NACUSO Presses on with CUSO Inclusion in SEC Broker/Dealer Exemptions Three Years After Incidental Powers Revisions

NEWPORT BEACH, Calif. – As the industry waits for final SEC rules on broker/dealer exemptions to credit unions, NACUSO continues to make its case for the inclusion of CUSOs in the regulator’s language. Many of NACUSO’s members have expressed an interest in continuing to enable CUSOs to enter into networking agreements, an exemption that has not been extended to CUSOs, said Bob Dorsa, NACUSO’s president. As proposed, the SEC’s Regulation B may provide onsite or electronic registered broker services for members and earn a percentage of the resulting commissions through networking arrangements with credit unions; 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. “Although the proposal would grant credit unions these three exceptions, it would not automatically give them any associated exemptions given to banks in the future,” NACUSO said in a regulatory alert to its members. “Moreover, the proposal does not grant credit unions all the exceptions that banks currently have.” Dorsa said the CUSO exclusion from the SEC proposal goes back a few years during the revising of incidental powers to credit unions, which he said “sealed the fate for CUSOs. “At the heart of this is a statement from NCUA that the SEC picked up on which was (NCUA) does not directly oversee CUSOs, which is true,” Dorsa said. “A credit union forming a CUSO agrees to provide NCUA access to (the CUSO’s) books and records. This validates NCUA’s position that they do not regulate CUSOs.” Since then, NACUSO has been “going back and forth” with the SEC to have CUSOs included in the exemption language. A no-action “Chubb” letter from the SEC allowed credit unions to enter into networking arrangements with broker-dealers under certain conditions but again, CUSOs were not included, Dorsa pointed out. The Chubb letter refers to a 1993 SEC letter from Catherine McGuire, Chief Counsel, SEC Division of Market Regulation, to Chubb Securities Corp. that authorized banks, thrifts, and credit unions to enter into third-party brokerage arrangements under certain conditions without the financial institution having to register. It also said a “required service corporation” involved in such arrangements did not have to register. NCUA’s Dec. 1993 Letter to Credit Unions No. 150 recognized that CUSOs may participate with a credit union and a broker in such arrangements. Although it did not specifically address the necessity of registration with the SEC, it stated generally that credit unions must comply with all laws and regulations applicable to the activity. NCUA Associate General Counsel Sheila Albin wrote “we understand that various CUSOs engaged in third-party brokerage arrangements have considered themselves to be `required service corporations’ and have relied on the Chubb letter to avoid SEC registration The basis for the conclusion was that a CUSO was `required’ in order for a credit union to earn income from the arrangement because of the previous limitation on compensation in Part 721. Our understanding is that SEC staff also held this view.” After consulting with SEC staff about the elimination of the compensation limit in Part 721, the SEC “now questions whether CUSOs are still required service corporations, as that phrase is used in the Chubb letter, and whether CUSOs may continue to rely on the Chubb letter to avoid registration,” Albin wrote. Guy Messick, NACUSO’s general counsel, wrote that May 24, 2002 letter to NCUA asking how CUSOs would be affected by the regulator’s revision of incidental power activities, which had taken place the year before. Messick is also on CUNA’s Brokerage Activities Task Force, which has been working with the SEC for three years on inclusion issues. “We have sat across the table from the SEC and they genuinely want credit unions to be included as entities” in networking arrangements, Messick said. “NCUA can still control what happens. If the SEC can take another look at CUSOs, they’ll find that they are operating in a safe and sound manner.” Messick pointed out that as of July 2001, CUSOs had to begin moving their operations within the credit union and while no current numbers are available on how many have done so, he said many are “technically out of compliance.” “It’s probably not on the SEC enforcement priority list,” he said, adding he expects the final SEC regulation would provide more emphasis on the transition. All new broker contracts are required to be made under the credit union’s auspices. Meanwhile, the big picture is uncertain for CUSOs regarding the SEC’s exemptions. “They have not given any indication that they will extend exemptions to CUSOs but we will continue to make our case,” Messick said. [email protected]