The comment clock is ticking on NCUA’s proposed rule that would make several changes to the way voluntary mergers are handled. The two changes that are causing the strongest early reactions are provisions governing member-to-member communications and the disclosure of financial arrangements made as part of a merger.
Every credit union industry insider interviewed for this series agreed transparency is good, but most had significant objections to how the regulator proposes to elicit said transparency. Here is a sampling of some of those comments:
Reputation at risk?
Susan Mitchell, CEO of Las Vegas-based consultancy Mitchell, Stankovic & Associates, expressed concern that the National Credit Union Administration's proposal related to disclosure of mergers involving compensation for certain board and executives implies "a level of dishonesty" in such cases.
“I do not agree with this assertion,” Mitchell said. “Certainly there are outliers. I have seen the worst of situations, and these are definitely outside ethical practices. However, lumping all into one solution is not good for the industry or consumers,” she said.
Moreover, the proposed rule could also mar the industry's white-hat reputation.
“There is reputational risk associated with broad solutions that affect the overall impression of consumers regarding cooperatives and credit unions, which is not good,” she asserted. That's why Mitchell said it would be better for credit union directors to lead this change, rather than the regulator.
Regardless of how it all shakes out, she said she doesn't believe this will slow down the pace of mergers. “It is very difficult to navigate the changing business environment – risk, fraud, hacking and more – without resources to allocate. Not to mention consumers’ demands of their financial institution regarding easy access, technology and instant response to loan decisions. If there is a strong FOM, then the credit union can and should survive on its own as a boutique provider. Otherwise, it is a tough business model in today’s world.”
Dennis Dollar, principal partner of Dollar Associates, and a former NCUA chairman, pointed out most of the credit unions that seek merger partners have been smaller in assets and, by the nature of size and scale, will in almost every case see their management and employees receive higher salaries and benefits when they become a part of a larger credit union.
“From an employee and member service perspective, that is a good thing – not bad,” Dollar said. “Anything that makes such a normal course of employee advancement through a merger appear to be some type of nefarious effort at self-enrichment is anti-marketplace and a potential regulatory over-reach, in my view.”
There is already a regulation requiring disclosure of any payments over a certain amount to senior executives, Dollar said, saying there is “nothing wrong” with disclosure of true golden parachutes. “The challenge is to find the balance of what is a substantive enough payment to warrant disclosure and what is reasonable from a market perspective. I normally get a little nervous when any federal agency declares itself the interpreter of what the market should or should not allow.”
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Swinging the pendulum
Vincent Hui specializes in strategic planning and leads the Merger & Acquisition and Risk Management practices for Cornerstone Advisors. He said when a business practice is taken out of context, the knee-jerk reaction to it often is wrong.
“The payments NCUA cited could be in the form of retention bonuses,” Hui said. “In some mergers there might be severance payments for layoffs – do you need two CFOs? Do you need two CIOs? For boards, who are volunteers, part of their ‘compensation’ might be NFL tickets and there might be a continuation of that. So probably 100% of mergers involve payments, but in context if a payment results in something benefitting the membership that is not bad. Of course there are payments that are a little more nefarious, but that is the exception to the rule. The vast majority of payments are appropriate and help grow the credit union and the value for the membership.”
According to Hui, not all payments made connected to a merger need to be disclosed. He said there is a “fine line” between disclosure and privacy. “Even at publicly traded companies not everything is disclosed. The CEO of Bank of America knows his salary is going to be disclosed every year, but CEOs of credit unions do not expect their salary to be disclosed because credit unions are not publicly traded.”
NCUA’s rules proposals “often times have some merit,” Hui assessed, “but this will have a lot of unintended consequences by swinging the pendulum too far the other way. I do not think it will slow mergers. If there are institutions out there whose mergers depend on ‘under the table payments,’ you would not want to merge with them anyway.”
State regulators should have a say
Lucy Ito, president and CEO of the National Association of State Credit Union Supervisors, said NASCUS is canvassing state regulators to see what their views are, if they have rules in place, or if they do not have codified rules what are the practices they follow.
“We will make those part of our overall comments to NCUA, but you cannot generalize and say payments are wrong, especially when commitments have been made to executives. I do think the question is what is ‘reasonable’ and ‘appropriate’ disclosure.”
Ito said NASCUS supports transparency and protection of members’ interests, but the trade group feels state credit union chartering agencies should be making decisions. “It is a business decision, not an insurance decision. States offer the overall system a way to test new rules. All respect to NCUA, they might not get it right when they finalize this rule. Giving states the space to test rules gives the system the chance to experiment with different approaches.”
Questioning the numbers
Carrie Hunt, EVP of government affairs and general counsel at the National Association of Federally-Insured Credit Unions, said the trade group is doing outreach to its members to get their feedback on all the proposed changes. “We have not heard about this aspect [merger-related compensation] from our members. The first time we heard about it was from NCUA. We have heard of lots of potential issues with mergers, and this was not one of them.”
Hunt said she does not think the desire of credit unions to merge will slow, but the mechanics of merger might be affected by the proposed rule, “So we are concerned about this.”
“The rules might delay mergers or cause problems. If there are requirements NCUA believes are absolutely necessary, that is one thing, but if it is something that has not been demonstrated to be a problem that is another. We do not support putting in a regulation simply out of an abundance of caution,” Hunt said.
Who says what's best for members?
Marvin Umholtz, president & CEO of Umholtz Strategic Planning & Consulting Services, Olympia, Wash., said, “I doubt these payments are really that exorbitant, and does NCUA or any federal government agency have the right to say if a payment is appropriate? What is in the members’ best interests after the merger? All members are different, so who is to say what is in the best interests of all members?”
Umholtz raised the issue of an executive order by the Trump administration mandating that regulatory agencies propose two rules to eliminate when they bring forth a new proposed rule.
“The Trump administration is serious, and will not take kindly to this proposed rule's timing,” Umholtz said. “NCUA is underestimating the cost of this new regulation exponentially, and I really do think the NCUA board is playing with fire by not getting rid of a couple of regulations at the same time.”
Codification, clarification of existing practice
Andy Price, senior director of advocacy and counsel at the Credit Union National Association, said much of what is in NCUA’s proposed rule happens in practice already.
“This is just a matter of practices being codified or clarified. We do not want to see the process become inefficient, although we do not think that is what is happening. Any material payment to board or management is already required to be disclosed per the existing rules. Specifically, an increase of 15 percent or $10,000 in compensation must be disclosed. Even that can be tricky to calculate in some instances.”
Pete Duffy, managing director with New York-based investment banking firm Sandler O’Neill, told CU Journal he is aware of credit union mergers as much as 15 years ago during which money was paid to senior staff, “So this is nothing new.”
According to Duffy, it is “very common” in corporate America for companies wishing to do an acquisition of another company to create an economic safe haven for some or even all of the employees of the target company.
“We live in a society that values freedom of choice. If someone at the target company does not want to work at the new parent company, they should not be bound to a new employer they did not choose,” Duffy said. “The bonus might be seen as a retention incentive or a severance package. Such payments are common and can be seen as humane. CEOs might, for some reason, not have a retirement plan. The questions are if the payment is reasonable and supportable, and if the membership of the credit union is told about it in clear terms, then you a transaction that has integrity. Some executive might have given years of service to the credit union that is being acquired. It comes back to reasonable and supportable, and disclosed to the membership.”
Duffy pointed out the pace of voluntary mergers by CUs has declined over the past five years, while the number of bank mergers is up in that same time period. “The new rules and their impact have to be seen in the context that mergers, inexplicably, are down in the last five years. We have to wonder if the ultimate in member care is being considered by boards, and if their members would be better suited if their credit union was part of a larger credit union? We think that is an extremely vital question that is not being asked.”
A very measured and very smart' proposal
John McKechnie, senior partner for Total Spectrum and a former lobbyist for CUNA and director of public and congressional affairs for NCUA, said, “The early reaction to the proposed rule has been uniformly positive, from what I am hearing. The NCUA board is getting high marks for recognizing the need to address the merger transparency issue in a way that, at first blush, seems very measured and very smart.”
'On the right track'
Eric Richard, a principal in the Washington, D.C.-based law firm CU Counsel, and former general counsel and executive vice president for CUNA, said, “The NCUA’s proposed rule is on the right track.”
“Clearly the starting point is anything that might affect a director’s decision should be disclosed," Richard said. “I start with the idea credit unions should be the leaders in corporate democracy, because we make a big deal out of it, but at this point publicly traded corporations are more transparent. There needs to be at least equivalency for credit unions. Corporations are expected to disclose all material facts that might affect shareholders’ decisions – so this goes beyond just compensation.”
With that said, Richard added he thinks there are still some “ambiguities” in the proposed rule. For example, he offered a theoretical executive of a smaller credit union who is offered the same salary going forward in a continuing arrangement. “Would that have to be disclosed since it is not an increase in salary? Also, suppose every board member of the acquired credit union is offered a coffee mug. Does that have to be disclosed? There is not a consistent use of a materiality standard. Obviously we want to focus on inducements that are significant, not trivial.”
View from a credit union
When asked if her credit union had made any cash payments or other inducements to the management and/or boards at CUs being merged out as part of its recent mergers, Michelle Thorne, president and CEO of $195 million American United Federal Credit Union, West Jordan, Utah, said emphatically, “Absolutely not.”
“Most of our merger partners are very small – less than $10 million in total assets – so maybe those are not the type of credit unions people would pay the big bucks for.”
Thorne said she does not completely disagree with the practice, “because there are instances where it would be proper to give compensation – as long as there is transparency on the member level. What we do not want to see is mergers going to the highest bidder. I look at credit unions as being altruistic than banks, so I do not believe that is what is happening. Certainly these new rules will give credit unions and boards pause when considering a merger. As long as there is a level playing field that is okay with me. There are some credit unions that cannot afford to make a big inducement for a merger.”
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