[Federal Register Volume 65, Number 227 (Friday, November 24, 2000)]
[Proposed Rules]
[Pages 70526-70533]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-29838]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

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.

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

[[Page 70526]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 721


Federal Credit Union Incidental Powers Activities

AGENCY: National Credit Union Administration.

ACTION: Proposed rule.

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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 
<a href="/cdn-cgi/l/email-protection#fa98959b889e979b9396ba94998f9bd49d958c"><span class="__cf_email__" data-cfemail="4c2e232d3e28212d25200c222f392d622b233a">[email protected]</span></a>. 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.

[[Page 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 state-chartered credit union 
income for group purchasing activities. However, as the Board notes 
below, income from these activities is subject to tax for state-
chartered 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

[[Page 70528]]

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

[[Page 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 Sec. 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

[[Page 70530]]

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 low-income 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

[[Page 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 Sec. 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 Sec. 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 Sec. 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 
Sec. 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 Sec. 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 Sec. 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 Sec. 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.

[[Page 70532]]

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.


Sec. 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.


Sec. 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.


Sec. 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 Sec. 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 third-party 
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, pre-authorized 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.

[[Page 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 profit-sharing plan, as 
authorized under the Internal Revenue Code. These services may include 
acting as a trustee or custodian for member retirement and education 
accounts.


Sec. 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 Sec. 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 Sec. 721.3. If the activity falls within a 
category provided in Sec. 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 Sec. 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 Sec. 721.3 and will 
request public comment on the establishment of a new category of 
activities within Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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


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