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Samantha: Hello, this is Samantha Shares.
This episode covers the N C U A's new
and final succession planning regulation.
This is in the N C U A Boards own words.
This podcast is educational
and is not legal advice.
We are sponsored by Credit Union
Exam Solutions Incorporated, whose
team has over two hundred and
Forty years of National Credit
Union Administration experience.
We assist our clients with N C
U A so they save time and money.
If you are worried about a recent,
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And now the Board
The first item of business today
is the final rules succession
planning part 701 and 741 staff
presenting our John Barry Jr.
policy officer, office of examination
and insurance and Ariel Pereira, senior
staff attorney, office of general counsel.
Joining John and Ariel at the
table to answer any questions is
Kelly Lay, Director of the Office
of Examination and Insurance.
Good morning to all three of you.
John, you're a pro at this
now, so this should be fine.
Uh, please begin whenever
the two of you are ready.
Is the webcast on?
Um, good morning, Chairman Harper, Vice
Chairman Hoffman, Board Member Otzka.
My colleagues and I are here to
present for your consideration a final
rule entitled Succession Planning.
The final rule follows the publication of
July 25th, 2024 proposed rule and takes
into consideration the public comments
received in response to the proposal.
The final rule applies to all consumer
FICUs, including federally insured
state chartered credit unions.
Thank you.
However, to the extent that a FSCU
is subject to a state statutory or
regulatory requirement that conflicts
with the final rule, the NCOA
will defer the state requirement.
The comment period on the proposed
rule closed on September 23rd, 2024.
The NCOA received 187
comments in response.
Comments were received from individual
FICUs, state and regional credit
union organizations, credit union
trade organizations, consulting
providers, and individuals.
Approximately 116 of the
comments were form letters
with nearly identical wording.
The issues raised in the form
letters were similar to those made
in many of the other comment letters.
The majority of commenters
acknowledged the importance of
succession planning and agreed with
the intent of the proposed rule.
However, they also raised questions
and issues regarding the rule.
These are addressed in the
preamble to the final rule.
In general, the changes made in
response to comment increased the
flexibility of credit unions in
complying with the new requirements.
Among other changes, the final rule makes
the following changes to the proposal.
First, the final rule provides that
a board must review its succession
plan no less than every 24 months.
This is opposed to the annual
review that would have been
required under the proposed rule.
Further, loan officers, supervisory
committee members, and credit committee
members have been removed from the
list of FICU officials that must
be covered by the succession plans.
The final rule also no longer specifies
that a succession plan must address
unexpected or temporary vacancies and
does not specify required contents
for FIQ's recruitment strategy.
The final rule no longer requires
the deviations from approved
succession plans to be documented
in the board's meeting minutes.
Finally, the rule makes several
other technical, non substantive
edits for purposes of clarity.
To help ensure that FIQs have the
necessary time to develop their succession
plans, the final rule provides for an
effective date of January 1st, 2026.
I will now turn it over to John, who will
discuss the specifics of the final rule.
Thank you, Ariel.
Good morning, Chairman Harper, Vice
Chairman Hoffman, and Board Member Otsuka.
The final rule requires that a federally
insured accredited board of directors
establish a written succession plan.
that addresses specified positions.
At a minimum, the succession plan must
cover members of the Board of Directors,
management officials and assistant
management officials, senior executive
officers, and any other personnel the
Crediting's Board of Directors deems
critical given the crediting's size,
complexity, and risk of operations.
As Ariel noted, the list of
covered officials has been revised
in response to public comment.
Supervisory committee members, credit
committee members, and loan officers
were removed from the list of personnel
required to be covered in a federally
insured crediting succession plan.
The final rule also requires the
succession plan to address the
crediting strategy for recruiting
candidates with the potential to
assume each of the covered positions.
The strategy must consider how the
selection and the diversity of skills
among the employees covered by the
succession plan collectively and
individually promotes the safe and
sound operation of the credit union.
The Board of Directors will be required to
review the succession plan in accordance
with the schedule it establishes,
but no less than every 24 months.
Although the Board of Directors is
expected to adhere to its succession plan.
The NQA recognizes that circumstances
might require changes to the plan
when filling specific vacancies.
However, unlike in the proposed rule,
the Board of Directors no longer
is required to approve deviations
from their approved succession plan
or document the rationale for the
deviation in their meeting minutes.
The final rule also amends section 701.
4b.
3, which contains education requirements
for directors of federal credit unions.
The rule requires that directors be
familiar with the succession plan no
later than six months after appointment.
The expectation is that a federally
insured credit union will develop a
succession plan that is consistent
with its size and complexity.
Credit unions, not the NCUA,
are best positioned to assess
various risks and opportunities
related to succession planning.
A credit union will need to make its own
determinations on the detail necessary
to address the required elements in their
succession plan and whether additional
factors, other than those required in
this rule, should be considered when,
uh, in their succession planning process.
As an aid, the NCUA is making available
a sample succession planning template.
That may be appropriate for some
smaller federally insured credients,
though it might be beneficial
to all credients to review.
This concludes our presentation.
We'd be happy to address
any of your questions.
Thank you, Ariel.
Thank you, John.
And thank you, Kelly, for your hard
work and presentation on the final
rule that codifies the succession
planning process for key positions
at federally insured credit unions.
And thank you to the many others
across the agency who worked
collaboratively to bring this final
rule before the NCUA board today.
Moreover, I am grateful for the
consideration by all three board offices
in negotiations over this final rule.
It's fair to say that none of us
got everything that we wanted in
this rulemaking, but all of us got
something that was important to us.
That's how boards and how compromising
to reach consensus should work.
So thank you to my fellow board
members and their policy advisors.
Why is succession planning so important?
It's because the best way to
solve a problem is to prevent it.
Some attribute Benjamin Franklin with
saying, if you fail to plan Regardless of
whether Franklin said those precise words,
I very much agree with the sentiment.
We know that failure to plan for
management and key decision maker
transitions comes with a cost.
The potential costs range from an
unanticipated merger of a credit union
or its failure when key personnel depart.
For small, low income, and minority
depository institution credit unions, as
well as those that support under resourced
and rural communities, the situation
happens more than any of us would like.
In my view, it's better for consumers and
the system to have many smaller, diverse
credit unions serving a wide variety
of purposes, communities, and markets,
instead of consolidating credit unions
into fewer and larger institutions.
More competition leads to greater consumer
choice, lower prices, and better services.
Moreover, arge and increasingly
complex credit unions can expose
the National Credit Union Share
Insurance Fund to greater risks.
This final rule on succession
planning establishes a way for the
NCUA to address one of the most
common causes for unplanned and
unforced credit union mergers.
It also ensures that smaller
credit institutions remain the
cornerstone of our nation's federally
insured credit union system.
Specifically, the final rule requires the
board of a federally insured credit union
to establish a written succession plan
that addresses the specified positions
that are vital to the credit union's
continued operation and management.
Boards also need to review
these plans periodically to
ensure they remain current.
The final rule additionally requires newly
appointed members of the board to gain
a familiarity with those plans within
six months of appointment, as John said.
Further, for federally insured state
charter credit unions in states
that have established succession
planning requirements, the NCOA will
defer to such requirements to the
extent no conflicts exist between
the final rule and the state's rule.
Some commenters argue that the rule
will have the unintended consequence of
increasing the number of consolidations as
smaller credit unions do not have the time
and resources to comply with the rule.
This, in turn, could lead to mergers
with larger institutions, they assert.
But smaller credit unions can develop
succession plans by leveraging the
templates included in the rulemaking.
I'm the NCAA's Small Credit Union
and Minority Depository Institution
Support Program and completing
online training available through the
NCAA's learning management system.
From my own experience, I know
firsthand the effort needed
to develop a succession plan.
I once served on the board of a non
profit group with approximately 650,
000 in annual revenue, a level of
earnings that puts the organization
on par with many of the credit union
industry's smaller institutions.
The volunteer board of that non profit
developed a succession plan that included,
um, that included what would happen if the
leader departed and adjusted the salary
structure over time to a market rate to
allow for the recruitment of a new leader
when she, uh, the departure occurred.
These efforts helped to ensure the future
viability of the non profit when the
leader moved on to her next opportunity.
This final rule also aims to be
straightforward and manageable.
It provides a standardized template
to support credit unions and their
succession planning processes.
It's also unnecessary to hire
expensive consultants or to make
the exercise overly complex.
The NCWA simply expects credit
unions to develop a succession plan.
Consistent with their size and complexity,
smaller institutions can have a simple
succession plan that addresses a few
leadership positions, while larger
institutions would have more extensive
plans for a variety of critical roles.
The final rule also narrows
the list of covered officials.
That change recognizes the many
varied structures and operations
of credit unions within the system.
So long as the succession plan
addresses the required elements under
this final rule, credit unions may
adjust their plans to reflect their
unique operations and structures.
With these provisions, credit union
management and boards of Not the
NCUA are in full control of the
credit union succession planning.
Some commenters noted that the supervisory
guidance instead of a rulemaking is a
better approach to address this issue.
We have chosen instead to adopt a
rule as a helpful because as, as
helpful as supervisory guidance may.
It is just that, guidance.
There would be no requirements on what
constitutes an acceptable succession plan,
and the NCWA would lack the regulatory
tools needed to address deficiencies in a
credit union succession planning process.
In closing, for the credit union system
to achieve its full potential, smaller
credit unions must remain viable
and at the heart of the movement.
However, a survey of NCUA exams in 2023
found that approximately one in four
credit unions lacked a succession plan
or had an inadequate plan in place.
A credit union board's failure to plan
for transition of its management and
key decision makers has far reaching
consequences that affect members, local
communities, and the health of the
share insurance fund, as well as the
sustainability of the credit union system.
This succession planning rule will help
address one of the most common reasons
for unnecessary consolidation within the
industry, and it will better ensure the
system's long term viability and promise.
Finally, this rule will benefit
credit union members and communities,
including many of our nation's
poorest and underserved areas,
by ensuring the sustainability of
their local community credit union.
This prudent and sensible regulation
makes sense, and I support it.
That concludes my remarks, and I
now recognize Vice Chairman Hoffman.
Thank you, sir.
And thanks for the presentation.
Ariel.
John Kelly.
I know it was a lot of work.
A lot of the changes late
was such a planning itself is
important for all credit unions.
I appreciate the intent of this final
rule to protect the members of smaller
credit unions from unintended mergers.
One thing I know is after a credit union
mergers, it's almost certain they'll never
be another credit union just like it.
That membership has lost
his credit union forever.
We should do everything we can to
help individuals keep their own.
Safe and sound credit union.
I want to be clear.
I'm still somewhat skeptical.
This rule will achieve that,
especially for smaller credit unions.
Most regulations are generally
harder for smaller credit unions.
I'm also generally averse to words
like mandatory or new edicts that
tell other people what to do,
when to do it and how to do it.
Now, this past July, I voted against
the proposed rule in such play.
Now, staff heard my concerns and
took a less intrusive approach to
the final rule before us today,
and I appreciate that very much.
very much.
A succession plan at a large
credit union is difficult, but in
smaller credit unions, a definitive
one is nearly unattainable.
Uh, those of us who have never worked at
a credit union, which is most of us, may
be thinking it shouldn't be that hard.
Smaller credit unions have
fewer positions to fill.
It's a short form, filling it out.
Shouldn't take more than a
couple hours, but here's why it's
harder for a smaller credit unit.
For one thing, there are fewer employees
to draw from existing employees.
A credit union with three employees
cannot just draw talent from within.
Even a credit union with 20 employees
will not have the talent pool of
qualified candidates to draw the
way a larger credit union does.
My point is, setting someone up for a
management position is a great thing
to do, but a small institution that
can create a cascade of open positions.
This is a unique hardship
for small credit unions.
Secondly, for board
positions, the same is true.
If the field of membership is smaller,
then the talent pool is smaller.
My educated guess is that in smaller
credit unions, finding someone willing
to volunteer for monthly meetings,
usually in the evenings, plus mandated
training on compliance, personal
risk as a fiduciary, not a dollar
in pay, And all the challenges that
go with being a board member, that's
already difficult at a credit union
with a limited pool of candidates.
It becomes really impossible.
Third, smaller credit
unions are more isolated.
So soliciting talent from
other credit unions is harder.
They often don't have the human or
financial resources to regularly
network with other credit unions.
The CEO is a working manager.
It must fill in for other staff
when you're filling in for a teller.
Even breaking away for a
zoom meeting is a challenge.
And lastly on this, smaller credit
units cannot pay as well as larger
ones, so the jobs are less attractive
to candidates, uh, that have experience.
When they can't promote within
and they're cut off from a natural
source of candidates in the credit
union world, salary is one of
the few tools available to them.
This is all to say that a succession plan
for a smaller credit unit is significantly
more difficult, but not impossible if we
give them the latitude to be flexible.
No matter what a small credit unit
puts in their plan, when the time
comes to implement it, the options.
available to them will probably change.
If N.
C.
U.
A.
Wants to preserve smaller credit unions,
the best way to do that is to make running
a small credit union less burdensome.
If we can make that a more attractive
job, then a lot of problems go away
and Americans are more likely to have
choice to join a small credit union.
If we cannot give them flexibility without
the additional work of documentation and
approval by us, then the only definitive
option for a succession plan is to merge.
And that's exactly what we want to avoid.
I deeply appreciate we were able to get
rid of language that required a credit
unit to document and get approval for
any deviation from their written plan.
It wouldn't be a good use of anyone's time
for NCUA examiners to talk to a credit
unit about the lack of documentation
for deviating from a document that
NCUA required in the first place.
That takes us way off the point of
this now, especially if that credit
unit is not part of the problem They've
actually managed this succession process
quite well when considering any rule.
I worry about the ineffective
burdens placed on already strained
credit units succession planning,
even if it's difficult Has remains
a key responsibility of management.
The cooperative business model gives
individual members a larger choice
regarding their credit union's direction
than an entity you're just a customer of.
So my skepticism is solely about whether
NCUA creating new paperwork for over 4,
000 credit unions will actually, every
year, will actually yield a tangible
result that exceeds the rule's costs.
And make no mistake, this
rule has a very explicit goal.
The chairman's been very clear from the
start that the rules to avoid unnecessary
mergers, whereby a field of membership
loses their own unique credit unit.
I believe the chairman used the example
of a credit unit in the Pacific Northwest
to focus on the logging industry and is
now gone due in theory, because the NCA
did not have a succession planning rule.
For that reason, I'm grateful we have
included language to re approve the rule.
Uh, three years after its effective
date that I believe will be Jan 2029.
This gives future boards the opportunity
to review its effectiveness as well
as its cost of compliance to the
credit unions and to the agency.
So it is for those reasons, those changes
done in good faith by my partners on the
board, that I will be voting for the rule.
Elena Anders, nothing
inherently wrong with mergers.
Even as part of a succession
plan, however, mergers should
be deliberate, intentional, and
supported by their membership.
So I'm aware we don't have a parallel
universe that can show us what life would
be like if we didn't pass this rule.
We're only going to know
what the next three years are
like after we pass this rule.
That said, in three years, there should be
clear, identifiable benefits to this rule
because the costs are very identifiable.
If not, if we don't have clear,
identifiable benefits to this rule.
Then the rule, in my opinion,
ought not be approved.
I probably would not be here at that time.
Can I put the slide up, please?
As I said, this is a rare rule
where we have a very explicit way
of judging if it worked or not.
I put the two lines up there, okay?
That's the number of FDIC insured
banks and NCUA insured credit units.
Over time, this goes back 12 years,
the slope is remarkably the same.
There's a couple twists, but in
the long run, it's remarkable.
The decline in number of banks and
credit units is almost identical.
Now, if you see the dotted
lines I made those up, okay?
And I put those two lines there for
the purposes so we could see them.
This rule, from its inception, has
been very clear that the world with the
rule, the line, should be less steep.
It'd probably still go down, because
that's how it's been for 40 years.
Then, without the rule, meaning
in a parallel universe, where
we don't pass this, it should be
more mergers, more going away.
Meaning a steeper line down, okay?
Now, the reason I put the FDIC
in there is for two reasons.
One is it's kind of a control sample,
because the pace of mergers is often
defined, uh, by economic events.
So, we don't know what the next
three years will look like in
terms of credit unions going away.
By the way, this is just numeric credit
unions, most of which are mergers, right?
A couple go away for other
reasons, we add a few.
But the FDIC is there to
isolate the variable of economic
conditions that may occur.
Create more or fewer mergers.
Secondly, the FDIC is a control sample
because they're not changing their policy.
Only we are so not only should we be
able to say this, this, this, and this
credit union without the rule, not
good successful playing, but without
the rule would have been gone and we
should be able to see some change in
that line and a deviation from the FDIC
line, the slopes over the last decades.
You can go back are almost
identical in the long run.
So the FDIC isn't changing
policy and NCUA is.
A future board should be able to say,
should we keep having our NCUA employees
and thousands of credit unions do this
or not, and should be able to identify
whether it has its desired effect.
That concludes my remarks on this.
Um, and let me ask you this, uh,
for credit unions out there hearing
about this, how long, like, what
are they getting picture it for us?
Are they going to, um, the rule itself?
What does it look like in terms of size?
people at conventions.
You passed 80 page rule.
There's only three of us.
You know, we work for
the church credit union.
We work in the basement.
We're part time deacons.
Like how are we supposed to do all this?
What's it look like?
The regulatory self text
itself is fairly short.
Um, it only amends to provisions.
Um, so it's hard to say how long it will
be in the code of federal regulations.
But I would imagine Maybe
one or two pages at most.
You all agree?
N.
C.
U.
A.
Does not run credit unions, right?
So, yeah, absolutely.
We do not run credit unions, correct?
That's correct.
We do not run credit unions.
I agree.
Actually, I make an exception
except conservatorship.
That's right.
That's absolutely right.
That concludes my remarks.
All righty.
Board member Otsuka,
you're now recognized.
Thank you, Chair Harper.
Um, so first off, I just want to
say Happy holidays to everybody.
Um, I hope staff and those in the audience
here virtually out in the public take
some time over the season for some well
deserved rest, relaxation and reflection.
So I know everybody's probably getting
excited about the holiday season.
Um, John, Ariel, and Kelly, thank you so
much for your presentation on the final
rule to implement succession planning
for federally insured credit unions.
Um, I appreciate the work that
you and your colleagues have
done in crafting today's rule.
Thanks to Chair Harper for championing,
championing the rule that will improve
the longevity of our credit union system
and strengthen small credit unions.
Um, I support the final rule.
It which reflects feedback
from many commenters.
It is non prescriptive, and it still gives
credit unions much latitude in determining
a succession plan that best suits them.
Um, on that note, I would also
like to again encourage M.
D.
I.
S.
to account for their designation as
they draft their succession plans
again, you know, The purpose of this
to really think about how best to serve
the needs of members when there may be
departures, you know, the, the community
around you is changing just to think
about how succession, a succession plan
can help serve the members in the end.
Our mission of providing credit
to people of modest means.
The credit union mission of providing
credit to people of modest means
is dependent on the presence of
credit unions in rural areas,
small towns, other communities that
would otherwise be banking deserts.
I think I mentioned this at the
July board meeting when we first,
uh, proposed, issued the proposal.
A sudden departure, difficult
recruiting for vacant positions, a
lack of leadership at credit unions.
We've seen all of these before.
All of those things can result in
financial and operational problems.
which hurts members and puts the
viability of the institution at risk.
That's really the reason why, um,
I think thinking about succession
planning is so important.
To this end, I encourage small
credit unions and MDIs to share how
else the NCUA can help think about
their long term continuity plans.
So, for example, we have a new crop
of high school and college graduates.
Uh, out there next spring.
We have local members of the community.
We have business leaders, all of
whom can and should see viable
careers in the credit union industry.
So in addition to succession planning,
I really do welcome any ideas and I'm
happy to work with staff and stakeholders
to promote the field of credit unions
and ensure the success of the next
generation of credit union leaders.
Because I think that's part of it too,
is really empowering the next generation
of leaders in credit unions so that we
can continue the credit union system
that we have today and strengthen it.
Um, so again, I support the rule
and appreciate the work of my
colleagues in collaboration.
I'll turn it back to you, Chair Harper.
Thank you so much.
Board member Otsuka.
I really appreciate your idea.
Related to MDI credit unions and taking
their circumstances under and I also
appreciate your Comments about the
need to scale our regulations vice
chairman Hoffman I do want to note for
the record that in addition to what's
in this rule preamble we also have a
rolling three year review of all of our
regulations as well as we voluntarily
participate in the decennial review
required under the economic growth
and regulatory paperwork reduction.
I think I got all of those
letters right uh, in it.
Board member Oetzke, is there a motion?
I move that the board approve Final
Rule Part 701 and 741 of NCUA's
Rules and Regulations as attached
to the Board Action Memorandum.
I second the motion.
All those in favor say aye!
Aye.
All those opposed say nay.
The ayes have it and let the record show
that the motion passed three to zero.
Thank you, Kelly, Ariel and John.
Uh, that concludes our discussion of
the succession planning final rule.
This concludes the board meeting and board
approval of the Succession Planning Rule.
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.