Regulations Aim to Close Gaps On Conversions and Mergers
Though there aren't any conversion applications pending, past problems during certain merger past efforts triggered the draft rules that the NCUA issued on the subject last month.
Some of the past conflicts triggered litigation and admissions of withholding vital information and attempts to remove board members.
To avoid a recurrence, the agency wants to mandate that if a credit union is considering a bank conversion, the board and its executives must break down the costs of converting and distribute it to members and provide "complete and accurate" information about possible changes in service, such as branch closings or access to a shared branching network.
The NCUA sent the proposed rules-some of which deal with conversions and others that would govern mergers-out for public comment. The comment period runs through May 28.
Steven Bisker, a former NCUA lawyer who has been involved in several conversion efforts, said the proposed rules are aimed at making up for past problems and to fill in gaps in existing law.
During a deposition following the ill-fated 2008 attempt of the Odessa, Texas-based First Basin Credit Union to convert to a mutual bank, the credit union's president and board chairman admitted that they commissioned no outside analysis of whether the conversion would be in members' best interests. They also didn't mention to members that CUNA Chief Economist Bill Hampel had expressed opposition to the idea.
The deposition was part of a lawsuit by First Basin CU's board members against opponents whom board members accused of spreading misinformation.
The NCUA's proposed rules would also require the board to get an independent evaluation, especially if for members the conversion will result in moving from having an equal vote in a credit union to being a bank shareholder.
When Kensington, Md.-based Lafayette Federal Credit Union went through parts of a conversion process in 2006 and 2007, it withdrew its application after an extremely close vote and a withdrawal of an initial certification of the balloting by an outside firm chosen to oversee the balloting.
To try to avoid a recurrence of this problem, the NCUA's proposed rules mandate that ballots have to be conducted in secret and tallied by an independent entity and prohibits preliminary vote tallies. Board members and employees couldn't assist members who are having trouble filling out their ballots.
The ban on helping members fill out ballots prompted NCUA Board Member Michael Fryzel, who is from Chicago, to quip, "We have employed these tactics in Chicago for many years and have always had impartial elections."
In addition, under the proposed NCUA rules, board members of federal credit unions could only get limited exemption from being sued for some of their actions FCUs seeking to convert to banks. They couldn't be indemnified against liability based on "aggravated breach of duty of care," when a breach affects members' rights and financial interests.
Also, within three months of joining the board of an FCU, volunteers would have to develop a level of financial proficiency, which includes basic finance and accounting proficiency. This training can be done by credit union employees, outside sources or in the case of small credit unions, the NCUA's Office of Small Credit Union Initiatives.