League of Southeastern Credit Unions Annual Convention 2011

Presented by F. Palmer Williams, Esquire

WILLIAMS GAUTIERPost Office Box 4128 · Tallahassee, Florida 32315

(800) 377-3325www.williamsgautier.com

Changing Fiduciary Responsibilities for Credit Union Directors

Background

Background of new NCUA Regulation § 701.4Rulemaking began March 2010Final rule adopted by NCUA Board in December 2010Effective January 27, 2011, but financial literacy not required until July 27, 2011Only applies to FCU Directors (not Supervisory Committee, other volunteers, or state chartered credit unions)NCUA issued Letter No.: 11-FCU-02 to provide general information about Directors’ duties, specifically focusing on the financial skills requirements

Purpose

PurposeClarifies the fiduciary duties and responsibilities of FCU Directors (historical first)Amends NCUA’s indemnification regulation limiting indemnification of FCU officials and employeesFocus FCU Directors on their membersMakes conforming changes to the standard FCU Bylaws

Key Provisions

Responsibility for the general direction and control of FCUFiduciary duties of Board of DirectorsIndemnification of Directors by FCU

Direction and Control of FCU

Board is responsible for the general direction and control of the affairs of FCU. Control cannot be delegated.Directors can delegate the execution of the operational functions to FCU personnel, but direction and control of FCU is non-delegable.Directors are similar to trustees.

Fiduciary Duties of Board of Directors

Must carry out duties in good faith, in the best interest of the membership as a whole

Duty of Care: Carry out duties with the care of an ordinarily prudent person in a similar position under similar circumstances (reasonable inquiry)Duty of Loyalty: Actions must benefit the FCU membership as a whole, not the Director personallyBusiness Judgment Rule: There is no liability for honest mistakes of judgment, provided the Director acts 1. with due care, 2. without conflict of interest, 3. in good faith, and 4. in furtherance of FCU’s purpose. No protection for violation of laws and regulationsAdminister the affairs of FCU fairly and impartially, without discrimination in favor of or against any particular member

Fiduciary Duties of Board of Directors

Directors must be financially literateBe familiar with basic finance and accounting practices, which includes the ability to read and understand FCU’s balance sheet and income statementAsk, as appropriate, substantive questions of management and the internal and external auditors concerning the balance sheet and income statementUnderstand the seven major risk areas (strategic, interest rate, credit, liquidity, transaction, compliance, and reputation) and ensure the internal controls are in place for these risks

Fiduciary Duties of Board of Directors

Directors must be financially literate (continued)Through experience, or must obtain training within six months of election or appointmentHas FCU adopted a policy to make available the appropriate training to enhance the financial knowledge of the Directors?The policy should provide:

Opportunities and funding for Directors to acquire the skills needed to evaluate FCU’s financesEducation alternatives for Directors commensurate with the size and complexity of FCUTimeframes noted in the timetable for acquiring financial skills section of Letter No.: 11-FCU-02, i.e., six months from the date of election or appointment

Authority Regarding Staff and Outside Consultants by Board of Directors

Board committees have authority to retain staff and outside counsel, independent accountants, financial advisors, and other outside consultants to carry out their duties and responsibilitiesFCU staff or any committee of the Board may be required by the Board to report directly to the Board or a committee of the BoardA Director who does not have knowledge that makes reliance unwarranted is entitled to rely on information and reports of FCU staff or consultantsReliance: Director may rely on officers or employees of FCU who the Director reasonably believes to be reliable and competent for information, opinions, reports, or statements providedBoard may rely upon legal counsel, independent public accountants, or other persons retained by FCU

Indemnification of Directors by Federal Credit Union

FCU may not indemnify Director:For any decision on a matter significantly affecting the fundamental rights and interests of the members, and When a court determines that the Directors’ actions/decisions are grossly negligent, reckless, or amount to willful misconduct.

FCU may advance legal fees and costs, if FCU believes the Director was acting in good faith. FCU must be able to afford the advanced legal fees and costs and the Director must give written affirmation that he/she acted in good faith and will reimburse FCU if necessary.Do your FCU bylaws address Director indemnification? What coverages for liability does FCU provide you? What are the exclusions?

Bylaws

Has Article XVI, Section 8, entitled “Indemnification” been amended to comply with this new NCUA Regulation?Has your Board adopted a Board Charter?

What is a Board Charter and why should your Board adopt one?

Status of Legislation Proposed by the Florida Office of Financial Regulation (OFR)

How does this legislation, if passed, affect your CU and the fiduciary responsibilities of credit union Directors?

Questions?