[Federal Register Volume 64, Number 144 (Wednesday, July 28, 1999)] [Proposed Rules] [Pages 40787-40789] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 99-19253] ----------------------------------------------------------------------- NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Part 704 Corporate Credit Unions AGENCY: National Credit Union Administration (NCUA). ACTION: Advance notice of proposed rulemaking. ----------------------------------------------------------------------- SUMMARY: NCUA requests public comment on revisions to the rule governing corporate credit unions (corporates). As part of its regulatory review process, NCUA has identified provisions for further clarification or revision. Comments from interested parties on these issues will assist NCUA in its regulatory review process. DATES: Comments must be received on or before November 26, 1999. ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail or hand-deliver comments to: National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. You may fax comments to (703) 518-6319. Please send comments by one method only. FOR FURTHER INFORMATION CONTACT: Robert F. Schafer, Director, Office of Corporate Credit Unions, at the above address or telephone (703) 518- 6640; or Mary Rupp, Staff Attorney, Office of General Counsel, at the above address or telephone (703) 518-6540. SUPPLEMENTARY INFORMATION: A. Background On March 7, 1997, NCUA issued a final rule that completely revised part 704 of its regulations, the provisions governing corporates. 62 FR 12929 (March 19, 1997). The final rule noted that ``[a] number of commenters strongly suggested that NCUA review the corporate regulation on an annual basis.'' Id. NCUA agreed that a periodic review was necessary, but that the frequency should be determined by circumstances and need. The NCUA Board directed the Office of Corporate Credit Unions (OCCU) to present a report on the rule within 18 months of publication. When the final regulation's compliance date was extended from January 1, 1998, to May 1, 1998, the completion date for the report to the NCUA Board was extended to provide adequate time to assess the impact of the rule. In February 1999, OCCU provided its report to the NCUA Board. The report identified the major areas of the rule for revision or clarification. The report was based on informal comments from 12 corporates, the Association of Corporate Credit Unions, the National Association of State Credit Union Supervisors, OCCU staff, and Office of Investment Services staff. This advance notice of proposed rulemaking requests comment on several issues raised as a result of OCCU's 18 month review. While NCUA welcomes comment on other sections of Part 704 not addressed in this advance notice, a proposed rule will be issued providing another opportunity to provide comments on all sections of Part 704. B. Specific Areas for Review Section 704.2 Definitions Asset-Backed Securities NCUA seeks comment on the definition of asset-backed security. There has been some confusion as to the types of securities that are permissible under the current, broad definition. For example, the definition does not specifically prohibit securities with foreign collateral. However, corporates are only permitted to make foreign investments if they have Part III Expanded Authority. NCUA is seeking recommendations on how to address this issue. Membership Capital A number of issues have been raised regarding the various capital accounts in part 704. Membership capital has been the most utilized source of additional capital for corporates. The regulation allows for an adjustment period during which the membership capital account can be adjusted in relation to a specific measure. Although the regulation does not dictate the measure, many corporates utilize a member's asset size. NCUA seeks comment on whether the regulation should require a specific measure, such as, requiring the membership capital account to be adjusted in order to remain equivalent to at least one percent of the member credit union's assets as of December 31st of the prior year. Additionally, the regulation does not state the frequency of the adjustment [[Page 40788]] period. NCUA staff believes that either an annual or semi-annual adjustment period is appropriate. There have been suggestions that a more frequent adjustment period (such as monthly or quarterly) would be more appropriate due to the often significant fluctuation in corporate assets over a short period of time. NCUA invites comment on whether the regulation should require specific allowable adjustment periods (annually, quarterly, monthly, daily) or if this should be left to the corporate to establish as long as the adjustment period is fully disclosed to the member when the account is opened. NCUA also seeks comment on whether a minimum capital level should be prescribed that, once reached, would prohibit readjusting downward an adjusted balance membership capital account. Paid-In Capital NCUA believes that the credit union system is adequately capitalized. The highest concentration of capital currently rests with natural person credit unions, while corporate credit unions are somewhat less capitalized. The current regulation differentiates between member and nonmember paid-in capital by requiring nonmember paid-in capital be approved by NCUA. Should the nonmember paid-in capital requirements apply if the nonmember is a credit union? NCUA welcomes comments on the benefits or disadvantages of this proposal, how the process might best be implemented, and the treatment of such accounts under Generally Accepted Accounting Principles (GAAP). The current regulation provides that paid-in capital cannot exceed reserves and undivided earnings. NCUA seeks comment on whether this limitation should be eliminated or revised. If the limitation on paid- in capital is eliminated, should the various regulatory limitations that are tied to reserves and undivided earnings (RUDE) and paid-in capital be revisited? Unmatched Embedded Options Section 704.8(d)(2) requires corporates with unmatched embedded options in excess of 200 percent of reserves, undivided earnings, and paid-in capital to perform additional tests. NCUA believes a definition of unmatched embedded options may be necessary and welcomes comment on this issue. Section 704.7 Lending Section 704.7(g) permits a corporate to enter into a loan participation agreement only with another corporate. NCUA seeks comments on the expansion of loan participation authority for corporates. Issues to be considered include: (1) should participation loans with entities other than corporates be permitted; (2) the impact of participation loans with entities other than corporates on a corporate's banker's bank exemption from the Federal Reserve Board's Regulation D reserve requirements; (3) the impact of loan participations on a corporate's liquidity position; (4) whether making participation loans should require corporates to establish additional reserves; (5) should corporates be allowed to participate in business and/or consumer loans; and (6) whether corporates have the expertise to underwrite and participate in business and consumer loans. Section 704.12 Services NCUA requests comment on the advantages and disadvantages of eliminating this section of the regulation. If Sec. 704.12 is eliminated, as a result, defined fields of membership would also be eliminated for federal corporates. NCUA encourages commenters to address any concerns or benefits to the credit union system from such an action. A number of corporates have indicated the need for a clearer definition of what constitutes ``correspondent services.'' NCUA believes clarification is warranted, and encourages commenters to provide specific examples of appropriate correspondent services and definition terminology. Section 704.15 Audit Requirements Statement of Auditing Standard (SAS) No. 70, Reports on the Processing of Transactions by Service Organizations, provides guidance: (1) on the factors an independent auditor should consider when auditing the financial statements of a corporate credit union that uses a service organization to process certain transactions; and (2) for independent service auditors who issue reports for a corporate credit union that functions as service organization for others. This report is primarily intended for the user organization's auditors. NCUA is seeking comment on a number of specific questions regarding requirements for SAS 70 reports under the latter situation noted above. Should a corporate credit union, when processing transactions for others as a service organization, be required to obtain a SAS 70 report. NCUA is aware that user organization auditors, in seeking to comply with auditing standards, routinely appeal to the service organization to provide a SAS 70 report through its service auditor. If regulation requires a SAS 70 report, should it only apply to corporate credit unions above a particular asset size? Additionally, the Board seeks comment on the two types of SAS 70 reports a service auditor can provide the corporate credit union that functions as a service organization processing transaction for others. These are: (1) a report on controls placed in operation; and (2) a report on controls placed in operation and tests of operating effectiveness. Generally, the service organization determines which type of engagement needs to be performed. Should the regulation specify which type of report the corporate must obtain? Section 704.18 Fidelity Bond Coverage NCUA seeks public comment on whether fidelity bond coverage should be made optional for corporates. In lieu of a fidelity bond, what types of criteria (such as maintaining a specific capital level) should be utilized to determine appropriate protection exists for the corporate and its members? Section 704.19 Wholesale Corporate Credit Unions NCUA questions the need for separate regulatory requirements for wholesale corporates. NCUA invites comment on whether there is a need for separate regulatory requirements for wholesale corporates and, if such a need exists, whether the existing regulatory requirements are appropriate. Appendix B--Expanded Authorities and Requirements NCUA asks for comment on the existing investment authorities under each expanded authority section and recommendations for any additional investment powers. Any recommendations for additional investment authority should be consistent with the infrastructure and personnel expertise required by each of the four specific expanded authority levels. NCUA believes it is necessary to review the permissible minimum credit ratings allowed under each authority level. For example, Part I and II provide authority to acquire asset-backed securities (ABS) rated no lower than AA. NCUA seeks comment on the existing minimum credit ratings allowed for Part I, Part II, and Part III expanded authority levels. Part III Part III authority allows corporates to make limited foreign investments. [[Page 40789]] NCUA has been asked to expand the types of foreign investments that corporates with Part III authority can make. NCUA seeks comments on the advisability of allowing corporates with Part III expanded authority to invest specifically in foreign ABS and foreign corporate debt obligations. NCUA invites commenters to provide additional recommendations for foreign investments that should be considered for Part III corporates. Part IV Part IV expanded authority allows corporates to engage in derivatives transactions. NCUA is cognizant that the derivative market is complex and seeks comment on the need for additional guidance in this area. Further, it has been proposed to allow corporates without Part IV authority to utilize derivatives as a means of risk reduction. This would be accomplished through a contractual arrangement with a corporate that has Part IV authority. NCUA invites commenters to address this proposal. By the National Credit Union Administration Board on July 22, 1999. Becky Baker, Secretary of the Board. [FR Doc. 99-19253 Filed 7-27-99; 8:45 am] BILLING CODE 7535-01-U