Dr. Walter Polner, Director of Research
ASCU
P.O. Box 5488
Madison, Wisconsin 53705
You have asked several questions in connection with legislation
currently pending before Congress, namely, HR1151. Particularly,
you have asked for examples of credit union officials financially
benefiting when credit unions have converted to a stock form financial
institution. You have also asked who suggested Section 401 of
the legislation which places restrictions on insiders benefiting
from such conversions. We are not aware of any credit union official
receiving financial benefits as a result of a conversion to stock
form. We believe this is primarily due to NCUA's regulatory ban
on insider preferences as well as similar restrictions by the
Office of Thrift Supervision (OTS) and the Federal Deposit Insurance
Corporation (FDIC).
NCUA issued a final regulation on March 8, 1995 that prohibits
officials from receiving financial benefits of a conversion for
"at least two years after the effective date of the transaction."
12 C.F.R. §708a.2(c). The prohibition on insider preferences
was supported by many of the public commenters and opposed by
none. NCUA was not the only regulator at the time addressing
conversion abuses.
In 1994, OTS, concerned with "management . . . undertaking
conversions for reasons other than the need for capital,"
issued an interim and then a final rule limiting such transactions.
59 Fed. Reg. 22725 (1994); 59 Fed. Reg. 44615 (1994). FDIC found
it "necessary and appropriate to adopt regulations similar
to OTS Regulations" restricting management conversion benefits.
59 Fed. Reg. 30318 (1994).
The issuance of stock options at the conversion price, rather
than at the aftermarket price, which in recent years has been
substantially higher than the conversion price, creates the impression
that insider enrichment may be the main reason for the conversion.
59 Fed. Reg. at 30320. Given the experiences and concerns of
OTS and FDIC, NCUA adopted similar restrictions.
Any questions regarding HR 1151 should be directed to the respective
Banking Committees in the House and Senate as well as credit union
and bank trade organizations.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/RSS:bhs
SSIC 3500
98-0530A