[Federal Register Volume 59, Number 184 (Friday, September 23, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23545]


[[Page Unknown]]

[Federal Register: September 23, 1994]


=======================================================================
-----------------------------------------------------------------------

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 704

 

Corporate Credit Unions

agency: National Credit Union Administration (NCUA).

action: Notice of proposed rulemaking.

-----------------------------------------------------------------------

summary: NCUA is proposing to amend its regulations governing corporate 
credit unions to reduce the close ties between many corporate credit 
unions and credit union trade associations. NCUA is concerned that 
these ties create unavoidable conflicts of interest for corporate 
credit unions.

dates: Comments must be postmarked or posted on NCUA's electronic 
bulletin board by October 24, 1994.

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

for further information contact: H. Allen Carver, Director, Office of 
Corporate Credit Unions, (703) 518-6640, or Robert M. Fenner, General 
Counsel, (703) 518-6540, at the above address.

SUPPLEMENTARY INFORMATION:

A. Background

    On April 12, 1994, the NCUA Board issued an advance notice of 
proposed rulemaking (ANPR) regarding the relationship between corporate 
credit unions and state leagues and trade associations. 59 FR 18503, 
April 19, 1994. The ANPR noted that approximately half of the corporate 
credit unions are closely tied to state leagues, through integrated 
boards or management relationships. In the case of U.S. Central Credit 
Union, six of nine board seats are allotted to trade association 
representatives: three to the Credit Union National Association (CUNA), 
two to the Association of Credit Union League Executives, and one to 
the Kansas Credit Union Association. In addition, U.S. Central's CEO 
reports to the CEO of CUNA.
    The ANPR noted that in 1992 NCUA acted to reduce the ties between 
corporate credit unions and trade associations by amending Part 704 to 
require either that three directors not be officers, directors, or 
employees of an affiliated organization, such as a state league, or 
that the corporate credit union conduct open and independent elections. 
The regulation was also amended to require recusal for matters 
involving personal pecuniary interest and, when the amount in question 
exceeds 5% of the corporate credit union's capital, matters involving 
the pecuniary interest of an entity in which an official is interested.
    Although the new regulations have resulted in greater independence 
for corporate credit unions, the leagues and trade associations still 
have considerable influence in some institutions. The ANPR stated that 
NCUA was considering taking additional steps to reduce that influence 
because of the following factors: (1) the increased scrutiny of 
financial institutions resulting from the savings and loan disaster; 
(2) the asset growth within the credit union system; (3) the fact that 
conflicts or the appearance of conflicts caused by the relationships 
between corporate credit unions and trade associations could threaten 
the survival of a strong and independent credit union system; and (4) 
the concerns surrounding U.S. Central's investment in the Banco Espanol 
de Credito [Banesto], which was taken over by the Spanish central bank 
because of problems in its commercial loan portfolio.
    The ANPR requested comment on whether Part 704 should be amended to 
require that the board of directors of a corporate credit union be 
independently elected by its members, with the condition that a 
majority of the board seats be held by representatives of member credit 
unions, that all or a majority of the corporate credit union board be 
comprised of representatives who do not also serve on the board of a 
league or trade association, and that management of a corporate credit 
union report solely to the board of the corporate credit union. The 
ANPR also asked for comment on whether classes of directors at U.S. 
Central should be established, whether the election of an 
organizational member representative to a position in a corporate 
credit union should be considered the election of the individual or the 
organization, and whether the recusal provision should be strengthened. 
The ANPR noted that the proposed changes, if implemented, would affect 
all corporate credit unions that are federally insured or accept 
deposits from federal credit unions.
    The ANPR was issued as part of the Board's overall plan regarding 
the corporate credit union system. The Board will request comment on 
possible changes to other sections of the corporate credit union 
regulation in the near future.

B. Comments

    NCUA received 400 comments letters in response to the ANPR, 333 
from natural person credit unions,\1\ 25 from corporate credit unions, 
21 from state credit union leagues, 2 from state credit union 
associations, 2 from state credit union ``systems'' (consisting of a 
league, corporate credit union, and a service organization), 3 from 
national credit union trade associations, 3 from banking trade 
associations, 3 from state credit union regulators, 5 from individuals, 
2 from NCUA staff, and 1 from a law firm on behalf of several state 
leagues and corporate credit unions. The natural person credit union 
commenters came from 39 states, but they were not evenly distributed 
among those states. Credit unions located in only 6 states accounted 
for 48% of the 333 comments. Credit unions located in 12 states 
accounted for 75% of those comments. The states with the highest number 
of natural person credit union commenters were: Missouri (37), Colorado 
(33), South Carolina (23), Virginia (23), New York (22), California 
(20), Georgia (18), Kansas (18), Louisiana (18), Texas (14), Iowa (12), 
and Illinois (11).
---------------------------------------------------------------------------

    \1\Multiple letters from members or employees of the same credit 
union were considered part of the credit union's comments and were 
not counted separately.
---------------------------------------------------------------------------

    Of the 400 commenters, 115 expressed general support for the 
proposed changes, 278 expressed general opposition, and 7 commented not 
on the proposed changes but on a tangential issue. For a comment to be 
considered generally supportive, the commenter had to be in favor of a 
requirement that all or a majority of the board be comprised of 
representatives who do not serve on the board of the state league or 
league service organization. Almost universally, commenters who were in 
favor of this proposed change were in favor of all of the changes. In 
contrast, many commenters who were considered to be generally opposed 
to the proposed changes did not support the elimination of integrated 
boards but did support the proposals to require, for example, that 
elections be independent or that management report to the board of the 
corporate.
    Of the 333 natural person credit union commenters, 98 generally 
supported the proposed changes, 230 generally opposed them, and 5 did 
not comment directly on them. Commenters from states with large numbers 
of commenters tended to be united in their opinions, usually in 
opposition to the proposed changes. For example, 36 of Missouri's 37 
credit union commenters were opposed to the proposed changes, as were 
32 of Colorado's 33, all of South Carolina's 23, 17 of Georgia's, 
Kansas's, and Louisiana's 18, 10 of Iowa's 12, and 9 of Illinois's 11.
    Of the 25 corporate credit unions that commented, 8 supported the 
proposed changes, and 17 were opposed to them. All of the 21 state 
leagues that commented were opposed to the changes, as were the 2 state 
credit union ``systems.'' The three national banking trade associations 
supported the changes, as did one of the national credit union trade 
associations. A second credit union trade association was opposed to 
the changes, and the third commented on a tangential issue.
    Most of the commenters who were opposed to the proposed changes 
took the position, ``if it ain't broke, don't fix it.'' They argued 
that the ANPR had provided no discussion of specific problems resulting 
from conflicts of interest. The commenters stated that the structure of 
corporate credit unions is not a safety and soundness issue and should 
not be regulated by NCUA.
    The commenters who were in favor of the proposed changes expressed 
concern about the potential for disaster to the credit union system if 
a loss should result from a conflict of interest in a corporate credit 
union. They acknowledged the role of the leagues and trade associations 
in establishing the corporate credit unions, but stated that it was 
time for corporate credit unions to stand on their own.
    The Board has determined to request comment on specific proposed 
changes. The Board remains concerned that the ties between corporate 
credit unions and trade associations may threaten the safety and 
soundness of the entire credit union system. Those ties have, in the 
past, led to corporate credit union resources being used to fund trade 
association expenses, questionable or preferential loans to trade 
associations and affiliates, and other transactions with trade 
associations that were not in the corporate credit union's best 
interest. Commenters did not dispute the existence of past abuses. 
Those who addressed the issue suggested, instead, that the potential 
for further abuses was properly addressed by NCUA's 1992 amendments. 
Issues currently under review in specific cases, however, raise 
continuing concerns with respect to the potential for abuses. These 
issues include the propriety of amounts paid by corporate credit unions 
to trade associations for support and management services and the 
fairness and objectivity of business transactions between corporate 
credit unions and related trade associations.
    The Board acknowledges that trade association involvement with 
corporate credit unions may have been appropriate when the corporate 
credit union system was in its infancy. At that time, asset levels were 
low, credit unions generally operated conservatively, and economic 
conditions were more relaxed. The problems that arose were serious but 
small enough to be handled ``within the family.''
    In the last decade, however, the corporate credit union system has 
matured, managing billions of dollars and providing increasingly 
sophisticated services. Furthermore, economic conditions have changed, 
requiring corporate credit unions to act aggressively to remain 
competitive. Corporate credit unions have changed the way they do 
business just in the past few months; instead of strictly matching 
assets against liabilities, some have begun speculating on interest 
rates--and losing.
    The independent committee which studied the corporate credit union 
system for six months also noted these changes. In its July 1994 
report, the committee found that corporate credit unions were assuming 
more risk in their investment practices than in the past, their 
activities in general were becoming more complex, and their credit 
analysis procedures had not kept pace with the increased volume of 
funds flowing into the system.
    As the activities of corporate credit unions have changed, the 
Board believes that the administration of those activities must change. 
The stakes are higher than they were in the past and the margin for 
error narrower. If a problem arises today, it is likely to be much more 
severe than in the past and to be corrected by the marketplace rather 
than within the credit union community. The Board is not willing to 
wait until there is a catastrophic loss to take action.
    The Board believes that the credit union movement of today requires 
absolute assurance that all corporate credit unions are directed and 
managed by experienced individuals who are dedicated solely to the 
success of their institutions. These individuals must be able to 
understand the financial marketplace and the appropriate role of their 
institutions in that marketplace. The independent committee agreed, 
recommending that corporate credit unions: 1) develop improved 
procedures to monitor and evaluate interest-rate and credit risk; 2) 
ensure that management personnel understand investment products as well 
as do the individuals who market such products to corporate credit 
unions; and 3) retain outside advisors who report directly to the board 
regarding activity involving derivative instruments, if they use such 
instruments.
    The Board believes that these recommendations cannot be implemented 
successfully when a corporate credit union is too closely tied to a 
trade association. The interests of each entity are too often in 
conflict. The independent committee agreed, stating that ``the 
integrated structure may hinder the prudent management of [a] corporate 
[credit union].'' In response, the committee recommended that all 
corporate credit unions, including U.S. Central, be stand-alone 
institutions, independent of leagues and trade associations.

C. Section-by-Section Analysis

Section 704.2  Definitions

    The Board has determined to replace the term ``affiliated 
organization'' in Section 704.12 with the term ``credit union-related 
organization.'' The Board believes that this term is clearer and easier 
to apply. ``Credit union-related organization'' is defined in new 
paragraph (e) in Section 704.12 to be a credit union league or trade 
association, an affiliate of a credit union league or trade 
association, or a entity operated or controlled by a credit union 
league, trade association, or affiliate. Since the term ``affiliated 
organizations'' is no longer used in Part 704, the proposed rule 
deletes the first paragraph of Section 704.2
    The Board is aware that in some states, credit unions are not 
permitted to join the corporate credit union unless they belong to the 
state league. The Board believes that this practice reflects and helps 
perpetuate the excessive influence of trade associations in the 
operations of some corporate credit unions. The Board believes, 
further, that a credit union should be able to obtain financial 
services from a corporate credit union without having to support a 
league's educational, lobbying, and other activities. The proposed rule 
amends the definition of ``corporate credit union,'' adding the 
requirement that a corporate credit union may not condition a credit 
union's eligibility to join the corporate credit union on that credit 
union's membership in any other organization.

Section 704.12(a)  Board Representation

    The ANPR asked for comment on whether the board of directors of a 
corporate credit union should be independently elected by its members, 
with the condition that a majority of the board seats be held by 
representatives of member credit unions. It also asked whether all of a 
majority of the corporate credit union board should be comprised of 
representatives who do not also serve on the board of the state league 
or league service organization.
    As noted earlier, virtually all the commenters who supported the 
proposed changes agreed that elections should be independent. This view 
was also shared by a number of commenters who generally opposed the 
proposed changes. There was little direct opposition the idea of 
independent elections.
    The Board believes that the time has come to give the voting 
members of a corporate credit union control over who serves on its 
board. The members should have the opportunity to nominate and elect 
candidates independent of those selected by the nominating committee. 
Rather than using the terms ``open'' and ``independent,'' which are 
unclear, the proposed rule requires that elections be conducted by mail 
ballot, with procedures for nominations by petition. The Board notes 
that election procedures generally are set forth in the bylaws and 
proposes to amend the standard corporate federal credit union bylaws, 
issued by the Board in 1983, to provide for mail balloting and 
nominations by petition. State-chartered corporate credit unions would 
be required to adopt the federal bylaws governing elections. The 
proposed bylaws, which are set forth later in this document, are based 
on standard bylaw amendments that have been successfully used by 
natural person federal credit unions for a number of years. While the 
proposed bylaws are self-explanatory, the following chart may be 
helpful in tracking the timing of the key steps in the nomination and 
balloting procedures.

Time Table for Nomination/Election Procedure in Accordance With Proposed
                             Standard Bylaw                             
Board of directors appoints          At least 120 days prior to annual  
 nominating committee.                meeting.                          
Nominating committee files           At least 90 days prior to annual   
 nominations with recording officer.  meeting.                          
Recording officer notifies members   At least 75 days prior to annual   
 in writing of persons nominated by   meeting.                          
 nominating committee and of                                            
 procedures to be followed to                                           
 nominate someone by petition.                                          
Period for receiving nominations by  At least 30 days from above notice.
 petition.                                                              
Nominations by petition to be filed  At least 40 days prior to annual   
 with recording officer.              meeting.                          
Recording officer mails ballots to   At least 30 days prior to annual   
 all members.                         meeting.                          
Ballots to be received by tellers    At least 5 days prior to annual    
 of election.                         meeting.                          
                                                                        

    There was stronger opposition to the proposals to require that a 
majority of seats be held by representatives of member credit unions 
and that a majority be held by representatives who do not also serve on 
the board of the state league or league service organization. The 
commenters argued that the members of each corporate should be allowed 
to structure the board as they see fit. They argued that NCUA 
regulation in this area would violate the credit union principle of 
democracy. Some commenters stated that the field of qualified 
candidates in some states was too narrow to support separate boards for 
the league and the corporate credit union. The commenters who supported 
the proposal stated that it was impossible for an individual to 
represent credit union members adequately on the board of a corporate 
credit union while also serving on the board of a league.
    The Board is not persuaded by the objections to the proposed 
changes, believing that corporate credit unions should be controlled by 
the credit unions they were chartered to serve. The Board also believes 
that, even in states with fewer credit unions, there are sufficient 
qualified candidates to support separate boards for the league and the 
corporate credit union. Accordingly, the proposed rule requires that at 
least a majority of a corporate credit union's directors be individuals 
who represent member credit unions and who are not officers, directors, 
or employees of a credit union-related organization. Recognizing the 
power the chair of an organization has, the proposed rule requires that 
the individual serving as chair of the board of directors be included 
in that majority. The proposed rule also provides, for purposes of 
meeting the required majority, that no individual from a member credit 
union can serve as a director of a corporate credit union if another 
individual from that member credit union serves as an officer, 
director, or employee of a credit union-related organization.
    To illustrate, assume a hypothetical corporate credit union (HCCC) 
with a five-member board. Under proposed Section 704.12(a)(1), at least 
three board members of HCCC must be individuals who represent member 
credit unions of HCCC (credit unions A, B, and C). The three directors 
could not also serve, for example, as directors of a state league, a 
national trade association, or a CUSO operated by a league because 
those entities are ``credit union-related organizations'' as defined in 
new Section 701.12(e). They could, however, serve as directors of a 
CUSO operated or controlled by HCCC member credit unions. Under Section 
704.12(a)(3), a representative of credit union B could not serve as a 
director of HCCC if another individual from credit union B is serving 
as an officer, director, agent, or employee of a league or other credit 
union-related organization.
    The ANPR asked whether classes of directors should be established 
at U.S. Central in order to ensure representation by natural person 
credit unions and others broadly representative of the public interest. 
The commenters generally were not in favor of establishing classes of 
directors at U.S. Central; several noted that the credit union has 
classes of directors now. Many commenters who were opposed to 
prohibiting interlocking boards for corporates in general were in favor 
of some action to reduce trade association influence at U.S. Central. 
At this time, the Board is not convinced that it is necessary to 
establish classes of directors in order to ensure broader 
representation at U.S. Central. The Board believes that compliance with 
the requirements set forth in proposed Section 704.12(a) will be 
sufficient. Further comment, however, is welcome on this issue.
    Also, while not proposed at this time, the Board requests comment 
on whether there should be a requirement that all of the directors of a 
corporate credit union be individuals who are not officers, directors, 
or employees of a credit-union related organization.

Section 704.12(b)  Representatives of Organizational Members

    An ``organizational member'' of a corporate credit union is a 
member that is not a natural person, such as credit union or service 
organization. The ANPR asked whether the election of an organizational 
member representative to a position in a corporate credit union should 
be considered the election of the individual or the organization. The 
vast majority of commenters who supported the proposed changes stated 
that it should be considered the election of the individual, with 
vacancies being filled by the board of directors of the corporate 
credit union according to the bylaws of the corporate credit union. 
Most of these commenters stated, however, that since it is the 
organization that is the member, if the individual leaves that 
organization, he or she should be removed from the corporate credit 
union board. They stated, furthermore, that an organization should be 
able to remove its representative if it chooses to, although it does 
not have the right to replace that individual with someone else. The 
commenters who were opposed to the proposed changes stated that this 
was a matter that should be left to each corporate credit union to 
determine.
    An organizational member's representative is elected to the 
corporate credit union board based on his or her unique qualifications. 
The Board believes that permitting the organization to replace that 
representative with someone else would compromise the integrity of the 
election process. Therefore, the proposed rule provides that if an 
individual ceases to be the representative of an organization for any 
reason, including, but not limited to, death, departure from the 
organization, or withdrawal of designation by the organization, his or 
her seat is declared vacant and is filled by the corporate credit union 
board in accordance with the bylaws. In filling the seat, the 
requirements of proposed Section 704.12(a) would have to be maintained.
    The Board notes that the term ``member credit union or affiliated 
non-credit union member'' in present Section 704.12(b) has bee replaced 
in proposed Section 704.12(b)(1) by the term ``organizational member.'' 
As noted above, an ``organizational member'' is a member that is not a 
natural person. In addition to being clearer, the term is more 
comprehensive than ``member credit union or affiliated non-credit union 
member,'' as it includes non-credit union members who may not be 
affiliated with credit unions.

Section 704.12(c)  Recusal Provision

    The ANPR asked whether the regulations should inquire recusal for 
all matters involving the pecuniary interest of an organization in 
which a corporate official is interested, rather than just matters 
where the amount in question exceeds 5% of the corporate's capital. 
Most of the commenters who supported the proposed changes favored a 
stronger recusal provision, as did a few of the commenters who were 
opposed to the changes. Some of the latter suggested that rather that 
eliminating the threshold amount entirely, NCUA should consider 
lowering it. Most of the commenters who were opposed to the changes 
stated that the current regulation was appropriate, although a few said 
it was too broad and that simply disclosing conflicts should be 
sufficient.
    The Board believes that a healthy and independent credit union 
movement depends, in part, on preventing even the appearance of 
conflicts of interest. The Board further believes that a strong recusal 
provision is necessary to achieve this goal. In light of the increased 
scrutiny of financial institutions, there is no justification for 
allowing individuals who are interested in a matter from deliberating 
upon or deciding that matter, no matter how small. Further, given the 
proposed changes in board representation requirements, full recusal 
does not present the same practical problems as does the present rule. 
Therefore, the proposed rule does not contain a threshold below which 
matters can be considered by an interested individual.
    Under the recusal provision, an individual who is interested in a 
matter may not discuss the matter with anyone in the credit union at 
any time. He or she may not provide an opinion on the matter and must 
leave the room or area where the matter is being discussed. Of course, 
he or she may not vote on the matter.
    The proposed rule provides a definition of ``interested,'' 
substitutes ``entity'' for ``corporation, partnership, or 
association,'' and clarifies that the recusal provision does not apply 
to general policy making regarding dividends, loan rates, and fees for 
services. It also deletes paragraph (c)(5), as no longer necessary.

Section 704.12(d)  Administration

    The ANPR asked whether the management of a corporate credit union 
should be required to report solely to its board. Again, most of the 
commenters who supported the proposed changes favored the proposal, as 
did some who were opposed to them. Most of those who were opposed said 
that the issue should be determined by each corporate credit union. 
Some of those who were opposed commented on the statement in the ANPR 
that the practice of the manager of one entity reporting to another 
entity violates fundamental principles of general corporate law. These 
commenters argued that the statement was incorrect, stating that the 
board of a corporation may delegate all or a portion of its management 
functions. The Board notes that the commenters may have misunderstood 
the statement, which was meant simply to affirm the principle that the 
board of a corporation is ultimately responsible for the actions of the 
corporation.
    The Board believes it is essential that corporate credit unions 
adhere to this principle of board responsibility. To that end, the 
proposed rule sets forth the authority of the board and management of a 
corporate credit union and requires that management report solely to 
the board. The Board wishes to stress, again, that this requirement is 
meant simply to make it clear that the board is ultimately responsible 
for the operation of the corporate credit union. To further ensure that 
a corporate credit union is controlled by its board and not by another 
entity, the proposed rule provides that no management official or other 
employee of a corporate credit union may be employed by or serve as an 
official of any credit union-related organization.

Section 704.12(e)  Credit Union-Related Organization

    As previously explained, the proposed rule defines ``credit union-
related organization'' to be a credit union league or trade 
association, an affiliate of a credit union league or trade 
association, or an entity operated or controlled by a credit union 
league, trade association, or affiliate.

D. Applicability to State-Chartered Corporate Credit Unions

    The ANPR noted that Part 704 applies to all federally insured 
corporate credit unions and that non-federally insured corporate credit 
unions must agree to comply with it as a condition of receiving funds 
from natural person federal credit unions. Several commenters objected 
to applying the proposed changes to state-chartered corporate credit 
unions, stating that it was a violation of state rights and outside 
NCUA's authority.
    The Board rejects these arguments, noting that NCUA has the 
statutory authority: 1) to regulate federally insured corporate credit 
unions to protect the NCUSIF; and 2) to establish investment standards 
(set forth in Part 703), based on safety and soundness, for natural 
person federal credit unions.

E. Effective Date

    The Board is considering a delayed effective date of up to one 
year, in order to give corporate credit unions ample time to comply 
with any new regulations.

F. Regulatory Procedures

Regulatory Flexibility Act

    The NCUA Board certifies that the proposed rule, if made final, 
will not have a significant economic impact on small credit unions 
(those under $1 million in assets). The rule applies only to corporate 
credit unions, all of which have assets well in excess of $1 million. 
Accordingly, the NCUA Board has determined that a Regulatory 
Flexibility Analysis is not required.

Paperwork Reduction Act

    The proposed rule does not impose any paperwork requirements.

Executive Order 12612

    Executive Order 12612 requires NCUA to consider the effect of its 
actions on state interests. It states, ``Federal action limiting the 
policy-making discretion of the states should be taken only where 
constitutional authority for the action is clear and certain, and the 
national activity is necessitated by the presence of a problem of 
national scope.'' There is no question of NCUA's constitutional 
authority to regulate federally insured corporate credit unions to 
protect the NCUSIF. The risk of loss to federally insured credit unions 
and the NCUSIF caused by actions of corporate credit unions are 
concerns of national scope. The proposed rule will help establish that 
NCUA has the proper tools to ensure the safety and soundness of 
corporate credit unions.
    The rule applies to all federally insured corporate credit unions, 
including those that are state-chartered. State-chartered corporate 
credit unions enjoy the same benefits provided by the NCUSIF as do 
federally chartered corporate credit unions. The benefits are provided 
through a federal system, the responsibility for which lies with the 
NCUA Board. The Board believes that those who benefit from the system 
should bear its burdens equally. The rule also applies, indirectly, to 
non federally insured state-chartered corporate credit unions, which, 
pursuant to 12 CFR Part 703, must comply with the rule in order to 
receive funds from federally chartered credit unions. The proposed rule 
does not impose additional costs or burdens on the states or affect the 
states' ability to discharge traditional state government functions.
    The Board had determined, pursuant to Executive Order 12612, that 
the proposed rule may have an occasional direct effect on the states, 
on the relationship between the national government and the states, or 
on the distribution of power and responsibilities among the various 
levels of government. Further, the proposed amendments may supersede 
provisions of state law or regulation concerning federally insured 
state-chartered corporate credit unions.

List of Subjects in 12 CFR Part 704

    Credit unions, Reporting and record keeping requirements.

    By the National Credit Union Administration Board on September 
16, 1994.
Becky Baker,
Secretary of the Board.

    For the reasons set forth in the preamble, 12 CFR part 704 is 
proposed to be amended as follows:

PART 704--CORPORATE CREDIT UNIONS

    1. The authority citation for part 704 continues to read as 
follows:

    Authority: 12 U.S.C. 1762, 1766(a), 1781, and 1789.

    2. Section 704.2 is amended by removing the definition of 
Affiliated organization and revising the definition of Corporate credit 
union to read as follows:


Sec. 704.2  Definitions.

* * * * *
    ``Corporate credit union'' means a credit union that:
    (1) Is operated primarily for the purpose of serving other credit 
unions;
    (2) Is designated by the National Credit Union Administration as a 
corporate credit union;
    (3) Limits natural person members to the minimum required by state 
or federal law to charter and operate the credit union; and
    (4) Does not condition the eligibility of any credit union to 
become a member on that credit union's membership in any other 
organization.
* * * * *
    3. Section 704.12 is amended by revising paragraphs (a), (b), 
(c)(1), (c)(2), and (c)(4), removing paragraph (c)(5), and adding 
paragraphs (d) and (e), to read as follows:


Sec. 704.12  Representation.

    (a) Board representation. The board shall be determined as 
stipulated in the standard corporate federal credit union bylaws, 
provided that:
    (1) At least a majority of directors, including the chair of the 
board, are individuals who represent member credit unions and are not 
officers, directors, agents, or employees of a credit union-related 
organization;
    (2) Elections are conducted by mail ballot, with procedures for 
nominations by petition; and
    (3) For purposes of meeting the majority representation requirement 
of paragraph (a)(1) of this section, no individual from a member credit 
union can serve as a director if another individual from that credit 
union serves as an officer, director, agent, or employee of a credit 
union-related organization.
    (b) Representatives of organizational members. (1) An 
organizational member of a corporate credit union may appoint one of 
its members or officials as a representative to the corporate credit 
union. The representative shall be empowered to attend membership 
meetings, to vote, and to stand for election on behalf of the member. 
No individual may serve as the representative of more than one 
organizational member in the same corporate credit union.
    (2) Any vacancy on the board of a corporate credit union caused by 
a representative being unable to complete his or her term shall be 
filled by the board of the corporate credit union according to the 
bylaws.
    (c) Recusal provision. (1) No director, committee member, officer, 
agent, or employee of a corporate credit union shall in any manner, 
directly or indirectly, participate in the deliberation upon or the 
determination of any question affecting his or her pecuniary interest 
or the pecuniary interest of any entity (other than the corporate 
credit union) in which he or she is interested, except if the matter 
involves general policy regarding setting dividend or loan rates or 
fees for services.
    (2) An individual is ``interested'' in an entity if he or she:
    (i) Serves as a director, officer, agent, or employee of the 
entity;
    (ii) Has a business, ownership, or deposit relationship with the 
entity; or
    (iii) Has a business, financial, or familial relationship with an 
individual who has a pecuniary interest in the entity.
    (3) * * *
    (4) In the event of the disqualification of any committee member by 
operation of paragraphs (c) (1) or (2) of this section, the remaining 
qualified committee members, if constituting a quorum with the 
disqualified committee members, may exercise, by majority vote, all the 
powers of the committee with respect to the matter under consideration. 
Where all of the committee members are disqualified, the matter shall 
be decided by the board of directors.
    (d) Administration. (1) A corporate credit union shall be under the 
direction and control of its board of directors. While the board may 
delegate the performance of administrative duties, the board is not 
relieved of its responsibility for their performance. The board may 
employ a management official who shall have such authority and such 
powers as delegated by the board to conduct business from day to day. 
Such management official must answer solely to the board of the 
corporate credit union.
    (2) No management official, agent, or employee of a corporate 
credit union may be a management official, agent, or employee of a 
credit union-related organization.
    (e) Credit union-related organization. A ``credit union-related 
organization'' means:
    (1) A credit union league;
    (2) A credit union trade association;
    (3) An affiliate of a credit union league or trade association; or
    (4) An entity operated or controlled by a credit union league, 
credit union trade association, or affiliate of a credit union league 
or trade association.

Appendix to the Proposed Rule

    [Note: The following material will not appear in the Code of 
Federal Regulations.]

    The document entitled ``Corporate Federal Credit Union Bylaws'' is 
proposed to be amended by revising Article IV, Section 2, and Article 
V, Sections 1 and 2, and adding Sections 4 and 5 to Article V, to read 
as follows:

Article IV. Meetings of Members

* * * * *
    Section 2. At least 75 days before the date of any annual meeting 
or 10 days before the date of any special meeting of the members, the 
recording officer shall cause written notice to be mailed to each 
member at the address that appears on the records of this credit union. 
Such notice shall state the date, time, and location of the meeting and 
such other information as the board of directors shall determine 
consistent with these bylaws. The written notice for the annual meeting 
shall advise the members of the deadlines for elections. Any meeting of 
the members, whether annual or special, may be held without prior 
notice, at any time or place, if all members entitled to vote and who 
are not present at such meeting shall, in writing, waive notice 
thereof, before, during, or after such meeting.
* * * * *

Article V. Elections

    Section 1. At least 120 days prior to each annual meeting the board 
of directors shall appoint a nominating committee of not fewer than 
three from among the members. It shall be the duty of the nominating 
committee to nominate at least one eligible candidate for each vacancy, 
including any unexpired-term vacancy, for which elections are being 
held, and to determine that the candidates nominated are agreeable to 
the placing of their names in nomination and will accept office if 
elected. The nominating committee shall file its nominations with the 
recording officer at least 90 days prior to the annual meeting, and the 
recording officer shall notify in writing all members eligible to vote 
at least 75 days prior to the annual meeting that nominations for 
vacancies may also be made by petition signed by 5 percent of the 
members with a minimum of 5 and a maximum of 100.
    The written notice shall indicate that the election will not be 
conducted by ballot and there will be no nominations from the floor 
when there is only one nominee for each position to be filled. A brief 
statement of qualifications and biographical data in such form as shall 
be approved by the board of directors will be included for each nominee 
submitted by the nominating committee with the written notice to all 
eligible members. Each nominee by petition shall submit a similar 
statement of qualifications and biographical data with the petition. 
The written notice shall state the closing date for receiving 
nominations by petition. The period for receiving nominations by 
petition shall, in all cases, extend at least 30 days from the date the 
petition requirement and the list of nominating committee nominees are 
mailed to all members. To be effective, such nominations shall be 
accompanied by a signed certificate from the nominee or nominees 
stating that they are agreeable to nomination and will serve if elected 
to office. Such nominations shall be filed with the recording officer 
at least 40 days prior to the annual meeting.
    In carrying out their responsibilities, the nominating committee 
and board of directors must ensure that the requirements of 12 CFR 
704.12(a) are satisfied.
    Section 2. All elections shall be determined by plurality vote and 
shall be by mail ballot except where there is only one nominee for each 
position to be filled. Nominations shall not be made from the floor 
unless sufficient nominations have not been made by the nominating 
committee or by petition to provide for one nominee for each position 
to be filled or circumstances prevent the candidacy of the one nominee 
for a position to be filled. Only those positions without a nominee 
shall be subject to nominations from the floor. In the event 
nominations from the floor, when permitted herein, result in more than 
one nominee for a position to be filled, and when nominations have been 
closed, tellers shall be appointed by the board of directors, ballots 
shall be distributed, the vote shall be taken and tallied by the 
tellers, and the results announced. When only one member is nominated 
for each position to be filled, the chair may take a voice vote or 
declare each nominee elected by general consent or acclamation at the 
annual meeting.
* * * * *
    Section 4. Except as provided in Section 2 of this article, all 
elections shall be by mail ballot, subject to the following conditions:
    (a) The tellers of election shall be appointed by the board of 
directors;
    (b) Sufficient nominations having been made by the nominating 
committee or by petition to provide more than one nominee for any 
position to be filled, the recording officer shall, at least 30 days 
prior to the annual meeting, cause printed ballots to be mailed to all 
members eligible to vote;
    (c) The recording officer shall cause the following materials to be 
mailed to each eligible voter:
    (1) One ballot, clearly identified as such, on which the names of 
the candidates for the board of directors and the candidates for other 
separately identified offices or committees shall have been printed in 
order as determined by the draw of lots. The name of each candidate 
shall be followed by a brief statement of qualifications and 
biographical data in such form as shall be approved by the board of 
directors;
    (2) One envelope clearly marked with instructions that the 
completed ballot shall be placed therein and the envelope sealed;
    (3) One identification form to be completed so as to include the 
name, address, signature, and credit union account number of the voter;
    (4) One mailing envelope in which the voter, pursuant to 
instructions provided, shall insert the sealed ballot envelope and the 
identification form, and which shall have been postage prepaid and pre 
addressed for return to the tellers of election;
    (5) When properly designed, one form can be printed that represents 
a combined ballot/identification form, and postage prepaid and pre 
addressed return envelope;
    (d) It shall be the duty of the tellers of election to verify, or 
cause to be verified, the name and account number of the credit union 
appearing on the identification form; to place the verified 
identification form and the sealed ballot envelope in separate places 
of safekeeping pending the count of the vote; and, in the case of a 
questionable or challenged identification form, to retain the 
identification form and sealed ballot envelope together until the 
verification or challenge has been resolved;
    (e) Ballots mailed to the tellers of election must be received by 
the tellers no later than midnight 5 days prior to the date of the 
annual meeting;
    (f) Voting shall be closed at the midnight deadline specified in 
subsection (e) hereof and the vote shall be tallied by the tellers of 
election. The result shall be verified at the annual meeting, and the 
board of directors shall make public the result of the vote at the 
annual meeting.

[FR Doc. 94-23545 Filed 9-22-94; 8:45 am]
BILLING CODE 7536-01-M