[Federal Register Volume 71, Number 124 (Wednesday, June 28, 2006)]
[Proposed Rules]
[Pages 36946-36966]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-5728]



[[Page 36945]]

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Part V





National Credit Union Administration





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12 CFR Part 708a



Conversion of Insured Credit Unions to Mutual Savings Banks; Proposed 
Rule

  Federal Register / Vol. 71, No. 124 / Wednesday, June 28, 2006 / 
Proposed Rules  

[[Page 36946]]


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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: Notice of proposed rulemaking with request for comments.

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SUMMARY: NCUA proposes to amend its rules regarding the conversion of 
insured credit unions to mutual savings banks or mutual savings 
associations. The proposed revisions are primarily intended to improve 
the information available to members and the board of directors as they 
consider a possible conversion. The revisions include revised 
disclosures, revised voting procedures, procedures to facilitate 
communications among members, and procedures for members to provide 
their comments to directors before the credit union board votes on a 
conversion plan.

Dates: Comments must be received on or before August 28, 2006.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web site: http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the 
instructions for submitting comments.
     E-mail: Address to [email protected]. Include ``[Your 
name] Comments on Proposed Rule Part 708a'' in the e-mail subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for e-mail.
     Mail: Address to Mary Rupp, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.

FOR FURTHER INFORMATION CONTACT: Jon J. Canerday, Trial Attorney; 
Moisette I. Green, Staff Attorney; Frank S. Kressman, Staff Attorney; 
Paul M. Peterson, Staff Attorney; or Gerard S. Poliquin, Trial 
Attorney, Office of General Counsel at the above address or telephone 
number: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

NCUA's Current Regulation

    Under the Federal Credit Union Act (``FCUA''), a federally insured 
credit union (``credit union'') may convert to a mutual savings bank or 
savings association in mutual form (collectively referred to as 
``MSBs'') subject to the FCUA and NCUA's implementing regulations. 12 
U.S.C. 1785(b)(2); 12 CFR Part 708a. In 1995, NCUA first adopted a rule 
that specifically addressed conversion or merger of a credit union into 
an institution other than a credit union. 60 FR 12695 (March 8, 1995). 
Two of the stated purposes of the rule were: (1) To ensure that 
transactions take place only pursuant to an informed vote of the credit 
union's member-owners; and (2) to prevent self-dealing and other abuses 
by individuals involved in the transactions. Id. The rule included, 
among other things, required voting procedures and disclosures to 
properly inform members.
    In 1998, Congress adopted the Credit Union Membership Access Act 
(``CUMAA''). CUMAA contains several provisions on the MSB conversion 
process. It states that a majority of directors must approve a proposal 
to convert, and that approval of the proposal shall be by the 
affirmative vote of a majority of the members of the credit union who 
vote on the proposal. 12 U.S.C. 1785(b)(2)(B). It requires that a 
credit union provide members notice of the vote 90 days, 60 days, and 
again 30 days before the vote, 12 U.S.C. 1785(b)(2)(C), and also 
provide the NCUA Board notice of its intent to convert. 12 U.S.C. 
1785(b)(2)(D). And it restricts the ability of directors and senior 
management to receive economic benefits in connection with the 
conversion. 12 U.S.C. 1785(b)(2)(F).
    CUMAA also provides NCUA a role in the MSB conversion process. It 
requires that NCUA ``administer[]'' the membership vote on the 
conversion and empowers NCUA to ``disapprove[] of the methods by which 
the member vote was taken or procedures applicable to the member 
vote.'' 12 U.S.C. 1785(b)(2)(G). CUMAA further requires that NCUA adopt 
rules governing MSB conversions. Id. These rules must be: (1) 
Consistent with the charter conversion rules promulgated by other 
financial regulators; and (2) no more or less restrictive than rules 
applicable to charter conversions of other financial institutions. Id.
    NCUA issued interim final rules shortly after the passage of CUMAA. 
63 FR 65532 (Nov. 27, 1998). In the eight years since, NCUA has amended 
its conversion rules three additional times to address various issues 
related to conversions and incorporate suggestions from interested 
parties. 64 FR 28733 (May 27, 1999); 69 FR 8548 (Feb, 24, 2004); and 70 
FR 4005 (Jan. 28, 2005). In all of these rulemakings, NCUA has been 
motivated by the same concerns it expressed during the first rulemaking 
in 1995: that members are entitled to make an informed decision on a 
conversion proposal and that they should be protected against the 
potential for self-dealing by credit union management and directors. 
Among other things, the current part 708a prescribes required notices 
to members of the conversion vote, contains mandatory disclosure 
language and a ban on inaccurate and misleading communications, 
prohibits certain benefits to directors and senior management officials 
in connection with the proposed conversion, and sets forth certain 
required voting procedures and supplemental guidance. 12 CFR part 708a.

Summary of NCUA's Proposed Amendments to the Current Regulation

    NCUA continues to acquire information about the MSB conversion 
process and, based on this greater level of empirical experience, NCUA 
has determined that there are ways to improve part 708a to better 
fulfill its purposes. Particularly, NCUA believes the rule can be 
improved with regard to the flow of information between and among 
members and board directors concerning the conversion issue.
    NCUA recognizes and fully supports the right of a credit union to 
change its charter to a bank charter. This change, however, is a 
fundamental shift. When a credit union becomes a bank, for example, the 
ownership rights of the members change. The statutory and regulatory 
framework under which the institution operates, including its tax-
exempt status, will also change. The services supplied to the members, 
and the cost of those services to the members, may change as well.
    The decision to change to a bank charter belongs to the credit 
union members. To make this decision, members must be fully informed as 
to the reasons for the conversion and have time to consider the pros 
and cons of the proposed conversion. They should have an opportunity to 
discuss the proposal with other members and to communicate their views 
to the credit union's directors. NCUA believes that the current 
conversion process can be improved to facilitate the quality and flow 
of information about the conversion.
    For these reasons, NCUA proposes to make modifications and 
additions to part 708a. These changes are discussed in detail in the 
Section-by-Section Analysis that follows. Briefly summarized, the 
proposal:

[[Page 36947]]

     Requires a converting credit union to give advance notice 
to members that the board intends to vote on a conversion proposal and 
establishes procedures for members to share their views with directors 
before they adopt the proposal.
     Clarifies that credit union directors may vote in favor of 
a conversion proposal only if they have determined the conversion is in 
the best interests of the members and requires the board of directors 
submit a certification to NCUA of its support for the conversion 
proposal and plan.
     Simplifies the ``boxed'' disclosures that a credit union 
must provide to its members.
     Changes the current requirement for delivery of the boxed 
disclosures (i.e., with all written communications to members) to 
require that the disclosures need only be delivered with the 90-, 60- 
and 30-day member notices.
     Provides for the form of the member ballot and that the 
ballot must be sent only with the 30-day notice.
     Requires the board of directors to set a voting record 
date not less than one hundred twenty days before the board notifies 
the members it is considering adopting a conversion proposal.
     Requires that, after the board has approved an MSB 
conversion proposal and upon the request of a member, a credit union 
must disseminate information from that requestor to other members at 
the requestor's expense.
     States that the members of federally-chartered credit 
unions (``FCUs'') may request and be granted access to the books and 
records of a converting credit union under the same terms and 
conditions that a state-chartered for-profit corporation in the state 
in which the federal credit union is located must grant access to its 
shareholders.
     Requires the NCUA Regional Director to make a 
determination to approve or disapprove the methods and procedures for 
the membership vote within thirty calendar days of the receipt of the 
credit union's certification of the member vote and permits any credit 
union dissatisfied with the determination to appeal to the NCUA Board 
for a final agency determination.
     Requires a credit union to complete a conversion within 
one year of the date of receipt of final approval from NCUA of the 
methods and procedures of the vote.
     Modifies the voting guidelines to include information on 
the use of voting incentives such as raffles.

NCUA's Rulemaking Authority

    The FCUA, as amended by CUMAA, provides NCUA with general 
rulemaking authority over federally-insured credit unions and specific 
rulemaking authority over conversions of credit unions to MSBs. This 
section contains an analysis of NCUA's rulemaking authority and how it 
applies to this proposed rulemaking.
    The FCUA provides the NCUA Board with broad, general rulemaking 
authority over federal and federally-insured state chartered credit 
unions:

    Powers of the Board and Administration personnel.--(a) The Board 
may prescribe rules and regulations for the administration of [the 
FCUA] (including, but not by way of limitation, the merger, 
consolidation, and dissolution of corporations organized under this 
chapter) * * *.

    12 U.S.C. 1766a. The FCUA contains numerous provisions on the 
activities of credit unions, including reorganizations and charter 
conversions. See, e.g., 12 U.S.C. 1771 and 1785. Section 1785, in 
particular, has provisions on the conversion of credit unions to MSBs, 
including establishing specific voting and notice requirements and 
limitations on benefits for directors and management. Section 1785 also 
charges NCUA with oversight of the membership vote:

    Oversight of member vote. The member vote concerning charter 
conversion under this paragraph shall be administered by the 
Administration, and shall be verified by the Federal or State 
regulatory agency that would have jurisdiction over the institution 
after the conversion. If either the Administration or that 
regulatory agency disapproves of the methods by which the member 
vote was taken or procedures applicable to the member vote, the 
member vote shall be taken again, as directed by the Administration 
or the agency.

    12 U.S.C. 1785(b)(2)(G)(ii). The FCUA also gives the NCUA Board 
specific rulemaking authority over credit union conversions to MSBs as 
follows:

    (G) Consistent rules. (i) In general. Not later than 6 months 
after the date of enactment of the Credit Union Membership Access 
Act the Administration shall promulgate final rules applicable to 
charter conversions described in this paragraph that are consistent 
with rules promulgated by other financial regulators, including the 
Office of Thrift Supervision and the Office of the Comptroller of 
the Currency. The rules required by this clause shall provide that 
charter conversion by an insured credit union shall be subject to 
regulation that is no more or less restrictive than that applicable 
to charter conversions by other financial institutions.

    12 U.S.C. 1785(b)(2)(G)(ii). The key rulemaking provisions are 
twofold. First, NCUA's rules must be ``consistent with rules 
promulgated by other financial regulators, including the Office of 
Thrift Supervision and the Office of the Comptroller of the Currency;'' 
and, second, NCUA's rules must be ``no more or less restrictive than 
[those rules] applicable to charter conversions by other financial 
institutions.'' Id.
    Because these two provisions contain general directions that do not 
require the NCUA to adopt specific rules and regulations of other 
regulators, those provisions are ambiguous on their face. Under 
established law, NCUA has significant authority to interpret the 
meaning of those provisions. In Pauley v. BethEnergy Mines, 501 U.S. 
680 (1991), for example, the Supreme Court considered a challenge to a 
rulemaking initiated by the Department of Labor that empowered it to 
adopt regulations that ``shall not be more restrictive than'' 
rulemakings by the Department of Health, Education, and Welfare. The 
Court stated ``[w]ith respect to the phrase `not * * * more restrictive 
than' Congress's intent is similarly clear: The phrase cannot be read 
except as a delegation of interpretive authority to the Secretary of 
Labor.'' \1\
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    \1\ Id. at 624. See also Mowbray v. Kozlowski, 914 F.2d 593 (4th 
Cir. 1990) (the court deferred to a state agency's interpretation of 
an ambiguous statutory scheme involving separate provisions 
providing that state medicaid eligibility rules should be both less 
restrictive and more restrictive than federal eligibility rules).
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    NCUA's analysis of the two relevant statutory provisions follows.

a. ``Consistent with rules promulgated by other financial regulators.''

    NCUA has carefully considered the meaning of this ``consistency'' 
language. The FCUA does not further define this provision. CUMAA's 
legislative history contains scant information on the MSB conversion 
provisions and provides no insight into the provisions governing NCUA's 
rulemaking authority over conversions.\2\
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    \2\ The available legislative history discusses the conversion 
provisions in the House version of CUMAA. The conversion provisions 
ultimately included in CUMAA were from the Senate bill. These 
provisions appear to have been added late in the drafting cycle 
without accompanying legislative history.
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    The Dictionary defines ``consistent'' as ``1. agreeing or 
concordant; compatible, not self-contradictory'' and ``2. constantly 
adhering to the same principles, course, form, etc.'' \3\ Accordingly, 
NCUA views this requirement for consistency as a mandate that NCUA's 
rules be compatible with or adhering to the same

[[Page 36948]]

principles as the conversion rules of other financial regulators.
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    \3\ The Random House Webster's Unabridged Dictionary (2d ed. 
2001), pg. 434.
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    A compatibility interpretation makes sense to NCUA. NCUA's rules 
applicable to conversion from credit unions to MSBs should be 
compatible with the rules, if any, that govern conversions to new 
banking entities. In other words, a credit union that wishes to convert 
to a federally-chartered MSB (``FMSB'') should not encounter 
insurmountable contradictions between NCUA's rules governing 
conversions to FMSBs and the existing Office of Thrift Supervision 
(``OTS'') and Federal Deposit Insurance Corporation (``FDIC'') rules 
governing the same. If NCUA's rules included requirements contrary to 
any OTS or FDIC rules governing the same conversion, the conversion 
could not take place.\4\ Likewise, if a credit union wishes to convert 
to a state-chartered MSB, NCUA's rules should be compatible with the 
state regulator's rules, if any, governing the same conversion. NCUA 
believes the proposed rule satisfies this compatibility analysis, but 
invites commenters to address this topic and, if they disagree, to 
provide specific examples.
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    \4\ Current OTS rules on conversion from credit unions to MSBs 
are found in 12 CFR 543.8 through 543.12. So, for example, if the 
NCUA required a conversion disclosure that was contrary to a 
prohibition existing in the OTS rules at the time NCUA promulgated 
its rules, that could render NCUA's rules inconsistent with the OTS 
rules. Since the consistency passage refers to the rules of other 
financial regulators ``including'' both the OTS and OCC, NCUA 
interprets this requirement to extend to other entities that can 
regulate a credit union conversion to an MSB. The FDIC has rules 
regarding application for its insurance which a credit union 
converting to an MSB must comply with. For conversions to state 
chartered MSBs, the credit union must also comply with the rules of 
state regulators.
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    Alternatively, the requirement for consistency may mean a 
requirement for NCUA's rules to be informed by the same principles that 
inform the conversion rules of other regulators. As discussed 
previously, the principles behind NCUA's rulemaking include a desire 
for an orderly and fair conversion process that takes into account the 
rights of the credit union's owners (i.e., the members) and ensures 
that they can make an informed conversion decision. NCUA believes these 
principles are, generally, the same principles informing the conversion 
rules of other state and federal regulators. Again, NCUA invites 
comment on this issue.

b. ``[N]o more or less restrictive than [rules] applicable to charter 
conversions by other financial institutions.''

    NCUA has also carefully considered the meaning of this ``no more or 
less restrictive'' provision. An identical rule would satisfy this 
requirement, but it is not possible to fashion an identical rule for 
several reasons.
    First, the FCUA contains certain procedural requirements for credit 
union to MSB conversions not found in the regulations governing the 
conversions of other financial institutions. So, for example, the 
requirement that credit union members receive three notices at 30-day 
intervals preceding the member vote has no counterpart in the OTS and 
OCC regulations governing thrift and bank conversions.\5\ NCUA's rule, 
however, must reflect these three notices, and so cannot be identical 
to the OTS or OCC rules in this regard.
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    \5\ Compare 12 U.S.C. 1785(B)(2)(C) with 12 CFR 5.24.
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    Second, all financial institutions have characteristics that are 
unique to that type of organization and which translate into different 
regulatory treatment.\6\ For example, conversions of thrifts and banks 
involve the creation and transfer of securities and involvement of the 
Securities and Exchange Commission and associated regulatory 
provisions. Conversion rules governing credit unions cannot be 
identical to those governing banks or thrifts in this and similar 
regards.
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    \6\ The U.S. Department of Treasury found that ``[a]lthough 
credit unions have certain characteristics in common with banks and 
thrifts, (e.g., the intermediation function), they are clearly 
distinguishable from these other depository institutions in their 
structural and operational characteristics.'' U.S. DEPT. TREAS., 
COMPARING CREDIT UNIONS WITH OTHER DEPOSITORY INSTITUTIONS, pg. 6 
(Jan. 2001).
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    Finally, the OTS rules for converting MSBs \7\ and the Office of 
the Comptroller of the Currency (``OCC'') rules for converting national 
banks \8\ are different from each other, so that if NCUA attempted to 
adopt a rule identical to the OTS' rule, then NCUA's rule would not be 
identical to the OCC's rule. Accordingly, it would be illogical to 
construe the phrase ``no more or less restrictive'' as meaning 
``identical.''
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    \7\ 12 CFR parts 563b (Conversions from Mutual to Stock Form) 
and 575 (Mutual Holding Companies).
    \8\ 12 CFR 5.24(f) (Conversion of a National Bank to a Federal 
Savings Association).
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    Again, the FCUA and CUMMA legislative history do not provide any 
definition for ``no more or less restrictive''. NCUA staff engaged in 
extensive legal research to identify other uses of the phrase. As far 
as staff could determine, there is no other federal statute that 
employs the phrase, nor does the phrase appear in any existing federal 
regulation. The phrase is not used in any existing state code or 
regulation. While the term appears in a few judicial opinions, the 
context of those opinions provides no helpful guidance.\9\
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    \9\ See, e.g., Vermef v. Noble, 2002 LEXIS Wa. Tax 22, 
(Washington Board of Tax Appeals, January 20, 2002). As far as NCUA 
can determine, the phrase is not discussed in any major secondary 
source, including law review articles and Words and Phrases.
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    As the FCUA charges NCUA with promulgating a rule, NCUA must 
develop an interpretation of the phrase ``no more or less 
restrictive.'' We start first with the meaning of ``restrictive.'' 
According to the dictionary, the definition of ``restrictive'' is 
``tending or serving * * * to confine or keep within limits, as of 
space, action, choice, intensity, or quantity.'' \10\ In the context of 
regulatory action, that can be further refined as ``tending to confine 
action or choice.'' We subdivide this statutory language into its two 
constituent parts: (1) ``no * * * less restrictive'' and (2) ``no more 
* * * restrictive.'' We interpret and apply each in turn.
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    \10\ This is actually the combination of two definitions. 
``Restrictive'' means ``tending or serving to restrict.'' 
``Restrict'' means ``to confine or keep within limits, as of space, 
action, choice, intensity, or quantity.'' Random House Webster's 
Unabridged Dictionary (2d. ed. 2001), pg. 1642.
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1. ``No less * * * restrictive than [rules] applicable to charter 
conversions by other financial institutions.''

    The FCUA states that NCUA's rules should be ``no * * * less 
restrictive'' than the rules of other regulators. Again, this cannot 
mean that NCUA must include every restriction found in every 
regulators' rule. NCUA interprets this phrase as meaning that when NCUA 
is aware of a particular federal or state law that confines the choices 
or action of a converting institution, NCUA should consider if that 
restriction makes sense for a converting credit union in light of the 
underlying principles that inform NCUA's and other regulators' 
rulemakings. In accordance with this interpretation, NCUA researched 
different regulatory provisions adopted by other financial regulators. 
These provisions are discussed where applicable as part of the Section-
by-Section Analysis. NCUA believes that the rule, as proposed, 
satisfies this element of the FCUA.

2. ``No more * * * restrictive than [those rules] applicable to charter 
conversions by other financial institutions.''

    According to the dictionary, the ``no more * * * restrictive'' 
phrase means NCUA's rulemaking should not tend to confine the 
converting credit union's actions or choices more than rules of other 
financial regulators. Which

[[Page 36949]]

actions or choices and which regulators is not clear. In some areas, 
for example, the OTS has significant limitations on action or choice 
where the OCC has none. As discussed previously, the FCUA also requires 
a series of three notices; and this is a restriction that is not found 
in either the OTS or OCC rules. NCUA concludes that Congress does not 
intend for NCUA to undertake a ``no more restrictive'' analysis on a 
provision-by-provision basis or as to every other regulator's rule. 
Instead, NCUA believes Congress intended NCUA to compare its rule 
generally against the conversion rules of other like regulators. To 
meet the ``no more * * * restrictive'' standard, NCUA concludes that 
its rule, taken in its entirety, should not confine a converting credit 
union's actions or choices more significantly than the rules of other 
financial regulators, taken in their entirety, confine the actions or 
choices of the converting institutions they regulate.
    NCUA examined the rules of various financial institution regulatory 
agencies, including state regulators, the OTS, OCC, and Farm Credit 
Administration.
    The Board first notes that a majority of the states have credit 
union statutes and regulations that are silent with regard to MSB 
conversions; apparently meaning that their state charters have no 
authority to convert to MSBs. Clearly, NCUA's rules are not more 
restrictive than these state rules and cannot be more restrictive, as 
the FCUA specifically permits conversions from credit unions to MSBs.
    With regard to the state laws and regulations permitting 
conversions, and the laws and regulations governing conversions 
overseen by the OTS and OCC, these laws and regulations all share 
similarities. They all establish procedures for the conversion. They 
all require certain disclosures be made to the members or stockholders 
of the converting institution. They all require votes by both the 
directors and the members or stockholders. And they all require that 
the converting institution provide certain information to the regulator 
for purposes of evaluating the conversion or conversion process. These 
are similarities that NCUA's rule shares with virtually every other 
regulator's rules, and in this sense NCUA's rules are no more 
restrictive than other regulators' rules.
    The other state and federal laws and regulations that expressly 
allow for conversions apply a variety of specific requirements to the 
conversion. Many of those requirements are cited in the Section-by-
Section Analysis below as precedent for particular provisions in NCUA's 
proposal and, in many cases, the NCUA proposal is not more restrictive 
than the cited precedent. For example, Sec.  708a.5 of both the current 
and proposed rules requires a credit union to provide NCUA with notice 
of its intent to convert before the date of the membership vote. NCUA's 
notice requirements are fairly simple. Several states require much more 
specificity or analysis in the notification requirements for their 
converting institutions than the NCUA requires in Sec.  708a.5.\11\
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    \11\ See Mich. Comp. Laws 490.373(1)(b), 490.374(1)(b); 2005 Vt. 
Acts & Resolves 16; Conn. Gen. Stat. Sec.  36a-469c(a)(3); Utah 
Admin. Code R337-2-3; Fla. Stat. ch. 655.411(1)(a); and Me. Rev. 
Stat. Ann. tit. 9-B, 343(1).
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    A comparison of the OTS conversion rules \12\ to the proposed NCUA 
rules demonstrates that the OTS rules, not the NCUA rules, are in many 
ways more restrictive. For example, within the OTS rules there are 
types of requirements that do not appear in the NCUA rule.\13\ These 
include the requirement to prepare and submit to OTS a three-year post 
conversion business plan and various requirements related to the 
issuance of stock, including making a valuation of the bank, 
determining subscriber rights, and making various stock-related 
filings.
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    \12\ Governing conversions of MSBs to stock banks.
    \13\ 12 CFR part 563b. OTS rules include additional requirements 
if the conversion involves the creation of a mutual holding company 
structure. 12 CFR part 575.
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    NCUA's proposed rule is also purely procedural. It contains no 
substantive restrictions or burdens. This is not true for the rules 
that affect other conversions. For example, a member of an Iowa credit 
union that converts to an MSB is entitled to a pro rata distribution of 
all unencumbered credit union retained and undivided earnings in excess 
of regulatory required reserves. Iowa Admin. Code r. 189-3.4(8). 
Similarly, the OCC conversion rule for conversion of a national bank to 
a mutual savings bank obligates the institution to payoff shareholders 
who dissent from the conversion.\14\ The Iowa rule and OCC rule, not 
NCUA's rule, are more restrictive in this particular sense as well.
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    \14\ ``Rights of dissenting stockholders. A shareholder of a 
national banking association who votes against the conversion * * * 
or who has given notice in writing to the bank at or prior to such 
meeting that he dissents from the plan, shall be entitled to receive 
in cash the value of the shares held by him, if and when the 
conversion, merger, or consolidation is consummated * * *.'' 12 
U.S.C. 214a(b), incorporated by cross reference into 12 CFR 5.24(f) 
(the OCC conversion rule).
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    In sum, NCUA believes this proposed rule is well within its 
statutory rulemaking authority. The rule carries out NCUA's statutory 
responsibility for oversight and administration of the voting process. 
The rule ensures that the member vote is fair and legal and the members 
who vote are informed of important aspects of the conversion. The rule 
is consistent with rules promulgated by other financial regulators, 
including the OTS and the OCC. It is also ``no more or less 
restrictive'' than the rules generally applicable to charter 
conversions by other financial institutions.

B. Section-by-Section Analysis

708a.1 Definitions

    The current Sec.  708a.1 contains definitions for the terms credit 
union, mutual savings bank, savings association, federal banking 
agencies, and senior management official.
    The proposed Sec.  708a.1 maintains these same definitions. The 
proposal adds an additional definition for the phrase ``clear and 
conspicuous,'' meaning ``text that is in bold type in a font at least 
as large as that used for headings, but in no event smaller than 12 
point.'' NCUA invites comment on this definition. The proposal also 
adds a definition for ``regional director'' to clarify that, for 
natural person credit unions, it means the NCUA director for the region 
where the credit union's main office is located and, for corporate 
credit unions, it means the Director, NCUA Office of Corporate Credit 
Unions.

708a.2 Authority To Convert

    The current Sec.  708a.2 recites the authority of a federally 
insured credit union to convert to a mutual savings bank or savings 
association as provided for in the FCUA. The proposed Sec.  708a.2 
maintains this same recitation.

708a.3 Board of Directors' Approval and Members' Opportunity To Comment

    The current Sec.  708a.3 provides that, if the board of directors 
of a credit union desires to convert, it must approve a conversion 
proposal by a majority vote and set a date for a member vote. The 
members must approve the proposal by the affirmative vote of those 
members who vote on the proposal.
    The proposed rule retains the same requirement for a board vote on 
the conversion proposal but clarifies that a credit union's directors 
may vote in favor of a conversion proposal only if they have determined 
that the conversion is in the best interests of the members. The 
proposal also contains a new requirement for advance notice to the 
members of the board's intent to consider a conversion proposal. It 
retains the requirement for the member vote, although that provision 
has been moved to Sec.  708a.6 of the proposed rule.

[[Page 36950]]

Determination by the Board of Directors That Conversion Is in the Best 
Interests of the Members

    The directors and officers of a credit union have a fiduciary duty 
to act in the best interests of the credit union members. The FCUA 
specifically provides that the Board may take adverse action against 
institution-affiliated parties, including directors, of a federally-
insured credit union, if they have ``committed or engaged in any act, 
omission, or practice, which constitutes a breach of such party's 
fiduciary duty * * * [and by reason of such action] * * * the interests 
of the insured credit union's members have been or could be damaged.'' 
12 U.S.C. 1786(g)(1). The NCUA Board itself has previously stated:

    It is well accepted law that officers and directors of 
depository institutions are held by a strict fiduciary duty to act 
in the best interest of * * * its shareholders. * * * As an officer 
of the credit union, Respondent had a duty to act in the 
institution's best interest and that of its members.\15\
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    \15\ In re Majette, Final Dec. & Order, p. 9 (NCUA Bd., Mar. 18, 
1999), copy available at www.ncua.gov.

    The fiduciary duties directors owe to credit union members are 
similar to those owed to corporate shareholders because, like 
shareholders who are the owners of a corporation, members own the 
credit union.\16\ These fiduciary duties include the duty to act 
loyally, in good faith, with due care and prudence.\17\ A director may 
be held personally liable for a breach of fiduciary duty to the credit 
union and its members.
---------------------------------------------------------------------------

    \16\ ``The directors of a non-profit membership corporation have 
a duty to act in the best interest of the corporation's members. * * 
*'' Baring v. Watergate East, Inc., 2004 Del. Ch. Lexis 17. See also 
Bourne v. Williams, 633 S.W.2d 469 (Tenn. App. 1981); Kirtley v. 
McClelland, 562 N.E. 2d 27 (Ind. Ct. App. 1990). As for the 
ownership rights of credit union members, ``it seems clear that the 
members of a credit union are, in the same sense as the shareholders 
of an ordinary business corporation, the owners of the entity.'' 
Anheuser-Busch Employees Credit Union v. Federal Deposit Insurance 
Corporation, 651 F.Supp. 718, 724 (W.D. Mo. 1986) (comparing rights 
of corporate shareholder to credit union member). Credit union 
members exert control over the affairs of the institution through 
their voting power, not delegable by proxy. 12 U.S.C. 1760. The net 
worth of the credit union belongs to the members, and they may 
recognize it in a variety of ways, including low loan rates and high 
savings rates (See discussion at notes 23-26 and accompanying text), 
voluntary liquidation (12 CFR part 710), and the special dividends 
paid by many credit unions. See, e.g. Loan Growth, Excess Capital 
Play Huge Role in Dividend Payouts, Credit Union Times, January 4, 
2006, at p. 1. There are several additional aspects of credit union 
membership that distinguish members from both debtors of the credit 
union and from bank depositors. For example, by law membership 
shares in an FCU are equity. 12 U.S.C. 1757(6). Dividends on FCU 
shares are not a contractual right, as is interest on a bank 
certificate of deposit, but may only be paid if the FCU has 
sufficient retained earnings. 12 U.S.C. 1763; NCUA OGC Legal Opinion 
96-0917 (January 22, 1997), located at www.ncua.gov. And, in the 
event of a credit union liquidation, unsecured creditors have 
priority over members to the extent of the members' uninsured 
shares, 12 CFR 709.5(b)(5), (6), unlike bank depositors who take 
equally with unsecured creditors to the extent of uninsured 
deposits. See, e.g., 12 CFR 360.3(a)(6).
    \17\ 19 C.J.S. Corporations, Sec. Sec.  477, 478 (1990).
---------------------------------------------------------------------------

    The Board believes that credit union directors must faithfully 
fulfill their fiduciary duties to members by closely examining whether 
a charter conversion is in the members' best interests. Directors 
should review all aspects of a conversion to an MSB, including, for 
example, how the conversion will affect rates and services available to 
members and how regulatory differences between the two institutions, 
such as lending restrictions imposed under the qualified thrift lender 
test, could affect member service. 12 U.S.C. 1467a(m); see also OTS 
Thrift Activities Regulatory Handbook, Section 270 (June 2002). 
Directors should not limit themselves to information presented by 
management or by conversion consultants, but should ensure that they 
have all of the information necessary to make a fully informed 
decision. In deliberating over a conversion proposal, officials' 
decisions must be free of self-interest and compliant with their duties 
of care and loyalty to the members.

Advance Notice of Board Meeting To Consider Conversion Proposal.

    The proposal amends Sec.  708a.3 to add a new requirement: The 
credit union's board of directors must publish public notice indicating 
its intent to hold a board meeting for purposes of voting on a 
conversion proposal. Ultimately, the decision to change from a credit 
union charter to a bank charter rests with the members, and the Board 
believes the conversion process will better inform the members and 
enable board members and officers to fulfill their fiduciary duties if 
members are involved early in the process and have an opportunity to 
interact with the board of directors before the directors formally 
commit to a conversion.
    The proposed rule requires the board of directors consider, adopt, 
and publish a notice of its upcoming meeting. The board must publish 
the notice in a local area newspaper and on the credit union's website, 
as well as post a notice in the credit union's offices, no later than 
30 days before the meeting. The notice will inform members that they 
may provide comment to the board before it votes to approve the 
conversion proposal. The board of directors must review the member 
comments before it votes on the conversion proposal. If the credit 
union maintains a website, the credit union must also post the comments 
in a clear and conspicuous fashion.
    NCUA believes these proposed amendments will benefit both the 
members and the board of directors. Advance notice of a pending 
conversion affords members additional time to educate themselves about 
the future path of their institution. For those members who want to 
discuss their views with other members, it gives them additional time 
to make contact and initiate dialogue. It also gives members an 
opportunity to discuss the issue with their board before it has 
committed itself to pursue a conversion.
    This advance notice is also beneficial for the board. The credit 
union's directors have a fiduciary duty to act in the best interests of 
the credit union's members, and it is reasonable to assume that the 
members may have some insight into their own best interests. By 
notifying members of the board's intentions and receiving member 
comments, the board is better able to understand the desires of its 
member-owners. Early feedback from the members will also help the board 
gauge if the membership is likely to vote against a conversion 
proposal. In some cases, the board may determine that the majority of 
members will oppose the conversion and, if they will, the board may 
decide against adopting the conversion proposal and so avoid incurring 
some considerable expense.
    The FCUA links NCUA's rulemaking authority to the rules promulgated 
by other financial regulators. Accordingly, NCUA notes there is 
precedent for NCUA's proposal to engage the membership early in the 
conversion process. In Michigan and Vermont, a state credit union's 
board of directors must send written notice to each member, without any 
other mailing, at least 30 days before the board votes on a plan of 
conversion from a credit union to an MSB. Mich. Comp. Laws 
490.373(1)(a) and (1)(i)(ii); 8 Vt. Stat. Ann. Tit. 8, Sec.  35102 
(2006). The notice must address why the board is considering 
conversion, discuss the positive and negative effects of the proposed 
conversion, and request member comments. Id. Members send their 
comments to the credit union, which later provides copies to the state 
supervisory authority. Texas also requires a similar notice to members 
at least 30 days before a credit union board

[[Page 36951]]

votes on a plan of conversion.\18\ These state law provisions impose a 
greater burden on a credit union in comparison with NCUA's proposal, 
which requires notice only by publication and not direct notice to each 
member.\19\
---------------------------------------------------------------------------

    \18\ 7 Tex. Admin. Code Sec.  91.1007(b) (Final rule adopted by 
Texas Credit Union Commission on June 9, 2006).
    \19\ There are other situations where law and regulation 
requires some public notice of pending conversions beyond the formal 
written notice sent directly to members. The OTS requires any entity 
desiring to organize or reorganize as a federal MSB, including a 
credit union, to publish public notice of its pending OTS 
application. 12 CFR 543.2(d) and part 516. The notice informs the 
public of the application, provides for public inspection rights, 
and solicits public comment. In Maine, a conversion plan must be 
presented to members at a special informational meeting in each 
county where there is a branch office before a meeting is held to 
vote on a plan, if the state supervisory authority (``SSA'') has not 
waived the requirements. Me. Rev. Stat. Ann. tit. 9-B, Sec.  344(3). 
A state savings association that proposes to convert to a bank in 
New Hampshire must publish public notice in a newspaper having 
general circulation in each city or town with an office. N.H. Code 
Admin. R. Ann. Banks 519.04. The notice must indicate the savings 
association's application and plan are available for public 
inspection at the bank commissioner's office and that the 
commissioner will accept written comments from the public. Id.
---------------------------------------------------------------------------

    In addition to the publication of notice in newspapers, in credit 
union offices, and on the credit union's Web site there are other 
potential vehicles for notifying members of the pending decision to 
adopt a conversion proposal. For example, many credit unions send 
information to members in the form of statement stuffers with periodic 
statements of account. Other credit unions may have an extensive e-mail 
list for member contact. The Board invites comment on whether the final 
rule should allow for the use of these communication channels, or 
others not mentioned, in addition to or in lieu of those communication 
methods described in the proposed rule text.

708a.4 Disclosures and Communications to Members

    Section 708a.4 of the current rule, entitled Voting procedures, 
provides for a member vote on the conversion at a special meeting or by 
mail and describes the notices that must be provided to members 90, 60, 
and 30 days before the vote. It prescribes certain information and 
disclosures that must be in the notices. It also requires the vote must 
be by secret ballot and conducted by an independent entity.\20\
---------------------------------------------------------------------------

    \20\ These confidentiality requirements are similar to those 
imposed by the Farm Credit Administration on the elections of the 
financial institutions it regulates. 12 CFR 611.330.
---------------------------------------------------------------------------

    The proposal contains several changes to Sec.  708a.4. It provides 
that the ballot must be sent with the 30-day notice. It modifies the 
mandatory disclosures the board of directors must give to members once 
the board has approved a proposal to convert. It establishes procedures 
for members to share their views with other members during the 90-day 
notice period before the membership vote. The proposal also retitles 
the section to reflect its additional purposes and relocates portions 
of the original Sec.  708a.4 to Sec.  708a.6.

Delivery of the Ballot to the Members.

    The FCUA and NCUA's conversion rule require a converting credit 
union to submit notice of its intent to convert to each member eligible 
to vote three times before the date set for the membership vote on the 
proposal. 12 U.S.C. 1785(b)(2)(C); 12 CFR 708a.4. The credit union must 
submit the notice 90, 60, and 30 days before the vote. Id. The member 
notice must adequately describe the purpose and subject matter of the 
vote on conversion. 12 CFR 708a.4(c).
    The proposed rule's paragraph (a) maintains the statutory three 
notice requirement but requires a credit union to include conversion 
mail ballots only with the 30-day notice. This requirement replaces the 
provision in the current rule that simply requires the ballot be 
submitted to members no less than 30 calendar days before the vote. 12 
CFR 708a.4(b).
    NCUA believes this change benefits members because it allows them 
time to consider the advantages and disadvantages of a conversion 
proposal before voting. If members receive a ballot with their 90-day 
or 60-day notice, as permitted by the current rule, they may vote 
before having the benefit of all the information they may need to make 
an informed decision. Under the proposal, members who want to share 
their views with the membership will have time to express their 
opinions before the credit union includes the mail ballot with the 30-
day notice. As discussed below, the proposed rule gives members the 
opportunity to share their views about a conversion proposal once their 
credit union's board of directors has approved a proposal to convert. 
The proposal gives members at least two full months to fully debate 
whether the credit union should change its charter and provides members 
an adequate amount of time to consider such a significant decision 
before casting their votes.
    NCUA notes that in several states converting state-chartered credit 
unions must include mail ballots 30 days before the membership vote on 
a conversion to a mutual savings bank and may not send ballots earlier 
than 30 days before the special meeting. Iowa Admin. Code r. 180-
3.4(1); Mich. Comp. Laws 490.373(1)(f); N.Y. Banking Law 487-A; and 
2005 Vt. Acts & Resolves 16.
    Proposed Sec.  708a.4(b)(4) discusses the content of the ballot. 
The ballot must set forth the proposal that the members are voting on 
and inform the members clearly and conspicuously that a vote for the 
proposal means the credit union will become a bank while a vote against 
the proposal means that the credit union will remain a credit union. 
The ballot may also indicate whether the board recommends a vote for or 
against the proposal, but may not contain any other information.

Required Disclosures to Members

    Section 202 of CUMAA requires NCUA to: (1) Administer and approve 
or disapprove the methods by which a member vote on a conversion 
proposal is taken, and (2) promulgate rules governing charter 
conversions that implement the statutory directive that credit unions 
provide notice to their memberships about proposed conversions. 12 
U.S.C. 1785(b)(2)(C), (G)(ii). NCUA's conversion rule and the proposed 
amendments are designed to ensure that a credit union's member-owners 
have the ability to make an informed choice about their credit union's 
future. Officials must give members full and fair disclosure regarding 
any conversion plan.
    Full and fair disclosure is important because the FCUA gives credit 
union members the responsibility for making the final decision 
regarding the future of their member-owned credit union. Due to the 
cooperative structure of credit unions, the FCUA and NCUA's 
implementing regulations afford a significant role to member-owners to 
participate in major decisions affecting both Federally-chartered and 
state-chartered credit unions. In addition to MSB conversion votes, 
credit union members (depending on their chartering statute) may have 
the right to vote on converting to a different credit union charter, 
terminating or converting federal share insurance, merging into another 
credit union, and liquidating the credit union voluntarily. 12 U.S.C. 
1771(a), 1786(a)(1); 12 CFR 708b.106(b), 708b.201(c), 710.3(b). Each of 
these transactions is subject to regulatory requirements imposed by 
NCUA or SSAs to ensure that members are given adequate notice before 
the vote is taken. Member notices must convey important information in 
an impartial manner so the membership can make an informed decision.
    Like the termination of Federal share insurance, the conversion to 
an MSB is a significant transaction that affects

[[Page 36952]]

various aspects of a member's interests and, therefore, requires full 
and fair disclosure to the membership. The board of directors will 
explain to the members why it desires to convert and provide reasons in 
support of conversion. The required disclosures contained in NCUA's 
current rule, including the attendant changes in membership ownership 
interests and voting rights, whether the MSB plans to change from 
mutual to stock form, conversion benefits that flow to management, and 
the implications of thrift lending limits, ensure that the information 
provided by the board is complete and comprehensive.
    Paragraphs (b), (c), and (d) of the proposed Sec.  708a.4 maintain 
the current disclosure requirements, namely, that the notices to 
members must adequately state the purpose and subject matter of the 
proposal and inform members that they may vote either in person at the 
meeting or by submission of a written ballot. To assure that a 
conversion vote is conducted in a fair and legal manner, all 
information communicated to members by the credit union must be 
accurate and not misleading. Under the current rule, in addition to 
disclosing the purpose, subject matter, date, time, and place of the 
special meeting, the three notices submitted to members must make 
certain disclosures relating to members' ownership interests and voting 
rights, as well as a disclosure regarding any conversion-related 
economic benefits to officials. NCUA has retained these additional 
disclosure requirements because members should have notice that their 
fundamental rights as credit union members will change if the credit 
union converts to an MSB.
    In addition to the disclosures above, the proposed rule requires 
that the 90-day and 60-day notices state in bold type, in at least 12-
point font, that a written ballot will be mailed together with the 30-
day notice. The proposal also requires all three notices to disclose 
the impact of the qualified thrift lender test, established under 12 
U.S.C. 1467a(m), on the institution if it converts to an MSB. NCUA 
believes officials should disclose to members in a manner members can 
easily understand that, upon conversion to an MSB, an institution's 
focus may shift from providing a full array of consumer loan products 
to the more limited financing of mortgages and other qualified thrift 
investments.

Required Boxed Disclosures

    The current Sec.  708a.4(e) requires that each written 
communication it sends to its members include specific disclosure 
language about the effects of a conversion. These disclosures include 
changes in ownership and control, the potential for changes in rates 
and fees, the possibility and effects of a subsequent stock conversion, 
and the costs of the conversion. NCUA believes these disclosures are 
important information that a member must see, read, and consider before 
the member decides how to vote. The current rule requires that these 
disclosures be ``boxed,'' that is, that they be offset by a border and 
are otherwise made more conspicuous than other information provided 
with the member notices. The disclosures also use plain English and 
basic concepts to help members comprehend the transaction before they 
vote on a conversion.
    The proposed boxed disclosures retain the current disclosures 
related to the potential for profits by directors and senior management 
and the possibility of changes in rates following conversion.\21\ A 
detailed justification for the truth of these particular disclosures 
and their importance to the members is set forth later in this 
preamble.
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    \21\ The proposed letter does not contain specific disclosure 
language about changes in ownership rights or the costs of 
conversion. The proposed rule still requires the credit union to 
disclose this information as part of the credit union's member 
notice. The proposed rule also does not include language that 
informs members that, due to field of membership restrictions, 
members may not be eligible to join another credit union if the 
conversion succeeds. This language is true but, because some credit 
unions may have community-based fields of membership, the 
possibility of obtaining membership in another credit union depends 
largely on where a member lives.
---------------------------------------------------------------------------

    The proposed boxed disclosure also contains a new disclosure that 
sets forth in plain language the effects of a member voting ``FOR'' a 
conversion: That the credit union will become a bank. The disclosure 
states the converse: That a vote ``AGAINST'' the conversion means that 
the credit union will remain a credit union. Some credit union members 
may not understand this. Often, these simple but important facts go 
unrecognized until the conversion has been approved.
    NCUA is further concerned that, in past conversions, not all 
members have seen and read the boxed disclosures required by Sec.  
708a.4. Accordingly, the proposal amends the delivery requirements for 
these important disclosures to ensure that members are aware of these 
disclosures. Specifically, paragraph 708a.4(c) of the proposal requires 
that these essential disclosures be delivered on a separate sheet of 
paper with no other text. The paper must be placed immediately after 
the credit union's cover letter and before any other information 
included with the notice. The current rule requires the credit union 
provide the boxed disclosures with all written communications to 
members. The proposal, however, provides that these disclosures need 
only go out to the members with the 90-day, 60-day, and 30-day 
notices.\22\
---------------------------------------------------------------------------

    \22\ Previously, some converting credit unions were not sure 
what communications constituted member communications, and the 
proposal eliminates this issue. Although the proposal contains no 
specific disclosures for member communications outside the member 
notices, those communications still must be accurate and not 
misleading. See 12 CFR 740.1 and proposed Sec.  708a.8(a).
---------------------------------------------------------------------------

    The boxed disclosure language and delivery requirements in this 
proposed rule will increase the likelihood that members will read and 
comprehend these important disclosures. A discussion of the particular 
boxed disclosures and disclosures required elsewhere in the member 
notices follows.

Required Boxed Disclosure: Loan and Savings Rates

    Credit union members can make an informed decision about a proposed 
MSB conversion only if they understand, among many other things, that 
the conversion may result in their paying higher loan rates and 
receiving lower savings rates post-conversion than pre-conversion. 
Accordingly, the proposal retains NCUA's disclosure language that, 
after conversion, a member may experience adverse changes in rates.
    NCUA engaged the services of Datatrac Corporation for purposes of 
gathering and analyzing data on historic loan and savings rates. 
Datatrac is a market research, information technology company 
specializing in the financial services industry. It has been an 
independent source of deposit and lending product information for more 
than 15 years, advertising that it manages the most comprehensive 
database of deposit and lending data in the industry.\23\
---------------------------------------------------------------------------

    \23\ Datatrac information and a link to the Datatrac Web site 
are available online at the Web site of the American Bankers 
Association (ABA). The ABA and Datatrac have partnered together to 
bring Datatrac resources to ABA members and users of ABA's Web site. 
Additionally, the following information can be found on the ABA's 
Web site:
    Datatrac is the exclusive provider of deposit & loan interest 
rate data to the American Bankers Association (ABA), Credit Union 
National Association (CUNA), National Association of Federal Credit 
Unions (NAFCU), Bank Administration Institute (BAI) and Financial 
Managers Society (FMS). Datatrac's rate information has been quoted 
in newspapers, television and Web sites nationwide, including USA 
Today, CBS MarketWatch, Consumers Digest, Kiplinger's Personal 
Finance, the American Banker, the Chicago Tribune, the Los Angeles 
Times and the Milwaukee Journal Sentinel. Since 1988 the company has 
combined technology, research and strategic services to enable 
financial institutions to make timely, competitive pricing and 
marketing decisions. With over 5 million retail deposit and lending 
interest rates and products updated annually for over 14,000 
financial institutions, Datatrac manages the most comprehensive 
financial products database in the industry. For more information, 
please visit http://www.datatrac.net/.

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[[Page 36953]]

    NCUA asked Datatrac to provide data on over 20 distinct loan and 
savings products offered by thousands of banks and credit unions. These 
products included automobile loans; fixed and variable rate mortgage 
products; credit cards; and savings products, such as short and long 
term CDs and savings, checking, and money market accounts. Datatrac 
broke each of these products down into average rates for all 
institutions over several years, including rates as of year-end for 
2002 through 2005.
    The Datatrac data was clear: The historic consumer loan and savings 
rates offered by credit unions are better for members than those same 
rates offered by banks of all types, including, specifically, MSBs.\24\ 
This table illustrates the difference for two particular products (60-
month certificates of deposit (CD) and 60-month new-auto loans) at 
year-end of 2005:
---------------------------------------------------------------------------

    \24\ In automobile lending and in long term savings, the credit 
union rates were far superior to bank rates. For two of the twenty 
products examined, mortgage lending and passbook savings, bank and 
credit union rates were almost identical, but there was no product 
of the twenty examined where banks rates were clearly better than 
credit unions rates. This data is average data; and rates will vary 
by particular financial institution and particular product. NCUA 
believes that average data over thousands of institutions is more 
reliable than individual institutional data because average data 
removes the effects of short-term promotional rates. Additional 
information about this data is available on NCUA's Web site at 
http://www.ncua.gov.

----------------------------------------------------------------------------------------------------------------
                  Product                     Average CU rate    Average MSB rate     CU  rate  advantage \25\
----------------------------------------------------------------------------------------------------------------
60-Month CD................................               4.58               4.20  9% greater.
60-Month New Auto Loan.....................               5.57               7.04  21% less.
----------------------------------------------------------------------------------------------------------------

    Recently, researchers at Fiscal and Economic Research Center at the 
University of Wisconsin--Whitewater also examined the differences in 
loan and savings rates between credit unions and banks. J. Heinrich and 
R. Kashian, Credit Union to Mutual Conversion: Do Rates Diverge?, 
February 22, 2006 (hereinafter Heinrich). The Heinrich study considered 
loans and savings rate data from 175 large credit unions and banks, 
including some banks that had converted from credit unions. The study's 
findings were consistent with NCUA's analysis of its Datatrac data, 
including, specifically, that ``[c]redit unions offer significantly 
higher interest rates on all savings products examined and charge lower 
interest rates on three of four loans products compared to converted 
credit unions after accounting for all other variables.'' \26\ The 
other variables accounted for included salary payment differences, size 
differences (economies of scale), and differences in market 
concentration. Id. at 3.
---------------------------------------------------------------------------

    \25\ Determined by dividing the CU rate by the MSB rate.
    \26\ Heinrich at 1.
---------------------------------------------------------------------------

    This information supports NCUA's belief that credit union members 
must be made aware that a conversion to an MSB may result in less 
advantageous rates. Informed credit union members may still decide to 
vote in favor of conversion in light of this information. NCUA's 
obligation under the FCUA is to provide regulations that ensure that 
members cast informed votes and, accordingly, the proposed disclosure 
reads as follows:

    RATES ON LOANS AND SAVINGS. If your credit union converts to a 
bank, you may experience adverse changes in your loan and savings 
rates. Available historic data indicates that, for most loan 
products, credit unions on average charge lower rates than banks. 
For most savings products, credit unions on average pay higher rates 
than banks.

    NCUA specifically invites comments on how rates, fees, and service 
levels may have changed in particular credit unions that have converted 
to banks. NCUA also invites comments on NCUA's proposed disclosure 
language.

Proposed Boxed Disclosure: Benefits to Directors and Senior Management

    NCUA is concerned that the directors and officers of a credit union 
considering conversion to an MSB may be motivated by the potential for 
personal financial gain and not by concerns for the best interests of 
credit union members. Most of the benefit for directors and officers 
occurs when the MSB converts to a stock bank within a few years after 
the conversion to an MSB. Accordingly, the boxed disclosures currently 
required by Sec.  708a.4 include the following:

    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.

    NCUA is aware that some do not agree that the credit union's 
directors and officers benefit as a result of a credit union to MSB to 
stock conversion process and have challenged NCUA's required disclosure 
language as being potentially misleading.\27\ In response, NCUA has 
examined this issue in greater depth. As discussed below, the evidence 
available to NCUA indicates that directors and officers do, in fact, 
profit from a conversion, in part by obtaining stock in excess of that 
available to the members. A discussion of this conversion process and 
the benefits that accrue to directors and officers at the institution 
follows.
---------------------------------------------------------------------------

    \27\ For example, in a letter to Representative Spencer Bachus, 
dated June 15, 2005, Ms. Casey-Landry, the President of the 
America's Community Bankers, wrote: ``The NCUA also is ill-informed 
regarding stock subscription rights when a mutual institution 
converts to stock form. The NCUA suggests that credit union managers 
use charter conversions as a way to get rich at the expense of 
account holders. * * * This erroneous belief is also reflected in 
the disclosure language the NCUA requires to be given to all members 
of a converting credit union.'' In June 2005, Mr. Riccobono, then 
the acting OTS Director, also signed an order stating that NCUA's 
required disclosures about access to stock by directors and officers 
were ``potentially misleading.'' OTS Order 2005-23, June 29, 2005. 
Mr. Riccobono stated, in part, that ``[OTS] regulations strictly 
limit the amount of stock any executive may purchase in a 
conversion. * * * In addition, executives cannot purchase any more 
stock in the conversion than any other member.'' Neither Ms. Casey-
Landry nor Mr. Riccobonno address director and officer access to 
stock in the case of an oversubscription to the initial public 
offering; nor do they mention the millions of dollars in free stock 
that the directors and officers--but not rank-and-file members--can 
and do receive following conversion through stock benefit plans. 
This is discussed further, infra.
---------------------------------------------------------------------------

    Twenty-nine credit unions have converted or merged into an MSB 
since 1995. Twenty-one of these 29 have since become a stock bank or 
merged into an existing stock institution.\28\ Some

[[Page 36954]]

recently converted MSBs have indicated an intent to convert to a stock 
bank, but the OTS requires these new MSBs to wait at least a year 
before applying with the OTS to convert to a stock banks.\29\ In some 
cases, credit unions that converted to MSBs waited multiple years 
before completing a stock conversion.\30\ Accordingly, to understand 
the likelihood of a credit union ultimately becoming a stock bank one 
must look to older MSB conversions. There were 24 credit union to MSB 
conversions that occurred from 1995 through the end of 2003, and 21 of 
those 24 converted credit unions, or about 87%, ultimately assumed a 
stock charter. These statistics suggest members of a credit union 
converting to an MSB should anticipate a follow-on conversion to a 
stock charter at some point in the future.
---------------------------------------------------------------------------

    \28\ Some of these stock conversions have been full stock, that 
is, 100% of the stock is publicly held. Others have been conversions 
into mutual holding company (MHC) form, where 49% of the stock is 
publicly held and the other 51% is held by an MHC. Whether an MSB 
converts to full stock or MHC, the directors and officers have 
access to stock that other members do not. The Board notes that the 
MHC structure was first introduced during the demutualization of the 
insurance industry in the 1990s. For a discussion of some of the 
issues particular to an MHC conversion, including the diminution of 
member-owner rights, see Note: No Longer Your Piece of the Rock: The 
Silent Reorganization of Mutual Life Insurance Firms, 73 N.Y.U.L. 
Rev. 999 (1998).
    \29\ ``Credit unions are not authorized to convert directly to a 
Federal stock savings institution. A credit union may convert to a 
Federal stock savings institution subsequent to its conversion to a 
Federal mutual savings institution, pursuant to 12 CFR part 563b. 
OTS will generally require the converted credit union to operate as 
a Federal mutual savings institution for at least one year before 
entertaining an application to convert to the stock form of 
organization.'' OTS Applications Processing Handbook, Section 430.1 
(February 5, 2002).
    \30\ For example, Beacon Federal took over four years to convert 
from an MSB to a stock bank (July of 1999 to January of 2004) and 
Atlantic Coast Federal took over two years to convert from an MSB to 
a stock bank (November of 2000 to January of 2003).
---------------------------------------------------------------------------

    The information collected by NCUA suggests that a mutual to stock 
conversion permits directors and officers to obtain significant 
financial benefits from the conversion, in part through the acquisition 
and control of stock. The ownership of the stock gives the directors 
and officers ownership of a portion of the net worth of the 
institution, and control of the stock voting rights also allows 
directors and officers to increase their compensation more easily. The 
directors and officers obtain ownership and control of stock in several 
different ways. While other members of the converting MSB have access 
to stock, none of them have nearly the access that the directors and 
officers do.
    Directors and officers acquire significant amounts of stock through 
management stock benefit plans and stock option plans, and (for the 
officers but not the directors) employee stock ownership plans. In 
fact, the rules governing federal mutual savings bank to stock 
conversions were specifically crafted to ``enhance the ability of 
officers, directors and employees of an institution to acquire stock 
when their institution converts, through various types of employee 
stock benefit vehicles * * * [so as to] * * * provide a means for 
officials and employees of converting institutions to acquire larger 
ownership stakes in their institutions upon conversion * * *'' \31\ A 
summary of these stock plans follows.
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    \31\ 51 FR 40127 (November 5, 1986) (Preamble to final Federal 
Home Loan Bank Board rule on federal mutual savings bank stock 
conversions).
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    The converting bank may establish an Employee Stock Ownership Plan 
(ESOP).\32\ The ESOP may participate directly in the initial stock 
subscription and may hold up to 10% of the total conversion stock 
offering.\33\ The bank funds ESOP purchases and so ESOP stock costs the 
employee beneficiaries nothing. Members of the credit union who become 
depositors of the subsequent bank and who are not employees cannot 
participate in the ESOP.
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    \32\ 12 CFR 563b.380. The ESOP is voted on and approved by the 
MSB members as part of the extensive materials constituting the plan 
of conversion. The existence and details of the ESOP are not placed 
conspicuously or highlighted for thrift members in the same manner 
that NCUA requires for the disclosures to credit union members under 
this rule.
    \33\ In practice, rules limiting the aggregate amount of stock 
held by both management stock plans and the ESOP may limit the ESOP 
to 8% of the total conversion stock offering.
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    Shortly after a stock conversion, a converted bank may establish 
two additional stock benefit plans for its directors and officers: A 
management stock benefit plan and a stock option plan.\34\ The 
management stock plan holds stock for the benefit of managers and 
directors and may own and hold up to 4% of the outstanding stock.\35\ 
Again, the bank funds the management stock benefit plan so the stock 
costs the managers and directors nothing.\36\ A stock option plan 
permits the bank to grant employees options to purchase stock and a 
stock option plan may hold up to 10% of the outstanding stock issued in 
a conversion.\37\ Members of the credit union who become depositors at 
the subsequent bank and who are not officers or directors cannot 
participate in the management stock benefit plan or stock option plan.
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    \34\ 12 CFR 563b.500(a). These plans are voted on and approved 
by the bank stockholders. At the time of this vote, the directors 
and officers generally control a large percentage of the votes 
through stock acquired by them in the initial public offering (IPO) 
or held for their benefit in the ESOP.
    \35\ 12 CFR 563b.500(a)(3). The management benefit plan is 
restricted to 3% of the stock if the converting institution has less 
than ten percent capital, which would be rare for converting MSBs 
that were former credit unions. Also, the aggregate amount of stock 
in the management stock benefit plan and the ESOP cannot exceed 12%.
    \36\ According to one press report, this management stock 
benefit plan is perhaps the most lucrative of the various stock 
acquisition options and often means millions of dollars in free 
stock for only a handful of senior executives. Credit Union Journal, 
February 24, 2004. The report, quoting an official from SNL 
Financial, states that ``[i]n some cases that can increase 
compensation by 10 to 20 times.'' Id.
    \37\ 12 CFR 563b.500(a)(2). Stock options may not be granted at 
less than the market price at time of grant. Id. at (a)(9). Also, 
there are restrictions on how the benefits in these plans may be 
divided between the officers and directors. No individual may 
receive more than 25% of the stock in any plan, and directors are 
limited to 5% (individually) and 30% (as a group) of the stock in 
any plan. 12 CFR 563b.500(a)(5) and (a)(6).
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    In addition to the various stock plans available to officers and 
directors, the officers and directors may also purchase between 25% and 
35%, in the aggregate, of the initial public offering (``IPO'') of 
stock.\38\ The converting institution typically sets the purchase price 
of each share of stock at ten dollars. On the day of the IPO, however, 
the value of this stock is likely to increase markedly over its 
purchase price, in some cases as much as seventy percent. This 
increase, known in the trade as the ``IPO pop,'' is pure profit to 
those who subscribe to and participate in the IPO.\39\ This pop 
represents part of the transfer of the value of the institution from 
its members as a whole to those individuals who subscribe to the IPO.
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    \38\ 12 CFR 563b.375. This aggregate limit increases from 25% to 
35% on a sliding scale as the size of the institution declines 
meaning the smaller the institution the more the officers and 
directors may buy. Any individual officer or director may purchase 
up to a limit established by the thrift, but generally no more than 
5%. The OTS may approve a higher limit. 12 CFR 563b.385.
    \39\ The stock of Rainier Pacific Financial Group, formerly the 
Rainier Pacific Credit Union, popped 69.9% on the day of its IPO. 
IPO pops vary, but investors can generally expect a pop well into 
the double digits. For a list of some historical IPO pops, see SNL 
Conversion Watch, Sept. 1, 2005, P. 4.
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    While all depositors (as of a certain date) of the converting 
institution technically have equal subscription IPO rights, if the IPO 
is oversubscribed, meaning there are more requests for stock than the 
amount of stock being offered, then the depositors with larger account 
balances will be able to buy more stock than those depositors with 
small account balances. The institution's directors and officers know 
in advance the date of record for subscription rights, and so may 
increase their account balances at an appropriate time to ensure 
maximum subscription

[[Page 36955]]

rights.\40\ Other depositors who are not directors or officers will not 
have this information. There is also anecdotal evidence suggesting many 
depositors of a converting institution do not exercise the IPO rights 
they have, either because they are not well informed about the value of 
the stock subscription or because they do not have the resources to 
purchase the stock and take advantage of the IPO pop.\41\ The 
depositors' failure to exercise their IPO rights also benefits the 
directors and officers.
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    \40\ While the OTS restricts the ability of directors and 
officers to increase account balances and, thus, subscription rights 
within the year before the date of record, 12 CFR 563b.360, these 
individuals may act to increase their account balances just before 
this one year period. NCUA is aware that some credit union boards 
hire consultants and begin deliberations on potential conversion to 
an MSB and then a stock bank multiple years before they adopt a 
formal proposal to convert to an MSB.
    \41\ See Mario F. Cattabiani, Jennifer Lin & Craig R. McCoy, A 
Fast-moving and Enriching Merger; Fumo's Bank Aimed to Merge Quickly 
with a Former Credit Union, But Ran Into Regulatory Yellow Lights, 
THE PHILADELPHIA INQUIRER, May 16, 2005, at A1. This article 
discusses the conversion of IGA FCU into an MSB and ultimately into 
a stock bank. The article notes that, although executives of the 
former credit union stated the 1999 stock conversion was intended to 
benefit the working class individuals who built the credit union, 
less than five percent of the former credit union members actually 
bought any stock. See also, Documents Show Insider Dealing Started 
Early At CU-Turned-Bank, Credit Union Journal, May 23, 2005. NCUA is 
not aware of any regulatory requirements that an MSB converting to 
stock form inform its members about the possibility of this IPO pop.
---------------------------------------------------------------------------

    This stock conversion structure permits the directors, officers, 
and employees of the bank and the benefit plans created for those 
persons to obtain a substantial portion of the shares and the 
associated net worth of the institution. Consultants who advise credit 
unions to pursue conversions make specific claims about the magnitude 
and extent of the financial benefits available to the directors and 
officers at converting credit unions. One newsletter article prepared 
by such a consultant states that:
     Bank CEOs typically receive much greater compensation than 
credit union CEOs, with the bank CEOs receiving from 20% to 57% more 
for institutions of similar assets size.\42\
---------------------------------------------------------------------------

    \42\ Theriault, Alan D., CEO & Directors: Salary Imbalance is 
Corrected by Converting to a Bank, CONVERTING FROM A CREDIT UNION 
FAX UPDATE, Sept. 16, 2002, available at http://www.cufinancial.com/pdfs/NL2002.pdf.
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     Bank directors typically earn between $2,500 to over 
$50,000 annually, in addition to travel and expense allowances, while 
credit union directors are typically uncompensated.\43\
---------------------------------------------------------------------------

    \43\ Id.
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     The gap in pay can be much wider at individual banking 
institutions that utilize stock compensation programs. For example, 
assuming a credit union with $50 million in capital converts to a stock 
bank with an IPO amount of $100 million, directors would share a $2 
million grant of stock, and management would receive an equal grant. 
Each member of a five director board would get $400,000 in stock, 
vested over five years, at the IPO value.\44\
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    \44\ Id.
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    This article continues by detailing various other opportunities for 
a credit union-turned-bank executive to accrue wealth, and concludes 
with ``[t]he reward for performance could lead to a $10 million plus, 
ownership stake for a capable CEO. * * * If the conversion is not made 
during the current tenure, the next CEO in charge may very well realize 
the value.'' \45\
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    \45\ Id. at 2-3.
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    The financial trade press has reported on the specific benefits 
that directors and officers of credit unions obtain from their access 
to stock following a mutual to stock conversion. In one converted 
credit union, the officers and directors set aside $5 million in free 
stock for themselves through stock benefit plans \46\ and made several 
million more dollars in profits on the IPO pop.\47\ At another 
converted credit union, the officers and directors amassed more than 
$14 million in stock and cash benefits during the three-year period 
following stock conversion, with the CEO alone receiving $3 million in 
stock.\48\ At another converted credit union, the officers and 
directors made approximately $1 million in profits on the IPO pop and 
set aside another $3.5 million for themselves in free stock.\49\ At 
another converted credit union, the CEO made $600,000 on the IPO, 
received rights to another $1 million in free stock, and received 
additional stock option benefits.\50\
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    \46\ ``On Feb. 17, directors of [Rainier Pacific Financial 
Group, the parent of Rainier Pacific Savings Bank], known until 2000 
as Rainier Pacific CU, approved a lucrative post-conversion 
compensation for both themselves and managers. Under the plan, 
disclosed in documents filed with the Securities and Exchange 
Commission, top executives and directors of Rainier Pacific will be 
granted a total of 288,500 shares of stock valued at almost $5 
million, to be vested over the next five years. The largest 
recipients will be [the President and CEO], who will receive 60,000 
shares valued at almost $1 million, and [the Senior Vice President], 
who will receive 40,000 shares valued at more than $650,000. But 
directors also voted themselves a share in the so-called management 
recognition stock plan, with each of the eight non-employee 
directors in line for 10,000 shares valued at $165,000 over the next 
five years. That's on top of the $13,750 each of the once-volunteer 
directors now earn each year to serve on the board. But that's not 
all. The group, as well as other employees will share in a pool of 
options to buy 680,000 bank shares at a discount over the next five 
years. Officials of Rainier Pacific did not return phone calls last 
week to comment.'' Taking It to the Bank; Filings Show How CEOs, 
Boards at Converts Have Cashed In, Credit Union Journal, March 29, 
2004, p. 1. Hereinafter, Taking It to the Bank.
    \47\ See the Credit Union Journal Daily, October 22, 2003, 
located at www.cujournal.com (discussing the conversion of Rainier 
Pacific Credit Union).
    \48\ See Excessive Compensation Charged at Convert CU, Credit 
Union Journal Daily, February 6, 2006 (Discussing SEC proxy filings 
involving the converted Synergy Federal Credit Union).
    \49\ ``The biggest winners at Kaiser [Federal Credit Union] were 
[the CEO] who bought the maximum allowable 30,000 shares, netting 
her $108,000 in IPO profits. Four directors and two other top execs 
also subscribed to the maximum 30,000 allotment. In all, the four 
top managers and six non-management directors earned $918,000 of 
profits on their 265,000 shares in last week's IPO. The ex-CU has 
also set aside another 255,000 shares, worth $3.5 million, as free 
stock grants to be awarded to the same individuals over the next 
five years.'' Credit Union Journal, April 5, 2004, p. 1.
    \50\ See Taking It to the Bank, supra, note 23 (Discussing the 
conversion of Pacific Trust Credit Union), and the Credit Union 
Journal, February 25, 2004. Four years after the IPO, the CEO had 
received stock grants and stock options of a total value of about 
$3.8 million. Credit Union Journal, April 14, 2006.
---------------------------------------------------------------------------

    NCUA has analyzed publicly available financial documents at the 
Securities and Exchange Commission related to these press reports and 
believes the numbers above are generally accurate.\51\
---------------------------------------------------------------------------

    \51\ The press report numbers are rounded. Also, some of the 
cited stock benefits are subject to vesting requirements or holding 
periods prior to resale. For example, stock awarded as part of a 
management or employee stock benefit plan may not vest more rapidly 
than 20 percent a year. 12 CFR 563b.500(a)(11). In addition, 
officers, directors, and their associates who make direct purchases 
of stock during the conversion must hold the shares for at least one 
year before resale. 12 CFR 563b.505(a).
---------------------------------------------------------------------------

    In sum, the NCUA believes there is ample evidence to support its 
conclusion, as set forth in the currently required boxed disclosures, 
that ``[i]n 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.'' NCUA also believes 
that banking regulations are structured to facilitate stock ownership 
by directors and officers. Credit union members have a right to know 
this before they vote on an MSB conversion. Accordingly, NCUA's 
proposed boxed disclosure retains language about profits by directors 
and officers. NCUA modified the proposed language slightly to make it 
less subjective and easier to understand. The proposed disclosure 
language reads as follows:

    POTENTIAL PROFITS BY OFFICERS AND DIRECTORS. Conversion to a 
mutual savings bank is often the first step in a two-step

[[Page 36956]]

process to convert to a stock-issuing bank or holding company 
structure. In such a scenario, the officers and directors of the 
institution often profit by obtaining stock in excess of that 
available to other members.

    The NCUA specifically invites comments on the changes in 
compensation for directors and management that have occurred in credit 
unions that have converted to banks and also the form of NCUA's 
proposed disclosure.

Disclosures: Member Voting Rights

    The proposed rule retains the current requirement that converting 
credit unions explain to members how the conversion from a credit union 
to a mutual savings bank will affect members' voting rights and if the 
mutual savings bank intends to base voting rights on account 
balances.\52\
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    \52\ The proposed boxed disclosures no longer include a 
discussion of change in voting rights, but a converting credit union 
must address these changes elsewhere in the member notice as 
required by the proposed 708a.4(c)(2).
---------------------------------------------------------------------------

    Voting rights in credit unions and MSBs are different in two 
important ways: how many votes each member gets and the use of proxy 
voting. Federal credit union members have the purest form of democratic 
government: One-person, one-vote. Federal MSBs are allowed to dilute 
this through voting based on account balances so that depositors with 
larger account balances may obtain up to 1000 votes while members with 
smaller balances may only have one vote.\53\ That means that members of 
lesser means lose voting power in a conversion from credit union to 
MSB. Directors and officers and other members of greater means gain 
increased voting power.
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    \53\ An FMSB may adopt a range of voting rights, from one-person 
one-vote to one vote per $100 account balance up to 1000 votes. NCUA 
believes, however, that all credit unions that have converted to 
FMSBs to-date have adopted bylaws allowing one vote per $100 account 
balance up to 1000 votes.
---------------------------------------------------------------------------

    The NCUA has seen converting credit unions put statistical 
information in their member notices that imply the difference between 
one vote and one thousand votes is meaningless. NCUA believes that no 
vote is meaningless under any circumstances. In certain situations, the 
ability to cast one thousand votes instead of only one vote can carry 
huge weight. For example, in elections with low voter turnout or in 
very close elections the person with the greater voting power can 
control the outcome of the election.\54\
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    \54\ For example, one credit union that recently went through 
the MSB conversion process reported to NCUA that, typically, fewer 
that one hundred of its members had participated in past elections. 
NCUA determined, based on call report data, that the average account 
balance at that credit union post-conversion would be about $8,200, 
and so the average MSB depositor would have about 82 votes. Some 
depositors, of course, would have balances in excess of $100,000, 
and so would have 1000 votes. Accordingly, in future elections, if 
the MSB continues to have about one hundred depositors vote in its 
annual election of directors, including its 13 incumbent directors, 
and the incumbents each have the maximum of 1000 votes, the 
incumbents could reelect themselves even if all the other 87 
depositor-voters (assuming average account balances) opposed the 
reelection. This example does not take into account the incumbent 
board's ability to exercise proxies on behalf of other depositors, 
which further amplifies control by the board and management.
---------------------------------------------------------------------------

    Federal MSBs are also permitted voting by proxy. 12 CFR 569. At 
some point in time, usually account opening, MSB depositors may sign a 
proxy statement that gives their voting rights to the MSB's board of 
directors. Typically, these proxies are perpetual or ``running,'' 
meaning that, except on a vote to convert to a stock charter, the MSB's 
board of directors, or a committee appointed by the board, will vote 
the proxy shares indefinitely unless the depositor takes some 
affirmative action to revoke the proxy.\55\ This isolates the MSB 
depositor from the oversight of the MSB; MSB directors can even elect 
themselves indefinitely through the use of perpetual proxies.
---------------------------------------------------------------------------

    \55\ ``In practice, members delegate voting rights and the 
operation of federal mutual savings associations through the 
granting of proxies typically given to the board of directors 
(trustees) or a committee appointed by a majority of the board.'' 
OTS Thrift Activities Regulatory Handbook, Section 110.2 (Dec. 
2003).
---------------------------------------------------------------------------

    An OTS Deputy Chief Counsel has characterized the effect of 
perpetual proxies at MSBs as follows:

    An important custom that perpetuates management control is the 
use of perpetual proxies that accountholders typically grant to 
management at the time they open a savings account. The OTS 
regulations permit a mutual institution's management to solicit 
proxies that are of unlimited duration. The use of these proxies, 
coupled with the management's control over meetings of a mutual 
savings institution, attenuates the influence that depositors may 
have.

D. Smith and J. Underwood, Memorandum: Mutual Savings Associations and 
Conversion to Stock Form, p. 17 (Office of Thrift Supervision, Business 
Transactions Division, May 1997).\56\
---------------------------------------------------------------------------

    \56\ Available at http://www.ots.treas.gov.
---------------------------------------------------------------------------

    In contrast, the FCUA specifically prohibits proxy voting. 12 
U.S.C. 1760. FCU members exercise their voting rights directly on all 
issues requiring a member vote, including the election of directors and 
fundamental organizational changes.

Disclosures: Regulations Applicable to Other Financial Institutions

    Other financial regulators impose disclosure requirements upon 
charter conversions. State-chartered institutions in Hawaii must state 
the purpose of the meeting, describe the transaction and include a copy 
of the conversion plan. Haw. Rev. Stat. 412:3-605(a). In both Iowa and 
Texas, if a credit union's conversion will ultimately lead to the 
credit union becoming a stock institution, the board must fully and 
accurately disclose its intention. Iowa Admin. Code r. 180-3.2(533); 7 
Tex. Admin. Code 91.1004(d)(1). Iowa also requires a state-chartered 
credit union proposing to convert to an FCU to make particular 
disclosures if the true purpose of the conversion is to convert to an 
MSB. Under the Iowa regulation, a credit union must disclose: Any loss 
of ownership interest in the credit union; that voting rights under a 
mutual savings bank structure are usually one vote per $100; and, that, 
if the MSB converts to stock, depositors will lose ownership interests 
and voting rights. Iowa Admin. Code r. 180-3.4(6). Three SSAs require 
that credit unions provide notice in boldface type to members when 
converting from a state to Federal credit union charter that the issue 
will be decided by a majority of the members who vote. Iowa Admin. Code 
r. 180-3.4(2); Tenn. Code Ann. 45-4-1902; 7 Tex. Admin. Code 
91.1004(d)(3).
    The OTS also has rules concerning disclosures in connection with 
depositor votes. It requires the financial institutions it regulates to 
provide accurate and non-misleading information in connection with 
depositor voting on matters relating to conversion. OTS also prohibits 
the use of proxy statement materials that contain any statement that, 
under the circumstances:

    Is false or misleading with respect to any material fact * * * 
Omits any material fact that is necessary to make the statements not 
false or misleading * * * or * * * Omits any material fact that is 
necessary to correct a statement in an earlier communication that 
has become false or misleading.

12 CFR 563b.285.

Member Communications With Other Members.

    Proposed 708a.4(f) establishes a process for a member to 
communicate directly with other members after a board has approved an 
MSB conversion proposal to share information and views about the 
proposal. The rule permits members to submit written requests to the 
credit union requesting dissemination of information to other

[[Page 36957]]

members at the expense of the requestor.
    The proposal requires a credit union, at the member's request, to 
send a communication by mail. The proposal also requires a credit 
union, at the member's request, to send the communication by e-mail to 
those members who have agreed to accept communications electronically 
from the credit union.\57\ This is an effective method for a requestor 
to reach some members quickly and affordably. The proposal also 
requires a credit union to provide members an opportunity to post their 
opinions on a credit union's Web site free-of-charge if the credit 
union itself posts conversion-related materials. If the credit union's 
resources are used to promote a conversion, members should have an 
opportunity to express their views as well, whether for or against the 
conversion, in a similar format so that the issue may be openly debated 
before the membership vote.
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    \57\ NCUA is not certain how difficult it may be for a credit 
union to take its member e-mail list and separate the eligible 
voters from others who may not be eligible to vote. Accordingly, the 
credit union may, at its option, send the e-mail to all members who 
have agreed to accept communications electronically or just to those 
members eligible to vote.
---------------------------------------------------------------------------

    Once a credit union sends the 90-day notice, the conversion process 
will move rapidly toward completion of the member vote. To ensure that 
member-to-member communications can be delivered in a timely fashion, 
and, in particular, before members receive the ballot with the 30-day 
notice, the proposal requires that any member desiring to communicate 
with other members deliver the communication to the credit union within 
35 days (five weeks) after the date of the 90-day notice. A credit 
union then will have seven days to deliver the communication to its 
membership or, in the case of a dispute, to NCUA.
    The member must agree to reimburse the credit union for the 
reasonable costs of delivering the communication to other members. The 
proposal requires a requesting member to provide a credit union with an 
advance payment toward the reimbursable costs. This advance payment 
serves two functions. First, it will screen out requestors who may not 
have the resources or the intent to reimburse the credit union for its 
costs of delivery. Second, it will streamline the member-to-member 
communication process and avoid unnecessary delay. A credit union that 
receives the advance payment must deliver the communication first and 
work out any details concerning reimbursement of actual costs after 
delivery.
    The amount of the advance payment depends on how the requestor 
wants the communication delivered. For deliveries by regular mail, the 
payment will be fifty cents times the number of eligible voters. For 
deliveries by e-mail the payment will be two hundred dollars regardless 
of the number of recipients. NCUA invites comment on whether these 
advance payment amounts are reasonable or whether they should be 
adjusted.
    A member that requests to communicate with other members will need 
to know the total number of credit union members eligible to vote on 
the proposed conversion so that the requestor can calculate the amount 
of the advance payment (for delivery by regular mail). The requestor 
will also need to know how many credit union members have agreed to 
receive electronic communications so that the requestor can decide 
about sending the communication to those members alone. The proposed 
Sec.  708a.4(b)(3) requires that the 90-day and 60-day notices include 
the number of credit union members eligible to vote on the conversion 
proposal and how many members have agreed to accept communications from 
the credit union in electronic form.\58\
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    \58\ NCUA will also use this information for another purpose. In 
at least one previous conversion to an MSB, it was not clear if the 
credit union had correctly identified all eligible voters and given 
them their opportunity to vote. NCUA will compare the number of 
eligible voters set forth in the 90-day notice with the number of 
members the credit union has identified in past call reports to 
ensure that the count is accurate and that every member eligible to 
vote on the conversion proposal is provided the opportunity to do 
so.
---------------------------------------------------------------------------

    The proposed member communication must be conversion-related and 
proper. Improper communications include communications that are 
impracticable to deliver, relate to personal gain or grievance, or are 
otherwise false or misleading with respect to any material fact.
    NCUA is concerned that a credit union and a requesting member may 
not be able to agree on whether a particular communication is proper 
and, accordingly, the proposed rule contains a procedure for resolving 
disputes. If a credit union believes that a particular communication is 
not proper, it must forward that communication to the Regional Director 
within seven days of receipt. The credit union must include with its 
transmittal letter a statement as to why it believes the communication 
is not proper and a recommendation for modifying the communication, if 
possible, to make it proper. The Regional Director will review the 
communication and respond to the credit union within seven days with a 
determination on the propriety of the communication. If necessary, the 
Regional Director will coordinate with the requesting member. After 
completion of the Regional Director's review, the credit union must 
mail or e-mail the material to the members if directed by the Regional 
Director.
    NCUA intends this timeline to allow members sufficient time to 
prepare their desired communications, provide them to the credit union, 
obtain resolution of any disputes, and have the communications 
delivered before the 30-day notice and the ballot. Specifically, in the 
most time-sensitive situation, a member will wait the full 35 days 
after the 90-day notice to deliver a communication to the credit union, 
the credit union will challenge it as improper and deliver it to NCUA a 
full seven days after that, and NCUA will then return the communication 
to the credit union to with instructions to deliver the communication, 
with any necessary modifications, seven days after that. This still 
leaves the credit union with at least eleven days to deliver the member 
communication to other members before delivery of the 30-day notice. If 
a credit union cannot forward a member communication to other members 
for receipt before the date they receive the 30-day notice and 
associated ballot, the proposed rule requires the credit union to 
postpone mailing the 30-day notice until members receive the 
communication. If a credit union postpones the mailing of the 30-day 
notice, it must also postpone the special meeting by the same number of 
days.

Member Communications: Regulations Affecting Other Financial 
Institutions

    Generally, in a conversion from an MSB to the stock form of 
ownership, both the MSB and its depositors may engage in proxy 
solicitations for the meeting to vote on the plan of conversion. In 
that context, OTS requires the MSB to mail a depositor's proxy 
solicitation under conditions similar to those in Sec.  708a.4(f) of 
the proposed rule. OTS also regulates how quickly the mailing must 
occur and the information that may be in the proxy solicitation. 12 CFR 
563b.280, 563b.285.
    OTS regulations also establish general procedures for communication 
between depositors of an FMSB that are independent of the conversion 
context. 12 CFR 544.8. For example, OTS requires an FMSB to forward 
depositor communications to other depositors if the requesting 
depositor agrees to defray the costs and the communication is not

[[Page 36958]]

``improper.'' The NCUA Board has patterned parts of its proposed Sec.  
708a.4(f) after Sec.  544.8 of the OTS rule, including the scope of an 
improper communication.
    NCUA solicits comments on this proposed method of member-to-member 
communication. NCUA specifically requests comment on whether NCUA 
should apply this method to all member communications, not just those 
communications made in the context of a pending conversion to an MSB. 
In that regard, commenters should be aware that while NCUA regulations 
and FCU bylaws do not currently address member-to-member 
communications, if the state corporation law where the FCU is located 
requires that a corporation facilitate shareholder-to-shareholder 
communications, the FCU would be bound to follow such a requirement for 
their member communications. See the discussion of proposed Sec.  
708a.12 in the Section-by-Section Analysis below.

Member Communications: Alternative Approaches

    NCUA also solicits comment on whether there may be other, better 
alternatives for facilitating communication among members than the 
procedure outlined in proposed Sec.  708a.4(f).
    For example, in addition to the procedures outlined in proposed 
Sec.  708a.4(f), should members also be allowed to request that a 
communication be sent electronically to those members who have agreed 
to receive communications electronically and have the communication 
sent by regular mail to those members who are eligible to vote that 
have not agreed to accept communications electronically? The Board 
seeks additional information on the difficulties faced by a credit 
union to organize this multiple-method communication under the 
timelines prescribed for delivering the member communications.
    Another alternative might be to permit members to ask the 
converting credit union to send other members the requestor's contact 
information only. That is, the converting institution would mail to its 
members the name and contact information (e.g., website or e-mail 
address) of requesting members, along with a statement that the 
requestor wishes to discuss the conversion and an indication whether 
the requestor generally supports, opposes, or is neutral on the 
conversion. A second alternative would be to require members desiring 
to make substantive statements to other members to prepare the mailing 
materials themselves, including packaging and sealing the envelopes and 
affixing the requisite postage. The converting credit union would then 
simply attach the address labels and mail the materials. Both of these 
alternatives have the potential advantage that they would not require a 
determination as to the accuracy of substantive communications made by 
the requesting member. A third alternative would be not to have a 
special procedure but to defer to general state corporate law for 
member access to membership mailing lists, as recognized in the 
proposed Sec.  708a.12. NCUA also solicits comment on whether any of 
these alternative approaches, alone or in combination, are better for 
facilitating member contact than the procedures outlined in proposed 
Sec.  708a.4(f). NCUA also solicits comment on any other alternatives 
not mentioned here.

Electronic Voting

    The current rule requires converting credit unions to accept 
ballots either by mail or in-person. NCUA is considering amending the 
rule to permit credit unions, if they wish, to accept member ballots 
electronically. NCUA solicits comment on this option.

708a.5 Notice to NCUA

    The current Sec.  708a.5 requires that converting credit unions 
notify NCUA of the intent to convert within 90 days of the member vote. 
The credit union must provide NCUA with copies of the notice and 
material it has or will send to the members. State-chartered credit 
unions must provide NCUA with certain information about the laws and 
regulations it intends to follow with regard to the conversion. The 
current Sec.  708a.5 also permits a credit union, if it chooses, to 
provide notice to NCUA more than 90 days before the member vote, and to 
request a preliminary determination as to the proposed methods and 
procedures of the conversion.

Certification Requirement

    The proposal amends Sec.  708a.5 to require a board of directors to 
submit to NCUA a certification of its support for the conversion 
proposal and plan. Each director who votes in favor of the conversion 
proposal must sign the certification.
    The certification must include a statement that each director 
signing the certification supports the proposed conversion and believes 
that the proposed conversion is in the best interests of the members of 
the credit union. It must include a description of all materials 
submitted to the Regional Director with the certification and a 
statement that these materials are true, correct, current, and complete 
as of the date of submission. Finally, it must include an 
acknowledgement that federal law prohibits any misrepresentations or 
omissions of material facts in connection with the conversion. 18 
U.S.C. 1001.
    The NCUA believes it vitally important that the directors of a 
converting credit union understand and acknowledge their fiduciary 
duties. NCUA intends the proposed certification requirement to impress 
upon directors their responsibility to conduct a thorough and complete 
analysis of the proposed conversion transaction and to make a decision 
in the best interests of the members.

Certification: Regulations Affecting Other Financial Institutions

    At least three states require some form of certification during the 
conversion process. Hawaii requires that an institution submit the 
certification of two executive officers that the meeting and vote were 
valid; a copy of the conversion resolution that is certified to be true 
and correct; or certification that the institution has complied with 
all federal laws and regulations relating to conversion if applicable. 
Haw. Rev. Stat. 412:3-608(b), see also 606, 607. Michigan and Vermont 
require that a converting credit union file certified copies of all 
records of all conversion-related proceedings held by the governing 
body and the credit union's members. Mich. Comp. Laws 490.373(1)(i); 
2005 Vt. Acts & Resolves 16. The OTS requires directors and other 
management officials associated with the de novo chartering of an MSB 
to file a Biographical and Financial Report which includes a 
certification. 12 CFR 543.3(e). The OTS also requires that, after the 
depositors' meeting on a conversion to a stock bank, the MSB must file 
a certified copy of each adopted conversion resolution, data regarding 
the votes cast and a legal opinion that the MSB conducted the 
depositors' meeting in compliance with all applicable state or federal 
laws and rules. 12 CFR 563b.240(a). NCUA's proposed certification 
requirement is similar to, but less onerous than, these states' and the 
OTS'' requirements.
    Section 708a.5(b) retains a credit union's right to request NCUA 
make a preliminary determination regarding the intended methods and 
procedures applicable to the membership vote. The proposal expands that 
right to allow a credit union also to request review of all of its 
proposed notices, including the public notice it intends to publish 
before the board of directors votes on a conversion proposal. Under the

[[Page 36959]]

proposal, the NCUA Regional Director will make a determination on the 
request within 30 calendar days unless more time is required to review 
the submission or obtain additional information.

708a.6 Membership Approval of a Proposal To Convert

    The current Sec.  708a.6 provides that the board of the converting 
credit union must certify the results of the member vote to NCUA within 
ten days of the member vote. The board must also certify that the 
materials actually provided to the members were the same as those 
previously submitted to NCUA or provide an explanation for any 
differences.
    As noted previously, the proposed Sec.  708a.6 includes the 
requirements found in the current Sec.  708a.4 that: (1) Members must 
approve the proposal by affirmative vote of the majority of members who 
vote; and (2) the vote must be by secret ballot conducted by an 
independent entity.
    Proposed Sec.  708a.6(b) requires the board of directors to set a 
date to determine member eligibility to vote. The voting date of record 
must be at least one hundred twenty days before the board of director's 
publishes the Sec.  708a.3 notice of intent to consider conversion. 
NCUA is aware that professional depositors may attempt to join a credit 
union to profit from a conversion to a mutual savings bank. NCUA 
believes this proposed one hundred twenty day cut-off will help deter 
such activity and ensure that credit union members who are not 
professional depositors have an undiluted voice in the conversion 
decision.
    The OTS rule governing conversions from MSBs to stock form states 
that voter eligibility is determined by a voting record date not more 
than 60 days nor less than 20 days before the depositor meeting. 12 CFR 
563b.230. State law applies if a state-chartered MSB is converting. Id. 
The OTS rule is comparable to the provision for fixing the record date 
in the model MSB bylaws, which sets the record date for those eligible 
to receive notice or vote at not more than 60 days or less than 10 days 
before the date depositors are to take action. OTS Form 1577, OTS 
Applications Handbook, Section 410.29 (April 2001). While NCUA's 
proposed restriction on the voting record date is somewhat different 
than that set by OTS, NCUA believes it is reasonable.

708a.7 Certification of Vote on Conversion Proposal

    Proposed Sec.  708a.7 retains the requirement, currently located in 
Sec.  708a.6, that the board of directors certify the results of the 
membership vote to NCUA. The proposal does not make any changes to this 
requirement.

708a.8 NCUA Oversight of Methods and Procedures of Membership Vote

    The current 708a.7 provides that the Regional Director will issue a 
determination to approve or disapprove a credit union's methods and 
procedures for the membership vote within 10 calendar days of the 
receipt of the credit union's certification of the member vote.
    The proposal lengthens this time period to 30 calendar days and 
relocates this provision from Sec.  708a.7 to Sec.  708a.8. Based on 
past NCUA experience, 10 days does not provide adequate time for the 
Regional Director to review all of the written materials provided to 
members, particularly if the credit union amended them in the process, 
and verify all of the information necessary to make the required 
determination.
    Section 708a.8(d) of the proposal also contains a new provision 
that permits a credit union dissatisfied with a determination issued by 
the Regional Director to appeal to the NCUA Board for a final agency 
determination. Any appeal must be filed by the credit union within 30 
calendar days after receipt of the Regional Director's determination.

708a.9 Other Regulatory Oversight of Methods and Procedures of 
Membership Vote

    Proposed Sec.  708a.9 retains the requirement, currently located in 
Sec.  708a.8, that the entity that will regulate the credit union 
following conversion must verify the vote and may direct that a new 
vote be taken. The proposal does not make any changes to the 
requirement or its language.

708a.10 Completion of Conversion

    This section retains the provisions in the current Sec.  708a.9 
stating that, once the credit union has received the approvals required 
in the current Sec. Sec.  708a.7 and Sec.  708a.8, it may complete the 
conversion. NCUA will then cancel its account insurance and, if it is a 
federal credit union, its charter.
    The proposal amends the current rule to require a credit union to 
complete the conversion transaction within one year of the date of 
receipt of its approval from NCUA under proposed Sec.  708a.8. NCUA 
believes in the normal course of events one year is more than enough 
time to complete a conversion, and, if it is not finalized in that 
time, problems may arise. For example, the credit union examination 
process, which involves detailed planning and resource allocation 
months in advance, becomes disrupted and uncertain, while the financial 
condition of a credit union may change rapidly. In addition, the 
composition and views of credit union membership change over time. At 
some point, the membership vote to approve conversion may no longer 
represent the views of the membership and so the vote becomes stale. 
Additionally, those individuals who join the credit union during this 
time period do not know if they are really joining a credit union or 
are becoming members of a potential bank. Accordingly, if the 
conversion process is not completed within a year, the process should 
end. The credit union should return to its normal examination cycle 
and, if the board of directors still desires to convert, it should 
reinitiate the conversion process at an appropriate time.

Conversion Completion: Regulations Affecting Other Financial 
Institutions

    NCUA notes that the OTS rule for conversions from MSBs to stock 
form also includes a regulatory completion date. 12 CFR 563b.420. An 
MSB must complete its conversion not later than 24 months from the date 
of the membership's approval of the conversion. Id. While the 
completion time frame under the NCUA proposal is shorter than the OTS 
completion time, an MSB to stock conversion needs the additional time. 
Before an MSB can complete its stock conversion, there are numerous 
prerequisites. For instance, the OTS must first approve of the 
conversion, authorize the MSB's proxy statement, and declare the 
offering statement effective. Then the MSB must distribute order forms 
to eligible account holders and voting members. 12 CFR 563b.325(a), 
563b.335.

708a.11 Limit on Compensation of Officials

    Proposed Sec.  708a.11 retains the limit on compensation for 
officials currently found in Sec.  708a.10. The proposal does not make 
any modifications to this limit.

708.12. Member Access to Books and Records

    The proposed rule includes a new provision on member access to the 
books and records of the converting credit union. The proposal states 
that members may request access to the books and records of a 
converting credit union for purposes such as facilitating contact with 
other members about the

[[Page 36960]]

conversion or obtaining copies of documents related to the due 
diligence performed by the credit union's board of directors. The 
proposal also states that federal credit unions will grant access under 
the same terms and conditions that a state-chartered for-profit 
corporation in the state in which the federal credit union is located 
must grant access to its shareholders.
    This is not new law. NCUA's longstanding opinion is that the 
internal governance of federal credit unions, to the extent a matter is 
not addressed in federal statutes, regulations, or bylaws, should be 
determined by reference to the law governing for-profit corporations in 
the state in which the federal credit union is located. See NCUA OGC 
Legal Opinion 96-0541 (June 14, 1996). NCUA believes it is helpful to 
restate this position explicitly in part 708a.
    Member access to the books and records of a state-chartered credit 
union is determined by applicable state law.

708a.13 Voting Guidelines.

    Section 708a.11 of the current conversion rule contains some 
guidelines to assist converting credit unions in conducting their 
member vote. The current guidelines discuss the interplay between state 
and federal law affecting the vote, the determination of who is 
eligible to vote, and the time and place of the special meeting at 
which the members will cast their ballots.
    The proposal moves the voting guidelines to Sec.  708a.13. It 
retains the existing guidance and adds additional guidance on the use 
of voting incentives. It also renumbers the paragraphs.
    In the past, some converting credit unions have offered incentives 
to members, such as entry to a prize raffle, to encourage participation 
in the conversion vote. Credit unions must exercise care in the design 
and execution of such incentives. The proposed voting guidelines state 
that credit union should ensure that the incentive complies with all 
applicable state, federal, and local laws; that the incentive should 
not be unreasonable in size; and that all materials promoting the 
incentive to members should make clear that they have an equal 
opportunity to participate in the incentive program regardless of 
whether they vote for or against the conversion.
    NCUA has received some informal complaints in past MSB conversions 
that these voting incentives distract voters from the issues 
surrounding the conversion. Some have even suggested that NCUA prohibit 
these incentives. At this time, NCUA is not inclined to prohibit these 
incentives. NCUA invites commenters to provide specific information on 
whether and how such incentives detract from the fairness of the vote.

C. Request for Public Comment

    NCUA's goal is to promulgate clear and understandable regulations 
that impose minimal regulatory burden. We request public comments on 
whether the proposed rule is understandable and minimally intrusive. We 
also seek specific suggestions to improve the content of the rule.

D. 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 proposed rule amends the procedures an 
insured credit union must follow to convert to an MSB. Based on past 
experience with MSB conversions, NCUA does not anticipate any future 
conversions by credit unions with less than ten million dollars in 
assets. Accordingly, the proposed 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 Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), NCUA has 
submitted a copy of this proposed regulation 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.
    The current rule requires an insured credit union intending to 
convert to a mutual savings bank or savings association to provide 
notice and disclosure of its intent to convert to its members and NCUA 
and requires the credit union to provide additional information to NCUA 
at various points in the conversion process. These collection 
requirements are necessary to insure safety and soundness in the credit 
union industry and protect the interests of credit union members in the 
charter conversion context. NCUA previously estimated that the ten 
credit unions would convert each year and that the burden associated 
with the collection would amount to no more than 20 hours per credit 
union, for an aggregate burden of 200 burden hours annually.
    The proposed modifications to part 708a will help ensure that 
credit union members receive sufficient information to enable them to 
make an informed decision regarding a vote on conversion to a mutual 
savings bank and will promote the likelihood the vote will be conducted 
in a fair and legal manner. The proposed modifications will also help 
ensure that NCUA has sufficient information to fulfill its statutory 
obligation to administer the member vote on conversion.
    To achieve these goals, the proposal increases the collection 
requirements for converting credit unions. Specifically, the credit 
union must collect, post, and retain the comments of members sent to 
directors before directors vote on a conversion proposal. NCUA 
estimates that up to one hundred members may comment on a conversion 
proposal with an associated burden of 50 hours per converting credit 
union. NCUA also estimates that, after a credit union's board votes to 
adopt a conversion proposal, perhaps five members will request to 
communicate with other members through the credit union. Although the 
expense of this request is the responsibility of the requesting member, 
and so will keep the number of such requests down, NCUA estimates that 
the associated burden at the credit union for each request is about 50 
hours, for an aggregate of about 250 hours for each converting credit 
union. The total burden for each credit union would then be 20 hours 
from the requirements retained from the original rule, plus an 
additional 300 hours from the proposed changes, for a total of 320 
hours.
    Based on recent history, NCUA now estimates that about three credit 
unions will seek to convert per year. Accordingly, the aggregate total 
collection burden is three times 320, or 960 hours, an increase of 
about 760 hours over the current rule.
    Organizations and individuals that wish to submit comments on this 
information collection requirement should direct them to the Office of 
Information and Regulatory Affairs, OMB, Attn: Mark Menchik, Room 
10226, New Executive Office Building, Washington, DC 20503, with a copy 
to Mary Rupp, Secretary of the Board, National Credit Union 
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428.

[[Page 36961]]

    The NCUA considers comments by the public on this proposed 
collection of information in:
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the NCUA, 
including whether the information will have a practical use;
     Evaluating the accuracy of the NCUA's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology; e.g., permitting 
electronic submission of responses.
    The Paperwork Reduction Act requires OMB to make a decision 
concerning the collection of information contained in the proposed 
regulation between 30 and 60 days after publication of this document in 
the Federal Register. Therefore, a comment to OMB is best assured of 
having its full effect if OMB receives it within 30 days of 
publication. This does not affect the deadline for the public to 
comment to the NCUA on the proposed regulation.

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, Public Law 105-277, 112 
Stat. 2681 (1998).

List of Subjects in 12 CFR Part 708a

    Charter conversions, Credit unions.

    By the National Credit Union Administration Board on June 22, 
2006.
Mary F. Rupp,
Secretary of the Board.

    For the reasons stated above, NCUA proposes to revise 12 CFR part 
708a as follows:

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

Sec.
708a.1 Definitions.
708a.2 Authority to convert.
708a.3 Board of directors' approval and members' opportunity to 
comment.
708a.4 Disclosures and communications to members.
708a.5 Notice to NCUA.
708a.6 Membership approval of a proposal to convert.
708a.7 Certification of vote on conversion proposal.
708a.8 NCUA oversight of methods and procedures of membership vote.
708a.9 Other regulatory oversight of methods and procedures of 
membership vote.
708a.10 Completion of conversion.
708a.11 Limit on compensation of officials.
708a.12 Member access to books and records.
708a.13 Voting guidelines.

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


Sec.  708a.1  Definitions.

    As used in this part:
    Clear and conspicuous means text that is in bold type in a font at 
least as large as that used for headings, but in no event smaller than 
12 point.
    Credit union has the same meaning as insured credit union in 
section 101 of the Federal Credit Union Act.
    Federal banking agencies have the same meaning as in section 3 of 
the Federal Deposit Insurance Act.
    Mutual savings bank and savings association have the same meaning 
as in section 3 of the Federal Deposit Insurance Act.
    Regional director means the director of the NCUA regional office 
for the region where a natural person credit union's main office is 
located. For corporate credit unions, regional director means the 
director of NCUA's Office of Corporate Credit Unions.
    Senior management official means a chief executive officer, an 
assistant chief executive officer, a chief financial officer, and any 
other senior executive officer as defined by the appropriate federal 
banking agencies pursuant to section 32(f) of the Federal Deposit 
Insurance Act, 12 U.S.C. 1831i(f).


Sec.  708a.2  Authority to convert.

    A credit union, with the approval of its members, may convert to a 
mutual savings bank or a savings association that is in mutual form 
without the prior approval of the NCUA, subject to applicable law 
governing mutual savings banks and savings associations and the other 
requirements of this part.


Sec.  708a.3  Board of directors' approval and members' opportunity to 
comment.

    (a) A credit union's board of directors must comply with the 
following notice requirements before voting on a proposal to convert.
    (1) No later than 30 days before a board of directors votes on a 
proposal to convert, it must publish a notice in a general circulation 
newspaper, or in multiple newspapers if necessary, serving all areas 
where the credit union has an office, branch, or service center. It 
must also post the notice in a clear and conspicuous fashion in the 
credit union's home office and branch offices and on the credit union's 
Web site, if it has one. If the notice is not on the home page of the 
Web site, the home page must have a clear and conspicuous link, visible 
on a standard monitor without scrolling, to the notice.
    (2) The public notice must include the following:

    (i) The name and address of the credit union;
    (ii) The type of institution to which the credit union's board 
is considering a proposal to convert;
    (iii) A brief statement of why the board is considering the 
conversion and the major positive and negative effects of the 
proposed conversion;
    (iv) A statement that directs members to submit any comments on 
the proposal to the credit union's board of directors by regular 
mail, electronic mail, or facsimile;
    (v) The date on which the board plans to vote on the proposal 
and the date by which members must submit their comments for 
consideration, which may not be more than 5 days before the board 
vote;
    (vi) The street address, electronic mail address, and facsimile 
number of the credit union where members may submit comments and the 
Web site address where the public and members may view others' 
comments; and
    (vii) A statement that, in the event the board approves the 
proposal to convert, the proposal will be submitted to the 
membership of the credit union for a vote following a notice period 
that is no shorter than 90 days.

    (3) The board of directors must approve publication of the notice.
    (b) The credit union must collect member comments and retain copies 
at

[[Page 36962]]

the credit union's main office until the conversion process is 
completed. If the credit union maintains a Web site, the credit union 
must post the comments in a clear and conspicuous fashion. If the 
credit union believes a particular member submission is not proper for 
posting, it will provide that submission to the Regional Director for 
review as described in Sec.  708a.4(f)(5).
    (c) The board of directors may vote on the conversion proposal only 
after reviewing and considering all member comments. The conversion 
proposal may only be approved by an affirmative vote of a majority of 
board members who have determined the conversion is in the best 
interests of the members. If approved, the board of directors must set 
a date for a vote on the proposal by the members of the credit union.


Sec.  708a.4  Disclosures and communications to members.

    (a) After the board of directors has complied with Sec.  708a.3 and 
approves a conversion proposal, the credit union must provide written 
notice of its intent to convert to each member who is eligible to vote 
on the conversion. The notice to members must be submitted 90 calendar 
days, 60 calendar days, and 30 calendar days before the date of the 
membership vote on the conversion. A ballot must be included in the 
same envelope as the 30-day notice and only in the 30-day notice. A 
converting credit union may not distribute ballots with either the 90-
day or 60-day notice, in any other written communications, or in person 
before the 30-day notice is sent.
    (b)(1) The notice to members must adequately describe the purpose 
and subject matter of the vote to be taken at the special meeting or by 
submission of the written ballot. The notice must clearly inform 
members that they may vote at the special meeting or by submitting the 
written ballot. The notice must state the date, time, and place of the 
meeting.
    (2) The notices that are submitted 90 and 60 days before the 
membership vote on the conversion must state in a clear and conspicuous 
fashion that a written ballot will be mailed together with another 
notice 30 days before the date of the membership vote on conversion. 
The notice submitted 30 days before the membership vote on the 
conversion must state in a clear and conspicuous fashion that a written 
ballot is included in the same envelope as the 30-day notice materials.
    (3) For purposes of facilitating the member-to-member contact 
described in paragraph (f) of this section, the 90-day and 60-day 
notices must indicate the number of credit union members eligible to 
vote on the conversion proposal and how many members have agreed to 
accept communications from the credit union in electronic form.
    (4) The member ballot must include:

    (i) A brief description of the proposal (e.g., ``Proposal: 
Approval of the Plan Charter Conversion by which (insert name of 
credit union) will convert its charter to that of a federal mutual 
savings bank.'');
    (ii) Two blocks marked respectively as ``FOR'' and ``AGAINST;'' 
and
    (iii) The following language: ``A vote FOR the proposal means 
that the credit union will become a bank. A vote AGAINST the 
proposal means that the credit union will remain a credit union.'' 
This language must be displayed in a clear and conspicuous fashion 
immediately beneath the FOR and AGAINST blocks.

    (5) The ballot may also include voting instructions and the 
recommendation of the board of directors (i.e., ``Your Board of 
Directors recommends a vote FOR the Plan of Conversion'') but may not 
include any further information without the prior written approval of 
the Regional Director.
    (c) An adequate description of the purpose and subject matter of 
the member vote on conversion, as required by paragraph (b) of this 
section, must include:
    (1) A clear and conspicuous 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;
    (2) A clear and conspicuous disclosure of how a conversion from a 
credit union to a mutual savings bank will affect members' voting 
rights and if the mutual savings bank intends to base voting rights on 
account balances;
    (3) A clear and conspicuous disclosure of any conversion-related 
economic benefit a director or senior management official will or 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 or mutual holding company 
structure. The explanation of stock-related benefits must include a 
comparison of the opportunities to acquire stock available to officials 
and employees with those opportunities available to the general 
membership;
    (4) A clear and conspicuous disclosure of how the conversion from a 
credit union to a mutual savings bank will affect the institution's 
ability to make non-housing-related consumer loans because of a mutual 
savings bank's obligations to satisfy certain lending requirements as a 
mutual savings bank. This disclosure should specify possible reductions 
in some kinds of loans to members; and
    (5) An affirmative statement that, at the time of conversion to a 
mutual savings bank, the credit union does or does not intend to 
convert to a stock institution or a mutual holding company structure.
    (d)(1) A converting credit union must provide the following 
disclosures in a clear and conspicuous fashion with the 90-, 60-, and 
30-day notices its sends to its members regarding the conversion:

------------------------------------------------------------------------
 
---------------------------------------------------------------------------
             IMPORTANT REGULATORY DISCLOSURE ABOUT YOUR VOTE
 
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. LOSS OF CREDIT UNION MEMBERSHIP. A vote ``FOR'' the proposed
 conversion means your credit union will become a mutual savings bank. A
 vote ``AGAINST'' the proposed conversion means your credit union will
 remain a credit union.
 
2. RATES ON LOANS AND SAVINGS. If your credit union converts to a bank,
 you may experience changes in your loan and savings rates. Available
 historic data indicates that, for most loan products, credit unions on
 average charge lower rates than banks. For most savings products,
 credit unions on average pay higher rates than banks.
 
3. POTENTIAL PROFITS BY OFFICERS AND DIRECTORS. 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 structure. In such a
 scenario, the officers and directors of the institution often profit by
 obtaining stock in excess of that available to other members.
------------------------------------------------------------------------

    (2) This text must be placed in a box, must be the only text on the 
front side of a single piece of paper, and must be placed so that the 
member will see the text after reading the credit union's cover letter 
but before reading any other

[[Page 36963]]

part of the member notice. The back side of the paper must be blank. A 
converting credit union may modify this text only with the prior 
written consent of the Regional Director and, in the case of a state-
chartered credit union, the appropriate state regulatory agency.
    (e) All written communications from a converting credit union to 
its members regarding the conversion must be written in a manner that 
is simple and easy to understand. Simple and easy to understand means 
the communications are written in plain language designed to be 
understood by ordinary consumers and use clear and concise sentences, 
paragraphs, and sections. For purposes of this part, examples of 
factors to be considered in determining whether a communication is in 
plain language and uses clear and concise sentences, paragraphs and 
sections include the use of short explanatory sentences; use of 
definite, concrete, everyday words; use of active voice; avoidance of 
multiple negatives; avoidance of legal and technical business 
terminology; avoidance of explanations that are imprecise and 
reasonably subject to different interpretations; and use of language 
that is not misleading.
    (f)(1) A converting credit union must mail or e-mail a requesting 
member's proper conversion-related materials to other members eligible 
to vote within seven days of receiving such a request if:

    (i) A credit union's board of directors has adopted a proposal 
to convert;
    (ii) A member makes a written request that the credit union mail 
or e-mail materials for the member;
    (iii) The request is received by the credit union no later than 
35 days after it sends out the 90-day member notice; and
    (iv) The requesting member agrees to reimburse the credit union 
for the reasonable expenses of mailing or e-mailing the materials 
and also provides the credit union with an appropriate advance 
payment.

    (2) A member's request must indicate if the member wants the 
materials mailed or e-mailed. If a member requests that the materials 
be mailed, the credit union will mail the materials to all eligible 
voters. If a member requests the materials be e-mailed, the credit 
union will e-mail the materials to all members who have agreed to 
accept communications electronically from the credit union. The subject 
line of the e-mail will be ``Proposed Credit Union Conversion--Views of 
Member (insert member name).''
    (3)(i) A converting credit union may, at its option, include the 
following statement with a member's material:

    On (date), the board of directors of (name of converting credit 
union) adopted a proposal to convert from a credit union to a mutual 
savings bank. Credit union members who wish to express their 
opinions about the proposed conversion to other members may provide 
those opinions to (name of credit union). By law, the credit union, 
at the requesting members' expense, must then send those opinions to 
the other members. The attached document represents the opinion of a 
member of this credit union. This opinion is a personal opinion and 
does not necessarily reflect the views of the management or 
directors of the credit union.

    (ii) A converting credit union may not add anything other than this 
statement to a member's material without the prior approval of the 
Regional Director.
    (4) The term ``proper conversion-related materials'' does not 
include materials that:

    (i) Due to size or similar reasons are impracticable to mail or 
e-mail;
    (ii) Are false or misleading with respect to any material fact;
    (iii) Omit a material fact necessary to make the statements in 
the material not false or misleading;
    (iv) Relate to a personal claim or a personal grievance, or 
solicit personal gain or business advantage by or on behalf of any 
party;
    (v) Relate to any matter, including a general economic, 
political, racial, religious, social, or similar cause, that is not 
significantly related to the proposed conversion;
    (vi) Directly or indirectly and without expressed factual 
foundation impugn a person's character, integrity, or reputation;
    (vii) Directly or indirectly and without expressed factual 
foundation make charges concerning improper, illegal, or immoral 
conduct; or
    (viii) Directly or indirectly and without expressed factual 
foundation make statements impugning the stability and soundness of 
the credit union.

    (5) If a converting credit union believes some or all of a member's 
request is not proper it must submit the member materials to the 
Regional Director within seven days of receipt. The credit union must 
include with its transmittal letter a specific statement of why the 
materials are not proper and a specific recommendation for how the 
materials should be modified, if possible, to make them proper. The 
Regional Director will review the communication, communicate with the 
requesting member, and respond to the credit union within seven days 
with a determination on the propriety of the materials. The credit 
union must then immediately mail or e-mail the material to the members 
if so directed by NCUA.
    (6) A credit union must deliver to its members all materials that 
meet the requirements of Sec.  708a.4(f) on or before the date the 
members receive the 30-day notice and associated ballot. If a credit 
union cannot meet this delivery requirement, it must postpone mailing 
the 30-day notice until it can deliver the member materials. If a 
credit union postpones the mailing of the 30-day notice, it must also 
postpone the special meeting by the same number of days.
    (7) The term ``appropriate advance payment'' means:

    (i) For requests to mail materials to all eligible voters, a 
payment in the amount of fifty cents times the number of eligible 
voters, and
    (ii) For requests to e-mail materials only to members that have 
agreed to accept electronic communications, a payment in the amount 
of two hundred dollars.

    (8) If a credit union posts conversion-related information or 
material on its Web site, then it must simultaneously make a portion of 
its Web site available free of charge to its members to post and share 
their opinions on the conversion. A link to the portion of the Web site 
available to members to post their views on the conversion must be 
marked ``Members: Share your views on the proposed conversion and see 
other members views'' and the link must also be visible on all pages on 
which the credit union posts its own conversion-related information or 
material, as well as on the credit union's homepage. If a credit union 
believes a particular member submission is not proper for posting, it 
will provide that submission to the Regional Director for review as 
described in paragraph (f)(5) of this section.
    (9) A converting credit union must inform members with the 90-day 
notice that if they wish to provide their opinions about the proposed 
conversion to other members they can submit their opinions in writing 
to the credit union no later than 35 days from the date of the notice 
and the credit union will forward those opinions to other members. The 
90-day notice will provide a contact at the credit union for delivery 
of communications, will explain that members must agree to reimburse 
the credit union's costs of transmitting the communication including 
providing an advance payment, and will refer members to this section of 
NCUA's rules for further information about the communication process. 
The credit union, at its option, may include additional factual 
information about the communication process with its 90-day notice.


Sec.  708a.5  Notice to NCUA.

    (a) If a converting credit union's board of directors approves a 
proposal to convert, it must provide the Regional Director with notice 
of its intent to convert during the 90 calendar day

[[Page 36964]]

period preceding the date of the membership vote on the conversion.
    (1) A credit union must give notice to the Regional Director of its 
intent to convert by providing a letter describing the material 
features of the conversion or a copy of the filing the credit union has 
made or intends to make with another federal or state regulatory agency 
in which the credit union seeks that agency's approval of the 
conversion. A credit union must include with the notice to the Regional 
Director copies of the notices the credit union has provided or intends 
to provide to members under Sec. Sec.  708a.3 and 708a.4. The credit 
union must also include a copy of the ballot form and all written 
materials the credit union has distributed or intends to distribute to 
members. The term ``written materials'' includes written documentation 
or information of any sort, including electronic communications posted 
on a Web site or transmitted by electronic mail.
    (2) As part of its notice to NCUA of intent to convert, the credit 
union's board of directors must provide the Regional Director with a 
certification of its support for the conversion proposal and plan. Each 
director who voted in favor of the conversion proposal must sign the 
certification. The certification must contain the following:


    (i) A statement that each director signing the certification 
supports the proposed conversion and believes the proposed 
conversion is in the best interests of the members of the credit 
union;
    (ii) A description of all materials submitted to the Regional 
Director with the notice and certification;
    (iii) A statement that each board member signing the 
certification has examined all these materials carefully and these 
materials are true, correct, current, and complete as of the date of 
submission; and
    (iv) An acknowledgement that federal law (18 U.S.C. 1001) 
prohibits any misrepresentations or omissions of material facts, or 
false, fictitious or fraudulent statements or representations made 
with respect to the certification or the materials provided to the 
Regional Director or any other documents or information provided to 
the members of the credit union or NCUA in connection with the 
conversion.

    (3) A state-chartered credit union must state as part of the notice 
required by Sec.  708a.5(a) if its state chartering law permits it to 
convert to a mutual savings bank and provide the specific legal 
citation. A state-chartered credit union will remain subject to any 
state law requirements for conversion that are more stringent than 
those this part 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 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:

    (i) 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; and
    (ii) 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.

    (b) If it chooses, a credit union may seek a preliminary 
determination from the Regional Director regarding any of the notices 
required under this part and its proposed methods and procedures 
applicable to the membership conversion vote. The Regional Director 
will make a preliminary determination regarding the notices and methods 
and procedures applicable to the membership vote within 30 calendar 
days of receipt of a credit union's request for review unless the 
Regional Director extends the period as necessary to request additional 
information or review a credit union's submission. A credit union's 
prior submission of any notice or proposed voting procedures does not 
relieve the credit union of its obligation to certify the results of 
the membership vote required by Sec.  708a.6 or eliminate the right of 
the Regional Director to disapprove the actual methods and procedures 
applicable to the membership vote if the credit union fails to conduct 
the membership vote in a fair and legal manner consistent with the 
Federal Credit Union Act and these rules.


Sec.  708a.6  Membership approval of a proposal to convert.

    (a) A proposal for conversion approved by a board of directors 
requires approval by a majority of the members who vote on the 
proposal.
    (b) The board of directors must set a voting record date to 
determine member voting eligibility that is at least one hundred twenty 
days before the publication of notice required in Sec.  708a.3.
    (c) A member may vote on a proposal to convert in person at a 
special meeting held on the date set for the vote or by written ballot 
filed by the member. 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 management official of the credit 
union or the immediate family members of any official or senior 
management official may have any ownership interest in or be employed 
by the independent entity.


Sec.  708a.7  Certification of vote on conversion proposal.

    (a) The board of directors of the converting credit union must 
certify the results of the membership vote to the Regional Director 
within 10 calendar days after the vote is taken.
    (b) The certification must also include a statement that the 
notice, ballot and other written materials provided to members were 
identical to those submitted to NCUA pursuant to Sec.  708a.5. If the 
board cannot certify this, the board must provide copies of any new or 
revised materials and an explanation of the reasons for any changes.


Sec.  708a.8  NCUA oversight of methods and procedures of membership 
vote.

    (a) The Regional Director will review the methods by which the 
membership vote was taken and the procedures applicable to the 
membership vote. The Regional Director will determine: If the notices 
and other communications to members were accurate, not misleading, and 
timely; the membership vote was conducted in a fair and legal manner; 
and the credit union has otherwise complied with part 708a.
    (b) After completion of this review, the Regional Director will 
issue a determination that the methods and procedures applicable to the 
membership vote are approved or disapproved. The Regional Director will 
issue this determination within 30 calendar days of receipt from the 
credit union of the certification of the result of the membership vote 
required under Sec.  708a.7 unless the Regional Director extends the 
period as necessary to request additional information or review the 
credit union's submission. Approval of the methods and procedures under 
this paragraph remains subject to a credit union fulfilling the 
requirements in Sec.  708a.10 for timely completion of the conversion.
    (c) If the Regional Director disapproves the methods by which the 
membership vote was taken or the procedures applicable to the 
membership vote, the Regional Director may direct that a new vote be 
taken.
    (d) A converting credit union may appeal the Regional Director's 
determination to the NCUA Board for a

[[Page 36965]]

final agency decision. The credit union must file the appeal within 30 
days after receipt of the Regional Director's determination. The NCUA 
Board will act on the appeal within 90 days of receipt.


Sec.  708a.9  Other regulatory oversight of methods and procedures of 
membership vote.

    The federal or state regulatory agency that will have jurisdiction 
over the financial institution after conversion must verify the 
membership vote and may direct that a new vote be taken, if it 
disapproves of the methods by which the membership vote was taken or 
the procedures applicable to the membership vote.


Sec.  708a.10  Completion of conversion.

    (a) After receipt of the approvals under Sec.  708a.8 and Sec.  
708a.9 the credit union may complete the conversion. The credit union 
must complete the conversion within one year of the date of receipt of 
NCUA approval under Sec.  708a.8. If a credit union fails to complete 
the conversion within one year the Director will disapprove of the 
methods and procedures. The credit union's board of directors must then 
adopt a new conversion proposal and solicit another member vote if it 
still desires to convert.
    (b) After notification by the board of directors of the mutual 
savings bank or mutual savings association that the conversion has been 
completed, the NCUA will cancel the insurance certificate of the credit 
union and, if applicable, the charter of a federal credit union.


Sec.  708a.11  Limit on compensation of officials.

    No director or senior management official of an insured credit 
union may receive any economic benefit in connection with the 
conversion of a credit union other than compensation and other benefits 
paid to directors or senior management officials of the converted 
institution in the ordinary course of business.


Sec.  708a.12  Member access to books and records.

    Members may request access to the books and records of a converting 
credit union for purposes of facilitating contact with other members 
about the conversion or obtaining copies of documents related to the 
due diligence performed by the credit union's board of directors. 
Federal credit unions will grant access under the same terms and 
conditions that a state-chartered for-profit corporation in the state 
in which the federal credit union is located must grant access to its 
shareholders.


Sec.  708a.13  Voting guidelines.

    A converting credit union must conduct its member vote on 
conversion in a fair and legal manner. NCUA provides the following 
guidelines as suggestions to help a credit union obtain a fair and 
legal vote and otherwise fulfill its regulatory obligations. These 
guidelines are not an exhaustive checklist and do not by themselves 
guarantee a fair and legal vote.
    (a) Applicability of state law. 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 may have substantive and procedural 
requirements that vary from federal law. For example, there may be 
different voting standards for approving a vote. While the Federal 
Credit Union Act 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.
    (b) Eligibility to vote. (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 
member 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 allowing 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 allowing 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, but 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.
    (c) Scheduling the special meeting. 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 wishing to 
attend, including 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.
    (d) Voting incentives. Some credit unions may wish to offer 
incentives to members, such as entry to a prize raffle, to encourage 
participation in the conversion vote. The credit union must exercise 
care in the design and execution of such incentives.
    (1) The credit union should ensure that the incentive complies with 
all applicable state, federal, and local laws.
    (2) The incentive should not be unreasonable in size. If the board 
desires to use such incentives, the cost of the incentive should be 
included in the directors' deliberations and

[[Page 36966]]

determination that the conversion is in the best interests of the 
credit union's members.
    (3) The credit union should ensure that the incentive is available 
to every member that votes regardless of how he or she votes. All of 
the credit union's materials promoting the incentive to the membership 
should make clear to the member that they have an equal opportunity to 
participate in the incentive program regardless of whether they vote 
for or against the conversion.

[FR Doc. 06-5728 Filed 6-27-06; 8:45 am]
BILLING CODE 7535-01-P