Colorado credit union skips CUSO to sell securities

<p>DENVER – In a move charting new regulatory ground, Denver Public Schools Credit Union is rolling out a CUNA Mutual investment/financial planning package this month in which services are sold directly to members rather than through a CUSO. The decision by the $440 million DPSCU to bypass the traditional CUSO “is the first one of its kind that we know of,” said CUNA Mutual and comes amidst heightened industry concern over proposed Securities and Exchange Commission rules undermining commission sharing between CUs and broker/dealers (see related story page 1). CUNA and other industry trade groups have warned that if SEC licensing rules on CUSOs are adopted “hundreds of CUSO investment programs will be disrupted” and 90% of CUs will be prevented from offering investment services to their members. The CUNA Mutual arrangement with Denver Public Schools has been in the works for six months. Last December the credit union was cleared by David L. Paul, state commissioner of financial services, who said the CUNA Mutual contract met “incidental powers” rules for state-chartered CUs. Moreover, the CU in offering “non-deposit investment products and services through an outside vendor” met regulations on the so called “finder activity” with outside vendors, wrote Paul in an opinion letter brought by the CU. “It should be noted that finder activities are explicitly authorized as incidental powers of federal credit unions in Part 721 of NCUA rules which became effective on Sept. 5,” wrote the Colorado commissioner in a December bulletin. Denver Public Schools, in hooking up with CUNA Mutual’s Members Financial package, said it chose to skip a CUSO formation as a cost-saver and to relieve the CU of administrative burdens. A CUSO formation would have involved extra expenses for separate audits, taxes, board and annual meetings, examinations and the like, explained Duane Bruno, vice president of financial services for Denver Public Schools. Many commercial banks, which contract with third parties, often keep investment services and the profits they generate within the bank proper, industry sources pointed out. Commissioner Paul said that since his December opinion he has heard from “maybe half a dozen other credit unions” in the state inquiring about Denver Schools’ approach, with two CUs actually making plans to “work directly through the credit union” on investment services. He declined to identify the CUs, but he said they are based in “metropolitan Denver.” Paul also said since there is no “mandate” in Colorado that investment services go through a CUSO, he believes state-chartered CUs in Colorado would be “largely unaffected” by any SEC action not to extend the license exemption applied to CUSOs under the so-called Chubb Letter of 1993 outlining commission sharing with third parties. But, he said, there could be a problem on existing Colorado CUs running broker/dealer arrangements through a CUSO, and the implications of that are uncertain. “Would we have to unwind the CUSO or would they be grandfathered?” he asked. Bruno said the investment services would be sold by “dual employees” working for CUNA Mutual and the CU. CUNA Mutual would supervise the employees on securities activities while the CU would handle conventional CU duties. As in traditional arrangements, CUNA Mutual would pay the CU fees based on the number of transactions generated, said Bruno. Denver Public Schools is offering the CUNA Mutual services on a “pilot” basis “to interested members” this month and expects to market to the full 33,000-member base by mid-summer. Robert Rusch, CUNA Mutual vice president and general counsel, forecast that other states depending on existing law might indeed follow Colorado’s lead in permitting CUs to sell directly to members in third party arrangements without CUSOs. However, he pointed out that the CUSO framework allows CUs to sell to non-members. Also, a CUSO allows pooling of capital and creates other efficiencies in service delivery. Rusch said he has been in touch with both Denver Public Schools and Paul’s office about the new procedure and said he helped write the Denver CU’s letter to the commissioner. He also has been advising interested CUs in other states. Alan Peppers, president and CEO of Denver Community, said he was “thrilled” by Commissioner Paul’s ruling and described the CUNA Mutual pact as “unique.” -</p> <p>[email protected]</p>