Fidelity Bonds, 59318-59326 [2018-25402]

Agencies

• National Credit Union Administration

[Federal Register Volume 83, Number 226 (Friday, November 23, 2018)]
[Proposed Rules]
[Pages 59318-59326]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-25402]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 704 and 713

RIN 3133-AE87


Fidelity Bonds

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: The NCUA Board (Board) is seeking comment on a proposed rule 
that would amend its regulations regarding fidelity bonds under Part 
704 for corporate credit unions and under Part 713 for natural person 
credit unions. The proposed rule would accomplish four objectives. 
First, it would strengthen a board of directors' oversight of a credit 
union's fidelity bond coverage. Second, it would ensure that there is 
an adequate period to discover and file fidelity bond claims following 
a credit union's liquidation. Third, it would codify a 2017 NCUA Office 
of General Counsel legal opinion that permits a natural person credit 
union's fidelity bond to include coverage for certain credit union 
service organizations (CUSOs). Fourth, it would clarify the documents 
subject to Board approval and require that all bond forms receive Board 
approval every ten years.

DATES:  Comments must be received on or before January 22, 2019.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     NCUA website: https://www.ncua.gov/news/proposed_regs/proposed_regs.html. Follow the instructions for submitting comments.

[[Page 59319]]

     Email: Address to [email protected]. Include ``[Your 
name] Comments on Notice of Proposed Rulemaking (Fidelity Bonds)'' in 
the email subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for email.
     Mail: Address to Gerard Poliquin, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.
    Public inspection: All public comments are available on the 
agency's website at https://www.ncua.gov/RegulationsOpinionsLaws/comments as submitted, except as may not be possible for technical 
reasons. Public comments will not be edited to remove any identifying 
or contact information. Paper copies of comments may be inspected in 
the NCUA's law library, 1775 Duke Street, Alexandria, Virginia 22314, 
by appointment weekdays between 9:00 a.m. and 3:00 p.m. To make an 
appointment, call (703) 518-6540 or send an email to [email protected].

FOR FURTHER INFORMATION CONTACT: Rob Robine, Trial Attorney, or Rachel 
Ackmann, Staff Attorney, Office of General Counsel, 1775 Duke Street, 
Alexandria, VA 22314-3428 or telephone (703) 548-2601.

SUPPLEMENTARY INFORMATION:

I. Introduction
II. Proposed Rule
III. Section-by-Section Analysis
IV. Request for Comment
V. Regulatory Procedures

I. Introduction

a. Background and Legal Authority

    The Federal Credit Union Act (FCU Act) requires that certain credit 
union employees and appointed and elected officials be subject to 
fidelity bond coverage.\1\ The FCU Act directs the Board to promulgate 
regulations concerning both the amount and character of fidelity bond 
coverage and to approve bond forms.\2\ The pertinent portion of the FCU 
Act provides:

    \1\ 12 U.S.C. 1761a, 1761b, and 1766.
    \2\ The FCU Act also grants the Board the powers to require such 
other surety coverage as the Board may determine to be reasonably 
appropriate; to approve a blanket bond in lieu of individual bonds; 
and to approve bond coverage in excess of minimum surety coverage.

    The Board is . . . directed to require that every person 
appointed or elected by any Federal credit union to any position 
requiring the receipt, payment, or custody of money or other 
personal property owned by a Federal credit union or in its custody 
or control as collateral or otherwise, give bond in a corporate 
surety company holding a certificate of authority from the Secretary 
of Treasury . . . as an acceptable surety on Federal bonds. Any such 
bond or bonds shall be in a form approved by the Board with a view 
to providing surety coverage to the Federal credit union with 
reference to loss by reason of acts of fraud or dishonesty including 
forgery, theft, embezzlement, wrongful abstraction, or 
misapplication on the part of the person, directly or through 
connivance with others, and such other surety coverages as the Board 
may determine to be reasonably appropriate. Any such bond or bonds 
shall be in such an amount in relation to the . . . assets of the 
Federal credit union as the Board may from time to time prescribe by 
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regulation[.] \3\

    \3\ 12 U.S.C. 1766(h).

    Parts 704 and 713 of the NCUA's regulations implement the 
requirements of the FCU Act regarding fidelity bonds.\4\ Parts 704 and 
713 reiterate the statutory requirement that certain credit union 
employees and appointed and elected officials are subject to fidelity 
bond coverage. The parts also establish the requirements for a fidelity 
bond, the acceptable bond forms, and the minimum permissible coverage. 
Both parts require a credit union's board of directors to review 
annually its fidelity bond coverage to ensure it is adequate in 
relation to the potential risks facing the credit union and the minimum 
requirements set by the Board. Part 713 is made applicable to all 
federally insured, state-chartered credit unions (FISCUs) through Sec.  
741.201 of the NCUA's regulations.\5\
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    \4\ 12 CFR pts. 704 and 713.
    \5\ 12 CFR 741.201.
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    Part 704 was recently revised to amend the provision that 
determines the maximum amount a credit union may pay for a covered 
loss, or deductible, before the fidelity bond insurer makes a payment. 
The NCUA restricts the deductible a corporate credit union may pay to 
limit the potential losses to it if there is a covered claim. The 
maximum deductible allowed is a percentage of a corporate credit 
union's capital based on its leverage ratio. For example, if a 
corporate credit union has a greater than 2.25 leverage ratio then it 
may have a maximum deductible that is 15 percent of its tier 1 capital. 
The recent final rule updated this provision to reference tier 1 
capital instead of core capital.\6\ Part 713, however, has not been 
substantively revised since 2005 when the NCUA issued a final rule 
modernizing Part 713.\7\
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    \6\ 80 FR 25932 (May 6, 2015).
    \7\ 70 FR 61713 (Oct. 26, 2005. In 2012, the NCUA revised Part 
713 by removing reference to the agency's former Regulatory 
Flexibility Program. 77 FR 74112 (Dec. 13, 2012).
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b. Regulatory Reform Task Force

    In August 2017, the Board published and sought comment on the 
NCUA's regulatory reform agenda (Agenda).\8\ The Agenda identifies 
those regulations the Board intends to amend or repeal because they are 
outdated, ineffective, or excessively burdensome. This is consistent 
with the spirit of Executive Order 13777.\9\ Although the NCUA, as an 
independent agency, is not required to comply with Executive Order 
13777, the Board has chosen to comply with it in spirit and has 
reviewed all of the NCUA's regulations to that end. One of the items in 
the Agenda is related to the NCUA's regulations on fidelity bonds. The 
Agenda supports exploring ways to implement the requirements of the FCU 
Act in this context in the least costly way possible. The Agenda 
further notes that while the FCU Act mandates fidelity bond coverage, 
the NCUA's objective should be to allow a credit union to make a 
business decision based on its own circumstances and needs. This would 
effectively reduce the NCUA's involvement in a credit union's 
operational decisions while remaining consistent with the FCU Act.
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    \8\ 82 FR 39702 (Aug. 22, 2017).
    \9\ E.O. 13771 (Jan. 30, 2017).
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c. The 2017 Legal Opinion

    As discussed above, Part 713 establishes the minimum requirements 
for a fidelity bond for a natural person credit union. One such 
requirement under Part 713 is that fidelity bonds be purchased in an 
``individual policy.'' \10\ The ``individual policy'' provision was 
intended to prevent multiple credit unions from being insured under one 
fidelity bond policy. The Board prohibited such joint coverage because 
the loss suffered by one or two of the joint policyholders could reduce 
the amount of available coverage for the other policyholders to below 
the required minimum amount.\11\ Before 2017, the NCUA's Office of 
General Counsel (OGC) had issued legal opinions stating that a credit 
union may not include one or more CUSOs or other parties as additional 
insureds under its fidelity bond because of the ``individual policy'' 
limitation.\12\ It came to OGC's attention, however, that some bond 
issuers may have been interpreting their policies to permit the 
issuance of bonds that covered credit unions and their

[[Page 59320]]

CUSOs, despite OGC's opinions to the contrary. This prompted OGC to 
review the regulation and approved bond forms. As a result of that 
review, OGC issued another legal opinion in September 2017 that 
rescinded and replaced all previous legal opinions that addressed the 
``individual policy'' requirement.\13\ The 2017 opinion concluded that 
the ``individual policy'' requirement of Sec.  713.3(a) of the NCUA's 
regulations generally prohibits joint coverage under fidelity bonds, 
but does not prohibit a credit union from purchasing a fidelity bond 
that covers both the credit union and certain of its CUSOs, as 
discussed more fully below.
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    \10\ 12 CFR 713.3(a). There is not an analogous provision for 
corporate credit unions under Part 704, therefore, the legal opinion 
relates only to fidelity bonds for natural person credit unions 
under Part 713.
    \11\ 64 FR 28178 (May 27, 1999).
    \12\ OGC Legal Op. 14-0311 (Mar. 21, 2014); see also OGC Legal 
Op. 04-0744 (Sept. 21, 2004).
    \13\ OGC Legal Op. 17-0959 (Sept. 26, 2017).
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II. Proposed Rule

    OGC's review of Part 713 extended beyond the issue of joint 
coverage and revealed several inconsistencies between the regulation 
and approved bond forms. The review also revealed several outdated 
provisions the Board now seeks to update to ensure the safe and sound 
operation of credit unions and to protect the National Credit Union 
Share Insurance Fund (NCUSIF). The Board believes that many of the 
concerns identified by OGC, as discussed more fully below, are also 
relevant for corporate credit unions. Therefore, where appropriate, the 
Board is also proposing amendments to the NCUA's corporate credit union 
regulations under Part 704. The specific details of the proposed 
amendments are discussed below.

III. Section-by-Section Analysis

Part 704

    In general, Part 704 applies to all federally insured corporate 
credit unions. Section 704.18 provides the fidelity bond requirements 
for such credit unions. Proposed changes to the specific subparagraphs 
of Sec.  704.18 are discussed below.
Sec. 704.18 Fidelity Bond Coverage
18(a)
    The proposed rule would not make any changes to paragraph (a).
18(b)
    The proposed rule would amend current Sec.  704.18(b) by dividing 
paragraph (b) into two subparts. Current paragraph (b) would remain 
unchanged and be designated paragraph (b)(1). The proposed rule would 
add a new paragraph as (b)(2). Proposed paragraph (b)(2) would require 
that a corporate credit union's board of directors and supervisory 
committee must review all applications for purchase or renewal of its 
fidelity bond coverage. After review, the corporate credit union's 
board must pass a resolution approving the purchase or renewal of 
fidelity bond coverage and delegate one member of the board, who is not 
an employee of the corporate credit union, to sign the purchase or 
renewal agreement and all attachments. No board members may be a 
signatory on consecutive purchase or renewal agreements for the same 
fidelity bond coverage policy. This proposed amendment is identical to 
proposed changes to Part 713 for natural person credit unions. For 
additional background, see the discussion below for proposed changes to 
Sec.  713.2(b).
18(c)
    The proposed rule would make significant revisions to current Sec.  
704.18(c). In the proposed rule, Sec.  704.18(c) is split into five new 
subparagraphs, each of which is described in more detail below.
18(c)(1)
    The proposed rule would state that a corporate credit union's 
fidelity bond coverage must be purchased from a company holding a 
certificate of authority from the Secretary of the Treasury. This is 
not a substantive change from the current requirements and has only 
been amended to reflect the comparable language in Part 713.
18(c)(2)
    Proposed Sec.  704.18(c)(2) would state that fidelity bonds must 
provide coverage for the fraud and dishonesty of all employees, 
directors, officers, and supervisory and credit committee members. This 
is not a substantive change from the current requirements.
18(c)(3)
    The proposed rule would substantively amend the requirements for a 
corporate credit union's approved bond forms. The revised requirements 
reflect the changes proposed for natural person credit unions in Part 
713. The proposed rule would require the Board to approve all bond 
forms before a corporate credit union may use them. In addition, a 
credit union may not use any bond form that has been amended since 
receiving Board approval or any rider, endorsement, renewal, or other 
document that limits coverage of approved bond forms without first 
receiving approval from the Board. As would be required under proposed 
Part 713, approval of all bond forms expires 10 years after the date 
the Board approved or reapproved use of the bond form. Any currently 
approved bond forms would expire on January 1, 2029. For additional 
background, see the discussion below for proposed changes to Sec.  
713.4.
18(c)(4)
    The proposed rule would add a new Sec.  704.18(c)(4) to ensure 
there is an adequate discovery period, the period to discover and file 
a claim, following a corporate credit union's liquidation. The revised 
requirements reflect the changes proposed for natural person credit 
unions in Part 713. The proposed rule would require fidelity bonds to 
include an option for the liquidating agent to purchase coverage in the 
event of an involuntary liquidation that extends the discovery period 
for a covered loss for at least two years after liquidation. In the 
case of a voluntary liquidation, fidelity bonds would be required to 
remain in effect, or provide that the discovery period is extended, for 
at least four months after the final distribution of assets. For 
additional background, see the discussion below for proposed changes to 
Sec. Sec.  713.3(a)(3) and (4).
18(c)(5)
    The proposed rule would require corporate credit union bonds to 
include a provision requiring written notification by surety to the 
NCUA when a credit union's bond is terminated or when the coverage of 
an employee, director, officer, supervisory or credit committee member 
has been terminated. The NCUA also must be notified in writing by 
surety if a deductible is increased above permissible limits. This is 
not a substantive change from the current requirements.
18(d)-18(f)
    The proposed rule would not make any changes to paragraphs (d), 
(e), and (f).

Part 713

    In general, Part 713 applies to all federally insured natural 
person credit unions and provides the fidelity bond requirements for 
them. Proposed changes to the specific subsections of Part 713 are 
discussed below.
Sec. 713.1 What is the scope of this section?
    The proposed rule would retain most of the current Sec.  713.1 
without change, with the following exceptions. The proposed rule would 
add the words ``federally insured'' before the words ``credit union'' 
to more precisely describe which credit unions are subject to the 
section. The current rule uses the

[[Page 59321]]

term ``credit union'' and ``federal credit union'' interchangeably to 
mean ``federal credit union.'' As discussed in the background section, 
the requirements in Part 713 are applicable to both federal credit 
unions and FISCUs.\14\ For clarity, the proposed rule would cross 
reference the requirement in Part 741 that FISCUs must comply with Part 
713 and would refer to federally insured credit unions (FICUs) 
throughout the rule instead of federal credit unions. The Board does 
not intend any substantive changes by this amendment and only intends 
to increase the clarity and internal consistency of Part 713.
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    \14\ Part 713 is applicable to all FISCUs through Sec.  741.201 
of the NCUA's regulations, which states that any credit union which 
makes application for share insurance must have the minimum fidelity 
bond coverage stated in Part 713 in order for its application to be 
approved and for such share insurance coverage to continue.
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    The proposed rule would also include a cross reference for 
corporate credit unions and would state that corporate credit unions 
must comply with Sec.  704.18 instead of Part 713.
Sec. 713.2 What are the responsibilities of a federally insured credit 
union's board of directors under this section?
2(a)
    The proposed rule would amend current Sec.  713.2 by dividing the 
section into two subparagraphs. Current Sec.  713.2 would become 
paragraph (a). The proposed rule would retain most of the current Sec.  
713.2 without change, with the following exception. For consistency 
with the rest of Part 713, the term ``Federal credit union'' would be 
revised to ``federally insured credit union.''
2(b)
    The proposed rule would add a new paragraph (b) to Sec.  713.2. 
Proposed paragraph (b) increases a board of directors' oversight 
responsibility of its FICU's fidelity bond coverage. Specifically, the 
Board is proposing to require a FICU's board, and, if applicable, a 
FICU's supervisory committee, to review all applications for purchase 
or renewal of bond coverage and to pass a board resolution approving 
the purchase or renewal. The proposed rule would also require a FICU's 
board to delegate one board member, who is not an employee of the FICU, 
to sign the attestation for bond purchase or renewal. This proposal 
would prohibit the same board member from signing the attestation for 
renewal in consecutive years.
    The Board notes the current rule already requires a FICU's board to 
annually review its fidelity bond and other insurance coverage to 
ensure it is adequate. The proposed rule would take that review a step 
further and require a FICU's board, and, if applicable, its supervisory 
committee, to review all applications for purchase or renewal of 
fidelity bond coverage. The Board believes this change will help ensure 
the board is addressing the adequacy of the coverage at all stages, 
rather than at an annual point in time that may be retrospective, and 
require additional steps by the FICU to remedy a deficiency.
    The Board is also proposing to require a FICU's supervisory 
committee to conduct a review of all applications for purchase or 
renewal of fidelity coverage, in addition to the board. The Board 
believes this is a function within the responsibilities of a FICU's 
supervisory committee and will add an additional layer of review. For 
FISCUs operating without a supervisory committee, its board should 
implement controls or establish procedures for conducting their own 
analysis of the FISCU's fidelity bond coverage, as opposed to relying 
on recommendations from the FISCU's officers.
    As noted, the proposed rule would also require a FICU's board to, 
after conducting its review, pass a resolution approving the purchase 
or renewal of fidelity coverage and designating a member of the board, 
who is not an employee of the FICU, to sign applications for purchase, 
bond renewals, and any accompanying attestations. Also as mentioned, 
the Board is proposing to require that the member of the board acting 
as signatory rotate each time the FICU purchases or renews fidelity 
coverage. The purpose of these requirements is to address the issue of 
rescission of fidelity coverage when the signatory to the application 
to purchase or renew coverage is knowledgeable of fraudulent activity. 
If the signatory to the application for purchase or renewal is 
knowledgeable of fraudulent activity, the bond issuer may void the 
policy and not make a payout when losses are discovered. The NCUA 
believes that a non-employee board member, who would not be involved in 
the day-to-day operations of a FICU, is less likely to be responsible 
for a fraudulent activity than an employee. The NCUA also believes that 
rotating signatories would reduce the potential for the signatory to be 
knowledgeable of the fraudulent activity.
    In the case where the NCUA is a liquidating agent of a FICU, the 
NCUSIF would suffer losses due to the fidelity bond being voided. In 
recent years, the NCUSIF has sustained increased losses due to voided 
fidelity bond coverage. Before 2010, bond rescission was not a material 
concern for the NCUA. Since 2010, however, the NCUA has had at least 
three claims denied due to rescinded fidelity bond coverage and the 
NCUA is concerned that the frequency of rescinded coverage will 
continue to increase. As of June 2018, the NCUSIF has already lost in 
excess of $10 million from fidelity bonds that were voided due to the 
signatory being aware of the fraudulent activities and litigation 
related to denied claims is ongoing and may result in additional 
expenses.
    The Board believes the proposed changes are only a minimal increase 
in regulatory burden as the FICU's board is already required to 
annually review its fidelity bond coverage, but would meaningfully 
mitigate the risk to the NCUSIF associated with fidelity bond coverage 
rescission. The Board notes that this proposed requirement is also 
advantageous to individual FICUs, as this will help prevent them from 
losing coverage absent involuntary liquidation.

Sec. 713.3 What bond coverage must a federally insured credit union 
have?

    The proposed rule would amend current Sec.  713.3 by renumbering 
and revising the section. Current Sec.  713.3 would become paragraph 
(a), current paragraphs (a) and (b) would be renumbered as paragraphs 
(a)(1) and (a)(2), and two new subparagraphs would be added as (a)(3) 
and (a)(4). Finally, a new paragraph (b) would also be added.

3(a)(2)

    Current paragraph (b) of Sec.  713.3 states that, at a minimum, a 
credit union's fidelity bond coverage must include fidelity bonds that 
cover fraud and dishonesty. The proposed rule would remove the 
redundant phrase ``[i]nclude fidelity bonds that'' in current paragraph 
(b). The proposed rule would read ``At a minimum, your bond coverage 
must: . . . Cover fraud and dishonesty by all employees, directors, 
officers, supervisory committee members, and credit committee 
members;''. The change is non-substantive and only intended to remove 
the unnecessary language and clarify the requirement.

3(a)(3)

    The proposed rule would add a new paragraph (a)(3) to Sec.  713.3. 
Proposed paragraph (a)(3) would require a FICU to have fidelity bond 
coverage that includes an option for the liquidating agent to purchase 
coverage that extends

[[Page 59322]]

the discovery period, the period to discover and file a claim, for at 
least two years after liquidation. Fidelity bonds mitigate the risk 
presented by fraudulent and other dishonest acts to the NCUSIF and have 
served as a significant source of recovery in liquidations caused by 
fraud. However, the NCUA, as liquidating agent, can only file a claim 
if it discovers the loss during the contractual period permitted for 
filling a claim. Historically, it had been standard for fidelity bonds 
to permit a reasonable period for discovery and filing a claim 
following a FICU's involuntary liquidation. The NCUA has identified 
approximately $1 million in claims paid to the NCUSIF that were 
identified during an extended discovery period from 2006 to 2013. Since 
then, however, insurers have removed standard discovery coverage 
provisions from fidelity bond contracts. Currently, most fidelity bonds 
provide that the bond's coverage terminates immediately upon a credit 
union's liquidation and that the ability to purchase an additional 
period to discover loss is at the sole discretion of the insurer.
    Under such contracts, the NCUA, as liquidating agent, would not 
have authority to extend the discovery period following a FICU's 
closure. There are some instances when liquidation occurs unexpectedly 
and there is insufficient time to discover a claim before liquidation, 
or where there is a covered loss, but it is unknown with the 
specificity required for filing a claim. In such a case, even if the 
liquidating agent subsequently discovers a covered loss, the fidelity 
bond issuer may deny the claim. If this happens when the NCUA is 
liquidating agent, the NCUA would either be forced into litigation to 
receive payment for the covered loss or not recover for the loss. In 
either situation, the NCUSIF bears additional losses than if the 
fidelity bond permitted a reasonable period of discovery. In addition 
to reducing losses to the NCUSIF, any funds recovered due to an 
extended discovery period may also be available to pay the failed 
FICU's creditors and uninsured depositors.\15\
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    \15\ For the priority of payment following a liquidation, see 12 
U.S.C. 1787(b)(11).
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    In an attempt to address this gap in coverage, it has been the 
NCUA's practice to provide notice that there may be a potential claim 
before a liquidation. This informal solution, however, lacks legal 
clarity and results in unnecessary risk that an insurer may deny a 
claim following an involuntary liquidation. The proposed rule would 
provide the NCUA with an explicit right to extend the discovery period, 
which should prevent unnecessary losses to the NCUSIF due to contract 
technicalities.
    The proposed rule would require that fidelity bond coverage provide 
a discovery period of two years because the FCU Act provides members 
with 18 months after the appointment of a liquidating agent to claim 
their insured accounts.\16\ Therefore, the Board is providing six 
months to discover and make a claim for fidelity bond coverage 
following the end of the 18-month statutory period for unclaimed 
accounts. Further, in the Board's experience, most liquidations are 
resolved within two years. The Board considers two years a reasonable 
period to resolve the FICU's affairs, discover any losses from 
fraudulent or dishonest acts, and file a claim under the fidelity bond. 
The Board does not expect this proposed requirement to result in any 
additional cost or burden on FICUs. The liquidating agent would bear 
the cost of any extension of a discovery period following an 
involuntary liquidation.
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    \16\ 12 U.S.C. 1787(o).
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3(a)(4)

    The Board is also proposing to add a new paragraph (a)(4) to Sec.  
713.3 to include a requirement that, for voluntary liquidations, a 
FICU's fidelity bond coverage remain in effect, or provide that the 
discovery period is extended, for at least four months after the final 
distribution of assets. The Board notes that this is currently required 
for federal credit unions in Part 710, the NCUA's voluntary liquidation 
regulations, and that this proposed change only reflects that 
requirement, and does not impose an additional burden for federal 
credit unions.\17\ This requirement would represent a new burden, 
however, for FISCUs. The Board believes that this requirement would 
impose only a minor burden for FISCUs, and would be beneficial to its 
members, as any recovery following a voluntary termination would flow 
through to members.
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    \17\ 12 CFR 710.2(c).
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3(b)

    The Board is proposing to amend Sec.  713.3 to allow a FICU to have 
a fidelity bond that covers both it and certain of its CUSOs, as more 
fully discussed below. Section 713.3 requires that a bond, at a 
minimum, must be purchased in ``an individual policy.'' \18\ The NCUA 
added this section to Part 713 in a 1999 final rule in response to a 
commenter who pointed out that there had been instances of FICUs 
jointly purchasing fidelity bonds with each other.\19\ The commenter 
was concerned that a loss caused by one or two of the joint 
policyholders could reduce the amount of available coverage for the 
other policyholders to below the required minimum amount. In addressing 
this comment, the Board provided in Sec.  713.3 that a FICU must 
purchase its own individual policy.\20\ The regulation did not, 
however, define ``individual policy.''
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    \18\ 12 CFR 713.3.
    \19\ 64 FR 28718, 28719 (May 27, 1999).
    \20\ Id. at 28719.
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    Since inclusion of this provision in the NCUA's regulations, OGC 
has issued two public legal opinions interpreting the meaning of 
``individual policy'' and opining on the type of coverage that is 
prohibited under Sec.  713.3(a).\21\ A 2014 OGC legal opinion states 
that a FICU may not include one or more of its CUSOs or other parties 
as additional insureds under its fidelity bond.\22\ In a 2004 legal 
opinion, OGC opined that a CUSO that provides management services for 
multiple credit unions could not purchase a single fidelity bond with 
each credit union named as an insured.\23\ In both letters, OGC 
explained the purpose of the individual policy requirement is to avoid 
diluting the individual credit union's coverage.
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    \21\ OGC Legal Op. 04-0744 (Sep. 21, 2004); and OGC Legal Op. 
14-1013 (Mar. 21, 2014).
    \22\ OGC Legal Op. 14-1013 (Mar. 21, 2014).
    \23\ OGC Legal Op. 04-0744 (Sep. 21, 2004).
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    As noted above, OGC issued a third legal opinion on the 
``individual policy'' requirement in 2017 (2017 legal opinion). The 
2017 legal opinion rescinded and replaced the previous two opinions and 
expanded the permissibility for certain joint coverage provisions under 
the ``individual policy'' requirement. OGC and the NCUA's Office of 
Examination and Insurance determined this broader interpretation was 
both within the NCUA's legal authority under the FCU Act and a safe and 
sound practice for FICUs. For clarity and ease of reference, the Board 
now seeks to incorporate the 2017 legal opinion into Part 713.
    The Board, therefore, is proposing to amend Sec.  713.3 to permit a 
FICU to have a fidelity bond that also covers its CUSO(s). This is 
permissible if the FICU owns greater than 50 percent of a CUSO it 
wishes to cover, or a covered CUSO is organized by the FICU for the 
purpose of handling certain of its business transactions and composed 
exclusively of its employees. The 50 percent threshold reflects the 
standard for accounting consolidation under generally accepted 
accounting principles, or GAAP. A FICU would

[[Page 59323]]

directly benefit from any fidelity bond insurance proceeds collected by 
a consolidated CUSO.\24\ This proposed rule, however, would not 
eliminate the prohibition against joint coverage of entities not 
majority owned by the FICU, such as other credit unions or non-
majority-owned CUSOs. The Board believes this amendment will provide 
greater flexibility to FICUs without affecting safety and 
soundness.\25\
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    \24\ As discussed in the 2017 legal opinion, the NCUA has 
previously approved certain nominee provisions that included limited 
joint coverage. For example, a nominee provision may state that a 
loss sustained by any ``nominee'' organized by the insured for the 
purpose of handling certain of its business transactions and 
composed exclusively of its employees shall be deemed to be loss 
sustained by the insured.
    \25\ Note, the proposal is not making a comparable amendment to 
Part 704. Corporate credit unions are not required to purchase 
fidelity bonds subject to an individual policy requirement. 
Therefore, the proposed amendment to clarify the individual policy 
requirement is only applicable to natural person credit unions.
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Sec. 713.4 What bond forms may a federally insured credit union use?

    The current rule provides that the NCUA will maintain a current 
list of bond forms approved by the Board for use by FICUs. The rule 
also states that a FICU must obtain the approval of the Board before it 
can use any other basic bond form or any rider or endorsement that 
limits coverage of an approved bond form. The Board is proposing to 
amend Sec.  713.4 to make several changes to reflect the practices of 
the NCUA, clarify the list of documents that must have Board approval, 
and address the expiration and continuing review of approved bond 
forms. Any questions regarding the NCUA's approval of fidelity bond 
forms can be directed to the NCUA's OGC, (703) 518-6540, or the Office 
of Examination and Insurance, (703) 518-6360.

4(a)

    Current Sec.  713.4(a) states that a current listing of basic bond 
forms that may be used without prior Board approval is on the NCUA's 
website. The Board is proposing to clarify this requirement by dividing 
paragraph (a) into two paragraphs. Proposed paragraph (a) would 
explicitly state that ``the NCUA Board must approve all bond forms 
before federally insured credit unions may use them.''

4(b)

    Proposed paragraph (b) would state that approved bond forms are 
listed on the NCUA's website and may be used by a FICU without further 
NCUA approval. If a FICU is unable to access the NCUA's website, it can 
get a current listing of approved bond forms by contacting the NCUA's 
Office of Public and Congressional Affairs. The proposed rule would 
rewrite this provision for clarity, but would not make any substantive 
changes.

4(c)

    Current paragraph (b), renumbered as paragraph (c), sets forth 
which fidelity bonds and fidelity bond documents require Board 
approval. The proposed rule also would set forth which fidelity bonds 
and fidelity bond documents require Board approval, but would rewrite 
this provision for clarity. The proposed rule states in paragraph (c) 
that ``Credit unions may not use any of the following without first 
receiving approval from the NCUA Board.'' No substantive changes are 
intended by this revision, and the revision is only intended to clarify 
the Board's expectation for FICUs.

4(c)(1)

    The Board is clarifying that any bond form that has been amended or 
changed since the Board approved it requires new approval from the 
Board. The Board notes that this policy is the current practice whereby 
bond issuers submit amended bond forms to the Board for approval under 
current Sec.  713.4(b)(1). This proposed change is only intended to 
make the regulation clearer with respect to this requirement.

4(c)(2)

    Current Sec.  713.4(b)(2) requires any rider or endorsement that 
limits coverage of approved basic bond forms to be approved by the 
Board. The proposed rule would clarify the list of documents that must 
receive Board approval. The Board is proposing to state explicitly that 
renewal forms (and any other document) that limit the coverage of 
approved bond forms must also receive Board approval. The Board is 
clarifying the list of documents subject to approval because the Board 
is aware of instances where the renewal or continuation of coverage 
forms included language affecting the bond coverage, including language 
that limited the bond coverage. As such, it is the Board's belief that 
the renewal form is an extension of the bond form and thus this is not 
an additional burden but further clarification of what constitutes the 
bond form.

4(d)

    The Board is proposing to add a new paragraph (d) to sunset its 
approval on all bond forms ten years after the form is approved. The 
impetus for this provision is the discovery that Board approved-bond 
forms were being interpreted in a way that was contrary to the NCUA's 
understanding of how the bond forms would be used. In addition, a 
review of previously approved bond forms, as part of issuing the 2017 
legal opinion, revealed several instances of outdated provisions, 
additions that had not been approved by the Board, and some forms that 
contained provisions that were contrary to the FCU Act and Part 713 of 
the NCUA's regulations. To avoid instances of this in the future, the 
Board is proposing to sunset its approval of a bond form after a period 
of ten years. This ten-year period will begin on the date the Board 
approves a bond form. The Board notes, however, that the ten-year 
period will not toll or start over when a bond carrier submits a 
revision to an approved bond. For example, if the Board approves a bond 
form on January 1, 2020, and that bond form is subsequently amended and 
approved by the Board on January 1, 2021, then the bond form will still 
expire on January 1, 2030, ten years from the date the Board issued its 
initial approval.
    The Board believes this ten-year sunset provision will provide a 
definitive date at which an approved bond form will be reviewed by the 
Board to determine if it is still in compliance with the NCUA's 
regulations. While this provision will require expired bond forms to be 
resubmitted to the Board, having a clear date upon which the Board's 
approval will sunset will help all interested parties prepare to 
resubmit the bond form to ensure continuity in coverage and operations. 
The Board also notes that should it determine, upon re-review, that a 
bond form does not comply with the NCUA's regulations, the Board would 
not require FICUs with coverage under that bond to seek new coverage. 
In these situations, the Board would require FICUs to seek new coverage 
under an approved bond form after its current coverage expires per the 
terms of the contract between the FICU and the bond issuer.
    With respect to bond forms that the Board has approved before 2019, 
the Board is proposing to allow its approval on these forms to continue 
until January 1, 2029. The Board believes this date for sunset of its 
approval will provide all currently approved bonds with at least ten 
years before they must be submitted for review and re-approval. The 
Board believes this will achieve the goal of ensuring all approved bond 
forms comply with the NCUA's regulations without imposing unnecessary 
burden on FICUs or bond issuers.

[[Page 59324]]

    In addition to including a sunset provision, the Board is also 
proposing to clarify its right and ability to review a bond form at any 
time. The Board notes that if it does undertake a review of an approved 
bond form during the ten-year period, this will not re-start or toll 
the expiration period and the Board's approval of that form will still 
sunset ten years from the date the Board issued its original approval.

Sec. 713.5-Sec.  713.7

    As discussed above, the proposed rule would use the term federally 
insured credit union instead of federal credit union in each of 
Sec. Sec.  713.5, 713.6, and 713.7 for consistency and clarity.

IV. Request for Comment

    The Board invites comment on all aspects of this proposed 
rulemaking. In particular, the Board seeks comment on whether FICUs 
anticipate any increase in compliance burden under the proposed rule.

V. Regulatory Procedures

a. 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. For purposes of the PRA, a 
paperwork burden may take the form of a reporting, disclosure, or 
recordkeeping requirement, each referred to as an information 
collection. The NCUA may not conduct or sponsor, and the respondent is 
not required to respond to, an information collection unless it 
displays a currently valid Office of Management and Budget (OMB) 
control number.
    A proposed change to Part 713 would require NCUA approval on all 
bond forms expired after a period of 10 years from the date of NCUA 
approval or reapproved of its use. The bond company would be required 
to seek NCUA approval before a bond form may be used by a FICU. The 
information collection burden associated with this proposed new 
requirements is minimal, only affecting an estimated two entities 
annually; for an increase of two hours to the currently approved OMB 
control number 3133-0170.
    Title of Information Collection: Fidelity Bond and Insurance 
Coverage for Federal Credit Unions, 12 CFR part 713.
    OMB Control Number: 3133-0170.
    Estimated Number of Respondents: 10.
    Estimated Annual Frequency of Response: 1.
    Estimated Total Annual Reponses: 10.
    Estimated Hours per Response: 1.
    Estimated Total Annual Burden Hours: 10.
    Affected Public: Private Sector: Not-for-profit institutions; 
Businesses and other for-profits.
    The NCUA invites comments on: (a) Whether the collections of 
information are necessary for the proper performance of the agencies' 
functions, including whether the information has practical utility; (b) 
the accuracy of the estimates of the burden of the information 
collections, including the validity of the methodology and assumptions 
used; (c) ways to enhance the quality, utility, and clarity of the 
information to be collected; (d) ways to minimize the burden of the 
information collections on respondents, including through the use of 
automated collection techniques or other forms of information 
technology; and (e) estimates of capital or start-up costs and costs of 
operation, maintenance, and purchase of services to provide 
information.
    All comments are a matter of public record. Comments regarding the 
information collection requirements of this rule should be sent to (1) 
Dawn Wolfgang, NCUA PRA Clearance Officer, National Credit Union 
Administration, 1775 Duke Street, Suite 5080, Alexandria, Virginia 
22314, or Fax No. 703-519-8572, or Email at [email protected] and 
the (2) Office of Information and Regulatory Affairs, Office of 
Management and Budget, Attention: Desk Officer for NCUA, New Executive 
Office Building, Room 10235, Washington, DC 20503, or email at 
[email protected].

b. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires that, in 
connection with a notice of proposed rulemaking, an agency prepare and 
make available for public comment an initial regulatory flexibility 
analysis that describes the impact of a proposed rule on small 
entities. A regulatory flexibility analysis is not required, however, 
if the agency certifies that the rule will not have a significant 
economic impact on a substantial number of small entities (defined for 
purposes of the RFA to include credit unions with assets less than $100 
million) and publishes its certification and a short, explanatory 
statement in the Federal Register together with the rule.
    The Board does not believe that the proposed rule would have a 
significant economic impact on a substantial number of small entities. 
Any increased costs for the bond insurer to resubmit their forms every 
ten years would be spread out among all FICUs and the cost to each FICU 
would be negligible. Additionally, the proposed requirement that 
boards, and if applicable, supervisory committees, must approve 
purchases and renewals would impose no direct cost on FICUs. 
Accordingly, the NCUA certifies that the proposed rule will not have a 
significant economic impact on a substantial number of small FICUs.

c. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. The 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order to adhere to fundamental 
federalism principles. This proposed rule will not have a direct effect 
on the states, on the relationship between the national government and 
the states, or on the distribution of power and responsibilities among 
the various levels of government. The NCUA has therefore determined 
that this proposed rule does not constitute a policy that has 
federalism implications for purposes of the executive order.

d. Assessment of Federal Regulations and Policies on Families

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

List of Subjects in 12 CFR Parts 704 and 713

    Bonds, Credit unions, Insurance.

    By the National Credit Union Administration Board on November 
15, 2018.
Gerard Poliquin,
Secretary of the Board.

    For the reasons discussed above, the NCUA is proposing to amend 12 
CFR parts 704 and 713 as follows:

PART 704--CORPORATE CREDIT UNIONS

0
1. The authority citation for part 704 is revised to read as follows:

    Authority:  12 U.S.C. 1762, 1766(a), 1772a, 1781, 1789, and 
1795e.

0
2. Section 704.18 is amended by revising paragraphs (b) and (c) to read 
as follows:


Sec.  704.18  Fidelity bond coverage.

* * * * *

[[Page 59325]]

    (b) Review of bond coverage. (1) The board of directors of each 
corporate credit union shall, at least annually, carefully review the 
bond coverage in force to determine its adequacy in relation to risk 
exposure and to the minimum requirements in this section.
    (2) The board of directors and the supervisory committee of each 
corporate credit union must review all applications for purchase or 
renewal of its fidelity bond coverage. After review, the credit union's 
board must pass a resolution approving the purchase or renewal of 
fidelity bond coverage and delegate one member of the board, who is not 
an employee of the credit union, to sign the purchase or renewal 
agreement and all attachments. Provided, however, that no board members 
may be a signatory on consecutive purchase or renewal agreements for 
the same fidelity bond coverage policy.
    (c) Minimum coverage; approved forms. (1) The fidelity bond 
coverage must be purchased from a company holding a certificate of 
authority from the Secretary of the Treasury.
    (2) Fidelity bonds must provide coverage for the fraud and 
dishonesty of all employees, directors, officers, and supervisory and 
credit committee members.
    (3) The NCUA Board must approve all bond forms before a corporate 
credit union may use them. Corporate credit unions may not use any bond 
form that has been amended since the time the NCUA Board approved the 
form or any rider, endorsement, renewal, or other document that limits 
coverage of approved bond forms without receiving approval from the 
NCUA Board. Approval on all bond forms expires 10 years after the date 
the NCUA Board approved or reapproved use of the bond form; provided, 
however, that any bond forms approved before 2019 will expire on 
January 1, 2029 and an NCUA Board-approved amendment to a bond form 
does not toll or cause the 10-year period to restart. The NCUA reserves 
the right to review a bond form at any point after its approval.
    (4) Fidelity bonds must include an option for the liquidating agent 
to purchase coverage in the event of an involuntary liquidation that 
extends the discovery period for a covered loss for at least two years 
after liquidation. In the case of a voluntary liquidation, fidelity 
bonds must remain in effect, or provide that the discovery period is 
extended, for at least four months after the final distribution of 
assets.
    (5) Notwithstanding the foregoing, all bonds must include a 
provision, in a form approved by the NCUA Board, requiring written 
notification by surety to NCUA:
    (i) When the fidelity bond of a credit union is terminated in its 
entirety;
    (ii) When fidelity bond coverage is terminated, by issuance of a 
written notice, on an employee, director, officer, supervisory or 
credit committee member; or
    (iii) When a deductible is increased above permissible limits. Said 
notification shall be sent to NCUA and shall include a brief statement 
of cause for termination or increase.
* * * * *

PART 713--FIDELITY BOND AND INSURANCE COVERAGE FOR FEDERALLY 
INSURED CREDIT UNIONS

0
3. The authority citation for Part 713 continues to read as follows:

    Authority:  12 U.S.C. 1761a, 1761b, 1766(a), 1766(h), 
1789(a)(11).

0
4. The heading for part 713 is revised as set forth above.
0
5. Revise Sec.  713.1 to read as follows:


Sec.  713.1  What is the scope of this section?

    This section provides the requirements for fidelity bonds for 
federally insured credit union employees and officials and for other 
insurance coverage for losses such as theft, holdup, vandalism, etc., 
caused by persons outside the credit union. Federally insured, state-
chartered credit unions are required by Sec.  741.201 of this chapter 
to comply with the fidelity bond coverage requirements of this part. 
Corporate credit unions must comply with Sec.  704.18 of this chapter 
in lieu of this part.
0
6. Revise Sec.  713.2 to read as follows:


Sec.  713.2  What are the responsibilities of a federally insured 
credit union's board of directors under this section?

    (a) The board of directors of each federally insured credit union 
must at least annually review its fidelity and other insurance coverage 
to ensure that it is adequate in relation to the potential risks facing 
the federally insured credit union and the minimum requirements set by 
the NCUA Board; and
    (b) The board of directors, and, if applicable, the supervisory 
committee of each federally insured credit union, must review all 
applications for purchase or renewal of its fidelity bond coverage. 
After review, the federally insured credit union's board must pass a 
resolution approving the purchase or renewal of fidelity bond coverage 
and delegate one member of the board, who is not an employee of the 
federally insured credit union, to sign the purchase or renewal 
agreement and all attachments; provided, however, that no board members 
may be a signatory on consecutive purchase or renewal agreements for 
the same fidelity bond coverage policy.
0
7. Revise Sec.  713.3 to read as follows:


Sec.  713.3  What bond coverage must a federally insured credit union 
have?

    (a) At a minimum, your bond coverage must:
    (1) Be purchased in an individual policy from a company holding a 
certificate of authority from the Secretary of the Treasury;
    (2) Cover fraud and dishonesty by all employees, directors, 
officers, supervisory committee members, and credit committee members;
    (3) Include an option for the liquidating agent to purchase 
coverage in the event of an involuntary liquidation that extends the 
discovery period for a covered loss for at least two years after 
liquidation; and
    (4) In the case of a voluntary liquidation, remain in effect, or 
provide that the discovery period is extended, for at least four months 
after the final distribution of assets, as required in Sec.  710.2(c) 
of this chapter.
    (b) The requirement in paragraph (a) of this section does not 
prohibit a federally insured credit union from having a fidelity bond 
that also covers its credit union service organization (CUSO(s)), 
provided the federally insured credit union owns more than 50 percent 
of the CUSO(s) or the CUSO(s) is organized by the federally insured 
credit union for the purpose of handling certain of its business 
transactions and composed exclusively of the federally insured credit 
union's employees.
0
8. Revise Sec.  713.4 to read as follows:


Sec.  713.4  What bond forms may a federally insured credit union use?

    (a) The NCUA Board must approve all bond forms before federally 
insured credit unions may use them.
    (b) Bond forms the NCUA Board has approved for use by federally 
insured credit union are listed on the NCUA's website, https://www.ncua.gov, and may be used by federally insured credit unions 
without further NCUA approval. If you are unable to access the NCUA's 
website, you can obtain a current listing of approved bond forms by 
contacting the NCUA's Office of Public and Congressional Affairs.
    (c) Federally insured credit union unions may not use any of the 
following without first receiving approval from the NCUA Board:
    (1) Any bond form that has been amended or changed since the time 
the NCUA Board approved the form; and

[[Page 59326]]

    (2) Any rider, endorsement, renewal, or other document that limits 
coverage of approved bond forms.
    (d) Approval on all bond forms expires after a period of 10 years 
from the date the NCUA Board approved or reapproved use of the bond 
form. Provided, however, that:
    (1) Any bond forms approved before 2019 will expire on January 1, 
2029.
    (2) An NCUA Board-approved amendment to a bond form does not toll 
or cause the 10-year period to restart; and
    (3) The NCUA reserves the right to review a bond form at any point 
after its approval.


Sec.  713.5  [AMENDED]

0
9. Section 713.5 is amended by:
0
a. In paragraphs (a) and (b) remove the word ``federal'' before the 
words ``credit union's'' and add in its place the words ``federally 
insured'' each place they appear.
0
b. In paragraph (c) add the words ``federally insured'' before the 
words ``credit union,'' ``credit unions,'' or ``credit union's'' each 
place they appear.
0
c. In paragraph (e) remove the word ``your'' and add in its place the 
words ``a federally insured credit union's''.


Sec.  713.6  [AMENDED]

0
10. In Sec.  713.6 remove the word ``federal'' before the words 
``credit union's'' or ``credit unions'' and add the words ``federally 
insured'' before the words ``credit union's,'' ``credit unions,'' and 
``credit union'' each place they appear.
0
11. Revise Sec.  713.7 to read as follows:


Sec.  713.7  May the NCUA Board require a federally insured credit 
union to secure additional insurance coverage?

    The NCUA Board may require additional coverage when the NCUA Board 
determines that a federally insured credit union's current coverage is 
inadequate. The federally insured credit union must purchase this 
additional coverage within 30 days.

[FR Doc. 2018-25402 Filed 11-21-18; 8:45 am]
BILLING CODE 7535-01-P