In August 2001, the NCUA General Counsel's Office issued a legal opinion that permitted credit union employees to be licensed to sell securities. The NCUA also removed regulations that prevented credit unions from fully realizing the benefits of the networking arrangements aunder the 1993 Chubb Letter. In response to the NCUA position, the SEC indicated that, due to the passage of the new NCUA regulations, CUSO's are no longer "required service corporations" and, therefore, no longer able to share commissions without being licensed. Although the SEC has yet to come out with a formal position, most credit unions have determined that they must decide between two alternatives regarding their investment operations: 1. Bring investment operations into the credit union by setting up their investment services networking agreement directly between the credit union or the third-party broker dealer, or 2. Retain investment operations in a CUSO and register the CUSO with the NASD as a broker dealer. This first option is less expensive in the short run and is likely to be the choice of the majority of credit union programs. There has been a range of annual revenue estimates required to justify retaining a licensed CUSO. The specific number will depend on the cost structure of each individual program. Programs that are unlikely to consistently generate at least $3.0 to $4.0 million in revenue annually over the next few years will have a difficult time justifying NASD registration. Supporting an NASD member CUSO requires a layer of fixed costs normally born by most third party networking organizations. Networking fee arrangements are usually set up a percentage of revenue and investment representative compensation is typically tied to revenue as well. That means networking programs established directly within credit unions benefit from a variable cost structure. During periods of lower revenue, most of the expenses decline proportionally. Offering investment services through the credit union may also help integration. With investment representatives becoming employees of the credit union rather than a CUSO, they may be perceived more as team members in the branch. This in turn can lead to better cooperation and valuable referrals. With investment services no longer offered through an affiliate, there could also be advantages in terms of sharing member information depending on each credit union's privacy policy. Moving investment services directly under the credit also has some disadvantages. There is the risk the program will lose its identity and unique sales culture. Important investment program initiatives could be mixed in with a long list of other credit union priorities and potentially get lost in the shuffle. If projects are prioritized strictly based on immediate revenue for the credit union, investment program projects could drop on many priority lists. Eliminating CUSOs for investment services could also expose the credit unions to higher levels of liability. For years CUSO managers have represented to their credit union boards that CUSO's are the best place to house investment services in part to limit liability to the credit union and its members. Credit union managers choosing to move their investment programs out of CUSOs are now arguing that the CUSO's corporate veil does not provide that much protection after all, and the same risks exist whether investment services are offered directly through the credit union or a separate CUSO. The fact is the added protection, if any, is impossible to measure. If tested in court the outcome will depend on a number of factors unique to each situation and structure. There are other advantages to retaining the CUSO structure and registering as a broker dealer. Branding is an important consideration. As credit unions raise their visibility within their fields of membership branding becomes increasingly important. For most investment programs, the credit union affiliation is their most important competitive advantage. Since CUSO names commonly include the name of the parent credit union, investment programs can "piggy back" on the marketing and public relation efforts of the credit union. As the broker dealer, the CUSO name can be more prominent in marketing literature, account statements, confirmations, branch displays, the Web site and other member correspondence. Licensing the investment CUSO can also provide more operating flexibility and opportunities. For example, networking arrangements with other credit unions can help expand investment programs by leveraging the distribution already in place. All credit union members have investment needs, but most credit unions do not have dedicated investment programs. There are many opportunities for some of the larger credit union affiliated investment programs to reach out to other credit unions with branches in the same or contiguous geographic areas to set up "shared investment representative" or networking agreements. These networking arrangements are best supported through licensed CUSOs. Through these agreements, smaller credit unions can provide investment services through "shared" representatives that serve only credit union members while enjoying a portion of the revenue generated from the activity. This may appear to be in direct competition with the large third party broker dealers, but smaller credit unions are generally not on their radar screens. Licensed CUSO's are subject to examinations by the NASD, SEC and potentially other regulatory agencies. Members of the CUSO management team must have the necessary securities licenses and experience to oversee the program which often means bringing in outside expertise. Many of the larger existing programs operating under networking agreements already have an experienced licensed Series 24 (General Securities Principal) in house to act as the program's OSJ (Office of Supervisory Jurisdiction). However in addition to the OSJ functions there is a growing list of monitoring and reporting requirements such as OATS, TRACE, OFAC and AML among others. While some of the monitoring and reporting may be taking place at the credit union level, the investment program must have its own systems and processes to comply with these requirements. The current regulatory environment is as challenging as ever. A strong compliance system is essential. Along with the added staff required to comply with the regulatory requirements, there are other fixed costs associated with maintaining a broker dealer. Licensing fees, state registration fees and E & O insurance premiums are among the direct expenses incurred by a licensed CUSO. In many cases these expenses may not represent incremental increases since it is likely these fees have been passed through directly to programs under the terms of their agreements with third party marketing firms. The decision to register with the NASD should ultimately be based on the facts and circumstances of each situation. The best option could be a two-step process. Programs on the fence regarding the best long-term approach could move the program under the credit union first, build revenue, experience and management expertise then move the program back to a licensed CUSO down the road. Again, the first step is not expensive. The best strategy for a two-step approach is to coordinate the process with the existing third party broker dealer. The key is to avoid surprises as the program moves forward.