VIA E-MAIL - firstname.lastname@example.org
July 17, 2001
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549-0609
RE: Exemptions for Banks, Savings Associations and Savings Banks from the Broker-Dealer Requirements under the Securities and Exchange Act of 1934 - File No. S7-12-01
Dear Mr. Katz:
The Credit Union National Association (CUNA) appreciates the opportunity to comment on the Securities and Exchange Commission's (SEC's) interim final rule regarding the exceptions for banks and other financial institutions from the broker-dealer requirements under the Securities and Exchange Act of 1934 (SEC Act). CUNA represents more than 90 percent of our nation's 10,600 state and federal credit unions.
Summary of CUNA's Position
Until the Gramm-Leach-Bliley Act (GLB Act) was enacted in 1999, banks were not covered under the broker-dealer definitions, as outlined in the Securities and Exchange Act of 1934 (1934 Act). This means that 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. The SEC interim final rules were issued to clarify these functional exceptions.
Although not required under the GLB Act, these exceptions will also apply to thrifts, but not to credit unions. Prior to the GLB Act, credit unions and thrifts were not covered under the exemption that was provided for banks. In the interim final rule, the SEC specifically noted that thrifts should be entitled to the same exceptions as banks because both types of institutions are subject to similar regulatory frameworks and examinations standards, which is sufficient to protect the interests of investors.
Credit unions are member-owned, not-for-profit cooperatives. Although this operational structure differs from the for-profit structure of banks and thrift institutions, credit unions are subject to a regulatory framework and examination standards that are at least as rigorous as those that apply to both banks and thrifts. For example, credit unions, similar to banks and thrifts, are subject to periodic examinations, prompt corrective action, and regulations governing the respective insurance funds.
In the interim final rule, the SEC has determined that the exceptions to the broker-dealer registration requirements for thrifts are sufficient because the regulatory framework and examination standards 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.
Because credit unions are not-for-profit cooperatives, their incentive is to offer new products and services that their members desire, and not to maximize profits. The financial needs of credit union members are very similar to the financial needs of bank and thrift customers and include an increasing emphasis on securities products and services. The not-for-profit motive of credit unions also reduces the incentives of their management to take excessive risks. This philosophy and the credit union structure should reduce any concerns with regard to investor protection that exists with for-profit entities. For example, the boards of directors of credit unions are generally uncompensated, which eliminates possible financial incentives that may be derived from questionable practices. Sound economic, business and policy grounds exist, therefore, for the SEC to extend the exceptions outlined in the interim final rule to credit unions.
Section 23(a)(2) of the SEC Act prohibits the SEC from adopting a rule that will impose a burden on competition that is not necessary or appropriate in furthering the purpose of the SEC Act. To comply with this requirement, the SEC must provide credit unions the same exceptions as banks and thrifts in order to mitigate possible anti-competitive effects that may result if credit unions do not receive these exceptions. Otherwise, credit unions will incur cost burdens that will result from complying with the SEC's broker-dealer registration requirements. This will place credit unions at a significant competitive disadvantage, as compared to banks and thrifts, in violation of Section 23(a)(2) of the SEC Act.
We realize that the anti-competitive effects may not be that obvious now since most credit unions do not engage in the activities that are covered under the exceptions. However, credit unions need the regulatory flexibility to engage in these activities in the future to the extent that the evolving needs of credit union members require them to do so. The SEC should address this issue now by including credit unions within these exceptions instead of addressing this later when the anti-competitive effects become more acute.
We also realize that credit unions may be prohibited by the National Credit Union Administration (NCUA) or their state regulators from engaging in certain of these activities that are covered under the exceptions. We still believe that credit unions should receive the same treatment under the rule as banks and thrifts because of the anti-competitive effects discussed above and because these prohibitions may be changed or removed in the future. The SEC's rulemaking agenda should not be determined by new developments at NCUA or state credit union regulatory agencies. To alleviate any concerns, the SEC could clarify that credit unions will receive these same exceptions to the extent that these activities "are permitted by law or regulation."
At the very least, the SEC should provide exceptions to credit unions for those activities that credit unions are now engaged. The current significant activities include third-party brokerage arrangements, sweep accounts, and safekeeping and custodian activities. Also, we urge the SEC to ensure that current "no-action" letters and interpretations remain in effect for those activities that affect credit unions.
If the SEC does not extend all of the exceptions to credit unions, then we also urge the SEC to amend the delegation of authority that is currently included in the interim final rule. Under this authority, the Division of Market Regulation will have the authority to issue to banks and thrifts additional exemptions from the broker-dealer registration requirements. This authority should be amended to provide the Division of Market Regulation the authority to provide credit unions with the exemptions that are necessary to alleviate anti-competitive effects.
However, we want to stress that this delegation authority would not be the optimal solution because credit unions would still suffer competitive disadvantages if financial products and services had to be delayed because of a requirement to obtain the SEC's approval under the delegation of authority. Also, it is our understanding that approval under this delegation only applies to the credit union that requests it and would not necessarily apply to all credit unions that want to offer similar products or services.
Thank you for the opportunity to comment on the interim final rule regarding the exceptions for banks and thrifts from the broker-dealer registration requirements under the SEC Act. If you or agency staff have questions about our comments, please give me a call at 202-218-7795.
Assistant General Counsel