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August 27, 2004

Jonathan G. Katz, Secretary
United States Securities and Exchange Commission
450 5th Street, NW
Washington, DC 20549-0609

Re: Comment Letter to Proposed Regulation B
File Number S7-26-04

Dear Mr. Katz,

This letter is written on behalf of the National Association of Credit Union Service Organizations (“NACUSO”) and its members. NACUSO is a trade association comprised of credit unions and credit union service organizations (“CUSOs”). CUSOs are service organizations owned by credit unions.

NACUSO is in favor of the exemptions provided to credit unions under proposed Regulation B and endorses the adoption of Regulation B with the stated exemptions for credit unions.

NACUSO requests that Regulation B also grant credit unions an exemption to enter into networking arrangements through CUSOs that are wholly owned by one or more credit unions. This request is very important to the credit union and CUSO members of NACUSO.

Prior to July 2001, credit unions could not receive revenue in networking arrangements in excess of a credit union’s actual expenses. CUSOs did not have this expense reimbursement limitation and thus, credit unions formed CUSOs to enter into networking agreements with broker/dealers. In July 2001, the National Credit Union Administration passed the Incidental Powers Regulation that removed the expense reimbursement limitations on credit unions, permitting credit unions to receive a full share of revenue generated in networking arrangements. Under the Chubb Securities No-Action Letter, CUSOs were no longer “required service corporations”.

CUSOs have been used by credit unions for twenty (20) years in networking arrangements. There is no evidence of any abuse or harm to investors as a result of CUSOs being used by credit unions for this purpose. There is no evidence that the use of CUSOs by credit unions in networking arrangements will pose a greater threat to investors than credit unions that do not use CUSOs.

We understand that the SEC feels comfortable in dealing with financial institutions as there is a regulator that directly regulates the financial institution. In the case of an issue involved with the investment program, the SEC has confidence that it could contact the financial institution’s regulator and that regulator will assist the SEC to resolve the issue. As you are aware, the respective credit union regulators regulate a credit union’s investment in its CUSO but do not directly regulate the CUSO. We submit that this is an immaterial distinction in practice as it relates to these networking arrangements. In the case of a serious regulatory issue, the credit union regulator has the ability to require the credit union to divest itself of its CUSO investment and terminate the credit union’s affiliation with the CUSO. This is a very powerful inducement to a credit union to cause its CUSO to act in accordance with the directives of the regulator. It is our contention that in the event that there is a problem in a networking arrangement, the SEC and the credit union regulator would have the same level of power and influence over a CUSO as they do a credit union.

Credit unions are non-profit financial cooperatives. Credit unions do not create investment products and therefore do not sell credit union proprietary investment products. Traditionally, credit unions have worked together to jointly provide financial services and operational services. As of year-end 2003, there are 9,709 credit unions and only 1,163 credit unions (about 12%) have assets in excess of $100,000,000. A common rule of thumb used by broker/dealers working with credit unions is that credit unions must have at least $100,000,000 to $150,000,000 in assets in order to support a registered representative. Credit unions also find that they need to have five or six registered representatives in order to afford a non-producing, full-time manager. A full-time manager of the investment program is a key component for success. Thus, both small and large credit unions find it highly desirable to have a credit union service organization that will aggregate the resources to effectively provide registered representatives, management and marketing services for investment programs. Of course, all personnel that provide these services would be fully and properly licensed with the broker/dealer.

The inability of CUSOs to provide this centralized hub of expertise is a severe detriment to the ability of many credit unions and their affiliated broker/dealers to effectively offer investment services. The inability to aggregate resources through a CUSO could prevent most credit unions from having networking arrangements. Serving small credit unions would be cost prohibitive to broker/dealers without the ability to use a CUSO to centralize the investment services management, compliance and registered representative services. This type of cooperative effort is unique to the credit unions. It is driven by the culture of cooperation among credit unions and by economic necessity.

The integrity and effectiveness of the credit union networking exemption would not be diminished by permitting credit unions to use CUSOs that are wholly owned by one or more credit unions. NACUSO submits that the benefits of having a centralized CUSO for multiple credit unions would enhance the ability of the broker/dealers to provide effective and efficient investment services. The ability to aggregate resources greatly aids the effectiveness of broker/dealers and the efficiency of the oversight function by the NASD and SEC. NACUSO strongly encourages the SEC to permit credit unions to use CUSOs in networking arrangements.

We thank you for the opportunity to comment and would welcome any questions you may have regarding these comments.

Very truly yours,

Robert Dorsa, NACUSO President
Guy Messick, NACUSO General Counsel

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As General Counsel to NACUSO, I have received many messages that indicate there is confusion as whether network investment programs that are still in a CUSO should be moved to the credit union. This message is being sent to our members in an effort to alleviate some of the confusion. The facts are as follows:

  1. As a result of the 2001 Incidental Powers Regulations, the SEC has told all who have asked that CUSOs no longer have a networking exemption to receive income without being registered, as CUSOs are no longer a “required service corporation” under the Chubb No-Action Letter. It is the position of the SEC that CUSOs have been out of compliance since July 2001.
  2. The SEC has required broker/dealers enter into new networking agreements only with credit unions and not CUSOs. The only exception has been for state chartered credit unions in states that have not confirmed that their state chartered credit unions have Incidental Powers similar to federally chartered credit unions. Wisconsin is the only state I know where this applies. Clarification is being sought from the Wisconsin state credit union regulator.
  3. In the proposed draft of Regulation B, credit unions and banks are provided a networking exemption but CUSOs and bank operating subsidiaries are not mentioned at all.
  4. The SEC has repeatedly stated that it has comfort in dealing with credit unions as they have regulators that the SEC can call upon to help correct any problem that may arise. Since CUSOs are not directly regulated by a credit union regulator, the SEC does not have the same comfort level with CUSOs.
  5. As to the networking exemption, the SEC has indicated that they do not see any reason, from their perspective, to treat CUSOs differently than operating subsidiaries for banks, which have never had a networking exemption.
  6. The SEC has indicated that it is their intention to issue a no-action letter based upon a request submitted by the CUNA Brokerage Advisory Task Force. That letter has not been issued as yet. That letter could provide some guidance as to the role of CUSOs in the investment program but there is no indication that that rule would be expanded to permit CUSOs to have an exemption, especially if CUSOs are not granted a networking exemption under Regulation B.
  7. I have received reports from some broker/dealers indicating that there is pressure from some NASD examiners to move the investment program from the CUSO to the credit union. This pressure does not appear to be uniformly applied. There are no enforcement actions that I am aware of against any CUSO based networking program.

What do we make of all this? NACUSO is responding in two capacities, as an advocate and as an advisor. As an advocate, NACUSO is strongly requesting that the SEC grant the networking exemption to both credit unions and CUSOs. NACUSO will not give up that fight. We expect that other credit unions, CUSOs, and trade associations will also be supportive of expanding Regulation B to include CUSOs. We believe we have good arguments but we have an uphill battle to convince the SEC. The SEC has different perspectives in its role as the securities industry’s regulator.

As an advisor we must not overlook the fact that it is very likely that CUSOs will not be included in Regulation B and only credit unions will have a networking exemption. You look to us for answers to aid you in planning. The ostrich approach to planning is not advisable. We recommend that, at the very least, you should be actively planning on how you will move your investment program from the CUSO to the credit union in order not to be caught unprepared if the SEC starts to initiate enforcement actions against CUSOs.

Many credit unions have already moved their networking program from the CUSO to the credit union. It is likely that the SEC will not begin to initiate enforcement actions against CUSOs until Regulation B is passed and passed in its present state without mentioning CUSOs but there is a regulatory risk in waiting. There is no official grace period that you can rely upon.

We are very close to this issue and we have given you the best assessment of the situation. The level of the regulatory risk of keeping the investment program in the CUSO has been constant and, in our opinion, has not changed as a result of the issuance of the proposed Regulation B for comment, but we think the risk will be very high once Regulation B is passed. The comment period ends September 1, 2004. It is anticipated that there will be many comments that the SEC will have to sort through. We cannot be certain as to you when the Regulation will be enacted but only that it will be enacted at some point, as it is required by the Gramm-Leach-Bliley Act.

Guy Messick
NACUSO General Counsel
July 30, 2004

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Many of our members have expressed an interest in continuing to enable CUSOs to enter into networking agreements. CUSOs are not mentioned in the proposed Regulation and would not have that power. NACUSO intends to issue a comment letter in support of CUSOs (along with credit unions) to be able to have the power to enter into networking agreements and to provide administrative and management support for the investment programs. If you want your thoughts considered for inclusion in NACUSO’s letter, please submit them by email to Guy Messick by Monday, August 16th. You are invited to submit your own comments to the SEC as well. The comments are now due on or before September 1st.

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As discussed at the NACUSO Annual Conference in May, NCUA reviews one third of its regulations every three years. There is a list of those regulations that will be reviewed this coming year. That can be viewed on NCUA’s website Included in this year’s review will be the regulations governing, CUSOs, Incidental Powers, Privacy and Member Business Loans. If you have any thoughts on how these Regulations can be improved, please send them to NCUA by August 1st at . We ask that you copy our General Counsel Guy Messick at so that NACUSO can advocate on your behalf. Note that you will have the ability to comment on any proposed changes but this is your chance to help define the issues.

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The Securities and Exchange Commission (SEC) has issued a proposed rule (“Regulation B”) that would grant credit unions some of the exemptions from the broker-dealer registration requirements that banks currently receive and provide new exemptions for banks. These exceptions are provided under the Securities Exchange Act of 1934 “Exchange Act,” as amended by the Gramm-Leach-Bliley Act (“GLBA”). These exceptions and how the SEC proposes to treat credit unions under Regulation B are described below:

  • First, the proposal would allow credit unions to enter into the same networking arrangements with broker-dealers that banks can. Currently, credit unions may enter into networking arrangements with broker-dealers under the conditions set forth in an SEC opinion letter (“Chubb letter”). However, banks can network with broker-dealers under the terms of the Exchange Act bank exception for third-party brokerage arrangements. This proposal extends that Exchange Act exception to include credit unions, and would thereby supercede the Chubb letter.
  • Second, the proposal would permit credit unions to sweep deposit accounts into no-load money market funds under the same terms as banks can under the bank exception in the Exchange Act. The SEC states that the statutory exception is limited and should place financial institutions offering similar services on a more level playing field.
  • Third, the proposal permits credit unions to buy and sell securities for investment purposes for themselves, or for accounts for which they act as trustee or fiduciary under the terms of the investments transaction exception in the Exchange Act.

The proposal would permit all credit unions, including federal- and state-chartered credit unions, as well as federally insured and privately insured credit unions to utilize the exemptions that are described above. Although the proposal would grant credit unions these three exceptions, it would not automatically give them any associated exemptions given to banks in the future. Moreover, the proposal does not grant credit unions all the exceptions that banks currently have. The SEC requests comments on whether all credit unions should be included in the current proposal, and asks for information on the regulatory oversight given all types of credit unions.

The proposal does not extend to credit unions an exemption to conduct safekeeping and custody activities because the SEC claims it did not find that credit unions engage in activities included in the safekeeping and custody exemption. Under this exception, a bank does not have to register as a broker, if it engages in certain specified types of safekeeping and custody services with respect to securities on behalf of its customers. The SEC invites comment on whether credit unions engage in these types of activities and what legal authority they use to do so. CUNA asked in its comment letter that credit unions be given this authority.

SEC has issued Regulation B and it amends a previous proposal (“Interim Rules”) that provided guidance on the bank exceptions for banks and thrifts under the Exchange Act.