SEC still out on CUSO broker/dealer license exemption, CFS prepares just-in-case strategies
SAN DIEGO - There's still no word from the Securities and Exchange Commission (SEC) on whether the agency will extend the broker-dealer license exemption for CUSOs. But with the ramifications on financial services CUSOs' business models being potentially far reaching, CUSO Financial Services has begun developing strategies to address the...
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SAN DIEGO – There’s still no word from the Securities and Exchange Commission (SEC) on whether the agency will extend the broker-dealer license exemption for CUSOs. But with the ramifications on financial services CUSOs’ business models being potentially far reaching, CUSO Financial Services has begun developing strategies to address the situation should the SEC decide against CUSOs. CFS President Valorie Seyfert said credit unions will “likely” have an exemption for networking arrangements with broker-dealers. However, she said, “From everything we’re hearing, it appears the SEC is leaning towards a proposed regulation comparable to that for the banks and will remove the license exemption for CUSOs.” The proposed SEC regulation is scheduled for implementation in May 2003. That, said Seyfert, would mean a “marked change in the way financial services CUSOs operate.” Not surprisingly, Seyfert said the SEC’s pending decision was a hot topic of discussion in sessions and in the hallways among attendees at CFS’ annual sales conference that was held July 7-10 at the Coronado Bay Resort in San Diego. If the SEC should decide not to extend CUSOs’ license exemption, CUSOs will have a choice of two alternatives: the CUSO would have to move the sale of securities products and the broker-dealer relationships back to the credit unions; or the relationships could remain with the CUSO and it would have to obtain a license and register with the SEC and NASD to be able to continue receiving a portion of commissions. In the latter scenario, the CUSO would in effect become its own licensed broker-dealer. Each option has its advantages and disadvantages, said Seyfert. Bringing the investment business back to the credit union would save the CU a considerable expense of registering and maintaining the CUSO as a broker-dealer. Seyfert said the licensing procedure is “cumbersome and expensive.” A credit union would also be allowed to outsource the management of its investment services to the CUSO, as well as the maintenance and administrative responsibilities for the investment services. The CUSO would basically handle everything but transaction services, and it would charge the credit union a flat fee since it would be prohibited from receiving a commission. The credit union could then deal with a registered broker/dealer CUSO for the transaction services side of investment services. Seyfert described this as “layering CUSOs.” “But many credit unions still won’t be comfortable with this arrangement because it will expose them to too much liability. Some prefer to keep investment services at arms length and it’s the reason many of them set up their CUSO to begin with,” said Seyfert. Regardless if a credit union chooses to bring the investment services back to the CU or register the CUSO as a broker-dealer, CFS has implemented programs to assist credit unions. John Zmolek, executive vice president of NW FCU in Seattle, Wash. and president of NW Member Network, the CU’s wholly-owned CUSO, said the credit union isn’t going to wait for the SEC to announce its decision. NW FCU is taking the initiative and will bring the CUSO’s investment services back under the credit union before then. NW Member Network was organized two years ago and was originally run as a managed CUSO through FNIC. “It was like a shell CUSO, everything was done under FNIC’s name,” said Zmolek. About a year ago, the credit union ended its relationship with FNIC, and the CUSO has since operated under the NW Member Network name. Zmolek said the credit union has spent a lot of money marketing the CUSO name and building name recognition for the CUSO. “It’s not worth the money,” he said “We’re spending a lot of money on things like mailing envelopes with the CUSO’s name on it to so the members will get accustomed to seeing it and they’re probably not opening them. Whereas if we send them a letter with NW FCU’s name on it, they’ll open it up right away because they know our name. It makes more sense for us to bring the investment services back to the credit union sooner than later. There’s nothing to be gained by waiting,” said Zmolek. Zmolek isn’t daunted by the possible increased risks the credit union will face by its strategic decision. “There’s no more risk than we had before,” he said. “Sure we may have to be a little more careful to make sure the members understand that even though NW FCU is offering the investment product, it isn’t insured like other products.” When NW FCU begins offering investment services, the CU will have a dual-employee relationship with CFS. Under this arrangement, a CFS licensed investment representative will be considered a full-time employee of the CU and be paid for by NW FCU. For those credit unions that prefer to keep their investment services with their CUSO and have the CUSO become a licensed broker-dealer, CFS’ program allows the company to handle the registration and perform the back-office functions for the CUSO under an outsourcing arrangement. Seyfert said any SEC decision against extending CUSOs’ broker/dealer license exemption would not prohibit a CUSO from outsourcing. Despite the lingering uncertainty over which way the SEC will decide, Seyfert strongly advises credit unions that have been thinking about offering investment services, to do so either by themselves directly or a CUSO. “The longer they wait, the further behind they’ll get. Credit unions’ competitors that offer a full array of services are looking at members’ money and are going after them, so it’s crucial that credit unions be able to give members the services they want. It doesn’t matter if the investment services are done through the credit union or a CUSO because either way it will enhance the credit union’s relationship with the member, and that’s what’s important. “The SEC’s decision will clearly change the way credit unions’ investment services programs operate, but it won’t change the impact these services have on members,” she added. Besides, said Seyfert, any SEC decision will not impact the insurance side of financial services CUSOs’ business. -
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