Compliance Blog

Posted by Anthony Demangone

NAFCU's offices are closed again, as the federal government has decided to close its Washington, D.C.-area offices.  We're getting hammered again with another winter storm.  This one appears to have less snow but more wind. 

NAFCU members - if you need compliance assistance, email us at compliance@nafcu.org.  We'll do our best to respond remotely.

Here's a photo of Lake Yellowstone at sunrise, taken during my honeymoon.  The thought of another snow photo just seems too depressing right now.

 

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NCUA recently released legal opinion letter 09-1039.  This is a great legal opinion, as it touches upon a number of important issues: conflicts of interest, disqualification, and voting issues.  Here's the portion dealing with conflicts.

The FCU Bylaws prohibit a director, committee member, officer, agent, or credit union employee from participating, directly or indirectly, in matters affecting his or her pecuniary or personal interest. The provision also covers matters affecting the pecuniary interests of an organization in which a director, or the others enumerated in the provision, is directly or indirectly interested. FCU Bylaws, Article XVI, Section 4.

Whether a conflict of interest exists requiring a director to be disqualified depends on the particular facts and circumstances involved. Sometimes the determination is obvious, for example, a director should not vote on whether a credit union should enter into a contract with a company of which the director is the sole or majority owner. But, for example, if a director has a modest investment in a publicly traded corporation, like Intel, that director need not be disqualified from voting on a contract with Intel to purchase computers. While any new contract for Intel would likely benefit the corporation –its pecuniary interest will be affected -- that director’s interest in the corporation is likely so attenuated that his interest in the corporation will not be affected. The director need not be disqualified.

The conflict of interest analysis under the bylaw provision is, first, whether the board’s decision will affect a director’s own private (pecuniary or personal) interests. Second, where an organization is involved in which a director has an interest, the analysis is: (a) whether a decision will affect the organization’s pecuniary interest and, also, (b) whether the decision regarding the organization will affect the director’s interest in the organization. Note that the conflict of interest provision in the bylaws requires a real or actual effect, not a hypothetical or speculative effect, on the individual or organization’s interest in order for a conflict to exist. Also, as noted in the example above, not all board decisions affecting an organization’s pecuniary interest will affect a director’s interest in the organization.

Directors make many decisions for a credit union that may affect their interests, and even the pecuniary interest of organizations in which they have an interest, but the decisions are not of the type that raises a conflict of interest requiring disqualification. For example, the directors establish dividend rates and, as members, will benefit. The decision, however, is affecting all members, not affecting particularly the directors’ personal or pecuniary interests. Also, a director may be able to vote on policies affecting an organization in which the director has an interest. For example, a board may be considering a policy to provide payroll deductions as a member benefit in cooperation with employer sponsors. A director may be an employee of a sponsoring entity. Because the policy will affect all employer sponsors, most likely, a director who is also a sponsor’s employee should not be disqualified.

That, my friends, is how legal opinions should be written.  First, it is clearly written.  Perhaps more importantly, though, it not only answers the question presented - the letter also provides an overview of the subject matter to illuminate other related areas.  The hypotheticals are a simple, yet effective way, to clarify the subject.