New Rules Present New Risks for CU Directors

Directors’ best protection against legal action is a solid understanding of their fiduciary duties.

August 5, 2011

New fiduciary and financial literacy rules for directors of federally chartered credit unions, coupled with economic challenges and more litigation, have greatly increased personal risk exposure for credit union decision makers.

But while this uncertain environment increases the chance of legal action against credit union directors, it also provides an opportunity to establish new practices to protect credit unions and their board members, a CUNA Mutual Group executive told a breakout session audience Thursday during the 34th Annual National Directors’ Convention in Las Vegas.

John Wallace, CUNA Mutual’s vice president of commercial products, said there are four keys to protecting directors’ personal assets, starting with a solid understanding of their fiduciary duties.

In December, NCUA finalized sections from its rules and regulations concerning federal credit union directors’ fiduciary duties and indemnification. “Federal credit union directors must carry out their duties in good faith, and within six months of their election or appointment they must also gain an understanding of basic finance and accounting practices,” he said.

NCUA also passed a rule on indemnification that strips federal credit unions of the ability to indemnify officials or employees for liability associated with misconduct that’s “grossly negligent, reckless, or willful” as deemed by a court in connection with a decision that affects the “fundamental rights” of credit unions’ members.

This applies to decisions affecting members’ rights, such as with conversions and changing share insurance.

In addition, NCUA “Rule 750” limits indemnification payments by credit unions.

Recent actions by the Federal Deposit Insurance Corp. (FDIC) provide some context and might be a precursor for what credit union directors could face. As of July 6, FDIC authorized action against 248 individuals in connection with 28 failed institutions, seeking $6.8 billion.

A second way directors can protect themselves is by establishing and/or broadening their corporate governance process, which Wallace defined as “a set of processes, customs, rules, policies, and laws that guide how an organization, like a credit union, is directed and controlled for the benefit of its stakeholders.”

Examples include establishing a lead director on governance, a whistle-blower policy, or a risk oversight policy.

Third, Wallace urged directors to consider their indemnification options to ensure alignment with the board’s risk philosophy. Indemnification is where the credit union agrees to reimburse an officer or director for expenses related to claims brought against them in their capacity as officers and directors.

“Consult a qualified attorney to help you construct your indemnification agreements,” Wallace said. “This is particularly important given the newly adopted rule that limits indemnification.”

Fourth and finally, Wallace advised credit unions to have directors’ and officers’ (D&O) liability insurance coverage to cover losses related to claims against a wrongful management liability act. Boards should play an active role in establishing the type and coverage limits for D&O insurance, he added.

Other recommendations Wallace offered to help directors protect their personal assets and their credit unions:

  • Conduct conflict of interest disclosures at least annually;
  • Determine, as a board, what risks the credit unions faces and ask for information to monitor that risk; and
  • Think of opportunities to improve.

The 34th Annual National Directors’ Conference continues through Friday.