NCUA’s Fidelity Bond Proposal: Less Process, Same Coverage Duty

NCUA’s Fidelity Bond Proposal: Less Process, Same Coverage Duty

NCUA’s board approved a proposed rule on October 13 that rolls back the procedural mandates added to the fidelity bond rules in 2019. It’s deregulatory by design. Boards get more flexibility on the process. They still owe the credit union adequate coverage for the risk, which is what the regulation requires in the first place.

The proposal amends four sections: 704.18 for corporate credit unions, and 713.2, 713.4, and 713.5 for natural person credit unions. The comment period is 60 days, closing in mid-December. Nothing changes until there’s a final rule.

How Part 713 got here

Part 713 was created in 1999, when the fidelity bond rules moved out of 701.20 and were rewritten for clarity. In 2005 the minimums went up. Then fourteen years without changes.

In 2019 the process tightened, and the driver was losses. Bond issuers rescinded coverage when the person who signed the application already knew about the fraud. The response was full board review of every application, purchase or renewal; a board resolution approving submission, with a formal vote on the record; a non-employee director signing, rotating so no one signed consecutive renewals; post-liquidation coverage; and a ten-year sunset on bond forms.

Delegation, and who signs

Under the proposal, the board or a duly authorized individual on the board, supervisory committee, or audit committee reviews and approves the bond. No board resolution is required in the proposed text. Duly authorized can come from a specific board delegation or by virtue of assigned duties. My interpretation is that a position description could do it.

Delegation is an option, not a mandate. The full board could still do it, and quite frankly, you might want to.

The signer still can’t be an employee. A board member can sign, as can a duly authorized supervisory or audit committee member who isn’t an employee. The CEO, the manager, or any other employee can’t. Those are the people NCUA sees as most likely to know of a fraud or a pending claim. Of everything in the 2019 package, that requirement is the one aimed most directly at the losses that prompted it.

Rotation goes away. NCUA’s reasoning is burden: small credit unions have few non-employee directors to rotate through. The non-employee requirement stays, so independence is still protected, and oversight stays with the board. The same person can sign year after year, as long as they hold the delegation.

Forms and the “should” language

The ten-year sunset on bond forms is proposed to go. The Federal Credit Union Act lets the NCUA Board approve the form of the bond and sets no limit. NCUA now calls the automatic expiration a substantive requirement the statute doesn’t contain. Approved forms only still applies. NCUA can review any form at any time and rescind approval, and amended forms and limiting riders still need its approval. My take is that the review power matters if a provider is rejecting claims inappropriately.

Two shoulds come out of 713.5. One says the board should purchase additional coverage as circumstances warrant. NCUA calls it purely advisory, restating fiduciary duties the board already has. The other ties increased coverage to cash on hand and money in transit, a two-factor formula NCUA calls prescriptive and ambiguous. Should is a bad word for a regulation. If you have to do it, it should say shall or must.

Corporates get parallel changes and a one-word fix: “and” becomes “or,” so an amended form or a limiting rider each needs NCUA approval on its own. NCUA says the effect is none, since both have been applied that way since 2019. NCUA also asks for comment on whether to drop the corporate board’s duty to buy coverage above the minimum when necessary. Unlike the Part 713 language, that one is written as a mandate.

What doesn’t change

Annual board review of coverage, based on risk. Required minimum bond amounts. Post-liquidation coverage. NCUA-approved forms only.

What boards should be thinking about

If you delegate, put it in writing, in your minutes or a policy naming who reviews, who approves, and who signs. Keep the signer truly independent. Before signing, the question to ask is what this person knows about possible claims.

Without the formula, your analysis carries the weight. Document why your coverage fits your cash-in-transit and insider fraud risk. And if you have a view, weigh in. Corporates especially.

If you want help thinking through your bond process or coverage analysis, CUES works with credit union boards on this. The full episode of With Flying Colors is here: [Episode link]