[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]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 704
Corporate Credit Unions
AGENCY: National Credit Union Administration (NCUA).
ACTION: Advance notice of proposed rulemaking.
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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
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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.
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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