Succession Planning, 60329-60336 [2024-16227]

Agencies

• National Credit Union Administration

[Federal Register Volume 89, Number 143 (Thursday, July 25, 2024)]
[Proposed Rules]
[Pages 60329-60336]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-16227]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 89, No. 143 / Thursday, July 25, 2024 / 
Proposed Rules

[[Page 60329]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701 and 741

[NCUA-2024-0037]
RIN 3133-AF42


Succession Planning

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: On February 3, 2022, the NCUA Board (Board) published a 
proposed rule to require Federal credit union (FCU) boards of directors 
to establish processes for succession planning for key positions. Based 
on the public comments received in response to the proposal, and upon 
further consideration of the issues involved, the Board is publishing 
this second proposed rule addressing succession planning. The new 
proposal is based on the earlier proposed rule but includes several 
changes that the Board believes will further strengthen succession 
planning efforts for both consumer FCUs and consumer federally insured, 
State-chartered credit unions (FISCUs).

DATES: Comments must be received on or before September 23, 2024.

ADDRESSES: You may submit written comments, identified by RIN 3133-
AF42, by any of the following methods (Please send comments by one 
method only):
     Federal eRulemaking Portal: https://www.regulations.gov. 
The docket number for this proposed rule is NCUA-2024-0037. Follow the 
instructions for submitting comments. A plain language summary of the 
proposed rule is also available on the docket website.
     Mail: Address to Melane Conyers-Ausbrooks, Secretary of 
the Board, National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.
     Hand Delivery/Courier: Same as mailing address.
     Public inspection: You may view all public comments on the 
Federal eRulemaking Portal at https://www.regulations.gov, as 
submitted, except for those we cannot post for technical reasons. The 
NCUA will not edit or remove any identifying or contact information 
from the public comments submitted. If you are unable to access public 
comments on the internet, you may contact the NCUA for alternative 
access by calling (703) 518-6540 or emailing [email protected].

FOR FURTHER INFORMATION CONTACT: Office of Examination and Insurance: 
John Berry, Policy Officer, at (703) 664-3909 or at 1775 Duke Street, 
Alexandria, VA 22314. Office of General Counsel: Ariel Pereira, Senior 
Attorney, Office of General Counsel, at (703) 548-2778 or at the above 
address.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Succession Planning
    B. Increased Relevance of Succession Planning
    C. NCUA Efforts To Strengthen FICU Succession Planning Efforts
II. The Board's February 3, 2022, Proposed Rule
III. Legal Authority
IV. This Proposed Rule
    A. Applicability of Proposed Rule
    B. Succession Plan Requirements
    C. Available Resources
    D. Small FICU Considerations
V. Regulatory Procedures
    A. Providing Accountability Through Transparency Act of 2023
    B. Regulatory Flexibility Act
    C. Paperwork Reduction Act
    D. Executive Order 13132 on Federalism
    E. Assessment of Federal Regulations and Policies on Families

I. Background

A. Succession Planning

    Board members play a key role in a federally insured credit union's 
(FICU) success.\1\ The Federal Credit Union Act (FCU Act) vests the 
general direction and control of an FCU in its board.\2\ The managerial 
structure for FISCUs is governed by State law; however, in general, the 
operational oversight of FISCUs is under a board of directors or 
comparable body.\3\ FICU boards are faced with a multitude of 
complicated challenges, such as meeting evolving member needs, 
fostering employee loyalty and trust, retaining, and developing 
necessary skills, and keeping pace with technological and industry 
changes. Among this list of issues, succession planning is one of the 
most critical.
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    \1\ The term FICU encompasses both FCUs and FISCUs.
    \2\ 12 U.S.C. 1761, 1761b; 12 CFR701.4, and Article VI, section 
6 of the FCU Bylaws codified in appendix A of 12 CFR part 701.
    \3\ The FCU Act, at 12 U.S.C. 1790a reflects the general 
proposition that a board of directors governs a FICU (providing that 
an ``insured credit union shall notify the Board of the proposed 
addition of any individual to the board of directors'' and that an 
``insured credit union may not add any individual to the board of 
directors'' under certain conditions.) This is also reflected in the 
NCUA regulations. For example, see 12 CFR 701.14(a), which provides 
that 12 U.S.C. 1790a ``sets forth conditions under which a credit 
union must notify NCUA in writing of any proposed changes in its 
board of directors.'' See also, 12 CFR 741.3(a)(2) (providing that a 
FISCU ``board of directors may authorize'' the designation of 
certain dividends on nonconforming investments as undivided 
earnings) and 12 CFR 747.2001(b) (referring to the service of credit 
union notices, directives, and decisions on appeal to ``a dismissed 
director or officer thereof'' of a FISCU).
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    Succession planning is the process through which an organization 
helps identify, develop, and retain key personnel to ensure its 
viability and continued effective performance. It also allows an 
organization to prepare for the unexpected, including the sudden 
departure of key staff. Succession planning is recognized as vital to 
the success of any institution, including FICUs. One of the variables 
over which a FICU board has control is the hiring of the organization's 
senior management.
    Succession planning is a critical component of a FICU's overall 
strategic plan. It helps ensure that the appropriate personnel are 
available to execute the FICU's strategic plan and mission. There are 
two elements to a FICU board's succession planning strategy. First, the 
FICU's board should develop a pool of talented candidates to 
potentially stand for election to the board, to fill temporary board 
and committee vacancies by appointment, and to fill appointed 
positions, such as to the FICU's supervisory committee (or equivalent 
body under State law). The NCUA Board recognizes the importance of the 
election process in FICU governance and emphasizes that the proposed 
rule is meant to complement and not supplant the vital role member-
owners play in FICU governance. Second, in furtherance of the board's 
responsibility to oversee the operations of the FICU, it must consider 
how best

[[Page 60330]]

to fill vacancies in senior management positions held by employees, 
such as the chief executive officer and the chief financial officer.\4\ 
This includes establishing an order of succession among existing 
employees for temporarily filling senior management roles in the event 
of a vacancy, as well as the development of strategies to identify, 
develop, and retain employees capable of filling these senior 
positions.
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    \4\ The NCUA regulation at 12 CFR 701.14 defines the term 
``senior executive officer'' to include ``the chief executive 
officer (typically this individual holds the title of president or 
treasurer/manager), any assistant chief executive officer (e.g., any 
assistant president, any vice president or any assistant treasurer/
manager) and the chief financial officer (controller).''
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    A board's failure to plan for vacancies in elected and appointed 
positions, as well as the transition of its management, could come with 
high costs. The FICU runs the risk of creating a leadership vacuum, 
disrupting operations and potentially jeopardizing the FICU's ability 
to adequately manage liquidity risk, address cybersecurity threats, or 
ensure continued compliance with consumer protection, bank secrecy, and 
other critical responsibilities. The FICU may also incur higher costs 
or be unable to recruit and retain new leadership and top talent than 
would be the case if it had an established succession plan. Failure to 
plan for succession can also negatively impact the FICU's ability to 
maintain relationships with members and suppliers and to secure future 
business opportunities. Accordingly, the failure to adequately plan for 
changes in leadership can jeopardize the continued viability of a FICU, 
potentially resulting in the unplanned merger of the FICU or other 
disruptions to safe and sound operations upon the departure of key 
personnel.
    For the above reasons, the Board finds that a compelling safety and 
soundness case exists for rulemaking in this area. The failure of FICUs 
to adequately plan for succession poses a risk not only to individual 
FICUs and their member-owners, but to the credit union system as a 
whole and to the National Credit Share Insurance Fund (NCUSIF). The 
proposed regulatory changes are designed to mitigate this risk and are 
consistent with the Board's statutory duty to ensure a safe and sound 
system of cooperative credit for its member-owners. Board action is 
also consistent with the guidance issued by the other banking agencies 
to address succession planning.\5\
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    \5\ See e.g., Federal Reserve Board, Supervisory Guidance on 
Board of Directors' Effectiveness (Feb. 26, 2021); also, the 
guidelines of the Office of the Comptroller of the Currency (OCC) at 
12 CFR part 30, appendix D, captioned ``OCC Guidelines Establishing 
Heightened Standards for Certain Large Insured National Banks, 
Insured Federal Savings Associations, and Insured Federal 
Branches.''
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B. Increased Relevance of Succession Planning

    Several factors have contributed to the increased relevance of 
succession planning for FICU boards. In 2000, the credit union system 
had 10,316 FICUs.\6\ The total number of FICUs declined to 4,645 by the 
third quarter of 2023.\7\ This decline is largely attributable to the 
long-running trend of consolidation across all depository 
institutions.\8\ This trend has remained relatively constant across all 
economic cycles for more than three decades. In 1999, the NCUA approved 
431 FICU consolidations.\9\ The number of annual consolidations has 
decreased since that time but remains steady. For example, in 2022, the 
Board approved 181 FICU consolidations.\10\ In 2023, the number of 
approved consolidations was only slightly lower at 145.\11\
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    \6\ NCUA, Historical Timeline, https://ncua.gov/about/
historical-timeline#:~:text=2000,more%20than%2077%20million%20members
.
    \7\ NCUA, Quarterly Credit Union Data Summary 2023 Q3, https://ncua.gov/files/publications/analysis/quarterly-data-summary-2023-Q3.pdf.
    \8\ Id.
    \9\ NCUA, NCUA 2000 Annual Report, https://ncua.gov/files/annual-reports/2000AR.pdf.
    \10\ NCUA, Merger and Insurance Reports, https://ncua.gov/analysis/chartering-mergers/merger-activity-insurance-report.
    \11\ Id.
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    Data suggests that smaller FICUs may be more likely to merge. The 
decline in the total number of FICUs has been particularly steep among 
the smallest FICUs with less than $10 million in assets. At the close 
of 2015, there were 1,816 FICUs with less than $10 million in 
assets.\12\ By the third quarter of 2023, the number of these smallest 
FICUs was 938.\13\ This figure represents a decrease from 975 FICUs the 
previous year.\14\ By comparison, during the same period, the number of 
FICUs with assets of at least $1 billion increased to 424 from 414.\15\
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    \12\ NCUA, Quarterly Credit Union Data Summary 2015 Q4, https://ncua.gov/files/publications/analysis/PACA-Facts-2015-12.pdf.
    \13\ Supra, note 7.
    \14\ Id.
    \15\ Id.
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    The available data does not differentiate between those smaller 
FICUs that consolidated or were liquidated, versus those that expanded 
into a larger asset category. However, the sharper decline of FICUs in 
the smaller asset categories, combined with the ongoing industry trend 
of consolidation, suggests that mergers may be more prevalent among 
smaller FICUs.
    Voluntary mergers can be used to create economies of scale to offer 
more or better products and services to FICU members. However, the 
Board is also aware of numerous instances in recent years where FICUs 
merged because of a lack of succession planning. An NCUA analysis found 
that poor succession planning was either a primary or secondary reason 
for almost a third (32 percent) of FICU consolidations.\16\ This data 
has been corroborated by industry participants.\17\ The Board is 
interested in helping FICUs reduce the number of mergers resulting from 
the lack of succession planning.
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    \16\ NCUA, Truth in Mergers: A Guide for Merging Credit Unions, 
page 9, https://www.ncua.gov/files/publications/Truth-In-Mergers.pdf.
    \17\ See, for example, CUtoday.info, A Look at What Members, 
Mgmt. Get in Mergers (November 16, 2021) (``Credit unions merging 
out of existence, nearly all of them smaller, shared reasons for 
merging that included inability to invest in technology (even though 
some had very high capital levels), inability to find volunteers and 
staff and, a common theme, a lack of any succession planning and a 
retiring CEO''), available at: https://www.cutoday.info/THE-feature/A-Look-at-What-Members-Mgmt.-Get-in-Mergers.
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    The Board finds that this goal is consistent with the FCU Act, 
which contains provisions that disfavor consolidation, implying a 
presumption that the public is better served with a greater number of 
credit unions. For example, the statute imposes added limitations on 
the addition of larger groups to multiple common-bond credit unions, 
prompting the Board to consider the feasibility of formation of a 
separate credit union.\18\ Further, the FCU Act provides that the Board 
shall ``encourage the formation of separately chartered credit unions 
instead of approving an application to include an additional group 
within the field of membership of an existing credit union whenever 
practicable and consistent with reasonable standards for the safe and 
sound operation of the credit union.'' \19\
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    \18\ 12 U.S.C. 1759(d)(1).
    \19\ 12 U.S.C. 1759(f).
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    Another reason for a heightened focus on succession planning is the 
ongoing retirements of the ``Baby Boomer'' generation (individuals born 
between 1946 and 1964). According to the U.S. Census Bureau, there are 
approximately 73 million Baby Boomers, the second-largest age group 
after ``Millennials'' (those born between 1982 and 2000).\20\ By 2030, 
all Baby Boomers will have reached age 65 and be eligible for 
retirement.\21\ The COVID-19 pandemic

[[Page 60331]]

accelerated the pace of retirements among this generational cohort.\22\ 
These retirements include credit union board members and executives. 
According to some sources, approximately 10 percent of credit union 
chief executive officers were expected to retire between 2019 and 
2021.\23\ Succession planning is critical to the continued operation of 
those credit unions with board members and executives that are part of 
this retirement wave.
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    \20\ U.S. Census Bureau, By 2030, All Baby Boomers Will Be Age 
65 or Older, (December 10, 2019), https://www.census.gov/library/stories/2019/12/by-2030-all-baby-boomers-will-be-age-65-or-older.html.
    \21\ Id.
    \22\ Kevin McCarthy, ``Just Tired:'' Why So Many Bank, Credit 
Union CEOs Are Calling it Quits, American Banker (December 7, 2021), 
https://www.americanbanker.com/creditunions/news/just-tired-why-so-many-bank-credit-union-ceos-are-calling-it-quits; and Richard Fry, 
The Pace of Boomer Retirements Has Accelerated in the Past Year, Pew 
Research Center (November 9, 2020), https://www.pewresearch.org/fact-tank/2020/11/09/the-pace-of-boomer-retirements-has-accelerated-in-the-past-year/.
    \23\ CUtoday.info, CUNA ACUC Coverage: What's Happening in 
Executive Compensation (June 19, 2019), https://www.cutoday.info/Fresh-Today/CUNA-ACUC-Coverage-What-s-Happening-in-Executive-Compensation.
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C. NCUA Efforts To Strengthen FICU Succession Planning Efforts

    Given the increased importance of the topic, the NCUA has taken 
several steps to strengthen current succession planning efforts being 
taken by FICUs, and to encourage others that have not yet done so to 
commence their succession planning process.
    In March 2022, the NCUA issued Letter to Credit Unions 22-CU-05, 
CAMELS Rating System, which provides that ``succession planning for key 
management positions'' is a key factor considered when assessing the 
management of a credit union.\24\ The Letter to Credit Unions 23-CU-01 
included succession planning as one of the NCUA's supervisory 
priorities for 2023.\25\
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    \24\ NCUA, Letter to Credit Unions 22-CU-05, CAMELS Rating 
System (March 2022), https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/camels-rating-system. CAMELS is 
the acronym for the rating system used by the NCUA to assess a 
FICU's performance and risk profile derived from the six critical 
elements of a FICU's operations: Capital adequacy, Asset quality, 
Management, Earnings, Liquidity and Sensitivity to Market Risk.
    \25\ NCUA, Letter to Credit Unions 23-CU-01, NCUA's 2023 
Supervisory Priorities (January 2023), https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/ncuas-2023-supervisory-priorities.
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    Several factors have highlighted the need for rulemaking in this 
area. While the NCUA does assess succession planning as part of the 
CAMELS Management component, there is no NCUA regulation requiring 
FICUs to implement a formal, written succession plan. As a result, the 
NCUA lacks a full complement of regulatory tools to help address 
deficiencies in a FICU's succession planning process. For example, 
Letter to Credit Unions 23-CU-01 makes clear that NCUA examiners are 
precluded from evaluating ``any formal or informal succession plans 
developed by credit unions beyond what would normally be considered in 
assigning the Management component of the CAMELS rating.'' \26\ 
Moreover, examiners may ``not issue an Examiner's Finding or Document 
of Resolution if the credit union has not conducted succession 
planning, or the planning is not adequate, unless the credit union is 
in violation of its own policy for conducting succession planning or 
administering any such plan(s).'' \27\ The absence of specific 
regulations on this topic also means there are no requirements as to 
what constitutes an acceptable succession plan. A regulation would 
therefore establish a needed, clearly articulated, and consistently 
enforceable set of succession planning standards.
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    \26\ Id.
    \27\ Id.
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II. The Board's February 3, 2022, Proposed Rule

    At its January 27, 2022, meeting, the Board approved a proposed 
rule to establish succession planning requirements for FCUs. The 
proposed rule was published in the Federal Register on February 3, 
2022.\28\ The proposed rule would have required FCU boards of directors 
to establish succession plans for key positions, such as officers of 
the board, management officials, executive committee members, 
supervisory committee members, and (where provided for in the FCU's 
bylaws) the members of the credit committee. Directors would have been 
required to have a working familiarity with the succession plan. The 
board of directors would also have been required to review the 
succession plan in accordance with a schedule established by the board, 
but no less than annually. While the proposed rule would have applied 
only to consumer FCUs (excluding corporate FCUs), the preamble noted 
that the Board's purpose was to encourage and strengthen succession 
planning for all FICUs. The preamble of the February 3, 2022, proposed 
rule provides additional details regarding the proposed regulatory 
amendments.
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    \28\ 87 FR 6078 (Feb. 3, 2022).
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    The preamble to the proposed rule presented nine questions on which 
the Board specifically sought public input. The proposed rule provided 
for a 60-day comment period, which closed on April 4, 2022. The Board 
received 26 public comments on the proposal.\29\ Comments were received 
from individual credit unions, individuals, a law firm, and from 
national, State, and regional organizations representing credit unions. 
All of the public comments received by the Board are available for 
public review on the Regulations.gov web portal, at: https://www.regulations.gov/document/NCUA-2022-0016-0002/comment.
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    \29\ Pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501-3520), the Board also published a separate notice soliciting 
comments for a period of 60 days on the information collection 
requirements contained in the 2022 proposed rule. (87 FR 7502, Feb. 
9, 2022.) The Board did not receive comments specifically in 
response to the February 9, 2022, notice.
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    Most commenters opted to provide general comments rather than 
address the specific questions posed in the preamble. Most commenters 
acknowledged the importance of succession planning but questioned the 
need for succession planning regulations and raised concerns about the 
specifics of the proposed regulatory amendments.
    Based on the comments received in response to the 2022 proposed 
rule, and upon further consideration of the issues involved, the Board 
is publishing this second proposed rule addressing succession planning. 
The new proposal is based on the earlier proposed rule but includes 
several changes that the Board believes will further strengthen 
succession planning efforts for all FICUs. This proposed rule would 
require that consumer FICUs have succession plans to proactively 
address key positions, such as officers of the board and management 
officials. The succession plans will also aid FICU efforts to foster a 
culture of growth and development.

III. Legal Authority

    The Board is issuing this proposed rule pursuant to its authority 
under the FCU Act. The proposed rule would establish succession 
planning requirements for an FCU. Section 113 of the FCU Act provides 
that an FCU's board of directors shall have the general direction and 
control of the affairs of the FCU.\30\ The board of directors must 
oversee the credit union's operations to ensure the credit union 
operates in a safe and sound manner. For example, the board must be 
kept informed about the credit union's operating environment, hire and 
retain competent management, and ensure that the credit union has a 
risk management structure

[[Page 60332]]

and process suitable for the credit union's size and activities.
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    \30\ 12 U.S.C. 1716b.
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    Further, under the FCU Act, the NCUA is the chartering and 
supervisory authority for FCUs and the Federal supervisory authority 
for FICUs.\31\ The FCU Act grants the NCUA a broad mandate to issue 
regulations governing both FCUs and all FICUs. Section 120 of the FCU 
Act is a general grant of regulatory authority and authorizes the Board 
to prescribe rules and regulations for the administration of the FCU 
Act.\32\ Section 207 of the FCU Act is a specific grant of authority 
over share insurance coverage, conservatorships, and liquidations.\33\ 
Section 209 of the FCU Act is a plenary grant of regulatory authority 
to the Board to issue rules and regulations necessary or appropriate to 
carry out its role as share insurer for all FICUs.\34\ Accordingly, the 
FCU Act grants the Board broad rulemaking authority to ensure that the 
credit union industry and the NCUSIF remain safe and sound.
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    \31\ 12 U.S.C. 1752-1775.
    \32\ 12 U.S.C. 1766(a).
    \33\ 12 U.S.C. 1787(b)(1).
    \34\ 12 U.S.C. 1789(a)(11).
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IV. This Proposed Rule

    While the data discussed previously, on their own, support the need 
for this rulemaking, the Board finds the need for succession planning 
as a sound governance practice equally compelling. As noted, succession 
planning is a vital element of a FICU's long-term strategic plan. This 
rulemaking will further strengthen FICU succession planning efforts. 
The following presents an overview of the proposed regulatory changes.

A. Applicability of Proposed Rule

    These proposed regulatory amendments would apply to all consumer 
FICUs. The Board recognizes the importance of State law in FISCUs' 
internal governance and that some FISCUs may already be subject to 
State-specific succession planning requirements.\35\ However, as 
discussed, the Board finds the proposed rule is appropriate to protect 
the NCUSIF from undue risk associated with mergers that may cause a 
loss to the NCUSIF or negatively affect the credit union industry's 
overall health. The Board also recognizes that under its statutory 
authorities relating to unsafe or unsound practices, the NCUA may act 
to address such practices in all FICUs.\36\ However, to the extent that 
a FISCU is subject to a State statutory or regulatory requirement that 
conflicts with the proposed rule, the NCUA will defer to the State 
requirement.
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    \35\ The Board recognizes that State law also plays a role in 
FCUs' governance, as the model FCU bylaws reflect in several 
instances; however, the Board performs a significant role in this 
process in preparing the form of the bylaws under 12 U.S.C. 1758.
    \36\ See 12 U.S.C. 1786(e), (k).
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    The Board specifically invites public comment on the inclusion of 
FISCUs within the scope of the regulatory amendments.
    Consistent with the prior proposal, this proposed rule would not 
amend the regulations in 12 CFR part 704, which establish requirements 
applicable to federally insured corporate credit unions. These 
regulations contain provisions that address succession planning. For 
example, Sec.  704.13(c)(1) requires that the corporate's board of 
directors must ensure that ``[s]enior managers . . . are capable of 
identifying, hiring, and retaining qualified staff.'' Further, 
paragraph (c)(2) of the section requires that the corporate's board of 
directors ensure that ``[q]ualified personnel are employed or under 
contract for all line support and audit areas, and designated back-up 
personnel or resources with adequate cross-training are in place.'' 
While the scope of the proposed rule does not include corporate credit 
unions, the Board welcomes public comment on whether changes to the 
wording of Sec.  704.13 are necessary to effectuate the purposes of the 
proposed regulatory amendments.
    Additionally, while the proposed rule does not add any specific 
requirements for Minority Depository Institutions (MDI), the Board 
encourages MDIs to consider how their succession plans will affect 
their MDI designation status. Recently the Board voted to update its 
policy to preserve MDI institutions. To that end, we encourage 
federally insured credit unions to the greatest extent possible, to 
develop a succession plan that maintains the board and senior 
leadership composition to maintain MDI eligibility. The Board also 
invites public comment on how the NCUA can support this effort and any 
unique barriers MDIs may face when developing succession plans.

B. Succession Plan Requirements

    The Board proposes to establish the new succession planning 
requirements by amending part 701 of its regulations, which govern the 
organization and operation of FCUs. Specifically, the proposed rule 
would add a new paragraph (e) to Sec.  701.4, which sets forth the 
general duties and responsibilities of FCU directors. The proposed rule 
would make these amendments applicable to FISCUs through an amendment 
to 12 CFR part 741, subpart B, which sets forth regulations codified 
elsewhere in the NCUA's regulations as applying to FCUs that also apply 
to FISCUs. The Board proposes to add a new Sec.  741.228 that addresses 
succession planning.
    The proposal would require that a FICU board of directors establish 
a written succession plan that addresses specified positions and 
contains certain information. In addition, the board of directors would 
be required to review the succession plan in accordance with a schedule 
it establishes, but no less than annually. The Board recognizes that 
circumstances might necessitate deviations from the plan in filling 
specific vacancies. The proposed regulatory text accommodates such 
exigencies but, as with substantive deviations in budgets and strategic 
plans, it would be expected the board would be informed of changes and 
rationale and document them in its meeting minutes.
    The Board invites comments on the proposed board responsibilities 
in the development of succession plans. Would the succession planning 
process be better served by restricting or prohibiting deviations from 
the succession plan in between the mandated regular review period? 
Additionally, the Board invites comments on how the NCUA can provide 
better support to credit unions in developing succession plans, and 
attracting new talent to the credit union system? The Board is also 
interested in comments on the timetable for regular review of the plans 
and whether the final rule should provide for a different timeframe or 
grant boards additional flexibility in establishing the review period.
    In specifying the officials covered by the succession plan, the 
Board has relied on the language of the FCU Act, which provides that 
``[t]he management of a Federal credit union shall be by a board of 
directors, a supervisory committee, and where the bylaws so provide, a 
credit committee.'' \37\ The model FCU bylaws codified in appendix A of 
12 CFR part 701 expand the list of senior FCU officials to include 
management officials, assistant management officials, and loan 
officers. In addition, the NCUA regulation at 12 CFR 701.14 defines the 
term ``senior executive officer'' to include the FICU's chief executive 
officer (typically this individual holds the title of president or 
treasurer/manager), any assistant chief executive officer (for example, 
any assistant president, any vice president,

[[Page 60333]]

or any assistant treasurer/manager) and the chief financial officer 
(controller).\38\
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    \37\ 12 U.S.C. 1761.
    \38\ This provision applies to all FICUs. See also 12 CFR 
741.205 (Reporting requirements for credit unions that are newly 
chartered or in troubled condition). In the preamble to the 1990 
final rule establishing the definition of ``senior executive 
officer,'' the Board clarified the intended scope: ``By definition, 
a vice president or assistant manager holds a senior position, 
ranking immediately below the president or manager, serves as a 
deputy or assistant in carrying out management functions, and is 
empowered, among other things, to assume the duties of president or 
manager in that individual's absence'' 55 FR 43084, 43085 (Oct. 26, 
1990).
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    Accordingly, under the proposed rule, the written succession plan 
must, at a minimum, cover the following FICU positions, or their 
equivalent if the FICU has adopted different position titles:
     Members of the board of directors;
     Members of the supervisory committee;
     Members of the credit committee, where such a committee is 
provided for in the FICU's bylaws and is involved daily in the review 
of loans;
     Loan officers, where provided for in the FICU's bylaws in 
lieu of a credit committee and the loan officers are involved daily in 
the review of loans;
     Management officials and assistant management officials, 
as those terms are defined in the model FCU bylaws, if the FICU has 
provided for such positions in its bylaws; and
     The FICU's ``senior executive officers'' as defined in 12 
CFR 701.14 and any other FICU personnel the board of directors deems 
critical given the FICU's size, complexity, or risk of operations. This 
includes new positions that may be required due to planned changes in 
operations, supervisory landscape, or corporate structure.
    As noted, the succession plans would be required to address credit 
committee members and loan officers only if such personnel are involved 
on a daily basis in the review of loans. The succession plans are 
intended to cover senior leadership positions responsible for the 
oversight of the FICU or its day-to-day management. Accordingly, the 
NCUA believes credit committee members and loan officers may not merit 
inclusion if their duties are limited to the review of periodic, 
specific lending decisions or other ``as-needed'' basis. However, the 
Board invites public comments on the inclusion of credit committee 
members and loan officers.
    The proposed rule would also establish certain required contents 
for a written succession plan. First, the succession plan would be 
required to identify the title of the incumbent for each covered 
position, the expiration of the incumbent's term (if serving in a term-
limited capacity) or other anticipated vacancy date (such as the 
incumbent's retirement eligibility date or announced departure date). 
The succession plan must also describe the FICU's general plan or 
strategy for temporarily and permanently filling vacancies for each of 
the positions, including vacancies due to unexpected circumstances.
    For example, the plan could provide an order or succession among 
the FICU's senior executive officers for temporarily assuming the role 
of chief executive officer in the event of vacancy until such time as a 
permanent hiring decision is made. Similarly, the plan might establish 
an order of succession within individual components of the FICU for 
temporarily filling specific senior executive positions (for example, 
the deputy chief financial officer temporarily filling the role of 
chief financial officer). Likewise, to the extent provided in the 
bylaws, certain board members might be designated to assume specific 
duties until the selection of a permanent successor (for example, a 
specified board member temporarily assuming the duties of a vacated 
position on the investment committee). Also, a smaller credit union 
could establish a relationship with a larger credit union to help 
manage the credit union during the time it takes to recruit and fill a 
senior executive vacancy.
    There is no expectation the plan specify particular successors, 
only how the FICU will go about appointing interim replacements and 
recruiting for a permanent replacement. The FICU's bylaws may establish 
procedures for filling vacancies on the board of directors and certain 
other positions. The succession plan should be consistent with any such 
provisions of the bylaws. Further, FICUs must continue to comply with 
all applicable employment or personnel laws and other requirements in 
making hiring decisions.
    In addition, the succession plan would be required to address the 
FICU's strategy for recruiting candidates with the potential to assume 
each of the positions. This could include, for example, the 
availability of associate director positions on the FICU's board, 
mentorship programs, educational opportunities offered by the FICU, 
internships, staff development plans, and other similar efforts. The 
strategy must consider how the selection and diversity among the 
employees covered by the succession plan collectively and individually 
promotes the safe and sound operation of the FICU. The board of 
directors should also consider budgetary impacts in the development of 
its succession plans. For example, the plan should consider the 
compensation that will be required to attract talented candidates, 
given such factors as the necessary education and skills, or the market 
for comparable positions at other FICUs. The decision regarding the 
compensation for one position may impact the FICU's ability to budget 
for other staffing needs. Accordingly, FICUs should account for these 
future needs in financial planning to strengthen their ability to plan 
for future personnel needs.
    The Board emphasizes that succession plans should provide 
sufficient detail and use language that is reasonably understandable to 
the FICU's member owners in describing its strategies for filling 
vacancies and for recruiting, developing, and retaining employees. A 
FICU is owned by its members, who elect the board and to whom the 
directors are ultimately answerable. Accordingly, the Board believes it 
is vital that succession plans be clearly and concisely written, use 
everyday language to the extent possible, and avoid ambiguous phrasing 
open to differing interpretations.
    The Board welcomes comment on the list of covered positions and the 
other proposed contents of the succession plan, and whether the final 
rule should require FICUs to address additional or different 
information in the plans. Depending on the comments and its continued 
consideration of this issue, in finalizing the proposed rule, the Board 
may adopt minor changes or additions to these requirements to meet the 
proposal's goal of promoting thorough succession planning.
    The proposed rule would also amend Sec.  701.4(b)(3), which sets 
forth certain education requirements for FCU directors, to require that 
directors have a working familiarity with the FCU's succession plan no 
later than 6 months after appointment. In making this change, the Board 
also proposes to reorganize the current contents of paragraph (b)(3) 
for clarity and grammar. No additional substantive changes are proposed 
to the current requirements of Sec.  701.4(b)(3). These amendments 
would be made applicable to FISCUs through proposed new Sec.  741.228.
    The expectation is for a FICU to develop a succession plan that is 
consistent with its size and complexity. Therefore, smaller FICUs are 
more likely to have a simple succession plan that only addresses a few 
key leadership positions. Larger and more sophisticated FICUs are 
expected to have more detailed plans. For example, smaller FICUs may 
have fewer board members, or have fewer staff that would qualify

[[Page 60334]]

for the positions listed in the proposed rule for inclusion in the 
succession plan. Likewise, smaller FICUs are likely to have less 
expansive employee recruitment, development, and retention strategies. 
In evaluating whether a succession plan meets the requirements of the 
rule, the NCUA will consider the size of the FICU, as well as the 
complexity and risk of its operations.
    The Board emphasizes that succession plans should include an 
estimate of the budgetary impacts of executing the succession plan, 
including costs associated with new hires, such as the hiring of 
recruitment firms and increased compensation packages for new hires. It 
is not required for credit unions to have an exact figure but at a 
minimum consider an estimate to allow for better planning.

C. Available Resources

    The NCUA offers training and other resources to aid FICUs in 
developing their succession plans. For example, the NCUA has posted a 
video series on succession planning on the internet.\39\ In addition, 
the Board's 2019 final rule on FCU bylaws promoted succession planning 
efforts by providing guidance to FCUs on associate director 
positions.\40\ The final rule clarified, through staff commentary, that 
these positions may be thought of as apprenticeships in which the 
incumbent receives training and knowledge about the business of the 
board, with the expectation that the experience will prepare the 
individual to serve as a director if elected for such a position by the 
membership or appointed on an interim basis in an exigent 
circumstance.\41\ FISCUs may wish to provide for similar positions if 
consistent with applicable State law and regulation, and applicable 
credit union bylaws.
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    \39\ NCUA, Succession Planning (2021), https://ncua.csod.com/LMS/catalog/Welcome.aspx?tab_page_id=-67&tab_id=221000382.
    \40\ 84 FR 53278 (Oct. 4, 2019).
    \41\ Id. at 53301.
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    In addition, credit union trade associations may also provide 
training and have guidance available to assist credit unions in the 
development of their succession plan. FICUs with a low-income 
designation may be able to apply for technical assistance grants to 
support succession planning or offset training costs through the 
Community Development Revolving Loan Fund. FICUs are encouraged to make 
use of these and other available resources in complying with the 
proposed rule.
    FICUs are also encouraged to use already existing information in 
preparing their plans. For example, under the NCUA guidelines codified 
in 12 CFR part 749, appendix B, all FICUs are encouraged to develop a 
program to prepare for a catastrophic act. The codified guidelines 
suggest that the program address several elements that are also 
relevant to succession planning. These suggested elements include a 
``business impact analysis to evaluate potential threats,'' the 
determination of ``critical systems and necessary resources,'' and the 
identification of the ``[p]ersons with authority to enact the plan.''

D. Small FICU Considerations

    As discussed previously, smaller FICUs may be more likely to merge, 
and data indicates the lack of succession planning is a significant 
cause of mergers.\42\ Accordingly, smaller FICUs may be the most likely 
to benefit from the proposed rule. The Board recognizes, however, that 
these FICUs may lack the resources or expertise to develop succession 
plans. Accordingly, smaller FICUs may especially benefit from the 
existing resources identified above. The NCUA's Small Credit Union 
Support Program is another available resource through which FICUs with 
less than $100 million in total assets may seek assistance in a variety 
of areas, including succession planning. In addition, the Board has 
developed a sample template for a succession plan that may be 
appropriate for some smaller FICUs, though all FICUs may benefit from 
it. FISCUs electing to use the template should consult applicable State 
requirements to ensure their succession plans are consistent with any 
such requirements. The proposed template is available for review and 
comment within the Regulations.gov docket for this notice of proposed 
rulemaking.
---------------------------------------------------------------------------

    \42\ Supra, note 16.
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    Smaller FICUs may also benefit from seeking the assistance of 
larger and more sophisticated FICUs in developing and implementing 
their succession plans. For example, a larger FICU may provide 
technical expertise in the drafting of the plan or may detail personnel 
to temporarily fill a critical vacancy in a smaller credit union until 
such time as it is permanently filled. In general, a FICU may engage 
outside parties to assist in compliance, so long as the FICU's board 
retains authority and is cognizant that it is responsible for 
compliance.
    The Board specifically invites comment from smaller credit unions 
on the proposed template, as well as other suggestions, to improve 
succession planning and reduce any burden associated with the proposal.

V. Regulatory Procedures

A. Providing Accountability Through Transparency Act of 2023

    The Providing Accountability Through Transparency Act of 2023 (5 
U.S.C. 553(b)(4)) (Act) requires that a notice of proposed rulemaking 
include the internet address of a summary of not more than 100 words in 
length of a proposed rule, in plain language, that shall be posted on 
the internet website under section 206(d) of the E-Government Act of 
2002 (44 U.S.C. 3501 note) (commonly known as regulations.gov). The 
Act, under its terms, applies to notices of proposed rulemaking and 
does not expressly include other types of documents that the Board 
publishes voluntarily for public comment, such as notices and interim-
final rules that request comment despite invoking ``good cause'' to 
forgo such notice and public procedure. The Board, however, has elected 
to address the Act's requirement in these types of documents in the 
interests of administrative consistency and transparency.
    In summary, the proposed rule would require that FICU boards of 
directors establish succession plans to proactively address any 
vacancies that may occur for key positions. The proposal is based on a 
prior February 3, 2022, proposed rule but includes several changes that 
the Board believes will further strengthen FICU succession planning.
    The proposal and the required summary can be found at https://www.regulations.gov.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act \43\ generally requires an agency to 
conduct a regulatory flexibility analysis of any rule subject to notice 
and comment rulemaking requirements, unless the agency certifies that 
the rule will not have a significant economic impact on a substantial 
number of small entities. If the agency makes such a certification, it 
shall publish the certification at the time of publication of either 
the proposed rule or the final rule, along with a statement providing 
the factual basis for such certification.\44\ For purposes of this 
analysis, the NCUA considers small credit unions to be those having 
under $100 million in assets.\45\ The Board fully considered the 
potential economic impacts of the

[[Page 60335]]

regulatory amendments on small credit unions.
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    \43\ 5 U.S.C. 601 et seq.
    \44\ 5 U.S.C. 605(b).
    \45\ 80 FR 57512 (Sept. 24, 2015).
---------------------------------------------------------------------------

    The proposed rule would require that FICU board of directors 
establish, and comply with, a written succession plan that addresses 
certain specified positions and contains specified elements. In 
addition, the board of directors would be required to review the 
succession plan no less than annually. These requirements may impose 
some cost on FICUs. However, the NCUA believes several factors mitigate 
the potential costs, especially for small FICUs with assets of less 
than $100 million.
    First, the preamble makes clear that an FICU is expected to develop 
a succession plan that is consistent with its size and complexity. 
Therefore, small FICUs may have a simple succession plan that is less 
costly to prepare than would be the case for larger and more complex 
FICUs. Further, in recognition that smaller FICUs may lack the 
resources or expertise to develop succession plans, the Board is 
providing a sample template for a simple succession plan that may be 
appropriate for these FICUs.
    The Board is also aware that many FICUs, including small FICUs, 
have already adopted succession plans. Many of these existing plans 
should already address, either partially or in their entirety, the 
elements that would be required by the proposed rule. This could 
minimize the burden of complying with the new requirements. The NCUA 
also offers training and other resources to aid credit unions in 
developing their succession plans. For example, the NCUA has posted a 
video series on succession planning on the internet. Smaller FICUs are 
encouraged to seek assistance from larger or more sophisticated FICUs 
in the development of the required succession plans. FICUs are also 
encouraged to use already existing information in preparing their 
plans, such as the data used to develop the recommended program to 
prepare for a catastrophic act. These resources should further reduce 
the costs of preparing the succession plans.
    Accordingly, the NCUA certifies the proposed rule would not have a 
significant economic impact on a substantial number of small credit 
unions.

C. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemaking in 
which an agency creates a new or amends existing information collection 
requirements.\46\ For purposes of the PRA, an information collection 
requirement may take the form of a reporting, recordkeeping, or a 
third-party disclosure requirement. The NCUA may not conduct or 
sponsor, and the respondent is not required to respond to, an 
information collection unless it displays a valid Office of Management 
and Budget (OMB) control number. The proposed changes to part 701 would 
establish new information collections in the form of succession 
policies and plans. These revisions will be submitted for approval by 
the Office of Information and Regulatory Affairs at OMB. Persons 
interested in submitting comments with respect to the information 
collection aspects and the estimated burden of the proposed rule should 
submit them via email or to OMB as noted below.
---------------------------------------------------------------------------

    \46\ 44 U.S.C. 3501-3520; 5 CFR part 1320.
---------------------------------------------------------------------------

Estimated PRA Burden
    The NCUA estimates a total annual burden of 46,750 hours as 
follows:
     OMB Control Number: 3133-NEW.
     Title of Information Collection: Succession Planning.
     Estimated number of respondents: 4,675.
     Estimated number of responses per respondent: 1.
     Estimated total annual responses: 4,675.
     Estimated total annual burden hours per response: 10.
     Estimated total annual burden hours: 46,750.
    The NCUA invites comments on (a) Whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the agency, including whether the information will have practical 
utility; (b) the accuracy of the agency's estimate of the burden of the 
proposed collection of information, including the validity of the 
methodology and assumptions used; (c) ways to enhance the quality, 
utility, and clarity of the information to be collected; and (d) ways 
to minimize the burden of the collection of information on those who 
are to respond, including through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology; and (e) estimates of capital or 
start-up costs and cost of operation, maintenance, and purchase of 
services to provide information.
    All comments are a matter of public record. Interested persons are 
invited to submit written comments via email to (1) 
[email protected] or (2) visit www.reginfo.gov/public/do/PRAMain 
(find this particular information collection by selecting the tab 
titled ``Information Collection Review'' and click on to the section 
titled ``Currently under Review--Open for Public comment'').

D. Executive Order 13132 on Federalism

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on State and local interests. The 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the Executive order to adhere to fundamental 
federalism principles. This proposed rule applies to FCUs and, if 
adopted, will also apply to FISCUs. By law, FISCUs are already subject 
to numerous provisions of NCUA's rules, based on the agency's role as 
the insurer of member share accounts and the significant interest NCUA 
has in the safety and soundness of their operations. The rulemaking 
may, therefore, have an occasional direct effect on the States, the 
relationship between the national government and the States, or on the 
distribution of power and responsibilities among the various levels of 
government. The Board specifically requests comment on ways to 
eliminate, or at least minimize, potential conflicts in this area. 
Based on the comments received, the final rule may modify the 
application of the succession planning requirements to FISCUs as 
necessary to carry out the purposes of this rulemaking and the intent 
of the Executive order.

E. Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this proposed rule would not affect 
family well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999.\47\ The proposed 
regulatory requirements are exclusively concerned with succession 
planning policies of FICUs for replacing vacancies among board members 
and other key management officials. While the proposed rule is intended 
to maintain access to quality credit union services by reducing 
unplanned or forced consolidations, the potential positive effect on 
family well-being, including financial well-being is, at most, 
indirect.
---------------------------------------------------------------------------

    \47\ Public Law 105-277, 112 Stat. 2681 (1998).
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List of Subjects

12 CFR Part 701

    Credit, Credit unions, Reporting and recordkeeping requirements.

[[Page 60336]]

12 CFR Part 741

    Bank deposit insurance, Credit, Credit unions, Reporting and 
recordkeeping requirements.

    By the National Credit Union Administration Board, this 18th day 
of July 2024.
Melane Conyers-Ausbrooks,
Secretary of the Board.

    For the reasons stated in the preamble, the NCUA Board proposes to 
amend 12 CFR parts 701 and 741 as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNION

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

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759, 
1761a, 1761b, 1766, 1767, 1782, 1784, 1785, 1786, 1787, 1788, 1789. 
Section 701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 
is also authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 
3601-3610. Section 701.35 is also authorized by 42 U.S.C. 4311-4312.

0
2. Amend Sec.  701.4 by revising paragraph (b)(3) and adding paragraph 
(e) to read as follows:


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

* * * * *
    (b) * * *
    (3) At the time of election or appointment, or within a reasonable 
time thereafter, not to exceed six months, have at least a working 
familiarity with, and to ask, as appropriate, substantive questions of 
management and the internal and external auditors of:
    (i) Basic finance and accounting practices, including the ability 
to read and understand the Federal credit union's balance sheet and 
income statement; and
    (ii) The Federal credit union's succession plan established 
pursuant to paragraph (e) of this section.
* * * * *
    (e) Succession planning requirements--(1) General. A Federal credit 
union must establish a written succession plan as provided in this 
paragraph that is approved by the board of directors and consistent 
with the credit union's size and complexity. In evaluating whether a 
succession plan meets the requirements of this paragraph, the NCUA will 
consider the size of the Federal credit union, as well as the 
complexity and risk of its operations.
    (2) Covered positions. The succession plan shall, at a minimum, 
cover the following positions, or their equivalent if the Federal 
credit union has adopted different position titles:
    (i) Members of the board of directors;
    (ii) Members of the supervisory committee;
    (iii) Members of the credit committee, where such a committee is 
provided for in the Federal credit union's bylaws and is involved daily 
in the review of loans;
    (iv) Loan officers, where provided for in the Federal credit 
union's bylaws in lieu of a credit committee and the loan officers are 
involved daily in the review of loans;
    (v) Management officials and assistant management officials, as 
those terms are defined in appendix A, if provided for in the Federal 
credit union's bylaws; and
    (vi) The Federal credit union's chief executive officer (typically 
this individual holds the title of president or treasurer/manager), any 
assistant chief executive officer (for example, any assistant 
president, any vice president, or any assistant treasurer/manager), the 
chief financial officer (controller), and any other personnel the board 
of directors deems critical given the Federal credit union's size, 
complexity, or risk of operations. This includes new positions that may 
be required due to planned changes in operations, supervisory 
landscape, or corporate structure.
    (3) Contents of succession plan. The succession plan must, at 
minimum, contain the following information regarding each of the 
positions covered under paragraph (e)(2) of this section:
    (i) The title for each covered position and the expiration of the 
incumbent's term (if serving in a term-limited capacity) or other 
anticipated vacancy date (such as the incumbent's retirement 
eligibility date or announced departure date).
    (ii) The Federal credit union's plan for temporarily and 
permanently filling vacancies for each of the positions, including 
vacancies due to unexpected circumstances.
    (iii) The Federal credit union's strategy for recruiting candidates 
with the potential to assume each of the positions. The strategy must 
consider how the selection and diversity among the employees covered by 
the succession plan collectively and individually promotes the safe and 
sound operation of the Federal credit union.
    (4) Board responsibilities. The board of directors must:
    (i) Approve a written succession plan that meets the requirements 
of paragraphs (e)(2) and (3) of this section; and
    (ii) Review, and update as necessary, the succession plan in 
accordance with a schedule established by the board of directors but no 
less than annually.
    (5) Adherence to plan. The board of directors shall approve and 
document in its meeting minutes the rationale for substantive 
deviations from its approved succession plan.

PART 741--REQUIREMENTS FOR INSURANCE

0
3. The authority citation for part 741 continues to read as follows:

    Authority: 12 U.S.C. 1757, 1766(a), 1781-1790, and 1790d; 31 
U.S.C. 3717.

0
4. Add Sec.  741.228 to read as follows:


Sec.  741.228  Succession planning.

    Any credit union that is insured pursuant to title II of the Act 
must adhere to the requirements in Sec.  701.4(b)(3) and (e) of this 
chapter, to the extent these regulatory provisions do not conflict with 
an applicable State requirement.

[FR Doc. 2024-16227 Filed 7-24-24; 8:45 am]
BILLING CODE 7535-01-P