"In fact the board now has the power to expel anyone for any reason, it has been used to expel those who want to give power back to the members. In fact signing my name to this letter may be cause to be expelled."

Save Columbia Credit Union, the group that opposed the conversion, stated in its comment letter, "The outcome would most certainly have been very different and less costly for all parties involved if there had been the opportunity to request regulatory intervention and then engagement in a dispute resolution process that resulted in resolving the bylaw and internal governance disputes."

Costly Courts

In the opposing corner, Umholtz' letter read, "The proposed rule to reincorporate the FCU Bylaws into NCUA regulations is unquestionably directed at facilitating dissident members who wish to disrupt a credit union that chooses to convert its charter to that of a mutual savings bank. If the NCUA Board had reasonable conversion rules and modern governance requirements in its bylaws regarding special membership meetings, there would be no tangible need for increased bylaws 'enforcement.' Without these anachronistic bylaws, unreasonable conversion rules, and NCUA's in loco parentis attitude, bylaw conflicts between members and credit union boards would be extremely rare. The NCUA is, in effect, the author of the problem it now seeks to cure with more draconian measures."

He advocated instead that NCUA should allow credit unions to customize their bylaws and publish them on NCUA's Web site for modernization and transparency.

The view from the other side, including those who have lived through the conversion scenarios, was a bit different. The Michigan Credit Union League, which got caught in the middle of the DFCU conversion attempt, said that regulatory intervention is necessary and supported NCUA's proposal. President/CEO Dave Adams wrote, "Deferring to the courts has resulted in an enormous waste of time, money and resources for both the members seeking relief and the credit union, not to mention the fact that it remains unresolved after many months."

All-Inclusive

Though some commenters expressed concern that NCUA could use the proposed authorities to micromanage, MCUL felt the proposed regulation contained adequate safeguards. "While the proposal gives NCUA a significant degree of discretion, the inclusion in the commentary and Bylaw introduction of key standards for essential matters that will draw them in, will provide adequate assurances to members that the NCUA will intervene for more weighty situations."

CUNA's letter stated that it does not believe NCUA's intent is to micromanage, but the proposed regulation reads otherwise. "As proposed, NCUA would move its position on bylaw enforcement from virtually no involvement to one that claims broad authority to enforce a bylaw that it deems is 'an appropriate case.' More to the point, even though the Supplementary Information to the proposal says NCUA will focus on bylaws that address members' rights, the proposal would reincorporate by reference all of the bylaws, giving the agency the authority to enforce any and every bylaw–even those that are ministerial in nature and do not address issues of members' rights," CUNA Senior Vice President and Deputy General Counsel Mary Dunn wrote.

She continued, "The proposal contains several indications that the agency is seeking substantial new authority, despite the assurances of the Supplementary Information to the contrary." For example, Dunn said the citations of the Federal Credit Union Act seem to indicate bylaw compliance would be incorporated into examinations and that re-incorporation of bylaws would allow the agency to even lower a CAMEL rating or impose fines for any and all bylaw violations. Additionally, CUNA was concerned NCUA could be proactive in bylaw disputes rather than waiting to be asked for assistance by the interested parties.

Drain on Agency Resources

In addition, John Dee Carruth, manager/CEO of The Credit Union of Alabama, questioned whether NCUA could take the place of the court system as the proposal seems to take away that option. "Is the NCUA prepared to hold extensive hearings and permit depositions and other discovery methods if they are required? Does the NCUA have sufficient employees to act as hearing officers to take evidence and make rulings?

"If not, would this lack of resources cause the NCUA to adopt a drastically streamlined approach without these protections? Although some parts of litigation take time and make the process more expensive, they also protect the interests of the parties, including the non-complaining credit union members for whom the credit union holds a fiduciary duty to protect."

Thomas Vartanian of international law firm Fried Frank also said in a footnote to his letter that NCUA does not explain in its proposal "the basis for the NCUA's assumption that it has the expertise or authority to interpret and enforce state contract law," among a number of other issues.

The Few Over The Many?

The Michigan league was disappointed at the 750 maximum signatures needed to petition for a special meeting. This figure is insignificant for many credit unions and special meetings are considerable undertakings, Adams said. Additionally, he said that the proposal does not address the timing of the special meeting and the current 30-day time frame is insufficient. He suggested upping it to 45 days.

Navy Federal Credit Union, the world's largest credit union, opposed the proposal generally but agreed with the league's assessment on the special meeting petition maximum. "Resolution of most FCU bylaw disputes may pale in comparison with the danger the proposed bylaws place on FCUs. The proposal could effectively place hundreds of millions of dollars of owner equity at the hands of a small group of FCU members," Navy Federal's letter read. With that much on the table, "it is not inconceivable that unscrupulous interests" would use the bylaws to hijack member interests and destroy the credit union for its equity.

"With such high stakes, the threshold for recalling the board of a medium or large size FCU must be placed much higher than 750 members and the Supervisory Committee must have more than the proposed 14 days to plan for the orderly election of a new board," the letter stated.

If the proposal is finalized, the Pennsyl-vania Credit Union Association asked NCUA to clarify when it would intervene in the actual language of the regulation rather than in the supplemental information and to emphasized that examiners will not conduct bylaw compliance reviews. PCUA also asked that informal notification be issued to the credit union prior to formal regulator action.

Not all the state leagues were in agreement. The Ohio Credit Union League opposed re-incorporating the FCU Bylaws into NCUA's regulations. "The League believes that it is unnecessary and that incorporating the Bylaws back into the regulations by reference would be reregulation and overly broad and ambiguous as to the interpretations, dispute enforcements and review of the Bylaws creating a burden on the credit union in time, resources, and cost," OCUL General Counsel John Kozlowski wrote.

The league urged the agency to "consider withdrawing its proposal or at the very least redrafting the proposal," stating that this proposal imposes greater regulatory burden on federal credit unions and is "more expansive than other regulators."

NCUA Already Empowered

NCUA has maintained that it has only drastic regulatory actions it can take for bylaw violations including charter suspension or liquidation and current policy is that the bylaws are a contract between the members and the credit union to be enforced in state court.

What would be truly extreme–and unsafe and unsound–would be to institute the proposal as is, which would allow a small percentage of a federal credit union's membership to remove the board, replace it with an unelected supervisory committee and replace them with inexperienced board members, according to Fried Frank. Additionally, replacing the board with the supervisory committee exceeds NCUA's authorities, Vartanian said.

NAFCU and Navy Federal advocated that NCUA actually does have authority to enforce the FCU Bylaws. Navy Federal wrote, "We believe NCUA's longstanding view that the parties seeking resolution of FCU bylaw disputes should look to local corporate law for answers is not in the best interest of FCUs and their members…We believe the Federal Credit Union Act grants NCUA authority to promulgate rules to assure federal resolution of FCU bylaw disputes, including administrative sanctions, without reincorporating bylaws into regulations."

CUNA's Dunn added, "The most reasonable reading of the (Federal Credit Union) Act is that NCUA has authority to address bylaw disputes through actions that are short of liquidating a credit union or removing its charter. If, in fact, the statute only permits bylaw issues to be addressed through liquidation or charter removal, then no regulation from NCUA that purports to permit lesser sanctions will fill the regulatory gap and allow the agency to create such authority."

The law requires NCUA to develop the model bylaws that "shall be used" and "requires" that "special meetings may be held in the manner indicated in the bylaws" she explained. "Further, the Act states that NCUA 'may' liquidate or revoke a credit union's charter for bylaw violations, not that it 'must' take such action," Dunn wrote.

NAFCU also pointed out if NCUA intervenes "it should make clear, among other things, whether credit union members are required to first seek judicial relief, and whether and to what extent a NCUA determination will have precedential value."

CUNA offered a simpler solution than re-incorporating the bylaws by instead amending the introduction to the bylaws to state that they are a contract between the credit union and its members but "on rare occasions" NCUA may step in. CUNA suggested such bylaw violations that would include members' rights to call and attend special meetings; petition for the removal of directors and committee members with due cause; participate in the election of directors; and maintain federal credit membership. "Federal credit unions are encouraged to first settle such disputes under an internal process involving the supervisory committee or other appropriate internal body, as determined by the credit union," CUNA would have the bylaw introduction read.

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