CUNA Regulatory Comment Call
December 9, 2010
Corporate Credit Union Follow-up Proposal
- The National Credit Union Administration (NCUA) has issued a proposal to amend its corporate credit union rule, contained in part 704. The pending proposal follows a much more extensive final corporate credit union rule that was recently adopted by the agency.
- The proposed rule would:
- Limit natural person credit unions to membership in only one corporate at any one time and prohibit them from making any investment in a corporate where they are not a member.
- Provide for the equitable sharing of Temporary Corporate Credit Union Stabilization Fund expenses among all members of corporate credit unions, including both credit union and noncredit union members (such as credit union associations), by establishing procedures for requesting members not insured by the National Credit Union Share Insurance Fund to make voluntary premium payments to the Stabilization Fund.
- Allow corporates to charge their members reasonable one-time or periodic membership fees.
- Require corporate credit unions to maintain a record of all board of director votes, including how each director voted.
- Incorporate certain sound audit, reporting, and audit committee practices from existing non-credit union guidance, such as the Federal Deposit Insurance Corporation regulations.
- Require corporates to establish enterprise-wide risk management committees staffed with at least one independent risk management expert.
- Require the disclosure of compensation received from a corporate credit union service organization (CUSO) by certain highly compensated corporate credit union executives.
- NCUA is accepting public comments until January 28, 2011; please send any comments to CUNA by January 14.
In September, NCUA made substantial revisions to its corporate credit union rule (September corporate rule). The most significant amendments of the September corporate rule establish a new capital scheme, including risk-based capital requirements; impose new prompt corrective action requirements; place various new limits on corporate investments; impose new asset-liability management controls; amend some corporate governance provisions; and limit a corporate CUSO to categories of services preapproved by NCUA.
The current proposal is intended to address issues outside the scope of the September corporate rule that were raised by either the public or the agency during the rulemaking of the September corporate rule.
BRIEF DESCRIPTION OF THE PROPOSED RULE
Membership Limited to One Corporate Credit Union – § 701.5
Under the proposal, natural person credit unions would be prohibited from maintaining membership in more than one corporate at any one time—with the limited exception of multiple memberships during the brief period during which the credit union transitions to a new corporate. The proposed restriction would only apply prospectively, and, therefore, would not prohibit a natural person credit union from maintaining membership in multiple corporates so long as such relationships existed prior to the effective date of the final rule.
The proposal would also prohibit a natural person credit union from making any new investment—including a share or deposit account, loan, or capital investment—in a corporate of which the natural person credit union is not a member.
According to NCUA, the proposed membership limitation is intended to prevent the unhealthy competition between corporates (which led to excessive risk-taking) that resulted from natural person credit union “rate shopping” among corporates.
Equitable Distribution of Corporate Credit Union Stabilization Expenses – § 704.21
In an effort to encourage all users of corporate credit unions to share in any future expenses related to stabilizing the corporate system, the proposal provides for the equitable sharing of Temporary Corporate Credit Union Stabilization Fund (Stabilization Fund) expenses among all members of corporate credit unions, which includes all federally insured credit unions (FICUs) as well as all non-FICUs. Specifically, the proposal provides that when NCUA assesses a Stabilization Fund premium on FICUs, NCUA will request existing non-FICU members to make voluntary payments to the Stabilization Fund.
Under the proposal, when NCUA imposes a Stabilization Fund premium assessment on FICUs, a corporate credit union must provide NCUA with a list of all its non-FICU members. NCUA will then request each of these non-FICU members to make a voluntary premium payment to the Stabilization Fund within 60 days of the assessment in an amount calculated as a percentage of the non-FICU’s previous year-end assets. Specifically, the amount requested would be the non-FICU’s assets times 0.815 times the percentage of insured shares that NCUA assessed each FICU.
For non-FICUs that belong to more than one corporate, NCUA would request only one voluntary payment in connection with each Stabilization Fund assessment.
If a non-FICU fails to pay the full amount requested, the corporate would conduct a member vote on whether to expel the non-FICU member.
The proposed definition of “non-FICU” would include any member of a corporate credit union that is not insured by the National Credit Union Share Insurance Fund. In addition, the proposal notes that “[t]rade associations, CUSOs, non credit union cooperatives, banks, insurance companies, and privately insured credit unions are examples of entities that might be members of certain corporates and fall within the term ‘non FICU.’”
Membership Fees – § 704.23
Under the proposal, as a way to build retained earnings, a corporate credit union would be permitted to charge its members a mandatory one-time or periodic membership fee; the fee would need to be proportional to the member’s asset size. The corporate would have the ability to reduce the fee for members that have contributed capital to the corporate, and any reduction would need to be proportional to the amount of the member’s non-depleted contributed capital.
A corporate would need to give its members at least six months notice of any new fee, or material change to an existing fee. If the member fails to pay the fee within 60 days of being invoiced, the corporate would have the option to of terminating the membership.
Disclosure of CUSO-related Compensation – §§ 704.11; 704.19
Under the proposal, a corporate’s auditor, board of directors, and NCUA would be permitted complete access to the corporate CUSO’s personnel, facilities, equipment, books, records, and any other pertinent documents. The corporate CUSO would be responsible for providing the corporate with aggregate data on the amount of compensation the CUSO paid to any of its employees who are also employees of the corporate.
The September corporate rule requires annual disclosure of the compensation of certain highly compensated corporate credit union employees. Under the proposal, such highly compensated employees would be required to include in the annual disclosure compensation paid from any corporate CUSO in which the corporate (employer) had invested or made a loan.
Board Responsibilities – § 704.13
The proposal would require that a corporate credit union maintain a detailed record of each vote of its board of directors. The minutes reporting the vote would identify the board members, by name, who voted for or against the proposal, and any board members who abstained from or otherwise failed to vote. NCUA believes this provision is necessary to increase the transparency of corporate board actions.
The corporate credit union system has confronted profound challenges during the economic crisis of the past several years. Some corporate credit unions made poor investment decisions, and these decisions caused billions of dollars of losses. However, the role of individual directors in these decisions was not always clear since the minutes often did not include the votes of individual directors.
NCUA believes that requiring recorded votes will help to ensure that corporate directors comply with their obligation to recuse themselves from deliberating and voting on items that may involve a conflict of interest. If a director is disqualified because of a conflict, the director must withdraw from deliberation and determination of the issue. Under the bylaw, the director has the obligation to identify issues that may pose a conflict of interest and withdraw from deliberation and determination of these issues. If, however, a director fails to self-identify or report a potential conflict, it would be difficult to determine whether or how the director voted on an issue without disclosure of votes on a director-by-director basis. The accountability and transparency that results from recording vote tallies by name will provide an important backstop to the self-policing aspect of the corporate bylaw conflict-of-interest provision, according to NCUA.
Audit and Reporting Requirements – § 704.15
To facilitate early identification of problems in financial management at corporate credit unions, the proposal would add certain auditing, reporting, and supervisory committee requirements to the corporate rule. Accurate and reliable measurement of a corporate credit union’s assets and earnings has a direct bearing on the determination of regulatory capital. Independent audits help to identify weaknesses in internal control over financial reporting and risk management at corporate credit unions and reinforce corrective measures, thus complementing supervisory efforts in contributing to the safety and soundness of corporate credit unions, according to NCUA.
NCUA currently requires that a corporate credit union’s board of directors ensure the preparation of timely and accurate balance sheets, income statements, and internal risk assessments and that systems are audited periodically in accordance with industry standards. In addition, a corporate’s supervisory committee must ensure that an external audit is performed annually in accordance with generally accepted auditing standards, and the audit report is submitted to the board of directors, NCUA, and the members.
The proposal would make several significant revisions to the audit and reporting requirements of corporates. The corporate would be required to ensure that its financial reports reflect all material correcting adjustments necessary to comply with generally accepted accounting principles (GAAP) that were identified by the corporate’s independent public accountant (IPA).
In addition, the corporate would need to prepare an annual management report, signed by the CEO and CFO, that contains:
- A statement of management’s responsibility for: (1) preparing financial statements, (2) establishing and maintaining an adequate internal control structure, (3) procedures for financial reporting, and (4) complying with safety and soundness laws and regulations designated by NCUA;
- An assessment of the corporate’s compliance with such laws and regulations; and
- For corporates with over $1 billion, an assessment of the effectiveness of the internal controls and procedures over financial reporting, including identifying the internal control framework used to evaluate such internal control.
Under the proposal the corporate credit union would be required to ensure that its IPA:
- Reports on a timely basis to the supervisory committee all critical accounting policies, alternative accounting practices discussed with management, and written communications provided to management;
- Retains the working papers related to an audit and the evaluation of the corporate’s internal control over financial reporting, for seven years;
- Complies with the independence standards and interpretations of the American Institute of Certified Public Accountants (AICPA);
- Has, prior to beginning any services for a corporate, a peer review that meets acceptable audit industry guidelines;
- Notifies NCUA if the IPA leaves the corporate; and
- For corporate’s over $1 billion, reports separately to the supervisory committee on management’s assertions concerning the effectiveness of the internal control structure and procedures for financial reporting.
Lastly, the proposal would require the corporate to ensure that its supervisory committee: (1) consists of members who are not employees of the corporate; (2) supervises the IPA; and (3) ensures that audit engagement letters do not contain unsafe and unsound limitation of liability provisions.
Enterprise Risk Management – § 704.22
Under the proposal, corporate credit unions would be required to develop and follow an enterprise risk management policy. The corporate’s board of directors would be responsible for establishing an enterprise risk management committee to oversee the corporate’s enterprise-wide risk management practices; the committee would report at least annually to the board of directors.
Each committee would need to include at least one independent risk management expert from outside the corporate with sufficient experience in identifying, assessing, and managing risk exposures. The proposed definition of “independent” means that the expert does not have any family relationships or material business or professional relationships with the corporate that would affect his or her independence as a committee member, and has been free of any such relationships for at least three years. In addition, the expert would need to have post-graduate education; an actuarial, accounting, economics, financial, or legal background; and at least five years experience in identifying, assessing, and managing risk exposures.
Management of a corporate with at least $1 billion in assets would have the additional requirement of assessing and signing off on the effectiveness of the corporate’s internal control structure and procedures for financial reporting.
QUESTIONS TO CONSIDER REGARDING THE PROPOSAL
- NCUA issued the proposed rule to address certain issues that the September corporate rule did not
cover. Do you agree with the timing of the proposed rule, or would it be preferable to allow more time
between the September corporate rule and any follow-up rule to allow the industry and NCUA to better
understand the impact and effectiveness of the changes made by the September corporate rule?
- The proposal would limit a natural person credit union to membership in only one corporate at a time to reduce “rate shopping” among the corporates. Do you support such an approach? Do you agree with NCUA that “rate shopping” by natural person credit unions is negative, in the sense that it led to excessive risk-taking by the corporates? Can you suggest an alternative approach to address the risky behavior of some corporates?
- The proposal would require corporate CUSOs to provide the corporate’s auditor, board of directors,
and NCUA complete access to the corporate’s books and other documents that the auditor, directors, or
NCUA deem pertinent. Do you support this proposed provision? Why or why not?
- The proposal would require each corporate credit union board of directors’ vote to be recorded and
included in the meeting minutes with the intent of increasing transparency and accountability. Do you
agree with NCUA that this proposed provision is necessary? Do you agree with including the voting record
in the meeting minutes? Do you agree with the extent of detail that would be recorded (how each director
voted for each vote by name, board members that were absent or otherwise failed to vote, and those who
abstained from voting)?
- The proposal establishes several new audit and reporting requirements. Do you support these proposed
changes? For example, the proposal would require a corporate to:
- Ensure that its financial reports reflect all material correcting adjustments necessary to comply
- Prepare a signed annual management report that contains a statement of management’s responsibility
for establishing and maintaining an adequate internal control structure.
- Ensure that its IPA complies with AICPA standards.
- Oversee its supervisory committee.
- The proposal establishes a system to encourage existing non-FICU members to pay their share of expenses
related to stabilization of the corporate system. Do you support this approach? Why or why not? Do you
foresee any positive or negative unintended consequences from requiring “voluntary” payments by non-FICUs?
- The proposal would require each corporate to establish and maintain an enterprise risk management
committee to oversee the risk management practices of the corporate. Do you support the proposed committee
requirement? Do you support the requirement that each committee include an independent risk management
expert, including the proposed qualifying characteristics of such an expert (i.e., post-graduate education)?
- As an option for corporates to raise retained earnings, the proposal would permit corporates to charge
one-time or recurring membership fees. Do you support this proposed authority? What, if any, unintended
consequences—particularly on the users of the corporates—could result from allowing corporates to charge
- Any other comments or questions?
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Deputy General Counsel (202) 508-6736 email@example.com
Luke Martone Senior Regulatory Counsel (202) 508-6743 firstname.lastname@example.org