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

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

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

"Given our understanding of the stock issuance...we conclude FCUs may receive and retain the Visa stock because it is a by-product of lending, a permissible activity for FCUs, and does not require FCUs to invest in an otherwise impermissible investment," NCUA Associate General Counsel Sheila Albin wrote in the letter to Visa, Inc. General Counsel Joshua Floum.

Generally the Federal Credit Union Act does not permit federal credit unions to invest in stock other than CUSOs. "The Visa restructuring, however, presents a unique situation," the letter read. "FCUs are not actually making an investment in Visa stock, namely, they are paying no tangible consideration and are receiving it as the result of the business decisions of Visa, a third party."

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

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

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

CU Accounting for Stocks

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

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

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

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

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

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

None of this means anything really to Patelco until the California Department of Financial Institutions determines whether it 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 Hartig said this is certainly something NASCUS and its members have been discussing. State regulators are reviewing their individual state laws to determine whether state-chartered credit unions have the same authority under their laws, she said.

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

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

Lobbying Efforts

CUNA and NAFCU had heard from their respective memberships and argued for this finding and generally considered NCUA's letter good news.

"This is a very positive development which will help ensure federal credit unions are treated equitably with other institutions as the conversion transpires," CUNA President/CEO Dan Mica said.

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

A spokesman from the American Bankers Association, soon to be merged

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

the ruling.

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

credit unions to continue their discussions with state regulators to pursue

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

--scooke@cutimes.com

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NCUA Says FCUs Can Hold Onto Visa Stock After Conversion

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