On Compliance: NCUA Fidelity Bond Rule Changes

director signing fidelity bond insurance policy
By John DeLoach

4 minutes

A few points to help insure you comply (pun intended)

As we all know in credit union land, the Great Recession marked big changes in the National Credit Union Administration’s perspective on the responsibilities of credit union directors for the oversight and management of their credit unions.

In late 2010, NCUA revised its Rules and Regulations Section 701.4 to clarify directors’ fiduciary duties and to mandate directors’ acquisition of financial skills necessary to meet those duties. In early 2011, then-NCUA Chairman Debbie Matz issued NCUA Letter to Federal Credit Unions 11-FCU-02, further emphasizing the expectations and obligations of credit union directors.

The overarching message of enhanced director responsibilities has been heard by many credit unions during their regulatory exams in the past decade. Consistent with this theme, NCUA has amended Rules and Regulations Part 713 to expand your board’s responsibilities related to the review, approval and purchase of your credit union’s fidelity bond.

To help ensure your credit union’s compliance with the Part 713 revisions, please take note of the following:

Annual Review of Bond and Insurance Coverage

Each federally insured credit union must schedule at least an annual review by its board of directors of the credit union’s fidelity bond and other insurance coverages. The purpose of the annual review is to ensure the then-current bond and insurance coverage (a) meets NCUA’s minimum requirements and (b) is adequate in light of the credit union’s potential risks.  

Compliance with the annual review requirements should include the following:

  1. Delivery of detailed summaries of the current bond and insurance coverages to the board well ahead of the scheduled board meeting for the directors’ review and preparation. Most bond/insurance companies are happy to provide such summaries upon request.
  2. Review and discussion of the current bond and insurance coverages at the scheduled board meeting. The discussion should cover not only the bond/insurance policies, but the relationship of the policies to the credit union’s identified risks and NCUA’s minimum requirements for bond coverage. The credit union’s management team and/or representatives from the bond/insurance company(ies) should provide guidance and be prepared to answer questions from the board during each review.
  3. While no specific approval of the existing coverages is required by NCUA, the board’s vote for either (a) approval of the existing coverages as reasonably adequate or (b) direction to the management team to provide proposals for increased or additional coverages to the board for review would seem the appropriate result of the review. In any event, the discussion and any related vote)should be memorialized in the minutes of the board meeting to evidence compliance with the annual review requirements.  

The annual review requirements detailed above apply even if the credit union’s then-current bond/insurance policies are not up for renewal or purchase.

Board Review and Approval of Fidelity Bond Coverage

The board of each federally insured credit union must review and act upon all applications for purchase or renewal of the credit unions’ fidelity bond coverage. This review process should include the following elements:

  1. The review should normally be scheduled as part of the board meeting that includes the annual review process detailed above (as applicable for any given year). As such, it would make sense to time annual reviews in accordance with bond purchases/renewals as applicable.
  2. Following the review as detailed above (and assuming the board is willing to approve the application “as is” without changes or additions), the board must pass an appropriate resolution. The resolution should (a) approve the purchase or renewal of the bond and (b) delegate authority to one “non-employee” board member to sign the bond purchase/renewal agreement and all attachments. The resolution should be reduced to writing, voted upon by the board in accordance with normal voting procedures, executed by the board chair and secretary, and included with the minutes for the board meeting.
  3. The director with signature authority must be rotated with each bond purchase/renewal such that no director signs the bond/purchase renewal agreement for two or more consecutive bond purchases/renewals. As such, the board should ensure the  immediately preceding bond purchase/renewal resolution is included with the board packet for each bond purchase/renewal meeting to avoid duplication of signatories.

Applicability and Effective Date

The requirements of Part 713 apply to both federal credit unions and federally insured state chartered credit unions. The new review and approval requirements detailed above became effective Oct. 22.  

While the Part 713 revisions include other minor changes that demand review by each credit union’s management team to ensure full compliance, the above-described requirements are all but certain to be focal points in your new NCUA exam.

John DeLoach is one of the managing shareholders of the Williams Gautier law firm located in Tallahassee, Florida. Williams Gautier has represented credit unions in Florida, Georgia, Alabama and throughout the United States for more than 40 years. DeLoach has focused his practice for more than 25 years on representing credit unions in compliance, contract, transaction and corporate matters. He also conducts seminars and workshops on credit union law and operations and, in particular, the various compliance issues which face credit unions. Reach him at 800.377.3325.

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