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ALEXANDRIA, Va. – Beginning in a couple of weeks, credit unions seeking to convert to mutual banks will have to present their members with significantly targeted information about both their conversion efforts and the impact they may have on their members. According to the final version of the NCUA’s conversion charter rule, which the agency board approved on January 13, 2005, every communication from the credit union to its members about the conversion will have to include a statement prepared by the agency and include information from the credit union. The statement states in clear language that changing to a mutual bank usually means that account holders with larger balances have more votes. Credit unions, by contrast, hold to the rule of one member, one vote. It makes it clear that most credit union directors serve as volunteers and that in a bank they are compensated, along with the fact that as a bank the institution will face more taxes. If the credit union takes the second step and converts to a stock issuing structure, whether a bank or a holding company, the statement makes clear that the credit union executives can profit by obtaining stock “far in excess of that available to the institution’s members.” It also requires the credit union estimate the costs of the conversion process, including the costs of printing, postage, advertising, consulting and professional fees, legal fees, staff time, the cost of holding a special meeting and conducting the vote, along with any other costs. Finally, the statement must be surrounded by a box whose border is one point larger than the size of the text and there are significant parts of the statement that are entirely in upper case. In addition, the rule mandates a secret ballot in conversion votes and having an independent third party count the votes. “NCUA understands that members, including those that are employees of the credit union, may be uncomfortable with a voting process that does not protect the privacy of their votes,” the agency wrote, in an apparent allusion to the previous experience at Columbia Community Credit Union. “NCUA is concerned this may lead some members to choose not to vote or to vote in a manner inconsistent with their true wishes.” Alan Theriault, a consultant with CU Financial Services who advises credit unions seeking to change their charters said he was not surprised by the board’s passage of the final rule, asserting that it signaled the reality that “there would be no secondary capital relief” and that the NCUA was focused on “keeping the remaining credit unions, credit unions.” “You have to ask how many of these conversion rules there are going to be,” Theriault said. “They have already opened the door to having more. Are they just going to keep building until they build the wall high enough?” In addition to a prepared statement, NCUA Board Chairman JoAnn Johnson praised Frank Kressman, an attorney with the agency’s General Counsel’s office, and the other staff for their work on the rule which has been difficult and painstaking, she said. The staff took particular care to evaluate the 42 suggestions and comments that came in after the preliminary rule was published in July. These resulted in two relatively minor changes. First, the agency changed the rule’s language to reflect that some states allow credit union board members to be compensated and, second, the agency allowed credit unions to use parliamentary procedures other than Robert’s Rules of Order. But the agency rejected many of the other objections raised by the American Bankers Association, other banking groups and conversion consulting firm CU Financial Services. Some had objected that mutual banks do not have to go to a voting structure based on account size but can have the same one member, one vote rule that credit unions use. The agency replied that the mutual banks “usually” choose to weigh voting according to account size and that it believed that statement to be accurate. Others objected that the additional steps that a mutual bank must go through in order to issue stock are all regulated and need not be addressed in the initial step from moving from a credit union to a mutual bank. But the agency replied that those additional regulatory steps did not preclude it from being concerned with all the ramifications of the conversion decision. “NCUA recognizes that additional steps and member votes are required to approve an MSB [mutual savings bank] to stock institution conversion,” the agency wrote. “This does not lessen NCUA’s concern about protecting credit union members’ interest in their credit union. Those additional steps and member votes, although possibly scrutinized by other regulators, occur only after the credit union has converted to an MSB and is on its way to converting to the stock form of ownership. Obviously, at that point, the credit union does not exist and the additional requirements can do nothing to enable a credit union member to make an informed decision on the initial conversion from a credit union to an MSB.” One possibly sticky area might be the language relating to stock conversions, which appear to imply that credit union directors will enjoy stock advantages that other former credit union members might not have. “In a typical conversion to the stock form of ownership, the executives of the institution profit by obtaining stock far in excess of that available to the institution’s members,” the agency’s mandated disclosure notice read. But it is unclear that this statement is truly accurate. While it is certainly true that most executives of these former credit unions have access to stock sharing plans that other members or shareholders will not have, it is not really true that the executives have any `inside track’ to getting stock. In most conversion cases, the members of the former credit union who have joined before the cut-off date generally enjoy the same opportunity to purchase stock that the executives have. The executives can often take greater advantage of the opportunity the stock purchase affords because they may have the greater means to do so, but merely having greater means doesn’t necessarily translate into having greater opportunity. The agency also took the unusual route of having the rule go into effect as soon as it is published in the Federal Register and thus forgoing the usual 30-day period between publication and when a rule comes into force. “There is a strong public interest in having this consumer protection rule in place immediately to provide credit union members with clear, concise, meaningful information concerning the vote,” Johnston said. “It is also important to provide regulatory certainty to credit unions that are considering converting or beginning the conversion process within the next 30 days to enable them to better understand what regulatory requirements they must follow throughout the conversion process.” But Theriault scoffed at the explanation arguing that the agency felt it had to move quickly to cut off any other credit unions that might be ready to “push the button.” “They clearly fear that many more credit unions are interested in doing this and want to dissuade them,” Theriault said. “But I don’t believe this will have any noticeable effect and I believe many will be surprised at how many credit unions are looking to make this change,” he added. -

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