conflicts of interest -...
TRANSCRIPT
1/26/2015
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Conflicts of Interest
CUNA
Must Know Mondays
January 26, 2015
David A. Reed
Attorney at Law
Reed & Jolly, PLLC
Fairfax, Virginia
(703) 675-9578
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The contents of this presentation are intended
to provide you with a general understanding
of the subject matter. However, it is not
intended to provide legal, accounting, or
other professional advice and should not be
relied on as such.
Conflicts
• What are some typical conflicts that could
involve the Board?
• Better to deal with it BEFORE it becomes
an issue (again).
• If you act early you can deal with the
problem instead of the person
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What Is a Conflict of Interest?
• A situation that has the potential to
undermine the impartiality of a person
because of the possibility of a clash
between the person's self-interest and
professional interest or public interest.
• Source: The Business Dictionary
Sources of Authority
• Federal Credit Union Act
• NCUA Rules and Regulations
• State Credit Union Act
• Credit Union Bylaws
• Credit Union Board Policy
• Board Action
• COMMON SENSE
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State vs. Federal
• Could be different rules depending on
Charter
• You need to be aware of your state laws
regarding Credit Union governance
• FCU Act and NCUA Rules and Regulations
versus state Credit Union Act and related
regulations
Duties of an FCU DirectorNCUA Rule Part 701.4
• (a) General direction and control of a Federal
credit union. The board of directors is
responsible for the general direction and control
of the affairs of each Federal credit union. While
a Federal credit union board of directors may
delegate the execution of operational functions
to Federal credit union personnel, the ultimate
responsibility of each Federal credit union's
board of directors for that Federal credit union's
direction and control is non-delegable.
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Duties of an FCU Director
(b)(1) Carry out his or her duties as a director in good faith, in a manner such director reasonably believes to be in the best interests of the membership of the Federal credit union as a whole, and with the care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances;
(2) Administer the affairs of the Federal credit union fairly and impartially and without discrimination in favor of or against any particular member;
Duties of an FCU Director
(3) At the time of election or appointment, or within a reasonable time thereafter, not to exceed six months, have at least a working familiarity with basic finance and accounting practices, including the ability to read and understand the Federal credit union's balance sheet and income statement and to ask, as appropriate, substantive questions of management and the internal and external auditors; and
(4) Direct management's operations of the Federal credit union in conformity with the requirements set forth in the Federal Credit Union Act, this chapter, other applicable law, and sound business practices.
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Key Fiduciary Duties
• Exercise Due Care
• Display Good Faith
Duty of Care
• Directors must exercise due care or due diligence in all their decisions
• Does not have to be perfect, just reasonable
• Attend meetings– Showing up is always a good thing
– Do you have a rule on that?
• Do your job as its stated in the bylaws, board policies, regulations, law and best practices
• Ask for more information if needed – Its OK
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Display Good Faith
• Directors must remain faithful to their
duties and obligations
• Directors must have honestly in all
dealings with the credit union
• Directors generally will be excused from
personal ability if they acted “in good faith
with honest intentions and with the
absence of malice or design to defraud or
to seek unconscionable advantage”
Duty of Loyalty
• Conflicts of Interest must be recognized
and disclosed
• Corporate Opportunities must first be
presented to CU
• Confidentiality must be maintained
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Independence
• What does it really mean?
• Remember the concept of delegating the
task, but NOT the responsibility.
• Is there a difference between cooperation
and capture?
Appearances Matter
• You must not only act appropriately, you
must avoid the appearance of impropriety.
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Common Landmines
• Conflicts of Interest
– What is it?
– How do we handle it?
• Person should withdraw from discussion AND
decision on the conflicted issue?
• Recognizing a conflict is not an admission of
wrong doing!
– Do you have a Conflict Policy that lays this all
out?
Conflicted Director
• A Director who has a conflict of interest is
not a bad person
• Being conflicted does NOT mean a
Director has dome anything wrong.
• Must deal with actual and perceived
conflicts equally.
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Bylaws
Since your credit union’s bylaws provide the
governing document for how you operate, it
is essential that each director familiarize
themselves with each bylaw provision and
that bylaws are kept current and up-to-date.
Beware of “old copies”.
Bylaws ChecklistAre you state or federally chartered?
When was the last time YOU reviewed your bylaws?
When was the last time your bylaws were updated? Is this information easily accessible to anyone looking at the bylaws?
Who maintains the “official” copy of your bylaws?
Do you conduct an annual “audit” of your bylaws to ensure all “new” regulations are addressed?
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Standard Bylaws
• Article XVI, Section 4 of the FCU Bylaws
states that “[n]o director . . . may
participate in any manner, directly or
indirectly, in the deliberation upon or the
determination of any question affecting his
or her pecuniary or personal interest . . . in
which he or she is directly or indirectly
interested.”
Standard Bylaws
• To prevent such a potential conflict of
interest, the FCU Bylaws require that an
interested director withdraw from the
deliberation and determination process.
• As such the director must recuse
themselves when the board considers and
decides any issue in which the director
may have a conflict of interest.
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Two Parts to the Process
• The Director needs to be removed from
BOTH the deliberations and the decision.
• Do not allow the conflicted Director to
remain in the room and possibly make
others uncomfortable.
Classic Conflicts
• Business interests
– Director as a vendor
– Director as a borrower
– Director as an investor
• Family interests
– Family member on the CU staff
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NCUA Rules §721.7
• (a) Conflicts. No official, employee, or
their immediate family member may
receive any compensation or benefit,
directly or indirectly, in connection with
your engagement in an activity authorized
under this part, except as otherwise
provided in paragraph (b) of this section.
NCUA Rule 701.21c(8)(i)
• NCUA’s lending rule generally prohibits a
director from “receiving directly or
indirectly, any commission, fee or other
compensation in connection with any loan
made by the credit union.”
• Some exceptions …….
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The Exception
• The lending rule, however, grants an
exception for volunteer officials who
receive compensation from an outside
party for a “service or activity performed
outside the credit union, provided that no
referral has been made by the credit union
or the official.” 12 C.F.R. 701.21c(8)(iii)(D)
Conflict of Interest Provisions
• No official or employee may be compensated in
connection to a credit union loan
– Exceptions:
• Salary
• Bonus tied to overall CU performance
• Incentive bonuses to non-senior level employees in
connection to loans under board-created plan
• Payments from 3rd parties where no CU referral took
place
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Some Specifics
• Loans to officials > $20,000
–Must be approved by the Board
• Non-preferential treatment for
officials and their family members
– Legal Opinion Letter 06-0924
• MBL prohibitions
The Power of One?
• Boards govern through the majority
– Executive Committee
– Emergency Actions
• What is the real power of one Board
member?
• Can one Board member veto an action?
• What do you do about an “uncooperative”
Board member?
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Best Practices
• It is always best if a Director self discloses
the conflict and follows the prescribed
rules voluntarily.
• If that is not the case, the Board must take
action by recognizing the conflict and
enforcing the proper recusal procedures.
• Remember: Majority wins!
Business Judgment Rule
• The legal doctrine that officers and directors cannot be liable for damages for a business decision that proves unprofitable or harmful to the business so long as the decision was:– within the officers’ or directors’ discretionary power
and was
– made on an informed basis,
– in good faith without any direct conflict of interest, and
– in the honest and reasonable belief that it was in the business’s best interest.
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Business Judgment Rule
• Your best defense to a liability claim!
• Courts will not “second guess” board
decisions
• Not a “gimme”. You have to earn the
defense through your actions.
Do Your Homework
• Decisions must be based on reasonable
inquiry
• Minimum level of due diligence
• Reports and opinions from outside
professionals
• Attorney opinion letters, audits,
accountant’s reports, etc.
• Must act in good faith with no self dealing
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QUESTIONS?