COMMENT PERIOD OPENS ON NCUA’S PROPOSED REGULATION REQUIRING ALL FEDERAL CREDIT UNIONS TO HAVE SUCCESSION PLANS THAT MEET NCUA SPECIFICATIONS

The official comment period has now opened and will accept written comments until April 4, 2022, on NCUA’s 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.

Since the NCUA Board approved the proposed rule on a 2-1 vote in January and our subsequent Client Update on the subject, our phone and email has been almost non-stop with contacts from our credit union clients – and even some credit unions that are not our clients – concerned about this proposed rule and how it might infringe upon their ability to control their own succession planning initiatives at both the CEO level and for other senior executive staff.

In particular, the credit unions we are hearing from are concerned about where this initial regulation may lead over time.

How extensive does it need to be to satisfy my examiner? Will NCUA want our plan to be two pages long, ten pages long, forty pages long?

How specific does a succession plan have to be to meet my examiner’s expectations?

Does the board have to select the next CEO and have him or her designated in waiting long before there is an opening, with all the issues that entails?

Will this lead over time to NCUA examiners getting involved in CEO and executive job descriptions, compensation, benefits, and qualifications?

A lot of questions are being asked. And frankly not a lot of answers are in the proposed regulation which seems to indicate that it will be fleshed out over time, most likely by the examiners who come into credit unions and evaluate the sufficiency of the succession plan every federal credit union will have to have in place and submit to them for review.

While the proposed rule has been touted by Chairman Harper, who has been pushing for such a regulation for several months, and Vice-Chairman Hauptman, who voted in favor of putting the proposed rule out for public comment, as primarily a means to help smaller credit unions avoid merger by putting in place a NCUA-approved succession plan to keep them in business, the potential of where this rule could expand in future years has many credit unions wanting to have their voice heard on the proposal.

Many of our clients that have been involved in credit union mergers over the last twenty years have told us that their merger partners have sought them out more for competitive reasons and regulatory burden concerns than for the fact that they don’t have a CEO in waiting.

In fact, one CEO told me his opinion that it is ironic, in order to supposedly slow down mergers that are largely driven by an inability to deal with growing regulatory burden, they find it incredibly off base that NCUA has chosen to enact a rule that imposes more regulatory burden.

This happens from time to time when a government agency falls in love with regulation as the answer to every question. This regulation, if finalized, will almost certainly drive more of the mergers NCUA is trying to prevent (for some inexplicable reason since keeping struggling credit unions afloat that want to merge is not in the best interest of the share insurance fund).

To avoid having to draft a succession plan that a struggling credit union realizes it cannot afford to implement if and when the time comes to fill a CEO vacancy in today’s market, many credit unions could simply pursue a merger now.

This is the unintended consequences of regulation for the sake of regulation.

So, in response to all of you who have reached out with questions, or perhaps have some concerns but haven’t had the time to contact me with your thoughts about this proposed rule, I thought I would give you all a quick – and, hopefully, beneficial – summary of the questions we have received about the succession planning proposed rule and what you can do in response.

Here goes.

If I want to register my opposition to this proposed rule, what should I do?

 Write a comment letter and let NCUA hear from you. We recommend as the most effective way of doing so (at least from what was effective during my tenure at NCUA) is to send your comment letter through the official federal agency comment portal and then to copy each of the NCUA Board members with an email echoing your views expressed through the comment portal.

How do I find the portal to make an official comment?

 In the old days, commenters wrote a letter to the NCUA Board Secretary at 1775 Duke Street, Alexandria, VA 22314 expressing their views and then cc’d the three NCUA Board Members at the same address.

You can still do this if you prefer. You can file a comment by regular mail on your credit union letterhead at the address above. It will go to the NCUA Board Secretary and Office of General Counsel where it will be recorded.

However, the digital age has moved largely to preferring comment letters being submitted on the online federal government comment portal under its NCUA proposed regulation sectioin.

Below are the instructions and the link to file your comment on the proposed succession planning rule. This general federal agency comment website (www.regulations.gov) can be kept in your bookmarks for any other proposed rules by NCUA, CFPB, or other federal agency that you may want to comment on in the future.

This one link below, however, is specific for the succession planning proposed rule by NCUA. This is the link you should use to file any official comments you elect to submit on the succession planning rule. It takes you right to the comment page.

https://www.regulations.gov/commenton/NCUA-2022-0016-0002

Do comments change the minds of the NCUA Board?

 The Administrative Procedures Act requires that every comment on a proposed rule must be catalogued and addressed, either individually or in groups regarding the subject raised, in the prologue of any final rule. The reasons for the agency either agreeing or disagreeing with the comments are also required to be included with any final rule in writing.

That is why it takes longer to get a final rule when there are hundreds and hundreds of comments than it does if there are only a handful. The agency has to respond in the final rule to each and every one of them in some manner.

But from experience I have seen NCUA proposed rules changed by comments, particularly when the volume is strong in opposition to certain aspects of a proposed rule. A decision by the NCUA Board to amend the rule is always possible when the comment letters are strongly against it.

However, I must honestly say that it is rare that a comment period changes the mind of an individual NCUA Board Member about the issue as a whole. Maybe an edit or two – but, if the individual board member wasn’t intending to vote ultimately for a final rule, he or she would not have likely voted to put it out for public comment and started the rulemaking process.

Is there any chance of changing Chairman Harper’s mind as he has spoken most often about wanting NCUA involved in the succession planning process for federal credit unions and this proposed rule seems to be his baby?

 It is very unlikely that any measure of comment opposition will move Chairman Harper from supporting this rule because it is, as you say, his regulatory baby. He is a regulatory activist, and this proposal fits his regulatory philosophy – which he is very open about and does not hide – quite well.

Board Member Hood voted against this proposed rule. Is he solid against it or might he join the majority on the final rule?

 Board Member Hood was quite strong in his statements at the January 2022 board meeting in opposition to the rule when it came before the NCUA Board as a proposal to be sent out for public comment. From my experience watching Mr. Hood’s positions during his two tenures on the NCUA Board, his opposition is very consistent with his “regulation should be more effective, not excessive” philosophy.

I have not seen him change his stance often, if at all, on an issue of philosophical importance to him as a free market-oriented regulator. Therefore, unless it is a part of some larger agreement within the board for him to support this in return for the others supporting something he wants to see approved, I would consider Board Member Hood as a solid no vote. The additional comment letters in opposition will likely serve to strengthen his opposition.

Vice-Chairman Hauptman was the swing vote in favor of this proposed rule. Is there any likelihood of him shifting his vote to opposition?

 There is no question that many observers were surprised by the Hauptman vote in favor of this proposed rule because he has thus far on the NCUA Board voted quite consistently with Board Member Hood and their seemingly strong agreement as free market regulators. For some reason, he went the other way on this proposed rule and cast the deciding vote to put it out for comment.

There have been cases where board members voted to put a proposed rule out for comment in order to gauge the level of support or opposition and then allowed that to determine their position on the final rule. But that does not happen often.

Most board members decide if they are for or against a regulation before they ever agree to propose it and put it out for public comment. Therefore, we must assume that Vice-Chairman Hauptman believes this is good regulatory policy.

Based upon this, it is frankly quite unlikely he will change his vote. However, he is a thoughtful board member and the position he took is indeed inconsistent with most of his positions on the NCUA Board to date. So, it could conceivably happen. But history tells us that a 2-1 vote on a proposed rule is normally reflective of a likely 2-1 vote on the final rule.

So, you think the succession rule is going to be finalized?

 If I were in Vegas, I would put the odds around 75-25 that the rule will be approved by the NCUA Board on a 2-1 vote before the end of 2022.

If that is the case, is writing a comment letter a waste of time?

 Comment letters are the only way to potentially impact the final decision. Without a strong opposition reflected through the comment period, those above odds go to 100% that it will be finalized in 2022.

When I was at NCUA as stated earlier, many commenters sent cc’s of their comment letters to me and to my chief policy advisor in addition to their formal letter to the Secretary of the NCUA Board. It was quite effective because it let me read the scope of their comments rather than just the compilation of comments that comes from the Board Secretary and General Counsel at NCUA.

Therefore, while it is necessary for your comment to be submitted through the portal or recorded by a hardcopy letter to the Secretary of the NCUA Board in Alexandria in order for it to be in the official record, we recommend that you also consider copying the three members of the NCUA Board individually on your comments by sending them to [email protected]; [email protected]; and [email protected]. It has been done for years and can help them recognize the amount and tenor of the response to a proposed rule since they aren’t following the federal comment portal every day.

It is also good to copy the chief policy advisors to each board member, if you feel strongly about the proposed rule..

Interestingly, many of you know Sarah Canepa Bang, formerly with Co-Op Financial Services and a longtime leader in the credit union shared branching field. She is now the Chief Policy Advisor with Vice-Chairman Hauptman. If you know Sarah well enough to do so, you can cc her at [email protected].  Chief Policy Advisors can absolutely help shape their board member’s approach to an issue.

For the record, the other two key advisors you might want to cc are [email protected] for Chairman Harper and [email protected] for Board Member Hood. Both will be a key part of the policy making process on this and all regulations before the NCUA Board.

If I write a comment letter, can you give me some key points to make in my comment?

 Comment letters don’t have to be long. They are designed to register your support, opposition, or suggested changes to a proposed rule.

Below are four possible templates for a short, sweet – but effective and direct – approach to take on your official comment. Feel free to cut and paste, edit as you see fit to make it reflect your thoughts and method of expression and send any of them in if you don’t want to take the time to write your own. (Your own comment letter in your own words is always best, but a revised template letter is better than a form letter. And a form letter is better than no letter at all.)

OPTION ONE:

On behalf of ABC Credit Union, I would like to comment on the NCUA proposed rule on succession planning. Our credit union has a succession plan that is unique and specific to our organization. We are concerned that a regulatory mandate will result in NCUA examiners implementing essentially a one-size-fits-all approach to succession plans that gives them the force and effect of policy. This is restricting and does not provide the flexibility that a credit union needs to properly make its strategic leadership decisions.

We encourage NCUA to continue to encourage strategic plans as just that – plans. We likewise believe that guidance is the best approach for the agency to follow in promoting formal succession plans. Therefore, we believe the proposed rule should not be finalized.

OPTION TWO:

I would like to provide the following comments for the official record in my role as TITLE at ABC Credit Union. We are opposed to a regulatory mandate on succession planning that could well evolve over time into NCUA as a regulator utilizing its supervisory authority to replace the fiduciary duty of our board of directors for CEO succession and the executive responsibility of our CEO for other executive succession with an examiner’s view of how succession should be accomplished – and, perhaps over time, with an examiner getting involved in the structure of compensation, benefits, and qualifications of a CEO.

Our recommendation is for NCUA to leave succession planning as a best practice guidance issued through Letters to Credit Unions, not to incorporate it into a regulation that will still be on the books and likely expanding over the years and decades to come. Therefore, we oppose the proposed regulation on succession planning and recommend that the NCUA Board elect not to move forward with a final rule.

OPTION THREE:

This comment letter is provided on behalf of ABC Credit Union regarding the NCUA Board’s proposed succession planning regulation. To us, this seems to be an area of unnecessary regulatory overreach.

NCUA examiners already have the authority to question whether a federal credit union has a sufficient plan in place to deal with a vacancy, either temporary or permanent, in the President/CEO position – as well as other executive positions. With a legitimate safety and soundness nexus, that is an appropriate supervisory authority. However, when a certain type of succession plan and a prescribed process begins to be mandated by the examiner, he or she is no longer operating with a safety and soundness perspective but instead is now utilizing regulatory authority to perhaps substitute his or her view of what a credit union board should do with their President/CEO position. That is not good regulatory philosophy or good credit union governance, in our view.

We at ABC Credit Union feel that the proposed rule should be withdrawn and encourage the NCUA Board to do so.

OPTION FOUR:

I hereby submit the following position of ABC Credit Union on the NCUA proposed succession planning rule that is designed to prevent mergers by requiring all credit unions to have a succession plan in place, as an alternative to a merger, that NCUA must approve through its supervisory process.

NCUA has historically been agnostic on the question of whether a merger is right or wrong for a particular credit union, leaving that to the fiduciaries of the credit union and its members. It seems a dramatic departure from that position for NCUA to now begin to promote credit unions, that might want to merge so they can serve their members better and be financially stronger, to instead have to go through the steps of a succession plan that might not be the best solution for any particular credit union.

Our experience tells us that many more mergers are driven by inability to keep up with growing regulation than the fact they cannot find a CEO. This additional regulation will, therefore, very likely result in exactly the opposite effect NCUA is intending. It will lead to more mergers, not less, because many credit unions will choose to avoid the additional succession planning regulatory burden by going ahead with a merger now.

We encourage NCUA to pull back from this succession planning regulation that will, in our view, create regulatory burden and not accomplish any positive purpose from a merger perspective.

I’d like a sample letter a little longer, any ideas?

 You can use any of the above letters and can feel free to add some additional thoughts from your perspective.

However, if you want a longer letter, here is a template for what some might consider a bit more meaty comment letter.

As TITLE of ABC Credit Union, I would like to express our thoughts on the NCUA proposal for a regulation requiring all federal credit union to have a NCUA-approved succession plan on the books in order to prevent mergers.

First, we believe that a credit union decision to merge with another credit union in order to serve its members better and to result in a stronger financial institution should be made on a credit union by credit union basis. It should neither be encouraged or discouraged by the regulator. This proposed rule seems to be based upon a belief at NCUA that credit unions that might consider merging should first go through the expense of filling a CEO opening before the agency will allow them to merge.

That does not seem to be in the best interest of the NCUSIF to keep struggling credit unions operating and spending money on a futile CEO search when the board and members of the credit union would rather join with another credit union that has better service and a stronger financial position.

Secondly, it is our belief that this rule will actually drive more mergers because the most often cited reason for merger seems to be the challenge of dealing with regulatory burden. Now, this regulation will add more regulatory burden if the credit union must jump through the hoops of their own succession plan in order to satisfy the NCUA regulation when the board feels the best action is to take a merger proposal to their members.

And, thirdly, this does not need to be a regulation. It is best handled through guidance and Letters to Credit Unions. This is a fiduciary decision for the board and the members to make, not the regulator or the examiner.

We have great concerns that today’s minimalist approach to succession planning that has been cited as the approach of the NCUA Board in 2022 may morph into a maximum approach over the years that gets NCUA much too involved in fiduciary decision making such as compensation, benefits, and qualifications of a CEO.

Our position is that NCUA should withdraw this proposed rule and not move forward with further action. Rather we believe NCUA should encourage federal credit unions to be prepared for a CEO vacancy in the manner that best fits that credit union and its members. This can be done through best practice guidance and not require an enforceable regulation that only adds more regulatory burden to the credit unions NCUA regulates and indicates that it is trying to keep from merging.

How short can a comment letter be?   I just want to register my opposition.

 Here you go. Very short and to the point. The most important thing is to be heard if you have concerns about this proposed regulation and where it could go in the future.

SHORT OPTION ONE:

On behalf of ABC Credit Union, I would like to offer this comment to state our opposition to the succession planning rule that the NCUA Board is now considering. It is an unnecessary regulation that attempts to solve through regulation a problem that few credit unions have and that could better be handled through agency Letters to Credit Unions. We encourage the NCUA Board to let this proposed rule die on the vine as a solution in search of a problem.

SHORT OPTION TWO:

ABC Credit Union hereby expresses its opposition to the succession planning rule. We consider it an overreach of NCUA into the fiduciary decision-making process that should be the responsibility of the board of directors of a federal credit union. The rule should not be finalized.

Those letters are great, but I want to write my own. Would you guys at Dollar Associates review it before I send it in?

 Absolutely. Again, we encourage you to write your own letter.  That is always best. And, yes, we would be more than glad to review it and make a few suggested edits, if necessary.

Let’s assume the rule becomes final. Do I need to revise my existing succession plan in anticipation of my examiner at the next exam deciding he wants to apply the new rule and evaluate the sufficiency of my succession plan?

 Remember first that the rule will be applicable only to federal chartered credit unions. State charters, although many states have parity laws and could choose to apply such a regulation, will not be required to submit their succession plans for examiner review unless through some subsequent action state regulation is adapted through parity to also require a state-approved succession plan.

Our recommendations for action if the rule is finalized are as follows.

(1) If you don’t currently have a succession plan, develop and have the board approve one that is concise but as broad and flexible as you can make it while still outlining a succession process that you will follow if a CEO vacancy comes and include the assurance that all responsibilities of a CEO are dealt with effectively and with accountability to the board in the event of a temporary or permanent vacancy.

(2) If you already have a current succession plan that you keep updated, that you feel meets your needs and that your board is satisfied with, don’t change it. If the rule passes, take an action at a future board meeting to review it again for the record and vote to reaffirm it as it is currently written in your board minutes. Then, unless and until the examiner comes in and takes some action to force you to change it in some way, let it stand.

If the examiners follow what the board members pushing the rule say as to how they do not intend this to require those with succession plans to rewrite them because of this rule (and that is a big “if” since every new regulation allows the examiner to look carefully at how it is being complied with), NCUA board members supporting this rule have said that the agency will make sure you have a plan – not necessarily dictate what is in the plan.

And, of course, (3) If you have a current succession plan that hasn’t been looked at in five or ten years and needs to be updated, do so within the next twelve months after the regulation is enacted. Or you may prefer to do so now with the new potential regulation in mind. Again, try to stay as broad and flexible as possible while still outlining the points made above in option 1.

If NCUA is going to just check a box showing that we have a succession plan, then why worry?

 Since it is quite likely that this rule will indeed become final this year, all federal credit unions can hope that this just becomes a “box checking” exercise for the examiners.

However, there are two things that have created the concern among federal credit unions about this proposed rule perhaps becoming more than just a box to be checked, even among those that already have succession plans.

First, the proposed rule clearly states that a federal credit union’s succession plan will be looked at by the examiner as to whether it is adequate, based upon the size and complexity of the credit union.

This seems to indicate that the NCUA examiner will determine if your succession plan is sufficient for your specific credit union based upon its size and complexity in the examiner’s eyes. It also sounds like, the larger the credit union, the more prescriptive the succession plan will have to be in order to meet the mandate of the rule. That, within itself, is a concern as it puts your NCUA examiner squarely in the middle of a process (choosing the next CEO) that is a fiduciary responsibility of the board of directors and should not be dictated by a federal regulator absent a safety and soundness reason for doing so.

Secondly, the concern we hear most often is where this rule could lead over time. Today’s requirement that a credit union merely have a succession plan that NCUA examiners like could, and many feel likely will, morph over time into NCUA examiners determining if the compensation of CEOs and the senior executives at a credit union is proportionate to the ability to replace the individuals under the succession plan. Or could it lead to NCUA determining that a certain executive benefit plan that your credit union has in place for the CEO and/or other executives is excessive and might disrupt the possibilities for hiring a new CEO under the succession plan.

What would happen if NCUA begins to require a CEO-in-waiting from the existing executive team that undermines the current CEO, promotes an existing executive before his or her time and sends the other executives scurrying for the door because they know they are not the chosen successor?

“Never happen” says the NCUA Board members promoting this proposed rule.  That’s not what we intend. And I tend to agree that they do not so intend. However, the problem is – will they still be on the NCUA Board five years from now or ten years from now to provide direction as to their intentions. We all know that, with six year terms that expire every two years, there will be a new dynamic on the NCUA Board biannually.

And the succession plan rule will still be on the books, easily able to be modified, amended or just interpreted differently.

Remember my Dollar-ism. Regulation always creeps. It often leaps. But it never retreats.

It is very applicable in a case like this.

Succession planning is a good idea. How should NCUA encourage it without a regulation requiring it?

 Indeed. We believe it is best practice for a credit union to have a succession plan that broadly addresses who will be responsible for a CEO’s duties in the event of a vacancy. We likewise believe that a broad process that a credit union will go through to evaluate internal and possibly external candidates should be outlined.

However, this does not have to be required through a regulation that puts a federal agency in the middle of that succession plan’s design.

Rather, if NCUA wants to encourage succession plans, they can do so through official agency guidance, Letters to Credit Unions and relating of best practices. Even examiner pressure could be used in a specific case where there is a legitimate safety and soundness reason to require a succession plan.

However, if the stated purpose is to prevent mergers by forcing struggling credit unions to go through a search and seek a new CEO that they cannot afford, this rule will work against its intended purpose.

Drafting a formal succession plan and the realities of the marketplace that it will open a board’s eyes to may well make some credit unions pull the trigger on a merger earlier than they would have otherwise.

Board members are fiduciaries acting in the best interests of the credit union members that elected them. If those members are better served by a merger than by implementing a costly succession plan that was imposed upon them by their regulator, that fiduciary decision should be respected by NCUA.

I’d like to read the proposed rule for myself. Can you provide me with a link to the proposal in its entirety?

 More than glad to do so. Below is the link.

https://www.regulations.gov/document/NCUA-2022-0016-0002

Can you guys at Dollar Associates help us if we feel that we need to update, adopt, or revise our credit union’s succession plan?

Of course. That’s what we’re here for. We’d be glad to assist you if you feel you need to take action on your succession plan.

Will you continue to keep us updated on issues like this and other items of regulatory importance that we need to know about and just don’t get enough information in the trade press?

 You bet. And thank you for the opportunity to do so.

Until next time.

Dennis Dollar