[Federal Register Volume 62, Number 49 (Thursday, March 13, 1997)]
[Proposed Rules]
[Pages 11779-11789]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-6374]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 701, 712 and 740
Organization and Operations of Federal Credit Unions; Credit
Union Service Organizations; Advertising
AGENCY: National Credit Union Administration (NCUA).
ACTION: Notice of Proposed Rulemaking.
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SUMMARY: The NCUA is proposing to update, clarify and streamline
existing rules concerning credit union service organizations (CUSOs), a
common means of outside provision of services to federal credit unions
(FCUs) and to credit union members. The intended effect of the proposal
is to reduce regulatory burden, maintain safety and soundness, and
ensure the continuity and growth of services to FCUs and their members
conducted through CUSOs. Related conforming changes are also proposed
to amend NCUA's rules on credit union service contract and credit union
advertising requirements.
DATES: Comments must be received on or before May 12, 1997.
ADDRESSES: Comments should be directed to Becky Baker, Secretary of the
Board. Mail or hand-deliver comments to: National Credit Union
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. Fax
comments to (703) 518-6319. Post comments on NCUA's electronic bulletin
board by dialing (703) 518-6480 or to NCUA's webpage on the Internet at
[email protected]. Please send comments by one method only.
FOR FURTHER INFORMATION CONTACT: Martin ``Sparky'' Conrey, Staff
Attorney, Division of Operations, Office of General Counsel, at the
above address or telephone: (703) 518-6540; or Linda Groth, State
Program Officer, Division of Supervision, Office of Examination and
Insurance, at the above address or telephone: (703) 518-6360.
SUPPLEMENTARY INFORMATION:
I. Background and Discussion
A. General
In 1977, Section 107 of the Federal Credit Union Act (12 U.S.C.
1757) was amended to authorize federal credit unions (FCUs) to invest
in, and make loans to, CUSOs subject to certain funding limits and
other regulatory restrictions. The first CUSO rule was promulgated in
1979; the last major revision of this rule was in 1986. In general, the
results of the 1986 revision have been very positive. Nonetheless, over
ten years of experience with the regulation indicates that there may be
a need for additional simplification, clarification, and improvement.
In particular, NCUA is aware that certain business and legal
developments make this a good time to review and update the CUSO rule.
NCUA staff researched the relevant regulations, guidance, legal
interpretations and reporting requirements of NCUA and the other
federal financial institution regulators. In addition, NCUA is
conducting a review of its regulations pursuant to the Regulatory
Reinvention Initiative of the Vice President's National Performance
Review and the NCUA Board's Regulatory Relief Project. The purpose of
this notice of proposed rulemaking is to identify and request public
comment on reducing regulatory burden and increasing the flexibility
and usefulness of CUSOs, while ensuring the safety and soundness of
FCUs and the National Credit Union Share Insurance Fund (NCUSIF).
In providing comments upon the proposed rule, commenters are
requested to keep in mind the needs of small credit unions, especially
community development and low-income designated credit unions and their
members. CUSOs provide an ideal means for smaller credit unions to
expand the types of products and services offered to their memberships,
offer economies of scale, enhance members' lives, and increase hours of
service and locations, through automated teller machines (ATMs),
service centers, and other CUSO services. CUSOs can result in more
favorable penetration rates of potential members through availability
of financial services that might not otherwise be available and can
result in a transfer of knowledge and expertise from larger, full-
service credit unions to smaller, more limited service credit unions,
which can have long-term positive implications upon safety and
soundness. Lately, NCUA has been concerned over some reports that
smaller credit unions have been unable to meet minimum investment or
other eligibility requirements in order to partake of CUSO services.
For this reason, NCUA is weighing various options to increase smaller
credit union utilization of CUSO services. One means might be through
informal guidance, such as an NCUA Letter to Credit Unions, regarding
smaller credit union participation in CUSOs. Another means might be
through informal understandings with the CUSO industry regarding
possible incentives to be offered to smaller credit unions, such as a
reduction in, or waiver of, ordinary transaction charges, or a lowered
minimum investment or deposit amount
[[Page 11780]]
in order to obtain CUSO services. For example, NCUA is currently
reviewing Interpretive Ruling and Policy Statement (IRPS) No. 79-6,
Donations/Contributions, 44 FR 56691 (October 2, 1979) to determine
whether restrictions are necessary upon the donative and charitable
activity of FCUs to other credit unions. NCUA might also consider
express authority for de minimis equity investments in community
organizations, such as certain CUSOs, as part of the IRPS 79-6 review.
Certainly, NCUA is interested in soliciting comments on these, and
other, ideas to increase the availability of CUSO services to small
credit unions, their members, and their potential members.
NCUA notes that the proposed corporate credit union rule contains a
new section on corporate CUSOs that would apply instead of the
provisions of the natural person credit union CUSO rule, as is the case
currently. Proposed Rule, 61 FR 28085, 28106 (June 4, 1996). Therefore,
while any corporate credit unions are welcome to comment on this
proposal, such credit unions should keep in mind the possibility that
this rule may not apply to their institutions.
B. Section-by-Section Analysis
Proposed Section 701.26(b), Credit Union Service Contracts
NCUA solicits comments on whether current section 701.26(b) of its
rules should be removed. That section states that when a vendor service
contract requires the advance payment of more than 3 months, such
payment is deemed an investment in a CUSO subject to section 701.27 of
NCUA's rules. Current business practices of many vendors either require
such payments or give a discount to the purchasing credit union for
paying in advance. Not all vendors are CUSOs, or lend themselves to
having the CUSO rule applied to them. NCUA asks whether section
701.26(b) is outdated, imposes regulatory burdens, and is unnecessary.
It is proposed to be removed.
Proposed Part 712
In order to assist readers of the CUSO rule, NCUA proposes to
remove current section 701.27 and replace it with a new Part 712, which
Part is now unoccupied. Since the rule applies to FCUs, but is of much
interest to other parties, such as CUSOs and other CUSO investors, it
is hoped that by giving CUSOs their own section of NCUA's Rules and
Regulations, the rule will be more prominently featured and better
known, resulting in increased compliance and in a reduction of NCUA
staff time spent interpreting the regulation to interested parties.
Raising the rule to a part also results in more convenient citations
with fewer subsections. The most noticeable change in proposed Part 712
is the use of a Plain English question and answer format. Plain English
is being promoted within the Federal government as a means to increase
regulatory comprehension and compliance for users of regulations. An
intended consequence of this format, other than anticipated increased
compliance, is a lessening of misunderstandings caused by vague or
unclear standard regulatory language, which also results in increased
administrative efficiency. This revision and redesignation is done in
the spirit of regulatory review, reinvention, and renewal. Comment is
requested on the use of the Plain English format, or alternative
formats that could be used to achieve the goals of the Plain English
movement.
Proposed Section 712.1, What does this part cover?
Proposed section 712.1 condenses existing section 701.27(a), Scope,
by eliminating statutory citations and a summary of rule requirements
contained elsewhere in the rule. No change in the scope of the rule is
intended by the proposed amendment.
The term ``affiliated credit union'' is used to represent the
spectrum of credit unions that are eligible to make the services of a
CUSO available to their membership within the customer base
requirements of the CUSO rule. Under the current rule, ``affiliated
credit unions'' are those credit unions that either invest in, or lend
to, a particular CUSO. FCUs that are not an ``affiliated credit union''
of a CUSO may allow services of that CUSO to be available to their
membership through the group purchasing rule. 12 CFR Part 721. The
current arrangement has the effect of making members of non-affiliated
credit unions count as nonmembers for purposes of the customer base
requirements of the CUSO rule. To correct this anomaly, the proposed
revision adds to the definition of ``affiliated credit union'' those
credit unions that simply contract with a CUSO for provision of
services (something currently done under the group purchasing rule), in
addition to investor and lender credit unions of the CUSO. The result
of this is not to penalize CUSOs for serving members of credit unions
that may be permissibly served under the group purchasing rule.
Comments are requested on whether this amendment realizes its goal of
permitting CUSO services to continue to be provided to credit union
members of credit unions not investing in, or lending to, the CUSO
without violating CUSO customer base requirements.
In the interests of Plain English, the term ``affiliated credit
union'' is shortened to ``you'' in most of Part 712. When a requirement
applies only to affiliated credit unions that have loans to, or
investments in, CUSOs (e.g., proposed sections 712.2(a-c), 712.3(a-d),
712.4(a), 712.7, and 712.9) or to affiliated credit unions with a 10%
equity interest in a CUSO (e.g., proposed section 712.4(b)), the
narrowed application is noted in the adjacent rule language. Therefore,
readers should be careful to read the term ``you'' in context of
surrounding language. ``You'' does not mean all affiliated credit
unions at all times in all places.
Proposed Section 712.2, How much can you invest in, or loan to, CUSOs,
and what parties may be involved?
The proposed revision would eliminate existing section 701.27(b),
Limits imposed by the FCU Act, as being repetitive of other rule
provisions. The statutory provisions of the FCU Act are, and would
continue to be under the proposal, completely incorporated into other
provisions of the CUSO rule. Provisions concerning funding limitations
and CUSO parties, currently in section 701.27(d)(1), would be contained
in proposed section 712.2.
Proposed Limits on Funding
The funding limitations contained in proposed section 701.2 (a) and
(b) are statutory in nature and required by Sections 107(5)(D) and
(7)(I) of the FCU Act. 12 U.S.C. 1757(5)(D) and (7)(I). An FCU cannot
invest more than one percent of its paid-in and unimpaired capital and
surplus in CUSOs. Nor can an FCU loan more than one percent of its
paid-in and unimpaired capital and surplus to CUSOs. Paid-in and
unimpaired capital and surplus means shares and undivided earnings.
NCUA staff would like to clarify the scope of covered CUSO
investments and loans. In the past, NCUA has deemed all of the
following to be either loan or investment equivalents in the context of
the CUSO rule: standby letter of credit issued by an FCU to cover a
CUSO; sale and leaseback transactions; installment sales and other
similar equipment financings; payment of CUSO expenses by FCU, such as
subsidies; guarantees of CUSO debt or purchase of CUSO debentures; FCU
pledge and guarantee of loans from other entities to the CUSO; and FCU
spin-off of assets to CUSOs. All of these loan and investment cash
[[Page 11781]]
equivalents are used in determining the actual aggregate cash outlay
figure.
For compliance purposes, FCUs should generally use the aggregate
cash outlay figure in order to compute the regulatory CUSO investment
and loan limits. This number would equal the total amount of FCU funds
either invested in, lent to, or available to be lent under a line of
credit with the FCU to, the CUSO. If an FCU accounts for its CUSO using
the cost method consistent with Generally Accepted Accounting
Principles (GAAP) and writes down the investment because of other than
temporary impairment, the written down amount becomes the new basis and
computes into the new aggregate cash outlay figure.
Calculation of the CUSO funding limits is a separate issue from
reporting CUSO investments and loans under GAAP. GAAP requires one of
three measurement options--the cost method, equity method, or
consolidated financial statements--depending upon the degree of
ownership an FCU has in a CUSO. FCU financial reporting of CUSO
activity should follow GAAP. The definition of ``paid-in and unimpaired
capital and surplus'' is unchanged in the proposal from the current
definition in section 701.27(c)(4). The content of the provision
regarding parties eligible to be CUSO investors or lenders, proposed
section 712.2(c), remains unchanged from the current reference in
section 701.27(d)(1).
Proposed Section 712.3, What are the characteristics of, and what
requirements apply to, CUSOs?
The proposed revision incorporates existing provisions on
Structure, currently section 701.27(d)(2), Customer base, currently
section 701.27(d)(4), Accounting procedures and access to information,
currently section 701.27(d)(7), and Compliance with other laws,
currently section 701.27(e), into new section 712.3.
Proposed Structure
For consistency purposes, NCUA proposes to add the limited
liability company (LLC) format to the existing permissible CUSO entity
structures in proposed section 712.3(a). Definitions for three new
terms are proposed to be added to this paragraph, ``corporation,''
``limited liability company,'' and ``limited partnership.'' The terms
``corporation'' and ``limited partnership'' are meant to clarify
existing NCUA interpretations regarding the current, permissible forms
of a CUSO. Corporations are creatures of statute, generally formed by a
combination of steps, including the filing of articles of
incorporation, the drafting and implementation of bylaws, and being
capitalized through the issuance of stock and/or bonds. A limited
partnership is also a creature of statute, generally formed by filing
with the state a certificate of limited partnership. Many limited
partnerships also have a limited partnership agreement which details
partnership specifics. Similar to both corporations and limited
partnerships, an LLC is a noncorporate business in which all of the
member-owners have limited liability and in which members can actively
participate in management. Generally, an LLC is created by filing
articles of organization with the state. Most LLCs also have an
operating agreement, which sets forth the managers' and members' rights
and obligations and management specifics. In some states, the LLC
format provides investors limited liability equivalent to that of the
corporation or limited partnership formats. However, in many states the
LLC laws have not yet been tested and upheld in the courts, and state
laws are not uniform.
NCUA views the lack of LLC law uniformity among the various states
as a problem. States have often relied upon uniform acts to provide
consistency and promote comity between the various states. For
examples, many states have adopted a form of either the Model Business
Corporation Act or the Revised Model Business Corporation Act, and most
states have adopted either the Uniform Limited Partnership Act or the
Revised Uniform Limited Partnership Act. NCUA has had many years of
experience with these uniform laws through CUSOs formed in both the
corporate format and limited partnership format. However, unlike the
uniform corporation and limited partnership laws, the Uniform Limited
Liability Company Act (ULLCA), adopted by the National Conference of
Commissioners on Uniform State Laws in 1994, has not been adopted by
any states.
Other potential negatives also exist. For example, most states
permit any LLC member to withdraw from an LLC at any time and receive
the fair market value of his or her membership interest. This can
trigger a capital crisis or act as a means for LLC members holding
larger interests to control other LLC members to the detriment of the
LLC. This potential instability may make it harder for the LLC CUSO to
attract working capital and talented employees. In addition, most LLC
acts specify that each LLC member is entitled to an equal vote on each
LLC matter and that each member has full power and authority to act as
an agent of the LLC. Most LLC acts, while permitting LLC economic
interests to be freely transferable, permit management (voting and
agency rights) to be transferable only with the consent of all other
LLC members. These unique strictures of the LLC format may lead to
management, operational, and accountability problems not seen in the
corporate and limited partnership formats. Also, taxation issues
regarding a nonprofit, nontaxable entity's investment in an LLC are
unclear. NCUA solicits information regarding the likely taxation of a
nonprofit, nontaxable entity's investment as an LLC member. In
particular, NCUA is interested in reviewing an Internal Revenue Service
(IRS) advance ruling regarding this issue. If one does not currently
exist NCUA may suspend a resolution of the LLC issue until such an IRS
advance ruling does exist.
It is critical that a CUSO be of a proven format that will insulate
FCU investors from liabilities incurred by the CUSO. The proposal
limits the availability of the LLC format to those states where an FCU
can obtain written legal advice that the state of formation's laws will
provide limited liability to the investing FCU equivalent to that of a
shareholder in a corporation or as a limited partner in a limited
partnership. However, comment is requested on other alternative
definitions that would provide equal assurance to NCUA of the limited
liability available to LLCs in various states. Attention to issues of
ease of examination, administrative application, and enforcement should
also be paid.
NCUA notes that CUSOs, as state-chartered entities, are subject to
relevant federal, state and local taxes. Being taxable entities, CUSOs
may take advantage of appropriate tax options, such as electing
cooperative tax status in a proper situation.
However, CUSOs will not be permitted to attempt to evade NCUA's
statutory and regulatory requirements. For example, the CUSO rule
applies to all levels or tiers of a CUSO's structure. Therefore, any
entity in which a CUSO invests will also be treated as a CUSO subject
to the CUSO rule. In other words, all tiers of a CUSO are also CUSOs.
Also, a CUSO will not be permitted to evade the limited liability
insulation of the limited partnership format by forming a corporation
CUSO to be a general partner of a limited partnership CUSO. Substance
over form will control, and NCUA will collapse such a transaction to
its essence deeming it the formation of a general partnership CUSO,
which is now, and is proposed to remain, impermissible.
[[Page 11782]]
Proposed Customer Base
Proposed section 712.3(b) deletes the cross-reference for the
definition of ``affiliated credit union'' to the definitions paragraph
that appears in current section 701.27(d)(4). The proposed rule has no
separate paragraph for definitions; instead, definitions appear next to
their first use in the regulatory text. Otherwise, the content of the
proposed section 712.3(b) remains unchanged from current section
701.27(d)(4). NCUA is soliciting comments on whether further guidance
should be offered on the definition of ``primarily serves'' in the
customer base requirement. In the 1986 final CUSO rule preamble, the
Board stated that defining the term as a percentage of business or
percentage of customers could prove arbitrary. In the past, NCUA's
definition of the term ``primarily serves'' has depended upon several
variables, such as: type of business(es) provided; number of affiliated
members served; gross or net revenues derived from affiliated members;
amount of affiliated members' assets under management; number of
policies sold to affiliated members; number of services provided to
affiliated members; and availability/access of services to affiliated
members. Since CUSO permissible services and activities vary so much by
business, and since many CUSOs are engaged in multiple permissible
services and activities, coming to a simple standard applicable to all
lines of business and all CUSOs is problematic. Still, if a simple,
equitable standard could be applied, NCUA may not be adverse to using
it. In providing comments, commenters are asked to consider the issues
of ease of administrative application and enforcement.
Proposed FCU and CUSO Accounting; Access to Information
Proposed sections 712.3(c) and (d) contain no changes from current
sections 701.27(d)(7)(i) and (ii). However, NCUA would like to obtain
comment on a few aspects of the current rule. First, NCUA is soliciting
comments on whether NCUA examination and supervision authority over
CUSOs should be strengthened. Both the Office of Thrift Supervision
(OTS), which charters and supervises federal savings associations, and
the Office of the Comptroller of the Currency (OCC), which charters and
supervises national banks, subject their regulated financial
institutions' subsidiaries to examination and supervision ``in the same
manner and to the same extent'' as the parent financial institution. 12
CFR 5.34(d)(3)(OCC) and 559.3(o)(OTS). NCUA believes that this approach
might be superior to the current approach of a contractual right of
review in several ways. It would make it easier for NCUA to react
quickly and more directly to situations involving CUSO safety and
soundness. It would also enable NCUA to better protect the NCUSIF from
potential FCU losses due to CUSO losses. Presently, NCUA's main
recourse is through threatened divestments or disposals of CUSO
interests and loans. NCUA is also concerned that CUSOs performing
critical, core functions for affiliated credit unions,\1\ may
disastrously affect affiliated credit union services if the CUSOs were
to fail, suspend services, or experience another situation resulting in
discontinuance of services. For example in instances where member
transactions flow through the CUSO, credit unions could be at risk of
losing much more than the amount of their CUSO investment or loan.
However, NCUA realizes that treating CUSOs as an extension of its
affiliated credit unions might also have some drawbacks as well. It
would be a factor a court could consider in piercing the corporate veil
and finding liability over to a credit union investor or lender. It
would be a major change from existing practice, which for the vast
majority of CUSOs has worked very well. For these reasons, NCUA is
interested in public comment regarding the best scope of review or
examination and supervision authority of CUSOs.
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\1\ As a point of beginning, NCUA considers the following a list
of such critical, core services and activities: (1) Share-related
core services. Data processing of share deposits, withdrawals, and
other account transactions; Operations conducting member share
transactions for credit unions, including service center branches,
remote service operations and ATMs; Provision of share account
related clerical, professional, or management services; Share draft
and deposit posting, sorting and processing; ACH services;
Advertising, brokerage, and other services to procure and retain
share accounts; Computation and posting of dividends and other
credits and charges; Preparation and mailing of share drafts,
statements, notices and similar items; (2) Credit-related core
services. Data processing of loan applications, evaluations,
extensions, collections, and payments; Making, acquiring, servicing,
warehousing or otherwise processing member loans or other extensions
of credit for a credit union, including consumer loans, credit card
loans, mortgage loans, business loans and loan equivalents, such as
leasing and indirect lending programs; Operations conducting lending
activity for credit unions, including service center branches,
remote service operations, ATMs, and loan production offices;
Advertising, brokerage, and other services to procure and retain
loans; Advising, structuring, and arranging extensions of credit;
Provision of credit analysis services; Provision of credit account
related clerical, professional, or management services; and (3)
Other related core services. General ledger data processing;
Management, development, sale or lease of affiliated credit union
fixed assets; Record retention, security and disaster recovery
services; Provision of investment advice, counseling, or services;
Provision of liquidity management, investment, advisory and
consulting services; Development and administration of personnel
benefit programs, including life insurance, health insurance, and
pension and retirement plans.
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Commenters are also asked to address issues concerning a middle
ground, such as requiring CUSOs to adhere contractually to any
conditions in writing imposed upon their business by the NCUA.
Currently, both OTS and OCC may impose conditions in writing upon the
subsidiaries of their regulated financial institutions. 12 CFR
5.34(d)(4)(OCC) and 559.1(b)(OTS). Another possibility would be to
strengthen the existing audit and reporting requirements further, or to
require CUSOs to adopt specified policies, procedures, and other
internal safety and soundness controls.
Commenters are also requested to comment on whether NCUA should
charge a review or examination fee for conducting CUSO supervision
activities. Currently, the OTS may assess a subsidiary examination fee.
12 CFR 559.3(o). More intensive CUSO reviews or examinations would
require more specialized examiner training and take time to complete.
On average, it currently takes at least one week to finish a CUSO
review. If all CUSOs were reviewed on a regular basis, it could add a
substantial strain on NCUA's budget and resources. A CUSO examination
fee would be one means to ensure that the cost for this program would
be borne by CUSOs and not all federally insured and federally charted
credit unions, many of which do not utilize CUSO services.
Additionally, commenters are reminded that: CUSOs must follow GAAP
for financial reporting purposes; affiliated credit unions must follow
GAAP or alternative accepted regulatory accounting practices (RAP).
Further, CUSOs must obtain audits consistent with generally accepted
auditing standards (GAAS). NCUA interprets GAAP to mean compliance with
standards of the Financial Accounting Standards Board (FASB) and
related hierarchy, and GAAS to mean auditing standards issued by the
American Institute of Certified Public Accountants (AICPA), unless
otherwise determined by NCUA.
NCUA recommends that a CPA performing an opinion audit of the
financial statements of an FCU that uses a CUSO to process transactions
consider the guidance in the AICPA's Statement on Auditing Standards
(SAS) No. 70, Reports on the Processing of Transactions by Service
Organizations, when planning and performing the audit. SAS No. 70
provides guidance
[[Page 11783]]
when an FCU obtains either or both of the following services from a
CUSO: (1) executing transactions and maintaining the related
accountability; and (2) recording transactions and processing related
data. The AICPA recommends SAS 70 reports be completed in CUSO trust
companies that invest and hold assets for FCU employee benefit plans;
CUSO mortgage bankers that service mortgages for FCUs; electronic data
processing (EDP) service centers that process transactions and related
data for FCUs; and other situations in which a CUSO develops, provides
and maintains the software used by FCUs. The SAS 70 report on policies
and procedures placed in operation and tests of operating effectiveness
are crucial in keeping FCUs informed of internal control weaknesses of
CUSOs performing core functions of the FCU. NCUA requests comment on
this approach.
NCUA also clarifies that the current requirement for a CPA audit
means an opinion audit and nothing less. The audit must be an audit of
the separate CUSO entity and not simply an audit of the FCU's financial
statements prepared on a consolidated basis, unless the CUSO is a
wholly-owned CUSO. The reason for this longstanding position is that
all credit unions investing in the CUSO need to be aware of any
potential risks in their CUSO. This clarification reflects current
practice and policy.
Compliance with Other Laws
Proposed section 712.3(e) remains unchanged from current section
701.27(e). NCUA has interpreted this requirement to apply not only to
laws applicable to the proper maintenance of either corporate or
limited partnership format, such as fee, filing and tax requirements,
but also to any other laws applicable to the nature of the CUSO's
business. For instance, an insurance agency CUSO must comply with state
insurance laws and regulations. Any CUSO that classifies as a franchise
would need to follow federal and state franchising laws. Any CUSO
service center would need to follow all applicable federal consumer
protection laws related to its activities, as well as other relevant
laws applicable to FCUs, such as those relating to supervisory
committee access (12 CFR 701.12-.13); loans to members (12 CFR 701.21);
truth in savings (12 CFR Part 707); advertising (12 CFR Part 740);
share insurance (12 CFR Part 745); security program, report of
suspicious activity, and bank secrecy act compliance (12 CFR Part 748);
records preservation and retention (12 CFR Part 749); and relevant
bylaw requirements, such as those relating to the confidentiality of
member records (Standard Federal Credit Union Bylaws, NCUA Publication
No. 8001).
Proposed Section 712.4, What must you and a CUSO do to maintain
separate corporate identities?
The proposed revision retains a version of the legal opinion
requirement of current section 701.27(d)(3), and adds a requirement
that corporate separateness be maintained between the FCU and the CUSO.
Proposed Separate Corporate Existence
The language used in proposed section 712.4(a)(1-6) is borrowed
from the OTS rules applicable to federal savings and loan service
corporations. 12 CFR 559.10. NCUA currently recommends such operating
practices in the NCUA Examiner's Guide, but believes that codifying
these guidelines into a rule will help to publicize the practices,
provide clear brightlines for compliance, provide continuing guidance
during the life of the CUSO, and not carry the drawbacks of solely
relying upon the legal opinion requirement. NCUA is not suggesting that
a failure to follow one or more or all of such suggested practices by
an FCU and its CUSO should cause a court to ignore the separate
corporate existence of the CUSO. Nor is NCUA suggesting that attorney
involvement is unwise or unnecessary for FCUs contemplating CUSO
involvement. Quite to the contrary, NCUA encourages legal, accounting,
tax advisor, and other consultant involvement in matters affecting CUSO
investments and loans. Legal opinions are important, but may not be
sufficient in and of themselves to achieve safety and soundness and
continued corporate separateness. However, by following the proposed
requirements, an FCU should be able to avoid potential exposure for
CUSO obligations. Comment is requested on this approach.
In addition, NCUA has long interpreted the Act to require as
minimum coverage that an FCU's fidelity bond provide coverage for the
fraud or dishonesty of all employees, directors, officers, and
supervisory and committee members. 12 U.S.C. 1766(h); 12 CFR 701.20(c).
Some question has arisen as to whether the directors and employees of a
CUSO should be covered by the fidelity bond of the FCU investor or
lender of the CUSO. This point of law is currently unsettled. After
some initial research, it seems that the insurance industry makes a
wide variety of insurance products available to CUSOs that are similar
to the FCU fidelity bond in coverage. A basic Commercial Crime Policy
can include coverage for employee dishonesty, theft, disappearance and
destruction, and depositor's forgery. Similarly, mortgage service CUSOs
generally must have a bond meeting secondary mortgage market
requirements, such as a Financial Institutions Bond Standard Form No.
15 (Mortgage Bankers Blanket Bond Policy). Likewise, a securities
brokerage CUSO often will be a member of the National Association of
Securities Dealers (NASD), and will meet NASD bonding requirements
through a Financial Institutions Bond Standard Form No. 14 (Security
Brokers Blanket Bond). NCUA strongly encourages CUSOs to maintain
business insurance adequate to meet the CUSO's needs as determined by
each CUSO's board of directors and management. At this time, NCUA does
not believe that it is necessary to codify any CUSO bonding or
insurance requirements, however, commenters are urged to respond as to
whether a CUSO bond or insurance requirement is necessary, and, if so,
given the variances in CUSO bond or insurance options available, what
the requirement should contain and achieve.
Proposed Legal Opinion
In current section 701.27(d)(3), an FCU must obtain a written legal
opinion as to whether the CUSO is established in a manner that will
limit the FCU's potential exposure to no more than the amount invested
in, or lent to, the CUSO. The legal opinion requirement does not
require updating as new services are offered, nor does the legal
opinion track management practices at a CUSO that could lead to
liability exposure to the affiliated credit union. In addition, some
credit union attorneys have questioned the implication that the rule
requires lawyers to act as guarantors or sureties of a CUSO's correct
formation and continued legal existence. To remedy these weaknesses,
NCUA proposes to amend the legal opinion requirement to require that
the legal opinion be obtained both when a CUSO is established and
whenever the CUSO adds a new permissible activity or service that
materially affects the CUSO. A legal opinion would also be required if
a CUSO converts from one permissible structure, such as a limited
partnership, to another permissible structure, such as a corporation.
This is in addition to the requirement that separate corporate
existence be maintained between the FCU and CUSO and is designed to
reduce the potential liability between an FCU and its CUSO investments.
In order to reduce the regulatory burden of obtaining legal
[[Page 11784]]
opinions, NCUA proposes that legal opinions will only be required for
FCUs owning a 10% or greater equity interest in a CUSO. NCUA roughly
estimates that this will reduce the number of legal opinions needed by
as much as 80%. Comment is requested on the approach, and also the use
of 10% as a material threshold for monitoring potential FCU liability
exposure through a legal opinion requirement.
Proposed 712.5, What activities and services are preapproved for CUSOs?
Proposed paragraphs (a)-(o) of section 712.5 reorder and
recategorize current sections 701.27(d)(5)(i and ii), permissible
services and activities, into a more user friendly format and add
services and activities deemed permissible by opinion letter since the
1986 rule revision.
Proposed Permissible Services and Activities
The first sentence of proposed section 712.5 is derived from
requirements imposed by the OCC and OTS upon bank and thrift
subsidiaries. 12 CFR 5.34(d)(3) and 559.1(b). OCC and OTS reserve the
right to limit any bank or thrift subsidiary's activities, or to refuse
to permit activities, for supervisory, legal, or safety and soundness
reasons. NCUA proposes to apply these same requirements to CUSOs. NCUA
sees this amendment as a clarification of existing NCUA practice.
Currently, NCUA provides interpretations of the parameters of existing
permissible CUSO activities through the issuance of legal opinion
letters and Regional and Central Office correspondence. As the proposed
amendment provides, these current NCUA pronouncements are based upon
supervisory, legal, and safety and soundness grounds. The proposed
amendment only puts FCUs and CUSOs on notice that NCUA does have the
right to interpret the parameters of permissible CUSO services and
activities. If transgressions are discovered after the fact, currently
NCUA can work with the credit unions and CUSOs involved to arrive at a
mutually satisfactory conclusion. In an extreme case, NCUA can order
the affiliated credit union to divest its CUSO investment or dispose of
its CUSO loan. NCUA may also already exercise these remedies if the
normally permissible CUSO services and activities are improperly,
imprudently, or recklessly conducted. Therefore, the proposed amendment
adds no new powers to NCUA's supervision of affiliated credit unions'
CUSO investments and loans. Comment is requested on the addition of the
proposed amendment in this context.
NCUA proposes to rearrange the list of permissible activities and
services for ease of understanding and citation, and to reflect changes
in CUSO activities and services. Since 1986, NCUA has divided all CUSO
activities into two categories: operational and financial. However,
many of these services and activities are now a combination of both
operational and financial services. The proposed change also reflects a
return to the 1978 CUSO rule format of listing services by related
categories. The proposed categories of permissible services and
activities are as follows: checking and currency services; clerical,
professional and management services; consumer mortgage loan
origination; electronic transaction services; financial counseling
services; fixed asset services; insurance brokerage or agency; leasing;
loan support services; real estate brokerage services; record
retention, security and disaster recovery services; securities
brokerage services; shared credit union branch (service center)
services; travel agency services; and trust and trust-related services.
The category headings are solely descriptive in nature and not meant to
convey authority for additional services and activities beyond the
specific services and activities listed.
Eight new services, reflecting current NCUA interpretations of
existing services, are proposed to be included in the rule revision.
First, in proposed paragraph (a)(3), under checking and currency
services, NCUA proposes to add ``money order, savings bonds, travelers
checks, and purchase and sale of U.S. Mint commemorative coins
services.'' Second, in proposed paragraph (b)(2), under clerical,
professional and management services, NCUA proposes to add ``courier
services.'' Third, in proposed paragraph (b)(4), also under clerical,
professional and management services, NCUA proposes to add ``facsimile
transmissions and copying services.'' Fourth, in proposed paragraph
(b)(10), also under clerical, professional and management services,
NCUA proposes to add ``supervisory committee audits.'' Fifth, in
proposed paragraph (d)(5), under electronic transaction services, NCUA
proposes to add ``electronic income tax filing.'' Sixth, in proposed
paragraph (h)(2), under leasing, NCUA proposes to add ``real estate
leasing of excess CUSO property.'' This covers real estate leasing only
of premises acquired for CUSO business, and otherwise mainly used in
CUSO business, that may later be used for future CUSO expansion.
Although ``personal property leasing'' and ``real estate leasing of
excess CUSO property'' are listed as the only two permissible leasing
services in proposed paragraph (h), fixed asset leasing is also
permitted, but retained with the other permissible fixed asset
activities in proposed paragraph (f)(1). Seventh, in proposed paragraph
(k)(2), under record retention, security, and disaster recovery
services, NCUA proposes to add ``disaster recovery services.'' Eighth,
in proposed paragraph (k)(3), also under record retention, security and
disaster recovery services, NCUA proposes to add ``optical imaging, CD-
ROM data storage and retrieval services'' to current ``microfilm and
microfiche services.'' NCUA believes that these proposed amendments are
self-explanatory, and only codify existing permissible services and
activities not currently in the rule itself. Comment is requested on
both the content and wording of these proposed amendments. In
particular, NCUA would like to use terms that keep abreast of current
and future technologies to provide CUSOs with operating and market
flexibility in accomplishing permissible CUSO services and activities.
NCUA has also received requests to add consumer loan originations
to the list of permissible activities. Historically, NCUA has been
opposed to this addition. Unlike consumer mortgage loan origination,
which requires a specialized lending staff, must follow strict
secondary mortgage market rules, and requires economies of scale in
order to be viable, consumer loans are relatively easy to offer and
process. In addition, NCUA is apprehensive in granting CUSOs authority
to provide consumer loans to the general public, as it may be perceived
as a dilution of the common bond by Congress and the public. NCUA is
also concerned that if member loans were being made by CUSOs, NCUA
would have a duty to examine such loans which would lead to stricter
NCUA examination authority over CUSOs. However, due to the requests to
add it as an additional service, NCUA would like to request comment on
adding consumer loan origination as an additional service. Comments
detailing needs, benefits, and drawbacks of offering this service
outside of the credit union itself are especially solicited. Comments
are also solicited on whether consumer loan origination services would
be helpful to small, low-income, or community development credit
unions. Commenters should address whether consumer loan services should
be permissible only for credit unions of
[[Page 11785]]
a certain asset size and how such a class should be defined.
CUSOs, according to the FCU Act, are to provide ``services which
are associated with the routine operations of credit unions.'' 12
U.S.C. 1757(7)(I). In addition, CUSOs are to be ``established primarily
to serve the needs of its member credit unions, and whose business
relates to the daily operations of the credit unions they serve.'' 12
U.S.C. 1757(5)(B). In providing these daily, routine services of need
to credit unions, CUSOs must avoid investments in depository financial
institutions, insurance companies, trade associations, liquidity
facilities, and similar entities. 12 U.S.C. 1757(7)(I). In the past,
NCUA has interpreted this statutory authority broadly to encompass most
services and activities a credit union can provide to itself and its
members through use of express authority, incidental authority, or
goodwill authority. NCUA feels this interpretation is supported by the
language of the FCU Act, which sets forth a clear boundary of CUSO
services, namely, services fulfilling credit union and credit union
member needs. Nor did Congress purport to limit CUSO activities by
cross-reference to statutory FCU powers or by specifically listing CUSO
powers in the statute.
With this discussion in mind, two services currently offered by
CUSOs have been denied as proper incidental authorities for other
financial institutions. The first is the provision of data processing
services to the general public (Nat. Retailer Corp. of Ariz. v. Valley
Nat. Bank, 604 F.2d 32 (9th Cir. 1979) and Ass'n of Data Processing
Service Organizations, Inc. v. Federal Home Loan Bank of Cincinnati,
568 F.2d 478 (6th Cir. 1977)) and the second is the provision of travel
related services (Arnold Tours, Inc. v. Camp, 408 F.2d 1147 (1st Cir.
1969) and Assn. of Bank Travel Bureaus, Inc. v. Bd. of Gov. of Federal
Reserve System, 568 F.2d 549 (7th Cir. 1978)). Although NCUA in the
past has permitted these two services as permissible CUSO services on a
member goodwill basis, NCUA would like to request public comment,
thereby creating an administrative record, on whether NCUA's position
is supported by fact and justified as a proper agency interpretation.
Goodwill services are those services that would normally be neither
express nor incidental, but provide services to members that either
cannot be conveniently obtained elsewhere or can be provided within the
traditional mission of a credit union. For instance, offering vendor
services through the group purchase rule could be termed a goodwill
activity. By making goods and products available to members that have
been reviewed and endorsed by the credit union, members are assured
that the offered products and services are legitimate and helpful.
Comments relating to member needs of such services would be helpful to
the NCUA Board in determining whether sufficient authority exists for
the Board to retain these services as permissible CUSO services. In a
similar vein, although NCUA currently does permit real estate brokerage
services as a permissible service, NCUA has been troubled by cases
involving conflicts and the appearance of conflicts between real estate
brokerage CUSOs and the credit unions such CUSOs serve. For similar
reasons regarding impairment of appraiser independence and possible
conflicts of interest, NCUA has declined to add real estate appraisal
activities to the list of permissible activities. Comment is also
requested regarding the propriety of maintaining real estate brokerage
services as a permissible service in a revised rule. NCUA also requests
comments regarding any aspects of any other currently allowable, or
potentially allowable, CUSO activity or service.
Proposed 712.6, What activities and services are prohibited for CUSOs?
This proposed section restates the statutory prohibition of 12
U.S.C. 1757(7)(I). NCUA legal opinion letters have opined that trade
association affiliates and subsidiaries are eligible to form CUSOs with
FCUs; however insurance company affiliates and subsidiaries are not so
eligible. NCUA bases this difference upon the composition and purpose
of the trade association affiliates and subsidiaries, which derive from
and benefit the credit unions themselves, as opposed to insurance
companies, which are not composed of, or directly benefit, credit
unions.
Proposed 712.7, What must you do to add activities or services that are
not preapproved?
Current Sec. 701.27(d)(5)(iii) regarding NCUA approval of other
activities and services is unchanged in proposed section 712.7. Though
it has never been used since its inclusion in 1986, the provision does
provide a means for the permissible activities and services portion of
the rule to keep pace with changes in the marketplace and technological
advances. The terms ``NCUA Board,'' and ``Secretary of the Board,''
have the meanings ascribed to them in Part 790 of the NCUA Rules and
Regulations. 12 CFR Part 790.
Proposed 712.8, What transaction and compensation limits might apply to
individuals related to you or a CUSO?
Proposed section 712.8 contains conflict of interest provisions
between FCUs and CUSOs.
Proposed Conflict of Interest
Section 701.27(d)(6) currently imposes restrictions between an
affiliated credit union and a CUSO. The primary purposes of the
conflict of interest section is to prevent insider abuse and self-
dealing that could lead to losses at the CUSO, affiliated credit
unions, and the NCUSIF. It is the responsibility and fiduciary duty of
FCU volunteers and employees to make decisions based on the best
interests of the FCU and its members. Motivations of personal financial
gain from CUSO activities could present an inherent conflict of
interest. Such motivations in various CUSO cases have led to personal
gain by FCU officials and resulted in FCU losses, occasionally even
resulting in the liquidation or merger of the FCU. In addition, CUSO
compensation of FCU volunteers could serve as means to subvert the
prohibitions on volunteer official compensation contained in the Act.
12 U.S.C. 1761 and 1761a. Moreover, compensation of shared CUSO/FCU
officials might be a factor that a court could evaluate in deciding to
pierce the corporate veil to expose an affiliated credit union to
liability. For these reasons, therefore, NCUA is committed to
maintaining strong conflicts of interest provisions between CUSOs and
FCUs. In this vein, NCUA is proposing one change to the current
language of the rule. Currently, under section 701.27(d)(6)(i), a CUSO
may reimburse an FCU for the services of an FCU official or FCU senior
management employee used by a CUSO. The ability of a CUSO to reimburse
an FCU for the services of FCU officials in the CUSO was orginally
permitted to enable newly formed CUSOs to have low cost help. It is
possible that this provision might still be needed, especially in the
context of smaller credit unions establishing CUSOs. As stated earlier,
NCUA wants to encourage increased smaller credit union involvement with
CUSO activities and services. On the other hand, NCUA is concerned that
reimbursement issues could affect the corporate separateness of a CUSO
and an FCU, as well as the other issues discussed in this paragraph.
Therefore, NCUA is proposing the elimination of the reimbursement
exemption. Comment is requested on this proposed change, especially
regarding any
[[Page 11786]]
repercussions upon the ability of smaller credit unions in forming and
maintaining CUSOs. Comments are also solicited on any other regulatory
improvements that would enable NCUA to better police and contain CUSO/
FCU conflicts.
The definitions of ``immediate family member,'' ``official,'' and
``senior management employee'' remain unchanged in the proposal from
the current definitions in section 701.27(c)(2, 3, and 5).
Proposed 712.9, When must you begin compliance with the revised rule?
Proposed section 712.9 updates the compliance phase-in period of a
final revised CUSO rule.
Proposed Preexisting CUSOs.
Other than a proposed change in the date of this section, from May
27, 1986, to the effective date of any final rule, section 701.27(d)(8)
remains mostly unchanged in proposed section 712.9. NCUA has
experienced one CUSO activity, ATM services, that often began as a
service primarily to credit unions, but with ATM network and switch
consolidations, arguably does not meet the CUSO rule ``primarily
serves'' customer base requirements. In some of these situations, it is
NCUA's understanding that an institution must hold stock in the ATM
network or switch in order to participate in the ATM network or switch.
NCUA does not want to deny credit union members ATM services due to a
rule restriction. Therefore, comment is requested on how best to
address this situation. Comment is also requested on whether other CUSO
activities and services may also be affected by similar trends, and on
possible solutions to such situations.
In 1986, when more extensive amendments were adopted, the Board
granted CUSOs and FCUs a one-year phase-in period before the amendments
would become effective. However, given the more limited scope of these
amendments, the Board is proposing an effective date compliance date.
Comments are requested on whether more time would be beneficial to
CUSOs and FCUs, and, if so, what length of time should be granted by
the Board as a phase-in period.
Proposed Section 740.3(c), Mandatory Requirements with Regard to
the Official Sign and its Display
Federally-insured credit unions are not permitted to receive
account funds at any teller's station or window where any non-federally
insured credit union or institution receives shares or deposits. Credit
union service centers and branches servicing more than one credit union
where only some of the credit unions are insured by NCUA are exempt
from this requirement. However, in a service center context a sign is
required immediately above or beside each official NCUA sign stating
``Only the following credit unions serviced by the facility are
federally insured by the NCUA ____________________.'' (the full name of
each credit union insured is to follow the word NCUA). The lettering is
to be of such size and print to be clearly legible to all members
conducting share or deposit transactions. The intent of this
requirement was to inform credit union members using a service center
that share insurance was dependent upon their credit union and not upon
the location of their transactions (the service center).
Since this rule was last revised in 1986, the number of states
permitting state-chartered credit unions to have non-federal account
insurance has shrunk. Currently, non-federally insured credit unions
exist primarily in California (13), Idaho (20), Illinois (54), Indiana
(21), Maryland (5), Nevada (8), Ohio (129), Puerto Rico (194), and
Washington State (71). In order to reduce the paperwork and compliance
burdens on service centers, which service mainly federally-insured
credit unions, NCUA is proposing to change this disclosure requirement.
The proposal only requires disclosure of non-federally insured credit
unions serviced at a service center. Since there are an estimated 515
non-federally insured credit unions compared to 11,687 federally-
insured credit unions, by reversing the disclosure requirement many
service centers should experience a compliance and paperwork burden
reduction. This disclosure would also accomplish the intent of the
current disclosure of informing the credit union members of whether
NCUSIF insurance exists on their credit union accounts. While NCUA is
aware of the statutorily-mandated disclosures that nonfederally insured
credit unions must give to their members (12 U.S.C. 1831t), NCUA is
concerned that some member confusion might still exist which might lead
the member of a nonfederally insured credit union to believe that his
or her deposits were federally insured by the NCUSIF. NCUA requests
comments on the need and adequacy of this proposed change.
II. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act requires the NCUA to prepare any
analysis to describe any significant economic impact any proposed
regulation may have on a substantial number of small entities
(primarily those under $1 million in assets). The proposed CUSO and
service contract rule revisions would reduce existing regulatory
burdens. The advertising amendment also reduces existing regulatory
burden. Therefore, the NCUA Board has determined and certifies that the
proposed amendment, if adopted, will not have a significant economic
impact on a substantial number of small credit unions. Accordingly, the
Board has determined that a Regulatory Flexibility Analysis is not
required.
B. Paperwork Reduction Act
NCUA has determined that several requirements of this proposal
constitute collections of information under the Paperwork Reduction
Act. The requirements are that the FCU: (1) Obtain a written agreement
from the CUSO, prior to investing in or lending to the organization,
that the CUSO will follow GAAP, render financial statements (balance
sheet and income statement) at least quarterly and obtain a Certified
Public Accountant opinion audit annually and provide copies of such to
the FCU, and provide NCUA and its representatives with complete access
to any books and records of the CUSO as deemed necessary by NCUA in
carrying out its responsibilities under the Act (proposed section
712.3(d)); (2) obtain written legal advice if the FCU's equity interest
in a CUSO is greater than 10 percent as to whether the CUSO is
established and maintained in a manner that will limit potential
exposure to no more than the loss of funds invested in, or lent to, the
CUSO (proposed section 712.4(b)); and (3) compose a list of non-
federally insured credit unions by a service center and post the list
by the official NCUA sign (proposed section 740.3(c)). NCUA has
submitted a copy of these proposed sections to the Office of Management
and Budget (OMB) for its review. These proposed sections enable NCUA to
monitor an FCU's involvement with CUSOs for safety and soundness and to
ensure that CUSOs are properly formed and maintained in accordance with
applicable state laws.
It is NCUA's view that the time a CUSO spends ensuring compliance
with GAAP, compiling quarterly financial statements, and providing NCUA
and its representatives with complete access to any books and records
of the CUSO are not burdens created by this regulation, but rather are
usual and customary practices in the normal operations of a business
entity. It is also NCUA's view that the written agreement between the
CUSO and the FCU is not a burden created by this regulation, but is
usual and customary practice in the normal
[[Page 11787]]
operations of a business entity. The paperwork burdens created by these
rules are the remaining requirements outlined above.
NCUA estimates that it should take the CUSO an average of 2 hours
to research and contract to have a Certified Public Accountant opinion
audit each year. Since this requirement applies to all 448 CUSOs, the
annual reporting burden would be 896 hours to comply with this
requirement. It is expected that it would take 15 minutes for each of
the 448 CUSOs to provide copies of the audit to NCUA, resulting in an
annual reporting burden of 112 hours. NCUA estimates that 482 FCUs
would have to research and obtain written legal advice on the CUSO
investment, an activity that is expected to take 1 hour per year,
imposing annual reporting burden of 482 hours. Each of the 282 service
center locations would need to compose and post a list of the non-
federally insured credit unions serviced by that location. The
estimated time to perform this at each location is estimated to be 0.5
hour for each, resulting in an annual reporting burden of 141 hours.
The total annual burden hours imposed by the proposed rule is 1631
hours.
The Paperwork Reduction Act of 1995 and regulations of the Office
of Management and Budget (OMB) require that the public be provided an
opportunity to comment on information collection requirements,
including an agency's estimate of the burden of the collection of
information.
The NCUA Board invites comment on: (1) Whether the collection of
the information is necessary for the proper performance of the
functions of NCUA, including whether the information will have
practical utility; (2) the accuracy of NCUA's estimate of the burden of
the collection of information, including the validity of the
methodology and assumptions used; (3) ways to enhance the quality,
utility, and clarity of the information to be collected; and (4) ways
to minimize the burden of collection of information on those who are to
respond, including through the use of appropriate automated electronic,
mechanical, or other technological collection techniques or other forms
of information technology; e.g., permitting electronic submission of
responses.
OMB is required to make a decision concerning the collection of
information contained in these proposed regulations between 30 and 60
days after publication of this document in the Federal Register.
Therefore, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of publication. This does not affect
the deadline for the public to comment to the NCUA Board on the
proposed regulations.
Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, OMB, Room 10235, New Executive
Office Building, Washington, D.C. 20503; Attention: Alex Hunt, Desk
Officer for NCUA. Comments must also be sent to NCUA, 1775 Duke Street,
Alexandria, VA 22314-3428; Attention: Marijean Brown, Acting Paperwork
Reduction Act Coordinator, Telephone No. (703) 518-6410; Fax No. (703)
518-6433; E-Mail Address: [email protected]. Comments should be
postmarked by May 12, 1997. All comments submitted in response to these
proposed regulations will be available for public inspection, during
and after the comment period, at NCUA's Central Office, 6th Floor, Law
Library, 1775 Duke Street, Alexandria, VA between the hours of 9 a.m.
and 1 p.m., Monday through Friday of each week except federal holidays,
and by appointment through the Law Librarian at telephone no. (703)
518-6540.
C. Executive Order 12612
Executive Order 12612 requires NCUA to consider the effect of its
actions on state interests. The proposed CUSO regulation applies only
to federal credit unions. The proposed advertising rule amendment would
apply to all federally insured credit unions, including federally
insured, state-chartered credit unions. However, due to the relatively
low number of credit union service centers that serve non-federally
insured credit unions, NCUA has determined that the proposed rule does
not constitute a ``significant regulatory action'' for purposes of the
Executive Order. However, NCUA welcomes comment on means and methods to
coordinate with the state credit union supervisors regarding
achievement of shared goals involving viability, flexibility, parity,
conformity and safety and soundness regarding CUSOs and service center
advertising of accounts.
List of Subjects
12 CFR Part 701
Advertising, Aged, Civil rights, Credit, Credit unions, Fair
housing, Individuals with disabilities, Insurance, Marital status
discrimination, Mortgages, Religious discrimination, Reporting and
recordkeeping requirements, Sex discrimination, Signs and symbols,
Surety bonds.
12 CFR Part 712
Administrative practice and procedure, Credit, Credit unions,
Investments, Reporting and recordkeeping requirements.
12 CFR Part 740
Advertising, Bank deposit insurance, Credit unions, Reporting and
recordkeeping requirements, Signs and symbols.
By the National Credit Union Administration Board on March 7,
1997.
Becky Baker,
Secretary of the Board.
For the reasons set forth in the preamble, it is proposed that 12
CFR chapter VII be amended as follows:
PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS
1. The authority citation for Part 701 continues to read as
follows:
Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a,
1761b, 1766, 1767, 1782, 1784, 1787, 1789, 1798. Section 701.6 is
also authorized by 31 U.S.C. 3717. Section 701.31 is also authorized
by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1861 and 3601-3610. Section
701.35 is also authorized by 42 U.S.C. 4311-4312.
Sec. 701.26 [Amended]
2. Section 701.26 is amended by removing paragraph (b) and removing
the paragraph designation (a).
Sec. 701.27 [Removed]
3. Section 701.27 is removed.
4. Part 712 is added to read as follows:
PART 712--CREDIT UNION SERVICE ORGANIZATIONS (CUSOs)
Sec.
712.1 What does this part cover?
712.2 How much can you invest in, or loan to, CUSOs, and what
parties may be involved?
712.3 What are the characteristics of, and what requirements apply
to, CUSOs?
712.4 What must you and a CUSO do to maintain separate corporate
identities?
712.5 What activities and services are preapproved for CUSOs?
712.6 What activities and services are prohibited for CUSOs?
712.7 What must you do to add activities or services that are not
preapproved?
712.8 What transaction and compensation limits might apply to
individuals related to you or a CUSO?
712.9 When must you begin compliance with this part?
Authority: 12 U.S.C. 1756, 1757(5)(D) and (7)(I), 1766, 1782,
1784, and 1785.
Sec. 712.1 What does this part cover?
This part establishes when you, an affiliated Federal credit union,
can
[[Page 11788]]
invest in, and make loans to, CUSOs. This part does not regulate CUSOs
directly, but rather establishes conditions of your investments in, and
loans to, CUSOs. For purposes of this part, ``affiliated credit
unions'' means those Federal credit unions that have either invested
in, made loans to, or contracted with, a CUSO.
Sec. 712.2 How much can you invest in, or loan to, CUSOs, and what
parties may be involved?
(a) Investments. Your total investments in CUSOs must not exceed,
in the aggregate, 1% of your paid-in and unimpaired capital and surplus
as of your last calendar year-end financial report. For purposes of
paragraphs (a) and (b) of this section, ``paid-in and unimpaired
capital and surplus'' means shares and undivided earnings.
(b) Loans. Your total loans to CUSOs must not exceed, in the
aggregate, 1% of your paid-in and unimpaired capital and surplus as of
your last calendar year-end financial report.
(c) Parties. You may invest in, or loan to, a CUSO by yourself, or
with other credit unions or with non-credit union parties.
Sec. 712.3 What are the characteristics of, and what requirements
apply to, CUSOs?
(a) Structure. You can invest in or loan to a CUSO only if the CUSO
is structured as a corporation, limited liability company, or limited
partnership. For purposes of this paragraph (a), ``corporation'' means
a legally incorporated corporation as established and maintained under
relevant state law. For purposes of this paragraph (a), ``limited
liability company'' means a legally established limited liability
company as established and maintained under relevant state law. For
purposes of this paragraph (a), ``limited partnership'' means a legally
established limited partnership as established and maintained under
relevant state law.
(b) Customer base. You can invest in or loan to a CUSO only if the
CUSO primarily serves credit unions, your membership or the membership
of affiliated credit unions.
(c) Federal credit union accounting. You must record your
investments in or loans to CUSOs in accord with ``generally accepted
accounting principles'' (GAAP).
(d) CUSO accounting; audits and financial statements; NCUA access
to books and records. You must obtain written agreements from a CUSO,
prior to investing in or lending to the organization, that the CUSO
will:
(1) Follow GAAP;
(2) Render financial statements (balance sheet and income
statement) at least quarterly and obtain a Certified Public Accountant
opinion audit annually and provide copies of such to you; and
(3) Provide NCUA and its representatives with complete access to
any books and records of the CUSO, as deemed necessary by NCUA in
carrying out its responsibilities under the Act.
(e) Other laws. A CUSO must comply with applicable Federal, state
and local laws.
Sec. 712.4 What must you and a CUSO do to maintain separate corporate
identities?
(a) Corporate separateness. You and the CUSO must be operated in a
manner that demonstrates to the public the separate corporate existence
of you and the CUSO. Each must operate so that:
(1) Its respective business transactions, accounts, and records are
not intermingled;
(2) Each observes the formalities of its separate corporate
procedures;
(3) Each is adequately financed as a separate unit in the light of
normal obligations reasonably foreseeable in a business of its size and
character;
(4) Each is held out to the public as a separate enterprise;
(5) You do not dominate the CUSO to the extent that the CUSO is
treated as a department of you; and
(6) Unless you have guaranteed a loan obtained by the CUSO, all
borrowings by theCUSO indicate that you are not liable.
(b) Legal opinion. If you have a 10% or greater equity interest in
a CUSO, you must obtain written legal advice as to whether the CUSO is
established and maintained in a manner that will limit your potential
exposure to no more than the loss of funds invested in, or lent to, the
CUSO.
Sec. 712.5 What activities and services are preapproved for CUSOs?
NCUA at any time may limit any CUSO activities or services, or
refuse to permit any CUSO activities or services, for supervisory,
legal, or safety and soundness reasons. Otherwise, you may invest in,
loan to, and/or contract with those CUSOs that provide one or more of
the following activities and services related to the routine, daily
operations of credit unions:
(a) Checking and currency services:
(1) Check cashing;
(2) Coin and currency services; and
(3) Money order, savings bonds, travelers checks, and purchase and
sale of U.S. Mint commemorative coins services;
(b) Clerical, professional and management services:
(1) Accounting services;
(2) Courier services;
(3) Credit analysis;
(4) Facsimile transmissions and copying services;
(5) Internal audit for credit unions;
(6) Locator services;
(7) Management and personnel training and support;
(8) Marketing services;
(9) Research services; and
(10) Supervisory committee audits;
(c) Consumer mortgage loan origination;
(d) Electronic transaction services:
(1) Automated teller machine (ATM) services;
(2) Credit card and debit card services;
(3) Data processing;
(4) Electronic fund transfer (EFT) services;
(5) Electronic income tax filing;
(6) Payment item processing; and
(7) Wire transfer services;
(e) Financial counseling services:
(1) Developing and administering Individual Retirement Accounts
(IRA), Keogh, deferred compensation and other personnel benefit plans;
(2) Estate planning;
(3) Financial planning and counseling;
(4) Income tax preparation;
(5) Investment counseling; and
(6) Retirement counseling;
(f) Fixed asset services:
(1) Management, development, sale or lease of fixed assets; and
(2) Sale, lease or servicing of computer hardware or software;
(g) Insurance brokerage or agency:
(1) Agency for sale of insurance; and
(2) Provision of vehicle warranty programs;
(h) Leasing:
(1) Personal property; and
(2) Real estate leasing of excess CUSO property;
(i) Loan support services:
(1) Debt collection services;
(2) Loan processing, servicing and sales; and
(3) Sale of repossessed collateral;
(j) Real estate brokerage services;
(k) Record retention, security and disaster recovery services:
(1) Alarm-monitoring and other security services;
(2) Disaster recovery services;
(3) Microfilm, microfiche, optical imaging, CD-ROM data storage and
retrieval services;
(4) Provision of forms and supplies; and
(5) Record retention and storage;
(l) Securities brokerage services;
(m) Shared credit union branch (service center) operations;
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(n) Travel agency services; and
(o) Trust and trust-related services:
(1) Acting as administrator for prepaid legal service plans;
(2) Acting as trustee, guardian, conservator, estate administrator,
or in any other fiduciary capacity; and
(3) Trust services.
Sec. 712.6 What activities and services are prohibited for CUSOs?
CUSOs must not engage in the activities or services of depository
financial institutions, insurance companies, trade associations,
liquidity facilities, and similar entities.
Sec. 712.7 What must you do to add activities or services that are not
preapproved?
In order for you to invest in and/or loan to a CUSO that offers the
unpreapproved activity or service, you must first receive NCUA Board
approval. Your request for NCUA Board approval of a new activity or
service should include a full explanation and complete documentation of
the activity or service and how that activity or service is associated
with routine credit union operations. Your request should be submitted
jointly to your Regional Office and to the Secretary of the Board. Your
request will be treated as a petition to amend Sec. 712.5 and NCUA will
request public comment or otherwise act on the petition within 60 days
after receipt.
Sec. 712.8 What transaction and compensation limits might apply to
individuals related to you or a CUSO?
(a) Officials and senior management employees. Your officials,
senior management employees, and their immediate family members must
not receive any salary, commission, investment income, or other income
or compensation from a CUSO either directly or indirectly, or from any
person being served through the CUSO. This provision does not prohibit
your officials or senior management employees from assisting in the
operation of a CUSO, provided your officials or senior management
employees are not compensated by the CUSO. For purposes of this
paragraph (a), ``official'' means your directors or committee members.
For purposes of this paragraph (a), ``senior management employee''
means your chief executive officer (typically this individual holds the
title of President or Treasurer/Manager), any assistant chief executive
officers (e.g. Assistant President, Vice President, or Assistant
Treasurer/Manager) and the chief financial officer (Comptroller). For
purposes of this paragraph (a), ``immediate family member'' means a
spouse or other family members living in the same household.
(b) Employees. The prohibition contained in paragraph (a) of this
section also applies to your employees not otherwise covered if the
employees are directly involved in dealing with the CUSO unless your
board of directors determines that your employees' positions do not
present a conflict of interest.
(c) Others. All transactions with business associates or family
members of your officials, senior management employees, and their
immediate family members, not specifically prohibited by paragraphs (a)
and (b) of this section must be conducted at arm's length and in your
interest.
Sec. 712.9 When must you begin compliance with this part?
(a) Investments. Your investments in existence prior to [the
effective date of the final regulation], must conform with this part
not later than [the effective date of the final regulation], unless the
Board grants its prior approval to continue such investment for a
stated period.
(b) Loans. Your loans in existence prior to [the effective date of
the final regulation] must conform with this part not later than [the
effective date of the final regulation], unless:
(1) The Board grants its prior approval to continue your loan for a
stated period; or
(2) Under the terms of its loan agreement you cannot require
accelerated repayment without breaching the agreement.
PART 740--ADVERTISING
5. The authority citation for Part 740 continues to read as
follows:
Authority: 12 U.S.C. 1766, 1781, 1789 and 4311.
6. Section 740.3(c) is revised to read as follows:
Sec. 740.3 Mandatory requirements with regard to the official sign and
its display.
* * * * *
(c) An insured credit union shall not receive account funds at any
teller's station or window where any noninsured credit union or
institution receives deposits. Excepted from this prohibition are
credit union centers, service centers, or branches servicing more than
one credit union where only some of the credit unions are insured by
the NCUA. In such instances there must be placed immediately above or
beside each official sign another sign stating ``The following credit
unions serviced by this facility are not federally insured by the NCUA
____________________.'' (the full legal name of each credit union and
the city and state of its principal office will follow the word NCUA
each time it appears). The lettering will be of such size and print to
be clearly legible to all members conducting share or share deposit
transactions.
* * * * *
[FR Doc. 97-6374 Filed 3-12-97; 8:45 am]
BILLING CODE 7535-01-P