After years of work on the new corporate reg, corporate leaders happy with outcome; say BBB investments won't get much play

ALEXANDRIA, Va. – It was a long hard road, but in the end corporates are pleased with the new corporate reg. The final corporate reg that was passed at NCUA’s October board meeting has been in the works for a few years now, with corporate leaders and NCUA’s Office of Corporate CUs exchanging many views and holding meetings on the hot button issues. Association of Corporate CUs Executive Director Gigi Hyland said overall she’s very pleased, though the ACCU didn’t get all that it wanted. From the last proposal to the final rule passed, Hyland is most pleased with the grandfathering provision for Paid-in-Capital (PIC); the elimination of the provision restricting corporates from paying dividends if Reserves, Undivided Earnings (RUDE) falls below 2%; and the change to the definition of trade association in terms of who can serve as a corporate’s chairman. NCUA got the message loud and clear on the dividend restriction, which had corporate leaders up in arms, stating in the final rule that the Board “agrees failure to pay dividends would be a dramatic impact on a corporate, its members, and potentially, the entire credit union system.” Corporate leaders feared it would give members undue panic if they couldn’t pay a dividend. Now NCUA is just requiring that the corporate notify NCUA if RUDE falls below 2%, and NCUA will work with the corporate to address it. NCUA showed its flexibility on the PIC issue as well, allowing corporates to now issue PIC under the current definition up until June 30, 2003. This is the grandfathering provision ACCU came up with to ease concerns of corporates who have yet to issue PIC, who were concerned it would be more expensive under the new definition of PIC, which now doesn’t go into effect until July 1, 2003. Corporates also got their way with who can serve as a corporate’s chairman. In the last proposal, NCUA restricted a corporate’s chairman from serving not only on the board of their state’s League or League Service Corporation Board – which goes to NCUA’s action of dividing corporates and the leagues in the `90s – but also local, state and national special interest CU associations and organizations. NCUA revamped that definition to more specifically exclude League and League Service Corporation directors from serving as chairman. Where NCUA didn’t hit the mark said Hyland, was requiring corporates to record ACH transactions at the time of advice of the funds, rather than the settlement date which the ACCU advocated. In the final rule, NCUA stuck by its guns on the settlement date, stating that it contacted all other financial regulators and found that they also record ACH transactions on the settlement date. “The Board believes it is important to have consistency among corporates, as well with the other financial regulators,” the Board stated in the final rule. Hyland questions though, given the unique nature of corporates, if looking at what other regulators do really is an apples-to-apples comparison in this case. For Hyland, who leaves ACCU on Nov. 15 to take a legal position with Empire Corporate FCU, getting the rule passed was a team effort. “In the face of what everyone is saying about corporate competition and that there’s only going to be this many corporates left someday, corporates came together in a cooperative way. I’m very proud of them,” she said. Some corporate CEOs are admittedly glad the process is over. “I think it turned out to be a really good, very balanced regulation. I’m glad it’s over. A lot of work went into it,” said Joe Herbst, president/CEO of Empire Corporate FCU. Mid-Atlantic Corporate FCU President/CEO Ed Fox said corporates have little to complain about. “I’m very pleased with this. All things considered I think this is an excellent reg. I’m pleased NCUA listened to the corporates and made some changes in the final ruling on the dividend issue. This may be the best 704 that I’ve seen in my tenure at the corporate,” said Fox. NCUA Board member Deborah Matz voted against the new reg, mainly because of the provision that allows corporates to invest up to 25% of capital in BBB investments. Matz said that was a safety and soundness issue. Most corporate investment professionals say they don’t see corporates doing much with the new BBB power, but it’s nice to have flexibility. Bruce Fox, SVP of Asset/Liability Management for Southwest Corporate FCU, says he doesn’t see Southwest, which has Part II authority, moving into BBB investments. “Southwest Corporate isn’t going to be very active or active at all in that market,” he said. “The 25% limit was very liberal. From our standpoint it’s way over the amount we would even consider,” said Fox. Bob Burrell, WesCorp’s SVP/Chief Investment Officer also doesn’t see the appeal of BBB investments. “I don’t know why we’d want to do that. Today we can go down to single A, and if you look at our investment portfolio, everything is AAA,” said Burrell. Burrell said instead of the flexibility of BBB investments, he wished NCUA would have extended corporates’ AAA investment powers by allowing them to invest up to 100% of total capital in AAA investments. Burrell said NCUA was probably trying to limit risk, but the chance of loss in an AAA investment is almost negligible. Southwest’s Fox said Southwest still would have liked to seen NCUA move to a risk-based formula for evaluating a corporate’s balance sheet. “That’s something I think all corporates wanted,” he said. [email protected]