[Federal Register Volume 64, Number 199 (Friday, October 15, 1999)]
[Proposed Rules]
[Pages 55871-55873]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26754]
-----------------------------------------------------------------------
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 724 and 745
Trustees and Custodians of Pension Plans; Share Insurance and
Appendix
AGENCY: National Credit Union Administration.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The National Credit Union Administration (NCUA) proposes to
revise its rules regarding a federal credit union's authority to act as
trustee or custodian of pension plans. The proposal permits federal
credit unions in a territory, including the trust territories, or a
possession of the United States, or the Commonwealth of Puerto Rico, to
offer trustee or custodian services for Individual Retirement Accounts
(IRAs), where otherwise permitted.
DATES: Comments must be received on or before December 14, 1999.
ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail
or hand-deliver comments to: National Credit Union Administration, 1775
Duke Street, Alexandria, Virginia 22314-3428. Fax comments to (703)
518-6319. E-mail comments to boardmail@ncua.gov. Please send comments
by one method only.
FOR FURTHER INFORMATION CONTACT: Dianne M. Salva, Staff Attorney,
Division of Operations, Office of General Counsel, at the above address
or telephone: (703) 518-6540.
SUPPLEMENTARY INFORMATION: NCUA has received many inquiries concerning
the permissibility of federal credit unions (FCUs) in Puerto Rico
offering IRA services to members. In the past, the agency has responded
that FCUs in Puerto Rico cannot provide the trustee services attendant
to an IRA account. Part 724 of NCUA's regulations permits FCUs to serve
as trustees for IRA accounts only if the IRA accounts qualify for
specific tax treatment under the Internal Revenue Code (IRC), and if
they are created or organized in the United States. Part 724 has its
roots in the Employee Retirement Income Security Act of 1974 (ERISA).
ERISA amended the IRC so that federally-insured credit unions were
recognized
[[Page 55872]]
as permissible trustees or custodians of Keogh plans and IRAs. ERISA,
Pub. L. 93-406, Sec. 1022(f) (1974). However, unlike banks and savings
and loans, credit unions did not have other statutory authority to act
as trustees; yet there was significant interest among credit unions in
providing these trust services. NCUA reasoned that the incidental
powers clause of the Federal Credit Union Act (FCUA), together with the
IRC, made it possible for credit unions to perform the trustee and
custodial function recognized by the IRC. But this finding was narrowly
drawn; credit unions would not be authorized to provide general
discretionary trustee services and they were not to act as trustees in
cases other than pension plans. Further, NCUA determined that funds
held in trust would be limited to share and share certificate accounts.
In 1985, NCUA published Interpretive Ruling and Policy Statement
85-1 (IRPS 85-1) in which it clarified its position that FCUs were
permitted to act as trustees or custodians of IRA or Keogh plans
established under the IRC, as long as the initial contribution to the
plan was made to a share or share certificate account and the FCU would
engage only in custodial duties with no exercise of investment
discretion or advice. After the initial contribution was made to a
share account, the IRA or Keogh was ``self-directed'' so that members
could order subsequent transfers at their own risk. The preamble to
IRPS 85-1 briefly retraced the history of FCU authority to serve as
trustees of IRA and Keogh plans. It cites the ERISA amendment to the
IRC recognizing FCUs as permissible trustees as the catalyst for the
NCUA Board's finding that FCUs were authorized to act as trustees.
However, it credits a 1978 amendment to the FCUA, which added a section
covering share insurance of IRA and Keogh plans, as providing the
statutory authority for FCUs to serve as trustees. 50 FR 48,176, Nov.
22, 1985.
In 1990, NCUA amended its pension trustee regulation, now
redesignated 12 CFR part 724, to incorporate IRPS 85-1. In 1997, IRPS
85-1 was rescinded. Because of the strict limitations imposed on the
trustee services FCUs offer members in connection with these types of
accounts, NCUA has not encountered significant safety and soundness
concerns related to IRA or Keogh accounts.
Today, the policy, as stated in 12 CFR part 724, still permits FCUs
to offer IRAs and Keogh accounts created in accordance with the IRS
Code. It is the IRC that requires such trust accounts be created in the
United States. 26 U.S.C. 408(a). IRS regulations provide a definition
of the United States limited to the States and the District of
Columbia. 26 U.S.C. 7701(a)(9). The internal revenue laws of the United
States are generally inapplicable in Puerto Rico. 48 U.S.C. 734. This
effectively excludes IRAs created in the Commonwealth of Puerto Rico
from the application of these provisions of the IRC and, therefore,
excludes federal credit unions in Puerto Rico from benefiting from the
authority granted by 12 CFR part 724. For some U.S. territories, such
as Guam, the United States Code specifically extends the income tax
laws of the United States to the territory, with the modification that
``Guam'' be substituted for the term ``United States'' in the
territorial version of the law. 48 U.S.C. 1421i. The Northern Mariana
Islands are the beneficiary of a similar arrangement. 48 U.S.C. 1681.
The net effect of this is that IRAs can be established in these
territories. The Virgin Islands, on the other hand, are subject to the
IRC, but without the modification that ``Virgin Islands'' be
substituted for the term ``United States.'' 48 U.S.C. 1397. This
operates to prevent credit unions in the Virgin Islands from offering
IRAs, because they cannot meet the IRC requirement that an IRA trust be
created or organized in the United States.
The Puerto Rico Internal Revenue Code of 1994 (PRITA) is similar to
the IRC. Like the IRC, the PRITA provides for a tax-deferred,
individual retirement account for its citizens and, like the IRC,
recognizes insured FCUs as permissible trustees for PRITA-IRAs
established under Puerto Rican law. P.R. Laws Ann. Tit. 13, Sec. 8569
(1995). However, because NCUA's regulation tracks the language of the
IRC, which requires such trusts to be created in the United States,
FCUs in Puerto Rico have been unable to meet their members' demands for
PRITA-IRA trustee services.
The NCUA Board believes that FCUs in Puerto Rico should also be
permitted to offer PRITA-IRAs to their members. While the FCUA does not
grant FCUs plenary trust powers, it does permit them to exercise such
incidental powers as are necessary to carry on their business. 17
U.S.C. 1757(17). When an FCU serves as a trustee for a member's IRA
share or share certificate account, it does not exercise the powers
normally associated with a trust account. Given that the discretion
exercised by an FCU as trustee for this type of account is so limited,
the function of the FCU as trustee is not significantly different from
its function as the issuer of share accounts and share certificates.
Based on the foregoing, the Board finds that the authority to offer
these accounts is incidental to the FCU's authority to issue share
accounts and share certificates. 12 U.S.C. 1757(6). Therefore, FCUs in
Puerto Rico are authorized by the incidental powers clause of the FCUA
to offer IRAs created under PRITA. But, the authority must be equally
narrow as that granted to FCUs offering IRA trust services in the
United States. That is, the initial contribution to the plan must be
made to a share or share certificate account, and the FCU may engage
only in custodial duties with no exercise of investment discretion or
advice. After the initial contribution is made to a share account,
members must direct any subsequent transfer of the funds at their own
risk.
The NCUA Board has further found that, for insurance purposes,
PRITA-IRAs will be treated like IRAs created in the United States. The
present vested ascertainable interest of the participant will be
insured up to $100,000 separately from other accounts of the
participant or designated beneficiary.
Medical Savings Accounts
In the future, the NCUA Board may consider a further amendment of
part 724 to authorize FCUs to serve as trustees for medical savings
accounts (MSAs). An MSA is another type of tax-deferred product which
requires limited trustee services, similar to those required for an
IRA. The Internal Revenue Service (IRS) is currently conducting a pilot
program to permit financial institutions, including credit unions, to
offer MSAs. On February 20, 1998, NCUA issued Letter to Credit Unions
No. 98-CU-5, which stated that NCUA considered MSAs to be insured
member accounts, but that FCUs could not act as an MSA custodian or
trustee. The IRS pilot program will be completed in 2000, and it is
possible in the near future legislation authorizing it on a permanent
basis may be adopted. If and when the full contours of a permanent MSA
program are announced, the NCUA Board will determine whether it will
make any additional amendments to the regulations.
Regulatory Procedures
Paperwork Reduction Act
This regulation, if adopted, will impose no additional information
collection, reporting or record keeping requirements.
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA)
(5 U.S.C. 605(b)), NCUA certifies that this
[[Page 55873]]
proposed rule will not have a significant economic impact on a
substantial number of small entities. NCUA expects that this proposal
will not: (1) have significant secondary or incidental effects on a
substantial number of small entities; or (2) create any additional
burden on small entities. These conclusions are based on the fact that
the proposed regulations merely extend the authority to offer a service
to members. Accordingly, a regulatory flexibility analysis is not
required.
Executive Order 12612
This regulation, if adopted, will only apply to federal credit
unions.
Agency Regulatory Goal
NCUA's goal is to promulgate clear and understandable regulations
that impose minimal regulatory burden. We request your comments on
whether the proposed amendment is understandable and minimally
intrusive if implemented as proposed.
List of Subjects
12 CFR Part 724
Credit unions, Pensions, Trusts and trustees.
12 CFR Part 745
Credit unions, Pensions, Share insurance, Trusts and trustees.
By the National Credit Union Administration Board on October 6,
1999.
Becky Baker,
Secretary of the Board.
For the reasons set out in the preamble, the NCUA proposes to amend
12 CFR chapter VII to read as follows:
PART 724--TRUSTEES AND CUSTODIANS OF PENSION PLANS
1. The authority citation for part 724 continues to read as
follows:
Authority: 12 U.S.C. 1757, 1765, 1766 and 1787.
2. In Sec. 724.1, remove the first sentence and add two sentences
in its place to read as follows:
Sec. 724.1 Federal credit unions acting as trustees and custodians of
pension and retirement plans.
A federal credit union is authorized to act as trustee or
custodian, and may receive reasonable compensation for so acting, under
any written trust instrument or custodial agreement created or
organized in the United States and forming part of a pension or
retirement plan which qualifies or qualified for specific tax treatment
under sections 401(d), 408, 408A and 530 of the Internal Revenue Code
(26 U.S.C. 401(d), 408, 408A and 530), for its members or groups of
members, provided the funds of such plans are invested in share
accounts or share certificate accounts of the federal credit union.
Federal credit unions located in a territory, including the trust
territories, or a possession of the United States, or the Commonwealth
of Puerto Rico, are also authorized to act as trustee or custodian for
such plans, if authorized under sections 401(d), 408, 408A and 530 of
the Internal Revenue Code as applied to the territory or possession or
under similar provisions of territorial law. * * *
PART 745--SHARE INSURANCE AND APPENDIX
3. The authority citation for part 745 continues to read as
follows:
Authority: 12 U.S.C. 1752(5), 1757, 1765, 1766, 1781, 1782,
1787, 1789.
4. Amend Sec. 745.9-2 by revising the first sentence of paragraph
(a) to read as follows:
Sec. 745.9-2 IRA/Keogh accounts.
(a) The present vested ascertainable interest of a participant or
designated beneficiary in a trust or custodial account maintained
pursuant to a pension or profit-sharing plan described under section
401(d) (Keogh account) or sections 408(a), 408A or 530 (IRA) of the
Internal Revenue Code or similar provisions of law applicable to a U.S.
territory or possession, will be insured up to $100,000 separately from
other accounts of the participant or designated beneficiary. * * *
* * * * *
[FR Doc. 99-26754 Filed 10-14-99; 8:45 am]
BILLING CODE 7535-01-P
