[Federal Register Volume 59, Number 75 (Tuesday, April 19, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9324]
[[Page Unknown]]
[Federal Register: April 19, 1994]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 704
Corporate Credit Unions
AGENCY: National Credit Union Administration (NCUA).
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: Many corporate credit unions are closely tied to credit union
leagues or trade associations through interlocking boards of directors
or common management. The NCUA Board requests comment on whether to
amend its regulations to require that a corporate credit union's board
of directors be independently elected by its members, that the board
represent primarily the interests of those members that are credit
unions, and that management report only to the corporate credit union's
board of directors.
DATES: Comments must be postmarked by June 20, 1994.
ADDRESSES: Send comments to Becky Baker, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria, VA
22314-3428.
FOR FURTHER INFORMATION CONTACT:
D. Michael Riley, Director, Office of Examination and Insurance, (703)
518-6360, or Robert M. Fenner, General Counsel, (703) 518-6540, at the
above address.
SUPPLEMENTARY INFORMATION:
A. Introduction
The corporate credit union system today consists of 44 corporate
credit unions serving the nation's 13,000 natural person credit unions,
with U.S. Central Credit Union in turn serving the corporate credit
unions. The corporate credit union system provides liquidity,
investment, and payment services to credit unions. As of December 31,
1993, the 44 corporate credit unions held about $41 billion in assets,
half of which was reinvested in shares in U.S. Central. Approximately
half of the corporate credit unions are closely tied to state credit
union leagues, either through interlocking boards, management
relationships, or both. In the case of U.S. Central, six of nine board
seats are allotted to trade association representatives: three to the
Credit Union National Association (CUNA), two to the Association of
Credit Union League Executives, and one to the Kansas Credit Union
Association. In addition, U.S. Central's CEO reports to the CEO of
CUNA.
For the reasons discussed below, the NCUA Board is requesting
comment on whether a corporate credit union's board of directors should
be independently elected by its members, primarily represent the
interests of the corporate's member credit unions, and have sole
authority over the management of the corporate credit union. These and
other corporate credit union issues, including investment powers and
capital levels, are currently under review by NCUA as part of a 180-day
study of the corporate system, and the Board may propose specific
regulatory changes at the completion of the study.
B. Background
The history of the ties between corporate credit unions and trade
associations is a long and, for the most part, successful one. It stems
from the credit union movement's long struggle for a national solution
to its liquidity problems. A review of these efforts is essential in
understanding how the present system, with its unusual combination of
private and government entities, was established.
The original draft of the 1934 Federal Credit Union Act contained a
section for a central bank for credit unions. It was dropped in
exchange for a grant of authority for federal credit unions to make
deposits in, and to borrow from, federal reserve banks. Opposition from
the Federal Reserve System led to the striking of this authority.
Federal credit unions were led to believe that, as a compromise, they
would be included in the upcoming legislation to create the Federal
Deposit Insurance Corporation (FDIC). When the legislation was adopted,
however, credit unions were not included.
During the 1940's, credit unions experienced a number of liquidity
problems, especially during the war years of 1941-1945. In response,
the first corporate credit union was organized by credit union leaders
in Kansas in 1951. Also in 1951, the credit union movement secured the
introduction of a bill for a national central bank and seven regional
banks, but Congress failed to address the issue. In the late 1950's,
several bills were considered by Congress for the chartering of central
credit unions which could accept the deposits of federal credit unions.
None of these was adopted.
Forced to address liquidity problems on their own, credit union
leagues began to establish additional state-chartered corporate credit
unions. League officials lent their expertise in helping to start these
corporate credit unions and serving on their boards.
Following severe liquidity problems in 1966 and 1969, the credit
union movement again petitioned Congress for a central bank.
Congressman Wright Patman (D-TX) introduced a bill to create a national
credit union bank in 1971, but did not secure enactment. He tried again
in 1973, once more unsuccessfully.
Realizing that credit union system liquidity and investment needs
would continue to be addressed in the private sector, CUNA worked to
establish a central institution to serve corporate credit unions,
securing a charter for U.S. Central Credit Union from the State of
Kansas in 1974. In 1980, legislation was passed enabling U.S. Central
and the other corporate credit unions to be designated as ``bankers
banks,'' with access to the Federal Reserve System. By the early
1980's, most states had established corporate credit unions.
The financial reform bills of the early to mid-1970's advanced the
concept of a central liquidity facility for credit unions, rather than
a central bank. The credit union movement eventually supported the
establishment of such a facility to serve as a backup for the private
system. The Central Liquidity Facility (CLF) was officially established
November 1978 and continues in its role of providing a government-
operated source of liquidity for the credit union system.
The credit union movement must be acknowledged for successfully
establishing a private system which has met the liquidity needs of
credit unions and provided services in the areas of investments,
securities safekeeping, payment systems, and correspondent services.
This corporate credit union system, while encountering some problems,
has nevertheless done an admirable job of meeting the needs of credit
unions over an extended period of time.
C. Regulatory History
The history of NCUA's regulatory efforts in this area reflects its
concern regarding the control and direction of corporate credit unions.
Until 1979, only natural person members of a corporate credit union
were permitted to serve on the board of directors. In 1979 the NCUA
Board issued a final rule permitting member credit unions to appoint
representatives to the corporate credit union. See 44 FR 58496, Oct.
10, 1979. A representative was empowered to attend meetings, vote, and
stand for election on behalf of the member credit union.
In 1980 the Board issued Interpretive Ruling and Policy Statement
(IRPS) 80-3, which clarified that although other non-natural person
members of corporate credit unions were entitled to vote through
agents, such agents could not stand for election in place of the non-
natural person member and were not eligible to serve in any elective or
appointive capacity in the corporate credit union. 45 FR 14202, Mar. 5,
1980.
In 1983 the Board adopted the standard corporate federal credit
union (FCU) bylaws. Article XV, Section 2, addresses conflicts of
interest of officials and employees and is identical to Article XIX,
Section 4, of the standard FCU bylaws for natural person FCUs. It
provides, in relevant part:
No director, committee member, officer, agent, or employee of
this credit union shall in any manner, directly or indirectly,
participate in the deliberation upon or the determination of any
question affecting his/her pecuniary interest or the pecuniary
interest of any corporation, partnership, or association (other than
this credit union) in which he/she is directly or indirectly
interested.
In response to concerns about the implications for a corporate
credit union official who is the designated representative of a member
credit union acting upon matters which may affect that credit union,
the Board noted that the provision was not intended to preclude an
official from participating in the establishment of policy and general
direction of the corporate credit union. The Board stated that it was
intended to preclude an official from taking part in actions which
would represent a true conflict of interest in a meaningful sense
pertaining to his or her credit union.
In 1984 the Board issued a final rule permitting all non-natural
person members of corporate credit unions to designate representatives
to stand for election and hold elective and appointive office. 49 FR
50368, Dec. 28, 1984. In the preamble to the proposed rule, the Board
stated that the restrictions of the regulation and IRPS 80-3 were at
variance with the underlying philosophy of one-member-one-vote. 49 FR
17953, Apr. 26, 1984. In the preamble to the final rule, the Board
stated that because corporate credit unions must primarily serve other
credit unions, the credit union members would continue to influence the
direction, policy, and priorities of the corporates through the
democratic process. The Board also acted to officially repeal IRPS 80-
3, stating that it addressed matters that were either superseded by or
incorporated in the rule.
Over time, a limited number of corporate credit unions developed
financial problems resulting in part from poor quality, preferential
loans made to affiliated leagues, less than arms-length transactions
involving the purchase or lease of league's fixed assets, and the
payment of other league expenses. These incidents occurred in
corporates that were closely tied to leagues at either the board or
management level. In response, the NCUA Board issued a proposed rule in
1991 requiring that at least three members of the corporate credit
union board be individuals who were independent of any organization
with which the corporate credit union was associated, excluding member
credit unions. See 56 FR 11952, Mar. 21, 1991. The Board noted that
many corporate credit unions shared physical space, personnel, and
officials with other organizations, often leagues and service
organizations, creating an environment in which conflicts of interest,
or the appearance of conflicts of interest, could develop. The proposed
rule also contained a recusal provision identical to Article XV,
Section 2, of the standard corporate FCU bylaws.
The final rule, issued on May 7, 1992, see 57 FR 22626, May 28,
1992, gave corporate credit unions an option with regard to board
representation. Section 704.12(a) states that the board of directors of
a corporate credit union is determined as stipulated in the corporate
credit union's bylaws, provided that: (1) At least three directors are
not officers, directors, or employees of an affiliated organization; or
(2) elections are open and independent, with procedures for nominations
by petition and mail balloting.
The proposed recusal provision was also changed. Section
704.12(c)(1) requires recusal for matters involving personal pecuniary
interest. For matters involving the pecuniary interest of an entity in
which an official or employee is interested, Section 704.12(c)(2)
requires recusal only when the amount in question exceeds 5 percent of
the corporate credit union's capital, when measured annually as an
aggregate of business arrangements with the entity. The conflict faced
by corporate FCUs, between the new recusal provision and the bylaws,
was not addressed.
D. Re-examining the System
Although the new regulations have resulted in greater independence
of corporate credit unions, the leagues and trade associations still
wield considerable influence in some institutions. A number of factors
have led the Board to consider whether additional steps should be taken
to ensure that boards of directors and management of corporate credit
unions operate independently of credit union trade associations and
represent the interests of the corporate's member credit unions.
One important factor is the dramatic increase in the scrutiny of
financial institutions by the public, the press, and Congress as a
result of the savings and loan disaster. A primary example of this
scrutiny is the exhaustive General Accounting Office study of credit
unions. This 371-page report was the longest and most detailed of any
financial institution sector and was done at a time when the credit
union movement was recording record growth, record health, and was
experiencing no identifiable problems.
This atmosphere of intense scrutiny, while fully understandable,
means that measures must be taken to ensure that safety and soundness,
and the perception of safety and soundness, are maintained at the
highest possible level. Public confidence in the financial system is
based, after all, more on public perception than on an intimate
knowledge of the workings of the system. The crash of the savings and
loan industry and temporary problems at the FDIC have increased public
scrutiny and mistrust of the financial services industry. In this
atmosphere, it is essential that credit union members and the public be
assured that corporate credit union decision makers act only with the
interests of the corporate credit union's members in mind.
The second factor is a function of credit union growth. The asset
level of corporate credit unions is almost as high as that of the
entire credit union movement when the CLF was created. The magnitude of
the asset growth within the corporate system attracts outside attention
and warrants continuous re-examination for possible weaknesses and/or
areas of improvement.
Third, as previously mentioned, the interrelationships between
corporate credit unions and state trade associations have in some cases
led to the misuse of corporate credit unions' resources to address
budgetary or financial constraints in the trade associations. The NCUA
Board is concerned that such conflicts, or even the appearance of
conflicts in these areas, may threaten the survival of a strong and
independent credit union system.
Finally, the recent publicity concerning U.S. Central's foreign
investments has focused considerable attention to the corporate credit
union system. The Board is concerned that if the system is perceived as
having areas of potential conflict, Congress will introduce legislative
proposals to address them. As mentioned earlier, the Board has
undertaken a study of the corporate credit union system which should
allay these concerns if they are unfounded. If changes are needed,
however, the Board believes it is preferable to address them by
regulation, rather than await Congressional action over which NCUA and
credit unions may have little or no control.
E. Request for Comment
Election of Directors
In consideration of the above factors, the Board requests comment
on changes to NCUA's regulation of corporate credit unions, 12 CFR Part
704, to require that the board of directors of a corporate credit union
be independently elected by its members, with the condition that at
least a majority of the board seats be held by representatives of
member credit unions.
Recognizing that in many instances interlocks exists as a result of
the same representative(s) being separately elected to both the
corporate credit union board of directors and the board of a league or
other association, the NCUA Board also requests comment on whether it
should establish a requirement that all or a majority of the corporate
board be comprised of representatives who do not serve in dual
capacities other than as officials of both the corporate and a member
credit union.
The Board requests comments on other issues related to how best to
accomplish majority representation by credit unions. For example,
elections could be open, with unrestricted nominations. However, once
the maximum number of seats permitted to representatives of non-credit
union members was filled, the remaining seats would go to credit union
representatives, even if a non-credit union representative received
more votes. As an alternative, the Board could revise the regulations
to revert to the limitations of IRPS 80-3, i.e., that non-credit union
members have full voting rights but are not eligible to hold seats or
place representatives on the board of directors. The Board seeks
comments on these and other methods to assure a corporate credit
union's board is representative primarily of the interests of the
corporate's member credit unions.
The Board is aware that this is a departure from the democratic
ideal of equal rights for all members, but believes for the reasons
described above, that it may be in the best interests of credit unions.
As the history of part 704 shows, the rights of various types of
corporate credit union members frequently have differed, as the role of
corporate credit unions has evolved over the years.
In the case of U.S. Central Credit Union, the Board has some
concern that majority representation by its member credit unions may
not be the best solution. While U.S. Central serves other corporate
credit unions, it ultimately has great responsibilities, because of its
central and national role, to natural person credit unions and credit
union members. The Board requests comment on whether classes of
directors should be established at U.S. Central in order to ensure
representation by natural person credit unions and others broadly
representative of the public interest.
Non-natural Person Representation
The Board also seeks comment on whether election or appointment of
a non-natural person member representative to a position in a corporate
credit union should be considered to be an election or appointment of
the individual or the non-natural person member. In IRPS 80-3 the Board
took the position that election or appointment was of the individual,
not the non-natural person member. The Board stated that while the
board of directors of a member credit union (at that time the only non-
natural person member permitted to designate a representative to stand
for election) was free to change its designated representative at any
time, where that representative had been elected to the corporate
credit union's board of directors or elected or appointed to a
committee, revocation of the designation meant that any position held
by that individual must be declared vacant. Such vacancies were to be
filled in accordance with the Article VII, Section 3, of the FCU bylaws
(the corporate FCU bylaws had not yet been issued), which provides that
vacancies on the board, credit committee, or supervisory committee
shall be filled by vote of a majority of the directors then holding
office. The member credit union's new representative did not
automatically assume the old representative's elected or appointed
position.
As discussed above, IRPS 80-3 was repealed in the 1984 revision to
the regulation. However, there was no discussion of NCUA's position on
filling a position when a non-natural person member's designated can no
longer serve or the non-natural person member wishes to change its
designate. Subsequently, NCUA informally took the position that it was
a matter to be determined by each corporate.
The Board notes that there are sound arguments for each position.
In IRPS 80-3, it was observed that where the designated representative
of a non-natural member has been elected or appointed to a position in
the corporate credit union, the voters or appointing official were, at
least in part, swayed by the qualifications of the individual. It was
reasoned that to permit the board of directors of the non-natural
person member to substitute another individual in the place of a
representative who has been elected or appointed to an office defeats
the purpose of an election in the one case and usurps the power of the
appointing official in the other. On the other hand, it is the non-
natural person entity that is the actual member of the corporate credit
union, not the representative, so it can be argued that it is the non-
natural person member that holds the elected or appointed position. As
such the member should have the right to determine who serves as its
representative. The Board seeks comment on whether all corporates
should be required to take the same approach to non-natural person
members and which approach is preferable.
Recusal Provision
Requiring that a majority of the board of directors of a corporate
credit union, but not all, be representatives of member credit unions
means that some board members may be either representatives of other
non-natural person members, such as leagues and service organizations,
or natural person members with ties to such entities. Also, depending
on the Board's ultimate decision on the issue, individual
representatives of member credit unions may, in some cases, continue to
serve on the corporate board and, at the same time, serve on the board
of a league or other association. Finally, conflicts will continue to
arise when matters come before the board of a corporate credit union
that directly involve a member credit union whose representative serves
on the board. Accordingly, the NCUA Board believes that to avoid even
the appearance of a conflict of interest, it is important to have a
strong recusal provision.
To address these concerns, the Board is considering returning to
the language of Article XV, Section 2, of the standard corporate FCU
bylaws, which prohibits directors, committee members, officers, agents,
or employees of corporate credit unions from participation in any
question affecting the pecuniary interest of any organization in which
those individuals are interested. Adopting this language would resolve
the conflict, for corporate FCUs, between the bylaw and the regulation,
and would make the standard uniform for all corporate credit unions.
The Board seeks comment on this idea and on the appropriate definition
of ``interested.''
Management Accountability
Finally, as previously mentioned, the NCUA Board is concerned about
situations in which management of a corporate credit union reports to
the officials of an affiliated league or trade association. For
corporate FCUs, this may violate several provisions of the standard
corporate FCU bylaws. Article VI, Section 5, provides that the board
shall have the general direction and control of the affairs of the
credit union. The bylaw states that the board may delegate the
performance of administrative duties but is not relieved of its
responsibility for their performance. Article VII, Section 6, provides
that the board may employ a management official who shall not be a
member of the board and who shall be under the direction and control of
the board. Although the Board cannot speak to the bylaws of state-
chartered corporate credit unions, the practice of the management of
one entity reporting to officials of another entity violates
fundamental principles of general corporate law. Accordingly, the Board
is considering amending its regulations to require that management of a
corporate credit union report solely to the board of directors of that
credit union.
The Board welcomes comment on these and any other considerations
with respect to the management and control of corporate credit unions.
F. Effect on State-Chartered Corporate Credit Unions
Part 704 applies to all federally insured corporate credit unions.
Further, non-federally insured corporate credit union must agree to
comply with NCUA's corporate credit union regulation as a condition of
receiving funds from natural person FCUs. Thus, the regulatory changes
will affect all corporate credit unions. The Board believes this result
is essential, given that the vast majority of funds held in the
corporate system represent investments by federally insured credit
unions.
By the National Credit Union Administration Board on April 12,
1994.
Becky Baker,
Secretary of the Board.
[FR Doc. 94-9324 Filed 4-18-94; 8:45 am]
BILLING CODE 7535-01-M