NCUA APPROVES PROPOSED REGULATION REQUIRING ALL FEDERAL CREDIT UNIONS TO HAVE SUCCESSION PLANS THAT MEET NCUA SPECIFICATIONS
Friday, January 28, 2022
The NCUA Board yesterday approved by a vote of 2-1 a proposed regulation for boards of directors at federal credit unions to establish and adhere to processes for succession planning through a required succession plan that meets NCUA examiner expectations.
NCUA Chairman Harper, who has been pushing for such a regulation for several months, and Vice-Chairman Hauptman voted in favor of putting the proposed rule out for public comment. Board Member Rodney Hood voted against it.
The stated reasoning for this considerable extension of NCUA regulatory authority into the steps and process a federal credit union should follow in preparing for and selecting its next chief executive officer is that, according to Vice-Chairman Hauptman, that 30% of small credit union mergers were attributed by NCUA to “either primarily, or secondarily” the lack of succession planning.
“At its core, this rulemaking is about federal credit unions of all sizes — especially smaller credit unions that do not already have succession plans — planning for their futures, so they can continue to serve their members for generations to come as independent entities,” said NCUA Chairman Todd M. Harper. “Small credit unions are at the heart of the movement, and we need to find a better way to preserve them, instead of consolidating them.”
Noble in purpose perhaps, but a bit out of touch with reality in that not 30%, but 100%, of credit union mergers are approved by the fiduciaries of the credit union (the board of directors) and a majority of the members of the credit union voting in a membership vote following extensive disclosures that include the basis or reason for the merger as required by existing NCUA regulation.
To assume that because less than a third of small credit union mergers were determined by NCUA to be tied, at least in part, to the credit union not having someone ready to take over a vacant CEO position or not having the ability to hire someone at today’s executive salary and benefits cost fails to fully recognize the difficulty those same credit unions are having in competing in today’s demanding marketplace.
The members are demanding more services, more technology, more digital, better rates, lower fees…all from a credit union that many times does not have the financial wherewithal to provide what the members are demanding. It seems to be that the directors who recognize this and choose to meet those growing needs by joining through merger with another credit union that can meet those needs should not have to overcome a regulation that first makes them have a plan of how to meet those needs by hiring someone they can’t afford and forcing them to struggle for additional years.
Under the proposed rule, credit union directors would also be required to have full and complete knowledge of the federal credit union’s succession plan. The proposed rule would provide federal credit unions with what the proposed regulation calls “broad discretion in implementing the proposed regulatory requirements to minimize any burden.” Yet the NCUA has the right to examine what they determine the adequacy of that plan with each examination.
Although the proposed rule would apply only to federal credit unions, the NCUA Board encourages all credit unions, regardless of asset size, to have a succession plan to fill key positions and ensure their credit union’s continued operations. The guidance that they expressed for non-federal credit unions over which they do not have regulatory authority is the same type of guidance that is now in effect for federal credit unions – and should remain so.
As a credit union consultant, our firm has helped over 200 credit unions draft succession plans so we definitely think it is good business practice for credit unions to strategically look at their futures regarding executive leadership.
However, a NCUA regulation telling credit unions how a federal agency thinks they should do their succession planning and what their succession plan should look like – even though it will bring my firm a lot of business – seems to us to be overkill and unnecessary one-size-fits-all thinking.
The assumption behind this regulation, as we have seen by the comments of Harper and Hauptman, is obviously driven by a desire to stifle mergers. They seem to truly believe, although they cited a figure of less than one-third of mergers citing succession planning as a reason, that those mergers are taking place primarily because there is no succession planning at some credit unions. They do not seem to recognize that all mergers occur because credit union boards have determined in their role as fiduciaries that their members would better be served by merging with a credit union that can provide them more products and services than by struggling to survive and trying to find a new CEO in a tough executive recruiting marketplace.
Every merger is strategically thought out by the board and then voted upon by the members, with transparency and extensive disclosures dictated by NCUA, to disclose how the long term best interests and service needs of the members were evaluated and determined.
It does not seem that a regulation trying to force credit unions that are struggling, not growing, and having trouble competing in the marketplace to go through the cost of developing an executive succession process – when the board as fiduciaries feel it is in the best interests of their members to merge with another credit union so those members can be served better – is consistent with the safety and soundness responsibilities of NCUA to protect the insurance fund.
Most losses to the insurance fund over the past five years have been from smaller credit unions due to fraud or lack of management oversight – not from credit unions with the scale to survive and thrive. If credit unions want to have a succession plan to build and grow for decades to come, they should have one in place and will do so without a regulatory mandate. Current NCUA guidance and Letters to Credit Unions appropriately specify this as a best practice.
If a credit union’s board and members prefer to join with another credit union through merger that can serve them better and with a more financially strong footing, merger is not necessarily a bad thing and they really don’t need a regulatory mandate to develop a costly succession plan or hire a search firm if merger is the best fiduciary decision for the members. The credit union fiduciaries should decide whether their credit union needs a succession plan or a merger, not the regulator.
In fact, it is quite likely that the scenario pointed out by Board Member Hood in opposing the proposed rule will come about more times than not. When a smaller credit union has to spend money to develop a succession plan that they realistically cannot afford to implement when the time comes, it very well could drive that credit union to go ahead and pursue merger now rather than waiting until the CEO is ready to retire or depart.
And even if you take the exaggerated merger reasoning off the table, this regulation will require every federal credit union – large and small – to have a written succession plan that will have to meet NCUA’s approval at examination time. Even larger credit unions will have to draft, probably with consultative support because of how tough the competitive executive compensation and benefits landscape is today, a much more robust succession plan out of fear that the additional scrutiny a regulatory requirement will being might leave them subject to an examiner finding if their current succession plan doesn’t go as far as the examiner might like.
Does this mean credit unions will have to designate CEO successors before there is an opening? What will that do to morale when one senior executive gets named as CEO-in-waiting while the other members of the executive team begin to look for other jobs because they know they are not on the list to move up?
What about the decision to promote from within or to search from outside? Does that decision have to be made years in advance of an opening, even though things may change in the internal pool of candidates in the interim?
Will this lead NCUA into approving or disapproving executive compensation packages and benefits? Will they have to be spelled out in advance in a plan that could change in a matter of months or certainly years before a vacancy occurs?
Just what will be required since every federal credit union, large and small, must now take NCUA examiner scrutiny into consideration when they begin looking at strategic plans for succession?
It is to their credit that both Chairman Harper and Vice-Chairman Hauptman went to great lengths to say that credit unions that already have plans should not have to change those. They both emphasized that they want to see the plans not be burdensome.
But as I was asked when I was NCUA Chairman and made statements about what we at the board level expected when a new regulation was implemented, “Are you, Chairman Dollar, going to be at my exam to reign in an examiner who may not have heard your remarks?”
This regulation is going to be in effect, if it is finalized, for years and decades. Where will today’s supposed minimalist approach be five years from now? Ten years?
Remember the Dollar-ism: Regulation always creeps. It often leaps. But it never retreats.
There are already guidance documents and letters to credit unions encouraging federal credit unions to have some plans in place for succession as a best practice. Examiners can already encourage credit unions with CEOs nearing retirement age to be more pro-active in preparing for that coming vacancy.
But do they need to pass a regulation that will be on the books twenty years from now because 30% of small credit union mergers today have been determined by NCUA to be partially driven by the lack of succession options. This seems to be regulating to the exception rather than the rule.
NCUA has every right to examine a credit union and through its supervisory authority question whether any hiring decision was the right one based upon results, but it is overreach for NCUA to enact a regulation requiring credit unions to get their approval of the steps and options the credit union fiduciaries will follow in making an executive hire.
NCUA should focus on the safety and soundness and compliance impact of the person hired to run a credit union, not the day to day options and specifics of the search process.
To use the Federal Aviation Administration (FAA) analogy I used when I was at NCUA.
It is the job the FAA to make sure the planes are safe and sound, that the pilots are trained and qualified and that the routes are spaced properly for safety. It is not the job of the FAA to fly the planes.
This regulation is getting pretty close to NCUA flying the planes when it comes to a decision that should be made by credit union fiduciaries.
From either a merger avoidance perspective or from a executive hiring point of view, moving to a mandatory succession planning regulation rather than a guidance approach as has been the case in the past is placing a federal regulator in the middle of the fiduciary decision-making process rather than its proper role of examining the outcomes of the decision.
This is, in our view, the very definition of federal agency overreach.
Below is a link to the proposed succession planning regulation that was approved yesterday.
If after studying the proposed rule, you feel that you would like to comment for the record, we encourage you to do so. There will be sixty-day comment period and the instructions for commenting are in the proposed rule.
We expect, from the number of inquiries and level of concern we have received in the past 24 hours since the NCUA Board approved the proposed rule, there to be a great deal of opposition from NCUA stakeholders.
After the last three months when the NCUA Board approved some very empowering regulations on expanded CUSO authority, modernized service facility definitions and mortgage servicing rights, it seems the pendulum of a majority at the NCUA Board level is swinging back to a more activist approach to regulation.
It will be interesting to see how this issue plays out and what indication it may have for where the NCUA Board majority goes in the months ahead and who sides with whom on the three-member board. It appears that Vice-Chairman Hauptman is playing the role of the swing vote these days.
It is worth watching which way the board majority goes issue by issue and the regulatory philosophy represented on each issue and every time they vote. This proposed succession planning regulation is a good bell-weather of where the board may or may not be headed.
The regulation is not final yet. How will the Harper-Hauptman majority respond to the commenters? And will the outcry be as loud as early indications seem? Stay tuned.
Until next time.
Dennis Dollar