[Federal Register Volume 63, Number 229 (Monday, November 30, 1998)]
[Proposed Rules]
[Pages 65714-65716]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31598]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 712
Credit Union Service Organizations
AGENCY: National Credit Union Administration
ACTION: Proposed rule.
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SUMMARY: NCUA proposes several changes to its recently revised rule
concerning federal credit unions' (FCUs') investments in and loans to
credit union service organizations (CUSOs). The proposed changes:
delete a provision preventing FCUs from investing in or lending to
CUSOs in which non-credit union depository institutions are co-
investors or lenders; revise a provision limiting CUSO investments in
non-CUSO service providers; delete a provision preventing FCUs from
investing in the debentures of a CUSO; and clarify how the NCUA
measures the limit on an FCU's investment in or loans to CUSOs. The
proposed changes decrease the regulatory burden for FCUs investing in
or lending to CUSOs.
DATES: Comments must be received by March 1, 1999.
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. E-mail comments to [email protected].
Please send comments by one method only.
FOR FURTHER INFORMATION CONTACT: Mary Rupp, Staff Attorney, Office of
General Counsel, at the above address or telephone (703) 518-6540; or
Linda Groth, Program Officer, Office of Examination and Insurance, at
the above address or telephone (703) 518-6360.
SUPPLEMENTARY INFORMATION:
Background
Section 107 of the Federal Credit Union Act (the Act) authorizes
FCUs to make loans to and invest in CUSOs subject to certain funding
limits and other restrictions. 12 U.S.C 1757. As to funding,
Sec. 107(5)(D) authorizes an FCU to lend, in the aggregate, up to 1% of
its shares and undivided earnings to CUSOs, and Sec. 107(7)(I)
authorizes an FCU to invest up to an additional 1% in the shares,
stocks, or obligations of a CUSO. 12 U.S.C. 1757(5)(D), (7)(I). Other
restrictions include Sec. 107(5)(D)'s requirement that a service
organization ``primarily serve the needs of its member credit unions''
and Sec. 107(7)(I)'s prohibition against using the CUSO authority to
acquire control of other specified organizations such as trade
associations and other financial institutions.
NCUA's implementing regulations have, since their inception,
combined these lending and investment provisions in a single ``CUSO
rule.'' Now codified at 12 CFR part 712, the CUSO rule was most
recently revised in March 1998. 63 FR 10743 (March 5, 1998). That
revision reflected a comprehensive updating and streamlining of the
rule. Among other changes, the revised rule clarifies NCUA's authority
to examine CUSO books and records, adds to the list of permissible CUSO
services, and simplifies the legal opinion requirements. Upon
reconsideration of the revised rule, NCUA now believes that three
provisions of the rule are unnecessarily restrictive and should be
changed and that one provision needs further clarification.
Proposed Changes
The first proposed change concerns the question of what other
organizations may participate with FCUs in the formation and operation
of a CUSO. In this connection, Sec. 712.2(c) of the current rule states
that ``[a]n FCU may invest in, or loan to, a CUSO by itself or with
other credit unions, or with non-depository institution parties not
otherwise prohibited by Sec. 712.6 or this part.'' This language
prohibits an FCU from investing in or lending to a CUSO in which one or
more banks or thrift institutions are also participating lenders or
investors.
Explaining this prohibition, the preamble to the current rule cited
concern about non-credit union depository institutions participating in
credit union service centers, such as shared branches. NCUA was
concerned that credit union members would be confused if both NCUSIF
and FDIC signs were posted together at shared service centers. 63 FR at
10746. On further consideration, however, NCUA believes any possible
confusion can be properly addressed through appropriate disclosures to
service center customers. The prohibition on bank and thrift
participants is unnecessary and NCUA proposes to revise Sec. 712.2(c)
to read: ``A federal credit union may invest in or loan to a CUSO by
itself, with other credit unions, or with non-credit union parties.''
This language is substantially the same as the rule prior to the March
1998 revision. In addition the proposed rule removes a cross-reference
in the current version of Sec. 712.2(c) to Sec. 712.6. Section 712.6
stands on its own to implement the statutory prohibition
[[Page 65715]]
against using the CUSO authority to acquire control of certain other
organizations such as the trade associations and other depository
institutions. 12 U.S.C. 1757(7)(I).
The second change concerns Sec. 712.3(b) of the current rule and
the amount a CUSO can invest in other service providers. This
paragraph, entitled ``Customer base,'' provides in part ``if in order
for the CUSO to provide a permissible service it is necessary for the
CUSO to own stock in a service provider not meeting the customer base
requirement, then the CUSO can own and buy the minimal amount of
service provider stock necessary to provide the service.'' As an
example of how this authority can be used, a CUSO might wish to buy
stock in a bank or thrift-owned ATM network, in order to make the
network available to members of the CUSO's participating credit unions.
Upon further consideration, NCUA believes it is not necessary to
limit a CUSO's investment in a service provider to a minimum amount
required as a condition of participation in the service provider. If a
CUSO can, as a result of an increased investment, obtain a reduced
price for goods or services, the CUSO should be free to make that
business decision. Accordingly, NCUA proposes to revise the language
concerning service providers to permit CUSO investments in non-CUSO
service providers if the investment is limited to the amount necessary
to participate in the service provider or a greater amount if necessary
to obtain a reduced price for goods or services, for the CUSO, its
credit unions, or the credit unions' members.
The intent of this provision is to allow a CUSO to invest as much
as is necessary to obtain an economic advantage on the goods or
services it is receiving. CUSOs would not be permitted to use this
provision as independent investment authority. The NCUA Board is
interested in receiving comment on this distinction, and on whether the
proposed regulatory language achieves the intended result.
NCUA believes it would be clearer for this provision to be set out
in that portion of the regulation addressing permissible activities
rather than in the section addressing customer base. NCUA proposes to
move this provision from the customer base section of the rule,
Sec. 712.3(b), and add it as a new subsection (p) to Sec. 712.5
concerning permissible CUSO activities and services.
The third change concerns Sec. 712.2(a) of the current rule that
limits an FCU's investment in a CUSO structured as a corporation to the
equity of the corporation. The preamble explains that this limitation
was a clarification. However, this provision has the effect of
prohibiting an FCU from investing in the debentures of a CUSO
structured as a corporation, a practice that was previously
permissible. NCUA proposes to eliminate this provision because the
limitation is more restrictive than the Act, which permits FCUs to
invest in the obligations of a CUSO. 12 U.S.C. 1757(7)(I).
Currently, Sec. 712.2(a) states that an FCU can only invest in a
limited partnership as a limited partner. This provision is more
related to the permissible structure of a CUSO than permissible
investments in a CUSO. NCUA believes this provision would be clearer if
it is moved from Sec. 712.2(a) to Sec. 712.3(a). In addition, the
provision limiting an FCU's investment in a limited liability company
to membership is deleted because it is unnecessary.
The final change clarifies that generally accepted accounting
principles (GAAP) are to be used in accounting for an FCU's investments
in and loans to a CUSO both for purposes of accounting for the
regulatory limitations under Sec. 712.2 and the financial statement
amounts under Sec. 712.3. In the past, some FCUs have measured both
regulatory limitations and financial statement amounts consistent with
GAAP while others have measured the regulatory limitation differently,
using a concept called aggregate cash outlay.
The aggregate cash outlay practice came about because of a
perceived inequity in having to use GAAP in certain situations. If a
credit union owns 20% or more, but less than 50% of a CUSO's voting
common stock, it is presumed to ``have the ability to exert significant
influence'' over the CUSO and GAAP requires the credit union to use the
equity method to account for its CUSO investment. Under this method,
the FCU records its initial investment and, subsequently, its
proportionate share of the CUSO's profits and losses. A situation could
arise in which an FCU's initial investment is within the 1% regulatory
limitation but, as the CUSO operates with continued profitability and
the credit union absorbs its proportionate share of the profits through
no additional cash outlay, the FCU exceeds its 1% limitation. This
could trigger regulatory action requiring divestiture. Some argue this
is contrary to prudent business practice and unfair because it would be
penalizing FCUs for investing in profitable CUSOs. To avoid this
result, there grew in practice a concept generally known as aggregate
cash outlay. Under this concept, the regulatory limitation would only
be measured in relation to the actual cash invested or lent to a CUSO,
not counting subsequent increases or decreases to this amount growing
out of application of equity method accounting.
The Board agrees that divestiture should not be required, but
believes it is important for FCUs to account in accordance with GAAP.
The proposed rule strikes a balance. It requires FCUs to account in
accordance with GAAP for both regulatory and financial reporting
purposes. It does not require divestiture or prohibit future
investments if the regulatory limitation is exceeded under the equity
method without any additional cash outlay.
To accomplish this, new subsections (d) and (e) have been added to
Sec. 712.2. Subsection (d) includes the definition of ``paid-in and
unimpaired capital and surplus'' that was formerly in subsection (a)
and adds the requirement that total investments in and loans to the
CUSO be measured consistent with GAAP for regulatory purposes. Section
712.3(c) is revised by adding ``for financial reporting purposes'' to
the title.
As an example of how the rule will be applied, if an FCU owns 45%
of a CUSO and the CUSO has an annual net income of $50,000, the equity
method requires an FCU to book a $22,500 addition to its ``investments
in and loans to CUSO'' asset account. If by doing so, the regulatory
limitation is reached or exceeded, NCUA will not require divestiture.
Request for Comment
The NCUA Board is interested in receiving comments on the proposed
amendments to part 712.
The NCUA Board is also interested in receiving comment on
Sec. 712.5(d)(8) which lists cyber financial services as a permissible
CUSO activity. The preamble to the current rule defined cyber financial
services as ``credit union member financial services that are analogous
to services performed for credit union members in a credit union branch
and not unrelated services.'' 63 FR at 10753. As part of a CUSO's
authority to provide cyber financial services, it may also want to
provide other forms of cyber service. The NCUA Board is interested in
receiving comment on the scope of services that should be included
within the category of cyber financial services.
[[Page 65716]]
Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an 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). Because these proposed changes reduce regulatory
burden, the NCUA Board has determined and certifies that the proposal
does not have a significant economic impact on a substantial number of
small credit unions.
Paperwork Reduction Act
This proposal has no effect on reporting requirements in part 712.
Executive Order 12612
Executive Order 12612 requires NCUA to consider the effect of its
actions on state interests. The CUSO regulation applies only to FCUs.
Thus, the NCUA Board has determined that this proposal does not
constitute a ``significant regulatory action'' for purposes of the
Executive Order. NCUA will continue to work with the state credit union
supervisors to achieve shared goals concerning CUSOs with both FCU and
state-chartered credit union participation.
List of Subjects in 12 CFR Part 712
Administrative practices and procedure, Credit, Credit unions,
Investments, Reporting and record-keeping requirements.
By the National Credit Union Administration Board on November 19,
1998.
Becky Baker,
Secretary of the Board.
Accordingly, NCUA proposes to amend 12 CFR part 712 as follows:
PART 712--CREDIT UNION SERVICE ORGANIZATIONS
1. The authority citation for part 712 will continue to read as
follows:
Authority: 12 U.S.C. 1756, 1757(5)(D), and (7)(I), 1766, 1782,
1784, 1785 and 1786.
2. Amend Sec. 712.2 by removing the second and third sentences of
paragraph (a), revising paragraph (c) and adding paragraphs (d) and (e)
to read as follows:
Sec. 712.2 How much can an FCU invest in, or loan to, CUSOs, and what
parties may be involved?
* * * * *
(c) Parties. An FCU may invest in or loan to a CUSO by itself, with
other credit unions, or with non-credit union parties.
(d) Measurement for calculating regulatory limitation. For purposes
of paragraphs (a) and (b) of this section: paid-in and unimpaired
capital and surplus means shares and undivided earnings; and total
investments in and total loans to CUSOs will be measured consistent
with GAAP.
(e) Divestiture. If the limitations in paragraph (a) of this
section are reached or exceeded because of the profitability of the
CUSO and the related GAAP valuation of the investment under the equity
method, without an additional cash outlay by the FCU, divestiture is
not required. An FCU may continue to invest up to 1% without regard to
the increase in the GAAP valuation resulting from a CUSO's
profitability.
3. Amend Sec. 712.3 by adding a new sentence following the first
sentence of paragraph (a), by removing the second sentence of paragraph
(b) and by revising the title of paragraph (c) to read as follows:
Sec. 712.3 What are the characteristics of and what requirements apply
to CUSOs?
(a) Structure. * * * An FCU may only participate in a limited
partnership as a limited partner. * * *
* * * * *
(c) Federal credit union accounting for financial reporting
purposes. * * *
* * * * *
4. In Sec. 712.5 add paragraph (p) to read as follows:
Sec. 712.5 What activities and services are preapproved for CUSOs?
* * * * *
(p) CUSO investments in non-CUSO service providers: In connection
with providing a permissible service, a CUSO may invest in a non-CUSO
service provider. The amount of the CUSO's investment is limited to the
amount necessary to participate in the service provider, or a greater
amount if necessary to receive a reduced price for goods or services.
[FR Doc. 98-31598 Filed 11-27-98; 8:45 am]
BILLING CODE 7535-01-P