Nonstandard Bylaw Amendment

GC/JT:bhs
SSIC 3700

[redacted]

FROM: Acting Assistant General Counsel Hattie M. Ulan

SUBJECT: Nonstandard Bylaw Amendment
[redacted]
(Your January 4, 1988 Memo)

DATE: February 7, 1989

You have asked for our comments on a proposed nonstandard amendment submitted to you by the [redacted] ("FCU"). The proposed bylaw provides for indemnification of FCU officials and employees. It is not clear to us whether the FCU has elected to indemnify its officials and employees pursuant to [redacted] law or whether it is establishing its own standards for indemnification. Since the intent of the bylaw is unclear, we recommend that it be denied and that the FCU be encouraged to develop a bylaw similar to that described herein.

ANALYSIS

Section 701.33(c) of NCUA's Rules and Regulations authorizes an FCU to indemnify its officials and employees. Section 701.33(c)(2) provides:

Indemnification shall be consistent either with the standards applicable to credit unions generally in the state in which the principal or home office of the credit union is located, or with the relevant provisions of the Model Business Corporation Act. A Federal credit union that elects to provide indemnification shall specify whether it will follow the relevant state law or the Model Business Corporation Act. Indemnification and the method of indemnification may be provided for by charter or bylaw amendment, contract or board resolution, consistent with the procedural requirements of the applicable state law or the Model Business Corporation Act, as specified. A charter or bylaw amendment must be approved by the National Credit Union Administration.

The proposed bylaw incorporates some provisions of Nevada corporation law (Section 78.751 of the Nevada Statutes). it also contains the somewhat confusing statement that "the indemnification authorized pursuant to this paragraph is in addition to any indemnification rights provided for [redacted] directors, officers and committee members by law. We are uncertain as to whether the FCU is in fact making a determination to follow the indemnification provisions provided by Nevada law or if it is creating its own standards of indemnification. It is also unclear whether Section 78.751 of the Nevada Statutes applies to officials and employees of Nevada chartered credit unions. We suggest that in the indemnification area FCU's be encouraged to adopt a bylaw that contains only their decision to indemnify and the method of indemnification elected (i.e., pursuant to state law or to the Model Business Corporation Act) rather than attempting to incorporate substantive indemnification provisions in the language of the bylaw. FCU's should then attach a copy of the state law or Model Business Corporation Act provisions to its bylaw so that the substantive indemnification provisions are readily available and understood. We are attaching a memo that discusses an indemnification bylaw that was recently concurred with by this Office. We recommend that the FCU adopt a similar bylaw.