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ALEXANDRIA, Va.- In a unanimous vote, the NCUA Board last week approved a final rule to increase the disclosures required for credit unions converting to private insurance, but did not go as far as the original proposed regulation. “NCUA made some accommodation,” NASCUS President and CEO Mary Martha Fortney commented after the meeting, but noted that her organization needed to review the rule further to determine just where the agency still may be infringing upon state’s rights, such as the voting procedures. The major accommodation that NCUA made was eliminating the prior approval of disclosure language and, instead, changing it to a contemporaneous notice to NCUA. The credit union may provide the disclosures in advance for review. It also clarifies that NCUA need not review internal credit union communications on the matter at all. While NCUA is not requiring specific language for disclosures, they must include language to the effect that the National Credit Union Share Insurance Fund has the backing of the full-faith and credit of the United States government. Though some have challenged this, including credit unions converting to private insurance within their disclosures, NCUA states that Congress and federal court decisions have made the statement irrefutable. NCUA included specific examples of what it termed erroneous information in disclosures, including that deposits are safer with private insurance because ASI has a higher equity ratio and not taking into account other factors, like the backing of the federal government. These disclosures must also state that if the credit union converts and subsequently fails, the federal government does not guarantee the members will receive their funds. This is the same disclosure language privately insured credit unions already must provide their members. However, NCUA Staff Attorney Paul Peterson said the agency felt it was common sense that members should receive this prior to deciding to convert from federal insurance to private insurance. “By law, when a credit union decides to pursue a conversion from federal to private share insurance, the decision to convert must be approved by an affirmative vote of the credit union’s members,” NCUA Chairman JoAnn Johnson said. “In recent years we at NCUA have been alarmed by the communications that we have seen made to the members of converting credit unions as they prepare to vote. These communications have not always been complete and accurate. With this rulemaking, we are attempting to remedy that.” She added, “We will look at these communications, and if they are false or misleading, we will take appropriate action to protect the members, which could include disapproving the conversion.” NCUA Board Member Debbie Matz followed up, “I see this rule being about one thing and one thing only and that’s protecting credit union members. We’re trying to make sure that before they vote on a conversion to private insurance, they’re well informed and that the information they received is accurate, timely, easy to read and understand, clear and precise.” CUNA Associate General Counsel Mary Dunn commented, “We did appreciate all the work NCUA has put into listening to the comments and making some improvements.” She noted CUNA’s key complaint about the proposal, the pre-approval requirement, was addressed satisfactorily. Matz emphasized that it is also important that the votes are properly administered and counted. The final rule included provisions from the proposal requiring a secret ballot to be tallied by a third party. Other changes from the proposed regulation include: * allowing members to withdraw their federally insured funds without penalty, should the conversion take place, for the federally insured portion (penalty will be paid on funds beyond that) if done between the time the conversion is approved and the time it takes effect; * providing examples in the preamble of misleading communications to support need for rulemaking; * final rule removes capitalization of “DO NOT approve” that appeared on the proposed member ballot; * modifying that the disclosure on the first page of a Web site in share insurance communications must be visible without scrolling to ensuring the credit union makes reasonable efforts to comply; and * clarifies NCUA approval of conversion is made after vote certification, but NCUA may invalidate beforehand if it finds share insurance communications misleading or inaccurate. NAFCU, which has previously called for the elimination of primary private deposit insurance, generally supported the initial proposal and was pleased. “NCUA made some very fair accommodations and showed it took into account the comments,” NAFCU Associate Director of Regulatory Affairs Kimberly Dewey said following the meeting. In its official comment letter, NAFCU had proposed requiring the converting credit union to contact the members via two different methods for greater awareness of the vote. NCUA did not include this in its final rule but NAFCU has asked the agency to look at it in the future. In contrast, NASCUS was concerned NCUA was trampling on state regulators’ toes. However, NCUA stated in its Board Action Memorandum, “The [Federal Credit Union] Act charges NCUA with ensuring that the needs of credit union members are met during share insurance conversions and terminations. (12 U.S.C. 1785c). This rulemaking is about ensuring that members have accurate information…[T]he rule acknowledges the participation of the [state supervisory authorities] in the conversion process. Since federal law assigns an approval function to NCUA, however, the regulation of conversions is not the sole province of state regulators. Accordingly, the proposed rulemaking does not undermine the dual chartering system… [F]ederal law places both safety and soundness and consumer protection responsibilities on NCUA. The Board believes these responsibilities are not in conflict and this rulemaking does not evidence a need to separate NCUA’s “insurer” and “regulator” functions.” As was included in the proposal, the final rule requires a list of the costs for conducting the private insurance conversion vote and that the credit union ensure and demonstrate to NCUA that it is eligible for private insurance. The final rule, like the proposal, addresses deposit insurance coverage in the case of mergers. In a merger, credit unions with over $50 million in assets must inform NCUA whether or not they plan to file pre-merger documentation under the Hart-Scott-Rodino Act, and if not why. Additionally, two merging credit unions are required to inform their members of a possible decrease in insurance coverage following a merger if the member has similar accounts in both institutions that add up to more than $100,000. The continuing credit union can either notify all members of the possibility, notify only those who are members of both institutions, or only notify those who could actually have uninsured funds six months after the merger. [email protected]

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