ALEXANDRIA, Va. — As of press time it appears NCUA has received roughly 36 comments related to its most recent proposed revision of regulations that govern the conversion of a credit union to a mutual bank.
But as might have been expected from such a controversial and emotional topic, the 18 credit unions, eight credit union leagues, seven credit union and bank associations, and three law firms or consultants found little upon which they could agree.
Generally speaking, the comments broke down along previous positions that different groups have taken on the general issue of credit unions converting to mutual banks.
Comments from the credit union trade associations generally supported the NCUA proposed effort and, where they were critical at all, suggested the agency go farther than it had in its proposal. Comments from the banking associations, as well as from those consultants and law firms which make money from credit unions converting to bank charters, generally attacked NCUA for lacking the legal authority to even propose the regulations although several made recommendations for how the agency might make the "illegal" regulations better.
Less predictable were the comments from credit unions and credit union leagues. These were mostly in favor of NCUA's regulations, but many also included suggestions for how the agency could improve the proposal or escape possible pitfalls. And some comments from credit unions and leagues ran against the proposal entirely. While its comments were generally supportive, CUNA also suggested to NCUA that the agency define the term "fiduciary duty" in the context of credit union-to-bank charter change decisions and not just discuss its meaning in the supplementary information to its proposed conversion rule.
In its Aug. 28 comment to the proposed rule, the association said a definition would educate board members as to the degree of care they must exercise in a conversion decision.
"The definition should not attempt to establish all the elements of 'fiduciary duty' or provide a mechanism for individual members to challenge the routine workings of the credit union," the association wrote. "Rather, a clear statement of the basic concept of 'fiduciary duty' would serve as guidance for credit union officials as they consider conversion issues and assist the members as they assess the extent to which board and senior management are acting in the best interests of the membership." CUNA suggested "fiduciary duty" be defined as "a legal obligation directors and senior management have in their capacity as officials of the credit union to place the interests of the credit union's membership ahead of their own personal financial interests."
In its comment, NAFCU said its members would prefer credit union members have a chance to meet with their board of directors about a conversion decision rather than receive an advance notice of a conversion vote on the board. The proposed regulation would mandate that a credit union board considering a conversion vote notify members of what it is contemplating and then solicit comments from the membership about that vote.
"We are concerned that members in favor of the conversion will not be as vocal as members against the conversion in expressing their views," NAFCU wrote. "Further, giving notice of the directors' intent to consider a conversion prior to the directors' conversion vote may make the institution more vulnerable to banks seeking to acquire credit unions."
The association believed it would be better to hold a meeting between the board and members after the conversion vote, but before the membership vote. The communication requirements between members, which the regulations mandate, could also be accomplished at the meeting, NAFCU said.
Significantly, this echoed some of the comments of the banking associations, most of which argued that the advance notice and certification requirements would effectively intimidate credit union board members from ever voting to convert.
For example, America's Community Bankers argued that requiring board members to certify their support for the conversion proposal will effectively dissuade board members from voting in favor of conversions for fear of lawsuits.
"It would be difficult, if not impossible for a board of directors to meet the certification requirement if the NCUA adopts the proposed advance notice and comment process," the ACB wrote. "Together, the certification requirement and the advance notice and comment requirement would discourage board members from doing what they genuinely believe to be in the best interest of the credit union, its members, and the communities it serves." ACB argued that the NCUA erred in basing its proposed certification requirement by basing its regulation on similar regulations in place in Hawaii, Michigan, and Vermont, and promulgated by the Office of Thrift Supervision. These regulations are "mostly documentation requirements" ACB said, and not certifications in the same way that NCUA's proposed regulation envisions. This was a line of argument picked up by Bob Freedman, whose Washington, D.C. firm of Silver, Freedman & Taff has represented the CUs in most of the recent credit union-to-bank charter conversions. "We believe the NCUA is setting up a scenario that if an institution eventually intends to convert to a stock form of ownership," Freedman wrote, "that the board of directors of a converting credit union can successfully be accused of a conflict of interest, because they voted for a conversion to a mutual thrift that may 'down the road' eventually involve a situation where they receive stock compensation or directors' fees or both that they cannot receive as a credit union."
Among credit unions and credit union leagues, the critical responses included arguments that the new regulation is not necessary or that the proposed language is unfair.
In an Aug. 22 e-mail, the Indiana Credit Union League questioned the need for more regulations.
"In general, when we believe that the current rules and regulations are already sufficient to accomplish a proper regulatory objective, then we are not in favor of additional rules and regulations, which is our view on this matter."
The $499 million Indiana University Employees weighed in along the same lines.
"In light of our enduring commitment to the credit union charter, we feel that we have standing to comment objectively as a stakeholder on these proposed regulatory changes," the CU wrote. "Although the current rules do not represent great public policy, on balance we believe the conversion process is adequately controlled by the existing statute and regulation and strongly urge the NCUA Board to reject the modifications as drafted to Part 708a." In its mostly supportive Aug. 25 comment, the Washington State Credit Union League warned the agency against basing too much of its regulation on the idea of credit union boards owing fiduciary responsibility to the CU's members. Recent state court decisions in Washington have held that board of directors of state chartered credit unions do not have fiduciary responsibilities to credit union members.
"[I]f a credit union's board of directors does not have a fiduciary duty to the members of a credit union, much of the strength behind these newly proposed rules may be diffused if the NCUA relies heavily on a credit union director's fiduciary duties to credit union members rather than a fiduciary duty to the credit union as an organization," the league wrote. –dmorrison@cutimes.com
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