81378 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 

By the Office of Thrift Supervision. 

John E. Bowman, 

Acting Director. 

[FR Doc. 2010–32637 Filed 12–27–10; 8:45 am] 

BILLING CODE P 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Parts 701, 708a, and 708b 

RIN 3133–AD40 

Fiduciary Duties at Federal Credit 

Unions; Mergers and Conversions of 

Insured Credit Unions 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Final rule. 

SUMMARY: NCUA is issuing final 

amendments to its regulations covering 

several related subjects. The final rule 

documents and clarifies the fiduciary 

duties and responsibilities of Federal 

credit union (FCU) directors. The final 

rule amends NCUA’s indemnification 

regulation limiting indemnification of 

FCU officials and employees for liability 

arising from improper decisions that 

affect the fundamental rights of credit 

union members, and makes conforming 

changes to the standard FCU and 

corporate credit union bylaws. In 

addition, the final rule adds new 

provisions establishing the procedures 

for insured credit unions merging into 

banks. The final rule also amends some 

of NCUA’s existing regulatory 

procedures applicable to insured credit 

union mergers with other credit unions, 

conversions to mutual savings banks 

(MSBs), and termination of share 

insurance. 

DATES: This rule is effective January 27, 

2011. 

FOR FURTHER INFORMATION CONTACT: Paul 

Peterson, Associate General Counsel; 

Elizabeth Wirick, Staff Attorney; or 

Jacqueline Lussier, Staff Attorney; 

Office of General Counsel, at the 

National Credit Union Administration, 

1775 Duke Street, Alexandria, Virginia 

22314–3428 or telephone (703) 518– 

6540. 

SUPPLEMENTARY INFORMATION: 

I. Background 

On March 18, 2010, the NCUA Board 

issued a Notice of Proposed Rulemaking 

(NPR or Proposal) to amend parts 701, 

708a, and 708b of NCUA’s rules. 75 FR 

15574 (March 29, 2010). 

The Proposal would have: 

• Added a new § 701.4 clarifying the 

authorities and duties of FCU directors 

in managing the affairs of their credit 

unions and revising § 701.33 limiting 

indemnification of FCU officials and 

employees for liability arising from 

improper decisions that affect the 

fundamental rights of credit union 

members. 

• Revised the existing provisions of 

Part 708a on insured credit union to 

MSB conversions. 

• Added a new subpart C to Part 708a 

setting forth procedural and substantive 

requirements for converting an insured 

credit union to a bank by merger. 

• Revised the existing provisions of 

Part 708b on insured credit union 

mergers with other credit unions and 

the termination of Federal share 

insurance. 

The public comment period for the 

NPR closed on May 28, 2010. NCUA 

received comments from 40 commenters 

including ten Federal and State credit 

unions, 16 credit union trade 

organizations (which included 13 State 

credit union leagues), one State credit 

union regulators’ association, six law 

firms, two credit union consultants, an 

individual credit union member, an 

election teller, a private deposit insurer, 

an association representing the interests 

of converting credit union members, 

and one bank trade association. The 

most significant comments on each part 

of the Proposal are discussed in the 

following section-by-section analysis of 

the revisions in this final rule. 

II. Section-by-Section Analysis 

A. Duties of Federal Credit Union 

Boards of Directors (§ 701.4) 

The Proposal included a new § 701.4, 

titled ‘‘General authorities and duties of 

Federal credit union boards of 

directors.’’ 

Sec. 701.4(a) Management of a Federal 

Credit Union 

Proposed paragraph (a) provided that 

the management of each Federal credit 

union is vested in its board of directors, 

and that while a Federal credit union 

board of directors may delegate the 

execution of operational functions to 

Federal credit union personnel, the 

ultimate responsibility of each Federal 

credit union’s board of directors for that 

Federal credit union’s management is 

non-delegable. The language of the 

proposal mirrors the duties of the 

Federal Home Loan Bank directors, as 

expressed in a rule promulgated by the 

Federal Housing Finance Agency 

(FHFA). 12 CFR 917.2(b)(1). 

Some commenters stated that NCUA 

should clarify that while an FCU’s board 

of directors has the ultimate 

responsibility for the management of the 

credit union, this responsibility does 

not include day-to-day management. 

One commenter said that NCUA should 

withdraw the language in the second 

sentence of proposed paragraph (a) 

making the board’s ultimate 

responsibility for the credit union’s 

management non-delegable. This 

commenter stated the FCU Act vests the 

management of each FCU in the board 

of directors, but it does not prohibit the 

board from delegating the management 

of the credit union. The commenter 

further stated that since an FCU’s board 

is composed primarily of unpaid 

volunteers the board of directors should 

be allowed to delegate the management 

to compensated executives. The 

commenter recommended NCUA 

substitute language that the board of 

directors provides the general direction 

for the credit union, which would better 

reflect the policy-making role of the 

board. 

The NCUA Board agrees that 

paragraph (a) should more closely track 

the language of section 113 of the FCU 

Act, which employs the language 

‘‘general direction and control.’’ 

Accordingly, the final rule substitutes 

‘‘general direction and control’’ for 

‘‘management.’’ This amendment clarify 

that the directors do not actually 

manage the credit union. The board of 

directors, however, may not and cannot 

delegate its ultimate statutory 

responsibility for the proper 

management of the credit union. 

Sec. 701.4(b) Duties of Federal Credit 

Union Directors 

Proposed paragraph (b) set forth the 

fiduciary duties of FCU directors. It 

charged each director to: 

• Carry out his or her duties as a 

director in good faith, in a manner 

reasonably believed to be in the best 

interests of the membership of the FCU, 

and with such care, including 

reasonable inquiry, as an ordinarily 

prudent person in a like position would 

use under similar circumstances 

(paragraph (b)(1)); 

• Administer the affairs of the FCU 

fairly and impartially and without 

discrimination in favor of or against any 

particular member (paragraph (b)(2)); 

• Understand the FCU’s balance sheet 

and income statement and ask, as 

appropriate, substantive questions of 

management and the internal and 

external auditors (paragraph (b)(3)); and 

• Direct the operations of the FCU in 

conformity with the requirements set 

forth in the Federal Credit Union Act, 

the NCUA’s regulations, other 

applicable law, and sound business 

practices (paragraph (b)(4)). 


srobinson on DSKHWCL6B1PROD with RULES
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 81379 

1See 75 FR 15574, 15575 (Mar. 29, 2010). 

2 1 Model Business Corporation Act Annot. xv, 8– 

187 (4th Ed., 2008 Supp., 2009 rev.). 

3 Id. at 8–209. 

Proposed paragraph (b)(1) stated that 

the directors have a fiduciary duty to act 

in the best interests of credit union 

members, particularly in connection 

with matters affecting the fundamental 

rights of members, such as mergers and 

conversions. A few commenters 

objected to the statement in (b)(1) that 

directors owe fiduciary rights to 

members and asserted that because 

members have little right to the equity 

in their credit unions, credit union 

members resemble customers of other 

depository institutions more than 

shareholders in corporations. Other 

commenters stated that the duties of the 

board of directors run first to the credit 

union and not to the members 

individually or collectively. 

These views are wrong from both a 

philosophical and legal standpoint. As 

stated in the preamble to the NPR, the 

NCUA Board is particularly concerned 

about assertions that the members of a 

credit union do not own the credit 

union, or that the duties of the directors 

do not flow to the members but, rather, 

flow in some amorphous way only to 

the institution. A lack of focus on the 

interests of the members makes it easier 

for officials and management to make 

decisions that benefit themselves 

personally, even if those decisions are 

not necessarily in the best interests of 

the membership as a whole.1

The Board cannot emphasize enough 

that the members own an FCU and that 

directors of an FCU must consider the 

interests of the membership as a whole, 

and put those interests first, when 

making decisions that affect the credit 

union. Accordingly, the NCUA Board is 

revising the final paragraph (b)(1) of 

§ 701.4 of the Proposal to emphasize 

that each FCU director must carry out 

his or her duties in a manner the 

director believes to be in the best 

interests of the membership of the credit 

union as a whole. 

One commenter was concerned that a 

focus on the membership as a whole 

might keep an FCU from developing 

new branches or ATMs because some 

members would be closer to the new 

branch or ATM and might find the new 

facility more convenient to use than 

other members. The Board recognizes 

that in the short term some members 

may benefit geographically from an 

FCU’s expansion plans. Such marginal 

geographical benefits, or other marginal 

access benefits, will not by themselves 

cause an FCU expansion to violate the 

fiduciary duties of an FCU’s Board. 

One commenter suggested that there 

might be a difference between the short 

term interests of credit union members 

and their long term interests. In the 

unusual situation where there might be 

such a perceived conflict, the board of 

directors should, as part of its due 

diligence, carefully define the perceived 

conflict, weight the competing short and 

long term interests, make a choice based 

on the greatest needs of the members, 

and explain the board’s choice. 

Proposed paragraph (b)(1) required FCU 

directors to carry out their duties with 

the care an ordinarily prudent person in 

a like position would use under similar 

circumstances. This language was based 

in part on Model Business Corporation 

Act (MBCA) § 8.30, titled ‘‘Standards of 

Conduct for Directors.’’ Some 

commenters recommended updating the 

italicized phrase to omit the words 

‘‘ordinarily prudent’’ so as to use a 1998 

change to § 8.30 of the MBCA 

employing the language ‘‘with the care 

that a person in a like position would 

reasonably believe appropriate.’’ 2 These 

commenters believe the words 

‘‘ordinarily prudent’’ heighten the risk of 

litigation. 

The NCUA Board does not agree with 

the commenters. The ordinarily prudent 

person formulation has been adopted by 

41 States while the newer MBCA 

language has been adopted by only six 

States.3 In addition, the proposed 

language mirrors the current standard 

applicable to directors of the Federal 

Home Loan Banks as set forth in 12 CFR 

917.2(b)(1). Accordingly, the final rule 

retains the traditional formulation for a 

director’s standard of care—‘‘with the 

care an ordinarily prudent person in a 

like position would use.’’ 

Proposed paragraph (b)(2) required 

that the directors administer the affairs 

of the Federal credit union fairly and 

impartially and without discrimination 

in favor of or against any particular 

member. Proposed paragraph (b)(2) 

employed the language of the Federal 

Home Loan Bank regulation, 12 CFR 

917.2(b)(2), and its underlying Federal 

Home Loan Bank Act (FHLB Act) 

statutory provision. 12 U.S.C. 1427(j). 

Some commenters expressed a concern 

that this ‘‘without discrimination’’ 

language, combined with the general 

statement of duties owed to the 

members in (b)(1), could provide 

members with a cause of action and 

increase the risk of litigation. 

The NCUA Board does not agree with 

these comments. First, as stated in the 

preamble of the NPR, this rulemaking 

does not create a Federal cause of action 

in favor of particular individuals or 

groups of individuals. 75 FR 15574, 

15578 n.11. Second, NCUA’s research 

revealed no case law holding that there 

is an implied private right of action 

under the equivalent language in the 

FHLB Act or regulations. In fact, there 

is case law to the contrary holding that 

there is no express or implied private 

right of action under § 1427(j) of the 

FHLB Act. Fidelity Financial Corp. v. 

Federal Home Loan Bank of San 

Francisco, 589 F. Supp. 885, 891, 894 

(N. D. Cal. 1983). 

Proposed paragraph (b)(3) required 

each director, at the time of election or 

appointment, or within a reasonable 

time thereafter, not to exceed three 

months, have at least a working 

familiarity with basic finance and 

accounting practices, including the 

ability to read and understand the FCU’s 

balance sheet and income statement and 

to ask, as appropriate, substantive 

questions of management and the 

internal and external auditors. 

Many commenters objected to three 

months as an unreasonably short period 

in which to become adequately 

proficient at understanding accounting 

and finance; several suggested 

substituting 12 months for three 

months. Those favoring 12 months 

stated that many credit union directors 

serve on a part-time basis, particularly 

at small credit unions, and acquiring 

proficiency within only three months 

would be extraordinarily difficult. 

The NCUA Board believes that having 

a working familiarity with basic finance 

and accounting practices is essential to 

being able to perform a credit union 

director’s functions. After considering 

these comments, however, the Board 

has decided that directors should be 

given more time in which to meet this 

requirement. Accordingly, this final rule 

revises paragraph (b)(3) to provide for a 

six-month period in which to gain at 

least a working familiarity with basic 

finance and accounting practices, 

including the ability to read and 

understand the Federal credit union’s 

balance sheet and income statement. As 

the preamble to the NPR indicated, 

there are a multiple of sources of 

training in finance and accounting, 

including training provided by credit 

unions, outside sources, or, for small 

credit unions, NCUA’s Office of Small 

Credit Union Initiatives. Accordingly, 

six months provides ample time for 

training while ensuring that directors 

who lack proper training do not 

procrastinate in obtaining the necessary 

training. 

Some commenters asked for 

clarification about what the phrase as 

appropriate meant in the phrase: ‘‘to 

ask, as appropriate, substantive 

questions of management and the 


srobinson on DSKHWCL6B1PROD with RULES
81380 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 

internal and external auditors.’’ The 

commenters wondered whether it meant 

that questions should be tailored to the 

size and complexity of the credit union. 

In fact, the NCUA Board added the as 

appropriate language to the proposed 

rule so directors would not feel they had 

to ask questions just for the sake of 

asking. 

Several other commenters objected to 

the financial literacy requirement for a 

variety of reasons. For example, one 

commenter argued the Proposal takes 

away one of the core right of members 

to elect directors of their choice, and 

that requiring a director to be financially 

literate or become financially literate 

within a short period of time would 

impose an eligibility requirement in 

violation of the FCU Act and the 

bylaws. Another commenter asserted 

that the financial literacy requirement 

imposes an eligibility requirement in 

violation of the FCU Act. This 

commenter believes any member of a 

credit union, so long as he or she is an 

adult and has not been convicted of a 

crime involving dishonesty or breach of 

trust as provided for, is eligible to serve 

as a director, regardless of financial 

literacy. 12 U.S.C. 1761(a), 1785(d). 

The Board agrees that any member of 

an FCU who meets the eligibility 

requirements of the FCU Act may run 

for, and serve as, an FCU director. As a 

matter of safety and soundness, 

however, a serving director does need to 

become literate within a reasonable 

period of time after election or 

appointment. The level of necessary 

literacy depends on the size and 

complexity of the FCU. 

Another commenter stated that the 

Proposal is vague and subjective 

because it provides no definitive 

measurements for when and how a 

director will be considered sufficiently 

trained in the use of financial 

statements and other data. This 

commenter believes that without 

specific and objective standards, it will 

be left up to the subjectivity of a given 

examiner to determine whether 

directors are in compliance with this 

requirement. The NCUA Board 

disagrees. Again, directors must obtain 

financial knowledge commensurate 

with the size and complexity of their 

credit union. The Board also notes there 

are multiple ways for resolving disputes 

between credit unions and their 

examiners. See, e.g., Interpretive Ruling 

and Policy Statement (IRPS) 95–1, as 

amended by IRPS 02–1. 

Proposed paragraph (b)(4) required 

each director to direct the operations of 

the Federal credit union in conformity 

with the requirements set forth in the 

FCU Act, the NCUA’s regulations, other 

applicable law, and sound business 

practices. The final rule revises this 

section to substitute the phrase ‘‘direct 

management’s operations’’ for ‘‘direct 

the operations.’’ 

Sec. 701.4(c) Authority Regarding Staff 

and Outside Consultants 

Proposed paragraph (c)(1) stated that 

the board of directors and all its 

committees have authority to retain staff 

and outside counsel, independent 

accountants, financial advisors, and 

other outside consultants at the expense 

of the Federal credit union. Paragraph 

(c)(2) states that the board of directors 

or any committee of the board may 

require FCU staff that are providing 

services to the board or committee 

under paragraph (c)(1) report directly to 

the board or committee. Paragraph (c)(3) 

provides that in discharging board or 

committee duties, a director who does 

not have knowledge that makes reliance 

unwarranted is entitled to rely on 

information, opinions, reports, or 

statements, including financial 

statements and other financial data, 

prepared or presented by officers or 

employees of the FCU, legal counsel, 

independent accountants, or other 

experts, and committees of the board of 

which the director is not a member. 

Some commenters opposed the 

provision requiring FCU employees 

(staff) to report directly to the board of 

directors or committees of the board, 

stating this would undermine 

management’s authority over the 

employees of the credit union. Another 

commenter questioned whether 

committees other than the supervisory 

committee had the authority to require 

employees to report directly to the 

committee. One commenter argued that 

direct contact between the board of 

directors and the credit union’s 

employees would put employees at the 

beck and call of the board and could 

interfere with the employees’ regular 

duties. 

The NCUA Board disagrees. An FCU’s 

board of directors cannot permit the 

chief executive officer (CEO) to screen 

all the board’s information sources. 

While the board of directors should not 

attempt to bypass the CEO in giving 

direction to management and 

employees, the board is free to ask any 

manager, employee, or independent 

contractor to provide the board and its 

committees information directly and not 

through the filter of the CEO. The 

NCUA’s Office of General Counsel has 

previously opined that board members 

must be free to gather information from 

any source in the credit union to 

perform their board duties. OGC Op. No. 

03–0763 (Sept. 29, 2003). 

Sec. 701.4(d) Reliance 

The Proposal instructed FCU directors 

on the authority and limits of the 

director’s ability to rely on information 

provided by others. A director is 

generally entitled to rely on information 

prepared or presented by employees or 

consultants whom the director 

reasonably believes to be reliable and 

competent in the functions performed. 

No commenters addressed proposed 

paragraph (d) of § 701.4. 

Sec. 701.4 and the Business Judgment 

Rule 

Some commenters asked about the 

interplay between § 701.4 and the 

business judgment rule. One commenter 

recommended that in the preamble to a 

final rule NCUA indicate its policy and 

intention whether the business 

judgment rule applies in actions brought 

against the directors of FCUs. 

The business judgment rule is a 

burden of proof issue associated with 

particular causes of actions. Since the 

proposed rule does not create an express 

or implied private right of action, a third 

party seeking to bring a cause of action 

must look to State law to establish the 

cause of action. It is likely that the 

existence, and form, of any business 

judgment rule would depend on the law 

of the State under which the private 

cause of action would reside. Of course, 

the business judgment rule does not 

apply at all to administrative 

enforcement actions brought by NCUA. 

Accordingly, and except as described 

above, the NCUA Board adopts § 701.4 

as proposed. 

B. Indemnification (§ 701.33) 

As stated in the NPR preamble, the 

NCUA Board desires to ensure that FCU 

officials and employees are held 

personally accountable, where 

appropriate, for egregious violations of 

their fiduciary duties. NCUA will not 

permit an FCU to indemnify officials 

and employees against liability based on 

an aggravated breach of the duty of care 

when such a breach may affect 

fundamental rights and financial 

interests of the FCU members. 

Accordingly, the Proposal included a 

new paragraph (c)(5) in § 701.33 

prohibiting an FCU from indemnifying 

an official or employee for personal 

liability related to any decision made by 

that individual on a matter significantly 

affecting the fundamental rights and 

interests of the FCU’s members. Such 

indemnification, however, was limited 

to situations in which the decision 

giving rise to the claim for 

indemnification is determined by a 

court to have constituted gross 


srobinson on DSKHWCL6B1PROD with RULES
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 81381 

negligence, recklessness, or willful 

misconduct. Matters affecting the 

fundamental rights and interests of FCU 

members include, charter and share 

insurance conversions and terminations. 

The Proposal also included 

corresponding amendments to the 

indemnification provisions of the 

standard bylaws of FCUs and Federal 

corporate credit unions. Of the 24 

commenters addressing this revision, 

most opposed it. Most of those opposed 

argued that the proposed provision 

would have the unintended 

consequence of discouraging qualified 

individuals from serving as directors 

because of the expanded potential for 

personal liability. Others asserted it 

would disadvantage the FCU charter as 

compared to the State charter because 

FCU directors would face an even 

higher burden compared to State 

chartered CU directors. 

The NCUA Board does not agree with 

these commenters. The proposed 

prohibition on indemnification is 

limited to the extraordinary 

circumstance of a board considering a 

proposal to change the credit union’s 

charter or insurance status. Not only are 

these situations rare, but the prohibition 

would only apply in the very limited 

circumstance of an aggravated breach of 

the duty of care as determined by a 

court. 

Some commenters stated that the 

proposed rule’s silence on the 

advancement of expenses would also 

disadvantage FCUs in attracting 

directors. To alleviate this concern, the 

final rule permits the FCU to advance 

funds to pay or reimburse reasonable 

legal fees and other professional 

expenses incurred by the official or 

employee to assist the official or 

employee in resisting lawsuits that the 

FCU considers meritless. The decision 

to advance funds requires the FCU’s 

board of directors make a good faith 

determination, after due investigation, 

that: 

• The official or employee acted in 

good faith and in a manner he or she 

believed to be in the best interests of the 

members; 

• The payment will not materially 

adversely affect the credit union’s safety 

and soundness; and 

• The official or employee provides a 

written affirmation of his or her good 

faith belief that the relevant standard of 

conduct in § 701.4 have been met and a 

written undertaking to reimburse the 

credit union, to the extent not covered 

by payments from insurance, the 

advanced funds if it ultimately decided 

that the official or employee is not 

entitled to indemnification. 

The NCUA Board is also adding a new 

provision to § 701.33 reinforcing that 

fiduciary duties are owed to the 

members. Existing (and unchanged) 

§ 701.33(c)(2) states that 

indemnification shall be consistent 

either with the standards applicable to 

credit unions generally under the law of 

the State where the FCU is located or 

the MBCA, as specified by the credit 

union. The MBCA standard under 

which a corporation may indemnify a 

director requires that the director acted 

in good faith and with the reasonable 

belief that his or her conduct was in the 

best interests of the corporation. MBCA 

§ 8.51(a). A commenter stated that this 

appears to conflict with the Proposal’s 

statement that FCU directors’ duties are 

owed to the membership and not to the 

credit union per se. The NCUA Board 

agrees that there is an apparent conflict 

and has added a new paragraph (c)(7) to 

§ 701.33 to resolve this conflict. The 

new (c)(7) states that, the extent an FCU 

has chosen to follow State law or the 

MBCA, the FCU must substitute ‘‘best 

interests of the members’’ for any 

language in State law or the MBCA 

indicating that duties are owed to any 

persons or entities (such as the credit 

union or the corporation) other than the 

membership as a whole. 

Accordingly, and except as described 

above, the final rule amends § 701.33 as 

proposed. 

C. Parts 708a and 708b 

The proposed amendments to Parts 

708a and 708b revise existing rules on 

credit union to mutual savings bank 

(MSB) conversions and conversions to 

nonfederal deposit insurance. The 

revisions are designed to better protect 

the secrecy and integrity of the voting 

process. The Proposal also reorganized 

Part 708a and added a new subpart C to 

Part 708a that establishes procedural 

and substantive requirements for 

converting a credit union to a bank 

through a merger. 

The preamble to the Proposal 

included a detailed section-by-section 

description and analysis for revised 

Parts 708a and 708b. 75 FR 15574, 

15579–15585 (March 29, 2010). The 

Board adopted many sections of the 

Proposal without change, and the 

detailed analysis of most of these 

sections is not repeated in this 

preamble. 

Credit Union Conversion to MSB, Part 

708a, Subpart A 

Sec. 708a.101 Definition of Secret 

Ballot 

The Proposal included a new 

definition of ‘‘secret ballot’’ in 

§ 708a.101 to prohibit credit union 

employees from helping members 

complete ballots or handling completed 

ballots. One commenter argued the 

prohibition would prevent employees 

from responding to any questions at all 

about the election because of the 

unclear delineation between answering 

questions and helping with a ballot. The 

NCUA Board disagrees. The definition 

of ‘‘secret ballot’’ prohibits credit union 

officials from assisting members in 

completing ballots or handling 

completed ballots. The provision only 

prohibits an employee from physically 

touching a ballot or telling a member 

which way to vote, and does not 

prohibit an employee from answering 

questions. While one commenter said 

the prohibition on employees handling 

ballots would create unnecessary 

difficulties for members, another 

commenter suggested the rule should 

also require the independent entity to 

empty the ballot boxes in credit union 

branches. After considering the 

comments, the NCUA Board determined 

the rule as proposed appropriately 

protects the secrecy of members’ votes 

without imposing an undue burden on 

credit unions. Accordingly, the final 

rule adopts the definition as proposed. 

Sec. 708a.101 Definition of 

‘‘Conducted by an Independent Entity’’ 

The Proposal added new definitions 

for ‘‘independent entity’’ and ‘‘conducted 

by an independent entity.’’ These 

definitions describe the qualifications 

of, and requirements applicable to, the 

entity responsible for tabulating member 

votes on the conversion proposal. The 

new definitions would prohibit the 

independent entity from providing any 

interim vote results to credit union 

management as well as prohibit the 

opening or tallying of ballots during the 

election period. As discussed in the 

Advance Notice of Proposed 

Rulemaking, NCUA has documented 

several instances where credit union 

management’s access to interim vote 

tallies raised concerns about the fairness 

of elections and the communications to 

members. 73 FR 5461, 5466 (January 30, 

2008). 

Several commenters stated the 

definition of ‘‘conducted by an 

independent entity’’ as proposed would 

pose practical challenges. Some of these 

commenters said the requirement to 

delay the counting of ballots until after 

the conclusion of the special meeting 

would make counting the ballots and 

certifying the results to NCUA within 10 

days much more difficult. The NCUA 

Board agrees that the change in 

procedure contemplated by the Proposal 

could make certification within 10 days 


srobinson on DSKHWCL6B1PROD with RULES
81382 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 

more difficult and has lengthened the 

period for certification under section 

708a.107 to 14 days. Another 

commenter, a company that conducts 

corporate elections, explained that the 

usual way the independent entity 

determines which members have voted 

is by opening the ballot and checking 

the validity of the control number and 

matching it with a member name. This 

commenter stated that because the 

independent entity needs to know 

which members have voted to produce 

a list of members who have not voted, 

the bar on opening ballots during the 

election period would make it much 

more difficult to produce the list of 

members who have yet to vote. The 

NCUA Board understands the Proposal 

might require election tellers and credit 

unions to modify the envelope format so 

that the outside of the envelope would 

show the ballot control number. The 

documented problems with interim vote 

tallies and the difficulty of ensuring that 

election tellers with access to interim 

tallies do not share these tallies with 

credit union management justify 

requiring election tellers to change their 

usual procedures if necessary. NCUA 

believes those rare cases where voters 

might not complete a ballot correctly, 

and so be listed as having voted when 

they did not actually vote properly, will 

not affect the fairness of the overall 

voting process. 

Another of the commenters suggested 

that the independent entity should be 

allowed to tally ballots as they are 

received, and only communicating the 

interim tallies to the credit union 

should be prohibited. The Board 

believes it would be too easy for a teller 

to unintentionally communicate the 

interim voting results to the credit 

union. 

One commenter who supported the 

rule as proposed suggested the rule 

should also prohibit giving credit union 

management the names of members who 

have not voted, because members 

opposing the conversion cannot obtain 

this information. As an alternative, this 

commenter suggested allowing 

management to provide an election 

reminder notice to the independent 

entity and having the independent 

entity mail it to members who have not 

voted. The Board is not aware of 

situations where allowing credit union 

management to obtain lists of nonvoting members during the election 

period has compromised the fairness of 

an election, and having such lists allows 

the credit union to conserve resources 

by only soliciting those who have not 

yet voted. 

Accordingly, the final rule adopts the 

definitions of ‘‘independent entity’’ and 

‘‘conducted by an independent entity’’ 

as proposed. 

Sec. 708a.104 Disclosures 

The Proposal also amended the list of 

disclosures in § 708a.104 (previously 

§ 708a.4) to add disclosures related to 

the cost of the conversion, the 

conversion’s effect on the availability of 

facilities, and a statement that NCUA 

neither supports nor endorses the 

conversion proposal. 

Most commenters were opposed to 

the requirement to disclose the costs of 

the conversion. One opposing 

commenter asserted that the costs are 

irrelevant to members and most of the 

costs are incurred before members are 

notified, while another said any such 

disclosures would be only speculation. 

The NCUA Board disagrees that simply 

because, as one commenter alleges, most 

of the costs have occurred, or, as 

another commenter alleges, most of the 

costs are in the future, that members 

will find these costs, or cost estimates, 

irrelevant. One of the commenters 

supporting the cost disclosures also 

suggested the cost disclosures should be 

updated in the mailings to members 60 

and 30 days before the vote, because any 

attempted opposition to a conversion 

proposal causes the credit union to 

incur additional advertising expenses to 

respond to the opposition. This 

suggestion goes beyond the scope of the 

Proposal. The NCUA Board will 

consider how these cost disclosure 

requirements will work in practice 

before proposing any additional 

disclosure requirements. 

The Proposal also required the 

converting credit union to disclose the 

projected effect of the conversion on the 

availability of facilities, including, at a 

minimum, the name and location of any 

branches, shared branches, and ATM 

networks to which members may lose 

access. Two commenters objected on the 

grounds it requires too much precision 

in advance predictions. The NCUA 

Board disagrees, as considering the 

future availability of facilities is a 

fundamental part of planning for the 

charter conversion transactions to 

which this disclosure applies. 

Moreover, the rule does not require a 

definitive, final statement about the 

availability of facilities—the disclosure 

can state a transaction ‘‘could’’ result in 

the loss of certain facilities, for example. 

The Proposal required the disclosure 

to include the statement that ‘‘NCUA 

does not approve or disapprove of the 

conversion proposal or the reasons 

advanced in support of the proposal.’’ 

Most commenters did not oppose this 

disclosure, although several suggested 

slight amendments. One commenter 

suggested either deleting the phrase ‘‘or 

the reasons advanced in support of the 

proposal’’ or revising the phrase to read 

‘‘or the reasons in support of or against 

the proposal.’’ The NCUA Board agrees 

that adding the language ‘‘or against’’ is 

a helpful clarification of NCUA’s 

neutrality in the final rule and has made 

this change. A commenter also 

suggested including this disclosure on 

the member-to-member communication 

as well, but this suggestion goes beyond 

the scope of the Proposal and the Board 

declines to adopt it. 

Except as described above, the final 

rule adopts § 708a.104 as proposed. 

Sec. 708a.113 Recommendation 

Against Using Credit Union Staff To 

Solicit Member Votes 

The Proposal added a new paragraph 

to the voting guidelines section, 

§ 708a.113 (previously § 708a.13), 

recommending against the use of credit 

union employees to solicit member 

votes. Although most commenters 

opposed this guidance, the opposing 

commenters tended to mischaracterize it 

as a requirement. The voting guidelines, 

including the recommendation to not 

use staff to solicit member votes, do not 

impose mandatory requirements, but 

simply suggest how credit unions can 

ensure an election is conducted fairly 

and in a manner that does not 

jeopardize the operations and condition 

of the converting credit union. NCUA 

may in the future propose a requirement 

that converting credit unions to use an 

independent third party to solicit votes 

rather than diverting credit union 

employees from their usual duties. In 

this final rule, NCUA strongly 

encourages credit unions to use an 

independent third party if soliciting 

votes. 

Accordingly, the final rule adopts the 

revisions to § 708a.113 as proposed, 

with minor revisions to highlight 

NCUA’s recommendation against using 

credit union employees to solicit votes. 

Credit Union-Into-Bank Merger, Part 

708a, Subpart C 

The Proposal included a new subpart 

C to Part 708a regulating mergers of 

credit unions into banks. The majority 

of commenters on these provisions 

generally supported the concept of 

regulating these types of transactions, 

and several commenters noted that 

these provisions fill a gap in current 

regulations. Specific comments 

addressed to certain provisions of 

subpart C are discussed below. 

Sec. 708a.303(a) Merger Valuation 

§ 708a.303(a) requires a credit union’s 

board of directors, when looking to 


srobinson on DSKHWCL6B1PROD with RULES
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 81383 

merge into a bank, to determine the 

merger value of the credit union either 

by conducting an auction or retaining a 

‘‘qualified appraisal entity’’ to estimate 

the merger value of the credit union 

before directors select a bank merger 

partner and vote on a proposal to merge. 

A qualified appraisal entity must have 

no past financial relationship with the 

merging credit union, the continuing 

bank, or any law firm representing the 

credit union or the bank in connection 

with the merger. 

Proposed § 708a.304 requires the 

credit union to disclose its merger 

value, and whether any merger payment 

will be made to members, to NCUA. 

This section also requires the notice to 

NCUA to include all information the 

credit union relied on in making the 

selection of a merger partner and, if the 

payment to members is less than the 

merger value, an explanation of why the 

merger and the merger partner selected 

are in the best interests of the members. 

The Regional Director must disapprove 

a proposed merger where the merger 

payment is less than the merger 

valuation, unless members receive some 

additional, quantifiable benefit. 

Commenters on the merger value 

provisions were equally divided. 

Opposing commenters found the merger 

value requirement too onerous, costly, 

or beyond NCUA’s authority. The 

NCUA Board disagrees with these latter 

commenters. In a transaction that 

fundamentally changes the nature of the 

credit union and its members’ 

ownership, knowing the value of the 

credit union is critical to the members’ 

decision on approving the merger 

proposal. This valuation is also critical 

to NCUA’s ability to make the 

statutorily required determination of 

whether a proposed merger meets the 

‘‘convenience and needs of the 

members.’’ 12 U.S.C. 1785(c)(5). While 

the merger valuation requirement may 

entail addition procedures, analysis, 

and costs for the credit union proposing 

the transaction, knowing the merger 

value, and whether members are 

receiving compensation for this value, 

outweighs institutions’ concerns about 

additional procedures. 

Some supporting commenters 

suggested revisions to the merger 

valuation process. A few would expand 

the requisite analysis to include 

intangible items such as the value of the 

relationship between the members and 

the credit union and would exclude the 

value of benefits a credit union member 

could get simply by becoming a bank 

customer in addition to a credit union 

member. The NCUA Board has not 

modified the rule as suggested by these 

commenters. The NCUA Board will 

examine how the merger valuation 

provision works in future practice 

before making adjustments to the 

procedure. 

Finally, one commenter suggested 

that a ‘‘qualified appraisal entity’’ under 

this provision should not only have no 

past relationship with the continuing 

bank or the merging credit union and 

any law firm representing either 

institution, but also no past relationship 

with the bank’s affiliates or holding 

company. The NCUA Board agrees that 

to be a qualified appraisal entity, the 

entity must also have no past 

relationship with a bank’s owners, 

affiliates, or holding companies, and the 

final rule reflects this. 

Sec. 708a.304(g) Regional Director 

Approval 

Proposed paragraph 708a.304(g) 

required the Regional Director to review 

the merging credit union’s Notice of 

Intent to Merge and Request for 

Approval (NIMRA) and either 

disapprove the NIMRA or authorize the 

credit union to proceed to the member 

vote. Section 708a.308 requires the 

Regional Director to review the methods 

and procedures of the membership vote 

and approve or disapprove the merger. 

Several commenters expressed concerns 

about the amount of discretion given to 

the Regional Directors in these reviews, 

with some suggesting these reviews 

exceed the scope of NCUA’s authority. 

The NCUA Board does not share these 

concerns, and the final rule retains the 

proposed delegations. The authority and 

discretion the NCUA Board gives to 

Regional Directors under this provision 

is entirely in keeping with the role 

assigned to the NCUA Board and the 

NCUA Board’s authority to delegate 

duties to staff under the FCU Act. The 

FCU Act requires the NCUA Board to 

assure that a Federally insured credit 

union’s merger with another type of 

financial institution, among other 

requirements, meets the ‘‘convenience 

and needs of the members.’’ 12 U.S.C. 

1785(c)(5). The FCU Act also permits 

the NCUA Board to delegate any of its 

responsibilities to staff. 12 U.S.C. 

1766(d). As part of its statutorily 

required assessment of whether a 

proposed transaction meets the 

convenience and needs of the members, 

the NCUA Board is delegating to the 

Regional Director the determination of 

whether the notice of a proposal to 

merge and the methods and procedures 

used to conduct the member vote were 

adequate. 

Sec. 708a.305 Disclosures 

Proposed § 708a.305 includes 

required disclosures to credit union 

members for credit union-to-bank 

mergers similar to those required for 

credit union-to-bank conversions. 

Comments were evenly split between 

support of and opposition to the 

disclosures. 

One commenter recommended a 

change to § 708a.305(d)(2), which says a 

member ‘‘could’’ lose all ownership 

interests if the bank converts to a stock 

bank and members do not purchase 

stock. This commenter recommended 

replacing the word ‘‘could’’ with ‘‘will,’’ 

because the fact that a member needs to 

re-purchase the ownership interest 

indicates the member no longer has it. 

Conversely, an opposing commenter 

stated the member rights disclosures 

ignore the rights of MSB members to 

subscribe to the initial stock offering. 

While the NCUA Board agrees with the 

first commenter that a former credit 

union member will lose ownership 

interests if the MSB later converts to a 

stock bank and the MSB member does 

not subscribe to the stock offering, the 

final rule retains the word ‘‘could’’ 

because a total loss of ownership 

interests is dependent on the MSB 

converting to a stock bank. The NCUA 

Board does not agree the disclosure 

ignores MSB members’ rights to 

subscribe to the initial stock offering, 

since the disclosure explicitly mentions 

the possibility that the MSB member 

may purchase stock. 

Sec. 708a.306 Participation 

Requirement 

Proposed § 708a.306 requires that at 

least 20 percent of members participate 

in the vote on merging with a bank. One 

commenter deemed 20 percent too low, 

since it would allow a merger with a 

bank with only 10 percent of the credit 

union members voting affirmatively. 

Another commenter deemed 20 percent 

too burdensome and opined the 

expenses of recruiting members to vote 

would drive down the value of the 

credit union to the potential merger 

partner. The final rule retains the 20 

percent participation requirement. This 

requirement is identical to the 

participation requirement for converting 

from Federal deposit insurance under 

the FCU Act. 12 U.S.C. 1786(d)(2). 

As discussed above, the final part 

708a, Subpart A (for credit union 

conversions to MSBs) contained 

modified definitions of ‘‘independent 

entity’’ and ‘‘conducted by an 

independent entity.’’ This final part 

708a, Subpart C (for credit union 

mergers into banks) contains similar 

modifications. 

Accordingly, and except as described 

above, the final rule adopts the new part 

708a, subpart C as proposed. 


srobinson on DSKHWCL6B1PROD with RULES
81384 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 

Credit Union-into-Credit Union Merger, 

Part 708b, Subpart A 

Subpart A of Part 708b regulates 

credit union-to-credit union mergers 

and termination of NCUSIF insurance. 

As discussed below, the Proposal 

required merging credit unions disclose 

and explain, in certain mergers, the 

factors used to determine whether a 

share adjustment will be paid to 

members of the merging credit union. 

The Proposal also required additional 

disclosures to members and to NCUA 

regarding compensation increases to key 

credit union staff and officials. 

708b.103(a)((5) Disclosures related to 

share adjustments. 

Proposed paragraph 708b.103(a)(5) 

expanded on the existing requirement in 

§ 708b.103 for merging credit unions to 

state the amount of any share 

adjustment in the summary of the 

merger plan given to members. The 

Proposal required, where the net worth 

ratio of the merging credit union 

exceeds the net worth ratio of the 

continuing credit union by more than 

500 basis points, an explanation of the 

factors used in establishing the amount 

of any proposed adjustment or in 

determining no adjustment is necessary. 

Contrary to some commenters’ 

interpretations, the Proposal did not 

require payment of a share adjustment. 

Several commenters argued these 

disclosures were unnecessary and 

would discourage mergers or disputed 

that members of a merging credit union 

are entitled to the net worth of a 

merging credit union. The NCUA Board 

disagrees. As discussed in the preamble 

to the Proposal, in many cases a merger 

involves a smaller credit union with 

limited services and a high net worth 

ratio (NWR) seeking to merge with a 

much larger credit union with more 

services but a lower NWR. 75 FR 15574, 

15584 (March 29, 2010). The higher 

NWR of the merging credit union 

includes retained earnings that could 

have been spent, but were not spent, on 

additional product offerings or more 

favorable rates. Because, in these 

situations, the members of the merging 

credit union have paid for the higher 

NWR with reduced services or less 

favorable rates, the NCUA Board 

believes that where a NWR disparity 

exists, the members of the merging 

credit union need to know how any 

merger dividend, if a merger dividend is 

offered, was calculated. Accordingly, 

the final rule adopts paragraph (a)(5) as 

proposed. 

Secs. 708b.103 and 708b.106

Disclosures Related to Compensation 

Increases Resulting From the Merger 

The Proposal amended §§ 708b.103 

and 708b.106 to require disclosure to 

NCUA and to credit union members of 

any ‘‘merger-related financial 

arrangement,’’ defined to include any 

increase in direct or indirect 

compensation to board members or 

senior management officials that 

exceeds the greater of 15% or $10,000. 

Half of the comments on this provision 

supported the general concept of 

increased disclosure in this area. Most 

opposing commenters suggested a 

higher threshold for compensation 

increases that would trigger disclosures, 

and several found the $10,000 trigger 

too low for larger credit unions. The 

NCUA Board reiterates that the 

threshold for requiring disclosure is a 

compensation increase that exceeds the 

greater of 15% or $10,000. Accordingly, 

for officials with higher salaries, the 

threshold for disclosure would be 

compensation increases of more than 

15%. The Proposal required disclosures 

only for compensation increases above 

certain thresholds and thus balances 

any privacy interests of the employees 

with the interests of members in 

knowing when material financial 

incentives have been proposed to 

directors and senior management 

officials. 

Several commenters also suggested 

this disclosure was unnecessary because 

it would be included in Internal 

Revenue Service filings and, for FCU 

members, accessible under NCUA’s 

regulation on access to books and 

records. The NCUA Board disagrees that 

these alternate means of accessing 

compensation information are adequate 

for the purposes of a member vote on a 

merger, because information from these 

sources is unlikely to be available to 

members during the voting period. The 

NCUA Board believes members should 

know whether credit union directors or 

senior management officials stand to 

gain financially from a merger before 

voting on the merger proposal. 

Accordingly, the final rule adopts these 

disclosure changes as proposed. 

Share Insurance Conversions, Part 708b, 

Subpart B 

Subpart B of Part 708b regulates share 

insurance conversions. The proposed 

changes to Part 708b include the 

prohibition on interim vote tallies and 

the ban on employees assisting with or 

handling ballots in transactions 

resulting in the termination of NCUSIF 

share insurance. 

The commenters’ chief concern about 

the practical effects of the Proposal— 

that the prohibition on opening ballots 

in the definition of ‘‘conducted by an 

independent entity’’ would make it 

difficult to ascertain which members 

had voted—was the same as the concern 

expressed in the context of credit unionto-bank conversions. Commenters on 

this section also noted that for 

conversions from Federal deposit 

insurance the FCU Act requires 20% of 

credit union members to vote. 12 U.S.C. 

1786(d)(2). The 20% quorum 

requirement, commenters said, makes it 

especially important that the credit 

union proposing the insurance 

conversion knows how many members 

have voted, and also more difficult to 

count the ballots and certify the results 

within 10 days after the election 

because a higher proportion of members 

must vote. As discussed above, the 

NCUA Board sees no reason why the 

election teller cannot modify the ballot 

envelope to allow the election teller to 

produce a list of members who have 

voted, and thus a list of those who have 

not yet voted, and so the Board has not 

changed the proposed definition. Also 

as discussed above, the Board is 

extending the deadline for certifying the 

election results from 10 days to 14 days 

after the close of the voting period to 

allow the teller more time for counting 

the ballots. 

Several commenters opined that 

applying the ban on interim vote tallies 

to insurance conversions was 

unnecessary because the concerns 

NCUA has documented with previous 

elections occurred in the context of 

charter conversions rather than 

insurance conversions. The NCUA 

Board disagrees. The same potential for 

problems exists with any election where 

credit union officials have access to 

interim voting tallies, so the NCUA 

Board has prohibited credit union 

officials from obtaining interim vote 

tallies on all transactions affecting a 

credit union’s charter or insurance 

status. Other commenters suggested 

NCUA’s requirements in this area 

impermissibly preempt State law. 

Again, the NCUA Board disagrees, 

because the FCU Act explicitly gives the 

NCUA authority to regulate conversion 

from Federal deposit insurance. 12 

U.S.C. 1785(b)(1)(D). 

Accordingly, and except as described 

above, the final rule adopts the 

proposed changes to Subpart B of 

§ 708b. 


srobinson on DSKHWCL6B1PROD with RULES
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 81385 

III. Regulatory Procedures 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

requires NCUA to prepare an analysis to 

describe any significant economic 

impact a proposed rule may have on a 

substantial number of small credit 

unions (those under ten million dollars 

in assets). Only a few credit unions 

convert in a given year. Accordingly, the 

NCUA Board certifies that this final rule 

will not have a significant economic 

impact on a substantial number of small 

credit unions, and, therefore, a 

regulatory flexibility analysis is not 

required. 

B. 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). For purposes of the 

PRA, a paperwork burden may take the 

form of either a reporting or a 

recordkeeping requirement, both 

referred to as information collections. 

NCUA identified and described several 

information collection requirements in 

the proposed rule. As required by the 

PRA, NCUA submitted a copy of the 

proposed regulation to the Office of 

Management and Budget (OMB) for its 

review and approval and invited 

comment on the PRA aspects. 

While NCUA received comments on 

the proposed rule, no commenters 

specifically addressed the agency’s 

estimates of burden hours or costs as set 

out in the preamble to the Proposal. 

Accordingly, NCUA anticipates that 

OMB will approve NCUA’s submission. 

C. 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. 

This final rule will 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 rule does not 

constitute a policy that has federalism 

implications for purposes of the 

executive order. 

D. The Treasury and General 

Government Appropriations Act, 1999— 

Assessment of Federal Regulations and 

Policies on Families 

NCUA has determined that this 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). 

E. Small Business Regulatory 

Enforcement Fairness Act 

The Small Business Regulatory 

Enforcement Act of 1996 (Pub. L. 104– 

121) (SBREFA) provides generally for 

congressional review of agency rules. A 

reporting requirement is triggered in 

instances where NCUA issues a final 

rule as defined by section 551 of the 

Administrative Procedure Act. 5 U.S.C. 

551. The Office of Management and 

Budget’s determination about whether 

this rule is a major rule for purposes of 

SBREFA is pending. 

List of Subjects 

12 CFR Part 701 

Credit unions, Loans. 

12 CFR Part 708a 

Charter conversions, Credit unions, 

Mergers of credit unions. 

12 CFR Part 708b 

Credit unions, Mergers of credit 

unions, Reporting and recordkeeping 

requirements. 

By the National Credit Union 

Administration Board on December 16, 2010. 

Mary F. Rupp, 

Secretary of the Board. 

■ For the reasons stated in the preamble, 

the National Credit Union 

Administration amends 12 CFR parts 

701, 708a, and 708b as follows: 

PART 701—ORGANIZATION AND 

OPERATIONS 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, and 1789. Section 

701.6 is also authorized by 15 U.S.C. 3717. 

Section 701.31 is also authorized by 15 

U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601– 

3619. Section 701.35 is also authorized by 42 

U.S.C. 4311–4312. 

■ 2. Add a new § 701.4 to read as 

follows: 

§ 701.4 General authorities and duties of 

Federal credit union directors. 

(a) General direction and control of a 

Federal credit union. The board of 

directors is responsible for the general 

direction and control of the affairs of 

each Federal credit union. While a 

Federal credit union board of directors 

may delegate the execution of 

operational functions to Federal credit 

union personnel, the ultimate 

responsibility of each Federal credit 

union’s board of directors for that 

Federal credit union’s direction and 

control is non-delegable. 

(b) Duties of Federal credit union 

directors. Each Federal credit union 

director has the duty to: 

(1) Carry out his or her duties as a 

director in good faith, in a manner such 

director reasonably believes to be in the 

best interests of the membership of the 

Federal credit union as a whole, and 

with the care, including reasonable 

inquiry, as an ordinarily prudent person 

in a like position would use under 

similar circumstances; 

(2) Administer the affairs of the 

Federal credit union fairly and 

impartially and without discrimination 

in favor of or against any particular 

member; 

(3) At the time of election or 

appointment, or within a reasonable 

time thereafter, not to exceed six 

months, have at least a working 

familiarity with basic finance and 

accounting practices, including the 

ability to read and understand the 

Federal credit union’s balance sheet and 

income statement and to ask, as 

appropriate, substantive questions of 

management and the internal and 

external auditors; and 

(4) Direct management’s operations of 

the Federal credit union in conformity 

with the requirements set forth in the 

Federal Credit Union Act, this chapter, 

other applicable law, and sound 

business practices. 

(c) Authority regarding staff and 

outside consultants. (1) In carrying out 

its duties and responsibilities, each 

Federal credit union’s board of directors 

and all its committees have authority to 

retain staff and outside counsel, 

independent accountants, financial 

advisors, and other outside consultants 

at the expense of the Federal credit 

union. 

(2) Federal credit union staff 

providing services to the board of 

directors or any committee of the board 

under paragraph (c)(1) of this section 

may be required by the board of 

directors or such committee to report 

directly to the board or such committee, 

as appropriate. 

(3) In discharging board or committee 

duties a director who does not have 

knowledge that makes reliance 

unwarranted is entitled to rely on 

information, opinions, reports or 


srobinson on DSKHWCL6B1PROD with RULES
81386 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 

statements, including financial 

statements and other financial data, 

prepared or presented by any of the 

persons specified in paragraph (d). 

(d) Reliance. A director may rely on: 

(1) One or more officers or employees 

of the Federal credit union who the 

director reasonably believes to be 

reliable and competent in the functions 

performed or the information, opinions, 

reports or statements provided; 

(2) Legal counsel, independent public 

accountants, or other persons retained 

by the Federal credit union as to matters 

involving skills or expertise the director 

reasonably believes are matters: 

(i) Within the particular person’s 

professional or expert competence, and 

(ii) As to which the particular person 

merits confidence; and 

(3) A committee of the board of 

directors of which the director is not a 

member if the director reasonably 

believes the committee merits 

confidence. 

■ 3. Add paragraphs (c)(5) through (7) to 

§ 701.33 to read as follows: 

§ 701.33 Reimbursement, insurance, and 

indemnification of officials and employees. 

* * * * * 

(c) * * * 

(5) Notwithstanding paragraphs (c)(1) 

through (3) of this section, a Federal 

credit union may not indemnify an 

official or employee for personal 

liability related to any decision made by 

that individual on a matter significantly 

affecting the fundamental rights and 

interests of the Federal credit union’s 

members where the decision giving rise 

to the claim for indemnification is 

determined by a court to have 

constituted gross negligence, 

recklessness, or willful misconduct. 

Matters affecting the fundamental rights 

and interests of Federal credit union 

members include charter and share 

insurance conversions and terminations. 

(6) A Federal credit union may, before 

final disposition of a proceeding 

referred to in paragraph (c)(5) of this 

section, advance funds to pay for or 

reimburse the expenses, including legal 

fees, reasonably incurred in connection 

with the proceeding by an official or 

employee who is a party to the 

proceeding because that individual is or 

was an official or employee of the credit 

union if: 

(i) The disinterested members of the 

credit union’s board of directors (or in 

the event there are fewer than two 

disinterested directors, the supervisory 

committee), in good faith, determine in 

writing after due investigation and 

consideration that the official or 

employee acted in good faith and in a 

manner he or she reasonably believed to 

be in the best interests of the credit 

union’s members; 

(ii) The disinterested members of the 

credit union’s board of directors (or the 

supervisory committee, as the case may 

be), in good faith, determine in writing 

after due investigation and 

consideration that the payment or 

reimbursement of the expenses will not 

materially adversely affect the credit 

union’s safety and soundness; and 

(iii) The official or employee 

provides: 

(A) A written affirmation of the 

individual’s reasonable good faith belief 

that the relevant standard of conduct 

described in § 701.4(b) of this chapter 

has been met by the individual; and 

(B) A written undertaking to repay the 

credit union for any funds advanced or 

reimbursed, to the extent not covered by 

payments from insurance, if the official 

or employee is not entitled to 

indemnification under paragraph (c)(5) 

of this section. 

(7) To the extent a Federal credit 

union has elected to follow State law or 

the Model Business Corporation Act in 

accordance with paragraph (c)(2) of this 

section, the credit union must substitute 

the phrase ‘‘in the best interests of the 

members’’ for any language indicating 

that fiduciary duties are owed to 

persons or entities other than the 

members of the credit union, including, 

but not limited to, language such as ‘‘in 

the best interests of the credit union’’ or 

‘‘in the best interests of the corporation.’’ 

■ 4. Section 8 of Article XVI of 

appendix A to part 701 is revised to 

read as follows: 

Appendix A to Part 701—Federal 

Credit Union Bylaws 

* * * * * 

Article XVI. General 

* * * * * 

Section 8. Indemnification. (a) Subject to 

the limitations in § 701.33(c)(5) through (c)(7) 

of the regulations, the credit union may elect 

to indemnify to the extent authorized by 

(check one) 

[ ] Law of the State of llll: 

[ ] Model Business Corporation Act: 

the following individuals from any liability 

asserted against them and expenses 

reasonably incurred by them in connection 

with judicial or administrative proceedings 

to which they are or may become parties by 

reason of the performance of their official 

duties (check as appropriate). 

[ ] Current officials 

[ ] Former officials 

[ ] Current employees 

[ ] Former employees 

(b) The credit union may purchase and 

maintain insurance on behalf of the 

individuals indicated in (a) above against any 

liability asserted against them and expenses 

reasonably incurred by them in their official 

capacities and arising out of the performance 

of their official duties to the extent such 

insurance is permitted by the applicable 

State law or the Model Business Corporation 

Act. 

(c) The term ‘‘official’’ in this bylaw means 

a person who is a member of the board of 

directors, credit committee, supervisory 

committee, other volunteer committee 

(including elected or appointed loan officers 

or membership officers), established by the 

board of directors. 

* * * * * 

PART 708a—BANK CONVERSIONS 

AND MERGERS 

■ 5–6. Revise the authority citation for 

part 708a to read as follows: 

Authority: 12 U.S.C. 1766, 1785(b), and 

1785(c). 

■ 7. Revise the heading for part 708a to 

read as set forth above: 

§§ 708a.1 through 708a.13 [Redesignated 

as §§ 708a.101 through 708a.113] 

■ 8a. Redesignate §§ 708a.1 through 

708a.13 as §§ 708a.101 through 

708a.113, respectively. 

Subpart A—Conversion of Insured 

Credit Unions to Mutual Savings Banks 

■ 8b. Add a new subpart A, consisting 

of newly redesignated §§ 708a.101 

through 708a.113 with the heading as 

shown above: 

■ 9. Revise § 708a.101 by adding 

definitions of ‘‘conducted by an 

independent entity,’’ ‘‘independent 

entity,’’ and ‘‘secret ballot’’ to read as 

follows: 

§ 708a.101 Definitions. 

* * * * * 

Conducted by an independent entity 

means: 

(1) The independent entity will 

receive the ballots directly from voting 

members. 

(2) After the conclusion of the special 

meeting that ends the ballot period, the 

independent entity will open all the 

ballots in its possession and tabulate the 

results. The entity must not open or 

tabulate any ballots before the 

conclusion of the special meeting. 

(3) The independent entity will certify 

the final vote tally in writing to the 

credit union and provide a copy to the 

NCUA Regional Director. The 

certification will include, at a 

minimum, the number of members who 

voted, the number of affirmative votes, 

and the number of negative votes. 

During the course of the voting period 

the independent entity may provide the 

credit union with the names of members 

who have not yet voted, but may not 

provide any voting results to the credit 


srobinson on DSKHWCL6B1PROD with RULES
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 81387 

union prior to certifying the final vote 

tally. 

* * * * * 

Independent entity means a company 

with experience in conducting corporate 

elections. No official or senior 

management official of the credit union, 

or the immediate family member of any 

official or senior management official, 

may have any ownership interest in, or 

be employed by, the entity. 

* * * * * 

Secret ballot means no credit union 

employee or official can determine how 

a particular member voted. Credit union 

employees and officials are prohibited 

from assisting members in completing 

ballots or handling completed ballots. 

* * * * * 

■ 10–11. Amend § 708a.104 as follows: 

■ a. In paragraph (b)(4)(i), add the word 

‘‘of’’ after the word ‘‘Plan’’. 

■ b. Revise paragraphs (c)(4) and (5), 

and add new paragraphs (c)(6), (7), and 

(8). 

■ c. In paragraph (f)(2), add the phrase 

‘‘to a Bank’’ after the word ‘‘Conversion’’ 

in the last sentence. 

The revisions and additions read as 

follows: 

§ 708a.104 Disclosures and 

communications to members. 

* * * * * 

(c) * * * 

(4) An affirmative statement that, at 

the time of conversion to a mutual 

savings bank, the credit union does or 

does not intend to convert to a stock 

institution or a mutual holding 

company structure; 

(5) A clear and conspicuous 

disclosure of the estimated, itemized 

cost of the proposed conversion, 

including printing fees, postage fees, 

advertising, consulting and professional 

fees, legal fees, staff time, the cost of 

holding a special meeting, other costs of 

conducting the vote, and any other 

conversion-related expenses; 

(6) A clear and conspicuous 

disclosure of how the conversion from 

a credit union to a mutual savings bank 

will affect the institution’s ability to 

make non-housing-related consumer 

loans because of a mutual savings 

bank’s obligations to satisfy certain 

lending requirements as a mutual 

savings bank. This disclosure should 

specify possible reductions in some 

kinds of loans to members; 

(7) A clear and conspicuous 

disclosure that the National Credit 

Union Administration does not approve 

or disapprove of the conversion 

proposal or the reasons advanced in 

support of and the reasons against the 

proposal; and 

(8) A clear and conspicuous 

disclosure of how the conversion from 

a credit union to a mutual savings bank 

is likely to affect the availability of 

facilities and services. At a minimum, 

this disclosure should include the name 

and location of any branches, including 

shared branches, and automatic teller 

networks, to which members may lose 

access as a result of the conversion. This 

disclosure must be based on research 

and analysis completed before the date 

the board of directors votes to adopt the 

conversion proposal. 

* * * * * 

■ 12. Amend § 708a.107 by revising 

paragraph (a) and adding paragraph (c) 

to read as follows: 

§ 708a.107 Certification of vote on 

conversion proposal. 

(a) The board of directors of the 

converting credit union must certify the 

results of the membership vote to the 

Regional Director within 14 calendar 

days after the vote is taken. 

* * * * * 

(c) The certification must be 

accompanied by copies of all 

correspondence between the credit 

union and any Federal banking agency 

whose approval is required for the 

conversion. 

■ 13. Amend § 708a.113 by adding 

paragraph (e) to read as follows: 

§ 708a.113 Voting guidelines. 

* * * * * 

(e) Solicitation of votes. Some credit 

unions may wish to contact members 

who have not voted and encourage them 

to vote on the conversion proposal. 

NCUA believes, however, that using 

credit union employees to solicit votes 

is problematic. Employees directed to 

solicit votes could easily neglect 

everyday duties critical to the credit 

union’s safe and sound operation. Also, 

employees may very well feel pressured 

to solicit votes for the conversion, 

regardless of whether or not they 

support the conversion. Accordingly, 

NCUA strongly encourages converting 

credit unions to use an independent 

third party to solicit votes rather than 

diverting credit union employees from 

their usual duties. 

Subpart B—[Reserved] 

■ 14a. Add a reserved subpart B. 

■ 14b. Add subpart C to part 708a to 

read as follows: 

Subpart C—Merger of Insured Credit 

Unions Into Banks 

Sec. 

708a.301 Definitions. 

708a.302 Authority to merge. 

708a.303 Board of directors’ approval and 

members’ opportunity to comment. 

708a.304 Notice to NCUA and request to 

proceed with member vote. 

708a.305 Disclosures and communications 

to members. 

708a.306 Membership approval of a 

proposal to merge. 

708a.307 Certification of vote on merger 

proposal. 

708a.308 NCUA approval of the merger. 

708a.309 Completion of merger. 

708a.310 Limits on compensation of 

officials. 

708a.311 Voting incentives. 

708a.312 Voting guidelines. 

Subpart C—Merger of Insured Credit 

Unions Into Banks 

§ 708a.301 Definitions. 

As used in this part: 

Bank has the same meaning as in 

section 3(a) of the Federal Deposit 

Insurance Act, 12 U.S.C. 1813(a). 

Clear and conspicuous means text in 

bold type in a font size at least one size 

larger than any other text used in the 

document (exclusive of headings), but 

in no event smaller than 12 point. 

Conducted by an independent entity 

means: 

(1) The independent entity will 

receive the ballots directly from voting 

members. 

(2) After the conclusion of the special 

meeting that ends the ballot period, the 

independent entity will open all the 

ballots in its possession and tabulate the 

results. The entity must not open or 

tabulate any ballots before the 

conclusion of the special meeting. 

(3) The independent entity will certify 

the final vote tally in writing to the 

credit union and provide a copy to the 

NCUA Regional Director. The 

certification will include, at a 

minimum, the number of members who 

voted, the number of affirmative votes, 

and the number of negative votes. 

During the course of the voting period 

the independent entity may provide the 

credit union with the names of members 

who have not yet voted, but may not 

provide any voting results to the credit 

union prior to certifying the final vote 

tally. 

Credit union has the same meaning as 

insured credit union in section 101 of 

the Federal Credit Union Act. 

Distribution formula is the formula 

the bank will use to determine each 

member’s portion of that payment to be 

received upon completion of the merger. 

Federal banking agencies have the 

same meaning as in section 3 of the 

Federal Deposit Insurance Act. 

Merger means any transaction in 

which a credit union transfers all, or 

substantially all, of its assets to a bank. 

The term merger includes any purported 

conversion of a credit union to a bank 


srobinson on DSKHWCL6B1PROD with RULES
81388 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 

if the purported conversion is 

conducted pursuant to an agreement 

between a preexisting bank and the 

credit union that provides— 

(1) The credit union will not conduct 

business as a stand-alone bank, and 

(2) The purported conversion will be 

followed by the transfer of all, or 

substantially all, of the credit union’s 

assets to the preexisting bank. 

Merger value or merger valuation is 

the amount that a stock bank would pay 

in an arm’s-length transaction to 

purchase the credit union’s assets and 

assume its liabilities and shares 

(deposits). 

Qualified appraisal entity means 

entity that has significant experience in 

the valuation of depository institutions 

and that has no past financial 

relationship with the merging credit 

union; the continuing bank, the 

continuing bank’s owners, affiliates, or 

holding companies; or any law firm 

representing the credit union or the 

bank in connection with the merger. 

Regional director means the director 

of the NCUA regional office for the 

region where a natural person credit 

union’s main office is located. For 

corporate credit unions, regional 

director means the director of NCUA’s 

Office of Corporate Credit Unions. 

Secret ballot means no credit union 

employee or official can determine how 

a particular member voted. Credit union 

employees and officials are prohibited 

from assisting members in completing 

ballots or handling completed ballots. 

Senior management official means a 

chief executive officer, an assistant chief 

executive officer, a chief financial 

officer, and any other senior executive 

officer as defined by the appropriate 

Federal banking agencies pursuant to 

section 32(f) of the Federal Deposit 

Insurance Act. 

§ 708a.302 Authority to merge. 

A credit union, with the approval of 

its members, may merge into a bank 

only with the prior approval of NCUA, 

the Federal Deposit Insurance 

Corporation, and the regulator of the 

bank. If the credit union is State 

chartered, it also needs the prior 

approval of its State regulator. 

§ 708a.303 Board of directors’ approval 

and members’ opportunity to comment. 

(a) Merger valuation. Before selecting 

a bank merger partner and voting on a 

proposal to merge, a credit union’s 

board of directors must determine, as 

part of its due diligence, the merger 

value of the credit union. In making its 

determination of the merger value of the 

credit union, the credit union must 

either: 

(1) Conduct a well-publicized merger 

auction and obtain purchase quotations 

from at least three banks, two or more 

of which must be stock banks; or 

(2) Retain a qualified appraisal entity 

to analyze and estimate the merger 

value of the credit union. 

(b) Advance notice. A credit union 

that does not conduct a public auction 

as described in paragraph (a)(1) of this 

section must comply with the following 

notice requirements before voting on a 

proposal to merge. 

(1) No later than 30 days before a 

board of directors votes on a proposal to 

merge, it must publish a notice in a 

general circulation newspaper, or in 

multiple newspapers if necessary, 

serving all areas where the credit union 

has an office, branch, or service center. 

It must also post the notice in a clear 

and conspicuous fashion in the lobby of 

the credit union’s home office and 

branch offices and on the credit union’s 

Web site, if it has one. If the notice is 

not on the home page of the Web site, 

the home page must have a clear and 

conspicuous link, visible on a standard 

monitor without scrolling, to the notice. 

(2) The public notice must include the 

following: 

(i) The name and address of the credit 

union; 

(ii) The name and type of institution 

into which the credit union’s board is 

considering a proposal to merge; 

(iii) A brief statement of why the 

board is considering the merger and the 

major positive and negative effects of 

the proposed merger; 

(iv) A statement that directs members 

to submit any comments on the 

proposal to the credit union’s board of 

directors by regular mail, electronic 

mail, or facsimile; 

(v) The date on which the board plans 

to vote on the proposal and the date by 

which members must submit their 

comments for consideration; which 

submission date may not be more than 

5 days before the board vote; 

(vi) The street address, electronic mail 

address, and facsimile number of the 

credit union where members may 

submit comments; and 

(vii) A statement that, in the event the 

board approves the proposal to merge, 

the proposal will be submitted to the 

membership of the credit union for a 

vote following a notice period that is no 

shorter than 90 days. 

(3) The board of directors must 

approve publication of the notice. 

(c) Member comments. A credit union 

must collect and review any member 

comments about the merger received 

during the merger process. The credit 

union must retain the comments until 

the merger is consummated. 

(d) Approval of proposal to merge. 

The merger proposal may only be 

approved by an affirmative vote of a 

majority of board members who have 

determined: 

(1) A merger with a bank is in the best 

interests of the members, and 

(2) The merger partner selected by the 

directors is the best choice for the 

members, taking into account the 

merger value of the credit union and the 

amount that the selected merger partner 

is willing to pay the credit union’s 

members to effect the merger. 

§ 708a.304 Notice to NCUA and request to 

proceed with member vote. 

(a) NIMRA. If a credit union’s board 

of directors adopts a proposal to merge, 

it must, within 30 days of the adoption, 

provide the Regional Director with a 

Notice of its Intent to Merge and 

Request for NCUA Authorization 

(NIMRA) to conduct a member vote. The 

NIMRA must include the following: 

(1) The merger plan (as described 

below in paragraph (b) of this section); 

(2) Resolutions of the boards of 

directors of both institutions; 

(3) Certification of the board of 

directors (as described below); 

(4) Proposed Merger Agreement; 

(5) Proposed Notice of Special 

Meeting of the Members and any other 

communications about the merger that 

the credit union intends to send to its 

members, including electronic 

communications posted on a Web site or 

transmitted by electronic mail; 

(6) Proposed ballot to be sent to the 

members; 

(7) For State chartered credit unions, 

evidence that the proposed merger is 

authorized under State law (as 

described below); 

(8) A copy of the bank’s last two 

examination reports; 

(9) A statement of the merger 

valuation of the credit union; 

(10) A statement of whether any 

merger payment will be made to the 

members and how such a payment will 

be distributed among the members; 

(11) Information about the due 

diligence of the directors in locating a 

merger partner and determining that the 

merger is in best interests of the 

members of the credit union (as 

described below); 

(12) Copies of all contracts reflecting 

any merger-related compensation or 

other benefit to be received by any 

director or senior management official 

of the credit union; 

(13) If the merging credit union’s 

assets on its latest call report are equal 

to or greater than the threshold amount 

established annually by the Federal 

Trade Commission under 15 U.S.C. 


srobinson on DSKHWCL6B1PROD with RULES
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 81389 

18a(a)(2)(B)(i), currently $63.4 million, a 

statement about whether the two 

institutions intend to make a Hart-ScottRodino Act premerger notification filing 

with the Federal Trade Commission 

and, if not, an explanation why not; 

(14) Copies of any filings the credit 

union or bank intends to make with 

another Federal or State regulatory 

agency in which the credit union or 

bank seeks that agency’s approval of the 

merger; and 

(15) Proof that the accounts of the 

credit union will be accepted for 

coverage by the Federal Deposit 

Insurance Corporation. 

(b) Merger plan. The merger plan 

must include: 

(1) Current financial statements for 

both institutions; 

(2) Current delinquent loan 

summaries and analyses of the adequacy 

of the Allowance for Loan and Lease 

Losses account for both institutions; 

(3) Consolidated financial statements 

of the continuing institution after the 

merger; 

(4) Explanation of any provisions for 

reserves, undivided earnings or 

dividends; 

(5) Provisions with respect to 

notification and payment of creditors; 

and 

(6) Explanation of any changes 

relative to insurance such as life savings 

and loan protection insurance and 

insurance of member accounts. 

(c) Director certification. The NIMRA 

must include a certification by the 

credit union’s board of directors of their 

support for the merger proposal and 

plan. Each director who voted in favor 

of the merger proposal must sign the 

certification. The certification must 

contain the following: 

(1) A statement that each director 

signing the certification supports the 

proposed merger and believes the 

proposed merger, and the selected bank 

merger partner, are both in the best 

interests of the members of the credit 

union; 

(2) A description of all materials 

submitted to the Regional Director with 

the notice and certification; 

(3) A statement that each board 

member signing the certification has 

examined all these materials carefully 

and these materials are true, correct, 

current, and complete as of the date of 

submission; and 

(4) An acknowledgement that Federal 

law (18 U.S.C. 1001) prohibits any 

misrepresentations or omissions of 

material facts, or false, fictitious or 

fraudulent statements or representations 

made with respect to the certification or 

the materials provided to the Regional 

Director or any other documents or 

information provided to the members of 

the credit union or NCUA in connection 

with the merger. 

(d) Due diligence. The NIMRA must 

include a description of all the credit 

union’s due diligence in determining 

that the merger satisfies the factors 

contained in section 205(c) of the Act. 

In particular, the NIMRA must describe 

how the board located the merger 

partner, how the board negotiated the 

merger agreement, and how the board 

determined that this merger was in the 

best interests of the credit union’s 

members. The description must include 

all information relied upon by the credit 

union in determining the merger value 

of the credit union, the amount of any 

payment to be made by the bank to the 

credit union’s members (the ‘‘merger 

payment’’), and, if that merger payment 

is less than the merger value of the 

credit union, an explanation why the 

merger and the merger partner selected 

is in the best interests of the members. 

The description must include an 

explanation of the distribution formula 

by which the merger payment will be 

distributed among the credit union’s 

members. 

(e) State chartered credit unions. A 

State chartered credit union must state 

as part of its NIMRA if its State 

chartering law permits it to merge into 

a bank and provide the specific legal 

citation. A State chartered credit union 

will remain subject to any State law 

requirements for merger that are more 

stringent than those this part imposes, 

including any internal governance 

requirements, such as the requisite 

membership vote for merger and the 

determination of a member’s eligibility 

to vote. If a State chartered credit union 

relies for its authority to merge into a 

bank on a State law parity provision, 

meaning a provision in State law 

permitting a State chartered credit 

union to operate with the same or 

similar authority as a Federal credit 

union, it must: 

(1) Include in its notice a statement 

that its State regulatory authority agrees 

that it may rely on the State law parity 

provision as authority to merge; and 

(2) Indicate its State regulatory 

authority’s position as to whether 

Federal law and regulations or State law 

will control internal governance issues 

in the merger such as the requisite 

membership vote for merger and the 

determination of a member’s eligibility 

to vote. 

(f) Consultation with State authorities. 

After receiving a NIMRA from a State 

chartered credit union, the Regional 

Director will consult with the 

appropriate State supervisory authority. 

(g) Regional Director approval. After 

receiving a NIMRA, the Regional 

Director will either disapprove the 

proposed merger or authorize the credit 

union to proceed with its membership 

vote. 

(1) The Regional Director will 

disapprove the proposed merger if the 

NIMRA either lacks the documentation 

required by this section or lacks 

substantial evidence to support each of 

the factors in section 205(c) of the Act. 

As part of this determination, the 

Regional Director must disapprove the 

proposed merger if: 

(i) The merger payment offered by the 

bank to the members is less than the 

merger valuation, absent some 

additional, quantifiable benefit to the 

members from the selected merger 

partner; or 

(ii) The NIMRA fails to adequately 

explain the nature and amount of any 

compensation to be received by the 

credit union’s directors or senior 

management officials in connection 

with the merger or to justify that 

compensation. 

(2) NCUA’s authorization to proceed 

with the member vote does not mean 

NCUA has approved of the merger 

proposal. 

(h) Appeal of adverse decision. If the 

Regional Director disapproves a merger 

proposal, the credit union may appeal 

the Regional Director’s determination to 

the Board. The credit union must file 

the appeal within 30 days after receipt 

of the Regional Director’s determination. 

The Board will act on the appeal within 

120 days of receipt. 

§ 708a.305 Disclosures and 

communications to members. 

(a) After the board of directors 

approves a merger proposal and receives 

NCUA’s authorization as described in 

§§ 708a.303 and 708a.304, the credit 

union must provide written notice of its 

intent to merge to each member who is 

eligible to vote on the merger. The 

notice to members must be mailed 90 

calendar days and 30 calendar days 

before the date of the membership vote 

on the merger. A ballot must be 

included in the same envelope as the 

30-day notice and only with the 30-day 

notice. A merging credit union may not 

distribute ballots with the 90-day notice, 

in any other written communications, or 

in person before the 30-day notice is 

sent. 

(b)(1) The notice to members must 

adequately describe the purpose and 

subject matter of the vote and clearly 

inform members that they may vote at 

the special meeting or by submitting the 

written ballot. The notice must state the 

date, time, and place of the meeting. 


srobinson on DSKHWCL6B1PROD with RULES
81390 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 

(2) The 90-day notice must state in a 

clear and conspicuous fashion that a 

written ballot will be mailed together 

with another notice 30 days before the 

date of the membership vote on merger. 

The 30-day notice must state in a clear 

and conspicuous fashion that a written 

ballot is included in the same envelope 

as the 30-day notice materials. 

(3) For purposes of facilitating the 

member-to-member contact described in 

paragraph (f) of this section, the 90-day 

notice must indicate the number of 

credit union members eligible to vote on 

the merger proposal and state how many 

members have agreed to accept 

communications from the credit union 

in electronic form. The 90-day notice 

must also include the information listed 

in paragraph (g)(9) of this section. 

(4) The member ballot must include: 

(i) A brief description of the proposal 

(e.g., ‘‘Proposal: Approval of the Plan of 

Merger by which [insert name of credit 

union] will merge with a bank’’); 

(ii) Two blocks marked respectively as 

‘‘FOR’’ and ‘‘AGAINST;’’ and 

(iii) The following language: ‘‘A vote 

FOR the proposal means that you want 

your credit union to merge with and 

become a bank. A vote AGAINST the 

proposal means that you want your 

credit union to remain a credit union.’’ 

This language must be displayed in a 

clear and conspicuous fashion 

immediately beneath the FOR and 

AGAINST blocks. 

(5) The ballot may also include voting 

instructions and the recommendation of 

the board of directors (i.e., ‘‘Your Board 

of Directors recommends a vote FOR the 

Plan of Merger’’) but may not include 

any further information without the 

prior written approval of the Regional 

Director. 

(c) For mergers into stock banks, an 

adequate description of the purpose and 

subject matter of the member vote on 

merger, as required by paragraph (b) of 

this section, must include: 

(1) A clear and conspicuous 

disclosure that if the merger is approved 

the members will lose all of their 

ownership interests in the institution, 

including the right to vote, the right to 

share in the value of the institution 

should it be liquidated, the right to 

share in any extraordinary dividends, 

and the right to have the net worth of 

the institution managed in their best 

interests; 

(2) A clear and conspicuous 

disclosure of any post-merger 

employment or consulting relationships 

offered by the bank to any of the credit 

union’s directors and senior 

management officials and the amount of 

the associated compensation; 

(3) A clear and conspicuous 

disclosure of how the merger of the 

credit union will affect the members’ 

ability to obtain non-housing-related 

consumer loans from the bank because 

of because of the bank’s obligations to 

satisfy statutory or regulatory lending 

requirements (if any). This disclosure 

should specify possible reductions in 

some kinds of loans to members; 

(4) A clear and conspicuous statement 

of the merger value of the credit union, 

the total dollar amount the selected 

bank merger partner has agreed to pay 

to effect the merger, and the distribution 

formula the bank will use to determine 

each member’s portion of that payment 

to be received upon completion of the 

merger; and 

(d) For mergers into mutual banks, an 

adequate description of the purpose and 

subject matter of the member vote on 

merger, as required by paragraph (b) of 

this section, must include: 

(1) A clear and conspicuous 

disclosure of how the merger will affect 

members’ voting rights including 

whether the bank bases voting rights on 

account balances; 

(2) A clear and conspicuous 

disclosure that the merger could lead to 

members losing all of their ownership 

interests in the credit union if the bank 

subsequently converts to a stock 

institution and the members do not 

purchase stock; 

(3) A clear and conspicuous 

disclosure of any post-merger 

employment or consulting relationships 

offered by the bank to the credit union’s 

directors and senior management 

officials and the associated 

compensation for each; 

(4) A clear and conspicuous 

disclosure of how the merger of the 

credit union will affect the members’ 

ability to obtain non-housing-related 

consumer loans from the bank because 

of the bank’s obligations to satisfy 

statutory or regulatory lending 

requirements (if any). This disclosure 

should specify possible reductions in 

some kinds of loans to members; 

(5) A clear and conspicuous statement 

that, at the time of merger, the bank 

does or does not intend to convert to a 

stock institution or a mutual holding 

company structure; 

(6) A clear and conspicuous statement 

of the merger value of the credit union, 

the total dollar amount the selected 

bank merger partner has agreed to pay 

to effect the merger, and the distribution 

formula the bank will use to determine 

each member’s portion of that payment 

to be received upon completion of the 

merger; and 

(7) If the bank plans to add one or 

more of the credit union’s directors to 

its board or employ one or more senior 

officials of the credit union, a clear and 

conspicuous statement that bank could 

convert to a stock bank in the future and 

a comparison of the opportunities 

available to those officials and 

employees to obtain stock with the 

opportunities available to the depositors 

of the bank. 

(e)(1) A merging credit union must 

provide the following disclosures in a 

clear and conspicuous fashion with the 

90-day and 30-day notices it sends to its 

members regarding the merger: 

IMPORTANT REGULATORY DISCLOSURE 

ABOUT YOUR VOTE 

The National Credit Union Administration, 

the Federal government agency that supervises credit unions, requires [insert 

name of credit union] to provide the following disclosures: 

1. LOSS OF CREDIT UNION MEMBERSHIP. A vote ‘‘FOR’’ the proposed merger 

means you want your credit union to 

merge with and become a bank. A vote 

‘‘AGAINST’’ the proposed merger means 

you want your credit union to remain a 

credit union. 

2. [For Mergers into Stock Banks Only]. 

LOSS OF OWNERSHIP INTERESTS. If 

your credit union merges into the bank, 

you will lose all the ownership interests 

you currently have in the credit union and 

you will become a customer of the bank. 

The bank’s stockholders own the bank, 

and the directors of the bank have a fiduciary responsibility to run the bank in the 

best interests of the stockholders, not the 

customers. 

2. [For Mergers into Mutual Banks Only]. 

POTENTIAL PROFITS BY OFFICERS 

AND DIRECTORS. Merger into a mutual 

savings bank is often the first step in a 

two-step process to convert to a stockissuing bank or holding company structure. In such a scenario, the officers and 

directors of the bank often profit by obtaining stock in excess of that available to 

other members. 

3. RATES ON LOANS AND SAVINGS. If 

your credit union merges into the bank, 

you may experience changes in your loan 

and savings rates. Available historic data 

indicates that, for most loan products, 

credit unions on average charge lower 

rates than banks. For most savings products, credit unions on average pay higher 

rates than banks. 

(2) This text must be placed in a box, 

must be the only text on the front side 

of a single piece of paper, and must be 

placed so that the member will see the 

text after reading the credit union’s 

cover letter but before reading any other 

part of the member notice. The back 

side of the paper must be blank. A 

merging credit union may modify this 

text only with the prior written consent 

of the Regional Director and, in the case 

of a State chartered credit union, the 

appropriate State regulatory agency. 


srobinson on DSKHWCL6B1PROD with RULES
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 81391 

(f) All written communications from a 

merging credit union to its members 

regarding the merger must be written in 

a manner that is simple and easy to 

understand. Simple and easy to 

understand means the communications 

are written in plain language designed 

to be understood by ordinary consumers 

and use clear and concise sentences, 

paragraphs, and sections. For purposes 

of this part, examples of factors to be 

considered in determining whether a 

communication is in plain language and 

uses clear and concise sentences, 

paragraphs and sections include the use 

of short explanatory sentences; use of 

definite, concrete, everyday words; use 

of active voice; avoidance of multiple 

negatives; avoidance of legal and 

technical business terminology; 

avoidance of explanations that are 

imprecise and reasonably subject to 

different interpretations; and use of 

language that is not misleading. 

(g)(1) A merging credit union must 

mail or e-mail a requesting member’s 

proper merger-related materials to other 

members eligible to vote if: 

(i) A credit union’s board of directors 

has adopted a proposal to merge; 

(ii) A member makes a written request 

that the credit union mail or e-mail 

materials for the member; 

(iii) The request is received by the 

credit union no later than 35 days after 

it sends out the 90-day member notice; 

and 

(iv) The requesting member agrees to 

reimburse the credit union for the 

reasonable expenses, excluding 

overhead, of mailing or e-mailing the 

materials and also provides the credit 

union with an appropriate advance 

payment. 

(2) A member’s request must indicate 

if the member wants the materials 

mailed or e-mailed. If a member 

requests that the materials be mailed, 

the credit union will mail the materials 

to all eligible voters. If a member 

requests the materials be e-mailed, the 

credit union will e-mail the materials to 

all members who have agreed to accept 

communications electronically from the 

credit union. The subject line of the 

credit union’s e-mail will be ‘‘Proposed 

Credit Union Merger—Views of Member 

(insert member name).’’ 

(3)(i) A merging credit union may, at 

its option, include the following 

statement with a member’s material: 

On (date), the board of directors of (name 

of merging credit union) adopted a proposal 

to merge the credit union into a bank. Credit 

union members who wish to express their 

opinions about the proposed merger to other 

members may provide those opinions to 

(name of credit union). By law, the credit 

union, at the requesting members’ expense, 

must then send those opinions to the other 

members. The attached document represents 

the opinion of a member (or group of 

members) of this credit union. This opinion 

is a personal opinion and does not 

necessarily reflect the views of the 

management or directors of the credit union. 

(ii) A merging credit union may not 

add anything other than this statement 

to a member’s material without the prior 

approval of the Regional Director. 

(4) The term ‘‘proper merger-related 

materials’’ does not include materials 

that: 

(i) Due to size or similar reasons are 

impracticable to mail or e-mail; 

(ii) Are false or misleading with 

respect to any material fact; 

(iii) Omit a material fact necessary to 

make the statements in the material not 

false or misleading; 

(iv) Relate to a personal claim or a 

personal grievance, or solicit personal 

gain or business advantage by or on 

behalf of any party; 

(v) Relate to any matter, including a 

general economic, political, racial, 

religious, social, or similar cause, that is 

not significantly related to the proposed 

merger; 

(vi) Directly or indirectly and without 

expressed factual foundation impugn a 

person’s character, integrity, or 

reputation; 

(vii) Directly or indirectly and 

without expressed factual foundation 

make charges concerning improper, 

illegal, or immoral conduct; or 

(viii) Directly or indirectly and 

without expressed factual foundation 

make statements impugning the stability 

and soundness of the credit union. 

(5) If a merging credit union believes 

some or all of a member’s request is not 

proper it must submit the member 

materials to the Regional Director 

within seven days of receipt. The credit 

union must include with its transmittal 

letter a specific statement of why the 

materials are not proper and a specific 

recommendation for how the materials 

should be modified, if possible, to make 

them proper. The Regional Director will 

review the communication, 

communicate with the requesting 

member, and respond to the credit 

union within seven days with a 

determination on the propriety of the 

materials. The credit union must then 

mail or e-mail the material to the 

members if so directed by NCUA. 

(6) A credit union must ensure that its 

members receive all materials that meet 

the requirements of § 708a.305(g) on or 

before the date the members receive the 

30-day notice and associated ballot. If a 

credit union cannot meet this delivery 

requirement, it must postpone mailing 

the 30-day notice until it can deliver the 

member materials. If a credit union 

postpones the mailing of the 30-day 

notice, it must also postpone the special 

meeting by the same number of days. 

When the credit union has completed 

the delivery, it must inform the 

requesting member that the delivery was 

completed and provide the number of 

recipients. 

(7) The term ‘‘appropriate advance 

payment’’ means: 

(i) For requests to mail materials to all 

eligible voters, a payment in the amount 

of 150 percent of the first class postage 

rate times the number of mailings, and 

(ii) For requests to e-mail materials 

only to members that have agreed to 

accept electronic communications, a 

payment in the amount of 200 dollars. 

(8) If a credit union posts mergerrelated information or material on its 

Web site, then it must simultaneously 

make a portion of its Web site available 

free of charge to its members to post and 

share their opinions on the merger. A 

link to the portion of the Web site 

available to members to post their views 

on the merger must be marked 

‘‘Members: Share your views on the 

proposed merger and see other 

members’ views’’ and the link must also 

be visible on all pages on which the 

credit union posts its own mergerrelated information or material, as well 

as on the credit union’s homepage. If a 

credit union believes a particular 

member submission is not proper for 

posting, it will provide that submission 

to the Regional Director for review as 

described in paragraph (g)(5) of this 

section. The credit union may also post 

a content-neutral disclaimer using 

language similar to the language in 

paragraph (g)(3)(i) of this section. 

(9) A merging credit union must 

inform members with the 90-day notice 

that if they wish to provide their 

opinions about the proposed merger to 

other members they can submit their 

opinions in writing to the credit union 

no later than 35 days from the date of 

the notice and the credit union will 

forward those opinions to other 

members. The 90-day notice will 

provide a contact at the credit union for 

delivery of communications, will 

explain that members must agree to 

reimburse the credit union’s costs of 

transmitting the communication 

including providing an advance 

payment, and will refer members to this 

section of NCUA’s rules for further 

information about the communication 

process. The credit union, at its option, 

may include additional factual 

information about the communication 

process with its 90-day notice. 

(10) A group of members may make a 

joint request that the credit union send 


srobinson on DSKHWCL6B1PROD with RULES
81392 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 

its materials to other members. For 

purposes of paragraphs (g)(2) and (g)(3) 

of this section, the credit union will use 

the group name provided by the group. 

(h) If it chooses, a credit union may 

seek a preliminary determination from 

the Regional Director regarding any of 

the notices required under this 

subchapter and its proposed methods 

and procedures applicable to the 

membership merger vote. The Regional 

Director will make a preliminary 

determination regarding the notices and 

methods and procedures applicable to 

the membership vote within 30 calendar 

days of receipt of a credit union’s 

request for review unless the Regional 

Director extends the period as necessary 

to request additional information or 

review a credit union’s submission. A 

credit union’s prior submission of any 

notice or proposed voting procedures 

does not relieve the credit union of its 

obligation to certify the results of the 

membership vote required by § 708a.307 

or eliminate the right of the Regional 

Director to disapprove the merger if the 

credit union fails to conduct the 

membership vote in a fair and legal 

manner consistent with the Federal 

Credit Union Act and these rules. 

§ 708a.306 Membership approval of a 

proposal to merge. 

(a) A proposal for merger approved by 

a board of directors also requires 

approval by a majority of the members 

who vote on the proposal. At least 20 

percent of the members eligible to vote 

must participate in the vote. The credit 

union must also have NCUA’s written 

authorization to proceed with the 

member vote. 

(b) The board of directors must set a 

voting record date to determine member 

voting eligibility. The record date must 

be at least one day before the 

publication of notice required in 

§ 708a.303. 

(c) A member may vote on a proposal 

to merge in person at a special meeting 

held on the date set for the vote or by 

written ballot delivered by mail or 

otherwise. The vote on the merger 

proposal must be by secret ballot and 

conducted by an independent entity. 

The independent entity must be a 

company with experience in conducting 

corporate elections. No official or senior 

management official of the credit union 

or the immediate family members of any 

official or senior management official 

may have any ownership interest in or 

be employed by the independent entity. 

§ 708a.307 Certification of vote on merger 

proposal. 

(a) The board of directors of the 

merging credit union must certify the 

results of the membership vote to the 

Regional Director within 14 calendar 

days after the vote is taken. 

(b) The certification must also include 

a statement that the notice, ballot, and 

other written materials provided to 

members were identical to those 

submitted to NCUA pursuant to 

§ 708a.305. If the board cannot certify 

this, the board must provide copies of 

any new or revised materials and an 

explanation of the reasons for any 

changes. 

(c) The certification must include 

copies of any correspondence between 

the credit union and other regulators 

related to the pending merger. 

§ 708a.308 NCUA approval of the merger. 

(a) The Regional Director will review 

the methods by which the membership 

vote was taken and the procedures 

applicable to the membership vote. The 

Regional Director will determine if the 

notices and other communications to 

members were accurate, not misleading, 

and timely; if the membership vote was 

conducted in a fair and legal manner; 

and if the credit union has otherwise 

met the requirements of this subpart, 

including whether there is substantial 

evidence that the factors in section 

205(c) of the Act are satisfied. 

(b) After completion of this review, 

the Regional Director will approve or 

disapprove the proposed merger. The 

Regional Director will issue the 

approval or disapproval within 30 

calendar days of receipt from the credit 

union of the certification of the result of 

the membership vote required under 

§ 708a.307, unless the Regional Director 

extends the period as necessary to 

request additional information or review 

the credit union’s submission. The 

Regional Director’s approval is 

conditional on the credit union 

completing the merger in the timeframes 

required by § 708a.309. 

(c) If the Regional Director 

disapproves the methods by which the 

membership vote was taken or the 

procedures applicable to the 

membership vote, the Regional Director 

may direct that a new vote be taken. 

(d) A merging credit union may 

appeal a Regional Director’s disapproval 

to the NCUA Board. The credit union 

must file the appeal within 30 days after 

receipt of the Regional Director’s 

determination. The NCUA Board will 

act on the appeal within 120 days of 

receipt. 

§ 708a.309 Completion of merger. 

(a) After receipt of the approvals 

under §§ 708a.302 and 708a.308 a credit 

union may complete the merger. 

(b) The credit union must complete 

the merger within one year of the date 

of NCUA approval under § 708a.308. If 

a credit union fails to complete the 

merger within one year the Regional 

Director will disapprove the merger. 

The credit union’s board of directors 

must then adopt a new merger proposal 

and solicit another member vote if it 

still desires to merge. 

(c) The Regional Director may, upon 

timely request and for good cause, 

extend the one year completion period 

for an additional six months. 

(d) After notification by the board of 

directors of the bank that the merger has 

been completed, the NCUA will cancel 

the insurance certificate of the credit 

union and, if applicable, the charter of 

a Federal credit union. 

§ 708a.310 Limits on compensation of 

officials. 

No director or senior management 

official of an insured credit union may 

receive any economic benefit in 

connection with the merger of a credit 

union other than reasonable 

compensation and other benefits paid in 

the ordinary course of business. 

§ 708a.311 Voting incentives. 

If a merging credit union offers an 

incentive to encourage members to 

participate in the vote, including a prize 

raffle, every reference to such incentive 

made by the credit union in a written 

communication to its members must 

also state that members are eligible for 

the incentive regardless of whether they 

vote for or against the proposed merger. 

§ 708a.312 Voting guidelines. 

A merging credit union must conduct 

its member vote on merger in a fair and 

legal manner. NCUA provides the 

following guidelines as suggestions to 

help a credit union obtain a fair and 

legal vote and otherwise fulfill its 

regulatory obligations. These guidelines 

are not an exhaustive checklist and do 

not by themselves guarantee a fair and 

legal vote. 

(a) Applicability of State law. While 

NCUA’s merger rules apply to all 

mergers of Federally insured credit 

unions, Federally insured State 

chartered credit unions (FISCUs) are 

also subject to State law on mergers. 

NCUA’s position is that no merger of a 

State chartered credit union is 

authorized unless permitted by State 

law, and also that a State legislature or 

State supervisory authority may impose 

merger requirements more stringent or 

restrictive than NCUA’s. States that 

permit mergers may have substantive 

and procedural requirements that vary 

from Federal law. For example, there 


srobinson on DSKHWCL6B1PROD with RULES
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 81393 

may be different voting standards for 

approving a vote. While the Federal 

Credit Union Act requires a simple 

majority of those who vote to approve 

a merger, some States have higher 

voting standards requiring two-thirds or 

more of those who vote. A FISCU 

should be careful to understand both 

Federal and State law to navigate the 

merger process and conduct a proper 

vote. 

(b) Eligibility to vote. (1) Determining 

who is eligible to cast a ballot is 

fundamental to any vote. No merger 

vote can be fair and legal if some 

members are improperly excluded. A 

merging credit union should be cautious 

to identify all eligible members and 

make certain they are included on its 

voting list. NCUA recommends that a 

merging credit union establish internal 

procedures to manage this task. 

(2) A merging credit union should be 

careful to make certain its member list 

is accurate and complete. For example, 

when a credit union converts from 

paper record keeping to computer 

record keeping, some member names 

may not transfer unless the credit union 

is careful in this regard. This same 

problem can arise when a credit union 

merges from one computer system to 

another where the software is not 

completely compatible. 

(3) Problems with keeping track of 

who is eligible to vote can also arise 

when a credit union merges from a 

Federal charter to a State charter or vice 

versa. NCUA is aware of an instance 

where a Federal credit union used 

membership materials allowing two or 

more individuals to open a joint account 

and also allowed each to become a 

member. The Federal credit union later 

converted to a State chartered credit 

union that, like most other State 

chartered credit unions in its State, used 

membership materials allowing two or 

more individuals to open a joint account 

but only allowed the first person listed 

on the account to become a member. 

The other individuals did not become 

members as a result of their joint 

account, but were required to open 

another account where they were the 

first or only person listed on the 

account. Over time, some individuals 

who became members of the Federal 

credit union as the second person listed 

on a joint account were treated like 

those individuals who were listed as the 

second person on a joint account 

opened directly with the State chartered 

credit union. Specifically, both of those 

groups were treated as non-members not 

entitled to vote. This example makes the 

point that a credit union must be 

diligent in maintaining a reliable 

membership list. 

(c) Scheduling the special meeting. 

NCUA’s merger rule requires a merging 

credit union to permit members to vote 

by written mail ballot or in person at a 

special meeting held for the purpose of 

voting on the merger. Although most 

members may choose to vote by mail, a 

significant number may choose to vote 

in person. As a result, a merging credit 

union should be careful to conduct its 

special meeting in a manner conducive 

to accommodating all members wishing 

to attend, including selecting a meeting 

location that can accommodate the 

anticipated number of attendees and is 

conveniently located. The meeting 

should also be held on a day and time 

suitable to most members’ schedules. A 

credit union should conduct its meeting 

in accordance with applicable Federal 

and State law, its bylaws, Robert’s Rules 

of Order or other appropriate 

parliamentary procedures, and 

determine before the meeting the nature 

and scope of any discussion to be 

permitted. 

(d) Voting incentives. Some credit 

unions may wish to offer incentives to 

members, such as entry to a prize raffle, 

to encourage participation in the merger 

vote. The credit union must exercise 

care in the design and execution of such 

incentives. 

(1) The credit union should ensure 

that the incentive complies with all 

applicable State, Federal, and local 

laws. 

(2) The incentive should not be 

unreasonable in size. The cost of the 

incentive should have a negligible 

impact on the credit union’s net worth 

ratio and the incentive should not be so 

large that it distracts the member from 

the purpose of the vote. If the board 

desires to use such incentives, the cost 

of the incentive should be included in 

the directors’ deliberation and 

determination that the merger is in the 

best interests of the credit union’s 

members. 

(3) The credit union should ensure 

that the incentive is available to every 

member that votes regardless of how or 

when he or she votes. All of the credit 

union’s written materials promoting the 

incentive to the membership must 

disclose to the members, as required by 

§ 708a.311 of this part, that they have an 

equal opportunity to participate in the 

incentive program regardless of whether 

they vote for or against the merger. The 

credit union should also design its 

incentives so that they are available 

equally to all members who vote, 

regardless of whether they vote by mail 

or in person at the special meeting. 

(e) Solicitation of votes. Some credit 

unions may wish to contact members 

who have not voted and encourage them 

to vote on the merger proposal. NCUA 

believes, however, that using credit 

union employees to solicit votes is 

problematic. Employees directed to 

solicit votes could easily neglect 

everyday duties critical to the credit 

union’s safe and sound operation. Also, 

employees may very well feel pressured 

to solicit votes for the merger, regardless 

of whether or not they support the 

merger. Accordingly, NCUA strongly 

encourages credit unions to use an 

independent third party to solicit votes 

rather than diverting credit union 

employees from their usual duties. 

PART 708b—MERGERS OF 

FEDERALLY INSURED CREDIT 

UNIONS; VOLUNTARY TERMINATION 

OR CONVERSION OF INSURED 

STATUS 

■ 15. The authority citation for part 

708b continues to read as follows: 

Authority: 12 U.S.C. 1752(7), 1766, 1785, 

1786, 1789. 

■ 16. Amend § 708b.2 by removing 

alphabetical paragraph designations (a) 

through (k) and adding definitions of 

‘‘conducted by an independent entity,’’ 

‘‘merger-related financial arrangement,’’ 

‘‘secret ballot,’’ and ‘‘senior management 

official’’ in alphabetical order to read as 

follows: 

§ 708b.2 Definitions. 

* * * * * 

Conducted by an independent entity 

means: 

(1) The independent entity will 

receive the ballots directly from voting 

members. 

(2) After the conclusion of the special 

meeting that ends the ballot period, the 

independent entity will open all the 

ballots in its possession and tabulate the 

results. The entity must not open or 

tabulate any ballots before the 

conclusion of the special meeting. 

(3) The independent entity will certify 

the final vote tally in writing to the 

credit union and provide a copy to the 

NCUA Regional Director. The 

certification will include, at a 

minimum, the number of members who 

voted, the number of affirmative votes, 

and the number of negative votes. 

During the course of the voting period 

the independent entity may provide the 

credit union with the names of members 

who have not yet voted, but may not 

provide any voting results to the credit 

union prior to certifying the final vote 

tally. 

* * * * * 

Merger-related financial arrangement 

means a material increase in 

compensation (including indirect 

compensation, for example, bonuses, 


srobinson on DSKHWCL6B1PROD with RULES
81394 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 

deferred compensation, or other 

financial rewards) or benefits that any 

board member or senior management 

official of a merging credit union may 

receive in connection with a merger 

transaction. For purposes of this 

definition, a material increase is an 

increase that exceeds the greater of 15 

percent or $10,000. 

* * * * * 

Secret ballot means no credit union 

employee or official can determine how 

a particular member voted. Credit union 

employees and officials are prohibited 

from assisting members in completing 

ballots or handling completed ballots. 

Senior management official means the 

chief executive officer (who may hold 

the title of president or treasurer/ 

manager), any assistant chief executive 

officer, and the chief financial officer. 

* * * * * 

■ 17–18. Amend § 708b.103 by revising 

paragraph (a)(5), redesignating 

paragraphs (a)(7) through (10) as 

paragraphs (a)(8) through (11), and 

adding new paragraph (a)(7) to read as 

follows: 

§ 708b.103 Preparation of merger plan. 

(a) * * * 

(5) Explanation of any proposed share 

adjustments, and where the net worth 

ratio of the merging credit union is more 

than 500 basis points higher than the 

net worth ratio of the continuing credit 

union, an explanation of the factors 

considered in establishing the amount 

of any proposed adjustment or in 

determining no adjustment is necessary; 

* * * * * 

(7) Description of any merger-related 

financial arrangement, as defined in 

§ 708b.2; 

* * * * * 

■ 19. In § 708b.104, revise paragraph 

(a)(8) to read as follows: 

§ 708b.104 Submission of merger proposal 

to the NCUA. 

(a) * * * 

(8) If the merging credit union’s assets 

on its latest call report are equal to or 

greater than the threshold amount 

established annually by the Federal 

Trade Commission under 15 U.S.C. 

18a(a)(2)(B)(i), currently $63.4 million, a 

statement about whether the two credit 

unions intend to make a Hart-ScottRodino Act premerger notification filing 

with the Federal Trade Commission 

and, if not, an explanation why not; and 

* * * * * 

■ 20. In § 708b.106, revise paragraph 

(a)(2)(ii) to read as follows: 

§ 708b.106 Approval of the merger 

proposal by members. 

(a) * * * 

(2) * * * 

(ii) Contain a summary of the merger 

plan, including, but not necessarily 

limited to, current financial statements 

for each credit union, a consolidated 

financial statement for the continuing 

credit union, analyses of share values, 

explanation of any proposed share 

adjustments, explanation of any changes 

relative to insurance such as life savings 

and loan protection insurance and 

insurance of member accounts, and a 

detailed description of any merger 

related financial arrangement, as 

defined in § 708b.2. The description 

must include the name and title of each 

individual recipient and an explanation 

of the financial impact of each element 

of the arrangement, including direct 

salary increases and any indirect 

compensation, such as any bonus, 

deferred compensation or other 

financial reward; 

* * * * * 

§ 708b.107 [Amended] 

■ 21. Amend the heading to § 708b.107 

by removing the word ‘‘Certificate’’ and 

adding the word ‘‘Certification’’ in its 

place. 

■ 22. In § 708b.201, revise paragraph (c) 

to read as follows: 

§ 708b.201 Termination of insurance. 

* * * * * 

(c) A majority of the credit union’s 

members must approve a termination of 

insurance by affirmative vote. The vote 

must be taken by secret ballot and 

conducted by an independent entity. 

* * * * * 

■ 23. In § 708b.203, revise paragraphs 

(d), (f), and (g) to read as follows: 

§ 708b.203 Conversion of insurance. 

* * * * * 

(d) Approval of a conversion of 

Federal to nonfederal insurance requires 

the affirmative vote of a majority of the 

credit union’s members who vote on the 

proposition, provided at least 20 percent 

of the total membership participates in 

the voting. The vote must be taken by 

secret ballot and conducted by an 

independent entity. 

* * * * * 

(f) The board of directors of the credit 

union and the independent entity that 

conducts the membership vote must 

certify the results of the membership 

vote to the NCUA within 14 calendar 

days after the deadline for receipt of 

votes. The certification must include the 

total number of members of record of 

the credit union, the number who voted 

on the conversion, the number who 

voted in favor of the conversion, and the 

number who voted against. The 

certification must be in the form 

specified in subpart C of this part. 

(g) Generally, the NCUA will 

conditionally approve or disapprove the 

conversion in writing within 14 days 

after receiving the certification of the 

vote. The credit union must complete 

the conversion within six months of the 

date of conditional approval. If a credit 

union fails to complete the conversion 

within six months the Regional Director 

will disapprove the conversion. The 

credit union’s board of directors, if it 

still wishes to convert, must then adopt 

a new conversion proposal and solicit 

another member vote. 

* * * * * 

■ 24. In § 708b.206, revise paragraph (b) 

to read as follows: 

§ 708b.206 Share insurance 

communications to members. 

* * * * * 

(b) Every share insurance 

communication must contain the 

following conspicuous statement: ‘‘IF 

YOU ARE A MEMBER OF THIS CREDIT 

UNION, YOUR ACCOUNTS ARE 

CURRENTLY INSURED BY THE 

NATIONAL CREDIT UNION 

ADMINISTRATION, A FEDERAL 

AGENCY. THIS FEDERAL INSURANCE 

IS BACKED BY THE FULL FAITH AND 

CREDIT OF THE UNITED STATES 

GOVERNMENT. IF THE CREDIT 

UNION CONVERTS TO PRIVATE 

INSURANCE WITH [insert name of 

private share insurer] AND THE CREDIT 

UNION FAILS, THE FEDERAL 

GOVERNMENT DOES NOT 

GUARANTEE THAT YOU WILL GET 

YOUR MONEY BACK.’’ The statement 

must: 

(1) Appear on the first page of the 

communication where conversion is 

discussed and, if the communication is 

on an Internet Web site posting, the 

credit union must make reasonable 

efforts to make it visible without 

scrolling; and (2) Must be in capital 

letters, bolded, offset from the other text 

by use of a border, and at least one font 

size larger than any other text (exclusive 

of headings) used in the 

communication. 

* * * * * 

Note: The following revision to a document 

entitled ‘‘Corporate Federal Credit Union 

Bylaws,’’ will not appear in the Code of 

Federal Regulations. 

Section 4 of Article XI of the 

document entitled ‘‘Corporate Federal 

Credit Union Bylaws’’ is revised to read 

as follows: 

Article XI. General 

* * * * * 


srobinson on DSKHWCL6B1PROD with RULES
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Rules and Regulations 81395 

1See Division A, titled the ‘‘Federal Housing 

Finance Regulatory Reform Act of 2008,’’ Title I, 

section 1101 of HERA. 2See 75 FR 10446, March 8, 2010. 

Section 4. (a) Subject to the 

limitations in 12 CFR 701.33(c)(5) 

through (c)(7) of the NCUA regulations, 

the corporate credit union may elect to 

indemnify to the extent authorized by 

(check one) ( ) law of the State of 

llll or ( ) Model Business 

Corporation Act the following 

individuals from any liability asserted 

against them and expenses reasonably 

incurred by them in connection with 

judicial or administrative proceedings to 

which they are or may become parties 

by reason of the performance of their 

official duties: (Check as appropriate) ( ) 

current officials, ( ) former officials, 

( ) current employees, ( ) former 

employees. 

(b) The corporate credit union may 

purchase and maintain insurance on 

behalf of the individuals indicated in (a) 

above against any liability asserted 

against them and expenses reasonably 

incurred by them in their official 

capacities and arising out of the 

performance of their official duties to 

the extent such insurance is permitted 

by the applicable State law or the Model 

Business Corporation Act. 

(c) The term ‘‘official’’ in this bylaw 

means a person who is a member of the 

board of directors, supervisory 

committee, other volunteer committee 

(including elected or appointed loan 

officers or membership officers), 

established by the board of directors. 

* * * * * 

[FR Doc. 2010–32115 Filed 12–27–10; 8:45 am] 

BILLING CODE 7535–01–P 

FEDERAL HOUSING FINANCE BOARD 

12 CFR Part 906 

FEDERAL HOUSING FINANCE 

AGENCY 

12 CFR Part 1207 

RIN 2590–AA28 

Minority and Women Inclusion 

AGENCIES: Federal Housing Finance 

Board; Federal Housing Finance 

Agency. 

ACTION: Final rule. 

SUMMARY: The Federal Housing Finance 

Agency (FHFA or agency) is adopting a 

final rule to implement section 1116 of 

the Housing and Economic Recovery 

Act of 2008 (HERA). Section 1116 of 

HERA requires FHFA, the Federal 

National Mortgage Association (Fannie 

Mae), the Federal Home Loan Mortgage 

Corporation (Freddie Mac), and the 

Federal Home Loan Banks (Banks) to 

promote diversity and the inclusion of 

women and minorities in all activities. 

The final rule implements the 

provisions of section 1116 of HERA that 

apply to Fannie Mae, Freddie Mac, and 

the Banks. 

DATES: This rule is effective January 27, 

2011. 

FOR FURTHER INFORMATION CONTACT: Eric 

Howard, Equal Employment 

Opportunity and Diversity Director, 

Eric.Howard@fhfa.gov, (202) 408–2502, 

1625 Eye Street NW., Washington, DC 

20006; or Mark Laponsky, Deputy 

General Counsel, 

Mark.Laponsky@fhfa.gov, (202) 414– 

3832 (not toll-free numbers), Federal 

Housing Finance Agency, Fourth Floor, 

1700 G Street, NW., Washington, DC 

20552. The telephone number for the 

Telecommunications Device for the 

Hearing Impaired is (800) 877–8339. 

SUPPLEMENTARY INFORMATION: 

I. Background 

Effective July 30, 2008, HERA, Public 

Law 110–289, 122 Stat. 2654, amended 

the Federal Housing Enterprises 

Financial Safety and Soundness Act of 

1992 (12 U.S.C. 4501 et seq.) (Safety and 

Soundness Act) to establish FHFA as an 

independent agency of the Federal 

government.1 HERA transferred the 

supervisory and oversight 

responsibilities of the Office of Federal 

Housing Enterprise Oversight (OFHEO) 

over Fannie Mae and Freddie Mac 

(collectively, Enterprises), and of the 

Federal Housing Finance Board (FHFB) 

over the Banks (collectively, regulated 

entities) and the Bank System’s Office of 

Finance to FHFA. 

The Safety and Soundness Act 

provides that FHFA is headed by a 

Director with general supervisory and 

regulatory authority over the regulated 

entities. FHFA is charged, among other 

things, with overseeing the prudential 

operations of the regulated entities. 

FHFA is also charged to ensure that the 

regulated entities: Operate in a safe and 

sound manner including maintenance of 

adequate capital and internal controls; 

foster liquid, efficient, competitive, and 

resilient national housing finance 

markets; comply with the Safety and 

Soundness Act and rules, regulations, 

guidelines and orders issued under the 

Safety and Soundness Act, and the 

respective authorizing statutes of the 

regulated entities; carry out the 

respective missions through activities 

authorized and consistent with the 

Safety and Soundness Act and the 

authorizing statutes; and, engage in 

activities and operations that are 

consistent with the public interest. 

Section 1116 of HERA amended 

section 1319A of the Safety and 

Soundness Act (12 U.S.C. 4520) to 

require FHFA to engage in certain 

activities to promote a diverse 

workforce. It also requires each 

regulated entity to establish an Office of 

Minority and Women Inclusion, or 

designate an office, responsible for 

carrying out the requirements of the 

section and such requirements and 

standards established by the Director. 

Section 1319A of the Safety and 

Soundness Act requires the regulated 

entities to promote diversity in all 

activities and at every level of the 

organization, including management, 

employment and contracting. 

Furthermore, 12 U.S.C. 1833e, as 

amended, and Executive Order 11478 

require FHFA and the regulated entities 

to promote equal opportunity in 

employment and contracting. 

On January 11, 2010, FHFA published 

a proposed rule on Minority and 

Women Inclusion to implement section 

1116 of HERA, 12 U.S.C. 4520. The 

proposal set forth minimum 

requirements for regulated entity 

diversity programs as well as 

requirements for reporting on these 

programs. The proposal also set forth 

the minimum requirements for the 

agency’s own diversity program. 

The proposed rule consisted of the 

following subparts: Subpart A addressed 

matters of general application; subpart B 

applied only to FHFA’s internal 

operational requirements under section 

1116 of HERA; and subpart C 

implemented the requirements under 

section 1116 of HERA for the regulated 

entities. FHFA initially established a 60- 

day comment period but, at the request 

of the public, extended that period 

another forty-five (45) days.2 The 

extended comment period closed on 

April 26, 2010. 

FHFA received 23 comment letters to 

the proposed rule from individuals and 

entities. Three letters came from private 

citizens. Fannie Mae, Freddie Mac, and 

eleven of the Banks submitted comment 

letters. The Banks of Atlanta, Boston, 

Chicago, Dallas, Indianapolis, New 

York, San Francisco, Seattle, Topeka, 

Des Moines and Pittsburgh sent 

comments that were generally similar. 

The Bank System’s fiscal agent, the 

Office of Finance, also submitted a 

comment. The following trade 

associations or potential vendors to the 

regulated entities submitted comment 

letters: The National Association of 

Hispanic Real Estate Professionals 


srobinson on DSKHWCL6B1PROD with RULES