AACUL Report Brings Scholarship, Strong Recommendations to Conversion Discussion

WASHINGTON – The American Association of Credit Union Leagues’ Cooperative Business Model Task Force has authored the most comprehensive and closely-researched report on the issues surrounding credit union-to-bank charter conversions to date. The report, which runs to 65 pages without graphics, both seeks to document in detail the differences that the task force found between being a credit union member and either a depositor in a mutual thrift and to make recommendations for changes to the conversion process that the Task Force believe are more necessary to protect credit union members faced with a charter conversion. The Task Force didn’t intend to draft a 65-page report on the issues surrounding credit union conversions, but once they began to research the topic they found it grew steadily larger, explained Mike Mercer, CEO of the Georgia Credit Union Affiliates and chairman of the Task Force. “It was a bit like peeling an onion,” he explained. “The deeper we got into it, the more there was to learn.” Mercer said the task force had sought to bring scholarship to the conversion issue that it felt had been lacking before. It also hoped, as the project went on, that the report would help educate even seasoned credit union industry executives about, for example, some of the differences between being credit union members and being depositors in a mutual thrift. “Many credit union people don’t understand that being a member of a credit union means really owning that institution whereas being a depositor in a mutual thrift is akin to renting a part of that mutual,” Mercer explained. Of Proxies And Authorizing Laws While proponents of credit unions’ converting to mutual banks have often made the case that a credit union-to-mutual bank charter change represents little more than a mutual becoming another mutual, the Task Force found that there were significant differences between how credit unions and thrifts are mutual – and that those differences are more than just the loss of the one member/one vote standard that credit unions use. For example, the two institutions’ authorizing acts, the Home Owners Loan Act (HOLA) for mutual thrifts and the Federal Credit Union Act (FCUA) for credit unions differ significantly in the rights they enumerate for thrift depositors and credit union members. The HOLA contains “scant” protections for thrift depositors, the report noted, while the FCUA specifically allows credit union members the right to elect their board of directors, to vote on the conversion to a mutual savings bank, on whether to terminate federal insurance, on whether to convert from federal insurance and on the removal of members. “While it would take an act of Congress to change the rights of credit union members that are expressly addressed in the Federal Credit Union Act,” the report noted, “mutual savings bank depositors’ privileges are addressed in documents such as OTS rules and the institution’s charter that are more readily changed.” The report also noted that the boards of directors for mutual thrifts are allowed the use of what are called “running proxies” which depositors generally sign over to the institution’s board of directors when they make their initial deposit. The Task Force found that there are some limitations on the use of proxies but such provisions are designed to protect management, not the interests of the depositors. “For example, proxies that are for a duration of more than eleven months or are solicited at the institution’s expense can only be held by the board of directors, or a committee appointed by the majority of the board. This limitation prevents others from exercising control of the institution,” the report said, while noting that some states allow credit unions to also use proxies. The Task Force also found that the Office of Thrift Supervision has not made protecting depositor’s rights a priority at all, but instead worked to diminish them. “More precisely, OTS has treated depositor interests, including depositor voting, as a mere privilege, not a right, that could be bestowed, diminished, or amended by the OTS or by changing the bank’s charter or bylaws,” the report found, and added that the courts have generally upheld this view of depositors’ rights in mutual thrifts. “What we essentially found is that credit union members own their credit unions,” Mercer said, “and that this ownership is materially different from the relationship of a mutual thrift depositor who is seen as renting the institution with his deposit and the credit union owner who is seen as owning the institution with his.” Task Force Recommendations The Task Force made more than 60 regulatory, legislative, administrative and judicial recommendations for how the NCUA and credit unions could act to better protect credit union members’ rights when faced with a proposed charter conversion. They ranged from requiring public comment and/or public hearings for credit union members prior to the conversion vote or proposal to various bylaws that credit unions could adapt and various lawsuits that members of current or former credit unions could bring. Among the bylaws suggested include changes which would guarantee that groups of dissenting members have an opportunity and the means to share their concerns about a conversion proposal with other members; ensure members are informed of their rights to the possibility of equity apportionment prior to the conversion and measures to authorize a full or partial distribution of equity to dissenting members subsequent to a vote for conversion. Among the legislative remedies that the Task Force recommended were prohibiting current and former senior management and directors from a converting credit union from obtaining any “disproportionate personal financial gain” as a result of the conversion for 10 years. The Task Force also recommended that credit unions who are converting be required to freeze the net worth of the credit union in a trust for the members. So long as the thrift remained mutual, the funds would remain part of the institution’s net worth. If the thrift converted to stock, the funds in the trust would be returned to the members of record at the time of the conversion. Pro-Conversion Voices Weigh In Unsurprisingly, Alan Theriault, a consultant who advocates credit union conversions, criticized the report. “AACUL’s effort is a loud statement that regulatory and statutory relief has run its course and credit union powers and capital access are stalled,” Theriault maintained. “It is also likely to fuel a spate of conversions as credit union boards move up their timetables fearing termination of the conversion option.” Theriault also attacked the report’s commentary on proxies, arguing that the report “fail[s] to address the resulting chaos when membership factions motivated by socialist groups, disgruntled former employees, or credit union leagues organize to take over a credit union. Proxies help tip the scales in favor of common sense and protect the continuity and stability of the organization,” he argued. When asked for any examples of times when “socialist groups, disgruntled former employees and credit union leagues” have attempted credit union takeovers, Theriault cited Senate FCU, Columbia CU and “a couple in California where the CEO was fired and he came back to remove the Board of Directors.” Theriault didn’t acknowledge that the very existence of these controversies proved that credit union members do, in fact, own their credit unions. -