It's the plan, man. The plan.

Posted by Anthony Demangone

Yesterday, NCUA released some much anticipated (and perhaps dreaded) guidance concerning its recent rulemaking on fiduciary duties.  It was released in the form of Letter to Federal Credit Unions 10-FCU-02, and the letter's attachment.   The guidance spells out NCUA's expectations concerning the new director fiduciary duty regarding financial literacy. It also talks a wee bit about the other duties, but the guidance clearly focuses on financial literacy.

In short...It's all about the plan, man.  Here's a key portion of the guidance:

It is NCUA’s intent to ensure that all federal credit union directors have a basic understanding of their credit union’s finances. It is not NCUA’s intent to increase examiner scrutiny of the financial skills of particular directors. Rather, examiners will evaluate whether the credit union has a policy in place to make available the appropriate training to enhance the financial knowledge of the directors.

OK, so perhaps its all about the policy, man.  The policy. 

So, what is a credit union director supposed to know?  What is this "financial literacy" all about?  In NCUA's words:

At a minimum, a director should be able to examine the credit union’s balance sheet, income statement and be able to answer the following questions:  

• What does this line item mean?
•  Why is it important to the credit union?
• Is the value of the line item changing over time? If so, what does that change (either positive or negative) mean?
• Is the change important to the credit union?

A director must understand the specific activities in which his or her credit union engages. In particular, a director must understand not only how these activities generate revenue for the credit union but also, and perhaps most importantly, the various risks associated with these activities that could lead to financial loss.

To do their job in a meaningful manner, it is essential that directors understand the risks found in depository institutions -- that is, credit, liquidity, interest rate, compliance,3strategic, transaction, and reputation risk. Moreover, directors must understand the internal control structures at the credit union that limit and control these risks.

So, you have to have a plan...err, a policy, that shows how your credit union will provide the necessary resources and training so that they can meet the financial literacy component discussed above.

And what does that policy have to look like?  In NCUA's words, the policy should provide:

• Opportunities and funding for directors to acquire the skills needed to evaluate the credit union’s finances. Some directors may come to the director position with the necessary financial knowledge. Other directors may obtain the necessary financial skills through internal credit union training, external training, self education, on-the-job experience, or a combination of these activities.
• Education alternatives for directors commensurate with the size and complexity of the credit union. Alternatives could include, but not be limited to, training provided by vendors or trade associations; college courses or other opportunities at colleges or universities; NCUA’s Office of Small Credit Union Initiatives (OSCUI) training program presented at various workshops across the country beginning March 5, 2011; and NCUA’s Office of Examination and Insurance (E&I) internet-based training. We will distribute additional information when the development is complete.
• Solutions that take into account the appropriate deadlines for the financial literacy duty as outlined in NCUA's guidance document.

Compliance Guy Conclusion: Kudos to NCUA.  This guidance is just what we asked for last week. There's a good deal of flexibility for federal credit unions here.  Examiners, according to the guidance, won't be quizzing your directors for an explanation of the net worth ratio.  Rather, they want to see how your training policy gets your board where they need to be.

With that in mind, please allow me to hop on my soapbox. 

If NCUA wants a policy, give them a policy! Make sure you hit each bullet point outlined in the guidance document so that you can defend your policy should someone examine it.

Opportunities and funding.  How does your credit union ensure that directors have opportunities and funding to hit the financial literacy requirement?  Do you have training scheduled for a board meeting?  What if someone misses that board meeting?  Does your policy address that?  And what if someone joins your board two weeks after your training session? These aren't end of the world problems, but you should think about addressing them in your policy.

Education alternatives.  NCUA notes that lots of different training formats can work. They don't come out and say that they require you to come up with alternatives, but I think that's never a bad idea.  A healthy mix of training solutions will help you show examiners that each director has been given opportunities, funding, and education alternatives in order to meet this new NCUA requirement. 

Time-frames.  Also make sure that your policy shows how you'll ensure that new directors (and existing) meet the timing requirements found in the fiduciary duties rule and guidance. 

So, NCUA has given us a flexible road map to meet this new compliance requirement.  Use that map!  I'll shy away from over-the-top shameless plugs.  Just keep in mind that NAFCU (as well as others) are offering solutions to this plan. If you are taking advantage of them, or you plan to, just be sure to document that fact.  It doesn't have to be in your policy, but you can use certificates, outlines, course descriptions, etc., as a way of showing that you are following your policy.