Final Rule on Mergers and Changes of Insured Status

CUNA
February 1, 2005

The National Credit Union Administration (NCUA) Board has issued a final rule on credit union mergers, federal share insurance terminations, and conversions from federal share insurance to nonfederal insurance.

The final rule will supplement current requirements and will in general:

· Establish additional communication and disclosure requirements to members before they vote on whether to convert from federal insurance to nonfederal insurance. · Provide protections to members who may lose federal insurance because they have large accounts at two federally-insured credit unions that are merging or have term accounts at a state-chartered credit union that is converting to nonfederal insurance. · Require merging credit unions to analyze the premerger requirements imposed on credit unions by the Hart-Scott-Rodino Act and to determine if it is necessary to inform NCUA if there is a need to file, as required under the Act. · The final rule will be effective as of February 23, 2005.

While the final rule is rigorous, an important change from the proposal is that the final rule allows credit unions to send additional information along with required disclosures to members without having to first get approval from NCUA, as long as the information is accurate and not misleading. The proposal would have required NCUA to approve of all communications prior to their distribution to members that deviated from the mandatory disclosures.

CUNA will continue to monitor the implementation of the final rule. In the meantime, if you have any questions or need a copy of the rule, please feel free to contact Senior Vice President and Associate General Counsel Mary Dunn by e-mail at mdunn@cuna.coop or by telephone at (800) 356-9655, extension 6736, or contact Assistant General Counsel Jeff Bloch by e-mail at jbloch@cuna.coop or by telephone at (800) 356-9655, extension 6732. You may also access the rule on the Internet at the following address:

http://www.ncua.gov/RegulationsOpinionsLaws/RecentFinalRegs/F-708b.pdf

BACKGROUND

The Federal Credit Union Act authorizes the NCUA Board to issue rules regarding mergers of federally-insured credit unions and changes in insured status. Under those rules, NCUA requires federally-insured credit unions to obtain approval from the agency prior to the merger or before a federally-insured credit union terminates federal insurance or converts to nonfederal insurance. The current rules also imposes notice and disclosure requirements as part of the process a federally insured credit union must undertake when merging, converting to private insurance or otherwise terminating federal insurance. The new amendments augment the current requirements and substantially increase the regulatory obligations imposed on federally insured credit unions as they make the transition from federal insurance.

BRIEF DESCRIPTION OF THE FINAL RULE

A. Mergers, 12 CFR 708b

1. Hart-Scott-Rodino Act

The Hart-Scott-Rodino Act requires certain entities, including credit unions, to file a premerger notification with the Federal Trade Commission (FTC) if they enter into a merger or acquisition. Credit unions need not file if they meet one of the following criteria:

· The merging credit union has less than $50 million in assets. · The merging credit union has from $50 million to $200 million in assets, and the continuing credit union is below a certain asset size, as established by the FTC.

For the first time, the rule will require a credit union with more than $50 million in assets to inform NCUA whether it plans to file with the FTC. This information must be part of the merger proposal submitted to the NCUA Regional Director after the credit union’s board of directors has approved the merger plan. Many credit unions of more than $50 million in assets may not be required to file because some of their assets do not count towards the FTC thresholds, which may mean their assets levels fall below $50 million for purposes of FTC filings. If a credit union that meets the threshold test does not plan to file with the FTC, it must provide an explanation for that decision.

1. Net Worth Analysis

The rule will require the merging credit unions to analyze the net worth of the two credit unions before the merger, as calculated under generally accepted accounting principles (GAAP), and compare those figures with the estimated net worth of the continuing credit union after the merger. Credit unions must conduct this analysis to determine any negative effects on GAAP net worth resulting from the merger.

1. Amendments Related to Share Insurance In a Merger Situation

a. Notice to Members

In situations in which both a merging and continuing credit union are federally insured and the two credit unions have overlapping fields of membership, the continuing credit union must notify members of the potential loss of insurance coverage which would result for individuals who were members of both credit unions. To assist with this notification requirement, NCUA has provided options from which a credit union may chose; it must use one of the options within three months after the merger. The continuing credit union must either notify all its members or only all entities that were members of both credit unions. Alternatively, the credit union may determine which members of both credit unions may actually have uninsured funds six months after the merger and notify those members of the potential loss of coverage.

b. Statement to NCUA

If the continuing credit union is not federally insured, it must provide a statement to NCUA that it is aware of the requirements of the Federal Deposit Insurance Act (FDIA, 12 USC 1831t) for institutions lacking federal deposit insurance. These provisions require additional disclosures, including on periodic statements, that if the institution fails, the Federal Government does not guarantee that depositors will get their money back. It also precludes privately insured credit unions from using the mails or any instrumentality of interstate commerce to receive or facilitate receiving deposits unless the appropriate state regulator in which the institution is chartered determines the institution meets the eligibility requirements for federal insurance. The provisions also require private deposit insurers to obtain an annual audit from an independent auditor.

In addition, the credit union must provide proof that its accounts will be accepted for insurance by the private insurer.

1. Voting Requirements

The final rule clarifies that the membership voting requirements that apply to insurance conversions or terminations must also apply to mergers if the continuing credit union is nonfederally insured. (These requirements are discussed below.) The credit union must also use the notice and ballot forms in subpart C of the rule, unless the Regional Director approves different forms.

1. Certifying the Vote

As under the current rule, the board must certify their results of the vote to the Regional Director. Now, the certification must include the total number of members or record, the number who voted for and the number who voted against the merger. The certification form in subpart C is required unless the Regional Director approves a different form.

B. Voluntary Termination of Insurance Status

1. Notice to NCUA

Credit unions wishing to terminate their federal insurance must already provide notice to NCUA but under the new rule, the notice must now include a written statement from the credit union that it is aware of the requirements of the FDIC Act (described above) for nonfederally insured institutions and a certification of the vote including the total number of members of record of the credit union, the number who voted in favor of termination and the number who voted against.

1. Notice to Members

Currently, when the board of a federally insured credit union adopts a resolution for insurance termination, it must provide members with written notice and the date set for the vote. The first written communication to members informing them of the board’s resolution must inform the members of the requirement for a membership vote, explain that the insurance from NCUA is backed by the full faith and credit union of the U.S. government; and include a conspicuous statement that if the termination is approved and the credit union subsequently fails, the federal government does not guarantee a member will get his or her money back.

Termination forms will no longer be included with the final rule, since there is no state that currently permits an insured credit union to voluntarily terminate its share insurance.

C. Conversion From Federal to Private Insurance

1. Notice to NCUA

As with terminations, the current rule requires a federally insured credit union to notify NCUA after the board’s has adopted a resolution to convert insurance. The final rule will now require the credit union to notify NCUA and request approval of the insurance conversion before the credit union solicits a member vote, and NCUA will generally make its decision within 14 days after receiving certification of the vote. The new rule clarifies that the notification to NCUA must be in the form specified in subpart C of the rules, unless the regional director approves a different form.

For all insurance conversions, the notice to NCUA must include the statement the credit union is aware of the requirements of the FDIC Act and provide proof that the nonfederal insurers is authorized to issue share insurance in the state where the credit union is located and that the insurer will insure the credit union.

In certifying the vote to NCUA, the certification must include the vote totals and total number of members of record.

1. Right to Redeem Term Share Accounts Without Penalty

The final rule will require credit unions to notify members that they may close share certificate and other term accounts without penalty if they are closed prior to the effective date of the conversion. This will only apply to the federally-insured portion of the funds, and not apply in insurance termination situations since federal insurance may continue up to one year after termination, unlike a conversion in which federal insurance ends on the date of the conversion.

The notification need not be provided in the notice to convert, but must be given to members if the conversion is approved. The credit union must deliver this notice at least 30 days before the effective date of the conversion, and it must be “conspicuous,” which means bolded and no smaller than any other font size that is used elsewhere in the notice. The statement about penalty-free withdrawals and loss of federal share insurance must be on the first page of the notice.

1. Notice to Members

The final rule provides additional requirements for the notice to members following the adoption of the board’s resolution.

It clarifies that the first written communication following the resolution to convert, made by or on behalf of the credit union and informs the members that the credit union will seek conversion of insurance, is to be considered the notice of the proposal to convert. This notice must be in the prescribed form that is included in the rule. A different form may be used if approved by the Regional Director.

The rule will also impose approval and disclosure requirements on “share insurance communications,” which are generally defined as written communications from the credit union, intended to be read by two or more members, and that mentions the share insurance conversion or termination. This will not include communications intended to be read only by the credit union’s employees or officials.

In response to comments from CUNA and others, NCUA has modified its earlier proposal that would have required that these communications receive prior approval from the Regional Director. The final rule will instead only require the credit union to provide a copy of the communication to the Regional Director at or before the time it is made, although the credit union may, at its option, provide an advance copy to the Regional Director for review and comment. The converting credit union must also inform the Regional Director when the communication is to be made, to which members it will be directed, and how it will be distributed. The Regional Director will have the right to take action if the communication is materially misleading, including disapproval of the conversion.

The following disclosure language must also be included in every “share insurance communication” and must be disclosed in a conspicuous manner, which means it must be in capital letters, bold, offset from other text by use of a border, and at least one font size larger than the other text (excluding headings):

IF YOU ARE A MEMBER OF THIS CREDIT UNION, YOUR ACCOUNTS ARE CURRENTLY INSURED BY THE NATIONAL CREDIT UNION ADMINISTRATION, A FEDERAL AGENCY. THIS INSURANCE IS BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED STATES GOVERNMENT. IF THE CREDIT UNION (CONVERTS TO PRIVATE INSURANCE ) (TERMINATES ITS FEDERAL INSURANCE), AND THE CREDIT UNION FAILS, THE FEDERAL GOVERNMENT DOES NOT GUARANTEE THAT YOU WILL GET YOUR MONEY BACK.

If posted on the Internet, the credit union must make reasonable efforts to have the disclosure visible without scrolling. Ensuring that most of the disclosure is on the screen without scrolling will be considered “reasonable.”

1. Eligibility for Nonfederal Insurance

In order to receive NCUA approval of the conversion to nonfederal insurance, the final rule will require the converting credit union to provide proof that the nonfederal insurer is authorized to issue share insurance in the state in which the credit union is located and that the insurer will insure the credit union.

1. Voting Procedures

The rule will require the vote regarding the change in insurance status to be conducted by secret ballot and administered by an independent entity. An “independent entity” is defined as a company with experience in conducting corporate elections and in which no official or senior manager of the credit union, or their immediate family members, have any ownership interest or is employed by that entity. Subpart C contains the required form for certifying the vote to NCUA.