Informing Members: What NCUA Requires Be Disclosed During A Bid To Change Charters
Just how big of a road block are NCUA's regulations for credit unions seeking to convert to mutual bank charters?
U.S. Rep. Patrick McHenry, (R-NC) has suggested NCUA interference is what drove Dearborn, Mich.-based DFCU Financial to withdraw its conversion application, saying the agency's regulations requiring all communications with members be reviewed and approved by NCUA are onerous. Similarly, DFCU Financial has repeatedly stated it did not diclose more information about its conversion plans to members because NCUA rules prohibited it from doing so.
But the fact is no such requirement exists in the regulations, according to Frank Kressman, staff attorney at NCUA.
"In our regulations, technically speaking, a credit union does not have to send NCUA any documents for review until just before the 90-day period right before the membership vote," Kressman told The Credit Union Journal. "The only thing they are required to provide to us at the beginning is notice that they intent convert."
And that notice, Kressman said, is simply a notification-it does not require NCUA approval.
The only real requirement, beyond that notification, is that any written communication about the conversion addressed to the entire membership must include the so-called "box disclosures"-essentially a short bullet list of disclosures designed to ensure members are informed of the full ramifications of converting, such as the potential eventual loss of the one-member, one-vote status in favor of voting weighted by deposits.
NCUA's only other role in the conversion process is to ensure that the vote is conducted in a fair and legal manner, said Kressman.
So, if CUs are not required to send their communications to NCUA for review before sending them to members, why is it that all of them do?
"The voluntarily provide us with the documents that they intend to send to the members because they may want the comfort of knowing that NCUA has already seen these documents and doesn't have a problem with them," Kressman noted. "This is not a requirement, but they have that option, and they do it because they know NCUA does have a responsibility in this process. One thing NCUA must do is administer the vote to ensure it is done in a fair and legal manner and ensure that information is fair and accurate and not misleading."
However, Alan Theriault, whose Portland, Maine-based CU Financial Services has been involved in most CU charter conversions, said it goes well beyond simply "seeking comfort."
"NCUA has the right to invalidate the vote if they don't like the disclosures, and they tried to do just that over the way a piece of paper was folded," Theriault said, referring to NCUA's failed attempt to invalidate the vote at Community CU, now View Point Bank, in Plano, Texas. "There is nothing in the regulation that says this stuff has to be cleared by NCUA, but in reality, you put yourself at great risk if you do not get these things cleared by NCUA first."
Theriault pointed to the potential scenario of a credit union not submitting its disclosures to NCUA first, getting all the way through the process, winning the membership vote to convert, and then having NCUA invalidate the vote over the way something was worded.
"In the Community Credit Union case, the judge ruled NCUA was arbitrary and capricious," he related. "When you have that type of regulator, you want to cover all your bases, you don't want to leave this up to chance."
But does this preclude a CU board and management from communicating with members outside of the formal, 90-day balloting process?
NCUA says: "no." Kressman said there are a variety of ways a credit union could go about communicating with its membership about a conversion-not only without having to get NCUA's blessing first, but in some cases even without having to include the box disclosures.
"They can send out anything they want as long as they include the box disclosures," Kressman explained. "But those box disclosures only have to be included in 'written communication,' and there's a strict definition of what 'written communication' is. 'Written communication' is any communication in writing that is addressed to and sent to every single member. So, if a credit union wanted to issue a press release to the media, for example, they could do that and not include the box disclosures."
In a more liberal reading of the regulation, a credit union could even send written documents to groups of members or individuals and that would not be considered "written communication" because it wasn't addressed and sent to every single member.
"NCUA does not mandate a pre-review of communications with members, but written communications must include the box disclosures, and it must be accurate and cannot be misleading," Kressman related. "Communication is certainly an important part of the process. We all want credit union members, who, after all, are supposed to be in charge of these institutions in the first place, to be well-informed so they can make a well-informed choice."
The court ruling against NCUA in the Community CU raises the question about how strong NCUA's teeth really are in this matter.
"If NCUA ends up back in court, it probably isn't going to be pretty for NCUA," Theriault suggested. "But they still retain the right to invalidate a vote, which, at the very least, gives them a way to delay the process. Taking your regulator to court shouldn't become a routine part of the process. It would seem, however, that NCUA did not learn its lesson. Instead, it would seem they view what happened in Texas as an opportunity to gain experience, to learn how to do this better the next time, to trample on the members' right to say yes or no to a conversion."