[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: 94-23546]


[[Page Unknown]]

[Federal Register: September 23, 1994]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 708a

 

Mergers or Conversions of Federally-Insured Credit Unions: NCUA 
Approval

AGENCY: National Credit Union Administration (NCUA).

ACTION: Interim final rule with request for comments.

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SUMMARY: The NCUA is adopting a new rule, part 708a, to clarify that 
the NCUA Board must approve any merger or conversion of a federally 
insured credit union to any non credit union institution. The Board 
also requests additional comment on a number of issues related to the 
circumstances under which these transactions should be approved and 
related to protecting the interests of credit unions and their 
membership.

DATES: Effective Date: The interim final rule is effective September 
23, 1994.
    Comments: Comments must be postmarked or posted on the NCUA 
electronic bulletin board by November 22, 1994.

ADDRESSES: Send comments to Becky Baker, Secretary of 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: Part 708 of the NCUA Rules and Regulations 
sets forth procedures and requirements for mergers and for terminations 
or conversions of insurance. As presently drafted, part 708 addresses 
situations where an insured credit union drops NCUSIF insurance, either 
in connection with a merger or through a voluntary termination or 
conversion of insurance, but retains its status as a credit union. It 
does not, however, address situations where a credit union drops NCUSIF 
insurance in connection with a merger with or conversion into a savings 
bank or other non credit union institution. In response to recent 
solicitations by outside attorneys and consultants to credit unions 
encouraging them to merge or convert to a mutual savings bank or a 
stock institution, NCUA issued a proposal to amend part 708 in order to 
clarify that it applies to all merger and termination or conversion 
situations where the continuing institution is not insured by the 
National Credit Union Share Insurance Fund (NCUSIF). 59 FR 33702 (June 
30, 1994).
    Sixteen Comments were received in response to the proposal. Of the 
14 that addressed the requirement that a federally-insured credit union 
contemplating merger with or conversion to a non credit union 
institution comply with part 708, 12 were in favor of the 
clarification. The two opposing commenters were a bank trade group and 
a state-chartered credit union. The bank trade group characterized the 
proposed rule as an effort to ``increase the barriers to exiting the 
NCUA system.'' The other opposing commenter offered no rationale for 
their opposition. The favorable comments consistently stressed that the 
members need to be properly informed and that the NCUA needs to ensure 
that the merger or conversion would be in the members' interests. These 
commenters argued that there is a need to protect the interests of 
credit unions and their membership from the potentially self motivated 
interests of lawyers, consultants and credit union insiders.
    The issues raised by conversions of credit unions to banks are new 
to the NCUA and require further study. The Federal Deposit Insurance 
Corporation (FDIC) and the Office of Thrift Supervision (OTS) have 
recently addressed similar issues. On May 3, 1994, OTS published an 
interim final rule and on August 30, 1994, a final rule strengthening 
conversion standards and ensuring integrity in the conversion process. 
59 FR 22725 and 59 FR 44615 respectively. The OTS experience has shown 
that not all conversions are done in the best interests of the 
customers.

    Given that mutual savings associations currently seeking to 
convert generally are well-capitalized, the OTS has become 
increasingly concerned that the association's management may be 
undertaking conversions for reasons other than the need for capital. 
Some thrift insiders may be sacrificing the interests of their 
associations and mutual account holders to acquire significant 
amounts of conversion stock and other benefits as cheaply as 
possible in the conversion process.

59 FR at 22729.
    In view of these concerns, the OTS has adopted detailed rules 
concerning conversions from mutual to stock savings associations, 
designed to ensure fair evaluation and distribution of the stock of the 
resulting institution. 12 CFR Sec. 563b. It is also interesting to note 
that the OTS has severely limited other transactions. For example, with 
very limited exceptions, the OTS rules require, in the case of a 
combination of a savings association and a non savings association 
institution (such as a credit union), that the resulting institution be 
a savings association. 12 CFR 546.2.
    FDIC also recently proposed regulations to tighten control over the 
conversion process. 59 FR 30316 (June 13, 1994). FDIC concurred with 
the need for OTS's interim final rule and found it ``necessary and 
appropriate to adopt regulations similar to OTS Revisions.'' 59 FR at 
30318. FDIC was particularly concerned with the same type of insider 
abuses cited by OTS and found ``it is necessary to reexamine the 
conversion process to explore whether existing economic value of a 
converting mutual institution can be better distributed directly to 
those who should receive it.'' 59 FR 30318.

    The issuance of stock options at the conversion price, rather 
than at the aftermarket price, which in recent years has been 
substantially higher than the conversion price, creates the 
impression that insider enrichment may be the main reason for the 
conversion. * * * In fact, it may be an inherent conflict of 
interest for management to decide to convert the bank to stock form 
when, as part of the proposed conversion, management will reap 
significant benefits.

59 FR at 30320.
    NCUA cannot afford to ignore these warning signals. It is 
significant and not a coincidence that the recent increase in 
conversion solicitations from attorneys to credit unions is occurring 
at the same time the banking regulators are clamping down on 
institutions they regulate.

Interim Rule

    The NCUA Board is issuing an interim final rule to immediately and 
clearly establish NCUA's jurisdiction over all conversions by insured 
credit unions. Upon further reflection, rather than place this rule in 
part 708 which focuses on converting from federal to private or no 
insurance, a new part 708a has been added to NCUA's Rules and 
Regulations. This interim rule sets forth the requirement that all 
mergers or conversions, involving one or more federally-insured credit 
union, including those where the resulting institution is not a credit 
union, must be approved by the NCUA Board. The rule also specifies that 
all notices are subject to NCUA approval. Further, current part 708 has 
been redesignated as part 708b to provide for a logical progression 
from general to a more specific regulation.

Request for Additional Comment

    The more NCUA studies these transactions, the more apparent it 
becomes that the issues involved in converting to a mutual savings bank 
or a stock institution are more complicated than they appear on their 
face. A number of issues require further consideration and review. 
Questions of insider preferences were addressed in the proposed 
regulations. Insider benefits are clearly a major issue with respect to 
the motivations for and objectivity of the conversion process. NCUA 
questions 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.
    Even assuming adequate safeguards against insider preferences, 
however, more basic questions exist concerning the authority for, and 
propriety of, a decision by the existing members of the credit union to 
convert the credit union to a stock corporation in order to distribute 
among themselves the credit union's equity and future earnings power. 
Some commenters have suggested that this is inherently unfair to the 
overall field of membership, that is, the present and future membership 
to be served by the credit union. In effect, these commenters have 
suggested that the current members and officials hold the credit union 
in trust for the benefit of the overall field of membership, including 
present and future members. They question whether existing members 
should be allowed to transform the credit union out of existence in 
order to personally ``cash in'' on its economic value.
    Other issues also require further study if healthy credit unions 
are to be allowed to merge or convert to non-credit union status. 
Included are how to properly appraise the value of the credit union for 
purposes of issuing stock, how to fairly distribute the credit union's 
value among members/shareholders (which may include share deposits made 
in contemplation of merger), whether there should be a public comment 
period on the proposed transaction, whether a majority of eligible 
voting members must approve the proposed transaction (and if so, should 
majority be defined as a simple majority or a super majority and if a 
super majority, how should that be defined), and what post-merger or 
post-conversion controls are needed to protect against improper insider 
preferences after the transaction is completed.
    Until the Board has fully addressed these issues and developed new 
specific regulatory standards and procedures for mergers and 
conversions to non-credit union status, it may, as a practical matter, 
be difficult to take final action on such transactions. Boards of 
directors of insured credit unions are urged to carefully consider 
whether it is a wise expenditure of credit union funds to pursue these 
transactions prior to the establishment of specific standards. Further, 
the NCUA Board reiterates its previously expressed intent to hold 
boards and management officials fully accountable for any waste of 
credit union resources that is motivated by the prospect of personal 
gain, rather than the best interests of the credit union and its 
members.
    The Board hopes to issue permanent rules with specific standards 
and procedures within 60 to 90 days after the close of the comment 
period on this interim final rule. In developing those rules, the Board 
will consider the comments it received in response to its notice of 
proposed rulemaking and any comments received in response to this 
interim rule. In that connection, nine of the ten commenters previously 
addressing the issue of a uniform member notice supported the creation 
of a uniform notice. Also, two credit union trade groups on behalf of 
state regulators and one state league expressed concern that NCUA may 
attempt to usurp the state's power to make the final determination 
where a state-chartered credit union is involved. As expressed in the 
preamble to the notice of proposed rulemaking, ``the Board values its 
positive working relationship with state credit union supervisors * * 
*'' and ``will continue to cooperate with state regulators in cases 
involving federally insured state chartered credit unions.'' NCUA 
remains committed to working with the state regulators to study the 
issues and develop any further rulemaking.

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). 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 the 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. 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 September 
16, 1994.
Becky Baker,
Secretary of the Board.

    For the reasons set forth in the Preamble, pursuant to authority 
granted in Section 205(b)(1) of the Federal Credit Union Act (12 U.S.C. 
1785(b)(1)), the Board is adding a new regulation in 12 CFR part 708a.
    1. Part 708a is added to read as follows:

PART 708a--MERGERS OR CONVERSIONS OF FEDERALLY-INSURED CREDIT 
UNIONS: NCUA APPROVAL

Sec.
708a.1  NCUA Board approved.
708a.2  Notice to Members.

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


Sec. 708a.1  NCUA Board approval.

    Pursuant to Section 205(b)(1) of the Federal Credit Union Act, NCUA 
Board approval is required in advance of any merger, consolidation, 
insurance conversion, transfer of liabilities or other transaction 
whereby a federally-insured credit union transfers all or any part of 
its members' accounts to any institution that is not NCUSIF-insured or 
assumes responsibility for all or any portion of accounts of an 
institution that is not NCUSIF-insured. In transactions involving 
federally-insured state chartered credit unions, the Board will 
coordinate with the appropriate state regulatory authority.


Sec. 708a.2  Notice to members.

    All notices to members will be preapproved by the NCUA Board. 
Procedures and forms for the transactions where the remaining 
institution continues to be a credit union--mergers involving both 
federally-insured credit unions and non federally-insured credit unions 
and conversion from federal insurance to nonfederal insurance--are set 
forth in Part 708b, Subparts A, B and C.

Part 708 [Redesignated as Part 708b]

    2. Part 708 is redesignated as part 708b.

[FR Doc. 94-23546 Filed 9-22-94; 8:45 am]
BILLING CODE 7536-01-M