new rules in 2011 for financial literacy and for fiduciary liability

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New Rules in 2011 For Financial New Rules in 2011 For Financial Literacy and For Fiduciary Liability – Literacy and For Fiduciary Liability –

Board Members Be ReadyBoard Members Be Ready

Virginia Credit Union LeagueVirginia Credit Union League

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Today’s AgendaToday’s Agenda

• Today’s goals & objectives• An Overview of Corporate Governance and

Fiduciary Duties• Detailed Review of NCUA’s Rule

– Fiduciary Duties– Volunteer and Employee Indemnification– Financial Literacy

• Panel Discussion

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Overview of Corporate Overview of Corporate GovernanceGovernance

• Corporate governance and boards• Basic Roles & Responsibilities

– Decision making– Oversight– Duty of loyalty– Duty of care– Be prepared

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• Standards– Standards of Conduct

• Good faith• Reasonable belief• Best interests of credit union

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• Standards– Standards of Liability

• Lack of good faith• Unreasonable belief• Lack of information• Lack of objectivity

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• Standards– Duty of Loyalty

• Always put the interests of the credit union first

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• Standards– Conduct– Liability– Loyalty

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• Business Judgment Rule (std. defense)– Business decision– Good faith– Disinterested parties– Informed judgment– Reasonable belief– Best interests of credit union

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• The board of directors shall meet at least once a month and shall have the general direction and control of the affairs of the Federal credit union. (Federal Credit Union Act)

• Credit union world– FCU Act, regulations, bylaws, guidance

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Federal Credit Union ActFederal Credit Union Act

• A board of directors of a federal credit union has the responsibility for the general direction and control of the affairs of the credit union

• Corporate governance is really how an organization makes decisions

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What if you breach?What if you breach?

• Breach of duty + damages = potential liability• Indemnification, insurance• Who would sue?

– NCUA, members with uninsured shares, disgruntled ex employees, those not elected to the Board

– Many “members” threaten a lawsuit

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IndemnificationIndemnification

• FCU Bylaws• FCUs may not indemnify officials or

employees for personal liability– Where decision giving rise to claim is determined

by a court to have constituted• Gross negligence• Recklessness• Willful misconduct

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Indemnification 12 CFR 701.33Indemnification 12 CFR 701.33

• Exception will allow advance of funds before final disposition if– Disinterested board members/supervisory

committee deem officials acted in good faith– Disinterested individuals determine that payment

will not harm safety and soundness– Corporate governance/Board resolution

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Directors are Responsible for Directors are Responsible for General Direction and Control of the General Direction and Control of the

Credit UnionCredit Union

• Duty of good faith• Best interests of membership• Fairly, impartially and without discrimination in

favor of any particular member• New regulation/financial literacy• Be prepared

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A Framework for Meeting the A Framework for Meeting the New ExpectationsNew Expectations

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NCUA’s Fiduciary Duties NCUA’s Fiduciary Duties RegulationRegulation

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Overview of RuleOverview of Rule

• Creation of federal duties• Indemnification changes• Financial literacy

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Fiduciary DutiesFiduciary Duties

• Fiduciary duties portion applies to federal credit union directors

• Financial literacy rules only today apply to federal credit unions

• Effective dates:– January 27, 2011 in general– July 27, 2011 for “financial literacy”

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Fiduciary DutiesFiduciary DutiesThumbnail SketchThumbnail Sketch

• Clarification that directors are responsible for general direction and control

• Four specific FCU director duties1. Director must carry out duty in good faith, in best interests

of membership

2. Administer affairs fairly, impartially and without discrimination in favor or against any particular member

3. Financial literacy

4. Ensure management’s operation comply with all applicable “rules”

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Fiduciary Duties 12 CFR 701.4Fiduciary Duties 12 CFR 701.4

• General direction and control– Board is ultimately responsible– Delegation of execution? Yes.– Delegation of responsibility? No.

• Carry out duties– In good faith– Reasonably believe that actions are in best interest of

membership as a whole– Use same care as “ordinary prudent person” in similar

situation

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• Administer affairs of CU:– Fairly– Impartially– Without discrimination in favor or against any

particular member

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Fiduciary Duties 12 CFR 701.4Fiduciary Duties 12 CFR 701.4Outside Staff and ConsultantsOutside Staff and Consultants

• Boards are empowered to retain staff and outside consultants as needed

• Boards may rely on staff, officers, committees or outside consultants if directors “reasonably believe” the person is reliable and competent in that area

• Higher standard for legal counsel, public accountants and others retained for their skills or expertise?

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Director and Staff InvolvementDirector and Staff Involvement• “Federal credit union's staff providing services to the

board of directors or any committee of the board under this regulation may be required to report directly to the board or such committee as appropriate.”– There is no mention of director in this paragraph– There is discussion of the board's right to require staff to

report to the board or committee of the board, as appropriate– A director, by himself or herself, has little or no power. It is

the board and their vote that matters

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NCUA DiscussionNCUA Discussion

• "Some commenters object to any provision requiring federal credit union employees (staff) to report directly to the board of directors or committees of the board, stating this would undermine management's authority over the employees of the credit union."

• "The NCUA Board disagrees."• "While the board of directors should not attempt to bypass the

CEO in giving direction to management and employees, the board is free to ask any manager, employee, or independent contractor to provide the board and its committees information directly and not through the filter of the CEO."

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SummarySummary

• Federal credit union's board has the right to gain direct access to information from credit union employees

• NCUA notes that boards should not bypass the CEO to direct or manage the credit union's employees.

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“It is NCUA's intent to ensure that all federal credit union directors have a basic understanding of their credit union's finances. It is not NCUA's intent to increase examiner scrutiny of the financial skills of particular directors. Rather, examiners will evaluate whether the credit union has a policy in place to make available the appropriate training to enhance the financial knowledge of the directors.”

Financial LiteracyFinancial Literacy

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• “Financial Literacy”– “(Within six months of joining board) Have at least

a working familiarity with basic finance and accounting, including the ability to read and understand the FCU’s balance sheet and income statement, and to ask appropriate questions of management and internal and external auditors

– So, is training mandatory?

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Financial Literacy OverviewFinancial Literacy Overview

• Applies to directors of federal credit unions• It does not apply to supervisory committee members• It does not apply to directors of state chartered credit

unions• It does not apply to senior managers• It does not apply to advisory or members or members

emeritus• Effective date: January 27, 2011, with phased

compliance by July 27, 2011; OR six months after a new board member elected or appointed.

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Minimum StandardMinimum Standard• At a minimum, a director should be able to examine

the credit union's balance sheet, income statement and be able to answer the following questions:– What does this line item mean?– Why is it important to the credit union?– Is the value of the line item changing over time?– If so, what does that change (either positive or negative)

mean?– Is the change important to the credit union?

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Minimum StandardMinimum Standard

• “A Director must understand the specific activities in which his or her credit union engages. In particular, a director must understand not only how these activities generate revenue for the credit union but also, and perhaps most importantly, the various risks associated with these activities that could lead to financial loss.”

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Identify the RisksIdentify the Risks

• Liquidity• Interest rate• Compliance• Type of credit• Transaction• Reputation risk

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“It is NCUA's intent to ensure that all federal credit union directors have a basic understanding of their credit union's finances. It is not NCUA's intent to increase examiner scrutiny of the financial skills of particular directors. Rather, examiners will evaluate whether the credit union has a policy in place to make available the appropriate training to enhance the financial knowledge of the directors.”

Financial LiteracyFinancial Literacy

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What Does the Policy Have to What Does the Policy Have to Look Like?Look Like?

• According to NCUA, the policy should provide:– Opportunities and funding for directors to acquire the skills

needed to evaluate the credit union's finances– Education alternatives for directors commensurate with the

size and complexity of the credit union– Solutions that take into account the appropriate deadlines– And understand the credit union’s internal control system– Timeframes

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Give Them a Policy!Give Them a Policy!

• Opportunities and funding• Education alternatives• Timeframes• Training for financial literacy and other

subjects• Sample policies• Certificate

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TrainingTraining

• NCUA’s office of small credit unions• Virginia Credit Union League• CUNA• CUES• Certificate• And many, many others

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Fiduciary DutiesFiduciary DutiesThumbnail SketchThumbnail Sketch

• Clarification that directors are responsible for general direction and control.

• Four specific FCU director duties1. Director must carry out duty in good faith, in best interests

of membership

2. Administer affairs fairly, impartially and without discrimination in favor or against any particular member

3. Financial literacy

4. Ensure management’s operation comply with all applicable “rules”

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Board Composition and Board Composition and GovernanceGovernance

• Recruiting• Nominating Committees• Credit Union Committee Structure• Associate Board Members• Director Emeritus• Board Governance• Ethics Policies• Conflicts of Interests

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Board ResourcesBoard Resources

• Access to Outside Experts and Audits• Board Packets• Training

– Financial Literacy– Ensuring “Compliance”– Training on effective board governance

• Strategic planning

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Parting ThoughtsParting Thoughts

• Culture• Board composition

– Acceptance of role and responsibility– Inquisitive, risk-minded, forward-thinking– Provides oversight, but allows management to do

its job– Credit Union comes first

• Board/Management relationship

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Minimum StandardMinimum Standard

• “A Director must understand the specific activities in which his or her credit union engages. In particular, a director must understand not only how these activities generate revenue for the credit union but also, and perhaps most importantly, the various risks associated with these activities that could lead to financial loss.”

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PanelPanel

• Evelyn G. Dowdy, President/CEO of Connects Federal Credit Union

• William Hawkins, President/CEO of Healthcare Systems Federal Credit Union

• Millard C. Ratcliff, Jr., President/CEO of ABNB Federal Credit Union

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E. Andrew Keeney, Esq.

Kaufman & Canoles, P.C.

150 West Main Street, Suite 2100

Norfolk, VA 23510

(757) 624-3153

[email protected]

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New Rules in 2011 For Financial New Rules in 2011 For Financial Literacy and For Fiduciary Liability – Literacy and For Fiduciary Liability –

Board Members Be ReadyBoard Members Be Ready

Virginia Credit Union LeagueVirginia Credit Union League