NCUA Launching Conversation over Proposed Rulemaking Guidelines

ALEXANDRIA, Va. — NCUA wants to start a conversation with the industry regarding how it can better protect credit union member interests under a broad range of circumstances, including so-called hostile mergers of one CU with another and possible mergers between credit unions and stock-issuing banks.

NCUA Chairman JoAnn Johnson remarked that she considered the Advanced Notice of Proposed Rulemaking–which the NCUA board approved at its Jan. 24 meeting–one of the most important that the agency had issued during her tenure because it directly impacted members' “core interests” and matters that “go to the heart of what it means to be a credit union member.”

At the same time, Frank Kressman, staff attorney in the Office of General Counsel, presented the notice to the board explaining that, despite its name, NCUA considered the ANPR to really be more of an “information gathering tool” than a definite commitment to issue regulations in any specific area. Instead, he said, the agency wants the ANPR to spur credit unions and leagues to tell NCUA what they think about the different topics the ANPR touches upon and that this input might lead the agency to issue a number of different rules.

“It's quite possible that after the comments are received [in response to the ANPR] we will review them and then decide to propose regulations with specific regulatory language in a number of different areas, perhaps a number of different regulations,” Kressman explained.

Credit unions have 60 days from Jan. 25 to comment on the regulations. CUNA and NAFCU both indicated that they wanted time to study the broad proposal and CUNA said it expected to share it with the relevant committees at its Government Affairs Conference in March.

Many have expressed reluctance to say anything firm about the proposal due to its large scope. The agency's ANPR discusses the merger of a federally insured credit union with–or a CU conversion to–a financial institution other than a mutual savings bank. NCUA currently does not have regulations governing these transactions. Also, NCUA is considering amending its regulations regarding mergers, charter conversions, and changes-in-account insurance to address issues that affect member rights and ownership interests. These include communications to members, voting integrity, fiduciary duty obligations for insiders, and member interest in credit union equity, for example, through merger dividends.

The agency acknowledged that there might, in fact, be downsides to issuing regulations in some of the areas, especially the movement of credit unions directly to stock issuing banks. Sources familiar with the question pointed out is not covered in the current credit union law.

“Potential downsides to issuing a rule are that, having a rule in place might encourage these transactions and many observers believe they are only in unusual circumstances, in the best interests of members,” NCUA wrote in the ANPR. “Nevertheless, having a rule in place, with appropriate safeguards for member interests, could assist all parties, including the NCUA Board, in protecting member interests in their credit unions.”

For the most part, sources on both sides of the conversion question declined to speak for the record until they had a chance to review the ANPR more thoroughly. One noted, however, that the agency's prior regulations did allow a direct CU-to-stock bank conversions, albeit with the requirement that 50% of all CU members eligible to vote would have to approve it–a standard considered impossible to meet.

The ANPR also discussed whether regulations are required to address the question of board members' fiduciary duty in charter changes and conversions, a topic that has been raised by conversion opponents and generally has been considered unclear in existing regulations and statutes.

“Unfortunately, case law and state law can vary widely from jurisdiction to jurisdiction causing confusion for credit unions and a lack of uniformity between credit unions in one state and others in other states,” NCUA noted. “As a result, the standard of care applying to these transactions can span a broad spectrum ranging from only requiring a board of directors to have a rational basis for making a decision to requiring the board to demonstrate that its decisions are made in the best interests of its members and based on a full consideration and documented analysis of all the alternatives.”

NCUA also invited discussion about the potential for insider enrichment in charter changes noting that there had been questionable examples in the past.

“NCUA is aware of conversion transactions where family members of credit union officials had joined the credit union in noticeable numbers prior to the conversion,” the agency wrote. “These new members–who may be motivated to share in the profits from an eventual sale of stock–can also skew the member vote on conversion in some instances, especially in a close vote. NCUA is considering specific regulatory requirements regarding the record date for members voting on a conversion proposal or other transaction to prevent this problem.”

Additionally in the area of credit union mergers, the agency discussed whether or not it should require credit union boards to consider offering members of a merging credit union a merger dividend as part of the transaction.

–dmorrison@cutimes.com