Guidance Regarding Prohibitions Imposed by Section 205(d) of the Federal Credit Union Act, 48399-48411 [E8-19158]

Agencies

• National Credit Union Administration

[Federal Register Volume 73, Number 161 (Tuesday, August 19, 2008)]
[Notices]
[Pages 48399-48411]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-19158]


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NATIONAL CREDIT UNION ADMINISTRATION


Guidance Regarding Prohibitions Imposed by Section 205(d) of the 
Federal Credit Union Act

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final Interpretive Ruling and Policy Statement 08-1.

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SUMMARY: The NCUA is issuing an Interpretive Ruling and Policy 
Statement (IRPS) regarding prohibitions imposed by Section 205(d) of 
the Federal Credit Union Act (FCU Act) (12 U.S.C. 1785(d)(1)). Section 
205(d) of the FCU Act prohibits a person who has been convicted of any 
criminal offense involving dishonesty or breach of trust, or who has 
entered into a pretrial diversion or similar program in connection with 
a prosecution for such offense, from participating in the affairs of an 
insured credit union except with the prior written consent of the NCUA 
Board. This IRPS provides direction and guidance to federally-insured 
credit unions and those persons who may be affected by Section 205(d) 
because of a prior criminal conviction or pretrial diversion program 
participation by describing the actions that are prohibited under the 
statute and establishing the procedures for applying for NCUA Board 
consent on a case-by-case basis.

DATES: This IRPS is effective September 18, 2008.

FOR FURTHER INFORMATION CONTACT: Jon Canerday, Trial Attorney, Office 
of General Counsel, at the National Credit Union Administration, 1775 
Duke Street, Alexandria, Virginia 22314-3428, by e-mail at 
canerday@ncua.gov or by telephone at (703) 518-6548.

SUPPLEMENTARY INFORMATION:

A. Background

    In April 2008, the NCUA Board published a proposed IRPS regarding 
the prohibition imposed by Section 205(d) of the FCU Act. 73 FR 18576 
(April 4, 2008). Section 205(d) of the FCU Act prohibits, without the 
prior written consent of the NCUA Board, a person convicted of any 
criminal offense involving dishonesty or breach of trust, or who has 
entered into a pretrial diversion or similar program in connection with 
a prosecution for such offense, from becoming or continuing as an 
institution-affiliated party, or otherwise participating, directly or 
indirectly, in the conduct of the affairs of an insured credit union. 
The comment period closed on June 3, 2008. NCUA received seven comments 
on the proposal. After consideration of the comments, NCUA is 
finalizing the IRPS, which generally adopts the guidance as proposed.

B. Public Comments

    NCUA welcomed general comments on the proposed IRPS. In addition, 
the Board specifically sought comments as to whether the format of this 
guidance as an IRPS was appropriate or whether a regulation would be 
more suitable. The Board invited comments as to whether a specific 
form, similar to the form required by the FDIC in connection with a 
similar statute, should be used to request consent pursuant to Section 
205(d).
    NCUA received seven comment letters in response to the proposed 
IRPS: two from federal credit unions, two from national credit union 
trade organizations, and three from credit union leagues. The 
commenters generally supported the need for the guidance as contained 
in the proposed IRPS and offered several suggestions intended to assist 
the Board in improving the proposed IRPS.
    Two commenters believed that a regulation was the more appropriate 
format for the guidance. One of the commenters who favored a regulation 
thought a regulation provided greater protection to a credit union that 
might be challenged by a prospective employee. Another commenter 
believed a regulation was preferable because it would help reinforce a 
credit union's right to appeal an adverse decision and subject future 
changes to public notice and comment. A third commenter suggested the 
guidance should take the form of a Letter to Credit Unions, believing 
that format was more familiar to credit union officials.
    The Board appreciates the need to provide protection for credit 
unions that

[[Page 48400]]

seek to comply with the requirements of the IRPS. However, the Board 
concludes that the source of the requirement stems from federal 
statute, namely Section 205(d). Thus, the Board believes that the need 
to comply with federal law, as augmented by guidance in the form of an 
IRPS, should be sufficient to protect a credit union. The Board 
believes that credit union officials should be able to adequately 
understand and apply the guidance styled as an IRPS and that the right 
to request a hearing contained in the IRPS provide a credit union a 
sufficient right to appeal a denial of consent by the Board. 
Additionally, the Board does not amend its IRPS without providing the 
public notice and an opportunity to comment. For all of these reasons, 
the Board believes it appropriate to issue the final guidance in the 
form of an IRPS.
    Four commenters believed that a form should be required in order to 
request consent. As one commenter observed, the use of a form ``is 
necessary to ensure uniformity and consistency throughout the consent 
process.'' The commenters favoring a form suggested that the form 
required by the FDIC was a reasonable template that could be modified 
to fit the needs of credit unions. The Board concurs with the 
commenters and therefore the final IRPS contains a requirement that 
applications for consent under Section 205(d) must be presented on the 
form attached to this IRPS.
    A majority of the commenters sought additional guidance from NCUA 
as to who comes within the prohibition of Section 205(d). In 
particular, commenters were concerned as to whether independent 
contractors of a credit union would come within the ambit of Section 
205(d), thus requiring credit unions to make inquiry as to the past 
criminal history of such contractors.
    Several commenters also expressed concern over the use of the term 
``de facto employee'', believing it is confusing and has never been 
defined by NCUA. Another commenter believed use of the concept exceeded 
the statute and thus was an improper expansion of the scope of the 
prohibition imposed by Section 205(d). Still another commenter 
expressed the view that such expansive definitions could require credit 
unions ``to perform background checks on any party with whom it has 
commercial dealings. * * *'' This commenter also believed that Section 
19 of the Federal Deposit Insurance Act was clearer and less subjective 
than the definition in the proposed IRPS. Further, another commenter 
believed the definition of independent contractor was inconsistent with 
the FCU Act because the definition cited to Section 206(r), which 
contains the term ``violation of any law or regulation.''
    The Board recognizes that the language of Section 205(d) creates 
uncertainty as to whom the section applies. The terms ``institution-
affiliated party'', and ``otherwise participate, directly or 
indirectly, in the conduct of the affairs of any insured credit union'' 
are terms dictated by Congress in the statute.\1\ Those are terms that 
are used and defined in various other sections of the FCU Act, as well 
as in statutes applied by the other federal financial institution 
regulatory agencies. As a result, a body of case law has developed that 
further defines these terms. These definitions are fact dependent, 
making it difficult to provide easily understood, universal 
definitions. Neither the OTS nor the FDIC thought it advisable to 
define similar terms, and the Board is likewise reluctant to attempt to 
do so.
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    \1\ These are virtually identical terms to those used in Section 
19 of the Federal Deposit Insurance Act.
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    The Board recognizes that one common concern expressed by 
commenters was to what extent Section 205(d) applied to independent 
contractors, and thus required inquiry of such contractors by credit 
unions. The Board wishes to make clear that not all contractors are 
subject to the prohibition contained in Section 205(d). The crucial 
test is the degree or extent to which the contractor participates in 
the affairs of the credit union. As the proposed IRPS stated, ``an 
independent contractor who influences or controls the management or 
affairs of an insured credit union, would be covered by Section 
205(d).''
    The FDIC addressed the issue of affiliated parties and independent 
contractors in the preamble to its Statement of Policy Pursuant to 
Section 19 of the Federal Deposit Insurance Act as follows:

    Similarly, directors and officers of affiliates, subsidiaries or 
joint ventures of an insured institution or its holding company will 
be covered if they are in a position to influence or control the 
management or affairs of the insured institution. In those cases in 
which such individuals exercise policymaking functions for the 
insured institution, they should be deemed ``participants.'' For 
example, officers of an electronic data processing (EDP) affiliate 
would not typically exercise a controlling influence to the extent 
that the affiliate simply provides a processing service to the bank. 
On the other hand, if a mortgage banking affiliate sends loans to an 
insured institution that the institution is obligated to purchase, 
then the officers of the affiliate may be participants in the 
insured institution's affairs. Where an employee of an EDP service 
has access to sensitive bank records and the ability to manipulate 
data so as to influence or control the management or affairs of an 
insured institution, that person will be covered by section 19. The 
degree of such influence may be controlled by reliance upon the 
safeguards and internal controls put in place by the affiliate and 
the bank. Insured depository institutions continue to out source 
increasing numbers of banking tasks. To the extent that independent 
contractors are utilized, an analysis similar to that for affiliates 
may be applied. Typically an independent contractor does not have a 
relationship with the insured institution other than the activity 
contracted for by the depository institution.
    63 FR 66177, at 66178-66179 (December 1, 1998).

    The Board agrees with the FDIC's analysis and believes it is 
applicable to the credit union community as well. Therefore, the Board 
is of the view that very few of the contractors who perform services 
for credit unions will be involved to such a degree that they could be 
said to be influencing or controlling the management or affairs of a 
credit union. Only when the involvement of affiliates or independent 
contractors rise to the level of influencing or controlling the 
management or affairs of a credit union does the credit union need to 
be concerned about the criminal past of the employees of the affiliate 
or independent contractor.
    One commenter asked whether it would be sufficient to specify in 
contracts with vendors that no one who had been convicted of any 
criminal offense involving dishonesty or breach of trust would be 
allowed to have dealings with the credit union. The FDIC touched on 
this question in its preamble, stating that it ``expects that the 
relationship between an independent contractor and an insured 
institution is to be governed by a written contract, through which the 
insured institution may require typical safeguards such as warranties 
and bond coverage.'' Id, at 66179. Though not required by the IRPS, the 
additional contractual restriction on a contractor to not use employees 
who would otherwise be prohibited under Section 205(d), as proposed by 
the commenter, would be a reasonable, additional safeguard.
    Several commenters expressed concern about the use of the term de 
facto employee. This is a common employment law concept that was 
adopted by the FDIC in its Statement of Policy Pursuant to Section 19 
of the Federal Deposit Insurance Act to prevent individuals from 
circumventing the requirements of the law by simply claiming to be an 
independent contractor. As the FDIC explained:


[[Page 48401]]


    The FDIC is aware that an effort can be made to evade the 
coverage of section 19 by ``converting'' an employee to an 
independent contractor. In those cases, generally applicable 
standards of employment law will be used to identify such 
arrangements, and to find that the person is a ``de facto'' 
employee.
    63 FR 66177, at 66179 (December 1, 1998).

    Whether an individual is actually an independent contractor or an 
employee (a de facto employee) has profound implications with respect 
to tax and other employment matters. In determining whether a person 
must request consent pursuant to Section 205(d), the Board believes it 
is appropriate to consider what the employee actually does and their 
relationship to the credit union rather than simply whether they are 
called an independent contractor. Therefore, the final IRPS retains the 
concept that de facto employees, as determined by applying generally 
applicable standards of employment law, will also be subject to Section 
205(d). Because it is not possible to provide more concrete 
definitions, the Board wants to emphasize that credit unions with any 
questions regarding whether a particular person comes within the scope 
of Section 205(d) may solicit guidance from NCUA's Office of General 
Counsel.
    Two commenters expressed a desire for a more comprehensive 
definition of what offenses qualify as de minimis. One commenter 
proposed that the Board provide a comprehensive listing of offenses 
that involve dishonesty or breach of trust. Another commenter noted 
that almost every criminal offense could be said to involve dishonesty 
or breach of trust in some form, and asked whether virtually all 
convictions would be subject to Section 205(d).
    The Board understands the desire by credit unions for more 
certainty regarding when an application under Section 205(d) is 
required. However, considering the number of potential jurisdictions 
that have criminal statutes containing offenses involving dishonesty or 
breach of trust, it is simply not possible to provide an exhaustive 
list of such offenses. Thus, it remains the responsibility of each 
credit union to examine the elements of the statute under which an 
individual was convicted in order to determine whether it constitutes a 
crime involving dishonesty or breach of trust.
    Another commenter urged the Board to not simply provide the 
statutory cite to those offenses that qualify for the ten year 
limitation on the Board providing consent (found at Section 205(d)(2)), 
but rather to list such offenses separately. The Board is not inclined 
to provide an exhaustive list. Congress could amend the provision, 
resulting in the list becoming outdated and inaccurate until the IRPS 
is appropriately modified. The Board believes the better approach is to 
cite the reader to the exact statutory provision that contains the most 
current list of offenses Congress has made subject to the ten year ban.
    Five commenters expressed concerns as to whether the proposed IRPS 
would operate to require credit unions to conduct background checks or 
other inquiries of existing employees or institution-affiliated 
parties, if such investigations were not performed at the time those 
persons became affiliated with the credit union. In that regard, the 
Board would note that the prohibition of Section 205(d) has existed in 
some form since 1970. Since that date, credit unions have been required 
to make a diligent inquiry as to whether prospective employees or 
institution-affiliated parties came within the prohibition imposed by 
Section 205(d). Section 205(d)(1)(B) contains a criminal provision that 
applies to credit unions and therefore, credit unions should determine 
for their own protection whether they have sufficiently examined the 
background of those previously allowed to serve as employees or 
institution-affiliated parties.
    Another commenter requested the Board to make clear that credit 
unions need not conduct background checks of prospective employees, but 
rather permit reliance on answers given by applicants. As stated in the 
proposed IRPS, ``The NCUA believes that at a minimum, each insured 
credit union should establish a screening process which provides the 
insured credit union with information concerning any convictions or 
pretrial diversion programs pertaining to a job applicant. This would 
include, for example, the completion of a written employment 
application which requires a listing of all convictions and pretrial 
diversion programs.'' The Board is cognizant that background checks are 
costly and time-consuming. Therefore, the Board agrees with the 
commenter that credit unions are normally justified in relying on a job 
applicant's answers regarding past criminal history. However, if a 
credit union has reason to believe that an applicant was not being 
truthful, further inquiry into the person's past might be necessary 
under the circumstances.
    In order to provide more guidance to credit unions regarding 
screening of prospective employees, one commenter suggested the Board 
issue guidance similar to that published by the FDIC on the same topic. 
We understand the guidance referenced in the comment letter is FDIC's 
Financial Institution Letter FIL-46-2005, dated June 1, 2005, and 
entitled ``Pre-Employment Background Screening.'' The guidance in FIL-
46-2005, while perhaps useful, is beyond the scope of this IRPS. 
However, the agency will consider addressing the subject in another 
forum in the future.
    One commenter asked for guidance as to whether ``good faith 
compliance with a similar state law may satisfy the requirements 
under'' Section 205(d). The statute cited by the commenter was a New 
York law that prevented denial of employment because of a prior 
criminal conviction unless certain other factors were met. The Board 
disagrees that reliance on a state law that conflicts with the 
prohibition imposed by Section 205(d) satisfies the requirements of the 
federal statute. The Board believes that in this circumstance, Section 
205(d), as a federal statute, pre-empts any state law that conflicts 
with it.\2\ Consequently, federally insured credit unions must comply 
with Section 205(d), even if doing so would appear to be in conflict 
with a state employment law.
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    \2\ ``Federal preemption of state laws stems from the supremacy 
clause, U.S Const., art. V, cl. 2, which provides that the laws of 
the United States shall be the supreme law of the land, 
notwithstanding any state laws to the contrary. Preemption may be * 
* * implied by the nature of federal legislation and the subject 
matter, even absent a declaration of preemptive intent. Meyers v. 
Beverly Hills Federal Savings and Loan Ass'n, 499 F.2d 1145, 1146 
(9th Cir. 1974).'' Opinion letter from Hattie M. Ulan, Associate 
General Counsel to Peter J. Liska, dated June 11, 1992, subject, 
Iowa Credit Card Registration Law.
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    Two commenters suggested that the IRPS specify the length of time 
the Board would take to act on an application submitted for consent 
under Section 205(d). One commenter suggested the Board should be able 
to act on an application within fourteen business days; another 
suggested within five days. The Board appreciates the credit union 
community's desire for certainty as to how quickly applications under 
Section 205(d) will be processed. However, each application is fact 
specific and varies in complexity. For that reason, the Board concludes 
that it is impracticable to set a time table for action on such 
applications. Past applications that have been submitted to the Board 
have generally been adjudicated within 60 days from submission. In most 
cases, the time was significantly less. The Board is committed to 
deciding applications for consent in the future as quickly as possible.

[[Page 48402]]

    With respect to the factors the Board will consider when evaluating 
an application under Section 205(d), one commenter suggested the IRPS 
include two provisions contained in FDIC's regulatory list of factors. 
Specifically, one of the suggested additions was a provision that would 
require the Board to consider whether a person's participation in the 
affairs of the credit union would constitute a threat to its safety or 
soundness or the interest of its members, or would threaten to impair 
public confidence in the credit union. The other suggested addition 
would address whether the person would be eligible for bond coverage.
    The Board believes the first suggested provision is a valuable 
factor to be considered and accordingly will add the additional 
criteria to the final IRPS. Regarding the second suggestion, the Board 
notes that the proposed IRPS contained a similar provision to that 
suggested (``(6) The applicability of the insured institution's 
fidelity bond coverage to the person;''). Thus, because of the 
similarity of the two provisions, the Board will retain the criteria 
unmodified from the proposed IRPS.
    Accordingly, and except as discussed above, the Board adopts IRPS 
08-1 as proposed.

C. Regulatory Procedures

Regulatory Flexibility Act
    The Regulatory Flexibility Act requires that NCUA prepare an 
analysis describing any significant economic impact agency rulemaking 
may have on a substantial number of small credit unions. 5 U.S.C. 601 
et seq. For purposes of this analysis, NCUA considers credit unions 
under $10 million in assets as small credit unions. Since the 
requirements in this IRPS are generally restatements of requirements in 
other laws, NCUA does not believe this IRPS will have a significant 
economic impact on a substantial number of small credit unions.
Paperwork Reduction Act
    This IRPS contains an application requirement. As required by the 
Paperwork Reduction Act of 1995, 44 U.S.C. 3507(d), NCUA submitted a 
copy of the proposed IRPS to the Office of Management and Budget (OMB) 
for its review and approval. OMB approval of the Collection of 
Information is still pending.
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. This IRPS applies to all federally-insured 
credit unions, but does not have substantial direct effect on the 
states, on the relationship 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 IRPS 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 the IRPS would not affect family well-
being within the meaning of section 654 of the Treasury and General 
Government Appropriations Act of 1999, Public Law 105-277, 112 Stat. 
2681 (1998).

    By the National Credit Union Administration Board, on July 24, 
2008.
Paul M. Peterson,
Acting Secretary of the Board.

    Authority: 12 U.S.C. 1752a, 1756, 1766, 1785.

Interpretive Ruling and Policy Statement 08-1

Guidance Regarding Prohibitions Imposed by Section 205(d) of the 
Federal Credit Union Act

I. Background

    This Interpretive Ruling and Policy Statement (IRPS) provides 
requirements, direction, and guidance to federally-insured credit 
unions (insured credit unions) and individuals regarding the 
prohibition imposed by operation of law by Section 205(d) of the 
Federal Credit Union Act (FCU Act) (12 U.S.C. 1785(d)). Section 
205(d)(1) provides that, except with the prior written consent of the 
National Credit Union Administration (NCUA) Board, a person who has 
been convicted of any criminal offense involving dishonesty or breach 
of trust, or has agreed to enter into a pretrial diversion or similar 
program in connection with a prosecution for such offense may not:
     Become, or continue as, an institution affiliated party 
with respect to any insured credit union; or
     Otherwise participate, directly or indirectly, in the 
conduct of the affairs of any insured credit union.
    Section 205(d)(1)(B) further provides that an insured credit union 
may not allow any person described above to engage in any conduct or to 
continue any relationship prohibited by Section 205(d). The statute 
imposes a ten-year ban against the NCUA Board granting consent for a 
person convicted of certain crimes enumerated in Title 18 of the United 
States Code. In order for the NCUA Board to grant consent during the 
ten-year period, the NCUA Board must file a motion with, and obtain the 
approval of, the sentencing court. (Section 205(d)(2)). Finally, 
Section 205(d)(3) states that ``whoever knowingly violates'' (d)(1)(A) 
or (d)(1)(B) is committing a felony, punishable by up to five years in 
jail and a fine of up to $1,000,000 a day.
    This IRPS provides guidance to credit unions and individuals 
regarding who is subject to the prohibition provision of Section 
205(d). The IRPS defines what offenses come within the prohibition 
provision of Section 205(d) and thus require an application for the 
NCUA Board's consent to participate in the affairs of an insured credit 
union. The IRPS also identifies certain offenses that will be excluded 
from Section 205(d) and do not require the NCUA Board's consent. In 
order to assist those who may need the consent of the NCUA Board to 
participate in the affairs of an insured credit union, the IRPS 
explains the procedures to request such consent, specifies the 
application form that must be used, clarifies the duty imposed on 
credit unions by Section 205(d), and identifies the factors the NCUA 
Board will consider in deciding whether to provide such consent. 
Finally, the IRPS explains how an applicant could appeal a decision by 
the NCUA Board denying an application for its consent.

II. Policies and Procedures Regarding Prohibitions Imposed by Section 
205(d)

A. Scope of Section 205(d) of the FCU Act

1. Persons Covered by Section 205(d)
    (a) Institution-affiliated parties.
    Section 205(d) of the FCU Act applies to institution-affiliated 
parties, as defined by Section 206(r) of the FCU Act (12 U.S.C. 
1786(r)), and others who are participants in the conduct of the affairs 
of an insured institution. Institution-affiliated party means:
    (1) Any committee member, director, officer, or employee of, or 
agent for, an insured credit union;
    (2) Any consultant, joint venture partner, and any other person as 
determined by the Board (by regulation or on a case-by case basis) who 
participates in the conduct of the affairs of an insured credit union; 
and
    (3) Any independent contractor (including any attorney, appraiser, 
or

[[Page 48403]]

accountant) who knowingly or recklessly participates in--
    (i) Any violation of any law or regulation;
    (ii) Any breach of fiduciary duty; or
    (iii) Any unsafe or unsound practice, which caused or is likely to 
cause more than a minimal financial loss to, or a significant adverse 
effect on, the insured credit union. (Section 206(r)).
    All officials, committee members and employees of an insured credit 
union fall within the scope of Section 205(d) of the FCU Act. 
Additionally, anyone NCUA determines to be a de facto employee, 
applying generally applicable standards of employment law, will also be 
subject to Section 205(d).
    Under Section 206(r), independent contractors are considered 
institution-affiliated parties if they knowingly or recklessly 
participate in violations, unsafe or unsound practices or breaches of 
fiduciary duty which are likely to cause significant loss to, or a 
significant adverse effect on, an insured credit union. As a general 
rule, an independent contractor who influences or controls the 
management or affairs of an insured credit union, would be covered by 
Section 205(d). In addition, a ``person''' for purposes of Section 
205(d) means an individual, and does not include a corporation, firm or 
other business entity.
    (b) Participants in the affairs of an insured credit union.
    A person who does not meet the definition of institution-affiliated 
party is nevertheless prohibited by Section 205(d) if he or she is 
considered to be participating, directly or indirectly, in the conduct 
of the affairs of an insured credit union. Whether persons who are not 
institution-affiliated parties are covered depends upon their degree of 
influence or control over the management or affairs of an insured 
institution. Those who exercise major policymaking functions of an 
insured institution would be deemed participants in the affairs of that 
institution and covered by Section 205(d). Participants in the affairs 
of a credit union is a term of art and is not capable of more precise 
definition. As the OTS stated in the preamble to its regulation 
regarding Section 19 of the FDIA:

    ?Given the changes in banking, including financial modernization 
and the rapid pace of technology, a regulatory listing of activities 
that constitute participation is neither practical nor advisable. 
Accordingly, like FDIC's [Statement of Policy], the interim final 
rule does not define precisely what activities constitute 
``participation.'' Rather, agency and court decisions will provide 
the guide as to what standards will be applied. As a general 
proposition, however, participation will depend upon the degree of 
influence or control over the management or affairs of the [insured 
credit union]. Those who exercise major policymaking functions at 
[an insured credit union] would fall within this category.
    72 FR 25948, at 25949 (May 8, 2007).

    NCUA agrees with that view and will not define what constitutes 
participation in the conduct of the affairs of an insured credit union 
but rather will analyze each individual's conduct on a case-by-case 
basis and make a determination.
2. Offenses Covered by Section 205(d)
    Except as indicated in paragraph (3), below, an application 
requesting the consent of the NCUA Board under Section 205(d) is 
required where any adult, or minor treated as an adult, has received a 
conviction by a court of competent jurisdiction for any criminal 
offense involving dishonesty or breach of trust (a covered offense), or 
where such person has entered a pretrial diversion or similar program 
regarding a covered offense. The following definitions apply:
    (a) Conviction. There must be a conviction of record. Section 
205(d) does not apply to arrests, pending cases not brought to trial, 
acquittals, or any conviction which has been reversed on appeal. A 
conviction with regard to which an appeal is pending will require an 
application until or unless reversed. A conviction for which a pardon 
has been granted will require an application.
    (b) Pretrial Diversion or Similar Program. A pretrial diversion 
program, whether formal or informal, is characterized by a suspension 
or eventual dismissal of charges or criminal prosecution upon agreement 
by the accused to treatment, rehabilitation, restitution, or other non-
criminal or non-punitive alternatives. Whether a program constitutes a 
pretrial diversion is determined by relevant federal, state or local 
law, and will be considered by the NCUA Board on a case-by-case basis.
    (c) Dishonesty or Breach of Trust. The conviction or entry into a 
pretrial diversion program must have been for a criminal offense 
involving dishonesty or breach of trust.
    ``Dishonesty'' means directly or indirectly to cheat or defraud; to 
cheat or defraud for monetary gain or its equivalent; or wrongfully to 
take property belonging to another in violation of any criminal 
statute. Dishonesty includes acts involving want of integrity, lack of 
probity, or a disposition to distort, cheat, or act deceitfully or 
fraudulently, and may include crimes which federal, state or local laws 
define as dishonest.
    ``Breach of trust'' means a wrongful act, use, misappropriation or 
omission with respect to any property or fund which has been committed 
to a person in a fiduciary or official capacity, or the misuse of one's 
official or fiduciary position to engage in a wrongful act, use, 
misappropriation or omission.
    Whether a crime involves dishonesty or breach of trust will be 
determined from the statutory elements of the crime itself. All 
convictions for offenses concerning the illegal manufacture, sale, 
distribution of or trafficking in controlled substances shall require 
an application for the NCUA Board's consent under Section 205(d).
3. Offenses Not Covered by Section 205(d)
    (a) De minimis Offenses. Approval is automatically granted and an 
application for the NCUA Board's consent under Section 205(d) will not 
be required where the covered offense is considered de minimis, because 
it meets all of the following criteria:
    (1) There is only one conviction or entry into a pretrial diversion 
program of record for a covered offense;
    (2) The offense was punishable by imprisonment for a term of less 
than one year and/or a fine of less than $1,000, and the punishment 
imposed by the court did not include incarceration;
    (3) The conviction or pretrial diversion program was entered at 
least five years prior to the date an application would otherwise be 
required;
    (4) The offense did not involve an insured depository institution 
or insured credit union; and
    (5) The NCUA Board or any other federal financial institution 
regulatory agency has not previously denied consent under Section 
205(d) of the FCU Act or Section 19 of the FDIA, respectively, for the 
same conviction or participation in a pretrial diversion program.
    Any person who meets the foregoing criteria must be covered by a 
fidelity bond to the same extent as other employees in similar 
positions. An insured credit union may not allow any person to 
participate in its affairs, even if that person has a conviction for 
what would constitute a de minimis covered offense, if the person 
cannot obtain required fidelity bond coverage.
    Any person who meets the foregoing criteria for a de minimis 
offense shall disclose the presence of the conviction or pretrial 
diversion program to all insured credit unions or other insured

[[Page 48404]]

institutions in the affairs of which he or she intends to participate.
    (b) Youthful offender adjudgments. An adjudgment by a court against 
a person as a ``youthful offender'' under any youth offender law, or 
any adjudgment as a ``juvenile delinquent'' by any court having 
jurisdiction over minors as defined by state law does not require an 
application for the NCUA Board's consent under Section 205(d). Such 
adjudications will not be considered convictions for criminal offenses.
    (c) Expunged convictions. A conviction which has been completely 
expunged is not considered a conviction of record and will not require 
an application for the NCUA Board's consent under Section 205(d).

B. Duty Imposed on Credit Unions

    Section 205(d) imposes a duty upon every insured credit union to 
make a reasonable inquiry regarding the history of every applicant for 
employment. NCUA believes that inquiry should consist of taking steps 
appropriate under the circumstances, consistent with applicable law, to 
avoid hiring or permitting participation in its affairs by a person who 
has a conviction or participation in a pretrial diversion program for a 
covered offense. The NCUA believes that at a minimum, each insured 
credit union should establish a screening process which provides the 
insured credit union with information concerning any convictions or 
pretrial diversion programs pertaining to a job applicant. This would 
include, for example, the completion of a written employment 
application which requires a listing of all convictions and pretrial 
diversion programs. When the credit union learns that a prospective 
employee has a prior conviction or entered into a pretrial diversion 
program for a covered offense, the credit union must submit an 
application requesting the NCUA Board's consent under Section 205(d) 
prior to hiring the person or otherwise permitting him or her to 
participate in its affairs.
    If an insured credit union discovers that an employee, official, or 
anyone else who is an institution-affiliated party or who participates, 
directly or indirectly, in its affairs, is in violation of Section 
205(d), the credit union must immediately place that person on a 
temporary leave of absence from the credit union and file an 
application seeking the NCUA Board's consent under Section 205(d). The 
person must remain on such temporary leave of absence until such time 
as the NCUA Board has acted on the application. When NCUA learns that 
an institution-affiliated party or a person participating in the 
affairs of an insured credit union should have received the NCUA 
Board's consent under Section 205(d) but did not, NCUA will look at the 
circumstances of each situation to determine whether the inquiry made 
by the credit union was reasonable under the circumstances.

C. Procedures for Requesting the NCUA Board's Consent Under Section 
205(d)

    Section 205(d) of the FCU Act serves, by operation of law, as a 
statutory bar to participation in the affairs of an insured credit 
union, absent the written consent of the NCUA Board. When an 
application for the NCUA Board's consent under Section 205(d) is 
required, the insured credit union must file a written application 
using the attached form with the appropriate NCUA Regional Director. 
The purpose of an application is to provide the applicant an 
opportunity to demonstrate that, notwithstanding the bar, the person is 
fit to participate in the conduct of the affairs of an insured credit 
union without posing a risk to its safety and soundness or impairing 
public confidence in that institution. Such an application should 
thoroughly explain the circumstances surrounding the conviction or 
pretrial diversion program. The applicant may also address the relevant 
factors and criteria the NCUA Board will consider in determining 
whether to grant consent, specified below. The burden is upon the 
applicant to establish that the application warrants approval.
    The application must be filed by an insured credit union on behalf 
of a person unless the NCUA Board grants a waiver of that requirement 
and allows the person to file an application in their own right. Such 
waivers will be considered on a case-by-case basis where substantial 
good cause for granting a waiver is shown.

D. Evaluation of Section 205(d) Applications

    The essential criteria used by the NCUA Board in assessing an 
application for consent under Section 205(d) are whether the person has 
demonstrated his or her fitness to participate in the conduct of the 
affairs of an insured credit union, and whether the employment, 
affiliation, or participation by the person in the conduct of the 
affairs of the insured credit union may constitute a threat to the 
safety and soundness of the institution or the interests of its members 
or threaten to impair public confidence in the insured credit union.
    In evaluating an application, the NCUA Board will consider:
    1. The conviction or pretrial diversion program and the specific 
nature and circumstances of the covered offense;
    2. Evidence of rehabilitation, including the person's reputation 
since the conviction or pretrial diversion program, the person's age at 
the time of conviction or pretrial diversion program, and the time 
which has elapsed since the conviction or pretrial diversion program;
    3. Whether participation, directly or indirectly, by the person in 
any manner in the conduct of the affairs of the insured credit union 
constitutes a threat to the safety or soundness of the insured credit 
union or the interest of its members, or threatens to impair public 
confidence in the insured credit union;
    4. The position to be held or the level of participation by the 
person at the insured credit union;
    5. The amount of influence and control the person will be able to 
exercise over the management or affairs of the insured credit union;
    6. The ability of management of the insured credit union to 
supervise and control the person's activities;
    7. The applicability of the insured institution's fidelity bond 
coverage to the person;
    8. For state chartered, federally insured credit unions, the 
opinion or position of the state regulator; and
    9. Any additional factors in the specific case that appear 
relevant.
    The foregoing criteria will also be applied by the NCUA Board to 
determine whether the interests of justice are served in seeking an 
exception in the appropriate court when an application is made to 
terminate the ten-year ban for certain enumerated offenses in violation 
of Title 18 of the United States Code prior to its expiration date. 
NCUA believes such requests will be extremely rare and will be made 
only upon a showing of compelling reasons.
    Some applications can be approved without an extensive review 
because the person will not be in a position to present any substantial 
risk to the safety and soundness of the insured credit union. Persons 
who will occupy clerical, maintenance, service or purely administrative 
positions, generally fall into this category. A more detailed analysis 
will be performed in the case of persons who will be in a position to 
influence or control the management or affairs of the insured credit 
union. Approval by the NCUA Board will be subject to the condition that 
the person shall be covered by a fidelity bond to

[[Page 48405]]

the same extent as others in similar positions.
    In cases in which the NCUA Board has granted a waiver to allow a 
person to file an application in their own right, approval of the 
application will be conditioned upon that person disclosing the 
presence of the conviction to all insured credit unions or other 
insured financial institutions in the affairs of which he or she wishes 
to participate. When deemed appropriate, approval may also be subject 
to the condition that the prior consent of the NCUA Board will be 
required for any proposed significant changes in the person's duties 
and/or responsibilities. Such proposed changes may, in the discretion 
of the appropriate Regional Director, require a new application for the 
NCUA Board's consent. When approval has been granted for a person to 
participate in the affairs of a particular insured credit union and 
subsequently that person seeks to participate in the affairs of another 
insured credit union, approval does not automatically follow. In such 
cases, another application must be submitted. Moreover, any person who 
has received consent from the NCUA Board under Section 205(d) and 
subsequently wishes to become an institution affiliated party or 
participate in the affairs of an FDIC-insured institution, he or she 
must obtain the prior approval of the FDIC pursuant to Section 19 of 
the FDIA.

E. Right To Request a Hearing Following the Denial of an Application 
Under Section 205(d)

    If the NCUA Board withholds consent under Section 205(d), the 
insured credit union (or in the case where a waiver has been granted, 
the individual that submitted the application) may request a hearing by 
submitting a written request within 30 days following the date of the 
NCUA Board's action. The NCUA Board will apply the process contained in 
regulations governing prohibitions based on felony convictions, found 
at part 747, subpart D of Title 12, Code of Federal Regulations, to any 
request for a hearing. The insured credit union (or in the case where a 
waiver has been granted, the individual that submitted the application) 
may also waive a hearing and request that the NCUA Board determine the 
matter on the basis of written submissions.
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 [FR Doc. E8-19158 Filed 8-18-08; 8:45 am]
BILLING CODE 7535-01-C