WASHINGTON – Despite lots of progress, there are still major thorns in the sides of corporates in the latest corporate reg proposal. At press time corporates throughout the country were still polishing off their comment letters to NCUA on Part 704. There are a few provisions they are adamantly against, but none so much as Section 704.3(i)(5), which would in effect prohibit a corporate from awarding dividends if its RUDE (reserves, undivided earnings) dropped below 2% or if retained earnings decline from the prior month end. Corporate leaders say the provision is harsh to put it lightly because if a corporate's RUDE falls at any given time it's likely because of an increase in assets. Of course assets have been increasing industry wide in the last few years as a flight to safety has seen consumers move money into safe deposit CU accounts. "If we see another jump up in balances that 2% RUDE can come into play. It's just not acceptable that those corporates wouldn't have the ability to pay dividends. What kind of unsettling message does that send to our members?" said Marc Schroeder, president/CEO of Corporate Central CU and the current chairman of the Association of Corporate CUs. Schroeder also pointed out that a lot of corporates pay dividends daily on things such as overnight accounts. If the provision stands, a corporate could be in violation, but not know it until the end of the month. Would a retroactive violation occur? "I think the reg has made great strides and has fixed quite a few things. But that is a very onerous provision," said Schroeder. "Not being able to pay dividends? I hate to use this word, but it's ludicrous. The only way corporates get to that kind of RUDE level is if they've been so successful in serving credit unions, because deposits have picked up. It could send a horrible message to credit unions that corporates are not safe and sound," said Bruce Fahenstock, president/CEO of Volunteer Corporate CU. Fahenstock believes that falling below 2% RUDE is not something that should trigger adverse consequences. "It sends a message to Congress and to members that they need to find other places to put their money. NCUA should move in line with the Basel Accord for risk-weighted capital," said Fahenstock. Southeast Corporate FCU President/CEO Bill Birdwell said if a comparable reg existed in the banking world, consumer confidence would have taken a very severe hit. "It's a very dangerous precedent to set. Actually I think it would create additional risk for credit unions, not less. If credit unions didn't get paid a dividend, that's going to have an impact on them, which could balloon across a region, state and across the whole country," said Birdwell. The problem said Birdwell is that RUDE can be dependent on much that is out of a corporate's hands. "Corporate assets are very volatile and countercyclical. As loan demand goes down, investable funds go up, corporate assets tend to balloon up. This dividend trigger would largely be beyond our control." NCUA however says corporates may have overreacted before understanding the full scope of that provision. Kent Buckham, the director of the Office of Corporate CUs, says once corporates heard they could be precluded from paying dividends they understandably were concerned, but he encourages them to look at the provision's flexibility. "We understand that in a situation of a rapidly consolidating balance sheet, when economic factors change it may be prudent and appropriate based on interest rates for corporates to take action that may result in retained earnings falling below 2%. We don't want to preclude them from doing anything appropriate," said Buckham. He pointed out that corporates can avert the dividend restriction if the drop below 2% was a result of a corporate restructuring its balance sheet and selling investments for a loss that caused the decline. He noted also that if the dollar amount of retained earnings increases from the prior month end, then the dividend restriction is avoided. And if all else fails, said Buckham, NCUA is simply asking for corporates to talk to their regulator about their situation and that can be another avenue of avoiding the restriction. Despite what Buckham described as a flexible rule, Association of Corporate CUs Executive Director Gigi Hyland said corporates have a conceptual problem with NCUA being able to prohibit them from paying dividends. "We're wondering what NCUA is trying to do. It seems like they're trying to make sure corporates are making money. Is that what they should be looking for?" said Hyland. "It also sends a message of uncertainty to credit unions." Ironically, corporates are happy that the minimum 2% RUDE ratio requirement was eliminated from the current proposed rule in its original form. That provision would have required corporates to submit a capital restoration plan if they fall below 2%, and many corporates felt it also severely devalued paid-in capital (PIC). The dividend provision is part of the new earnings retention requirement which is what replaced the 2% RUDE requirement in the prior proposed rule. It establishes an earnings retention requirement of 10 to 15 basis points per annum based upon the corporate's retained earnings and core capital ratio. Hyland said that provision and the dividends restriction still do not fundamentally address what NCUA said it originally set out to do with corporate capital – that is to make measuring it more comparable with other financial institutions. "This is not consistent with other regulatory schemes, since other regulatory schemes have moved to a much more risk profile formula," said Hyland. Risk-based capital measurements were once part of the corporate reg and some corporate leaders say they might be needed now more than ever if NCUA truly wants to put corporate CU capital on par with other financials. While the provision restricting dividends seemed to be the biggest negative for corporate leaders, it certainly wasn't the only one. Section 704.2 would require a corporate to record an ACH transaction at the time of advice of the funds, rather than the settlement date. "NCUA is requiring corporates account for the money as of the advice date that the money is coming in. You could be talking about millions of dollars for which the corporate has no liability until the settlement date," said Hyland. She said what this does is makes a corporate's capital look less than it actually is. She said considering things like payroll and Social Security payments, the amount of money can be very large. Only a handful of corporates record on the advice date, with the bulk recording on settlement date. Hyland said a number of corporates have already checked with their accounting firms and have been told there's no reason to record on the advice date. She said nothing in NACHA's rules require corporates to make funds available on the advice date, but of course on the settlement date. Buckham said that NCUA is looking at this issue and may reassess its position, yet it was still too early to tell. "We just received the ACCU's letter a few days ago and know it's an issue for them. We're looking at it," said Buckham. Another provision the ACCU is against isn't financial in nature at all. Section 704.14 would bar anyone serving as the chairman of a corporate credit union to serve "simultaneously as an officer, director, or employee of a credit union trade association." Corporate leaders say this is overkill, and it would severely limit the talent pool for corporate chairs. "It is so broad. It encompasses the whole credit union world-leagues, leagues service corporations, chapters, foundations. The original intent of the reg goes back to interlock. NCUA did not want those who serve in a leadership capacity on a league board, have chairman or decision making power on the corporate board. It shouldn't encompass someone who may be head of their local chapter," said Hyland. The ACCU is asking NCUA to amend the definition to include only state credit union leagues of the state in which a corporate credit union is headquartered. That too may have problems though given that many corporates are now serving CUs in multiple states. "Part of the problem is when you have volunteers in the system, they typically volunteer for more than one thing. Chances are those positions could be totally unrelated (to the corporate). There are no interlock concerns, but they are going to be drawn into that big broad sweeping definition," said Joe Herbst, president/CEO of Empire Corporate FCU. On this issue, Buckham again said NCUA is aware of the concern and would consider alternatives. "Through different meetings with corporate folks, we've heard their concerns. We have not offered anything on our end to change it, but they can propose language which we would consider," said Buckham, stressing that in no way means NCUA is set on changing it. Some other provisions caught the eyes of individual corporates. For example, Section 704.11(g)(3) requires corporates who lend to or invest in a corporate CUSO to obtain an annual audit. Seems reasonable enough, but what the ACCU is objecting to is requiring the audit for CUSOs that are wholly-owned by a corporate. "If the corporate CUSO is wholly-owned or majority-owned by the corporate, the corporate prepares the financial statements and there is no need for reliance on an independent audit in order to meet due diligence requirements," stated ACCU in its comment letter. This provision caught the attention of Corporate One, Columbus, Ohio. "What we're seeking is clarity. We don't believe that it makes a lot of sense to require a wholly-owned or majority-owned CUSO to have an annual audit. The reason being because it's wholly-owned you have control of the statements. The provision is intended for when you're a minority owner when you don't have any control over the financial statement," said Mark Solomon, CFO for Corporate One. Corporate One happens to have a wholly-owned subsidiary that it gets an annual audit on anyway because other corporates are using its investment products, however Solomon said Corporate One is simply looking out for the future when it may have a wholly-owned CUSO that doesn't require an audit in its eyes. Most corporates and the ACCU agree with the changes to PIC, which now must be in the form of perpetual, non-cumulative dividend accounts. The revised reg also grandfathers in corporates who have already issued PIC to count its PIC in their core capital ratio. The problem, according to ACCU, is that the 15 corporates that have yet to issue PIC now are forced to issue more expensive perpetual PIC. The ACCU argues that since NCUA took so long in defining PIC, many corporates were in a holding pattern on issuing PIC – corporates such as Mid-States. "Now that we know what the definition is we have a window of four months to turn around legal documents that take three to six months to get done. It's an uneven playing field," said Mark Bedigian,vp of risk management for Mid-States Corporate. The ACCU is advocating for an 18 month window for corporates to issue PIC under the same parameters as those who have done so already. Bedigian said that would eliminate the problem. Buckham said NCUA has not discussed the granfathering clause as of yet, but is aware of the concern. [email protected]