[Federal Register Volume 78, Number 182 (Thursday, September 19, 2013)]
[Proposed Rules]
[Pages 57539-57542]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-22734]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 703 and 721

RIN 3133-AE17


Charitable Donation Accounts

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule with request for comments.

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SUMMARY: NCUA proposes to amend its regulations to clarify that a 
federal credit union (FCU) is authorized to fund a charitable donation 
account (CDA), a hybrid charitable and investment vehicle described 
below, as an activity incidental to the business for which an FCU is 
chartered, provided the account is primarily charitable in nature and 
meets other regulatory conditions.

DATES: Comments must be received on or before October 21, 2013.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web site: http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx. Follow the instructions for submitting comments.
     Email: Address to [email protected]. Include ``[Your 
name]--
    Comments on Notice of Proposed Rulemaking for Parts 703 and 721'' 
in the email subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for email.
     Mail: Address to Gerard Poliquin, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.
    Public Inspection: You may view all public comments, as submitted, 
on NCUA's Web site at http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx, except those we cannot post for technical reasons. NCUA 
will not edit or remove identifying or contact information from the 
public comments submitted. You may inspect paper copies of comments in 
NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by 
appointment weekdays between 9 a.m. and 3 p.m. To make an appointment, 
call (703) 518-6546 or send an email to [email protected].

FOR FURTHER INFORMATION CONTACT: Steven W. Widerman, Senior Staff 
Attorney, Office of General Counsel, at the above address or by 
telephone: (703) 518-6540; or Rick Mayfield, Senior Capital Markets 
Specialist, Office of Examination and Insurance, at the above address 
or by telephone: (703) 518-6360.

SUPPLEMENTARY INFORMATION:

I. Background
II. Summary of the Proposed Rule
III. Regulatory Procedures

I. Background

1. Federal Credit Union Authority To Make Charitable Contributions

    The Federal Credit Union Act (``the Act'') provides that an FCU may 
``exercise such incidental powers as shall be necessary or requisite to 
enable it to carry on effectively the business for which it is 
incorporated.'' \1\ Under this authority, the Board has long recognized 
that making charitable contributions and donations is among an FCU's 
incidental powers.\2\
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    \1\ 12 U.S.C. 1757(17).
    \2\ 44 FR 56691 (Oct. 2, 1979); 64 FR 19441 (Apr. 21, 1999); 12 
CFR 721.3.
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    Between 1999 and 2012, FCU donations were limited to two categories 
of charities: (1) non-profit organizations located or active in the 
community where the donor FCU had a place of business; and (2) tax-
exempt organizations that ``operated primarily to promote and develop 
credit unions.'' \3\ An FCU's donation to these kinds of charities was 
conditioned on a determination by its board of directors that the 
donation was in the best interests of the FCU and reasonable given its 
size and financial condition.\4\ In 2012, the Board repealed the 
restrictions on permissible charities and

[[Page 57540]]

the conditions for making a donation.\5\ The Board then added 
charitable contributions and donations as a category of activities 
preapproved by regulation as ``incidental powers necessary and 
requisite to carry on a credit union's business.'' \6\ Activities in 
this preapproved category include donations to nonprofit organizations 
and credit union-affiliated causes, and to create charitable 
foundations.
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    \3\ 12 CFR 701.25(a) (2011).
    \4\ Id. 12 CFR 701.25(b).
    \5\ 77 FR 31981 (May 31, 2012).
    \6\ 12 CFR 721.3(b); See also 12 CFR 721.2.
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2. Federal Credit Union Investment Authority

    The Act grants FCUs the express power to invest in certain 
enumerated categories of investments.\7\ FCUs may invest only in those 
investments expressly authorized by the Act. Further, part 703, NCUA's 
investment regulation, limits or prohibits FCUs from purchasing certain 
investments, otherwise permitted by the Act, for safety and soundness 
reasons.\8\ Investments authorized by the Act and not prohibited or 
limited by part 703 constitute the universe of permissible investments 
for FCUs.
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    \7\ 12 U.S.C. 1757(7) & (15).
    \8\ 12 CFR part 703.
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3. Why is NCUA proposing this rule?

    The Board proposes to amend its regulations to clarify that, under 
certain circumstances, an FCU is authorized to fund a CDA, which may 
hold investments that are impermissible for an FCU, as a charitable 
contribution or donation under its incidental powers authority.\9\ The 
purpose of permitting an FCU to fund a CDA as an incidental power is to 
help facilitate an FCU's charitable activities. However, for this 
activity to be considered an incidental power, instead of an 
impermissible investment, the proposed rule requires the CDA to be 
primarily charitable in structure. Any investment feature benefitting 
the FCU must be incidental to that charitable purpose. The CDA must 
also be structured to preserve safety and soundness and to limit an 
FCU's exposure to the risks of otherwise impermissible investments.
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    \9\ 12 CFR 721.3(b).
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    The details of how a CDA must be structured and how it would work 
under the proposed rule are discussed in more detail below.

II. Summary of the Proposed Rule

1. Part 721--Establishing and Funding a CDA

    Section 721.3 enumerates the categories of activities that are 
preapproved as incidental powers of an FCU. In order for the funding of 
a CDA to be characterized as a preapproved incidental power, the 
proposed rule provides that a CDA must be structured to satisfy the 
following seven conditions, including a definitions section.
    a. Maximum Aggregate Funding. An FCU's investment in all CDAs, in 
the aggregate, must be limited to 3 percent of its net worth for the 
duration of the accounts. This means that regardless how many CDAs an 
FCU invests in, at all times, the aggregate book value of all such 
investments must not exceed 3 percent of net worth. Book value means 
the value at which the account is carried on your statement of 
financial condition prepared in accordance with GAAP. FCU's must 
monitor CDA exposure relative to net worth no less frequently than 
every quarterly call report cycle and will be expected to comply within 
30 days of any breach of the maximum aggregate funding limit. The 3 
percent net worth ceiling reflects an amount that generally would allow 
an FCU to generate income for the charity while ensuring the amount of 
risk taken will not pose safety and soundness issues.
    b. Segregated Account. CDA assets must be held in a segregated 
custodial account or special purpose entity specifically identified as 
a CDA. This enables an FCU to better manage this activity and provides 
more transparency for supervisory purposes.
    c. Regulatory Oversight. If an FCU chooses to establish a CDA using 
a trust vehicle, then the trustee must be an entity regulated by the 
Office of the Comptroller of the Currency, the U.S. Securities and 
Exchange Commission (``SEC'') or another federal regulatory agency. A 
regulated trustee or other person who is authorized to make investment 
decisions for a CDA (``manager''), other than the FCU itself, must be 
registered with the SEC as an investment advisor. This will help to 
ensure proper regulatory oversight of those professionals who owe 
fiduciary duties to the FCU, and to mitigate counterparty, credit, 
interest rate, liquidity, and reputational risks associated with 
funding a CDA.
    d. Account Documentation. The parties to the CDA, typically the FCU 
and trustee or manager, must document the terms and conditions 
controlling the account in a written operating agreement, trust 
agreement or similar instrument. The terms of the agreement must be 
consistent with the requirements and conditions set forth in this 
proposal. Additionally, the board of directors of an FCU that wishes to 
fund a CDA must adopt written policies addressing this activity, which 
also must be consistent with this proposal, and which may be amended 
from time to time.
    An FCU's CDA agreement and policies must provide that the FCU will 
donate only to charities exempt from taxation under section 501(c)(3) 
of the Internal Revenue Code, and they must name those charities. The 
agreement and policies must document the investment strategies the CDA 
trustee or other manager must follow, and provide that the FCU will 
account for all aspects of the CDA, including its distributions and 
liquidation, in accordance with generally accepted accounting 
principles.
    e. Minimum Distributions to Charities. An FCU is required to 
distribute to one or more qualified charities, no less frequently than 
every 5 years, and upon termination of a CDA, a minimum of 51 percent 
of the CDA's total return on assets over the period of up to 5 years. 
If a CDA is terminated before the initial or a subsequent period of up 
to 5 years elapses, the minimum distribution of total return on assets 
for that period must be complete by the time the account is closed. 
Requiring at least one charitable distribution within a 5-year window 
emulates the structure of a trust that would expire at the end of a 
term as long as 5 years, triggering such a distribution. Consistent 
with a CDA's primarily charitable structure, the proposed rule permits 
an FCU to maintain its account in perpetuity as long as it makes the 
minimum charitable distribution over each 5-year window of its 
existence, through one or more individual distributions. The 5-year 
constraint serves to provide periodic reassessment of risk and ensures 
timely distribution of charitable payments to the beneficiary.
    The proposed rule defines ``qualified charity'' as a charitable 
organization or other non-profit entity recognized as exempt from 
taxation under section 501(c)(3) of the Internal Revenue Code, and 
``total return'' as the actual rate of return of an investment, 
including realized interest, capital gains, dividends and distributions 
over a given period of up to 5 years. These minimum distribution 
frequency and amount requirements are a distinguishing feature of a 
CDIA. They are key to characterizing the funding of a CDA as primarily 
charitable and thus an incidental powers activity.
    An FCU may choose to donate in excess of the minimum distribution 
frequency and amount. Also, the proposed rule allows an FCU to decide 
how frequently to make distributions. For example, an FCU may choose to 
make periodic distributions over a

[[Page 57541]]

period of up to 5 years, or a single distribution at the end of that 
period. These choices should be documented in the CDA agreement and 
internal policies.
    f. Liquidation of Assets Upon CDA Termination. Upon termination of 
the CDA, the funding FCU may receive a distribution of the remaining 
assets in cash or a distribution in kind of the remaining assets but 
only if those assets are permissible investments for FCUs pursuant to 
the Act and part 703.
    g. Definitions. The proposed rule includes a definitions section to 
ensure consistent usage of key terms in the proposed rule.

2. Part 703--Exclusion of CDAs From Investment Rules

    The proposed rule revises part 703 to clarify that the funding of a 
CDA satisfying the above conditions is a preapproved incidental power 
of an FCU, even if the investments in the account are otherwise 
impermissible for FCUs, and it is not a violation of part 703 or the 
investment provisions of the Act.

III. 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 (primarily those under $50 
million in assets). This proposed rule does not impose any mandatory 
requirements on small credit unions, and NCUA does not anticipate many 
small credit unions will fund CDAs with significant amounts of money. 
NCUA has determined this proposed rule will not have a significant 
economic impact on a substantial number of small credit unions.

Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency creates a new paperwork burden on regulated entities or 
modifies an existing burden. For purposes of the PRA, a paperwork 
burden may take the form of either a reporting or a recordkeeping 
requirement, both referred to as information collections. The proposed 
changes to parts 703 and 721 would clarify that CDAs are an option for 
FCUs. NCUA has determined that the procedures for an FCU to open, 
maintain, and monitor a CDA would create a new information collection 
requirement. As required, NCUA has applied to the Office of Management 
and Budget (OMB) for approval of the information collection.
    To establish a CDA, an FCU must produce an internal policy and 
board of directors' resolution authorizing the funding of the CDA, must 
apply to open a segregated account, must engage a regulated trustee or 
registered investment advisor (``RIA'') to manage the CDA, and must 
enter into an operating agreement with the chosen trustee or RIA.
    To maintain its CDA once it begins operating, an FCU will receive 
and review periodic activity statements and reports on the account in 
order to properly monitor, and account for, its performance. The FCU 
also must determine which qualified charities will receive charitable 
distributions.
    NCUA estimates that, if this proposed rule were to become 
effective, approximately 100 FCUs would fund CDAs. NCUA further 
estimates that, on average, it would take an FCU's staff approximately 
20 hours to draft, review, and retain the documentation associated with 
opening a CDA. NCUA also estimates that maintaining and monitoring a 
CDA and performing all other functions associated with the CDA will 
take an FCU's staff an additional 8 hours annually. Accordingly, NCUA 
estimates the aggregate information collection burden for FCUs funding 
CDAs would be 28 hours times 100 FCUs for a total of 2800 hours for the 
first year and 8 hours times 100 FCUs for a total of 800 hours annually 
thereafter.
    Organizations and individuals wishing to submit comments on this 
information collection requirement should direct them to the Office of 
Information and Regulatory Affairs, OMB, Attn: Shagufta Ahmed, Room 
10226, New Executive Office Building, Washington, DC 20503, with a copy 
to the Secretary of the Board, National Credit Union Administration, 
1775 Duke Street, Alexandria, Virginia 22314-3428. The PRA requires OMB 
to make a decision concerning the collection of information contained 
in the proposed regulation between 30 and 60 days after publication of 
this document in the Federal Register.
    NCUA considers comments by the public on this proposed collection 
of information in:
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the NCUA, 
including whether the information will have a practical use;
     Evaluating the accuracy of NCUA's estimate of the burden 
of the proposed collection of information, including the validity of 
the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology (e.g., permitting 
electronic submission of responses).

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order to adhere to fundamental 
federalism principles. This proposed rule applies only to federally 
chartered credit unions. Accordingly, the 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 proposed rule does not constitute a policy that 
has federalism implications for purposes of the Executive Order.

Treasury and General Government Appropriations Act, 1999

    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).

List of Subjects

12 CFR Part 703

    Credit unions, investments.

12 CFR Part 721

    Credit unions, functions, implied powers.

    By the National Credit Union Administration Board on September 
12, 2013.
Gerard Poliquin,
Secretary of the Board.

    For the reasons set forth above, NCUA proposes to amend 12 CFR 
parts 703 and 721 as follows:

PART 703--INVESTMENTS

0
1. The authority citation for part 703 continues to read as follows:

    Authority:  12 U.S.C. 1757(7), 1757(8), 1757(15).

[[Page 57542]]

Sec.  703.1  [Amended]

0
2. Amend Sec.  703.1 as follows:
0
a. In paragraph (b)(5) by removing the word ``or'';
0
b. In paragraph (b)(6) by removing the period at the end of the 
paragraph and adding ``; or'' in its place; and
0
c. By adding paragraph (b)(7).
    The addition reads as follows:


Sec.  703.1  Purpose and scope.

* * * * *
    (b) * * *
    (7) Funding a Charitable Donation Account pursuant to Sec.  
721.3(b) of this chapter.
* * * * *

PART 721--INCIDENTAL POWERS

0
3. The authority citation for part 721 continues to read as follows:

    Authority: 12 U.S.C. 1757(17), 1766, 1789.

0
4. In Sec.  721.3, redesignate paragraph (b) as paragraph (b)(1) and 
add paragraph (b)(2) to read as follows:


Sec.  721.3  What categories of activities are preapproved as 
incidental powers necessary or requisite to carry on a credit union's 
business?

* * * * *
    (b) * * *
    (2) Charitable Donation Accounts. A charitable income account 
(``CDA'') is a hybrid charitable and investment vehicle, satisfying the 
conditions in paragraphs (b)(2)(i) through (vii) of this section, that 
you may fund as a means to provide charitable contributions and 
donations to qualified charities. If you fund a CDA that satisfies all 
of the following conditions, then you may do so free from the 
investment limitations of the Federal Credit Union Act and part 703 of 
this chapter:
    (i) Maximum aggregate funding. The book value of your investments 
in all CDAs, in the aggregate, as carried on your statement of 
financial condition prepared in accordance with GAAP, must be limited 
to 3 percent of your net worth at all times for the duration of the 
accounts, as measured at least every quarterly call report cycle. This 
means that regardless of how many CDAs you invest in, the combined book 
value of all such investments must not exceed 3 percent of your net 
worth. You must bring your aggregate accounts into compliance with the 
maximum aggregate funding limit within 30 days of any breach of this 
limit.
    (ii) Segregated account. The assets of a CDA must be held in a 
segregated custodial account or special purpose entity and must be 
specifically identified as a CDA;
    (iii) Regulatory oversight. If you choose to establish a CDA using 
a trust vehicle, the trustee must be regulated by the Office of the 
Comptroller of the Currency, the U.S. Securities and Exchange 
Commission (``SEC'') or another federal regulatory agency. A regulated 
trustee or other person or entity that is authorized to make investment 
decisions for a CDA (``manager''), other than the credit union itself, 
must be a Registered Investment Advisor.
    (iv) Account documentation and other written requirements. The 
parties to the CDA, typically the funding credit union and trustee or 
other manager of the account, must document the terms and conditions 
controlling the account in a written trust agreement or other similar 
instrument. The terms of the agreement must be consistent with this 
section. Your board of directors must adopt written policies addressing 
this funding activity that are consistent with this section, must 
review the policies annually, and may amend them from time to time.
    (A) Your CDA agreement and policies must at a minimum:
    (1) Provide that the CDA will make charitable contributions and 
donations only to charities you name therein that are exempt from 
taxation under section 501(c)(3) of the Internal Revenue Code;
    (2) Document the investment strategies and risk tolerances the CDA 
trustee or other manager must follow in administering the account;
    (3) Provide that you will account for all aspects of the CDA, 
including distributions to charities and liquidation of the account, in 
accordance with generally accepted accounting principles; and (4) 
indicate the frequency with which the trustee or manager of the CDA 
will make distributions to qualified charities as provided in paragraph 
(b)(2)(v) of this section;
    (B) [Reserved]
    (v) Minimum distribution to charities. You are required to 
distribute to one or more qualified charities, no less frequently than 
every 5 years, or upon termination of a CDA in less than 5 years, a 
minimum of 51 percent of the account's total return on assets over the 
period of up to 5 years. You may choose how frequently distributions 
will be made during each period of up to 5 years. For example, you may 
choose to make periodic distributions over a period of up to 5 years, 
or a single distribution at the end of that period. You may choose to 
donate in excess of the minimum distribution frequency and amount;
    (vi) Liquidation of assets upon CDA termination. Upon termination 
of the CDA, you may receive a distribution of the remaining account 
assets in cash or you may receive a distribution in kind of the 
remaining account assets but only if those assets are permissible 
investments for federal credit unions under the Federal Credit Union 
Act and part 703 of this chapter; and
    (vii) Definitions. For purposes of this section, the following 
definitions apply:
    (A) Distribution in kind is your acceptance of remaining CDA 
assets, upon termination of the account, in their original form instead 
of in cash resulting from the liquidation of the assets.
    (B) Qualified charity is a charitable organization or other non-
profit entity recognized as exempt from taxation under section 
501(c)(3) of the Internal Revenue Code.
    (C) Registered Investment Advisor is an investment advisor 
registered with the SEC pursuant to the Investment Advisers Act of 
1940.
    (D) Total return is the actual rate of return on all investments in 
a CDA over a given period of up to 5 years, including realized 
interest, capital gains, dividends, and distributions.
* * * * *
[FR Doc. 2013-22734 Filed 9-18-13; 8:45 am]
BILLING CODE 7535-01-P