Mergers of Federally-Insured Credit Unions: Voluntary Termination or Conversion of Insured Status

SUMMARY: The proposed rule would amend part 708 to clarify that the

rules and regulations on mergers, voluntary termination and insurance

conversion apply not only to federally-insured credit unions converting

to non federally-insured credit unions, but to federally-insured credit

unions converting to any institution that is not NCUSIF insured.

DATES: Comments must be postmarked or posted on the NCUA electronic

bulletin board by August 1, 1994.

ADDRESSES: Send comments to Becky Baker, Secretary to the Board,

National Credit Union Administration, 1775 Duke Street, Alexandria,

Virginia 22314-3428.

FOR FURTHER INFORMATION CONTACT:

Mary F. Rupp, Staff Attorney, Office of General Counsel, at the above

address or telephone: (703) 518-6553.

SUPPLEMENTARY INFORMATION:

A. Background

Section 205(b)(1) of the Federal Credit Union Act, 12 U.S.C.

1785(b)(1) provides that a federally-insured credit union seeking to

merge or consolidate with a ``noninsured credit union or institution''

must obtain the prior written consent of the NCUA Board. The term

``insured credit union'' means one that is insured by the NCUA Board

through the National Credit Union Share Insurance Fund (NCUSIF);

``noninsured credit union'' means one that is not so insured. (See

Section 101(7) of the Act (12 U.S.C. 1752(7)). The Board has determined

that the term ``institution'' as used in Section 205(b)(1)(A) of the

Act applies to any financial institution that is not insured through

the NCUSIF, such as banks and savings and loans as well as institutions

that carry no federal insurance. Section 205(c) of the Act sets forth

the six criteria the Board will consider in granting or withholding

approval under subsection (b).

In addition, part 708 of the NCUA Rules and Regulations sets forth

procedures and requirements of mergers and termination/conversion of

insurance. Part 708 addresses situations where an insured credit union

either voluntarily terminates federal insurance or merges with a credit

union that is not federally insured. It does not specifically address

the situation where an insured credit union merges with a non credit

union institution. The effect on credit union members--that is, the

loss of membership in a federally insured credit union--is the same no

matter what type of financial institution the credit union merges into.

This amendment clarifies part 708 to apply to all merger and

termination/conversion situations where the continuing institution is

not insured by NCUSIF.

The amendment is also needed to provide NCUA with clear authority

to prevent abuses in connection with conversions of insured status. In

a limited number of past cases, credit unions attempting to convert to

private insurance or FDIC insurance have argued that NCUA has no

jurisdiction over these actions. This has called into question NCUA's

authority to require membership votes, to monitor the fairness of those

votes, and to ensure the transaction is handled in the best interests

of the members and the NCUSIF.

In one case, a credit union incurred substantial legal and other

expenses attempting to convert to an FDIC insured bank. The credit

union was unsuccessful and was ultimately liquidated for insolvency due

in part to the expenses associated with the conversion efforts.

The Board is aware of a limited number of more recent instances

where federally insured credit unions have been solicited for

conversion to other institution charters by law firms and consultants.

The supposed benefits that have been cited in these solicitations have

had nothing to do with the good of the credit union membership, but

rather have been motivated by the significant fee income the outside

parties expect to generate and the prospect of financial gain to

management, through compensation of directors, increased management

salary potential, stock options and other means. The Board hereby

serves notice that these solicitations should stop, and that any

expense of credit union funds pursuing such a transaction that is

motivated by other than the members' interests will be addressed

through the use of all available administrative powers.

Further, while this regulatory action addresses mergers and

consolidations, the Board cautions anyone who would consider using, as

a substitute, a voluntary liquidation with the payout to members being

in the form of deposits and/or stock in another institution. Voluntary

liquidation requires a direct payout, to the members of all shares and

equity, and the NCUA Board, working with state regulators where

appropriate, will stop any liquidation transaction that does not

include direct payment as a clear element of the liquidation plan.

The Board has in the past worked with the state regulators when

approving mergers and consolidations of federally-insured state

chartered credit unions with other credit unions. It will do so as well

when reviewing mergers and consolidations of federally-insured state

chartered credit unions with other financial institutions. The Board

values its positive working relationship with state credit union

supervisors. This action is not intended to supplant that relationship,

but to ensure the means exist to prevent losses to the National Credit

Union Share Insurance Fund and protect the rights of members. The Board

will continue to cooperate with state regulators in cases involving

federally insured state chartered credit unions.

The current rule requires credit unions considering the merger/

conversion route to submit modifications or additions to the member

notices to the NCUA Regional Director and the appropriate state

authority for approval before the information is sent to the members.

12 CFR 708.303. The Board is proposing to modify the requirement for

Regional Director approval and require all credit unions to obtain

institution merger/conversion notice modification approvals from the

Board. As under the current rule, the Board will not approve proposed

notices that do not fully apprise members of the negative consequences

of the action as well as any windfall benefits to officials. The rule

states that approval of the modifications may be withheld if it ``is

determined that the credit union, by inclusion or omission of

information, would materially mislead or misinform its membership.''

The Board wants to be very clear that approval of a proposed notice to

members is not an approval of the proposed merger/conversion. Since

part 708 does not provide an approved notice to members for credit

union to institution merger/conversions, the Board expects all

federally insured credit unions proposing such a merger/conversion to

request its approval of proposed notices. The Board is requesting

comment on whether part 708 should include a uniform member notice for

institution merger/conversions.

B. Section by Section Analysis

Section 708.0(a)

This section is amended to clarify that ``institution'' is within

the scope of part 708.

Section 708.0(b)

This section is amended by substituting the term ``nonNCUSIF

insurance'' for ``nonfederal insurance'' to clarify that the

regulations apply to all financial institutions.

Section 708.0(e)

This section is amended by adding the modifier ``additional'' to

clarify that state procedures are not substitute for NCUA procedures.

Section 708.1(i)

This definition has been added to clarify that the term

``institution'' as used in Section 205(b)(1)(A) of the Act applies to

any financial institution that is either nonfederally-insured or

insured by an agency of the federal government other than NCUSIF and is

covered by part 708.

Section 708.1(j)

This definition has been added to clarify that although only the

term ``merger'' is used in part 708, Section 205(b)(1)(A) of the Act

applies to all forms of consolidations.

Section 708.101(a)

This section has been modified by substituting the term ``nonNCUSIF

insurance'' for ``nonfederal insurance'' to clarify that the merger

requirements apply to all financial institutions.

Section 708.101(b)

This section has been modified by adding the term ``institution''

to clarify that all financial institutions must seek approval from the

NCUA Board prior to merging with a federally insured credit union.

Section 708.102(c)

This section has been modified by adding the term ``institution''

to clarify that all nonNCUSIF-insured financial institutions would be

entitled to a refund of the merging credit union's NCUSIF deposit and

the unused portion of the merging credit union's NCUSIF share insurance

premium.

Section 708.102(d)

This section has been modified by adding the term ``institution''

to clarify that NCUSIF insurance terminates for all nonNCUSIF-insured

financial institutions member accounts as of the effective date of the

merger.

Section 708.108 (a) and (b)

These sections have been modified by adding the term

``institution'' and substituting ``affected supervisory authority'' for

``state supervisory authority'' to clarify that all financial

institutions must certify the completion of the merger to the Regional

Director.

Section 708.203 (a), (b), (c) and (d)

These sections have been modified by adding the term

``institution'' to clarify that this regulation applies to additional

methods whereby federally-insured state chartered credit unions and

federal credit unions might consider converting to nonNCUSIF insurance.

Section 708.204(a)

This section has been modified by substituting the term

``nonNCUSIF'' for ``nonfederal'' to clarify that the notice

requirements apply to conversions to all institutions.

Section 708.303

This section has been modified by deleting the reference to

subparagraph (a) and inserting as a new second sentence, ``Proposed

notices or ballots concerning mergers or conversions to institutions

will be made with the approval of the Board and, in the case of a state

credit union, the appropriate state authority.''

Regulatory Procedures

Regulatory Flexibility Act

The Regulatory Flexibility Act requires the NCUA to prepare an

analysis to describe any significant economic impact any regulation may

have on a potential number of small credit unions (primarily those

under $1 million in assets). Preliminary analysis concerning the effect

the proposed rule will have on small credit unions indicates that no

significant economic impact will result if the rule is promulgated by

the NCUA Board. The proposed rule merely clarifies statutory authority.

Therefore, the NCUA Board has determined and certifies under the

authority granted in 5 U.S.C. 605(b) that the proposed rule, if

adopted, will not have a significant economic impact on a substantial

number of small credit unions. Accordingly, the NCUA Board has

determined that a Regulatory Flexibility Analysis is not required.

Paperwork Reduction Act

These amendments do not change the paperwork requirements.

Executive Order 12612

Executive Order 12612 requires NCUA to consider the effect of its

actions on state interests. The proposed regulation applies to all

federally insured credit unions. However, it makes no substantive

changes but merely clarifies existing requirements. The Federal Credit

Union Act gave the NCUA the authority to approve all insured credit

union mergers or consolidations with ``institutions.'' 12 U.S.C.

1785(b)(1)(A). The NCUA Office of General Counsel has also issued

several public opinion letters consistent with these clarifications.

These letters are available on request to the NCUA Public and

Congressional Affairs Office. The NCUA Board has determined that this

amendment is not likely to have any direct effect on states, on the

relationship between the states, or on the distribution of power and

responsibilities among the various levels of government.

List of Subjects in 12 CFR Part 708

Back deposit insurance, Credit Unions and Reporting and record

keeping requirements.

By the National Credit Union Administration Board on June 23,

1994.

Becky Baker,

Secretary to the Board.

Accordingly, NCUA proposes to amend 12 CFR part 708 as follows:

PART 708--MERGERS OF FEDERALLY-INSURED CREDIT UNIONS: VOLUNTARY

TERMINATION OR CONVERSION OF INSURED STATUS

1. The authority citation of part 708 continues to read as follows:

Authority: 12 U.S.C. 1766, 12 U.S.C. 1785, 12 U.S.C. 1786, 12

U.S.C. 1789.

2. Section 708.0 is amended by revising paragraphs (a), (b) and (e)

to read as follows:

Sec. 708.0 Scope.

(a) Subpart A of this part prescribes the procedures for merging on

or more credit unions with a continuing credit union or institution

where at least one is federally-insured.

(b) Subpart B of this part prescribes the procedures and notice

requirements for termination of Federal insurance or conversion of

Federal insurance to nonNCUSIF insurance, including termination or

conversion resulting from a merger.

* * * * *

(e) This part does not address additional procedures or

requirements that may be applicable under state law for a state credit

union.

3. Section 708.1 is amended by adding paragraphs (i) and (j) to

read as follows:

Sec. 708.1 Definitions.

* * * * *

(i) Institution means any bank, savings, and loan, mutual savings

bank, or similar institution that is nonfederally-insured or insured by

an agency of the federal government other than NCUSIF.

(j) Merger includes any consolidation or its equivalent under

applicable laws, including a merger or consolidation of an existing

credit union with a newly chartered credit union or other institution.

4. Section 708.101 is amended by revising paragraphs (a) and (b) to

read as follows:

Sec. 708.101 Mergers generally.

(a) In any case where a merger will result in the termination of

Federal insurance or conversion to nonNCUSIF insurance, the merging

credit union must comply with the provisions of subpart B in addition

to this subpart A.

(b) No federally-insured credit union shall merge with any other

credit union or institution without the prior written approval of the

Board.

* * * * *

5. Section 708.102 is amended by revising paragraphs (c) and (d) to

read as follows:

Sec. 708.102 Special provisions for Federal insurance.

* * * * *

(c) Where the continuing entity is uninsured or a nonfederally-

insured credit union or an institution and does not make application

for insurance, but the merging credit union is federally-insured, the

continuing credit union or institution is entitled to a refund of the

merging credit union's NCUSIF deposit and to a refund of the unused

portion of the NCUSIF premium (if any). If the continuing credit union

or institution is uninsured, the refund will be made only after

expiration of the one-year period of continued insurance coverage noted

in paragraph (e) of this section.

(d) Where the continuing entity is a nonfederally-insured credit

union or an institution, NCUSIF insurance of the member accounts of a

merging federally-insured credit union ceases as of the effective date

of the merger. (Refer to subpart B, Secs. 708.203 and 708.204 and

subpart C, Sec. 708.302(b).

* * * * *

6. Section 708.108 is amended by revising paragraphs (a) and (b) to

read as follows:

Sec. 708.108 Completion of merger.

(a) Upon approval of the merger proposal by NCUA and by any other

affected supervisory authority (where a continuing or merging credit

union or institution is not a Federal credit union) and by the members

of each credit union where required, action may be taken to complete

the merger.

(b) Upon completion of the merger, the board of directors of the

continuing credit union or institution shall certify the completion of

the merger to the Regional Director within 30 days after the effective

date of the merger.

* * * * *

7. Section 708.203 is revised to read as follows:

Sec. 708.203 Conversion of insurance.

(a) A federally-insured state credit union may convert to nonNCUSIF

insurance, if permitted by state law, either on its own or by merging

into a nonfederally-insured credit union or an institution.

(b) A Federal credit union may convert to nonNCUSIF insurance only

by merging into, or converting its charter to, a nonfederally-insured

credit union or an institution.

(c) Conversion of Federal to nonNCUSIF insurance must be approved

by an affirmative vote of a majority of the credit union's members who

vote on the proposition, provided at least 20 percent of the total

membership participates in the voting. The credit union must notify the

Board, through the Regional Director, in writing at least 90 days prior

to conversion. Notice to the Board may be given when membership

approval is solicited or after membership approval is obtained.

(d) No federally-insured credit union shall convert to nonNCUSIF

insurance without the prior written approval of the Board. The Board

will approve or disapprove the conversion in writing within 90 days

after being notified by the credit union.

8. Section 708.204 is amended by revising paragraph (a) to read as

follows:

Sec. 708.204 Notice to members of conversion of insurance.

(a) When a federally-insured credit union proposes to convert to

nonNCUSIF insurance, including conversion due to a merger or conversion

of charter, it shall provide its members with written notice of the

proposal to convert and of the date set for the membership vote. Notice

of the proposal shall be as set forth in either Sec. 708.203 (a)(1) or

(b)(1), or as provided in Sec. 708.302(c), as the circumstances

warrant.

* * * * *

9. Section 708.303 is amended by revising paragraph (a) to read as

follows:

Sec. 708.303 Modifications to notice.

(a) Any modifications or additions to the notices or ballot

concerning insurance coverage, and any additional communications

concerning insurance coverage included with the notice or ballot, may

be made with the approval of the Regional Director and, in the case of

a state credit union, the appropriate state authority. Proposed notices

or ballots concerning mergers or conversions to institutions will be

made with the approval of the Board and, in the case of a state credit

union, the appropriate state authority. Approval of such modifications,

additions or additional communications will not be withheld unless it

is determined that the credit union, by inclusion or omission of

information, would materially mislead or misinform its membership.

* * * * *

[FR Doc. 94-15800 Filed 6-29-94; 8:45 am]

BILLING CODE 7535-01-M