July 18, 2002
Mr. Jonathan G. Katz
United States 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 and 36 of the Exchange Act
67 FR 41545 (June 18, 2002) File No. S7-12-01
Dear Mr. Katz:
America's Community Bankers ("ACB")1 welcomes the opportunity to comment on a credit union's request for an exemption from the Securities and Exchange Commission's ("SEC" or "Commission") broker-dealer registration requirement and certain disclosure requirements. Specifically, the SEC requests comment on: 1) whether the Evangelical Christian Credit Union ("ECCU") should be permitted to offer sweep accounts to its members without registering as a broker-dealer; and 2) whether all credit unions should be permitted to offer sweep accounts to their members without registering with the Commission.
ACB strongly opposes permitting the ECCU and all other credit unions from providing sweep accounts directly to their members without registering as a broker-dealer. Allowing the exemption would permit a credit union to engage in a business that does not comport with the statutory purpose for credit unions. In the event the exemption is permitted, the SEC should limit its application to the ECCU and require that the National Credit Union Administration ("NCUA") gain additional experience in supervising credit unions engaged in these activities. Furthermore, any restrictions specific to this application should not be imposed on banks and savings associations.
The Securities Exchange Act of 1934 (the "Exchange Act")2 generally requires brokers and dealers to register with the SEC. Under the Exchange Act, "any person engaged in the business of effecting transactions in securities for the account of others" is deemed to be a broker. Because sweeping deposit balances into mutual funds constitutes "effecting transactions in securities," entities offering sweep services must register with the SEC.
Title II of the Gramm-Leach-Bliley Act ("GLBA")3 amended the Exchange Act by repealing the general exemption for banks from the definitions of "broker" and "dealer." The general exemption from the registration requirements was replaced by more limited exceptions for specific products and services, for example offering sweep accounts or engaging in trust activities. To the extent that a bank engages in the enumerated products and services, it is not required to register as a broker or dealer under the Exchange Act. The commission issued an interim final rule implementing this provision of the law.
The statute grants these exemptions to banks engaged in the activities. In the interim final rule, the Commission adopted Rule 15a-9 which broadens the definition of bank for these purposes to include savings banks and savings associations. The preamble to the interim rule explained that because the exemptions were more narrowly drawn and because savings institutions and banks have substantially similar regulatory schemes, it is appropriate for savings banks and savings associations to have the same limited exemptions.
Accordingly, banks, savings banks, and savings associations that meet one of eleven product or transaction specific exceptions of the GLBA will not have to register as a broker-dealer. Specifically, banks that sweep deposit funds into "any no-load, open-end management investment company . . . that holds itself out as a money market fund" are not required to register with the SEC as a broker-dealer.4
Exempting credit unions from the broker-dealer registration requirement does not accurately reflect the business purpose of credit unions or the supervisory scheme that regulates them.
Credit Union Mission
Credit unions were formed to provide limited financial services to persons of moderate means who may not have access to other financial service providers. On that basis, they are exempt from federal tax. The proposed product is not one associated with services necessary to fulfill a credit union's mission. In addition, in the case of the federal banking regulators, an analysis was prepared to determine whether and under what circumstances their respective regulated entities had the authority to engage in sweep activities. We suggest that this analysis is necessary for credit unions.
Furthermore, ECCU's application indicates that sweep services would not be available to all members; it would be offered only to ECCU's member institutions and not to individuals. The application submitted by the ECCU makes a point that the credit union would not provide the services to retail customers, but only to member institutions that are primarily non profit organizations. These institutions are non-profit churches and ministries dependent on donations that probably are coming mostly from individuals. Unlike corporate customers, if there is a loss or mismanagement of funds, individual donors will need to make up the difference. Given the make up of the membership of this credit union, individual members may be impacted and not be aware of the circumstances.
Credit Union Regulatory Structure and Investor Protection
Absent broker-dealer registration, credit union sweep activities would be regulated only under credit union law and would take place outside of the coordinated system of securities regulation that is designed to protect investors. Because sweep activities historically are not credit union activities, ACB in concerned that the NCUA and state credit union supervisors do not have the regulatory experience or the regulatory structure necessary for overseeing these activities. Furthermore, the NCUA examiner handbook does not directly address the topic. ACB is concerned that the credit union regulatory structure is insufficient to protect the interest of investors.
Over the years, the federal banking regulators have issued a number of opinions and interpretive guidance describing how a bank or savings association is permitted to engage in sweep activities. There are sweep arrangements that are not permitted by every regulator and a number of restrictions on those that are permitted including customer disclosures and safety and soundness factors.
Finally, unlike banks and savings associations that have a fairly long history of providing cash management services, credit unions are not experienced in this area and may not have the proper technology in place to manage the system required to offer sweep accounts. While credit unions would be subject to the strict regulatory scrutiny over the security of computer systems, they would need to ensure that the technology used to offer the sweep arrangements is adequate and would not disrupt any other operations.
Limitations and Future Exemptions
Any exemption that permits credit unions to offer sweep services on the same terms and conditions as banks and savings associations should be limited to ECCU until the NCUA develops adequate regulatory procedures and gains additional supervisory experience in this area. Additionally, any future exemptions should only be granted to credit unions supervised by regulators with sufficient guidelines and experience.
Exempting credit unions from the broker-dealer registration requirements will disadvantage community banks that compete with non-taxpaying credit unions.
Permitting credit unions to offer sweep accounts without registering with the SEC would be anti-competitive as the distinction between the business operations of banks and taxpayer subsidized credit unions continues to narrow while the framework for regulation has not changed. Community banks should not be forced to compete with these entities that are able to offer lower cost services because of their tax-exempt status. A number of insured depository institutions and their uninsured competitors provide sweep accounts and other business arrangements to all sizes of business. If credit unions wish to offer these accounts, ACB would welcome their conversion into full taxpaying members of the financial services marketplace.
In addition, the SEC should not use the current issue as a template for exempting credit unions from the remaining securities activities exempted from the broker-dealer registration requirements under the GLBA.
Restrictions specific to this application should not be imposed on banks and savings associations.
ECCU's proposal is fact specific and may be subject to various conditions. Specifically, ECCU stated that:
In the event that the credit union exemption is permitted, the SEC should not attempt to extend these limitations to banks and savings associations relying on the Exchange Act's exemption provisions. These conditions are not part of the Exchange Act's exemption, and it would be appropriate to condition the exemption's availability on these limitations.
Thank you for the opportunity to comment on this important matter. If you have any questions, please contact the undersigned at (202) 857-3121 or email@example.com or Krista Shonk at (202) 857-3187 or firstname.lastname@example.org.
Charlotte M. Bahin
Director of Regulatory Affairs
Senior Regulatory Counsel
|1||ACB represents the nation's community banks of all charter types and sizes. ACB members, whose aggregate assets exceed $1 trillion, pursue progressive, entrepreneurial and service-oriented strategies in providing financial services to benefit their customers and communities.|
|2||15 U.S.C. 78c(a)(4)(B)(v).|
|3||Pub.L. 106-102, 106th Cong., 1st Sess., 113 Stat. 1338 (Nov. 12, 1999).|
|4||15 U.S.C. 78c(a)(4)(B)(v).|