[Federal Register Volume 71, Number 246 (Friday, December 22, 2006)]
[Rules and Regulations]
[Pages 77150-77172]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-21661]



[[Page 77149]]

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Part III





National Credit Union Administration





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12 CFR Part 708a



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

  Federal Register / Vol. 71, No. 246 / Friday, December 22, 2006 / 
Rules and Regulations  

[[Page 77150]]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 708a

RIN 3133-AD16


Conversion of Insured Credit Unions to Mutual Savings Banks

AGENCY: National Credit Union Administration.

ACTION: Final rule.

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SUMMARY: The National Credit Union Administration (NCUA) is issuing 
final revisions to its rules regarding the conversion of insured credit 
unions to mutual savings banks or mutual savings associations. The 
final rule improves the information available to members and the board 
of directors as they consider a possible conversion. The final rule 
includes 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: This rule is effective January 22, 2007.

FOR FURTHER INFORMATION CONTACT: Moisette Green and Paul Peterson, 
Staff Attorneys, Division of Operations, Office of General Counsel, at 
the National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428 or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

    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). 
12 U.S.C. 1785(b)(2). NCUA has regulations on the conversion process. 
12 CFR part 708a. In June 2006, the NCUA Board published proposed 
amendments to part 708a in the Federal Register for a 60-day public 
comment period. 71 FR 36946 (June 28, 2006).
    As stated in the preamble to the proposal, the conversion from a 
credit union charter to a bank charter is a fundamental shift. The 
decision to convert belongs to the members. To make this decision, 
members must be fully informed as to the reasons for the conversion and 
have time to consider the advantages and disadvantages of conversion. 
They should also have an opportunity to communicate their views to the 
credit union's directors and to communicate with other members about 
the proposed conversion. NCUA believes the current conversion process 
can be improved in these areas.
    Briefly summarized, the proposal:
     Required a converting credit union to give advance notice 
to members that the board intends to vote on a conversion proposal and 
established procedures for members to share their views with directors 
before they adopt the proposal.
     Clarified 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 required the board of directors 
to submit a certification to NCUA of its support for the conversion 
proposal and plan.
     Simplified the boxed disclosures that a credit union must 
provide to its members.
     Changed 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.
     Provided for the form of the member ballot and that the 
ballot must be sent only with the 30-day notice.
     Required 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.
     Required 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.
     Stated that members of federal 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 FCU is located must 
grant access to its shareholders.
     Required the 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 certification of 
the member vote and permitted a credit union dissatisfied with the 
determination to appeal to the NCUA Board.
     Required a credit union to complete a conversion within 
one year of NCUA's approval of the methods and procedures of the vote.
     Modified the voting guidelines to include information on 
the use of voting incentives such as raffles.
    NCUA received 52 comment letters on the proposal from a variety of 
sources, including credit unions, credit union trade associations, bank 
trade associations, and individuals and entities associated with the 
conversion process. The final rule retains most of the proposed rule as 
described above but does include some changes in response to comments. 
For purposes of this preamble, the comments are divided into three 
categories: general comments on NCUA's rulemaking authority, comments 
addressed to particular sections of the rule, and other comments. The 
preamble addresses each of these categories in turn.

B. Legal Authority for the Rulemaking

    The FCUA grants the NCUA Board 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. 1766(a). The FCUA contains numerous provisions governing 
credit union activities, including reorganizations and charter 
conversions. See, e.g., 12 U.S.C. 1771 and 1785. Section 1785, in 
particular, addresses the conversion of credit unions to MSBs, 
including 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

[[Page 77151]]

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, added 
by the Credit Union Membership Access Act (CUMAA) in 1998, 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.
    In the preamble to the proposed rule, the NCUA Board addressed 
NCUA's statutory rulemaking authority. 71 FR 36946, 36947-49 (June 28, 
2006). The Board noted that, due to differences in the structure of 
different financial institutions and differences in the statutes that 
enable charter conversions, it would not be possible for NCUA to adopt 
conversion rules that were identical to those of all other financial 
regulators and, therefore, that Congress could not have intended such a 
result. After analyzing the FCUA enabling legislation at some length, 
the Board reached several conclusions about its statutory authority. 
The first conclusion, interpreting the FCUA's requirement that NCUA's 
rules be ``consistent with rules promulgated by other financial 
regulators'' was:

    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 * * *. 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.

    Id. at 36948. The Board next turned to the FCUA's ``no more or less 
restrictive'' requirement and, after demonstrating that this ``no more 
or less restrictive'' phrase could not mean ``identical,'' analyzed the 
phrase in terms of its constituent pieces, that is, the meanings of 
``no * * * less restrictive'' and ``no * * * more restrictive.'' The 
Board concluded that ``no * * * less restrictive than [those] 
applicable to charter conversions by other financial institutions'' 
meant:

    [T]hat 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 regulator's rulemakings * * *.

    Id. at 36948. The Board then concluded the requirement that NCUA's 
rules be ``no more * * * restrictive than [those] applicable to charter 
conversions by other financial institutions'' meant that:

    [NCUA's] 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.

    Id. at 36949.
    As discussed above, the FCUA language ``no * * * less restrictive 
than the rules governing charter conversions by other financial 
institutions'' instructs NCUA to consider particular, procedural 
elements in other conversion rules and determine if those provisions 
make sense for a converting credit union in light of the underlying 
principles that inform NCUA's and other regulator's rulemakings. NCUA 
has discretion to adopt particular procedural provisions used by other 
regulators, or not adopt them, or establish new procedural provisions 
depending on whether those provisions make sense for credit unions and 
their members. The particular regulatory provisions considered by NCUA 
for this rulemaking, and their utility, are discussed in the preamble 
to the proposed rule. 71 FR 36946, 36949-60 (June 28, 2006).
    The FCUA limits NCUA's discretion to adopt particular regulatory 
provisions through its requirement that NCUA's rule also be ``no * * * 
more restrictive than the rules governing charter conversions by other 
financial institutions,'' meaning that NCUA's rule should not, when 
taken in its entirety, constrain a converting credit union's action or 
choice more significantly than the rules of other financial regulators 
taken in their entirety. Accordingly, NCUA compared its final rule to 
the charter conversion rules of other regulators, including, in 
particular, to the following conversion rules of the OCC and the OTS:
     OCC rules governing the conversion of state banks to 
national banks.
     OTS rules governing the conversion of state mutual savings 
banks to federal mutual savings banks; and
     OTS rules governing the conversion of mutual savings banks 
to stock banks, including state to federal charter conversions.
    NCUA believes these particular rules are appropriate for comparison 
to NCUA's rule because they have procedural protections that ensure 
informed decision making and that protect the interests of the relevant 
stakeholders.\1\ These rules place various requirements on a converting 
financial institution, including:
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    \1\ The relevant decision makers do vary among these conversion 
situations. In NCUA's rulemaking, directors and stakeholders (i.e., 
the members) make substantive decisions about the conversion, and 
NCUA, the regulator, administers the member vote and approves the 
methods and procedures of the vote. The conversion of state MSBs to 
federal MSBs and the associated OTS rule involve the directors and 
the regulator as the substantive decision makers. For the conversion 
of a state bank to a national bank and the conversion of mutual 
savings banks to stock banks and the associated OCC and OTS rules, 
the decision makers are the directors, stakeholders, and regulators. 
Despite the variance in the decision makers among these NCUA, OTS, 
and OCC conversion situations, in all cases the applicable rules and 
the requirements placed on the converting institution by the rules 
ensure the decision makers make an informed decision. Accordingly, 
these OTS and OCC rules are appropriate precedent for NCUA's rule.
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     Director voting;
     Director certifications;
     Stakeholder voting and procedures;
     Disclosures;
     Public notice, comment, and meetings;
     Obtaining legal opinions;
     Procedures for communication among stakeholders using the 
resources of the converting institution, including proxy solicitations 
and other communication measures; and
     Regulatory compliance provisions, such as applications for 
insurance coverage, Community Reinvestment Act (CRA) compliance, and 
Qualified Thrift Lender Test (QTL) compliance.
    The following chart summarizes those elements of each rule, 
including NCUA's final rule, that confine the converting institution's 
actions or choice:

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                                                                          OTS (state/federal
Regulatory conversion provisions   NCUA (CU to MSB)   OCC (state bank to    MSB to  federal    OTS (state MSB to
               \2\                                       national bank)       stock bank)        federal MSB)
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Requires director approval of     Yes...............  Yes...............  Yes. Two-thirds     Yes.
 conversion plan.                                                          vote.
Requires director certifications  Yes...............  Yes...............  Yes...............  Yes.
Requires legal or other third     No................  Yes...............  Yes...............  Yes.
 party opinions.
Requires regulator approval.....  Methods and         Yes...............  Yes...............  Yes.
                                   procedures only.
May require a regulator           No................  Yes...............  No................  No.
 examination.
May require a regulator meeting.  No................  Yes...............  Yes...............  Yes.
Publication of notice of intent   Yes...............  Yes...............  Yes...............  Yes.
 to convert.
Solicitation of comments........  Yes, member-to-     Yes, public.......  Yes, public.......  Yes, public.
                                   director.
May require a public meeting or   No................  Yes...............  Yes...............  Yes.
 hearing.
Requires stakeholder approval...  Yes...............  Yes...............  Yes...............  Yes.
Sets a minimum level of           No. Simple          Yes. At least 51%   Yes. Majority of    No.
 stakeholder participation.        majority of those   of all voting       total outstanding
                                   who actually vote.  stock must          votes must
                                                       approve.            approve.
Requires general disclosures to   Yes...............  Yes...............  Yes...............  No.
 stakeholders or public.
Requires specific disclosures to  Yes...............  No................  Not currently, but  No.
 stakeholders.                                                             may require (see,
                                                                           for example, OTS
                                                                           TB 58).
Provides a process for            Yes...............  Yes...............  Yes (two different  Yes.
 communication among                                                       methods).
 stakeholders.
Restricts date of record for      Yes...............  No................  Yes...............  N/A.
 stakeholder voting purposes.
Provides deadline for completing  Yes. 18 months....  Yes. Six months...  Yes. 24 months....  Yes. 24 months.
 conversion.
Can add additional requirements   No................  Yes...............  Yes...............  Yes.
 on converting institution
 through policies incorporated
 into regulation.
Other significant requirements..  No................  Yes, e.g.,          Yes, e.g.,          Yes, e.g.,
                                                       business plan,      detailed            business plan,
                                                       subsidiaries, non-  conversion plan,    CRA.
                                                       conforming          business plan.
                                                       assets, insider
                                                       compensation.
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    After comparing NCUA's final rule to these OCC and OTS rules, the 
Board believes NCUA's final rule, taken in its entirety, does not 
confine a converting credit union's actions or choice more than these 
OCC and OTS rules taken in their entirety. Accordingly, NCUA's final 
rule is ``no more or less restrictive than the rules governing charter 
conversions by other financial institutions.'' 12 U.S.C. 
1785(b)(2)(G)(i).
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    \2\ OCC regulations applicable to the OCC conversions include 12 
CFR part 5, Sec.  5.24(d) and the incorporated Comptroller's 
Licensing Manual. OTS regulations generally applicable to mutual-to-
stock conversions include 12 CFR part 516, Sec. Sec.  543.1, 543.8 
through 543.14, 544.1 through 544.5, and the incorporated OTS Form 
AC. OTS regulations generally applicable to the conversion of a 
state MSB to a federal MSB include 12 CFR parts 516 and 563b and the 
incorporated Sec. Sec.  420 and 430 of the OTS Applications 
Handbook.
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    Several commenters suggested NCUA lacked legal authority for its 
proposed revisions to part 708a. Some of these commenters focused on 
the NCUA's reliance on particular provisions in the regulations of 
other regulators, including state regulations. These commenters made 
the following arguments:
     The FCUA requires NCUA to look only to the rules of other 
federal regulators, not state regulators, for precedent;
     The FCUA does not permit NCUA to consider the rules of 
non-bank financial regulators (e.g., the Securities and Exchange 
Commission or the Farm Credit Administration) as precedent;
     The FCUA requires NCUA to look only to the conversion 
regulations governing the loss of a converting institution, not the 
gain of a converting institution; and
     The FCUA prohibits NCUA from referring to the rules 
surrounding mutual-to-stock conversions as precedent because stock 
conversions are amendments to an existing charter, not charter 
conversions.
    The Board does not find any support for these limitations in the 
text of the FCUA. The phrase ``including the Office of Thrift 
Supervision and the Office of the Comptroller of the Currency (OCC)'' 
modifies the phrase ``other financial regulators'' and is not a 
limitation. The word ``including'' references the OTS and the OCC by 
way of example and does not limit NCUA to considering only the rules of 
the OTS or OCC, or only the rules of federal regulators or banking 
regulators, or only the rules applicable to the loss, but not the gain, 
of a converting institution. Likewise, the plain language of the 
phrases ``other financial institutions'' or ``other financial 
regulators'' does not limit NCUA as suggested by these commenters. 
Further, the plain language of the statute does not direct NCUA to 
consider only the conversion regulations governing the loss of a 
converting institution. As discussed in the preamble of the proposed 
rule, there is no legislative history for these FCUA provisions, and so 
there is nothing in the legislative history that would support such 
narrow interpretations. See 71 FR 36946, 36947 fn.3 (June 28, 2006).
    Despite the absence of anything in the FCUA or legislative history 
that suggests NCUA should restrict its search for precedent as 
described above, some commenters argue that, because NCUA is regulating 
the conversion of an institution that is leaving NCUA's jurisdiction, 
it should look only to OTS and OCC rules that govern conversions

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where the OTS or OCC is also losing a regulated institution. The Board 
carefully considered this argument and concluded that reliance on these 
types of OTS and OCC rules as precedent would be inappropriate.
    The Board first considered the conversion of a federal MSB to a 
state MSB. The OTS has rules applicable to this process, and the OTS 
would, in most of these cases, be losing regulatory authority over the 
converted institution to a state regulator. The OTS does not impose any 
significant procedural requirements on these conversions, which is 
understandable because there is no shift in ownership interests or 
rights when one MSB converts into another MSB. The NCUA Board believes, 
however, that the conversion from a credit union to an MSB is different 
because it involves a diminution of ownership rights. Some key 
differences between credit union and MSB membership are:
     FCU members exert control over the affairs of the 
institution through their voting power, not delegable by proxy. 12 
U.S.C. 1760. MSB members not only can delegate their votes by proxy, 
but they can give them up forever in the form of running proxies. OTS 
staff has stated that ``[t]he use of these proxies, coupled with the 
management's control over meetings of a mutual savings institution, 
attenuates the influence that depositors may have.'' \3\
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    \3\ 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)(OTS 
Conversion Memorandum).
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     FCU members have the right to one-member, one-vote. MSBs, 
for the most part, give greater voting power to depositors with larger 
deposits.\4\
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    \4\ Some credit unions converting to MSBs have announced that 
they intend to maintain the one-member, one-vote method of voting. 
Even so, NCUA believes that, with the use of running proxies, the 
directors of an MSB could easily change the MSB's charter to 
establish account balance voting.
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     The net worth of a credit union belongs to its members, 
and they may recognize it in a variety of ways, including lower loan 
rates and higher savings rates than banks (See 71 FR 36946, 36953 (June 
28, 2006)) 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.
     Ownership is measured not only in terms of possible 
rewards, but also in terms of the assumption of risk--and credit unions 
and MSBs are different in this regard as well. 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 http://www.ncua.gov. 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) and (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).
     As discussed below, credit union directors have a 
fiduciary duty to act in the best interests of credit union members. 
While MSB directors have a fiduciary duty to act in the best interests 
of the institution, there is no apparent duty to act in the best 
interests of the MSB members, at least for federal MSBs.\5\ The shift 
in fiduciary duty when a credit union converts to an MSB, and the 
associated loss of focus on the members, diminishes the member's 
ownership rights.
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    \5\ The Home Owners' Loan Act does not describe any duty to act 
in the best interests of a federal MSB's member-depositors. 12 
U.S.C. Sec. Sec.  1461 et seq. OTS regulations refer only to the 
director's duty to act in the best interests of the institution. See 
12 CFR 563.200 (Conflicts of Interest) and 563.201 (Corporate 
Opportunities). The OTS Thrift Activities Handbook makes numerous 
references to the fiduciary duties of MSB directors, but none of 
these state a duty is owed to the members. One state case refers to 
a director's fiduciary duty to the members of a state-chartered MSB. 
Appeal of Concerned Corporators of the Portsmouth Savings Bank, 525 
A.2d 671 (N.H. 1987). OTS staff, in reviewing the Portsmouth case, 
stated ``the court's decision was based primarily upon the fact that 
the depositors'' rights in this transaction were specifically 
provided for in the savings bank's charter, a special charter 
granted by the state legislature in 1823. Since charters of most 
savings institutions, including those of federal mutual 
institutions, do not have the unique provisions of the New Hampshire 
savings bank's charter, the Portsmouth decision is of limited 
precedential value.'' OTS Conversion Memorandum, supra note 3, at 
23.
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    The diminution in ownership interests when a credit union converts 
to an MSB make this conversion fundamentally different than an MSB to 
MSB conversion. Credit union members need the procedural protections 
afforded by NCUA's rule, while MSB members need little or no protection 
when converting from one form of MSB to another. Accordingly, the NCUA 
does not believe the particular OTS rules associated with conversions 
from a federal MSB to a state MSB are appropriate precedent for NCUA's 
rule.
    The Board also considered the OCC process for converting a national 
bank to a state bank, where the OCC loses jurisdiction over the 
converted bank. Two provisions in OCC regulations and federal law work 
in tandem to provide significant protection to the ownership interests 
of the converting bank's stockholders. First, the conversion requires 
the approval of two-thirds of all the outstanding stock. 12 CFR 
5.24(e); 12 U.S.C. 214a. Second, those stockholders who dissent to the 
conversion have the right to an appraisal and a cash payment in 
exchange for their ownership interests. 12 CFR 5.24(e); 12 U.S.C. 214c. 
Together, these two provisions ensure that no conversion takes place 
unless a significant majority of the ownership interests support 
conversion and also that minority ownership interests are protected 
through the right to cash out their ownership interests. NCUA, however, 
cannot adopt a similar approach to protect the ownership interests of 
credit union members. The FCUA establishes the voting threshold for MSB 
conversions as ``the affirmative vote of the majority of the members of 
the insured credit union who vote on the proposal.'' 12 U.S.C. 
1785(b)(2)(B). This FCUA provision not only does not protect the 
members in the manner a supermajority would, it hypothetically would 
allow the directors of a credit union to convert it to an MSB even if 
only a handful of members approve. Accordingly, NCUA does not believe 
the OCC process for converting national banks to state banks is 
appropriate precedent for NCUA's rulemaking. The better approach is to 
ensure that, through the various notice, disclosure, and communication 
channels in this final rule, the directors and members will make a 
careful and informed conversion decision. The approach in this final 
rule is similar to the approach taken by the OTS and OCC in other 
charter conversions, such as the OTS mutual-to-stock charter conversion 
rules, the OTS state MSB to federal MSB conversion rules, and the OCC 
state bank to national bank conversion rules discussed above.
    The Board disagrees with commenters who state OTS rules governing 
mutual-to-stock conversions are not relevant to NCUA's rulemaking 
because these are not ``charter'' conversions. These commenters state 
that, because the OTS may technically amend the existing charter when a 
federal mutual bank converts to a federal stock bank, and not issue a 
new charter, it is not a charter conversion. First, NCUA notes that the 
FCUA does not define the term charter conversion, and that NCUA has 
significant discretion to define and interpret the FCUA, both in 
general and in terms of its specific authority to administer the 
conversion vote as discussed above. In the Board's view, a mutual-to-
stock conversion is a de facto

[[Page 77154]]

charter conversion because the mutual-to-stock conversion results in a 
fundamental restructuring of ownership interests and, usually, a 
wholesale change in owners. The Board also notes that OTS rules on 
mutual-to-stock conversions cover not only federal-to-federal stock 
conversions, but also state-to-federal stock conversions. 12 CFR 
563b.430. In a state-to-federal stock conversion, OTS will not amend 
the state charter, but will issue a new federal charter. In both form 
and substance, this is a charter conversion.
    Accordingly, NCUA is satisfied that the proposed rule, and this 
final rule as adopted, are well within the rulemaking authority 
provided by Congress to NCUA.

C. 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 proposal added a 
definition for ``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.'' The proposal also added 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.
    One commenter thought the use of bold text at least as large as 
that used for headings but in any event no smaller than 12 point would 
not necessarily be clear and conspicuous. This commenter recommended a 
definition of ``clear and conspicuous'' like NCUA uses for its privacy 
rules at 12 CFR 716(3)(b). Another commenter stated that NCUA should 
define what it means by headings.
    Upon consideration of these comments, the Board has modified the 
definition of clear and conspicuous to mean ``text in bold type in a 
font size at least one size larger than any other text used in the 
document (exclusive of headings), but in no event smaller than 12 
point.'' The Board believes that this definition will be easier for 
converting credit unions to apply, particularly if there are multiple 
headings with different font sizes, while ensuring members notice the 
information. The Board notes that if the document contains multiple 
passages that must be clear and conspicuous all these passages would be 
the same font size.

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 in the FCUA. The proposed Sec.  708a.2 
maintained this same recitation. NCUA received no public comments on 
this section, and the section is adopted as proposed.

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

    The current Sec.  708a.3 provides the board of directors must 
approve a conversion proposal by a majority vote and set a date for a 
member vote. Members must approve the proposal by the affirmative vote 
of those members who vote on the proposal.
    The proposed rule retained the same requirement for a board vote on 
the conversion proposal but clarified that 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 
contained a new requirement for advance notice to members of the 
board's intent to consider a conversion proposal. The board must 
publish a notice in a local area newspaper and on the credit union's 
Web site, as well as post a notice in the credit union's offices, no 
later than 30 days before the directors meeting. Directors must 
consider the comments before voting on the conversion proposal. The 
proposal also required that, if the credit union maintains a Web site, 
the credit union must post any comments received on its Web site.
The Fiduciary Duty of the Board of Directors (Public Comments)
    Proposed Sec.  708a.3(c) required the directors adopting a 
conversion proposal to determine that the conversion is in the best 
interests of the members. A related provision in proposed Sec.  708a.5 
required directors to certify to NCUA that the conversion is in the 
best interests of the members. NCUA received many comments on this 
issue of the fiduciary duty of the board of directors to its members.
    One commenter felt the fiduciary duty of the board of directors to 
act in the best interests of members was self-evident and needed no 
reference in the rule.
    One commenter asked NCUA to clarify that its interpretation of 
fiduciary duty, that the officers and management must act in the best 
interests of the members, is not a departure from traditional 
interpretations of fiduciary duty. This commenter believes the 
directors' deciding to act in the best interests of members is part of 
deciding whether the conversion is in the best interests of the 
institution.
    One commenter noted the concept of fiduciary duty is discussed only 
in the preamble to the proposed rule, and the rule itself should state 
the credit union officials have fiduciary duties and should define 
fiduciary duty as ``[a] legal obligation directors and senior 
management have in their capacity as officials of the credit union to 
place the interests of the credit union's membership ahead of their own 
personal financial interests.'' This commenter felt the proposed voting 
guidelines should be further expanded to include a discussion of the 
obligations of credit union officials to act with due care and 
prudence, with loyalty to the membership, and in good faith.
    Another commenter suggested NCUA include guidance to directors on 
how this determination is to be made. This commenter gave an example: 
If a credit union is seeking to convert in order to increase its member 
business lending activity, how has the board assessed whether members 
are interested in obtaining more loans of this nature?
    One commenter suggested the rule require a board to obtain an 
opinion from an unbiased third party to validate the directors' 
determination that a conversion was in the members' best interests. 
Another suggested the board should obtain an opinion from counsel that 
discusses the board's compliance with applicable legal requirements. 
This commenter thought the opinion should be made available to members 
upon request.
    One commenter expressed concern that, in some states, the officials 
of a state-chartered credit union may not have a fiduciary duty that 
runs to the members of the credit union, citing Save Columbia CU 
Committee v. Columbia Community Credit Union, 139 P.3d 386 (2006).
The Fiduciary Duty of the Board of Directors (Discussion)
    The FCUA has numerous references to the duty to act in the best 
interests of the credit union's members, including:
     The NCUA Board may act to remove or prohibit any 
institution-affiliated party at a federally-insured credit union if 
that action meets certain requirements, including that the ``interests 
of the insured credit union's members have been or could be 
prejudiced.'' 12 U.S.C. 1787(g)(1)(B).

[[Page 77155]]

     Credit unions applying for federal account insurance must 
agree to maintain such special reserves as the NCUA Board may require 
``for protecting the interests of the members.'' 12 U.S.C. 1781(b)(6).
     The NCUA Board must review the application of any 
individual to become a director or senior manager at a newly chartered 
or troubled federally-insured credit union, and disapprove that 
application, if acceptance of the applicant would not be in the best 
interests of the depositors (members). 12 U.S.C. 1790a.
     When acting as the conservator or liquidating agent of a 
federally-insured credit union, the NCUA Board may take any action it 
determines is in the best interests of the credit union's account 
holders (members). 12 U.S.C. 1787(b)(2)(J)(2).
     A voluntary liquidation of an FCU must be in the best 
interests of the members. 12 U.S.C. 1766(b)(2).
    Most of these FCUA provisions on the duty to act in the best 
interests of the members refer specifically to the NCUA Board. A closer 
look at how the cited provisions function, however, connects them to 
the directors. Specifically, the best interests of the members will 
dictate the Board's actions when removing or prohibiting a director, 
approving the appointment of a director, operating a conserved credit 
union in the role of the board of directors, and reviewing the 
propriety of a board of directors' decision to pursue a voluntary 
liquidation. If the best interests of the members standard guides the 
conduct of the Board, it must also guide the conduct of directors.
    NCUA believes it is important for the directors of every credit 
union to understand the duty to act in the best interests of the 
members. It is particularly important, however, that the directors 
recognize this duty and act upon it when considering a proposal to 
convert a credit union to a bank.
    First, there is a financial incentive, as discussed in the preamble 
of the proposed rule, for the directors of a converting institution to 
put their own personal financial interests ahead of the interests of 
their members. 71 FR 369546, 36953-56 (June 28, 2006).
    Second, there may be a tendency by directors of a converting credit 
union to focus solely on the projected growth of the converting 
institution and acquiring new customers and not to focus, as the best 
interests of the members standard suggests, on the financial services 
existing members want and how the conversion will affect the quality, 
rates, and fees associated with these services. NCUA's boxed disclosure 
on the relative rates at banks and credit unions is relevant to this 
issue, and converting credit unions should be able to explain how and 
why their institution will be different than the average bank in this 
regard.
    Third, as discussed previously, a conversion to an MSB dilutes the 
ownership interests of the members. Further, if the MSB subsequently 
converts to a stock bank, as about ninety percent of converting credit 
unions ultimately do, the vast majority of the former credit union 
members will likely not subscribe to the stock offering.\6\ This, in 
turn, either deprives former credit union owners of any ownership 
interest, or, in the case of a mutual holding company structure, 
creates a competing minority stock ownership class that can, and does, 
result in benefit to the minority stockholders at the members' 
expense.\7\
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    \6\ There is significant anecdotal information supporting the 
conclusion that member participation in IPOs is extremely low. 
``Long-time members of IGA FCU were mostly left out of the money 
when IGA became the first credit union convert to sell stock * * * 
[F]ewer than 5% of the 22,200 members of the credit union shared in 
the profits from the sale of the institution.'' Credit Union 
Journal, November 13, 2000, p. 1. ``All who had their subscriptions 
filled were depositors-but only 5% of all depositors subscribed.'' 
FDIC Review, Mutual-to-Stock Conversions of State Nonmember Savings 
Banks, 59 FR 30357, 30359 (June 13, 1994). And, in just the past few 
months, ``about 3,500 depositors at ViewPoint Bank, the former 
Community Credit Union, subscribed to [the IPO] * * * The 3,500 
members represent 1.56% of the [CU's] 223,000 members * * *.'' 
Credit Union Times, October 4, 2006, at www.cutimes.com.
    \7\ FDIC Review of Mutual-to-Stock Conversions of State 
Nonmember Savings Banks, 59 FR 30357, 30363 (June 13, 1994).
---------------------------------------------------------------------------

    Some converting credit unions, and law firms that advise them, have 
written NCUA suggesting that, because credit union members cannot force 
a distribution of credit union assets, or transfer or pledge their 
interest in the credit union for value, the members have little or no 
real ownership interest in the credit union. This view ignores the 
fiduciary duty that credit union directors owe to their members. The 
duty owed by credit union directors is analogous to the duty owed by a 
trustee to the beneficiaries of a trust. In a typical family trust, the 
trustees have discretion in the management and distribution of the 
trust assets. Many family trusts also have provisions forbidding the 
beneficiaries from pledging, selling, or otherwise alienating their 
interests in the trust. The inclusion of these provisions in the trust 
agreement, however, does not result in any loss or diminution of the 
beneficiaries' ownership interest in the trust. On the contrary, any 
trustee who might manage trust assets other than in the interest of the 
beneficiaries, including using the trust assets for his or her own 
personal gain or attempting to take personal ownership of trust assets, 
would be guilty of a gross breach of fiduciary duty.
    All these factors make it imperative that the board of directors of 
a converting credit union understand they must act in the best 
interests of their members. A conversion from a credit union to a bank 
should only take place after the board has completed its due diligence, 
including consideration of the above factors, and an informed 
membership has approved the conversion. Directors should question the 
assertion of any consultant that minimizes the ownership rights of 
members or their fiduciary duty to members.
    NCUA believes this delineation of a board's fiduciary 
responsibility to members restates existing law without change or 
modification. In the normal course of business when a board acts in the 
bests interests of the credit union it is also furthering the interests 
of the members. But the duty to act in the best interests of members is 
primary, and, if there is any divergence or conflict between the 
interests of the institution and the interests of members, the latter 
takes precedence.\8\
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    \8\ One situation in which the best interests of the institution 
and the members may diverge is the possible voluntary liquidation of 
a healthy credit union. The FCUA provides that the decision to 
undertake a voluntary liquidation is determined by the best 
interests of the members and not the best interests of the 
institution. 12 U.S.C. 1766(b)(2).
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    The Board has considered the views of commenters who believe the 
rule should provide additional information on the fiduciary duty 
standard and how compliance with that standard is measured in the 
conversion context. The Board offers the following additional guidance.
    The Board believes that members want their depository institution 
to provide the types of financial services that they need. They want 
those services to be convenient and of high quality. And they want 
those services to be provided at a good price, meaning good rates and 
low fees. Accordingly, when directors consider a conversion to the bank 
they should, as part of their due diligence and in consonance with the 
duty to act in the best interests of the members, answer the following 
questions: What financial services do the majority of my members want? 
How do I know this? Can the institution best provide these services to 
its members as a credit union or a bank? If the credit union converts 
to a bank, how will that affect the rates and fees that the

[[Page 77156]]

institution charges the members for these services? And if the credit 
union converts to a bank, will it be able to offer members (now 
customers) something in the way of services or value that existing 
banks in the area are not offering?
    Mere assertions that a charter change is needed to facilitate 
growth are not, by themselves, sufficient to establish that the change 
is in the best interests of the members.\9\ While post-conversion 
growth may possibly result in profits and dividends payable to the 
bank's future stockholders, it does not necessarily follow that the 
credit union's members also benefit.\10\ Accordingly, if the directors 
rely on growth as a reason for conversion, they should establish 
specifically how accelerated growth will benefit the members in terms 
of providing services the members want, higher quality services, and 
better pricing on those services.
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    \9\ The only time that growth, by itself, would be sufficient to 
justify a charter change would be in the highly unusual case where 
the credit union cannot survive as a credit union and so the 
continued existence of the institution requires a charter change.
    \10\ As discussed above, supra note 7 and associated discussion, 
historic data suggests only a tiny fraction of the credit union's 
members will become future stockholders.
---------------------------------------------------------------------------

    This guidance is provided by way of example and is not intended to 
be all inclusive of a director's due diligence. The nature of the due 
diligence required may vary somewhat from credit union to credit union 
depending on each credit union's particular circumstances.
    NCUA has also carefully considered the decision of the Washington 
state appellate court in Save Columbia CU Committee v. Columbia 
Community Credit Union, 139 P.3d 386 (Wash. Ct. App. 2006) (Save 
Columbia) and how it affects the proposed certification requirement. 
One of the issues considered by the court in Save Columbia was if 
members of the Columbia Community Credit Union, a state-chartered 
credit union, had standing to bring a breach of fiduciary duty claim 
against the directors. In reversing the trial court, the appellate 
court ruled that the Committee (i.e., the members) had no private 
action to sue for a breach of fiduciary duty and that such duty must be 
enforced by the state regulator. While NCUA does not necessarily agree 
with the holding or reasoning of the state court, any inference that 
the directors owed no duty to the members of the credit union was dicta 
and not necessary to the holding. NCUA also believes it unlikely that 
under Washington state law, or the laws of any other state, the 
directors of a state-chartered credit union owe no fiduciary duty to 
their members.
    The Save Columbia court did not consider how the FCUA might apply 
to the facts in that case. When a state-chartered credit union applies 
for, and receives, federal account insurance, it is bound by those 
portions of the FCUA applicable to federally-insured credit unions. 12 
U.S.C. 1781 et seq. (Title II). Four of the five FCUA citations to the 
duty to act in the best interests of members are found in Title II of 
the FCUA and so are applicable to all federally-insured credit unions, 
including state charters. Accordingly, the FCUA imposes a duty to act 
in the best interests of the members on the directors of all federally-
insured state-chartered credit unions regardless of whether state law 
also imposes such a duty.
Advance Notice (Comments)
    Most commenters supported the advance notice requirement, and some 
commenters suggested additional ways a credit union should provide the 
advance notice, including the use of statement stuffers, newsletters, 
and e-mails or a notice on the quarterly periodic statement preceding 
the meeting. Many commenters felt a credit union should be required to 
send an advance notice directly to members, either by mail or e-mail. 
One commenter believed that, in addition to the advance notice, the 
portion of the directors' meeting on the conversion proposal should be 
open to the membership or, alternatively, the directors should be 
required to hold a town hall style meeting immediately after they 
adopted the conversion plan. Another commenter made a similar 
suggestion but suggested the meeting be a special meeting of the 
members.
    One commenter suggested the rule require 60 days notice instead of 
30 days; another suggested 120 days. These commenters believe the 
additional time would allow for better communications between members 
and directors without adversely affecting the conversion process.
    Several commenters objected to the advance notice requirement. Some 
did not think NCUA had the authority to require advance notice, stating 
variously that the FCUA limited the notices to members to three and 
that a fourth notice violated this limitation or that the advance 
notice was contrary to the FCUA provision that a proposal to convert 
``shall first be approved * * * by a majority of the directors.'' Other 
objections to the advance notice included statements that it would:
     Not provide meaningful information to credit union members 
or a credit union's board of directors;
     Fuel the spread of misinformation;
     Generate submissions only from dissenters and those would 
lack value because they would be based on incomplete information about 
the proposal;
     Interject member participation at a very early stage in a 
manner unlike most other corporate governance situations;
     Constitute a member vote before the board vote;
     Lead to an ill-informed director vote based on limited 
input;
     Undermine the authority of the board of directors because 
the members elect their board of directors to study and make all types 
of business decisions on behalf of the members;
     Be costly and burdensome for the credit union;
     Impair the ability of a board to act quickly and 
decisively on a conversion proposal; and
     Discourage candid and informed discussion among the 
directors.
    Some commenters stated the credit union should not have to post 
views of nonmembers on its Web site. One commenter suggested NCUA 
should provide additional guidance on posting of member comments, 
including whether the comments must be put in a particular order; how 
long the comments must remain on the Web site; whether a credit union 
has the right to respond to comments and in what manner it may respond; 
whether the credit union is responsible for any misinformation in the 
postings; and whether there are any privacy concerns that must be 
addressed when posting member comments.
Advance Notice (Discussion)
    NCUA does not believe the language of the FCUA prohibits an advance 
notice requirement. The 90-, 60-, and 30-day notice requirements 
enumerated in the FCUA are not exclusive, and, in any event, relate 
only to the notice of the member vote and so are different than the 
proposed advance notice of a directors meeting to adopt a conversion 
proposal. The advance notice is also not an approval requirement, so 
that the notice requirement does not contravene the FCUA provision that 
the conversion proposal must first be approved by the board of 
directors.
    As stated in the preamble to the proposed rule, NCUA intends the 
advance notice requirement to facilitate the flow of information 
between members and directors. NCUA does not believe information 
provided by a member to directors undermines the

[[Page 77157]]

directors' authority, discourages candid discussion among the 
directors, or otherwise impedes their ability to make an appropriate 
and timely decision. Directors should welcome member input and are free 
to consider any particular member's point of view and reject it. 
Directors are also free to obtain additional information from their 
members, beyond the input received as a result of the advance notice, 
by using member surveys, questionnaires, or other collection 
techniques.
    NCUA has, however, reconsidered the proposal to require posting of 
the member's comments on the credit union's Web site. The intent of the 
advance notice is to inform members that a credit union is considering 
a conversion and to facilitate member-director contact, not member-
member contact, in the period of time preceding the directors' decision 
on the conversion proposal. As noted by some commenters, posting member 
comments does not directly further the stated purposes of the advance 
notice, and the posting does impose some burden on the converting 
credit union in determining the propriety of particular postings. 
Accordingly, the final rule does not require the converting credit 
union to publicize comments received before the adoption of a 
conversion proposal. As discussed below, this final rule does include 
other procedures to facilitate member-to-member contact in the period 
of time following the directors' adoption of a conversion proposal.
    NCUA also considered alternatives suggested by commenters for 
communicating the advance notice to the members. NCUA believes its 
proposal for publication and posting in the credit union's branch 
offices and on its Web site minimizes the burden on the credit union 
while ensuring that members have a reasonable chance to learn of the 
proposal and provide input to directors. One commenter suggested that 
the rule be clarified to require the advance notice be posted in the 
lobby of a converting credit union. NCUA agrees with this clarification 
and has made the suggested change to the final rule. Converting credit 
unions are, of course, free to use additional methods of communicating, 
including mailings, statement stuffers, newsletters, and e-mails.
    Accordingly, and except as described above, NCUA adopts Sec.  
708a.3 as proposed.

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.
    The proposal contained several changes to Sec.  708a.4. It modified 
the mandatory boxed disclosures the board of directors must give to 
members once the board has approved a proposal to convert to read:

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
             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.
------------------------------------------------------------------------

    The proposal required that these boxed disclosures be sent only 
with the three written notices and not with all written communications 
as under the current rule. The proposal also established procedures for 
members to share their views with other members during the 90-day 
notice period preceding the membership vote. The proposal further 
stated that the ballot must be sent only with the 30-day notice and may 
not contain any information other than a statement of the proposition 
being voted on, a short statement of the board's recommendation, and 
voting instructions.
Proposed Boxed Disclosure 1 (Loss of Credit Union Membership)
    Most commenters supported the disclosure as written. These 
commenters thought members need to know precisely what a FOR vote and 
an AGAINST vote mean.
    Some commenters thought the title line, ``LOSS OF CREDIT UNION 
MEMBERSHIP,'' was unnecessarily negative and should be changed or 
eliminated. The Board disagrees that there is anything negative about 
the title. In every conversion, the converting credit union will 
emphasize why it wants to convert including what it perceives are the 
positive aspects of the conversion. Nothing in NCUA's rule prohibits 
such statements, as long as they are accurate and not deceptive. 12 CFR 
740.2.
    A few commenters also suggested that this proposed box disclosure 
on the effect of a ``FOR'' vote might be misinterpreted by a member as 
indicating that the member's vote, by itself, would determine the 
outcome of the vote. To clarify this, the final rule amends this 
disclosure to read:

    1. LOSS OF CREDIT UNION MEMBERSHIP. A vote ``FOR'' the proposed 
conversion means you want your credit union to become a mutual savings 
bank. A vote ``AGAINST'' the proposed conversion means you want your 
credit union to remain a credit union.
Proposed Boxed Disclosure 2 (Rates on Loans and Savings)
    Most commenters strongly supported this disclosure. These 
commenters thought this disclosure highlighted a fundamental difference 
between banks and credit unions. Some of these commenters stated credit 
unions generally charge fewer and smaller fees than banks and 
recommended the disclosure should also address differences in fees. One 
such commenter suggested that, if NCUA did not have data on the fees 
banks and credit unions charge, it should commission a study. One 
commenter suggested that, in addition to the discussion of historic 
averages, the boxed disclosure should include actual examples of 
specific rate disparities. One commenter noted that, in addition to the 
data and studies cited by NCUA in the preamble to the proposed rule, a 
study by University of North Carolina Economist William

[[Page 77158]]

Jackson, entitled The Benefits of Credit Unions to North Carolina 
Consumers of Financial Services, also supports this disclosure.
    Several commenters thought the proposed boxed disclosure was 
misleading. One thought it implies rates on existing loans and deposits 
established by contract could be changed post-conversion. Another 
commenter thought the proposed language was not representative of the 
actual transaction being voted on: ``the conversion to a mutual savings 
bank.''
    A few commenters objected to the disclosure because credit unions 
do not always have more favorable rates than banks. One commenter 
objected to the disclosure because it implies a credit union's current 
pricing is more attractive than the competition and its future pricing 
will be less attractive than the competition. This commenter also 
stated that, in a free market economy, the marketplace determines 
pricing, and that requiring this disclosure suggests otherwise.
    One commenter dismissed the method by which NCUA uses the economic 
data, stating that it focused on one particular year (2002-2003) and 
particular data points rather than a more extensive and complete 
analysis including regional and market differences, market trends, and 
a full spectrum of products and services.
    None of the commenters disputed the accuracy of the data supporting 
the disclosure. Contrary to the comments above, the data did not focus 
on one particular year or point in time, but covered three separate 
years of rates for thousands of banks and credit unions. The data were 
clear that for most loan and savings products credit union rates are, 
on average, significantly better than banks. While this is not true of 
all products surveyed, what is true is that for no particular product 
was the average bank rate significantly better than the credit union 
rate. The boxed disclosure makes no statement about particular credit 
union rates, only average rates. Also, in this disclosure the generic 
word ``bank'' is more appropriate than the phrase ``mutual savings 
bank.'' The disclosure is true of all banks, including both mutual and 
stock banks--and most converting credit unions convert to mutual banks 
and then to stock banks. Accordingly, the Board has determined the 
disclosure is not misleading.
    NCUA requested data from DATATRAC on credit unions that had 
previously converted to banks, but DATATRAC had only incomplete data on 
them. NCUA also asked, in the preamble to the proposed rule, for 
comments on the rates at converted credit unions. NCUA received no 
comments responsive to this request. This lack of data on converted 
credit unions, however, is not critical. Looking at just the small 
number of previous credit union to bank conversions could, if one or 
more of the new banks ran promotional rates, skew the real effect of 
the conversion on rates. NCUA believes that averaging rates over a 
large number of banks and credit unions is the best way to remove the 
effects of occasional promotional rates. NCUA also has no reason to 
believe that the average rates at banks that were formerly credit 
unions will be different than banks that have always been banks, 
particularly with the passage of time following the conversion.
    Accordingly, the Board does not believe this disclosure, as 
proposed, was misleading in any way, and the final rule adopts this 
disclosure as proposed.\11\ The Board would also like to address a few 
of the other comments related to this disclosure.
---------------------------------------------------------------------------

    \11\ NCUA compared average rates for banks and credit unions for 
20 savings and loan products over a three-year period. Recently, the 
General Accounting Office (GAO) completed a similar comparison of 
average bank and credit union rates for 15 savings and loan products 
over a five year period. The NCUA and GAO reached the same 
conclusion that, while there was virtually no difference between 
banks and credit unions in mortgage rates, the data ``indicate(s) 
that credit unions offer more favorable rates on average than 
similarly sized banks for a number of savings products and consumer 
loans.'' Greater Transparency Needed on Who Credit Unions Serve and 
on Senior Executive Compensation Arrangements, U.S. General 
Accounting Office Report GAO-07-29, p. 57.
---------------------------------------------------------------------------

    First, the Board disagrees with the commenters who stated that the 
``marketplace'' dictates the prices of loan and savings products, 
implying that credit unions and banks have no control over prices 
because prices are predetermined solely by external market forces. 
Clearly, depository institutions have some control over their prices, 
since competing depositories in a given market area can and do offer 
different prices for the same product. While external forces play a 
part in determining prices, internal factors such as how much of the 
product the depository wishes to sell and what margin it desires also 
play a part in setting prices. In particular, the cost of offering a 
product, including expenses, figures into the profit margin calculation 
and the pricing determination. Credit unions may also offer better 
prices than banks because lower loan rates and higher savings rates 
return value directly to the credit union's member-owners while, at 
least for stock banks and mutual holding companies, the bank may seek 
higher margins through higher pricing to benefit the bank's 
stockholders.
    NCUA does not intend for these disclosures on savings and loan 
rates to keep a converting credit union from providing its views on the 
rate issue. On the contrary, NCUA wants members and directors to think 
about and discuss this issue, and for the directors to fully explain 
why their bank, after conversion, will differ from the average bank. In 
this regard, one commenter who objected to the proposed disclosure as 
bad policy gave the following reasons:
     The studies cited by NCUA do not compare the rates for 
converted credit unions pre-conversion and post-conversion, and the 
growth rates for converted credit unions are much higher after 
conversion than before conversion; and
     The NCUA makes comparisons using products, such as 60-
month certificates of deposit (CDs), that typically do not compose a 
large proportion of a mutual bank's balance sheet.\12\
---------------------------------------------------------------------------

    \12\ NCUA does not know if this comment about the proportion of 
a bank's balance sheet devoted to certificates of deposit is 
accurate. The DATATRAC data analyzed by NCUA included thousands of 
banks offering 60-month CDs. For example, the DATATRAC data for 
year-end 2005 included 60-month CD rates offered by 4,824 banks.
---------------------------------------------------------------------------

    This comment raises important issues. If the converted credit union 
will charge less favorable rates to its members as a result of its 
growth, the Board questions how the conversion is in the best interests 
of the members or how members benefit from the growth, particularly if 
the bank converts to stock and the vast majority of members do not 
become stockholders, as historic data indicates. Also, if the 
converting credit union plans to reduce the availability of its term 
savings products after conversion, it should tell its members and 
explain why the members do not need the product. If the converting 
credit union plans to offer a 60-month CD, but at lower rates as is 
suggested by the average historic data, it should tell its members that 
as well.
Proposed Boxed Disclosures (Potential Profits by Officers and 
Directors)
    Most commenters supported the proposed disclosure. One suggested an 
``actual, worst-case'' example be provided. One suggested NCUA replace 
the word ``often'' in the phrase ``often the first step in a two-step 
process to convert to a stock-issuing bank or holding company 
structure'' with an actual percentage based on historical data.

[[Page 77159]]

    The NCUA Board does not believe an example is appropriate. In 
addition, the use of an actual historical percentage would quickly 
become out of date as a result of future conversions.
    Several commenters objected to the proposed boxed disclosure and 
stated variously:
     The disclosure is speculative because the stock conversion 
may not take place and NCUA should not assume it will;
     The disclosure is misleading and inflammatory;
     OTS regulations ensure that officials are not enriched at 
the expense of depositors;
     NCUA does not have authority to require disclosures about 
transactions outside of its jurisdiction;
     The disclosure suggests unreasonably that stock option and 
stock benefit plans are unfair and unethical; and
     The disclosure is not balanced and should include 
statements about the benefits of such stock plans.
    As discussed in the preamble to the proposed rule, a credit union 
that converts to an MSB converts to a stock bank almost ninety percent 
of the time.\13\ An event that occurs about ninety percent of the time 
is not speculative. In addition, no commenter challenged the accuracy 
of the past insider benefits as discussed in the preamble.\14\ 
Accordingly, the Board does not believe the proposed box disclosure is 
inaccurate or misleading. Additionally, if a credit union does not plan 
to convert to stock, it is free to tell its members. Of course, it may 
change its mind after conversion to a mutual, and credit union members 
should be aware that a converting credit union still could convert to 
stock.
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    \13\ 71 FR 36946, 36954 (June 28, 2006).
    \14\ The preamble to the proposed rule also contains a 
discussion of what management and officials at former credit unions 
obtained in stock and other benefits as a result of the stock 
conversion. Id. at 36954. Since the proposed rule was issued for 
comment, Viewpoint Bank, another former credit union, has converted 
to stock inside a mutual holding company structure. Based on the 
Viewpoint prospectus and other publicly available information, it 
appears that senior officials at Viewpoint made more than $1 million 
in profits on the IPO pop. The bank also set aside $13.9 million in 
free stock for its employees in the Employee Stock Ownership Plan, 
and intends to set aside another $7.8 million in free stock for 
senior officials in its restricted stock plan and another $3.1 
million in stock for senior officials in its stock option plan.
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    OTS regulations do not purport to ensure that officials are not 
enriched, and the disclosure does not suggest that stock plans are 
unfair or unethical. As discussed above, credit union directors have a 
fiduciary duty to their members and so should inform their members when 
they might acquire ownership interests that otherwise belong to their 
members.
    NCUA is not the only financial regulator to have recognized the 
benefits that officials gain in a stock conversion or to raise issues 
concerning conflicts of interest and fiduciary duties. In 1994, the 
Board of Directors of the Federal Deposit Insurance Corporation (FDIC) 
ordered the publication of a review, authored by several senior members 
of the FDIC staff, of mutual-to-stock conversions by state nonmember 
banks.\15\ This FDIC review stated that the mutual-to-stock conversion 
process was ``fundamentally flawed.'' The review noted that the mutual-
to-stock conversion process was designed to recapitalize struggling 
thrifts, not healthy ones, and that when a healthy thrift converted it 
typically resulted in a jump, or ``pop,'' in the value of the stock at 
the initial public offering (IPO). The review then observed that the 
vast majority of member-depositors do not subscribe to and obtain the 
benefit of the IPO because of lack of knowledge, lack of resources, or 
both. As a result, the review stated, professional depositors and 
insiders obtain large ownership interests in the value of the IPO and 
the institution's stock. The FDIC review stated, ``[w]e believe that 
for individuals who control the conversion transaction to lay any 
claim, in their capacity as managers and trustees, to a portion of the 
value being transferred creates a conflict of interest.''\16\
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    \15\ Review of Mutual-to-Stock Conversions of State Nonmember 
Savings Banks, 59 FR 30357, 30362-63 (June 14, 1994).
    \16\ Id. at 30361. The FDIC review proposed a solution that 
involved issuing stock purchase rights to stakeholders, including 
depositors. The stakeholder rights would be valued, in the 
aggregate, at the amount of capital the bank needed, and if the IPO 
produced additional capital, those stakeholders who had not 
exercised their stock purchase rights would be given the excess 
capital. Following publication of the review, the FDIC was inundated 
with more than 1000 comments from the banking industry. Five months 
later, the FDIC dropped its proposal with the statement that ``[a]ny 
fundamental re-design of the conversion process should involve the 
appropriate legislative bodies, Congress or State legislatures.'' 59 
FR 61233, 61235 (November 30, 1994). These issues of a large IPO 
pop, tiny participation by member-depositors, and windfalls to 
senior officials, remain today. See supra notes 5 and 10 and the 
accompanying text on the recent IPO of Viewpoint Bank.
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    The NCUA Board feels it important to also respond to suggestions 
that this boxed disclosure, or any of the boxed disclosures, lack 
balance. The FCUA requires membership approval of the conversion, and 
so the credit union has an incentive to advocate for conversion. In 
every conversion reviewed by NCUA, the converting credit union has set 
forth its reasons supporting the conversion at some length in the 
member notice. NCUA's past experience is that converting credit unions 
do not, however, want to present to their members the important 
information in the boxed disclosures. Accordingly, the disclosures, as 
written, create the balance that would otherwise be lacking. If the 
directors of a converting credit union believe the information about 
stock plans is unbalanced, they are free to include whatever accurate 
information they want in the notices about the perceived benefits of 
stock plans. Credit unions should explain to members why the conversion 
and important aspects of the conversion such as stock plans are in the 
best interests of members.
Proposed Boxed Disclosures (General)
    Several commenters objected to requiring the boxed disclosures be 
sent only with the three formal notices and not with all written 
communications, as in the current rule. These commenters believe these 
disclosures are very important and a converting credit union may 
mislead members by failing to include this information with other 
written communications.
    The boxed disclosure language is designed to accompany the notices 
to members of the member vote. The disclosure language does not 
necessarily fit well with other communications, such as communications 
that precede the adoption of a proposal to convert. Further, NCUA does 
not want the boards of converting credit unions to use the required 
disclosures as an excuse not to communicate with their members.
    Several commenters suggested NCUA prohibit a converting credit 
union from disputing or refuting the boxed disclosures. Some of these 
commenters stated the boxed disclosures present facts, not opinion, and 
should not be subject to interpretation or rebuttal. One of these 
commenters stated NCUA approval of rebuttals of these required 
disclosures dilutes the effectiveness of these critical disclosures. 
This commenter believes attempts to disguise or disclaim federally 
required disclosures have traditionally resulted in disclosures being 
held to be defective and legally insufficient. This commenter 
analogized such rebuttals to allowing a rebuttal to the Annual 
Percentage Rate (APR) disclosure required by the Truth-in-Lending Act 
and Regulation Z.
    NCUA's disclosures are not analogous to the APR disclosure required 
by Federal Reserve Board's Regulation Z. The APR calculation is a 
standardized numerical calculation meant to facilitate

[[Page 77160]]

comparisons. NCUA wants to encourage communication and discussion, not 
discourage it. As discussed previously, if a converting credit union 
wants to make statements about its intent with regard to post-
conversion rates or post-conversion stock benefits, it is free to do 
so.
    Several commenters felt the disclosure relating to diminution of 
voting rights following conversion to an MSB should be retained as part 
of the boxed disclosures. NCUA believes this disclosure is important, 
and so must be made by the converting credit union in the body of the 
member notice. Including too much information in the boxed disclosures, 
however, reduces the probability a member will read and comprehend the 
disclosures. Accordingly, the final rule does not include this 
particular disclosure as a boxed disclosure.
    A few commenters suggested other changes to the disclosures. One 
commenter that supports the proposed boxed disclosures believes the key 
language in the disclosures should be capitalized, as in the existing 
rule. The Board believes the disclosures are adequate without 
additional capitalization. One commenter suggested an additional 
disclosure informing members they may contact the appropriate NCUA 
regional office if they feel officials are not acting in the best 
interests of members. NCUA believes that members who are dissatisfied 
with the credit union's actions may use the NCUA complaint process that 
exists for all member complaints and that no specific notice of that 
process is necessary. Some commenters suggested the boxed disclosure be 
expanded to include what those commenters perceive as advantages of the 
thrift charter over the credit union charter. A converting credit union 
is free to explain what it believes are the advantages of the thrift 
charter in the notice to the members.
    One commenter thought the proposed requirement that the disclosures 
be placed immediately after the cover letter was ``unworkable'' because 
the credit union cannot control what its printer does or how a member 
opens an envelope. This commenter suggested NCUA only require best 
efforts in that regard. NCUA disagrees. A converting credit union can 
control the order in which the documents are placed in the envelope. 
When members pull out the materials, they will see the cover letter 
prepared by the directors, and the other documents should be placed in 
the appropriate order behind that cover letter.
Other Required Disclosures (General)
    The current rule requires a converting credit union to disclose 
other information about the conversion, and the proposal retained these 
disclosures, including whether the converting credit union intends to 
convert to a stock entity; any conversion-related benefits to directors 
and senior management; and the effect of conversion on products and 
services, including the effect, if any, of the Qualified Thrift Lender 
(QTL) test applicable to federal MSBs.
    Several commenters stated that disclosure of the intent to convert 
to a stock institution would violate the confidentiality requirement in 
Sec.  563b.120 of the OTS regulations.\17\ Some of these commenters 
stated that requiring a credit union to state its conversion intentions 
would cause these decisions to be fueled by professional investors.
---------------------------------------------------------------------------

    \17\ 12 CFR 563b.120. This section reads as follows:
    ``May I discuss my plans to convert [to a stock institution] 
with others?
    (a) You may discuss information about your conversion with 
individuals that you authorize to prepare documents for your 
conversion.
    (b) Except as permitted under paragraph (a) of this section, you 
must keep all information about your conversion confidential until 
your board of directors adopts your plan of conversion.
    (c) If you violate this section, OTS may require you to take 
remedial action. For example, OTS may require you to take any or all 
of the following actions:
    (1) Publicly announce that you are considering a conversion;
    (2) Set an eligibility record date acceptable to OTS;
    (3) Limit the subscription rights of any person who violates or 
aids a violation of this section; or
    (4) Take any other action to assure that your conversion is fair 
and equitable.''
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    NCUA does not believe its required disclosure violates either the 
letter or the spirit of the OTS provision at 12 CFR 563b.120. The 
disclosure requirement does not violate the letter of Sec.  563b.120 
because it applies only to the converting institution while it is a 
credit union, and the OTS rule applies only to the converting 
institution after it becomes an MSB. Accordingly, the institution can 
reference its intent before it converts and then remain silent about 
its further intent after it converts.
    Moreover, the NCUA disclosure provision does not run afoul of the 
spirit of the OTS confidentiality provision. If an MSB violates 
563b.120, the first element of the cure is for the MSB to make full 
public disclosure. 12 CFR 563b.120(c)(1). The confidentiality provision 
is designed to protect against limited disclosure to the benefit of 
select individuals, such as professional depositors, and to the 
detriment of the MSB membership as a whole. NCUA's disclosure provision 
is consistent with this intent because it ensures that all interested 
parties, including the credit union's membership, are aware of the 
credit union's intent to go to convert to stock and professional 
depositors and others with access to inside information will not have 
an advantage over the credit union's members.
    NCUA is aware that professional investors can purchase private 
research predicting which credit unions are likely to convert to MSBs 
and then to stock banks. Professional depositors already have an 
information edge over the member-owners of a credit union and it is 
only proper that the board of a credit union keep its membership 
informed of its intentions when those intentions could have a 
fundamental effect on that ownership interest.
    The Board also notes that the OTS has never informed NCUA that it 
objects to the NCUA requirement that a converting credit union disclose 
its intent with regard to a future stock conversion. In 2005, two Texas 
credit unions converted to MSBs. Their notices to members about the 
upcoming vote stated their intention, after the MSB conversion, to 
convert to stock institutions. Following the member vote, these credit 
unions requested OTS certify the member vote, and OTS issued formal 
certification orders. OTS Order No. 2005-24 (July 20, 2005) and Order 
No. 2005-23 (June 29, 2005). These orders state that OTS reviewed the 
text of the member notices. While the orders criticize some of NCUA's 
disclosure requirements, neither order mentions the disclosure of 
intent to convert to stock.
The Ballot
    Most commenters strongly support the proposal that the ballot be 
sent only with the 30-day notice. These commenters believe members must 
have time to consider both the advantages and disadvantages of the 
conversion and to hear what other members have to say about the 
conversion before deciding how to vote. Several of these commenters 
also suggested NCUA require that a converting credit union allow a 
member to change his or her vote anytime up to the close of the special 
meeting. These commenters cited the balloting rules in Roberts Rules of 
Order and also those applicable to for-profit companies.
    Several commenters objected to the requirement that the ballot go 
only with the 30-day notice, stating this would shorten the time frame 
for voting and discourage voters from voting. One commenter stated NCUA 
should not presume that voters need more time to vote absent evidence 
to the contrary. One commenter suggested a credit

[[Page 77161]]

union ``mail the ballot separately from the 30-day disclosure.''
    NCUA has carefully considered both sides of this issue. NCUA has 
heard from members of converting credit unions that they need time, 
once the membership voting process has been launched, to communicate 
with one another and to consider their votes. The decision made by most 
converting credit unions not to allow members to change their votes 
once cast makes it imperative that the members receive and consider all 
relevant information before they cast an irrevocable ballot. NCUA 
wishes to balance the need for an informed vote with the burden on the 
converting institution. For example, it could be burdensome to allow 
voters to change their votes up to the close of the special meeting. It 
would also be a burden on a converting credit union to require all 
voting be done in person at the special meeting, and that no ballots be 
sent, or any votes cast, by mail.\18\ NCUA believes that the proposed 
rule strikes the appropriate balance between voters' rights and the 
burden on the credit union. Accordingly, the final rule retains the 
requirement that the ballot be sent with the 30-day notice and not 
earlier.
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    \18\ The FCUA is silent on ballot delivery. The FCUA language 
stating that the credit union ``shall submit notice to each of its 
members * * * 90 days before the date of the member vote'' could be 
interpreted to mean that the member vote must be conducted in person 
on the date of the vote, with no ballots sent, or votes received, by 
mail. 12 U.S.C. 1785(b)(2)(C)(i).
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    One commenter noted that the statement on the ballot about loss of 
credit union membership required by proposed Sec.  708a.4(b)(4)(iii) 
did not track the corresponding boxed disclosure exactly, because it 
simply said ``bank'' and not ``mutual savings bank.'' The text of the 
final Sec.  708a.4(b)(4)(iii) tracks the final version of the boxed 
disclosure.
    One commenter objected to the proposed rule's limiting information 
on the ballot to a statement of the conversion proposal under 
consideration, the board's recommendation, and voting instructions. 
This commenter believes this constitutes censorship. NCUA disagrees. A 
converting credit union is free to make its case for conversion in the 
notice materials and other communications to members. The ballot itself 
should focus on the mechanics of voting and not include other 
information that may confuse members and keep them from exercising 
their voting rights.
    The FCUA states that ``[t]he member vote concerning charter 
conversion * * * shall be administered by the [NCUA].'' 12 U.S.C. 
1785(b)(2)(G)(ii). The courts have given a very broad meaning to the 
word ``administer.''\19\ NCUA's authority to administer the vote 
certainly includes the authority to dictate the form of the ballot and 
its delivery.
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    \19\ As one court stated, ``[t]he word `administer' is one 
susceptible of a very broad interpretation * * * [t]o `manage' is to 
control and direct, to `administer,' to take charge of * * *'' 
Costonis v. Medford Housing Authority, 343 Mass. 108, 114 (Mass. 
1961). Another court analyzing the use of the word ``administer'' 
stated that ``[t]o administer a decree is to execute it, to enforce 
its provisions, to resolve conflicts as to its meaning, to construe 
and to interpret its language.'' United States v. Hennen, 300 F. 
Supp. 256, 263 (D.C. Nev. 1968).
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Procedure for Members To Communicate With Each Other at the Member's 
Expense
    Most commenters supported the proposal's provisions for 
facilitating member-to-member contact, including the timing, advance 
payment amounts, and NCUA review of disputed materials. These 
commenters generally felt the proposal protected the rights of members 
to make their views known to other members without delaying the 
conversion or unduly burdening the credit union.
    Several comments touched on the proposed amount of the required 
advance payment (50 cents per member) for hardcopy mailings. A few 
commenters thought 50 cents was too low. One commenter said the cost of 
a member mailing was currently closer to one dollar per member. This 
commenter also suggested the regulation should accommodate changes in 
costs over time and recommended NCUA specify the advance payment rate 
in terms of a multiple of the first class postage rate or, 
alternatively, permit the converting credit union to establish some 
reasonable rate. Another commenter was also concerned about the ``hard 
coding'' of these costs, and suggested credit unions should determine 
the cost, within reason. Another commenter suggested NCUA set a maximum 
amount a credit union could seek for cost reimbursement. A few 
commenters were concerned about the collectability of the remainder of 
the reimbursement, and one suggested NCUA authorize a credit union to 
take additional monies, not to exceed the maximum amount, from a 
member's share accounts. One commenter stated the cost to a member 
should be based on actual amounts, and not specified in the 
regulations. One commenter asked if the reimbursable expense included 
any credit union overhead.
    First, NCUA would like to clarify that the proposed rule did not 
require a member to pay the full cost of delivery in advance. 
Reimbursement is not required in advance, but the member must make an 
advance on the full reimbursement to ensure the communication is 
delivered. The credit union and member will subsequently work out the 
actual cost of delivery. The credit union may not take the remaining 
monies due out of the member's account unless the member concurs.
    Second, the Board clarifies that the reimbursable cost only 
includes direct costs to the credit union. It does not include indirect 
costs or overhead. For example, if the credit union plans to use 
internal staff to prepare some or all of the mailing a credit union may 
not charge the member for staff salary or benefits. The final rule 
provides for this.
    Third, NCUA agrees with those commenters suggesting that some 
advance payment formula adjusting with changes in future prices would 
be better than a fixed amount, at least for the advance payment on 
hardcopy mailings.
    Accordingly, the final rule replaces 50 cents, the proposed fixed 
amount, with an advance payment calculation using 150% of the first 
class postage rate on a letter of less than an ounce. The current first 
class postage rate is 39 cents, and 150% of that, or 58.5 cents, lies 
between the proposed 50 cents and the one dollar cost that the one 
credit union commenter suggested would be its total per-member cost of 
a hardcopy mailing.
    A few commenters stated that, because of the impact of the bank 
conversion decision on members and their rights, a credit union should 
bear the entire cost of the member-to-member communication. These 
commenters questioned whether the cost of sending the communication 
might discourage some members from attempting to communicate with other 
members. Several of these commenters noted that converting credit 
unions spend large sums of money promoting the conversion and 
individual members opposed to the conversion cannot raise this kind of 
money. Some commenters suggested member comments be included with the 
90-, 60-, and 30-day notices if received by the credit union before 
those mailings, citing SEC proxy solicitation requirements. One 
commenter suggested the credit union could put all member 
communications in one separate mailing to be sent before the 30-day 
notice. Another commenter suggested the credit union fund ``a 
reasonable number'' of these communications. Another commenter 
suggested that, if a member could obtain a certain minimum number of 
member

[[Page 77162]]

signatures on a petition supporting a communication, the credit union 
should send it for free.
    NCUA has carefully considered these comments. Members who only want 
their comments posted only on the credit union's Web site may do so for 
free. Other forms of distribution, however, may involve significant 
credit union resources. Members who feel strongly about delivery of 
their message to other members should be willing to pay to have it 
delivered. NCUA did not want all the communications to be sent together 
in one mailing because that might raise the issue of which 
communications (e.g., for or against the conversion) would be placed 
first. The petition idea is interesting, but there are only sixty days 
between the first notice and the mailing of the ballot, and NCUA is not 
sure that a petition would work given the time needed to gather and 
validate signatures. In addition, the idea of having the credit union 
fund a reasonable number of communications, but not all communications, 
raises issues such as the definition of ``reasonable'' and who will 
select those communications that will be sent for free and which must 
be paid for.
    One commenter objected to the proposed communication procedures 
because of the resources a credit union would have to devote to 
determining which members have agreed to receive e-mail communications 
and which communications were not proper. This commenter felt the 
proposed provisions providing for the posting of comments in the credit 
union's branches and on its Web sites were sufficient communication 
methods. NCUA disagrees because such postings are not guaranteed to 
reach every member. If the member wants a communication delivered 
directly to other members and is willing to pay for it, the credit 
union should do it.
    Credit unions should follow their customary mailing practices for 
member-to-member communications. For example, if a credit union 
regularly delivers information or statements with respect to two or 
more members sharing the same address by delivering a single mailing to 
those members, referred to as ``householding,'' then the credit union 
should follow this same practice for member-to-member communications. 
The householding method of delivery will reduce the amount of 
duplicative information that members receive and also lower printing 
and mailing costs for the credit union and, ultimately, the requestor.
    One commenter stated that, as between e-mailing and regular mail, 
the regulation should clarify whether the requestor must select one 
method or the other, and, if a combination is permitted, how the 
advance payment is to be calculated. NCUA believes the rule is clear. 
The member may request that the communication be sent by mail, by e-
mail, or both. In the latter case, the member must make both advance 
payments. Those members that have agreed to accept communications by e-
mail will then get the communication by both mail and e-mail.
    A few commenters were concerned that, if a credit union could not 
meet the timeline for review and delivery of a communication, 
postponement of the special meeting unduly burdens the credit union. 
Another credit union commenter stated that the proposal allowing only 
seven days to deliver the communication was unrealistic in that it 
would take at least 14 days to print, stuff, and mail the 90,000 pieces 
of mail required to reach that credit union's members.
    The proposed paragraph 708a.4(f)(1) provided that:

    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 .* 
* *

    The Board has considered this and agrees a seven-day delivery 
standard may be overly burdensome. The final rule deletes the words 
``within seven days of receiving such a request'' from paragraph 
(f)(1). The final rule retains the requirement, however, that the 
credit union must deliver the member communication on or before the 
date members receive the 30-day notice and ballot. There are at least 
60 days between the date the 90-day notice is mailed and the date the 
members receive the 30-day notice. The rule provides that members have 
35 days from the date of the 90-day notice to submit any communication 
requests to a converting credit union. That leaves at least 25 days (60 
minus 35) for a credit union to process and deliver a communication. In 
the event of a disputed communication, NCUA has seven of those 25 days 
to review the communication, but that still leaves 18 days for a credit 
union to process and deliver the communication. The Board recognizes 
this timeline may be demanding, but it is certainly achievable. A large 
converting credit union should anticipate it may have to deliver 
several member communications on short notice and plan accordingly in 
advance of sending the 90-day notice.
    A few commenters addressed the proposed standard for determining if 
a particular communication is proper and were supportive of the 
proposal.
    A few commenters suggested the required member notices include a 
statement informing members they may provide materials for distribution 
to other members. Paragraph 708a.4(f)(9) of the proposed rule requires 
this, and the final rule retains this provision.
    One commenter objected to the proposal and analogized such member-
to-member communications as junk mail or spam. NCUA disagrees. 
Communications among members are part of the democratic character of 
credit unions.
    One commenter stated that, after a credit union delivers a 
communication to its members, it should inform the requesting member 
that the communication has been delivered. NCUA agrees, and the final 
rule has been modified accordingly.
    One commenter suggested a group of members might get together to 
request delivery of a single communication and the rule should 
specifically permit that. NCUA agrees, and has added a new subparagraph 
(f)(10) to address that situation. The converting credit union will 
refer to the group in the manner requested by the group, for example, 
with a single group name or by listing each member's name individually.
    One commenter objected to NCUA resolving disputes over the 
propriety of the communication, stating this would constitute NCUA 
censorship of the conversion debate. The commenter claims OTS resolves 
disputes over the communications of MSB members only when requested. 
NCUA will perform a similar role to OTS. NCUA will only become involved 
when requested. If there is a dispute, the parties will request NCUA to 
resolve it, which is the same role OTS plays in MSB communications.
    NCUA solicited comment on possible alternative methods of 
communication, including, for example, having the member prepare the 
communication for mailing, including sealing the envelopes and applying 
postage, with the credit union itself being responsible only for 
putting mailing labels on the envelopes and mailing them. NCUA received 
a few comments on this proposal. Some commenters thought this would put 
too much burden on a member. A few commenters supported the proposal 
but only if NCUA reviewed the communication before mailing for proper 
content. Another commenter thought this approach would reduce the 
burden on the credit union and the credit union should have the option 
of requiring the sender to prepare the mailing. After fully considering 
these

[[Page 77163]]

options and comments, NCUA concludes that the form of communication as 
proposed is best, and not the alternatives.
    One commenter stated NCUA should regulate the content of 
communications made by those opposed to the conversion in the same 
manner it regulates the content of communications made by the credit 
union itself. In fact, the rule provides for NCUA review of comments 
made by the credit union and comments made through the credit union, 
regardless of whether those comments are for conversion or against 
conversion.
    Accordingly, and except as discussed above, the final rule retains 
Sec.  708a.4 as proposed.

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. A state-chartered credit 
union 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.
Requirement for Board Certification
    The proposed rule provided for directors to submit to NCUA a 
certification of their support for the conversion proposal and plan. 
Each director who votes in favor of the conversion proposal would have 
to 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.
    Most commenters strongly supported the proposed director 
certification requirement as written. These commenters think it is 
important that credit union directors understand their fiduciary 
obligations. Several commenters noted that, with the financial 
incentives to convert, the certification helps directors to focus on 
their fiduciary obligation.
    Several commenters objected to the certification requirement. Some 
of these commenters believe it exceeds NCUA's statutory authority to 
impose such a requirement. Some of them felt the requirement will have 
the effect of deterring credit union board members from voting in favor 
of a plan of conversion by increasing the potential for litigation 
against directors. One of these commenters believed the vast majority 
of written comments received as part of the advance notice requirement 
would oppose the conversion process and that this, combined with the 
certification requirement, would discourage board members from doing 
what they believe to be in the best interests of the credit union, its 
members, and the communities it serves. One of these commenters asked 
why only a conversion vote merits this certification when ``other, 
equally fundamental changes do not,'' without identifying what changes 
are equally fundamental. One commenter stated that NCUA had not offered 
any evidence that in the past a board has skirted its fiduciary 
responsibility on this topic. One of these commenters suggests NCUA 
adopt certification requirements identical to the OTS certification 
requirements. One commenter objected to the certification but suggested 
that, if adopted, the reference to 18 U.S.C. 1001 should be expanded to 
indicate that the title 18 provision only applies to willful and 
knowing false certifications.
    The Board has carefully considered these comments. Given the 
financial incentives to credit union officials in connection with 
conversion and the need to link the board's conversion due diligence to 
the interests of the members, the Board believes the certification 
requirement is both appropriate and necessary. This imposition of this 
certification requirement is within NCUA's authority, as discussed in 
the previous section on NCUA's rulemaking authority.
    The Board has also considered the suggestion that the reference to 
18 U.S.C. 1001 be expanded to indicate that the provision only applies 
to willful and knowing false certifications. The Board has examined 
similar citations to 18 U.S.C. 1001 used in director certifications 
submitted to OTS in connection with other charter conversions, and 
found no use of the words ``willful and knowing.''
    Accordingly, the final rule retains the certification requirement 
as proposed.
Materials Subject to NCUA Review
    Proposed Sec.  708a.5(b) retained 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 
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.
    Virtually all the comments on the proposed expansion of reviewable 
materials supported the expansion. Accordingly, the final rule retains 
this provision as proposed.
Consultation With State Supervisory Authorities (SSA)
    One commenter requested that, for converting state-chartered credit 
unions, NCUA specifically add a provision to the rule stating it will 
coordinate with the state supervisory authority on the conversion and 
conversion process. The Board has added a provision that requires the 
Regional Director, upon notification from a state-chartered credit 
union that it has adopted a plan of conversion, to contact and consult 
with the credit union's SSA.
    Accordingly, and except as described as above, this final rule 
adopts Sec.  708a.5 as proposed.

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 included the 
requirements found in the current Sec.  708a.4 that members must 
approve the proposal by affirmative vote of the majority of members who 
vote and the vote must be by secret ballot conducted by an independent 
entity.
    Proposed Sec.  708a.6(b) required the board of directors to set a 
date

[[Page 77164]]

determining member eligibility to vote. The proposal required the 
voting date of record be at least one hundred twenty days before the 
board of directors publishes the Sec.  708a.3 notice of intent to 
consider conversion.
    Most commenters agree with the 120-day voting eligibility 
requirement. No commenters opposed the requirement, although one 
thought that 30 to 60 days was more appropriate, so as to 
disenfranchise as few legitimate members as possible. Another commenter 
thought the eligibility date should be as close to the advance notice 
date as possible.
    NCUA agrees with the last commenter. The final rule modifies the 
voting eligibility requirement to no later than one day before 
publication of the advance notice. This will still minimize the impact 
of professional depositors while disenfranchising as few legitimate 
members as possible.
    NCUA also solicited comment on whether it should permit electronic 
voting. Only a few comments addressed this issue. One supporter stated 
the opportunity to vote electronically must be consistent with the 
timetable prescribed in the proposed regulations and that integrity of 
the process must be verified and maintained. Dissenters were generally 
concerned about the possibility of fraud. Given the general lack of 
response to this suggestion, the final rule does not authorize 
electronic voting.
    Several commenters recommended the rule be amended to prohibit the 
independent teller from providing interim updates to the credit union 
on the member vote. These commenters believe the credit union may abuse 
this information or that the information creates an unfair advantage 
because the credit union management knows the vote tally while members 
opposed to the conversion do not. In the alternative, some of these 
commenters suggest that, if the teller is permitted to make interim 
voting reports available to credit union officials, then those reports 
should also be made available to all interested parties.
    The interim reporting of voting results is not addressed in the 
proposed rule and so is beyond the scope of this rulemaking. The Board 
notes that, by requiring the ballot to be sent with the 30-day notice, 
the final rule mitigates any advantage that may be gained through 
interim reporting.
    Accordingly, the final Sec.  708a.6 is adopted as proposed.

708a.7 Certification of Vote on Conversion Proposal

    Proposed Sec.  708a.7 retained the requirement, currently located 
in Sec.  708a.6, that the board of directors certify the results of the 
membership vote to NCUA. No comments were received on this section, and 
the final rule retains Sec.  708a.7 as proposed.

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

    The current Sec.  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 lengthened this time period to 30 calendar days and 
relocated 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 contained a new provision 
permitting a credit union dissatisfied with a Regional Director's 
determination to appeal to the NCUA Board. Any appeal must be filed by 
the credit union within 30 calendar days after receipt of the Regional 
Director's determination.
    Most commenters supported the proposed changes, including allowing 
the Regional Director 30 days to approve or disapprove of the methods 
and procedures of the vote and the proposed appellate process.
    One commenter objected to the proposed appeal process as illegal. 
This commenter characterized the appeal as ``mandatory,'' and stated a 
mandatory appeal was impermissible under the Administrative Procedures 
Act (APA), 5 U.S.C. 702 and 704; and Darby v. Cisneros, 509 U.S. 137 
(1993). The Board intends the appeal to be permissive, not mandatory. 
Both the proposed and final rules state that ``[a] converting credit 
union may appeal the Regional Director's determination * * *'' 
(emphasis added). Accordingly, there is no APA issue.

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. NCUA received no comments on this section, and the final 
rule retains the language as proposed.

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.
    Many commenters agreed with this one-year completion window. One 
commenter suggested that NCUA grant the Regional Director authority to 
extend this window, upon request of the converting institution, for an 
additional six months. A few commenters objected to this provision. One 
of them thought two years was more reasonable.
    The final rule permits the Regional Director, upon timely request 
and for good cause, to extend the one-year completion period for an 
additional six months. This provides additional flexibility to 
converting credit unions, while still ensuring that the process moves 
along, that the membership vote will not become stale, and, as 
discussed in the preamble to the proposed rule, that NCUA can plan for 
efficient use of its examination resources.
    Except as discussed above, the final rule retains Sec.  708a.10 as 
proposed.

708a.11 Limit on Compensation of Officials

    Proposed Sec.  708a.11 retains the limit on compensation for 
officials currently found in Sec.  708a.10. NCUA received no comments 
on this section, and the final rule retains Sec.  708a.11 as proposed.

708a.12 Voting incentives (Proposed: Member Access to Books and 
Records)

    The proposed rule included a new provision on member access to the 
books and records of the converting credit union. The proposal stated 
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 conversion or obtaining copies of documents 
related to the due diligence performed by the credit union's board of 
directors. The proposal also stated that FCUs will grant access under 
the same terms and conditions that a state-chartered for-profit 
corporation in the

[[Page 77165]]

state in which the FCU is located must grant access to its 
shareholders.
    Some commenters suggested that, in lieu of relying on the state law 
where the FCU is located, NCUA establish a particular standard for 
access to member books and records. These commenters noted that state 
law on records access varies widely from state to state. They also 
noted that, because of the way state corporation statutes are written, 
it is possible that a state court may decline to apply state corporate 
law to an FCU. Some commenters expressed concern about access to 
certain records, including member names and other sensitive personal 
information and safety and soundness information. One commenter 
suggested NCUA specify the kinds of documents members could review, 
such as the conversion proposal, the board minutes addressing 
conversion, and related documents. One commenter stated NCUA should 
require disclosure of all communications between the credit union and 
``outside promoters of the conversion.'' One commenter that supported 
the provision stated NCUA needed to provide a definition of where an 
FCU that does business in more than one state is located. One commenter 
believed access to FCU books and records should be governed by the same 
law that applies to records access for members of state-chartered 
mutual savings banks or members of state-chartered nonprofit 
organizations. One commenter thought it should be made clear that 
access to books and records does not give members permission to disrupt 
the normal course of business.
    The Board has decided not to adopt a regulatory provision on member 
access to books and records at this time. FCUs should continue to 
follow existing legal opinions on member access to books and records, 
including NCUA OGC Legal Opinion 06-0127B (February 6, 2006), located 
on NCUA's Web site at http://www.ncua.gov.
    Accordingly, the final rule does not adopt Sec.  708a.12 as 
proposed. Instead, the final Sec.  708a.12 addresses voting incentives. 
The text of the final Sec.  708a.12 is discussed below.

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 moved the voting guidelines to Sec.  708a.13. It 
retained the existing guidance and added additional guidance on the use 
of voting incentives.
    Many commenters supported these proposed changes, although many 
also thought the rule should be amended to specifically prohibit the 
use of raffles or other voting incentives. Some of these commenters 
desire a blanket prohibition, while others want to prohibit only those 
incentives constructed to affect the outcome of a conversion vote or 
designed to encourage rapid voting (e.g., raffles that are only open to 
the first 500 voters). Some of the commenters supporting a blanket 
prohibition feel that voting incentives increase the participation of 
``casual'' or ``indifferent'' members, while they do not increase the 
participation of those who ``properly regard conversion as a matter of 
the highest importance.'' One commenter stated these incentives are 
intended to encourage members to vote quickly, before fully discussing 
the issue with other members. Some of these commenters distinguish the 
use of raffles in other contexts, stating that, while raffles may be 
permissible in other contexts, the importance of the charter conversion 
decision should keep out any mechanism that could skew the fairness of 
the vote. One commenter also suggested that, in addition to a 
discussion of voting incentives in the guidelines attached to the rule, 
NCUA should specifically prohibit any incentives offered to affect the 
outcome of the vote rather than to encourage participation in the 
voting process. One commenter thought a credit union should be allowed 
to conduct raffles as it desired without NCUA oversight.
    The Board believes voting incentives are not necessarily bad. 
Still, when incentives are employed, they must be used in a way that 
does not skew the results of the vote or encourage members to vote 
before they have time to consider the ramifications of the conversion. 
After careful consideration, the Board has determined the final rule 
should include a disclosure requirement in connection with voting 
incentives. Accordingly, the final Sec.  708a.12 requires that, if a 
converting credit union offers an incentive to encourage members to 
participate in the vote, including a prize raffle, every reference to 
such incentive made by the credit union in a written communication to 
its members must also state that members are eligible for the incentive 
regardless of whether they vote for or against the proposed conversion.
    Members should take the time that they need to consider their vote, 
and so incentives should not encourage rapid voting. Incentives should 
be available equally to all who vote, whether by mail or in person at 
the special meeting. The final guidelines address this.
    A few commenters believe the statement in the proposed guidelines 
that ``incentive(s) should not be unreasonable in size'' is ambiguous 
and requested clarification.
    An incentive could be unreasonably large in two different ways. 
First, the cost of the incentive could be unreasonable in relation to 
the credit union's net worth. In other words, the cost of the incentive 
should have a negligible impact on the credit union's net worth ratio. 
Second, the incentive could be unreasonable if it is so large that it 
distracts the member from the purpose of the vote. The Board has added 
additional language to the guidelines to reflect this guidance.
    Except as discussed above, the final Sec.  708a.13 is adopted as 
proposed. Also, as discussed above, the final Sec.  708a.12 is retitled 
and restructured.

D. Other Comments and Issues

    NCUA received other comments not related to any particular section 
of the rule. Some of these comments were beyond the scope of this 
rulemaking, including:
     A few commenters asked that NCUA review its position that 
it generally does not become involved in bylaws disputes. These 
commenters believe NCUA should actively enforce bylaw provisions, 
particularly as they relate to the conversion process. Some of these 
commenters stated NCUA often focuses on bylaw issues as part of its 
examination process. One of these commenters stated the bylaws should 
be a regulation.
     One commenter stated NCUA should create a private right of 
action for members against directors who violate their fiduciary 
duties.
     Some commenters urged NCUA to require converting credit 
unions to release their due diligence to the members before they vote. 
Some of the commenters thought converting credit unions should address 
how conversion to a mutual is more beneficial than converting directly 
to a stock based organization and giving member a pro rata share of 
stock based on their investment in the credit union.
     A few commenters suggested NCUA promulgate a rule 
requiring a converting credit union distribute its capital and surplus 
in a pro rata distribution to credit union members before converting.

[[Page 77166]]

    As these comments are beyond the scope of this rulemaking, NCUA 
declines to address them in this final rule.
    A few commenters suggested NCUA permit credit unions to convert 
directly to stock banks. A few commenters suggested that, in addition 
to a conversion rule, NCUA also promulgate a rule on credit union 
mergers into banks. The FCUA permits credit unions to merge into banks, 
but a rulemaking specific to those conversions is also beyond the scope 
of this rulemaking. 12 U.S.C. 1785(b)(1).
    Several commenters noted the current regulation has no minimum 
quorum requirement for the member vote and the decision to convert 
could be made by only a small fraction of the members. These commenters 
suggested NCUA should require a quorum of a substantial percentage of 
the membership. The FCUA, however, does not permit the NCUA to 
establish a quorum requirement for MSB conversions. The FCUA states 
that membership approval ``shall be by affirmative vote of a majority 
of the members of the insured credit union who vote on the proposal.'' 
12 U.S.C. 1785(b)(2)(B).
    Several commenters who objected to the proposed rule felt the 
proposed rule undermined the corporate business judgment rule. The 
Board does not agree that anything in the proposed or final rule, which 
focuses on process and procedures not the substantive decision, 
undermines the corporate business judgment rule.
    Many credit unions that convert to MSBs subsequently convert to 
stock banks in a mutual holding company format. One commenter stated 
that NCUA ``vilifies'' the MHC form unjustly. This commenter states 
that the MHC form allows mutual savings associations to raise 
additional capital, add branches, and acquire whole businesses, all the 
while ``retaining their mutual ownership structure.'' This commenter 
states ``it is hard to find where the NCUA has any experience on this 
matter to give their views credibility.''
    The Board believes the conversion to an MHC form presents the 
directors with conflicts of interest, and the directors' waiver of 
dividends in favor of minority stockholders and to the detriment of the 
members of the MHC exemplifies this conflict. Another banking 
regulator, the FDIC, agrees. The FDIC has expressed its concern over 
this waiver practice as follows:

    The Competitive Equality Banking Act of 1987 and the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 
authorized conversion of mutual savings institutions into federal 
mutual holding companies, which in turn transfer virtually all their 
assets and liabilities to new, stock savings institutions, part of 
whose stock is acquired by subscribers in the conversion, with the 
majority retained by the mutual parent. This structure has the 
benefit of permitting converting institutions to raise only the 
amount of new capital they actually need. It has, however, in our 
view, potential for even a higher level of insider abuse than in 
standard conversions. We note that many newly formed mutual holding 
companies propose to refuse dividends declared by their operating 
subsidiary--with no corresponding change in their percentage 
ownership of the subsidiary as dividends flowed to its minority 
stockholders. It seems to us that this could constitute a breach of 
fiduciary duty on the part of the trustees--which would be 
particularly acute were the trustees significant stockholders of the 
subsidiary * * * As our suggested form of standard conversion would 
eliminate the need to raise excessive amounts of capital, we believe 
use of the mutual holding company structure should be discouraged in 
future conversions.\20\
---------------------------------------------------------------------------

    \20\ Review of Mutual-to-Stock Conversions of State Nonmember 
Savings Banks, 59 FR 30357, 30362-63 (June 14, 1994). See supra note 
11 and accompanying discussion.

    The Board understands the FDIC, as a matter of past and present 
policy, does not approve MHC conversions of state nonmember banks 
unless the converting institution agrees not to waive dividends in 
favor of minority stockholders. In this regard, the FDIC policy differs 
from the policy OTS applies to federal MHC conversions.

Conversions in Process at the Time This Final Rule Becomes Effective

    A few commenters asked about how conversions in process, if any, 
will be affected by this rulemaking. The Board intends that credit 
unions in the process of conversion, to the extent it is reasonable for 
them to do so, comply with the provisions of this final rule. If 
compliance with a particular provision of the rule, however, would 
impose a significant burden on the credit union by requiring it to 
repeat something it has already done, it need not comply with that 
provision of the rule. For example, if, on the date this rule is 
published in the Federal Register, the board of directors of a 
converting credit union has already adopted a conversion proposal, it 
need not give advance notice nor adopt the conversion proposal again. 
It must, however, provide public notice as soon as possible that it has 
adopted a conversion proposal. Similarly, if, on the date that this 
rule is published in the Federal Register, a credit union has already 
adopted a conversion proposal and mailed the 90-day notice, it need not 
redo that notice nor comply with the member-to-member communication 
procedures in the final rule. The Board anticipates that a credit union 
in the process of converting when this rule becomes effective will 
consult with its Regional Director for further guidance.

E. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a proposed rule may have on 
a substantial number of small credit unions (those under ten million 
dollars in assets). 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 believes that, 
in any given year, it is unlikely there will be any conversions by 
credit unions with less than ten million dollars in assets. 
Accordingly, the Board certifies that this final rule will not have a 
significant economic impact on a substantial number of small credit 
unions, and, therefore, a regulatory flexibility analysis is not 
required.

Paperwork Reduction Act

    Part 708a contains information collection requirements currently 
approved under Office of Management and Budget (OMB) Control Number 
3133-0153. 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 OMB for its review 
and approval of a revision to Control Number 3133-0153. At the time of 
this rulemaking, OMB approval is still pending.

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

[[Page 77167]]

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 rule will not affect family well-
being within the meaning of section 654 of the Treasury and General 
Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 2681 
(1998).

Small Business Regulatory Enforcement Fairness Act

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

List of Subjects in 12 CFR Part 708a

    Charter conversions, Credit unions.

    By the National Credit Union Administration Board on December 
14, 2006.
Mary F. Rupp,
Secretary of the Board.

0
For the reasons stated above, the NCUA Board revises 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 Voting incentives.
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 in bold type in a font size at 
least one size larger than any other text used in the document 
(exclusive of 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.


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 
lobby of 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
    (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 the credit union's main office until the conversion process is 
completed.
    (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

[[Page 77168]]

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 notice must 
indicate the number of credit union members eligible to vote on the 
conversion proposal and state how many members have agreed to accept 
communications from the credit union in electronic form. The 90-day 
notice must also include the information listed in paragraph (f)(9) of 
this section.
    (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
    (ii) The following language: ``A vote FOR the proposal means that 
you want your credit union to become a mutual savings bank. A vote 
AGAINST the proposal means that you want your credit union to 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 it sends to its members regarding the conversion:

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             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 you want your credit union to become a mutual savings
 bank. A vote ``AGAINST'' the proposed conversion means you want your
 credit union to 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.
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    (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 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 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

[[Page 77169]]

it sends out the 90-day member notice; and
    (iv) The requesting member agrees to reimburse the credit union for 
the reasonable expenses, excluding overhead, 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 credit union's 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 ensure that its members receive 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. When the credit union has completed the delivery, it must inform 
the requesting member that the delivery was completed and provide the 
number of recipients.
    (7) The term ``appropriate advance payment'' means:
    (i) For requests to mail materials to all eligible voters, a 
payment in the amount of 150% of the first class postage rate times the 
number of mailings, and
    (ii) For requests to e-mail materials only to members that have 
agreed to accept electronic communications, a payment in the amount of 
200 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. The credit union may 
also post a content-neutral disclaimer using language similar to the 
language in paragraph (f)(3)(i) 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.
    (10) A group of members may make a joint request that the credit 
union send its materials to other members. For purposes of paragraphs 
(f)(2) and (f)(3) of this section, the credit union will use the group 
name provided by the group.


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 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

[[Page 77170]]

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.
    (c) After receiving the notice described in paragraph (a)(3) of 
this section, the Regional Director will contact and consult with the 
appropriate State Supervisory Authority.


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 day 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. 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

[[Page 77171]]

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.
    (b) 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 Regional 
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.
    (c) The Regional Director may, upon timely request and for good 
cause, extend the one year completion period for an additional six 
months.
    (d) 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  Voting incentives.

    If a converting credit union offers an incentive to encourage 
members to participate in the vote, including a prize raffle, every 
reference to such incentive made by the credit union in a written 
communication to its members must also state that members are eligible 
for the incentive regardless of whether they vote for or against the 
proposed conversion.


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 recordkeeping to computer recordkeeping, 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. The cost of 
the incentive should have a negligible impact on the credit union's net 
worth ratio and the incentive should not be so large that it distracts 
the member from the purpose of the vote. If the board desires to use 
such incentives, the cost of the incentive should be included in the 
directors' deliberation and 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 or when he or she votes. 
All of the credit union's written materials promoting the incentive to 
the membership must disclose to the members, as required by

[[Page 77172]]

Sec.  708a.12 of this part, that they have an equal opportunity to 
participate in the incentive program regardless of whether they vote 
for or against the conversion. The credit union should also design its 
incentives so that they are available equally to all members who vote, 
regardless of whether they vote by mail or in person at the special 
meeting.

 [FR Doc. E6-21661 Filed 12-21-06; 8:45 am]
BILLING CODE 7535-01-P