[Federal Register Volume 63, Number 42 (Wednesday, March 4, 1998)]
[Rules and Regulations]
[Pages 10515-10517]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-5451]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 708a
Mergers or Conversions of Federally-Insured Credit Unions to Non
Credit Union Status: NCUA Approval
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: The final rule adds a new provision to the disclosure
statement in regulations relating to NCUA approval of mergers or
conversions of federally-insured credit unions to non credit union
status. Credit unions are required to disclose in plain English on the
cover page of the disclosure statement specific facts relating to the
proposed transaction's impact on the members.
DATES: This rule is effective April 1, 1998.
FOR FURTHER INFORMATION CONTACT: Mary F. Rupp, Staff Attorney, Office
of General Counsel, National Credit Union Administration, 1775 Duke
Street, Alexandria, Virginia 22314-3428 or telephone: (703) 518-6553.
SUPPLEMENTARY INFORMATION:
Background
On November 24, 1997, the NCUA Board requested comments on proposed
changes to part 708a of its regulations. 62 FR 64187 (December 4,
1987). Part 708a sets forth the procedures and requirements for credit
unions proposing to convert to non credit union status. The current
rule requires credit unions to provide a disclosure statement to the
members prior to the membership vote. The rule lists the information
that must be included in the disclosure. The Board has had the
opportunity to review several disclosure statements filed under the
current rule. The disclosures are often in excess of fifteen pages and
contain technical information which may be difficult for the average
member to understand. The Board believes it would be helpful to the
members if certain key information could be provided to them in plain
English on the cover page of the disclosure. The proposal set forth
three key areas the
[[Page 10516]]
Board believed should be highlighted to the members. These were voting
rights, potential future transactions, and director compensation. Based
on the comments, the Board has modified the provisions relating to
voting rights and director compensation and deleted the provision on
potential future transactions and replaced it with a provision noting
the costs of conversion.
Summary of Comments and Discussion of Issues
In the proposal, the NCUA Board requested comment on the proposed
uniform disclosure requirements. The NCUA Board received 28 comments on
the proposal: seven from credit unions; three identical letters from
three members of the same credit union; two from bank leagues; four
from bank trade groups; four from law firms; one from a credit union
conversion consultant; three from credit union trade groups; three from
credit union state leagues; and one from an individual. The following
is a summary of the comments received on the proposed rule's uniform
cover page to the Disclosure. Twenty of the 28 commenters opposed the
proposed disclosure. One of the general negative comments was that it
is unfair to require credit unions to highlight the negative aspects on
the cover without giving them the opportunity to highlight the positive
aspects there as well. The positive commenters noted that it is
appropriate that certain information be highlighted to help assure that
it receives careful consideration. Some of the positive commenters
noted that the language appeared somewhat biased and should be more
neutral. The NCUA Board agrees with these commenters that, as
originally drafted, the proposal highlighted negative information. The
final rule has been amended to address this concern. The final rule
references three areas the Board believes are important to the members
and then refers them to the disclosure for a complete discussion of the
issues.
The proposal required disclosure of voting rights, the potential
for a stock conversion, and the right of the directors to be
compensated. All 11 of the commenters that commented on the voting
rights provision objected to the way it was worded. One of the
objections is that it is incorrect to say that the institution is no
longer democratically controlled, just because it is no longer one
member one vote. Further, in some cases the institution will continue
with one member one vote. The Board agrees with these comments and has
taken the language relating to ``democratic control'' out of the final
rule. In the event a credit union retains one member one vote, the
proposal allowed for the disclosure statement to be modified
appropriately. The final rule does as well. Five commenters noted that
the issue of voting is often not important for credit union members and
therefore, should not be highlighted. Although the Board is aware that
not all credit union members take the opportunity to vote in credit
union elections, the Board believes it is important for members to be
made aware of such a fundamental change in the structure of their
financial institution.
Eighteen commenters specifically addressed and opposed the
requirement that the credit union inform the members that the credit
union could further change its organizational structure in the future.
All of these commenters noted that a disclosure should not contain
speculative information. Some noted that the proposal gives the false
impression that all mutuals convert to stock. Some commenters found the
statement that ``members will lose their equity ownership interest''
confusing and misleading. After reviewing the comments, the NCUA Board
agrees that credit unions should not be required to include information
that may not apply to their transaction. This provision has been
deleted from the final rule.
Ten of the commenters objected to the disclosure that board members
may receive compensation after waiting the two years required by NCUA's
regulation. Some of the commenters thought that the way it was being
disclosed carried the negative implication that the Board's decision
was motivated by greed. They objected to this negative implication
because directors' fees are nominal. Further, the commenters stated
that directors act on the basis of their good faith assessments of
their members' best interests. The NCUA Board has modified the
statement to remove any negative or speculative overtones. It merely
states that Directors may receive compensation after waiting two years
and refers the member to the disclosure for further information. The
Board does not intend to imply that the transaction is motivated by
greed, but believes it is important for the members to know that the
spirit of volunteerism that motivated credit union directors may not be
present in the proposed new financial institution. A couple of the
commenters suggested that credit union directors do not really serve as
volunteers because they may receive health and accident insurance and
are allowed reasonable reimbursement for themselves and their spouse
when traveling on credit union business. To compare this minimal
insurance and reimbursement to direct compensation is not an accurate
or fair comparison. The insurance is limited by regulation and
reimbursement is not compensation.
Two commenters suggested a format change for the disclosures so
that boxes could be checked to indicate those provisions that apply.
The NCUA Board believes that this format is not necessary because the
language the rule requires will generally apply. It is sufficient that
the rule provides for modifications as necessary to ensure accuracy.
One of the commenters objected to using the term ``savings bank''
in the disclosure. This term has been eliminated from the final rule.
Although not part of the proposal, several of the commenters raised
three other issues which the Board will briefly address. First, a
number of the commenters object to the voting requirement in part 708a.
The rule requires a majority of the members to vote in favor of the
transaction for it to be approved. The negative commenters believe this
is excessive since conversion from a federal to state charter only
requires approval by a majority of the members who vote and conversion
from federal to private insurance only requires approval by a majority
of the members who vote, providing at least 20% vote. The commenters
have failed to mention that termination of insurance like termination
of a credit union charter requires approval by a majority of the credit
union's members. 12 U.S.C. 1786(a)(1). Prior to issuing its final rule
on credit union conversions to non credit union status, the Board
requested and received comment on the issue of majority approval. The
Board considered those comments when it issued the final rule. 60 FR
12659, 12660 (March 8, 1995). The six commenters that addressed the
issue all supported approval by a majority of the members. Two defined
majority as over 50%, two defined it as 60% to 66 2/3%, one defined it
as 70% to 80% and one commenter did not define it. The Board continues
to believe in ``the importance of a clear mandate on an issue of such
significance to the members.'' 60 FR at 12660. It should be noted that
in 1995 the Board chose the least burdensome voting requirement
recommended by the commenters.
Second, several of the commenters object to Sec. 708a.5(a)(2) of
the rule. This provision requires the ballot to be mailed to the
members not more than 30 days prior to the vote. The commenters contend
that NCUA is more liberal with other forms of transactions and has
[[Page 10517]]
placed the 30-day limitation in an attempt to block the transaction.
The 30-day time frame is the statutorily-required time frame for
insurance conversions and for federal charter to state charter
conversions. 12 U.S.C. 1771(a)(1) and 1786(d)(2). In 1995, the Board
selected this time frame to be consistent with Congress' time frame for
other types of transactions of comparable significance that require a
membership vote.
Finally, a few of the commenters state that NCUA has overreached
its regulatory authority over state chartered credit unions. They
contend that state chartered conversions should be governed by state
law. This issue was discussed in detail in the final rule. 60 FR at
12660. The Board explained how very few states have statutes or
regulations that address the issue of conversions. However, in
deference to the states that have regulations, the Board in 1995
incorporated into the final rule a provision that allows a federally
insured state chartered credit union to file a request for a waiver of
compliance with the procedural portions of part 708a and instead follow
the applicable state regulation.
Final Rule
The final rule requires credit unions to provide in plain English
on the cover page of the Disclosure the following information: (1) The
control of the institution will no longer be based on each member
having one equal vote; this could change a member's influence in any
future decisions affecting the institution. Votes will be based on the
amount of an individual's deposits. For further information, see
page(s) ________ of the Disclosure Statement. (2) The institution will
lose its tax-exempt status and there may be increased costs associated
with the conversion. For further information, see page(s) ________ of
the Disclosure Statement. (3) After waiting the two years required by
NCUA's regulation, Board members may be compensated. For further
information, see page(s) ________ of the Disclosure Statement.
In the event these statements do not apply to a particular
transaction, they may be modified as necessary.
The NCUA Board has modified the proposal to remove any prejudicial
inference. The Board believes that these three areas are important to
the members. If the members are interested in learning more about the
issue, they are referred to the appropriate place in the Disclosure
Statement, so that the credit union can describe in its own words, the
impact the issue will have on the members.
Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires the NCUA to prepare an
analysis to describe any significant economic effect any regulation may
have on a substantial number of small credit unions, meaning those
under $1 million in assets. The NCUA Board has determined and certifies
that the final rule will not have a significant economic impact on a
substantial number of small credit unions. The reason for this
determination is that it is highly unlikely that small credit unions
would be engaged in a merger or conversion to a non credit union
institution. Accordingly, the NCUA Board has determined that a
Regulatory Flexibility Analysis is not required.
Executive Order 12612
Executive Order 12612 requires NCUA to consider the effect of its
actions on state interests. The final amendments will apply to all
federally insured credit unions. The final amendments are not designed
or intended to interfere with the state regulation of state chartered
institutions. However, existing statutory requirements mandate the
Board approve transactions of this nature for all federally insured
credit unions. The rule recognizes the interests of states and state
regulators in supervising state chartered credit unions by including a
provision that allows federally insured state chartered credit unions,
on a case-by-case-basis, to obtain a waiver from NCUA's rule and follow
state procedures if those procedures adequately address the concerns of
NCUA's rule. With this provision in the rule, the NCUA Board has
determined that the final amendments are not likely to have any direct
effect on states, the relationship between the states, or the
distribution of power and responsibilities among the various levels of
government.
Paperwork Reduction Act
The final amendment requires a credit union to provide its members
information provided by NCUA. The Paperwork Reduction Act does not
apply to disclosures that are directives for a person to disclose
information completely supplied by the agency. 5 CFR 1320.3(c)(2).
Congressional Review
Awaiting OMB determination.
List of Subjects in 12 CFR Part 708a
Bank deposit insurance, Credit unions, Reporting and recordkeeping
requirements.
By the National Credit Union Administration Board on February
25, 1998.
Becky Baker,
Secretary of the Board.
Accordingly, NCUA amends 12 CFR part 708a as follows:
PART 708a--MERGERS OR CONVERSIONS OF FEDERALLY-INSURED CREDIT
UNIONS TO NON CREDIT UNION STATUS: NCUA APPROVAL
1. Revise the heading of part 708a to read as set forth above.
1a. The authority citation for part 708a is revised to read as
follows:
Authority: 12 U.S.C. 1766, 1785.
2. Amend Appendix A to part 708a by revising paragraph (2)(m) to
read as follows:
Appendix A to Part 708a--Notice to Members of Special Meeting,
Disclosure and Ballot
* * * * *
(2) * * *
(m) The cover of the Disclosure Statement must contain the
following statement in bold, appropriately modified to the extent
that this statement does not accurately describe the transaction:
PLEASE READ THIS DISCLOSURE DOCUMENT. IT CONTAINS IMPORTANT
INFORMATION ABOUT YOUR CREDIT UNION.
The control of the institution will no longer be based on each
member having one equal vote; this could change a member's influence
in any future decisions affecting the institution. Votes will be
based on the amount of an individual's deposits. For further
information, see page(s) ________ of the Disclosure.
The institution will lose its tax-exempt status and there may be
increased costs associated with the conversion. For further
information, see page(s) ________ of the Disclosure.
After waiting the two years required by NCUA's regulation, Board
members may be compensated. For further information, see page(s)
________ of the Disclosure.
* * * * *
[FR Doc. 98-5451 Filed 3-3-98; 8:45 am]
BILLING CODE 7535-01-U
