NCUA's Proposed Rule on Succession Planning - Entire Rule
Samantha: Hello, this is Samantha Shares.
This episode covers N C U Aâs
actual language of the proposed
rule on Succession Planning.
This podcast is educational
and is not legal advice.
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and now the proposed rule.
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 701 and 741
Succession Planning
AGENCY: National Credit
Union Administration (NCUA).
ACTION: Proposed rule.
SUMMARY: On February 3, 2022, the NCUA
Board (Board) published a proposed rule to
require federal credit union (FCU) boards
of directors to establish processes for
succession planning for key positions.
Based on the public comments received in
response to the proposal, and upon further
consideration of the issues involved, the
Board is publishing this second proposed
rule addressing succession planning.
The new proposal is based
on the earlier proposed
rule but includes several changes
that the Board believes will further
strengthen succession planning
efforts for both consumer FCUs
and consumer federally insured,
state-chartered credit unions (FISCUs).
DATES: Comments must be received
on or before 60 DAYS AFTER DATE OF
PUBLICATION IN THE FEDERAL REGISTER.
ADDRESSES: You may submit written
comments, identified by RIN 3133-AF42,
by any of the following methods (Please
send comments by one method only):
⢠Federal eRulemaking Portal:
https://www.regulations.gov.
The docket number for this
proposed rule is NCUAâ2024â0037.
Follow the instructions
for submitting comments.
A plain language summary of
the proposed rule is also
available on the docket website.
⢠Mail: Address to Melane Conyers-Ausbrooks,
Secretary of the Board, National Credit
Union Administration, 1775 Duke Street,
Alexandria, Virginia 22314â3428.
⢠Hand Delivery/Courier:
Same as mailing address.
⢠Public inspection: You may view all
public comments on the Federal eRulemaking
Portal at https://www.regulations.gov,
as submitted, except for those we
cannot post for technical reasons.
The NCUA will not edit or
remove any identifying or
contact information from the
public comments submitted.
If you are unable to access public
comments on the internet, you may
contact the NCUA for alternative
access by calling (703) 518â6540 or
emailing OGCMail@ncua.gov.
FOR FURTHER INFORMATION CONTACT: Office
of Examination and Insurance: John Berry,
Policy Officer, at (703) 664-3909 or at
1775 Duke Street, Alexandria, VA 22314.
Office of General Counsel: Ariel
Pereira, Senior Attorney, Office
of General Counsel, at (703) 548-
2778 or at the above address.
SUPPLEMENTARY INFORMATION:
Table of Contents
I.
Background
A.
Succession Planning
B.
Increased Relevance of Succession Planning
C.
NCUA Efforts to Strengthen FICU
Succession Planning Efforts
II.
The Boardâs February
3, 2022, Proposed Rule
III.
Legal Authority
IV.
This Proposed Rule
A.
Applicability of Proposed Rule
B.
Succession Plan Requirements
C.
Available Resources
D.
Small FICU Considerations
V.
Regulatory Procedures
A.
Providing Accountability
Through Transparency Act of 2023
B.
Regulatory Flexibility Act
C.
Paperwork Reduction Act
D.
Executive Order 13132 on Federalism
E.
Assessment of Federal Regulations
and Policies on Families
I.
Background
A.
Succession Planning
Board members play a key role in a
federally insured credit unionâs (FICU)
success.1 The Federal Credit Union Act
(FCU Act) vests the general direction
and control of an FCU in its board.2
The managerial structure for FISCUs
is governed by state law; however, in
general, the operational oversight of
FISCUs is under a board of directors
or comparable body.3 FICU 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 FICUs.
1 The term FICU encompasses
both FCUs and FISCUs.
2 12 U.S.C.
1761, 1761b; 12 CFR701.4, and Article
VI, section 6 of the FCU Bylaws codified
in Appendix A of 12 CFR part 701.
3 The FCU Act, at 12 U.S.C.
1790a reflects the general proposition
that a board of directors governs a
FICU (providing that an âinsured credit
union shall notify the Board of the
proposed addition of any individual
to the board of directorsâ and that an
âinsured credit union may not add any
individual to the board of directorsâ
under certain conditions.) This is
also reflected in the NCUA regulations.
For example, see 12 CFR 701.14(a), which
provides that 12 USC 1790a âsets forth
conditions under which a credit union must
notify NCUA in writing of any proposed
changes in its board of directors.â
See also,12 CFR 741.3(a)(2) (providing
that a FISCU âboard of directors may
authorizeâ the designation of certain
dividends on nonconforming investments
as undivided earnings) and 12 CFR
747.2001(b) (referring to the service
of credit union notices, directives,
and decisions on appeal to âa dismissed
director or officer thereofâ of a FISCU).
One of the variables over which a FICU
board has control is the hiring of
the organizationâs senior management.
Succession planning is a
critical component of a
FICUâs overall strategic plan.
It helps ensure that the appropriate
personnel are available to execute
the FICUâs strategic plan and mission.
There are two elements to a FICU
boardâs succession planning strategy.
First, the FICUâs board should develop
a pool of talented candidates to
potentially stand for election to the
board, to fill temporary board and
committee vacancies by appointment,
and to fill appointed positions, such
as to the FICUâs supervisory committee
(or equivalent body under state law).
The NCUA Board recognizes the importance
of the election process in FICU
governance and emphasizes that the
proposed rule is meant to complement
and not supplant the vital role
member-owners play in FICU governance.
Second, in furtherance of the boardâs
responsibility to oversee the operations
of the FICU, it must consider how best
to fill vacancies in senior management
positions held by employees, such as
the chief executive officer and the
chief financial officer.4 This includes
establishing an order of succession
among existing employees for temporarily
filling senior management roles in
the event of a vacancy, as well as the
development of strategies to identify,
develop, and retain employees capable
of filling these senior positions.
A boardâs failure to plan for vacancies
in elected and appointed positions,
as well as the transition of its
management, could come with high costs.
The FICU runs the risk of creating a
4 The NCUA regulation at 12 CFR 701.14
defines the term âsenior executive
officerâ to include âthe chief executive
officer (typically this individual
holds the title of president or
treasurer/manager), any assistant chief
executive officer (e.g., any assistant
president, any vice president or any
assistant treasurer/manager) and the
chief financial officer (controller).â
leadership vacuum, disrupting operations
and potentially jeopardizing the FICUâs
ability to adequately manage liquidity
risk, address cybersecurity threats,
or ensure continued compliance with
consumer protection, bank secrecy,
and other critical responsibilities.
The FICU may also incur higher
costs or be unable to recruit and
retain new leadership and top talent
than would be the case if it had
an established succession plan.
Failure to plan for succession can
also negatively impact the FICUâs
ability to maintain relationships
with members and suppliers and to
secure future business opportunities.
Accordingly, the failure to adequately
plan for changes in leadership can
jeopardize the continued viability of
a FICU, potentially resulting in the
unplanned merger of the FICU or other
disruptions to safe and sound operations
upon the departure of key personnel.
For the above reasons, the Board finds
that a compelling safety and soundness
case exists for rulemaking in this area.
The failure of FICUs to adequately
plan for succession poses a risk not
only to individual FICUs and their
member-owners, but to the credit union
system as a whole and to the National
Credit Share Insurance Fund (NCUSIF).
The proposed regulatory changes are
designed to mitigate this risk and are
consistent with the Boardâs statutory
duty to ensure a safe and sound system of
cooperative credit for its member-owners.
Board action is also consistent with
the guidance issued by the other banking
agencies to address succession planning.5
B.
Increased Relevance of Succession Planning
5 See e.g., Federal Reserve Board,
Supervisory Guidance on Board of
Directorsâ Effectiveness (Feb.
26, 2021); also, the guidelines of
the Office of the Comptroller of the
Currency (OCC) at 12 CFR part 30,
Appendix D, captioned âOCC Guidelines
Establishing Heightened Standards for
Certain Large Insured National Banks,
Insured Federal Savings Associations,
and Insured Federal Branches.â
Several factors have contributed
to the increased relevance of
succession planning for FICU boards.
In 2000, the credit union system had
10,316 FICUs.6 The total number of
FICUs declined to 4,645 by the third
quarter of 2023.7 This decline is largely
attributable to the long- running trend
of consolidation across all depository
institutions.8 This trend has remained
relatively constant across all economic
cycles for more than three decades.
In 1999, the NCUA approved 431
FICU consolidations.9 The number of
annual consolidations has decreased
since that time but remains steady.
For example, in 2022, the Board approved
181 FICU consolidations.10 In 2023,
the number of approved consolidations
was only slightly lower at 145.11
Data suggests that smaller FICUs
may be more likely to merge.
The decline in the total number
of FICUs has been particularly
steep among the smallest FICUs with
less than $10 million in assets.
At the close of 2015, there were 1,816
FICUs with less than $10 million in
assets.12 By the third quarter of 2023,
the number of these smallest FICUs was
938.13 This figure represents a decrease
from 975 FICUs the previous year.14 By
comparison, during the same period, the
number of FICUs with assets of at least
$1 billion increased to 424 from 414.15
6 NCUA, Historical Timeline,
https://ncua.gov/about/historical-
timeline#:~:text=2000,more%20than%2077%20million%20members.
7 NCUA, Quarterly Credit
Union Data Summary 2023 Q3,
https://ncua.gov/files/publications/analysis/quarterly-
data-summary-2023-Q3.pdf.
8 Id.
9 NCUA, NCUA 2000 Annual Report,
https://ncua.gov/files/annual-reports/2000AR.pdf.
10 NCUA, Merger and Insurance Reports,
https://ncua.gov/analysis/chartering-mergers/merger-activity-insurance-
report.
11 Id.
12 NCUA, Quarterly Credit
Union Data Summary 2015 Q4,
https://ncua.gov/files/publications/analysis/PACA-
Facts-2015-12.pdf.
13 Supra, note 7.
14 Id.
15 Id.
The available data does not
differentiate between those smaller
FICUs that consolidated or were
liquidated, versus those that
expanded into a larger asset category.
However, the sharper decline of FICUs in
the smaller asset categories, combined
with the ongoing industry trend of
consolidation, suggests that mergers may
be more prevalent among smaller FICUs.
Voluntary mergers can be used to create
economies of scale to offer more or better
products and services to FICU members.
However, the Board is also aware
of numerous instances in recent
years where FICUs merged because
of a lack of succession planning.
An NCUA analysis found that poor
succession planning was either a primary
or secondary reason for almost a third
(32 percent) of FICU consolidations.16
This data has been corroborated by
industry participants.17 The Board
is interested in helping FICUs reduce
the number of mergers resulting from
the lack of succession planning.
The Board finds that this goal is
consistent with the FCU Act, which
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.18 Further, the
FCU Act provides that the Board shall
âencourage 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
16 NCUA, Truth in Mergers: A Guide
for Merging Credit Unions, page 9,
https://www.ncua.gov/files/publications/Truth-In-Mergers.pdf.
17 See, for example, CUtoday.info,
A Look at What Members, Mgmt.
Get in Mergers (November 16, 2021)
(âCredit unions merging out of existence,
nearly all of them smaller, shared reasons
for merging that included inability to
invest in technology (even though some had
very high capital levels), inability to
find volunteers and staff and, a common
theme, a lack of any succession planning
and a retiring CEOâ), available at:
https://www.cutoday.info/THE-feature/A-Look-at-What-Members-Mgmt.-Get-in-Mergers.
18 12 U.S.C.
1759(d)(1).
union whenever practicable and consistent
with reasonable standards for the safe and
sound operation of the credit union.â19
Another reason for a heightened
focus on succession planning is the
ongoing retirements of the âBaby
Boomerâ generation (individuals
born between 1946 and 1964).
According to the
U.S.
Census Bureau, there are approximately 73
million Baby Boomers, the second-largest
age group after âMillennialsâ (those
born between 1982 and 2000).20 By 2030,
all Baby Boomers will have reached age
65 and be eligible for retirement.21 The
COVID-19 pandemic accelerated the pace
of retirements among this generational
cohort.22 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 2021.23
Succession planning is critical to the
continued operation of those credit
unions with board members and executives
that are part of this retirement wave.
C.
NCUA Efforts to Strengthen FICU
Succession Planning Efforts
Given the increased importance of
the topic, the NCUA has taken several
steps to strengthen current succession
planning efforts being taken by
FICUs, and to encourage others that
have not yet done so to commence
their succession planning process.
19 12 U.S.C.
1759(f).
20 U.S.
Census Bureau, By 2030, All
Baby Boomers Will Be Age 65
or Older, (December 10, 2019),
https://www.census.gov/library/stories/2019/12/by-2030-all-baby-boomers-will-be-age-65-or-older.html.
21 Id.
22 Kevin McCarthy, âJust Tired:â
Why So Many Bank, Credit Union
CEOs Are Calling it Quits,
American Banker (December 7, 2021),
https://www.americanbanker.com/creditunions/news/just-tired-why-so-many-bank-credit-
union-ceos-are-calling-it-quits;
and Richard Fry, The Pace of
Boomer Retirements Has Accelerated
in the Past Year, Pew Research
Center (November 9, 2020),
https://www.pewresearch.org/fact-tank/2020/11/09/the-pace-of-boomer-
retirements-has-accelerated-in-the-past-year/.
23 CUtoday.info, CUNA ACUC Coverage:
Whatâs Happening in Executive
Compensation (June 19, 2019),
https://www.cutoday.info/Fresh-Today/CUNA-ACUC-Coverage-What-s-Happening-in-Executive-Compensation.
In March 2022, the NCUA issued Letter
to Credit Unions 22-CU-05, CAMELS Rating
System, which provides that âsuccession
planning for key management positionsâ
is a key factor considered when assessing
the management of a credit union.24
The Letter to Credit Unions 23- CU-01
included succession planning as one of the
NCUAâs supervisory priorities for 2023.25
Several factors have highlighted the
need for rulemaking in this area.
While the NCUA does assess succession
planning as part of the CAMELS
Management component, there is no NCUA
regulation requiring FICUs to implement
a formal, written succession plan.
As a result, the NCUA lacks a full
complement of regulatory tools
to help address deficiencies in a
FICUâs succession planning process.
For example, Letter to Credit Unions
23-CU-01 makes clear that NCUA examiners
are precluded from evaluating âany
formal or informal succession plans
developed by credit unions beyond what
would normally be considered in assigning
the Management component of the CAMELS
rating.â26 Moreover, examiners may ânot
issue an Examinerâs Finding or Document
of Resolution if the credit union has
not conducted succession planning, or
the planning is not adequate, unless the
credit union is in violation of its own
policy for conducting succession planning
or administering any such plan(s).â27
The absence of specific regulations
on this topic also means there are no
requirements as to what constitutes an
24 NCUA, Letter to Credit Unions
22-CU-05, CAMELS Rating System (March
2022), https://ncua.gov/regulation-
supervision/letters-credit-unions-other-guidance/camels-rating-system.
CAMELS is the acronym for the rating
system used by the NCUA to assess a
FICUâs performance and risk profile
derived from the six critical elements
of a FICUâs operations: Capital adequacy,
Asset quality, Management, Earnings,
Liquidity and Sensitivity to Market Risk.
25 NCUA, Letter to Credit Unions
23-CU-01, NCUAâs 2023 Supervisory
Priorities (January 2023),
https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/ncuas-2023-supervisory-priorities.
26 Id.
27 Id.
acceptable succession plan.
A regulation would therefore establish
a needed, clearly articulated,
and consistently enforceable set
of succession planning standards.
II.
The Boardâs February
3, 2022, Proposed Rule
At its January 27, 2022, meeting,
the Board approved a proposed
rule to establish succession
planning requirements for FCUs.
The proposed rule was published in the
Federal Register on February 3, 2022.28
The proposed rule would have required
FCU boards of directors to establish
succession plans for key positions, such
as officers of the board, management
officials, executive committee members,
supervisory committee members, and
(where provided for in the FCUâs bylaws)
the members of the credit committee.
Directors would have been required
to have a working familiarity
with the succession plan.
The board of directors would also
have been required to review the
succession plan in accordance
with a schedule established by the
board, but no less than annually.
While the proposed rule would have applied
only to consumer FCUs (excluding corporate
FCUs), the preamble noted that the Boardâs
purpose was to encourage and strengthen
succession planning for all FICUs.
The preamble of the February
3, 2022, proposed rule provides
additional details regarding the
proposed regulatory amendments.
The preamble to the proposed rule
presented nine questions on which the
Board specifically sought public input.
The proposed rule provided
for a 60-day comment period,
which closed on April 4, 2022.
The Board received 26 public comments
on the proposal.29 Comments were
received from individual credit unions,
individuals, a law firm, and from
28 87 FR 6078 (Feb.
3, 2022).
29 Pursuant to the Paperwork
Reduction Act of 1995 (44 U.S.C.
3501-3520), the Board also published
a separate notice soliciting comments
for a period of 60 days on the
information collection requirements
contained in the 2022 proposed rule.
(87 FR 7502, Feb.
9, 2022.) The Board did not receive
comments specifically in response
to the February 9, 2022, notice.
national, state, and regional
organizations representing credit unions.
All of the public comments received by
the Board are available for public review
on the Regulations.gov web portal, at:
https://www.regulations.gov/document/NCUA-2022-0016-0002/comment.
Most commenters opted to provide
general comments rather than address the
specific questions posed in the preamble.
Most commenters acknowledged the
importance of succession planning but
questioned the need for succession
planning regulations and raised
concerns about the specifics of
the proposed regulatory amendments.
Based on the comments received in
response to the 2022 proposed rule,
and upon further consideration of
the issues involved, the Board is
publishing this second proposed
rule addressing succession planning.
The new proposal is based on the
earlier proposed rule but includes
several changes that the Board believes
will further strengthen succession
planning efforts for all FICUs.
This proposed rule would require
that consumer FICUs have succession
plans to proactively address key
positions, such as officers of the
board and management officials.
The succession plans will also
aid FICU efforts to foster a
culture of growth and development.
III.
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 an FCUâs board of directors
shall have the general direction and
control of the affairs of the FCU.30
The board of directors must oversee
the credit unionâs operations to
30 12 U.S.C.
1716b.
ensure the credit union operates
in a safe and sound manner.
For example, the board must be kept
informed about the credit unionâs
operating environment, hire and retain
competent management, and ensure that
the credit union has a risk management
structure and process suitable for the
credit unionâs size and activities.
Further, under the FCU Act, the NCUA
is the chartering and supervisory
authority for FCUs and the federal
supervisory authority for FICUs.31
The FCU Act grants the NCUA 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.32 Section 207 of
the FCU Act is a specific grant of
authority over share insurance coverage,
conservatorships, and liquidations.33
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.34
Accordingly, the FCU Act grants the
Board broad rulemaking authority to
ensure that the credit union industry
and the NCUSIF remain safe and sound.
IV.
This Proposed Rule
While the data discussed previously,
on their own, support the need for
this rulemaking, the Board finds the
need for succession planning as a sound
governance practice equally compelling.
As noted, succession planning is a vital
element of a FICUâs long-term strategic
31 12 U.S.C.
1752-1775.
32 12 U.S.C.
1766(a).
33 12 U.S.C.
1787(b)(1).
34 12 U.S.C.
1789(a)(11).
plan.
This rule will further strengthen
FICU succession planning efforts.
The following presents an overview
of the proposed regulatory changes.
A.
Applicability of Proposed Rule
These proposed regulatory amendments
would apply to all consumer FICUs.
The Board recognizes the importance of
state law in FISCUsâ internal governance
and that some FISCUs may already be
subject to state-specific succession
planning requirements.35 However, as
discussed, the Board finds the proposed
rule is appropriate to protect the
NCUSIF from undue risk associated
with mergers that may cause a loss to
the NCUSIF or negatively affect the
credit union industryâs overall health.
The Board also recognizes that under
its statutory authorities relating to
unsafe or unsound practices, the NCUA
may act to address such practices in
all FICUs.36 However, to the extent
that a FISCU is subject to a state
statutory or regulatory requirement that
conflicts with the proposed rule, the
NCUA will defer to the state requirement.
The Board specifically invites public
comment on the inclusion of FISCUs within
the scope of the regulatory amendments.
Consistent with the prior proposal,
this proposed rule would not amend the
regulations in 12 CFR part 704, which
establish requirements applicable to
federally insured corporate credit unions.
These regulations contain provisions
that address succession planning.
For example, § 704.13(c)(1) requires
that the corporateâs board of directors
must ensure that â[s]enior managers
⦠are capable of identifying, hiring,
and retaining qualified staff.â
Further, paragraph (c)(2) of
35 The Board recognizes that state
law also plays a role in FCUsâ
governance, as the model FCU bylaws
reflect in several instances; however,
the Board performs a significant
role in this process in preparing the
form of the bylaws under 12 U.S.C.
1758.
36 See 12 U.S.C.
1786(e), (k).
the section requires that the corporateâs
board of directors ensure that
â[q]ualified 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.â While
the scope of the proposed rule does not
include corporate credit unions, the
Board welcomes public comment on whether
changes to the wording of § 704.13 are
necessary to effectuate the purposes
of the proposed regulatory amendments.
Additionally, while the proposed rule
does not add any specific requirements
for Minority Depository Institutions
(MDI), the Board encourages MDIs to
consider how their succession plans will
affect their MDI designation status.
Recently the Board voted to update its
policy to preserve MDI institutions.
To that end, we encourage federally
insured credit unions to the
greatest extent possible, to develop
a succession plan that maintains
the board and senior leadership
composition to maintain MDI eligibility.
The Board also invites public comment
on how the NCUA can support this effort
and any unique barriers MDIs may face
when developing succession plans.
B.
Succession Plan Requirements
The Board proposes to establish
the new succession planning
requirements by amending part 701
of its regulations, which govern the
organization and operation of FCUs.
Specifically, the proposed rule would
add a new paragraph (e) to § 701.4,
which sets forth the general duties
and responsibilities of FCU directors.
The proposed rule would make these
amendments applicable to FISCUs
through an amendment to 12 CFR part
741, subpart B, which sets forth
regulations codified elsewhere in
the NCUAâs regulations as applying
to FCUs that also apply to FISCUs.
The Board proposes to add a new § 741.228
that addresses succession planning.
The proposal would require that a
FICU board of directors establish
a written succession plan that
addresses specified positions
and contains certain information.
In addition, the board of directors would
be required to review the succession
plan in accordance with a schedule it
establishes, but no less than annually.
The Board recognizes that circumstances
might necessitate deviations from the
plan in filling specific vacancies.
The proposed regulatory text accommodates
such exigencies but, as with substantive
deviations in budgets and strategic plans,
it would be expected the board would be
informed of changes and rationale and
document them in its meeting minutes.
The Board invites comments on the
proposed board responsibilities in
the development of succession plans.
Would the succession planning process
be better served by restricting
or prohibiting deviations from
the succession plan in between the
mandated regular review period?
Additionally, the Board invites comments
on how the NCUA can provide better
support to credit unions in developing
succession plans, and attracting new
talent to the credit union system?
The Board is also interested in comments
on the timetable for regular review of
the plans and whether the final rule
should provide for a different timeframe
or grant boards additional flexibility
in establishing the review period.
In specifying the officials covered
by the succession plan, the Board has
relied on the language of the FCU Act,
which provides that â[t]he 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.â37 The
model FCU bylaws codified in Appendix
A of 12 CFR part 701 expand the
37 12 U.S.C.
1761.
list of senior FCU officials to
include management officials, assistant
management officials, and loan officers.
In addition, the NCUA regulation at
12 CFR 701.14 defines the term âsenior
executive officerâ to include the FICUâs
chief executive officer (typically
this individual holds the title of
president or treasurer/manager), any
assistant chief executive officer
(for example, any assistant president,
any vice president, or any assistant
treasurer/manager) and the chief
financial officer (controller).38
Accordingly, under the proposed rule,
the written succession plan must, at
a minimum, cover the following FICU
positions, or their equivalent if the FICU
has adopted different position titles:
⢠Members of the board of directors;
⢠Members of the supervisory committee;
⢠Members of the credit committee,
where such a committee is provided
for in the FICUâs bylaws and is
involved daily in the review of loans;
⢠Loan officers, where provided for in
the FICUâs bylaws in lieu of a credit
committee and the loan officers are
involved daily in the review of loans;
⢠Management officials and assistant
management officials, as those
terms are defined in the model FCU
bylaws, if the FICU has provided for
such positions in its bylaws; and
38 This provision applies to all FICUs.
See also 12 CFR 741.205 (Reporting
requirements for credit unions that are
newly chartered or in troubled condition).
In the preamble to the 1990 final rule
establishing the definition of âsenior
executive officer,â the Board clarified
the intended scope: âBy definition,
a vice president or assistant manager
holds a senior position, ranking
immediately below the president or
manager, serves as a deputy or assistant
in carrying out management functions,
and is empowered, among other things,
to assume the duties of president
or manager in that individualâs
absenceâ 55 FR 43084, 43085 (Oct.
26, 1990).
⢠The FICUâs âsenior executive officersâ
as defined in 12 CFR 701.14 and any other
FICU personnel the board of directors
deems critical given the FICUâs size,
complexity, or risk of operations.
This includes new positions that
may be required due to planned
changes in operations, supervisory
landscape, or corporate structure.
As noted, the succession plans would
be required to address credit committee
members and loan officers only if
such personnel are involved on a
daily basis in the review of loans.
The succession plans are intended
to cover senior leadership positions
responsible for the oversight of the
FICU or its day-to-day management.
Accordingly, the NCUA believes
credit committee members and loan
officers may not merit inclusion
if their duties are limited to the
review of periodic, specific lending
decisions or other âas-neededâ basis.
However, the Board invites public
comments on the inclusion of credit
committee members and loan officers.
The proposed rule would also
establish certain required contents
for a written succession plan.
First, the succession plan would be
required to identify the title of the
incumbent for each covered position, the
expiration of the incumbentâs term (if
serving in a term-limited capacity) or
other anticipated vacancy date (such as
the incumbentâs retirement eligibility
date or announced departure date).
The succession plan must also describe
the FICUâs general plan or strategy
for temporarily and permanently
filling vacancies for each of the
positions, including vacancies
due to unexpected circumstances.
For example, the plan could provide
an order or succession among the
FICUâs senior executive officers
for temporarily assuming the role
of chief executive officer in the
event of vacancy until such time as
a permanent hiring decision is made.
Similarly, the plan might
establish an order of succession
within individual components of
the FICU for temporarily filling
specific senior executive positions
(for example, the deputy chief
financial officer temporarily filling
the role of chief financial officer).
Likewise, to the extent provided in
the bylaws, certain board members
might be designated to assume specific
duties until the selection of a
permanent successor (for example, a
specified board member temporarily
assuming the duties of a vacated
position on the investment committee).
Also, a smaller credit union could
establish a relationship with a larger
credit union to help manage the credit
union during the time it takes to recruit
and fill a senior executive vacancy.
There is no expectation the plan
specify particular successors, only
how the FICU will go about appointing
interim replacements and recruiting
for a permanent replacement.
The FICUâs bylaws may establish procedures
for filling vacancies on the board of
directors and certain other positions.
The succession plan should be consistent
with any such provisions of the bylaws.
Further, FICUs must continue to comply
with all applicable employment or
personnel laws and other requirements
in making hiring decisions.
In addition, the succession plan would be
required to address the FICUâs strategy
for recruiting candidates with the
potential to assume each of the positions.
This could include, for example, the
availability of associate director
positions on the FICUâs board,
mentorship programs, educational
opportunities offered by the FICU,
internships, staff development
plans, and other similar efforts.
The strategy must consider how the
selection and diversity among the
employees covered by the succession plan
collectively and individually promotes
the safe and sound operation of the FICU.
The board of directors should also
consider budgetary impacts in the
development of its succession plans.
For example, the plan should consider
the compensation that will be required
to attract talented candidates, given
such factors as the necessary education
and skills, or the market for
comparable positions at other FICUs.
The decision regarding the
compensation for one position
may impact the FICUâs ability to
budget for other staffing needs.
Accordingly, FICUs should account
for these future needs in financial
planning to strengthen their ability
to plan for future personnel needs.
The Board emphasizes that succession
plans should provide sufficient detail
and use language that is reasonably
understandable to the FICUâs member
owners in describing its strategies for
filling vacancies and for recruiting,
developing, and retaining employees.
A FICU is owned by its members,
who elect the board and to whom the
directors are ultimately answerable.
Accordingly, the Board believes it
is vital that succession plans be
clearly and concisely written, use
everyday language to the extent
possible, and avoid ambiguous phrasing
open to differing interpretations.
The Board welcomes comment on the list
of covered positions and the other
proposed contents of the succession
plan, and whether the final rule should
require FICUs to address additional
or different information in the plans.
Depending on the comments and its
continued consideration of this issue,
in finalizing the proposed rule,
the Board may adopt minor changes or
additions to these requirements to
meet the proposalâs goal of promoting
thorough succession planning.
The proposed rule would also amend
§ 701.4(b)(3), which sets forth certain
education requirements for FCU directors,
to require that directors have a working
familiarity with the FCUâs succession plan
no later than 6 months after appointment.
In making this change, the Board
also proposes to reorganize the
current contents of paragraph
(b)(3) for clarity and grammar.
No additional substantive changes are
proposed to the current requirements of
§ 701.4(b)(3).
These amendments would be made
applicable to FISCUs through proposed new
§ 741.228.
The expectation is for a FICU to
develop a succession plan that is
consistent with its size and complexity.
Therefore, smaller FICUs are more likely
to have a simple succession plan that only
addresses a few key leadership positions.
Larger and more sophisticated FICUs are
expected to have more detailed plans.
For example, smaller FICUs may have
fewer board members, or have fewer
staff that would qualify for the
positions listed in the proposed rule
for inclusion in the succession plan.
Likewise, smaller FICUs are likely to
have less expansive employee recruitment,
development, and retention strategies.
In evaluating whether a succession
plan meets the requirements of the
rule, the NCUA will consider the
size of the FICU, as well as the
complexity and risk of its operations.
The Board emphasizes that succession
plans should include an estimate of
the budgetary impacts of executing
the succession plan, including costs
associated with new hires, such as the
hiring of recruitment firms and increased
compensation packages for new hires.
It is not required for credit
unions to have an exact figure but
at a minimum consider an estimate
to allow for better planning.
C.
Available Resources
The NCUA offers training and
other resources to aid FICUs in
developing their succession plans.
For example, the NCUA has posted a
video series on succession planning
on the internet.39 In addition,
the Boardâs 2019 final rule on
FCU bylaws promoted succession
39 NCUA, Succession Planning (2021),
https://ncua.csod.com/LMS/catalog/Welcome.aspx?tab_page_id=-
67&tab_id=221000382.
planning efforts by providing guidance to
FCUs on associate director positions.40
The final 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 to
serve as a director if elected for such
a position by the membership or appointed
on an interim basis in an exigent
circumstance.41 FISCUs may wish to provide
for similar positions if consistent with
applicable state law and regulation,
and applicable credit union bylaws.
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.
FICUs with a 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.
FICUs are encouraged to make use of
these and other available resources
in complying with the proposed rule.
FICUs are also encouraged to
use already existing information
in preparing their plans.
For example, under the NCUA guidelines
codified in 12 CFR part 749, Appendix
B, all FICUs 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 âbusiness impact analysis to
evaluate potential threats,â the
determination of âcritical systems
and necessary resources,â and the
identification of the â[p]ersons
with authority to enact the plan.â
40 84 FR 53278 (Oct.
4, 2019).
41 Id.
at 53301.
D.
Small FICU Considerations
As discussed previously, smaller FICUs
may be more likely to merge, and data
indicates the lack of succession planning
is a significant cause of mergers.42
Accordingly, smaller FICUs may be the most
likely to benefit from the proposed rule.
The Board recognizes, however, that
these FICUs may lack the resources or
expertise to develop succession plans.
Accordingly, smaller FICUs may
especially benefit from the
existing resources identified above.
The NCUAâs Small Credit Union Support
Program is another available resource
through which FICUs with less than
$100 million in total assets may
seek assistance in a variety of
areas, including succession planning.
In addition, the Board has developed a
sample template for a succession plan that
may be appropriate for some smaller FICUs,
though all FICUs may benefit from it.
FISCUs electing to use the template should
consult applicable state requirements
to ensure their succession plans are
consistent with any such requirements.
The proposed template is available
for review and comment within the
Regulations.gov docket for this
notice of proposed rulemaking.
Smaller FICUs may also benefit from
seeking the assistance of larger and
more sophisticated FICUs in developing
and implementing their succession plans.
For example, a larger FICU may provide
technical expertise in the drafting
of the plan or may detail personnel
to temporarily fill a critical vacancy
in a smaller credit union until such
time as it is permanently filled.
In general, a FICU may engage outside
parties to assist in compliance,
so long as the FICUâs board retains
authority and is cognizant that
it is responsible for compliance.
42 Supra, note 16.
The Board specifically invites comment
from smaller credit unions on the proposed
template, as well as other suggestions,
to improve succession planning and reduce
any burden associated with the proposal.
V.
Regulatory Procedures
A.
Providing Accountability
Through Transparency Act of 2023
The Providing Accountability Through
Transparency Act of 2023 (5 U.S.C.
553(b)(4)) (Act) requires that a notice of
proposed rulemaking include the internet
address of a summary of not more than 100
words in length of a proposed rule, in
plain language, that shall be posted on
the internet website under section 206(d)
of the E-Government Act of 2002 (44 U.S.C.
3501 note) (commonly
known as regulations.gov).
The Act, under its terms, applies to
notices of proposed rulemaking and
does not expressly include other types
of documents that the Board publishes
voluntarily for public comment,
such as notices and interim-final
rules that request comment despite
invoking âgood causeâ to forgo
such notice and public procedure.
The Board, however, has elected
to address the Actâs requirement
in these types of documents in
the interests of administrative
consistency and transparency.
In summary, the proposed rule
would require that FICU boards of
directors establish succession plans
to proactively address any vacancies
that may occur for key positions.
The proposal is based on a prior
February 3, 2022, proposed rule
but includes several changes that
the Board believes will further
strengthen FICU succession planning.
The proposal and the required summary can
be found at https://www.regulations.gov.
B.
Regulatory Flexibility Act
The Regulatory Flexibility Act43
generally requires an agency to conduct
a regulatory flexibility analysis of
any rule subject to notice and comment
rulemaking requirements, unless the
agency certifies that the rule will not
have a significant economic impact on
a substantial number of small entities.
If the agency makes such a certification,
it shall publish the certification at
the time of publication of either the
proposed rule or the final rule, along
with a statement providing the factual
basis for such certification.44 For
purposes of this analysis, the NCUA
considers small credit unions to be those
having under $100 million in assets.45
The Board fully considered the potential
economic impacts of the regulatory
amendments on small credit unions.
The proposed rule would require that
FICU board of directors establish,
and comply with, a written succession
plan that addresses certain specified
positions and contains specified elements.
In addition, the board of directors
would be required to review the
succession plan no less than annually.
These requirements may
impose some cost on FICUs.
However, the NCUA believes several
factors mitigate the potential costs,
especially for small FICUs with
assets of less than $100 million.
First, the preamble makes clear that
an FICU is expected to develop a
succession plan that is consistent
with its size and complexity.
Therefore, small FICUs may have a
simple succession plan that is less
costly to prepare than would be the
case for larger and more complex FICUs.
Further, in recognition that
smaller FICUs may lack the
resources or expertise to develop
43 5 U.S.C.
601 et seq.
44 5 U.S.C.
605(b).
45 80 FR 57512 (Sept.
24, 2015).
succession plans, the Board is
providing a sample template for
a simple succession plan that may
be appropriate for these FICUs.
The Board is also aware that many
FICUs, including small FICUs, have
already adopted succession plans.
Many of these existing plans should
already address, either partially or
in their entirety, the elements that
would be required by the proposed rule.
This could minimize the burden of
complying with the new requirements.
The NCUA also offers training and
other resources to aid credit unions
in developing their succession plans.
For example, the NCUA has posted
a video series on succession
planning on the internet.
Smaller FICUs are encouraged to
seek assistance from larger or more
sophisticated FICUs in the development
of the required succession plans.
FICUs are also encouraged to use already
existing information in preparing
their plans, such as the data used
to develop the recommended program
to prepare for a catastrophic act.
These resources should further reduce the
costs of preparing the succession plans.
Accordingly, the NCUA certifies
the proposed rule would not have
a significant economic impact on a
substantial number of small credit unions.
C.
Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA) applies to rulemaking in which an
agency creates a new or amends existing
information collection requirements.46
For purposes of the PRA, an information
collection requirement may take the
form of a reporting, recordkeeping, or
a third-party disclosure requirement.
The NCUA may not conduct or
sponsor, and the respondent
46 44 U.S.C.
3501-3520; 5 CFR part 1320.
is not required to respond to, an
information collection unless it
displays a valid Office of Management
and Budget (OMB) control number.
The proposed changes to part 701 would
establish new information collections in
the form of succession policies and plans.
These revisions will be submitted for
approval by the Office of Information
and Regulatory Affairs at OMB.
Persons interested in submitting comments
with respect to the information collection
aspects and the estimated burden of
the proposed rule should submit them
via email or to OMB as noted below.
Estimated PRA Burden
The NCUA estimates a total annual
burden of 46,750 hours as follows:
⢠OMB Control Number: 3133-NEW.
⢠Title of Information
Collection: Succession Planning.
⢠Estimated number of respondents: 4,675.
⢠Estimated number of
responses per respondent: 1.
⢠Estimated total annual responses: 4,675.
⢠Estimated total annual burden
hours per response: 10.
⢠Estimated total annual
burden hours: 46,750.
The NCUA invites comments on (a) Whether
the proposed collection of information
is necessary for the proper performance
of the functions of the agency, including
whether the information will have
practical utility; (b) the accuracy of
the agencyâs estimate of the burden of
the proposed collection of information,
including the validity of the methodology
and assumptions used; (c) ways to enhance
the quality, utility, and clarity of
the information to be collected; and
(d) ways to minimize the burden of the
collection of information on those who are
to respond, including through the use
of appropriate automated, electronic,
mechanical, or other technological
collection techniques or other forms of
information technology; and (e) estimates
of capital or start-up costs and cost
of operation, maintenance, and purchase
of services to provide information.
All comments are a
matter of public record.
Interested persons are invited to
submit written comments via email to
(1) PRAComments@ncua.gov or (2) visit
www.reginfo.gov/public/do/PRAMain
(find this particular information
collection by selecting
the tab titled âInformation
Collection Reviewâ and click on to
the section titled âCurrently under
Review â Open for Public commentâ).
D.
Executive Order 13132 on Federalism
Executive Order 13132 encourages
independent regulatory agencies
to consider the impact of their
actions on state and local interests.
The NCUA, an independent regulatory
agency as defined in 44 U.S.C.
3502(5), voluntarily complies with
the executive order to adhere to
fundamental federalism principles.
This proposed rule applies to FCUs and,
if adopted, will also apply to FISCUs.
By law, FISCUs are already subject to
numerous provisions of NCUAâs rules,
based on the agencyâs role as the
insurer of member share accounts and
the significant interest NCUA has in the
safety and soundness of their operations.
The rulemaking may, therefore, have an
occasional direct effect on the states,
the relationship between the national
government and the states, or on the
distribution of power and responsibilities
among the various levels of government.
The Board specifically requests comment on
ways to eliminate, or at least minimize,
potential conflicts in this area.
Based on the comments
received, the final rule may
modify the application of the
succession planning requirements
to FISCUs as necessary to carry out
the purposes of this rulemaking and
the intent of the Executive Order.
E.
Assessment of Federal Regulations
and Policies on Families
The NCUA has determined that this
proposed rule would not affect family
well-being within the meaning of
Section 654 of the Treasury and General
Government Appropriations Act, 1999.47
The proposed regulatory requirements are
exclusively concerned with succession
planning policies of FICUs for
replacing vacancies among board members
and other key management officials.
While the proposed rule is intended
to maintain access to quality credit
union services by reducing unplanned
or forced consolidations, the
potential positive effect on family
well-being, including financial
well-being is, at most, indirect.
List of Subjects
12 CFR Part 701
Credit, Credit unions, Reporting
and recordkeeping requirements.
12 CFR Part 741
Bank deposit insurance, Credit,
Credit unions, Reporting and
recordkeeping requirements.
By the National Credit
Union Administration Board,
this 18th day of July 2024.
47 Public Law 105â277, 112 Stat.
2681 (1998).
Melane Conyers-Ausbrooks,
Secretary of the Board.
For the reasons stated in the preamble,
the NCUA Board proposes to amend 12
CFR parts 701 and 741, as follows:
PART 701 â ORGANIZATION AND
OPERATION OF FEDERAL CREDIT UNION
1.
The authority citation for part
701 continues to read as follows:
Authority: 12 U.S.C.
1752(5), 1755, 1756, 1757, 1758,
1759, 1761a, 1761b, 1766, 1767,
1782, 1784, 1785, 1786, 1787, 1788, 1789.
Section 701.6 is also
authorized by 15 U.S.C.
3717.
Section 701.31 is also
authorized by 15 U.S.C.
1601 et seq.; 42 U.S.C.
1981 and 3601-3610.
Section 701.35 is also
authorized by 42 U.S.C.
4311-4312.
2.
Amend § 701.4 by:
a.
Revising paragraph (b)(3).
b.
Adding paragraph (e).
The addition and revision
to read as follows:
§ 701.4 General authorities and duties
of Federal credit union directors.
* * * * *
(b)
* * *
(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 unionâs
balance sheet and income statement; and
(ii) The Federal credit unionâs
succession plan established pursuant
to paragraph (e) of this section.
* * * * *
(e) Succession planning requirements.
(1) General.
A Federal credit union must establish a
written succession plan as provided in
this paragraph that is approved by the
board of directors and consistent with
the credit unionâs size and complexity.
In evaluating whether a succession plan
meets the requirements of this paragraph,
the NCUA will consider the size of the
Federal credit union, as well as the
complexity and risk of its operations.
(2) Covered positions.
The succession plan shall, at a minimum,
cover the following positions, or their
equivalent if the Federal credit union
has adopted different position titles:
(i) Members of the board of directors;
(ii) Members of the supervisory committee;
(iii) Members of the credit committee,
where such a committee is provided for
in the federal credit unionâs bylaws and
is involved daily in the review of loans;
(iv) Loan officers, where provided
for in the Federal credit unionâs
bylaws in lieu of a credit committee
and the loan officers are involved
daily in the review of loans;
(v) Management officials and assistant
management officials, as those terms are
defined in Appendix A, if provided for
in the Federal credit unionâs bylaws; and
(vi) The Federal credit unionâs
chief executive officer (typically
this individual holds the title of
president or treasurer/manager), any
assistant chief executive officer
(for example, any assistant president,
any vice president, or any assistant
treasurer/manager), the chief financial
officer (controller), and any other
personnel the board of directors deems
critical given the Federal credit unionâs
size, complexity, or risk of operations.
This includes new positions that
may be required due to planned
changes in operations, supervisory
landscape, or corporate structure.
(3) Contents of succession plan.
The succession plan must, at minimum,
contain the following information
regarding each of the positions covered
under paragraph (e)(2) of this section:
(i) The title for each covered position
and the expiration of the incumbentâs term
(if serving in a term-limited capacity)
or other anticipated vacancy date (such
as the incumbentâs retirement eligibility
date or announced departure date).
(ii) The Federal credit unionâs
plan for temporarily and permanently
filling vacancies for each of the
positions, including vacancies
due to unexpected circumstances.
(iii) The Federal credit unionâs strategy
for recruiting candidates with the
potential to assume each of the positions.
The strategy must consider how the
selection and diversity among the
employees covered by the succession
plan collectively and individually
promotes the safe and sound operation
of the Federal credit union.
(4) Board responsibilities.
The board of directors must:
(i) Approve a written succession plan
that meets the requirements of paragraphs
(e)(2) and (e)(3) of this section; and
(ii) Review, and update as necessary,
the succession plan in accordance with
a schedule established by the board of
directors but no less than annually.
(5) Adherence to plan.
The board of directors shall approve
and document in its meeting minutes the
rationale for substantive deviations
from its approved succession plan.
PART 741 â REQUIREMENTS FOR INSURANCE
3.
The authority citation for part
741 continues to read as follows:
Authority: 12 U.S.C.
1757, 1766(a), 1781â1790,
and 1790d; 31 U.S.C.
3717.
4.
Add § 741.228 to read as follows:
§ 741.228 Succession planning.
Any credit union that is insured pursuant
to Title II of the Act must adhere to
the requirements in § 701.4(b)(3) and
(e) of this chapter, to the extent these
regulatory provisions do not conflict
with an applicable state requirement.
This concludes this item.
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.
