[Federal Register Volume 76, Number 144 (Wednesday, July 27, 2011)]
[Proposed Rules]
[Pages 44866-44872]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-18906]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 712 and 741
RIN 3133-AD93
Credit Union Service Organizations
AGENCY: National Credit Union Administration (NCUA).
ACTION: Proposed rule.
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SUMMARY: NCUA proposes to amend its credit union service organization
(CUSO) regulation to address certain safety and soundness concerns.
Specifically, this proposal expands the requirements of the CUSO
regulation that apply to federally insured state-chartered credit
unions (FISCUs) to include investment limits for FISCUs that are ``less
than adequately capitalized'' and requirements related to accounting
and reporting by CUSOs owned by FISCUs. This proposal also adds two new
requirements that would apply to both federal credit unions (FCUs) and
FISCUs. These new items would include requiring CUSOs to file financial
reports directly with NCUA and the appropriate state supervisory
authority and requiring subsidiary CUSOs to follow all applicable laws
and regulations. Finally, this proposal makes conforming amendments to
NCUA's regulation on the requirements for insurance to address the
items discussed above that apply to FISCUs.
DATES: Comments must be received on or before September 26, 2011.
ADDRESSES: You may submit comments by any of the following methods
(Please send comments by one method only):
NCUA Web Site: http://www.ncua.gov/news/proposed_regs/proposed_regs.html. Follow the instructions for submitting comments.
E-mail: Address to [email protected]. Include ``[Your
name] Comments on Notice of Proposed Rulemaking (CUSO)'' in the e-mail
subject line.
[[Page 44867]]
Fax: (703) 518-6319. Use the subject line described above
for e-mail.
Mail: Address to Mary Rupp, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314-3428.
Hand Delivery/Courier: Same as mail address.
FOR FURTHER INFORMATION CONTACT: Justin M. Anderson, Trial Attorney,
Pamela Yu, Staff Attorney, Office of General Counsel, at the above
address or telephone (703) 518-6540 or Lisa Dolin, Program Officer,
Office of Examination and Insurance, at the above address or telephone
at 703-518-6630.
SUPPLEMENTARY INFORMATION:
A. Background
In 2008, the NCUA Board (the Board) issued a final rule, which,
among other things, made certain provisions of the CUSO regulation
applicable to FISCUs. 73 FR 79312 (December 29, 2008). Specifically,
the final rule required FISCUs to maintain separate corporate
identities with their CUSOs and enter into agreements with CUSOs
stating that the CUSOs would provide open access to their books and
records to NCUA and the applicable state supervisory authority (SSA).
Id. Those provisions had previously only applied to FCUs, but the Board
believed that, to protect the National Credit Union Share Insurance
Fund (NCUSIF), it was necessary to make those requirements applicable
to FISCUs as well. Since the promulgation of the 2008 rule, the Board
has continued to investigate ways to gather complete and accurate
information about credit unions' use of CUSOs and the services those
entities provide. As a result, the Board is proposing this rule, which
as discussed below, makes additional parts of the CUSO rule applicable
to FISCUs, requires CUSOs to file financial reports directly to NCUA
and the appropriate SSA, and addresses subsidiary CUSOs.
B. Proposal
The Board believes additional protections in the CUSO rule,
currently only applicable to FCUs, addressing accounting, financial
statements, and audits should apply to FISCUs as well to protect credit
unions and the NCUSIF.
The Board also believes it is imperative to have complete and
accurate financial information about CUSOs and the nature of their
services to ensure protection of the NCUSIF and to identify emerging
systemic risk posed by CUSOs within the credit union industry. At this
time, the Board, through agreements between credit unions and CUSOs,
maintains the right to inspect the books and records of CUSOs. This,
however, does not provide NCUA with complete information necessary to
evaluate CUSOs and their potential impact to the NCUSIF. As such, the
Board is proposing to require both FISCUs and FCUs to include, in their
agreements with CUSOs, a requirement that a CUSO submit a financial
report directly to NCUA and the appropriate SSA, in the case of a
FISCU, at least annually. As discussed below, NCUA will issue guidance
on the required specific timing of and information contained in these
reports.
The Board is also concerned that ``less than adequately
capitalized'' FISCUs that continue to invest money in a failing CUSO
pose serious risks to their members and the NCUSIF. Accordingly, the
Board is proposing to subject FISCUs to a similar requirement contained
in current Sec. 712.2(d)(3) for FCUs. Specifically, the proposal
limits a ``less than adequately capitalized'' FISCU's aggregate cash
outlay to a CUSO, measured on a cumulative basis, to the permissible
investment limit in the state in which the FISCU is chartered.
Finally, the Board wants to ensure that all requirements in the
CUSO rule also apply to subsidiary CUSOs. For consistency, the Board is
proposing to prohibit FCUs and FISCUs from investing in a CUSO unless
that CUSO's subsidiaries also comply with all of the requirements of
the CUSO rule and/or laws and rules of the state in which the credit
union is chartered, as applicable.
C. Section by Section Analysis
1. 741.222 Requirements for Insurance--Credit Union Service
Organizations
Subpart B of part 741 addresses NCUA regulations that FISCUs must
follow to obtain and maintain federal insurance from NCUA. The specific
section of part 741 amended by this proposal lists those portions of
the CUSO regulation that FISCUs must follow as a condition of federal
insurance. Currently, only two provisions of the CUSO rule apply to
FISCUs: the requirements to maintain separate corporate identities with
their CUSOs and enter into agreements with CUSOs stating that the CUSOs
will provide open access to their books and records to NCUA and the
applicable SSA.
However, the Board believes to protect the NCUSIF it is appropriate
and necessary to make additional sections applicable to FISCUs. As
noted in the 2008 proposed rule, while NCUA has the authority under the
Federal Credit Union Act to impose regulatory requirements on FISCUs,
NCUA's approach has always been to work cooperatively with the SSAs and
only regulate where there are safety and soundness concerns. 73 FR
23983 (May 1, 2008).
In keeping with that approach, and for the reasons noted below, the
Board is proposing to amend Sec. 741.222 of NCUA's regulations to
specify that current Sec. Sec. 712.2(d)(3), 712.3(d), 712.4 and new
Sec. 712.11 apply to FISCUs (as well as FCUs). Each of these sections
is discussed more fully below.
In accordance with the proposed change regarding subsidiary CUSOs,
the Board is also proposing to expand the definition of a CUSO to
include subsidiary CUSOs. As discussed below, a subsidiary CUSO is any
entity in which a CUSO invests. The definition of a subsidiary CUSO,
however, does not extend to outside third parties a CUSO contracts or
otherwise does business with, but is limited only to those entities in
which the CUSO has made an investment.
2. Section 712.1 What does this part cover?
The Board proposes to update this section of the CUSO regulation by
creating three subsections, which retain most of the language from the
current section but also address the changes made in this proposal. The
first subsection will retain most of the current language in Sec.
712.1 and state that Part 712 addresses FCUs making loans and
investments in CUSOs but does not apply to corporate credit unions that
have CUSOs subject to Sec. 704.11.
The second subsection addresses those sections of the regulation
that apply to FCUs as well as FISCUs and reflects the proposed changes
in this rule as well as those sections that currently apply to FISCUs.
Specifically, this subsection would identify Sec. Sec. 712.2(d)(3),
712.3(d), 712.4 and 712.11 as those sections of the CUSO rule that
apply to both FCUs and FISCUs. In addition, this new subsection
contains a clarification that a FISCU must comply with the law in the
state in which it is chartered with respect to any activity that is not
regulated by NCUA. The Board believes that this statement will provide
FISCUs with a better understanding of the interplay between federal and
state laws and when each system applies to a particular activity.
The third subsection added by this proposal would provide that the
term
[[Page 44868]]
``federally insured credit union'' or ``FICU'' means all FCUs and
FISCUs . The Board believes this additional definition will add
conciseness to the rule and is more favorable than repeating the phrase
``FCU and FISCU'' throughout the sections of the CUSO regulation that
apply to both. In conjunction with this change, the Board also proposes
to make modifications to those sections that apply to both FCUs and
FISCUs to use the term ``FICU'' where applicable. The Board believes
the new structure of this section proposed by this rule will add
clarity to the regulation, eliminate confusion, and be more user
friendly.
3. Section 712.2 How much can an FCU invest in or loan to CUSOs, and
what parties may participate?
In the 2008 final rule amending the CUSO regulation, the Board
approved an addition to the regulation that required less than
adequately capitalized FCUs to obtain written approval from the
appropriate regional director before making an investment in a CUSO
that would result in an aggregate cash outlay, measured on a cumulative
basis, in an amount in excess of one percent of the credit union's paid
in and unimpaired capital and surplus. 73 FR 79312 (December 29, 2008).
In the 2008 proposed rule, the Board noted it was aware of credit
unions that had experienced losses because they chose to recapitalize
insolvent CUSOs.
As noted above, this proposed rule adds a similar requirement for
FISCUs that are or would become less than adequately capitalized.
Specifically, this proposed change would require a FISCU to obtain
written approval from the appropriate SSA before making an investment
that would result in an aggregate cash outlay, measured on a cumulative
basis, that exceeds the investment limit in the state in which the
FISCU is chartered, if the FISCU is less than adequately capitalized or
the investment would result in the FISCU being less than adequately
capitalized. In addition to submitting a request to the appropriate
SSA, under this proposal, a less than adequately capitalized FISCU must
also submit its request to the appropriate NCUA Regional Office. While
the SSA will render decisions on such requests, the Board believes it
is important that NCUA's Regional Offices also be made aware of these
requests so these offices can provide appropriate input to the SSAs.
This amendment would minimize the likelihood that a FISCU may be
investing in a CUSO, on an aggregate basis, more than the limit imposed
in the state in which it is chartered and would eliminate the
possibility of a FISCU becoming under capitalized because of its
investment in a CUSO. This amendment would also prevent a FISCU from
continuing to invest in an entity that has become unsustainable. As
noted above, the limit for FISCUs would be the investment limit in the
state in which the credit union is chartered. If the state does not
regulate the investment limit for FISCUs, however, the 1% limit
applicable to FCUs will apply. The Board notes that this amendment
would not require a less than adequately capitalized FISCU to divest in
a CUSO. Rather, a less than adequately capitalized FISCU may maintain
its existing investment but cannot make additional investments without
prior written concurrence from the appropriate SSA.
4. Section 712.3 What are the characteristics of and what requirements
apply to CUSOs?
The Board is proposing to expand the scope of subsection (d) of
this section to apply to FISCUs as well as FCUs. As noted above, in
2008 the Board approved final amendments to this section that required
FISCUs to comply with the requirements addressing access to a CUSO's
books and records. 73 FR 79312 (December 29, 2008). The Board noted in
2008 that FISCUs are exposed to significant potential safety and
soundness and reputation risks based on their relationships with CUSOs.
While NCUA currently has the ability to examine the books and records
of a CUSO owned by a FISCU, this does not allow the agency to gather
all of the information necessary to ensure a uniform system of
monitoring and evaluation of the financial condition of CUSOs invested
in or loaned to by FISCUs. As such the Board is proposing to have the
remaining subsections of Sec. 712.3(d) also apply to FISCUs. These
remaining subsections necessitate a credit union's agreement with a
CUSO to require the CUSO to account for all of its transactions
according to Generally Accepted Accounting Principles (GAAP), prepare
quarterly financial statements, and obtain an annual financial
statement audit of its financial statements by a licensed certified
public accountant. These requirements will ensure NCUA will be able to
clearly and uniformly review the financial condition of CUSOs and
evaluate the risks posed to FISCUs and the NCUSIF. While these
requirements will greatly increase the ability and efficiency of NCUA's
monitoring of CUSOs, as discussed below, these requirements do not
provide all of the information necessary to adequately evaluate CUSOs.
As such, the Board is also proposing a new subsection that states that
an FCU's or FISCU's written agreement with its CUSO further requires
the CUSO to submit financial reports directly to NCUA and, in the case
of a CUSO invested in by a FISCU, NCUA and the appropriate SSA.
Currently, the information NCUA has been able to compile on CUSOs
is incomplete and flawed, as the agency is attempting to gather
pertinent information from customer credit unions rather than directly
from the CUSO. The Board notes that without further reporting directly
from CUSOs, it is impossible for NCUA to determine which CUSOs maintain
relationships with credit unions, the financial condition of CUSOs, and
the full range of service those entities are offering. This lack of
information restricts NCUA's ability to conduct offsite monitoring and
evaluate the systemic risks posed by CUSOs. This new requirement will
allow NCUA to collect uniform information directly from all CUSOs,
which will allow the agency to adequately evaluate the relationships
between CUSOs and credit unions and the systemic risk posed by those
relationships. As discussed below, the information required in the
reports will be comprehensive to allow NCUA to obtain a clear picture
of, not only relationships between CUSOs and credit unions, but also
the structure of CUSOs, the services they offer, and their financial
condition.
The reporting addressed in this proposed new subsection will be
required at least annually and will address five broad categories,
which are summarized in the following table:
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Category Examples of required information
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General Information............................ EIN of CUSO, state of incorporation, date of incorporation,
date of most recent audit, subsidiary information, disaster
recovery plans and testing, and headquarters and branch
locations.
[[Page 44869]]
Board and Management........................... Contact information for each board member, affiliated credit
union, and their position at their credit union.
Services....................................... List of services offered.
Customer Listing............................... List of clients by charter number, name, service, and level of
activity.
Balance Sheet and Income Statement............. Balance sheet, income statement, capital structure by credit
union and amount, unfunded commitments, contingent
liabilities, borrowings, investments, audits, and loan
activity.
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While the table above provides examples of required information,
NCUA will publish guidance on the report, providing specific
information on the correct format, timing, and required information.
The Board believes it is important to issue guidance on the specifics
of the reporting to preserve maximum flexibility for the agency to
adjust its information gathering to the changes in the ways in which
CUSOs operate and conduct business. As such, the regulatory text of
this proposal contains the five broad categories above and a
requirement that the reports be filed at least annually, rather than a
list of required information and a set time frame for reporting. In
addition to general reporting period for all CUSOs, the Board is also
proposing to require newly formed CUSOs to file the report addressed in
this section within 30 days after its formation. The Board believes
this reporting requirement for new CUSOs will bridge any potential gaps
between the formation of a CUSO and the annual reporting date and will
allow NCUA to allocate resources in preparation for CUSO reviews that
will happen in the following year. For purposes of this reporting
requirement, the definition of ``newly formed CUSO'' includes a newly
established business or an established business that becomes subject to
this regulation by virtue of a credit union's investment or loan to the
business.
The Board believes that applying the current requirements in this
section of the regulation to FISCUs as well as the addition of the new
requirement regarding financial reporting of all CUSOs will allow NCUA
to obtain accurate information on the CUSO industry and better evaluate
the risks posed to credit unions and the NCUSIF. The ability to
accurately inventory CUSOs and evaluate their financial condition is
paramount to mitigating risk to the credit union industry as a whole.
Transition Period for Compliance
The Board recognizes that FISCUs and FCUs with loans to or
investments in CUSOs will be required under this proposal to make
changes in the agreements they currently have with their CUSOs. The
Board proposes to establish a compliance date for these changes that is
not earlier than six months following the date of publication of the
final rule in the Federal Register.
5. 712.9 When must an FCU comply with this part?
This section currently states that FCUs must comply with the CUSO
regulation by April 1, 2001 unless certain conditions are met. The
Board recognizes that this section is outdated, and is proposing to
delete and reserve this section for future use.
6. 712.10 How can a state supervisory authority obtain an exemption for
FISCUs from compliance with Sec. 712.3(d)?
The Board is aware that some states may already have rules or
requirements that govern financial reporting, audits, and accounting
practices of FISCUs and their CUSOs. In line with the changes made in
2008, the Board is proposing to expand Sec. 712.10 to allow SSAs to
obtain an exemption from compliance with certain provisions of Sec.
712.3(d). These proposed changes do not alter the way in which an SSA
can obtain an exemption, but merely make changes that take into account
the amendments made to Sec. 712.3(d) in this proposal. As stated in
the current regulation, an SSA may obtain an exemption by demonstrating
that compliance with an existing state rule adequately addresses NCUA's
concerns. See current Sec. 712.10(b). The proposed changes would
merely expand that section to allow an SSA to obtain an exemption from
the requirements of Sec. Sec. 712.3(d)(1), (2), and (3), provided the
state rules or laws address NCUA's concerns with the financial
conditions of CUSOs present in the context of this section of the CUSO
regulation. This section, however, would not allow an SSA to apply for
an exemption from the financial reporting requirement in Sec.
712.3(d)(4). As noted above, it is imperative that NCUA maintain
complete and accurate information on CUSOs and their relationships with
FCUs and FISCUs. The Board is concerned that allowing an exemption from
this requirement would result in inconsistent reporting based on the
varying laws in the different states. Inconsistent information and
reporting formats will impede NCUA's ability to accurately evaluate
systemic risk posed by CUSOs.
7. 712.11 What requirements apply to subsidiary CUSOs?
The Board is proposing to add a new section to the CUSO regulation,
applicable to both FCUs and FISCUs, prohibiting a credit union from
investing in a CUSO unless all subsidiaries of the CUSO also follow all
applicable laws and regulations. The treatment of CUSOs with
subsidiaries was previously addressed in the preamble to a 1997 rule
amending the CUSO regulation, but was never included in regulatory
text. In the preamble to the 1997 proposed rule, the Board stated that
the CUSO rule applies to all levels or tiers of a CUSO's structure and
any entity in which a CUSO invests will also be treated as a CUSO and
subject to the CUSO regulation. 62 FR 11781 (March 13, 1997). The Board
believes it is appropriate at this time to include the requirement
articulated in the 1997 preamble into the text of the regulation to
ensure credit unions and CUSOs are aware that the requirements of the
CUSO rule and applicable state rules apply to all entities in which a
CUSO invests. This requirement will only apply to entities in which a
CUSO invests and will not apply to third parties with whom a CUSO
contracts or otherwise does business. The Board believes without this
change there is an inherent risk that a subsidiary CUSO could
negatively impact the investing credit union and ultimately the NCUSIF.
As noted above, the Board is also proposing to expand the definition of
a CUSO in Sec. 741.222 to include entities in which a CUSO invests.
Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires NCUA to prepare an
analysis to describe any significant economic impact any proposed
regulation may have on a substantial number of small entities. NCUA
considers credit unions
[[Page 44870]]
having less than ten million dollars in assets to be small for purposes
of RFA. Interpretive Ruling and Policy Statement (IRPS) 87-2 as amended
by IRPS 03-2. The proposed changes to the CUSO rule impose minimal
compliance obligations by requiring credit unions to comply with
certain regulatory requirements concerning agreements with CUSOs and
investment limits. NCUA has determined and certifies that the final
rule will not have a significant economic impact on a substantial
number of small credit unions. Accordingly, the NCUA has determined
that an RFA analysis is not required.
Paperwork Reduction Act
NCUA recognizes that this proposal requires FISCUs and FCUs to
comply with certain requirements that constitute an information
collection within the meaning of the Paperwork Reduction Act (PRA). 44
U.S.C. 3507(d). First, under this proposal, FISCUs with an investment
in or loan to a CUSO will need to revise the current agreement they
have with their CUSO to provide that the CUSO will account for all its
transactions in accordance with GAAP, prepare quarterly financial
statements and obtain an annual financial statement audit of its
financial statements by a licensed certified public accountant, and
submit a financial report directly to NCUA. According to NCUA records,
of the 2,750 FISCUs that filed a form 5300 call report with NCUA as of
December 31, 2010, 988 reported at least one interest in a CUSO; a
total of 1,708 CUSO interests was reported. For purposes of this
analysis, NCUA estimates that this requirement will affect all FISCUs
reporting an interest in a CUSO. Using these estimates, information
collection obligations imposed by this aspect of the rule, on an annual
basis, are analyzed below:
Changing the written agreement relating to certain accounting and
reporting requirements.
FISCUs with a reported interest in a CUSO, 12/31/2010: 988.
Frequency of response: one-time.
Initial hour burden: 1.
1 hour x 988 = 988.
In addition to the requirement for FISCUs to revise their
agreements with CUSOs, this proposal also requires FCUs with an
investment in or loan to a CUSO to revise the current agreement they
have with their CUSO to provide that the CUSO submit a financial report
directly to NCUA. According to NCUA records, of the 4,589 FCUs that
filed a form 5300 call report with NCUA as of December 31, 2010, 1,097
reported at least one interest in a CUSO; a total of 1,857 CUSO
interests was reported. For purposes of this analysis, NCUA estimates
that this requirement will affect all FCUs with a reported interest in
a CUSO. Using these estimates, information collection obligations
imposed by this aspect of the rule, on an annual basis, are analyzed
below:
Changing the written agreement relating to financial reports to
NCUA.
FCUs with a reported interest in a CUSO, 12/31/2010: 1,097.
Frequency of response: One-time.
Initial hour burden: 1.
1 hour x 1,097 = 1,097.
The final aspect of this proposal that involves PRA consideration
is the requirement pertaining to recapitalizing CUSOs that have become
insolvent. The proposed rule would require certain FISCUs to seek and
obtain prior approval from their state supervisory authority before
making an investment to recapitalize an insolvent CUSO. According to
NCUA's records, as of December 31, 2010, there were only 53 FISCUs that
were less than adequately capitalized (i.e., net worth of under 6%).
According to year-end 2010 call report data, 31 of these FISCUs
currently have an interest in a CUSO. NCUA estimates it would take a
FISCU approximately two hours to complete a request for the SSA's prior
approval for an investment to recapitalize an insolvent CUSO.
Obtaining regulatory approval:
Total less than adequately capitalized FISCUs with an interest in a
CUSO, 12/31/2010: 31.
Frequency of response: One-time.
Initial hour burden: 2.
2 hours x 31 = 62.
In accordance with the requirements of the PRA, NCUA intends to
obtain a modification of its current OMB Control Number, 3133-0149, to
support these proposed changes. Simultaneous with its publication of
this proposed amendment to part 712, NCUA is submitting a copy of the
proposed rule to the Office of Management and Budget (OMB) along with
an application for a modification of the OMB Control Number. The PRA
and OMB regulations require that the public be provided an opportunity
to comment on the paperwork requirements, including an agency's
estimate of the burden of the paperwork requirements. The NCUA Board
invites comment on: (1) Whether the paperwork requirements are
necessary; (2) the accuracy of NCUA's estimates on the burden of the
paperwork requirements; (3) ways to enhance the quality, utility, and
clarity of the paperwork requirements; and (4) ways to minimize the
burden of the paperwork requirements.
Comments should be sent to: OMB Reports Management Branch, New
Executive Office Building, Room 10202, Washington, DC 20503. Please
send NCUA a copy of any comments submitted to OMB.
Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. In
adherence to fundamental federalism principles, NCUA, an independent
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies
with the executive order. The major aspects of the rule make certain
aspects applicable to state chartered, federally-insured credit unions.
By law, these institutions are already subject to numerous provisions
of NCUA's rules, based on the agency's role as the insurer of member
share accounts and the significant interest NCUA has in the safety and
soundness of their operations. In developing the proposal, NCUA worked
with representatives of the state credit union regulatory community.
This proposed rule incorporates a mechanism by which states may request
an exemption from coverage of part of the rule for institutions in that
state, provided certain criteria are met. In any event, the proposed
rule will not have substantial direct effects on the states, on the
relationship between the national government and the states, or on the
distribution of power and responsibilities among the various levels of
government. NCUA has determined that this proposal does not constitute
a policy that has federalism implications for purposes of the executive
order.
The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this proposed rule will not affect
family well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999, Public Law 105-277, 112
Stat. 2681 (1998).
Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement 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 Procedure
Act. 5 U.S.C. 551. NCUA does not believe, and will
[[Page 44871]]
seek concurrence from the Office of Management and budget, that this
rule is not a major rule for purposes of the Small Business Regulatory
Enforcement Fairness Act of 1996.
List of Subjects in 12 CFR Parts 712 and 741
Administrative practices and procedure, credit, credit unions,
insurance, investments, reporting, and record keeping requirements.
By the National Credit Union Administration Board on July 21,
2011.
Mary F. Rupp,
Secretary of the Board.
Accordingly, NCUA amends 12 CFR parts 712 and 741 as follows:
PART 712--CREDIT UNION SERVICE ORGANIZATIONS (CUSOs)
1. Revise the authority citation for part 712 to read as follows:
Authority: 12 U.S.C. 1756, 1757(5)(D), and (7)(I), 1766,
1781(b)(9), 1782, 1784, 1785, 1786 and 1789(11).
2. Revise Sec. 712.1 to read as follows:
Sec. 712.1 What does this part cover?
(a) This part establishes when a Federal Credit Union (FCU) can
invest in and make loans to CUSOs. CUSOs are subject to review by NCUA.
This part does not apply to corporate credit unions that have CUSOs
subject to Sec. 704.11 of this chapter.
(b) Sections 712.2 (d)(3), 712.3(d), 712.4 and 712.11 of this part
apply to federally insured state-chartered credit unions (FISCUs), as
provided in Sec. 741.222 of this chapter. All other sections of this
part only apply to FCUs. FISCUs must follow the law in the state in
which they are chartered with respect to the sections in this part that
only apply to FCUs.
(c) As used in Sec. Sec. 712.2 (d)(3), 712.3(d), 712.4, 712.10,
and 712.11 of this part, federally insured credit union (FICU) means an
FCU or FISCU.
3. Revise Sec. 712.2(d)(3) to read as follows:
Sec. 712.2 How much can an FCU invest in or loan to CUSOs, and what
parties may participate?
* * * * *
(d) * * *
(3) Special rule in the case of less than adequately capitalized
FICUs. This rule applies in the case of a FICU that is currently less
than adequately capitalized, as determined under part 702, or where the
making of an investment in a CUSO would render the FICU less than
adequately capitalized under part 702. Before making an investment in a
CUSO:
(i) An FCU must obtain prior written approval from the appropriate
NCUA regional office if the making of the investment would result in an
aggregate cash outlay, measured on a cumulative basis (regardless of
how the investment is valued for accounting purposes) in an amount that
is in excess of 1% of its paid in and unimpaired capital and surplus;
or
(ii) A FISCU must obtain prior written approval from the
appropriate state supervisory authority if the making of the investment
would result in an aggregate cash outlay, measured on a cumulative
basis (regardless of how the investment is valued for accounting
purposes) in an amount that is in excess of the investment limit in the
state in which it is chartered. A FISCU must also, and at the same
time, submit a copy of its request for prior written approval to the
appropriate NCUA Regional Office. If there is no state limit in the
state in which a FISCU is chartered, the requirements in subsection
(d)(3)(i) of this section will apply.
* * * * *
4. Revise Sec. 712.3(d) to read as follows:
Sec. 712.3 What are the characteristics of and what requirements
apply to CUSOs?
* * * * *
(d) CUSO accounting; audits and financial statements; NCUA access
to information. A FICU must obtain written agreements from a CUSO
before investing in or lending to the CUSO that the CUSO will:
(1) Account for all of its transactions in accordance with GAAP;
(2) Prepare quarterly financial statements and obtain an annual
financial statement audit of its financial statements by a licensed
certified public accountant in accordance with generally accepted
auditing standards. A wholly owned CUSO is not required to obtain a
separate annual financial statement audit if it is included in the
annual consolidated financial statement audit of the FICU that is its
parent;
(3) Provide NCUA, its representatives, and the state credit union
regulatory authority having jurisdiction over any FISCU with an
outstanding loan to, investment in or contractual agreement for
products or services with the CUSO with complete access to any books
and records of the CUSO and the ability to review the CUSO's internal
controls, as deemed necessary by NCUA or the state credit union
regulatory authority in carrying out their respective responsibilities
under the Act and the relevant state credit union statute.
(4) Submit a financial report directly to NCUA and the appropriate
state supervisory authority, if applicable. Pursuant to guidance duly
adopted by the NCUA Board, a CUSO must submit a financial report at
least annually, except in the case of a newly formed CUSO (including a
pre-existing business which becomes subject to this regulation by
virtue of a credit union investment or loan), which must file a
financial report within 30 days of its formation, and the financial
report must contain:
(i) General information about the CUSO;
(ii) A list of services;
(iii) A customer list;
(iv) Information on the CUSO's board and management; and
(v) Balance sheet and income information.
* * * * *
5. Revise Sec. 712.4 to read as follows:
Sec. 712.4 What must a FICU and a CUSO do to maintain separate
corporate identities?
(a) Corporate separateness. A FICU and a CUSO must be operated in a
manner that demonstrates to the public the separate corporate existence
of the FICU and the CUSO. Good business practices dictate that each
must operate so that:
(1) Its respective business transactions, accounts, and records are
not intermingled;
(2) Each observes the formalities of its separate corporate
procedures;
(3) Each is adequately financed as a separate unit in the light of
normal obligations reasonably foreseeable in a business of its size and
character;
(4) Each is held out to the public as a separate enterprise;
(5) The FICU does not dominate the CUSO to the extent that the CUSO
is treated as a department of the FICU; and
(6) Unless the FICU has guaranteed a loan obtained by the CUSO, all
borrowings by the CUSO indicate that the FICU is not liable.
(b) Legal opinion. Prior to a FICU investing in a CUSO, the FICU
must obtain written legal advice as to whether the CUSO is established
in a manner that will limit potential exposure of the FICU to no more
than the loss of funds invested in, or lent to, the CUSO. In addition,
if a CUSO in which an FICU has an investment plans to change its
structure under Sec. 712.3(a), a FICU must also obtain prior, written
legal advice that the CUSO will remain established in a manner that
will limit potential exposure of the CU to no more than the loss of
funds invested in, or loaned to, the CUSO. The legal advice must
address factors that have led courts to ``pierce the corporate veil''
such as inadequate capitalization, lack of
[[Page 44872]]
separate corporate identity, common boards of directors and employees,
control of one entity over another, and lack of separate books and
records. The legal advice may be provided by independent legal counsel
of the investing FICU or the CUSO.
Sec. 712.9 [Removed and Reserved]
6. Remove and reserve Sec. 712.9
7. Revise Sec. 712.10 to read as follows:
Sec. 712.10 How can a state supervisory authority obtain an exemption
for FISCUs from compliance with Sec. 712.3(d)?
(a) The NCUA Board may exempt FISCUs in a given state from
compliance with Sec. Sec. 712.3(d)(1), (2), and (3) if the NCUA Board
determines the laws and procedures available to the supervisory
authority in that state are sufficient to provide NCUA with the degree
of access and information it believes is necessary to evaluate the
safety and soundness of FICUs having business relationships with CUSOs
owned by FISCUs in that state.
(b) To obtain the exemption, the state supervisory authority must
submit a copy of the legal authority pursuant to which it secures the
information required in Sec. Sec. 712.3(d)(1), (2), and (3) of this
part to NCUA's regional office having responsibility for that state,
along with all procedural and operational documentation supporting and
describing the actual practices by which it implements and exercises
the authority.
(c) The state supervisory authority must provide the regional
director with an assurance that NCUA examiners will be provided with
co-extensive authority and will be allowed direct access to CUSO books
and records at such times as NCUA, in its sole discretion, may
determine necessary or appropriate. For purposes of this section,
access includes the right to make and retain copies of any CUSO record,
as to which NCUA will accord the same level of control and
confidentiality that it uses with respect to all other examination-
related materials it obtains in the course of its duties.
(d) The state supervisory authority must also provide the regional
director with an assurance that NCUA, upon request, will have access to
copies of any financial statements or reports, which a CUSO has
provided to the state supervisory authority.
(e) The regional director will review the applicable authority,
procedures and assurances and forward the exemption request, along with
the regional director's recommendation, to the NCUA Board for a final
determination.
(f) For purposes of this section, whether an entity is a CUSO shall
be determined in accordance with the definition set out in Sec.
741.222 of this chapter.
8. Add Sec. 712.11 to read as follows:
712.11 What requirements apply to subsidiary CUSOs?
(a) FCUs investing in a CUSO that invests in a CUSO. The
requirements of this part apply to all tiers or levels of a CUSO's
structure and FCUs may only invest in or loan to a CUSO, which has an
investment in another CUSO, if the subsidiary CUSO satisfies all of the
requirements of this part.
(b) FISCUs investing in a CUSO that invests in a CUSO. FISCUs may
only invest in or loan to a CUSO, which has an investment in another
CUSO, if the subsidiary CUSO complies with the following:
(1) All of the requirements of this part that apply to FISCUs,
which are listed in Sec. 712.1; and
(2) All applicable state laws and rules regarding CUSOs.
(c) For purposes of this section, a subsidiary CUSO is any entity
in which a CUSO invests.
PART 741--REQUIREMENTS FOR INSURANCE
1. The authority citation for part 741 continues to read as
follows:
Authority: 12 U.S.C. 1757, 1766(a), 1781-1790, and 1790d; 31
U.S.C. 3717.
2. Revise Sec. 741.222 to read as follows:
Sec. 741.222. Credit Union Service Organizations.
(a) Any credit union that is insured pursuant to Title II of the
Act must adhere to the requirements in Sec. Sec. 712.2 (d)(3),
712.3(d), 712.4 and 712.11 of this chapter concerning permissible
investment limits for less than adequately capitalized credit unions,
agreements between credit unions and their credit union service
organizations (CUSOs), the requirement to maintain separate corporate
identities, and investments and loans to CUSOs investing in other
CUSOs. For purposes of this section, a CUSO is any entity in which a
credit union has an ownership interest or to which a credit union has
extended a loan and that is engaged primarily in providing products or
services to credit unions or credit union members, or, in the case of
checking and currency services, including check cashing services, sale
of negotiable checks, money orders, and electronic transaction
services, including international and domestic electronic fund
transfers, to persons eligible for membership in any credit union
having a loan, investment or contract with the entity. A CUSO also
includes any entity in which a CUSO invests.
(b) This section shall have no preemptive effect with respect to
the laws or rules of any state providing for access to CUSO books and
records or CUSO examination by credit union regulatory authorities.
[FR Doc. 2011-18906 Filed 7-26-11; 8:45 am]
BILLING CODE 7535-01-P