On December 28, 2010, the Federal Register published new National Credit Union Administration (NCUA) final rules governing the mergers of federally insured credit unions, termination of federal insurance and the duties and responsibilities of federal credit union (FCU) directors. While the new final rule contains merger and insurance termination provisions applicable to all federally insured credit unions, the provisions related to board governance apply only to FCUs.
These new provisions establishing a fiduciary duty to the members of an FCU and requiring financial literacy for FCU directors have caused a great deal of discussion and debate within the credit union system.
NASCUS commends NCUA for limiting the application of the aforementioned governance provisions to federal credit unions. In 2008, in response to NCUA's Advanced Notice of Proposed Rulemaking on this matter, NASCUS wrote that neither the prevailing practices of other bank regulators, nor the precedent of case law, supported the creation of a federal fiduciary duty standard for state-chartered credit unions.
However, this does not mean NASCUS or state regulators disagree with NCUA on the importance of good governance. Indeed, state regulators place the highest priority on appropriate board governance in state-chartered credit unions. State regulators have long stressed the need for director education and sound board governance.
In the course of their oversight of state-chartered credit unions, state regulators routinely evaluate the credit union's board. In situations where the performance of the board demonstrably harms the safety of the credit union, state regulators can generally take actions including dismissal of the board. With respect to financial literacy and the board's ability to perform its duties, a number of states have continuing education requirements for directors.
Whether one views the duty to the members or to the institution, the underlying principle of responsibility and accountability of the board is the same. In short, regardless of how one defines the fiduciary duty of directors, or how one evaluates their competence, the underlying principles remain: directors owe a duty of care, must not engage in self dealing and have the responsibility to be meaningfully engaged in the governance of their credit union. Belief in these principles, coupled with regulatory concerns about the effectiveness of some boards led NASCUS to create its Directors College training series to provide ongoing education to credit union boards from the regulatory perspective.
Since 2008, in partnership with our state regulatory agencies, and often with state leagues, NASCUS has provided training opportunities to more than 600 state credit union directors. State regulators understand that competent leadership from a credit union board is essential to the health of the institution and that director training is critical.
NASCUS acknowledges the need to balance what is primarily a volunteer-led industry with the fact that these financial institutions are responsible for the safe stewardship of the members' funds. Throughout the years as NASCUS addressed the need for director training opportunities, we have remained cognizant that credit union directors are primarily volunteers. Some states allow state-chartered credit unions to compensate their directors, and as the responsibilities and liabilities continue to grow, perhaps more states will consider whether allowing compensation would enhance some credit unions' ability to retain engaged directors. However, the fact remains that most directors serve as volunteers, giving their time and expertise without compensation. Certainly, that is a factor that should be considered as the system evaluates its demands on, and expectations of, directors.
Volunteers Are Responsible
While we are sympathetic to the fact that most directors are volunteers, we must reject the notion that the volunteer nature of many credit union directors absolves them of being held to the highest standards. Whether compensated or not, each director voluntarily undertook the responsibilities of the position. The credit union members have entrusted those directors with the safe stewardship of the credit union. State regulators and NCUA must evaluate the governance of the credit unions they charter.
Finally, with respect to the confusion that accompanied NCUA's publication of the new rules, NASCUS suggests a modest proposal to help avert confusion in the future. We recommend that any NCUA rules that derive from the agency's insurance function should be contained in their entirety in Part 741 of NCUA's Rules and Regulations. In that way, credit unions could quickly determine whether a new rule applies or not, rather than trying to determine if a change to NCUA Part 701.33 is a federal credit union rule or a federally-insured credit union rule.
Ultimately, NASCUS and NCUA share similar concerns and similar goals regarding ensuring the effectiveness of credit union governance. NASCUS will continue to emphasize the importance of good governance and the appropriateness of the heightened attention to the manner in which credit union boards perform their duties. We look forward to the partnership opportunities to provide directors with the tools they need to fulfill their responsibilities.
Mary Martha Fortney is president of NASCUS and can be reached at firstname.lastname@example.org or by phone at (703) 528-8351.