ALEXANDRIA, Va. – Beginning in a couple of weeks, credit unionsseeking to convert to mutual banks will have to present theirmembers with significantly targeted information about both theirconversion efforts and the impact they may have on their members.According to the final version of the NCUA's conversion charterrule, which the agency board approved on January 13, 2005, everycommunication from the credit union to its members about theconversion will have to include a statement prepared by the agencyand include information from the credit union. The statement statesin clear language that changing to a mutual bank usually means thataccount holders with larger balances have more votes. Creditunions, by contrast, hold to the rule of one member, one vote. Itmakes it clear that most credit union directors serve as volunteersand that in a bank they are compensated, along with the fact thatas a bank the institution will face more taxes. If the credit uniontakes the second step and converts to a stock issuing structure,whether a bank or a holding company, the statement makes clear thatthe credit union executives can profit by obtaining stock “far inexcess of that available to the institution's members.” It alsorequires the credit union estimate the costs of the conversionprocess, including the costs of printing, postage, advertising,consulting and professional fees, legal fees, staff time, the costof holding a special meeting and conducting the vote, along withany other costs. Finally, the statement must be surrounded by a boxwhose border is one point larger than the size of the text andthere are significant parts of the statement that are entirely inupper case. In addition, the rule mandates a secret ballot inconversion votes and having an independent third party count thevotes. “NCUA understands that members, including those that areemployees of the credit union, may be uncomfortable with a votingprocess that does not protect the privacy of their votes,” theagency wrote, in an apparent allusion to the previous experience atColumbia Community Credit Union. “NCUA is concerned this may leadsome members to choose not to vote or to vote in a mannerinconsistent with their true wishes.” Alan Theriault, a consultantwith CU Financial Services who advises credit unions seeking tochange their charters said he was not surprised by the board'spassage of the final rule, asserting that it signaled the realitythat “there would be no secondary capital relief” and that the NCUAwas focused on “keeping the remaining credit unions, creditunions.” “You have to ask how many of these conversion rules thereare going to be,” Theriault said. “They have already opened thedoor to having more. Are they just going to keep building untilthey build the wall high enough?” In addition to a preparedstatement, NCUA Board Chairman JoAnn Johnson praised FrankKressman, an attorney with the agency's General Counsel's office,and the other staff for their work on the rule which has beendifficult and painstaking, she said. The staff took particular careto evaluate the 42 suggestions and comments that came in after thepreliminary rule was published in July. These resulted in tworelatively minor changes. First, the agency changed the rule'slanguage to reflect that some states allow credit union boardmembers to be compensated and, second, the agency allowed creditunions to use parliamentary procedures other than Robert's Rules ofOrder. But the agency rejected many of the other objections raisedby the American Bankers Association, other banking groups andconversion consulting firm CU Financial Services. Some had objectedthat mutual banks do not have to go to a voting structure based onaccount size but can have the same one member, one vote rule thatcredit unions use. The agency replied that the mutual banks“usually” choose to weigh voting according to account size and thatit believed that statement to be accurate. Others objected that theadditional steps that a mutual bank must go through in order toissue stock are all regulated and need not be addressed in theinitial step from moving from a credit union to a mutual bank. Butthe agency replied that those additional regulatory steps did notpreclude it from being concerned with all the ramifications of theconversion decision. “NCUA recognizes that additional steps andmember votes are required to approve an MSB [mutual savings bank]to stock institution conversion,” the agency wrote. “This does notlessen NCUA's concern about protecting credit union members'interest in their credit union. Those additional steps and membervotes, although possibly scrutinized by other regulators, occuronly after the credit union has converted to an MSB and is on itsway to converting to the stock form of ownership. Obviously, atthat point, the credit union does not exist and the additionalrequirements can do nothing to enable a credit union member to makean informed decision on the initial conversion from a credit unionto an MSB.” One possibly sticky area might be the language relatingto stock conversions, which appear to imply that credit uniondirectors will enjoy stock advantages that other former creditunion members might not have. “In a typical conversion to the stockform of ownership, the executives of the institution profit byobtaining stock far in excess of that available to theinstitution's members,” the agency's mandated disclosure noticeread. But it is unclear that this statement is truly accurate.While it is certainly true that most executives of these formercredit unions have access to stock sharing plans that other membersor shareholders will not have, it is not really true that theexecutives have any `inside track' to getting stock. In mostconversion cases, the members of the former credit union who havejoined before the cut-off date generally enjoy the same opportunityto purchase stock that the executives have. The executives canoften take greater advantage of the opportunity the stock purchaseaffords because they may have the greater means to do so, butmerely having greater means doesn't necessarily translate intohaving greater opportunity. The agency also took the unusual routeof having the rule go into effect as soon as it is published in theFederal Register and thus forgoing the usual 30-day period betweenpublication and when a rule comes into force. “There is a strongpublic interest in having this consumer protection rule in placeimmediately to provide credit union members with clear, concise,meaningful information concerning the vote,” Johnston said. “It isalso important to provide regulatory certainty to credit unionsthat are considering converting or beginning the conversion processwithin the next 30 days to enable them to better understand whatregulatory requirements they must follow throughout the conversionprocess.” But Theriault scoffed at the explanation arguing that theagency felt it had to move quickly to cut off any other creditunions that might be ready to “push the button.” “They clearly fearthat many more credit unions are interested in doing this and wantto dissuade them,” Theriault said. “But I don't believe this willhave any noticeable effect and I believe many will be surprised athow many credit unions are looking to make this change,” he added.-

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