7535-01-U

**NATIONAL CREDIT UNION ADMINISTRATION**

**12 CFR Part 708b**

**Disclosure of Merger Related Compensation Arrangements.**

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

**ACTION:** Proposed rule with request for comments.

**SUMMARY:** NCUA is issuing a proposed rule on mergers to require all
federally insured credit unions to include in the merger plan submitted
to NCUA a description of any arrangements providing a material increase
in compensation or benefits to senior management officials in connection
with the merger. The proposed rule also requires federal credit unions
to disclose the existence of such compensation arrangements in the
materials provided to members voting on whether to approve the merger.
The proposed rule will ensure members of a merging federal credit union
and NCUA are fully informed about arrangements providing for a material
increase in compensation or benefits to senior management officials
before considering whether to approve the merger. NCUA believes this
requirement will assure merger decisions are based on the best interests
of the members.

**DATES:** Comments must be received on or before June 22, 2007.

**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/news/proposed_regs/proposed_regs.html**](http://www.ncua.gov/news/proposed_regs/proposed_regs.html).
    Follow the instructions for submitting comments.

-   E-mail: Address to **<regcomments@ncua.gov>.** Include "\[Your
    name\] Comments on Proposed Rule Part 708b (Disclosure of Merger
    Related Compensation)" 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:** Ross Kendall, Staff Attorney,
Office of General Counsel, at the above address or telephone: (703)
518-6540.

**SUPPLEMENTARY INFORMATION:**

**A. Background**

The Federal Credit Union Act (Act) authorizes the NCUA Board to
prescribe rules regarding mergers of federally-insured credit unions and
changes in insured status and requires written approval of the Board
before one or more federally-insured credit unions merge. 12 U.S.C.
1766(a), 1785(b), 1785(c), 1789(a). Part 708b of NCUA's rules implements
this authority and applies to both corporate credit union and natural
person credit unions. 12 CFR part 708b. The rule provides for NCUA
review and approval of any merger involving a federally-insured credit
union. 12 CFR 708b.104(a). Where a merging credit union is a federal
credit union, members have the right to vote on whether to approve the
merger, subject to one exception; NCUA may permit a merger without a
member vote if it determines the FCU is in danger of insolvency and a
merger will protect the National Credit Union Share Insurance Fund. 12
CFR 708b.106, 708b.105(b).

As with any maturing industry, consolidation in the nation's credit
unions is occurring and is expected to continue. Efforts to increase
efficiencies through improved economies of scale, along with
improvements in information technology and the increasing costs
associated with compliance, all contribute to the trend toward
consolidation. The increasingly competitive marketplace for financial
services in which credit unions operate adds additional pressure to
consolidate.

Most of this consolidation is occurring through voluntary mergers of
credit unions. With the increase in merger activity, some credit unions
may find themselves in the position of being a potential merger partner
with more than one other credit union. In this position, management of
the credit union will naturally want to evaluate competing opportunities
and should consider which of the potential merger partners offers the
best fit, in terms of member philosophy and continued or expanded
services and products for its membership.

**B. Proposed Rule**

The NCUA Board is concerned that prospective merger partners may seek to
improperly influence the outcome of deliberations by a board of
directors of the merging credit union. The support of senior management
officials of a credit union considered for merger may influence a
decision to approve a merger plan with a particular merger partner.
Thus, a potential merger partner might agree to provide financial
incentives in exchange for support from senior management.

This proposed rule would require all federally-insured credit unions to
describe any financial arrangements providing a material increase in
compensation or benefit to a senior management official in the merger
plan submitted to the NCUA. For purposes of the disclosure requirement,
the proposal defines a material increase as an increase of 15% above the
official's current compensation or \$10,000, whichever is greater.
Compensation includes salary as well as any indirect compensation such
as bonus, deferred compensation or other financial reward. NCUA would
determine, on a case by case basis, whether to request further details
about an arrangement in connection with its review of the merger plan.

Where a merging credit union is federally chartered, the proposal would
also require disclosure of the existence of a material increase in
compensation to its members before their vote on the merger. State law
governs whether members of a state-chartered credit union are entitled
to vote; therefore, NCUA is only proposing this requirement for federal
credit unions. Any individual member of a federal credit union wishing
to review the details of the arrangement would be entitled to inspect
the credit union's records detailing the arrangement. The inspection
would be at an office of the credit union during regular business hours
and a member requesting it would need to submit a request in writing to
the credit union at least one day before the date announced for the
meeting called for the purpose of voting on the merger.

NCUA notes that the proposed creation of a member inspection right in
the context of merger related compensation arrangements is specific to
these limited circumstances. Simultaneously with the adoption of this
proposal, NCUA is also proposing a broader, more general rule to govern
member access to federal credit union records. In accordance with
settled rules of construction, a more specific provision in a rule takes
precedence over a broader provision of general applicability. NORMAN J.
SINGER, STATUTES AND STATUTORY CONSTRUCTION, §51.05 (6^th^ Ed., 2000).
Thus, a member asserting a right to review documents relating to merger
related compensation would be entitled to follow the procedures outlined
in this rule and not the general procedures relating to member access to
records.

The proposed rule would permit a member to review merger related
compensation records without making or retaining copies at "an" office
of the credit union, including branch office locations. The Board
recognizes that requested documents may be at a credit union office at
some distance from where members may live and that conducting a review
may be difficult or expensive for members. The Board expects credit
unions and their members to work out reasonable arrangements about how a
review can take place that are mutually acceptable. For example, a
credit union may agree to provide photocopies to a branch office
location convenient to the member. The Board solicits comment on this
subject.

The NCUA Board believes this proposed rule will help assure that
management's decision to recommend a merger is based on sound business
judgment reflecting the best interests of the members. The Board also
notes the proposal tracks an Office of Thrift Supervision (OTS)
regulation that requires disclosure of officer compensation, among other
matters, in a merging thrift's merger approval application; the OTS rule
states an increase in compensation paid to an officer, director or
controlling person of a merging federal thrift or savings bank is
presumed to be unreasonable and a sale of control if it exceeds the
greater of 15% or \$10,000. 12 C.F.R. §563.22(d)(1)(vi)(C). The Board
also notes comparable disclosure requirements relating to economic
benefits for directors and senior management officials are in NCUA's
rule on conversions of insured credit unions to mutual savings banks. 12
CFR 708a.4(d)(1)(iii).

The proposed rule addresses arrangements providing material economic
benefits to board members or senior management officials of the merging
credit union. The NCUA Board believes these individuals are most likely
to be in a position to negotiate personally advantageous compensation
arrangements. The Board also understands retention agreements and
bonuses for persons holding managerial or technical positions may be
essential for a successful merger, and the proposed rule does not
prohibit offering retention agreements or bonuses that a continuing
credit union believes are appropriate, including arrangements affecting
senior management officials. In this respect, the Board notes it does
not intend to substitute its business judgment for that of the boards of
the merging and continuing credit unions on marketplace demands and
reasonable compensation arrangements. The proposed rule change focuses
on transparency and the principle that full disclosure usually results
in more informed and better membership decisions.

The Board recognizes that, in some cases, officials of the merging
credit union may be retained by the continuing credit union and assigned
additional duties with greater responsibilities. In those cases, the
continuing credit union may offer to pay officials relatively greater
compensation than they earned with the merging credit union. Credit
unions should be able to support these types of increases in
compensation, bonuses, or retention agreements in the required
disclosures. The proposed rule would simply require a description of
these arrangements in the merger plan and, in the case of a merging
federal credit union, disclosure of their existence to the membership
before their vote on approving the merger.

State law governs whether members of a merging state chartered credit
union are entitled to vote on a proposed merger. If a state law requires
a state supervisory authority's approval, NCUA's rule requires evidence
that the state supervisory authority has approved the merger as part of
the material submitted to the appropriate Regional Director. 12 CFR
708b.104(a)(6). For corporate credit unions, the NCUA Merger and
Conversion Manual specifies that credit unions submit their merger
requests to NCUA's Office of Corporate Credit Unions. NCUA 8056/M 6300
(June 2005).

**C. Proposed Amendments**

*[Definitions.]{.underline}* The proposal adds two new definitions to
the rule. "Merger related financial arrangement" is defined to mean an
increase in direct or indirect compensation of 15% or \$10,000,
whichever is greater, that any board member or senior management
official of a merging credit union may receive in connection with a
merger transaction. Such an increase is considered material and would
need to be disclosed. The term does not include an agreement to retain a
senior management official in a comparable managerial role with the
continuing credit union, so long as the agreement is limited to
retention and does not include any financial component resulting in a
material increase, as defined, above the official's existing
compensation package. The second new definition, "senior management
official," includes the chief executive officer (who may hold the title
of president or treasurer/manager), any assistant chief executive
officer, and the chief financial officer. This definition conforms to
other NCUA rules affecting members of senior management of credit
unions; [see, e.g.,]{.underline} 12 CFR Part 703.

*[Disclosures.]{.underline}* The proposed rule would add to the rule's
provisions describing the merger plan and the approval of the merger
proposal by members of the merging credit union. 12 CFR 708b.103(a),
106(a)(2). The new provisions require financial arrangements providing a
material increase in compensation or benefits for senior management
officials and related to a merger to be described in the merger plan
and, in the case of a merging federal credit union, disclosed to the
membership in the balloting materials. These disclosure obligations
would only be triggered where the proposed financial arrangement results
in an increase in compensation equal to 15% or \$10,000, whichever is
greater. Furthermore, the rule would simply require that the disclosure
to the members indicate the existence of a material financial
arrangement involving one or more senior management officials. Any
individual member would be entitled to inspect the credit union's
records pertaining to the arrangement, at the credit union's office
during business hours.

### REGULATORY PROCEDURES

## **Regulatory Flexibility Act**

The Regulatory Flexibility Act requires NCUA to prepare an analysis to
describe any significant economic impact a proposed rule may have on a
substantial number of small credit unions (those under ten million
dollars in assets). Most of the mergers of federal credit unions involve
small credit unions. In almost all cases, the small credit union merges
into a much larger continuing credit union. The larger credit union is
available to assist the small credit union with each step in the merger
process, keeping the economic impact on the small credit union to a
minimum. Accordingly, the Board does not anticipate that this proposed
rule would have a significant economic impact on a substantial number of
small credit unions, and, therefore, a regulatory flexibility analysis
is not required.

## **Paperwork Reduction Act**

The proposed changes to part 708b contain information collection
requirements. As required by the Paperwork Reduction Act of 1995 [(44
U.S.C.
3507](http://www.lexis.com/research/buttonTFLink?_m=3ff6943d1a045e23e3ede6de4de47e3b&_xfercite=<cite cc%3D"USA"><!%5BCDATA%5B61 FR 47398%5D%5D><%2Fcite>&_butType=4&_butStat=0&_butNum=1&_butInline=1&_butinfo=44 USC 3507&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVzz-zSkAA&_md5=9b45ac5dd68f9a584f5a005abb851c62)(d)),
NCUA is submitting a copy of this proposed rule as part of an
information collection package to the Office of Management and Budget
(OMB) for its review and approval for revision of Collection of
Information, Mergers of Federally Insured Credit Unions, Control Number
3133-0024.

The proposed changes ensure that NCUA has sufficient information to
determine whether to approve a proposed merger. The changes would also
help ensure, in the case of a merging federal credit union, that members
have sufficient and accurate information to exercise their vote properly
concerning the proposed merger.

In the five-year period ending June 30, 2006, NCUA approved 1,567
mergers involving federally insured credit unions. On average for the
past five years, therefore, there were approximately 313 mergers each
year that would be covered by the proposed rule. NCUA estimates less
than one percent of these mergers will involve merger related financial
arrangements as defined in the proposed rule. NCUA estimates it will
take the merging credit unions about five hours to describe any merger
related financial arrangements and include the description in the merger
plan and, in cases involving a merging federal credit union, to make
materials available to members upon request. One percent of 313,
treating the two merging credit unions as one respondent, or 3.1 times
five hours per respondent equals sixteen (rounding up from fifteen and
one-half) total annual burden hours associated with this revision to the
existing collection of information associated with this rule, OMB
Control Number 3133-0024.

***[Total annual burden hours = Sixteen]{.underline}***

The Paperwork Reduction Act and OMB regulations require that the public
be provided an opportunity to comment on the paperwork requirements,
including an agency's estimate of the burden of the paperwork
requirements. The NCUA Board invites comment on: (1) whether the
paperwork requirements are necessary; (2) the accuracy of NCUA's
estimates on the burden of the paperwork requirements; (3) ways to
enhance the quality, utility, and clarity of the paperwork requirements;
and (4) ways to minimize the burden of the paperwork requirements.

Comments should be sent to: OMB Reports Management Branch, New Executive
Office Building, Room 10202, Washington, DC 20503; Attention: Mark
Menchik, Desk Officer for NCUA. Please send NCUA a copy of any comments
submitted to OMB.

The Paperwork Reduction Act requires OMB to make a decision concerning
the collection of information contained in these proposed regulations
between 30 and 60 days after publication of this document in the Federal
Register. Therefore, a comment to OMB is best assured of having its full
effect if OMB receives it within 30 days of publication. This does not
affect the deadline for the public to comment to the NCUA on the
proposed regulations. 

## **Executive Order 13132**

Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. In
adherence to fundamental federalism principles, NCUA, an independent
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies
with the executive order. The proposed rule would not have substantial
direct effects on the states, on the connection between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. NCUA has
determined that this proposed rule does not constitute a policy that has
federalism implications for purposes of the executive order.

## **The Treasury and General Government Appropriations Act, 1999 - -** 

## **Assessment of Federal Regulations and Policies on Families**

The NCUA has determined that this proposed rule would not affect family
well-being within the meaning of §654 of the Treasury and General
Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 2681
(1998).

**List of Subjects**

**12 CFR part 708b**

Credit unions, Mergers of credit unions, Reporting and recordkeeping
requirements.

By the National Credit Union Administration Board on April 12, 2007.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Mary F. Rupp

Secretary of the Board

For the reasons stated above, NCUA proposes to revise 12 CFR part 708b
as follows:

## **PART 708b --- MERGERS OF FEDERALLY-INSURED CREDIT UNIONS; VOLUNTARY TERMINATION OR CONVERSION OF INSURED STATUS**

1\. The authority citation for part 708b continues to read as follows:

**Authority:** 12 USC 1766(a), 1785(b), 1785(c), and 1789(a).

2\. Amend §708b.2 by removing current alphabetical paragraph
designations (a) through (k) and adding new definitions of "merger
related financial arrangement" and "senior management official" in
alphabetical order to read as follows:

§708b.2 Definitions.

\* \* \* \* \*

[Merger related financial arrangement]{.underline} means a material
increase in compensation (including indirect compensation, for example,
bonuses, deferred compensation, or other financial rewards) or benefits
that any board member or senior management official of a merging credit
union may receive in connection with a merger transaction. For purposes
of this definition, a material increase is an increase of 15% or
\$10,000, whichever is greater.

\* \* \* \* \*

> [Senior management official]{.underline} means the chief executive
> officer (who may hold the title of president or treasurer/manager),
> any assistant chief executive officer, and the chief financial
> officer.

3\. Amend §708b.103 by redesignating paragraphs (a)(7) through (10) as
paragraphs (a)(8) through (11) and adding new paragraph (a)(7) to read
as follows:

§708b.103 Preparation of merger plan.

> \(a\) \* \* \*
>
> \(7\) Description of any merger related financial arrangement, as
> defined in §708b.2.
>
> \* \* \* \* \*

4\. Amend § 708b.106:

A. By removing the semicolon at the end of paragraph (a)(2)(ii) and
adding

> ", and disclosure of the existence of any merger related financial
> arrangement, as defined in §708b.2;" and

B. By adding a new paragraph (a)(2)(vii) to read as follows:

§708b.106 Approval of the merger proposal by members.

\(a\) \* \* \*

\(2\) \* \* \*

\(vii\) Inform the members they have the right to inspect the credit
union's records pertaining to any merger related financial arrangement,
as defined in §708b.2, by submitting a request in writing to the credit
union at least one day before the date announced for the meeting called
for the purpose of voting on the merger. The inspection must occur at an
office of the credit union during regular business hours and is limited
to the right to review pertinent documents on site, without making or
retaining copies.