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ALEXANDRIA, Va. – Using a shared employee with a broker-dealer to provide investment services to nonmembers is not an option for federally-chartered credit unions, NCUA recently said. Linsco/Private Ledger sought guidance on the matter and in a January 19 opinion letter, NCUA Associate General Counsel Sheila Albin wrote a shared employee, acting on behalf of the broker-dealer, could provide services to nonmembers but the FCU could not derive income from that activity. An FCU may invest in a CUSO that provides nonmembers investment services, or it may act as a finder of investment services to members under the incidental powers rule, she added. An FCU may also only provide correspondent services that fall under the express powers provisions of the Federal Credit Union Act, but it does not authorize FCUs to engage in broker-dealer services. Albin also clarified that while FCUs have no express power to provide broker-dealer services itself, it may only do so as a “finder activity.” Finder activities permit an FCU to introduce members to third-party vendors to consummate a transaction. An FCU may only engage in finder activities on behalf of members but it can not rely on the correspondent services category of incidental powers to provide a different category of services authorized by the incidental powers rule, Albin wrote. Linsco/Private Ledger provides broker-dealer services to HFCU Services, Inc., a CUSO wholly-owned by Hughes Federal Credit Union (Hughes FCU). The CUSO currently provides investment services to both members and nonmembers of Hughes FCU. Under NCUA regulations, a CUSO may also serve nonmembers, as long as it primarily serves credit unions, their membership or the membership of credit unions contracting with the CUSO. 12 C.F.R. 712.3(b). Albin wrote. By using a CUSO to offer investment services to members, Hughes FCU may derive income from HFCU Services, Inc. for the investment services to nonmembers. The CUSO was interested in expanding its business to serve members of other credit unions and believes that it may contract directly with the FCU, rather than the CUSO, to provide broker-dealer services to members and nonmembers of Hughes FCU. Linsco/Private Ledger wanted to continue to provide broker/dealer services to its HFCU Services customers and expand the customer base to include members of other credit unions, but sought to contract directly with Hughes FCU rather than HFCU Services by sharing an employee with the credit union under a third-party networking agreement that would comply with NCUA Letter to Credit Unions No. 150 (Letter 150) and all other applicable rules. “Hughes FCU may not circumvent the prohibition against serving nonmembers by using a dual employee. It could not profit from, or be reimbursed its expenses for, a dual employee’s services to nonmembers,” Albin wrote. Linsco/Private Ledger referred to an NCUA legal opinion OGC 01-0742, dated August 31, 2001 that appeared to be “consistent” with its request. Albin disagreed, pointing out that the 2001 letter considered the permissibility of an FCU employee selling nondeposit investment products to members on behalf of a CUSO or third party. “Our opinion in that case does not permit a shared FCU employee to provide broker-dealer services to nonmembers,” Albin wrote.” Further, Letter 150 does not authorize FCUs to provide broker-dealer services to nonmembers, it merely offers FCUs guidelines for otherwise permissible sales of nondeposit investment products.” Linsco/Private Ledger also suggested that an FCU could provide broker-dealer services to customers who are members of other credit unions as a correspondent service to the other credit unions. “An FCU may only engage in activities that the Act expressly authorizes or that fall within an FCU’s incidental powers,” Albin wrote. “Correspondent services are a category of incidental powers in which an FCU provides services to other credit unions that it is authorized to provide to its members or as part of its operation. 12 C.F.R. 721.3(b).” Under the incidental powers rule, an FCU may earn income from incidental powers activities. 12 C.F.R. 721.6. As explained in the preamble to the most recent revision of the incidental powers rule, correspondent services are an exercise of an FCU’s incidental powers because they are a “convenient and useful way for a recipient credit union to carry out its express powers when it can not perform the service itself.” 66 Fed. Reg. 40845, 40850 (August 6, 2001). Albin said since an FCU has no express power to provide broker-dealer services itself, it may only do so under another category of the incidental powers rule; as a finder activity. 12 C.F.R. 721.3(f). Finder activities permit an FCU to introduce members to third-party vendors so that the member and vendor may consummate a transaction. An FCU may only engage in finder activities on behalf of members but it can not rely on the correspondent services category of incidental powers to provide a different category of services authorized by the incidental powers rule. -

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