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<p>Many questions have arisen from the Securities and Exchange Commission’s stated intent to require credit unions to move their investment programs from Credit Union Service Organizations (CUSOs) to within the credit union. This confusion came as a result of enactment of banking modernization legislation (the Gramm-Leach-Bliley Act) and the National Credit Union Administration’s approval of Incidental Powers for federal credit unions. Caught up in the mix between expanded powers for FCUs and the regulatory agencies that oversee them, once again, are state-chartered credit unions, their CUSOs, and state regulatory agencies. While NASCUS and credit union trade associations including CUNA, NACUSO, and NAFCU continue to negotiate a coordinated response to the Securities and Exchange Commission (SEC), let’s all take a moment to reflect how we got here and why – before we make any drastic changes in business models. It may be too soon to abruptly redirect the delivery systems already in place, especially since the SEC has said it plans no enforcement action against CUSOs. But new networking arrangements are in a state of limbo and state-chartered CUs must determine if their state laws allow them to receive revenue from broker/dealers and hold an insurance license. SEC rules require that an entity be licensed or hold a license exemption in order to receive a share of commission on the sale of securities. For many years, that licensing exemption resided in the credit union’s CUSO as a “required service corporation.” The CUSO could share commissions with broker/dealers through networking arrangements. The SEC’s letter to Chubb Securities in 1993 laid out that exemption for the unlicensed CU and the licensed broker/dealer. Because NCUA’s Group Purchasing Regulation (Part 721) allowed for only an expense reimbursement from those commissions, CUSOs were formed in order to take full advantage of commission income. But GLB removed that blanket exemption for banks – permitting so-called “one-stop shopping” for all consumer-driven financial services, including investment products and insurance. Wary of past abuses, particularly the S&L scandal, Congress instructed the SEC to issue a regulation covering bank securities activities and provide for transactional exemptions. So, banks and thrifts must be the contracting parties with broker/dealers. The proposed regulation by the SEC included banks and thrifts, but overlooked credit unions. NCUA’s passage of the Incidental Powers Regulation in July 2001 removed the Group Purchasing Limitation on the split of commissions and rendered CUSOs as “no longer required” under the Chubb letter. The SEC has said it understands that this dilemma came about as an “unintended consequence” of incidental powers and admits there is no inherent risk to CU investors in the CU/CUSO business model. However, that may not be enough to convince them to grant an exemption to CUSOs. Because bank operating subsidiaries cannot receive a split of commissions, the SEC may be heavily pressured to apply the same standard to CUSOs. Under Incidental Powers, FCUs are also permitted to split commissions on the sale of insurance, and a legal opinion issued by the NCUA in November 2001 allows FCUs to be licensed. Most states require an entity be licensed to sell insurance, but some states do not allow credit unions to hold insurance licenses. CUSOs typically got those licenses and provided liability protection to the credit union. The NASCUS Regulators and the NASCUS Credit Union Council have taken the position that the SEC should amend its rule to exempt state credit unions as it does banks and thrifts. The fact is that the “requisite competence” already lies in the state agencies that regulate credit unions and often the securities entities. Beyond that, state financial agencies have led the way in consumer protection. Crackdowns on day trading frauds and misleading claims made by online brokerage firms were first uncovered at the state level – before any enforcement at the federal level was undertaken. In fact, state agencies led the way in developing investor-warning alerts. Marc Beauchamp, executive director of the North American Securities Administrators Association was recently quoted in the New York Times, saying, “The states have always been focused on Main Street Investors and their concerns. The United States has the most transparent markets in the world, and a big reason for that is the complimentary system of regulation: the SEC, the self-regulatory organizations and the states.” Positive, tangible results come about due to active enforcement and state investigations: to wit, the recent $100 million settlement by Merrill Lynch in New York. This settlement effectively changes how investment analysts are compensated and separates the advice they offer from the influence of investment bankers. So state credit union leaders are rightly concerned that the powers afforded state CUs through state legislatures and state regulators not be preempted – and the movement must oppose that. The true intent of Gramm-Leach-Bliley was to broaden competition in the financial marketplace. We can do that by working in concert with federal agencies – as we always have. The same interaction that exists between the NCUA and state agencies exists between state agencies and other federal entities, specifically the Treasury and the Federal Reserve. As the SEC continues to gather feedback on its proposed rule, state credit unions should take steps to see that they are not disadvantaged by “unintended consequences” created by federal action. Many issues remain, such as how will non-members be served, how will dual employee programs be affected, and how can CUSOs owned by multiple CUs provide such services? This is an opportunity to stress the innate differences between credit unions and other financial institutions, and to advocate the rights of the states to regulate these matters themselves.</p>

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