[Federal Register Volume 60, Number 45 (Wednesday, March 8, 1995)]
[Rules and Regulations]
[Pages 12659-12663]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-5593]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 60, No. 45 / Wednesday, March 8, 1995 / Rules
and Regulations
[[Page 12659]]
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 applies to any credit union that is insured by
the National Credit Union Share Insurance Fund (NCUSIF) and that
proposes to merge into or convert to any non credit union institution.
The rule imposes new substantive requirements. The purposes of these
requirements are to ensure that such transactions take place only
pursuant to an informed vote of the credit union's members/owners, to
prevent self-dealing and other abuses by individuals involved in the
transactions and to ensure that these transactions do not present
safety and soundness risks to the NCUSIF and the credit union system.
State chartered NCUSIF insured credit unions may, on a case-by-case
basis, obtain a waiver from NCUA's rules if state laws and procedures
are determined to adequately address these concerns.
EFFECTIVE DATE: April 1, 1995.
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
In June 1994, the NCUA requested comments on proposed changes to
part 708 of its regulations. At that time, part 708 only addressed
situations where an NCUSIF insured credit union dropped NCUSIF
insurance, either through a merger into a non NCUSIF insured credit
union or through a voluntary termination or conversion of insurance. It
did not cover the merger or conversion of a credit union into a non
credit union institution. The Federal Credit Union Act, however, vests
the NCUA Board with the responsibility to regulate such mergers or
conversions. 12 U.S.C. 1785(b). The proposed changes to part 708
clarified that NCUA approval requirements apply to all mergers and
conversions where the continuing institution is not insured by NCUSIF.
59 FR 33702 (June 30, 1994).
The proposal was in response to abuses that had occurred with bank
and thrift conversions, some isolated instances in the credit union
system, and recent solicitations by outside consultants and attorneys
to federally insured credit unions for conversion to non credit union
charters. The solicitations often appeared motivated by benefits to the
attorneys, consultants and insiders, rather than the members. The
amendment was deemed necessary ``to provide NCUA with clear authority
to prevent abuses in connection with conversions of insured status.''
59 FR 33702. The comments to the proposal were generally positive and
consistently stressed that the members need to be properly informed and
that the NCUA needs to ensure that safety and soundness and members'
interests are protected.
On September 16, 1994, the NCUA Board issued an interim final rule
and request for further comment. The rule was effective upon
publication on September 23, 1994. 59 FR 48790. The new rule, part
708a, established that the NCUA Board must approve any merger or
conversion of a federally-insured credit union to any non credit union
institution, including preapproval of any notices to members that are
sent out in connection with the merger or conversion. At the same time,
the Board requested further comment on a number of issues related to
the application and approval process.
Summary of Comments and Discussion of Issues
In the June 1994, proposal, the NCUA Board requested comment on the
general issue of NCUA regulation in this area and on the specific issue
of uniform member notice. In the interim rule, comment was requested on
a number of issues that the Board felt required further consideration
and review. The NCUA received 16 comments on the proposed rule: 10 from
credit unions; 4 from credit union trade groups; 1 from a bank trade
group; and 1 from a credit union league. The NCUA received 19 comments
on the interim rule: 6 from federal credit unions; 6 from federally
insured state chartered credit unions (FISCUs); 3 from credit union
trade groups; 2 from bank trade groups; and 2 from state regulators.
The following is a combined summary of the comments received on the
proposed rule and the interim final rule.
1. NCUA Oversight
In the proposed rule, 14 commenters addressed the issue of NCUA
oversight. Twelve expressed general support for NCUA oversight and two
expressed general opposition. The supportive commenters cited the
following benefits of NCUA regulation: Eliminate confusion, prevent
unnecessary litigation, protect the members from potential abuse,
assure that the members know the advantages and disadvantages of any
proposal, protect the assets and integrity of the NCUSIF and assure
that financial benefits to insiders are fully disclosed. The two
negative commenters were a bank trade group and a state chartered
credit union. The bank trade group characterized the proposal as an
overreaction by NCUA to a few isolated examples.
The issue of NCUA's jurisdiction over mergers or conversions by
federally-insured state credit unions (FISCUs) was raised by 5
commenters on the interim rule. The five consisted of the professional
group that represents state credit union supervisors (the National
Association of State Credit Union Supervisors, or NASCUS), two FISCUs
and two state regulators. All strongly opposed any NCUA regulation of
mergers or conversions of FISCUs.
NASCUS made the point that only seven of the 48 states which
charter credit unions allow them to merge with other financial
institutions and only four states allow credit unions to convert into
another form of financial institution. NASCUS' comment also recognized,
however, that several states have statutes that are silent on the
issue. It is those states which cause the Board the most concern.
Without specific [[Page 12660]] regulations in this area, there is
potential for abuse.
The NCUA Board believes that basic regulatory standards applicable
to all NCUSIF insured credit unions are necessary to safeguard the
integrity of the process and to ensure that issues of safety and
soundness and fiduciary duty are properly addressed. The Board has
attempted, however, to balance these concerns with a deference to the
important role of the state supervisors. As it is NCUA's intention to
work with the state supervisor in cases involving federally-insured
state credit unions, the Board has crafted a final rule that would
allow FISCUs to merge or convert if they have the state's authority to
do so. In those instances, the FISCU may file a written request with
the NCUA Board for a waiver of compliance with the procedural portions
of part 708a and instead follow the applicable state regulation. The
request would have to demonstrate that the waiver would not be
detrimental to the safety and soundness of the credit union, that there
is no possibility of self-dealing or other breach of fiduciary duty by
the credit union's management or others involved in the transaction,
and that the members' interests are adequately protected.
2. Insider Preferences
The proposed rule asked whether directors and management officials
involved in the conversion process should be allowed to receive any
personal financial benefit from the transaction, other than that
available to ordinary members. The ten commenters responding to this
question agreed that directors and management should not be allowed to
receive any compensation in excess of that available to other members.
Several commenters suggested NCUA enact strong regulations in this
area. As well as limiting the compensation available to insiders, one
commenter suggested individuals should not be guaranteed employment at
the continuing institution, noting that this would remove the incentive
for insiders encouraging a merger that is not in the best interest of
the members.
A related issue is that of what post-merger or post-conversion
controls are needed to protect against improper insider preferences
after the transaction is completed. Some of the suggestions of the five
commenters who commented on this issue were that NCUA should prohibit
stock acquisition by insiders for a period of five years and that both
pre- and post-merger or conversion controls are necessary to prevent
insider abuse. One of the trade groups suggested a way to avoid the
problem would be to condition approval of the transaction ``on a return
of equal shares of equity to all members before the execution of the
charter change.''
The recommendations of the commenters have been modified and
incorporated into the final rule as follows: For a period of two years
after the transaction, directors may not receive any benefits not
otherwise equally available to other members, and directors and senior
management officials may not acquire stock in the continuing
institution or its successor on terms not available to the other
members of the credit union. These prohibitions on directors and senior
management officials must remain in effect for at least two years
following the merger. In order to enable NCUA to ensure compliance with
these prohibitions, the affected individuals will be required to enter
into written agreements with NCUA. The NCUA Board decided not to
require a distribution of reserves and undivided earnings to members,
as such a requirement would have the practical effect of prohibiting
the transactions covered by the rule. Among the disclosures required to
be provided to the members, however, is a clear explanation of the
change in the nature of their ownership interest in reserves and
undivided earnings that will result from the transaction.
3. Majority Approval
NCUA requested comment on whether a majority of eligible voting
members should be required to approve the transaction. Comment was
further requested on whether majority should be defined as a simple
majority or a super majority, and, if a super majority, how it should
be defined. The six commenters that addressed the issue all agreed that
a majority of the voting members should be required for approval. Two
defined majority as over 50%, two defined it as 60% to 63\1/3\%, one
defined it as 70% to 80% and the other commenter did not define it.
Recognizing the importance of a clear mandate on an issue of such
significance to the members, the final rule requires that a majority of
all eligible voters approve any transaction covered by the rule.
4. Appraisal
In those cases the Board is aware of where credit unions have
considered conversions or mergers to non credit union charters, the
first step of the transaction would be to move from a credit union
charter to a mutual savings bank charter. In cases where the ultimate
goal is to become a stock institution, conversion from mutual to stock
would be proposed as a second, but virtually simultaneous step.
For those cases involving this second step, the Board specifically
asked for comment on how to properly appraise the value of the credit
union for purposes of issuing stock. This issue is important to the
members, who, as noted above, are entitled to acquire stock on the same
terms and conditions as directors and senior management officials.
Seven commenters had suggestions on this issue. One recommended that a
professional appraisal be performed, three recommended that the value
of the stock include accumulated capital and one suggested the new
regulator determine the value of the stock. One trade group suggested
it be handled as a liquidation and payout and another suggested NCUA
turn to state law for guidance.
After considering the comments and reviewing the other agencies'
rules in this area, the Board has determined to simply require that an
appraisal be performed and included in the application. The Board will
review the appraisal as part of its review of the application.
5. Uniform Member Notice
The proposal requested comment on whether the rule should include a
uniform member notice. Nine of the ten commenters responding to this
issue supported a uniform notice. Commenters suggested that a uniform
notice would provide clear and consistent guidelines for merging
institutions, ensure that important information is not withheld from
the members and require less individual review. The Board agrees with
these goals, but believes they can be accomplished more effectively
through a listing of the information that must be included in the
notice to members, rather than a form which may become outdated or not
apply to all transactions.
Overview of Final Rule
The final rule adopts with minor modifications the interim rule and
expands upon it to impose substantive and procedural requirements that
the Board has determined are necessary to ensure an informed membership
vote, to safeguard against potential safety and soundness problems and
to prevent breaches of fiduciary duty. The final rule, part 708a,
tracks in large part the current part 708b. Its key provisions are as
follows: NCUA Board approval is required in advance of any transaction
whereby a federally insured credit union transfers all or any part of
its [[Page 12661]] members' shares or similar accounts to any non
credit union institution; a majority of all members of record must vote
to approve the transaction; directors must agree to receive no benefits
in excess of those available to the members; notice to members must be
preapproved by the NCUA Board and must include all pertinent
information required by the rule as well as any additional information
deemed necessary on a case by case basis; FISCUs may only engage in the
transaction if they obtain approval from the state authority to proceed
with the merger or conversion; and FISCUs must follow part 708a unless
they obtain a waiver from NCUA.
Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires the NCUA to prepare an
analysis to describe any significant economic impact any regulation may
have on a substantial number of small credit unions. It is highly
unlikely that small credit unions (those under $1 million in assets)
would be engaged in a merger or conversion to a non credit union
institution. The final rule merely clarifies statutory authority.
Accordingly, the NCUA Board has determined that a Regulatory
Flexibility Analysis is not required.
Paperwork Reduction Act
These amendments do not change paperwork requirements.
Executive Order 12612
This rule applies to all federally insured credit unions. The rule
clarifies existing statutory requirements of NCUA Board approval of
certain transactions involving federally insured credit unions.
Recognizing the interests of states and state regulators in supervising
state chartered credit unions, the NCUA Board has included a provision
in the final rule that allows FISCUs, on a case-by-case basis, to
obtain a waiver from NCUA's rule and follow state procedures if those
procedures are determined to adequately address the concerns of NCUA's
rule. With this provision, the NCUA Board has determined that this
amendment is not likely to have any direct effect on states, on the
relationship between the states, or on the distribution of power and
responsibilities among the various levels of government.
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 March 1,
1995. ---
Becky Baker,
Secretary of the Board.
Accordingly, the interim rule adding a new regulation in 12 CFR
part 708a which was published at 59 FR 48790 on September 23, 1994, is
adopted as a final rule with changes as follows:
PART 708a--MERGERS OR CONVERSIONS OF FEDERALLY-INSURED CREDIT
UNIONS TO NON CREDIT UNION STATUS: NCUA APPROVAL
1. The authority citation for part 708a continues to read as
follows:
Authority: 12 U.S.C. 1766, 12 U.S.C. 1785.
2. Sections 708a.1 and 708a.2 are revised to read as follows:
Sec. 708a.1 NCUA Board Approval.
Section 205(b)(1) of the Federal Credit Union Act requires NCUA
Board approval in advance of any transaction whereby a federally-
insured credit union transfers all or any part of its members' accounts
to any non credit union institution. This part establishes rules and
procedures for any merger, conversion or other transaction in which a
federally-insured credit union's share accounts or similar member
accounts are transferred to a non credit union institution.
Transactions where a federally-insured credit union transfers member
accounts to another credit union are subject to the provisions of part
708b of this chapter. Compliance with this part 708a is in addition to
any other federal or state laws and regulations which may be applicable
to the proposed transaction, including state corporate laws and state
and federal securities laws.
Sec. 708a.2 Plan for Merger or Conversion to a Non Credit Union
Institution.
(a) Proposition for merger or conversion. The board of directors of
the credit union shall approve a proposition for merger or conversion.
(b) Plan for merger or conversion. Upon approval of a proposition
for merger or conversion by the board of directors, a plan for the
transaction shall be prepared. The plan shall include:
(1) Current financial reports;
(2) Current delinquent loan schedules annotated to reflect
collection problems;
(3) Combined financial report, if applicable;
(4) Contingencies;
(5) Explanation of any provisions for reserves, undivided earnings
or dividends;
(6) Analyses of share values and explanation of any adjustments to
member's share accounts;
(7) Analyses of the regulatory effect of the merger or conversion
brought about by the change in government regulator;
(8) Explanation of any other relevant effects on the members; and
(9) Any additional information, as required by the NCUA Regional
Director.
(c) Nonpreferential treatment. The plan for merger or conversion
shall provide that, for a period of at least two years after the
effective date of the transaction: -
(1) No director of the credit union may receive any compensation or
any benefits not provided or available to other members; and
(2) No director or senior management official of the credit union
shall be allowed to acquire stock in the resulting or continuing
institution or any successor institution, on any terms other than those
readily available to all members of the former credit union. This
prohibition would include stock issued for services rendered prior to
the merger or conversion. For purposes of this section, senior
management official means the credit union's chief executive officer,
any assistant chief executive officers and the chief financial officer.
3. Sections 708a.3, 708a.4, 708a.5, 708a.6 and Appendix A are added
to read as follows:
Sec. 708a.3 Submission of Proposal to NCUA.
(a) Submissions to the NCUA Regional Director. Upon approval of the
plan by the board of directors of the credit union, the following will
be submitted to the appropriate NCUA Regional Director:
(1) The plan, as described in Sec. 708a.2(b) of this part;
(2) A resolution of the board of directors approving the plan;
(3) A written agreement from each member of the board of directors
and each senior management official to comply with the terms of
Sec. 708a.2(c) (the agreement shall be executed by NCUA as well, in the
event of approval of the transaction);
(4) A proposed merger or conversion agreement;
(5) A proposed Notice of Meeting, as described in Appendix A of
this part;
(6) A copy of the form ballot and any accompanying materials to be
sent to the members, as described in Appendix A of this part;
(7) A complete copy of the package [to be] submitted to any other
regulatory agencies involved in the merger or conversion;
(8) A copy of an appraisal of the value of the credit union, if the
proposal is to [[Page 12662]] convert or merge the credit union either
directly or indirectly into a stock institution, and any plan for sale
or distribution of stock to the credit union's members, officials and
employees; and
(9) In the case of a federally-insured state chartered credit
union, evidence that the state supervisory authority is in agreement
with the merger or conversion proposal.
(b) Coordination with State Supervisory Authority. In the event the
proposal is filed with the NCUA prior to receiving consent from the
state supervisory authority:
(1) The Board will coordinate with the state supervisory authority;
and
(2) The Board will not approve any merger or conversion unless it
is approved by the state supervisory authority.
(c) Waiver of NCUA rules and approval by state supervisory
authority. A federally-insured state credit union may, on a case-by-
case basis, request a waiver of this part 708a from the Board and
receive authority to proceed under state rules and procedures. In
making such a request, the credit union shall demonstrate that the
concerns underlying this part 708a are adequately addressed and, in
particular that:
(1) Proceeding under state rules present no financial risk to the
credit union or the NCUSIF;
(2) Adequate safeguards exist against breach of duty by, or
preferential treatment of directors, committee members and others
involved in the transaction; and
(3) The transaction is otherwise fair to members and carried out
pursuant to an informed and decisive membership vote.
Sec. 708a.4 Approval of Proposal by NCUA.
If NCUA finds that the proposal complies with the provisions of
this part and does not present an undue risk to the NCUSIF or unduly
prejudice the members, it may approve the proposal subject to such
other specific requirements as may be prescribed to fulfill the stated
purposes of the proposal. No proposal will be approved that does not
clearly inform the members of the fundamental rights they would be
giving up if their credit union converts or merges into a non credit
union institution.
Sec. 708a.5 Approval of Proposal by Members.
(a) Notification of members. The members shall:
(1) Have the option of voting on the proposal either in person at a
membership meeting or by mail ballot.
(2) Be given advance notice of the membership meeting in accordance
with the provisions of Appendix A of this part. The notice shall be
delivered in person to each member, or mailed to each member at the
address for such member as it appears on the records of the credit
union, not more than 30 days nor less than 14 days prior to the date
for the vote. The ballot to be used for the membership vote shall be in
accordance with the provisions of Appendix A of this part. The notice
and ballot shall be provided to the members at the same time. If
applicable, the notice and ballot shall be provided in both English as
well as the native language of the majority of the members.
(3) Be made aware that the complete application and proposal are
available for inspection at the credit union's branch offices during
normal business hours.
(b) Vote by members. The proposal must be approved by the
affirmative vote of a majority of the credit union's members.
(c) Notice of Approval to members. If the proposal for merger or
conversion is approved by the membership and the NCUA Board, prompt and
reasonable notice shall be given to all members.
Sec. 708a.6 Certification and Completion of Merger or Conversion.
(a) Certification of vote. The board of directors shall certify the
results of the membership vote to the Regional Director within 10 days
after the vote is taken.
(b) Completion. Upon approval of the proposal by NCUA, the state
supervisory authority (where the credit union is state chartered), the
members and any federal agency with approval or regulatory authority
for the transaction, the credit union may complete the merger or
conversion.
(c) Certification of completion. Within 30 days after the effective
date of the merger or conversion, the board of directors of the
continuing institution shall certify the completion of the transaction
to the Regional Director.
(d) Cancellation of charter and insurance. Upon NCUA's receipt of
certification that the transaction has been completed, the charter of
the federal credit union (if applicable) and the insurance certificate
of the federally insured credit union will be canceled.
Appendix A to Part 708a--Notice to Members of Special Meeting,
Disclosure and Ballot
(1) The Notice of Special Meeting must include the following:
(a) The date, time and place of the Meeting;
(b) A description of the matters to be voted upon at the Special
Meeting;
(c) A statement in a prominent location in bold letters that ``A
DISCLOSURE STATEMENT HAS BEEN PROVIDED TO YOU WITH THIS NOTICE OF
SPECIAL MEETING. THE DISCLOSURE MUST BE READ BEFORE VOTING ON THE
PROPOSED (``CONVERSION'' or ``MERGER'', as appropriate)'', and
(d) A statement that a Mail Ballot for the Special Meeting is
enclosed.
(2) The Disclosure provided with the Notice must at a minimum
provide the following information to the members:
(a) Factual information about the credit union, i.e. name and
address of credit union and telephone number of contact person;
(b) Summary of the proposal which shall contain but not
necessarily be limited to current financial reports for the credit
union and the other institution if a merger is proposed; a projected
financial report for the continuing institution; analyses of share
values; an explanation of any proposed share adjustments; and an
explanation of any changes relative to insurance such as insurance
of member accounts and life savings and loan protection insurance.
(c) Summary of the direct and indirect benefits to the credit
union members, as well as any disadvantages, including a clear
explanation of the nature of the change in the members' ownership
interest in the reserves and undivided earnings of the credit union
as a result of the merger or conversion;
(d) Summary of the direct and indirect benefits to management
and other key persons at the credit union and at the new
institution, including a comparison of salaries for those
individuals employed by both the credit union and the new
institution; copies of the certifications from the directors and
committee members that they will receive no compensation either
directly or indirectly from the new institution for a period of two
years; and disclosure of any relationship by blood or marriage, of
any of the officers, directors, key personnel or principal
stockholders of the proposed institution to any officials or
employees of the credit union.
(e) For each director, officer, key employee and consultant of
the proposed institution, state in detail the names, positions,
addresses, age and description of employment and educational
background. Include any petitions for bankruptcy, civil judgments
(indicate the plaintiff and the amount of the judgment), criminal
conviction (indicate the nature of the charge) and any
administrative action taken by a federal or state agency.
(f) Description of how the proposed merger/conversion results in
a new financial institution without the unique characteristics of a
credit union, for example, that the board of directors (that is, any
new board members, since Sec. 708a.2(c) prohibits compensation for a
period of 2 years) may be compensated as officials instead of
offering volunteer services, that the credit union will lose its tax
exempt status, and any changes in the voting power of members.
(g) A dollar expenditure comparison chart of the estimated
increases/decreases in regulatory and insurance fees;
[[Page 12663]]
(h) Itemized expenses incurred to date in the conversion process
with an estimate as to future expenses;
(i) Management's discussion and analysis of the proposed
conversion, including its economic advisability and how it will
serve the needs of the members of the merging or converting credit
union;
(j) Business and properties of the proposed institution--
describe in detail the assets of the credit union and whether these
assets will be transferred to the proposed institution and how the
members will or will not benefit from the transfer;
(k) Description and comparison of the competition of the
proposed institution and why the proposed institution believes it
can effectively compete;
(l) In any transaction where the new or resulting institution is
a stock institution, identify the principal owners of the proposed
stock institution (those who will beneficially own directly or
indirectly 1% or more of the common and preferred stock outstanding)
starting with the largest common stockholder. Indicate by footnote
if the price paid was for a consideration other than cash and the
nature of any such consideration. Indicate the number of shares to
be individually owned by officers, directors and key personnel of
the new institution; and
(m) State in bold on the cover ``PLEASE READ THIS DISCLOSURE
DOCUMENT. IT CONTAINS IMPORTANT INFORMATION ABOUT YOUR CREDIT
UNION.''
(3) The Mail Ballot must:
(a) State at the top in bold letters using 12 point pitch or
greater that ``THE ATTACHED DISCLOSURE STATEMENT MUST BE READ BEFORE
VOTING ON THE PROPOSED (``CONVERSION'' or ``MERGER'', as
appropriate)'';
(b) The issues for the member to vote on should be stated as
follows:
Please vote for either (a) or (b) by checking the appropriate
box.
(a) Approve the merger {time}
(b) Disapprove the merger {time}
(c) Advise the member of the right to terminate the mail ballot
and attend and vote at the Special Meeting.
[FR Doc. 95-5593 Filed 3-7-95; 8:45 am]
BILLING CODE 7535-01-P
