[Federal Register Volume 59, Number 125 (Thursday, June 30, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15800]


[[Page Unknown]]

[Federal Register: June 30, 1994]


                                                   VOL. 59, NO. 125

                                            Thursday, June 30, 1994

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 708

 

Mergers of Federally-Insured Credit Unions: Voluntary Termination 
or Conversion of Insured Status

AGENCY: National Credit Union Administration (NCUA).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The proposed rule would amend part 708 to clarify that the 
rules and regulations on mergers, voluntary termination and insurance 
conversion apply not only to federally-insured credit unions converting 
to non federally-insured credit unions, but to federally-insured credit 
unions converting to any institution that is not NCUSIF insured.

DATES: Comments must be postmarked or posted on the NCUA electronic 
bulletin board by August 1, 1994.

ADDRESSES: Send comments to Becky Baker, Secretary to the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.

FOR FURTHER INFORMATION CONTACT:
Mary F. Rupp, Staff Attorney, Office of General Counsel, at the above 
address or telephone: (703) 518-6553.

SUPPLEMENTARY INFORMATION: 

A. Background

    Section 205(b)(1) of the Federal Credit Union Act, 12 U.S.C. 
1785(b)(1) provides that a federally-insured credit union seeking to 
merge or consolidate with a ``noninsured credit union or institution'' 
must obtain the prior written consent of the NCUA Board. The term 
``insured credit union'' means one that is insured by the NCUA Board 
through the National Credit Union Share Insurance Fund (NCUSIF); 
``noninsured credit union'' means one that is not so insured. (See 
Section 101(7) of the Act (12 U.S.C. 1752(7)). The Board has determined 
that the term ``institution'' as used in Section 205(b)(1)(A) of the 
Act applies to any financial institution that is not insured through 
the NCUSIF, such as banks and savings and loans as well as institutions 
that carry no federal insurance. Section 205(c) of the Act sets forth 
the six criteria the Board will consider in granting or withholding 
approval under subsection (b).
    In addition, part 708 of the NCUA Rules and Regulations sets forth 
procedures and requirements of mergers and termination/conversion of 
insurance. Part 708 addresses situations where an insured credit union 
either voluntarily terminates federal insurance or merges with a credit 
union that is not federally insured. It does not specifically address 
the situation where an insured credit union merges with a non credit 
union institution. The effect on credit union members--that is, the 
loss of membership in a federally insured credit union--is the same no 
matter what type of financial institution the credit union merges into. 
This amendment clarifies part 708 to apply to all merger and 
termination/conversion situations where the continuing institution is 
not insured by NCUSIF.
    The amendment is also needed to provide NCUA with clear authority 
to prevent abuses in connection with conversions of insured status. In 
a limited number of past cases, credit unions attempting to convert to 
private insurance or FDIC insurance have argued that NCUA has no 
jurisdiction over these actions. This has called into question NCUA's 
authority to require membership votes, to monitor the fairness of those 
votes, and to ensure the transaction is handled in the best interests 
of the members and the NCUSIF.
    In one case, a credit union incurred substantial legal and other 
expenses attempting to convert to an FDIC insured bank. The credit 
union was unsuccessful and was ultimately liquidated for insolvency due 
in part to the expenses associated with the conversion efforts.
    The Board is aware of a limited number of more recent instances 
where federally insured credit unions have been solicited for 
conversion to other institution charters by law firms and consultants. 
The supposed benefits that have been cited in these solicitations have 
had nothing to do with the good of the credit union membership, but 
rather have been motivated by the significant fee income the outside 
parties expect to generate and the prospect of financial gain to 
management, through compensation of directors, increased management 
salary potential, stock options and other means. The Board hereby 
serves notice that these solicitations should stop, and that any 
expense of credit union funds pursuing such a transaction that is 
motivated by other than the members' interests will be addressed 
through the use of all available administrative powers.
    Further, while this regulatory action addresses mergers and 
consolidations, the Board cautions anyone who would consider using, as 
a substitute, a voluntary liquidation with the payout to members being 
in the form of deposits and/or stock in another institution. Voluntary 
liquidation requires a direct payout, to the members of all shares and 
equity, and the NCUA Board, working with state regulators where 
appropriate, will stop any liquidation transaction that does not 
include direct payment as a clear element of the liquidation plan.
    The Board has in the past worked with the state regulators when 
approving mergers and consolidations of federally-insured state 
chartered credit unions with other credit unions. It will do so as well 
when reviewing mergers and consolidations of federally-insured state 
chartered credit unions with other financial institutions. The Board 
values its positive working relationship with state credit union 
supervisors. This action is not intended to supplant that relationship, 
but to ensure the means exist to prevent losses to the National Credit 
Union Share Insurance Fund and protect the rights of members. The Board 
will continue to cooperate with state regulators in cases involving 
federally insured state chartered credit unions.
    The current rule requires credit unions considering the merger/
conversion route to submit modifications or additions to the member 
notices to the NCUA Regional Director and the appropriate state 
authority for approval before the information is sent to the members. 
12 CFR 708.303. The Board is proposing to modify the requirement for 
Regional Director approval and require all credit unions to obtain 
institution merger/conversion notice modification approvals from the 
Board. As under the current rule, the Board will not approve proposed 
notices that do not fully apprise members of the negative consequences 
of the action as well as any windfall benefits to officials. The rule 
states that approval of the modifications may be withheld if it ``is 
determined that the credit union, by inclusion or omission of 
information, would materially mislead or misinform its membership.'' 
The Board wants to be very clear that approval of a proposed notice to 
members is not an approval of the proposed merger/conversion. Since 
part 708 does not provide an approved notice to members for credit 
union to institution merger/conversions, the Board expects all 
federally insured credit unions proposing such a merger/conversion to 
request its approval of proposed notices. The Board is requesting 
comment on whether part 708 should include a uniform member notice for 
institution merger/conversions.

B. Section by Section Analysis

Section 708.0(a)

    This section is amended to clarify that ``institution'' is within 
the scope of part 708.

Section 708.0(b)

    This section is amended by substituting the term ``nonNCUSIF 
insurance'' for ``nonfederal insurance'' to clarify that the 
regulations apply to all financial institutions.

Section 708.0(e)

    This section is amended by adding the modifier ``additional'' to 
clarify that state procedures are not substitute for NCUA procedures.

Section 708.1(i)

    This definition has been added to clarify that the term 
``institution'' as used in Section 205(b)(1)(A) of the Act applies to 
any financial institution that is either nonfederally-insured or 
insured by an agency of the federal government other than NCUSIF and is 
covered by part 708.

Section 708.1(j)

    This definition has been added to clarify that although only the 
term ``merger'' is used in part 708, Section 205(b)(1)(A) of the Act 
applies to all forms of consolidations.

Section 708.101(a)

    This section has been modified by substituting the term ``nonNCUSIF 
insurance'' for ``nonfederal insurance'' to clarify that the merger 
requirements apply to all financial institutions.

Section 708.101(b)

    This section has been modified by adding the term ``institution'' 
to clarify that all financial institutions must seek approval from the 
NCUA Board prior to merging with a federally insured credit union.

Section 708.102(c)

    This section has been modified by adding the term ``institution'' 
to clarify that all nonNCUSIF-insured financial institutions would be 
entitled to a refund of the merging credit union's NCUSIF deposit and 
the unused portion of the merging credit union's NCUSIF share insurance 
premium.

Section 708.102(d)

    This section has been modified by adding the term ``institution'' 
to clarify that NCUSIF insurance terminates for all nonNCUSIF-insured 
financial institutions member accounts as of the effective date of the 
merger.

Section 708.108 (a) and (b)

    These sections have been modified by adding the term 
``institution'' and substituting ``affected supervisory authority'' for 
``state supervisory authority'' to clarify that all financial 
institutions must certify the completion of the merger to the Regional 
Director.

Section 708.203 (a), (b), (c) and (d)

    These sections have been modified by adding the term 
``institution'' to clarify that this regulation applies to additional 
methods whereby federally-insured state chartered credit unions and 
federal credit unions might consider converting to nonNCUSIF insurance.

Section 708.204(a)

    This section has been modified by substituting the term 
``nonNCUSIF'' for ``nonfederal'' to clarify that the notice 
requirements apply to conversions to all institutions.

Section 708.303

    This section has been modified by deleting the reference to 
subparagraph (a) and inserting as a new second sentence, ``Proposed 
notices or ballots concerning mergers or conversions to institutions 
will be made with the approval of the Board and, in the case of a state 
credit union, the appropriate state authority.''

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 potential number of small credit unions (primarily those 
under $1 million in assets). Preliminary analysis concerning the effect 
the proposed rule will have on small credit unions indicates that no 
significant economic impact will result if the rule is promulgated by 
the NCUA Board. The proposed rule merely clarifies statutory authority. 
Therefore, the NCUA Board has determined and certifies under the 
authority granted in 5 U.S.C. 605(b) that the proposed rule, if 
adopted, will not have a significant economic impact on a substantial 
number of small credit unions. Accordingly, the NCUA Board has 
determined that a Regulatory Flexibility Analysis is not required.

Paperwork Reduction Act

    These amendments do not change the paperwork requirements.

Executive Order 12612

    Executive Order 12612 requires NCUA to consider the effect of its 
actions on state interests. The proposed regulation applies to all 
federally insured credit unions. However, it makes no substantive 
changes but merely clarifies existing requirements. The Federal Credit 
Union Act gave the NCUA the authority to approve all insured credit 
union mergers or consolidations with ``institutions.'' 12 U.S.C. 
1785(b)(1)(A). The NCUA Office of General Counsel has also issued 
several public opinion letters consistent with these clarifications. 
These letters are available on request to the NCUA Public and 
Congressional Affairs Office. 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 708

    Back deposit insurance, Credit Unions and Reporting and record 
keeping requirements.

    By the National Credit Union Administration Board on June 23, 
1994.
Becky Baker,
Secretary to the Board.

    Accordingly, NCUA proposes to amend 12 CFR part 708 as follows:

PART 708--MERGERS OF FEDERALLY-INSURED CREDIT UNIONS: VOLUNTARY 
TERMINATION OR CONVERSION OF INSURED STATUS

    1. The authority citation of part 708 continues to read as follows:

    Authority: 12 U.S.C. 1766, 12 U.S.C. 1785, 12 U.S.C. 1786, 12 
U.S.C. 1789.

    2. Section 708.0 is amended by revising paragraphs (a), (b) and (e) 
to read as follows:


Sec. 708.0  Scope.

    (a) Subpart A of this part prescribes the procedures for merging on 
or more credit unions with a continuing credit union or institution 
where at least one is federally-insured.
    (b) Subpart B of this part prescribes the procedures and notice 
requirements for termination of Federal insurance or conversion of 
Federal insurance to nonNCUSIF insurance, including termination or 
conversion resulting from a merger.
* * * * *
    (e) This part does not address additional procedures or 
requirements that may be applicable under state law for a state credit 
union.
    3. Section 708.1 is amended by adding paragraphs (i) and (j) to 
read as follows:


Sec. 708.1  Definitions.

* * * * *
    (i) Institution means any bank, savings, and loan, mutual savings 
bank, or similar institution that is nonfederally-insured or insured by 
an agency of the federal government other than NCUSIF.
    (j) Merger includes any consolidation or its equivalent under 
applicable laws, including a merger or consolidation of an existing 
credit union with a newly chartered credit union or other institution.
    4. Section 708.101 is amended by revising paragraphs (a) and (b) to 
read as follows:


Sec. 708.101  Mergers generally.

    (a) In any case where a merger will result in the termination of 
Federal insurance or conversion to nonNCUSIF insurance, the merging 
credit union must comply with the provisions of subpart B in addition 
to this subpart A.
    (b) No federally-insured credit union shall merge with any other 
credit union or institution without the prior written approval of the 
Board.
* * * * *
    5. Section 708.102 is amended by revising paragraphs (c) and (d) to 
read as follows:


Sec. 708.102  Special provisions for Federal insurance.

* * * * *
    (c) Where the continuing entity is uninsured or a nonfederally-
insured credit union or an institution and does not make application 
for insurance, but the merging credit union is federally-insured, the 
continuing credit union or institution is entitled to a refund of the 
merging credit union's NCUSIF deposit and to a refund of the unused 
portion of the NCUSIF premium (if any). If the continuing credit union 
or institution is uninsured, the refund will be made only after 
expiration of the one-year period of continued insurance coverage noted 
in paragraph (e) of this section.
    (d) Where the continuing entity is a nonfederally-insured credit 
union or an institution, NCUSIF insurance of the member accounts of a 
merging federally-insured credit union ceases as of the effective date 
of the merger. (Refer to subpart B, Secs. 708.203 and 708.204 and 
subpart C, Sec. 708.302(b).
* * * * *
    6. Section 708.108 is amended by revising paragraphs (a) and (b) to 
read as follows:


Sec. 708.108  Completion of merger.

    (a) Upon approval of the merger proposal by NCUA and by any other 
affected supervisory authority (where a continuing or merging credit 
union or institution is not a Federal credit union) and by the members 
of each credit union where required, action may be taken to complete 
the merger.
    (b) Upon completion of the merger, the board of directors of the 
continuing credit union or institution shall certify the completion of 
the merger to the Regional Director within 30 days after the effective 
date of the merger.
* * * * *
    7. Section 708.203 is revised to read as follows:


Sec. 708.203  Conversion of insurance.

    (a) A federally-insured state credit union may convert to nonNCUSIF 
insurance, if permitted by state law, either on its own or by merging 
into a nonfederally-insured credit union or an institution.
    (b) A Federal credit union may convert to nonNCUSIF insurance only 
by merging into, or converting its charter to, a nonfederally-insured 
credit union or an institution.
    (c) Conversion of Federal to nonNCUSIF insurance must be approved 
by an affirmative vote of a majority of the credit union's members who 
vote on the proposition, provided at least 20 percent of the total 
membership participates in the voting. The credit union must notify the 
Board, through the Regional Director, in writing at least 90 days prior 
to conversion. Notice to the Board may be given when membership 
approval is solicited or after membership approval is obtained.
    (d) No federally-insured credit union shall convert to nonNCUSIF 
insurance without the prior written approval of the Board. The Board 
will approve or disapprove the conversion in writing within 90 days 
after being notified by the credit union.
    8. Section 708.204 is amended by revising paragraph (a) to read as 
follows:


Sec. 708.204  Notice to members of conversion of insurance.

    (a) When a federally-insured credit union proposes to convert to 
nonNCUSIF insurance, including conversion due to a merger or conversion 
of charter, it shall provide its members with written notice of the 
proposal to convert and of the date set for the membership vote. Notice 
of the proposal shall be as set forth in either Sec. 708.203 (a)(1) or 
(b)(1), or as provided in Sec. 708.302(c), as the circumstances 
warrant.
* * * * *
    9. Section 708.303 is amended by revising paragraph (a) to read as 
follows:


Sec. 708.303  Modifications to notice.

    (a) Any modifications or additions to the notices or ballot 
concerning insurance coverage, and any additional communications 
concerning insurance coverage included with the notice or ballot, may 
be made with the approval of the Regional Director and, in the case of 
a state credit union, the appropriate state authority. Proposed notices 
or ballots concerning mergers or conversions to institutions will be 
made with the approval of the Board and, in the case of a state credit 
union, the appropriate state authority. Approval of such modifications, 
additions or additional communications will not be withheld unless it 
is determined that the credit union, by inclusion or omission of 
information, would materially mislead or misinform its membership.
* * * * *
[FR Doc. 94-15800 Filed 6-29-94; 8:45 am]
BILLING CODE 7535-01-M