[Federal Register Volume 64, Number 199 (Friday, October 15, 1999)]
[Proposed Rules]
[Pages 55871-55873]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26754]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 724 and 745


Trustees and Custodians of Pension Plans; Share Insurance and 
Appendix

AGENCY: National Credit Union Administration.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The National Credit Union Administration (NCUA) proposes to 
revise its rules regarding a federal credit union's authority to act as 
trustee or custodian of pension plans. The proposal permits federal 
credit unions in a territory, including the trust territories, or a 
possession of the United States, or the Commonwealth of Puerto Rico, to 
offer trustee or custodian services for Individual Retirement Accounts 
(IRAs), where otherwise permitted.

DATES: Comments must be received on or before December 14, 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. Fax comments to (703) 
518-6319. E-mail comments to [email protected]. Please send comments 
by one method only.

FOR FURTHER INFORMATION CONTACT: Dianne M. Salva, Staff Attorney, 
Division of Operations, Office of General Counsel, at the above address 
or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION: NCUA has received many inquiries concerning 
the permissibility of federal credit unions (FCUs) in Puerto Rico 
offering IRA services to members. In the past, the agency has responded 
that FCUs in Puerto Rico cannot provide the trustee services attendant 
to an IRA account. Part 724 of NCUA's regulations permits FCUs to serve 
as trustees for IRA accounts only if the IRA accounts qualify for 
specific tax treatment under the Internal Revenue Code (IRC), and if 
they are created or organized in the United States. Part 724 has its 
roots in the Employee Retirement Income Security Act of 1974 (ERISA). 
ERISA amended the IRC so that federally-insured credit unions were 
recognized

[[Page 55872]]

as permissible trustees or custodians of Keogh plans and IRAs. ERISA, 
Pub. L. 93-406, Sec. 1022(f) (1974). However, unlike banks and savings 
and loans, credit unions did not have other statutory authority to act 
as trustees; yet there was significant interest among credit unions in 
providing these trust services. NCUA reasoned that the incidental 
powers clause of the Federal Credit Union Act (FCUA), together with the 
IRC, made it possible for credit unions to perform the trustee and 
custodial function recognized by the IRC. But this finding was narrowly 
drawn; credit unions would not be authorized to provide general 
discretionary trustee services and they were not to act as trustees in 
cases other than pension plans. Further, NCUA determined that funds 
held in trust would be limited to share and share certificate accounts.
    In 1985, NCUA published Interpretive Ruling and Policy Statement 
85-1 (IRPS 85-1) in which it clarified its position that FCUs were 
permitted to act as trustees or custodians of IRA or Keogh plans 
established under the IRC, as long as the initial contribution to the 
plan was made to a share or share certificate account and the FCU would 
engage only in custodial duties with no exercise of investment 
discretion or advice. After the initial contribution was made to a 
share account, the IRA or Keogh was ``self-directed'' so that members 
could order subsequent transfers at their own risk. The preamble to 
IRPS 85-1 briefly retraced the history of FCU authority to serve as 
trustees of IRA and Keogh plans. It cites the ERISA amendment to the 
IRC recognizing FCUs as permissible trustees as the catalyst for the 
NCUA Board's finding that FCUs were authorized to act as trustees. 
However, it credits a 1978 amendment to the FCUA, which added a section 
covering share insurance of IRA and Keogh plans, as providing the 
statutory authority for FCUs to serve as trustees. 50 FR 48,176, Nov. 
22, 1985.
    In 1990, NCUA amended its pension trustee regulation, now 
redesignated 12 CFR part 724, to incorporate IRPS 85-1. In 1997, IRPS 
85-1 was rescinded. Because of the strict limitations imposed on the 
trustee services FCUs offer members in connection with these types of 
accounts, NCUA has not encountered significant safety and soundness 
concerns related to IRA or Keogh accounts.
    Today, the policy, as stated in 12 CFR part 724, still permits FCUs 
to offer IRAs and Keogh accounts created in accordance with the IRS 
Code. It is the IRC that requires such trust accounts be created in the 
United States. 26 U.S.C. 408(a). IRS regulations provide a definition 
of the United States limited to the States and the District of 
Columbia. 26 U.S.C. 7701(a)(9). The internal revenue laws of the United 
States are generally inapplicable in Puerto Rico. 48 U.S.C. 734. This 
effectively excludes IRAs created in the Commonwealth of Puerto Rico 
from the application of these provisions of the IRC and, therefore, 
excludes federal credit unions in Puerto Rico from benefiting from the 
authority granted by 12 CFR part 724. For some U.S. territories, such 
as Guam, the United States Code specifically extends the income tax 
laws of the United States to the territory, with the modification that 
``Guam'' be substituted for the term ``United States'' in the 
territorial version of the law. 48 U.S.C. 1421i. The Northern Mariana 
Islands are the beneficiary of a similar arrangement. 48 U.S.C. 1681. 
The net effect of this is that IRAs can be established in these 
territories. The Virgin Islands, on the other hand, are subject to the 
IRC, but without the modification that ``Virgin Islands'' be 
substituted for the term ``United States.'' 48 U.S.C. 1397. This 
operates to prevent credit unions in the Virgin Islands from offering 
IRAs, because they cannot meet the IRC requirement that an IRA trust be 
created or organized in the United States.
    The Puerto Rico Internal Revenue Code of 1994 (PRITA) is similar to 
the IRC. Like the IRC, the PRITA provides for a tax-deferred, 
individual retirement account for its citizens and, like the IRC, 
recognizes insured FCUs as permissible trustees for PRITA-IRAs 
established under Puerto Rican law. P.R. Laws Ann. Tit. 13, Sec. 8569 
(1995). However, because NCUA's regulation tracks the language of the 
IRC, which requires such trusts to be created in the United States, 
FCUs in Puerto Rico have been unable to meet their members' demands for 
PRITA-IRA trustee services.
    The NCUA Board believes that FCUs in Puerto Rico should also be 
permitted to offer PRITA-IRAs to their members. While the FCUA does not 
grant FCUs plenary trust powers, it does permit them to exercise such 
incidental powers as are necessary to carry on their business. 17 
U.S.C. 1757(17). When an FCU serves as a trustee for a member's IRA 
share or share certificate account, it does not exercise the powers 
normally associated with a trust account. Given that the discretion 
exercised by an FCU as trustee for this type of account is so limited, 
the function of the FCU as trustee is not significantly different from 
its function as the issuer of share accounts and share certificates. 
Based on the foregoing, the Board finds that the authority to offer 
these accounts is incidental to the FCU's authority to issue share 
accounts and share certificates. 12 U.S.C. 1757(6). Therefore, FCUs in 
Puerto Rico are authorized by the incidental powers clause of the FCUA 
to offer IRAs created under PRITA. But, the authority must be equally 
narrow as that granted to FCUs offering IRA trust services in the 
United States. That is, the initial contribution to the plan must be 
made to a share or share certificate account, and the FCU may engage 
only in custodial duties with no exercise of investment discretion or 
advice. After the initial contribution is made to a share account, 
members must direct any subsequent transfer of the funds at their own 
risk.
    The NCUA Board has further found that, for insurance purposes, 
PRITA-IRAs will be treated like IRAs created in the United States. The 
present vested ascertainable interest of the participant will be 
insured up to $100,000 separately from other accounts of the 
participant or designated beneficiary.

Medical Savings Accounts

    In the future, the NCUA Board may consider a further amendment of 
part 724 to authorize FCUs to serve as trustees for medical savings 
accounts (MSAs). An MSA is another type of tax-deferred product which 
requires limited trustee services, similar to those required for an 
IRA. The Internal Revenue Service (IRS) is currently conducting a pilot 
program to permit financial institutions, including credit unions, to 
offer MSAs. On February 20, 1998, NCUA issued Letter to Credit Unions 
No. 98-CU-5, which stated that NCUA considered MSAs to be insured 
member accounts, but that FCUs could not act as an MSA custodian or 
trustee. The IRS pilot program will be completed in 2000, and it is 
possible in the near future legislation authorizing it on a permanent 
basis may be adopted. If and when the full contours of a permanent MSA 
program are announced, the NCUA Board will determine whether it will 
make any additional amendments to the regulations.

Regulatory Procedures

Paperwork Reduction Act

    This regulation, if adopted, will impose no additional information 
collection, reporting or record keeping requirements.

Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA) 
(5 U.S.C. 605(b)), NCUA certifies that this

[[Page 55873]]

proposed rule will not have a significant economic impact on a 
substantial number of small entities. NCUA expects that this proposal 
will not: (1) have significant secondary or incidental effects on a 
substantial number of small entities; or (2) create any additional 
burden on small entities. These conclusions are based on the fact that 
the proposed regulations merely extend the authority to offer a service 
to members. Accordingly, a regulatory flexibility analysis is not 
required.

Executive Order 12612

    This regulation, if adopted, will only apply to federal credit 
unions.

Agency Regulatory Goal

    NCUA's goal is to promulgate clear and understandable regulations 
that impose minimal regulatory burden. We request your comments on 
whether the proposed amendment is understandable and minimally 
intrusive if implemented as proposed.

List of Subjects

12 CFR Part 724

    Credit unions, Pensions, Trusts and trustees.

12 CFR Part 745

    Credit unions, Pensions, Share insurance, Trusts and trustees.

    By the National Credit Union Administration Board on October 6, 
1999.
Becky Baker,
Secretary of the Board.

    For the reasons set out in the preamble, the NCUA proposes to amend 
12 CFR chapter VII to read as follows:

PART 724--TRUSTEES AND CUSTODIANS OF PENSION PLANS

    1. The authority citation for part 724 continues to read as 
follows:

    Authority: 12 U.S.C. 1757, 1765, 1766 and 1787.

    2. In Sec. 724.1, remove the first sentence and add two sentences 
in its place to read as follows:


Sec. 724.1  Federal credit unions acting as trustees and custodians of 
pension and retirement plans.

    A federal credit union is authorized to act as trustee or 
custodian, and may receive reasonable compensation for so acting, under 
any written trust instrument or custodial agreement created or 
organized in the United States and forming part of a pension or 
retirement plan which qualifies or qualified for specific tax treatment 
under sections 401(d), 408, 408A and 530 of the Internal Revenue Code 
(26 U.S.C. 401(d), 408, 408A and 530), for its members or groups of 
members, provided the funds of such plans are invested in share 
accounts or share certificate accounts of the federal credit union. 
Federal credit unions located in a territory, including the trust 
territories, or a possession of the United States, or the Commonwealth 
of Puerto Rico, are also authorized to act as trustee or custodian for 
such plans, if authorized under sections 401(d), 408, 408A and 530 of 
the Internal Revenue Code as applied to the territory or possession or 
under similar provisions of territorial law. * * *

PART 745--SHARE INSURANCE AND APPENDIX

    3. The authority citation for part 745 continues to read as 
follows:

    Authority: 12 U.S.C. 1752(5), 1757, 1765, 1766, 1781, 1782, 
1787, 1789.

    4. Amend Sec. 745.9-2 by revising the first sentence of paragraph 
(a) to read as follows:


Sec. 745.9-2  IRA/Keogh accounts.

    (a) The present vested ascertainable interest of a participant or 
designated beneficiary in a trust or custodial account maintained 
pursuant to a pension or profit-sharing plan described under section 
401(d) (Keogh account) or sections 408(a), 408A or 530 (IRA) of the 
Internal Revenue Code or similar provisions of law applicable to a U.S. 
territory or possession, will be insured up to $100,000 separately from 
other accounts of the participant or designated beneficiary. * * *
* * * * *
[FR Doc. 99-26754 Filed 10-14-99; 8:45 am]
BILLING CODE 7535-01-P