Compliance Blog

Feb 07, 2022
Categories: Board and Governance

NCUA Plans for Succession Plan Requirements

A few weeks ago, the National Credit Union Administration (NCUA) Board held its January 2022 monthly meeting. During the meeting, the Board approved a proposed rule that, if adopted as a final rule, would require Federal Credit Unions (FCUs) to create succession plans for filling certain positions to ensure continuity of operations. Let’s review this rule and how it would affect the credit union industry:

Which credit unions would be subject to the rule?

The proposed rule, if adopted as a final rule, would apply to all FCUs, regardless of asset size. The rule specifically notes that the rule would not apply to federally-insured state-chartered credit unions (FISCUs). However, the proposed rule notes that FISCUs may be required to comply with state-level requirements on the topic of succession planning, and the NCUA board encourages FISCUs to “undertake succession planning efforts” to the extent compatible with state law. Additionally, the proposed rule notes that it would not apply to corporate credit unions covered by Part 704 of the NCUA regulations, as those rules already address succession planning. 

What would the rule require?

The proposed rule would amend section 701.4 of the NCUA regulations, which discusses the authorities and duties of the board of directors of an FCU. If adopted as a final rule, that section would be amended to require the board of directors to “establish and adhere to” a succession plan for certain key positions. The rule would require the board to create and approve a written succession plan which must, at a minimum, identify the FCU’s key positions, the “necessary general competencies and skills for those positions” and strategies for identifying replacements for those positions when vacancies occur. For FCUs that have already addressed succession planning in some capacity, the proposed rule encourages FCU “to use already existing information in preparing their plans.”

Additionally, the rule would amend section 701.4(b)(3) – that provision currently required that directors, at the time of appointment or within six months, develop at least a “working familiarity” with finance and accounting practices such that they could successfully read and understand the FCU’s balance sheet and income statements. If the proposed rule is adopted as a final rule, that section would be amended to add that directors would also be required to develop a “working familiarity” with the FCU’s succession plan. The rule would require that FCUs develop training on the succession plan to accomplish that, though the proposed rule states that it “does not mandate the contents of training to meet this requirement.” Finally, the rule would require the board of directors to develop a schedule to review the succession plan at least annually.

The rule also states that NCUA examinations “would confirm the existence of a succession plan and training.” However, aside from confirming their existence, NCUA contemplates leaving the specific details of the succession plan and training up to the individual FCU, stating: “[t]he examination program will defer to a credit union’s self-assessment of its succession planning needs and the information contained in the plan, so long as its plan addresses the elements required by the rule.”

What positions should be covered by the succession plan?

The proposed rule would require a succession plan that addresses how to fill vacancies for the following positions:

“officers of the board, management officials, executive committee members, supervisory committee members, and (where provided for in the bylaws) the members of the credit committee.”

Why did NCUA propose this rule?

According to the preamble to the proposed rule, NCUA is seeking to impose the succession plan requirement due to the decline in the number of credit unions as a result of mergers and consolidations. According to the preamble, NCUA analysis found that poor succession planning was a primary or secondary reason for about 32 percent of credit union consolidations. NCUA states that succession planning is “one of the most critical” challenges that an FCU’s board must deal with, and it has become increasingly relevant as the baby boomer generation reaches retirement age.

In addition to those considerations, NCUA highlights the benefits of proper succession planning, such as:

  • “Minimizing service disruptions during management transitions;
  • Ensuring organizational viability over the long term;
  • Clarifying the employee development path;
  • Developing current talent;
  • Creating opportunities for employees; and
  • Bringing in new ideas from outside hires.”

What comes next?

NCUA is accepting comments on the proposed rule. According to the Federal Register publication, the comment period will close on April 4, 2022.

NAFCU’s regulatory affairs team will solicit feedback from NAFCU members on this proposal in the near future.  Additionally, the Compliance Blog will continue to update readers on this proposal as it progresses through the rulemaking process.

About the Author

Nick St. John, NCCO, NCBSO, Director of Regulatory Compliance, NAFCU

Nick St. John, Regulatory Compliance Counsel, NAFCUNick St. John, was named Director of Regulatory Compliance in August 2022. In this role, Nick helps credit unions with a variety of compliance issues.

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