[Federal Register Volume 64, Number 119 (Tuesday, June 22, 1999)]
[Rules and Regulations]
[Pages 33184-33187]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-15650]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 703 and 712
Investment and Deposit Activities; Credit Union Service
Organizations
AGENCY: National Credit Union Administration (NCUA)
ACTION: Final rule.
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SUMMARY: The final rule makes four changes to the recently revised rule
concerning federal credit unions' (FCUs') investments in and loans to
credit union service organizations (CUSOs). The four changes are:
First, delete a provision preventing FCUs from investing in or lending
to CUSOs in which non-credit union depository institutions are co-
investors or lenders; second, revise a provision limiting CUSO
investments in non-CUSO service providers; third, delete a provision
preventing FCUs from investing in the debentures of a CUSO; and fourth,
clarify how the NCUA measures the limit on an FCU's investment in or
loans to CUSOs. In addition, the final rule clarifies the meaning of
cyber financial services. The changes decrease the regulatory burden
for FCUs investing in or lending to CUSOs.
DATES: This rule is effective July 22, 1999.
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
On November 19, 1998, the NCUA Board requested comment on proposed
changes to part 712 of its regulations. 63 FR 65714 (November 30,
1998). Part 712 sets forth the requirements for FCUs investing in or
lending to CUSOs. The proposed amendments addressed four issues
resulting from the March 1998 revisions to the CUSO rule. 63 FR 10743
(March 5, 1998). The Board also requested comment on the scope of
services that should be included within the existing cyber financial
services category of the CUSO rule.
Summary of Comments
The NCUA Board received twenty comments on the proposal: nine from
credit unions; three from CUSOs; two from credit union trade groups;
one from a CUSO trade group; one from a bank trade group; three from
state leagues; and one from an attorney. Of the fourteen commenters
that addressed the proposed changes, thirteen generally supported the
added flexibility of the proposed amendments.
FCUs Investing in or Lending to a CUSO in Which a Bank or Thrift Is
Also a Participant
Section 712.2(c) prohibits an FCU from investing in or lending to a
CUSO in which one or more banks or thrift institutions participate. The
rationale behind the limitation was that it would be too confusing to
credit union members if both NCUSIF and FDIC signs were posted together
at shared branches. 63 FR at 10746. The Board believes possible
confusion can be addressed through appropriate disclosures and so the
proposal removed the prohibition.
The commenters generally supported the added flexibility of this
amendment. There were two negative commenters. One was a bank trade
group that objected because it believes the
[[Page 33185]]
requirement that CUSOs primarily serve credit unions or their members
will be too hard to monitor if banks and thrifts are allowed to
participate. The bank trade group also objected on the basis that
insurance disclosures for this type of CUSO would be too burdensome.
The Board rejects these arguments. The disclosure issue for federally
insured credit unions is currently addressed in Sec. 740.3(c) of NCUA's
regulations. The CUSO rule currently allows credit unions to
participate with other entities, just not banks or thrifts. This
participation has not led to a problem in monitoring the ``primarily
serves'' requirement, and the Board does not anticipate a problem when
banks and thrifts are added. One commenter was concerned that NCUA
would no longer be able to regulate CUSOs if banks and thrifts were
allowed to participate. Inasmuch as NCUA does not currently regulate
CUSOs, the Board determined that this concern was not justified.
CUSO Investment in Other Service Providers
Section 712.3(b) limits a CUSO investing in a service provider not
meeting the customer base requirement to the minimum amount necessary
to provide the service. The NCUA Board does not believe it is necessary
to be so restrictive in limiting the amount a CUSO can invest. It
proposed limiting the amount 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.
All of the commenters but the bank trade group were in support of
this added flexibility, and three commenters suggested even greater
flexibility. One commenter suggested that FCUs also be permitted to
invest in non-CUSO service providers. There is no statutory authority
for this type of investment. Another commenter recommended deleting any
investment restriction on CUSOs, and a third commenter suggested
expanding a CUSO's investment authority up to the amount necessary ``to
obtain a board of director position or policy input in the service
provider.''
In contrast, the bank trade group objects to a CUSO having the
potential to gain a controlling interest in a non-CUSO service provider
and recommends limiting the investment to a passive interest. Its
position is that CUSOs should be limited as much as possible because of
the tax exempt status of FCUs. The final rule allows CUSOs to invest so
that they can provide goods and services to their customers at
competitive prices without losing sight of the fact that CUSOs cannot
function as an investment vehicle for FCUs to invest in what would
otherwise be an impermissible investment. Accordingly, the Board thinks
the proposal struck the appropriate balance and has adopted that
approach in the final rule.
FCUs Investing in the Debentures of a CUSO
Section 712.2(a) limits an FCU's investment in a CUSO structured as
a corporation to the equity of a corporation. Although this provision
was intended as a clarification, it has the effect of prohibiting an
FCU from investing in the debentures of a CUSO structured as a
corporation. The proposal removed this prohibition. The one commenter
that specifically referenced this amendment was in support of it.
FCUs Accounting in Accordance With GAAP
The proposed change clarified that generally accepted accounting
principles (GAAP) are to be used in accounting for an FCU's investment
in and loans to a CUSO both for the regulatory limitations under
Sec. 712.2 and the financial statement amounts under Sec. 712.3.
However, it does not require divestiture or prohibit future investments
if the regulatory limitation is exceeded under the equity method
without any additional cash outlay.
The commenters generally supported this change because ``it
maintains consistency in the accounting treatment of CUSOs and avoids
the undesired possibility of penalizing success.'' One commenter
objected and two commenters had drafting suggestions. The negative
commenter maintains that if the investment in the CUSO is less than .5%
of total credit union assets, the credit union should be permitted to
use aggregate cash outlay since the material effect would be
insignificant. However, Sec. 201(a) of the Credit Union Membership
Access Act (CUMAA), Pub. L. No. 105-219, 112 Stat. 918 (1998), requires
credit unions having assets of $10 million or more to follow GAAP in
all reports or statements filed with the Board. 12 U.S.C.
1782(a)(6)(C). Therefore, the requirement that all FCUs use GAAP in
accounting for their investment and loans to CUSOs is consistent with
the new accounting requirements of CUMAA and, even for investments
below the regulatory limit will insure that future growth or diminution
in the investment are fairly reported in FCU financial statements.
Cyber Financial Services
The NCUA Board also requested comment on Sec. 712.5(d)(8) which
lists cyber financial services as a permissible CUSO activity. The
Board received thirteen comments on this issue. The preamble to the
current rule described 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. The NCUA Board specifically requested
comment on the scope of services that should be included within the
category of cyber financial services.
Six of the commenters opposed having a list of specific permissible
services because they thought it would be too limiting and, with
changing technology, would rapidly become outdated. The Board agrees
with these concerns. The Board also agrees that the limitations
described in the preamble to the March 1998 rule are too restrictive.
The Board's intent is that CUSOs be permitted to provide to credit
unions and their members electronic delivery of any permissible CUSO
service and electronic delivery of any permissible credit union
service.
Some commenters noted that credit unions need to be able to offer
Internet access to their members to market their services effectively
and compete in the financial marketplace. Therefore, in addition to
allowing CUSOs to provide currently permissible financial services
electronically, the Board, similar to a Federal Reserve Board
determination, will allow CUSOs to provide FCUs and their members an
electronic link to an Internet access provider as part of providing
currently permissible financial services electronically. Royal Bank of
Canada, Montreal, Canada, et al., Order Approving Notices to Engage in
Nonbanking Activities, Federal Reserve Board (December 2, 1996). CUSOs
providing Internet access would be limited to providing access through
an electronic link to their member credit unions, which in turn would
offer Internet access to their members, only as part of a broader
package of credit union or financial services. This is an example of an
activity that would be considered incidental to permissible cyber
financial services.
Group Purchasing
Although comment was not requested on this issue, one commenter
suggested that CUSOs be allowed to provide group purchasing for FCU
members to the same extent as FCUs under part 721 of NCUA's
regulations. Although the
[[Page 33186]]
commenter cites the statutory limitations placed on CUSOs to provide a
service that ``relates to the daily operations of the credit unions
they serve'' or ``the routine operations of credit unions,'' the
commenter ignores the implications of these limitations by arguing that
CUSOs should be allowed to market any service provided by a third party
vendor. 12 U.S.C. 1757 (5)(D) and (7)(I). The Federal Credit Union Act
(Act) prohibits the commenter's broad interpretation of permissible
CUSO activities.
Section by Section Analysis
Section 712.2(c) is revised 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
final 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 against using the CUSO authority to
acquire control of certain other organizations such as trade
associations and other depository institutions. 12 U.S.C. 1757(7)(I).
Section 712.3(b) of the current rule limits the amount a CUSO can
invest in other service providers to the minimum amount necessary to
provide the service. The revised language concerning service providers
permits 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.
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 is moving
this provision from the customer base section of the rule,
Sec. 712.3(b), and adding 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 to the March 1998 rule explains
that this limitation was a clarification. 63 FR at 10745. 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 is eliminating 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.
This Board is revising Secs. 712.2 and 712.3 to clarify that GAAP
is 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.
The final rule does not require divestiture or prohibit future
investments if the regulatory limitation is exceeded under the GAAP
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 explained in the proposal, an example of how the rule will be
applied is 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.
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 Board has determined and certifies that
the final rule will not have a significant economic impact on a
substantial number of small credit unions. The reason for this
determination is that the amendments to the rule reduce regulatory
burden. Accordingly, the NCUA Board has determined that a Regulatory
Flexibility Analysis is not required.
Paperwork Reduction Act
This final rule 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 rule 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.
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
reviewed this rule and determined that, for purposes of the Small
Business Regulatory Enforcement Fairness Act of 1996, this is not a
major rule.
List of Subjects
12 CFR Part 703
Credit unions, Investments.
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 June 14,
1999.
Becky Baker,
Secretary of the Board.
For the reasons stated in the preamble, the NCUA amends 12 CFR
chapter VII as follows:
[[Page 33187]]
PART 703--INVESTMENT AND DEPOSIT ACTIVITIES
1. The authority citation for part 703 will continue to read as
follows:
Authority: 12 U.S.C. 1757(7), 1757(8) and 1757(15).
Sec. 703.20 [Amended]
2. Section 703.20 is amended in paragraph (c) by revising
``Sec. 701.27'' to read ``part 712.''
PART 712--CREDIT UNION SERVICE ORGANIZATIONS
3. 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.
4. Amend Sec. 712.2 by revising the section heading, 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 participate?
* * * * *
(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.
5. 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 can invest in or loan to a CUSO only if
the CUSO is structured as a corporation, limited liability company, or
limited partnership. An FCU may only participate in a limited
partnership as a limited partner. * * *
* * * * *
(c) Federal credit union accounting for financial reporting
purposes. * * *
* * * * *
6. In Sec. 712.5 add paragraph (p) to read as follows:
Sec. 712.5 What activities and service are preapproved for CUSO
* * * * *
(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. 99-15650 Filed 6-21-99; 8:45 am]
BILLING CODE 7535-01-U