NCUA Reverses Position on "Individual Policy" Requirements for Fidelity Bonds
NCUA's Office of General Counsel (OGC) recently issued its third formal legal opinion of 2017. Dated September 26, 2017, the opinion letter concludes that the "individual policy" requirement in NCUA's fidelity bond rule does not prohibit a credit union from purchasing a fidelity bond that covers both the credit union and its credit union service organization (CUSO), provided the credit union owns at least 50 percent of the CUSO or the CUSO qualifies as a "nominee," as defined in the letter. See, NCUA Legal Opinion 17-0959.
Notably, the opinion represents a reversal from OGC's previous interpretations of the rule. Opinion 17-0959 supersedes two previous legal opinions on this topic issued in 2004 and 2014, respectively. See, NCUA Legal Opinions 04-0744 and 14-0311.
The Federal Credit Union Act (FCU Act) directs NCUA to require fidelity bond coverage for credit union employees who handle funds or collateral. See, 12 U.S.C. §1766(h). Part 713 of NCUA's regulations, which implements that provision, describes the fidelity bond and insurance coverage required for federal credit unions (the provision is also applicable to federally insured state-chartered credit unions by §741.221).
The fidelity bond rule requires, among other things, that a bond (at a minimum) must be purchased in "an individual policy." See, 12 C.F.R. §713.3(a). According to NCUA, the "individual policy" requirement was added to the rule in 1999 to address specific concerns raised during the public comment period about jointly purchased fidelity bonds:
"[One] commenter was concerned that in [joint fidelity bond policies] a loss suffered by one or two of the joint policy holders could reduce the amount of coverage available for the other joint policy holders below the required minimum amount, i.e. two losses equal to the single loss limit of liability would exhaust the coverage available for all credit unions to zero even though some of these credit unions would not have suffered a loss. This commenter also noted a concern with the joint purchase of fidelity bond policies even when the policy purchased does not have an aggregate limit of liability. While it is true that a loss suffered by one credit union would not reduce the amount of coverage available to the other credit unions purchasing the policy, this commenter suggested that, when several credit unions purchase a policy in a group, they may not give adequate attention to providing for the specific risks faced by individual credit unions. Compromises might be made in coverage amounts that would not be made if the policy were purchased individually. In addition, this commenter argued that the joint policy holders might not adjust coverages in a timely manner because of the difficulty of doing so in a group purchasing scenario." See, 64 Fed. Reg. 28718, 28719 (May 27, 1999).
Based on these and other concerns, the NCUA Board clarified the rule to provide that a fidelity bond must be individually purchased by each credit union, but it did not define "individual policy."
In 2004, OGC was asked if a CUSO that provided management services for several credit unions could purchase a single fidelity bond with all its credit unions named as insureds. In opinion 04-0744, the office found that the joint bond was not permissible under §713.3(a), noting that "the principal reason for not permitting a credit union's bond to cover additional insureds is to ensure that the coverage of the other insureds does not conflict with or in any way dilute the individual credit union's required coverage."
In 2014, the office was asked to consider whether a credit union could include one or more CUSOs as additional insureds under its fidelity bond. Again, OGC opined that a federally insured credit union is required to obtain fidelity bond coverage under an individual policy, and could not include one or more CUSOs or other parties as additional insureds under its fidelity bond. See, NCUA Legal Opinion 14-0311. Citing the 2004 opinion and its rationale, OGC further noted that the requirement "prevents a claim against one insured from depleting coverage limits for the credit union".
In a departure from its position since 1999, OGC has now changed its opinion of the permissibility of certain joint coverage fidelity bond provisions. The reversal was precipitated by the office's recent review of bond forms approved by NCUA pursuant to §713.3(b), and the realization that several already-approved bond forms included joint coverage provisions. For example, some of the approved forms, which NCUA approved before the 1999 rule change, included nominee provisions, joint insureds provisions, and definitions of "insured" that include subsidiaries that are more than 50 percent owned by the insured. Given the "inconsistency between NCUA's approvals and [OGC's] legal opinions," the office now says that the "individual policy" requirement does not prohibit a credit union from covering its majority owned CUSO under its fidelity bond. A CUSO may also be covered if it otherwise qualifies as a nominee. However, joint coverage of non-majority-owned CUSOs or other entities continues to be impermissible. See, NCUA Legal Opinion 17-0959.
This change in position may lead to formal amendments or other revisions to the fidelity bond rule. The opinion notes that NCUA recently published a proposed regulatory reform agenda, which includes a recommendation to consider revisions to Part 713. See, 82 Fed. Reg. 39702, 39707 (Aug. 21, 2017).
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About the Author
Pamela Yu was named special counsel for compliance and research in September 2016. In this role, Yu works with NAFCU's compliance and research departments to help credit unions with a variety of compliance and operational issues.