Mergers, Conversion From Credit Union Charter, and Account Insurance Termination, 5461-5466 [E8-1572]

Agencies

• National Credit Union Administration

[Federal Register Volume 73, Number 20 (Wednesday, January 30, 2008)]
[Proposed Rules]
[Pages 5461-5466]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-1572]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 708a and 708b

RIN 3133-AD40


Mergers, Conversion From Credit Union Charter, and Account 
Insurance Termination

AGENCY: National Credit Union Administration (NCUA).

ACTION: Advance notice of proposed rulemaking and request for comment 
(ANPR).

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SUMMARY: NCUA is considering whether to issue regulations to govern 
merger of a federally insured credit union (FICU)

[[Page 5462]]

into or a FICU's conversion to a financial institution other than a 
mutual savings bank (MSB). NCUA currently does not have regulations 
governing these transactions. Also, NCUA is considering amending its 
regulations regarding mergers, charter conversions, and changes in 
account insurance to address various issues these transactions present 
that affect member rights and ownership interests. These issues include 
accuracy of communications to members, voting integrity, fiduciary duty 
obligations for insiders, and member interest in credit union equity, 
for example, through merger dividends. NCUA seeks comment on the 
necessity of amending its current regulations to address these issues, 
any additional issues relevant to these transactions not noted in this 
ANPR, and, if commenters believe regulatory amendments are needed, 
suggestions on how to address these issues.

DATES: Comments must be received on or before March 31, 2008.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web Site: https://www.ncua.gov/
RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the 
instructions for submitting comments.
     E-mail: Address to regcomments@ncua.gov. Include ``[Your 
name]--Comments on Advanced Notice of Proposed Rulemaking for Parts 
708a and 708b'' 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: Frank Kressman, Staff Attorney, Office 
of General Counsel, at the above address or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION: 

A. Background

    The primary focus of this ANPR is protection of member interests in 
transactions where members have a great deal at stake because the 
transactions involve fundamental changes in their ownership or the 
structure of their credit union, including, in some cases, termination 
of a credit union charter or termination of federal account insurance. 
This ANPR concerns six types of transactions: Merger of a FICU into a 
FICU; merger of a FICU into a privately insured credit union (PICU); 
conversion of a federally-insured state credit union (FISCU) into a 
PICU; conversion of a FICU to an MSB; merger of a FICU into a financial 
institution other than an MSB; and conversion of a FICU into a 
financial institution other than an MSB.
    While these transactions are legally permissible, member ownership 
can be extinguished or diluted and members may have lesser voting 
rights or be deprived of the security of federal share insurance. These 
transactions raise various issues, as discussed below, that NCUA 
believes its current regulations may not adequately address. NCUA is 
considering amendments to make certain member interests are adequately 
protected, including helping members understand the risks and rewards 
associated with these transactions. In addition, NCUA has not 
promulgated rules on the merger of a FICU or conversion of a FICU into 
a financial institution other than an MSB and NCUA is considering the 
necessity of issuing rules to govern these transactions. As in all 
rulemaking it undertakes, NCUA's focus is on providing flexibility and 
fairness, imposing minimal regulatory burden on credit unions whose 
members choose to pursue any of these transactions, and protecting the 
National Credit Union Share Insurance Fund (NCUSIF).
    NCUA's legal authority to regulate these transactions derives from 
the Federal Credit Union Act (Act). The Act specifically authorizes the 
NCUA Board to prescribe rules governing mergers of FICUs, including 
mergers or consolidations with any noninsured credit union or 
institution. 12 U.S.C. 1766(a), 1785(b), 1785(c), and 1789(a). By 
definition, ``noninsured'' means not insured by the NCUSIF, 12 U.S.C. 
1752(7), and, therefore, NCUA may prescribe rules governing mergers, 
conversions, or consolidations with PICUs or other financial 
institutions, for example, banks or thrifts insured by the Federal 
Deposit Insurance Corporation.
    Part 708b of NCUA's regulations, which is limited to ``credit union 
into credit union'' mergers, generally requires: (1) Approval of a 
merger plan by the boards of directors of each credit union; (2) 
submission of a written plan and other documents to NCUA; and (3) 
approval of a plan or proposal by NCUA and, for federal credit unions, 
by members. 12 CFR Part 708b. If a federal credit union is in danger of 
insolvency, member approval is not required. 12 CFR 708b.105(b). NCUA 
considers various factors in approving or disapproving a merger 
including protecting member interests and effects on the NCUSIF.
    Similar to FICU to FICU mergers, NCUA broadly regulates the 
procedures and substance of FICU to PICU mergers including: (1) 
Approval of a merger plan by the boards of directors of each credit 
union; (2) submission of a written plan and other documents to NCUA; 
and (3) approval of plan or proposal by NCUA and, for federal credit 
unions, by members. NCUA imposes additional notice, voting, and 
approval requirements on this type of transaction, including the use of 
form documents. 12 CFR Part 708b, Subpart B-Voluntary Termination or 
Conversion of Insured Status, and Subpart C-Forms. These requirements 
apply as well where a FISCU converts to a PICU.
    The Act specifically addresses FICU to MSB conversions. 12 U.S.C. 
1785(b)(2). While a FICU may convert to an MSB without the prior 
approval of the NCUA Board, 12 U.S.C. 1785(b)(2)(A), it must provide 
notice to each of its members who is eligible to vote on the matter of 
its intent to convert 90, 60, and 30 days before the date of the member 
vote on the conversion. 12 U.S.C. 1785(b)(2)(C). In this context, the 
Act requires NCUA's regulations to be consistent with rules promulgated 
by other federal financial regulators and must be no more or less 
restrictive than those applicable to charter conversions by other 
financial institutions. 12 U.S.C. 1785(b)(2)(G)(i). NCUA administers 
the member vote, which is verified by the federal or state regulatory 
agency that would have jurisdiction over the institution after the 
conversion. If either NCUA or that regulatory agency disapproves of the 
methods by which the member vote was taken or procedures applicable to 
the member vote, the member vote shall be taken again, as directed by 
NCUA or the other agency. 12 U.S.C. 1785 (b)(2)(G)(ii). Additionally, 
the Act specifically provides that no director or senior management 
official may receive any economic benefit in connection with a 
conversion of the credit union other than director fees and other 
compensation and benefits paid in the ordinary course of business. 12 
U.S.C. 1785(b)(2)(F).
    NCUA has implemented its statutory authority to administer FICU to 
MSB conversions. 12 CFR Part 708a. While the decision to convert 
belongs to members, to make this decision, members must be fully 
informed as to the reasons for the conversion and be

[[Page 5463]]

able to consider the advantages and disadvantages.
    In 2006, NCUA revised Part 708a to improve the information 
available to members and the board of directors as they consider a 
possible conversion. 71 FR 77150 (December 22, 2006). The revisions 
included amended disclosures, revised voting procedures, procedures to 
facilitate communications among members, and procedures for members to 
provide their comments to directors before the credit union board votes 
on a conversion plan.
    NCUA has not issued regulations regarding the merger or conversion 
of a FICU into a financial institution other than an MSB. The NCUA 
Board has statutory authority to approve or disapprove these two kinds 
of transactions and authority to promulgate rules to regulate the 
substance and procedures of them. 12 U.S.C. 1766(a), 1785(b)(1)(A), 
1785(b)(1)(D), 1789(a)(11). In approving or disapproving these 
transactions, the NCUA Board must consider a number of criteria 
including: (1) The history, financial condition, and management 
policies of the credit union; (2) the adequacy of the credit union's 
reserves; (3) the economic advisability of the transaction; (4) the 
general character and fitness of the credit union's management; (5) the 
convenience and needs of the members to be served by the credit union; 
and (6) whether the credit union is a cooperative association organized 
for the purpose of promoting thrift among its members and creating a 
source of credit for provident or productive purposes. 12 U.S.C. 
1785(c). NCUA has not issued regulations regarding these transactions 
because there have been only a handful of these transactions; in those 
instances, credit unions sought Board approval by petition, fashioning 
a submission and following procedures generally in line with the 
requirements of Part 708a.

B. Discussion

1. Credit Union Merger or Conversion Into a Financial Institution Other 
Than an MSB

    NCUA seeks comment on whether issuing rules to govern credit union 
mergers or conversions into a financial institution other than an MSB 
would be beneficial for credit union members. NCUA is considering 
establishing an administrative framework and procedures rather than the 
case-by-case approach that has been used. Potential downsides to 
issuing a rule are that, having a rule in place, might encourage these 
transactions and many observers believe they are, only in unusual 
circumstances, in the best interests of members. Nevertheless, having a 
rule in place, with appropriate safeguards for member interests, could 
assist all parties, including the NCUA Board, in protecting protect 
member interests in their credit unions.
    If it is determined a new rule would be beneficial, NCUA believes 
the rule, in brief, would establish a comprehensive administrative 
framework to process these transactions, while including provisions to 
ensure the protection of member rights and interests. In addition, NCUA 
would consider clarifying in a rule the criteria it would apply in 
approving these transactions. Procedurally, a new rule could be modeled 
after part 708b, including the use of form documentation and, in 
addition to borrowing the certain provisions of part 708b, it could 
address the issues discussed below that the Board believes would also 
be present in these transactions.
    Some observers have argued that direct merger or conversion of a 
FICU into a stock issuing bank may have potential advantages. For 
example, it would enable a FICU that anticipates the need to eventually 
issue stock as a bank to accomplish this goal in a more efficient one-
step process as opposed to the typical two-step process (FICU to MSB 
then MSB to stock bank) that has been the pattern in recent years in 
the FICU to MSB conversion scenario. Another advantage of a rule 
permitting these types of transactions is that it could be structured 
in a manner to give economic protection to members by making certain 
they share in the distribution of cash, free stock, or transferable 
stock subscription rights as compensation for their equity interest in 
their credit union.
    A potential issue with a rule for these transactions is that the 
rule would likely be complex because it would need to cover: (1) Both 
mergers and conversions; (2) charter changes to federal and state 
banks; and (3) charter changes to freestanding stock banks and those 
within a mutual holding company structure or stock holding company 
structure.
    NCUA requests comment on whether it should issue a rule regulating 
these transactions or continue to address them under NCUA's statutory 
authority on an as-needed basis. If a commenter is in favor of NCUA 
issuing a rule, the commenter should also suggest how the rule could be 
structured, how NCUA should address the four issues discussed in B.2. 
below in the context of the rule, and what other issues should be 
addressed.

2. Issues

    NCUA believes there are significant issues affecting member 
interests arising across the spectrum of the restructuring transactions 
contemplated in this ANPR, including those for which NCUA currently has 
regulations in place and those, discussed above, for which it does not. 
This ANPR sets out the issues for comment in four categories: 
Management's Duties, Member Right to Equity, Communications to Members, 
and Member Voting. NCUA is interested in receiving comments on how its 
regulations should best address these issues. A discussion of the 
issues follows.
    (a) Management's Duties. In this category, the ANPR seeks comment 
on two issues: the need for a regulation to address the fiduciary duty 
credit union directors owe to members and the need for additional 
regulatory provisions to guard against insider enrichment.
(i) Fiduciary Duty
    A credit union's board of directors has a fiduciary duty to act in 
the best interests of its members.\1\ The Act makes numerous references 
to the NCUA Board's responsibility to act in the best interests of 
credit union members, including:
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    \1\ This duty is based on the relationship of trust and 
confidence between the members and directors and arises because 
members' property is entrusted to the entity to be managed for the 
members benefit. Jean E. Maess, J.D., Corpus Juris Secundum 47 
(2007).
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     The NCUA Board may act to remove or prohibit any 
institution-affiliated party at a FICU if that action meets certain 
requirements, including that the ``interests of the insured credit 
union's members have been or could be prejudiced.'' 12 U.S.C. 
1787(g)(1)(B).
     Credit unions applying for federal account insurance must 
agree to maintain such special reserves as the NCUA Board may require 
``for protecting the interests of the members.'' 12 U.S.C. 1781(b)(6).
     The NCUA Board must review the application of any 
individual to become a director or senior manager at a newly chartered 
or troubled FICU, and disapprove that application, if acceptance of the 
applicant would not be in the best interests of the depositors 
(members). 12 U.S.C. 1790a.
     When acting as the conservator or liquidating agent of a 
FICU, the NCUA Board may take any action it determines is in the best 
interests of the credit union's account holders (members). 12 U.S.C. 
1787(b)(2)(J)(2).
    As discussed in a previous rulemaking, although referring

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specifically to the NCUA Board, these provisions support the conclusion 
that credit union directors have a fiduciary obligation to credit union 
members. 71 FR 77150 (December 22, 2006).

    A closer look at how the cited provisions function, however, 
connects them to the [credit union's board of] directors. 
Specifically, the best interests of the members will dictate the 
[NCUA] Board's actions when removing or prohibiting a director, 
approving the appointment of a director, operating a conserved 
credit union in the role of the board of directors, and reviewing 
the propriety of a board of directors' decision to pursue a 
voluntary liquidation. If the best interests of the members standard 
guides the conduct of the [NCUA] Board, it must also guide the 
conduct of [the credit union's board of] directors.

Id.

    While it is important for a credit union's board of directors to 
understand its duty to act in the best interests of the members in the 
ordinary course of business, NCUA believes it is especially important 
when the board is considering a proposal to change the credit union's 
charter or insurance status. These extraordinary transactions not only 
result in a fundamental shift in the credit union, but tend to present 
more conflicts between member interests and the personal financial 
interests of credit union management.
    While the existence of a fiduciary duty owed by directors to 
members is clear, neither the Act nor NCUA regulations establish or 
provide any guidance as to what that standard of care is for directors. 
NCUA is considering establishing a regulatory standard of care for 
directors that will help ensure they meet their fiduciary duty to their 
members when directors are making decisions in connection with the 
transactions discussed in this ANPR.
    NCUA has considered the standards of care that have developed in 
this area of the law, which, to a great extent, have developed in case 
law, applying fiduciary principles not only to situations involving 
trusts, but also in the corporate context. The result is that a credit 
union board currently must look to state law and case law to understand 
the scope of its fiduciary duties to members and the standard of care 
required as articulated by its particular state. Unfortunately, case 
law and state law can vary widely from jurisdiction to jurisdiction 
causing confusion for credit unions and a lack of uniformity between 
credit unions in one state and others in other states. As a result, the 
standard of care applying to these transactions can span a broad 
spectrum ranging from only requiring a board of directors to have a 
rational basis for making a decision to requiring the board to 
demonstrate that its decisions are made in the best interests of its 
members and based on a full consideration and documented analysis of 
all the alternatives.
    Considering the unique interests, concerns, and structure of credit 
unions as financial cooperatives, NCUA believes having a uniform 
federal standard may be useful to eliminate confusion resulting from 
differences in state law and may make it easier for credit union boards 
to fulfill their duties to members. NCUA solicits comment on whether it 
should establish, by regulation, a uniform federal standard of care for 
the transactions discussed in this ANPR, including specific suggestions 
on the standard that should be applied and if there should be a 
separate standard of care for transactions where the credit union 
member will no longer be a member of a credit union.

(ii) Insider Enrichment

    NCUA's experience with FICU to MSB conversions suggests that in 
some cases credit union officials have pursued personal enrichment to 
the detriment of members, and NCUA has issued disclosure requirements 
to make members aware of the potential for this. NCUA is aware of 
conversion transactions where family members of credit union officials 
had joined the credit union in noticeable numbers prior to the 
conversion. These new members, who may be motivated to share in the 
profits from an eventual sale of stock, can also skew the member vote 
on conversion in some instances, especially in a close vote.
    NCUA is considering specific regulatory requirements regarding the 
record date for members voting on a conversion proposal or other 
transaction to prevent this problem. NCUA is interested in comments on 
any aspect of this issue.
    (b) Member Right to Equity.
    NCUA is broadly considering the issue of how to deal with unequal 
net worth ratios among merging credit unions. This imbalance may result 
in unfair treatment of members of a credit union with a higher net 
worth. One method NCUA is considering to address this issue is to 
require a merger dividend. Another option could be to simply require 
the board of directors of a merging credit union to consider this issue 
as part of its due diligence, come to its own conclusion, and then 
justify that decision to its members.
    Generally, federal credit unions may only return net worth to 
members in the form of dividends or a return of interest. 12 U.S.C. 
1761b, 1763. Dividends must be based on an account balance as of a 
specific date or calculated over a period of time, whether a month, a 
quarter, or several years. 12 CFR 707.7(a), Appendix B (b). Often, 
credit unions undertake a calculation of a dividend going back for a 
period of years to permit a credit union to reward long-time members.
    As noted, a merging credit union often has a higher net worth ratio 
than the continuing credit union. Also, a merging credit union may have 
other valuable characteristics for which the continuing credit union is 
willing to pay a premium, such as a complementary field of membership, 
thus increasing the net worth of the merging credit union in the 
context of the merger. In recent merger transactions, issues about 
merger dividends, also sometimes called a ``share adjustment'' and 
``capital equalization,'' have arisen because of the nature of 
dividends in credit unions. NCUA's Office of General Counsel has 
addressed this issue and concluded that so-called ``per capita'' 
dividends (a flat amount paid to all members) are legally 
impermissible. OGC Op. 07-0410 (April 13, 2007), OGC Op. 97-0813 
(September 29, 1997).
    NCUA recognizes that requiring a merger dividend or other return of 
interest in certain circumstances could include the following 
advantages: (1) Rewarding the merging credit union's members; (2) 
equalizing an imbalance in net worth between the credit unions, 
although this could lessen the merging credit union's value to the 
continuing credit union; and (3) establishing a consistent approach 
(e.g., setting a record date or dividend period, identifying the kinds 
of accounts to receive the merger dividend, and so forth).
    On the other hand, NCUA recognizes that not imposing a merger 
dividend requirement in this area allows credit unions the flexibility 
to decide for themselves whether to include a merger dividend as part 
of their due diligence and negotiations and leaves calculation of any 
dividend to the merging credit unions, essentially allowing market 
forces and the wishes of the members to determine if a dividend is 
appropriate.
    The Board notes that, in a recent FICU to stock bank merger, the 
merging FICU returned to its members their equity interest in the 
credit union plus a premium, and the Board believes a return of equity 
can be a fair way to compensate members for the loss of the credit 
union they own. In other transactions, such as FICU to MSB conversions, 
NCUA has noticed that

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many of the converting credit unions seek to convert at a time when 
their net worth is high. In some instances, the conversion appears 
timed to occur after a period where the credit union has purposefully 
acted to increase its net worth. NCUA believes that, in those instances 
where excess equity has been built up, fairness to members may dictate 
payment of some equity to members of a merging or converting credit 
union instead of transferring it to a new institution where the credit 
union members will have less control and have diluted or no ownership 
interests.
    NCUA seeks comment on all possible options for dealing with this 
issue either as an amendment to current regulations or by issuing a new 
regulation.
    (c) Communications to Members: Improper or Misleading 
Communications to Members.
    NCUA fully supports members' rights to vote, in accordance with the 
Act, to make changes to their charter or account insurance but believes 
the linchpin in these transactions is that communications to members 
regarding the risks and benefits of the transactions must be accurate, 
sufficiently comprehensive, and not misleading.
    NCUA encourages a FICU converting to an MSB to communicate freely 
with its members. There are no limits or restrictions on the number or 
kind of communications, provided the communications are accurate and 
not misleading and otherwise comply with NCUA's rules for written 
member communications. An example of an improper, conversion-related 
communication is one that implies NCUA endorses the conversion or 
conversion-related materials. In a recent conversion transaction, NCUA 
discovered a credit union made this kind of improper communication to 
its members. Although the instances in which this issue has been most 
prevalent are FICU to MSB conversions, it also could arise in any 
transaction in which a credit union sends materials to its members, 
such as federal to private insurance conversions and FICU to bank 
mergers.
    NCUA is considering the need for a regulatory provision that 
specifically prohibits communications from credit union officials that 
state or imply that NCUA has endorsed the charter change transaction or 
accompanying credit union materials. NCUA is also considering requiring 
a credit union to include a statement in its materials to that effect, 
namely, that NCUA has not endorsed the transaction. NCUA requests 
comment in this regard.
    In a charter change transaction, a credit union may communicate 
with its members about the kind and quality of services it will provide 
after completion of the transaction. For example, a credit union may 
close or move branch offices or modify other services available to 
members, such as ATM services. It may choose to do this as a cost 
savings measure, to achieve better compatibility with the continuing 
financial institution, or for other reasons. In the FICU to MSB 
conversion context, a converting credit union may be legally required 
to close or move a branch located in a federal building that has been 
provided by a federal agency on a rent-free and utility-free basis.\2\ 
Under any of these circumstances, members may face the diminution of 
services or have less convenient access to them.
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    \2\ The Act authorizes federal agencies to provide federal 
credit unions space in federal buildings on a rent-free and utility-
free basis if certain conditions are met. 12 U.S.C. 1770. The key 
condition is that ``at least 95 percent of the membership of the 
credit union to be served by the allotment of space * * * is 
composed of persons who either are presently federal employees or 
were federal employees at the time of their admission into the 
credit union, and members of their families * * *'' See also 41 CFR 
102-79.40. MSBs do not have any similar authority, although it 
appears that, under General Service Administration regulations, 
commercial entities, including banks, can lease space on a rental 
basis in publicly-accessible areas of federal buildings.
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    An issue in a past FICU to MSB conversion was whether the credit 
union would be legally required to close or move a number of its rent-
free branches located in federal buildings. In that transaction, the 
credit union made what appeared to be potentially inaccurate statements 
about its ability to continue to operate the branches in the same 
locations following conversion to an MSB.
    In another FICU to MSB conversion, the credit union made arguably 
misleading statements to members about its ability to continue to 
participate in a shared branch/shared service center network after 
conversion. In that transaction, the credit union told its members it 
was seeking approval to obtain post-conversion access to the network 
but failed to disclose that its request could be denied resulting in 
the members not having access to the network.
    Members need full and accurate information about a conversion to 
cast an informed vote, including if the transaction will result in the 
credit union closing or moving branches, losing access to shared 
branch/shared service center networks, or modifying other services 
available to members. NCUA is considering requiring converting credit 
unions to research this aspect of a transaction and disclose their 
findings to members. Alternatively, NCUA could issue a more general 
rule to address the need for full and accurate information. NCUA 
solicits comments on all aspects of this issue.
    Another communications issue, which NCUA's rules do not 
specifically address, is the so-called ``hostile takeover'' scenario, 
where an institution communicates directly with the members of a target 
credit union to encourage a merger or other consolidation.\3\ In the 
credit union context, the term ``hostile takeover'' may be a misnomer 
because there is no saleable stock. Generally, a hostile takeover 
refers to a takeover of a target company against the wishes of the 
target's management and board of directors through the purchase of a 
controlling interest in the target's stock. Failed merger negotiations 
between two federal credit unions recently resulted in the potential 
acquiring credit union communicating directly with the potentially 
merging credit union's members in a fashion that was deemed hostile by 
the management of the target credit union.
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    \3\ Outside of the credit union context, where there is a tender 
offer for stock of a public company (the mechanism by which a 
hostile bidder solicits the stockholders of the target), it triggers 
the provisions of the Securities Exchange Act of 1934 and Securities 
and Exchange Commission (SEC) rules. These provisions address 
communications by third parties to stockholders and, as noted in OGC 
Op 07-0342 (April 6, 2007), those SEC provisions provide detailed 
requirements regarding disclosures, tender offers, and other 
matters. SEC oversight in this regard helps protect stockholders by 
ensuring they are informed with accurate information about the 
transaction.
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    NCUA could consider addressing third party merger communications by 
relying on current regulations or issuing a new regulation. As noted 
above, NCUA regulations do not directly address this situation, 
although part 740 prohibits a FICU from using any advertising or making 
any representation that is inaccurate or deceptive or in any way 
misrepresents its services, contracts, or financial condition. 12 CFR 
Part 740. The limitations of current regulations such as Part 708b and 
Part 740 are also, in part, that they only extend to insured credit 
unions. While a new regulation addressing mergers by a hostile 
institution may be more effective than the status quo, it would not be 
without its own limitations. Specifically, NCUA has no direct 
jurisdiction over communications by non-credit union institutions with 
credit union members. Alternatively, an approach could be to establish 
communication standards that would have to be met as a condition of 
NCUA approval of a merger.
    NCUA seeks comment on this topic in general and regulatory 
approaches to

[[Page 5466]]

protecting the interests of credit union members in this context.
    (d) Member Voting: Right to Request a Recount and Use of Interim 
Tallies.
    For the transactions that are the subject of this ANPR, NCUA is 
considering permitting any member of a credit union to request a formal 
recount of the vote in any situation in which the margin of decision is 
less than a certain percentage of the total votes cast. NCUA has not 
determined the appropriate margin for triggering recount rights and 
believes examining state law on political vote recounts in this regard 
could be appropriate and useful. NCUA is also considering a recount 
provision if sufficient evidence exists that the original vote 
tabulation is unreliable.
    NCUA has reviewed the voting procedures of a number of close votes 
in recent years. In those cases, NCUA found irregularities and 
improprieties that called into question the reliability of the vote. 
Examples of problems found include the credit union or its agent: 
Failing to compile a proper membership list thereby excluding some 
members from the vote; improperly excluding members from voting for 
causing a loss to the credit union; allowing individuals not fully 
qualified as members to vote; improperly handling mail ballots returned 
as undeliverable; employing poor internal controls in securing, 
counting, and recording votes; using inconsistent procedures for 
determining if a vote cast was invalid; and being generally unable to 
reconcile the tally.
    An unreliable voting process, whether intentionally manipulated or 
the result of incompetence, deprives members of their right to choose 
the fate of their credit union. NCUA requests comment on providing 
members the right to request a recount, under what circumstances and 
criteria a recount should be undertaken, and procedures for exercising 
such a right.
    The use by management of an interim vote tally presently is 
primarily an issue in the FICU to MSB conversion context but could be 
an issue anytime management has an interest in influencing the outcome 
of a membership vote. NCUA has observed in the voting procedures in 
some FICU to MSB conversions that credit union management seek periodic 
running tallies from the election teller as to how many members have 
voted yes and no and which members have not voted. Credit union 
management has justified this practice by stating they only use the 
information for the purpose of encouraging members to vote. In 
investigations of recent conversions, NCUA has discovered that, in 
practice, some credit unions use this information only for encouraging 
votes in favor of the conversion. This violates both Part 708a and 
typical credit union policies aimed at neutrality in this regard. For 
example, some credit unions have pressured, required, or paid employees 
to encourage members to vote in favor of conversion even where the 
employees did not wish to do so or did not believe conversion was in 
the members' best interests. NCUA has learned that some credit unions 
have targeted likely ``yes'' voters in an attempt to sway the vote in 
favor of conversion. Other tactics include determining how a member 
voted in violation of the voting secrecy requirement, using periodic 
voting tallies to management's advantage and to the disadvantage of 
those members opposed to the conversion by not sharing that information 
with members, and improperly handling ballots for members instead of 
having members mail them directly to the independent election teller.
    NCUA is considering: (1) Prohibiting credit union management from 
obtaining interim voting tallies from the election teller; (2) 
prohibiting credit union management from obtaining lists of members who 
have not voted from the election teller; (3) prohibiting credit union 
employees from soliciting members to vote; and (4) prohibiting credit 
union employees from completing member ballots or otherwise handling 
ballots. NCUA would appreciate comments on these means for ensuring the 
integrity of the voting process.

Request for Comments

    The NCUA Board invites comment on any of the issues discussed above 
including: (1) If NCUA's regulations should be amended to address the 
issues discussed in this ANPR; (2) if NCUA should promulgate new 
regulations for credit union merger or conversion into a financial 
institution other than an MSB and, if so, what those regulations should 
cover; and (3) any other relevant issues NCUA has not considered.

    By the National Credit Union Administration Board on January 24, 
2008.
Mary F. Rupp,
Secretary of the Board.
 [FR Doc. E8-1572 Filed 1-29-08; 8:45 am]
BILLING CODE 7535-01-P