Fiduciary Duties at Federal Credit Unions; Mergers and Conversions of Insured Credit Unions, 81378-81395 [2010-32115]

Agencies

• National Credit Union Administration

[Federal Register Volume 75, Number 248 (Tuesday, December 28, 2010)]
[Rules and Regulations]
[Pages 81378-81395]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-32115]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701, 708a, and 708b

RIN 3133-AD40


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

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: NCUA is issuing final amendments to its regulations covering 
several related subjects. The final rule documents and clarifies the 
fiduciary duties and responsibilities of Federal credit union (FCU) 
directors. The final rule amends NCUA's indemnification regulation 
limiting indemnification of FCU officials and employees for liability 
arising from improper decisions that affect the fundamental rights of 
credit union members, and makes conforming changes to the standard FCU 
and corporate credit union bylaws. In addition, the final rule adds new 
provisions establishing the procedures for insured credit unions 
merging into banks. The final rule also amends some of NCUA's existing 
regulatory procedures applicable to insured credit union mergers with 
other credit unions, conversions to mutual savings banks (MSBs), and 
termination of share insurance.

DATES: This rule is effective January 27, 2011.

FOR FURTHER INFORMATION CONTACT: Paul Peterson, Associate General 
Counsel; Elizabeth Wirick, Staff Attorney; or Jacqueline Lussier, Staff 
Attorney; Office of General Counsel, at the National Credit Union 
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428 or 
telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION:

I. Background

    On March 18, 2010, the NCUA Board issued a Notice of Proposed 
Rulemaking (NPR or Proposal) to amend parts 701, 708a, and 708b of 
NCUA's rules. 75 FR 15574 (March 29, 2010).
    The Proposal would have:
     Added a new Sec.  701.4 clarifying the authorities and 
duties of FCU directors in managing the affairs of their credit unions 
and revising Sec.  701.33 limiting indemnification of FCU officials and 
employees for liability arising from improper decisions that affect the 
fundamental rights of credit union members.
     Revised the existing provisions of Part 708a on insured 
credit union to MSB conversions.
     Added a new subpart C to Part 708a setting forth 
procedural and substantive requirements for converting an insured 
credit union to a bank by merger.
     Revised the existing provisions of Part 708b on insured 
credit union mergers with other credit unions and the termination of 
Federal share insurance.
    The public comment period for the NPR closed on May 28, 2010. NCUA 
received comments from 40 commenters including ten Federal and State 
credit unions, 16 credit union trade organizations (which included 13 
State credit union leagues), one State credit union regulators' 
association, six law firms, two credit union consultants, an individual 
credit union member, an election teller, a private deposit insurer, an 
association representing the interests of converting credit union 
members, and one bank trade association. The most significant comments 
on each part of the Proposal are discussed in the following section-by-
section analysis of the revisions in this final rule.

II. Section-by-Section Analysis

A. Duties of Federal Credit Union Boards of Directors (Sec.  701.4)

    The Proposal included a new Sec.  701.4, titled ``General 
authorities and duties of Federal credit union boards of directors.''
 Sec. 701.4(a) Management of a Federal Credit Union
    Proposed paragraph (a) provided that the management of each Federal 
credit union is vested in its board of directors, and that 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 language 
of the proposal mirrors the duties of the Federal Home Loan Bank 
directors, as expressed in a rule promulgated by the Federal Housing 
Finance Agency (FHFA). 12 CFR 917.2(b)(1).
    Some commenters stated that NCUA should clarify that while an FCU's 
board of directors has the ultimate responsibility for the management 
of the credit union, this responsibility does not include day-to-day 
management. One commenter said that NCUA should withdraw the language 
in the second sentence of proposed paragraph (a) making the board's 
ultimate responsibility for the credit union's management non-
delegable. This commenter stated the FCU Act vests the management of 
each FCU in the board of directors, but it does not prohibit the board 
from delegating the management of the credit union. The commenter 
further stated that since an FCU's board is composed primarily of 
unpaid volunteers the board of directors should be allowed to delegate 
the management to compensated executives. The commenter recommended 
NCUA substitute language that the board of directors provides the 
general direction for the credit union, which would better reflect the 
policy-making role of the board.
    The NCUA Board agrees that paragraph (a) should more closely track 
the language of section 113 of the FCU Act, which employs the language 
``general direction and control.'' Accordingly, the final rule 
substitutes ``general direction and control'' for ``management.'' This 
amendment clarify that the directors do not actually manage the credit 
union. The board of directors, however, may not and cannot delegate its 
ultimate statutory responsibility for the proper management of the 
credit union.
Sec. 701.4(b) Duties of Federal Credit Union Directors
    Proposed paragraph (b) set forth the fiduciary duties of FCU 
directors. It charged each director to:
     Carry out his or her duties as a director in good faith, 
in a manner reasonably believed to be in the best interests of the 
membership of the FCU, and with such care, including reasonable 
inquiry, as an ordinarily prudent person in a like position would use 
under similar circumstances (paragraph (b)(1));
     Administer the affairs of the FCU fairly and impartially 
and without discrimination in favor of or against any particular member 
(paragraph (b)(2));
     Understand the FCU's balance sheet and income statement 
and ask, as appropriate, substantive questions of management and the 
internal and external auditors (paragraph (b)(3)); and
     Direct the operations of the FCU in conformity with the 
requirements set forth in the Federal Credit Union Act, the NCUA's 
regulations, other applicable law, and sound business practices 
(paragraph (b)(4)).

[[Page 81379]]

    Proposed paragraph (b)(1) stated that the directors have a 
fiduciary duty to act in the best interests of credit union members, 
particularly in connection with matters affecting the fundamental 
rights of members, such as mergers and conversions. A few commenters 
objected to the statement in (b)(1) that directors owe fiduciary rights 
to members and asserted that because members have little right to the 
equity in their credit unions, credit union members resemble customers 
of other depository institutions more than shareholders in 
corporations. Other commenters stated that the duties of the board of 
directors run first to the credit union and not to the members 
individually or collectively.
    These views are wrong from both a philosophical and legal 
standpoint. As stated in the preamble to the NPR, the NCUA Board 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. 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.\1\
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    \1\ See 75 FR 15574, 15575 (Mar. 29, 2010).
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    The Board cannot emphasize enough that the members own an FCU and 
that directors of an FCU must consider the interests of the membership 
as a whole, and put those interests first, when making decisions that 
affect the credit union. Accordingly, the NCUA Board is revising the 
final paragraph (b)(1) of Sec.  701.4 of the Proposal to emphasize that 
each FCU director must carry out his or her duties in a manner the 
director believes to be in the best interests of the membership of the 
credit union as a whole.
    One commenter was concerned that a focus on the membership as a 
whole might keep an FCU from developing new branches or ATMs because 
some members would be closer to the new branch or ATM and might find 
the new facility more convenient to use than other members. The Board 
recognizes that in the short term some members may benefit 
geographically from an FCU's expansion plans. Such marginal 
geographical benefits, or other marginal access benefits, will not by 
themselves cause an FCU expansion to violate the fiduciary duties of an 
FCU's Board.
    One commenter suggested that there might be a difference between 
the short term interests of credit union members and their long term 
interests. In the unusual situation where there might be such a 
perceived conflict, the board of directors should, as part of its due 
diligence, carefully define the perceived conflict, weight the 
competing short and long term interests, make a choice based on the 
greatest needs of the members, and explain the board's choice. Proposed 
paragraph (b)(1) required FCU directors to carry out their duties with 
the care an ordinarily prudent person in a like position would use 
under similar circumstances. This language was based in part on Model 
Business Corporation Act (MBCA) Sec.  8.30, titled ``Standards of 
Conduct for Directors.'' Some commenters recommended updating the 
italicized phrase to omit the words ``ordinarily prudent'' so as to use 
a 1998 change to Sec.  8.30 of the MBCA employing the language ``with 
the care that a person in a like position would reasonably believe 
appropriate.'' \2\ These commenters believe the words ``ordinarily 
prudent'' heighten the risk of litigation.
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    \2\ 1 Model Business Corporation Act Annot. xv, 8-187 (4th Ed., 
2008 Supp., 2009 rev.).
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    The NCUA Board does not agree with the commenters. The ordinarily 
prudent person formulation has been adopted by 41 States while the 
newer MBCA language has been adopted by only six States.\3\ In 
addition, the proposed language mirrors the current standard applicable 
to directors of the Federal Home Loan Banks as set forth in 12 CFR 
917.2(b)(1). Accordingly, the final rule retains the traditional 
formulation for a director's standard of care--``with the care an 
ordinarily prudent person in a like position would use.''
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    \3\ Id. at 8-209.
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    Proposed paragraph (b)(2) required that the directors administer 
the affairs of the Federal credit union fairly and impartially and 
without discrimination in favor of or against any particular member. 
Proposed paragraph (b)(2) employed the language of the Federal Home 
Loan Bank regulation, 12 CFR 917.2(b)(2), and its underlying Federal 
Home Loan Bank Act (FHLB Act) statutory provision. 12 U.S.C. 1427(j). 
Some commenters expressed a concern that this ``without 
discrimination'' language, combined with the general statement of 
duties owed to the members in (b)(1), could provide members with a 
cause of action and increase the risk of litigation.
    The NCUA Board does not agree with these comments. First, as stated 
in the preamble of the NPR, this rulemaking does not create a Federal 
cause of action in favor of particular individuals or groups of 
individuals. 75 FR 15574, 15578 n.11. Second, NCUA's research revealed 
no case law holding that there is an implied private right of action 
under the equivalent language in the FHLB Act or regulations. In fact, 
there is case law to the contrary holding that there is no express or 
implied private right of action under Sec.  1427(j) of the FHLB Act. 
Fidelity Financial Corp. v. Federal Home Loan Bank of San Francisco, 
589 F. Supp. 885, 891, 894 (N. D. Cal. 1983).
    Proposed paragraph (b)(3) required each director, at the time of 
election or appointment, or within a reasonable time thereafter, not to 
exceed three months, have at least a working familiarity with basic 
finance and accounting practices, including the ability to read and 
understand the FCU's balance sheet and income statement and to ask, as 
appropriate, substantive questions of management and the internal and 
external auditors.
    Many commenters objected to three months as an unreasonably short 
period in which to become adequately proficient at understanding 
accounting and finance; several suggested substituting 12 months for 
three months. Those favoring 12 months stated that many credit union 
directors serve on a part-time basis, particularly at small credit 
unions, and acquiring proficiency within only three months would be 
extraordinarily difficult.
    The NCUA Board believes that having a working familiarity with 
basic finance and accounting practices is essential to being able to 
perform a credit union director's functions. After considering these 
comments, however, the Board has decided that directors should be given 
more time in which to meet this requirement. Accordingly, this final 
rule revises paragraph (b)(3) to provide for a six-month period in 
which to gain at least a working familiarity with basic finance and 
accounting practices, including the ability to read and understand the 
Federal credit union's balance sheet and income statement. As the 
preamble to the NPR indicated, there are a multiple of sources of 
training in finance and accounting, including training provided by 
credit unions, outside sources, or, for small credit unions, NCUA's 
Office of Small Credit Union Initiatives. Accordingly, six months 
provides ample time for training while ensuring that directors who lack 
proper training do not procrastinate in obtaining the necessary 
training.
    Some commenters asked for clarification about what the phrase as 
appropriate meant in the phrase: ``to ask, as appropriate, substantive 
questions of management and the

[[Page 81380]]

internal and external auditors.'' The commenters wondered whether it 
meant that questions should be tailored to the size and complexity of 
the credit union. In fact, the NCUA Board added the as appropriate 
language to the proposed rule so directors would not feel they had to 
ask questions just for the sake of asking.
    Several other commenters objected to the financial literacy 
requirement for a variety of reasons. For example, one commenter argued 
the Proposal takes away one of the core right of members to elect 
directors of their choice, and that requiring a director to be 
financially literate or become financially literate within a short 
period of time would impose an eligibility requirement in violation of 
the FCU Act and the bylaws. Another commenter asserted that the 
financial literacy requirement imposes an eligibility requirement in 
violation of the FCU Act. This commenter believes any member of a 
credit union, so long as he or she is an adult and has not been 
convicted of a crime involving dishonesty or breach of trust as 
provided for, is eligible to serve as a director, regardless of 
financial literacy. 12 U.S.C. 1761(a), 1785(d).
    The Board agrees that any member of an FCU who meets the 
eligibility requirements of the FCU Act may run for, and serve as, an 
FCU director. As a matter of safety and soundness, however, a serving 
director does need to become literate within a reasonable period of 
time after election or appointment. The level of necessary literacy 
depends on the size and complexity of the FCU.
    Another commenter stated that the Proposal is vague and subjective 
because it provides no definitive measurements for when and how a 
director will be considered sufficiently trained in the use of 
financial statements and other data. This commenter believes that 
without specific and objective standards, it will be left up to the 
subjectivity of a given examiner to determine whether directors are in 
compliance with this requirement. The NCUA Board disagrees. Again, 
directors must obtain financial knowledge commensurate with the size 
and complexity of their credit union. The Board also notes there are 
multiple ways for resolving disputes between credit unions and their 
examiners. See, e.g., Interpretive Ruling and Policy Statement (IRPS) 
95-1, as amended by IRPS 02-1.
    Proposed paragraph (b)(4) required each director to direct the 
operations of the Federal credit union in conformity with the 
requirements set forth in the FCU Act, the NCUA's regulations, other 
applicable law, and sound business practices. The final rule revises 
this section to substitute the phrase ``direct management's 
operations'' for ``direct the operations.''
Sec. 701.4(c) Authority Regarding Staff and Outside Consultants
    Proposed paragraph (c)(1) stated that the 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. Paragraph 
(c)(2) states that the board of directors or any committee of the board 
may require FCU staff that are providing services to the board or 
committee under paragraph (c)(1) report directly to the board or 
committee. Paragraph (c)(3) provides that 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 officers or employees of the 
FCU, legal counsel, independent accountants, or other experts, and 
committees of the board of which the director is not a member.
    Some commenters opposed the provision requiring FCU employees 
(staff) to report directly to the board of directors or committees of 
the board, stating this would undermine management's authority over the 
employees of the credit union. Another commenter questioned whether 
committees other than the supervisory committee had the authority to 
require employees to report directly to the committee. One commenter 
argued that direct contact between the board of directors and the 
credit union's employees would put employees at the beck and call of 
the board and could interfere with the employees' regular duties.
    The NCUA Board disagrees. An FCU's board of directors cannot permit 
the chief executive officer (CEO) to screen all the board's information 
sources. While the board of directors should not attempt to bypass the 
CEO in giving direction to management and employees, the board is free 
to ask any manager, employee, or independent contractor to provide the 
board and its committees information directly and not through the 
filter of the CEO. The NCUA's Office of General Counsel has previously 
opined that board members must be free to gather information from any 
source in the credit union to perform their board duties. OGC Op. No. 
03-0763 (Sept. 29, 2003).
Sec. 701.4(d) Reliance
    The Proposal instructed FCU directors on the authority and limits 
of the director's ability to rely on information provided by others. A 
director is generally entitled to rely on information prepared or 
presented by employees or consultants whom the director reasonably 
believes to be reliable and competent in the functions performed. No 
commenters addressed proposed paragraph (d) of Sec.  701.4.
Sec. 701.4 and the Business Judgment Rule
    Some commenters asked about the interplay between Sec.  701.4 and 
the business judgment rule. One commenter recommended that in the 
preamble to a final rule NCUA indicate its policy and intention whether 
the business judgment rule applies in actions brought against the 
directors of FCUs.
    The business judgment rule is a burden of proof issue associated 
with particular causes of actions. Since the proposed rule does not 
create an express or implied private right of action, a third party 
seeking to bring a cause of action must look to State law to establish 
the cause of action. It is likely that the existence, and form, of any 
business judgment rule would depend on the law of the State under which 
the private cause of action would reside. Of course, the business 
judgment rule does not apply at all to administrative enforcement 
actions brought by NCUA.
    Accordingly, and except as described above, the NCUA Board adopts 
Sec.  701.4 as proposed.

B. Indemnification (Sec.  701.33)

    As stated in the NPR preamble, the NCUA Board desires to ensure 
that FCU officials and employees are held personally accountable, where 
appropriate, for egregious violations of their fiduciary duties. NCUA 
will not permit an FCU to indemnify officials and employees against 
liability based on an aggravated breach of the duty of care when such a 
breach may affect fundamental rights and financial interests of the FCU 
members.
    Accordingly, the Proposal included a new paragraph (c)(5) in Sec.  
701.33 prohibiting an FCU from indemnifying 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. Such indemnification, however, was limited to 
situations in which the decision giving rise to the claim for 
indemnification is determined by a court to have constituted gross

[[Page 81381]]

negligence, recklessness, or willful misconduct. Matters affecting the 
fundamental rights and interests of FCU members include, charter and 
share insurance conversions and terminations.
    The Proposal also included corresponding amendments to the 
indemnification provisions of the standard bylaws of FCUs and Federal 
corporate credit unions. Of the 24 commenters addressing this revision, 
most opposed it. Most of those opposed argued that the proposed 
provision would have the unintended consequence of discouraging 
qualified individuals from serving as directors because of the expanded 
potential for personal liability. Others asserted it would disadvantage 
the FCU charter as compared to the State charter because FCU directors 
would face an even higher burden compared to State chartered CU 
directors.
    The NCUA Board does not agree with these commenters. The proposed 
prohibition on indemnification is limited to the extraordinary 
circumstance of a board considering a proposal to change the credit 
union's charter or insurance status. Not only are these situations 
rare, but the prohibition would only apply in the very limited 
circumstance of an aggravated breach of the duty of care as determined 
by a court.
    Some commenters stated that the proposed rule's silence on the 
advancement of expenses would also disadvantage FCUs in attracting 
directors. To alleviate this concern, the final rule permits the FCU to 
advance funds to pay or reimburse reasonable legal fees and other 
professional expenses incurred by the official or employee to assist 
the official or employee in resisting lawsuits that the FCU considers 
meritless. The decision to advance funds requires the FCU's board of 
directors make a good faith determination, after due investigation, 
that:
     The official or employee acted in good faith and in a 
manner he or she believed to be in the best interests of the members;
     The payment will not materially adversely affect the 
credit union's safety and soundness; and
     The official or employee provides a written affirmation of 
his or her good faith belief that the relevant standard of conduct in 
Sec.  701.4 have been met and a written undertaking to reimburse the 
credit union, to the extent not covered by payments from insurance, the 
advanced funds if it ultimately decided that the official or employee 
is not entitled to indemnification.
    The NCUA Board is also adding a new provision to Sec.  701.33 
reinforcing that fiduciary duties are owed to the members. Existing 
(and unchanged) Sec.  701.33(c)(2) states that indemnification shall be 
consistent either with the standards applicable to credit unions 
generally under the law of the State where the FCU is located or the 
MBCA, as specified by the credit union. The MBCA standard under which a 
corporation may indemnify a director requires that the director acted 
in good faith and with the reasonable belief that his or her conduct 
was in the best interests of the corporation. MBCA Sec.  8.51(a). A 
commenter stated that this appears to conflict with the Proposal's 
statement that FCU directors' duties are owed to the membership and not 
to the credit union per se. The NCUA Board agrees that there is an 
apparent conflict and has added a new paragraph (c)(7) to Sec.  701.33 
to resolve this conflict. The new (c)(7) states that, the extent an FCU 
has chosen to follow State law or the MBCA, the FCU must substitute 
``best interests of the members'' for any language in State law or the 
MBCA indicating that duties are owed to any persons or entities (such 
as the credit union or the corporation) other than the membership as a 
whole.
    Accordingly, and except as described above, the final rule amends 
Sec.  701.33 as proposed.

C. Parts 708a and 708b

    The proposed amendments to Parts 708a and 708b revise existing 
rules on credit union to mutual savings bank (MSB) conversions and 
conversions to nonfederal deposit insurance. The revisions are designed 
to better protect the secrecy and integrity of the voting process. The 
Proposal also reorganized Part 708a and added a new subpart C to Part 
708a that establishes procedural and substantive requirements for 
converting a credit union to a bank through a merger.
    The preamble to the Proposal included a detailed section-by-section 
description and analysis for revised Parts 708a and 708b. 75 FR 15574, 
15579-15585 (March 29, 2010). The Board adopted many sections of the 
Proposal without change, and the detailed analysis of most of these 
sections is not repeated in this preamble.
Credit Union Conversion to MSB, Part 708a, Subpart A
Sec. 708a.101 Definition of Secret Ballot
    The Proposal included a new definition of ``secret ballot'' in 
Sec.  708a.101 to prohibit credit union employees from helping members 
complete ballots or handling completed ballots. One commenter argued 
the prohibition would prevent employees from responding to any 
questions at all about the election because of the unclear delineation 
between answering questions and helping with a ballot. The NCUA Board 
disagrees. The definition of ``secret ballot'' prohibits credit union 
officials from assisting members in completing ballots or handling 
completed ballots. The provision only prohibits an employee from 
physically touching a ballot or telling a member which way to vote, and 
does not prohibit an employee from answering questions. While one 
commenter said the prohibition on employees handling ballots would 
create unnecessary difficulties for members, another commenter 
suggested the rule should also require the independent entity to empty 
the ballot boxes in credit union branches. After considering the 
comments, the NCUA Board determined the rule as proposed appropriately 
protects the secrecy of members' votes without imposing an undue burden 
on credit unions. Accordingly, the final rule adopts the definition as 
proposed.
Sec. 708a.101 Definition of ``Conducted by an Independent Entity''
    The Proposal added new definitions for ``independent entity'' and 
``conducted by an independent entity.'' These definitions describe the 
qualifications of, and requirements applicable to, the entity 
responsible for tabulating member votes on the conversion proposal. The 
new definitions would prohibit the independent entity from providing 
any interim vote results to credit union management as well as prohibit 
the opening or tallying of ballots during the election period. As 
discussed in the Advance Notice of Proposed Rulemaking, NCUA has 
documented several instances where credit union management's access to 
interim vote tallies raised concerns about the fairness of elections 
and the communications to members. 73 FR 5461, 5466 (January 30, 2008).
    Several commenters stated the definition of ``conducted by an 
independent entity'' as proposed would pose practical challenges. Some 
of these commenters said the requirement to delay the counting of 
ballots until after the conclusion of the special meeting would make 
counting the ballots and certifying the results to NCUA within 10 days 
much more difficult. The NCUA Board agrees that the change in procedure 
contemplated by the Proposal could make certification within 10 days

[[Page 81382]]

more difficult and has lengthened the period for certification under 
section 708a.107 to 14 days. Another commenter, a company that conducts 
corporate elections, explained that the usual way the independent 
entity determines which members have voted is by opening the ballot and 
checking the validity of the control number and matching it with a 
member name. This commenter stated that because the independent entity 
needs to know which members have voted to produce a list of members who 
have not voted, the bar on opening ballots during the election period 
would make it much more difficult to produce the list of members who 
have yet to vote. The NCUA Board understands the Proposal might require 
election tellers and credit unions to modify the envelope format so 
that the outside of the envelope would show the ballot control number. 
The documented problems with interim vote tallies and the difficulty of 
ensuring that election tellers with access to interim tallies do not 
share these tallies with credit union management justify requiring 
election tellers to change their usual procedures if necessary. NCUA 
believes those rare cases where voters might not complete a ballot 
correctly, and so be listed as having voted when they did not actually 
vote properly, will not affect the fairness of the overall voting 
process.
    Another of the commenters suggested that the independent entity 
should be allowed to tally ballots as they are received, and only 
communicating the interim tallies to the credit union should be 
prohibited. The Board believes it would be too easy for a teller to 
unintentionally communicate the interim voting results to the credit 
union.
    One commenter who supported the rule as proposed suggested the rule 
should also prohibit giving credit union management the names of 
members who have not voted, because members opposing the conversion 
cannot obtain this information. As an alternative, this commenter 
suggested allowing management to provide an election reminder notice to 
the independent entity and having the independent entity mail it to 
members who have not voted. The Board is not aware of situations where 
allowing credit union management to obtain lists of non-voting members 
during the election period has compromised the fairness of an election, 
and having such lists allows the credit union to conserve resources by 
only soliciting those who have not yet voted.
    Accordingly, the final rule adopts the definitions of ``independent 
entity'' and ``conducted by an independent entity'' as proposed.
Sec. 708a.104 Disclosures
    The Proposal also amended the list of disclosures in Sec.  708a.104 
(previously Sec.  708a.4) to add disclosures related to the cost of the 
conversion, the conversion's effect on the availability of facilities, 
and a statement that NCUA neither supports nor endorses the conversion 
proposal.
    Most commenters were opposed to the requirement to disclose the 
costs of the conversion. One opposing commenter asserted that the costs 
are irrelevant to members and most of the costs are incurred before 
members are notified, while another said any such disclosures would be 
only speculation. The NCUA Board disagrees that simply because, as one 
commenter alleges, most of the costs have occurred, or, as another 
commenter alleges, most of the costs are in the future, that members 
will find these costs, or cost estimates, irrelevant. One of the 
commenters supporting the cost disclosures also suggested the cost 
disclosures should be updated in the mailings to members 60 and 30 days 
before the vote, because any attempted opposition to a conversion 
proposal causes the credit union to incur additional advertising 
expenses to respond to the opposition. This suggestion goes beyond the 
scope of the Proposal. The NCUA Board will consider how these cost 
disclosure requirements will work in practice before proposing any 
additional disclosure requirements.
    The Proposal also required the converting credit union to disclose 
the projected effect of the conversion on the availability of 
facilities, including, at a minimum, the name and location of any 
branches, shared branches, and ATM networks to which members may lose 
access. Two commenters objected on the grounds it requires too much 
precision in advance predictions. The NCUA Board disagrees, as 
considering the future availability of facilities is a fundamental part 
of planning for the charter conversion transactions to which this 
disclosure applies. Moreover, the rule does not require a definitive, 
final statement about the availability of facilities--the disclosure 
can state a transaction ``could'' result in the loss of certain 
facilities, for example.
    The Proposal required the disclosure to include the statement that 
``NCUA does not approve or disapprove of the conversion proposal or the 
reasons advanced in support of the proposal.'' Most commenters did not 
oppose this disclosure, although several suggested slight amendments. 
One commenter suggested either deleting the phrase ``or the reasons 
advanced in support of the proposal'' or revising the phrase to read 
``or the reasons in support of or against the proposal.'' The NCUA 
Board agrees that adding the language ``or against'' is a helpful 
clarification of NCUA's neutrality in the final rule and has made this 
change. A commenter also suggested including this disclosure on the 
member-to-member communication as well, but this suggestion goes beyond 
the scope of the Proposal and the Board declines to adopt it.
    Except as described above, the final rule adopts Sec.  708a.104 as 
proposed.
Sec. 708a.113 Recommendation Against Using Credit Union Staff To 
Solicit Member Votes
    The Proposal added a new paragraph to the voting guidelines 
section, Sec.  708a.113 (previously Sec.  708a.13), recommending 
against the use of credit union employees to solicit member votes. 
Although most commenters opposed this guidance, the opposing commenters 
tended to mischaracterize it as a requirement. The voting guidelines, 
including the recommendation to not use staff to solicit member votes, 
do not impose mandatory requirements, but simply suggest how credit 
unions can ensure an election is conducted fairly and in a manner that 
does not jeopardize the operations and condition of the converting 
credit union. NCUA may in the future propose a requirement that 
converting credit unions to use an independent third party to solicit 
votes rather than diverting credit union employees from their usual 
duties. In this final rule, NCUA strongly encourages credit unions to 
use an independent third party if soliciting votes.
    Accordingly, the final rule adopts the revisions to Sec.  708a.113 
as proposed, with minor revisions to highlight NCUA's recommendation 
against using credit union employees to solicit votes.
Credit Union-Into-Bank Merger, Part 708a, Subpart C
    The Proposal included a new subpart C to Part 708a regulating 
mergers of credit unions into banks. The majority of commenters on 
these provisions generally supported the concept of regulating these 
types of transactions, and several commenters noted that these 
provisions fill a gap in current regulations. Specific comments 
addressed to certain provisions of subpart C are discussed below.
Sec. 708a.303(a) Merger Valuation
    Sec.  708a.303(a) requires a credit union's board of directors, 
when looking to

[[Page 81383]]

merge into a bank, to determine the merger value of the credit union 
either by conducting an auction or retaining a ``qualified appraisal 
entity'' to estimate the merger value of the credit union before 
directors select a bank merger partner and vote on a proposal to merge. 
A qualified appraisal entity must have no past financial relationship 
with the merging credit union, the continuing bank, or any law firm 
representing the credit union or the bank in connection with the 
merger.
    Proposed Sec.  708a.304 requires the credit union to disclose its 
merger value, and whether any merger payment will be made to members, 
to NCUA. This section also requires the notice to NCUA to include all 
information the credit union relied on in making the selection of a 
merger partner and, if the payment to members is less than the merger 
value, an explanation of why the merger and the merger partner selected 
are in the best interests of the members. The Regional Director must 
disapprove a proposed merger where the merger payment is less than the 
merger valuation, unless members receive some additional, quantifiable 
benefit.
    Commenters on the merger value provisions were equally divided. 
Opposing commenters found the merger value requirement too onerous, 
costly, or beyond NCUA's authority. The NCUA Board disagrees with these 
latter commenters. In a transaction that fundamentally changes the 
nature of the credit union and its members' ownership, knowing the 
value of the credit union is critical to the members' decision on 
approving the merger proposal. This valuation is also critical to 
NCUA's ability to make the statutorily required determination of 
whether a proposed merger meets the ``convenience and needs of the 
members.'' 12 U.S.C. 1785(c)(5). While the merger valuation requirement 
may entail addition procedures, analysis, and costs for the credit 
union proposing the transaction, knowing the merger value, and whether 
members are receiving compensation for this value, outweighs 
institutions' concerns about additional procedures.
    Some supporting commenters suggested revisions to the merger 
valuation process. A few would expand the requisite analysis to include 
intangible items such as the value of the relationship between the 
members and the credit union and would exclude the value of benefits a 
credit union member could get simply by becoming a bank customer in 
addition to a credit union member. The NCUA Board has not modified the 
rule as suggested by these commenters. The NCUA Board will examine how 
the merger valuation provision works in future practice before making 
adjustments to the procedure.
    Finally, one commenter suggested that a ``qualified appraisal 
entity'' under this provision should not only have no past relationship 
with the continuing bank or the merging credit union and any law firm 
representing either institution, but also no past relationship with the 
bank's affiliates or holding company. The NCUA Board agrees that to be 
a qualified appraisal entity, the entity must also have no past 
relationship with a bank's owners, affiliates, or holding companies, 
and the final rule reflects this.
Sec. 708a.304(g) Regional Director Approval
    Proposed paragraph 708a.304(g) required the Regional Director to 
review the merging credit union's Notice of Intent to Merge and Request 
for Approval (NIMRA) and either disapprove the NIMRA or authorize the 
credit union to proceed to the member vote. Section 708a.308 requires 
the Regional Director to review the methods and procedures of the 
membership vote and approve or disapprove the merger. Several 
commenters expressed concerns about the amount of discretion given to 
the Regional Directors in these reviews, with some suggesting these 
reviews exceed the scope of NCUA's authority.
    The NCUA Board does not share these concerns, and the final rule 
retains the proposed delegations. The authority and discretion the NCUA 
Board gives to Regional Directors under this provision is entirely in 
keeping with the role assigned to the NCUA Board and the NCUA Board's 
authority to delegate duties to staff under the FCU Act. The FCU Act 
requires the NCUA Board to assure that a Federally insured credit 
union's merger with another type of financial institution, among other 
requirements, meets the ``convenience and needs of the members.'' 12 
U.S.C. 1785(c)(5). The FCU Act also permits the NCUA Board to delegate 
any of its responsibilities to staff. 12 U.S.C. 1766(d). As part of its 
statutorily required assessment of whether a proposed transaction meets 
the convenience and needs of the members, the NCUA Board is delegating 
to the Regional Director the determination of whether the notice of a 
proposal to merge and the methods and procedures used to conduct the 
member vote were adequate.
Sec. 708a.305 Disclosures
    Proposed Sec.  708a.305 includes required disclosures to credit 
union members for credit union-to-bank mergers similar to those 
required for credit union-to-bank conversions. Comments were evenly 
split between support of and opposition to the disclosures.
    One commenter recommended a change to Sec.  708a.305(d)(2), which 
says a member ``could'' lose all ownership interests if the bank 
converts to a stock bank and members do not purchase stock. This 
commenter recommended replacing the word ``could'' with ``will,'' 
because the fact that a member needs to re-purchase the ownership 
interest indicates the member no longer has it. Conversely, an opposing 
commenter stated the member rights disclosures ignore the rights of MSB 
members to subscribe to the initial stock offering. While the NCUA 
Board agrees with the first commenter that a former credit union member 
will lose ownership interests if the MSB later converts to a stock bank 
and the MSB member does not subscribe to the stock offering, the final 
rule retains the word ``could'' because a total loss of ownership 
interests is dependent on the MSB converting to a stock bank. The NCUA 
Board does not agree the disclosure ignores MSB members' rights to 
subscribe to the initial stock offering, since the disclosure 
explicitly mentions the possibility that the MSB member may purchase 
stock.
Sec. 708a.306 Participation Requirement
    Proposed Sec.  708a.306 requires that at least 20 percent of 
members participate in the vote on merging with a bank. One commenter 
deemed 20 percent too low, since it would allow a merger with a bank 
with only 10 percent of the credit union members voting affirmatively. 
Another commenter deemed 20 percent too burdensome and opined the 
expenses of recruiting members to vote would drive down the value of 
the credit union to the potential merger partner. The final rule 
retains the 20 percent participation requirement. This requirement is 
identical to the participation requirement for converting from Federal 
deposit insurance under the FCU Act. 12 U.S.C. 1786(d)(2).
    As discussed above, the final part 708a, Subpart A (for credit 
union conversions to MSBs) contained modified definitions of 
``independent entity'' and ``conducted by an independent entity.'' This 
final part 708a, Subpart C (for credit union mergers into banks) 
contains similar modifications.
    Accordingly, and except as described above, the final rule adopts 
the new part 708a, subpart C as proposed.

[[Page 81384]]

Credit Union-into-Credit Union Merger, Part 708b, Subpart A
    Subpart A of Part 708b regulates credit union-to-credit union 
mergers and termination of NCUSIF insurance. As discussed below, the 
Proposal required merging credit unions disclose and explain, in 
certain mergers, the factors used to determine whether a share 
adjustment will be paid to members of the merging credit union. The 
Proposal also required additional disclosures to members and to NCUA 
regarding compensation increases to key credit union staff and 
officials. 708b.103(a)((5) Disclosures related to share adjustments.
    Proposed paragraph 708b.103(a)(5) expanded on the existing 
requirement in Sec.  708b.103 for merging credit unions to state the 
amount of any share adjustment in the summary of the merger plan given 
to members. The Proposal required, where the net worth ratio of the 
merging credit union exceeds the net worth ratio of the continuing 
credit union by more than 500 basis points, an explanation of the 
factors used in establishing the amount of any proposed adjustment or 
in determining no adjustment is necessary. Contrary to some commenters' 
interpretations, the Proposal did not require payment of a share 
adjustment.
    Several commenters argued these disclosures were unnecessary and 
would discourage mergers or disputed that members of a merging credit 
union are entitled to the net worth of a merging credit union. The NCUA 
Board disagrees. As discussed in the preamble to the Proposal, in many 
cases a merger involves a smaller credit union with limited services 
and a high net worth ratio (NWR) seeking to merge with a much larger 
credit union with more services but a lower NWR. 75 FR 15574, 15584 
(March 29, 2010). The higher NWR of the merging credit union includes 
retained earnings that could have been spent, but were not spent, on 
additional product offerings or more favorable rates. Because, in these 
situations, the members of the merging credit union have paid for the 
higher NWR with reduced services or less favorable rates, the NCUA 
Board believes that where a NWR disparity exists, the members of the 
merging credit union need to know how any merger dividend, if a merger 
dividend is offered, was calculated. Accordingly, the final rule adopts 
paragraph (a)(5) as proposed.
Secs. 708b.103 and 708b.106 Disclosures Related to Compensation 
Increases Resulting From the Merger
    The Proposal amended Sec. Sec.  708b.103 and 708b.106 to require 
disclosure to NCUA and to credit union members of any ``merger-related 
financial arrangement,'' defined to include any increase in direct or 
indirect compensation to board members or senior management officials 
that exceeds the greater of 15% or $10,000. Half of the comments on 
this provision supported the general concept of increased disclosure in 
this area. Most opposing commenters suggested a higher threshold for 
compensation increases that would trigger disclosures, and several 
found the $10,000 trigger too low for larger credit unions. The NCUA 
Board reiterates that the threshold for requiring disclosure is a 
compensation increase that exceeds the greater of 15% or $10,000. 
Accordingly, for officials with higher salaries, the threshold for 
disclosure would be compensation increases of more than 15%. The 
Proposal required disclosures only for compensation increases above 
certain thresholds and thus balances any privacy interests of the 
employees with the interests of members in knowing when material 
financial incentives have been proposed to directors and senior 
management officials.
    Several commenters also suggested this disclosure was unnecessary 
because it would be included in Internal Revenue Service filings and, 
for FCU members, accessible under NCUA's regulation on access to books 
and records. The NCUA Board disagrees that these alternate means of 
accessing compensation information are adequate for the purposes of a 
member vote on a merger, because information from these sources is 
unlikely to be available to members during the voting period. The NCUA 
Board believes members should know whether credit union directors or 
senior management officials stand to gain financially from a merger 
before voting on the merger proposal. Accordingly, the final rule 
adopts these disclosure changes as proposed.
Share Insurance Conversions, Part 708b, Subpart B
    Subpart B of Part 708b regulates share insurance conversions. The 
proposed changes to Part 708b include the prohibition on interim vote 
tallies and the ban on employees assisting with or handling ballots in 
transactions resulting in the termination of NCUSIF share insurance.
    The commenters' chief concern about the practical effects of the 
Proposal--that the prohibition on opening ballots in the definition of 
``conducted by an independent entity'' would make it difficult to 
ascertain which members had voted--was the same as the concern 
expressed in the context of credit union-to-bank conversions. 
Commenters on this section also noted that for conversions from Federal 
deposit insurance the FCU Act requires 20% of credit union members to 
vote. 12 U.S.C. 1786(d)(2). The 20% quorum requirement, commenters 
said, makes it especially important that the credit union proposing the 
insurance conversion knows how many members have voted, and also more 
difficult to count the ballots and certify the results within 10 days 
after the election because a higher proportion of members must vote. As 
discussed above, the NCUA Board sees no reason why the election teller 
cannot modify the ballot envelope to allow the election teller to 
produce a list of members who have voted, and thus a list of those who 
have not yet voted, and so the Board has not changed the proposed 
definition. Also as discussed above, the Board is extending the 
deadline for certifying the election results from 10 days to 14 days 
after the close of the voting period to allow the teller more time for 
counting the ballots.
    Several commenters opined that applying the ban on interim vote 
tallies to insurance conversions was unnecessary because the concerns 
NCUA has documented with previous elections occurred in the context of 
charter conversions rather than insurance conversions. The NCUA Board 
disagrees. The same potential for problems exists with any election 
where credit union officials have access to interim voting tallies, so 
the NCUA Board has prohibited credit union officials from obtaining 
interim vote tallies on all transactions affecting a credit union's 
charter or insurance status. Other commenters suggested NCUA's 
requirements in this area impermissibly preempt State law. Again, the 
NCUA Board disagrees, because the FCU Act explicitly gives the NCUA 
authority to regulate conversion from Federal deposit insurance. 12 
U.S.C. 1785(b)(1)(D).
    Accordingly, and except as described above, the final rule adopts 
the proposed changes to Subpart B of Sec.  708b.

[[Page 81385]]

III. Regulatory Procedures

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a proposed rule may have on 
a substantial number of small credit unions (those under ten million 
dollars in assets). Only a few credit unions convert in a given year. 
Accordingly, the NCUA Board certifies that this final rule will not 
have a significant economic impact on a substantial number of small 
credit unions, and, therefore, a regulatory flexibility analysis is not 
required.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or modifies an existing burden. 44 U.S.C. 3507(d). For 
purposes of the PRA, a paperwork burden may take the form of either a 
reporting or a recordkeeping requirement, both referred to as 
information collections. NCUA identified and described several 
information collection requirements in the proposed rule. As required 
by the PRA, NCUA submitted a copy of the proposed regulation to the 
Office of Management and Budget (OMB) for its review and approval and 
invited comment on the PRA aspects.
    While NCUA received comments on the proposed rule, no commenters 
specifically addressed the agency's estimates of burden hours or costs 
as set out in the preamble to the Proposal. Accordingly, NCUA 
anticipates that OMB will approve NCUA's submission.

C. 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 final rule will not have substantial direct effects on the 
States, on the connection between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. NCUA has determined that this rule does 
not constitute a policy that has federalism implications for purposes 
of the executive order.

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

    NCUA has determined that this rule will not affect family well-
being within the meaning of section 654 of the Treasury and General 
Government Appropriations Act, 1999, Public Law 105-277, 112 Stat. 2681 
(1998).

E. Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Act of 1996 (Pub. L. 104-
121) (SBREFA) provides generally for congressional review of agency 
rules. A reporting requirement is triggered in instances where NCUA 
issues a final rule as defined by section 551 of the Administrative 
Procedure Act. 5 U.S.C. 551. The Office of Management and Budget's 
determination about whether this rule is a major rule for purposes of 
SBREFA is pending.

List of Subjects

12 CFR Part 701

    Credit unions, Loans.

12 CFR Part 708a

    Charter conversions, Credit unions, Mergers of credit unions.

12 CFR Part 708b

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


    By the National Credit Union Administration Board on December 
16, 2010.
Mary F. Rupp,
Secretary of the Board.

0
For the reasons stated in the preamble, the National Credit Union 
Administration amends 12 CFR parts 701, 708a, and 708b as follows:

PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS

0
1. The authority citation for part 701 continues to read as follows:

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759, 
1761a, 1761b, 1766, 1767, 1782, 1784, 1786, 1787, and 1789. Section 
701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 is also 
authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3619. 
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.


0
2. Add a new Sec.  701.4 to read as follows:


Sec.  701.4  General authorities and duties of Federal credit union 
directors.

    (a) General direction and control of a Federal credit union. The 
board of directors is responsible for the general direction and control 
of the affairs of each Federal credit union. 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 direction and control is non-delegable.
    (b) Duties of Federal credit union directors. Each Federal credit 
union director has the duty to:
    (1) 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 as a whole, and with the 
care, including reasonable inquiry, as an ordinarily prudent person in 
a like position would use under similar circumstances;
    (2) Administer the affairs of the Federal credit union fairly and 
impartially and without discrimination in favor of or against any 
particular member;
    (3) At the time of election or appointment, or within a reasonable 
time thereafter, not to exceed six months, have at least a working 
familiarity with basic finance and accounting practices, including the 
ability to read and understand the Federal credit union's balance sheet 
and income statement and to ask, as appropriate, substantive questions 
of management and the internal and external auditors; and
    (4) Direct management's operations of the Federal credit union in 
conformity with the requirements set forth in the Federal Credit Union 
Act, this chapter, other applicable law, and sound business practices.
    (c) Authority regarding staff and outside consultants. (1) 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.
    (2) 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.
    (3) 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

[[Page 81386]]

statements, including financial statements and other financial data, 
prepared or presented by any of the persons specified in paragraph (d).
    (d) Reliance. A director may rely on:
    (1) 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;
    (2) 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
    (3) A committee of the board of directors of which the director is 
not a member if the director reasonably believes the committee merits 
confidence.

0
3. Add paragraphs (c)(5) through (7) to Sec.  701.33 to read as 
follows:


Sec.  701.33  Reimbursement, insurance, and indemnification of 
officials and employees.

* * * * *
    (c) * * *
    (5) 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 Federal credit union'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 Federal 
credit union members include charter and share insurance conversions 
and terminations.
    (6) A Federal credit union may, before final disposition of a 
proceeding referred to in paragraph (c)(5) of this section, advance 
funds to pay for or reimburse the expenses, including legal fees, 
reasonably incurred in connection with the proceeding by an official or 
employee who is a party to the proceeding because that individual is or 
was an official or employee of the credit union if:
    (i) The disinterested members of the credit union's board of 
directors (or in the event there are fewer than two disinterested 
directors, the supervisory committee), in good faith, determine in 
writing after due investigation and consideration that the official or 
employee acted in good faith and in a manner he or she reasonably 
believed to be in the best interests of the credit union's members;
    (ii) The disinterested members of the credit union's board of 
directors (or the supervisory committee, as the case may be), in good 
faith, determine in writing after due investigation and consideration 
that the payment or reimbursement of the expenses will not materially 
adversely affect the credit union's safety and soundness; and
    (iii) The official or employee provides:
    (A) A written affirmation of the individual's reasonable good faith 
belief that the relevant standard of conduct described in Sec.  
701.4(b) of this chapter has been met by the individual; and
    (B) A written undertaking to repay the credit union for any funds 
advanced or reimbursed, to the extent not covered by payments from 
insurance, if the official or employee is not entitled to 
indemnification under paragraph (c)(5) of this section.
    (7) To the extent a Federal credit union has elected to follow 
State law or the Model Business Corporation Act in accordance with 
paragraph (c)(2) of this section, the credit union must substitute the 
phrase ``in the best interests of the members'' for any language 
indicating that fiduciary duties are owed to persons or entities other 
than the members of the credit union, including, but not limited to, 
language such as ``in the best interests of the credit union'' or ``in 
the best interests of the corporation.''

0
4. Section 8 of Article XVI of appendix A to part 701 is revised to 
read as follows:

Appendix A to Part 701--Federal Credit Union Bylaws

* * * * *

Article XVI. General

* * * * *
    Section 8. Indemnification. (a) Subject to the limitations in 
Sec.  701.33(c)(5) through (c)(7) of the regulations, the credit 
union may elect to indemnify to the extent authorized by (check one)

[ ] Law of the State of --------:
[ ] Model Business Corporation Act:

the following individuals from any liability asserted against them 
and expenses reasonably incurred by them in connection with judicial 
or administrative proceedings to which they are or may become 
parties by reason of the performance of their official duties (check 
as appropriate).

[ ] Current officials
[ ] Former officials
[ ] Current employees
[ ] Former employees

    (b) The credit union may purchase and maintain insurance on 
behalf of the individuals indicated in (a) above against any 
liability asserted against them and expenses reasonably 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 the applicable State law or the Model Business Corporation Act.
    (c) The term ``official'' in this bylaw means a person who is a 
member of the board of directors, credit committee, supervisory 
committee, other volunteer committee (including elected or appointed 
loan officers or membership officers), established by the board of 
directors.
* * * * *

PART 708a--BANK CONVERSIONS AND MERGERS

0
5-6. Revise the authority citation for part 708a to read as follows:

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


0
7. Revise the heading for part 708a to read as set forth above:


Sec. Sec.  708a.1 through 708a.13  [Redesignated as Sec. Sec.  708a.101 
through 708a.113]

0
8a. Redesignate Sec. Sec.  708a.1 through 708a.13 as Sec. Sec.  
708a.101 through 708a.113, respectively.

Subpart A--Conversion of Insured Credit Unions to Mutual Savings 
Banks

0
8b. Add a new subpart A, consisting of newly redesignated Sec. Sec.  
708a.101 through 708a.113 with the heading as shown above:

0
9. Revise Sec.  708a.101 by adding definitions of ``conducted by an 
independent entity,'' ``independent entity,'' and ``secret ballot'' to 
read as follows:


Sec.  708a.101  Definitions.

* * * * *
    Conducted by an independent entity means:
    (1) The independent entity will receive the ballots directly from 
voting members.
    (2) 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