July 12, 2002
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549-0609
Re: Notice of Application of Evangelical Christian Credit Union for Exemptive Relief Under Sections 15 and 36 of the Exchange Act and Request for Comment, Release No. 34-46069, File No. S7-12-01.
Dear Mr. Katz:
The National Credit Union Administration (NCUA), an independent agency in the executive branch, appreciates this opportunity to provide comments on Evangelical Christian Credit Union's (ECCU's) application for relief from the broker-dealer registration and other requirements of the Exchange Act so that ECCU might offer sweep account services to its members without registering as a broker-dealer. We also appreciate the opportunity to comment on whether all credit unions should be permitted to offer sweep accounts to their members on the same terms requested by ECCU.
We support exemptive relief for ECCU and for all federally-insured credit unions to permit them to offer sweep account services without registration to all their members on the same terms and conditions as banks and thrifts. We believe this relief would be in the public interest and consistent with the protection of investors.
The Securities and Exchange Commission (the Commission) asked for comments on particular issues. Those issues and our comments follow.
1. Would the requested relief raise investor protection concerns?
The sweep accounts service that the Exchange Act §3(a)(4)(B)(v) authorizes banks to conduct without registration does not raise investor protection concerns, and the same service would not raise investor protection concerns if conducted by ECCU or any other federally-insured credit union. The Commission recognizes the no-load money market funds bought and sold in these sweep accounts carry little investment risk.1 The Commission further recognizes that the distribution fees no-load funds may pay the institution offering the sweep service and the associated potential for conflicts of interest between the institution and investor are minimal.2 These low-risk aspects of no-load money market funds protect investors regardless of the type institution offering the sweep service, be it bank, thrift, or credit union, or the type of investor, be it institution or individual.
In addition, we believe the structure of credit unions and NCUA's regulatory oversight and enforcement powers should alleviate any residual investor protection concerns the Commission might have. Credit unions are non-profit cooperatives that are owned and controlled by members and that can only serve members. There are no incentives to maximize profits at the expense of the member-consumer or to tolerate activities that harm the member-consumer. In addition, credit union regulation for the protection and confidence of consumers is substantially identical to corresponding thrift and bank regulation. For example, NCUA's enforcement authority is the same as that of the federal banking and thrift regulators, and includes the authority to take action for violation of any law, including consumer protection laws. And, in a manner similar to its bank and thrift counterparts, NCUA conducts on-site examinations and requires frequent, detailed reporting on the financial condition and activities of credit unions. This intensive supervision is a key safeguard against consumer fraud and abuse. These points and others are discussed in detail in the enclosed comment letter we sent to you last July.3
2. 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?
If the Commission grants the requested relief, it will have the effect of enhancing consumer choice by removing an unnecessary requirement that burdens the ability of credit unions to provide an authorized service. As discussed in the enclosed letter from Sheila Albin to Rosemary Hardiman, dated March 2, 1998, federal credit unions are authorized subject to certain conditions to offer sweep account services. A credit union with members that have transaction accounts but who are looking for the higher returns and convenience associated with sweep accounts may want to offer that option so that its members do not have to look elsewhere for the service. As we noted in our letter to you of last July, however, the differing capital and regulatory requirements placed on federally-insured credit unions and registered brokers make it impracticable if not impossible for a federally-insured credit union to register with the Commission.4 Accordingly, the registration requirement acts as a significant impediment to the exercise of an authorized power and the expansion of consumer choice.5
3. 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 do not believe the requested relief would disadvantage any institution based on the nature of the account from which funds might be swept. As stated in ECCU's application, in a typical sweep arrangement customers instruct the institution to invest their excess account balances automatically in the shares of a money market mutual fund. The purpose of the sweep is to maximize the investor's return, and so the establishment of a sweep account only makes sense if the money market fund pays more than the account being swept.6 The interest or dividends that might have been paid on excess funds if they were in the account being swept is not relevant, and the rate of return on that account does not disadvantage any other entity.7
We also note that the law prohibiting banks from paying interest on business checking accounts may be repealed. Legislation containing a repeal was introduced in both the House and Senate during the 107th Congress.8 The House bill passed three months ago, and the Senate bill continues to pick up additional sponsors.9
4. Should the relief granted be available with respect to all credit union members or only some members or only some category or categories of credit union members such as, for example, individuals or non-profit organizations?
As discussed above, the requested relief poses little in the way of investor protection concern given the nature of no-load money market funds and the regulation and structure of credit unions. We see no reason that the Commission should limit the requested relief involving sweep accounts to certain types of credit union members. Expansion to all credit union members would be in the public interest and consistent with the protection of investors.
5. Should the relief granted be available only to some category or categories of credit unions such as, for example, federally insured credit unions?
NCUA believes the Commission should grant relief to all federally-insured credit unions. The NCUA has examination and enforcement authority over federally-insured credit unions. With limited exceptions, the NCUA does not have authority over credit unions that are not federally-insured and expresses no opinion about relief for those credit unions.
6. Should the relief granted be limited to the ECCU application until additional experience is gained with other applicants?
The NCUA does not believe that relief should be limited to the ECCU application. As stated above, sweep accounts involving no-load money market funds are low risk, and the structure and regulation of credit unions further work to protect the member-consumer. No additional experience is necessary to demonstrate that full relief is in the public interest and consistent with the protection of investors.
NCUA staff would be glad to provide Commission staff with additional information, if necessary. Please contact Staff Attorney Paul Peterson at (703) 518-6555.
|1||"The sweep account exception protects sweep customers from conflicts of interest created by compensation arrangements by limiting banks that are not registered as broker-dealers to sweeping deposit accounts into no-load money market funds that pay minimal distribution fees. In addition, the sweep accounts exception's limitation to no-load money market funds results in limited risks to bank customers because of the constant net asset value of the funds, the absence of a sales load, and the minimal distribution fees that funds may pay to banks." 66 Fed. Reg. 27,760, 27,778-79 (May 18, 2001).|
|3||Letter from me to you, dated July 17, 2001, Release No. 34-44291, File No. S7-12-01.|
|4||Id. at 3.|
|5||To the extent the Commission is concerned about the effect of the requested relief on competition among depository institutions, the Commission should be aware that a credit union looking to compete with a bank or thrift faces some fundamental impediments. For example, because credit unions may only serve those persons or entities in their fields of membership, they cannot expand to take advantage of economies of scale in the manner banks and thrifts can. See U.S. Department of the Treasury, Comparing Credit Unions with Other Depository Institutions, dated January 2001 (the "Treasury Report"), at 39. In addition, federal credit unions are limited in their ability to obtain capital, because they may not issue stock and, with very limited exceptions, can build capital only through retained earnings. Treasury Report, at 52-53. Further, federal credit unions cannot offer their members the same panoply of services that banks and thrifts can offer their customers, such as trust and investment advisory services. Finally, federally-insured credit unions face certain limitations on serving their business members that do not apply to other depository institutions. See 12 C.F.R. Part 723 (Member Business Loan Rule); Treasury Report, at 22, 46.|
|6||In the unlikely event that a particular credit union account might pay a higher return than a linked money market fund offered as part of a sweep arrangement, there would be no incentive to establish or maintain that particular arrangement. The member would simply keep his funds in the higher-paying, federally-insured credit union account and forgo the sweep.|
|7||Although federal credit unions may pay dividends on share draft accounts, including business share draft accounts, federally-insured credit unions are limited in other ways they may serve business members. See, e.g., 12 C.F.R. Part 723 (Member Business Loan Rule). Also, the account being swept may not be a business account, and the Commission should not limit its analysis to business accounts. We expect credit unions that establish sweep accounts would also offer them to individual consumers since credit unions primarily serve individuals. Banks, thrifts, and credit unions may all pay interest (dividends) on consumer accounts. In addition, the Commission should be aware of certain fundamental impediments that would affect a credit union attempting to compete with a bank or thrift, discussed in fn. 5 above.|
|8||H.R. 1009, Business Checking Freedom Act of 2001; S. 229, Interest on Business Checking Act of 2001.|
|9||148 Cong. Rec. H. 1107 (April 9, 2002)(Passage of H.R. 1009); 148 Cong. Rec. S. 1421 (March 4, 2002)(Addition of cosponsor for S. 229); 148 Cong. Rec. S. 2951 (April 18, 2002) (Addition of cosponsor for S. 229).|
March 2, 1998
Rosemary Brady Hardiman, Esq.
Hardiman & Hardiman
6464 Blarney Stone Court
Springfield, VA 22152
Re: Integrated Financial Service Arrangements, Your Letter of November 6, 1997.
Dear Ms. Hardiman:
You state that several federal credit unions (FCUs) wish to establish integrated financial service arrangements that link members' share draft accounts with investment accounts at broker-dealers. You have identified four issues related to National Credit Union Administration (NCUA) rules or policies that might apply to these arrangements and ask if there are any others. As explained more fully below, you are correct that the only NCUA-related issues presented by the arrangements, as you describe them, relate to Article XIX, Section 2, of the Standard FCU Bylaws, Letter to Credit Unions # 150, and Section 701.21 and Part 721 of the NCUA Rules and Regulations.
Description of the Arrangement
As noted above, members' share draft accounts are linked to their money market reserve accounts ("money market accounts") at broker-dealers. A member can automatically transfer funds between the share draft and money market accounts based on a previously executed written authorization. When a member establishes a linked account, he or she provides the FCU with written direction to transfer all or a portion of the balance from the member's share draft account to his or her money market account at the broker-dealer at the end of each business day. At the beginning of each business day, the broker-dealer provides the FCU with a report of the member's balance in his or her money market account. During the day, drafts are presented for payment on the member's FCU account. If the account does not have sufficient funds to cover the drafts, the FCU informs the broker-dealer of the amount needed, based on a previously executed written direction from the member. The FCU and the broker-dealer settle each night.
In connection with the account services, the FCU also could establish a line of credit through separate application and agreement with the member. The line would be used to cover overdrafts if there are not sufficient funds in the money market account
Before allowing any transactions to take place, the FCU and the broker-dealer would execute a written agreement regarding the details of the program, including any liability issues. The FCU also would notify its bonding company.
As you suggest, the arrangement implicates Section XIX, Article 2, of the Standard FCU Bylaws, which requires an FCU to keep its members' transactions confidential. However, a member may consent to an FCU providing information to an outside entity. By signing the account agreement, a member would permit the FCU and the broker-dealer to share information regarding the linked accounts.
Letter to Credit Unions # 150 requires an FCU offering nondeposit investment products to its members to follow certain guidelines, including making specific disclosures regarding the products. Letter # 150 applies to the broker-dealer money market fund you have described, and you represent that the arrangement will follow the Letter in all respects.
An FCU may provide overdraft services to its members as long as it complies with 12 C.F.R. §701.21 and has an overdraft lending agreement in place. If the FCU establishes a line of credit through separate application and agreement with the member, as you indicate, it may cover overdrafts when there are not sufficient funds in the money market account
FCUs are limited in the reimbursement they may receive for making available to their members group purchasing plans involving outside vendors, such as a broker-dealer money market fund. 12 C.F.R. Part 721. You state that any FCU offering the arrangement will comply with Part 721.
Based on the information you have provided, we do not think the arrangement involves any other specific NCUA rules or policies.
Sheila A. Albin
Associate General Counsel