Author: Tony Muka

To: NACUSO Members & Affiliates
From: Guy Messick, NACUSO Legal Counsel
Date: March 14, 2005

NACUSO has learned that a broker/dealer that has many CUSO networking programs has been advised by the SEC that it is out of compliance. Naturally, this broker/dealer will be requiring its clients to move the networking arrangements from the CUSO to the credit union. It will not be long before all broker/dealers are so notified. The time to move the programs cannot be delayed longer. The longer you delay, the more risk you assume for adverse regulatory action by the SEC. We recommend moving them within the next three (3) months or sooner if possible. Please feel free to contact us if you have any questions.

To: NACUSO Members & Affiliates
From: Guy Messick
Re: NCUA General Counsel Opinion Providing Investment Services to Nonmembers and Credit Unions Helping Other Credit Unions with Investment Services
Date: January 26, 2005

NCUA General Counsel Office issued an opinion on January 19, 2005. This letter was requested by a broker/dealer and addresses the issue of a credit union permitting its licensed dual employees to provide investment services to nonmembers and whether a credit union may provide its licensed dual employees to assist other credit unions in serving their members.

NONMEMBER ISSUES

The letter confirms that Incidental Powers permits credit unions to receive income only for member business. While the letter does say that a shared employee, acting on behalf of the broker/dealer, may serve nonmembers; the credit union cannot receive any income for the nonmember business. Let me say this again as there was some confusion on this point. The dual employee representatives can serve nonmembers. The prohibition is that the credit unions cannot be paid for these nonmember transactions.

Our advice has been that credit unions could be reimbursed its actual costs, including the costs of paying commissions for the nonmember transactions to the dual employee representatives. Unfortunately, the opinion specifically prohibits the payment of any money, including expenses for the nonmember business. I am in discussion about this issue with NCUA. We will seek to change their mind on the expense reimbursement prohibition, at least as it applies to representative commissions.

Typically, registered representatives in credit union programs will have separate representative numbers for member business and nonmember business to track the nonmember business. The credit unions are paid for both member business and the nonmember business but we recommend that at least once a year there is an analysis of whether the revenue of the nonmember business exceeds the credit union’s actual expenses. If revenue exceeds actual expenses, there is an adjustment to the revenue sharing to reflect the appropriate expense reimbursement for the nonmember business. If revenue does not exceed actual expenses, nothing is done other than to retain the analysis in the event a regulator asks for it.

At this time, while I continue my discussions with NCUA on this issue, I would suggest that credit unions keep the status quo with respect to receiving reimbursement of expenses for nonmember business. If NCUA maintains the position in the letter, the representatives will have to be paid by the broker/dealer directly for the nonmember commissions as independent contractors. The credit union will not be able to receive any nonmember revenue share, regardless of the actual costs incurred for nonmember business.

CREDIT UNIONS HELPING OTHER CREDIT UNIONS

The letter also states that a credit union may not provide its dual employees to assist other credit unions to serve their members under the correspondent powers portion of Incidental Powers. NCUA says that one Incidental Power cannot be used to support another Incidental Power, i.e. credit union A could not use its correspondent powers to help credit union B with its finder activity powers. I am in discussion with NCUA over this point as well.

If your credit union desires to provide investment support services (e.g. administrative and marketing services) to another credit union, the only sure way of complying with the letter is to have the support services provided by a CUSO. CUSOs have the power to provide these support services. The CUSO could not be paid a percentage of commissions for these services per the position of the SEC and the anticipated Regulation B. The CUSO would be paid on a fixed fee or hourly basis to support the client credit union’s investment services. The representatives will have to be paid by the credit union whose members are being served or by the broker/dealer.

For example, if credit union A has a dual employee program and wants to make its dual employees available to credit union B, both credit union A and credit union B would enter into a financial services agreement with the same broker/dealer. The representatives will be paid for credit union A member business as credit union A employees. The representatives will be paid for credit union B business either as a part-time employee of credit union B or directly by the broker/dealer as a 1099 independent representative. In most cases, the broker/dealer will pay the representatives directly. The broker/dealers will have to make these direct payments for nonmember business anyway and the representatives will not want to be employees of multiple credit unions. Multiple credit union employers would add even more complication on an already complicated business model.

This letter will cause yet another change in our investment services business model. We will do what we can as NACUSO General Counsel to modify the impact of this letter. Please provide your comments to me as I want the benefits of your collective thoughts as I approach NCUA.

Guy Messick
(610)891-9000

The letter is available online: https://www.nacuso.org/pdf/NCUALegalOpinion03-0736.pdf

To: NACUSO Members

Re: Pending Changes to the CUSO and Incidental Powers Regulations

Date: January 6, 2005

NCUA reviews one-third of its regulations every year. In 2005, the CUSO Regulation and Incidental Powers Regulation are included in the regulations NCUA will be reviewing. This is your opportunity to have an impact on the CUSO and Incidental Powers Regulations. NCUA has not yet issued any proposed changes. We would like to speak with NCUA about all proposed changes as soon as possible. As your regulatory advocate, we want to be sure that your voice is heard.

Guy Messick, NACUSO General Counsel, is NACUSO’s liaison to NCUA. He has already discussed three issues described below with NCUA. It would be very helpful if you provide your input on these three issues and on any other issues that are important to you. You may print the below with your comments/selection and fax to Guy Messick at (610)891-9008

.

Issues

Action

Amend the CUSO Regulation to add Consumer Lending to the list of preapproved CUSO services.

Reason

CUSOs already have the power to issue mortgage loans, member business loans and student loans. There is no compelling rationale to exclude consumer lending from the list of preapproved CUSO services. Such a power could be useful for indirect lending and other consumer loans where pooled resources and risk management considerations may make it more advantageous to use a CUSO as the lender. The addition of this power will also enable credit unions to form CUSOs to buy credit card portfolios. Currently, credit unions do not have a credit union related choice if they want to sell their credit card portfolios. They have to sell them to banks and other non-credit union buyers. Selling credit union loan portfolios to banks will enable banks to cross-sell their other services to credit union members.

Action

Amend the CUSO Regulation to add “Finders Activities” to the list of preapproved CUSO services.

Reason

There is no regulatory purpose served by permitting a credit union to receive revenue from incidental powers and prohibiting a CUSO from doing the same. The concept of group purchasing is permitted for insurance services but not for other services. A credit union should have the option to outsource the incidental powers function to its CUSO. The CUSO primarily serves test will keep the business focused on credit unions and/or credit union’s members.

Action

Amend the Incidental Powers Regulation, to clarify that a credit union, under the correspondent powers portion of incidental powers, has the power to assist other credit unions with both their expressed and incidental powers.

Reason

Many smaller credit unions look to a CUSOs to help them offer third party brokerage programs. Now that the investment programs will be housed in the credit union, we must be sure that credit unions can help other credit unions offer these services. Broker/dealers are reluctant to work with over 90% of credit unions because they are too small to independently support an investment representative. Unless we are proactive, smaller credit unions will be precluded from offering investment services. Small credit unions also want help to manage other finders activities services. It takes credit union resources to manage finders activities services and many small credit unions do not have the resources to do so. Since non-interest income is becoming an essential part of the revenue flow for credit unions, the inability of offer finders activities services could adversely affect many credit unions. There is no reason to distinguish between expressed powers and incidental powers when it comes to one credit union helping another.

Do you have other suggested changes?

If so, state the following in your response:

• The proposed action
• Reasons for proposed action
• Name of responding CU/CUSO
• Name of responding person
• Telephone number
• Email

SEC Extends Comment Period for Proposed Regulation B, Provisions Implementing Gramm-Leach-Bliley Bank Broker Rules

FOR IMMEDIATE RELEASE 2004-96

Washington, D.C., July 21, 2004 — The Securities and Exchange Commission today voted to extend for 30 days the comment period on the proposed Regulation B published in the Federal Register on June 30, 2004. This proposed regulation is designed to implement provisions of the Gramm-Leach-Bliley Act of 1999 that delineate the securities activities banks may engage in without registering as brokers under the Securities Exchange Act of 1934.

In a letter submitted to the Commission on July 1, seven trade associations representing financial institutions asked the Commission to provide the public with additional time to review, analyze and submit comments on the proposed regulation. In addition, other commenters also requested an additional 30-day period for public comment.

The public comment period on the proposed Regulation B will now end Sept. 1, 2004. The scope and comment process for this proposed Regulation B remain as stated in the original Federal Register notice of June 30, 2004, and comments should be received on or before Sept. 1, 2004.