Credit Unions: Organization and operations— Fidelity bond and insurance coverage; insurance requirements,

[Federal Register: January 4, 1999 (Volume 64, Number 1)]

[Proposed Rules]

[Page 58-60]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr04ja99-27]

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701, 713, 741

Organization and Operations of Federal Credit Unions; Fidelity Bond and Insurance Coverage for Federal Credit Unions; Requirements for Insurance

AGENCY: National Credit Union Administration (NCUA).

ACTION: Notice of proposed rulemaking.

SUMMARY: The NCUA is proposing to update, clarify, revise and redesignate its regulation that addresses the requirements for surety bond coverage for losses caused by credit union employees and officials and for general insurance coverage for losses caused by persons outside of the credit union, e.g., losses due to theft, holdup or vandalism. The proposed rule recasts the rule in plain English format and adds several previously approved bond forms to the regulation.

DATES: Submit comments on or before March 5, 1999.

ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail or hand-deliver comments to: National Credit Union Administration, 1775 Duke Street, Alexandria, VA 22314-3428. Fax comments to (703) 518-6319. Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Robert M. Fenner, General Counsel, or Allan Meltzer, Associate General Counsel, at the above address, or telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION: The Federal Credit Union Act sets forth statutory requirements for the bonding of credit union employees and appointed and elected officials. 12 U.S.C. 1761a, 1761b(2) and 1766(h). The NCUA Board is directed to promulgate regulations setting forth both the amount and character of bond requirements for employees and officials. The NCUA Board is also granted the following powers concerning bonding:

To approve bond forms; To set minimum requirements for bond coverage; 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.

In addition, NCUA's general rulemaking authority provides a statutory basis for both the bonding requirements of Section 701.20 and the insurance coverage requirements related to losses caused by persons outside the credit union. 12 U.S.C. 1766(a), 1789(a)(11).

NCUA has a policy of periodically reviewing its regulations to ``update, clarify and simplify existing regulations and eliminate redundant and unnecessary provisions.'' IRPS 87-2, Developing and Reviewing Government Regulations. As part of its regulatory review program, NCUA reviewed Sec. 701.20 to determine whether the language of the regulation was clear and effective. As a result of that review, these amendments are proposed to increase regulatory effectiveness by making it easier for credit unions to understand the requirements regarding surety bonds and other insurance. The proposed rule also adds a number of bond forms which have been approved by the NCUA for use by federal credit unions.

In addition, when the original surety bond regulation was issued, no surety bond policy provided for an aggregate limit of liability. Most approved policies now provide for such a limit. The minimum required bond coverage provision of the proposed rule has been modified to clarify that the required dollar amount of coverage is for a single loss under the bond. Any aggregate limit of liability provided for in the policy must be for at least twice the single loss limit of liability.

Regulatory Procedures

Regulatory Flexibility Act

The Regulatory Flexibility Act requires NCUA to prepare an analysis to describe any significant economic impact any proposed regulation may have on a substantial number of small entities (primarily those under $1 million in assets). The NCUA Board has determined and certifies that the proposed amendment, if adopted, will not have a significant economic impact on a substantial number of small credit unions. Accordingly, the Board has determined that a Regulatory Flexibility Analysis is not required.

Paperwork Reduction Act

NCUA has determined that the proposed amendment does not increase paperwork requirements under the Paperwork Reduction Act of 1995 and regulations of the Office of Management and Budget.

Executive Order 12612

The NCUA Board has determined that the proposed rule will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among various levels of government.

List of Subjects

12 CFR Part 701

Credit, Credit unions, Reporting and recordkeeping requirements.

12 CFR Part 713

Credit unions, Surety bonds.

12 CFR Part 741

Bank deposit insurance, Credit unions, Reporting and recordkeeping requirements.

By the National Credit Union Administration Board this 17th day of December, 1998. Becky Baker, Secretary of the Board.

For the reasons set forth in the preamble, it is proposed that 12 CFR chapter VII be amended as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

1. The authority citation for part 701 continues to read as follows:

   [[Page 59]]

   Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 1761b, 1766, 1767, 1782, 1784, 1787, 1789. Section 701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 is also authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610. Section 701.35 is also authorized by 42 U.S.C. 4311-4312.

2. Part 701 is amended by removing and reserving 701.20.

3. Part 713 is added to read as follows:

   PART 713--FIDELITY BOND AND INSURANCE COVERAGE FOR FEDERAL CREDIT UNIONS

   Sec. 713.1 What is the scope of this section? 713.2 What are the responsibilities of a credit union's board of directors under this section? 713.3 What bond coverage must a credit union have? 713.4 What bond forms may be used? 713.5 What is the required minimum dollar amount of coverage? 713.6 What is the permissible deductible? 713.7 May the NCUA Board require a credit union to secure additional insurance coverage?

   Authority: 12 U.S.C. 1761a, 1761b, 1766(a), 1766(h), 1789(a)(11).

   Sec. 713.1 What is the scope of this section?

   This section provides the requirements for fidelity bonds for Federal 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.

   Sec. 713.2 What are the responsibilities of a credit union's board of directors under this section?

   The board of directors of each Federal 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 credit union and the minimum requirements set by the Board.

   Sec. 713.3 What bond coverage must a credit union have?

   At a minimum, your bond coverage must:

   (a) Come from a company holding a certificate of authority from the Secretary of the Treasury; and

   (b Include fidelity bonds that cover fraud and dishonesty by all employees, directors, officers, supervisory committee members, and credit committee members.

   Sec. 713.4 What bond forms may be used?

   (a) The following basic bonds may be used without prior NCUA Board approval:

   Credit union form No.

   Carrier

   Credit Union Blanket Bond Standard Form Various. 23 of the Surety Association of America (revised May 1950) Extended Form 23....................... USFG. 100.................................... CUMIS (only approved for corporate credit union use). 200.................................... CUMIS. 300.................................... CUMIS. 400.................................... CUMIS. AIG 23................................. National Union Fire Insurance Co. of Pitts., PA. Reliance Preferred Form 23............. Reliance Insurance Company. Form 31................................ ITT Hartford. Form 24 with Credit Union Endorsement.. Continental (only approved for corporate credit union use). Form 40325............................. St. Paul Fire and Marine. Form F2350............................. Fidelity & Deposit Co. Of Maryland. Form 9993 (6/97)....................... Progressive Casualty Insurance Co.

   (b) To use any of the following, you need prior written approval from the Board:

   (1) Any other basic bond form; or

   (2) Any rider or endorsement that limits coverage on approved bond forms.

   Sec. 713.5 What is the required minimum dollar amount of coverage?

   (a) The minimum required amount of fidelity bond coverage for any single loss is computed based on a Federal credit union's total assets.

   Assets

   Minimum bond

   $0 to $10,000.......................... Coverage equal to the credit union's assets. $10,001 to $1,000,000.................. $10,000 for each $100,000 or fraction thereof. $1,000,001 to $50,000,000.............. $100,000 plus $50,000 for each million or fraction over $1,000,000. $50,000,001 to $295,000,000............ $2,550,000 plus $10,000 for each million or fraction thereof over $50,000,000. Over $295,000,000...................... $5,000,000.

   (b) This is the minimum coverage required, but a Federal credit union's board of directors should purchase additional coverage when circumstances, such as cash on hand or cash in transit warrant.

   (c) While the above is the required minimum amount of bond coverage, credit unions should maintain increased coverage equal to the greater of either of the following amounts within thirty days of discovery of the need for such increase:

   (1) The amount of the daily cash fund, i.e. daily cash plus anticipated daily money receipts on the credit union's premises, or

   (2) The total amount of the credit union's money in transit in any one shipment.

   (3) Increased coverage is not required pursuant to this paragraph (c), however, when the credit union temporarily increased its cash fund because of unusual events which cannot reasonably be expected to recur.

   (d) Any aggregate limit of liability provided for in a surety bond policy must be at least twice the single loss limit of liability.

   (e) Any proposal to reduce your bond coverage must be approved in writing by the NCUA Board at least twenty days in advance of the proposed effective date of the reduction.

   [[Page 60]]

   Sec. 713.6 What is the permissible deductible?

   (a)(1) The maximum amount of allowable deductible is computed based on a Federal credit union's asset size, as follows:

   Assets

   Minimum bond

   $0-$100,000

   No deductibles allowed. $100,001-$250,000...................... $1,000. $250,001-$1,000,000.................... $2,000. Over $1,000,001........................ $2,000 plus 1/1000 of total assets up to a maximum deductible of $200,000.

   (2) The deductibles may apply to one or more insurance clauses in a policy. Any deductibles in excess of the above amounts must receive the prior written permission of the NCUA Board.

   (b) A deductible may not exceed 10 percent of a credit union's Regular Reserve unless a separate Contingency Reserve is set up for the excess. In computing the maximum deductible, valuation accounts such as the allowance for loan losses cannot be considered.

   Sec. 713.7 May the NCUA Board require a credit union to secure additional insurance coverage?

   The NCUA Board may require additional coverage when the Board determines that a credit union's current coverage is inadequate. The credit union must purchase this additional coverage within 30 days.

   PART 741--REQUIREMENTS FOR INSURANCE

4. The authority citation for part 741 continues to read as follows:

   Authority: 12 U.S.C. 1757, 1766 and 1781-1790. Section 741.4 is also authorized by 31 U.S.C. 3717.

   Sec. 741.20 [Amended]

5. Section 741.201 (a) and (b) are amended by removing ``Sec. 701.20'' and adding ``Part 713'' in its place.

   [FR Doc. 98-34031Filed12-31-98; 8:45 am]

   BILLING CODE 7535-01-P