[Federal Register Volume 76, Number 102 (Thursday, May 26, 2011)]
[Rules and Regulations]
[Pages 30510-30521]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-12827]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 704, 741 and 750

RIN 3133-AD73


Golden Parachute and Indemnification Payments

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: NCUA is issuing a final rule to prohibit, in certain 
circumstances, a Federally insured credit union (FICU) from making 
golden parachute and indemnification payments to an institution-
affiliated party (IAP). The rule will help safeguard the National 
Credit Union Share Insurance Fund (NCUSIF) by preventing the wrongful 
or improper disposition of FICU assets and inhibit unwarranted rewards 
to IAPs that can contribute to an FICU's troubled condition.

DATES: This rule is effective June 27, 2011.

FOR FURTHER INFORMATION CONTACT: Pamela Yu, Staff Attorney, or Ross 
Kendall, Special Counsel to the General

[[Page 30511]]

Counsel, at the above address, or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

I. Background

    On July 10, 2010, the NCUA Board (Board) issued a Notice of 
Proposed Rulemaking (proposal or proposed rule) to implement section 
206(t) \1\ of the Federal Credit Union Act (FCU Act), 12 U.S.C. 
1786(t), by adding a new part 750 to NCUA's regulations. 75 FR 47236 
(August 5, 2010).
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    \1\ In 1990, section 2523 of the Comprehensive Thrift and Bank 
Fraud Prosecution and Taxpayer Recovery Act of 1990 (Fraud Act) 
amended the Federal Credit Union Act (FCU Act) by adding section 
206(t). Public Law 101-647, 2523 (1990). The Fraud Act 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.
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    The proposed rule would have prohibited, in certain circumstances, 
an FICU from making golden parachute and indemnification payments to an 
IAP. The purpose of the proposal, which tracked closely to existing 
regulations applying to banks,\2\ was 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 or, in the case of indemnification, are the subject of 
certain types of administrative enforcement actions brought by the 
regulator. It was also intended to provide FICUs with greater clarity 
on the distinction between legitimate employee severance payments and 
improper golden parachute payments.
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    \2\ See 12 CFR part 359.
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General Comments

    The public comment period for the proposed rule ended on September 
7, 2010. NCUA received comments from eighteen commenters, including two 
national credit union trade organizations, a national association 
representing state credit union regulators, seven state credit union 
leagues, two credit unions, three attorneys or law firms, two credit 
union service providers (employee compensation/benefits providers), and 
one individual credit union volunteer. The majority of commenters were 
generally supportive of the rule, but all disagreed with some aspect of 
the proposal or offered suggestions on one or more aspects of the 
proposed rule. Six commenters, however, opposed the proposed rule in 
full. All of these commenters opposed the rule because they disagreed 
with the proposed indemnification provisions. One commenter supported 
the golden parachute provisions but opposed the indemnification 
provisions. Virtually all commenters who were opposed to the 
indemnification provisions expressed concern that the proposed 
provisions would be a deterrent to credit union service and would have 
a negative impact on the ability of FICUs to attract and maintain 
qualified volunteers and management personnel. NCUA has carefully 
reviewed and analyzed the comment letters it received in response to 
the proposal.

II. Summary of the Final Rule

    The final rule applies to all FICUs, including natural person and 
corporate credit unions. NCUA previously issued a final rule to 
implement section 206(t) for corporate credit unions on September 24, 
2010, as part of a comprehensive rule amending part 704, NCUA's rule 
governing corporate credit unions. 75 FR 64786 (October 20, 2010); see 
also 74 FR 65210 (Dec. 9, 2009) (publication of the proposed rule). 
Those provisions, which currently apply only to corporates, are 
substantially identical to the provisions contained in this final rule. 
Accordingly, to avoid duplicative sections on the same subject, the 
Board has determined to delete the indemnification and golden parachute 
provisions (codified at 12 CFR Sec.  704.20) from the corporate rule. 
This rulemaking, which applies to corporate as well as natural person 
credit unions, consolidates the provisions into a single rule.

Summary of Golden Parachute Provisions

    The final rule prohibits, with some exceptions, FICUs that are 
insolvent, in conservatorship, rated composite CAMEL or CRIS 4 or 5, 
subject to a proceeding to terminate or suspend share insurance, 
undercapitalized (corporates only) or in an otherwise troubled 
condition \3\ from making golden parachute payments. Golden parachutes 
are defined in the rule as 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.\4\
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    \3\ ``Troubled condition'' is defined in 12 CFR 701.14(b)(3) and 
(4).
    \4\ In this preamble, the term ``troubled'' is used to refer to 
any of the triggering events listed in Sec.  750.1(e)(1)(ii) of this 
final rule.
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    The Board recognizes, however, that certain post-employment 
payments have reasonable business purposes. Accordingly, the final rule 
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 
``nondiscriminatory'' severance pay plans. The rule also includes an 
exception to permit a troubled FICU, with NCUA's prior approval, to 
hire and agree to pay a golden parachute to competent management to 
assist in bringing a troubled credit union back to financial health. 
Additionally, the final rule permits limited golden parachute payments, 
with prior NCUA approval, in circumstances involving the merger of a 
troubled FICU and contains a general exception provision to allow an 
FICU to seek NCUA approval to pay an otherwise prohibited golden 
parachute.

Summary of Indemnification Provisions

    The final rule prohibits FICUs, regardless of their financial 
condition, from paying or reimbursing an IAP's legal or other 
professional expenses incurred in an administrative or civil action 
instituted by NCUA or the appropriate state regulatory authority where 
the IAP is assessed a civil money penalty, removed from office or is 
required to cease and desist from an action or take an affirmative 
action described in section 206 of the FCU Act. 12 U.S.C. 1786. Federal 
credit unions may indemnify their officials and current and former 
employees in accordance with 701.33(c) of the NCUA regulations, 12 CFR 
701.33(c). That section sets forth authority and restrictions on an FCU 
providing indemnification of officials and employees ``for expenses 
reasonably incurred in connection with any judicial or administrative 
proceedings to which they are or may become parties by reason of their 
performance of their official duties.'' 12 CFR 701.33(c)(1). Federally 
insured, state-chartered credit unions look to state law for their 
general indemnification authority. This part 750 contains restrictions 
on the ability of all FICUs to provide indemnification payments to 
credit union officials, but the restrictions apply only in the limited 
circumstances described in the rule, i.e., in the context of an 
administrative enforcement action brought by NCUA or the appropriate 
state regulatory authority. This part would, accordingly, take 
precedence in that specific instance over broader, generally applicable 
provisions of Sec.  701.33 or of state law and regulation.
    The final rule does permit FICUs to purchase reasonable commercial 
insurance policies or fidelity bonds. The final rule also allows for 
partial indemnification in circumstances in which there is a formal and 
final adjudication or finding in a settlement

[[Page 30512]]

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.
    FICUs may also advance funds to pay reasonable legal fees and other 
professional expenses (excluding judgments and penalties) for an IAP's 
defense of an administrative action under certain circumstances. 
Specifically, the final rule permits an FICU to advance reasonable 
legal expenses to an IAP directly if its board of directors, in good 
faith, makes certain specific findings and the IAP provides a written 
affirmation and agrees in writing to reimburse the FICU if the 
administrative action ultimately results in a final order against the 
IAP.

Application to Existing Employment Contracts

    The Board does not intend for the provisions in the rule 
restricting golden parachute payments to have a retroactive 
application. Accordingly, the final rule applies to all new employment 
contracts or arrangements entered into on or after the rule's effective 
date, as well as to existing contracts or arrangements that are renewed 
or materially modified in any way on or after the final rule's 
effective date. The Board adopts a similar construction for 
indemnification obligations that are specifically addressed in an 
employment contract. However, to the extent that an FICU's 
indemnification provisions are reflected in a general policy statement 
or a bylaw provision with general applicability, the Board takes the 
view that, following the effective date of the final rule, the policy 
or bylaw must be interpreted so as to give effect to the rule's 
prohibitions.
    With respect to the golden parachute provisions, the final rule 
does not apply to contracts already in existence on the rule's 
effective date that contain reasonable provisions relating to the 
entitlement of an IAP to a payment that falls within the definition of 
a golden parachute. Thus, existing employment contracts that were legal 
when made and negotiated at arm's length will not be affected by the 
rule. The Board expects FICUs will, at the first opportunity, such as 
at renewal, renegotiate existing employment contracts to bring them 
into compliance with the rule. Moreover, on or after the effective date 
of the final rule, its restrictions are applicable, even in the case of 
an FICU in a healthy condition that enters into a contract or 
arrangement for payment of a golden parachute to an IAP. Should that 
FICU subsequently fall into a troubled condition, the provisions in the 
rule would apply to the contract and would govern whether or not the 
payment called for in the contract could be made.

III. Detailed Analysis

    A detailed analysis and summary of the specific comments pertaining 
to the final rule's key provisions follows.

Definitions

    Section 750.1 contains definitions applicable to this part. The key 
definitions are discussed below.
``Bona fide Deferred Compensation Plan or Arrangement''
    This definition, which appears in the final rule as Sec.  750.1(c), 
will permit FICUs to continue to provide deferred compensation plans, 
including supplemental retirement benefits and nonqualified deferred 
compensation plans, consistent with normal business practices.
    Two commenters suggested that language dealing with this subject 
(Sec.  750.1(d)(3)(iii) in the proposed rule) should be clarified. 
These commenters noted that, while typically nonqualified deferred 
compensation plans vest if the participant remains employed to a 
specific date, benefits also vest if, prior to the specified vesting 
date, the participant dies or becomes disabled; in some plans, 
involuntary termination without cause may also result in vesting. As 
proposed, Sec.  750.1(d)(3)(iii) required the IAP to have a vested 
right ``at the time of termination of employment'' to payments under 
the deferred compensation plan. Narrowly interpreted, commenters felt 
this language could be ambiguous with regard to circumstances where a 
participant vests in the benefit upon death, disability or involuntary 
termination without cause. Their concern was whether such an occurrence 
might trigger the restrictions pertaining to golden parachutes.
    The Board agrees that this language should not be interpreted to 
exclude or limit an IAP who vests by death, disability, or, where 
applicable, involuntary termination without cause, and notes that 
proposed Sec.  750.1(f)(2)(iii) specifically excluded ``any payment 
made pursuant to a bona fide deferred compensation plan or 
arrangement'' from the definition of ``golden parachute payment.'' As 
such, a payment to an IAP who vests in a nonqualified deferred 
compensation plan by virtue of the provisions in that plan is not a 
golden parachute payment for the purposes of this rule. Accordingly, 
the definition for ``bona fide deferred compensation plan or 
arrangement'' is adopted in final as proposed. As a technical 
amendment, the final rule redesignates Sec.  750.1(d) as Sec.  
750.1(c).
``Golden Parachute Payment''
    Proposed Sec.  750.1(f) defined 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, in conservatorship, 
rated CAMEL 4 or 5, undercapitalized (for corporates), 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).
    The proposed golden parachute definition provided 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 the rule. The Board adopts Sec.  750.1(f) substantially as proposed, 
with the exception of a revision pertaining to Sec.  457 plans, as 
described in more detail below. For purposes of clarification, the 
Board has also revised the definition of ``Benefit Plan'' so it is now 
clear that, to the extent such a plan also exhibits characteristics of 
a deferred compensation or severance plan, it must meet the more 
specific requirements (i.e., ``bona fide'' and ``nondiscriminatory,'' 
respectively) in the rule that apply before payments under such plans 
will be permissible. Additionally, the Board has added where applicable 
references to Corporate Risk Information System (CRIS) ratings, which 
are the corporate credit union counterpart to CAMEL ratings. Finally, 
as a technical amendment, Sec.  750.1(f) has been redesignated as Sec.  
750.1(e) in the final rule.
    One commenter believed each of the triggering events enumerated in 
proposed Sec.  750.1(f)(1)(ii) is unique and FICUs that are either 
insolvent, undercapitalized, in conservatorship, rated CAMEL or CRIS 4 
or 5, subject to a proceeding to terminate or suspend its

[[Page 30513]]

share insurance or in an otherwise troubled condition should not be 
treated in the same manner for the purposes of the rule. Another 
commenter believed the phrase ``troubled condition'' was vague.
    The Board notes that the triggering events in proposed Sec.  
750.1(f)(1)(ii) are statutorily defined in the FCU Act, except for the 
``undercapitalized'' standard, which is applicable only to corporates. 
See 12 U.S.C. 1786(t)(4)(A)(ii). Moreover, while each is a unique 
condition, the Board believes each triggering event poses a risk 
sufficient to warrant safeguards to prevent the improper disposition of 
FICU assets. The Board also notes that the term ``troubled condition'' 
is already defined in Sec.  701.14 of NCUA's regulations, which 
generally requires newly chartered and troubled credit unions to notify 
NCUA of any change in official. See 12 CFR 701.14(b)(3) and (4). 
Section 750.1(e)(1)(ii)(C) of the final rule contains a cross-reference 
to Sec.  701.14; there is no new definition of ``troubled condition'' 
created in this rule. The definition of ``troubled credit unions'' set 
forth in Sec.  701.14(b)(3) and (4) is not vague: It includes CAMEL and 
CRIS ratings of 4 and 5 for natural person and corporate credit unions, 
respectively, as well as credit unions receiving assistance under 
sections 208 or 216 of the FCU Act. 12 U.S.C. 1788, 1790d.
    At least two commenters suggested ``457 deferred compensation 
plans'' (457 Plans) should be specifically excluded from the definition 
of ``golden parachute payment''. Deferred compensation plans described 
in section 457 of the IRC are available for certain state and local 
governments and tax-exempt organizations under IRC 501(c), including 
Federal credit unions (tax-exempt under IRC 501(c)(1)) and state 
chartered credit unions (tax-exempt under IRC 501(c)(14)). These 457 
Plans, which can be eligible plans under IRC 457(b) or ineligible plans 
under IRC 457(f), allow employees of sponsoring organizations to defer 
income into future years, for retirement purposes, thereby reducing 
current year income taxes.
    The Board agrees 457 Plans should be excluded from the golden 
parachute definition. The definition is intended to permit FICUs to 
offer reasonable deferred compensation plans that are typical in 
executive compensation packages for credit union executives. The Board 
recognizes that credit unions, as tax-exempt organizations, are not 
able to offer equity-based incentive compensation. Deferred 
compensation plans, including 457 Plans, are an important tool for 
credit unions to attract executive talent in a competitive market. 
Accordingly, the final rule specifically excludes 457 Plans from the 
definition of ``golden parachute payment'' in Sec.  750.1(e)(2)(i).
    Another commenter asked for clarification that the golden parachute 
definition is not intended to extend to collateral assignment, split 
dollar employee benefit plans (CASD Plans).
    The Board notes Sec.  750.1(f)(2)(ii) of the proposed rule excluded 
from the definition of ``golden parachute payment'' employee benefit 
plans that are permissible under Sec.  701.19. NCUA's Office of General 
Counsel has previously stated FCUs may purchase split dollar life 
insurance for the purpose of funding employee benefit plan obligations 
under Sec.  701.19. OGC Op. 05-0117 (January 13, 2005); see also OGC 
Op. 06-0924 (January 19, 2007). Split dollar life insurance 
arrangements can be structured in a number of ways, including an 
arrangement known as a CASD Plan. In general, under this arrangement, 
an employee owns the insurance policy, while the credit union pays the 
premiums. The arrangement is structured as a loan from the credit union 
to the employee, with the loan secured by the employee's assignment of 
an interest in the policy. To the extent CASD Plans are consistent with 
Sec.  701.19, these arrangements are excluded from the golden parachute 
definition under Sec.  750.1(e)(2)(ii) in the final rule.
``Nondiscriminatory''
    Section 750.1(i) of the proposed rule defined ``nondiscriminatory'' 
as it relates to severance pay plans or arrangements. Under the 
proposal, only ``nondiscriminatory'' severance pay plans or 
arrangements would qualify as an exception to the prohibition on golden 
parachute payments. To meet the definition of nondiscriminatory under 
the final rule, a severance pay plan must apply to all employees of an 
FICU who meet reasonable and customary eligibility requirements 
applicable to all employees. Disparities in benefits are only 
acceptable if based on objective criteria like salary, total 
compensation, length of service, job grade or classification (with a 
variance in severance benefits relating to any criterion of plus or 
minus ten percent). Any group of employees that is designated for a 
different level of benefits based on objective criteria must consist of 
not less than 33 percent of all employees.
    One commenter suggested a greater variance in severance benefits 
should be permitted and that the size of employee groups designated for 
a different level of benefits should be capped.
    The Board recognizes that severance plans providing somewhat more 
generous benefits to higher ranking IAPs are typical in the industry 
but believes the permitted 10 percent variance and required 33 percent 
group size are appropriate to meet this objective. The Board believes 
the final rule strikes a reasonable balance to allow FICUs to provide, 
if appropriate, severance plans with a modest variance in benefits 
while ensuring that such disparities are based on objective criteria to 
avoid unwarranted rewards to IAPs. The Board adopts Sec.  750.1(i) as 
proposed.
``Prohibited Indemnification Payment''
    Under proposed Sec.  750.1(k), a ``prohibited indemnification 
payment'' would be defined as 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. The rule becomes operative if 
the IAP is, in fact, assessed a civil money penalty, removed from 
office or required to cease and desist from or take any affirmative 
action with respect to the credit union. The definition would not 
include any reasonable payment to purchase commercial insurance 
policies or fidelity bonds, provided the policy or bond is not used to 
pay or reimburse an IAP for the amount of a civil money penalty or 
judgment assessed against the IAP. The proposed definition would also 
allow partial indemnification in certain circumstances. The Board 
adopts Sec.  750.1(k) as proposed.
    Several commenters suggested that if an IAP is found not to have 
violated the law or breached his or her fiduciary duty, full 
indemnification, as opposed to partial indemnification, should be 
permitted.
    If an IAP is charged with a violation of law and a breach of 
fiduciary duty and is ultimately absolved of all charges, then the IAP 
will receive full indemnification in such circumstance. The Board 
interprets these commenters to be suggesting that, if an IAP is found 
not to have violated the law or breached his or her fiduciary duty but, 
at the same time, the IAP is found to have engaged in unsafe or unsound 
practices, the IAP should nevertheless be fully indemnified. The Board 
disagrees. Permitting full indemnification of an IAP, including legal 
or professional expenses attributable to charges for which the IAP has 
been found liable, would be contrary to the spirit and

[[Page 30514]]

intent of section 206(t) of the FCU Act. Partial indemnification is an 
appropriate compromise in circumstances where an IAP is ultimately 
absolved of some, but not all, charges. Accordingly, the final rule 
permits 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 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. Partial indemnification is not 
permitted, however, in cases where there is a final prohibition order 
against the IAP.
    One commenter asked for clarification on whether payment by the 
FICU of the amount of the deductible under an insurance policy would be 
permissible. The permissibility of a particular deductible payment 
would depend on the individual policy or bond and the nature of the 
insurance claim. Under the final rule, proceeds from an insurance 
policy or bond must not be used to pay or reimburse an IAP for the cost 
of a civil money penalty or judgment assessed against that IAP. In the 
same vein, a FICU may not pay any deductible amount to the extent that 
it would apply to any penalty or judgment against an IAP. However, a 
FICU may pay a deductible amount that is applied toward legal costs 
attributable to charges for which the IAP is ultimately found not 
liable.
Prohibited Golden Parachute Payments
    Eight commenters provided specific comments on the provision 
prohibiting golden parachute payments, proposed in Sec.  750.2. Most of 
the comments were not opposed to the rule but offered suggestions for 
improvement.
    Several commenters expressed concern that the rule penalizes IAPs 
regardless of their culpability and suggested golden parachute payments 
should be permissible to IAPs who were not responsible for causing or 
contributing to the FICU's troubled condition.
    The Board emphasizes that the final rule does not create a blanket 
prohibition on golden parachute payments. The final rule contains 
several exceptions to avoid unfairly prohibiting payments to 
individuals who were not responsible for causing or contributing to the 
FICU's troubled condition. As discussed in more detail below, a FICU 
may obtain approval to make or agree to make a golden parachute payment 
under certain circumstances. Where an IAP is not responsible for 
causing or contributing to the FICU's troubled condition, an FICU may 
seek approval from NCUA to pay a golden parachute payment to the IAP 
under the general exception in Sec.  750.4(a)(1).
Permissible Golden Parachute Payments
    Section 750.4 of the proposal included three major exceptions to 
the general prohibition on golden parachute payments. The exceptions 
would permit, in certain circumstances, payments that would otherwise 
satisfy the definition of a prohibited golden parachute payment.
    First, the proposal included a general exception to permit golden 
parachute payments where 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 such a 
payment is permissible.
    Second, the proposal included 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 was intended to ensure an FICU can 
attract qualified senior management with appropriate expertise to help 
improve a troubled FICU's financial condition. An FICU would be 
required to notify and obtain the written permission of the Board, and, 
if applicable, the concurrence of the state supervisory authority, 
before employing this exception to commit to or make a golden parachute 
payment.
    Third, the proposed rule included 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 or the National 
Credit Union Share Insurance Fund. Reasonable severance arrangements 
related to an unassisted merger must not exceed twelve months' salary. 
Additionally, under the proposal, an FICU would be required to obtain 
the written consent of the Board before making the severance payment.
    In applying to the Board for any of the three exceptions discussed 
above, the FICU would be required to demonstrate that the IAP does not 
bear any responsibility for the troubled condition of the FICU. 
Specifically, under the proposal, 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;
     Is substantially responsible for the insolvency of, the 
appointment of a conservator or liquidating agent for, or the troubled 
condition of the FICU; or
     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 would 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.
    One commenter stated that, in the case of unassisted mergers, 
severance package decisions should be left to the surviving credit 
union's management to decide. This commenter also suggested severance 
packages of 24 months' pay should be permitted under the rule to more 
accurately reflect common industry standards.
    The Board is not convinced a modification to the proposed exception 
for severance payments made in connection with unassisted mergers is 
necessary. While the Board believes it is important to provide an 
exception for circumstances involving payments made in connection with 
an unassisted merger involving a troubled credit union, reasonable 
limits need to be placed on such payments. In the Board's opinion, 12 
months' pay is an appropriate severance payment in the event of an 
unassisted merger.
    None of the comment letters specifically addressed the other 
proposed exceptions. As such, the Board adopts Sec.  750.4, 
substantially as proposed, in the final rule. Minor technical 
modifications have been made, however, to provide that requests for 
permission to make a golden parachute payment under Sec.  750.4 must be 
submitted to ``NCUA'' rather than ``the Board.'' Additionally, more 
detailed filing instructions, further discussed below, are provided in 
Sec.  750.6 of the final rule to clarify the approval process, 
including provisions governing the right to appeal an initial adverse 
decision to the Board.
    The Board also emphasizes that some of the general concerns 
expressed by commenters about the golden parachute provisions should be 
alleviated by the

[[Page 30515]]

exceptions available in Sec.  750.4, particularly the general exception 
in Sec.  750.4(a)(1).
Prohibited Indemnification Payments
    The most prevalent concerns raised by commenters were with regard 
to the indemnification provisions in the proposed rule. The majority of 
commenters were either opposed to or concerned about the proposed 
indemnification provisions. Six commenters opposed the proposed rule in 
full due to the indemnification provisions. Another eight commenters 
either opposed one or more aspects of the proposed indemnification 
provisions, expressed concern with some aspect of the provisions, or 
offered suggestions on how the rule could be improved or clarified. 
Four commenters did not provide any comments on the indemnification 
provisions.
    Of the commenters providing specific comment on the proposed 
indemnification provisions, most expressed concern that the rule would 
make it difficult, if not impossible, to provide any indemnification to 
credit union volunteers, thus deterring qualified and experienced 
individuals from credit union service. Credit union board members serve 
without pay, on a voluntary basis. Several commenters noted the unique 
nature of voluntary credit union service, and expressed concern that 
individuals will be unwilling to serve as board members if they 
perceive their personal net worth to be at risk because the FICU cannot 
offer them protection against the potential of personal financial 
exposure.
    The Board does not agree with these commenters. While recognizing 
that credit unions' voluntary governance structure presents unique 
recruitment and retention challenges, the scope of the rule is very 
limited. The indemnification limitations apply only to administrative 
actions brought by NCUA or appropriate state regulator. Such actions 
are not only rare, but most often take the form of either a removal 
action or an action to prohibit an individual from serving on behalf of 
an insured depository institution in the future. These actions do not 
typically threaten the individual credit union official with 
significant exposure to personal liability. Moreover, the Board 
emphasizes that the rule does not create a blanket prohibition on 
indemnification payments. Under certain conditions, which are described 
in more detail below, an FICU may make indemnification available to an 
IAP unless or until the administrative proceeding or civil action 
results in civil money penalties, removal or prohibition, or an order 
against the IAP to cease and desist from or take any affirmative action 
with respect to the credit union.
    Several commenters argued the proposed indemnification provisions 
may interfere with an IAP's right to counsel. One commenter argued that 
if IAPs must advance their own legal expenses, they will obtain the 
most affordable representation, as opposed to the best available 
representation, in their defense of an administrative action. One 
commenter suggested that, in prohibiting the advancement of legal 
expenses, the rule would incentivize IAPs to agree to fines or admit 
liability in an administrative action to avoid advancing their own 
personal funds to absolve themselves of the charges brought against 
them. On the other hand, another commenter stated the rule would be a 
disincentive to settlement since indemnification payments are 
prohibited where the settlement provisions are adverse for the IAP. One 
commenter also suggested NCUA would effectively be depriving IAPs the 
right of judicial review because indemnification is unavailable 
following an adverse outcome in an administrative action.
    The Board disagrees with these commenters. First, the Board does 
not agree with the contention that a reasonable limitation on 
indemnification where an IAP is subject to an adverse final order in an 
administrative action, such as that proposed, interferes with an IAP's 
due process rights or is otherwise contrary to public policy. While 
IAPs may have to use their own funds to pay for or reimburse legal 
expenses in their defense of an administrative action, IAPs maintain 
their fundamental right to counsel. Similarly, IAPs maintain their 
right of judicial review even if indemnification is prohibited. The 
proposed rule's limitations on indemnification would not disturb an 
IAP's right to appeal a final administrative order to the U.S. Court of 
Appeals; furthermore, if the appellate court reversed an administrative 
order, then the IAP would again be entitled to indemnification. Second, 
under the proposal an FICU can advance reasonable legal expenses to 
IAPs directly to assist in defending themselves against administrative 
actions. While proposed Sec.  750.1(k) defined ``prohibited 
indemnification payment'' as any payment for the benefit of an IAP to 
pay or reimburse such person for, among other things, ``any legal 
expense'' resulting from an administrative action, this statement was 
qualified with the language: ``that results in a final order or 
settlement [against the IAP]''. Thus, under the proposal, an 
indemnification payment would not be prohibited unless and until the 
administrative action resulted in a final order or settlement pursuant 
to which the IAP is assessed or agrees to a civil money penalty, 
removal from office, prohibition from participating in the conduct of 
the affairs of an insured credit union, or cease and desist from or 
take an affirmative action described in section 206 of the FCU Act. 12 
U.S.C. 1786.
    Proposed Sec.  750.5 then described the circumstance when an 
indemnification payment would be permissible; specifically, 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 ultimately 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.'' (Emphasis added).
    Read together, the proposed provisions would allow for reasonable 
indemnification payments and the advancement of legal expenses to 
assist IAPs in their defense of administrative actions under certain 
conditions. To alleviate commenters' concerns, however, the Board has 
elected to make several modifications in Sec.  750.5 of the final rule 
to clarify the circumstances under which indemnification will be 
permissible. These modifications are discussed more fully below.
Permissible Indemnification Payments
    Several commenters suggested changes or clarifications with regard 
to proposed Sec.  750.5. As discussed above, a number of commenters 
expressed concern that the proposal would not permit the advancement of 
legal funds, essentially depriving an IAP of the right to counsel and 
otherwise eroding principles of due process.
    Additionally, several commenters opposed the requirement that a 
FICU's board of directors make a ``good faith determination'' that an 
indemnification

[[Page 30516]]

payment will not ultimately become prohibited. These commenters 
characterized the requirement as overly subjective, insofar as it 
involves, in their view, the interpretation of law and facts and places 
an unrealistic expectation on the FICU board to predict the outcome of 
an administrative action. Thus, according to these commenters, the 
determination should not reasonably be required to be made by a FICU 
board. Some commenters expressed concern that NCUA could second guess 
the credit union's good faith decision to indemnify an IAP and noted 
there are no safeguards to preclude NCUA from disagreeing with a 
board's good faith determination and blocking the indemnification 
payment. One commenter also disagreed with proposed Sec.  750.5(a)(4), 
which would require an IAP to agree to reimburse the FICU, to the 
extent not covered by payments from insurance and bonds, for that 
portion of the advanced indemnification payments for which the IAP has 
ultimately been found liable. This commenter argued that such a 
requirement would essentially render futile the mitigating purpose of 
the exception.
    To both alleviate concerns regarding the advancement of legal 
expenses and to provide clarification about the ``good faith 
determination'' requirement, the Board is modifying Sec.  750.5(a) of 
the final rule. Under the final rule, an FICU may make or agree to make 
reasonable indemnification payments to an IAP, including advancing 
funds to pay or reimburse reasonable legal fees and other professional 
expenses incurred by an IAP in an administrative proceeding or civil 
action initiated by NCUA or a state regulatory authority. The decision 
to approve payment of such funds requires the FICU's board of directors 
to make a good faith determination, after due consideration, that:
     The IAP acted in good faith and in a manner he or she 
believed to be consistent with his or her fiduciary duty; \5\ and
---------------------------------------------------------------------------

    \5\ Directors of Federal credit unions have a fiduciary duty to 
act in the best interest of the members. By necessary implication, 
an FCU's officers and employees, who are under the oversight and 
direction of the board, have the same obligation. See 75 FR 81378 
(December 28, 2010); 12 CFR 701.4. Directors and officers of credit 
unions chartered at the state level should look to applicable 
standards as contained in state law to determine the scope and 
extent of their duties. The text of the rule has been clarified to 
reflect this distinction.
---------------------------------------------------------------------------

     The payment will not materially adversely affect the 
FICU's safety and soundness.
    The Board has also determined to clarify that the FICU board of 
directors' determination as to whether or not an advance is appropriate 
should take into consideration the ability of the affected IAP to repay 
the advance if required. This would include, for example, a review of 
the affected individual's financial circumstances, including whether or 
not he or she has collateral that might be pledged to secure the 
repayment obligation. Accordingly, the rule text includes this element 
as part of the board's due consideration.
    The IAP will be required to provide:
     A written affirmation of his or her good faith belief that 
the IAP acted in manner he or she believed to be consistent with his or 
her fiduciary duty; and
     A written agreement to reimburse the FICU, to the extent 
not covered by payments from liability insurance or surety bond, for 
that portion of the advanced indemnification payment which ultimately 
becomes a prohibited indemnification payment as defined in Sec.  
750.1(k).
    An indemnification payment can ultimately become a prohibited 
indemnification payment because of the entry of a final order or 
settlement pursuant to which the IAP is assessed a civil money penalty, 
subject to a prohibition or removal order, or required to cease and 
desist from or take any affirmative action described in section 206 of 
the FCU Act. If such a final order or settlement is the result, then 
the IAP must reimburse the FICU for all legal and professional fees 
advanced. Moreover, the FICU must not, under any circumstance, agree to 
reimburse any civil money penalty actually entered against the IAP.
    The Board believes the final rule is clear in describing how an 
FICU may provide for the advancement of legal and other professional 
expenses in appropriate circumstances. The modifications also provide 
greater clarification about the conditions under which indemnification 
payments will be permitted under Sec.  750.5. Further, the added 
requirement that an IAP provide a written affirmation of a good faith 
belief that he or she acted in a manner believed to be in the best 
interests of the members will assist the FICU's board in conducting its 
own due diligence investigation and determination that the ``good 
faith'' standard has been met.
    The Board believes the new provisions in Sec.  750.5 are consistent 
with the spirit and intent of Sec.  206(t) of the FCU Act and 
effectively balance the interest in allowing for the protection of 
volunteer officials while preventing the improper use of FICU funds to 
unjustly reward IAPs who are not deserving of indemnification.
    Additionally, as discussed above, for purposes of clarification the 
final rule makes a generic reference to an IAP's fiduciary duty, rather 
than referring specifically to a duty to serve the ``best interests of 
the institution.'' This avoids inconsistency with the NCUA's recent 
rule outlining the fiduciary duties and responsibilities of Federal 
credit union directors, (See, 12 CFR 701.4), while recognizing that 
applicable standards governing conduct and duties of IAPs of state 
chartered institutions are established by state law. See footnote 5.
Filing Instructions
    Section 750.6 of the final rule is revised to provide greater 
detail about the procedures for submitting written requests to make 
excess nondiscriminatory severance plan payments pursuant to Sec.  
750.1(e)(2)(v) and golden parachute payments permitted by Sec.  750.4. 
The final rule clarifies that, in the case of a Federal or state 
chartered natural person credit union, such written requests must be 
submitted to the NCUA regional director for the region in which the 
credit union is located. In the case of a Federal or state chartered 
corporate credit union, such written requests must be submitted to the 
Director of the Office of Corporate Credit Unions. Additionally, the 
final rule clarifies that, in the case of a state chartered natural 
person or corporate credit union, where written concurrence by the 
state supervisory authority is required, the requesting party must 
submit a copy of its written request to the state supervisory authority 
where the credit union is located.
    The Board has also determined, on its own, to add provisions to 
this section of the rule outlining a process by which a requester may 
appeal an adverse decision to the Board. The provisions, at new 
subsection (b), include time frames and procedural considerations and 
are modeled on the provisions found elsewhere in NCUA's regulations 
governing the appeal of creditor and share insurance claims. See 12 CFR 
709, 745, 747.

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 rule does not impose any regulatory burden but 
prohibits improper golden parachute and indemnification payments to 
IAPs by FICUs in certain circumstances.

[[Page 30517]]

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. Part 750 will impose new information 
collection requirements. Specifically, Sec.  750.6 will require 
requests for an FICU to make nondiscriminatory severance plan payments 
under Sec.  750.1(e)(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 between $10 million and $100 million in total assets. As of 
year-end 2010, there were 365 CAMEL 4 and 5 FICUs. Of those, 163 had 
less than $10 million in assets and 130 had total assets between $10 
million and $100 million. 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 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 has submitted a copy of this final 
regulation to the Office of Management and Budget (OMB) for its review 
and approval.

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 final 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 704

    Credit unions, Corporate credit unions, Reporting and recordkeeping 
requirements.

12 CFR Part 741

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

12 CFR Part 750

    Credit Unions, Golden parachute payments, Indemnity payments.

    Dated: By the National Credit Union Administration Board, this 
19th day of May 2011.
Mary F. Rupp,
Secretary of the Board.

    For the reasons discussed above, NCUA amends 12 CFR parts 704 and 
741, and adds part 750 of title 12, chapter VII, of the Code of Federal 
Regulations as follows:

PART 704 --CORPORATE CREDIT UNIONS

0
1. The authority citation for part 704 continues to read as follows:

    Authority:  12 U.S.C. 1766(a), 1781, 1789.


Sec.  704.20  [Removed]

0
2. Remove Sec.  704.20.

PART 741--REQUIREMENTS FOR INSURANCE

0
3. 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.


0
4. Add new Sec.  741.224 to read as follows:


Sec.  741.224  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.

0
5. 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; appeal.
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

[[Page 30518]]

that portion of the costs sustained with regard to an administrative 
proceeding or civil action commenced by NCUA or a state regulatory 
authority 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 an action 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 provides 
a written affirmation and agrees in writing to reimburse the credit 
union if it is ultimately determined that the IAP violated a law or 
regulation or has engaged in certain unsafe or unsound practices or 
breaches of fiduciary duty. For Federal credit unions, fiduciary duty 
is defined in 701.4 of this chapter. State chartered credit unions 
should look to applicable state law.


Sec.  750.1  Definitions.

    As used in this part:
    (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; provided, however, that to the extent the plan 
exhibits characteristics of a deferred compensation plan or 
arrangement, or severance plan, it meets the criteria set forth in 
paragraph (c) or (i), respectively, of this section.
    (c) Bona fide deferred compensation plan or arrangement means any 
plan, 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 (c)(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 (e)(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 (c)(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 (e)(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 (e)(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 (e)(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.
    (d) 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.
    (e) 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 NCUA 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, or has been 
assigned a 4 or 5 Corporate Risk Information System (CRIS) rating by 
NCUA in either the Financial Risk or Risk Management composites, or, in 
the case of a state chartered corporate credit union, assigned a rating 
equivalent to a 4 or 5 CRIS rating in either composite

[[Page 30519]]

by the state supervisory authority (SSA) or by NCUA, based on core exam 
work papers received from the SSA (in states not using the CRIS or 
CAMEL rating systems); or
    (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 (e)(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 deferred compensation plan under 
section 457 of the Internal Revenue Code of 1986, 26 U.S.C. 457, or 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 (c) 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 NCUA 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 (e)(1)(ii) of this section or in 
contemplation of that condition without the prior written consent of 
NCUA; or
    (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 NCUA determines to be permissible in 
accordance with Sec.  750.4.
    (f) Institution-affiliated party (IAP) means any individual meeting 
the criteria in section 206(r) of the Act, 12 U.S.C. 1786(r).
    (g) 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.
    (h) NCUA means the National Credit Union Administration.
    (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; or
    (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 an action 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.

[[Page 30520]]

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 
chapter.\1\
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    \1\ The provisions in this part 750 control to the extent of any 
inconsistency with Sec.  701.33 of this chapter.
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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) NCUA, 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(e)(1)(ii), and NCUA, 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. NCUA's consent 
will not improve the IAP's position in the event of the insolvency of 
the credit union since NCUA'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 NCUA 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
    (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; or
    (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, NCUA 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, including advanced funds 
to pay or reimburse reasonable legal fees or other professional 
expenses incurred by an IAP in 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:
    (i) The IAP acted in good faith and in a manner he or she believed 
to be consistent with his or her fiduciary duty;
    (ii) The advancement or payment of the expenses will not materially 
adversely affect the credit union's safety and soundness; and
    (iii) The IAP has the financial capability or has otherwise made 
appropriate financial arrangements sufficient to repay the advance if 
required in accordance with this rule; and
    (2) The IAP provides:
    (i) A written affirmation of his or her reasonable good faith 
belief that he or she acted in a manner believed to be consistent with 
his or her fiduciary duty; and
    (ii) An agreement 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 
any advanced indemnification payments which ultimately become 
prohibited indemnification payments as defined in Sec.  750.1(k); and
    (3) The indemnification payments do not ultimately constitute 
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 (a)(1) through (3) 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

[[Page 30521]]

review the indemnification request and provide the board with a written 
opinion of counsel as to whether the conditions in paragraph (a)(1) 
through (3) 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; appeal.

    (a) Requests to make excess nondiscriminatory severance plan 
payments pursuant to Sec.  750.1(e)(2)(v) and golden parachute payments 
permitted by Sec.  750.4 must be submitted in writing to NCUA. In the 
case of a Federal or state chartered natural person credit union, such 
written requests must be submitted to the NCUA regional director for 
the region in which the credit union is located. In the case of a 
Federal or state chartered corporate credit union, such written 
requests must be submitted to the Director of the Office of Corporate 
Credit Unions. 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. If written concurrence by the state supervisory 
authority is required, the requesting party must submit a copy of its 
written request to the state supervisory authority where the credit 
union is located.
    (b) An FICU whose request for approval by NCUA in accordance with 
paragraph (a) of this section has been denied may file an appeal of 
that denial with the NCUA Board by following the procedures set out in 
this paragraph.
    (1) The appeal must be in writing and filed with the Secretary of 
the Board, National Credit Union Administration, 1775 Duke Street, 
Alexandria, VA 22314-3428, and must be filed not later than sixty days 
after the initial determination denying the request.
    (2) The Board shall make its determination concerning the appeal 
based on what is submitted in writing; there shall be no personal 
appearance before the Board in connection with an appeal under this 
paragraph.
    (3) The Board shall make its determination concerning the appeal 
within 180 days from the date of its receipt of the appeal. The 
decision by the Board on appeal shall be provided to the appellant in 
writing, stating the reasons for the decision, and shall constitute a 
final agency decision. Failure by the Board to issue a decision on 
appeal within the 180-day period provided for under this section shall 
be deemed to be denial of such appeal.
    (4) A final determination by the Board is reviewable in accordance 
with the provisions of chapter 7, title 5, United States Code, by the 
United States District Court for the Eastern District of Virginia or 
the U.S. District Court for the Federal judicial district where the 
FICU's principal place of business is located. Any request for judicial 
review under this section must be filed within 60 days of the date of 
the Board's final decision. If any appellant fails to file before the 
end of the 60-day period, the Board's decision shall be final, and the 
appellant shall have no further rights or remedies with respect to the 
request.


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 NCUA, 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. Nothing in this part may be construed to permit 
the payment of salary or any liability or legal expense of any IAP 
contrary to 12 U.S.C. 1786(t)(3).

[FR Doc. 2011-12827 Filed 5-25-11; 8:45 am]
BILLING CODE 7535-01-P