WHEN THE NATIONAL ENQUIRER AND THE NATIONAL CREDIT UNION ADMINISTRATION MEET

This past Friday afternoon the Office of Inspector General (OIG) at the National Credit Union Administration (NCUA) released an investigative report that can only be described as sensational and sordid – National Enquirer worthy, in fact.

The report centered on the Office of General Counsel (OGC) and the two highest ranking attorneys in that crucially important office.  The General Counsel and the Deputy General Counsel, both of whom retired and/or resigned without notice and within a day of each other in November 2019, were documented as being involved with allegations of harassment, potential drug abuse, visiting strip clubs  and consuming pot edibles.

Any of these allegations, if true, would have been inappropriate and put those senior officials in danger of being manipulated in their jobs if it happened on personal time and someone found out.

However, the most disappointing aspect of the revelations from the   OIG’s investigative report was the fact that much of this activity apparently took place on agency time and while these individuals were being paid to conduct agency business.  

That, as the Inspector General pointed out, is more than inappropriate.  It is illegal.

It would be an understatement to say that these findings are a shock and very disconcerting for those of us who depend upon a steady hand to properly guide the regulatory and supervisory authority of NCUA.

A copy of the Inspector General’s report can be accessed through the link below:  

https://www.ncua.gov/files/oig/report-of-investigation-20-01-v2.pdf

Once you have read the report, it is likely you will find yourself concerned about what this type of activity says about your federal regulator and/or insurer.

That concern is legitimate based upon this revelation which certainly gives a black eye to NCUA.

In this Client Update, we’d like to provide you with some background information that can at least provide some color and perhaps clarity to this situation.  

Possibly, this additional “inside baseball” background can make you feel a bit better about the agency as a whole and perhaps provide some perspective that will lead you to the point where you recognize that – like all black eyes – this one too will heal over time.  

But there will be some ramifications that we believe you should be expecting.  And there is absolutely some cleaning up at NCUA that you have every right to expect the NCUA Board to take the lead in making happen.

 

WHAT IS THE IMPORTANCE OF THE OFFICE OF GENERAL COUNSEL AT NCUA?

There is probably no more important office at NCUA for both federal and state chartered credit unions than the Office of General Counsel (OGC).

The OGC consists of all the lawyers that represent NCUA, writes their regulations, evaluates the comments of their stakeholders, interprets those rules, defends them in court, and opines on their application.  

No department extends themselves on almost any decision without it first clearing the OGC.  

Whether it be field of membership approvals from the Office of Credit Union Resources and Expansion (CURE), supervisory actions stemming from an exam finding by a NCUA regional office or a determination of whether supplemental capital should be allowed for a low-income designated credit union by the Office of Examination and Insurance (E&I), every one of those determinations must first clear and gain concurrence of the OGC.

Arguably second in influence within the agency staff hierarchy only to the NCUA Executive Director, the General Counsel is one of the most influential figures at NCUA.  And the position pays accordingly.

Published reports have the General Counsel at NCUA being among the ten highest paid officials in the US Government.  The previous General Counsel and prime subject of the Inspector General report, Mike McKenna, was paid in excess of $275,000 annually – plus bonuses.

The Deputy General Counsel is also compensated well above $200,000 annually.

Therefore, if there are any officials (and they all should be) who should carry themselves with the professionalism and stewardship of agency resources commensurate to their positions, it should be the top two attorneys at a federal agency with over $300 million in annual budget, about 1200 employees and the deposits of over 5200 credit unions under their care like NCUA.

The actions of these two, as specified in the Inspector General’s report, are therefore indefensible.  Even more so when you consider that previous General Counsel also served as the agency’s Ethics Officer.

But let’s go beyond just the obvious and dig a little deeper.

 

WHAT DOES THIS REFLECT INTERNALLY ABOUT A FEDERAL AGENCY LIKE NCUA?

While I will preface this section with the fact that some of the finest public servants I have ever worked with in my professional career are in the leadership and on the staff of NCUA, these actions are a symptom of the larger problem of bureaucratic arrogance.

Does the conduct of these two individuals reflect all NCUA executives and staff?  Absolutely not.  

And it is not fair to paint all NCUA executives and staff with the same tawdry brush that has created this unseemly portrait.

I truly feel compassion for those outstanding public servants at NCUA who are today feeling let down by some of their own leaders.  The great majority of NCUA executives and staff are undoubtedly today feeling that these findings are abhorrent and represent actions they could never conceive themselves or their co-workers of engaging in.

Still, the factor that results at times in these types of actions is indeed arrogance.

And federal agency bureaucrats, particularly those protected by the federal employment system that makes it almost impossible to remove a federal employee regardless of his or her transgressions, find themselves among the most arrogant.

If an executive has moved up through the ranks of a bureaucracy by playing the internal politics of the agency well over several decades, he or she may enter the final years of a career with both federal employment protections from dismissal and a feeling of invincibility because others within the agency fear them for their influence.

As mentioned earlier, the General Counsel can make the job easier or tougher for the heads of other departments at NCUA.  Those department heads have the same ability within their own areas of domain.

Soon, the key players begin to feel they cannot be challenged.  This takes place at every agency to one level or another. Longevity creates an institutional “untouchable-ness” within the agency.  And arrogance follows.

This arrogance has led to many downfalls over the years at numerous agencies of the federal government.  

I regret that it has come to pass at NCUA because I truly respect the agency.  However, knowing the agency as I do, I am not necessarily surprised.

Yes, I am disappointed in Mike McKenna who was one of the brightest young legal minds in the OGC when we were at NCUA.  He was a real up-and-comer who would take on any project and was willing to think outside the box in a way most agency attorneys would not.

He was, even though he had only been at the agency less than ten years when we were there, one of the attorneys we turned to for the toughest assignments.

Yet, as we watched him over the years following our departure, he became more and more institutionalized in his thinking.  He had served as a policy advisor to two NCUA Board Members (Bacino and Matz), become Deputy General Counsel after our departure and eventually was promoted to the General Counsel’s position by Chairman Matz during her tenure.

He brought on board his own attorneys, including designating his own Deputy General Counsel in Lara Daly-Sims whom he was obviously grooming to be his successor.  The entire office of attorneys began to reflect Mike’s growing inflexibility and lack of willingness to be the “outside the box” thinker he was in his early career.

Even with the federal charter under attack from its overly restrictive approach to field of membership, Mike McKenna’s OGC was totally supportive of the increasingly tight interpretations of community charters, underserved areas, SEG expansions, reasonable proximity, service center definitions and approach to associational SEGs that were coming out of the CURE office.

It was obvious that once he was eligible to retire at any time, the powers of his office had led to the arrogance displayed in recent years and cited in the report that would have been impossible to predict in his earlier tenure at the agency.

Very sad.  And we saw it happen a number of times.

A small number admittedly.  But we could give examples of multiple men and women in senior NCUA executive positions that became convinced that they were bigger than the agency they represented.

Although the OIG investigative report is filled with eye-opening allegations that make fascinating reading for the prurient mind, its biggest indictment is of the bureaucratic arrogance that these activities represent. 

Rarely does bureaucratic arrogance manifest itself in the salacious manner described in this report.  More often, it is reflected in the day-to-day overreach of overly restrictive regulatory interpretations, staff complacency, or a tendency for staff to insert themselves into the policy-making role that is specifically reserved for the NCUA Board.

It is this arrogance which must be reined in at NCUA and other federal agencies that often feel their permanent, protected federal staff are bigger than the agency itself – and certainly more important than the stakeholders of the agency.

For that reason, an occasional black eye (even when the eye is on the face of someone you know and worked with in the past) is healthy if it serves to remind others at these agencies headed down the same path that public service is both – a public to which they are responsible and a service that they are paid to deliver for the good of that public rather than for their own benefit.

 

HOW DID THIS BECOME PUBLIC?

As the OIG report indicated and as had become evident over the past several years, General Counsel McKenna was obviously grooming Daly-Sims to become his replacement as NCUA General Counsel.

And she obviously wanted the job because all her defense for her actions that she now has reported as inappropriate by McKenna is based upon her fear of him and that she felt she needed his help to get the promotion to GC upon his retirement.

What Daly-Sims and McKenna both had forgotten in their arrogance, however, was that the selection of the agency’s General Counsel is not made by the outgoing GC – nor any agency staff, for that matter.

Even though McKenna had strong support from previous chairmen Matz and McWatters and considered himself untouchable because of his support from the previous occupants of the corner office at NCUA, the reality came about in 2019 that there was a new sheriff in town by the name of Rodney Hood.

When Hood became chairman and began spending his days at the NCUA’s headquarters considerably more than his immediate predecessor, he began to see firsthand the campaign for Daly-Sims that McKenna was waging.  And he began to hear from credit unions about their challenges from CURE, E&I, NCUA regional offices – all of which were backed by a hardline position from the OGC.

Chairman Hood then, having been informed by McKenna that he would soon be retiring and that Daly-Sims was the heir apparent, elected to guide the Board toward doing a nationwide search for the next GC.

To that end, Hood set up a screening committee, of which McKenna was not a member, and farmed the nationwide search out to the widely respected firm of Korn-Ferry.

This sent shock waves throughout the executive ranks of NCUA where, for too many years, promotions were almost always internally recommended and Board acted upon with little challenge to the staff recommendations.   

(We know that such actions create reverberations throughout the agency because we went outside NCUA for an associate regional director when we were there and hired an incredibly well-qualified executive from FDIC.  I don’t think some staff ever got over the audacity of Chairman Dollar to actually seek someone outside NCUA for an executive position within. We did the same thing by replacing a longtime NCUA Congressional and Public Affairs Director with someone with outside Capitol Hill advocacy experience.)  

But, among the most serious shock waves sent by the nationwide search for the next agency GC was the realization it gave to Daly-Sims that she was no longer the automatic choice to take McKenna’s place.  

This is where the situation between McKenna and Daly-Sims began to fall apart.  Recriminations, charges, counter-charges and complaints about the OGC working conditions represented in this story landed the issue in the hands of the Inspector General.

The Inspector General’s investigation led to the retirement of McKenna, the resignation of Daly-Sims and the ultimate report that was released this past Friday.  

Black eyes all around.  But it all began when a NCUA Chairman decided to actually manage the General Counsel, remove him from an internal railroad job to select his own successor and have the audacity to do a nationwide search to find the best possible General Counsel for NCUA.

For that, the Chairman (and the NCUA Board that must have at least not objected) deserves kudos for bringing this matter to a head.  

 

HOW CAN THIS SITUATION BE AVOIDED IN THE FUTURE?

The only three individuals that can corral the bureaucratic arrogance at NCUA that is reflected in this IG report is the NCUA Chairman and the two NCUA Board Members.

They must decide to lead their staff and hold them accountable, rather than substantially abdicating control of the agency to them with little or no oversight.

That cannot be done by managing from afar.  When the NCUA Chairman (who manages the executive staff on behalf of the Board) is not on official business travel, he or she needs to be in Alexandria meeting with senior officials of the agency and holding their feet to the fire on their responsibilities and actions.

There is a reason that Congress puts a presidentially appointed and US Senate confirmed Board over these federal agencies like NCUA.  That reason – an agency’s power is so far reaching that it can not be counted on for effective checks and balances within itself.

Outside governance from someone not tied long term to the agency and its past is essential to hold those who run the agency on a day-to-day basis accountable.  

The NCUA Board must be the NCUA Board.  They must trust their staff, but they must verify that the staff is properly carrying out the rules, regulations and strategic direction of the agency.

Trust, but verify.

The IG report we just learned about is an example of what can happen when there is trust, but no verification.  

 

WHAT RAMIFICATIONS CAN WE EXPECT FROM THIS?

Like all black eyes, this one shall too heal in time.

NCUA has taken some hits in the past and survived.  

However, there are some potential ramifications of this IG finding that may have more impact than some previous black eyes.

One, the ABA is trying to decide within the next few days as to whether they will appeal their defeat on the 2016 NCUA Field of Membership rules to the US Supreme Court.

With a hit like this to the credibility of the General Counsel’s office at NCUA that wrote the FOM rules in question, it is likely to strengthen the ABA’s resolve to appeal.

While this black eye doesn’t change the solid legal footing that NCUA is on with the new FOM rules as was evident by their decisive win in the appeals court, this will likely reinforce what we feel like is the preference of the ABA anyway – and that is to appeal.

Even though they will almost certainly lose at the Supreme Court, the hit to the credibility of the General Counsel’s office that drafted the rules will increase the possibility of another lengthy delay in implementing a FOM rule that is now approaching four years post-enactment.

They would have probably appealed anyway as we believe their actual tactic is much more one of delay than one believing they can win the lawsuit.  But this almost certainly ensures that they will appeal.

Second, a congressional hearing is almost a sure thing.  

Why?   Well, it is sensational.  It will draw headlines. Congress loves to get headlines.  

But, when coupled with the fact that the Chair of the House subcommittee with responsibility over NCUA is Rep. Carolyn Maloney (D-NY) who is currently upset with the agency’s action on selling the taxi medallion loan portfolio, the perfect storm is there for an oversight hearing on both items together.

It will be survivable.  But it will not be a pretty day for NCUA.

Lastly is a ramification we more hope for than necessarily expect.  

Even though Chairman Hood rightly deserves credit for his actions which shook up the status quo at NCUA enough to bring this matter to a head, the real question is whether he and the current NCUA Board is up to addressing the bureaucratic arrogance that exists in other departments of their agency.

While it is not widespread, almost every department from CURE to the regional offices to the Examination and Insurance team has been comfortable with and tied to the interpretations and approach of the Office of General Counsel that has now been unmasked in this IG report.  

These departments need to be shaken out of their own bureaucratic arrogance.  And some of the attorneys in the Office of General Counsel need to take the lead to show that they can think and act beyond the approach their department has been taking in recent years.

It is time to bring NCUA regulations, opinion letters and interpretations into the 2020 era.  The Office of General Counsel will take the lead on that effort, if it comes.  

The NCUA Chairman and the NCUA Board can leave their own legacy and turn this black eye into a more wholesome looking face if they use this opportunity to begin managing and holding accountable the senior leadership of a very fine agency.

Again, I am a fan of NCUA as an independent federal regulator of credit unions.   I like the separate National Credit Union Share Insurance Fund.

I want to see NCUA overseeing a vibrant and dynamic federal charter.  I believe that the staff and executive leadership at NCUA can help create the type of regulatory and supervisory environment that can make credit unions safe, sound and viable in the marketplace for decades to come.

And I believe that NCUA’s team can be trusted to do so.  However, I equally believe that there must be verification and accountability of them held by the presidentially appointed and Senate confirmed leaders that are the NCUA Chairman and the NCUA Board.

If the NCUA staff sees this as a chance to learn from the mistakes of others among their colleagues and the NCUA Board sees this as a chance to reassert their proper role of staff oversight, this current black eye could well be the type of lesson that many black eyes become – how to avoid getting another one.   

Until next time.