[Federal Register Volume 75, Number 59 (Monday, March 29, 2010)]
[Proposed Rules]
[Pages 15574-15596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-6439]



[[Page 15573]]

-----------------------------------------------------------------------

Part III





National Credit Union Administration





-----------------------------------------------------------------------



12 CFR Parts 701, 708a, and 708b



Fiduciary Duties at Federal Credit Unions; Mergers and Conversions of 
Insured Credit Unions; Proposed Rules

  Federal Register / Vol. 75, No. 59 / Monday, March 29, 2010 / 
Proposed Rules  

[[Page 15574]]


-----------------------------------------------------------------------

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701, 708a, and 708b


Fiduciary Duties at Federal Credit Unions; Mergers and 
Conversions of Insured Credit Unions

AGENCY: National Credit Union Administration.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The National Credit Union Administration (NCUA) is issuing a 
proposed rulemaking covering several related subjects. The proposal 
documents and clarifies the fiduciary duties and responsibilities of 
Federal credit union directors. The proposal adds new provisions 
establishing the procedures for insured credit unions merging into 
banks. The proposal also amends some of the existing regulatory 
procedures applicable to insured credit union mergers with other credit 
unions and conversions to banks.

DATES: Comments must be received on or before May 28, 2010.

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

FOR FURTHER INFORMATION CONTACT: Paul Peterson, Director, Applications 
Section, Office of General Counsel; Elizabeth Wirick, Staff Attorney, 
Office of General Counsel; or Jacqueline Lussier, Staff Attorney, 
Office of General Counsel, at the above address or telephone (703) 518-
6540.

SUPPLEMENTARY INFORMATION:

A. Background

    In January 2008, the NCUA Board issued an Advance Notice of 
Proposed Rulemaking and Request for Comment (ANPR), asking whether it 
should adopt rules governing the merger of a federally insured credit 
union (FICU) into, or a FICU's conversion to, a financial institution 
other than a mutual savings bank (MSB). The ANPR also sought comments 
about whether NCUA should amend its existing regulations regarding 
mergers, charter conversions, and changes in account insurance. 73 FR 
5461 (Jan. 30, 2008). In particular, NCUA sought comments about how 
these transactions affect member rights and ownership interests, and 
whether regulatory changes are necessary to better protect member 
interests.
    A particular focus of the ANPR was whether existing rules 
adequately protect member interests. Interestingly, all of the comments 
from individual credit union members and credit union attorneys stated 
that NCUA's current rules relating to conversions and mergers are 
inadequate.\1\ Some of these commenters expressed concern that the 
fundamental changes brought about by the conversion and merger 
transactions referenced in the ANPR remove value from a credit union or 
transfer the value of some owners' interests to others, and so these 
transactions should be further regulated to protect all credit union 
member-owners. Accordingly, NCUA is now proposing rules designed to 
better protect the members.
---------------------------------------------------------------------------

    \1\ Several other commenters, including comments from some 
credit unions, generally opposed any rule changes related to any of 
the subjects in the ANPR. These commenters argued that prior 
revisions to the merger regulation as well as the member access to 
records rule provide adequate regulation of merger and conversion 
transactions. Some of these commenters also stated that credit 
unions have sufficient regulation in general and do not need further 
regulatory burden at this time. A few commenters asserted NCUA lacks 
authority to further regulate these transactions.
---------------------------------------------------------------------------

    This proposed rulemaking has four parts. First, a new Sec.  701.4 
addresses the duties of Federal credit union directors in managing the 
affairs of their credit unions. Second, revisions to part 708a address 
issues related to credit union conversions to mutual savings banks. 
Third, a new subpart to part 708a sets forth the procedures for merging 
a credit union into a bank. Finally, revisions to the existing 
provisions of part 708b address issues related to credit union mergers 
with other credit unions and the termination of Federal deposit 
insurance.
    The proposed new Sec.  701.4 provides that management of each FCU 
is vested in its board of directors who may delegate authority to carry 
out functions but not responsibility for the execution of such 
functions. Among other things, the proposal specifies the directors' 
duties of loyalty and care, requires that directors understand how to 
evaluate the credit union's financials, and instructs directors on when 
they may properly rely on the information and advice of third parties 
when making decisions. The proposal also amends Sec.  701.33, and 
NCUA's standard FCU bylaws, to limit the indemnification of FCU 
directors for liability arising from improper decisions that affect the 
fundament rights and interests of the credit union's members. The 
proposal makes a corresponding change to the standard Federal corporate 
credit union bylaws.
    The proposal revises the existing provisions of part 708a on the 
direct conversion of a credit union to a bank. The revisions are 
intended to better protect the secrecy and integrity of the voting 
process, to require converting credit unions provide members with 
additional information about how the conversion process could affect 
them, and to require these credit unions to provide NCUA copies of 
correspondence with other agencies related to the conversion.
    The proposal also adds a new subpart to 708a that establishes 
procedural and substantive requirements for converting a credit union 
to a bank through a merger. The procedures are, generally, an 
amalgamation of the existing procedures for merging a credit union into 
another credit union and the procedures for converting a credit union 
into a mutual savings bank. The proposal also requires that the credit 
union determine the value of the transaction to the gaining bank and 
compensate the members of the merging credit union for the diminution 
of their ownership rights that results from the merger.
    The proposal also provides for several amendments to the existing 
provisions of part 708b relating to credit union-to-credit union 
mergers and share insurance conversions. The proposed revisions include 
provisions that protect the secrecy and integrity of the voting 
process, that require disclosure to the members of information on any 
material increases in management compensation connected with the 
merger, that place time limits on completion of share insurance 
conversions, and that require disclosures related to share adjustments. 
The proposal also includes other technical amendments to part 708b.

B. Proposed Rule: Sec.  701.4 General Authorities and Duties of Federal 
Credit Union Boards of Directors

    Proposed Sec.  701.4 establishes the fiduciary duties and 
responsibilities of Federal credit union directors. A discussion of the 
basis for this rule, followed by a detailed paragraph-by-paragraph 
discussion, follows.
    The directors of a credit union have a fiduciary duty to act in the 
best

[[Page 15575]]

interests of the credit union members. As discussed in the ANPR, the 
Federal Credit Union Act (Act) 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, including a director, of a federally-
insured credit union, if the institution-affiliated party has 
``committed or engaged in any act, omission, or practice, which 
constitutes a breach of such party's fiduciary duty * * * [and by 
reason of such action] * * * the interests of the insured credit 
union's members have been or could be damaged.'' 12 U.S.C. 
1786(g)(1)(B).
     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 a Federal credit union must 
be in the best interests of the members. 12 U.S.C. 1766(b)(2).\2\
---------------------------------------------------------------------------

    \2\ 73 FR 5461, 5463 (Jan 30, 2008). In addition, NCUA's rule on 
conversions of insured credit unions to mutual savings banks 
requires that as part of the credit union's notice to NCUA of its 
intent to convert to an MSB, the credit union's board of directors 
must provide a certification of the board of directors' support for 
the conversion, which must state that each director signing the 
certification believes the proposed conversion is in the best 
interests of the credit union's members. 12 CFR 708a.5(a)(2).

    Although referring specifically to the NCUA Board, these provisions 
support the conclusion that credit union directors have a fiduciary 
obligation to credit union members. As previously stated by the NCUA 
---------------------------------------------------------------------------
Board:

    A closer look at how the cited provisions function, however, 
connects them to the [credit union's board of] directors. 
Specifically, the best interests of the members will dictate the 
[NCUA] 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 [NCUA] Board, it must also guide the 
conduct of the [credit union's board] of directors.

71 FR 77150, 77155 (Dec. 22, 2006) (preamble to NCUA's final rule on 
conversions of federally-insured credit unions to mutual savings 
banks).
    A Federal credit union's board of directors must understand its 
fiduciary duty to act in the best interests of the members. This 
understanding is particularly important when the board is considering a 
proposal to change the credit union's charter or insurance status. 
These extraordinary transactions may have a significant impact on the 
members' financial interests, and may also present conflicts between 
member interests and the personal financial interests of credit union 
officials and management.
    While the existence of fiduciary duties owed by directors to 
members is clear, neither the Act nor NCUA regulations provide 
specificity as to fiduciary duties and standards. Currently, an FCU's 
board must look to state statutory and case law to determine the scope 
of its fiduciary duties to members and the standard of care required as 
articulated by its state of location.\3\ Statutory law and case law 
vary from jurisdiction to jurisdiction causing confusion for FCUs and a 
lack of uniformity between FCUs in different states.
---------------------------------------------------------------------------

    \3\ Duties of directors of for-profit corporations have been 
codified in many states, although fewer states have codified the 
duties of directors of credit unions. Some state credit union 
statutes incorporate the law applicable to the directors of for-
profit corporations. In Gully v. Nat'l Credit Union Admin. Brd., 341 
F.3d 155 (2d Cir. 2003), an appeal from an NCUA prohibition order 
finding that the manager of a Federal credit union engaged in unsafe 
and unsound practices and that she breached her fiduciary duty as 
the manager of the credit union, the court applied New York law. 
``The parties agree that New York law applies to [the] claim of 
breach of fiduciary duty and that the [Federal credit union] is 
considered a corporation for purposes of New York fiduciary law.'' 
Id. at 165. The court concluded that New York's fiduciary law was 
consistent with the standard used by the NCUA Board in its decision. 
Id.
---------------------------------------------------------------------------

    In fact, NCUA is particularly concerned about assertions that the 
members of a credit union do not own the credit union, or that the 
duties of the directors do not flow to the members but, rather, flow in 
some amorphous way only to the institution. NCUA has observed this view 
both among some Federal credit union directors and in one state court 
decision.\4\ A lack of focus on the interests of the members makes it 
easier for officials and management to make decisions that benefit 
themselves personally, even if those decisions are not necessarily in 
the best interests of the membership as a whole. Accordingly, NCUA 
wants to make clear that directors at a federally chartered credit 
union must consider the interests of the membership, and put those 
interests first, when making decisions that affect the credit union.\5\
---------------------------------------------------------------------------

    \4\ See, e.g., Save Columbia CU Committee v. Columbia Community 
Credit Union, 139 P. 3d 386, 393, 394 (Wash. Ct. App. 2006). The 
court stated, in dicta, that under Washington state law the 
directors of a state chartered credit union owed no fiduciary duties 
to the members of the credit union. Although the credit union was 
federally insured, the state court did not discuss the applicable 
provisions of the Federal Credit Union Act.
    \5\ Of course, in the normal course of business when a board 
acts in the best interests of the credit union it is usually 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 
theoretical divergence or conflict between the interests of the 
institution and the interests of the members, the latter takes 
precedence. For example, when a credit union proposes a voluntary 
liquidation, the interests of the credit union as an institution, 
and the interests of the members, may diverge. The Act provides, 
however, 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).
---------------------------------------------------------------------------

    Considering the unique interests, concerns, and structure of credit 
unions as financial cooperatives, NCUA believes having a uniform 
regulatory standard of care for FCUs may be useful to eliminate 
confusion and may make it easier for FCU boards to fulfill their duties 
to members. Accordingly, NCUA is now proposing a regulatory standard of 
care for directors that will help ensure they meet their fiduciary 
duties to their members, both in general and also when making decisions 
that affect the fundamental interests of members.
    The proposal provides that management of each FCU is vested in its 
board of directors who can delegate operational function but not the 
responsibility for operations. The proposal further provides that an 
FCU director must:
     Carry out his or her duties in good faith, in a manner 
reasonably believed to be in the best interests of the membership of 
the Federal credit union, and with such care, including reasonable 
inquiry, as an ordinarily prudent person in a like position would use 
under similar circumstances;
     Administer the affairs of the Federal credit union fairly 
and impartially and without discrimination in favor of or against any 
particular member;
     Understand the Federal credit union's balance sheet and 
income statement and, ask, as appropriate, substantive questions of 
management and the internal and external auditors; and
     Direct the operations of the Federal credit union in 
conformity with the requirements set forth in the Federal Credit Union 
Act (Act), the NCUA's regulations, other applicable law and sound 
business practices.
    The proposal also discusses the authority and limits of the board's

[[Page 15576]]

ability to rely on information provided by others. A director is 
generally entitled to rely on information prepared or presented by 
employees of the Federal credit union or consultants whom the director 
reasonably believes to be reliable and competent in the functions 
performed.
    The proposal also amends the indemnification provisions of NCUA's 
rules to prohibit a Federal credit union from indemnifying officials 
and employees for liability from misconduct that is grossly negligent, 
reckless, or willful in connection with a decision that affects the 
fundamental rights of members. NCUA is also proposing a change to 
NCUA's standard bylaw on indemnification to conform that bylaw with the 
proposed change to the rule on indemnification. The proposal makes a 
corresponding change to the standard Federal corporate credit union 
bylaw on indemnification.
    The proposed rule applies to Federal credit unions only, and not to 
state chartered federally-insured credit unions. The proposed rule 
applies generally to all of the actions of a Federal credit union board 
of directors, but imposes a higher standard of care for actions by the 
board that affect members' ownership interests in Federal credit unions 
and other fundamental rights. The proposed rule is modeled in part on 
an existing rule on the powers and responsibilities of the boards of 
directors of the Federal Home Loan Banks promulgated by the Federal 
Housing Finance Board in 2000.\6\ The proposal is also based in part on 
Model Business Corporation Act Sec.  8.30, which defines the general 
standards of conduct for directors of for-profit corporations.
---------------------------------------------------------------------------

    \6\ 12 CFR 917.2. See 65 FR 25267 (May 1, 2000) and 65 FR 81 
(Jan. 3, 2000). The Federal Housing Finance Agency (FHFA) succeeded 
the Federal Housing Finance Board (FHFB). Housing and Economic 
Recovery Act of 2008, Pub. L. 110-289, 122 Stat. 2654 (enacted July 
30, 2008). The entities the FHFB regulated, the Federal Home Loan 
Banks (now regulated by the FHFA), continue to operate under 
regulations promulgated by the FHFB until such regulations are 
superseded by regulations promulgated by the FHFA. See 74 FR 30975 
(June 29, 2009).
---------------------------------------------------------------------------

    A paragraph-by-paragraph discussion of the rule follows.

Sec. 701.4(a) Management of a Federal credit union.

    Proposed paragraph (a) states, ``The management of each Federal 
credit union is vested in its board of directors. While a Federal 
credit union board of directors may delegate the execution of 
operational functions to Federal credit union personnel, the ultimate 
responsibility of each Federal credit union's board of directors for 
that Federal credit union's management is non-delegable.''
    The first sentence restates section 113 of the FCUA, 12 U.S.C. 
1761b, which provides that the board of directors shall have the 
general direction and control of the affairs of the Federal credit 
union.\7\ The board of directors must oversee the credit union's 
operations to ensure the credit union operates in a safe and sound 
manner. For example, the board must be kept informed about the credit 
union's operating environment, hire and retain competent management, 
and ensure that the credit union has the risk management structure and 
process suitable for the credit union's size and activities. The second 
sentence of proposed Sec.  701.4(a) makes clear that a credit union's 
board of directors may delegate responsibility for day-to-day 
operations to credit union management officials, but that, in so doing, 
may not and cannot delegate its ultimate statutory responsibility for 
the management of the credit union.
---------------------------------------------------------------------------

    \7\ See also Sec.  111 of the FCUA, 12 U.S.C. 1761, which states 
that the management of a Federal credit union shall be by a board of 
directors, a supervisory committee, and where the bylaws so provide, 
a credit committee. This and other sections of the FCUA delineate 
the role and responsibilities of the board of directors, the 
supervisory committee and the credit committee, but do not 
articulate a general standard of fiduciary conduct for directors or 
members of any committee on which a director may serve.
---------------------------------------------------------------------------

Sec. 701.4(b) Duties of Federal credit union directors.

    Proposed paragraph (b) sets forth the fiduciary duties of Federal 
credit union directors. Paragraph (b)(1) charges a director to:

    Carry out his or her duties as a director in good faith, in a 
manner such director reasonably believes to be in the best interests 
of the membership of the Federal credit union, and with such care, 
including reasonable inquiry, as an ordinarily prudent person in a 
like position would use under similar circumstances * * *.

    This standard is the most common fiduciary duty standard applicable 
to corporations under state law, and the language of (b)(1) mirrors the 
current standard applicable to FHLBs. 12 CFR 917.2(b)(1). This standard 
is crucial in defining a director's obligations to its members, and is 
the standard by which the members and NCUA will measure the actions of 
FCU directors.
    Embedded in this standard is both a duty of loyalty and a duty of 
care. The duty of loyalty is set forth in the words ``[e]ach Federal 
credit union director has the duty to * * * carry out his or her duties 
as a director in good faith, in a manner such director reasonably 
believes to be in the best interests of the membership of the Federal 
credit union * * *.'' Directors owe a duty to act in the best interests 
of the membership of the credit union and not in the director's 
personal interests. When carrying out his or her responsibilities, a 
director must always seek to advance what the director reasonably 
believes to be in the members' best interests, and must place the 
members' well-being above his or her own personal interests or those of 
third parties.
    The obligation to act in good faith means honesty in purpose, 
making sure not to disregard the director's responsibilities or to act 
in a way that violates the law. Good faith also requires that all 
material facts known to a director be disclosed to other directors and 
also to the members where the members are charged with voting on a 
particular issue.
    The Federal credit union standard bylaws contain a provision on 
conflicts of interest. Article XVI., Section 4. A director who has a 
conflict of interest is disqualified from board deliberations upon or 
the voting on any question affecting his or her pecuniary or personal 
interest or the pecuniary interest of other entities in which he or she 
is interested, directly or indirectly. While the duty of loyalty goes 
beyond the terms of this provision or other specific conflicts of 
interest provisions, a director who violates this provision is also in 
violation of the duty of loyalty.
    Section 701.4(b)(1) also establishes a duty of care with the words 
``[e]ach * * * director * * * must carry out his or her duties * * * 
with such care, including reasonable inquiry, as an ordinarily prudent 
person in a like position would use under similar circumstances * * *. 
'' Compliance with the duty of care is measured by the ``prudent 
person,'' or ``reasonable person'' standard--what would such a prudent 
person have done under similar circumstances? This standard is 
consistent with the historic standards imposed on directors of national 
banks.\8\

[[Page 15577]]

As suggested by the language, the duty of care includes a duty of 
inquiry that requires that directors inform themselves of ``all 
material information reasonably available to them'' prior to rendering 
a decision.\9\ These duties of care and loyalty are amplified and 
reinforced by the remainder of proposed paragraph (b) and the 
provisions in proposed Sec.  701.4(c) and (d), as discussed further 
below.
---------------------------------------------------------------------------

    \8\ In 1891, in the absence of an applicable Federal statute or 
regulation, the Supreme Court considered the standard of care that 
should be applied to the officers and directors of a national bank. 
See Briggs v. Spaulding, 141 U.S. 132 (1891). In Briggs, a receiver 
for a national bank sought to hold several officers and directors 
liable for losses incurred by the bank on risky loans and general 
mismanagement of the bank. The receiver alleged that the directors 
failed to keep accurate books, have regular meetings, and oversee 
the actions of the bank's president. Id. at 137. They were accused 
of ``passive negligence,'' the failure to act when a duty existed, 
but not of ``positive misfeasance.'' Id. at 151. The Supreme Court 
held that ``directors must exercise ordinary care and prudence in 
the administration of the affairs of the bank, and that this 
includes something more than officiating as figure-heads.'' Id. at 
165. The Court stated that the standard of care for bank directors 
was ``that which ordinarily prudent and diligent men would exercise 
under similar circumstances.'' Id. at 152.
    \9\ See, e.g., Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 
1985). This case discusses various factors for determining whether a 
board of directors satisfied the standard of care when rendering an 
important decision, including:
     The amount of time directors spent researching the 
transaction, preparing for the decision and investigating the 
information and proposals;
     The amount of time spent in the meeting in which 
deliberation on the transaction took place;
     The source of any important numbers and dollar amounts, 
and whether they were based on credible information or were 
arbitrary;
     Whether the proposal and subsequent deliberations were 
thoroughly debated by the directors;
     Whether the directors had prior notice of what would be 
discussed before the meeting in which they deliberated and voted;
     Whether the directors were presented with or sought out 
outside information, such as an opinion of counsel or a fairness 
opinion; and
     Whether the board fully considered other alternatives 
to the transaction under consideration.
---------------------------------------------------------------------------

    Proposed paragraph (b)(2) requires that directors administer the 
affairs of the credit union fairly and impartially so as not to favor 
the interests of any particular member or group of members. The 
director's obligation is to the membership as a whole, not to 
particular individuals or groups. So, for example, when the credit 
union makes determinations about extending credit to a particular 
member, the credit union has no fiduciary obligation to that particular 
member vis-a-vis that credit transaction but, rather, must make its 
decision on the credit transaction with regard only to the effects of 
the proposed transaction on the interests of the membership as a whole.
    Proposed paragraph (b)(3) requires that each board director be 
financially literate. The directors must have a working familiarity 
with basic finance and accounting practices, (including the ability to 
understand the credit union's balance sheet and income statement and to 
ask, as appropriate, substantive questions of management and the 
internal and external auditors) or become financially literate within a 
reasonable time, not to exceed three months, after his or her election 
or appointment to the board of directors. This financial literacy may 
be obtained through training provided by the credit union, outside 
sources, or, for small credit unions, NCUA's Office of Small Credit 
Union Initiatives, if a director does not possess such financial 
literacy at the time of his or her election or appointment to the 
board.
    Proposed paragraph (b)(4) charges each director with the general 
duty to direct the operations of the Federal credit union in conformity 
with the requirements of the FCUA, NCUA regulations, other applicable 
law, and sound business practices.

Sec. 701.4(c) Authority regarding staff and outside consultants.

    Proposed paragraph (c) provides that:

     In carrying out its duties and responsibilities, each 
Federal credit union's board of directors and all its committees 
have authority to retain staff and outside counsel, independent 
accountants, financial advisors, and other outside consultants at 
the expense of the Federal credit union.
     Federal credit union staff providing services to the 
board of directors or any committee of the board under paragraph 
(c)(1) of this section may be required by the board of directors or 
such committee to report directly to the board or such committee, as 
appropriate.
     In discharging board or committee duties a director, 
who does not have knowledge that makes reliance unwarranted, is 
entitled to rely on information, opinions, reports, or statements, 
including financial statements and other financial data, prepared or 
presented by any of the persons specified in paragraph (d).

    The board is the primary corporate decision-making body. The board 
in turn typically delegates significant authority for the day-to-day 
operations to senior management. To the extent that a board delegates 
to management, it must exercise reasonable oversight and supervision 
over management. Accordingly, proposed paragraph (c)(1) empowers the 
board of directors, and committees of the board, to hire staff 
(employees) and outside consultants, as necessary to carry out the 
board's duties and responsibilities.
    Under proposed paragraph (c)(3), a director may generally rely on 
information, opinions, reports, or statements, including financial 
statements and other financial information, prepared by those to whom 
authority has been delegated. Still, as required by the duty of care, 
any reliance on the advice of others or information provided by others 
must be warranted under the circumstances. Limits on such reliance are 
discussed further in paragraph (d).

Sec. 701.4(d) Reliance.

    Proposed paragraph (d) provides that a director may rely on:


     One or more officers or employees of the Federal credit 
union who the director reasonably believes to be reliable and 
competent in the functions performed or the information, opinions, 
reports, or statements provided;
     Legal counsel, independent public accountants, or other 
persons retained by the Federal credit union as to matters involving 
skills or expertise the director reasonably believes are matters (i) 
within the particular person's professional or expert competence, 
and (ii) as to which the particular person merits confidence; and
     A committee of the board of directors of which the 
director is not a member if the director reasonably believes the 
committee merits confidence.

    Generally, a director must comply with the standard of care in 
making a judgment as to the reliability and competence of the source of 
information upon which the director proposes to rely or that it 
otherwise merits confidence. The director must also have read the 
information, opinion, report, or statement in question, or have been 
present at a meeting at which it was orally presented, or have taken 
other steps to become generally familiar with it.
    Care in delegation and supervision includes evaluation of the 
capabilities and diligence of the person receiving the delegation in 
light of the subject and its relative importance, and paragraph (d) 
provides specificity as to when a director may rely on certain persons 
or groups.
    Proposed paragraph (d)(1) permits a director to rely on one or more 
officers or employees of the Federal credit union who the director 
reasonably believes to be reliable and competent in the functions 
performed or the information, opinions, reports, or statements 
provided. In determining whether an office or employee is reliable, the 
director would typically consider the individual's record for honesty, 
care, and ability in carrying out responsibilities which he or she 
undertakes. In determining whether an individual is competent, the 
director would normally consider the individual's background, 
education, experience and scope of responsibility within the credit 
union, the individual's familiarity and knowledge with respect to the 
subject matter, and the individual's technical skill.
    Proposed paragraph (d)(2) permits reliance on legal counsel, 
independent public accountants, or other persons retained by the 
Federal credit union, but only as to matters involving skills or 
expertise the director reasonably believes are matters (i) within the 
particular person's professional or expert competence, and (ii) as to 
which

[[Page 15578]]

the particular person merits confidence. A determination of competence 
involves an examination of factors similar to those discussed in 
connection with determining competence under paragraph (d)(1). 
Likewise, a determination that the potential advisor merits confidence 
includes an examination of both competence and reliability, including 
whether the individual may be subject to conflicts of interests or may 
have a vested interest in the outcome of any transaction under 
advisement. This paragraph covers not only lawyers and accountants, but 
also other potential external advisers with special experience and 
skills, such as investment bankers and management consultants.
    Proposed paragraph (d)(3) permits reliance on a committee of the 
board if, again, the director reasonably believes the committee merits 
confidence. This paragraph applies when the committee is submitting 
recommendations for action by the full board of directors as well as 
when it is performing supervisory or other functions not requiring 
immediate board action.
    The Board also notes that there are several sources of guidance on 
the fiduciary duties of directors of depository institutions. These 
sources include the Federal Credit Union Handbook; Office of 
Comptroller of the Currency (OCC), The Director's Book (1997) and 
Corporate Governance and the Community Bank: A Regulatory Perspective 
(2005), both available on the OCC's Web site: http://www.occ.treas.gov; 
and American Bar Association Committee on Corporate Laws, Corporate 
Director's Guidebook, 5th ed., 62 Business Lawyer 1482 (August 2007) 
(available on Lexis). FCU directors may follow this guidance to the 
extent that it does not conflict with the provisions of the proposed 
rule or any future guidance NCUA may put out in this area.

Proposed amendment to Sec.  701.33.

    Section 701.33 of the NCUA regulations is NCUA's indemnification 
regulation. 12 CFR 701.33. Section 701.33(c)(1) states that a Federal 
credit union may provide indemnification for its officials and 
employees. Section 701.33(c)(2) states that FCU indemnification shall 
be consistent either with the standards applicable to credit unions 
generally in the state in which the principal or home office of the FCU 
is located, or with the relevant provisions of the Model Business 
Corporation Act (MBCA). An FCU that elects to provide indemnification 
must specify whether it will follow state law or the MBCA. It also 
states that indemnification and the method of indemnification may be 
provided for by charter or bylaw amendment, contract, or board 
resolution, consistent with the procedural requirements of the 
applicable state law or the MBCA, as specified.\10\ Section 
701.33(c)(3) also permits a Federal credit union to purchase and 
maintain insurance on behalf of its officials and employees against any 
liability asserted against them and expenses incurred by them in their 
official capacities and arising out of the performance of their 
official duties to the extent such insurance is permitted by applicable 
state law or the MBCA. 12 CFR 701.33(c)(4).
---------------------------------------------------------------------------

    \10\ Id. The NCUA must approve any such charter or bylaw 
amendment.
---------------------------------------------------------------------------

    The preamble to the final rule on indemnification indicated that 
indemnification is not to be automatically provided in every case. 
``[T]he power to provide for indemnification does not relieve [a 
Federal credit union] of its responsibility to determine whether 
indemnification is appropriate under the circumstances. NCUA will 
monitor indemnification provisions for consistency with the 
indemnification standards chosen, for the safety and soundness 
implications for the institution, and for their application in a given 
case.'' 53 FR 29640, 29641 (Aug. 8, 1988).
    The NCUA Board desires to ensure that FCU officials and employees 
are held personally accountable, where appropriate, for violations of 
their fiduciary duties. Accordingly, NCUA will not permit a Federal 
credit union to indemnify officials and employees against liability 
based on an aggravated breach of the duty of care when such a breach 
may affect fundamental member rights and financial interests. 
Accordingly, NCUA proposes to amend Sec.  701.33 by adding a new 
paragraph (c)(5) to read as follows:

    Notwithstanding paragraphs (c)(1) through (3) of this section, a 
Federal credit union may not indemnify an official or employee for 
personal liability related to any decision made by that individual 
on a matter significantly affecting the fundamental rights and 
interests of the FCU's members where the decision giving rise to the 
claim for indemnification is determined by a court to have 
constituted gross negligence, recklessness, or willful misconduct. 
Matters affecting the fundamental rights and interests of FCU 
members include charter and share insurance conversions and 
terminations.

    Consistent with the proposed Sec.  701.4, matters affecting the 
fundamental rights and interests of Federal credit union members are 
defined to include charter conversions and share insurance conversions 
and terminations.
    The Board believes that, where directors and other officials and 
employees are charged with making decisions relating to the fundamental 
rights and interests of the members, a gross negligence standard for 
denying indemnification is appropriate. Gross negligence is a legal 
term of art, generally defined as a ``conscious, voluntary act or 
omission in reckless disregard of a legal duty and of the consequences 
to another party * * *.'' Black's Law Dictionary 8th ed. (Thomson West 
2004). Gross negligence is a more lenient standard than simple 
negligence, and indemnification will still be permitted under the 
proposal for liability premised on simple negligence.
    One section of the FCU Act references the level of disregard by an 
official or employee of the duty of care. Section 207(h) of the FCU Act 
states that:

    A director or officer of an insured credit union may be held 
personally liable for monetary damages in any civil action, by * * * 
the [NCUA] Board, which action is prosecuted wholly or partially for 
the benefit of the Board * * * acting as conservator or liquidating 
agent of such insured credit union * * * for gross negligence, 
including any similar conduct or conduct that demonstrates a greater 
disregard of a duty of care (than gross negligence) including 
intentional tortious conduct, as such terms are defined and 
determined under applicable State law. Nothing in this paragraph 
shall impair or affect any right, if any, of the Board under other 
applicable law.

12 U.S.C. 1787(h)(3). Section 207(h) applies only to actions taken by 
the Board, and only as conservator or liquidating agent, while the 
proposed indemnification provision applies to liability, whether to the 
Board or other parties. In the Board's view, the proposed limits on 
indemnification at FCUs are consistent with Sec.  207(h) and the 
associated case law.\11\
---------------------------------------------------------------------------

    \11\ See Atherton v. FDIC, 519 U.S. 213 (1997) (holding that 12 
U.S.C. 1821(k), a Federal statute addressing the standard of care 
owed by bank directors and officers under the Federal Deposit 
Insurance Act, provides for a gross negligence standard as the 
minimum level of disregard of the standard of care, but does not 
preempt state statutes that set a stricter level of disregard, such 
as simple negligence). The Court was reviewing the Federal Deposit 
Insurance Act's analog to Sec.  207(h) of the FCU Act. While this 
proposed rulemaking establishes fiduciary standards for FCU 
directors and limits indemnification for officials and employees, 
this rulemaking does not address causes of action based on those 
standards, nor does the rulemaking address the requisite level of 
disregard for a finding of liability based on any particular cause 
of action.
---------------------------------------------------------------------------

    NCUA also proposes to make a conforming change to the FCU Standard 
Bylaws. Article XVI, Sec.  8 sets forth the requirements for director

[[Page 15579]]

indemnification. The proposed change to Article XVI will limit 
indemnification in a manner parallel to paragraph (c)(5) of Sec.  
701.33. The proposal makes a corresponding change to the standard 
Federal corporate credit union bylaws.

C. Proposed Reorganization of Parts 708a and 708b

    Currently, part 708a of NCUA's rules covers the conversion of 
insured credit unions into MSBs, and part 708b covers the merger of 
insured credit unions with other credit unions and the conversion and 
termination of Federal share insurance. This proposed rulemaking, if 
adopted, would result in a reorganization of part 708a.
    Part 708a currently has no subparts, and the revisions to part 708a 
create three new subparts. The revision moves the current part 708a 
treatment of MSB conversions into subpart A. The new rule regarding the 
mergers of insured credit unions into banks would be located in subpart 
C. Subpart B would be reserved for a potential future rulemaking on the 
conversion of insured credit unions into stock banks.
    The proposal does not affect the organization of part 708b, which 
currently consists of three subparts. The title of part 708b, however, 
would change slightly. The current title of part 708b, ``Mergers of 
Federally-insured Credit Unions; Voluntary Termination Or Conversion of 
Insured Status,'' would change to read ``Mergers of Federally-insured 
Credit Unions with Other Credit Unions; Voluntary Termination Or 
Conversion of Insured Status.'' With the addition of a new rule in part 
708a on the merger of credit unions into banks, this change to the 
title of 708b is necessary to clarify the limited scope of part 708b.

D. Proposed Amendments to Part 708a, Subpart A: Conversion of Insured 
Credit Unions to Mutual Savings Banks

    The proposed revisions to newly designated Subpart A of Part 708a 
(sections 708a.101 to 708a.113, as redesignated) protect the integrity 
of the voting process during conversions to a mutual savings bank, 
provide members with additional information about how the conversion 
process could affect them, and require converting credit unions to 
provide copies of correspondence with other agencies related to the 
conversion. The proposed changes are as follows:

Sec. 708a.101 Definitions.

    The proposal adds definitions for the terms ``conducted by an 
independent entity'' and ``secret ballot.'' These new definitions 
clarify Part 708a's requirements for balloting in credit union 
conversions. Section 708a.106 (formerly Sec.  708a.6) requires 
elections to be by secret ballot and conducted by an independent 
entity. Along with the new definitions for ``conducted by an 
independent entity'' and ``secret ballot,'' the proposed amendments 
move the definition of ``independent entity'' from Sec.  708a.106 to 
the definitions section, Sec.  708a.101.
    The proposal also adds a new definition of the phrase ``conducted 
by an independent entity'' to prevent credit union staff and officials 
from accessing interim vote tallies during the election and also to 
ensure that members learn the results of the membership vote. NCUA has 
concerns that the use of interim vote tallies by credit union 
management may unfairly skew the results of elections in favor of the 
result management prefers.
    NCUA has observed in some FICU to MSB conversions that credit union 
management seeks periodic running tallies from the election teller as 
to how many members have voted yes and no and which members have not 
voted. Management has justified this practice by stating they only use 
the information for the purpose of encouraging members to vote. In 
investigations of conversions, however, NCUA has discovered that some 
credit unions use this interim vote information for soliciting only 
voters likely to vote in favor of the conversion. In addition, some 
converting credit unions have pressured or required employees to 
encourage members, including family, to vote in favor of conversion 
even where the employees did not wish to do so or did not believe 
conversion was in the members' best interests. Other problematic 
tactics include determining how a member voted in violation of the 
voting secrecy requirement, using periodic voting tallies to 
management's advantage and to the disadvantage of those members opposed 
to the conversion by not sharing that information with members during 
the voting period, and improperly handling ballots for members instead 
of having members mail them directly to the independent election 
teller. See the ANPR discussion at 73 FR 5461, 5466 (Jan. 30, 2008).
    Since issuing the ANPR, NCUA also encountered a situation where 
management halted the vote on conversion shortly before the conclusion 
of the voting period and then declined to announce the interim results 
to the member-owners, and NCUA later learned that management stopped 
the vote because the running vote tallies management was receiving from 
the election teller were nearly two-to-one in opposition to the 
conversion. In another situation, after a conversion vote was 
completed, management refused to disclose the results of the vote, in 
terms of the votes for and against the conversion, to its member-owners 
and failed to include these numbers in its certification to NCUA.
    Accordingly, the proposal adds a definition of ``conducted by an 
independent entity'' that carries the following:

     The independent entity will receive the ballots 
directly from voting members and store them.
     After the conclusion of the special meeting that ends 
the ballot period, the independent entity will open all the ballots 
in its possession and tabulate the results. The entity must not open 
or tabulate any ballots before the conclusion of the special 
meeting. The independent entity will certify the final vote tally in 
writing to the credit union and to the NCUA Regional Director. The 
certification will include, at a minimum, the number of members who 
voted, the number of affirmative votes, and the number of negative 
votes. During the course of the voting period the independent entity 
may provide the credit union with the names of members who have not 
yet voted, but may not provide any voting results to the credit 
union prior to certifying the final vote tally.

    This proposed definition of ``conducted by an independent entity'' 
prohibits interim vote tallies and ensures that member-owners and NCUA 
are properly informed of the results of any conversion vote. Some ANPR 
commenters opposed to a ban on the use of interim vote tallies 
expressed concern that without access to voting results, a converting 
credit union would be unable to determine which members had voted and 
so determine how to efficiently target their outreach efforts to ensure 
that all voters had an opportunity to vote. To address this concern, 
the proposal does not prohibit management from obtaining lists of 
members who have not voted at any point during the election process, 
but only prevents management access to running vote tallies.
    The proposal adds a definition of ``secret ballot'' to mean ``no 
credit union employee or official can determine how a particular member 
voted. Credit union employees and officials are prohibited from 
assisting members in completing ballots or handling completed 
ballots.''
    This proposal will ensure that employees and officials do not 
improperly influence members' votes, even inadvertently. Some ANPR 
commenters opposed to a ban on employees handling ballots expressed 
concerns that the ban would make it less convenient for members to 
vote, but the proposed rule need not have this

[[Page 15580]]

effect, as nothing prohibits the independent teller from placing a 
secure ballot box at credit union branch locations for use by members 
who bring their completed ballots to the credit union. Also, nothing 
prohibits employees from distributing blank ballots to those members 
who may have misplaced their original ballot.
    Some commenters opposed to prohibitions on management obtaining 
interim voting tallies and employees handling ballots stated it would 
be unfair to impose these rules in the context of conversions to a 
mutual savings bank and not also for credit union to credit union 
mergers or insurance conversions. NCUA agrees and as discussed under 
Sec.  708b, has added identical definitions and restrictions for 
elections involving other types of transactions as well.
    The proposal also moves the current definition of ``independent 
entity'' into the definitions section but does not revise the 
substance.

Sec. 708a.104 Disclosures and communications to members.

    Paragraph (c) of this section lists the information that credit 
unions seeking to convert must disclose to members. The proposal adds 
required disclosures about the estimated costs of conversion; the 
conversion's affect on the availability of facilities, including 
branches and ATMs; and the fact that NCUA neither approves nor 
disapproves of the proposed conversion. The addition of these 
disclosures results in the addition of three new subparagraphs to 
paragraph (c) and the renumbering of the other five existing 
subparagraphs of paragraph (c).
    One ANPR commenter suggested information about conversion-related 
expenses would be useful to members, and the Board agrees. Conversion 
costs are paid from a credit union's earnings, and accumulated earnings 
are capital and represent members' ownership interests, so members have 
a right to know how these ownership interests will be affected by 
consideration of the board of directors' conversion proposal. The Board 
adds a new required disclosure about the costs of the conversion in 
subparagraph (5) of paragraph (c). The credit union must disclose the 
total estimated cost of the conversion with separate line items for 
printing fees, postage fees, advertising, consulting and professional 
fees, legal fees, staff time, the cost of holding a special meeting, 
the cost of conducting the vote, and any other conversion-related 
expenses.
    As discussed in the ANPR, conversions have the potential to change 
members' access to the institution. 73 FR 5461, 5465 (Jan. 30, 2008). 
Some converting credit unions, for example, plan to shut certain 
branches after conversion. In addition, a credit union participating in 
a credit union shared branching network could lose access to that 
network if it becomes a bank. Likewise, some ATM networks limit their 
services to credit unions. Members accustomed to accessing their credit 
union accounts through a particular branch, shared branch, or an ATM 
need to know if the conversion has the potential to disrupt that access 
before voting on the conversion. NCUA is concerned, however, that 
credit unions seeking to convert have not always provided members with 
complete and accurate information about the potential for changes to 
services and facilities. Id. Accordingly, the proposal adds a 
disclosure in subparagraph (8) requiring disclosure of the conversion's 
affect on services and facilities.
    NCUA will, at the request of a converting credit union, review 
draft notices and other member communications for compliance with NCUA 
rules. Some members may believe, erroneously, that NCUA's review of 
conversion-related materials in a particular conversion, and NCUA's 
non-disapproval of these materials, means that NCUA endorses the 
materials and, possibly, the proposed conversion. In fact, NCUA does 
not take a position on the merit of conversion proposals. NCUA conducts 
its reviews of the conversion materials and the associated process 
simply to fulfill its statutory duty of overseeing the methods and 
procedures of the member vote. 12 U.S.C. 1785(a)(2)(G)(ii). The ANPR 
requested comment on whether the disclosures to members should include 
a statement that NCUA does not approve of the proposed conversion. Most 
commenters opposed adding this statement because they found it biased, 
but several of these commenters also suggested they would not be 
opposed to a more neutral statement. Accordingly, the proposal adds a 
requirement in subparagraph (7) that the notice to members state that 
NCUA does not approve or disapprove of the conversion proposal. NCUA 
believes this disclosure is necessary to clarify for members what 
NCUA's role is in the conversion process.
    Finally, the proposed revisions correct typographical errors in 
subparagraph (b)(4) and clarify the subject line of the e-mail 
forwarding a member communication on the conversion proposal in 
subparagraph (f)(2).

Sec. 708a.106 Membership approval of a proposal to convert.

    As discussed above, the proposal moves the definition of 
``independent entity,'' currently located in paragraph (c) of this 
section, to the definitions section.

Sec. 708a.107 Certification of vote on conversion proposal.

    NCUA has encountered situations where the converting credit union 
experienced significant difficulties in obtaining approval from the 
gaining regulators. In at least one of these situations, NCUA learned 
well after the conversion attempt that the Federal Deposit Insurance 
Corporation (FDIC) had expressed concerns about the business plan, 
continuing operation of branches, internal controls, and loan 
underwriting, all at the same time the credit union was beginning the 
member voting process on its conversion proposal. Knowing of these 
concerns in a timely manner would have assisted NCUA in its role in 
approving the methods and procedures used by the credit union to 
conduct its member vote, including the accuracy of the communications 
provided to members. Accordingly, the proposal includes a new paragraph 
(c) that requires converting credit unions to submit to NCUA with their 
certification of the member vote copies of any correspondence with any 
agency where that correspondence is related to the conversion.
    Also, to fulfill NCUA's mission to protect the share insurance fund 
in an efficient manner, NCUA must be able to gauge whether, and when, 
converting credit unions are likely to actually complete their 
attempted conversions. If NCUA is aware that gaining regulators might 
delay or derail approval of the new charter, NCUA can better schedule 
its supervisory resources in the time period between member approval 
and actual conversion.

Sec. 708a.113 Voting guidelines.

    Section 708a.113 contains guidance on conducting the member 
conversion vote. The proposal adds a new paragraph (e) to this section 
recommending that converting credit unions not use employees to solicit 
member votes. NCUA has observed a situation in which credit union 
management admitted that using employees to solicit votes diverted the 
employees from the primary duties in running the credit union. NCUA is 
also concerned that employees not be coerced to advocate a position on 
the conversion that they do not believe in.

[[Page 15581]]

    NCUA also considered prohibiting employee solicitation of member 
votes, but most ANPR commenters were opposed to such a prohibition. For 
one thing, employees should be able to answer questions from members 
about the conversion, and it may be difficult to distinguish this 
activity from solicitation. Accordingly, the proposal does not contain 
an explicit prohibition on solicitation.

E. Proposed New Part 708a, Subpart C: Merger of Insured Credit Unions 
Into Banks

    During the course of the past two decades, several credit unions 
have merged into banks. In some of these mergers, the continuing bank 
has been a been a mutual savings bank, such as the Roper Employees FCU 
merger into Carolina Federal Savings Bank. In other mergers, the 
continuing bank has been a stock bank, such as in the merger of 
Nationwide FCU merger into Nationwide Bank. Some of these mergers have 
been ``two-step'' mergers, that is, the credit union proposed to 
convert first to a bank and then immediately merge into an existing 
bank, such as in the merger of Salt City Hospital FCU into Beacon 
Federal Savings Bank. Other mergers have been ``one-step'' mergers, 
that is, the direct merger of the credit union into the bank, such as 
in the merger of Northeast Community Credit Union Into Haverhill 
Cooperative Bank.
    What all of the above mergers, and other mergers not mentioned, had 
in common was that they were conducted and completed on an ad hoc 
basis. The FCU Act requires that no FICU may merge with a bank without 
the prior approval of the NCUA Board, 12 U.S.C. 1785(b)(1)(A), and the 
Act provides a listing of certain factors that the Board must consider 
when granting or withholding its approval. 12 U.S.C. 1785(c). Still, 
NCUA has never had any regulations establishing the procedural or 
substantive requirements for obtaining the approval of the NCUA Board 
or the credit union's members with regard to a particular merger 
proposal. This lack of regulations has resulted in the Board adopting 
merger procedures and other merger requirements on an ad hoc basis each 
time a merger proposal has come to the Board.
    The Board believes that it is time to replace the current, 
uncertain process with a regulation that prescribes a clear, 
predictable process governing all future merger proposals. The decision 
to convert a credit union charter to a bank charter through a merger 
fundamentally affects on the ownership rights of the credit union's 
members, and there should be a clearly defined process that protects 
those rights. There probably will be some credit unions that wish to 
merge with banks, and the credit unions considering such action deserve 
to know in advance the process and procedures governing these mergers. 
The rulemaking process will help define and standardize those 
procedures.
    In crafting this rule, the Board considered its statutory 
responsibilities for approving mergers. 12 U.S.C. 1785(b), (c). The 
Board also looked to the existing regulatory procedures for credit 
union-into-credit union mergers, 12 CFR 708b, and for credit union 
conversions to mutual savings banks, 12 CFR 708a. A section-by-section 
discussion of the proposed rule follows.

Sec. 708a.301 Definitions.

    This section provides definitions of key terms used throughout the 
regulation.
    For example, the proposal defines merger as any transaction in 
which a FICU transfers all, or substantially all, of its assets to a 
bank. The merger provisions of subpart C also apply to any purported 
conversion of a credit union to a bank if the purported conversion is 
conducted pursuant to an agreement between a preexisting bank and the 
credit union that provides (1) the credit union will not conduct 
business as a stand-alone bank, and (2) the purported conversion will 
be followed by the transfer of all, or substantially all, of the credit 
union's assets to the preexisting bank.
    This definition of merger means that NCUA will apply the provisions 
of subpart C to both ``one-step'' and ``two-step'' mergers. Regardless 
of whether the merger is accomplished in one or two steps as described 
above, in form it is still a merger, and thus subject to NCUA's 
approval under Sec.  205(b)(1)(A) and (c) of the FCU Act. 12 U.S.C. 
1785(b)(1)(A) and (c). A transaction in which a credit union purports 
to convert to a bank--but never actually opens its doors as a 
converted, stand alone bank--is not a true conversion governed by the 
requirements of Sec.  205(b)(2) of the FCU Act. 12 U.S.C. 1785(b)(2).
    Other key definitions are discussed below in the context they 
appear.

Sec. 708a.302 Authority to merge.

    This section provides that a FICU, with the approval of its 
members, may merge into a bank only with the prior approval of NCUA, 
the Federal Deposit Insurance Corporation, and the regulator of the 
continuing bank. If the credit union is state chartered, it also needs 
the prior approval of its state regulator.

Sec. 708a.303 Board of directors' approval and members' opportunity to 
comment.

    The section describes what the board of directors of a credit union 
must do prior to adopting a proposal to merge with a particular bank.
    The directors must conduct due diligence so as to determine that 
the concept of merging with a bank, and with the particular bank under 
consideration, is in the best interests of the credit union's members. 
As part of this due diligence, the directors must determine the merger 
value of the credit union, that is, the amount of money that a stock 
bank would pay in an arms-length transaction to purchase the credit 
union's assets and assume its liabilities and shares. The rule permits 
the credit union to obtain this valuation through either a public 
auction process or an independent appraisal process. The merger 
proposal may then be approved by an affirmative vote of a majority of 
board members who have determined that the merger partner selected by 
the directors is the best choice for the members, taking into account 
the merger value of the credit union and the amount that the selected 
merger partner is willing to pay the credit union's members to effect 
the merger.
    The merger value of the credit union is important for the following 
reasons. The merger of a credit union into a bank will cause members to 
either (1) lose their ownership rights entirely, as in a merger with a 
stock bank, or (2) see a diminution in the ownership rights in a merger 
with a mutual bank. See 71 FR 77150, 77153 (Dec. 22, 2006) (Discussion 
in preamble to NCUA's final rule on conversion of credit unions to 
mutual savings banks). Following the merger, the credit union's members 
will also likely see a worsening of their rates and fees. Id., at 
77157-58. See also the DATATRAC rate data posted on NCUA's Web site at 
http://www.ncua.gov/DataServices/BankRateData/index.aspx. Accordingly, 
the draft rule text seeks to ensure the credit union's members are 
properly compensated for these losses. The best way to ensure that the 
member is compensated for these losses it to obtain an informed 
valuation for the transfer of the credit unions assets, either through 
an auction or appraisal process.
    Precedent exists for the use of an appraisal process. During the 
2006-2007 merger of Nationwide Federal Credit Union into Nationwide 
Bank, the continuing bank obtained an independent appraisal of the 
value of

[[Page 15582]]

the credit union's accounts and the bank made a significant payment for 
those accounts. The payment, which included the net worth of the credit 
union plus a premium, was ultimately distributed to the credit union's 
members in compensation for their loss of ownership rights. Similar 
appraisal and auction valuation techniques have been employed in the 
merger of one bank into another. For example, in a 1998 letter from the 
FDIC to an MSB considering a merger into a stock bank the FDIC wrote:

    Neither FDIC nor OTS regulations regarding conversions specify a 
methodology for determining fair value for an institution in the 
context of a merger/conversion. In the preamble to the FDIC Final 
Rule on conversions, the FDIC indicated that industry innovation was 
encouraged. One method of determining value which may have validity 
would be to ``shop'' the institution among prospective acquirers. 
This methodology would establish a market-based value, which the 
converting institution's board could take into consideration, in the 
proper exercise of its fiduciary duty, when determining whether a 
specific proposal would provide for a distribution of appropriate 
value to rightful recipients. The FDIC looks for tangible evidence 
that the board of an institution proposing to enter into a merger/
conversion marketed the institution widely enough to ascertain a 
valid market-based value. While a formal ``shopping'' of the mutual 
savings bank is not required [for several reasons] * * * the FDIC 
continues to strongly encourage mutual institutions that are 
considering any form of a merger/conversion proposal to demonstrate 
their best effort to ``shop'' the institution among prospective 
acquirers. Such institutions should not rely on the FDIC's action on 
[Corry Savings Bank's] notice, which was dependent upon a number of 
factors, as a precedent for their respective merger/conversion 
proposal.

    Letter from Mark S. Schmidt, Associate Director, to the Board of 
Trustees of Corry Savings Bank, dated July 16, 1998, available at 
http://www.fdic.gov/regulations/laws/bankdecisions/Mutual/CorrySavings.html.
    If the credit union chooses to use the appraisal process, the 
credit union must use a ``qualified appraisal entity'' to conduct the 
appraisal. Section 708a.301 of the proposal defines such an entity as:

    [A]n entity that has significant experience in the valuation of 
depository institutions and that has no past financial relationship 
with the merging credit union, the continuing bank, or any law firm 
representing the credit union or the bank in connection with the 
merger.

    The intent is to ensure that this entity provides an unbiased 
appraisal that ensures the members receive appropriate consideration 
for the effects of the transaction on their financial interests. The 
Board specifically does not want an appraisal from an entity that might 
be influenced to undervalue the transaction so as to facilitate the 
transaction at the expense of the members' interests. The Board invites 
comment on this proposed definition and how it might be improved 
without sacrificing the intent.
    If the merging credit union's directors pursue an appraisal rather 
than a public auction, they must publish an advance notice of the 
proposal to merge that alerts their members to the pending possibility 
of a merger. The rule also requires that the directors collect, review, 
and retain any comments about the merger proposal that they receive 
during the merger process.

Sec. 708a.304 Notice to NCUA and request to proceed with member vote.

    Following adoption of a merger proposal, the credit union's board 
of directors must provide its NCUA Regional Director with a Notice of 
Intent to Merge and Request for NCUA Authorization to proceed with the 
member vote (NIMRA). The contents of the NIMRA are similar to the 
merger proposal documentation that two credit unions desiring to merge 
with each other must submit to NCUA. 12 CFR 708b.103, 708b.104. The 
NIMRA requires certain additional documentation related to the merger 
valuation and merger payments to be made to members; certain 
information about any merger-related compensation to be received by any 
director of senior management official of the merging credit union; and 
a certification that the directors believe the merger is in the best 
interests of the credit union's members. The NIMRA must also include a 
description of the due diligence conducted by the directors in 
determining that the merger is in the best interests of the members and 
that the merger satisfies the statutory considerations for such members 
in Sec.  205(c) of the FCU Act. For state chartered credit unions, the 
NIMRA must include a discussion of the authority for such mergers under 
state law and the use by the credit union of any parity provision. This 
discussion is similar to that required by Sec.  708a.5(a)(3) of NCUA's 
rules governing conversions of credit unions to mutual savings banks.
    If the Regional Director receives a NIMRA from a credit union, the 
Regional Director will, for state charters, consult with the 
appropriate state supervisory authority. The Regional Director will 
then, for both state and Federal charters, either disapprove the merger 
proposal or authorize the credit union to proceed with a vote of its 
members on the proposal.
    The proposed regulation specifies that the Regional Director must 
disapprove the proposed merger if the NIMRA either lacks the 
documentation required by this section or lacks substantial evidence to 
support each of the factors in Sec.  205(c) of the Act. Two of the 
important considerations in that section of the Act are ``the economic 
advisability of the transaction,'' 12 U.S.C. 1785(c)(3), and whether 
the transaction meets ``the convenience and needs of the members,'' 12 
U.S.C. 1785(c)(5). In particular, the Regional Director must disapprove 
the proposed merger for failing to meet the requirements of these two 
provisions of the Act if the if the merger payment offered by the bank 
to the members is less than the merger valuation, absent some 
additional, quantifiable benefit to the members from the selected 
merger partner. Similarly, the Regional Director must disapprove the 
proposed merger if the NIMRA fails to adequately explain the nature and 
amount of any merger-related compensation to be received by the credit 
union's directors or senior management officials or to justify that 
compensation.
    If the Regional Director disapproves a merger proposal, the credit 
union may appeal the Regional Director's determination to the NCUA 
Board. The appeal must be filed within 30 days, and the Board has 120 
days to act on the appeal.

Sec. 708a.305 Disclosures and communications to members.

    After a credit union's board of directors approves a merger 
proposal and receives NCUA approval to proceed with the member vote, 
the credit union will schedule a special meeting and then mail the 
notice of vote twice to the members: 90 days before the special meeting 
and 30 days before. The credit union will also prepare and send the 
ballot with the 30 day notice.
    The proposal describes the required content of the two notices, 
including disclosures to enable members to make an informed decision 
about the merger. The disclosures are, for the most part, similar to 
those required by NCUA's rules governing the conversions of credit 
unions to mutual savings banks in part 708a. 12 CFR part 708a. The rule 
has slightly different disclosure requirements depending on whether the 
continuing bank is organized in mutual form or stock form. For example, 
the required boxed disclosure for a stock bank merger discusses the 
loss of ownership rights, while the required

[[Page 15583]]

boxed disclosure for a mutual stock bank merger discusses the potential 
profits for management associated with a future stock conversion. The 
rule also requires the disclosure of the merger value and whether the 
members will receive a merger payment based on the merger value. The 
rule provides a mechanism similar to that in part 708a for interested 
members to communicate with one another about the pending merger and 
also provides for a ballot form similar to that in part 708a.

Sec. 708a.306 Membership approval of a proposal to merge.

    A proposal for merger requires approval by a majority of the 
members who vote on the proposal, with the additional requirements that 
at least 20 percent of the members eligible to vote must participate in 
the vote. This quorum requirement is the same as the quorum required 
when a credit union's members make certain other decisions affecting 
their fundamental rights, such as a share insurance conversion. 12 
U.S.C. 1786(d)(2).
    The board of directors must set a voting record date to determine 
member voting eligibility. The members may vote in person or by mail, 
and the vote must be by secret ballot and conducted by an independent 
entity. Again, these requirements are similar to the current 
requirements for conversion to a mutual savings bank in part 708a.

Sec. 708a.307 Certification of vote on merger proposal.

    The board of directors of the merging credit union must certify the 
results of the membership vote to the Regional Director within 10 
calendar days after the vote is taken. The certification requirements 
are similar to those required in a conversion to a mutual savings bank 
in part 708a.

Sec. 708a.308 NCUA approval of the merger.

    Following the member vote, 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; if the membership vote was conducted in a fair 
and legal manner; and if the credit union has otherwise met the 
requirements of subpart C of part 708a, including whether there is 
substantial evidence that the factors in Section 205(c) of the Act are 
satisfied. After completion of this review, the Regional Director will 
approve or disapprove the proposed merger and issue the approval or 
disapproval within 30 calendar days of receipt from the credit union of 
the certification of the result of the membership vote. A merging 
credit union has 30 days to appeal any disapproval to the NCUA Board, 
and the NCUA Board will act on the appeal within 120 days of receipt. 
Again, this process is similar to the review process conducted by the 
Regional Director following the certification of member vote in a 
conversion to a mutual savings bank as described in part 708a.

Sec. 708a.309 Completion of merger.

    The credit union must complete the merger within one year of the 
date of NCUA approval. If a credit union fails to complete the merger 
within one year the Regional Director will disapprove the merger, and 
the credit union's board of directors must then adopt a new merger 
proposal and solicit another member vote if it still desires to merge. 
The Regional Director may, upon timely request and for good cause, 
extend the one year completion period for an additional six months. The 
process of completion of the merger is substantially the same as the 
process for completion of a conversion to a mutual savings bank as 
described in part 708a.

Sec. 708a.310 Limits on compensation of officials.

    No director or senior management official of an insured credit 
union may receive any economic benefit in connection with the merger of 
a credit union other than reasonable compensation and other benefits 
paid in the ordinary course of business. This compensation limitation 
is substantially the same as the limitation imposed in part 708a for 
conversions to a mutual savings bank.

Sec. 708a.311 Voting incentives.

    If a merging credit union offers an incentive to encourage members 
to participate in the vote 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 merger. This requirement is 
substantially the same as the requirement imposed in part 708a for 
conversions to a mutual savings bank.

Sec. 708a.12 Voting guidelines.

    This section provides guidance on the conduct of the member vote. 
It is substantially the same as NCUA's guidance in part 708a on the 
conduct of the member vote in conversions to a mutual savings bank.

F. Proposed Amendments to Part 708b: Mergers of Federally-Insured 
Credit Unions With Other Credit Unions; Voluntary Termination or 
Conversion of Insured Status

    Part 708b of NCUA's rules implements NCUA's authority under the FCU 
Act to prescribe rules governing mergers of federally-insured credit 
unions. Like other financial services entities, credit unions are 
increasingly consolidating, and this trend is likely to continue. Much 
of the consolidation in the credit union industry results from 
voluntary mergers of credit unions. The proposed amendments to Part 
708b will help assure that management's decision to recommend a merger 
is based on sound business judgment reflecting the best interests of 
the members.
    NCUA must review and approve any merger involving a FICU. 12 CFR 
708b.104(a). As part of this process, merging credit unions must submit 
a merger plan to NCUA. Id. The proposed amendments in this area revise 
and clarify items in the merger plan submitted to NCUA.
    If the merging credit union is a Federal credit union, members have 
right to vote on whether to approve the merger, unless NCUA determines 
the FCU is in danger of insolvency and waives the member vote. 12 CFR 
708b.106, 708b.105(b). Under the proposal, FCUs would have to disclose 
to members the same additional information the proposal requires in the 
merger plan submitted to NCUA before the member vote on the merger 
proposal.
    A section-by-section summary of the proposed changes follows.

Sec. 708b.2 Definitions.

    The proposal adds definitions for the terms ``conducted by an 
independent entity,'' ``merger-related financial arrangement,'' and 
``secret ballot,'' and ``senior management official.'' The new 
definitions of ``conducted by an independent entity'' and ``secret 
ballot'' clarify requirements for balloting in insurance conversions, 
and match the proposed revisions to the voting requirements in Subpart 
A of Part 708a (conversions to mutual savings banks). The new 
definitions of ``merger-related financial arrangement'' and ``senior 
management official'' relate to the proposed new required disclosures 
in connection with credit union mergers. Each of these definitions is 
discussed in greater detail in the relevant section below.

[[Page 15584]]

Sec. 708b.103 Preparation of merger plan.

1. Share Adjustments
    The proposal amends subparagraph (a)(5) of this section to require 
additional information in the merger plan submitted to NCUA in cases 
where the merging credit union has a higher net worth ratio (NWR) than 
the continuing credit union. In these situations, the proposal would 
require the merger plan to discuss not only actual share adjustments, 
but an explanation of the factors used to establish the amount of the 
adjustment or to determine no adjustment is necessary.
    NCUA is proposing these additional disclosures because of the 
potential for unfair treatment of members of the credit union with 
higher net worth. In many merger situations, a smaller credit union 
offering limited services seeks to merge with a larger credit union. 
Often, the smaller, merging credit union will have a NWR much higher 
than the continuing credit union's NWR. Credit unions' only source of 
capital is retained earnings, so the higher NWR of the merging credit 
union represents retained earnings directed toward increasing the NWR, 
perhaps in lieu of spending on additional service or products, or more 
favorable rates on savings and loans. In these situations, the members 
of the merging credit union have paid for their higher NWR with fewer 
services or less favorable rates on savings and loan products, or both. 
These members then face the potential dilution of their membership 
interests as a result of the merger if the merging credit union's 
capital is simply subsumed into the less well-capitalized continuing 
credit union.
    One way to prevent this loss of equity by members of a merging 
credit union that has a higher NWR than the continuing credit union is 
to compensate members of the merging credit union with a merger 
dividend, termed a share adjustment in Part 708b. In a share 
adjustment, some or all of the capital of the credit union with the 
highest NWR that is above the amount of capital needed to match NWR of 
the other credit union would be distributed to members of credit union 
with the higher NWR. Current rules require the merger plan to include 
only an explanation of any proposed share adjustment as part of the 
merger. 12 CFR 708b.105(a)(5). Under the proposal, where a merging 
credit union has a significantly greater NWR than the continuing credit 
union, meaning in excess of 500 basis points greater, the required 
explanation must also include the factors considered in establishing 
the amount of the adjustment or in determining no adjustment is 
necessary.
    Many ANPR commenters opposed any NCUA-mandated share adjustment or 
calculation method. Most of these opposing commenters cited the need 
for credit union boards of directors and market forces to determine 
whether and how much of a share adjustment should be paid in each 
particular situation. Consistent with these comments, the proposal does 
not require a share adjustment or specific calculation method. Instead, 
the proposal simply requires that where a merging credit union has a 
significantly greater NWR than a continuing credit union, credit union 
management disclose the basis for its calculation of a share adjustment 
or the determination that a share adjustment is unnecessary.
2. Disclosure of Merger-Related Financial Arrangements
    The proposal amends paragraph (a) of this section to add a new 
paragraph (f), requiring all federally insured credit unions disclose 
to NCUA any ``merger-related financial arrangements'' received by 
officials or senior managers of a merging credit union in connection 
with the merger.\12\ A merger-related financial arrangement is defined 
as:
---------------------------------------------------------------------------

    \12\ Proposed 708b.106, discussed below, requires a similar 
disclosure to members preceding the member vote.

    [A] material increase in compensation (including indirect 
compensation, for example, bonuses, deferred compensation, or other 
financial rewards) or benefits that any board member or senior 
management official of a merging credit union may receive in 
connection with a merger transaction. For purposes of this 
definition, a material increase is an increase that exceeds the 
---------------------------------------------------------------------------
greater of 15 percent or $10,000.

    Proposed Sec.  708b.2. ``Senior management official'' is defined as

    [A] chief executive officer, an assistant chief executive 
officer, a chief financial officer, and any other senior executive 
officer as defined by the financial institution regulatory agencies 
pursuant to section 32(f) of the Federal Deposit Insurance Act.

    This definition is currently included in Sec.  708a, but was not in 
Sec.  708b. NCUA first proposed an amendment requiring merging FICUs to 
disclose any material increase in compensation for officials and senior 
managers in 2007, with a material increase defined as the greater of 15 
percent of $10,000. 72 FR 20067 (April 23, 2007). This proposed 
definition of material is identical to a definition of material 
employed by the Office of Thrift Supervision (OTS) in a similar 
context. 12 CFR 563.22(d)(1)(vi)(C). Under the OTS rule, an increase in 
compensation paid to an officer, director or controlling person of a 
merging Federal thrift of savings bank is presumed to be unreasonable 
if it exceeds the greater of 15 percent or $10,000. Id.
    The Board intends that all compensation arrangements, formal and 
informal, be covered by this disclosure requirement. The scope of 
disclosure includes both arrangements that are written and those not 
immediately reduced to writing, as well as arrangements involving 
deferred compensation.
    The proposed revisions to the merger plan regarding the calculation 
of any share adjustment and the existence of merger-related financial 
arrangements are disclosure requirements only. That is, the proposal 
would not prohibit a higher net worth credit union from merging into a 
lower net worth credit union without paying a merger dividend to 
members of the merging credit union, as long as this fact and the 
reasoning behind it is disclosed to NCUA and, for FCUs, to members. 
Similarly, the proposal would not prohibit mergers where the merger 
resulted in a material increase in compensation to directors or senior 
management officials of the merging credit union, as long as this fact 
is properly disclosed.

Sec. 708b.104 Submission of merger proposal to the NCUA.

    This section details the requirements for the merger proposal 
submitted to NCUA, and the current paragraph (a)(8) requires a 
statement about whether a merging credit union, if it is above $50 
million in assets, plans to submit a Hart-Scott-Rodino Act (HSRA) 
premerger notification to the Federal Trade Commission (FTC). The HSRA 
requires certain entities contemplating a merger to notify the FTC of 
the pending merger and wait for a designated time period before 
consummating the merger. 15 U.S.C. 18a(a)(2)(B)(i). Only mergers above 
a certain asset size threshold are subject to the notification 
requirement, and the FTC adjusts this threshold amount annually. Id. 
The proposal updates the $50 million threshold in paragraph (a)(8) to 
the current threshold amount for HSRA filings, which is $63.4 million 
for 2010. 75 FR 3468 (Jan. 21, 2010).

Sec. 708b.106 Approval of the merger vote by members.

    This section addresses the member vote generally required when the 
merging credit union is an FCU, and lists the required elements of the 
notice to members. Subparagraph (a)(2)(ii) of

[[Page 15585]]

this section requires that the members be given a summary of the merger 
plan. The proposal amends this subparagraph to require this summary 
include a detailed description of any ``merger-related financial 
arrangement'' made available to any board member or senior management 
official of the merging credit union. The description must include the 
name and title of each individual recipient and an explanation of the 
financial impact of each element of the arrangement, including direct 
salary increases and any indirect compensation, such as any bonus, 
deferred compensation or other financial rewards. As noted above, the 
term merger-related financial arrangement applies only to material 
increases in compensation, which means an increase exceeding the 
greater of $15,000 or 10 percent of the individual's compensation.

Sec. 708b.107 Certificate of vote on merger proposal.

    The proposal corrects a typographical error in the title of this 
section. The corrected title is ``Certification of vote on merger 
proposal.''

Sec. 708b.201 Termination of insurance.

    This section addresses state credit unions terminating Federal 
share insurance, and requires member votes taken in connection with 
share insurance termination to be conducted by an independent entity 
and secret ballot. Because the proposal includes the terms ``secret 
ballot'' and ``independent entity'' in the definitions section, the 
proposal deletes the existing explanation of secret ballot in paragraph 
(c) of Sec.  708b.201.

Sec. 708b.203 Conversion of insurance.

    This section addresses credit unions converting from Federal share 
insurance to nonfederal insurance, and implements the statutory 
requirement that at least 20 percent of credit union members must vote 
on the conversion proposal in order to approve it. 12 U.S.C. 
1786(d)(2). Paragraph (d) of this section also requires member votes 
taken in connection with share insurance conversions to be conducted by 
an independent entity and secret ballot. Because the proposal includes 
the terms ``secret ballot'' and ``independent entity'' in the 
definitions section, the proposal deletes the existing explanation of 
secret ballot in paragraph (d) of Sec.  708b.203.
    The current paragraph (g) of this section also states that, 
generally, NCUA will act to approve or disapprove a conversion within 
14 days of receiving the certification of vote. The proposal amends 
paragraph (g) to clarify that such approval is conditional on the 
credit union completing the conversion within six months of the date of 
the NCUA approval letter. This six month timeframe ensures that the 
conversion is completed before the member vote becomes stale and also 
ensures that NCUA can properly plan for and allocate scarce examination 
resources that would otherwise be devoted to examining the converting 
credit union. Six months should be more than ample time to complete the 
conversion, since the credit union will already have obtained the 
approval of the gaining insurer for the conversion prior to notifying 
NCUA of the credit union's intent to convert. 12 CFR 708b.204(e)(2).

Sec. 708b.206 Share insurance communications to members.

    Currently, paragraph (b) of this section requires that certain 
communications about a pending share insurance conversion that a 
converting credit union provides to its members must include the 
following disclosure:

IF YOU ARE A MEMBER OF THIS CREDIT UNION, YOUR ACCOUNTS ARE 
CURRENTLY INSURED BY THE NATIONAL CREDIT UNION ADMINISTRATION, A 
FEDERAL AGENCY. THIS FEDERAL INSURANCE IS BACKED BY THE FULL FAITH 
AND CREDIT OF THE UNITED STATES GOVERNMENT. IF THE CREDIT UNION 
CONVERTS TO PRIVATE INSURANCE AND THE CREDIT UNION FAILS, THE 
FEDERAL GOVERNMENT DOES NOT GUARANTEE THAT YOU WILL GET YOUR MONEY 
BACK.''

    The proposal amends and this disclosure language slightly by 
changing the third sentence to read:

IF THE CREDIT UNION CONVERTS TO PRIVATE INSURANCE WITH (insert name 
of private share insurer) AND THE CREDIT UNION FAILS, THE FEDERAL 
GOVERNMENT DOES NOT GUARANTEE THAT YOU WILL GET YOUR MONEY BACK.''

    This clarification ensures the reader understands the reference to 
``private insurance.''

Regulatory Procedures

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a rule may have on a 
substantial number of small credit unions, defined as those under ten 
million dollars in assets. At this time, NCUA does not believe that 
this proposed rulemaking will have a significant economic impact on a 
substantial number of small credit unions.
    As discussed above, the proposed fiduciary standards for FCUs are 
intended to replace existing standards on a state-by-state basis, so 
these new standards should not have a significant impact on small 
credit unions. The proposal does specifically provide that an FCU 
director ``have a working familiarity with basic finance and accounting 
practices, including the ability to read and understand the Federal 
credit union's balance sheet and income statement,'' but this 
requirement would likely be implicit in the existing state fiduciary 
standards governing a Federal credit union since all credit unions are 
financial institutions and all credit union directors must obtain some 
level of familiarity to properly perform their governance function. If 
a director of a small, noncomplex credit union does not begin his or 
her directorship with such familiarity, the director should be able to 
obtain this familiarity shortly after assuming the directorship. 
Training is available from various external sources and, for small 
credit unions, training is also available from NCUA's Office of Small 
Credit Union Initiatives.
    Also, the proposed rules related to bank conversions and mergers 
should not affect a substantial number of small credit unions because 
very few credit unions typically seek such a charter conversion, and 
those that do seek such a charter are not small. Finally, the proposed 
revisions to the rules relating to credit union mergers with other 
credit unions are seem economically significant. NCUA invites comment, 
however, on the potential economic impact of this rulemaking on small 
credit unions, including the nature of the impact, the size of the 
impact, and the number of small credit unions that could be affected in 
any given year. NCUA also invited comment on the necessity for a 
Regulatory Flexibility Act analysis.

B. Paperwork Reduction Act

    Currently, parts 708a and 708b contain various information 
collection requirements as described in the Paperwork Reduction Act of 
1995 and implemented by the Office of Management and Budget (OMB) and 
previously submitted by NCUA. 44 U.S.C. 3507(d); 5 CFR part 1320. The 
proposed revisions to part 708a include a new subpart C: Merger of 
Insured Credit Unions into Banks. This new subpart will increase the 
existing paperwork burden, since the existing part 708b on Mergers of 
Federally Insured Credit Unions only applies to

[[Page 15586]]

mergers involving two credit unions. Accordingly, as required by the 
Paperwork Reduction Act, NCUA is forwarding an information collection 
package to the OMB for its review and approval on the mergers of 
insured credit unions with banks to revise a prior collection.
    The proposed new subpart C of part 708a ensures that (1) Directors 
of credit unions perform sufficient due diligence on any proposed 
merger so as to ensure the merger is in the best interests of the 
credit union's members, (2) the credit union provides NCUA with 
sufficient information about the proposed transaction for NCUA to 
fulfill its statutory duties, and (3) the credit union provides its 
members with sufficient information to enable them to vote on the 
proposal. Based on the history of such merger proposals, NCUA estimates 
that approximately one credit union a year will propose to merge with a 
bank. NCUA further estimates the annual reporting and recordkeeping 
burden associated with the new rule for each merging credit union at 
about 714 hours, for a total annual burden of 714 hours. This estimate 
is calculated as follows.
    Proposed Sec.  708a.303(a) requires a merging credit union to 
obtain a merger valuation. NCUA estimates that it will take a credit 
union approximately 50 hours to obtain such a merger valuation.
    Proposed Sec.  708a.303(b) requires, under certain circumstances, 
that a merging credit union prepare and publish an advance notice of 
intent to merge. NCUA estimates that it will take a credit union 
approximately 2 hours to prepare an advance notice of intent to merge.
    Proposed Sec.  708a.303(c) requires that a merging credit union 
solicit and review member comments. NCUA estimates that it will take a 
credit union approximately 10 hours to solicit and review any member 
comments.
    Proposed Sec.  708a.303(d), and associated due diligence 
requirement in Sec.  708a.304(d), require that a merging credit union's 
directors conduct due diligence and affirmatively approve a proposal to 
merge. NCUA estimates that it will take the directors approximately 50 
hours to properly consider and approve such a proposal.
    Proposed Sec.  708a.304(a) and (b) require that a merging credit 
union prepare and submit to NCUA a Notice of its Intent to Merge and 
Request for NCUA Authorization (NIMRA) to conduct a member vote. The 
preparation of the NIMRA, and the associated merger plan, requires 
collection and preparation of numerous items, and NCUA estimates this 
collection and preparation will take about 100 hours.
    Proposed Sec.  708a.304(c) requires that a merging credit union 
prepare a director's certification of support for the merger proposal 
and plan. NCUA estimates this collection and preparation will take 
about 1 hour.
    Proposed Sec. Sec.  708a.305 and 708a.306 require that a merging 
credit union conduct a member vote on the proposed merger. Members must 
be allowed to vote either by mail or in person at a special meeting. 
NCUA estimates the preparation and mailing of notices and ballots, and 
the collection of ballots, will take about 500 hours.
    Proposed Sec.  708a.305(g) requires that, when a member of a 
merging credit union requests to communicate with other members, the 
merging credit union provide such communication to other members at the 
expense of the requesting member. NCUA estimates the associated burden 
on the merging credit union at zero hours.
    Proposed Sec.  708a.307 requires that a merging credit union 
certify the results of the member vote to NCUA. NCUA estimates that the 
preparation of the certification will take about 1 hour.
    The following table summarizes this information.

------------------------------------------------------------------------
                                                              Estimated
                                                              associated
        Proposed rule section (part 708a, subpart C)            burden
                                                               (hours)
------------------------------------------------------------------------
Sec.   708a.303(a).........................................           50
Sec.   708a.303(b).........................................            2
Sec.   708a.303(c).........................................           10
Sec.   708a.303(d) and Sec.   708a.304(d)..................           50
Sec.   708a.304(a) and Sec.   708a.304(b)..................          100
Sec.   708a.304(c).........................................            1
Sec.   708a.305 and Sec.   708a.306........................          500
Sec.   708a.305(g).........................................            0
Sec.   708a.307............................................            1
 
n,sTotal Estimated Burden Hours (per Respondent) =........          714
 
n,sEstimated Number of Respondents (Annual) =.............          x 1
 
  n,sTotal Annual Burden Hours =..........................          714
------------------------------------------------------------------------

    Organizations and individuals desiring to submit comments on the 
proposed information collection requirements should send them to: 
Office of Information and Regulatory Affairs, OMB, New Executive Office 
Building, Washington, DC 20503; Attention: National Credit Union 
Administration Desk Officer, with a copy to Mary Rupp, Secretary of the 
Board, National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.
    The NCUA considers comments by the public on this proposed 
collection of information in:
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the NCUA, 
including whether the information will have a practical use;
     Evaluating the accuracy of the NCUA's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of responses.
    The Office of Management and Budget will make a decision concerning 
the collection of information contained in the proposed regulation 
between 30 and 60 days after publication of this proposed rule in the 
Federal Register. Therefore, a comment to OMB is best assured of having 
its full effect if OMB receives it within 30 days of publication. This 
does not affect the deadline for the public to comment to the NCUA on 
the proposed regulation.

C. Executive Order 13132

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

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

    The NCUA has determined that the proposed rule would not affect 
family well-being within the meaning of Sec.  654 of the Treasury and 
General Government Appropriations Act, 1999,

[[Page 15587]]

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

List of Subjects

12 CFR Part 701

    Credit unions, Loans.

12 CFR Part 708a

    Charter conversions, Credit unions, Mergers of credit unions.

12 CFR Part 708b

    Credit unions, Mergers of credit unions, Reporting and 
recordkeeping requirements.

    By the National Credit Union Administration Board on March 18, 
2010.
Mary Rupp,
Secretary of the Board.

    For the reasons stated in the preamble, the National Credit Union 
Administration proposes to amend 12 CFR parts 701, 708a, and 708b as 
set forth below:

PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS

    1. The authority citation for part 701 continues to read as 
follows:

    Authority:  12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 
1761b, 1766, 1767, 1782, 1784, 1787, and 1789. Section 701.6 is also 
authorized by 31 U.S.C. 3717. Section 701.31 is also authorized by 
15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3619. Section 701.35 
is also authorized by 42 U.S.C. 4311-4312.

    2. Add a new Sec.  701.4 to read as follows:


Sec.  701.4  General authorities and duties of Federal credit union 
boards of directors.

    (a) Management of a Federal credit union. The management of each 
Federal credit union is vested in its board of directors. While a 
Federal credit union board of directors may delegate the execution of 
operational functions to Federal credit union personnel, the ultimate 
responsibility of each Federal credit union's board of directors for 
that Federal credit union's management is non-delegable.
    (b) Duties of Federal credit union directors. Each Federal credit 
union director has the duty to:
    (1) Carry out his or her duties as a director in good faith, in a 
manner such director reasonably believes to be in the best interests of 
the membership of the Federal credit union, and with such care, 
including reasonable inquiry, as an ordinarily prudent person in a like 
position would use under similar circumstances;
    (2) Administer the affairs of the Federal credit union fairly and 
impartially and without discrimination in favor of or against any 
particular member;
    (3) At the time of election or appointment, or within a reasonable 
time thereafter, not to exceed three months, have at least a working 
familiarity with basic finance and accounting practices, including the 
ability to read and understand the Federal credit union's balance sheet 
and income statement and to ask, as appropriate, substantive questions 
of management and the internal and external auditors; and
    (4) Direct the operations of the Federal credit union in conformity 
with the requirements set forth in the Federal Credit Union Act, this 
chapter, other applicable law, and sound business practices.
    (c) Authority regarding staff and outside consultants. (1) In 
carrying out its duties and responsibilities, each Federal credit 
union's board of directors and all its committees have authority to 
retain staff and outside counsel, independent accountants, financial 
advisors, and other outside consultants at the expense of the Federal 
credit union.
    (2) Federal credit union staff providing services to the board of 
directors or any committee of the board under paragraph (c)(1) of this 
section may be required by the board of directors or such committee to 
report directly to the board or such committee, as appropriate.
    (3) In discharging board or committee duties, a director who does 
not have knowledge that makes reliance unwarranted is entitled to rely 
on information, opinions, reports or statements, including financial 
statements and other financial data, prepared or presented by any of 
the persons specified in paragraph (d).
    (d) Reliance. A director may rely on:
    (1) One or more officers or employees of the Federal credit union 
who the director reasonably believes to be reliable and competent in 
the functions performed or the information, opinions, reports or 
statements provided;
    (2) Legal counsel, independent public accountants, or other persons 
retained by the Federal credit union as to matters involving skills or 
expertise the director reasonably believes are matters
    (i) Within the particular person's professional or expert 
competence, and
    (ii) As to which the particular person merits confidence; and
    (3) A committee of the board of directors of which the director is 
not a member if the director reasonably believes the committee merits 
confidence.
    3. Add paragraph (c)(5) of Sec.  701.33 to read as follows:


Sec.  701.33  Reimbursement, insurance, and indemnification of 
officials and employees.

* * * * *
    (c) * * *
    (5) Notwithstanding paragraphs (c)(1) through (3) of this section, 
a Federal credit union may not indemnify an official or employee for 
personal liability related to any decision made by that individual on a 
matter significantly affecting the fundamental rights and interests of 
the FCU's members where the decision giving rise to the claim for 
indemnification is determined by a court to have constituted gross 
negligence, recklessness, or willful misconduct. Matters affecting the 
fundamental rights and interests of FCU members include charter and 
share insurance conversions and terminations.
    4. Section 8 of Article XVI of appendix A to part 701 is revised to 
read as follows:

Appendix A to Part 701--Federal Credit Union Bylaws

* * * * *
Article XVII. Amendments of Bylaws and Charter
* * * * *
    Section 8. Indemnification. (a) Subject to the limitations in Sec.  
701.33(c)(5) of the regulations, the credit union may elect to 
indemnify to the extent authorized by (check one)


[ ] law of the state of ------:

[ ] Model Business Corporation Act:

    the following individuals from any liability asserted against them 
and expenses reasonably incurred by them in connection with judicial or 
administrative proceedings to which they are or may become parties by 
reason of the performance of their official duties (check as 
appropriate).

    [ ] current officials
    [ ] former officials
    [ ] current employees
    [ ] former employees

    (b) The credit union may purchase and maintain insurance on behalf 
of the individuals indicated in (a) above against any liability 
asserted against them and expenses reasonably incurred by them in their 
official capacities and arising out of the performance of their 
official duties to the extent such insurance is permitted by the 
applicable state law or the Model Business Corporation Act.
    (c) The term ``official'' in this bylaw means a person who is a 
member of the board of directors, credit committee, supervisory 
committee, other volunteer

[[Page 15588]]

committee (including elected or appointed loan officers or membership 
officers), established by the board of directors.

PART 708a--BANK CONVERSIONS AND MERGERS

    5-6. Revise the authority citation for part 708a to read as 
follows:

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

    7. Revise the heading for part 708a to read as set forth above:


Sec. Sec.  708a.1 through 708a.13  [Redesignated as Sec. Sec.  708a.101 
through 708a.113]

    8a. Redesignate Sec. Sec.  708a.1 through 708a.13 as Sec. Sec.  
708a.101 through 708a.113, respectively.

Subpart A--Conversion of Insured Credit Unions to Mutual Savings 
Banks

    8b. Add a new subpart A, consisting of newly redesignated 
Sec. Sec.  708a.101 through 708a.113 with the heading as shown above:
    9. Amend Sec.  708a.101 by adding definitions of ``conducted by an 
independent entity,'' ``independent entity,'' and ``secret ballot'' to 
read as follows:


Sec.  708a.101  Definitions

* * * * *
    Conducted by an independent entity means:
    (1) The independent entity will receive the ballots directly from 
voting members and store them.
    (2) After the conclusion of the special meeting that ends the 
ballot period, the independent entity will open all the ballots in its 
possession and tabulate the results. The entity must not open or 
tabulate any ballots before the conclusion of the special meeting.
    (3) The independent entity will certify the final vote tally in 
writing to the credit union and provide a copy to the NCUA Regional 
Director. The certification will include, at a minimum, the number of 
members who voted, the number of affirmative votes, and the number of 
negative votes. During the course of the voting period the independent 
entity may provide the credit union with the names of members who have 
not yet voted, but may not provide any voting results to the credit 
union prior to certifying the final vote tally.
* * * * *
    Independent entity means a company with experience in conducting 
corporate elections. No official or senior management official of the 
credit union, or the immediate family member of any official or senior 
management official, may have any ownership interest in, or be employed 
by, the entity.
* * * * *
    Secret ballot means no credit union employee or official can 
determine how a particular member voted. Credit union employees and 
officials are prohibited from assisting members in completing ballots 
or handling completed ballots.
* * * * *
    10-11. Amend Sec.  708a.104 as follows:
    a. In paragraph (b)(4)(i), add the word ``of'' after the word 
``Plan''.
    b. In paragraph (b)(4), revise the paragraph designation ``(ii)'' 
to ``(iii)'' the second time it appears.
    c. Revise paragraphs (c)(4) and (5), and add new paragraphs (c)(6), 
(7), and (8).
    d. In paragraph (f)(2), add the phrase ``to a Bank'' after the word 
``Conversion'' in the last sentence.
    The revisions and additions read as follows:


Sec.  708a.104  Disclosures and communications to members.

* * * * *
    (c) * * *
    (4) 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;
    (5) A clear and conspicuous disclosure of the estimated, itemized 
cost of the proposed conversion, including printing fees, postage fees, 
advertising, consulting and professional fees, legal fees, staff time, 
the cost of holding a special meeting, other costs of conducting the 
vote, and any other conversion-related expenses;
    (6) 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;
    (7) A clear and conspicuous disclosure that the National Credit 
Union Administration does not approve or disapprove of the conversion 
proposal or the reasons advanced in support of the proposal; and
    (8) A clear and conspicuous disclosure of how the conversion from a 
credit union to a mutual savings bank is likely to affect the 
availability of facilities and services. At a minimum, this disclosure 
should include the name and location of any branches, including shared 
branches, and automatic teller networks, to which members may lose 
access as a result of the conversion. This disclosure must be based on 
research and analysis completed before the date the board of directors 
votes to adopt the conversion proposal.
* * * * *
    12. Amend Sec.  708a.107 by adding paragraph (c) to read as 
follows:


Sec.  708a.107  Certification of vote on conversion proposal.

* * * * *
    (c) The certification must be accompanied by copies of all 
correspondence between the credit union and any Federal banking agency 
whose approval is required for the conversion.
    13. Amend Sec.  708a.113 by adding paragraph (e) to read as 
follows:


Sec.  708a.113  Voting guidelines.

* * * * *
    (e) Solicitation of votes. Some credit unions may wish to contact 
members who have not voted and encourage them to vote on the conversion 
proposal. However, using credit union employees to solicit votes can 
lead to problems. NCUA is aware of at least one instance where credit 
union employees were directed to solicit member votes for the 
conversion, forcing them to neglect duties critical to the credit 
union's safe and sound operations. Also, employees may feel pressured 
to solicit votes for the conversion, regardless of whether or not they 
support it. Given these potential problems, NCUA recommends that a 
converting credit union planning to solicit votes use a third party to 
solicit votes rather than diverting credit union employees from their 
usual duties.

Subpart B--[Reserved]

    14a. Add a reserved subpart B.
    14b. Add subpart C to part 708a to read as follows:
Subpart C--Merger of Insured Credit Unions Into Banks
Sec.
708a.301 Definitions.
708a.302 Authority to merge.
708a.303 Board of directors' approval and members' opportunity to 
comment.
708a.304 Notice to NCUA and request to proceed with member vote.
708a.305 Disclosures and communications to members.
708a.306 Membership approval of a proposal to merge.
708a.307 Certification of vote on merger proposal.
708a.308 NCUA approval of the merger.
708a.309 Completion of merger.
708a.310 Limits on compensation of officials.
708a.311 Voting incentives.

[[Page 15589]]

708a.312 Voting guidelines.

Subpart C--Merger of Insured Credit Unions into Banks


Sec.  708a.301  Definitions.

    As used in this part:
    Bank has the same meaning as in section 3(a) of the Federal Deposit 
Insurance Act, 12 U.S.C. 1813(a).
    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.
    Distribution formula is the formula the bank will use to determine 
each member's portion of that payment to be received upon completion of 
the merger.
    Federal banking agencies have the same meaning as in section 3 of 
the Federal Deposit Insurance Act.
    Merger means any transaction in which a credit union transfers all, 
or substantially all, of its assets to a bank. The term merger includes 
any purported conversion of a credit union to a bank if the purported 
conversion is conducted pursuant to an agreement between a preexisting 
bank and the credit union that provides--
    (1) The credit union will not conduct business as a stand-alone 
bank, and
    (2) The purported conversion will be followed by the transfer of 
all, or substantially all, of the credit union's assets to the 
preexisting bank.
    Merger value or merger valuation is the amount that a stock bank 
would pay in an arms-length transaction to purchase the credit union's 
assets and assume its liabilities and shares (deposits).
    Qualified appraisal entity means entity that has significant 
experience in the valuation of depository institutions and that has no 
past financial relationship with the merging credit union, the 
continuing bank, or any law firm representing the credit union or the 
bank in connection with the merger.
    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.302  Authority to merge.

    A credit union, with the approval of its members, may merge into a 
bank only with the prior approval of NCUA, the Federal Deposit 
Insurance Corporation, and the regulator of the bank. If the credit 
union is state chartered, it also needs the prior approval of its state 
regulator.


Sec.  708a.303  Board of directors' approval and members' opportunity 
to comment.

    (a) Merger valuation. Before selecting a bank merger partner and 
voting on a proposal to merge, a credit union's board of directors must 
determine, as part of its due diligence, the merger value of the credit 
union. In making its determination of the merger value of the credit 
union, the credit union must either:
    (1) Conduct a well-publicized merger auction and obtain purchase 
quotations from at least three banks, two or more of which must be 
stock banks; or
    (2) Retain a qualified appraisal entity to analyze and estimate the 
merger value of the credit union.
    (b) Advance notice. A credit union that does not conduct a public 
auction as described in paragraph (a)(1) of this section must comply 
with the following notice requirements before voting on a proposal to 
merge.
    (1) No later than 30 days before a board of directors votes on a 
proposal to merge, 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 name and type of institution into which the credit union's 
board is considering a proposal to merge;
    (iii) A brief statement of why the board is considering the merger 
and the major positive and negative effects of the proposed merger;
    (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 submission date 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 merge, 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.
    (c) Member comments. A credit union must collect and review any 
member comments about the merger received during the merger process. 
The credit union must retain the comments until the merger is 
consummated.
    (d) Approval of proposal to merge. The merger proposal may only be 
approved by an affirmative vote of a majority of board members who have 
determined:
    (1) A merger with a bank is in the best interests of the members, 
and
    (2) The merger partner selected by the directors is the best choice 
for the members, taking into account the merger value of the credit 
union and the amount that the selected merger partner is willing to pay 
the credit union's members to effect the merger.


Sec.  708a.304  Notice to NCUA and request to proceed with member vote.

    (a) NIMRA. If a credit union's board of directors adopts a proposal 
to merge, it must, within 30 days of the adoption, provide the Regional 
Director with a Notice of its Intent to Merge and Request for NCUA 
Authorization (NIMRA) to conduct a member vote.
    The NIMRA must include the following:
    (1) The merger plan (as described in paragraph (b) of this 
section);
    (2) Resolutions of the boards of directors of both institutions;
    (3) Certification of the board of directors (as described below);
    (4) Proposed Merger Agreement;
    (5) Proposed Notice of Special Meeting of the Members and any other 
communications about the merger that the credit union intends to send 
to its members, including electronic communications posted on a Web 
site or transmitted by electronic mail;
    (6) Proposed ballot to be sent to the members;
    (7) For state chartered credit unions, evidence that the proposed 
merger is authorized under state law (as described below);
    (8) A copy of the bank's last two examination reports;

[[Page 15590]]

    (9) A statement of the merger valuation of the credit union;
    (10) A statement of whether any merger payment will be made to the 
members and how such a payment will be distributed among the members;
    (11) Information about the due diligence of the directors in 
locating a merger partner and determining that the merger is in the 
best interests of the members of the credit union (as described below);
    (12) Copies of all contracts reflecting any merger-related 
compensation or other benefit to be received by any director or senior 
management official of the credit union;
    (13) If the merging credit union's assets on its latest call report 
are equal to or greater than the threshold amount established annually 
by the Federal Trade Commission under 15 U.S.C. 18a(a)(2)(B)(i), 
currently $63.4 million, a statement about whether the two institutions 
intend to make a Hart-Scott-Rodino Act premerger notification filing 
with the Federal Trade Commission and, if not, an explanation why not;
    (14) Copies of any filings the credit union or bank intends to make 
with another Federal or state regulatory agency in which the credit 
union or bank seeks that agency's approval of the merger; and
    (15) Proof that the accounts of the credit union will be accepted 
for coverage by the Federal Deposit Insurance Corporation.
    (b) Merger plan. The merger plan must include:
    (1) Current financial statements for both institutions;
    (2) Current delinquent loan summaries and analyses of the adequacy 
of the Allowance for Loan and Lease Losses account for both 
institutions;
    (3) Consolidated financial statements of the continuing institution 
after the merger;
    (4) Explanation of any provisions for reserves, undivided earnings 
or dividends;
    (5) Provisions with respect to notification and payment of 
creditors; and
    (6) Explanation of any changes relative to insurance such as life 
savings and loan protection insurance and insurance of member accounts.
    (c) Director certification. The NIMRA must include a certification 
by the credit union's board of directors of their support for the 
merger proposal and plan. Each director who voted in favor of the 
merger proposal must sign the certification. The certification must 
contain the following:
    (1) A statement that each director signing the certification 
supports the proposed merger and believes the proposed merger, and the 
selected bank merger partner, are both in the best interests of the 
members of the credit union;
    (2) A description of all materials submitted to the Regional 
Director with the notice and certification;
    (3) 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
    (4) 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 merger.
    (d) Due diligence. The NIMRA must include a description of all the 
credit union's due diligence in determining that the merger satisfies 
the factors contained in section 205(c) of the Act. In particular, the 
NIMRA must describe how the board located the merger partner, how the 
board negotiated the merger agreement, and how the board determined 
that this merger was in the best interests of the credit union's 
members. The description must include all information relied upon by 
the credit union in determining the merger value of the credit union, 
the amount of any payment to be made by the bank to the credit union's 
members (the ``merger payment''), and, if that merger payment is less 
than the merger value of the credit union, an explanation why the 
merger and the merger partner selected is in the best interests of the 
members. The description must include an explanation of the 
distribution formula by which the merger payment will be distributed 
among the credit union's members.
    (e) State chartered credit unions. A state chartered credit union 
must state as part of its NIMRA if its state chartering law permits it 
to merge into a bank and provide the specific legal citation. A state 
chartered credit union will remain subject to any state law 
requirements for merger that are more stringent than those this part 
imposes, including any internal governance requirements, such as the 
requisite membership vote for merger and the determination of a 
member's eligibility to vote. If a state chartered credit union relies 
for its authority to merge into a 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:
    (1) 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 merge; and
    (2) Indicate its state regulatory authority's position as to 
whether Federal law and regulations or state law will control internal 
governance issues in the merger such as the requisite membership vote 
for merger and the determination of a member's eligibility to vote.
    (f) Consultation with state authorities. After receiving a NIMRA 
from a state chartered credit union, the Regional Director will consult 
with the appropriate state supervisory authority.
    (g) Regional Director approval. After receiving a NIMRA, the 
Regional Director will either disapprove the proposed merger or 
authorize the credit union to proceed with its membership vote.
    (1) The Regional Director will disapprove the proposed merger if 
the NIMRA either lacks the documentation required by this section or 
lacks substantial evidence to support each of the factors in section 
205(c) of the Act. As part of this determination, the Region Director 
must disapprove the proposed merger if:
    (i) The merger payment offered by the bank to the members is less 
than the merger valuation, absent some additional, quantifiable benefit 
to the members from the selected merger partner; or
    (ii) The NIMRA fails to adequately explain the nature and amount of 
any compensation to be received by the credit union's directors or 
senior management officials in connection with the merger or to justify 
that compensation.
    (2) NCUA's authorization to proceed with the member vote does not 
mean NCUA has approved of the merger proposal.
    (h) Appeal of adverse decision. If the Regional Director 
disapproves a merger proposal, the 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 120 days of 
receipt.


Sec.  708a.305  Disclosures and communications to members.

    (a) After the board of directors approves a merger proposal and 
receives NCUA's authorization as described in

[[Page 15591]]

Sec. Sec.  708a.303 and 708a.304, the credit union must provide written 
notice of its intent to merge to each member who is eligible to vote on 
the merger. The notice to members must be mailed 90 calendar days and 
30 calendar days before the date of the membership vote on the merger. 
A ballot must be included in the same envelope as the 30-day notice and 
only with the 30-day notice. A merging credit union may not distribute 
ballots with the 90-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 and 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 90-day notice 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 merger. The 30-day 
notice 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 
merger 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 (g)(9) of 
this section.
    (4) The member ballot must include:
    (i) A brief description of the proposal (e.g., ``Proposal: Approval 
of the Plan of Merger by which [insert name of credit union] will merge 
with a bank'');
    (ii) Two blocks marked respectively as ``FOR'' and ``AGAINST;'' and
    (iii) The following language: ``A vote FOR the proposal means that 
you want your credit union to merge with and become a 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 Merger'') but may not 
include any further information without the prior written approval of 
the Regional Director.
    (c) For mergers into stock banks, an adequate description of the 
purpose and subject matter of the member vote on merger, as required by 
paragraph (b) of this section, must include:
    (1) A clear and conspicuous disclosure that if the merger is 
approved the members will lose all of their ownership interests in the 
institution, including the right to vote, the right to share in the 
value of the institution should it be liquidated, the right to share in 
any extraordinary dividends, and the right to have the net worth of the 
institution managed in their best interests;
    (2) A clear and conspicuous disclosure of any post-merger 
employment or consulting relationships offered by the bank to any of 
the credit union's directors and senior management officials and the 
amount of the associated compensation;
    (3) A clear and conspicuous disclosure of how the merger of the 
credit union will affect the members' ability to obtain non-housing-
related consumer loans from the bank because of the bank's obligations 
to satisfy statutory or regulatory lending requirements (if any). This 
disclosure should specify possible reductions in some kinds of loans to 
members;
    (4) A clear and conspicuous statement of the merger value of the 
credit union, the total dollar amount the selected bank merger partner 
has agreed to pay to effect the merger, and the distribution formula 
the bank will use to determine each member's portion of that payment to 
be received upon completion of the merger; and
    (d) For mergers into mutual banks, an adequate description of the 
purpose and subject matter of the member vote on merger, as required by 
paragraph (b) of this section, must include:
    (1) A clear and conspicuous disclosure of how the merger will 
affect members' voting rights including whether the bank bases voting 
rights on account balances;
    (2) A clear and conspicuous disclosure that the merger could lead 
to members losing all of their ownership interests in the credit union 
if the bank subsequently converts to a stock institution and the 
members do not purchase stock;
    (3) A clear and conspicuous disclosure of any post-merger 
employment or consulting relationships offered by the bank to the 
credit union's directors and senior management officials and the 
associated compensation for each;
    (4) A clear and conspicuous disclosure of how the merger of the 
credit union will affect the members' ability to obtain non-housing-
related consumer loans from the bank because of the bank's obligations 
to satisfy statutory or regulatory lending requirements (if any). This 
disclosure should specify possible reductions in some kinds of loans to 
members;
    (5) A clear and conspicuous statement that, at the time of merger, 
the bank does or does not intend to convert to a stock institution or a 
mutual holding company structure;
    (6) A clear and conspicuous statement of the merger value of the 
credit union, the total dollar amount the selected bank merger partner 
has agreed to pay to effect the merger, and the distribution formula 
the bank will use to determine each member's portion of that payment to 
be received upon completion of the merger; and
    (7) If the bank plans to add one or more of the credit union's 
directors to its board or employ one or more senior officials of the 
credit union, a clear and conspicuous statement that bank could convert 
to a stock bank in the future and a comparison of the opportunities 
available to those officials and employees to obtain stock with the 
opportunities available to the depositors of the bank.
    (e)(1) A merging credit union must provide the following 
disclosures in a clear and conspicuous fashion with the 90-day and 30-
day notices it sends to its members regarding the merger:

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 
merger means you want your credit union to merge with and become a 
bank. A vote ``AGAINST'' the proposed merger means you want your credit 
union to remain a credit union.
    2. [For Mergers into Stock Banks Only]. LOSS OF OWNERSHIP 
INTERESTS. If your credit union merges into the bank, you will lose all 
the ownership interests you currently have in the credit union and you 
will become a customer of the bank. The bank's stockholders own the 
bank, and the directors of the bank have a fiduciary responsibility to 
run the bank in the best interests of the stockholders, not the 
customers.
    2. [For Mergers into Mutual Banks Only]. POTENTIAL PROFITS BY 
OFFICERS AND DIRECTORS. Merger into 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

[[Page 15592]]

scenario, the officers and directors of the bank often profit by 
obtaining stock in excess of that available to other members.
    3. RATES ON LOANS AND SAVINGS. If your credit union merges into the 
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.
    (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 merging 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.
    (f) All written communications from a merging credit union to its 
members regarding the merger 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.
    (g)(1) A merging credit union must mail or e-mail a requesting 
member's proper merger-related materials to other members eligible to 
vote if:
    (i) A credit union's board of directors has adopted a proposal to 
merge;
    (ii) A member makes a written request that the credit union mail or 
e-mail materials for the member;
    (iii) The request is received by the credit union no later than 35 
days after it sends out the 90-day member notice; and
    (iv) The requesting member agrees to reimburse the credit union for 
the reasonable expenses, 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 
Merger--Views of Member (insert member name).''
    (3)(i) A merging credit union may, at its option, include the 
following statement with a member's material:

    On (date), the board of directors of (name of merging credit 
union) adopted a proposal to merge the credit union into a bank. 
Credit union members who wish to express their opinions about the 
proposed merger 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 
(or group of members) 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 merging 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 merger-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 merger;
    (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 merging 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 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.305(g) 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 percent 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 merger-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 merger. A link to the portion of the Web site available 
to members to post their views on the merger must be marked ``Members: 
Share your views on the proposed merger and see other members' views'' 
and the link must also be visible on all pages on which the credit 
union posts its own merger-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 (g)(5) of this section. The credit union may also post a 
content-neutral disclaimer using

[[Page 15593]]

language similar to the language in paragraph (g)(3)(i) of this 
section.
    (9) A merging credit union must inform members with the 90-day 
notice that if they wish to provide their opinions about the proposed 
merger 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 
(g)(2) and (g)(3) of this section, the credit union will use the group 
name provided by the group.
    (h) If it chooses, a credit union may seek a preliminary 
determination from the Regional Director regarding any of the notices 
required under this subchapter and its proposed methods and procedures 
applicable to the membership merger 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.307 or eliminate the right 
of the Regional Director to disapprove the merger if the credit union 
fails to conduct the membership vote in a fair and legal manner 
consistent with the Federal Credit Union Act and these rules.


Sec.  708a.306  Membership approval of a proposal to merge.

    (a) A proposal for merger approved by a board of directors also 
requires approval by a majority of the members who vote on the 
proposal. At least 20 percent of the members eligible to vote must 
participate in the vote. The credit union must also have NCUA's written 
authorization to proceed with the member vote.
    (b) The board of directors must set a voting record date to 
determine member voting eligibility. The record date must be at least 
one day before the publication of notice required in Sec.  708a.303.
    (c) A member may vote on a proposal to merge in person at a special 
meeting held on the date set for the vote or by written ballot 
delivered by mail or otherwise. The vote on the merger 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.307  Certification of vote on merger proposal.

    (a) The board of directors of the merging 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.305. 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.
    (c) The certification must include copies of any correspondence 
between the credit union and other regulators related to the pending 
merger.


Sec.  708a.308  NCUA approval of the merger.

    (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; if the membership vote was conducted in a fair and legal 
manner; and if the credit union has otherwise met the requirements of 
this subpart, including whether there is substantial evidence that the 
factors in section 205(c) of the Act are satisfied.
    (b) After completion of this review, the Regional Director will 
approve or disapprove the proposed merger. The Regional Director will 
issue the approval or disapproval within 30 calendar days of receipt 
from the credit union of the certification of the result of the 
membership vote required under Sec.  708a.307, unless the Regional 
Director extends the period as necessary to request additional 
information or review the credit union's submission. The Regional 
Director's approval is conditional on the credit union completing the 
merger in the timeframes required by Sec.  708a.309.
    (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 merging credit union may appeal a Regional Director's 
disapproval 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 120 days of receipt.


Sec.  708a.309  Completion of merger.

    (a) After receipt of the approvals under Sec. Sec.  708a.302 and 
708a.308 a credit union may complete the merger.
    (b) The credit union must complete the merger within one year of 
the date of NCUA approval under Sec.  708a.308. If a credit union fails 
to complete the merger within one year the Regional Director will 
disapprove the merger. The credit union's board of directors must then 
adopt a new merger proposal and solicit another member vote if it still 
desires to merge.
    (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 bank that 
the merger 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.310  Limits on compensation of officials.

    No director or senior management official of an insured credit 
union may receive any economic benefit in connection with the merger of 
a credit union other than reasonable compensation and other benefits 
paid in the ordinary course of business.


Sec.  708a.311  Voting incentives.

    If a merging 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 
merger.

[[Page 15594]]

Sec.  708a.12  Voting guidelines.

    A merging credit union must conduct its member vote on merger 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 merger rules apply to 
all mergers of federally insured credit unions, federally insured state 
chartered credit unions (FISCUs) are also subject to state law on 
mergers. NCUA's position is that no merger of a state chartered credit 
union is authorized unless permitted by state law, and also that a 
state legislature or state supervisory authority may impose merger 
requirements more stringent or restrictive than NCUA's. States that 
permit mergers 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 merger, 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 merger 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 merger vote can be fair and legal 
if some members are improperly excluded. A merging credit union should 
be cautious to identify all eligible members and make certain they are 
included on its voting list. NCUA recommends that a merging credit 
union establish internal procedures to manage this task.
    (2) A merging credit union should be careful to make certain its 
member list is accurate and complete. For example, when a credit union 
converts from paper record keeping to computer record keeping, some 
member names may not transfer unless the credit union is careful in 
this regard. This same problem can arise when a credit union merges 
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 merges 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 merger rule requires a 
merging 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 
merger. Although most members may choose to vote by mail, a significant 
number may choose to vote in person. As a result, a merging 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 merger 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 merger 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 Sec.  
708a.311 of this part, that they have an equal opportunity to 
participate in the incentive program regardless of whether they vote 
for or against the merger. 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.

PART 708b--MERGERS OF FEDERALLY INSURED CREDIT UNIONS; VOLUNTARY 
TERMINATION OR CONVERSION OF INSURED STATUS

    15. The authority citation for part 708b continues to read as 
follows:

    Authority:  12 U.S.C. 1752(7), 1766, 1785, 1786, 1789.

    16. Amend Sec.  708b.2 by removing alphabetical paragraph 
designations (a) through (k) and adding definitions of ``conducted by 
an independent entity,'' ``merger-related financial arrangement,'' 
``secret ballot'' and ``senior management official'' in alphabetical 
order to read as follows:


Sec.  708b.2  Definitions

* * * * *
    Conducted by an independent entity means:
    (1) The independent entity will receive the ballots directly from 
voting members and store them.
    (2) After the conclusion of the special meeting that ends the 
ballot period, the independent entity will open all the ballots in its 
possession and tabulate the results. The entity must not open or 
tabulate any ballots before the conclusion of the special meeting.
    (3) The independent entity will certify the final vote tally in 
writing to the credit union and provide a copy to the NCUA Regional 
Director. The certification will include, at a minimum, the number of 
members who voted, the number of affirmative votes, and the number of 
negative votes. During the course of the voting period the independent 
entity may provide the credit union with the names of members who have 
not yet voted, but may not provide any voting results to the credit

[[Page 15595]]

union prior to certifying the final vote tally.
* * * * *
    Merger-related financial arrangement means a material increase in 
compensation (including indirect compensation, for example, bonuses, 
deferred compensation, or other financial rewards) or benefits that any 
board member or senior management official of a merging credit union 
may receive in connection with a merger transaction. For purposes of 
this definition, a material increase is an increase that exceeds the 
greater of 15 percent or $10,000.
* * * * *
    Secret ballot means no credit union employee or official can 
determine how a particular member voted. Credit union employees and 
officials are prohibited from assisting members in completing ballots 
or handling completed ballots.
    Senior management official means the chief executive officer (who 
may hold the title of president or treasurer/manager), any assistant 
chief executive officer, and the chief financial officer.
* * * * *
    17-18. Amend Sec.  708b.103 by revising paragraph (a)(5), 
redesignating paragraphs (a)(7) through (10) as paragraphs (a)(8) 
through (11), and adding new paragraph (a)(7) to read as follows:


Sec.  708b.103  Preparation of merger plan.

    (a) * * *
    (5) Explanation of any proposed share adjustments, and where the 
net worth ratio of the merging credit union is more than 500 basis 
points higher than the net worth ratio of the continuing credit union, 
an explanation of the factors considered in establishing the amount of 
any proposed adjustment or in determining no adjustment is necessary;
* * * * *
    (7) Description of any merger-related financial arrangement, as 
defined in Sec.  708b.2;
* * * * *
    19. Revise paragraph (a)(8) of Sec.  708b.104 to read as follows:


Sec.  708b.104  Submission of merger proposal to the NCUA.

    (a) * * *
    (8) If the merging credit union's assets on its latest call report 
are equal to or greater than the threshold amount established annually 
by the Federal Trade Commission under 15 U.S.C. 18a(a)(2)(B)(i), 
currently $63.4 million, a statement about whether the two credit 
unions intend to make a Hart-Scott-Rodino Act premerger notification 
filing with the Federal Trade Commission and, if not, an explanation 
why not; and
* * * * *
    20. Revise paragraph (a)(2)(ii) of Sec.  708b.106 to read as 
follows:


Sec.  708b.106  Approval of the merger proposal by members.

    (a) * * *
    (2) * * *
    (ii) Contain a summary of the merger plan, including, but not 
necessarily limited to, current financial statements for each credit 
union, a consolidated financial statement for the continuing credit 
union, analyses of share values, explanation of any proposed share 
adjustments, explanation of any changes relative to insurance such as 
life savings and loan protection insurance and insurance of member 
accounts, and a detailed description of any merger related financial 
arrangement, as defined in Sec.  708b.2. The description must include 
the name and title of each individual recipient and an explanation of 
the financial impact of each element of the arrangement, including 
direct salary increases and any indirect compensation, such as any 
bonus, deferred compensation or other financial reward;
* * * * *


Sec.  708b.107  [Amended]

    21. Amend the heading to Sec.  708b.107 by removing the word 
``Certificate'' and adding the word ``Certification'' in its place.
    22. Revise paragraph (c) of Sec.  708b.201 to read as follows:


Sec.  708b.201  Termination of insurance.

* * * * *
    (c) A majority of the credit union's members must approve a 
termination of insurance by affirmative vote. The vote must be taken by 
secret ballot and conducted by an independent entity.
* * * * *
    23. Revise paragraphs (d) and (g) of Sec.  708b.203 to read as 
follows:


Sec.  708b.203  Conversion of insurance.

* * * * *
    (d) Approval of a conversion of Federal to nonfederal insurance 
requires the affirmative vote of a majority of the credit union's 
members who vote on the proposition, provided at least 20 percent of 
the total membership participates in the voting. The vote must be taken 
by secret ballot and conducted by an independent entity.
* * * * *
    (g) Generally, the NCUA will conditionally approve or disapprove 
the conversion in writing within 14 days after receiving the 
certification of the vote. The credit union must complete the 
conversion within six months of the date of conditional approval. If a 
credit union fails to complete the conversion within six months the 
Regional Director will disapprove the conversion. The credit union's 
board of directors, if it still wishes to convert, must then adopt a 
new conversion proposal and solicit another member vote.
* * * * *
    24. Revise paragraph (b) of Sec.  708b.206 to read as follows:


Sec.  708b.206  Share insurance communications to members.

* * * * *
    (b) Every share insurance communication about share insurance 
conversion must contain the following conspicuous statement: ``IF YOU 
ARE A MEMBER OF THIS CREDIT UNION, YOUR ACCOUNTS ARE CURRENTLY INSURED 
BY THE NATIONAL CREDIT UNION ADMINISTRATION, A FEDERAL AGENCY. THIS 
FEDERAL INSURANCE IS BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED 
STATES GOVERNMENT. IF THE CREDIT UNION CONVERTS TO PRIVATE INSURANCE 
WITH (insert name of private share insurer) AND THE CREDIT UNION FAILS, 
THE FEDERAL GOVERNMENT DOES NOT GUARANTEE THAT YOU WILL GET YOUR MONEY 
BACK.'' The statement must:
    (1) Appear on the first page of the communication where conversion 
is discussed and, if the communication is on an Internet Web site 
posting, the credit union must make reasonable efforts to make it 
visible without scrolling; and
    (2) Must be in capital letters, bolded, offset from the other text 
by use of a border, and at least one font size larger than any other 
text (exclusive of headings) used in the communication.
* * * * *

    Note: The following revision to a document entitled ``Corporate 
Federal Credit Union Bylaws,'' will not appear in the Code of 
Federal Regulations.

    Section 4 of Article XI of the document entitled ``Corporate 
Federal Credit Union Bylaws,'' is revised to read as follows:

Article XI. General

* * * * *
    Section 4. (a) Subject to the limitations in 12 CFR 701.33(c)(5) of 
the NCUA regulations, the corporate credit union may elect to indemnify 
to the extent authorized by (check one) ( ) law of the state of ------
-- or ( ) Model Business Corporation Act the following

[[Page 15596]]

individuals from any liability asserted against them and expenses 
reasonably incurred by them in connection with judicial or 
administrative proceedings to which they are or may become parties by 
reason of the performance of their official duties: (Check as 
appropriate) ( ) current officials, ( ) former officials, ( ) current 
employees, ( ) former employees.
    (b) The corporate credit union may purchase and maintain insurance 
on behalf of the individuals indicated in (a) above against any 
liability asserted against them and expenses reasonably incurred by 
them in their official capacities and arising out of the performance of 
their official duties to the extent such insurance is permitted by the 
applicable state law or the Model Business Corporation Act.
    (c) The term ``official'' in this bylaw means a person who is a 
member of the board of directors, supervisory committee, other 
volunteer committee (including elected or appointed loan officers or 
membership officers), established by the board of directors.
* * * * *
[FR Doc. 2010-6439 Filed 3-25-10; 8:45 am]
BILLING CODE 7535-01-P