Fidelity Bonds
| Published date | 24 July 2019 |
| Citation | 84 FR 35517 |
| Record Number | 2019-15709 |
| Section | Rules and Regulations |
| Court | National Credit Union Administration |
Federal Register, Volume 84 Issue 142 (Wednesday, July 24, 2019)
[Federal Register Volume 84, Number 142 (Wednesday, July 24, 2019)]
[Rules and Regulations]
[Pages 35517-35525]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15709]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 704 and 713
RIN 3133-AE87
Fidelity Bonds
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: The NCUA Board (Board) is finalizing a rule that amends its
regulations regarding fidelity bonds for corporate credit unions and
natural person credit unions. The rule strengthens a board of
directors' oversight of a federally insured credit union's (FICU)
fidelity bond coverage; ensures an adequate period to discover and file
fidelity bond claims following a FICU's liquidation; codifies a 2017
NCUA Office of General Counsel legal opinion that permits a natural
person credit union's fidelity bond to include coverage for certain
credit union service organizations (CUSOs); and addresses Board
approval of bond forms.
DATES: The final rule is effective October 22, 2019.
FOR FURTHER INFORMATION CONTACT: Rob Robine, Trial Attorney, or Rachel
Ackmann, Staff Attorney, Office of General Counsel, 1775 Duke Street,
Alexandria, VA 22314-3428 or telephone (703) 548-2601.
SUPPLEMENTARY INFORMATION
I. Introduction
II. Proposed Rule
III. Final Rule and Discussion of Comments
IV. Regulatory Procedures
I. Introduction
a. Background and Legal Authority
The Federal Credit Union Act (FCU Act) requires that certain credit
union employees and appointed and elected officials be subject to
fidelity bond coverage.\1\ The FCU Act directs the Board to promulgate
regulations concerning both the amount and character of fidelity bond
coverage and to approve bond forms.\2\ The pertinent portion of the FCU
Act provides that the Board is directed to require that every person
appointed or elected by any Federal credit union to any position
requiring the receipt, payment, or custody of money or other personal
property owned by a Federal credit union or in its custody or control
as collateral or otherwise, give bond in a corporate surety company
holding a certificate of authority from the Secretary of Treasury as an
acceptable surety on Federal bonds. Any such bond or bonds shall be in
a form approved by the Board with a view to providing surety coverage
to the Federal credit union with reference to loss by reason of acts of
fraud or dishonesty including forgery, theft, embezzlement, wrongful
abstraction, or misapplication on the part of the person, directly or
through connivance with others, and such other surety coverages as the
Board may determine to be reasonably appropriate. Any such bond or
bonds shall be in such an amount in relation to the assets of the
Federal credit union as the Board may from time to time prescribe by
regulation.\3\
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\1\ 12 U.S.C. 1761a, 1761b, and 1766.
\2\ The FCU Act also grants the Board the powers to require such
other surety coverage as the Board may determine to be reasonably
appropriate; to approve a blanket bond in lieu of individual bonds;
and to approve bond coverage in excess of minimum surety coverage.
\3\ 12 U.S.C. 1766(h).
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Parts 704 and 713 of the NCUA's regulations implement the
requirements of the FCU Act regarding fidelity bonds.\4\ Part 713
applies to natural person credit unions and Part 704 applies to
corporate credit unions. The parts establish the requirements for a
fidelity bond, the acceptable bond forms, and the minimum permissible
coverage. Both parts require a FICU's board of directors to review
annually its fidelity bond coverage to ensure it is adequate in
relation to the potential risks facing the FICU and the minimum
requirements set by the Board.
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\4\ 12 CFR pts. 704 and 713.
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Part 704 was recently revised to amend the provision that
determines the maximum amount a corporate credit union may pay for a
deductible or a covered loss before the fidelity bond insurer makes a
payment. The NCUA restricts the deductible a corporate credit union may
pay to limit the potential losses to it if there is a covered claim.
The maximum deductible allowed is a percentage of a corporate credit
union's capital based on its leverage ratio. For example, if a
corporate credit union has a greater than 2.25 percent leverage ratio
then it may have a maximum deductible that is 15 percent of its tier 1
capital. The recent final rule updated this provision to reference tier
1 capital instead of core capital.\5\ Part 713, however, has not been
substantively revised since 2005, when the NCUA issued a final rule
modernizing it.\6\
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\5\ 80 FR 25932 (May 6, 2015).
\6\ 70 FR 61713 (Oct. 26, 2005). In 2012, the NCUA revised Part
713 by removing reference to the agency's former Regulatory
Flexibility Program. 77 FR 74112 (Dec. 13, 2012).
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b. Regulatory Reform Task Force
In August 2017, the Board published and sought comment on the
NCUA's regulatory reform agenda (Agenda).\7\ The Agenda identifies
those regulations the Board intends to amend or repeal because they are
outdated, ineffective, or excessively burdensome. This is consistent
with the spirit of Executive Order 13777.\8\ Although the NCUA, as an
independent agency, is not required to comply with Executive Order
13777, the Board has chosen to comply with it in spirit and has
reviewed all of the NCUA's regulations to that end. One of the items in
the Agenda is related to the NCUA's regulations on fidelity bonds. The
Agenda supports exploring ways to implement the requirements of the FCU
Act related to fidelity bonds in the least costly way possible. The
Agenda further notes that while the FCU Act mandates fidelity bond
coverage, the NCUA's objective should be to allow a credit union to
make a business decision based on its own circumstances and needs. This
would effectively reduce the NCUA's involvement in a credit union's
operational decisions while remaining consistent with the FCU Act.
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\7\ 82 FR 39702 (Aug. 22, 2017).
\8\ E.O. 13777 (Feb. 24, 2017).
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c. The 2017 Legal Opinion
As discussed above, part 713 establishes the minimum requirements
for a fidelity bond for a natural person credit union. One such
requirement under part 713 is that fidelity bonds be
[[Page 35518]]
purchased in an ``individual policy.'' \9\ The ``individual policy''
provision was intended to prevent multiple FICUs from being insured
under one fidelity bond policy. The Board prohibited such joint
coverage because the loss suffered by one or two of the joint
policyholders could reduce the amount of available coverage for the
other policyholders to below the required minimum amount.\10\ Before
2017, the NCUA's Office of General Counsel (OGC) had issued legal
opinions stating that a FICU may not include one or more CUSOs or other
parties as additional insureds under its fidelity bond because of the
``individual policy'' limitation.\11\ It came to OGC's attention,
however, that some bond issuers may have been interpreting their
policies to permit the issuance of bonds that covered FICUs and their
CUSOs, despite OGC's opinions. This prompted OGC to review the
regulation and approved bond forms. As a result of that review, OGC
issued another legal opinion in September 2017 that rescinded and
replaced all previous legal opinions that addressed the ``individual
policy'' requirement.\12\ The 2017 opinion concluded that the
``individual policy'' requirement of Sec. 713.3(a) of the NCUA's
regulations generally prohibits joint coverage under fidelity bonds,
but does not prohibit a FICU from purchasing a fidelity bond that
covers both it and certain of its CUSOs, as discussed more fully below.
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\9\ 12 CFR 713.3(a). There is not an analogous provision for
corporate credit unions under Part 704, therefore, the legal opinion
relates only to fidelity bonds for natural person FICUs under Part
713.
\10\ 64 FR 28178 (May 27, 1999).
\11\ OGC Legal Op. 14-0311 (Mar. 21, 2014); see also OGC Legal
Op. 04-0744 (Sept. 21, 2004).
\12\ OGC Legal Op. 17-0959 (Sept. 26, 2017).
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II. Proposed Rule
OGC's fidelity bond review extended beyond the issue of joint
coverage and revealed several inconsistencies between part 713 and
approved bond forms. The review also revealed several outdated
provisions. In November 2018, the NCUA published a notice of proposed
rulemaking (the proposed rule) to update its fidelity bond regulation
to correct these problems, ensure the safe and sound operation of
FICUs, and protect the National Credit Union Share Insurance Fund
(NCUSIF).\13\ The comment period closed on January 22, 2019.
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\13\ 83 FR 59318 (Nov. 23, 2018).
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III. Final Rule and Discussion of Comments
The NCUA received 26 comment letters on its November 2018 proposed
rule. These comments were received from credit unions, including
corporate credit unions, credit union leagues and trade associations,
an association of state credit union supervisors, an insurance company,
and two insurance associations. In general, many of the commenters
supported the stated goal, to implement fidelity bond requirements in a
cost-effective manner. All of the commenters, however, expressed
concerns about specific aspects of the proposal. Most commenters
believed that the proposed rule resulted in unnecessary burden and
increased costs without substantially improving the adequacy of FICU
fidelity bond coverage. Some commenters also expressed concerns that
the rule reduced the number of insurance companies providing fidelity
bonds, which would reduce FICUs' ability to negotiate among providers.
In response to the comments received, the Board has made several
changes to the final rule. The specific details of the final rule,
including changes as a result of the comments received, are discussed
below.
Part 713
In general, part 713 applies to all federally insured natural
person credit unions and provides the fidelity bond requirements for
them. Changes to the specific subsections of part 713 are discussed
below.
Sec. 713.1 What is the scope of this section?
The proposed rule retained most of the current Sec. 713.1 without
change, with the following exceptions. The proposed rule added the
words ``federally insured'' before the words ``credit union'' to more
precisely describe which credit unions are subject to the section. The
current rule uses the term ``credit union'' and ``federal credit
union'' interchangeably to mean ``federal credit union.'' As discussed
in the background section, the requirements in part 713 are applicable
to both federal credit unions and federally insured, state-chartered
credit unions (FISCUs).\14\ For clarity, the proposed rule cross-
referenced the requirement in part 741 that FISCUs must comply with
Part 713 and referred to FICUs throughout the rule instead of federal
credit unions.
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\14\ Part 713 is applicable to all FISCUs through Sec. 741.201
of the NCUA's regulations, which states that any credit union which
makes application for share insurance must have the minimum fidelity
bond coverage stated in part 713 in order for its application to be
approved and for such share insurance coverage to continue.
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One commenter questioned whether the proposed rule should be
applicable to all FISCUs. FISCUs' fidelity bond requirements are
applied through part 741, which states that ``[a]ny credit union which
makes application for insurance . . . must possess the minimum fidelity
bond coverage stated in part 713 . . . .'' The commenter stated that
the positioning of the language referring to minimum coverage means
that only the amount of bond coverage, and not the other requirements
in part 713, apply to FISCUs. The commenter stated that the NCUA should
invite specific comment on whether all of Part 713 should apply to
FISCUs. The commenter also does not believe it is necessary for the
NCUA to impose detailed provisions on FISCUs' fidelity bonds.
The Board has considered the comment and disagrees that part 741
applies to only the amount of bond coverage. Part 741 does not use the
term ``amount'' and instead uses the term ``minimum coverage.'' The
Board believes that the reasonable and plain understanding of the term
``coverage'' includes factors such as the amount of insurance, the
claims covered by the insurance, and other operational considerations
that ensure the coverage is adequate. The Board's position is further
supported by the fact it has been the Board's public and longstanding
position that the entirety of part 713 applies to FISCUs. The commenter
even noted that prior NCUA discussions of part 713 were directed to all
FISCUs. Therefore, the Board is finalizing this provision as proposed.
The final rule also includes a cross-reference for corporate credit
unions and states that corporate credit unions must comply with Sec.
704.18 instead of part 713.
Sec. 713.2 What are the responsibilities of a federally insured credit
union's board of directors under this section?
2(a)
The proposed rule amended current Sec. 713.2 by dividing the
section into two subparagraphs. Current Sec. 713.2 became paragraph
(a). The proposed rule retained most of the current Sec. 713.2 without
change, with the following exception. For consistency with the rest of
part 713, the term ``Federal credit union'' was revised to ``federally
insured credit union.'' The Board did not receive any comment on this
provision and is finalizing it as proposed.
[[Page 35519]]
2(b)
The proposed rule added a new paragraph (b) to Sec. 713.2.
Proposed paragraph (b) increased a board of directors' oversight
responsibility of its FICU's fidelity bond coverage. Specifically, the
proposed rule required a FICU's board, and, if applicable, a FICU's
supervisory committee, to review all applications for purchase or
renewal of bond coverage and to pass a board resolution approving the
purchase or renewal. The proposed rule also required a FICU's board to
delegate one board member, who is not an employee of the FICU, to sign
the attestation for bond purchase or renewal. This proposal prohibited
the same board member from signing the attestation for renewal in
consecutive years.
The Board notes the current rule already requires a FICU's board to
annually review its fidelity bond and other insurance coverage to
ensure it is adequate. The proposed rule took that review a step
further and required a FICU's board, and, if applicable, its
supervisory committee, to review all applications for purchase or
renewal of fidelity bond coverage. The Board believed this change
helped ensure the board is addressing the adequacy of the coverage at
all stages, rather than at an annual point in time that may be
retrospective, and require additional steps by the FICU to remedy a
deficiency.
Almost every commenter objected to the requirement for additional
board review and stated that the current requirement for an annual
review of the adequacy of coverage is sufficient. Most commenters
stated that bond renewal is a highly involved, time-intensive, and
technical process and that it is more appropriate for a board of
directors to focus on broad strategic goals. One commenter stated that
a bond renewal usually takes about one year to complete. A few
commenters stated that the risk of loss from dishonest employees is
better addressed through NCUA's examination of a credit union's
internal controls. In contrast, one insurance company supported the
proposed requirement as adding an important layer of review.
The Board continues to believe that an ongoing review by a FICU's
board of directors is necessary to ensure the adequacy of fidelity bond
coverage. The Board agrees with commenters that adequate internal
controls are a fundamental part of ensuring a FICU's safety and
soundness. The Board, however, also believes that adequate fidelity
bond coverage complements sound internal controls. Therefore, the Board
is finalizing a board's requirement to review all applications for
purchase or renewal of fidelity bond coverage as proposed.
The proposed rule required a FICU's supervisory committee to
conduct a review of all applications for purchase or renewal of
fidelity bond coverage, in addition to the FICU's board. Several
commenters objected to the proposed requirement that both the board of
directors and the supervisory committee were responsible for reviewing
renewal documents. Commenters generally believed that the dual review
is unnecessary. A few commenters noted that many supervisory committees
do not meet as frequently as boards of directors and it would be very
difficult to synchronize their review given the back-and-forth
negotiating with the insurance company that usually occurs during the
renewal process. After reviewing the comments, the Board has removed
the requirement for the supervisory committee to review fidelity bond
purchases or renewals. The Board believes that removing the requirement
for supervisory committee review balances the Board's concern for
adequate fidelity bond oversight with concerns about regulatory burden.
As noted, the proposed rule also required a FICU's board to, after
conducting its review, pass a resolution approving the purchase or
renewal of fidelity coverage and designating a member of the board, who
is not an employee of the FICU, to sign applications for purchase, bond
renewals, and any accompanying attestations. Also as mentioned, the
proposed rule required that the member of the board acting as signatory
rotate each time the FICU purchases or renews fidelity coverage.
Commenters were almost universally against this proposed requirement.
A few commenters stated that some insurance companies require an
employee of the credit union to sign the renewal documents. The Board
is aware that under the current rule it is industry practice for
employees to generally sign renewal documents. The final rule, however,
requires that a non-employee sign the renewal documents. This policy
may necessitate changes to certain fidelity bond forms.
One commenter thought a more effective solution would be to mandate
the inclusion of a clause in the fidelity bond contract that states the
signatory's fraud is not imputed to the company and, therefore, the
signatory's fraud cannot serve as a basis for the insurer to rescind
coverage. The Board has not adopted this suggestion. The Board is
concerned that this level of specificity in a fidelity bond contract,
along with the fact this would be a significant departure from current
industry practice, would reduce the number of fidelity bond insurance
providers. A robust market for fidelity bond insurance ensures each
FICU has options when determining appropriate insurance coverage. The
Board believes, however, that if an insurer offers such a bond form it
would likely address the Board's concerns regarding rescinded fidelity
bond coverage and may alleviate the need for the board of directors to
review each renewal and for a director to sign the renewal.
Most other comments focused on the potential burden of this
provision. Some commenters expressed concern that this requirement
could negatively affect a FICU's ability to recruit volunteer board
members by increasing the perceived personal liability of the board
member who is designated to sign the renewal. Other commenters thought
insurance companies would either increase costs or modify contracts in
response to the proposed rule. One commenter stated that the proposal
is problematic due to the amount of time, bandwidth, and knowledge that
is necessary to be a signatory, and believed it would require the board
member to have a background in insurance. In contrast, one insurance
company expressed support for this requirement, however, the company
stated that the NCUA should impose additional requirements to ensure
the signatory has done adequate due diligence before signing the bond
renewal.
The Board is finalizing this provision as proposed. The Board has
not made any changes to this proposed provision because the Board
believes it is necessary to prevent losses to the NCUSIF due to
rescinded coverage. The underlying purpose of these requirements is to
address the issue of rescission of fidelity bond coverage when the
signatory to the application to purchase or renew coverage is
knowledgeable of fraudulent activity. If the signatory to the
application for purchase or renewal is knowledgeable of fraudulent
activity, the bond issuer might void the policy and not make a payout
when losses are discovered. The NCUA believes that a non-employee board
member, who would not be involved in the day-to-day operations of a
FICU, is less likely to be responsible for a fraudulent activity than
an employee. The NCUA also believes that rotating signatories reduces
the potential for the signatory to be knowledgeable of the fraudulent
activity.
[[Page 35520]]
In recent years, the NCUSIF has sustained increased losses due to
voided fidelity bond coverage. Before 2010, bond rescission was not a
material concern for the NCUA. Since 2010, however, the NCUA has had at
least three claims denied due to rescinded fidelity bond coverage and
the NCUA is concerned that the frequency of rescinded coverage will
continue to increase. Between 2010 and May 2019, the NCUSIF has already
lost in excess of $10 million from fidelity bonds that were voided due
to the signatory being aware of fraudulent activities. Litigation
related to denied claims is ongoing and may result in additional losses
to the NCUA. The Board also notes that this requirement is also
advantageous to individual FICUs, as this will help prevent them from
losing coverage in cases not involving involuntary liquidation.
Finally, the Board believes the final rule presents only a minimal
increase in regulatory burden as the FICU's board is already required
to annually review its fidelity bond coverage, but meaningfully
mitigates the risk to the NCUSIF associated with fidelity bond coverage
rescission.
713.3 What bond coverage must a federally insured credit union have?
The proposed rule amended current Sec. 713.3 by renumbering and
revising the section. Current Sec. 713.3 became paragraph (a), current
paragraphs (a) and (b) were renumbered as paragraphs (a)(1) and (2),
and two new subparagraphs were added as (a)(3) and (4). Finally, a new
paragraph (b) also was added.
3(a)(2)
Current paragraph (b) of Sec. 713.3 states that, at a minimum, a
FICU's fidelity bond coverage must include fidelity bonds that cover
fraud and dishonesty. The proposed rule removed the redundant phrase
``[i]nclude fidelity bonds that'' in current paragraph (b). The Board
did not receive any comment on this section and is finalizing this
provision as proposed. The final rule reads ``At a minimum, your bond
coverage must: . . . Cover fraud and dishonesty by all employees,
directors, officers, supervisory committee members, and credit
committee members;''.
3(a)(3)
The proposed rule added a new paragraph (a)(3) to Sec. 713.3.
Proposed paragraph (a)(3) required a FICU to have fidelity bond
coverage that includes an option for the liquidating agent to purchase
coverage that extends the discovery period, the period to discover and
file a claim, for at least two years after liquidation.\15\ Most
commenters objected to the proposed two-year discovery period following
an involuntary liquidation. Most commenters cited the potential for
increased premiums as the reason for their objection. In the proposed
rule, the NCUA stated its belief that any additional cost of this
provision would likely be covered by the liquidating agent as the
liquidating agent would pay the fee for an extended discovery period.
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\15\ The Board believes that an extended discovery period is
important for protecting the NCUSIF as fidelity bonds mitigate the
risk presented by fraudulent and other dishonest acts to the NCUSIF
and have served as a significant source of recovery in liquidations
caused by fraud.
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Commenters, however, did not believe that the liquidating agent
would bear all of the additional cost of the two-year discovery window
because state insurance regulations cap the amount that an insurer can
charge for an extended discovery period. Several commenters expressed
concern that the NCUSIF savings would not justify the added cost to all
FICUs due to the limited number of FICUs that are involuntarily
liquidated. Several commenters requested that the NCUA undergo a cost-
benefit analysis. One commenter stated that the NCUA did not present
any evidence that the current policy of providing notice does not work,
just that it lacks legal certainty. In contrast, two credit union
commenters supported the extended discovery period. In addition, two
commenters associated with the insurance industry suggested a 12-month
discovery window. One stated that a 12-month window is in line with
industry standards and encourages timely action by the liquidating
agent. In response to the commenters, the Board has amended the
proposed two-year discovery window.
In an effort to better balance the costs and benefits of the
Board's intent, the Board has amended the final rule to require that
fidelity bond contracts provide for a 12-month discovery window
following an involuntary liquidation. The Board initially proposed a
two-year discovery window as members have 18 months to file a claim on
insured accounts after the appointment of a liquidating agent.\16\ Upon
consideration of the comments, the Board believes a 12-month discovery
period provides adequate time to discovery and file a claim.
Additionally, after conducting research, the Board believes that this
proposed requirement will not result in any material additional cost or
burden on FICUs.
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\16\ 12 U.S.C. 1787(o).
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3(a)(4)
The Board also proposed to add a new paragraph (a)(4) to Sec.
713.3 to include a requirement that, for voluntary liquidations, a
FICU's fidelity bond coverage remain in effect, or provide that the
discovery period is extended, for at least four months after the final
distribution of assets. There were only two comments on the proposed
four-month discovery period following a voluntary liquidation. One
commenter did not object to it. The other commenter did not support
imposing the requirement on FISCUs and stated that state law governs
voluntary liquidations for FISCUs. The Board believes that this
requirement is important because it benefits a FISCU's members as any
recovery following a voluntary termination flows through to members.
Additionally, the provision imposes only a minor burden for FISCUs.
Therefore, the Board is finalizing this provision as proposed.
3(b)
Section 713.3 requires that a bond, at a minimum, must be purchased
in ``an individual policy.'' \17\ The NCUA added this section to part
713 in a 1999 final rule in response to a commenter who pointed out
that there had been instances of FICUs jointly purchasing fidelity
bonds with each other.\18\ The commenter was concerned that a loss
caused by one or two of the joint policyholders could reduce the amount
of available coverage for the other policyholders to below the required
minimum amount. In addressing this comment, the Board provided in Sec.
713.3 that a FICU must purchase its own individual policy.\19\ The
regulation did not, however, define ``individual policy.''
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\17\ 12 CFR 713.3.
\18\ 64 FR 28718, 28719 (May 27, 1999).
\19\ Id. at 28719.
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Since inclusion of this provision in the NCUA's regulations, OGC
has issued two public legal opinions interpreting the meaning of
``individual policy'' and opining on the type of coverage that is
prohibited under Sec. 713.3(a).\20\ A 2014 OGC legal opinion states
that a FICU may not include one or more of its CUSOs or other parties
as additional insureds under its fidelity bond.\21\ In a 2004 legal
opinion, OGC opined that a CUSO that provides management services for
multiple credit unions could not purchase a single fidelity
[[Page 35521]]
bond with each credit union named as an insured.\22\ In both letters,
OGC explained the purpose of the individual policy requirement is to
avoid diluting the individual credit union's coverage.
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\20\ OGC Legal Op. 04-0744 (Sep. 21, 2004); and OGC Legal Op.
14-1013 (Mar. 21, 2014).
\21\ OGC Legal Op. 14-1013 (Mar. 21, 2014).
\22\ OGC Legal Op. 04-0744 (Sep. 21, 2004).
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As noted above, OGC issued a third legal opinion on the
``individual policy'' requirement in 2017 (2017 legal opinion). The
2017 legal opinion rescinded and replaced the previous two opinions and
expanded the permissibility for certain joint coverage provisions under
the ``individual policy'' requirement. OGC and the NCUA's Office of
Examination and Insurance determined this broader interpretation was
both within the NCUA's legal authority under the FCU Act and a safe and
sound practice for FICUs. For clarity and ease of reference, the Board
sought to incorporate the 2017 legal opinion into proposed part 713.
No commenters opposed this policy and several commenters supported
it. The Board is finalizing this provision as proposed. Under the final
rule, a FICU may have a fidelity bond that also covers its CUSO(s) if
the FICU owns greater than 50 percent of a CUSO it wishes to cover, or
a covered CUSO is organized by the FICU for the purpose of handling
certain of its business transactions and composed exclusively of its
employees. The 50 percent threshold reflects the standard for
accounting consolidation under generally accepted accounting
principles, or GAAP. A FICU directly benefits from any fidelity bond
insurance proceeds collected by a consolidated CUSO.\23\ This final
rule, however, does not eliminate the prohibition against joint
coverage of entities not majority owned by the FICU, such as other
credit unions or non-majority-owned CUSOs. The Board believes this
amendment will provide greater flexibility to FICUs without affecting
safety and soundness.\24\
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\23\ As discussed in the 2017 legal opinion, the NCUA has
previously approved certain nominee provisions that included limited
joint coverage. For example, a nominee provision may state that a
loss sustained by any ``nominee'' organized by the insured for the
purpose of handling certain of its business transactions and
composed exclusively of its employees shall be deemed to be loss
sustained by the insured.
\24\ The final rule is not making a comparable amendment to Part
704. Corporate credit unions are not required to purchase fidelity
bonds subject to an individual policy requirement. Therefore, the
amendment to clarify the individual policy requirement is only
applicable to natural person credit unions.
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Sec. 713.4 What bond forms may a federally insured credit union use?
The current rule provides that the NCUA will maintain a current
list of bond forms approved by the Board for use by FICUs. The rule
also states that a FICU must obtain the approval of the Board before it
can use any other basic bond form or any rider or endorsement that
limits coverage of an approved bond form. The Board proposed to amend
Sec. 713.4 to make several changes to reflect the practices of the
NCUA, clarify the list of documents that must have Board approval, and
address the expiration and continuing review of approved bond forms.
The Board received several comments that addressed the expiration and
continuing review of approved bond forms. Those comments are discussed
below. Other than the expiration of bond form approval, the Board did
not receive any comments that generally discussed its approval of bond
forms. Therefore, this section has generally been finalized as
proposed. Any questions regarding the NCUA's approval of fidelity bond
forms can be directed to the NCUA's OGC, (703) 518-6540.
4(a)
Current Sec. 713.4(a) states that a current listing of basic bond
forms that may be used without prior Board approval is on the NCUA's
website. The proposed rule clarified this requirement by dividing
paragraph (a) into two new paragraphs. The Board did not receive any
comment on this section and is finalizing this provision as proposed.
New paragraph (a) explicitly states that ``the NCUA Board must approve
all bond forms before federally insured credit unions may use them.''
4(b)
Proposed paragraph (b) stated that approved bond forms are listed
on the NCUA's website and may be used by a FICU without further NCUA
approval. If a FICU is unable to access the NCUA's website, it can get
a current listing of approved bond forms by contacting the NCUA at
(703) 518-6330. The proposed rule rewrote this provision for clarity,
but did not make any substantive changes. The Board did not receive any
comment on this section and is finalizing it as proposed.
4(c)
Proposed paragraph (c) set forth which fidelity bonds and fidelity
bond documents require Board approval. The Board is finalizing this
paragraph as proposed.
4(c)(1)
The final rule clarifies that any bond form that has been amended
or changed since the Board approved it requires new approval from the
Board. The Board notes that this policy is the current practice whereby
bond issuers submit amended bond forms to the Board for approval under
current Sec. 713.4(b)(1).
4(c)(2)
The final rule states explicitly that renewal forms (and any other
document) that limit the coverage of approved bond forms must also
receive Board approval. The Board is clarifying the list of documents
subject to approval because the Board is aware of instances where the
renewal or continuation of coverage forms included language affecting
the bond coverage, including language that limited the bond coverage.
As such, it is the Board's belief that the renewal form is an extension
of the bond form and thus this is not an additional burden but further
clarification of what constitutes the bond form.
4(d)
The proposed rule also added a new paragraph (d) to sunset its
approval on all bond forms ten years after the form is approved. The
impetus for this provision is the discovery that Board approved-bond
forms were being interpreted in a way that was contrary to the NCUA's
understanding of how the bond forms would be used. In addition, a
review of previously approved bond forms, as part of issuing the 2017
legal opinion, revealed several instances of outdated provisions,
additions that had not been approved by the Board, and some forms that
contained provisions that were contrary to the FCU Act and part 713 of
the NCUA's regulations. To avoid instances of this in the future, the
Board proposed to sunset its approval of a bond form after a period of
ten years. Commenters had mixed opinions on this provision. While
several commenters supported the ten-year sunset, many other commenters
expressed concerns about the ten-year sunset date. Specifically, two
commenters associated with the insurance industry expressed concerns
because form approval is already a complicated process as it involves
state insurance regulators. The Board understands the complexity
involved in the approval process, but is maintaining the ten-year
sunset. The Board believes the sunset is necessary to ensure bond forms
are up-to-date and continue to
[[Page 35522]]
provide adequate fidelity bond coverage for FICUs.
With respect to bond forms that the Board has approved before 2019,
the Board proposed to allow its approval on these forms to continue
until January 1, 2029. Several commenters expressed concerns about the
NCUA's ability to reapprove bond forms, and particularly, reapprove all
existing bond forms in 2029. Commenters believed that re-approval would
be a resource-intensive process and suggested that the NCUA include
qualifying language in case there is a delay and the NCUA has not
reapproved all bond forms by their expiration date. The Board agrees
that qualifying language is beneficial. Therefore, the final rule
provides that approval for all existing bond forms sunsets after ten
years unless otherwise determined by the NCUA Board.\25\ The Board
believes the addition of qualifying language provides reasonable
flexibility while preserving its intent to sunset bond form approval
after ten years.
---------------------------------------------------------------------------
\25\ The Board has added this flexibility both for the general
ten-year sunset provision and for the 2029 sunset date for all
currently approved bond forms.
---------------------------------------------------------------------------
Under the proposed rule, the ten-year approval period began on the
date the Board approved a bond form. The proposed rule stated, however,
that the ten-year period would not toll or start over if a bond carrier
submits a revision to an approved bond form. One commenter believed
that this is unnecessary and approval should always sunset ten years
after a bond form is reviewed and approved. The Board has reconsidered
and agrees with the commenter. Under the final rule, the Board's
approval always sunsets ten years after a bond is reviewed and
approved. The Board proposed to maintain the original sunset date
because of concerns that a subsequent review may be targeted and not
review the bond form in its entirety. To address this concern, under
the final rule, a bond form will always be reviewed in its entirety.
The proposed rule also noted that should the Board determine, upon
re-review, that a bond form does not comply with the NCUA's
regulations, the Board would not require FICUs with coverage under that
bond to seek new coverage. One commenter objected to this provision and
believed that if the coverage is not adequate, new coverage should be
required immediately. The Board is supportive of adequate fidelity bond
coverage, but is concerned about the burden to a FICU if the contract
is determined to be inadequate during the contract term. Therefore,
under the final rule a FICU must only seek new coverage under an
approved bond form after its current coverage expires per the terms of
the contract between the FICU and the bond issuer.
The proposed rule also clarified that the Board may review a bond
form at any time. The Board received no comment on this provision and
is finalizing it as proposed.
Sec. 713.5-Sec. 713.7
The proposed rule used the term federally insured credit union
instead of federal credit union in each of Sec. Sec. 713.5, 713.6, and
713.7 for consistency and clarity. The Board did not receive any
comment on these sections and is finalizing them as proposed.
Part 704
In general, part 704 applies to all federally insured corporate
credit unions. Section 704.18 provides the fidelity bond requirements
for such credit unions. Changes to the specific subparagraphs of Sec.
704.18 are discussed below.
Sec. 704.18 Fidelity Bond Coverage
18(b)
The proposed rule amended current Sec. 704.18(b) by dividing
paragraph (b) into two subparts. Current paragraph (b) remained
unchanged and was designated paragraph (b)(1). The proposed rule added
a new paragraph as (b)(2). Proposed paragraph (b)(2) required that a
corporate credit union's board of directors and supervisory committee
review all applications for purchase or renewal of its fidelity bond
coverage. After review, the corporate credit union's board was required
to pass a resolution approving the purchase or renewal of fidelity bond
coverage and delegate one member of the board, who is not an employee
of the corporate credit union, to sign the purchase or renewal
agreement and all attachments. No board member was permitted to be a
signatory on consecutive purchase or renewal agreements for the same
fidelity bond coverage policy. This proposed amendment was identical to
proposed changes to Part 713 for natural person credit unions. The
Board received significant comment on this proposed requirement. As
compared to the proposed rule, the final rule does not require that the
corporate credit union's supervisory committee review all applications
for purchase or renewal. The Board is finalizing the remaining
requirements of this paragraph as proposed. For additional background
and a detailed discussion of comments received, see the previous
discussion for changes to Sec. 713.2(b).
18(c)
The proposed rule made significant revisions to current Sec.
704.18(c). Section 704.18(c) was split into five new subparagraphs,
each of which is described in more detail below.
18(c)(1)
The proposed rule stated that a corporate credit union's fidelity
bond coverage must be purchased from a company holding a certificate of
authority from the Secretary of the Treasury. This was not a
substantive change from the current requirements and the proposed
language was intended to reflect the comparable language in part 713.
The Board did not receive any comment on this provision and is
finalizing it as proposed.
18(c)(2)
Proposed Sec. 704.18(c)(2) stated that fidelity bonds must provide
coverage for the fraud and dishonesty of all employees, directors,
officers, and supervisory and credit committee members. This was not a
substantive change from the current requirements and the Board is
finalizing this provision as proposed.
18(c)(3)
The proposed rule substantively amended the requirements for a
corporate credit union's approved bond forms. The proposed requirements
reflected the changes proposed for natural person credit unions in part
713. The proposed rule required the Board to approve all bond forms
before a corporate credit union may use them. In addition, a corporate
credit union could not use any bond form that had been amended since
receiving Board approval, or any rider, endorsement, renewal, or other
document that limited coverage of approved bond forms, without first
receiving approval from the Board. As required under proposed part 713,
approval of all bond forms expired 10 years after the date the Board
approved or reapproved use of the bond form. Any currently approved
bond forms would expire on January 1, 2029. The Board is finalizing
this provision as proposed with one exception. As compared to the
proposed rule, the final rule adds qualifying language to provide the
Board flexibility to extend its approval of bond forms. For additional
background, and a detailed discussion of comments, see the previous
discussion for changes to Sec. 713.4.
[[Page 35523]]
18(c)(4)
The proposed rule added a new Sec. 704.18(c)(4) to ensure that
there is an adequate discovery period, the period to discover and file
a claim, following a corporate credit union's liquidation. The proposed
requirements reflected the changes proposed for natural person credit
unions in part 713. The proposed rule required fidelity bonds to
include an option for the liquidating agent to purchase coverage in the
event of an involuntary liquidation that extended the discovery period
for a covered loss for at least two years after liquidation. The Board
is finalizing this provision as proposed with one substantive
modification. The final rule requires only a one-year discovery period
following an involuntary liquidation. In the case of a voluntary
liquidation, under the proposed rule, fidelity bonds were required to
remain in effect, or provide that the discovery period is extended, for
at least four months after the final distribution of assets. The Board
is finalizing this provision as proposed. For additional background and
a detailed discussion of comments, see the previous discussion for
changes to Sec. 713.3(a)(3) and (4).
18(c)(5)
The current rule requires that corporate credit union bond forms
include a provision requiring written notification by surety to the
NCUA when a credit union's bond is terminated or when the coverage of
an employee, director, officer, supervisory or credit committee member
has been terminated. The NCUA also must be notified in writing by
surety if a deductible is increased above permissible limits. The
proposed rule did not include any amendments to these requirements. One
commenter, however, objected to the existing requirements and stated
that the corporate credit union, and not the insurer, should be
responsible for providing the required notice. This comment is outside
the scope of the proposed rule, but the Board notes that it continues
to believe that the insurance company should notify the NCUA if any of
the listed events occur.
IV. Regulatory Procedures
a. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.)
requires that the Office of Management and Budget (OMB) approve all
collections of information by a Federal agency from the public before
they can be implemented. Respondents are not required to respond to any
collection of information unless it displays a current, valid OMB
control number.
The burden outline in the preamble of the notice of proposed
rulemaking did not include those associated with corporate credit
unions. As with part 713, part 704 is being amended to require NCUA
approval on all bond forms expired after a period of 10 years from the
date of the NCUA approval or reapproved of its use. This information
collection requirement is estimated to impact two corporate credit
unions, for a total of two additional burden hours. This program change
is reflected in the 19 total burden hours requested.
In accordance with the PRA, the information collection requirements
included in this final rule have been submitted to OMB for approval
under control number 3133-0170.
b. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires that, in
connection with a final rulemaking, an agency prepare and make
available for public comment a final regulatory flexibility analysis
that describes the impact of a final rule on small entities. A
regulatory flexibility analysis is not required, however, if the agency
certifies that the rule will not have a significant economic impact on
a substantial number of small entities (defined for purposes of the RFA
to include credit unions with assets less than $100 million) and
publishes its certification and a short, explanatory statement in the
Federal Register together with the rule.
The Board does not believe that the final rule has a significant
economic impact on a substantial number of small entities. Any
increased costs for the bond insurer to resubmit their forms every ten
years is spread out among all FICUs and the cost to each FICU is
negligible. In addition, after conducting research the Board believes
that the requirement for bond forms to include a 12-month discovery
period following liquidation will not result in any material additional
cost or burden on FICUs. Finally, the requirement that boards must
approve purchases and renewals would impose no direct cost on FICUs.
Accordingly, the NCUA certifies that the final rule does not have a
significant economic impact on a substantial number of small FICUs.
c. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. The
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive order to adhere to fundamental
federalism principles. This final rule does not have a direct effect on
the states, on the relationship between the national government and the
states, or on the distribution of power and responsibilities among the
various levels of government. The NCUA has therefore determined that
this final rule does not constitute a policy that has federalism
implications for purposes of the executive order.
d. Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this final rule does not affect family
well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999, Public Law 105-277, 112
Stat. 2681 (1998).
e. Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(Pub. L. 104-121) (SBREFA) generally provides for congressional review
of agency rules.\26\ A reporting requirement is triggered in instances
where the NCUA issues a final rule as defined by section 551 of the
APA.\27\ An agency rule, in addition to being subject to congressional
oversight, may also be subject to a delayed effective date if the rule
is a ``major rule.'' \28\ The NCUA does not believe this rule is a
``major rule'' within the meaning of the relevant sections of SBREFA.
As required by SBREFA, the NCUA submitted this final rule to the Office
of Management and Budget (OMB) for it to determine if the final rule is
a ``major rule'' for purposes of SBREFA. OMB determined the final rule
was not a major rule. The NCUA also will file appropriate reports with
Congress and the Government Accountability Office so this rule may be
reviewed.
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\26\ 5 U.S.C. 801-804.
\27\ 5 U.S.C. 551.
\28\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------
List of Subjects in 12 CFR Parts 704 and 713
Bonds, Credit unions, Insurance.
By the National Credit Union Administration Board on July 18,
2019.
Gerard Poliquin,
Secretary of the Board.
For the reasons discussed above, the NCUA is amending 12 CFR parts
704 and 713 as follows:
[[Page 35524]]
PART 704--CORPORATE CREDIT UNIONS
0
1. The authority citation for part 704 continues to read as follows:
Authority: 12 U.S.C. 1762, 1766(a), 1772a, 1781, 1789, and
1795e.
0
2. Section 704.18 is amended by revising paragraphs (b) and (c) to read
as follows:
Sec. 704.18 Fidelity bond coverage.
* * * * *
(b) Review of bond coverage. (1) The board of directors of each
corporate credit union shall, at least annually, carefully review the
bond coverage in force to determine its adequacy in relation to risk
exposure and to the minimum requirements in this section.
(2) The board of directors of each corporate credit union must
review all applications for purchase or renewal of its fidelity bond
coverage. After review, the credit union's board must pass a resolution
approving the purchase or renewal of fidelity bond coverage and
delegate one member of the board, who is not an employee of the credit
union, to sign the purchase or renewal agreement and all attachments;
provided, however, that no board members may be a signatory on
consecutive purchase or renewal agreements for the same fidelity bond
coverage policy.
(c) Minimum coverage; approved forms. (1) The fidelity bond
coverage must be purchased from a company holding a certificate of
authority from the Secretary of the Treasury.
(2) Fidelity bonds must provide coverage for the fraud and
dishonesty of all employees, directors, officers, and supervisory and
credit committee members.
(3) The NCUA Board must approve all bond forms before a corporate
credit union may use them. Corporate credit unions may not use any bond
form that has been amended since the time the NCUA Board approved the
form or any rider, endorsement, renewal, or other document that limits
coverage of approved bond forms without receiving approval from the
NCUA Board. Approval on all bond forms expires 10 years after the date
the NCUA Board approved or reapproved use of the bond form unless
otherwise determined by the NCUA Board; provided, however, that any
bond forms approved before 2019 will expire on January 1, 2029, unless
otherwise determined by the NCUA Board. The NCUA reserves the right to
review a bond form at any point after its approval.
(4) Fidelity bonds must include an option for the liquidating agent
to purchase coverage in the event of an involuntary liquidation that
extends the discovery period for a covered loss for at least one year
after liquidation. In the case of a voluntary liquidation, fidelity
bonds must remain in effect, or provide that the discovery period is
extended, for at least four months after the final distribution of
assets.
(5) Notwithstanding the foregoing, all bonds must include a
provision, in a form approved by the NCUA Board, requiring written
notification by surety to NCUA:
(i) When the fidelity bond of a credit union is terminated in its
entirety;
(ii) When fidelity bond coverage is terminated, by issuance of a
written notice, on an employee, director, officer, supervisory or
credit committee member; or
(iii) When a deductible is increased above permissible limits. Said
notification shall be sent to NCUA and shall include a brief statement
of cause for termination or increase.
* * * * *
PART 713--FIDELITY BOND AND INSURANCE COVERAGE FOR FEDERALLY
INSURED CREDIT UNIONS
0
3. The authority citation for part 713 continues to read as follows:
Authority: 12 U.S.C. 1761a, 1761b, 1766(a), 1766(h),
1789(a)(11).
0
4. The heading for part 713 is revised to read as set forth above.
0
5. Revise Sec. 713.1 to read as follows:
Sec. 713.1 What is the scope of this section?
This section provides the requirements for fidelity bonds for
federally insured credit union employees and officials and for other
insurance coverage for losses such as theft, holdup, vandalism, etc.,
caused by persons outside the credit union. Federally insured, state-
chartered credit unions are required by Sec. 741.201 of this chapter
to comply with the fidelity bond coverage requirements of this part.
Corporate credit unions must comply with Sec. 704.18 of this chapter
in lieu of this part.
0
6. Revise Sec. 713.2 to read as follows:
Sec. 713.2 What are the responsibilities of a federally insured
credit union's board of directors under this section?
(a) The board of directors of each federally insured credit union
must at least annually review its fidelity and other insurance coverage
to ensure that it is adequate in relation to the potential risks facing
the federally insured credit union and the minimum requirements set by
the NCUA Board; and
(b) The board of directors of each federally insured credit union
must review all applications for purchase or renewal of its fidelity
bond coverage. After review, the federally insured credit union's board
must pass a resolution approving the purchase or renewal of fidelity
bond coverage and delegate one member of the board, who is not an
employee of the federally insured credit union, to sign the purchase or
renewal agreement and all attachments; provided, however, that no board
members may be a signatory on consecutive purchase or renewal
agreements for the same fidelity bond coverage policy.
0
7. Revise Sec. 713.3 to read as follows:
Sec. 713.3 What bond coverage must a federally insured credit union
have?
(a) At a minimum, your bond coverage must:
(1) Be purchased in an individual policy from a company holding a
certificate of authority from the Secretary of the Treasury;
(2) Cover fraud and dishonesty by all employees, directors,
officers, supervisory committee members, and credit committee members;
(3) Include an option for the liquidating agent to purchase
coverage in the event of an involuntary liquidation that extends the
discovery period for a covered loss for at least one year after
liquidation; and
(4) In the case of a voluntary liquidation, remain in effect, or
provide that the discovery period is extended, for at least four months
after the final distribution of assets, as required in Sec. 710.2(c)
of this chapter.
(b) The requirement in subsection (a) of this section does not
prohibit a federally insured credit union from having a fidelity bond
that also covers its credit union service organization (CUSO(s)),
provided the federally insured credit union owns more than 50 percent
of the CUSO(s) or the CUSO(s) is organized by the federally insured
credit union for the purpose of handling certain of its business
transactions and composed exclusively of the federally insured credit
union's employees.
0
8. Revise Sec. 713.4 to read as follows:
Sec. 713.4 What bond forms may a federally insured credit union use?
(a) The NCUA Board must approve all bond forms before federally
insured credit unions may use them.
(b) Bond forms the NCUA Board has approved for use by federally
insured credit union are listed on the NCUA's website, http://www.ncua.gov, and may be used by federally insured credit unions
without further NCUA approval.
[[Page 35525]]
If you are unable to access the NCUA's website, you can obtain a
current listing of approved bond forms by contacting the NCUA at (703)
518-6330.
(c) Federally insured credit unions may not use any of the
following without first receiving approval from the NCUA Board:
(1) Any bond form that has been amended or changed since the time
the NCUA Board approved the form; and
(2) Any rider, endorsement, renewal, or other document that limits
coverage of approved bond forms.
(d) Approval on all bond forms expires after a period of 10 years
from the date the NCUA Board approved or reapproved use of the bond
form unless otherwise determined by the NCUA Board. Provided, however,
that:
(1) Any bond forms approved before 2019 will expire on January 1,
2029, unless otherwise determined by the NCUA Board; and
(2) The NCUA reserves the right to review a bond form at any point
after its approval.
Sec. 713.5 [Amended]
0
9. In Sec. 713.5:
0
a. In paragraphs (a) and (b), remove the word ``federal'' before the
words ``credit union's'' and add in its place the words ``federally
insured'' each place they appear;
0
b. In paragraph (c), add the words ``federally insured'' before the
words ``credit union'', ``credit unions'', or ``credit union's'' each
place they appear; and
0
c. In paragraph (e), remove the word ``your'' and add in their place
the words ``a federally insured credit union's''
Sec. 713.6 [Amended]
0
10. In Sec. 713.6 remove the word ``federal'' before the words
``credit union's'' or ``credit unions'' and add the words ``federally
insured'' before the words ``credit union's'', ``credit unions'', and
``credit union'' each place they appear.
0
11. Revise Sec. 713.7 to read as follows:
Sec. 713.7 May the NCUA Board require a federally insured credit
union to secure additional insurance coverage?
The NCUA Board may require additional coverage when the NCUA Board
determines that a federally insured credit union's current coverage is
inadequate. The federally insured credit union must purchase this
additional coverage within 30 days.
[FR Doc. 2019-15709 Filed 7-23-19; 8:45 am]
BILLING CODE 7535-01-P
