WEBVTT NOTE This file was generated by Descript 00:00:00.470 --> 00:00:02.410 Samantha: Hello, this is Samantha Shares. 00:00:03.080 --> 00:00:07.020 This episode covers N C U A’s actual language of the proposed 00:00:07.020 --> 00:00:08.650 rule on Succession Planning. 00:00:09.336 --> 00:00:12.556 This podcast is educational and is not legal advice. 00:00:13.066 --> 00:00:17.126 We are sponsored by Credit Union Exam Solutions Incorporated, whose 00:00:17.126 --> 00:00:20.216 team has over two hundred and Forty years of National Credit 00:00:20.216 --> 00:00:22.116 Union Administration experience. 00:00:22.566 --> 00:00:26.196 We assist our clients with N C U A so they save time and money. 00:00:26.626 --> 00:00:30.566 If you are worried about a recent, upcoming or in process N C U A 00:00:30.566 --> 00:00:35.006 examination, reach out to learn how they can assist at Mark Treichel DOT COM. 00:00:35.426 --> 00:00:39.796 Also check out our other podcast called With Flying Colors where we provide tips 00:00:39.796 --> 00:00:42.366 on how to achieve success with N C U A. 00:00:43.093 --> 00:00:44.443 and now the proposed rule. 00:00:45.168 --> 00:00:47.328 NATIONAL CREDIT UNION ADMINISTRATION 00:00:48.050 --> 00:00:51.890 12 CFR Parts 701 and 741 00:00:52.518 --> 00:00:53.728 Succession Planning 00:00:54.358 --> 00:00:57.978 AGENCY: National Credit Union Administration (NCUA). 00:00:58.688 --> 00:01:00.338 ACTION: Proposed rule. 00:01:01.017 --> 00:01:07.047 SUMMARY: On February 3, 2022, the NCUA Board (Board) published a proposed rule to 00:01:07.047 --> 00:01:11.817 require federal credit union (FCU) boards of directors to establish processes for 00:01:11.817 --> 00:01:13.947 succession planning for key positions. 00:01:14.677 --> 00:01:19.057 Based on the public comments received in response to the proposal, and upon further 00:01:19.057 --> 00:01:23.667 consideration of the issues involved, the Board is publishing this second proposed 00:01:23.667 --> 00:01:25.617 rule addressing succession planning. 00:01:26.307 --> 00:01:29.017 The new proposal is based on the earlier proposed 00:01:29.755 --> 00:01:33.195 rule but includes several changes that the Board believes will further 00:01:33.195 --> 00:01:36.905 strengthen succession planning efforts for both consumer FCUs 00:01:37.025 --> 00:01:41.025 and consumer federally insured, state-chartered credit unions (FISCUs). 00:01:41.725 --> 00:01:46.305 DATES: Comments must be received on or before 60 DAYS AFTER DATE OF 00:01:46.305 --> 00:01:48.255 PUBLICATION IN THE FEDERAL REGISTER. 00:01:49.024 --> 00:01:55.084 ADDRESSES: You may submit written comments, identified by RIN 3133-AF42, 00:01:55.474 --> 00:01:59.494 by any of the following methods (Please send comments by one method only): 00:02:00.211 --> 00:02:06.821 • Federal eRulemaking Portal: https://www.regulations.gov. 00:02:07.511 --> 00:02:11.921 The docket number for this proposed rule is NCUA–2024–0037. 00:02:12.391 --> 00:02:14.721 Follow the instructions for submitting comments. 00:02:15.331 --> 00:02:18.301 A plain language summary of the proposed rule is also 00:02:18.301 --> 00:02:20.021 available on the docket website. 00:02:20.832 --> 00:02:26.072 • Mail: Address to Melane Conyers-Ausbrooks, Secretary of the Board, National Credit 00:02:26.072 --> 00:02:33.962 Union Administration, 1775 Duke Street, Alexandria, Virginia 22314–3428. 00:02:34.821 --> 00:02:37.671 • Hand Delivery/Courier: Same as mailing address. 00:02:38.368 --> 00:02:42.928 • Public inspection: You may view all public comments on the Federal eRulemaking 00:02:42.928 --> 00:02:50.078 Portal at https://www.regulations.gov, as submitted, except for those we 00:02:50.078 --> 00:02:51.978 cannot post for technical reasons. 00:02:52.618 --> 00:02:55.758 The NCUA will not edit or remove any identifying or 00:02:55.758 --> 00:02:57.438 contact information from the 00:02:58.220 --> 00:02:59.620 public comments submitted. 00:03:00.160 --> 00:03:03.900 If you are unable to access public comments on the internet, you may 00:03:03.900 --> 00:03:10.820 contact the NCUA for alternative access by calling (703) 518–6540 or 00:03:11.578 --> 00:03:13.898 emailing OGCMail@ncua.gov. 00:03:14.759 --> 00:03:20.169 FOR FURTHER INFORMATION CONTACT: Office of Examination and Insurance: John Berry, 00:03:20.289 --> 00:03:29.819 Policy Officer, at (703) 664-3909 or at 1775 Duke Street, Alexandria, VA 22314. 00:03:30.449 --> 00:03:34.779 Office of General Counsel: Ariel Pereira, Senior Attorney, Office 00:03:34.779 --> 00:03:41.059 of General Counsel, at (703) 548- 2778 or at the above address. 00:03:41.687 --> 00:03:43.187 SUPPLEMENTARY INFORMATION: 00:03:43.907 --> 00:03:45.017 Table of Contents 00:03:45.706 --> 00:03:45.936 I. 00:03:46.446 --> 00:03:47.006 Background 00:03:47.796 --> 00:03:48.086 A. 00:03:48.616 --> 00:03:49.806 Succession Planning 00:03:50.490 --> 00:03:50.860 B. 00:03:51.380 --> 00:03:53.630 Increased Relevance of Succession Planning 00:03:54.294 --> 00:03:54.724 C. 00:03:55.164 --> 00:03:58.594 NCUA Efforts to Strengthen FICU Succession Planning Efforts 00:03:59.667 --> 00:03:59.997 II. 00:04:00.717 --> 00:04:04.057 The Board’s February 3, 2022, Proposed Rule 00:04:05.238 --> 00:04:05.508 III. 00:04:05.968 --> 00:04:06.858 Legal Authority 00:04:07.834 --> 00:04:08.014 IV. 00:04:08.984 --> 00:04:10.144 This Proposed Rule 00:04:10.822 --> 00:04:11.182 A. 00:04:11.802 --> 00:04:13.622 Applicability of Proposed Rule 00:04:14.348 --> 00:04:14.718 B. 00:04:15.148 --> 00:04:16.908 Succession Plan Requirements 00:04:17.550 --> 00:04:18.040 C. 00:04:18.630 --> 00:04:19.980 Available Resources 00:04:20.689 --> 00:04:20.989 D. 00:04:21.369 --> 00:04:23.059 Small FICU Considerations 00:04:23.785 --> 00:04:24.115 V. 00:04:24.375 --> 00:04:25.805 Regulatory Procedures 00:04:26.504 --> 00:04:26.774 A. 00:04:27.394 --> 00:04:31.004 Providing Accountability Through Transparency Act of 2023 00:04:31.740 --> 00:04:32.060 B. 00:04:32.410 --> 00:04:34.250 Regulatory Flexibility Act 00:04:34.917 --> 00:04:35.367 C. 00:04:35.787 --> 00:04:37.247 Paperwork Reduction Act 00:04:37.943 --> 00:04:38.293 D. 00:04:38.583 --> 00:04:41.833 Executive Order 13132 on Federalism 00:04:42.542 --> 00:04:42.732 E. 00:04:43.082 --> 00:04:46.392 Assessment of Federal Regulations and Policies on Families 00:04:47.123 --> 00:04:47.363 I. 00:04:47.853 --> 00:04:48.473 Background 00:04:49.201 --> 00:04:49.501 A. 00:04:50.031 --> 00:04:51.211 Succession Planning 00:04:51.915 --> 00:04:56.465 Board members play a key role in a federally insured credit union’s (FICU) 00:04:57.055 --> 00:05:01.135 success.1 The Federal Credit Union Act (FCU Act) vests the general direction 00:05:01.135 --> 00:05:05.835 and control of an FCU in its board.2 The managerial structure for FISCUs 00:05:05.835 --> 00:05:10.265 is governed by state law; however, in general, the operational oversight of 00:05:10.265 --> 00:05:15.185 FISCUs is under a board of directors or comparable body.3 FICU boards are 00:05:15.185 --> 00:05:19.455 faced with a multitude of complicated challenges, such as meeting evolving 00:05:19.455 --> 00:05:24.065 member needs, fostering employee loyalty and trust, retaining, and developing 00:05:24.065 --> 00:05:28.475 necessary skills, and keeping pace with technological and industry changes. 00:05:29.045 --> 00:05:32.875 Among this list of issues, succession planning is one of the most critical. 00:05:33.586 --> 00:05:37.126 Succession planning is the process through which an organization helps 00:05:37.126 --> 00:05:41.436 identify, develop, and retain key personnel to ensure its viability 00:05:41.436 --> 00:05:43.256 and continued effective performance. 00:05:43.826 --> 00:05:47.656 It also allows an organization to prepare for the unexpected, including 00:05:47.656 --> 00:05:49.366 the sudden departure of key staff. 00:05:50.046 --> 00:05:53.676 Succession planning is recognized as vital to the success of any 00:05:53.676 --> 00:05:55.726 institution, including FICUs. 00:05:56.386 --> 00:05:59.806 1 The term FICU encompasses both FCUs and FISCUs. 00:06:00.523 --> 00:06:03.843 2 12 U.S.C. 00:06:03.843 --> 00:06:11.783 1761, 1761b; 12 CFR701.4, and Article VI, section 6 of the FCU Bylaws codified 00:06:11.783 --> 00:06:15.293 in Appendix A of 12 CFR part 701. 00:06:16.107 --> 00:06:19.367 3 The FCU Act, at 12 U.S.C. 00:06:19.587 --> 00:06:22.997 1790a reflects the general proposition that a board of directors governs a 00:06:22.997 --> 00:06:27.247 FICU (providing that an “insured credit union shall notify the Board of the 00:06:27.247 --> 00:06:31.577 proposed addition of any individual to the board of directors” and that an 00:06:31.607 --> 00:06:35.777 “insured credit union may not add any individual to the board of directors” 00:06:35.777 --> 00:06:40.447 under certain conditions.) This is also reflected in the NCUA regulations. 00:06:40.927 --> 00:06:48.527 For example, see 12 CFR 701.14(a), which provides that 12 USC 1790a “sets forth 00:06:48.527 --> 00:06:53.047 conditions under which a credit union must notify NCUA in writing of any proposed 00:06:53.047 --> 00:07:00.057 changes in its board of directors.” See also,12 CFR 741.3(a)(2) (providing 00:07:00.057 --> 00:07:04.177 that a FISCU “board of directors may authorize” the designation of certain 00:07:04.177 --> 00:07:10.147 dividends on nonconforming investments as undivided earnings) and 12 CFR 00:07:10.147 --> 00:07:14.587 747.2001(b) (referring to the service of credit union notices, directives, 00:07:14.687 --> 00:07:19.807 and decisions on appeal to “a dismissed director or officer thereof” of a FISCU). 00:07:20.615 --> 00:07:24.515 One of the variables over which a FICU board has control is the hiring of 00:07:24.515 --> 00:07:26.375 the organization’s senior management. 00:07:27.118 --> 00:07:29.578 Succession planning is a critical component of a 00:07:29.708 --> 00:07:31.618 FICU’s overall strategic plan. 00:07:32.188 --> 00:07:35.838 It helps ensure that the appropriate personnel are available to execute 00:07:35.838 --> 00:07:37.748 the FICU’s strategic plan and mission. 00:07:38.338 --> 00:07:41.808 There are two elements to a FICU board’s succession planning strategy. 00:07:42.328 --> 00:07:45.978 First, the FICU’s board should develop a pool of talented candidates to 00:07:45.978 --> 00:07:49.978 potentially stand for election to the board, to fill temporary board and 00:07:49.978 --> 00:07:54.108 committee vacancies by appointment, and to fill appointed positions, such 00:07:54.108 --> 00:07:58.218 as to the FICU’s supervisory committee (or equivalent body under state law). 00:07:58.598 --> 00:08:02.568 The NCUA Board recognizes the importance of the election process in FICU 00:08:02.568 --> 00:08:06.178 governance and emphasizes that the proposed rule is meant to complement 00:08:06.438 --> 00:08:10.148 and not supplant the vital role member-owners play in FICU governance. 00:08:10.568 --> 00:08:14.648 Second, in furtherance of the board’s responsibility to oversee the operations 00:08:14.648 --> 00:08:19.058 of the FICU, it must consider how best to fill vacancies in senior management 00:08:19.058 --> 00:08:23.388 positions held by employees, such as the chief executive officer and the 00:08:23.388 --> 00:08:28.218 chief financial officer.4 This includes establishing an order of succession 00:08:28.258 --> 00:08:32.338 among existing employees for temporarily filling senior management roles in 00:08:32.338 --> 00:08:36.598 the event of a vacancy, as well as the development of strategies to identify, 00:08:36.688 --> 00:08:40.768 develop, and retain employees capable of filling these senior positions. 00:08:41.525 --> 00:08:45.675 A board’s failure to plan for vacancies in elected and appointed positions, 00:08:46.015 --> 00:08:49.595 as well as the transition of its management, could come with high costs. 00:08:50.145 --> 00:08:52.295 The FICU runs the risk of creating a 00:08:53.049 --> 00:08:59.479 4 The NCUA regulation at 12 CFR 701.14 defines the term “senior executive 00:08:59.479 --> 00:09:03.979 officer” to include “the chief executive officer (typically this individual 00:09:03.979 --> 00:09:07.929 holds the title of president or treasurer/manager), any assistant chief 00:09:07.929 --> 00:09:13.049 executive officer (e.g., any assistant president, any vice president or any 00:09:13.049 --> 00:09:16.639 assistant treasurer/manager) and the chief financial officer (controller).” 00:09:17.418 --> 00:09:21.728 leadership vacuum, disrupting operations and potentially jeopardizing the FICU’s 00:09:21.728 --> 00:09:26.308 ability to adequately manage liquidity risk, address cybersecurity threats, 00:09:26.498 --> 00:09:30.628 or ensure continued compliance with consumer protection, bank secrecy, 00:09:30.728 --> 00:09:32.618 and other critical responsibilities. 00:09:33.188 --> 00:09:36.918 The FICU may also incur higher costs or be unable to recruit and 00:09:36.918 --> 00:09:40.518 retain new leadership and top talent than would be the case if it had 00:09:40.518 --> 00:09:42.278 an established succession plan. 00:09:42.588 --> 00:09:46.358 Failure to plan for succession can also negatively impact the FICU’s 00:09:46.358 --> 00:09:49.978 ability to maintain relationships with members and suppliers and to 00:09:49.978 --> 00:09:52.068 secure future business opportunities. 00:09:52.558 --> 00:09:56.378 Accordingly, the failure to adequately plan for changes in leadership can 00:09:56.378 --> 00:10:00.558 jeopardize the continued viability of a FICU, potentially resulting in the 00:10:00.558 --> 00:10:05.048 unplanned merger of the FICU or other disruptions to safe and sound operations 00:10:05.048 --> 00:10:06.948 upon the departure of key personnel. 00:10:07.738 --> 00:10:11.528 For the above reasons, the Board finds that a compelling safety and soundness 00:10:11.528 --> 00:10:13.838 case exists for rulemaking in this area. 00:10:14.458 --> 00:10:18.778 The failure of FICUs to adequately plan for succession poses a risk not 00:10:18.778 --> 00:10:22.688 only to individual FICUs and their member-owners, but to the credit union 00:10:22.688 --> 00:10:26.818 system as a whole and to the National Credit Share Insurance Fund (NCUSIF). 00:10:27.488 --> 00:10:31.488 The proposed regulatory changes are designed to mitigate this risk and are 00:10:31.488 --> 00:10:35.818 consistent with the Board’s statutory duty to ensure a safe and sound system of 00:10:35.818 --> 00:10:37.938 cooperative credit for its member-owners. 00:10:38.318 --> 00:10:42.248 Board action is also consistent with the guidance issued by the other banking 00:10:42.248 --> 00:10:44.638 agencies to address succession planning.5 00:10:46.286 --> 00:10:46.686 B. 00:10:47.156 --> 00:10:49.426 Increased Relevance of Succession Planning 00:10:50.224 --> 00:10:54.744 5 See e.g., Federal Reserve Board, Supervisory Guidance on Board of 00:10:54.744 --> 00:10:56.534 Directors’ Effectiveness (Feb. 00:10:56.534 --> 00:11:01.634 26, 2021); also, the guidelines of the Office of the Comptroller of the 00:11:01.634 --> 00:11:06.974 Currency (OCC) at 12 CFR part 30, Appendix D, captioned “OCC Guidelines 00:11:06.974 --> 00:11:10.974 Establishing Heightened Standards for Certain Large Insured National Banks, 00:11:11.214 --> 00:11:15.344 Insured Federal Savings Associations, and Insured Federal Branches.” 00:11:15.997 --> 00:11:18.927 Several factors have contributed to the increased relevance of 00:11:18.927 --> 00:11:21.017 succession planning for FICU boards. 00:11:21.647 --> 00:11:27.707 In 2000, the credit union system had 10,316 FICUs.6 The total number of 00:11:27.707 --> 00:11:34.107 FICUs declined to 4,645 by the third quarter of 2023.7 This decline is largely 00:11:34.107 --> 00:11:38.517 attributable to the long- running trend of consolidation across all depository 00:11:38.517 --> 00:11:43.637 institutions.8 This trend has remained relatively constant across all economic 00:11:43.637 --> 00:11:45.667 cycles for more than three decades. 00:11:46.247 --> 00:11:52.137 In 1999, the NCUA approved 431 FICU consolidations.9 The number of 00:11:52.137 --> 00:11:56.127 annual consolidations has decreased since that time but remains steady. 00:11:56.657 --> 00:12:03.627 For example, in 2022, the Board approved 181 FICU consolidations.10 In 2023, 00:12:03.717 --> 00:12:09.107 the number of approved consolidations was only slightly lower at 145.11 00:12:09.838 --> 00:12:13.318 Data suggests that smaller FICUs may be more likely to merge. 00:12:13.818 --> 00:12:16.788 The decline in the total number of FICUs has been particularly 00:12:16.788 --> 00:12:21.058 steep among the smallest FICUs with less than $10 million in assets. 00:12:21.548 --> 00:12:26.438 At the close of 2015, there were 1,816 FICUs with less than $10 million in 00:12:26.438 --> 00:12:32.708 assets.12 By the third quarter of 2023, the number of these smallest FICUs was 00:12:32.708 --> 00:12:40.258 938.13 This figure represents a decrease from 975 FICUs the previous year.14 By 00:12:40.258 --> 00:12:44.748 comparison, during the same period, the number of FICUs with assets of at least 00:12:44.748 --> 00:12:49.688 $1 billion increased to 424 from 414.15 00:12:50.501 --> 00:13:01.571 6 NCUA, Historical Timeline, https://ncua.gov/about/historical- 00:13:01.781 --> 00:13:06.411 timeline#:~:text=2000,more%20than%2077%20million%20members. 00:13:07.136 --> 00:13:18.876 7 NCUA, Quarterly Credit Union Data Summary 2023 Q3, 00:13:18.876 --> 00:13:22.236 https://ncua.gov/files/publications/analysis/quarterly- data-summary-2023-Q3.pdf. 00:13:23.064 --> 00:13:23.704 8 Id. 00:13:23.979 --> 00:13:26.779 9 NCUA, NCUA 2000 Annual Report, https://ncua.gov/files/annual-reports/2000AR.pdf. 00:13:27.219 --> 00:13:38.939 10 NCUA, Merger and Insurance Reports, https://ncua.gov/analysis/chartering-mergers/merger-activity-insurance- 00:13:38.939 --> 00:13:39.399 report. 00:13:40.166 --> 00:13:40.976 11 Id. 00:13:41.245 --> 00:13:44.845 12 NCUA, Quarterly Credit Union Data Summary 2015 Q4, 00:13:44.845 --> 00:13:45.645 https://ncua.gov/files/publications/analysis/PACA- Facts-2015-12.pdf. 00:13:46.125 --> 00:13:47.885 13 Supra, note 7. 00:13:48.654 --> 00:13:49.574 14 Id. 00:13:50.291 --> 00:13:51.131 15 Id. 00:13:51.800 --> 00:13:54.830 The available data does not differentiate between those smaller 00:13:54.830 --> 00:13:58.380 FICUs that consolidated or were liquidated, versus those that 00:13:58.380 --> 00:14:00.830 expanded into a larger asset category. 00:14:01.350 --> 00:14:05.830 However, the sharper decline of FICUs in the smaller asset categories, combined 00:14:05.830 --> 00:14:10.040 with the ongoing industry trend of consolidation, suggests that mergers may 00:14:10.040 --> 00:14:12.370 be more prevalent among smaller FICUs. 00:14:13.076 --> 00:14:17.206 Voluntary mergers can be used to create economies of scale to offer more or better 00:14:17.206 --> 00:14:19.366 products and services to FICU members. 00:14:19.896 --> 00:14:23.356 However, the Board is also aware of numerous instances in recent 00:14:23.356 --> 00:14:26.846 years where FICUs merged because of a lack of succession planning. 00:14:27.356 --> 00:14:31.596 An NCUA analysis found that poor succession planning was either a primary 00:14:31.596 --> 00:14:37.396 or secondary reason for almost a third (32 percent) of FICU consolidations.16 00:14:37.396 --> 00:14:41.696 This data has been corroborated by industry participants.17 The Board 00:14:41.696 --> 00:14:45.766 is interested in helping FICUs reduce the number of mergers resulting from 00:14:45.766 --> 00:14:47.366 the lack of succession planning. 00:14:48.107 --> 00:14:51.827 The Board finds that this goal is consistent with the FCU Act, which 00:14:51.827 --> 00:14:56.007 contains provisions that disfavor consolidation, implying a presumption 00:14:56.007 --> 00:14:59.447 that the public is better served with a greater number of credit unions. 00:14:59.847 --> 00:15:04.017 For example, the statute imposes added limitations on the addition of larger 00:15:04.017 --> 00:15:08.467 groups to multiple common-bond credit unions, prompting the Board to consider 00:15:08.467 --> 00:15:13.107 the feasibility of formation of a separate credit union.18 Further, the 00:15:13.107 --> 00:15:17.417 FCU Act provides that the Board shall “encourage the formation of separately 00:15:17.417 --> 00:15:21.147 chartered credit unions instead of approving an application to include 00:15:21.147 --> 00:15:24.967 an additional group within the field of membership of an existing credit 00:15:25.648 --> 00:15:35.288 16 NCUA, Truth in Mergers: A Guide for Merging Credit Unions, page 9, 00:15:35.288 --> 00:15:40.378 https://www.ncua.gov/files/publications/Truth-In-Mergers.pdf. 00:15:41.193 --> 00:15:46.663 17 See, for example, CUtoday.info, A Look at What Members, Mgmt. 00:15:47.003 --> 00:15:51.823 Get in Mergers (November 16, 2021) (“Credit unions merging out of existence, 00:15:51.993 --> 00:15:56.343 nearly all of them smaller, shared reasons for merging that included inability to 00:15:56.343 --> 00:16:01.063 invest in technology (even though some had very high capital levels), inability to 00:16:01.063 --> 00:16:05.973 find volunteers and staff and, a common theme, a lack of any succession planning 00:16:06.023 --> 00:16:20.723 and a retiring CEO”), available at: https://www.cutoday.info/THE-feature/A-Look-at-What-Members-Mgmt.-Get-in-Mergers. 00:16:21.488 --> 00:16:23.278 18 12 U.S.C. 00:16:23.278 --> 00:16:24.008 1759(d)(1). 00:16:24.748 --> 00:16:29.188 union whenever practicable and consistent with reasonable standards for the safe and 00:16:29.188 --> 00:16:32.438 sound operation of the credit union.”19 00:16:33.176 --> 00:16:36.536 Another reason for a heightened focus on succession planning is the 00:16:36.536 --> 00:16:40.186 ongoing retirements of the “Baby Boomer” generation (individuals 00:16:40.186 --> 00:16:43.456 born between 1946 and 1964). 00:16:44.006 --> 00:16:44.766 According to the 00:16:45.607 --> 00:16:45.747 U.S. 00:16:45.747 --> 00:16:51.037 Census Bureau, there are approximately 73 million Baby Boomers, the second-largest 00:16:51.037 --> 00:16:56.837 age group after “Millennials” (those born between 1982 and 2000).20 By 2030, 00:16:57.257 --> 00:17:01.797 all Baby Boomers will have reached age 65 and be eligible for retirement.21 The 00:17:02.457 --> 00:17:08.047 COVID-19 pandemic accelerated the pace of retirements among this generational 00:17:08.627 --> 00:17:12.837 cohort.22 These retirements include credit union board members and executives. 00:17:13.257 --> 00:17:17.257 According to some sources, approximately 10 percent of credit union chief 00:17:17.257 --> 00:17:22.747 executive officers were expected to retire between 2019 and 2021.23 00:17:22.747 --> 00:17:26.557 Succession planning is critical to the continued operation of those credit 00:17:26.557 --> 00:17:30.747 unions with board members and executives that are part of this retirement wave. 00:17:31.497 --> 00:17:31.877 C. 00:17:32.357 --> 00:17:35.767 NCUA Efforts to Strengthen FICU Succession Planning Efforts 00:17:36.440 --> 00:17:40.410 Given the increased importance of the topic, the NCUA has taken several 00:17:40.410 --> 00:17:44.100 steps to strengthen current succession planning efforts being taken by 00:17:44.100 --> 00:17:48.040 FICUs, and to encourage others that have not yet done so to commence 00:17:48.040 --> 00:17:49.950 their succession planning process. 00:17:50.592 --> 00:17:52.412 19 12 U.S.C. 00:17:52.412 --> 00:17:53.052 1759(f). 00:17:53.880 --> 00:17:54.320 20 U.S. 00:17:54.320 --> 00:17:58.910 Census Bureau, By 2030, All Baby Boomers Will Be Age 65 00:17:58.950 --> 00:18:19.020 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. 00:18:19.710 --> 00:18:20.650 21 Id. 00:18:21.381 --> 00:18:26.161 22 Kevin McCarthy, “Just Tired:” Why So Many Bank, Credit Union 00:18:26.161 --> 00:18:41.011 CEOs Are Calling it Quits, American Banker (December 7, 2021), 00:18:41.011 --> 00:18:43.981 https://www.americanbanker.com/creditunions/news/just-tired-why-so-many-bank-credit- union-ceos-are-calling-it-quits; 00:18:44.401 --> 00:18:47.791 and Richard Fry, The Pace of Boomer Retirements Has Accelerated 00:18:47.791 --> 00:18:56.701 in the Past Year, Pew Research Center (November 9, 2020), 00:18:56.821 --> 00:19:05.671 https://www.pewresearch.org/fact-tank/2020/11/09/the-pace-of-boomer- retirements-has-accelerated-in-the-past-year/. 00:19:06.384 --> 00:19:11.384 23 CUtoday.info, CUNA ACUC Coverage: What’s Happening in Executive 00:19:11.384 --> 00:19:26.784 Compensation (June 19, 2019), https://www.cutoday.info/Fresh-Today/CUNA-ACUC-Coverage-What-s-Happening-in-Executive-Compensation. 00:19:27.523 --> 00:19:33.323 In March 2022, the NCUA issued Letter to Credit Unions 22-CU-05, CAMELS Rating 00:19:33.323 --> 00:19:37.813 System, which provides that “succession planning for key management positions” 00:19:38.223 --> 00:19:42.063 is a key factor considered when assessing the management of a credit union.24 00:19:43.133 --> 00:19:47.813 The Letter to Credit Unions 23- CU-01 included succession planning as one of the 00:19:47.813 --> 00:19:51.453 NCUA’s supervisory priorities for 2023.25 00:19:52.200 --> 00:19:55.710 Several factors have highlighted the need for rulemaking in this area. 00:19:56.290 --> 00:19:59.650 While the NCUA does assess succession planning as part of the CAMELS 00:19:59.650 --> 00:20:04.380 Management component, there is no NCUA regulation requiring FICUs to implement 00:20:04.380 --> 00:20:06.450 a formal, written succession plan. 00:20:07.010 --> 00:20:10.990 As a result, the NCUA lacks a full complement of regulatory tools 00:20:10.990 --> 00:20:14.920 to help address deficiencies in a FICU’s succession planning process. 00:20:15.470 --> 00:20:20.560 For example, Letter to Credit Unions 23-CU-01 makes clear that NCUA examiners 00:20:20.560 --> 00:20:24.860 are precluded from evaluating “any formal or informal succession plans 00:20:24.860 --> 00:20:28.780 developed by credit unions beyond what would normally be considered in assigning 00:20:28.780 --> 00:20:34.310 the Management component of the CAMELS rating.”26 Moreover, examiners may “not 00:20:34.310 --> 00:20:38.560 issue an Examiner’s Finding or Document of Resolution if the credit union has 00:20:38.560 --> 00:20:43.180 not conducted succession planning, or the planning is not adequate, unless the 00:20:43.180 --> 00:20:47.720 credit union is in violation of its own policy for conducting succession planning 00:20:47.720 --> 00:20:53.180 or administering any such plan(s).”27 The absence of specific regulations 00:20:53.180 --> 00:20:57.600 on this topic also means there are no requirements as to what constitutes an 00:20:58.379 --> 00:21:03.609 24 NCUA, Letter to Credit Unions 22-CU-05, CAMELS Rating System (March 00:21:03.609 --> 00:21:14.059 2022), https://ncua.gov/regulation- supervision/letters-credit-unions-other-guidance/camels-rating-system. 00:21:14.489 --> 00:21:18.469 CAMELS is the acronym for the rating system used by the NCUA to assess a 00:21:18.469 --> 00:21:22.599 FICU’s performance and risk profile derived from the six critical elements 00:21:22.599 --> 00:21:28.049 of a FICU’s operations: Capital adequacy, Asset quality, Management, Earnings, 00:21:28.109 --> 00:21:30.459 Liquidity and Sensitivity to Market Risk. 00:21:31.225 --> 00:21:37.155 25 NCUA, Letter to Credit Unions 23-CU-01, NCUA’s 2023 Supervisory 00:21:37.155 --> 00:21:52.965 Priorities (January 2023), https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/ncuas-2023-supervisory-priorities. 00:21:53.862 --> 00:21:54.822 26 Id. 00:21:55.560 --> 00:21:56.550 27 Id. 00:21:57.313 --> 00:21:59.013 acceptable succession plan. 00:21:59.783 --> 00:22:03.743 A regulation would therefore establish a needed, clearly articulated, 00:22:04.003 --> 00:22:07.523 and consistently enforceable set of succession planning standards. 00:22:08.628 --> 00:22:08.958 II. 00:22:09.688 --> 00:22:12.978 The Board’s February 3, 2022, Proposed Rule 00:22:13.740 --> 00:22:18.380 At its January 27, 2022, meeting, the Board approved a proposed 00:22:18.380 --> 00:22:21.950 rule to establish succession planning requirements for FCUs. 00:22:22.480 --> 00:22:27.820 The proposed rule was published in the Federal Register on February 3, 2022.28 00:22:27.820 --> 00:22:31.710 The proposed rule would have required FCU boards of directors to establish 00:22:31.710 --> 00:22:36.220 succession plans for key positions, such as officers of the board, management 00:22:36.220 --> 00:22:40.450 officials, executive committee members, supervisory committee members, and 00:22:40.450 --> 00:22:44.130 (where provided for in the FCU’s bylaws) the members of the credit committee. 00:22:44.710 --> 00:22:47.700 Directors would have been required to have a working familiarity 00:22:47.700 --> 00:22:48.960 with the succession plan. 00:22:49.620 --> 00:22:52.560 The board of directors would also have been required to review the 00:22:52.560 --> 00:22:55.670 succession plan in accordance with a schedule established by the 00:22:55.670 --> 00:22:57.810 board, but no less than annually. 00:22:58.370 --> 00:23:02.500 While the proposed rule would have applied only to consumer FCUs (excluding corporate 00:23:02.500 --> 00:23:07.030 FCUs), the preamble noted that the Board’s purpose was to encourage and strengthen 00:23:07.030 --> 00:23:09.040 succession planning for all FICUs. 00:23:09.580 --> 00:23:13.850 The preamble of the February 3, 2022, proposed rule provides 00:23:13.850 --> 00:23:17.360 additional details regarding the proposed regulatory amendments. 00:23:18.052 --> 00:23:21.602 The preamble to the proposed rule presented nine questions on which the 00:23:21.602 --> 00:23:23.912 Board specifically sought public input. 00:23:24.532 --> 00:23:27.722 The proposed rule provided for a 60-day comment period, 00:23:27.862 --> 00:23:30.452 which closed on April 4, 2022. 00:23:30.942 --> 00:23:35.722 The Board received 26 public comments on the proposal.29 Comments were 00:23:35.722 --> 00:23:40.412 received from individual credit unions, individuals, a law firm, and from 00:23:41.169 --> 00:23:44.589 28 87 FR 6078 (Feb. 00:23:44.589 --> 00:23:46.189 3, 2022). 00:23:46.979 --> 00:23:53.079 29 Pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 00:23:53.079 --> 00:23:57.639 3501-3520), the Board also published a separate notice soliciting comments 00:23:57.639 --> 00:24:01.179 for a period of 60 days on the information collection requirements 00:24:01.179 --> 00:24:03.599 contained in the 2022 proposed rule. 00:24:04.249 --> 00:24:07.299 (87 FR 7502, Feb. 00:24:07.449 --> 00:24:12.139 9, 2022.) The Board did not receive comments specifically in response 00:24:12.139 --> 00:24:14.669 to the February 9, 2022, notice. 00:24:15.329 --> 00:24:19.399 national, state, and regional organizations representing credit unions. 00:24:19.969 --> 00:24:23.999 All of the public comments received by the Board are available for public review 00:24:23.999 --> 00:24:37.299 on the Regulations.gov web portal, at: https://www.regulations.gov/document/NCUA-2022-0016-0002/comment. 00:24:38.048 --> 00:24:41.928 Most commenters opted to provide general comments rather than address the 00:24:41.928 --> 00:24:44.238 specific questions posed in the preamble. 00:24:44.708 --> 00:24:48.258 Most commenters acknowledged the importance of succession planning but 00:24:48.258 --> 00:24:51.618 questioned the need for succession planning regulations and raised 00:24:51.618 --> 00:24:55.318 concerns about the specifics of the proposed regulatory amendments. 00:24:56.015 --> 00:25:00.075 Based on the comments received in response to the 2022 proposed rule, 00:25:00.415 --> 00:25:03.995 and upon further consideration of the issues involved, the Board is 00:25:03.995 --> 00:25:07.605 publishing this second proposed rule addressing succession planning. 00:25:08.165 --> 00:25:11.845 The new proposal is based on the earlier proposed rule but includes 00:25:11.845 --> 00:25:15.335 several changes that the Board believes will further strengthen succession 00:25:15.335 --> 00:25:17.155 planning efforts for all FICUs. 00:25:17.835 --> 00:25:21.345 This proposed rule would require that consumer FICUs have succession 00:25:21.345 --> 00:25:25.465 plans to proactively address key positions, such as officers of the 00:25:25.465 --> 00:25:27.095 board and management officials. 00:25:27.395 --> 00:25:30.805 The succession plans will also aid FICU efforts to foster a 00:25:30.805 --> 00:25:32.605 culture of growth and development. 00:25:33.830 --> 00:25:34.100 III. 00:25:34.610 --> 00:25:35.530 Legal Authority 00:25:36.244 --> 00:25:39.034 The Board is issuing this proposed rule pursuant to its 00:25:39.034 --> 00:25:40.884 authority under the FCU Act. 00:25:41.424 --> 00:25:44.104 The proposed rule would establish succession planning 00:25:44.104 --> 00:25:45.624 requirements for an FCU. 00:25:46.094 --> 00:25:50.904 Section 113 of the FCU Act provides that an FCU’s board of directors 00:25:50.904 --> 00:25:54.594 shall have the general direction and control of the affairs of the FCU.30 00:25:55.224 --> 00:25:59.154 The board of directors must oversee the credit union’s operations to 00:25:59.890 --> 00:26:01.680 30 12 U.S.C. 00:26:01.680 --> 00:26:02.490 1716b. 00:26:03.214 --> 00:26:06.444 ensure the credit union operates in a safe and sound manner. 00:26:06.984 --> 00:26:10.384 For example, the board must be kept informed about the credit union’s 00:26:10.384 --> 00:26:14.974 operating environment, hire and retain competent management, and ensure that 00:26:14.974 --> 00:26:19.034 the credit union has a risk management structure and process suitable for the 00:26:19.034 --> 00:26:21.224 credit union’s size and activities. 00:26:21.949 --> 00:26:26.149 Further, under the FCU Act, the NCUA is the chartering and supervisory 00:26:26.149 --> 00:26:30.079 authority for FCUs and the federal supervisory authority for FICUs.31 00:26:30.669 --> 00:26:35.209 The FCU Act grants the NCUA a broad mandate to issue regulations 00:26:35.209 --> 00:26:37.479 governing both FCUs and all FICUs. 00:26:37.969 --> 00:26:42.869 Section 120 of the FCU Act is a general grant of regulatory authority and 00:26:42.869 --> 00:26:47.019 authorizes the Board to prescribe rules and regulations for the administration 00:26:47.019 --> 00:26:52.629 of the FCU Act.32 Section 207 of the FCU Act is a specific grant of 00:26:52.629 --> 00:26:57.899 authority over share insurance coverage, conservatorships, and liquidations.33 00:26:57.899 --> 00:27:02.729 Section 209 of the FCU Act is a plenary grant of regulatory authority to the 00:27:02.729 --> 00:27:07.019 Board to issue rules and regulations necessary or appropriate to carry out its 00:27:07.019 --> 00:27:12.429 role as share insurer for all FICUs.34 Accordingly, the FCU Act grants the 00:27:12.429 --> 00:27:16.429 Board broad rulemaking authority to ensure that the credit union industry 00:27:16.489 --> 00:27:18.599 and the NCUSIF remain safe and sound. 00:27:19.602 --> 00:27:19.752 IV. 00:27:20.742 --> 00:27:21.822 This Proposed Rule 00:27:22.560 --> 00:27:26.140 While the data discussed previously, on their own, support the need for 00:27:26.140 --> 00:27:30.310 this rulemaking, the Board finds the need for succession planning as a sound 00:27:30.310 --> 00:27:32.490 governance practice equally compelling. 00:27:33.000 --> 00:27:37.820 As noted, succession planning is a vital element of a FICU’s long-term strategic 00:27:38.628 --> 00:27:41.518 31 12 U.S.C. 00:27:41.518 --> 00:27:42.238 1752-1775. 00:27:43.090 --> 00:27:45.110 32 12 U.S.C. 00:27:45.110 --> 00:27:45.670 1766(a). 00:27:46.433 --> 00:27:48.823 33 12 U.S.C. 00:27:48.823 --> 00:27:49.163 1787(b)(1). 00:27:49.930 --> 00:27:51.770 34 12 U.S.C. 00:27:51.770 --> 00:27:52.720 1789(a)(11). 00:27:53.469 --> 00:27:53.979 plan. 00:27:54.679 --> 00:27:58.189 This rule will further strengthen FICU succession planning efforts. 00:27:58.729 --> 00:28:02.379 The following presents an overview of the proposed regulatory changes. 00:28:03.130 --> 00:28:03.430 A. 00:28:04.080 --> 00:28:05.930 Applicability of Proposed Rule 00:28:06.596 --> 00:28:10.456 These proposed regulatory amendments would apply to all consumer FICUs. 00:28:11.136 --> 00:28:15.276 The Board recognizes the importance of state law in FISCUs’ internal governance 00:28:15.626 --> 00:28:19.416 and that some FISCUs may already be subject to state-specific succession 00:28:19.416 --> 00:28:24.606 planning requirements.35 However, as discussed, the Board finds the proposed 00:28:24.606 --> 00:28:28.546 rule is appropriate to protect the NCUSIF from undue risk associated 00:28:28.546 --> 00:28:32.396 with mergers that may cause a loss to the NCUSIF or negatively affect the 00:28:32.396 --> 00:28:34.596 credit union industry’s overall health. 00:28:35.096 --> 00:28:39.006 The Board also recognizes that under its statutory authorities relating to 00:28:39.006 --> 00:28:44.006 unsafe or unsound practices, the NCUA may act to address such practices in 00:28:44.006 --> 00:28:48.896 all FICUs.36 However, to the extent that a FISCU is subject to a state 00:28:48.896 --> 00:28:53.526 statutory or regulatory requirement that conflicts with the proposed rule, the 00:28:53.526 --> 00:28:55.716 NCUA will defer to the state requirement. 00:28:56.484 --> 00:29:00.884 The Board specifically invites public comment on the inclusion of FISCUs within 00:29:00.884 --> 00:29:02.904 the scope of the regulatory amendments. 00:29:03.598 --> 00:29:07.488 Consistent with the prior proposal, this proposed rule would not amend the 00:29:07.488 --> 00:29:13.028 regulations in 12 CFR part 704, which establish requirements applicable to 00:29:13.028 --> 00:29:15.318 federally insured corporate credit unions. 00:29:15.928 --> 00:29:19.648 These regulations contain provisions that address succession planning. 00:29:20.198 --> 00:29:25.758 For example, § 704.13(c)(1) requires that the corporate’s board of directors 00:29:25.758 --> 00:29:27.928 must ensure that “[s]enior managers 00:29:28.716 --> 00:29:32.886 … are capable of identifying, hiring, and retaining qualified staff.” 00:29:33.826 --> 00:29:35.746 Further, paragraph (c)(2) of 00:29:36.541 --> 00:29:40.851 35 The Board recognizes that state law also plays a role in FCUs’ 00:29:40.851 --> 00:29:46.181 governance, as the model FCU bylaws reflect in several instances; however, 00:29:46.251 --> 00:29:49.831 the Board performs a significant role in this process in preparing the 00:29:49.831 --> 00:29:52.511 form of the bylaws under 12 U.S.C. 00:29:52.511 --> 00:29:53.171 1758. 00:29:53.977 --> 00:29:56.017 36 See 12 U.S.C. 00:29:56.017 --> 00:29:57.307 1786(e), (k). 00:29:58.026 --> 00:30:01.476 the section requires that the corporate’s board of directors ensure that 00:30:01.646 --> 00:30:05.846 “[q]ualified personnel are employed or under contract for all line support 00:30:05.846 --> 00:30:10.546 and audit areas, and designated back-up personnel or resources with adequate 00:30:10.546 --> 00:30:14.926 cross-training are in place.” While the scope of the proposed rule does not 00:30:14.926 --> 00:30:19.166 include corporate credit unions, the Board welcomes public comment on whether 00:30:19.166 --> 00:30:24.966 changes to the wording of § 704.13 are necessary to effectuate the purposes 00:30:24.966 --> 00:30:27.096 of the proposed regulatory amendments. 00:30:27.759 --> 00:30:31.839 Additionally, while the proposed rule does not add any specific requirements 00:30:31.839 --> 00:30:36.399 for Minority Depository Institutions (MDI), the Board encourages MDIs to 00:30:36.399 --> 00:30:40.729 consider how their succession plans will affect their MDI designation status. 00:30:41.269 --> 00:30:45.759 Recently the Board voted to update its policy to preserve MDI institutions. 00:30:46.279 --> 00:30:49.589 To that end, we encourage federally insured credit unions to the 00:30:49.589 --> 00:30:53.729 greatest extent possible, to develop a succession plan that maintains 00:30:53.729 --> 00:30:57.969 the board and senior leadership composition to maintain MDI eligibility. 00:30:58.259 --> 00:31:02.629 The Board also invites public comment on how the NCUA can support this effort 00:31:02.679 --> 00:31:07.099 and any unique barriers MDIs may face when developing succession plans. 00:31:07.823 --> 00:31:08.173 B. 00:31:08.573 --> 00:31:10.353 Succession Plan Requirements 00:31:11.029 --> 00:31:14.129 The Board proposes to establish the new succession planning 00:31:14.129 --> 00:31:18.609 requirements by amending part 701 of its regulations, which govern the 00:31:18.609 --> 00:31:20.839 organization and operation of FCUs. 00:31:21.289 --> 00:31:26.809 Specifically, the proposed rule would add a new paragraph (e) to § 701.4, 00:31:27.139 --> 00:31:31.399 which sets forth the general duties and responsibilities of FCU directors. 00:31:31.929 --> 00:31:35.149 The proposed rule would make these amendments applicable to FISCUs 00:31:35.149 --> 00:31:40.419 through an amendment to 12 CFR part 741, subpart B, which sets forth 00:31:40.419 --> 00:31:44.349 regulations codified elsewhere in the NCUA’s regulations as applying 00:31:44.349 --> 00:31:46.529 to FCUs that also apply to FISCUs. 00:31:47.159 --> 00:31:53.399 The Board proposes to add a new § 741.228 that addresses succession planning. 00:31:54.115 --> 00:31:57.605 The proposal would require that a FICU board of directors establish 00:31:57.665 --> 00:32:01.065 a written succession plan that addresses specified positions 00:32:01.065 --> 00:32:02.775 and contains certain information. 00:32:03.315 --> 00:32:07.055 In addition, the board of directors would be required to review the succession 00:32:07.055 --> 00:32:11.315 plan in accordance with a schedule it establishes, but no less than annually. 00:32:11.925 --> 00:32:15.885 The Board recognizes that circumstances might necessitate deviations from the 00:32:15.885 --> 00:32:18.135 plan in filling specific vacancies. 00:32:18.465 --> 00:32:23.485 The proposed regulatory text accommodates such exigencies but, as with substantive 00:32:23.485 --> 00:32:28.065 deviations in budgets and strategic plans, it would be expected the board would be 00:32:28.065 --> 00:32:31.985 informed of changes and rationale and document them in its meeting minutes. 00:32:32.661 --> 00:32:36.101 The Board invites comments on the proposed board responsibilities in 00:32:36.101 --> 00:32:37.981 the development of succession plans. 00:32:38.541 --> 00:32:42.141 Would the succession planning process be better served by restricting 00:32:42.191 --> 00:32:45.631 or prohibiting deviations from the succession plan in between the 00:32:45.631 --> 00:32:47.361 mandated regular review period? 00:32:47.941 --> 00:32:51.831 Additionally, the Board invites comments on how the NCUA can provide better 00:32:51.831 --> 00:32:56.311 support to credit unions in developing succession plans, and attracting new 00:32:56.311 --> 00:32:58.211 talent to the credit union system? 00:32:58.631 --> 00:33:02.691 The Board is also interested in comments on the timetable for regular review of 00:33:02.691 --> 00:33:06.501 the plans and whether the final rule should provide for a different timeframe 00:33:06.501 --> 00:33:10.621 or grant boards additional flexibility in establishing the review period. 00:33:11.378 --> 00:33:15.308 In specifying the officials covered by the succession plan, the Board has 00:33:15.308 --> 00:33:19.508 relied on the language of the FCU Act, which provides that “[t]he management 00:33:19.508 --> 00:33:23.668 of a Federal credit union shall be by a board of directors, a supervisory 00:33:23.668 --> 00:33:27.048 committee, and where the bylaws so provide, a credit committee.”37 The 00:33:28.568 --> 00:33:34.518 model FCU bylaws codified in Appendix A of 12 CFR part 701 expand the 00:33:35.292 --> 00:33:37.042 37 12 U.S.C. 00:33:37.042 --> 00:33:37.772 1761. 00:33:38.489 --> 00:33:42.719 list of senior FCU officials to include management officials, assistant 00:33:42.719 --> 00:33:45.089 management officials, and loan officers. 00:33:45.519 --> 00:33:51.669 In addition, the NCUA regulation at 12 CFR 701.14 defines the term “senior 00:33:51.669 --> 00:33:56.129 executive officer” to include the FICU’s chief executive officer (typically 00:33:56.129 --> 00:34:00.069 this individual holds the title of president or treasurer/manager), any 00:34:00.069 --> 00:34:04.129 assistant chief executive officer (for example, any assistant president, 00:34:04.319 --> 00:34:07.929 any vice president, or any assistant treasurer/manager) and the chief 00:34:07.929 --> 00:34:10.349 financial officer (controller).38 00:34:11.156 --> 00:34:15.496 Accordingly, under the proposed rule, the written succession plan must, at 00:34:15.496 --> 00:34:19.886 a minimum, cover the following FICU positions, or their equivalent if the FICU 00:34:19.886 --> 00:34:21.976 has adopted different position titles: 00:34:22.648 --> 00:34:24.388 • Members of the board of directors; 00:34:25.030 --> 00:34:26.950 • Members of the supervisory committee; 00:34:27.594 --> 00:34:30.814 • Members of the credit committee, where such a committee is provided 00:34:30.814 --> 00:34:35.014 for in the FICU’s bylaws and is involved daily in the review of loans; 00:34:35.683 --> 00:34:39.643 • Loan officers, where provided for in the FICU’s bylaws in lieu of a credit 00:34:39.643 --> 00:34:43.753 committee and the loan officers are involved daily in the review of loans; 00:34:44.429 --> 00:34:48.029 • Management officials and assistant management officials, as those 00:34:48.029 --> 00:34:52.429 terms are defined in the model FCU bylaws, if the FICU has provided for 00:34:52.429 --> 00:34:54.729 such positions in its bylaws; and 00:34:55.528 --> 00:34:58.168 38 This provision applies to all FICUs. 00:34:58.658 --> 00:35:05.118 See also 12 CFR 741.205 (Reporting requirements for credit unions that are 00:35:05.118 --> 00:35:07.368 newly chartered or in troubled condition). 00:35:07.768 --> 00:35:12.078 In the preamble to the 1990 final rule establishing the definition of “senior 00:35:12.078 --> 00:35:17.018 executive officer,” the Board clarified the intended scope: “By definition, 00:35:17.138 --> 00:35:21.298 a vice president or assistant manager holds a senior position, ranking 00:35:21.298 --> 00:35:25.628 immediately below the president or manager, serves as a deputy or assistant 00:35:25.628 --> 00:35:29.788 in carrying out management functions, and is empowered, among other things, 00:35:29.878 --> 00:35:33.258 to assume the duties of president or manager in that individual’s 00:35:33.258 --> 00:35:38.428 absence” 55 FR 43084, 43085 (Oct. 00:35:38.428 --> 00:35:39.948 26, 1990). 00:35:40.686 --> 00:35:47.286 • The FICU’s “senior executive officers” as defined in 12 CFR 701.14 and any other 00:35:47.286 --> 00:35:51.376 FICU personnel the board of directors deems critical given the FICU’s size, 00:35:51.486 --> 00:35:53.756 complexity, or risk of operations. 00:35:54.336 --> 00:35:57.406 This includes new positions that may be required due to planned 00:35:57.406 --> 00:36:01.576 changes in operations, supervisory landscape, or corporate structure. 00:36:02.355 --> 00:36:06.165 As noted, the succession plans would be required to address credit committee 00:36:06.165 --> 00:36:09.925 members and loan officers only if such personnel are involved on a 00:36:09.925 --> 00:36:12.105 daily basis in the review of loans. 00:36:12.745 --> 00:36:16.275 The succession plans are intended to cover senior leadership positions 00:36:16.275 --> 00:36:20.065 responsible for the oversight of the FICU or its day-to-day management. 00:36:20.685 --> 00:36:23.845 Accordingly, the NCUA believes credit committee members and loan 00:36:23.845 --> 00:36:27.395 officers may not merit inclusion if their duties are limited to the 00:36:27.395 --> 00:36:32.385 review of periodic, specific lending decisions or other “as-needed” basis. 00:36:32.935 --> 00:36:36.595 However, the Board invites public comments on the inclusion of credit 00:36:36.595 --> 00:36:38.535 committee members and loan officers. 00:36:39.258 --> 00:36:42.738 The proposed rule would also establish certain required contents 00:36:42.738 --> 00:36:44.328 for a written succession plan. 00:36:44.938 --> 00:36:48.688 First, the succession plan would be required to identify the title of the 00:36:48.688 --> 00:36:53.018 incumbent for each covered position, the expiration of the incumbent’s term (if 00:36:53.018 --> 00:36:57.898 serving in a term-limited capacity) or other anticipated vacancy date (such as 00:36:57.898 --> 00:37:01.768 the incumbent’s retirement eligibility date or announced departure date). 00:37:02.208 --> 00:37:06.358 The succession plan must also describe the FICU’s general plan or strategy 00:37:06.358 --> 00:37:09.698 for temporarily and permanently filling vacancies for each of the 00:37:09.698 --> 00:37:13.928 positions, including vacancies due to unexpected circumstances. 00:37:14.649 --> 00:37:18.299 For example, the plan could provide an order or succession among the 00:37:18.329 --> 00:37:21.909 FICU’s senior executive officers for temporarily assuming the role 00:37:21.909 --> 00:37:25.869 of chief executive officer in the event of vacancy until such time as 00:37:25.869 --> 00:37:27.959 a permanent hiring decision is made. 00:37:28.489 --> 00:37:31.709 Similarly, the plan might establish an order of succession 00:37:31.709 --> 00:37:35.289 within individual components of the FICU for temporarily filling 00:37:35.976 --> 00:37:39.856 specific senior executive positions (for example, the deputy chief 00:37:39.856 --> 00:37:43.866 financial officer temporarily filling the role of chief financial officer). 00:37:44.486 --> 00:37:48.376 Likewise, to the extent provided in the bylaws, certain board members 00:37:48.376 --> 00:37:52.216 might be designated to assume specific duties until the selection of a 00:37:52.216 --> 00:37:56.586 permanent successor (for example, a specified board member temporarily 00:37:56.586 --> 00:38:00.216 assuming the duties of a vacated position on the investment committee). 00:38:00.656 --> 00:38:04.746 Also, a smaller credit union could establish a relationship with a larger 00:38:04.746 --> 00:38:08.996 credit union to help manage the credit union during the time it takes to recruit 00:38:09.176 --> 00:38:11.186 and fill a senior executive vacancy. 00:38:11.952 --> 00:38:16.262 There is no expectation the plan specify particular successors, only 00:38:16.262 --> 00:38:19.742 how the FICU will go about appointing interim replacements and recruiting 00:38:19.742 --> 00:38:21.092 for a permanent replacement. 00:38:21.652 --> 00:38:25.882 The FICU’s bylaws may establish procedures for filling vacancies on the board of 00:38:25.882 --> 00:38:28.062 directors and certain other positions. 00:38:28.652 --> 00:38:32.842 The succession plan should be consistent with any such provisions of the bylaws. 00:38:33.632 --> 00:38:37.752 Further, FICUs must continue to comply with all applicable employment or 00:38:37.752 --> 00:38:41.502 personnel laws and other requirements in making hiring decisions. 00:38:42.196 --> 00:38:46.446 In addition, the succession plan would be required to address the FICU’s strategy 00:38:46.446 --> 00:38:50.376 for recruiting candidates with the potential to assume each of the positions. 00:38:51.006 --> 00:38:54.486 This could include, for example, the availability of associate director 00:38:54.486 --> 00:38:58.326 positions on the FICU’s board, mentorship programs, educational 00:38:58.326 --> 00:39:02.166 opportunities offered by the FICU, internships, staff development 00:39:02.166 --> 00:39:04.256 plans, and other similar efforts. 00:39:04.616 --> 00:39:07.976 The strategy must consider how the selection and diversity among the 00:39:07.976 --> 00:39:12.266 employees covered by the succession plan collectively and individually promotes 00:39:12.266 --> 00:39:14.566 the safe and sound operation of the FICU. 00:39:15.176 --> 00:39:18.526 The board of directors should also consider budgetary impacts in the 00:39:18.526 --> 00:39:20.536 development of its succession plans. 00:39:21.026 --> 00:39:24.656 For example, the plan should consider the compensation that will be required 00:39:24.656 --> 00:39:29.506 to attract talented candidates, given such factors as the necessary education 00:39:30.233 --> 00:39:33.963 and skills, or the market for comparable positions at other FICUs. 00:39:34.613 --> 00:39:37.423 The decision regarding the compensation for one position 00:39:37.453 --> 00:39:41.083 may impact the FICU’s ability to budget for other staffing needs. 00:39:41.583 --> 00:39:44.973 Accordingly, FICUs should account for these future needs in financial 00:39:44.973 --> 00:39:48.803 planning to strengthen their ability to plan for future personnel needs. 00:39:49.486 --> 00:39:53.546 The Board emphasizes that succession plans should provide sufficient detail 00:39:53.546 --> 00:39:57.216 and use language that is reasonably understandable to the FICU’s member 00:39:57.216 --> 00:40:01.556 owners in describing its strategies for filling vacancies and for recruiting, 00:40:01.596 --> 00:40:03.646 developing, and retaining employees. 00:40:04.046 --> 00:40:07.556 A FICU is owned by its members, who elect the board and to whom the 00:40:07.556 --> 00:40:09.626 directors are ultimately answerable. 00:40:10.016 --> 00:40:13.606 Accordingly, the Board believes it is vital that succession plans be 00:40:13.606 --> 00:40:17.616 clearly and concisely written, use everyday language to the extent 00:40:17.616 --> 00:40:22.096 possible, and avoid ambiguous phrasing open to differing interpretations. 00:40:22.760 --> 00:40:26.330 The Board welcomes comment on the list of covered positions and the other 00:40:26.330 --> 00:40:30.380 proposed contents of the succession plan, and whether the final rule should 00:40:30.380 --> 00:40:34.370 require FICUs to address additional or different information in the plans. 00:40:34.840 --> 00:40:38.390 Depending on the comments and its continued consideration of this issue, 00:40:38.650 --> 00:40:42.770 in finalizing the proposed rule, the Board may adopt minor changes or 00:40:42.770 --> 00:40:46.500 additions to these requirements to meet the proposal’s goal of promoting 00:40:46.500 --> 00:40:48.010 thorough succession planning. 00:40:48.732 --> 00:40:54.722 The proposed rule would also amend § 701.4(b)(3), which sets forth certain 00:40:54.722 --> 00:40:59.482 education requirements for FCU directors, to require that directors have a working 00:40:59.482 --> 00:41:04.372 familiarity with the FCU’s succession plan no later than 6 months after appointment. 00:41:04.932 --> 00:41:08.362 In making this change, the Board also proposes to reorganize the 00:41:08.362 --> 00:41:11.852 current contents of paragraph (b)(3) for clarity and grammar. 00:41:12.452 --> 00:41:16.812 No additional substantive changes are proposed to the current requirements of 00:41:17.483 --> 00:41:20.153 § 701.4(b)(3). 00:41:20.813 --> 00:41:24.183 These amendments would be made applicable to FISCUs through proposed new 00:41:25.447 --> 00:41:28.207 § 741.228. 00:41:28.975 --> 00:41:32.565 The expectation is for a FICU to develop a succession plan that is 00:41:32.565 --> 00:41:34.795 consistent with its size and complexity. 00:41:35.505 --> 00:41:39.895 Therefore, smaller FICUs are more likely to have a simple succession plan that only 00:41:39.895 --> 00:41:42.205 addresses a few key leadership positions. 00:41:42.655 --> 00:41:47.055 Larger and more sophisticated FICUs are expected to have more detailed plans. 00:41:47.555 --> 00:41:51.515 For example, smaller FICUs may have fewer board members, or have fewer 00:41:51.515 --> 00:41:55.105 staff that would qualify for the positions listed in the proposed rule 00:41:55.105 --> 00:41:57.245 for inclusion in the succession plan. 00:41:57.635 --> 00:42:02.195 Likewise, smaller FICUs are likely to have less expansive employee recruitment, 00:42:02.305 --> 00:42:04.435 development, and retention strategies. 00:42:04.995 --> 00:42:08.355 In evaluating whether a succession plan meets the requirements of the 00:42:08.355 --> 00:42:12.355 rule, the NCUA will consider the size of the FICU, as well as the 00:42:12.355 --> 00:42:14.765 complexity and risk of its operations. 00:42:15.470 --> 00:42:19.210 The Board emphasizes that succession plans should include an estimate of 00:42:19.210 --> 00:42:23.530 the budgetary impacts of executing the succession plan, including costs 00:42:23.530 --> 00:42:28.130 associated with new hires, such as the hiring of recruitment firms and increased 00:42:28.130 --> 00:42:30.360 compensation packages for new hires. 00:42:30.890 --> 00:42:34.520 It is not required for credit unions to have an exact figure but 00:42:34.520 --> 00:42:37.870 at a minimum consider an estimate to allow for better planning. 00:42:38.534 --> 00:42:39.024 C. 00:42:39.594 --> 00:42:40.944 Available Resources 00:42:41.642 --> 00:42:45.282 The NCUA offers training and other resources to aid FICUs in 00:42:45.282 --> 00:42:47.122 developing their succession plans. 00:42:47.592 --> 00:42:51.582 For example, the NCUA has posted a video series on succession planning 00:42:51.582 --> 00:42:56.212 on the internet.39 In addition, the Board’s 2019 final rule on 00:42:56.212 --> 00:42:58.482 FCU bylaws promoted succession 00:42:59.246 --> 00:43:15.346 39 NCUA, Succession Planning (2021), https://ncua.csod.com/LMS/catalog/Welcome.aspx?tab_page_id=- 00:43:15.346 --> 00:43:19.206 67&tab_id=221000382. 00:43:19.935 --> 00:43:24.325 planning efforts by providing guidance to FCUs on associate director positions.40 00:43:25.235 --> 00:43:29.395 The final rule clarified, through staff commentary, that these positions may 00:43:29.395 --> 00:43:32.725 be thought of as apprenticeships in which the incumbent receives training 00:43:32.725 --> 00:43:36.235 and knowledge about the business of the board, with the expectation that the 00:43:36.235 --> 00:43:40.565 experience will prepare the individual to serve as a director if elected for such 00:43:40.565 --> 00:43:44.825 a position by the membership or appointed on an interim basis in an exigent 00:43:44.825 --> 00:43:50.535 circumstance.41 FISCUs may wish to provide for similar positions if consistent with 00:43:50.535 --> 00:43:54.995 applicable state law and regulation, and applicable credit union bylaws. 00:43:55.745 --> 00:43:59.125 In addition, credit union trade associations may also provide 00:43:59.125 --> 00:44:02.605 training and have guidance available to assist credit unions in the 00:44:02.605 --> 00:44:04.445 development of their succession plan. 00:44:04.945 --> 00:44:09.245 FICUs with a low- income designation may be able to apply for technical assistance 00:44:09.245 --> 00:44:13.175 grants to support succession planning or offset training costs through the 00:44:13.175 --> 00:44:15.535 Community Development Revolving Loan Fund. 00:44:16.065 --> 00:44:19.855 FICUs are encouraged to make use of these and other available resources 00:44:19.855 --> 00:44:21.715 in complying with the proposed rule. 00:44:22.470 --> 00:44:25.890 FICUs are also encouraged to use already existing information 00:44:25.890 --> 00:44:27.280 in preparing their plans. 00:44:27.790 --> 00:44:33.700 For example, under the NCUA guidelines codified in 12 CFR part 749, Appendix 00:44:33.700 --> 00:44:38.660 B, all FICUs are encouraged to develop a program to prepare for a catastrophic act. 00:44:39.350 --> 00:44:43.390 The codified guidelines suggest that the program address several elements that 00:44:43.390 --> 00:44:45.570 are also relevant to succession planning. 00:44:45.970 --> 00:44:49.750 These suggested elements include a “business impact analysis to 00:44:49.750 --> 00:44:53.800 evaluate potential threats,” the determination of “critical systems 00:44:53.800 --> 00:44:57.600 and necessary resources,” and the identification of the “[p]ersons 00:44:57.600 --> 00:44:59.380 with authority to enact the plan.” 00:45:00.234 --> 00:45:03.484 40 84 FR 53278 (Oct. 00:45:03.484 --> 00:45:04.954 4, 2019). 00:45:05.746 --> 00:45:06.736 41 Id. 00:45:07.156 --> 00:45:08.836 at 53301. 00:45:09.571 --> 00:45:09.891 D. 00:45:10.361 --> 00:45:12.061 Small FICU Considerations 00:45:12.753 --> 00:45:17.433 As discussed previously, smaller FICUs may be more likely to merge, and data 00:45:17.433 --> 00:45:21.473 indicates the lack of succession planning is a significant cause of mergers.42 00:45:22.533 --> 00:45:26.863 Accordingly, smaller FICUs may be the most likely to benefit from the proposed rule. 00:45:27.423 --> 00:45:31.453 The Board recognizes, however, that these FICUs may lack the resources or 00:45:31.453 --> 00:45:33.793 expertise to develop succession plans. 00:45:34.293 --> 00:45:37.443 Accordingly, smaller FICUs may especially benefit from the 00:45:37.443 --> 00:45:39.643 existing resources identified above. 00:45:40.093 --> 00:45:44.503 The NCUA’s Small Credit Union Support Program is another available resource 00:45:44.503 --> 00:45:48.673 through which FICUs with less than $100 million in total assets may 00:45:48.673 --> 00:45:52.593 seek assistance in a variety of areas, including succession planning. 00:45:53.133 --> 00:45:57.343 In addition, the Board has developed a sample template for a succession plan that 00:45:57.343 --> 00:46:01.903 may be appropriate for some smaller FICUs, though all FICUs may benefit from it. 00:46:02.690 --> 00:46:06.880 FISCUs electing to use the template should consult applicable state requirements 00:46:06.880 --> 00:46:10.810 to ensure their succession plans are consistent with any such requirements. 00:46:11.370 --> 00:46:14.640 The proposed template is available for review and comment within the 00:46:14.640 --> 00:46:18.520 Regulations.gov docket for this notice of proposed rulemaking. 00:46:19.239 --> 00:46:23.279 Smaller FICUs may also benefit from seeking the assistance of larger and 00:46:23.279 --> 00:46:27.669 more sophisticated FICUs in developing and implementing their succession plans. 00:46:28.159 --> 00:46:32.309 For example, a larger FICU may provide technical expertise in the drafting 00:46:32.309 --> 00:46:36.749 of the plan or may detail personnel to temporarily fill a critical vacancy 00:46:36.779 --> 00:46:40.709 in a smaller credit union until such time as it is permanently filled. 00:46:41.119 --> 00:46:45.419 In general, a FICU may engage outside parties to assist in compliance, 00:46:45.659 --> 00:46:49.529 so long as the FICU’s board retains authority and is cognizant that 00:46:49.529 --> 00:46:51.449 it is responsible for compliance. 00:46:52.148 --> 00:46:54.138 42 Supra, note 16. 00:46:54.841 --> 00:46:59.121 The Board specifically invites comment from smaller credit unions on the proposed 00:46:59.121 --> 00:47:03.901 template, as well as other suggestions, to improve succession planning and reduce 00:47:03.901 --> 00:47:06.091 any burden associated with the proposal. 00:47:06.842 --> 00:47:07.192 V. 00:47:07.642 --> 00:47:09.052 Regulatory Procedures 00:47:09.768 --> 00:47:09.948 A. 00:47:10.658 --> 00:47:14.228 Providing Accountability Through Transparency Act of 2023 00:47:14.984 --> 00:47:20.164 The Providing Accountability Through Transparency Act of 2023 (5 U.S.C. 00:47:20.164 --> 00:47:24.474 553(b)(4)) (Act) requires that a notice of proposed rulemaking include the internet 00:47:24.474 --> 00:47:29.004 address of a summary of not more than 100 words in length of a proposed rule, in 00:47:29.004 --> 00:47:34.054 plain language, that shall be posted on the internet website under section 206(d) 00:47:34.054 --> 00:47:37.264 of the E-Government Act of 2002 (44 U.S.C. 00:47:37.264 --> 00:47:40.424 3501 note) (commonly known as regulations.gov). 00:47:40.894 --> 00:47:45.104 The Act, under its terms, applies to notices of proposed rulemaking and 00:47:45.104 --> 00:47:48.984 does not expressly include other types of documents that the Board publishes 00:47:48.984 --> 00:47:52.984 voluntarily for public comment, such as notices and interim-final 00:47:52.984 --> 00:47:56.714 rules that request comment despite invoking “good cause” to forgo 00:47:56.714 --> 00:47:58.584 such notice and public procedure. 00:47:59.254 --> 00:48:02.554 The Board, however, has elected to address the Act’s requirement 00:48:02.554 --> 00:48:05.504 in these types of documents in the interests of administrative 00:48:05.504 --> 00:48:07.394 consistency and transparency. 00:48:08.156 --> 00:48:11.546 In summary, the proposed rule would require that FICU boards of 00:48:11.546 --> 00:48:16.096 directors establish succession plans to proactively address any vacancies 00:48:16.096 --> 00:48:17.926 that may occur for key positions. 00:48:18.446 --> 00:48:22.996 The proposal is based on a prior February 3, 2022, proposed rule 00:48:23.106 --> 00:48:26.146 but includes several changes that the Board believes will further 00:48:26.146 --> 00:48:28.126 strengthen FICU succession planning. 00:48:28.870 --> 00:48:36.160 The proposal and the required summary can be found at https://www.regulations.gov. 00:48:36.982 --> 00:48:37.292 B. 00:48:37.622 --> 00:48:39.462 Regulatory Flexibility Act 00:48:40.166 --> 00:48:44.926 The Regulatory Flexibility Act43 generally requires an agency to conduct 00:48:44.926 --> 00:48:49.416 a regulatory flexibility analysis of any rule subject to notice and comment 00:48:49.416 --> 00:48:53.556 rulemaking requirements, unless the agency certifies that the rule will not 00:48:53.556 --> 00:48:57.946 have a significant economic impact on a substantial number of small entities. 00:48:58.336 --> 00:49:02.646 If the agency makes such a certification, it shall publish the certification at 00:49:02.646 --> 00:49:07.036 the time of publication of either the proposed rule or the final rule, along 00:49:07.036 --> 00:49:11.516 with a statement providing the factual basis for such certification.44 For 00:49:11.706 --> 00:49:16.306 purposes of this analysis, the NCUA considers small credit unions to be those 00:49:16.306 --> 00:49:21.896 having under $100 million in assets.45 The Board fully considered the potential 00:49:21.926 --> 00:49:26.006 economic impacts of the regulatory amendments on small credit unions. 00:49:26.734 --> 00:49:30.564 The proposed rule would require that FICU board of directors establish, 00:49:30.754 --> 00:49:34.734 and comply with, a written succession plan that addresses certain specified 00:49:34.734 --> 00:49:37.234 positions and contains specified elements. 00:49:37.834 --> 00:49:40.904 In addition, the board of directors would be required to review the 00:49:40.904 --> 00:49:43.384 succession plan no less than annually. 00:49:43.904 --> 00:49:46.564 These requirements may impose some cost on FICUs. 00:49:47.014 --> 00:49:50.934 However, the NCUA believes several factors mitigate the potential costs, 00:49:51.224 --> 00:49:54.944 especially for small FICUs with assets of less than $100 million. 00:49:56.222 --> 00:50:00.012 First, the preamble makes clear that an FICU is expected to develop a 00:50:00.012 --> 00:50:03.652 succession plan that is consistent with its size and complexity. 00:50:04.252 --> 00:50:07.952 Therefore, small FICUs may have a simple succession plan that is less 00:50:07.952 --> 00:50:12.192 costly to prepare than would be the case for larger and more complex FICUs. 00:50:12.732 --> 00:50:15.772 Further, in recognition that smaller FICUs may lack the 00:50:15.772 --> 00:50:17.992 resources or expertise to develop 00:50:18.757 --> 00:50:20.477 43 5 U.S.C. 00:50:20.477 --> 00:50:21.517 601 et seq. 00:50:22.271 --> 00:50:24.321 44 5 U.S.C. 00:50:24.321 --> 00:50:24.841 605(b). 00:50:25.650 --> 00:50:29.080 45 80 FR 57512 (Sept. 00:50:29.080 --> 00:50:30.590 24, 2015). 00:50:31.269 --> 00:50:34.769 succession plans, the Board is providing a sample template for 00:50:34.769 --> 00:50:38.359 a simple succession plan that may be appropriate for these FICUs. 00:50:39.019 --> 00:50:42.999 The Board is also aware that many FICUs, including small FICUs, have 00:50:42.999 --> 00:50:45.039 already adopted succession plans. 00:50:45.539 --> 00:50:49.339 Many of these existing plans should already address, either partially or 00:50:49.339 --> 00:50:53.149 in their entirety, the elements that would be required by the proposed rule. 00:50:53.699 --> 00:50:56.889 This could minimize the burden of complying with the new requirements. 00:50:57.329 --> 00:51:01.489 The NCUA also offers training and other resources to aid credit unions 00:51:01.529 --> 00:51:03.509 in developing their succession plans. 00:51:03.969 --> 00:51:07.649 For example, the NCUA has posted a video series on succession 00:51:07.649 --> 00:51:08.739 planning on the internet. 00:51:09.039 --> 00:51:12.669 Smaller FICUs are encouraged to seek assistance from larger or more 00:51:12.669 --> 00:51:16.609 sophisticated FICUs in the development of the required succession plans. 00:51:17.149 --> 00:51:21.129 FICUs are also encouraged to use already existing information in preparing 00:51:21.129 --> 00:51:25.029 their plans, such as the data used to develop the recommended program 00:51:25.029 --> 00:51:26.929 to prepare for a catastrophic act. 00:51:27.669 --> 00:51:31.989 These resources should further reduce the costs of preparing the succession plans. 00:51:32.701 --> 00:51:36.091 Accordingly, the NCUA certifies the proposed rule would not have 00:51:36.091 --> 00:51:40.711 a significant economic impact on a substantial number of small credit unions. 00:51:41.405 --> 00:51:41.865 C. 00:51:42.315 --> 00:51:43.745 Paperwork Reduction Act 00:51:44.463 --> 00:51:48.843 The Paperwork Reduction Act of 1995 (PRA) applies to rulemaking in which an 00:51:48.843 --> 00:51:53.273 agency creates a new or amends existing information collection requirements.46 00:51:53.823 --> 00:51:58.383 For purposes of the PRA, an information collection requirement may take the 00:51:58.383 --> 00:52:02.853 form of a reporting, recordkeeping, or a third-party disclosure requirement. 00:52:03.413 --> 00:52:06.723 The NCUA may not conduct or sponsor, and the respondent 00:52:07.561 --> 00:52:10.481 46 44 U.S.C. 00:52:10.481 --> 00:52:14.341 3501-3520; 5 CFR part 1320. 00:52:15.069 --> 00:52:18.819 is not required to respond to, an information collection unless it 00:52:18.819 --> 00:52:22.689 displays a valid Office of Management and Budget (OMB) control number. 00:52:23.279 --> 00:52:27.989 The proposed changes to part 701 would establish new information collections in 00:52:27.989 --> 00:52:30.429 the form of succession policies and plans. 00:52:31.049 --> 00:52:34.779 These revisions will be submitted for approval by the Office of Information 00:52:34.809 --> 00:52:36.549 and Regulatory Affairs at OMB. 00:52:37.019 --> 00:52:41.109 Persons interested in submitting comments with respect to the information collection 00:52:41.109 --> 00:52:45.169 aspects and the estimated burden of the proposed rule should submit them 00:52:45.169 --> 00:52:47.759 via email or to OMB as noted below. 00:52:48.534 --> 00:52:49.844 Estimated PRA Burden 00:52:50.469 --> 00:52:56.499 The NCUA estimates a total annual burden of 46,750 hours as follows: 00:52:57.241 --> 00:53:00.401 • OMB Control Number: 3133-NEW. 00:53:01.176 --> 00:53:04.376 • Title of Information Collection: Succession Planning. 00:53:05.081 --> 00:53:09.091 • Estimated number of respondents: 4,675. 00:53:09.865 --> 00:53:12.825 • Estimated number of responses per respondent: 1. 00:53:13.601 --> 00:53:17.851 • Estimated total annual responses: 4,675. 00:53:18.700 --> 00:53:22.290 • Estimated total annual burden hours per response: 10. 00:53:23.042 --> 00:53:27.962 • Estimated total annual burden hours: 46,750. 00:53:28.686 --> 00:53:32.536 The NCUA invites comments on (a) Whether the proposed collection of information 00:53:32.536 --> 00:53:36.976 is necessary for the proper performance of the functions of the agency, including 00:53:36.976 --> 00:53:41.036 whether the information will have practical utility; (b) the accuracy of 00:53:41.036 --> 00:53:44.926 the agency’s estimate of the burden of the proposed collection of information, 00:53:45.256 --> 00:53:50.036 including the validity of the methodology and assumptions used; (c) ways to enhance 00:53:50.036 --> 00:53:54.456 the quality, utility, and clarity of the information to be collected; and 00:53:54.456 --> 00:53:58.516 (d) ways to minimize the burden of the collection of information on those who are 00:53:59.267 --> 00:54:03.427 to respond, including through the use of appropriate automated, electronic, 00:54:03.517 --> 00:54:07.607 mechanical, or other technological collection techniques or other forms of 00:54:07.607 --> 00:54:12.567 information technology; and (e) estimates of capital or start-up costs and cost 00:54:12.567 --> 00:54:16.807 of operation, maintenance, and purchase of services to provide information. 00:54:17.524 --> 00:54:19.804 All comments are a matter of public record. 00:54:20.444 --> 00:54:24.274 Interested persons are invited to submit written comments via email to 00:54:24.274 --> 00:54:31.584 (1) PRAComments@ncua.gov or (2) visit www.reginfo.gov/public/do/PRAMain 00:54:31.584 --> 00:54:34.744 (find this particular information collection by selecting 00:54:35.480 --> 00:54:39.410 the tab titled “Information Collection Review” and click on to 00:54:39.410 --> 00:54:43.430 the section titled “Currently under Review – Open for Public comment”). 00:54:44.128 --> 00:54:44.408 D. 00:54:44.748 --> 00:54:47.928 Executive Order 13132 on Federalism 00:54:48.680 --> 00:54:53.530 Executive Order 13132 encourages independent regulatory agencies 00:54:53.530 --> 00:54:57.130 to consider the impact of their actions on state and local interests. 00:54:57.710 --> 00:55:02.730 The NCUA, an independent regulatory agency as defined in 44 U.S.C. 00:55:02.730 --> 00:55:06.880 3502(5), voluntarily complies with the executive order to adhere to 00:55:06.880 --> 00:55:08.870 fundamental federalism principles. 00:55:09.490 --> 00:55:14.410 This proposed rule applies to FCUs and, if adopted, will also apply to FISCUs. 00:55:14.880 --> 00:55:19.130 By law, FISCUs are already subject to numerous provisions of NCUA’s rules, 00:55:19.430 --> 00:55:23.200 based on the agency’s role as the insurer of member share accounts and 00:55:23.200 --> 00:55:27.590 the significant interest NCUA has in the safety and soundness of their operations. 00:55:28.120 --> 00:55:31.990 The rulemaking may, therefore, have an occasional direct effect on the states, 00:55:32.160 --> 00:55:35.700 the relationship between the national government and the states, or on the 00:55:35.700 --> 00:55:39.870 distribution of power and responsibilities among the various levels of government. 00:55:40.490 --> 00:55:45.260 The Board specifically requests comment on ways to eliminate, or at least minimize, 00:55:45.330 --> 00:55:47.170 potential conflicts in this area. 00:55:47.820 --> 00:55:50.630 Based on the comments received, the final rule may 00:55:51.331 --> 00:55:54.671 modify the application of the succession planning requirements 00:55:54.671 --> 00:55:58.861 to FISCUs as necessary to carry out the purposes of this rulemaking and 00:55:58.861 --> 00:56:00.661 the intent of the Executive Order. 00:56:01.370 --> 00:56:01.660 E. 00:56:02.050 --> 00:56:05.380 Assessment of Federal Regulations and Policies on Families 00:56:06.082 --> 00:56:09.722 The NCUA has determined that this proposed rule would not affect family 00:56:09.722 --> 00:56:14.312 well-being within the meaning of Section 654 of the Treasury and General 00:56:14.312 --> 00:56:20.662 Government Appropriations Act, 1999.47 The proposed regulatory requirements are 00:56:20.662 --> 00:56:24.502 exclusively concerned with succession planning policies of FICUs for 00:56:24.502 --> 00:56:28.842 replacing vacancies among board members and other key management officials. 00:56:29.162 --> 00:56:32.972 While the proposed rule is intended to maintain access to quality credit 00:56:32.972 --> 00:56:37.192 union services by reducing unplanned or forced consolidations, the 00:56:37.192 --> 00:56:41.132 potential positive effect on family well-being, including financial 00:56:41.132 --> 00:56:43.442 well-being is, at most, indirect. 00:56:44.143 --> 00:56:45.213 List of Subjects 00:56:45.857 --> 00:56:48.097 12 CFR Part 701 00:56:48.882 --> 00:56:52.582 Credit, Credit unions, Reporting and recordkeeping requirements. 00:56:53.287 --> 00:56:55.827 12 CFR Part 741 00:56:56.606 --> 00:57:00.346 Bank deposit insurance, Credit, Credit unions, Reporting and 00:57:00.346 --> 00:57:01.986 recordkeeping requirements. 00:57:02.621 --> 00:57:05.231 By the National Credit Union Administration Board, 00:57:05.601 --> 00:57:07.821 this 18th day of July 2024. 00:57:08.711 --> 00:57:13.981 47 Public Law 105–277, 112 Stat. 00:57:14.491 --> 00:57:16.461 2681 (1998). 00:57:17.200 --> 00:57:20.000 Melane Conyers-Ausbrooks, Secretary of the Board. 00:57:20.781 --> 00:57:25.491 For the reasons stated in the preamble, the NCUA Board proposes to amend 12 00:57:25.491 --> 00:57:29.611 CFR parts 701 and 741, as follows: 00:57:30.343 --> 00:57:34.453 PART 701 – ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNION 00:57:35.245 --> 00:57:35.685 1. 00:57:36.455 --> 00:57:40.925 The authority citation for part 701 continues to read as follows: 00:57:41.599 --> 00:57:44.799 Authority: 12 U.S.C. 00:57:44.939 --> 00:57:58.969 1752(5), 1755, 1756, 1757, 1758, 1759, 1761a, 1761b, 1766, 1767, 00:57:59.691 --> 00:58:08.421 1782, 1784, 1785, 1786, 1787, 1788, 1789. 00:58:08.941 --> 00:58:13.931 Section 701.6 is also authorized by 15 U.S.C. 00:58:13.931 --> 00:58:14.931 3717. 00:58:15.645 --> 00:58:20.685 Section 701.31 is also authorized by 15 U.S.C. 00:58:20.685 --> 00:58:24.275 1601 et seq.; 42 U.S.C. 00:58:24.275 --> 00:58:26.485 1981 and 3601-3610. 00:58:27.153 --> 00:58:33.953 Section 701.35 is also authorized by 42 U.S.C. 00:58:33.953 --> 00:58:34.733 4311-4312. 00:58:35.556 --> 00:58:35.916 2. 00:58:36.676 --> 00:58:39.456 Amend § 701.4 by: 00:58:40.271 --> 00:58:40.551 a. 00:58:41.091 --> 00:58:42.771 Revising paragraph (b)(3). 00:58:43.524 --> 00:58:43.884 b. 00:58:44.314 --> 00:58:45.524 Adding paragraph (e). 00:58:46.209 --> 00:58:48.559 The addition and revision to read as follows: 00:58:49.222 --> 00:58:54.932 § 701.4 General authorities and duties of Federal credit union directors. 00:58:58.635 --> 00:58:58.835 * * * * * (b) 00:59:01.528 --> 00:59:05.378 * * * (3) At the time of election or appointment, or within a reasonable time 00:59:05.378 --> 00:59:09.758 thereafter, not to exceed six months, have at least a working familiarity 00:59:09.758 --> 00:59:14.038 with, and to ask, as appropriate, substantive questions of management and 00:59:14.038 --> 00:59:16.218 the internal and external auditors of: 00:59:17.097 --> 00:59:21.277 (i) Basic finance and accounting practices, including the ability to read 00:59:21.277 --> 00:59:25.767 and understand the Federal credit union’s balance sheet and income statement; and 00:59:26.950 --> 00:59:30.480 (ii) The Federal credit union’s succession plan established pursuant 00:59:30.480 --> 00:59:32.320 to paragraph (e) of this section. 00:59:36.077 --> 00:59:38.027 * * * * * (e) Succession planning requirements. 00:59:38.447 --> 00:59:39.197 (1) General. 00:59:39.597 --> 00:59:43.847 A Federal credit union must establish a written succession plan as provided in 00:59:43.847 --> 00:59:47.487 this paragraph that is approved by the board of directors and consistent with 00:59:47.487 --> 00:59:49.627 the credit union’s size and complexity. 00:59:50.307 --> 00:59:54.437 In evaluating whether a succession plan meets the requirements of this paragraph, 00:59:54.767 --> 00:59:58.877 the NCUA will consider the size of the Federal credit union, as well as the 00:59:58.877 --> 01:00:01.307 complexity and risk of its operations. 01:00:02.006 --> 01:00:03.266 (2) Covered positions. 01:00:04.056 --> 01:00:08.496 The succession plan shall, at a minimum, cover the following positions, or their 01:00:08.496 --> 01:00:12.556 equivalent if the Federal credit union has adopted different position titles: 01:00:13.314 --> 01:00:15.104 (i) Members of the board of directors; 01:00:16.180 --> 01:00:18.070 (ii) Members of the supervisory committee; 01:00:19.303 --> 01:00:22.983 (iii) Members of the credit committee, where such a committee is provided for 01:00:22.983 --> 01:00:27.773 in the federal credit union’s bylaws and is involved daily in the review of loans; 01:00:28.673 --> 01:00:32.313 (iv) Loan officers, where provided for in the Federal credit union’s 01:00:32.313 --> 01:00:36.273 bylaws in lieu of a credit committee and the loan officers are involved 01:00:36.273 --> 01:00:37.943 daily in the review of loans; 01:00:38.660 --> 01:00:42.900 (v) Management officials and assistant management officials, as those terms are 01:00:42.900 --> 01:00:47.850 defined in Appendix A, if provided for in the Federal credit union’s bylaws; and 01:00:48.924 --> 01:00:52.564 (vi) The Federal credit union’s chief executive officer (typically 01:00:52.564 --> 01:00:56.504 this individual holds the title of president or treasurer/manager), any 01:00:56.504 --> 01:01:00.564 assistant chief executive officer (for example, any assistant president, 01:01:00.694 --> 01:01:04.864 any vice president, or any assistant treasurer/manager), the chief financial 01:01:04.864 --> 01:01:08.964 officer (controller), and any other personnel the board of directors deems 01:01:08.964 --> 01:01:13.874 critical given the Federal credit union’s size, complexity, or risk of operations. 01:01:14.144 --> 01:01:17.354 This includes new positions that may be required due to planned 01:01:17.354 --> 01:01:21.404 changes in operations, supervisory landscape, or corporate structure. 01:01:22.212 --> 01:01:24.222 (3) Contents of succession plan. 01:01:24.892 --> 01:01:28.732 The succession plan must, at minimum, contain the following information 01:01:28.732 --> 01:01:32.882 regarding each of the positions covered under paragraph (e)(2) of this section: 01:01:33.549 --> 01:01:37.659 (i) The title for each covered position and the expiration of the incumbent’s term 01:01:37.869 --> 01:01:42.729 (if serving in a term-limited capacity) or other anticipated vacancy date (such 01:01:42.729 --> 01:01:46.599 as the incumbent’s retirement eligibility date or announced departure date). 01:01:47.781 --> 01:01:51.251 (ii) The Federal credit union’s plan for temporarily and permanently 01:01:51.251 --> 01:01:55.041 filling vacancies for each of the positions, including vacancies 01:01:55.041 --> 01:01:57.101 due to unexpected circumstances. 01:01:58.295 --> 01:02:01.795 (iii) The Federal credit union’s strategy for recruiting candidates with the 01:02:01.795 --> 01:02:04.235 potential to assume each of the positions. 01:02:04.735 --> 01:02:08.015 The strategy must consider how the selection and diversity among the 01:02:08.015 --> 01:02:11.825 employees covered by the succession plan collectively and individually 01:02:11.825 --> 01:02:15.395 promotes the safe and sound operation of the Federal credit union. 01:02:16.247 --> 01:02:17.877 (4) Board responsibilities. 01:02:18.367 --> 01:02:19.817 The board of directors must: 01:02:20.584 --> 01:02:24.434 (i) Approve a written succession plan that meets the requirements of paragraphs 01:02:24.504 --> 01:02:26.844 (e)(2) and (e)(3) of this section; and 01:02:28.021 --> 01:02:32.431 (ii) Review, and update as necessary, the succession plan in accordance with 01:02:32.431 --> 01:02:36.601 a schedule established by the board of directors but no less than annually. 01:02:37.390 --> 01:02:38.820 (5) Adherence to plan. 01:02:39.530 --> 01:02:43.310 The board of directors shall approve and document in its meeting minutes the 01:02:43.310 --> 01:02:47.250 rationale for substantive deviations from its approved succession plan. 01:02:48.015 --> 01:02:51.095 PART 741 – REQUIREMENTS FOR INSURANCE 01:02:51.830 --> 01:02:52.240 3. 01:02:53.040 --> 01:02:57.780 The authority citation for part 741 continues to read as follows: 01:02:58.499 --> 01:03:01.439 Authority: 12 U.S.C. 01:03:01.489 --> 01:03:07.079 1757, 1766(a), 1781–1790, and 1790d; 31 U.S.C. 01:03:07.699 --> 01:03:10.239 3717. 01:03:11.036 --> 01:03:11.396 4. 01:03:12.116 --> 01:03:16.286 Add § 741.228 to read as follows: 01:03:16.982 --> 01:03:20.982 § 741.228 Succession planning. 01:03:21.730 --> 01:03:26.340 Any credit union that is insured pursuant to Title II of the Act must adhere to 01:03:26.340 --> 01:03:32.480 the requirements in § 701.4(b)(3) and (e) of this chapter, to the extent these 01:03:32.480 --> 01:03:36.520 regulatory provisions do not conflict with an applicable state requirement. 01:03:37.271 --> 01:03:38.611 This concludes this item. 01:03:39.341 --> 01:03:43.481 If your Credit union could use assistance with your exam, reach out to Mark Treichel 01:03:43.481 --> 01:03:46.261 on LinkedIn, or at mark Treichel dot com. 01:03:46.821 --> 01:03:49.441 This is Samantha Shares and we Thank you for listening.