The full effect of the Dodd–Frank Wall Street Reform andConsumer Protection Act of 2010 (Dodd-Frank) is still to be felt inthe financial sector. Dodd-Frank creates an environment ofincreased scrutiny and heightened sensitivity by regulators andconsumers.

Perhaps credit unions should not be treated in the same way asother financial firms; however, regulators are reacting to thisenvironment. With this in mind, senior management and their boardsmust be on top of their game today in addressing complianceissues.

Volunteer board members and management need a common senseapproach to regulation and compliance. To assist them, the CreditUnion Leadership Forum recently hosted a Web seminar on “TheFuture of Regulation and Compliance: What You Need to Know toSuccessfully Prepare Your Organization.”

• See the webinar online: “Future of Regulation and Compliance”

Fully, two thirds of the participants believed that Dodd-Frankwould play a significant role in their 2013 planning. Indeed, manycredit unions will be allocating additional funds to the regulatoryeffort.

About 30% of participating credit unions indicated that theywould be spending $10,000 to $50,000 more on regulatory compliancein 2013 than in 2012, and about 10% said they would allocate anadditional $50,000 or more.

Tim Segerson, deputy director of the Office of Examination andInsurance of the NCUA, participated in the Web seminar. Hepredicted that addressing the legislation would take time forcredit unions to sort out. Much of Dodd-Frank deals with financialinstitutions aside from credit unions, but the legislation itselfaffects the markets in which credit unions operate.

For example, the mortgage industry is an area where there willbe rulemaking. The Consumer Financial Protection Board will soonannounce regulations for qualified mortgages and for the secondarymarket for mortgages. These regulations will affect the creditunion industry.

The CFPB is mandated to write a significant number of consumerrelated protections affecting the financial services industry,including credit unions. Changes to truth in lending and mortgageregulation are forthcoming.

The NCUA does not write regulations; other agencies, such asCFPB, do so. NCUA usually has some input and at times a voice atthe table. NCUA uses the regulations in its normal examinationprocess to assure that credit unions are in compliance. There is aparticular focus on managing risky activities that could have animpact on the NCUA insurance fund.

Tim pointed out that the diversity in size of credit unionsmakes rule writing difficult. To give some context, the largestcredit union has more than $51 billion in assets and over 9,000employees, while the smallest has less than $15,000, with noemployees, only volunteers. The NCUA oversees both; so one sizeregulation cannot fit all.

Tim explained the importance of scalability. Rules must applyappropriately across the spectrum of credit union sizes. Rulewriting must not be so complex as to set smaller firms up forfailure, but it must appropriately address risks associated withlarge institutions.

The NCUA has a focus on modernization, asking “Are the rules ofthe past appropriate for the future?” There is an emphasis onstreamlining regulations, with a fresh look at making the processless burdensome.

The trend is towards fewer, larger and more sophisticated creditunions. Larger institutions will have a greater impact on the riskassociated with the insurance fund. Tim reiterated that manyregulations relate to the protection of the insurance fund.

Anne C. Flannery, senior counsel with Morgan Lewis's litigationpractice was another Web seminar participant. She emphasized thatit is critical that management and boards show that good governancepractices are in place and are being followed. This is critical fortwo reasons:

First, this actually prevents mishaps. Following routine controlmeasures and methodically following processes that are in place cancorrect problems before they become major issues for the creditunion. Testing the code of ethics and comparing a firm's practicesto new developments to assure that the firm is testing for theright things, often leads to discovering minor problems and attimes major ones before they escalate. The process works.

Secondly, organizations must prove to regulators that there is aprocess in place. Being able to show that management and the boardwere staying abreast of best practices demonstrates that the creditunion was, in fact, living up to the standard of duty ofloyalty and duty of care.

Duty of Loyalty requires a director to act in goodfaith in the best interest of the organization and not in thedirector's own interest. Accordingly, the director avoids allconflicts of interest. The board should review its Code ofEthics at least annually. Board members must fully understandthe Code of Ethics and the issues involving conflicts ofinterests. Signing the ethics disclosure form should be part of theboard's regular duties.

Management compensation is an important element of the dutyof care. The board must be engaged and assure that thecompensation committee is well functioning. Board oversight meansthat management is paid fairly and appropriately. It means that theboard sees that compensation is aligned with the mission of theorganization and the strategic plan.

Design of management compensation systems should beindependently verified with boards and their compensationcommittees having access to independent counsel.

Of the Web seminar credit union participants, about 60% agreedthat transparency was good. Anne noted the importance oftransparency between management and their compliance groups andwith regulators. Credit unions will be in a stronger position whenconfronting a significant regulatory challenge, when it hasdeveloped the relationship with its regulators before a problemoccurs; they know in advance what the credit union is trying toaccomplish and the challenges that it faces.

Tim agreed that discussions with the regulators build the trustrelationship. Continual communication can minimize regulatoryproblems if an issue does arise.

Quality communication among management, the board and regulatorsis important for risk management. This conversation must be basedon sound values that support the firm's mission. Addressing anyregulatory problem must be done at the highest intellectual level.No one should fear “retribution or payback”.

Tim explained that there are systems in place to avoid anysemblance of regulatory retribution or payback. Debbie Matz, thechair of the NCUA Board, has explicitly stated that this will notbe tolerated.

Anne pointed out that now there is much more communication amongthe regulatory agencies, and much less compartmentalization than inthe past. For example, if the SEC were to receive a complaintrelated to a credit union, it would communicate that complaint tothe NCUA.

Creating a culture of common sense ethics in the credit unionindustry will benefit it in a number of ways. It will help in thecompetition for talent, with credit unions attracting smart anddecent people. A focus on the mission of the credit union and theirdedication to values will attract talent with character and goodindependent judgment. These are the qualities that will help theindustry succeed during a time of heightened scrutiny.

Values require that management has the self-confidence to engagethe board at a strategic level on issues of ethics and compliance.The character of the board members sets the tone for the CEO andfor the firm. The values are the foundation upon which service tothe members is built.

Stuart R. Levine is chairman/CEO of Stuart Levine &Associates. He can be reached at (516) 465-0800 or stuartlevine.com.