NCUA Forces Disclosure Of Payments To Senior Staff
Reinforcing this insider-arranged sale: The CEO would receive a bonus of $250,000; the CFO and COO payments of $125,000 each, upon the merger’s approval. These disclosures were added to the official notice only after the NCUA required they be put in the requirement mailing.
Read more about PenFed’s merger strategies in this look at its takeover of Miramar Federal Credit Union in California.
Managing The Vote
By keeping the process secret, Belvoir’s board and senior managers were able to control the discussion and messages sent to members. Nowhere in the announcement was a comparison of rates, products, or services provided. The notice gave lists of general PenFed services and its “low loan rates” and a description of PenFed’s distribution system including its “36 worldwide branches.”
There was no description of PenFed’s business model and how PenFed’s products and services would compare with Belvoir’s five-branch, locally focused, high personal service approach.
Nowhere was there a description of what might be lost in the merger. For example, Belvoir offered member business loans, which PenFed does not offer and required Belvoir to sell prior to the merger. Belvoir offered courtesy pay and a much-broader credit underwriting approach. PenFed’s policies and business strategy are much different than Belvoir’s, which listed 189 local businesses and employee groups in its FOM.
One example of these policy differences is that Belvoir’s mortgage loan portfolio as reported in the HMDA data had twice the level of CRA qualified loans (income at 80% or lower of the median income in the MSA) than did PenFed’s. For the most recent year’s data, 2015, 18% of Belvoir’s mortgages were CRA eligible versus 9% for PenFed.
Further there was no explanation of why PenFed — at $21 billion, or 63 times larger than Belvoir — would be able to provide better personal service. On Jan. 29, 2016, one month prior to the merger announcement, Belvoir was named one of the best places to work in Virginia for the third consecutive year.
Even with this one-sided, time-restricted process, the members voted against the merger at the required special meeting. Unfortunately, that result was overwhelmed by the ballots submitted where members relied on the notice information. If a member trusts the credit union enough to send their money to it, why should they not rely on this same instinct if the recommendation is to close up the shop?
What PenFed Gained
In the March 31, 2016, press release announcing the merger, PenFed made clear what it was gaining in this transaction:
“PenFed expands its field of membership to include the Fort Belvoir military community which ... is home to some of the top national defense organizations. ... The largest employer in Fairfax County, Virginia, Belvoir boasts twice as many employees as the Pentagon. PenFed also gains an employee team that is dedicated to member service, five convenient branch locations, and an outstanding membership base focused on America’s national security.”
Belvoir’s board and management, while negotiating for their members’ "best interests," transferred $41 million in collective book and market value in addition to the opportunities described above.
How did such a transaction ever get past the NCUA and its oversight of member interests and consumer rights? How could this event pass any description of fiduciary duty by either party?
A Blind Eye or Benign Neglect?
When a member who received the FOIA merger file (after nine months and multiple requests) and wrote a request that the transaction be reviewed, the NCUA replied:
“(We have) reviewed the materials submitted ... and determined that the merger’s disclosures and procedures complied with applicable NCUA regulations.”
In other words, the transaction was legal.
In prior opinions NCUA has been explicit in some of its statements of fiduciary duty by directors and senior managers. Two such statements are especially relevant in this context:
In a February 2011 letter to federal credit unions (11-FCU-02), the NCUA stated what the duties of directors’ entails:
^ “Directors must always focus on the best interest of the membership as a whole.”
^ “The requirement for 'reasonable inquiry' means that the more complex a decision, and the more important the decision is to the financial interests of the members, the more due diligence the directors need to do in an attempt to make a good decision.” (emphasis added)
The General Counsel letter of March 15, 2011, directly addresses the central issue of fiduciary responsibility in Belvoir’s board’s merger recommendation: “We believe that fiduciary duties are properly owed to people and not to entities ... the danger is that, if the directors are allowed to focus only on the credit union when making a decision ? without regard to how the members are affected ? the directors can justify making self-serving decisions, or decisions that serve primarily the FCU’s insiders, under the guise that the directors are simply doing what is best for the credit union.” (emphasis added)
Making A New Rule Matter
The difficulty of a new, more transparent rule is that for those who want to game the system, the new regulation can just become a more involved roadmap. The maneuvering outlined above undermines both the values and principles that cooperatives depend upon for stewardship of common wealth.
It's Not Too Late To Make Your Voice Heard
Click here for the new merger rule as published in the Federal Register on June 8, 2017. (11 pages)
Click here for the full text of the proposed changes to 12 CFR Parts 701, 708a, and 708b. (52 pages)
Click here to submit comments directly to the NCUA, due by Aug. 8, 2017.
Click here to submit comments through NAFCU, due by July 19, 2017.
Submit comments through CUNA, due by Aug. 7, 2017.
Credit unions are designed to be an alternative to the profit-driven ambitions of other financial institutions. Member-owner interest must be the dominant consideration if credit unions want to continue to claim a special role in the marketplace.
If the new rule merely provides boards and CEOs better guidelines for self-dealing, then no rule is going to eliminate greed. Boards, senior managers, and the NCUA need to recognize that fiduciary duties are meaningful even if they can never be fully codified by rule.
Just as terms like democracy, justice, and freedom are always being reviewed against events, so, too, must the cooperative structure be constantly defined and defended.
The credit union system is a powerful and successful one that operates alongside the market economy. It is free from some threats because of its cooperative design and mission; however, even with good intentions, credit unions are always at risk of betraying their mission by seeking the rewards of the for-profit sector.
Credit unions have shown they can survive adversity. But the real test of their character is how they use their success. Will it be to seek institutional glory and personal gain or to further the member-owners’ well-being?