TORRANCE, Calif. – If anyone had suggested a few months ago when the SEC first announced it might not extend CUSOs' broker/dealer license exemption, that the agency's decision could actually prove to be an opportunity for credit unions, their opinion probably would have fallen on disbelieving ears. Though still in the minority, some credit union financial management experts are now saying `it's entirely possible.' Steve Benton, senior vice president for the financial institutions division of Financial Network Investment Corp., Torrance, Calif. doesn't deny that if the SEC decides against CUSOs "it will spell a change for the credit union community." But to those credit unions that are considering "rushing out" to get a broker/dealer license for their CUSO, "they should remember that the licensing is easy to get, but hard to sustain. There's a lot of baggage that comes with maintaining the licensing and a CUSO needs a significant amount of volume to be able to sustain it," said Benton. "Credit unions and CUSOs need to take a long-term outlook of the situation and not just have a knee jerk reaction," he said. To those credit unions and CUSOs that are hoping the SEC, if it decides not to renew the exemption, will recognize credit unions' uniqueness and agree to some middle ground between that and continuing the exemption, Benton opined that the SEC will decided either to continue the exemption or discontinue it all together. "There's no such thing as SEC-lite," he said. "There won't be any alternatives, that's not the way the SEC operates. But there will be a grace period." Benton said he doesn't blame credit unions and CUSOs for being skittish about the situation. "It raises some interesting issues. If the SEC decides to withdraw its exemption, credit unions will have to make some tough decisions." One of the decisions credit unions will first have to make is whether to bring the investment transaction services part of the CUSO's business back to the credit union. More CUs may opt to do this than some think, said Benton. "When credit unions first began offering investment services through their CUSOs, for many of them it was something they were nervous about but wanted to try and experiment with, even though they didn't thoroughly understand it. Now financial institutions are looking for fee income, and even credit unions are faced with a lot of pressure to generate revenue. So some of them want to take back control of their investment services. If the SEC decides against CUSOs, it would be an opportunity for credit unions to take back control of their investment service offerings." If the SEC is willing to make any concessions to credit unions, Benton hopes it will be concerning multi-owned CUSOs. "I hope the SEC will recognize the need for that, otherwise it will be hard to work out," he said. NACUSO General Counsel Guy Messick, an attorney and partner with Lastowka and Messick, P.C. in Media, Pa. agrees that an SEC decision against CUSOs could prove to be beneficial to credit unions, but for different reasons than those cited by Benton. "Because of the legal requirements of organizing CUSOs, many credit unions have taken an `us versus them' mentality with CUSOs. For those credit unions that decide to bring the investment transaction services back inside the credit union, this could prove to be an opportunity for them to reevaluate their investment product and integrate it with the rest of the credit union's product offerings," said Messick. Some CUs won't have a problem doing this, he said, and understandably it's a risky situation. "But that doesn't mean credit unions can't accept the risk and go forward. There are ways to manage the risk," said Messick. In a managed plan, for example, where a broker/dealer representative is provided and paid by the broker/dealer, there would be "no appreciable difference" in the risk since it wouldn't matter if the credit union or the CUSO receives the check, said Messick. If a CU opts for a dual-employee plan with a broker/dealer, the risk could be reduced if the investment rep was a full-time employee of the CU involved with investment services transactions, not a part-timer. If the employee works part-time, Messick said the person would have to be closely monitored and supervised by a compliance person with the CU. Messick concurred with Benton that an SEC decision could get sticky as it would apply to multiple-owned CUSOs. "That's why it's important that we have on-going discussions with the SEC on things like indemnification and bonding issues." Messick said the SEC "is willing" to listen to "our problems and concerns." Regardless of what the SEC decides, CUNA Mutual Vice President and Deputy General Counsel Kevin Thompson stressed that "the SEC is not the bad guy." He added that, "Neither is the NCUA," because of its passage of the Incidental Powers regulation in 2001 that triggered the SEC to take the action it has. The rule among other things, allows credit union to share in commissions from investment services transactions. Since NCUA's Group Purchasing Regulation, Part 721 prohibited the sharing of commission in excess of expenses, CUSOs were formed to provide for the sharing of commissions, to insulate the CU from risk, and to allow the serving of non-members. Because of incidental powers, the SEC has determined that CUSOs are no longer a "required service corporation." "The SEC hasn't changed their initial position that they first stated when they issued the Chubb Letter," said Thompson. "What's changed is NCUA's position on incidental powers." Thompson characterized the on-going situation as being the result of "interplay between two sets of independent regulators over two separate industries. It's not the case of one regulator trying to change another regulator's rules. It's taking a while to work through how each one's rules interact with the other's." -

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