CUNA Regulatory Comment Call

January 24, 2008

NCUA Seeks Comments On Whether It Should Issue Rules On Charter Changes And Share Insurance Terminations


The National Credit Union Administration Board is seeking comments through April 30, 2008 on an Advance Notice of Proposed Rulemaking under Parts 708a and 708b of its regulations regarding mergers, conversions to another type of financial institution, and terminations of federal share insurance. The ANPR was approved for comments at the Board’s January meeting. Click here for a copy of the ANPR. Click here for notice of time extension.

CUNA’s Examination and Supervision Subcommittee, along with our Federal Credit Union Subcommittee, will be reviewing the ANPR and helping to develop CUNA’s comment letter.


Comments may be submitted to NCUA through the agency’s website or through Commenters should include their names and “Comments on Advance Notice of Proposed Rulemaking for Parts 708a and 708b” in the email subject line. Letters may also be faxed to 703-518-6319 or mailed to Ms. Mary Rupp, NCUA Board Secretary, 1775 Duke Street, Alexandria, VA 22314-3428.

Please share your letters with us and send them to CUNA’s Regulatory Research Counsel Luke Martone at If you have questions about this Comment Call or the ANPR, contact Mary Dunn, CUNA’s SVP and Deputy General Counsel at


According to NCUA, the agency is seeking to protect the interests of members when their credit union is considering transactions that would significantly affect members’ rights, such as a change in the ownership of the credit union, termination of a credit union’s charter or its federal share insurance.

More specifically, NCUA is focusing on six types of transactions:

NCUA states that while these transactions are permissible, they may result in diminishing member ownership or removing federal share insurance. Also, while the agency has issued rules on a number of these transactions, it has not developed regulations on the merger or conversion of a FICU into an institution other than an MSB. NCUA states that its legal authority to regulate these transactions is derived from the Federal Credit Union Act, 12 USC 1766(a), 1785(b), 1785(c), and 1789(a).


NCUA has not issued a rule on mergers or conversion of a FICU to an institution other than an MSB because there have been just a few of these transactions and such transactions approved by the Board generally followed the agency’s requirements, the ANPR states. Factors that NCUA considers in such transactions include:

NCUA is now considering whether a regulatory framework rather than the case-by-case process it uses now would be more appropriate for these types of transactions. The agency points out that the downsides to such a rule are that it might actually encourage such transactions. On the other hand, it could set forth the appropriate safeguards for members’ interests and benefit all parties by knowing what is expected of them in the process. NCUA notes that such a rule could be modeled after 708b, the rule that governs credit union into credit union mergers.


NCUA is also requesting comment on whether there is a need for a regulation to address the fiduciary duty credit union directors owe to members and the need for additional regulatory provisions to guard against insider enrichment in any of the six types of transactions mentioned above.

The ANPR notes that the NCUA Board has a number of specific responsibilities to protect members' interests, such as when it reviews applications for directors or senior management at a newly chartered or troubled credit union or when it acts as the conservator or liquidating agent of a FICU. The ANPR also notes these provisions support the view that credit union directors have a fiduciary duty to their credit union members.

Such a duty has not been regulated by NCUA, and the agency is considering establishing a duty of care for directors that would apply when they are making decisions regarding the six types of transactions above. Currently, credit union board members must rely on state law to guide them on fiduciary duty issues and such law can vary from jurisdiction to jurisdiction. The standard of care ranges from a low standard that only requires a rational basis for certain actions to one that requires decisions to be made based on a full consideration of all alternatives.


The ANPR notes that in some cases of FICU to MSB conversions, credit union officials have pursued personal enrichment to the detriment of the membership. NCUA has adopted disclosure requirements to address this concern but additional requirements may be needed to guard against such enrichment.

In that connection, the agency is considering whether new requirements to set a record date for voting which would provide a disincentive for family members of a credit union’s officials from joining a credit union to take advantage of the conversion.

NCUA is also considering whether a merger dividend or other return of shares or shares should be required in mergers and conversions. The other option NCUA is considering is whether such a dividend should be considered by the Board as part of its due diligence as opposed to a specific requirement from NCUA.

The ANPR notes that not imposing such a dividend allows credit unions flexibility to decide for themselves whether it is appropriate. It also notes that requiring such a dividend has advantages such as rewarding the merging credit union’s members, and equalizing the net worth between the two credit unions.


NCUA notes that there have been improper communications to members during some conversion transactions. The communicators implied that NCUA endorsed the conversion or conversion-related materials. NCUA is considering whether there should be a specific prohibition against stating or implying such an endorsement. NCUA is also considering whether a statement should be included that NCUA has not endorsed the transaction.

Another concern that has arisen is when a credit union seeking to convert provides misleading information regarding the location of continuing branches or other services. The ANPR cites two examples of such communications. In that connection NCUA is considering requiring converting credit unions to research whether the transaction will result in closing or moving branches or losing access to services. NCUA is also considering whether to issue a more general rule regarding the need to disclose such information.

NCUA is also requesting comments on whether a credit union seeking an unfriendly merger with another credit union should be precluded from communicating with the target credit unions’ members. The agency notes that it does not have direct jurisdiction over such communications by noncredit unions. Another approach, the ANPR notes would be to establish communication standards that would have to be met as part of the merger.


The ANPR notes that NCUA has found irregularities in a number of close member votes in recent years on conversion or merger issues. To address concerns, the agency is seeking comments on whether members should be allowed to request a recount when there is enough evidence to show that the original tally is not reliable. NCUA is also considering several prohibitions imposed on the board or management regarding the voting process which would include disallowing:


Here are the particular issues on which NCUA is seeking comments:

Eric Richard • General Counsel • (202) 508-6742 •
Mary Mitchell Dunn • SVP & Deputy General Counsel • (202) 508-6736 •
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 •
Lilly Thomas • Assistant General Counsel • (202) 508-6733 •
Luke Martone • Senior Regulatory Counsel • (202) 508-6743 •