[Federal Register: December 28, 2010 (Volume 75, Number 248)]
[Rules and Regulations]
[Page 81378-81395]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28de10-4]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 701, 708a, and 708b
RIN 3133-AD40
Fiduciary Duties at Federal Credit Unions; Mergers and
Conversions of Insured Credit Unions
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: NCUA is issuing final amendments to its regulations covering
several related subjects. The final rule documents and clarifies the
fiduciary duties and responsibilities of Federal credit union (FCU)
directors. The final rule amends NCUA's indemnification regulation
limiting indemnification of FCU officials and employees for liability
arising from improper decisions that affect the fundamental rights of
credit union members, and makes conforming changes to the standard FCU
and corporate credit union bylaws. In addition, the final rule adds new
provisions establishing the procedures for insured credit unions
merging into banks. The final rule also amends some of NCUA's existing
regulatory procedures applicable to insured credit union mergers with
other credit unions, conversions to mutual savings banks (MSBs), and
termination of share insurance.
DATES: This rule is effective January 27, 2011.
FOR FURTHER INFORMATION CONTACT: Paul Peterson, Associate General
Counsel; Elizabeth Wirick, Staff Attorney; or Jacqueline Lussier, Staff
Attorney; Office of General Counsel, at the National Credit Union
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428 or
telephone (703) 518-6540.
SUPPLEMENTARY INFORMATION:
I. Background
On March 18, 2010, the NCUA Board issued a Notice of Proposed
Rulemaking (NPR or Proposal) to amend parts 701, 708a, and 708b of
NCUA's rules. 75 FR 15574 (March 29, 2010).
The Proposal would have:
Added a new Sec. 701.4 clarifying the authorities and
duties of FCU directors in managing the affairs of their credit unions
and revising Sec. 701.33 limiting indemnification of FCU officials and
employees for liability arising from improper decisions that affect the
fundamental rights of credit union members.
Revised the existing provisions of Part 708a on insured
credit union to MSB conversions.
Added a new subpart C to Part 708a setting forth
procedural and substantive requirements for converting an insured
credit union to a bank by merger.
Revised the existing provisions of Part 708b on insured
credit union mergers with other credit unions and the termination of
Federal share insurance.
The public comment period for the NPR closed on May 28, 2010. NCUA
received comments from 40 commenters including ten Federal and State
credit unions, 16 credit union trade organizations (which included 13
State credit union leagues), one State credit union regulators'
association, six law firms, two credit union consultants, an individual
credit union member, an election teller, a private deposit insurer, an
association representing the interests of converting credit union
members, and one bank trade association. The most significant comments
on each part of the Proposal are discussed in the following section-by-
section analysis of the revisions in this final rule.
II. Section-by-Section Analysis
A. Duties of Federal Credit Union Boards of Directors (Sec. 701.4)
The Proposal included a new Sec. 701.4, titled ``General
authorities and duties of Federal credit union boards of directors.''
Sec. 701.4(a) Management of a Federal Credit Union
Proposed paragraph (a) provided that the management of each Federal
credit union is vested in its board of directors, and that while a
Federal credit union board of directors may delegate the execution of
operational functions to Federal credit union personnel, the ultimate
responsibility of each Federal credit union's board of directors for
that Federal credit union's management is non-delegable. The language
of the proposal mirrors the duties of the Federal Home Loan Bank
directors, as expressed in a rule promulgated by the Federal Housing
Finance Agency (FHFA). 12 CFR 917.2(b)(1).
Some commenters stated that NCUA should clarify that while an FCU's
board of directors has the ultimate responsibility for the management
of the credit union, this responsibility does not include day-to-day
management. One commenter said that NCUA should withdraw the language
in the second sentence of proposed paragraph (a) making the board's
ultimate responsibility for the credit union's management non-
delegable. This commenter stated the FCU Act vests the management of
each FCU in the board of directors, but it does not prohibit the board
from delegating the management of the credit union. The commenter
further stated that since an FCU's board is composed primarily of
unpaid volunteers the board of directors should be allowed to delegate
the management to compensated executives. The commenter recommended
NCUA substitute language that the board of directors provides the
general direction for the credit union, which would better reflect the
policy-making role of the board.
The NCUA Board agrees that paragraph (a) should more closely track
the language of section 113 of the FCU Act, which employs the language
``general direction and control.'' Accordingly, the final rule
substitutes ``general direction and control'' for ``management.'' This
amendment clarify that the directors do not actually manage the credit
union. The board of directors, however, may not and cannot delegate its
ultimate statutory responsibility for the proper management of the
credit union.
Sec. 701.4(b) Duties of Federal Credit Union Directors
Proposed paragraph (b) set forth the fiduciary duties of FCU
directors. It charged each director to:
Carry out his or her duties as a director in good faith,
in a manner reasonably believed to be in the best interests of the
membership of the FCU, and with such care, including reasonable
inquiry, as an ordinarily prudent person in a like position would use
under similar circumstances (paragraph (b)(1));
Administer the affairs of the FCU fairly and impartially
and without discrimination in favor of or against any particular member
(paragraph (b)(2));
Understand the FCU's balance sheet and income statement
and ask, as appropriate, substantive questions of management and the
internal and external auditors (paragraph (b)(3)); and
Direct the operations of the FCU in conformity with the
requirements set forth in the Federal Credit Union Act, the NCUA's
regulations, other applicable law, and sound business practices
(paragraph (b)(4)).
[[Page 81379]]
Proposed paragraph (b)(1) stated that the directors have a
fiduciary duty to act in the best interests of credit union members,
particularly in connection with matters affecting the fundamental
rights of members, such as mergers and conversions. A few commenters
objected to the statement in (b)(1) that directors owe fiduciary rights
to members and asserted that because members have little right to the
equity in their credit unions, credit union members resemble customers
of other depository institutions more than shareholders in
corporations. Other commenters stated that the duties of the board of
directors run first to the credit union and not to the members
individually or collectively.
These views are wrong from both a philosophical and legal
standpoint. As stated in the preamble to the NPR, the NCUA Board is
particularly concerned about assertions that the members of a credit
union do not own the credit union, or that the duties of the directors
do not flow to the members but, rather, flow in some amorphous way only
to the institution. A lack of focus on the interests of the members
makes it easier for officials and management to make decisions that
benefit themselves personally, even if those decisions are not
necessarily in the best interests of the membership as a whole.\1\
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\1\ See 75 FR 15574, 15575 (Mar. 29, 2010).
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The Board cannot emphasize enough that the members own an FCU and
that directors of an FCU must consider the interests of the membership
as a whole, and put those interests first, when making decisions that
affect the credit union. Accordingly, the NCUA Board is revising the
final paragraph (b)(1) of Sec. 701.4 of the Proposal to emphasize that
each FCU director must carry out his or her duties in a manner the
director believes to be in the best interests of the membership of the
credit union as a whole.
One commenter was concerned that a focus on the membership as a
whole might keep an FCU from developing new branches or ATMs because
some members would be closer to the new branch or ATM and might find
the new facility more convenient to use than other members. The Board
recognizes that in the short term some members may benefit
geographically from an FCU's expansion plans. Such marginal
geographical benefits, or other marginal access benefits, will not by
themselves cause an FCU expansion to violate the fiduciary duties of an
FCU's Board.
One commenter suggested that there might be a difference between
the short term interests of credit union members and their long term
interests. In the unusual situation where there might be such a
perceived conflict, the board of directors should, as part of its due
diligence, carefully define the perceived conflict, weight the
competing short and long term interests, make a choice based on the
greatest needs of the members, and explain the board's choice. Proposed
paragraph (b)(1) required FCU directors to carry out their duties with
the care an ordinarily prudent person in a like position would use
under similar circumstances. This language was based in part on Model
Business Corporation Act (MBCA) Sec. 8.30, titled ``Standards of
Conduct for Directors.'' Some commenters recommended updating the
italicized phrase to omit the words ``ordinarily prudent'' so as to use
a 1998 change to Sec. 8.30 of the MBCA employing the language ``with
the care that a person in a like position would reasonably believe
appropriate.'' \2\ These commenters believe the words ``ordinarily
prudent'' heighten the risk of litigation.
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\2\ 1 Model Business Corporation Act Annot. xv, 8-187 (4th Ed.,
2008 Supp., 2009 rev.).
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The NCUA Board does not agree with the commenters. The ordinarily
prudent person formulation has been adopted by 41 States while the
newer MBCA language has been adopted by only six States.\3\ In
addition, the proposed language mirrors the current standard applicable
to directors of the Federal Home Loan Banks as set forth in 12 CFR
917.2(b)(1). Accordingly, the final rule retains the traditional
formulation for a director's standard of care--``with the care an
ordinarily prudent person in a like position would use.''
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\3\ Id. at 8-209.
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Proposed paragraph (b)(2) required that the directors administer
the affairs of the Federal credit union fairly and impartially and
without discrimination in favor of or against any particular member.
Proposed paragraph (b)(2) employed the language of the Federal Home
Loan Bank regulation, 12 CFR 917.2(b)(2), and its underlying Federal
Home Loan Bank Act (FHLB Act) statutory provision. 12 U.S.C. 1427(j).
Some commenters expressed a concern that this ``without
discrimination'' language, combined with the general statement of
duties owed to the members in (b)(1), could provide members with a
cause of action and increase the risk of litigation.
The NCUA Board does not agree with these comments. First, as stated
in the preamble of the NPR, this rulemaking does not create a Federal
cause of action in favor of particular individuals or groups of
individuals. 75 FR 15574, 15578 n.11. Second, NCUA's research revealed
no case law holding that there is an implied private right of action
under the equivalent language in the FHLB Act or regulations. In fact,
there is case law to the contrary holding that there is no express or
implied private right of action under Sec. 1427(j) of the FHLB Act.
Fidelity Financial Corp. v. Federal Home Loan Bank of San Francisco,
589 F. Supp. 885, 891, 894 (N. D. Cal. 1983).
Proposed paragraph (b)(3) required each director, at the time of
election or appointment, or within a reasonable time thereafter, not to
exceed three months, have at least a working familiarity with basic
finance and accounting practices, including the ability to read and
understand the FCU's balance sheet and income statement and to ask, as
appropriate, substantive questions of management and the internal and
external auditors.
Many commenters objected to three months as an unreasonably short
period in which to become adequately proficient at understanding
accounting and finance; several suggested substituting 12 months for
three months. Those favoring 12 months stated that many credit union
directors serve on a part-time basis, particularly at small credit
unions, and acquiring proficiency within only three months would be
extraordinarily difficult.
The NCUA Board believes that having a working familiarity with
basic finance and accounting practices is essential to being able to
perform a credit union director's functions. After considering these
comments, however, the Board has decided that directors should be given
more time in which to meet this requirement. Accordingly, this final
rule revises paragraph (b)(3) to provide for a six-month period in
which to gain at least a working familiarity with basic finance and
accounting practices, including the ability to read and understand the
Federal credit union's balance sheet and income statement. As the
preamble to the NPR indicated, there are a multiple of sources of
training in finance and accounting, including training provided by
credit unions, outside sources, or, for small credit unions, NCUA's
Office of Small Credit Union Initiatives. Accordingly, six months
provides ample time for training while ensuring that directors who lack
proper training do not procrastinate in obtaining the necessary
training.
Some commenters asked for clarification about what the phrase as
appropriate meant in the phrase: ``to ask, as appropriate, substantive
questions of management and the
[[Page 81380]]
internal and external auditors.'' The commenters wondered whether it
meant that questions should be tailored to the size and complexity of
the credit union. In fact, the NCUA Board added the as appropriate
language to the proposed rule so directors would not feel they had to
ask questions just for the sake of asking.
Several other commenters objected to the financial literacy
requirement for a variety of reasons. For example, one commenter argued
the Proposal takes away one of the core right of members to elect
directors of their choice, and that requiring a director to be
financially literate or become financially literate within a short
period of time would impose an eligibility requirement in violation of
the FCU Act and the bylaws. Another commenter asserted that the
financial literacy requirement imposes an eligibility requirement in
violation of the FCU Act. This commenter believes any member of a
credit union, so long as he or she is an adult and has not been
convicted of a crime involving dishonesty or breach of trust as
provided for, is eligible to serve as a director, regardless of
financial literacy. 12 U.S.C. 1761(a), 1785(d).
The Board agrees that any member of an FCU who meets the
eligibility requirements of the FCU Act may run for, and serve as, an
FCU director. As a matter of safety and soundness, however, a serving
director does need to become literate within a reasonable period of
time after election or appointment. The level of necessary literacy
depends on the size and complexity of the FCU.
Another commenter stated that the Proposal is vague and subjective
because it provides no definitive measurements for when and how a
director will be considered sufficiently trained in the use of
financial statements and other data. This commenter believes that
without specific and objective standards, it will be left up to the
subjectivity of a given examiner to determine whether directors are in
compliance with this requirement. The NCUA Board disagrees. Again,
directors must obtain financial knowledge commensurate with the size
and complexity of their credit union. The Board also notes there are
multiple ways for resolving disputes between credit unions and their
examiners. See, e.g., Interpretive Ruling and Policy Statement (IRPS)
95-1, as amended by IRPS 02-1.
Proposed paragraph (b)(4) required each director to direct the
operations of the Federal credit union in conformity with the
requirements set forth in the FCU Act, the NCUA's regulations, other
applicable law, and sound business practices. The final rule revises
this section to substitute the phrase ``direct management's
operations'' for ``direct the operations.''
Sec. 701.4(c) Authority Regarding Staff and Outside Consultants
Proposed paragraph (c)(1) stated that the board of directors and
all its committees have authority to retain staff and outside counsel,
independent accountants, financial advisors, and other outside
consultants at the expense of the Federal credit union. Paragraph
(c)(2) states that the board of directors or any committee of the board
may require FCU staff that are providing services to the board or
committee under paragraph (c)(1) report directly to the board or
committee. Paragraph (c)(3) provides that in discharging board or
committee duties, a director who does not have knowledge that makes
reliance unwarranted is entitled to rely on information, opinions,
reports, or statements, including financial statements and other
financial data, prepared or presented by officers or employees of the
FCU, legal counsel, independent accountants, or other experts, and
committees of the board of which the director is not a member.
Some commenters opposed the provision requiring FCU employees
(staff) to report directly to the board of directors or committees of
the board, stating this would undermine management's authority over the
employees of the credit union. Another commenter questioned whether
committees other than the supervisory committee had the authority to
require employees to report directly to the committee. One commenter
argued that direct contact between the board of directors and the
credit union's employees would put employees at the beck and call of
the board and could interfere with the employees' regular duties.
The NCUA Board disagrees. An FCU's board of directors cannot permit
the chief executive officer (CEO) to screen all the board's information
sources. While the board of directors should not attempt to bypass the
CEO in giving direction to management and employees, the board is free
to ask any manager, employee, or independent contractor to provide the
board and its committees information directly and not through the
filter of the CEO. The NCUA's Office of General Counsel has previously
opined that board members must be free to gather information from any
source in the credit union to perform their board duties. OGC Op. No.
03-0763 (Sept. 29, 2003).
Sec. 701.4(d) Reliance
The Proposal instructed FCU directors on the authority and limits
of the director's ability to rely on information provided by others. A
director is generally entitled to rely on information prepared or
presented by employees or consultants whom the director reasonably
believes to be reliable and competent in the functions performed. No
commenters addressed proposed paragraph (d) of Sec. 701.4.
Sec. 701.4 and the Business Judgment Rule
Some commenters asked about the interplay between Sec. 701.4 and
the business judgment rule. One commenter recommended that in the
preamble to a final rule NCUA indicate its policy and intention whether
the business judgment rule applies in actions brought against the
directors of FCUs.
The business judgment rule is a burden of proof issue associated
with particular causes of actions. Since the proposed rule does not
create an express or implied private right of action, a third party
seeking to bring a cause of action must look to State law to establish
the cause of action. It is likely that the existence, and form, of any
business judgment rule would depend on the law of the State under which
the private cause of action would reside. Of course, the business
judgment rule does not apply at all to administrative enforcement
actions brought by NCUA.
Accordingly, and except as described above, the NCUA Board adopts
Sec. 701.4 as proposed.
B. Indemnification (Sec. 701.33)
As stated in the NPR preamble, the NCUA Board desires to ensure
that FCU officials and employees are held personally accountable, where
appropriate, for egregious violations of their fiduciary duties. NCUA
will not permit an FCU to indemnify officials and employees against
liability based on an aggravated breach of the duty of care when such a
breach may affect fundamental rights and financial interests of the FCU
members.
Accordingly, the Proposal included a new paragraph (c)(5) in Sec.
701.33 prohibiting an FCU from indemnifying an official or employee for
personal liability related to any decision made by that individual on a
matter significantly affecting the fundamental rights and interests of
the FCU's members. Such indemnification, however, was limited to
situations in which the decision giving rise to the claim for
indemnification is determined by a court to have constituted gross
[[Page 81381]]
negligence, recklessness, or willful misconduct. Matters affecting the
fundamental rights and interests of FCU members include, charter and
share insurance conversions and terminations.
The Proposal also included corresponding amendments to the
indemnification provisions of the standard bylaws of FCUs and Federal
corporate credit unions. Of the 24 commenters addressing this revision,
most opposed it. Most of those opposed argued that the proposed
provision would have the unintended consequence of discouraging
qualified individuals from serving as directors because of the expanded
potential for personal liability. Others asserted it would disadvantage
the FCU charter as compared to the State charter because FCU directors
would face an even higher burden compared to State chartered CU
directors.
The NCUA Board does not agree with these commenters. The proposed
prohibition on indemnification is limited to the extraordinary
circumstance of a board considering a proposal to change the credit
union's charter or insurance status. Not only are these situations
rare, but the prohibition would only apply in the very limited
circumstance of an aggravated breach of the duty of care as determined
by a court.
Some commenters stated that the proposed rule's silence on the
advancement of expenses would also disadvantage FCUs in attracting
directors. To alleviate this concern, the final rule permits the FCU to
advance funds to pay or reimburse reasonable legal fees and other
professional expenses incurred by the official or employee to assist
the official or employee in resisting lawsuits that the FCU considers
meritless. The decision to advance funds requires the FCU's board of
directors make a good faith determination, after due investigation,
that:
The official or employee acted in good faith and in a
manner he or she believed to be in the best interests of the members;
The payment will not materially adversely affect the
credit union's safety and soundness; and
The official or employee provides a written affirmation of
his or her good faith belief that the relevant standard of conduct in
Sec. 701.4 have been met and a written undertaking to reimburse the
credit union, to the extent not covered by payments from insurance, the
advanced funds if it ultimately decided that the official or employee
is not entitled to indemnification.
The NCUA Board is also adding a new provision to Sec. 701.33
reinforcing that fiduciary duties are owed to the members. Existing
(and unchanged) Sec. 701.33(c)(2) states that indemnification shall be
consistent either with the standards applicable to credit unions
generally under the law of the State where the FCU is located or the
MBCA, as specified by the credit union. The MBCA standard under which a
corporation may indemnify a director requires that the director acted
in good faith and with the reasonable belief that his or her conduct
was in the best interests of the corporation. MBCA Sec. 8.51(a). A
commenter stated that this appears to conflict with the Proposal's
statement that FCU directors' duties are owed to the membership and not
to the credit union per se. The NCUA Board agrees that there is an
apparent conflict and has added a new paragraph (c)(7) to Sec. 701.33
to resolve this conflict. The new (c)(7) states that, the extent an FCU
has chosen to follow State law or the MBCA, the FCU must substitute
``best interests of the members'' for any language in State law or the
MBCA indicating that duties are owed to any persons or entities (such
as the credit union or the corporation) other than the membership as a
whole.
Accordingly, and except as described above, the final rule amends
Sec. 701.33 as proposed.
C. Parts 708a and 708b
The proposed amendments to Parts 708a and 708b revise existing
rules on credit union to mutual savings bank (MSB) conversions and
conversions to nonfederal deposit insurance. The revisions are designed
to better protect the secrecy and integrity of the voting process. The
Proposal also reorganized Part 708a and added a new subpart C to Part
708a that establishes procedural and substantive requirements for
converting a credit union to a bank through a merger.
The preamble to the Proposal included a detailed section-by-section
description and analysis for revised Parts 708a and 708b. 75 FR 15574,
15579-15585 (March 29, 2010). The Board adopted many sections of the
Proposal without change, and the detailed analysis of most of these
sections is not repeated in this preamble.
Credit Union Conversion to MSB, Part 708a, Subpart A
Sec. 708a.101 Definition of Secret Ballot
The Proposal included a new definition of ``secret ballot'' in
Sec. 708a.101 to prohibit credit union employees from helping members
complete ballots or handling completed ballots. One commenter argued
the prohibition would prevent employees from responding to any
questions at all about the election because of the unclear delineation
between answering questions and helping with a ballot. The NCUA Board
disagrees. The definition of ``secret ballot'' prohibits credit union
officials from assisting members in completing ballots or handling
completed ballots. The provision only prohibits an employee from
physically touching a ballot or telling a member which way to vote, and
does not prohibit an employee from answering questions. While one
commenter said the prohibition on employees handling ballots would
create unnecessary difficulties for members, another commenter
suggested the rule should also require the independent entity to empty
the ballot boxes in credit union branches. After considering the
comments, the NCUA Board determined the rule as proposed appropriately
protects the secrecy of members' votes without imposing an undue burden
on credit unions. Accordingly, the final rule adopts the definition as
proposed.
Sec. 708a.101 Definition of ``Conducted by an Independent Entity''
The Proposal added new definitions for ``independent entity'' and
``conducted by an independent entity.'' These definitions describe the
qualifications of, and requirements applicable to, the entity
responsible for tabulating member votes on the conversion proposal. The
new definitions would prohibit the independent entity from providing
any interim vote results to credit union management as well as prohibit
the opening or tallying of ballots during the election period. As
discussed in the Advance Notice of Proposed Rulemaking, NCUA has
documented several instances where credit union management's access to
interim vote tallies raised concerns about the fairness of elections
and the communications to members. 73 FR 5461, 5466 (January 30, 2008).
Several commenters stated the definition of ``conducted by an
independent entity'' as proposed would pose practical challenges. Some
of these commenters said the requirement to delay the counting of
ballots until after the conclusion of the special meeting would make
counting the ballots and certifying the results to NCUA within 10 days
much more difficult. The NCUA Board agrees that the change in procedure
contemplated by the Proposal could make certification within 10 days
[[Page 81382]]
more difficult and has lengthened the period for certification under
section 708a.107 to 14 days. Another commenter, a company that conducts
corporate elections, explained that the usual way the independent
entity determines which members have voted is by opening the ballot and
checking the validity of the control number and matching it with a
member name. This commenter stated that because the independent entity
needs to know which members have voted to produce a list of members who
have not voted, the bar on opening ballots during the election period
would make it much more difficult to produce the list of members who
have yet to vote. The NCUA Board understands the Proposal might require
election tellers and credit unions to modify the envelope format so
that the outside of the envelope would show the ballot control number.
The documented problems with interim vote tallies and the difficulty of
ensuring that election tellers with access to interim tallies do not
share these tallies with credit union management justify requiring
election tellers to change their usual procedures if necessary. NCUA
believes those rare cases where voters might not complete a ballot
correctly, and so be listed as having voted when they did not actually
vote properly, will not affect the fairness of the overall voting
process.
Another of the commenters suggested that the independent entity
should be allowed to tally ballots as they are received, and only
communicating the interim tallies to the credit union should be
prohibited. The Board believes it would be too easy for a teller to
unintentionally communicate the interim voting results to the credit
union.
One commenter who supported the rule as proposed suggested the rule
should also prohibit giving credit union management the names of
members who have not voted, because members opposing the conversion
cannot obtain this information. As an alternative, this commenter
suggested allowing management to provide an election reminder notice to
the independent entity and having the independent entity mail it to
members who have not voted. The Board is not aware of situations where
allowing credit union management to obtain lists of non-voting members
during the election period has compromised the fairness of an election,
and having such lists allows the credit union to conserve resources by
only soliciting those who have not yet voted.
Accordingly, the final rule adopts the definitions of ``independent
entity'' and ``conducted by an independent entity'' as proposed.
Sec. 708a.104 Disclosures
The Proposal also amended the list of disclosures in Sec. 708a.104
(previously Sec. 708a.4) to add disclosures related to the cost of the
conversion, the conversion's effect on the availability of facilities,
and a statement that NCUA neither supports nor endorses the conversion
proposal.
Most commenters were opposed to the requirement to disclose the
costs of the conversion. One opposing commenter asserted that the costs
are irrelevant to members and most of the costs are incurred before
members are notified, while another said any such disclosures would be
only speculation. The NCUA Board disagrees that simply because, as one
commenter alleges, most of the costs have occurred, or, as another
commenter alleges, most of the costs are in the future, that members
will find these costs, or cost estimates, irrelevant. One of the
commenters supporting the cost disclosures also suggested the cost
disclosures should be updated in the mailings to members 60 and 30 days
before the vote, because any attempted opposition to a conversion
proposal causes the credit union to incur additional advertising
expenses to respond to the opposition. This suggestion goes beyond the
scope of the Proposal. The NCUA Board will consider how these cost
disclosure requirements will work in practice before proposing any
additional disclosure requirements.
The Proposal also required the converting credit union to disclose
the projected effect of the conversion on the availability of
facilities, including, at a minimum, the name and location of any
branches, shared branches, and ATM networks to which members may lose
access. Two commenters objected on the grounds it requires too much
precision in advance predictions. The NCUA Board disagrees, as
considering the future availability of facilities is a fundamental part
of planning for the charter conversion transactions to which this
disclosure applies. Moreover, the rule does not require a definitive,
final statement about the availability of facilities--the disclosure
can state a transaction ``could'' result in the loss of certain
facilities, for example.
The Proposal required the disclosure to include the statement that
``NCUA does not approve or disapprove of the conversion proposal or the
reasons advanced in support of the proposal.'' Most commenters did not
oppose this disclosure, although several suggested slight amendments.
One commenter suggested either deleting the phrase ``or the reasons
advanced in support of the proposal'' or revising the phrase to read
``or the reasons in support of or against the proposal.'' The NCUA
Board agrees that adding the language ``or against'' is a helpful
clarification of NCUA's neutrality in the final rule and has made this
change. A commenter also suggested including this disclosure on the
member-to-member communication as well, but this suggestion goes beyond
the scope of the Proposal and the Board declines to adopt it.
Except as described above, the final rule adopts Sec. 708a.104 as
proposed.
Sec. 708a.113 Recommendation Against Using Credit Union Staff To
Solicit Member Votes
The Proposal added a new paragraph to the voting guidelines
section, Sec. 708a.113 (previously Sec. 708a.13), recommending
against the use of credit union employees to solicit member votes.
Although most commenters opposed this guidance, the opposing commenters
tended to mischaracterize it as a requirement. The voting guidelines,
including the recommendation to not use staff to solicit member votes,
do not impose mandatory requirements, but simply suggest how credit
unions can ensure an election is conducted fairly and in a manner that
does not jeopardize the operations and condition of the converting
credit union. NCUA may in the future propose a requirement that
converting credit unions to use an independent third party to solicit
votes rather than diverting credit union employees from their usual
duties. In this final rule, NCUA strongly encourages credit unions to
use an independent third party if soliciting votes.
Accordingly, the final rule adopts the revisions to Sec. 708a.113
as proposed, with minor revisions to highlight NCUA's recommendation
against using credit union employees to solicit votes.
Credit Union-Into-Bank Merger, Part 708a, Subpart C
The Proposal included a new subpart C to Part 708a regulating
mergers of credit unions into banks. The majority of commenters on
these provisions generally supported the concept of regulating these
types of transactions, and several commenters noted that these
provisions fill a gap in current regulations. Specific comments
addressed to certain provisions of subpart C are discussed below.
Sec. 708a.303(a) Merger Valuation
Sec. 708a.303(a) requires a credit union's board of directors,
when looking to
[[Page 81383]]
merge into a bank, to determine the merger value of the credit union
either by conducting an auction or retaining a ``qualified appraisal
entity'' to estimate the merger value of the credit union before
directors select a bank merger partner and vote on a proposal to merge.
A qualified appraisal entity must have no past financial relationship
with the merging credit union, the continuing bank, or any law firm
representing the credit union or the bank in connection with the
merger.
Proposed Sec. 708a.304 requires the credit union to disclose its
merger value, and whether any merger payment will be made to members,
to NCUA. This section also requires the notice to NCUA to include all
information the credit union relied on in making the selection of a
merger partner and, if the payment to members is less than the merger
value, an explanation of why the merger and the merger partner selected
are in the best interests of the members. The Regional Director must
disapprove a proposed merger where the merger payment is less than the
merger valuation, unless members receive some additional, quantifiable
benefit.
Commenters on the merger value provisions were equally divided.
Opposing commenters found the merger value requirement too onerous,
costly, or beyond NCUA's authority. The NCUA Board disagrees with these
latter commenters. In a transaction that fundamentally changes the
nature of the credit union and its members' ownership, knowing the
value of the credit union is critical to the members' decision on
approving the merger proposal. This valuation is also critical to
NCUA's ability to make the statutorily required determination of
whether a proposed merger meets the ``convenience and needs of the
members.'' 12 U.S.C. 1785(c)(5). While the merger valuation requirement
may entail addition procedures, analysis, and costs for the credit
union proposing the transaction, knowing the merger value, and whether
members are receiving compensation for this value, outweighs
institutions' concerns about additional procedures.
Some supporting commenters suggested revisions to the merger
valuation process. A few would expand the requisite analysis to include
intangible items such as the value of the relationship between the
members and the credit union and would exclude the value of benefits a
credit union member could get simply by becoming a bank customer in
addition to a credit union member. The NCUA Board has not modified the
rule as suggested by these commenters. The NCUA Board will examine how
the merger valuation provision works in future practice before making
adjustments to the procedure.
Finally, one commenter suggested that a ``qualified appraisal
entity'' under this provision should not only have no past relationship
with the continuing bank or the merging credit union and any law firm
representing either institution, but also no past relationship with the
bank's affiliates or holding company. The NCUA Board agrees that to be
a qualified appraisal entity, the entity must also have no past
relationship with a bank's owners, affiliates, or holding companies,
and the final rule reflects this.
Sec. 708a.304(g) Regional Director Approval
Proposed paragraph 708a.304(g) required the Regional Director to
review the merging credit union's Notice of Intent to Merge and Request
for Approval (NIMRA) and either disapprove the NIMRA or authorize the
credit union to proceed to the member vote. Section 708a.308 requires
the Regional Director to review the methods and procedures of the
membership vote and approve or disapprove the merger. Several
commenters expressed concerns about the amount of discretion given to
the Regional Directors in these reviews, with some suggesting these
reviews exceed the scope of NCUA's authority.
The NCUA Board does not share these concerns, and the final rule
retains the proposed delegations. The authority and discretion the NCUA
Board gives to Regional Directors under this provision is entirely in
keeping with the role assigned to the NCUA Board and the NCUA Board's
authority to delegate duties to staff under the FCU Act. The FCU Act
requires the NCUA Board to assure that a Federally insured credit
union's merger with another type of financial institution, among other
requirements, meets the ``convenience and needs of the members.'' 12
U.S.C. 1785(c)(5). The FCU Act also permits the NCUA Board to delegate
any of its responsibilities to staff. 12 U.S.C. 1766(d). As part of its
statutorily required assessment of whether a proposed transaction meets
the convenience and needs of the members, the NCUA Board is delegating
to the Regional Director the determination of whether the notice of a
proposal to merge and the methods and procedures used to conduct the
member vote were adequate.
Sec. 708a.305 Disclosures
Proposed Sec. 708a.305 includes required disclosures to credit
union members for credit union-to-bank mergers similar to those
required for credit union-to-bank conversions. Comments were evenly
split between support of and opposition to the disclosures.
One commenter recommended a change to Sec. 708a.305(d)(2), which
says a member ``could'' lose all ownership interests if the bank
converts to a stock bank and members do not purchase stock. This
commenter recommended replacing the word ``could'' with ``will,''
because the fact that a member needs to re-purchase the ownership
interest indicates the member no longer has it. Conversely, an opposing
commenter stated the member rights disclosures ignore the rights of MSB
members to subscribe to the initial stock offering. While the NCUA
Board agrees with the first commenter that a former credit union member
will lose ownership interests if the MSB later converts to a stock bank
and the MSB member does not subscribe to the stock offering, the final
rule retains the word ``could'' because a total loss of ownership
interests is dependent on the MSB converting to a stock bank. The NCUA
Board does not agree the disclosure ignores MSB members' rights to
subscribe to the initial stock offering, since the disclosure
explicitly mentions the possibility that the MSB member may purchase
stock.
Sec. 708a.306 Participation Requirement
Proposed Sec. 708a.306 requires that at least 20 percent of
members participate in the vote on merging with a bank. One commenter
deemed 20 percent too low, since it would allow a merger with a bank
with only 10 percent of the credit union members voting affirmatively.
Another commenter deemed 20 percent too burdensome and opined the
expenses of recruiting members to vote would drive down the value of
the credit union to the potential merger partner. The final rule
retains the 20 percent participation requirement. This requirement is
identical to the participation requirement for converting from Federal
deposit insurance under the FCU Act. 12 U.S.C. 1786(d)(2).
As discussed above, the final part 708a, Subpart A (for credit
union conversions to MSBs) contained modified definitions of
``independent entity'' and ``conducted by an independent entity.'' This
final part 708a, Subpart C (for credit union mergers into banks)
contains similar modifications.
Accordingly, and except as described above, the final rule adopts
the new part 708a, subpart C as proposed.
[[Page 81384]]
Credit Union-into-Credit Union Merger, Part 708b, Subpart A
Subpart A of Part 708b regulates credit union-to-credit union
mergers and termination of NCUSIF insurance. As discussed below, the
Proposal required merging credit unions disclose and explain, in
certain mergers, the factors used to determine whether a share
adjustment will be paid to members of the merging credit union. The
Proposal also required additional disclosures to members and to NCUA
regarding compensation increases to key credit union staff and
officials. 708b.103(a)((5) Disclosures related to share adjustments.
Proposed paragraph 708b.103(a)(5) expanded on the existing
requirement in Sec. 708b.103 for merging credit unions to state the
amount of any share adjustment in the summary of the merger plan given
to members. The Proposal required, where the net worth ratio of the
merging credit union exceeds the net worth ratio of the continuing
credit union by more than 500 basis points, an explanation of the
factors used in establishing the amount of any proposed adjustment or
in determining no adjustment is necessary. Contrary to some commenters'
interpretations, the Proposal did not require payment of a share
adjustment.
Several commenters argued these disclosures were unnecessary and
would discourage mergers or disputed that members of a merging credit
union are entitled to the net worth of a merging credit union. The NCUA
Board disagrees. As discussed in the preamble to the Proposal, in many
cases a merger involves a smaller credit union with limited services
and a high net worth ratio (NWR) seeking to merge with a much larger
credit union with more services but a lower NWR. 75 FR 15574, 15584
(March 29, 2010). The higher NWR of the merging credit union includes
retained earnings that could have been spent, but were not spent, on
additional product offerings or more favorable rates. Because, in these
situations, the members of the merging credit union have paid for the
higher NWR with reduced services or less favorable rates, the NCUA
Board believes that where a NWR disparity exists, the members of the
merging credit union need to know how any merger dividend, if a merger
dividend is offered, was calculated. Accordingly, the final rule adopts
paragraph (a)(5) as proposed.
Secs. 708b.103 and 708b.106 Disclosures Related to Compensation
Increases Resulting From the Merger
The Proposal amended Sec. Sec. 708b.103 and 708b.106 to require
disclosure to NCUA and to credit union members of any ``merger-related
financial arrangement,'' defined to include any increase in direct or
indirect compensation to board members or senior management officials
that exceeds the greater of 15% or $10,000. Half of the comments on
this provision supported the general concept of increased disclosure in
this area. Most opposing commenters suggested a higher threshold for
compensation increases that would trigger disclosures, and several
found the $10,000 trigger too low for larger credit unions. The NCUA
Board reiterates that the threshold for requiring disclosure is a
compensation increase that exceeds the greater of 15% or $10,000.
Accordingly, for officials with higher salaries, the threshold for
disclosure would be compensation increases of more than 15%. The
Proposal required disclosures only for compensation increases above
certain thresholds and thus balances any privacy interests of the
employees with the interests of members in knowing when material
financial incentives have been proposed to directors and senior
management officials.
Several commenters also suggested this disclosure was unnecessary
because it would be included in Internal Revenue Service filings and,
for FCU members, accessible under NCUA's regulation on access to books
and records. The NCUA Board disagrees that these alternate means of
accessing compensation information are adequate for the purposes of a
member vote on a merger, because information from these sources is
unlikely to be available to members during the voting period. The NCUA
Board believes members should know whether credit union directors or
senior management officials stand to gain financially from a merger
before voting on the merger proposal. Accordingly, the final rule
adopts these disclosure changes as proposed.
Share Insurance Conversions, Part 708b, Subpart B
Subpart B of Part 708b regulates share insurance conversions. The
proposed changes to Part 708b include the prohibition on interim vote
tallies and the ban on employees assisting with or handling ballots in
transactions resulting in the termination of NCUSIF share insurance.
The commenters' chief concern about the practical effects of the
Proposal--that the prohibition on opening ballots in the definition of
``conducted by an independent entity'' would make it difficult to
ascertain which members had voted--was the same as the concern
expressed in the context of credit union-to-bank conversions.
Commenters on this section also noted that for conversions from Federal
deposit insurance the FCU Act requires 20% of credit union members to
vote. 12 U.S.C. 1786(d)(2). The 20% quorum requirement, commenters
said, makes it especially important that the credit union proposing the
insurance conversion knows how many members have voted, and also more
difficult to count the ballots and certify the results within 10 days
after the election because a higher proportion of members must vote. As
discussed above, the NCUA Board sees no reason why the election teller
cannot modify the ballot envelope to allow the election teller to
produce a list of members who have voted, and thus a list of those who
have not yet voted, and so the Board has not changed the proposed
definition. Also as discussed above, the Board is extending the
deadline for certifying the election results from 10 days to 14 days
after the close of the voting period to allow the teller more time for
counting the ballots.
Several commenters opined that applying the ban on interim vote
tallies to insurance conversions was unnecessary because the concerns
NCUA has documented with previous elections occurred in the context of
charter conversions rather than insurance conversions. The NCUA Board
disagrees. The same potential for problems exists with any election
where credit union officials have access to interim voting tallies, so
the NCUA Board has prohibited credit union officials from obtaining
interim vote tallies on all transactions affecting a credit union's
charter or insurance status. Other commenters suggested NCUA's
requirements in this area impermissibly preempt State law. Again, the
NCUA Board disagrees, because the FCU Act explicitly gives the NCUA
authority to regulate conversion from Federal deposit insurance. 12
U.S.C. 1785(b)(1)(D).
Accordingly, and except as described above, the final rule adopts
the proposed changes to Subpart B of Sec. 708b.
[[Page 81385]]
III. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact a proposed rule may have on
a substantial number of small credit unions (those under ten million
dollars in assets). Only a few credit unions convert in a given year.
Accordingly, the NCUA Board certifies that this final rule will not
have a significant economic impact on a substantial number of small
credit unions, and, therefore, a regulatory flexibility analysis is not
required.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency by rule creates a new paperwork burden on regulated
entities or modifies an existing burden. 44 U.S.C. 3507(d). For
purposes of the PRA, a paperwork burden may take the form of either a
reporting or a recordkeeping requirement, both referred to as
information collections. NCUA identified and described several
information collection requirements in the proposed rule. As required
by the PRA, NCUA submitted a copy of the proposed regulation to the
Office of Management and Budget (OMB) for its review and approval and
invited comment on the PRA aspects.
While NCUA received comments on the proposed rule, no commenters
specifically addressed the agency's estimates of burden hours or costs
as set out in the preamble to the Proposal. Accordingly, NCUA
anticipates that OMB will approve NCUA's submission.
C. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on State and local interests. In
adherence to fundamental federalism principles, NCUA, an independent
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies
with the executive order.
This final rule will not have substantial direct effects on the
States, on the connection between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government. NCUA has determined that this rule does
not constitute a policy that has federalism implications for purposes
of the executive order.
D. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
NCUA has determined that this rule will not affect family well-
being within the meaning of section 654 of the Treasury and General
Government Appropriations Act, 1999, Public Law 105-277, 112 Stat. 2681
(1998).
E. Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Act of 1996 (Pub. L. 104-
121) (SBREFA) provides generally for congressional review of agency
rules. A reporting requirement is triggered in instances where NCUA
issues a final rule as defined by section 551 of the Administrative
Procedure Act. 5 U.S.C. 551. The Office of Management and Budget's
determination about whether this rule is a major rule for purposes of
SBREFA is pending.
List of Subjects
12 CFR Part 701
Credit unions, Loans.
12 CFR Part 708a
Charter conversions, Credit unions, Mergers of credit unions.
12 CFR Part 708b
Credit unions, Mergers of credit unions, Reporting and
recordkeeping requirements.
By the National Credit Union Administration Board on December
16, 2010.
Mary F. Rupp,
Secretary of the Board.
0
For the reasons stated in the preamble, the National Credit Union
Administration amends 12 CFR parts 701, 708a, and 708b as follows:
PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS
0
1. The authority citation for part 701 continues to read as follows:
Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759,
1761a, 1761b, 1766, 1767, 1782, 1784, 1786, 1787, and 1789. Section
701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 is also
authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3619.
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.
0
2. Add a new Sec. 701.4 to read as follows:
Sec. 701.4 General authorities and duties of Federal credit union
directors.
(a) General direction and control of a Federal credit union. The
board of directors is responsible for the general direction and control
of the affairs of each Federal credit union. While a Federal credit
union board of directors may delegate the execution of operational
functions to Federal credit union personnel, the ultimate
responsibility of each Federal credit union's board of directors for
that Federal credit union's direction and control is non-delegable.
(b) Duties of Federal credit union directors. Each Federal credit
union director has the duty to:
(1) Carry out his or her duties as a director in good faith, in a
manner such director reasonably believes to be in the best interests of
the membership of the Federal credit union as a whole, and with the
care, including reasonable inquiry, as an ordinarily prudent person in
a like position would use under similar circumstances;
(2) Administer the affairs of the Federal credit union fairly and
impartially and without discrimination in favor of or against any
particular member;
(3) At the time of election or appointment, or within a reasonable
time thereafter, not to exceed six months, have at least a working
familiarity with basic finance and accounting practices, including the
ability to read and understand the Federal credit union's balance sheet
and income statement and to ask, as appropriate, substantive questions
of management and the internal and external auditors; and
(4) Direct management's operations of the Federal credit union in
conformity with the requirements set forth in the Federal Credit Union
Act, this chapter, other applicable law, and sound business practices.
(c) Authority regarding staff and outside consultants. (1) In
carrying out its duties and responsibilities, each Federal credit
union's board of directors and all its committees have authority to
retain staff and outside counsel, independent accountants, financial
advisors, and other outside consultants at the expense of the Federal
credit union.
(2) Federal credit union staff providing services to the board of
directors or any committee of the board under paragraph (c)(1) of this
section may be required by the board of directors or such committee to
report directly to the board or such committee, as appropriate.
(3) In discharging board or committee duties a director who does
not have knowledge that makes reliance unwarranted is entitled to rely
on information, opinions, reports or
[[Page 81386]]
statements, including financial statements and other financial data,
prepared or presented by any of the persons specified in paragraph (d).
(d) Reliance. A director may rely on:
(1) One or more officers or employees of the Federal credit union
who the director reasonably believes to be reliable and competent in
the functions performed or the information, opinions, reports or
statements provided;
(2) Legal counsel, independent public accountants, or other persons
retained by the Federal credit union as to matters involving skills or
expertise the director reasonably believes are matters:
(i) Within the particular person's professional or expert
competence, and
(ii) As to which the particular person merits confidence; and
(3) A committee of the board of directors of which the director is
not a member if the director reasonably believes the committee merits
confidence.
0
3. Add paragraphs (c)(5) through (7) to Sec. 701.33 to read as
follows:
Sec. 701.33 Reimbursement, insurance, and indemnification of
officials and employees.
* * * * *
(c) * * *
(5) Notwithstanding paragraphs (c)(1) through (3) of this section,
a Federal credit union may not indemnify an official or employee for
personal liability related to any decision made by that individual on a
matter significantly affecting the fundamental rights and interests of
the Federal credit union's members where the decision giving rise to
the claim for indemnification is determined by a court to have
constituted gross negligence, recklessness, or willful misconduct.
Matters affecting the fundamental rights and interests of Federal
credit union members include charter and share insurance conversions
and terminations.
(6) A Federal credit union may, before final disposition of a
proceeding referred to in paragraph (c)(5) of this section, advance
funds to pay for or reimburse the expenses, including legal fees,
reasonably incurred in connection with the proceeding by an official or
employee who is a party to the proceeding because that individual is or
was an official or employee of the credit union if:
(i) The disinterested members of the credit union's board of
directors (or in the event there are fewer than two disinterested
directors, the supervisory committee), in good faith, determine in
writing after due investigation and consideration that the official or
employee acted in good faith and in a manner he or she reasonably
believed to be in the best interests of the credit union's members;
(ii) The disinterested members of the credit union's board of
directors (or the supervisory committee, as the case may be), in good
faith, determine in writing after due investigation and consideration
that the payment or reimbursement of the expenses will not materially
adversely affect the credit union's safety and soundness; and
(iii) The official or employee provides:
(A) A written affirmation of the individual's reasonable good faith
belief that the relevant standard of conduct described in Sec.
701.4(b) of this chapter has been met by the individual; and
(B) A written undertaking to repay the credit union for any funds
advanced or reimbursed, to the extent not covered by payments from
insurance, if the official or employee is not entitled to
indemnification under paragraph (c)(5) of this section.
(7) To the extent a Federal credit union has elected to follow
State law or the Model Business Corporation Act in accordance with
paragraph (c)(2) of this section, the credit union must substitute the
phrase ``in the best interests of the members'' for any language
indicating that fiduciary duties are owed to persons or entities other
than the members of the credit union, including, but not limited to,
language such as ``in the best interests of the credit union'' or ``in
the best interests of the corporation.''
0
4. Section 8 of Article XVI of appendix A to part 701 is revised to
read as follows:
Appendix A to Part 701--Federal Credit Union Bylaws
* * * * *
Article XVI. General
* * * * *
Section 8. Indemnification. (a) Subject to the limitations in
Sec. 701.33(c)(5) through (c)(7) of the regulations, the credit
union may elect to indemnify to the extent authorized by (check one)
[ ] Law of the State of --------:
[ ] Model Business Corporation Act:
the following individuals from any liability asserted against them
and expenses reasonably incurred by them in connection with judicial
or administrative proceedings to which they are or may become
parties by reason of the performance of their official duties (check
as appropriate).
[ ] Current officials
[ ] Former officials
[ ] Current employees
[ ] Former employees
(b) The credit union may purchase and maintain insurance on
behalf of the individuals indicated in (a) above against any
liability asserted against them and expenses reasonably incurred by
them in their official capacities and arising out of the performance
of their official duties to the extent such insurance is permitted
by the applicable State law or the Model Business Corporation Act.
(c) The term ``official'' in this bylaw means a person who is a
member of the board of directors, credit committee, supervisory
committee, other volunteer committee (including elected or appointed
loan officers or membership officers), established by the board of
directors.
* * * * *
PART 708a--BANK CONVERSIONS AND MERGERS
0
5-6. Revise the authority citation for part 708a to read as follows:
Authority: 12 U.S.C. 1766, 1785(b), and 1785(c).
0
7. Revise the heading for part 708a to read as set forth above:
Sec. Sec. 708a.1 through 708a.13 [Redesignated as Sec. Sec. 708a.101
through 708a.113]
0
8a. Redesignate Sec. Sec. 708a.1 through 708a.13 as Sec. Sec.
708a.101 through 708a.113, respectively.
Subpart A--Conversion of Insured Credit Unions to Mutual Savings
Banks
0
8b. Add a new subpart A, consisting of newly redesignated Sec. Sec.
708a.101 through 708a.113 with the heading as shown above:
0
9. Revise Sec. 708a.101 by adding definitions of ``conducted by an
independent entity,'' ``independent entity,'' and ``secret ballot'' to
read as follows:
Sec. 708a.101 Definitions.
* * * * *
Conducted by an independent entity means:
(1) The independent entity will receive the ballots directly from
voting members.
(2) After the conclusion of the special meeting that ends the
ballot period, the independent entity will open all the ballots in its
possession and tabulate the results. The entity must not open or
tabulate any ballots before the conclusion of the special meeting.
(3) The independent entity will certify the final vote tally in
writing to the credit union and provide a copy to the NCUA Regional
Director. The certification will include, at a minimum, the number of
members who voted, the number of affirmative votes, and the number of
negative votes. During the course of the voting period the independent
entity may provide the credit union with the names of members who have
not yet voted, but may not provide any voting results to the credit
[[Page 81387]]
union prior to certifying the final vote tally.
* * * * *
Independent entity means a company with experience in conducting
corporate elections. No official or senior management official of the
credit union, or the immediate family member of any official or senior
management official, may have any ownership interest in, or be employed
by, the entity.
* * * * *
Secret ballot means no credit union employee or official can
determine how a particular member voted. Credit union employees and
officials are prohibited from assisting members in completing ballots
or handling completed ballots.
* * * * *
0
10-11. Amend Sec. 708a.104 as follows:
0
a. In paragraph (b)(4)(i), add the word ``of'' after the word ``Plan''.
0
b. Revise paragraphs (c)(4) and (5), and add new paragraphs (c)(6),
(7), and (8).
0
c. In paragraph (f)(2), add the phrase ``to a Bank'' after the word
``Conversion'' in the last sentence.
The revisions and additions read as follows:
Sec. 708a.104 Disclosures and communications to members.
* * * * *
(c) * * *
(4) An affirmative statement that, at the time of conversion to a
mutual savings bank, the credit union does or does not intend to
convert to a stock institution or a mutual holding company structure;
(5) A clear and conspicuous disclosure of the estimated, itemized
cost of the proposed conversion, including printing fees, postage fees,
advertising, consulting and professional fees, legal fees, staff time,
the cost of holding a special meeting, other costs of conducting the
vote, and any other conversion-related expenses;
(6) A clear and conspicuous disclosure of how the conversion from a
credit union to a mutual savings bank will affect the institution's
ability to make non-housing-related consumer loans because of a mutual
savings bank's obligations to satisfy certain lending requirements as a
mutual savings bank. This disclosure should specify possible reductions
in some kinds of loans to members;
(7) A clear and conspicuous disclosure that the National Credit
Union Administration does not approve or disapprove of the conversion
proposal or the reasons advanced in support of and the reasons against
the proposal; and
(8) A clear and conspicuous disclosure of how the conversion from a
credit union to a mutual savings bank is likely to affect the
availability of facilities and services. At a minimum, this disclosure
should include the name and location of any branches, including shared
branches, and automatic teller networks, to which members may lose
access as a result of the conversion. This disclosure must be based on
research and analysis completed before the date the board of directors
votes to adopt the conversion proposal.
* * * * *
0
12. Amend Sec. 708a.107 by revising paragraph (a) and adding paragraph
(c) to read as follows:
Sec. 708a.107 Certification of vote on conversion proposal.
(a) The board of directors of the converting credit union must
certify the results of the membership vote to the Regional Director
within 14 calendar days after the vote is taken.
* * * * *
(c) The certification must be accompanied by copies of all
correspondence between the credit union and any Federal banking agency
whose approval is required for the conversion.
0
13. Amend Sec. 708a.113 by adding paragraph (e) to read as follows:
Sec. 708a.113 Voting guidelines.
* * * * *
(e) Solicitation of votes. Some credit unions may wish to contact
members who have not voted and encourage them to vote on the conversion
proposal. NCUA believes, however, that using credit union employees to
solicit votes is problematic. Employees directed to solicit votes could
easily neglect everyday duties critical to the credit union's safe and
sound operation. Also, employees may very well feel pressured to
solicit votes for the conversion, regardless of whether or not they
support the conversion. Accordingly, NCUA strongly encourages
converting credit unions to use an independent third party to solicit
votes rather than diverting credit union employees from their usual
duties.
Subpart B--[Reserved]
0
14a. Add a reserved subpart B.
0
14b. Add subpart C to part 708a to read as follows:
Subpart C--Merger of Insured Credit Unions Into Banks
Sec.
708a.301 Definitions.
708a.302 Authority to merge.
708a.303 Board of directors' approval and members' opportunity to
comment.
708a.304 Notice to NCUA and request to proceed with member vote.
708a.305 Disclosures and communications to members.
708a.306 Membership approval of a proposal to merge.
708a.307 Certification of vote on merger proposal.
708a.308 NCUA approval of the merger.
708a.309 Completion of merger.
708a.310 Limits on compensation of officials.
708a.311 Voting incentives.
708a.312 Voting guidelines.
Subpart C--Merger of Insured Credit Unions Into Banks
Sec. 708a.301 Definitions.
As used in this part:
Bank has the same meaning as in section 3(a) of the Federal Deposit
Insurance Act, 12 U.S.C. 1813(a).
Clear and conspicuous means text in bold type in a font size at
least one size larger than any other text used in the document
(exclusive of headings), but in no event smaller than 12 point.
Conducted by an independent entity means:
(1) The independent entity will receive the ballots directly from
voting members.
(2) After the conclusion of the special meeting that ends the
ballot period, the independent entity will open all the ballots in its
possession and tabulate the results. The entity must not open or
tabulate any ballots before the conclusion of the special meeting.
(3) The independent entity will certify the final vote tally in
writing to the credit union and provide a copy to the NCUA Regional
Director. The certification will include, at a minimum, the number of
members who voted, the number of affirmative votes, and the number of
negative votes. During the course of the voting period the independent
entity may provide the credit union with the names of members who have
not yet voted, but may not provide any voting results to the credit
union prior to certifying the final vote tally.
Credit union has the same meaning as insured credit union in
section 101 of the Federal Credit Union Act.
Distribution formula is the formula the bank will use to determine
each member's portion of that payment to be received upon completion of
the merger.
Federal banking agencies have the same meaning as in section 3 of
the Federal Deposit Insurance Act.
Merger means any transaction in which a credit union transfers all,
or substantially all, of its assets to a bank. The term merger includes
any purported conversion of a credit union to a bank
[[Page 81388]]
if the purported conversion is conducted pursuant to an agreement
between a preexisting bank and the credit union that provides--
(1) The credit union will not conduct business as a stand-alone
bank, and
(2) The purported conversion will be followed by the transfer of
all, or substantially all, of the credit union's assets to the
preexisting bank.
Merger value or merger valuation is the amount that a stock bank
would pay in an arm's-length transaction to purchase the credit union's
assets and assume its liabilities and shares (deposits).
Qualified appraisal entity means entity that has significant
experience in the valuation of depository institutions and that has no
past financial relationship with the merging credit union; the
continuing bank, the continuing bank's owners, affiliates, or holding
companies; or any law firm representing the credit union or the bank in
connection with the merger.
Regional director means the director of the NCUA regional office
for the region where a natural person credit union's main office is
located. For corporate credit unions, regional director means the
director of NCUA's Office of Corporate Credit Unions.
Secret ballot means no credit union employee or official can
determine how a particular member voted. Credit union employees and
officials are prohibited from assisting members in completing ballots
or handling completed ballots.
Senior management official means a chief executive officer, an
assistant chief executive officer, a chief financial officer, and any
other senior executive officer as defined by the appropriate Federal
banking agencies pursuant to section 32(f) of the Federal Deposit
Insurance Act.
Sec. 708a.302 Authority to merge.
A credit union, with the approval of its members, may merge into a
bank only with the prior approval of NCUA, the Federal Deposit
Insurance Corporation, and the regulator of the bank. If the credit
union is State chartered, it also needs the prior approval of its State
regulator.
Sec. 708a.303 Board of directors' approval and members' opportunity
to comment.
(a) Merger valuation. Before selecting a bank merger partner and
voting on a proposal to merge, a credit union's board of directors must
determine, as part of its due diligence, the merger value of the credit
union. In making its determination of the merger value of the credit
union, the credit union must either:
(1) Conduct a well-publicized merger auction and obtain purchase
quotations from at least three banks, two or more of which must be
stock banks; or
(2) Retain a qualified appraisal entity to analyze and estimate the
merger value of the credit union.
(b) Advance notice. A credit union that does not conduct a public
auction as described in paragraph (a)(1) of this section must comply
with the following notice requirements before voting on a proposal to
merge.
(1) No later than 30 days before a board of directors votes on a
proposal to merge, it must publish a notice in a general circulation
newspaper, or in multiple newspapers if necessary, serving all areas
where the credit union has an office, branch, or service center. It
must also post the notice in a clear and conspicuous fashion in the
lobby of the credit union's home office and branch offices and on the
credit union's Web site, if it has one. If the notice is not on the
home page of the Web site, the home page must have a clear and
conspicuous link, visible on a standard monitor without scrolling, to
the notice.
(2) The public notice must include the following:
(i) The name and address of the credit union;
(ii) The name and type of institution into which the credit union's
board is considering a proposal to merge;
(iii) A brief statement of why the board is considering the merger
and the major positive and negative effects of the proposed merger;
(iv) A statement that directs members to submit any comments on the
proposal to the credit union's board of directors by regular mail,
electronic mail, or facsimile;
(v) The date on which the board plans to vote on the proposal and
the date by which members must submit their comments for consideration;
which submission date may not be more than 5 days before the board
vote;
(vi) The street address, electronic mail address, and facsimile
number of the credit union where members may submit comments; and
(vii) A statement that, in the event the board approves the
proposal to merge, the proposal will be submitted to the membership of
the credit union for a vote following a notice period that is no
shorter than 90 days.
(3) The board of directors must approve publication of the notice.
(c) Member comments. A credit union must collect and review any
member comments about the merger received during the merger process.
The credit union must retain the comments until the merger is
consummated.
(d) Approval of proposal to merge. The merger proposal may only be
approved by an affirmative vote of a majority of board members who have
determined:
(1) A merger with a bank is in the best interests of the members,
and
(2) The merger partner selected by the directors is the best choice
for the members, taking into account the merger value of the credit
union and the amount that the selected merger partner is willing to pay
the credit union's members to effect the merger.
Sec. 708a.304 Notice to NCUA and request to proceed with member vote.
(a) NIMRA. If a credit union's board of directors adopts a proposal
to merge, it must, within 30 days of the adoption, provide the Regional
Director with a Notice of its Intent to Merge and Request for NCUA
Authorization (NIMRA) to conduct a member vote. The NIMRA must include
the following:
(1) The merger plan (as described below in paragraph (b) of this
section);
(2) Resolutions of the boards of directors of both institutions;
(3) Certification of the board of directors (as described below);
(4) Proposed Merger Agreement;
(5) Proposed Notice of Special Meeting of the Members and any other
communications about the merger that the credit union intends to send
to its members, including electronic communications posted on a Web
site or transmitted by electronic mail;
(6) Proposed ballot to be sent to the members;
(7) For State chartered credit unions, evidence that the proposed
merger is authorized under State law (as described below);
(8) A copy of the bank's last two examination reports;
(9) A statement of the merger valuation of the credit union;
(10) A statement of whether any merger payment will be made to the
members and how such a payment will be distributed among the members;
(11) Information about the due diligence of the directors in
locating a merger partner and determining that the merger is in best
interests of the members of the credit union (as described below);
(12) Copies of all contracts reflecting any merger-related
compensation or other benefit to be received by any director or senior
management official of the credit union;
(13) If the merging credit union's assets on its latest call report
are equal to or greater than the threshold amount established annually
by the Federal Trade Commission under 15 U.S.C.
[[Page 81389]]
18a(a)(2)(B)(i), currently $63.4 million, a statement about whether the
two institutions intend to make a Hart-Scott-Rodino Act premerger
notification filing with the Federal Trade Commission and, if not, an
explanation why not;
(14) Copies of any filings the credit union or bank intends to make
with another Federal or State regulatory agency in which the credit
union or bank seeks that agency's approval of the merger; and
(15) Proof that the accounts of the credit union will be accepted
for coverage by the Federal Deposit Insurance Corporation.
(b) Merger plan. The merger plan must include:
(1) Current financial statements for both institutions;
(2) Current delinquent loan summaries and analyses of the adequacy
of the Allowance for Loan and Lease Losses account for both
institutions;
(3) Consolidated financial statements of the continuing institution
after the merger;
(4) Explanation of any provisions for reserves, undivided earnings
or dividends;
(5) Provisions with respect to notification and payment of
creditors; and
(6) Explanation of any changes relative to insurance such as life
savings and loan protection insurance and insurance of member accounts.
(c) Director certification. The NIMRA must include a certification
by the credit union's board of directors of their support for the
merger proposal and plan. Each director who voted in favor of the
merger proposal must sign the certification. The certification must
contain the following:
(1) A statement that each director signing the certification
supports the proposed merger and believes the proposed merger, and the
selected bank merger partner, are both in the best interests of the
members of the credit union;
(2) A description of all materials submitted to the Regional
Director with the notice and certification;
(3) A statement that each board member signing the certification
has examined all these materials carefully and these materials are
true, correct, current, and complete as of the date of submission; and
(4) An acknowledgement that Federal law (18 U.S.C. 1001) prohibits
any misrepresentations or omissions of material facts, or false,
fictitious or fraudulent statements or representations made with
respect to the certification or the materials provided to the Regional
Director or any other documents or information provided to the members
of the credit union or NCUA in connection with the merger.
(d) Due diligence. The NIMRA must include a description of all the
credit union's due diligence in determining that the merger satisfies
the factors contained in section 205(c) of the Act. In particular, the
NIMRA must describe how the board located the merger partner, how the
board negotiated the merger agreement, and how the board determined
that this merger was in the best interests of the credit union's
members. The description must include all information relied upon by
the credit union in determining the merger value of the credit union,
the amount of any payment to be made by the bank to the credit union's
members (the ``merger payment''), and, if that merger payment is less
than the merger value of the credit union, an explanation why the
merger and the merger partner selected is in the best interests of the
members. The description must include an explanation of the
distribution formula by which the merger payment will be distributed
among the credit union's members.
(e) State chartered credit unions. A State chartered credit union
must state as part of its NIMRA if its State chartering law permits it
to merge into a bank and provide the specific legal citation. A State
chartered credit union will remain subject to any State law
requirements for merger that are more stringent than those this part
imposes, including any internal governance requirements, such as the
requisite membership vote for merger and the determination of a
member's eligibility to vote. If a State chartered credit union relies
for its authority to merge into a bank on a State law parity provision,
meaning a provision in State law permitting a State chartered credit
union to operate with the same or similar authority as a Federal credit
union, it must:
(1) Include in its notice a statement that its State regulatory
authority agrees that it may rely on the State law parity provision as
authority to merge; and
(2) Indicate its State regulatory authority's position as to
whether Federal law and regulations or State law will control internal
governance issues in the merger such as the requisite membership vote
for merger and the determination of a member's eligibility to vote.
(f) Consultation with State authorities. After receiving a NIMRA
from a State chartered credit union, the Regional Director will consult
with the appropriate State supervisory authority.
(g) Regional Director approval. After receiving a NIMRA, the
Regional Director will either disapprove the proposed merger or
authorize the credit union to proceed with its membership vote.
(1) The Regional Director will disapprove the proposed merger if
the NIMRA either lacks the documentation required by this section or
lacks substantial evidence to support each of the factors in section
205(c) of the Act. As part of this determination, the Regional Director
must disapprove the proposed merger if:
(i) The merger payment offered by the bank to the members is less
than the merger valuation, absent some additional, quantifiable benefit
to the members from the selected merger partner; or
(ii) The NIMRA fails to adequately explain the nature and amount of
any compensation to be received by the credit union's directors or
senior management officials in connection with the merger or to justify
that compensation.
(2) NCUA's authorization to proceed with the member vote does not
mean NCUA has approved of the merger proposal.
(h) Appeal of adverse decision. If the Regional Director
disapproves a merger proposal, the credit union may appeal the Regional
Director's determination to the Board. The credit union must file the
appeal within 30 days after receipt of the Regional Director's
determination. The Board will act on the appeal within 120 days of
receipt.
Sec. 708a.305 Disclosures and communications to members.
(a) After the board of directors approves a merger proposal and
receives NCUA's authorization as described in Sec. Sec. 708a.303 and
708a.304, the credit union must provide written notice of its intent to
merge to each member who is eligible to vote on the merger. The notice
to members must be mailed 90 calendar days and 30 calendar days before
the date of the membership vote on the merger. A ballot must be
included in the same envelope as the 30-day notice and only with the
30-day notice. A merging credit union may not distribute ballots with
the 90-day notice, in any other written communications, or in person
before the 30-day notice is sent.
(b)(1) The notice to members must adequately describe the purpose
and subject matter of the vote and clearly inform members that they may
vote at the special meeting or by submitting the written ballot. The
notice must state the date, time, and place of the meeting.
[[Page 81390]]
(2) The 90-day notice must state in a clear and conspicuous fashion
that a written ballot will be mailed together with another notice 30
days before the date of the membership vote on merger. The 30-day
notice must state in a clear and conspicuous fashion that a written
ballot is included in the same envelope as the 30-day notice materials.
(3) For purposes of facilitating the member-to-member contact
described in paragraph (f) of this section, the 90-day notice must
indicate the number of credit union members eligible to vote on the
merger proposal and state how many members have agreed to accept
communications from the credit union in electronic form. The 90-day
notice must also include the information listed in paragraph (g)(9) of
this section.
(4) The member ballot must include:
(i) A brief description of the proposal (e.g., ``Proposal: Approval
of the Plan of Merger by which [insert name of credit union] will merge
with a bank'');
(ii) Two blocks marked respectively as ``FOR'' and ``AGAINST;'' and
(iii) The following language: ``A vote FOR the proposal means that
you want your credit union to merge with and become a bank. A vote
AGAINST the proposal means that you want your credit union to remain a
credit union.'' This language must be displayed in a clear and
conspicuous fashion immediately beneath the FOR and AGAINST blocks.
(5) The ballot may also include voting instructions and the
recommendation of the board of directors (i.e., ``Your Board of
Directors recommends a vote FOR the Plan of Merger'') but may not
include any further information without the prior written approval of
the Regional Director.
(c) For mergers into stock banks, an adequate description of the
purpose and subject matter of the member vote on merger, as required by
paragraph (b) of this section, must include:
(1) A clear and conspicuous disclosure that if the merger is
approved the members will lose all of their ownership interests in the
institution, including the right to vote, the right to share in the
value of the institution should it be liquidated, the right to share in
any extraordinary dividends, and the right to have the net worth of the
institution managed in their best interests;
(2) A clear and conspicuous disclosure of any post-merger
employment or consulting relationships offered by the bank to any of
the credit union's directors and senior management officials and the
amount of the associated compensation;
(3) A clear and conspicuous disclosure of how the merger of the
credit union will affect the members' ability to obtain non-housing-
related consumer loans from the bank because of because of the bank's
obligations to satisfy statutory or regulatory lending requirements (if
any). This disclosure should specify possible reductions in some kinds
of loans to members;
(4) A clear and conspicuous statement of the merger value of the
credit union, the total dollar amount the selected bank merger partner
has agreed to pay to effect the merger, and the distribution formula
the bank will use to determine each member's portion of that payment to
be received upon completion of the merger; and
(d) For mergers into mutual banks, an adequate description of the
purpose and subject matter of the member vote on merger, as required by
paragraph (b) of this section, must include:
(1) A clear and conspicuous disclosure of how the merger will
affect members' voting rights including whether the bank bases voting
rights on account balances;
(2) A clear and conspicuous disclosure that the merger could lead
to members losing all of their ownership interests in the credit union
if the bank subsequently converts to a stock institution and the
members do not purchase stock;
(3) A clear and conspicuous disclosure of any post-merger
employment or consulting relationships offered by the bank to the
credit union's directors and senior management officials and the
associated compensation for each;
(4) A clear and conspicuous disclosure of how the merger of the
credit union will affect the members' ability to obtain non-housing-
related consumer loans from the bank because of the bank's obligations
to satisfy statutory or regulatory lending requirements (if any). This
disclosure should specify possible reductions in some kinds of loans to
members;
(5) A clear and conspicuous statement that, at the time of merger,
the bank does or does not intend to convert to a stock institution or a
mutual holding company structure;
(6) A clear and conspicuous statement of the merger value of the
credit union, the total dollar amount the selected bank merger partner
has agreed to pay to effect the merger, and the distribution formula
the bank will use to determine each member's portion of that payment to
be received upon completion of the merger; and
(7) If the bank plans to add one or more of the credit union's
directors to its board or employ one or more senior officials of the
credit union, a clear and conspicuous statement that bank could convert
to a stock bank in the future and a comparison of the opportunities
available to those officials and employees to obtain stock with the
opportunities available to the depositors of the bank.
(e)(1) A merging credit union must provide the following
disclosures in a clear and conspicuous fashion with the 90-day and 30-
day notices it sends to its members regarding the merger:
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IMPORTANT REGULATORY DISCLOSURE ABOUT YOUR VOTE
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. LOSS OF CREDIT UNION MEMBERSHIP. A vote ``FOR'' the proposed merger
means you want your credit union to merge with and become a bank. A
vote ``AGAINST'' the proposed merger means you want your credit union
to remain a credit union.
2. [For Mergers into Stock Banks Only]. LOSS OF OWNERSHIP INTERESTS. If
your credit union merges into the bank, you will lose all the ownership
interests you currently have in the credit union and you will become a
customer of the bank. The bank's stockholders own the bank, and the
directors of the bank have a fiduciary responsibility to run the bank
in the best interests of the stockholders, not the customers.
2. [For Mergers into Mutual Banks Only]. POTENTIAL PROFITS BY OFFICERS
AND DIRECTORS. Merger into a mutual savings bank is often the first
step in a two-step process to convert to a stock-issuing bank or
holding company structure. In such a scenario, the officers and
directors of the bank often profit by obtaining stock in excess of that
available to other members.
3. RATES ON LOANS AND SAVINGS. If your credit union merges into the
bank, you may experience changes in your loan and savings rates.
Available historic data indicates that, for most loan products, credit
unions on average charge lower rates than banks. For most savings
products, credit unions on average pay higher rates than banks.
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(2) This text must be placed in a box, must be the only text on the
front side of a single piece of paper, and must be placed so that the
member will see the text after reading the credit union's cover letter
but before reading any other part of the member notice. The back side
of the paper must be blank. A merging credit union may modify this text
only with the prior written consent of the Regional Director and, in
the case of a State chartered credit union, the appropriate State
regulatory agency.
[[Page 81391]]
(f) All written communications from a merging credit union to its
members regarding the merger must be written in a manner that is simple
and easy to understand. Simple and easy to understand means the
communications are written in plain language designed to be understood
by ordinary consumers and use clear and concise sentences, paragraphs,
and sections. For purposes of this part, examples of factors to be
considered in determining whether a communication is in plain language
and uses clear and concise sentences, paragraphs and sections include
the use of short explanatory sentences; use of definite, concrete,
everyday words; use of active voice; avoidance of multiple negatives;
avoidance of legal and technical business terminology; avoidance of
explanations that are imprecise and reasonably subject to different
interpretations; and use of language that is not misleading.
(g)(1) A merging credit union must mail or e-mail a requesting
member's proper merger-related materials to other members eligible to
vote if:
(i) A credit union's board of directors has adopted a proposal to
merge;
(ii) A member makes a written request that the credit union mail or
e-mail materials for the member;
(iii) The request is received by the credit union no later than 35
days after it sends out the 90-day member notice; and
(iv) The requesting member agrees to reimburse the credit union for
the reasonable expenses, excluding overhead, of mailing or e-mailing
the materials and also provides the credit union with an appropriate
advance payment.
(2) A member's request must indicate if the member wants the
materials mailed or e-mailed. If a member requests that the materials
be mailed, the credit union will mail the materials to all eligible
voters. If a member requests the materials be e-mailed, the credit
union will e-mail the materials to all members who have agreed to
accept communications electronically from the credit union. The subject
line of the credit union's e-mail will be ``Proposed Credit Union
Merger--Views of Member (insert member name).''
(3)(i) A merging credit union may, at its option, include the
following statement with a member's material:
On (date), the board of directors of (name of merging credit
union) adopted a proposal to merge the credit union into a bank.
Credit union members who wish to express their opinions about the
proposed merger to other members may provide those opinions to (name
of credit union). By law, the credit union, at the requesting
members' expense, must then send those opinions to the other
members. The attached document represents the opinion of a member
(or group of members) of this credit union. This opinion is a
personal opinion and does not necessarily reflect the views of the
management or directors of the credit union.
(ii) A merging credit union may not add anything other than this
statement to a member's material without the prior approval of the
Regional Director.
(4) The term ``proper merger-related materials'' does not include
materials that:
(i) Due to size or similar reasons are impracticable to mail or e-
mail;
(ii) Are false or misleading with respect to any material fact;
(iii) Omit a material fact necessary to make the statements in the
material not false or misleading;
(iv) Relate to a personal claim or a personal grievance, or solicit
personal gain or business advantage by or on behalf of any party;
(v) Relate to any matter, including a general economic, political,
racial, religious, social, or similar cause, that is not significantly
related to the proposed merger;
(vi) Directly or indirectly and without expressed factual
foundation impugn a person's character, integrity, or reputation;
(vii) Directly or indirectly and without expressed factual
foundation make charges concerning improper, illegal, or immoral
conduct; or
(viii) Directly or indirectly and without expressed factual
foundation make statements impugning the stability and soundness of the
credit union.
(5) If a merging credit union believes some or all of a member's
request is not proper it must submit the member materials to the
Regional Director within seven days of receipt. The credit union must
include with its transmittal letter a specific statement of why the
materials are not proper and a specific recommendation for how the
materials should be modified, if possible, to make them proper. The
Regional Director will review the communication, communicate with the
requesting member, and respond to the credit union within seven days
with a determination on the propriety of the materials. The credit
union must then mail or e-mail the material to the members if so
directed by NCUA.
(6) A credit union must ensure that its members receive all
materials that meet the requirements of Sec. 708a.305(g) on or before
the date the members receive the 30-day notice and associated ballot.
If a credit union cannot meet this delivery requirement, it must
postpone mailing the 30-day notice until it can deliver the member
materials. If a credit union postpones the mailing of the 30-day
notice, it must also postpone the special meeting by the same number of
days. When the credit union has completed the delivery, it must inform
the requesting member that the delivery was completed and provide the
number of recipients.
(7) The term ``appropriate advance payment'' means:
(i) For requests to mail materials to all eligible voters, a
payment in the amount of 150 percent of the first class postage rate
times the number of mailings, and
(ii) For requests to e-mail materials only to members that have
agreed to accept electronic communications, a payment in the amount of
200 dollars.
(8) If a credit union posts merger-related information or material
on its Web site, then it must simultaneously make a portion of its Web
site available free of charge to its members to post and share their
opinions on the merger. A link to the portion of the Web site available
to members to post their views on the merger must be marked ``Members:
Share your views on the proposed merger and see other members' views''
and the link must also be visible on all pages on which the credit
union posts its own merger-related information or material, as well as
on the credit union's homepage. If a credit union believes a particular
member submission is not proper for posting, it will provide that
submission to the Regional Director for review as described in
paragraph (g)(5) of this section. The credit union may also post a
content-neutral disclaimer using language similar to the language in
paragraph (g)(3)(i) of this section.
(9) A merging credit union must inform members with the 90-day
notice that if they wish to provide their opinions about the proposed
merger to other members they can submit their opinions in writing to
the credit union no later than 35 days from the date of the notice and
the credit union will forward those opinions to other members. The 90-
day notice will provide a contact at the credit union for delivery of
communications, will explain that members must agree to reimburse the
credit union's costs of transmitting the communication including
providing an advance payment, and will refer members to this section of
NCUA's rules for further information about the communication process.
The credit union, at its option, may include additional factual
information about the communication process with its 90-day notice.
(10) A group of members may make a joint request that the credit
union send
[[Page 81392]]
its materials to other members. For purposes of paragraphs (g)(2) and
(g)(3) of this section, the credit union will use the group name
provided by the group.
(h) If it chooses, a credit union may seek a preliminary
determination from the Regional Director regarding any of the notices
required under this subchapter and its proposed methods and procedures
applicable to the membership merger vote. The Regional Director will
make a preliminary determination regarding the notices and methods and
procedures applicable to the membership vote within 30 calendar days of
receipt of a credit union's request for review unless the Regional
Director extends the period as necessary to request additional
information or review a credit union's submission. A credit union's
prior submission of any notice or proposed voting procedures does not
relieve the credit union of its obligation to certify the results of
the membership vote required by Sec. 708a.307 or eliminate the right
of the Regional Director to disapprove the merger if the credit union
fails to conduct the membership vote in a fair and legal manner
consistent with the Federal Credit Union Act and these rules.
Sec. 708a.306 Membership approval of a proposal to merge.
(a) A proposal for merger approved by a board of directors also
requires approval by a majority of the members who vote on the
proposal. At least 20 percent of the members eligible to vote must
participate in the vote. The credit union must also have NCUA's written
authorization to proceed with the member vote.
(b) The board of directors must set a voting record date to
determine member voting eligibility. The record date must be at least
one day before the publication of notice required in Sec. 708a.303.
(c) A member may vote on a proposal to merge in person at a special
meeting held on the date set for the vote or by written ballot
delivered by mail or otherwise. The vote on the merger proposal must be
by secret ballot and conducted by an independent entity. The
independent entity must be a company with experience in conducting
corporate elections. No official or senior management official of the
credit union or the immediate family members of any official or senior
management official may have any ownership interest in or be employed
by the independent entity.
Sec. 708a.307 Certification of vote on merger proposal.
(a) The board of directors of the merging credit union must certify
the results of the membership vote to the Regional Director within 14
calendar days after the vote is taken.
(b) The certification must also include a statement that the
notice, ballot, and other written materials provided to members were
identical to those submitted to NCUA pursuant to Sec. 708a.305. If the
board cannot certify this, the board must provide copies of any new or
revised materials and an explanation of the reasons for any changes.
(c) The certification must include copies of any correspondence
between the credit union and other regulators related to the pending
merger.
Sec. 708a.308 NCUA approval of the merger.
(a) The Regional Director will review the methods by which the
membership vote was taken and the procedures applicable to the
membership vote. The Regional Director will determine if the notices
and other communications to members were accurate, not misleading, and
timely; if the membership vote was conducted in a fair and legal
manner; and if the credit union has otherwise met the requirements of
this subpart, including whether there is substantial evidence that the
factors in section 205(c) of the Act are satisfied.
(b) After completion of this review, the Regional Director will
approve or disapprove the proposed merger. The Regional Director will
issue the approval or disapproval within 30 calendar days of receipt
from the credit union of the certification of the result of the
membership vote required under Sec. 708a.307, unless the Regional
Director extends the period as necessary to request additional
information or review the credit union's submission. The Regional
Director's approval is conditional on the credit union completing the
merger in the timeframes required by Sec. 708a.309.
(c) If the Regional Director disapproves the methods by which the
membership vote was taken or the procedures applicable to the
membership vote, the Regional Director may direct that a new vote be
taken.
(d) A merging credit union may appeal a Regional Director's
disapproval to the NCUA Board. The credit union must file the appeal
within 30 days after receipt of the Regional Director's determination.
The NCUA Board will act on the appeal within 120 days of receipt.
Sec. 708a.309 Completion of merger.
(a) After receipt of the approvals under Sec. Sec. 708a.302 and
708a.308 a credit union may complete the merger.
(b) The credit union must complete the merger within one year of
the date of NCUA approval under Sec. 708a.308. If a credit union fails
to complete the merger within one year the Regional Director will
disapprove the merger. The credit union's board of directors must then
adopt a new merger proposal and solicit another member vote if it still
desires to merge.
(c) The Regional Director may, upon timely request and for good
cause, extend the one year completion period for an additional six
months.
(d) After notification by the board of directors of the bank that
the merger has been completed, the NCUA will cancel the insurance
certificate of the credit union and, if applicable, the charter of a
Federal credit union.
Sec. 708a.310 Limits on compensation of officials.
No director or senior management official of an insured credit
union may receive any economic benefit in connection with the merger of
a credit union other than reasonable compensation and other benefits
paid in the ordinary course of business.
Sec. 708a.311 Voting incentives.
If a merging credit union offers an incentive to encourage members
to participate in the vote, including a prize raffle, every reference
to such incentive made by the credit union in a written communication
to its members must also state that members are eligible for the
incentive regardless of whether they vote for or against the proposed
merger.
Sec. 708a.312 Voting guidelines.
A merging credit union must conduct its member vote on merger in a
fair and legal manner. NCUA provides the following guidelines as
suggestions to help a credit union obtain a fair and legal vote and
otherwise fulfill its regulatory obligations. These guidelines are not
an exhaustive checklist and do not by themselves guarantee a fair and
legal vote.
(a) Applicability of State law. While NCUA's merger rules apply to
all mergers of Federally insured credit unions, Federally insured State
chartered credit unions (FISCUs) are also subject to State law on
mergers. NCUA's position is that no merger of a State chartered credit
union is authorized unless permitted by State law, and also that a
State legislature or State supervisory authority may impose merger
requirements more stringent or restrictive than NCUA's. States that
permit mergers may have substantive and procedural requirements that
vary from Federal law. For example, there
[[Page 81393]]
may be different voting standards for approving a vote. While the
Federal Credit Union Act requires a simple majority of those who vote
to approve a merger, some States have higher voting standards requiring
two-thirds or more of those who vote. A FISCU should be careful to
understand both Federal and State law to navigate the merger process
and conduct a proper vote.
(b) Eligibility to vote. (1) Determining who is eligible to cast a
ballot is fundamental to any vote. No merger vote can be fair and legal
if some members are improperly excluded. A merging credit union should
be cautious to identify all eligible members and make certain they are
included on its voting list. NCUA recommends that a merging credit
union establish internal procedures to manage this task.
(2) A merging credit union should be careful to make certain its
member list is accurate and complete. For example, when a credit union
converts from paper record keeping to computer record keeping, some
member names may not transfer unless the credit union is careful in
this regard. This same problem can arise when a credit union merges
from one computer system to another where the software is not
completely compatible.
(3) Problems with keeping track of who is eligible to vote can also
arise when a credit union merges from a Federal charter to a State
charter or vice versa. NCUA is aware of an instance where a Federal
credit union used membership materials allowing two or more individuals
to open a joint account and also allowed each to become a member. The
Federal credit union later converted to a State chartered credit union
that, like most other State chartered credit unions in its State, used
membership materials allowing two or more individuals to open a joint
account but only allowed the first person listed on the account to
become a member. The other individuals did not become members as a
result of their joint account, but were required to open another
account where they were the first or only person listed on the account.
Over time, some individuals who became members of the Federal credit
union as the second person listed on a joint account were treated like
those individuals who were listed as the second person on a joint
account opened directly with the State chartered credit union.
Specifically, both of those groups were treated as non-members not
entitled to vote. This example makes the point that a credit union must
be diligent in maintaining a reliable membership list.
(c) Scheduling the special meeting. NCUA's merger rule requires a
merging credit union to permit members to vote by written mail ballot
or in person at a special meeting held for the purpose of voting on the
merger. Although most members may choose to vote by mail, a significant
number may choose to vote in person. As a result, a merging credit
union should be careful to conduct its special meeting in a manner
conducive to accommodating all members wishing to attend, including
selecting a meeting location that can accommodate the anticipated
number of attendees and is conveniently located. The meeting should
also be held on a day and time suitable to most members' schedules. A
credit union should conduct its meeting in accordance with applicable
Federal and State law, its bylaws, Robert's Rules of Order or other
appropriate parliamentary procedures, and determine before the meeting
the nature and scope of any discussion to be permitted.
(d) Voting incentives. Some credit unions may wish to offer
incentives to members, such as entry to a prize raffle, to encourage
participation in the merger vote. The credit union must exercise care
in the design and execution of such incentives.
(1) The credit union should ensure that the incentive complies with
all applicable State, Federal, and local laws.
(2) The incentive should not be unreasonable in size. The cost of
the incentive should have a negligible impact on the credit union's net
worth ratio and the incentive should not be so large that it distracts
the member from the purpose of the vote. If the board desires to use
such incentives, the cost of the incentive should be included in the
directors' deliberation and determination that the merger is in the
best interests of the credit union's members.
(3) The credit union should ensure that the incentive is available
to every member that votes regardless of how or when he or she votes.
All of the credit union's written materials promoting the incentive to
the membership must disclose to the members, as required by Sec.
708a.311 of this part, that they have an equal opportunity to
participate in the incentive program regardless of whether they vote
for or against the merger. The credit union should also design its
incentives so that they are available equally to all members who vote,
regardless of whether they vote by mail or in person at the special
meeting.
(e) Solicitation of votes. Some credit unions may wish to contact
members who have not voted and encourage them to vote on the merger
proposal. NCUA believes, however, that using credit union employees to
solicit votes is problematic. Employees directed to solicit votes could
easily neglect everyday duties critical to the credit union's safe and
sound operation. Also, employees may very well feel pressured to
solicit votes for the merger, regardless of whether or not they support
the merger. Accordingly, NCUA strongly encourages credit unions to use
an independent third party to solicit votes rather than diverting
credit union employees from their usual duties.
PART 708b--MERGERS OF FEDERALLY INSURED CREDIT UNIONS; VOLUNTARY
TERMINATION OR CONVERSION OF INSURED STATUS
0
15. The authority citation for part 708b continues to read as follows:
Authority: 12 U.S.C. 1752(7), 1766, 1785, 1786, 1789.
0
16. Amend Sec. 708b.2 by removing alphabetical paragraph designations
(a) through (k) and adding definitions of ``conducted by an independent
entity,'' ``merger-related financial arrangement,'' ``secret ballot,''
and ``senior management official'' in alphabetical order to read as
follows:
Sec. 708b.2 Definitions.
* * * * *
Conducted by an independent entity means:
(1) The independent entity will receive the ballots directly from
voting members.
(2) After the conclusion of the special meeting that ends the
ballot period, the independent entity will open all the ballots in its
possession and tabulate the results. The entity must not open or
tabulate any ballots before the conclusion of the special meeting.
(3) The independent entity will certify the final vote tally in
writing to the credit union and provide a copy to the NCUA Regional
Director. The certification will include, at a minimum, the number of
members who voted, the number of affirmative votes, and the number of
negative votes. During the course of the voting period the independent
entity may provide the credit union with the names of members who have
not yet voted, but may not provide any voting results to the credit
union prior to certifying the final vote tally.
* * * * *
Merger-related financial arrangement means a material increase in
compensation (including indirect compensation, for example, bonuses,
[[Page 81394]]
deferred compensation, or other financial rewards) or benefits that any
board member or senior management official of a merging credit union
may receive in connection with a merger transaction. For purposes of
this definition, a material increase is an increase that exceeds the
greater of 15 percent or $10,000.
* * * * *
Secret ballot means no credit union employee or official can
determine how a particular member voted. Credit union employees and
officials are prohibited from assisting members in completing ballots
or handling completed ballots.
Senior management official means the chief executive officer (who
may hold the title of president or treasurer/manager), any assistant
chief executive officer, and the chief financial officer.
* * * * *
0
17-18. Amend Sec. 708b.103 by revising paragraph (a)(5), redesignating
paragraphs (a)(7) through (10) as paragraphs (a)(8) through (11), and
adding new paragraph (a)(7) to read as follows:
Sec. 708b.103 Preparation of merger plan.
(a) * * *
(5) Explanation of any proposed share adjustments, and where the
net worth ratio of the merging credit union is more than 500 basis
points higher than the net worth ratio of the continuing credit union,
an explanation of the factors considered in establishing the amount of
any proposed adjustment or in determining no adjustment is necessary;
* * * * *
(7) Description of any merger-related financial arrangement, as
defined in Sec. 708b.2;
* * * * *
0
19. In Sec. 708b.104, revise paragraph (a)(8) to read as follows:
Sec. 708b.104 Submission of merger proposal to the NCUA.
(a) * * *
(8) If the merging credit union's assets on its latest call report
are equal to or greater than the threshold amount established annually
by the Federal Trade Commission under 15 U.S.C. 18a(a)(2)(B)(i),
currently $63.4 million, a statement about whether the two credit
unions intend to make a Hart-Scott-Rodino Act premerger notification
filing with the Federal Trade Commission and, if not, an explanation
why not; and
* * * * *
0
20. In Sec. 708b.106, revise paragraph (a)(2)(ii) to read as follows:
Sec. 708b.106 Approval of the merger proposal by members.
(a) * * *
(2) * * *
(ii) Contain a summary of the merger plan, including, but not
necessarily limited to, current financial statements for each credit
union, a consolidated financial statement for the continuing credit
union, analyses of share values, explanation of any proposed share
adjustments, explanation of any changes relative to insurance such as
life savings and loan protection insurance and insurance of member
accounts, and a detailed description of any merger related financial
arrangement, as defined in Sec. 708b.2. The description must include
the name and title of each individual recipient and an explanation of
the financial impact of each element of the arrangement, including
direct salary increases and any indirect compensation, such as any
bonus, deferred compensation or other financial reward;
* * * * *
Sec. 708b.107 [Amended]
0
21. Amend the heading to Sec. 708b.107 by removing the word
``Certificate'' and adding the word ``Certification'' in its place.
0
22. In Sec. 708b.201, revise paragraph (c) to read as follows:
Sec. 708b.201 Termination of insurance.
* * * * *
(c) A majority of the credit union's members must approve a
termination of insurance by affirmative vote. The vote must be taken by
secret ballot and conducted by an independent entity.
* * * * *
0
23. In Sec. 708b.203, revise paragraphs (d), (f), and (g) to read as
follows:
Sec. 708b.203 Conversion of insurance.
* * * * *
(d) Approval of a conversion of Federal to nonfederal insurance
requires the affirmative vote of a majority of the credit union's
members who vote on the proposition, provided at least 20 percent of
the total membership participates in the voting. The vote must be taken
by secret ballot and conducted by an independent entity.
* * * * *
(f) The board of directors of the credit union and the independent
entity that conducts the membership vote must certify the results of
the membership vote to the NCUA within 14 calendar days after the
deadline for receipt of votes. The certification must include the total
number of members of record of the credit union, the number who voted
on the conversion, the number who voted in favor of the conversion, and
the number who voted against. The certification must be in the form
specified in subpart C of this part.
(g) Generally, the NCUA will conditionally approve or disapprove
the conversion in writing within 14 days after receiving the
certification of the vote. The credit union must complete the
conversion within six months of the date of conditional approval. If a
credit union fails to complete the conversion within six months the
Regional Director will disapprove the conversion. The credit union's
board of directors, if it still wishes to convert, must then adopt a
new conversion proposal and solicit another member vote.
* * * * *
0
24. In Sec. 708b.206, revise paragraph (b) to read as follows:
Sec. 708b.206 Share insurance communications to members.
* * * * *
(b) Every share insurance communication must contain the following
conspicuous statement: ``IF YOU ARE A MEMBER OF THIS CREDIT UNION, YOUR
ACCOUNTS ARE CURRENTLY INSURED BY THE NATIONAL CREDIT UNION
ADMINISTRATION, A FEDERAL AGENCY. THIS FEDERAL INSURANCE IS BACKED BY
THE FULL FAITH AND CREDIT OF THE UNITED STATES GOVERNMENT. IF THE
CREDIT UNION CONVERTS TO PRIVATE INSURANCE WITH [insert name of private
share insurer] AND THE CREDIT UNION FAILS, THE FEDERAL GOVERNMENT DOES
NOT GUARANTEE THAT YOU WILL GET YOUR MONEY BACK.'' The statement must:
(1) Appear on the first page of the communication where conversion
is discussed and, if the communication is on an Internet Web site
posting, the credit union must make reasonable efforts to make it
visible without scrolling; and (2) Must be in capital letters, bolded,
offset from the other text by use of a border, and at least one font
size larger than any other text (exclusive of headings) used in the
communication.
* * * * *
Note: The following revision to a document entitled ``Corporate
Federal Credit Union Bylaws,'' will not appear in the Code of
Federal Regulations.
Section 4 of Article XI of the document entitled ``Corporate
Federal Credit Union Bylaws'' is revised to read as follows:
Article XI. General
* * * * *
[[Page 81395]]
Section 4. (a) Subject to the limitations in 12 CFR 701.33(c)(5)
through (c)(7) of the NCUA regulations, the corporate credit union may
elect to indemnify to the extent authorized by (check one) ( ) law of
the State of -------- or ( ) Model Business Corporation Act the
following individuals from any liability asserted against them and
expenses reasonably incurred by them in connection with judicial or
administrative proceedings to which they are or may become parties by
reason of the performance of their official duties: (Check as
appropriate) ( ) current officials, ( ) former officials, ( ) current
employees, ( ) former employees.
(b) The corporate credit union may purchase and maintain insurance
on behalf of the individuals indicated in (a) above against any
liability asserted against them and expenses reasonably incurred by
them in their official capacities and arising out of the performance of
their official duties to the extent such insurance is permitted by the
applicable State law or the Model Business Corporation Act.
(c) The term ``official'' in this bylaw means a person who is a
member of the board of directors, supervisory committee, other
volunteer committee (including elected or appointed loan officers or
membership officers), established by the board of directors.
* * * * *
[FR Doc. 2010-32115 Filed 12-27-10; 8:45 am]
BILLING CODE 7535-01-P
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