Changing Fiduciary Responsibilities for Credit Union Directors League of Southeastern Credit Unions Annual Convention 2011
Presented by F. Palmer Williams, Esquire WILLIAMS GAUTIER Post Office Box 4128 路 Tallahassee, Florida 32315 (800) 377-3325 www.williamsgautier.com
Background Background of new NCUA Regulation § 701.4 Rulemaking began March 2010 Final rule adopted by NCUA Board in December 2010 Effective January 27, 2011, but financial literacy not required until July 27, 2011 Only applies to FCU Directors (not Supervisory Committee, other volunteers, or state chartered credit unions) NCUA issued Letter No.: 11-FCU-02 to provide general information about Directors’ duties, specifically focusing on the financial skills requirements
Purpose Purpose Clarifies the fiduciary duties and responsibilities of FCU Directors (historical first) Amends NCUA’s indemnification regulation limiting indemnification of FCU officials and employees Focus FCU Directors on their members Makes conforming changes to the standard FCU Bylaws
Key Provisions Responsibility for the general direction and control of FCU Fiduciary duties of Board of Directors Indemnification of Directors by FCU
Direction and Control of FCU Board is responsible for the general direction and control of the affairs of FCU. Control cannot be delegated. Directors can delegate the execution of the operational functions to FCU personnel, but direction and control of FCU is non-delegable. Directors are similar to trustees.
Fiduciary Duties of Board of Directors Must carry out duties in good faith, in the best interest of the membership as a whole Duty of Care: Carry out duties with the care of an ordinarily prudent person in a similar position under similar circumstances (reasonable inquiry) Duty of Loyalty: Actions must benefit the FCU membership as a whole, not the Director personally Business Judgment Rule: There is no liability for honest mistakes of judgment, provided the Director acts 1. with due care, 2. without conflict of interest, 3. in good faith, and 4. in furtherance of FCU’s purpose. No protection for violation of laws and regulations Administer the affairs of FCU fairly and impartially, without discrimination in favor of or against any particular member
Fiduciary Duties of Board of Directors Directors must be financially literate Be familiar with basic finance and accounting practices, which includes the ability to read and understand FCU’s balance sheet and income statement Ask, as appropriate, substantive questions of management and the internal and external auditors concerning the balance sheet and income statement Understand the seven major risk areas (strategic, interest rate, credit, liquidity, transaction, compliance, and reputation) and ensure the internal controls are in place for these risks
Fiduciary Duties of Board of Directors Directors must be financially literate (continued) Through experience, or must obtain training within six months of election or appointment Has FCU adopted a policy to make available the appropriate training to enhance the financial knowledge of the Directors? The policy should provide: Opportunities and funding for Directors to acquire the skills needed to evaluate FCU’s finances Education alternatives for Directors commensurate with the size and complexity of FCU Timeframes noted in the timetable for acquiring financial skills section of Letter No.: 11-FCU-02, i.e., six months from the date of election or appointment
Authority Regarding Staff and Outside Consultants by Board of Directors Board committees have authority to retain staff and outside counsel, independent accountants, financial advisors, and other outside consultants to carry out their duties and responsibilities FCU staff or any committee of the Board may be required by the Board to report directly to the Board or a committee of the Board A Director who does not have knowledge that makes reliance unwarranted is entitled to rely on information and reports of FCU staff or consultants Reliance: Director may rely on officers or employees of FCU who the Director reasonably believes to be reliable and competent for information, opinions, reports, or statements provided Board may rely upon legal counsel, independent public accountants, or other persons retained by FCU
Indemnification of Directors by Federal Credit Union FCU may not indemnify Director: For any decision on a matter significantly affecting the fundamental rights and interests of the members, and When a court determines that the Directors’ actions/decisions are grossly negligent, reckless, or amount to willful misconduct.
FCU may advance legal fees and costs, if FCU believes the Director was acting in good faith. FCU must be able to afford the advanced legal fees and costs and the Director must give written affirmation that he/she acted in good faith and will reimburse FCU if necessary. Do your FCU bylaws address Director indemnification? What coverages for liability does FCU provide you? What are the exclusions?
Bylaws Has Article XVI, Section 8, entitled “Indemnification” been amended to comply with this new NCUA Regulation? Has your Board adopted a Board Charter? What is a Board Charter and why should your Board adopt one?
Status of Legislation Proposed by the Florida Office of Financial Regulation (OFR)
ƒ How does this legislation, if passed, affect your CU and the fiduciary responsibilities of credit union Directors?
Questions?