CUNA Comment Letter

Fiduciary Duties at Federal Credit Unions; Mergers and Conversions of Insured Credit Unions

May 28, 2010

Ms. Mary Rupp
Secretary to the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428

RE: 12 CFR Parts 701, 708a, and 708b Fiduciary Duties at Federal Credit Unions; Mergers and Conversions of Insured Credit Unions

Dear Ms. Rupp:

This comment letter represents the views of the Credit Union National Association (CUNA) regarding the National Credit Union Administration Board’s (NCUA’s) proposal, published in the Federal Register for comments on March 29, 2010, to clarify the fiduciary duties and responsibilities of federal credit union directors, and add new provisions for insured credit union conversions and mergers. By way of background, CUNA is the largest credit union advocacy organization in this country, representing approximately 90% of our nation’s 7,800 state and federal credit unions, which serve 92 million members.

CUNA appreciates NCUA’s efforts to clarify the fiduciary duties of federal credit union directors and to protect the rights of credit union members during a conversion or merger. However, based on feedback from credit unions and our analysis, CUNA has a number of significant concerns with the proposed rules.

Summary of CUNA’s Views


The proposed rule is related to an Advance Notice of Proposed Rulemaking and Request for Comment (ANPR) from January 2008. In the ANPR, NCUA asked if it should adopt proposed rules for credit union mergers and conversions. At the time, CUNA did not support the suggested rules in the ANPR, because credit unions faced significant regulatory burdens from NCUA and other regulators, but CUNA noted that some guidelines were appropriate for specific circumstances such as a “hostile merger” situation. In addition, CUNA has supported dialogue within the credit union system to determine if appropriate fiduciary duty guidelines could be developed.

1. Fiduciary Duties

Uniform Fiduciary Duty Standard

The proposed rule would establish a uniform fiduciary duty standard for federal credit union directors. Federal credit union boards of directors would be able to delegate operational functions, but not the ultimate responsibility for these operations. The proposed rule provides the following:

In general, the requirements that directors should act in good faith in the best interest of their members, and administer the affairs of the credit union fairly and impartially, are consistent with existing state law fiduciary duty standards. We recognize the value of federal credit union directors having their existing fiduciary duties clarified.

We also support ensuring that directors understand the finances and balance sheet of the credit union they serve. However, it should be the credit union board's collective responsibility to ensure this is the case for each board member, and not an authority that an examiner could enforce against an individual director. The credit union board should have a written policy that could be reviewed by the examiner.

However, the proposed approach—issuing a regulation applicable to federal credit unions primarily premised on deposit insurance provisions of the FCUA established by FIRREA—would be redundant with existing state law fiduciary duties.

We therefore ask the Board to consider adopting an approach to state fiduciary duty law similar with the OCC’s policy regarding state corporate law’s application to national banks. Under 12 C.F.R. § 7.2000, OCC has clarified that a national bank’s corporate governance is controlled by “applicable Federal banking statues and regulations, and safe and sound” operation but is otherwise controlled by state corporate law. The OCC regulation permits a national bank to adopt a bylaw, which specifies one of three sources of state corporate law: (1) the corporate law of the state of its home office; (2) the corporate law of Delaware; or (3) the Model Business Corporations Act.

We recognize that state law does not always specifically address corporate governance questions about credit unions per se. However, we believe that it would be reasonable for NCUA to specify by rule that a state’s law for governance of stock corporations applies to federal credit unions to the extent that the state law does not conflict with the FCUA or NCUA rules. State fiduciary duty and other laws applicable to corporations are usually well delineated, especially in the case of Delaware. This approach would be consistent with the Agency’s goal of better defining federal credit union directors’ fiduciary duties.

Even though the concept, purposes, and culture of not-for-profit credit unions are highly distinct from those of most for-profit stock corporations, an NCUA regulation similar to 12 C.F.R. § 7.2000, which specifically references state laws for stock corporations, would be reasonable because Congress borrowed liberally from the law of stock corporations in providing standards for credit union governance. For instance, federal credit union members are shareholders in the federal credit union and, like common stock, these shares represent equity ownership interests. See 12 U.S.C. § 1757(6). Also like corporate shareholders, federal credit union shareholders elect the institution’s board, are paid dividends on their shares, and have other rights analogous to those of corporate shareholders, such as the right to examine the institution’s books and records.

We recognize that not all aspects of state corporate law for stock corporations make sense for federal credit unions. Some of the differences between credit unions and stock corporations might need to be specifically addressed in any NCUA rule so as not to have unintended consequences, especially since federal credit unions are not-for-profit enterprises whereas most stock corporations operate for profit. Nevertheless, we believe that state corporate laws are the appropriate place to start any rulemaking on the fiduciary duties of credit unions boards of directors.

Such a rule would enable NCUA to take prompt enforcement action against breaches of fiduciary duty by making violations of state corporate law standards violation of a federal rule as well. In addition, in many situations, state corporate law provisions which conflict with the FCUA or NCUA rules would be preempted, as is the case for national banks pursuant to 12 C.F.R. § 7.2000.

Adopting a regulation for federal credit unions similar to 12 C.F.R. § 7.2000 would help clarify not only the fiduciary duties of directors, but also many other areas of federal credit union governance not addressed by the FCUA or NCUA regulations. Such a regulation would be generally consistent with NCUA’s current policies holding that the corporate law of the state where the federal credit union's home office is located controls on matters of corporate governance not addressed by federal law, but would make NCUA’s policy clearer for federal credit unions, for their members, and for any court.

The approach suggested here would also minimize the creation by this rule of additional regulatory burdens for credit unions, since we believe that credit unions (including federal credit unions) are already subject to most of the state standards that we are suggesting for incorporation into federal law.

Rather than adopt this standard now, NCUA should help increase credit unions’ awareness of their fiduciary duties by issuing a regulation clarifying how state fiduciary duty and other corporate laws apply to federal credit unions, as suggested above, and discuss these standards more broadly with credit unions in agency meetings around the country.

No Indemnification for Fundamental Rights Decisions

We are very concerned with the scope, effects, and unintended consequences of the proposed rule that prohibits indemnification. In the proposed rule, a credit union may not indemnify its employees for grossly negligent, reckless, or willful misconduct on decisions that affect the fundamental rights of its members.

For a number of reasons, we believe that the proposed rule that prohibits indemnification is not reasonable.

2. Credit Union Conversions and Mergers

While we support adequate due diligence and integrity in the voting process, the proposed rules would unnecessarily increase the complexity and time to complete a credit union merger.

An Independent Entity for Voting; A Credit Union Conversion into a Mutual Savings Bank

We support an independent entity that is intended to improve the fairness and integrity of the voting process. However, it is important that a rule governing such an entity be drafted an implemented with sensitivity to any additional costs and complexity it would create for credit union conversions and mergers.

In the proposed rule, there would be procedures for an independent entity to tally, record, and certify the votes for a credit union conversion into a mutual savings bank, a credit union merger into a bank, or a credit union merger with another credit union. These procedures are intended to protect the “secrecy and integrity” of the voting process. The vote must be conducted by an independent entity that would prevent credit union staff from accessing interim vote tallies during the balloting. In addition, the proposal would require disclosure of the estimated costs of conversion on separate lines, and disclosure to NCUA of correspondence with any other agency that is related to the conversion. The proposal also recommends that converting credit unions not use employees to solicit member votes.

A Credit Union Merger with a Bank

We support adequate and independent due diligence requirements for a credit union merger into a bank. In the proposed rule, there would be a broader merger definition that includes a transfer of “substantially all" its assets. There are additional proposed related due diligence requirements for directors to obtain an independent valuation of the credit union; determine any compensation for the diminished or loss of ownership rights for credit union members; disclose other pertinent merger-related information; and use the proposed independent entity for the voting process.

A Credit Union Merger with another Credit Union

These proposed rules would impose additional costs and complexity to a significant number of credit unions that are interested in a merger with another credit union for further growth or consolidation. There will be a significant impact because there were over 200 credit union mergers in 2009. Unlike conversions or mergers between a bank and a credit union, mergers between two federally-insured credit unions do not result in fundamental changes to members’ rights or to the insurance status of their deposits.

Here are the concerns we have with these credit union to credit union merger provisions:

The Termination of Federal Share Insurance

We do not oppose more direct disclosure for a conversion from federal share insurance, which will provide greater notice to credit union members.

In the proposed rules, for a conversion of federal share insurance to nonfederal insurance, NCUA’s approval is contingent on a six month period to complete the conversion and merger. For the termination of federal share insurance for state credit unions, the proposed disclosure explicitly lists the name of the private share insurer.

Regulatory Relief and Conclusion

In general, the proposed regulations should be tailored to avoid adding significant costs and regulatory burden to credit unions.

CUNA appreciates NCUA’s efforts to clarify the fiduciary duties of federal credit union directors and to protect the rights of credit union members during a conversion or merger process. While we support protecting the rights of credit union members, we think that the state law approach discussed in this letter strikes a reasonable balance between member protection and minimizing burdensome regulation.

We strongly urge NCUA to support greater regulatory relief for credit unions because credit unions continue to face a challenging business and regulatory environment.

Thank you for the opportunity to express our views on this important rulemaking. If you have any questions about our letter, please do not hesitate to give me a call at (202) 508-6736 or you may contact Michael Edwards, CUNA Counsel for Special Projects at (202) 508-6705.


Mary Mitchell Dunn
CUNA Senior Vice President and Deputy General Counsel