CUNA Regulatory Comment Call
December 31, 2002
NCUA's Proposed Rule on Investments and Deposit Activities(MAJOR RULE)
- The NCUA Board unanimously approved a proposal to amend its rule regarding the investment activities of federal credit unions (FCUs), which will also include expanding the Regulatory Flexibility Program (RegFlex) to conform to a number of these proposed revisions. To be eligible for the RegFlex program, credit unions must have net worth of at least 9%. Those that operate with a risk- based net worth requirement must have net worth that is at least 200 basis points above that requirement (or 9%, whichever is higher). In addition, all eligible credit unions must have earned a CAMEL 1 or 2 rating in their last two exams.
- NCUA had originally issued an advance notice of proposed rulemaking (ANPR) in October 2001 in an initial effort to solicit comment on changes that should be made. This proposal incorporates and responds to the comments submitted in response to the ANPR.
- In addition to expanding FCU investment authority, the proposal will also impose additional due diligence requirements in a number of areas, such as in the use of investment advisors and safekeepers.
- NCUA also plans to issue additional guidance in the future with regard to investment activities. This will include guidance with regard to broker-dealer requirements and standards for the evaluation and granting of expanded investment authority under NCUA's investment pilot program.
- Comments are due no later than February 25, 2003. Please submit your comments to CUNA by February 19, 2003.
Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at firstname.lastname@example.org and to Assistant General Counsel Jeff Bloch at email@example.com; 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.
NCUA issued an ANPR on October 18, 2001 with regard to the rules on investments and deposit activities. The ANPR solicited comment on how NCUA could provide FCUs with greater flexibility and enhanced investment authorities without sacrificing safety and soundness. NCUA was also interested in comments on how the rule could be revised so that they are easier to understand. NCUA has reviewed the comments it received in response to the ANPR, as well as other issues that have arisen, and has now issued this proposal.
DESCRIPTION OF THE PROPOSED RULE
The proposal will amend NCUA's rule regarding the investment activities of FCUs, which will also include expanding the RegFlex program to conform to a number of these proposed revisions. Here are the proposed changes, along with NCUA's response to a number of comments that were submitted in response to the ANPR:
- Broker-dealer requirements In the ANPR, NCUA solicited comment on possible changes in this area. NCUA has now determined that the current rule outlines prudent minimum criteria that a broker-dealer must meet for a credit union to purchase and sell investments through a broker-dealer, although NCUA will issue additional guidance in the future. The proposal will permit FCUs to use the services of depository institutions whose broker-dealer activities are regulated by a state regulatory agency, in addition to those that are regulated by federal agencies, which FCUs are currently able to use. This should provide FCUs with greater access to broker-dealers.
- Safekeeper requirements The current rule requires an FCU to investigate a safekeeper's background to determine the safekeeper's reputation and compliance with laws and regulations. The proposal will add a due diligence requirement that an FCU also review the safekeeper's financial condition as well. FCUs will also be required to retain documentation their boards of directors used to approve the use of a safekeeper to the same extent that this must be done in the broker-dealer context. The proposal will also permit state-regulated trust companies to be safekeepers for FCUs.
- Expanded investment authorities The proposal will permit RegFlex eligible FCUs to purchase Commercial Mortgage Related
Securities (CMRS) that are not otherwise permitted under NCUA rules if the CMRS:
- Are rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization.
- Otherwise meet the definitions of mortgage related security under securities laws with regard to ownership, origination, and the secured status.
- Have an underlying pool of loans containing more than fifty loans with no one loan representing more than ten percent of the pool.
A RegFlex eligible FCU can only purchase such CMRS up to fifty percent of its net worth in the aggregate. The proposal will also allow FCUs to provide mortgage servicing as an incidental power, as long as it owns the loan. The proposal will also incorporate the investment pilot program as a means of evaluating and granting expanded investment authority to FCUs and NCUA will soon issue standards for approval of such activities in an effort to educate FCUs about the program. NCUA has determined that FCUs with foreign branches may apply to NCUA for expanded investment authority under the pilot program in order to make investments necessary to manage currency rate risk and other risks associated with conducting businesses in foreign countries.
- Discretionary control of investments - Currently, FCUs can delegate to a third party discretionary control over the purchase and sale of investments up to 100 percent of the FCUs net capital. RegFlex eligible FCUs are exempt from this limitation, and the ANPR solicited comment on whether this limitation should be raised for all other FCUs. NCUA has now determined that it will not make any changes, but the proposal will now require FCU boards of directors to notify the regional office within five days after receiving notice that the limitation has been exceeded. The FCU must then develop a plan to bring the FCU in compliance with this requirement within a reasonable time.
- Investment credit ratings After receiving comments in response to the ANPR, NCUA will not change the current provisions regarding the requirement that FCUs conduct a credit analysis for any investment that is not guaranteed by the federal government or insured by NCUA or the Federal Deposit Insurance Corporation.
- Borrowing purchase transaction NCUA will continue the prohibition on purchasing an investment with the proceeds from a borrowing transaction if the purchased investment matures after the maturity of the borrowing repurchase transaction. However, the proposal will permit this for RegFlex eligible FCUs in an amount not to exceed the credit union's net worth.
- Purchase of equity-linked options The proposal will permit FCUs to purchase equity-linked options for the sole purpose of offering equity-linked dividends to their members, subject to certain eligibility requirements with regard to: 1) maximum shares permitted in the program; 2) minimum counterparty rating; 3) collateral requirements; 4) option proceeds that fund dividend costs only; 5) final maturity of the options that coincide with the maturity of the share account; and 6) minimum monthly reporting requirements.
- Investment advisors With regard to background checks of investment advisors, the proposal will also clarify that FCUs should also analyze the background of the firm for whom the advisor works, in addition to the advisor and other associated personnel.
- Recordkeeping The proposal will clarify that FCUs with assets of at least $10 million must comply with all GAAP provisions related to the accounting principles applicable to the reports or statements that are required to be filed with NCUA.
QUESTIONS TO CONSIDER REGARDING NCUA's PROPOSED RULE ON INVESTMENT AND DEPOSIT ACTIVITIES
- Do you agree that no further changes are needed with regard to the minimum criteria that a broker-dealer must
meet in order for a credit union to use its services in light of certain circumstances in which broker-dealers have
engaged in deceptive practices in the sale of certificates of deposits? Do you support the proposed change that will
allow FCUs to also use the services of depository institutions whose broker-dealer activities are regulated by a state
regulatory agency as a means to provide FCUs with greater access to broker-dealers? Do you have any suggestions on what
should be included in the guidance that NCUA plans to issue on this subject?
- Will the proposed requirement to review the safekeeper's financial condition pose any significant or unreasonable
burden? Will the requirement to retain documentation related to the approval of the use of the safekeeper pose any
significant, unreasonable burden? Do you support the provision that will permit state-regulated trust companies to be
safekeepers for FCUs?
- Do you have any suggestions for improving the investment pilot program as the means of evaluating and granting
expanded investment authority for FCUs? Do you have suggestions on what issues should be addressed in the standards
that NCUA plans to issue in this area?
- FCUs can currently delegate to a third party discretionary control over the purchase and sale of investments
up to 100 percent of the FCUs net capital. (RegFlex eligible credit unions are exempt from this limitation). If
this limitation is exceeded, the proposal will require FCU boards of directors to notify the NCUA Regional Office
within five days after it receives notice that this has occurred. Is this a reasonable time? The FCU must than
develop a plan to bring the credit union in compliance with this limitation within a reasonable time. Should NCUA
provide further guidance with regard to this plan and what issues should the guidance address? Should the term
"reasonable time" be replaced with a specific timeframe? If so, what should be the timeframe?
- With regard to background checks of investment advisors, the proposal will require FCUs to analyze the
background of the firm for whom the advisor works, in addition to the advisor and associated personnel. Will
this impose an unreasonable burden?
- The proposal contains a number of requirements that will not apply to RegFlex eligible credit unions.
Should any of these requirements not apply to FCUs at all?
- Other comments?
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Associate General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Catherine Orr Senior Regulatory Counsel (202) 508-6743 email@example.com