CUNA Comment Letter -- NCUAs Proposal on Golden Parachute and Indemnification Payments
September 7, 2010
Ms. Mary Rupp
Secretary to the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314
|RE:||NCUAs Proposal on Golden Parachute and Indemnification Payments|
Dear Ms. Rupp:
The National Credit Union Administration (NCUA) Board is seeking comments on a proposed rule regarding prohibited golden parachute and indemnification payments for federally insured credit unions (FICUs), including natural person and corporate credit unions. This letter represents the views of the Credit Union National Association (CUNA) concerning this proposal, which were developed under the auspices of the CUNA Federal Credit Union Subcommittee, chaired by Truliant Federal Credit Union President and CEO, Marc Schaefer. By way of background, CUNA represents approximately 90 percent of our nations 7,700 state and federal credit unions, which serve an estimated 93 million members.
In CUNAs view, proposals on these subjects, especially the issue of indemnification, should reflect several important considerations. First, the system of credit union board governance, which depends in large measure on the willingness of volunteers to serve, is a remarkable and delicate structure that deserves protection and encouragement. This includes some measure of protection from the prospect of personal ruin resulting from legal proceedings that may or may not ultimately have merit.
Also, we believe NCUA must be careful to avoid even the appearance that it is attempting to tip in the scales of justice in its favor by writing rules that would disadvantage credit unions or their officials should challenges under such rules occur, especially since NCUA has much greater resources to pursue litigation than do either credit unions or their officials.
In light of these considerations and others discussed below, CUNA does not support this proposal. Particularly regarding the indemnification provisions, based on these concerns and others raised by credit union officials, we urge the Board to drop these amendments. If the Board determines it is in the best interests of credit unions to proceed, we urge the Board to make a number of changes and then seek further comments from the credit union system before moving forward on these issues.
Background on the Proposal and CUNAs General View
Under the proposal, FICUs, regardless of their financial condition, would not be permitted to make payments to an institution-affiliated party (IAP) to compensate them for any legal costs or other professional expenses they may have incurred in connection with administrative and civil proceedings by NCUA or a state regulatory agency where the IAP has been assessed a civil money penalty, removed from office or made subject to a cease and desist order. (IAPs are defined under Section 206(r) of the Federal Credit Union Act (FCU) Act. They include a credit union committee member, director, officer, or employee of or agent for an insured credit union, as well as certain consultants, and independent contractors who have knowingly or recklessly participated in a violation of a law or regulation, breach of fiduciary duty or any unsafe or unsound practice which caused or is likely to cause a loss to the insured credit union.)
Also, an FICU would not be able to make golden parachute payments to an IAP if the FICU is: insolvent, in conservatorship, has a CAMEL 4 or 5 rating, or is otherwise in a troubled condition. A credit union that has received NCUSIF assistance under Sections 208 or 216 of the FCU Act would be considered in a "troubled condition."
As proposed, the regulation would cover all new employment contracts on or after the effective date of the rule and existing contracts that are renewed or modified after the effective date. Existing arrangements that are not changed or renewed would not be affected.
Last December, NCUA issued a similar proposed rule that only applied to corporate credit unions; it was included in the overall proposed rule on corporate credit unions that is still pending at NCUA. CUNA opposed the prohibition on indemnification for corporate credit union officials and noted that the agencys proposed corporate governance requirements were generally too prescriptive and in some instances, unnecessary.
According to NCUA, the purpose of the proposal is to protect the NCUSIF by preventing the wrongful or improper disposition of FICU assets and to inhibit rewards to IAPs who may have contributed to an FICUs troubled condition. In addition, the proposed regulation is intended to clarify the differences between legitimate employee severance payments and improper golden parachute payments, and to make NCUA's rules more similar to regulations for banks on these issues.
CUNA has a long-standing record of support for strong safety and soundness regulation of credit unions. We appreciate, and have endorsed, the agencys efforts in a number of instances to reduce and limit NCUSIF costs.
Nonetheless, CUNA is generally concerned that the scope of the proposal is too far-reaching and will have a chilling affect on the ability of credit unions to attract management personnel and board members. Moreover, the proposal stakes out a much greater role for the agency in the regulation of corporate governance issues than it currently assumes. Since this is an area of the law that is generally addressed under state law, we believe much more justification than what was provided with the proposal is needed to provide the basis for these changes, particularly as they apply to natural person credit unions. We are also concerned that aspects of this proposal if adopted may interfere with the right to counsel of an IAP as well as of the credit union.
In addition, a number of credit unions have questioned whether NCUA has crafted a proposal for all federally insured credit union that is based on its concerns regarding problems experienced by a limited number of corporate credit unions.
Further, we seriously question the need for the shortened comment period for this proposal, particularly since the agency has not provided adequate justification for the compressed comment period. Virtually everyone in the credit union system is inundated with regulatory issues, including new regulatory proposals. Some of these are from NCUA but many others are from other agencies. While NCUA cannot control how other regulators handle their proposals, we urge the agency to be mindful of the multitude of proposals that affect credit unions, including those beyond NCUA, and to ensure credit unions are provided with sufficient time to consider and comment on significant NCUA issues such as this one.
CUNAs Specific Comments on Prohibited Indemnification Payments
As stated above, the proposal would prohibit indemnifications for IAPs under certain conditions, although FICUs would be able to continue to purchase reasonable commercial insurance policies or fidelity bonds covering key personnel. As NCUA indicated, such insurance generally does not cover any penalty or judgments against an IAP, but would cover the potential future costs of defending against administrative and civil proceedings.
In order to provide indemnification payments for an individual, the FICUs board must first in good faith determine after an investigation that: 1) the IAP acted in good faith that he or she thought was in the best interests of the FICU; 2) the payments will not materially affect the safety and soundness of the FICU; 3) the payments will not ultimately become prohibited indemnification payments that are related to administrative or civil proceedings as described above; and 4) the IAP agrees in writing to reimburse the FICU for indemnification payments that subsequently become prohibited, to the extent not covered by the commercial insurance policies or fidelity bonds.
CUNA has a number of concerns about the indemnification provisions.
The process NCUA has outlined under the proposal to investigate whether conditions are appropriate for indemnification payments is too cumbersome and the standards for assessments are too vague, leaving the agency considerable latitude to second guess the credit unions decision.
For example, it is far from clear what is required of the credit union to act in good faith or how it should determine the motives of a party to which it seeks to provide indemnification payments. These requirements and the uncertain standards associated with them would make it very difficult for a credit union to provide indemnification at all for key credit union officials.
Furthermore, there are no safeguards in the proposal that would preclude NCUA from blocking an indemnification payment because the examiners or others at the agency do not want to accept the credit union board's "good faith" determination. Likewise, if NCUA does not want to accept that the individual involved acted in "good faith," that could be grounds for challenging the credit union's indemnification.
Moreover, a credit union may be very reluctant to offer indemnification payments to any individuals at all for fear the payment will ultimately be prohibited. This could mean that individuals will have to assume virtually all costs for their defenses, and only when completely exonerated could they be reimbursed by the credit union.
An individual who is paying for his or her own legal expenses may have to settle for representation that is affordable as opposed to representation that would represent his or her interests comprehensively, which indemnification from the credit union might help the individual obtain.
In addition, prohibited payments, if erroneously made by the credit union to an individual, would have to be repaid but what if the individual does not have the means to repay? Is the credit union on the hook to pursue the funds or replace them at the credit union?
The proposal allows for partial indemnification if the individual is found not to have violated the law or breached his or her fiduciary duties. If NCUA adopts this rule, in those instances, full indemnification should be permitted. Also, the proposal allows for credit unions to apply for exceptions under the golden parachute provisions. A similar process should be permitted for indemnification payments.
Prohibited Golden Parachute Payments
A golden parachute payment is one that is made to an IAP, such as a CEO, that is provided generally following the termination of the individual's employment. Under the proposal, FICUs would not generally be allowed to make golden parachute payments to an IAP if the FICU is: insolvent, in conservatorship, rated CAMEL 4 or 5, or in an otherwise troubled condition. A credit union that has received assistance under sections 208 or 216 of the FCU Act would be considered in a "troubled condition."
Generally, deferred compensation plans and legitimate "nondiscriminatory" severance pay plans are not considered golden parachute payments. (Nondiscriminatory plans apply to all employees of an FICU that meet reasonable and customary eligibility requirements, and differences in benefits per employee are acceptable if they are based on objective criteria.) In addition, an FICU may request approval from the NCUA Board for a golden parachute payment under three other exceptions.
- FICUs that are insolvent, in conservatorship, rated CAMEL 4 or 5, or in an otherwise troubled condition, may pay golden parachute payments in order to hire new management to help bring a troubled FICU back to sound financial health or in an effort to prevent the credit union from imminently satisfying the criteria for a troubled condition;
- FICUs may also pay reasonable severance plan payments if there is an unassisted merger that involves a troubled credit union. Such reasonable severance payments related to an unassisted merger require the consent of the Board prior to making the payment and must not exceed twelve months of the IAPs salary; and
- In addition, there is a general exception under which the Board (with the concurrence of the appropriate state supervisor for a state chartered credit union), may determine if the payment is permissible.
For each of these exceptions, an FICU must demonstrate to the Board that the IAP did not have any responsibility for the troubled condition of the FICU. The Board may consider these factors: 1) whether, and to what degree, the IAP was in a position of managerial or fiduciary responsibility; 2) length of time the IAP was affiliated with the FICU, and the degree to which the proposed payment represents a reasonable payment for services rendered over the period of employment; and 3) any other factors or circumstances.
Again, CUNA does not believe NCUA has justified the need for these changes. If NCUA proceeds with these revisions, we would support an additional provision regarding golden parachute payments. We believe such payments should be permissible to former officials of credit unions in conservatorship, CAMEL 4 or 5 credit unions or those in troubled condition situations in which the official receiving the payment was not involved in causing the loss.
CUNA does not support or endorse unjust enrichment for any financial institution official, including those that serve credit unions. Further, we appreciate that NCUA wants to contain losses to the NCUSIF, particularly in this time of economic hardships and in consideration of the large costs the NCUSIF must bear now and into the future, according to the agencys estimates.
However, because most credit union officials are hard-working, dedicated individuals whose chief motivation is to serve their credit unions well, we do not agree that this proposal is necessary and do not believe the need for the rule has been sufficiently documented in the supplementary information to the proposal.
CUNA cannot support proposals that do not provide proper safeguards for credit union officials who strive to fulfill their duties and serve their credit union to the best of their capabilities, which is the case in the vast majority of credit unions. We urge the agency not to adopt this proposal as issued, and to consider whether the indemnification provisions in particular should be dropped altogether or whether they can be improved sufficiently to achieve the agencys objectives while protecting upstanding and committed credit union officials. Thank you for your consideration of our concerns.
Mary Mitchell Dunn
SVP and Deputy General Counsel
Credit Union National Association