Third-party brokerage arrangements for the sale of nondeposit investment products outlined in a recent NCUA guidance letter contain duties some federal credit unions may not have the ability to perform.
NACUSO took that position in a Jan. 7 comment letter to the regulator on NCUA Letter No. 10-FCU-03. The agency said this letter supersedes and replaces NCUA's Letter No. 150-December 1993, which contains previous guidance to credit unions on the sales of nondeposit investments.
"The letter asks credit unions to perform duties outside of the scope of their expertise and to interpose themselves in broker-dealer compliance issues," read a letter provided by NACUSO's legislative and regulatory advocacy committee to Credit Union Times.
The NCUA said in selecting an appropriate broker before entering into a third-party brokerage arrangement for the sale of nondeposit investment products, FCUs should perform a "qualitative analysis of the level of complexity and volatility in the investments that the credit union will permit the broker to offer members."
"Does NCUA really expect the credit unions they regulate to engage in analyzing and authorizing the investment product that will be offered to their members?" wrote Jack Antonini, president/CEO of NACUSO. "Credit unions have no experience doing that, no expertise and are not registered."
Antonini said NACUSO is concerned that the Financial Industry Regulatory Authority will consider this an improper act by an unregistered entity.
The NCUA said it would also require a program that includes "a system that monitors member complaints and periodically reviews and randomly samples member account activity to look for evidence of abuse." By doing this, NACUSO said, credit unions would take on the role of a registered Office of Supervisory Jurisdiction principal and broker-dealer compliance officer.
"It is unlikely that any credit union will have sufficient training to identify sophisticated types of abuses by merely looking at account activity," said Antonini. "Broker-dealers and FINRA will vigorously resist this intrusion into their regulatory authority, just as NCUA would not want the broker-dealer to do compliance checks on the credit union's loan accounts for loans referred by the broker-dealer to the credit union."
Restricting what products the broker-dealer may offer can put the credit union in the middle of the potential liability of investor suitability claims that might stem from a claim of "we would have offered a more suitable product but the credit union would not let us," NACUSO wrote.
Rather than taking the route that the NCUA suggests, NACUSO offered that if a credit union suspects that there are abusive practices, timely reporting of the issue to the broker-dealer and FINRA will enable facts to be uncovered.