99-15650. Investment and Deposit Activities; Credit Union Service Organizations  

  • [Federal Register Volume 64, Number 119 (Tuesday, June 22, 1999)]
    [Rules and Regulations]
    [Pages 33184-33187]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 99-15650]
    
    
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    NATIONAL CREDIT UNION ADMINISTRATION
    
    12 CFR Parts 703 and 712
    
    
    Investment and Deposit Activities; Credit Union Service 
    Organizations
    
    AGENCY: National Credit Union Administration (NCUA)
    
    ACTION: Final rule.
    
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    SUMMARY: The final rule makes four changes to the recently revised rule 
    concerning federal credit unions' (FCUs') investments in and loans to 
    credit union service organizations (CUSOs). The four changes are: 
    First, delete a provision preventing FCUs from investing in or lending 
    to CUSOs in which non-credit union depository institutions are co-
    investors or lenders; second, revise a provision limiting CUSO 
    investments in non-CUSO service providers; third, delete a provision 
    preventing FCUs from investing in the debentures of a CUSO; and fourth, 
    clarify how the NCUA measures the limit on an FCU's investment in or 
    loans to CUSOs. In addition, the final rule clarifies the meaning of 
    cyber financial services. The changes decrease the regulatory burden 
    for FCUs investing in or lending to CUSOs.
    
    DATES: This rule is effective July 22, 1999.
    
    FOR FURTHER INFORMATION CONTACT: Mary Rupp, Staff Attorney, Office of 
    General Counsel, at the above address or telephone (703) 518-6540; or 
    Linda Groth, Program Officer, Office of Examination and Insurance, at 
    the above address or telephone (703) 518-6360.
    
    SUPPLEMENTARY INFORMATION:
    
    Background
    
        On November 19, 1998, the NCUA Board requested comment on proposed 
    changes to part 712 of its regulations. 63 FR 65714 (November 30, 
    1998). Part 712 sets forth the requirements for FCUs investing in or 
    lending to CUSOs. The proposed amendments addressed four issues 
    resulting from the March 1998 revisions to the CUSO rule. 63 FR 10743 
    (March 5, 1998). The Board also requested comment on the scope of 
    services that should be included within the existing cyber financial 
    services category of the CUSO rule.
    
    Summary of Comments
    
        The NCUA Board received twenty comments on the proposal: nine from 
    credit unions; three from CUSOs; two from credit union trade groups; 
    one from a CUSO trade group; one from a bank trade group; three from 
    state leagues; and one from an attorney. Of the fourteen commenters 
    that addressed the proposed changes, thirteen generally supported the 
    added flexibility of the proposed amendments.
    
    FCUs Investing in or Lending to a CUSO in Which a Bank or Thrift Is 
    Also a Participant
    
        Section 712.2(c) prohibits an FCU from investing in or lending to a 
    CUSO in which one or more banks or thrift institutions participate. The 
    rationale behind the limitation was that it would be too confusing to 
    credit union members if both NCUSIF and FDIC signs were posted together 
    at shared branches. 63 FR at 10746. The Board believes possible 
    confusion can be addressed through appropriate disclosures and so the 
    proposal removed the prohibition.
        The commenters generally supported the added flexibility of this 
    amendment. There were two negative commenters. One was a bank trade 
    group that objected because it believes the
    
    [[Page 33185]]
    
    requirement that CUSOs primarily serve credit unions or their members 
    will be too hard to monitor if banks and thrifts are allowed to 
    participate. The bank trade group also objected on the basis that 
    insurance disclosures for this type of CUSO would be too burdensome. 
    The Board rejects these arguments. The disclosure issue for federally 
    insured credit unions is currently addressed in Sec. 740.3(c) of NCUA's 
    regulations. The CUSO rule currently allows credit unions to 
    participate with other entities, just not banks or thrifts. This 
    participation has not led to a problem in monitoring the ``primarily 
    serves'' requirement, and the Board does not anticipate a problem when 
    banks and thrifts are added. One commenter was concerned that NCUA 
    would no longer be able to regulate CUSOs if banks and thrifts were 
    allowed to participate. Inasmuch as NCUA does not currently regulate 
    CUSOs, the Board determined that this concern was not justified.
    
    CUSO Investment in Other Service Providers
    
        Section 712.3(b) limits a CUSO investing in a service provider not 
    meeting the customer base requirement to the minimum amount necessary 
    to provide the service. The NCUA Board does not believe it is necessary 
    to be so restrictive in limiting the amount a CUSO can invest. It 
    proposed limiting the amount to the amount necessary to participate in 
    the service provider or a greater amount if necessary to obtain a 
    reduced price for goods or services.
        All of the commenters but the bank trade group were in support of 
    this added flexibility, and three commenters suggested even greater 
    flexibility. One commenter suggested that FCUs also be permitted to 
    invest in non-CUSO service providers. There is no statutory authority 
    for this type of investment. Another commenter recommended deleting any 
    investment restriction on CUSOs, and a third commenter suggested 
    expanding a CUSO's investment authority up to the amount necessary ``to 
    obtain a board of director position or policy input in the service 
    provider.''
        In contrast, the bank trade group objects to a CUSO having the 
    potential to gain a controlling interest in a non-CUSO service provider 
    and recommends limiting the investment to a passive interest. Its 
    position is that CUSOs should be limited as much as possible because of 
    the tax exempt status of FCUs. The final rule allows CUSOs to invest so 
    that they can provide goods and services to their customers at 
    competitive prices without losing sight of the fact that CUSOs cannot 
    function as an investment vehicle for FCUs to invest in what would 
    otherwise be an impermissible investment. Accordingly, the Board thinks 
    the proposal struck the appropriate balance and has adopted that 
    approach in the final rule.
    
    FCUs Investing in the Debentures of a CUSO
    
        Section 712.2(a) limits an FCU's investment in a CUSO structured as 
    a corporation to the equity of a corporation. Although this provision 
    was intended as a clarification, it has the effect of prohibiting an 
    FCU from investing in the debentures of a CUSO structured as a 
    corporation. The proposal removed this prohibition. The one commenter 
    that specifically referenced this amendment was in support of it.
    
    FCUs Accounting in Accordance With GAAP
    
        The proposed change clarified that generally accepted accounting 
    principles (GAAP) are to be used in accounting for an FCU's investment 
    in and loans to a CUSO both for the regulatory limitations under 
    Sec. 712.2 and the financial statement amounts under Sec. 712.3. 
    However, it does not require divestiture or prohibit future investments 
    if the regulatory limitation is exceeded under the equity method 
    without any additional cash outlay.
        The commenters generally supported this change because ``it 
    maintains consistency in the accounting treatment of CUSOs and avoids 
    the undesired possibility of penalizing success.'' One commenter 
    objected and two commenters had drafting suggestions. The negative 
    commenter maintains that if the investment in the CUSO is less than .5% 
    of total credit union assets, the credit union should be permitted to 
    use aggregate cash outlay since the material effect would be 
    insignificant. However, Sec. 201(a) of the Credit Union Membership 
    Access Act (CUMAA), Pub. L. No. 105-219, 112 Stat. 918 (1998), requires 
    credit unions having assets of $10 million or more to follow GAAP in 
    all reports or statements filed with the Board. 12 U.S.C. 
    1782(a)(6)(C). Therefore, the requirement that all FCUs use GAAP in 
    accounting for their investment and loans to CUSOs is consistent with 
    the new accounting requirements of CUMAA and, even for investments 
    below the regulatory limit will insure that future growth or diminution 
    in the investment are fairly reported in FCU financial statements.
    
    Cyber Financial Services
    
        The NCUA Board also requested comment on Sec. 712.5(d)(8) which 
    lists cyber financial services as a permissible CUSO activity. The 
    Board received thirteen comments on this issue. The preamble to the 
    current rule described cyber financial services as ``credit union 
    member financial services that are analogous to services performed for 
    credit union members in a credit union branch and not unrelated 
    services.'' 63 FR at 10753. The NCUA Board specifically requested 
    comment on the scope of services that should be included within the 
    category of cyber financial services.
        Six of the commenters opposed having a list of specific permissible 
    services because they thought it would be too limiting and, with 
    changing technology, would rapidly become outdated. The Board agrees 
    with these concerns. The Board also agrees that the limitations 
    described in the preamble to the March 1998 rule are too restrictive. 
    The Board's intent is that CUSOs be permitted to provide to credit 
    unions and their members electronic delivery of any permissible CUSO 
    service and electronic delivery of any permissible credit union 
    service.
        Some commenters noted that credit unions need to be able to offer 
    Internet access to their members to market their services effectively 
    and compete in the financial marketplace. Therefore, in addition to 
    allowing CUSOs to provide currently permissible financial services 
    electronically, the Board, similar to a Federal Reserve Board 
    determination, will allow CUSOs to provide FCUs and their members an 
    electronic link to an Internet access provider as part of providing 
    currently permissible financial services electronically. Royal Bank of 
    Canada, Montreal, Canada, et al., Order Approving Notices to Engage in 
    Nonbanking Activities, Federal Reserve Board (December 2, 1996). CUSOs 
    providing Internet access would be limited to providing access through 
    an electronic link to their member credit unions, which in turn would 
    offer Internet access to their members, only as part of a broader 
    package of credit union or financial services. This is an example of an 
    activity that would be considered incidental to permissible cyber 
    financial services.
    
    Group Purchasing
    
        Although comment was not requested on this issue, one commenter 
    suggested that CUSOs be allowed to provide group purchasing for FCU 
    members to the same extent as FCUs under part 721 of NCUA's 
    regulations. Although the
    
    [[Page 33186]]
    
    commenter cites the statutory limitations placed on CUSOs to provide a 
    service that ``relates to the daily operations of the credit unions 
    they serve'' or ``the routine operations of credit unions,'' the 
    commenter ignores the implications of these limitations by arguing that 
    CUSOs should be allowed to market any service provided by a third party 
    vendor. 12 U.S.C. 1757 (5)(D) and (7)(I). The Federal Credit Union Act 
    (Act) prohibits the commenter's broad interpretation of permissible 
    CUSO activities.
    
    Section by Section Analysis
    
        Section 712.2(c) is revised to read: ``A federal credit union may 
    invest in or loan to a CUSO by itself, with other credit unions, or 
    with non-credit union parties.'' This language is substantially the 
    same as the rule prior to the March 1998 revision. In addition, the 
    final rule removes a cross-reference in the current version of 
    Sec. 712.2(c) to Sec. 712.6. Section 712.6 stands on its own to 
    implement the statutory prohibition against using the CUSO authority to 
    acquire control of certain other organizations such as trade 
    associations and other depository institutions. 12 U.S.C. 1757(7)(I).
        Section 712.3(b) of the current rule limits the amount a CUSO can 
    invest in other service providers to the minimum amount necessary to 
    provide the service. The revised language concerning service providers 
    permits CUSO investments in non-CUSO service providers if the 
    investment is limited to the amount necessary to participate in the 
    service provider or a greater amount if necessary to obtain a reduced 
    price for goods or services, for the CUSO, its credit unions, or the 
    credit unions' members. The intent of this provision is to allow a CUSO 
    to invest as much as is necessary to obtain an economic advantage on 
    the goods or services it is receiving. CUSOs would not be permitted to 
    use this provision as independent investment authority.
        NCUA believes it would be clearer for this provision to be set out 
    in that portion of the regulation addressing permissible activities 
    rather than in the section addressing customer base. NCUA is moving 
    this provision from the customer base section of the rule, 
    Sec. 712.3(b), and adding it as a new subsection (p) to Sec. 712.5 
    concerning permissible CUSO activities and services.
        The third change concerns Sec. 712.2(a) of the current rule that 
    limits an FCU's investment in a CUSO structured as a corporation to the 
    equity of the corporation. The preamble to the March 1998 rule explains 
    that this limitation was a clarification. 63 FR at 10745. However, this 
    provision has the effect of prohibiting an FCU from investing in the 
    debentures of a CUSO structured as a corporation, a practice that was 
    previously permissible. NCUA is eliminating this provision because the 
    limitation is more restrictive than the Act, which permits FCUs to 
    invest in the obligations of a CUSO. 12 U.S.C. 1757(7)(I).
        Currently, Sec. 712.2(a) states that an FCU can only invest in a 
    limited partnership as a limited partner. This provision is more 
    related to the permissible structure of a CUSO than permissible 
    investments in a CUSO. NCUA believes this provision would be clearer if 
    it is moved from Sec. 712.2(a) to Sec. 712.3(a). In addition, the 
    provision limiting an FCU's investment in a limited liability company 
    to membership is deleted because it is unnecessary.
        This Board is revising Secs. 712.2 and 712.3 to clarify that GAAP 
    is to be used in accounting for an FCU's investments in and loans to a 
    CUSO both for purposes of accounting for the regulatory limitations 
    under Sec. 712.2 and the financial statement amounts under Sec. 712.3. 
    The final rule does not require divestiture or prohibit future 
    investments if the regulatory limitation is exceeded under the GAAP 
    equity method without any additional cash outlay.
        To accomplish this, new subsections (d) and (e) have been added to 
    Sec. 712.2. Subsection (d) includes the definition of ``paid-in and 
    unimpaired capital and surplus'' that was formerly in subsection (a) 
    and adds the requirement that total investments in and loans to the 
    CUSO be measured consistent with GAAP for regulatory purposes. Section 
    712.3(c) is revised by adding ``for financial reporting purposes'' to 
    the title.
        As explained in the proposal, an example of how the rule will be 
    applied is if an FCU owns 45% of a CUSO and the CUSO has an annual net 
    income of $50,000, the equity method requires an FCU to book a $22,500 
    addition to its ``investments in and loans to CUSO'' asset account. If 
    by doing so, the regulatory limitation is reached or exceeded, NCUA 
    will not require divestiture.
    
    Regulatory Procedures
    
    Regulatory Flexibility Act
    
        The Regulatory Flexibility Act requires NCUA to prepare an analysis 
    to describe any significant economic impact any proposed regulation may 
    have on a substantial number of small entities (primarily those under 1 
    million in assets). The NCUA Board has determined and certifies that 
    the final rule will not have a significant economic impact on a 
    substantial number of small credit unions. The reason for this 
    determination is that the amendments to the rule reduce regulatory 
    burden. Accordingly, the NCUA Board has determined that a Regulatory 
    Flexibility Analysis is not required.
    
    Paperwork Reduction Act
    
        This final rule has no effect on reporting requirements in part 
    712.
    
    Executive Order 12612
    
        Executive Order 12612 requires NCUA to consider the effect of its 
    actions on state interests. The CUSO regulation applies only to FCUs. 
    Thus, the NCUA Board has determined that this rule does not constitute 
    a ``significant regulatory action'' for purposes of the Executive 
    Order. NCUA will continue to work with the state credit union 
    supervisors to achieve shared goals concerning CUSOs with both FCU and 
    state-chartered credit union participation.
    
    Small Business Regulatory Enforcement Fairness Act
    
        The Small Business Regulatory Enforcement Fairness Act of 1996 
    (Pub. L. 104-121) provides generally for congressional review of agency 
    rules. A reporting requirement is triggered in instances where NCUA 
    issues a final rule as defined by Section 551 of the Administrative 
    Procedures Act. 5 U.S.C. 551. The Office of Management and Budget has 
    reviewed this rule and determined that, for purposes of the Small 
    Business Regulatory Enforcement Fairness Act of 1996, this is not a 
    major rule.
    
    List of Subjects
    
    12 CFR Part 703
    
        Credit unions, Investments.
    
    12 CFR Part 712
    
        Administrative practices and procedure, Credit, Credit unions, 
    Investments, Reporting and record keeping requirements.
    
        By the National Credit Union Administration Board on June 14, 
    1999.
    Becky Baker,
    Secretary of the Board.
    
        For the reasons stated in the preamble, the NCUA amends 12 CFR 
    chapter VII as follows:
    
    [[Page 33187]]
    
    PART 703--INVESTMENT AND DEPOSIT ACTIVITIES
    
        1. The authority citation for part 703 will continue to read as 
    follows:
    
        Authority: 12 U.S.C. 1757(7), 1757(8) and 1757(15).
    
    
    Sec. 703.20  [Amended]
    
        2. Section 703.20 is amended in paragraph (c) by revising 
    ``Sec. 701.27'' to read ``part 712.''
    
    PART 712--CREDIT UNION SERVICE ORGANIZATIONS
    
        3. The authority citation for part 712 will continue to read as 
    follows:
    
        Authority: 12 U.S.C. 1756, 1757(5)(D), and (7)(I), 1766, 1782, 
    1784, 1785 and 1786.
    
        4. Amend Sec. 712.2 by revising the section heading, removing the 
    second and third sentences of paragraph (a), revising paragraph (c) and 
    adding paragraphs (d) and (e) to read as follows:
    
    
    Sec. 712.2  How much can an FCU invest in or loan to CUSOs, and what 
    parties may participate?
    
    * * * * *
        (c) Parties. An FCU may invest in or loan to a CUSO by itself, with 
    other credit unions, or with non-credit union parties.
        (d) Measurement for calculating regulatory limitation. For purposes 
    of paragraphs (a) and (b) of this section: paid-in and unimpaired 
    capital and surplus means shares and undivided earnings; and total 
    investments in and total loans to CUSOs will be measured consistent 
    with GAAP.
        (e) Divestiture. If the limitations in paragraph (a) of this 
    section are reached or exceeded because of the profitability of the 
    CUSO and the related GAAP valuation of the investment under the equity 
    method, without an additional cash outlay by the FCU, divestiture is 
    not required. An FCU may continue to invest up to 1% without regard to 
    the increase in the GAAP valuation resulting from a CUSO's 
    profitability.
        5. Amend Sec. 712.3 by adding a new sentence following the first 
    sentence of paragraph (a), by removing the second sentence of paragraph 
    (b) and by revising the title of paragraph (c) to read as follows:
    
    
    Sec. 712.3  What are the characteristics of and what requirements apply 
    to CUSOs?
    
        (a) Structure. * * * An FCU can invest in or loan to a CUSO only if 
    the CUSO is structured as a corporation, limited liability company, or 
    limited partnership. An FCU may only participate in a limited 
    partnership as a limited partner. * * *
    * * * * *
        (c) Federal credit union accounting for financial reporting 
    purposes. * * *
    * * * * *
        6. In Sec. 712.5 add paragraph (p) to read as follows:
    
    
    Sec. 712.5  What activities and service are preapproved for CUSO
    
    * * * * *
        (p) CUSO investments in non-CUSO service providers: In connection 
    with providing a permissible service, a CUSO may invest in a non-CUSO 
    service provider. The amount of the CUSO's investment is limited to the 
    amount necessary to participate in the service provider, or a greater 
    amount if necessary to receive a reduced price for goods or services.
    
    [FR Doc. 99-15650 Filed 6-21-99; 8:45 am]
    BILLING CODE 7535-01-U
    
    
    

Document Information

Effective Date:
7/22/1999
Published:
06/22/1999
Department:
National Credit Union Administration
Entry Type:
Rule
Action:
Final rule.
Document Number:
99-15650
Dates:
This rule is effective July 22, 1999.
Pages:
33184-33187 (4 pages)
PDF File:
99-15650.pdf
CFR: (4)
12 CFR 703.20
12 CFR 712.2
12 CFR 712.3
12 CFR 712.5