ROSEVILLE, Calif. – NACUSO Board member Pete Snyder, president of Addison Avenue Financial Partners Inc. may be a majority of one these days while NACUSO, CUNA and NCUA continue their discussions with the SEC on extending the license exemption to CUSOs that was first granted them nine years ago under the Chubb Securities Letter. Snyder doesn't deny the SEC decision will change the look and feel of CUSOs, but he calls the pending SEC decision " a classic example of a situation where most people think terrible things are going to happen, when they're not." For Snyder, the issue comes down to this: CUSOs' ability to adapt to a change in the character of their balance sheet and income statement. " The SEC decision is not the big negative for CUSOs as some people think," said Snyder. He opined that, "The biggest impact of the SEC's decision will be that from an accounting standpoint, a financial services CUSO that offers investment services will no longer be measured on the gross income it brings in, but more on the services it provides. "Under the new model, the gross revenue would be shifted to the credit union side. The CUSO reps would likely be credit union employees, and the CUSO would have to invoice the credit union for the services. What would remain on the CUSO side is back office support services," he explained. "It's no more different now than whenever a credit union is approved to offer mortgage lending or offer lines of credit. You hear everyday about new things credit unions are doing," said Snyder. Is it really that simple? Yes, said Snyder, but Renee' Guerin, president/CEO of RCU Services Group, a wholly-owned CUSO of Redwood CU has other thoughts. RCU Services Group offers investment, insurance, and auto participation loan services. "The credit union has always advocated keeping the investment services on the CUSO side because of the increased liability for the credit union," she explained. "If you switch the CUSO operations over to the credit union, then it's as if the CUSO becomes part of the product line of the credit union," she said. Guerin said RCU Services was exploring various options including the possibility of keeping the employees and business line with the CUSO, but transferring the income to the credit union. If that were to happen, the CUSO would still have to find a way to move income back and forth between RCU and the CUSO. As for the idea of having the CUSO reps obtain their NASD license so they could continue to sell securities for the CUSO, Guerin said the CUSO was too small and didn't have the income stream to support that level of management. "There are so many unknowns now because the SEC hasn't released its decision," said Guerin. On that point, at least, Snyder and Guerin agree. But Snyder insists that the key to CUSOs being able to smoothly handle the change in business model the SEC decision will require is whether or not CUSOs and their owner credit unions are strategically integrated. If they are, said Snyder, "It will be just a matter of looking at the tasks that have to be performed and rearranging who does what, based on what the SEC says." Unfortunately, he offered, the vast majority of CUSOs and credit unions are not strategically integrated, and that's because "credit unions have the perception that there is minimal potential for the CUSO to contribute to the financial side of a credit union's business. The primary motivations of credit unions to form a CUSO are because everyone else is doing it and because the members need the services. The financial benefit of CUSOs to credit unions is not perceived as being significant." NACUSO General Counsel Guy Messick of the law firm Lastowka & Messick, P.C., said credit unions that own financial services CUSOs that provide investment services are going to have to answer two questions: "Is the additional liability protection afforded them by CUSOs important enough for the credit union to go out and obtain the security license for the CUSO and register it with the NASD?" "If the credit union decides it can handle the risk through indemnification and insurance of offering investment services itself, how will it handle the nonmember issue of being allowed to continue to serve nonmembers but not obtain any income from that?" "Every time a CUSO wants to deliver a service, it has to deal with rules and regulations concerning the delivery of that service. The SEC's pending rule takes away a delivery option credit unions have for delivering investment services," said Messick. Of all the issues NACUSO has been covering in its ongoing discussions with the SEC, Messick said the issue of multiple-owned CUSOs "is the most important discussion we're having with them. Will investment reps be reps for each credit union? Will they have to have a different rep number for each credit union? We want to get as much flexibility as possible. The SEC rule will make CUSO logistics more complicated, and our objective is to reduce the operational hurdles the CUSOs will face," said Messick. -

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