Member Inspection of Credit Union Books, Records, and Minutes, 20061-20067 [E7-7610]

Download as PDF 20061 Proposed Rules Federal Register Vol. 72, No. 77 Monday, April 23, 2007 This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. Office of the Secretary 6 CFR Part 37 [Docket No. DHS–2006–0030] RIN 1601–AA37 Minimum Standards for Driver’s Licenses and Identification Cards Acceptable by Federal Agencies for Official Purposes Office of the Secretary, DHS. Notice of public meeting; request for comments. AGENCY: ACTION: The Department of Homeland Security, Office of the Secretary, will hold a public meeting to receive comments on the Notice of Proposed Rulemaking, ‘‘Minimum Standards for Driver’s Licenses and Identification Cards Acceptable by Federal Agencies for Official Purposes,’’ published in the Federal Register on March 9, 2007 (72 FR 10820). We encourage interested parties to attend the meeting and submit comments for discussion during the meeting. In addition, we will also seek comments via email for discussion during the meeting from any party who is unable to attend in person. The webcast of the public meeting will be viewable at http:// www.realidtownhall.com. SUMMARY: Public Meeting: We will hold the meeting on May 1, 2007, from 10 a.m. to 2 p.m. ADDRESSES: We will hold the meeting in Freeborn Hall on the campus of the University of California, Davis. The university is located in the City of Davis, approximately 11 miles west of downtown Sacramento. The street address for Freeborn Hall is 104 Freeborn Hall, One Shields Ave., Davis, CA 95616. FOR FURTHER INFORMATION CONTACT: For information concerning this public meeting, please contact Mike Kangior, U.S. Department of Homeland Security, pwalker on PROD1PC71 with PROPOSALS VerDate Aug<31>2005 16:49 Apr 20, 2007 Jkt 211001 the final rulemaking development process. SUPPLEMENTARY INFORMATION: What Issues Should I Discuss at the Meeting? How Are Comments Being Solicited for This Rulemaking? In addition to the public meeting on May 1, 2007, the Department of Homeland Security is soliciting comments through the following methods: • Federal Rulemaking Portal: http:// www.regulations.gov. Follow the instructions for submitting comments. • Fax: 866–466–5370. • Mail: Paper, disk or CD–ROM submissions can be mailed to the Department of Homeland Security, Attn: NAC 1–12037, Washington, D.C. 20538. Please include the DHS Docket Number, DHS–2006–0030 on any comments submitted to DHS. Individuals that provide comments at the public meeting may also submit comments through one of the above methods. DEPARTMENT OF HOMELAND SECURITY DATES: Washington, DC 20528, at 202–282– 8939. How Can I Get Additional Information, Including Copies of This Notice or Other Related Documents? The Federal Rulemaking Portal at www.regulations.gov maintains the public docket for this proposed rule. The docket number for the rule is DHS– 2006–0030. Comments submitted during the public meeting, and any other documents submitted to DHS at the public meeting, including any comments that were not discussed at the meeting, will become part of this docket and will be available for inspection electronically at http:// www.regulations.gov. Where Can I Get Information on Service for Individuals With Disabilities? To obtain information on facilities or services for individuals with disabilities or to request that we provide special assistance at the public meeting, please contact Mike Kangior as soon as possible. You will find his address and phone number in the FOR FURTHER INFORMATION CONTACT section of this notice. Why Is the Department of Homeland Security Holding This Public Meeting? This meeting serves as an additional opportunity for members of the public to submit comments on the proposed rule to DHS for consideration as part of PO 00000 Frm 00001 Fmt 4702 Sfmt 4702 The public meeting on May 1, 2007 will provide a forum for members of the public to discuss various issues related to the proposed rule. Such issues may include consumer concerns, verification, privacy/security, funding/ implementation and law enforcement. For convenience to public participants who wish to attend the meeting, DHS intends to discuss these issues under the proposed agenda below. What Is the Agenda for the Public Meeting? Agenda The agenda for the meeting on May 1, 2007 is as follows: • Session I—Introduction and Overview. • Session II—Presentation and discussion of public comments. Dated: April 17, 2007. Richard C. Barth, Assistant Secretary of Policy Development. [FR Doc. E7–7655 Filed 4–20–07; 8:45 am] BILLING CODE 4410–10–P NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Part 701 RIN 3133–AD33 Member Inspection of Credit Union Books, Records, and Minutes National Credit Union Administration. ACTION: Proposed rule. AGENCY: SUMMARY: The National Credit Union Administration (NCUA) is issuing a proposed rule on member inspection of federal credit union (FCU) books, records, and minutes. The rule provides that a group of members representing approximately one percent of the membership, with a proper purpose and upon petition, may inspect and copy the nonconfidential portions of the credit union’s books, records, and minutes. This proposal standardizes and clarifies existing member inspection rights. DATES: Comments must be received on or before June 22, 2007. E:\FR\FM\23APP1.SGM 23APP1 20062 Federal Register / Vol. 72, No. 77 / Monday, April 23, 2007 / Proposed Rules You may submit comments by any of the following methods (Please send comments by one method only): • Federal eRulemaking Portal: http:// www.regulations.gov. Follow the instructions for submitting comments. • NCUA Web site: http:// www.ncua.gov/ RegulationsOpinionsLaws/ 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 701.3’’ 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: Paul Peterson or Annette Tapia, Staff Attorneys, at the above address or telephone number (703) 518–6540. SUPPLEMENTARY INFORMATION: ADDRESSES: pwalker on PROD1PC71 with PROPOSALS A. Background This proposed rule provides that a group of members representing approximately one percent of an FCU’s membership, upon petition and with a proper purpose, may obtain access to the nonconfidential portions of the FCU’s books, records, and minutes. FCUs are not-for-profit, memberowned cooperatives organized to provide financial services and products to their members. The financial interests of members in their credit union are similar to the financial interests shareholders have in for-profit corporations. Corporate shareholders have various methods to protect their financial interests in the corporation, including the right at common law and in various state statutes to inspect corporate books and records. Because of the similarity of interests between credit union members and corporate shareholders, NCUA legal opinions going back many years have stated that FCU members may inspect the FCU’s books and records under the same terms and conditions that state corporation law where the FCU is located permits shareholder inspection of corporate records. See, e.g., OGC Ops. 92–0101, 96–0451, and 06–0127B. These opinion letters are available at http:// www.ncua.gov. The NCUA Board believes regulating member inspection of FCU records is preferable to reliance on state VerDate Aug<31>2005 16:49 Apr 20, 2007 Jkt 211001 corporation law. Corporation law on shareholder inspection, for example, varies from state to state, and FCUs should have a consistent standard regardless of an FCU’s location. Some FCUs have branches in multiple states, further complicating the application of state law to inspection requests. In addition, some courts may refuse to apply their corporation law to inspection requests by FCU members or may incorrectly analogize the financial interests of credit union members to those of depositors in a mutual savings bank and deny members inspection on those grounds. See, e.g., Save Columbia Credit Union Committee v. Columbia Credit Union, 139 P.3d 386, 393–95 (Wash. App. 2006) (refusing to apply state corporation law to records inspection request by members of a state-chartered credit union). The Board considered when and why members might want to inspect FCU records. The law charges members with responsibility for important decisions that affect both the FCU and the members’ financial interests. For example, a vote of the FCU’s members is required on the election and removal of directors, mergers, conversion from federal to private account insurance, conversion from a federal to state charter or conversion to a mutual savings bank, and voluntary liquidations. In these situations, members may want to inspect FCU records to better inform themselves before voting and to ensure that directors are acting in the best interests of the members. There are other situations where the members want to inspect records to protect their financial interests, as discussed further below. The Board also considered how stakeholders of depository institutions other than credit unions may inspect their institution’s books and records. The Board identified an existing Office of Thrift Supervision (OTS) rule governing the right of shareholders to inspect the books, records, and minutes of federal stock savings associations. 12 CFR 552.11 (OTS Rule). The ownership interests of members in an FCU are similar to the ownership interests of stockholders in a stock savings association; the issues on which FCU members and stock bank shareholders vote are similar; and the regulatory and supervisory powers of NCUA and OTS over their respective regulated institutions are also similar. Accordingly, this proposed rule tracks, in large part, the OTS Rule. The proposal is also consistent with existing NCUA guidance on member inspection of FCU records. See FCU Handbook (Rev. 2006), p.68. PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 B. Paragraph-by-Paragraph Analysis (a) Member Inspection Rights Proposed paragraph (a) establishes the right of a group of members of an FCU, upon submission of a proper petition, to inspect and copy the credit union’s books and records of account and minutes of the proceedings of the credit union’s members, board of directors, and committees of directors. This inspection right is similar to that in the OTS Rule, with the use of a member petition in lieu of the stockholder affidavit requirement in the OTS Rule. The member petition must meet the requirements in proposed paragraph (b). Also, inspection rights are limited to the nonconfidential portions of the credit union’s books, records, and minutes. Proposed paragraph (d) defines confidential books, records, and minutes; all other books, records, and minutes are nonconfidential. Minutes The Board intends the phrase ‘‘minutes of the proceedings at all meetings of its members, board of directors, and committees of directors’’ to include any summary or recording of the proceedings and all documents, reports, studies, and visual aids considered by the meeting participants. The Board believes this broad interpretation of minutes is appropriate. For example, in situations where an FCU membership vote is required, the vote is either about the election or removal of directors or officers or is precipitated by the actions of the directors as in the case of a merger or conversion. Members should have access to the directors’ deliberations to help members decide how to vote and help members determine if the directors are acting in the members’ best interests. Books and Records of Account Courts have interpreted the phrase ‘‘books and records of account’’ differently. Some courts have interpreted the phrase broadly to include both financial and nonfinancial records while other courts have interpreted the phrase to include only financial records. See, e.g., Meyer v. Ford Industries, Inc., 538 P.2d 353, 358 (Or. 1975) (broad interpretation); Corwin v. Abbott Laboratories, 819 N.E.2d 1249 (Ill. App. 2004), app. den. 2005 Ill. LEXIS 609 (Ill. 2005) (phrase includes both financial and nonfinancial records); and Jewelers International Showcase, Inc. v. Mandell, 529 So. 2d 1211 (Fla. Dist. Ct App. 3d Dist. 1988) (stockholder was entitled to inspect financial records such as general ledger, E:\FR\FM\23APP1.SGM 23APP1 Federal Register / Vol. 72, No. 77 / Monday, April 23, 2007 / Proposed Rules balance sheets, and profit and loss statements). The NCUA Board believes a narrow interpretation is best. The plain language meaning of ‘‘of account’’ supports a limitation to accounting records. Stockholder inspection of corporate records under the Model Business Corporation Act (MBCA) is expressly limited to minutes and ‘‘accounting records,’’ and the Counsel to the Federal Home Loan Bank Board (FHLBB), in interpreting the predecessor to the OTS rule, has cited to the MBCA as authority for the OTS rule. Letter from Julie Williams, FHLBB Deputy General Counsel, dated September 17, 1986, located at 1986 FHLBB LEXIS 82 (hereinafter 1986 FHLBB DGC Letter); and Model Bus. Corp. Act § 16.02(b)(2)(1984). The Board believes the financial interests of members are adequately protected by combining a broad interpretation of minutes with a more restrictive interpretation of the phrase books and records of account. represent the petitioners on issues such as inspection procedures, costs, and potential disputes. At least one percent of the credit union’s members, with a minimum of 20 members and a maximum of 250 members, must sign the petition. The language of this proposed paragraph is similar to language in paragraphs (b) and (c) of the OTS Rule. pwalker on PROD1PC71 with PROPOSALS Inspection and Copying Generally, a member’s right to inspect FCU minutes and records includes the right to make copies of those records. Obtaining copies enables members to provide the information to other members or, in some cases, to experts for independent analysis and review. If an FCU believes that certain of its records should not be copied, it may request that the regional director impose conditions on the inspection, as discussed further below. Minimum Signature Requirement The OTS Rule requires stockholders seeking records to own a certain number of shares and to submit an affidavit describing their request to the savings association. For shareholders who have owned their shares at least six months, the affidavit generally must be signed by shareholders representing at least one percent of the outstanding shares. OTS Rule, paragraphs (b)(1) and (2). The proposal substitutes a member petition for this stockholder affidavit. The petition also employs a minimum signature requirement of one percent of the members, representing an ownership interest roughly equivalent to one percent of the shares of a stock association. The proposed rule further provides that a minimum of 20 members and a maximum of 250 must sign the petition. The one percent and minimum and maximum signature requirements are similar to those established in NCUA’s standard FCU bylaws for members seeking a nomination by petition to run for election to an FCU’s board of directors. NCUA Standard FCU Bylaws, Art. V, Sec. 1 (Rev. April 2006). (b) Petition for Inspection Proposed paragraph (b) establishes the member petition requirements. The petition must describe the particular records to be inspected and state a purpose for the inspection related to the business of the credit union. The petition must state that the petitioners as a whole, or certain named petitioners, agree to pay the direct and reasonable costs associated with search and duplication of requested material. The petition must also state that the inspection is not desired for any purpose in the interest of a business or object other than the business of the credit union; that the members signing the petition have not within five years preceding the signature date sold or offered for sale, and do not now intend to sell or offer for sale, any information obtained from the credit union; and that the members signing the petition have not within the past five years aided or abetted any other person in procuring any information from the credit union for purposes of sale. The petition must name one or more members who will Proper Purpose The purpose of an inspection must be related to the business of the credit union. A proper purpose includes attempting to ascertain and protect members’ financial interests and to ascertain possible mismanagement. See, e.g., 1986 FHLBB DGC Letter (interpreting OTS Rule). The issue of member inspection of records may arise, for example, in the context of a member vote on merger or charter conversion. Members of a merging or converting credit union may desire access to the due diligence performed by their directors, and other credit union books and records, to determine if the directors are acting in the members’ best interests. Members of a credit union merging with another credit union may also have an interest in determining if they are receiving an appropriate share adjustment. 12 CFR 708b.103(a)(5). Members may have a financial interest in ascertaining how the proposed merger or conversion will affect their services, rates, and fees and how the directors analyzed this issue. VerDate Aug<31>2005 16:49 Apr 20, 2007 Jkt 211001 PO 00000 Frm 00003 Fmt 4702 Sfmt 4702 20063 Members of a credit union merging with a bank may have a further interest in determining the value of their shares plus any associated premium and whether the directors carefully considered all the available merger opportunities with a view to maximizing the financial benefit to the members. Members of a credit union converting to a bank may also want to know if their directors considered the possibility of a merger and appropriate payments to members. Members may wish to obtain FCU records in other contexts. For example, some members might want records about FCU decisions that have a direct effect on the members, such as a determination to close a branch office or to discontinue a service or product. Members electing directors might want records from the credit union about the qualifications of and benefits received by sitting directors. Members might also want records about the qualifications and compensation of senior management. Burden of Proof on Proper Purpose Generally, in the absence of evidence indicating an improper purpose, courts do not assume that stockholders of a corporation requesting an inspection intend to use the information improperly just because it would be possible for them to do so. Fears v. Cattlemen’s Inv. Co., 483 P.2d 724, 730 (Okla. 1971). The requirement in the proposed rule that petitioners state they are not intending to sell the information, nor have they aided or abetted such sales in the past five years, helps ensure a proper purpose. The minimum signature requirement in the proposal also helps ensure a proper purpose because members seeking signatures will have to convince other members that they share a common and appropriate purpose. Accordingly, a petition meeting the requirements of paragraph (c) creates a presumption of proper purpose, and an FCU should have substantial evidence of improper purpose to deny inspection for that reason. Description of Records The petition must describe the particular records sought and the description must be specific enough to allow the FCU to identify responsive records. The FCU may ask the petitioners for more information if necessary to help understand the scope of the request. (c) Inspection Procedures Proposed paragraph (b) provides the inspection procedures. Within 14 days E:\FR\FM\23APP1.SGM 23APP1 20064 Federal Register / Vol. 72, No. 77 / Monday, April 23, 2007 / Proposed Rules of receipt of a petition, the FCU must either allow inspection and copying of all requested material or inform the petitioning members in writing why it is not able to do so. Inspection may be in person or by an agent or attorney and at any reasonable time or times. Member inspection rights under this paragraph are in addition to any other member inspection rights afforded by law, regulation, or the credit union’s bylaws. Unless a regional director imposes conditions on a particular request for records, the member’s right to inspect records includes the right to make copies. In many cases, the credit union will mail or deliver copies of the requested documents to the individual(s) designated by the petitioners. In some cases, however, the petitioners may request an inspection of requested documents at the credit union before copies are made or the credit union may ask the petitioners to come to the credit union to pick up the copies. The Board recognizes original documents may be at a credit union office some distance from where the petitioners live and that conducting an on-site inspection or pick-up may be difficult or expensive for petitioners. The Board expects credit unions and petitioners to work out reasonable, mutually acceptable arrangements for on-site inspection or pick-up, including, for example, movement of documents or copies to a credit union branch location convenient to petitioners. The language of this paragraph is similar to language in paragraph (b) of the OTS Rule. The proposed 14-day compliance timeframe, not found in the OTS Rule, will ensure that an FCU responds promptly to the member petition. The proposed paragraph also recognizes that members may have additional inspection rights, including, for example, inspection rights related to merger compensation in another pending NCUA rulemaking. pwalker on PROD1PC71 with PROPOSALS (d) Confidential Books, Records, and Minutes Proposed paragraph (d) provides that members do not have the right to inspect portions of the books, records, or minutes of an FCU under certain circumstances: first, if federal law or regulation prohibits disclosure of that portion; second, if that portion contains nonpublic personal information; and, third, if that portion contains information about credit union employees or officials the release of which would constitute an unwarranted invasion of personal privacy. VerDate Aug<31>2005 16:49 Apr 20, 2007 Jkt 211001 Federal Law or Regulation Prohibits Disclosure The provision prohibits credit unions, for example, from disclosing nonpublic records generated by NCUA, including reports of inspection that might otherwise be considered by the FCU’s board of directors and included within its meeting minutes. 12 CFR 792.40, 792.49. Nonpublic Personal Information The members of a credit union are both its customers and its owners, and the credit union maintains sensitive personal and financial information about members that must be protected. The OTS Rule protects the privacy of a bank’s customers by providing that no stockholder may inspect any list of depositors or borrowers or their addresses, deposit, or loan records or any data from which that information can be constructed. The proposed rule provides similar protection for the personal and financial information of a credit union’s members, but instead of a reference to specific sensitive information as in the OTS Rule, the proposal will protect all nonpublic personal information as that term is defined in NCUA’s rules on the privacy of consumer financial information. 12 CFR part 716. Nonpublic personal information includes information such as the fact an individual is a member, account numbers and balances, transaction information, consumer reports, and any information provided by the member to obtain a financial product from the credit union. 12 CFR 716(r). Information that is publicly available or information that does not identify a particular member would not be nonpublic personal information. 12 CFR 716(q). Information About Credit Union Employees or Officials The proposed rule also protects from inspection information about the FCU’s employees and officials if disclosure would constitute a clearly unwarranted invasion of personal privacy. This terminology is similar to the confidentiality provision in the Freedom of Information Act. 5 U.S.C. 552(b)(6). Some categories of information that will receive confidentiality treatment include marital status, financial status, children, medical conditions, dates of birth, religious affiliations, citizenship data, sexual inclinations, and social security numbers. See Freedom of Information Act Guide and Privacy Act Overview, U.S. Department of Justice (May 2004 ed.). PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 As an exception to this confidentiality provision, FCU members may inspect materials describing the compensation and benefits provided to senior executive officers. The member-owners of a credit union have a financial interest in how their credit union is managed, and that interest extends to knowledge about who the senior managers are, their qualifications, and their compensation levels. The members’ interest in this information outweighs any privacy interests the senior managers may have in the information. Accordingly, the rule provides that members may inspect information about the qualifications, compensation and benefits of senior executive officers, as defined in § 701.14 of NCUA’s rules: Senior executive officer means a credit union’s chief executive officer (typically this individual holds the title of president or treasurer/manager), any assistant chief executive officer (e.g., any assistant president, any vice president or any assistant treasurer/ manager), and the chief financial officer (controller). The term ‘‘senior executive officer’’ also includes employees of an entity, such as a consulting firm, hired to perform the functions of positions covered by the regulation. 12 CFR 701.14(b)(2). Other Considerations This proposal provides confidentiality only for materials the release of which is prohibited by federal law, materials that contain nonpublic personal information, and personal information about FCU employees and officials. In some states, courts have withheld other types of documents from shareholder inspection, such as confidential internal correspondence or materials containing corporate trade secrets. See, e.g., Morton v. Rodgers, 20 Ariz. App. 581, 514, P.2d 752 (Ariz. Div. 1, 1973) (trade secrets); State Ex. Rel. Armour & Co. v. Gulf Sulphur Corp., 231, A.2d 470 (Del. 1967) (trade secrets); and State ex rel. Jones v. Ralston Purina Co., 358 S.W.2d 772, 778 (Mo. 1962) (internal correspondence). As one court noted, however: Both under the common law and under our statute a stockholder of a corporation is entitled to examine the books and records of the corporation * * *. The right rests upon the proposition that, while the corporation holds the legal title to its property, the stockholders are deemed to be the real and beneficial owners thereof and, as such, are entitled to information concerning the management of the property and business which they have confided to the officers and directors of the corporation as their agents * * *. It ordinarily is not enough to deny the right that the information sought is of a confidential nature. E:\FR\FM\23APP1.SGM 23APP1 pwalker on PROD1PC71 with PROPOSALS Federal Register / Vol. 72, No. 77 / Monday, April 23, 2007 / Proposed Rules Nationwide Corp. v. Northwestern National Life Insurance Co., 251 Minn. 255, 256; 87 N.W.2d 671, 672 (Minn. 1958). This proposal, like the OTS Rule, has no confidentiality provisions related to internal memoranda or trade secrets for several reasons. First, credit unions do not generally have trade secrets, that is, secret formulas or technology on which the success of the organization is dependent, and cases that deal with confidential internal correspondence generally do not provide a standard by which confidentiality can be measured. Second, it is unlikely that, given the narrow interpretation of ‘‘books and records of account’’ intended by the Board, any materials deserving of confidentiality would appear among those materials subject to inspection. Third, even if confidential materials appear among the materials subject to this rule, requested materials must be relevant to the petitioners’ stated business purpose before they become subject to inspection. See, e.g., Azzar v. Primebank Federal Savings Bank, 499 N.W.2d 793, 798 (Ct. App. Mich. 1993)(interpreting the OTS Rule). Finally, and as discussed above, if a credit union has substantial evidence of an improper purpose, it may deny inspection for that reason. In the unlikely event there are portions of relevant FCU books and records of account or minutes the public release of which might cause the credit union substantial competitive injury or financial damage, the dispute resolution paragraph of the proposed rule permits the regional director to place conditions on member inspection that balance the interests of the member-owners in the requested information against any interests the credit union may have in maintaining confidentiality. The regional director’s authority to resolve disputes is discussed further below. The NCUA Board also considered if privileged information, that is, exempt from discovery in court cases, should be withheld from members. Case law on the corporate shareholder’s right to inspect privileged information differs by jurisdiction. In California, for example, shareholders lack the right to inspect corporate books and records covered by the attorney-client privilege. National Football League Properties, Inc. v. Oakland Raiders, 75 Cal. Rptr. 2d 893 (Ca. Ct. App. 6th District 1998). In other jurisdictions, however, shareholders who are concerned with corporate mismanagement may inspect attorneyclient privileged documents. Beard v. Ames, 168 A2d 119 (N.Y. 1983); Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). For example, in determining that VerDate Aug<31>2005 16:49 Apr 20, 2007 Jkt 211001 20065 stockholders could inspect communications between attorney and corporate management under some circumstances, the Garner court stated: for costs of shareholder inspection and copying of stock savings association records, an OTS legal opinion describes that reimbursement: But in assessing management assertions of injury to the corporation it must be borne in mind that management does not manage for itself and that the beneficiaries of its action are the stockholders. Conceptualistic phrases describing the corporation as an entity separate from its stockholders are not useful tools of analysis. They serve only to obscure the fact that management has duties which run to the benefit ultimately of the stockholders. In our view, a federal stock association may charge a requesting Qualifying Shareholder reasonable expenses for document searches, duplication, and direct costs associated with producing and delivering documents. However, a requesting Qualifying Shareholder is not obligated to pay the association’s attorneys fees in order to gain access to review the association’s books and records required to be made available to shareholders under section 552.11. Id. at 1101. The Board believes member-owners with a proper purpose should have access to relevant FCU information. Accordingly, and like the OTS Rule, this proposal does not include confidentiality protection for privileged information, but that does not mean that privileged material will automatically be subject to inspection. Privileged material would have to be the subject of a proper petition with a valid purpose; it would have to fall within the scope of ‘‘books and records of account’’ or ‘‘minutes;’’ and it would have to be relevant to the petitioners’’ stated purpose, all before it would be subject to inspection. Proposed paragraph (f) also provides regional directors with authority to resolve disputes, and a regional director could place conditions on the release of the privileged material where appropriate. The FCU may have other minutes or books and records of account that it has designated as confidential by policy or otherwise. That designation by an FCU does not defeat the inspection rights of members. If the requested material does not contain confidential information as described in § 701.3(d), the memberowners have the right to inspect it upon a proper petition. Again, as discussed below, a regional director may impose conditions on inspection and copying in appropriate cases. In some cases, materials requested by members may include a mix of both confidential portions and nonconfidential portions. An FCU must make as much of the nonconfidential material available to members as possible, redacting or withholding only the confidential portions. (e) Costs Proposed paragraph (e) states that an FCU may charge petitioners the direct and reasonable costs associated with search and duplication but it may not charge for other costs, including indirect costs or attorney’s fees. While the OTS Rule does not specifically address the reimbursement PO 00000 Frm 00005 Fmt 4702 Sfmt 4702 Letter from Harris Weinstein, OTS Chief Counsel, dated December 5, 1991 (1991 OTS LEXIS 68). The proposed paragraph (e) addresses costs in a manner similar to that described in OTS legal opinions. Typically, the direct costs of search and duplication would include only the number of hours a clerk might take to locate and duplicate the requested documents multiplied by the clerk’s hourly compensation rate, plus the perpage costs of duplication. Requesters need not reimburse the credit union for other costs, including costs associated with the management or supervision of the person(s) conducting the search, costs to review documents, costs associated with in-person inspection of records, overhead costs, or the costs of any legal services. As noted above, the petition must recognize the obligation of the petitioners as a whole, or certain named petitioners, to pay the direct and reasonable costs associated with search and duplication. Petitioners may also include in the petition, if they want, a maximum amount that they are willing to pay; and the FCU, if it wants, may provide petitioners with an estimate of the search and duplication costs. The rule does not require, however, that petitioners pay in advance, or agree to pay any specific amount, before the FCU provides the petitioners with the requested documents. (f) Dispute Resolution Proposed paragraph (f) provides, in the event of a dispute between an FCU and its members concerning a petition for inspection or the associated costs, either party may submit the dispute to the regional director. The regional director, after obtaining the views of both parties, will direct the credit union either to withhold the disputed materials or to make them available for member inspection and copying. The regional director may place conditions upon release, if appropriate. Depending on the circumstances, conditions E:\FR\FM\23APP1.SGM 23APP1 20066 Federal Register / Vol. 72, No. 77 / Monday, April 23, 2007 / Proposed Rules imposed by the regional director might include limitations on making copies or a requirement that the parties enter into a contract restricting the use or further dissemination of the material. The OTS Rule does not contain a dispute resolution procedure. The NCUA Board believes that a dispute resolution procedure is necessary to protect both the inspection rights of members and the FCU’s interests. In other circumstances involving member disputes with FCUs, NCUA usually refers the dispute to the FCU’s supervisory committee for resolution. The proposed rule does not require such referral because, in certain circumstances, such as a pending member vote on a charter or share insurance conversion or a merger, members’ need for the information may be time sensitive. Still, in the event of a dispute over access to FCU records, petitioners, if they desire, may contact an FCU’s supervisory committee before taking it directly to the regional director. Similarly, if a regional director receives a request from a petitioner for dispute resolution and determines that resolution is not time sensitive, the director may refer the matter to the FCU’s supervisory committee for analysis and response before the director makes any decision about the dispute. The NCUA Board does not believe that specific time frames for regional director action are appropriate. The time needed for dispute resolution could vary significantly from case to case depending on the complexity of the dispute. In addition, the Board does not believe a right to appeal to the Board is necessary. C. Request for Public Comment NCUA’s goal is to promulgate clear and understandable regulations that impose minimal regulatory burden. The Board requests public comments on whether the proposed rule is understandable and minimally intrusive and also solicits specific suggestions to improve the content of the rule. D. Regulatory Procedures pwalker on PROD1PC71 with PROPOSALS 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 credit unions, defined as those under ten million dollars in assets. This proposed rule standardizes and clarifies the rights of members to inspect FCU records. The rule is not a significant departure from existing practice that FCUs must permit VerDate Aug<31>2005 16:49 Apr 20, 2007 Jkt 211001 inspection under the same terms and conditions that state law requires for shareholders to inspect corporation records. The proposed rule requires that a minimum of one percent of the FCU’s members sign a petition to obtain access. In some states, this burden on the members might exceed the burden on shareholders to obtain access and so reduces the likelihood of an FCU having to grant access. Accordingly, the Board does not anticipate that the proposed rule, if adopted, would have a significant economic impact on a substantial number of small credit unions. Paperwork Reduction Act Section 701.3 contains 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 regulation as part of an information collection package to the Office of Management and Budget (OMB) for its review and approval of a new collection of information. The proposed rule standardizes and clarifies the circumstances and conditions under which FCU members may inspect and copy an FCU’s books, records of accounts, and minutes of meetings. The FCU must permit inspection of relevant records if it receives a member petition stating a proper purpose for inspection and signed by at least one percent of members, with a minimum of five and a maximum of 250. NCUA does not believe members will use this petition authority often. NCUA estimates that there will be, perhaps, five such petitions per year. NCUA also estimates it will take an FCU that receives a petition approximately 20 hours to evaluate the petition, locate relevant documents, and make them available for inspection and copying. Five petitions times 20 hours per petition equals 100 annual burden hours associated with this proposed collection of information. The Board also notes that the costs of document search and duplication will fall on the petitioners and not on the FCU. Organizations and individuals that wish to submit comments on this information collection requirement should direct them to the Office of Information and Regulatory Affairs, OMB, Attn: Mark Menchik, Room 10226, New Executive Office Building, Washington, DC 20503, with a copy to Mary Rupp, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314–3428. PO 00000 Frm 00006 Fmt 4702 Sfmt 4702 The NCUA considers comments by the public on this proposed collection of information in: • Evaluating whether the proposed collection of information is necessary for the proper performance of the functions of the NCUA, including whether the information will have a practical use; • Evaluating the accuracy of the NCUA’s estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; • Enhancing the quality, usefulness, and clarity of the information to be collected; and • Minimizing the burden of collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology; e.g., permitting electronic submission of responses. The Paperwork Reduction Act requires OMB to make a decision concerning the collection of information contained in the proposed regulation 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 regulation. 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 section 654 of the Treasury and General Government Appropriations Act, 1999, Pub. L. 105–277, 112 Stat. 2681 (1998). E:\FR\FM\23APP1.SGM 23APP1 Federal Register / Vol. 72, No. 77 / Monday, April 23, 2007 / Proposed Rules List of Subjects in 12 CFR Part 701 Credit unions, Records. By the National Credit Union Administration Board on April 12, 2007. Mary F. Rupp, Secretary of the Board. Accordingly, NCUA proposes to amend 12 CFR part 701 as follows: PART 701—ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS 1. The authority citation for part 701 continues to read as follows: Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 1761b, 1766, 1767, 1782, 1784, 1787, 1789. Section 701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 is also authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601–3610. Section 701.35 is also authorized by 42 U.S.C. 4311– 4312. 2. Add § 701.3 to read as follows: pwalker on PROD1PC71 with PROPOSALS § 701.3 Member inspection of credit union books, records, and minutes. (a) Member inspection rights. A group of members of a federal credit union has the right, upon submission of a petition to the credit union as described in paragraph (b) of this section, to inspect and copy nonconfidential portions of the credit union’s: (1) Books and records of account; and (2) Minutes of the proceedings of the credit union’s members, board of directors, and committees of directors. (b) Petition for inspection. The petition must describe the particular records to be inspected and state a purpose for the inspection related to the business of the credit union. The petition must state that the petitioners as a whole, or certain named petitioners, agree to pay the direct and reasonable costs associated with search and duplication of requested material. The petition must also state that the inspection is not desired for any purpose in the interest of a business or object other than the business of the credit union; that the members signing the petition have not within five years preceding the signature date sold or offered for sale, and do not now intend to sell or offer for sale, any information obtained from the credit union; and that the members signing the petition have not within the past five years aided or abetted any other person in procuring any information from the credit union for purposes of sale. The petition must name one or more members who will represent the petitioners on issues such as inspection procedures, costs, and potential disputes. At least one percent of the credit union’s members, with a VerDate Aug<31>2005 16:49 Apr 20, 2007 Jkt 211001 minimum of 20 members and a maximum of 250 members, must sign the petition. (c) Inspection procedures. Within 14 days of receipt of a petition, the federal credit union must either allow inspection and copying of all requested material or inform the petitioning members in writing why it is not able to do so. Inspection may be made in person or by agent or attorney and at any reasonable time or times. Member inspection rights under this paragraph are in addition to any other member inspection rights afforded by law, regulation, or the credit union’s bylaws. (d) Confidential books, records, and minutes. Members do not have the right to inspect any portion of the books, records, or minutes of a federal credit union if: (1) Federal law or regulation prohibits disclosure of that portion, (2) The portion contains nonpublic personal information as defined in § 716.4 of this part; or (3) The portion contains information about credit union employees or officials the disclosure of which would constitute a clearly unwarranted invasion of personal privacy. Members may, however, inspect materials describing the compensation and benefits provided by the credit union to its senior executive officers, and the qualifications of the senior executive officers, as that term is defined in § 701.14 of this part. (e) Costs. A federal credit union may charge petitioners the direct and reasonable costs associated with search and duplication. The credit union may not charge for other costs, including indirect costs or attorney’s fees. (f) Dispute resolution. In the event of a dispute between a federal credit union and its members concerning a petition for inspection or the associated costs, either party may submit the dispute to the regional director. The regional director, after obtaining the views of both parties, will direct the credit union either to withhold the disputed materials or to make them available for member inspection and copying. The regional director may place conditions upon release, if appropriate. The decision of the regional director is a final agency decision and is not appealable to the Board. [FR Doc. E7–7610 Filed 4–20–07; 8:45 am] BILLING CODE 7535–01–P PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 20067 NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Part 708b Disclosure of Merger Related Compensation Arrangements National Credit Union Administration (NCUA). ACTION: Proposed rule with request for comments. AGENCY: 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: http:// www.regulations.gov. Follow the instructions for submitting comments. • NCUA Web site: http:// 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: E:\FR\FM\23APP1.SGM 23APP1

Agencies

[Federal Register Volume 72, Number 77 (Monday, April 23, 2007)]
[Proposed Rules]
[Pages 20061-20067]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-7610]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701

RIN 3133-AD33


Member Inspection of Credit Union Books, Records, and Minutes

AGENCY: National Credit Union Administration.

ACTION: Proposed rule.

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SUMMARY: The National Credit Union Administration (NCUA) is issuing a 
proposed rule on member inspection of federal credit union (FCU) books, 
records, and minutes. The rule provides that a group of members 
representing approximately one percent of the membership, with a proper 
purpose and upon petition, may inspect and copy the nonconfidential 
portions of the credit union's books, records, and minutes. This 
proposal standardizes and clarifies existing member inspection rights.

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

[[Page 20062]]


ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web site: http://www.ncua.gov/
RegulationsOpinionsLaws/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 701.3'' 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: Paul Peterson or Annette Tapia, Staff 
Attorneys, at the above address or telephone number (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

    This proposed rule provides that a group of members representing 
approximately one percent of an FCU's membership, upon petition and 
with a proper purpose, may obtain access to the nonconfidential 
portions of the FCU's books, records, and minutes.
    FCUs are not-for-profit, member-owned cooperatives organized to 
provide financial services and products to their members. The financial 
interests of members in their credit union are similar to the financial 
interests shareholders have in for-profit corporations. Corporate 
shareholders have various methods to protect their financial interests 
in the corporation, including the right at common law and in various 
state statutes to inspect corporate books and records. Because of the 
similarity of interests between credit union members and corporate 
shareholders, NCUA legal opinions going back many years have stated 
that FCU members may inspect the FCU's books and records under the same 
terms and conditions that state corporation law where the FCU is 
located permits shareholder inspection of corporate records. See, e.g., 
OGC Ops. 92-0101, 96-0451, and 06-0127B. These opinion letters are 
available at http://www.ncua.gov.
    The NCUA Board believes regulating member inspection of FCU records 
is preferable to reliance on state corporation law. Corporation law on 
shareholder inspection, for example, varies from state to state, and 
FCUs should have a consistent standard regardless of an FCU's location. 
Some FCUs have branches in multiple states, further complicating the 
application of state law to inspection requests. In addition, some 
courts may refuse to apply their corporation law to inspection requests 
by FCU members or may incorrectly analogize the financial interests of 
credit union members to those of depositors in a mutual savings bank 
and deny members inspection on those grounds. See, e.g., Save Columbia 
Credit Union Committee v. Columbia Credit Union, 139 P.3d 386, 393-95 
(Wash. App. 2006) (refusing to apply state corporation law to records 
inspection request by members of a state-chartered credit union).
    The Board considered when and why members might want to inspect FCU 
records. The law charges members with responsibility for important 
decisions that affect both the FCU and the members' financial 
interests. For example, a vote of the FCU's members is required on the 
election and removal of directors, mergers, conversion from federal to 
private account insurance, conversion from a federal to state charter 
or conversion to a mutual savings bank, and voluntary liquidations. In 
these situations, members may want to inspect FCU records to better 
inform themselves before voting and to ensure that directors are acting 
in the best interests of the members. There are other situations where 
the members want to inspect records to protect their financial 
interests, as discussed further below.
    The Board also considered how stakeholders of depository 
institutions other than credit unions may inspect their institution's 
books and records. The Board identified an existing Office of Thrift 
Supervision (OTS) rule governing the right of shareholders to inspect 
the books, records, and minutes of federal stock savings associations. 
12 CFR 552.11 (OTS Rule). The ownership interests of members in an FCU 
are similar to the ownership interests of stockholders in a stock 
savings association; the issues on which FCU members and stock bank 
shareholders vote are similar; and the regulatory and supervisory 
powers of NCUA and OTS over their respective regulated institutions are 
also similar. Accordingly, this proposed rule tracks, in large part, 
the OTS Rule. The proposal is also consistent with existing NCUA 
guidance on member inspection of FCU records. See FCU Handbook (Rev. 
2006), p.68.

B. Paragraph-by-Paragraph Analysis

(a) Member Inspection Rights

    Proposed paragraph (a) establishes the right of a group of members 
of an FCU, upon submission of a proper petition, to inspect and copy 
the credit union's books and records of account and minutes of the 
proceedings of the credit union's members, board of directors, and 
committees of directors. This inspection right is similar to that in 
the OTS Rule, with the use of a member petition in lieu of the 
stockholder affidavit requirement in the OTS Rule.
    The member petition must meet the requirements in proposed 
paragraph (b). Also, inspection rights are limited to the 
nonconfidential portions of the credit union's books, records, and 
minutes. Proposed paragraph (d) defines confidential books, records, 
and minutes; all other books, records, and minutes are nonconfidential.
Minutes
    The Board intends the phrase ``minutes of the proceedings at all 
meetings of its members, board of directors, and committees of 
directors'' to include any summary or recording of the proceedings and 
all documents, reports, studies, and visual aids considered by the 
meeting participants. The Board believes this broad interpretation of 
minutes is appropriate. For example, in situations where an FCU 
membership vote is required, the vote is either about the election or 
removal of directors or officers or is precipitated by the actions of 
the directors as in the case of a merger or conversion. Members should 
have access to the directors' deliberations to help members decide how 
to vote and help members determine if the directors are acting in the 
members' best interests.
Books and Records of Account
    Courts have interpreted the phrase ``books and records of account'' 
differently. Some courts have interpreted the phrase broadly to include 
both financial and nonfinancial records while other courts have 
interpreted the phrase to include only financial records. See, e.g., 
Meyer v. Ford Industries, Inc., 538 P.2d 353, 358 (Or. 1975) (broad 
interpretation); Corwin v. Abbott Laboratories, 819 N.E.2d 1249 (Ill. 
App. 2004), app. den. 2005 Ill. LEXIS 609 (Ill. 2005) (phrase includes 
both financial and nonfinancial records); and Jewelers International 
Showcase, Inc. v. Mandell, 529 So. 2d 1211 (Fla. Dist. Ct App. 3d Dist. 
1988) (stockholder was entitled to inspect financial records such as 
general ledger,

[[Page 20063]]

balance sheets, and profit and loss statements).
    The NCUA Board believes a narrow interpretation is best. The plain 
language meaning of ``of account'' supports a limitation to accounting 
records. Stockholder inspection of corporate records under the Model 
Business Corporation Act (MBCA) is expressly limited to minutes and 
``accounting records,'' and the Counsel to the Federal Home Loan Bank 
Board (FHLBB), in interpreting the predecessor to the OTS rule, has 
cited to the MBCA as authority for the OTS rule. Letter from Julie 
Williams, FHLBB Deputy General Counsel, dated September 17, 1986, 
located at 1986 FHLBB LEXIS 82 (hereinafter 1986 FHLBB DGC Letter); and 
Model Bus. Corp. Act Sec.  16.02(b)(2)(1984). The Board believes the 
financial interests of members are adequately protected by combining a 
broad interpretation of minutes with a more restrictive interpretation 
of the phrase books and records of account.
Inspection and Copying
    Generally, a member's right to inspect FCU minutes and records 
includes the right to make copies of those records. Obtaining copies 
enables members to provide the information to other members or, in some 
cases, to experts for independent analysis and review. If an FCU 
believes that certain of its records should not be copied, it may 
request that the regional director impose conditions on the inspection, 
as discussed further below.

(b) Petition for Inspection

    Proposed paragraph (b) establishes the member petition 
requirements.
    The petition must describe the particular records to be inspected 
and state a purpose for the inspection related to the business of the 
credit union. The petition must state that the petitioners as a whole, 
or certain named petitioners, agree to pay the direct and reasonable 
costs associated with search and duplication of requested material. The 
petition must also state that the inspection is not desired for any 
purpose in the interest of a business or object other than the business 
of the credit union; that the members signing the petition have not 
within five years preceding the signature date sold or offered for 
sale, and do not now intend to sell or offer for sale, any information 
obtained from the credit union; and that the members signing the 
petition have not within the past five years aided or abetted any other 
person in procuring any information from the credit union for purposes 
of sale. The petition must name one or more members who will represent 
the petitioners on issues such as inspection procedures, costs, and 
potential disputes. At least one percent of the credit union's members, 
with a minimum of 20 members and a maximum of 250 members, must sign 
the petition.
    The language of this proposed paragraph is similar to language in 
paragraphs (b) and (c) of the OTS Rule.
Minimum Signature Requirement
    The OTS Rule requires stockholders seeking records to own a certain 
number of shares and to submit an affidavit describing their request to 
the savings association. For shareholders who have owned their shares 
at least six months, the affidavit generally must be signed by 
shareholders representing at least one percent of the outstanding 
shares. OTS Rule, paragraphs (b)(1) and (2). The proposal substitutes a 
member petition for this stockholder affidavit. The petition also 
employs a minimum signature requirement of one percent of the members, 
representing an ownership interest roughly equivalent to one percent of 
the shares of a stock association. The proposed rule further provides 
that a minimum of 20 members and a maximum of 250 must sign the 
petition. The one percent and minimum and maximum signature 
requirements are similar to those established in NCUA's standard FCU 
bylaws for members seeking a nomination by petition to run for election 
to an FCU's board of directors. NCUA Standard FCU Bylaws, Art. V, Sec. 
1 (Rev. April 2006).
Proper Purpose
    The purpose of an inspection must be related to the business of the 
credit union. A proper purpose includes attempting to ascertain and 
protect members' financial interests and to ascertain possible 
mismanagement. See, e.g., 1986 FHLBB DGC Letter (interpreting OTS 
Rule).
    The issue of member inspection of records may arise, for example, 
in the context of a member vote on merger or charter conversion. 
Members of a merging or converting credit union may desire access to 
the due diligence performed by their directors, and other credit union 
books and records, to determine if the directors are acting in the 
members' best interests. Members of a credit union merging with another 
credit union may also have an interest in determining if they are 
receiving an appropriate share adjustment. 12 CFR 708b.103(a)(5). 
Members may have a financial interest in ascertaining how the proposed 
merger or conversion will affect their services, rates, and fees and 
how the directors analyzed this issue. Members of a credit union 
merging with a bank may have a further interest in determining the 
value of their shares plus any associated premium and whether the 
directors carefully considered all the available merger opportunities 
with a view to maximizing the financial benefit to the members. Members 
of a credit union converting to a bank may also want to know if their 
directors considered the possibility of a merger and appropriate 
payments to members.
    Members may wish to obtain FCU records in other contexts. For 
example, some members might want records about FCU decisions that have 
a direct effect on the members, such as a determination to close a 
branch office or to discontinue a service or product. Members electing 
directors might want records from the credit union about the 
qualifications of and benefits received by sitting directors. Members 
might also want records about the qualifications and compensation of 
senior management.
Burden of Proof on Proper Purpose
    Generally, in the absence of evidence indicating an improper 
purpose, courts do not assume that stockholders of a corporation 
requesting an inspection intend to use the information improperly just 
because it would be possible for them to do so. Fears v. Cattlemen's 
Inv. Co., 483 P.2d 724, 730 (Okla. 1971). The requirement in the 
proposed rule that petitioners state they are not intending to sell the 
information, nor have they aided or abetted such sales in the past five 
years, helps ensure a proper purpose. The minimum signature requirement 
in the proposal also helps ensure a proper purpose because members 
seeking signatures will have to convince other members that they share 
a common and appropriate purpose. Accordingly, a petition meeting the 
requirements of paragraph (c) creates a presumption of proper purpose, 
and an FCU should have substantial evidence of improper purpose to deny 
inspection for that reason.
Description of Records
    The petition must describe the particular records sought and the 
description must be specific enough to allow the FCU to identify 
responsive records. The FCU may ask the petitioners for more 
information if necessary to help understand the scope of the request.

(c) Inspection Procedures

    Proposed paragraph (b) provides the inspection procedures. Within 
14 days

[[Page 20064]]

of receipt of a petition, the FCU must either allow inspection and 
copying of all requested material or inform the petitioning members in 
writing why it is not able to do so. Inspection may be in person or by 
an agent or attorney and at any reasonable time or times. Member 
inspection rights under this paragraph are in addition to any other 
member inspection rights afforded by law, regulation, or the credit 
union's bylaws.
    Unless a regional director imposes conditions on a particular 
request for records, the member's right to inspect records includes the 
right to make copies. In many cases, the credit union will mail or 
deliver copies of the requested documents to the individual(s) 
designated by the petitioners. In some cases, however, the petitioners 
may request an inspection of requested documents at the credit union 
before copies are made or the credit union may ask the petitioners to 
come to the credit union to pick up the copies. The Board recognizes 
original documents may be at a credit union office some distance from 
where the petitioners live and that conducting an on-site inspection or 
pick-up may be difficult or expensive for petitioners. The Board 
expects credit unions and petitioners to work out reasonable, mutually 
acceptable arrangements for on-site inspection or pick-up, including, 
for example, movement of documents or copies to a credit union branch 
location convenient to petitioners.
    The language of this paragraph is similar to language in paragraph 
(b) of the OTS Rule. The proposed 14-day compliance timeframe, not 
found in the OTS Rule, will ensure that an FCU responds promptly to the 
member petition. The proposed paragraph also recognizes that members 
may have additional inspection rights, including, for example, 
inspection rights related to merger compensation in another pending 
NCUA rulemaking.

(d) Confidential Books, Records, and Minutes

    Proposed paragraph (d) provides that members do not have the right 
to inspect portions of the books, records, or minutes of an FCU under 
certain circumstances: first, if federal law or regulation prohibits 
disclosure of that portion; second, if that portion contains nonpublic 
personal information; and, third, if that portion contains information 
about credit union employees or officials the release of which would 
constitute an unwarranted invasion of personal privacy.
Federal Law or Regulation Prohibits Disclosure
    The provision prohibits credit unions, for example, from disclosing 
nonpublic records generated by NCUA, including reports of inspection 
that might otherwise be considered by the FCU's board of directors and 
included within its meeting minutes. 12 CFR 792.40, 792.49.
Nonpublic Personal Information
    The members of a credit union are both its customers and its 
owners, and the credit union maintains sensitive personal and financial 
information about members that must be protected. The OTS Rule protects 
the privacy of a bank's customers by providing that no stockholder may 
inspect any list of depositors or borrowers or their addresses, 
deposit, or loan records or any data from which that information can be 
constructed. The proposed rule provides similar protection for the 
personal and financial information of a credit union's members, but 
instead of a reference to specific sensitive information as in the OTS 
Rule, the proposal will protect all nonpublic personal information as 
that term is defined in NCUA's rules on the privacy of consumer 
financial information. 12 CFR part 716. Nonpublic personal information 
includes information such as the fact an individual is a member, 
account numbers and balances, transaction information, consumer 
reports, and any information provided by the member to obtain a 
financial product from the credit union. 12 CFR 716(r). Information 
that is publicly available or information that does not identify a 
particular member would not be nonpublic personal information. 12 CFR 
716(q).
Information About Credit Union Employees or Officials
    The proposed rule also protects from inspection information about 
the FCU's employees and officials if disclosure would constitute a 
clearly unwarranted invasion of personal privacy. This terminology is 
similar to the confidentiality provision in the Freedom of Information 
Act. 5 U.S.C. 552(b)(6). Some categories of information that will 
receive confidentiality treatment include marital status, financial 
status, children, medical conditions, dates of birth, religious 
affiliations, citizenship data, sexual inclinations, and social 
security numbers. See Freedom of Information Act Guide and Privacy Act 
Overview, U.S. Department of Justice (May 2004 ed.).
    As an exception to this confidentiality provision, FCU members may 
inspect materials describing the compensation and benefits provided to 
senior executive officers. The member-owners of a credit union have a 
financial interest in how their credit union is managed, and that 
interest extends to knowledge about who the senior managers are, their 
qualifications, and their compensation levels. The members' interest in 
this information outweighs any privacy interests the senior managers 
may have in the information. Accordingly, the rule provides that 
members may inspect information about the qualifications, compensation 
and benefits of senior executive officers, as defined in Sec.  701.14 
of NCUA's rules:

    Senior executive officer means a credit union's chief executive 
officer (typically this individual holds the title of president or 
treasurer/manager), any assistant chief executive officer (e.g., any 
assistant president, any vice president or any assistant treasurer/ 
manager), and the chief financial officer (controller). The term 
``senior executive officer'' also includes employees of an entity, 
such as a consulting firm, hired to perform the functions of 
positions covered by the regulation.

12 CFR 701.14(b)(2).
Other Considerations
    This proposal provides confidentiality only for materials the 
release of which is prohibited by federal law, materials that contain 
nonpublic personal information, and personal information about FCU 
employees and officials. In some states, courts have withheld other 
types of documents from shareholder inspection, such as confidential 
internal correspondence or materials containing corporate trade 
secrets. See, e.g., Morton v. Rodgers, 20 Ariz. App. 581, 514, P.2d 752 
(Ariz. Div. 1, 1973) (trade secrets); State Ex. Rel. Armour & Co. v. 
Gulf Sulphur Corp., 231, A.2d 470 (Del. 1967) (trade secrets); and 
State ex rel. Jones v. Ralston Purina Co., 358 S.W.2d 772, 778 (Mo. 
1962) (internal correspondence). As one court noted, however:

    Both under the common law and under our statute a stockholder of 
a corporation is entitled to examine the books and records of the 
corporation * * *. The right rests upon the proposition that, while 
the corporation holds the legal title to its property, the 
stockholders are deemed to be the real and beneficial owners thereof 
and, as such, are entitled to information concerning the management 
of the property and business which they have confided to the 
officers and directors of the corporation as their agents * * *. It 
ordinarily is not enough to deny the right that the information 
sought is of a confidential nature.


[[Page 20065]]


    Nationwide Corp. v. Northwestern National Life Insurance Co., 251 
Minn. 255, 256; 87 N.W.2d 671, 672 (Minn. 1958).
    This proposal, like the OTS Rule, has no confidentiality provisions 
related to internal memoranda or trade secrets for several reasons. 
First, credit unions do not generally have trade secrets, that is, 
secret formulas or technology on which the success of the organization 
is dependent, and cases that deal with confidential internal 
correspondence generally do not provide a standard by which 
confidentiality can be measured. Second, it is unlikely that, given the 
narrow interpretation of ``books and records of account'' intended by 
the Board, any materials deserving of confidentiality would appear 
among those materials subject to inspection. Third, even if 
confidential materials appear among the materials subject to this rule, 
requested materials must be relevant to the petitioners' stated 
business purpose before they become subject to inspection. See, e.g., 
Azzar v. Primebank Federal Savings Bank, 499 N.W.2d 793, 798 (Ct. App. 
Mich. 1993)(interpreting the OTS Rule). Finally, and as discussed 
above, if a credit union has substantial evidence of an improper 
purpose, it may deny inspection for that reason.
    In the unlikely event there are portions of relevant FCU books and 
records of account or minutes the public release of which might cause 
the credit union substantial competitive injury or financial damage, 
the dispute resolution paragraph of the proposed rule permits the 
regional director to place conditions on member inspection that balance 
the interests of the member-owners in the requested information against 
any interests the credit union may have in maintaining confidentiality. 
The regional director's authority to resolve disputes is discussed 
further below.
    The NCUA Board also considered if privileged information, that is, 
exempt from discovery in court cases, should be withheld from members. 
Case law on the corporate shareholder's right to inspect privileged 
information differs by jurisdiction. In California, for example, 
shareholders lack the right to inspect corporate books and records 
covered by the attorney-client privilege. National Football League 
Properties, Inc. v. Oakland Raiders, 75 Cal. Rptr. 2d 893 (Ca. Ct. App. 
6th District 1998). In other jurisdictions, however, shareholders who 
are concerned with corporate mismanagement may inspect attorney-client 
privileged documents. Beard v. Ames, 168 A2d 119 (N.Y. 1983); Garner v. 
Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). For example, in 
determining that stockholders could inspect communications between 
attorney and corporate management under some circumstances, the Garner 
court stated:

    But in assessing management assertions of injury to the 
corporation it must be borne in mind that management does not manage 
for itself and that the beneficiaries of its action are the 
stockholders. Conceptualistic phrases describing the corporation as 
an entity separate from its stockholders are not useful tools of 
analysis. They serve only to obscure the fact that management has 
duties which run to the benefit ultimately of the stockholders.

Id. at 1101.
    The Board believes member-owners with a proper purpose should have 
access to relevant FCU information. Accordingly, and like the OTS Rule, 
this proposal does not include confidentiality protection for 
privileged information, but that does not mean that privileged material 
will automatically be subject to inspection. Privileged material would 
have to be the subject of a proper petition with a valid purpose; it 
would have to fall within the scope of ``books and records of account'' 
or ``minutes;'' and it would have to be relevant to the petitioners'' 
stated purpose, all before it would be subject to inspection. Proposed 
paragraph (f) also provides regional directors with authority to 
resolve disputes, and a regional director could place conditions on the 
release of the privileged material where appropriate.
    The FCU may have other minutes or books and records of account that 
it has designated as confidential by policy or otherwise. That 
designation by an FCU does not defeat the inspection rights of members. 
If the requested material does not contain confidential information as 
described in Sec.  701.3(d), the member-owners have the right to 
inspect it upon a proper petition. Again, as discussed below, a 
regional director may impose conditions on inspection and copying in 
appropriate cases.
    In some cases, materials requested by members may include a mix of 
both confidential portions and nonconfidential portions. An FCU must 
make as much of the nonconfidential material available to members as 
possible, redacting or withholding only the confidential portions.

(e) Costs

    Proposed paragraph (e) states that an FCU may charge petitioners 
the direct and reasonable costs associated with search and duplication 
but it may not charge for other costs, including indirect costs or 
attorney's fees.
    While the OTS Rule does not specifically address the reimbursement 
for costs of shareholder inspection and copying of stock savings 
association records, an OTS legal opinion describes that reimbursement:

    In our view, a federal stock association may charge a requesting 
Qualifying Shareholder reasonable expenses for document searches, 
duplication, and direct costs associated with producing and 
delivering documents. However, a requesting Qualifying Shareholder 
is not obligated to pay the association's attorneys fees in order to 
gain access to review the association's books and records required 
to be made available to shareholders under section 552.11.

Letter from Harris Weinstein, OTS Chief Counsel, dated December 5, 1991 
(1991 OTS LEXIS 68). The proposed paragraph (e) addresses costs in a 
manner similar to that described in OTS legal opinions.
    Typically, the direct costs of search and duplication would include 
only the number of hours a clerk might take to locate and duplicate the 
requested documents multiplied by the clerk's hourly compensation rate, 
plus the per-page costs of duplication. Requesters need not reimburse 
the credit union for other costs, including costs associated with the 
management or supervision of the person(s) conducting the search, costs 
to review documents, costs associated with in-person inspection of 
records, overhead costs, or the costs of any legal services.
    As noted above, the petition must recognize the obligation of the 
petitioners as a whole, or certain named petitioners, to pay the direct 
and reasonable costs associated with search and duplication. 
Petitioners may also include in the petition, if they want, a maximum 
amount that they are willing to pay; and the FCU, if it wants, may 
provide petitioners with an estimate of the search and duplication 
costs. The rule does not require, however, that petitioners pay in 
advance, or agree to pay any specific amount, before the FCU provides 
the petitioners with the requested documents.

(f) Dispute Resolution

    Proposed paragraph (f) provides, in the event of a dispute between 
an FCU and its members concerning a petition for inspection or the 
associated costs, either party may submit the dispute to the regional 
director. The regional director, after obtaining the views of both 
parties, will direct the credit union either to withhold the disputed 
materials or to make them available for member inspection and copying. 
The regional director may place conditions upon release, if 
appropriate. Depending on the circumstances, conditions

[[Page 20066]]

imposed by the regional director might include limitations on making 
copies or a requirement that the parties enter into a contract 
restricting the use or further dissemination of the material.
    The OTS Rule does not contain a dispute resolution procedure. The 
NCUA Board believes that a dispute resolution procedure is necessary to 
protect both the inspection rights of members and the FCU's interests.
    In other circumstances involving member disputes with FCUs, NCUA 
usually refers the dispute to the FCU's supervisory committee for 
resolution. The proposed rule does not require such referral because, 
in certain circumstances, such as a pending member vote on a charter or 
share insurance conversion or a merger, members' need for the 
information may be time sensitive. Still, in the event of a dispute 
over access to FCU records, petitioners, if they desire, may contact an 
FCU's supervisory committee before taking it directly to the regional 
director. Similarly, if a regional director receives a request from a 
petitioner for dispute resolution and determines that resolution is not 
time sensitive, the director may refer the matter to the FCU's 
supervisory committee for analysis and response before the director 
makes any decision about the dispute.
    The NCUA Board does not believe that specific time frames for 
regional director action are appropriate. The time needed for dispute 
resolution could vary significantly from case to case depending on the 
complexity of the dispute. In addition, the Board does not believe a 
right to appeal to the Board is necessary.

C. Request for Public Comment

    NCUA's goal is to promulgate clear and understandable regulations 
that impose minimal regulatory burden. The Board requests public 
comments on whether the proposed rule is understandable and minimally 
intrusive and also solicits specific suggestions to improve the content 
of the rule.

D. 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 credit unions, defined as those under ten 
million dollars in assets. This proposed rule standardizes and 
clarifies the rights of members to inspect FCU records. The rule is not 
a significant departure from existing practice that FCUs must permit 
inspection under the same terms and conditions that state law requires 
for shareholders to inspect corporation records. The proposed rule 
requires that a minimum of one percent of the FCU's members sign a 
petition to obtain access. In some states, this burden on the members 
might exceed the burden on shareholders to obtain access and so reduces 
the likelihood of an FCU having to grant access. Accordingly, the Board 
does not anticipate that the proposed rule, if adopted, would have a 
significant economic impact on a substantial number of small credit 
unions.

Paperwork Reduction Act

    Section 701.3 contains 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 regulation as part of an 
information collection package to the Office of Management and Budget 
(OMB) for its review and approval of a new collection of information.
    The proposed rule standardizes and clarifies the circumstances and 
conditions under which FCU members may inspect and copy an FCU's books, 
records of accounts, and minutes of meetings. The FCU must permit 
inspection of relevant records if it receives a member petition stating 
a proper purpose for inspection and signed by at least one percent of 
members, with a minimum of five and a maximum of 250.
    NCUA does not believe members will use this petition authority 
often. NCUA estimates that there will be, perhaps, five such petitions 
per year. NCUA also estimates it will take an FCU that receives a 
petition approximately 20 hours to evaluate the petition, locate 
relevant documents, and make them available for inspection and copying. 
Five petitions times 20 hours per petition equals 100 annual burden 
hours associated with this proposed collection of information. The 
Board also notes that the costs of document search and duplication will 
fall on the petitioners and not on the FCU.
    Organizations and individuals that wish to submit comments on this 
information collection requirement should direct them to the Office of 
Information and Regulatory Affairs, OMB, Attn: Mark Menchik, Room 
10226, New Executive Office Building, Washington, DC 20503, with a copy 
to Mary Rupp, Secretary of the Board, National Credit Union 
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428.
    The NCUA considers comments by the public on this proposed 
collection of information in:
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the NCUA, 
including whether the information will have a practical use;
     Evaluating the accuracy of the NCUA's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology; e.g., permitting 
electronic submission of responses.
    The Paperwork Reduction Act requires OMB to make a decision 
concerning the collection of information contained in the proposed 
regulation 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 regulation.

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 section 654 of the Treasury and 
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 
2681 (1998).

[[Page 20067]]

List of Subjects in 12 CFR Part 701

    Credit unions, Records.

    By the National Credit Union Administration Board on April 12, 
2007.
Mary F. Rupp,
Secretary of the Board.

    Accordingly, NCUA proposes to amend 12 CFR part 701 as follows:

PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS

    1. The authority citation for part 701 continues to read as 
follows:

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 
1761b, 1766, 1767, 1782, 1784, 1787, 1789. Section 701.6 is also 
authorized by 15 U.S.C. 3717. Section 701.31 is also authorized by 
15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610. Section 701.35 
is also authorized by 42 U.S.C. 4311-4312.

    2. Add Sec.  701.3 to read as follows:


Sec.  701.3  Member inspection of credit union books, records, and 
minutes.

    (a) Member inspection rights. A group of members of a federal 
credit union has the right, upon submission of a petition to the credit 
union as described in paragraph (b) of this section, to inspect and 
copy nonconfidential portions of the credit union's:
    (1) Books and records of account; and
    (2) Minutes of the proceedings of the credit union's members, board 
of directors, and committees of directors.
    (b) Petition for inspection. The petition must describe the 
particular records to be inspected and state a purpose for the 
inspection related to the business of the credit union. The petition 
must state that the petitioners as a whole, or certain named 
petitioners, agree to pay the direct and reasonable costs associated 
with search and duplication of requested material. The petition must 
also state that the inspection is not desired for any purpose in the 
interest of a business or object other than the business of the credit 
union; that the members signing the petition have not within five years 
preceding the signature date sold or offered for sale, and do not now 
intend to sell or offer for sale, any information obtained from the 
credit union; and that the members signing the petition have not within 
the past five years aided or abetted any other person in procuring any 
information from the credit union for purposes of sale. The petition 
must name one or more members who will represent the petitioners on 
issues such as inspection procedures, costs, and potential disputes. At 
least one percent of the credit union's members, with a minimum of 20 
members and a maximum of 250 members, must sign the petition.
    (c) Inspection procedures. Within 14 days of receipt of a petition, 
the federal credit union must either allow inspection and copying of 
all requested material or inform the petitioning members in writing why 
it is not able to do so. Inspection may be made in person or by agent 
or attorney and at any reasonable time or times. Member inspection 
rights under this paragraph are in addition to any other member 
inspection rights afforded by law, regulation, or the credit union's 
bylaws.
    (d) Confidential books, records, and minutes. Members do not have 
the right to inspect any portion of the books, records, or minutes of a 
federal credit union if:
    (1) Federal law or regulation prohibits disclosure of that portion,
    (2) The portion contains nonpublic personal information as defined 
in Sec.  716.4 of this part; or
    (3) The portion contains information about credit union employees 
or officials the disclosure of which would constitute a clearly 
unwarranted invasion of personal privacy. Members may, however, inspect 
materials describing the compensation and benefits provided by the 
credit union to its senior executive officers, and the qualifications 
of the senior executive officers, as that term is defined in Sec.  
701.14 of this part.
    (e) Costs. A federal credit union may charge petitioners the direct 
and reasonable costs associated with search and duplication. The credit 
union may not charge for other costs, including indirect costs or 
attorney's fees.
    (f) Dispute resolution. In the event of a dispute between a federal 
credit union and its members concerning a petition for inspection or 
the associated costs, either party may submit the dispute to the 
regional director. The regional director, after obtaining the views of 
both parties, will direct the credit union either to withhold the 
disputed materials or to make them available for member inspection and 
copying. The regional director may place conditions upon release, if 
appropriate. The decision of the regional director is a final agency 
decision and is not appealable to the Board.

 [FR Doc. E7-7610 Filed 4-20-07; 8:45 am]
BILLING CODE 7535-01-P