Retail investments, for instance, cannot be sold unless it is through a broker-dealer, Lauer explained. Compliance with Securities and Exchange Commission regulations and ensuring that services such as investment advisory offerings have the proper licenses are critical. It is one piece of the bigger picture of CUSOs and separateness. Meaning, that delineation in Part 712 of NCUA regulation that mandates that a CUSO is a separate entity from the credit union in the eyes of the legal system, Lauer said. This can prevent third-party creditors from attaching the obligations of the CUSO to its credit union owners. If a CUSO does not maintain this separateness, a court may grant a creditor this ability, which is often called “piercing the corporate veil.”

“The decision to pierce the corporate veil by a court is not a black and white decision. Instead, a court will look at many factors to make this decision and the decision is, by its nature, subjective because the court must weigh each of the factors to determine if the veil should be pierced,” Lauer said.

Although this doctrine is driven by state law and may be slightly different from state to state, the factors used by the courts in most states are generally the same, Lauer added. The reason why a creditor would feel it necessary to pierce the corporate veil usually comes down to money.

A creditor may look through the CUSO to its owners with the objective of getting paid. Lauer said even though a credit union may invest in a CUSO to shield the credit union from the liability of a particular service, a third party creditor of the CUSO may try to break down that barrier to get paid.

“This is why one of the most important factors analyzed by a court is capitalization of the CUSO.

“A CUSO must be adequately capitalized to meet the reasonably foreseeable obligations of the services provided by such CUSO,” Lauer said. “This takes the form of both capital infusion and reasonable errors and omissions insurance. If a creditor is trying to pierce the corporate veil, my first guess would be that the entity was not capitalized and insured to meet the present obligations upon it.”

One of the keys here is that the creditor must show that these obligations were reasonably foreseeable and not extraordinary, Lauer said. Simply not having the capital or insurance to pay every single third party claim is not enough to pierce the veil, he pointed out. It must be shown that the third party claim is a reasonable byproduct of conducting the business of the CUSO.

“Obviously, there are many instances where companies become insolvent and this alone is not a license to dig in the pockets of its owners,” Lauer said.

If he had to pinpoint one document that relates specifically to exams and corporate separateness, Lauer said it would be an attorney opinion letter stating that the CUSO is a separate entity. NCUA requires the letter to be on file. While this document is critical, Lauer said, looking at the current climate puts it all in perspective.

“Many companies and credit unions are having trouble and many creditors are less and less likely to write down losses. This is leading to a lot more litigation and that litigation is definitely touching the credit union world.”