**Please note that the following rule is the version that was approved
by the NCUA Board. The official version is published in the Federal
Register approximately one week after Board approval. There may be some
minor numbering or format differences between the two versions.**

**7535-01-U**

**NATIONAL CREDIT UNION ADMINISTRATION**

# 

# 12 CFR Parts 708a and 708b 

### RIN 3133-AD40

### 

### Mergers, Conversion from Credit Union Charter, and Account Insurance Termination

**AGENCY:** National Credit Union Administration (NCUA).

**ACTION:** Advance notice of proposed rulemaking and request for
comment (ANPR).

**SUMMARY:** NCUA is considering whether to issue regulations to govern
merger of a federally insured credit union (FICU) into or a FICU's
conversion to a financial institution other than a mutual savings bank
(MSB). NCUA currently does not have regulations governing these
transactions. Also, NCUA is considering amending its regulations
regarding mergers, charter conversions, and changes in account insurance
to address various issues these transactions present that affect member
rights and ownership interests. These issues include accuracy of
communications to members, voting integrity, fiduciary duty obligations
for insiders, and member interest in credit union equity, for example,
through merger dividends. NCUA seeks comment on the necessity of
amending its current regulations to address these issues, any additional
issues relevant to these transactions not noted in this ANPR, and, if
commenters believe regulatory amendments are needed, suggestions on how
to address these issues.

**DATES:** Comments must be received on or before March 31, 2008.

**ADDRESSES:** You may submit comments by any of the following methods
(**Please send comments by one method only**):

-   Federal eRulemaking Portal:
    [**http://www.regulations.gov**](http://www.regulations.gov/).
    Follow the instructions for submitting comments.

-   NCUA Web Site:
    [**http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html**](http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html).
    Follow the instructions for submitting comments.

-   E-mail: Address to **<regcomments@ncua.gov>.** Include "\[Your
    name\] --

> Comments on Advanced Notice of Proposed Rulemaking for Parts 708a and
> 708b" in the e-mail subject line.

-   Fax: (703) 518-6319. Use the subject line described above for
    e-mail.

-   Mail: Address to Mary Rupp, Secretary of the Board, National Credit
    Union Administration, 1775 Duke Street, Alexandria, Virginia
    22314-3428.

-   Hand Delivery/Courier: Same as mail address.

**FOR FURTHER INFORMATION CONTACT:** Frank Kressman, Staff Attorney,
Office of General Counsel, at the above address or telephone: (703)
518-6540.

**SUPPLEMENTARY INFORMATION:**

### A. Background. 

The primary focus of this ANPR is protection of member interests in
transactions where members have a great deal at stake because the
transactions involve fundamental changes in their ownership or the
structure of their credit union, including, in some cases, termination
of a credit union charter or termination of federal account insurance.
This ANPR concerns six types of transactions: merger of a FICU into a
FICU; merger of a FICU into a privately insured credit union (PICU);
conversion of a federally-insured state credit union (FISCU) into a
PICU; conversion of a FICU to an MSB; merger of a FICU into a financial
institution other than an MSB; and conversion of a FICU into a financial
institution other than an MSB.

While these transactions are legally permissible, member ownership can
be extinguished or diluted and members may have lesser voting rights or
be deprived of the security of federal share insurance. These
transactions raise various issues, as discussed below, that NCUA
believes its current regulations may not adequately address. NCUA is
considering amendments to make certain member interests are adequately
protected, including helping members understand the risks and rewards
associated with these transactions. In addition, NCUA has not
promulgated rules on the merger of a FICU or conversion of a FICU into a
financial institution other than an MSB and NCUA is considering the
necessity of issuing rules to govern these transactions. As in all
rulemaking it undertakes, NCUA's focus is on providing flexibility and
fairness, imposing minimal regulatory burden on credit unions whose
members choose to pursue any of these transactions, and protecting the
National Credit Union Share Insurance Fund (NCUSIF).

NCUA's legal authority to regulate these transactions derives from the
Federal Credit Union Act (Act). The Act specifically authorizes the NCUA
Board to prescribe rules governing mergers of FICUs, including mergers
or consolidations with any noninsured credit union or institution. 12
U.S.C. 1766(a), 1785(b), 1785(c), and 1789(a). By definition,
"noninsured" means not insured by the NCUSIF, 12 U.S.C. 1752(7), and,
therefore, NCUA may prescribe rules governing mergers, conversions, or
consolidations with PICUs or other financial institutions, for example,
banks or thrifts insured by the Federal Deposit Insurance Corporation.

Part 708b of NCUA\'s regulations, which is limited to "credit union into
credit union" mergers, generally requires: (1) approval of a merger plan
by the boards of directors of each credit union; (2) submission of a
written plan and other documents to NCUA; and (3) approval of a plan or
proposal by NCUA and, for federal credit unions, by members. 12 C.F.R.
Part 708b. If a federal credit union is in danger of insolvency, member
approval is not required. 12 C.F.R. §708b.105(b). NCUA considers various
factors in approving or disapproving a merger including protecting
member interests and effects on the NCUSIF.

Similar to FICU to FICU mergers, NCUA broadly regulates the procedures
and substance of FICU to PICU mergers including: (1) approval of a
merger plan by the boards of directors of each credit union; (2)
submission of a written plan and other documents to NCUA; and (3)
approval of plan or proposal by NCUA and, for federal credit unions, by
members. NCUA imposes additional notice, voting, and approval
requirements on this type of transaction, including the use of form
documents. 12 C.F.R. Part 708b, Subpart B- Voluntary Termination or
Conversion of Insured Status, and Subpart C- Forms. These requirements
apply as well where a FISCU converts to a PICU.

The Act specifically addresses FICU to MSB conversions. 12 U.S.C.
1785(b)(2).

While a FICU may convert to an MSB without the prior approval of the
NCUA Board, 12 U.S.C. 1785(b)(2)(A), it must provide notice to each of
its members who is eligible to vote on the matter of its intent to
convert 90, 60, and 30 days before the date of the member vote on the
conversion. 12 U.S.C. 1785(b)(2)(C). In this context, the Act requires
NCUA's regulations to be consistent with rules promulgated by other
federal financial regulators and must be no more or less restrictive
than those applicable to charter conversions by other financial
institutions. 12 U.S.C. 1785(b)(2)(G)(i). NCUA administers the member
vote, which is verified by the federal or state regulatory agency that
would have jurisdiction over the institution after the conversion. If
either NCUA or that regulatory agency disapproves of the methods by
which the member vote was taken or procedures applicable to the member
vote, the member vote shall be taken again, as directed by NCUA or the
other agency. 12 U.S.C. 1785 (b)(2)(G)(ii). Additionally, the Act
specifically provides that no director or senior management official may
receive any economic benefit in connection with a conversion of the
credit union other than director fees and other compensation and
benefits paid in the ordinary course of business. 12 U.S.C.
1785(b)(2)(F).

NCUA has implemented its statutory authority to administer FICU to MSB
conversions. 12 CFR Part 708a. While the decision to convert belongs to
members, to make this decision, members must be fully informed as to the
reasons for the conversion and be able to consider the advantages and
disadvantages.

In 2006, NCUA revised Part 708a to improve the information available to
members and the board of directors as they consider a possible
conversion. 71 FR 77150 (December 22, 2006). The revisions included
amended disclosures, revised voting procedures, procedures to facilitate
communications among members, and procedures for members to provide
their comments to directors before the credit union board votes on a
conversion plan.

NCUA has not issued regulations regarding the merger or conversion of a
FICU into a financial institution other than an MSB. The NCUA Board has
statutory authority to approve or disapprove these two kinds of
transactions and authority to promulgate rules to regulate the substance
and procedures of them. 12 U.S.C. 1766(a), 1785(b)(1)(A), 1785(b)(1)(D),
1789(a)(11). In approving or disapproving these transactions, the NCUA
Board must consider a number of criteria including: (1) the history,
financial condition, and management policies of the credit union; (2)
the adequacy of the credit union's reserves; (3) the economic
advisability of the transaction; (4) the general character and fitness
of the credit union's management; (5) the convenience and needs of the
members to be served by the credit union; and (6) whether the credit
union is a cooperative association organized for the purpose of
promoting thrift among its members and creating a source of credit for
provident or productive purposes. 12 U.S.C. 1785(c). NCUA has not issued
regulations regarding these transactions because there have been only a
handful of these transactions; in those instances, credit unions sought
Board approval by petition, fashioning a submission and following
procedures generally in line with the requirements of Part 708a.

**B. Discussion**

*[1. Credit Union Merger or Conversion into a Financial Institution
Other than an MSB.]{.underline}*

NCUA seeks comment on whether issuing rules to govern credit union
mergers or conversions into a financial institution other than an MSB
would be beneficial for credit union members. NCUA is considering
establishing an administrative framework and procedures rather than the
case-by-case approach that has been used. Potential downsides to issuing
a rule are that, having a rule in place, might encourage these
transactions and many observers believe they are, only in unusual
circumstances, in the best interests of members. Nevertheless, having a
rule in place, with appropriate safeguards for member interests, could
assist all parties, including the NCUA Board, in protecting protect
member interests in their credit unions.

If it is determined a new rule would be beneficial, NCUA believes the
rule, in brief, would establish a comprehensive administrative framework
to process these transactions, while including provisions to ensure the
protection of member rights and interests. In addition, NCUA would
consider clarifying in a rule the criteria it would apply in approving
these transactions. Procedurally, a new rule could be modeled after Part
708b, including the use of form documentation and, in addition to
borrowing the certain provisions of Part 708b, it could address the
issues discussed below that the Board believes would also be present in
these transactions.

Some observers have argued that direct merger or conversion of a FICU
into a stock issuing bank may have potential advantages. For example, it
would enable a FICU that anticipates the need to eventually issue stock
as a bank to accomplish this goal in a more efficient one-step process
as opposed to the typical two-step process (FICU to MSB then MSB to
stock bank) that has been the pattern in recent years in the FICU to MSB
conversion scenario. Another advantage of a rule permitting these types
of transactions is that it could be structured in a manner to give
economic protection to members by making certain they share in the
distribution of cash, free stock, or transferable stock subscription
rights as compensation for their equity interest in their credit union.

A potential issue with a rule for these transactions is that the rule
would likely be complex because it would need to cover: (1) both mergers
and conversions; (2) charter changes to federal and state banks; and (3)
charter changes to freestanding stock banks and those within a mutual
holding company structure or stock holding company structure.

NCUA requests comment on whether it should issue a rule regulating these
transactions or continue to address them under NCUA's statutory
authority on an as-needed basis. If a commenter is in favor of NCUA
issuing a rule, the commenter should also suggest how the rule could be
structured, how NCUA should address the four issues discussed in B.2.
below in the context of the rule, and what other issues should be
addressed.

*[2. Issues]{.underline}*

NCUA believes there are significant issues affecting member interests
arising across the spectrum of the restructuring transactions
contemplated in this ANPR, including those for which NCUA currently has
regulations in place and those, discussed above, for which it does not.
This ANPR sets out the issues for comment in four categories:
Management's Duties, Member Right to Equity, Communications to Members,
and Member Voting. NCUA is interested in receiving comments on how its
regulations should best address these issues. A discussion of the issues
follows.

*[(a) Management's Duties.]{.underline}* In this category, the ANPR
seeks comment on two issues: the need for a regulation to address the
fiduciary duty credit union directors owe to members and the need for
additional regulatory provisions to guard against insider enrichment.

*[(i) Fiduciary Duty]{.underline}*

A credit union's board of directors has a fiduciary duty to act in the
best interests of its members.[^1] The Act makes numerous references to
the NCUA Board's responsibility to act in the best interests of credit
union members, including:

1.  • The NCUA Board may act to remove or prohibit any
    institution-affiliated party at a FICU if that action meets certain
    requirements, including that the "interests of the insured credit
    union\'s members have been or could be prejudiced." 12 U.S.C.
    1787(g)(1)(B).

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1.  • Credit unions applying for federal account insurance must agree to
    maintain such special reserves as the NCUA Board may require "for
    protecting the interests of the members." 12 U.S.C. 1781(b)(6).

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1.  • The NCUA Board must review the application of any individual to
    become a director or senior manager at a newly chartered or troubled
    FICU, and disapprove that application, if acceptance of the
    applicant would not be in the best interests of the depositors
    (members). 12 U.S.C. 1790a.

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```
1.  • When acting as the conservator or liquidating agent of a FICU, the
    NCUA Board may take any action it determines is in the best
    interests of the credit union's account holders (members). 12 U.S.C.
    1787(b)(2)(J)(2).

As discussed in a previous rulemaking, although referring specifically
to the NCUA Board, these provisions support the conclusion that credit
union directors have a fiduciary obligation to credit union members. 71
FR 77150 (December 22, 2006).

> A closer look at how the cited provisions function, however, connects
> them to the \[credit union's board of\] directors. Specifically, the
> best interests of the members will dictate the \[NCUA\] Board's
> actions when removing or prohibiting a director, approving the
> appointment of a director, operating a conserved credit union in the
> role of the board of directors, and reviewing the propriety of a board
> of directors' decision to pursue a voluntary liquidation. If the best
> interests of the members standard guides the conduct of the \[NCUA\]
> Board, it must also guide the conduct of \[the credit union's board
> of\] directors.

[Id]{.underline}.

While it is important for a credit union's board of directors to
understand its duty to act in the best interests of the members in the
ordinary course of business, NCUA believes it is especially important
when the board is considering a proposal to change the credit union's
charter or insurance status. These extraordinary transactions not only
result in a fundamental shift in the credit union, but tend to present
more conflicts between member interests and the personal financial
interests of credit union management.

While the existence of a fiduciary duty owed by directors to members is
clear, neither the Act nor NCUA regulations establish or provide any
guidance as to what that standard of care is for directors. NCUA is
considering establishing a regulatory standard of care for directors
that will help ensure they meet their fiduciary duty to their members
when directors are making decisions in connection with the transactions
discussed in this ANPR.

NCUA has considered the standards of care that have developed in this
area of the law, which, to a great extent, have developed in case law,
applying fiduciary principles not only to situations involving trusts,
but also in the corporate context.

The result is that a credit union board currently must look to state law
and case law to understand the scope of its fiduciary duties to members
and the standard of care required as articulated by its particular
state. Unfortunately, case law and state law can vary widely from
jurisdiction to jurisdiction causing confusion for credit unions and a
lack of uniformity between credit unions in one state and others in
other states. As a result, the standard of care applying to these
transactions can span a broad spectrum ranging from only requiring a
board of directors to have a rational basis for making a decision to
requiring the board to demonstrate that its decisions are made in the
best interests of its members and based on a full consideration and
documented analysis of all the alternatives.

Considering the unique interests, concerns, and structure of credit
unions as financial cooperatives, NCUA believes having a uniform federal
standard may be useful to eliminate confusion resulting from differences
in state law and may make it easier for credit union boards to fulfill
their duties to members. NCUA solicits comment on whether it should
establish, by regulation, a uniform federal standard of care for the
transactions discussed in this ANPR, including specific suggestions on
the standard that should be applied and if there should be a separate
standard of care for transactions where the credit union member will no
longer be a member of a credit union.

*[(ii) Insider Enrichment]{.underline}*

NCUA\'s experience with FICU to MSB conversions suggests that in some
cases credit union officials have pursued personal enrichment to the
detriment of members, and NCUA has issued disclosure requirements to
make members aware of the potential for this. NCUA is aware of
conversion transactions where family members of credit union officials
had joined the credit union in noticeable numbers prior to the
conversion. These new members, who may be motivated to share in the
profits from an eventual sale of stock, can also skew the member vote on
conversion in some instances, especially in a close vote.

NCUA is considering specific regulatory requirements regarding the
record date for members voting on a conversion proposal or other
transaction to prevent this problem. NCUA is interested in comments on
any aspect of this issue.

*[(b) Member Right to Equity.]{.underline}*

NCUA is broadly considering the issue of how to deal with unequal net
worth ratios among merging credit unions. This imbalance may result in
unfair treatment of members of a credit union with a higher net worth.
One method NCUA is considering to address this issue is to require a
merger dividend. Another option could be to simply require the board of
directors of a merging credit union to consider this issue as part of
its due diligence, come to its own conclusion, and then justify that
decision to its members.

Generally, federal credit unions may only return net worth to members in
the form of dividends or a return of interest. 12 U.S.C. 1761b, 1763.
Dividends must be based on an account balance as of a specific date or
calculated over a period of time, whether a month, a quarter, or several
years. 12 CFR 707.7(a), Appendix B (b). Often, credit unions undertake a
calculation of a dividend going back for a period of years to permit a
credit union to reward long-time members.

As noted, a merging credit union often has a higher net worth ratio than
the continuing credit union. Also, a merging credit union may have other
valuable characteristics for which the continuing credit union is
willing to pay a premium, such as a complementary field of membership,
thus increasing the net worth of the merging credit union in the context
of the merger. In recent merger transactions, issues about merger
dividends, also sometimes called a "share adjustment" and "capital
equalization," have arisen because of the nature of dividends in credit
unions. NCUA's Office of General Counsel has addressed this issue and
concluded that so-called "per capita" dividends (a flat amount paid to
all members) are legally impermissible. OGC Op. 07-0410 (April 13,
2007), OGC Op. 97-0813 (September 29, 1997).

NCUA recognizes that requiring a merger dividend or other return of
interest in certain circumstances could include the following
advantages: (1) rewarding the merging credit union's members; (2)
equalizing an imbalance in net worth between the credit unions, although
this could lessen the merging credit union's value to the continuing
credit union; and (3) establishing a consistent approach (e.g., setting
a record date or dividend period, identifying the kinds of accounts to
receive the merger dividend, and so forth).

On the other hand, NCUA recognizes that not imposing a merger dividend
requirement in this area allows credit unions the flexibility to decide
for themselves whether to include a merger dividend as part of their due
diligence and negotiations and leaves calculation of any dividend to the
merging credit unions, essentially allowing market forces and the wishes
of the members to determine if a dividend is appropriate.

The Board notes that, in a recent FICU to stock bank merger, the merging
FICU returned to its members their equity interest in the credit union
plus a premium, and the Board believes a return of equity can be a fair
way to compensate members for the loss of the credit union they own. In
other transactions, such as FICU to MSB conversions, NCUA has noticed
that many of the converting credit unions seek to convert at a time when
their net worth is high. In some instances, the conversion appears timed
to occur after a period where the credit union has purposefully acted to
increase its net worth. NCUA believes that, in those instances where
excess equity has been built up, fairness to members may dictate payment
of some equity to members of a merging or converting credit union
instead of transferring it to a new institution where the credit union
members will have less control and have diluted or no ownership
interests.

NCUA seeks comment on all possible options for dealing with this issue
either as an amendment to current regulations or by issuing a new
regulation.

*[(c) Communications to Members: Improper or Misleading Communications
to Members.]{.underline}*

NCUA fully supports members' rights to vote, in accordance with the Act,
to make changes to their charter or account insurance but believes the
linchpin in these transactions is that communications to members
regarding the risks and benefits of the transactions must be accurate,
sufficiently comprehensive, and not misleading.

NCUA encourages a FICU converting to an MSB to communicate freely with
its members. There are no limits or restrictions on the number or kind
of communications, provided the communications are accurate and not
misleading and otherwise comply with NCUA's rules for written member
communications. An example of an improper, conversion-related
communication is one that implies NCUA endorses the conversion or
conversion-related materials. In a recent conversion transaction, NCUA
discovered a credit union made this kind of improper communication to
its members. Although the instances in which this issue has been most
prevalent are FICU to MSB conversions, it also could arise in any
transaction in which a credit union sends materials to its members, such
as federal to private insurance conversions and FICU to bank mergers.

NCUA is considering the need for a regulatory provision that
specifically prohibits communications from credit union officials that
state or imply that NCUA has endorsed the charter change transaction or
accompanying credit union materials. NCUA is also considering requiring
a credit union to include a statement in its materials to that effect,
namely, that NCUA has not endorsed the transaction. NCUA requests
comment in this regard.

In a charter change transaction, a credit union may communicate with its
members about the kind and quality of services it will provide after
completion of the transaction. For example, a credit union may close or
move branch offices or modify other services available to members, such
as ATM services. It may choose to do this as a cost savings measure, to
achieve better compatibility with the continuing financial institution,
or for other reasons. In the FICU to MSB conversion context, a
converting credit union may be legally required to close or move a
branch located in a federal building that has been provided by a federal
agency on a rent-free and utility-free basis.[^2] Under any of these
circumstances, members may face the diminution of services or have less
convenient access to them.

An issue in a past FICU to MSB conversion was whether the credit union
would be legally required to close or move a number of its rent-free
branches located in federal buildings. In that transaction, the credit
union made what appeared to be potentially inaccurate statements about
its ability to continue to operate the branches in the same locations
following conversion to an MSB.

In another FICU to MSB conversion, the credit union made arguably
misleading statements to members about its ability to continue to
participate in a shared branch/shared service center network after
conversion. In that transaction, the credit union told its members it
was seeking approval to obtain post-conversion access to the network but
failed to disclose that its request could be denied resulting in the
members not having access to the network.

Members need full and accurate information about a conversion to cast an
informed vote, including if the transaction will result in the credit
union closing or moving branches, losing access to shared branch/shared
service center networks, or modifying other services available to
members. NCUA is considering requiring converting credit unions to
research this aspect of a transaction and disclose their findings to
members. Alternatively, NCUA could issue a more general rule to address
the need for full and accurate information. NCUA solicits comments on
all aspects of this issue.

Another communications issue, which NCUA's rules do not specifically
address, is the so-called "hostile takeover" scenario, where an
institution communicates directly with the members of a target credit
union to encourage a merger or other consolidation.[^3] In the credit
union context, the term "hostile takeover" may be a misnomer because
there is no saleable stock. Generally, a hostile takeover refers to a
[takeover](http://www.investorwords.com/4868/takeover.html) of a target
company against the wishes of the
[target](http://www.investorwords.com/4874/target.html)\'s
[management](http://www.investorwords.com/2931/management.html) and
[board of
directors](http://www.investorwords.com/511/board_of_directors.html)
through the purchase of a controlling interest in the target's stock.
Failed merger negotiations between two federal credit unions recently
resulted in the potential acquiring credit union communicating directly
with the potentially merging credit union's members in a fashion that
was deemed hostile by the management of the target credit union.

NCUA could consider addressing third party merger communications by
relying on current regulations or issuing a new regulation. As noted
above, NCUA regulations do not directly address this situation, although
Part 740 prohibits a FICU from using any advertising or making any
representation that is inaccurate or deceptive or in any way
misrepresents its services, contracts, or financial condition. 12 C.F.R.
Part 740. The limitations of current regulations such as Part 708b and
Part 740 are also, in part, that they only extend to insured credit
unions. While a new regulation addressing mergers by a hostile
institution may be more effective than the *[status]{.underline}
[quo]{.underline}*, it would not be without its own limitations.
Specifically, NCUA has no direct jurisdiction over communications by
non-credit union institutions with credit union members. Alternatively,
an approach could be to establish communication standards that would
have to be met as a condition of NCUA approval of a merger.

NCUA seeks comment on this topic in general and regulatory approaches to
protecting the interests of credit union members in this context.

*[(d) Member Voting: Right to Request a Recount and Use of Interim
Tallies.]{.underline}*

For the transactions that are the subject of this ANPR, NCUA is
considering permitting any member of a credit union to request a formal
recount of the vote in any situation in which the margin of decision is
less than a certain percentage of the total votes cast. NCUA has not
determined the appropriate margin for triggering recount rights and
believes examining state law on political vote recounts in this regard
could be appropriate and useful. NCUA is also considering a recount
provision if sufficient evidence exists that the original vote
tabulation is unreliable.

NCUA has reviewed the voting procedures of a number of close votes in
recent years. In those cases, NCUA found irregularities and
improprieties that called into question the reliability of the vote.
Examples of problems found include the credit union or its agent:
failing to compile a proper membership list thereby excluding some
members from the vote; improperly excluding members from voting for
causing a loss to the credit union; allowing individuals not fully
qualified as members to vote; improperly handling mail ballots returned
as undeliverable; employing poor internal controls in securing,
counting, and recording votes; using inconsistent procedures for
determining if a vote cast was invalid; and being generally unable to
reconcile the tally.

An unreliable voting process, whether intentionally manipulated or the
result of incompetence, deprives members of their right to choose the
fate of their credit union. NCUA requests comment on providing members
the right to request a recount, under what circumstances and criteria a
recount should be undertaken, and procedures for exercising such a
right.

The use by management of an interim vote tally presently is primarily an
issue in the FICU to MSB conversion context but could be an issue
anytime management has an interest in influencing the outcome of a
membership vote. NCUA has observed in the voting procedures in some FICU
to MSB conversions that credit union management seek periodic running
tallies from the election teller as to how many members have voted yes
and no and which members have not voted. Credit union management has
justified this practice by stating they only use the information for the
purpose of encouraging members to vote. In investigations of recent
conversions, NCUA has discovered that, in practice, some credit unions
use this information only for encouraging votes in favor of the
conversion. This violates both Part 708a and typical credit union
policies aimed at neutrality in this regard. For example, some credit
unions have pressured, required, or paid employees to encourage members
to vote in favor of conversion even where the employees did not wish to
do so or did not believe conversion was in the members' best interests.
NCUA has learned that some credit unions have targeted likely "yes"
voters in an attempt to sway the vote in favor of conversion. Other
tactics include determining how a member voted in violation of the
voting secrecy requirement, using periodic voting tallies to
management's advantage and to the disadvantage of those members opposed
to the conversion by not sharing that information with members, and
improperly handling ballots for members instead of having members mail
them directly to the independent election teller.

NCUA is considering: (1) prohibiting credit union management from
obtaining interim voting tallies from the election teller; (2)
prohibiting credit union management from obtaining lists of members who
have not voted from the election teller; (3) prohibiting credit union
employees from soliciting members to vote; and (4) prohibiting credit
union employees from completing member ballots or otherwise handling
ballots. NCUA would appreciate comments on these means for ensuring the
integrity of the voting process.

**Request for Comments.**

The NCUA Board invites comment on any of the issues discussed above
including: (1) if NCUA's regulations should be amended to address the
issues discussed in this ANPR; (2) if NCUA should promulgate new
regulations for credit union merger or conversion into a financial
institution other than an MSB and, if so, what those regulations should
cover; and (3) any other relevant issues NCUA has not considered.

By the National Credit Union Administration Board on January 24, 2008.

Mary F. Rupp

Secretary of the Board

[^1]: This duty is based on the relationship of trust and confidence
    between the members and directors and arises because members'
    property is entrusted to the entity to be managed for the members
    benefit. Jean E. Maess, J.D., Corpus Juris Secundum 47 (2007).

[^2]: The Act authorizes federal agencies to provide federal credit
    unions space in federal buildings on a rent-free and utility-free
    basis if certain conditions are met. 12 U.S.C. §1770. The key
    condition is that "at least 95 percent of the membership of the
    credit union to be served by the allotment of space . . . is
    composed of persons who either are presently federal employees or
    were federal employees at the time of their admission into the
    credit union, and members of their families . . . ." See also 41
    C.F.R. §102-79.40. MSBs do not have any similar authority, although
    it appears that, under General Service Administration regulations,
    commercial entities, including banks, can lease space on a rental
    basis in publicly-accessible areas of federal buildings.

[^3]: Outside of the credit union context, where there is a tender offer
    for stock of a public company (the mechanism by which a hostile
    bidder solicits the stockholders of the target), it triggers the
    provisions of the Securities Exchange Act of 1934 and Securities and
    Exchange Commission (SEC) rules. These provisions address
    communications by third parties to stockholders and, as noted in OGC
    Op 07-0342 (April 6, 2007), those SEC provisions provide detailed
    requirements regarding disclosures, tender offers, and other
    matters. SEC oversight in this regard helps protect stockholders by
    ensuring they are informed with accurate information about the
    transaction.