Part 713 and Part 704 Fidelity Bond Coverage
(741.201)


NCUA Proposed Rule
Summary

Prepared by NASCUS Legislative & Regulatory Affairs Department
December 2018

NCUA has proposed amendments to Parts 713 and 704, its rules for federally insured natural person credit union and corporate credit union fidelity bond requirements. Part 713 is written for federal credit unions (FCUs) but applies, in part, to federally insured state-chartered credit unions (FISCUs) by reference in Part 741.201.
NCUA asserts the proposed changes would accomplish the following 4 objectives:

  • Strengthen credit union board oversight of fidelity bond coverage
  • Ensure an adequate period to discover and file fidelity bond claims following a credit union’s liquidation
  • Codify a 2017 NCUA legal opinion that permits a natural person credit union’s fidelity bond to include coverage for certain CUSOs (17-0959)
  • Clarify the documents subject to Board approval and require that all bond forms receive Board approval every ten years

NASCUS Note: While FISCUs are subject to Part 741.201 for fidelity bond coverage, NCUA is not proposing changes to that section. Currently, Part 741.201 does not appear to incorporate by reference ALL of Part 713.
NCUA’s proposed rule may be read here. The proposed rule is open for comment until January 22, 2019.

Summary
The Federal Credit Union Act (FCUA) requires that certain federal credit union employees and appointed and elected officials be subject to fidelity bond coverage. The FCUA authorizes NCUA to promulgate regulations regarding both the amount and character of fidelity bond coverage. NCUA is also authorized to approve bond forms.
NCUA carries out the FCUA directive for FCUs in Part 713, for all corporate credit unions in Part 704.18, and for FISCUs by partial reference in Part 741.201.
These provisions:

  • establish the requirements for a fidelity bond and the acceptable bond forms
  • establish the minimum permissible coverage
  • require a credit union’s board of directors to review its bond coverage annually to ensure it is adequate in relation to the potential risks facing the credit union and the minimum requirements set by the Board

In 2014, Part 704 was revised to limit the deductible a corporate credit union may pay to a percentage of its capital based on its leverage ratio. Part 713, however, has not been substantively revised since 2005. NCUA’s interpretation of the rule requires natural person credit unions purchase an ‘‘individual policy.’’ Before 2017, the NCUA’s Office of General Counsel (OGC) had issued legal opinions stating that a credit union may not include one or more CUSOs or other parties as additional insureds under its fidelity bond because of the ‘‘individual policy’’ limitation. In September 2017, OGC reversed its opinions and now says that the ‘‘individual policy’’ requirement generally prohibits joint coverage under fidelity bonds but does not prohibit a policy that covers both the credit union and its CUSOs.
NCUA’s Proposed Changes

  • Part 704.18(b) – NCUA proposes amending Part 704.18(b) by adding a new 18(b)(2) requiring a corporate credit union’s board of directors and supervisory committee review all applications for purchase or renewal of its fidelity bond coverage. After review, the board must pass a resolution approving the purchase or renewal of the fidelity bond coverage and delegate one member of the board, who is not an employee of the corporate credit union, to sign the purchase or renewal agreement and all attachments. No board members may be a signatory on consecutive purchase or renewal agreements for the same fidelity bond coverage policy.
  • Part 704.18(c) – NCUA proposes splitting the corporate credit union fidelity bond provision into 5 new subparagraphs. New requirements include:
    • 704.18(c)(3) – NEW - would substantively amend the requirements for corporate credit union approved bond forms. Would require NCUA Board approval of all bond forms before a corporate credit union may use them. Also, corporates would not be allowed to use any bond form that has been amended since receiving NCUA Board approval or any rider, endorsement, renewal, or other document that limits coverage of approved bond forms without first receiving approval from NCUA. Approval of all bond forms expires 10 years after the date the Board approved or reapproved use of the bond form. Any currently approved bond forms would expire on January 1, 2029.
    • 704.18(c)(4) – NEW - would require fidelity bonds to include an option for the liquidating agent to purchase coverage in the event of an involuntary liquidation extending the discovery period for a covered loss for at least 2 years after liquidation. For voluntary liquidations, fidelity bonds would be required to remain in effect, or provide that the discovery period is extended, for at least four months after the final distribution of assets.

Current Part 704.18 paragraphs (d), (e), and (f) would be unchanged by the proposal.

  • Part 713.1 – Scope - retains most of the current § 713.1 while expanding the application of ALL of Part 713 to FISCUs. The proposed rule would add the words ‘‘federally insured’’ before the words ‘‘credit union’’ to apply to FISCUs and would “cross reference“ § 741.201 as well as contain a reference for corporate credit unions directing them to 704.18.

     

    NASCUS note: the proposed rule does not provide draft new language for Part 741 and is unclear how that provision would be clarified.

  • Part 713.2 – Director Responsibility – would divide the current section into 2 subparagraphs. Current § 713.2 would become paragraph (a). The term ‘‘federal credit union’’ would be revised to ‘‘federally insured credit union.’’ 2(b) The proposed rule would add a new paragraph (b) to § 713.2. Proposed paragraph (b) increases a board of directors’ oversight responsibility of its FICU’s fidelity bond coverage. A FICU’s board and supervisory committee (if applicable) would be required to review all applications for purchase or renewal of bond coverage and to pass a board resolution approving the purchase or renewal. One board member (a non- CU employee) must sign the attestation for bond purchase or renewal (same board member may not sign attestation for renewal in consecutive years). NCUA’s goal is to prevent rescission of fidelity coverage resulting from the signatory’s knowledgeable of fraudulent activity.
  • Sec. 713.3 – Bond Coverage – Among changes to § 713.3 is streamlining of existing provisions and the addition of several new provisions. One new requirement (713.3(a)(3))would be that a FICU’s bind coverage include a provision that allows the liquidating agent to purchase a Discovery Extension, extending the period to discover and file a claim for at least two years after liquidation. Another new requirement for FISCUs would be new 713.3(a)(4) requiring fidelity bond coverage remain in effect, or provide that the discovery period is extended, for at least four months after the final distribution of assets. This provision already applies to FCUs in Part 710.

NCUA is also proposing new Part 713.3(b) that would incorporate the 2017 legal opinion allowing for an “individual policy” to cover both the credit union and some CUSOs. A CUSO may be included in a FICU’s bond coverage if:

    • the FICU owns greater than 50% the CUSO, or
    • the CUSO is organized by the FICU for the purpose of handling certain of its business transactions and composed exclusively of its employees
  • Sec. 713.4 – Bond Forms – current § 713.4(a) would be divided into 2 parts (a) and (b) restating the requirement for NCUA approval of bond forms and directing readers to NCUA’s website for the list of approved forms. In section 713.4(c), NCUA would clarify that any bond form that has been amended or changed since the Board approved it requires new approval from the Board as is the current policy/practice. The proposed rule would clarify the list of documents that must receive Board approval, including renewal forms (and any other document) that limit the coverage of approved bond forms.
  • A new section 713.4(d) would sunset NCUA’s approval of all bond forms 10 years after approval given. However, NCUA notes that the 10-year period will not toll or start over when a bond carrier submits a revision to an approved bond. NCUA also proposes to reserve the right to review a bond form at any time, notwithstanding the 10-year sunset.
    In addition to seeking comments on the proposed changes to Parts 704 and 713 fidelity bond requirements, NCUA also seeks comments on whether FICUs anticipate any increase in compliance burden under the proposed rule.

    NASCUS Notes:
    As noted above, NCUA’s fidelity bind requirements applied in part to FISCUs by reference in § 741.201, which currently reads as follows:


§741.201   Minimum fidelity bond requirements.
(a) Any credit union which makes application for insurance of its accounts pursuant to title II of the Act must possess the minimum fidelity bond coverage stated in part 713 of this chapter in order for its application for such insurance to be approved and for such insurance coverage to continue. A federally insured credit union whose fidelity bond coverage is terminated shall mail notice of such termination to the Regional Director not less than 35 days prior to the effective date of such termination.

(b) Corporate credit unions must comply with §704.18 of this chapter in lieu of part 713 of this chapter.

12/31/18