December 17, 2010

At its meeting yesterday, the board of the National Credit Union Administration adopted a rule (12 CFR § 701.4; view the draft of the final rule here) that establishes the fiduciary duties and responsibilities of federal credit union directors to members. The rule is effective 30 days after publication in the Federal Register.

Before NCUA’s action yesterday created an authoritative statement of the fiduciary duties of federal credit union directors, CU officials were obligated to adhere to standards set by state law. The policy promulgated by NCUA superimposes above the state fiduciary duties a federally articulated standard of ethical conduct and principles.

In publishing the draft rule for comment, NCUA offered a uniform set of fiduciary standards for federal credit union directors. At bottom, the agency took the view that a written rule expressing directors’ standards of care would “...be useful to eliminate confusion and may make it easier for FCU boards to fulfill their duties to members.”

A close examination of the newly finalized federal standards shows that they underscore, but do not significantly deviate from, the standards with which directors have had to comply right along. Notably, many of the touchstones of FCU director conduct have previously been expressed in NCUA-promulgated authoritative documentary guidance.

The first principle stated by NCUA in the new rule is that “[t]he board of directors is responsible for the general direction and control of the affairs of each Federal credit union.” This proposition has been expressed in both the Federal Credit Union Act and the standard bylaws for decades.

Thereafter, NCUA’s policy communicates the principle that a federal credit union director has the duty to “[c]arry out his or her duties as a director in good faith, in a manner such director reasonably believes to be in the best interests of the membership of the Federal credit union as a whole [emphasis added], and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.”

This is no more than a restatement of the two cardinal fiduciary principles guiding all directors, the duties of “care” and “loyalty.”

The rule next says directors must administer the affairs of a credit union “fairly and impartially and without discrimination in favor of or against any particular member.” This notion also has long been contained within the standard institutional bylaws.

Finally, NCUA’s rule states that directors must “...have at least a working familiarity with basic finance and accounting practices...” within a reasonable time of election or appointment, not to exceed six months. This proposition also is an extension of the fiduciary duty of care, with the addition of NCUA’s specific six-month timeframe.

It may be wise to maintain a record of director training to show examiners if they inquire about this responsibility.

According to the rule, directors may rely on other sources of knowledge and experience to support them in meeting their obligations. Specifically, directors can rely on the credit union’s staff or third-party professional consultants at the expense of the institution. This reliance on staff or a third-party professional is permissible if a director reasonably believes such individuals are reliable and competent in the advice they render.

Finally, the rule establishes a new prohibition against indemnification in certain circumstances (12 CFR § 701.33(c)(5)). In egregious situations, where a court has determined action by a director represents gross negligence, recklessness or willful misconduct, a credit union may not indemnify a director for personal liability.

Notwithstanding some of the rule’s critics, NCUA’s regulation does not create confusion relating to the standards by which credit union directors must abide. The newly articulated rules are clear, unequivocal and coincident with those that have previously existed. 

CUES member Stephen A.J. Eisenberg is EVP/general counsel for $15 billion Pentagon Federal Credit Union, Alexandria, Va.