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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
guy.messick@gmail.com
July 30, 2004
