Corporate Governance:

NCUA's Controls and Related Procedures for Board Independence and Objectivity Are Similar to Other Financial Regulators, but Opportunities Exist to Enhance Its Governance Structure

GAO-07-72R: Published: Nov 30, 2006. Publicly Released: Dec 1, 2006.

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Alicia P. Cackley
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During recent congressional hearings and in public speeches, statements made by the National Credit Union Administration's (NCUA) Chairman and another board member raised congressional interest in the ability of NCUA to collect and objectively analyze data on credit union membership and executive compensation. More generally, these statements also raised issues about the agency's overall vigilance as a regulator and the independence and objectivity of NCUA's board and senior staff from the industry being regulated. As a result, Congress asked us to expand upon our current work looking at the tax-exempt status of credit unions to include a review of governance policies and procedures for NCUA's board of directors and senior staff and more specifically how the policies and procedures address independence and objectivity issues. This correspondence (1) compares controls and related procedures applicable to NCUA that help ensure the independence and objectivity of its board members with those of other federal financial regulatory agencies and relevant recommended management practices identified in academic and industry literature and (2) describes NCUA's use of Schedule C staff compared with that of other federal financial regulatory agencies.

Similar to the other regulators, NCUA is subject to statutory criteria and federal standards on the independence and objectivity of board members, but five of the six other regulators have additional controls and procedures relating to independence. More specifically, the primary criteria and standards addressing independence and objectivity of board members that we identified at NCUA and the other six regulators are based on (1) statutory criteria for individual qualifications and the composition of the boards and commissions we reviewed, and (2) rules promulgated by the Office of Government Ethics (OGE) setting forth ethical standards for employees in the executive branch. The qualifications for NCUA board membership, as written in the Federal Credit Union Act (FCUA), are similar to the qualifications for board members or commissioners at four of the six other agencies we reviewed in that they seek to ensure that nominees are suited by education or experience for the positions they are to serve. In addition, we compared the professional backgrounds and qualifications of current and prior NCUA board members and found them to be similar. Our review of available literature indicated that NCUA's board follows several recommended management practices for independence, many of which are included in FCUA. However, there is one notable exception. While NCUA's enabling legislation limits the NCUA board to three members, some academic and industry sources suggest there should be a minimum of five members on a board of directors to help maintain independence, retain needed expertise, and enable continuity of leadership. Further, some of NCUA's board members told us that having a three-member board sometimes made communicating among the members complicated because of the Government in the Sunshine Act, which largely limits nonpublic meetings of the majority of the board (in this case, two board members). Additionally, we recommended in 1991 that NCUA's board be expanded to five members, in part, to achieve a broader perspective on financial market regulatory and insurance issues. NCUA's use of Schedule C positions generally was similar to the practices at five regulators that we contacted that had Schedule C staff. The selection of Schedule C staff rests with the NCUA Chairman or individual board member, subject to White House approval, and does not require input from NCUA career staff. We reviewed the backgrounds of the seven NCUA Schedule C appointees and identified four who were formerly affiliated with the same credit union industry trade group (three were former employees and one held key positions in various committees of the trade group). Of the four NCUA Schedule C appointees with prior ties to the trade group, two are senior policy advisors to NCUA board members, one is the Director of Public Affairs and Congressional Relations, and one is a staff assistant to a board member. NCUA officials told us that Schedule C appointees that have trade group experience are viewed as beneficial to board members in discharging their regulatory responsibilities. In particular, the officials explained that the senior policy advisors that have come from credit union industry trade groups have brought an in-depth understanding of credit union issues as well as industry contacts.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: The NCUA Board followed GAO's recommendation and added the terms "independent" and "objective" to NCUA's Mission Statement and added and defined the terms "integrity" and "objectivity" in NCUA's list of values in our 2007 Performance Budget, the annual update to the Strategic Plan. On December 31, 2007, the NCUA Board issued a new, comprehensive Instruction (1235.07), entitled NCUA Policy on Objectivity, Independence and Standards of Ethics. The Instruction was sent out to all NCUA staff and is posted on both the ethics page of NCUA's intranet as well as on the NCUA e-library. The second paragraph of the Instruction specifically addresses the Board's rulemaking and adjudicatory functions.

    Recommendation: To address perception issues regarding NCUA's independence from and objectivity about the industry being regulated, the Chairman of NCUA should consider adopting practices that other financial regulators use to enhance their independence and objectivity. These practices include drafting agency-specific rules to maintain an arm's length relationship with the regulated industry and including independence and objectivity as core values in the agency's strategic plan.

    Agency Affected: National Credit Union Administration


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