NCUA Appealing To Conversion Advocates

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NCUA said last week it has called on a group lobbying Congress to ease the conversion of credit unions to banks to join the regulator in its efforts to protect credit union members throughout the controversial process.

In an unusual letter to Lee Bettis, head of the Coalition for CU Charter Options, posted on NCUA's web site, NCUA General Counsel Robert Fenner called on the thrift representatives and others favoring the credit union-to-bank switches to back proposals barring insiders from profiting from the conversion.

"NCUA asks you to join the agency in seeking legislation that would ensure directors approve of conversion plans in the best interests of members and would enable members to make informed decisions about charter options promoted by unbiased directors," Fenner wrote Bettis, in response to charges that NCUA is unfairly opposed to the charter conversions.

Bettis was president of AGE FCU and converted the Albany, Ga., credit union to a mutual savings bank, then a publicly owned bank now known as Heritage Bank of the South, and is working with the thrift trade groups to loosen NCUA's regulatory control over credit union conversions. The Coalition for CU Charter Options is a rump group supported by the thrift lobby that has been opposing NCUA's efforts in the Community CU and OmniAmerican CU conversions.

In his letter to Fenner, Bettis claims that comments by the NCUA General Counsel and other officials with the credit union regulator asserting that credit union conversions may be motivated by management's desire for personal financial gain are inappropriate for a regulator.

Bettis claims that a regulator should stay out of issues of corporate governance and business decisions regarding conversions and leave that to the institution's management and board.

But Fenner said last week he remains convinced the conversions, first to mutual form, then to publicly held stock form, are motivated by the potential for insider enrichment.

In his letter to Bettis, Fenner urged the former credit union executive to support NCUA's proposal for a five-year ban on insider enrichment, such as through stock purchases, options or grants, as a result of the conversion.

Such a ban, asserted Fenner, would ensure that only "unbiased officials" would evaluate whether a conversion is best for a credit union's members and take the insider enrichment issue off the table.

NCUA, insisted Fenner, seeks that three standards be met in the conversion process to ensure that any vote be conducted with an informed membership.

The first is that credit union officials "faithfully fulfill their fiduciary duty to the credit union's members and closely examine whether a charter conversion is in the members' best interests."

The second is that officials give members full and fair disclosure regarding any conversion plan, including an objective analysis of the transaction, regulatory variations, the benefits to insiders and any changes to members' voting rights.

The third is that members have a way to communicate to directors and other members to share their views on the conversion, said Fenner.

Fenner told The Credit Union Journal he would like to see such a ban on insider enrichment in conversions enacted by Congress, similar to a proposal made by then-House Banking Committee Chairman Jim Leach, during the debate over HR 1151.

He believes that would deter future conversions, which he believes are motivated mainly be the potential for financial riches hat have been earned by directors and managers of converting credit unions over the past few years, as has been documented by The Credit Union Journal.

However, interest in the conversions issue has died down in Congress since the federal court in Texas forced NCUA to reverse its earlier ruling and approve the two Texas conversions in August.

The two cases were an embarrassment to NCUA and to Fenner, whose staff had argued that technical flaws in the voting of the two conversions invalidated the overwhelming member vote in favor of the charter switches.

There now appears to be little interest in Congress in tightening requirements for conversions, even though a provision of the CU Regulatory Improvements Act would do just that by requiring a vote of at least 20% of the membership on conversions.

But CURIA is not expected to be passed, at least in this Congress, and there has been little support for the provisions as part of an overall regulatory relief package.

And a bill proposed by Rep. Patrick Henry, the freshman Republican from North Carolina, which would ease NCUA's role in conversions, has lost steam after the Texas cases were settled.

Though McHenry indicated he would continue to raise the issue, House leaders have expressed little interest in holding a hearing on the bill.

Meantime, advocates of the charter switches of credit unions to banks are predicting that more conversions are in the works, some of big credit unions.

When that happens, we will see this debate heat up once again.

Stay tuned.

Ed Roberts can be reached at robertscuj

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