Presented By: J. Kirk Cuevas, Partner, Dollar Associates, LLC Utah Credit Union Association

Presented By:J. Kirk Cuevas, Partner,Dollar Associates, LLC

Utah Credit Union Association Volunteers Conference

October 27, 2012Park City, UT

Understanding Your Fiduciary Role as a Credit Union Volunteer

Understanding Fiduciary Duties

Committed Volunteers are Critical to the Success of the Credit Union Movement

• Volunteers have made the credit union movement what it is today.

• Serving as a credit union volunteer can be a rewarding and fulfilling pursuit.

• Ongoing success of the credit union movement will be dependent upon responsible, competent and committed directors and volunteers.

• It is critical that directors and volunteers fully understand their roles. This is especially the case in the current economic, regulatory and legal environments.


Public Perception of Boards of Directors

• Public perception has become increasingly heightened in recent years primarily due to high profile failures of organizations such as:


What Does Fiduciary Duty Mean?• Black's Law Dictionary describes a fiduciary

relationship as "one founded on trust or confidence reposed by one person in the integrity and fidelity of another."

• The American Heritage Dictionary describes a fiduciary as “one who stands in a special relation of trust , confidence, or responsibility in his or her obligations to others, as a company director or an agent of the principal.”

• Over the years the definition of fiduciary duty has become associated with the core duties of care and loyalty.


Defining Fiduciary Duties and Roles in Today’s Environment

• Fiduciary duties of directors were first elaborated by common law judges, operating without guidance from the formal written law.

• Even today, the laws of the United States and many other common law jurisdictions, contain no statement at all of the core fiduciary duties of care and loyalty.

• In short, fiduciary duties of directors are continuing to evolve and for the most part without formal written law.

• Generally, these duties are a matter of interpretation and have been broadly addressed in regulation, credit union bylaws, case law, etc.


Three General Duties That a Director Owes to the Credit Union

• Duty of Obedience

• Duty of Care

• Duty of Loyalty


Duty of Obedience• Must adhere to the Federal Credit Union Act or

State Credit Union Act, applicable credit union rules and regulations and credit union bylaws.

• The directors must not engage in ultra vires acts. These are acts that the credit union, under its charter and applicable law, can not perform because such acts are prohibited or beyond the scope of the credit union’s powers.


Duty of Care• Many have described this duty as the duty of a director

to be informed and to try to make good decisions.• As a director you have the responsibility to be informed

about an issue prior to making a decision about the issue.

• The duty does not require you to make the right decision. It simply means that you must consider all material information reasonably available to you prior to making the decision.

• Directors will be considered to have fulfilled this duty if they followed the policies and procedures of the credit union, consulted with appropriate committees, management and appropriate outside experts in making the decision.


“Business Judgment Rule” Relative to the Duty of Care

• It is important to note that US courts have traditionally not held directors liable for business decisions, made without a conflict of interest, unless those decisions are completely irrational.

• This doctrine is known as the Business Judgment Rule. Essentially, it is a doctrine of noninterference.

• Courts are bad at second guessing in hindsight decisions that turn out poorly. Therefore, there is a presumption that the Board acted in good faith and honest belief.

• Cannot eliminate risk in decision making or the marketplace (although new CFPB seems to be attempting such an approach).

• Some risky decisions work out, some don’t and the courts want to make sure that we have people willing to serve on Boards without fear of personal liability for bad outcomes.

• Ultimately it comes down to not what the Board decided, but how they decided the issue.


Duty of Loyalty• Some have suggested that the duty of

loyalty is the most important fiduciary duty. • In short, this duty requires the director to act

in the best interests of the credit union rather than his or her own interests or their associates.

• The easiest way to fulfill this duty is to not engage in transactions or decisions that involve a conflict of interest.


Duty of Loyalty Cont’d• An important aspect of this duty is to retain the

confidentiality of information that is deemed confidential by the credit union, as well as information that appears to be confidential from its nature or matter.

• Directors should familiarize themselves with the credit union’s conflict of interest policy and all applicable regulations or bylaws regarding the issue.

• If a conflict of interest is present the director has an obligation to disclose to the board the material facts as to his or her relationship or interest and not participate in any discussion or vote on the matter unless the Board determines otherwise.


Duty of Extra Care• An enhanced fiduciary duty seems to be

evolving for board members that some have begun to characterize as a Duty of Extra Care.

• Most commonly associated with issues involving ownership rights of an institution.

• NCUA’s recent amendments to Part 701 regarding duties of Federal Credit Union Directors is a good example of how this heightened duty is being implemented.


Part 701 – Duties at Federal Credit Unions

• Part 701.4 makes it clear that the directors must carry out their duties in good faith and in a manner that could be viewed as in the best interests of the members as a whole.

• Requires directors at the time of election or appointment or within six months of their selection to have at least a working familiarity with basic finance and accounting practices.

• Part 701.33 prohibits indemnification of directors against liability for a breach of duty of care when the breach affects the fundamental rights and financial interests of the FCU members.


Director Liability for Breach of Fiduciary Duty

• Directors can be held personally liable for failing to meet their fiduciary obligations.

• Recent lawsuits have been filed individually against the Directors of US Central and WesCorp.

• Claims against the US Central Volunteer Directors alleged that they were involved in securities fraud, negligence, breach of fiduciary duties, willful misrepresentation and negligent misrepresentation.

• While these lawsuits have yet to be adjudicated, these cases clearly demonstrate that directors must take their fiduciary responsibility seriously.


Types of Liability Exposure

• Civil Liability

• Criminal Liability

• Statutory Liability


Civil Liability• A director could be subjected to civil liability coupled

with money damages if it can be established that his or her actions or breach of fiduciary duty resulted in an injury to one of the following parties:

-Credit Union -Members -Regulator -Insurance Carrier -Third Party


Civil Liability Cont’d• In general directors will not be held personally

liable for negligence or contractual non-performance of the credit union merely because of their status as directors.

• Director can be held personally liable if he or she engages in wrongful conduct toward a third party or willfully directs or participates in wrongful conduct by the credit union.

• Examples could include, among others, sexual harassment or intentional release of confidential information of a member.


Criminal Liability• A director may be subjected to criminal liability if

it can be established that he or she violated a specific governmental statute. i.e. FCUA or State Credit Union Act. FIRREA or BSA.

• Other examples where directors could be subjected to criminal liability include, fraud and misappropriation of funds.

• Criminal liability usually results in the imposition of money fines, penalties, removal from office and prohibition orders.


Most Common Breaches of Fiduciary Duty

• General Mismanagement. Usually a pattern of actions or inactions that result in significant harm over a period of time.

• General Neglect. Directors are expected to exercise “good faith and honesty” in performance of their duties. This implies that a director would exercise some level of due diligence in the performance of their duties.

• Mismanagement of Investments. The duty of care mandates that the board protect the assets of the credit union. Investment decisions must be reasonable and defensible. Not required to seek outside expertise, but the board should provide adequate oversight. It is not unusual to delegate investment authority to an individual, but you must document the delegation and be clear in the scope of the delegation. “Trust but verify.”


Application of Sarbanes-Oxley • Applies primarily to publicly traded companies, but

many proactive non-profits have applied various aspects of SOX to their Board governance model.

• NCUA has recommended that certain provisions of SOX be considered as an example of best practices.

• It is likely that credit unions and other non-profits will become subject to SOX or something similar in the future.

• Section 404 of SOX requires management to assess the internal control of an organization.

• Likewise, board assessment is also specifically recommended or encouraged.



Ten Fundamental Responsibilities for Every Credit Union Board of Directors

• Determine the credit union’s mission and purpose.

• Select a President and CEO• Provide proper financial oversight• Ensure adequate resources• Ensure legal and ethical integrity and

maintain accountability• Ensure effective organizational planning












Ten Fundamental Responsibilities for Every Credit Union Board of Directors Cont’d

• Recruit and train new board members and assess board performance.

• Promote and enhance the credit union’s public image.

• Determine , monitor and strengthen the credit union’s products and services.

• Support the CEO and assess his or her performance.

Source: Ingram, Robert T (2003),Ten Basic Responsibilities of Non-Profit Boards


Duties of an Individual Board Member

• Understand the credit union’s mission, goals and objectives

• Understand the environment and climate in which you are operating

• Prepare for meetings• Maintain confidentiality• Avoid conflicts of interest• Understand the credit union’s financials



References• 12 CFR Part 701 –Fiduciary Duties at Federal Credit Unions• Black, Bernard S., (2001) The Principal Duties of Boards of Directors,

Presentation at Third Asian Roundtable on Corporate Governance• Federal Credit Union Act• Ingram, Richard T., (2003). Ten Basic Responsibilities of Nonprofit Boards,

BoardSource.• Joseph, James P., (2006) Fiduciary Duties of a Director and Conflicts of Interest• Sarbanes-Oxley Act of 2002• Trudeau, Gary P.,(2007), Assessing Board Members in the Nonprofit

Organizational Arena: Increased Board Responsibilities Dictated by Sarbanes Oxley, Journal of Business and Economic Research Volume 5, Number 7

• Witt, Brian, (2010) Director Liability-It Shouldn’t Hurt to be a Volunteer, Presentation at Volunteer Leadership Institute

Documents

Presented By: J. Kirk Cuevas, Partner, Dollar Associates, LLC Utah Credit Union Association