Proposed Rule Summary

Mergers of Federally Insured Credit Unions

Prepared by NASCUS Legislative & Regulatory Affairs Department
June 2017

NCUA is proposing changes to their regulations Parts 701, 708a, and 708b to amend the rules pertaining to voluntary mergers. NCUA notes in the preamble to the proposal that it is concerned that in some mergers, prospective merger partners may be seeking to influence the merging credit union by offering financial incentives to management and certain highly compensated employees to support the merger that the Board believes should be disclosed to members.

The proposed changes:

  • revise and clarify the contents and format of the member notice
  • require merging FCUs to disclose all merger-related financial arrangements for covered persons (currently only material increases need be disclosed)
  • Expand the pool of covered individuals required to disclose compensation
  • increase the minimum member notice period
  • provide for member-to-member communications regarding the proposed merger
  • makes conforming amendments to regulations governing termination of federal share insurance when the continuing credit union is not an FCU

NCUA’s proposed rule may be read here. The proposed rule is open for comment until August 7, 2017.

In its proposal, NCUA’s narration speaks to federal credit unions (FCUs). However, NCUA explicitly seeks comments on whether its proposed changes, including disclosure of all merger related compensation, should be applied to federally insured state chartered credit unions (FISCUs).

Section 205 of the Federal Credit Union Act (FCUA) prohibits a federally insured credit union (FICU) from merging or consolidating with any other FICU without NCUA’s prior written approval. The FCUA provides the following factors for NCUA to consider when determining whether to approve or decline a merger:

  • the history, financial condition, and management policies of the FICU
  • the adequacy of the FICU’s reserves
  • the economic advisability of the transaction
  • the general character and fitness of the FICU’s management
  • the convenience and needs of the members to be served by the FICU
  • whether the FICU is a cooperative association organized for the purpose of promoting thrift among its members and creating a source of credit

To implement §205 of the FCUA, NCUA published its merger rule, Part 708b Subpart A. NCUA applied the merger rule to FISCUs by reference in Part 741.208 which requires compliance with the “applicable provisions” of the merger rule.

Generally speaking, NCUA’s current merger rule requires merging credit unions to submit information to NCUA once the boards of directors of the credit unions vote to approve the merger plan. Information to be submitted includes:

  • The merger plan, as described in this part
  • Resolutions of the boards of directors
  • The Proposed Merger Agreement
  • SSA approval of the merger proposal (if state requires preapproval)
  • Application and Agreement for Insurance of Member Accounts (if continuing SCU needs to become federally insured)
  • A Hart-Scott-Rodino filing with the FTC or explanation why one is not required
  • Demonstration of coverage by private insurer for those not continuing as a FICU

In addition, for FCUs only, the current rules require submission of a copy of the notice to members of the special meeting to vote on the mergers and a copy of the ballot. NCUA’s rule also contains FCU specific requirements for the member vote in §708b.106 that do not apply to FISCUs. State charters follow state law with respect to requirements for the member vote.

Proposed Changes

  • Section 708b.2 Definitions

NCUA proposes expanding the merger compensation disclosure provisions to require merging FCUs to disclose to members any increase in compensation or benefits that any “covered person” will receive because of a merger. As a result, the proposed rule amends § 708b.2 by:

  • Adding a definition for “covered person” – The current definition of “senior management official” would be replaced by a definition of covered person that means “the chief executive officer or manager (or a person acting in a similar capacity); the four most highly compensated employees other than the chief executive officer or manager; and any member of the board of directors or the supervisory committee.”
  • Amending the definition of “merger-related financial arrangement” – Currently credit unions must report merger related compensation to any board member or senior management official that equals $10,000.00 or 15% of their current compensation. For the purposes of the rule, compensation is defined in a similar manner as in NCUA’s Golden Parachute rule and encompasses not just payments, but also benefits, credit, and debt relief.

NCUA is proposing to amend the definition to include any increases in compensation or benefits that a covered person has received during the 24 months prior to the date of the approval of the merger plan by the boards of directors of both credit unions. NCUA would also include any future compensation or benefits received as a result of the merger. Under this approach there would be no 15% or $10,000.00 threshold.

NCUA is also proposing to require merging credit unions to disclose all increases in compensation or benefits made during the 24 month look back period regardless of whether that increase was made because of the merger.

In addition to changes to the merger related compensation definition, NCUA also proposes changes to clarify that under both the existing and proposed rule, it reserves the right to review any future compensation paid to covered persons of the merging FCU by the continuing credit union if there are concerns such compensation was tied to the merger. NCUA will also require all merger related compensation to be expressed in dollars wherever possible. If not practical, then the compensation may be described.

  • Record Date – NCUA is adding a definition for “record date” to clarify which members are eligible to vote on the merger. Although commonly understood, the authority to set a record date has never been explicitly stated in NCUA’s rules.

Specific Questions Posed by NCUA

  • Should the definition of “covered persons” be even more expansive, covering the top 10 employees or maybe even all employees?
  • NCUA is limiting the lookback period in the proposed rule to 24 months, but asks if the look back period should be shorter or longer.
  • Should benefits offered on a non-discriminatory basis to all employees of the credit union continue to be disclosed as a merger related compensation?
  • Section 708b.105 Submission of Merger Proposal to NCUA

As part of the merger package, NCUA would require both the merging and continuing credit union to submit board minutes that reference the merger during the 24 months preceding the date of approval of the merger plan by the credit unions’ boards. The boards of both credit unions would also be required to certify that there are no merger-related financial arrangements other than those in the member notice.

  • Section 708b.106 Approval of the Merger Proposal by Members

The proposed rule will require member notices to be mailed at least 45 days, but no more than 90 days, before the merger vote meeting and revise the content of the member notice. The 45-90 day notice requirement replaces existing 60, 30, and in some cases 7 day time frames.

NCUA is also revising the content of the member notice by reorganizing the list of required information and adding explicit requirements that the credit unions explain to members in understandable language the relative net worth of the 2 credit unions and whether any of the merging credit union’s net worth will be returned to members. In addition, merging credit unions will also be required to include a plain language summary statement of all required disclosures without referring members to a separate attachment, although credit unions will still be allowed to provide additional information in attachments.

The proposed rule also includes a new paragraph that establishes procedures to allow for member-to-member communications in advance of a member vote on a proposed merger. The new provisions would be consistent with existing NCUA regulations for conversions (Part 708a.104(f)). Merging credit unions will have to notify members of the option to communicate directly with their peers. Members would have 30 days from receipt of that notice to provide the communication to the credit union in writing which in turn will send the communication to the other members at least 15 days before the vote.

  • Sections 708b.202 and 204 Notice to Members of Proposal to Terminate on Convert Insurance

NCUA proposes change the timing of notices of a credit union seeking to terminate federal share from a 7-30 day timeframe to a 45-90 day timeframe.

  • Conforming and Clarifying Amendments to Other NCUA Regulations 12 CFR 708b.202, 204

Finally, NCUA proposes amending both Parts 708a and 708b regarding member-to-member communications to clarify that credit union sending a communication on behalf of a member pursuant to the regulations must inform members where there reply to the email communication go.

Executive Order 13132

NCUA concludes that because they believe the rule does not have substantial direct effects on the relationship between the national government and the states, or on the distribution of power and responsibilities there are no federalism implications of the proposal.