Part 701 & 708b – FCU Bylaws and Voluntary Mergers of Federally Insured Credit Unions

Final Rule Summary
Prepared by NASCUS Legislative & Regulatory Affairs Department
July 2018

NCUA has published a final rule to add additional requirements to the voluntary mergers of federally insured credit unions (FICUs). At-A-Glance, the final rule will:

  • Revise and clarify the contents and format of the member notice
  • Require merging credit unions to disclose “merger-related compensation” provided to “covered persons”
  • Increase the minimum member notice period
  • Provide a method for members and others to submit comments to the NCUA regarding the proposed merger.

In addition, NCUA will retire its merger manual, and incorporate model forms conforming to the rule within a new sub-part to its merger rule.

NCUA’s merger rule, Part 708b, applies to federally insured state credit unions (FISCUs) by way of reference in §741.208 of NCUA’s Rules & Regulations.

The final merger rule is available here. The rule will take effect on October 1, 2018.

NCUA’s revised final voluntary merger rule will require FICUs to disclose to members any ‘‘merger-related financial arrangement’’ provided to a ‘‘covered person.’’ The rule also provides for NCUA to create a website where members may comment on the proposed merger.

  • Covered Persons

The current merger rule’s definition of “senior management official” is replaced by a definition of “covered person” that includes:

  • the chief executive officer or manager (or a person acting in a similar capacity)
  • each of the four most highly compensated employees (other than the CEO)
  • any member of the board of directors or the supervisory committee

Note: NCUA’s rule explicitly cites the supervisory committee. However, not all FISCUs have a supervisory committee by that name. Some utilize an audit committee with similar authorities, but NCUA’s rule is silent as to an audit committee’s inclusion in the definition of “covvered person.”

  • Merger-Related Compensation

Since 2007, NCUA has required disclosure of merger related financial arrangements to the merging credit union’s members. Merger related financial arrangements was defined as any increase in compensation or benefits that represented an increase in compensation of 15% or $10,000. Under the new rule, merging credit union will disclose merger related financial arrangements, defined as “a material increase in compensation or benefits because of, or in anticipation of, a merger that any covered person of a merging credit union has received during the 24 months before the date the boards of directors of both credit unions approve the merger plan.” The definition includes a material increase in compensation or benefits that any covered person will receive in the future because of the merger.

The rule does not require disclosure of material increases in compensation resulting from employer-provided medical insurance, retirement, and other benefits offered on a non-discriminatory basis to all employees of the continuing credit union.

  • 24-Month Lookback and Certification

The final rule requires the merging and continuing credit unions to submit to NCUA copies of any board minutes from the previous 24 months that mention “the merger.” The rule also requires the CEOs and Board Chairs of both credit unions to sign the certification form now included in Part 708b.304(c) that stipulates that the merger submission to NCUA includes all merger related financial arrangements for covered persons.

  • Record Date

The final rule adds a formal definition of “record date” that requires credit unions to set the date by which persons must have been members of the credit union to vote on the merger proposal.

  • Timing Requirements for Member Notice

Under the current rule, a merging credit union can give its members as brief a notice as seven days. Under the final rule, the merging credit union will be required to give members at least 45 days, but no more than 90 days, notice before the meeting where the vote will take place.

  • Contents of Member Notice

The final rule reorganizes the list of required information for the notice to members by adding explicit requirements that the credit unions explain to members in understandable language the relative net worth of the two credit unions and whether any of the merging credit union’s net worth will be returned to members. Members must be informed of the website being created by NCUA for the sharing of comments on the merger, and the merger’s effect on ATM access and other services.  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.

  • Member Comments on the Proposed Merger Transaction

NCUA did not finalize the section of its proposed merger rule that would have required merging credit unions to facilitate member-to-member communications regarding the merger. Rather, NCUA will facilitate member-to-member communications by creating a
NCUA website where merger information and member comments will be posted. Members may submit comments to NCUA for posting both electronically and by mail. The website will also include non-confidential portions of merger applications. The member notice will include a link to the website where the merger application and comments will be available, as well as information about how to submit a comment. NCUA states that it only post comments from members (but does not indicate how it intends to verify membership). NCUA will also review all comments before posting to “ensure they are appropriate and limited to the topic of the merger.”

New Part 708b.304: Forms

NCUA has included model forms in a new §708b.304. The forms are similar to the existing forms in the merger manual with the exception od of the Member Notice which has been revised pursuant to the new rule.

Use of the forms IS NOT mandatory. However, NCUA notes that review of “custom” forms will add to the length of time taken for approval. Credit unions are free to choose the model forms or customize/create their own. The one exception is he certification form found in new §708b.304(c).