Firm helps navigate broker-dealer waters while SEC decides fate of license exemption

SAN DIEGO – As credit unions await the U.S. Securities and Exchange Commission decision on whether an exemption will be extended that would circumvent CUSOs not having to be licensed to conduct broker-dealer transactions, one firm is already laying the groundwork. CUSO Financial Services (CFS) recently launched BD Build, an all-encompassing product that helps CUSOs become licensed broker-dealers complete with outsourcing solutions. The entire package includes handling the complexities of registering with the SEC, National Association of Securities Dealers (NASD), Municipal Securities Rulemaking Board (MSRB) and regulatory agencies on the state level. “Pending SEC regulations are threatening the CUSO’s ability to share in commission revenues from the sales of investment products unless they are licensed and registered with the SEC,” said Valorie Seyfert, CFS’s president. The momentum for being exempt began to shape nearly two years ago with industry proponents including NCUA writing the SEC to support the exception pointing out that the agency’s “regulatory oversight and enforcement powers should alleviate any residual investor protection concerns the Commission might have.” Section 15(a)(1) of the Securities Exchange Act of 1934 generally requires any broker or dealer who “makes use of the mails or any instrumentality of interstate commerce to effect transactions in, or induce the purchase or sale of, any security” to register with the regulator. In 2000, Evangelical Christian Credit Union began petitioning the SEC for the ability to offer sweep investment accounts without having to register as a broker-dealer. In July, the credit union said it would roll out a sweep product to its 26,000 members in 50 states and 100 countries with the understanding that should the SEC rule in favor of credit unions, Evangelical would transition from a broker-dealer relationship and offer the service directly. The credit union selected Federated Investors, Inc. to offer the Treasury Obligations Fund and the Prime Obligations Fund. Meanwhile, BD Build was unveiled at the National Association of Credit Union Services Organization in Toronto on Sept. 18 to much fanfare, Seyfert said. Both Seyfert and Amy Beattie, CFS’s co-founder and COO have 17 years and 25 years respectively in the broker-dealer business working as legal counsel and investment advisors. “Credit unions have struggled to be successful with investment business over the past three years,” Seyfert said. “Some cutting-edge credit unions have put a lot of focus, marketing resources and training to make programs work. Having a choice will be critical to continuing their strategy.” Should the SEC decide against the licensing exemption, Seyfert said CUSOs will have a couple of options. “They can bring their investment programs back into the credit union, or the program can remain in the CUSO, which would require the CUSO to become a broker-dealer by, at a minimum, registering with the SEC, the NASD and applicable state securities regulators.” She pointed out the “expensive and cumbersome” process the latter option would be adding that should the SEC decide not to extend the exemption, she hopes credit unions won’t pull back on their investment programs. Having a choice alleviates concerns from those credit unions “that are not comfortable with taking revenue from their investments into the credit union.” Others see liability as a fear, wanting to keep an investment program at arm’s length through the CUSO. The program typically takes between four to six months to meet the application requirements of the various regulatory agencies. From there, services are customized to the credit union’s needs CFS is also offering an outsourcing solution to handle some of the functions associated with CUSOs’ investment programs such as technology, products, back office expertise and systems to operate the BD without having to build it themselves. As part of the outsourcing solution, CFS will also provide staff and continuing education training, compliance and licensing, and financial record keeping. BD Build allows credit unions to choose a “full operating agreement” that covers all operations and trading functions and allows the CUSOs to concentrate on their core business of providing investment advice and service to members. Seyfert cautions that the program may not be for every credit union. “It’s a very complex process that requires licenses, net capital and filing with the SEC to be sure that you maintain that capital, dealing with customer complaints, compliance and what happens when the market crashes,” Seyfert said. “There a lot of issues that, unfortunately, some CUSOs are not positioned to handle.” -