July 11, 2002
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Notice of Application of Evangelical Christian Credit Union for Exemptive Relief Under Sections 15 and36 of the Exchange Act and Request for Comment, Release No. 34-46069; File No.S7-12-01
Dear Mr. Katz:
Treasury Strategies, Inc.1is pleased to provide the U.S. Securities and Exchange Commission("Commission") with comments on the Evangelical Christian Credit Union's ("ECCU") request for exemptive relief under Sections 15 and 36 of the Securities Exchange Act of 1934.
The central focus of the request for exemptive relief is a commercial sweep account("sweep"). Treasury Strategies, Inc. has observed and measured the growth and composition of the sweep market since 1991. Our Financial Institutions practice has assisted a large number of financial institutions in implementing and positioning sweep account products to the benefit of both the financial institutions and their customers. Our Global Corporate and Specialized Industries practices have assisted hundreds of business organizations in optimizing the treasury functions, including the adoption of sweep accounts.
We propose to assist the Commission in two ways: 1) by providing background and insight into the sweep marketplace, including information from our proprietary sweep market surveys, and 2) by commenting specifically on the ECCU's request and the Commission's questions for comment surrounding that request.
Background and Insight into the Sweep Marketplace
A sweep account is a banking service that automatically links a commercial depository account with an investment account and, without customer intervention, adjusts depository account balances to a predetermined target level by transferring funds to or from the investment account as necessary.
Financial institutions began offering sweep accounts during the 1970s in response to the requests from important corporate customers. Many banks with a large cash management business felt that these accounts would disintermediate their demand deposits and for a long time, therefore only offered these products defensively.
Treasury Strategies, Inc. began measuring sweep assets in 1991 and found total system-wide assets of $20 billion invested primarily in overnight repurchase agreements. We also found that sweep programs offered attractive fee and spread income for financial institutions while providing commercial customers with investing convenience.
During the 1990s, sweep assets began growing rapidly as institutions learned that with proper pricing and positioning, sweeps assets and deposits could grow simultaneously. This is because companies tended to concentrate more of their accounts with institutions that offered well designed sweeps. Large banks began moving sweep assets off their balance sheets into their proprietary money market mutual funds as a way to jump-start their mutual funds. Smaller institutions matched the fund offerings by sweeping into third party mutual funds.
By 2002, total sweep assets had reached $320 billion. Thus, they had pulled even with total demand deposits. Most financial institutions now offer sweeps into multiple investment offerings. About 40% of sweep assets are invested off balance sheet into money market mutual funds. The remaining 60% stay on the financial institution holding company's balance sheet in the form of investments in overnight repurchase agreements, offshore time deposits or money market deposits accounts (which are currently subject to a six withdrawal per month limitation).
Commentson the ECCU's Request
1) First, the Commission invites any person to submit comments or other information that relates to the relief requested in ECCU's application, including whether the application should be granted.
Treasury Strategies, Inc. believes strongly that any activity which reduces friction in the economic marketplace is advantageous to the marketplace overall. Programs which allow funds to efficiently flow to their highest and best use create economic value. In that context and subject to the issues we raise in the following section of this letter ("Issues"), we encourage the Commission to grant the exemptive relief sought by the ECCU.
2a) Should (the requested relief) be limited to the ECCU application until additional experience is gained with other applicants?
Hundreds of financial institutions have already demonstrated the efficacy of sweep programs. We see no compelling reason to limit the requested relief to the ECCU.
2b) Should (the requested relief) be available only to some category or categories ofcredit unions such as, for example, federally insured credit unions?
Again, with the well documented success of sweep programs among all categories of commercial banks, we see no compelling reason to limit the exemptive relief to specific categories of credit unions.
2c) Should (the requested relief) be available with respect to all credit union members or only some category or categories of credit union members such as, for example, individuals or non-profit organizations?
We believe that the requested relief should be available to all commercial customers of credit unions including sole proprietorships, partnerships, corporations, units of government and non-profit organizations. This will level the playing field relative to other financial institutions.
Webelieve that relief with respect to individuals raises a more complex set of issues beyond the scope of this response.
2d) Would (the requested relief) benefit credit union members and customers of banks and thrifts by enhancing the ability of credit unions to compete with banks and thrifts by offering new services?
We believe that credit union members will benefit by this relief. Commercial members will enjoy the direct benefits of sweeping and earning competitive returns on their funds. All members benefit from the improved profitability of the credit union.
We do not believe that customers of banks and thrifts will benefit as the result of competition from credit unions. The competition in the marketplace among banks and thrifts is already robust. The entrance of credit unions into the sweep market is not likely to have a material competitive impact either way.
2e) Would (the requested relief) raise investor protection concerns?
To the extent that credit unions (or any financial institution, for that matter) sweep into "smaller" money market mutual funds, it is possible that volatile sweep assets could be disruptive to sound portfolio management principles.
To the extent that credit unions (or any financial institution, for that matter) sweep into "lower quality" money market mutual funds, it ispossible that investor assets are at greater risk than is warranted for this type of investment.
2f) Would (the requested relief) unfairly disadvantage banks, thrifts, broker-dealers, or other financial institutions in light of the ability of credit unions to offer particular products or services that other institutions might not be able to offer such as, for example, interest-bearing business checking accounts?
We feel that the markets are so robust and competitive that the requested relief will have virtually no adverse impact on other classes of financial institutions.
HR1009 which recently passed in the U.S. House of Representatives effectively grants banks and thrifts the ability to offer interest-bearing checking accounts. That measure, inconjunction with this requested exemptive relief is essentially a complete leveling of the playing field.
3) Third, the Commission requests comment on whether such relief would raise issues that should be considered in connection with amendments to the May 11, 2001 interim final rules implementing the functional regulation exceptions frombroker-dealer registration of the GLBA.
We have no comment for this point.
Credit unions, like almost all bank-like financial institutions, are chartered with the purpose of achieving a specific mission. They generate assets and liabilities and serve their constituents in a manner consistent with that mission.
A properly managed sweep program can certainly be consistent with the credit union mission by growing both deposit liabilities and profit.
However, a poorly managed sweep program which only disintermediates needed deposit liabilities and invests them in money market mutual funds impedes that mission.
Treasury Strategies, Inc. welcomes this opportunity to comment on the Evangelical Christian Credit Union's request for exemptive relief under Sections 15 and 36 of the Securities Exchange Act of 1934. We would be pleased to provide additional information that the Commission considers to be helpful in considering this request.
Treasury Strategies, Inc. believes that the Commission should grant this request for exemptive relief and extend it to all credit unions for all commercial customers. We als obelieve that the Commission should encourage great care in the design and implementation of sweep programs. Finally, we believe that the Commission should encourage sweeps into on-balance sheet liabilities as well as the off-balance sheet money market mutual funds.
If we can provide further information or clarification of the points made in this letter, please contact us at 312-443-0840.
Anthony J. Carfang, Partner
Treasury Strategies, Inc.
309 W. Washington St.
Chicago, IL 60606
1 Foundedin 1982, Treasury Strategies, Inc. is a consulting firm specializing in payment systems and liquidity management. Its Financial Institutions practice has consulted with numerous banks, mutual fund companies and securities dealers on the design and implementation of sweep accounts and other cash management programs. Its Global Corporate and Specialized Industries practices have consulted with hundreds of large corporations, small businesses, units of government and non-profits on the optimization of their treasury functions, including the use of sweep accounts. (More information about Treasury Strategies, Inc. is available on our home page: http://www.TreasuryStrategies.com.)