This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

73000 

Vol. 75, No. 228 

Monday, November 29, 2010 

1Within the 50 states, approximately 152 statechartered credit unions have private, primary share 

insurance and are not subject to NCUA regulation 

or oversight. 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Parts 701, 704, and 741 

RIN 3133–AD74 

Corporate Credit Unions 

AGENCY: National Credit Union 

Administration. 

ACTION: Proposed rule. 

SUMMARY: NCUA is issuing proposed 

amendments to its rule governing 

corporate credit unions (corporates). 

The amendments include internal 

control and reporting requirements for 

corporates similar to those required for 

banks under the Federal Deposit 

Insurance Act and the Sarbanes-Oxley 

Act. The amendments require each 

corporate to establish an enterprisewide risk management committee 

staffed with at least one risk 

management expert. The amendments 

provide for the equitable sharing of 

Temporary Corporate Credit Union 

Stabilization Fund (TCCUSF) expenses 

among all members of corporates, 

including both credit union and 

noncredit union members. The 

amendments increase the transparency 

of decision-making by requiring that 

corporates conduct all board of director 

votes as recorded votes and include the 

votes of individual directors in the 

meeting minutes. The amendments 

permit corporates to charge their 

members reasonable one-time or 

periodic membership fees as necessary 

to facilitate retained earnings growth. 

For senior corporate executives who are 

dual employees of corporate credit 

union service organizations (CUSOs), 

the amendments require disclosure of 

certain compensation received from the 

corporate CUSO. In addition, this 

proposal would amend our regulations 

to limit natural person credit unions 

(NPCUs) to membership in one 

corporate credit union at any particular 

time and provide that a natural person 

credit union may not make any 

investment in a corporate credit union 

of which the natural person credit union 

is not also a member. These proposed 

amendments will further strengthen 

individual corporates and the corporate 

system as a whole. 

DATES: Comments must be received on 

or before December 29, 2010. 

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. Follow the 

instructions for submitting comments. 

NCUA Web site: http://www.ncua.

gov/Resources/RegulationsOpinions

Laws/ProposedRegulations.aspx. Follow 

the instructions for submitting 

comments. 

E-mail: Address to 

regcomments@ncua.gov. Include ‘‘[Your 

name] Comments on ‘Notice of 

Proposed Rulemaking for Part 704— 

Corporate Credit Unions’ ’’ 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. 

Public Inspection: All public 

comments are available on the agency’s 

Web site at http://www.ncua.gov/

Resources/RegulationsOpinionsLaws/

ProposedRegulations.aspx as submitted, 

except as may not be possible for 

technical reasons. Public comments will 

not be edited to remove any identifying 

or contact information. Paper copies of 

comments may be inspected in NCUA’s 

law library at 1775 Duke Street, 

Alexandria, Virginia 22314, by 

appointment weekdays between 9 a.m. 

and 3 p.m. To make an appointment, 

call (703) 518–6546 or send an e-mail to 

OGCMail@ncua.gov. 

FOR FURTHER INFORMATION CONTACT: 

Jacqueline Lussier, Staff Attorney, 

Office of General Counsel; Elizabeth 

Wirick, Staff Attorney, Office of General 

Counsel; and Lisa Henderson, Staff 

Attorney, Office of General Counsel, at 

the address above or telephone (703) 

518–6540; or David Shetler, Deputy 

Director, Office of Corporate Credit 

Unions, at the address above or 

telephone (703) 518–6640. 

SUPPLEMENTARY INFORMATION: The 

NCUA performs its mission of ensuring 

the safety and soundness of Federallyinsured credit unions by examining all 

Federal credit unions, participating in 

the examination and supervision of 

Federally-insured, State-chartered credit 

unions in coordination with State 

regulators, and insuring Federallyinsured credit union members’ 

accounts. In its statutory role as the 

administrator of the National Credit 

Union Share Insurance Fund (NCUSIF), 

NCUA insures and supervises 

approximately 7,500 Federally-insured 

credit unions (FICUs), representing 98 

percent of all credit unions and serving 

approximately 90 million members. 

Corporate Credit Union System 

A corporate credit union is an 

organization, chartered under the 

Federal Credit Union Act (the Act) or 

under applicable State law as a credit 

union that receives share deposits from 

and provides loan and other services 

primarily to other credit unions. 12 CFR 

704.2. There are 26 retail corporates that 

provide services directly to NPCUs, and 

there is one wholesale corporate, U.S. 

Central Bridge Federal Credit Union 

(U.S. Central Bridge), that provides 

services to many of the 26 retail 

corporates. Fourteen retail corporates 

and U.S. Central Bridge are Federallychartered and 12 retail corporates are 

State-chartered. 

Like NPCUs, corporates are memberowned cooperatives. However, at 

corporates the member-owners are 

primarily NPCUs. Over 95 percent of 

NPCUs belong to corporate credit 

unions. In addition, other entities that 

are not Federally-insured credit unions 

(i.e., ‘‘non FICUs’’) also may become 

members of corporates. These 

nonfederally-insured members consist 

of nonfederally-insured credit unions 1

and non credit union entities. Non 

credit union entities include credit 

union leagues and trade associations, 

CUSOs, certain banks, and other types 

of organizations. These other 

organizations include, for example, 

credit union political action 

committees, credit union charitable and 

educational foundations, and law firms, 

insurance agencies, and mortgage 

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Federal Register / Vol. 75, No. 228 / Monday, November 29, 2010 / Proposed Rules 73001 

2The FCU Act provisions generally authorizing 

such nonmember transactions, such as 12 U.S.C. 

1757(6) and 1757(7)(C), are specifically subject to 

the regulation of the Board. 12 U.S.C. 1757 and 

1782. 

companies that are connected to the 

credit union industry. 

The corporate system offers a broad 

range of support to its members. The 

products and services provided by U.S. 

Central Bridge to retail corporates, and 

by retail corporates to their members, 

include, among other things: investment 

and deposit services, wire transfers, 

share draft processing and imaging, 

automated clearinghouse (ACH) 

transactions processing, automated 

teller machine (ATM) processing, bill 

payment services, and security 

safekeeping. The volume of payment 

systems-related transactions throughout 

the system annually runs into the 

millions and the dollar amounts 

associated with those transactions are in 

the billions each month. Corporates also 

serve as liquidity providers for their 

members. An NPCU invests excess 

liquidity in a corporate when the NPCU 

has lower loan demand and draws down 

the invested liquidity when loan 

demand increases. 

Some NPCUs depend heavily on 

corporates; for example, 75 percent of 

NPCUs rely on a corporate as their 

primary settlement agent. Corporates 

provide NPCUs with convenient and 

quality services and expertise, all at a 

fair price. For many NPCUs, this is a 

combination that makes the corporate 

system a valuable resource and, for 

some smaller NPCUs, an essential 

resource. 

Federally-chartered corporates are 

governed by Federal law and Statechartered corporate credit unions by 

State law. In addition, all corporates 

that are Federally insured, or that accept 

share deposits from NPCU members that 

are Federally insured, must comply 

with NCUA’s part 704 corporate rule. 12 

CFR 704.1, 12 U.S.C. 1766(a). 

NCUA recently made substantial 

revisions to part 704 (with conforming 

amendments to parts 702, 703, 709, and 

747). Final Rule, 75 FR 64786 (October 

20, 2010) (September Rulemaking). The 

most significant amendments establish a 

new capital scheme, including riskbased capital requirements; impose new 

prompt corrective action requirements; 

place various new limits on corporate 

investments; impose new asset-liability 

management controls; amend some 

corporate governance provisions; and 

limit a corporate CUSO to categories of 

services preapproved by NCUA. The 

preamble to the September Rulemaking 

also stated that shortly after its 

promulgation the Board intended to 

issue another proposal that would 

further amend Part 704 and related 

provisions. Id. at 64824. This current 

proposal is the referenced follow-on 

rulemaking. 

These proposed amendments would: 

(1) Increase the transparency of 

corporate credit union decision-making 

by requiring corporates conduct all 

board of director votes as recorded votes 

and include the votes of individual 

directors in the meeting minutes; 

(2) Incorporate certain sound audit, 

reporting, and audit committee practices 

from the Federal Deposit Insurance Act 

(FDI Act), Part 363 of the Federal 

Deposit Insurance Corporation (FDIC) 

Regulations, and the Sarbanes-Oxley 

Act of 2002 (SOX); 

(3) Provide for the equitable sharing of 

TCCUSF expenses among all members 

of corporate credit unions, including 

both credit union and noncredit union 

members, by establishing procedures for 

requesting members not insured by the 

NCUSIF to make voluntary premium 

payments to the TCCUSF; 

(4) Protect against unnecessary 

competition between corporates by 

limiting NPCUs to membership in one 

corporate of the NPCU’s choice at any 

one time and prohibiting an NPCU from 

making any investment in a corporate 

where the NPCU is not also a member; 

(5) Improve risk management at 

corporates by requiring corporates to 

establish enterprise-wide risk 

management committees staffed with at 

least one independent risk management 

expert; 

(6) Provide corporates with more 

options to grow retained earnings by 

allowing corporates to charge their 

members reasonable one-time or 

periodic membership fees; and 

(7) Require the disclosure of 

compensation received from a corporate 

CUSO by certain highly compensated 

corporate credit union executives. 

These proposals are discussed in 

more detail below in the section-bysection analysis. 

Section-by-Section Analysis of 

Proposed Amendments 

Section 701.5 Membership Limited to 

One Corporate Credit Union 

In the recent past, some NPCUs ‘‘rate 

shopped’’ among corporates for the 

highest deposit rates and lowest service 

costs. This rate shopping resulted in 

increased competition and, in some 

cases, led to unsafe investment activities 

as corporates sought higher investment 

yields to subsidize share dividends and 

service costs. 

Proposed § 701.5 seeks to prevent 

unhealthy competition among 

corporates by requiring Federal credit 

unions to make a decision to commit to 

membership in one corporate at a time. 

The proposal provides that a Federal 

credit union may belong to two 

corporates for a short period of time, but 

only when transitioning between those 

corporates. In addition, the proposal 

prohibits a Federal credit union from 

making any investment, including a 

share or deposit account, a loan, or a 

capital investment, in a corporate of 

which the Federal credit union is not a 

member.2 This will avoid unhealthy 

competition among corporates driven by 

rate shopping among nonmembers. 

Proposed § 701.5 has prospective 

impact only. That is, credit unions that 

are currently members of two or more 

corporates do not have to relinquish 

memberships in any of those corporates. 

The Board believes that the members of 

a credit union are owners of that credit 

union, including the members of a 

corporate, and that ‘‘once a member, 

always a member.’’ 

The Board also notes that § 704.8(k) 

applies a 15 percent investment limit to 

investments in a corporate made by a 

‘‘member or nonmember credit union.’’ 

This section does not authorize 

investments by nonmembers, and, if the 

Board adopts § 701.5(c) as proposed, it 

is unlikely that a nonmember credit 

union would be able to make any 

investments in a corporate where it is 

not already a member. 

These same restrictions, through 

language added in new § 741.226 of part 

741, would apply to State-chartered 

Federally-insured NPCUs as well as 

FCUs. 

This proposal also contains the 

following changes to part 704. 

Section 704.2 Definitions 

The NCUA Board is proposing to add 

a number of new definitions to § 704.2 

to assist in complying with the 

proposed revisions to § 704.15 

discussed below. The defined terms 

include: Critical accounting policies, 

Enterprise risk management, 

Examination of internal control, Family, 

Financial statements, Financial 

statement audit, Generally accepted 

auditing standards, Independent public 

accountant, Internal control, Internal 

control framework, Internal control over 

financial reporting, and Supervisory 

committee. 

The associated definitions come from 

a variety of sources, including other 

sections of the NCUA Rules and 

Regulations, auditing and accounting 

industry standards, and Securities and 

Exchange Commission (SEC) rules. The 

Board requests comment on the 

appropriateness of these definitions. 

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73002 Federal Register / Vol. 75, No. 228 / Monday, November 29, 2010 / Proposed Rules 

3The September Rulemaking redesignated the 

Board Responsibilities section from § 704.4 to 

§ 704.13. 

Section 704.11 Corporate Credit Union 

Service Organizations; § 704.19

Disclosure of Executive and Director 

Compensation 

The recently adopted revisions in the 

September Rulemaking require that each 

corporate annually prepare, and provide 

to its members, a document that 

discloses the compensation of certain 

employees. 12 CFR 704.19(a). An 

employee of a corporate may also, 

however, be an employee of a corporate 

CUSO and receive additional 

compensation from the CUSO. The dual 

employee’s compensation disclosure 

under § 704.19(a) would be incomplete 

without a disclosure of both sources of 

compensation, particularly where the 

employee’s corporate has made a loan 

to, or other investment in, that corporate 

CUSO and so has some control over the 

CUSO. 

The proposal amends § 704.19 to 

clarify that for CUSOs in which a 

corporate has invested, the corporate 

must include compensation received 

from the CUSO in disclosures of 

compensation paid to the corporate’s 

most highly compensated employees. 

To facilitate this disclosure, the 

proposal also amends § 704.11(g), which 

lists certain items with which a CUSO 

must agree in writing before a corporate 

credit union may make a loan to or 

invest in the CUSO. The amendment to 

§ 704.11(g) requires a corporate CUSO 

disclose compensation paid to any 

employees that are also employees of a 

corporate credit union lending to, or 

investing in, the CUSO. This ensures 

that CUSOs will provide corporate 

credit unions the information necessary 

for the corporate to make the full 

disclosure required by § 704.19. 

The proposal applies only to 

corporate employees. It does not amend 

or otherwise modify § 704.11(f), which 

prohibits officials of corporate credit 

unions which have invested in or 

loaned to a corporate CUSO from 

receiving any compensation or other 

payments from the corporate CUSO. 

Section 704.13 Board Responsibilities 

The proposal adds a new 

subparagraph (c)(8) to § 704.13, Board 

responsibilities, to require that all board 

of directors votes be conducted by 

recorded votes.3

The minutes reporting the vote must 

identify the board members, by name, 

who voted for or against the proposal, 

as well as, if applicable, the board 

members who were absent or otherwise 

failed to vote, and any board members 

who abstained from voting. The Board 

believes this provision is necessary so as 

to increase the transparency of corporate 

board actions. 

The corporate credit union system has 

confronted profound challenges during 

the economic crisis of the past several 

years. Some corporate credit unions 

made poor investment decisions, and 

these decisions caused billions of 

dollars of losses. Unfortunately, the role 

of individual directors in these 

decisions was not always clear because 

the board secretary did not always 

record the votes of individual directors 

in the minutes of the board meeting. 

Corporate boards are likely to 

continue to face crucial decisions. For 

example, the ongoing effects of the 

financial crisis may force some 

corporates to confront critical 

restructuring questions in which the 

interests of NPCUs utilizing different 

services of the corporate may diverge. In 

these situations, members may need to 

know how each director voted in 

addition to knowing the outcome of the 

vote. 

Also, requiring recorded votes will 

help to ensure that corporate directors 

comply with their obligation to recuse 

themselves from deliberating and voting 

on items which may involve a conflict 

of interest. Article XI, § 2 of the 

Standard Corporate Federal Credit 

Union Bylaws prohibits corporate 

insiders, including directors, from 

participating ‘‘in any manner, directly, 

or indirectly in the deliberation upon or 

the determination of any question 

affecting his/her pecuniary interest or 

the pecuniary interest of any 

corporation, partnership, or association 

(other than the corporate credit union) 

in which he/she is directly or indirectly 

interested.’’ If a director is disqualified 

because of a conflict, the director must 

withdraw from deliberation and 

determination of the issue. Id. Under the 

bylaw, the director has the obligation to 

identify issues that may pose a conflict 

of interest and withdraw from 

deliberation and determination of these 

issues. If, however, a director fails to 

self-identify or report a potential 

conflict, it would be difficult to 

determine whether or how the director 

voted on an issue without disclosure of 

votes on a director-by-director basis. 

The accountability and transparency 

that results from recording vote tallies 

by name will provide an important 

backstop to the self-policing aspect of 

the corporate bylaw conflict-of-interest 

provision. 

NCUA’s existing regulations provide 

some transparency to members, but may 

not be sufficient absent a specific 

requirement to record votes by name. 

For example, NCUA’s regulations 

provide a process by which members of 

credit unions, including members of 

corporate credit unions, may inspect the 

credit union’s books and records as well 

as minutes of member, board, and 

committee meetings. 12 CFR 701.3(a). 

Members seeking access to records must 

submit a petition signed by one percent 

of the credit union’s members; the 

petition must identify particular records 

and state a purpose related to the 

protection of the members’ financial 

interest in the credit union. 12 CFR 

701.3(b). Like the current proposal, the 

rule providing for member access to 

records increases the transparency of 

actions and decisions of the credit 

union’s leadership. If, however, the 

corporate credit union’s records lack 

recorded votes showing how each 

director voted on a particular issue, 

members would not be able to get the 

director-by-director tally even after 

submitting a petition. 

There are multiple sources of 

authority for NCUA’s proposed 

amendment to paragraph 704.13(c). The 

Act grants NCUA broad authority to 

require FICUs, including corporate 

credit unions, to submit financial data 

and other information as required by the 

NCUA Board. 12 U.S.C. 1761, 1766, 

1781, and 1789. Further, the Act 

authorizes the NCUA Board to request 

additional information as it may require. 

12 U.S.C. 1782(a)(2). NCUA’s 

recommended standard procedures for 

corporate credit union examinations 

include a review of minutes of the board 

of directors’ meetings or actions. NCUA 

Corporate Examination Procedures 

§ 301P–004 (2003). Like the review of 

board minutes, the proposal falls under 

NCUA’s general powers to require both 

Federal credit unions and Federallyinsured State-chartered credit unions to 

prepare and submit information in 

connection with insurance 

examinations. 

Section 704.15 Audit and Reporting 

Requirements 

Both NCUA and natural person credit 

unions rely upon financial information 

to evaluate the condition of insured 

corporate credit unions and to 

determine the adequacy of regulatory 

capital. Accurate and reliable 

measurement of a corporate credit 

union’s assets and earnings has a direct 

bearing on the determination of 

regulatory capital. Interested parties can 

place greater reliance on recognition, 

measurement, and disclosures 

contained in financial statements that 

have been subject to an independent 

audit. Independent audits help to 

identify weaknesses in internal control 

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Federal Register / Vol. 75, No. 228 / Monday, November 29, 2010 / Proposed Rules 73003 

4A few provisions in proposed 704.15 would 

apply only to corporates with assets of at least $1 

billion. 

5Ultimately, the FDIC limited its compliance 

concerns to laws and regulations concerning insider 

lending and dividend restrictions. See 58 FR 31332, 

June 2, 1993. 

over financial reporting and risk 

management at corporate credit unions 

and reinforce corrective measures, thus 

complementing supervisory efforts in 

contributing to the safety and soundness 

of corporate credit unions. 

NCUA currently requires that a 

corporate credit union’s board of 

directors ensure the preparation of 

timely and accurate balance sheets, 

income statements, and internal risk 

assessments and that systems are 

audited periodically in accordance with 

industry standards. 12 CFR 704.4(c). In 

addition, a corporate credit union’s 

supervisory committee must ensure 

that: (1) An external audit is performed 

annually in accordance with generally 

accepted auditing standards; and (2) the 

audit report is submitted to the board of 

directors, to NCUA, and in a summary 

version, to the members. 12 CFR 

704.15(a). 

To facilitate early identification of 

problems in financial management at 

corporate credit unions, the NCUA 

Board is proposing to amend § 704.15 to 

add certain additional auditing, 

reporting, and supervisory committee 

requirements. The most significant 

proposed revisions would require a 

corporate credit union to: 

Ensure that its financial reports reflect 

all material correcting adjustments 

necessary to conform with generally 

accepted accounting principles (GAAP) 

that were identified by the corporate 

credit union’s independent public 

accountant (IPA). 

Prepare an annual management 

report, signed by the chief executive 

officer and the chief accounting officer 

or chief financial officer, that contains: 

(1) A statement of management’s 

responsibility for preparing financial 

statements, responsibility for 

establishing and maintaining an 

adequate internal control structure, 

responsibility for procedures for 

financial reporting, and responsibility 

for complying with laws and regulations 

relating to safety and soundness 

designated by NCUA; (2) an assessment 

of the corporate credit union’s 

compliance with such laws and 

regulations; and (3) for a corporate with 

assets of at least $1 billion, an 

assessment of the effectiveness of the 

internal control structure and 

procedures over financial reporting, 

including identifying the internal 

control framework used to evaluate such 

internal control. 

Ensure that its IPA: (1) Reports on a 

timely basis to the supervisory 

committee all critical accounting 

policies, alternative accounting 

practices discussed with management, 

and written communications provided 

to management; (2) retains the working 

papers related to an audit and, if 

applicable, the evaluation of the 

corporate credit union’s internal control 

over financial reporting, for seven years 

from the report release date; (3) 

complies with the independence 

standards and interpretations of the 

American Institute of Certified Public 

Accountants (AICPA); (4) has, prior to 

beginning any services for a corporate, 

a peer review that meets acceptable 

audit industry guidelines; (5) notifies 

NCUA if the IPA ceases being a 

corporate credit union’s independent 

accountant; and (6) for a corporate with 

assets of at least $1 billion, reports 

separately to the supervisory committee 

on management’s assertions concerning 

the effectiveness of the corporate credit 

union’s internal control structure and 

procedures for financial reporting. 

Ensure that its supervisory committee 

(1) consists of members who are not 

employees of the corporate credit union; 

(2) supervises the IPA; and (3) ensures 

that audit engagement letters do not 

contain unsafe and unsound limitation 

of liability provisions. 

NCUA has based many of these 

proposed revisions on part 363 of the 

FDIC’s Rules, 12 CFR part 363. The 

FDIC has provided guidance, found in 

Appendices A and B to part 363, to 

assist managements of banks and thrifts 

in complying with a number of part 363 

requirements. The NCUA Board has 

determined not to issue similar formal 

guidance in conjunction with the 

proposed revisions to part 704. 

The NCUA Board also notes that part 

363 only applies to banks and thrifts 

with assets of at least $500 million. In 

contrast, most of these proposed 

provisions to part 704 would apply to 

all corporate credit unions, even those 

smaller corporates with under $500 

million in assets.4 The Board believes 

that because corporates provide services 

to NPCUs, smaller corporate credit 

unions may present systemic risks that 

smaller banks and thrifts do not. The 

Board requests comment, however, on 

whether certain of the proposed 

provisions should apply only to 

corporate credit unions with assets 

above a certain threshold. Commenters 

should specify which provisions and 

what the asset threshold or thresholds 

should be. 

Paragraph 704.15(a) Annual Reporting 

Requirements 

704.15(a)(1) Audited Financial 

Statements 

Proposed paragraph (a)(1) restates the 

existing requirement that a corporate 

credit union prepare audited financial 

statements that conform with GAAP. To 

facilitate a more accurate picture of a 

corporate credit union’s financial 

condition, the proposal also adds the 

requirement that the annual financial 

statements reflect all material correcting 

adjustments identified by the IPA as 

necessary to conform with GAAP. 

704.15(a)(2) Management Report 

Proposed paragraph (a)(2) requires the 

management of a corporate prepare an 

annual report that contains certain 

enumerated elements. 

The Board is concerned that 

management in some corporate credit 

unions may have insufficient oversight 

over certain reporting, control, and 

compliance functions. The Board 

believes that requiring management to 

acknowledge its responsibilities in these 

areas will help the corporate credit 

union identify needed improvements in 

financial management. Accordingly, 

proposed paragraph (a)(2)(i) requires 

management reports contain a statement 

of management’s responsibilities for 

preparing the corporate credit union’s 

annual financial statements, for 

establishing and maintaining an 

adequate internal control structure and 

procedures for financial reporting, and 

for complying with certain laws and 

regulations relating to safety and 

soundness. 

The proposed rule identifies the 

following five safety and soundness 

areas about which the NCUA Board is 

concerned: affiliate transactions, legal 

lending limits, loans to insiders, 

restrictions on capital and share 

dividends, and regulatory reporting that 

meets full and fair disclosure. When the 

FDIC issued a proposed rule 

implementing new audit, reporting, and 

internal control requirements for certain 

banks and thrifts, see 12 CFR part 363, 

it identified these five areas as 

presenting the greatest risks. See 57 FR 

42516, Sept. 15, 1992.5 Corporate credit 

unions are structured differently from 

banks, however, and the Board seeks 

comment on whether the five identified 

areas are appropriate. The Board also 

seeks comment on whether the final 

regulation should specify the laws and 

rules and regulations covered by 

mstockstill on DSKH9S0YB1PROD with PROPOSALS

73004 Federal Register / Vol. 75, No. 228 / Monday, November 29, 2010 / Proposed Rules 

proposed paragraph (a)(2), such as 

section 107(5)(A)(iv) and (v) of the 

Federal Credit Union Act, 12 U.S.C. 

1757(5)(A)(iv) and (v), governing loans 

to directors and committee members, 

and § 704.7, governing corporate credit 

union lending. 

Proposed paragraph (a)(2)(ii) requires 

management assess and report on the 

corporate credit union’s compliance 

with those designated safety and 

soundness laws and regulations. This 

assessment requirement reinforces the 

importance of management’s 

responsibility for complying with the 

rules by requiring disclosure of 

instances of noncompliance. 

Management should perform its own 

investigation and review of compliance 

with the rules and maintain records of 

its assessments until the next NCUA 

examination or such later date as 

specified by NCUA. 

The NCUA Board has determined that 

corporate credit unions with $1 billion 

or more in total assets present 

additional risks. Accordingly, proposed 

paragraph (a)(2)(iii) requires these larger 

corporate credit unions include in their 

management reports an assessment of 

the effectiveness of the internal control 

structure over financial reporting. 

Management must identify the internal 

control framework used to make its 

evaluation, include a statement that the 

evaluation included controls over the 

preparation of financial statements and 

regulatory reports, include a statement 

as to management’s conclusion 

regarding the effectiveness of internal 

control over financial reporting, and 

disclose all material weaknesses 

identified by management. Management 

may not conclude that internal control 

over financial reporting is effective if 

there are any material weaknesses. 

A suitable control framework is one 

established by a body of experts 

following widespread opportunity for 

comment, including the broad 

distribution of the framework for public 

comment. A framework is suitable only 

when it: 

• Is free from bias; 

• Permits reasonably consistent 

qualitative and quantitative 

measurements of a corporate credit 

union’s internal control over financial 

reporting; 

• Is sufficiently complete so that 

those relevant factors that would alter a 

conclusion about the effectiveness of a 

corporate credit union’s internal control 

over financial reporting are not omitted; 

and 

• Is relevant to an evaluation of 

internal control over financial reporting. 

The Internal Control—Integrated 

Framework published by the Committee 

of Sponsoring Organizations of the 

Treadway Commission (the ‘‘COSO 

Report’’) provides a suitable and 

recognized framework for purposes of a 

management assessment in the United 

States. Other suitable frameworks have 

been published in other countries, and 

still others may be developed in the 

future. Such other suitable frameworks 

may be used by management and the 

corporate credit union’s IPA in 

assessments, attestations, and audits of 

internal control over financial reporting. 

704.15(a)(3) Management Report 

Signatures 

To ensure that management 

understands its ultimate responsibility 

for the corporate credit union’s 

performance, proposed paragraph (a)(3) 

requires the chief executive officer and 

either the chief accounting officer or 

chief financial officer of the corporate 

credit union to sign the management 

report. 

704.15(b)(1) Annual Audit of Financial 

Statements 

Proposed paragraph (b) sets forth the 

requirements applicable to the 

corporate’s IPA. Proposed paragraph 

(b)(1) clarifies the existing requirement 

that a corporate credit union have its 

annual financial statements audited by 

an IPA in accordance with generally 

accepted auditing standards. The IPA 

should be registered or licensed to 

practice as a public accountant, and be 

in good standing, under the laws of the 

State or other political subdivision of 

the United States in which the home 

office of the corporate credit union is 

located. 

704.15(b)(2) Internal Control Over 

Financial Reporting 

Proposed paragraph (b)(2) requires an 

IPA who audits a corporate credit union 

with assets of at least $1 billion attest to 

management’s assertions concerning the 

effectiveness of the corporate credit 

union’s internal control structure and 

procedures for financial reporting. To 

ensure that an attestation report is 

sufficiently informative, the report 

must: 

• Identify the internal control 

framework that the IPA used to make 

the evaluation (which must be the same 

as the internal control framework used 

by management); 

• Include a statement that the IPA’s 

evaluation included controls over the 

preparation of regulatory financial 

statements; 

• Include a clear statement as to the 

IPA’s conclusion regarding the 

effectiveness of internal control over 

financial reporting; 

• Disclose all material weaknesses 

identified by the IPA that have not been 

remediated; 

• Conclude that internal control is 

ineffective if there are any material 

weaknesses; and 

• Be dated by the IPA on or after the 

date of management’s report on its 

assessment of the effectiveness of 

internal control over financial reporting. 

704.15(b)(3) Notice by Accountant of 

Termination of Services 

In the interests of safety and 

soundness, and to ensure that NCUA is 

aware of potential conflicts between a 

corporate credit union and its IPA, 

proposed paragraph (b)(3) requires an 

IPA to notify NCUA if the IPA 

terminates work as the corporate credit 

union’s auditor. The IPA’s notice of 

termination under (b)(3) is similar to the 

notice of termination in proposed 

paragraph (c)(4) that the corporate credit 

union must provide to both NCUA and 

the IPA. In its (b)(3) notice, the IPA 

must state whether the IPA agrees with 

the corporate credit union’s assertions 

contained in the (c)(4) notice and 

whether the IPA agrees that the (c)(4) 

notice discloses all relevant reasons for 

the IPA’s termination. 

704.15(b)(4) Communications With 

Supervisory Committee 

The Board believes that 

communications between a corporate 

credit union’s supervisory committee 

and its auditor are critical to proper 

oversight of the auditing function. 

Accordingly, proposed paragraph (b)(4) 

establishes certain communication 

requirements between the auditor and 

the committee. Under the proposal, an 

IPA must inform the supervisory 

committee on a timely basis about: (1) 

All critical accounting policies, (2) 

alternative accounting treatments 

discussed with management, and (3) 

written communications provided to 

management, such as a management 

letter or schedule of unadjusted 

differences. These requirements are 

minimum requirements—other 

communications beyond these 

requirements are encouraged. 

704.15(b)(5) Retention of Working 

Papers 

Consistent with best industry 

practices, proposed paragraph (b)(5) 

requires an IPA to retain the working 

papers related to its audit of a corporate 

credit union’s financial statements for at 

least seven years. If the IPA has 

conducted an evaluation of internal 

control over financial reporting, the IPA 

must also retain those working papers 

for at least seven years. 

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6 27 FR 6847, Feb. 9, 2006. 

704.15(b)(6) Independence 

Proposed paragraph (b)(6) codifies 

existing industry self-governance 

requirements that auditors comply with 

the independence standards of the 

American Institute of Certified Public 

Accountants (AICPA). 

704.15(b)(7) Peer Reviews 

Proposed paragraph (b)(7) codifies 

existing industry self-governance 

requirements that auditors undergo 

periodic peer reviews. The proposal 

clarifies that acceptable peer reviews 

include those performed in accordance 

with the AICPA’s Peer Review 

Standards and inspections conducted by 

the Public Company Accounting 

Oversight Board (PCAOB). This 

paragraph also requires a corporate 

credit union’s IPA to file a copy of the 

peer review report, or the public portion 

of the PCAOB inspection report, with 

NCUA. 

704.15(c)(1) Annual Reporting 

Proposed paragraph 704.15(c) sets 

forth various reporting, filing, and 

notice requirements. The current 

regulation is silent on when a corporate 

credit union must provide a copy of its 

annual report to NCUA. To ensure 

timely filing and provide consistent 

application of the requirement, 

proposed paragraph (c)(1) provides that 

a corporate credit union must file a copy 

of its annual report to NCUA within 180 

days after the end of the calendar year. 

The report must contain the audited 

financial statements, the IPA’s report on 

those statements, a management report, 

and, if applicable, the IPA’s attestation 

report on management’s assessment of 

internal control over financial reporting. 

704.15(c)(2) Public Availability 

Proposed paragraph (c)(2) provides 

that NCUA will make a corporate credit 

union’s annual report available for 

public inspection. 

704.15(c)(3) IPA’s Reports 

Consistent with good corporate 

governance, proposed paragraph (c)(3) 

requires a corporate credit union to 

provide NCUA with a copy of any 

management letter or report issued by 

its IPA. The proposal includes examples 

of the types of reports covered. 

704.15(c)(4) Notice of Engagement or 

Change of Accountants 

In the interests of safety and 

soundness, and as discussed above, 

proposed paragraph (c)(4) requires a 

corporate to inform NCUA when the 

credit union engages an IPA or loses an 

IPA through dismissal or resignation. 

The corporate must include with the 

notice a reasonably detailed statement 

of the reasons for any dismissal or 

resignation. The corporate must send a 

copy of the (c)(4) notice required to the 

IPA when the notice is filed with 

NCUA. 

704.15(c)(5) Notification of Late Filing 

Proposed paragraph (c)(5) requires the 

corporate provide a notice to NCUA of 

late filing of the annual report. The 

notice must specify the reasons for the 

inability to comply with the 180-day 

requirement and must also state the date 

by which the report will be filed. 

704.15(c)(6) Report to Members 

Paragraph (a) of the current § 704.15 

requires a corporate credit union to 

submit a summary of its annual report 

to the membership. Recognizing that a 

corporate credit union may not have 

completed its annual report at the time 

of the annual meeting, proposed 

paragraph (c)(6) substitutes the word 

‘‘preliminary’’ for ‘‘summary.’’ 

704.15(d)(1) Composition 

Proposed paragraph 704.15(d) deals 

with the corporate’s supervisory 

committee. Proposed paragraph (d)(1) 

discusses the composition of the 

supervisory committee, stating that its 

members may not be employees of the 

corporate credit union and must be 

independent of the corporate credit 

union. The employment prohibition 

codifies Article X, Section 1, of the 

Corporate Federal Credit Union Bylaws 

for all corporates. The NCUA Board 

believes that in the interests of sound 

governance this prohibition should be 

applied to all corporates. 

The Board further believes that to 

avoid potential conflicts of interest, 

supervisory committee members should 

be independent of the corporate. Under 

the proposal, a committee member is 

independent if he or she does not have 

any family relationships or material 

business or professional relationships 

with the corporate credit union and has 

been free of such relationships for at 

least three years. 

704.15(d)(2) Duties 

As a general matter, the supervisory 

committee should perform all the duties 

required of it under the corporate’s 

bylaws as determined by the corporate’s 

board of directors. Proposed paragraph 

(d)(2) clarifies that the committee is also 

responsible for the appointment, 

compensation, and oversight of the IPA, 

and for reviewing with management and 

the IPA the basis for audit reports. 

As the SEC noted when it adopted its 

final rule implementing a similar 

provision regarding the audit 

committees of public companies, the 

auditing process may be compromised if 

a company’s outside auditors 

incorrectly view their primary 

responsibility as serving the company’s 

management rather than the company’s 

full board of directors or audit 

committee. See 68 FR 18787, 18796, 

Apr. 16, 2003. The SEC went on to state 

that auditors may view management as 

the ‘‘employer’’ if management has the 

power to hire, fire, and set 

compensation and that under these 

circumstances the auditor may not have 

the appropriate incentive to raise 

concerns and conduct an objective 

review. Id. The SEC concluded that one 

way to promote auditor independence 

was for the auditor to be hired, 

evaluated, and, if necessary, terminated 

by the audit committee. Id. The NCUA 

Board believes it is critical that 

accountants who perform audit and 

attestation services for corporates have 

an appropriate incentive to conduct an 

objective review and identify potential 

concerns. In this regard, the Board 

believes it is a sound governance 

practice for a corporate’s supervisory 

committee, rather than its management, 

to be responsible for the appointment, 

compensation, and oversight of the 

accountant. 

704.15(d)(3) IPA Engagement Letters 

In response to an observed increase in 

the types and frequency of provisions in 

financial institutions’ external audit 

engagement letters that limit the 

auditors’ liability, in February 2006 the 

Federal financial institution regulatory 

agencies, including NCUA, issued an 

Interagency Advisory on the Unsafe and 

Unsound Use of Limitation of Liability 

Provisions in External Audit 

Engagement Letters (Interagency 

Advisory).6 The Advisory states that 

such provisions may weaken the 

external auditors’ objectivity, 

impartiality, and performance, which in 

turn may reduce the reliability of audits 

and consequently raise safety and 

soundness concerns. The agencies 

stated that a financial institution should 

not enter into any agreement that 

incorporates limitation of liability 

provisions with respect to audits. 

Since a central purpose of this 

proposal is to increase the reliability of 

audits, proposed paragraph (d)(3)(i)(B) 

requires the supervisory committee 

ensure that audit engagement letters and 

any related agreements with the IPA for 

services to be performed under part 704 

do not contain certain limitation of 

liability provisions. Prohibited 

provisions include any language that 

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73006 Federal Register / Vol. 75, No. 228 / Monday, November 29, 2010 / Proposed Rules 

7The term ‘‘non FICU’’ includes every corporate 

member that is not insured by the NCUSIF. Trade 

associations, CUSOs, non credit union cooperatives, 

banks, insurance companies, and privately insured 

credit unions are examples of entities that might be 

members of certain corporates and fall within the 

term ‘‘non FICU.’’ 

8See 12 U.S.C. 1772a (authority of NCUA to 

accept gifts for carrying out any of its functions 

under the Act); and 12 U.S.C. 1789. 

9 2008: total shares $658.9 billion; total assets 

$813.4 billion. http://www.ncua.gov/Resources/ 

Reports/statistics/Yearend2008.pdf (page 1, 

footnote 3). 

10 2009: total shares $724.8 billion; total assets 

$884.8 billion. http://www.ncua.gov/Resources/ 

Reports/statistics/Yearend2009.pdf (page 1). 

indemnifies the IPA against claims 

made by third parties; holds harmless or 

release the IPA from liability for claims 

or potential claims that might be 

asserted by the client corporate credit 

union, other than claims for punitive 

damages; or limits the remedies 

available to the client corporate credit 

union. Consistent with the Interagency 

Advisory, the proposal does not 

preclude the use of alternative dispute 

resolution agreements and jury trial 

waivers. 

704.15(d)(4) Outside Counsel 

Proposed paragraph (d)(4) provides 

that the supervisory committee must, 

when deemed necessary by the 

committee, have access to its own 

outside counsel. All counsel retained by 

a corporate, regardless of who at the 

corporate retained the counsel, owe the 

same fiduciary duties, that is, to provide 

advice in the best interests of the 

membership. Accordingly, in most 

circumstances the Board expects the 

supervisory committee, when seeking 

legal advice, would employ the services 

of the in-house counsel or other counsel 

under contract to the corporate. The 

Board believes, however, that in the 

interest of safety and soundness the 

supervisory committee must be able to 

retain counsel at its discretion without 

prior permission of the board of 

directors or management, particularly 

when the committee perceives that the 

in-house counsel or other counsel under 

contract to the corporate may be unable 

to provide unbiased advice. 

704.15(e) Internal Audit 

Paragraph (e) restates the internal 

audit requirements in the current 

paragraph (b). 

704.21 Equitable Distribution of 

Corporate Credit Union Stabilization 

Expenses 

Some of the recent corporate 

investment losses were absorbed 

directly by the members of the 

corporates in the form of capital 

depletion. Much of these losses, 

however, were absorbed by the NCUSIF 

as it made capital injections and 

launched liquidity and share guarantee 

programs designed to stabilize the 

corporate system and protect the system 

from collapse. The corporate losses 

absorbed by the NCUSIF—and 

subsequently transferred from the 

NCUSIF to the TCCUSF in June of 2009 

and 2010—will be paid by all FICUs in 

the form of premium assessments now 

and over the next several years. The 

stabilization actions taken by NCUA to 

protect the corporate system benefitted 

every member of every corporate, both 

FICU and non FICU.7 Without NCUA’s 

stabilization actions, the entire 

corporate system would have been in 

danger of collapse. NCUA’s actions 

protected both FICUs and non FICUs 

from potential losses in their uninsured 

shares and from other potential 

problems, such as interruptions in their 

payment systems. Unfortunately, 

however, not all corporate members 

have assumed their fair share of the 

expense of NCUA’s corporate 

stabilization actions. In particular, non 

FICU members have not paid, and likely 

will not pay in the future without some 

encouragement, their fair share of the 

expenses associated with NCUA’s 

stabilization actions. Accordingly, and 

as discussed below, this proposal seeks 

to encourage existing non FICU 

members to pay their fair share of such 

expenses. 

The proposal adds a new § 704.21, 

Equitable Distribution of Corporate 

Credit Union Stabilization Expenses, to 

provide for the equitable sharing of 

TCCUSF expenses among all members 

of corporate credit unions. Proposed 

§ 704.21 provides that when the NCUA 

Board assesses a TCCUSF premium on 

FICUs, NCUA will request existing non 

FICU members make voluntary 

payments to the TCCUSF. It requires 

that when the NCUA Board imposes a 

TCCUSF premium assessment on 

FICUs, a corporate credit union must 

furnish to NCUA information about all 

its non FICU members. NCUA will then 

request each of these non FICU 

members to make a voluntary premium 

payment to the TCCUSF in an amount 

calculated as a percentage of the non 

FICU member’s previous year-end 

assets.8 In the event one or more of these 

non FICUs declines to make the 

requested payment, or makes a payment 

in an amount less than requested, the 

proposal requires the corporate conduct 

a member vote on whether to expel that 

non FICU. A paragraph-by-paragraph 

breakdown of § 704.21 follows. 

When the Board acts to assess a 

premium on FICUs, paragraph (a) 

provides that each corporate credit 

union must prepare a list of all its 

members on the date of the assessment 

that are non FICUs, including the name 

and assets of each such member, with 

the address and contact information for 

each such member. The assets of the 

non FICUs will be determined as of the 

previous year-end. The corporate should 

collect information from the member to 

support this asset calculation, such as 

an annual financial statement. If the 

member will not provide this 

information to the corporate, the 

corporate should simply make its best 

estimate of the asset size and inform 

NCUA of the basis for the estimate. 

Paragraph (b) provides that within 14 

days after the date of the assessment on 

FICUs, the corporate credit union must 

send the list of non FICU members to 

the NCUA Office of Corporate Credit 

Unions. A corporate that has no non 

FICU members must provide the Office 

of Corporate Credit Unions with a 

statement to that effect. 

Paragraph (c) provides that within 60 

days after the date of assessment on 

FICUs, the NCUA Chief Financial 

Officer will request each non FICU to 

make a voluntary payment to the 

TCCUSF. The amount of the requested 

payment will be the entity’s assets times 

0.815 times the percentage of insured 

shares that each FICU was assessed. The 

payment must be received by NCUA 

within 60 days after the date of the 

Chief Financial Officer’s request. 

NCUA determined the 0.815 factor by 

using the ratio of total aggregate FICU 

insured shares to aggregate FICU assets. 

NCUA calculated these ratios for yearend 2008 (ratio = 0.810) 9 and year-end 

2009 (ratio = 0.819) 10 and then averaged 

the two ratios to obtain the factor 0.815. 

Accordingly, multiplying a non FICU’s 

assets by 0.815 produces an amount 

approximating the entity’s ‘‘insured 

shares’’ as if the entity were a Federallyinsured credit union. 

Paragraph (d) provides that if NCUA 

does not receive a full, timely payment 

of the TCCUSF contribution requested, 

NCUA will notify the corporate credit 

union of the failure. Paragraph (e) 

requires that no later than 90 days after 

receipt of the notice from NCUA, the 

corporate must call a special meeting of 

its members to determine whether each 

member that failed to make the full 

payment should be expelled from the 

corporate credit union. For Federallychartered corporates, the expulsion vote 

will be conducted in accordance with 

§ 118(a) of the Act, which provides that 

a member may be expelled by a twothirds vote of the members present at a 

special meeting called for that purpose, 

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Federal Register / Vol. 75, No. 228 / Monday, November 29, 2010 / Proposed Rules 73007 

but only after an opportunity has been 

given to the member to be heard. 12 

U.S.C. 1764(a); see Article III, § 5 of the 

Standard Federal Corporate Credit 

Union Bylaws. For State-chartered 

corporates, the expulsion vote will be 

conducted in accordance with the 

bylaws of the corporate and applicable 

State law. 

Paragraph (f) permits the corporate to 

conduct the expulsion vote at an annual 

meeting, if that would coincide with the 

date of any special meeting called under 

paragraph (e). 

Paragraph (g) provides that for non 

FICUs that belong to more than one 

corporate, NCUA will request only one 

voluntary payment from that non FICU 

in connection with each TCCUSF 

assessment. If NCUA does not receive 

full payment of the amount requested, 

however, NCUA will notify all 

corporates to which the non FICU 

belongs for purposes of conducting an 

expulsion vote. 

As should be clear from the language 

of proposed § 704.21, NCUA does not 

ultimately make the determination of 

whether a non FICU should make a 

payment to the TCCUSF or the amount 

of the payment. The non FICU makes 

that determination. NCUA also does not 

make the determination of the adequacy 

of any payment. The members of the 

affected corporate make that 

determination when deciding whether 

or not to expel the non FICU member. 

It is these corporate members, and 

particularly the FICU corporate 

members, that have a vested financial 

interest in whether or not non FICU 

members are contributing equitably to 

cover losses in the corporate credit 

union system. 

The Board does not intend at this time 

to apply § 704.21 retroactively. Section 

704.21 would only apply to TCCUSF 

assessments made following the 

effective date of any final rule. 

704.22 Enterprise Risk Management 

Sound risk management is an integral 

part of running a corporate credit union, 

and corporates need to strengthen their 

enterprise risk management. A welldesigned enterprise risk management 

process can help a corporate by 

providing a framework within which 

the board of directors and senior 

management can determine: 

• Where all the corporate’s risk 

exposures lie; 

• The amount of risk the corporate 

has in each exposure and the maximum 

levels it is willing to accept; 

• How the risk exposures are 

changing; and 

• The appropriate risk controls to 

limit overall risk to targeted levels. 

Accordingly, this proposal adds a new 

§ 704.22, Enterprise Risk Management. 

This section requires corporates to 

develop and follow an enterprise risk 

management policy (paragraph (a)). The 

board of directors must establish an 

enterprise risk management committee 

that is responsible for overseeing the 

corporate’s risk management practices 

and must report at least annually to the 

board of directors (paragraph (b)). The 

committee must include at least one 

independent risk management expert 

with sufficient experience in 

identifying, assessing, and managing 

risk exposures (paragraph (c)). 

The proposal defines independent to 

mean that the expert does not have any 

family relationships or any material 

business or professional relationships 

with the corporate that would affect his 

or her independence as a committee 

member, and has been free of any such 

relationships for at least three years 

(paragraph (d)). The risk management 

expert will have post-graduate 

education; an actuarial, accounting, 

economics, financial, or legal 

background; and at least five years 

experience in identifying, assessing, and 

managing risk exposures. The expert’s 

experience must also be commensurate 

with the size of the corporate and the 

complexity of its operations. Proposed 

paragraph 704.22(e) clarifies that the 

risk management expert is not required 

to be a director of the corporate credit 

union. The board must hire this 

individual from outside the corporate. 

Proposed paragraph 704.15(a)(2)(iii) 

requires management of a corporate 

with assets of at least $1 billion assess 

the effectiveness of the corporate’s 

internal control structure and 

procedures for financial reporting. 

Proposed paragraph 704.15(a)(3) 

requires the corporate’s managers to 

sign the report. The Board requests 

comment on whether NCUA should add 

a corresponding requirement that 

management assess the effectiveness of 

the corporate’s enterprise risk reporting 

and that the senior risk management 

official sign the management report. 

704.23 Membership Fees 

This proposal adds a new § 704.23, 

Membership Fees, permitting corporates 

the option of charging their members, as 

a mandatory requirement of 

membership, reasonable one-time or 

periodic membership fees. The fees 

must generally be proportional to the 

member’s asset size, and a member must 

be given at least six months notice of 

any new fees, or any material change to 

an existing fee. Furthermore, a corporate 

can terminate the membership of any 

credit union that fails to pay the fee 

fully and on time. 

The September Rulemaking requires 

corporates to achieve certain minimum 

capital ratios, including, over time, 

certain minimum retained earnings 

ratios. NCUA is proposing this 

amendment to provide corporates with 

additional options in building up their 

retained earnings. Unlike a capital 

contribution, which will not flow to 

retained earnings, a membership fee 

flows directly to a corporate’s retained 

earnings. 

Paragraph (a) states that a corporate 

may charge its members a membership 

fee. The fees may be assessed on a 

periodic basis or as a one-time fee. 

Paragraph (b) provides that the 

corporate must calculate the fee 

uniformly for all members and as a 

percentage of each member’s assets. 

However, the corporate has the 

discretion to reduce the amount of the 

fee for members that have contributed 

capital to the corporate. Any such 

reduction must be proportional to the 

amount of the member’s non-depleted 

contributed capital. Calculating the fee 

as a percentage of each member’s assets 

is fairer to smaller natural person credit 

unions than a one-size-fits-all fee. In 

addition, NCUA wishes to give 

corporates the flexibility to reduce the 

size of the fee for those members that 

are contributing more capital to the 

corporate. 

Paragraph (c) requires a corporate to 

give its members a minimum of six 

months notice of any new fee, including 

disclosure of its terms and conditions, 

before invoicing the fee. For a recurring 

fee, the corporate must also provide six 

months notice of any material change to 

the terms and condition of the fee. 

Corporate members should be given 

adequate time to look for alternatives to 

membership in the corporate should 

they find the fees too onerous. The 

Board believes that six months to find 

an alternative service provider should 

be appropriate. 

Paragraph (d) permits a corporate to 

terminate the membership of any credit 

union that fails to pay the fee in full 

within 60 days of the invoice date. The 

Board believes this is a reasonable 

amount of time, given the advance 

notice required by paragraph (c). 

Comment Period 

The Board is putting this proposal out 

for a 30-day comment period in lieu of 

the standard 60-day comment period. 

The proposed rule is straightforward in 

its operation, and so does not require 

extensive time to consider. In addition, 

the Board desires, as much as possible, 

to coordinate the effective date of this 

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73008 Federal Register / Vol. 75, No. 228 / Monday, November 29, 2010 / Proposed Rules 

rulemaking with the effective dates of 

the September Rulemaking. 

Regulatory Procedures 

Regulatory Flexibility Act 

The Regulatory Flexibility Act 

requires NCUA to prepare an analysis to 

describe any significant economic 

impact any proposed regulation may 

have on a substantial number of small 

entities (those under $10 million in 

assets). For the most part, the proposal 

applies only to corporate credit unions, 

all of which have assets well in excess 

of $10 million. The one provision that 

applies directly to natural person credit 

unions, which generally limits 

membership in one corporate at a time, 

will not affect many small credit unions 

because they generally do not belong to 

multiple corporates. Accordingly, the 

proposed amendments will not 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 Paperwork Reduction Act of 1995 

(PRA) applies to rulemakings in which 

an agency by rule creates a new 

paperwork burden on regulated entities 

or modifies an existing burden. 44 

U.S.C. 3507(d); 5 CFR part 1320. For 

purposes of the PRA, a paperwork 

burden may take the form of a reporting, 

recordkeeping, or disclosure 

requirement, each referred to as an 

information collection. 

The proposed changes to part 704 in 

this proposal impose new information 

collection requirements. As required by 

the PRA, NCUA is submitting a copy of 

this proposal to OMB for its review and 

approval. Persons interested in 

submitting comments with respect to 

the information collection aspects of the 

proposed rule should submit them to 

OMB at the address noted below. 

Estimated PRA Burden 

The following discussion describes 

the new information collection 

requirements in the proposal: 

1. Recorded director votes. 

Proposed § 704.13(c)(8) revises 

existing § 704.13(c), Board 

responsibilities, to require corporates to 

conduct all board of directors votes by 

recorded vote, such that the minutes 

reporting the vote list the board 

members (by name) voting for or against 

the proposal, as well as, if applicable, 

board members who were absent or 

otherwise failed to vote, and board 

members who abstained from the vote. 

Proposed paragraph (c)(8) would apply 

to all 27 corporates. NCUA estimates 

that compliance with the requirement to 

record all board votes and to include the 

votes of each director by name in the 

minutes will take about one hour. 

Corporates are required to hold a 

minimum of twelve meetings each year. 

27 corporates × 12 meetings = 324 

meetings per year. 324 meetings × 1 

hour = 324 hours. 

2. Equitable distribution of corporate 

credit union stabilization fund 

expenses. 

When the NCUA Board assesses a 

premium on FICUs for the TCCUSF in 

accordance with proposed § 704.21, 

NCUA will ask current non FICU 

members of corporates to make 

voluntary contributions to the TCCUSF. 

Proposed § 704.21(e) requires a 

corporate hold an expulsion vote if a 

non FICU member does not make the 

requested payment. These provisions 

would apply to all 27 corporates. NCUA 

estimates that the NCUA Board may 

assess a premium on FICUs for the 

TCCUSF about once each year for the 

next several years. 

Proposed paragraphs (a) and (b) of 

§ 704.21 state that when a TCCUSF 

premium is assessed on FICUs, a 

corporate must immediately prepare a 

list of all its members that are non 

FICUs, including the name and asset 

size of each such member as of the end 

of the previous year, and the address 

and contact information of each such 

member, and forward the list to NCUA. 

NCUA estimates that it should take each 

corporate approximately 20 hours to 

collect the information, prepare the list, 

and submit the list to NCUA. 27 

corporates × 20 hours = 540 hours. 

Proposed paragraph (e) of § 704.21 

provides that following receipt of a 

notice of non-payment from NCUA, the 

corporate must call a special meeting of 

its members to determine whether each 

non FICU member that failed to make 

the full payment to the TCCUSF should 

be expelled from membership in the 

corporate. The corporate must notify 

NCUA of the result of the member vote. 

NCUA estimates that approximately 27 

corporates will be required to conduct a 

member vote on expulsion once each 

year. NCUA estimates the preparation 

and mailing of notices and ballots (if 

paper ballots are used), the collection of 

ballots (if paper ballots are used), and 

notifying NCUA of the result of the vote 

will take about 25 hours. 27 corporates 

× 25 hours = 675 hours. 

3. Disclosure of dual employee 

compensation from corporate CUSOs. 

The amendment to § 704.11 requires 

that each corporate CUSO disclose 

compensation of dual employees to the 

corporate credit unions that make loans 

to, or invest in, the CUSO. NCUA 

estimates that this requirement will 

apply to five or fewer CUSOs, and that 

making these disclosures will take one 

hour per CUSO. 5 CUSOs × 1 hour = 5 

hours. 

4. Management report. 

Proposed § 704.15(a)(2) requires each 

corporate credit union to prepare an 

annual management report that contains 

a statement of management’s 

responsibilities for performing certain 

duties in the corporate credit union. The 

report must also contain an assessment 

of the corporate’s compliance with 

certain laws and regulations. NCUA 

estimates that it should take each 

corporate approximately 4 hours to 

prepare its management report. 27 

corporates × 4 hours = 108 hours. 

5. Large corporate credit union 

management report. 

Proposed § 704.15(a)(2)(iii) requires a 

corporate credit union with assets of $1 

billion or more to include in its 

management report an assessment by 

management of the effectiveness of the 

corporate credit union’s internal control 

structure and procedures for financial 

reporting. Currently, there are 16 

corporates with at least $1 billion in 

assets. NCUA estimates that it should 

take a corporate credit union 

approximately 8 hours to prepare its 

assessment. 16 corporates × 8 hours = 

128 hours. 

6. Notice of engagement or change of 

accountants. 

Proposed § 704.15(c)(4) requires a 

corporate credit union to notify NCUA 

when it engages an independent public 

accountant or loses an independent 

public accountant through dismissal or 

resignation. The corporate credit union 

must include with the notice a 

reasonably detailed statement of the 

reasons for any dismissal or resignation. 

NCUA estimates that no more than five 

corporate credit unions will change 

accountants each year and that it should 

take a corporate credit union about two 

hours to prepare the notice and submit 

it to NCUA. 5 corporates × 2 hours = 10 

hours. 

7. Notification of late filing. 

Proposed § 704.15(c)(5) requires a 

corporate credit union that is unable to 

timely file its Annual Report to submit 

a written notice to NCUA. NCUA 

estimates that no more than five 

corporate credit unions will need to 

submit such notice and that it should 

take about one hour to prepare the 

notice and submit it to NCUA. 5 

corporates × 1 hour = 5 hours. 

B. Summary of Collection Burden 

NCUA estimates the total information 

collection burden represented by the 

proposal, calculated on an annual basis, 

as follows: 

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Recorded director votes: 27 corporates 

× 12 meetings × 1 hour = 324 hours. 

Preparation of list of non FICU 

members of a corporate and providing 

list to NCUA: 27 corporates × 20 hours 

= 540 hours. 

Conducting special meeting of a 

corporate’s members to expel a member 

and notifying NCUA of result of vote: 27 

corporates × 25 hours = 675 hours. 

Disclosure of dual employee 

compensation from corporate CUSOs: 5 

CUSOs × 1 hour = 5 hours. 

Management report: 27 corporates × 4 

hours = 108 hours. 

Large corporate credit union 

management report: 16 corporates × 8 

hours = 128 hours. 

Notice of engagement or change of 

accountants: 5 corporates × 2 hours = 10 

hours. 

Notification of late filing: 5 corporates 

× 1 hour = 5 hours. 

Total Burden Hours: 1,795 hours. 

The NCUA considers comments by 

the public on this proposed collection of 

information in: 

Evaluating whether the proposed 

collection of information is necessary 

for the proper performance of the 

functions of the NCUA, including 

whether the information will have a 

practical use; 

Evaluating the accuracy of the 

NCUA’s estimate of the burden of the 

proposed collection of information, 

including the validity of the 

methodology and assumptions used; 

Enhancing the quality, usefulness, 

and clarity of the information to be 

collected; and 

Minimizing the burden of collection 

of information on those who are to 

respond, including through the use of 

appropriate automated, electronic, 

mechanical, or other technological 

collection techniques or other forms of 

information technology; e.g., permitting 

electronic submission of responses. 

The Paperwork Reduction Act 

requires OMB to make a decision 

concerning the collection of information 

contained in the proposed regulation 

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 regulation. 

Comments on the proposed 

information collection requirements 

should be sent to: Office of Information 

and Regulatory Affairs, OMB, New 

Executive Office Building, Washington, 

DC 20503; Attention: NCUA Desk 

Officer, with a copy to Mary Rupp, 

Secretary of the Board, National Credit 

Union Administration, 1775 Duke 

Street, Alexandria, Virginia 22314– 

3428. 

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 proposal 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 will not affect family 

well-being within the meaning of 

section 654 of the Treasury and General 

Government Appropriations Act, 1999, 

Public Law 105–277, 112 Stat. 2681 

(1998). 

List of Subjects 

12 CFR Part 701 

Credit unions, Reporting and 

recordkeeping requirements. 

12 CFR Part 704 

Credit unions, Corporate credit 

unions, Reporting and recordkeeping 

requirements. 

12 CFR Part 741 

Bank deposit insurance, Credit 

unions, Reporting and recordkeeping 

requirements. 

By the National Credit Union 

Administration Board on November 18, 2010. 

Mary F. Rupp, 

Secretary of the Board. 

For the reasons stated in the 

preamble, the National Credit Union 

Administration proposes to amend 12 

CFR parts 701, 704, and 741 as set forth 

below: 

PART 701—ORGANIZATION AND 

OPERATION OF FEDERAL CREDIT 

UNIONS 

1. The authority citation for part 701 

continues to read as follows: 

Authority: 12 U.S.C. 1752(5), 1755, 1756, 

1757, 1758, 1759, 1761a, 1761b, 1766, 1767, 

1782, 1784, 1786, 1787, 1789. 

2. Add a new § 701.5 to read as 

follows: 

§ 701.5 Membership limited to one 

corporate credit union. 

(a) A Federal credit union is 

prohibited from joining a corporate 

credit union if, after joining, the Federal 

credit union would be a member of 

three or more corporate credit unions. 

(b) A Federal credit union is 

prohibited from joining a corporate 

credit union if, after joining, the Federal 

credit union would be a member of 

exactly two corporate credit unions. As 

an exception, a Federal credit union 

may join a second corporate credit 

union, but only if the Federal credit 

union intends to transfer its share and 

deposit account(s) from one corporate 

credit union to the other corporate 

credit union and has informed the 

former corporate credit union of its 

intent to resign its membership no later 

than six months after joining the latter 

corporate credit union. 

(c) A Federal credit union is 

prohibited from making any investment, 

including a share or deposit account, a 

loan, or a capital investment, in a 

corporate credit union of which the 

Federal credit union is not also a 

member. This prohibition does not 

apply to investments made at a time 

when the Federal credit union was a 

member of the corporate. 

PART 704—CORPORATE CREDIT 

UNIONS 

3. The authority citation for part 704 

continues to read as follows: 

Authority: 12 U.S.C. 1762, 1766(a), 1772a, 

1781, 1789, and 1795e. 

4. In § 704.2, add the following new 

definitions: 

* * * * * 

Critical accounting policies means 

those policies that are most important to 

the portrayal of a corporate credit 

union’s financial condition and results 

and that require management’s most 

difficult, subjective, or complex 

judgments, often as a result of the need 

to make estimates about the effect of 

matters that are inherently uncertain. 

* * * * * 

Enterprise risk management means 

the process of addressing risk on an 

entity-wide basis. The purpose of this 

process is not to eliminate risk but, 

rather, to provide the knowledge the 

board of directors and management 

need to effectively measure, monitor, 

and control risk and to then plan 

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appropriate strategies to achieve the 

entity’s business objectives with a 

reasonable amount of risk taking. 

Examination of internal control 

means an engagement of an 

independent public accountant to report 

directly on internal control or on 

management’s assertions about internal 

control. An examination of internal 

control over financial reporting includes 

controls over the preparation of 

financial statements in accordance with 

accounting principles generally 

accepted in the United States of 

America and NCUA regulatory reporting 

requirements. 

* * * * * 

Family, as it relates to a particular 

individual, means that individual’s 

spouse, parents, children, and siblings, 

whether by blood, marriage, or 

adoption; and any other person residing 

in the individual’s home. 

* * * * * 

Financial statements means the 

presentation of a corporate credit 

union’s financial data, including 

accompanying notes, derived from 

accounting records of the credit union, 

and intended to disclose the credit 

union’s economic resources or 

obligations at a point in time, or the 

changes therein for a period of time, in 

conformity with GAAP. Each of the 

following is considered to be a financial 

statement: A balance sheet or statement 

of financial condition; statement of 

income or statement of operations; 

statement of undivided earnings; 

statement of cash flows; statement of 

changes in members’ equity; statement 

of revenue and expenses; and statement 

of cash receipts and disbursements. 

Financial statement audit means an 

audit of the financial statements of a 

credit union performed in accordance 

with generally accepted auditing 

standards by an independent person 

who is licensed by the appropriate State 

or jurisdiction. The objective of a 

financial statement audit is to express 

an opinion as to whether those financial 

statements of the credit union present 

fairly, in all material respects, the 

financial position and the results of its 

operations and its cash flows in 

conformity with GAAP. 

Generally accepted auditing 

standards (GAAS) means the standards 

approved and adopted by the American 

Institute of Certified Public Accountants 

which apply when an ‘‘independent, 

licensed certified public accountant’’ 

audits private company financial 

statements in the United States of 

America. Auditing standards differ from 

auditing procedures in that 

‘‘procedures’’ address acts to be 

performed, whereas ‘‘standards’’ 

measure the quality of the performance 

of those acts and the objectives to be 

achieved by use of the procedures 

undertaken. In addition, auditing 

standards address the auditor’s 

professional qualifications as well as the 

judgment exercised in performing the 

audit and in preparing the report of the 

audit. 

* * * * * 

Independent public accountant (IPA) 

means a person who is licensed by the 

appropriate State or jurisdiction to 

practice public accounting. An IPA 

must be able to exercise fairness toward 

credit union officials, members, 

creditors and others who may rely upon 

the report of a supervisory committee 

audit and demonstrate the impartiality 

necessary to produce dependable 

findings. As used in this part, IPA is 

synonymous with the terms ‘‘auditor’’ or 

‘‘accountant.’’ The term IPA does not 

include a licensed person working in 

his or her capacity as an employee of an 

unlicensed entity and issuing an audit 

opinion in the unlicensed entity’s name, 

e.g., a licensed league auditor or 

licensed retired examiner working for a 

non-licensed entity. 

Internal control means the process, 

established by the credit union’s board 

of directors, officers and employees, 

designed to provide reasonable 

assurance of reliable financial reporting 

and safeguarding of assets against 

unauthorized acquisition, use, or 

disposition. A credit union’s internal 

control structure generally consists of 

five components: Control environment; 

risk assessment; control activities; 

information and communication; and 

monitoring. Reliable financial reporting 

refers to preparation of Call Reports that 

meet management’s financial reporting 

objectives. Internal control over 

safeguarding of assets against 

unauthorized acquisition, use, or 

disposition refers to prevention or 

timely detection of transactions 

involving such unauthorized access, 

use, or disposition of assets which could 

result in a loss that is material to the 

financial statements. 

Internal control framework means 

criteria such as that established in 

Internal Control—Integrated Framework 

issued by the Committee of Sponsoring 

Organizations of the Treadway 

Commission (COSO) or comparable, 

reasonable, and U.S. recognized criteria. 

Internal control over financial 

reporting means a process effected by 

those charged with governance, 

management, and other personnel, 

designed to provide reasonable 

assurance regarding the preparation of 

reliable financial statements in 

accordance with accounting principles 

generally accepted in the United States 

of America. A corporate credit union’s 

internal control over financial reporting 

includes those policies and procedures 

that: 

(1) Pertain to the maintenance of 

records that, in reasonable detail, 

accurately and fairly reflect the 

transactions and dispositions of the 

assets of the entity; 

(2) Provide reasonable assurance that 

transactions are recorded as necessary to 

permit preparation of financial 

statements in accordance with 

accounting principles generally 

accepted in the United States of 

America, and that receipts and 

expenditures of the entity are being 

made only in accordance with 

authorizations of management and those 

charged with governance; and 

(3) Provide reasonable assurance 

regarding prevention, or timely 

detection and correction of 

unauthorized acquisition, use, or 

disposition of the entity’s assets that 

could have a material effect on the 

financial statements. 

* * * * * 

Supervisory committee means, for 

Federally chartered corporate credit 

unions, the supervisory committee as 

defined in Section 111(b) of the Federal 

Credit Union Act, 12 U.S.C. 1761(b). For 

State chartered corporate credit unions, 

the term supervisory committee refers to 

the audit committee, or similar 

committee, designated by State statute 

or regulation. 

* * * * * 

5. In § 704.11, revise paragraphs (g)(5) 

and (g)(6), and add a new paragraph 

(g)(7), to read as follows: 

§ 704.11. Corporate Credit Union Service 

Organizations (Corporate CUSOs). 

* * * * * 

(g) * * * 

(5) Will allow the auditor, board of 

directors, and NCUA complete access to 

its personnel, facilities, equipment, 

books, records, and any other 

documentation that the auditor, 

directors, or NCUA deem pertinent; 

(6) Will inform the corporate, at least 

quarterly, of all the compensation paid 

by the CUSO to its employees who are 

also employees of the corporate credit 

union; and 

(7) Will comply with all the 

requirements of this section. 

6. In § 704.13, revise paragraphs (c)(6) 

and (c)(7), and add a new paragraph 

(c)(8), to read as follows: 

§ 704.13 Board responsibilities. 

* * * * * 

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(c) * * * 

(6) Financial performance is evaluated 

to ensure that the objectives of the 

corporate credit union and the 

responsibilities of management are met; 

(7) Planning addresses the retention of 

external consultants, as appropriate, to 

review the adequacy of technical, 

human, and financial resources 

dedicated to support major risk areas; 

and 

(8) All board of directors votes are 

conducted by recorded vote, such that 

the minutes reporting the vote list the 

board members (by name) voting for or 

against the proposal, as well as, if 

applicable, board members who were 

absent or otherwise failed to vote and 

board members who abstained from the 

vote. 

7. Revise § 704.15 to read as follows: 

§ 704.15 Audit and reporting requirements. 

(a) Annual reporting requirements— 

(1) Audited financial statements. A 

corporate credit union must prepare 

annual financial statements in 

accordance with generally accepted 

accounting principles (GAAP), which 

must be audited by an independent 

public accountant in accordance with 

generally accepted auditing standards. 

The annual financial statements and 

regulatory reports must reflect all 

material correcting adjustments 

necessary to conform with GAAP that 

were identified by the corporate credit 

union’s independent public accountant. 

(2) Management report. Each 

corporate credit union must prepare, as 

of the end of the previous calendar year, 

an annual management report that 

contains the following: 

(i) A statement of management’s 

responsibilities for preparing the 

corporate credit union’s annual 

financial statements, for establishing 

and maintaining an adequate internal 

control structure and procedures for 

financial reporting, and for complying 

with laws and regulations relating to 

safety and soundness in the following 

areas: Affiliate transactions, legal 

lending limits, loans to insiders, 

restrictions on capital and share 

dividends, and regulatory reporting that 

meets full and fair disclosure; 

(ii) An assessment by management of 

the corporate credit union’s compliance 

with such laws and regulations during 

the past calendar year. The assessment 

must state management’s conclusion as 

to whether the corporate credit union 

has complied with the designated safety 

and soundness laws and regulations 

during the calendar year and disclose 

any noncompliance with the laws and 

regulations; and 

(iii) For a corporate credit union with 

consolidated total assets of $1 billion or 

more as of the beginning of such 

calendar year, an assessment by 

management of the effectiveness of such 

internal control structure and 

procedures as of the end of such 

calendar year that must include the 

following: 

(A) A statement identifying the 

internal control framework used by 

management to evaluate the 

effectiveness of the corporate credit 

union’s internal control over financial 

reporting; 

(B) A statement that the assessment 

included controls over the preparation 

of regulatory financial statements in 

accordance with regulatory reporting 

instructions including identification of 

such regulatory reporting instructions; 

and 

(C) A statement expressing 

management’s conclusion as to whether 

the corporate credit union’s internal 

control over financial reporting is 

effective as of the end of the previous 

calendar year. Management must 

disclose all material weaknesses in 

internal control over financial reporting, 

if any, that it has identified that have 

not been remediated prior to the 

calendar year-end. Management may not 

conclude that the corporate credit 

union’s internal control over financial 

reporting is effective if there are one or 

more material weaknesses. 

(3) Management report signatures. 

The chief executive officer and either 

the chief accounting officer or chief 

financial officer of the corporate credit 

union must sign the management report. 

(b) Independent public accountant— 

(1) Annual audit of financial 

statements. Each corporate credit union 

must engage an independent public 

accountant to audit and report on its 

annual financial statements in 

accordance with generally accepted 

auditing standards. The scope of the 

audit engagement must be sufficient to 

permit such accountant to determine 

and report whether the financial 

statements are presented fairly and in 

accordance with GAAP. A corporate 

credit union must provide its 

independent public accountant with a 

copy of its most recent Call Report and 

NCUA examination report. It must also 

provide its independent public 

accountant with copies of any notice 

that its capital category is being changed 

or reclassified and any correspondence 

from NCUA regarding compliance with 

this section. 

(2) Internal control over financial 

reporting. For each corporate credit 

union with total assets of $1 billion or 

more at the beginning of the calendar 

year, the independent public accountant 

who audits the corporate credit union’s 

financial statements must examine, 

attest to, and report separately on the 

assertion of management concerning the 

effectiveness of the corporate credit 

union’s internal control structure and 

procedures for financial reporting. The 

attestation and report must be made in 

accordance with generally accepted 

standards for attestation engagements. 

The accountant’s report must not be 

dated prior to the date of the 

management report and management’s 

assessment of the effectiveness of 

internal control over financial reporting. 

Notwithstanding the requirements set 

forth in applicable professional 

standards, the accountant’s report must 

include the following: 

(i) A statement identifying the 

internal control framework used by the 

independent public accountant, which 

must be the same as the internal control 

framework used by management, to 

evaluate the effectiveness of the 

corporate credit union’s internal control 

over financial reporting; 

(ii) A statement that the independent 

public accountant’s evaluation included 

controls over the preparation of 

regulatory financial statements in 

accordance with regulatory reporting 

instructions including identification of 

such regulatory reporting instructions; 

and 

(iii) A statement expressing the 

independent public accountant’s 

conclusion as to whether the corporate 

credit union’s internal control over 

financial reporting is effective as of the 

end of the previous calendar year. The 

report must disclose all material 

weaknesses in internal control over 

financial reporting that the independent 

public accountant has identified that 

have not been remediated prior to the 

calendar year-end. The independent 

public accountant may not conclude 

that the corporate credit union’s internal 

control over financial reporting is 

effective if there are one or more 

material weaknesses. 

(3) Notice by accountant of 

termination of services. An independent 

public accountant performing an audit 

under this part who ceases to be the 

accountant for a corporate credit union 

must notify NCUA in writing of such 

termination within 15 days after the 

occurrence of such event and set forth 

in reasonable detail the reasons for such 

termination. 

(4) Communications with supervisory 

committee. In addition to the 

requirements for communications with 

audit committees set forth in applicable 

professional standards, the independent 

public accountant must report the 

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73012 Federal Register / Vol. 75, No. 228 / Monday, November 29, 2010 / Proposed Rules 

following on a timely basis to the 

supervisory committee: 

(i) All critical accounting policies and 

practices to be used by the corporate 

credit union; 

(ii) All alternative accounting 

treatments within GAAP for policies 

and practices related to material items 

that the independent public accountant 

has discussed with management, 

including the ramifications of the use of 

such alternative disclosures and 

treatments, and the treatment preferred 

by the independent public accountant; 

and 

(iii) Other written communications 

the independent public accountant has 

provided to management, such as a 

management letter or schedule of 

unadjusted differences. 

(5) Retention of working papers. The 

independent public accountant must 

retain the working papers related to the 

audit of the corporate credit union’s 

financial statements and, if applicable, 

the evaluation of the corporate credit 

union’s internal control over financial 

reporting for seven years from the report 

release date, unless a longer period of 

time is required by law. 

(6) Independence. The independent 

public accountant must comply with the 

independence standards and 

interpretations of the American Institute 

of Certified Public Accountants 

(AICPA). 

(7) Peer reviews and inspection 

reports. (i) Prior to commencing any 

services for a corporate credit union 

under this section, the independent 

public accountant must have received a 

peer review, or be enrolled in a peer 

review program, that meets acceptable 

guidelines. Acceptable peer reviews 

include peer reviews performed in 

accordance with the AICPA’s Peer 

Review Standards and inspections 

conducted by the Public Company 

Accounting Oversight Board (PCAOB). 

(ii) Within 15 days of receiving 

notification that the AICPA has 

accepted a peer review or the PCAOB 

has issued an inspection report, or 

before commencing any audit under this 

section, whichever is earlier, the 

independent public accountant must 

file a copy of the most recent peer 

review report and the public portion of 

the most recent PCAOB inspection 

report, if any, accompanied by any 

letters of comments, response, and 

acceptance, with NCUA if the report has 

not already been filed. 

(iii) Within 15 days of the PCAOB 

making public a previously nonpublic 

portion of an inspection report, the 

independent public accountant must 

file a copy of the previously nonpublic 

portion of the inspection report with 

NCUA. 

(c) Filing and notice requirements— 

(1) Annual Report. Each corporate credit 

union must, no later than 180 days after 

the end of the calendar year, file an 

Annual Report with NCUA consisting of 

the following documents: 

(i) The audited comparative annual 

financial statements; 

(ii) The independent public 

accountant’s report on the audited 

financial statements; 

(iii) The management report; and, if 

applicable, 

(iv) The independent public 

accountant’s attestation report on 

management’s assessment concerning 

the corporate credit union’s internal 

control structure and procedures for 

financial reporting. 

(2) Public availability. The annual 

report in paragraph (c)(1) of this section 

will be made available for public 

inspection by NCUA. 

(3) Independent public accountant’s 

letters and reports. Each corporate 

credit union must file with NCUA a 

copy of any management letter or other 

report issued by its independent public 

accountant with respect to such 

corporate credit union and the services 

provided by such accountant pursuant 

to this part (except for the independent 

public accountant’s reports that are 

included in the Annual Report) within 

15 days after receipt by the corporate 

credit union. Such reports include, but 

are not limited to: 

(i) Any written communication 

regarding matters that are required to be 

communicated to the supervisory 

committee (for example, critical 

accounting policies, alternative 

accounting treatments discussed with 

management, and any schedule of 

unadjusted differences); and 

(ii) Any written communication of 

significant deficiencies and material 

weaknesses in internal control required 

by the AICPA’s auditing standards. 

(4) Notice of engagement or change of 

accountants. Each corporate credit 

union that engages an independent 

public accountant, or that loses an 

independent public accountant through 

dismissal or resignation, must notify 

NCUA within 15 days after the 

engagement, dismissal, or resignation. 

The corporate credit union must include 

with the notice a reasonably detailed 

statement of the reasons for any 

dismissal or resignation. The corporate 

credit union must also provide a copy 

of the notice to the independent public 

accountant at the same time the notice 

is filed with NCUA. 

(5) Notification of late filing. A 

corporate credit union that is unable to 

timely file any part of its Annual Report 

or any other report or notice required by 

this paragraph (c) must submit a written 

notice of late filing to NCUA. The notice 

must disclose the corporate credit 

union’s inability to timely file all or 

specified portions of its Annual Report 

or other report or notice and the reasons 

therefore in reasonable detail. The late 

filing notice must also state the date by 

which the report or notice will be filed. 

The written notice must be filed with 

NCUA before the deadline for filing the 

Annual Report or any other report or 

notice, as appropriate. NCUA may take 

appropriate enforcement action for 

failure to timely file any report, or 

notice of late filing, required by this 

section. 

(6) Report to Members. A corporate 

credit union must submit a preliminary 

Annual Report to the membership at the 

next calendar year’s annual meeting. 

(d) Supervisory committees. (1) 

Composition. Each corporate credit 

union must establish a supervisory 

committee. The members of the 

supervisory committee must not be 

employees of the corporate credit union 

and must be independent of the 

corporate credit union. A committee 

member is independent if: 

(i) The committee member does not 

have any family relationships or any 

material business or professional 

relationships with the corporate credit 

union or its management that would 

affect his or her independence as a 

committee member, and 

(ii) The committee member has not 

had any such relationships for at least 

three years preceding his or her 

appointment to the committee. 

(2) Duties. In addition to any duties 

specified under the corporate credit 

union’s bylaws and these regulations, 

the duties of the credit union’s 

supervisory committee include the 

appointment, compensation, and 

oversight of the independent public 

accountant who performs services 

required under this section and 

reviewing with management and the 

independent public accountant the basis 

for all the reports prepared and issued 

under this section. The supervisory 

committee must submit the audited 

comparative annual financial statements 

and the independent public 

accountant’s report on those statements 

to the corporate credit union’s board of 

directors. 

(3) Independent public accountant 

engagement letters. (i) In performing its 

duties with respect to the appointment 

of the corporate credit union’s 

independent public accountant, the 

supervisory committee must ensure that 

engagement letters and/or any related 

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Federal Register / Vol. 75, No. 228 / Monday, November 29, 2010 / Proposed Rules 73013 

agreements with the independent public 

accountant for services to be performed 

under this section: 

(A) Obligate the independent public 

accountant to comply with the 

requirements of paragraph (b) of this 

section (including, but not limited to, 

the notice of termination of services, 

communications with the supervisory 

committee, and notifications of peer 

reviews and inspection reports); and 

(B) Do not contain any limitation of 

liability provisions that: 

(1) Indemnify the independent public 

accountant against claims made by third 

parties; 

(2) Hold harmless or release the 

independent public accountant from 

liability for claims or potential claims 

that might be asserted by the client 

corporate credit union, other than 

claims for punitive damages; or 

(3) Limit the remedies available to the 

client corporate credit union. 

(ii) Engagement letters may include 

alternative dispute resolution 

agreements and jury trial waiver 

provisions provided that the letters do 

not incorporate any limitation of 

liability provisions set forth in 

paragraph (e)(2)(i)(B) of this section. 

(4) Outside counsel. The supervisory 

committee of any corporate credit union 

must, when deemed necessary by the 

committee, have access to its own 

outside counsel. 

(e) Internal audit. A corporate credit 

union with average daily assets in 

excess of $400 million for the preceding 

calendar year, or as ordered by NCUA, 

must employ or contract, on a full- or 

part-time basis, the services of an 

internal auditor. The internal auditor’s 

responsibilities will, at a minimum, 

comply with the Standards and 

Professional Practices of Internal 

Auditing, as established by the Institute 

of Internal Auditors. The internal 

auditor will report directly to the chair 

of the corporate credit union’s 

supervisory committee, who may 

delegate supervision of the internal 

auditor’s daily activities to the chief 

executive officer of the corporate credit 

union. The internal auditor’s reports, 

findings, and recommendations will be 

in writing and presented to the 

supervisory committee no less than 

quarterly, and will be provided upon 

request to the IPA and NCUA. 

8. Revise the introductory text of 

paragraph (a) of § 704.19 to read as 

follows: 

§ 704.19. Disclosure of executive and 

director compensation. 

(a) Annual disclosure. A corporate 

credit union must annually prepare and 

maintain a disclosure of the dollar 

amount of compensation paid to its 

most highly compensated employees, 

including compensation from any 

corporate CUSO in which the corporate 

has invested or made a loan, in 

accordance with the following schedule: 

* * * * * 

9. Add a new § 704.21 to read as 

follows: 

§ 704.21 Equitable distribution of 

corporate credit union stabilization 

expenses. 

When the NCUA Board acts to assess 

a premium on Federally-insured credit 

unions for the Temporary Corporate 

Credit Union Stabilization Fund 

(TCCUSF): 

(a) A corporate credit union must 

immediately prepare a list of all its nonnatural person members on the date of 

assessment that are not Federallyinsured credit unions (‘‘non-FICU 

members’’), including the name of each 

such non-FICU member, the assets of 

each such non-FICU member as of the 

end of the previous year, and the 

address and contact information of each 

such non-FICU member. 

(b) Within 14 days after the date of the 

assessment, the corporate credit union 

must forward the list described in 

paragraph (a) of this section to the 

Office of Corporate Credit Unions. A 

corporate credit union that has no nonFICU members must provide the Office 

of Corporate Credit Unions with a 

response indicating that it has no nonFICU members. 

(c) Within 60 days after the date of 

assessment, the NCUA Chief Financial 

Officer will request each member on the 

list described in paragraph (a) of this 

section to make a voluntary payment to 

the TCCUSF. The amount of the 

requested payment will be the member’s 

assets (as of the previous year-end) 

times 0.815 times the percentage of 

insured shares that NCUA assessed each 

Federally-insured credit union. If the 

member decides to make a payment, the 

member must deliver the payment to 

NCUA no later than 60 days after the 

date of the NCUA Chief Financial 

Officer’s request. 

(d) If NCUA fails to receive a full, 

timely payment of the amount requested 

in paragraph (c) of this section, NCUA 

will notify the corporate credit union of 

the failure. 

(e) No later than 90 days following 

receipt of the notice in paragraph (d) of 

this section, the corporate credit union 

must call a special meeting of its 

members to determine whether each 

non-FICU member that failed to make 

the full payment to the TCCUSF should 

be expelled from the corporate credit 

union. For a Federally-chartered 

corporate credit union, the expulsion 

vote will be conducted in accordance 

with section 118(a) of the Federal Credit 

Union Act (12 U.S.C. 1764(a)) and the 

bylaws of the corporate credit union. 

For a State-chartered corporate credit 

union, the expulsion vote will be 

conducted in accordance with the 

bylaws of the corporate credit union and 

applicable State law. The corporate 

credit union must notify the Office of 

Corporate Credit Unions of the results of 

the member vote no later than 14 days 

following the date of the vote. 

(f) If the corporate credit union’s 

annual meeting falls within the 

timeframe specified in paragraph (e) of 

this section, the expulsion vote may be 

conducted at the annual meeting instead 

of a special meeting. 

(g) For non-FICUs that belong to more 

than one corporate credit union, NCUA 

will request only one voluntary 

payment from that non-FICU in 

connection with each TCCUSF 

assessment. If NCUA fails to receive a 

full payment of the amount requested in 

paragraph (c) of this section, however, 

NCUA will notify all corporate credit 

unions to which the non-FICU belongs 

for purposes of conducting an expulsion 

vote. 

10. Add a new § 704.22 to read as 

follows: 

§ 704.22 Enterprise risk management. 

(a) A corporate credit union must 

develop and follow an enterprise risk 

management policy. 

(b) The board of directors of a 

corporate credit union must establish an 

enterprise risk management committee 

(ERMC) responsible for the oversight of 

the enterprise-wide risk management 

practices of the corporate credit union. 

The ERMC must report at least annually 

to the board of directors. 

(c) The ERMC must include at least 

one independent risk management 

expert. The risk management expert will 

have post-graduate education; an 

actuarial, accounting, economics, 

financial, or legal background; and at 

least five years experience in 

identifying, assessing, and managing 

risk exposures. The risk management 

expert’s experience must also be 

commensurate with the size of the 

corporate credit union and the 

complexity of its operations. 

(d) An expert is independent if: 

(1) He or she does not have any family 

relationships or any material business or 

professional relationships with the 

corporate credit union that would affect 

his or her independence as a committee 

member, and 

(2) He or she has not had any such 

relationships for at least three years 

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73014 Federal Register / Vol. 75, No. 228 / Monday, November 29, 2010 / Proposed Rules 

preceding his or her appointment to the 

committee. 

(e) The risk management expert is not 

required to be a director of the corporate 

credit union. 

11. Add a new § 704.23 to read as 

follows: 

§ 704.23 Membership fees. 

(a) A corporate credit union may 

charge its members a membership fee. 

The fee may be one-time or periodic. 

(b) The corporate credit union must 

calculate the fee uniformly for all 

members as a percentage of each 

member’s assets, except that the 

corporate credit union may reduce the 

amount of the fee for members that have 

contributed capital to the corporate. 

Any reduction must be proportional to 

the amount of the member’s 

nondepleted contributed capital. 

(c) The corporate credit union must 

give its members at least six months 

advance notice of any initial or new fee, 

including terms and conditions, before 

invoicing the fee. For a recurring fee, the 

corporate credit union must also give 

six months notice of any material 

change to the terms and conditions of 

the fee. 

(d) The corporate credit union may 

terminate the membership of any credit 

union that fails to pay the fee in full 

within 60 days of the invoice date. 

PART 741—REQUIREMENTS FOR 

INSURANCE 

12. The authority citation for part 741 

continues to read as follows: 

Authority: 12 U.S.C. 1757, 1766(a), 1781– 

1790, and 1790d; 31 U.S.C. 3717. 

13. Add a new § 741.226 to read as 

follows: 

§ 741.226 Membership in one corporate 

credit union. 

Any credit union which is insured 

pursuant to Title II of the Act must 

adhere to the requirements stated in 

§ 701.5 of this chapter. 

[FR Doc. 2010–29546 Filed 11–26–10; 8:45 am] 

BILLING CODE 7535–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 61 

Notice of Public Meeting: Updating the 

Flight Instructor Renewal Process To 

Enhance Safety of Flight 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Notice of public meeting. 

SUMMARY: The FAA announces a public 

meeting to receive industry input as to 

how to improve the Certificated Flight 

Instructor (CFI) biennial renewal 

process to enhance the safety of flight in 

the General Aviation (GA) community. 

This is an information gathering 

meeting. 

DATES: The public meetings will be held 

on the following dates. 

• December 6, 2010, from 9 a.m. until 

no later than 4 p.m., and 

• December 7, 2010 from 9 p.m. until 

no later than 4 p.m. 

ADDRESSES: The December 6 and 7, 

2010, public meetings will be held at 

the FAA headquarters building B, 

located at 600 Independence Avenue, 

SW., Washington, DC 20591. 

Because of limited capacity, we ask 

that all those who anticipate attending 

the meeting contact Gregory.french@

faa.gov with written confirmation of 

attendance and the number of members 

in the attending party. If we find that we 

are nearing capacity, we may request 

that those who are planning on sending 

more than a single representative reduce 

the number in their party. If this is the 

case, respondents will be notified by 

e-mail and/or phone prior to the 

meeting date. 

FOR FURTHER INFORMATION CONTACT: 

Requests to attend this public meeting, 

questions regarding the logistics of the 

meeting, and any technical questions 

should be directed to Inspector Gregory 

French, AFS–800, General Aviation and 

Commercial Division, Federal Aviation 

Administration, 800 Independence 

Avenue, SW., Washington, DC 20591; 

telephone (202) 267–8212, facsimile 

(202) 267–5094, or, preferably, via email at Gregory.french@faa.gov. 

SUPPLEMENTARY INFORMATION: 

Background 

The FAA has been reviewing safety of 

flight data in the general aviation (GA) 

community over the last ten years. Even 

with the advent of new technologies to 

assist the GA pilot, there has been little 

improvement in the accident/incident 

rate among that community of aviators. 

CFIs are responsible for ensuring that 

pilots are properly educated to operate 

safely within the National Airspace 

System (NAS). For CFIs to accomplish 

that mission effectively they must be 

provided the means and knowledge to 

do so, and there must be some objective 

method of measuring that information 

transfer and retention. The FAA has 

been reviewing indicators that suggest 

that the processes currently in place 

may lack sufficient effectiveness in 

ensuring that CFIs are being provided 

the best information in the most useful 

manner. This meeting will elicit input 

from the community of authorized flight 

instructor renewal program operators so 

that the FAA can better analyze how to 

improve the process. 

Purpose of the Public Meeting 

The purpose of this public meeting is 

for the FAA to hear the public’s views 

and obtain information relevant to 

improving the CFI biennial renewal 

process. The FAA will consider 

comments made at this public meeting 

before making decisions on any 

suggested changes to the current policy. 

More specifically, the FAA seeks 

information on the following questions. 

The FAA requests that that all meeting 

participants provide written comments 

to support any positions they may 

express support for, or disagreement 

with. 

• How effective have Flight Instructor 

Refresher Clinics been in transferring 

relevant information to flight 

instructors? 

• What can be done to improve the 

effectiveness of flight instructor 

refresher clinics? 

• How effective are the written tests 

provided at the conclusion of flight 

instructor refresher clinics? 

• How can the effectiveness of flight 

instructor knowledge be better assessed? 

• How effective have the online 

courses been? 

• How do we effectively measure the 

success of knowledge transfer in online 

flight instructor renewal courses? 

• Should there be changes to 14 CFR 

part 61.197? 

• Are those non-FIRC methods of CFI 

biennial certificate renewal found in 14 

CFR part 61.197 adequate and effective 

in ensuring that CFIs possess the most 

up to date information in terms of both 

proficiency and knowledge? 

• What can the community 

conducting flight instructor recurrent 

training, the FIRC providers, do to 

contribute to enhancing safety of flight 

among the GA community at large? 

Participation at the Public Meetings 

Commenters who wish to present oral 

statements at the December 6 and 7, 

2010, public meetings will be permitted 

to do so on an ad-hoc basis during the 

meeting. 

The FAA will have available a 

projector and a computer capable of 

accommodating Word and PowerPoint 

presentations from a compact disk (CD) 

or USB memory device. Persons 

requiring any other kind of audiovisual 

equipment should notify the FAA prior 

to the meeting. 

Sign and oral interpretation can be 

made available at the meeting, as well 

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