[Federal Register Volume 76, Number 83 (Friday, April 29, 2011)]
[Rules and Regulations]
[Pages 23861-23871]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-10108]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 704
RIN 3133-AD74
Corporate Credit Unions
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: NCUA is issuing final 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 require 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 also require
disclosure of certain compensation received from the corporate CUSO.
DATES: This rule is effective May 31, 2011, except that the amendments
to Sec. Sec. 704.2 and 704.15 are effective January 1, 2012, and the
addition of Sec. 704.21 is effective April 29, 2013.
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, all at telephone (703) 518-6540), National Credit Union
Administration, 1775 Duke Street, Alexandria, VA 22314; or David
Shetler, Deputy Director, Office of Corporate Credit Unions, at the
address above or telephone (703) 518-6640.
SUPPLEMENTARY INFORMATION:
I. Background
In September 2010, the NCUA Board made substantial revisions to
part 704 (with conforming amendments to parts 702, 703, 709, and 747).
75 FR 64786 (Oct. 20, 2010) (September Rulemaking). These amendments
established a new capital scheme, including risk-based capital
requirements; imposed new prompt corrective action requirements; placed
various new limits on corporate investments; imposed new asset-
liability management controls; amended some corporate governance
provisions; and limited a corporate CUSO to categories of activities
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.
In November 2010, the Board issued the promised follow-on proposal with
further revisions to the corporate rule. 75 FR 73000 (Nov. 29, 2010).
The seven amendments proposed in November would have:
Provided for the sharing of Temporary Corporate Credit
Union Stabilization Fund (TCCUSF) expenses among all members of
corporate credit unions, including both credit union and noncredit
union members;
Limited natural person credit unions (NPCUs) to membership
in one corporate of the NPCU's choice at any one time;
Required corporates conduct all board of director votes as
recorded votes and include the votes of individual directors in the
meeting minutes;
Incorporated certain 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;
Required corporates to establish enterprise-wide risk
management committees staffed with at least one independent risk
management expert;
Allowed corporates to charge their members reasonable one-
time or periodic membership fees; and
[[Page 23862]]
Required the disclosure of compensation received from a
corporate CUSO by certain highly compensated corporate credit union
executives.
The initial public comment period on the November proposals was 30
days, but the Board extended the comment period to 60 days. 75 FR 75648
(Dec. 6, 2010). During the comment period, which closed on January 28,
2011, NCUA received 227 comments from a wide variety of sources.
II. Overview of the Final Amendments
After considering the comments received on the November proposal,
the Board determined not to proceed with the first two proposals listed
above relating to the sharing of TCCUSF expenses and the limitation on
corporate credit union membership. This final rule does include the
other five November proposals. As discussed in detail below, the Board
adopted the membership fee and CUSO compensation disclosure amendments
exactly as proposed. In response to the comments, however, the Board
adopted the final three proposals (i.e., relating to internal controls,
enterprise risk management, and recording director votes) with some
changes from the proposed versions. Additionally, some of the
provisions relating to internal controls and enterprise risk management
have delayed effective dates.
III. Section-by-Section Analysis of the Final Amendments
Section 704.2 Definitions
The proposal included a number of new definitions in Sec. 704.2,
generally relating to terms used in the proposed internal control and
reporting amendments to Sec. 704.15. The newly defined terms included:
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.
Although the proposed rule contained a definition for Family, that
definition has been dropped from this final rule as the Board has
determined that the existing part 704 definition of Immediate family
member is sufficient. This final rule also modifies the proposed
definition of Independent public accountant (IPA) slightly to ensure
that if a state permits accountants licensed out-of-state to practice
accounting in-state, those accountants will be considered to fall
within the IPA definition.
The effective date of these new definitions is delayed to January
1, 2012, to correspond to the earliest effective date of the internal
control and reporting amendments in Sec. 704.15.
Except as described above, the proposed Sec. 704.2 definitions are
adopted as proposed.
Section 704.11 Corporate Credit Union Service Organizations; and Sec.
704.19 Disclosure of Executive and Director Compensation
The proposal included amendments to Sec. Sec. 704.11 and 704.19 to
ensure that the required disclosures of compensation paid to certain
corporate employees under Sec. 704.19 also capture compensation paid
to these employees by any corporate CUSO in which the corporate credit
union has invested or made a loan. The proposed revisions to Sec.
704.19(a) clarified that a corporate credit union's annual disclosures
of compensation paid to its most highly compensated employees must
include any compensation from a CUSO in which the corporate has
invested. To facilitate an accurate disclosure, the proposal also
required the CUSO agree to provide this information about dual employee
compensation to the corporate. This agreement would be embedded in the
general agreement between the corporate and the CUSO discussed in Sec.
704.11(g).
A slight majority of commenters opposed this proposed CUSO
compensation disclosure requirement, and the most frequent reason given
was a concern that this disclosure could lead to ``piercing the
corporate veil'' between the corporate and the CUSO. The NCUA Board
disagrees that disclosure of the compensation of dually-compensated
employees, by itself or in connection with other factors, is likely to
shift a CUSO's legal liability to a corporate.
Some commenters also worried NCUA might eventually impose these
disclosure requirements on natural person credit unions and their CUSOs
as well. At this time, the Board has no such intent. The Board does
believe, however, that the members of corporate credit unions need this
transparency with regard to corporate executive pay.
Other commenters opined that NCUA has no authority to regulate
CUSOs. The Board agrees that it cannot regulate CUSOs directly, but it
can, for safety and soundness reasons, regulate the types of
investments that credit unions make and whether credit unions should
invest in CUSOs. If a corporate wishes to invest in, or loan to, an
entity, that entity will likely meet the definition of a corporate
CUSO, and the CUSO must conform to NCUA's requirements if it wishes to
retain that corporate investment. Another objector termed the proposal
unnecessary because the information is required on, and can be obtained
from, IRS Form 990. This objector is incorrect. For example, federally
chartered credit unions do not file Form 990s, and, typically, the
information contained on a completed Form 990 is not coextensive with
the information required to be disclosed to members under this rule.
One commenter who generally supported the proposal requested that
disclosure be limited to the member/owners of the corporate and that
the disclosure not be made to the general public. The Board notes that
Sec. 704.19 does not require public disclosure, but only disclosure to
members. 12 CFR 704.19(b). The corporate can make this member
disclosure in a nonpublic manner if it desires.
Accordingly, the Board adopts the proposed revisions to Sec. Sec.
704.11 and 704.19 without change.
Section 704.13 Board Responsibilities
The proposal would have amended Sec. 704.13 to require corporates
to conduct all board of director votes as recorded votes and to include
the votes of individual directors in the meeting minutes, with the goal
of increasing the transparency of the corporate credit union decision-
making process. In the final rule, the Board has modified this proposal
to require recording only ``no'' votes and abstentions on a particular
item where the affirmative votes can otherwise be determined as the
remaining directors in attendance.
Many commenters who opposed the proposal were concerned that
requiring recorded votes would create divisiveness within the board or
could lead to individuals being singled out for litigation or
enforcement action. Some commenters also stated that the proposal would
discourage individuals from serving on corporate boards. A few
commenters also expressed concerns that NCUA would also eventually
impose the same requirement on NPCUs. Other commenters opined that the
proposal exceeded NCUA's authority generally, arguing that only states
could impose such requirements on state-chartered corporates. Another
commenter stated this requirement was a matter for the bylaws, not a
regulation.
The Board disagrees with these commenters. Recent events in the
corporate system illustrate the dangers resulting from the insular and
non-transparent decision-making that occurred at some corporate credit
[[Page 23863]]
unions. As corporates continue their efforts to reorganize and recover
from the crisis, it is essential that the members of corporate credit
unions are able to see how their directors vote on matters that affect
the members. While the Board acknowledges the possibility that this
transparency requirement could create dissension among board members,
the Board believes that the benefits of openness and transparency far
outweigh any discomfort individual board members may face from recorded
votes. Further, as discussed in the preamble to the proposed rule, NCUA
has broad authority to require federally-insured credit unions,
including corporate credit unions, to prepare and submit financial
information and other information as the Board requires. 12 U.S.C.
1761, 1766, 1781, 1782(a)(2), and 1789. Because of the importance of
transparency in corporate credit union board decisions, and the effect
those decisions can have on the safety and soundness of the entire
credit union system, the Board believes this provision is appropriately
placed in a regulation rather than relying on each corporate to adopt a
conforming bylaw.
A few commenters also asserted that the proposed recorded vote
requirement would conflict with provisions of Roberts' Rules of Order
that provide for the chair to vote only in case of a tie, or with
provisions of state law and the Revised Model Business Corporation Act
that presume all directors assent to an action unless dissent is
documented. Several commenters suggested recording ``no'' votes and
abstentions would suffice, especially if the meeting minutes list the
directors present. After considering these comments, the Board has
modified the proposal to require recording only ``no'' votes and
abstentions on all board votes, as long as the names of directors
attending the meeting are recorded elsewhere in the minutes.
Except as noted above, the Board adopts the revisions to Sec.
704.13 as proposed.
Section 704.15 Audit and Reporting Requirements
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 proposed to amend
Sec. 704.15 to add certain additional auditing, reporting, and
supervisory committee requirements. These proposals were very similar
to those required of banks by the FDIC. 12 CFR part 363. The most
significant proposed revisions would have required a corporate to:
Ensure that its financial reports reflect all material
correcting adjustments necessary to conform with generally accepted
accounting principles (GAAP) as identified by the corporate's 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, for establishing and maintaining an
adequate internal control structure, and for complying with safety and
soundness laws and regulations; (2) an assessment of the corporate'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.
Ensure that its IPA: (1) Reports to the supervisory
committee all critical accounting policies; (2) retains the working
papers related to an audit for seven years; (3) complies with the
independence standards and interpretations of the American Institute of
Certified Public Accountants (AICPA); (4) has an acceptable peer
review; (5) notifies NCUA if the IPA ceases being a corporate'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's
internal control structure.
Ensure that it: (1) Files a copy of its annual report to
NCUA within 180 days after the end of the calendar year, which NCUA
will make available for public inspection; (2) provides NCUA with a
copy of any letter or report issued by its IPA; (3) informs NCUA when
it engages an IPA or loses an IPA through dismissal or resignation; (4)
provides a notice to NCUA of late filing of the annual report; and (5)
submits a summary of its annual report to the membership.
Ensure that its supervisory committee (1) consists of
members who are independent of the corporate (defined as having no
family relationships or material business or professional relationships
with the corporate); (2) supervises the IPA; and (3) ensures that audit
engagement letters do not contain unsafe and unsound limitation of
liability provisions.
The public commenters that addressed the proposed revisions to
Sec. 704.15 generally did so without discussing the specific
revisions. That is, those in favor of the proposal simply stated that
it was a good idea. Likewise, those opposed maintained generally that
the proposed revisions to Sec. 704.15 were too burdensome. A few
commenters said that if any of the provisions were adopted, they should
apply to all corporates regardless of size.
The NCUA Board believes that the proposed amendments are important
to ensure the accurate and reliable measurement of a corporate credit
union's assets and earnings, which has a direct bearing on the
determination of regulatory capital. The Board believes that the
amendments will help identify weaknesses in internal control 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.
Accordingly, the Board is adopting the provisions as proposed, except
as discussed below. The Board is mindful, however, that corporates are
still adjusting to the major part 704 revisions in the September
Rulemaking, and that imposing these new auditing and reporting
requirements on corporate credit unions immediately could be confusing
and overly burdensome. Accordingly, the Board is delaying the effective
date of all the Sec. 704.15 revisions until at least January 1, 2012,
and as discussed below, delaying some of the revisions into 2013 and
2014.
Proposed paragraph 704.15(a)(2) required corporate credit union
management to prepare an annual report containing certain enumerated
elements. Several elements--including a statement of management's
responsibility for establishing and maintaining an adequate internal
control structure and procedures for financial reporting--applied to
all corporates. However, proposed paragraph 704.15(a)(2)(iii), which
required that management assess the effectiveness of the internal
control structure and procedures for financial reporting, would have
applied only to corporate credit unions with at least $1 billion in
assets. Similarly, proposed paragraph 704.15(b)(2), which required
[[Page 23864]]
that corporates have the IPA attest to management's assertions
concerning the effectiveness of the corporate's internal control
structure and procedures for financial reporting, also applied only to
corporates with at least $1 billion in assets.
Some commenters stated that all the internal control requirements
in Sec. 704.15 should apply to all corporates. After careful
consideration, the Board agrees and has determined to remove the $1
billion asset threshold for these two provisions. All corporates
present systemic risk and therefore should be subject to strong
internal control reviews and attestations. To mitigate the compliance
burden of these requirements, however, the Board has determined to
delay the effective date of these provisions past 2012. The management
assessment requirement in paragraph (a)(2)(iii) will take effect on
January 1, 2013, so that only management reports prepared in 2013 (for
the calendar year 2012) and for later calendar years must contain
management's assessment of the effectiveness of the internal control
structure and procedures. In addition, the IPA assessment requirement
in paragraph (b)(2) will take effect on January 1, 2014 for management
reports prepared for the calendar year 2013 and thereafter.
Proposed paragraph 704.15(d)(1) addressed the composition of a
corporate credit union's supervisory committee, stating that its
members may not be employees of the corporate credit union and must be
independent of the corporate credit union. A few commenters found this
provision confusing, and the Board has clarified it. The final
paragraph (d)(1) states that supervisory committee members must be
independent of the operational side of the corporate, that is, the part
of the credit union that is supervised, directly or indirectly, by the
corporate's Chief Executive Officer.
Except as discussed above, the Board adopts Sec. 704.15 as
proposed.
Section 704.21 Enterprise Risk Management
The proposal included a new section on Enterprise Risk Management
(ERM) requiring all corporate credit unions to develop and follow an
ERM policy. The proposal required the board of directors establish an
ERM committee responsible for overseeing the corporate's risk
management practices and for reporting at least annually to the board
of directors. The committee would include at least one independent risk
management expert with sufficient experience in identifying, assessing,
and managing risk exposures.
The proposal defined independent to mean that the expert does not,
going back three years, 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. The risk
management expert must have a 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. The board
must hire this individual from outside the corporate.
Most of the commenters who commented generally on enterprise risk
assessments thought they were valuable and could be effective tools for
management. Many of these commenters agreed with the proposed rule but
thought it should be refined.
Several other commenters specifically opposed any regulatory ERM
requirement. Many of these commenters thought the ERM proposals were
redundant with other committees (ALCO, supervisory, and audit) and
unnecessary in light of these committees, regular NCUA and state
examinations, and the new NCUA corporate regulations. Some of these
commenters thought that the ERM functions were not sufficiently
distinguished from the functions of the board, ALCO, supervisory
committee, or audit committee, and that the ERM committee might impinge
on the turf of these committees and the board, all without providing
material new information or new benefit. These commenters, however, did
not say specifically how the ERM might cause this confusion. A few
commenters thought that NCUA should consider addressing ERM as guidance
or best practices. A few commenters grouped the proposed rule's ERM and
audit reporting requirements together and generally opposed both as
expensive and unnecessary.
The Board disagrees with these comments. As general matter,
organizations may be practicing good risk management on an exposure-by-
exposure basis, but they may not be paying close enough attention to
the aggregation of exposures across the entire organization. An
organization must measure and understand all the individual risks
associated with its various business components, and also understand
how they interact dynamically. A successful ERM process can help to
meet many of those challenges. As one commenter stated,
``[i]ncreasingly, [ERM] is being utilized by credit unions,
particularly larger ones, as an important mechanism to ensure the
organization has the proper, overall [perspective] on all of its risks
and its capacity to manage those risks. * * * [E]nterprise risk
assessments * * * can be very effective tools [for] making sure the
corporate has the ability to identify, manage, and correct material
risks.''
There is a misapprehension among some commenters that the ERM
committee would be redundant of other committees, such as the
supervisory (or audit) and ALCO or credit committees. The FCU Act,
NCUA's regulations, and the standard federal corporate credit union
bylaws provide for those committees and prescribe targeted areas of
responsibility for each. The ERM committee's unique mission would be to
review and report on management's identification and management of all
of the corporate's significant and emerging enterprise risk. The ERM
committee would act in an advisory capacity to the board of directors
to ensure that the board obtains focused, comprehensive information on
enterprise risk, and not just on the individual, specific risks
addressed by the ALCO, credit, and supervisory committees. The ERM
committee would address all of an enterprise's risks--including
financial, operational, strategic, compliance, and reputational risks--
under one umbrella. The ERM committee would also conduct its analysis
and present its views independent of the earnings pressure faced by the
operational side of the corporate. The pressure to achieve certain
earnings goals can, in some instances, cause the operators to overlook
or downplay the risks associated with their endeavors.
The ERM committee has no power to require action by the corporate
or any part of the corporate, and thus does not overlap with
management's turf or the turf of any other committee. To clarify that
the committee is only advisory, and has no prescriptive powers or
authorities, the final rule replaces the word ``oversight'' with the
word ``review'' as it applies to the ERM committee's activities.
One commenter stated that, if the rule was adopted, it ought to
specify a charter for the ERM committee and the scope of its duties and
delegated responsibilities. The Board believes that the board of
directors of the corporate has the responsibility to specify the duties
of the ERM committee consistent with the requirements of this rule.
Accordingly, a specific charter is not
[[Page 23865]]
necessary. Another commenter stated that annual ERM reporting is
insufficient, and that it should be done at least quarterly. The Board
agrees and has modified the regulation accordingly.
Some commenters addressed the ERM expert. One commenter thought
that a single expert was insufficient, and that multiple experts with
different expertise were necessary. Another commenter thought a ``part-
time'' consultant was not a good idea, and that the rule should
encourage the use of ``in-house full-time risk management experts.'' A
few commenters asked for clarification of the independence concept, and
two commenters did not see how the ERM expert could remain independent
from the corporate once the expert was compensated by the corporate.
In response to these comments, the NCUA Board notes that the
proposal required that the ERM committee include ``at least'' one
independent risk management expert. Each corporate has the authority to
determine whether additional experts are necessary or desirable. The
Board also believes that each corporate should be permitted to decide
whether to employ the expert on a full- or part-time basis as part of
the ERM committee or to engage the expert as a consultant, either part-
or full-time, and has clarified this in the rule text.
As for the independence requirement, the Board's intent was to
ensure the ERM expert is not influenced by the operational side of the
corporate credit union. For clarity, the final rule provides that an
ERM expert is independent if neither the expert, nor any immediate
family member of the expert, is supervised by, or has any other
material business or professional relationship with, the chief
executive officer or anyone supervised, directly or indirectly, by the
CEO. This is similar to the independence standard applicable to the
members of the supervisory committee as provided under Sec. 704.15(d).
Also, the Board notes that the fact that the expert is compensated by
the corporate does not undermine the independence of the expert any
more than compensating the independent public accountant undermines the
IPA's independence.
The Board is delaying the effective date of this ERM section for 24
months to give corporates time to put together an ERM policy, assemble
an ERM committee, and locate and hire a qualified ERM expert. The final
rule also renumbers this ERM section as Sec. 704.21, instead of Sec.
704.22 as proposed.
Except as discussed above, the Board adopts the final ERM section
as proposed.
Section 704.22 Membership Fees
The proposal included a new section on membership fees permitting a
corporate the option to charge its members a one-time or periodic
membership fee as a mandatory requirement of membership. The purpose of
the proposal was to give corporates another tool to build retained
earnings.
The proposal required the fee be uniform and proportional to the
member's asset size. The corporate could reduce the fee for members
that have contributed capital to the corporate, but any reduction would
have to be proportional to the amount of the member's non-depleted
contributed capital. The corporate would have to give members at least
six months advance notice of any initial or new fees, or any material
change to a recurring fee. A corporate could terminate the membership
of any credit union that fails to pay the fee fully within 60 days of
invoicing.
Of the commenters who commented on this provision, slightly over
half supported it, with the rest opposed to it. Several corporate
credit unions commented on the proposal with most supporting it. Many
commenters that supported the proposal recommended some changes to it,
as discussed below.
Some supportive commenters stated corporates should be allowed to
determine the amount of the fee without the limits imposed in the
proposed rule and in accordance with a formulation set by the
corporate. Some of these commenters felt that adequate disclosure to
the members should be the only requirement. The Board does not agree
with these comments. The rule provides corporates the option of
charging reasonable membership fees as a way to build retained
earnings. The requirement that fees be calculated uniformly for all
members and as a percentage of each member's assets is a safeguard
against the imposition of arbitrary and unreasonable fees and ensures
fair treatment of all members, including smaller natural person credit
unions. Furthermore, this fee provision does give corporates the
flexibility to reduce fees for those members that are contributing more
capital to the corporate. One commenter also recommended that the rule
require any membership fees be approved by at least a majority vote of
the corporate's members. Again, the Board disagrees. Allowing members
to vote on whether the corporate may charge such fees would undermine
the corporate's flexibility in employing fees as a tool to attain
required retained earnings targets. Also, the rule provides for
adequate notice to members about upcoming fees so that the members can
oppose the fee or obtain their services elsewhere.
Some commenters stated that the required six-month notice provision
for any new fees is too long, and should be shortened to something like
45 or 60 days. These commenters believe that this would permit
corporates to more accurately estimate the need for and results from
assessing the fee. Another commenter opined that six months notice is
adequate for routine fees, but that for more significant fee charges
the proposal does not allow time for forward planning by credit union
members.
The Board disagrees with these commenters. The Board believes that
the required minimum six-month advance notice is reasonable for
planning by both corporates and members. A notice period shorter than
six months would not give members adequate time to look for alternative
service providers should they find the fees too onerous. The commenter
who said that six months notice is adequate for routine fees, but
wanted a longer advance notice period for more significant charges did
not define ``routine fees'' or ``more significant charges.'' The
proposed rule sets only a minimum notice period; it does not keep a
corporate from providing additional advance notice for particular fees.
Those commenters who opposed permitting membership fees provided
various reasons for their opposition. Some of these commenters felt
such fees would put additional, unwarranted financial strain on NPCUs
already required to contribute capital to corporates and make payments
to the Temporary Corporate Credit Union Stabilization Fund. Many of
these commenters thought the fee option would give corporates too much
power over their NPCU members. The Board believes that the fee rule
provides an acceptable balance between the corporates' need for
retained earnings and capital and the members' need for services.
Some commenters expressed concern about allowing a corporate to
``expel'' a member for not paying membership fees. One commenter felt
the proposal appears to circumvent the expulsion process established in
the FCU Act and that the process of expulsion should be defined with
regard to capital and contract requirements. Several commenters stated
that the proposal does not address whether an NPCU whose membership is
terminated for
[[Page 23866]]
failure to pay the fee will get its perpetual contributed capital back.
The Board believes that some of these commenters are
mischaracterizing the membership termination provision as an
``expulsion'' from membership. A corporate has the right to terminate
membership of any member that does not comply with the minimum
conditions of membership, such as maintaining the minimum share balance
required under the bylaws. Such termination is not an expulsion.
Likewise, failure to pay a legally imposed membership fee in a timely
fashion under this new section subjects the member to potential
membership termination. In addition, provisions for the return of
membership capital are addressed elsewhere in part 704.
The Board notes that the membership fees section numbering in the
proposed (i.e., Sec. 704.23) is changed to Sec. 704.22 in the final
rule. Also, paragraph (d) of the proposed Sec. 704.23 stated that the
corporate credit union may terminate the membership of any credit union
that fails to pay the fee in full on a timely basis. The reference to
credit union should have been to member since corporates may have
certain entities in their fields of membership that are not credit
unions, and the final rule corrects this reference.
Except as discussed above, the Board adopts this membership fee
provision as proposed.
IV. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact any regulation may have on
a substantial number of small entities (those under $10 million in
assets). This final regulation applies only to corporate credit unions,
all of which have assets well in excess of $10 million. Accordingly,
the NCUA Board certifies that this final rule 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). 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. NCUA identified and described several
information collection requirements in the proposed rule. As required
by the PRA, NCUA submitted a copy of the proposed rule to the Office of
Management and Budget (OMB) for its review and approval. Persons
interested in submitting comments with respect to the information
collection aspects of the proposed rule were invited to submit them to
OMB (with a copy to NCUA) at the addresses noted in the preamble to the
proposed rule.
For several reasons, NCUA has modified the final estimated burden
associated with the final rule. At the time the proposed rule was
issued, there were 27 corporate credit unions, and there are now only
26 corporates. This reduction affects the burden estimates for some
aspects of the information collection requirements, as discussed below.
In addition, and as discussed more fully in the preamble to this final
rule, the Board has determined to make several changes in the final
rule, and some of those changes affect the burden estimates for some
aspects of the information collection requirements. These changes are
also discussed below. Finally, NCUA received one comment specifically
addressed to the agency's estimates of paperwork burden as set out in
the preamble to the proposed rule concerning proposed Sec. 704.15,
Audit and reporting requirements. This comment is discussed below in
the section addressing the burden represented by Sec. 704.15(a)(2).
The specific provisions of the final rule with hour-burden
estimates different from the proposal follow.
Section 704.13(c)(8)--Recorded Director Votes
As proposed, this section required all 27 corporates to conduct all
board of director votes by recorded vote and to record those votes in
the minutes of the directors' meetings. In the proposed rule, NCUA
estimated that compliance with the requirement should take
approximately 1 hour and that each corporate would hold 12 meetings per
year. 27 corporates x 12 meetings = 324 meetings per year. 324 meetings
x 1 hours = 324 hours.
There are now 26 corporates, so the estimated burden is reduced. 26
corporates x 12 meetings = 312 meetings per year. 312 meetings x 1 hour
= 312 hours. Accordingly, this change has the effect of decreasing the
estimated burden by 12 hours.
Section 704.21--Equitable Distribution of Corporate Credit Union
Stabilization Fund Expenses
The Board has determined not to adopt this proposal in the final
rule. This eliminates the associated information collection
requirements, which consisted of (i) an aggregate estimated 540 hours
for the preparation of a list of non-FICU members of each corporate and
providing the list to NCUA and (ii) an aggregate estimated 675 hours
for conducting a special meeting of a corporate's members to expel a
member and notifying NCUA of the result of the vote. Accordingly, the
elimination of this section has the effect of decreasing the estimated
aggregate burden by 1,215 hours.
Section 704.15(a)(2)--Management Report
NCUA received one comment letter opposed to nearly every aspect of
the audit and reporting requirements under proposed Sec. 704.15. One
of the comments concerned NCUA's paperwork burden estimates. The
commenter stated that the management report requirements in proposed
Sec. 704.15(a)(2) will substantially increase the cost of compliance,
``far beyond what the NCUA reports in the Summary of Collection Burden
of the regulation.'' The commenter, however, failed to provide any
specific information on what the increased burden hours or costs would
be.
There are two information collections in proposed Sec.
704.15(a)(2), as described below:
(1) As proposed, paragraphs (a)(2)(i) and (ii) of Sec. 704.15
require all corporates to prepare an annual management report that
contains a statement of management's responsibilities for performing
certain duties in the corporate. The report must also contain an
assessment of the corporate's compliance with certain laws and
regulations. NCUA estimated that it should take a corporate
approximately 4 hours to prepare its management report. 27 corporates x
4 hours = 108 hours.
(2) As proposed, paragraph (a)(2)(iii) of Sec. 704.15 required
each 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. There were 16
corporates with at least $1 billion in assets at the time the proposed
rule was issued. NCUA estimated that it should take a corporate
approximately 8 hours to prepare its assessment. 16 corporates x 8
hours = 128 hours.
After considering the comment and based on additional information,
the following factors affect the estimated burden hours associated with
Sec. 704.15(a)(2):
[[Page 23867]]
The number of corporates has dropped from 27 to 26;
The final rule applies the assessment requirements of
Sec. 704.15(a)(2)(iii) to all corporates, regardless of asset size;
and
NCUA estimates that the burden hours per corporate will be
25% greater than the burden estimated in the proposal.
Accordingly, NCUA estimates that it should take a corporate about 5
hours to prepare its management report under paragraphs (a)(2)(i) and
(ii) of Sec. 704.15. 26 corporates x 5 hours = 130 hours.
NCUA estimates that it should take a corporate about 10 hours to
prepare its assessment under paragraph (a)(2)(iii) of Sec. 704.15. 26
corporates x 10 hours = 260 hours.
With the revisions described above, NCUA now estimates the total
information collection burden represented by the final rule, calculated
on an annual basis, as follows:
Recorded director votes: 26 corporates x 12 meetings x 1
hour = 312 hours.
Disclosure of dual employee compensation from corporate
CUSOs: 5 CUSOs x 1 hour = 5 hours.
Management report: 26 corporates x 5 hours = 130 hours.
Assessment: 26 corporates x 10 hours = 260 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: 722 hours.
NCUA has submitted these burden revisions to OMB. NCUA expects that
OMB will review and approve the revisions, and approve NCUA's
submission, in the near future.
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 final rule will 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 final rule
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 final 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).
Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(Pub. L. 104-121) provides generally for congressional review of agency
rules. A reporting requirement is triggered in instances where NCUA
issues a final rule as defined by section 551 of the Administrative
Procedure Act. 5 U.S.C. 551. The Office of Management and Budget has
determined that this rule is not a major rule for purposes of the Small
Business Regulatory Enforcement Fairness Act of 1996.
List of Subjects in 12 CFR Part 704
Credit unions, Corporate credit unions, Reporting and recordkeeping
requirements.
By the National Credit Union Administration Board on April 21,
2011.
Mary F. Rupp,
Secretary of the Board.
For the reasons stated in the preamble, the National Credit Union
Administration amends 12 CFR part 704 as set forth below:
PART 704--CORPORATE CREDIT UNIONS
0
1. The authority citation for part 704 continues to read as follows:
Authority: 12 U.S.C. 1762, 1766(a), 1772a, 1781, 1789, and
1795e.
0
2. Effective January 1, 2012, add definitions of Critical accounting
policies, Enterprise risk management, Examination of internal control,
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 to Sec. 704.2 as follows:
Sec. 704.2 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 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 (GAAP)
and NCUA regulatory reporting requirements.
* * * * *
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 corporate 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
[[Page 23868]]
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, or otherwise authorized 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 to
demonstrate the impartiality necessary to produce dependable findings.
As used in this part, IPA is synonymous with the terms ``auditor'' and
``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 corporate
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.
* * * * *
0
3. Revise paragraphs (g)(5) and (g)(6), and add a new paragraph (g)(7),
to Sec. 704.11 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 the CUSO's 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.
* * * * *
0
4. Revise paragraphs (c)(6) and (c)(7), and add a new paragraph (c)(8),
in Sec. 704.13 to read as follows:
Sec. 704.13 Board responsibilities.
* * * * *
(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) For each item before the board, the meeting minutes list the
names of directors and their votes, as well as the names of any
directors who did not vote, except that if the minutes include a
complete list of directors attending the meeting, the vote tally need
only list the names of directors who voted against the item or who
abstained.
0
5. Effective January 1, 2012, 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
[[Page 23869]]
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) Beginning on and after January 1, 2013, an assessment by
management of the effectiveness of the corporate credit union's
internal control structure and procedures as of the end of the past
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. Beginning on and
after January 1, 2014, 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 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
[[Page 23870]]
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
(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 by NCUA for public inspection.
(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 committee.--(1) Composition. Each corporate credit
union must establish a supervisory committee, all of whose members must
independent. A committee member is independent if:
(i) Neither the committee member, nor any immediate family member
of the committee member, is supervised by, or has any material business
or professional relationship with, the chief executive officer (CEO) of
the corporate credit union, or anyone directly or indirectly supervised
by the CEO, and
(ii) Neither the committee member, nor any immediate family member
of the committee member, has had any of the relationships described in
paragraph (d)(1)(i) for at least the past three years.
(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 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 (d)(3)(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.
[[Page 23871]]
0
6. 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:
* * * * *
0
7. Effective April 29, 2013, add a new Sec. 704.21 to read as follows:
Sec. 704.21 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 reviewing the enterprise-wide risk management practices of the
corporate credit union. The ERMC must report at least quarterly 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. The board of directors may hire the
independent risk management expert to work full-time or part-time for
the ERMC or as a consultant for the ERMC.
(d) A risk management expert qualifies as independent if:
(1) The expert reports to the ERMC and to the corporate credit
union's board of directors;
(2) Neither the expert, nor any immediate family member of the
expert, is supervised by, or has any material business or professional
relationship with, the chief executive officer (CEO) of the corporate
credit union, or anyone directly or indirectly supervised by the CEO;
and
(3) Neither the expert, nor any immediate family member of the
expert, has had any of the relationships described in paragraph (d)(2)
of this section for at least the past three years.
(e) The risk management expert is not required to be a director of
the corporate credit union.
0
8. Add a new Sec. 704.22 to read as follows:
Sec. 704.22 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.
[FR Doc. 2011-10108 Filed 4-28-11; 8:45 am]
BILLING CODE 7535-01-P