FCU Bylaws 2019 Update: Board of Directors
Greetings Compliance Friends!
The NAFCU Compliance Team has been tirelessly combing through NCUA’s recent final rule which makes several updates to the FCU model bylaws located in Appendix A to Part 701. NAFCU previously addressed aspects of the final rule here and here. The final rule also makes a handful of amendments to Board of Director requirements under Article VI. Notable changes include a new option to appoint a director emeritus, increased flexibility to remove board and committee members who fail to regularly attend board meetings, clarifications on the composition of the board, as well as other minor clarifications that provide flexibility to federal credit unions.
Director Emeritus and Associate Director Roles
NCUA has received requests for guidance on establishing director emeritus and associate director positions since at least 2003. These are general advisory roles whereby individuals may assist the credit union during board meetings and other tasks, but may not vote. NCUA has previously opined that the board has discretion to add such advisory roles under the Federal Credit Union Act. These opinions are now integrated into the bylaws. See e.g., NCUA Legal Opinion Letter 03-1029.
The position of Director Emeritus is for former directors who faithfully fulfilled their responsibilities as members of the board for at least a specified number of years. Many of the comments submitted to NCUA suggest that the ability to create these types of positions provides greater flexibility to federal credit unions. Adding a director emeritus to the board may also be a useful way to retain institutional knowledge during meetings. The final rule explains a director emeritus may attend and participate in board meetings, but may not vote or exercise official duties of a director. The requirements for appointing a director emeritus are located in newly created Section 10 of Article VI, and the accompanying staff commentary.
The Final Rule also adds guidance to the staff commentary on the board’s option to create associate director positions. As explained in the commentary, the purpose of these positions is to provide qualified individuals with an opportunity to gain training, knowledge and exposure to board member discussions, but without formal director responsibilities. Adding an associate director to the board can be a useful way to prepare for board vacancies, retirements, or other needs, similar to an apprenticeship. As with the director emeritus position, the final rule explains the decision to appoint an associate director is within the sole discretion of the board. Additionally, associate directors may attend and participate in board meetings, but do not have any voting rights. See, 84 Fed. Reg. 53285.
Removal of Board and Committee Members
The Final Rule also amended the language to Section 8 of Article VI regarding the option to remove a director or credit committee member for failing to attend regular meetings. Under the current language, the board may remove a director who has missed meetings for “3 consecutive months or 4 meetings within a calendar year.” The revision provides an additional option to change the latter possibility from “4 meetings within a calendar year” to “4 meetings within any 12 consecutive meetings” to account for situations where a director misses a substantial number of meetings, but does not qualify for removal because they do not all occur within the same calendar year. Removal of a director under this provision is not mandatory. This is simply an additional option which provides greater flexibility to remove those who may have stop participating in the affairs of the credit union. See, 84 Fed. Reg. 53285.
Composition of the Board
The Bylaw amendments clarify the existing restrictions on the number of employees and family members of employees who may simultaneously serve on the board. The restriction is located in section 2 of Article VI and is designed to prevent conflicts of interest amongst the board, by limiting the ability of employees and their family members to make up a majority of the board. The bylaws current state that “in no case may employees, family members, or employees and family members constitute a majority of the board.” The final rule made non-substantive changes to this section clarifying exactly which categories of voting directors may not constitute a majority of the board.
A new option has also been added to the end of section 2 granting the board the authority to control whether directors or credit committee members may become paid employees after finishing their term. The final rule also added an option to set a minimum number of years before a former director may become a paid employee. See, 84 Fed. Reg. 53285.
NCUA adopted several minor revisions and clarifications to Article VI without making further amendments to the language in the proposed rule. These revisions clarify misunderstandings, provide more flexibility to credit unions, or otherwise reflect NCUA’s general intentions:
· Revisions to “Section 6. Board responsibilities,” including 2 new options to appoint a loan review committee to review denied loans if the board has not established a credit committee;
· Clarifications to “Section 3. Terms of office”;
· Clarifications to “Section 5. Regular and special meetings”;
· Clarifications to “Section 7. Quorum”;
· Clarifications to “Section 9. Suspension of supervisory committee members”;
· Staff commentary encouraging the formation of a board of directors that reflects the credit union’s field of membership to the greatest extent possible; and
· Staff commentary encouraging federal credit unions to notify members of changes to the number of board members via the credit union’s website. This notification may be provided in a conspicuous place of the credit union’s office if the credit union does not maintain a website.
The final rule was published in the Federal Register on October 4, 2019 at 84 Fed. Reg. 353278 and becomes effective January 2, 2020. The updated bylaws may be adopted in whole or in part through a board resolution. A credit union seeking to make any word changes to the standard bylaws is required to first seek NCUA approval.
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About the Author
Reginald Watson, NCCO, was named regulatory compliance counsel in August 2017. In this role, Watson helps credit unions with a variety of compliance issues.