Merger proposal earns opposition for lack of deference to state law

Proposed changes to NCUA rules regarding voluntary mergers are opposed by NASCUS, primarily because of the proposal’s lack of deference to state law, the association for the state credit union system wrote in its official comment letter to the agency.

In addition, NASCUS pointed out several other problematic areas and asserted that the agency should have issued the proposal as an advance notice of proposed rulemaking (ANPR) rather than a proposed rule, given the uncertainty of the rule’s application to FISCUs.

The proposed rule, as presented by NCUA, would revise the procedures a federally insured credit union must follow to merge voluntarily with another credit union. At its meeting in May (when the proposal was issued), NCUA staff noted that the proposal addresses concerns of the agency that “merger packets” presented to members in advance of merger decisions are not “serving members’ needs.” The proposal is also aimed, staff said, at clarifying contents and format of the member notice of the merger “so that members of merging federal credit unions have better information about the merger transaction.” Further, the proposal would require merging FCUs to disclose all merger-related compensation for certain employees and officials of the merging FCU.

In its comment letter, NASCUS made clear that the proposal should not apply to FISCUs. “With respect to a FISCU, NCUA’s sole concern should be mitigating risk to the National Credit Union Share Insurance Fund (NCUSIF),” NASCUS Executive Vice President and General Counsel Brian Knight wrote. “In the absence of any clear and compelling nexus between the activity being regulated and risk to the NCUSIF, NCUA should defer to state law. Nowhere in the preamble to the proposed rule does NCUA articulate an NCUSIF risk that would compel extension of this proposal to FISCUs.”

NASCUS also pointed out that FISCUs are already subject to more extensive disclosure requirements than are FCUs. For example, the NASCUS letter noted, all FISCUs must complete annual Internal Revenue Service Form 990 filings, which require disclosure of any compensation paid to directors and officers, the compensation paid to “key employees” (employees earning more than $150,000.00 in reportable compensation, and “highly paid” employees (the top 5 employees earning more than $100,000.00 in reportable compensation)

In other areas, NASCUS asserted that the proposal – especially with respect to FISCUs – should have been issued as an ANPR. “On its face, the proposal as published is unclear as to what exactly NCUA proposes to apply to FISCUs,” NASCUS wrote. “This lack of clarity in the proposal puts the state system at a disadvantage evaluating the rule.”

Other problematic areas of the proposal, NASCUS wrote, include:

  • Definitions of “covered persons” and scope of compensation, which NASCUS described respectively as dubious (since there is no asset threshold set – which could result in modest-sized credit unions required to report all their employees) and “too broad.”
  • The requirement that 24 months of board minutes which reference a merger is “overly broad,” noting that federal and state supervisors already have unlimited access to a credit union’s board minutes, books and records.
  • “Member to member” communication requirements (in disseminating information about a proposed merger) raises concern about “practical operation” of the provision. “NCUA should more carefully consider whether the potential for acrimony among members is outweighed by the marginal benefit of compelling the credit union to send unsolicited member communications to other members,” NASCUS wrote. “Ultimately, it is the credit union’s reputation at risk in member-to-member communications. Disclaimers aside, members receiving an unwanted communication will lay blame on the credit union as the transmitter of the communique.”