Succession Planning

<RULE> NATIONAL CREDIT UNION ADMINISTRATION <CFR>12 CFR Parts 701 and 741</CFR> <RIN>RIN 3133-AF42</RIN> <SUBJECT>Succession Planning</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> National Credit Union Administration (NCUA). <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The NCUA Board (Board) is issuing this final rule to further strengthen succession planning efforts for all consumer federally insured credit unions (FICUs). This final rule requires that a FICU board of directors establish a written succession plan that addresses specified positions and contains certain information. In addition, the board of directors is required to regularly review the succession plan. The final rule also requires that newly appointed members of the board of directors have a working familiarity with the succession plan no later than six months after appointment. The final rule follows publication of a July 25, 2024, proposed rule and takes into consideration the public comments received on the proposed rule. In response to comments, the Board has amended the proposal to provide that a credit union board must review its succession plan no less than every 24 months, as opposed to the annual review that would have been required under the proposed rule. The Board has also revised the proposed rule by removing loan officers, credit committee members, and supervisory committee members from the list of FICU officials that must be covered by the succession plans. In addition, non-substantive changes have been made to the wording used in the list of covered officials for purposes of clarity. The final rule also streamlines the required contents of the succession plans and no longer requires that deviations from approved succession plans be documented in the FICU board's meeting minutes. Further, to help ensure that FICUs have the necessary time to develop their succession plans, the Board is delaying the effective date of the final rule until January 1, 2026. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> This final rule is effective on January 1, 2026. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> <E T="03">Office of Examination and Insurance:</E> John Berry, Policy Officer, at (703) 664-3909 or at 1775 Duke Street, Alexandria, VA 22314. <E T="03">Office of General Counsel:</E> Ariel Pereira, Senior Attorney, Office of General Counsel, at (703) 548-2778 or at the above address. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <EXTRACT> <HD SOURCE="HD1">Table of Contents</HD> <FP SOURCE="FP-1">I. Background</FP> <FP SOURCE="FP-1">II. Discussion of Public Comments</FP> <FP SOURCE="FP1-2">A. The Comments, Generally</FP> <FP SOURCE="FP1-2">B. Comments Regarding Alternatives to Rulemaking</FP> <FP SOURCE="FP1-2">C. Comments Regarding Data and the Justification for Rulemaking</FP> <FP SOURCE="FP1-2">D. Comments Regarding Regulatory Burden</FP> <FP SOURCE="FP1-2">E. Comments Raising General Objections to Rule</FP> <FP SOURCE="FP1-2">F. Comments Regarding the Inclusion of FISCUs</FP> <FP SOURCE="FP1-2">G. Comments Raising Potential Privacy and Discrimination Concerns</FP> <FP SOURCE="FP1-2">H. Comments Regarding Specific Rule Provisions</FP> <FP SOURCE="FP1-2">I. Other Comments</FP> <FP SOURCE="FP-1">III. Regulatory Procedures</FP> <FP SOURCE="FP1-2">A. Regulatory Flexibility Act</FP> <FP SOURCE="FP1-2">B. Small Business Regulatory Enforcement Fairness Act/Congressional Review Act</FP> <FP SOURCE="FP1-2">C. Paperwork Reduction Act</FP> <FP SOURCE="FP1-2">D. Executive Order 13132 on Federalism</FP> <FP SOURCE="FP1-2">E. Assessment of Federal Regulations and Policies on Families</FP> </EXTRACT> <HD SOURCE="HD1">I. Background</HD> At its July 18, 2024, meeting, the Board approved a proposed rule to address succession planning at FICUs. The proposed rule was published in the <E T="04">Federal Register</E> on July 25, 2024, and provided for a 60-day public comment period. <SU>1</SU> <FTREF/> The proposal followed publication of the Board's earlier 2022 proposed rule on the same topic. <SU>2</SU> <FTREF/> The July 25, 2024, proposed rule was based on that earlier proposed rule but included several changes that the Board believed would further strengthen succession planning efforts for both consumer federal credit unions (FCUs) and consumer federally insured, state- chartered credit unions (FISCUs), which collectively are referred to as FICUs. <FTNT> <SU>1</SU>  89 FR 60329 (July 25, 2024). </FTNT> <FTNT> <SU>2</SU>  87 FR 6078 (Feb. 3, 2022). </FTNT> Under the July 25, 2024, proposed rule a FICU board of directors would have been required to establish a written succession plan that addresses specified positions and contains certain information. In addition, the board of directors would have been required to review the succession plan in accordance with an established schedule, but no less than annually. The proposed rule would also have required that newly appointed members of the board of directors have a working familiarity with the FICU's succession plan no later than six months after appointment. Interested readers are referred to the preamble of the proposed rule for additional details regarding the proposed regulatory amendments. Two ongoing factors highlighted the need for rulemaking on succession planning. The long-running trend of consolidation across all depository institutions has remained relatively constant across all economic cycles for more than three decades. Voluntary mergers can be used to create economies of scale to offer more or better products and services to FICU members. However, the Board is also aware of numerous instances in recent years where FICUs merged because of a lack of succession planning. More emphasis on succession planning would help reduce the number of such mergers. Another reason for a heightened focus on succession planning are the ongoing retirements of the “Baby Boomer” generation (individuals born between 1946 and 1964). According to some sources, approximately 10 percent of credit union chief executive officers were expected to retire between 2019 and 2021. <SU>3</SU> <FTREF/> Succession planning is critical to the continued operation of those credit unions with board members and executives that are part of this retirement wave. <FTNT> <SU>3</SU>   <E T="03">CUtoday.info</E> , <E T="03">CUNA ACUC Coverage: What's Happening in Executive Compensation</E> (June 19, 2019), <E T="03">https://www.cutoday.info/Fresh-Today/CUNA-ACUC-Coverage-What-s-Happening-in-Executive-Compensation.</E> </FTNT> Given the importance of the topic, the NCUA has taken several steps to strengthen current succession planning efforts of FICUs. For example, in March 2022 the NCUA issued Letter to Credit Unions 22-CU-05, <E T="03">CAMELS Rating System,</E> which provides that “succession planning for key management positions” is a key factor considered when assessing the Management CAMELS component rating of a credit union. <SU>4</SU> <FTREF/> Letter to Credit Unions 23-CU-01 included succession planning as one of the NCUA's supervisory priorities for 2023. <SU>5</SU> <FTREF/> The July 25, 2024, proposed rule was designed to build upon these prior NCUA efforts. <FTNT> <SU>4</SU>  NCUA, <E T="03">Letter to Credit Unions 22-CU-05, CAMELS Rating System</E> (March 2022), <E T="03">https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/camels-rating-system.</E> CAMELS is the acronym for the rating system used by the NCUA to assess a FICU's performance and risk profile derived from the six critical elements of a FICU's operations: Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk. </FTNT> <FTNT> <SU>5</SU>  NCUA, <E T="03">Letter to Credit Unions 23-CU-01, NCUA's 2023 Supervisory Priorities</E> (January 2023), <E T="03">https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/ncuas-2023-supervisory-priorities.</E> </FTNT> This final rule follows publication of the July 25, 2024, proposed rule and takes into consideration the public comments received on the proposed rule. In this final rule, the Board has incorporated the following amendments to the July 25, 2024, proposal: 1. In response to public comments, the final rule provides that a board must review its succession plan no less than every 24 months, as opposed to the annual review that would have been required under the proposed rule. 2. Also in response to public comments, the Board has revised the proposed rule by removing loan officers, credit committee members, and supervisory committee members from the list of FICU officials who must be covered by the succession plans. 3. In addition, non-substantive changes have been made to the wording used in the list of covered officials for purposes of clarity. Specifically, the proposed rule listed “management officials” (as defined in the model FCU bylaws) and the “senior executive officers” identified in 12 CFR 701.14(b)(2). Given the potential overlap between these two categories of officials, the final rule merges their listing in a single paragraph of the regulation. The final rule also simplifies the regulatory text by cross referencing to § 701.14(b)(2), rather than listing the senior executive officers. 4. The final rule also streamlines the required contents of the succession plans. Specifically, the rule no longer specifies that a succession plan must address unexpected or temporary vacancies in covered positions. Although the Board encourages a FICU to consider these types of vacancies in its plan, it believes FICUs, and not the NCUA, are best positioned to determine how much detail is necessary to address the required plan elements. 5. The final rule no longer requires that deviations from ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 90k characters. 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