Fiduciary Duties at Federal Credit Unions; Mergers and Conversions of Insured Credit Unions, 15574-15596 [2010-6439]

Agencies

• National Credit Union Administration

[Federal Register Volume 75, Number 59 (Monday, March 29, 2010)]
[Proposed Rules]
[Pages 15574-15596]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-6439]



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Part III





National Credit Union Administration





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12 CFR Parts 701, 708a, and 708b



Fiduciary Duties at Federal Credit Unions; Mergers and Conversions of 
Insured Credit Unions; Proposed Rules

Federal Register / Vol. 75, No. 59 / Monday, March 29, 2010 / 
Proposed Rules

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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701, 708a, and 708b


Fiduciary Duties at Federal Credit Unions; Mergers and 
Conversions of Insured Credit Unions

AGENCY: National Credit Union Administration.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The National Credit Union Administration (NCUA) is issuing a 
proposed rulemaking covering several related subjects. The proposal 
documents and clarifies the fiduciary duties and responsibilities of 
Federal credit union directors. The proposal adds new provisions 
establishing the procedures for insured credit unions merging into 
banks. The proposal also amends some of the existing regulatory 
procedures applicable to insured credit union mergers with other credit 
unions and conversions to banks.

DATES: Comments must be received on or before May 28, 2010.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     NCUA Web site: https://www.ncua.gov/news/proposed_regs/proposed_regs.html. Follow the instructions for submitting comments.
     E-mail: Address to regcomments@ncua.gov. Include ``[Your 
name] Comments on Advance Notice of Proposed Rulemaking (Specialized 
Lending Activities)'' 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, Director, Applications 
Section, Office of General Counsel; Elizabeth Wirick, Staff Attorney, 
Office of General Counsel; or Jacqueline Lussier, Staff Attorney, 
Office of General Counsel, at the above address or telephone (703) 518-
6540.

SUPPLEMENTARY INFORMATION:

A. Background

    In January 2008, the NCUA Board issued an Advance Notice of 
Proposed Rulemaking and Request for Comment (ANPR), asking whether it 
should adopt rules governing the merger of a federally insured credit 
union (FICU) into, or a FICU's conversion to, a financial institution 
other than a mutual savings bank (MSB). The ANPR also sought comments 
about whether NCUA should amend its existing regulations regarding 
mergers, charter conversions, and changes in account insurance. 73 FR 
5461 (Jan. 30, 2008). In particular, NCUA sought comments about how 
these transactions affect member rights and ownership interests, and 
whether regulatory changes are necessary to better protect member 
interests.
    A particular focus of the ANPR was whether existing rules 
adequately protect member interests. Interestingly, all of the comments 
from individual credit union members and credit union attorneys stated 
that NCUA's current rules relating to conversions and mergers are 
inadequate.\1\ Some of these commenters expressed concern that the 
fundamental changes brought about by the conversion and merger 
transactions referenced in the ANPR remove value from a credit union or 
transfer the value of some owners' interests to others, and so these 
transactions should be further regulated to protect all credit union 
member-owners. Accordingly, NCUA is now proposing rules designed to 
better protect the members.
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    \1\ Several other commenters, including comments from some 
credit unions, generally opposed any rule changes related to any of 
the subjects in the ANPR. These commenters argued that prior 
revisions to the merger regulation as well as the member access to 
records rule provide adequate regulation of merger and conversion 
transactions. Some of these commenters also stated that credit 
unions have sufficient regulation in general and do not need further 
regulatory burden at this time. A few commenters asserted NCUA lacks 
authority to further regulate these transactions.
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    This proposed rulemaking has four parts. First, a new Sec.  701.4 
addresses the duties of Federal credit union directors in managing the 
affairs of their credit unions. Second, revisions to part 708a address 
issues related to credit union conversions to mutual savings banks. 
Third, a new subpart to part 708a sets forth the procedures for merging 
a credit union into a bank. Finally, revisions to the existing 
provisions of part 708b address issues related to credit union mergers 
with other credit unions and the termination of Federal deposit 
insurance.
    The proposed new Sec.  701.4 provides that management of each FCU 
is vested in its board of directors who may delegate authority to carry 
out functions but not responsibility for the execution of such 
functions. Among other things, the proposal specifies the directors' 
duties of loyalty and care, requires that directors understand how to 
evaluate the credit union's financials, and instructs directors on when 
they may properly rely on the information and advice of third parties 
when making decisions. The proposal also amends Sec.  701.33, and 
NCUA's standard FCU bylaws, to limit the indemnification of FCU 
directors for liability arising from improper decisions that affect the 
fundament rights and interests of the credit union's members. The 
proposal makes a corresponding change to the standard Federal corporate 
credit union bylaws.
    The proposal revises the existing provisions of part 708a on the 
direct conversion of a credit union to a bank. The revisions are 
intended to better protect the secrecy and integrity of the voting 
process, to require converting credit unions provide members with 
additional information about how the conversion process could affect 
them, and to require these credit unions to provide NCUA copies of 
correspondence with other agencies related to the conversion.
    The proposal also adds a new subpart to 708a that establishes 
procedural and substantive requirements for converting a credit union 
to a bank through a merger. The procedures are, generally, an 
amalgamation of the existing procedures for merging a credit union into 
another credit union and the procedures for converting a credit union 
into a mutual savings bank. The proposal also requires that the credit 
union determine the value of the transaction to the gaining bank and 
compensate the members of the merging credit union for the diminution 
of their ownership rights that results from the merger.
    The proposal also provides for several amendments to the existing 
provisions of part 708b relating to credit union-to-credit union 
mergers and share insurance conversions. The proposed revisions include 
provisions that protect the secrecy and integrity of the voting 
process, that require disclosure to the members of information on any 
material increases in management compensation connected with the 
merger, that place time limits on completion of share insurance 
conversions, and that require disclosures related to share adjustments. 
The proposal also includes other technical amendments to part 708b.

B. Proposed Rule: Sec.  701.4 General Authorities and Duties of Federal 
Credit Union Boards of Directors

    Proposed Sec.  701.4 establishes the fiduciary duties and 
responsibilities of Federal credit union directors. A discussion of the 
basis for this rule, followed by a detailed paragraph-by-paragraph 
discussion, follows.
    The directors of a credit union have a fiduciary duty to act in the 
best

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interests of the credit union members. As discussed in the ANPR, the 
Federal Credit Union Act (Act) has numerous references to the duty to 
act in the best interests of the credit union's members, including:

     The NCUA Board may act to remove or prohibit any 
institution-affiliated party, including a director, of a federally-
insured credit union, if the institution-affiliated party has 
``committed or engaged in any act, omission, or practice, which 
constitutes a breach of such party's fiduciary duty * * * [and by 
reason of such action] * * * the interests of the insured credit 
union's members have been or could be damaged.'' 12 U.S.C. 
1786(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 federally-insured credit union, 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 federally-insured credit union, 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).
     A voluntary liquidation of a Federal credit union must 
be in the best interests of the members. 12 U.S.C. 1766(b)(2).\2\
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    \2\ 73 FR 5461, 5463 (Jan 30, 2008). In addition, NCUA's rule on 
conversions of insured credit unions to mutual savings banks 
requires that as part of the credit union's notice to NCUA of its 
intent to convert to an MSB, the credit union's board of directors 
must provide a certification of the board of directors' support for 
the conversion, which must state that each director signing the 
certification believes the proposed conversion is in the best 
interests of the credit union's members. 12 CFR 708a.5(a)(2).

    Although referring specifically to the NCUA Board, these provisions 
support the conclusion that credit union directors have a fiduciary 
obligation to credit union members. As previously stated by the NCUA 
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Board:

    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.

71 FR 77150, 77155 (Dec. 22, 2006) (preamble to NCUA's final rule on 
conversions of federally-insured credit unions to mutual savings 
banks).
    A Federal credit union's board of directors must understand its 
fiduciary duty to act in the best interests of the members. This 
understanding is particularly important when the board is considering a 
proposal to change the credit union's charter or insurance status. 
These extraordinary transactions may have a significant impact on the 
members' financial interests, and may also present conflicts between 
member interests and the personal financial interests of credit union 
officials and management.
    While the existence of fiduciary duties owed by directors to 
members is clear, neither the Act nor NCUA regulations provide 
specificity as to fiduciary duties and standards. Currently, an FCU's 
board must look to state statutory and case law to determine the scope 
of its fiduciary duties to members and the standard of care required as 
articulated by its state of location.\3\ Statutory law and case law 
vary from jurisdiction to jurisdiction causing confusion for FCUs and a 
lack of uniformity between FCUs in different states.
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    \3\ Duties of directors of for-profit corporations have been 
codified in many states, although fewer states have codified the 
duties of directors of credit unions. Some state credit union 
statutes incorporate the law applicable to the directors of for-
profit corporations. In Gully v. Nat'l Credit Union Admin. Brd., 341 
F.3d 155 (2d Cir. 2003), an appeal from an NCUA prohibition order 
finding that the manager of a Federal credit union engaged in unsafe 
and unsound practices and that she breached her fiduciary duty as 
the manager of the credit union, the court applied New York law. 
``The parties agree that New York law applies to [the] claim of 
breach of fiduciary duty and that the [Federal credit union] is 
considered a corporation for purposes of New York fiduciary law.'' 
Id. at 165. The court concluded that New York's fiduciary law was 
consistent with the standard used by the NCUA Board in its decision. 
Id.
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    In fact, NCUA is particularly concerned about assertions that the 
members of a credit union do not own the credit union, or that the 
duties of the directors do not flow to the members but, rather, flow in 
some amorphous way only to the institution. NCUA has observed this view 
both among some Federal credit union directors and in one state court 
decision.\4\ A lack of focus on the interests of the members makes it 
easier for officials and management to make decisions that benefit 
themselves personally, even if those decisions are not necessarily in 
the best interests of the membership as a whole. Accordingly, NCUA 
wants to make clear that directors at a federally chartered credit 
union must consider the interests of the membership, and put those 
interests first, when making decisions that affect the credit union.\5\
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    \4\ See, e.g., Save Columbia CU Committee v. Columbia Community 
Credit Union, 139 P. 3d 386, 393, 394 (Wash. Ct. App. 2006). The 
court stated, in dicta, that under Washington state law the 
directors of a state chartered credit union owed no fiduciary duties 
to the members of the credit union. Although the credit union was 
federally insured, the state court did not discuss the applicable 
provisions of the Federal Credit Union Act.
    \5\ Of course, in the normal course of business when a board 
acts in the best interests of the credit union it is usually also 
furthering the interests of the members. But the duty to act in the 
best interests of members is primary, and, if there is any 
theoretical divergence or conflict between the interests of the 
institution and the interests of the members, the latter takes 
precedence. For example, when a credit union proposes a voluntary 
liquidation, the interests of the credit union as an institution, 
and the interests of the members, may diverge. The Act provides, 
however, that the decision to undertake a voluntary liquidation is 
determined by the best interests of the members and not the best 
interests of the institution. 12 U.S.C. 1766(b)(2).
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    Considering the unique interests, concerns, and structure of credit 
unions as financial cooperatives, NCUA believes having a uniform 
regulatory standard of care for FCUs may be useful to eliminate 
confusion and may make it easier for FCU boards to fulfill their duties 
to members. Accordingly, NCUA is now proposing a regulatory standard of 
care for directors that will help ensure they meet their fiduciary 
duties to their members, both in general and also when making decisions 
that affect the fundamental interests of members.
    The proposal provides that management of each FCU is vested in its 
board of directors who can delegate operational function but not the 
responsibility for operations. The proposal further provides that an 
FCU director must:
     Carry out his or her duties in good faith, in a manner 
reasonably believed to be in the best interests of the membership of 
the Federal credit union, and with such care, including reasonable 
inquiry, as an ordinarily prudent person in a like position would use 
under similar circumstances;
     Administer the affairs of the Federal credit union fairly 
and impartially and without discrimination in favor of or against any 
particular member;
     Understand the Federal credit union's balance sheet and 
income statement and, ask, as appropriate, substantive questions of 
management and the internal and external auditors; and
     Direct the operations of the Federal credit union in 
conformity with the requirements set forth in the Federal Credit Union 
Act (Act), the NCUA's regulations, other applicable law and sound 
business practices.
    The proposal also discusses the authority and limits of the board's

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ability to rely on information provided by others. A director is 
generally entitled to rely on information prepared or presented by 
employees of the Federal credit union or consultants whom the director 
reasonably believes to be reliable and competent in the functions 
performed.
    The proposal also amends the indemnification provisions of NCUA's 
rules to prohibit a Federal credit union from indemnifying officials 
and employees for liability from misconduct that is grossly negligent, 
reckless, or willful in connection with a decision that affects the 
fundamental rights of members. NCUA is also proposing a change to 
NCUA's standard bylaw on indemnification to conform that bylaw with the 
proposed change to the rule on indemnification. The proposal makes a 
corresponding change to the standard Federal corporate credit union 
bylaw on indemnification.
    The proposed rule applies to Federal credit unions only, and not to 
state chartered federally-insured credit unions. The proposed rule 
applies generally to all of the actions of a Federal credit union board 
of directors, but imposes a higher standard of care for actions by the 
board that affect members' ownership interests in Federal credit unions 
and other fundamental rights. The proposed rule is modeled in part on 
an existing rule on the powers and responsibilities of the boards of 
directors of the Federal Home Loan Banks promulgated by the Federal 
Housing Finance Board in 2000.\6\ The proposal is also based in part on 
Model Business Corporation Act Sec.  8.30, which defines the general 
standards of conduct for directors of for-profit corporations.
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    \6\ 12 CFR 917.2. See 65 FR 25267 (May 1, 2000) and 65 FR 81 
(Jan. 3, 2000). The Federal Housing Finance Agency (FHFA) succeeded 
the Federal Housing Finance Board (FHFB). Housing and Economic 
Recovery Act of 2008, Pub. L. 110-289, 122 Stat. 2654 (enacted July 
30, 2008). The entities the FHFB regulated, the Federal Home Loan 
Banks (now regulated by the FHFA), continue to operate under 
regulations promulgated by the FHFB until such regulations are 
superseded by regulations promulgated by the FHFA. See 74 FR 30975 
(June 29, 2009).
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    A paragraph-by-paragraph discussion of the rule follows.

Sec. 701.4(a) Management of a Federal credit union.

    Proposed paragraph (a) states, ``The management of each Federal 
credit union is vested in its board of directors. While a Federal 
credit union board of directors may delegate the execution of 
operational functions to Federal credit union personnel, the ultimate 
responsibility of each Federal credit union's board of directors for 
that Federal credit union's management is non-delegable.''
    The first sentence restates section 113 of the FCUA, 12 U.S.C. 
1761b, which provides that the board of directors shall have the 
general direction and control of the affairs of the Federal credit 
union.\7\ The board of directors must oversee the credit union's 
operations to ensure the credit union operates in a safe and sound 
manner. For example, the board must be kept informed about the credit 
union's operating environment, hire and retain competent management, 
and ensure that the credit union has the risk management structure and 
process suitable for the credit union's size and activities. The second 
sentence of proposed Sec.  701.4(a) makes clear that a credit union's 
board of directors may delegate responsibility for day-to-day 
operations to credit union management officials, but that, in so doing, 
may not and cannot delegate its ultimate statutory responsibility for 
the management of the credit union.
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    \7\ See also Sec.  111 of the FCUA, 12 U.S.C. 1761, which states 
that the management of a Federal credit union shall be by a board of 
directors, a supervisory committee, and where the bylaws so provide, 
a credit committee. This and other sections of the FCUA delineate 
the role and responsibilities of the board of directors, the 
supervisory committee and the credit committee, but do not 
articulate a general standard of fiduciary conduct for directors or 
members of any committee on which a director may serve.
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Sec. 701.4(b) Duties of Federal credit union directors.

    Proposed paragraph (b) sets forth the fiduciary duties of Federal 
credit union directors. Paragraph (b)(1) charges a director to:

    Carry out his or her duties as a director in good faith, in a 
manner such director reasonably believes to be in the best interests 
of the membership of the Federal credit union, and with such care, 
including reasonable inquiry, as an ordinarily prudent person in a 
like position would use under similar circumstances * * *.

    This standard is the most common fiduciary duty standard applicable 
to corporations under state law, and the language of (b)(1) mirrors the 
current standard applicable to FHLBs. 12 CFR 917.2(b)(1). This standard 
is crucial in defining a director's obligations to its members, and is 
the standard by which the members and NCUA will measure the actions of 
FCU directors.
    Embedded in this standard is both a duty of loyalty and a duty of 
care. The duty of loyalty is set forth in the words ``[e]ach Federal 
credit union director has the duty to * * * carry out his or her duties 
as a director in good faith, in a manner such director reasonably 
believes to be in the best interests of the membership of the Federal 
credit union * * *.'' Directors owe a duty to act in the best interests 
of the membership of the credit union and not in the director's 
personal interests. When carrying out his or her responsibilities, a 
director must always seek to advance what the director reasonably 
believes to be in the members' best interests, and must place the 
members' well-being above his or her own personal interests or those of 
third parties.
    The obligation to act in good faith means honesty in purpose, 
making sure not to disregard the director's responsibilities or to act 
in a way that violates the law. Good faith also requires that all 
material facts known to a director be disclosed to other directors and 
also to the members where the members are charged with voting on a 
particular issue.
    The Federal credit union standard bylaws contain a provision on 
conflicts of interest. Article XVI., Section 4. A director who has a 
conflict of interest is disqualified from board deliberations upon or 
the voting on any question affecting his or her pecuniary or personal 
interest or the pecuniary interest of other entities in which he or she 
is interested, directly or indirectly. While the duty of loyalty goes 
beyond the terms of this provision or other specific conflicts of 
interest provisions, a director who violates this provision is also in 
violation of the duty of loyalty.
    Section 701.4(b)(1) also establishes a duty of care with the words 
``[e]ach * * * director * * * must carry out his or her duties * * * 
with such care, including reasonable inquiry, as an ordinarily prudent 
person in a like position would use under similar circumstances * * *. 
'' Compliance with the duty of care is measured by the ``prudent 
person,'' or ``reasonable person'' standard--what would such a prudent 
person have done under similar circumstances? This standard is 
consistent with the historic standards imposed on directors of national 
banks.\8\

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As suggested by the language, the duty of care includes a duty of 
inquiry that requires that directors inform themselves of ``all 
material information reasonably available to them'' prior to rendering 
a decision.\9\ These duties of care and loyalty are amplified and 
reinforced by the remainder of proposed paragraph (b) and the 
provisions in proposed Sec.  701.4(c) and (d), as discussed further 
below.
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    \8\ In 1891, in the absence of an applicable Federal statute or 
regulation, the Supreme Court considered the standard of care that 
should be applied to the officers and directors of a national bank. 
See Briggs v. Spaulding, 141 U.S. 132 (1891). In Briggs, a receiver 
for a national bank sought to hold several officers and directors 
liable for losses incurred by the bank on risky loans and general 
mismanagement of the bank. The receiver alleged that the directors 
failed to keep accurate books, have regular meetings, and oversee 
the actions of the bank's president. Id. at 137. They were accused 
of ``passive negligence,'' the failure to act when a duty existed, 
but not of ``positive misfeasance.'' Id. at 151. The Supreme Court 
held that ``directors must exercise ordinary care and prudence in 
the administration of the affairs of the bank, and that this 
includes something more than officiating as figure-heads.'' Id. at 
165. The Court stated that the standard of care for bank directors 
was ``that which ordinarily prudent and diligent men would exercise 
under similar circumstances.'' Id. at 152.
    \9\ See, e.g., Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 
1985). This case discusses various factors for determining whether a 
board of directors satisfied the standard of care when rendering an 
important decision, including:
     The amount of time directors spent researching the 
transaction, preparing for the decision and investigating the 
information and proposals;
     The amount of time spent in the meeting in which 
deliberation on the transaction took place;
     The source of any important numbers and dollar amounts, 
and whether they were based on credible information or were 
arbitrary;
     Whether the proposal and subsequent deliberations were 
thoroughly debated by the directors;
     Whether the directors had prior notice of what would be 
discussed before the meeting in which they deliberated and voted;
     Whether the directors were presented with or sought out 
outside information, such as an opinion of counsel or a fairness 
opinion; and
     Whether the board fully considered other alternatives 
to the transaction under consideration.
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    Proposed paragraph (b)(2) requires that directors administer the 
affairs of the credit union fairly and impartially so as not to favor 
the interests of any particular member or group of members. The 
director's obligation is to the membership as a whole, not to 
particular individuals or groups. So, for example, when the credit 
union makes determinations about extending credit to a particular 
member, the credit union has no fiduciary obligation to that particular 
member vis-a-vis that credit transaction but, rather, must make its 
decision on the credit transaction with regard only to the effects of 
the proposed transaction on the interests of the membership as a whole.
    Proposed paragraph (b)(3) requires that each board director be 
financially literate. The directors must have a working familiarity 
with basic finance and accounting practices, (including the ability to 
understand the credit union's balance sheet and income statement and to 
ask, as appropriate, substantive questions of management and the 
internal and external auditors) or become financially literate within a 
reasonable time, not to exceed three months, after his or her election 
or appointment to the board of directors. This financial literacy may 
be obtained through training provided by the credit union, outside 
sources, or, for small credit unions, NCUA's Office of Small Credit 
Union Initiatives, if a director does not possess such financial 
literacy at the time of his or her election or appointment to the 
board.
    Proposed paragraph (b)(4) charges each director with the general 
duty to direct the operations of the Federal credit union in conformity 
with the requirements of the FCUA, NCUA regulations, other applicable 
law, and sound business practices.

Sec. 701.4(c) Authority regarding staff and outside consultants.

    Proposed paragraph (c) provides that:

     In carrying out its duties and responsibilities, each 
Federal credit union's board of directors and all its committees 
have authority to retain staff and outside counsel, independent 
accountants, financial advisors, and other outside consultants at 
the expense of the Federal credit union.
     Federal credit union staff providing services to the 
board of directors or any committee of the board under paragraph 
(c)(1) of this section may be required by the board of directors or 
such committee to report directly to the board or such committee, as 
appropriate.
     In discharging board or committee duties a director, 
who does not have knowledge that makes reliance unwarranted, is 
entitled to rely on information, opinions, reports, or statements, 
including financial statements and other financial data, prepared or 
presented by any of the persons specified in paragraph (d).

    The board is the primary corporate decision-making body. The board 
in turn typically delegates significant authority for the day-to-day 
operations to senior management. To the extent that a board delegates 
to management, it must exercise reasonable oversight and supervision 
over management. Accordingly, proposed paragraph (c)(1) empowers the 
board of directors, and committees of the board, to hire staff 
(employees) and outside consultants, as necessary to carry out the 
board's duties and responsibilities.
    Under proposed paragraph (c)(3), a director may generally rely on 
information, opinions, reports, or statements, including financial 
statements and other financial information, prepared by those to whom 
authority has been delegated. Still, as required by the duty of care, 
any reliance on the advice of others or information provided by others 
must be warranted under the circumstances. Limits on such reliance are 
discussed further in paragraph (d).

Sec. 701.4(d) Reliance.

    Proposed paragraph (d) provides that a director may rely on:


     One or more officers or employees of the Federal credit 
union who the director reasonably believes to be reliable and 
competent in the functions performed or the information, opinions, 
reports, or statements provided;
     Legal counsel, independent public accountants, or other 
persons retained by the Federal credit union as to matters involving 
skills or expertise the director reasonably believes are matters (i) 
within the particular person's professional or expert competence, 
and (ii) as to which the particular person merits confidence; and
     A committee of the board of directors of which the 
director is not a member if the director reasonably believes the 
committee merits confidence.

    Generally, a director must comply with the standard of care in 
making a judgment as to the reliability and competence of the source of 
information upon which the director proposes to rely or that it 
otherwise merits confidence. The director must also have read the 
information, opinion, report, or statement in question, or have been 
present at a meeting at which it was orally presented, or have taken 
other steps to become generally familiar with it.
    Care in delegation and supervision includes evaluation of the 
capabilities and diligence of the person receiving the delegation in 
light of the subject and its relative importance, and paragraph (d) 
provides specificity as to when a director may rely on certain persons 
or groups.
    Proposed paragraph (d)(1) permits a director to rely on one or more 
officers or employees of the Federal credit union who the director 
reasonably believes to be reliable and competent in the functions 
performed or the information, opinions, reports, or statements 
provided. In determining whether an office or employee is reliable, the 
director would typically consider the individual's record for honesty, 
care, and ability in carrying out responsibilities which he or she 
undertakes. In determining whether an individual is competent, the 
director would normally consider the individual's background, 
education, experience and scope of responsibility within the credit 
union, the individual's familiarity and knowledge with respect to the 
subject matter, and the individual's technical skill.
    Proposed paragraph (d)(2) permits reliance on legal counsel, 
independent public accountants, or other persons retained by the 
Federal credit union, but only as to matters involving skills or 
expertise the director reasonably believes are matters (i) within the 
particular person's professional or expert competence, and (ii) as to 
which

[[Page 15578]]

the particular person merits confidence. A determination of competence 
involves an examination of factors similar to those discussed in 
connection with determining competence under paragraph (d)(1). 
Likewise, a determination that the potential advisor merits confidence 
includes an examination of both competence and reliability, including 
whether the individual may be subject to conflicts of interests or may 
have a vested interest in the outcome of any transaction under 
advisement. This paragraph covers not only lawyers and accountants, but 
also other potential external advisers with special experience and 
skills, such as investment bankers and management consultants.
    Proposed paragraph (d)(3) permits reliance on a committee of the 
board if, again, the director reasonably believes the committee merits 
confidence. This paragraph applies when the committee is submitting 
recommendations for action by the full board of directors as well as 
when it is performing supervisory or other functions not requiring 
immediate board action.
    The Board also notes that there are several sources of guidance on 
the fiduciary duties of directors of depository institutions. These 
sources include the Federal Credit Union Handbook; Office of 
Comptroller of the Currency (OCC), The Director's Book (1997) and 
Corporate Governance and the Community Bank: A Regulatory Perspective 
(2005), both available on the OCC's Web site: https://www.occ.treas.gov; 
and American Bar Association Committee on Corporate Laws, Corporate 
Director's Guidebook, 5th ed., 62 Business Lawyer 1482 (August 2007) 
(available on Lexis). FCU directors may follow this guidance to the 
extent that it does not conflict with the provisions of the proposed 
rule or any future guidance NCUA may put out in this area.

Proposed amendment to Sec.  701.33.

    Section 701.33 of the NCUA regulations is NCUA's indemnification 
regulation. 12 CFR 701.33. Section 701.33(c)(1) states that a Federal 
credit union may provide indemnification for its officials and 
employees. Section 701.33(c)(2) states that FCU indemnification shall 
be consistent either with the standards applicable to credit unions 
generally in the state in which the principal or home office of the FCU 
is located, or with the relevant provisions of the Model Business 
Corporation Act (MBCA). An FCU that elects to provide indemnification 
must specify whether it will follow state law or the MBCA. It also 
states that indemnification and the method of indemnification may be 
provided for by charter or bylaw amendment, contract, or board 
resolution, consistent with the procedural requirements of the 
applicable state law or the MBCA, as specified.\10\ Section 
701.33(c)(3) also permits a Federal credit union to purchase and 
maintain insurance on behalf of its officials and employees against any 
liability asserted against them and expenses incurred by them in their 
official capacities and arising out of the performance of their 
official duties to the extent such insurance is permitted by applicable 
state law or the MBCA. 12 CFR 701.33(c)(4).
---------------------------------------------------------------------------

    \10\ Id. The NCUA must approve any such charter or bylaw 
amendment.
---------------------------------------------------------------------------

    The preamble to the final rule on indemnification indicated that 
indemnification is not to be automatically provided in every case. 
``[T]he power to provide for indemnification does not relieve [a 
Federal credit union] of its responsibility to determine whether 
indemnification is appropriate under the circumstances. NCUA will 
monitor indemnification provisions for consistency with the 
indemnification standards chosen, for the safety and soundness 
implications for the institution, and for their application in a given 
case.'' 53 FR 29640, 29641 (Aug. 8, 1988).
    The NCUA Board desires to ensure that FCU officials and employees 
are held personally accountable, where appropriate, for violations of 
their fiduciary duties. Accordingly, NCUA will not permit a Federal 
credit union to indemnify officials and employees against liability 
based on an aggravated breach of the duty of care when such a breach 
may affect fundamental member rights and financial interests. 
Accordingly, NCUA proposes to amend Sec.  701.33 by adding a new 
paragraph (c)(5) to read as follows:

    Notwithstanding paragraphs (c)(1) through (3) of this section, a 
Federal credit union may not indemnify an official or employee for 
personal liability related to any decision made by that individual 
on a matter significantly affecting the fundamental rights and 
interests of the FCU's members where the decision giving rise to the 
claim for indemnification is determined by a court to have 
constituted gross negligence, recklessness, or willful misconduct. 
Matters affecting the fundamental rights and interests of FCU 
members include charter and share insurance conversions and 
terminations.

    Consistent with the proposed Sec.  701.4, matters affecting the 
fundamental rights and interests of Federal credit union members are 
defined to include charter conversions and share insurance conversions 
and terminations.
    The Board believes that, where directors and other officials and 
employees are charged with making decisions relating to the fundamental 
rights and interests of the members, a gross negligence standard for 
denying indemnification is appropriate. Gross negligence is a legal 
term of art, generally defined as a ``conscious, voluntary act or 
omission in reckless disregard of a legal duty and of the consequences 
to another party * * *.'' Black's Law Dictionary 8th ed. (Thomson West 
2004). Gross negligence is a more lenient standard than simple 
negligence, and indemnification will still be permitted under the 
proposal for liability premised on simple negligence.
    One section of the FCU Act references the level of disregard by an 
official or employee of the duty of care. Section 207(h) of the FCU Act 
states that:

    A director or officer of an insured credit union may be held 
personally liable for monetary damages in any civil action, by * * * 
the [NCUA] Board, which action is prosecuted wholly or partially for 
the benefit of the Board * * * acting as conservator or liquidating 
agent of such insured credit union * * * for gross negligence, 
including any similar conduct or conduct that demonstrates a greater 
disregard of a duty of care (than gross negligence) including 
intentional tortious conduct, as such terms are defined and 
determined under applicable State law. Nothing in this paragraph 
shall impair or affect any right, if any, of the Board under other 
applicable law.

12 U.S.C. 1787(h)(3). Section 207(h) applies only to actions taken by 
the Board, and only as conservator or liquidating agent, while the 
proposed indemnification provision applies to liability, whether to the 
Board or other parties. In the Board's view, the proposed limits on 
indemnification at FCUs are consistent with Sec.  207(h) and the 
associated case law.\11\
---------------------------------------------------------------------------

    \11\ See Atherton v. FDIC, 519 U.S. 213 (1997) (holding that 12 
U.S.C. 1821(k), a Federal statute addressing the standard of care 
owed by bank directors and officers under the Federal Deposit 
Insurance Act, provides for a gross negligence standard as the 
minimum level of disregard of the standard of care, but does not 
preempt state statutes that set a stricter level of disregard, such 
as simple negligence). The Court was reviewing the Federal Deposit 
Insurance Act's analog to Sec.  207(h) of the FCU Act. While this 
proposed rulemaking establishes fiduciary standards for FCU 
directors and limits indemnification for officials and employees, 
this rulemaking does not address causes of action based on those 
standards, nor does the rulemaking address the requisite level of 
disregard for a finding of liability based on any particular cause 
of action.
---------------------------------------------------------------------------

    NCUA also proposes to make a conforming change to the FCU Standard 
Bylaws. Article XVI, Sec.  8 sets forth the requirements for director

[[Page 15579]]

indemnification. The proposed change to Article XVI will limit 
indemnification in a manner parallel to paragraph (c)(5) of Sec.  
701.33. The proposal makes a corresponding change to the standard 
Federal corporate credit union bylaws.

C. Proposed Reorganization of Parts 708a and 708b

    Currently, part 708a of NCUA's rules covers the conversion of 
insured credit unions into MSBs, and part 708b covers the merger of 
insured credit unions with other credit unions and the conversion and 
termination of Federal share insurance. This proposed rulemaking, if 
adopted, would result in a reorganization of part 708a.
    Part 708a currently has no subparts, and the revisions to part 708a 
create three new subparts. The revision moves the current part 708a 
treatment of MSB conversions into subpart A. The new rule regarding the 
mergers of insured credit unions into banks would be located in subpart 
C. Subpart B would be reserved for a potential future rulemaking on the 
conversion of insured credit unions into stock banks.
    The proposal does not affect the organization of part 708b, which 
currently consists of three subparts. The title of part 708b, however, 
would change slightly. The current title of part 708b, ``Mergers of 
Federally-insured Credit Unions; Voluntary Termination Or Conversion of 
Insured Status,'' would change to read ``Mergers of Federally-insured 
Credit Unions with Other Credit Unions; Voluntary Termination Or 
Conversion of Insured Status.'' With the addition of a new rule in part 
708a on the merger of credit unions into banks, this change to the 
title of 708b is necessary to clarify the limited scope of part 708b.

D. Proposed Amendments to Part 708a, Subpart A: Conversion of Insured 
Credit Unions to Mutual Savings Banks

    The proposed revisions to newly designated Subpart A of Part 708a 
(sections 708a.101 to 708a.113, as redesignated) protect the integrity 
of the voting process during conversions to a mutual savings bank, 
provide members with additional information about how the conversion 
process could affect them, and require converting credit unions to 
provide copies of correspondence with other agencies related to the 
conversion. The proposed changes are as follows:

Sec. 708a.101 Definitions.

    The proposal adds definitions for the terms ``conducted by an 
independent entity'' and ``secret ballot.'' These new definitions 
clarify Part 708a's requirements for balloting in credit union 
conversions. Section 708a.106 (formerly Sec.  708a.6) requires 
elections to be by secret ballot and conducted by an independent 
entity. Along with the new definitions for ``conducted by an 
independent entity'' and ``secret ballot,'' the proposed amendments 
move the definition of ``independent entity'' from Sec.  708a.106 to 
the definitions section, Sec.  708a.101.
    The proposal also adds a new definition of the phrase ``conducted 
by an independent entity'' to prevent credit union staff and officials 
from accessing interim vote tallies during the election and also to 
ensure that members learn the results of the membership vote. NCUA has 
concerns that the use of interim vote tallies by credit union 
management may unfairly skew the results of elections in favor of the 
result management prefers.
    NCUA has observed in some FICU to MSB conversions that credit union 
management seeks periodic running tallies from the election teller as 
to how many members have voted yes and no and which members have not 
voted. Management has justified this practice by stating they only use 
the information for the purpose of encouraging members to vote. In 
investigations of conversions, however, NCUA has discovered that some 
credit unions use this interim vote information for soliciting only 
voters likely to vote in favor of the conversion. In addition, some 
converting credit unions have pressured or required employees to 
encourage members, including family, 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. Other problematic 
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 during 
the voting period, and improperly handling ballots for members instead 
of having members mail them directly to the independent election 
teller. See the ANPR discussion at 73 FR 5461, 5466 (Jan. 30, 2008).
    Since issuing the ANPR, NCUA also encountered a situation where 
management halted the vote on conversion shortly before the conclusion 
of the voting period and then declined to announce the interim results 
to the member-owners, and NCUA later learned that management stopped 
the vote because the running vote tallies management was receiving from 
the election teller were nearly two-to-one in opposition to the 
conversion. In another situation, after a conversion vote was 
completed, management refused to disclose the results of the vote, in 
terms of the votes for and against the conversion, to its member-owners 
and failed to include these numbers in its certification to NCUA.
    Accordingly, the proposal adds a definition of ``conducted by an 
independent entity'' that carries the following:

     The independent entity will receive the ballots 
directly from voting members and store them.
     After the conclusion of the special meeting that ends 
the ballot period, the independent entity will open all the ballots 
in its possession and tabulate the results. The entity must not open 
or tabulate any ballots before the conclusion of the special 
meeting. The independent entity will certify the final vote tally in 
writing to the credit union and to the NCUA Regional Director. The 
certification will include, at a minimum, the number of members who 
voted, the number of affirmative votes, and the number of negative 
votes. During the course of the voting period the independent entity 
may provide the credit union with the names of members who have not 
yet voted, but may not provide any voting results to the credit 
union prior to certifying the final vote tally.

    This proposed definition of ``conducted by an independent entity'' 
prohibits interim vote tallies and ensures that member-owners and NCUA 
are properly informed of the results of any conversion vote. Some ANPR 
commenters opposed to a ban on the use of interim vote tallies 
expressed concern that without access to voting results, a converting 
credit union would be unable to determine which members had voted and 
so determine how to efficiently target their outreach efforts to ensure 
that all voters had an opportunity to vote. To address this concern, 
the proposal does not prohibit management from obtaining lists of 
members who have not voted at any point during the election process, 
but only prevents management access to running vote tallies.
    The proposal adds a definition of ``secret ballot'' to mean ``no 
credit union employee or official can determine how a particular member 
voted. Credit union employees and officials are prohibited from 
assisting members in completing ballots or handling completed 
ballots.''
    This proposal will ensure that employees and officials do not 
improperly influence members' votes, even inadvertently. Some ANPR 
commenters opposed to a ban on employees handling ballots expressed 
concerns that the ban would make it less convenient for members to 
vote, but the proposed rule need not have this

[[Page 15580]]

effect, as nothing prohibits the independent teller from placing a 
secure ballot box at credit union branch locations for use by members 
who bring their completed ballots to the credit union. Also, nothing 
prohibits employees from distributing blank ballots to those members 
who may have misplaced their original ballot.
    Some commenters opposed to prohibitions on management obtaining 
interim voting tallies and employees handling ballots stated it would 
be unfair to impose these rules in the context of conversions to a 
mutual savings bank and not also for credit union to credit union 
mergers or insurance conversions. NCUA agrees and as discussed under 
Sec.  708b, has added identical definitions and restrictions for 
elections involving other types of transactions as well.
    The proposal also moves the current definition of ``independent 
entity'' into the definitions section but does not revise the 
substance.

Sec. 708a.104 Disclosures and communications to members.

    Paragraph (c) of this section lists the information that credit 
unions seeking to convert must disclose to members. The proposal adds 
required disclosures about the estimated costs of conversion; the 
conversion's affect on the availability of facilities, including 
branches and ATMs; and the fact that NCUA neither approves nor 
disapproves of the proposed conversion. The addition of these 
disclosures results in the addition of three new subparagraphs to 
paragraph (c) and the renumbering of the other five existing 
subparagraphs of paragraph (c).
    One ANPR commenter suggested information about conversion-related 
expenses would be useful to members, and the Board agrees. Conversion 
costs are paid from a credit union's earnings, and accumulated earnings 
are capital and represent members' ownership interests, so members have 
a right to know how these ownership interests will be affected by 
consideration of the board of directors' conversion proposal. The Board 
adds a new required disclosure about the costs of the conversion in 
subparagraph (5) of paragraph (c). The credit union must disclose the 
total estimated cost of the conversion with separate line items for 
printing fees, postage fees, advertising, consulting and professional 
fees, legal fees, staff time, the cost of holding a special meeting, 
the cost of conducting the vote, and any other conversion-related 
expenses.
    As discussed in the ANPR, conversions have the potential to change 
members' access to the institution. 73 FR 5461, 5465 (Jan. 30, 2008). 
Some converting credit unions, for example, plan to shut certain 
branches after conversion. In addition, a credit union participating in 
a credit union shared branching network could lose access to that 
network if it becomes a bank. Likewise, some ATM networks limit their 
services to credit unions. Members accustomed to accessing their credit 
union accounts through a particular branch, shared branch, or an ATM 
need to know if the conversion has the potential to disrupt that access 
before voting on the conversion. NCUA is concerned, however, that 
credit unions seeking to convert have not always provided members with 
complete and accurate information about the potential for changes to 
services and facilities. Id. Accordingly, the proposal adds a 
disclosure in subparagraph (8) requiring disclosure of the conversion's 
affect on services and facilities.
    NCUA will, at the request of a converting credit union, review 
draft notices and other member communications for compliance with NCUA 
rules. Some members may believe, erroneously, that NCUA's review of 
conversion-related materials in a particular conversion, and NCUA's 
non-disapproval of these materials, means that NCUA endorses the 
materials and, possibly, the proposed conversion. In fact, NCUA does 
not take a position on the merit of conversion proposals. NCUA conducts 
its reviews of the conversion materials and the associated process 
simply to fulfill its statutory duty of overseeing the methods and 
procedures of the member vote. 12 U.S.C. 1785(a)(2)(G)(ii). The ANPR 
requested comment on whether the disclosures to members should include 
a statement that NCUA does not approve of the proposed conversion. Most 
commenters opposed adding this statement because they found it biased, 
but several of these commenters also suggested they would not be 
opposed to a more neutral statement. Accordingly, the proposal adds a 
requirement in subparagraph (7) that the notice to members state that 
NCUA does not approve or disapprove of the conversion proposal. NCUA 
believes this disclosure is necessary to clarify for members what 
NCUA's role is in the conversion process.
    Finally, the proposed revisions correct typographical errors in 
subparagraph (b)(4) and clarify the subject line of the e-mail 
forwarding a member communication on the conversion proposal in 
subparagraph (f)(2).

Sec. 708a.106 Membership approval of a proposal to convert.

    As discussed above, the proposal moves the definition of 
``independent entity,'' currently located in paragraph (c) of this 
section, to the definitions section.

Sec. 708a.107 Certification of vote on conversion proposal.

    NCUA has encountered situations where the converting credit union 
experienced significant difficulties in obtaining approval from the 
gaining regulators. In at least one of these situations, NCUA learned 
well after the conversion attempt that the Federal Deposit Insurance 
Corporation (FDIC) had expressed concerns about the business plan, 
continuing operation of branches, internal controls, and loan 
underwriting, all at the same time the credit union was beginning the 
member voting process on its conversion proposal. Knowing of these 
concerns in a timely manner would have assisted NCUA in its role in 
approving the methods and procedures used by the credit union to 
conduct its member vote, including the accuracy of the communications 
provided to members. Accordingly, the proposal includes a new paragraph 
(c) that requires converting credit unions to submit to NCUA with their 
certification of the member vote copies of any correspondence with any 
agency where that correspondence is related to the conversion.
    Also, to fulfill NCUA's mission to protect the share insurance fund 
in an efficient manner, NCUA must be able to gauge whether, and when, 
converting credit unions are likely to actually complete their 
attempted conversions. If NCUA is aware that gaining regulators might 
delay or derail approval of the new charter, NCUA can better schedule 
its supervisory resources in the time period between member approval 
and actual conversion.

Sec. 708a.113 Voting guidelines.

    Section 708a.113 contains guidance on conducting the member 
conversion vote. The proposal adds a new paragraph (e) to this section 
recommending that converting credit unions not use employees to solicit 
member votes. NCUA has observed a situation in which credit union 
management admitted that using employees to solicit votes diverted the 
employees from the primary duties in running the credit union. NCUA is 
also concerned that employees not be coerced to advocate a position on 
the conversion that they do not believe in.

[[Page 15581]]

    NCUA also considered prohibiting employee solicitation of member 
votes, but most ANPR commenters were opposed to such a prohibition. For 
one thing, employees should be able to answer questions from members 
about the conversion, and it may be difficult to distinguish this 
activity from solicitation. Accordingly, the proposal does not contain 
an explicit prohibition on solicitation.

E. Proposed New Part 708a, Subpart C: Merger of Insured Credit Unions 
Into Banks

    During the course of the past two decades, several credit unions 
have merged into banks. In some of these mergers, the continuing bank 
has been a been a mutual savings bank, such as the Roper Employees FCU 
merger into Carolina Federal Savings Bank. In other mergers, the 
continuing bank has been a stock bank, such as in the merger of 
Nationwide FCU merger into Nationwide Bank. Some of these mergers have 
been ``two-step'' mergers, that is, the credit union proposed to 
convert first to a bank and then immediately merge into an existing 
bank, such as in the merger of Salt City Hospital FCU into Beacon 
Federal Savings Bank. Other mergers have been ``one-step'' mergers, 
that is, the direct merger of the credit union into the bank, such as 
in the merger of Northeast Community Credit Union Into Haverhill 
Cooperative Bank.
    What all of the above mergers, and other mergers not mentioned, had 
in common was that they were conducted and completed on an ad hoc 
basis. The FCU Act requires that no FICU may merge with a bank without 
the prior approval of the NCUA Board, 12 U.S.C. 1785(b)(1)(A), and the 
Act provides a listing of certain factors that the Board must consider 
when granting or withholding its approval. 12 U.S.C. 1785(c). Still, 
NCUA has never had any regulations establishing the procedural or 
substantive requirements for obtaining the approval of the NCUA Board 
or the credit union's members with regard to a particular merger 
proposal. This lack of regulations has resulted in the Board adopting 
merger procedures and other merger requirements on an ad hoc basis each 
time a merger proposal has come to the Board.
    The Board believes that it is time to replace the current, 
uncertain process with a regulation that prescribes a clear, 
predictable process governing all future merger proposals. The decision 
to convert a credit union charter to a bank charter through a merger 
fundamentally affects on the ownership rights of the credit union's 
members, and there should be a clearly defined process that protects 
those rights. There probably will be some credit unions that wish to 
merge with banks, and the credit unions considering such action deserve 
to know in advance the process and procedures governing these mergers. 
The rulemaking process will help define and standardize those 
procedures.
    In crafting this rule, the Board considered its statutory 
responsibilities for approving mergers. 12 U.S.C. 1785(b), (c). The 
Board also looked to the existing regulatory procedures for credit 
union-into-credit union mergers, 12 CFR 708b, and for credit union 
conversions to mutual savings banks, 12 CFR 708a. A section-by-section 
discussion of the proposed rule follows.

Sec. 708a.301 Definitions.

    This section provides definitions of key terms used throughout the 
regulation.
    For example, the proposal defines merger as any transaction in 
which a FICU transfers all, or substantially all, of its assets to a 
bank. The merger provisions of subpart C also apply to any purported 
conversion of a credit union to a bank if the purported conversion is 
conducted pursuant to an agreement between a preexisting bank and the 
credit union that provides (1) the credit union will not conduct 
business as a stand-alone bank, and (2) the purported conversion will 
be followed by the transfer of all, or substantially all, of the credit 
union's assets to the preexisting bank.
    This definition of merger means that NCUA will apply the provisions 
of subpart C to both ``one-step'' and ``two-step'' mergers. Regardless 
of whether the merger is accomplished in one or two steps as described 
above, in form it is still a merger, and thus subject to NCUA's 
approval under Sec.  205(b)(1)(A) and (c) of the FCU Act. 12 U.S.C. 
1785(b)(1)(A) and (c). A transaction in which a credit union purports 
to convert to a bank--but never actually opens its doors as a 
converted, stand alone bank--is not a true conversion governed by the 
requirements of Sec.  205(b)(2) of the FCU Act. 12 U.S.C. 1785(b)(2).
    Other key definitions are discussed below in the context they 
appear.

Sec. 708a.302 Authority to merge.

    This section provides that a FICU, with the approval of its 
members, may merge into a bank only with the prior approval of NCUA, 
the Federal Deposit Insurance Corporation, and the regulator of the 
continuing bank. If the credit union is state chartered, it also needs 
the prior approval of its state regulator.

Sec. 708a.303 Board of directors' approval and members' opportunity to 
comment.

    The section describes what the board of directors of a credit union 
must do prior to adopting a proposal to merge with a particular bank.
    The directors must conduct due diligence so as to determine that 
the concept of merging with a bank, and with the particular bank under 
consideration, is in the best interests of the credit union's members. 
As part of this due diligence, the directors must determine the merger 
value of the credit union, that is, the amount of money that a stock 
bank would pay in an arms-length transaction to purchase the credit 
union's assets and assume its liabilities and shares. The rule permits 
the credit union to obtain this valuation through either a public 
auction process or an independent appraisal process. The merger 
proposal may then be approved by an affirmative vote of a majority of 
board members who have determined that the merger partner selected by 
the directors is the best choice for the members, taking into account 
the merger value of the credit union and the amount that the selected 
merger partner is willing to pay the credit union's members to effect 
the merger.
    The merger value of the credit union is important for the following 
reasons. The merger of a credit union into a bank will cause members to 
either (1) lose their ownership rights entirely, as in a merger with a 
stock bank, or (2) see a diminution in the ownership rights in a merger 
with a mutual bank. See 71 FR 77150, 77153 (Dec. 22, 2006) (Discussion 
in preamble to NCUA's final rule on conversion of credit unions to 
mutual savings banks). Following the merger, the credit union's members 
will also likely see a worsening of their rates and fees. Id., at 
77157-58. See also the DATATRAC rate data posted on NCUA's Web site at 
https://www.ncua.gov/