[Federal Register Volume 64, Number 76 (Wednesday, April 21, 1999)]
[Rules and Regulations]
[Pages 19441-19443]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-9931]



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 Rules and Regulations
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  Federal Register / Vol. 64, No. 76 / Wednesday, April 21, 1999 / 
Rules and Regulations  

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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701


Organization and Operations of Federal Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: NCUA is issuing a final rule that incorporates into its 
regulations the agency's longstanding interpretation that federal 
credit unions (FCUs) are authorized, within limits, to make charitable 
contributions and donations. NCUA seeks to increase regulatory 
effectiveness by making it easier for FCUs to locate applicable rules 
regarding the making of charitable contributions and donations.

DATES: This rule is effective May 21, 1999.

FOR FURTHER INFORMATION CONTACT: Frank S. Kressman, Staff Attorney, 
Division of Operations, Office of General Counsel, (703) 518-6540.

SUPPLEMENTARY INFORMATION:

Background

    On October 29, 1998, the NCUA Board requested comments on a 
proposed rule to incorporate into NCUA regulations the requirements of 
Interpretive Ruling and Policy Statement 79-6, Donations/Contributions 
(IRPS 79-6). 63 FR 57942, October 29, 1998. Tracking IRPS 79-6, the 
proposed rule permitted an FCU to make charitable contributions to a 
recipient that is a tax exempt organization under Section 501(c)(3) of 
the Internal Revenue Code (501(c)(3) organization) and located in or 
conducting its activities in a community in which the FCU has a 
principal place of business. 26 U.S.C. 501(c)(3) (1998). The proposed 
rule also permitted FCUs to make charitable contributions to a 
501(c)(3) organization that operates primarily to promote and develop 
credit unions. Finally, the proposed rule provided that an FCU's board 
of directors must approve charitable contributions based on a 
determination that the contributions are in the best interests of the 
credit union and are reasonable given the financial condition of the 
credit union.

Summary of Comments

    The NCUA Board received thirty-four comment letters regarding the 
proposal: three from national trade associations; seven from credit 
union leagues; twenty-three from FCUs; and one from a state-chartered 
credit union.

Comments on Proposed Section 701.25(a)

    Twenty-six commenters stated that limiting donation recipients to 
501(c)(3) organizations is too restrictive and could exclude 
organizations and causes that are otherwise worthy of receiving 
donations from FCUs. One commenter suggested broadening the 501(c)(3) 
restriction by defining eligible recipients as ``organizations that 
primarily serve either a charitable, social, welfare, or educational 
purpose, or are exempt from taxation pursuant to section 501(c)(3) of 
the internal revenue code.'' Revised Code of Washington 31.12.402(20). 
We note that, while Washington state law does not require that 
recipients are tax exempt organizations under 501(c)(3), it requires 
credit unions to work with community leaders and limits donations to 
``efforts to improve areas where their [credit union] members reside.''
    Since issuance of IRPS 79-6, the NCUA has viewed the legal 
authority for FCUs to make contributions as ``an activity incidental to 
an FCU's business'' under the provision of the FCU Act that authorizes 
FCUs ``to exercise such incidental powers as shall be necessary or 
requisite to enable it to carry on effectively the business for which 
it is incorporated.'' 44 FR 56691 (Oct. 2 1979); 12 U.S.C. 1757(17). An 
FCU's purpose, as a nonpropfit cooperative, is to benefit its members 
by ``promoting thrift among its members and creating a source of credit 
for provident or productive purposes.'' 12 U.S.C. 1752(1). Prior to 
issuance of IRPS 79-6, the NCUA had permitted FCUs to make donations 
only where the FCU would derive a direct benefit. While IRPS 79-6 
broadened an FCU's ability to make contributions by permitting 
contributions for ``diverse, charitable, recreational and educational 
needs of the public,'' it limited permissible donations to 501(c)(3) 
organizations. The discussion accompanying IRPS 79-6 specifically 
prohibited contributions for candidates to league or trade association 
positions or for political office and cautioned FCUs about the 
applicability of the conflict of interest provisions of the FCU bylaws.
    The range of organizations that qualify as 501(c)(3) organizations 
is very broad, permitting donations to community chests and religious, 
charitable, scientific, and educational organizations, institutions and 
foundations. In addition, the 501(c)(3) designation insures a degree of 
credibility and independence in the exercise of the board of directors' 
decision as fiduciaries for member funds. These factors are important 
given that the funds an FCU will use for contributions would otherwise 
be available for dividends to members who, in turn, could use their 
dividends to make their own decisions about charitable giving.
    NCUA acknowledges that there may be cases where an FCU may want to 
contribute to a worthy cause or activity that is not part of or 
sponsored by a 501(c)(3) organization and that boards of directors 
should have the discretion to do so. Examples that appear appropriate 
would be good will, scholarships, not for profit projects as 
contributing to a community sports team, local clean-up projects, or 
community festivals or fairs. Accordingly, the final rule permits FCUs 
to make donations to recipients without regard to their status as 
501(c)(3) organizations. The reasonableness of a donation will depend 
on the size and financial condition of the FCU. Finally, FCUs should be 
aware that, while the final regulation does not require that recipients 
be 501(c)(3) organizations, the regulation is not authority for 
contributions to candidates for a trade association or credit union 
league office or for other political contributions which, as noted in 
the preamble to the proposed regulation, are governed by the Federal 
Election Campaign Act (2 U.S.C. 441b).
    Twenty-one commenters stated that limiting donation recipients to

[[Page 19442]]

organizations that are located in or conduct their activities in a 
community in which the FCU has a principal place of business is too 
restrictive and could exclude organizations and causes that are 
otherwise worthy of receiving donations from FCUs. The typical examples 
noted by commenters were organizations serving victims of distant 
natural disasters such as hurricanes or earthquakes and well-known 
national organizations that may not have a local office near the FCU. 
Most of these commenters favored removing the restriction from the 
regulation while others only suggested that it be broadened to include 
donation recipients located or conducting activities anywhere the FCU 
has members. The final rule, consistent with IRPS 79-6 and the proposed 
rule, permits contributions to national charitable organizations such 
as the Red Cross which, as needed, conduct activities in the community 
where the credit union is located and, therefore, would qualify as 
permissible recipients.
    One commenter noted that the proximity requirement is particularly 
restrictive for some community chartered credit unions, especially 
those in rural areas. NCUA believes that any organization located or 
conducting activities within the geographic boundaries of a community 
chartered credit union is, by definition, located in the community in 
which the FCU has a principal place of business and would be eligible 
to receive contributions under the final regulation. To provide 
additional flexibility and avoid questions that could arise about 
whether a particular office or branch of an FCU is a ``principal'' 
place of business, the Board has decided to delete the word 
``principal'' from this description in the final rule. By stating in 
the final regulation that a recipient be located or conduct activities 
in a community where the FCU has a place of business, the Board means a 
branch or office of the FCU. Place of business would not, however, 
include an ATM location.
    Another commenter noted that members of some multiple group FCUs 
are spread over large geographic areas and contended that there may be 
members located far from any of the FCU's principal places of business. 
Credit unions generally locate their places of business where a 
relatively significant number of their members will have access to 
services. NCUA recognizes an FCU's interest in serving communities 
where its members reside or carry on their activities through 
charitable donations and believes there should be flexibility in 
construing the term ``community.'' Donating to recipients in areas 
where relatively few members are located, however, would not serve the 
needs of the FCU's community. NCUA believes that limiting donation 
recipients to organizations located in or conducting activities in a 
community in which the FCU has a place of business helps to ensure that 
the FCU's charitable donations will be used to serve the needs of 
communities where its members are located.
    Finally, without regard to the location of the organization, NCUA 
has maintained in the final regulation the provision from the proposed 
rule that permits FCUs to make charitable donations to organizations 
that operate primarily to promote and develop credit unions even if the 
organization is not located or does not conduct activities in a 
community where the FCU has a place of business. For these 
contributions to be permissible, the final rule retains the requirement 
that these organizations be 501(c)(3) organizations.

Comments on Proposed Section 701.25(b)

    Twelve commenters suggested that an FCU's board of directors should 
be permitted to approve a budget for charitable donations and delegate 
authority to other FCU officials to allocate these funds. The preamble 
to the proposed rule stated that this would be an appropriate approach. 
Some commenters suggested including this in the regulation and the 
final rule incorporates this provision. Seven other commenters 
suggested that an FCU's board of directors should be permitted to 
delegate authority to make charitable donations to other FCU officials, 
including complete discretion to determine donation amounts without the 
board approving a budget for this purpose. While delegation of the 
approval of the recipients of charitable donations within an FCU board-
approved budget category is permitted, the NCUA Board has rejected 
complete delegation without a budget item being approved by the FCU's 
board because it believes that an FCU's decision as to the amount of 
donations is a significant one that warrants the consideration of its 
board of directors.

Other Comments

    Ten commenters stated that NCUA oversight of contributions and 
donations is more appropriately accomplished through guidelines, as 
opposed to regulations. Four commenters stated that charitable giving 
should not be the subject of NCUA oversight at all. The NCUA Board 
notes that FCUs do not have the express authority to make contributions 
or donations. IRPS 79-6 was a formal ruling by the NCUA Board regarding 
the incidental power of FCUs that has permitted them to make donations 
and contributions. As noted in the preamble to the proposed rule, 
NCUA's foremost intention in incorporating IRPS 79-6 into its 
regulations is to increase regulatory effectiveness by making it easier 
for FCUs to locate applicable rules regarding the making of charitable 
contributions and donations.
    The NCUA notes that this final rule provides broad discretion and 
flexibility for FCUs in determining the amount, the administration, and 
recipients for contributions but the incidental power to make 
contributions is not unlimited. The NCUA believes that contributions 
and donations may raise safety and soundness concerns and deserve 
regulatory oversight. The limitations and requirements in the final 
rule balance the interests of FCU members with the responsibility of 
FCU boards of directors to exercise their fiduciary responsibility to 
make independent and prudent decisions about contributions and 
donations.

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). The NCUA has determined and certifies that the 
final rule will not have a significant economic impact on a substantial 
number of small credit unions. Accordingly, the NCUA has determined 
that a Regulatory Flexibility Analysis is not required.

Paperwork Reduction Act

    NCUA has determined that the final rule does not increase paperwork 
requirements under the Paperwork Reduction Act of 1995 and regulations 
of the Office of Management and Budget.

Executive Order 12612

    Executive Order 12612 requires NCUA to consider the effect of its 
actions on state interests. The final rule only applies to federal 
credit unions. NCUA has determined that the proposed amendment does not 
constitute a significant regulatory action for purposes of Executive 
Order 12612.

[[Page 19443]]

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) provides generally for congressional review of agency 
rules. A reporting requirement is triggered in instances where NCUA 
issues a final rule as defined by Section 551 of the Administrative 
Procedures Act. 5 U.S.C. 551. The Office of Management and Budget has 
determined that this rule does not constitute a major rule for purposes 
of the Small Business Regulatory Enforcement Fairness Act of 1996.

List of Subjects in 12 CFR Part 701

    Charitable contributions, Credit unions.

    By the National Credit Union Administration Board on April 15, 
1999.
Becky Baker,
Secretary of the Board.

    For the reasons set forth above, NCUA amends 12 CFR part 701 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, and 1789. 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 42 U.S.C. 3601-3610. 
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.

    2. Part 701 is amended by adding Sec. 701.25 to read as follows:


Sec. 701.25  Charitable contributions and donations.

    (a) A federal credit union may make charitable contributions and/or 
donate funds to recipients not organized for profit that are located in 
or conduct activities in a community in which the federal credit union 
has a place of business or to organizations that are tax exempt 
organizations under Section 501(c)(3) of the Internal Revenue Code and 
operate primarily to promote and develop credit unions.
    (b) The board of directors must approve charitable contributions 
and/or donations, and the approval must be based on a determination by 
the board of directors that the contributions and/or donations are in 
the best interests of the federal credit union and are reasonable given 
the size and financial condition of the federal credit union. The board 
of directors, if it chooses, may establish a budget for charitable 
contributions and/or donations and authorize appropriate officials of 
the federal credit union to select recipients and disburse budgeted 
funds among those recipients.

[FR Doc. 99-9931 Filed 4-20-99; 8:45 am]
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