NEWPORT BEACH, Calif. – For those credit unions that are taking a “wait-and see” stand on when the SEC will pick up scrutiny of those investment programs that have not been moved out of a CUSO, making the transition may require more planning than envisioned. That’s certainly the case if a credit union has a CUSO that serves multiple credit unions, said Guy Messick, legal counsel for NACUSO. “They especially should be sure on how the program will run,” Messick said. “You can run the investment program but there has to be some type of coordinated program through a CUSO.” 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. “From what I’m hearing, most have already moved to the credit union,” Messick said. “And then many of them are filing a wait-and-see program.” On its Web site,, NACUSO has provided a listing of “ten keys to transitioning investment services from the CUSO.” Among them includes verifying if the credit union can receive securities commissions under state laws and reviewing the bond and insurance coverage for the investment activities. A bigger question CUs might have to ponder is will the investment program have profit accountability. Messick said when the investment programs were in the CUSO, the profitability was always an item that was monitored. If the CU has a cost accounting or arranges itself in profit centers, the investment services’ profitability will still be monitored. “If the credit union does not have cost accounting by services provided, there is a larger question for the credit union as to whether it should apply cost accounting across all lines of service,” Messick said. Some credit unions will and have taken a hard look at what they are capable of handling, Messick said. “Some credit unions will have to consider not having the time or expertise to turn this program and (may seek out) brokers,” he said. In March, NACUSO learned that an unnamed broker-dealer was alerted by the SEC that it was out of compliance with Incidental Powers Regulations. At the time, Messick, said the alert, which occurred during a routine examination, was not a target enforcement but a clear indicator that the Commission may start looking more closely at non-compliant brokers. The SEC may not be scrutinizing this particular issue as heavily as others. “We try hard to look at everything,” said John Heine, deputy director, SEC Office of Public Affairs. “I haven’t heard of any task force to look at this area,” referring to the out-of-compliance broker-dealer. On the SEC’s recent extensions for banks to comply with broker requirements under the Gramm-Leach-Bliley Act of 2002, Messick said the agency wants to ensure investor protection. “The SEC has said its first charge is making sure the investor is protected. A lot of issues have come up. The Federal Reserve has weighed in. I think the biggest issue with the banks has been on the compensation side,” Messick said. Meanwhile, 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. Regulation B would allow credit unions to enter into the same networking arrangements with broker-dealers that banks can. Currently, credit unions may enter into networking arrangements with broker-dealers under the conditions set forth in an SEC opinion letter (“Chubb letter”). However, banks can network with broker-dealers under the terms of the Exchange Act bank exception for third-party brokerage arrangements. This proposal extends that Exchange Act exception to include credit unions, and would thereby supersede the Chubb letter. -

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