NCUA Proposed Rules on Fiduciary Duties Clarify States’ Laws

The following is an article reprinted with permission from the upcoming Fall 2010 edition of The WWR Letter:

By: Matt Young, Associate

Whether an individual serves on a board of directors for a community theater group, homeowner’s association or other not-for-profit organization such as a credit union, the law in every state imposes fiduciary duties upon these board of directors in the same manner it imposes these duties on the chairman of a Fortune 500 company. Fiduciary duties more broadly refer to two duties: the duty of care and the duty of loyalty. The duty of care standard requires that directors undertake their role diligently, staying informed on the organization’s purposes, goals and activities as well as regularly attending meetings in the same manner as an “ordinarily prudent person.” The duty of loyalty requires that a director avoid conflicts of interest as well as using the officer’s position to further his/her personal interests above those of the organization.

The National Credit Union Administration (“NCUA”) has adopted a proposed rule to clarify these fiduciary duties and provide a uniform fiduciary standard for federal credit union directors. As part of this rule, directors will be required to have or obtain a basic understanding of finance and accounting principles. Moreover, under this proposal, federal credit unions would not be permitted to indemnify its directors for grossly negligent, reckless, or willful misconduct that affect the basic rights of its members. In response to the proposed additions, the Credit Union National Association (“CUNA”) called the prohibition on director indemnification unnecessary and expressed concern that such a prohibition could make it difficult for credit unions to find qualified volunteers to serve on the board. CUNA, however, supported the requirement that all board members have a basic understanding of the finances and balance sheet of the credit unions
they serve.

Despite concerns with these changes, the proposal only reinforces common law requirements that have been codified by a majority of states and offers greater clarity as to directors’ responsibilities. For example, as part of the duty of care as a member of a credit union board of directors, you must be diligent in reviewing the credit union’s affairs. As a financial institution, having a basic understanding of finance and balance sheets is a prerequisite to making sound decisions on behalf of a credit union. After all, an ordinarily prudent person would gain this basic understanding!

This requirement does not require directors to be experts. Similar to most state laws under the proposed rule, directors may rely on attorneys, accountants, financial advisors and other consultants, reasonably believed to be reliable, in analyzing and making decisions in certain matters. The prohibition of indemnification under the proposed rule does not change the landscape of serving as a member of a credit union board of directors. Importantly, this prohibition is limited to grossly negligent, reckless or willful conduct. As it stands in most states,
indemnification for such acts may be limited anyway. Grossly negligent, reckless and willful acts involves egregious actions such as terminating deposit insurance coverage or engaging in acts of self dealing. In these scenarios, the credit union would not be indemnifying its Board and typically, the credit union’s bond coverage for director and officer liability would contain exclusions for such activities. Accordingly, the NCUA’s proposed rules concerning fiduciary responsibility clarifies rather than changes or adds requirements relating to a director’s duties and responsibilities. Credit union directors should view the NCUA’s proposal as a tool to further understand their existing obligation under state law

Matthew Young is an Associate in Consumer Collections; Corporate & Financial Services and Credit Union Groups and is based in the Brooklyn Heights office. Matt can be reached at (216) 739-5726 or myoung@weltman.com.

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