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ALEXANDRIA, Va. – Comments on NCUA’s proposal to require more detailed disclosures from credit unions that are considering switching to mutual bank charters ranged from those who thought the proposal did not go far enough and was illegal, to those who believed NCUA should simply stay out of the matter entirely. NCUA published the proposed rule on October 1. The changes would mandate that credit unions going through a conversion of their charters would have to disclose any economic benefit that a director or senior manager obtained from the conversion. The proposal would also mandate credit unions make it clear to their members that a conversion will change the “one member, one vote” governance structure. Converting credit unions would also have to affirmatively state whether they intend to convert to a stock issuing institution at a later date. Altogether NCUA says there were 15 comments on the proposal, with credit union trade associations, bank trade associations, law firms which work in charter conversions, credit union leagues and individual credit unions all weighing in on the proposed changes. CUNA set the tone – shared by many of the comments who generally approved of NCUA’s effort – and thought it should even go farther. In its November 26 letter, CUNA generally approved of the NCUA’s proposal but suggested that converting credit unions keep their communications regarding their proposed conversion completely separate from other credit union communication as well as give their members a chance to comment in writing about the conversion. CUNA wrote that keeping the communication separate is important “because it will facilitate the ability of members to focus on key information about a conversion and not be distracted by other disclosures or materials from the credit union.” CUNA also recommended allowing members to comment in writing about the conversion and requiring the credit union to share those comments with the rest of the membership. However, the letter refrained from recommending exactly when during the notification and voting process a credit union would be required to open itself to such comments or from recommending when a credit union should make the comments available to other members. “We wanted to leave it flexible about how exactly a credit union wanted to handle that,” said CUNA Associate General Counsel Mary Dunn. Add Some History To Disclosures Marc Schaefer, CEO of the $921 million Truliant Federal Credit Union, based in Winston-Salem, North Carolina, expressed support for NCUA’s proposal, but added that additional measures might help. “To further enhance the transparency of conversion, we suggest requiring the disclosure of the historical ratio of former credit unions who eventually convert to stock savings banks,” Schaefer wrote. “Such statistics may call more attention to the standard practices of converting credit unions,” he added. Martin Eakes, CEO of the Self Help Credit Union, a $115 million institution based in Durham, North Carolina, also supported the proposal and quoted Alan Theriault, a consultant with the firm CU Financial Services, who told a meeting of credit union managers “there are real advantages to management to convert to stock form, including some real financial gains (for management). You can’t miss it. I’m not saying that is all that drives the decision, but it’s hard to avoid.” CU Financial Services specializes in helping credit unions make the charter change and Eakes noted, “The proposed rule correctly requires credit unions seeking conversion to fully disclose potential director or officer profits from the conversion.” Writing for his firm, Theriault weighed in strongly on the NCUA proposal, calling it “illegal” and urging the agency to withdraw it. “Congress, as a matter of public policy, authorized conversion of a credit union to a bank,” Theriault wrote. “Considering and undertaking such a conversion is perfectly legal and the NCUA should not be in the business of finding loopholes to complicate, make more difficult, more costly, or which could stop conversions.” Theriault also attacked the idea the disclosure process needed tightening and suggested that many of the credit union critics had not taken the time to educate themselves on the issue. “Given that over 500,000 disclosure statements have been circulated to members of converting credit unions, the sincere critics are few,” Theriault wrote. “However, I’ve observed that some critics have private agendas and include employees of credit unions who must now compete with a more aggressive former credit union, disgruntled former employees, jilted job applicants, denied loan applicants, CU trade association employees, and consumer activists looking for a cause. For example, during a recent credit union conference, after boldly proclaiming the need for more conversion disclosure, a critic – a credit union CEO – admitted he had never read a disclosure.” NAFCU’s comment on the issue was typical of the sort that expressed general support for the NCUA taking this action, but also expressed reservations as well. In its December 1 letter NAFCU supported the disclosures of future intent and of potential changes in member voting rights. But NAFCU also raised some concerns and potential need for revisions. “For example, while a credit union may convert to a mutual savings bank and then subsequently convert to a stock institution, the credit union may choose not to exercise this option or could even potentially convert back to a credit union charter, depending on that institution’s unique circumstances,” NAFCU wrote. “In addition, a conversion to a mutual savings bank charter may lead to lesser voting rights for some members; however, voting rights may also stay the same, and depending on the number of shares the credit union member has purchased in the credit union prior to conversion, could potentially increase.” Don’t Overreach Mr. Regulator NAFCU also admitted that a significant percentage of its members questioned whether NCUA was not overreaching in its authority in this area. “The Federal Credit Union Act states, with respect to conversions to mutual savings banks, that NCUA must enact rules `that are consistent with rules promulgated by other financial regulators’ and that these rules must be `no more or less restrictive than that applicable to charter conversions by other financial institutions.’ ” A number of different comments picked up on this theme as well. The $400 million Three Rivers Federal Credit Union, based in Fort Wayne, Indiana, used a computerized form to convey its objections to the proposal, writing in part: “ We do not understand why NCUA is entering this arena,” the credit union wrote. “The credit union industry has a lot more pressing issues then this. The NCUA efforts should be devoted to the area of taxation and improving the Federal Charter. They should remove themselves from the issue. Why are they involved?…. It seems to us they are trying to protect their own turf.” Roger Michaelis, CEO of the $277 million Clark County School Employees Credit Union, also wrote against the NCUA proposal, but with a general lack of belief that the matter could be addressed at all in regulation. Michaelis wrote that his credit union is in the same community as the recently converted Columbia Credit Union (see story on pages 1-44) and that his credit union had picked up members from Columbia’s decision. “I have read the disclosures on the Columbia Credit Union conversion,” Michaelis wrote. “I have read the disclosures of many large corporations on various stockholder issues and votes. In every case the information that is provided is far beyond a lay person’s ability to understand. The complexities of these transactions are hard to understand even from an insider’s perspective. I do not believe any disclosure will make this more understandable.” He also noted that with 30,000 members, less than 200 attend the institution’s annual meetings. “Granted members have the right to vote but the practical exercise shows apathy and disinterest,” he added. [email protected]

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