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On Compliance: Merger Transparency

September 2017: Vol 40 No 9
Stephen A.J. Eisenberg
NCUA’s proposed rule includes 5 key considerations and plenty of nuance

Weather vane in front of a cloudy skyThis past June, the National Credit Union Administration issued a notice of proposed rulemaking that would expand and amplify credit union procedures related to merger initiatives. Specifically, NCUA’s objective is to enhance transparency—often thought of as “honesty” or “openness”—with members about merger-related transactions. And indeed, transparency and accountability are generally considered the two main pillars of good corporate governance.

The agency explained in the notice that the current environment is “a period of significant consolidation.” This, in turn, has created situations in which “... some prospective merger partners may be seeking to influence the merging credit union’s financial incentives ...” that implicate conflicts of interest in the merging credit union’s management. This explains NCUA’s concerned interest in transparency for members.

During the comment period, many suggestions were submitted to NCUA. We don’t know what the final rule will look like, but we do know critical elements that NCUA will address—elements that boards of directors and management will want to be mindful of in the future should they be involved in a merger. The proposed merger rule touches, among others, five significant areas: definitional changes that accommodate the proposed rule’s modifications; an obligation for greater credit union information submissions to NCUA; revised information standards for members; a right of members to communicate their views with other members; and delineation of the timing of merger process notices.

1. The definitional changes. Now, instead of being required to report information about “senior management officials,” credit unions will need to report information about “covered persons”: the CEO or manager or a person acting in a similar capacity; the four most highly compensated employees at the CU; and any member of the board of directors or the supervisory committee.

In addition, the definition of the term “merger-related financial arrangement” is proposed to be significantly modified. In lieu of numerical standards, the proposal would adopt all increases in compensation over a defined period including both a “look-back” and future timeframe.

2. Greater information submissions. In terms of information presented to NCUA, the merger proposal package would be bolstered with additional required material. The board minutes of both the merging and continuing institutions are being considered for inclusion. The documents would need to cover a set period prior to the boards’ approval of the merger plan. Moreover, the document submission would need to include a certification of the completeness and accuracy of the merger-related financial arrangements.

3. Revised requirements for information provided to members. NCUA noted in the NPRM that it has received many questions concerning what information merging credit unions will be required to provide to their members so that they can most effectively vote on a merger proposal. Simply put, the provision published for comment is an easy-to-read laundry list of minimum requirements that must be communicated to the impacted membership for its evaluation.

4. Member-to-member communication. NCUA has proposed adding a new requirement concerning the ability and right of members to communicate their opinions about a recommended merger to other members of the merging credit union. It has established a right of individuals to voice their views to all other members in advance of the merger vote. This, in NCUA’s view, enables members to have a healthy debate. 

The rule would place the burden upon the merging credit union to either mail or email a member’s expression with reimbursement for the cost of the communication carried by the member requesting the communication. To balance the institution’s rights against those of the member, under certain specified circumstances—such as a member’s inclusion of misstatements or matters involving a personal grievance—a credit union could seek its NCUA regional director’s authority to refrain from or limit the substance of the mailing.

5. Timing of merger notifications. Finally, the NPRM establishes time frames for both the conduct of a proposed merger as well as the timing of carrying out member-requested communications. Accordingly, being aware of the specifics in any final rule will be critical to running a valid merger process.

Beyond these “must knows” are a number of nuanced aspects. Illustratively, in providing “merger-related financial arrangement” information, a “covered person[’s]” personal privacy information may be implicated. If members have a healthy discussion concerning the merger proposal on social media, they may express views that are misinformed or erroneous. In all, the final rule may become a substantial burden for credit unions, especially smaller ones. 

NCUA is attempting to neutralize any question of conflicts of interest by an institution’s management, while enhancing the informed participation of the member owners. Change is in the wind, and it is essential that credit union leaders have a finger up to understand which way it is blowing.

Stephen A.J. Eisenberg is of counsel with CU Counsel PLLC, Washington, D.C.

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