[Federal Register Volume 68, Number 190 (Wednesday, October 1, 2003)]
[Proposed Rules]
[Pages 56589-56591]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-24762]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 708a


Conversion of Insured Credit Unions to Mutual Savings Banks

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule with request for comments.

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SUMMARY: NCUA proposes to update its rule regarding conversion of 
insured credit unions to mutual savings banks. This proposal, seeking 
to accomplish full disclosure and transparency, would require a 
converting credit union to provide additional information in the notice 
to members of its intent to convert. Specifically, the credit union 
would have to disclose any economic benefit a director or senior 
management official of a converting credit union may receive in 
connection with the conversion. The proposal also would require the 
converting credit union to disclose that conversion to a mutual savings 
bank could lead to members having diminished voting rights and losing 
their ownership interests in the credit union if the mutual savings 
bank subsequently converted to a stock institution and the members do 
not become stockholders. NCUA believes this proposal would enhance a 
member's ability to make informed decisions about the conversion 
without increasing the regulatory burden for converting credit unions 
and would help converting credit unions to more fully understand what 
NCUA expects to be included in the notice to members.

DATES: Comments must be received on or before December 1, 2003.

ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail 
or hand-deliver comments to: National Credit Union Administration, 1775 
Duke Street, Alexandria, Virginia 22314-3428. You are encouraged to fax 
comments to (703) 518-6319 or e-mail comments to [email protected] 
instead of mailing or hand-delivering them. Whatever method you choose, 
please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Frank S. Kressman, Staff Attorney, 
Office of General Counsel, at the above address or telephone: (703) 
518-6540.

SUPPLEMENTARY INFORMATION:

Background

    The Credit Union Membership Access Act (CUMAA) was enacted into law 
on August 7, 1998. Pub. L. 105-21. Section 202 of CUMAA amended the 
provisions

[[Page 56590]]

of the Federal Credit Union Act (Act) concerning conversion of insured 
credit unions to mutual savings banks. 12 U.S.C. 1785(b). CUMAA 
required NCUA to promulgate final rules regarding charter conversions 
that were: (1) Consistent with CUMAA; (2) consistent with the charter 
conversion rules promulgated by other financial regulators; and (3) no 
more or less restrictive than rules applicable to charter conversions 
of other financial institutions. NCUA issued rules in compliance with 
this mandate. 63 FR 65532 (November 27, 1998); 64 FR 28733 (May 27, 
1999).
    It has been almost five years since NCUA first amended Part 708a to 
comply with CUMAA. In that time, NCUA has grown concerned that many 
credit union members do not fully appreciate the effect the conversion 
may have on their ownership interests in the credit union and voting 
power in the mutual savings bank.

Discussion

    There are increasing indications that a high percentage of credit 
unions that convert to mutual savings banks have or will undertake a 
second conversion to become a stock institution. While it is certainly 
within the rights of the credit union membership to exercise their 
right to convert and change the structure of the institution, 
converting credit unions generally do not adequately discuss in the 
notice to credit union members the likelihood and ramifications of a 
second conversion to a stock institution.
    While State laws may vary, under the Office of Thrift Supervision's 
regulations, there is no minimum waiting period for a newly chartered 
Federal mutual savings bank to convert to a stock institution. As a 
result, it is possible for a credit union that converts to a Federal 
mutual savings bank to attempt to convert to a stock institution in 
less than two years. In most cases, a conversion from a mutual savings 
bank to a stock institution will result in a loss of ownership interest 
for a majority of its members because most members do not purchase 
stock in the institution.
    While CUMAA provides that an insured credit union may convert to a 
mutual savings bank without the prior approval of NCUA, it also 
requires NCUA to administer the member vote on conversion and review 
the methods and procedures by which the vote is taken. This is 
reflected in NCUA's conversion rule. The rule requires a converting 
credit union to provide its members with written notice of its intent 
to convert. 12 CFR 708a.4. It also specifies that the member notice 
must adequately describe the purpose and subject matter of the vote on 
conversion. Id. In addition, a converting credit union must notify NCUA 
of its intent to convert. 12 CFR 708a.5. The credit union must provide 
for NCUA's review a copy of the member notice, ballot, and all other 
written materials the credit union has provided or intends to provide 
to its members in connection with the conversion. Id.
    A converting credit union has the option of submitting these 
materials to NCUA before it begins to distribute them to its members. 
Id. This enables the credit union to obtain NCUA's preliminary 
determination on the methods and procedures of the member vote based on 
NCUA's review of the written materials. The credit union can then 
decide whether to move forward with the often expensive, labor 
intensive conversion process with a full and complete understanding of 
NCUA's position. NCUA believes its review of these materials is a 
practical and unintrusive way of fulfilling, at least part of, its 
congressionally mandated responsibility to review the methods and 
procedures of the vote to ensure that all reasonable measures to 
accomplish full disclosure and transparency have been taken to inform 
the credit union membership of the potential consequences of their 
vote.
    If NCUA disapproves of the methods and procedures of the member 
vote, after the vote is conducted, then NCUA is authorized to direct a 
new vote be taken. 12 CFR 708a.7. NCUA interprets its responsibility to 
review the methods and procedures of the member vote to include 
determining that the member notice and other materials sent to the 
members are accurate and not misleading, that all required notices are 
timely, and that the membership vote is conducted in a fair and legal 
manner.
    NCUA believes that full and proper disclosure to members that they 
could potentially lose their ownership interest in their credit union 
if it ultimately becomes a stock institution is key to describing the 
purpose and subject matter of the member vote adequately. Failing to 
discuss this integral risk associated with the conversion adequately is 
tantamount to providing misleading information. Most of the conversion 
packets NCUA has reviewed since CUMAA went into effect have contained 
some information relating to this issue, but have not addressed it 
sufficiently to make this point clear to members.
    A charter conversion is a sophisticated transaction with 
consequences that might not surface for a number of years and that are 
often not recognizable at the time of conversion to even the most 
astute members. As a result, few members can make a truly informed 
decision about how the conversion will affect their ownership interest 
in the credit union unless the credit union provides them with this 
information. Accordingly, for the reasons discussed above and in an 
effort to achieve full disclosure and transparency, NCUA proposes to 
require a converting credit union to disclose that the conversion from 
a credit union to a mutual savings bank could lead to members losing 
their ownership interests in the credit union if the mutual savings 
bank subsequently converted to a stock institution and the members do 
not become stockholders.
    The Act provides that a member of a Federal credit union is 
entitled to only one vote irrespective of the number of shares held by 
that member. The ``one member one vote'' structure gives an equal voice 
to all members, even those of modest means. 12 U.S.C. 1760. Most, if 
not all, state credit unions also are required to follow this approach. 
This is not usually the case with mutual savings banks. In most 
instances, mutual savings banks allot votes based on the amount of a 
member's deposits. Commonly, one vote is granted for each $100 a member 
has on deposit up to a maximum of 1,000 votes. As noted above, NCUA 
believes that disclosing that members could have lesser voting power in 
the mutual savings bank than they do in the credit union is central to 
describing the purpose and subject matter of the member vote in an 
adequate and proper fashion. Accordingly, for the reasons discussed 
above and in an effort to achieve full disclosure and transparency, 
NCUA proposes to require a converting credit union to disclose that the 
conversion from a credit union to a mutual savings bank could lead to 
members having lesser voting rights in the mutual savings bank than 
they had in the credit union.
    NCUA's conversion rule echoes CUMAA by providing that directors and 
senior management officials of a credit union may not receive any 
economic benefit from the conversion of their credit union other than 
compensation and benefits paid to them in the ordinary course of 
business. 12 CFR 708a.10. This is intended to insure that management's 
decision to begin the conversion process is based on sound business 
judgment reflecting the best interests of the members. Consistent with 
this statutory and regulatory limitation, NCUA believes it is 
appropriate to require a converting credit union to disclose in the 
member

[[Page 56591]]

notice any conversion related benefits a director or senior management 
official may receive, including compensation not permitted in the 
credit union context. To be complete, this disclosure must include any 
foreseeable stock related benefits associated with a subsequent 
conversion to a stock institution. Accordingly, for the reasons 
discussed above and in an effort to achieve full disclosure and 
transparency, NCUA proposes to require a converting credit union to 
disclose whether it will provide any or increasing compensation or 
other conversion related benefits, including stock related benefits, to 
directors or senior management officials.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires NCUA to prepare an 
analysis to describe any significant economic impact a proposed rule 
may have on a substantial number of small entities. NCUA considers 
credit unions having less than ten million dollars in assets to be 
small for purposes of RFA. Interpretive Ruling and Policy Statement 
(IRPS) 87-2 as amended by IRPS 03-2. The proposed rule requires some 
revisions to the disclosures a converting credit union must provide to 
its members. It is unlikely that small credit unions will engage in 
these kinds of conversions. The proposed rule would not have a 
significant economic impact on a substantial number of small credit 
unions, and, therefore, the NCUA has determined that a regulatory 
flexibility analysis is not required.

Paperwork Reduction Act

    The Office of Management and Budget control number associated with 
part 708a is 3133-0153. The NCUA Board has determined that the proposed 
rule will not increase paperwork requirements and a paperwork reduction 
analysis is not required.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on State and local interests. In 
adherence to fundamental federalism principles, NCUA, an independent 
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies 
with the executive order. The proposed rule would not have substantial 
direct effects on the States, on the connection between the National 
government and the States, or on the distribution of power and 
responsibilities among the various levels of Government. NCUA has 
determined that this proposed rule does not constitute a policy that 
has federalism implications for purposes of the executive order.

The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this proposed rule would not affect 
family well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 
2681 (1998).

Agency Regulatory Goal

    NCUA's goal is to promulgate clear and understandable regulations 
that impose minimal regulatory burden. We request your comments on 
whether the proposed rule is understandable and minimally intrusive.

List of Subjects in 12 CFR Part 708a

    Charter conversions, Credit unions.

    By the National Credit Union Administration Board on September 
24, 2003.
Becky Baker,
Secretary of the Board.
    For the reasons stated above, NCUA proposes to amend Sec.  708a.4 
as follows:

PART 708a--CONVERSION OF INSURED CREDIT UNIONS TO MUTUAL SAVINGS 
BANKS

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

    Authority: 12 U.S.C. 1766, 12 U.S.C. 1785(b).

    2. Section 708a.4 is amended by adding paragraph (d) to read as 
follows:


Sec.  708a.4  Voting procedures.

* * * * *
    (d)(1) An adequate description of the purpose and subject matter of 
the member vote on conversion, as required by paragraph (c) of this 
section, must include:
    (i) A disclosure that the conversion from a credit union to a 
mutual savings bank could lead to members losing their ownership 
interests in the credit union if the mutual savings bank subsequently 
converts to a stock institution and the members do not become 
stockholders;
    (ii) A disclosure that the conversion from a credit union to a 
mutual savings bank could lead to members having lesser voting rights 
in the mutual savings bank than they had in the credit union; and
    (iii) A disclosure of any conversion related economic benefit a 
director or senior management official may receive including receipt of 
or an increase in compensation and any foreseeable stock related 
benefits associated with a subsequent conversion to a stock 
institution.
    (d)(2) In connection with the disclosures required by paragraphs 
(d)(1)(i) through (iii) of this section, the converting credit union 
must include an affirmative statement, that at the time of conversion 
to a mutual savings bank, the credit union does or does not intend to:
    (i) Convert to a stock institution;
    (ii) Provide any compensation to previously uncompensated directors 
or increase compensation or other conversion related benefits, 
including stock related benefits, to directors or senior management 
officials; and
    (iii) Base member voting rights on account balances.

[FR Doc. 03-24762 Filed 9-30-03; 8:45 am]
BILLING CODE 7535-01-P