[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