WASHINGTON -- This Thanksgiving will mark 14 years since a pivotal no-action letter from the Securities and Exchange Commission put in place requirements for networking broker-dealers from customer disclosure to the actual location of a firm's securities activities emerged and would eventually have a huge impact in the credit union industry.

The letter in question is the SEC's Nov. 24, 1993 Chubb Securities Corporation correspondence. A wholly-owned subsidiary of Chubb Life Insurance Company of America, CSC had proposed to enter into networking arrangements with credit unions, federal and state-chartered banks, savings banks and savings and loan associations to provide securities brokerage services on their premises to their members and customers as well as the general public.

Essentially, Chubb authorized banks, thrifts, and credit unions to enter into third-party brokerage arrangements under certain conditions without them having to register.

"That's a big deal because other times, you would have to register," said Guy Messick, general counsel for NACUSO and of Media, Pa.-based Messick & Weber PC, a law and consulting firm that provides service to credit unions and CUSOs nationwide. "SEC permitted this arrangement because of their confidence that banking regulators would assist with this oversight."

While banks could directly enter into networking arrangements, credit unions had the same latitude although they could not receive income over and beyond their actual expenses, said Messick, who has been in front and center on the issue, particularly how CUSOs fit into the Chubb equation. In July, Messick wrote to NCUA General Counsel Robert Fenner on a number of issues NACUSO would be providing feedback on. Among them is the assurance that credit unions would be able to offer investment services through networking arrangements.

"There have been some state credit union regulators, state securities regulators and even some NCUA examiners that have questioned the ability of federal credit unions to receive revenue share of commission income in networking arrangements with broker/dealers," Messick wrote. "The ability is clear under the Chubb No-Action Letter. While this request does not require a regulatory change, any method of communication and confirmation of that fact could prevent confusion over the issue in the future."

Messick said Utah, for instance, had some questions during a routine examination of a credit union about whether Chubb applies. After some research, the state regulator "backed off" and eventually acknowledged the networking exemption.

The spotlight is on Chubb again in large part because of the SEC and Federal Reserve Board's recent adoption of new rules that will finally implement the bank broker provisions of the Gramm-Leach-Bliley Act of 1999 after more than eight years of negotiations with regulators, trade groups and others. Credit unions are not addressed in those new rules but NCUA

has assured that it is in discussions with the SEC about developing a rule for credit unions that will address their needs in the securities activities area.

NASCUS said it has written to the SEC three times regarding the need to provide credit unions with the same exemptions for "broker" and "dealer" activities. The association has called for parity for credit unions including the more than 11% of state-chartered credit unions serving 17 million members that offer investment and sales activities. In a March 30, 2007 comment letter, NASCUS said the broker exemptions should apply equally to all credit unions, "regardless of their choice of charter type or insurance provider."

"...there is no distinction between the examination and supervision for federally insured or privately insured credit unions. The common structure, governance, regulation and examination of state and federal credit unions, regardless of insurance or charter type, should outweigh distinguishing between credit unions for exemptions granted for the definition of 'broker' and 'dealer' for certain activities," NASCUS wrote.

Going back to 2005, NCUA put up for consideration the Interpretive Ruling and Policy Statement 05-1, Sales of Nondeposit Investments. The rule would incorporate new SEC requirements for CUSOs and other third parties to register as brokers. It would also codify recent NCUA opinion letters concerning how credit unions and CUSOs can use the incidental powers rule to avoid registration in certain circumstances. The proposal would also require disclosures for employees shared by the credit union and a CUSO when the employee is selling stocks, bonds or variable annuities and not acting on behalf of the credit union.

One of those letters IRPS 05-1 looked to codify was NCUA Letter 150, which specifically recognized that CUSOs may participate with a credit union and a broker in such arrangements. Although it did not specifically address the necessity of registration with the SEC, it stated generally that credit unions must comply with all laws and regulations applicable to the activity. NCUA received strong opposition to IRPS 05-1 and eventually pulled back on the proposed replacement to Letter 150.

"I don't know if there are any present plans to bring it back," Messick said.

As NCUA and SEC continue talks on a proposal that addresses credit unions and broker-dealer exemptions, the commission has stepped up efforts to get credit unions to move their investment programs from CUSOs to credit unions, Messick said. As a result of the 2001 Incidental Powers Regulations, the SEC said CUSOs no longer have a networking exemption to receive income without being registered because CUSOs are no longer a "required service corporation" under the Chubb letter, Messick has been saying since 2004.

The SEC has required broker/dealers enter into new networking agreements with credit unions, not CUSOs. The only exception has been for state chartered credit unions in states that have not confirmed that their state chartered credit unions have Incidental Powers similar to federally chartered credit unions.

"My sense is that there are only a handful of CUSOs that have done this," Messick said on investment programs that have moved from CUSOs to credit unions.

--msamaad@cutimes.com

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Third-Party Brokerage Arrangements Hold Up Under Chubb Letter, Talks On Proposal With More Regulatory Teeth Begin

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