Compliance Blog

Written by Elizabeth M. Young LaBerge, Senior Regulatory Compliance Counsel, NAFCU

At the July meeting of the NCUA Board, the Board voted to finalize the fidelity bond rule proposed in November 2018. It was published in the Federal Register on July 24, 2019 at 84 Fed. Reg. 35517.

A fidelity bond is a form of insurance that covers against losses that might be incurred due to fraud or acts of dishonesty caused by specific individuals, like credit union staff or volunteers. Section 120 of the Federal Credit Union Act requires credit unions to obtain fidelity bonds regarding “every person appointed or elected” by an FCU “to any position requiring the receipt, payment or custody of money or other personal property” of the FCU. The NCUA Board is tasked by the FCU Act to establish bond forms and regulatory requirements. The requirements for fidelity bonds can be found in Part 713 of NCUA’s rules and regulations. Federally-insured state-chartered credit unions are also subject to NCUA’s fidelity bond requirements through a cross-reference at section 741.201.

The regulatory review of the fidelity bond provisions found several inconsistencies between Part 713 and approved bond forms and outdated provisions, leading to the 2018 proposal.

Board and Supervisory Committee Responsibilities

The current rule requires that the credit union’s board of directors annually review its fidelity bond and other insurance coverage to ensure it is adequate. NCUA proposed that the rule further require the board to review applications for purchase or renewal of a fidelity bond. NCUA stated “almost every commenter objected” to this requirement on the basis that it was unnecessary and too time intensive. NCUA disagreed and finalized it anyway.

In addition to review of the credit union’s board of directors on all policy purchases and renewals, the proposed rule also required review by the credit union’s supervisory committee. Commenters generally indicated this was unnecessary and pointed out that there would be significant difficulties in synchronizing review to get the bond renewal finalized. NCUA removed the requirement for supervisory committee review, stating that it believed this strikes a balance between proper oversight and the regulatory burden.

Another provision is regarding the signatory on the bond coverage. The current rule and industry practice is to have an employee sign the renewal documents. NCUA proposed to require a member of the credit union board who is not an employee of the credit union designated to execute the application for purchase or renewal, and to have that designation rotate through the board. If a signatory on the bond is aware of (or committing) fraudulent activity, the bond can be rescinded, leaving the credit union (and the NCUSIF) unprotected from losses due to insider fraud. NCUA indicated that the NCUSIF has lost more than $10 million dollars as a result fidelity bonds voided under these kinds of circumstances. The assumption underlying the proposal is that a non-employee board member is less likely to be aware of or committing fraud when executing the renewal, and therefore the risk of having the policy rescinded would be lower. NCUA finalized that provision as proposed.

Discovery Period Provisions

The proposal also included a requirement for a 2-year discovery period in the event of an involuntary liquidation. In other words, if a credit union is liquidated, NCUA (or any other liquidating agent) can have two years to identify whether insider fraud caused the loss and make a claim on the bond. Commenters indicated that a 12-month discovery window would be more in line with industry practice and less likely to cause an increase in premiums that would be passed onto credit unions, and NCUA adopted that suggested change. A parallel provision regarding a 4-month discovery period on voluntary liquidations was approved as proposed as well.

“Individual” Policies and the 2017 Legal Opinion Letter

In the final rule, NCUA explains the history of some confusion regarding “individual policies” and whether credit unions can jointly purchase policies with other federally-insured credit unions or with CUSOs. In 2017, NCUA issued a Legal Opinion Letter that rescinded some prior guidance and explained that joint coverage is permissible with a CUSO that is sufficiently related to the federally-insured credit union by ownership or composition. NCUA proposed to incorporate this guidance into the text of the regulation to improve clarity.

Bond Forms

NCUA is required to maintain a list of approved bond forms for credit unions to use, and NCUA proposed provisions to clarify the list of documents that must have NCUA Board approval and to establish a process for form expiration and continuing review. Generally, forms will expire and need to be reapproved 10 years after the form was approved.

The final rule will become effective on October 22, 2019.

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