Federal Register, Volume 89 Issue 247 (Thursday, December 26, 2024)

[Federal Register Volume 89, Number 247 (Thursday, December 26, 2024)]
[Rules and Regulations]
[Pages 104865-104877]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-30449]

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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701 and 741

RIN 3133-AF42

Succession Planning

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA Board (Board) is issuing this final rule to further
strengthen succession planning efforts for all consumer federally
insured credit unions (FICUs). This final rule requires that a FICU
board of directors establish a written succession plan that addresses
specified positions and contains certain information. In addition, the
board of directors is required to regularly review the succession plan.
The final rule also requires that newly appointed members of the board
of directors have a working familiarity with the succession plan no
later than six months after appointment. The final rule follows
publication of a July 25, 2024, proposed rule and takes into
consideration the public comments received on the proposed rule. In
response to comments, the Board has amended the proposal to provide
that a credit union board must review its succession plan no less than
every 24 months, as opposed to the annual review that would have been
required under the proposed rule. The Board has also revised the
proposed rule by removing loan officers, credit committee members, and
supervisory committee members from the list of FICU officials that must
be covered by the succession plans. In addition, non-substantive
changes have been made to the wording used in the list of covered
officials for purposes of clarity. The final rule also streamlines the
required contents of the succession plans and no longer requires that
deviations from approved succession plans be documented in the FICU
board's meeting minutes. Further, to help ensure that FICUs have the
necessary time to develop their succession plans, the Board is delaying
the effective date of the final rule until January 1, 2026.

DATES: This final rule is effective on January 1, 2026.

FOR FURTHER INFORMATION CONTACT: Office of Examination and Insurance:
John Berry, Policy Officer, at (703) 664-3909 or at 1775 Duke Street,
Alexandria, VA 22314. Office of General Counsel: Ariel Pereira, Senior
Attorney, Office of General Counsel, at (703) 548-2778 or at the above
address.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Discussion of Public Comments
A. The Comments, Generally
B. Comments Regarding Alternatives to Rulemaking
C. Comments Regarding Data and the Justification for Rulemaking
D. Comments Regarding Regulatory Burden
E. Comments Raising General Objections to Rule
F. Comments Regarding the Inclusion of FISCUs
G. Comments Raising Potential Privacy and Discrimination
Concerns
H. Comments Regarding Specific Rule Provisions
I. Other Comments
III. Regulatory Procedures
A. Regulatory Flexibility Act
B. Small Business Regulatory Enforcement Fairness Act/
Congressional Review Act
C. Paperwork Reduction Act
D. Executive Order 13132 on Federalism
E. Assessment of Federal Regulations and Policies on Families

I. Background

At its July 18, 2024, meeting, the Board approved a proposed rule
to address succession planning at FICUs. The proposed rule was
published in the Federal Register on July 25, 2024, and provided for a
60-day public comment period.\1\ The proposal followed publication of
the Board's earlier 2022 proposed rule on the same topic.\2\ The July
25, 2024, proposed rule was based on that earlier proposed rule but
included several changes that the Board believed would further
strengthen succession planning efforts for both consumer federal credit
unions (FCUs) and consumer federally insured, state-

[[Page 104866]]

chartered credit unions (FISCUs), which collectively are referred to as
FICUs.
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\1\ 89 FR 60329 (July 25, 2024).
\2\ 87 FR 6078 (Feb. 3, 2022).
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Under the July 25, 2024, proposed rule a FICU board of directors
would have been required to establish a written succession plan that
addresses specified positions and contains certain information. In
addition, the board of directors would have been required to review the
succession plan in accordance with an established schedule, but no less
than annually. The proposed rule would also have required that newly
appointed members of the board of directors have a working familiarity
with the FICU's succession plan no later than six months after
appointment. Interested readers are referred to the preamble of the
proposed rule for additional details regarding the proposed regulatory
amendments.
Two ongoing factors highlighted the need for rulemaking on
succession planning. The long-running trend of consolidation across all
depository institutions has remained relatively constant across all
economic cycles for more than three decades. Voluntary mergers can be
used to create economies of scale to offer more or better products and
services to FICU members. However, the Board is also aware of numerous
instances in recent years where FICUs merged because of a lack of
succession planning. More emphasis on succession planning would help
reduce the number of such mergers.
Another reason for a heightened focus on succession planning are
the ongoing retirements of the ``Baby Boomer'' generation (individuals
born between 1946 and 1964). According to some sources, approximately
10 percent of credit union chief executive officers were expected to
retire between 2019 and 2021.\3\ Succession planning is critical to the
continued operation of those credit unions with board members and
executives that are part of this retirement wave.
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\3\ CUtoday.info, CUNA ACUC Coverage: What's Happening in
Executive Compensation (June 19, 2019), https://www.cutoday.info/Fresh-Today/CUNA-ACUC-Coverage-What-s-Happening-in-Executive-Compensation.
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Given the importance of the topic, the NCUA has taken several steps
to strengthen current succession planning efforts of FICUs. For
example, in March 2022 the NCUA issued Letter to Credit Unions 22-CU-
05, CAMELS Rating System, which provides that ``succession planning for
key management positions'' is a key factor considered when assessing
the Management CAMELS component rating of a credit union.\4\ Letter to
Credit Unions 23-CU-01 included succession planning as one of the
NCUA's supervisory priorities for 2023.\5\ The July 25, 2024, proposed
rule was designed to build upon these prior NCUA efforts.
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\4\ NCUA, Letter to Credit Unions 22-CU-05, CAMELS Rating System
(March 2022), https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/camels-rating-system. CAMELS is the
acronym for the rating system used by the NCUA to assess a FICU's
performance and risk profile derived from the six critical elements
of a FICU's operations: Capital adequacy, Asset quality, Management,
Earnings, Liquidity, and Sensitivity to Market Risk.
\5\ NCUA, Letter to Credit Unions 23-CU-01, NCUA's 2023
Supervisory Priorities (January 2023), https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/ncuas-2023-supervisory-priorities.
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This final rule follows publication of the July 25, 2024, proposed
rule and takes into consideration the public comments received on the
proposed rule. In this final rule, the Board has incorporated the
following amendments to the July 25, 2024, proposal:
1. In response to public comments, the final rule provides that a
board must review its succession plan no less than every 24 months, as
opposed to the annual review that would have been required under the
proposed rule.
2. Also in response to public comments, the Board has revised the
proposed rule by removing loan officers, credit committee members, and
supervisory committee members from the list of FICU officials who must
be covered by the succession plans.
3. In addition, non-substantive changes have been made to the
wording used in the list of covered officials for purposes of clarity.
Specifically, the proposed rule listed ``management officials'' (as
defined in the model FCU bylaws) and the ``senior executive officers''
identified in 12 CFR 701.14(b)(2). Given the potential overlap between
these two categories of officials, the final rule merges their listing
in a single paragraph of the regulation. The final rule also simplifies
the regulatory text by cross referencing to Sec. 701.14(b)(2), rather
than listing the senior executive officers.
4. The final rule also streamlines the required contents of the
succession plans. Specifically, the rule no longer specifies that a
succession plan must address unexpected or temporary vacancies in
covered positions. Although the Board encourages a FICU to consider
these types of vacancies in its plan, it believes FICUs, and not the
NCUA, are best positioned to determine how much detail is necessary to
address the required plan elements.
5. The final rule no longer requires that deviations from approved
succession plans be documented in the FICU board's meeting minutes.
6. The final rule also makes a few technical, non-substantive,
edits for clarity and precision of language.
The final rule otherwise adopts the proposed regulatory
requirements. FICUs are reminded that succession plans should include
an estimate of the budgetary impacts of executing the succession plan,
including costs associated with new hires, such as any hiring of
recruitment firms and any increased compensation packages for new
hires. Credit unions are not required to have an exact figure for any
such anticipated costs, but at a minimum should provide an estimate to
allow for better planning.
To help ensure that FICUs have the necessary time to develop their
succession plans, the Board is delaying the effective date of the final
rule until January 1, 2026. This rule will be reapproved three years
after its effective date for a term of the Board's choosing.

II. Discussion of Public Comments

The comment period on the proposed rule closed on September 23,
2024. The NCUA received 187 public comments on the proposal. Comments
were received from individual FICUs, state and regional credit union
organizations, credit union trade organizations, credit union
consulting services providers, and individuals. Approximately 116 of
the comments were form letters with nearly identical wording. The
issues raised in the form letters were similar to those made in many of
the other comment letters. This section of the preamble summarizes the
significant issues raised by the commenters and the Board's responses
to these comments.

A. The Comments, Generally

The majority of commenters, while acknowledging the importance of
succession planning and agreeing with the intent of the proposed rule,
raised concerns about the need for succession planning regulations, as
well as some of the specifics of the proposed regulatory amendments.
As discussed in greater detail in the following paragraphs, the
large majority of the commenters questioned the need for succession
planning regulations. Some of these commenters objected that the NCUA
was overstepping its regulatory authority by issuing regulations on
internal management matters best left to credit union discretion. Other
commenters wrote that the NCUA already has tools capable of addressing
succession planning, or that the topic could be better addressed
through non-regulatory guidance. These

[[Page 104867]]

commenters also noted that the other federal banking regulatory
agencies have elected to address succession planning through guidance.
Commenters also objected to the inclusion of FISCUs and noted potential
conflicts with state requirements.
A majority of the commenters also questioned the data cited in the
preamble of the proposed rule as justification for the rulemaking.
These commenters objected that the data was stale, and that more recent
data did not seem to support the need for succession planning
regulations to prevent FICU consolidations. The commenters also wrote
that the NCUA had underestimated the time and resources required for
complying with the proposed requirements, and that the rule would
impose an undue compliance burden. Many commenters wrote that the
burden of complying with the rule would actually increase the number of
consolidations. Still others wrote that the NCUA's goal of reducing
FICU consolidations was misguided.
With regard to the specific amendments, many commenters objected to
the list of officials covered by the succession plans, writing that it
was overly inclusive for the stated purposes of the rulemaking. Other
commenters were concerned about the possibility that succession plans
might be publicly posted, potentially raising privacy or age-
discrimination issues. Some commenters wrote that requiring boards to
review their succession plans at least annually was unnecessarily
prescriptive. Commenters also expressed concerns about the proposed
board education requirements and requested clarification of other
provisions.

B. Comments Regarding Alternatives to Rulemaking

Comment: Guidance is more appropriate than rulemaking. The majority
of commenters urged the Board to consider issuing guidance regarding
succession planning as an alternative to rulemaking. While generally
agreeing that succession planning is an important element of a FICU's
overall strategic planning process, the commenters wrote that a rule
would only add to growing regulatory burden imposed on FICUs. The
commenters noted that the issuance of guidance is consistent with the
approach taken by the other federal banking regulatory agencies. The
commenters wrote that the banking industry faces consolidation trends
similar to those of credit unions. Nonetheless, the other banking
agencies have opted to issue guidance regarding succession planning
instead of undertaking rulemaking.
NCUA Response. The Board continues to believe that rulemaking on
succession planning is appropriate and necessary. While guidance can be
helpful in describing sound practices or clarifying existing
requirements, the lack of a regulation means there is no requirement
that FICUs implement a formal, written succession plan. As a result,
the NCUA lacks a full complement of regulatory tools to help address
deficiencies in a FICU's succession planning process. The absence of
specific regulations on this topic also means there are no requirements
as to what constitutes an acceptable succession plan. A regulation is
therefore necessary to establish a clearly articulated, consistent, and
enforceable set of succession planning standards.
Comment: Succession planning is already addressed under CAMELS.
Several commenters wrote that the rule is redundant since succession
planning is part of every examination under the CAMELS rating system.
The commenters noted that the CAMELS ``Management'' component already
considers succession planning for ``key management positions.'' The
commenters wrote that this is consistent with the practice of the other
federal banking regulatory agencies, which require their examiners to
conduct a high-level assessment of banks' succession planning in their
rating of the capability and performance of management. The commenters
noted that the examination process is the ideal time to discuss with a
board of directors any weaknesses that exist in this area.
NCUA Response. The NCUA does assess succession planning as part of
the CAMELS Management component. However, as supervisory guidance, the
Letter to Credit Unions that established CAMELS does not provide the
NCUA with the authority necessary to fully address any inadequacies in
a FICU's succession planning practices and procedures. Letter to Credit
Unions 23-CU-01 establishing the 2023 supervisory priorities
acknowledges these limitations. For example, the letter makes clear
that NCUA examiners are precluded from evaluating ``any formal or
informal succession plans developed by credit unions beyond what would
normally be considered in assigning the Management component of the
CAMELS rating.'' \6\ Moreover, examiners may ``not issue an Examiner's
Finding or Document of Resolution if the credit union has not conducted
succession planning, or the planning is not adequate, unless the credit
union is in violation of its own policy for conducting succession
planning or administering any such plan(s).'' \7\ Accordingly, the NCUA
continues to believe that rulemaking is necessary to establish clear,
consistent, and enforceable succession planning standards.
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\6\ Id.
\7\ Id.
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Comment: Succession plan requirements are duplicative of disaster
program guidelines. Several commenters noted that under the NCUA
guidelines codified in 12 CFR part 749, appendix B, all FICUs are
encouraged to develop a program to prepare for a catastrophic act. As a
part of this planning and program development, FICUs distinguish the
roles of the FICU's leadership and the board of directors, as well as
backup personnel for various roles. The commenters wrote that the
succession plan requirements are in many ways duplicative of the
disaster guidelines and therefore unnecessarily add regulatory
compliance burden.
NCUA Response. The Board acknowledges that, as a result of other
planning and documentation efforts, many FICUs may already have data
and information that is useful to completing their succession plans.
FICUs are encouraged to use such existing information, where
appropriate, in preparing their succession plans. Further, the preamble
to the July 25, 2024, proposed rule notes that the catastrophic act
guidelines may address several elements that are also relevant to
succession planning. These suggested elements include a ``business
impact analysis to evaluate potential threats,'' the determination of
``critical systems and necessary resources,'' and the identification of
the ``[p]ersons with authority to enact the plan.'' \8\
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\8\ 89 FR 60329, at 60334.
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However, the Board does not agree that these codified guidelines
are a suitable alternative to this final rule. For one thing, the
guidelines are non-regulatory in nature and therefore do not establish
the enforceable standards that, as discussed in the preceding
responses, the Board has determined are necessary for succession
planning. Further, the guidelines are broader in scope than, and only
tangentially related to, succession planning. The guidelines are
intended to ensure the continued operations of a FICU in response to an
external, unforeseen, and hopefully infrequent event, whereas
succession planning is meant to address the ongoing retention and
recruitment

[[Page 104868]]

cycle institutions face, including for critical positions and those
that have significant influence and impact on a FICU's operations. The
guidelines are therefore not an adequate substitute for regulations
that specifically address FICU succession planning practices.
Comment: The Call Report offers an alternative means of
implementing succession planning. Several commenters wrote that the
NCUA could determine the existence of a succession plan at FICUs by
asking the question on the 5300 Call Report. Because Call Reports must
be submitted quarterly, the NCUA will always have up-to-date
information on a FICU's succession plan. The Call Report is a way for
FICUs to report to the NCUA a big picture of what is going on at their
credit union and to document any potential risk areas.
NCUA Response. While the suggestion made by the commenters could
potentially serve as a means of notifying the NCUA whether a FICU has
adopted a succession plan, it fails to ensure that FICUs adopt plans
and would not address the quality of those plans. The final rule will
clearly communicate the NCUA's expectations regarding succession
planning and establish enforceable standards for determining the
sufficiency of the plans. Accordingly, the Board has not revised the
proposed rule in response to these comments.

C. Comments Regarding Data and the Justification for Rulemaking

Comment: The NCUA relied on outdated or limited data to justify the
proposed rule. The majority of commenters objected to the data cited in
the preamble as justification for the rulemaking. Among other data, the
preamble cites to a 2014 NCUA analysis that found that poor succession
planning was either a primary or secondary reason for almost a third
(32 percent) of FICU consolidations.\9\ The commenters objected to the
fact that the analysis dates from over a decade before the publication
of this proposed rule and includes the years immediately following the
2007-2008 global financial crisis, which they said was likely a
compounding factor in FICU consolidations. Several of the commenters
pointed to a more recent NCUA analysis of mergers between 2017 and
2021, which found that an ``inability to obtain officials'' was the
primary cause for under 3 percent of mergers.\10\ Other commenters
wrote that, based on NCUA data, of the 149 mergers occurring during the
second half of 2023 and first half of 2024, only 11 cited the inability
to obtain officials as the reason for the merger.
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\9\ 89 FR 60329, at 60330, footnote 16 citing to: NCUA, Truth in
Mergers: A Guide for Merging Credit Unions, page 9, https://ncua.gov/files/publications/Truth-In-Mergers.pdf.
\10\ https://ncua.gov/regulation-supervision/manuals-guides/lessons-learned-mergers.
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The commenters also objected to the preamble language stating that
the 2014 findings had been corroborated by industry participants.\11\
The commenters wrote that the article includes information on only 10
mergers with only a few of the credit unions citing a lack of
succession planning as a factor in the merger.
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\11\ 89 FR 60329, at 60330.
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NCUA Response. As an initial matter, and as noted in the preamble
to the proposed rule, the Board's justification for issuing this final
rule is based not only on the data but also on the Board's finding that
``the need for succession planning as a sound governance practice [is]
equally compelling.'' \12\ The Board found ``that a compelling safety
and soundness case exists for rulemaking in this area,'' because the
failure to adequately plan for changes in leadership can jeopardize the
continued viability of a FICU and disrupt safe and sound operations
upon the departure of key personnel.\13\ The safety and soundness
rationale for this rulemaking remains even if the concerns raised by
the commenters were valid. However, the commenters' categorization of
the data cited in the preamble is incorrect.
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\12\ 89 FR 60329, at 60332.
\13\ 89 FR 60329, at 60330.
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The fact that some of the mergers included in the NCUA's 2014
analysis occurred during the global financial crisis in no way
diminishes the validity of the study. Indeed, the analysis acknowledges
that the FICU's weak financial condition was the primary or secondary
cause for 78 percent of the consolidations, the largest cause for
mergers during the ten-year period under review (2003 to 2012). The
fact that during that same period the lack of adequate succession
planning was still cited as a primary or secondary cause for 32 percent
of mergers only serves to underscore the need for rulemaking in this
area.
Neither does the Board believe that the NCUA's more recent analysis
of mergers between 2017 and 2021 undermines the earlier study. The 2014
study specifically analyzed succession planning, while the more recent
study looked at ``inability to obtain officials.'' While this inability
could be partially due to the lack of a succession plan, it might also
encompass other factors deterring potential candidates, such as the
FICU's inability to offer a competitive compensation package,
reputational and operational obstacles to hiring, or geographic
undesirability. A succession plan is critical to addressing such
factors, but it is not a guarantee, especially when the FICU is faced
with a sudden or unexpected leadership vacancy. The more recent study's
utility to inform this rulemaking is thus limited by the fact that it
does not distinguish between those mergers occurring because of a lack
of succession planning and those that happened despite the FICU's best
efforts in this regard.
The Board also rejects the objections raised by the commenters
regarding the news articles cited in support of the proposition that
the merger ``data has been corroborated by industry participants.'' The
commenters object to the number of mergers discussed in the articles.
However, the footnote citation was included simply to illustrate the
credit union industry's general recognition that a failure to plan for
succession is a contributing factor in consolidations. The footnote was
included to complement the data and rationale set forth in the main
text of the preamble rather than as an independent data source for the
rulemaking.
Comment: The proposed rule will have the unintended consequence of
increasing the number of consolidations. Many commenters wrote that,
contrary to the proposed rule's stated goal of mitigating the effects
of industry consolidation, it would actually lead to an increased
number of mergers. The majority of these commenters focused on the
additional regulatory burden of complying with the proposed rule,
especially on smaller FICUs. The commenters wrote the additional time
and resources required to comply with the proposed rule might lead
smaller FICUs to conclude that a merger with a larger institution is
the most sustainable path forward. One commenter wrote that the
succession planning process might force smaller FICUs to confront
challenging realities about their future prospects, such as their
limited internal talent pools and the inability to offer competitive
salaries or advancement opportunities. The commenters also expressed
concerns that the preamble language noting that smaller FICUs might
benefit from the assistance of larger FICUs in developing and
implementing their succession plans could inadvertently result in
mergers.\14\
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\14\ 89 FR 60329, at 60334.

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[[Page 104869]]

NCUA Response. The Board disagrees with the commenters that
implementation of this final rule will increase the number of FICU
consolidations. In the 2014 analysis of mergers discussed previously,
FICUs did not identify regulatory compliance burden as a cause of
mergers. The closest analogue among the listed causes--``recordkeeping
burden''--was cited by only two percent of FICUs as either a primary or
secondary cause for consolidation. In the more recent NCUA analysis for
mergers occurring between 2017 and 2021, regulatory burden was not
included among the 11 listed causes for mergers (the term
``recordkeeping burden'' also did not appear). The NCUA is not aware of
other data that supports the claims made by the commenters, and such
data was not offered in the comments.
The Board also notes that it has taken several steps to ease the
burden imposed on FICUs by the new requirements. For example, the NCUA
has posted a video series on succession planning on the internet.\15\
In addition, the Board has developed a sample template for a succession
plan that may be appropriate for some smaller FICUs, though all FICUs
may benefit from it. The Board has also revised the proposed rule by
removing loan officers, credit committee members, and supervisory
committee members from the list of FICU officials who must be covered
by succession plans. This should further minimize burden by enabling
FICUs to develop more appropriately tailored succession plans that
better reflect their unique circumstances. Further, the Board is
delaying effectiveness of the final rule until January 1, 2026, which
should also decrease burden by providing FICUs with additional time to
make any operational changes or resource allocations necessary for
development of the succession plans.
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\15\ NCUA, Succession Planning (2021), https://ncua.csod.com/LMS/catalog/Welcome.aspx?tab_page_id=-67&tab_id=221000382.
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As noted by the commenters, the preamble to the proposed rule
discussed that smaller FICUs may also benefit from seeking the
assistance of larger and more sophisticated FICUs in developing and
implementing their succession plans. For example, a larger FICU may
provide technical expertise in the drafting of the plan or may detail
personnel to temporarily fill a critical vacancy in a smaller credit
union until such time as it is permanently filled. The Board recognizes
the concerns raised by the commenters that such strategic partnerships
between a larger and smaller FICU may sometimes lead to a merger.
However, that is an individual decision that must be made by the FICUs
involved, based on their specific facts and circumstances.
Comment: The goal of preventing consolidations is misplaced.
Several commenters objected to the preamble language citing increased
consolidations as a driving factor for the rule. The commenters wrote
that the NCUA has historically been agnostic on the appropriateness of
a merger for a particular FICU, leaving the decision to the FICU's
management and membership. One commenter noted that there are
situations where a smaller FICU may propose a merger as a key component
of its succession plan. The commenters wrote that in some instances a
merger may be the best approach for a FICU and its members. The
commenters wrote that the decision to merge should therefore be left to
the FICU.
NCUA Response. One of the Board's stated goals in undertaking this
rulemaking is to reduce the number of unplanned or forced mergers
resulting from a FICU's failure to adequately plan for changes in
leadership. However, the Board agrees with the commenters that
voluntary mergers can be used by FICUs to achieve various objectives,
including creating economies of scale to offer more or better products
and services to members. The reasons for voluntarily merging vary by
FICU. For example, mergers may be a strategic decision as part of the
continuing credit union's growth strategy, while the merging credit
union's management may be seeking to expand services for the members.
This final rule does not change the Board's longstanding position that,
to the extent any such decision meets the applicable statutory and
regulatory requirements, the determination of whether a merger is
appropriate is best left to the particular FICU's management and
membership.

D. Comments Regarding Regulatory Burden

Comment: The NCUA underestimated the regulatory burden imposed by
succession planning. Many commenters wrote that the proposed rule
underestimated the amount of time FICUs would be required to spend
ensuring compliance with the succession plan requirements. The
Paperwork Reduction Act (PRA) statement contained in the proposed rule
estimated about 10 hours per year per FICU.\16\ The commenters wrote
that this estimate failed to adequately account for all of the time and
cost that would be incurred to understand the regulatory requirements
and formulate strategies for filling vacancies. The commenters also
objected that the estimate did not sufficiently consider the resources
required to regularly audit and update the plans, including examiner
consultations. One commenter pointed to a proposed rule issued by
another federal banking regulatory agency addressing succession
planning and noted that agency estimated 40 annual hours for plan
development and 20 hours for annual reviews.\17\
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\16\ 89 FR 60329, at 60335. The PRA is codified at 44 U.S.C.
3501-3520, and the implementing regulations issued by the Office of
Management and Budget are located at 5 CFR part 1320.
\17\ See, Federal Deposit Insurance Corporation, Guidelines
Establishing Standards for Corporate Governance and Risk Management
for Covered Institutions with Total Consolidated Assets of $10
Billion or More, 88 FR 70391 (Oct. 11, 2023) (to be codified at 12
CFR parts 308, 364). https://www.federalregister.gov/documents/2023/10/11/2023-22421/guidelines-establishing-standards-for-corporate-governance-and-risk-management-for-covered.
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NCUA Response. The information provided in the proposed rule
represents the NCUA's best estimate of the information collection
burden associated with the succession planning requirements. As with
all PRA collections of information, the estimates of the associated
burden may change over time as the agency and regulated entities gain
experience with implementation. Under the PRA regulations, Office of
Management and Budget (OMB) approval of an agency collection of
information is subject to periodic renewal through a notice and comment
process.\18\ The Board is committed to ensuring the accuracy of its PRA
burden estimates, and the information collections established by this
final rule are subject to such process.
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\18\ 5 CFR 1320.10. Under Sec. 1320.10(b), OMB will not approve
a collection of information for a period longer than three years.
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The estimate noted by the commenters that was provided in the
proposed rule issued by another federal banking agency does not provide
a useful comparison. Under its own terms, that rulemaking applies
solely to covered institutions with total consolidated assets of $10
billion or more. According to the most recent quarterly data available
to the NCUA, there were only 21 FICUs in this asset category as of the
second quarter in 2024.\19\ These institutions are far larger than most
FICUs, and their succession plans would necessarily reflect their

[[Page 104870]]

size and operational complexity. In contrast, the vast majority of
FICUs would have more streamlined succession plans. Further, and as
noted in a preceding response, the NCUA has made available several
resources to ease the burden imposed by this final rule, including an
optional plan template. The estimated information collection burden
reflects the availability of these resources.
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\19\ NCUA, Financial Trends in Federally Insured Credit Unions
2024 Q2, page iii, available at: https://ncua.gov/files/publications/analysis/quarterly-data-summary-2024-Q2.pdf.
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Comment: The proposed rule will unduly increase regulatory burden,
especially on smaller FICUs. Several commenters wrote that FICU
resources are already under strain and the proposed rule would only
serve to add to the cumulative regulatory burden faced by FICUs. The
commenters wrote that, given the complexity of the business environment
over the past several years and the pressures on the industry's
business model in general, the NCUA should tread lightly in adding to
the list of requirements. The commenters expressing these concerns were
particularly focused on the regulatory burden imposed on smaller FICUs
that lack the resources and staff available to larger institutions.
NCUA Response: The Board is mindful of the regulatory burden
imposed by its regulations and is committed to providing assistance and
resources to help FICUs comply with their regulatory obligations. The
NCUA currently offers training and other resources to aid FICUs in
developing their succession plans. As noted, the NCUA has posted a
video series on succession planning on the internet.\20\ FICUs with a
low-income designation may be able to apply for technical assistance
grants to support succession planning or offset training costs through
the Community Development Revolving Loan Fund. As also previously
discussed, FICUs may use already existing information in preparing
their plans. FICUs are encouraged to make use of these and other
available resources in complying with the proposed rule. The Board has
also narrowed the list of FICU officials that must be covered by the
plans, enabling FICUs to develop succession plans that better reflect
their unique circumstances. Further, the Board is delaying the
effective date of the final rule until January 1, 2026, which will
provide FICUs with additional time to develop their succession plans.
---------------------------------------------------------------------------

\20\ Supra, note 15.
---------------------------------------------------------------------------

The Board is especially mindful of the burden imposed on smaller
FICUs, as they may lack the resources or expertise to develop
succession plans. Accordingly, smaller FICUs may especially benefit
from the existing resources identified above. The NCUA's Small Credit
Union and Minority Depository Institution Support Program is another
available resource through which FICUs with less than $100 million in
total assets and minority depository institutions of any size may seek
assistance in a variety of areas, including succession planning. In
addition, the Board again notes that it has developed a sample template
for a succession plan that may be appropriate for smaller FICUs, though
all FICUs may benefit from it. FISCUs electing to use the template
should consult applicable state requirements to ensure their succession
plans are consistent with any such requirements.
Comment: Classification of the rule as ``major'' under the
Congressional Review Act. One comment expressed concern that the NCUA
might not classify the rule as ``major'' for purposes of the
Congressional Review Act (CRA).\21\ A rule that is ``major'' under the
CRA may take effect no earlier than 60 calendar days after the Congress
receives the statutorily prescribed rule report from the agency or the
rule is published in the Federal Register, whichever is later. The
commenter was concerned that not classifying the rule as ``major''
would underestimate the true impact of the succession planning
requirements, particularly on smaller FICUs.
---------------------------------------------------------------------------

\21\ 5 U.S.C. 801-808. The CRA was included as part of the Small
Business Regulatory Enforcement Fairness Act, Public Law 104-121
(March 29, 1996).
---------------------------------------------------------------------------

NCUA Response. The NCUA acknowledges its obligations under the CRA.
As required by the CRA, the NCUA has submitted this final rule to OMB
for it to determine if the final rule is a ``major rule.'' The NCUA
also will file appropriate reports with Congress and the Government
Accountability Office (GAO) so this rule may be reviewed.
The CRA defines a major rule as one that has resulted in or is
likely to result in (A) an annual effect on the economy of $100,000,000
or more; (B) a major increase in costs or prices for consumers,
individual industries, federal, state, or local government agencies, or
geographic regions; or (C) significant adverse effects on competition,
employment, investment, productivity, innovation, or on the ability of
United States-based enterprises to compete with foreign-based
enterprises in domestic and export markets. The CRA vests the ultimate
decision as to whether this final rule qualifies as ``major'' with OMB.
However, the Board does not believe that this final rule meets the
definition of a ``major rule'' under the CRA.
While the final rule may impose some additional costs on FICUs, it
is unlikely that these costs would rise to the $100 million required
under the CRA definition of a ``major rule.'' The Board also believes
that several factors mitigate the potential costs imposed on FICUs. For
example, the Board is providing a sample template for a simple
succession plan that may be appropriate for some FICUs. Many FICUs have
already adopted succession plans, and these existing plans should
already address at least some of the elements required by the final
rule, thereby minimizing the cost of complying with the new
requirements. As previously noted, the NCUA also offers training and
other resources to aid credit unions in developing their succession
plans. FICUs are also encouraged to use already existing information in
preparing their plans, such as the data used to develop the recommended
program to prepare for a catastrophic act. These resources should
further reduce the costs of preparing succession plans.
Neither does the Board believe that the final rule meets the second
and third prongs of the CRA ``major rule'' definition. The final rule
imposes new reporting requirements that will not directly impact
consumer costs for the financial products offered by FICUs. Nor are
these reporting requirements likely to drive up costs for the credit
union industry, governments, or geographic regions. The effects of the
new requirements are also unlikely to significantly affect employment,
competition, investment, or innovation, as contemplated under the CRA.

E. Comments Raising General Objections to Rule

Comment: The proposed rule constitutes regulatory overreach.
Several commenters wrote that, while it is the NCUA's responsibility to
supervise credit unions so as to protect the safety and soundness of
the credit union system, the proposed rule oversteps the agency's
regulatory authority. The commenters wrote that succession planning is
appropriately the fiduciary responsibility of a FICU's board of
directors as only an individual FICU can determine the appropriate
timing and extent of succession planning needed to preserve the health
of the FICU and its members. The commenters worried that the rule could
lead to an unintended consequence where NCUA examiners, rather than
focusing on the outcomes and effectiveness of a succession plan,

[[Page 104871]]

might use their supervisory authority to impose their own views on how
succession planning should be managed. The commenters wrote that such a
scenario could lead to a significant administrative workload, diverting
attention and resources away from serving members.
NCUA Response. The Board continues to believe that NCUA rulemaking
on succession planning is both appropriate and consistent with the
agency's statutory authority. While the Board agrees that succession
planning is a responsibility of the FICU's board of directors, it also
finds that a compelling safety and soundness case exists for rulemaking
in this area. The failure of FICUs to adequately plan for succession
poses a risk not only to individual FICUs and their member-owners, but
to the credit union system as a whole and to the Share Insurance Fund.
Without adequate planning, key operations could be impacted during
management transitions or leadership vacuums, such as recordkeeping,
lending and other member services, liquidity management, cybersecurity,
compliance with laws and regulations, and other critical
responsibilities.
The proposed regulatory changes are designed to mitigate this risk
and are consistent with the Board's statutory duty to ensure a safe and
sound system of cooperative credit for its member-owners, as the
proposed rule explained. Under the FCU Act, the NCUA is the chartering
and supervisory authority for FCUs and the federal supervisory
authority for FICUs.\22\ The FCU Act grants the NCUA broad authority to
issue regulations governing both FCUs and all FICUs. Section 120 of the
FCU Act is a general grant of regulatory authority and authorizes the
Board to prescribe rules and regulations for the administration of the
FCU Act.\23\ Section 207 of the FCU Act is a specific grant of
authority over share insurance coverage, conservatorships, and
liquidations.\24\ Section 209 of the FCU Act is a plenary grant of
regulatory authority to the Board to issue rules and regulations
necessary or appropriate to carry out its role as share insurer for all
FICUs.\25\ Moreover, the NCUA has statutory authority to determine
whether FICUs are operated in an unsafe or unsound manner and terminate
a FICU's insurance if a FICU is not operated in a safe and sound
manner.\26\ This final rule will help to identify or prevent unsafe or
unsound practices. Accordingly, the FCU Act grants the Board broad
rulemaking authority to ensure that the credit union industry and the
Share Insurance Fund remain safe and sound and service to members is
maintained in compliance with applicable laws and regulations.
---------------------------------------------------------------------------

\22\ 12 U.S.C. 1752-1775.
\23\ 12 U.S.C. 1766(a).
\24\ 12 U.S.C. 1787(b)(1).
\25\ 12 U.S.C. 1789(a)(11).
\26\ 12 U.S.C. 1786.
---------------------------------------------------------------------------

In assessing compliance with this rule, the NCUA will focus on
whether the FICU has developed a succession plan that addresses the
elements required by the final rule and is consistent with the FICU's
size and complexity. The Board emphasizes that FICUs, not the NCUA, are
best positioned to assess various risks and opportunities related to
succession planning. A FICU will need to make its own determinations as
to how much detail is necessary to address the required plan elements
and whether additional factors, besides those required by this final
rule, should be considered in its succession planning process. The NCUA
does not intend to micromanage a FICU's succession planning process and
may issue guidance, as it deems necessary, to clarify a FICU's
discretion in developing its succession plans and further assist FICU
succession planning efforts.
Comment: A ``one-size fits all'' approach is inappropriate. Several
commenters objected to the broad application of the proposed rule to
all FICUs, regardless of their size and operational complexity. The
commenters wrote that individual FICUs have unique challenges and
governance structures. The commenters wrote that uniform requirements
might limit the ability of a FICU to design a plan that best aligns
with its strategic objectives and long-term viability. Some of these
commenters focused on the potential impacts of uniform requirements on
smaller FICUs that may not have the resources to meet the detailed
requirements. The commenters wrote that the diversity among FICUs--
ranging from small, community focused institutions to larger, complex
organizations--requires flexibility in succession planning that a rigid
regulatory mandate may not accommodate.
NCUA Response. The Board agrees a uniform approach to succession
planning would fail to account for the diversity among FICUs. The final
rule accommodates such differences. For example, in response to public
comment, the Board has revised the proposed rule by narrowing the list
of FICU officials that must be covered by the succession plans, thereby
enabling FICUs to develop more appropriately tailored plans that better
reflect their unique circumstances. So long as succession plans address
the elements required by the final rule, FICUs may adjust their plans
to reflect operational differences, varying governance structures, and
other unique circumstances. FICUs may include within the scope of their
plans ``other personnel the board of directors deems critical given the
[FICU's] size, complexity, or risk of operations. This includes new
positions that may be required due to planned changes in operations,
supervisory landscape, or corporate structure.'' \27\
---------------------------------------------------------------------------

\27\ Proposed Sec. 701.4(e)(2)(vi), finalized as Sec.
701.4(e)(2)(iii)
---------------------------------------------------------------------------

As the preamble to the proposed rule noted, the expectation is for
a FICU to develop a succession plan that is consistent with its size
and complexity. Therefore, smaller FICUs are more likely to have a
simple succession plan that only addresses a few key leadership
positions. Larger and more sophisticated FICUs are expected to have
more detailed plans. For example, smaller FICUs may have fewer board
members, or have fewer staff that would qualify for the positions
listed in the proposed rule for inclusion in the succession plan.
Likewise, smaller FICUs are likely to have less expansive employee
recruitment, development, and retention strategies.

F. Comments Regarding the Inclusion of FISCUs

Comment: Inclusion of FISCUs is inappropriate. Several commenters
objected to the inclusion of FISCUs within the scope of the proposed
regulatory requirements. Some of the commenters wrote that the
inclusion of FISCUs signals to the states that their regulatory
agencies are not equipped to ensure that FISCUs are adequately
positioned for the future. These commenters wrote that the assumption
is contrary to data that demonstrates state charters have fewer
failures, more growth, and a history of strong management performance.
The commenters urged the NCUA to narrow the applicability of the rule
to exclude FISCUs as was the case in the Board's 2022 proposal.
NCUA Response. As discussed above, the Board finds that compelling
safety and soundness reasons exist for undertaking rulemaking on
succession planning. The failure of FICUs--whether federal or state-
chartered--to adequately plan for succession poses an undue risk to the
credit union system and to the Share Insurance Fund. The inclusion of
FISCUs within the scope of the final rule is consistent with the

[[Page 104872]]

Board's statutory authority to ensure a safe and sound system of
cooperative credit for its member-owners. Under the FCU Act, the NCUA
is the chartering and supervisory authority for FCUs and the federal
supervisory authority for FICUs.\28\ The FCU Act also grants the NCUA
broad authority to issue regulations governing all FICUs.
---------------------------------------------------------------------------

\28\ 12 U.S.C. 1752-1775.
---------------------------------------------------------------------------

The Board emphasizes that, contrary to the assertion made by the
commenters, this final rule does not reflect a statement on the
efficacy of state efforts to address succession planning. Specifically,
the final rule provides that for FISCUs in states that have established
succession planning requirements, the NCUA will defer to such
requirements to the extent no conflict exists between the final rule
and the state requirements.\29\
---------------------------------------------------------------------------

\29\ Sec. 741.228.
---------------------------------------------------------------------------

Comment: The FISCU carveout is confusing. Several commenters, while
supportive of the proposed rule's carveout for FISCUs in states where
succession planning is addressed, found the wording of the provision
confusing. The preamble of the proposed rule stated that ``to the
extent that a FISCU is subject to a state statutory or regulatory
requirement that conflicts with the proposed rule, the NCUA will defer
to the state requirement.'' \30\ The commenters wrote that this wording
implies that if a state rule addresses succession planning, FISCUs in
that state would be exempt from the proposed rule. However, the
regulatory text of the proposed rule at Sec. 741.228 provides that a
FISCU must adhere to the succession planning requirements ``to the
extent these regulatory provisions do not conflict with an applicable
state requirement.'' According to the commenters, this language implies
only a partial exemption from specific conflicting provisions. These
commenters wrote that while a state may not have a specific statutory
or regulatory requirement addressing succession planning, it may use
definitions or have issued guidance that differs from that of the NCUA
proposed rule.
---------------------------------------------------------------------------

\30\ 89 FR 60329, at 60332.
---------------------------------------------------------------------------

In addition, one commenter wrote that neither the preamble nor the
proposed regulatory text uses the word ``exempt'' to describe the
applicability of the rule to a FISCU in a state that addresses
succession planning. Instead, the preamble uses defer, and the
regulatory text is silent. The commenter recommended that, absent a
total exclusion of FISCUs from the scope of the rule, the Board should
provide a simplified exemption provision that exempts FISCUs in a state
upon notice from the state regulator to the NCUA regional director that
the state supervises succession planning by rule, guidance, or through
the examination process. The commenter wrote that this approach would
reduce confusion, ease administration, and presents no greater risk of
material loss to the Share Insurance Fund.
NCUA Response. The Board has not revised the rule in response to
these comments. Contrary to the assertions made by the commenters,
there is no conflict between the preamble language and the regulatory
text. Both provide that the NCUA's deferral is contingent on a lack of
conflict between the rule and the state requirement.\31\ Nowhere does
the preamble indicate, as the commenter suggests, that the deferral
provision is intended as a complete exemption for FISCUs from the
regulatory requirements. Further, as the commenter writes, the deferral
only applies to legally enforceable state requirements, such as
statutes, regulations, or other issuances that are binding under state
law. The deferral does not apply to other issuances in the form of
guidance, which may be set forth in policy statements, handbooks,
letters, or similar issuances. While these guidance documents may
represent supervisory expectations, such as for purposes of determining
a credit union's CAMELS and risk ratings, FISCUs are not required to
comply with such guidance because it is by definition non-binding. The
Board has also not elected to adopt the alternate process suggested by
the commenter, because it continues to believe that whether deferral
applies is best addressed on a case-by-case basis during the
examination process.
---------------------------------------------------------------------------

\31\ 89 FR 60329, at 60332; proposed Sec. 741.228.
---------------------------------------------------------------------------

Comment: The NCUA should consolidate the regulation applicable to
FISCUs. One commenter was concerned regarding the structure of 12 CFR
part 741, which identifies the regulatory requirements applicable to
FISCUs by cross-referencing regulatory provisions for FCUs codified
elsewhere in title 12 of the Code of Federal Regulations. The commenter
wrote that, while this might seem like a minor detail, it results in
confusion and inefficiency for many FISCUs as they sift through FCU
rules to determine what may apply to them. The commenter wrote that
there is no compelling argument against consolidating FISCU regulations
in a single location.
NCUA Response. The suggestion made by the commenter is outside the
scope of the rulemaking, Accordingly, the rule has not been revised in
response to the comment. However, the NCUA remains committed to working
with all FICUs to ensure the clarity of their regulatory obligations.

G. Comments Raising Potential Privacy and Discrimination Concerns

Comment: Concerns regarding expected retirement and vacancy date
requirements. The proposed rule would require that a succession plan
identify the anticipated vacancy date for each of the covered
positions, ``such as the incumbent's retirement eligibility date or
announced departure date.'' \32\ Several commenters objected to this
provision, writing that it was unduly burdensome and could potentially
raise privacy and age discrimination concerns. The commenters wrote
that the shift from employee pensions based on years of service to
defined contribution plans have dramatically altered the concept of
retirement and made it difficult to estimate when an individual will
retire. Other commenters wrote that many FICU management officials
operate under employment agreements that may be renewed or extended.
Requiring that FICUs publish such dates could lead to charges of age
discrimination or be used by management to force an employee out who
has no intention of retiring.
---------------------------------------------------------------------------

\32\ Proposed Sec. 701.4(e)(3)(i).
---------------------------------------------------------------------------

NCUA Response. As an initial matter, the Board notes that it is not
requiring that FICUs make their succession plans public, nor does the
Board intend to do so. Succession plans will be reviewed by examiners
and will be treated as confidential supervisory documents, as with
other supervisory matters.
The provision is intended solely as a planning aid. In the case of
elected officials, such date is clearly the expiration of the
incumbent's term. However, the expected vacancy date for non-elected
officials can be less clear. The final rule does not require the FICU
use a specific date, but suggests some possible proxies, including the
individual's anticipated retirement date or announced departure date. A
credit union can also note that a retirement or departure date is
unknown. The decision of what to reflect for the date is at the FICU's
discretion.
The Board emphasizes that inclusion of any known or estimated
retirement or departure date is not intended to create a requirement
that an individual will retire or otherwise vacate a position on a
specific date. The Board, therefore, understands that these dates may
evolve. Nevertheless, the inclusion of a specific or approximate date
will

[[Page 104873]]

promote conversations within the FICU and allow for better planning in
advance of a transition, thus accomplishing the purpose of the final
rule. Further, the FICU should update the dates as necessary to reflect
changes in an individual's circumstances or plans.
Comment: Concerns regarding public posting of succession plans. The
preamble to the proposed rule provided that ``succession plans should
provide sufficient detail and use language that is reasonably
understandable to the FICU's member-owners in describing its strategies
for filling vacancies and for recruiting, developing, and retaining
employees.'' \33\ The preamble further provided that succession plans
should be ``clearly and concisely written, use everyday language to the
extent possible, and avoid ambiguous phrasing open to differing
interpretations.'' \34\ Several commenters wrote that this language
implies the succession plans will be publicly available, which raises
privacy concerns. The commenters wrote that the succession plans may
include retirement information for senior credit union management,
which should not be made public. Another commenter wrote that
succession plans often reflect a FICUs strategy for maintaining
viability in a competitive market. The public posting of plans would
enable other financial institutions to access the information for
competitive advantage or potential merger opportunities.
---------------------------------------------------------------------------

\33\ 89 FR 60329, at 60333.
\34\ Id.
---------------------------------------------------------------------------

NCUA Response. The Board again emphasizes that there is no
requirement that succession plans be posted or otherwise made available
to the public. Neither does the final rule supersede existing laws or
FICU procedures governing the public dissemination of similar
governance documents. The public availability of the succession plans
should be treated similarly to such documents. The preamble language
cited by the commenters was intended solely to emphasize the importance
of clarity in drafting, especially in those circumstances where the
plan, or portions thereof, may be made available to member-owners.

H. Comments Regarding Specific Rule Provisions

Comment: The scope of covered FICU officials should be narrowed.
Many commenters recommended that the NCUA narrow the scope of the
positions covered by the succession plans. The commenters wrote that
the proposed list was overly prescriptive and would impose an undue
burden to administer. Almost all of these commenters agreed the scope
should be limited to those officials most directly responsible for
ensuring the FICU's continuity of operations but differed on the
specific positions this would include. Some commenters suggested
inclusion of the members of the board, the members of the supervisory
and credit committees, and key management officials, including the
chief executive officer. Other commenters suggested the scope be
limited to the chief executive officer and chief financial officer (or
equivalent), because the boards of directors are not involved in the
FICU's day-to-day operations. Still others suggested that the rule not
include a specific list at all, but that FICUs should instead be
provided with the flexibility to determine which critical positions
should be included in a succession plan based on the specific risks
associated with unanticipated or extended vacancies.
Despite their differing recommendations, almost all the commenters
writing on this topic suggested that loan officers and assistant
managers be excluded from the list. Several of these commenters wrote
that larger FICUs may have hundreds of loan officers involved in the
daily review of loans. The commenters wrote that, given the
decentralized lending structure of many large FICUs, there is likely
minimal risk to the ability to serve members if a loan officer vacancy
occurs. The commenters wrote the risk is even less for assistant
management officials, who are not crucial to a FICU's continuity of
operations.
NCUA Response. In response to these comments, the Board has removed
loan officers, credit committee members, and supervisory committee
members from the list of FICU officials that must be covered by the
succession plans. During development of the July 25, 2024, proposed
rule, the Board relied on the language of the FCU Act, the model FCU
bylaws, and the definition of '' senior executive officer'' in 12 CFR
701.14 as a guide in identifying the list of officials that should be
covered by the succession plans.\35\ As it did in the preamble to the
proposed rule, the Board emphasizes that succession plans are intended
to cover senior leadership positions responsible for the oversight of
the FICU or its day-to-day management.\36\ Upon consideration of the
comments and the issues involved, the Board recognizes that loan
officers and members of credit and supervisory committees may not
always meet these criteria depending on the size and structure of a
particular FICU. The change will enable FICUs to develop more
appropriately tailored succession plans that better reflect their
unique circumstances.
---------------------------------------------------------------------------

\35\ Specifically, section 111 of the FCU Act provides that
``[t]he management of a Federal credit union shall be by a board of
directors, a supervisory committee, and where the bylaws so provide,
a credit committee'' (12 U.S.C. 1761). The model FCU bylaws codified
in Appendix A of 12 CFR part 701 expand the list of senior FCU
officials to include management officials, assistant management
officials, and loan officers. The NCUA regulation at 12 CFR 701.14
defines the term ``senior executive officer'' to include the FICU's
chief executive officer (typically this individual holds the title
of president or treasurer/manager), any assistant chief executive
officer (for example, any assistant president, any vice president,
or any assistant treasurer/manager) and the chief financial officer
(controller).
\36\ 89 FR 60329, at 60333.
---------------------------------------------------------------------------

As noted in a preceding response, FICUs may include within the
scope of their plans ``other personnel the board of directors deems
critical given the [FICU's] size, complexity, or risk of operations.''
\37\ FICUs should use the flexibility provided by this provision to
assess whether the inclusion of loan officers and members of the
supervisory and credit committees is appropriate given the
institution's characteristics. For example, a smaller FICU with few
loan officers may deem the position critical given the impact a
departure would have on the institution's operations. In contrast, a
larger FICU that employs many loan officers may determine its
operations would not be impacted by the loss of any specific individual
and choose to not include this position in their plan.
---------------------------------------------------------------------------

\37\ Proposed Sec. 701.4(e)(2)(vi), finalized as Sec.
701.4(e)(2)(iii).
---------------------------------------------------------------------------

Comment: The annual plan review requirement is excessive. Several
commenters objected to the requirement that a FICU board review the
succession plan ``no less than annually.'' \38\ The commenters wrote
that this requirement is burdensome and excessive. The commenters wrote
that succession plans are not a dynamic and ever-evolving document and,
therefore, should only be reviewed as needed. One of the commenters
recommended that FICUs be provided the flexibility to review the plans
once every 24 months. Another commenter suggested a review period of
every three years.
---------------------------------------------------------------------------

\38\ Proposed Sec. 701.4(e)(4)(ii).
---------------------------------------------------------------------------

NCUA Response. Upon reconsideration, the Board agrees that the
annual review of plans is unnecessary. The final rule now requires
FICUs to review and update the plan as necessary but at least once
every 24 months. The Board believes this change provides FICUs with
additional flexibility while still accomplishing the

[[Page 104874]]

goal of the rulemaking of ensuring that succession plans are regularly
reviewed and kept current.
Comment: Education requirements for FICU board members. Several
commenters objected to the proposed regulatory language requiring that
directors have a ``working familiarity'' with the FICU's succession
plan no later than six months after appointment.\39\ The commenters
wrote that the focus of newly appointed directors should be on gaining
familiarity with items such as the FICU's operations, the products and
services being offered, and applicable legal authorities. In contrast,
a minority of commenters supported the requirement, writing that it is
appropriate for boards to maintain a working knowledge of the latest
developments in all of the areas of risk confronted by the FICU.
---------------------------------------------------------------------------

\39\ Proposed Sec. 701.4(b)(3)(ii).
---------------------------------------------------------------------------

NCUA Response. The Board has not revised the rule in response to
these comments. The Board continues to believe that succession planning
is one of the most vital responsibilities of a FICU's board of
directors. Succession planning is a critical component of a FICU's
overall strategic plan. It helps ensure that the appropriate personnel
are available to execute the FICU's strategic plan and mission. A
board's failure to plan for vacancies in elected and appointed
positions, as well as the transition of its management, could come with
high costs. The FICU runs the risk of creating a leadership vacuum,
disrupting operations, and potentially jeopardizing the FICU's ability
to adequately manage liquidity risk, address cybersecurity threats, or
ensure continued compliance with consumer protection, Bank Secrecy Act,
and other critical responsibilities. Accordingly, and as recognized by
the commenters writing in support of the requirement, succession
planning merits inclusion among the items new board members must become
familiar with.
Comment: The ``working familiarity'' requirement is vague. Several
commenters were concerned about a perceived lack of clarity with the
proposed ``working familiarity'' language. The commenters wrote that,
unlike the Board's 2022 proposal, the proposed rule did not include
language stating that training is not mandated to meet this
requirement. The commenters wrote that it is unclear what steps a board
of directors would be expected to take to achieve a ``working
familiarity.'' The commenters were concerned this perceived ambiguity
would leave the door open for differing practices among FICUs regarding
training, as well as for different interpretations of the requirement
between FICUs and examiners. They wrote that this could lead to
inconsistencies in the examination process and urged the NCUA to
clarify the meaning of the provision.
NCUA Response. The Board has not revised the rule in response to
these comments. The Board notes that the ``working familiarity''
language is not new but comes from existing Sec. 701.4(b)(3). This
existing regulation requires new credit union board members to gain a
``working familiarity with basic finance and accounting practices''
within six months of election or appointment. The final rule does not
revise this language but adds succession planning to the list of items
that directors must have a working familiarity with no later than six
months after appointment. The final rule does not mandate the contents
of training to meet this requirement. A FICU may incorporate succession
planning into whatever materials it currently uses to comply with the
education requirement.
Comment: Deviations from succession plan. Several commenters wrote
about potential deviations from the succession plan due to unforeseen
circumstances. The commenters wrote that requiring documentation of
such changes is overly prescriptive and sometimes not feasible given
rapidly changing circumstances. Another commenter asked for additional
clarity on the steps a FICU should take if it is unable to adhere to
its succession plan, writing that the proposed rule lacked sufficient
detail.
NCUA Response. As provided in the preamble to the proposed rule,
the Board recognizes that circumstances might necessitate deviations
from the succession plan in filling specific vacancies. The final rule
accommodates such exigencies. In the event exigent circumstances
require a substantial deviation from the board approved plan,
management and/or the FICU board has the flexibility to do what it
deems necessary at the time, consistent with their fiduciary duties and
legal responsibilities. To further emphasize this flexibility, the
final rule no longer requires that such deviations be documented in the
board's meeting minutes. However, a substantial deviation from the
approved plan should be reported to the board as soon as practicable.
Credit unions, not the NCUA, are best positioned to assess various
risks and exigent circumstances. The agency does not intend to
micromanage deviations from succession plans made in response to
exigent circumstances. Further, FICU boards have flexibility in
determining how to calculate the required 24-month review period. A
FICU may determine that the review of a succession plan necessitated by
a change to address an exigent circumstance satisfies the required
review, therefore restarting the 24-month review cycle.

I. Other Comments

Comment: Exemption for high performing FICUs. One commenter
suggested that the Board include an exemption for FICUs of all asset
sizes with a CAMELS composite rating of 1 or 2. The commenter wrote
that bond requirements for FICUs vary by CAMELS rating, with a greater
bond being required for CAMELS 3, 4, and 5 rated FICUs due to the
increased risk to the Share Insurance Fund. The commenter wrote that
this logic should extend to succession planning as well. The commenter
wrote that, at minimum, the final rule should establish such an
exemption for FISCUs with a CAMELS composite rating of 1 or 2 because
the NCUA is not the primary federal regulator for FISCUs. The commenter
wrote that, given the lower risk to the Share Insurance Fund, the NCUA
does not have as much standing to issue regulations covering FISCUs
``when it is not necessary, but only a best practice.''
NCUA Response. The suggestion made by the commenter is outside the
scope of the proposed rule. The Board did not propose or seek public
comment on a class-based exemption of this type. Accordingly, the Board
has not revised the rule in response to this comment. As discussed, the
Board believes that having clearly articulated, consistent, and
enforceable succession planning requirements will benefit all FICUs,
irrespective of asset size and CAMELS rating. Moreover, the
establishment of a succession plan in advance of a FICU potentially
becoming a composite CAMELS code 3, 4, or 5 will allow the FICU's
leadership to remain focused on the most pressing problems that led to
the downgrade.
Comment: Additional resources are necessary to aid compliance.
Several commenters wrote that FICUs would require additional resources
to comply with the succession plan requirements. While the majority of
these commenters focused on the challenges faced by smaller FICUs,
others wrote that all FICUs, irrespective of size, would require
assistance. The commenters suggested the NCUA develop a broad range of
resources to assist all FICUs in developing succession planning. One
commenter recommended that the NCUA work with state supervisory
authorities to develop recruitment

[[Page 104875]]

strategies and resources to assist FICUs in developing and implementing
their succession plans.
NCUA Response. As discussed, the NCUA makes available several
resources to aid FICU succession planning efforts, including online
training. The Board has also developed a sample template for a
succession plan that may be appropriate for some FICUs. Smaller FICUs
with less than $100 million in total assets and minority depository
institutions of all sizes may also be eligible for assistance in a
variety of areas, including succession planning, through the agency's
Small Credit Union and Minority Depository Institution Support Program.
FICUs with a low-income designation may be able to apply for technical
assistance grants to support succession planning or offset training
costs through the Community Development Revolving Loan Fund.
Comment: Additional clarity required regarding examination
expectations. Several commenters wrote that the proposed rule was
unclear about the potential impact on a FICU if an examiner determines
a succession plan to be inadequate. The commenters urged the NCUA to
clarify the expectations of the examination program to ensure
consistency in evaluations of FICU regulatory compliance. The
commenters also suggested that the final rule should identify a
reasonable timeline for remediation should a FICU's succession plan be
deemed inadequate.
NCUA Response. The expectation is for a FICU to develop a
succession plan that meets the regulatory requirements and is
consistent with the FICU's size and complexity. Potential examination
actions due to inadequate succession plans and possible remediation
timelines are outside the scope of this rulemaking. As is current
practice, examiners will use discretion and judgment when working with
FICUs to remedy a potential negative finding before issuing documents
of resolution or other negative findings. The NCUA may, in its
discretion, issue guidance on the topic of succession planning as it
deems necessary.

III. Regulatory Procedures

A. Regulatory Flexibility Act

The Regulatory Flexibility Act \40\ generally requires an agency to
conduct a regulatory flexibility analysis of any rule subject to notice
and comment rulemaking requirements, unless the agency certifies that
the rule will not have a significant economic impact on a substantial
number of small entities. If the agency makes such a certification, it
shall publish the certification at the time of publication of either
the proposed rule or the final rule, along with a statement providing
the factual basis for such certification.\41\ For purposes of this
analysis, the NCUA considers small credit unions to be those having
under $100 million in assets.\42\ The Board fully considered the
potential economic impacts of the regulatory amendments on small credit
unions.
---------------------------------------------------------------------------

\40\ 5 U.S.C. 601 et seq.
\41\ 5 U.S.C. 605(b).
\42\ 80 FR 57512 (Sept. 24, 2015).
---------------------------------------------------------------------------

The final rule requires that a FICU board of directors establish,
and comply with, a written succession plan that addresses certain
specified positions and contains specified elements. In addition, the
board of directors will be required to review the succession plan no
less than every 24 months. These requirements may impose some cost on
FICUs. However, the NCUA believes several factors mitigate the
potential costs, especially for small FICUs with assets of less than
$100 million.
First, a FICU is expected to develop a succession plan that is
consistent with its size and complexity. Therefore, small FICUs may
have a simple succession plan that is less costly to prepare than would
be the case for larger and more complex FICUs. Further, in recognition
that smaller FICUs may lack the resources or expertise to develop
succession plans, the Board is providing a sample template for a simple
succession plan that may be appropriate for these FICUs. The Board is
also aware that many FICUs, including small FICUs, have already adopted
succession plans. Many of these existing plans should already address,
either partially or in their entirety, the elements that would be
required by the proposed rule. This could minimize the burden of
complying with the new requirements.
In response to comments, the Board has narrowed the list of FICU
officials that must be covered by the succession plans. This should
further minimize burden by enabling FICUs to develop more tailored
succession plans that reflect their unique circumstances. Further, the
Board is delaying the effective date of the final rule until January 1,
2026, which will provide additional time to make any operational
changes or resource allocations necessary for development of the
succession plans.
The NCUA also offers training and other resources to aid credit
unions in developing their succession plans. For example, the NCUA has
posted a video series on succession planning on the internet. The
NCUA's Small Credit Union and Minority Depository Institution Support
Program is an available succession planning resource for FICUs with
less than $100 million in total assets and minority depository
institutions of any size. Smaller FICUs are also encouraged to seek
assistance from larger or more sophisticated FICUs in the development
of the required succession plans.\43\ FICUs may also use already
existing information in preparing their plans, such as the data used to
develop the recommended program to prepare for a catastrophic act.
These resources should further reduce the costs of preparing the
succession plans.
---------------------------------------------------------------------------

\43\ Supra, note 15.
---------------------------------------------------------------------------

Accordingly, the NCUA certifies the final rule will not have a
significant economic impact on a substantial number of small credit
unions.

B. Small Business Regulatory Enforcement Fairness Act/Congressional
Review Act

The Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) \44\ generally provides for congressional review of agency
rules. A reporting requirement is triggered in instances where the NCUA
issues a final rule as defined by section 551 of the Administrative
Procedure Act.\45\ An agency rule, in addition to being subject to
congressional oversight, may also be subject to a delayed effective
date if the rule is a ``major rule.'' The NCUA does not believe this
rule is a ``major rule'' within the meaning of the relevant sections of
SBREFA.
---------------------------------------------------------------------------

\44\ Public Law 104-121, 110 Stat. 147 (1996).
\45\ 5 U.S.C. 551.
---------------------------------------------------------------------------

As required by SBREFA, the NCUA has submitted this final rule to
OMB for it to determine if the final rule is a ``major rule'' for
purposes of SBREFA. The NCUA also will file appropriate reports with
Congress and the GAO so this rule may be reviewed.

C. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (PRA) applies to rulemaking in
which an agency creates a new or amends existing information collection
requirements.\46\ For purposes of the PRA, an information collection
requirement may take the form of a reporting, recordkeeping, or a
third-party disclosure requirement. The NCUA may not conduct or
sponsor, and the respondent is not required to respond to, an
information collection

[[Page 104876]]

unless it displays a valid OMB control number.
---------------------------------------------------------------------------

\46\ 44 U.S.C. 3501-3520; 5 CFR part 1320.
---------------------------------------------------------------------------

The final rule establishes new information collections in the form
of succession policies and plans. The NCUA estimates a total annual
burden of 46,750 hours as follows:

Estimated PRA Burden

OMB Control Number: 3133-NEW.
Title of Information Collection: Succession Planning.
Estimated number of respondents: 4,499.
Estimated number of responses per respondent: 1.
Estimated total annual responses: 4,499.
Estimated total annual burden hours per response: 10.
Estimated total annual burden hours: 44,990.
The NCUA addressed comments on the proposed PRA burden estimate
under section II. Discussion of Public Comments. In accordance with the
PRA, the information collection requirements included in this final
rule have been submitted to OMB for approval under control number 3133-
NEW.

D. Executive Order 13132 on Federalism

Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. The
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive order to adhere to fundamental
federalism principles. This final rule applies to FCUs and to FISCUs.
By law, FISCUs are already subject to numerous provisions of NCUA's
rules, based on the agency's role as the insurer of member share
accounts and the significant interest NCUA has in the safety and
soundness of their operations. The rulemaking may, therefore, have an
occasional direct effect on the states, the relationship between the
national government and the states, or on the distribution of power and
responsibilities among the various levels of government.

E. Assessment of Federal Regulations and Policies on Families

The NCUA has determined that this final rule will not affect family
well-being within the meaning of Section 654 of the Treasury and
General Government Appropriations Act, 1999.\47\ The regulatory
requirements are exclusively concerned with succession planning
policies of FICUs for replacing vacancies among board members and other
key management officials. While the final rule is intended to maintain
access to quality credit union services by reducing unplanned or forced
consolidations, the potential positive effect on family well-being,
including financial well-being is, at most, indirect.
---------------------------------------------------------------------------

\47\ Public Law 105-277, 112 Stat. 2681 (1998).
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List of Subjects

12 CFR Part 701

Credit, Credit unions, Reporting and recordkeeping requirements.

12 CFR Part 741

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

By the National Credit Union Administration Board, this 17th day
of December 2024.
Melane Conyers-Ausbrooks,
Secretary of the Board.

For the reasons stated in the preamble, the NCUA Board amends 12
CFR parts 701 and 741, as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNION

0
1. The authority citation for part 701 continues to read as follows:

Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759,
1761a, 1761b, 1766, 1767, 1782, 1784, 1785, 1786, 1787, 1788, 1789.
Section 701.6 is also authorized by 15 U.S.C. 3717. Section 701.31
is also authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and
3601-3610. Section 701.35 is also authorized by 42 U.S.C. 4311-4312.

0
2. Amend Sec. 701.4 by:
0
a. Revising paragraph (b)(3).
0
b. Adding paragraph (e).
The addition and revision to read as follows:

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

* * * * *
(b) * * *
(3) At the time of election or appointment, or within a reasonable
time thereafter, not to exceed six months, have at least a working
familiarity with, and to ask, as appropriate, substantive questions of
management and the internal and external auditors of:
(i) Basic finance and accounting practices, including the ability
to read and understand the Federal credit union's balance sheet and
income statement; and
(ii) The Federal credit union's succession plan established
pursuant to paragraph (e) of this section.
* * * * *
(e) Succession planning requirements. (1) General. A federal credit
union must establish a written succession plan as provided in this
paragraph that is approved by the board of directors and consistent
with the credit union's size and complexity. In evaluating whether a
succession plan meets the requirements of this paragraph, the NCUA will
consider the size of the federal credit union, as well as the
complexity and risk of its operations.
(2) Covered positions. The succession plan shall, at a minimum,
cover the following positions, or their equivalent if the federal
credit union has adopted different position titles:
(i) Members of the board of directors;
(ii) Management officials and assistant management officials, as
those terms are defined in Appendix A, if provided for in the federal
credit union's bylaws, and, to the extent not already covered, the
senior executive officers identified in Sec. 701.14(b)(2); and
(iii) Any other personnel the board of directors deems critical
given the federal credit union's size, complexity, or risk of
operations. This includes new positions that may be required due to
planned changes in operations, supervisory landscape, or corporate
structure.
(3) Contents of succession plan. The succession plan must, at
minimum, contain the following information regarding each of the
positions covered under paragraph (e)(2) of this section:
(i) The title for each covered position and the expiration of the
incumbent's term (if serving in a term-limited capacity) or other
anticipated vacancy date if known (such as the incumbent's retirement
eligibility date or announced departure date).
(ii) The federal credit union's plan for permanently filling
vacancies for each of the positions.
(iii) The federal credit union's strategy for recruiting candidates
with the potential to assume each of the positions.The strategy must
consider how the selection and diversity of skills among the employees
covered by the succession plan collectively and individually promotes
the safe and sound operation of the federal credit union.
(4) Board responsibilities. The board of directors must:
(i) Approve a written succession plan that meets the requirements
of paragraphs (e)(2) and (e)(3) of this section; and
(ii) Review, and update as necessary, the succession plan in
accordance with a schedule established by the board of directors but no
less than every 24 months.

[[Page 104877]]

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 Sec. 741.228 to read as follows:

Sec. 741.228 Succession planning.

Any credit union that is insured pursuant to Title II of the Act
must adhere to the requirements in Sec. 701.4(b)(3) and (e) of this
chapter, to the extent these regulatory provisions do not conflict with
an applicable state requirement.

[FR Doc. 2024-30449 Filed 12-23-24; 8:45 am]
BILLING CODE 7535-01-P