[Federal Register Volume 75, Number 228 (Monday, November 29, 2010)]
[Proposed Rules]
[Pages 73000-73014]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29546]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 75, No. 228 / Monday, November 29, 2010 /
Proposed Rules
[[Page 73000]]
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 701, 704, and 741
RIN 3133-AD74
Corporate Credit Unions
AGENCY: National Credit Union Administration.
ACTION: Proposed rule.
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SUMMARY: NCUA is issuing proposed amendments to its rule governing
corporate credit unions (corporates). The amendments include internal
control and reporting requirements for corporates similar to those
required for banks under the Federal Deposit Insurance Act and the
Sarbanes-Oxley Act. The amendments require each corporate to establish
an enterprise-wide risk management committee staffed with at least one
risk management expert. The amendments provide for the equitable
sharing of Temporary Corporate Credit Union Stabilization Fund (TCCUSF)
expenses among all members of corporates, including both credit union
and noncredit union members. The amendments increase the transparency
of decision-making by requiring that corporates conduct all board of
director votes as recorded votes and include the votes of individual
directors in the meeting minutes. The amendments permit corporates to
charge their members reasonable one-time or periodic membership fees as
necessary to facilitate retained earnings growth. For senior corporate
executives who are dual employees of corporate credit union service
organizations (CUSOs), the amendments require disclosure of certain
compensation received from the corporate CUSO. In addition, this
proposal would amend our regulations to limit natural person credit
unions (NPCUs) to membership in one corporate credit union at any
particular time and provide that a natural person credit union may not
make any investment in a corporate credit union of which the natural
person credit union is not also a member. These proposed amendments
will further strengthen individual corporates and the corporate system
as a whole.
DATES: Comments must be received on or before December 29, 2010.
ADDRESSES: You may submit comments by any of the following methods
(Please send comments by one method only):
Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments.
NCUA Web site: http://www.ncua.gov/Resources/RegulationsOpinionsLaws/ProposedRegulations.aspx. Follow the
instructions for submitting comments.
E-mail: Address to [email protected]. Include ``[Your name]
Comments on `Notice of Proposed Rulemaking for Part 704--Corporate
Credit Unions' '' in the e-mail subject line.
Fax: (703) 518-6319. Use the subject line described above for e-
mail.
Mail: Address to Mary Rupp, Secretary of the Board, National Credit
Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-
3428.
Hand Delivery/Courier: Same as mail address.
Public Inspection: All public comments are available on the
agency's Web site at http://www.ncua.gov/Resources/RegulationsOpinionsLaws/ProposedRegulations.aspx as submitted, except
as may not be possible for technical reasons. Public comments will not
be edited to remove any identifying or contact information. Paper
copies of comments may be inspected in NCUA's law library at 1775 Duke
Street, Alexandria, Virginia 22314, by appointment weekdays between 9
a.m. and 3 p.m. To make an appointment, call (703) 518-6546 or send an
e-mail to [email protected].
FOR FURTHER INFORMATION CONTACT: Jacqueline Lussier, Staff Attorney,
Office of General Counsel; Elizabeth Wirick, Staff Attorney, Office of
General Counsel; and Lisa Henderson, Staff Attorney, Office of General
Counsel, at the address above or telephone (703) 518-6540; or David
Shetler, Deputy Director, Office of Corporate Credit Unions, at the
address above or telephone (703) 518-6640.
SUPPLEMENTARY INFORMATION: The NCUA performs its mission of ensuring
the safety and soundness of Federally-insured credit unions by
examining all Federal credit unions, participating in the examination
and supervision of Federally-insured, State-chartered credit unions in
coordination with State regulators, and insuring Federally-insured
credit union members' accounts. In its statutory role as the
administrator of the National Credit Union Share Insurance Fund
(NCUSIF), NCUA insures and supervises approximately 7,500 Federally-
insured credit unions (FICUs), representing 98 percent of all credit
unions and serving approximately 90 million members.
Corporate Credit Union System
A corporate credit union is an organization, chartered under the
Federal Credit Union Act (the Act) or under applicable State law as a
credit union that receives share deposits from and provides loan and
other services primarily to other credit unions. 12 CFR 704.2. There
are 26 retail corporates that provide services directly to NPCUs, and
there is one wholesale corporate, U.S. Central Bridge Federal Credit
Union (U.S. Central Bridge), that provides services to many of the 26
retail corporates. Fourteen retail corporates and U.S. Central Bridge
are Federally-chartered and 12 retail corporates are State-chartered.
Like NPCUs, corporates are member-owned cooperatives. However, at
corporates the member-owners are primarily NPCUs. Over 95 percent of
NPCUs belong to corporate credit unions. In addition, other entities
that are not Federally-insured credit unions (i.e., ``non FICUs'') also
may become members of corporates. These nonfederally-insured members
consist of nonfederally-insured credit unions \1\ and non credit union
entities. Non credit union entities include credit union leagues and
trade associations, CUSOs, certain banks, and other types of
organizations. These other organizations include, for example, credit
union political action committees, credit union charitable and
educational foundations, and law firms, insurance agencies, and
mortgage
[[Page 73001]]
companies that are connected to the credit union industry.
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\1\ Within the 50 states, approximately 152 state-chartered
credit unions have private, primary share insurance and are not
subject to NCUA regulation or oversight.
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The corporate system offers a broad range of support to its
members. The products and services provided by U.S. Central Bridge to
retail corporates, and by retail corporates to their members, include,
among other things: investment and deposit services, wire transfers,
share draft processing and imaging, automated clearinghouse (ACH)
transactions processing, automated teller machine (ATM) processing,
bill payment services, and security safekeeping. The volume of payment
systems-related transactions throughout the system annually runs into
the millions and the dollar amounts associated with those transactions
are in the billions each month. Corporates also serve as liquidity
providers for their members. An NPCU invests excess liquidity in a
corporate when the NPCU has lower loan demand and draws down the
invested liquidity when loan demand increases.
Some NPCUs depend heavily on corporates; for example, 75 percent of
NPCUs rely on a corporate as their primary settlement agent. Corporates
provide NPCUs with convenient and quality services and expertise, all
at a fair price. For many NPCUs, this is a combination that makes the
corporate system a valuable resource and, for some smaller NPCUs, an
essential resource.
Federally-chartered corporates are governed by Federal law and
State-chartered corporate credit unions by State law. In addition, all
corporates that are Federally insured, or that accept share deposits
from NPCU members that are Federally insured, must comply with NCUA's
part 704 corporate rule. 12 CFR 704.1, 12 U.S.C. 1766(a).
NCUA recently made substantial revisions to part 704 (with
conforming amendments to parts 702, 703, 709, and 747). Final Rule, 75
FR 64786 (October 20, 2010) (September Rulemaking). The most
significant amendments establish a new capital scheme, including risk-
based capital requirements; impose new prompt corrective action
requirements; place various new limits on corporate investments; impose
new asset-liability management controls; amend some corporate
governance provisions; and limit a corporate CUSO to categories of
services preapproved by NCUA. The preamble to the September Rulemaking
also stated that shortly after its promulgation the Board intended to
issue another proposal that would further amend Part 704 and related
provisions. Id. at 64824. This current proposal is the referenced
follow-on rulemaking.
These proposed amendments would:
(1) Increase the transparency of corporate credit union decision-
making by requiring corporates conduct all board of director votes as
recorded votes and include the votes of individual directors in the
meeting minutes;
(2) Incorporate certain sound audit, reporting, and audit committee
practices from the Federal Deposit Insurance Act (FDI Act), Part 363 of
the Federal Deposit Insurance Corporation (FDIC) Regulations, and the
Sarbanes-Oxley Act of 2002 (SOX);
(3) Provide for the equitable sharing of TCCUSF expenses among all
members of corporate credit unions, including both credit union and
noncredit union members, by establishing procedures for requesting
members not insured by the NCUSIF to make voluntary premium payments to
the TCCUSF;
(4) Protect against unnecessary competition between corporates by
limiting NPCUs to membership in one corporate of the NPCU's choice at
any one time and prohibiting an NPCU from making any investment in a
corporate where the NPCU is not also a member;
(5) Improve risk management at corporates by requiring corporates
to establish enterprise-wide risk management committees staffed with at
least one independent risk management expert;
(6) Provide corporates with more options to grow retained earnings
by allowing corporates to charge their members reasonable one-time or
periodic membership fees; and
(7) Require the disclosure of compensation received from a
corporate CUSO by certain highly compensated corporate credit union
executives.
These proposals are discussed in more detail below in the section-
by-section analysis.
Section-by-Section Analysis of Proposed Amendments
Section 701.5 Membership Limited to One Corporate Credit Union
In the recent past, some NPCUs ``rate shopped'' among corporates
for the highest deposit rates and lowest service costs. This rate
shopping resulted in increased competition and, in some cases, led to
unsafe investment activities as corporates sought higher investment
yields to subsidize share dividends and service costs.
Proposed Sec. 701.5 seeks to prevent unhealthy competition among
corporates by requiring Federal credit unions to make a decision to
commit to membership in one corporate at a time. The proposal provides
that a Federal credit union may belong to two corporates for a short
period of time, but only when transitioning between those corporates.
In addition, the proposal prohibits a Federal credit union from making
any investment, including a share or deposit account, a loan, or a
capital investment, in a corporate of which the Federal credit union is
not a member.\2\ This will avoid unhealthy competition among corporates
driven by rate shopping among nonmembers.
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\2\ The FCU Act provisions generally authorizing such nonmember
transactions, such as 12 U.S.C. 1757(6) and 1757(7)(C), are
specifically subject to the regulation of the Board. 12 U.S.C. 1757
and 1782.
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Proposed Sec. 701.5 has prospective impact only. That is, credit
unions that are currently members of two or more corporates do not have
to relinquish memberships in any of those corporates. The Board
believes that the members of a credit union are owners of that credit
union, including the members of a corporate, and that ``once a member,
always a member.''
The Board also notes that Sec. 704.8(k) applies a 15 percent
investment limit to investments in a corporate made by a ``member or
nonmember credit union.'' This section does not authorize investments
by nonmembers, and, if the Board adopts Sec. 701.5(c) as proposed, it
is unlikely that a nonmember credit union would be able to make any
investments in a corporate where it is not already a member.
These same restrictions, through language added in new Sec.
741.226 of part 741, would apply to State-chartered Federally-insured
NPCUs as well as FCUs.
This proposal also contains the following changes to part 704.
Section 704.2 Definitions
The NCUA Board is proposing to add a number of new definitions to
Sec. 704.2 to assist in complying with the proposed revisions to Sec.
704.15 discussed below. The defined terms include: Critical accounting
policies, Enterprise risk management, Examination of internal control,
Family, Financial statements, Financial statement audit, Generally
accepted auditing standards, Independent public accountant, Internal
control, Internal control framework, Internal control over financial
reporting, and Supervisory committee.
The associated definitions come from a variety of sources,
including other sections of the NCUA Rules and Regulations, auditing
and accounting industry standards, and Securities and Exchange
Commission (SEC) rules. The Board requests comment on the
appropriateness of these definitions.
[[Page 73002]]
Section 704.11 Corporate Credit Union Service Organizations; Sec.
704.19 Disclosure of Executive and Director Compensation
The recently adopted revisions in the September Rulemaking require
that each corporate annually prepare, and provide to its members, a
document that discloses the compensation of certain employees. 12 CFR
704.19(a). An employee of a corporate may also, however, be an employee
of a corporate CUSO and receive additional compensation from the CUSO.
The dual employee's compensation disclosure under Sec. 704.19(a) would
be incomplete without a disclosure of both sources of compensation,
particularly where the employee's corporate has made a loan to, or
other investment in, that corporate CUSO and so has some control over
the CUSO.
The proposal amends Sec. 704.19 to clarify that for CUSOs in which
a corporate has invested, the corporate must include compensation
received from the CUSO in disclosures of compensation paid to the
corporate's most highly compensated employees. To facilitate this
disclosure, the proposal also amends Sec. 704.11(g), which lists
certain items with which a CUSO must agree in writing before a
corporate credit union may make a loan to or invest in the CUSO. The
amendment to Sec. 704.11(g) requires a corporate CUSO disclose
compensation paid to any employees that are also employees of a
corporate credit union lending to, or investing in, the CUSO. This
ensures that CUSOs will provide corporate credit unions the information
necessary for the corporate to make the full disclosure required by
Sec. 704.19.
The proposal applies only to corporate employees. It does not amend
or otherwise modify Sec. 704.11(f), which prohibits officials of
corporate credit unions which have invested in or loaned to a corporate
CUSO from receiving any compensation or other payments from the
corporate CUSO.
Section 704.13 Board Responsibilities
The proposal adds a new subparagraph (c)(8) to Sec. 704.13, Board
responsibilities, to require that all board of directors votes be
conducted by recorded votes.\3\
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\3\ The September Rulemaking redesignated the Board
Responsibilities section from Sec. 704.4 to Sec. 704.13.
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The minutes reporting the vote must identify the board members, by
name, who voted for or against the proposal, as well as, if applicable,
the board members who were absent or otherwise failed to vote, and any
board members who abstained from voting. The Board believes this
provision is necessary so as to increase the transparency of corporate
board actions.
The corporate credit union system has confronted profound
challenges during the economic crisis of the past several years. Some
corporate credit unions made poor investment decisions, and these
decisions caused billions of dollars of losses. Unfortunately, the role
of individual directors in these decisions was not always clear because
the board secretary did not always record the votes of individual
directors in the minutes of the board meeting.
Corporate boards are likely to continue to face crucial decisions.
For example, the ongoing effects of the financial crisis may force some
corporates to confront critical restructuring questions in which the
interests of NPCUs utilizing different services of the corporate may
diverge. In these situations, members may need to know how each
director voted in addition to knowing the outcome of the vote.
Also, requiring recorded votes will help to ensure that corporate
directors comply with their obligation to recuse themselves from
deliberating and voting on items which may involve a conflict of
interest. Article XI, Sec. 2 of the Standard Corporate Federal Credit
Union Bylaws prohibits corporate insiders, including directors, from
participating ``in any manner, directly, or indirectly in the
deliberation upon or the determination of any question affecting his/
her pecuniary interest or the pecuniary interest of any corporation,
partnership, or association (other than the corporate credit union) in
which he/she is directly or indirectly interested.'' If a director is
disqualified because of a conflict, the director must withdraw from
deliberation and determination of the issue. Id. Under the bylaw, the
director has the obligation to identify issues that may pose a conflict
of interest and withdraw from deliberation and determination of these
issues. If, however, a director fails to self-identify or report a
potential conflict, it would be difficult to determine whether or how
the director voted on an issue without disclosure of votes on a
director-by-director basis. The accountability and transparency that
results from recording vote tallies by name will provide an important
backstop to the self-policing aspect of the corporate bylaw conflict-
of-interest provision.
NCUA's existing regulations provide some transparency to members,
but may not be sufficient absent a specific requirement to record votes
by name. For example, NCUA's regulations provide a process by which
members of credit unions, including members of corporate credit unions,
may inspect the credit union's books and records as well as minutes of
member, board, and committee meetings. 12 CFR 701.3(a). Members seeking
access to records must submit a petition signed by one percent of the
credit union's members; the petition must identify particular records
and state a purpose related to the protection of the members' financial
interest in the credit union. 12 CFR 701.3(b). Like the current
proposal, the rule providing for member access to records increases the
transparency of actions and decisions of the credit union's leadership.
If, however, the corporate credit union's records lack recorded votes
showing how each director voted on a particular issue, members would
not be able to get the director-by-director tally even after submitting
a petition.
There are multiple sources of authority for NCUA's proposed
amendment to paragraph 704.13(c). The Act grants NCUA broad authority
to require FICUs, including corporate credit unions, to submit
financial data and other information as required by the NCUA Board. 12
U.S.C. 1761, 1766, 1781, and 1789. Further, the Act authorizes the NCUA
Board to request additional information as it may require. 12 U.S.C.
1782(a)(2). NCUA's recommended standard procedures for corporate credit
union examinations include a review of minutes of the board of
directors' meetings or actions. NCUA Corporate Examination Procedures
Sec. 301P-004 (2003). Like the review of board minutes, the proposal
falls under NCUA's general powers to require both Federal credit unions
and Federally-insured State-chartered credit unions to prepare and
submit information in connection with insurance examinations.
Section 704.15 Audit and Reporting Requirements
Both NCUA and natural person credit unions rely upon financial
information to evaluate the condition of insured corporate credit
unions and to determine the adequacy of regulatory capital. Accurate
and reliable measurement of a corporate credit union's assets and
earnings has a direct bearing on the determination of regulatory
capital. Interested parties can place greater reliance on recognition,
measurement, and disclosures contained in financial statements that
have been subject to an independent audit. Independent audits help to
identify weaknesses in internal control
[[Page 73003]]
over financial reporting and risk management at corporate credit unions
and reinforce corrective measures, thus complementing supervisory
efforts in contributing to the safety and soundness of corporate credit
unions.
NCUA currently requires that a corporate credit union's board of
directors ensure the preparation of timely and accurate balance sheets,
income statements, and internal risk assessments and that systems are
audited periodically in accordance with industry standards. 12 CFR
704.4(c). In addition, a corporate credit union's supervisory committee
must ensure that: (1) An external audit is performed annually in
accordance with generally accepted auditing standards; and (2) the
audit report is submitted to the board of directors, to NCUA, and in a
summary version, to the members. 12 CFR 704.15(a).
To facilitate early identification of problems in financial
management at corporate credit unions, the NCUA Board is proposing to
amend Sec. 704.15 to add certain additional auditing, reporting, and
supervisory committee requirements. The most significant proposed
revisions would require a corporate credit union to:
Ensure that its financial reports reflect all material correcting
adjustments necessary to conform with generally accepted accounting
principles (GAAP) that were identified by the corporate credit union's
independent public accountant (IPA).
Prepare an annual management report, signed by the chief executive
officer and the chief accounting officer or chief financial officer,
that contains: (1) A statement of management's responsibility for
preparing financial statements, responsibility for establishing and
maintaining an adequate internal control structure, responsibility for
procedures for financial reporting, and responsibility for complying
with laws and regulations relating to safety and soundness designated
by NCUA; (2) an assessment of the corporate credit union's compliance
with such laws and regulations; and (3) for a corporate with assets of
at least $1 billion, an assessment of the effectiveness of the internal
control structure and procedures over financial reporting, including
identifying the internal control framework used to evaluate such
internal control.
Ensure that its IPA: (1) Reports on a timely basis to the
supervisory committee all critical accounting policies, alternative
accounting practices discussed with management, and written
communications provided to management; (2) retains the working papers
related to an audit and, if applicable, the evaluation of the corporate
credit union's internal control over financial reporting, for seven
years from the report release date; (3) complies with the independence
standards and interpretations of the American Institute of Certified
Public Accountants (AICPA); (4) has, prior to beginning any services
for a corporate, a peer review that meets acceptable audit industry
guidelines; (5) notifies NCUA if the IPA ceases being a corporate
credit union's independent accountant; and (6) for a corporate with
assets of at least $1 billion, reports separately to the supervisory
committee on management's assertions concerning the effectiveness of
the corporate credit union's internal control structure and procedures
for financial reporting.
Ensure that its supervisory committee (1) consists of members who
are not employees of the corporate credit union; (2) supervises the
IPA; and (3) ensures that audit engagement letters do not contain
unsafe and unsound limitation of liability provisions.
NCUA has based many of these proposed revisions on part 363 of the
FDIC's Rules, 12 CFR part 363. The FDIC has provided guidance, found in
Appendices A and B to part 363, to assist managements of banks and
thrifts in complying with a number of part 363 requirements. The NCUA
Board has determined not to issue similar formal guidance in
conjunction with the proposed revisions to part 704.
The NCUA Board also notes that part 363 only applies to banks and
thrifts with assets of at least $500 million. In contrast, most of
these proposed provisions to part 704 would apply to all corporate
credit unions, even those smaller corporates with under $500 million in
assets.\4\ The Board believes that because corporates provide services
to NPCUs, smaller corporate credit unions may present systemic risks
that smaller banks and thrifts do not. The Board requests comment,
however, on whether certain of the proposed provisions should apply
only to corporate credit unions with assets above a certain threshold.
Commenters should specify which provisions and what the asset threshold
or thresholds should be.
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\4\ A few provisions in proposed 704.15 would apply only to
corporates with assets of at least $1 billion.
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Paragraph 704.15(a) Annual Reporting Requirements
704.15(a)(1) Audited Financial Statements
Proposed paragraph (a)(1) restates the existing requirement that a
corporate credit union prepare audited financial statements that
conform with GAAP. To facilitate a more accurate picture of a corporate
credit union's financial condition, the proposal also adds the
requirement that the annual financial statements reflect all material
correcting adjustments identified by the IPA as necessary to conform
with GAAP.
704.15(a)(2) Management Report
Proposed paragraph (a)(2) requires the management of a corporate
prepare an annual report that contains certain enumerated elements.
The Board is concerned that management in some corporate credit
unions may have insufficient oversight over certain reporting, control,
and compliance functions. The Board believes that requiring management
to acknowledge its responsibilities in these areas will help the
corporate credit union identify needed improvements in financial
management. Accordingly, proposed paragraph (a)(2)(i) requires
management reports contain a statement of management's responsibilities
for preparing the corporate credit union's annual financial statements,
for establishing and maintaining an adequate internal control structure
and procedures for financial reporting, and for complying with certain
laws and regulations relating to safety and soundness.
The proposed rule identifies the following five safety and
soundness areas about which the NCUA Board is concerned: affiliate
transactions, legal lending limits, loans to insiders, restrictions on
capital and share dividends, and regulatory reporting that meets full
and fair disclosure. When the FDIC issued a proposed rule implementing
new audit, reporting, and internal control requirements for certain
banks and thrifts, see 12 CFR part 363, it identified these five areas
as presenting the greatest risks. See 57 FR 42516, Sept. 15, 1992.\5\
Corporate credit unions are structured differently from banks, however,
and the Board seeks comment on whether the five identified areas are
appropriate. The Board also seeks comment on whether the final
regulation should specify the laws and rules and regulations covered by
[[Page 73004]]
proposed paragraph (a)(2), such as section 107(5)(A)(iv) and (v) of the
Federal Credit Union Act, 12 U.S.C. 1757(5)(A)(iv) and (v), governing
loans to directors and committee members, and Sec. 704.7, governing
corporate credit union lending.
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\5\ Ultimately, the FDIC limited its compliance concerns to laws
and regulations concerning insider lending and dividend
restrictions. See 58 FR 31332, June 2, 1993.
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Proposed paragraph (a)(2)(ii) requires management assess and report
on the corporate credit union's compliance with those designated safety
and soundness laws and regulations. This assessment requirement
reinforces the importance of management's responsibility for complying
with the rules by requiring disclosure of instances of noncompliance.
Management should perform its own investigation and review of
compliance with the rules and maintain records of its assessments until
the next NCUA examination or such later date as specified by NCUA.
The NCUA Board has determined that corporate credit unions with $1
billion or more in total assets present additional risks. Accordingly,
proposed paragraph (a)(2)(iii) requires these larger corporate credit
unions include in their management reports an assessment of the
effectiveness of the internal control structure over financial
reporting. Management must identify the internal control framework used
to make its evaluation, include a statement that the evaluation
included controls over the preparation of financial statements and
regulatory reports, include a statement as to management's conclusion
regarding the effectiveness of internal control over financial
reporting, and disclose all material weaknesses identified by
management. Management may not conclude that internal control over
financial reporting is effective if there are any material weaknesses.
A suitable control framework is one established by a body of
experts following widespread opportunity for comment, including the
broad distribution of the framework for public comment. A framework is
suitable only when it:
Is free from bias;
Permits reasonably consistent qualitative and quantitative
measurements of a corporate credit union's internal control over
financial reporting;
Is sufficiently complete so that those relevant factors
that would alter a conclusion about the effectiveness of a corporate
credit union's internal control over financial reporting are not
omitted; and
Is relevant to an evaluation of internal control over
financial reporting.
The Internal Control--Integrated Framework published by the
Committee of Sponsoring Organizations of the Treadway Commission (the
``COSO Report'') provides a suitable and recognized framework for
purposes of a management assessment in the United States. Other
suitable frameworks have been published in other countries, and still
others may be developed in the future. Such other suitable frameworks
may be used by management and the corporate credit union's IPA in
assessments, attestations, and audits of internal control over
financial reporting.
704.15(a)(3) Management Report Signatures
To ensure that management understands its ultimate responsibility
for the corporate credit union's performance, proposed paragraph (a)(3)
requires the chief executive officer and either the chief accounting
officer or chief financial officer of the corporate credit union to
sign the management report.
704.15(b)(1) Annual Audit of Financial Statements
Proposed paragraph (b) sets forth the requirements applicable to
the corporate's IPA. Proposed paragraph (b)(1) clarifies the existing
requirement that a corporate credit union have its annual financial
statements audited by an IPA in accordance with generally accepted
auditing standards. The IPA should be registered or licensed to
practice as a public accountant, and be in good standing, under the
laws of the State or other political subdivision of the United States
in which the home office of the corporate credit union is located.
704.15(b)(2) Internal Control Over Financial Reporting
Proposed paragraph (b)(2) requires an IPA who audits a corporate
credit union with assets of at least $1 billion attest to management's
assertions concerning the effectiveness of the corporate credit union's
internal control structure and procedures for financial reporting. To
ensure that an attestation report is sufficiently informative, the
report must:
Identify the internal control framework that the IPA used
to make the evaluation (which must be the same as the internal control
framework used by management);
Include a statement that the IPA's evaluation included
controls over the preparation of regulatory financial statements;
Include a clear statement as to the IPA's conclusion
regarding the effectiveness of internal control over financial
reporting;
Disclose all material weaknesses identified by the IPA
that have not been remediated;
Conclude that internal control is ineffective if there are
any material weaknesses; and
Be dated by the IPA on or after the date of management's
report on its assessment of the effectiveness of internal control over
financial reporting.
704.15(b)(3) Notice by Accountant of Termination of Services
In the interests of safety and soundness, and to ensure that NCUA
is aware of potential conflicts between a corporate credit union and
its IPA, proposed paragraph (b)(3) requires an IPA to notify NCUA if
the IPA terminates work as the corporate credit union's auditor. The
IPA's notice of termination under (b)(3) is similar to the notice of
termination in proposed paragraph (c)(4) that the corporate credit
union must provide to both NCUA and the IPA. In its (b)(3) notice, the
IPA must state whether the IPA agrees with the corporate credit union's
assertions contained in the (c)(4) notice and whether the IPA agrees
that the (c)(4) notice discloses all relevant reasons for the IPA's
termination.
704.15(b)(4) Communications With Supervisory Committee
The Board believes that communications between a corporate credit
union's supervisory committee and its auditor are critical to proper
oversight of the auditing function. Accordingly, proposed paragraph
(b)(4) establishes certain communication requirements between the
auditor and the committee. Under the proposal, an IPA must inform the
supervisory committee on a timely basis about: (1) All critical
accounting policies, (2) alternative accounting treatments discussed
with management, and (3) written communications provided to management,
such as a management letter or schedule of unadjusted differences.
These requirements are minimum requirements--other communications
beyond these requirements are encouraged.
704.15(b)(5) Retention of Working Papers
Consistent with best industry practices, proposed paragraph (b)(5)
requires an IPA to retain the working papers related to its audit of a
corporate credit union's financial statements for at least seven years.
If the IPA has conducted an evaluation of internal control over
financial reporting, the IPA must also retain those working papers for
at least seven years.
[[Page 73005]]
704.15(b)(6) Independence
Proposed paragraph (b)(6) codifies existing industry self-
governance requirements that auditors comply with the independence
standards of the American Institute of Certified Public Accountants
(AICPA).
704.15(b)(7) Peer Reviews
Proposed paragraph (b)(7) codifies existing industry self-
governance requirements that auditors undergo periodic peer reviews.
The proposal clarifies that acceptable peer reviews include those
performed in accordance with the AICPA's Peer Review Standards and
inspections conducted by the Public Company Accounting Oversight Board
(PCAOB). This paragraph also requires a corporate credit union's IPA to
file a copy of the peer review report, or the public portion of the
PCAOB inspection report, with NCUA.
704.15(c)(1) Annual Reporting
Proposed paragraph 704.15(c) sets forth various reporting, filing,
and notice requirements. The current regulation is silent on when a
corporate credit union must provide a copy of its annual report to
NCUA. To ensure timely filing and provide consistent application of the
requirement, proposed paragraph (c)(1) provides that a corporate credit
union must file a copy of its annual report to NCUA within 180 days
after the end of the calendar year. The report must contain the audited
financial statements, the IPA's report on those statements, a
management report, and, if applicable, the IPA's attestation report on
management's assessment of internal control over financial reporting.
704.15(c)(2) Public Availability
Proposed paragraph (c)(2) provides that NCUA will make a corporate
credit union's annual report available for public inspection.
704.15(c)(3) IPA's Reports
Consistent with good corporate governance, proposed paragraph
(c)(3) requires a corporate credit union to provide NCUA with a copy of
any management letter or report issued by its IPA. The proposal
includes examples of the types of reports covered.
704.15(c)(4) Notice of Engagement or Change of Accountants
In the interests of safety and soundness, and as discussed above,
proposed paragraph (c)(4) requires a corporate to inform NCUA when the
credit union engages an IPA or loses an IPA through dismissal or
resignation. The corporate must include with the notice a reasonably
detailed statement of the reasons for any dismissal or resignation. The
corporate must send a copy of the (c)(4) notice required to the IPA
when the notice is filed with NCUA.
704.15(c)(5) Notification of Late Filing
Proposed paragraph (c)(5) requires the corporate provide a notice
to NCUA of late filing of the annual report. The notice must specify
the reasons for the inability to comply with the 180-day requirement
and must also state the date by which the report will be filed.
704.15(c)(6) Report to Members
Paragraph (a) of the current Sec. 704.15 requires a corporate
credit union to submit a summary of its annual report to the
membership. Recognizing that a corporate credit union may not have
completed its annual report at the time of the annual meeting, proposed
paragraph (c)(6) substitutes the word ``preliminary'' for ``summary.''
704.15(d)(1) Composition
Proposed paragraph 704.15(d) deals with the corporate's supervisory
committee. Proposed paragraph (d)(1) discusses the composition of the
supervisory committee, stating that its members may not be employees of
the corporate credit union and must be independent of the corporate
credit union. The employment prohibition codifies Article X, Section 1,
of the Corporate Federal Credit Union Bylaws for all corporates. The
NCUA Board believes that in the interests of sound governance this
prohibition should be applied to all corporates.
The Board further believes that to avoid potential conflicts of
interest, supervisory committee members should be independent of the
corporate. Under the proposal, a committee member is independent if he
or she does not have any family relationships or material business or
professional relationships with the corporate credit union and has been
free of such relationships for at least three years.
704.15(d)(2) Duties
As a general matter, the supervisory committee should perform all
the duties required of it under the corporate's bylaws as determined by
the corporate's board of directors. Proposed paragraph (d)(2) clarifies
that the committee is also responsible for the appointment,
compensation, and oversight of the IPA, and for reviewing with
management and the IPA the basis for audit reports.
As the SEC noted when it adopted its final rule implementing a
similar provision regarding the audit committees of public companies,
the auditing process may be compromised if a company's outside auditors
incorrectly view their primary responsibility as serving the company's
management rather than the company's full board of directors or audit
committee. See 68 FR 18787, 18796, Apr. 16, 2003. The SEC went on to
state that auditors may view management as the ``employer'' if
management has the power to hire, fire, and set compensation and that
under these circumstances the auditor may not have the appropriate
incentive to raise concerns and conduct an objective review. Id. The
SEC concluded that one way to promote auditor independence was for the
auditor to be hired, evaluated, and, if necessary, terminated by the
audit committee. Id. The NCUA Board believes it is critical that
accountants who perform audit and attestation services for corporates
have an appropriate incentive to conduct an objective review and
identify potential concerns. In this regard, the Board believes it is a
sound governance practice for a corporate's supervisory committee,
rather than its management, to be responsible for the appointment,
compensation, and oversight of the accountant.
704.15(d)(3) IPA Engagement Letters
In response to an observed increase in the types and frequency of
provisions in financial institutions' external audit engagement letters
that limit the auditors' liability, in February 2006 the Federal
financial institution regulatory agencies, including NCUA, issued an
Interagency Advisory on the Unsafe and Unsound Use of Limitation of
Liability Provisions in External Audit Engagement Letters (Interagency
Advisory).\6\ The Advisory states that such provisions may weaken the
external auditors' objectivity, impartiality, and performance, which in
turn may reduce the reliability of audits and consequently raise safety
and soundness concerns. The agencies stated that a financial
institution should not enter into any agreement that incorporates
limitation of liability provisions with respect to audits.
---------------------------------------------------------------------------
\6\ 27 FR 6847, Feb. 9, 2006.
---------------------------------------------------------------------------
Since a central purpose of this proposal is to increase the
reliability of audits, proposed paragraph (d)(3)(i)(B) requires the
supervisory committee ensure that audit engagement letters and any
related agreements with the IPA for services to be performed under part
704 do not contain certain limitation of liability provisions.
Prohibited provisions include any language that
[[Page 73006]]
indemnifies the IPA against claims made by third parties; holds
harmless or release the IPA from liability for claims or potential
claims that might be asserted by the client corporate credit union,
other than claims for punitive damages; or limits the remedies
available to the client corporate credit union. Consistent with the
Interagency Advisory, the proposal does not preclude the use of
alternative dispute resolution agreements and jury trial waivers.
704.15(d)(4) Outside Counsel
Proposed paragraph (d)(4) provides that the supervisory committee
must, when deemed necessary by the committee, have access to its own
outside counsel. All counsel retained by a corporate, regardless of who
at the corporate retained the counsel, owe the same fiduciary duties,
that is, to provide advice in the best interests of the membership.
Accordingly, in most circumstances the Board expects the supervisory
committee, when seeking legal advice, would employ the services of the
in-house counsel or other counsel under contract to the corporate. The
Board believes, however, that in the interest of safety and soundness
the supervisory committee must be able to retain counsel at its
discretion without prior permission of the board of directors or
management, particularly when the committee perceives that the in-house
counsel or other counsel under contract to the corporate may be unable
to provide unbiased advice.
704.15(e) Internal Audit
Paragraph (e) restates the internal audit requirements in the
current paragraph (b).
704.21 Equitable Distribution of Corporate Credit Union Stabilization
Expenses
Some of the recent corporate investment losses were absorbed
directly by the members of the corporates in the form of capital
depletion. Much of these losses, however, were absorbed by the NCUSIF
as it made capital injections and launched liquidity and share
guarantee programs designed to stabilize the corporate system and
protect the system from collapse. The corporate losses absorbed by the
NCUSIF--and subsequently transferred from the NCUSIF to the TCCUSF in
June of 2009 and 2010--will be paid by all FICUs in the form of premium
assessments now and over the next several years. The stabilization
actions taken by NCUA to protect the corporate system benefitted every
member of every corporate, both FICU and non FICU.\7\ Without NCUA's
stabilization actions, the entire corporate system would have been in
danger of collapse. NCUA's actions protected both FICUs and non FICUs
from potential losses in their uninsured shares and from other
potential problems, such as interruptions in their payment systems.
Unfortunately, however, not all corporate members have assumed their
fair share of the expense of NCUA's corporate stabilization actions. In
particular, non FICU members have not paid, and likely will not pay in
the future without some encouragement, their fair share of the expenses
associated with NCUA's stabilization actions. Accordingly, and as
discussed below, this proposal seeks to encourage existing non FICU
members to pay their fair share of such expenses.
---------------------------------------------------------------------------
\7\ The term ``non FICU'' includes every corporate member that
is not insured by the NCUSIF. Trade associations, CUSOs, non credit
union cooperatives, banks, insurance companies, and privately
insured credit unions are examples of entities that might be members
of certain corporates and fall within the term ``non FICU.''
---------------------------------------------------------------------------
The proposal adds a new Sec. 704.21, Equitable Distribution of
Corporate Credit Union Stabilization Expenses, to provide for the
equitable sharing of TCCUSF expenses among all members of corporate
credit unions. Proposed Sec. 704.21 provides that when the NCUA Board
assesses a TCCUSF premium on FICUs, NCUA will request existing non FICU
members make voluntary payments to the TCCUSF. It requires that when
the NCUA Board imposes a TCCUSF premium assessment on FICUs, a
corporate credit union must furnish to NCUA information about all its
non FICU members. NCUA will then request each of these non FICU members
to make a voluntary premium payment to the TCCUSF in an amount
calculated as a percentage of the non FICU member's previous year-end
assets.\8\ In the event one or more of these non FICUs declines to make
the requested payment, or makes a payment in an amount less than
requested, the proposal requires the corporate conduct a member vote on
whether to expel that non FICU. A paragraph-by-paragraph breakdown of
Sec. 704.21 follows.
---------------------------------------------------------------------------
\8\ See 12 U.S.C. 1772a (authority of NCUA to accept gifts for
carrying out any of its functions under the Act); and 12 U.S.C.
1789.
---------------------------------------------------------------------------
When the Board acts to assess a premium on FICUs, paragraph (a)
provides that each corporate credit union must prepare a list of all
its members on the date of the assessment that are non FICUs, including
the name and assets of each such member, with the address and contact
information for each such member. The assets of the non FICUs will be
determined as of the previous year-end. The corporate should collect
information from the member to support this asset calculation, such as
an annual financial statement. If the member will not provide this
information to the corporate, the corporate should simply make its best
estimate of the asset size and inform NCUA of the basis for the
estimate.
Paragraph (b) provides that within 14 days after the date of the
assessment on FICUs, the corporate credit union must send the list of
non FICU members to the NCUA Office of Corporate Credit Unions. A
corporate that has no non FICU members must provide the Office of
Corporate Credit Unions with a statement to that effect.
Paragraph (c) provides that within 60 days after the date of
assessment on FICUs, the NCUA Chief Financial Officer will request each
non FICU to make a voluntary payment to the TCCUSF. The amount of the
requested payment will be the entity's assets times 0.815 times the
percentage of insured shares that each FICU was assessed. The payment
must be received by NCUA within 60 days after the date of the Chief
Financial Officer's request.
NCUA determined the 0.815 factor by using the ratio of total
aggregate FICU insured shares to aggregate FICU assets. NCUA calculated
these ratios for year-end 2008 (ratio = 0.810) \9\ and year-end 2009
(ratio = 0.819) \10\ and then averaged the two ratios to obtain the
factor 0.815. Accordingly, multiplying a non FICU's assets by 0.815
produces an amount approximating the entity's ``insured shares'' as if
the entity were a Federally-insured credit union.
---------------------------------------------------------------------------
\9\ 2008: total shares $658.9 billion; total assets $813.4
billion. http://www.ncua.gov/Resources/Reports/statistics/Yearend2008.pdf (page 1, footnote 3).
\10\ 2009: total shares $724.8 billion; total assets $884.8
billion. http://www.ncua.gov/Resources/Reports/statistics/Yearend2009.pdf (page 1).
---------------------------------------------------------------------------
Paragraph (d) provides that if NCUA does not receive a full, timely
payment of the TCCUSF contribution requested, NCUA will notify the
corporate credit union of the failure. Paragraph (e) requires that no
later than 90 days after receipt of the notice from NCUA, the corporate
must call a special meeting of its members to determine whether each
member that failed to make the full payment should be expelled from the
corporate credit union. For Federally-chartered corporates, the
expulsion vote will be conducted in accordance with Sec. 118(a) of the
Act, which provides that a member may be expelled by a two-thirds vote
of the members present at a special meeting called for that purpose,
[[Page 73007]]
but only after an opportunity has been given to the member to be heard.
12 U.S.C. 1764(a); see Article III, Sec. 5 of the Standard Federal
Corporate Credit Union Bylaws. For State-chartered corporates, the
expulsion vote will be conducted in accordance with the bylaws of the
corporate and applicable State law.
Paragraph (f) permits the corporate to conduct the expulsion vote
at an annual meeting, if that would coincide with the date of any
special meeting called under paragraph (e).
Paragraph (g) provides that for non FICUs that belong to more than
one corporate, NCUA will request only one voluntary payment from that
non FICU in connection with each TCCUSF assessment. If NCUA does not
receive full payment of the amount requested, however, NCUA will notify
all corporates to which the non FICU belongs for purposes of conducting
an expulsion vote.
As should be clear from the language of proposed Sec. 704.21, NCUA
does not ultimately make the determination of whether a non FICU should
make a payment to the TCCUSF or the amount of the payment. The non FICU
makes that determination. NCUA also does not make the determination of
the adequacy of any payment. The members of the affected corporate make
that determination when deciding whether or not to expel the non FICU
member. It is these corporate members, and particularly the FICU
corporate members, that have a vested financial interest in whether or
not non FICU members are contributing equitably to cover losses in the
corporate credit union system.
The Board does not intend at this time to apply Sec. 704.21
retroactively. Section 704.21 would only apply to TCCUSF assessments
made following the effective date of any final rule.
704.22 Enterprise Risk Management
Sound risk management is an integral part of running a corporate
credit union, and corporates need to strengthen their enterprise risk
management. A well-designed enterprise risk management process can help
a corporate by providing a framework within which the board of
directors and senior management can determine:
Where all the corporate's risk exposures lie;
The amount of risk the corporate has in each exposure and
the maximum levels it is willing to accept;
How the risk exposures are changing; and
The appropriate risk controls to limit overall risk to
targeted levels.
Accordingly, this proposal adds a new Sec. 704.22, Enterprise Risk
Management. This section requires corporates to develop and follow an
enterprise risk management policy (paragraph (a)). The board of
directors must establish an enterprise risk management committee that
is responsible for overseeing the corporate's risk management practices
and must report at least annually to the board of directors (paragraph
(b)). The committee must include at least one independent risk
management expert with sufficient experience in identifying, assessing,
and managing risk exposures (paragraph (c)).
The proposal defines independent to mean that the expert does not
have any family relationships or any material business or professional
relationships with the corporate that would affect his or her
independence as a committee member, and has been free of any such
relationships for at least three years (paragraph (d)). The risk
management expert will have post-graduate education; an actuarial,
accounting, economics, financial, or legal background; and at least
five years experience in identifying, assessing, and managing risk
exposures. The expert's experience must also be commensurate with the
size of the corporate and the complexity of its operations. Proposed
paragraph 704.22(e) clarifies that the risk management expert is not
required to be a director of the corporate credit union. The board must
hire this individual from outside the corporate.
Proposed paragraph 704.15(a)(2)(iii) requires management of a
corporate with assets of at least $1 billion assess the effectiveness
of the corporate's internal control structure and procedures for
financial reporting. Proposed paragraph 704.15(a)(3) requires the
corporate's managers to sign the report. The Board requests comment on
whether NCUA should add a corresponding requirement that management
assess the effectiveness of the corporate's enterprise risk reporting
and that the senior risk management official sign the management
report.
704.23 Membership Fees
This proposal adds a new Sec. 704.23, Membership Fees, permitting
corporates the option of charging their members, as a mandatory
requirement of membership, reasonable one-time or periodic membership
fees. The fees must generally be proportional to the member's asset
size, and a member must be given at least six months notice of any new
fees, or any material change to an existing fee. Furthermore, a
corporate can terminate the membership of any credit union that fails
to pay the fee fully and on time.
The September Rulemaking requires corporates to achieve certain
minimum capital ratios, including, over time, certain minimum retained
earnings ratios. NCUA is proposing this amendment to provide corporates
with additional options in building up their retained earnings. Unlike
a capital contribution, which will not flow to retained earnings, a
membership fee flows directly to a corporate's retained earnings.
Paragraph (a) states that a corporate may charge its members a
membership fee. The fees may be assessed on a periodic basis or as a
one-time fee.
Paragraph (b) provides that the corporate must calculate the fee
uniformly for all members and as a percentage of each member's assets.
However, the corporate has the discretion to reduce the amount of the
fee for members that have contributed capital to the corporate. Any
such reduction must be proportional to the amount of the member's non-
depleted contributed capital. Calculating the fee as a percentage of
each member's assets is fairer to smaller natural person credit unions
than a one-size-fits-all fee. In addition, NCUA wishes to give
corporates the flexibility to reduce the size of the fee for those
members that are contributing more capital to the corporate.
Paragraph (c) requires a corporate to give its members a minimum of
six months notice of any new fee, including disclosure of its terms and
conditions, before invoicing the fee. For a recurring fee, the
corporate must also provide six months notice of any material change to
the terms and condition of the fee. Corporate members should be given
adequate time to look for alternatives to membership in the corporate
should they find the fees too onerous. The Board believes that six
months to find an alternative service provider should be appropriate.
Paragraph (d) permits a corporate to terminate the membership of
any credit union that fails to pay the fee in full within 60 days of
the invoice date. The Board believes this is a reasonable amount of
time, given the advance notice required by paragraph (c).
Comment Period
The Board is putting this proposal out for a 30-day comment period
in lieu of the standard 60-day comment period. The proposed rule is
straightforward in its operation, and so does not require extensive
time to consider. In addition, the Board desires, as much as possible,
to coordinate the effective date of this
[[Page 73008]]
rulemaking with the effective dates of the September Rulemaking.
Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact any proposed regulation may
have on a substantial number of small entities (those under $10 million
in assets). For the most part, the proposal applies only to corporate
credit unions, all of which have assets well in excess of $10 million.
The one provision that applies directly to natural person credit
unions, which generally limits membership in one corporate at a time,
will not affect many small credit unions because they generally do not
belong to multiple corporates. Accordingly, the proposed amendments
will not have a significant economic impact on a substantial number of
small credit unions and, therefore, a regulatory flexibility analysis
is not required.
Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency by rule creates a new paperwork burden on regulated
entities or modifies an existing burden. 44 U.S.C. 3507(d); 5 CFR part
1320. For purposes of the PRA, a paperwork burden may take the form of
a reporting, recordkeeping, or disclosure requirement, each referred to
as an information collection.
The proposed changes to part 704 in this proposal impose new
information collection requirements. As required by the PRA, NCUA is
submitting a copy of this proposal to OMB for its review and approval.
Persons interested in submitting comments with respect to the
information collection aspects of the proposed rule should submit them
to OMB at the address noted below.
Estimated PRA Burden
The following discussion describes the new information collection
requirements in the proposal:
1. Recorded director votes.
Proposed Sec. 704.13(c)(8) revises existing Sec. 704.13(c), Board
responsibilities, to require corporates to conduct all board of
directors votes by recorded vote, such that the minutes reporting the
vote list the board members (by name) voting for or against the
proposal, as well as, if applicable, board members who were absent or
otherwise failed to vote, and board members who abstained from the
vote. Proposed paragraph (c)(8) would apply to all 27 corporates. NCUA
estimates that compliance with the requirement to record all board
votes and to include the votes of each director by name in the minutes
will take about one hour. Corporates are required to hold a minimum of
twelve meetings each year. 27 corporates x 12 meetings = 324 meetings
per year. 324 meetings x 1 hour = 324 hours.
2. Equitable distribution of corporate credit union stabilization
fund expenses.
When the NCUA Board assesses a premium on FICUs for the TCCUSF in
accordance with proposed Sec. 704.21, NCUA will ask current non FICU
members of corporates to make voluntary contributions to the TCCUSF.
Proposed Sec. 704.21(e) requires a corporate hold an expulsion vote if
a non FICU member does not make the requested payment. These provisions
would apply to all 27 corporates. NCUA estimates that the NCUA Board
may assess a premium on FICUs for the TCCUSF about once each year for
the next several years.
Proposed paragraphs (a) and (b) of Sec. 704.21 state that when a
TCCUSF premium is assessed on FICUs, a corporate must immediately
prepare a list of all its members that are non FICUs, including the
name and asset size of each such member as of the end of the previous
year, and the address and contact information of each such member, and
forward the list to NCUA. NCUA estimates that it should take each
corporate approximately 20 hours to collect the information, prepare
the list, and submit the list to NCUA. 27 corporates x 20 hours = 540
hours.
Proposed paragraph (e) of Sec. 704.21 provides that following
receipt of a notice of non-payment from NCUA, the corporate must call a
special meeting of its members to determine whether each non FICU
member that failed to make the full payment to the TCCUSF should be
expelled from membership in the corporate. The corporate must notify
NCUA of the result of the member vote. NCUA estimates that
approximately 27 corporates will be required to conduct a member vote
on expulsion once each year. NCUA estimates the preparation and mailing
of notices and ballots (if paper ballots are used), the collection of
ballots (if paper ballots are used), and notifying NCUA of the result
of the vote will take about 25 hours. 27 corporates x 25 hours = 675
hours.
3. Disclosure of dual employee compensation from corporate CUSOs.
The amendment to Sec. 704.11 requires that each corporate CUSO
disclose compensation of dual employees to the corporate credit unions
that make loans to, or invest in, the CUSO. NCUA estimates that this
requirement will apply to five or fewer CUSOs, and that making these
disclosures will take one hour per CUSO. 5 CUSOs x 1 hour = 5 hours.
4. Management report.
Proposed Sec. 704.15(a)(2) requires each corporate credit union to
prepare an annual management report that contains a statement of
management's responsibilities for performing certain duties in the
corporate credit union. The report must also contain an assessment of
the corporate's compliance with certain laws and regulations. NCUA
estimates that it should take each corporate approximately 4 hours to
prepare its management report. 27 corporates x 4 hours = 108 hours.
5. Large corporate credit union management report.
Proposed Sec. 704.15(a)(2)(iii) requires a corporate credit union
with assets of $1 billion or more to include in its management report
an assessment by management of the effectiveness of the corporate
credit union's internal control structure and procedures for financial
reporting. Currently, there are 16 corporates with at least $1 billion
in assets. NCUA estimates that it should take a corporate credit union
approximately 8 hours to prepare its assessment. 16 corporates x 8
hours = 128 hours.
6. Notice of engagement or change of accountants.
Proposed Sec. 704.15(c)(4) requires a corporate credit union to
notify NCUA when it engages an independent public accountant or loses
an independent public accountant through dismissal or resignation. The
corporate credit union must include with the notice a reasonably
detailed statement of the reasons for any dismissal or resignation.
NCUA estimates that no more than five corporate credit unions will
change accountants each year and that it should take a corporate credit
union about two hours to prepare the notice and submit it to NCUA. 5
corporates x 2 hours = 10 hours.
7. Notification of late filing.
Proposed Sec. 704.15(c)(5) requires a corporate credit union that
is unable to timely file its Annual Report to submit a written notice
to NCUA. NCUA estimates that no more than five corporate credit unions
will need to submit such notice and that it should take about one hour
to prepare the notice and submit it to NCUA. 5 corporates x 1 hour = 5
hours.
B. Summary of Collection Burden
NCUA estimates the total information collection burden represented
by the proposal, calculated on an annual basis, as follows:
[[Page 73009]]
Recorded director votes: 27 corporates x 12 meetings x 1 hour = 324
hours.
Preparation of list of non FICU members of a corporate and
providing list to NCUA: 27 corporates x 20 hours = 540 hours.
Conducting special meeting of a corporate's members to expel a
member and notifying NCUA of result of vote: 27 corporates x 25 hours =
675 hours.
Disclosure of dual employee compensation from corporate CUSOs: 5
CUSOs x 1 hour = 5 hours.
Management report: 27 corporates x 4 hours = 108 hours.
Large corporate credit union management report: 16 corporates x 8
hours = 128 hours.
Notice of engagement or change of accountants: 5 corporates x 2
hours = 10 hours.
Notification of late filing: 5 corporates x 1 hour = 5 hours.
Total Burden Hours: 1,795 hours.
The NCUA considers comments by the public on this proposed
collection of information in:
Evaluating whether the proposed collection of information is
necessary for the proper performance of the functions of the NCUA,
including whether the information will have a practical use;
Evaluating the accuracy of the NCUA's estimate of the burden of the
proposed collection of information, including the validity of the
methodology and assumptions used;
Enhancing the quality, usefulness, and clarity of the information
to be collected; and
Minimizing the burden of collection of information on those who are
to respond, including through the use of appropriate automated,
electronic, mechanical, or other technological collection techniques or
other forms of information technology; e.g., permitting electronic
submission of responses.
The Paperwork Reduction Act requires OMB to make a decision
concerning the collection of information contained in the proposed
regulation between 30 and 60 days after publication of this document in
the Federal Register. Therefore, a comment to OMB is best assured of
having its full effect if OMB receives it within 30 days of
publication. This does not affect the deadline for the public to
comment to the NCUA on the proposed regulation.
Comments on the proposed information collection requirements should
be sent to: Office of Information and Regulatory Affairs, OMB, New
Executive Office Building, Washington, DC 20503; Attention: NCUA Desk
Officer, with a copy to Mary Rupp, Secretary of the Board, National
Credit Union Administration, 1775 Duke Street, Alexandria, Virginia
22314-3428.
Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on State and local interests. In
adherence to fundamental federalism principles, NCUA, an independent
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies
with the executive order.
The proposed rule would not have substantial direct effects on the
States, on the connection between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government. NCUA has determined that this proposal
does not constitute a policy that has federalism implications for
purposes of the executive order.
The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this proposed rule will not affect
family well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999, Public Law 105-277, 112
Stat. 2681 (1998).
List of Subjects
12 CFR Part 701
Credit unions, Reporting and recordkeeping requirements.
12 CFR Part 704
Credit unions, Corporate credit unions, Reporting and recordkeeping
requirements.
12 CFR Part 741
Bank deposit insurance, Credit unions, Reporting and recordkeeping
requirements.
By the National Credit Union Administration Board on November
18, 2010.
Mary F. Rupp,
Secretary of the Board.
For the reasons stated in the preamble, the National Credit Union
Administration proposes to amend 12 CFR parts 701, 704, and 741 as set
forth below:
PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS
1. The authority citation for part 701 continues to read as
follows:
Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759,
1761a, 1761b, 1766, 1767, 1782, 1784, 1786, 1787, 1789.
2. Add a new Sec. 701.5 to read as follows:
Sec. 701.5 Membership limited to one corporate credit union.
(a) A Federal credit union is prohibited from joining a corporate
credit union if, after joining, the Federal credit union would be a
member of three or more corporate credit unions.
(b) A Federal credit union is prohibited from joining a corporate
credit union if, after joining, the Federal credit union would be a
member of exactly two corporate credit unions. As an exception, a
Federal credit union may join a second corporate credit union, but only
if the Federal credit union intends to transfer its share and deposit
account(s) from one corporate credit union to the other corporate
credit union and has informed the former corporate credit union of its
intent to resign its membership no later than six months after joining
the latter corporate credit union.
(c) A Federal credit union is prohibited from making any
investment, including a share or deposit account, a loan, or a capital
investment, in a corporate credit union of which the Federal credit
union is not also a member. This prohibition does not apply to
investments made at a time when the Federal credit union was a member
of the corporate.
PART 704--CORPORATE CREDIT UNIONS
3. The authority citation for part 704 continues to read as
follows:
Authority: 12 U.S.C. 1762, 1766(a), 1772a, 1781, 1789, and
1795e.
4. In Sec. 704.2, add the following new definitions:
* * * * *
Critical accounting policies means those policies that are most
important to the portrayal of a corporate credit union's financial
condition and results and that require management's most difficult,
subjective, or complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain.
* * * * *
Enterprise risk management means the process of addressing risk on
an entity-wide basis. The purpose of this process is not to eliminate
risk but, rather, to provide the knowledge the board of directors and
management need to effectively measure, monitor, and control risk and
to then plan
[[Page 73010]]
appropriate strategies to achieve the entity's business objectives with
a reasonable amount of risk taking.
Examination of internal control means an engagement of an
independent public accountant to report directly on internal control or
on management's assertions about internal control. An examination of
internal control over financial reporting includes controls over the
preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America and NCUA
regulatory reporting requirements.
* * * * *
Family, as it relates to a particular individual, means that
individual's spouse, parents, children, and siblings, whether by blood,
marriage, or adoption; and any other person residing in the
individual's home.
* * * * *
Financial statements means the presentation of a corporate credit
union's financial data, including accompanying notes, derived from
accounting records of the credit union, and intended to disclose the
credit union's economic resources or obligations at a point in time, or
the changes therein for a period of time, in conformity with GAAP. Each
of the following is considered to be a financial statement: A balance
sheet or statement of financial condition; statement of income or
statement of operations; statement of undivided earnings; statement of
cash flows; statement of changes in members' equity; statement of
revenue and expenses; and statement of cash receipts and disbursements.
Financial statement audit means an audit of the financial
statements of a credit union performed in accordance with generally
accepted auditing standards by an independent person who is licensed by
the appropriate State or jurisdiction. The objective of a financial
statement audit is to express an opinion as to whether those financial
statements of the credit union present fairly, in all material
respects, the financial position and the results of its operations and
its cash flows in conformity with GAAP.
Generally accepted auditing standards (GAAS) means the standards
approved and adopted by the American Institute of Certified Public
Accountants which apply when an ``independent, licensed certified
public accountant'' audits private company financial statements in the
United States of America. Auditing standards differ from auditing
procedures in that ``procedures'' address acts to be performed, whereas
``standards'' measure the quality of the performance of those acts and
the objectives to be achieved by use of the procedures undertaken. In
addition, auditing standards address the auditor's professional
qualifications as well as the judgment exercised in performing the
audit and in preparing the report of the audit.
* * * * *
Independent public accountant (IPA) means a person who is licensed
by the appropriate State or jurisdiction to practice public accounting.
An IPA must be able to exercise fairness toward credit union officials,
members, creditors and others who may rely upon the report of a
supervisory committee audit and demonstrate the impartiality necessary
to produce dependable findings. As used in this part, IPA is synonymous
with the terms ``auditor'' or ``accountant.'' The term IPA does not
include a licensed person working in his or her capacity as an employee
of an unlicensed entity and issuing an audit opinion in the unlicensed
entity's name, e.g., a licensed league auditor or licensed retired
examiner working for a non-licensed entity.
Internal control means the process, established by the credit
union's board of directors, officers and employees, designed to provide
reasonable assurance of reliable financial reporting and safeguarding
of assets against unauthorized acquisition, use, or disposition. A
credit union's internal control structure generally consists of five
components: Control environment; risk assessment; control activities;
information and communication; and monitoring. Reliable financial
reporting refers to preparation of Call Reports that meet management's
financial reporting objectives. Internal control over safeguarding of
assets against unauthorized acquisition, use, or disposition refers to
prevention or timely detection of transactions involving such
unauthorized access, use, or disposition of assets which could result
in a loss that is material to the financial statements.
Internal control framework means criteria such as that established
in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) or
comparable, reasonable, and U.S. recognized criteria.
Internal control over financial reporting means a process effected
by those charged with governance, management, and other personnel,
designed to provide reasonable assurance regarding the preparation of
reliable financial statements in accordance with accounting principles
generally accepted in the United States of America. A corporate credit
union's internal control over financial reporting includes those
policies and procedures that:
(1) Pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions
of the assets of the entity;
(2) Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the entity are being
made only in accordance with authorizations of management and those
charged with governance; and
(3) Provide reasonable assurance regarding prevention, or timely
detection and correction of unauthorized acquisition, use, or
disposition of the entity's assets that could have a material effect on
the financial statements.
* * * * *
Supervisory committee means, for Federally chartered corporate
credit unions, the supervisory committee as defined in Section 111(b)
of the Federal Credit Union Act, 12 U.S.C. 1761(b). For State chartered
corporate credit unions, the term supervisory committee refers to the
audit committee, or similar committee, designated by State statute or
regulation.
* * * * *
5. In Sec. 704.11, revise paragraphs (g)(5) and (g)(6), and add a
new paragraph (g)(7), to read as follows:
Sec. 704.11. Corporate Credit Union Service Organizations (Corporate
CUSOs).
* * * * *
(g) * * *
(5) Will allow the auditor, board of directors, and NCUA complete
access to its personnel, facilities, equipment, books, records, and any
other documentation that the auditor, directors, or NCUA deem
pertinent;
(6) Will inform the corporate, at least quarterly, of all the
compensation paid by the CUSO to its employees who are also employees
of the corporate credit union; and
(7) Will comply with all the requirements of this section.
6. In Sec. 704.13, revise paragraphs (c)(6) and (c)(7), and add a
new paragraph (c)(8), to read as follows:
Sec. 704.13 Board responsibilities.
* * * * *
[[Page 73011]]
(c) * * *
(6) Financial performance is evaluated to ensure that the
objectives of the corporate credit union and the responsibilities of
management are met;
(7) Planning addresses the retention of external consultants, as
appropriate, to review the adequacy of technical, human, and financial
resources dedicated to support major risk areas; and
(8) All board of directors votes are conducted by recorded vote,
such that the minutes reporting the vote list the board members (by
name) voting for or against the proposal, as well as, if applicable,
board members who were absent or otherwise failed to vote and board
members who abstained from the vote.
7. Revise Sec. 704.15 to read as follows:
Sec. 704.15 Audit and reporting requirements.
(a) Annual reporting requirements--(1) Audited financial
statements. A corporate credit union must prepare annual financial
statements in accordance with generally accepted accounting principles
(GAAP), which must be audited by an independent public accountant in
accordance with generally accepted auditing standards. The annual
financial statements and regulatory reports must reflect all material
correcting adjustments necessary to conform with GAAP that were
identified by the corporate credit union's independent public
accountant.
(2) Management report. Each corporate credit union must prepare, as
of the end of the previous calendar year, an annual management report
that contains the following:
(i) A statement of management's responsibilities for preparing the
corporate credit union's annual financial statements, for establishing
and maintaining an adequate internal control structure and procedures
for financial reporting, and for complying with laws and regulations
relating to safety and soundness in the following areas: Affiliate
transactions, legal lending limits, loans to insiders, restrictions on
capital and share dividends, and regulatory reporting that meets full
and fair disclosure;
(ii) An assessment by management of the corporate credit union's
compliance with such laws and regulations during the past calendar
year. The assessment must state management's conclusion as to whether
the corporate credit union has complied with the designated safety and
soundness laws and regulations during the calendar year and disclose
any noncompliance with the laws and regulations; and
(iii) For a corporate credit union with consolidated total assets
of $1 billion or more as of the beginning of such calendar year, an
assessment by management of the effectiveness of such internal control
structure and procedures as of the end of such calendar year that must
include the following:
(A) A statement identifying the internal control framework used by
management to evaluate the effectiveness of the corporate credit
union's internal control over financial reporting;
(B) A statement that the assessment included controls over the
preparation of regulatory financial statements in accordance with
regulatory reporting instructions including identification of such
regulatory reporting instructions; and
(C) A statement expressing management's conclusion as to whether
the corporate credit union's internal control over financial reporting
is effective as of the end of the previous calendar year. Management
must disclose all material weaknesses in internal control over
financial reporting, if any, that it has identified that have not been
remediated prior to the calendar year-end. Management may not conclude
that the corporate credit union's internal control over financial
reporting is effective if there are one or more material weaknesses.
(3) Management report signatures. The chief executive officer and
either the chief accounting officer or chief financial officer of the
corporate credit union must sign the management report.
(b) Independent public accountant--(1) Annual audit of financial
statements. Each corporate credit union must engage an independent
public accountant to audit and report on its annual financial
statements in accordance with generally accepted auditing standards.
The scope of the audit engagement must be sufficient to permit such
accountant to determine and report whether the financial statements are
presented fairly and in accordance with GAAP. A corporate credit union
must provide its independent public accountant with a copy of its most
recent Call Report and NCUA examination report. It must also provide
its independent public accountant with copies of any notice that its
capital category is being changed or reclassified and any
correspondence from NCUA regarding compliance with this section.
(2) Internal control over financial reporting. For each corporate
credit union with total assets of $1 billion or more at the beginning
of the calendar year, the independent public accountant who audits the
corporate credit union's financial statements must examine, attest to,
and report separately on the assertion of management concerning the
effectiveness of the corporate credit union's internal control
structure and procedures for financial reporting. The attestation and
report must be made in accordance with generally accepted standards for
attestation engagements. The accountant's report must not be dated
prior to the date of the management report and management's assessment
of the effectiveness of internal control over financial reporting.
Notwithstanding the requirements set forth in applicable professional
standards, the accountant's report must include the following:
(i) A statement identifying the internal control framework used by
the independent public accountant, which must be the same as the
internal control framework used by management, to evaluate the
effectiveness of the corporate credit union's internal control over
financial reporting;
(ii) A statement that the independent public accountant's
evaluation included controls over the preparation of regulatory
financial statements in accordance with regulatory reporting
instructions including identification of such regulatory reporting
instructions; and
(iii) A statement expressing the independent public accountant's
conclusion as to whether the corporate credit union's internal control
over financial reporting is effective as of the end of the previous
calendar year. The report must disclose all material weaknesses in
internal control over financial reporting that the independent public
accountant has identified that have not been remediated prior to the
calendar year-end. The independent public accountant may not conclude
that the corporate credit union's internal control over financial
reporting is effective if there are one or more material weaknesses.
(3) Notice by accountant of termination of services. An independent
public accountant performing an audit under this part who ceases to be
the accountant for a corporate credit union must notify NCUA in writing
of such termination within 15 days after the occurrence of such event
and set forth in reasonable detail the reasons for such termination.
(4) Communications with supervisory committee. In addition to the
requirements for communications with audit committees set forth in
applicable professional standards, the independent public accountant
must report the
[[Page 73012]]
following on a timely basis to the supervisory committee:
(i) All critical accounting policies and practices to be used by
the corporate credit union;
(ii) All alternative accounting treatments within GAAP for policies
and practices related to material items that the independent public
accountant has discussed with management, including the ramifications
of the use of such alternative disclosures and treatments, and the
treatment preferred by the independent public accountant; and
(iii) Other written communications the independent public
accountant has provided to management, such as a management letter or
schedule of unadjusted differences.
(5) Retention of working papers. The independent public accountant
must retain the working papers related to the audit of the corporate
credit union's financial statements and, if applicable, the evaluation
of the corporate credit union's internal control over financial
reporting for seven years from the report release date, unless a longer
period of time is required by law.
(6) Independence. The independent public accountant must comply
with the independence standards and interpretations of the American
Institute of Certified Public Accountants (AICPA).
(7) Peer reviews and inspection reports. (i) Prior to commencing
any services for a corporate credit union under this section, the
independent public accountant must have received a peer review, or be
enrolled in a peer review program, that meets acceptable guidelines.
Acceptable peer reviews include peer reviews performed in accordance
with the AICPA's Peer Review Standards and inspections conducted by the
Public Company Accounting Oversight Board (PCAOB).
(ii) Within 15 days of receiving notification that the AICPA has
accepted a peer review or the PCAOB has issued an inspection report, or
before commencing any audit under this section, whichever is earlier,
the independent public accountant must file a copy of the most recent
peer review report and the public portion of the most recent PCAOB
inspection report, if any, accompanied by any letters of comments,
response, and acceptance, with NCUA if the report has not already been
filed.
(iii) Within 15 days of the PCAOB making public a previously
nonpublic portion of an inspection report, the independent public
accountant must file a copy of the previously nonpublic portion of the
inspection report with NCUA.
(c) Filing and notice requirements--(1) Annual Report. Each
corporate credit union must, no later than 180 days after the end of
the calendar year, file an Annual Report with NCUA consisting of the
following documents:
(i) The audited comparative annual financial statements;
(ii) The independent public accountant's report on the audited
financial statements;
(iii) The management report; and, if applicable,
(iv) The independent public accountant's attestation report on
management's assessment concerning the corporate credit union's
internal control structure and procedures for financial reporting.
(2) Public availability. The annual report in paragraph (c)(1) of
this section will be made available for public inspection by NCUA.
(3) Independent public accountant's letters and reports. Each
corporate credit union must file with NCUA a copy of any management
letter or other report issued by its independent public accountant with
respect to such corporate credit union and the services provided by
such accountant pursuant to this part (except for the independent
public accountant's reports that are included in the Annual Report)
within 15 days after receipt by the corporate credit union. Such
reports include, but are not limited to:
(i) Any written communication regarding matters that are required
to be communicated to the supervisory committee (for example, critical
accounting policies, alternative accounting treatments discussed with
management, and any schedule of unadjusted differences); and
(ii) Any written communication of significant deficiencies and
material weaknesses in internal control required by the AICPA's
auditing standards.
(4) Notice of engagement or change of accountants. Each corporate
credit union that engages an independent public accountant, or that
loses an independent public accountant through dismissal or
resignation, must notify NCUA within 15 days after the engagement,
dismissal, or resignation. The corporate credit union must include with
the notice a reasonably detailed statement of the reasons for any
dismissal or resignation. The corporate credit union must also provide
a copy of the notice to the independent public accountant at the same
time the notice is filed with NCUA.
(5) Notification of late filing. A corporate credit union that is
unable to timely file any part of its Annual Report or any other report
or notice required by this paragraph (c) must submit a written notice
of late filing to NCUA. The notice must disclose the corporate credit
union's inability to timely file all or specified portions of its
Annual Report or other report or notice and the reasons therefore in
reasonable detail. The late filing notice must also state the date by
which the report or notice will be filed. The written notice must be
filed with NCUA before the deadline for filing the Annual Report or any
other report or notice, as appropriate. NCUA may take appropriate
enforcement action for failure to timely file any report, or notice of
late filing, required by this section.
(6) Report to Members. A corporate credit union must submit a
preliminary Annual Report to the membership at the next calendar year's
annual meeting.
(d) Supervisory committees. (1) Composition. Each corporate credit
union must establish a supervisory committee. The members of the
supervisory committee must not be employees of the corporate credit
union and must be independent of the corporate credit union. A
committee member is independent if:
(i) The committee member does not have any family relationships or
any material business or professional relationships with the corporate
credit union or its management that would affect his or her
independence as a committee member, and
(ii) The committee member has not had any such relationships for at
least three years preceding his or her appointment to the committee.
(2) Duties. In addition to any duties specified under the corporate
credit union's bylaws and these regulations, the duties of the credit
union's supervisory committee include the appointment, compensation,
and oversight of the independent public accountant who performs
services required under this section and reviewing with management and
the independent public accountant the basis for all the reports
prepared and issued under this section. The supervisory committee must
submit the audited comparative annual financial statements and the
independent public accountant's report on those statements to the
corporate credit union's board of directors.
(3) Independent public accountant engagement letters. (i) In
performing its duties with respect to the appointment of the corporate
credit union's independent public accountant, the supervisory committee
must ensure that engagement letters and/or any related
[[Page 73013]]
agreements with the independent public accountant for services to be
performed under this section:
(A) Obligate the independent public accountant to comply with the
requirements of paragraph (b) of this section (including, but not
limited to, the notice of termination of services, communications with
the supervisory committee, and notifications of peer reviews and
inspection reports); and
(B) Do not contain any limitation of liability provisions that:
(1) Indemnify the independent public accountant against claims made
by third parties;
(2) Hold harmless or release the independent public accountant from
liability for claims or potential claims that might be asserted by the
client corporate credit union, other than claims for punitive damages;
or
(3) Limit the remedies available to the client corporate credit
union.
(ii) Engagement letters may include alternative dispute resolution
agreements and jury trial waiver provisions provided that the letters
do not incorporate any limitation of liability provisions set forth in
paragraph (e)(2)(i)(B) of this section.
(4) Outside counsel. The supervisory committee of any corporate
credit union must, when deemed necessary by the committee, have access
to its own outside counsel.
(e) Internal audit. A corporate credit union with average daily
assets in excess of $400 million for the preceding calendar year, or as
ordered by NCUA, must employ or contract, on a full- or part-time
basis, the services of an internal auditor. The internal auditor's
responsibilities will, at a minimum, comply with the Standards and
Professional Practices of Internal Auditing, as established by the
Institute of Internal Auditors. The internal auditor will report
directly to the chair of the corporate credit union's supervisory
committee, who may delegate supervision of the internal auditor's daily
activities to the chief executive officer of the corporate credit
union. The internal auditor's reports, findings, and recommendations
will be in writing and presented to the supervisory committee no less
than quarterly, and will be provided upon request to the IPA and NCUA.
8. Revise the introductory text of paragraph (a) of Sec. 704.19 to
read as follows:
Sec. 704.19. Disclosure of executive and director compensation.
(a) Annual disclosure. A corporate credit union must annually
prepare and maintain a disclosure of the dollar amount of compensation
paid to its most highly compensated employees, including compensation
from any corporate CUSO in which the corporate has invested or made a
loan, in accordance with the following schedule:
* * * * *
9. Add a new Sec. 704.21 to read as follows:
Sec. 704.21 Equitable distribution of corporate credit union
stabilization expenses.
When the NCUA Board acts to assess a premium on Federally-insured
credit unions for the Temporary Corporate Credit Union Stabilization
Fund (TCCUSF):
(a) A corporate credit union must immediately prepare a list of all
its non-natural person members on the date of assessment that are not
Federally-insured credit unions (``non-FICU members''), including the
name of each such non-FICU member, the assets of each such non-FICU
member as of the end of the previous year, and the address and contact
information of each such non-FICU member.
(b) Within 14 days after the date of the assessment, the corporate
credit union must forward the list described in paragraph (a) of this
section to the Office of Corporate Credit Unions. A corporate credit
union that has no non-FICU members must provide the Office of Corporate
Credit Unions with a response indicating that it has no non-FICU
members.
(c) Within 60 days after the date of assessment, the NCUA Chief
Financial Officer will request each member on the list described in
paragraph (a) of this section to make a voluntary payment to the
TCCUSF. The amount of the requested payment will be the member's assets
(as of the previous year-end) times 0.815 times the percentage of
insured shares that NCUA assessed each Federally-insured credit union.
If the member decides to make a payment, the member must deliver the
payment to NCUA no later than 60 days after the date of the NCUA Chief
Financial Officer's request.
(d) If NCUA fails to receive a full, timely payment of the amount
requested in paragraph (c) of this section, NCUA will notify the
corporate credit union of the failure.
(e) No later than 90 days following receipt of the notice in
paragraph (d) of this section, the corporate credit union must call a
special meeting of its members to determine whether each non-FICU
member that failed to make the full payment to the TCCUSF should be
expelled from the corporate credit union. For a Federally-chartered
corporate credit union, the expulsion vote will be conducted in
accordance with section 118(a) of the Federal Credit Union Act (12
U.S.C. 1764(a)) and the bylaws of the corporate credit union. For a
State-chartered corporate credit union, the expulsion vote will be
conducted in accordance with the bylaws of the corporate credit union
and applicable State law. The corporate credit union must notify the
Office of Corporate Credit Unions of the results of the member vote no
later than 14 days following the date of the vote.
(f) If the corporate credit union's annual meeting falls within the
timeframe specified in paragraph (e) of this section, the expulsion
vote may be conducted at the annual meeting instead of a special
meeting.
(g) For non-FICUs that belong to more than one corporate credit
union, NCUA will request only one voluntary payment from that non-FICU
in connection with each TCCUSF assessment. If NCUA fails to receive a
full payment of the amount requested in paragraph (c) of this section,
however, NCUA will notify all corporate credit unions to which the non-
FICU belongs for purposes of conducting an expulsion vote.
10. Add a new Sec. 704.22 to read as follows:
Sec. 704.22 Enterprise risk management.
(a) A corporate credit union must develop and follow an enterprise
risk management policy.
(b) The board of directors of a corporate credit union must
establish an enterprise risk management committee (ERMC) responsible
for the oversight of the enterprise-wide risk management practices of
the corporate credit union. The ERMC must report at least annually to
the board of directors.
(c) The ERMC must include at least one independent risk management
expert. The risk management expert will have post-graduate education;
an actuarial, accounting, economics, financial, or legal background;
and at least five years experience in identifying, assessing, and
managing risk exposures. The risk management expert's experience must
also be commensurate with the size of the corporate credit union and
the complexity of its operations.
(d) An expert is independent if:
(1) He or she does not have any family relationships or any
material business or professional relationships with the corporate
credit union that would affect his or her independence as a committee
member, and
(2) He or she has not had any such relationships for at least three
years
[[Page 73014]]
preceding his or her appointment to the committee.
(e) The risk management expert is not required to be a director of
the corporate credit union.
11. Add a new Sec. 704.23 to read as follows:
Sec. 704.23 Membership fees.
(a) A corporate credit union may charge its members a membership
fee. The fee may be one-time or periodic.
(b) The corporate credit union must calculate the fee uniformly for
all members as a percentage of each member's assets, except that the
corporate credit union may reduce the amount of the fee for members
that have contributed capital to the corporate. Any reduction must be
proportional to the amount of the member's nondepleted contributed
capital.
(c) The corporate credit union must give its members at least six
months advance notice of any initial or new fee, including terms and
conditions, before invoicing the fee. For a recurring fee, the
corporate credit union must also give six months notice of any material
change to the terms and conditions of the fee.
(d) The corporate credit union may terminate the membership of any
credit union that fails to pay the fee in full within 60 days of the
invoice date.
PART 741--REQUIREMENTS FOR INSURANCE
12. The authority citation for part 741 continues to read as
follows:
Authority: 12 U.S.C. 1757, 1766(a), 1781-1790, and 1790d; 31
U.S.C. 3717.
13. Add a new Sec. 741.226 to read as follows:
Sec. 741.226 Membership in one corporate credit union.
Any credit union which is insured pursuant to Title II of the Act
must adhere to the requirements stated in Sec. 701.5 of this chapter.
[FR Doc. 2010-29546 Filed 11-26-10; 8:45 am]
BILLING CODE 7535-01-P