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.
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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.