The NAFCU Journal March - April 2018 - 44

COMPLIANCE CENTRAL

Fiduciary Duties: What Your
Board Needs to Know
By Jennifer Aguilar

A

credit union's board of directors is generally responsible
for the overall direction and
control of the credit union.
While the board may delegate the dayto-day operation of the credit union to
management and staff, NCUA regulations, bylaws and principles of corporate
law generally require a board to provide
oversight. NCUA has explained that this
means the board must direct the operation of the credit union, ensure safety
and soundness and establish programs
to achieve the credit union's purpose.
NCUA has also provided a catch-all provision that requires the board to perform
all other acts that may be required.
In carrying out these responsibilities,
Section 701.4 of NCUA's regulations
requires each director to act in good
faith and in the best interests of the
credit union membership. This rule, also
known as the fiduciary duty rule, creates
a fiduciary relationship between each
director and the credit union membership. As a fiduciary, each director must
set aside his or her own needs for the
needs of the credit union membership
and manage the credit union for the
benefit of the members. While there are
numerous responsibilities a fiduciary
must undertake, these generally boil
down to two main duties: loyalty and
reasonable care.

Loyalty

The duty of loyalty requires directors
to set aside their own interests and the
interests of any third party and instead
consider the interests of the credit union
membership. NCUA emphasized the fact
44

that a credit union's members own the
credit union and that the duty of loyalty is
ultimately owed to the members, not the
credit union. NCUA also explained that
directors must consider the interests of
the membership as a whole when making
decisions. This is particularly important
when decisions affect a member's fundamental rights - for example, when the
directors are considering a merger.

knowledge, the amount of due diligence
conducted, etc.) and determine whether
a reasonable person would have made a
different decision in the same circumstance. The focus is generally not on
whether the decision was a good business decision, but rather on whether the
director considered all the information
and acted in the best interest of the credit
union membership.

Directors are also required to avoid all
conflicts of interest. Article XVI, Section
4 of NCUA's model bylaws explains that
a director must not participate in any
manner with a decision that affects their
personal interest or the interests of any
business they are involved in. If a decision involves a director's personal interest, the director must withdraw from all
deliberations and voting. The fiduciary
duty rule explains that a violation of this
provision of the bylaws is also a breach of
the director's duty of loyalty.

This duty to act reasonably also requires
directors to ensure they have all material
information before making a decision.
While exactly what this requires will
vary from state to state, NCUA referred
to a Delaware case that provided some
factors to consider: the amount of
time spent preparing for the decision,
including researching and investigating
the information; the thoroughness of
deliberations; whether outside guidance
was obtained; and whether alternatives
were considered. Whether the director
obtained all material information is also
judged by the reasonable person standard. Receiving board packets prior to
meetings and having minutes that reflect
deliberation can be key to showing that
directors acted with care.

Reasonable Care

The duty of reasonable care requires a
director to act as an ordinary prudent
person would act under similar circumstances. This imposes an objective
"reasonable person" standard in assessing a director's behavior. In determining
what this means, NCUA referred to the
long-standing Supreme Court opinion
that explained directors cannot act as
mere figureheads; they must act reasonably. Essentially, this means that in
assessing whether a particular director acted appropriately in a particular
circumstance, a court would look at all
the factors involved (the information
provided to the director, the director's

Reliance on Others

While the fiduciary duty rule imposes
these two specific nondelegable duties on
directors, the rule also makes clear that
directors are not meant to be experts on
every topic. Both the rule and the model
bylaws require directors to receive training
on certain aspects of credit union operations. The rule explains that directors have
six months from the date they take office to
obtain a "working familiarity" with finance
THE NAFCU JOURNAL  MARCH-APRIL 2018



Table of Contents for the Digital Edition of The NAFCU Journal March - April 2018

Conferences
From the Chair
Your Washington Watchdog
Advocacy Snapshot
Washington and Industry Briefs
Growth Strategies
Understanding Risk and Managing It
The Board of Directors
Best-of-Class Strategies for Retaining Top Talent
Executive Spotlight
Management Insight
Compliance Central
Inside NAFCU Services
From the President’s Desk
The NAFCU Journal March - April 2018 - Cover1
The NAFCU Journal March - April 2018 - Cover2
The NAFCU Journal March - April 2018 - 1
The NAFCU Journal March - April 2018 - 2
The NAFCU Journal March - April 2018 - Conferences
The NAFCU Journal March - April 2018 - From the Chair
The NAFCU Journal March - April 2018 - 5
The NAFCU Journal March - April 2018 - Advocacy Snapshot
The NAFCU Journal March - April 2018 - 7
The NAFCU Journal March - April 2018 - Washington and Industry Briefs
The NAFCU Journal March - April 2018 - 9
The NAFCU Journal March - April 2018 - 10
The NAFCU Journal March - April 2018 - 11
The NAFCU Journal March - April 2018 - 12
The NAFCU Journal March - April 2018 - 13
The NAFCU Journal March - April 2018 - 14
The NAFCU Journal March - April 2018 - 15
The NAFCU Journal March - April 2018 - 16
The NAFCU Journal March - April 2018 - 17
The NAFCU Journal March - April 2018 - 18
The NAFCU Journal March - April 2018 - 19
The NAFCU Journal March - April 2018 - Growth Strategies
The NAFCU Journal March - April 2018 - 21
The NAFCU Journal March - April 2018 - Understanding Risk and Managing It
The NAFCU Journal March - April 2018 - 23
The NAFCU Journal March - April 2018 - 24
The NAFCU Journal March - April 2018 - 25
The NAFCU Journal March - April 2018 - The Board of Directors
The NAFCU Journal March - April 2018 - 27
The NAFCU Journal March - April 2018 - 28
The NAFCU Journal March - April 2018 - 29
The NAFCU Journal March - April 2018 - 30
The NAFCU Journal March - April 2018 - 31
The NAFCU Journal March - April 2018 - 32
The NAFCU Journal March - April 2018 - 33
The NAFCU Journal March - April 2018 - Best-of-Class Strategies for Retaining Top Talent
The NAFCU Journal March - April 2018 - 35
The NAFCU Journal March - April 2018 - 36
The NAFCU Journal March - April 2018 - 37
The NAFCU Journal March - April 2018 - 38
The NAFCU Journal March - April 2018 - 39
The NAFCU Journal March - April 2018 - Executive Spotlight
The NAFCU Journal March - April 2018 - 41
The NAFCU Journal March - April 2018 - Management Insight
The NAFCU Journal March - April 2018 - 43
The NAFCU Journal March - April 2018 - Compliance Central
The NAFCU Journal March - April 2018 - 45
The NAFCU Journal March - April 2018 - Inside NAFCU Services
The NAFCU Journal March - April 2018 - 47
The NAFCU Journal March - April 2018 - From the President’s Desk
The NAFCU Journal March - April 2018 - Cover3
The NAFCU Journal March - April 2018 - Cover4
http://www.nxtbook.com/ygsreprints/NAFCU/G105388_nafcu_mayjun2019
http://www.nxtbook.com/ygsreprints/NAFCU/G103030_nafcu_marapr2019
http://www.nxtbook.com/ygsreprints/NAFCU/G88665_nafcu_janfeb2019
http://www.nxtbook.com/ygsreprints/NAFCU/G100235_nafcu_novdec2018
http://www.nxtbook.com/ygsreprints/NAFCU/G98517_nafcu_septoct2018
http://www.nxtbook.com/ygsreprints/NAFCU/G96479_nafcu_julaug2018
http://www.nxtbook.com/ygsreprints/NAFCU/G93390_nafcu_mayjune2018
http://www.nxtbook.com/ygsreprints/NAFCU/G90161_nafcu_marapr2018
http://www.nxtbook.com/ygsreprints/NAFCU/G88665_nafcu_janfeb2018
http://www.nxtbook.com/ygsreprints/NAFCU/G83806_nafcu_novdec2017
http://www.nxtbook.com/ygsreprints/NAFCU/G80296_nafcu_septoct2017
http://www.nxtbook.com/ygsreprints/NAFCU/G79086_nafcu_julyaugust2017
http://www.nxtbook.com/ygsreprints/NAFCU/G75911_nafcu_mayjune2017
http://www.nxtbook.com/ygsreprints/NAFCU/G73247_nafcu_marapr2017
http://www.nxtbook.com/ygsreprints/NAFCU/G71923_nafcu_janfeb2017
http://www.nxtbook.com/ygsreprints/NAFCU/G69249_nafcu_novdec2016
http://www.nxtbook.com/ygsreprints/NAFCU/nafcu_septoct2016
http://www.nxtbook.com/ygsreprints/NAFCU/g63853_nafcu_julaug2016
http://www.nxtbook.com/ygsreprints/NAFCU/g61005_nafcu_mayjun2016
http://www.nxtbook.com/ygsreprints/NAFCU/g58935_nafcu_marapr2016
http://www.nxtbook.com/ygsreprints/NAFCU/g56716_nafcu_janfeb2016
http://www.nxtbook.com/ygsreprints/NAFCU/g55605_nafcu_novdec2015
http://www.nxtbook.com/ygsreprints/NAFCU/g53582_nafcu_sepoct2015
http://www.nxtbook.com/ygsreprints/NAFCU/g52154_nafcu_july2015
http://www.nxtbook.com/ygsreprints/NAFCU/g50302_nafcu_mayjune2015
http://www.nxtbook.com/ygsreprints/NAFCU/g48554_nafcu_marapr2015
http://www.nxtbook.com/ygsreprints/NAFCU/g47118_nafcu_janfeb15
http://www.nxtbook.com/ygsreprints/NAFCU/g45886_nafcu_novdec2014
http://www.nxtbook.com/ygsreprints/NAFCU/g44155_nafcu_sepoct2014
http://www.nxtbook.com/ygsreprints/NAFCU/g42892_nafcu_julyaug2014
http://www.nxtbook.com/ygsreprints/NAFCU/g41296_nafcu_mayjun2014
http://www.nxtbook.com/ygsreprints/NAFCU/g39799_nafcu_marapr2014
http://www.nxtbook.com/ygsreprints/NAFCU/g38961_nafcu_janfeb2014
http://www.nxtbook.com/ygsreprints/NAFCU/g38041_nafcu_novdec2013
http://www.nxtbook.com/ygsreprints/NAFCU/g36539_nafcu_sepoct2013
http://www.nxtbook.com/ygsreprints/NAFCU/g34910_nafcu_julaug2013
http://www.nxtbookMEDIA.com