[Federal Register Volume 75, Number 150 (Thursday, August 5, 2010)]
[Proposed Rules]
[Pages 47236-47242]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-19095]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 75, No. 150 / Thursday, August 5, 2010 / 
Proposed Rules  

[[Page 47236]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 741 and 750

RIN 3133-AD73


Golden Parachute and Indemnification Payments

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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

SUMMARY: NCUA proposes to adopt a rule to prohibit, with some 
exceptions, a federally insured credit union (FICU) from making golden 
parachute and indemnification payments to an institution-affiliated 
party (IAP). The proposed rule is intended to help safeguard the 
National Credit Union Share Insurance Fund (NCUSIF) by preventing the 
wrongful or improper disposition of FICU assets and to inhibit 
unwarranted rewards to IAPs who may have contributed to an FICU's 
troubled condition. The proposed rule would also provide FICUs with 
greater clarity on the distinction between legitimate employee 
severance payments and improper golden parachute payments.

DATES: Comments must be received on or before September 7, 2010.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web site: http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the 
instructions for submitting comments.
     E-mail: Address to [email protected]. Include ``[Your 
name] Comments on ``Golden Parachute and Indemnification Payments'' 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.
    Public Inspection: All public comments are available on the 
agency's Web site at http://www.ncua.gov/RegulationsOpinionsLaws/comments as submitted, except as may not be possible for technical 
reasons. Public comments will not be edited to remove any identifying 
or contact information. Paper copies of comments may be inspected in 
NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by 
appointment weekdays between 9 a.m. and 3 p.m. To make an appointment, 
call (703) 518-6546 or send an e-mail to [email protected].

FOR FURTHER INFORMATION CONTACT: Pamela Yu, Staff Attorney, at the 
above address, or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 2523 of the Comprehensive Thrift and Bank Fraud Prosecution 
and Taxpayer Recovery Act of 1990 (Fraud Act) \1\ amended the Federal 
Credit Union Act (FCU Act) by adding section 206(t). Public Law No. 
101-647, 2523 (1990). Section 206(t) states that ``[t]he Board may 
prohibit or limit, by regulation or order, any golden parachute payment 
or indemnification payment.'' 12 U.S.C. 1786(t)(1).
---------------------------------------------------------------------------

    \1\ The Comprehensive Thrift and Bank Fraud Prosecution and 
Taxpayer Recovery Act of 1990 is title XXV of the Crime Control Act 
of 1990, S. 3266, which Congress passed on October 27, 1990 and the 
President signed into law on November 29, 1990.
---------------------------------------------------------------------------

    This proposal implements section 206(t) by adding a new part 750 to 
NCUA's regulations. Although the Fraud Act authorized the Board to 
prescribe rules in this area, the Board did not promulgate rules to 
implement section 206(t) initially because of a government-wide 
moratorium on rulemaking. Regarding the golden parachute and 
indemnification provisions in the proposed corporate rule, the Board 
noted its concern with ``recent problems exposed by the corporate 
financial crisis, including corporate governance problems'' but stated 
it did not intend to apply the requirements of the proposed corporate 
rule to natural person credit unions. 74 FR 65210, 65255 (Dec. 9, 
2009). Given the current economic climate and continuing financial 
problems facing many natural person credit unions, the Board now 
believes it should implement the golden parachute and indemnification 
provisions of the anti-fraud legislation for all FICUs. Furthermore, 
because the Board wishes to implement this regulation without delay, 
the comment period will be 30 days, as required under the 
Administrative Procedure Act, 5 U.S.C. 553(d), rather than a 60-day 
comment period NCUA generally provides under IRPS 87-2, Developing and 
Reviewing Government Regulations, 52 FR 35231 (Sept. 18, 1987), as 
amended by IRPS 03-2, 68 FR 31949 (May 29, 2003). The provisions of 
this proposed rule, substantively identical to the provisions in the 
proposed corporate rule, will prevent the improper disposition of FICU 
assets and inhibit unwarranted rewards that can contribute to an FICU's 
troubled condition.

II. Summary of the Proposed Rule

    NCUA proposes to adopt a rule to prohibit, with certain exceptions, 
an FICU from making golden parachute and indemnification payments to an 
IAP. The purpose of the proposed rule is to safeguard the NCUSIF by 
preventing the wrongful or improper disposition of FICU assets and to 
inhibit rewards to IAPs who may have contributed to an FICU's troubled 
condition. It is also intended to provide FICUs with greater clarity on 
the distinction between legitimate employee severance payments and 
improper golden parachute payments. The proposed rule tracks closely to 
existing regulations applying to banks.\2\
---------------------------------------------------------------------------

    \2\ See 12 CFR part 359.
---------------------------------------------------------------------------

    This proposal is drafted so as to apply to all FICUs, including 
natural person and corporate credit unions. NCUA previously issued a 
proposal to implement section 206(t) for corporate credit unions on 
November 19, 2009, as part of a comprehensive proposal to amend part 
704, NCUA's rule governing corporate credit unions. 74 FR 6520 (Dec. 9, 
2009) (to be codified at 12 CFR 704.20).\3\ This proposed rule, with 
only minor differences, for example, in grammar or simpler word choice, 
is substantively the same as the proposed corporate provisions. A final 
corporate rule may be adopted before this

[[Page 47237]]

proposal is finalized and, if so, the Board may then consider 
consolidating the corporate rule's golden parachute provisions into a 
final rule for this proposal to avoid duplicative sections on the same 
subject.
---------------------------------------------------------------------------

    \3\ The comment period for the corporate proposal ended March 9, 
2010.
---------------------------------------------------------------------------

    Once finalized, the new part 750 will apply to all new employment 
contracts entered into on or after that date, as well as to existing 
contracts that are renewed or modified in any way after the final 
rule's effective date.

A. Prohibited Golden Parachute Payments

    Proposed part 750 prohibits, with some exceptions, FICUs that are 
insolvent, in conservatorship, rated CAMEL 4 or 5, or in an otherwise 
troubled condition from making golden parachute payments. Golden 
parachutes are payments made to an IAP that are contingent on the 
termination of that person's employment and received when the credit 
union making the payment is troubled, undercapitalized, or insolvent. 
12 U.S.C. 1786(t)(4).
    Recognizing, however, that certain post-employment payments have 
reasonable business purposes, the proposal includes several 
``exceptions'' to the general prohibition against golden parachutes to 
allow FICUs to offer, consistent with normal business practice, ``bona 
fide'' deferred compensation plans and legitimate ``nondiscriminatory'' 
severance pay plans. The proposal also includes an exception to permit 
a troubled FICU to hire and agree to pay a golden parachute to 
competent management to assist in bringing a troubled credit union back 
to financial health. The proposal would also permit limited golden 
parachute payments, with prior NCUA approval, in circumstances 
involving the merger of a troubled FICU.

B. Prohibited Indemnification Payments

    The proposal also prohibits FICUs, regardless of their financial 
condition, from paying or reimbursing an IAP's legal or other 
professional expenses incurred in administrative or civil proceedings 
instituted by NCUA or the appropriate state regulatory authority where 
the IAP is assessed a civil money penalty, removed from office or made 
subject to a cease and desist order.\4\ FICUs, however, may purchase 
reasonable commercial insurance policies or fidelity bonds. The 
proposal also allows for partial indemnification in circumstances where 
there is a formal and final adjudication or finding that the IAP has 
not violated certain laws or regulations or has not engaged in certain 
unsafe or unsound practices or breaches of fiduciary duty. In these 
instances, indemnification would be permitted for only that portion of 
the legal or professional expenses attributable to the charges for 
which there has been a finding in favor of the IAP.
---------------------------------------------------------------------------

    \4\ Federal credit unions may provide for indemnification of 
officers and directors as set forth at 12 CFR 701.33(c). While 
proposed Sec.  750.5 is intended to apply to all FICUS, it does not 
grant or enhance any authority state chartered credit unions may 
have under state law to provide indemnification. To the extent this 
proposed part 750 is perceived to conflict with Sec.  701.33 or any 
state law or regulation for state-chartered credit unions, a FICU 
must comply with part 750.
---------------------------------------------------------------------------

III. Description of Key Provisions

    A detailed description of the proposal rule's key provisions 
follows.

Section 750.1 Definitions

    Proposed Sec.  750.1 contains definitions applicable to this part. 
The key definitions are discussed in detail below.
Bona Fide Deferred Compensation Plan or Arrangement
    This definition, which appears as proposed Sec.  750.1(d), is 
intended to permit FICUs to offer reasonable deferred compensation 
plans that are typical in executive compensation packages for credit 
union executives. Since credit unions, as tax-exempt organizations, are 
not able to offer equity-based incentive compensation, deferred 
compensation plans are an important tool for credit unions to attract 
executive talent in a competitive market. The proposed definition would 
permit FICUs to continue to provide legitimate deferred compensation 
plans, including supplemental retirement benefits and nonqualified 
deferred compensation plans, consistent with normal business practices.
Golden Parachute Payment
    The proposed rule generally prohibits a FICU from making or 
agreeing to make any golden parachute payment. Proposed Sec.  750.1(f) 
defines a ``golden parachute payment'' as any payment (or agreement to 
make any payment) to an IAP that is contingent on the termination of 
that party's employment and received when the FICU making the payment 
is insolvent, undercapitalized, in conservatorship, rated CAMEL 4 or 5, 
subject to a proceeding to terminate or suspend its share insurance, or 
in an otherwise troubled condition, as defined in Sec.  701.14(b)(3) 
and (4).\5\
---------------------------------------------------------------------------

    \5\ Corporate credit unions that have been granted assistance as 
described in sections 208 or 216 of the FCU Act would also be 
considered to be in a ``troubled condition'' under the proposal.
---------------------------------------------------------------------------

    The proposed golden parachute definition would provide exceptions 
for certain qualified pension or retirement plans under section 401 of 
the Internal Revenue Code (IRC); employee benefit plans that are 
permissible under Sec.  701.19; bona fide deferred compensation plans; 
certain death and disability payments; certain ``nondiscriminatory'' 
severance plans; payments required by state law; and payments that the 
Board has determined permissible under Sec.  750.4. These types of 
payments would not be considered golden parachute payments for purposes 
of this rule.
Nondiscriminatory
    Section 750.1(i) of the proposal defines ``nondiscriminatory'' as 
it relates to severance pay plans or arrangements, stating only 
``nondiscriminatory'' severance pay plans or arrangements qualify as an 
exception to the prohibition on golden parachute payments. To meet the 
proposed definition of nondiscriminatory, a severance pay plan must 
apply to all employees of an FICU who meet reasonable and customary 
eligibility requirements applicable to all employees. NCUA recognizes 
that severance plans providing somewhat more generous benefits to 
higher ranking IAPs are typical in the industry. Thus, the proposed 
definition permits severance plans with a modest variance in benefits 
based on objective criteria. Disparities in benefits are only 
acceptable if based on objective criteria like salary, total 
compensation, length of service, job grade or classification. 
Additionally, the proposed definition requires any group of employees 
that is designated for a different level of benefits based on objective 
criteria must consist of not less than 33% of all employees.
Prohibited Indemnification Payment
    Under proposed Sec.  750.1(k), a ``prohibited indemnification 
payment'' is any payment or agreement to make any payment by an FICU to 
an IAP to pay or reimburse such person for any civil money penalty, 
judgment, or other liability or legal expense resulting from any 
administrative or civil action by NCUA or the appropriate state 
regulatory authority and the IAP is assessed a civil money penalty, 
removed from office or made subject to a cease and desist order. The 
proposed definition would not include any reasonable payment to 
purchase commercial insurance policies or fidelity bonds. The policy or 
bond cannot pay for any penalty or judgment against an IAP; however, 
the policy or bond may cover the potential future cost of defending an 
administrative

[[Page 47238]]

proceeding or civil action or pay restitution to the FICU or its 
liquidating agent.
    The proposed definition would also provide an exception for 
payments representing a partial indemnification for legal or 
professional expenses specifically attributable to charges for which 
there has been a formal and final adjudication or finding that the IAP 
has not violated certain laws or regulations or has not engaged in 
certain unsafe or unsound practices or breaches of fiduciary duty.

Section 750.4 Permissible Golden Parachute Payments

    In certain, limited circumstances, NCUA believes payments that 
otherwise satisfy the definition of golden parachute payments should be 
permitted. Accordingly, the proposal includes three major exceptions to 
the general prohibition on golden parachute payments.
    First, the proposal includes an exception to allow an FICU in a 
troubled condition to agree to pay a golden parachute payment in order 
to hire new management to help bring a troubled FICU back to sound 
financial health. This exception is intended to ensure an FICU can 
attract qualified senior management with appropriate expertise to help 
improve a troubled FICU's financial condition. An FICU must notify and 
obtain the written permission of the Board before employing this 
exception to make a golden parachute payment.
    Second, the proposed rule includes an exception to allow FICUs to 
offer reasonable severance plan payments in the context of a merger 
involving a troubled credit union.
    The merger must be unassisted, that is, without assistance from, 
and at no cost to, NCUA. Reasonable severance arrangements related to 
an unassisted merger must not exceed twelve months' salary. 
Additionally, an FICU must obtain the written consent of the Board 
before making the severance payment.
    Third, the proposal includes a general exception to permit golden 
parachute payments where the Board determines such a payment is 
permissible.
    In applying to NCUA for any of the three exceptions above, the FICU 
must demonstrate that the IAP does not bear any responsibility for the 
troubled condition of the FICU. Specifically, an FICU must demonstrate 
that it does not possess, and is not aware of, any information 
providing a reasonable basis to believe that: the IAP has committed any 
fraudulent act or omission, breach of trust or fiduciary duty, or 
insider abuse; the IAP is substantially responsible for the insolvency 
of, the appointment of a conservator or liquidating agent for, or the 
troubled condition of the FICU; or the IAP has violated or conspired to 
violate any applicable federal or state law or regulation or certain 
specified criminal provisions of the United States Code.
    Under the proposal, the Board may consider the following factors in 
determining whether to permit a golden parachute payment:
     Whether, and to what degree, the IAP was in a position of 
managerial or fiduciary responsibility;
     The length of time the IAP was affiliated with the FICU, 
and the degree to which the proposed payment represents a reasonable 
payment for services rendered over the period of employment; and
     Any other factors or circumstances which would indicate 
that the proposed payment would be contrary to the intent of section 
206(t) of the FCU Act.

Section 750.5 Permissible Indemnification Payments

    The proposed rule generally prohibits indemnification payments for 
the benefit of an IAP for any liability or legal expense in connection 
with an administrative or civil enforcement action that results in a 
final order or settlement pursuant to which the IAP is assessed a civil 
money penalty, removed from office, prohibited from participating in 
the conduct of the affairs of an insured credit union, or required to 
cease and desist from or take any affirmative action described in 
section 206 of the FCU Act. Recognizing, however, that there are 
circumstances where indemnification would be appropriate, Sec.  750.5 
of the proposal allows for reasonable indemnification payments to an 
IAP under certain conditions. Specifically, an FICU may make or agree 
to make an indemnification payment to an IAP for reasonable legal or 
other professional expenses incurred in defending an administrative or 
civil action brought by NCUA or the appropriate state regulator where 
the FICU's board of directors makes a good faith determination, after 
due investigation, that:
     The IAP acted in good faith and in a manner he or she 
believed to be in the best interests of the FICU;
     The payment will not materially adversely affect the 
FICU's safety and soundness;
     The payments do not ultimately become prohibited 
indemnification payments as defined in Sec.  750.1(k), that is, the 
administrative action does not result in a civil money penalty, removal 
order, or cease and desist order against the IAP; and
     The IAP agrees in writing to reimburse the FICU, to the 
extent not covered by payments from insurance, for that portion of the 
advanced indemnification payments, if any, which subsequently becomes a 
prohibited indemnification payment.

Section 750.7 Applicability in the Event of Liquidation or 
Conservatorship

    This section clarifies how the prohibitions and limitations in this 
part would apply in the event of a liquidation or conservatorship. 
Under the proposal, the Board's consent or approval of a golden 
parachute payment under this part will not in any way bind or obligate 
any liquidating agent or conservator for a failed FICU to pay any claim 
or obligation under any golden parachute, severance, indemnification or 
other agreement.

IV. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a rule may have on a 
substantial number of small entities (primarily those under ten million 
dollars in assets). This proposed rule does not impose any regulatory 
burden but prohibits improper golden parachute and indemnification 
payments to IAPs by FICUs in certain circumstances. Accordingly, it 
will not have a significant economic impact on a substantial number of 
small credit unions, and therefore, no regulatory flexibility analysis 
is required.

Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or modifies an existing burden. 44 U.S.C. 3507(d). For 
purposes of the PRA, a paperwork burden may take the form of a either a 
reporting or a recordkeeping requirement, both referred to as 
information collections. Proposed part 750 would impose new information 
collection requirements. Proposed Sec.  750.6 would require requests 
for an FICU to make nondiscriminatory severance plan payments under 
Sec.  750.1(f)(2)(v) and golden parachute payments permitted by Sec.  
750.4 to be submitted in writing to NCUA.
    In FY 2009, there were 351 problem FICUs with CAMEL 4 or 5 ratings. 
Of those, 156 FICUs had less than $10 million in total assets and 117 
FICUs had less than $100 million in total

[[Page 47239]]

assets. These smaller FICUs are unlikely to seek NCUA approval to make 
golden parachute payments because these payments are more typically 
seen in the executive compensation of larger, more complex FICUs. Of 
the remaining 78 larger problem FICUs, NCUA anticipates no more than 20 
percent would seek NCUA approval to make a golden parachute payment. 
Accordingly, NCUA estimates that 15 FICUs will need to solicit NCUA 
approval in advance of making a severance or golden parachute payment 
within the scope of the proposed rule and that preparing the request 
for approval may take four hours: 15 FICUs x 4 hours = 60 hours.
    As required by the PRA, NCUA is submitting a copy of this proposed 
regulation to the Office of Management and Budget (OMB) for its review 
and approval. Persons interested in submitting comments with respect to 
the information collection aspect of the proposed rule should submit 
them to the OMB at the following address: Office of Information and 
Regulatory Affairs, OMB, New Executive Office Building, Washington, DC 
20503; Attention: NCUA Desk Officer, with a copy to Mary Rupp, 
Secretary of the Board, National Credit Union Administration, 1775 Duke 
Street, Alexandria, Virginia 22314-3428.

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

    NCUA has determined that this rule will not affect family well-
being within the meaning of section 654 of the Treasury and General 
Government Appropriations Act, 1999, Public Law 105-277, 112 Stat. 2681 
(1998).

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) (SBREFA) provides generally for congressional review 
of agency rules. A reporting requirement is triggered in instances 
where NCUA issues a final rule as defined by Section 551 of the APA. 5 
U.S.C. 551. NCUA does not believe this proposed rule is a ``major 
rule'' within the meaning of the relevant sections of SBREFA. NCUA has 
submitted the rule to the Office of Management and Budget for its 
determination in that regard.

List of Subjects

12 CFR Part 741

    Bank deposit insurance, Credit unions, Reporting and recordkeeping 
requirements.

12 CFR Part 750

    Credit Unions, Golden parachute payments, Indemnity payments.

    By the National Credit Union Administration Board, this 29th day 
of July, 2010.
Mary F. Rupp,
Secretary of the Board.

    For the reasons discussed above, NCUA proposes to amend 12 CFR 
chapter VII as follows:

PART 741--REQUIREMENTS FOR INSURANCE

    1. The authority citation for part 741 continues to read as 
follows:

    Authority: 12 U.S.C. 1757, 1766(a), 1781-1790, and 1790d; 31 
U.S.C. 3717.

    2. Add Sec.  741.223 to read as follows:


Sec.  741.223  Golden parachute and indemnification payments.

    Any credit union insured pursuant to Title II of the Act must 
adhere to the requirements stated in part 750 of this chapter.
    3. New part 750 is added to read as follows:

PART 750--GOLDEN PARACHUTE AND INDEMINIFICATION PAYMENTS

Sec.
750.0 Scope.
750.1 Definitions.
750.2 Golden parachute payments prohibited.
750.3 Prohibited indemnification payments.
750.4 Permissible golden parachute payments.
750.5 Permissible indemnification payments.
750.6 Filing instructions.
750.7 Applicability in the event of liquidation or conservatorship.

    Authority: 12 U.S.C. 1786(t).


Sec.  750.0  Scope.

    (a) This part limits and prohibits, in certain circumstances, the 
ability of federally insured credit unions, including federally and 
state chartered natural person credit unions and federally and state 
chartered corporate credit unions, to enter into contracts to pay and 
to make golden parachute and indemnification payments to institution-
affiliated parties (IAPs).
    (b) The limitations on golden parachute payments apply to troubled 
federally insured credit unions that seek to enter into contracts to 
pay or to make golden parachute payments to their IAPs. A ``golden 
parachute payment'' is generally considered to be any payment to an IAP 
which is contingent on the termination of that person's employment and 
is received when the federally insured credit union making the payment 
is troubled. The definition of golden parachute payment does not 
include payments pursuant to qualified retirement plans, nonqualified 
bona fide deferred compensation plans, nondiscriminatory severance pay 
plans, other types of common benefits plans, state statutes and death 
benefits. Certain limited exceptions to the golden parachute payment 
prohibition are provided for in cases involving unassisted mergers and 
the hiring of new management to help improve a troubled federally 
insured credit union's financial condition. A procedure is also set 
forth to permit a federally insured credit union to request permission 
to make what would otherwise be a prohibited golden parachute payment.
    (c) The limitations on indemnification payments apply to all 
federally insured credit unions, including state chartered credit 
unions, regardless of their financial health. Generally, this part 
prohibits federally insured credit unions from indemnifying an IAP for 
that portion of the costs sustained with regard to an administrative or 
civil enforcement action commenced by NCUA that results in a final 
order or settlement pursuant to which the IAP is assessed a civil money 
penalty, removed from office, prohibited from participating in the 
affairs of a federally insured credit union or required to cease and 
desist from or take an affirmative action described in section 206 of 
the Federal Credit Union Act, 12 U.S.C. 1786. There are exceptions to 
this general prohibition. First, a federally insured credit union may 
purchase commercial insurance to cover these expenses, except judgments 
and penalties. Second, the credit union may advance legal and other 
professional expenses to an IAP directly (except for judgments and 
penalties) if its board of directors makes certain specific findings 
and the IAP agrees in writing to reimburse the credit union if it is 
ultimately determined that the IAP violated a law, regulation or other 
fiduciary duty.


Sec.  750.1  Definitions.

    (a) Act means the Federal Credit Union Act.
    (b) Benefit plan means any employee benefit plan, contract, 
agreement or other arrangement subject to the requirements in Sec.  
701.19 of this chapter, but the term does not include a plan within the 
exceptions described in paragraphs (f)(2) (iii) and (v) of this 
section.
    (c) Board means the National Credit Union Administration Board.
    (d) Bona fide deferred compensation plan or arrangement means any 
plan,

[[Page 47240]]

contract, agreement or other arrangement where:
    (1) An IAP voluntarily elects to defer all or a portion of the 
reasonable compensation, wages or fees paid for services rendered that 
otherwise would have been paid to the IAP at the time the services were 
rendered, including a plan providing for crediting a reasonable 
investment return on the elective deferrals, and the federally insured 
credit union either:
    (i) Recognizes compensation expense and accrues a liability for the 
benefit payments according to generally accepted accounting principles 
(GAAP); or
    (ii) Segregates or otherwise sets aside assets in a trust that may 
only be used to pay plan and other benefits, except that the assets of 
the trust may be available to satisfy claims of the federally insured 
credit union's creditors in the case of insolvency; or
    (2) A federally insured credit union establishes a nonqualified 
deferred compensation or supplemental retirement plan, other than an 
elective deferral plan described in paragraph (f)(1) of this section:
    (i) Primarily for the purpose of providing benefits for certain 
IAPs in excess of the limitations on contributions and benefits imposed 
by sections 415, 401(a)(17), 402(g) or any other applicable provision 
of the Internal Revenue Code of 1986 (26 U.S.C. 415, 401(a)(17), 
402(g)); or
    (ii) Primarily for the purpose of providing supplemental retirement 
benefits or other deferred compensation for a select group of 
directors, management or highly compensated employees, excluding 
severance payments described in paragraph (f)(2)(v) of this section and 
permissible golden parachute payments described in Sec.  750.4; and
    (3) In the case of any nonqualified deferred compensation or 
supplemental retirement plans as described in paragraphs (d)(1) and (2) 
of this section, the following requirements apply:
    (i) The plan was in effect at least one year before any of the 
events described in paragraph (f)(1)(ii) of this section;
    (ii) Any payment made pursuant to the plan is made in accordance 
with the terms of the plan as in effect no later than one year before 
any of the events described in paragraph (f)(1)(ii) of this section and 
in accordance with any amendments to the plan during that one year 
period that do not increase the benefits payable under the plan;
    (iii) The IAP has a vested right, as defined under the applicable 
plan document, at the time of termination of employment to payments 
under the plan;
    (iv) Benefits under the plan are accrued each period only for 
current or prior service rendered to the employer, except that an 
allowance may be made for service with a predecessor employer;
    (v) Any payment made pursuant to the plan is not based on any 
discretionary acceleration of vesting or accrual of benefits that 
occurs at any time later than one year before any of the events 
described in paragraph (f)(1)(ii) of this section;
    (vi) The federally insured credit union has previously recognized 
compensation expense and accrued a liability for the benefit payments 
according to GAAP or segregated or otherwise set aside assets in a 
trust that may only be used to pay plan benefits, except that the 
assets of the trust may be available to satisfy claims of the credit 
union's creditors in the case of insolvency; and
    (vii) Payments pursuant to the plans must not exceed the accrued 
liability computed in accordance with GAAP.
    (e) Federally insured credit union means a federal credit union, 
state chartered credit union, or corporate credit union the member 
accounts of which are insured under the Act.
    (f) Golden parachute payment. (1) The term golden parachute payment 
means any payment or any agreement to make any payment in the nature of 
compensation by any federally insured credit union for the benefit of 
any current or former IAP pursuant to an obligation of the credit union 
that:
    (i) Is contingent on, or by its terms is payable on or after, the 
termination of the party's primary employment or affiliation with the 
credit union; and
    (ii) Is received on or after, or is made in contemplation of, any 
of the following events:
    (A) The insolvency of the federally insured credit union that is 
making the payment; or
    (B) The appointment of any conservator or liquidating agent for the 
federally insured credit union; or
    (C) A determination by the Board or, in the case of a state 
chartered credit union, the appropriate state supervisory authority 
that the federally insured credit union is in a troubled condition, as 
defined in Sec.  701.14(b)(3) and (4) of this chapter; or
    (D) The federally insured credit union has been assigned:
    (1) In the case of a federal credit union, 4 or 5 CAMEL composite 
rating by NCUA; or
    (2) In the case of a federally insured state chartered credit 
union, an equivalent 4 or 5 CAMEL composite rating by the state 
supervisor; or
    (3) In the case of a federally insured state chartered credit union 
in a state that does not use the CAMEL system, a 4 or 5 CAMEL composite 
rating by NCUA based on core workpapers received from the state 
supervisor; or
    (4) In the case of a corporate credit union, the corporate credit 
union is undercapitalized as defined in Sec.  704.4.
    (E) The federally insured credit union is subject to a proceeding 
to terminate or suspend its share insurance; and
    (iii) Is payable to an IAP whose employment by or affiliation with 
a federally insured credit union is terminated at a time when the 
federally insured credit union by which the IAP is employed or with 
which the IAP is affiliated satisfies any of the conditions enumerated 
in paragraphs (f)(1)(ii) (A) through (E) of this section, or in 
contemplation of any of these conditions.
    (2) Exceptions. The term golden parachute payment does not include:
    (i) Any payment made pursuant to a pension or retirement plan that 
is qualified or is intended within a reasonable period of time to be 
qualified under section 401 of the Internal Revenue Code of 1986, 26 
U.S.C. 401; or
    (ii) Any payment made pursuant to a benefit plan as that term is 
defined in paragraph (b) of this section; or
    (iii) Any payment made pursuant to a bona fide deferred 
compensation plan or arrangement as defined in paragraph (d) of this 
section; or
    (iv) Any payment made by reason of death or by reason of 
termination caused by the disability of an IAP; or
    (v) Any payment made pursuant to a nondiscriminatory severance pay 
plan or arrangement that provides for payment of severance benefits to 
all eligible employees upon involuntary termination other than for 
cause, voluntary resignation, or early retirement; provided, however, 
that no employee will receive any payment that exceeds the base 
compensation paid to the employee during the twelve months, or a longer 
period or greater benefit as the Board will consent to, immediately 
preceding termination of employment, resignation or early retirement, 
and the severance pay plan or arrangement must not or cannot have been 
adopted or modified to increase the amount or scope of severance 
benefits at a time when the federally insured credit union was in a 
condition specified in paragraph (f)(1)(ii) of this section or in 
contemplation of that condition without the prior written consent of 
the Board; or

[[Page 47241]]

    (vi) Any severance or similar payment required to be made pursuant 
to a state statute applicable to all employers within the appropriate 
jurisdiction, with the exception of employers that may be exempt due to 
their small number of employees or other similar criteria; or
    (vii) Any other payment the Board determines to be permissible in 
accordance with Sec.  750.4.
    (g) Institution-affiliated party (IAP) means any individual meeting 
the criteria in section 206(r) of the Act, 12 U.S.C. 1786(r).
    (h) Liability or legal expense means:
    (1) Any legal or other professional fees and expenses incurred in 
connection with any claim, proceeding, or action;
    (2) The amount of, and any cost incurred in connection with, any 
settlement of any claim, proceeding, or action; and
    (3) The amount of, and any cost incurred in connection with, any 
judgment or penalty imposed with respect to any claim, proceeding, or 
action.
    (i) Nondiscriminatory means that the plan, contract or arrangement 
applies to all employees of a federally insured credit union who meet 
reasonable and customary eligibility requirements applicable to all 
employees, such as minimum length of service requirements. A 
nondiscriminatory plan, contract or arrangement may provide different 
benefits based only on objective criteria, such as salary, total 
compensation, length of service, job grade or classification, applied 
on a proportionate basis (with a variance in severance benefits 
relating to any criterion of plus or minus ten percent) to groups of 
employees consisting of not less than 33% of all employees.
    (j) Payment means:
    (1) Any direct or indirect transfer of any funds or any asset;
    (2) Any forgiveness of any debt or other obligation;
    (3) The conferring of any benefit; and
    (4) Any segregation of any funds or assets, the establishment or 
funding of any trust or the purchase of or arrangement for any letter 
of credit or other instrument, for the purpose of making, or pursuant 
to any agreement to make, any payment on or after the date on which the 
funds or assets are segregated, or at the time of or after such trust 
is established or letter of credit or other instrument is made 
available, without regard to whether the obligation to make such 
payment is contingent on:
    (i) The determination, after such date, of the liability for the 
payment of such amount; or
    (ii) The liquidation, after such date, of the amount of such 
payment.
    (k) Prohibited indemnification payment. (1) Prohibited 
indemnification payment means any payment or any agreement or 
arrangement to make any payment by any federally insured credit union 
for the benefit of any person who is or was an IAP of the federally 
insured credit union, to pay or reimburse such person for any civil 
money penalty, judgment, or other liability or legal expense resulting 
from any administrative or civil action instituted by NCUA or any 
appropriate state regulatory authority, in the case of a credit union 
or corporate credit union chartered by a state, that results in a final 
order or settlement pursuant to which such person:
    (i) Is assessed a civil money penalty;
    (ii) Is removed from office or prohibited from participating in the 
conduct of the affairs of the federally insured credit union; or
    (iii) Is required to cease and desist from or take any affirmative 
action described in section 206 of the Act (12 U.S.C.1786) with respect 
to the credit union.
    (2) Exceptions. Prohibited indemnification payment does not include 
any reasonable payment that:
    (i) Is used to purchase a commercial insurance policy or fidelity 
bond, provided that the insurance policy or bond must not be used to 
pay or reimburse an IAP for the cost of any judgment or civil money 
penalty assessed against the IAP in an administrative proceeding or 
civil action commenced by NCUA or the appropriate state supervisory 
authority, in the case of a credit union or corporate credit union 
chartered by a state, but may pay any legal or professional expenses 
incurred in connection with a proceeding or action or the amount of any 
restitution, to the federally insured credit union or its conservator 
or liquidating agent; or
    (ii) Represents partial indemnification for legal or professional 
expenses specifically attributable to particular charges for which 
there has been a formal and final adjudication or finding in connection 
with a settlement that the IAP has not violated certain laws or 
regulations or has not engaged in certain unsafe or unsound practices 
or breaches of fiduciary duty, unless the administrative action or 
civil proceeding has resulted in a final prohibition order against the 
IAP.
    (l) Troubled condition means any federally insured credit union 
that meets the criteria as described in Sec.  701.14(b)(3) and (4) of 
this chapter, or has been granted assistance described in sections 208 
or 216 of the Act.


Sec.  750.2   Golden parachute payments prohibited.

    A federally insured credit union must not make or agree to make any 
golden parachute payment, except as permitted by this part.


Sec.  750.3   Prohibited indemnification payments.

    A federally insured credit union must not make or agree to make any 
prohibited indemnification payment, except as permitted by this part.


Sec.  750.4   Permissible golden parachute payments.

    (a) A federally insured credit union may agree to make or may make 
a golden parachute payment if:
    (1) The Board, with written concurrence of the appropriate state 
supervisory authority in the case of a state chartered credit union or 
corporate credit union, determines the payment or agreement is 
permissible; or
    (2) An agreement is made in order to hire a person to become an IAP 
at a time when the federally insured credit union satisfies or in an 
effort to prevent it from imminently satisfying any of the criteria in 
Sec.  750.1(f)(1)(ii), and the Board, with written concurrence of the 
appropriate state supervisory authority in the case of a state 
chartered credit union or corporate credit union, consents in writing 
to the amount and terms of the golden parachute payment. The Board's 
consent will not improve the IAP's position in the event of the 
insolvency of the credit union since the Board's consent cannot bind a 
liquidating agent or affect the provability of claims in liquidation. 
In the event the credit union is placed into conservatorship or 
liquidation, the conservator or the liquidating agent, will not be 
obligated to pay the promised golden parachute and the IAP will not be 
accorded preferential treatment on the basis of any prior approval; or
    (3) A payment is made pursuant to an agreement that provides for a 
reasonable severance payment, not to exceed twelve months' salary, to 
an IAP in the event of a merger of the federally insured credit union; 
provided, however, that a federally insured credit union must obtain 
the consent of the Board before making a payment and this paragraph 
(a)(3) does not apply to any merger of a federally insured credit union 
resulting from an assisted transaction described in section 208 of the 
Act, 12 U.S.C. 1788, or the federally insured credit union being placed 
into conservatorship or liquidation; and

[[Page 47242]]

    (4) A federally insured credit union or IAP making a request 
pursuant to paragraphs (a)(1) through (3) of this section must 
demonstrate it does not possess and is not aware of any information, 
evidence, documents or other materials indicating there is a reasonable 
basis to believe, at the time the payment is proposed to be made, that:
    (i) The IAP has committed any fraudulent act or omission, breach of 
trust or fiduciary duty, or insider abuse with regard to the federally 
insured credit union that has had or is likely to have a material 
adverse effect on the federally insured credit union;
    (ii) The IAP is substantially responsible for the insolvency of, 
the appointment of a conservator liquidating agent for, or the troubled 
condition, as defined by Sec.  750.1(l), of the federally insured 
credit union;
    (iii) The IAP has materially violated any applicable federal or 
state law or regulation that has had or is likely to have a material 
effect on the federally insured credit union; and
    (iv) The IAP has violated or conspired to violate sections 215, 
656, 657, 1005, 1006, 1007, 1014, 1032, or 1344 of title 18 of the 
United States Code, or sections 1341 or 1343 of that title affecting a 
federally insured financial institution, as defined in title 18 of the 
United States Code.
    (b) In making a determination under paragraphs (a)(1) through (3) 
of this section, the Board may consider:
    (1) Whether, and to what degree, the IAP was in a position of 
managerial or fiduciary responsibility;
    (2) The length of time the IAP was affiliated with the federally 
insured credit union and the degree to which the proposed payment 
represents a reasonable payment for services rendered over the period 
of employment; and
    (3) Any other factors or circumstances indicating the proposed 
payment would be contrary to the intent of section 206(t) of the Act or 
this part.


Sec.  750.5  Permissible indemnification payments.

    (a) A federally insured credit union may make or agree to make 
reasonable indemnification payments to an IAP with respect to an 
administrative proceeding or civil action initiated by NCUA or a state 
regulatory authority if:
    (1) The federally insured credit union's board of directors, in 
good faith, determines in writing after due investigation and 
consideration that the institution-affiliated party acted in good faith 
and in a manner he or she believed to be in the best interests of the 
institution;
    (2) The federally insured credit union's board of directors, in 
good faith, determines in writing after due investigation and 
consideration that the payment of the expenses will not materially 
adversely affect the credit union's safety and soundness;
    (3) The indemnification payments do not constitute prohibited 
indemnification payments as defined in Sec.  750.1(k); and
    (4) The IAP agrees in writing to reimburse the federally insured 
credit union, to the extent not covered by payments from insurance or 
bonds purchased pursuant to Sec.  750.1(k)(2)(i), for that portion of 
the advanced indemnification payments which subsequently become 
prohibited indemnification payments, as defined in Sec.  750.1(k).
    (b) An IAP seeking indemnification payments must not participate in 
any way in the board of director's discussion and approval of such 
payments; however, the IAP may present his or her request to the board 
and respond to any inquiries from the board concerning his or her 
involvement in the circumstances giving rise to the administrative 
proceeding or civil action.
    (c) In the event a majority of the members of the board of 
directors are named as respondents in an administrative proceeding or 
civil action and request indemnification, the remaining members of the 
board may authorize independent legal counsel to review the 
indemnification request and provide the remaining members of the board 
with a written opinion of counsel as to whether the conditions in 
paragraph (e)(1) of this section have been met. If independent legal 
counsel concludes that the conditions have been met, the remaining 
members of the board of directors may rely on the opinion in 
authorizing the requested indemnification.
    (d) In the event all of the members of the board of directors are 
named as respondents in an administrative proceeding or civil action 
and request indemnification, the board will authorize independent legal 
counsel to review the indemnification request and provide the board 
with a written opinion of counsel as to whether the conditions in 
paragraph (e)(1) of this section have been met. If independent legal 
counsel concludes the conditions have been met, the board of directors 
may rely on the opinion in authorizing the requested indemnification.


Sec.  750.6  Filing instructions.

    Requests to make excess nondiscriminatory severance plan payments 
pursuant to Sec.  750.1(f)(2)(v) and golden parachute payments 
permitted by Sec.  750.4 must be submitted in writing to the Board. The 
request must be in letter form and must contain all relevant factual 
information as well as the reasons why such approval should be granted.


Sec.  750.7  Applicability in the event of liquidation or 
conservatorship.

    The provisions of this part, or any consent or approval granted 
under the provisions of this part by the Board, will not in any way 
bind any liquidating agent or conservator for a failed federally 
insured credit union and will not in any way obligate the liquidating 
agent or conservator to pay any claim or obligation pursuant to any 
golden parachute, severance, indemnification or other agreement. Claims 
for employee welfare benefits or other benefits that are contingent, 
even if otherwise vested, when a liquidating agent or conservator is 
appointed for any federally insured credit union, including any 
contingency for termination of employment, are not provable claims or 
actual, direct compensatory damage claims against such liquidating 
agent or conservator.

[FR Doc. 2010-19095 Filed 8-4-10; 8:45 am]
BILLING CODE 7535-01-P