Credit Unions Weigh in on Broker/Dealer Proposal as Banks Decipher `Most Complicated' Regulation on Record

WASHINGTON – Nearly three weeks remains before the SEC pours through the hundreds of comment letters it has received on its proposal that would extend a number of exemptions to credit unions without them having to register as broker/dealer. A number of credit unions and trade groups as well as NCUA have expressed their support for the proposal, which if adopted, would include the ability 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. Most recently, $3.2 billion Security Service Federal Credit Union has thrown its support behind the proposed Regulation B saying “(it) facilitate(s) activities that are of benefit to credit union members” and commending the SEC for even considering “this regulatory revision that allows activities that are appropriate for financial service cooperatives,” wrote Howard Baker, SSFCU senior vice president and chief of staff. American Share Insurance also recently submitted a letter to SEC, zeroing in on the supervision of credit unions without federal insurance, said Dennis Adams, ASI president. “Our counsel has met with the SEC and quite frankly, they admitted they didn’t understand how private insurance works at a credit union,” Adams said, adding that ASI is urging credit unions to weigh in on that component and the effect Regulation B could have here. While the $1.5 billion Visions Federal Credit Union supports the key exemptions, it agrees with the SEC in not extending the safekeeping and custody exemption to credit unions. The SEC said it based its decision on the fact that credit unions do not engage in activities necessitating the need for this service. “There was no real objection here,” said Frank Berrish, Visions FCU president/CEO. “It might be different for other credit unions,” but the credit union saw something with the safekeeping exemption that could affect the cost of operations in the long run. Berrish also wrote while the credit union does not currently act as a trustee and/or custodian of pension and retirement plans for any of its members, “we should retain this right as currently permitted by NCUA regulations.” The Credit Union Association of Oregon is among those that support the safekeeping exemption saying since credit unions engage in buying and selling securities for their members “it would make sense that they would also serve to hold those in safekeeping, should their member wish,” wrote Janet Josselyn, CUAO director of compliance services. Josselyn also wrote that credit unions currently meet SEC requirements of safekeeping agents in that they are supervised or regulated by federal or state regulators. The Missouri Bankers Association (MBA) also recently took advantage of an extended comment period that several banking groups had asked for and received from the SEC. In an Aug. 2 letter, the trade group described the proposal as “one of the most complicated regulations on record with far reaching impact on banks.” “Many banks are concerned that they will not fit within the very confining framework of the proposed regulation,” wrote Wade Nash, MBA general counsel. “If so, then the banks will be required to qualify as a broker, push out the trust business tied to the unlawful conduct, or perhaps so rearrange the trust business that for the size trust business involved it simply is not worth the trouble.” Nash said one exemption – mutual fund transaction orders for certain employee benefit plans – would be exempt completely from the broker push-out provision under proposed Rule 770. Banks that serve as trustees or in a fiduciary capacity with respect to covered plans would not have to comply with the requirement of the trust and fiduciary exceptions, including the “chiefly compensated” calculations, he wrote. Similarly, banks serving in a custodial capacity with respect to the covered plans need not satisfy the requirements of the proposed custodial exceptions. Only bank activity with respect to qualified plans and 403(b) and 457 plans would be exempted under Rule 770, Nash wrote. Other bank employee benefit fiduciary plans involving individual retirement accounts, Simple IRA’s, SEPs and other non-qualified deferred compensation plans would not be exempted and instead need to fit within another exemption. “In order to take advantage of the exemption, a bank would be required to offset or credit any compensation that it receives from a fund complex against fees and expenses that the plan owes to the bank,” Nash wrote. “The SEC proposed this condition under the mistaken belief that most banks followed ERISA Advisory Opinion 97-15A, when, most banks are not investment fiduciaries and thus follow ERISA Advisory Opinion 97-16A.” Nash pointed out that “the exemption’s references to compensation appear to include not only 12b-1 fees but also shareholders administration fees and even investment management fees received when a plan invests in proprietary mutual funds.” “Bankers have already been through the first SEC proposal to push out broker activity and they were outraged,” Nash wrote. “These current exemptions in Proposed Regulation B are incredibly complex. Even if the banks could meet such exemptions, documenting them is paper work intensive and too time consuming.” The SEC will continue to take comments on Regulation B until Sept. 1. [email protected]