Evangelical Christian CU Amazed at Wider Net Cast by SEC Through Broker-Dealer Exemption Proposal

ANAHEIM, Calif. – The industry is still buzzing about the anticipation of an SEC rule adoption that opens the door for credit unions to engage in certain transactions without having to register with or as a broker dealer. While that new regulation could come as early as December, it would not take effect until Jan. 2006, according to the SEC, which will continue to review comment letters until Aug. 2. The SEC’s proposed rule would allow credit unions to provide onsite or electronic registered broker services for members and earn a percentage of the resulting commissions; set up arrangements to sweep funds in member share accounts into and out of no-load money market mutual funds; and buy and sell securities for their own accounts and as fiduciaries for their members. At the forefront of at least one of the areas – sweep accounts – has been $569 million Evangelical Christian Credit Union (ECCU), which sought relief from the SEC as far back as December 2000 asking the Commission for the ability to bypass a broker-dealer “middleman.” In July 2002, the credit union announced it would offer a sweep product to its faith-based member organizations through Federated Investors, Inc. At the time, ECCU planned to transition from Federated and offer the service directly should the SEC grant its request. Today, the relationship with Federated is still intact but no one could have imagined credit unions would even be considered in the 11 exemptions the SEC has recently extended to them, said Mark Jones, ECCU vice president of enterprise application and product management. “This is quite significant authority, it goes way beyond sweep accounts, Jones said. “In essence, (it) has changed the fundamental definition of what a bank is.” Jones said this “huge gain” may call for changes in credit unions’ systems, most which don’t have a sweep functionality. Meanwhile, the low interest rate environment has hammered ECCU’s sweep product with most members using them for automation rather than actual sweeping of funds. “Rates have hit historical lows so we’ve had limited success,” Jones said. “We’re about 150 basis points away” from an interest rate scenario when the product will become more popular, he predicted. Jones said ECCU plans to submit an additional comment letter to the SEC on sweep accounts. The three areas of significance to credit unions are occurring in some fashion today, said Kevin Thompson, associate general counsel for CUNA Mutual Group. Clarifications rather that permission were sought from the SEC through a no-action letter from CUNA last year on networking arrangements as well as with sweep accounts led by ECCU. Fiduciary relationships also needed clarity, Thompson said. CUNA is still waiting on a response from the SEC on that no-action letter, he added. Indeed, CUNA has been working with the SEC to protect credit unions and their credit union service organizations which had developed networking arrangements subsequent to NCUA’s letter 150 but which SEC has questioned in light of the Gramm-Leach-Bliley amendments. “The newest area for credit unions will be in the trust areas,” Thompson said. “The proposal is about 150 pages long. If you peel back the layers, there will be other areas of note for credit unions.” The culmination of the inclusion of credit unions comes from more than three years of open communication lines with the SEC, Thompson said. CUNA has been working with the SEC on these securities related issues under the auspices of the CUNA Brokerage Activities Task Force (BATForce). The BATForce, which includes representatives from CUNA Mutual, NAFCU, several credit unions and a credit union-owned broker dealer, worked with the SEC as well as the NCUA to advance and protect credit unions’ capabilities to engage in certain brokerage activities. Mark Allen, president/CEO of XCU Capital and a member of BATForce, says credit unions are already starting to move investment program back in house. Over the last two years, he’s noticed that XCU Capital’s newest credit unions clients have moved toward managed programs with the smaller to medium-sized ones moving away from customized solutions. “Over the long term, integrating back into the credit union will be a positive step,” Allen said, adding should the SEC proposal be adopted, it won’t be seen as a threat to the more than 80 relationships the credit-union owned broker provides services for. “This is a huge development,” Thompson said. “There is receptivity from the SEC. They want to understand how credit unions work. Our voices are being heard.” [email protected]