[Federal Register Volume 69, Number 37 (Wednesday, February 25, 2004)]
[Rules and Regulations]
[Pages 8548-8551]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-4075]


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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: Final rule.

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SUMMARY: NCUA is updating its rule regarding conversion of insured 
credit unions to mutual savings banks. This amendment requires a 
converting credit union to provide additional information in the notice 
to members of its intent to convert. Specifically, the credit union 
must disclose any economic benefit a director or senior management 
official of a converting credit union may receive in connection with 
the conversion. A converting credit union must also disclose how 
conversion to a mutual savings bank will affect members' voting rights, 
and how any subsequent conversion to a stock institution may affect 
ownership interests. NCUA believes this amendment enhances a member's 
ability to make informed decisions about the conversion without 
increasing the regulatory burden for converting credit unions and helps 
converting credit unions to more fully understand what NCUA expects to 
be included in the notice to members.

DATES: This final rule is effective March 26, 2004.

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

SUPPLEMENTARY INFORMATION:

A. Background

    The Credit Union Membership Access Act (CUMAA) was enacted into law 
on August 7, 1998. Public Law 105-21. Section 202 of CUMAA amended the 
provisions 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).
    In the approximately five years since NCUA first amended Part 708a 
to comply with CUMAA, NCUA has grown concerned that credit union 
members may 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. Accordingly, NCUA issued a proposed rule in 
September 2003 to require a converting credit union to disclose 
additional information to its members to better educate them regarding 
the conversion. 68 FR 56589 (October 1, 2003).

B. 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 as 
little as 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 the vast majority of members because they do not purchase stock, 
while most officers and directors do obtain stock in the newly created 
stock institution. While members and officials generally have the same 
opportunity to purchase stock at an initial public offering, officials 
also obtain stock through other methods such as employee stock 
ownership plans, restricted stock awards and stock options. These 
opportunities, which are not available to the general membership, have 
in the past been little understood and inadequately explained to the 
members.
    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. A credit union must provide 
for NCUA's review a copy of the member notice, ballot, and all other 
written materials it has provided or intends to provide to its members 
in connection with a 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 a 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. A credit union can then decide 
whether to move forward with the often expensive, labor intensive 
conversion process with an understanding of NCUA's position.

[[Page 8549]]

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. Prior 
submission of these materials does not relieve the credit union of its 
other obligations under Part 708a, nor does it eliminate NCUA's right 
to disapprove the methods and procedures of the vote if the credit 
union fails to conduct the vote in a fair and legal manner. 12 CFR 
708a.5.
    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 became 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 
documentation NCUA has reviewed since CUMAA went into effect has 
contained some information relating to this issue, but it has become 
apparent to NCUA that it has 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 amends Part 
708a 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. Also, many issues, such 
as election of directors, which are subject to a member vote in a 
credit union, may not be subject to a vote in a mutual savings bank. 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 adequately the purpose and 
subject matter of the member vote. Accordingly, for the reasons 
discussed above and in an effort to achieve full disclosure and 
transparency, NCUA amends Part 708a to require a converting credit 
union to disclose how the conversion from a credit union to a mutual 
savings bank will affect members' voting rights. The language of the 
proposal would have required a disclosure that the members may have 
lesser voting rights in a mutual savings bank. This final rule requires 
an actual explanation of how voting rights will change. This is a 
clearer articulation of the information the proposal intended members 
to receive and will assist members in casting a better informed vote on 
the proposed conversion.
    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 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 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 amends Part 708a to require a converting credit 
union to disclose any increased compensation or other conversion 
related benefits, including stock related benefits, that directors or 
senior management officials may receive. This disclosure must include a 
comparison of the stock related benefits available to the general 
membership with those available to officials and employees in the event 
of conversion to a stock institution. This comparison of stock benefits 
more clearly articulates the information the proposal intended members 
to receive and will assist members in casting a better informed vote.

C. Summary of Comments

    NCUA received forty-five comment letters regarding the proposed 
rule: nine from federal credit unions, seven from state credit unions, 
one from a professional association representing the forty-eight state 
credit union regulators, sixteen from credit union trade organizations, 
two from state financial institution regulators, one from a financial 
services company that has been involved in facilitating the majority of 
credit union conversions to mutual savings banks, two from law firms 
that also have been involved in facilitating many credit union 
conversions to mutual savings banks (together these law firms and the 
financial services company will be referred to as conversion 
consultants), one from an attorney who represents credit unions, three 
from private individuals, and three from banking trade organizations.
    Thirty-four of the commenters fully supported the proposal and 
acknowledged the importance of educating credit union members about the 
effects and ramifications of the conversion to enable them to cast 
informed votes. Over two-thirds of those supporters stated that they 
believe NCUA should impose more disclosures and requirements on 
converting credit unions than proposed. The kinds of additional 
disclosures and requirements they suggested include: requiring the 
member vote be conducted by an independent third party, establishing a 
voting standard greater than the present simple majority of those who 
actually vote, disclosing the percentage of credit unions that have 
converted to mutual savings banks that went on to convert to the stock 
form of ownership, disclosing the views of a converting credit union's

[[Page 8550]]

directors who do not favor converting or have specific reservations, 
permitting members to post comments on the conversion proposal as a 
part of the conversion process, disclosing that voluntary liquidation 
of the credit union is an option for members to extract their ownership 
interests in the credit union if management believes the institution 
can no longer serve its members' needs as a credit union, increasing 
the number of members required for a quorum for special meetings to 
insure that there is sufficient member participation for such a 
monumental decision, disclosing the estimated cost of the conversion, 
providing additional financial data to support claims that the 
conversion will benefit members, and disclosing historical data 
regarding the percentage of stock management buys as compared to the 
amount members buy in a stock bank that previously converted from a 
credit union to a mutual savings bank to the stock form of ownership.
    One commenter supported parts of the proposal, but opposed some 
sections it believes require speculation on the credit union's part. 
Three commenters stated that the current disclosure requirements are 
sufficient.
    The conversion consultants and the banking trade organizations 
opposed the proposal. Some of these commenters believe the proposal is 
inconsistent with CUMAA, duplicates the disclosures required by other 
regulators like the Securities and Exchange Commission (SEC), the 
Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift 
Supervision (OTS), or requires the credit union to determine whether it 
will ever convert to the stock form of ownership. One of these 
commenters stated that it did not believe that a credit union 
disclosing its intent to convert to stock would enhance a member's 
ability to cast an informed vote. NCUA is aware of the limitations that 
CUMAA has placed on its authority to approve a conversion but is 
mindful of its responsibility to oversee the methods and procedures 
applicable to the member vote on conversion and protect the interests 
of credit union members. The proposal does not require a converting 
credit union to speculate about future events, rather it simply 
provides that the credit union must disclose its present intent 
regarding its business plans and provide information about how future 
events might affect members' interests. Although NCUA does not 
necessarily agree that the proposal duplicates disclosures required by 
the SEC, FDIC, and OTS, NCUA believes that, even if it did, these 
disclosures are necessary at the time the credit union's members are 
deciding how to vote on the conversion to a mutual savings bank. If 
credit union members wait to receive similar disclosures from the SEC, 
FDIC, or OTS, then that means the credit union has already converted to 
a mutual savings bank and may be on its way to converting to the stock 
form of ownership. Obviously, at that point, the disclosures are too 
late with respect to enabling a credit union member to make an informed 
decision on the conversion from a credit union to a mutual savings 
bank. For the reasons discussed above, NCUA adopts the proposed 
amendments as final without change.

D. Additional Information

    NCUA appreciates the valuable suggestions offered by commenters who 
believe NCUA should impose more disclosures and requirements on 
converting credit unions. Many of these suggestions deserve further 
consideration but are beyond the scope of the proposal and will have to 
be considered in a separate rule making. Also, over time, NCUA has 
gained a more in-depth, practical understanding of the nuances of the 
disclosure and voting processes associated with a conversion. 
Accordingly, in the near future, NCUA intends to further fine tune the 
conversion regulation by providing more specific guidelines to help 
credit unions understand what will satisfy the regulatory standard that 
the vote be conducted in a fair and legal manner.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a proposed rule may have on 
a substantial number of small credit unions, defined as those under ten 
million dollars in assets. This rule provides the procedures an insured 
credit union must follow to convert to a mutual savings bank. The final 
amendments will not have a significant economic impact on a substantial 
number of small credit unions, and, therefore, a regulatory flexibility 
analysis is not required.

Paperwork Reduction Act

    NCUA has determined that the final rule would not increase 
paperwork requirements under the Paperwork Reduction Act of 1995 and 
regulations of the Office of Management and Budget.

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 final 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 final 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 final 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).

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 
determined that this rule is not a major rule for purposes of the Small 
Business Regulatory Enforcement Fairness Act of 1996.

List of Subjects in 12 CFR Part 708a

    Charter conversions, Credit unions.

    By the National Credit Union Administration Board on February 
19, 2004.
Becky Baker,
Secretary of the Board.

0
For the reasons stated above, NCUA amends 12 CFR part 708a as follows:

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

0
1. The authority citation for part 708a continues to read as follows:

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

0
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

[[Page 8551]]

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 of how the conversion from a credit union to a 
mutual savings bank will affect members' voting rights; 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 an explanation of any foreseeable 
stock related benefits associated with a subsequent conversion to a 
stock institution. The explanation of stock related benefits must 
include a comparison of the opportunities to acquire stock that are 
available to officials and employees, with those opportunities 
available to the general membership.
    (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. 04-4075 Filed 2-24-04; 8:45 am]
BILLING CODE 7535-01-P