[Federal Register Volume 63, Number 42 (Wednesday, March 4, 1998)]
[Rules and Regulations]
[Pages 10515-10517]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-5451]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 708a


Mergers or Conversions of Federally-Insured Credit Unions to Non 
Credit Union Status: NCUA Approval

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The final rule adds a new provision to the disclosure 
statement in regulations relating to NCUA approval of mergers or 
conversions of federally-insured credit unions to non credit union 
status. Credit unions are required to disclose in plain English on the 
cover page of the disclosure statement specific facts relating to the 
proposed transaction's impact on the members.

DATES: This rule is effective April 1, 1998.

FOR FURTHER INFORMATION CONTACT: Mary F. Rupp, Staff Attorney, Office 
of General Counsel, National Credit Union Administration, 1775 Duke 
Street, Alexandria, Virginia 22314-3428 or telephone: (703) 518-6553.

SUPPLEMENTARY INFORMATION:

Background

    On November 24, 1997, the NCUA Board requested comments on proposed 
changes to part 708a of its regulations. 62 FR 64187 (December 4, 
1987). Part 708a sets forth the procedures and requirements for credit 
unions proposing to convert to non credit union status. The current 
rule requires credit unions to provide a disclosure statement to the 
members prior to the membership vote. The rule lists the information 
that must be included in the disclosure. The Board has had the 
opportunity to review several disclosure statements filed under the 
current rule. The disclosures are often in excess of fifteen pages and 
contain technical information which may be difficult for the average 
member to understand. The Board believes it would be helpful to the 
members if certain key information could be provided to them in plain 
English on the cover page of the disclosure. The proposal set forth 
three key areas the

[[Page 10516]]

Board believed should be highlighted to the members. These were voting 
rights, potential future transactions, and director compensation. Based 
on the comments, the Board has modified the provisions relating to 
voting rights and director compensation and deleted the provision on 
potential future transactions and replaced it with a provision noting 
the costs of conversion.

Summary of Comments and Discussion of Issues

    In the proposal, the NCUA Board requested comment on the proposed 
uniform disclosure requirements. The NCUA Board received 28 comments on 
the proposal: seven from credit unions; three identical letters from 
three members of the same credit union; two from bank leagues; four 
from bank trade groups; four from law firms; one from a credit union 
conversion consultant; three from credit union trade groups; three from 
credit union state leagues; and one from an individual. The following 
is a summary of the comments received on the proposed rule's uniform 
cover page to the Disclosure. Twenty of the 28 commenters opposed the 
proposed disclosure. One of the general negative comments was that it 
is unfair to require credit unions to highlight the negative aspects on 
the cover without giving them the opportunity to highlight the positive 
aspects there as well. The positive commenters noted that it is 
appropriate that certain information be highlighted to help assure that 
it receives careful consideration. Some of the positive commenters 
noted that the language appeared somewhat biased and should be more 
neutral. The NCUA Board agrees with these commenters that, as 
originally drafted, the proposal highlighted negative information. The 
final rule has been amended to address this concern. The final rule 
references three areas the Board believes are important to the members 
and then refers them to the disclosure for a complete discussion of the 
issues.
    The proposal required disclosure of voting rights, the potential 
for a stock conversion, and the right of the directors to be 
compensated. All 11 of the commenters that commented on the voting 
rights provision objected to the way it was worded. One of the 
objections is that it is incorrect to say that the institution is no 
longer democratically controlled, just because it is no longer one 
member one vote. Further, in some cases the institution will continue 
with one member one vote. The Board agrees with these comments and has 
taken the language relating to ``democratic control'' out of the final 
rule. In the event a credit union retains one member one vote, the 
proposal allowed for the disclosure statement to be modified 
appropriately. The final rule does as well. Five commenters noted that 
the issue of voting is often not important for credit union members and 
therefore, should not be highlighted. Although the Board is aware that 
not all credit union members take the opportunity to vote in credit 
union elections, the Board believes it is important for members to be 
made aware of such a fundamental change in the structure of their 
financial institution.
    Eighteen commenters specifically addressed and opposed the 
requirement that the credit union inform the members that the credit 
union could further change its organizational structure in the future. 
All of these commenters noted that a disclosure should not contain 
speculative information. Some noted that the proposal gives the false 
impression that all mutuals convert to stock. Some commenters found the 
statement that ``members will lose their equity ownership interest'' 
confusing and misleading. After reviewing the comments, the NCUA Board 
agrees that credit unions should not be required to include information 
that may not apply to their transaction. This provision has been 
deleted from the final rule.
    Ten of the commenters objected to the disclosure that board members 
may receive compensation after waiting the two years required by NCUA's 
regulation. Some of the commenters thought that the way it was being 
disclosed carried the negative implication that the Board's decision 
was motivated by greed. They objected to this negative implication 
because directors' fees are nominal. Further, the commenters stated 
that directors act on the basis of their good faith assessments of 
their members' best interests. The NCUA Board has modified the 
statement to remove any negative or speculative overtones. It merely 
states that Directors may receive compensation after waiting two years 
and refers the member to the disclosure for further information. The 
Board does not intend to imply that the transaction is motivated by 
greed, but believes it is important for the members to know that the 
spirit of volunteerism that motivated credit union directors may not be 
present in the proposed new financial institution. A couple of the 
commenters suggested that credit union directors do not really serve as 
volunteers because they may receive health and accident insurance and 
are allowed reasonable reimbursement for themselves and their spouse 
when traveling on credit union business. To compare this minimal 
insurance and reimbursement to direct compensation is not an accurate 
or fair comparison. The insurance is limited by regulation and 
reimbursement is not compensation.
    Two commenters suggested a format change for the disclosures so 
that boxes could be checked to indicate those provisions that apply. 
The NCUA Board believes that this format is not necessary because the 
language the rule requires will generally apply. It is sufficient that 
the rule provides for modifications as necessary to ensure accuracy.
    One of the commenters objected to using the term ``savings bank'' 
in the disclosure. This term has been eliminated from the final rule.
    Although not part of the proposal, several of the commenters raised 
three other issues which the Board will briefly address. First, a 
number of the commenters object to the voting requirement in part 708a. 
The rule requires a majority of the members to vote in favor of the 
transaction for it to be approved. The negative commenters believe this 
is excessive since conversion from a federal to state charter only 
requires approval by a majority of the members who vote and conversion 
from federal to private insurance only requires approval by a majority 
of the members who vote, providing at least 20% vote. The commenters 
have failed to mention that termination of insurance like termination 
of a credit union charter requires approval by a majority of the credit 
union's members. 12 U.S.C. 1786(a)(1). Prior to issuing its final rule 
on credit union conversions to non credit union status, the Board 
requested and received comment on the issue of majority approval. The 
Board considered those comments when it issued the final rule. 60 FR 
12659, 12660 (March 8, 1995). The six commenters that addressed the 
issue all supported approval by a majority of the members. Two defined 
majority as over 50%, two defined it as 60% to 66 2/3%, one defined it 
as 70% to 80% and one commenter did not define it. The Board continues 
to believe in ``the importance of a clear mandate on an issue of such 
significance to the members.'' 60 FR at 12660. It should be noted that 
in 1995 the Board chose the least burdensome voting requirement 
recommended by the commenters.
    Second, several of the commenters object to Sec. 708a.5(a)(2) of 
the rule. This provision requires the ballot to be mailed to the 
members not more than 30 days prior to the vote. The commenters contend 
that NCUA is more liberal with other forms of transactions and has

[[Page 10517]]

placed the 30-day limitation in an attempt to block the transaction. 
The 30-day time frame is the statutorily-required time frame for 
insurance conversions and for federal charter to state charter 
conversions. 12 U.S.C. 1771(a)(1) and 1786(d)(2). In 1995, the Board 
selected this time frame to be consistent with Congress' time frame for 
other types of transactions of comparable significance that require a 
membership vote.
    Finally, a few of the commenters state that NCUA has overreached 
its regulatory authority over state chartered credit unions. They 
contend that state chartered conversions should be governed by state 
law. This issue was discussed in detail in the final rule. 60 FR at 
12660. The Board explained how very few states have statutes or 
regulations that address the issue of conversions. However, in 
deference to the states that have regulations, the Board in 1995 
incorporated into the final rule a provision that allows a federally 
insured state chartered credit union to file a request for a waiver of 
compliance with the procedural portions of part 708a and instead follow 
the applicable state regulation.

Final Rule

    The final rule requires credit unions to provide in plain English 
on the cover page of the Disclosure the following information: (1) The 
control of the institution will no longer be based on each member 
having one equal vote; this could change a member's influence in any 
future decisions affecting the institution. Votes will be based on the 
amount of an individual's deposits. For further information, see 
page(s) ________ of the Disclosure Statement. (2) The institution will 
lose its tax-exempt status and there may be increased costs associated 
with the conversion. For further information, see page(s) ________ of 
the Disclosure Statement. (3) After waiting the two years required by 
NCUA's regulation, Board members may be compensated. For further 
information, see page(s) ________ of the Disclosure Statement.
    In the event these statements do not apply to a particular 
transaction, they may be modified as necessary.
    The NCUA Board has modified the proposal to remove any prejudicial 
inference. The Board believes that these three areas are important to 
the members. If the members are interested in learning more about the 
issue, they are referred to the appropriate place in the Disclosure 
Statement, so that the credit union can describe in its own words, the 
impact the issue will have on the members.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires the NCUA to prepare an 
analysis to describe any significant economic effect any regulation may 
have on a substantial number of small credit unions, meaning those 
under $1 million in assets. The NCUA Board has determined and certifies 
that the final rule will not have a significant economic impact on a 
substantial number of small credit unions. The reason for this 
determination is that it is highly unlikely that small credit unions 
would be engaged in a merger or conversion to a non credit union 
institution. Accordingly, the NCUA Board has determined that a 
Regulatory Flexibility Analysis is not required.

Executive Order 12612

    Executive Order 12612 requires NCUA to consider the effect of its 
actions on state interests. The final amendments will apply to all 
federally insured credit unions. The final amendments are not designed 
or intended to interfere with the state regulation of state chartered 
institutions. However, existing statutory requirements mandate the 
Board approve transactions of this nature for all federally insured 
credit unions. The rule recognizes the interests of states and state 
regulators in supervising state chartered credit unions by including a 
provision that allows federally insured state chartered credit unions, 
on a case-by-case-basis, to obtain a waiver from NCUA's rule and follow 
state procedures if those procedures adequately address the concerns of 
NCUA's rule. With this provision in the rule, the NCUA Board has 
determined that the final amendments are not likely to have any direct 
effect on states, the relationship between the states, or the 
distribution of power and responsibilities among the various levels of 
government.

Paperwork Reduction Act

    The final amendment requires a credit union to provide its members 
information provided by NCUA. The Paperwork Reduction Act does not 
apply to disclosures that are directives for a person to disclose 
information completely supplied by the agency. 5 CFR 1320.3(c)(2).

Congressional Review

    Awaiting OMB determination.

List of Subjects in 12 CFR Part 708a

    Bank deposit insurance, Credit unions, Reporting and recordkeeping 
requirements.

    By the National Credit Union Administration Board on February 
25, 1998.
Becky Baker,
Secretary of the Board.

    Accordingly, NCUA amends 12 CFR part 708a as follows:

PART 708a--MERGERS OR CONVERSIONS OF FEDERALLY-INSURED CREDIT 
UNIONS TO NON CREDIT UNION STATUS: NCUA APPROVAL

    1. Revise the heading of part 708a to read as set forth above.
    1a. The authority citation for part 708a is revised to read as 
follows:

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

    2. Amend Appendix A to part 708a by revising paragraph (2)(m) to 
read as follows:

Appendix A to Part 708a--Notice to Members of Special Meeting, 
Disclosure and Ballot

* * * * *
    (2) * * *
    (m) The cover of the Disclosure Statement must contain the 
following statement in bold, appropriately modified to the extent 
that this statement does not accurately describe the transaction:
    PLEASE READ THIS DISCLOSURE DOCUMENT. IT CONTAINS IMPORTANT 
INFORMATION ABOUT YOUR CREDIT UNION.
    The control of the institution will no longer be based on each 
member having one equal vote; this could change a member's influence 
in any future decisions affecting the institution. Votes will be 
based on the amount of an individual's deposits. For further 
information, see page(s) ________ of the Disclosure.
    The institution will lose its tax-exempt status and there may be 
increased costs associated with the conversion. For further 
information, see page(s) ________ of the Disclosure.
    After waiting the two years required by NCUA's regulation, Board 
members may be compensated. For further information, see page(s) 
________ of the Disclosure.
* * * * *
[FR Doc. 98-5451 Filed 3-3-98; 8:45 am]
BILLING CODE 7535-01-U