New Rules in 2011 for Financial Literacy and For Fiduciary Liability

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E. Andrew Keeney presented this program to the Virginia Credit Union League designed to educate board members on financial and fiduciary duties

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New Rules in 2011 for Financial Literacy and For Fiduciary Liability

  1. 1. New Rules in 2011 For Financial Literacy and For Fiduciary Liability – Board Members Be Ready Virginia Credit Union League
  2. 2. New Rules in 2011 For Financial Literacy and For Fiduciary Liability – Board Members Be Ready Virginia Credit Union League
  3. 3. Today’s Agenda <ul><li>Today’s goals & objectives </li></ul><ul><li>An Overview of Corporate Governance and Fiduciary Duties </li></ul><ul><li>Detailed Review of NCUA’s Rule </li></ul><ul><ul><li>Fiduciary Duties </li></ul></ul><ul><ul><li>Volunteer and Employee Indemnification </li></ul></ul><ul><ul><li>Financial Literacy </li></ul></ul><ul><li>Panel Discussion </li></ul>
  4. 4. Overview of Corporate Governance <ul><li>Corporate governance and boards </li></ul><ul><li>Basic Roles & Responsibilities </li></ul><ul><ul><li>Decision making </li></ul></ul><ul><ul><li>Oversight </li></ul></ul><ul><ul><li>Duty of loyalty </li></ul></ul><ul><ul><li>Duty of care </li></ul></ul><ul><ul><li>Be prepared </li></ul></ul>
  5. 5. Overview of Corporate Governance <ul><li>Standards </li></ul><ul><ul><li>Standards of Conduct </li></ul></ul><ul><ul><ul><li>Good faith </li></ul></ul></ul><ul><ul><ul><li>Reasonable belief </li></ul></ul></ul><ul><ul><ul><li>Best interests of credit union </li></ul></ul></ul>
  6. 6. Overview of Corporate Governance <ul><li>Standards </li></ul><ul><ul><li>Standards of Liability </li></ul></ul><ul><ul><ul><li>Lack of good faith </li></ul></ul></ul><ul><ul><ul><li>Unreasonable belief </li></ul></ul></ul><ul><ul><ul><li>Lack of information </li></ul></ul></ul><ul><ul><ul><li>Lack of objectivity </li></ul></ul></ul>
  7. 7. Overview of Corporate Governance <ul><li>Standards </li></ul><ul><ul><li>Duty of Loyalty </li></ul></ul><ul><ul><ul><li>Always put the interests of the credit union first </li></ul></ul></ul>
  8. 8. Overview of Corporate Governance <ul><li>Standards </li></ul><ul><ul><li>Conduct </li></ul></ul><ul><ul><li>Liability </li></ul></ul><ul><ul><li>Loyalty </li></ul></ul>
  9. 9. Overview of Corporate Governance <ul><li>Business Judgment Rule (std. defense) </li></ul><ul><ul><li>Business decision </li></ul></ul><ul><ul><li>Good faith </li></ul></ul><ul><ul><li>Disinterested parties </li></ul></ul><ul><ul><li>Informed judgment </li></ul></ul><ul><ul><li>Reasonable belief </li></ul></ul><ul><ul><li>Best interests of credit union </li></ul></ul>
  10. 10. Overview of Corporate Governance <ul><li>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) </li></ul><ul><li>Credit union world </li></ul><ul><ul><li>FCU Act, regulations, bylaws, guidance </li></ul></ul>
  11. 11. Federal Credit Union Act <ul><li>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 </li></ul><ul><li>Corporate governance is really how an organization makes decisions </li></ul>
  12. 12. What if you breach? <ul><li>Breach of duty + damages = potential liability </li></ul><ul><li>Indemnification, insurance </li></ul><ul><li>Who would sue? </li></ul><ul><ul><li>NCUA, members with uninsured shares, disgruntled ex employees, those not elected to the Board </li></ul></ul><ul><ul><li>Many “members” threaten a lawsuit </li></ul></ul>
  13. 13. Indemnification <ul><li>FCU Bylaws </li></ul><ul><li>FCUs may not indemnify officials or employees for personal liability </li></ul><ul><ul><li>Where decision giving rise to claim is determined by a court to have constituted </li></ul></ul><ul><ul><ul><li>Gross negligence </li></ul></ul></ul><ul><ul><ul><li>Recklessness </li></ul></ul></ul><ul><ul><ul><li>Willful misconduct </li></ul></ul></ul>
  14. 14. Indemnification 12 CFR 701.33 <ul><li>Exception will allow advance of funds before final disposition if </li></ul><ul><ul><li>Disinterested board members/supervisory committee deem officials acted in good faith </li></ul></ul><ul><ul><li>Disinterested individuals determine that payment will not harm safety and soundness </li></ul></ul><ul><ul><li>Corporate governance/Board resolution </li></ul></ul>
  15. 15. Directors are Responsible for General Direction and Control of the Credit Union <ul><li>Duty of good faith </li></ul><ul><li>Best interests of membership </li></ul><ul><li>Fairly, impartially and without discrimination in favor of any particular member </li></ul><ul><li>New regulation/financial literacy </li></ul><ul><li>Be prepared </li></ul>
  16. 17. A Framework for Meeting the New Expectations
  17. 19. NCUA’s Fiduciary Duties Regulation
  18. 20. Overview of Rule <ul><li>Creation of federal duties </li></ul><ul><li>Indemnification changes </li></ul><ul><li>Financial literacy </li></ul>
  19. 21. Fiduciary Duties <ul><li>Fiduciary duties portion applies to federal credit union directors </li></ul><ul><li>Financial literacy rules only today apply to federal credit unions </li></ul><ul><li>Effective dates: </li></ul><ul><ul><li>January 27, 2011 in general </li></ul></ul><ul><ul><li>July 27, 2011 for “financial literacy” </li></ul></ul>
  20. 23. Fiduciary Duties Thumbnail Sketch <ul><li>Clarification that directors are responsible for general direction and control </li></ul><ul><li>Four specific FCU director duties </li></ul><ul><ul><li>Director must carry out duty in good faith, in best interests of membership </li></ul></ul><ul><ul><li>Administer affairs fairly, impartially and without discrimination in favor or against any particular member </li></ul></ul><ul><ul><li>Financial literacy </li></ul></ul><ul><ul><li>Ensure management’s operation comply with all applicable “rules” </li></ul></ul>
  21. 24. Fiduciary Duties 12 CFR 701.4 <ul><li>General direction and control </li></ul><ul><ul><li>Board is ultimately responsible </li></ul></ul><ul><ul><li>Delegation of execution? Yes. </li></ul></ul><ul><ul><li>Delegation of responsibility? No. </li></ul></ul><ul><li>Carry out duties </li></ul><ul><ul><li>In good faith </li></ul></ul><ul><ul><li>Reasonably believe that actions are in best interest of membership as a whole </li></ul></ul><ul><ul><li>Use same care as “ordinary prudent person” in similar situation </li></ul></ul>
  22. 25. Fiduciary Duties 12 CFR 701.4 <ul><li>Administer affairs of CU: </li></ul><ul><ul><li>Fairly </li></ul></ul><ul><ul><li>Impartially </li></ul></ul><ul><ul><li>Without discrimination in favor or against any particular member </li></ul></ul>
  23. 26. Fiduciary Duties 12 CFR 701.4 Outside Staff and Consultants <ul><li>Boards are empowered to retain staff and outside consultants as needed </li></ul><ul><li>Boards may rely on staff, officers, committees or outside consultants if directors “reasonably believe” the person is reliable and competent in that area </li></ul><ul><li>Higher standard for legal counsel, public accountants and others retained for their skills or expertise? </li></ul>
  24. 27. Director and Staff Involvement <ul><li>“ 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.” </li></ul><ul><ul><li>There is no mention of director in this paragraph </li></ul></ul><ul><ul><li>There is discussion of the board's right to require staff to report to the board or committee of the board, as appropriate </li></ul></ul><ul><ul><li>A director, by himself or herself, has little or no power. It is the board and their vote that matters </li></ul></ul>
  25. 28. NCUA Discussion <ul><li>&quot;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.&quot; </li></ul><ul><li>&quot;The NCUA Board disagrees.&quot; </li></ul><ul><li>&quot;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.&quot; </li></ul>
  26. 29. Summary <ul><li>Federal credit union's board has the right to gain direct access to information from credit union employees </li></ul><ul><li>NCUA notes that boards should not bypass the CEO to direct or manage the credit union's employees. </li></ul>
  27. 30. <ul><li>“ 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.” </li></ul>Financial Literacy
  28. 31. Fiduciary Duties 12 CFR 701.4 <ul><li>“Financial Literacy” </li></ul><ul><ul><li>“ (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 </li></ul></ul><ul><ul><li>So, is training mandatory? </li></ul></ul>
  29. 32. Financial Literacy Overview <ul><li>Applies to directors of federal credit unions </li></ul><ul><li>It does not apply to supervisory committee members </li></ul><ul><li>It does not apply to directors of state chartered credit unions </li></ul><ul><li>It does not apply to senior managers </li></ul><ul><li>It does not apply to advisory or members or members emeritus </li></ul><ul><li>Effective date: January 27, 2011, with phased compliance by July 27, 2011; OR six months after a new board member elected or appointed. </li></ul>
  30. 33. Minimum Standard <ul><li>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: </li></ul><ul><ul><li>What does this line item mean? </li></ul></ul><ul><ul><li>Why is it important to the credit union? </li></ul></ul><ul><ul><li>Is the value of the line item changing over time? </li></ul></ul><ul><ul><li>If so, what does that change (either positive or negative) mean? </li></ul></ul><ul><ul><li>Is the change important to the credit union? </li></ul></ul>
  31. 34. Minimum Standard <ul><li>“ 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.” </li></ul>
  32. 35. Identify the Risks <ul><li>Liquidity </li></ul><ul><li>Interest rate </li></ul><ul><li>Compliance </li></ul><ul><li>Type of credit </li></ul><ul><li>Transaction </li></ul><ul><li>Reputation risk </li></ul>
  33. 36. <ul><li>“ 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.” </li></ul>Financial Literacy
  34. 37. What Does the Policy Have to Look Like? <ul><li>According to NCUA, the policy should provide: </li></ul><ul><ul><li>Opportunities and funding for directors to acquire the skills needed to evaluate the credit union's finances </li></ul></ul><ul><ul><li>Education alternatives for directors commensurate with the size and complexity of the credit union </li></ul></ul><ul><ul><li>Solutions that take into account the appropriate deadlines </li></ul></ul><ul><ul><li>And understand the credit union’s internal control system </li></ul></ul><ul><ul><li>Timeframes </li></ul></ul>
  35. 38. Give Them a Policy! <ul><li>Opportunities and funding </li></ul><ul><li>Education alternatives </li></ul><ul><li>Timeframes </li></ul><ul><li>Training for financial literacy and other subjects </li></ul><ul><li>Sample policies </li></ul><ul><li>Certificate </li></ul>
  36. 39. Training <ul><li>NCUA’s office of small credit unions </li></ul><ul><li>Virginia Credit Union League </li></ul><ul><li>CUNA </li></ul><ul><li>CUES </li></ul><ul><li>Certificate </li></ul><ul><li>And many, many others </li></ul>
  37. 40. Fiduciary Duties Thumbnail Sketch <ul><li>Clarification that directors are responsible for general direction and control. </li></ul><ul><li>Four specific FCU director duties </li></ul><ul><ul><li>Director must carry out duty in good faith, in best interests of membership </li></ul></ul><ul><ul><li>Administer affairs fairly, impartially and without discrimination in favor or against any particular member </li></ul></ul><ul><ul><li>Financial literacy </li></ul></ul><ul><ul><li>Ensure management’s operation comply with all applicable “rules” </li></ul></ul>
  38. 41. Board Composition and Governance <ul><li>Recruiting </li></ul><ul><li>Nominating Committees </li></ul><ul><li>Credit Union Committee Structure </li></ul><ul><li>Associate Board Members </li></ul><ul><li>Director Emeritus </li></ul><ul><li>Board Governance </li></ul><ul><li>Ethics Policies </li></ul><ul><li>Conflicts of Interests </li></ul>
  39. 42. Board Resources <ul><li>Access to Outside Experts and Audits </li></ul><ul><li>Board Packets </li></ul><ul><li>Training </li></ul><ul><ul><li>Financial Literacy </li></ul></ul><ul><ul><li>Ensuring “Compliance” </li></ul></ul><ul><ul><li>Training on effective board governance </li></ul></ul><ul><li>Strategic planning </li></ul>
  40. 43. Parting Thoughts <ul><li>Culture </li></ul><ul><li>Board composition </li></ul><ul><ul><li>Acceptance of role and responsibility </li></ul></ul><ul><ul><li>Inquisitive, risk-minded, forward-thinking </li></ul></ul><ul><ul><li>Provides oversight, but allows management to do its job </li></ul></ul><ul><ul><li>Credit Union comes first </li></ul></ul><ul><li>Board/Management relationship </li></ul>
  41. 44. Minimum Standard <ul><li>“ 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.” </li></ul>
  42. 45. Panel <ul><li>Evelyn G. Dowdy, President/CEO of Connects Federal Credit Union </li></ul><ul><li>William Hawkins, President/CEO of Healthcare Systems Federal Credit Union </li></ul><ul><li>Millard C. Ratcliff, Jr., President/CEO of ABNB Federal Credit Union </li></ul>
  43. 46. E. Andrew Keeney, Esq. Kaufman & Canoles, P.C. 150 West Main Street, Suite 2100 Norfolk, VA 23510 (757) 624-3153 [email_address]
  44. 47. New Rules in 2011 For Financial Literacy and For Fiduciary Liability – Board Members Be Ready Virginia Credit Union League

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