An estimated 75% to 85% of credit union consolidation agreements contain significant merger related compensation for top executives, but this information is usually not disclosed to members before they vote on merging their credit union.
That may change this year if the NCUA board approves a proposed rule for voluntary mergers.
The NCUA board and its legal staff Thursday discussed a proposed rule regarding voluntary mergers that would provide greater transparency and disclosures to members of federal credit unions when those credit unions are seeking voluntary mergers.
“This issue is pretty important to me,” NCUA Board Member Rick Metsger said. “While this has been referred to a voluntary merger rule, it’s more accurately described as a member disclosure and transparency rule. It’s underlying principle is simple. It provides due process and transparency so when a federal credit union merges into another credit union the member/owners of the merging credit union understand the terms and conditions.”
Acting NCUA Chair J. Mark McWatters also said this rule is important to him as a former securities lawyer.
“This follows an SEC approach of full and fair disclosure…..full and fair disclosure of what? Material items,” McWatters said. “The items to be disclosed would be material information to someone engaged in the merger vote.”
One of the changes in the proposed rule would require the merging federal credit union to disclose to its members all merger related financial arrangements in whatever form they may take that are paid to its CEO, the next four highest employees, the board of directors and members of the supervisory committee.
“This requirement makes it easy for the merging federal credit union to understand exactly what they need to disclose, and it also provides members with key information they need to make an informed decision,” Frank Kressman, the NCUA’s associate general counsel, said.
Elizabeth Wirick, an NCUA senior staff attorney, pointed to one merger that she reviewed that had a total payout in the low seven figures to about 18 different people, but only four persons were getting the bulk of the amount.
“We worked with the credit union on its disclosures to its members to make it clear who was getting what,” Wirick told the board. “Originally, they had no disclosures. (In) another draft, they came in with an aggregate total and some vague language about percentage of who was getting what which was not, in our opinion, sufficient. Another version was a block of text with a wraparound that was sort of impossible, again, to see who was getting what, so we worked with them to make that a transparent disclosure for those members to know who was getting the merger related compensation.”
In another merger case, a CEO was guaranteed five years of employment. But the merger agreement indicated that at any point during those five years — if employment of the CEO was terminated either voluntary or by the continuing credit union —- then that CEO would get a cash out payment.
In other words, Kressman noted, the CEO could be working one day, quit and get the five-year cash payment.
The proposed rule also would require merging credit unions to mail member notices of the consolidation at least 45 days but not more than 90 days before the special meeting to vote on the merger.
In addition, the proposed rule would clarify the contents and format of the members’ notice to provide better information, and create a member-to-member communications process similar that is found in NCUA’s regulations covering credit union conversions to or mergers with banks.
