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Letters to Regulators

Conversion of Insured Credit Unions to Mutual Savings Banks

October 1, 2004

Ms. Becky Baker
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314-3428

Re: National Credit Union Administration; Conversion of Insured Credit Unions to Mutual Savings Banks, 12 CFR Part 708a

Dear Ms. Baker:

The Independent Community Bankers of America (ICBA)1 appreciates the opportunity to comment on the proposed rule by the National Credit Union Administration ("NCUA") that would require a converting credit union to provide its members with additional disclosures about the conversion before conducting a member vote and would require that any member vote on conversion be conducted by an independent entity. ICBA strongly supports the right of a financial institution to choose the type of type of charter under which it operates. These disclosure and voting requirements are an attempt to obstruct the right of a credit union to convert to a mutual savings bank. ICBA urges the NCUA to retract the proposed rule.


Section 202 of the Credit Union Membership Access Act (CUMAA) establishes the rules concerning the conversions of insured credit unions to mutual savings banks.2 In addition to requiring that the board of directors must approve a proposal to convert by a majority vote and that the membership must approve the proposal by the affirmative vote of a majority of those members who vote on such proposal, it directs the NCUA to promulgate rules that are consistent with OTS and OCC rules and that are no more or less restrictive than that applicable to charter conversions by other financial institutions.

Pursuant to this statutory authority, the NCUA has promulgated rules interpreting these provisions on three different occasions.3 As recently as last February, the NCUA issued rules requiring a converting credit union to disclose additional information to its members. This additional information included disclosures: (a) of any conversion related economic benefit a director or senior management official may receive including receipt of or an increase in compensation and an explanation of any foreseeable stock related benefits associated with a subsequent conversion to a stock institution, (b) of how the conversion from a credit union to a mutual savings bank will affect members' voting rights, and (c) that the conversion from a credit union to a mutual savings bank could lead to members losing their ownership interests in the credit union if the mutual savings bank subsequently converts to a stock institution and the members do not become stockholders. In addition, a converting credit union would have to include an affirmative statement, that at the time of conversion to a mutual savings bank, the credit union does or does not intend to: (a) convert to a stock institution, (b) provide any compensation to previously uncompensated directors or increase compensation or other conversion related benefits, including stock related benefits, to directors or senior management official, and (c) base member voting rights on account balances.

According to the NCUA, when the February rules were proposed, some persons suggested that the NCUA should go further and impose even more disclosures and requirements on converting credit unions. These latest proposals are an outgrowth of some of those suggestions and reflect NCUA's concerns about protecting members' interests in the conversion process.

NCUA's Proposal

The NCUA is concerned that credit union members may be overwhelmed by the volume of information they receive during a credit union conversion. Accordingly, the NCUA is requiring that members receive a disclosure in addition to the one required in last February that would address (1) ownership and control of the credit union, (2) operating expenses and their effect on rates and services, (3) the effect of a subsequent conversion to a stock institution, and (4) the costs of conversion. A converting credit union would have to include this disclosure in a prominent place with each written communication it sends to its members regarding the conversion and would have to take specific steps to ensure that the disclosure is conspicuous to the member.

The NCUA is also concerned that credit union members, including those that are employees of the credit union, may be intimidated by a voting process that does not protect the privacy of their votes. Accordingly, the NCUA is proposing to protect members' privacy by requiring a converting credit union to use a secret ballot and an independent entity to conduct the vote. Under the rule, a third party teller would be responsible for all phases of the voting process including the distribution of the ballots, receipt and safe keeping of the ballots, verification of the ballots, and the tabulation of the vote.

NCUA Has Exceeded its Statutory Authority

ICBA believes that the proposal exceeds NCUA's authority under CUMAA to oversee conversions by insured credit unions. Section 202 of CUMAA limits NCUA's role in conversions to overseeing the "methods by which the member vote was taken or the procedures applicable to the member vote."4 Congress did not intend for the NCUA to review and monitor information presented to credit union members concerning the vote or to even insure that certain information concerning the vote is fully or fairly disclosed to the member in a certain manner. Instead, Congress wanted the NCUA to oversee the vote of converting credit unions to make sure that it was conducted fairly.

NCUA ignores the fact that, under CUMAA, its oversight role is to be shared with, and verified by the Federal or State regulatory agency that would have jurisdiction over the institution after the conversion.5 Once the conversion is complete, CUMAA says that the provisions of the Federal Credit Union Act no longer apply.6 All of the federal banking regulators have adopted regulations that are applicable to conversions of institutions. In every instance, the federal agency that will supervise the surviving entity following the conversion and that receives the conversion application is the agency that reviews the disclosures to determine if inaccurate or misleading information was communicated during the conversion process. Therefore, when a credit union intends to convert to a federal savings association charter or a savings bank, it should be agency that receives the application and that will be supervising the resulting financial institution that should be reviewing the disclosures. The NCUA's role should be limited to monitoring the voting process.

Furthermore, NCUA's proposal violates CUMAA's requirement that any rules that are promulgated cannot be any more restrictive than those applicable to charter conversions by other financial institutions. For instance, the OTS rules on converting from a mutual to a stock form of ownership do not require an independent entity experienced in conducting corporate elections to conduct the conversion vote.7 NCUA's requirement to have a third party teller responsible for all phases of the voting process is a costly requirement and one that will discourage credit unions from converting. The OTS rules also do not require that an updated, itemized account of the conversion costs be included in boldface in each and every written communication that is sent to a member.

NCUA's Disclosure Requirements Obstruct the Conversion Process

NCUA's proposed disclosures for converting credit union members are so slanted and misleading that one can only assume that the agency is attempting to dissuade credit union members from voting for a conversion. Rather than being neutral with regard to the question of whether to convert, these disclosures resemble the warnings that cigarette manufacturers must place on their packaging. The message of these disclosures seems to be all too clear-don't vote for conversion since it involves substantial risks to the ownership interests of credit union members.

The disclosure requirements mandate a converting credit union to make the following disclosure with every written communication it sends to its members regarding the conversion:

  1. OWNERSHIP AND CONTROL. In a credit union, every member has an equal vote in the election of directors and other matters concerning ownership and control. In a mutual savings bank, ACCOUNT HOLDERS WITH LARGER BALANCES USUALLY HAVE MORE VOTES AND, THUS, GREATER CONTROL.

  2. EXPENSES AND THEIR EFFECT ON RATES AND SERVICES. Credit union directors and committee members serve on a volunteer basis. Directors of a mutual savings bank are compensated. Credit unions are exempt from federal tax and most state taxes. Mutual savings banks pay taxes, including federal income tax. If {insert name of credit union} converts to a mutual savings bank, these ADDITIONAL EXPENSES MAY CONTRIBUTE TO LOWER SAVINGS RATES, HIGHER LOAN RATES, OR ADDITIONAL FEES FOR SERVICES.

  3. SUBSEQUENT CONVERSION TO STOCK INSTITUTION. Conversion to a mutual savings bank is often the first step in a two-step process to convert to a stock-issuing bank or holding company. In a typical conversion to the stock form of ownership, the EXECUTIVES OF THE INSTITUTION PROFIT BY OBTAINING STOCK FAR IN EXCESS OF THAT AVAILABLE TO THE INSTITUTION'S MEMBERS.

  4. COSTS OF CONVERSION. The costs of converting a credit union to a mutual savings bank are paid from the credit union's current and accumulated earnings. Because accumulated earnings are capital and represent members' ownership interests in a credit union, the conversion costs reduce members' ownership interests. As of [insert date], [insert name of credit union] estimates THE CONVERSION WILL COST [INSERT DOLLAR AMOUNT] IN TOTAL. That total amount is further broken down as follows [itemize the costs of all expenses related to the conversion including printing fees, postage fees, advertising, consulting and professional fees, legal fees, staff time, the cost of holding a special meeting, conducting the vote, and any other expenses incurred]

NCUA has not adequately explained why it is necessary that the proposed disclosures be a series of dire warnings of possible higher fees, higher loan rates, loss of voting control, and executives profiting from stock options at the expense of members. None of these disclosure requirements permit a converting credit union to list the benefits that can occur to a member upon a conversion such as additional products and services. NCUA concedes that often the disclosure information is overwhelming and that all it is doing is trying to further inform credit union members. But instead of informing credit union members, NCUA appears to be frightening them into voting against a conversion.

For instance, the disclosure that executives typically profit from conversions by obtaining stock far in excess of that available to the members is not only misleading but an effort to play on the fears and emotions of credit union members that credit union executives are conspiring against them in an effort to enrich themselves. Similarly, the requirement that the converting credit union disclose an updated and itemized list of its conversion expenses every time it sends a written communication to its members is onerous and unjustified. The warning that additional post conversion expenses may result in higher fees or higher loan rates is another example of NCUA intimidating the credit union members into voting against a conversion.

These disclosure requirements are an attempt by the NCUA to obstruct the right of a credit union to convert to a mutual institution. As a representative of mutual institutions in thirty-five states, ICBA strongly supports the right of a financial institution to choose the type of type of charter under which it operates. Mutuality is a choice that mutual institutions make-it is a community charter that reflects the historical roots and community values of our nation. The NCUA appears to believe that, in every case, mutuality is the first step in a corporate transformation that eventually results in a stock charter and that credit union members must be warned of this in a conversion. Mutuality remains a vigorous, competitive, and innovative charter for hundreds of banks in the United States who are very content with their choice of charter and have no desire to change it.

NCUA Should Concentrate on Improving Overall Credit Union Disclosures

Instead of concentrating on the disclosures of converting credit unions that would only affect a dozen or so conversions every year, the NCUA should focus on improving the transparency and quality of the disclosures routinely given by federal credit unions. Credit unions should be required to file a Form 990 like other not-for-profit organizations, disclosing the compensation of their highest-paid senior managers. Large credit unions should concentrate on improving the quality of their disclosures. These types of disclosures would assist credit union members with voting and with choosing a credit union and would have much greater overall impact than the proposed required disclosures for converting credit unions.


ICBA believes that NCUA's proposal exceeds its statutory authority under CUMAA which is limited to overseeing the conversion vote and violates CUMAA's requirement that the rules be no more restrictive than that applicable to charter conversions by other financial institutions. The proposed disclosure and voting requirements are an attempt to obstruct the right of a credit union to convert to a mutual savings bank. ICBA strongly supports the right of a financial institution to choose the type of type of charter under which it operates and urges the NCUA to retract the proposed rule.

If you have questions or need any additional information, please do not hesitate to contact me at 202-659-8111 or at Chris.Cole@icba.org.


Christopher Cole
Regulatory Counsel

1 The Independent Community Bankers of America represents the largest constituency of community banks of all sizes and charter types in the nation, and is dedicated exclusively to promoting the interests of the community banking industry. ICBA aggregates the power of its members to provide a voice for community banking interests in Washington, resources to enhance community bank education and marketability, and profitability options to help community banks compete in an ever-changing marketplace. For more information, visit ICBA's website at www.icba.org.

2 See 12 U.S.C. 1785(b).

3 See 63 FR 65532 (November 27, 1998); 64 FR 28733 (May 27, 1999); and 69 FR 8548 (February 25, 2004.

4 12 U.S.C. 1785(b)(2)(G)(ii)

5 12 U.S.C. 1785(b)(2)(G)(ii)

6 12 U.S.C. 1785(b)(2)(E)

7 See 12 CFR Sec. 563b.240. The rules do require the submission to the OTS of an opinion of counsel that the meeting was conducted in compliance with all applicable state or federal laws and regulations.

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