Standards for New CUNA Mutual Investment Fund Outline Strict Rules

MADISON, Wis. – A little over two months since NCUA gave CUNA Mutual Group approval to proceed with a new investment fund, sales activity is expected to get going this month. CUNA Mutual’s new CU Systems Fund, approved by NCUA at its March 17 board meeting, would allow for the purchase of business loans from credit unions and the sale of shares in them to interested credit unions. Shortly after approval, the American Bankers Association attempted to stop the fund’s movement saying it had concerns with a number of areas including questioning whether there will be “asset enhancements” and how will “risk transfers” be handled. NCUA Chairman JoAnn Johnson responded with assurances that the fund provides credit unions with “a permissible investment product intended to enhance liquidity and provide a reasonable return” as well as diversification and barriers to risk exposure. At press time, six credit unions had been certified or became eligible to sell loans to CU System Funds and another ten were currently in the certification process, said Kevin Thompson, vice president of product development for CUNA Mutual’s Credit Union Financial Solutions Group. While CUNA Mutual has not started selling shares, $4 million in member business loans have been purchased with another half dozen in the pipeline. Meanwhile, the fund has a number of standards including for investment funds; originating credit unions; purchasing credit unions; sponsor; advisor; and the custodian. Here’s how the fund works: a credit union can invest in shares of a series of funds holding a portfolio of credit union-originated member business loan participations and other “permissible” investments for liquidity purposes. Loans from a single credit union originator can not exceed 10% of fund assets and will require sellers to retain at least that same percentage interest in the loan. Shares in the investment funds will then be offered to credit unions and affiliated entities. CUNA Mutual will serve as the sponsor and will also maintain an equity position in the funds. Investors are limited to 10% of their net worth in any one fund and an aggregate limit of 50% of their net worth in all funds. Standards for the fund itself include qualifying as an investment company under SEC rules but with the option of being structured and operated to avoid SEC registration. The fund must also provide NCUA with an annual financial statement audit; an annual assessment of the fund’s management and a report by the fund’s licensed independent accountant on internal controls. As the sponsor, CUNA Mutual’s standards include providing the seed money and retaining a equity interest in the funds equal to the greater of $25 million in all funds; $10 million in any one investment fund; or 2% ownership of the outstanding shares. CUNA Mutual will also be responsible for providing investors with a quarterly update on fund activity and changes including pricing. For the originating or selling credit union, it will only purchase shares in a particular fund if the value of the loans it has originated and sold to that fund constitute less than 10% of the total value of the loans in that fund. It must also ensure that once a loan is sold, if the transfer qualifies for “true sale” treatment under generally accepted accounting principles (GAAP) and applicable state law in the jurisdiction of transfer, the loan will be removed from the credit union’s balance sheet. The sellers must also maintain a 10% interest in loans sold to the investment fund. On the purchasing side, credit unions will have an investment limit in any one fund of 10% of its net worth and an aggregate investment limit in all funds of 50% of net worth. Beyond executing the transaction from and ensuring the investment is consistent with its investment policy, the purchasing credit union has less to do than the selling credit union. Outside of the investment fund itself, by far, the advisor has a number of standards it must uphold. First off, the entity must be an SEC registered investment advisor; have at least $5 billion under management; have at least 25 employees; have an errors and omission coverage policy of at least $1 million; and charge a management fee that will not exceed 1.00%. The advisor will also be required to permit NCUA full access to the premises, books and records for review. All underwriting and diversification requirements including determining a net asset value (NAV) for the fund will be established by the advisor. The custodian’s standards include being independent of the sponsor, the fund, the advisor and investment funds. It must also have at least $10 billion in assets; have assets under custody of at least $1 trillion and be regulated by the SEC, a federal or state depository institution regulatory agency or a state trust company regulatory agency. [email protected]