CUNA Regulatory Comment Call
August 11, 2004
Proposal on Mergers and Changes
of Insured Status
(Major Rule)
EXECUTIVE SUMMARY
- The National Credit Union Administration (NCUA) Board has issued a proposed rule on credit union mergers, federal share insurance terminations, and conversions from federal share insurance to nonfederal insurance.
- The proposed rule will:
- Establish communication and disclosure requirements to ensure that members are fully and properly informed before they vote on whether to convert from federal insurance to nonfederal insurance.
- Provide protections to members who may lose federal insurance because they have large accounts at two federally-insured credit unions that are merging or have term accounts at a state-chartered credit union that is converting to nonfederal insurance.
- Require merging credit unions to analyze the premerger requirements imposed on credit unions by the Hart-Scott-Rodino Act and to determine if it is necessary to inform NCUA if there is a need to file, as required under the Act.
- Comments are due by September 27, 2004. Please submit your comments to CUNA by September 15, 2004.
Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.coop and to Assistant General Counsel Jeff Bloch at jbloch@cuna.coop; or mail them to Mary and Jeff in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6732, if you would like a copy of the proposed rule, or you may access it here.
BACKGROUND
The Federal Credit Union Act authorizes the NCUA Board to issue rules regarding mergers of federally-insured credit unions and changes in insured status. The approval of the NCUA Board is required before federally-insured credit unions merge or before a federally-insured credit union terminates federal insurance or converts to nonfederal insurance. As part of NCUA’s continuing process of reviewing all its rules, the Board has decided to issue these amendments regarding mergers of federally-insured credit unions and the voluntary conversion or termination of federal insurance.
BRIEF DESCRIPTION OF THE PROPOSED RULE
Amendment Related to Hart-Scott-Rodino Act
The Hart-Scott-Rodino Act requires certain entities, including credit unions, to file a premerger notification with the Federal Trade Commission (FTC) if they enter into a merger or acquisition. Credit unions need not file if they meet one of the following criteria:
- The merging credit union has less than $50 million in assets.
- The merging credit union has from $50 million to $200 million in assets, and the continuing credit union is below a certain asset size, as established by the FTC.
The proposal will require a credit union with more than $50 million in assets to inform NCUA whether it plans to file with the FTC. Many credit unions of more than $50 million in assets may not be required to file because some of their assets do not count towards the FTC thresholds, which may mean their assets levels fall below $50 million for purposes of FTC filings.
Amendments Related to Share Insurance Disclosure
The Federal Deposit Insurance Act (FDIA) requires financial institutions, including credit unions, that do not have federal deposit or share insurance to disclose that fact and the potential ramifications to their current and potential accountholders. The proposed rule will revise the disclosure requirements in connection with the membership vote required of credit unions seeking to terminate or convert from federal insurance, and it will also require credit unions to acknowledge these provisions of the FDIA and certify that they will comply with them after the termination or conversion.
As part of the membership voting process, the current rules require credit unions to use certain language to disclose to members the effects of insurance termination or conversion. These disclosures will be modified so they are more consistent with the FDIA requirements.
The proposed rule also updates the required form notices, ballots, and certifications. These forms must be used, unless the Regional Director approves the use of alternative forms. Termination forms will no longer be included, since there is no state that currently permits an insured credit union to voluntarily terminate its share insurance.
Other Amendments Related to Insurance Conversions and Terminations
Timing and Sequence of the Approval Process — Currently, the credit union must give notice of an insurance conversion to the NCUA Board either when the membership approval is solicited or after membership approval is obtained. The proposed rule will now require the credit union to notify NCUA and request approval of the insurance conversion before the credit union solicits a member vote.
Right to Redeem Term Share Accounts Without Penalty — The proposal rule will require, as part of the insurance conversion process, to notify members that they may close share certificate and other term accounts without penalty if they are closed prior to the effective date of the conversion. This will not apply in insurance termination situations since federal insurance may continue up to one year after termination, unlike a conversion in which federal insurance ends on the date of the conversion.
Communications to Members
- The proposed rule clarifies that the first written communication following the resolution to convert, made by or on behalf of the credit union and informs the members that the credit union will seek conversion of insurance, is to be considered the notice of the proposal to convert. This notice must be in the prescribed form that is included in the rule. A different form may be used if it is approved by the Regional Director.
- The proposed rule will also impose approval and disclosure requirements on “share
insurance communications,” which are generally defined as written communications from
the credit union, intended to be read by two or more members, and that mentions the
share insurance conversion or termination. Prior approval from the Regional Director
will be required for all “share insurance communications,” including those not
included with notices and ballots. The following disclosure language must also be
included in every “share insurance communication” and must be disclosed in a
conspicuous manner, which means it must be in capital letters, bold, offset from other
text by use of a border, and at least one font size larger than the other text
(excluding headings):
IF YOU ARE A MEMBER OF THIS CREDIT UNION, YOUR ACCOUNTS ARE CURRENTLY INSURED BY THE NATIONAL CREDIT UNION ADMINISTRATION, A FEDERAL AGENCY. THIS INSURANCE IS BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED STATES GOVERNMENT. IF THE CREDIT UNION (CONVERTS TO PRIVATE INSURANCE ) (TERMINATES ITS FEDERAL INSURANCE), AND THE CREDIT UNION FAILS, THE FEDERAL GOVERNMENT DOES NOT GUARANTEE THAT YOU WILL GET YOUR MONEY BACK.
Eligibility for Nonfederal Insurance — In order to receive NCUA approval of the conversion to nonfederal insurance, the proposed rule will require the converting credit union to provide proof that the nonfederal insurer is authorized to issue share insurance in the state in which the credit union is located and that the insurer will insure the credit union.
Voting procedures — The proposed rule will require the vote regarding the change in insurance status to be conducted by secret ballot and administered by an independent entity. An “independent entity” is defined as a company with experience in conducting corporate elections and in which no official or senior manager of the credit union, or their immediate family members, have any ownership interest or is employed by that entity.
Miscellaneous Amendments
- In a merger, certain members may be at a risk of losing insurance coverage if they are members of the two merging credit unions, with large accounts in each one, and they do not make the necessary changes within six months of the merger, as permitted under NCUA rules. The proposed rule will require the continuing credit union to either: 1) notify all members of the continuing credit union of the potential loss of insurance; 2) notify all members of both credit unions of the potential loss of insurance; or 3) determine which members of both credit unions may actually have uninsured funds six months after the merger and notify them of the potential loss of insurance.
- The proposed rule will require the merging credit unions to analyze the net worth of the two credit unions before the merger, as calculated under generally accepted accounting principles (GAAP), and compare those figures with the estimated net worth of the continuing credit union after the merger. Credit unions must conduct this analysis to determine any negative effects on GAAP net worth resulting from the merger.
QUESTIONS TO CONSIDER REGARDING THE PROPOSAL ON MERGERS AND CHANGES OF INSURED STATUS
- Currently, a credit union must give notice of an insurance conversion to the NCUA Board
either when the membership approval is solicited or after membership approval is obtained.
The proposed rule will now require the credit union to notify NCUA and request approval of
the insurance conversion before the credit union solicits a member vote. The proposal will
be consistent with the requirements for mergers. NCUA believes this change is necessary to
avoid confusion when there is a merger that also involves an insurance conversion. Do you
agree?
- The proposal rule will require, as part of the insurance conversion process, to
notify members that they may close share certificate and other term accounts without
penalty if they are closed prior to the effective date of the conversion. Do you
agree that this change is fair to the affected members?
- The proposed rule will also impose approval and disclosure requirements on "share
insurance communications," which are generally defined as written communications from the
credit union, intended to be read by two or more members, and that mentions the share
insurance conversion or termination. Do you agree with this approach that will cover
communications made before, during, and after the board of directors seeks conversion or
termination and includes all forms of communications, such as mail, e-mail, and website
postings?
- The proposed disclosure requirement for share insurance communications requires
conspicuous language highlighting that share insurance is backed by the full faith and
credit of the federal government and that this will no longer apply after the
conversion, which means the federal government will no longer guarantee that members
will receive their money if the credit union fails. Do you believe it is necessary to
provide this disclosure in every share insurance communication?
- The proposed rule will require the vote regarding the change in insurance status
to be conducted by secret ballot and administered by an independent entity. Is this a
necessary requirement to ensure members will be able to vote free of any outside
pressure?
- The proposed rule will require the continuing credit union in a merger to notify members
having large accounts in each of the merging credit unions that they may need to make changes
to their accounts to avoid possible loss of insurance coverage. Do you agree this is
necessary to ensure that these members make the necessary changes?
- Other comments?
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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 |
