ALEXANDRIA, Va. -- On Nov. 1, NCUA issued a legal opinionstating that federal credit unions can hold onto their Visa stockafter the conversion of Visa USA to a subsidiary of Visa Inc.

Visa USA, which is an association including credit unions, willbe converted to a subsidiary of Visa Inc., at which time memberswill be issued stock. Visa stated in its prospectus "we expect thatfederal or state-chartered credit unions may be required to seekthe advice of their relevant federal and state regulators inconnection with the receipt and holding of our common stock."

Since then, NCUA's office of general counsel has been in contactwith Visa staff regarding the arrangement. In the restructuring,members of Visa USA will receive stock based on the basis of feesgenerated by a member. Members will not pay for the stock and donot need to take any further action to receive the stock. There arenot other alternatives available in lieu of the stock offerings,according NCUA's letter.

"Given our understanding of the stock issuance...we concludeFCUs may receive and retain the Visa stock because it is aby-product of lending, a permissible activity for FCUs, and doesnot require FCUs to invest in an otherwise impermissibleinvestment," NCUA Associate General Counsel Sheila Albin wrote inthe letter to Visa, Inc. General Counsel Joshua Floum.

Generally the Federal Credit Union Act does not permit federalcredit unions to invest in stock other than CUSOs. "The Visarestructuring, however, presents a unique situation," the letterread. "FCUs are not actually making an investment in Visa stock,namely, they are paying no tangible consideration and are receivingit as the result of the business decisions of Visa, a thirdparty."

State-chartered credit unions were advised to consult with theirstate regulators. Many states have parity laws with federal creditunions though some require pre-approval for the authority.

Visa provided NCUA its Proxy-Statement Prospectus that was datedas of June 22. The nation's largest credit card network announcedOct. 11 that it would begin selling stocks next year.

MasterCard also made the switch in May at $39 a share, New YorkTimes reported, which has since skyrocketed 78% to $69.50.MasterCard has a current market value of about $9.4 billion andanalysts have said Visa will at least double that, according to thereport.

CU Accounting for Stocks

Credit unions have never really accounted for stocks before, sohow should it be done? According to Patelco Credit Union ChiefFinancial Officer Scott Waite, chair of CUNA's Accounting TaskForce, no one is really sure. "I hate to be vague about this but itis a little vague," he commented.

When MasterCard had its Initial Public Offering, Waite said avariety of treatments were used but the amounts were so small,there was not much concern over it. Now, Waite said he and othersare hoping for an opinion or guidance from the Securities andExchange Commission. They may have to be adjusted monthly and couldimpact capital either positively or negatively depending on how thestock performs. He noted there are some similarities between theVisa situation and the demutualization of an insurance company.

Additionally, there are two schools of thought on the stock'svalue. According to the IPO proxy, Waite said the stock would havea book value of $0.0001, which would make 100,000 shares worthabout $10. However, it has been widely reported that the stockcould be offered at around $50 a share; for the 162,000 sharesPatelco stands to receive, that equals about $8 million. Waiterecommended that credit unions consult their accountants on theaccounting matters.

Patelco is also a $4 billion credit union doing about $590million in Visa business annually, ranked by Nilson Reports as 54thnationally among all card issuers, he said, so most credit unionsshould not be expecting that huge a return.

Of course, there is the proverbial "catch." Waite said therecipients have to hold onto the stocks for at least three years asper Visa's policy. A group of large

retailers are currently suing Visa and if the suit issuccessful, the stock value could be impacted.

None of this means anything really to Patelco until theCalifornia Department of Financial Institutions determines whetherit had the authority to take the same action NCUA did. However,Waite added, "The opinion by NCUA is very helpful."

NASCUS Communications and Public Affairs Director Kate Hartigsaid this is certainly something NASCUS and its members have beendiscussing. State regulators are reviewing their individual statelaws to determine whether state-chartered credit unions have thesame authority under their laws, she said.

NASCUS is also aware that the state leagues are working withstate regulators on this issue.

"State regulators have indicated to NASCUS they are reviewingthe applicability of their state laws and upon initial review, somestate regulators have said their laws allow for the same type ofinvestment," Hartig said.

Lobbying Efforts

CUNA and NAFCU had heard from their respective memberships andargued for this finding and generally considered NCUA's letter goodnews.

"This is a very positive development which will help ensurefederal credit unions are treated equitably with other institutionsas the conversion transpires," CUNA President/CEO Dan Micasaid.

Neither credit union groups nor the bankers anticipate thisruling will set any sort of investment authorities precedent. NAFCUSenior Counsel and Director of Regulatory Affairs Carrie Hunt said,"It certainly has the potential to but the Visa situation wasunique and NCUA took the stance that this was not an investment instock but that it was a by-product of credit unions already havingcredit cards and using those types of products. NCUA hasconsistently said that credit unions can only invest in stock ifits part of a CUSO or whether its necessary to the operations ofthe credit union, so we would expect it would use that sameanalysis if it were to look at other types of investments instocks."

A spokesman from the American Bankers Association, soon to bemerged

with America's Community Bankers, said they did not have anyconcerns with

the ruling.

Mica concluded, "We commend NCUA and leagues who have workedwith their regulators on this issue for favorable decisions andencourage other leagues and

credit unions to continue their discussions with stateregulators to pursue

positive rulings as needed in order for state credit unions tobe able to acquire and hold this stock."

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