NEWPORT BEACH, Calif. – NACUSO recently sought to alleviate confusion among network investment programs concerned about when they should move out of their CUSOs and into their credit unions. As a result of the 2001 Incidental Powers Regulations, the SEC has said that CUSOs no longer have a networking exemption to receive income without being registered and CUSOs are no longer a `required service corporation' under the Chubb No-Action Letter, said Guy Messick, NACUSO general counsel. "It is the position of the SEC that CUSOs have been out of compliance since July 2001," Messick recently told NACUSO members. The SEC has required broker/dealers enter into new networking agreements only with credit unions and not CUSOs. The only exception has been for state chartered credit unions in states that have not confirmed that their state chartered credit unions have Incidental Powers similar to federally chartered credit unions. "Wisconsin is the only state I know where this applies," Messick said, adding clarification is being sought from the Wisconsin state credit union regulator. In the SEC's proposed draft of Regulation B, credit unions and banks are provided a networking exemption but CUSOs and bank-operating subsidiaries are not mentioned. "The SEC has repeatedly stated that it has comfort in dealing with credit unions as they have regulators that the SEC can call upon to help correct any problem that may arise," Messick said. "Since CUSOs are not directly regulated by a credit union regulator, the SEC does not have the same comfort level with CUSOs." Regulation B contains a networking exemption which "the SEC has indicated that they do not see any reason, from their perspective, to treat CUSOs differently than operating subsidiaries for banks, which have never had a networking exemption," Messick said. The SEC has indicated that it intends to issue a no-action letter based upon a request submitted by the CUNA Brokerage Advisory Task, which has not been issued as of yet. "That letter could provide some guidance as to the role of CUSOs in the investment program but there is no indication that that rule would be expanded to permit CUSOs to have an exemption, especially if CUSOs are not granted a networking exemption under Regulation B," Messick said. The uncertainties have set the stage for NACUSO urging CUSOs to move their networking investment programs to the credit unions. NACUSO said it has received reports from some broker/dealers indicating that there is pressure from some NASD examiners to move the investment program from the CUSO to the credit union. Messick said he is not aware of any enforcement actions against any CUSO-based networking program and doesn't believe the pressure is "uniformly applied." "NACUSO will not give up that fight," Messick said. "We expect that other credit unions, CUSOs, and trade associations will also be supportive of expanding Regulation B to include CUSOs. We believe we have good arguments, but we have an uphill battle to convince the SEC." Messick added the SEC has "different perspectives" in its role as the securities industry's regulator. Realistically, NACUSO is not overlooking the fact "that it is very likely that CUSOs will not be included in Regulation B and only credit unions will have a networking exemption." Meanwhile, NACUSO continues to recommend that CUSOs start planning to move their investment programs to the credit union "in order not to be caught unprepared if the SEC starts to initiate enforcement actions against CUSOs." "It is likely that the SEC will not begin to initiate enforcement actions against CUSOs until Regulation B is passed and passed in its present state without mentioning CUSOs, but there is a regulatory risk in waiting," Messick said. "There is no official grace period that you can rely upon." Messick said "the risk will be very high" once Regulation B is passed even though it is not certain when it will be enacted but only that it will be enacted at some point, as required by the Gramm-Leach-Bliley Act. The SEC will continue to take comments on Regulation B until Sept. 1. [email protected]