NCUA’s General Counsel On Directors’ Number One Responsibility

Fiduciary Duties “Are Properly Owed to People, and Not to Entities”

Credit union leaders often state priorities for their financial institution’s future but not how members will benefit. The following is NCUA’s view of directors’ principal fiduciary duty.

This analysis was in response to a state league CEO’s concerns about a proposed rule on directors’ responsibilities. NCUA General Counsel Bob Fenner wrote on March 15, 2011 as follows:

At the very beginning of your letter, you do not state that you are writing to NCUA on behalf of credit unions. Instead, you and your fellow authors state that “[a]s associations representing 18,280,456 members in nine states . . . we want to call your attention to several key issues.

. . . .” I presume that by “members” you mean the people who are members of the credit unions in your states, and I commend you for attempting to look beyond credit unions as entities and through to the people that credit unions were structured to serve. As our rulemakings make clear, the directors of federal credit unions must also represent the interests of the members of their credit unions.

The “Interests of Members”

I do not believe that a rulemaking clarifying that FCU directors owe their fiduciary duties to the membership of the FCU is a difficult concept or one that should surprise or concern directors. Section 701.4 is intended to make clear that the law with regard to federal credit unions is in direct alignment with the credit union philosophy; that is, that credit unions exist to serve their members; that credit unions are about people, not profits; and that the members own their credit unions. As the NCUA Board stated back in 2006 . . . when making important decisions affecting the FCU, directors should ask themselves the following questions:

What financial services do my members need and want? How do I know this? [And] [w]ill my decision today help the credit union provide these member services in a quality manner and at low cost to the members?

Fiduciary Duties Are Owed to Members

Your letter, however, states that “[i]t is our position that the director’s duty should be to the credit union as an organization, and not to the members of the credit union.” I disagree. As the NCUA Board has discussed at length in rulemaking preambles going back to 2006, for federal credit unions the law (as determined by the FCU Act) and philosophy align: the directors’ duties flow primarily to the membership. Id. at 77154-55.

As a practical matter, however, we believe that in the vast majority of situations what is good for the credit union will also be good for the members. See 75 Fed. Reg. 15574, 15575 (fn. 5)(March 29, 2010). . .

 . . .we also believe that fiduciary duties are properly owed to people, and not to entities. FCU directors must understand the people who are affected by the directors’ decisions and identify which people the directors are serving.

The danger is that, if the directors are allowed to focus only on the credit union when making a decision – without regard to how the members are affected – the directors can justify making self- serving decisions, or decisions that serve primarily the FCU’s insiders, under the guise that the directors are simply doing what is best for the credit union.

Ed. (emphasis added)

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