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# The Attorney General of Texas

December 31, 1982

MARK WHITE Attorney General

Supreme Court Building P. 0. BOX 12546 Austin. TX. 78711. 2548 5121475-2501 Telex 9101674-1367 Telecopier 5121475.0266

1607 Main St., Suite 1400 Dallas. TX. 75201-4709 2141742-6944

4024 Alberta Ave.. Suite 160 El Paso, TX. 79905.2793 9151533-3484

,220 Dallas Ave., Suite 202 Houston, TX. 77002-6986 7131650-0666

006 Broadway, Suite 312 Lubbock, TX. 79401-3479 8061747-5236

4309 N. Tenth, Suite B McAllen, TX. 78501.1665 5121662-4547

200 Main Plaza. Suite 400 San Antonio, TX. 76205.2797 512/225.4191

An Equal Opportunity, Affirmative Action Employer Mr. John P. Parsons commissioner Texas CreditUnion Department 914 EastAnderson Lane Austin, Texas 78752 OpinionNo.m-579

lk: Whether credit union chartered under Texas Credit Uni0l-lAct may offer debt securitiesfor sale

Dear Mr. Parsons:

You have requestedour opinion on certain issues relating to the authority of Texas credit unions to issue debt securities and the regulationof those securities.

Your first question iswhether creditunions charteredunder the Texas Credit UnionAct, article 2461-1.01 et seq.,V.T.C.S., have the authority to sell debt securities to theirmembers and to the general public. The securities involved in this inquiry sre debt instruments such as bonds and debentures not share accounts or other savings, depositsplaced in creditunionsby theirmembers.

The bonds and similar securities in question are instruments of debt by which the issuer borrows money from the purchasers. SC%? generally, Black’s Law Dictionary 224, 408 (4th ed. rev. 1968). Essentially,by sellinga bond, the issuerborrowsmoney and createsa debt, evidencedby thebond,which the issuer is obligated to repay at fixed times at a stated rate of interest, to the bond purchaser or a subsequentbona fide holder. Bonds can either be secured by certain property of the issuer or unsecured. An unsecured bond is generally labeleda debenture.

Under the Credit Union Act, credit unions are given the power to “borrow money from any source.” V.T.C.S. art. 2461-4.01(10). Although the borrowing authority of credit unions is subject to certain restrictionsdiscussed later in this opinion, that authority is not limited in method or form. Specifically, for purposes of our inquiry, the act contains no indication that incurring debt through the sale of bonds is not included under the general borrowing power granted by section 4.01(10). Therefore, the sale of debt securities by creditunions organizedunder the CreditUnions Act is an authorized formof borrowingunder the act.

p. 2142Mr. John P. Parsons - Page 2 (NW-579)

Although section 4.02 grants the creditunions certain powers to accomplish theirpurposes, it does not expand or otherwisemodify the express provisions of the act. Because a credit union's specific authorization to borrow money under section 4.01(10) includes the power to issuebonds, section 4.02 does not expand that power and is not applicable in thepresent case.
The present inquiry includes the question of whether the credit unions can sell the securities they issue to the general public as well as to credit union members. Section 4.01(10) makes clear that credit unions' borrowing authority allows them to "borrow money from any source." (Emphasis added). This language does not restrict a credit union's borrowing to its membership. If the legislature intended to limit the creditunion'sborrowing sources, it couldhave expressed such a limitation. The legislature, for instance, did express such a limitationwith respect to the credit unions' lending authority. A credit union is only allowed to "lend its funds to its members." (Emphasisadded). V.T.C.S. art. 2461-4.01(S). The broad language of section 4.02(10) authorizes borrowing from the general public as well as from credit union members. Therefore, under the CreditUnionAct, creditunions are authorized toborrowmoney through the issuance of debt securities. Those securitiesmay be sold to the generalpublic aswell as to creditunionmembers.

Your second question asks to what extent debt securities issued by creditunions are exempted from theTexas SecuritiesAct by section 11.17of the CreditUnionAct. Section 11.17provides:

Credit unions, whether authorized to do business under this Act or the Federal Credit Union Act, theirofficers,employees,and agents in the sale, issuance, or offering of any security issued by any state or federal creditunion are exempt from the provisions of the laws of this state, other than as required by this Act, which provide for the supervision, registration, or regulation in connectionwith the sale, issuance,or offeringof securities as the term is defined in Section 4, Securities Act, as amended (Article 581-4, Vernon's Texas Civil Statutes). The sale, issuance, or offering of any such security is legal without any action or approval on the part of any official, other than the credit union commissioner,authorized to license, regulate, or supervise the sale, issuance, or offering of securities.

V.T.C.S. art. 2461-11.17.

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Mr. John P. Parsons - Page 3 (m-579)

Initially, it should be noted that bonds and similar debt securitiesare "securities"under the SecuritiesAct. Section4(A) of that act defines "securities" to include any "bond, debenture,... or other evidence of indebtedness." V.T.C.S. art. 581-4(A). This definition of securities is expressly referenced for application in section 11.17of the CreditUnionAct.
Althoughnotmentionedby name, the SecuritiesAct is theprimary statute to which the section 11.17 exemption applies. That act is part of "the laws of this state...which provide for the supervision, registration,or regulation in connectionwith the sale, issuance, or offering of securities." V.T.C.S. art. 2461-11.17. The question, therefore, becomes: "to what extent are debt securities issued by creditunions exempt from provisions of the SecuritiesAct by section 11.17."

In construing the extent of the exemption, it is important to note that section 11.17 does not grant a blanket exemption from the SecuritiesAct. If the legislature intended such complete exemption, it could have briefly and directly stated that intention. Instead of exempting those securities from compliancewith all provisions of the Texas SecuritiesAct, section 11.17only gives creditunions a form of transaction exemption in the issuing of securities. That section states that credit unions and their agents are exempt "in the sale, issuance, or offering of any security issued by any state or federal credit union." The extent of this exemption is clarified by the second sentence of section 11.17 which provides that the "sale, issuance, or offering of any security is legalwithout any action or approval on thepart of" the state securitiescommissioner. Under the Securities Act, the securities commissioner is the "official... authorized to license, regulate, or supervise the sale, issuance, or offeringof securities." V.T.C.S.art. 2461-11.17.

The effectof section 11.17,therefore, is to allow creditunions to offer and sell securitieswithout seeking or obtaining any form of authorizationunder the SecuritiesAct. Specifically, credit unions
are allowed to offer and sell securitieswithout compliancewith the securityregistrationrequirementsof section 7 of the SecuritiesAct. V.T.C.S. art. 581-7. Further, the persons offering and selling securities on behalf of credit unions are exempt from the licensing requirements of section 12 of the Securities Act. V.T.C.S. art. 581-12. By the terms of section 11.17, however, the licensing exemption applies only to "credit unions..., their officers, employees,and agents." V.T.C.S. art. 2461-11.17. The exemptiondoes not extend to independentdealersof the securities.

The transaction exemption provided by section 11.17 does not exempt creditunions from compliancewith the substantiverequirements of the Texas SecuritiesAct. Most important, the offer and sale of

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Mr. John P. Parsons - Page 4 (Mw-579)

securities by credit unions remain subject to the anti-fraud protections of the Securities Act. See, e. ., Securities Act, V.T.C.S. art. 581 553, 23, 28, 29, 32, 33.

The section 11.17 exemption from the SecuritiesAct registration and licensing requirements is similar to the transaction exemptions providedby section 5 of the SecuritiesAct. V.T.C.S.ar,t.581-5. As found in the legislativehistory, thepurpose of the current enactment of section 11.17 was to provide credit unions with the same transaction exemption granted to banks and savings and loan institutions. Statement of Representative Gerald Hill before the House cotnrn.

on Financial Institutions, Hearings on H.B. No. 1399, April 7, 1981,on tape filedwith House HearingReporter.

The Securities Act exemption for banks and savings and loan institutions is found in section 5(L) which exempts from application of the act the offer and sale of securitiesas follows:

The sale by the issuer itself, or by a registered dealer, of any security issued or guaranteed by any bank organized and subject to regulationunder the laws of the United States or under the laws of any State or territory of the United States, or any insularpossession thereof,
or by any savings and loan association organized and subject to regulation under the laws of this state, or the sale by the issuer itself of any security issued by any federal savings and loan association.

V.T.C.S. art. 581-5(L). Although they are exempt from the registration and licensing requirements of the Securities Act by section 5(L), securities issued by banks and savings and loans are still subject to the act's anti-fraudprovisions. See SecuritiesAct, - V.T.C.S. art. 581, 532. The exemption of section 11.17 of the Texas CreditUnionAct shouldbe applied in the samemanner as the exemption providedby section5(L) of the SecuritiesAct.

As a final question, you ask to what extent the Texas credit union commissioneris authorized to approveor disapprovethe issuance of debt securities by credit unions. Section 11.17 gives the commissionerthe authority to approveand otherwiseregulatethe offer and sale of securitiesby credit unions. The second sentence of that section clarifies this authority by stating that "[tlhe sale, issuance, or offering of any [security issued by a credit union] is legal without any action or approval on the part of any official, other than the credit union commissioner,.... II V.T.C.S. art. 2461-11.17.

p. 2145Mr. John P. Parsons - Page 5 mw-579)

While enabling the commissioner to approve or disapprove credit union bond issues, section 11.17 in itself does not require affirmative action by the commissioner in this regard. Instead, the proviso in the first sentence of that section allows approval and other regulation of credit union securities "as required by [the Credit Union] Act." Consequently, the regulation is conductedby the commissioner according to other provisions of the act and the rules promulgated under the act which are applicable to credit union securities.

The only statutory requirement of commissioner approval for credit union securities is found in article 2461-4.01(10) section 4.01(10). V.T.C.S. That section requires prior approval by the commissioner of all credit union debt which exceeds twenty-five percent of its shares, deposits, and surplus. That is, when the issuance of debt securities, combined with all other credit union debt, will exceed the twenty-fivepercent limit, the credit union is required to obtain prior commissionerapproval before the securities couldbe offeredor sold.

The issuance of securities by credit unions would also be subjected to further scrutiny under such administrative rules which the commissioner enforces. V.T.C.S. art. 2461-11.10(b). At present there are no applicable rules which have been adopted by the Texas Credit Union Commission under its rule making authority. V.T.C.S. art. 2461-11.07.

SUMMARY

Credit unions organizedunder the Texas Credit UnionAct are authorizedto issuedebt securities. These securitiesmay be sold to the generalpublic
as well as to credit union members. While exempt from the registration and licensing requirements of the Texas Securities Act, credit union sec"rities are not exempt from the anti-fraud provisions of that act. The credit union commissionerhas the authority to regulate credit union securities.

Very trulyyours,

AttorneyGeneralof Texas

JOHNW. FAINTER,JR. FirstAssistantAttorneyGeneral

p. 2146Mr. John P. Parsons - Page 6 (Mw-579)

RICHARDE. GRAY III ExecutiveAssistantAttorneyGeneral
Preparedby JefferyL. Hart AssistantAttorneyGeneral

APPROVED: OPINION COMMITTEE

SusanL. Garrison,Chairman Jon Bible Rick Gilpin JefferyL. Hart JimMoellinger

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