ARLINGTON, Va. – While hard figures on the number of credit unions that have done business with Bentley Financial Services, Inc. and Entrust Group-the firms being sued by the SEC for offering uninsured CDs-may be hard to come by, some say the impact is expected to be crucial. NCUA requested comments from credit unions on amending Regulation 703 which details rules on investment dealings just days after Robert Bentley, owner of both firms, was charged by the SEC for changing the terms of the CDs and relying on investors to drum up new clients as a precursor to receive payment of previous investors’ principal. Investors currently have $300 million invested with Bentley. Hundreds of Bentley’s clients were credit unions, said Amy Norwood, assistant regional director of the SEC’s Denver office and as a result, NCUA has disseminated an urgent communication to those credit unions to contact David Marion, the attorney appointed as receiver to determine whether funds were misallocated. In Texas, a number of credit unions affected have contacted that state’s league to find out what steps they need to preserve liquidity, said Debbie Rightmire, TCUL’s vice president of asset/liability management. “We’ve helped those credit unions determine amount of risk, and we continue to offer training sessions and workshops on exercising due diligence with broker dealers,” Rightmire explained. The Gramm-Leach-Bliley Act addressed the broker/financial institution partnership by repealing an exception that had allowed banks to engage in securities activities without registering as a broker or dealer. In July, the Association of Corporate Credit Unions (ACCU) urged the SEC at the agency’s request for comments on amending the definition of “broker” and “dealer” in the Gramm Act to also exempt corporates from registration because they offer member credit unions “a variety of services and products including securities safekeeping and custody, letters of credit and certificates of deposit.” Corporate credit unions are “essentially limited to doing business with credit unions or other institutional organizations and such an extension (to them) would eliminate what ACCU believes to be unintended legal uncertainty,” wrote Gigi Hyland, ACCU’s executive director. The SEC has since enacted safeguards to protect investors including requiring broker-dealers to create a record containing certain minimum information that must be furnished to the customer on a periodic basis and listing the identity of the person responsible for the account on the order ticket and any other person who entered or accepted the order of behalf of the customer. And for many, here is where the pitfalls often lie – when CDs are held by a group of unrelated investors, said David Becker, SEC’s general counsel. “Instead of owning the entire CD, each investor owns a piece,” Becker said. “Always confirm with your broker how your CD is held, and be sure to ask for a copy of the exact title of the CD. If several investors own the CD, the deposit broker will probably not list each person’s name in the title.” The SEC also urges credit unions to research any penalties for early withdrawal especially if interest rates have fallen since the initial purchase of the CD. Selling a CD during a high-interest rate environment may mean the investor will have to sell the CD at a discount and lose of the original deposit, Becker said. Because deposit brokers do not have to go through any licensing or certification procedures and are not regulated by state or federal agencies, investors can still track complaints or fraud issues by contacting the National Association of Securities Dealers’ Central Registration Depository, a step Rightmire said the league has been reiterating for years. In addition, “it always goes back to policy,” Rightmire said. “It is extremely important to have an asset liability management policy. If you’re going to do anything beyond CDs, there needs to be a policy in place structured after 703.” Indeed, regulation 703 requires credit unions to perform an annual review of the broker/dealers they use to transact business. Meanwhile, NCUA will accept comments until Jan. 24, 2002 on recommendations for setting standards for federal credit unions so that any brokerage firm that transacts purchases or sales of investments with an FCU must have at least one General Securities Principal (as defined in National Association of Securities Dealer regulations) registered with the NASD. The agency is also hoping to require broker-dealer activities to be regulated by a federal or state regulatory agency. All changes would apply to those who act only as a certificate of deposit or share certificate finder. At press time, Rightmire was preparing for a chapter meeting presentation on due diligence involving broker-dealers. “We will continue to walk credit unions through the process of pulling all of the necessary information before working with brokers,” she said. “Many of these financial institutions had a long relationship with the (Bentley) and had no reason to doubt their credibility. This makes exercising due diligence so important.” – [email protected]

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