NCUA Board Member Tanya F. Otsuka’s Statement on the Succession Planning Notice of Proposed Rulemaking

As Prepared for Delivery on July 18, 2024

John and Ariel, thank you very much for your presentation on this notice of proposed rulemaking on succession planning for federal credit unions. I appreciate the work put in by you and your colleagues in the Office of General Counsel in drafting today's proposal. I would also like to thank Chairman Harper for reproposing this critical rule and thus creating the opportunity for us to implement the most effective version-an effort I fully support.

Back in 2019, I recall a conversation at a community bank conference with the CEO of a very small bank. He explained that the biggest problem facing his institution was attracting talent and training staff to prepare for a change in leadership - he and his board were approaching retirement, and he wanted to be sure he could ensure the long-term viability of the institution with the right people taking the reins. Since then, I've had so many similar conversations with credit union executives who are facing this challenge.

"Small credit unions are often left with little choice but to merge when their leadership retires or leaves because of the difficulties associated with finding new talent on short notice. Or, worse, the lack of leadership results in serious financial and operational problems, which hurts members and puts the viability of the entire institution at risk."

As Chairman Harper mentioned, one of the explicit goals of this rule is to help ensure the continuity of small credit unions. Small credit unions are often left with little choice but to merge when their leadership retires or leaves because of the difficulties associated with finding new talent on short notice. Or, worse, the lack of leadership results in serious financial and operational problems, which hurts members and puts the viability of the entire institution at risk. And while of course our examiners already look at management as part of the supervisory process, this rule will provide clearer guidance to both examiners and credit unions on what is expected and how to assess credit unions for sound managerial practices.

The proposed rule would require federal credit unions to establish and adhere to processes for succession planning. This is a key gap in our regulatory framework and one this proposal begins to fill. It would require credit unions to be proactive in thinking through how to maintain critical leadership positions, such as officers of the board and senior management officials, to ensure continuity of operations. The rule is not prescriptive, but instead provides basic standards for developing an effective succession plan. The NCUA understands the differing needs of credit unions, especially small and low-income designated credit unions, and wrote the rule with this in mind to provide enough flexibility.

"The proposed rule would require federal credit unions to establish and adhere to processes for succession planning. This is a key gap in our regulatory framework and one this proposal begins to fill. It would require credit unions to be proactive in thinking through how to maintain critical leadership positions, such as officers of the board and senior management officials, to ensure continuity of operations. The rule is not prescriptive, but instead provides basic standards for developing an effective succession plan."

In that vein, I would like to highlight that although it is not part of the regulatory text, I think it is important for MDIs to account for retaining their MDI status as they draft their succession plans-as the composition of their leadership team is a criterion to being designated an MDI. This board recently reaffirmed our commitment to preserving MDIs, and this is another avenue through which we can execute this goal.

My questions are:

1. Many times, we focus on how our rules, including this one, will cost credit unions; however, can you speak to the potential savings and benefits this rule can provide for credit unions and how this may outweigh the costs associated with developing these plans?
2. I think it's important for credit unions to understand what the expectations are when it comes to how we evaluate management, including succession planning. Can you explain how this rule provides clarity for credit unions and examiners?

Thank you both for your responses and adding further context as to why this rule is needed to help preserve our system of cooperative credit. I turn it back to Chairman Harper.

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