[Federal Register Volume 76, Number 102 (Thursday, May 26, 2011)]
[Rules and Regulations]
[Pages 30510-30521]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-12827]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 704, 741 and 750
RIN 3133-AD73
Golden Parachute and Indemnification Payments
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: NCUA is issuing a final rule to prohibit, in certain
circumstances, a Federally insured credit union (FICU) from making
golden parachute and indemnification payments to an institution-
affiliated party (IAP). The rule will help safeguard the National
Credit Union Share Insurance Fund (NCUSIF) by preventing the wrongful
or improper disposition of FICU assets and inhibit unwarranted rewards
to IAPs that can contribute to an FICU's troubled condition.
DATES: This rule is effective June 27, 2011.
FOR FURTHER INFORMATION CONTACT: Pamela Yu, Staff Attorney, or Ross
Kendall, Special Counsel to the General
[[Page 30511]]
Counsel, at the above address, or telephone: (703) 518-6540.
SUPPLEMENTARY INFORMATION:
I. Background
On July 10, 2010, the NCUA Board (Board) issued a Notice of
Proposed Rulemaking (proposal or proposed rule) to implement section
206(t) \1\ of the Federal Credit Union Act (FCU Act), 12 U.S.C.
1786(t), by adding a new part 750 to NCUA's regulations. 75 FR 47236
(August 5, 2010).
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\1\ In 1990, section 2523 of the Comprehensive Thrift and Bank
Fraud Prosecution and Taxpayer Recovery Act of 1990 (Fraud Act)
amended the Federal Credit Union Act (FCU Act) by adding section
206(t). Public Law 101-647, 2523 (1990). The Fraud Act is title XXV
of the Crime Control Act of 1990, S. 3266, which Congress passed on
October 27, 1990 and the President signed into law on November 29,
1990.
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The proposed rule would have prohibited, in certain circumstances,
an FICU from making golden parachute and indemnification payments to an
IAP. The purpose of the proposal, which tracked closely to existing
regulations applying to banks,\2\ was to safeguard the NCUSIF by
preventing the wrongful or improper disposition of FICU assets and to
inhibit rewards to IAPs who may have contributed to an FICU's troubled
condition or, in the case of indemnification, are the subject of
certain types of administrative enforcement actions brought by the
regulator. It was also intended to provide FICUs with greater clarity
on the distinction between legitimate employee severance payments and
improper golden parachute payments.
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\2\ See 12 CFR part 359.
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General Comments
The public comment period for the proposed rule ended on September
7, 2010. NCUA received comments from eighteen commenters, including two
national credit union trade organizations, a national association
representing state credit union regulators, seven state credit union
leagues, two credit unions, three attorneys or law firms, two credit
union service providers (employee compensation/benefits providers), and
one individual credit union volunteer. The majority of commenters were
generally supportive of the rule, but all disagreed with some aspect of
the proposal or offered suggestions on one or more aspects of the
proposed rule. Six commenters, however, opposed the proposed rule in
full. All of these commenters opposed the rule because they disagreed
with the proposed indemnification provisions. One commenter supported
the golden parachute provisions but opposed the indemnification
provisions. Virtually all commenters who were opposed to the
indemnification provisions expressed concern that the proposed
provisions would be a deterrent to credit union service and would have
a negative impact on the ability of FICUs to attract and maintain
qualified volunteers and management personnel. NCUA has carefully
reviewed and analyzed the comment letters it received in response to
the proposal.
II. Summary of the Final Rule
The final rule applies to all FICUs, including natural person and
corporate credit unions. NCUA previously issued a final rule to
implement section 206(t) for corporate credit unions on September 24,
2010, as part of a comprehensive rule amending part 704, NCUA's rule
governing corporate credit unions. 75 FR 64786 (October 20, 2010); see
also 74 FR 65210 (Dec. 9, 2009) (publication of the proposed rule).
Those provisions, which currently apply only to corporates, are
substantially identical to the provisions contained in this final rule.
Accordingly, to avoid duplicative sections on the same subject, the
Board has determined to delete the indemnification and golden parachute
provisions (codified at 12 CFR Sec. 704.20) from the corporate rule.
This rulemaking, which applies to corporate as well as natural person
credit unions, consolidates the provisions into a single rule.
Summary of Golden Parachute Provisions
The final rule prohibits, with some exceptions, FICUs that are
insolvent, in conservatorship, rated composite CAMEL or CRIS 4 or 5,
subject to a proceeding to terminate or suspend share insurance,
undercapitalized (corporates only) or in an otherwise troubled
condition \3\ from making golden parachute payments. Golden parachutes
are defined in the rule as payments made to an IAP that are contingent
on the termination of that person's employment and received when the
credit union making the payment is troubled.\4\
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\3\ ``Troubled condition'' is defined in 12 CFR 701.14(b)(3) and
(4).
\4\ In this preamble, the term ``troubled'' is used to refer to
any of the triggering events listed in Sec. 750.1(e)(1)(ii) of this
final rule.
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The Board recognizes, however, that certain post-employment
payments have reasonable business purposes. Accordingly, the final rule
includes several ``exceptions'' to the general prohibition against
golden parachutes to allow FICUs to offer, consistent with normal
business practice, ``bona fide'' deferred compensation plans and
``nondiscriminatory'' severance pay plans. The rule also includes an
exception to permit a troubled FICU, with NCUA's prior approval, to
hire and agree to pay a golden parachute to competent management to
assist in bringing a troubled credit union back to financial health.
Additionally, the final rule permits limited golden parachute payments,
with prior NCUA approval, in circumstances involving the merger of a
troubled FICU and contains a general exception provision to allow an
FICU to seek NCUA approval to pay an otherwise prohibited golden
parachute.
Summary of Indemnification Provisions
The final rule prohibits FICUs, regardless of their financial
condition, from paying or reimbursing an IAP's legal or other
professional expenses incurred in an administrative or civil action
instituted by NCUA or the appropriate state regulatory authority where
the IAP is assessed a civil money penalty, removed from office or is
required to cease and desist from an action or take an affirmative
action described in section 206 of the FCU Act. 12 U.S.C. 1786. Federal
credit unions may indemnify their officials and current and former
employees in accordance with 701.33(c) of the NCUA regulations, 12 CFR
701.33(c). That section sets forth authority and restrictions on an FCU
providing indemnification of officials and employees ``for expenses
reasonably incurred in connection with any judicial or administrative
proceedings to which they are or may become parties by reason of their
performance of their official duties.'' 12 CFR 701.33(c)(1). Federally
insured, state-chartered credit unions look to state law for their
general indemnification authority. This part 750 contains restrictions
on the ability of all FICUs to provide indemnification payments to
credit union officials, but the restrictions apply only in the limited
circumstances described in the rule, i.e., in the context of an
administrative enforcement action brought by NCUA or the appropriate
state regulatory authority. This part would, accordingly, take
precedence in that specific instance over broader, generally applicable
provisions of Sec. 701.33 or of state law and regulation.
The final rule does permit FICUs to purchase reasonable commercial
insurance policies or fidelity bonds. The final rule also allows for
partial indemnification in circumstances in which there is a formal and
final adjudication or finding in a settlement
[[Page 30512]]
that the IAP has not violated certain laws or regulations or has not
engaged in certain unsafe or unsound practices or breaches of fiduciary
duty. In these instances, indemnification would be permitted for only
that portion of the legal or professional expenses attributable to the
charges for which there has been a finding in favor of the IAP.
FICUs may also advance funds to pay reasonable legal fees and other
professional expenses (excluding judgments and penalties) for an IAP's
defense of an administrative action under certain circumstances.
Specifically, the final rule permits an FICU to advance reasonable
legal expenses to an IAP directly if its board of directors, in good
faith, makes certain specific findings and the IAP provides a written
affirmation and agrees in writing to reimburse the FICU if the
administrative action ultimately results in a final order against the
IAP.
Application to Existing Employment Contracts
The Board does not intend for the provisions in the rule
restricting golden parachute payments to have a retroactive
application. Accordingly, the final rule applies to all new employment
contracts or arrangements entered into on or after the rule's effective
date, as well as to existing contracts or arrangements that are renewed
or materially modified in any way on or after the final rule's
effective date. The Board adopts a similar construction for
indemnification obligations that are specifically addressed in an
employment contract. However, to the extent that an FICU's
indemnification provisions are reflected in a general policy statement
or a bylaw provision with general applicability, the Board takes the
view that, following the effective date of the final rule, the policy
or bylaw must be interpreted so as to give effect to the rule's
prohibitions.
With respect to the golden parachute provisions, the final rule
does not apply to contracts already in existence on the rule's
effective date that contain reasonable provisions relating to the
entitlement of an IAP to a payment that falls within the definition of
a golden parachute. Thus, existing employment contracts that were legal
when made and negotiated at arm's length will not be affected by the
rule. The Board expects FICUs will, at the first opportunity, such as
at renewal, renegotiate existing employment contracts to bring them
into compliance with the rule. Moreover, on or after the effective date
of the final rule, its restrictions are applicable, even in the case of
an FICU in a healthy condition that enters into a contract or
arrangement for payment of a golden parachute to an IAP. Should that
FICU subsequently fall into a troubled condition, the provisions in the
rule would apply to the contract and would govern whether or not the
payment called for in the contract could be made.
III. Detailed Analysis
A detailed analysis and summary of the specific comments pertaining
to the final rule's key provisions follows.
Definitions
Section 750.1 contains definitions applicable to this part. The key
definitions are discussed below.
``Bona fide Deferred Compensation Plan or Arrangement''
This definition, which appears in the final rule as Sec. 750.1(c),
will permit FICUs to continue to provide deferred compensation plans,
including supplemental retirement benefits and nonqualified deferred
compensation plans, consistent with normal business practices.
Two commenters suggested that language dealing with this subject
(Sec. 750.1(d)(3)(iii) in the proposed rule) should be clarified.
These commenters noted that, while typically nonqualified deferred
compensation plans vest if the participant remains employed to a
specific date, benefits also vest if, prior to the specified vesting
date, the participant dies or becomes disabled; in some plans,
involuntary termination without cause may also result in vesting. As
proposed, Sec. 750.1(d)(3)(iii) required the IAP to have a vested
right ``at the time of termination of employment'' to payments under
the deferred compensation plan. Narrowly interpreted, commenters felt
this language could be ambiguous with regard to circumstances where a
participant vests in the benefit upon death, disability or involuntary
termination without cause. Their concern was whether such an occurrence
might trigger the restrictions pertaining to golden parachutes.
The Board agrees that this language should not be interpreted to
exclude or limit an IAP who vests by death, disability, or, where
applicable, involuntary termination without cause, and notes that
proposed Sec. 750.1(f)(2)(iii) specifically excluded ``any payment
made pursuant to a bona fide deferred compensation plan or
arrangement'' from the definition of ``golden parachute payment.'' As
such, a payment to an IAP who vests in a nonqualified deferred
compensation plan by virtue of the provisions in that plan is not a
golden parachute payment for the purposes of this rule. Accordingly,
the definition for ``bona fide deferred compensation plan or
arrangement'' is adopted in final as proposed. As a technical
amendment, the final rule redesignates Sec. 750.1(d) as Sec.
750.1(c).
``Golden Parachute Payment''
Proposed Sec. 750.1(f) defined a ``golden parachute payment'' as
any payment (or agreement to make any payment) to an IAP that is
contingent on the termination of that party's employment and received
when the FICU making the payment is insolvent, in conservatorship,
rated CAMEL 4 or 5, undercapitalized (for corporates), subject to a
proceeding to terminate or suspend its share insurance, or in an
otherwise troubled condition, as defined in Sec. 701.14(b)(3) and (4).
The proposed golden parachute definition provided exceptions for
certain qualified pension or retirement plans under section 401 of the
Internal Revenue Code (IRC); employee benefit plans that are
permissible under Sec. 701.19; bona fide deferred compensation plans;
certain death and disability payments; certain ``nondiscriminatory''
severance plans; payments required by state law; and payments that the
Board has determined permissible under Sec. 750.4. These types of
payments would not be considered golden parachute payments for purposes
of the rule. The Board adopts Sec. 750.1(f) substantially as proposed,
with the exception of a revision pertaining to Sec. 457 plans, as
described in more detail below. For purposes of clarification, the
Board has also revised the definition of ``Benefit Plan'' so it is now
clear that, to the extent such a plan also exhibits characteristics of
a deferred compensation or severance plan, it must meet the more
specific requirements (i.e., ``bona fide'' and ``nondiscriminatory,''
respectively) in the rule that apply before payments under such plans
will be permissible. Additionally, the Board has added where applicable
references to Corporate Risk Information System (CRIS) ratings, which
are the corporate credit union counterpart to CAMEL ratings. Finally,
as a technical amendment, Sec. 750.1(f) has been redesignated as Sec.
750.1(e) in the final rule.
One commenter believed each of the triggering events enumerated in
proposed Sec. 750.1(f)(1)(ii) is unique and FICUs that are either
insolvent, undercapitalized, in conservatorship, rated CAMEL or CRIS 4
or 5, subject to a proceeding to terminate or suspend its
[[Page 30513]]
share insurance or in an otherwise troubled condition should not be
treated in the same manner for the purposes of the rule. Another
commenter believed the phrase ``troubled condition'' was vague.
The Board notes that the triggering events in proposed Sec.
750.1(f)(1)(ii) are statutorily defined in the FCU Act, except for the
``undercapitalized'' standard, which is applicable only to corporates.
See 12 U.S.C. 1786(t)(4)(A)(ii). Moreover, while each is a unique
condition, the Board believes each triggering event poses a risk
sufficient to warrant safeguards to prevent the improper disposition of
FICU assets. The Board also notes that the term ``troubled condition''
is already defined in Sec. 701.14 of NCUA's regulations, which
generally requires newly chartered and troubled credit unions to notify
NCUA of any change in official. See 12 CFR 701.14(b)(3) and (4).
Section 750.1(e)(1)(ii)(C) of the final rule contains a cross-reference
to Sec. 701.14; there is no new definition of ``troubled condition''
created in this rule. The definition of ``troubled credit unions'' set
forth in Sec. 701.14(b)(3) and (4) is not vague: It includes CAMEL and
CRIS ratings of 4 and 5 for natural person and corporate credit unions,
respectively, as well as credit unions receiving assistance under
sections 208 or 216 of the FCU Act. 12 U.S.C. 1788, 1790d.
At least two commenters suggested ``457 deferred compensation
plans'' (457 Plans) should be specifically excluded from the definition
of ``golden parachute payment''. Deferred compensation plans described
in section 457 of the IRC are available for certain state and local
governments and tax-exempt organizations under IRC 501(c), including
Federal credit unions (tax-exempt under IRC 501(c)(1)) and state
chartered credit unions (tax-exempt under IRC 501(c)(14)). These 457
Plans, which can be eligible plans under IRC 457(b) or ineligible plans
under IRC 457(f), allow employees of sponsoring organizations to defer
income into future years, for retirement purposes, thereby reducing
current year income taxes.
The Board agrees 457 Plans should be excluded from the golden
parachute definition. The definition is intended to permit FICUs to
offer reasonable deferred compensation plans that are typical in
executive compensation packages for credit union executives. The Board
recognizes that credit unions, as tax-exempt organizations, are not
able to offer equity-based incentive compensation. Deferred
compensation plans, including 457 Plans, are an important tool for
credit unions to attract executive talent in a competitive market.
Accordingly, the final rule specifically excludes 457 Plans from the
definition of ``golden parachute payment'' in Sec. 750.1(e)(2)(i).
Another commenter asked for clarification that the golden parachute
definition is not intended to extend to collateral assignment, split
dollar employee benefit plans (CASD Plans).
The Board notes Sec. 750.1(f)(2)(ii) of the proposed rule excluded
from the definition of ``golden parachute payment'' employee benefit
plans that are permissible under Sec. 701.19. NCUA's Office of General
Counsel has previously stated FCUs may purchase split dollar life
insurance for the purpose of funding employee benefit plan obligations
under Sec. 701.19. OGC Op. 05-0117 (January 13, 2005); see also OGC
Op. 06-0924 (January 19, 2007). Split dollar life insurance
arrangements can be structured in a number of ways, including an
arrangement known as a CASD Plan. In general, under this arrangement,
an employee owns the insurance policy, while the credit union pays the
premiums. The arrangement is structured as a loan from the credit union
to the employee, with the loan secured by the employee's assignment of
an interest in the policy. To the extent CASD Plans are consistent with
Sec. 701.19, these arrangements are excluded from the golden parachute
definition under Sec. 750.1(e)(2)(ii) in the final rule.
``Nondiscriminatory''
Section 750.1(i) of the proposed rule defined ``nondiscriminatory''
as it relates to severance pay plans or arrangements. Under the
proposal, only ``nondiscriminatory'' severance pay plans or
arrangements would qualify as an exception to the prohibition on golden
parachute payments. To meet the definition of nondiscriminatory under
the final rule, a severance pay plan must apply to all employees of an
FICU who meet reasonable and customary eligibility requirements
applicable to all employees. Disparities in benefits are only
acceptable if based on objective criteria like salary, total
compensation, length of service, job grade or classification (with a
variance in severance benefits relating to any criterion of plus or
minus ten percent). Any group of employees that is designated for a
different level of benefits based on objective criteria must consist of
not less than 33 percent of all employees.
One commenter suggested a greater variance in severance benefits
should be permitted and that the size of employee groups designated for
a different level of benefits should be capped.
The Board recognizes that severance plans providing somewhat more
generous benefits to higher ranking IAPs are typical in the industry
but believes the permitted 10 percent variance and required 33 percent
group size are appropriate to meet this objective. The Board believes
the final rule strikes a reasonable balance to allow FICUs to provide,
if appropriate, severance plans with a modest variance in benefits
while ensuring that such disparities are based on objective criteria to
avoid unwarranted rewards to IAPs. The Board adopts Sec. 750.1(i) as
proposed.
``Prohibited Indemnification Payment''
Under proposed Sec. 750.1(k), a ``prohibited indemnification
payment'' would be defined as any payment or agreement to make any
payment by an FICU to an IAP to pay or reimburse such person for any
civil money penalty, judgment, or other liability or legal expense
resulting from any administrative or civil action by NCUA or the
appropriate state regulatory authority. The rule becomes operative if
the IAP is, in fact, assessed a civil money penalty, removed from
office or required to cease and desist from or take any affirmative
action with respect to the credit union. The definition would not
include any reasonable payment to purchase commercial insurance
policies or fidelity bonds, provided the policy or bond is not used to
pay or reimburse an IAP for the amount of a civil money penalty or
judgment assessed against the IAP. The proposed definition would also
allow partial indemnification in certain circumstances. The Board
adopts Sec. 750.1(k) as proposed.
Several commenters suggested that if an IAP is found not to have
violated the law or breached his or her fiduciary duty, full
indemnification, as opposed to partial indemnification, should be
permitted.
If an IAP is charged with a violation of law and a breach of
fiduciary duty and is ultimately absolved of all charges, then the IAP
will receive full indemnification in such circumstance. The Board
interprets these commenters to be suggesting that, if an IAP is found
not to have violated the law or breached his or her fiduciary duty but,
at the same time, the IAP is found to have engaged in unsafe or unsound
practices, the IAP should nevertheless be fully indemnified. The Board
disagrees. Permitting full indemnification of an IAP, including legal
or professional expenses attributable to charges for which the IAP has
been found liable, would be contrary to the spirit and
[[Page 30514]]
intent of section 206(t) of the FCU Act. Partial indemnification is an
appropriate compromise in circumstances where an IAP is ultimately
absolved of some, but not all, charges. Accordingly, the final rule
permits payments representing a partial indemnification for legal or
professional expenses specifically attributable to charges for which
there has been a formal and final adjudication or finding in connection
with a settlement that the IAP has not violated certain laws or
regulations or has not engaged in certain unsafe or unsound practices
or breaches of fiduciary duty. Partial indemnification is not
permitted, however, in cases where there is a final prohibition order
against the IAP.
One commenter asked for clarification on whether payment by the
FICU of the amount of the deductible under an insurance policy would be
permissible. The permissibility of a particular deductible payment
would depend on the individual policy or bond and the nature of the
insurance claim. Under the final rule, proceeds from an insurance
policy or bond must not be used to pay or reimburse an IAP for the cost
of a civil money penalty or judgment assessed against that IAP. In the
same vein, a FICU may not pay any deductible amount to the extent that
it would apply to any penalty or judgment against an IAP. However, a
FICU may pay a deductible amount that is applied toward legal costs
attributable to charges for which the IAP is ultimately found not
liable.
Prohibited Golden Parachute Payments
Eight commenters provided specific comments on the provision
prohibiting golden parachute payments, proposed in Sec. 750.2. Most of
the comments were not opposed to the rule but offered suggestions for
improvement.
Several commenters expressed concern that the rule penalizes IAPs
regardless of their culpability and suggested golden parachute payments
should be permissible to IAPs who were not responsible for causing or
contributing to the FICU's troubled condition.
The Board emphasizes that the final rule does not create a blanket
prohibition on golden parachute payments. The final rule contains
several exceptions to avoid unfairly prohibiting payments to
individuals who were not responsible for causing or contributing to the
FICU's troubled condition. As discussed in more detail below, a FICU
may obtain approval to make or agree to make a golden parachute payment
under certain circumstances. Where an IAP is not responsible for
causing or contributing to the FICU's troubled condition, an FICU may
seek approval from NCUA to pay a golden parachute payment to the IAP
under the general exception in Sec. 750.4(a)(1).
Permissible Golden Parachute Payments
Section 750.4 of the proposal included three major exceptions to
the general prohibition on golden parachute payments. The exceptions
would permit, in certain circumstances, payments that would otherwise
satisfy the definition of a prohibited golden parachute payment.
First, the proposal included a general exception to permit golden
parachute payments where the Board, with written concurrence of the
appropriate state supervisory authority in the case of a state
chartered credit union or corporate credit union, determines such a
payment is permissible.
Second, the proposal included an exception to allow an FICU in a
troubled condition to agree to pay a golden parachute payment in order
to hire new management to help bring a troubled FICU back to sound
financial health. This exception was intended to ensure an FICU can
attract qualified senior management with appropriate expertise to help
improve a troubled FICU's financial condition. An FICU would be
required to notify and obtain the written permission of the Board, and,
if applicable, the concurrence of the state supervisory authority,
before employing this exception to commit to or make a golden parachute
payment.
Third, the proposed rule included an exception to allow FICUs to
offer reasonable severance plan payments in the context of a merger
involving a troubled credit union. The merger must be unassisted, that
is, without assistance from, and at no cost to, NCUA or the National
Credit Union Share Insurance Fund. Reasonable severance arrangements
related to an unassisted merger must not exceed twelve months' salary.
Additionally, under the proposal, an FICU would be required to obtain
the written consent of the Board before making the severance payment.
In applying to the Board for any of the three exceptions discussed
above, the FICU would be required to demonstrate that the IAP does not
bear any responsibility for the troubled condition of the FICU.
Specifically, under the proposal, an FICU must demonstrate that it does
not possess, and is not aware of, any information providing a
reasonable basis to believe that the IAP:
Has committed any fraudulent act or omission, breach of
trust or fiduciary duty, or insider abuse;
Is substantially responsible for the insolvency of, the
appointment of a conservator or liquidating agent for, or the troubled
condition of the FICU; or
Has violated or conspired to violate any applicable
Federal or state law or regulation or certain specified criminal
provisions of the United States Code.
Under the proposal, the Board would consider the following factors
in determining whether to permit a golden parachute payment:
Whether, and to what degree, the IAP was in a position of
managerial or fiduciary responsibility;
The length of time the IAP was affiliated with the FICU,
and the degree to which the proposed payment represents a reasonable
payment for services rendered over the period of employment; and
Any other factors or circumstances which would indicate
that the proposed payment would be contrary to the intent of section
206(t) of the FCU Act.
One commenter stated that, in the case of unassisted mergers,
severance package decisions should be left to the surviving credit
union's management to decide. This commenter also suggested severance
packages of 24 months' pay should be permitted under the rule to more
accurately reflect common industry standards.
The Board is not convinced a modification to the proposed exception
for severance payments made in connection with unassisted mergers is
necessary. While the Board believes it is important to provide an
exception for circumstances involving payments made in connection with
an unassisted merger involving a troubled credit union, reasonable
limits need to be placed on such payments. In the Board's opinion, 12
months' pay is an appropriate severance payment in the event of an
unassisted merger.
None of the comment letters specifically addressed the other
proposed exceptions. As such, the Board adopts Sec. 750.4,
substantially as proposed, in the final rule. Minor technical
modifications have been made, however, to provide that requests for
permission to make a golden parachute payment under Sec. 750.4 must be
submitted to ``NCUA'' rather than ``the Board.'' Additionally, more
detailed filing instructions, further discussed below, are provided in
Sec. 750.6 of the final rule to clarify the approval process,
including provisions governing the right to appeal an initial adverse
decision to the Board.
The Board also emphasizes that some of the general concerns
expressed by commenters about the golden parachute provisions should be
alleviated by the
[[Page 30515]]
exceptions available in Sec. 750.4, particularly the general exception
in Sec. 750.4(a)(1).
Prohibited Indemnification Payments
The most prevalent concerns raised by commenters were with regard
to the indemnification provisions in the proposed rule. The majority of
commenters were either opposed to or concerned about the proposed
indemnification provisions. Six commenters opposed the proposed rule in
full due to the indemnification provisions. Another eight commenters
either opposed one or more aspects of the proposed indemnification
provisions, expressed concern with some aspect of the provisions, or
offered suggestions on how the rule could be improved or clarified.
Four commenters did not provide any comments on the indemnification
provisions.
Of the commenters providing specific comment on the proposed
indemnification provisions, most expressed concern that the rule would
make it difficult, if not impossible, to provide any indemnification to
credit union volunteers, thus deterring qualified and experienced
individuals from credit union service. Credit union board members serve
without pay, on a voluntary basis. Several commenters noted the unique
nature of voluntary credit union service, and expressed concern that
individuals will be unwilling to serve as board members if they
perceive their personal net worth to be at risk because the FICU cannot
offer them protection against the potential of personal financial
exposure.
The Board does not agree with these commenters. While recognizing
that credit unions' voluntary governance structure presents unique
recruitment and retention challenges, the scope of the rule is very
limited. The indemnification limitations apply only to administrative
actions brought by NCUA or appropriate state regulator. Such actions
are not only rare, but most often take the form of either a removal
action or an action to prohibit an individual from serving on behalf of
an insured depository institution in the future. These actions do not
typically threaten the individual credit union official with
significant exposure to personal liability. Moreover, the Board
emphasizes that the rule does not create a blanket prohibition on
indemnification payments. Under certain conditions, which are described
in more detail below, an FICU may make indemnification available to an
IAP unless or until the administrative proceeding or civil action
results in civil money penalties, removal or prohibition, or an order
against the IAP to cease and desist from or take any affirmative action
with respect to the credit union.
Several commenters argued the proposed indemnification provisions
may interfere with an IAP's right to counsel. One commenter argued that
if IAPs must advance their own legal expenses, they will obtain the
most affordable representation, as opposed to the best available
representation, in their defense of an administrative action. One
commenter suggested that, in prohibiting the advancement of legal
expenses, the rule would incentivize IAPs to agree to fines or admit
liability in an administrative action to avoid advancing their own
personal funds to absolve themselves of the charges brought against
them. On the other hand, another commenter stated the rule would be a
disincentive to settlement since indemnification payments are
prohibited where the settlement provisions are adverse for the IAP. One
commenter also suggested NCUA would effectively be depriving IAPs the
right of judicial review because indemnification is unavailable
following an adverse outcome in an administrative action.
The Board disagrees with these commenters. First, the Board does
not agree with the contention that a reasonable limitation on
indemnification where an IAP is subject to an adverse final order in an
administrative action, such as that proposed, interferes with an IAP's
due process rights or is otherwise contrary to public policy. While
IAPs may have to use their own funds to pay for or reimburse legal
expenses in their defense of an administrative action, IAPs maintain
their fundamental right to counsel. Similarly, IAPs maintain their
right of judicial review even if indemnification is prohibited. The
proposed rule's limitations on indemnification would not disturb an
IAP's right to appeal a final administrative order to the U.S. Court of
Appeals; furthermore, if the appellate court reversed an administrative
order, then the IAP would again be entitled to indemnification. Second,
under the proposal an FICU can advance reasonable legal expenses to
IAPs directly to assist in defending themselves against administrative
actions. While proposed Sec. 750.1(k) defined ``prohibited
indemnification payment'' as any payment for the benefit of an IAP to
pay or reimburse such person for, among other things, ``any legal
expense'' resulting from an administrative action, this statement was
qualified with the language: ``that results in a final order or
settlement [against the IAP]''. Thus, under the proposal, an
indemnification payment would not be prohibited unless and until the
administrative action resulted in a final order or settlement pursuant
to which the IAP is assessed or agrees to a civil money penalty,
removal from office, prohibition from participating in the conduct of
the affairs of an insured credit union, or cease and desist from or
take an affirmative action described in section 206 of the FCU Act. 12
U.S.C. 1786.
Proposed Sec. 750.5 then described the circumstance when an
indemnification payment would be permissible; specifically, where the
FICU's board of directors makes a good faith determination, after due
investigation, that:
The IAP acted in good faith and in a manner he or she
believed to be in the best interests of the FICU;
The payment will not materially adversely affect the
FICU's safety and soundness;
The payments do not ultimately become prohibited
indemnification payments as defined in Sec. 750.1(k), that is, the
administrative action does not ultimately result in a civil money
penalty, removal order, or cease and desist order against the IAP; and
The IAP agrees in writing to reimburse the FICU, to the
extent not covered by payments from insurance, for ``that portion of
the advanced indemnification payments, if any, which subsequently
becomes a prohibited indemnification payment.'' (Emphasis added).
Read together, the proposed provisions would allow for reasonable
indemnification payments and the advancement of legal expenses to
assist IAPs in their defense of administrative actions under certain
conditions. To alleviate commenters' concerns, however, the Board has
elected to make several modifications in Sec. 750.5 of the final rule
to clarify the circumstances under which indemnification will be
permissible. These modifications are discussed more fully below.
Permissible Indemnification Payments
Several commenters suggested changes or clarifications with regard
to proposed Sec. 750.5. As discussed above, a number of commenters
expressed concern that the proposal would not permit the advancement of
legal funds, essentially depriving an IAP of the right to counsel and
otherwise eroding principles of due process.
Additionally, several commenters opposed the requirement that a
FICU's board of directors make a ``good faith determination'' that an
indemnification
[[Page 30516]]
payment will not ultimately become prohibited. These commenters
characterized the requirement as overly subjective, insofar as it
involves, in their view, the interpretation of law and facts and places
an unrealistic expectation on the FICU board to predict the outcome of
an administrative action. Thus, according to these commenters, the
determination should not reasonably be required to be made by a FICU
board. Some commenters expressed concern that NCUA could second guess
the credit union's good faith decision to indemnify an IAP and noted
there are no safeguards to preclude NCUA from disagreeing with a
board's good faith determination and blocking the indemnification
payment. One commenter also disagreed with proposed Sec. 750.5(a)(4),
which would require an IAP to agree to reimburse the FICU, to the
extent not covered by payments from insurance and bonds, for that
portion of the advanced indemnification payments for which the IAP has
ultimately been found liable. This commenter argued that such a
requirement would essentially render futile the mitigating purpose of
the exception.
To both alleviate concerns regarding the advancement of legal
expenses and to provide clarification about the ``good faith
determination'' requirement, the Board is modifying Sec. 750.5(a) of
the final rule. Under the final rule, an FICU may make or agree to make
reasonable indemnification payments to an IAP, including advancing
funds to pay or reimburse reasonable legal fees and other professional
expenses incurred by an IAP in an administrative proceeding or civil
action initiated by NCUA or a state regulatory authority. The decision
to approve payment of such funds requires the FICU's board of directors
to make a good faith determination, after due consideration, that:
The IAP acted in good faith and in a manner he or she
believed to be consistent with his or her fiduciary duty; \5\ and
---------------------------------------------------------------------------
\5\ Directors of Federal credit unions have a fiduciary duty to
act in the best interest of the members. By necessary implication,
an FCU's officers and employees, who are under the oversight and
direction of the board, have the same obligation. See 75 FR 81378
(December 28, 2010); 12 CFR 701.4. Directors and officers of credit
unions chartered at the state level should look to applicable
standards as contained in state law to determine the scope and
extent of their duties. The text of the rule has been clarified to
reflect this distinction.
---------------------------------------------------------------------------
The payment will not materially adversely affect the
FICU's safety and soundness.
The Board has also determined to clarify that the FICU board of
directors' determination as to whether or not an advance is appropriate
should take into consideration the ability of the affected IAP to repay
the advance if required. This would include, for example, a review of
the affected individual's financial circumstances, including whether or
not he or she has collateral that might be pledged to secure the
repayment obligation. Accordingly, the rule text includes this element
as part of the board's due consideration.
The IAP will be required to provide:
A written affirmation of his or her good faith belief that
the IAP acted in manner he or she believed to be consistent with his or
her fiduciary duty; and
A written agreement to reimburse the FICU, to the extent
not covered by payments from liability insurance or surety bond, for
that portion of the advanced indemnification payment which ultimately
becomes a prohibited indemnification payment as defined in Sec.
750.1(k).
An indemnification payment can ultimately become a prohibited
indemnification payment because of the entry of a final order or
settlement pursuant to which the IAP is assessed a civil money penalty,
subject to a prohibition or removal order, or required to cease and
desist from or take any affirmative action described in section 206 of
the FCU Act. If such a final order or settlement is the result, then
the IAP must reimburse the FICU for all legal and professional fees
advanced. Moreover, the FICU must not, under any circumstance, agree to
reimburse any civil money penalty actually entered against the IAP.
The Board believes the final rule is clear in describing how an
FICU may provide for the advancement of legal and other professional
expenses in appropriate circumstances. The modifications also provide
greater clarification about the conditions under which indemnification
payments will be permitted under Sec. 750.5. Further, the added
requirement that an IAP provide a written affirmation of a good faith
belief that he or she acted in a manner believed to be in the best
interests of the members will assist the FICU's board in conducting its
own due diligence investigation and determination that the ``good
faith'' standard has been met.
The Board believes the new provisions in Sec. 750.5 are consistent
with the spirit and intent of Sec. 206(t) of the FCU Act and
effectively balance the interest in allowing for the protection of
volunteer officials while preventing the improper use of FICU funds to
unjustly reward IAPs who are not deserving of indemnification.
Additionally, as discussed above, for purposes of clarification the
final rule makes a generic reference to an IAP's fiduciary duty, rather
than referring specifically to a duty to serve the ``best interests of
the institution.'' This avoids inconsistency with the NCUA's recent
rule outlining the fiduciary duties and responsibilities of Federal
credit union directors, (See, 12 CFR 701.4), while recognizing that
applicable standards governing conduct and duties of IAPs of state
chartered institutions are established by state law. See footnote 5.
Filing Instructions
Section 750.6 of the final rule is revised to provide greater
detail about the procedures for submitting written requests to make
excess nondiscriminatory severance plan payments pursuant to Sec.
750.1(e)(2)(v) and golden parachute payments permitted by Sec. 750.4.
The final rule clarifies that, in the case of a Federal or state
chartered natural person credit union, such written requests must be
submitted to the NCUA regional director for the region in which the
credit union is located. In the case of a Federal or state chartered
corporate credit union, such written requests must be submitted to the
Director of the Office of Corporate Credit Unions. Additionally, the
final rule clarifies that, in the case of a state chartered natural
person or corporate credit union, where written concurrence by the
state supervisory authority is required, the requesting party must
submit a copy of its written request to the state supervisory authority
where the credit union is located.
The Board has also determined, on its own, to add provisions to
this section of the rule outlining a process by which a requester may
appeal an adverse decision to the Board. The provisions, at new
subsection (b), include time frames and procedural considerations and
are modeled on the provisions found elsewhere in NCUA's regulations
governing the appeal of creditor and share insurance claims. See 12 CFR
709, 745, 747.
IV. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact a rule may have on a
substantial number of small entities (primarily those under ten million
dollars in assets). This rule does not impose any regulatory burden but
prohibits improper golden parachute and indemnification payments to
IAPs by FICUs in certain circumstances.
[[Page 30517]]
Accordingly, it will not have a significant economic impact on a
substantial number of small credit unions, and therefore, no regulatory
flexibility analysis is required.
Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency by rule creates a new paperwork burden on regulated
entities or modifies an existing burden. 44 U.S.C. 3507(d). For
purposes of the PRA, a paperwork burden may take the form of a either a
reporting or a recordkeeping requirement, both referred to as
information collections. Part 750 will impose new information
collection requirements. Specifically, Sec. 750.6 will require
requests for an FICU to make nondiscriminatory severance plan payments
under Sec. 750.1(e)(2)(v) and golden parachute payments permitted by
Sec. 750.4 to be submitted in writing to NCUA.
In FY 2009, there were 351 problem FICUs with CAMEL 4 or 5 ratings.
Of those, 156 FICUs had less than $10 million in total assets and 117
FICUs had between $10 million and $100 million in total assets. As of
year-end 2010, there were 365 CAMEL 4 and 5 FICUs. Of those, 163 had
less than $10 million in assets and 130 had total assets between $10
million and $100 million. Smaller FICUs are unlikely to seek NCUA
approval to make golden parachute payments because these payments are
more typically seen in the executive compensation of larger, more
complex FICUs. Of the remaining larger, problem FICUs, NCUA anticipates
no more than 20 percent would seek NCUA approval to make a golden
parachute payment. Accordingly, NCUA estimates that 15 FICUs will need
to solicit NCUA approval in advance of making a severance or golden
parachute payment within the scope of the proposed rule and that
preparing the request for approval may take four hours: 15 FICUs x 4
hours = 60 hours.
As required by the PRA, NCUA has submitted a copy of this final
regulation to the Office of Management and Budget (OMB) for its review
and approval.
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).
Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness 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 APA. 5
U.S.C. 551. NCUA does not believe this final rule is a ``major rule''
within the meaning of the relevant sections of SBREFA. NCUA has
submitted the rule to the Office of Management and Budget for its
determination in that regard.
List of Subjects
12 CFR Part 704
Credit unions, Corporate credit unions, Reporting and recordkeeping
requirements.
12 CFR Part 741
Bank deposit insurance, Credit unions, Reporting and recordkeeping
requirements.
12 CFR Part 750
Credit Unions, Golden parachute payments, Indemnity payments.
Dated: By the National Credit Union Administration Board, this
19th day of May 2011.
Mary F. Rupp,
Secretary of the Board.
For the reasons discussed above, NCUA amends 12 CFR parts 704 and
741, and adds part 750 of title 12, chapter VII, of the Code of Federal
Regulations as follows:
PART 704 --CORPORATE CREDIT UNIONS
0
1. The authority citation for part 704 continues to read as follows:
Authority: 12 U.S.C. 1766(a), 1781, 1789.
Sec. 704.20 [Removed]
0
2. Remove Sec. 704.20.
PART 741--REQUIREMENTS FOR INSURANCE
0
3. The authority citation for part 741 continues to read as follows:
Authority: 12 U.S.C. 1757, 1766(a), 1781-1790, and 1790d; 31
U.S.C. 3717.
0
4. Add new Sec. 741.224 to read as follows:
Sec. 741.224 Golden parachute and indemnification payments.
Any credit union insured pursuant to Title II of the Act must
adhere to the requirements stated in part 750 of this chapter.
0
5. New part 750 is added to read as follows:
PART 750--GOLDEN PARACHUTE AND INDEMINIFICATION PAYMENTS
Sec.
750.0 Scope.
750.1 Definitions.
750.2 Golden parachute payments prohibited.
750.3 Prohibited indemnification payments.
750.4 Permissible golden parachute payments.
750.5 Permissible indemnification payments.
750.6 Filing instructions; appeal.
750.7 Applicability in the event of liquidation or conservatorship.
Authority: 12 U.S.C. 1786(t).
Sec. 750.0 Scope.
(a) This part limits and prohibits, in certain circumstances, the
ability of Federally insured credit unions, including Federally and
state chartered natural person credit unions and Federally and state
chartered corporate credit unions, to enter into contracts to pay and
to make golden parachute and indemnification payments to institution-
affiliated parties (IAPs).
(b) The limitations on golden parachute payments apply to troubled
Federally insured credit unions that seek to enter into contracts to
pay or to make golden parachute payments to their IAPs. A ``golden
parachute payment'' is generally considered to be any payment to an IAP
which is contingent on the termination of that person's employment and
is received when the Federally insured credit union making the payment
is troubled. The definition of golden parachute payment does not
include payments pursuant to qualified retirement plans, nonqualified
bona fide deferred compensation plans, nondiscriminatory severance pay
plans, other types of common benefits plans, state statutes and death
benefits. Certain limited exceptions to the golden parachute payment
prohibition are provided for in cases involving unassisted mergers and
the hiring of new management to help improve a troubled Federally
insured credit union's financial condition. A procedure is also set
forth to permit a Federally insured credit union to request permission
to make what would otherwise be a prohibited golden parachute payment.
(c) The limitations on indemnification payments apply to all
Federally insured credit unions, including state chartered credit
unions, regardless of their financial health. Generally, this part
prohibits Federally insured credit unions from indemnifying an IAP for
[[Page 30518]]
that portion of the costs sustained with regard to an administrative
proceeding or civil action commenced by NCUA or a state regulatory
authority that results in a final order or settlement pursuant to which
the IAP is assessed a civil money penalty, removed from office,
prohibited from participating in the affairs of a Federally insured
credit union or required to cease and desist from an action or take an
affirmative action described in section 206 of the Federal Credit Union
Act, 12 U.S.C. 1786. There are exceptions to this general prohibition.
First, a Federally insured credit union may purchase commercial
insurance to cover these expenses, except judgments and penalties.
Second, the credit union may advance legal and other professional
expenses to an IAP directly (except for judgments and penalties) if its
board of directors makes certain specific findings and the IAP provides
a written affirmation and agrees in writing to reimburse the credit
union if it is ultimately determined that the IAP violated a law or
regulation or has engaged in certain unsafe or unsound practices or
breaches of fiduciary duty. For Federal credit unions, fiduciary duty
is defined in 701.4 of this chapter. State chartered credit unions
should look to applicable state law.
Sec. 750.1 Definitions.
As used in this part:
(a) Act means the Federal Credit Union Act.
(b) Benefit plan means any employee benefit plan, contract,
agreement or other arrangement subject to the requirements in Sec.
701.19 of this chapter; provided, however, that to the extent the plan
exhibits characteristics of a deferred compensation plan or
arrangement, or severance plan, it meets the criteria set forth in
paragraph (c) or (i), respectively, of this section.
(c) Bona fide deferred compensation plan or arrangement means any
plan, contract, agreement or other arrangement where:
(1) An IAP voluntarily elects to defer all or a portion of the
reasonable compensation, wages or fees paid for services rendered that
otherwise would have been paid to the IAP at the time the services were
rendered, including a plan providing for crediting a reasonable
investment return on the elective deferrals, and the Federally insured
credit union either:
(i) Recognizes compensation expense and accrues a liability for the
benefit payments according to generally accepted accounting principles
(GAAP); or
(ii) Segregates or otherwise sets aside assets in a trust that may
only be used to pay plan and other benefits, except that the assets of
the trust may be available to satisfy claims of the Federally insured
credit union's creditors in the case of insolvency; or
(2) A Federally insured credit union establishes a nonqualified
deferred compensation or supplemental retirement plan, other than an
elective deferral plan described in paragraph (c)(1) of this section:
(i) Primarily for the purpose of providing benefits for certain
IAPs in excess of the limitations on contributions and benefits imposed
by sections 415, 401(a)(17), 402(g) or any other applicable provision
of the Internal Revenue Code of 1986 (26 U.S.C. 415, 401(a)(17),
402(g)); or
(ii) Primarily for the purpose of providing supplemental retirement
benefits or other deferred compensation for a select group of
directors, management or highly compensated employees, excluding
severance payments described in paragraph (e)(2)(v) of this section and
permissible golden parachute payments described in Sec. 750.4; and
(3) In the case of any nonqualified deferred compensation or
supplemental retirement plans as described in paragraphs (c)(1) and (2)
of this section, the following requirements apply:
(i) The plan was in effect at least one year before any of the
events described in paragraph (e)(1)(ii) of this section;
(ii) Any payment made pursuant to the plan is made in accordance
with the terms of the plan as in effect no later than one year before
any of the events described in paragraph (e)(1)(ii) of this section and
in accordance with any amendments to the plan during that one year
period that do not increase the benefits payable under the plan;
(iii) The IAP has a vested right, as defined under the applicable
plan document, at the time of termination of employment to payments
under the plan;
(iv) Benefits under the plan are accrued each period only for
current or prior service rendered to the employer, except that an
allowance may be made for service with a predecessor employer;
(v) Any payment made pursuant to the plan is not based on any
discretionary acceleration of vesting or accrual of benefits that
occurs at any time later than one year before any of the events
described in paragraph (e)(1)(ii) of this section;
(vi) The Federally insured credit union has previously recognized
compensation expense and accrued a liability for the benefit payments
according to GAAP or segregated or otherwise set aside assets in a
trust that may only be used to pay plan benefits, except that the
assets of the trust may be available to satisfy claims of the credit
union's creditors in the case of insolvency; and
(vii) Payments pursuant to the plans must not exceed the accrued
liability computed in accordance with GAAP.
(d) Federally insured credit union means a Federal credit union,
state chartered credit union, or corporate credit union the member
accounts of which are insured under the Act.
(e) Golden parachute payment.
(1) The term golden parachute payment means any payment or any
agreement to make any payment in the nature of compensation by any
Federally insured credit union for the benefit of any current or former
IAP pursuant to an obligation of the credit union that:
(i) Is contingent on, or by its terms is payable on or after, the
termination of the party's primary employment or affiliation with the
credit union; and
(ii) Is received on or after, or is made in contemplation of, any
of the following events:
(A) The insolvency of the Federally insured credit union that is
making the payment; or
(B) The appointment of any conservator or liquidating agent for the
Federally insured credit union; or
(C) A determination by NCUA or, in the case of a state chartered
credit union, the appropriate state supervisory authority that the
Federally insured credit union is in a troubled condition, as defined
in Sec. 701.14(b)(3) and (4) of this chapter; or
(D) The Federally insured credit union has been assigned:
(1) In the case of a Federal credit union, 4 or 5 CAMEL composite
rating by NCUA; or
(2) In the case of a Federally insured state chartered credit
union, an equivalent 4 or 5 CAMEL composite rating by the state
supervisor; or
(3) In the case of a Federally insured state chartered credit union
in a state that does not use the CAMEL system, a 4 or 5 CAMEL composite
rating by NCUA based on core workpapers received from the state
supervisor; or
(4) In the case of a corporate credit union, the corporate credit
union is undercapitalized as defined in Sec. 704.4, or has been
assigned a 4 or 5 Corporate Risk Information System (CRIS) rating by
NCUA in either the Financial Risk or Risk Management composites, or, in
the case of a state chartered corporate credit union, assigned a rating
equivalent to a 4 or 5 CRIS rating in either composite
[[Page 30519]]
by the state supervisory authority (SSA) or by NCUA, based on core exam
work papers received from the SSA (in states not using the CRIS or
CAMEL rating systems); or
(E) The Federally insured credit union is subject to a proceeding
to terminate or suspend its share insurance; and
(iii) Is payable to an IAP whose employment by or affiliation with
a Federally insured credit union is terminated at a time when the
Federally insured credit union by which the IAP is employed or with
which the IAP is affiliated satisfies any of the conditions enumerated
in paragraphs (e)(1)(ii) (A) through (E) of this section, or in
contemplation of any of these conditions.
(2) Exceptions. The term golden parachute payment does not include:
(i) Any payment made pursuant to a deferred compensation plan under
section 457 of the Internal Revenue Code of 1986, 26 U.S.C. 457, or a
pension or retirement plan that is qualified or is intended within a
reasonable period of time to be qualified under section 401 of the
Internal Revenue Code of 1986, 26 U.S.C. 401; or
(ii) Any payment made pursuant to a benefit plan as that term is
defined in paragraph (b) of this section; or
(iii) Any payment made pursuant to a bona fide deferred
compensation plan or arrangement as defined in paragraph (c) of this
section; or
(iv) Any payment made by reason of death or by reason of
termination caused by the disability of an IAP; or
(v) Any payment made pursuant to a nondiscriminatory severance pay
plan or arrangement that provides for payment of severance benefits to
all eligible employees upon involuntary termination other than for
cause, voluntary resignation, or early retirement; provided, however,
that no employee will receive any payment that exceeds the base
compensation paid to the employee during the twelve months, or a longer
period or greater benefit as the NCUA will consent to, immediately
preceding termination of employment, resignation or early retirement,
and the severance pay plan or arrangement must not or cannot have been
adopted or modified to increase the amount or scope of severance
benefits at a time when the Federally insured credit union was in a
condition specified in paragraph (e)(1)(ii) of this section or in
contemplation of that condition without the prior written consent of
NCUA; or
(vi) Any severance or similar payment required to be made pursuant
to a state statute applicable to all employers within the appropriate
jurisdiction, with the exception of employers that may be exempt due to
their small number of employees or other similar criteria; or
(vii) Any other payment NCUA determines to be permissible in
accordance with Sec. 750.4.
(f) Institution-affiliated party (IAP) means any individual meeting
the criteria in section 206(r) of the Act, 12 U.S.C. 1786(r).
(g) Liability or legal expense means:
(1) Any legal or other professional fees and expenses incurred in
connection with any claim, proceeding, or action;
(2) The amount of, and any cost incurred in connection with, any
settlement of any claim, proceeding, or action; and
(3) The amount of, and any cost incurred in connection with, any
judgment or penalty imposed with respect to any claim, proceeding, or
action.
(h) NCUA means the National Credit Union Administration.
(i) Nondiscriminatory means that the plan, contract or arrangement
applies to all employees of a Federally insured credit union who meet
reasonable and customary eligibility requirements applicable to all
employees, such as minimum length of service requirements. A
nondiscriminatory plan, contract or arrangement may provide different
benefits based only on objective criteria, such as salary, total
compensation, length of service, job grade or classification, applied
on a proportionate basis (with a variance in severance benefits
relating to any criterion of plus or minus ten percent) to groups of
employees consisting of not less than 33% of all employees.
(j) Payment means:
(1) Any direct or indirect transfer of any funds or any asset;
(2) Any forgiveness of any debt or other obligation;
(3) The conferring of any benefit; or
(4) Any segregation of any funds or assets, the establishment or
funding of any trust or the purchase of or arrangement for any letter
of credit or other instrument, for the purpose of making, or pursuant
to any agreement to make, any payment on or after the date on which the
funds or assets are segregated, or at the time of or after such trust
is established or letter of credit or other instrument is made
available, without regard to whether the obligation to make such
payment is contingent on:
(i) The determination, after such date, of the liability for the
payment of such amount; or
(ii) The liquidation, after such date, of the amount of such
payment.
(k) Prohibited indemnification payment. (1) Prohibited
indemnification payment means any payment or any agreement or
arrangement to make any payment by any Federally insured credit union
for the benefit of any person who is or was an IAP of the Federally
insured credit union, to pay or reimburse such person for any civil
money penalty, judgment, or other liability or legal expense resulting
from any administrative or civil action instituted by NCUA or any
appropriate state regulatory authority, in the case of a credit union
or corporate credit union chartered by a state, that results in a final
order or settlement pursuant to which such person:
(i) Is assessed a civil money penalty;
(ii) Is removed from office or prohibited from participating in the
conduct of the affairs of the Federally insured credit union; or
(iii) Is required to cease and desist from an action or take any
affirmative action described in section 206 of the Act (12 U.S.C.1786)
with respect to the credit union.
(2) Exceptions. Prohibited indemnification payment does not include
any reasonable payment that:
(i) Is used to purchase a commercial insurance policy or fidelity
bond, provided that the insurance policy or bond must not be used to
pay or reimburse an IAP for the cost of any judgment or civil money
penalty assessed against the IAP in an administrative proceeding or
civil action commenced by NCUA or the appropriate state supervisory
authority, in the case of a credit union or corporate credit union
chartered by a state, but may pay any legal or professional expenses
incurred in connection with a proceeding or action or the amount of any
restitution, to the Federally insured credit union or its conservator
or liquidating agent; or
(ii) Represents partial indemnification for legal or professional
expenses specifically attributable to particular charges for which
there has been a formal and final adjudication or finding in connection
with a settlement that the IAP has not violated certain laws or
regulations or has not engaged in certain unsafe or unsound practices
or breaches of fiduciary duty, unless the administrative action or
civil proceeding has resulted in a final prohibition order against the
IAP.
(l) Troubled condition means any Federally insured credit union
that meets the criteria as described in Sec. 701.14(b)(3) and (4) of
this chapter, or has been granted assistance described in sections 208
or 216 of the Act.
[[Page 30520]]
Sec. 750.2 Golden parachute payments prohibited.
A Federally insured credit union must not make or agree to make any
golden parachute payment, except as permitted by this part.
Sec. 750.3 Prohibited indemnification payments.
A Federally insured credit union must not make or agree to make any
prohibited indemnification payment, except as permitted by this
chapter.\1\
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\1\ The provisions in this part 750 control to the extent of any
inconsistency with Sec. 701.33 of this chapter.
---------------------------------------------------------------------------
Sec. 750.4 Permissible golden parachute payments.
(a) A Federally insured credit union may agree to make or may make
a golden parachute payment if:
(1) NCUA, with written concurrence of the appropriate state
supervisory authority in the case of a state chartered credit union or
corporate credit union, determines the payment or agreement is
permissible; or
(2) An agreement is made in order to hire a person to become an IAP
at a time when the Federally insured credit union satisfies or in an
effort to prevent it from imminently satisfying any of the criteria in
Sec. 750.1(e)(1)(ii), and NCUA, with written concurrence of the
appropriate state supervisory authority in the case of a state
chartered credit union or corporate credit union, consents in writing
to the amount and terms of the golden parachute payment. NCUA's consent
will not improve the IAP's position in the event of the insolvency of
the credit union since NCUA's consent cannot bind a liquidating agent
or affect the provability of claims in liquidation. In the event the
credit union is placed into conservatorship or liquidation, the
conservator or the liquidating agent will not be obligated to pay the
promised golden parachute and the IAP will not be accorded preferential
treatment on the basis of any prior approval; or
(3) A payment is made pursuant to an agreement that provides for a
reasonable severance payment, not to exceed twelve months' salary, to
an IAP in the event of a merger of the Federally insured credit union;
provided, however, that a Federally insured credit union must obtain
the consent of NCUA before making a payment and this paragraph (a)(3)
does not apply to any merger of a Federally insured credit union
resulting from an assisted transaction described in section 208 of the
Act, 12 U.S.C. 1788, or the Federally insured credit union being placed
into conservatorship or liquidation; and
(4) A Federally insured credit union or IAP making a request
pursuant to paragraphs (a)(1) through (3) of this section must
demonstrate it does not possess and is not aware of any information,
evidence, documents or other materials indicating there is a reasonable
basis to believe, at the time the payment is proposed to be made, that:
(i) The IAP has committed any fraudulent act or omission, breach of
trust or fiduciary duty, or insider abuse with regard to the Federally
insured credit union that has had or is likely to have a material
adverse effect on the Federally insured credit union;
(ii) The IAP is substantially responsible for the insolvency of,
the appointment of a conservator liquidating agent for, or the troubled
condition, as defined by Sec. 750.1(l), of the Federally insured
credit union;
(iii) The IAP has materially violated any applicable Federal or
state law or regulation that has had or is likely to have a material
effect on the Federally insured credit union; or
(iv) The IAP has violated or conspired to violate sections 215,
656, 657, 1005, 1006, 1007, 1014, 1032, or 1344 of title 18 of the
United States Code, or sections 1341 or 1343 of that title affecting a
Federally insured financial institution, as defined in title 18 of the
United States Code.
(b) In making a determination under paragraphs (a)(1) through (3)
of this section, NCUA may consider:
(1) Whether, and to what degree, the IAP was in a position of
managerial or fiduciary responsibility;
(2) The length of time the IAP was affiliated with the Federally
insured credit union and the degree to which the proposed payment
represents a reasonable payment for services rendered over the period
of employment; and
(3) Any other factors or circumstances indicating the proposed
payment would be contrary to the intent of section 206(t) of the Act or
this part.
Sec. 750.5 Permissible indemnification payments.
(a) A Federally insured credit union may make or agree to make
reasonable indemnification payments to an IAP, including advanced funds
to pay or reimburse reasonable legal fees or other professional
expenses incurred by an IAP in an administrative proceeding or civil
action initiated by NCUA or a state regulatory authority if:
(1) The Federally insured credit union's board of directors, in
good faith, determines in writing after due investigation and
consideration that:
(i) The IAP acted in good faith and in a manner he or she believed
to be consistent with his or her fiduciary duty;
(ii) The advancement or payment of the expenses will not materially
adversely affect the credit union's safety and soundness; and
(iii) The IAP has the financial capability or has otherwise made
appropriate financial arrangements sufficient to repay the advance if
required in accordance with this rule; and
(2) The IAP provides:
(i) A written affirmation of his or her reasonable good faith
belief that he or she acted in a manner believed to be consistent with
his or her fiduciary duty; and
(ii) An agreement in writing to reimburse the Federally insured
credit union, to the extent not covered by payments from insurance or
bonds purchased pursuant to Sec. 750.1(k)(2)(i), for that portion of
any advanced indemnification payments which ultimately become
prohibited indemnification payments as defined in Sec. 750.1(k); and
(3) The indemnification payments do not ultimately constitute
prohibited indemnification payments as defined in Sec. 750.1(k).
(b) An IAP seeking indemnification payments must not participate in
any way in the board of director's discussion and approval of such
payments; however, the IAP may present his or her request to the board
and respond to any inquiries from the board concerning his or her
involvement in the circumstances giving rise to the administrative
proceeding or civil action.
(c) In the event a majority of the members of the board of
directors are named as respondents in an administrative proceeding or
civil action and request indemnification, the remaining members of the
board may authorize independent legal counsel to review the
indemnification request and provide the remaining members of the board
with a written opinion of counsel as to whether the conditions in
paragraph (a)(1) through (3) of this section have been met. If
independent legal counsel concludes that the conditions have been met,
the remaining members of the board of directors may rely on the opinion
in authorizing the requested indemnification.
(d) In the event all of the members of the board of directors are
named as respondents in an administrative proceeding or civil action
and request indemnification, the board will authorize independent legal
counsel to
[[Page 30521]]
review the indemnification request and provide the board with a written
opinion of counsel as to whether the conditions in paragraph (a)(1)
through (3) of this section have been met. If independent legal counsel
concludes the conditions have been met, the board of directors may rely
on the opinion in authorizing the requested indemnification.
Sec. 750.6 Filing instructions; appeal.
(a) Requests to make excess nondiscriminatory severance plan
payments pursuant to Sec. 750.1(e)(2)(v) and golden parachute payments
permitted by Sec. 750.4 must be submitted in writing to NCUA. In the
case of a Federal or state chartered natural person credit union, such
written requests must be submitted to the NCUA regional director for
the region in which the credit union is located. In the case of a
Federal or state chartered corporate credit union, such written
requests must be submitted to the Director of the Office of Corporate
Credit Unions. The request must be in letter form and must contain all
relevant factual information as well as the reasons why such approval
should be granted. If written concurrence by the state supervisory
authority is required, the requesting party must submit a copy of its
written request to the state supervisory authority where the credit
union is located.
(b) An FICU whose request for approval by NCUA in accordance with
paragraph (a) of this section has been denied may file an appeal of
that denial with the NCUA Board by following the procedures set out in
this paragraph.
(1) The appeal must be in writing and filed with the Secretary of
the Board, National Credit Union Administration, 1775 Duke Street,
Alexandria, VA 22314-3428, and must be filed not later than sixty days
after the initial determination denying the request.
(2) The Board shall make its determination concerning the appeal
based on what is submitted in writing; there shall be no personal
appearance before the Board in connection with an appeal under this
paragraph.
(3) The Board shall make its determination concerning the appeal
within 180 days from the date of its receipt of the appeal. The
decision by the Board on appeal shall be provided to the appellant in
writing, stating the reasons for the decision, and shall constitute a
final agency decision. Failure by the Board to issue a decision on
appeal within the 180-day period provided for under this section shall
be deemed to be denial of such appeal.
(4) A final determination by the Board is reviewable in accordance
with the provisions of chapter 7, title 5, United States Code, by the
United States District Court for the Eastern District of Virginia or
the U.S. District Court for the Federal judicial district where the
FICU's principal place of business is located. Any request for judicial
review under this section must be filed within 60 days of the date of
the Board's final decision. If any appellant fails to file before the
end of the 60-day period, the Board's decision shall be final, and the
appellant shall have no further rights or remedies with respect to the
request.
Sec. 750.7 Applicability in the event of liquidation or
conservatorship.
The provisions of this part, or any consent or approval granted
under the provisions of this part by NCUA, will not in any way bind any
liquidating agent or conservator for a failed Federally insured credit
union and will not in any way obligate the liquidating agent or
conservator to pay any claim or obligation pursuant to any golden
parachute, severance, indemnification or other agreement. Claims for
employee welfare benefits or other benefits that are contingent, even
if otherwise vested, when a liquidating agent or conservator is
appointed for any Federally insured credit union, including any
contingency for termination of employment, are not provable claims or
actual, direct compensatory damage claims against such liquidating
agent or conservator. Nothing in this part may be construed to permit
the payment of salary or any liability or legal expense of any IAP
contrary to 12 U.S.C. 1786(t)(3).
[FR Doc. 2011-12827 Filed 5-25-11; 8:45 am]
BILLING CODE 7535-01-P