Understanding Your Fiduciary
Role as a Credit Union Volunteer
Presented By:
J. Kirk Cuevas, Partner,
Dollar Associates, LLC
Utah Credit Union Association
Volunteers Conference
October 27, 2012
Park City, UT
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.
Understanding Fiduciary Duties
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:
Understanding Fiduciary Duties
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.
Understanding Fiduciary Duties
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.
Understanding Fiduciary Duties
Three General Duties That a Director
Owes to the Credit Union
• Duty of Obedience
• Duty of Care
• Duty of Loyalty
Understanding Fiduciary Duties
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.
Understanding Fiduciary Duties
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.
Understanding Fiduciary Duties
“Business Judgment Rule” Relative to
the Duty of Care
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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.
Understanding Fiduciary Duties
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.
Understanding Fiduciary Duties
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.
Understanding Fiduciary Duties
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.
Understanding Fiduciary Duties
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.
Understanding Fiduciary Duties
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.
Understanding Fiduciary Duties
Types of Liability Exposure
• Civil Liability
• Criminal Liability
• Statutory Liability
Understanding Fiduciary Duties
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
Understanding Fiduciary Duties
Civil Liability Cont’d
• In general directors will not be held personally
liable for negligence or contractual nonperformance 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.
Understanding Fiduciary Duties
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.
Understanding Fiduciary Duties
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.”
Understanding Fiduciary Duties
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.
Understanding Fiduciary Duties
Understanding Fiduciary Duties
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
Understanding Fiduciary Duties
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
Understanding Fiduciary Duties
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
Understanding Fiduciary Duties
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
Understanding Fiduciary Duties
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
Understanding Fiduciary Duties
Understanding Fiduciary Duties
References
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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