July 17, 2001
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549-0609
Re: File No. S7-12-01; Definition of Terms in and Specific Exemptions for Banks, Savings Associations, and Savings Banks under Section 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934.
Dear Mr. Katz:
U.S. Central Credit Union ("U.S. Central") is pleased to respond to the Commission's request for comment on the Interim Final Rules implementing the exemptions from broker-dealer regulation for banks in Title II of the Gramm-Leach-Bliley Act, published in the Federal Register on May 18, 2001 (the "Interim Rule").
U.S. Central is a Kansas-chartered, federally insured corporate credit union with assets greater than $31.5 billion. U.S. Central's primary members consist of 34 other corporate credit unions. Other members of U.S. Central are various state- or national-level credit union organizations and three foreign cooperative financial institutions. U.S. Central and its member corporate credit unions comprise the Corporate Credit Union Network, which provides financial products and services to approximately 10, 000 credit unions across the United States.
To qualify as a corporate credit union, the credit union must be operated primarily for the purpose of serving other credit unions. (12 C.F.R. 704.2) In addition, membership of natural persons in a corporate credit union is limited to those individuals such as directors or incorporators as may be required by applicable law. In the case of U.S. Central, such membership is limited to its directors and incorporators, each of whom has purchased one qualifying share and receives no products or services from U.S. Central. Except for payment-system services or the purchase of U.S. Central shares or share certificates, all of U.S. Central's activity with its members are with its corporate credit union members.
We support the Commission's decision to exempt savings associations and savings banks from the definition of broker and dealer under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (the "Act") on the same terms and under the same conditions as banks are excepted or exempted. We believe that these terms and conditions provide a well-reasoned, measured approach that provides reasonable assurance for the protection of investors without creating an unnecessary regulatory intrusion in the operations and activity of a financial institution.
In the Interim Rule, the Commission requested comments on whether the exemptions and exceptions of savings associations and savings banks from the definitions of "broker" and "dealer" should be extended to any other entities. While we believe that it is appropriate for the exemptions contained in Interim Rule 15a-9 to be extended to credit unions generally, and while much of the same rationale for exemption may also apply to credit unions generally, our comments are directed more particularly to the applicability for exemption from the definition of "broker" and "dealer" for U.S. Central and corporate credit unions specifically.
Credit unions are unique, highly regulated financial institutions. They are owned and controlled by their members. Most credit unions are federally insured by the National Credit Union Share Insurance Fund ("NCUSIF"). Federally chartered and state-chartered, NCUSIF-insured credit unions are subject to examination and regulatory oversight by the National Credit Union Administration ("NCUA"). State-chartered credit unions are also subject to examination and supervision by state credit union regulators.
All corporate credit unions are subject to regulatory oversight and examination by NCUA. (12 CFR 704.1) In addition, state-chartered corporate credit unions, such as U.S. Central, are also subject to examination and supervision by their applicable state regulators. In some states, state banking regulators also supervise credit unions.
As credit unions did not have the advantage of a blanket exemption from the definitions of "broker" or "dealer" under the Act, the securities activity of credit unions has been limited. For example, a credit union may make brokerage services available to its members through a registered broker-dealer subsidiary or through a networking relationship with a registered broker-dealer. U.S. Central has created a subsidiary, U.S. Central Capital Markets, Inc. ("CMI"), which is registered with the Commission as a broker-dealer and is a member of the National Association of Securities Dealers, Inc. CMI was created to offer securities to U.S. Central's member corporate credit unions. Creating a subsidiary to engage in the securities business was necessary due, in part, to the fact that broker-dealer registration and regulation requirements are not particularly compatible with, or conducive to, a credit union's financial structure. For example, for net capital or aggregate indebtedness calculations, there is some uncertainty as to how credit union shares which are legally equity capital but which the American Institute of Certified Public Accountants characterize, for accounting purposes, as debt, would be treated. This type of issue makes it impracticable, if not impossible, for a credit union itself to become a registered broker-dealer.
Accordingly, credit unions, to the extent that they wish to provide broker-dealer services to their members, make such services available through third-party registered broker-dealers.
In the Discussion and Analysis of the Interim Rule and the rationale for the exemption of savings associations and savings banks from the definitions of "broker" and "dealer," the Commission noted as follows:
"In addition, the existence of some of the bank exceptions from broker-dealer registration, such as the trust and fiduciary activities exception, the safekeeping and custody exception, and the sweep accounts exception, that may suggest registration is necessary for certain limited conduct, create legal uncertainty for savings associations and savings banks engaging in such activities." (emphasis added)
In addition to the quoted exceptions that create legal uncertainty, we would also add the exclusion from the definition of dealer in Section 3(a)(5)(C)(ii)(I) of the Act for a bank that buys or sells securities for investment purposes for the bank.
Credit unions routinely purchase securities for investment. Such investments may be sold prior to maturity for any number of reasons, such as asset/liability management purposes or for needed liquidity. Such investment activity is subject to and limited by applicable credit union law and regulation. It may also routinely include engaging in repurchase transactions or in securities lending transactions with their own securities. This type of activity has not been viewed as engaging in the business of buying and selling securities within the meaning of Section 3(a)(5) of the Act.
However, as amended by the Gramm-Leach-Bliley Act, 113 Stat. 1338 (1999), the structure of Section 3(a)(5) and the exception for a bank buying or selling a security for investment purposes for the bank contained in section 3(a)(5)(C)(ii)(I) could be viewed as creating legal uncertainty regarding whether such routine activity by a credit union would require registration as a dealer. Including credit unions in the exemption under Interim Rule 15a-9 would eliminate any uncertainty.
Corporate credit unions also provide safekeeping and custody services for their member credit unions' securities. Corporate credit unions use U.S. Central or other financial institutions to safekeep their members' securities. U.S. Central serves as safekeeping custodian for thirty-two corporate credit unions, which in turn safekeep securities for approximately 1,450 credit unions. Total securities held in safekeeping by U.S. Central are approximately $41 billion. Credit unions may use their securities held in safekeeping in repurchase transactions or securities lending transactions.
As a Kansas-chartered corporate credit union, U.S. Central has the legal authority to establish and engage in a full range of trust activities for its members. U.S. Central has not yet elected to create the business and support infrastructure necessary to engage in this type of activity. However, in the event that we were to make a decision to engage in trust activities, such activities would be subject to a comprehensive fiduciary regulatory structure. See Kansas Administrative Regulation 121-4-1 et seq. which provides for the same fiduciary obligations applicable to bank trust departments.
To the extent that U.S. Central were to establish a trust operation and engage in limited fiduciary activity for its members, we would be concerned that such activity could trigger a registration requirement as a broker or dealer. We recognize that exemption from the broker-dealer definition for banks would not address any investment adviser registration requirements that may be triggered by the services to be provided. However, such registration requirements do not currently raise the same regulatory concerns that would be attendant to registration as a broker or dealer.
As corporate credit unions are essentially limited to doing business with credit unions or other institutional organizations, and as those corporate credit unions and their member credit unions are subject to a common regulatory authority, we believe that extending the exemptions from the definition of broker or dealer to corporate credit unions would not adversely affect investors in need of protections afforded by the Act and would eliminate what we believe to be unintended legal uncertainty created by the functional exemption structure for banks from the definitions of broker and dealer.
Thank you for the opportunity to provide comments.