Fidelity Bonds, 35517-35525 [2019-15709]
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Federal Register / Vol. 84, No. 142 / Wednesday, July 24, 2019 / Rules and Regulations
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BILLING CODE 3410–34–P
NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Parts 704 and 713
RIN 3133–AE87
Fidelity Bonds
National Credit Union
Administration (NCUA).
ACTION: Final rule.
AGENCY:
The NCUA Board (Board) is
finalizing a rule that amends its
regulations regarding fidelity bonds for
corporate credit unions and natural
person credit unions. The rule
strengthens a board of directors’
oversight of a federally insured credit
union’s (FICU) fidelity bond coverage;
ensures an adequate period to discover
and file fidelity bond claims following
a FICU’s liquidation; codifies 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); and addresses
Board approval of bond forms.
DATES: The final rule is effective
October 22, 2019.
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.
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SUMMARY:
SUPPLEMENTARY INFORMATION
I. Introduction
II. Proposed Rule
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III. Final Rule and Discussion of Comments
IV. 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 that 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
regulation.3
Parts 704 and 713 of the NCUA’s
regulations implement the requirements
of the FCU Act regarding fidelity
bonds.4 Part 713 applies to natural
person credit unions and Part 704
applies to corporate credit unions. The
parts establish the requirements for a
fidelity bond, the acceptable bond
forms, and the minimum permissible
coverage. Both parts require a FICU’s
board of directors to review annually its
fidelity bond coverage to ensure it is
adequate in relation to the potential
risks facing the FICU and the minimum
requirements set by the Board.
Part 704 was recently revised to
amend the provision that determines the
U.S.C. 1761a, 1761b, and 1766.
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.
3 12 U.S.C. 1766(h).
4 12 CFR pts. 704 and 713.
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1 12
2 The
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35517
maximum amount a corporate credit
union may pay for a deductible or a
covered loss 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 percent 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.5 Part 713, however, has not
been substantively revised since 2005,
when the NCUA issued a final rule
modernizing it.6
b. Regulatory Reform Task Force
In August 2017, the Board published
and sought comment on the NCUA’s
regulatory reform agenda (Agenda).7
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 13777.8 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 related to fidelity bonds 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.
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
5 80
FR 25932 (May 6, 2015).
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).
7 82 FR 39702 (Aug. 22, 2017).
8 E.O. 13777 (Feb. 24, 2017).
6 70
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purchased in an ‘‘individual policy.’’ 9
The ‘‘individual policy’’ provision was
intended to prevent multiple FICUs
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.10
Before 2017, the NCUA’s Office of
General Counsel (OGC) had issued legal
opinions stating that a FICU may not
include one or more CUSOs or other
parties as additional insureds under its
fidelity bond because of the ‘‘individual
policy’’ limitation.11 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 FICUs and their CUSOs,
despite OGC’s opinions. 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.12 The
2017 opinion concluded that the
‘‘individual policy’’ requirement of
§ 713.3(a) of the NCUA’s regulations
generally prohibits joint coverage under
fidelity bonds, but does not prohibit a
FICU from purchasing a fidelity bond
that covers both it and certain of its
CUSOs, as discussed more fully below.
rule. These comments were received
from credit unions, including corporate
credit unions, credit union leagues and
trade associations, an association of
state credit union supervisors, an
insurance company, and two insurance
associations. In general, many of the
commenters supported the stated goal,
to implement fidelity bond
requirements in a cost-effective manner.
All of the commenters, however,
expressed concerns about specific
aspects of the proposal. Most
commenters believed that the proposed
rule resulted in unnecessary burden and
increased costs without substantially
improving the adequacy of FICU fidelity
bond coverage. Some commenters also
expressed concerns that the rule
reduced the number of insurance
companies providing fidelity bonds,
which would reduce FICUs’ ability to
negotiate among providers. In response
to the comments received, the Board has
made several changes to the final rule.
The specific details of the final rule,
including changes as a result of the
comments received, are discussed
below.
II. Proposed Rule
OGC’s fidelity bond review extended
beyond the issue of joint coverage and
revealed several inconsistencies
between part 713 and approved bond
forms. The review also revealed several
outdated provisions. In November 2018,
the NCUA published a notice of
proposed rulemaking (the proposed
rule) to update its fidelity bond
regulation to correct these problems,
ensure the safe and sound operation of
FICUs, and protect the National Credit
Union Share Insurance Fund
(NCUSIF).13 The comment period
closed on January 22, 2019.
§ 713.1 What is the scope of this
section?
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III. Final Rule and Discussion of
Comments
The NCUA received 26 comment
letters on its November 2018 proposed
9 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 FICUs under Part
713.
10 64 FR 28178 (May 27, 1999).
11 OGC Legal Op. 14–0311 (Mar. 21, 2014); see
also OGC Legal Op. 04–0744 (Sept. 21, 2004).
12 OGC Legal Op. 17–0959 (Sept. 26, 2017).
13 83 FR 59318 (Nov. 23, 2018).
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Part 713
In general, part 713 applies to all
federally insured natural person credit
unions and provides the fidelity bond
requirements for them. Changes to the
specific subsections of part 713 are
discussed below.
The proposed rule retained most of
the current § 713.1 without change, with
the following exceptions. The proposed
rule added 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 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
federally insured, state-chartered credit
unions (FISCUs).14 For clarity, the
proposed rule cross-referenced the
requirement in part 741 that FISCUs
must comply with Part 713 and referred
to FICUs throughout the rule instead of
federal credit unions.
14 Part 713 is applicable to all FISCUs through
§ 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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One commenter questioned whether
the proposed rule should be applicable
to all FISCUs. FISCUs’ fidelity bond
requirements are applied through part
741, which states that ‘‘[a]ny credit
union which makes application for
insurance . . . must possess the
minimum fidelity bond coverage stated
in part 713 . . . .’’ The commenter
stated that the positioning of the
language referring to minimum coverage
means that only the amount of bond
coverage, and not the other
requirements in part 713, apply to
FISCUs. The commenter stated that the
NCUA should invite specific comment
on whether all of Part 713 should apply
to FISCUs. The commenter also does not
believe it is necessary for the NCUA to
impose detailed provisions on FISCUs’
fidelity bonds.
The Board has considered the
comment and disagrees that part 741
applies to only the amount of bond
coverage. Part 741 does not use the term
‘‘amount’’ and instead uses the term
‘‘minimum coverage.’’ The Board
believes that the reasonable and plain
understanding of the term ‘‘coverage’’
includes factors such as the amount of
insurance, the claims covered by the
insurance, and other operational
considerations that ensure the coverage
is adequate. The Board’s position is
further supported by the fact it has been
the Board’s public and longstanding
position that the entirety of part 713
applies to FISCUs. The commenter even
noted that prior NCUA discussions of
part 713 were directed to all FISCUs.
Therefore, the Board is finalizing this
provision as proposed.
The final rule also includes a crossreference for corporate credit unions
and states that corporate credit unions
must comply with § 704.18 instead of
part 713.
§ 713.2 What are the responsibilities of
a federally insured credit union’s board
of directors under this section?
2(a)
The proposed rule amended current
§ 713.2 by dividing the section into two
subparagraphs. Current § 713.2 became
paragraph (a). The proposed rule
retained most of the current § 713.2
without change, with the following
exception. For consistency with the rest
of part 713, the term ‘‘Federal credit
union’’ was revised to ‘‘federally
insured credit union.’’ The Board did
not receive any comment on this
provision and is finalizing it as
proposed.
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2(b)
The proposed rule added a new
paragraph (b) to § 713.2. Proposed
paragraph (b) increased a board of
directors’ oversight responsibility of its
FICU’s fidelity bond coverage.
Specifically, the proposed rule required
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 also
required 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 prohibited 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 took that
review a step further and required a
FICU’s board, and, if applicable, its
supervisory committee, to review all
applications for purchase or renewal of
fidelity bond coverage. The Board
believed this change helped 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.
Almost every commenter objected to
the requirement for additional board
review and stated that the current
requirement for an annual review of the
adequacy of coverage is sufficient. Most
commenters stated that bond renewal is
a highly involved, time-intensive, and
technical process and that it is more
appropriate for a board of directors to
focus on broad strategic goals. One
commenter stated that a bond renewal
usually takes about one year to
complete. A few commenters stated that
the risk of loss from dishonest
employees is better addressed through
NCUA’s examination of a credit union’s
internal controls. In contrast, one
insurance company supported the
proposed requirement as adding an
important layer of review.
The Board continues to believe that
an ongoing review by a FICU’s board of
directors is necessary to ensure the
adequacy of fidelity bond coverage. The
Board agrees with commenters that
adequate internal controls are a
fundamental part of ensuring a FICU’s
safety and soundness. The Board,
however, also believes that adequate
fidelity bond coverage complements
sound internal controls. Therefore, the
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Board is finalizing a board’s
requirement to review all applications
for purchase or renewal of fidelity bond
coverage as proposed.
The proposed rule required a FICU’s
supervisory committee to conduct a
review of all applications for purchase
or renewal of fidelity bond coverage, in
addition to the FICU’s board. Several
commenters objected to the proposed
requirement that both the board of
directors and the supervisory committee
were responsible for reviewing renewal
documents. Commenters generally
believed that the dual review is
unnecessary. A few commenters noted
that many supervisory committees do
not meet as frequently as boards of
directors and it would be very difficult
to synchronize their review given the
back-and-forth negotiating with the
insurance company that usually occurs
during the renewal process. After
reviewing the comments, the Board has
removed the requirement for the
supervisory committee to review fidelity
bond purchases or renewals. The Board
believes that removing the requirement
for supervisory committee review
balances the Board’s concern for
adequate fidelity bond oversight with
concerns about regulatory burden.
As noted, the proposed rule also
required 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
proposed rule required that the member
of the board acting as signatory rotate
each time the FICU purchases or renews
fidelity coverage. Commenters were
almost universally against this proposed
requirement.
A few commenters stated that some
insurance companies require an
employee of the credit union to sign the
renewal documents. The Board is aware
that under the current rule it is industry
practice for employees to generally sign
renewal documents. The final rule,
however, requires that a non-employee
sign the renewal documents. This policy
may necessitate changes to certain
fidelity bond forms.
One commenter thought a more
effective solution would be to mandate
the inclusion of a clause in the fidelity
bond contract that states the signatory’s
fraud is not imputed to the company
and, therefore, the signatory’s fraud
cannot serve as a basis for the insurer to
rescind coverage. The Board has not
adopted this suggestion. The Board is
concerned that this level of specificity
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35519
in a fidelity bond contract, along with
the fact this would be a significant
departure from current industry
practice, would reduce the number of
fidelity bond insurance providers. A
robust market for fidelity bond
insurance ensures each FICU has
options when determining appropriate
insurance coverage. The Board believes,
however, that if an insurer offers such
a bond form it would likely address the
Board’s concerns regarding rescinded
fidelity bond coverage and may alleviate
the need for the board of directors to
review each renewal and for a director
to sign the renewal.
Most other comments focused on the
potential burden of this provision. Some
commenters expressed concern that this
requirement could negatively affect a
FICU’s ability to recruit volunteer board
members by increasing the perceived
personal liability of the board member
who is designated to sign the renewal.
Other commenters thought insurance
companies would either increase costs
or modify contracts in response to the
proposed rule. One commenter stated
that the proposal is problematic due to
the amount of time, bandwidth, and
knowledge that is necessary to be a
signatory, and believed it would require
the board member to have a background
in insurance. In contrast, one insurance
company expressed support for this
requirement, however, the company
stated that the NCUA should impose
additional requirements to ensure the
signatory has done adequate due
diligence before signing the bond
renewal.
The Board is finalizing this provision
as proposed. The Board has not made
any changes to this proposed provision
because the Board believes it is
necessary to prevent losses to the
NCUSIF due to rescinded coverage. The
underlying purpose of these
requirements is to address the issue of
rescission of fidelity bond 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
might 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 reduces the
potential for the signatory to be
knowledgeable of the fraudulent
activity.
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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. Between 2010 and May 2019,
the NCUSIF has already lost in excess
of $10 million from fidelity bonds that
were voided due to the signatory being
aware of fraudulent activities. Litigation
related to denied claims is ongoing and
may result in additional losses to the
NCUA. The Board also notes that this
requirement is also advantageous to
individual FICUs, as this will help
prevent them from losing coverage in
cases not involving involuntary
liquidation.
Finally, the Board believes the final
rule presents only a minimal increase in
regulatory burden as the FICU’s board is
already required to annually review its
fidelity bond coverage, but meaningfully
mitigates the risk to the NCUSIF
associated with fidelity bond coverage
rescission.
713.3 What bond coverage must a
federally insured credit union have?
The proposed rule amended current
§ 713.3 by renumbering and revising the
section. Current § 713.3 became
paragraph (a), current paragraphs (a)
and (b) were renumbered as paragraphs
(a)(1) and (2), and two new
subparagraphs were added as (a)(3) and
(4). Finally, a new paragraph (b) also
was added.
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3(a)(2)
Current paragraph (b) of § 713.3 states
that, at a minimum, a FICU’s fidelity
bond coverage must include fidelity
bonds that cover fraud and dishonesty.
The proposed rule removed the
redundant phrase ‘‘[i]nclude fidelity
bonds that’’ in current paragraph (b).
The Board did not receive any comment
on this section and is finalizing this
provision as proposed. The final rule
reads ‘‘At a minimum, your bond
coverage must: . . . Cover fraud and
dishonesty by all employees, directors,
officers, supervisory committee
members, and credit committee
members;’’.
3(a)(3)
The proposed rule added a new
paragraph (a)(3) to § 713.3. Proposed
paragraph (a)(3) required a FICU to have
fidelity bond coverage that includes an
option for the liquidating agent to
purchase coverage that extends the
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discovery period, the period to discover
and file a claim, for at least two years
after liquidation.15 Most commenters
objected to the proposed two-year
discovery period following an
involuntary liquidation. Most
commenters cited the potential for
increased premiums as the reason for
their objection. In the proposed rule, the
NCUA stated its belief that any
additional cost of this provision would
likely be covered by the liquidating
agent as the liquidating agent would pay
the fee for an extended discovery
period.
Commenters, however, did not
believe that the liquidating agent would
bear all of the additional cost of the twoyear discovery window because state
insurance regulations cap the amount
that an insurer can charge for an
extended discovery period. Several
commenters expressed concern that the
NCUSIF savings would not justify the
added cost to all FICUs due to the
limited number of FICUs that are
involuntarily liquidated. Several
commenters requested that the NCUA
undergo a cost-benefit analysis. One
commenter stated that the NCUA did
not present any evidence that the
current policy of providing notice does
not work, just that it lacks legal
certainty. In contrast, two credit union
commenters supported the extended
discovery period. In addition, two
commenters associated with the
insurance industry suggested a 12month discovery window. One stated
that a 12-month window is in line with
industry standards and encourages
timely action by the liquidating agent.
In response to the commenters, the
Board has amended the proposed twoyear discovery window.
In an effort to better balance the costs
and benefits of the Board’s intent, the
Board has amended the final rule to
require that fidelity bond contracts
provide for a 12-month discovery
window following an involuntary
liquidation. The Board initially
proposed a two-year discovery window
as members have 18 months to file a
claim on insured accounts after the
appointment of a liquidating agent.16
Upon consideration of the comments,
the Board believes a 12-month discovery
period provides adequate time to
discovery and file a claim. Additionally,
after conducting research, the Board
believes that this proposed requirement
15 The Board believes that an extended discovery
period is important for protecting the NCUSIF as
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.
16 12 U.S.C. 1787(o).
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will not result in any material
additional cost or burden on FICUs.
3(a)(4)
The Board also proposed to add a new
paragraph (a)(4) to § 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. There were only
two comments on the proposed fourmonth discovery period following a
voluntary liquidation. One commenter
did not object to it. The other
commenter did not support imposing
the requirement on FISCUs and stated
that state law governs voluntary
liquidations for FISCUs. The Board
believes that this requirement is
important because it benefits a FISCU’s
members as any recovery following a
voluntary termination flows through to
members. Additionally, the provision
imposes only a minor burden for
FISCUs. Therefore, the Board is
finalizing this provision as proposed.
3(b)
Section 713.3 requires that a bond, at
a minimum, must be purchased in ‘‘an
individual policy.’’ 17 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.18 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 § 713.3
that a FICU must purchase its own
individual policy.19 The regulation did
not, however, define ‘‘individual
policy.’’
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 § 713.3(a).20 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.21 In a
2004 legal opinion, OGC opined that a
CUSO that provides management
services for multiple credit unions
could not purchase a single fidelity
17 12
CFR 713.3.
FR 28718, 28719 (May 27, 1999).
19 Id. at 28719.
20 OGC Legal Op. 04–0744 (Sep. 21, 2004); and
OGC Legal Op. 14–1013 (Mar. 21, 2014).
21 OGC Legal Op. 14–1013 (Mar. 21, 2014).
18 64
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bond with each credit union named as
an insured.22 In both letters, OGC
explained the purpose of the individual
policy requirement is to avoid diluting
the individual credit union’s coverage.
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 sought to incorporate the
2017 legal opinion into proposed part
713.
No commenters opposed this policy
and several commenters supported it.
The Board is finalizing this provision as
proposed. Under the final rule, a FICU
may have a fidelity bond that also
covers its CUSO(s) 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 directly
benefits from any fidelity bond
insurance proceeds collected by a
consolidated CUSO.23 This final rule,
however, does 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.24
22 OGC
Legal Op. 04–0744 (Sep. 21, 2004).
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.
24 The final rule 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
amendment to clarify the individual policy
requirement is only applicable to natural person
credit unions.
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23 As
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§ 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 proposed to
amend § 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. The Board
received several comments that
addressed the expiration and continuing
review of approved bond forms. Those
comments are discussed below. Other
than the expiration of bond form
approval, the Board did not receive any
comments that generally discussed its
approval of bond forms. Therefore, this
section has generally been finalized as
proposed. Any questions regarding the
NCUA’s approval of fidelity bond forms
can be directed to the NCUA’s OGC,
(703) 518–6540.
4(a)
Current § 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 proposed rule
clarified this requirement by dividing
paragraph (a) into two new paragraphs.
The Board did not receive any comment
on this section and is finalizing this
provision as proposed. New paragraph
(a) explicitly states that ‘‘the NCUA
Board must approve all bond forms
before federally insured credit unions
may use them.’’
4(b)
Proposed paragraph (b) stated 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 at (703) 518–6330. The proposed
rule rewrote this provision for clarity,
but did not make any substantive
changes. The Board did not receive any
comment on this section and is
finalizing it as proposed.
4(c)
Proposed paragraph (c) set forth
which fidelity bonds and fidelity bond
documents require Board approval. The
Board is finalizing this paragraph as
proposed.
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4(c)(1)
The final rule clarifies 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
§ 713.4(b)(1).
4(c)(2)
The final rule states 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 proposed rule also added 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 proposed
to sunset its approval of a bond form
after a period of ten years. Commenters
had mixed opinions on this provision.
While several commenters supported
the ten-year sunset, many other
commenters expressed concerns about
the ten-year sunset date. Specifically,
two commenters associated with the
insurance industry expressed concerns
because form approval is already a
complicated process as it involves state
insurance regulators. The Board
understands the complexity involved in
the approval process, but is maintaining
the ten-year sunset. The Board believes
the sunset is necessary to ensure bond
forms are up-to-date and continue to
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provide adequate fidelity bond coverage
for FICUs.
With respect to bond forms that the
Board has approved before 2019, the
Board proposed to allow its approval on
these forms to continue until January 1,
2029. Several commenters expressed
concerns about the NCUA’s ability to
reapprove bond forms, and particularly,
reapprove all existing bond forms in
2029. Commenters believed that reapproval would be a resource-intensive
process and suggested that the NCUA
include qualifying language in case
there is a delay and the NCUA has not
reapproved all bond forms by their
expiration date. The Board agrees that
qualifying language is beneficial.
Therefore, the final rule provides that
approval for all existing bond forms
sunsets after ten years unless otherwise
determined by the NCUA Board.25 The
Board believes the addition of
qualifying language provides reasonable
flexibility while preserving its intent to
sunset bond form approval after ten
years.
Under the proposed rule, the ten-year
approval period began on the date the
Board approved a bond form. The
proposed rule stated, however, that the
ten-year period would not toll or start
over if a bond carrier submits a revision
to an approved bond form. One
commenter believed that this is
unnecessary and approval should
always sunset ten years after a bond
form is reviewed and approved. The
Board has reconsidered and agrees with
the commenter. Under the final rule, the
Board’s approval always sunsets ten
years after a bond is reviewed and
approved. The Board proposed to
maintain the original sunset date
because of concerns that a subsequent
review may be targeted and not review
the bond form in its entirety. To address
this concern, under the final rule, a
bond form will always be reviewed in
its entirety.
The proposed rule also noted that
should the Board determine, upon rereview, 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. One commenter objected to
this provision and believed that if the
coverage is not adequate, new coverage
should be required immediately. The
Board is supportive of adequate fidelity
bond coverage, but is concerned about
the burden to a FICU if the contract is
determined to be inadequate during the
25 The Board has added this flexibility both for
the general ten-year sunset provision and for the
2029 sunset date for all currently approved bond
forms.
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contract term. Therefore, under the final
rule a FICU must only 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.
The proposed rule also clarified that
the Board may review a bond form at
any time. The Board received no
comment on this provision and is
finalizing it as proposed.
received, see the previous discussion for
changes to § 713.2(b).
§ 713.5–§ 713.7
The proposed rule used the term
federally insured credit union instead of
federal credit union in each of §§ 713.5,
713.6, and 713.7 for consistency and
clarity. The Board did not receive any
comment on these sections and is
finalizing them as proposed.
The proposed rule stated 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 was not a substantive
change from the current requirements
and the proposed language was
intended to reflect the comparable
language in part 713. The Board did not
receive any comment on this provision
and is finalizing it as proposed.
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. Changes to the specific
subparagraphs of § 704.18 are discussed
below.
§ 704.18
Fidelity Bond Coverage
18(b)
The proposed rule amended current
§ 704.18(b) by dividing paragraph (b)
into two subparts. Current paragraph (b)
remained unchanged and was
designated paragraph (b)(1). The
proposed rule added a new paragraph as
(b)(2). Proposed paragraph (b)(2)
required that a corporate credit union’s
board of directors and supervisory
committee review all applications for
purchase or renewal of its fidelity bond
coverage. After review, the corporate
credit union’s board was required to
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 member was
permitted to be a signatory on
consecutive purchase or renewal
agreements for the same fidelity bond
coverage policy. This proposed
amendment was identical to proposed
changes to Part 713 for natural person
credit unions. The Board received
significant comment on this proposed
requirement. As compared to the
proposed rule, the final rule does not
require that the corporate credit union’s
supervisory committee review all
applications for purchase or renewal.
The Board is finalizing the remaining
requirements of this paragraph as
proposed. For additional background
and a detailed discussion of comments
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18(c)
The proposed rule made significant
revisions to current § 704.18(c). Section
704.18(c) was split into five new
subparagraphs, each of which is
described in more detail below.
18(c)(1)
18(c)(2)
Proposed § 704.18(c)(2) stated that
fidelity bonds must provide coverage for
the fraud and dishonesty of all
employees, directors, officers, and
supervisory and credit committee
members. This was not a substantive
change from the current requirements
and the Board is finalizing this
provision as proposed.
18(c)(3)
The proposed rule substantively
amended the requirements for a
corporate credit union’s approved bond
forms. The proposed requirements
reflected the changes proposed for
natural person credit unions in part 713.
The proposed rule required the Board to
approve all bond forms before a
corporate credit union may use them. In
addition, a corporate credit union could
not use any bond form that had been
amended since receiving Board
approval, or any rider, endorsement,
renewal, or other document that limited
coverage of approved bond forms,
without first receiving approval from
the Board. As required under proposed
part 713, approval of all bond forms
expired 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.
The Board is finalizing this provision as
proposed with one exception. As
compared to the proposed rule, the final
rule adds qualifying language to provide
the Board flexibility to extend its
approval of bond forms. For additional
background, and a detailed discussion
of comments, see the previous
discussion for changes to § 713.4.
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18(c)(4)
The proposed rule added a new
§ 704.18(c)(4) to ensure that there is an
adequate discovery period, the period to
discover and file a claim, following a
corporate credit union’s liquidation.
The proposed requirements reflected the
changes proposed for natural person
credit unions in part 713. The proposed
rule required fidelity bonds to include
an option for the liquidating agent to
purchase coverage in the event of an
involuntary liquidation that extended
the discovery period for a covered loss
for at least two years after liquidation.
The Board is finalizing this provision as
proposed with one substantive
modification. The final rule requires
only a one-year discovery period
following an involuntary liquidation. In
the case of a voluntary liquidation,
under the proposed rule, fidelity bonds
were required to remain in effect, or
provide that the discovery period is
extended, for at least four months after
the final distribution of assets. The
Board is finalizing this provision as
proposed. For additional background
and a detailed discussion of comments,
see the previous discussion for changes
to § 713.3(a)(3) and (4).
18(c)(5)
The current rule requires that
corporate credit union bond forms
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. The proposed rule
did not include any amendments to
these requirements. One commenter,
however, objected to the existing
requirements and stated that the
corporate credit union, and not the
insurer, should be responsible for
providing the required notice. This
comment is outside the scope of the
proposed rule, but the Board notes that
it continues to believe that the
insurance company should notify the
NCUA if any of the listed events occur.
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IV. Regulatory Procedures
a. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA) (44 U.S.C. 3501 et seq.) requires
that the Office of Management and
Budget (OMB) approve all collections of
information by a Federal agency from
the public before they can be
implemented. Respondents are not
required to respond to any collection of
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information unless it displays a current,
valid OMB control number.
The burden outline in the preamble of
the notice of proposed rulemaking did
not include those associated with
corporate credit unions. As with part
713, part 704 is being amended to
require NCUA approval on all bond
forms expired after a period of 10 years
from the date of the NCUA approval or
reapproved of its use. This information
collection requirement is estimated to
impact two corporate credit unions, for
a total of two additional burden hours.
This program change is reflected in the
19 total burden hours requested.
In accordance with the PRA, the
information collection requirements
included in this final rule have been
submitted to OMB for approval under
control number 3133–0170.
b. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
generally requires that, in connection
with a final rulemaking, an agency
prepare and make available for public
comment a final regulatory flexibility
analysis that describes the impact of a
final 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
final rule has 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 is spread out among all
FICUs and the cost to each FICU is
negligible. In addition, after conducting
research the Board believes that the
requirement for bond forms to include
a 12-month discovery period following
liquidation will not result in any
material additional cost or burden on
FICUs. Finally, the requirement that
boards must approve purchases and
renewals would impose no direct cost
on FICUs. Accordingly, the NCUA
certifies that the final rule does 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
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35523
complies with the executive order to
adhere to fundamental federalism
principles. This final rule does 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 final 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
final rule does not affect family wellbeing 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 Fairness Act of 1996 (Pub.
L. 104–121) (SBREFA) generally
provides for congressional review of
agency rules.26 A reporting requirement
is triggered in instances where the
NCUA issues a final rule as defined by
section 551 of the APA.27 An agency
rule, in addition to being subject to
congressional oversight, may also be
subject to a delayed effective date if the
rule is a ‘‘major rule.’’ 28 The NCUA
does not believe this rule is a ‘‘major
rule’’ within the meaning of the relevant
sections of SBREFA. As required by
SBREFA, the NCUA submitted this final
rule to the Office of Management and
Budget (OMB) for it to determine if the
final rule is a ‘‘major rule’’ for purposes
of SBREFA. OMB determined the final
rule was not a major rule. The NCUA
also will file appropriate reports with
Congress and the Government
Accountability Office so this rule may
be reviewed.
List of Subjects in 12 CFR Parts 704 and
713
Bonds, Credit unions, Insurance.
By the National Credit Union
Administration Board on July 18, 2019.
Gerard Poliquin,
Secretary of the Board.
For the reasons discussed above, the
NCUA is amending 12 CFR parts 704
and 713 as follows:
26 5
U.S.C. 801–804.
U.S.C. 551.
28 5 U.S.C. 804(2).
27 5
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PART 704—CORPORATE CREDIT
UNIONS
1. The authority citation for part 704
continues to read as follows:
■
Authority: 12 U.S.C. 1762, 1766(a), 1772a,
1781, 1789, and 1795e.
2. Section 704.18 is amended by
revising paragraphs (b) and (c) to read
as follows:
■
§ 704.18
Fidelity bond coverage.
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*
*
*
*
*
(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 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 unless otherwise determined by
the NCUA Board; provided, however,
that any bond forms approved before
2019 will expire on January 1, 2029,
unless otherwise determined by the
NCUA Board. 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
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purchase coverage in the event of an
involuntary liquidation that extends the
discovery period for a covered loss for
at least one year 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
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).
4. The heading for part 713 is revised
to read as set forth above.
■ 5. Revise § 713.1 to read as follows:
■
§ 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 § 741.201 of this
chapter to comply with the fidelity bond
coverage requirements of this part.
Corporate credit unions must comply
with § 704.18 of this chapter in lieu of
this part.
■ 6. Revise § 713.2 to read as follows:
§ 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
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(b) The board of directors 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.
■ 7. Revise § 713.3 to read as follows:
§ 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 one
year 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
§ 710.2(c) of this chapter.
(b) The requirement in subsection (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.
■ 8. Revise § 713.4 to read as follows:
§ 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.
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If you are unable to access the NCUA’s
website, you can obtain a current listing
of approved bond forms by contacting
the NCUA at (703) 518–6330.
(c) Federally insured credit 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
(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 unless
otherwise determined by the NCUA
Board. Provided, however, that:
(1) Any bond forms approved before
2019 will expire on January 1, 2029,
unless otherwise determined by the
NCUA Board; and
(2) The NCUA reserves the right to
review a bond form at any point after its
approval.
§ 713.5
[Amended]
9. In § 713.5:
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;
■ b. In paragraph (c), add the words
‘‘federally insured’’ before the words
‘‘credit union’’, ‘‘credit unions’’, or
‘‘credit union’s’’ each place they appear;
and
■ c. In paragraph (e), remove the word
‘‘your’’ and add in their place the words
‘‘a federally insured credit union’s’’
■
■
§ 713.6
[Amended]
10. In § 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.
■
■
11. Revise § 713.7 to read as follows:
khammond on DSKBBV9HB2PROD with RULES
§ 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. 2019–15709 Filed 7–23–19; 8:45 am]
BILLING CODE 7535–01–P
VerDate Sep<11>2014
15:37 Jul 23, 2019
Jkt 247001
NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Part 722
RIN 3133–AE79
Real Estate Appraisals
National Credit Union
Administration (NCUA).
ACTION: Final rule.
AGENCY:
The NCUA Board (Board) is
amending the agency’s rule requiring
real estate appraisals for certain
transactions. The final rule
accomplishes four objectives: Increasing
the threshold below which appraisals
are not required for commercial real
estate transactions from $250,000 to
$1,000,000; restructuring the rule to
enhance clarity; exempting from the
rule certain federally related
transactions involving real estate in a
rural area; and making conforming
amendments to the definitions section.
DATES: The final rule is effective
October 22, 2019.
FOR FURTHER INFORMATION CONTACT:
Technical information: Jeffrey Marshall,
Program Officer, (703) 548–2415, Lou
Pham, Senior Credit Specialist, (703)
548–2745, Office of Examination and
Insurance, or Legal information: Rachel
Ackmann, Staff Attorney, (703) 518–
6540, Office of General Counsel,
National Credit Union Administration,
each at 1775 Duke Street, Alexandria,
VA 22314.
SUPPLEMENTARY INFORMATION:
SUMMARY:
I. Introduction
A. Background
Title XI of the Financial Institutions
Reform, Recovery, and Enforcement Act
of 1989 (Title XI) 1 directs each federal
financial institutions regulatory agency 2
to publish appraisal regulations for
federally related transactions within its
jurisdiction. In 1994, the Board of
Governors of the Federal Reserve
System, the Federal Deposit Insurance
Corporation, and the Office of the
Comptroller of the Currency (other
banking agencies) established
thresholds for all real estate-related
financial transactions with a transaction
value 3 of $250,000 or less, as well as
U.S.C. 3331 et seq.
financial institutions regulatory
agencies’’ means the Board of Governors of the
Federal Reserve System (Fed); the Federal Deposit
Insurance Corporation (FDIC); the Office of the
Comptroller of the Currency, Treasury (OCC); the
NCUA, and, formerly, the Office of Thrift
Supervision. 12 U.S.C. 3350(6).
3 For loans and extensions of credit, the
transaction value is the amount of the loan or
extension of credit. For sales, leases, purchases,
PO 00000
1 12
2 ‘‘Federal
Frm 00011
Fmt 4700
Sfmt 4700
35525
certain real estate-secured business
loans (qualifying business loans or
QBLs) with a transaction value of $1
million or less.4 Transactions below
these established threshold levels were
not required to have Title XI appraisals.
QBLs are business loans 5 that are real
estate-related financial transactions and
that are not dependent on the sale of, or
rental income derived from, real estate
as the primary source of repayment.6
Thereafter, first in 1995 and again in
2001, the NCUA promulgated rules
similar to those of the other banking
agencies then in effect, eventually
establishing a similar Title XI appraisal
threshold level for most real estaterelated transactions.7 In particular, the
rulemakings established that all real
estate-related financial transactions with
a transaction value 8 of $250,000 or less
do not require appraisals.9 The NCUA
did not, however, adopt the separate
exemption provided in the other
banking agencies’ appraisal regulations
for QBLs with transaction values of $1
million or less. In addition, both
residential and commercial real estate
related financial transactions, not
otherwise exempt from the appraisal
rule, are subject to the $1 million
threshold, which requires certified
appraisals for all transactions with
transaction values of $1 million or more.
B. The Other Banking Agencies 2017–
2018 Rulemaking
In July 2017, the other banking
agencies invited comment on a notice of
proposed rulemaking (OBAs
investments in or exchanges of real property, the
transaction value is the market value of the real
property. For the pooling of loans or interests in
real property for resale or purchase, the transaction
value is the amount of each loan or the market
value of each real property, respectively. See OCC:
12 CFR 34.42(n); Fed: 12 CFR 225.62(n); and FDIC:
12 CFR 323.2(n).
4 See 59 FR 29482 (June 7, 1994); see also OCC:
12 CFR 34.43(a)(1) and (5); Fed: 12 CFR 225.63(a)(1)
and (5); and FDIC: 12 CFR 323.3(a)(1) and (5).
5 The other banking agencies’ Title XI appraisal
regulations define ‘‘business loan’’ to mean ‘‘a loan
or extension of credit to any corporation, general or
limited partnership, business trust, joint venture,
pool, syndicate, sole proprietorship, or other
business entity.’’ OCC: 12 CFR 34.42(d); Fed: 12
CFR 225.62(d); and FDIC: 12 CFR 323.2(d).
6 See OCC: 12 CFR 34.43(a)(5); Fed: 12 CFR
225.63(a)(5); and FDIC: 12 CFR 323.3(a)(5).
7 See 60 FR 51889 (Oct. 4, 1995) and 66 FR 58656
(Nov. 23, 2001).
8 Transaction value means, for loans or other
extensions of credit, the amount of the loan or
extension of credit, for sales, leases, purchases, and
investments in or exchanges of real property, the
market value of the real property interest involved;
and for the pooling of loans or interests in real
property for resale or purchase, the amount of the
loan or market value of the real property calculated
with respect to each such loan or interest in real
property. 12 CFR 722.2(l).
9 12 CFR 722.3(a)(1).
E:\FR\FM\24JYR1.SGM
24JYR1
]]>Agencies
[Federal Register Volume 84, Number 142 (Wednesday, July 24, 2019)]
[Rules and Regulations]
[Pages 35517-35525]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15709]
=======================================================================
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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: Final rule.
-----------------------------------------------------------------------
SUMMARY: The NCUA Board (Board) is finalizing a rule that amends its
regulations regarding fidelity bonds for corporate credit unions and
natural person credit unions. The rule strengthens a board of
directors' oversight of a federally insured credit union's (FICU)
fidelity bond coverage; ensures an adequate period to discover and file
fidelity bond claims following a FICU's liquidation; codifies 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); and addresses Board
approval of bond forms.
DATES: The final rule is effective October 22, 2019.
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. Final Rule and Discussion of Comments
IV. 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 that 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
regulation.\3\
---------------------------------------------------------------------------
\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.
\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\ Part 713
applies to natural person credit unions and Part 704 applies to
corporate credit unions. The parts establish the requirements for a
fidelity bond, the acceptable bond forms, and the minimum permissible
coverage. Both parts require a FICU's board of directors to review
annually its fidelity bond coverage to ensure it is adequate in
relation to the potential risks facing the FICU and the minimum
requirements set by the Board.
---------------------------------------------------------------------------
\4\ 12 CFR pts. 704 and 713.
---------------------------------------------------------------------------
Part 704 was recently revised to amend the provision that
determines the maximum amount a corporate credit union may pay for a
deductible or a covered loss 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 percent 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.\5\ Part 713, however, has not been
substantively revised since 2005, when the NCUA issued a final rule
modernizing it.\6\
---------------------------------------------------------------------------
\5\ 80 FR 25932 (May 6, 2015).
\6\ 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).
---------------------------------------------------------------------------
b. Regulatory Reform Task Force
In August 2017, the Board published and sought comment on the
NCUA's regulatory reform agenda (Agenda).\7\ 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.\8\ 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 related to fidelity bonds 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.
---------------------------------------------------------------------------
\7\ 82 FR 39702 (Aug. 22, 2017).
\8\ E.O. 13777 (Feb. 24, 2017).
---------------------------------------------------------------------------
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
[[Page 35518]]
purchased in an ``individual policy.'' \9\ The ``individual policy''
provision was intended to prevent multiple FICUs 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.\10\ Before
2017, the NCUA's Office of General Counsel (OGC) had issued legal
opinions stating that a FICU may not include one or more CUSOs or other
parties as additional insureds under its fidelity bond because of the
``individual policy'' limitation.\11\ 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 FICUs and their
CUSOs, despite OGC's opinions. 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.\12\ 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 FICU from purchasing a fidelity bond that
covers both it and certain of its CUSOs, as discussed more fully below.
---------------------------------------------------------------------------
\9\ 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 FICUs under Part
713.
\10\ 64 FR 28178 (May 27, 1999).
\11\ OGC Legal Op. 14-0311 (Mar. 21, 2014); see also OGC Legal
Op. 04-0744 (Sept. 21, 2004).
\12\ OGC Legal Op. 17-0959 (Sept. 26, 2017).
---------------------------------------------------------------------------
II. Proposed Rule
OGC's fidelity bond review extended beyond the issue of joint
coverage and revealed several inconsistencies between part 713 and
approved bond forms. The review also revealed several outdated
provisions. In November 2018, the NCUA published a notice of proposed
rulemaking (the proposed rule) to update its fidelity bond regulation
to correct these problems, ensure the safe and sound operation of
FICUs, and protect the National Credit Union Share Insurance Fund
(NCUSIF).\13\ The comment period closed on January 22, 2019.
---------------------------------------------------------------------------
\13\ 83 FR 59318 (Nov. 23, 2018).
---------------------------------------------------------------------------
III. Final Rule and Discussion of Comments
The NCUA received 26 comment letters on its November 2018 proposed
rule. These comments were received from credit unions, including
corporate credit unions, credit union leagues and trade associations,
an association of state credit union supervisors, an insurance company,
and two insurance associations. In general, many of the commenters
supported the stated goal, to implement fidelity bond requirements in a
cost-effective manner. All of the commenters, however, expressed
concerns about specific aspects of the proposal. Most commenters
believed that the proposed rule resulted in unnecessary burden and
increased costs without substantially improving the adequacy of FICU
fidelity bond coverage. Some commenters also expressed concerns that
the rule reduced the number of insurance companies providing fidelity
bonds, which would reduce FICUs' ability to negotiate among providers.
In response to the comments received, the Board has made several
changes to the final rule. The specific details of the final rule,
including changes as a result of the comments received, are discussed
below.
Part 713
In general, part 713 applies to all federally insured natural
person credit unions and provides the fidelity bond requirements for
them. Changes to the specific subsections of part 713 are discussed
below.
Sec. 713.1 What is the scope of this section?
The proposed rule retained most of the current Sec. 713.1 without
change, with the following exceptions. The proposed rule added 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 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 federally insured, state-chartered
credit unions (FISCUs).\14\ For clarity, the proposed rule cross-
referenced the requirement in part 741 that FISCUs must comply with
Part 713 and referred to FICUs throughout the rule instead of federal
credit unions.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
One commenter questioned whether the proposed rule should be
applicable to all FISCUs. FISCUs' fidelity bond requirements are
applied through part 741, which states that ``[a]ny credit union which
makes application for insurance . . . must possess the minimum fidelity
bond coverage stated in part 713 . . . .'' The commenter stated that
the positioning of the language referring to minimum coverage means
that only the amount of bond coverage, and not the other requirements
in part 713, apply to FISCUs. The commenter stated that the NCUA should
invite specific comment on whether all of Part 713 should apply to
FISCUs. The commenter also does not believe it is necessary for the
NCUA to impose detailed provisions on FISCUs' fidelity bonds.
The Board has considered the comment and disagrees that part 741
applies to only the amount of bond coverage. Part 741 does not use the
term ``amount'' and instead uses the term ``minimum coverage.'' The
Board believes that the reasonable and plain understanding of the term
``coverage'' includes factors such as the amount of insurance, the
claims covered by the insurance, and other operational considerations
that ensure the coverage is adequate. The Board's position is further
supported by the fact it has been the Board's public and longstanding
position that the entirety of part 713 applies to FISCUs. The commenter
even noted that prior NCUA discussions of part 713 were directed to all
FISCUs. Therefore, the Board is finalizing this provision as proposed.
The final rule also includes a cross-reference for corporate credit
unions and states 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 amended current Sec. 713.2 by dividing the
section into two subparagraphs. Current Sec. 713.2 became paragraph
(a). The proposed rule retained 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'' was revised to ``federally
insured credit union.'' The Board did not receive any comment on this
provision and is finalizing it as proposed.
[[Page 35519]]
2(b)
The proposed rule added a new paragraph (b) to Sec. 713.2.
Proposed paragraph (b) increased a board of directors' oversight
responsibility of its FICU's fidelity bond coverage. Specifically, the
proposed rule required 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 also required 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 prohibited
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 took that review a step
further and required a FICU's board, and, if applicable, its
supervisory committee, to review all applications for purchase or
renewal of fidelity bond coverage. The Board believed this change
helped 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.
Almost every commenter objected to the requirement for additional
board review and stated that the current requirement for an annual
review of the adequacy of coverage is sufficient. Most commenters
stated that bond renewal is a highly involved, time-intensive, and
technical process and that it is more appropriate for a board of
directors to focus on broad strategic goals. One commenter stated that
a bond renewal usually takes about one year to complete. A few
commenters stated that the risk of loss from dishonest employees is
better addressed through NCUA's examination of a credit union's
internal controls. In contrast, one insurance company supported the
proposed requirement as adding an important layer of review.
The Board continues to believe that an ongoing review by a FICU's
board of directors is necessary to ensure the adequacy of fidelity bond
coverage. The Board agrees with commenters that adequate internal
controls are a fundamental part of ensuring a FICU's safety and
soundness. The Board, however, also believes that adequate fidelity
bond coverage complements sound internal controls. Therefore, the Board
is finalizing a board's requirement to review all applications for
purchase or renewal of fidelity bond coverage as proposed.
The proposed rule required a FICU's supervisory committee to
conduct a review of all applications for purchase or renewal of
fidelity bond coverage, in addition to the FICU's board. Several
commenters objected to the proposed requirement that both the board of
directors and the supervisory committee were responsible for reviewing
renewal documents. Commenters generally believed that the dual review
is unnecessary. A few commenters noted that many supervisory committees
do not meet as frequently as boards of directors and it would be very
difficult to synchronize their review given the back-and-forth
negotiating with the insurance company that usually occurs during the
renewal process. After reviewing the comments, the Board has removed
the requirement for the supervisory committee to review fidelity bond
purchases or renewals. The Board believes that removing the requirement
for supervisory committee review balances the Board's concern for
adequate fidelity bond oversight with concerns about regulatory burden.
As noted, the proposed rule also required 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
proposed rule required that the member of the board acting as signatory
rotate each time the FICU purchases or renews fidelity coverage.
Commenters were almost universally against this proposed requirement.
A few commenters stated that some insurance companies require an
employee of the credit union to sign the renewal documents. The Board
is aware that under the current rule it is industry practice for
employees to generally sign renewal documents. The final rule, however,
requires that a non-employee sign the renewal documents. This policy
may necessitate changes to certain fidelity bond forms.
One commenter thought a more effective solution would be to mandate
the inclusion of a clause in the fidelity bond contract that states the
signatory's fraud is not imputed to the company and, therefore, the
signatory's fraud cannot serve as a basis for the insurer to rescind
coverage. The Board has not adopted this suggestion. The Board is
concerned that this level of specificity in a fidelity bond contract,
along with the fact this would be a significant departure from current
industry practice, would reduce the number of fidelity bond insurance
providers. A robust market for fidelity bond insurance ensures each
FICU has options when determining appropriate insurance coverage. The
Board believes, however, that if an insurer offers such a bond form it
would likely address the Board's concerns regarding rescinded fidelity
bond coverage and may alleviate the need for the board of directors to
review each renewal and for a director to sign the renewal.
Most other comments focused on the potential burden of this
provision. Some commenters expressed concern that this requirement
could negatively affect a FICU's ability to recruit volunteer board
members by increasing the perceived personal liability of the board
member who is designated to sign the renewal. Other commenters thought
insurance companies would either increase costs or modify contracts in
response to the proposed rule. One commenter stated that the proposal
is problematic due to the amount of time, bandwidth, and knowledge that
is necessary to be a signatory, and believed it would require the board
member to have a background in insurance. In contrast, one insurance
company expressed support for this requirement, however, the company
stated that the NCUA should impose additional requirements to ensure
the signatory has done adequate due diligence before signing the bond
renewal.
The Board is finalizing this provision as proposed. The Board has
not made any changes to this proposed provision because the Board
believes it is necessary to prevent losses to the NCUSIF due to
rescinded coverage. The underlying purpose of these requirements is to
address the issue of rescission of fidelity bond 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 might 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 reduces
the potential for the signatory to be knowledgeable of the fraudulent
activity.
[[Page 35520]]
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. Between 2010 and May 2019, the NCUSIF has already
lost in excess of $10 million from fidelity bonds that were voided due
to the signatory being aware of fraudulent activities. Litigation
related to denied claims is ongoing and may result in additional losses
to the NCUA. The Board also notes that this requirement is also
advantageous to individual FICUs, as this will help prevent them from
losing coverage in cases not involving involuntary liquidation.
Finally, the Board believes the final rule presents only a minimal
increase in regulatory burden as the FICU's board is already required
to annually review its fidelity bond coverage, but meaningfully
mitigates the risk to the NCUSIF associated with fidelity bond coverage
rescission.
713.3 What bond coverage must a federally insured credit union have?
The proposed rule amended current Sec. 713.3 by renumbering and
revising the section. Current Sec. 713.3 became paragraph (a), current
paragraphs (a) and (b) were renumbered as paragraphs (a)(1) and (2),
and two new subparagraphs were added as (a)(3) and (4). Finally, a new
paragraph (b) also was added.
3(a)(2)
Current paragraph (b) of Sec. 713.3 states that, at a minimum, a
FICU's fidelity bond coverage must include fidelity bonds that cover
fraud and dishonesty. The proposed rule removed the redundant phrase
``[i]nclude fidelity bonds that'' in current paragraph (b). The Board
did not receive any comment on this section and is finalizing this
provision as proposed. The final rule reads ``At a minimum, your bond
coverage must: . . . Cover fraud and dishonesty by all employees,
directors, officers, supervisory committee members, and credit
committee members;''.
3(a)(3)
The proposed rule added a new paragraph (a)(3) to Sec. 713.3.
Proposed paragraph (a)(3) required a FICU to have fidelity bond
coverage that includes an option for the liquidating agent to purchase
coverage that extends the discovery period, the period to discover and
file a claim, for at least two years after liquidation.\15\ Most
commenters objected to the proposed two-year discovery period following
an involuntary liquidation. Most commenters cited the potential for
increased premiums as the reason for their objection. In the proposed
rule, the NCUA stated its belief that any additional cost of this
provision would likely be covered by the liquidating agent as the
liquidating agent would pay the fee for an extended discovery period.
---------------------------------------------------------------------------
\15\ The Board believes that an extended discovery period is
important for protecting the NCUSIF as 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.
---------------------------------------------------------------------------
Commenters, however, did not believe that the liquidating agent
would bear all of the additional cost of the two-year discovery window
because state insurance regulations cap the amount that an insurer can
charge for an extended discovery period. Several commenters expressed
concern that the NCUSIF savings would not justify the added cost to all
FICUs due to the limited number of FICUs that are involuntarily
liquidated. Several commenters requested that the NCUA undergo a cost-
benefit analysis. One commenter stated that the NCUA did not present
any evidence that the current policy of providing notice does not work,
just that it lacks legal certainty. In contrast, two credit union
commenters supported the extended discovery period. In addition, two
commenters associated with the insurance industry suggested a 12-month
discovery window. One stated that a 12-month window is in line with
industry standards and encourages timely action by the liquidating
agent. In response to the commenters, the Board has amended the
proposed two-year discovery window.
In an effort to better balance the costs and benefits of the
Board's intent, the Board has amended the final rule to require that
fidelity bond contracts provide for a 12-month discovery window
following an involuntary liquidation. The Board initially proposed a
two-year discovery window as members have 18 months to file a claim on
insured accounts after the appointment of a liquidating agent.\16\ Upon
consideration of the comments, the Board believes a 12-month discovery
period provides adequate time to discovery and file a claim.
Additionally, after conducting research, the Board believes that this
proposed requirement will not result in any material additional cost or
burden on FICUs.
---------------------------------------------------------------------------
\16\ 12 U.S.C. 1787(o).
---------------------------------------------------------------------------
3(a)(4)
The Board also proposed 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. There were only two comments on the proposed
four-month discovery period following a voluntary liquidation. One
commenter did not object to it. The other commenter did not support
imposing the requirement on FISCUs and stated that state law governs
voluntary liquidations for FISCUs. The Board believes that this
requirement is important because it benefits a FISCU's members as any
recovery following a voluntary termination flows through to members.
Additionally, the provision imposes only a minor burden for FISCUs.
Therefore, the Board is finalizing this provision as proposed.
3(b)
Section 713.3 requires that a bond, at a minimum, must be purchased
in ``an individual policy.'' \17\ 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.\18\ 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.\19\ The
regulation did not, however, define ``individual policy.''
---------------------------------------------------------------------------
\17\ 12 CFR 713.3.
\18\ 64 FR 28718, 28719 (May 27, 1999).
\19\ Id. at 28719.
---------------------------------------------------------------------------
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).\20\ 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.\21\ In a 2004 legal
opinion, OGC opined that a CUSO that provides management services for
multiple credit unions could not purchase a single fidelity
[[Page 35521]]
bond with each credit union named as an insured.\22\ In both letters,
OGC explained the purpose of the individual policy requirement is to
avoid diluting the individual credit union's coverage.
---------------------------------------------------------------------------
\20\ OGC Legal Op. 04-0744 (Sep. 21, 2004); and OGC Legal Op.
14-1013 (Mar. 21, 2014).
\21\ OGC Legal Op. 14-1013 (Mar. 21, 2014).
\22\ OGC Legal Op. 04-0744 (Sep. 21, 2004).
---------------------------------------------------------------------------
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
sought to incorporate the 2017 legal opinion into proposed part 713.
No commenters opposed this policy and several commenters supported
it. The Board is finalizing this provision as proposed. Under the final
rule, a FICU may have a fidelity bond that also covers its CUSO(s) 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 directly benefits from any fidelity bond
insurance proceeds collected by a consolidated CUSO.\23\ This final
rule, however, does 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.\24\
---------------------------------------------------------------------------
\23\ 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.
\24\ The final rule 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
amendment to clarify the individual policy requirement is only
applicable to natural person credit unions.
---------------------------------------------------------------------------
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 proposed 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.
The Board received several comments that addressed the expiration and
continuing review of approved bond forms. Those comments are discussed
below. Other than the expiration of bond form approval, the Board did
not receive any comments that generally discussed its approval of bond
forms. Therefore, this section has generally been finalized as
proposed. Any questions regarding the NCUA's approval of fidelity bond
forms can be directed to the NCUA's OGC, (703) 518-6540.
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 proposed rule clarified this requirement by dividing
paragraph (a) into two new paragraphs. The Board did not receive any
comment on this section and is finalizing this provision as proposed.
New paragraph (a) explicitly states that ``the NCUA Board must approve
all bond forms before federally insured credit unions may use them.''
4(b)
Proposed paragraph (b) stated 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 at
(703) 518-6330. The proposed rule rewrote this provision for clarity,
but did not make any substantive changes. The Board did not receive any
comment on this section and is finalizing it as proposed.
4(c)
Proposed paragraph (c) set forth which fidelity bonds and fidelity
bond documents require Board approval. The Board is finalizing this
paragraph as proposed.
4(c)(1)
The final rule clarifies 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).
4(c)(2)
The final rule states 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 proposed rule also added 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 proposed to sunset its approval of a bond form after a period of
ten years. Commenters had mixed opinions on this provision. While
several commenters supported the ten-year sunset, many other commenters
expressed concerns about the ten-year sunset date. Specifically, two
commenters associated with the insurance industry expressed concerns
because form approval is already a complicated process as it involves
state insurance regulators. The Board understands the complexity
involved in the approval process, but is maintaining the ten-year
sunset. The Board believes the sunset is necessary to ensure bond forms
are up-to-date and continue to
[[Page 35522]]
provide adequate fidelity bond coverage for FICUs.
With respect to bond forms that the Board has approved before 2019,
the Board proposed to allow its approval on these forms to continue
until January 1, 2029. Several commenters expressed concerns about the
NCUA's ability to reapprove bond forms, and particularly, reapprove all
existing bond forms in 2029. Commenters believed that re-approval would
be a resource-intensive process and suggested that the NCUA include
qualifying language in case there is a delay and the NCUA has not
reapproved all bond forms by their expiration date. The Board agrees
that qualifying language is beneficial. Therefore, the final rule
provides that approval for all existing bond forms sunsets after ten
years unless otherwise determined by the NCUA Board.\25\ The Board
believes the addition of qualifying language provides reasonable
flexibility while preserving its intent to sunset bond form approval
after ten years.
---------------------------------------------------------------------------
\25\ The Board has added this flexibility both for the general
ten-year sunset provision and for the 2029 sunset date for all
currently approved bond forms.
---------------------------------------------------------------------------
Under the proposed rule, the ten-year approval period began on the
date the Board approved a bond form. The proposed rule stated, however,
that the ten-year period would not toll or start over if a bond carrier
submits a revision to an approved bond form. One commenter believed
that this is unnecessary and approval should always sunset ten years
after a bond form is reviewed and approved. The Board has reconsidered
and agrees with the commenter. Under the final rule, the Board's
approval always sunsets ten years after a bond is reviewed and
approved. The Board proposed to maintain the original sunset date
because of concerns that a subsequent review may be targeted and not
review the bond form in its entirety. To address this concern, under
the final rule, a bond form will always be reviewed in its entirety.
The proposed rule also noted that should the Board 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. One commenter objected to this provision and
believed that if the coverage is not adequate, new coverage should be
required immediately. The Board is supportive of adequate fidelity bond
coverage, but is concerned about the burden to a FICU if the contract
is determined to be inadequate during the contract term. Therefore,
under the final rule a FICU must only 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.
The proposed rule also clarified that the Board may review a bond
form at any time. The Board received no comment on this provision and
is finalizing it as proposed.
Sec. 713.5-Sec. 713.7
The proposed rule used 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. The Board did not receive any
comment on these sections and is finalizing them as proposed.
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. Changes to the specific subparagraphs of Sec.
704.18 are discussed below.
Sec. 704.18 Fidelity Bond Coverage
18(b)
The proposed rule amended current Sec. 704.18(b) by dividing
paragraph (b) into two subparts. Current paragraph (b) remained
unchanged and was designated paragraph (b)(1). The proposed rule added
a new paragraph as (b)(2). Proposed paragraph (b)(2) required that a
corporate credit union's board of directors and supervisory committee
review all applications for purchase or renewal of its fidelity bond
coverage. After review, the corporate credit union's board was required
to 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 member was permitted to be a
signatory on consecutive purchase or renewal agreements for the same
fidelity bond coverage policy. This proposed amendment was identical to
proposed changes to Part 713 for natural person credit unions. The
Board received significant comment on this proposed requirement. As
compared to the proposed rule, the final rule does not require that the
corporate credit union's supervisory committee review all applications
for purchase or renewal. The Board is finalizing the remaining
requirements of this paragraph as proposed. For additional background
and a detailed discussion of comments received, see the previous
discussion for changes to Sec. 713.2(b).
18(c)
The proposed rule made significant revisions to current Sec.
704.18(c). Section 704.18(c) was split into five new subparagraphs,
each of which is described in more detail below.
18(c)(1)
The proposed rule stated 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 was not a
substantive change from the current requirements and the proposed
language was intended to reflect the comparable language in part 713.
The Board did not receive any comment on this provision and is
finalizing it as proposed.
18(c)(2)
Proposed Sec. 704.18(c)(2) stated that fidelity bonds must provide
coverage for the fraud and dishonesty of all employees, directors,
officers, and supervisory and credit committee members. This was not a
substantive change from the current requirements and the Board is
finalizing this provision as proposed.
18(c)(3)
The proposed rule substantively amended the requirements for a
corporate credit union's approved bond forms. The proposed requirements
reflected the changes proposed for natural person credit unions in part
713. The proposed rule required the Board to approve all bond forms
before a corporate credit union may use them. In addition, a corporate
credit union could not use any bond form that had been amended since
receiving Board approval, or any rider, endorsement, renewal, or other
document that limited coverage of approved bond forms, without first
receiving approval from the Board. As required under proposed part 713,
approval of all bond forms expired 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. The Board is finalizing
this provision as proposed with one exception. As compared to the
proposed rule, the final rule adds qualifying language to provide the
Board flexibility to extend its approval of bond forms. For additional
background, and a detailed discussion of comments, see the previous
discussion for changes to Sec. 713.4.
[[Page 35523]]
18(c)(4)
The proposed rule added a new Sec. 704.18(c)(4) to ensure that
there is an adequate discovery period, the period to discover and file
a claim, following a corporate credit union's liquidation. The proposed
requirements reflected the changes proposed for natural person credit
unions in part 713. The proposed rule required fidelity bonds to
include an option for the liquidating agent to purchase coverage in the
event of an involuntary liquidation that extended the discovery period
for a covered loss for at least two years after liquidation. The Board
is finalizing this provision as proposed with one substantive
modification. The final rule requires only a one-year discovery period
following an involuntary liquidation. In the case of a voluntary
liquidation, under the proposed rule, fidelity bonds were required to
remain in effect, or provide that the discovery period is extended, for
at least four months after the final distribution of assets. The Board
is finalizing this provision as proposed. For additional background and
a detailed discussion of comments, see the previous discussion for
changes to Sec. 713.3(a)(3) and (4).
18(c)(5)
The current rule requires that corporate credit union bond forms
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. The
proposed rule did not include any amendments to these requirements. One
commenter, however, objected to the existing requirements and stated
that the corporate credit union, and not the insurer, should be
responsible for providing the required notice. This comment is outside
the scope of the proposed rule, but the Board notes that it continues
to believe that the insurance company should notify the NCUA if any of
the listed events occur.
IV. Regulatory Procedures
a. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.)
requires that the Office of Management and Budget (OMB) approve all
collections of information by a Federal agency from the public before
they can be implemented. Respondents are not required to respond to any
collection of information unless it displays a current, valid OMB
control number.
The burden outline in the preamble of the notice of proposed
rulemaking did not include those associated with corporate credit
unions. As with part 713, part 704 is being amended to require NCUA
approval on all bond forms expired after a period of 10 years from the
date of the NCUA approval or reapproved of its use. This information
collection requirement is estimated to impact two corporate credit
unions, for a total of two additional burden hours. This program change
is reflected in the 19 total burden hours requested.
In accordance with the PRA, the information collection requirements
included in this final rule have been submitted to OMB for approval
under control number 3133-0170.
b. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires that, in
connection with a final rulemaking, an agency prepare and make
available for public comment a final regulatory flexibility analysis
that describes the impact of a final 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 final rule has 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 is spread out among all FICUs and the cost to each FICU is
negligible. In addition, after conducting research the Board believes
that the requirement for bond forms to include a 12-month discovery
period following liquidation will not result in any material additional
cost or burden on FICUs. Finally, the requirement that boards must
approve purchases and renewals would impose no direct cost on FICUs.
Accordingly, the NCUA certifies that the final rule does 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 final rule does 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 final 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 final rule does 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 Fairness Act of 1996
(Pub. L. 104-121) (SBREFA) generally provides for congressional review
of agency rules.\26\ A reporting requirement is triggered in instances
where the NCUA issues a final rule as defined by section 551 of the
APA.\27\ An agency rule, in addition to being subject to congressional
oversight, may also be subject to a delayed effective date if the rule
is a ``major rule.'' \28\ The NCUA does not believe this rule is a
``major rule'' within the meaning of the relevant sections of SBREFA.
As required by SBREFA, the NCUA submitted this final rule to the Office
of Management and Budget (OMB) for it to determine if the final rule is
a ``major rule'' for purposes of SBREFA. OMB determined the final rule
was not a major rule. The NCUA also will file appropriate reports with
Congress and the Government Accountability Office so this rule may be
reviewed.
---------------------------------------------------------------------------
\26\ 5 U.S.C. 801-804.
\27\ 5 U.S.C. 551.
\28\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------
List of Subjects in 12 CFR Parts 704 and 713
Bonds, Credit unions, Insurance.
By the National Credit Union Administration Board on July 18,
2019.
Gerard Poliquin,
Secretary of the Board.
For the reasons discussed above, the NCUA is amending 12 CFR parts
704 and 713 as follows:
[[Page 35524]]
PART 704--CORPORATE CREDIT UNIONS
0
1. The authority citation for part 704 continues 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.
* * * * *
(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 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 unless
otherwise determined by the NCUA Board; provided, however, that any
bond forms approved before 2019 will expire on January 1, 2029, unless
otherwise determined by the NCUA Board. 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 one year
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 to read 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 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 one year 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 subsection (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.
[[Page 35525]]
If you are unable to access the NCUA's website, you can obtain a
current listing of approved bond forms by contacting the NCUA at (703)
518-6330.
(c) Federally insured credit 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
(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 unless otherwise determined by the NCUA Board. Provided, however,
that:
(1) Any bond forms approved before 2019 will expire on January 1,
2029, unless otherwise determined by the NCUA Board; and
(2) The NCUA reserves the right to review a bond form at any point
after its approval.
Sec. 713.5 [Amended]
0
9. In Sec. 713.5:
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; and
0
c. In paragraph (e), remove the word ``your'' and add in their 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. 2019-15709 Filed 7-23-19; 8:45 am]
BILLING CODE 7535-01-P
