The National Credit Union Administration (NCUA) recently
published proposed rules intended to bar financially troubled
federally insured credit unions from providing golden parachute
payments to executives terminating employment and all federally
insured credit unions from making certain prohibited
indemnification payments.
The proposed limitations on golden parachute payments do not apply
to financially strong credit unions and also include specific
exceptions that are intended to permit payments under bona-fide
long-term deferred compensation and retirement plans established
prior to any financial troubles such as supplemental executive
retirement plans and top-hat nonqualified deferred compensation
plans. The proposed regulations would apply only to plans
implemented on or after the effective date of the final regulations
and would only apply to existing plans if and when they are renewed
or modified.
The proposed regulations also prohibit all federally insured credit
unions, regardless of their financial condition, from reimbursing
legal and similar professional expenses to an executive that has
incurred a civil monetary penalty, has received a cease and desist
order, or who has been removed from office (the prohibited
indemnification payment provision). However, there are some
situations described in the regulations under which indemnification
payments are permissible.
The NCUA states that the proposed regulations are being developed
in an effort to assure that the NCUA and the National Credit Union
Share Insurance Fund (NCUSIF) are utilizing assets as effectively
as possible. In addition, the new rules are intended to help
insured credit unions distinguish between improper golden parachute
payments and legitimate employee severance payments.
Golden Parachute Payments. The
limitations apply to "golden parachute payments." A
golden parachute payment is a payment or an agreement to make a
payment by a credit union to an executive that is contingent upon
the executive's termination of employment, and is received when
the credit union making the payment is financially troubled as
defined below. The proposed rules are designed to eliminate certain
types of payments made to executives of credit unions who may have
contributed to the financial troubles of the credit union. The
limitations do not apply to payments "pursuant to qualified
retirement plans, nonqualified bona fide deferred compensation
plans, nondiscriminatory severance pay plans, other types of common
benefits, state statutes and death benefits."
Troubled Credit Unions. The golden
parachute limitations only apply if the credit union is financially
troubled. A credit union will be considered to be troubled if it is
insolvent, undercapitalized, under conservatorship, rated CAMEL 4
or 5 (or state equivalent), or is subject to a proceeding to
terminate or suspend share insurance, or otherwise deemed to be in
a troubled condition as defined in §701.14(b)(3) and
(4).
Bona Fide Deferred Compensation Plan
Exemption. The proposed regulations indicate that
credit unions may "continue to provide legitimate deferred
compensation plans, including supplemental retirement benefits and
nonqualified deferred compensation plans, consistent with normal
business practices." In the case of a bona fide deferred
compensation plan, the plan must have been in place for at least
one year before the credit union became financially troubled. No
plan amendment made within that one year time period can increase
the benefits under the plan. Further, the executive must have a
vested right in the benefit at the time of termination, and there
cannot be any discretionary acceleration of benefits. Although not
clearly stated, the prohibition against "discretionary
acceleration" suggests that nondiscretionary accelerations of
vesting upon involuntary termination of employment without cause,
for example, under pre-established plan provisions, should be
permissible. All such plans must be properly accounted for with the
appropriate liability accrual, and permissible payments are limited
to the accrued liability.
Nondiscriminatory Severance Plan
Exemption. Severance benefits up to twelve months
salary may be provided under a "nondiscriminatory severance
plan" which applies to all employees of a credit union who
meet reasonable and customary eligibility requirements. The
definition acknowledges that benefit levels may be different for
different tiers of executives but requires that the covered group
must consist of not less than 33% of all employees.
Additional Golden Parachute Exceptions.
The proposed regulations also provide the following additional
exceptions to the golden parachute limitation:
- The proposal includes an exception to permit a troubled credit union to hire and promise golden parachute payments to competent management to assist in returning the credit union back to financial health.
- The regulations would permit severance payments of up to twelve months salary in certain circumstances involving the merger of a troubled credit union. Such a merger must be without assistance from, and at no cost to, the NCUA.
- The regulations contain a general exception permitting golden parachute payments when the NCUA Board determines such a payment is permissible. However, language in the proposed regulations state that the Board's consent or approval of a golden parachute payment in the event of a liquidation or conservatorship will not in any way bind or obligate any liquidating agent or conservator.
In each of these instances, the credit union must receive
written permission to allow such a benefit in advance of making the
payment. When applying to the NCUA for approval to utilize one of
the listed exceptions, the credit union must demonstrate that the
executive receiving the payment was not responsible for the
troubled condition of the credit union due to fraudulent acts or
omission, breach of trust or fiduciary duty, or insider abuse which
caused the credit union to become insolvent, be appointed a
conservator or liquidating agent. In addition, the credit union
must show that the executive did not violate any applicable federal
or state laws or regulations, or the criminal provisions of the
United States Code.
Prohibited Indemnification Payment. The
proposed rules also prohibit certain indemnification payments. A
prohibited indemnification payment is any payment, or agreement to
make a payment, to reimburse an executive for any civil penalty,
judgment, or other liability or legal expense resulting from an
administrative or civil action by the NCUA or state regulatory
authority that results in a final order or settlement pursuant to
the executive being assessed a civil monetary penalty, is removed
from office, or is made subject to a cease and desist order.
Summary. The proposed rules do not
eliminate a credit union's ability to utilize strategic benefit
plans to compensate executives. In fact, the proposed regulations
state that since credit unions are not able to offer equity-based
incentive compensation, given their tax-exempt nature, deferred
compensation plans remain an important tool for credit unions to
attract executive talent in a competitive marketplace. However, it
is important to be sure that benefit plans are properly designed
and administered, so as to assure that the promise made to the
executive can be delivered.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
