Compliance Blog

Posted by Anthony Demangone

Through the years, I have learned that some read regulations and guidance documents through a lens that serves their interests. For instance, they focus on the one paragraph of a document that seemingly supports their position, while ignoring many provisions that do not.  I've come to believe that one of best qualities a compliance officer can have is the intestinal fortitude to look an executive or board member in the eyes, and say the following with certainty and professionalism:

I'm sorry, but I don't believe the regulation says that.

I had one of those moments recently with a compliance officer from a federal credit union.  It seems that one director from the credit union was calling staff members directly to check in on certain loan applications, certain projects, and the like. The director said that the new NCUA regulation concerning fiduciary duties said that the director could do that, and in fact, encouraged directors to bypass the CEO to deal with staff whenever they wanted. 

Let's say it together.  I'm sorry, but I don't believe the regulation says that.

The director perhaps read a news article that casually talked about the regulation.  Or perhaps the director did skim the new rule.  In any event, the regulation doesn't exactly support the director's argument.

Here's the section of the regulation that the director pointed to:

(2) Federal credit union staff providing services to the board of directors or any committee of the board under paragraph (c)(1) of this section may be required by the board of directors or such committee to report directly to the board or such committee, as appropriate.

I'll just make a few points on this text.  There's no mention of "director" in that paragraph.  Rather, this paragraph talks of the board's right to require staff to report to the board, or a committee of the board, as appropriate.  A director, by himself or herself, has little to no power. It is only as part of a board that the director can vote on matters, assuming a quorum is present.  So, a board, or a committee of a board, would have that right - but, again, this paragraph does not talk about a director's individual right. 

Did NCUA discuss this issue elsewhere? Yes, they did.  When NCUA issues a final rule, they also publish a "discussion" section that goes into detail regarding what they were thinking when they crafted certain provisions of a regulation. Here's what they said about the paragraph that we're discussing today.

Some commenters opposed the provision requiring FCU employees (staff) to report directly to the board of directors or committees of the board, stating this would undermine management’s authority over the employees of the credit union. Another commenter questioned whether committees other than the supervisory committee had the authority to require employees to report directly to the committee. One commenter argued that direct contact between the board of directors and the credit union’s employees would put employees at the beck and call of the board and could interfere with the employees’ regular duties.

The NCUA Board disagrees. An FCU’s board of directors cannot permit the chief executive officer (CEO) to screen all the board’s information sources.  While the board of directors should not attempt to bypass the CEO in giving direction to management and employees, the board is free to ask any manager, employee, or independent contractor to provide the board and its committees information directly and not through the filter of the CEO. The NCUA’s Office of General Counsel has previously opined that board members must be free to gather information from any source in the credit union to perform their board duties. OGC Op. No.03–0763 (Sept. 29, 2003).  (Emphasis added.)

To summarize, a federal credit union's board does have the right to gain direct access to information from credit union employees.  And they have that right, as appropriate, as needed to perform their duties. But NCUA went on to clarify that boards should not bypass the CEO to direct or manage the credit union's employees.  That's the CEO's job. 

Now, I believe that is what the regulation states!  (As always, though, I'm happy to hear comments and feedback, especially on board governance issues.)

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Here are some tasty compliance tid-bits.

• The repeal of a new and controversial 1099-MISC reporting requirement is nearly here.
• Episode 57 of "Current Issues in Credit Unions" is fresh out of the oven.