NCUA is also proposing guidelines for conducting a fair vote.
    • A federally insured state credit union to provide NCUA with information about how the laws of the state where it is chartered relates to NCUA’s conversion rule.

  • CUNA has policy reaffirming 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. 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 wants to make sure that this rule, if adopted, would not be unnecessarily restrictive. To that end, CUNA’s Examination and Supervision Subcommittee will be reviewing this proposal in detail, along with comments from leagues, credit unions and others on this topic. The Subcommittee will be formulating CUNA’s comment letter.

  • NCUA is seeking comments by October 1, 2004. Please send your comments to CUNA by September 17, 2004. Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Kboze@cuna.com or mail them to CUNA's Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, 6th Floor - South Building, Washington, DC 20004-2601. A copy of NCUA’s proposal is available via the Internet at the following address: http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/P-708A.pdf

BACKGROUND

  • Concerned that many credit union members do not appreciate the effect a conversion may have on their ownership interests in the credit union and voting power in the mutual savings bank, NCUA amended it conversion rule in February to require a converting credit union to disclose the following additional information in the notice to its members:

    • The conversion from a credit union to a mutual savings bank could lead members to losing their ownership interests in the credit union if the mutual savings bank subsequently converts to a stock institution and the members do not become stockholders;
    • How the conversion from a credit union to a mutual savings bank will affect members’ voting rights; and
    • Any conversion-related economic benefit a director or senior management official may receive, including receipt of or an increase in compensation and an explanation of any foreseeable stock-related benefits associated with a subsequent conversion to a stock institution.

  • NCUA is concerned that credit unions may not be providing some important conversion-related information effectively to their members, limiting members’ ability to make informed decisions about a conversion. In addition, many credit unions may not be equipped to conduct a proper member vote on conversion. During the comment period for the recent conversion rule amendment, some commenters suggested that NCUA impose more disclosure and other requirements on converting credit unions. At that time, NCUA felt such changes were outside the scope of its proposal. However, NCUA has now determined that it is appropriate to consider such changes as part of a new rulemaking procedure to amend the rule even further to address NCUA’s ongoing concerns about protecting members’ interests in the conversion process.

    • DESCRIPTION OF THE PROPOSAL

    Disclosures

    • In order to prevent members from being overwhelmed by a vast amount of information sent to them connected with the conversion but not unduly limit the communications sent by the converting credit union, the converting credit union must send a short disclosure prepared by NCUA.

    • The disclosure addresses:
      • 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.).

    • CUNA noted in comments to NCUA on the previous amendment to the agency’s conversion rule that it is important to facilitate the ability of members to focus on key information concerning the conversion and not get distracted by other disclosures on materials from the converting credit union. In order that the disclosure does not get buried in the information provided to the membership, a converting credit union must include this disclosure in a prominent place with each written communication it sends to its members regarding the conversion.

    • The converting credit union must take the following specific steps to ensure that the disclosure is conspicuous:
      • The disclosures must be offset from the other text by use of a border.
      • The disclosures must be at least one font size larger than any other text (excluding headings) used in the communication.
      • Certain portions of the disclosures must be capitalized and bolded, as indicated below.

    The National Credit Union Administration, the federal government agency that supervises credit unions, requires [insert name of credit union] to provide the following disclosures.

    1. OWNERSHIP AND CONTROL. In a credit union, every member has an equal vote in the election of directors and other matters concerning ownership and control. In a mutual savings bank, ACCOUNT HOLDERS WITH LARGER BALANCES USUALLY HAVE MORE VOTES AND, THUS, GREATER CONTROL.

    2. EXPENSES AND THEIR EFFECT ON RATES AND SERVICES. Credit union directors and committee members serve on a volunteer basis. Directors of a mutual savings bank are compensated. Credit unions are exempt from federal tax and most state taxes. Mutual savings banks pay taxes, including federal income tax. If [insert name of credit union] converts to a mutual savings bank, these ADDITIONAL EXPENSES MAY CONTRIBUTE TO LOWER SAVINGS RATES, HIGHER LOAN RATES, OR ADDITIONAL FEES FOR SERVICES.

    3. SUBSEQUENT CONVERSION TO STOCK INSTITUTION. Conversion to a mutual savings bank is often the first step in a two-step process to convert to a stock-issuing bank or holding company. In a typical conversion to the stock form of ownership, the EXECUTIVES OF THE INSTITUTION PROFIT BY OBTAINING STOCK FAR IN EXCESS OF THAT AVAILABLE TO THE INSTITUTION'S MEMBERS.

    4. COSTS OF CONVERSION. The costs of converting a credit union to a mutual savings bank are paid from the credit union's current and accumulated earnings. Because accumulated earnings are capital and represent members' ownership interests in a credit union, the conversion costs reduce members' ownership interests. As of [insert date], [insert name of credit union] estimates THE CONVERSION WILL COST [INSERT DOLLAR AMOUNT] IN TOTAL. That total amount is further broken down as follows: [itemize the costs of all expenses related to the conversion including printing fees, postage fees, advertising, consulting and professional fees, legal fees, staff time, the cost of holding a special meeting, conducting the vote, and any other expenses incurred].

    Requirement to Use Secret Ballot 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 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.

    Guidelines for Conducting a Membership Vote

    • NCUA proposes the following 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:
      • A federally insured state-chartered credit union (FISCU) should be careful to understand both federal and state law in order to conduct a proper vote. While NCUA’s rule requires a simple majority of those who vote to approve a conversion, some states have higher voting standards requiring two-thirds or more of those who vote.
      • A converting credit union should be careful to identify all eligible members and make sure they are included on its voting list. A converting credit union should be diligent is maintaining an accurate and complete membership list. Problems can arise when a credit union converts from paper record keeping to computer record keeping and when converting from one computer system to another.
      • A converting credit union should be careful to conduct its special; meeting held for the purpose of voting on the conversion in a manner conductive to accommodating all members who wish to attend. That includes selecting a meeting location that can accommodate the anticipated number of attendees and is conveniently location. The meeting should also be held on a day and time suitable to most members’ schedules.

    • The guidelines are not an exhaustive checklist. A converting credit union should tailor these guidelines in accordance with its particular circumstances.

    Relationship Between State and Federal Law

    • NCUA holds the position that a state legislature or state supervisory authority (SSA) may impose conversion requirements more stringent or restrictive than NCUA’s requirements. This proposal would require a converting FISCU to provide NCUA with information on state law applicable to conversions so NCUA can fulfill it responsibilities to review the methods and procedures of the membership vote.

    • The proposal would require a FISCU 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 (a provision permitting a state credit union to operate with the same or similar authority as a federal credit union) and if its SSA agrees that it may rely on the parity provision for that purpose. If a FISCU relies on a state parity provision, it must indicate its SSA’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.

    QUESTIONS REGARDING THE PROPOSAL

      Meaningful Way for Members to Share Opinions on Conversion

    1. NCUA is also asking for comments on how to provide members with a meaningful way to share their opinions on the conversion and on how to disclose the views and concerns of the credit union’s directors and officers who oppose the conversion. [In CUNA’s comments to NCUA in 2003 regarding an earlier proposal to amend the agency’s conversion rule, CUNA recommended that NCUA require converting credit unions to provide their members with an opportunity to file written comments with the credit union on the conversion before the membership vote and to share such comments with the membership prior to the vote.] How could this be accomplished with minimal regulatory burden?

      Please explain.









      Disclosures

    2. Do you believe that the disclosure prepared by NCUA would enhance the members’ ability to make informed decisions about the conversion?

      Yes ______ No ______

      Are there are additional/other disclosures that should be included in the notice to members?

      Yes ______ No ______

      Please explain.









    3. Are the amount and level of disclosures in the form prepared by NCUA appropriate or overly burdensome for a converting credit union?

      Please explain.









      Secret Ballot and Independent Entity

    4. Would the dual requirements to have secret ballot and hire a third-party teller pose undue burden for converting credit unions?

      Yes ______ No ______

      Please explain.









      Guidelines for Conducting Membership Vote

    5. Do you believe the proposed guidelines would sufficiently assist converting credit unions to more fully understand what they need to do to fulfill their regulatory obligation in terms of conducting the membership vote?

      Yes ______ No ______

      If not, what additional information would be helpful?









      Relationship Between State and Federal Law

    6. Do you agree with the requirements for a converting FISCU to notify NCUA about the law of its state upon which it relies for authority to convert?

      Yes ______ No ______

      Please explain.









      Other









    7. Other comments









    Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
    Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
    Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
    Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com
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