FROM: Assistant General Counsel
Hattie M. Ulan
SUBJECT: Reconsideration of Request for Nonstandard Bylaw Amendment,
Article VIII, Section 1, [redacted]
Your May 4, 19989, Memo)
DATE: June 8, 1989
You have asked for our comments on a proposed nonstandard bylaw amendment ("the proposed amendment") to Article VII of the FCU Bylaws. The proposed amendment would alter Article VII by changing Section 1 to prohibit a former employee from serving the board of directors for a period of two years after termination of employment. You indicated that you were inclined to approve the proposed amendment for safety and soundness reasons if we do not have problems with its legality. After reconsideration, we have determined that this nonstandard bylaw amendment is inconsistent with the FCU Act.
This FCU has previously requested a nonstandard bylaw amendment to Article VIII which would have prohibited a former employee from serving on the board of directors for a period of two year following termination of such employment. The request was denied by Region [redacted] based on the concurrence of all the Regions and this Office. The FCU has now requested a change in Article VII which would achieve the same result -- a prohibition against former employees from serving on the board of directors for a period of two years following termination of their employment.
The FCU has requested that Section 1 of Article VII be changed as follows:
The board shall consist of nine (9) members, of whom shall be members of this credit union; provided however, that none shall be or have been employed by the credit union as an officer or employee for a period of at least two (2) years prior to their election. The number of directors may be changed to an odd number not fewer than 5 no [sic] more than 15 by resolution of the board. No reduction in the number of directors may be made unless corresponding vacancies exist as a result of deaths, resignations, expiration of terms of office, or other sections provided by these laws. A copy of the resolution of the board covering any increase or decrease in the number of directors shall be filed with the official copy of the bylaws of this credit union. (Nonstandard language underlined.)
The FCU states that the purpose of this proposed amendment is for the safety and soundness of the credit union and to prevent conflicts of interest. The FCU also points out that the propose amendment is the reverse of a standard amendment to Article VIII Section 7 of the B laws that provides, in part:
... no director or committee member may be a paid employee of this credit union for a minimum of two years from the date the official terminates his/her position as a director or committee member unless the employee position to be filled exists as the result of a death or disability. (See p. 11 of NCUA publication 8001A.)
The stated purpose for this standard amendment is that it:
diminishes the possibility of "insider" dealing to take advantage of a position of authority. For example, it may prevent abuses such as the board of directors discharging the manager to create a vacancy for a credit union director to be hired. (See p. 11 of NCUA publication 8001A.)
In addition to the standard bylaw amendment cited above (hereinafter referred to as the first standard bylaw amendment), there is one other standard bylaw amendment that applies to this issue. It provides that " ... no director or committee member or members of the immediate family of a director or committee member may be a paid employee of this credit union." (See p.10 NCUA publication 8001A.) This amendment (hereinafter referred as the second standard bylaw amendment), is permitted for purposes of internal control.
The FCU is correct in stating that the proposed amendment is the reverse of the first standard bylaw amendment. The first standard amendment places a limitation on a director's ability become an employee of the FCU. Conversely, the proposed nonstandard amendment places restrictions on an employee's ability to become a director.
As you are well aware, it has long been our position that the only eligibility requirements for FCU board membership are those contained in the FCU Act and the Standard FCU Bylaws. That is, as long as an individual is a member (Section 111 of the FCU Act and has not been convicted of a crime involving dishonesty or breach of trust (Section 205(d) of the FCU Act), or if they have been convicted of such a crime the NCUA Board has waived the Section 205(d) prohibition, he or she is eligible to be elected as a director. Article VI, Section 7, of the FCU Bylaws permits the board to establish a minimum age of 16 to run for the board. Article VIII, Section 6 specifies that neither management officials nor assistant management officials shall be members of the board. This amendment does not affect the eligibility to be elected to the board. If elected, management officials would have to choose between serving on the board or in a management (employee) capacity. NCUA has generally not granted nonstandard bylaws that affect eligibility to be elected to the board of directors.
The amendment sought by the FCU would prohibit an FCU employee from running for and serving as a director while he or she is working for the FCU and for two years thereafter. The second standard bylaw amendment permits an FCU to prohibit a director from being a paid employee of the FCU. NCUA has allowed this amendment since (1) it does not bar an individual from running for and serving on the board; it simply requires the individual to determine whether he or she wants to be a paid employee or a member of the board of directors; and 2) it promotes principles of sound internal control. The proposed amendment goes a step further from this standard amendment in that it continues the prohibition for two years after termination of employment. In our view, this prohibition is impermissible as it serves as an absolute, albeit temporary, bar against an FCU member running for and serving as a director during the two-year period.
The proposed amendment is distinguishable from the first standard bylaw amendment, which is a prohibition against a director serving as an employee. The first standard amendment does not limit eligibility for board membership.
We recommend you deny the request for the proposed amendment. The FCU may, of course, adopt any of the standard bylaw amendments.
As you are aware, while we do not believe that the FCU should permitted to adopt this proposed amendment, the FCU's nominating committee may consider the fact that an individual was an employee of the FCU in deciding against including the person as nominee. This is inherent in the discretion given to the nominating committee by Article VI of the Bylaws.
We apologize for any confusion we may have caused concerning this nonstandard amendment.