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