NEWS: Wisconsin’s Office of Credit Unions (OCU) has published new guidance that is important for credit unions offering certain types of retirement and other employee benefits to help recruit and retain good executives, managers, and staff.
“Letter to Credit Unions CU 2-21: Factors Affecting the Permissibility of Certain Investment Instruments Used to Provide Employee Benefits” is available online here. It describes the factors the OCU will use when reviewing credit union investments that fund certain employee benefits, like executives’ deferred compensation plans:
This guidance is intended to describe factors that the Office will consider when evaluating requests for credit union approval for certain investments used to pre-fund future benefit obligations or implement deferred compensation programs, including credit union-owned life insurance, … collateral assignment split-dollar … arrangements, and other investment products.
The letter begins by listing several general factors the OCU uses in evaluating any request for approval of such an investment. The following is a summary of those factors. Please review the letter’s full text for details.
- Whether the investment conforms to the credit union’s written investment policies. Those policies must address investment risk tolerances, net worth and overall financial condition of the credit union, as well as the credit union’s procedures for reviewing, authorizing, and – where necessary – seeking OCU approval for such investments.
- Whether the credit union has avoided potential conflicts of interest when considering the proposed benefit plan. The letter stresses the importance of avoiding conflicts: “[T]he credit union’s board of directors (or compensation committee, if it has one) should be responsible for reviewing, evaluating, and approving or disapproving proposed benefit plans – not the officer or employee who will receive the contemplated benefits (or anyone subject to their supervision or control).”
- Whether the credit union has obtained the advice of independent legal counsel, accountants, or other advisers concerning the proposed benefit plan. The OCU wrote that it “expects the credit union to retain legal counsel to review the compensation policy, plan, documents and agreements and any amendments to these items, as well as an independent CPA or other qualified consultant to ensure the program is properly administered, valuated, and accounted for.”
- Whether the credit union has a clear understanding of the terms and conditions of the proposed benefit plan and possible alternatives. The letter explains that: “The board should have a clear, documented understanding of each proposed benefit plan or arrangement, including: eligibility criteria and vesting periods; the effects of early or involuntary termination of employment; responsibility for tax reporting and liabilities; and all other obligations and responsibilities of both the credit union and the employee, including identification of the person authorized to act on behalf of the credit union concerning the plan.”
- Whether the credit union has fully considered and documented the risks associated with the proposed benefit plan. Due diligence on proposed investments must consider all associated risks to the credit union’s future earnings, net worth, and other safety and soundness concerns. Risks include:
- Concentration risks,
- Interest rate risks,
- Liquidity risks,
- Transaction risks,
- Vendor risks,
- Compliance risks,
- Credit risks,
- Exit risks,
- Strategic risks, and
- Reputation risk.
- Whether the credit union has taken documented steps to ensure proper accounting for the plan. “The credit union must comply with all IRS provisions,” the letter says, “and work with an independent CPA regarding the accounting, financial statement reporting, and consideration of any changes of circumstance related to the plan.”
- Whether the board has adopted a policy to ensure ongoing assessment and compliance. A credit union’s board should have a written compensation policy that addresses ongoing monitoring and periodic review of employee benefit plans, the OCU said.
In addition to these general factors, the letter goes on to list specific considerations the OCU will use to review investments in credit union-owned life insurance, collateral assignment split-dollar arrangements, and other investment products.
The OCU concludes by summarizing how important it is for credit unions to address all the factors its new letter describes:
When seeking approval of these programs, credit unions must provide documentation to the OCU quantifying their investment and addressing the general factors and specific considerations described in this letter. Examiners and management will review and evaluate these programs and related investments to ensure that adequate due diligence has been done, the products are reasonable, the program is properly set up and monitored and has been approved by the board.
If a credit union does not obtain the required approval or the investment presents safety and soundness concerns, the Office of Credit Unions has the authority to order divesture of the investment.