Disclosure of Merger Related Compensation Arrangements, 20067-20070 [E7-7608]

Agencies

• National Credit Union Administration

[Federal Register Volume 72, Number 77 (Monday, April 23, 2007)]
[Proposed Rules]
[Pages 20067-20070]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-7608]


-----------------------------------------------------------------------

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 708b


Disclosure of Merger Related Compensation Arrangements

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule with request for comments.

-----------------------------------------------------------------------

SUMMARY: NCUA is issuing a proposed rule on mergers to require all 
federally insured credit unions to include in the merger plan submitted 
to NCUA a description of any arrangements providing a material increase 
in compensation or benefits to senior management officials in 
connection with the merger. The proposed rule also requires federal 
credit unions to disclose the existence of such compensation 
arrangements in the materials provided to members voting on whether to 
approve the merger. The proposed rule will ensure members of a merging 
federal credit union and NCUA are fully informed about arrangements 
providing for a material increase in compensation or benefits to senior 
management officials before considering whether to approve the merger. 
NCUA believes this requirement will assure merger decisions are based 
on the best interests of the members.

DATES: Comments must be received on or before June 22, 2007.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web site: https://www.ncua.gov/news/proposed_regs/
proposed_regs.html. Follow the instructions for submitting comments.
     E-mail: Address to regcomments@ncua.gov. Include ``[Your 
name] Comments on Proposed Rule Part 708b (Disclosure of Merger Related 
Compensation)'' in the e-mail subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for e-mail.
     Mail: Address to Mary Rupp, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.

FOR FURTHER INFORMATION CONTACT: Ross Kendall, Staff Attorney, Office 
of General Counsel, at the above address or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION: 

[[Page 20068]]

A. Background

    The Federal Credit Union Act (Act) authorizes the NCUA Board to 
prescribe rules regarding mergers of federally-insured credit unions 
and changes in insured status and requires written approval of the 
Board before one or more federally-insured credit unions merge. 12 
U.S.C. 1766(a), 1785(b), 1785(c), 1789(a). Part 708b of NCUA's rules 
implements this authority and applies to both corporate credit union 
and natural person credit unions. 12 CFR part 708b. The rule provides 
for NCUA review and approval of any merger involving a federally-
insured credit union. 12 CFR 708b.104(a). Where a merging credit union 
is a federal credit union, members have the right to vote on whether to 
approve the merger, subject to one exception; NCUA may permit a merger 
without a member vote if it determines the FCU is in danger of 
insolvency and a merger will protect the National Credit Union Share 
Insurance Fund. 12 CFR 708b.106, 708b.105(b).
    As with any maturing industry, consolidation in the nation's credit 
unions is occurring and is expected to continue. Efforts to increase 
efficiencies through improved economies of scale, along with 
improvements in information technology and the increasing costs 
associated with compliance, all contribute to the trend toward 
consolidation. The increasingly competitive marketplace for financial 
services in which credit unions operate adds additional pressure to 
consolidate.
    Most of this consolidation is occurring through voluntary mergers 
of credit unions. With the increase in merger activity, some credit 
unions may find themselves in the position of being a potential merger 
partner with more than one other credit union. In this position, 
management of the credit union will naturally want to evaluate 
competing opportunities and should consider which of the potential 
merger partners offers the best fit, in terms of member philosophy and 
continued or expanded services and products for its membership.

B. Proposed Rule

    The NCUA Board is concerned that prospective merger partners may 
seek to improperly influence the outcome of deliberations by a board of 
directors of the merging credit union. The support of senior management 
officials of a credit union considered for merger may influence a 
decision to approve a merger plan with a particular merger partner. 
Thus, a potential merger partner might agree to provide financial 
incentives in exchange for support from senior management.
    This proposed rule would require all federally-insured credit 
unions to describe any financial arrangements providing a material 
increase in compensation or benefit to a senior management official in 
the merger plan submitted to the NCUA. For purposes of the disclosure 
requirement, the proposal defines a material increase as an increase of 
15% above the official's current compensation or $10,000, whichever is 
greater. Compensation includes salary as well as any indirect 
compensation such as bonus, deferred compensation or other financial 
reward. NCUA would determine, on a case by case basis, whether to 
request further details about an arrangement in connection with its 
review of the merger plan.
    Where a merging credit union is federally chartered, the proposal 
would also require disclosure of the existence of a material increase 
in compensation to its members before their vote on the merger. State 
law governs whether members of a state-chartered credit union are 
entitled to vote; therefore, NCUA is only proposing this requirement 
for federal credit unions. Any individual member of a federal credit 
union wishing to review the details of the arrangement would be 
entitled to inspect the credit union's records detailing the 
arrangement. The inspection would be at an office of the credit union 
during regular business hours and a member requesting it would need to 
submit a request in writing to the credit union at least one day before 
the date announced for the meeting called for the purpose of voting on 
the merger.
    NCUA notes that the proposed creation of a member inspection right 
in the context of merger related compensation arrangements is specific 
to these limited circumstances. Simultaneously with the adoption of 
this proposal, NCUA is also proposing a broader, more general rule to 
govern member access to federal credit union records. In accordance 
with settled rules of construction, a more specific provision in a rule 
takes precedence over a broader provision of general applicability. 
Norman j. Singer, statutes and statutory construction, Sec.  51.05 (6th 
Ed., 2000). Thus, a member asserting a right to review documents 
relating to merger related compensation would be entitled to follow the 
procedures outlined in this rule and not the general procedures 
relating to member access to records.
    The proposed rule would permit a member to review merger related 
compensation records without making or retaining copies at ``an'' 
office of the credit union, including branch office locations. The 
Board recognizes that requested documents may be at a credit union 
office at some distance from where members may live and that conducting 
a review may be difficult or expensive for members. The Board expects 
credit unions and their members to work out reasonable arrangements 
about how a review can take place that are mutually acceptable. For 
example, a credit union may agree to provide photocopies to a branch 
office location convenient to the member. The Board solicits comment on 
this subject.
    The NCUA Board believes this proposed rule will help assure that 
management's decision to recommend a merger is based on sound business 
judgment reflecting the best interests of the members. The Board also 
notes the proposal tracks an Office of Thrift Supervision (OTS) 
regulation that requires disclosure of officer compensation, among 
other matters, in a merging thrift's merger approval application; the 
OTS rule states an increase in compensation paid to an officer, 
director or controlling person of a merging federal thrift or savings 
bank is presumed to be unreasonable and a sale of control if it exceeds 
the greater of 15% or $10,000. 12 CFR 563.22(d)(1)(vi)(C). The Board 
also notes comparable disclosure requirements relating to economic 
benefits for directors and senior management officials are in NCUA's 
rule on conversions of insured credit unions to mutual savings banks. 
12 CFR 708a.4(d)(1)(iii).
    The proposed rule addresses arrangements providing material 
economic benefits to board members or senior management officials of 
the merging credit union. The NCUA Board believes these individuals are 
most likely to be in a position to negotiate personally advantageous 
compensation arrangements. The Board also understands retention 
agreements and bonuses for persons holding managerial or technical 
positions may be essential for a successful merger, and the proposed 
rule does not prohibit offering retention agreements or bonuses that a 
continuing credit union believes are appropriate, including 
arrangements affecting senior management officials. In this respect, 
the Board notes it does not intend to substitute its business judgment 
for that of the boards of the merging and continuing credit unions on 
marketplace demands and reasonable compensation arrangements. The 
proposed rule change focuses on

[[Page 20069]]

transparency and the principle that full disclosure usually results in 
more informed and better membership decisions.
    The Board recognizes that, in some cases, officials of the merging 
credit union may be retained by the continuing credit union and 
assigned additional duties with greater responsibilities. In those 
cases, the continuing credit union may offer to pay officials 
relatively greater compensation than they earned with the merging 
credit union. Credit unions should be able to support these types of 
increases in compensation, bonuses, or retention agreements in the 
required disclosures. The proposed rule would simply require a 
description of these arrangements in the merger plan and, in the case 
of a merging federal credit union, disclosure of their existence to the 
membership before their vote on approving the merger.
    State law governs whether members of a merging state chartered 
credit union are entitled to vote on a proposed merger. If a state law 
requires a state supervisory authority's approval, NCUA's rule requires 
evidence that the state supervisory authority has approved the merger 
as part of the material submitted to the appropriate Regional Director. 
12 CFR 708b.104(a)(6). For corporate credit unions, the NCUA Merger and 
Conversion Manual specifies that credit unions submit their merger 
requests to NCUA's Office of Corporate Credit Unions. NCUA 8056/M 6300 
(June 2005).

C. Proposed Amendments

    Definitions. The proposal adds two new definitions to the rule. 
``Merger related financial arrangement'' is defined to mean an increase 
in direct or indirect compensation of 15% or $10,000, whichever is 
greater, that any board member or senior management official of a 
merging credit union may receive in connection with a merger 
transaction. Such an increase is considered material and would need to 
be disclosed. The term does not include an agreement to retain a senior 
management official in a comparable managerial role with the continuing 
credit union, so long as the agreement is limited to retention and does 
not include any financial component resulting in a material increase, 
as defined, above the official's existing compensation package. The 
second new definition, ``senior management official,'' includes the 
chief executive officer (who may hold the title of president or 
treasurer/manager), any assistant chief executive officer, and the 
chief financial officer. This definition conforms to other NCUA rules 
affecting members of senior management of credit unions; see, e.g., 12 
CFR part 703.
    Disclosures. The proposed rule would add to the rule's provisions 
describing the merger plan and the approval of the merger proposal by 
members of the merging credit union. 12 CFR 708b.103(a), 106(a)(2). The 
new provisions require financial arrangements providing a material 
increase in compensation or benefits for senior management officials 
and related to a merger to be described in the merger plan and, in the 
case of a merging federal credit union, disclosed to the membership in 
the balloting materials. These disclosure obligations would only be 
triggered where the proposed financial arrangement results in an 
increase in compensation equal to 15% or $10,000, whichever is greater. 
Furthermore, the rule would simply require that the disclosure to the 
members indicate the existence of a material financial arrangement 
involving one or more senior management officials. Any individual 
member would be entitled to inspect the credit union's records 
pertaining to the arrangement, at the credit union's office during 
business hours.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a proposed rule may have on 
a substantial number of small credit unions (those under ten million 
dollars in assets). Most of the mergers of federal credit unions 
involve small credit unions. In almost all cases, the small credit 
union merges into a much larger continuing credit union. The larger 
credit union is available to assist the small credit union with each 
step in the merger process, keeping the economic impact on the small 
credit union to a minimum. Accordingly, the Board does not anticipate 
that this proposed rule would have a significant economic impact on a 
substantial number of small credit unions, and, therefore, a regulatory 
flexibility analysis is not required.

Paperwork Reduction Act

    The proposed changes to part 708b contain information collection 
requirements. As required by the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)), NCUA is submitting a copy of this proposed rule as 
part of an information collection package to the Office of Management 
and Budget (OMB) for its review and approval for revision of Collection 
of Information, Mergers of Federally Insured Credit Unions, Control 
Number 3133-0024.
    The proposed changes ensure that NCUA has sufficient information to 
determine whether to approve a proposed merger. The changes would also 
help ensure, in the case of a merging federal credit union, that 
members have sufficient and accurate information to exercise their vote 
properly concerning the proposed merger.
    In the five-year period ending June 30, 2006, NCUA approved 1,567 
mergers involving federally insured credit unions. On average for the 
past five years, therefore, there were approximately 313 mergers each 
year that would be covered by the proposed rule. NCUA estimates less 
than one percent of these mergers will involve merger related financial 
arrangements as defined in the proposed rule. NCUA estimates it will 
take the merging credit unions about five hours to describe any merger 
related financial arrangements and include the description in the 
merger plan and, in cases involving a merging federal credit union, to 
make materials available to members upon request. One percent of 313, 
treating the two merging credit unions as one respondent, or 3.1 times 
five hours per respondent equals sixteen (rounding up from fifteen and 
one-half) total annual burden hours associated with this revision to 
the existing collection of information associated with this rule, OMB 
Control Number 3133-0024.

Total Annual Burden Hours = Sixteen

    The Paperwork Reduction Act and OMB regulations require that the 
public be provided an opportunity to comment on the paperwork 
requirements, including an agency's estimate of the burden of the 
paperwork requirements. The NCUA Board invites comment on: (1) Whether 
the paperwork requirements are necessary; (2) the accuracy of NCUA's 
estimates on the burden of the paperwork requirements; (3) ways to 
enhance the quality, utility, and clarity of the paperwork 
requirements; and (4) ways to minimize the burden of the paperwork 
requirements.
    Comments should be sent to: OMB Reports Management Branch, New 
Executive Office Building, Room 10202, Washington, DC 20503; Attention: 
Mark Menchik, Desk Officer for NCUA. Please send NCUA a copy of any 
comments submitted to OMB.
    The Paperwork Reduction Act requires OMB to make a decision 
concerning the collection of information

[[Page 20070]]

contained in these proposed regulations between 30 and 60 days after 
publication of this document in the Federal Register. Therefore, a 
comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days of publication. This does not affect the 
deadline for the public to comment to the NCUA on the proposed 
regulations.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. In 
adherence to fundamental federalism principles, NCUA, an independent 
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies 
with the executive order. The proposed rule would not have substantial 
direct effects on the states, on the connection between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. NCUA has 
determined that this proposed rule does not constitute a policy that 
has federalism implications for purposes of the executive order.

The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this proposed rule would not affect 
family well-being within the meaning of Sec.  654 of the Treasury and 
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 
2681 (1998).

List of Subjects 12 CFR Part 708b

    Credit unions, Mergers of credit unions, Reporting and 
recordkeeping requirements.

    By the National Credit Union Administration Board on April 12, 
2007.
Mary F. Rupp,
Secretary of the Board.
    For the reasons stated above, NCUA proposes to amend 12 CFR part 
708b as follows:

PART 708b--MERGERS OF FEDERALLY-INSURED CREDIT UNIONS; VOLUNTARY 
TERMINATION OR CONVERSION OF INSURED STATUS

    1. The authority citation for part 708b continues to read as 
follows:

    Authority: 12 U.S.C. 1766(a), 1785(b), 1785(c), and 1789(a).

    2. Amend Sec.  708b.2 by removing current alphabetical paragraph 
designations (a) through (k) and adding new definitions of ``merger 
related financial arrangement'' and ``senior management official'' in 
alphabetical order to read as follows:


Sec.  708b.2  Definitions.

* * * * *
    Merger related financial arrangement means a material increase in 
compensation (including indirect compensation, for example, bonuses, 
deferred compensation, or other financial rewards) or benefits that any 
board member or senior management official of a merging credit union 
may receive in connection with a merger transaction. For purposes of 
this definition, a material increase is an increase of 15% or $10,000, 
whichever is greater.
* * * * *
    Senior management official means the chief executive officer (who 
may hold the title of president or treasurer/manager), any assistant 
chief executive officer, and the chief financial officer.
* * * * *
    3. Amend Sec.  708b.103 by redesignating paragraphs (a)(7) through 
(10) as paragraphs (a)(8) through (11) and adding new paragraph (a)(7) 
to read as follows:


Sec.  708b.103  Preparation of merger plan.

    (a) * * *
    (7) Description of any merger related financial arrangement, as 
defined in Sec.  708b.2.
* * * * *
    4. Amend Sec.  708b.106:
    A. By removing the semicolon at the end of paragraph (a)(2)(ii) and 
adding ``,and disclosure of the existence of any merger related 
financial arrangement, as defined in Sec.  708b.2;'' and
    B. By adding a new paragraph (a)(2)(vii) to read as follows:


Sec.  708b.106  Approval of the merger proposal by numbers.

    (a) * * *
    (2) * * *
    (vii) Inform the members they have the right to inspect the credit 
union's records pertaining to any merger related financial arrangement, 
as defined in Sec.  708b.2, by submitting a request in writing to the 
credit union at least one day before the date announced for the meeting 
called for the purpose of voting on the merger. The inspection must 
occur at an office of the credit union during regular business hours 
and is limited to the right to review pertinent documents on site, 
without making or retaining copies.
* * * * *
[FR Doc. E7-7608 Filed 4-20-07; 8:45 am]
BILLING CODE 7535-01-P