ALBANY, N.Y. – NCUA has rejected the $1.8 billion DFCU Financial Federal Credit Union's first proposed package of disclosure materials and balloting procedures that the credit union must send to members prior to the vote on whether to convert the credit union to a mutual bank. In a 10-page Jan. 12 letter to the credit union's law firm, Washington D.C.'s Silver, Freedman and Taff, along with all 11 members of the credit union's board and supervisory committee, the agency laid out three broad areas of concern; issues that must be addressed in order to ensure the voting methods and procedures, including disclosures, meet regulatory requirements; issues which the agency presumed the credit union would want to address for the sake of a fair and informed membership vote; and areas about which the agency still had questions. Even though most of the letter's questions were direct and its tone sometimes verged on harsh, Alan Theriault, CEO of CU Financial Services, a conversion consultancy which has often worked with Silver Freedman, downplayed the letter's impact. He noted that all the federal agencies which have a role in a credit union-to-bank charter conversion (NCUA, Office of Thrift Supervision and FDIC) often have questions early in the process and have never replied to a conversion application with immediate approval. "The process took 75 days with Community," Theriault pointed out. "There is always give and take and it's a negotiation. These are just the first steps." The letter indicates that, in the wake of the dispute over disclosures with the then Community Credit Union, the agency is taking pains to be very clear about what its thoughts are about the proposed disclosure package before it is approved and sent. Last year, the agency got involved in a legal fight with the then $1.4 billion Community credit union over disclosures it had approved initially and then disapproved later. NCUA lost the fight and wound up having to approve the Community charter change balloting even though it contended that the disclosure package that had been sent to Community members differed from that which had been negotiated with the agency. In the Jan. 12 letter, NCUA listed the credit union's use of prizes and lotteries along with language the credit union used which appeared to blur the proposed charter as things DFCU Financial would have to change in order to have its disclosures and procedures approved. NCUA noted that most of the disclosures urged members to vote quickly, now, or urgently and left the impression that if members did not do so they might not be eligible to win the lottery's prizes. Even though some of the proposed documents say that members do not have to vote either for or against the charter change in order to win a prize, the agency also took note of some documents where this is not stated. "To avoid misleading members, DFCU must separate any discussion of the DFCU Board's recommended `yes' vote from any discussion of the prize drawing or make sure that every mention of the prize drawing makes clear that prize eligibility is independent of how the member votes," the agency wrote. In addition, NCUA objected to the credit union's use of the terms "mutual savings institution" or "the savings institution" when the credit union's application to the OTS is specifically to become a "mutual savings bank." "In order for the documents to be accurate and provide clearer information to members, DFCU must refer to the converted bank more specifically as a "mutual savings bank" or "savings bank" where applicable throughout the documents. DFCU must make these revisions." Significantly, the agency also challenged DFCU Financial's assertions that "years of study, due diligence and continuing assessment" underpin its determination that the charter change was really in the best interest of the credit union. "Without evidence of the due diligence the DFCU Board indicates it is relying on, it is not possible for NCUA to determine if these statements are accurate and not misleading," the agency wrote. "Accordingly, DFCU must provide NCUA with documentation of that due diligence." In the suggestions part of the letter, NCUA urged DFCU to only send out ballots with the 30-day disclosures and not the 60- or 90-day disclosures since members might not have had enough time to think over the issues involved in the conversion when they first read about it and the credit union has made it clear that all the ballots are final. Harking back to the Community fight, the agency also urged that the credit union's counterpoints to the agency's mandated boxed disclosures YOUR CREDIT UNION WANTS YOU TO KNOW THE FACTS appear on an entirely separate piece of paper and not merely on the flip side of the sheet which contains NCUA's boxed disclosures. Having the statements on the flip sides of the same page was at the heart of NCUA's fight with Community. NCUA also drew the credit union's attention to different mistakes about language, such as referencing state regulations which do not apply to DFCU and recommended changing them. Although the agency didn't say so, the mistakes made it appear as though DFCU merely submitted the same disclosure package that Community had submitted and merely changed the names and details on it, a practice which other converting credit unions have used in the past. Who Is Supervising Who? The biggest element of DFCU's conversion plan that the agency questioned was its decision to include members of the credit union's current supervisory committee on the board of the new bank if members approve the conversion. NCUA questioned whether such an arrangement does not compromise the supervisory committee's role as watchdog and auditor of the credit union's operations and asked whether the credit union shouldn't point out that potential conflict of interest to its members. After quoting the standard FCU bylaws about the role of the supervisory committee, the agency noted: "In fact, if any members of a federal credit union believe that the federal credit union's board has acted improperly, the supervisory committee is the one and only internal entity to which those members can turn seeking renewal and relief. Accordingly, we think that you should explain to your members why members of DFCU's supervisory committee will become members of its future board and why this will not undermine the supervisory committee's oversight function in respect to the ongoing conversion." What Happens Next? It's unclear what the release of the document might mean and what may happen next in DFCU's case. On the one hand, Alan Theriault and other sources familiar with the process point out that this is merely the first step in what can be a long process of satisfying regulators and that nothing about the NCUA's letter appears meant to be the final word. On the other hand, it was very unusual, even shocking to those familiar with the process, that the NCUA would release this letter while the negotiation is ongoing. Theriault commented that disclosing this correspondence is highly unusual since the topics referenced in the correspondence often reflect part of the application which is considered confidential. "That application, which all the regulators get, contains things that are extremely confidential such as business plans and board member biographies," Theriault said. "It is highly unusual that correspondence related to an application of this sort would be made public." But other sources noted that NCUA's Jan. 12 letter didn't reference any confidential information relating to the credit union's business plan but addressed only what the credit union proposed to disclose to its members about the proposed conversion and how it planned to conduct the balloting. But Theriault also mentioned that once NCUA's positions become public, it becomes more difficult for the agency to negotiate or be flexible with them, a factor which could hurt the agency's interests in the end. Rumors circulated that DFCU Financial had hired the Washington, D.C. law firm of Butera and Andrews in response to the released letter. The lobbying group, which had helped Community and Omni, would presumably try to make the case to Congress that the agency was behaving in an unfair or biased way toward DFCU. Butera and Andrews did not return calls before press time, but sources familiar with the process predicted that the credit union would have a problem making a case that NCUA was acting unfairly when the process was just beginning and when it was evident that the DFCU disclosures had such a range of questionable statements in them. A source close to this story who spoke only on background about the DFCU situation noted that the process was still ongoing and that the NCUA had every right to ask for more information and to annunciate its regulatory requirements. "I am not sure Congress will believe NCUA's role is to merely rubber stamp these applications," the source observed. [email protected]