Samantha: Hello, this is Samantha Shares.
This episode covers N C U Aâs actual language of the proposed
rule on Succession Planning.
This podcast is educational and is not legal advice.
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and now the proposed rule.
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 701 and 741
Succession Planning
AGENCY: National Credit Union Administration (NCUA).
ACTION: Proposed rule.
SUMMARY: On February 3, 2022, the NCUA Board (Board) published a proposed rule to
require federal credit union (FCU) boards of directors to establish processes for
succession planning for key positions.
Based on the public comments received in response to the proposal, and upon further
consideration of the issues involved, the Board is publishing this second proposed
rule addressing succession planning.
The new proposal is based on the earlier proposed
rule but includes several changes that the Board believes will further
strengthen succession planning efforts for both consumer FCUs
and consumer federally insured, state-chartered credit unions (FISCUs).
DATES: Comments must be received on or before 60 DAYS AFTER DATE OF
PUBLICATION IN THE FEDERAL REGISTER.
ADDRESSES: You may submit written comments, identified by RIN 3133-AF42,
by any of the following methods (Please send comments by one method only):
â¢ Federal eRulemaking Portal: https://www.regulations.gov.
The docket number for this proposed rule is NCUAâ2024â0037.
Follow the instructions for submitting comments.
A plain language summary of the proposed rule is also
available on the docket website.
â¢ Mail: Address to Melane Conyers-Ausbrooks, Secretary of the Board, National Credit
Union Administration, 1775 Duke Street, Alexandria, Virginia 22314â3428.
â¢ Hand Delivery/Courier: Same as mailing address.
â¢ Public inspection: You may view all public comments on the Federal eRulemaking
Portal at https://www.regulations.gov, as submitted, except for those we
cannot post for technical reasons.
The NCUA will not edit or remove any identifying or
contact information from the
public comments submitted.
If you are unable to access public comments on the internet, you may
contact the NCUA for alternative access by calling (703) 518â6540 or
emailing OGCMail@ncua.gov.
FOR FURTHER INFORMATION CONTACT: Office of Examination and Insurance: John Berry,
Policy Officer, at (703) 664-3909 or at 1775 Duke Street, Alexandria, VA 22314.
Office of General Counsel: Ariel Pereira, Senior Attorney, Office
of General Counsel, at (703) 548- 2778 or at the above address.
SUPPLEMENTARY INFORMATION:
Table of Contents
I.
Background
A.
Succession Planning
B.
Increased Relevance of Succession Planning
C.
NCUA Efforts to Strengthen FICU Succession Planning Efforts
II.
The Boardâs February 3, 2022, Proposed Rule
III.
Legal Authority
IV.
This Proposed Rule
A.
Applicability of Proposed Rule
B.
Succession Plan Requirements
C.
Available Resources
D.
Small FICU Considerations
V.
Regulatory Procedures
A.
Providing Accountability Through Transparency Act of 2023
B.
Regulatory Flexibility Act
C.
Paperwork Reduction Act
D.
Executive Order 13132 on Federalism
E.
Assessment of Federal Regulations and Policies on Families
I.
Background
A.
Succession Planning
Board members play a key role in a federally insured credit unionâs (FICU)
success.1 The Federal Credit Union Act (FCU Act) vests the general direction
and control of an FCU in its board.2 The managerial structure for FISCUs
is governed by state law; however, in general, the operational oversight of
FISCUs is under a board of directors or comparable body.3 FICU boards are
faced with a multitude of complicated challenges, such as meeting evolving
member needs, fostering employee loyalty and trust, retaining, and developing
necessary skills, and keeping pace with technological and industry changes.
Among this list of issues, succession planning is one of the most critical.
Succession planning is the process through which an organization helps
identify, develop, and retain key personnel to ensure its viability
and continued effective performance.
It also allows an organization to prepare for the unexpected, including
the sudden departure of key staff.
Succession planning is recognized as vital to the success of any
institution, including FICUs.
1 The term FICU encompasses both FCUs and FISCUs.
2 12 U.S.C.
1761, 1761b; 12 CFR701.4, and Article VI, section 6 of the FCU Bylaws codified
in Appendix A of 12 CFR part 701.
3 The FCU Act, at 12 U.S.C.
1790a reflects the general proposition that a board of directors governs a
FICU (providing that an âinsured credit union shall notify the Board of the
proposed addition of any individual to the board of directorsâ and that an
âinsured credit union may not add any individual to the board of directorsâ
under certain conditions.) This is also reflected in the NCUA regulations.
For example, see 12 CFR 701.14(a), which provides that 12 USC 1790a âsets forth
conditions under which a credit union must notify NCUA in writing of any proposed
changes in its board of directors.â See also,12 CFR 741.3(a)(2) (providing
that a FISCU âboard of directors may authorizeâ the designation of certain
dividends on nonconforming investments as undivided earnings) and 12 CFR
747.2001(b) (referring to the service of credit union notices, directives,
and decisions on appeal to âa dismissed director or officer thereofâ of a FISCU).
One of the variables over which a FICU board has control is the hiring of
the organizationâs senior management.
Succession planning is a critical component of a
FICUâs overall strategic plan.
It helps ensure that the appropriate personnel are available to execute
the FICUâs strategic plan and mission.
There are two elements to a FICU boardâs succession planning strategy.
First, the FICUâs board should develop a pool of talented candidates to
potentially stand for election to the board, to fill temporary board and
committee vacancies by appointment, and to fill appointed positions, such
as to the FICUâs supervisory committee (or equivalent body under state law).
The NCUA Board recognizes the importance of the election process in FICU
governance and emphasizes that the proposed rule is meant to complement
and not supplant the vital role member-owners play in FICU governance.
Second, in furtherance of the boardâs responsibility to oversee the operations
of the FICU, it must consider how best to fill vacancies in senior management
positions held by employees, such as the chief executive officer and the
chief financial officer.4 This includes establishing an order of succession
among existing employees for temporarily filling senior management roles in
the event of a vacancy, as well as the development of strategies to identify,
develop, and retain employees capable of filling these senior positions.
A boardâs failure to plan for vacancies in elected and appointed positions,
as well as the transition of its management, could come with high costs.
The FICU runs the risk of creating a
4 The NCUA regulation at 12 CFR 701.14 defines the term âsenior executive
officerâ to include âthe chief executive officer (typically this individual
holds the title of president or treasurer/manager), any assistant chief
executive officer (e.g., any assistant president, any vice president or any
assistant treasurer/manager) and the chief financial officer (controller).â
leadership vacuum, disrupting operations and potentially jeopardizing the FICUâs
ability to adequately manage liquidity risk, address cybersecurity threats,
or ensure continued compliance with consumer protection, bank secrecy,
and other critical responsibilities.
The FICU may also incur higher costs or be unable to recruit and
retain new leadership and top talent than would be the case if it had
an established succession plan.
Failure to plan for succession can also negatively impact the FICUâs
ability to maintain relationships with members and suppliers and to
secure future business opportunities.
Accordingly, the failure to adequately plan for changes in leadership can
jeopardize the continued viability of a FICU, potentially resulting in the
unplanned merger of the FICU or other disruptions to safe and sound operations
upon the departure of key personnel.
For the above reasons, the Board finds that a compelling safety and soundness
case exists for rulemaking in this area.
The failure of FICUs to adequately plan for succession poses a risk not
only to individual FICUs and their member-owners, but to the credit union
system as a whole and to the National Credit Share Insurance Fund (NCUSIF).
The proposed regulatory changes are designed to mitigate this risk and are
consistent with the Boardâs statutory duty to ensure a safe and sound system of
cooperative credit for its member-owners.
Board action is also consistent with the guidance issued by the other banking
agencies to address succession planning.5
B.
Increased Relevance of Succession Planning
5 See e.g., Federal Reserve Board, Supervisory Guidance on Board of
Directorsâ Effectiveness (Feb.
26, 2021); also, the guidelines of the Office of the Comptroller of the
Currency (OCC) at 12 CFR part 30, Appendix D, captioned âOCC Guidelines
Establishing Heightened Standards for Certain Large Insured National Banks,
Insured Federal Savings Associations, and Insured Federal Branches.â
Several factors have contributed to the increased relevance of
succession planning for FICU boards.
In 2000, the credit union system had 10,316 FICUs.6 The total number of
FICUs declined to 4,645 by the third quarter of 2023.7 This decline is largely
attributable to the long- running trend of consolidation across all depository
institutions.8 This trend has remained relatively constant across all economic
cycles for more than three decades.
In 1999, the NCUA approved 431 FICU consolidations.9 The number of
annual consolidations has decreased since that time but remains steady.
For example, in 2022, the Board approved 181 FICU consolidations.10 In 2023,
the number of approved consolidations was only slightly lower at 145.11
Data suggests that smaller FICUs may be more likely to merge.
The decline in the total number of FICUs has been particularly
steep among the smallest FICUs with less than $10 million in assets.
At the close of 2015, there were 1,816 FICUs with less than $10 million in
assets.12 By the third quarter of 2023, the number of these smallest FICUs was
938.13 This figure represents a decrease from 975 FICUs the previous year.14 By
comparison, during the same period, the number of FICUs with assets of at least
$1 billion increased to 424 from 414.15
6 NCUA, Historical Timeline, https://ncua.gov/about/historical-
timeline#:~:text=2000,more%20than%2077%20million%20members.
7 NCUA, Quarterly Credit Union Data Summary 2023 Q3,
https://ncua.gov/files/publications/analysis/quarterly- data-summary-2023-Q3.pdf.
8 Id.
9 NCUA, NCUA 2000 Annual Report, https://ncua.gov/files/annual-reports/2000AR.pdf.
10 NCUA, Merger and Insurance Reports, https://ncua.gov/analysis/chartering-mergers/merger-activity-insurance-
report.
11 Id.
12 NCUA, Quarterly Credit Union Data Summary 2015 Q4,
https://ncua.gov/files/publications/analysis/PACA- Facts-2015-12.pdf.
13 Supra, note 7.
14 Id.
15 Id.
The available data does not differentiate between those smaller
FICUs that consolidated or were liquidated, versus those that
expanded into a larger asset category.
However, the sharper decline of FICUs in the smaller asset categories, combined
with the ongoing industry trend of consolidation, suggests that mergers may
be more prevalent among smaller FICUs.
Voluntary mergers can be used to create economies of scale to offer more or better
products and services to FICU members.
However, the Board is also aware of numerous instances in recent
years where FICUs merged because of a lack of succession planning.
An NCUA analysis found that poor succession planning was either a primary
or secondary reason for almost a third (32 percent) of FICU consolidations.16
This data has been corroborated by industry participants.17 The Board
is interested in helping FICUs reduce the number of mergers resulting from
the lack of succession planning.
The Board finds that this goal is consistent with the FCU Act, which
contains provisions that disfavor consolidation, implying a presumption
that the public is better served with a greater number of credit unions.
For example, the statute imposes added limitations on the addition of larger
groups to multiple common-bond credit unions, prompting the Board to consider
the feasibility of formation of a separate credit union.18 Further, the
FCU Act provides that the Board shall âencourage the formation of separately
chartered credit unions instead of approving an application to include
an additional group within the field of membership of an existing credit
16 NCUA, Truth in Mergers: A Guide for Merging Credit Unions, page 9,
https://www.ncua.gov/files/publications/Truth-In-Mergers.pdf.
17 See, for example, CUtoday.info, A Look at What Members, Mgmt.
Get in Mergers (November 16, 2021) (âCredit unions merging out of existence,
nearly all of them smaller, shared reasons for merging that included inability to
invest in technology (even though some had very high capital levels), inability to
find volunteers and staff and, a common theme, a lack of any succession planning
and a retiring CEOâ), available at: https://www.cutoday.info/THE-feature/A-Look-at-What-Members-Mgmt.-Get-in-Mergers.
18 12 U.S.C.
1759(d)(1).
union whenever practicable and consistent with reasonable standards for the safe and
sound operation of the credit union.â19
Another reason for a heightened focus on succession planning is the
ongoing retirements of the âBaby Boomerâ generation (individuals
born between 1946 and 1964).
According to the
U.S.
Census Bureau, there are approximately 73 million Baby Boomers, the second-largest
age group after âMillennialsâ (those born between 1982 and 2000).20 By 2030,
all Baby Boomers will have reached age 65 and be eligible for retirement.21 The
COVID-19 pandemic accelerated the pace of retirements among this generational
cohort.22 These retirements include credit union board members and executives.
According to some sources, approximately 10 percent of credit union chief
executive officers were expected to retire between 2019 and 2021.23
Succession planning is critical to the continued operation of those credit
unions with board members and executives that are part of this retirement wave.
C.
NCUA Efforts to Strengthen FICU Succession Planning Efforts
Given the increased importance of the topic, the NCUA has taken several
steps to strengthen current succession planning efforts being taken by
FICUs, and to encourage others that have not yet done so to commence
their succession planning process.
19 12 U.S.C.
1759(f).
20 U.S.
Census Bureau, By 2030, All Baby Boomers Will Be Age 65
or Older, (December 10, 2019), https://www.census.gov/library/stories/2019/12/by-2030-all-baby-boomers-will-be-age-65-or-older.html.
21 Id.
22 Kevin McCarthy, âJust Tired:â Why So Many Bank, Credit Union
CEOs Are Calling it Quits, American Banker (December 7, 2021),
https://www.americanbanker.com/creditunions/news/just-tired-why-so-many-bank-credit- union-ceos-are-calling-it-quits;
and Richard Fry, The Pace of Boomer Retirements Has Accelerated
in the Past Year, Pew Research Center (November 9, 2020),
https://www.pewresearch.org/fact-tank/2020/11/09/the-pace-of-boomer- retirements-has-accelerated-in-the-past-year/.
23 CUtoday.info, CUNA ACUC Coverage: Whatâs Happening in Executive
Compensation (June 19, 2019), https://www.cutoday.info/Fresh-Today/CUNA-ACUC-Coverage-What-s-Happening-in-Executive-Compensation.
In March 2022, the NCUA issued Letter to Credit Unions 22-CU-05, CAMELS Rating
System, which provides that âsuccession planning for key management positionsâ
is a key factor considered when assessing the management of a credit union.24
The Letter to Credit Unions 23- CU-01 included succession planning as one of the
NCUAâs supervisory priorities for 2023.25
Several factors have highlighted the need for rulemaking in this area.
While the NCUA does assess succession planning as part of the CAMELS
Management component, there is no NCUA regulation requiring FICUs to implement
a formal, written succession plan.
As a result, the NCUA lacks a full complement of regulatory tools
to help address deficiencies in a FICUâs succession planning process.
For example, Letter to Credit Unions 23-CU-01 makes clear that NCUA examiners
are precluded from evaluating âany formal or informal succession plans
developed by credit unions beyond what would normally be considered in assigning
the Management component of the CAMELS rating.â26 Moreover, examiners may ânot
issue an Examinerâs Finding or Document of Resolution if the credit union has
not conducted succession planning, or the planning is not adequate, unless the
credit union is in violation of its own policy for conducting succession planning
or administering any such plan(s).â27 The absence of specific regulations
on this topic also means there are no requirements as to what constitutes an
24 NCUA, Letter to Credit Unions 22-CU-05, CAMELS Rating System (March
2022), https://ncua.gov/regulation- supervision/letters-credit-unions-other-guidance/camels-rating-system.
CAMELS is the acronym for the rating system used by the NCUA to assess a
FICUâs performance and risk profile derived from the six critical elements
of a FICUâs operations: Capital adequacy, Asset quality, Management, Earnings,
Liquidity and Sensitivity to Market Risk.
25 NCUA, Letter to Credit Unions 23-CU-01, NCUAâs 2023 Supervisory
Priorities (January 2023), https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/ncuas-2023-supervisory-priorities.
26 Id.
27 Id.
acceptable succession plan.
A regulation would therefore establish a needed, clearly articulated,
and consistently enforceable set of succession planning standards.
II.
The Boardâs February 3, 2022, Proposed Rule
At its January 27, 2022, meeting, the Board approved a proposed
rule to establish succession planning requirements for FCUs.
The proposed rule was published in the Federal Register on February 3, 2022.28
The proposed rule would have required FCU boards of directors to establish
succession plans for key positions, such as officers of the board, management
officials, executive committee members, supervisory committee members, and
(where provided for in the FCUâs bylaws) the members of the credit committee.
Directors would have been required to have a working familiarity
with the succession plan.
The board of directors would also have been required to review the
succession plan in accordance with a schedule established by the
board, but no less than annually.
While the proposed rule would have applied only to consumer FCUs (excluding corporate
FCUs), the preamble noted that the Boardâs purpose was to encourage and strengthen
succession planning for all FICUs.
The preamble of the February 3, 2022, proposed rule provides
additional details regarding the proposed regulatory amendments.
The preamble to the proposed rule presented nine questions on which the
Board specifically sought public input.
The proposed rule provided for a 60-day comment period,
which closed on April 4, 2022.
The Board received 26 public comments on the proposal.29 Comments were
received from individual credit unions, individuals, a law firm, and from
28 87 FR 6078 (Feb.
3, 2022).
29 Pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C.
3501-3520), the Board also published a separate notice soliciting comments
for a period of 60 days on the information collection requirements
contained in the 2022 proposed rule.
(87 FR 7502, Feb.
9, 2022.) The Board did not receive comments specifically in response
to the February 9, 2022, notice.
national, state, and regional organizations representing credit unions.
All of the public comments received by the Board are available for public review
on the Regulations.gov web portal, at: https://www.regulations.gov/document/NCUA-2022-0016-0002/comment.
Most commenters opted to provide general comments rather than address the
specific questions posed in the preamble.
Most commenters acknowledged the importance of succession planning but
questioned the need for succession planning regulations and raised
concerns about the specifics of the proposed regulatory amendments.
Based on the comments received in response to the 2022 proposed rule,
and upon further consideration of the issues involved, the Board is
publishing this second proposed rule addressing succession planning.
The new proposal is based on the earlier proposed rule but includes
several changes that the Board believes will further strengthen succession
planning efforts for all FICUs.
This proposed rule would require that consumer FICUs have succession
plans to proactively address key positions, such as officers of the
board and management officials.
The succession plans will also aid FICU efforts to foster a
culture of growth and development.
III.
Legal Authority
The Board is issuing this proposed rule pursuant to its
authority under the FCU Act.
The proposed rule would establish succession planning
requirements for an FCU.
Section 113 of the FCU Act provides that an FCUâs board of directors
shall have the general direction and control of the affairs of the FCU.30
The board of directors must oversee the credit unionâs operations to
30 12 U.S.C.
1716b.
ensure the credit union operates in a safe and sound manner.
For example, the board must be kept informed about the credit unionâs
operating environment, hire and retain competent management, and ensure that
the credit union has a risk management structure and process suitable for the
credit unionâs size and activities.
Further, under the FCU Act, the NCUA is the chartering and supervisory
authority for FCUs and the federal supervisory authority for FICUs.31
The FCU Act grants the NCUA a broad mandate to issue regulations
governing both FCUs and all FICUs.
Section 120 of the FCU Act is a general grant of regulatory authority and
authorizes the Board to prescribe rules and regulations for the administration
of the FCU Act.32 Section 207 of the FCU Act is a specific grant of
authority over share insurance coverage, conservatorships, and liquidations.33
Section 209 of the FCU Act is a plenary grant of regulatory authority to the
Board to issue rules and regulations necessary or appropriate to carry out its
role as share insurer for all FICUs.34 Accordingly, the FCU Act grants the
Board broad rulemaking authority to ensure that the credit union industry
and the NCUSIF remain safe and sound.
IV.
This Proposed Rule
While the data discussed previously, on their own, support the need for
this rulemaking, the Board finds the need for succession planning as a sound
governance practice equally compelling.
As noted, succession planning is a vital element of a FICUâs long-term strategic
31 12 U.S.C.
1752-1775.
32 12 U.S.C.
1766(a).
33 12 U.S.C.
1787(b)(1).
34 12 U.S.C.
1789(a)(11).
plan.
This rule will further strengthen FICU succession planning efforts.
The following presents an overview of the proposed regulatory changes.
A.
Applicability of Proposed Rule
These proposed regulatory amendments would apply to all consumer FICUs.
The Board recognizes the importance of state law in FISCUsâ internal governance
and that some FISCUs may already be subject to state-specific succession
planning requirements.35 However, as discussed, the Board finds the proposed
rule is appropriate to protect the NCUSIF from undue risk associated
with mergers that may cause a loss to the NCUSIF or negatively affect the
credit union industryâs overall health.
The Board also recognizes that under its statutory authorities relating to
unsafe or unsound practices, the NCUA may act to address such practices in
all FICUs.36 However, to the extent that a FISCU is subject to a state
statutory or regulatory requirement that conflicts with the proposed rule, the
NCUA will defer to the state requirement.
The Board specifically invites public comment on the inclusion of FISCUs within
the scope of the regulatory amendments.
Consistent with the prior proposal, this proposed rule would not amend the
regulations in 12 CFR part 704, which establish requirements applicable to
federally insured corporate credit unions.
These regulations contain provisions that address succession planning.
For example, Â§ 704.13(c)(1) requires that the corporateâs board of directors
must ensure that â[s]enior managers
â¦ are capable of identifying, hiring, and retaining qualified staff.â
Further, paragraph (c)(2) of
35 The Board recognizes that state law also plays a role in FCUsâ
governance, as the model FCU bylaws reflect in several instances; however,
the Board performs a significant role in this process in preparing the
form of the bylaws under 12 U.S.C.
1758.
36 See 12 U.S.C.
1786(e), (k).
the section requires that the corporateâs board of directors ensure that
â[q]ualified personnel are employed or under contract for all line support
and audit areas, and designated back-up personnel or resources with adequate
cross-training are in place.â While the scope of the proposed rule does not
include corporate credit unions, the Board welcomes public comment on whether
changes to the wording of Â§ 704.13 are necessary to effectuate the purposes
of the proposed regulatory amendments.
Additionally, while the proposed rule does not add any specific requirements
for Minority Depository Institutions (MDI), the Board encourages MDIs to
consider how their succession plans will affect their MDI designation status.
Recently the Board voted to update its policy to preserve MDI institutions.
To that end, we encourage federally insured credit unions to the
greatest extent possible, to develop a succession plan that maintains
the board and senior leadership composition to maintain MDI eligibility.
The Board also invites public comment on how the NCUA can support this effort
and any unique barriers MDIs may face when developing succession plans.
B.
Succession Plan Requirements
The Board proposes to establish the new succession planning
requirements by amending part 701 of its regulations, which govern the
organization and operation of FCUs.
Specifically, the proposed rule would add a new paragraph (e) to Â§ 701.4,
which sets forth the general duties and responsibilities of FCU directors.
The proposed rule would make these amendments applicable to FISCUs
through an amendment to 12 CFR part 741, subpart B, which sets forth
regulations codified elsewhere in the NCUAâs regulations as applying
to FCUs that also apply to FISCUs.
The Board proposes to add a new Â§ 741.228 that addresses succession planning.
The proposal would require that a FICU board of directors establish
a written succession plan that addresses specified positions
and contains certain information.
In addition, the board of directors would be required to review the succession
plan in accordance with a schedule it establishes, but no less than annually.
The Board recognizes that circumstances might necessitate deviations from the
plan in filling specific vacancies.
The proposed regulatory text accommodates such exigencies but, as with substantive
deviations in budgets and strategic plans, it would be expected the board would be
informed of changes and rationale and document them in its meeting minutes.
The Board invites comments on the proposed board responsibilities in
the development of succession plans.
Would the succession planning process be better served by restricting
or prohibiting deviations from the succession plan in between the
mandated regular review period?
Additionally, the Board invites comments on how the NCUA can provide better
support to credit unions in developing succession plans, and attracting new
talent to the credit union system?
The Board is also interested in comments on the timetable for regular review of
the plans and whether the final rule should provide for a different timeframe
or grant boards additional flexibility in establishing the review period.
In specifying the officials covered by the succession plan, the Board has
relied on the language of the FCU Act, which provides that â[t]he management
of a Federal credit union shall be by a board of directors, a supervisory
committee, and where the bylaws so provide, a credit committee.â37 The
model FCU bylaws codified in Appendix A of 12 CFR part 701 expand the
37 12 U.S.C.
1761.
list of senior FCU officials to include management officials, assistant
management officials, and loan officers.
In addition, the NCUA regulation at 12 CFR 701.14 defines the term âsenior
executive officerâ to include the FICUâs chief executive officer (typically
this individual holds the title of president or treasurer/manager), any
assistant chief executive officer (for example, any assistant president,
any vice president, or any assistant treasurer/manager) and the chief
financial officer (controller).38
Accordingly, under the proposed rule, the written succession plan must, at
a minimum, cover the following FICU positions, or their equivalent if the FICU
has adopted different position titles:
â¢ Members of the board of directors;
â¢ Members of the supervisory committee;
â¢ Members of the credit committee, where such a committee is provided
for in the FICUâs bylaws and is involved daily in the review of loans;
â¢ Loan officers, where provided for in the FICUâs bylaws in lieu of a credit
committee and the loan officers are involved daily in the review of loans;
â¢ Management officials and assistant management officials, as those
terms are defined in the model FCU bylaws, if the FICU has provided for
such positions in its bylaws; and
38 This provision applies to all FICUs.
See also 12 CFR 741.205 (Reporting requirements for credit unions that are
newly chartered or in troubled condition).
In the preamble to the 1990 final rule establishing the definition of âsenior
executive officer,â the Board clarified the intended scope: âBy definition,
a vice president or assistant manager holds a senior position, ranking
immediately below the president or manager, serves as a deputy or assistant
in carrying out management functions, and is empowered, among other things,
to assume the duties of president or manager in that individualâs
absenceâ 55 FR 43084, 43085 (Oct.
26, 1990).
â¢ The FICUâs âsenior executive officersâ as defined in 12 CFR 701.14 and any other
FICU personnel the board of directors deems critical given the FICUâs size,
complexity, or risk of operations.
This includes new positions that may be required due to planned
changes in operations, supervisory landscape, or corporate structure.
As noted, the succession plans would be required to address credit committee
members and loan officers only if such personnel are involved on a
daily basis in the review of loans.
The succession plans are intended to cover senior leadership positions
responsible for the oversight of the FICU or its day-to-day management.
Accordingly, the NCUA believes credit committee members and loan
officers may not merit inclusion if their duties are limited to the
review of periodic, specific lending decisions or other âas-neededâ basis.
However, the Board invites public comments on the inclusion of credit
committee members and loan officers.
The proposed rule would also establish certain required contents
for a written succession plan.
First, the succession plan would be required to identify the title of the
incumbent for each covered position, the expiration of the incumbentâs term (if
serving in a term-limited capacity) or other anticipated vacancy date (such as
the incumbentâs retirement eligibility date or announced departure date).
The succession plan must also describe the FICUâs general plan or strategy
for temporarily and permanently filling vacancies for each of the
positions, including vacancies due to unexpected circumstances.
For example, the plan could provide an order or succession among the
FICUâs senior executive officers for temporarily assuming the role
of chief executive officer in the event of vacancy until such time as
a permanent hiring decision is made.
Similarly, the plan might establish an order of succession
within individual components of the FICU for temporarily filling
specific senior executive positions (for example, the deputy chief
financial officer temporarily filling the role of chief financial officer).
Likewise, to the extent provided in the bylaws, certain board members
might be designated to assume specific duties until the selection of a
permanent successor (for example, a specified board member temporarily
assuming the duties of a vacated position on the investment committee).
Also, a smaller credit union could establish a relationship with a larger
credit union to help manage the credit union during the time it takes to recruit
and fill a senior executive vacancy.
There is no expectation the plan specify particular successors, only
how the FICU will go about appointing interim replacements and recruiting
for a permanent replacement.
The FICUâs bylaws may establish procedures for filling vacancies on the board of
directors and certain other positions.
The succession plan should be consistent with any such provisions of the bylaws.
Further, FICUs must continue to comply with all applicable employment or
personnel laws and other requirements in making hiring decisions.
In addition, the succession plan would be required to address the FICUâs strategy
for recruiting candidates with the potential to assume each of the positions.
This could include, for example, the availability of associate director
positions on the FICUâs board, mentorship programs, educational
opportunities offered by the FICU, internships, staff development
plans, and other similar efforts.
The strategy must consider how the selection and diversity among the
employees covered by the succession plan collectively and individually promotes
the safe and sound operation of the FICU.
The board of directors should also consider budgetary impacts in the
development of its succession plans.
For example, the plan should consider the compensation that will be required
to attract talented candidates, given such factors as the necessary education
and skills, or the market for comparable positions at other FICUs.
The decision regarding the compensation for one position
may impact the FICUâs ability to budget for other staffing needs.
Accordingly, FICUs should account for these future needs in financial
planning to strengthen their ability to plan for future personnel needs.
The Board emphasizes that succession plans should provide sufficient detail
and use language that is reasonably understandable to the FICUâs member
owners in describing its strategies for filling vacancies and for recruiting,
developing, and retaining employees.
A FICU is owned by its members, who elect the board and to whom the
directors are ultimately answerable.
Accordingly, the Board believes it is vital that succession plans be
clearly and concisely written, use everyday language to the extent
possible, and avoid ambiguous phrasing open to differing interpretations.
The Board welcomes comment on the list of covered positions and the other
proposed contents of the succession plan, and whether the final rule should
require FICUs to address additional or different information in the plans.
Depending on the comments and its continued consideration of this issue,
in finalizing the proposed rule, the Board may adopt minor changes or
additions to these requirements to meet the proposalâs goal of promoting
thorough succession planning.
The proposed rule would also amend Â§ 701.4(b)(3), which sets forth certain
education requirements for FCU directors, to require that directors have a working
familiarity with the FCUâs succession plan no later than 6 months after appointment.
In making this change, the Board also proposes to reorganize the
current contents of paragraph (b)(3) for clarity and grammar.
No additional substantive changes are proposed to the current requirements of
Â§ 701.4(b)(3).
These amendments would be made applicable to FISCUs through proposed new
Â§ 741.228.
The expectation is for a FICU to develop a succession plan that is
consistent with its size and complexity.
Therefore, smaller FICUs are more likely to have a simple succession plan that only
addresses a few key leadership positions.
Larger and more sophisticated FICUs are expected to have more detailed plans.
For example, smaller FICUs may have fewer board members, or have fewer
staff that would qualify for the positions listed in the proposed rule
for inclusion in the succession plan.
Likewise, smaller FICUs are likely to have less expansive employee recruitment,
development, and retention strategies.
In evaluating whether a succession plan meets the requirements of the
rule, the NCUA will consider the size of the FICU, as well as the
complexity and risk of its operations.
The Board emphasizes that succession plans should include an estimate of
the budgetary impacts of executing the succession plan, including costs
associated with new hires, such as the hiring of recruitment firms and increased
compensation packages for new hires.
It is not required for credit unions to have an exact figure but
at a minimum consider an estimate to allow for better planning.
C.
Available Resources
The NCUA offers training and other resources to aid FICUs in
developing their succession plans.
For example, the NCUA has posted a video series on succession planning
on the internet.39 In addition, the Boardâs 2019 final rule on
FCU bylaws promoted succession
39 NCUA, Succession Planning (2021), https://ncua.csod.com/LMS/catalog/Welcome.aspx?tab_page_id=-
67&tab_id=221000382.
planning efforts by providing guidance to FCUs on associate director positions.40
The final rule clarified, through staff commentary, that these positions may
be thought of as apprenticeships in which the incumbent receives training
and knowledge about the business of the board, with the expectation that the
experience will prepare the individual to serve as a director if elected for such
a position by the membership or appointed on an interim basis in an exigent
circumstance.41 FISCUs may wish to provide for similar positions if consistent with
applicable state law and regulation, and applicable credit union bylaws.
In addition, credit union trade associations may also provide
training and have guidance available to assist credit unions in the
development of their succession plan.
FICUs with a low- income designation may be able to apply for technical assistance
grants to support succession planning or offset training costs through the
Community Development Revolving Loan Fund.
FICUs are encouraged to make use of these and other available resources
in complying with the proposed rule.
FICUs are also encouraged to use already existing information
in preparing their plans.
For example, under the NCUA guidelines codified in 12 CFR part 749, Appendix
B, all FICUs are encouraged to develop a program to prepare for a catastrophic act.
The codified guidelines suggest that the program address several elements that
are also relevant to succession planning.
These suggested elements include a âbusiness impact analysis to
evaluate potential threats,â the determination of âcritical systems
and necessary resources,â and the identification of the â[p]ersons
with authority to enact the plan.â
40 84 FR 53278 (Oct.
4, 2019).
41 Id.
at 53301.
D.
Small FICU Considerations
As discussed previously, smaller FICUs may be more likely to merge, and data
indicates the lack of succession planning is a significant cause of mergers.42
Accordingly, smaller FICUs may be the most likely to benefit from the proposed rule.
The Board recognizes, however, that these FICUs may lack the resources or
expertise to develop succession plans.
Accordingly, smaller FICUs may especially benefit from the
existing resources identified above.
The NCUAâs Small Credit Union Support Program is another available resource
through which FICUs with less than $100 million in total assets may
seek assistance in a variety of areas, including succession planning.
In addition, the Board has developed a sample template for a succession plan that
may be appropriate for some smaller FICUs, though all FICUs may benefit from it.
FISCUs electing to use the template should consult applicable state requirements
to ensure their succession plans are consistent with any such requirements.
The proposed template is available for review and comment within the
Regulations.gov docket for this notice of proposed rulemaking.
Smaller FICUs may also benefit from seeking the assistance of larger and
more sophisticated FICUs in developing and implementing their succession plans.
For example, a larger FICU may provide technical expertise in the drafting
of the plan or may detail personnel to temporarily fill a critical vacancy
in a smaller credit union until such time as it is permanently filled.
In general, a FICU may engage outside parties to assist in compliance,
so long as the FICUâs board retains authority and is cognizant that
it is responsible for compliance.
42 Supra, note 16.
The Board specifically invites comment from smaller credit unions on the proposed
template, as well as other suggestions, to improve succession planning and reduce
any burden associated with the proposal.
V.
Regulatory Procedures
A.
Providing Accountability Through Transparency Act of 2023
The Providing Accountability Through Transparency Act of 2023 (5 U.S.C.
553(b)(4)) (Act) requires that a notice of proposed rulemaking include the internet
address of a summary of not more than 100 words in length of a proposed rule, in
plain language, that shall be posted on the internet website under section 206(d)
of the E-Government Act of 2002 (44 U.S.C.
3501 note) (commonly known as regulations.gov).
The Act, under its terms, applies to notices of proposed rulemaking and
does not expressly include other types of documents that the Board publishes
voluntarily for public comment, such as notices and interim-final
rules that request comment despite invoking âgood causeâ to forgo
such notice and public procedure.
The Board, however, has elected to address the Actâs requirement
in these types of documents in the interests of administrative
consistency and transparency.
In summary, the proposed rule would require that FICU boards of
directors establish succession plans to proactively address any vacancies
that may occur for key positions.
The proposal is based on a prior February 3, 2022, proposed rule
but includes several changes that the Board believes will further
strengthen FICU succession planning.
The proposal and the required summary can be found at https://www.regulations.gov.
B.
Regulatory Flexibility Act
The Regulatory Flexibility Act43 generally requires an agency to conduct
a regulatory flexibility analysis of any rule subject to notice and comment
rulemaking requirements, unless the agency certifies that the rule will not
have a significant economic impact on a substantial number of small entities.
If the agency makes such a certification, it shall publish the certification at
the time of publication of either the proposed rule or the final rule, along
with a statement providing the factual basis for such certification.44 For
purposes of this analysis, the NCUA considers small credit unions to be those
having under $100 million in assets.45 The Board fully considered the potential
economic impacts of the regulatory amendments on small credit unions.
The proposed rule would require that FICU board of directors establish,
and comply with, a written succession plan that addresses certain specified
positions and contains specified elements.
In addition, the board of directors would be required to review the
succession plan no less than annually.
These requirements may impose some cost on FICUs.
However, the NCUA believes several factors mitigate the potential costs,
especially for small FICUs with assets of less than $100 million.
First, the preamble makes clear that an FICU is expected to develop a
succession plan that is consistent with its size and complexity.
Therefore, small FICUs may have a simple succession plan that is less
costly to prepare than would be the case for larger and more complex FICUs.
Further, in recognition that smaller FICUs may lack the
resources or expertise to develop
43 5 U.S.C.
601 et seq.
44 5 U.S.C.
605(b).
45 80 FR 57512 (Sept.
24, 2015).
succession plans, the Board is providing a sample template for
a simple succession plan that may be appropriate for these FICUs.
The Board is also aware that many FICUs, including small FICUs, have
already adopted succession plans.
Many of these existing plans should already address, either partially or
in their entirety, the elements that would be required by the proposed rule.
This could minimize the burden of complying with the new requirements.
The NCUA also offers training and other resources to aid credit unions
in developing their succession plans.
For example, the NCUA has posted a video series on succession
planning on the internet.
Smaller FICUs are encouraged to seek assistance from larger or more
sophisticated FICUs in the development of the required succession plans.
FICUs are also encouraged to use already existing information in preparing
their plans, such as the data used to develop the recommended program
to prepare for a catastrophic act.
These resources should further reduce the costs of preparing the succession plans.
Accordingly, the NCUA certifies the proposed rule would not have
a significant economic impact on a substantial number of small credit unions.
C.
Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemaking in which an
agency creates a new or amends existing information collection requirements.46
For purposes of the PRA, an information collection requirement may take the
form of a reporting, recordkeeping, or a third-party disclosure requirement.
The NCUA may not conduct or sponsor, and the respondent
46 44 U.S.C.
3501-3520; 5 CFR part 1320.
is not required to respond to, an information collection unless it
displays a valid Office of Management and Budget (OMB) control number.
The proposed changes to part 701 would establish new information collections in
the form of succession policies and plans.
These revisions will be submitted for approval by the Office of Information
and Regulatory Affairs at OMB.
Persons interested in submitting comments with respect to the information collection
aspects and the estimated burden of the proposed rule should submit them
via email or to OMB as noted below.
Estimated PRA Burden
The NCUA estimates a total annual burden of 46,750 hours as follows:
â¢ OMB Control Number: 3133-NEW.
â¢ Title of Information Collection: Succession Planning.
â¢ Estimated number of respondents: 4,675.
â¢ Estimated number of responses per respondent: 1.
â¢ Estimated total annual responses: 4,675.
â¢ Estimated total annual burden hours per response: 10.
â¢ Estimated total annual burden hours: 46,750.
The NCUA invites comments on (a) Whether the proposed collection of information
is necessary for the proper performance of the functions of the agency, including
whether the information will have practical utility; (b) the accuracy of
the agencyâs estimate of the burden of the proposed collection of information,
including the validity of the methodology and assumptions used; (c) ways to enhance
the quality, utility, and clarity of the information to be collected; and
(d) ways to minimize the burden of the 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; and (e) estimates of capital or start-up costs and cost
of operation, maintenance, and purchase of services to provide information.
All comments are a matter of public record.
Interested persons are invited to submit written comments via email to
(1) PRAComments@ncua.gov or (2) visit www.reginfo.gov/public/do/PRAMain
(find this particular information collection by selecting
the tab titled âInformation Collection Reviewâ and click on to
the section titled âCurrently under Review â Open for Public commentâ).
D.
Executive Order 13132 on Federalism
Executive Order 13132 encourages independent regulatory agencies
to consider the impact of their actions on state and local interests.
The NCUA, an independent regulatory agency as defined in 44 U.S.C.
3502(5), voluntarily complies with the executive order to adhere to
fundamental federalism principles.
This proposed rule applies to FCUs and, if adopted, will also apply to FISCUs.
By law, FISCUs are already subject to numerous provisions of NCUAâs rules,
based on the agencyâs role as the insurer of member share accounts and
the significant interest NCUA has in the safety and soundness of their operations.
The rulemaking may, therefore, have an occasional direct effect on the states,
the relationship between the national government and the states, or on the
distribution of power and responsibilities among the various levels of government.
The Board specifically requests comment on ways to eliminate, or at least minimize,
potential conflicts in this area.
Based on the comments received, the final rule may
modify the application of the succession planning requirements
to FISCUs as necessary to carry out the purposes of this rulemaking and
the intent of the Executive Order.
E.
Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this proposed rule would not affect family
well-being within the meaning of Section 654 of the Treasury and General
Government Appropriations Act, 1999.47 The proposed regulatory requirements are
exclusively concerned with succession planning policies of FICUs for
replacing vacancies among board members and other key management officials.
While the proposed rule is intended to maintain access to quality credit
union services by reducing unplanned or forced consolidations, the
potential positive effect on family well-being, including financial
well-being is, at most, indirect.
List of Subjects
12 CFR Part 701
Credit, Credit unions, Reporting and recordkeeping requirements.
12 CFR Part 741
Bank deposit insurance, Credit, Credit unions, Reporting and
recordkeeping requirements.
By the National Credit Union Administration Board,
this 18th day of July 2024.
47 Public Law 105â277, 112 Stat.
2681 (1998).
Melane Conyers-Ausbrooks, Secretary of the Board.
For the reasons stated in the preamble, the NCUA Board proposes to amend 12
CFR parts 701 and 741, as follows:
PART 701 â ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNION
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, 1785, 1786, 1787, 1788, 1789.
Section 701.6 is also authorized by 15 U.S.C.
3717.
Section 701.31 is also authorized by 15 U.S.C.
1601 et seq.; 42 U.S.C.
1981 and 3601-3610.
Section 701.35 is also authorized by 42 U.S.C.
4311-4312.
2.
Amend Â§ 701.4 by:
a.
Revising paragraph (b)(3).
b.
Adding paragraph (e).
The addition and revision to read as follows:
Â§ 701.4 General authorities and duties of Federal credit union directors.
* * * * * (b)
* * * (3) At the time of election or appointment, or within a reasonable time
thereafter, not to exceed six months, have at least a working familiarity
with, and to ask, as appropriate, substantive questions of management and
the internal and external auditors of:
(i) Basic finance and accounting practices, including the ability to read
and understand the Federal credit unionâs balance sheet and income statement; and
(ii) The Federal credit unionâs succession plan established pursuant
to paragraph (e) of this section.
* * * * * (e) Succession planning requirements.
(1) General.
A Federal credit union must establish a written succession plan as provided in
this paragraph that is approved by the board of directors and consistent with
the credit unionâs size and complexity.
In evaluating whether a succession plan meets the requirements of this paragraph,
the NCUA will consider the size of the Federal credit union, as well as the
complexity and risk of its operations.
(2) Covered positions.
The succession plan shall, at a minimum, cover the following positions, or their
equivalent if the Federal credit union has adopted different position titles:
(i) Members of the board of directors;
(ii) Members of the supervisory committee;
(iii) Members of the credit committee, where such a committee is provided for
in the federal credit unionâs bylaws and is involved daily in the review of loans;
(iv) Loan officers, where provided for in the Federal credit unionâs
bylaws in lieu of a credit committee and the loan officers are involved
daily in the review of loans;
(v) Management officials and assistant management officials, as those terms are
defined in Appendix A, if provided for in the Federal credit unionâs bylaws; and
(vi) The Federal credit unionâs chief executive officer (typically
this individual holds the title of president or treasurer/manager), any
assistant chief executive officer (for example, any assistant president,
any vice president, or any assistant treasurer/manager), the chief financial
officer (controller), and any other personnel the board of directors deems
critical given the Federal credit unionâs size, complexity, or risk of operations.
This includes new positions that may be required due to planned
changes in operations, supervisory landscape, or corporate structure.
(3) Contents of succession plan.
The succession plan must, at minimum, contain the following information
regarding each of the positions covered under paragraph (e)(2) of this section:
(i) The title for each covered position and the expiration of the incumbentâs term
(if serving in a term-limited capacity) or other anticipated vacancy date (such
as the incumbentâs retirement eligibility date or announced departure date).
(ii) The Federal credit unionâs plan for temporarily and permanently
filling vacancies for each of the positions, including vacancies
due to unexpected circumstances.
(iii) The Federal credit unionâs strategy for recruiting candidates with the
potential to assume each of the positions.
The strategy must consider how the selection and diversity among the
employees covered by the succession plan collectively and individually
promotes the safe and sound operation of the Federal credit union.
(4) Board responsibilities.
The board of directors must:
(i) Approve a written succession plan that meets the requirements of paragraphs
(e)(2) and (e)(3) of this section; and
(ii) Review, and update as necessary, the succession plan in accordance with
a schedule established by the board of directors but no less than annually.
(5) Adherence to plan.
The board of directors shall approve and document in its meeting minutes the
rationale for substantive deviations from its approved succession plan.
PART 741 â REQUIREMENTS FOR INSURANCE
3.
The authority citation for part 741 continues to read as follows:
Authority: 12 U.S.C.
1757, 1766(a), 1781â1790, and 1790d; 31 U.S.C.
3717.
4.
Add Â§ 741.228 to read as follows:
Â§ 741.228 Succession planning.
Any credit union that is insured pursuant to Title II of the Act must adhere to
the requirements in Â§ 701.4(b)(3) and (e) of this chapter, to the extent these
regulatory provisions do not conflict with an applicable state requirement.
This concludes this item.
If your Credit union could use assistance with your exam, reach out to Mark Treichel
on LinkedIn, or at mark Treichel dot com.
This is Samantha Shares and we Thank you for listening.