CUNA Comment Letter

ANPR on NCUA's Rules on Investment and Deposit Activities

January 24, 2002

Ms. Becky Baker
Secretary to the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314

Dear Ms. Baker:

On behalf of the Credit Union National Association, I am pleased to file comments on the agency’s Advanced Notice of Proposed Rulemaking regarding NCUA’s Rules on Investment and Deposit Activities. By way of background, CUNA is the largest credit union trade association in the United States representing over 90% of the nation’s more than 10,300 state and federal credit unions. This letter was developed under the auspices of CUNA’s Federal Credit Union Subcommittee, chaired by Mr. Wendell Sebastian, President and CEO of GTE FCU.

General Comments

CUNA strongly supports NCUA’s efforts to review the area of investments and consider changes to its regulations that will facilitate investment activities for federal credit unions. This initiative in fully consistent with the changes in the incidental powers regulation and with NCUA’s Regulatory Flexibility program which CUNA wholeheartedly endorsed. CUNA also commends the agency for using the Advance Notice of Proposed rulemaking process to solicit comments regarding investments. We view this approach as the first step toward developing a proposal that could result in important changes for federal credit unions in the area of investments.


NCUA is seeking comments on ways to change the formatting of the regulation to improve it. One suggestion is to cross-reference Reg- Flex provisions that apply to investments. For example, under Reg-Flex, qualifying credit unions will have relief from quarterly stress testing for complex securities, Sec. 703.90(c). Reg-Flex provisions, both current and future ones, should be identified in the investment rule (just as the fixed assets rule and other regulations affected by Reg-Flex should cross-reference applicable exemptions.) Reg-Flex credit unions will also receive relief from the current maturity limit on zero coupon investments, now at under 10 years, Sec. 703.110(d) and the 100%-of-net-capital limits on discretionary delegation of investments to third parties, Sec. 703.40(c)(6). These limits would be removed under NCUA’s proposal; we discuss the lifting of these limitations below.

The rule is written is a question and answer format and in second person (the use of this voice seems to be rare among financial institution regulations). While we commend the agency for attempting to make the rule more readable and understandable, our compliance staff hear ongoing concerns from credit unions that the format does not seem to facilitate compliance. We encourage the agency to consider recasting the rule to eliminate the Q and A format and to highlight what is permissible and what is not.

Section 703.100 lists permissible activities. Its might be easier to find specific permissible investment activities if headings were used in this section. We would also like to suggest that NCUA move this section and Section 703.110, prohibited activities, toward the beginning of the investment regulation, following Section 703.20, so that credit union officials will be able to turn to these critical sections more readily.

Broker Requirements

NCUA is requesting comments on standards for FCUs under which any brokerage firm that transacts purchases or sales of investments with an FCU must have at least one General Securities Principal. Also, if a depository institution transacts purchases and sales of securities with an FCU, its broker-dealer activities would have to be regulated by a federal or state regulatory agency. NCUA specifically requests comments on the effect that these standards would have on an FCU’s ability to purchase and sell securities at competitive prices.

We certainly appreciate the agency’s objective to help minimize credit unions’ exposure to incompetent and or fraudulent brokers and do not believe that the broker criteria will limit an FCU’s ability to trade securities. However we are not certain that the requirement that a brokerage firm with which an FCU transacts purchases or sales have at least one General Securities Principal is necessary as Section 703.50 already requires a broker-dealer to be regulated. We encourage the agency to focus on whether an FCU has conducted due diligence in assessing a deposit broker, whether controls are in place to limit concentrations in investments and whether the FCU is managing the risk to earnings and net worth of such investments. We would support additional guidelines to assist FCUs in making these assessments.

Currently, NCUA requires that depository institutions transacting securities purchase or sales with an FCU must be regulated by the federal government. The proposal would add institutions regulated by states, and we support this change.

Safekeeper Requirements

The proposal would require a safekeeper to be either a clearing broker-dealer registered by the Securities Exchange Commission or a depository institution regulated by a state or federal agency. We support the agency’s goal to help minimize the risk associated with security safekeeping, but it is unclear that the proposed requirements would accomplish this purpose. We encourage the agency to provide additional guidance to FCUs to help them evaluate the practices of a potential or current safekeeper and decide for themselves whether the safekeeper should be independent from the broker. Such guidance should also focus on assisting an FCU to assess whether it is positioned to manage the risks associated with dealing with a safekeeper.

We also support allowing an FCU to use regulated institutions that do not accept deposits, such as trust companies. This could be accomplished by changing the reference from “deposit institution-- to “financial institution.--

Expanded Investment Authorities

The proposal would expand the investment authority of FCUs by removing the regulatory prohibition on investments such as variable rate instruments tied to a foreign currency or interest rate; financial derivatives; short sales; mortgage-backed security interest and principal strips; residual interests in collateralized mortgage obligations; mortgage servicing rights; commercial mortgage-related securities; and zero coupon securities with remaining maturities greater than 10 years. CUNA strongly supports such an expansion.

However, to obtain these expanded authorities, an FCU would have to apply for each authority individually and demonstrate it has the ability and expertise to manage the new investments in a safe and sound manner. This is similar to the approach authorized for corporate credit unions.

NCUA’s is undoubtedly concerned that credit unions have the expertise, internal controls and risk management structure necessary to safely engage in additional investments. We agree the agency should develop guidelines that would help credit unions develop processes and procedures for mitigating and managing additional risk and that during the examination process, risk management policies should be evaluated.

We do not agree that the agency should require an FCU to apply for each new authority. Rather, we would support a notice process under which an FCU would notify its regional office that it is proceeding with a new investment authority and a brief summary of its risk management capabilities. Using the FCU’s call report, last examination and the brief summary provided by the credit union, the regional office could then intervene only if there are substantiated concerns that the FUC does not have the capacity to manage the risk it is attempting to assume.

One area in which the agency is seeking comments is mortgage loan servicing. Some credit unions have questioned whether this activity is an investment that is more in the nature of an incidental power.

CUNA strongly supports allowing the purchasing of mortgage servicing rights by federal credit unions, whether it is permitted under the investment rule or incidental powers rule. However, we request that the agency allow an FCU to purchase mortgage serving rights from any legitimate mortgage originator, and that this activity not be limited to the purchase of serving rights from another credit union.

Discretionary Control

The proposal would raise the cap on the amount of investments that a FCU may delegate to an investment advisor to control. Currently, an FCU may delegate discretionary control of investments to an investment advisor, so long as the aggregate amount does not exceed 100% of the FCU’s net capital at the time of the delegation. NCUA may set minimum criteria that FCUs must meet to raise the limit and require FCUs to apply for a raised limit.

We believe that NCUA should set guidelines for credit unions to follow in exceeding the cap. We do not agree that a prior approval process, which diverts agency resources, is necessary. Rather, as suggested above, we would favor a process under which an FCU would notify the regional office that it is exceeding the cap and provide a very brief explanation of how it is meeting the agency’s guidelines.

Investment Credit

The proposal would require FCUs to evaluate credit risk in terms of capital at risk and/or by using minimum credit rating for investments not fully guaranteed or insure. NCUA seeks comments on whether it is reasonable to require credit risk to be expressed in terms of minimum credit ratings, risk to capital or other standards.

We support the development of guidelines in this area and encourage NCUA to work with the Federal Financial Institutions Examination Council is establishing such a framework. We are aware that some FCUs have adopted practices that establish credit limits in terms of capital at risk or that set minimum credit criteria for investments that are not fully guaranteed.

However, we do not believe that FCUs should be subjected to a regulatory requirement that may not permit them to have sufficient flexibility to structure their investments as they determine appropriate for their ability to manage risk. We urge NCUA to refrain from establishing a rigid rule and to rely instead on guidelines that would help credit unions evaluate risk and position themselves to handle it in the context of their investment activities.

Borrowing Repurchase Agreements

The proposal would remove the prohibition so that an FCU has the flexibility to invest the proceeds from a borrowing repurchase agreement at its discretion, without regard to whether the purchased investment matures after the maturity of the borrowing repurchase agreement. We strongly support this change. However, we would welcome guidance from NCUA for FCUs in this area to that would address issues such as the avoidance of pyramiding investments using borrowed funds.

Purchase of Equity-Linked Options

The proposal would allow an FCU to purchase equity options for the sole purpose of offering equity-linked dividends to their members. Currently, the agency has approved an investment pilot program that permits a vendor to act as an agent for FCUs to purchase equity-based options. NCUA would likely develop regulatory guidelines and limitations on the purchase of equity options based on the experience it has gained from the pilot program. We support the agency’s use of pilot programs in the area of investments and encourage the agency to utilize this process as credit unions seek to engage in new activities.

Secondary Capital

The agency did not specifically seek comments on the issue of secondary capital. However, CUNA does want to reiterate its strong position that credit unions should be able to generate secondary capital and that such capital should be allowed to count as part of the credit union’s net worth for purpose of determining net worth ratios under prompt corrective action.

Under the auspices of our Examination and Supervision Subcommittee, chaired by John Franklin, President of the South Carolina CU League, CUNA has organized a task force to review this issue and develop economically and politically feasible approaches to the issue of secondary capital. We look forward to partnering with the agency in pursuing this matter.

Additional Investment Authority

Flexible investment authority for federal credit unions is critical to their ability to serve their members and meet the demands of a changing financial marketplace. We realize that the agency does not have the authority to change statutory limitations on credit union investments. However, CUNA’s Renaissance Commission has identified a number of restricted investment activities in which regulatory relief could be meaningful. These activities, some of which would be less risky than changes NCUA is already proposing, include investments such as:

CUNA also supports changes such as allowing credit unions to treat loan participations as either a loan or an investment.

CUNA is already working with NCUA and the House Financial Services Committee on issues such as increased authority to invest in CUSOs, and we will be looking carefully for further opportunities to expand the investment opportunities for federal credit unions without jeopardizing safety and soundness.

Thank you for the opportunity to share our views. Please do not hesitate to contact me at if you have any questions about our comments.


Mary Mitchell Dunn
Associate General Counsel
And Senior Vice President