[Federal Register Volume 76, Number 144 (Wednesday, July 27, 2011)]
[Proposed Rules]
[Pages 44866-44872]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-18906]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 712 and 741

RIN 3133-AD93


Credit Union Service Organizations

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: NCUA proposes to amend its credit union service organization 
(CUSO) regulation to address certain safety and soundness concerns. 
Specifically, this proposal expands the requirements of the CUSO 
regulation that apply to federally insured state-chartered credit 
unions (FISCUs) to include investment limits for FISCUs that are ``less 
than adequately capitalized'' and requirements related to accounting 
and reporting by CUSOs owned by FISCUs. This proposal also adds two new 
requirements that would apply to both federal credit unions (FCUs) and 
FISCUs. These new items would include requiring CUSOs to file financial 
reports directly with NCUA and the appropriate state supervisory 
authority and requiring subsidiary CUSOs to follow all applicable laws 
and regulations. Finally, this proposal makes conforming amendments to 
NCUA's regulation on the requirements for insurance to address the 
items discussed above that apply to FISCUs.

DATES:  Comments must be received on or before September 26, 2011.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     NCUA Web Site: http://www.ncua.gov/news/proposed_regs/proposed_regs.html. Follow the instructions for submitting comments.
     E-mail: Address to [email protected]. Include ``[Your 
name] Comments on Notice of Proposed Rulemaking (CUSO)'' in the e-mail 
subject line.

[[Page 44867]]

     Fax: (703) 518-6319. Use the subject line described above 
for e-mail.
     Mail: Address to Mary Rupp, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.

FOR FURTHER INFORMATION CONTACT: Justin M. Anderson, Trial Attorney, 
Pamela Yu, Staff Attorney, Office of General Counsel, at the above 
address or telephone (703) 518-6540 or Lisa Dolin, Program Officer, 
Office of Examination and Insurance, at the above address or telephone 
at 703-518-6630.

SUPPLEMENTARY INFORMATION: 

A. Background

    In 2008, the NCUA Board (the Board) issued a final rule, which, 
among other things, made certain provisions of the CUSO regulation 
applicable to FISCUs. 73 FR 79312 (December 29, 2008). Specifically, 
the final rule required FISCUs to maintain separate corporate 
identities with their CUSOs and enter into agreements with CUSOs 
stating that the CUSOs would provide open access to their books and 
records to NCUA and the applicable state supervisory authority (SSA). 
Id. Those provisions had previously only applied to FCUs, but the Board 
believed that, to protect the National Credit Union Share Insurance 
Fund (NCUSIF), it was necessary to make those requirements applicable 
to FISCUs as well. Since the promulgation of the 2008 rule, the Board 
has continued to investigate ways to gather complete and accurate 
information about credit unions' use of CUSOs and the services those 
entities provide. As a result, the Board is proposing this rule, which 
as discussed below, makes additional parts of the CUSO rule applicable 
to FISCUs, requires CUSOs to file financial reports directly to NCUA 
and the appropriate SSA, and addresses subsidiary CUSOs.

B. Proposal

    The Board believes additional protections in the CUSO rule, 
currently only applicable to FCUs, addressing accounting, financial 
statements, and audits should apply to FISCUs as well to protect credit 
unions and the NCUSIF.
    The Board also believes it is imperative to have complete and 
accurate financial information about CUSOs and the nature of their 
services to ensure protection of the NCUSIF and to identify emerging 
systemic risk posed by CUSOs within the credit union industry. At this 
time, the Board, through agreements between credit unions and CUSOs, 
maintains the right to inspect the books and records of CUSOs. This, 
however, does not provide NCUA with complete information necessary to 
evaluate CUSOs and their potential impact to the NCUSIF. As such, the 
Board is proposing to require both FISCUs and FCUs to include, in their 
agreements with CUSOs, a requirement that a CUSO submit a financial 
report directly to NCUA and the appropriate SSA, in the case of a 
FISCU, at least annually. As discussed below, NCUA will issue guidance 
on the required specific timing of and information contained in these 
reports.
    The Board is also concerned that ``less than adequately 
capitalized'' FISCUs that continue to invest money in a failing CUSO 
pose serious risks to their members and the NCUSIF. Accordingly, the 
Board is proposing to subject FISCUs to a similar requirement contained 
in current Sec.  712.2(d)(3) for FCUs. Specifically, the proposal 
limits a ``less than adequately capitalized'' FISCU's aggregate cash 
outlay to a CUSO, measured on a cumulative basis, to the permissible 
investment limit in the state in which the FISCU is chartered.
    Finally, the Board wants to ensure that all requirements in the 
CUSO rule also apply to subsidiary CUSOs. For consistency, the Board is 
proposing to prohibit FCUs and FISCUs from investing in a CUSO unless 
that CUSO's subsidiaries also comply with all of the requirements of 
the CUSO rule and/or laws and rules of the state in which the credit 
union is chartered, as applicable.

C. Section by Section Analysis

1. 741.222 Requirements for Insurance--Credit Union Service 
Organizations

    Subpart B of part 741 addresses NCUA regulations that FISCUs must 
follow to obtain and maintain federal insurance from NCUA. The specific 
section of part 741 amended by this proposal lists those portions of 
the CUSO regulation that FISCUs must follow as a condition of federal 
insurance. Currently, only two provisions of the CUSO rule apply to 
FISCUs: the requirements to maintain separate corporate identities with 
their CUSOs and enter into agreements with CUSOs stating that the CUSOs 
will provide open access to their books and records to NCUA and the 
applicable SSA.
    However, the Board believes to protect the NCUSIF it is appropriate 
and necessary to make additional sections applicable to FISCUs. As 
noted in the 2008 proposed rule, while NCUA has the authority under the 
Federal Credit Union Act to impose regulatory requirements on FISCUs, 
NCUA's approach has always been to work cooperatively with the SSAs and 
only regulate where there are safety and soundness concerns. 73 FR 
23983 (May 1, 2008).
    In keeping with that approach, and for the reasons noted below, the 
Board is proposing to amend Sec.  741.222 of NCUA's regulations to 
specify that current Sec. Sec.  712.2(d)(3), 712.3(d), 712.4 and new 
Sec.  712.11 apply to FISCUs (as well as FCUs). Each of these sections 
is discussed more fully below.
    In accordance with the proposed change regarding subsidiary CUSOs, 
the Board is also proposing to expand the definition of a CUSO to 
include subsidiary CUSOs. As discussed below, a subsidiary CUSO is any 
entity in which a CUSO invests. The definition of a subsidiary CUSO, 
however, does not extend to outside third parties a CUSO contracts or 
otherwise does business with, but is limited only to those entities in 
which the CUSO has made an investment.

2. Section 712.1 What does this part cover?

    The Board proposes to update this section of the CUSO regulation by 
creating three subsections, which retain most of the language from the 
current section but also address the changes made in this proposal. The 
first subsection will retain most of the current language in Sec.  
712.1 and state that Part 712 addresses FCUs making loans and 
investments in CUSOs but does not apply to corporate credit unions that 
have CUSOs subject to Sec.  704.11.
    The second subsection addresses those sections of the regulation 
that apply to FCUs as well as FISCUs and reflects the proposed changes 
in this rule as well as those sections that currently apply to FISCUs. 
Specifically, this subsection would identify Sec. Sec.  712.2(d)(3), 
712.3(d), 712.4 and 712.11 as those sections of the CUSO rule that 
apply to both FCUs and FISCUs. In addition, this new subsection 
contains a clarification that a FISCU must comply with the law in the 
state in which it is chartered with respect to any activity that is not 
regulated by NCUA. The Board believes that this statement will provide 
FISCUs with a better understanding of the interplay between federal and 
state laws and when each system applies to a particular activity.
    The third subsection added by this proposal would provide that the 
term

[[Page 44868]]

``federally insured credit union'' or ``FICU'' means all FCUs and 
FISCUs . The Board believes this additional definition will add 
conciseness to the rule and is more favorable than repeating the phrase 
``FCU and FISCU'' throughout the sections of the CUSO regulation that 
apply to both. In conjunction with this change, the Board also proposes 
to make modifications to those sections that apply to both FCUs and 
FISCUs to use the term ``FICU'' where applicable. The Board believes 
the new structure of this section proposed by this rule will add 
clarity to the regulation, eliminate confusion, and be more user 
friendly.

3. Section 712.2 How much can an FCU invest in or loan to CUSOs, and 
what parties may participate?

    In the 2008 final rule amending the CUSO regulation, the Board 
approved an addition to the regulation that required less than 
adequately capitalized FCUs to obtain written approval from the 
appropriate regional director before making an investment in a CUSO 
that would result in an aggregate cash outlay, measured on a cumulative 
basis, in an amount in excess of one percent of the credit union's paid 
in and unimpaired capital and surplus. 73 FR 79312 (December 29, 2008). 
In the 2008 proposed rule, the Board noted it was aware of credit 
unions that had experienced losses because they chose to recapitalize 
insolvent CUSOs.
    As noted above, this proposed rule adds a similar requirement for 
FISCUs that are or would become less than adequately capitalized. 
Specifically, this proposed change would require a FISCU to obtain 
written approval from the appropriate SSA before making an investment 
that would result in an aggregate cash outlay, measured on a cumulative 
basis, that exceeds the investment limit in the state in which the 
FISCU is chartered, if the FISCU is less than adequately capitalized or 
the investment would result in the FISCU being less than adequately 
capitalized. In addition to submitting a request to the appropriate 
SSA, under this proposal, a less than adequately capitalized FISCU must 
also submit its request to the appropriate NCUA Regional Office. While 
the SSA will render decisions on such requests, the Board believes it 
is important that NCUA's Regional Offices also be made aware of these 
requests so these offices can provide appropriate input to the SSAs.
    This amendment would minimize the likelihood that a FISCU may be 
investing in a CUSO, on an aggregate basis, more than the limit imposed 
in the state in which it is chartered and would eliminate the 
possibility of a FISCU becoming under capitalized because of its 
investment in a CUSO. This amendment would also prevent a FISCU from 
continuing to invest in an entity that has become unsustainable. As 
noted above, the limit for FISCUs would be the investment limit in the 
state in which the credit union is chartered. If the state does not 
regulate the investment limit for FISCUs, however, the 1% limit 
applicable to FCUs will apply. The Board notes that this amendment 
would not require a less than adequately capitalized FISCU to divest in 
a CUSO. Rather, a less than adequately capitalized FISCU may maintain 
its existing investment but cannot make additional investments without 
prior written concurrence from the appropriate SSA.

4. Section 712.3 What are the characteristics of and what requirements 
apply to CUSOs?

    The Board is proposing to expand the scope of subsection (d) of 
this section to apply to FISCUs as well as FCUs. As noted above, in 
2008 the Board approved final amendments to this section that required 
FISCUs to comply with the requirements addressing access to a CUSO's 
books and records. 73 FR 79312 (December 29, 2008). The Board noted in 
2008 that FISCUs are exposed to significant potential safety and 
soundness and reputation risks based on their relationships with CUSOs. 
While NCUA currently has the ability to examine the books and records 
of a CUSO owned by a FISCU, this does not allow the agency to gather 
all of the information necessary to ensure a uniform system of 
monitoring and evaluation of the financial condition of CUSOs invested 
in or loaned to by FISCUs. As such the Board is proposing to have the 
remaining subsections of Sec.  712.3(d) also apply to FISCUs. These 
remaining subsections necessitate a credit union's agreement with a 
CUSO to require the CUSO to account for all of its transactions 
according to Generally Accepted Accounting Principles (GAAP), prepare 
quarterly financial statements, and obtain an annual financial 
statement audit of its financial statements by a licensed certified 
public accountant. These requirements will ensure NCUA will be able to 
clearly and uniformly review the financial condition of CUSOs and 
evaluate the risks posed to FISCUs and the NCUSIF. While these 
requirements will greatly increase the ability and efficiency of NCUA's 
monitoring of CUSOs, as discussed below, these requirements do not 
provide all of the information necessary to adequately evaluate CUSOs. 
As such, the Board is also proposing a new subsection that states that 
an FCU's or FISCU's written agreement with its CUSO further requires 
the CUSO to submit financial reports directly to NCUA and, in the case 
of a CUSO invested in by a FISCU, NCUA and the appropriate SSA.
    Currently, the information NCUA has been able to compile on CUSOs 
is incomplete and flawed, as the agency is attempting to gather 
pertinent information from customer credit unions rather than directly 
from the CUSO. The Board notes that without further reporting directly 
from CUSOs, it is impossible for NCUA to determine which CUSOs maintain 
relationships with credit unions, the financial condition of CUSOs, and 
the full range of service those entities are offering. This lack of 
information restricts NCUA's ability to conduct offsite monitoring and 
evaluate the systemic risks posed by CUSOs. This new requirement will 
allow NCUA to collect uniform information directly from all CUSOs, 
which will allow the agency to adequately evaluate the relationships 
between CUSOs and credit unions and the systemic risk posed by those 
relationships. As discussed below, the information required in the 
reports will be comprehensive to allow NCUA to obtain a clear picture 
of, not only relationships between CUSOs and credit unions, but also 
the structure of CUSOs, the services they offer, and their financial 
condition.
    The reporting addressed in this proposed new subsection will be 
required at least annually and will address five broad categories, 
which are summarized in the following table:

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                    Category                                     Examples of required information
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General Information............................  EIN of CUSO, state of incorporation, date of incorporation,
                                                  date of most recent audit, subsidiary information, disaster
                                                  recovery plans and testing, and headquarters and branch
                                                  locations.

[[Page 44869]]

 
Board and Management...........................  Contact information for each board member, affiliated credit
                                                  union, and their position at their credit union.
Services.......................................  List of services offered.
Customer Listing...............................  List of clients by charter number, name, service, and level of
                                                  activity.
Balance Sheet and Income Statement.............  Balance sheet, income statement, capital structure by credit
                                                  union and amount, unfunded commitments, contingent
                                                  liabilities, borrowings, investments, audits, and loan
                                                  activity.
----------------------------------------------------------------------------------------------------------------

    While the table above provides examples of required information, 
NCUA will publish guidance on the report, providing specific 
information on the correct format, timing, and required information. 
The Board believes it is important to issue guidance on the specifics 
of the reporting to preserve maximum flexibility for the agency to 
adjust its information gathering to the changes in the ways in which 
CUSOs operate and conduct business. As such, the regulatory text of 
this proposal contains the five broad categories above and a 
requirement that the reports be filed at least annually, rather than a 
list of required information and a set time frame for reporting. In 
addition to general reporting period for all CUSOs, the Board is also 
proposing to require newly formed CUSOs to file the report addressed in 
this section within 30 days after its formation. The Board believes 
this reporting requirement for new CUSOs will bridge any potential gaps 
between the formation of a CUSO and the annual reporting date and will 
allow NCUA to allocate resources in preparation for CUSO reviews that 
will happen in the following year. For purposes of this reporting 
requirement, the definition of ``newly formed CUSO'' includes a newly 
established business or an established business that becomes subject to 
this regulation by virtue of a credit union's investment or loan to the 
business.
    The Board believes that applying the current requirements in this 
section of the regulation to FISCUs as well as the addition of the new 
requirement regarding financial reporting of all CUSOs will allow NCUA 
to obtain accurate information on the CUSO industry and better evaluate 
the risks posed to credit unions and the NCUSIF. The ability to 
accurately inventory CUSOs and evaluate their financial condition is 
paramount to mitigating risk to the credit union industry as a whole.
Transition Period for Compliance
    The Board recognizes that FISCUs and FCUs with loans to or 
investments in CUSOs will be required under this proposal to make 
changes in the agreements they currently have with their CUSOs. The 
Board proposes to establish a compliance date for these changes that is 
not earlier than six months following the date of publication of the 
final rule in the Federal Register.

5. 712.9 When must an FCU comply with this part?

    This section currently states that FCUs must comply with the CUSO 
regulation by April 1, 2001 unless certain conditions are met. The 
Board recognizes that this section is outdated, and is proposing to 
delete and reserve this section for future use.

6. 712.10 How can a state supervisory authority obtain an exemption for 
FISCUs from compliance with Sec.  712.3(d)?

    The Board is aware that some states may already have rules or 
requirements that govern financial reporting, audits, and accounting 
practices of FISCUs and their CUSOs. In line with the changes made in 
2008, the Board is proposing to expand Sec.  712.10 to allow SSAs to 
obtain an exemption from compliance with certain provisions of Sec.  
712.3(d). These proposed changes do not alter the way in which an SSA 
can obtain an exemption, but merely make changes that take into account 
the amendments made to Sec.  712.3(d) in this proposal. As stated in 
the current regulation, an SSA may obtain an exemption by demonstrating 
that compliance with an existing state rule adequately addresses NCUA's 
concerns. See current Sec.  712.10(b). The proposed changes would 
merely expand that section to allow an SSA to obtain an exemption from 
the requirements of Sec. Sec.  712.3(d)(1), (2), and (3), provided the 
state rules or laws address NCUA's concerns with the financial 
conditions of CUSOs present in the context of this section of the CUSO 
regulation. This section, however, would not allow an SSA to apply for 
an exemption from the financial reporting requirement in Sec.  
712.3(d)(4). As noted above, it is imperative that NCUA maintain 
complete and accurate information on CUSOs and their relationships with 
FCUs and FISCUs. The Board is concerned that allowing an exemption from 
this requirement would result in inconsistent reporting based on the 
varying laws in the different states. Inconsistent information and 
reporting formats will impede NCUA's ability to accurately evaluate 
systemic risk posed by CUSOs.

7. 712.11 What requirements apply to subsidiary CUSOs?

    The Board is proposing to add a new section to the CUSO regulation, 
applicable to both FCUs and FISCUs, prohibiting a credit union from 
investing in a CUSO unless all subsidiaries of the CUSO also follow all 
applicable laws and regulations. The treatment of CUSOs with 
subsidiaries was previously addressed in the preamble to a 1997 rule 
amending the CUSO regulation, but was never included in regulatory 
text. In the preamble to the 1997 proposed rule, the Board stated that 
the CUSO rule applies to all levels or tiers of a CUSO's structure and 
any entity in which a CUSO invests will also be treated as a CUSO and 
subject to the CUSO regulation. 62 FR 11781 (March 13, 1997). The Board 
believes it is appropriate at this time to include the requirement 
articulated in the 1997 preamble into the text of the regulation to 
ensure credit unions and CUSOs are aware that the requirements of the 
CUSO rule and applicable state rules apply to all entities in which a 
CUSO invests. This requirement will only apply to entities in which a 
CUSO invests and will not apply to third parties with whom a CUSO 
contracts or otherwise does business. The Board believes without this 
change there is an inherent risk that a subsidiary CUSO could 
negatively impact the investing credit union and ultimately the NCUSIF. 
As noted above, the Board is also proposing to expand the definition of 
a CUSO in Sec.  741.222 to include entities in which a CUSO invests.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires NCUA to prepare an 
analysis to describe any significant economic impact any proposed 
regulation may have on a substantial number of small entities. NCUA 
considers credit unions

[[Page 44870]]

having less than ten million dollars in assets to be small for purposes 
of RFA. Interpretive Ruling and Policy Statement (IRPS) 87-2 as amended 
by IRPS 03-2. The proposed changes to the CUSO rule impose minimal 
compliance obligations by requiring credit unions to comply with 
certain regulatory requirements concerning agreements with CUSOs and 
investment limits. NCUA has determined and certifies that the final 
rule will not have a significant economic impact on a substantial 
number of small credit unions. Accordingly, the NCUA has determined 
that an RFA analysis is not required.

Paperwork Reduction Act

    NCUA recognizes that this proposal requires FISCUs and FCUs to 
comply with certain requirements that constitute an information 
collection within the meaning of the Paperwork Reduction Act (PRA). 44 
U.S.C. 3507(d). First, under this proposal, FISCUs with an investment 
in or loan to a CUSO will need to revise the current agreement they 
have with their CUSO to provide that the CUSO will account for all its 
transactions in accordance with GAAP, prepare quarterly financial 
statements and obtain an annual financial statement audit of its 
financial statements by a licensed certified public accountant, and 
submit a financial report directly to NCUA. According to NCUA records, 
of the 2,750 FISCUs that filed a form 5300 call report with NCUA as of 
December 31, 2010, 988 reported at least one interest in a CUSO; a 
total of 1,708 CUSO interests was reported. For purposes of this 
analysis, NCUA estimates that this requirement will affect all FISCUs 
reporting an interest in a CUSO. Using these estimates, information 
collection obligations imposed by this aspect of the rule, on an annual 
basis, are analyzed below:
    Changing the written agreement relating to certain accounting and 
reporting requirements.
    FISCUs with a reported interest in a CUSO, 12/31/2010: 988.
    Frequency of response: one-time.
    Initial hour burden: 1.

1 hour x 988 = 988.

    In addition to the requirement for FISCUs to revise their 
agreements with CUSOs, this proposal also requires FCUs with an 
investment in or loan to a CUSO to revise the current agreement they 
have with their CUSO to provide that the CUSO submit a financial report 
directly to NCUA. According to NCUA records, of the 4,589 FCUs that 
filed a form 5300 call report with NCUA as of December 31, 2010, 1,097 
reported at least one interest in a CUSO; a total of 1,857 CUSO 
interests was reported. For purposes of this analysis, NCUA estimates 
that this requirement will affect all FCUs with a reported interest in 
a CUSO. Using these estimates, information collection obligations 
imposed by this aspect of the rule, on an annual basis, are analyzed 
below:
    Changing the written agreement relating to financial reports to 
NCUA.
    FCUs with a reported interest in a CUSO, 12/31/2010: 1,097.
    Frequency of response: One-time.
    Initial hour burden: 1.

1 hour x 1,097 = 1,097.

    The final aspect of this proposal that involves PRA consideration 
is the requirement pertaining to recapitalizing CUSOs that have become 
insolvent. The proposed rule would require certain FISCUs to seek and 
obtain prior approval from their state supervisory authority before 
making an investment to recapitalize an insolvent CUSO. According to 
NCUA's records, as of December 31, 2010, there were only 53 FISCUs that 
were less than adequately capitalized (i.e., net worth of under 6%). 
According to year-end 2010 call report data, 31 of these FISCUs 
currently have an interest in a CUSO. NCUA estimates it would take a 
FISCU approximately two hours to complete a request for the SSA's prior 
approval for an investment to recapitalize an insolvent CUSO.
    Obtaining regulatory approval:
    Total less than adequately capitalized FISCUs with an interest in a 
CUSO, 12/31/2010: 31.
    Frequency of response: One-time.
    Initial hour burden: 2.

2 hours x 31 = 62.

    In accordance with the requirements of the PRA, NCUA intends to 
obtain a modification of its current OMB Control Number, 3133-0149, to 
support these proposed changes. Simultaneous with its publication of 
this proposed amendment to part 712, NCUA is submitting a copy of the 
proposed rule to the Office of Management and Budget (OMB) along with 
an application for a modification of the OMB Control Number. The PRA 
and OMB regulations require that the public be provided an opportunity 
to comment on the paperwork requirements, including an agency's 
estimate of the burden of the paperwork requirements. The NCUA Board 
invites comment on: (1) Whether the paperwork requirements are 
necessary; (2) the accuracy of NCUA's estimates on the burden of the 
paperwork requirements; (3) ways to enhance the quality, utility, and 
clarity of the paperwork requirements; and (4) ways to minimize the 
burden of the paperwork requirements.
    Comments should be sent to: OMB Reports Management Branch, New 
Executive Office Building, Room 10202, Washington, DC 20503. Please 
send NCUA a copy of any comments submitted to OMB.
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 major aspects of the rule make certain 
aspects applicable to state chartered, federally-insured credit unions. 
By law, these institutions are already subject to numerous provisions 
of NCUA's rules, based on the agency's role as the insurer of member 
share accounts and the significant interest NCUA has in the safety and 
soundness of their operations. In developing the proposal, NCUA worked 
with representatives of the state credit union regulatory community. 
This proposed rule incorporates a mechanism by which states may request 
an exemption from coverage of part of the rule for institutions in that 
state, provided certain criteria are met. In any event, the proposed 
rule will not have substantial direct effects on the states, on the 
relationship 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 proposal 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 will 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).

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement 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. NCUA does not believe, and will

[[Page 44871]]

seek concurrence from the Office of Management and budget, 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 Parts 712 and 741

    Administrative practices and procedure, credit, credit unions, 
insurance, investments, reporting, and record keeping requirements.

    By the National Credit Union Administration Board on July 21, 
2011.
Mary F. Rupp,
Secretary of the Board.

    Accordingly, NCUA amends 12 CFR parts 712 and 741 as follows:

PART 712--CREDIT UNION SERVICE ORGANIZATIONS (CUSOs)

    1. Revise the authority citation for part 712 to read as follows:

    Authority:  12 U.S.C. 1756, 1757(5)(D), and (7)(I), 1766, 
1781(b)(9), 1782, 1784, 1785, 1786 and 1789(11).

    2. Revise Sec.  712.1 to read as follows:


Sec.  712.1  What does this part cover?

    (a) This part establishes when a Federal Credit Union (FCU) can 
invest in and make loans to CUSOs. CUSOs are subject to review by NCUA. 
This part does not apply to corporate credit unions that have CUSOs 
subject to Sec.  704.11 of this chapter.
    (b) Sections 712.2 (d)(3), 712.3(d), 712.4 and 712.11 of this part 
apply to federally insured state-chartered credit unions (FISCUs), as 
provided in Sec.  741.222 of this chapter. All other sections of this 
part only apply to FCUs. FISCUs must follow the law in the state in 
which they are chartered with respect to the sections in this part that 
only apply to FCUs.
    (c) As used in Sec. Sec.  712.2 (d)(3), 712.3(d), 712.4, 712.10, 
and 712.11 of this part, federally insured credit union (FICU) means an 
FCU or FISCU.
    3. Revise Sec.  712.2(d)(3) to read as follows:


Sec.  712.2  How much can an FCU invest in or loan to CUSOs, and what 
parties may participate?

* * * * *
    (d) * * *
    (3) Special rule in the case of less than adequately capitalized 
FICUs. This rule applies in the case of a FICU that is currently less 
than adequately capitalized, as determined under part 702, or where the 
making of an investment in a CUSO would render the FICU less than 
adequately capitalized under part 702. Before making an investment in a 
CUSO:
    (i) An FCU must obtain prior written approval from the appropriate 
NCUA regional office if the making of the investment would result in an 
aggregate cash outlay, measured on a cumulative basis (regardless of 
how the investment is valued for accounting purposes) in an amount that 
is in excess of 1% of its paid in and unimpaired capital and surplus; 
or
    (ii) A FISCU must obtain prior written approval from the 
appropriate state supervisory authority if the making of the investment 
would result in an aggregate cash outlay, measured on a cumulative 
basis (regardless of how the investment is valued for accounting 
purposes) in an amount that is in excess of the investment limit in the 
state in which it is chartered. A FISCU must also, and at the same 
time, submit a copy of its request for prior written approval to the 
appropriate NCUA Regional Office. If there is no state limit in the 
state in which a FISCU is chartered, the requirements in subsection 
(d)(3)(i) of this section will apply.
* * * * *
    4. Revise Sec.  712.3(d) to read as follows:


Sec.  712.3  What are the characteristics of and what requirements 
apply to CUSOs?

* * * * *
    (d) CUSO accounting; audits and financial statements; NCUA access 
to information. A FICU must obtain written agreements from a CUSO 
before investing in or lending to the CUSO that the CUSO will:
    (1) Account for all of its transactions in accordance with GAAP;
    (2) Prepare quarterly financial statements and obtain an annual 
financial statement audit of its financial statements by a licensed 
certified public accountant in accordance with generally accepted 
auditing standards. A wholly owned CUSO is not required to obtain a 
separate annual financial statement audit if it is included in the 
annual consolidated financial statement audit of the FICU that is its 
parent;
    (3) Provide NCUA, its representatives, and the state credit union 
regulatory authority having jurisdiction over any FISCU with an 
outstanding loan to, investment in or contractual agreement for 
products or services with the CUSO with complete access to any books 
and records of the CUSO and the ability to review the CUSO's internal 
controls, as deemed necessary by NCUA or the state credit union 
regulatory authority in carrying out their respective responsibilities 
under the Act and the relevant state credit union statute.
    (4) Submit a financial report directly to NCUA and the appropriate 
state supervisory authority, if applicable. Pursuant to guidance duly 
adopted by the NCUA Board, a CUSO must submit a financial report at 
least annually, except in the case of a newly formed CUSO (including a 
pre-existing business which becomes subject to this regulation by 
virtue of a credit union investment or loan), which must file a 
financial report within 30 days of its formation, and the financial 
report must contain:
    (i) General information about the CUSO;
    (ii) A list of services;
    (iii) A customer list;
    (iv) Information on the CUSO's board and management; and
    (v) Balance sheet and income information.
* * * * *
    5. Revise Sec.  712.4 to read as follows:


Sec.  712.4  What must a FICU and a CUSO do to maintain separate 
corporate identities?

    (a) Corporate separateness. A FICU and a CUSO must be operated in a 
manner that demonstrates to the public the separate corporate existence 
of the FICU and the CUSO. Good business practices dictate that each 
must operate so that:
    (1) Its respective business transactions, accounts, and records are 
not intermingled;
    (2) Each observes the formalities of its separate corporate 
procedures;
    (3) Each is adequately financed as a separate unit in the light of 
normal obligations reasonably foreseeable in a business of its size and 
character;
    (4) Each is held out to the public as a separate enterprise;
    (5) The FICU does not dominate the CUSO to the extent that the CUSO 
is treated as a department of the FICU; and
    (6) Unless the FICU has guaranteed a loan obtained by the CUSO, all 
borrowings by the CUSO indicate that the FICU is not liable.
    (b) Legal opinion. Prior to a FICU investing in a CUSO, the FICU 
must obtain written legal advice as to whether the CUSO is established 
in a manner that will limit potential exposure of the FICU to no more 
than the loss of funds invested in, or lent to, the CUSO. In addition, 
if a CUSO in which an FICU has an investment plans to change its 
structure under Sec.  712.3(a), a FICU must also obtain prior, written 
legal advice that the CUSO will remain established in a manner that 
will limit potential exposure of the CU to no more than the loss of 
funds invested in, or loaned to, the CUSO. The legal advice must 
address factors that have led courts to ``pierce the corporate veil'' 
such as inadequate capitalization, lack of

[[Page 44872]]

separate corporate identity, common boards of directors and employees, 
control of one entity over another, and lack of separate books and 
records. The legal advice may be provided by independent legal counsel 
of the investing FICU or the CUSO.


Sec.  712.9  [Removed and Reserved]

    6. Remove and reserve Sec.  712.9
    7. Revise Sec.  712.10 to read as follows:


Sec.  712.10  How can a state supervisory authority obtain an exemption 
for FISCUs from compliance with Sec.  712.3(d)?

    (a) The NCUA Board may exempt FISCUs in a given state from 
compliance with Sec. Sec.  712.3(d)(1), (2), and (3) if the NCUA Board 
determines the laws and procedures available to the supervisory 
authority in that state are sufficient to provide NCUA with the degree 
of access and information it believes is necessary to evaluate the 
safety and soundness of FICUs having business relationships with CUSOs 
owned by FISCUs in that state.
    (b) To obtain the exemption, the state supervisory authority must 
submit a copy of the legal authority pursuant to which it secures the 
information required in Sec. Sec.  712.3(d)(1), (2), and (3) of this 
part to NCUA's regional office having responsibility for that state, 
along with all procedural and operational documentation supporting and 
describing the actual practices by which it implements and exercises 
the authority.
    (c) The state supervisory authority must provide the regional 
director with an assurance that NCUA examiners will be provided with 
co-extensive authority and will be allowed direct access to CUSO books 
and records at such times as NCUA, in its sole discretion, may 
determine necessary or appropriate. For purposes of this section, 
access includes the right to make and retain copies of any CUSO record, 
as to which NCUA will accord the same level of control and 
confidentiality that it uses with respect to all other examination-
related materials it obtains in the course of its duties.
    (d) The state supervisory authority must also provide the regional 
director with an assurance that NCUA, upon request, will have access to 
copies of any financial statements or reports, which a CUSO has 
provided to the state supervisory authority.
    (e) The regional director will review the applicable authority, 
procedures and assurances and forward the exemption request, along with 
the regional director's recommendation, to the NCUA Board for a final 
determination.
    (f) For purposes of this section, whether an entity is a CUSO shall 
be determined in accordance with the definition set out in Sec.  
741.222 of this chapter.
    8. Add Sec.  712.11 to read as follows:


712.11  What requirements apply to subsidiary CUSOs?

    (a) FCUs investing in a CUSO that invests in a CUSO. The 
requirements of this part apply to all tiers or levels of a CUSO's 
structure and FCUs may only invest in or loan to a CUSO, which has an 
investment in another CUSO, if the subsidiary CUSO satisfies all of the 
requirements of this part.
    (b) FISCUs investing in a CUSO that invests in a CUSO. FISCUs may 
only invest in or loan to a CUSO, which has an investment in another 
CUSO, if the subsidiary CUSO complies with the following:
    (1) All of the requirements of this part that apply to FISCUs, 
which are listed in Sec.  712.1; and
    (2) All applicable state laws and rules regarding CUSOs.
    (c) For purposes of this section, a subsidiary CUSO is any entity 
in which a CUSO invests.

PART 741--REQUIREMENTS FOR INSURANCE

    1. The authority citation for part 741 continues to read as 
follows:

    Authority:  12 U.S.C. 1757, 1766(a), 1781-1790, and 1790d; 31 
U.S.C. 3717.

    2. Revise Sec.  741.222 to read as follows:


Sec.  741.222.  Credit Union Service Organizations.

    (a) Any credit union that is insured pursuant to Title II of the 
Act must adhere to the requirements in Sec. Sec.  712.2 (d)(3), 
712.3(d), 712.4 and 712.11 of this chapter concerning permissible 
investment limits for less than adequately capitalized credit unions, 
agreements between credit unions and their credit union service 
organizations (CUSOs), the requirement to maintain separate corporate 
identities, and investments and loans to CUSOs investing in other 
CUSOs. For purposes of this section, a CUSO is any entity in which a 
credit union has an ownership interest or to which a credit union has 
extended a loan and that is engaged primarily in providing products or 
services to credit unions or credit union members, or, in the case of 
checking and currency services, including check cashing services, sale 
of negotiable checks, money orders, and electronic transaction 
services, including international and domestic electronic fund 
transfers, to persons eligible for membership in any credit union 
having a loan, investment or contract with the entity. A CUSO also 
includes any entity in which a CUSO invests.
    (b) This section shall have no preemptive effect with respect to 
the laws or rules of any state providing for access to CUSO books and 
records or CUSO examination by credit union regulatory authorities.

[FR Doc. 2011-18906 Filed 7-26-11; 8:45 am]
BILLING CODE 7535-01-P