Corporate Governance: NCUA's Controls and Related Procedures for
Board Independence and Objectivity Are Similar to Other Financial
Regulators, but Opportunities Exist to Enhance Its Governance
Structure (30-NOV-06, GAO-07-72R).
During recent congressional hearings and in public speeches,
statements made by the National Credit Union Administration's
(NCUA) Chairman and another board member raised congressional
interest in the ability of NCUA to collect and objectively
analyze data on credit union membership and executive
compensation. More generally, these statements also raised issues
about the agency's overall vigilance as a regulator and the
independence and objectivity of NCUA's board and senior staff
from the industry being regulated. As a result, Congress asked us
to expand upon our current work looking at the tax-exempt status
of credit unions to include a review of governance policies and
procedures for NCUA's board of directors and senior staff and
more specifically how the policies and procedures address
independence and objectivity issues. This correspondence (1)
compares controls and related procedures applicable to NCUA that
help ensure the independence and objectivity of its board members
with those of other federal financial regulatory agencies and
relevant recommended management practices identified in academic
and industry literature and (2) describes NCUA's use of Schedule
C staff compared with that of other federal financial regulatory
agencies.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-72R
ACCNO: A63784
TITLE: Corporate Governance: NCUA's Controls and Related
Procedures for Board Independence and Objectivity Are Similar to
Other Financial Regulators, but Opportunities Exist to Enhance
Its Governance Structure
DATE: 11/30/2006
SUBJECT: Agency proceedings
Credit unions
Evaluation criteria
Internal controls
Policy evaluation
Professional ethics
Regulatory agencies
Strategic planning
Board of directors
Policies and procedures
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GAO-07-72R
* [1]Results in Brief
* [2]Background
* [3]Controls Addressing NCUA Board Member Independence Generally Are
Similar to Those of the Other Federal Financial Regulators, with Some
Notable Exceptions
* [4]NCUA's Use of Schedule C Appointees Was Similar to That of the
Other Federal Financial Regulators
* [5]Conclusions
* [6]Recommendations for Executive Action
* [7]Agency Comments and Our Evaluation
* [8]Comments from the National Credit Union Administration
* [9]Ordering Information
November 30, 2006
The Honorable William M. Thomas
Chairman, Committee on Ways and Means
House of Representatives
Subject: Corporate Governance: NCUA's Controls and Related Procedures for
Board Independence and Objectivity Are Similar to Other Financial
Regulators, but Opportunities Exist to Enhance Its Governance Structure
Dear Mr. Chairman:
During recent congressional hearings and in public speeches, statements
made by the National Credit Union Administration's (NCUA) Chairman and
another board member raised congressional interest in the ability of NCUA
to collect and objectively analyze data on credit union membership and
executive compensation. More generally, these statements also raised
issues about the agency's overall vigilance as a regulator and the
independence and objectivity of NCUA's board and senior staff from the
industry being regulated.
As a result, you asked us to expand upon our current work looking at the
tax-exempt status of credit unions to include a review of governance
policies and procedures for NCUA's board of directors and senior staff and
more specifically how the policies and procedures address independence and
objectivity issues.^1 This correspondence (1) compares controls and
related procedures applicable to NCUA that help ensure the independence
and objectivity of its board members with those of other federal financial
regulatory agencies and relevant recommended management practices
identified in academic and industry literature and (2) describes NCUA's
use of Schedule C staff compared with that of other federal financial
regulatory agencies.^2
To address our objectives, we reviewed statutory criteria for the
selection of board members and commissioners at NCUA and six other federal
financial regulatory agencies: the Commodity Futures Trading Commission
(CFTC), Farm Credit Administration (FCA), Federal Deposit Insurance
Corporation (FDIC), Federal Housing Finance Board (FHFB), the Board of
Governors of the Federal Reserve System (Federal Reserve), and the
Securities and Exchange Commission (SEC). We selected these six agencies
for our comparison because they are all financial regulators with either a
board
United States Government Accountability Office
Washington, DC 20548
^1See GAO, Credit Unions: Greater Transparency Needed on Who Credit Unions
Serve and on Senior Executive Compensation Arrangements, GAO-07-29
(Washington, D.C.: Nov. 30, 2006).
^2Schedule C appointees, frequently called political appointees, generally
are noncompetitive and noncareer; that is, they are appointed without
regard to the rules for competition that govern career appointees.
Schedule C appointments are not subject to Senate confirmation.
of directors or a commission as their governing structure, similar to
NCUA. For each of the agencies, we analyzed and compared the statutory
criteria for qualifications of board or commission membership, the
backgrounds and experience of board members and commissioners, statutory
requirements for board structure and composition, agency guidance and
other related documents, and the agencies' use of Schedule C staff. We
interviewed officials from the staff and board of NCUA, as well as
officials from other federal financial regulatory agencies. We also
analyzed academic and industry literature on recommended management
practices as the literature relates to board composition, structure, and
independence issues. We conducted our work in Washington, D.C., from June
2006 through November 2006, in accordance with generally accepted
government auditing standards.
Results in Brief
Similar to the other regulators, NCUA is subject to statutory criteria and
federal standards on the independence and objectivity of board members,
but five of the six other regulators have additional controls and
procedures relating to independence. More specifically, the primary
criteria and standards addressing independence and objectivity of board
members that we identified at NCUA and the other six regulators are based
on (1) statutory criteria for individual qualifications and the
composition of the boards and commissions we reviewed, and (2) rules
promulgated by the Office of Government Ethics (OGE) setting forth ethical
standards for employees in the executive branch.^3 For example, the OGE
regulations address ethics and financial conflicts of interest matters
that apply to all federal employees, and the Federal Credit Union Act
(FCUA), like the enabling legislation of five of the six other regulators,
addresses board independence through such provisions as fixed term limits
for board members and apportionment of political party representation.^4
Unlike NCUA, five of the six other regulators have additional controls and
procedures that address independence, including agency-specific rules that
address conflicts of interest and independence, or the recognition of the
importance of independence in the agency's mission statement or values
written in their strategic plans. The qualifications for NCUA board
membership, as written in FCUA, are similar to the qualifications for
board members or commissioners at four of the six other agencies we
reviewed in that they seek to ensure that nominees are suited by education
or experience for the positions they are to serve. In addition, we
compared the professional backgrounds and qualifications of current and
prior NCUA board members and found them to be similar. Our review of
available literature indicated that NCUA's board follows several
recommended management practices for independence, many of which are
included in FCUA. However, there is one notable exception. While NCUA's
enabling legislation limits the NCUA board to three members, some academic
and industry sources suggest there should be a minimum of five members on
a board of directors to help maintain independence, retain needed
expertise, and enable continuity of leadership. Further, some of NCUA's
board members told us that having a three-member board sometimes made
communicating among the members complicated because of the Government in
the Sunshine Act, which largely limits nonpublic meetings of the majority
of the board (in this case, two board members).^5 Additionally, we
recommended in 1991 that NCUA's board be expanded to five members, in
part, to achieve a broader perspective on financial market regulatory and
insurance issues.^6
3Executive branch employees are subject to OGE's Standards of Ethical
Conduct for Employees of the Executive Branch. The Standards includes
rules governing gifts from outside sources, gifts between employees,
conflicting financial interests, impartiality in performing official
duties, seeking other employment, misuse of position, and outside
activities. See 5 C.F.R. Part 2635 (2006).
^4The Federal Reserve Act does not contain a restriction on party
affiliations of the Board of Governors. 12 U.S.C. S 241.
NCUA's use of Schedule C positions generally was similar to the practices
at five regulators that we contacted that had Schedule C staff. The
selection of Schedule C staff rests with the NCUA Chairman or individual
board member, subject to White House approval, and does not require input
from NCUA career staff. We reviewed the backgrounds of the seven NCUA
Schedule C appointees and identified four who were formerly affiliated
with the same credit union industry trade group (three were former
employees and one held key positions in various committees of the trade
group). Of the four NCUA Schedule C appointees with prior ties to the
trade group, two are senior policy advisors to NCUA board members, one is
the Director of Public Affairs and Congressional Relations, and one is a
staff assistant to a board member. NCUA officials told us that Schedule C
appointees that have trade group experience are viewed as beneficial to
board members in discharging their regulatory responsibilities. In
particular, the officials explained that the senior policy advisors that
have come from credit union industry trade groups have brought an in-depth
understanding of credit union issues as well as industry contacts.
This correspondence includes a recommendation that the NCUA Chairman
consider adopting practices that the other financial regulators use to
enhance NCUA controls for independence and objectivity. Further,
consistent with our 1991 report, we believe that consideration should be
given to exploring the potential benefits and costs associated with
increasing the number of NCUA board members.
We provided a draft of this report to the Chairman, NCUA, and the heads or
designees of CFTC, FCA, FDIC, FHFB, the Federal Reserve, and SEC for their
review and comment. NCUA provided written comments which are discussed at
the end of this correspondence and are reprinted in enclosure 1. NCUA,
FCA, FDIC, and the Federal Reserve provided technical comments that we
incorporated into the report, as appropriate. With respect to our
recommendations, NCUA stated it was not opposed to adopting
agency-specific ethics guidelines or including independence and
objectivity as part of its values and mission in future versions of its
strategic plan. In this regard, NCUA stated that it explicitly included
the concept of independence and objectivity in its 2007 Annual Performance
Budget. NCUA also stated that it did not agree that Congress should
increase the size of the NCUA board. NCUA stated that in its view, the
costs and reduced efficiencies outweigh any potential benefits.
Specifically, NCUA estimated that the cost of salaries, benefits, and
other expenses for two additional board members and their staff would be
at least $1.1 million annually. Moreover, NCUA stated that increasing the
size of the board would make agency processes more time-consuming and less
efficient. While we acknowledge there would be some financial and
potential efficiency costs associated with increasing the board size at
NCUA, we continue to believe it would be worthwhile to review the
potential benefits an expanded board may provide. NCUA has sometimes
experienced lengthy board vacancies, which resulted at times in a board of
less than three active members, potentially offsetting the full benefits
of a multimember board structure. The benefits of a larger board could
include, among other things, continuity of expertise and decision making
on the board, improved communication among board members, and greater
parity with the other regulatory agencies. Consistent with the literature
on corporate governance practices, we believe the size of the board should
be periodically reviewed to ensure that the agency has the most
appropriate board size for its current resources and responsibilities.
^5The Government in the Sunshine Act, 5 U.S.C. S552b, declares that the
public is entitled to the fullest practicable information on the decision
making processes of the federal government. The act applies to agencies
headed by a collegial body of two or more individual members appointed by
the President and confirmed by the Senate. Accordingly, the act requires
those agencies to open their meetings to public observation, except in
instances where the agencies find that disclosure of information discussed
at the meetings could be detrimental to the public interest. Agencies must
maintain a complete transcript, electronic recording, or minutes (as
specified in the act) of meetings closed to the public, in accordance with
the act. These records are publicly available, unless the agency
determines under exemptions provided in the act that the information
should not be disclosed.
^6GAO, Credit Unions: Reforms for Ensuring Future Soundness, GAO/GGD-91-85
(Washington, D.C.: Jul. 10, 1991), 197.
Background
NCUA is an independent agency of the executive branch and has oversight
authority for federally chartered credit unions. FCUA requires federal
credit unions to obtain federal share (deposit) insurance from the
National Credit Union Share Insurance Fund. This fund, administered by
NCUA, also provides share insurance to most state-chartered credit unions,
and NCUA shares oversight responsibilities for safety and soundness issues
with state regulators in these cases. As of December 2005, there were 958
employees at NCUA and the agency oversaw nearly 8,700 federally insured
credit unions--about 5,400 federally chartered and 3,300
state-chartered--with about $679 billion in total assets.^7
FCUA was amended in 1978 to create a three-member board of directors to
manage NCUA.^8 According to NCUA representatives, the change in leadership
structure from a single administrator was in response to the more complex
and increasing responsibilities of NCUA and to make NCUA's governing
structure more like those of other federal regulators of financial
institutions.^9 FCUA specifies that the President, with the advice and
consent of the Senate, appoint each of the NCUA board members to 6-year
staggered terms. In appointing the members of the board, the President
also designates the chairman. Additionally, the act specifies that not
more than two members of the board be members of the same political party.
Further, FCUA specifies that members shall be chosen to represent the
public interest and consideration be given to individuals with education,
training, or experience relating to a broad range of financial services,
financial services regulation, or financial policy. Finally, according to
the act, not more than one board member may be appointed who, at the time
of appointment, was or had recently been involved with any insured credit
union as a committee member, director, officer, employee, or other
institution-affiliated party.
^7According to NCUA's Web site, there are currently fewer than 500
non-federally insured state-chartered credit unions. Non-federally insured
credit unions are not subject to NCUA regulation.
^8Pub. L. No. 95-630 (Nov. 10, 1978).
Controls Addressing NCUA Board Member Independence Generally Are Similar
to Those of the Other Federal Financial Regulators, with Some Notable
Exceptions
As is the case with the other regulators we reviewed, provisions in NCUA's
enabling legislation and OGE's rules on independence guide NCUA
independence and objectivity standards. NCUA's current board members have
professional experience and knowledge that were generally similar to the
experience and knowledge of past NCUA board members. NCUA follows several
of the recommended management practices for board independence that we
identified in our review of relevant literature and research, although
some sources, including GAO, recommended a larger board size.
Controls over Board Independence and Objectivity at NCUA and the Other
Regulators Primarily Are Based on the Agency's Enabling Legislation and
Executive Branch Ethics Rules
Standards and regulations addressing the independence and objectivity of
NCUA board members generally are similar to those at other financial
regulatory agencies, but NCUA officials stated they have no additional
policies or controls outside of what is provided in law. Most of the
policies applicable to NCUA and these other agencies that address board
member independence are established in law specific to the agencies,
specifically each agency's enabling legislation. Table 1 shows the
controls in place at NCUA and the six other agencies we reviewed. For
example, FCUA addresses independence of NCUA's board members from
political pressures by creating fixed term limits for board members and
limiting the number of board members who are members of the same political
party. In the enabling legislation of the other agencies we reviewed, all
six include fixed term limits, and five of the six limit the number of
board members or commissioners who are members of the same political
party. NCUA and the six other agencies identified OGE's rules for ethical
conduct as another authority for addressing board independence and
objectivity. In addition to the controls listed in table 1, FCUA addresses
the independence of NCUA's board members from professional associations by
limiting the number of board members who have recent credit union
experience.
^9In support of this statement, NCUA representatives referred to a report
by the Senate Committee on Banking, Housing and Urban Affairs issued in
connection with a bill from the previous Congress that contained language
replacing an administrator with a board. See S. Rep. No. 94-751.
Table 1: Comparison of Agency Controls and Procedures Addressing Board
Member Independence and Objectivity
Federal
Control NCUA CFTC FCA FDIC FHFB Reserve SEC
Board members / commissioners serve a o o o o o o o
fixed term
Have political party affiliation rules o o o o o o
Undergo White House nomination and o o o o o o o
Senate confirmation process
Subject to OGE ethical standards and o o o o o o o
federal ethics rules
Source: GAO.
According to officials at NCUA and the six other financial regulatory
agencies, they relied on OGE rules and ethics guidance on financial and
personal conflicts of interest to address board member independence. Among
other things, OGE's Standards of Ethical Conduct for Employees of the
Executive Branch prohibit federal employees from having financial and
personal conflicts of interest that conflict with their official duties.
OGE also prohibits federal employees from accepting gifts worth more than
$20 that are presented to the employees because of their position or by
prohibited sources, which for NCUA would be a regulated credit union or
its representatives. During our interviews, NCUA officials focused on the
importance of identifying potential financial conflicts of interest; as
required by the Ethics in Government Act, NCUA requires board members to
file a financial disclosure statement annually with the agency-designated
ethics officer. ^10 NCUA's ethics officer serves as the primary contact
for board members for guidance on ethics matters, and frequently interacts
with board members. The officer also reviews gifts and invitations sent to
board members for any possible conflicts or to determine prohibitions.
When financial conflicts of interest arise, board members either must
recuse themselves from any matter involving their financial interest or
divest the asset. When we spoke with officials at the six other agencies,
they all pointed to the same OGE financial disclosure policy as their
primary tool for monitoring and enforcing independence from financial
conflicts of interest.
According to NCUA officials, NCUA exclusively relies on standards
contained in FCUA and OGE ethics rules to monitor board member
independence, while officials from five of the six other agencies we
reviewed stated their agencies are subject to some additional rules, some
of which are designed to maintain independence from the industry they
regulate. For example, SEC had established a "Canons of Ethics," which the
agency uses in addition to OGE's guidance. FHFB has adopted written
standards of conduct addressing, among other things, relationships and
communications between FHFB directors and employees and entities subject
to FHFB supervision. CFTC, FCA, and the Federal Reserve also have
additional rules for their board members and agency employees regarding
asset holdings specific to the industries they regulate.
^10See 5 U.S.C. Appendix - Ethics S 101.
In its 2006-2011 strategic plan, NCUA did not include the terms
"independence" or "objectivity" either as a value or as part of its
mission statement, but two of the six other financial regulatory agencies
included independence in their strategic plans as part of mission and
value statements. Generally, agencies write and adopt value and mission
statements in their strategic plans to guide the organization with clear
goals and operating principles. FHFB listed independence as its first
value, stating that "the Finance Board is the arm's length regulator of
the FHLBanks [Federal Home Loan Banks] and OF [Office of Finance]."^11 In
another example, the Federal Reserve included "independence of views" as
one of its guiding values.
NCUA board members said NCUA has no controls or procedures in place that
directly addressed objectivity. Although NCUA has no official guidance,
the board members stated that when considering issues related to
objectivity, they rely on OGE's rules and guidance, NCUA's strategic plan,
and FCUA to guide their regulatory policy decisions. Specifically, one
board member stated that objectivity, as well as independence, had been a
central theme of the White House interviews during the nomination process,
and that although NCUA has no written guidance for objectivity, the
obligation to be objective was well understood among board members.
NCUA Board Member Qualifications and Professional Backgrounds Generally
Are Similar to Those for Other Financial Regulators
The professional qualifications of board members at NCUA and at four of
the six other financial regulatory agencies are determined statutorily,
but are broadly similar. NCUA and the other agencies have no authority in
deciding who constitutes the board of directors or commission, as this
authority rests solely with the President and the Senate. FCUA specifies
that when appointing NCUA board members, the President shall give
consideration to individuals who have education, training, or experience
relating to financial services, financial services regulation, or
financial policy. These qualifications are similar to those at four of the
six other financial regulatory agencies we reviewed. Table 2 presents
board member qualifications and restrictions as stated in each agency's
enabling legislation. For example, both NCUA and FCA list experience with
and knowledge of financial regulation as one possible qualification for
board membership. NCUA's statute also states that no more than one member
of the board may have recent involvement with an insured credit union as a
committee member, director, officer, employee, or other
institution-affiliated party, although including an individual with recent
credit union experience on NCUA's board is not a requirement. FDIC's
statute requires that one of the three appointed members must have state
bank supervisory experience. Of the six other agencies, the Federal
Reserve and SEC did not have specific language regarding prior
professional experience.
^11FHLBanks are the 12 Federal Home Loan Banks that, along with the Office
of Finance, constitute the Federal Home Loan Bank System.
Table 2: Statutory Appointment Considerations for Board or Commission
Members, Including Professional Experience, by Selected Agencies
Regulator (number of Considerations regarding education, knowledge,
board members) professional experience, and public interest served,
or other qualifications
NCUA (3) o In considering an appointment to the NCUA board,
the President shall consider individuals who are
specially qualified to serve on the board by
virtue of their education, training, or experience
relating to a broad range of financial services,
financial services regulation, or financial
policy.
o Not more than one member of the board may be, or
have recently been, involved with any insured
credit unions as a committee member, director,
officer, employee, or other institution-affiliated
party.
CFTC (5) o The President shall select for nomination
persons who have demonstrated knowledge in futures
trading or its regulation, or the production,
merchandising, processing, or distribution of one
or more of the commodities or other goods and
articles, services, rights, and interests covered
by the Commodity Exchange Act.
o In nominating persons for appointment, the
President shall seek to ensure that the
demonstrated knowledge of the commissioners is
balanced with respect to the areas listed above.
FCA (3) o The board shall consist of three members, who
shall be citizens of the United States and broadly
representative of the public interest.
o The President shall appoint members of the board
who are experienced or knowledgeable in
agricultural economics and financial reporting and
disclosure; experienced or knowledgeable in the
regulation of financial entities; or have a strong
financial, legal, or regulatory background.
FDIC (5) o Three members shall be appointed by the
President, from among individuals who are citizens
of the United States, one of whom shall have state
bank supervisory experience.
o One shall be the Comptroller of the Currency.
o One shall be the Director of the Office of
Thrift Supervision.
FHFB (5) o The appointed directors shall be among persons
with extensive experience or training in housing
finance or with a commitment to providing
specialized housing credit.
o Not more than one appointed director shall be
from any single district of the Federal Home Loan
Bank System.
o At least one director shall be chosen from an
organization with more than a 2-year history of
representing consumer and community interests on
banking services, credit needs, housing, or
financial consumer protection.
o One director shall be the Secretary of Housing
and Urban Development.
Federal Reserve (7) o In selecting members of the board, not more than
one shall be selected from any one Federal Reserve
district.
o The President shall have due regard to a fair
representation of the financial, agricultural,
industrial, and commercial interests, and
geographical divisions of the country.
SEC (5) None.^a
Sources: Commodity Exchange Act, 7 U.S.C S 2a(2); Farm Credit Act, 12
U.S.C. S2242; Federal Deposit Insurance Act, 12 U.S.C. S 1812; Federal
Home Loan Bank Act, 12 U.S.C. S 1422a; Federal Reserve Act, 12 U.S.C. S
241; Federal Credit Union Act, 12 U.S.C. S 1752a; Securities Exchange Act,
15 U.S.C. S 78d.
^aThe Securities Exchange Act and the Federal Reserve Act do not specify
professional background or knowledge requirements for SEC commissioners
and Federal Reserve governors.
We also reviewed the professional experience of NCUA's current board
members and compared their experience with that of the 14 former NCUA
board members. The current board members fulfill FCUA's guidelines for
experience. Specifically, one member has recent credit union experience,
one has financial policy experience, and the third has financial services
experience. We also found that current and past board members had similar
professional experiences and qualifications. For example, current board
members previously worked as lawyers, state senators, and non-credit union
bankers. Of NCUA's 14 prior board members, 3 had been lawyers, 3 had been
state or federal legislators, and 3 had been non-credit union bankers.
NCUA Board Follows Several Recommended Practices for Independence, but Its
Size Does Not Reflect Recommended Practices and May Hinder Communication
among Board Members
Our review of available literature indicated NCUA's board follows several
recommended management practice standards, many of which are written into
law. We reviewed literature specific to recommended management practices
for independence at federal regulatory agencies and were able to identify
some management practices applicable to NCUA.^12 Practices and policies
for independence at federal regulatory agencies build upon the following
characteristics and structures:
o a multimember commission helps ensure consistency and continuity
of decision making over time and would be less likely to be
influenced by the views of any one individual;
o separation of regulatory and operations functions;
o freedom from direct political pressure;
o fair and transparent procedures; and
o an arm's length relationship with regulated firms, consumers,
and other private interests.
FCUA provides for the multimember board by requiring a three-member board
of directors, and addresses freedom from direct political pressure by
having board members serve fixed terms and limiting the number of members
who may be members of the same political party. As provided for in the
statute, NCUA Delegations of Authority separate the regulatory and
operations functions by making the board responsible for regulatory policy
functions and field examiners and staff responsible for operational
functions. Further, the Government in the Sunshine Act helps ensure
transparency by requiring that complete transcripts, electronic
recordings, or minutes (as specified in the act) of board meetings closed
to the public be made publicly available, unless the agency determines
under exemptions provided in the act that such information should not be
disclosed. NCUA also allows for and encourages public comment on credit
union policy decisions before they are finalized. NCUA board members
stated that their relationships with member credit unions and trade groups
are important for understanding the issues affecting the credit union
industry, but that NCUA gathers information from all sources before making
any policy decisions and weighs the information from NCUA examiners and
career staff more heavily than information from other sources.
^12Warrick Smith, "Utility Regulators - The Independence Debate," The
World Bank Group, Public Policy for the Private Sector, Note no. 127
(October 1997). Marc Quintyn and Michael W. Taylor, "Regulatory and
Supervisory Independence and Financial Stability," CESifo Economics
Studies, 49 (February 2003). Federal Communication Commission, Connecting
the Globe: A Regulator's Guide to Building a Global Information Community
(Washington, D.C.: June 1999).
We also reviewed literature on corporate governance that related to
recommended management practices for board structure and size, which
generally suggests boards of directors have a minimum of five members.^13
Corporate governance literature typically is targeted to publicly traded
corporations or nonprofit organizations and not federal regulatory
agencies, but we identified some elements of the recommended management
practices that are applicable to NCUA. Among the sources we reviewed,
several stated that board size is not one-size-fits-all and should be
based on the needs and complexity of the organization, and some also
suggest a minimum of five members on a board of directors would be needed
to maintain independence and retain needed expertise. Furthermore, a board
that is too small may allow for one member to exert greater influence over
the other members. The literature also suggests the size of the board
should be reevaluated periodically to ensure that it remains appropriate
for the organization. Situations that could potentially detract from a
larger board's effectiveness include increased difficulties in reaching
consensus on issues and the ability of the board to act expeditiously on
matters needing its attention.
Although FCUA provides for a multimember board, the board has not always
experienced continuity in full membership. Figure 1 shows the periods
during which the NCUA board had fewer than three active members. When a
board has a vacancy, it could potentially offset the benefits of a
multimember board structure, such as a diversity of perspectives,
experience, and political party representation among board members. Since
1990, there have been two periods of 12 or more consecutive months when
NCUA's board had two active members, and in a recent 45-day period, NCUA
has had one active board member.
Figure 1: NCUA Board Membership Vacancies, 1979-2006
According to two of the three NCUA board members, communication among the
board members is sometimes complicated by the small size of the board and
Government in the Sunshine Act disclosure provisions that require that a
meeting involving deliberation regarding official agency business be made
public if it is attended by a majority of board members (for NCUA, two
members). Because any discussion among NCUA board members would involve a
minimum of two people, members are not allowed to discuss and deliberate
official agency business outside of monthly board meetings unless they
release a transcript of the discussion. To comply with such rigorous
disclosure requirements, NCUA board members instead communicate with each
other through their senior policy advisors, which one board member
mentioned was "particularly challenging." One board member noted that the
three-member board structure makes it easier to schedule meetings.
However, with five or more members, a board gains the ability to create
subcommittees and distribute tasks among these subcommittees and, for
agencies covered by the Government in the Sunshine Act, allows for
flexibility in communicating among members. Officials at FDIC and the
Federal Reserve noted that their boards have subcommittees that work
independently and report to the full board. Of the six other federal
financial regulatory agencies we reviewed, only FCA has fewer than five
members.
^13Holly J. Gregory, Comparison of Corporate Governance Guidelines and
Codes of Best Practice (New York: Weil, Gotshal & Manges, LLP: January
2006).
Although FDIC had a three-member board in 1979, Congress expanded it to
five members in 1989 in response to the increased responsibilities FDIC
assumed from absorbing the Federal Savings and Loan Insurance Corporation.
NCUA also has had an increase in responsibility, particularly in the last
decade. Over this time, the credit union industry has changed
substantially, and credit unions now compete more directly with similarly
sized banks and thrifts. For example, recent charter conversions have
greatly increased the number of federal credit unions that have
geographic-based fields of membership (community charter credit unions).
The movement away from the more traditional occupation- or employer-based
fields of membership (single- and multiple-bond credit unions) has
resulted in credit unions being in more direct competition with banks for
members in those geographic areas included in the credit union's field of
membership. Additionally, the overall number of federally chartered credit
unions has declined, but larger credit unions, in terms of total assets,
have emerged. The larger credit unions offer products traditionally
associated with banks and thrifts such as real estate and business loans,
which has further blurred the distinctions between credit unions and
banks.
In 1991, we recommended that NCUA's board size be increased, in part to
bring to the board a broader perspective on financial market regulatory
and insurance issues.^14 We made this recommendation to reflect changes in
credit union activities, such as the introduction of real estate lending
and the increase in membership and assets held at credit unions.^15 In its
comments on our 1991 report, NCUA disagreed with our recommendation,
stating that it would be difficult to hold board meetings with all members
present and that frequent vacancies among the appointed membership would
mean the agency could face disproportionate influence from the ex officio
members.
^14GAO/GGD-91-85, 197.
^15NCUA's oversight responsibilities, in terms of total credit union
assets and insured share deposits, have continued to increase
substantially. As of December 2005, federally insured credit unions held
$678.7 billion in assets and had $515.6 billion in insured share deposits
compared to $195.3 billion in assets and $178 billion in insured share
deposits in June 1990.
NCUA's Use of Schedule C Appointees Was Similar to That of the Other
Federal Financial Regulators
The use of Schedule C appointees at NCUA generally was similar to that of
the other federal regulators that we reviewed that had Schedule C
appointees.^16 NCUA's Schedule C appointees are subject to the previously
mentioned OGE ethics and conflict of interest regulations that focus
primarily on ethics and independence matters. Of NCUA's seven Schedule C
appointees, four had been previously affiliated with one specific credit
union trade group. NCUA officials noted that the industry knowledge that
the Schedule C appointees gained from their trade group experiences have
been beneficial to board members.
Schedule C appointments generally are made without regard to the rules for
competition that govern career appointments. Schedule C appointees receive
noncompetitive appointments to positions graded GS-15 and below that
involve determining policy or other key close, confidential relationship
with the agency head or other key appointed officials of the agency.
Agency heads or key appointed officials may dismiss Schedule C appointees
at any time, and such appointees generally leave their positions at the
end of an administration. The Office of Personnel Management (OPM) reviews
and authorizes agency applications for use of Schedule C positions.
However, OPM does not review the qualifications of a Schedule C appointee,
and final authority rests with the appointing officials.
Similar to board or commission members at four of the other five
regulators with Schedule C positions, NCUA board members have the
authority to select Schedule C personal staff, while the chair has
additional authority to select individuals for positions allocated to
staff offices. NCUA and three agencies allot Schedule C positions to head
similar staff offices. For example, NCUA, CFTC, FCA and FDIC each have a
Schedule C appointee as the director of their respective public or
external affairs offices. Table 3 presents information on the Schedule C
positions at the financial regulators.
^16The Federal Reserve did not have Schedule C positions.
Table 3: Allotment of Schedule C Appointees at Financial Regulators, as of
September 15, 2006
Financial Positions allocated to
regulatory agency the chair and board
(total agency (number of appointments Positions allocated to
employees)^a if greater than one) program offices Total^b
NCUA (958) o Chief of staff to o Director, Office 7^c
the chair of Public and
o Staff assistant to Congressional
the board members (2) Affairs
o Senior policy o Associate
advisor to the board Director of
members (2) External Affairs
CFTC (485) o Chief of staff o Chief Economist 10
o Administrative o Director, Office
assistant to chief of of External Affairs
staff o General Counsel
o Administrative
assistant to the
commissioner (2)
o Special assistant to
the commissioner (2)
o Attorney advisor
FCA (254) o Chief of staff o Director, Office 4
o Executive assistant of Congressional
to board member (2) and Public Affairs
FDIC (4514) o Chief of staff o Director, Office 2
of Public Affairs
and Deputy Chief of
Staff
FHFB (147) o Staff assistant to N/A 4
chair
o Counsel to chair
o Special assistant to
board member (2)
Federal Reserve N/A^d N/A N/A
(1,858)
SEC (3,865) o Chief of staff o Speechwriter 16
o Senior advisor to o Director,
the chair Legislative Affairs
o Confidential o Legislative
assistant to the chair affairs specialist
o Confidential (2)
assistant to the o Investor advocate
commissioners (4) o Confidential
assistants to the
division directors
(4)
Source: GAO.
^aFigures refer to either total staff members, full time equivalents, or
average number of personnel. Employee figures are from most recent
information available at the time of our review.
^bNumber reflects positions filled at the time of our review.
^cOPM has authorized a total of nine NCUA Schedule C appointments. At the
time of our review, the Public Affairs Specialist (Media Manager) position
was not filled. Additionally, while the NCUA chairman is authorized a
Schedule C staff assistant position, an NCUA career employee currently
holds the position.
^dNot Applicable. The Federal Reserve did not have any Schedule C
appointees.
According to NCUA officials, the decision to select Schedule C staff rests
with the individual board member, subject to White House approval, and
requires no input from NCUA career staff. Board members told us that
Schedule C staff generally have been identified through personal or White
House referrals. Board members supervise and evaluate Schedule C staff. In
addition, all of the board members stressed the importance of having staff
who would complement the board member's knowledge, skill, and abilities
through knowledge of the credit union industry or politics.
NCUA's Schedule C staff are subject to the OGE ethics rules. As mentioned
previously, OGE's Standards of Ethical Conduct for Employees of the
Executive Branch focuses primarily on ethics and conflict of interest
rules and disclosure.^17 Similar to board members, Schedule C staff
complete financial disclosure reports, receive ethics training, and seek
advice and guidance from NCUA's ethics officer on matters involving
potential conflicts of interest.
We reviewed the backgrounds of NCUA's seven Schedule C appointees and
identified four Schedule C appointees who have been associated with the
same credit union industry trade group. Of these four Schedule C
appointees, two are Senior Policy Advisors, one is the Director of Public
Affairs and Congressional Relations, and one is a staff assistant to a
board member. NCUA officials told us that Schedule C appointees that have
trade group experience are viewed as beneficial to board members in
discharging their regulatory responsibilities. The officials explained
that in particular, the senior policy advisors that have come from credit
union industry trade groups have brought an in-depth understanding of
credit union issues as well as industry contacts. A board member further
added that it is difficult to attract and retain staff from outside of the
Washington, D.C., area. We reviewed available Schedule C background
information at four other agencies and found a few examples of trade group
experience.^18 For instance, out of the four Schedule C appointees at FCA,
two appointees had prior trade group experience but came from different
trade groups.
Conclusions
NCUA has a number of controls and procedures in place that address
independence and objectivity of board members that are similar to those at
the six other financial regulatory agencies we reviewed. Generally, the
primary controls for addressing independence and objectivity at all of the
agencies are based on the statutory criteria for individual qualifications
and composition of the boards and commissions as well as rules promulgated
by the Office of Government Ethics. For example, to address political
independence of board members and commissioners, NCUA and the six other
agencies have multimember boards or commissions and the board/commission
members are subject to Senate confirmation and have fixed term limits.
Additionally, NCUA and five of the other agencies have restrictions on the
number of board or commission members that can be of the same political
party. Moreover, NCUA's board and staff, like other federal employees, are
required to adhere to the Office of Government Ethics' Standards of
Ethical Conduct for Employees of the Executive Branch, which sets
standards for maintaining impartiality as well as avoiding conflicts of
interest.
^17OGE's Standards of Ethical Conduct for Employees of the Executive
Branch contains provisions addressing impartiality in performing official
duties. Under 5 C.F.R. S 2635.502, unless they receive prior
authorization, employees should not participate in a particular matter
involving specific parties that they know is likely to affect the
financial interests of a member of their household, or in which they know
a person with whom they have a covered relationship is or represents a
party, if they determine that a reasonable person with knowledge of the
relevant facts would question their impartiality in the matter. Under 5
C.F.R. S 2635.503, employees who have received an extraordinary severance
or other payment from a former employer prior to entering government
service are subject, in the absence of a waiver, to a 2-year period of
disqualification from participation in particular matters in which that
former employer is or represents a party.
^18Of the six other agencies we reviewed, four provided information on the
professional backgrounds of their Schedule C appointees, one did not
provide information, and one did not have any Schedule C appointees.
However, opportunities exist for NCUA and policy makers to address, at
least in part, perception issues regarding its impartiality as a
regulator. In particular, NCUA could consider adopting, with appropriate
modifications, one or more of the additional practices identified by
officials of five of the six other financial regulators that address
regulatory independence and objectivity. For example, NCUA could adopt
additional independence and objectivity guidance similar to FHFB's
Standards of Conduct that required FHFB employees, including its board, to
maintain an arm's length relationship with the regulated industry.
Similarly, NCUA could consider including independence and objectivity as
core values in the agency's strategic plan, similar to FHFB and the
Federal Reserve. By adopting one or more of the practices that the other
regulators use, NCUA would reinforce the message that independence and
objectivity are enduring and achievable values and goals for all staff,
whether they are board members, career staff, or Schedule C appointees.
Finally, consistent with our 1991 report, we continue to believe that
consideration should be given to exploring the potential benefits and
costs associated with increasing the number of NCUA board members. We made
this recommendation, in part, as a reflection of the increasing
involvement of credit unions in activities traditionally associated with
banks and thrifts. These changes are more evident today as credit unions
have expanded their fields of membership and compete more directly with
similarly sized banks and thrifts. Further, NCUA has sometimes experienced
board vacancies, which resulted at times in a board of fewer than three
active members, potentially offsetting the full benefits of a multimember
board structure. Additionally, some NCUA board members have noted that the
public meeting restrictions of the Government in Sunshine Act effectively
at times constrain communication and collaboration between board members,
since any meeting involving two of the board members to deliberate
official agency business must be public. As we noted in 1991, a larger
board would help provide a broader perspective on financial market
regulatory and insurance issues. A larger board also could offer
opportunities to enhance continuity of expertise and decision making on
the board, improve communication between board members, and achieve
greater parity with the other regulatory agencies. As part of these
deliberations, it would be important to consider the potential costs of an
expanded board, including the potential for greater difficulties in
reaching consensus on issues or the board's ability to act expeditiously
on matters needing its attention.
Recommendations for Executive Action
To address perception issues regarding NCUA's independence from and
objectivity about the industry being regulated, we recommend that the
Chairman of NCUA consider adopting practices that other financial
regulators use to enhance their independence and objectivity. These
practices include drafting agency-specific rules to maintain an arm's
length relationship with the regulated industry and including independence
and objectivity as core values in the agency's strategic plan.
Agency Comments and Our Evaluation
We provided a draft of this report to the Chairman, NCUA, and the heads or
designees of CFTC, FCA, FDIC, FHFB, the Federal Reserve, and SEC for their
review and comment. NCUA provided written comments that are reprinted in
enclosure 1. NCUA, FCA, FDIC, and the Federal Reserve provided technical
comments that we incorporated into the report, as appropriate.
In its response, NCUA stated it was not opposed to our recommendation to
consider adopting agency-specific ethics guidance. NCUA further indicated
that it will consider including the concepts of independence and
objectivity as part of its values and mission in its future strategic
plans and in its 2007 Annual Performance Budget. NCUA indicated that
adopting agency-specific ethics standards may not in practice result in
more rigorous standards than those imposed by the Office of Government
Ethics rules. NCUA stated that the general OGE rules prohibiting
participation in any matter that would have a direct and predictable
effect on an employee's financial interest would prohibit the conduct
proscribed by the agency-specific rules, and are sufficient to assure
independence and objectivity of NCUA board members and staff. Our
recommendation is not limited to adopting agency-specific ethics
standards, and the report points out practices of the other regulators,
such as adopting rules that require an arm's length relationship with the
regulated industry that could enhance NCUA's controls for independence and
objectivity and help address perception issues associated with its
impartiality as a regulator.
NCUA also stated in its comment letter that our characterization of the
Government in the Sunshine Act as prohibiting any discussions between two
NCUA board members unless a transcript is produced and released was not
accurate. We changed the report text to clarify that because of the
current size of the board, the Government in the Sunshine Act effectively
prohibits deliberations of official agency business between any of the
NCUA board members outside of board meetings unless they release a
transcript of the discussion in accordance with the act's open meeting
procedures.
NCUA also stated that it did not agree that Congress should increase the
size of the NCUA board. NCUA stated in its view the costs and anticipated
reduced efficiencies involved would outweigh any potential benefits,
estimating the cost of additional board members and their staff to be at
least $1.1 million annually. NCUA also stated that the increasing size and
complexity of the credit union industry was being addressed through its
focus on maintaining an adequate expert field staff, and that the
three-member board was more than adequate to perform the board's role in
establishing safety and soundness regulations and policy. While we
acknowledge there would be some financial and potential efficiency costs
associated with increasing the board size at NCUA, we continue to believe
it would be worthwhile to review the potential benefits an expanded board
may provide. We note that other financial regulatory agencies with broadly
similar duties have operated for many years with boards having five or
more members. As we noted in our report, vacancies on NCUA's board have
sometimes been lengthy, leading the board to operate with two or fewer
members, potentially offsetting the benefits of its multimember board
structure, such as diversity of perspectives, experience, and political
party representation among board members. Additionally, the benefits of a
larger board could include, among other things, enhanced continuity of
expertise and decision making on the board, improved communication among
board members, and greater parity with the other regulatory agencies. We
agree that maintaining an adequate field staff is essential to protecting
the safety and soundness of the credit union industry, but believe that it
is the responsibility of a balanced board to bring a diversity of
perspectives and experience to board deliberations and to provide a
broader perspective on financial market regulatory and insurance issues.
Although Congress did not adopt our 1991 recommendation to expand NCUA's
board, we believe that, consistent with the literature on corporate
governance practices, the size of the board should be periodically
reviewed to ensure that the agency has the most appropriate board size for
its current resources and responsibilities.
- - - - -
As we agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution of it until 30
days from the date of this letter. At that time, we will send copies of
the report to the Ranking Member, House Committee on Ways and Means; other
interested congressional committees and subcommittees; the Chairman, NCUA;
and the Chairmen of CFTC, FCA, FDIC, FHFB, the Federal Reserve, and SEC.
We will make copies available to others upon request. In addition, the
report will be available at no charge on the GAO Web site at
http://www.gao.gov .
If you have any questions concerning this report, please contact me at
(202) 512-8678. Contact points for our Office of Congressional Relations
and Public Affairs may be found on the last page of this report. Key
contributors to this assignment were Harry Medina, Assistant Director;
Janet Fong; Danielle Novak; Barbara Roesmann; and Paul G. Thompson.
Sincerely yours,
Yvonne D. Jones
Director, Financial Markets
and Community Investment
Comments from the National Credit Union Administration
(250302)
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