Small credit unions often turn to mergers as a way to continue serving their members in the face of increasing costs and competition, but some in the industry fear a new rule could have a chilling effect on deals.

The National Credit Union Administration board in June approved a rule it says will provide credit union members with more transparency when institutions look to merge. Members will now have to be notified of a merger vote within at least 45 days. The rule will also require partnering credit unions to show members merger-related compensation hikes greater than 15% of overall compensation or $10,000, whichever is more, for select employees of the partnering credit unions.

Rocky Hill, Conn.-based Nutmeg State Financial CU President and CEO John Holt said he is not opposed to transparency, but believes the NCUA's rule is simply too intrusive in the merger process. In an interview, Holt said the rule is overkill in situations where two solid credit unions want to partner.

"With some of what's required I'm really concerned that it's going to dampen the merger environment," he said. "I'm all for transparency and I'm all for putting things out there, but the concern I have is some of the pieces to the rule."

For example, credit unions will be required to list payouts of unused paid time off for certain high-ranking officials and any salary increases given to those employees during the past two years.

Holt said part of Nutmeg State's growth strategy includes mergers. The credit union in early 2017 completed a merger with Housatonic Teachers FCU, a $20 million-in-assets institution that Holt said complements Nutmeg's footprint. The credit union is involved in other merger discussions that have now slowed because of the new rule, he said.

Such transparency is acceptable for stock-held companies that are ultimately compensated through higher deal pricing and perhaps additional stock when being acquired by another publicly-owned company, Holt said, but not for credit unions.

"A stock held organization — I don't care what anyone says — is different than a credit union that's not for profit," he said. "So if we're going to be putting all this information out there and [we are] limited to how we can explain it, I'm concerned about what the perception would be for the credit union that's trying to merge."

Members have the right to know what is involved in a deal, but Holt said he is worried about the credit union's ability to effectively communicate the information through the required channels. He said the letter to members has to be constructed in a very specific way per the NCUA guidance. "And being able to make sense of how this can be beneficial in the long term for the member is a challenge," he said.

Holt said he has heard similar concerns from other CEOs.

During a recent review, the NCUA said that 75% to 80% of mergers have included "significant" merger-related compensation information of executives of the non-surviving institution. NCUA Chairman J. Mark McWatters said the new rule is similar to what the SEC requires. He said that he does not believe the rule will lead to fewer mergers.

"I think it's reasonable to expect that a member of a credit union that is being merged out of existence would consider this material information," he said. "If it has a chilling effect then perhaps something was wrong with the merger to begin with."

Caroline Willard, president and CEO of the Cornerstone Credit Union League, told S&P Global Market Intelligence she is in favor of transparency but not if the price is increased bureaucracy. Still, members have a right to know if someone stands to see a large windfall due to a merger, she said. "You certainly would hope that's not the motivation," she said. "If the merger is happening because it's going to improve service or it's going to make for a more stable financial institution, great. If it's going to give someone a golden parachute I'm not in favor of that."

National Association of Federally-Insured Credit Unions President and CEO Dan Berger also expressed concern about the potential impact of the rule. "While we support increased transparency and disclosure, the rule could create unnecessary and troublesome roadblocks for responsible credit union mergers," Berger said.