[Federal Register Volume 67, Number 186 (Wednesday, September 25, 2002)]
[Proposed Rules]
[Pages 60184-60187]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-24288]


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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: Proposed rule with request for comments.

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SUMMARY: NCUA proposes to amend its rule that permits a Federal credit 
union to provide reasonable retirement benefits to its employees and 
officers. These amendments clarify the scope of the rule and the 
investments federal credit unions may use to fund employee benefits. 
This proposal is substantially similar to an earlier proposal issued in 
December 2001, but, as a result of comments received in response to the 
earlier proposal, addresses additional investment issues related to 
particular benefit plans.

DATES: Comments must be received on or before November 25, 2002.

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 are encouraged to fax 
comments to (703) 518-6319 or email comments to [email protected] 
instead of mailing or hand-delivering them. Whatever method you choose, 
please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Frank Kressman, Staff Attorney, Office 
of General Counsel, at the above address or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

    In December 2001, NCUA issued a proposed rule with request for 
comments to clarify that the scope of Sec.  701.19(a), which currently 
states that a federal credit union (FCU) may provide reasonable 
retirement benefits for its employees and officers, is not limited only 
to retirement benefits, but is more broadly applicable to other 
employee benefit plans. 66 FR 65662 (December 20, 2001). NCUA received 
fifteen comments: seven from credit union trade associations and eight 
from federal credit unions. All of the comments were generally 
supportive of the proposal.
    Having considered those comments, the Board has determined that it 
will issue this second proposed rule to address certain issues raised 
in the comments, including the need to distinguish defined contribution 
plans from various kinds of defined benefit plans. This revised 
proposal is, however, substantially similar to the first proposal 
issued in December 2001 and contains much of the same background 
information from the first proposal.
    As competition to attract and retain highly qualified employees has 
increased and the employee benefit marketplace has become more 
sophisticated, FCUs are increasingly providing more diverse and less 
traditional forms of employee benefits including, for example, deferred 
compensation plans and stock option plans. As a result, FCUs need 
flexibility to use safe, reasonable and efficient methods to fund their 
employee benefit obligations. In addition to providing this 
flexibility, this proposed rule updates the regulatory language to 
reflect current employee benefits terminology including renaming the 
rule ``Benefits for Employees of Federal Credit Unions.''
    An FCU investing on its own behalf is subject to the investment 
provisions of the Federal Credit Union Act (Act) and NCUA regulations. 
12 U.S.C. 1757(7), (8), (15); 12 CFR part 703. In legal opinion 
letters, the NCUA's Office of General Counsel has stated that these 
investment provisions do not apply when an FCU is acting under its 
authority to provide and fund retirement or other employee benefits. 12 
U.S.C. 1761b(12); 12 CFR Sec.  701.19. NCUA's long-standing legal 
interpretation is that an FCU may purchase an otherwise impermissible 
investment to fund an employee benefit obligation as long as there is a 
direct connection between the investment and the employee benefit 
obligation it serves to fund. In that context, NCUA has also

[[Page 60185]]

stated that once the obligation ceases to exist, the FCU must divest 
itself of the impermissible investment.
    For example, an FCU is generally not permitted to purchase equity 
investments when investing for its own account. An FCU that is 
obligated under an employee benefit plan to provide an employee with 
100 shares of XYZ Corporation stock on a specific date, however, may 
purchase and hold 100 shares of that stock for that purpose. It may 
not, however, purchase 100 shares of ABC Corporation stock. In that 
instance, there would not be a sufficient connection between the 
investment and the obligation to be funded.
    NCUA is aware that for-profit corporations often provide employee 
benefits that contain investment options an employee may exercise after 
he or she has separated or retired from the employer. For example, an 
employer may grant an employee the option to purchase a fixed number of 
shares in a mutual fund for a fixed price on a specific date after the 
employee separates or retires from the employer. These post-separation 
or post-retirement options would require a prudent FCU to buy and hold 
shares in that mutual fund to fund the potential obligation it faces 
after its employee has separated or retired. In legal opinion letters, 
the NCUA's Office of General Counsel has also taken the position that 
an FCU may hold an impermissible investment to fund an ongoing employee 
benefit obligation after the employee separates or retires provided the 
investment option period is reasonable. Upon the exercise or expiration 
of the option, the FCU must divest itself of the impermissible 
investment. This proposed regulation incorporates the positions taken 
by the Office of General Counsel in these legal opinion letters.

B. Comments

Defined Contribution Plans and Defined Benefit Plans

    Comments received in response to the first proposed rule raised 
issues about interpretation of the requirement that an investment be 
``directly related'' to an FCU's obligation to fund an employee benefit 
plan. A direct relationship is necessary between the investment and the 
employee benefit obligation it is intended to fund as it is the legal 
basis on which NCUA permits FCUs to make otherwise impermissible 
investments. Without a direct relationship between the investment and 
the employee benefit obligation, an FCU is merely investing for its own 
account and, as noted above, is subject to the general statutory and 
regulatory limitations applicable to FCU investments. The absence of a 
direct relationship between the investment and the employee obligation 
also raises safety and soundness concerns as an FCU is investing 
without statutory or regulatory limits. Specifically, the existence of 
a direct relationship is an issue in defined benefit plans.
    Previously issued legal opinions have generally analyzed issues 
involving the funding of employee benefit obligations under defined 
contribution plans, not defined benefit plans. Under defined 
contribution plans, a credit union's obligation is to make a fixed 
contribution, for example, to contribute a fixed dollar amount at a 
particular time or over a period of time, and the level of benefits 
vary depending on the return on the investments. Thus, the risk of 
investment performance is on the employee under a defined contribution 
plan.
    NCUA has more recently had cause to analyze issues involving the 
funding of employee benefit obligations under defined benefit plans. 
Under defined benefit plans, a credit union typically promises to pay a 
specified dollar amount to an employee at a specified time. Thus, with 
defined benefit plans, the risk of investment performance is on the 
credit union.
    The differences between defined contribution plans and defined 
benefit plans are significant, and defined benefit plans warrant 
different treatment under NCUA's employee benefits rule for two primary 
reasons. First, with defined benefit plans, the investment risk is on 
the credit union. Poor investment performance not only can result in a 
loss of all or part of the principal a credit union invests, but, after 
sustaining losses, a credit union is still obligated to fulfill its 
employee benefit obligation. Second, it is much more difficult to 
determine if there is a direct relationship between investments a 
credit union chooses and the obligation it is intended to fund. This is 
because a credit union's obligation under a defined benefit plan 
typically is for a fixed dollar amount, as opposed to, for example, a 
specified number of shares of a particular company's stock.
    For example, if a credit union obligates itself to pay a senior 
executive an employee benefit of $500,000 on a certain date, it may 
want to purchase and hold investments to meet that future obligation. 
If the performance of those investments cannot be conservatively 
predicted with any degree of certainty, then it is difficult to 
conclude there is a direct relationship between the investment and the 
obligation it is intended to fund. NCUA is concerned that this 
difficulty in predicting the return on an investment could result in 
credit unions underfunding the investment and not meeting their 
employee benefit obligations. NCUA is also concerned that other credit 
unions could overfund the investment in hopes of obtaining a return in 
excess of their employee benefit obligations. For both legal and safety 
and soundness concerns, NCUA cannot permit credit unions to make 
impermissible, speculative investments for their own accounts when 
funding an employee benefit obligation under Sec.  701.19.
    The revised proposal permits FCUs to offer defined benefit plans 
yet addresses the legal and safety and soundness concerns they raise by 
distinguishing between defined benefit plans covered by the fiduciary 
responsibilities of Employee Retirement Income Security Act (ERISA) and 
those that are not. 29 U.S.C. 1101-14. NCUA believes the ERISA 
fiduciary requirements, which provide for a trust and places 
obligations on the trustee to act prudently on behalf of the credit 
union and its employees, are a sufficient safeguard against the risks 
about which NCUA is concerned.
    FCUs may still make investments, otherwise impermissible by statute 
and regulation, to fund a defined benefit plan not covered by ERISA 
fiduciary requirements, but must meet certain additional criteria. The 
proposed rule provides that these investments must have a fixed rate of 
return, mature on or before the date of the employee benefit 
obligation, and be rated by a nationally recognized statistical rating 
organization in one of the four highest rating categories. These broad 
criteria support the determination that an investment is directly 
related to the employee benefit the investment is intended to fund and, 
in addition, address the safety and soundness concerns these otherwise 
unrestricted investments present. An FCU investing to fund a defined 
benefit plan that is not covered by ERISA may invest in a registered 
investment company or collective investment fund that restricts 
investments to those permitted by the proposed rule, except for the 
maturity restriction. Although not included as a requirement for 
defined benefit plans not covered by ERISA, an FCU should consider 
sufficiently diversifying its investments to control the risk of loss.
    Regardless of what kind of investment plan is used, an FCU must 
comply with safety and soundness standards by ensuring that the kind 
and amount of employee benefits it offers are reasonable given its 
size, financial

[[Page 60186]]

condition, and the duties of the employees. Furthermore, an FCU's 
authority to offer and fund an employee benefit plan does not guarantee 
the permissibility or treatment of the plan under other laws, such as 
ERISA and the Internal Revenue Code.
    FCUs with assets of $10 million or greater are reminded that they 
are required to account for their employee benefit plans in accordance 
with generally accepted accounting principles (GAAP). FCUs with assets 
under $10 million are not required to follow GAAP, but are encouraged 
to do so in this context. All FCUs are encouraged to seek the advice of 
an independent accountant if they have questions regarding the proper 
accounting for these benefit plans.
    Finally, Sec.  701.19(b) provides that an FCU acting as a 
fiduciary, as defined in ERISA, must obtain appropriate liability 
coverage as provided in Sec.  410(b) of ERISA. NCUA wishes to clarify 
that section 410(b) of ERISA describes certain kinds of insurance 
coverage and permits certain parties to purchase that insurance, but 
does not require any party to purchase insurance. 29 U.S.C. 1110.

Additional Issues Raised in Comments

    Several commenters noted that it was not clear if the first 
proposed rule applied to corporate credit unions because it did not 
contain a reference to the investment authority for corporate credit 
unions provided in part 704 of NCUA's rules. The revised proposal has 
been modified in response to this comment to include a reference so it 
is clear the rule applies to corporates as well.
    Several comments suggested that, because the title of the rule will 
refer more generally to employee benefits instead of retirement 
benefits, it should also state that other benefits, including non-
monetary forms of compensation, are included and should specify those 
benefits such as fringe benefits, welfare benefits, training, and so 
forth. The Board believes this change is unnecessary. The rule states 
generally that FCUs may provide benefits and that the kind and amount 
of benefits must be reasonable in relation to the size and financial 
condition of the credit union and the duties of the employees. The 
Board is concerned that by specifying particular benefits, even in 
broad categories, that the rule could be interpreted as being 
restrictive. Another change in this revised proposal, namely, the 
provisions regarding plan trustees and custodians are stated in a 
separate subsection, makes the general statement of FCU authority more 
clearly applicable to non-monetary benefits as well as monetary 
benefits.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a proposed rule may have on 
a substantial number of small credit unions (those under one million 
dollars in assets). The proposed rule only clarifies that credit unions 
have additional options and flexibility to manage their employee 
benefit obligations without imposing any regulatory burden. The 
proposed rule would not have a significant economic impact on a 
substantial number of small credit unions, and therefore, a regulatory 
flexibility analysis is not required.

Paperwork Reduction Act

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

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. In 
adherence to fundamental federalism principles, NCUA, an independent 
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies 
with the executive order. The proposed rule would not have substantial 
direct effects on the states, on the connection between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. NCUA has 
determined that this proposed rule does not constitute a policy that 
has federalism implications for purposes of the executive order.

The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this proposed rule would not affect 
family well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Public Law 105-277, 112 
Stat. 2681 (1998).

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 rule is understandable and minimally intrusive.

List of Subjects in 12 CFR part 701

    Credit unions.

    By the National Credit Union Administration Board on September 
19, 2002.
Becky Baker,
Secretary of the Board.

    Accordingly, NCUA proposes to amend 12 CFR part 701 as follows:

PART 701--ORGANIZATION AND OPERATIONS 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, 1789. Section 701.6 is also 
authorized by 15 U.S.C. 3717. Section 701.31 is also authorized by 
15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610. Section 701.35 
is also authorized by 42 U.S.C. 4311-4312.

    2. Revise Sec.  701.19 to read as follows:


Sec.  701.19  Benefits for employees of federal credit unions.

    (a) General authority. A Federal credit union may provide employee 
benefits, including retirement benefits, to its employees and officers 
who are compensated in conformance with the Act and the bylaws, 
individually or collectively with other credit unions. The kind and 
amount of these benefits must be reasonable given the Federal credit 
union's size, financial condition, and the duties of the employees.
    (b) Plan trustees and custodians. Where a Federal credit union is 
the benefit plan trustee or custodian, the plan must be authorized and 
maintained in accordance with the provisions of part 724 of this 
chapter. Where the benefit plan trustee or custodian is a party other 
than a federal credit union, the benefit plan must be maintained in 
accordance with applicable laws governing employee benefit plans, 
including any applicable rules and regulations issued by the Secretary 
of Labor, the Secretary of the Treasury, or any other federal or state 
authority exercising jurisdiction over the plan.
    (c) Investment authority. A Federal credit union investing to fund 
an employee benefit plan obligation is not subject to the investment 
limitations of the Act and part 703 or, as applicable, part 704, of 
this chapter and may purchase an investment that would otherwise be 
impermissible if the investment is directly related to the Federal 
credit union's obligation or potential obligation under the employee

[[Page 60187]]

benefit plan and the Federal credit union holds the investment only for 
as long as it has an actual or potential obligation under the employee 
benefit plan.
    (d) Additional investment requirements for defined benefit plans. A 
Federal credit union may invest to fund a defined benefit plan if the 
investment meets the conditions provided in paragraph (c) of this 
section, and only if the plan is subject to the fiduciary 
responsibility provisions of part 4 of the Employee Retirement Income 
Security Act of 1974. If a defined benefit plan is not subject to the 
fiduciary responsibility provisions of part 4 of the Employee 
Retirement Income Security Act of 1974, then the investment must yield 
a fixed rate of return, mature on or before the date of the employee 
benefit obligation, and be rated by a nationally recognized statistical 
rating organization in one of the four highest rating categories.
    (e) Liability insurance. No Federal credit union may occupy the 
position of a fiduciary, as defined in the Employee Retirement Income 
Security Act of 1974 and the rules and regulations issued by the 
Secretary of Labor, unless it has obtained appropriate liability 
insurance as described and permitted by section 410(b) of the Employee 
Retirement Income Security Act of 1974.
    (f) Definitions. For this section, defined benefit plan has the 
same meaning as in 29 U.S.C. 1002(35) and employee benefit plan has the 
same meaning as in 29 U.S.C. 1002(3).

[FR Doc. 02-24288 Filed 9-24-02; 8:45 am]
BILLING CODE 7535-01-P