CUNA Regulatory Comment Call

March 23, 2006

Share Insurance Rules

EXECUTIVE SUMMARY

  • The NCUA Board adopted an interim final rule to amend the share insurance rules, which will incorporate recent amendments to the Federal Credit Union Act (FCUA). These amendments were included in the deposit insurance reform law that Congress passed last year. The rule will be effective as of April 1, 2006, although there will be a 60-day comment period.

  • The interim final rule will:

    • Increase the share insurance limit for certain retirement accounts from $100,000 to $250,000. These include individual retirement accounts (IRAs) and Keogh accounts.

    • Define the “standard maximum share insurance amount (SMSIA)” as $100,000, other than for the retirement accounts described above. The insurance limit has been $100,000 for all types of accounts since 1980. Beginning in 2010, and in each subsequent five-year period thereafter, NCUA and the Federal Deposit Insurance Corporation (FDIC) will jointly consider whether the SMSIA and the equivalent amount for bank deposits should be adjusted for inflation. The purpose of using the term SMSIA, instead of a dollar amount, is to avoid having to change the dollar limit in the rule each time there is an inflation-adjusted change.

    • Provide pass-through coverage to each participant of an employee benefit plan, but will limit acceptance of shares in these plans to insured credit unions that are well capitalized or adequately capitalized. NCUA’s interpretation of the new deposit insurance reform law is that it has authority to allow full insurance coverage for all participants in an employer benefit plan, even if a participant is not a member of the credit union in which the account is maintained. NCUA is seeking specific comments on this issue.

    • Incorporate an NCUA Office of General Counsel legal opinion regarding “529 Plans,” such as prepaid tuition programs that educational institutions create and tuition savings programs that states sponsor. Under NCUA’s opinion and the proposal, participants would have to be members of the credit union. These accounts will be insured as single ownership accounts under the share insurance rules that cover accounts held by agents or nominees. Such accounts will be aggregated with all other individual accounts that a participant has at the credit union and insured up to the SMSIA. NCUA cautions that careful titling is essential to ensure individual account coverage.

    • Provide for insurance coverage for shares denominated in foreign currency and for conversion of foreign currency to U.S. dollars before an insurance payment is made as a result of a credit union’s liquidation.

  • Comments are due by May 22, 2006. Please submit your comments to CUNA by May 11, 2006.

    Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Associate General Counsel Mary Dunn at mdunn@cuna.coop and to Senior Assistant General Counsel Jeff Bloch jbloch@cuna.coop; or mail them to Mary and Jeff in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6732, if you would like a copy of the interim final rule, or you may access it on the Internet at the following address:

    http://www.ncua.gov/RegulationsOpinionsLaws/RecentFinalRegs/F-745.pdf

    BACKGROUND

    The deposit insurance law passed by Congress last year amends the share insurance provisions of the FCUA in the following ways:

    • Beginning in 2010, and for each five-year period thereafter, NCUA and the FDIC will jointly consider whether the SMSIA and the standard maximum deposit insurance amount (SMDIA) should be adjusted (the SMDIA is the FDIC equivalent for bank deposits). Congress will have the authority to prevent or limit these increases.

    • NCUA will provide “pass-through” share insurance coverage in any employee benefit plan account, which means the insurance coverage will be assigned on a per-participant basis. These accounts include employee welfare benefit plans, employee pension benefit plans, Keogh accounts, and “457 Plans,” which include certain deferred compensation plans of tax-exempt organizations, along with State and local governments. Acceptance of employee benefit plan funds are limited to insured credit unions that are “well capitalized” or “adequately capitalized” under prompt corrective action.

    • The share insurance limit for certain retirement accounts will be increased from $100,000 to $250,000. These include IRAs and Keogh Accounts. These new limits will also be subject to future inflation adjustments beginning in 2010, as provided for other types of accounts. The interim final rule implements the initial adjustment from $100,000 to $250,000.

    • Creates the term “Government Depositor” in connection with public funds that are insured, as permitted under the FCUA. NCUA has until now referred to these as “public unit accounts” under the share insurance rules.

    The interim final rule implements the above changes. A separate rule will be issued later to implement other changes included in the deposit insurance law, such as the required changes to the share insurance logo.

    BRIEF DESCRIPTION OF THE INTERIM FINAL RULE

    Standard Maximum Share Insurance Amount

    The interim final rule will define the SMSIA as $100,000, which may be adjusted for inflation every five years, beginning in 2010, under the process described above in which the FDIC and NCUA will jointly consider such an adjustment for both the SMSIA and SMDIA. Throughout the rules, the term SMSIA will replace $100,000, which until now has been the insurance limit for all types of accounts. This replacement will allow NCUA to avoid having to change the numerical limit throughout the rules each time there is an inflation-adjusted change.

    Retirement and Other Employee Benefit Plan Accounts

    The interim final rule implements the provisions that raise the insurance coverage to $250,000 for IRAs and Keogh accounts and that provide pass-through insurance coverage for employee benefit plan accounts. Although the recent deposit insurance law prohibits credit unions that are not “well capitalized” or “adequately capitalized,” as defined under prompt corrective action, from accepting employee benefit shares, pass-through coverage will be granted to shares in such plans that have been accepted by credit unions that are not permitted to accept them because of their net worth levels. This includes such shares that existed before the effective date of the interim final rule.

    Until now, full share insurance coverage in an employee benefit plan has been limited to participants who are also members of the credit union in which the account is maintained. Non-member interests, and other interests that cannot be properly evaluated, are added together and insured up to $100,000 in the aggregate. NCUA believes that the recent deposit insurance law, as well as its legislative history, allows NCUA the authority to provide additional share insurance coverage for nonmembers. For example, NCUA believes it may be appropriate to provide full share insurance coverage to all participants, regardless of whether they are members of the credit union, as long as the plan trustee or employer sponsoring the plan is a member or if a certain percentage of participants are members, such as 25%.

    NCUA is now requesting comments as whether this pass-through coverage should be extended to nonmembers and, if so, whether nonmembers should receive the same coverage as members for all plans or whether there should be conditions, such as requiring the employer or trustee to be a member or require that a certain percentage of participants be members of the credit union.

    With regard to the new $250,000 limit, the members’ IRA and Roth IRA accounts will be combined and insured in the aggregate up to $250,000. However, a Keogh account will be separately insured from any IRA and Roth IRA account that the member may have.

    529 Plans

    The interim final rule will incorporate an NCUA Office of General Counsel legal opinion regarding “529 Plans,” which include prepaid tuition programs that educational institutions create and tuition savings programs that States sponsor. Under NCUA’s opinion and the interim final rule, if a 529 plan includes shares in a credit union, participants in such a plan would have to be credit union members to receive pass-through share insurance coverage.

    These accounts will be insured as single ownership accounts under the share insurance rules that cover accounts held by agents or nominees. Such accounts will be aggregated with all other individual accounts that a participant may have at the credit union and insured up to the SMSIA. NCUA cautions that careful titling is essential to ensure individual account coverage.

    Share Accounts Denominated in a Foreign Currency

    The interim rule will provide insurance coverage for shares denominated in foreign currency and for conversion of foreign currency to U.S. dollars before an insurance payment is made as a result of a credit union’s liquidation. The value of the foreign currency deposit will be determined based on the exchange rate quoted by the Federal Reserve Bank of New York on Noon on the day that the credit union has failed, unless the share agreement provides that some other widely recognized exchange rate be used.

    The rule does not allow credit unions to make loans or invest funds denominated in foreign currencies. These transactions may require credit unions to participate in hedging or currency swaps to manage the risk of currency fluctuations. Federal credit unions that wish to engage in swaps to hedge currency fluctuations must apply for NCUA approval as part of a properly designed investment pilot program.

    QUESTIONS TO CONSIDER REGARDING NCUA’s INTERIM FINAL RULE ON SHARE INSURANCE

    1. Do you agree that pass-through insurance coverage for employee benefit plans should cover nonmembers to the extent that members are covered? Should there be requirements before such coverage should apply, such as requiring that the employer or trustee be a member of the credit union or requiring that a certain percentage of participants be members?
















    2. Under these rules, only certain retirement plans will receive additional insurance coverage up to $250,000 per account, such as IRAs and Keoghs, and different IRAs created by the same member will be combined and insured in the aggregate up to $250,000, while Keoghs will be separately insured. Are you concerned about how to explain these differences to your members, and do you have suggestions on how to alleviate this possible confusion?
















    3. Are you aware of any States that allow state-chartered credit unions to offer additional retirement accounts that are not permitted for federal credit unions? Are you concerned about the additional confusion that may result since IRAs and Keoghs will be insured up to $250,000 but these other accounts may not be?
















    4. Other comments?
















    Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
    Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
    Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
    Lilly Thomas • Assistant General Counsel • (202) 508-6733 • lthomas@cuna.com
    Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com