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STATEMENT

OF

THE HONORABLE JOANN M. JOHNSON

CHAIRMAN

NATIONAL CREDIT UNION ADMINISTRATION

"H.R. 3206, Credit Union Charter Choice Act.\"

BEFORE THE

Subcommittee on Financial Institutions and Consumer Credit

# U.S. House of Representatives

Thursday, May 11, 2006

Chairman Bachus, Ranking Member Sanders, and Members of the
Subcommittee, on behalf of the National Credit Union Administration
(NCUA), thank you for the opportunity to present the Agency's views on
H.R. 3206, the Credit Union Charter Choice Act, introduced July 12, 2005
by Representative Patrick McHenry, and on credit union conversions to
mutual savings banks or associations (MSBs).

NCUA's primary mission is to ensure the safety and soundness of
federally insured credit unions. It performs this important public
function by examining all federal credit unions (FCUs), participating in
the supervision of federally insured state chartered credit unions
(FISCUs) in coordination with state regulators, and insuring credit
unions. In its capacity as the administrator for the National Credit
Union Share Insurance Fund (NCUSIF), NCUA provides oversight and
supervision to approximately 8695 federally insured credit unions,
representing 98 percent of all credit unions and approximately 84
million members. [^1]

A credit union is owned and governed on a democratic, cooperative basis
by the members. It is the member-owners, not NCUA or any other group,
who should decide the future of their credit union. NCUA fully supports
the right of credit union members to decide the business model that is
most appropriate and beneficial to them, and whether a charter
conversion serves their best interest. In that regard and in the
interest of basic consumer protection, NCUA strongly believes that the
member-owners deserve to receive information about the conversion of
their credit union to another form of financial institution that is
accurate, complete and understandable.

My statement today provides a brief history of NCUA's rulemaking on
conversions, responds to criticism of NCUA's current rule, addresses the
statutory limitations on NCUA's rulemaking authority and provides
comments on H.R. 3206.

[History of Statutory Provisions and NCUA Rulemakings on
Conversions]{.underline}

In 1995, NCUA first adopted a rule to address the conversion or merger
of a credit union into a non-credit union institution. [^2] The purposes
of the rule were to ensure that transactions took place only pursuant to
an informed vote of the credit union's member-owners and to prevent
self-dealing and other abuses by individuals involved in the
transactions.[^3] The rule addressed, among other things, voting
procedures, disclosures, member approval, and NCUA approval.

Congress enacted the Credit Union Membership Access Act (CUMAA) on
August 7, 1998.[^4] Section 202 of CUMAA amended the provisions of the
Federal Credit Union Act (Act) concerning the conversion of insured
credit unions to MSBs. These amendments provide that a majority of a
credit union's board of directors must approve a proposal to convert,
and membership approval shall be determined by a majority of the members
who vote on the proposal.[^5] The CUMAA voting standard was a
significant departure from the pre-CUMAA standard, which required that a
majority of the credit union's members approve a conversion, not just a
majority of those members who actually voted on the proposal.

CUMAA requires that a credit union give its members notice of the vote
90 days, 60 days, and 30 days in advance and provide NCUA with notice of
its intent to convert.[^6] CUMAA also requires that NCUA administer the
member vote on a proposed conversion and review the methods and
procedures by which the vote is taken. It provides authority to either
NCUA or the federal or state regulatory agency that would have
jurisdiction over the institution after the conversion to disapprove of
the methods by which the member vote was taken or procedures applicable
to the member vote and to require that the member vote be taken again.

Under CUMAA, NCUA was required to promulgate final rules regarding
charter conversions within six months of the passage of CUMAA that were:
(1) consistent with CUMAA; (2) consistent with the charter conversion
rules promulgated by other financial regulators; and (3) no more or less
restrictive than rules applicable to charter conversions of other
financial institutions. NCUA issued final rules on November 19, 1998 to
implement §202 of CUMAA.[^7]

NCUA's first post-CUMAA conversion rule, while necessarily different
from NCUA's pre-CUMAA rule, shared the common goal of enhancing consumer
protection for credit union members. The rule acknowledged that under
CUMAA, an insured credit union could convert to an MSB without the prior
approval of the NCUA. It also articulated NCUA's statutory
responsibility to administer the methods and procedures of the member
vote, and to disapprove them and direct a new vote be taken if
warranted.

In the approximately 8 years since the first post-CUMAA conversion rule
was issued, NCUA has refined the rule three times.[^8] In each of these
rulemakings, NCUA has been motivated by the same basic concern, namely,
that members receive accurate and complete information to make an
informed decision on a conversion proposal. Among these amendments were
requirements that converting credit unions disclose additional
information to their members, that the member vote be by secret ballot,
and that the vote be conducted by an independent entity.

Since 1995, of the 33 credit unions that sought to convert to MSBs, 29
have converted. Of the four that did not convert, one did not receive
the requisite member vote under provisions of the relevant state credit
union law; one had difficulties with the banking regulators and withdrew
its application to become a bank; one chose not to conduct a second
member vote after NCUA discovered significant problems and
irregularities, such as failure to allow some members to vote and
inconsistencies in voting procedures; and one withdrew its application
for reasons unknown to NCUA after sending its 90-day notice and ballot
to members.

[Overview of NCUA's Current Conversion Rule]{.underline}

As noted above, the Act requires NCUA to administer the member vote on a
proposed conversion and review the methods and procedures by which the
vote is taken. [^9] This requirement is a directive to ensure converting
credit unions provide accurate and complete disclosures to members so
that they can make an informed decision about the conversion. Towards
that end, NCUA's conversion rule requires a converting credit union to
provide disclosures to its members with the statutorily required three
written notices at 90, 60 and 30 days prior to the vote. It also
specifies that the member notices must adequately describe the purpose
and subject matter of the vote.

Additionally, NCUA's rule tracks the Act's language that allows a
converting credit union to notify NCUA of its intent to convert. The
credit union must provide NCUA a copy of its member notice, ballot, and
all other written materials it has provided or intends to provide to its
members in connection with the conversion. A converting credit union has
the option of submitting these materials to NCUA before it distributes
them to its members. This enables the credit union to obtain NCUA's
preliminary determination on the methods and procedures of the member
vote. If NCUA disapproves of the methods and procedures of the member
vote after the vote is conducted, then NCUA may direct the credit union
to take a new vote. NCUA's responsibility to review the methods and
procedures of the member vote includes determining that the member
notice and other materials sent to the members are accurate and not
misleading, all required notices are timely, and the membership vote is
conducted in a fair and legal manner. As discussed below, these
requirements are consistent with and no more or less restrictive than
the rules promulgated by other financial regulators, including the
Office of Thrift Supervision and the Office of the Comptroller of the
Currency.

A converting credit union can provide information to its members
regarding any aspect of the conversion in any format it wishes, provided
all communications are accurate and not misleading. In accordance with
the Act and NCUA's rules, a converting credit union must provide certain
minimal information in the notices to members. Most converting credit
unions choose to provide significantly more information concerning the
conversion.

NCUA's conversion rule allows a converting credit union to communicate
with its members as it deems appropriate, but requires that members
receive a short, simple disclosure prepared by NCUA. This disclosure,
which is included with the three notices and other written communication
to members after the board votes to convert, addresses: (1) ownership
and control of the credit union; (2) operating expenses and their effect
on rates and services; (3) the effect of a subsequent conversion to a
stock institution; and (4) the costs of conversion.

This disclosure represents basic and fundamental consumer protection.
Additionally, it maximizes the ability of members to exercise real
control over an institution that they not only own but to which they
have contributed in the accumulation of owner equity.

Credit union members should be particularly aware of these topics as
they consider voting to convert their credit union to another form of
financial institution. NCUA recognizes a credit union might discuss
these topics elsewhere in its communications with members, but NCUA is
concerned that this information may not be conspicuous or clearly
stated, given the volume of information provided. Accordingly, a
converting credit union must include the form disclosures in a prominent
place with each written communication it sends to its members regarding
the conversion and ensure that the disclosures are conspicuous to the
member. If a credit union wishes to modify the disclosure, it may do so
with the prior consent of the Regional Director and, in the case of a
state credit union, the appropriate state supervisory authority.

A converting credit union must conduct its member vote on a conversion
in a fair and legal manner. NCUA requires the credit union to conduct
the vote using secret ballots and an independent teller to ensure the
integrity of the voting process and the privacy of each member's vote.
To assist credit unions in achieving the goal of a fair and legal voting
process, NCUA's conversion rule includes guidelines that address such
topics as understanding the relationship between federal and state law,
determining voter eligibility, and holding a special meeting.

[H.R. 3206, "The Credit Union Charter Choice Act"]{.underline}

NCUA appreciates the concerns of Representative McHenry and the
cosponsors of H.R. 3206, The Credit Union Charter Choice Act, for
recognizing the importance of the credit union conversion issue.

[Provisions NCUA Supports]{.underline}

Two provisions of H.R. 3206 would improve current law -- the
requirements for a secret ballot and an independent inspector of
elections. NCUA's current conversion regulation includes both of these
provisions and adding them to the statute as well will ensure that
credit unions conduct charter conversion elections fairly. Further, we
support the retention of the requirement to notify credit union members
of the conversion vote 90, 60, and 30 days before the vote. NCUA also
has no objection to being required to review the proposed notices within
30 days. These proposed changes to the statute further enhance
transparency and member ability to exert control over the voting
process.

[Provisions NCUA Does Not Support]{.underline}

However, NCUA respectfully suggests that many of the provisions of this
bill will prevent the agency from achieving the goal of allowing
informed credit union members to select the type of charter that best
serves their needs. NCUA is concerned that provisions of H.R. 3206 will
prevent members from obtaining complete and accurate information
regarding the potential conversion of their credit union. H.R. 3206
seriously diminishes oversight in a conversion vote. The bill deletes
the requirement for NCUA to administer the vote. Without this oversight,
there would be no enforcement of the bill's notice provisions or of the
requirements for secret ballots and independent inspectors of election.

NCUA does not seek to block conversions, but to ensure that
member-owners of the credit union understand the fundamental change on
which they are voting, and that the vote is transparent and legal.
Absent NCUA's authority to administer the vote, there would be no
consequences for violations of the conversion notice and voting
requirements. NCUA's oversight protects members' right to complete and
accurate information, and this role should be preserved.

The importance of regulatory oversight was underscored during a recent
widely-publicized conversion case. Allegations were made of
misrepresentations by management concerning issues such as
post-conversion access to credit union shared service centers, ability
of management and board members to acquire stock other than through the
IPO, and ability of management to freely communicate with members.
Through its oversight authority, NCUA was able to promptly address and
clarify these issues.

H.R. 3206 would also prevent NCUA involvement in the key area of
communications. The bill recognizes the current ability for the
management of the credit union to engage, in direct communication to
members in addition to the 90-, 60-, and 30-day notices, but eliminates
any effective oversight on the content of this communication. Although
the bill prohibits inconsistent, false, or misleading information in any
additional communications, the bill prohibits NCUA from reviewing any of
these communications. NCUA encourages open and honest communication to
members before a conversion vote and does not seek to limit management's
ability to communicate about a conversion proposal. However, any such
communications should be subject to oversight to ensure accuracy and
fairness.

NCUA is concerned that the prohibition on "speculative" information
about the institution's future operations is subject to interpretation.
The bill is also unclear about what type of information would "distort
the impact of conversion," another prohibited item in notices.
Similarly, the prohibition on "information attributable to the Board"
could be interpreted to prevent the inclusion of NCUA-suggested language
in notices, but another section of the bill charges NCUA with reviewing
and commenting on proposed conversion notices.

Another area of uncertainty involves the conflicting standards the bill
establishes for review of the conversion process. For example, one
section of the bill would prohibit post-vote review unless there were
"fraud or reckless disregard for fairness," but another section
prohibits NCUA from requiring a new membership vote unless a
communication "contains a knowingly false statement that affects the
outcome of a conversion vote."

[Effects of H.R. 3206 on Current Regulatory Requirements]{.underline}

The bill would appear to prohibit the NCUA mandated disclosure of
additional critical facts of a conversion that are necessary for members
to make an informed decision. Below is a discussion of NCUA's specific
concerns based on our experience with the current conversion rule.

[A. Higher loan rates or lower savings rates]{.underline}

NCUA's rule requires that the disclosures include verbiage that members
may experience higher loan rates or lower savings rates. This
requirement has been criticized as speculative or uncertain. NCUA
disagrees. NCUA engaged the services of Datatrac Corporation to gather
and analyze data on historic loan and savings rates and verify the
possible adverse changes in post-conversion rates. [^10] Datatrac
provided NCUA data on over 20 distinct loan and savings products offered
by thousands of banks and credit unions. [^11] Datatrac broke each of
these products down into average rates for all institutions over several
years. Datatrac data for 2002-2005 is attached as appendix A. The data
is clear: the historic consumer loan and savings rates offered by credit
unions are more favorable for members than those same rates offered by
banks of all types, including savings banks.

Recently, researchers at the Fiscal and Economic Research Center at the
University of Wisconsin - Whitewater also examined the differences in
loan and savings rates between credit unions and banks.[^12] That study
considered loans and savings rate data from 175 credit unions and banks,
including some banks that had converted from credit unions. The study's
findings were consistent with NCUA's analysis of the Datatrac data,
including that "\[c\]redit unions offer significantly higher interest
rates on all savings products examined and charge lower interest rates
on three of four loans products compared to converted credit unions
after accounting for all other variables." [^13]

NCUA respectfully submits that a disclosure about the consequences on
loan and savings rates is crucial to a member's informed decision and
vote on changing from a credit union to another financial institution
charter.

[B. Distribution of Owner Equity]{.underline}

The conversion rule requires that the disclosure include language that
conversion to an MSB is often a prelude to a stock conversion in which
insiders realize financial gain far in excess of that available to
average members. The history of the 29 former credit unions that
converted to mutual savings banks provides a useful guide to what
happens to former member equity after a conversion occurs.

Of those 29 mutual savings banks, 21 have converted to stock
institutions. A mutual-to-stock conversion permits directors and
officers to obtain significant financial benefits from the conversion,
in part through the acquisition and control of stock. The directors and
officers obtain ownership and control of stock in several different
ways. While other members of the converting MSB have access to stock,
none of them have the same access as the directors and officers.

After a stock conversion, a converted bank may establish an Employee
Stock Ownership Plan (ESOP), funded by the bank, as well as additional
stock benefit plans for directors and officers, such as a management
stock benefit plan and a stock option plan. Members of the credit
union-turned-MSB who are not employees or directors cannot participate
in these stock plans.

NCUA is not suggesting that there is anything improper about the
management and the compensated directors of a corporation having a
vested interest in the company's financial performance. However, using a
simple example to illustrate the point, if a credit union with \$100
million in net worth converts to a mutual and then to a stock bank, and
the officers, directors, and employees exercise their rights through the
IPO, ESOP, stock option plan, and management stock benefit plan, they
may own 25% or more of the total stock. This represents, among other
compensation, a transfer of \$25 million to those individuals that was
previously member-owner equity in the credit union. Members who own the
credit union and its net worth have a right to know when they vote on a
proposed conversion that the officials who are recommending the
conversion stand to benefit from this kind of transfer of member equity.

Distribution of member equity in the form of stock is an important facet
in the conversion process. Even though all members of the converting
institution technically have equal subscription rights during the
initial public offering (IPO) of stock, directors and officers are able
to use their position to gain greater understanding of and access to the
IPO subscription than other members. Rules governing federally chartered
mutual savings banks (FMSB) to stock conversions were specifically
written to "enhance the ability of officers, directors, and employees of
an institution to acquire stock when their institution converts, through
various types of employee stock benefit vehicles . . . \[so as to\] . .
. provide a means for officials and employees of converting institutions
to acquire larger ownership stakes in their institutions upon conversion
. . . ."[^14]

These rules permit the MSB directors, officers, employees, and the
benefit plans created for those persons to obtain a substantial portion
of the shares and the associated net worth of the institution. This fact
is not lost on those who advocate conversion. Consultants who advise
credit unions to pursue conversions make specific claims about the
magnitude and extent of the financial benefits available to the
directors and officers at converting credit unions. One newsletter
article prepared by such a consultant states:

-   Bank CEOs typically receive much greater compensation than credit
    unions CEOs, with the bank CEOs receiving from 20% to 57% more for
    institutions of similar assets size.[^15]

-   Bank directors typically earn between \$2,500 to over \$50,000
    annually, in addition to travel and expense allowances, while credit
    union directors are uncompensated in almost every instance.[^16]

-   The gap in pay can be much wider at individual banking institutions
    that utilize stock compensation programs.  For example, assuming a
    credit union with \$50 million in capital converts to a stock bank
    with an IPO amount of \$100 million, directors would share a \$2
    million grant of stock and management would receive an equal grant. 
    Each member of a five-director board would get \$400,000 in stock,
    vested over five years, at the IPO value.[^17]

This article continues by detailing various other opportunities for a
credit union-turned-bank executive to accrue wealth, and concludes
"\[t\]he reward for performance could lead to a \$10 million plus,
ownership stake for a capable CEO . . . . If the conversion is not made
during the current tenure, the next CEO in charge may very well realize
the value."[^18]

The financial trade press has reported on the specific benefits that
directors and officers of credit unions obtain from their access to
stock following a mutual to stock conversion. In one converted credit
union, the officers and directors made \$7 million in profit on the IPO
increase in value, commonly called an "IPO pop,"[^19] and set aside
another \$5 million in free stock for themselves through stock benefit
plans.[^20] At another converted credit union, the officers and
directors amassed more than \$14 million in stock and cash benefits
during the three-year period following stock conversion, with the CEO
alone receiving \$4 million in cash compensation and \$3 million in
stock.[^21] At still another converted credit union, the officers and
directors made about \$1 million in profits at the time of the IPO and
set aside another \$3.5 million that was later distributed to those
officers and directors.[^22] At another converted credit union, the CEO
made \$600,000 on the IPO, received rights to another \$1 million in
stock, and received additional stock option benefits.[^23]

NCUA maintains there is ample evidence to support the conclusion, as set
forth in the required disclosures, that "\[i\]n a typical conversion to
the stock form of ownership, the executives of the institution profit by
obtaining stock far in excess of that available to the institution's
members." [^24] If the potential benefits that may accrue to the credit
union officials are accurately disclosed, and there is transparency in
the process, NCUA has no concern with the transfer of member-owner
equity. Experience has shown us that in the absence of regulatory
oversight, these disclosures are not accurately or prominently made.

[C. Voting Rights]{.underline}

NCUA's conversion rule requires converting credit unions explain to
members how the conversion from a credit union to an MSB will affect
members' voting rights and whether the MSB will base voting rights on
account balances. Voting rights in credit unions and MSBs are in fact
different in two important ways: (1) the use of proxy voting and (2) how
many votes each member gets.

Proxy voting is not allowed in Federal credit unions, meaning that
credit union members cannot delegate their voting rights to the credit
union's board of directors. Federal mutual savings banks, in contrast,
are allowed to use proxy voting, and they typically collect these
proxies from their account holders at the time of account opening. With
the exception of the vote to convert to a stock charter, these proxies
may be "running," meaning that the MSB's board of directors will vote
the proxies indefinitely unless the account holder takes action to
affirmatively revoke the proxy. [^25] Also, credit unions are purely
democratic. Every member gets one vote, regardless of account balances.
Federal MSBs may choose to dilute the voting power of lower balance
depositors by allotting each customer one vote per \$100 on deposit, up
to 1000 votes. [^26] Recently converted credit unions have elected this
account balance voting option. One result is that directors, officers
and other customers of greater means have increased voting power in
determining whether to convert to a stock institution.     

 

[D. Regulatory Consistency]{.underline}

Section 205 of the Act, as amended by CUMAA, requires that NCUA's
conversion rules be consistent with the rules of other financial
regulators, including OTS and the Office of the Comptroller of the
Currency and that NCUA's rules be "no more or less restrictive" than the
rules applicable to charter conversions by other financial
institutions.[^27]

Clearly, NCUA's rule cannot and should not be identical to those of the
other regulators. The other regulators' rules are not identical to one
another, making cross-uniformity impossible for NCUA. More importantly,
the rules address different transactions, with different statutory
requirements, requiring different regulatory approaches. NCUA interprets
the consistency requirement as a mandate that NCUA's rules be compatible
with and adhere to the same principles as the conversion rules of other
regulators. Similarly, NCUA interprets the "no more or less restrictive"
requirement to mean that, consistent with underlying principles of
informed member choice, NCUA should adopt restrictions of other
regulators that make sense for credit union conversions, while not
confining a credit union's choices more significantly than the
regulatory options of other institutions.

By comparison to NCUA's rules, OTS maintains significant authority over
the conversion approval process from mutual associations to stock
associations and remains involved throughout the entire process.[^28]
The rules of both OTS and NCUA have different requirements at different
stages of a conversion; some of these requirements are more detailed
than that of the other agency, given that the conversions governed by
each agency differ.

For example, OTS's involvement in the conversion process is mandatory
even before the board of the mutual association passes a conversion
plan; the board of the converting mutual bank must meet with OTS prior
to passing the conversion plan and provide OTS with a written strategic
plan that outlines the objectives of the proposed conversion and the
intended use of the conversion proceeds.[^29] NCUA's rules by comparison
do not require a mandatory meeting prior to the board of the credit
union passing a conversion plan or a business plan. OTS also requires
that a converting MSB adopt a plan of conversion that contains specific
information.[^30] NCUA's rules merely require that the converting credit
union "approve a proposal to convert," but do not dictate what must be
in that proposal.[^31]

The notice requirements differ between OTS and NCUA because MSBs and
credit unions are structurally different. The difference is highlighted
by the individuals they may serve or with whom they can transact
business. Any member of the public may utilize an MSB. Thus, the MSB
must notify the public-at-large of the potential conversion. OTS's
notice requirements mandate that the converting MSB publish a notice of
its application and post the notice in the bank's home office and at all
branch offices; the converting MSB must also send notice of the plan's
approval either by mailing a letter to each member or by publishing a
notice in the local newspaper in every local community where the bank
has an office.[^32]

Credit unions, on the other hand, do not serve the public-at-large, but
serve a defined group of members.[^33] By statute, those members must
each receive notice "on the matter of" the credit union's intent to
convert at the prescribed 30-day intervals.[^34] The fact that NCUA
requires certain information in its notice that OTS does not similarly
require does not render NCUA's notice provision in violation of the
statute. Both agencies essentially prohibit their converting entities
from omitting any material facts in their notices.[^35] NCUA requires
that converting credit unions include certain disclosures in its
notices, precluding them from omitting these material facts. NCUA
maintains that the provisions of its current conversion rule do not
exceed NCUA's statutory authority, are consistent with other financial
regulators and are no more or less restrictive than rules applicable to
charter conversion by other financial institutions.

[E. Management Communication with Members]{.underline}

NCUA's conversion rule does not prevent a converting credit union from
communicating with its members to refute or correct misinformation
supplied by groups opposed to the conversion. The disclosures required
by §708a.4(e) of NCUA's regulations provide important, factual
information to make members aware of the potential effects of converting
to a bank so they can make an informed decision. Any credit union that
has a concern about the disclosures can contact the appropriate NCUA
Regional Director to request that the disclosures be modified to address
those concerns.[^36]

While §708a.4(e) requires a converting credit union to include NCUA's
disclosures with written conversion-related communications to its
members, there are communications to which the requirement does not
apply. NCUA has advised the attorneys who have represented most
converting credit unions that conversion-related press releases and
advertisements, not directly mailed to members, are not written
communications to members contemplated by §708a.4(e).

Additionally, the form disclosures are not required until after the
board of directors vote to approve a plan of conversion. Therefore, a
credit union is free to communicate with its members in any way it deems
appropriate, before the board's vote on the plan of conversion, to
provide its members with earlier notice that conversion is under
consideration without including the NCUA disclosure. Indeed, many who
have opposed recent credit union conversions have complained that they
learned of the board's intention to convert only when they received the
first (90-day) notice and ballot.

Finally, communications with individual members, in response to specific
questions posed by these members, are not required to be accompanied by
the NCUA disclosures under §708a.4(e).

[Possible Changes to the Conversion Rule]{.underline}

NCUA believes that certain changes can and should be made to clarify and
improve its conversion rule. NCUA recognizes and fully supports the
rights of credit union members to convert their credit union to a bank
charter. This charter change, however, is a fundamental shift in the
institution's structure, which in turn changes the rights of the
owner-members. The services supplied to the members, and the cost of
those services to the members, are also likely to change.

The decision to change to a bank charter ultimately belongs to the
credit union members. It belongs directly to the members in the sense
that the member vote decides the conversion issue. It also belongs to
the members because the directors, when adopting a proposal to convert
to a bank and advocating that position to the members, have a fiduciary
duty to act in the best interests of the members.

With these fundamental issues at stake, and with NCUA's statutory
obligation, it is imperative that the voting process be transparent and
fair. Inherent to the process is the right of members to be fully
informed as to the reasons for the proposed conversion. They must also
have time to consider the pros and cons of the proposed conversion and
should have an opportunity to discuss the proposal with other members
and to communicate their views to the credit union's directors. This is
not possible under the procedures currently used by converting credit
unions, where members first receive notice at the time the ballot is
mailed. The current conversion process can be improved to facilitate the
quality and flow of information about the conversion between and among
members and directors.

One possible regulatory change NCUA is considering would require a
converting credit union to give advance notice to members that the
credit union's board intends to vote on a conversion proposal. This
notice would provide members, whether they are initially for or against
the conversion, an opportunity to express their opinions to the credit
union's board before the board has expended significant resources on the
conversion process. NCUA has determined that some states have adopted
similar early notice laws and regulations for their state-charted credit
unions considering conversion to banks. [^37]

Another change under consideration would further enhance member
involvement and communication. OTS regulations require a thrift to
forward information from one customer to all the thrift's customers if
the requesting customer agrees to reimburse the thrift for its expenses.
No such system currently exists in NCUA regulations for credit union
members to communicate with each other about a pending conversion, and
we believe it may be a valuable tool to improve the member decision
process in conversions.

NCUA is considering whether the disclosures that a credit union must
provide to its members as part of the conversion process should be
simplified. NCUA's required disclosures have been characterized by some
as inhibiting a credit union board's ability to communicate with their
members outside the formal notice process. While NCUA respectfully
disagrees with this characterization, NCUA is considering modifying the
current requirement that certain disclosures be delivered with all
written communications, and, instead, only require that those
disclosures be delivered with the formal notices of member vote.

NCUA will continue to refine the proposed rule prior to Board issuance
for public comment. The actual proposed rule may include all or some of
the ideas under consideration, as well as additional suggestions from
commenters. Of course, NCUA will carefully consider all comments it
receives before issuing final amendments to the conversion rule. NCUA
believes that such a rulemaking is timely and will provide for a
clearer, more efficient and effective conversion rule.

[Conclusions and Recommendations]{.underline}

Credit unions exist for the purpose of promoting thrift and providing a
source of credit for their members. Since their inception, credit unions
have been organized as democratically controlled, nonprofit
cooperatives, managed by volunteer directors. Credit unions exist to
provide affordable services to their members, rather than to maximize
profits to outside investors or stockholders. Credit unions are unique
and an important financial option for consumers.

While NCUA fully supports the ability of members to vote democratically
to change the charter of their financial institution, NCUA also believes
its primary role in this matter is to ensure that members receive
complete, accurate, and timely disclosures regarding the conversion.
Consumers have a right to expect regulatory bodies to carefully monitor
the disclosures to ensure transparency and maximize the amount of
control that the member-owners exercise over their credit unions. In the
same vein, Congress has a valid and important oversight role in the
process, and consumers derive benefits from the active interest on the
part of their elected representatives. NCUA supports the provisions of
H.R. 3206 that make the requirements of a secret ballot and an
independent inspector of elections statutory. As discussed previously,
NCUA believes other provisions of the bill would interfere with the
Agency's ability to ensure that credit union members receive clear,
complete and accurate information on a conversion.

NCUA believes that any changes to improve the conversion process can be
accomplished through regulation. In that regard, NCUA is taking steps to
enhance clarify, and improve the effectiveness of its regulation. NCUA
remains concerned that, absent important regulatory refinements outlined
in this statement, consumers may not have access to plainly-worded,
accurate and prominent disclosures that inform them about their stake in
a charter change. When member-owners are asked to vote on their credit
union's future, they should have every opportunity to assess all facts
and make an informed choice. Ownership, particularly of the kind
conferred by membership in a financial cooperative, is a significant and
important concept that should be protected by diligent regulatory
oversight.

NCUA looks forward to working with Congress and the credit union
industry to address these important issues.

[^1]: ^1^ Approximately 180 state chartered credit unions are privately
    insured and are not subject to NCUA oversight.

[^2]: ^2^ 60 Fed. Reg. 12695 (March 8, 1995). In 1995, prior to CUMAA,
    the Federal Credit Union Act stated that no credit union could
    convert into a noninsured credit union or institution without the
    prior approval of the NCUA Board but contained no other provisions
    relating to MSB conversions. NCUA's 1995 rulemaking specific to MSB
    conversions was in response to problems observed in credit unions
    attempting to convert. 59 Fed. Reg. 33702 (June 30, 1994)(Proposed
    NCUA Rules on Mergers of Federally-Insured Credit Unions; Voluntary
    Termination or Conversion of Insured Status).

[^3]: ^3^ *Id.*

[^4]: ^4^ Public Law 105-21.

[^5]: ^5^ 12 U.S.C. 1785(b)(2)(B).

[^6]: ^6^12 U.S.C. 1785(b)(2)(C); 12 U.S.C. 1785(b)(2)(D).

[^7]: ^7^ 63 Fed. Reg. 65532 (November 27, 1998).

[^8]: ^8^ 64 Fed. Reg. 28733 (May 27, 1999); 69 Fed. Reg. 8548 (February
    25, 2004); 70 Fed. Reg. 4005 (January 28, 2005).

[^9]: ^9^ 12 U.S.C. 1785 (b)(2)(g)(ii)

[^10]: ^10^ Datatrac is a market research, information technology
    company specializing in the financial services industry. It has been
    an independent source of deposit and lending product information for
    more than 15 years, specializing in the banking and credit union
    industries and representing that it provides its services to over
    17,000 financial institutions nationwide.

[^11]: ^11^ These products included automobile loans; fixed and variable
    rate mortgage products; credit cards; and savings products, such as
    short and long-term certificates of deposit, savings, checking, and
    money market accounts.

[^12]: J. Heinrich and R. Kashian, *Credit Union to Mutual Conversion:
    Do Rates Diverge?,* February 22, 2006 (hereinafter the Heinrich
    study). A copy of the study is attached as Appendix B.

[^13]: Id. at 1.

[^14]: 51 Fed. Reg. 40127 (November 5, 1986)(Preamble to final Federal
    Home Loan Bank Board rule on federal mutual savings bank stock
    conversions).

[^15]: Theriault, Alan D., *CEO & Directors:  Salary Imbalance is
    Corrected by Converting to a Bank,* CONVERTING FROM A CREDIT UNION
    FAX UPDATE, Sept. 16, 2002, *available at*
    http://www.cufinancial.com/pdfs/ NL2002.pdf.

[^16]: *Id*.

[^17]: *Id*.

[^18]: *Id.* at 2-3.

[^19]: *See* *Credit Union Journal Daily*, February 22, 2003, located at
    www.cujournal.com (discussing the conversion of Rainier Pacific
    Credit Union).

[^20]: "On Feb. 17, directors of \[Rainier Pacific Financial Group, the
    parent of Rainier Pacific Savings Bank\], known until 2000 as
    Rainier Pacific CU, approved a lucrative post-conversion
    compensation for both themselves and managers. Under the plan,
    disclosed in documents filed with the Securities and Exchange
    Commission, top executives and directors of Rainier Pacific will be
    granted a total of 288,500 shares of stock valued at almost \$5
    million, to be vested over the next five years. The largest
    recipients will be \[the President and CEO\], who will receive
    60,000 shares valued at almost \$1 million, and \[the Senior Vice
    President\], who will receive 40,000 shares valued at more than
    \$650,000. But directors also voted themselves a share in the
    so-called management recognition stock plan, with each of the eight
    non-employee directors in line for 10,000 shares valued at \$165,000
    over the next five years. That\'s on top of the \$13,750 each of the
    once-volunteer directors now earns each year to serve on the board.
    But that\'s not all. The group, as well as other employees will
    share in a pool of options to buy 680,000 bank shares at a discount
    over the next five years. Officials of Rainier Pacific did not
    return phone calls last week to comment." "Taking It to the Bank;
    Filings Show How CEOs, Boards at Converts Have Cashed In," *Credit
    Union Journal*, March 29, 2004, p.1 (hereinafter [Taking it to the
    Bank]{.underline}).

[^21]: *See* "Excessive Compensation Charged at Convert CU," *Credit
    Union Journal Daily*, February 6, 2006 (Discussing SEC proxy filings
    involving the converted Synergy Federal Credit Union).

[^22]: "The biggest winners at Kaiser \[Federal Credit Union\] were
    \[the CEO\] who bought the maximum allowable 30,000 shares, netting
    her \$108,000 in IPO profits. Four directors and two other top execs
    also subscribed to the maximum 30,000 allotment. In all, the four
    top managers and six non-management directors earned \$918,000 of
    profits on their 265,000 shares in last week\'s IPO. The ex-CU has
    also set aside another 255,000 shares, worth \$3.5 million, as free
    stock grants to be awarded to the same individuals over the next
    five years." Credit Union Journal, April 5, 2004, p.1.

[^23]: See [Taking it to The Bank]{.underline}, *supra* note 23
    (Discussing the conversion of Pacific Trust Credit Union); *Credit
    Union Journal*, February 25, 2004. Four years after the IPO, the CEO
    had received stock grants and stock options of a total value of
    about \$3.8 million. *Credit Union Journal*, April 14, 2006.

[^24]: 12 C.F.R. §708a.4(e).

[^25]: "In practice, members delegate voting rights and the operation of
    federal mutual savings associations through the granting of proxies
    typically given to the board of directors (trustees) or a committee
    appointed by a majority of the board." OTS Thrift Activities
    Regulatory Handbook, Section 110.2 (December 2003).

[^26]: An FMSB may adopt a range of voting rights, from one-person
    one-vote to one vote per \$100 account balance up to 1000 votes.
    NCUA believes, however, that all credit unions that have converted
    to FMSBs to-date have made a conscious decision to abandon the
    one-person one-vote concept.

[^27]: 12 USC 1785(b)(2)(G)(i).

[^28]: *See* 12 C.F.R. part 563b.

[^29]: *See* 12 C.F.R. §§ 563b.100, 563b.105 (outlines required
    information to be included in business plan).

[^30]: *See* 12 C.F.R. §§ 536b.125, 536.130.

[^31]: *See* 12 C.F.R. § 708a.3.

[^32]: *Supra* note 53; 12 C.F.R. §§ 536b.135, 563b.180.

[^33]: *See* 12 U.S.C. 1759.

[^34]: 12 U.S.C. 1785(2)(C).

[^35]: *See*, *e.g.,* 12 C.F.R. § 563b.285.

[^36]: 12 C.F.R. §708a.4(e).

[^37]: [See, e.g]{.underline}., Mich. Comp. Laws 490.373(1)(a) and
    (1)(b)(ii) and 8 Vt. Stat. Ann. Tit. 8, §35102 (2006).