[Federal Register Volume 68, Number 83 (Wednesday, April 30, 2003)]
[Rules and Regulations]
[Pages 23025-23027]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-10614]



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 Rules and Regulations
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  Federal Register / Vol. 68, No. 83 / Wednesday, April 30, 2003 / 
Rules and Regulations  

[[Page 23025]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701


Organization and Operations of Federal Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: NCUA is amending its rule that permits a federal credit union 
(FCU) to provide reasonable retirement benefits to its employees and 
officers. The amendments clarify the scope of the rule and the 
investments an FCU may use to fund employee benefits.

DATES: This final rule is effective May 30, 2003.

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

    NCUA issued a proposed rule in December 2001 to clarify that the 
scope of Sec.  701.19, which states an 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). The proposal 
incorporated into Sec.  701.19 a number of opinions issued by NCUA's 
Office of General Counsel that provide an FCU may purchase an otherwise 
impermissible investment to fund an employee benefit obligation if the 
investment is directly related to the obligation, and may hold the 
investment for as long as it has an actual or potential obligation. 
This direct relationship requirement is the legal basis on which NCUA 
permits FCUs to make otherwise impermissible investments to fund 
employee benefits. NCUA received fifteen comments to the proposal. The 
comments were generally supportive, but raised investment issues 
relating to particular benefit plans.
    NCUA issued a second proposal in September 2002 to address these 
issues and others raised outside of the rulemaking process. 67 FR 60184 
(September 25, 2002). The second proposal distinguished defined 
contribution plans from various kinds of defined benefit plans. In the 
second proposal, NCUA was particularly concerned about FCUs investing 
to fund defined benefit plans as these plans place investment 
performance risk on FCUs and make it more difficult for FCUs to 
demonstrate a direct relationship between an investment and the 
obligation it serves to fund.
    NCUA distinguished defined benefit plans covered by the fiduciary 
responsibility provisions of the Employee Retirement Income Security 
Act of 1974 (ERISA) from those that are not. 29 U.S.C. 1101-14. NCUA 
determined that the ERISA requirements, which provide for a trust and 
place obligations on the trustee to act prudently on behalf of plan 
participants and beneficiaries, would safeguard against the legal and 
safety and soundness risks about which NCUA is concerned. For defined 
benefit plans not covered by ERISA's fiduciary responsibility 
provisions, NCUA proposed that investments to fund these plans 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. NCUA believed that these broad criteria would support the 
determination that an investment is directly related to the employee 
benefit it is intended to fund and, in addition, address the safety and 
soundness concerns presented by these otherwise unrestricted 
investments.
    NCUA extended the expiration of the comment period from November 
25, 2002 to December 26, 2002. 67 FR 71113 (November 29, 2002).

B. Summary of Comments to the Second Proposed Rule

    NCUA received twenty-six comment letters regarding the second 
proposed rule: nine from FCUs, one from a state credit union, thirteen 
from credit union trade organizations, one from an insurance company, 
one from a corporate credit union and one from a law firm. Five 
commenters expressed complete support for the proposal and did not 
object to any provisions. All but a few of the remaining commenters 
expressed general support for NCUA's intent to provide flexibility to 
FCUs investing to fund employee benefits. Commenters focused primarily 
on two aspects of the second proposed rule: the requirement that any 
investments purchased under this authority must be directly related to 
an FCU's obligation to fund employee benefits and the particular 
requirements proposed for defined benefit plans.
    Directly Related Requirement. Some commenters stated that the 
requirement that an investment to fund an employee benefit be directly 
related to the FCU's obligation is new or would be too restrictive for 
certain employee benefit plans. This requirement was stated in the 
first proposal as well as the second proposed rule. While the 
particular terminology may be different, this requirement is not new 
for FCUs. As noted previously, this provision incorporates into the 
regulation NCUA's long standing position as reflected in legal opinions 
issued by NCUA's Office of General Counsel.
    These legal opinions state NCUA's view that FCUs have the authority 
to purchase investments otherwise impermissible under the Federal 
Credit Union Act and NCUA's regulations if the investments are intended 
to fund an employee benefit. This requisite relationship is the legal 
basis, as has been previously discussed, which permits these 
investments. These legal opinions have addressed specific proposed 
retirement or benefit plans, for the most part defined contribution 
plans, and have focused on various criteria such as the reasonableness 
of the benefit in relation to the credit union's size and financial 
condition. In addition, these letters have noted that the ability of an 
FCU to make these otherwise impermissible investments is based on the 
legal premise that an FCU is not investing for its own account and is 
subject to restriction, such as the investments may only be held for as 
long as an FCU has an obligation under the retirement or benefit plan. 
For this reason, NCUA has declined to adopt alternative language 
proposed by a couple of commenters that an investment need only be 
reasonably

[[Page 23026]]

related to an employee benefit. That language could arguably permit an 
FCU to make larger than necessary investments or hold investments 
longer than necessary to meet the employee benefit obligation, which 
would indicate an FCU was investing for its own account. The 
requirement in the regulation that investments must be directly related 
to the employee benefit obligation is intended to capture prior legal 
analysis and state simply and succinctly the requirements applicable to 
investments made to fund employee benefits.
    While some commenters would like NCUA to specify the types of 
records or record keeping that would demonstrate that an investment is 
directly related to funding an employment benefit, NCUA is reluctant to 
impose specific requirements given the broad range of employee benefit 
plans and funding options that exist. NCUA believes that, if an FCU is 
holding an otherwise impermissible investment to fund an employee 
benefit, the FCU's records should reflect that the FCU purchased the 
investment exclusively for the purpose of funding the employee benefit 
obligation. Information in an FCU's records that would demonstrate this 
purpose might include: employee benefit plan documents, date or dates 
of investment purchases consistent with the assumption of the employee 
benefit obligation, anticipated maturity of the investment, and 
evidence that the FCU has calculated the amount of the investment and 
the anticipated return from the investment to match the FCU's 
obligation.
    Defined Benefit Plans. Half of the commenters stated that 
prohibiting variable rate investments to fund defined benefit plans not 
subject to ERISA is too restrictive. About the same number also stated 
or implied NCUA has ample authority to regulate the safety and 
soundness of these investments through its examination and supervision 
program. Ten commenters contended that, if FCUs are subject to 
additional investment restrictions, they will have higher costs of 
funding employee benefits and will be at a disadvantage in competing 
for talented employees with state-chartered credit unions and other 
financial institutions.
    The NCUA Board has decided not to distinguish between defined 
benefit and defined contribution plans in the final rule or place 
additional requirements on defined benefit plans not covered by ERISA. 
Thus, all employee benefit plans will be subject to the general 
requirements set out in both the first and second proposed rules, 
namely, that an investment to fund an employee benefit must be directly 
related to the FCU's obligation, may only be held as long as the FCU is 
obligated, and the amount must be reasonable given the size and 
condition of the FCU. NCUA believes this approach will maximize 
investment flexibility and minimize confusion and competitive 
disadvantage for FCUs.
    NCUA still believes, as noted in the second proposal, that defined 
benefit plans not subject to ERISA pose additional risks for FCUs and, 
for that reason, has included in the regulation guidance regarding 
diversification of investments. NCUA believes an FCU investing to fund 
a defined benefit plan not subject to ERISA should diversify its 
investment portfolio, which may include investments in insurance 
products, to minimize the risk of large losses, unless it is clearly 
prudent not to do so under the circumstances.
    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 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.
    Finally, Sec.  701.19(e) 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 Sec.  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.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a proposed regulation may 
have on a substantial number of small entities (under $1 million in 
assets). This rule clarifies that federal credit unions have additional 
options and flexibility to manage their employee benefit obligations 
without imposing any regulatory burden. The final amendments will 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 final 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 final 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 final 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 final rule would not affect 
family well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 
2681 (1998).

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 
Procedure Act. 5 U.S.C. 551. The Office of Management and Budget has 
determined that this rule is not a major rule for purposes of the Small 
Business Regulatory Enforcement Fairness Act of 1996.

List of Subjects in 12 CFR Part 701

    Credit Unions.

    By the National Credit Union Administration Board on April 24, 
2003.
Becky Baker,
Secretary of the Board.

0
Accordingly, NCUA amends 12 CFR part 701 as follows:

[[Page 23027]]

PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS

0
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.

0
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 
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) Defined benefit plans. Under paragraph (c) of this section, a 
federal credit union may invest to fund a defined benefit plan if the 
investment meets the conditions provided in that paragraph. If a 
federal credit union invests to fund a defined benefit plan that is not 
subject to the fiduciary responsibility provisions of part 4 of the 
Employee Retirement Income Security Act of 1974, it should diversify 
its investment portfolio to minimize the risk of large losses unless it 
is clearly prudent not to do so under the circumstances.
    (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. 03-10614 Filed 4-29-03; 8:45 am]
BILLING CODE 7535-01-P