Perhaps no regulatory change of recent memory has had a greater emotional impact on volunteers than the addition of section 701.4 to the NCUA Rules and Regulations. At the time the director duties and authority regulation became final, there was a frenzy of speculation on its requirements and just a hint of paranoia regarding its true objective.
Now that it’s been a year since the regulation became final, we have a better idea about how this new rule is being interpreted, and also what impact it’s having on the examination process. As we compare and contrast initial fears raised by the rule with the reality of its application, it becomes clear 2011 came in like a lion but is leaving like a lamb.
Fear: The rule will require all board members to acquire a volunteer certification.
Reality: Receiving up-to-date training on the financial services marketplace has always been a volunteer best practice. In light of the new rule, many board members rushed to find the “correct” certification program to comply with the new rules and attended sessions and schools in the hopes of satisfying skeptical examiners. However, comments from examiners reveal it is not the existence of a paper certificate that will satisfy the rule, but evidence that a board member is fully active and educated that will meet the requirement. While there is much insight, information and value to be found in certifications, such a certification is not necessary. The key to compliance is found simply in the documenting of knowledge, attendance, participation and education in board minutes and attachments. So, take note: If you have board members who do not regularly attend and participate in meetings and education sessions, the NCUA will take “special” interest in your credit union per the new rule.
Fear: The rule will require board members to become CPAs and business analysts.
Reality: Boards are faced with increasing pressure to stay informed regarding the complex regulatory and business realities of the financial services marketplace. It is essential for each director to understand line items on financial statements, the types of risk faced by all depository institutions, and internal controls over these risks. In other words, each director must understand the specific activities in which his or her credit union engages and the revenue and risks associated with each. Not only do you not need to be a rocket scientist to understand such matters, you don’t need to be a CPA or business analyst either.
Fear (or thanksgiving, depending on which side of the fence you’re on): The rule will have no impact on state volunteers.
Reality: While the new rule only applies to board members of federally chartered credit unions, it is clear that the guidance is being utilized by both state volunteers and examiners. Conversations with both groups reveal greater emphasis on board involvement in the oversight of the credit union and more time spent reviewing board minutes and training materials. While state-chartered credit unions don’t primarily interact with NCUA, the agency does examine all federally insured credit unions and continues to focus on the board’s role. As such, expect to see more states amend their own laws and regulations to mirror the federal rule.
Fear: The rule will cause examiners to interrogate all board members.
Reality: Conversations with scores of volunteers have not revealed an increase in examiner interaction with the board or an attempt to interview individual members. Rather the examiners are verifying that every federal credit union has developed a volunteer training policy that ensures the proper opportunities and resources are available to the board. The examiner will determine if the policy meets all the suggested requirements and confirm that the credit union and the directors are following the policy. But, if examiners have reason to question a volunteer’s actions or abilities, they will dig further. And if your credit union doesn’t have a fully developed volunteer training policy that addresses the new rule’s requirements, you may receive that dreaded “special” attention from the NCUA.
Fear: The rule will impose substantial new duties on boards.
Reality: Again, the “new” fiduciary requirements are merely a restatement of existing board responsibilities and expectations. The opening section states: “The board of directors is responsible for the general direction and control of the affairs of each Federal credit union. While a Federal credit union board of directors may delegate the execution of operational functions to Federal credit union personnel, the ultimate responsibility of each Federal credit union’s board of directors for that Federal credit union’s direction and control is non-delegable.” This has always been the standard applied to board service, and the new rule simply provides clarification and standardization of key FCU director duties.
Fear: The rule will have a chilling effect on volunteer recruitment and retention.
Reality: Unfortunately, board recruitment and retention have become more difficult … partly due to this new rule. While the rule did not impose major new requirements for board service, it has sparked much discussion on the role of the board and the increased responsibilities of board service. Coupled with so many recent news stories about board member liability, board members and potential board members are thinking twice about service. On the bright side, it has also created an increased sense of urgency on building a bigger bench for board service and taking a hard look at the recruitment and retention process.
In short, the addition of Part 701.4 to the NCUA Regulations merely highlights the increased expectations of your board. But don’t overthink the issue. There have been no significant changes to the expectations of a board member. The new rule simply provides an opportunity for all credit unions to fortify their director training programs.
David Reed is a partner in Reed and Jolly, LCC, Fairfax, Va.
