July 17, 2002
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
RE: File No. S7-12-01 -Exemptive Relief from the Broker-Dealer Requirements with Regard to Credit Union Sweep Accounts
Dear Mr. Katz:
The Credit Union National Association (CUNA) appreciates the opportunity to comment on the Securities and Exchange Commission's (SEC's) Notice of Application of Evangelical Christian Credit Union (ECCU) for Exemptive Relief from the Broker-Dealer Requirements with Regard to Sweep Accounts (Notice). CUNA represents more than 90 percent of our nation's 10,500 state and federal credit unions.
Summary of CUNA's Position
Until the Gramm-Leach-Bliley Act (GLB Act) was enacted in 1999, banks were excepted from the broker-dealer definitions, as outlined in the Securities and Exchange Act of 1934. Thus, banks were not required to register with the SEC when engaging in permissible securities activities. The GLB Act removed this exemption and replaced it with a number of functional exceptions for certain bank securities activities, including sweep accounts in which funds are transferred to no-load money market funds.
Last year, the SEC issued interim final rules to clarify these functional exceptions. Although not required under the GLB Act, these exceptions will also apply to thrifts, but not to credit unions.
In June, the SEC issued a notice requesting comments on whether the sweep account services that Evangelical Christian Credit Union (ECCU) proposes to offer should be exempt from the broker-dealer requirements.
In our comment letter that we submitted last year in response to the interim final rules, CUNA requested that credit unions receive the same exceptions from the broker-dealer registration requirements as banks and thrifts. The basis for this request was that credit unions, banks, and thrifts are subject to similar regulatory requirements and examination standards and that the exceptions for credit unions are necessary in order to mitigate possible anti-competitive effects.
For the same reasons, we request that the SEC approve ECCU's request to offer sweep account services to its members, as outlined in the Notice. At the same time and because these reasons are equally applicable to all credit unions, we also request that the SEC allow all credit unions to offer sweep accounts to the same extent that banks and thrifts will be allowed to provide under the interim final rules that were issued last year. This should not only include federally-insured credit unions, as discussed in the Notice, but also privately insured credit unions.
We recognize that ECCU proposes to offer sweep account services to organizations, as opposed to individuals. However, we do not think that there is a legal or public policy basis for the SEC to only exempt such arrangements from SEC registration and regulatory requirements. Banks and thrifts will be allowed to provide these services to both their corporate and individual customers and there has been no discussion, at least publicly, about the possibility or need to restrict these services to corporate entities.
The financial expectations of credit union members are often very similar to those of bank and thrift customers and include an increasing emphasis on securities products and services. Because credit unions are not-for-profit cooperatives, their incentive is not to maximize profits, but to offer new products and services that their members desire.
For this reason, members would benefit significantly if credit unions were able to offer sweep account services which, consistent with other credit union products and services, would be offered at a very reasonable cost. Bank and thrift customers could also benefit if credit unions offered these services because this would encourage banks and thrifts to offer these services at a reasonable price in order to compete.
However, if credit unions were required to register with the SEC as a broker-dealer in order to provide these services, the cost of these services could be much higher. That is because credit unions would incur significant costs in order to register and comply with the broker-dealer requirements, and these costs would have to be passed on to the members.
Under these circumstances, credit unions would either decide not to offer these sweep account services, to the detriment of those members who want these services from their credit unions, or would likely have to offer them at a higher price than would banks and thrifts, which will not be required to register as a broker-dealer with the SEC.
Although ECCU proposes to offer such services to member institutions, most members of credit unions are individuals. The total number of sweep accounts that credit unions would offer to organizations would be very small, and this aspect of the sweep account market would pose no significant competitive effect on banks and thrifts.
In the interim final rule issued last year, the SEC noted that it would be appropriate to provide thrifts with exceptions to the broker-dealer registration requirements because the regulatory framework and examination standards that apply to thrifts are adequate to protect the interests of investors. The exceptions should also apply to credit unions because the regulatory framework and examination standards that apply to credit unions are similar and, therefore, are also sufficient to protect the interests of investors. For example, credit unions, similar to banks and thrifts, are subject to periodic examinations, prompt corrective action, and other safety and soundness regulations.
Under the Securities and Exchange Act of 1934, banks and thrifts that offer sweep account services are limited to arrangements in which funds are transferred to a no-load money market mutual fund that is offered by a registered broker-dealer. The sweep account services that would be offered by ECCU and other credit unions under this proposal would also be subject to the same requirement that funds be transferred to an account operated by a registered broker-dealer.
In addition to the government supervision that applies to credit unions, the broker-dealers, which have significant regulatory oversight by SEC and the National Association of Securities Dealers, have an obligation to understand their clients' capabilities in these transactions. These regulatory constraints should help alleviate any investor protection concerns that may arise when considering whether credit unions should be permitted to offer sweep accounts services without the need to register as a broker-dealer.
In the Notice, the SEC has requested comments on whether the exceptions for credit union sweep accounts should be considered in connection with amendments to the interim final rules that were issued last year. As outlined above, permitting credit unions to offer sweep account services without the broker-dealer registration requirements can be supported for a number of public policy reasons, and there is no reason to delay a decision that would permit credit unions to offer these services.
We recognize that there are a number of broader issues that need to be considered with regard to credit union securities activities. This includes possible exceptions to the broker-dealer registration requirements for other activities, in addition to sweep accounts, and the ability of CUSOs to also provide these services without the need to register.
CUNA has recently formed the CUNA Broker Activities Task Force, comprised of representatives from a number of credit union related organizations, to address these issues over the next several months. We would welcome the opportunity for Task Force members to meet with the SEC in an effort to work with the agency as it develops over the coming months, a regulatory approach appropriate for credit union/CUSO activities. (The agency has stated it will not issue a final rule for banks and thrifts regarding exempt activities under the GLB Act until May 2003, and we do not believe there is any legal or sound public policy rationale that would require the SEC to address the broader issues on a quicker timetable.)
We also would like to work with the SEC to develop and establish a process under which the agency would address future exemption requests from individual credit unions seeking to offer other broker services. We believe that seeking comments whenever a new service is requested would be needlessly burdensome for the credit union system as well as for the SEC. We will contact SEC staff within the next few weeks to begin these efforts.
Thank you for the opportunity to comment on the Notice. If you or agency staff have questions about our comments, please give me or Assistant General Counsel Jeff Bloch a call at 202-518-6736.
Mary Mitchell Dunn
CUNA Senior Vice President and
Associate General Counsel