This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

70526

Vol. 65, No. 227

Friday, November 24, 2000

NATIONAL CREDIT UNION

ADMINISTRATION

12 CFR Part 721

Federal Credit Union Incidental Powers

Activities

AGENCY: National Credit Union

Administration.

ACTION: Proposed rule.

SUMMARY: The National Credit Union

Administration (NCUA) is proposing a

revised regulation to categorize

activities deemed to be within the

incidental powers of a federal credit

union (FCU). The proposed rule also

describes how interested parties may

request a legal opinion on whether an

activity is within an FCU’s incidental

powers or apply to add new activities or

categories to the regulation. The

proposed rule also clarifies the conflict

of interest provisions applicable to

activities authorized by this regulation.

DATES: Comments must be received on

or before February 22, 2001.

ADDRESSES: Comments should be

directed to Becky Baker, Secretary of the

Board. Mail or hand-deliver comments

to: National Credit Union

Administration, 1775 Duke Street,

Alexandria, Virginia 22314–3428. You

may also fax comments to (703) 518-

6319 or e-mail comments to

boardmail@ncua.gov. Please send

comments by one method only.

FOR FURTHER INFORMATION CONTACT:

Michael J. McKenna, Senior Staff

Attorney, or Chrisanthy J. Loizos, Staff

Attorney, Division of Operations, Office

of General Counsel at the address above

or telephone: (703) 518–6540.

SUPPLEMENTARY INFORMATION:

A. Background

B. Comments

C. Overview of Proposed Regulation

1. The Incidental Powers Authority

2. Other Considerations

D. Section by Section Analysis

E. Regulatory Procedures

A. Background

On November 18, 1999, the NCUA

Board (the Board) issued a request for

comments in an Advance Notice of

Proposed Rulemaking (ANPR) on

whether the Board should restructure

part 721 of NCUA’s Regulations and

adopt provisions regarding incidental

powers within the regulation. 64 FR

66413 (November 26, 1999). At the time,

the Board envisioned that it would

create four sections within Part 721 and

expand its test for analyzing the

incidental powers of FCUs.

In the first section, the Board

considered listing activities or

categories of activities deemed to be

within the incidental powers of FCUs.

In addition to the approved activities,

the Board suggested an application

process for FCUs to request additional

activities. Further, the Board requested

that commenters offer standards for

analyzing the permissibility of an

activity as an incidental power, as well

as examples or categories of incidental

activities.

The Board suggested that the second

section authorize group purchasing

activities and limit compensation to the

credit union’s cost amount, similar to

the current regulation. The Board also

sought comment on the compensation

limit to an FCU’s cost amount, the

appropriateness of a limit, and whether

reasonable value be added to the credit

union’s cost when applying the

compensation limit.

The third section considered by the

Board tracked the current regulation

regarding the sale of insurance products

directly related to a loan or share

account. Similarly, the fourth section

regarding conflicts of interest tracked

the current provision in part 721, but

the Board sought comment on clarifying

the applicability of this provision.

B. Comments

The Board received twenty-three

comment letters. Comments were

received from ten natural person credit

unions, one corporate credit union, four

national credit union trade associations,

six state credit union leagues, one

insurance company and one attorney. In

general, the commenters supported

updating the regulation. Most

commenters did not specifically address

the restructuring of the regulation but

rather responded by commenting

individually on each of the proposed

four sections.

Seven commenters opposed the

regulation’s structure as proposed. One

commenter suggested the Board

dispense with part 721 and adopt a

broad policy addressing incidental

powers and group purchasing.

Similarly, another commenter,

concerned that a single regulation may

be unable to address all incidental

powers, opposed defining NCUA’s

analysis of incidental powers in a

regulation. After further consideration

of the legal justifications and safety and

soundness issues, as well as a review of

the comment letters, the Board has

decided to structure the regulation

differently than presented in the ANPR.

Furthermore, other laws and regulations

have since supplanted some of the

issues raised for comment in the ANPR.

For example, the issue of mailing lists

is now addressed in NCUA’s new

consumer privacy regulation. 12 CFR

part 716.

The NCUA Board is now proposing

seven sections instead of the original

four sections. The Board’s analysis of

incidental powers is addressed in the

text of the proposed regulation. The

Board believes that the regulation

should contain the Board’s analysis so

FCUs will know the criteria the Board

will apply to petitions for new

incidental powers.

In the ANPR, the Board addressed

case law regarding incidental powers

and how other financial institution

regulatory agencies have addressed the

issue. The Board requested comment on

the standards it should consider when

analyzing the permissibility of an

activity under an FCU’s incidental

powers. The commenters

overwhelmingly supported an

expansion of an FCU’s incidental

powers. Most commenters asked that

the Board adopt an analysis similar to

the OCC’s and advocated broad

standards.

The Board requested comment on

establishing a section with a list or

categories of activities NCUA has

approved as incidental powers for

FCUs. Of the twenty-three commenters,

eight supported a list of approved

activities deemed to be within an FCU’s

incidental powers. Those in support of

a list agreed with NCUA’s proposal that

the list would be illustrative of

permitted activities and not exclusive.

Federal Register / Vol. 65, No. 227 / Friday, November 24, 2000 / Proposed Rules 70527

Seven opposed a list of activities. Of

that group, some objected to having

incidental powers addressed in a

regulation. The remaining commenters

believed policy guidelines or regulatory

commentary, in lieu of a list, would

provide NCUA more flexibility. The

Board believes that the use of activity

categories, rather than a narrow list of

permissible activities, allows for

adequate illustration of the areas

determined to be within an FCU’s

incidental powers. The Board chose not

to use guidelines and commentary

because they lack certainty and would

not adequately illustrate what is

permissible.

The Board asked for examples or

categories of activities within an FCU’s

incidental powers. Several commenters

suggested that FCUs have the incidental

authority to offer stored value products

or alternate media, such as gift

certificates, transportation tickets,

concert tickets, stamps, and phone

cards. Commenters also suggested that

FCUs should be able to sell advertising

space on their web sites, ATM receipts,

and statements. Many of the

commenters’ suggestions have been

incorporated into the proposed

regulation.

Many commenters commented on the

significance of technology in the

financial services industry. They

suggested that FCUs should be

authorized under their incidental

powers to act as Internet service portals

and Internet service providers, and to

otherwise provide electronic financial

services. Commenters also requested the

ability to sell data processing services

and to certify digital signatures or

identifications. Again, many of these

suggestions have been incorporated into

the proposed regulation.

In response to the expanded powers

granted to banks as a result of the

Gramm-Leach-Bliley Act, many

commenters discussed various types of

advisory services, such as brokerage

services for buying and selling

insurance and investments, financial

counseling, investment counseling,

consumer credit counseling, estate

planning, financial planning, tax

counseling and preparation, and other

financial or legal counseling for

managing financial needs. Credit unions

were not granted expanded powers as a

result of the Gramm-Leach-Bliley Act

but some of the commenters’

suggestions traditionally have been

performed by credit unions and are

included in the proposed rule.

In the ANPR, the Board asked for

comment on group purchasing

activities. NCUA’s longstanding

position has been that FCUs could offer

group purchasing opportunities as a

goodwill service to members.

Accordingly, FCU compensation for

offering group purchasing opportunities

has been limited to an FCU’s cost

amount. One commenter suggested that

the regulation should clearly distinguish

group purchasing and incidental powers

as two separate powers. Five

commenters argued that group

purchasing should be considered an

activity within an FCU’s incidental

powers. The Board has reexamined the

concept of group purchasing and has

established an incidental powers

activity category entitled finder

activities.

The Board asked for comment on

defining ‘‘insurance products’’ to clarify

the types of products an FCU may sell

to its members without compensation

limits. One commenter suggested that, if

the Board explicitly permits FCUs to

generate income from all incidental

activities, a definition would be

unnecessary. In the alternative, this

commenter defined ‘‘insurance

products’’ as a product, offered by a

third party, which protects the credit

union or borrower against loss incurred

in connection with the borrower’s

ability or willingness to repay an

extension of credit or the credit union’s

level of security in the event of the

borrower’s default. Two commenters

raised the issue of state insurance laws.

Of the two, one asked that a caveat

within the regulation direct FCUs to

state laws governing the splitting of

commissions. The second commenter

stated that a definition of ‘‘insurance

products’’ may fail to meet the same

standards under various state laws and

prove confusing to FCUs, resulting in

violations of state insurance laws.

Currently, FCUs may provide a

convenient service by offering members

insurance products unrelated to an

extension of credit or the opening or

maintenance of a share, share draft or

share certificate account. FCUs are

limited to reimbursement not exceeding

the greater of a nominal dollar amount

or cost amount. 12 CFR 721.2(b)(2). The

Board requested comment on the

compensation limit of the credit union’s

cost amount, whether any limit is

appropriate, and whether reasonable

value should be added to the credit

union’s cost when applying the

compensatory limit. NCUA also

requested comment on how the term

‘‘reasonable value’’ should be defined.

One commenter offered definitions for

both phrases. ‘‘Cost amount’’ was

defined to include the direct cost to the

FCU and reasonable related

administrative costs. The commenter

also offered a definition of ‘‘reasonable

value’’ as the greater of the FCU’s actual

cost or the fair market value for the

services rendered in the FCU’s

geographic area. Five commenters stated

that FCUs should be able to earn income

in excess of their cost when selling

insurance products to members that are

not directly related to share accounts or

loans.

Having considered the range of

comments in response to the ANPR on

group purchasing and the sale of

insurance products, the Board proposes

to incorporate the concept of group

purchasing in regard to insurance

products into the category of finder

activities.

Finder activities are those in which an

FCU introduces its members to third

party vendors, a traditional role for

financial service providers and credit

unions. As a finder, the FCU assists its

members in accessing products while

being in the position to negotiate

membership-wide rates or benefits with

vendors. An FCU may act as a finder on

a variety of products, including

insurance products. Therefore, the

Board does not need to distinguish the

offering of insurance products from

other types of finder activities.

The Board sought comment on

whether compensation for incidental

powers activities should be unlimited.

Seven commenters believed that

compensation should be unlimited.

Some of these commenters believed that

clarification was necessary. Some stated

that only an FCU’s board of directors

should make the business decision to

limit compensation derived from these

activities.

Similar comments were submitted in

response to the Board’s query regarding

the current compensation restriction of

an FCU’s cost amount when offering

group purchasing opportunities.

Eighteen commenters specifically stated

that FCUs should engage in group

purchasing activities without

restrictions on compensation to the

FCU. The commenters offered several

reasons for lifting the compensation

limitations. Many of these commenters

believe that the amount of

compensation should be a management

decision. One commenter noted the

laws of eight states do not restrict statechartered credit union income for group

purchasing activities. However, as the

Board notes below, income from these

activities is subject to tax for statechartered credit unions.

One commenter expressed concern

that income earned by FCUs under this

section may be considered unrelated

business income for tax purposes. The

FCU Act expressly provides that FCUs

are exempt from all income taxes. 12

70528 Federal Register / Vol. 65, No. 227 / Friday, November 24, 2000 / Proposed Rules

U.S.C. 1768. Furthermore, FCUs are tax

exempt organizations under 26 U.S.C.

501(c)(1) and, therefore, exempt from

taxes on unrelated business income

under 26 U.S.C. 511(a)(2). By finding

that particular activities are within the

incidental powers of FCUs, the Board,

as regulator of these institutions,

determines whether activities are

necessary or requisite for FCUs to carry

on their business effectively under the

FCU Act. Under this analysis, FCUs

engaging in approved incidental

activities are conducting business

substantially related to their business as

nonprofit financial institutions.

The Board sought comment on a

process for FCUs to seek approval to

add activities to the regulation. The

commenters offered varied responses to

this request. One commenter supported

an approval procedure within the

regulation for activities not previously

approved by NCUA. Two commenters

rejected the proposal that FCUs seek

approval from NCUA. One commenter

suggested that NCUA regional directors

accept applications and process requests

within a specified time frame. Another

commenter, opposed to an application

process, stated that NCUA should set a

clear standard so that FCUs could

determine their own incidental powers.

This commenter also suggested that

FCUs could seek a legal opinion from

NCUA if necessary. The Board has

adopted an approach in the proposed

regulation that adopts many of these

comments. The proposed regulation

provides for regulatory approval to

identify additional incidental powers

activities, recognizing the deference to

which the NCUA as regulator is entitled

in making this determination. The

Board believes that regulatory

identification of permissible activities

provides assurance to FCUs that the

activities in which they engage are legal.

The Board proposed retaining the

current regulation’s conflict of interest

provisions. To provide clarity, the Board

sought comment on possible definitions

for the phrase ‘‘in conjunction with any

activity.’’ One commenter supported the

current conflict of interest provision.

Others commenting on this section

offered various suggestions for

amending this provision. One

commenter stated that, where no

conflict of interest exists, senior

management should not be prohibited

from receiving compensation from an

FCU in conjunction with group

purchasing. Another commenter

suggested that, instead of defining the

phrase, it should be eliminated from the

regulation. Five commenters also

suggested that, under certain conditions,

the regulation permit senior

management officials to receive bonuses

or incentives for overseeing group

purchasing activities.

The proposed rule deletes the phrase

‘‘in conjunction with’’ and replaces it

with the phrase ‘‘in connection with.’’

This will make the provision consistent

with other NCUA conflict of interest

provisions that use the phrase ‘‘in

connection with,’’ such as the lending

regulation. 12 CFR 701.21(c)(8). To

address the confusion about the

application of the conflict of interest

provision, the section by section

analysis that follows provides an

example illustrating the kind of

compensation that is permissible.

C. Overview of the Proposed Regulation

1. The Incidental Powers Authority

The legal authority for the activities

covered by part 721 is the incidental

powers provision of the Federal Credit

Union Act (FCU Act). 12 U.S.C.

1757(17). That provision states that an

FCU may ‘‘exercise such incidental

powers as shall be necessary or requisite

to enable it to carry on effectively the

business for which it is incorporated.’’

12 U.S.C. 1757(17). Over the years,

NCUA has looked to whether an activity

is convenient or useful to the credit

union’s business as expressly

authorized by the FCU Act when

determining if an activity is authorized.

NCUA’s position has been based on

Arnold Tours, Inc. v. Camp, 472 F.2d

427 (1st Cir. 1972). This case established

a test for determining the incidental

powers of national banks and was

applied to FCUs in American Bankers

Association v. Connell, 447 F. Supp. 296

at 298 (D.D.C. 1978).

Recently, the U.S. Supreme Court

expanded the incidental powers of

national banks in Nationsbank of North

Carolina v. Variable Annuity Life

Insurance Co. (VALIC), 513 U.S. 251

(1995). The Court found that the powers

of national banks are not limited to

those activities enumerated in 12 U.S.C

24 (Seventh), and that banks have the

authority to carry on the business of

banking as provided in that section. The

Court deferred to the OCC’s finding that

the brokerage of financial investment

instruments and the sale of investment

products, such as annuities, are

authorized as part of, or incidental to,

the business of banking. Id. at 259. In

evaluating the case, the Court stated:

We expressly hold that the ‘‘business of

banking’’ is not limited to the enumerated

powers in section 24 Seventh and that the

Comptroller therefore has discretion to

authorize activities beyond those specifically

enumerated. The exercise of the

Comptroller’s discretion, however, must be

kept within reasonable bounds. Ventures

distant from dealing in financial investment

instruments—for example, operating a

general travel agency—may exceed those

bounds.

Id. at 259, n. 2.

After considering VALIC and the

cases and OCC interpretations that have

evolved since the VALIC case was

decided, the Board recognizes that it,

like the OCC, has the discretion under

the incidental powers provision to

authorize activities beyond those

enumerated in the FCU Act. The Board

believes that it may adopt a broader,

more flexible analysis of those activities

that fall within an FCU’s incidental

powers than it has used in the past.

The Board believes that the incidental

activities of FCUs have evolved and

must continue to evolve as a result of

changes in the enumerated powers in

the FCU Act and the impact of modern

technology on how FCUs deliver

financial services to their members.

Congress, since the creation of the

federal charter in 1934, has seen fit to

amend the FCU Act many times,

expanding the express powers of FCUs

in various areas, including the types of

accounts FCUs may offer, the types of

lending and the permissible maturities

for loans, and permissible investments,

including the ability of FCUs to invest

in credit union service organizations

that support the operations of the credit

unions they serve. As a result, the

exercise of incidental powers, necessary

for FCUs to carry on the business for

which they are incorporated, has

expanded. In addition, the Board is very

aware of the significant impact that

changing media has had on how

businesses operate. Particularly,

electronic communication has changed

dramatically the nature and delivery of

financial services. As a result, the

exercise of incidental powers must

expand to enable FCUs to deliver

financial services through the use of

modern media.

The Board does not believe it is

necessary to link an incidental power

directly to an express power

enumerated in the FCU Act but

generally will consider an activity to be

within an FCU’s incidental powers if it

is ‘‘necessary or requisite to enable it to

carry on effectively the business for

which it is incorporated.’’ 12 U.S.C.

1757(17). The Board believes the

business of FCUs is to provide financial

services to their members as

contemplated by the FCU Act.

In determining whether an activity is

authorized as an appropriate exercise of

an FCU’s incidental powers, the Board

will consider: (1) Whether the activity is

convenient or useful in carrying out the

Federal Register / Vol. 65, No. 227 / Friday, November 24, 2000 / Proposed Rules 70529

mission or business of credit unions

consistent with the Federal Credit

Union Act; (2) whether the activity is

the functional equivalent or logical

outgrowth of activities that are part of

the mission or business of credit unions;

and (3) whether the activity involves

risks similar in nature to those already

assumed as part of the business of credit

unions. In reviewing whether an activity

is within an FCU’s incidental powers,

the Board is adopting criteria that are

substantially similar to those used by

the OCC but notes that those criteria

will be applied in the unique context of

credit unions and the business for

which they are incorporated. Thus,

while the Board may look to other laws

and precedents in the financial industry

for guidance in this area, the results of

the Board’s analysis may be different.

2. Other Considerations

The Board acknowledges that the

proposed regulation will permit FCUs to

engage in some activities that may have

been traditionally performed by credit

union service organizations (CUSOs).

For example, both FCUs and CUSOs

may offer income tax preparation. The

Board continues to believe that CUSOs

provide a good vehicle for providing

services to credit unions and their

members while protecting federal credit

unions from increased liability. In

addition, CUSOs are a means for FCUs

to pool their resources and establish an

operation for products or services that a

single FCU would not be able to support

on its own.

D. Section by Section Analysis

Section 721.1 What does this part

cover?

This section describes the scope of

part 721.

Section 721.2 What is an incidental

powers activity?

This section establishes a definition

for an incidental powers activity by

using a three prong test. NCUA will

determine whether an activity is within

the incidental powers of FCUs if the

activity: (1) Is convenient or useful in

carrying out the mission or business of

credit unions consistent with the

Federal Credit Union Act; (2) is the

functional equivalent or logical

outgrowth of activities that are part of

the mission or business of credit unions;

and (3) involves risks similar in nature

to those already assumed as part of the

business of credit unions.

Section 721.3 What categories of

activities are preapproved as incidental

powers necessary or requisite to carry

on a credit union’s business?

Proposed § 721.3 establishes

categories of activities that the Board

has determined to be within an FCU’s

incidental powers. It is not intended to

be exhaustive and the regulation

provides a mechanism for approving

additional activities. Each of the

categories is discussed briefly in this

preamble.

Certification Services

The Board proposes that various

certification services, such as notary

services, electronic signature

authentications and signature

guarantees, are within the incidental

powers of an FCU.

The provision of notary services has

been an exercise of an FCU’s incidental

powers for many years. A notary

administers oaths, verifies the identity

of a signer, attests to the verification,

records signatures, and authenticates

commercial transactions. By providing

notary services to members, an FCU

facilitates transactions for its members

that require the certification of

signatures. This service allows for

timely processing of credit union

transactions as compared with sending

members elsewhere for notarizations.

Therefore, this service is convenient and

useful in carrying out an FCU’s business

by allowing it to operate efficiently and

effectively.

Similarly, the Board proposes that the

authentication of electronic signatures is

analogous to notarization. Like a notary,

a certification authority (CA) must

verify the identity of the signer and

authenticate the signature or electronic

equivalent. While state notary laws

impose identification standards, a CA

contractually agrees to the extent of its

investigation before issuing a particular

grade of an authentication certificate.

In a conditional approval, the OCC

found that the CA activity is the

functional equivalent of notary and

other authentication services provided

by banks, and a logical outgrowth of

bank identification and verification

skills. OCC Conditional Approval No.

267 (January 1998). The risks borne by

an FCU acting as a CA are similar to a

notary’s improper verification and are

similar to those risks inherent in

providing electronic services. The OCC

approval was conditioned upon an

acceptable information systems and

operations architecture, as well as OCC

supervision of vendor services. Id. FCUs

capable of providing this advanced

service must employ technological and

legal risk controls to address safety and

soundness considerations.

FCUs, as eligible guarantor

institutions, are permitted to issue

signature guarantees for the transfer of

securities. 17 CFR 240.17Ad–15. NCUA

has maintained for many years that

FCUs could engage in the guarantee of

stock transfer signatures for their

members as a free, goodwill service. The

Board now proposes that FCUs may

provide signature guarantees for stock

transfers and U.S. Treasury transactions,

as provided by law, because this activity

is an incidental power.

An FCU, acting as a signature

guarantor, warrants three conditions: (1)

That the signature is genuine; (2) that

the signer is appropriately authorized to

perform the act; and (3) that the signer

has legal capacity to sign. A signature

guarantor warrants the authority of the

signer, rather than simply the

genuineness of the signature.

Nevertheless, this activity is

fundamentally identity verification and

is the functional equivalent or logical

outgrowth to the provision of notarial

services. Like notary services, this

activity conveniently facilitates

members’ financial transactions.

Correspondent Services

Correspondent services have been an

exercise of an FCU’s incidental powers

for many years. This authority allows a

credit union that is authorized to

perform a service for its members to

provide the same services to other credit

unions. For example, a credit union may

engage in loan processing for another

credit union.

Electronic Financial Services

The Board proposes that FCUs may

offer, through electronic means and

facilities, any activity, function, product

or service that they are otherwise

authorized to provide under their

express or incidental powers. FCUs may

establish their own web sites to promote

credit union services and to effect

member transactions, such as electronic

bill payment, bill presentment, account

inquiries and transfers. Web sites have

become the electronic equivalent of

newsletters, office signs and teller

services. They provide a convenient and

useful means for FCUs to carry out their

business.

Through a transactional web site, an

FCU may advertise and communicate

with its members and others within its

field of membership. Features, such as

electronic bill payment and bill

presentment, allow members to

schedule payments and complete

transactions without handwritten drafts

or visits to the credit union. As noted by

70530 Federal Register / Vol. 65, No. 227 / Friday, November 24, 2000 / Proposed Rules

the OCC, the risks confronted in

providing financial services over the

Internet are similar to the risks

associated with the permissible

activities of providing these services via

electronic means generally. OCC

Interpretive Letter No. 742 (August

1996). Accordingly, there are security

issues that FCUs must address to

manage risks involved in providing

these services.

As part of the electronic delivery of

traditional products or services, the

Board believes FCUs have the authority

under their incidental powers to engage

in new activities or services due to the

changing commercial environment,

such as Internet access. By providing

Internet access services to its members,

an FCU offers its members a device to

receive electronic products and services

from the FCU. It also assures the FCU

that members will access the credit

union’s home page when they initially

connect to the Internet, positioning the

credit union to market its products

successfully. Members using the FCU’s

Internet access and transactional web

site can retrieve account information

and process transactions similarly to

services offered by tellers, automated

teller machines or telephone response

systems.

Excess Capacity

The Board recognizes that, in

planning for future expansion and

offering new products and services to

their members, FCUs should be able to

sell their excess capacity as a matter of

good business practice. The sale of

excess capacity offers FCUs the

opportunity to provide financial

services to its members, even though

member demand for the services does

not initially meet the FCU’s capacity.

The opportunity to sell excess capacity

may involve leasing excess office space,

sharing employees, or using data

processing systems to process

information for third parties. As the

business of FCUs is to provide financial

services to their members, the Board

believes that the sale of excess capacity

is within an FCU’s incidental powers

under two conditions: (1) The FCU

properly established the service or made

the investment in good faith with the

intent of serving its members; and (2)

the FCU reasonably anticipates that the

excess capacity will be taken up by the

future expansion of services to its

members.

Financial Counseling Services

Credit unions have traditionally been

an alternative for moderate and lowincome savers. As nonprofits, they serve

to foster the financial well being of their

members rather than being driven by

achieving corporate profits. The Board

believes that, as part of providing credit

and saving opportunities for their

members, FCUs have the responsibility

of promoting provident planning

through consumer education and

responsible investment. The Board

believes it is part of the business of

FCUs to provide financial counseling

services to their members including

estate planning, income tax preparation

and filing, and investment and

retirement counseling.

Finder Activities

The Board proposes to consolidate

group purchasing and insurance

activities in part 721 under the category

entitled finder activities. Finder

activities are defined as the promotion

of products and services offered by

outside vendors. As a finder, an FCU

may introduce to or otherwise bring

together outside vendors with its

members for the negotiation and

consummation of transactions through

its role as a financial service provider

and intermediary of financial services.

The Board believes that finder

activities are member services that are

necessary or requisite to enable FCUs to

carry on their business effectively. FCUs

can serve as their members’ primary

financial institution by bringing

members together with providers of

services and products. Although the

FCU does not act as a broker, the FCU

may negotiate group discounts or

benefits on behalf of its membership

with vendors. Additionally, these

referrals enhance the quality of service

FCUs offer their members and afford the

FCU the opportunity to promote its own

products as well. Examples of finder

activities include placing third party

vendor advertisements in the FCU’s

newsletter or as a link to the vendor’s

web site on the FCU’s home page.

In establishing the category of finder

activities, the Board is proposing to

incorporate activities that FCUs

previously have performed as group

purchasing activities. In the past, group

purchasing plans have been an

opportunity for a third party vendor to

market its products or services directly

to credit union members through

various promotional means, such as

statement stuffers or advertisements

displayed at credit union branches.

Currently, part 721 specifically

authorizes FCUs to endorse third party

vendors and perform administrative

functions on their behalf. 12 CFR 721.1.

As part of securing an FCU’s

endorsement, third party vendors

typically have provided discounts or

other additional benefits to an FCU’s

members. If FCUs engage in finder

activities, the Board believes that FCUs

should continue, as they have in the

past in providing group purchasing

opportunities, to enhance the economic

well-being of their members by securing

discounts or other benefits for their

members from third party vendors.

Marketing

This section states that credit union

management can use its longstanding

incidental power to advertise and

market its services in any legally

permissible manner.

Monetary Instruments

This section allows a credit union to

sell and exchange monetary instruments

for its members. Among other things, it

allows credit union to maintain deposits

in foreign financial institutions to

facilitate member transactions.

However, this provision does not allow

a credit union to maintain foreign

deposits for speculative purposes.

Operational Programs

The Board is proposing to identify

certain operational programs as within

an FCU’s incidental powers. This is not

an exclusive list and other programs

may be authorized through the legal

opinion process. The Board is

requesting comment on whether

additional programs should be stated in

this section or whether this section

should be broadened to encompass a

wider scope of permissible activities.

Stored Value Products

The Board proposes to identify stored

value products or alternate media as

within an FCU’s incidental powers. As

noted in an OCC decision, these

products represent a member’s

prepayment for a merchant’s goods or

services and are, therefore, a form of bill

payment. OCC Interpretive Letter No.

718 (April 1996). A credit union simply

transfers funds from a member’s share

account to a merchant’s account. The

credit union acts as an intermediary by

transferring funds from a member to a

merchant, a traditional role for FCUs.

Therefore, the activity poses no more

additional risk than that already

assumed by credit unions.

Trustee or Custodial Services

Although FCUs do not have express

trust powers under the FCU Act, they

have long served as trustees and

custodians where that authority has

been granted under other provisions of

law such as the Internal Revenue Code.

Under this authority, FCUs are able to

provide individual retirement accounts

(IRA), education saving accounts such

Federal Register / Vol. 65, No. 227 / Friday, November 24, 2000 / Proposed Rules 70531

as the Roth IRA, and other savings

opportunities that are of importance to

modest savers. The ability of FCUs to

provide these saving opportunities to

their members fits within the role of

FCUs as encouraging thrift among their

members and creating a source of credit

for provident purposes.

Section 721.4 How may a credit union

apply to engage in an activity that is not

preapproved as within a credit union’s

incidental powers?

Proposed § 721.4 allows FCUs to seek

approval from NCUA to engage in an

activity that is not within the ambit of

the broad categories set forth in § 721.3.

However, before FCUs engage in the

petition process they should seek

advisory opinions from NCUA’s General

Counsel, as to whether a proposed

activity fits into one of the authorized

categories or is otherwise within an

FCU’s incidental power. If NCUA’s

Office of General Counsel finds that the

activity is not within the scope of the

regulation set forth in § 721.3, an FCU

wishing to conduct the activity should

submit an application by certified mail,

return receipt requested, to the

Secretary of the Board describing the

proposed activity in detail, including

the requested activity’s financial and

operational impact on FCUs. NCUA will

endeavor to respond to the applicant

within 60 days as to whether it will

propose an amendment. The application

is treated as a petition to amend § 721.3.

Because the addition of a new activity

to the list is a substantive change in the

regulation, the requirements of the

Administrative Procedure Act must be

followed.

Paragraph (c) of this section addresses

what the Board will consider in

determining whether a new activity

should be included in the regulation.

This procedure is similar to the one

found in § 712.7 for the addition of

permissible services for credit union

service organizations (CUSOs). The

Board originally adopted this procedure

in the CUSO regulation in 1986, but

FCUs have not found the need to

petition for an amendment of this rule.

51 FR 10360 (March 26, 1986). The

categories in the current CUSO rule are

fairly broad. The Board believes that the

proposed categories of activities in

proposed § 721.3 are drafted broadly

enough to encompass many activities

and that the petition process will rarely,

if ever, be used.

Section 721.5 What limitations apply

to a credit union engaging in activities

approved under this part as within a

credit union’s incidental powers?

This section acknowledges the

distinction between an FCU’s authority

to engage in an activity deemed to be

within its incidental powers and the

requirement that an FCU comply with

any conditions or regulations that apply

to the activity. When engaging in an

authorized activity, FCUs must comply

with conditions or constraints on the

activity established in applicable federal

and state law, NCUA regulations and

legal opinions.

For example, FCUs are responsible for

ensuring their compliance with

applicable state licensing laws relating

to insurance sales. Another example is

the use of raffles in promotional

activities that may be regulated or

prohibited under local law. The

regulation does not preempt FCUs from

compliance with these laws.

Section 721.6 May a credit union

derive income from activities approved

under this part?

The proposed regulation provides that

an FCU may receive compensation from

its incidental power activities because

these activities are deemed necessary or

requisite for an FCU to carry on its

business effectively. This includes

charging fees to vendors that solicit

members with products and services.

Section 721.7 What are the potential

conflicts of interest for official and

senior management employees when

credit unions engage in activities

approved under this part?

The proposed regulation defines a

senior management employee, official,

and immediate family member similarly

to other conflict of interest provisions in

NCUA regulations, such as those in the

lending regulation. 12 CFR 701.21(c)(8).

The proposed regulation, again

consistent with other NCUA regulations,

prohibits a senior management

employee, official, or his or her

immediate family member from

receiving any compensation or benefit,

directly or indirectly, from activity that

is covered by the regulation. The Board

wishes to clarify that this section only

prohibits compensation that is linked to

products or services provided by third

party vendors.

The Board does not prohibit

compensation from the above named

persons by a third party vendor if the

compensation is: (1) Fixed in amount;

(2) not related to the amount of products

sold or services used; and (3) received

by no more than one director or official

of the credit union, who is recused from

the credit union decision concerning its

business with the third party vendor.

This type of arrangement does not

present the type of conflict that would

cause NCUA safety and soundness

concerns. The following example of

compensation that is not prohibited by

the Board may prove helpful. A federal

credit union official, Ms. Smith, is also

on the board of directors of Company

DMH, which sells phone cards. Ms.

Smith is paid $5,000 a year by Company

DMH for her services as a director. The

credit union contracts with Company

DMH to provide prepaid phone cards to

its members. Ms. Smith is not involved

in the decision making process, and her

compensation from the DMH Company

is not linked to the credit union’s phone

card sales. Under this type of scenario,

there is no conflict of interest and the

compensation paid by DMH Company is

not prohibited.

Finally, proposed § 721.7 allows

employees, who are not senior

management employees or officials, to

receive incentives, provided the FCU’s

board of directors maintains a policy on

the program and determines that no

conflict exists.

Regulatory Procedures

Paperwork Reduction Act

NCUA has determined that the

proposed regulation does not increase

paperwork requirements under the

Paperwork Reduction Act of 1995 and

regulations of the Office of Management

and Budget.

Executive Order 13132

Executive Order 13132 encourages

independent regulatory agencies to

consider the impact of their regulatory

actions on state and local interests. In

adherence to fundamental federalism

principles, NCUA, an independent

regulatory agency as defined in 44

U.S.C. 3502(5), voluntarily complies

with the executive order. This proposed

rule, if adopted, will apply only to

federally-chartered credit unions. It will

not have substantial direct effects on the

states, on the relationship between the

national government and the states, or

on the distribution of power and

responsibilities among the various

levels of government. NCUA has

determined that the proposed rule does

not constitute a policy that has

federalism implications for purposes of

the executive order.

70532 Federal Register / Vol. 65, No. 227 / Friday, November 24, 2000 / Proposed Rules

The Treasury and General Government

Appropriations Act, 1999—Assessment

of Federal Regulations and Policies on

Families

The NCUA has determined that this

proposed rule will not affect family

well-being within the meaning of

section 654 of the Treasury and General

Government Appropriations Act, 1999,

Pub. L. 105–277, 112 Stat. 2681 (1998).

Agency Regulatory Goal

NCUA’s goal is to promulgate clear

and understandable regulations that

impose minimal regulatory burden. We

request your comments on whether the

proposed rule is understandable and

minimally intrusive if implemented as

proposed.

List of Subjects in 12 CFR Part 721

Credit unions.

By the National Credit Union

Administration Board on November 16, 2000.

Becky Baker,

Secretary of the Board.

For the reasons set forth in the

preamble, it is proposed that 12 CFR

chapter VII be amended as follows:

Part 721 is revised to read as follows:

PART 721—INCIDENTAL POWERS

Sec.

721.1 What does this part cover?

721.2 What is an incidental powers

activity?

721.3 What categories of activities are

preapproved as incidental powers

necessary or requisite to carry on a credit

union’s business?

721.4 How may a credit union apply to

engage in an activity that is not

preapproved as within a credit union’s

incidental powers?

721.5 What limitations apply to a credit

union engaging in activities approved as

within a credit union’s incidental

powers?

721.6 May a credit union derive income

from activities approved under this part?

721.7 What are the potential conflicts of

interest for officials and senior

management employees when credit

unions engage in activities approved

under this part?

Authority: 12 U.S.C. 1757(17), 1766 and

1789.

§ 721.1 What does this part cover?

This part authorizes a federal credit

union (you) to engage in activities

incidental to your business as set out in

this part. This part also describes how

interested parties may request a legal

opinion on whether an activity is within

a federal credit union’s incidental

powers or apply to add new activities or

categories to the regulation.

§ 721.2 What is an incidental powers

activity?

An incidental powers activity is one

that is necessary or requisite to enable

you to carry on effectively the business

for which you are incorporated. An

activity meets the definition of an

incidental power activity if the activity:

(a) Is convenient or useful in carrying

out the mission or business of credit

unions consistent with the Act;

(b) is the functional equivalent or

logical outgrowth of activities that are

part of the mission or business of credit

unions; and

(c) involves risks similar in nature to

those already assumed as part of the

business of credit unions.

§ 721.3 What categories of activities are

preapproved as incidental powers

necessary or requisite to carry on a credit

union’s business?

The categories of activities in this

section are preapproved as incidental to

carrying on your business under § 721.2.

The examples of incidental powers

activities within each category are

provided in this section as illustrations

of activities permissible under the

particular category, not as an exclusive

or exhaustive list.

(a) Certification services. Certification

services are services whereby you attest

or authenticate a fact for your members’

use. Certification services may include

such services as notary services,

signature guarantees, certification of

electronic signatures, and share draft

certifications.

(b) Correspondent services.

Correspondent services are services you

provide to other credit unions that you

are authorized to perform for your

members or as part of your operation.

These services may include loan

processing, member check cashing

services and automated teller machine

deposit services.

(c) Electronic financial services.

Electronic financial services are any

services, products, functions, or

activities that you are otherwise

authorized to perform, provide, or

deliver to your members but performed

through electronic means. Electronic

services may include online transaction

processing through a web site, web site

hosting services, and Internet access

services to perform or deliver products

or services to members.

(d) Excess capacity. Excess capacity is

the excess use or capacity remaining in

facilities, equipment, or services that

you have acquired or developed in good

faith in the furtherance of your

operations. You may sell or lease the

excess capacity in facilities, equipment

or services such as office space,

employees and data processing.

(e) Financial counseling services.

Financial counseling services means

advice, guidance or services that you

offer to your members to promote thrift

or to otherwise assist members on

financial matters. Financial counseling

services may include income tax

preparation service, electronic tax filing

for your members, counseling regarding

estate and retirement planning, and

investment counseling.

(f) Finder activities. Finder activities

are activities in which you introduce or

otherwise bring together outside

vendors with your members so that the

two parties may negotiate and

consummate transactions. Finder

activities may include offering thirdparty products and services to members

through the sale of advertising space on

your web site, account statements and

receipts, or selling statistical or

consumer financial information to

outside vendors to facilitate the sale of

their products to your members. Finder

activities also include the offering of

insurance products or agreements that

cover credit disability, life savings,

mechanical breakdown, debt

cancellation, debt suspension, or loan

protection.

(g) Marketing activities. Marketing

activities are the activities or means you

use to promote the products and

services you offer to your members.

Marketing activities may include

advertising and other promotional

activities such as raffles, membership

referral drives, and the purchase or use

of advertising.

(h) Monetary instrument services.

Monetary instrument services are

services that enable your members to

purchase, sell, or exchange various

currencies. These services may include

the sale and exchange of foreign

currency and U.S. commemorative

coins. You may also use accounts you

have in foreign financial institutions to

facilitate your members’ transfer and

negotiation of checks denominated in

foreign currency.

(i) Operational programs. Operational

programs are programs that you

establish within your business to

establish or deliver products and

services that enhance member service

and promote safe and sound operation.

Operational programs may include

electronic funds transfers, remote

tellers, point of purchase terminals,

debit cards, payroll deduction, preauthorized member transactions, direct

deposit, check clearing services, safe

deposit boxes, letters of credit, loan

collection services, service fees, and

collateral protection programs for

improving repossessed collateral.

Federal Register / Vol. 65, No. 227 / Friday, November 24, 2000 / Proposed Rules 70533

(j) Stored value products. Stored value

products are alternate media to currency

in which you transfer monetary value to

the product and create a medium of

exchange for your members’ use.

Examples of stored value products

include stored value cards, public

transportation tickets, event and

attraction tickets, gift certificates,

prepaid phone cards, postage stamps,

electronic benefits transfer script, and

similar media.

(k) Trustee or custodial services.

Trustee or custodial services are

services in which you are authorized to

act under any written trust instrument

or custodial agreement created or

organized in the United States and

forming part of a pension or profitsharing plan, as authorized under the

Internal Revenue Code. These services

may include acting as a trustee or

custodian for member retirement and

education accounts.

§ 721.4 How may a credit union apply to

engage in an activity that is not

preapproved as within a credit union’s

incidental powers?

(a) Application contents. To engage in

an activity that may be within an FCU’s

incidental powers but not fall within a

preapproved category listed in § 721.3,

you may submit an application by

certified mail, return receipt requested,

to the NCUA Board. Your application

must describe the activity, including

your proposed investment in the

activity and the financial and

operational impact of the activity on

you, your explanation, consistent with

the test provided in paragraph (c) of this

section, of why this activity is within

your incidental powers, your plan for

implementing the proposed activity, any

state licenses you must obtain to

conduct the activity, and any other

information necessary to describe the

proposed activity adequately. Before

you engage in the petition process you

should seek advisory opinions from

NCUA’s Office of General Counsel, as to

whether a proposed activity fits into one

of the authorized categories without

filing a petition to amend the regulation.

(b) Processing of application. Your

application must be filed with the

Secretary of the NCUA Board. NCUA

will review your application for

completeness and will notify you

whether additional information is

required or whether the activity

requested is permissible under one of

the categories listed in § 721.3. If the

activity falls within a category provided

in § 721.3, NCUA will notify you that

the activity is permissible and treat the

application as withdrawn. If the activity

does not fall within a category provided

in § 721.3, NCUA staff will consider

whether the proposed activity is legally

permissible. Upon a recommendation by

NCUA staff that the activity is within a

credit union’s incidental powers, the

NCUA Board may amend § 721.3 and

will request public comment on the

establishment of a new category of

activities within § 721.3. If the activity

proposed in your application fails to

meet the criteria established in

paragraph (c) of this section, NCUA will

notify you within a reasonable period of

time.

(c) Decision on application. In

determining whether an activity is

authorized as an appropriate exercise of

a federal credit union’s incidental

powers, the Board will consider:

(1) whether the activity is convenient

or useful in carrying out the mission or

business of credit unions consistent

with the Act;

(2) whether the activity is the

functional equivalent or logical

outgrowth of activities that are part of

the mission or business of credit unions;

and

(3) whether the activity involves risks

similar in nature to those already

assumed as part of the business of credit

unions.

§ 721.5 What limitations apply to a credit

union engaging in activities approved as

within a credit union’s incidental powers?

You must comply with any applicable

NCUA regulations, policies, and legal

opinions, as well as applicable state and

federal law, if an activity authorized

under this part is otherwise regulated or

conditioned.

§ 721.6 May a credit union derive income

from activities approved under this part?

You may earn income for those

activities determined to be incidental to

your business.

§ 721.7 What are the potential conflicts of

interest for officials and senior

management employees when credit unions

engage in activities approved under this

part?

(a) Conflicts. No senior management

employee, official, or their immediate

family member may receive any

compensation or benefit, directly or

indirectly, in connection with your

engagement in an activity authorized

under this part.

(b) Commissions. No employee, not

otherwise covered in paragraph (a) of

this section, may receive a commission,

fee, or other similar compensation that

is directly related to the sale of group

purchasing or insurance products to

your members, unless your board of

directors determines that a conflict of

interest does not exist and complies

with paragraph (d)(3) of this section

when appropriate.

(c) Business associates and immediate

family members. All transactions with

business associates or immediate family

members not specifically prohibited by

paragraph (a) of this section must be

conducted at arm’s length and in the

interest of the credit union.

(d) Permissible payments. This

section does not prohibit:

(1) Payment, by you, of salary to your

employees;

(2) Payment, by you, of an incentive

or bonus to an employee based on your

overall financial performance;

(3) Payment, by you, of an incentive

or bonus to an employee, other than a

senior management employee or paid

official, in connection with an activity

authorized by this part, provided that

your board of directors establishes

written policies and internal controls for

the incentive program and monitors

compliance with such policies and

controls at least annually.

(e) Definitions. For purposes of this

part, the following definitions apply.

(1) Senior management employee

means your chief executive officer

(typically, this individual holds the title

of President or Treasurer/Manager), any

assistant chief executive officers (e.g.

Assistant President, Vice President, or

Assistant Treasurer/Manager), and the

chief financial officer (Comptroller).

(2) Official means any member of your

board of directors, credit committee or

supervisory committee.

(3) Immediate family member means

a spouse or other family member living

in the same household.

[FR Doc. 00–29838 Filed 11–22–00; 8:45 am]

BILLING CODE 7535–01–U

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 2000–NE–30–AD]

RIN 2120–AA64

Airworthiness Directives; General

Electric Company (GE) CF6–50

Turbofan Engines

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: This amendment proposes the

adoption of a new airworthiness

directive (AD) that applies to GE CF6–

50 turbofan engines. This proposal

would require removal of old high