Insights
Occasional papers from Western CUNA Management School

Permissibility of Investment

While non-qualified plans are not "funded" for purposes of ERISA and the Tax Code, it is not unusual for credit unions to "informally" fund the contractual obligations under the non-qualified plan through a credit union owned investment (provided that the employee does not have any right of ownership or claim upon the investment other than as a general creditor). Indeed, many credit unions contemplate the purchase of investment vehicles such as mutual funds and annuities to "fund" their contractual obligations to their employees.

When considering such investments, the credit union should consider the limitations on possible investments under the Federal Credit Union Act (FCUA) or the state credit union act under which it is chartered. For example, NCUA in its recently Proposed Rule, recognizes that a credit union investing on its own behalf is subject to the investment limitations of the FCUA. However, the NCUA has also indicated that these limitations do not apply "when a FCU is acting under its authority to provide and fund retirement or other employee benefits." The federal credit union may invest in an otherwise impermissible investment to "fund" an employee benefit obligation "as long as there is a direct connection between the investment and the employee obligation it serves to fund." Once the obligation ceases to exist, the credit union must generally divest itself of the otherwise impermissible benefit.

Reasonableness of Compensation

In determining executive compensation the board must take steps to assure that the compensation reflects reasonable payment for services rendered over the executive's period of employment. Whether compensation is reasonable depends upon the facts and circumstances, including the nature of the services, the nature of the credit union's operations, the "market" for the services of a comparable executive at a comparable credit union and whether the compensation has been negotiated at "arms length."

Given the high likelihood of regulatory review and given that the board represents the interests of the members, it is important for a board to document the bases and factors on which a compensation package was developed. Outside consultants and review of surveys and other data should assist in the objective evaluation and documentation of suitable and reasonable executive compensation. So as to avoid the appearance of any "undue influence," the executive should not participate in any discussion, deliberation or vote by the board in evaluating and approving executive compensation. This, of course, does not preclude an executive from being involved in negotiating his or her own compensation package.

In sum, the credit union's board should have a great deal of latitude in determining compensation when they do not have a "conflict of interest," obtain and rely upon appropriate comparability data in conducting their due diligence, approve compensation arrangements in advance and adequately document the basis for compensation. Meeting these standards will also assist against a member's alleging a "waste" of corporate assets or any administrative action to recover "wasted" funds and/or the application of administrative fines or other action by a regulatory agency such as the NCUA.

Page 6...

Prev 1 2 3 4 5 6 Next