[Federal Register Volume 70, Number 18 (Friday, January 28, 2005)]
[Rules and Regulations]
[Pages 4005-4010]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-1167]


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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 (MSBs). The amendments require a 
converting credit union to provide its members with additional 
disclosures about the conversion before conducting a member vote. The 
amendments also require the vote to be by secret ballot and conducted 
by an independent entity. Finally, the amendments require a federally-
insured State credit union to provide NCUA with conversion related 
information about the law of the State where the credit union is 
chartered.

DATES: This final rule is effective January 28, 2005.

FOR FURTHER INFORMATION CONTACT: Frank S. Kressman, Staff Attorney, at 
(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 concerning conversion of 
insured credit unions to MSBs. 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).
    Since the enactment of CUMAA, NCUA has become concerned that many 
credit union members do not appreciate the effect a conversion may have 
on their ownership interests in the credit union and voting power in 
the MSB. In February 2004, NCUA amended part 708a to require a 
converting credit union to disclose additional information to its 
members to better educate them regarding the conversion. 69 FR 8548 
(February 25, 2004). NCUA solicited public comment as part of that 
rulemaking. Some commenters suggested that, among other things, NCUA 
should have imposed more disclosures and requirements on converting 
credit unions. Many offered specific suggestions. NCUA noted at that 
time that many of those suggestions deserved further consideration but 
were beyond the scope of that rulemaking and would have to be 
considered in a future rulemaking. In July 2004, NCUA issued a proposed 
rule with request for comments to address some of those suggestions and 
other ongoing concerns NCUA has in connection with protecting members' 
interests in the conversion process. 69 FR 46111 (August 2, 2004).

B. Discussion

    CUMAA provides that an insured credit union may convert to an MSB 
without the prior approval of NCUA, but 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 NCUA a copy of 
its member notice, ballot, and all other written materials it 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 distributes 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. 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.
    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, all required notices are 
timely, and the membership vote is conducted in a fair and legal 
manner.
    A charter conversion has consequences that may not surface for a

[[Page 4006]]

number of years and are often not apparent at the time of conversion to 
even the most astute members. As a result, members cannot make an 
informed decision about how the conversion will affect them unless 
their credit union provides them with this information.
    NCUA is aware that credit unions are not providing some important 
conversion related information effectively to their members. This 
limits members' ability to make informed decisions about a conversion. 
NCUA also has become aware that many credit unions may not be equipped 
to conduct a proper member vote on conversion. Accordingly, NCUA is 
amending the conversion rule to require a converting credit union to 
provide additional disclosures to its members. Also, NCUA is providing 
guidelines to help converting credit unions better understand how they 
can satisfy the regulatory standard that the member vote be conducted 
in a fair and legal manner. In addition to the guidelines, NCUA is 
amending the rule to require the vote be conducted using secret ballots 
and an independent teller to ensure the integrity of the voting process 
and the privacy of each member's vote. Finally, NCUA is amending the 
conversion rule to require a federally-insured State credit union to 
provide NCUA with information about how the law of the State under 
which it is chartered relates to NCUA's conversion rule so that NCUA's 
review of the methods and procedures of the vote includes ensuring 
compliance with applicable State law.

C. Disclosures

    A converting credit union can provide information to its members 
regarding any aspect of the conversion in any format it wishes, 
provided all communications are accurate and not misleading. NCUA only 
requires certain, minimal information be provided in the notice to 
members. Most converting credit unions choose to provide a great deal 
more information and, while NCUA recognizes this is a way to educate 
members, NCUA is concerned that members may be overwhelmed by the great 
volume of information. NCUA does not, however, wish to dissuade 
converting credit unions from communicating with their members or limit 
those communications.
    To balance these competing interests, NCUA will continue to allow a 
converting credit union to communicate with its members as it sees fit, 
but will require that members receive a short, simple disclosure 
prepared by NCUA. This disclosure addresses: (1) Ownership and control 
of the credit union; (2) operating expenses and their effect on rates 
and services; (3) the effect of a subsequent conversion to a stock 
institution; and (4) the costs of conversion. NCUA believes members 
need to be particularly aware of these topics. NCUA recognizes these 
topics might be discussed elsewhere in a credit union's communications 
with its members, but NCUA is concerned that this information may get 
buried in the great volume of information being provided. Accordingly, 
a converting credit union must include this disclosure in a prominent 
place with each written communication it sends to its members regarding 
the conversion and must take specific steps to ensure that the 
disclosure is conspicuous to the member. To promote flexibility, a 
converting credit union may modify the disclosure with the prior 
consent of the Regional Director and, in the case of a State credit 
union, the appropriate State supervisory authority (SSA).
    Officials of many converting credit unions indicate in their 
conversion materials that they are unable to raise capital quickly 
enough to operate their credit unions as they see fit, which often 
includes a desire to pursue rapid growth. These credit unions encourage 
their members to support the conversion to an MSB as a way to overcome 
this capital restraint. They do not, however, inform their members that 
the conversion process can be expensive and further deplete a credit 
union's capital. NCUA believes members deserve to know how much of 
their money will be spent on the conversion effort. Accordingly, NCUA 
is amending the conversion rule to require converting credit unions to 
disclose the costs of conversion as part of the above disclosure 
requirements. An accurate cost estimate must take into account 
conversion related expenses including printing fees, postage fees, 
advertising, consulting and professional fees, legal fees, staff time, 
the cost of holding a special meeting, conducting the vote, and other 
related expenses.

D. Guidelines for Conducting a Member Vote

    A converting credit union must conduct its member vote on 
conversion in a fair and legal manner. A vote that does not satisfy 
this standard denies members their democratic right to decide the fate 
of their credit union and could result in a charter change without the 
true support of the members. The final rule includes guidelines to 
avoid these kinds of undesirable results. The guidelines address topics 
such as: (1) Understanding the relationship between Federal and State 
law; (2) determining voter eligibility; (3) holding a special meeting.
    NCUA does not purport these guidelines are an exhaustive checklist 
that guarantees a fair and legal vote. Rather, the guidelines are 
suggestions that provide a framework that, if followed, will help a 
credit union fulfill its regulatory obligations. A converting credit 
union should use these guidelines in conjunction with its own 
independent analysis and planning to tailor the member vote to its 
particular circumstances.

E. Relationship Between State and Federal Law

    Although NCUA's conversion rule applies to all conversions of 
federally-insured credit unions, federally-insured state credit unions 
may also be subject to State law on conversions. As stated in previous 
rulemakings, NCUA's position is that a State legislature or SSA may 
impose conversion requirements more stringent or restrictive than 
NCUA's. This position is included in the final rule. In fact, NCUA 
understands over half the States do not specifically permit conversions 
of credit unions to MSBs. Reflecting NCUA's support of the dual 
chartering system, NCUA will defer to a State regulator when 
appropriate on questions involving interpretation of State law.
    When State law applies to a conversion, it can change the 
procedural and substantive requirements a converting credit union must 
satisfy. NCUA needs to understand how State law affects those 
requirements to fulfill its responsibility to review the methods and 
procedures of the member vote. Accordingly, NCUA requires a federally-
insured state credit union to notify NCUA if the State law under which 
it is chartered permits it to convert to an MSB. The credit union also 
must inform NCUA if it relies for its authority to convert on a State 
law parity provision, a provision permitting a state credit union to 
operate with the same or similar authority as a federal credit union 
(FCU), and if its State regulatory authority agrees that it may rely on 
the parity provision for that purpose. Finally, if a federally-insured 
state credit union relies on a state parity provision for authority to 
convert, it is required to indicate its State regulatory authority's 
position as to whether Federal law or State law will control internal 
governance issues in the conversion such as the requisite membership 
vote for conversion and the determination of a member's eligibility to 
vote.

[[Page 4007]]

F. Secret Ballots and Third Party Tellers

    NCUA understands that members, including those that are employees 
of the credit union, may be uncomfortable with a voting process that 
does not protect the privacy of their votes. NCUA is concerned this may 
lead some members to choose not to vote or to vote in a manner 
inconsistent with their true wishes. Accordingly, the final rule 
protects members' privacy by requiring a converting credit union to use 
a secret ballot and an independent entity to conduct the vote. NCUA 
requires that a converting credit union use a third party teller to 
conduct the vote meaning that a third party teller will be responsible 
for sending ballots, receiving and safe keeping ballots, verifying 
ballots, and tabulating the vote. Use of a third party teller enhances 
the integrity of the voting process and provides confidence that 
members, including employees, will have their votes remain 
confidential.

G. Written Materials

    Since CUMAA, the conversion rule has required a converting credit 
union to provide NCUA with copies of all written materials it sends or 
intends to send to its members in connection with the conversion 
proposal. NCUA is not changing that requirement but is clarifying that 
it applies to all written materials, including electronic 
communications posted on Web sites.

H. Summary of Comments

    NCUA received 42 comments regarding the proposed rule. Thirty 
commenters supported the proposal. One so strongly that it stated it 
was ``criminal'' for credit unions to convert and strip out of the 
credit union the reserves accumulated over time by many members and put 
them ``into the pockets of a very few individuals.'' All of the nine 
commenters who are members of a credit union whose recent conversion 
campaign failed supported the proposal and many of them indicated that, 
if the terms of the proposal were in place when their credit union was 
considering converting, they would have been better informed or the 
process would have been fairer to members.
    Many of the proposal's supporters offered suggestions to improve 
the rule. For example, ten commenters offered various suggestions to 
revise the proposed disclosures. Six commenters suggested there should 
be more required disclosures beyond those proposed.
    One of those commenters suggested that paid consultants and service 
providers be identified to the members and be required to disclose if 
they have opened an account at the credit union as a result of their 
involvement in the conversion. One of the conversion consultants stated 
that, if the costs of the conversion are to be disclosed, then the 
credit union should identify the name of the recipients of 
expenditures. NCUA believes the portion of the proposal that requires a 
converting credit union to disclose an itemized estimate of the costs 
of the conversion to its members helps to provide members with 
necessary information to understand and cast an informed vote on the 
conversion. NCUA also believes the suggestion that NCUA require a 
converting credit union to identify by name the recipients of 
expenditures as part of a detailed itemization of costs is worthy of 
further consideration. That requirement, however, as well as disclosure 
of the accountholder status of paid consultants and service providers, 
are beyond the scope of the proposal and are not adopted in this final 
rule.
    One commenter suggested NCUA provide more voting guidelines than 
proposed. Another asked NCUA to clarify ``the extent to which the 
guidelines would be enforced.'' NCUA reiterates the voting guidelines 
are not regulatory requirements subject to enforcement. Rather, they 
are suggestions intended to help converting credit unions fulfill their 
regulatory obligation of conducting its member vote in a fair and legal 
manner.
    Nine commenters stated that the proposed disclosure, which states 
``Credit union directors and committee members serve on a volunteer 
basis,'' is not completely accurate because a number of States allow 
credit unions to compensate their board members while others are silent 
on the issue. NCUA is amending the disclosure to reflect these 
comments.
    Seven commenters stated a converting credit union should not be 
legally required to use Robert's Rules of Order to conduct its special 
meeting on conversion or suggested there be flexibility to use other 
parliamentary procedures. One of these commenters also suggested NCUA 
require a converting credit union to hire an independent 
parliamentarian to run the meeting. Another commenter did not mention 
Robert's Rules of Order, but recommended the use of a certified 
parliamentarian. NCUA discusses the use of Robert's Rules of Order in 
the voting guidelines section of the proposal. As noted above, the 
guidelines are not regulatory requirements, and, therefore, a 
converting credit union is not legally required to follow them 
including using Robert's Rules of Order in conducting its special 
meeting relating to the member vote. NCUA recommends, however, that a 
converting credit union use appropriate parliamentary procedures to 
conduct its vote, and should enlist the services of an individual 
knowledgeable and skilled in those procedures. NCUA is revising the 
voting guidelines to clarify that Robert's Rules of Order are not the 
only parliamentary procedures a credit union should consider using for 
its member vote.
    Twelve commenters, including the conversion consultants, banking 
trade organizations, and a bank that was formerly an FCU that had 
converted to an MSB and subsequently converted to a stock bank, opposed 
the proposal in general, stating it is inconsistent with CUMAA or 
obstructs credit unions' right to convert. NCUA fully supports a credit 
union's right to convert its charter but notes this right belongs to 
the members of the credit union. Members can only exercise that right 
in a meaningful way if their credit union provides them with 
information that is accurate and not misleading. NCUA is aware of the 
limitations CUMAA places 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.
    Some of the commenters who opposed the proposal:
     Believe the disclosure regarding voting rights is 
inaccurate because an MSB could choose a ``one vote per member'' policy 
instead of allotting votes based on account balances,
     Highlighted that an MSB to stock conversion requires a 
number of steps scrutinized by other regulators and stated the 
disclosure regarding subsequent conversion to a stock institution is 
misleading and intended to discourage credit union members from voting 
for the conversion to an MSB,
     Believe NCUA acknowledges the proposal is intended to 
discourage conversions because NCUA reduced the estimated number of 
conversions per year in a Paperwork Reduction Act (PRA) filing 
associated with the proposed rulemaking, and
     Suggested the proposed requirement on state credit unions 
to provide NCUA with information about State laws affecting the 
conversion is burdensome or indicated NCUA does not have confidence in 
SSAs to perform their functions.
    The fact that MSBs could choose a ``one vote per member'' policy 
instead

[[Page 4008]]

of allotting votes based on account balances is not what MSBs, in fact, 
usually choose to do. The disclosure regarding voting rights states 
that, in an MSB, account holders with larger balances ``usually'' have 
more votes and, thus, greater control. NCUA believes this is an 
accurate statement. Also, NCUA recognizes that additional steps and 
member votes are required to approve an MSB to stock institution 
conversion. This does not lessen NCUA's concern about protecting credit 
union members' interest in their credit union. Those additional steps 
and member votes, although possibly scrutinized by other regulators, 
occur only after the credit union has converted to an MSB and is on its 
way to converting to the stock form of ownership. Obviously, at that 
point, the credit union does not exist and the additional requirements 
can do nothing to enable a credit union member to make an informed 
decision on the initial conversion from a credit union to an MSB.
    The disclosure regarding subsequent conversion to a stock 
institution is not misleading and not intended to discourage credit 
union members from voting for the conversion to an MSB. It states that, 
in a typical conversion to the stock form of ownership, the executives 
of the institution profit by obtaining stock far in excess of that 
available to the institution's members. This accurately reflects an 
executive's ability to obtain stock options, restricted stock or other 
forms of stock related compensation not available to members not 
employed by the credit union.
    In the normal course of the rulemaking process, NCUA submitted a 
required PRA filing. In that filing, NCUA reduced the estimated number 
of conversions per year from a previous submission based on its 
experience with conversions over the past several years. NCUA would 
have made the same reduction in the PRA filing based on historical data 
even if this rule were not being considered.
    The requirement on state credit unions to provide NCUA with 
information about State laws affecting the conversion is not burdensome 
and does not indicate any lack of confidence in SSAs to perform their 
functions. NCUA fully acknowledges that a State legislature or SSA may 
impose conversion requirements more stringent or restrictive than 
NCUA's. As noted above, when State law applies to a conversion, it can 
change drastically the procedural and substantive requirements a 
converting credit union must satisfy. It is essential for a converting 
credit union to understand both Federal and State requirements for 
compliance purposes and for NCUA to do the same to fulfill its 
responsibility to review the methods and procedures of the member vote 
as affected by State law. NCUA does not believe it is burdensome for a 
converting credit union to inform NCUA of State law that the credit 
union must obtain in any event to assure compliance with all applicable 
laws. NCUA works closely and cooperatively with SSAs in processing 
conversions and defers to SSAs in making determinations regarding State 
law. NCUA believes the subject requirement helps to promote cooperation 
among the regulators and a more informed converting credit union.
    Three commenters disagreed with NCUA's statement that no conversion 
vote can be fair and legal if some members are improperly excluded. 
These commenters stated there is no statutory requirement for 
perfection and that a certain percentage of member exclusions should be 
tolerated if not the result of wrongful intent on the part of the 
converting credit union. Since CUMAA, NCUA has disapproved a converting 
credit union's methods and procedures applicable to the member vote on 
only one occasion. In that situation, voter disenfranchisement was 
widespread. NCUA will continue to take a pragmatic approach in 
reviewing member votes on conversion.
    One commenter suggested a converting credit union should be 
required to prepare a comprehensive three-year business plan for the 
converted institution similar to the plan required by 12 CFR part 563b 
for MSBs proposing to convert to stock form. This commenter also stated 
the plan should be required to be sent to the credit union's members 
with the notice of intent to convert or the notice should explain how a 
member can obtain a free copy of the plan. This suggestion is beyond 
the scope of the proposal, but NCUA will consider it for future 
inclusion in the conversion rule.
    Finally, commenters to previous amendments to the conversion rule 
have recommended NCUA require converting credit unions to provide 
members a meaningful way to share their opinions on the conversion and 
to disclose the views and concerns of the credit union's directors and 
officers who oppose the conversion. Four commenters to this rulemaking 
suggested there should be some mechanism in place for members to share 
their opinions on the conversion with each other and the credit union 
during the process. NCUA will continue to consider if this is practical 
and valuable and if it could be accomplished with minimal regulatory 
burden.

I. Effective Date of Final Rule

    Generally, a final rule promulgated by NCUA is effective 30 days 
following its publication in the Federal Register. This final rule, 
however, is effective immediately upon publication because there is a 
strong public interest in having this consumer protection rule in 
place. First, this is necessary to ensure crucial disclosure 
information is provided to credit union members whose credit union has 
initiated or is about to initiate the conversion process, so the 
members may cast an informed and educated vote on the future existence 
of their credit union and their stake in it. Second, this will provide 
regulatory certainty to credit unions that are considering converting 
or beginning the conversion process within the next thirty days and 
enable them to better understand the regulatory requirements they must 
follow throughout the entirety of the process.
    A converting credit union is required by statute and regulation to 
provide notice of its intent to convert to its members 90 days, 60 
days, and 30 days before the member vote on conversion. 12 U.S.C. 
205(b)(2)(C); 12 CFR 708a.4(b). It would be confusing for a converting 
credit union and its members if this rule became effective during that 
90-day period as that would alter the regulatory requirements of the 
conversion in mid-process. That confusion about which regulatory 
requirements must be followed at a given point in the conversion 
process is eliminated for any recently initiated, soon to be initiated, 
and future conversions by making this rule immediately effective. 
Accordingly, for good cause, NCUA finds that, pursuant to 5 U.S.C. 
553(d)(3), it would be impracticable and contrary to the public 
interest to delay the effective date of this rule for 30 days following 
publication. Therefore, this rule is effective immediately upon 
publication.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a rule may have on a 
substantial number of small credit unions, defined as those under ten 
million dollars in assets. This final rule amends the procedures an 
insured credit union must follow to convert to an MSB. Slightly over 
twenty credit unions have converted since 1995. NCUA anticipates no 
more than five credit unions per year will convert in the future and it 
is

[[Page 4009]]

unlikely that any will have less than ten million dollars in assets. 
Accordingly, the amendments would 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

    Part 708a contains information collection requirements. As required 
by the PRA, 44 U.S.C. 3507(d), NCUA previously submitted a copy of this 
regulation in proposed form as part of an information collection 
package to the Office of Management and Budget (OMB) for its review and 
approval of a revision to Collection of Information, Conversion of 
Insured Credit Unions to Mutual Savings Banks, Control Number 3133-
0153.
    NCUA estimated the average annual burden per converting credit 
union to be between 20 and 23 hours and that no more than five credit 
unions will convert per year. As a result, NCUA estimated the total 
annual collection burden to be no more than 115 hours. NCUA did not 
receive any comments addressing the accuracy or methodology for 
computing the burden. OMB approved the revision.

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, Public Law 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 January 13, 
2005.
Mary F. Rupp,
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 three sentences at the end of 
paragraph (a) and adding paragraph (e) to read as follows:


Sec.  708a.4  Voting procedures.

    (a) * * * The vote on the conversion proposal must be by secret 
ballot and conducted by an independent entity. The independent entity 
must be a company with experience in conducting corporate elections. No 
official or senior manager of the credit union, or the immediate family 
members of any official or senior manager, may have any ownership 
interest in, or be employed by, the entity.
* * * * *
    (e) A converting credit union must include the following 
disclosures with each written communication it sends to its members 
regarding the conversion. The disclosures must be offset from the other 
text by use of a border and at least one font size larger than any 
other text (exclusive of headings) used in the communication. Certain 
portions of the disclosures must be capitalized and bolded. A 
converting credit union may modify the disclosure with the prior 
consent of the Regional Director and, in the case of a state credit 
union, the appropriate state regulatory agency. The unmodified form of 
disclosure reads as follows:

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
The National Credit Union Administration, the federal government agency
 that supervises credit unions, requires [insert name of credit union]
 to provide the following disclosures.
1. OWNERSHIP AND CONTROL. In a credit union, every member has an equal
 vote in the election of directors and other matters concerning
 ownership and control. In a mutual savings bank, ACCOUNT HOLDERS WITH
 LARGER BALANCES USUALLY HAVE MORE VOTES AND, THUS, GREATER CONTROL.
2. EXPENSES AND THEIR EFFECT ON RATES AND SERVICES. Most credit union
 directors and committee members serve on a volunteer basis. Directors
 of a mutual savings bank are compensated. Credit unions are exempt from
 federal tax and most state taxes. Mutual savings banks pay taxes,
 including federal income tax. If [insert name of credit union] converts
 to a mutual savings bank, these ADDITIONAL EXPENSES MAY CONTRIBUTE TO
 LOWER SAVINGS RATES, HIGHER LOAN RATES, OR ADDITIONAL FEES FOR
 SERVICES.
3. SUBSEQUENT CONVERSION TO STOCK INSTITUTION. Conversion to a mutual
 savings bank is often the first step in a two-step process to convert
 to a stock-issuing bank or holding company. In a typical conversion to
 the stock form of ownership, the EXECUTIVES OF THE INSTITUTION PROFIT
 BY OBTAINING STOCK FAR IN EXCESS OF THAT AVAILABLE TO THE INSTITUTION'S
 MEMBERS.
4. COSTS OF CONVERSION. The costs of converting a credit union to a
 mutual savings bank are paid from the credit union's current and
 accumulated earnings. Because accumulated earnings are capital and
 represent members' ownership interests in a credit union, the
 conversion costs reduce members' ownership interests. As of [insert
 date], [insert name of credit union] estimates THE CONVERSION WILL COST
 [INSERT DOLLAR AMOUNT] IN TOTAL. That total amount is further broken
 down as follows: [itemize the costs of all expenses related to the
 conversion including printing fees, postage fees, advertising,
 consulting and professional fees, legal fees, staff time, the cost of
 holding a special meeting, conducting the vote, and any other expenses
 incurred].
------------------------------------------------------------------------


0
3. Section 708a.5 is amended by redesignating paragraph (b) as 
paragraph (b)(1), adding a sentence at the end of paragraph (b)(1), and 
adding paragraph (b)(2) to read as follows:


Sec.  708a.5  Notice to NCUA.

* * * * *

[[Page 4010]]

    (b)(1) * * * The term ``written materials'' includes written 
documentation or information of any sort, including electronic 
communications posted on a Web site.
    (b)(2) A federally-insured State chartered credit union must 
include in its notice to NCUA a statement as to whether the State law 
under which it is chartered permits it to convert to a mutual savings 
bank and include a legal citation to the State law providing this 
authority. A federally-insured State chartered credit union will remain 
subject to any State law requirements for conversion that are more 
stringent than those this chapter imposes, including any internal 
governance requirements, such as the requisite membership vote for 
conversion and the determination of a member's eligibility to vote. If 
a federally-insured State chartered credit union relies for its 
authority to convert to a mutual savings bank on a State law parity 
provision, meaning a provision in State law permitting a State 
chartered credit union to operate with the same or similar authority as 
a federal credit union, it must include in its notice a statement that 
its State regulatory authority agrees that it may rely on the State law 
parity provision as authority to convert. If a federally-insured state 
chartered credit union relies on a State law parity provision for 
authority to convert, it must indicate its State regulatory authority's 
position as to whether Federal law and regulations or State law will 
control internal governance issues in the conversion such as the 
requisite membership vote for conversion and the determination of a 
member's eligibility to vote.
* * * * *

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4. Add section 708a.11 to read as follows:


Sec.  708a.11  Voting guidelines.

    (a) A converting credit union must conduct its member vote on 
conversion in a fair and legal manner. These guidelines are not an 
exhaustive checklist that guarantees a fair and legal vote but are 
suggestions that provide a framework to help a credit union fulfill its 
regulatory obligations.
    (b) While NCUA's conversion rule applies to all conversions of 
federally insured credit unions, federally-insured State chartered 
credit unions (FISCUs) are also subject to State law on conversions. 
NCUA's position is that a State legislature or State supervisory 
authority may impose conversion requirements more stringent or 
restrictive than NCUA's. States that permit this kind of conversion 
could have substantive and procedural requirements that vary from 
Federal law. For example, there could be different voting standards for 
approving a vote. While NCUA's rule requires a simple majority of those 
who vote to approve a conversion, some States have higher voting 
standards requiring two-thirds or more of those who vote. A FISCU 
should be careful to understand both Federal and State law to navigate 
the conversion process and conduct a proper vote.
    (c)(1) Determining who is eligible to cast a ballot is fundamental 
to any vote. No conversion vote can be fair and legal if some members 
are improperly excluded. A converting credit union should be cautious 
to identify all eligible members and make certain they are included on 
its voting list. NCUA recommends that a converting credit union 
establish internal procedures to manage this task.
    (2) A converting credit union should be careful to make certain its 
member list is accurate and complete. For example, when a credit union 
converts from paper record keeping to computer record keeping, some 
members' names may not transfer unless the credit union is careful in 
this regard. This same problem can arise when a credit union converts 
from one computer system to another where the software is not 
completely compatible.
    (3) Problems with keeping track of who is eligible to vote can also 
arise when a credit union converts from a federal charter to a State 
charter or vice versa. NCUA is aware of an instance where a federal 
credit union used membership materials that allowed two or more 
individuals to open a joint account and also allowed each to become a 
member. The federal credit union later converted to a State chartered 
credit union that, like most other State chartered credit unions in its 
State, used membership materials that allowed two or more individuals 
to open a joint account but only allowed the first person listed on the 
account to become a member. The other individuals did not become 
members as a result of their joint account. To become members, those 
individuals were required to open another account where they were the 
first or only person listed on the account. Over time, some individuals 
who became members of the federal credit union as the second person 
listed on a joint account were treated like those individuals who were 
listed as the second person on a joint account opened directly with the 
State chartered credit union. Specifically, both of those groups were 
treated as non-members not entitled to vote. This example makes the 
point that a credit union must be diligent in maintaining a reliable 
membership list.
    (d) NCUA's conversion rule requires a converting credit union to 
permit members to vote by written mail ballot or in person at a special 
meeting held for the purpose of voting on the conversion. Although most 
members may choose to vote by mail, a significant number may choose to 
vote in person. As a result, a converting credit union should be 
careful to conduct its special meeting in a manner conducive to 
accommodating all members that wish to attend. That includes selecting 
a meeting location that can accommodate the anticipated number of 
attendees and is conveniently located. The meeting should also be held 
on a day and time suitable to most members' schedules. A credit union 
should conduct its meeting in accordance with applicable federal and 
State law, its bylaws, Robert's Rules of Order or other appropriate 
parliamentary procedures, and determine before the meeting the nature 
and scope of any discussion to be permitted.

[FR Doc. 05-1167 Filed 1-27-05; 8:45 am]
BILLING CODE 7535-01-P