New Rules Present New Risks For Credit Union Directors

From CUNA Mutual Group Public Relations

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Phil Tschudy 608/231-7188
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LAS VEGAS – The establishment of new fiduciary and financial literacy rules for directors of federally chartered credit unions, coupled with economic challenges and more litigation have greatly increased personal risk exposure for credit union decision makers.

While this uncertain environment increases the chance of legal action against credit union directors, it also provides an opportunity to establish new practices to protect credit unions and their board members, a CUNA Mutual Group product executive told a breakout session audience Thursday, at the 34th Annual National Directors’ Convention.

John Wallace, vice president of commercial products, said there are four keys to protecting directors’ personal assets, starting with a solid understanding of their fiduciary duties.

The National Credit Union Administration (NCUA) in December finalized sections from its rules and regulations concerning federal credit union directors’ fiduciary duties and indemnification. “Federal credit union directors must carry out their duties in good faith and within six months of their election or appointment, they must also gain an understanding of ‘basic finance and accounting practices,’” he said.

NCUA also passed a rule on indemnification that strips federal credit unions of the ability to indemnify officials or employees for liability associated with misconduct that’s “grossly negligent, reckless, or willful” as deemed by a court in connection with a decision that affects the “fundamental rights” of credit unions’ members. This applies to decisions affecting members’ rights, such as with conversions and changing share insurance.

In addition, NCUA “Rule 750” limits indemnification payments by credit unions.

Recent actions by the Federal Deposit Insurance Corp. (FDIC) provide some context and might be a potential precursor for what credit union directors could face. As of July 6, FDIC authorized action against 248 individuals in connection with 28 failed institutions, seeking $6.8 billion.

A second way directors can protect themselves is by establishing and/or broadening their corporate governance process, which Wallace defined as “a set of processes, customs, rules, policies, and laws that guide how an organization, like a credit union, is directed and controlled for the benefit of its stakeholders.” Examples include establishing a lead director on governance, a whistle-blower policy or a risk oversight policy.

He also urged directors to consider their indemnification options to ensure alignment with the board’s philosophy on risk. Indemnification is where the credit union agrees to reimburse an officer or director for expenses related to claims brought against them in their capacity as officers and directors. “Consult a qualified attorney to help you construct your indemnification agreements. This is particularly important given the newly adopted rule that limits indemnification.”

Finally, Wallace recommended credit unions have directors’ and officers’ (D&O) liability insurance coverage to cover losses related to claims against a Wrongful Management Liability Act. Boards of directors should play an active role in establishing the type and coverage limits for D&O insurance, he added.

Wallace also offered several other recommendations to help directors protect their personal assets and their credit unions:

  • Conduct conflict of interest disclosures at least once a year
  • As a board, determine what risks the credit unions faces and ask for information to monitor that risk
  • Think of opportunities to improve

The 34th Annual National Directors’ Conference continues through midday, Friday.

CUNA Mutual Group insurance, retirement and investment products provide financial security and protection to credit unions and their members worldwide. With more than 75 years of true market commitment, CUNA Mutual’s vision is unwavering: To be a trusted business partner who delivers service excellence through customer-focused products and market-driven insight. More information on the company is available on the company’s Web site at

CUNA Mutual Group is the marketing name of CUNA Mutual Insurance Society, its affiliates and subsidiaries, including CUMIS Insurance Society, Inc.  Product availability and features may vary by jurisdiction and are subject to actual policy language. Corporate headquarters are located in Madison, Wisconsin.

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