ALEXANDRIA, Va.-The NCUA Board issued a proposed Interpretive Ruling and Policy Statement last week at its monthly meeting that offers requirements and guidance for federally-insured credit unions on third-party brokerage arrangements. The proposal, which carries a 60-day comment period, explains the responsibilities of the credit union and the brokerage firm, separation of nondeposit sales from other types, contact with members in securities sales, compensation and referral fees, shared employees, and sales to nonmembers, among other issues. It would replace the current Letter to Credit Unions No. 150, issued in 1993. NCUA decided to put the item out as a proposed IRPS as opposed to a Letter to Credit Unions because it will be more available to the public, parts will have the force of regulation, and an IRPS generally allows for public comment. Nondeposit investments, such as stocks, bonds, mutual funds, and variable annuities, are becoming much more common offerings among credit unions. While credit unions cannot register as securities brokers because SEC requirements are inconsistent with those of NCUA and the state regulators, third parties, such as CUSOS, may. Under federal credit unions’ incidental powers, they may bring third-party brokers to their membership, but state-chartered credit unions must refer to their own state’s laws. Though the third-party is liable for any misleading representations, the credit union could also be liable if it does not ensure that the brokerage activity is sufficiently separated from the credit union’s other activities. While complete separation is not practical, precautions must be taken when a credit union employee refers the member to the nondeposit side or a dual employee is used. “Credit union management must be aware of how the member will perceive the relationship between a credit union and the broker and how the two may be connected in the member’s mind,” according to the Board Action Memorandum. “The greater the possible connection, the more management must be involved in oversight of nondeposit investment sales practices.” A number of changes have occurred since NCUA’s 1993 letter that led to the updating, including the establishment of the Incidental Powers rule, as well as changes to the SEC’s rules that expand and clarify credit unions’ ability to work with brokerages without registering as a broker themselves. When made final, the SEC’s Regulation B will replace the current series of `no action’ letters. If there are significant differences to the final Reg B, NCUA will amend the final IRPS accordingly. The agency heads also issued a proposed rule updating the minimum requirements for fidelity bond coverage. It would increase the deductibles permitted for larger credit unions under RegFlex and remove the approved bond forms and carriers list, instead stating it is available and will be updated on NCUA’s Web site (www.ncua.gov). The proposal requests comment on additional factors for credit unions to consider in determining if it should obtain more than the minimum requirements. The maximum deductible is currently $2,000 plus one one-thousandth of total assets, up to $200,000, according to NCUA’s BAM. Therefore, credit unions in excess of $198 million are limited to a $200,000 deductible. Currently, asset size is the only factor impacting the deductible, which the NCUA Board plans to maintain, but wants to raise the maximum deductible to $1 million for RegFlex credit unions, which they would reach at assets in excess of $998 million. At $1 billion, a RegFlex credit union has at least $90 million to absorb the possible $1 million loss. Between credit union growth and inflation since 1981 when the rule was last updated, the BAM read, “The Board believes large, well-run credit unions with substantial net worth can absorb financial risk greater than $200,000.” The current risk environment also calls for higher bond coverage at both ends of the asset range, according to the NCUA Board. The maximum required coverage now is $5 million for all credit unions over $295 million in assets, which has not been changed since 1977. The board has proposed to raise the minimum bond coverage for credit unions over $500 million in assets to 1% of the credit union’s assets rounded to the nearest $100 million with a cap of $9 million. On the smaller end, credit unions under $4 million have a cap on the bond coverage minimum of $250,000. The board has proposed that the bond coverage increase to the lesser of $250,000 or their total assets, whichever is less. -firstname.lastname@example.org
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