NCUA's Proposed Rule on Succession Planning
Hello, this is Samantha Shares. This episode covers NCU A’s proposed rule on Succession Planning.
Why are we covering this proposal on our podcast? Because we anticipate that with the NCU A board now being led by two democrats, that some version of this rule will be approved in twenty twenty four.
The following is an audio version of that proposal. 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 NCU A so they save time and money. If you are worried about a recent, upcoming or in process NCU A examination, reach out to learn how they can assist at Mark Treichel DOT COM. Also check out our other podcast called With Flying Colors where we provide tips on how to achieve success with NCU A.
And now the proposed regulation on succession planning.
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 701
Succession Planning
SUMMARY: Through this proposed rule, the NCU A Board ( hereinafter the Board) would require that Federal Credit Union (FCU) boards of directors establish and adhere to processes for succession planning. The succession plans will help to ensure that the credit union has plans to fill key positions, such as officers of the board, management officials, executive committee members, supervisory committee members, and (where provided for in the bylaws) the members of the credit committee to provide continuity of operations. In addition, the proposed rule would require directors to be knowledgeable about the FCU’s succession plan. Although the proposed rule would apply only to FCUs, the Board’s purpose is to encourage and strengthen succession planning for all credit unions. The proposed rule would provide FCUs with broad discretion in implementing the proposed regulatory requirements to minimize any burden.
DATES: Comments have expired.
Background
A. Succession Planning
Board members play a key role in a credit union’s success. The Federal Credit Union Act (FCU Act) vests the general direction and control of an FCU to its board. Credit union boards are faced with a multitude of complicated challenges, such as meeting evolving member needs, fostering employee loyalty and trust, retaining and developing necessary skills, and keeping pace with technological and industry changes. Among this list of issues, succession planning is one of the most critical.
Succession planning is the process through which an organization helps identify, develop, and retain key personnel to ensure its viability and continued effective performance. It also allows an organization to prepare for the unexpected, including the sudden departure of key staff. Succession planning is recognized as vital to the success of any institution, including credit unions. One of the variables over which a credit union board has control is the hiring of the organization’s senior management. A board’s failure to plan for the transition of its management could potentially come with high costs, including the potential for the unplanned merger of the credit union upon the departure of key personnel.
Conversely, good succession planning confers a variety of benefits, including:
Minimizing service disruptions during management transitions;
Ensuring organizational viability over the long term;
Clarifying the employee development path;
Developing current talent;
Creating opportunities for employees; and
Bringing in new ideas from outside hires.
Succession planning is a critical component of a credit union’s overall strategic plan. It ensures that the appropriate personnel are available to execute the credit union’s strategic plan and mission. As noted, the goal of succession planning is to build and/or identify a pool of qualified individuals who can be recruited or selected to fill a vacancy in a key position. To be successful, succession planning should be an ongoing and iterative process, not a one-time event.
B. Increased Relevance of Succession Planning
Several factors have contributed to increase the relevance of succession planning for credit union boards. First, there has been a decline in the number of credit unions mainly resulting from the long-running trend of consolidation across all depository institutions. This trend has remained relatively constant across all economic cycles for more than three decades. During the third quarter of 2021, the number of FICUs increased in every asset category tracked by the NCU A, except for those with less than 50 million dollars in assets. The number of FICUs with assets of at least 10 million dollars but less than 50 million dollars declined to 1,467 in the third quarter of 2021 from 1,561in the third quarter of 2020 (a decline of 94 credit unions). The decline in the number of FICUs with less than 10 million dollars in assets was even greater. The number of FICUs with less than 10 million dollars in assets declined to 1,068 in the third quarter of 2021 from 1,199 in the third quarter of 2020 (a decline of 131 credit unions). The available data does not differentiate between those smaller credit unions that consolidated or were liquidated, versus those that expanded into a larger asset category. However, the decrease in the total number of FICUs with less than 50 million dollars in assets (especially those with assets of less than 10 million dollars, combined with the ongoing industry trend of consolidation, suggests that mergers may be more prevalent among smaller credit unions.
One of the reasons for the consolidation is the lack of succession planning. An NCU A analysis found that poor management succession planning was either a primary or secondary reason for almost a third (32 percent) of credit union consolidations. The FCU Act contains provisions that disfavor consolidation, implying a presumption that the public is better served with a greater number of credit unions. For example, the statute imposes added limitations on the addition of larger groups to multiple common-bond credit unions, prompting the Board to consider the feasibility of formation of a separate credit union. Further, the FCU Act provides that the Board shall “encourage the formation of separately chartered credit unions instead of approving an application to include an additional group within the field of membership of an existing credit union whenever P R Acticable and consistent with reasonable standards for the safe and sound operation of the credit union.”
Another reason for a heightened focus on succession planning is the ongoing retirements of the so-called “Baby Boomer” generation (individuals born between 1946 and 1964). These individuals comprise more than a quarter of the total population of the United States. Each day, commencing in 2011 (when the oldest members of the generation turned 65) and continuing until 2030, approximately 10,000 Baby Boomers will turn age 65. The COVID-19 pandemic has accelerated the pace of retirements among this generational cohort.11 These retirements include credit union board members and executives. According to some sources, approximately 10 percent of credit union chief executive officers were expected to retire between 2019 and 2021.
Succession planning is critical to the continued operation of those credit unions with board members and executives that are part of this retirement wave.
Legal Authority.
The Board is issuing this proposed rule pursuant to its authority under the FCU Act. The proposed rule would establish succession planning requirements for an FCU. Section 113 of the FCU Act provides that the board of directors shall have the general direction and control of the affairs of the FCU. The board of directors must oversee the credit union’s operations to ensure the credit union operates in a safe and sound manner. For example, the board must be kept informed about the credit union’s operating environment, hire and retain competent management, and ensure that the credit union has a risk management structure and process suitable for the credit union’s size and activities.
Further, under the FCU Act, the NCU A is the chartering and supervisory authority for FCUs and the Federal supervisory authority for FICUs. The FCU Act grants the NCU A a broad mandate to issue regulations governing both FCUs and all FICUs. Section 120 of the FCU Act is a general grant of regulatory authority and authorizes the Board to prescribe rules and regulations for the administration of the FCU Act. Section 207 of the FCU Act is a specific grant of authority over share insurance coverage, conservatorships, and liquidations. Section 209 of the FCU Act is a plenary grant of regulatory authority to the Board to issue rules and regulations necessary or appropriate to carry out its role as share insurer for all FICUs. Accordingly, the FCU Act grants the Board broad rulemaking authority to ensure that the credit union industry and the NCUSIF remain safe and sound.
Applicability of Proposed Rule. As described in more detail in the following discussion, the proposed regulatory amendments would apply solely to FC U's. FISCUs must comply with any state-specific requirements pertaining to succession planning. However, the Board encourages FISCU boards, to the extent compatible with state law, to undertake succession planning efforts to help ensure continued viability of their credit union.
In addition, the proposed rule would not amend the regulations in 12 CFR part 704, which establishes requirements applicable to federally insured corporate credit unions, since the Board believes these regulations already adequately address succession planning. For example,
§704.13(c)(1) requires that the board must ensure that “senior managers are capable of identifying, hiring, and retaining qualified staff.” Further, paragraph (c)(2) of the section requires that the board also ensure that “qualified personnel are employed or under contract for all line support and audit areas, and designated back-up personnel or resources with adequate cross- training are in place.” The Board welcomes public comment on whether changes to the wording of section 704.13 are necessary to effectuate the purposes of the proposed regulatory amendments. The proposed rule applies to all FCUs, irrespective of asset size. However, as discussed above, smaller credit unions may be more susceptible to consolidation. Further, data demonstrates that the lack of succession planning is a major cause of credit union mergers. Accordingly, smaller credit unions may be the most likely to benefit from the proposed rule. The Board specifically invites comment from smaller credit unions on the proposed regulatory amendments, as well as other suggestions, to improve credit union succession planning.
C. Proposed Regulatory Amendments
The proposed rule would amend section 701.4, which sets forth the general duties and responsibilities of FCU directors. The proposal would add a new paragraph e requiring that FCU directors must establish and adhere to processes for succession planning for key positions. In specifying the officials covered by the succession plan, the Board has relied on the language of the FCU Act, which provides that “the management of a Federal credit union shall be by a board of directors, a supervisory committee, and where the bylaws so provide, a credit committee.” The FCU bylaws codified in Appendix A of 12 CFR part 701 expand the list of senior FCU executives to include the members of an executive committee and management officials.
The board of directors or an appropriate committee of the board would be required to review and approve a written succession plan regarding the specified FCU executives and officials. The succession plan must, at a minimum, identify the credit union’s key positions, necessary competencies and skill sets for those positions, and strategies to identify alternatives to fill vacancies. The board of directors must review the succession plan in accordance with a schedule established by the board, but no less than annually.
In addition, the proposed rule would amend section 701.4(b)(3), which sets forth certain education requirements for FCU directors, to require that directors have a working familiarity with the FCU’s succession plan. In making this change, the Board also proposes to reorganize the current contents of paragraph (b)(3) for clarity and grammar. No substantive changes are proposed to the current requirements of section 701.4(b)(3).
Current Succession Planning Efforts
This proposed rule is intended to strengthen current succession planning efforts being taken by credit unions, and to require others that have not yet done so to commence their succession planning process. The proposed rule is also consistent with the guidance issued by the other banking agencies to address succession planning.
The Board is aware that many credit unions have already adopted succession planning strategies and models. The NCU A offers training and other resources to aid credit unions in developing their succession plans. For example, the NCU A has posted a video series on succession planning on the internet. In addition, the Board’s 2019 final rule on FCU bylaws promoted succession planning efforts by providing guidance to FCUs on associate director positions. The proposed rule clarified, through staff commentary, that these positions may be thought of as apprenticeships in which the incumbent receives training and knowledge about the business of the board, with the expectation that the experience will prepare the individual for an eventual election to a director position.
D. Minimizing Burden
In designing this proposed rule, the Board has endeavored to minimize the burden on FCUs, especially small FCUs. The proposed regulatory amendments provide FCUs with broad discretion in how to implement the new requirements. For example, while the proposed rule would require succession plans to include certain mandatory elements, the rule neither specifies how the topics should be addressed nor does it otherwise prescribe the contents of the succession plans. Similarly, the proposal would require that directors have a working familiarity with the FCU’s succession plan but does not mandate the contents of training to meet this requirement.
The expectation is for credit unions to develop a plan and provide training that is consistent with the size and complexity of the credit union. Therefore, smaller credit unions are more likely to have a simple succession plan that only addresses a few key leadership positions. The Board envisions that the examination program would confirm the existence of a succession plan and training. The examination program will defer to a credit union’s self-assessment of its succession planning needs and the information contained in the plan, so long as its plan addresses the elements required by the rule. Further, the Board envisions that, as a result of other planning and documentation efforts, many FCUs already have the necessary data and information to complete their succession plans. Rather than undertaking new analysis specifically for the succession plan, FCUs are encouraged to use already existing information in preparing their plans. For example, under the NCU A guidelines codified in 12 CFR part 749, Appendix B, all federally insured credit unions are encouraged to develop a program to prepare for a catastrophic act. The codified guidelines suggest that the program address several elements that are also relevant to succession planning. These suggested elements include a “business impact analysis to evaluate potential threats,” the determination of “critical systems and necessary resources,” and the identification of the “persons with authority to enact the plan.” The Board is committed to assisting credit unions in implementing their succession plans. For example, the NCU A has posted online training on succession planning through its Learning Management System. In addition, credit union trade associations may also provide training and have guidance available to assist credit unions in the development of their succession plan process. Credit unions with low-income designation may be able to apply for technical assistance grants to support succession planning or offset training costs through the Community Development Revolving Loan Fund. Credit unions are encouraged to make use of these and other available resources in complying with the proposed rule. The NCU A will develop additional guidance, as it deems necessary, to aid credit union succession planning efforts.
Questions for Comment
The Board welcomes comments on all aspects of this proposed rule. It is especially interested in comments addressing ways the NCU A may better support succession planning in small credit unions and suggestions on ways the final rule might minimize burden. In particular, the Board requests public input on the following questions:
1. What do you believe will be the quantified burden imposed by the rule, be it in hours, dollars, or effort?
2. It is anticipated that most FCUs already possess the information needed to comply with the proposed rule, and thus that most FCU will not have to create any new documentation as a result of the rule. Do you agree with this view? Why or why not?
3. As noted, the Board anticipates that the examination program will establish an FCU’s compliance with the proposed rule by confirming the existence of a succession plan and training. Do you have any other suggested methods of establishing compliance?
4. This preamble provides that smaller credit unions with less than $10 million in assets will be the primary beneficiaries of the proposed rule. What benefits do you think smaller credit unions will receive from the Board’s adoption of this proposed rule?
5. What benefits do you anticipate larger FCUs will receive from adoption of the proposed rule? For purposes of this question, “larger FCUs” may include FCUs with more than
$10 million in assets or FCUs in another higher asset category.
6. What benefits do you anticipate members will receive from the adoption of the proposed rule?
7. What impact do you believe this rule will have on credit union consolidations?
8. The NCU A believes that the proposed rule will result in benefits for the National Credit Union Share Insurance Fund, to the overall safety and soundness of the credit union system, and to FCU members. If the rule is adopted as is, what would you suggest the NCU A do to test the assumption above?
9. The NCU A reviews all of its existing regulations every three years. The NCUA’s Office of General Counsel maintains a rolling review schedule that identifies one-third of the NCUA’s existing regulations for review each year and provides notice to the public of those regulations under review so the public may have an opportunity to comment.25 In addition, should the NCU A commit to revisiting this rule within a specific period, say after 7 years, at which time the rule would either be rescinded or approved by the Board for renewal? The Board might also choose, at that time to renew the rule but with some revisions.
PART 701 – ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNION
§ 701.4 General authorities and duties of Federal credit union directors.
(3) At the time of election or appointment, or within a reasonable time thereafter, not to exceed six months, have at least a working familiarity with, and to ask, as appropriate, substantive questions of management and the internal and external auditors of:
(i) Basic finance and accounting practices, including the ability to read and understand the Federal credit union's balance sheet and income statement; and
(ii) The Federal credit union’s succession plan established pursuant to paragraph (e) of this section.
(e) Succession planning. (1) General. A Federal credit union board of directors must establish a process to ensure proper succession planning to include officers of the board, management officials, executive committee members, supervisory committee members, and (where provided for in the bylaws) the members of the credit committee, as described in Appendix A.
(2) Board responsibilities. The board of directors or an appropriate committee of the board must:
(i) Approve a written succession plan that covers the individuals described in paragraph (e)(1) of this section; and
(ii) Review, and update as deemed necessary, the succession plan and policy in accordance with a schedule established by the board of directors, but no less than annually.
(3) Succession plan contents. The succession plan must, at a minimum, identify key positions covered by the plan, necessary general competencies and skills for those positions, and strategies to identify alternatives to fill vacancies.
This concludes the NCU A’s proposed rule on Succession Planning. We anticipate that with the NCU A board now being led by two democrats, that some version of this rule will be approved in 2024.
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.
