Compliance Matters: Director Responsibilities

NCUA provides clear statements on FCU boards’ responsibilities to members.

April 14, 2011

The National Credit Union Administration (NCUA) adopted new rules on the fiduciary duties of federal credit union directors. Agency concerns arose in recent years about the motives of some volunteers and senior staff in pursuing mergers and conversions. NCUA included in its regulations clear statements on federal credit union boards’ responsibilities to act in the best interests of their members.

While most of the regulation’s fiduciary standards on duties to act in good faith and use good business judgment aren’t new, NCUA requires for the first time that every federal credit union director have, or gain, an understanding of basic accounting.

Those directors elected or appointed before the Jan. 27, 2011, effective date must comply with the financial literacy requirements by July 27, 2011. Directors elected or appointed after the effective date must satisfy the financial literacy requirements within six months after joining the board. Note that this rule doesn’t apply to state-chartered credit unions.

New Section 701.4 of NCUA’s regulations requires directors of federal credit unions to have “at least a working familiarity with basic finance and accounting practices, including the ability to read and understand the federal credit union’s balance sheet and income statement and to ask, as appropriate, substantive questions of management and the internal and external auditors….”

NCUA’s Office of Small Credit Unions will offer director training, and the Credit Union National Association (CUNA) has announced a new “Board Financial Literacy Certificate” to meet this requirement (“Earn a financial literacy certificate”).

NCUA will develop examiner guidance to track compliance, but NCUA Chairman Debbie Matz said examiners won’t be “aggressive in quizzing” volunteers about their accounting knowledge.

The agency also amend­ed Section 701.33. It will prohibit a federal credit union from indemnifying officials or employees for personal liability for decisions they made in connection with charter conversions and share insurance changes if a court has determined that they acted in a gross­ly negligent or reckless manner, or willfully engaged in misconduct.

But NCUA will allow federal credit unions to advance funds to pay for legal costs for directors or employees, who would only have to repay the funds if found liable by a court under the grossly negligent or reckless standard. The agency is still considering a broader rule affecting a federal credit union’s ability to indemnify volunteers and employees.

Temporary Insurance Coverage

A Dodd-Frank Act rule provides temporary unlimited insurance coverage by the Federal Deposit Insurance Corp. (FDIC) and the National Credit Union Share Insurance Fund (NCUSIF) for noninterest and nondividend bearing transaction accounts. 

This special insurance coverage became effective on July 21, 2010, when Dodd-Frank became law. It runs through Dec. 31, 2012. But last December the NCUA Board proposed amendments to its insurance regulations (Section 745) to clarify coverage and to propose two disclosure requirements. The comment period closes on Feb. 22, 2011.

The unlimited NCUSIF coverage for nondividend-bearing transaction accounts (and noninterest-bearing transaction accounts authorized for some state-chartered credit unions) is separate from, and in addition to, any other insurance coverage of accounts the owner may have in the credit union. The terms of the account agreement must call for zero interest/dividends.

Why was this included in Dodd-Frank? The FDIC had a temporary guarantee program since 2008 to give employers assurances that funds set aside in business checking accounts to meet payrolls wouldn’t be in jeopardy should the bank fail. Banks could voluntarily participate and pay a guarantee fee. Last summer, Congress changed this to a temporary insurance program with FDIC and NCUSIF coverage. Insurance premiums are paid on the funds and, unlike the FDIC guarantee program, the coverage extends to all types of transaction accounts (not just business accounts, although business accounts are the most likely to be covered).

NCUA expanded its call report information last fall and found that more than 630 credit unions report they have accounts now covered by this new insurance provision.

If the amendments to Section 745 are adopted as proposed, credit unions that offer noninterest/nondividend transaction accounts would be required to post a lobby notice explaining the temporary insurance coverage. (If the credit union offers Internet deposit services, it must post the notice also on its website.) The proposed rule includes the specific disclosure language. A second disclosure would be required if a credit union does something so the account earns interest/dividends—such as providing sweep account arrangements—which would eliminate the special insurance coverage. 

Credit unions offering noninterest/nondividend transaction accounts don’t have to worry about providing any disclosures until the NCUA Board adopts a final regulation, which won’t happen before March or April at the earliest.