Alert April 06, 2010

NCUA Proposes New Regulation that Would Provide FCU Directors with Clear Guidance Regarding Their Fiduciary Duties to FCU They Serve

The National Credit Union Administration (“NCUA”) issued a notice of proposed rulemaking (the “NPR”) in which the NCUA, among other things, proposed the adoption of a new NCUA regulation at 12 C.F.R. §701.4 (“§701.4”) that would set forth the duties of a federal credit union (“FCU”) director in managing the affairs of the FCU he or she serves.  As proposed, §701.4 provides that a Board of Directors of an FCU may delegate authority to carry out functions, but may not delegate the Board’s responsibility to carry out such functions.  The proposed §701.4 specifies the duties of care and loyalty of an FCU director, states that a director of an FCU must understand how to evaluate the FCU’s financials and provides guidance on when a director of an FCU may properly rely on management and other third parties.  The NCUA said that the proposed §701.4 “responds to the need to provide [FCU] directors with uniform standards.”

Proposed §701.4 states that an FCU director, among other things:

Must act in the best interests of FCU members;

  • Must carry out his or her duties in good faith, in a manner reasonably believed to be in the best interests of the membership of the FCU, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances;
  • Must administer the affairs of the FCU fairly and impartially and without discrimination in favor of or against any particular member;
  • Is generally entitled to rely on information prepared or presented by FCU employees or consultants whom the director reasonably believes to be reliable and competent in the functions performed;
  • May not indemnify an official or employee for liability for misconduct that is grossly negligent, reckless or willful in connection with a decision that affects the fundamental rights of members;
  • Must understand the FCU’s balance sheet and income statement and ask, as appropriate, substantive questions of management and the internal and external auditors; and
  • Must direct the operations of the FCU in conformity with the requirements set forth in the Federal Credit Union Act, the NCUA’s regulations, other applicable law and sound business practices.
Comments on the NPR are due to the NCUA by May 28, 2010.