July 17, 2001

Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549-0609

Re: Interim Final Rules for Banks, Savings Associations, and Savings Banks Under Sections 3(a)(4) and 3(a)(5) of the Securities and Exchange Act of 1934 (the "Exchange Act"), File No. S7-12-01 (the "Interim Final Rules Release").

Dear Mr. Katz:

The National Credit Union Administration (NCUA) appreciates this opportunity to provide comments on the Interim Final Rules issued by the Securities and Exchange Commission (the "Commission").

The Interim Final Rules grant an exemption from the definitions of "broker" and "dealer" for savings associations and savings banks ("thrifts") on the same terms and conditions that banks are excepted or exempted from broker-dealer registration under Section 3 of the Exchange Act, as amended by Sections 201 and 202 of the Gramm-Leach-Bliley Act (GLBA).1 The Commission requested comment on whether this treatment of thrifts "should be extended to any other entities."2 The NCUA believes that the same or similar relief should be extended to federally-insured credit unions.

The Interim Final Rules also amend Rule 30-3 of the Commission's Rules of Organization and Program Management to delegate to the Director of the Division of Market Regulation authority to review and to grant or deny banks and thrifts exemptions from the broker-dealer registration requirements.3 Just as the powers of banks and thrifts have evolved over time, so have the powers of credit unions. We anticipate that this evolution will continue, and request that the Commission amend this delegation to include the authority to grant or deny future exemptive relief for credit unions.

The National Credit Union Administration and Credit Unions

The Federal Credit Union Act (FCUA) establishes the NCUA as an independent agency in the executive branch.4 The NCUA, a member of the Federal Financial Institutions Examination Council (FFIEC), charters and supervises federal credit unions and insures accounts at federal credit unions and certain state-chartered credit unions.5 Credit unions are nonprofit, cooperative financial institutions owned by their members and designed to provide a safe place to save, borrow, and receive other financial services. Credit unions, along with banks and thrifts, constitute the nation's depository institutions.6

Why the Commission Should Grant Credit Unions Relief from Registration

The GLBA did not require the Commission to extend to thrifts the same relief from registration provided to banks, but the Commission did so as requested by the U.S. Department of the Treasury, Office of Thrift Supervision (OTS).7 In extending this relief, the Commission cited "narrowed differences" between thrifts and banks and similar regulatory structure and examination standards for thrifts and banks. Also, the Commission noted that the extension is "in the public interest and is consistent with the protection of investors."8

The NCUA desires relief for credit unions from broker-dealer registration under the same terms and conditions granted to banks. NCUA seeks this relief so that credit unions empowered by law to offer securities-related financial services may do so in a cost-efficient manner consistent with the requirements of consumer protection.9 We understand that the Commission may not be specifically concerned with cost efficiencies or the creation and maintenance of "level playing fields" among various financial institutions. The primary mission of the Commission is, in fact, the protection of investors from fraud or abuse in connection with securities transactions. This comment letter highlights the similarities between credit unions and the other depository institutions (i.e., banks and thrifts), particularly in the regulatory scheme for ensuring consumer protection. But it also explains that many of the differences between credit unions and the other depository institutions, primarily structural in nature, enhance consumer protection for credit union members.

The U.S. Department of the Treasury recently completed a report entitled Comparing Credit Unions with Other Depository Institutions, dated January 2001 (the "Treasury report")(enclosed). The Treasury report contains a detailed comparison of the three depository institutions: credit unions, banks, and thrifts. As summarized in the report, "[d]espite their relatively small size and their restricted fields of membership, federally-insured credit unions operate under banking statutes and rules virtually identical to those applicable to banks and thrifts."10 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, not just the FCUA.11 NCUA's enforcement responsibilities for the various consumer protection laws are also the same as the bank and thrift regulators.12 Like the FDIC insurance fund protecting bank and thrift accounts, the NCUA-administered National Credit Union Share Insurance Fund (NCUSIF) protects credit union share accounts up to $100,000.13 And, in a manner similar to its bank and thrift counterparts, NCUA conducts annual on-site examinations and requires frequent, detailed reporting on the financial condition and activities of credit unions.14 In sum, the NCUA supervises credit unions in substantially the same fashion that NCUA's FFIEC counterparts supervise banks and thrifts. This intensive supervision is a key safeguard against consumer fraud and abuse.

Credit unions are not, of course, exactly the same in organization, function, or regulation as banks or thrifts, just as thrifts are not identical to banks.15 Most differences between credit unions and other depository institutions derive from the structure of credit unions.16 We believe that these structural differences act to reduce the possibility of consumer fraud or abuse by credit union employees or management. We ask the Commission to examine these differences, as discussed below, and consider them favorably when deciding if credit unions should receive relief from broker-dealer registration under the same terms and conditions as banks.

First, credit unions are non-profit cooperatives.17 There is no incentive in a credit union to maximize profits at the expense of consumers.

Second, credit unions are member-owned and can only serve members.18 There is no distinction between a credit union owner and a credit union consumer. Credit union owners have no incentive to sponsor or tolerate activities that benefit owners at the expense of consumers.

Third, credit union fields of membership, established in the credit union's charter, are very limited in nature.19 A credit union's field of membership is defined in terms of a common bond, either associational or occupational, or a well-defined local community, neighborhood, or rural district.20 Because of the nature of these membership limitations, a credit union's financial survival depends heavily on its reputation within a close-knit group. A credit union that abuses some of its members will have difficulty surviving, as word of any abuses will likely spread through the association, the sponsor corporation, or through the local community, depending on whether the credit union has a common-bond based charter or a community charter. And, unlike a bank or thrift, no credit union is legally able to seek new or different customers outside its field of membership.

Fourth, membership rights in credit unions are purely democratic. Each credit union member has one vote for the election of the board of directors of a credit union, regardless of the amount of money the member has invested in the credit union.21 One member, or group of members, cannot exercise inordinate power or control based on wealth at the expense of other, less wealthy members.

Fifth, management of credit unions is vested in a board of directors who must be members of the credit union.22 As members, they are related to the other members by association, occupation, or local community. Also, all directors save one must be uncompensated volunteers.23 Accordingly, credit union directors are independent in the sense that there is no pecuniary motivation to encourage or overlook credit union management practices that may be abusive to the credit union's members. In addition, credit union directors and employees are also subject to significant conflict of interest prohibitions.24

Sixth, every credit union has a supervisory committee, also consisting of member volunteers.25 The supervisory committee functions as a further check on credit union management and has the power to suspend any officer or director and call special meetings of the members.26 NCUA regional offices accept and process member complaints. Typically, NCUA will refer any such complaints to the credit union's supervisory committee and request the committee investigate the complaint and notify NCUA of the credit union's action on the complaint.

Powers of Credit Unions to Conduct Securities-Related Activities

Federal credit unions are empowered to engage in the specific activities enumerated in the FCUA and any other activities incidental to the enumerated activities.27 Among the specific broker-related activities currently authorized are third-party brokerage arrangements,28 sweep accounts,29 and safekeeping and custody activities.30 Among the dealer-related activities are the purchase and sale of particular securities, including but not limited to municipal securities and "Identified Banking Products," for the credit union's own investment account.31 NCUA recently published a proposed rule that would change our analysis for determining whether a particular activity falls within a credit union's permissible activities as an incidental power.32 This rule, if adopted, may affect the authority to conduct securities-related activities. Also, the powers of credit unions, like those of the other depository institutions, change over time as Congress amends the FCUA. Such amendments are not infrequent. NCUA requests that any relief granted by the Commission take into account the probability of continued evolution in the powers of credit unions within the limits of the bank activities enumerated in Sections 3(a)(4)(B) and 3(a)(5)(C) of the Exchange Act.

Corporate credit unions, which provide a broad range of financial services to credit unions that serve natural persons in a manner similar to banker's banks, have additional powers beyond those of natural person credit unions.33 These additional powers include expanded safekeeping and custody activities and the purchase and sale of certain securities, identified in the Exchange Act under "Permissible Securities Transactions" and "Identified Banking Products,"34 to, from, and for other credit unions, including other corporate credit unions.

Federally-insured state-chartered credit unions may have additional or different powers.


We ask that the Commission carefully consider both the similarities and differences between federally-insured credit unions and the other depository institutions. We believe that both similarities and differences support relief from broker-dealer registration under the same terms and conditions as banks.

NCUA staff would be glad to meet with Commission staff to provide you with additional information about credit unions or the NCUA. We would also be happy to provide the Commission with information about NCUA examination procedures and policies. Please contact Paul Peterson, Staff Attorney, at (703) 518-6555.


Dennis Dollar
Acting Chairman


1 66 Fed. Reg. 27760, 27800 (May 18, 2001).
2 Id. at 27788.
3 17 C.F.R. §200.30(a); Interim Final Rules Release at 27788.
4 12 U.S.C. §1751 et seq., §1752a(a).
5 The FFIEC consists of the Chairman, NCUA; the Chairman of the Board of the Federal Reserve, the Comptroller of the Currency; the Chairman, Federal Deposit Insurance Corporation; and the Director, Office of Thrift Supervision. 12 U.S.C. §3303. Also, unless otherwise specified, citations in this letter refer to federally-chartered credit unions. Generally, state law governs the activities of state-chartered credit unions. Federally-insured state-chartered credit unions are subject to NCUA's oversight, 12 U.S.C. §1781 et. seq., and must comply with some of the requirements applicable to federally-chartered credit unions. See, e.g., 12 C.F.R. Part 741. The organization and function of state-chartered credit unions is, generally, similar to that of federal credit unions discussed in this letter.
6 U.S. Department of the Treasury, Comparing Credit Unions with Other Depository Institutions (January 2001) at 1.
7 Letter from Scott Albinson, Managing Director of the Offfice of Thrift Supervision (OTS), dated March 20, 2001. The OTS cited various reasons for its request, including the maintenance of a "level playing field" with banks.
8 Interim Final Rules Release at 27788.
9 The NCUA desires to avoid the placement of unnecessary regulatory burdens and associated compliance costs on credit unions. We are particularly concerned with the broad definitions of the terms "broker" and "dealer" in the Exchange Act, §3(a)(4), (5). Credit unions that engage in securities-related activities need a clear understanding of when broker-dealer registration is required and should not have to register when it is not necessary. The Interim Final Rule, with its associated discussion, provides certainty and will, if made applicable to credit unions, require fewer resources devoted to determine if registration is necessary and result in fewer instances that require registration. We are also concerned about the lack of options available to credit unions that wish to conduct legally permissible activities that fall within the Exchange Act definitions of broker or dealer. As the Commission indicated in its release, there are regulatory and capital requirements for broker-dealers that differ substantially from those that the banking regulators place on banks. Accordingly, a bank would find it "impracticable" to register as a broker-dealer. Interim Final Rules Release at 27792 (fn. 288). Due to the capital and other regulatory requirements placed on credit unions by the FCUA, the NCUA, and state regulators, a credit union would also find it impracticable to register as a broker-dealer. Thus, a credit union that might have the legal authority to engage in certain securities-related activities could be, de facto, prohibited from engaging in otherwise lawful activities. The credit union would have to abandon the activity or push it out to a third party at increased expense. To the extent the Commission wishes to consider these efficiency issues, we invite it to do so. See Exchange Act, §3(f).
10 Treasury report at 1.
11 "When comparing enforcement authority across the federal depository institutions regulators, few differences are found. As the Appendix shows, credit unions in fact operate under almost identical enforcement rules as banks and thrifts." Treasury report at 23, 58-61; 12 U.S.C. §1786(e).
12 "Credit unions are also subject to the same consumer protection rules as other depository institutions." Treasury report at 23, 61-66.
13 12 U.S.C. §1787(k)(1). As with the FDIC fund, the NCUSIF is well capitalized and is backed by the full faith and credit of the U.S. government.
14 NCUA conducts all the on-site examinations of federally-chartered credit unions. For federally-insured state-chartered credit unions, NCUA may conduct its own on-site examination, participate in a joint on-site examination with state regulators, or review information collected by the state regulator from its on-site examination.
15 There are significant differences between federal thrifts and national banks: how they are owned and organized (Treasury report at 42); how they provide securities brokerage, investment advice or counseling, and real estate brokerage services (Treasury report at 42); lending limits (Treasury report at 45-46); authority to invest in asset backed securities (Treasury report at 48); and investment in service companies, corporations, and financial subsidiaries (Treasury report at 50). In the Interim Final Rules Release, the Commission did not cite these differences, but cited several other areas in which banks and thrifts are similar. Interim Final Rule Release, at 27788 (fn. 249). Credit unions are similar to banks and thrifts in these areas as well. For example, NCUA has removal and prohibition powers identical to those of the federal banking and thrift agencies. Compare 12 U.S.C. §1786(g) with 12 U.S.C. §1818(e). Like the bank and thrift regulators with bank and thrift mergers, NCUA must approve all mergers and conversions involving insured credit unions before the merger or conversion. Members of the merging credit union must also vote to approve the merger. Compare 12 U.S.C. §1785(b) and (h) with 12 U.S.C. §1828(c). Federally-insured credit unions must submit periodic reports of condition, submit to annual audits in accordance with generally accepted accounting principles, and establish independent audit committees in a manner similar to that required of banks and thrifts. Compare 12 U.S.C. §1782a with 12 U.S.C. §1831m. Federally-insured credit unions have prompt corrective action requirements similar to those imposed on banks and thrifts. Compare 12 U.S.C. §1790d with 12 U.S.C. §1831o. Where there is a difference in the investment authority of federal credit unions and federally-insured state-chartered credit unions, the state-chartered credit union is limited in its ability to exercise its expanded investment authorities. Compare 12 C.F.R. §741.3(a)(3) with 12 U.S.C. §1831e (investment authority of federally-insured state-chartered thrifts) and 12 U.S.C. §1831a (investment authority of federally-insured state-chartered banks).
16 Treasury report at 24.
17 12 U.S.C. §1752(1), §1790d. The citations in this section about unique structural aspects of credit unions refer to federally-chartered credit unions, but the structure of state-chartered credit unions is substantially the same.
18 12 U.S.C. §1752(1).
19 12 U.S.C. §1759.
20 Some common bond credit unions are chartered to serve more than one particular associational or occupational group. These credit unions are referred to as "multiple common bond."
21 12 U.S.C. §1760.
22 12 U.S.C. §1761.
23 12 U.S.C. §§1761(c), 1761a.
24 See, e.g., 12 C.F.R. §§701.21(c)(8)(i), 712.8, and 721.2(c); and Federal Credit Union Bylaws, Art. XVI, Sec. 4 (Rev 10/99).
25 12 U.S.C. §1761(b).
26 12 U.S.C. §1761d.
27 12 U.S.C. §1757.
28 See Letter to Credit Unions No. 150, available on our website at www.ncua.gov.
29 Letter from Sheila Albin, NCUA Associate General Counsel, to Rosemary Hardiman, dated March 7, 1998, available on our website at www.ncua.gov.
30 12 C.F.R. Part 724. Federal credit unions do not currently have general trust powers.
31 See GLBA §206 (definition of Identified Banking Products); 12 U.S.C. §1757(7); and 12 C.F.R. §§701.22, 701.23, and Part 703.
32 65 Fed. Reg. 70526 (November 24, 2000).
33 12 U.S.C. §1766, 12 C.F.R. Part 704. Unlike natural person credit unions, corporate credit unions may have national fields of membership, but their membership is generally restricted to credit unions and entities other than natural persons.
34 The Exchange Act, §(3)(a)(4)(B)(iii) and §(3)(a)(5)(C)(i), (iv).