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PALO ALTO, Calif. – The list of California credit unions that have moved investment programs out of their CUSOs and in-house has a new addition. The $1.6 billion Addison Avenue Federal Credit Union completed its integration on Jan.1, said Scott Davis, president of Addison Avenue Financial Partners. As a result of the move, the relationship with its broker-dealer, CUSO Financial Services (CFS) has also been moved into the credit union so that the third-party agreement is between Addison FCU and CFS. Addison Avenue FCU joins other California CUs that have made the transition over including the $3 billion Wescom Credit Union’s CUSO, Wescom Financial Services, which has converted to an independent broker/dealer and $783 million Orange County’s Credit Union, which brought its investment program in house. The moves come as a result of the following: under 2001′s Incidental Powers Regulations, the SEC has said CUSOs no longer have a networking exemption to receive income without being registered, as CUSOs are no longer a “required service corporation” under the Chubb No-Action Letter and that technically, they have been out of compliance since July 2001. The SEC has required broker/dealers enter into new networking agreements only with credit unions and not CUSOs, according to NACUSO. The only exception has been for state-chartered credit unions in states that have not confirmed that Incidental Powers are similar to those of federally-chartered credit unions. There may be several exceptions to this rule including in Wisconsin, NACUSO said. Meanwhile, complying with the SEC was one motivation for the move but in the end, the transition makes sense for its member relationships, Davis said. With $1.3 billion assets under management, it was a “very important part of the process” for Addison Avenue Financial Partners to build on the investment advisory success it had seen for years. “The reason we went this route of becoming an SEC investment advisor is really geared towards wanting to have control over the product development process for our members,” Davis said. “We felt we understand our members and wanted to build an advisory and money management program for our members.” All 42 of the CUSO’s employees were moved to the credit union and the CUSO’s board was reduced from seven to three members to “bring it in line with the (advisory and insurance) activity in the CUSO today.” The integration process took about six months including laying the groundwork and the transition is transparent to the members, Davis said. The credit union will work with just members. “In the past, we have worked with non-members. Going forward with investment advisory services in house, our interpretation is that we can only work with members,” Davis said. “We have structured it so that we can deal with members from all walks of life.” Still, a new advisory platform will see most of its products directed to higher net worth members, which are those with a minimum investment of $50,000. After doing extensive requests for proposals with seven firms, the list was reduced to three and the credit union ended up partnering with Houston-based U.S. Fiduciary for its “superior electronic platform service.” The firm will provide the CUSO with an electronic advisory platform including a proposal generation system and reporting system. Davis said they will also be looking at the ability to use U.S. Fiduciary to offer an advisory product at a lower minimum investment. No hard figures are available on the number of credit unions that have moved their investment programs out of their CUSOs but one sign that the SEC is on the lookout occurred earlier this year. NACUSO reported that a broker/dealer, whose name is not known and has many CUSO networking programs, was advised by the SEC that it was out of compliance – becoming the first to be singled out. At the time, NACUSO General Counsel Guy Messick said “We knew the SEC was doing some routine exams, we knew that this one broker/dealer was selected and the issue came up. Naturally, this broker/dealer will be requiring its clients to move the networking arrangements from the CUSO to the credit union,” he said. In June 2004, the SEC issued a proposed rule Regulation B that would grant credit unions some of the exemptions from the broker-dealer registration requirements that banks currently receive and provide new exemptions for banks. These are provided under the Securities Exchange Act of 1934 as amended by the Gramm-Leach-Bliley Act. CUSOs are not mentioned in the proposal and the SEC has indicated that they do not see any reason, from their perspective, to treat CUSOs differently than operating subsidiaries for banks, which have never had a networking exemption, Messick had previously said. “The SEC has repeatedly stated that it has comfort in dealing with credit unions as they have regulators that the SEC can call upon to help correct any problem that may arise,” Messick has said. “Since CUSOs are not directly regulated by a credit union regulator, the SEC does not have the same comfort level with CUSOs.” In light of probably the first broker/dealer found to be out of compliance with the SEC, NACUSO is continuing to advise credit unions to move their investment program in-house from their CUSOs “in order not to be caught unprepared if the SEC starts to initiate enforcement actions.” -

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