Samantha: Hello, this is Samantha Shares.
This episode covers twenty twent y two NCU A’s proposed rule on Succession Planning.
Why are we covering this proposal on our podcast?
Because we anticipate that with the NCU A board now being led by two democrats,
that some version of this rule will be approved in twenty twenty four.
The following is an audio version of that proposal.
This podcast is educational and is not legal advice.
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reach out to learn how they can assist at Mark Treichel DOT COM.
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And now the proposed regulation on succession planning.
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 701
Succession Planning
AGENCY: National Credit Union Administration (NCUA).
ACTION: Proposed rule.
SUMMARY: Through this proposed rule, the NCU A Board ( hereinafter the Board) would
require that Federal Credit Union (FCU) boards of directors establish and adhere
to processes for succession planning.
The succession plans will help to ensure that the credit union has plans to
fill key positions, such as officers of the board, management officials,
executive committee members, supervisory committee members, and (where provided
for in the bylaws) the members of the
1
credit committee to provide continuity of operations.
In addition, the proposed rule would require directors to be knowledgeable
about the FCU’s succession plan.
Although the proposed rule would apply only to FCUs, the Board’s purpose is
to encourage and strengthen succession planning for all credit unions.
The proposed rule would provide FCUs with broad discretion in
implementing the proposed regulatory requirements to minimize any burden.
DATES: Comments have expired.
I.
Background
A.
Succession Planning
Board members play a key role in a credit union’s success.
The Federal Credit Union Act (FCU Act) vests the general direction
and control of an FCU to its board.
Credit union 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 credit unions.
One of the variables over which a credit union board has control is the hiring
of the organization’s senior management.
A board’s failure to plan for the transition of its management
could potentially come with high costs, including the potential for the
unplanned merger of the credit union upon the departure of key personnel.
Conversely, good succession planning confers a variety of benefits, including:
Minimizing service disruptions during management transitions;
Ensuring organizational viability over the long term;
Clarifying the employee development path;
Developing current talent;
Creating opportunities for employees; and
Bringing in new ideas from outside hires.
Succession planning is a critical component of a credit
union’s overall strategic plan.
It ensures that the appropriate personnel are available to execute the credit
union’s strategic plan and mission.
As noted, the goal of succession planning is to build and/or identify
a pool of qualified individuals who can be recruited or selected to
fill a vacancy in a key position.
To be successful, succession planning should be an ongoing and iterative
process, not a one-time event.
B.
Increased Relevance of Succession Planning
Several factors have contributed to increase the relevance of succession
planning for credit union boards.
First, there has been a decline in the number of credit unions mainly
resulting from the long-running trend of consolidation across
all depository institutions.
This trend has remained relatively constant across all economic
cycles for more than three decades.
During the third quarter of 2021, the number of FICUs increased in
every asset category tracked by the NCU A, except for those with less
than 50 million dollars in assets.
The number of FICUs with assets of at least 10 million dollars but less
than 50 million dollars declined to 1,467 in the third quarter of 2021
from 1,561in the third quarter of 2020 (a decline of 94 credit unions).
The decline in the number of FICUs with less than 10 million
dollars in assets was even greater.
The number of FICUs with less than 10 million dollars in assets declined
to 1,068 in the third quarter of 2021 from 1,199 in the third quarter of
2020 (a decline of 131 credit unions).
The available data does not differentiate between those smaller
credit unions that consolidated or were liquidated, versus those that
expanded into a larger asset category.
However, the decrease in the total number of FICUs with less than 50
million dollars in assets (especially those with assets of less than
10 million dollars), combined with the ongoing industry trend of consolidation,
suggests that mergers may be more prevalent among smaller credit unions.
One of the reasons for the consolidation is the lack of succession planning.
An NCU A analysis found that poor management succession planning was
either a primary or secondary reason for almost a third (32 percent)
of credit union consolidations.
The FCU Act 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.
Further, the FCU Act provides that the Board shall “encourage 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 union
whenever P R Acticable and consistent with reasonable standards for the safe
and sound operation of the credit union.”
Another reason for a heightened focus on succession planning is the
ongoing retirements of the so-called “Baby Boomer” generation (individuals
born between 1946 and 1964).
These individuals comprise more than a quarter of the total
population of the United States.
Each day, commencing in 2011 (when the oldest members of the
generation turned 65) and continuing until 2030, approximately 10,000
Baby Boomers will turn age 65.
The COVID-19 pandemic has accelerated the pace of retirements among
this generational cohort.11 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.
Succession planning is critical to the continued operation of those credit
unions with board members and executives that are part of this retirement wave.
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 the board of directors shall
have the general direction and control of the affairs of the FCU.
The board of directors must oversee the credit union’s operations to
ensure the credit union operates in a safe and sound manner.
For example, the board must be kept informed about the credit union’s
operating environment, hire and retain competent management, and ensure that
the credit union has a risk management structure and process suitable for the
credit union’s size and activities.
Further, under the FCU Act, the NCU A is the chartering and supervisory
authority for FCUs and the Federal supervisory authority for FICUs.
The FCU Act grants the NCU A 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.
Section 207 of the FCU Act is a specific grant of authority
over share insurance coverage, conservatorships, and liquidations.
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.
Accordingly, the FCU Act grants the Board broad rulemaking authority to
ensure that the credit union industry and the NCUSIF remain safe and sound.
This Proposed Rule
Applicability of Proposed Rule
As described in more detail in the following discussion, the
proposed regulatory amendments would apply solely to FCUs.
FISCUs must comply with any state-specific requirements
pertaining to succession planning.
However, the Board encourages FISCU boards, to the extent compatible with
state law, to undertake succession planning efforts to help ensure continued
viability of their credit union.
In addition, the proposed rule would not amend the regulations in 12 CFR
part 704, which establishes requirements applicable to federally insured
corporate credit unions, since the Board believes these regulations already
adequately address succession planning.
For example,
§704.13(c)(1) requires that the board must ensure that “senior managers are
capable of identifying, hiring, and retaining qualified staff.” Further,
paragraph (c)(2) of the section requires that the board also ensure
that “qualified 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.” The Board welcomes public comment on whether
changes to the wording of section 704.13 are necessary to effectuate the purposes
of the proposed regulatory amendments.
The proposed rule applies to all FCUs, irrespective of asset size.
However, as discussed above, smaller credit unions may be more
susceptible to consolidation.
Further, data demonstrates that the lack of succession planning is a
major cause of credit union mergers.
Accordingly, smaller credit unions may be the most likely to
benefit from the proposed rule.
The Board specifically invites comment from smaller credit unions on the
proposed regulatory amendments, as well as other suggestions, to improve
credit union succession planning.
C.
Proposed Regulatory Amendments
The proposed rule would amend section 701.4, which sets forth the general duties
and responsibilities of FCU directors.
The proposal would add a new paragraph e requiring that FCU directors must
establish and adhere to processes for succession planning for key positions.
In specifying the officials covered by the succession plan, the Board has
relied on the language of the FCU Act, which provides that “the 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.” The FCU bylaws codified in
Appendix A of 12 CFR part 701 expand the list of senior FCU executives to
include the members of an executive committee and management officials.
The board of directors or an appropriate committee of the board would be
required to review and approve a written succession plan regarding the
specified FCU executives and officials.
The succession plan must, at a minimum, identify the credit union’s key positions,
necessary competencies and skill sets for those positions, and strategies to
identify alternatives to fill vacancies.
The board of directors must review the succession plan in accordance
with a schedule established by the board, but no less than annually.
In addition, the proposed rule would amend section 701.4(b)(3), which sets
forth certain education requirements for FCU directors, to require that
directors have a working familiarity with the FCU’s succession plan.
In making this change, the Board also proposes to reorganize the
current contents of paragraph (b)(3) for clarity and grammar.
No substantive changes are proposed to the current requirements
of section 701.4(b)(3).
Current Succession Planning Efforts
This proposed rule is intended to strengthen current succession
planning efforts being taken by credit unions, and to require others that
have not yet done so to commence their succession planning process.
The proposed rule is also consistent with the guidance issued by the other banking
agencies to address succession planning.
The Board is aware that many credit unions have already adopted succession
planning strategies and models.
The NCU A offers training and other resources to aid credit unions in
developing their succession plans.
For example, the NCU A has posted a video series on succession
planning on the internet.
In addition, the Board’s 2019 final rule on FCU bylaws
promoted succession planning efforts by providing guidance to FCUs
on associate director positions.
The proposed 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 for an eventual election to a director position.
D.
Minimizing Burden
In designing this proposed rule, the Board has endeavored to minimize the
burden on FCUs, especially small FCUs.
The proposed regulatory amendments provide FCUs with broad discretion in
how to implement the new requirements.
For example, while the proposed rule would require succession plans to include
certain mandatory elements, the rule neither specifies how the topics should be
addressed nor does it otherwise prescribe the contents of the succession plans.
Similarly, the proposal would require that directors have a working familiarity
with the FCU’s succession plan but does not mandate the contents of
training to meet this requirement.
The expectation is for credit unions to develop a plan and provide training
that is consistent with the size and complexity of the credit union.
Therefore, smaller credit unions are more likely to have a simple
succession plan that only addresses a few key leadership positions.
The Board envisions that the examination program would confirm the existence
of a succession plan and training.
The examination program will defer to a credit union’s self-assessment
of its succession planning needs and the information contained in the
plan, so long as its plan addresses the elements required by the rule.
Further, the Board envisions that, as a result of other planning and
documentation efforts, many FCUs already have the necessary data and information
to complete their succession plans.
Rather than undertaking new analysis specifically for the succession plan, FCUs
are encouraged to use already existing information in preparing their plans.
For example, under the NCU A guidelines codified in 12 CFR part 749, Appendix
B, all federally insured credit unions 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 “business impact analysis to
evaluate potential threats,” the determination of “critical systems
and necessary resources,” and the identification of the “persons
with authority to enact the plan.”
The Board is committed to assisting credit unions in implementing
their succession plans.
For example, the NCU A has posted online training on succession planning
through its Learning Management System.
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 process.
Credit unions with 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.
Credit unions are encouraged to make use of these and other available resources
in complying with the proposed rule.
The NCU A will develop additional guidance, as it deems necessary, to aid
credit union succession planning efforts.
Questions for Comment
The Board welcomes comments on all aspects of this proposed rule.
It is especially interested in comments addressing ways the NCU A may better
support succession planning in small credit unions and suggestions on ways
the final rule might minimize burden.
In particular, the Board requests public input on the following questions:
1.
What do you believe will be the quantified burden imposed by the rule,
be it in hours, dollars, or effort?
2.
It is anticipated that most FCUs already possess the information needed to comply
with the proposed rule, and thus that most FCU will not have to create any new
documentation as a result of the rule.
Do you agree with this view?
Why or why not?
3.
As noted, the Board anticipates that the examination program will establish
an FCU’s compliance with the proposed rule by confirming the existence
of a succession plan and training.
Do you have any other suggested methods of establishing compliance?
4.
This preamble provides that smaller credit unions with less than $10
million in assets will be the primary beneficiaries of the proposed rule.
What benefits do you think smaller credit unions will receive from the
Board’s adoption of this proposed rule?
5.
What benefits do you anticipate larger FCUs will receive from
adoption of the proposed rule?
For purposes of this question, “larger FCUs” may include FCUs with more than
$10 million in assets or FCUs in another higher asset category.
6.
What benefits do you anticipate members will receive from the
adoption of the proposed rule?
7.
What impact do you believe this rule will have on credit union consolidations?
8.
The NCU A believes that the proposed rule will result in benefits for the National
Credit Union Share Insurance Fund, to the overall safety and soundness of the
credit union system, and to FCU members.
If the rule is adopted as is, what would you suggest the NCU A
do to test the assumption above?
9.
The NCU A reviews all of its existing regulations every three years.
The NCUA’s Office of General Counsel maintains a rolling review schedule
that identifies one-third of the NCUA’s existing regulations for review each year
and provides notice to the public of those regulations under review so the public
may have an opportunity to comment.25 In addition, should the NCU A commit to
revisiting this rule within a specific period, say after 7 years, at which
time the rule would either be rescinded or approved by the Board for renewal?
The Board might also choose, at that time to renew the rule but with some revisions.
25 See, https://www.ncua.gov/regulation-supervision/rules-regulations/regulatory-review
Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires the NCU A to prepare an
analysis to describe any significant economic impact a regulation may
have on a substantial number of small entities.26 For purposes of this
analysis, the NCU A considers small credit unions to be those having under
100 million dollars in assets.
The Board fully considered the potential economic impacts of the proposed
succession planning requirements on small credit unions during the
development of the proposed rule.
As noted in the preamble, the proposed rule would provide FCUs
with discretion in how to implement the new regulatory requirements.
For example, the rule does not specify how specific succession
plan topics should be addressed.
Similarly, the proposal does not mandate the contents of succession plan training.
Accordingly, the NCU A certifies that it would not have a significant
economic impact on a substantial number of small credit unions.
Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (P R A) applies to rulemakings in
which an agency by rule creates a new paperwork burden on regulated
entities or amends an existing burden.
For purposes of the P R A, a paperwork burden may take the form
of a reporting, disclosure, or recordkeeping requirement, each referred
to as an information collection.
The proposed changes to part 701 would establish new information
collections in the form of succession policies, plans, and related trainings.
These revisions will be addressed in a separate Federal Register notice and
will be submitted for approval by the Office of Information
and Regulatory Affairs at the Office of Management and Budget.
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.
The proposed rule would not have substantial direct effects on the states,
on 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 has therefore determined that this rule does not constitute a
policy that has federalism implications for purposes of the executive order.
Assessment of Federal Regulations and Policies on Families
The NCU A 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.
List of Subjects in 12 CFR Part 701
Advertising, Aged, Civil rights, Credit, Credit unions, Fair housing,
Individuals with disabilities, Insurance, Marital status discrimination,
Mortgages, Religious discrimination,
PART 701 – ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNION
§ 701.4 General authorities and duties of Federal credit union directors.
(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 union's balance sheet and income statement; and
(ii) The Federal credit union’s succession plan established pursuant
to paragraph (e) of this section.
(e) Succession planning.
(1) General.
A Federal credit union board of directors must establish a process to ensure proper
succession planning to include officers of the board, management officials,
executive committee members, supervisory committee members, and (where provided for
in the bylaws) the members of the credit committee, as described in Appendix A.
(2) Board responsibilities.
The board of directors or an appropriate committee of the board must:
(i) Approve a written succession plan that covers the individuals described
in paragraph (e)(1) of this section; and
(ii) Review, and update as deemed necessary, the succession plan
and policy in accordance with a schedule established by the board of
directors, but no less than annually.
(3) Succession plan contents.
The succession plan must, at a minimum, identify key positions
covered by the plan, necessary general competencies and skills for those
positions, and strategies to identify alternatives to fill vacancies.
This concludes the NCU A’s proposed rule on Succession Planning.
We anticipate that with the NCU A board now being led by two
democrats, that some version of this rule will be approved in 2024.
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.