[Federal Register Volume 64, Number 102 (Thursday, May 27, 1999)]
[Rules and Regulations]
[Pages 28718-28721]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13309]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701, 713, and 741


Organization and Operations of Federal Credit Unions; Fidelity 
Bond and Insurance Coverage for Federal Credit Unions; Requirements for 
Insurance

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA is issuing this rule to update, clarify, revise and 
redesignate its regulation that addresses the requirements for fidelity 
bond coverage for losses caused by credit union employees and officials 
and for general insurance coverage for losses caused by persons outside 
of the credit union, e.g., losses due to theft, holdup or vandalism. 
The final rule recasts the rule in plain English format and adds 
several previously approved bond forms to the regulation.

DATES: This rule is effective July 26, 1999.

ADDRESSES: National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.

FOR FURTHER INFORMATION CONTACT: Allan Meltzer, Associate General 
Counsel, 1775 Duke Street, Alexandria, VA 22314-3428. Telephone Number 
(703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

    The Federal Credit Union Act sets forth statutory requirements for 
the bonding of credit union employees and appointed and elected 
officials. 12 U.S.C. 1761a, 1761b(2) and 1766(h). The NCUA Board is 
directed to promulgate regulations setting forth both the amount and 
character of bond requirements for employees and officials. The NCUA 
Board is also granted the following powers concerning bonding:
    To approve bond forms;
    To set minimum requirements for bond coverage;
    To require such other fidelity coverage as the Board may determine 
to be reasonably appropriate;
    To approve a blanket bond in lieu of individual bonds; and
    To approve bond coverage in excess of minimum fidelity coverage.
    In addition, NCUA's general rulemaking authority provides a 
statutory basis for both the bonding requirements of Sec. 701.20 and 
the insurance coverage requirements related to losses caused by persons 
outside the credit union. 12 U.S.C. 1766(a), 1789(a)(11).
    NCUA has a policy of periodically reviewing its regulations to 
``update, clarify and simplify existing regulations and eliminate 
redundant and unnecessary provisions.'' IRPS 87-2, Developing and 
Reviewing Government Regulations. As part of its regulatory review 
program, NCUA reviewed Sec. 701.20 to determine whether the language of 
the regulation was clear and effective. As a result of that review on 
December 17, 1998, the NCUA Board proposed changes to this regulation 
(64 FR 58, January 4, 1999) to increase regulatory effectiveness by 
making it easier for credit unions to understand the requirements 
regarding fidelity bonds and other insurance. The proposed rule also 
added a number of additional bond forms which have been approved by the 
NCUA for use by federal credit unions.
    In addition, the proposed rule provided for an aggregate limit of 
liability no less than twice the single loss limit of liability stated 
in the fidelity bond. Most bond forms currently in use provide for such 
an aggregate liability limit.

B. Comments

    Five comment letters were received. Of these, three were received 
from state credit union leagues, one from a national credit union trade 
association, and one from an insurance company. All five concurred with 
the final rule.

[[Page 28719]]

    Two commenters noted that the proposal uses the terms surety and 
fidelity interchangeably, and suggest that for the sake of clarity the 
term fidelity be used throughout. The term surety has been eliminated 
from the final rule and the term fidelity used throughout.
    One commenter suggested that NCUA clarify that the provision 
requiring that an aggregate limit of liability be twice the single loss 
limit of liability does not apply to optional coverages, but only to 
required fidelity coverage. Section 713.5(d) of the final rule has been 
modified to adopt this suggested change. Section 713.5(e) has also been 
clarified to provide that a credit union need only obtain prior written 
approval from the NCUA Board for a reduction in required fidelity bond 
coverage. A credit union board of directors may modify optional 
insurance coverage as business needs dictate.
    One commenter suggested a clarification related to Section 713.2, 
which sets forth the responsibilities of a board of directors to 
annually review a federal credit union's insurance coverage to ensure 
its adequacy. This commenter suggested that either the regulation or 
preamble state that the board of directors may discharge its duties in 
this respect by requiring that management provide it with an annual 
report on the credit union's insurance coverage. The manner in which a 
board of directors chooses to discharge its responsibilities under 
Section 713.2 will differ from credit union to credit union. However it 
chooses to do so, the ultimate responsibility remains with the board of 
directors. Accordingly, the final rule remains as proposed.
    With respect to the minimum bond limits and maximum deductibles set 
forth in the proposal, three commenters concurred with the proposed 
amounts. One commenter suggested that the maximum deductible for the 
largest credit unions be increased from $200,000 to $500,000. NCUA has 
continued these amounts as proposed.
    One commenter noted that while the proposed rule was drafted in 
terms of requirements for individual credit unions, and while most 
fidelity bond policies are in fact purchased separately by credit 
unions, there have been instances where credit unions have jointly 
purchased fidelity bond policies. This commenter also noted that the 
majority of policies written today carry an aggregate limit of two 
times the single loss limit of liability, a limitation required under 
the final rule. The commenter was concerned that in these cases a loss 
suffered by one or two of the joint policy holders could reduce the 
amount of coverage available for the other joint policy holders below 
the required minimum amount, i.e. two losses equal to the single loss 
limit of liability would exhaust the coverage available for all credit 
unions to zero even though some of these credit unions would not have 
suffered a loss.
    This commenter also noted a concern with the joint purchase of 
fidelity bond policies even when the policy purchased does not have an 
aggregate limit of liability. While it is true that a loss suffered by 
one credit union would not reduce the amount of coverage available to 
the other credit unions purchasing the policy, this commenter suggested 
that, when several credit unions purchase a policy in a group, they may 
not give adequate attention to providing for the specific risks faced 
by individual credit unions. Compromises might be made in coverage 
amounts that would not be made if the policy were purchased 
individually.
    In addition, this commenter argued that the joint policy holders 
might not adjust coverages in a timely manner because of the difficulty 
of doing so in a group purchasing scenario. The Board notes that 
Sec. 713.5 of the regulation requires that a credit union increase its 
bond coverage within thirty days of certain events having occurred. The 
Board also reserves the right, pursuant to Sec. 713.7, to require a 
credit union to purchase additional coverage within thirty days if it 
deems current coverage to be inadequate. Both sections would be more 
difficult to implement for a credit union holding a jointly purchased 
fidelity bond policy.
    In light of these concerns Sec. 713.3 of the final rule has been 
clarified to provide that a fidelity bond must be individually 
purchased by each federal credit union.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact any proposed regulation may 
have on a substantial number of small entities (primarily those under 
$1 million in assets). The NCUA Board certifies that this final rule 
will not have a significant economic impact on a substantial number of 
small credit unions. Accordingly, a regulatory flexibility analysis was 
not required.

Paperwork Reduction Act

    The final rule has no information collection requirements; 
therefore, no Paperwork Reduction Act analysis was required.

Executive Order 12612

    The NCUA Board has determined that the final rule will not have a 
substantial direct effect on the States, on the relationship between 
the national government and the States, or on the distribution of power 
and responsibilities among various levels of government.

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) provides generally for congressional review of agency 
rules. A reporting requirement is triggered in instances where NCUA 
issues a final rule as defined by Section 551 of the Administrative 
Procedure Act. 5 U.S.C. 551. The Office of Management and Budget has 
reviewed this rule and has determined that for purposes of the Small 
Business Regulatory Enforcement Fairness Act of 1996 it is not a major 
rule.

List of Subjects

12 CFR Part 701

    Credit, Credit unions, Reporting and recordkeeping requirements.

12 CFR Part 713

    Credit unions, Fidelity bonds.

12 CFR Part 741

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

    By the National Credit Union Administration Board this 19th day 
of May, 1999.
Becky Baker,
Secretary of the Board.

    For the reasons set forth in the preamble, 12 CFR chapter VII is 
amended as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

    1. The authority citation for part 701 continues to read as 
follows:

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 
1761b, 1766, 1767, 1782, 1784, 1787, 1789. Section 701.6 is also 
authorized by 15 U.S.C. 3717. Section 701.31 is also authorized by 
15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610. Section 701.35 
is also authorized by 42 U.S.C. 4311-4312.

Sec. 701.20  [Removed and Reserved]

    2. Part 701 is amended by removing and reserving 701.20.
    3. Part 713 is added to read as follows:

[[Page 28720]]

PART 713--FIDELITY BOND AND INSURANCE COVERAGE FOR FEDERAL CREDIT 
UNIONS

Sec.
713.1  What is the scope of this section?
713.2  What are the responsibilities of a credit union's board of 
directors under this section?
713.3  What bond coverage must a credit union have?
713.4  What bond forms may be used?
713.5  What is the required minimum dollar amount of coverage?
713.6  What is the permissible deductible?
713.7  May the NCUA Board require a credit union to secure 
additional insurance coverage?

    Authority: 12 U.S.C. 1761a, 1761b, 1766(a), 1766(h), 
1789(a)(11).


Sec. 713.1  What is the scope of this section?

    This section provides the requirements for fidelity bonds for 
Federal credit union employees and officials and for other insurance 
coverage for losses such as theft, holdup, vandalism, etc., caused by 
persons outside the credit union.


Sec. 713.2  What are the responsibilities of a credit union's board of 
directors under this section?

    The board of directors of each Federal credit union must at least 
annually review its fidelity and other insurance coverage to ensure 
that it is adequate in relation to the potentials risks facing the 
credit union and the minimum requirements set by the Board.


Sec. 713.3  What bond coverage must a credit union have?

    At a minimum, your bond coverage must:
    (a) Be purchased in an individual policy from a company holding a 
certificate of authority from the Secretary of the Treasury; and
    (b) Include fidelity bonds that cover fraud and dishonesty by all 
employees, directors, officers, supervisory committee members, and 
credit committee members.


Sec. 713.4  What bond forms may be used?

    (a) The following basic bonds may be used without prior NCUA Board 
approval:

------------------------------------------------------------------------
         Credit union form No.                       Carrier
------------------------------------------------------------------------
Credit Union Blanket Bond Standard Form  Various.
 23 of the Surety Association of
 America (revised May 1950).
Extended Form 23.......................  USFG.
100....................................  CUMIS (only approved for
                                          corporate credit union use).
200....................................  CUMIS.
300....................................  CUMIS.
400....................................  CUMIS.
AIG 23.................................  National Union Fire Insurance
                                          Co. of Pitts., PA.
Reliance Preferred Form 23.............  Reliance Insurance Company.
Form 31................................  ITT Hartford.
Form 24 with Credit Union Endorsement..  Continental (only approved for
                                          corporate credit union use).
Form 40325.............................  St. Paul Fire and Marine.
Form F2350.............................  Fidelity & Deposit Co. Of
                                          Maryland.
Form 9993 (6/97).......................  Progressive Casualty Insurance
                                          Co.
Credit Union Blanket Bond (1/96).......  Cooperativas de Seguros
                                          Multiples de Puerto Rico.
------------------------------------------------------------------------

    (b) To use any of the following, you need prior written approval 
from the Board:
    (1) Any other basic bond form; or
    (2) Any rider or endorsement that limits coverage of approved basic 
bond forms.


Sec. 713.5  What is the required minimum dollar amount of coverage?

    (a) The minimum required amount of fidelity bond coverage for any 
single loss is computed based on a Federal credit union's total assets.

------------------------------------------------------------------------
                 Assets                            Minimum bond
------------------------------------------------------------------------
$0 to $10,000..........................  Coverage equal to the credit
                                          union's assets.
$10,001 to $1,000,000..................  $10,000 for each $100,000 or
                                          fraction thereof.
$1,000,001 to $50,000,000..............  $100,000 plus $50,000 for each
                                          million or fraction over
                                          $1,000,000.
$50,000,001 to $295,000,000............  $2,550,000 plus $10,000 for
                                          each million or fraction
                                          thereof over $50,000,000.
Over $295,000,000......................  $5,000,000.
------------------------------------------------------------------------

    (b) This is the minimum coverage required, but a Federal credit 
union's board of directors should purchase additional coverage when 
circumstances, such as cash on hand or cash in transit, warrant.
    (c) While the above is the required minimum amount of bond 
coverage, credit unions should maintain increased coverage equal to the 
greater of either of the following amounts within thirty days of 
discovery of the need for such increase:
    (1) The amount of the daily cash fund, i.e. daily cash plus 
anticipated daily money receipts on the credit union's premises, or
    (2) The total amount of the credit union's money in transit in any 
one shipment.
    (3) Increased coverage is not required pursuant to paragraph (c) of 
this section, however, when the credit union temporarily increased its 
cash fund because of unusual events which cannot reasonably be expected 
to recur.
    (d) Any aggregate limit of liability provided for in a fidelity 
bond policy must be at least twice the single loss limit of liability. 
This requirement does not apply to optional insurance coverage.
    (e) Any proposal to reduce your required bond coverage must be 
approved in writing by the NCUA Board at least twenty days in advance 
of the proposed effective date of the reduction.

[[Page 28721]]

Sec. 713.6  What is the permissible deductible?

    (a)(1) The maximum amount of allowable deductible is computed based 
on a Federal credit union's asset size, as follows:

------------------------------------------------------------------------
                 Assets                         Maximum deductible
------------------------------------------------------------------------
$0-$100,000............................  No deductibles allowed.
$100,001-$250,000......................  $1,000.
$250,001-$1,000,000....................  $2,000.
Over $1,000,001........................  $2,000 plus 1/1000 of total
                                          assets up to a maximum
                                          deductible of $200,000.
------------------------------------------------------------------------

    (2) The deductibles may apply to one or more insurance clauses in a 
policy. Any deductibles in excess of the above amounts must receive the 
prior written permission of the NCUA Board.
    (b) A deductible may not exceed 10 percent of a credit union's 
Regular Reserve unless a separate Contingency Reserve is set up for the 
excess. In computing the maximum deductible, valuation accounts such as 
the allowance for loan losses cannot be considered.


Sec. 713.7  May the NCUA Board require a credit union to secure 
additional insurance coverage?

    The NCUA Board may require additional coverage when the Board 
determines that a credit union's current coverage is inadequate. The 
credit union must purchase this additional coverage within 30 days.

PART 741--REQUIREMENTS FOR INSURANCE

    4. The authority citation for part 741 continues to read as 
follows:

    Authority: 12 U.S.C. 1757, 1766 and 1781-1790. Section 741.4 is 
also authorized by 31 U.S.C. 3717.

    5. Section 741.201(a) and (b) are amended by removing 
``Sec. 701.20'' and adding ``Part 713'' in its place.

[FR Doc. 99-13309 Filed 5-26-99; 8:45 am]
BILLING CODE 7535-01-P