“It was quite successful,” Fate said. “Back in the day when we were operating this by ourselves, we were able to retain those relationships that may have otherwise gone to other third parties.”

Fate said even though the broker-dealer grew, because of economies of scale and methods of efficiencies, putting additional money in to expand service became a consideration. LPL, along with a few others were interested in XCU Capital.

“It's a great company. We have a great relationship and we look forward to a great future with them,” Fate said.

Meanwhile, WesCorp saw its new ownership stake as fuel to drive the development of mutual funds, unit investment trusts and other proprietary investment products. In a March 2002 press release, the corporate credit union touted its established marketing and technological capabilities and payment systems as more avenues to build XCU Capital's presence. At one point, WesCorp owned an institutional broker-dealer that underwrote securities for the Federal Home Loan Bank. That firm has since been outsourced to CU Investment Solutions Inc., a subsidiary of U.S. Central CU, said Bob Burrell, executive vice president and chief investment officer at WesCorp.

“We weren't heavily impacted by the [XCU Capital] decision,” Burrell said. “WesCorp had a marketing initiative. We were the only one that didn't have a core business with them.”

Burrell said all of XCU Capital's investors were WesCorp members and the corporate, believing wealth management was an important area, offered its support to those credit unions. Even though WesCorp didn't have any business to shift to LPL, he said the corporate has had early discussions with the broker-dealer on areas the two might be able to collaborate in.

XCU Capital set out on a path to diversify. It created Focus Insurance Agency and began offering trust services through a partnership with BNY Trust. It also teamed up with Pershing LLC, a BNY Securities Group and subsidiary of the Bank of New York Co., in 1998 for its clearing services. In 2005, XCU Capital partnered with Ameritrade Inc. to offer online trading. Along the way, the broker-dealer rolled out several services including CU Broker, a branch sales automation platform. At one point, the broker-dealer offered CUNA Mutual Group's debt cancellation product to its clients to protect them and their members from loan delinquencies, chargeoffs, and collection costs.

Mark Allen initially served at XCU Capital's helm since 1991 but took an administrative leave of absence in 2005. Hoaglin was named as interim before becoming the permanent CEO in June 2006.

Toward the end, all of XCU Capital's efforts to grow may not have been enough. Hoaglin said with just $17 million in revenue, the board faced two choices: align with a company that had the resources needed to serve clients or go out and raise capital. The former won out. The broker-dealer spent roughly a year talking with potential partners. A commitment to the credit union model was paramount followed by the ability to offer cutting edge technology, support for financial advisors and ultimately providing return on investments to shareholders, Hoaglin explained.

“The overriding desire was to serve the end user, which was credit unions now, and going forward,” Hoaglin said.

LPL met the criteria and in August 2007, the deal was agreed upon and consummated the following month. With mainly fixed annuities and some life insurance products, Focus Insurance was dissolved. Hoaglin said the subsidiary didn't have enough market value to warrant a sale. The $15 billion State Employees' CU was the only credit union that decided not to follow the others after the LPL acquisition. Instead, in a move to keep most of its programs in-house, it bought XCU's shell for $40,000 in late 2007 and moved its 6,000 accounts totaling approximately $30 million in-house, said Jim Blaine, president/CEO of SECU (CU Times, May 14, 2008). XCU Capital's shareholders voted to accept a negotiated purchase offer from LPL in the fourth quarter of 2007 and the deal was finalized earlier this year, Hoaglin said.

Shell sales are common in the broker-dealer space, Hoaglin said. Purchase transactions are typically handled on an asset sale basis or as an outright purchase of the broker-dealer. Companies seeking to avoid the

start-up costs, licensing paperwork and time for regulatory approval associated with starting a new broker dealer often opt to purchase a shell.

“Depending on the dynamics of the transaction it may make sense for the acquiring broker-dealer to simply purchase the assets of the selling broker dealer which for the most part consists of the client accounts of the seller,” Hoaglin said. “When this type of transaction takes place the seller is left with a licensed shell, which is stripped of all assets.”

In fact, about a decade ago, Xceed Financial bought the shell of a small broker-dealer, Fate said.

Unlike SECU, the $6.7 billion The Golden 1 CU continued on with LPL but did look at other firms as its contract came to a close in August 2007, said Teresa Halleck, president. LPL's size, technology and credit union reputation were unmatched, she acknowledged. The Golden 1 amassed $399 million in assets for a total of 14,426 accounts through XCU Capital and now LPL. Halleck is confident that the credit union will continue to grow its AUM each year.

“We have no regrets. [LPL] has the scale and the technology. We didn't have that under XCU,” Halleck said. “We wanted to do what was in the best interest of the members.”

To those critics who may say that XCU Capital sold out, Halleck said everyone has different philosophies but reality trumped naysayers.

“Those that are passionate about keeping everything in the [credit union] industry, if you keep that type of approach, you will not be able to serve your members,” Halleck said. “Banking is so huge. You have to go after what is cost efficient and what serves the members. I don't think XCU Capital sold out. I think selling your credit card portfolio is selling out but that's another story.”

Bill Cheney has seen XCU Capital evolve from several viewpoints. Cheney, president/CEO of the California Credit Union League, was president/CEO of Xceed Financial when XCU Capital launched. He also served as chairman of the broker-dealer.

XCU Capital's board spent a considerable amount of time weighing its options and another six to 10 months reviewing the firms it had contacted, he said.

“I don't think we sold out,” said Cheney, adding once the LPL sale and SECU shell transaction concluded, his only role was assisting with shutting down obligations. “The best move for XCU was to go with LPL. We found what we felt was the best solution.”

Violations may have also impacted XCU Capital's growth. According to FINRA and National Association of Securities records dated July 29, 2007, XCU Capital submitted a letter of acceptance, waiver and consent and was censured and fined $87,000 for several offenses.

Without admitting or denying the allegations, the firm consented to the entry of findings acting through its agents, recommended and effected, or caused to be effected, purchases of large positions of Class B mutual fund shares in customer accounts without a reasonable basis for believing them to be suitable for the customers, according to FINRA.

The findings also stated that XCU Capital, acting through its agents, failed to establish, maintain, and enforce a supervisory system “reasonably designed” to enable the firm and its supervisors to prevent and detect unsuitable large Class B share positions.

According to FINRA, XCU Capital, acting through a registered representative, utilized sales materials that consisted of a “hypothetical sales charge projection that was unbalanced and failed to provide prospective investors with a sound basis for evaluating the facts.” NASD also found that the firm failed to file the projection with NASD's Advertising Regulation Department.

“That really killed the forward momentum,” said Henry Wirz, president/CEO of $1.3 billion of SAFE CU, about the FINRA findings. “It was a period of time when a lot of credit unions wanted to partner with XCU. It was a significant blow to the company.”

Still, everyone, including shareholder SAFE CU, saw the promise in XCU Capital. But to get over the hump, a broker-dealer needs at least $150,000 in gross commissions each year, Wirz said.

“We could never get there as a group,” he lamented.

Credit union representatives that provide investment information to members work considerably different than independent reps, Wirz said. More members are seen on a daily basis, there is an implied trust and cold calls are not the norm, he added.

“We quickly found that this was a different kind of business,” Wirz said. “Mark Hoaglin used his expertise to build a strong base. He's a fabulous leader. If he had been CEO from the beginning, we probably wouldn't be where we are now.”

LPL is probably the best in the game right now to help SAFE increase its investment penetration to 10% or 13,000 of its 127,000 member base, Wirz said. The credit union is also striving to bump its average investment account from $25,000 to between $30,000 and $50,000. He admitted that there's been some struggle because credit union reps do much higher volume than LPL's. But the broker-dealer makes up for that with a top notch compliance department and research resources for both reps and members.

“We couldn't make it work in the credit union space,” Wirz said about XCU Capital. “You have to get credit unions to join and support it. We have since found that there are other credit unions that have their own broker-dealers. I can tell you that it's not going to work. We picked the best vendor that was out there.”

Looking forward, Hoaglin said LPL is making good on its promise to deliver to credit unions. At a recent program managers' conference in Las Vegas, a session devoted just to credit unions convened for the first time. Hoaglin is also head of a 10-member credit union advisory council that held its inaugural meeting in late April. As the “voice for credit unions” at LPL, the program managers plan to meet four times a year to discuss service improvements and legislative and regulatory issues.

“While not a credit union-owned entity, we felt there is a significant commitment to credit unions, more than any other options we had,” Hoaglin said. “At the end of the day, we feel we can silence those critics [that say XCU Capital sold out] because we are in fact aligned with our colleagues in the credit union industry with the formation of this channel.”

–[email protected]