Federal Register / Vol. 62, No. 49 / Thursday, March 13, 1997 / Proposed Rules 11779

• Article III, Section 4—Delete the $1

transfer fee (outdated);

• Article IV—Delete the reference to

passbook accounts (outdated);

• Article XIII—Delete this section on

reserves (duplicative of the regulations);

and

• Article XX—Delete this section on

operation following an attack on the

United States (outdated).

In conjunction with deleting the

outdated provisions, NCUA is

committed to ensuring that FCUs

operate under state-of-the-art corporate

governance procedures. Wherever

possible, consistent with safety and

soundness and fairness to members, we

are seeking to move toward greater

flexibility. Some of the areas that we

have identified for modernization and

flexibility are Article V, Meeting of

Members; Article VI, Elections; Article

VII, Board of Directors; and Article VIII,

Board Officers, Management Officials

and Executive Committee. Comments on

how to modernize these provisions, as

well as other areas in need of

modernization, are requested.

4. Upon revision of the bylaws,

should FCUs be required to adopt the

revised FCU Bylaws? The Board is

grappling with the issue of whether

FCUs should be required to adopt the

revised bylaws. On the one hand, the

Board believes that consistent bylaws

among FCUs is preferable. On the other

hand, the Board recognizes that a

complete revision of an FCU’s bylaws

may create a hardship for some FCUs.

The Board requests comment on

whether all FCUs should be required to

adopt the new bylaws and if so, what

would be a reasonable time-frame for

compliance.

The NCUA Board is seeking

comments on all of the above mentioned

possible means of simplifying and

modernizing the bylaws, including the

likely effect of such changes on the

FCUs and their members. The Board is

also seeking suggestions on any other

ways that the bylaws might be

streamlined, simplified and clarified.

Based upon the comments, the Board

will issue a proposed rule with

proposed bylaws and another request

for comments. Based upon those

comments, the Board will issue a final

rule.

By the National Credit Union

Administration Board on March 7, 1997.

Becky Baker,

Secretary of the Board.

[FR Doc. 97–6380 Filed 3–12–97; 8:45 am]

BILLING CODE 7535–01–P

12 CFR Parts 701, 712 and 740

Organization and Operations of

Federal Credit Unions; Credit Union

Service Organizations; Advertising

AGENCY: National Credit Union

Administration (NCUA).

ACTION: Notice of Proposed Rulemaking.

SUMMARY: The NCUA is proposing to

update, clarify and streamline existing

rules concerning credit union service

organizations (CUSOs), a common

means of outside provision of services

to federal credit unions (FCUs) and to

credit union members. The intended

effect of the proposal is to reduce

regulatory burden, maintain safety and

soundness, and ensure the continuity

and growth of services to FCUs and

their members conducted through

CUSOs. Related conforming changes are

also proposed to amend NCUA’s rules

on credit union service contract and

credit union advertising requirements.

DATES: Comments must be received on

or before May 12, 1997.

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. Fax

comments to (703) 518–6319. Post

comments on NCUA’s electronic

bulletin board by dialing (703) 518–

6480 or to NCUA’s webpage on the

Internet at http.www@NCUA.gov.

Please send comments by one method

only.

FOR FURTHER INFORMATION CONTACT:

Martin ‘‘Sparky’’ Conrey, Staff Attorney,

Division of Operations, Office of

General Counsel, at the above address or

telephone: (703) 518–6540; or Linda

Groth, State Program Officer, Division of

Supervision, Office of Examination and

Insurance, at the above address or

telephone: (703) 518–6360.

SUPPLEMENTARY INFORMATION:

I. Background and Discussion

A. General

In 1977, Section 107 of the Federal

Credit Union Act (12 U.S.C. 1757) was

amended to authorize federal credit

unions (FCUs) to invest in, and make

loans to, CUSOs subject to certain

funding limits and other regulatory

restrictions. The first CUSO rule was

promulgated in 1979; the last major

revision of this rule was in 1986. In

general, the results of the 1986 revision

have been very positive. Nonetheless,

over ten years of experience with the

regulation indicates that there may be a

need for additional simplification,

clarification, and improvement.

In particular, NCUA is aware that

certain business and legal developments

make this a good time to review and

update the CUSO rule. NCUA staff

researched the relevant regulations,

guidance, legal interpretations and

reporting requirements of NCUA and

the other federal financial institution

regulators. In addition, NCUA is

conducting a review of its regulations

pursuant to the Regulatory Reinvention

Initiative of the Vice President’s

National Performance Review and the

NCUA Board’s Regulatory Relief Project.

The purpose of this notice of proposed

rulemaking is to identify and request

public comment on reducing regulatory

burden and increasing the flexibility

and usefulness of CUSOs, while

ensuring the safety and soundness of

FCUs and the National Credit Union

Share Insurance Fund (NCUSIF).

In providing comments upon the

proposed rule, commenters are

requested to keep in mind the needs of

small credit unions, especially

community development and lowincome designated credit unions and

their members. CUSOs provide an ideal

means for smaller credit unions to

expand the types of products and

services offered to their memberships,

offer economies of scale, enhance

members’ lives, and increase hours of

service and locations, through

automated teller machines (ATMs),

service centers, and other CUSO

services. CUSOs can result in more

favorable penetration rates of potential

members through availability of

financial services that might not

otherwise be available and can result in

a transfer of knowledge and expertise

from larger, full-service credit unions to

smaller, more limited service credit

unions, which can have long-term

positive implications upon safety and

soundness. Lately, NCUA has been

concerned over some reports that

smaller credit unions have been unable

to meet minimum investment or other

eligibility requirements in order to

partake of CUSO services. For this

reason, NCUA is weighing various

options to increase smaller credit union

utilization of CUSO services. One means

might be through informal guidance,

such as an NCUA Letter to Credit

Unions, regarding smaller credit union

participation in CUSOs. Another means

might be through informal

understandings with the CUSO industry

regarding possible incentives to be

offered to smaller credit unions, such as

a reduction in, or waiver of, ordinary

transaction charges, or a lowered

minimum investment or deposit amount
11780 Federal Register / Vol. 62, No. 49 / Thursday, March 13, 1997 / Proposed Rules

in order to obtain CUSO services. For

example, NCUA is currently reviewing

Interpretive Ruling and Policy

Statement (IRPS) No. 79–6, Donations/

Contributions, 44 FR 56691 (October 2,

1979) to determine whether restrictions

are necessary upon the donative and

charitable activity of FCUs to other

credit unions. NCUA might also

consider express authority for de

minimis equity investments in

community organizations, such as

certain CUSOs, as part of the IRPS 79–

6 review. Certainly, NCUA is interested

in soliciting comments on these, and

other, ideas to increase the availability

of CUSO services to small credit unions,

their members, and their potential

members.

NCUA notes that the proposed

corporate credit union rule contains a

new section on corporate CUSOs that

would apply instead of the provisions of

the natural person credit union CUSO

rule, as is the case currently. Proposed

Rule, 61 FR 28085, 28106 (June 4, 1996).

Therefore, while any corporate credit

unions are welcome to comment on this

proposal, such credit unions should

keep in mind the possibility that this

rule may not apply to their institutions.

B. Section-by-Section Analysis

Proposed Section 701.26(b), Credit

Union Service Contracts

NCUA solicits comments on whether

current section 701.26(b) of its rules

should be removed. That section states

that when a vendor service contract

requires the advance payment of more

than 3 months, such payment is deemed

an investment in a CUSO subject to

section 701.27 of NCUA’s rules. Current

business practices of many vendors

either require such payments or give a

discount to the purchasing credit union

for paying in advance. Not all vendors

are CUSOs, or lend themselves to

having the CUSO rule applied to them.

NCUA asks whether section 701.26(b) is

outdated, imposes regulatory burdens,

and is unnecessary. It is proposed to be

removed.

Proposed Part 712

In order to assist readers of the CUSO

rule, NCUA proposes to remove current

section 701.27 and replace it with a new

Part 712, which Part is now unoccupied.

Since the rule applies to FCUs, but is of

much interest to other parties, such as

CUSOs and other CUSO investors, it is

hoped that by giving CUSOs their own

section of NCUA’s Rules and

Regulations, the rule will be more

prominently featured and better known,

resulting in increased compliance and

in a reduction of NCUA staff time spent

interpreting the regulation to interested

parties. Raising the rule to a part also

results in more convenient citations

with fewer subsections. The most

noticeable change in proposed Part 712

is the use of a Plain English question

and answer format. Plain English is

being promoted within the Federal

government as a means to increase

regulatory comprehension and

compliance for users of regulations. An

intended consequence of this format,

other than anticipated increased

compliance, is a lessening of

misunderstandings caused by vague or

unclear standard regulatory language,

which also results in increased

administrative efficiency. This revision

and redesignation is done in the spirit

of regulatory review, reinvention, and

renewal. Comment is requested on the

use of the Plain English format, or

alternative formats that could be used to

achieve the goals of the Plain English

movement.

Proposed Section 712.1, What does this

part cover?

Proposed section 712.1 condenses

existing section 701.27(a), Scope, by

eliminating statutory citations and a

summary of rule requirements

contained elsewhere in the rule. No

change in the scope of the rule is

intended by the proposed amendment.

The term ‘‘affiliated credit union’’ is

used to represent the spectrum of credit

unions that are eligible to make the

services of a CUSO available to their

membership within the customer base

requirements of the CUSO rule. Under

the current rule, ‘‘affiliated credit

unions’’ are those credit unions that

either invest in, or lend to, a particular

CUSO. FCUs that are not an ‘‘affiliated

credit union’’ of a CUSO may allow

services of that CUSO to be available to

their membership through the group

purchasing rule. 12 CFR Part 721. The

current arrangement has the effect of

making members of non-affiliated credit

unions count as nonmembers for

purposes of the customer base

requirements of the CUSO rule. To

correct this anomaly, the proposed

revision adds to the definition of

‘‘affiliated credit union’’ those credit

unions that simply contract with a

CUSO for provision of services

(something currently done under the

group purchasing rule), in addition to

investor and lender credit unions of the

CUSO. The result of this is not to

penalize CUSOs for serving members of

credit unions that may be permissibly

served under the group purchasing rule.

Comments are requested on whether

this amendment realizes its goal of

permitting CUSO services to continue to

be provided to credit union members of

credit unions not investing in, or

lending to, the CUSO without violating

CUSO customer base requirements.

In the interests of Plain English, the

term ‘‘affiliated credit union’’ is

shortened to ‘‘you’’ in most of Part 712.

When a requirement applies only to

affiliated credit unions that have loans

to, or investments in, CUSOs (e.g.,

proposed sections 712.2(a-c), 712.3(a-d),

712.4(a), 712.7, and 712.9) or to

affiliated credit unions with a 10%

equity interest in a CUSO (e.g.,

proposed section 712.4(b)), the

narrowed application is noted in the

adjacent rule language. Therefore,

readers should be careful to read the

term ‘‘you’’ in context of surrounding

language. ‘‘You’’ does not mean all

affiliated credit unions at all times in all

places.

Proposed Section 712.2, How much can

you invest in, or loan to, CUSOs, and

what parties may be involved?

The proposed revision would

eliminate existing section 701.27(b),

Limits imposed by the FCU Act, as

being repetitive of other rule provisions.

The statutory provisions of the FCU Act

are, and would continue to be under the

proposal, completely incorporated into

other provisions of the CUSO rule.

Provisions concerning funding

limitations and CUSO parties, currently

in section 701.27(d)(1), would be

contained in proposed section 712.2.

Proposed Limits on Funding

The funding limitations contained in

proposed section 701.2 (a) and (b) are

statutory in nature and required by

Sections 107(5)(D) and (7)(I) of the FCU

Act. 12 U.S.C. 1757(5)(D) and (7)(I). An

FCU cannot invest more than one

percent of its paid-in and unimpaired

capital and surplus in CUSOs. Nor can

an FCU loan more than one percent of

its paid-in and unimpaired capital and

surplus to CUSOs. Paid-in and

unimpaired capital and surplus means

shares and undivided earnings.

NCUA staff would like to clarify the

scope of covered CUSO investments and

loans. In the past, NCUA has deemed all

of the following to be either loan or

investment equivalents in the context of

the CUSO rule: standby letter of credit

issued by an FCU to cover a CUSO; sale

and leaseback transactions; installment

sales and other similar equipment

financings; payment of CUSO expenses

by FCU, such as subsidies; guarantees of

CUSO debt or purchase of CUSO

debentures; FCU pledge and guarantee

of loans from other entities to the CUSO;

and FCU spin-off of assets to CUSOs.

All of these loan and investment cash
Federal Register / Vol. 62, No. 49 / Thursday, March 13, 1997 / Proposed Rules 11781

equivalents are used in determining the

actual aggregate cash outlay figure.

For compliance purposes, FCUs

should generally use the aggregate cash

outlay figure in order to compute the

regulatory CUSO investment and loan

limits. This number would equal the

total amount of FCU funds either

invested in, lent to, or available to be

lent under a line of credit with the FCU

to, the CUSO. If an FCU accounts for its

CUSO using the cost method consistent

with Generally Accepted Accounting

Principles (GAAP) and writes down the

investment because of other than

temporary impairment, the written

down amount becomes the new basis

and computes into the new aggregate

cash outlay figure.

Calculation of the CUSO funding

limits is a separate issue from reporting

CUSO investments and loans under

GAAP. GAAP requires one of three

measurement options—the cost method,

equity method, or consolidated financial

statements—depending upon the degree

of ownership an FCU has in a CUSO.

FCU financial reporting of CUSO

activity should follow GAAP. The

definition of ‘‘paid-in and unimpaired

capital and surplus’’ is unchanged in

the proposal from the current definition

in section 701.27(c)(4). The content of

the provision regarding parties eligible

to be CUSO investors or lenders,

proposed section 712.2(c), remains

unchanged from the current reference in

section 701.27(d)(1).

Proposed Section 712.3, What are the

characteristics of, and what

requirements apply to, CUSOs?

The proposed revision incorporates

existing provisions on Structure,

currently section 701.27(d)(2), Customer

base, currently section 701.27(d)(4),

Accounting procedures and access to

information, currently section

701.27(d)(7), and Compliance with other

laws, currently section 701.27(e), into

new section 712.3.

Proposed Structure

For consistency purposes, NCUA

proposes to add the limited liability

company (LLC) format to the existing

permissible CUSO entity structures in

proposed section 712.3(a). Definitions

for three new terms are proposed to be

added to this paragraph, ‘‘corporation,’’

‘‘limited liability company,’’ and

‘‘limited partnership.’’ The terms

‘‘corporation’’ and ‘‘limited

partnership’’ are meant to clarify

existing NCUA interpretations regarding

the current, permissible forms of a

CUSO. Corporations are creatures of

statute, generally formed by a

combination of steps, including the

filing of articles of incorporation, the

drafting and implementation of bylaws,

and being capitalized through the

issuance of stock and/or bonds. A

limited partnership is also a creature of

statute, generally formed by filing with

the state a certificate of limited

partnership. Many limited partnerships

also have a limited partnership

agreement which details partnership

specifics. Similar to both corporations

and limited partnerships, an LLC is a

noncorporate business in which all of

the member-owners have limited

liability and in which members can

actively participate in management.

Generally, an LLC is created by filing

articles of organization with the state.

Most LLCs also have an operating

agreement, which sets forth the

managers’ and members’ rights and

obligations and management specifics.

In some states, the LLC format provides

investors limited liability equivalent to

that of the corporation or limited

partnership formats. However, in many

states the LLC laws have not yet been

tested and upheld in the courts, and

state laws are not uniform.

NCUA views the lack of LLC law

uniformity among the various states as

a problem. States have often relied upon

uniform acts to provide consistency and

promote comity between the various

states. For examples, many states have

adopted a form of either the Model

Business Corporation Act or the Revised

Model Business Corporation Act, and

most states have adopted either the

Uniform Limited Partnership Act or the

Revised Uniform Limited Partnership

Act. NCUA has had many years of

experience with these uniform laws

through CUSOs formed in both the

corporate format and limited

partnership format. However, unlike the

uniform corporation and limited

partnership laws, the Uniform Limited

Liability Company Act (ULLCA),

adopted by the National Conference of

Commissioners on Uniform State Laws

in 1994, has not been adopted by any

states.

Other potential negatives also exist.

For example, most states permit any

LLC member to withdraw from an LLC

at any time and receive the fair market

value of his or her membership interest.

This can trigger a capital crisis or act as

a means for LLC members holding larger

interests to control other LLC members

to the detriment of the LLC. This

potential instability may make it harder

for the LLC CUSO to attract working

capital and talented employees. In

addition, most LLC acts specify that

each LLC member is entitled to an equal

vote on each LLC matter and that each

member has full power and authority to

act as an agent of the LLC. Most LLC

acts, while permitting LLC economic

interests to be freely transferable, permit

management (voting and agency rights)

to be transferable only with the consent

of all other LLC members. These unique

strictures of the LLC format may lead to

management, operational, and

accountability problems not seen in the

corporate and limited partnership

formats. Also, taxation issues regarding

a nonprofit, nontaxable entity’s

investment in an LLC are unclear.

NCUA solicits information regarding the

likely taxation of a nonprofit,

nontaxable entity’s investment as an

LLC member. In particular, NCUA is

interested in reviewing an Internal

Revenue Service (IRS) advance ruling

regarding this issue. If one does not

currently exist NCUA may suspend a

resolution of the LLC issue until such an

IRS advance ruling does exist.

It is critical that a CUSO be of a

proven format that will insulate FCU

investors from liabilities incurred by the

CUSO. The proposal limits the

availability of the LLC format to those

states where an FCU can obtain written

legal advice that the state of formation’s

laws will provide limited liability to the

investing FCU equivalent to that of a

shareholder in a corporation or as a

limited partner in a limited partnership.

However, comment is requested on

other alternative definitions that would

provide equal assurance to NCUA of the

limited liability available to LLCs in

various states. Attention to issues of

ease of examination, administrative

application, and enforcement should

also be paid.

NCUA notes that CUSOs, as statechartered entities, are subject to relevant

federal, state and local taxes. Being

taxable entities, CUSOs may take

advantage of appropriate tax options,

such as electing cooperative tax status

in a proper situation.

However, CUSOs will not be

permitted to attempt to evade NCUA’s

statutory and regulatory requirements.

For example, the CUSO rule applies to

all levels or tiers of a CUSO’s structure.

Therefore, any entity in which a CUSO

invests will also be treated as a CUSO

subject to the CUSO rule. In other

words, all tiers of a CUSO are also

CUSOs. Also, a CUSO will not be

permitted to evade the limited liability

insulation of the limited partnership

format by forming a corporation CUSO

to be a general partner of a limited

partnership CUSO. Substance over form

will control, and NCUA will collapse

such a transaction to its essence

deeming it the formation of a general

partnership CUSO, which is now, and is

proposed to remain, impermissible.
11782 Federal Register / Vol. 62, No. 49 / Thursday, March 13, 1997 / Proposed Rules

1As a point of beginning, NCUA considers the

following a list of such critical, core services and

activities: (1) Share-related core services. Data

processing of share deposits, withdrawals, and

other account transactions; Operations conducting

member share transactions for credit unions,

including service center branches, remote service

operations and ATMs; Provision of share account

related clerical, professional, or management

services; Share draft and deposit posting, sorting

and processing; ACH services; Advertising,

brokerage, and other services to procure and retain

share accounts; Computation and posting of

dividends and other credits and charges;

Preparation and mailing of share drafts, statements,

notices and similar items; (2) Credit-related core

services. Data processing of loan applications,

evaluations, extensions, collections, and payments;

Making, acquiring, servicing, warehousing or

otherwise processing member loans or other

extensions of credit for a credit union, including

consumer loans, credit card loans, mortgage loans,

business loans and loan equivalents, such as leasing

and indirect lending programs; Operations

conducting lending activity for credit unions,

including service center branches, remote service

operations, ATMs, and loan production offices;

Advertising, brokerage, and other services to

procure and retain loans; Advising, structuring, and

arranging extensions of credit; Provision of credit

analysis services; Provision of credit account

related clerical, professional, or management

services; and (3) Other related core services.

General ledger data processing; Management,

development, sale or lease of affiliated credit union

fixed assets; Record retention, security and disaster

recovery services; Provision of investment advice,

counseling, or services; Provision of liquidity

management, investment, advisory and consulting

services; Development and administration of

personnel benefit programs, including life

insurance, health insurance, and pension and

retirement plans.

Proposed Customer Base

Proposed section 712.3(b) deletes the

cross-reference for the definition of

‘‘affiliated credit union’’ to the

definitions paragraph that appears in

current section 701.27(d)(4). The

proposed rule has no separate paragraph

for definitions; instead, definitions

appear next to their first use in the

regulatory text. Otherwise, the content

of the proposed section 712.3(b) remains

unchanged from current section

701.27(d)(4). NCUA is soliciting

comments on whether further guidance

should be offered on the definition of

‘‘primarily serves’’ in the customer base

requirement. In the 1986 final CUSO

rule preamble, the Board stated that

defining the term as a percentage of

business or percentage of customers

could prove arbitrary. In the past,

NCUA’s definition of the term

‘‘primarily serves’’ has depended upon

several variables, such as: type of

business(es) provided; number of

affiliated members served; gross or net

revenues derived from affiliated

members; amount of affiliated members’

assets under management; number of

policies sold to affiliated members;

number of services provided to affiliated

members; and availability/access of

services to affiliated members. Since

CUSO permissible services and

activities vary so much by business, and

since many CUSOs are engaged in

multiple permissible services and

activities, coming to a simple standard

applicable to all lines of business and

all CUSOs is problematic. Still, if a

simple, equitable standard could be

applied, NCUA may not be adverse to

using it. In providing comments,

commenters are asked to consider the

issues of ease of administrative

application and enforcement.

Proposed FCU and CUSO Accounting;

Access to Information

Proposed sections 712.3(c) and (d)

contain no changes from current

sections 701.27(d)(7)(i) and (ii).

However, NCUA would like to obtain

comment on a few aspects of the current

rule. First, NCUA is soliciting comments

on whether NCUA examination and

supervision authority over CUSOs

should be strengthened. Both the Office

of Thrift Supervision (OTS), which

charters and supervises federal savings

associations, and the Office of the

Comptroller of the Currency (OCC),

which charters and supervises national

banks, subject their regulated financial

institutions’ subsidiaries to examination

and supervision ‘‘in the same manner

and to the same extent’’ as the parent

financial institution. 12 CFR

5.34(d)(3)(OCC) and 559.3(o)(OTS).

NCUA believes that this approach might

be superior to the current approach of

a contractual right of review in several

ways. It would make it easier for NCUA

to react quickly and more directly to

situations involving CUSO safety and

soundness. It would also enable NCUA

to better protect the NCUSIF from

potential FCU losses due to CUSO

losses. Presently, NCUA’s main recourse

is through threatened divestments or

disposals of CUSO interests and loans.

NCUA is also concerned that CUSOs

performing critical, core functions for

affiliated credit unions,1 may

disastrously affect affiliated credit union

services if the CUSOs were to fail,

suspend services, or experience another

situation resulting in discontinuance of

services. For example in instances

where member transactions flow

through the CUSO, credit unions could

be at risk of losing much more than the

amount of their CUSO investment or

loan. However, NCUA realizes that

treating CUSOs as an extension of its

affiliated credit unions might also have

some drawbacks as well. It would be a

factor a court could consider in piercing

the corporate veil and finding liability

over to a credit union investor or lender.

It would be a major change from

existing practice, which for the vast

majority of CUSOs has worked very

well. For these reasons, NCUA is

interested in public comment regarding

the best scope of review or examination

and supervision authority of CUSOs.

Commenters are also asked to address

issues concerning a middle ground,

such as requiring CUSOs to adhere

contractually to any conditions in

writing imposed upon their business by

the NCUA. Currently, both OTS and

OCC may impose conditions in writing

upon the subsidiaries of their regulated

financial institutions. 12 CFR

5.34(d)(4)(OCC) and 559.1(b)(OTS).

Another possibility would be to

strengthen the existing audit and

reporting requirements further, or to

require CUSOs to adopt specified

policies, procedures, and other internal

safety and soundness controls.

Commenters are also requested to

comment on whether NCUA should

charge a review or examination fee for

conducting CUSO supervision activities.

Currently, the OTS may assess a

subsidiary examination fee. 12 CFR

559.3(o). More intensive CUSO reviews

or examinations would require more

specialized examiner training and take

time to complete. On average, it

currently takes at least one week to

finish a CUSO review. If all CUSOs were

reviewed on a regular basis, it could add

a substantial strain on NCUA’s budget

and resources. A CUSO examination fee

would be one means to ensure that the

cost for this program would be borne by

CUSOs and not all federally insured and

federally charted credit unions, many of

which do not utilize CUSO services.

Additionally, commenters are

reminded that: CUSOs must follow

GAAP for financial reporting purposes;

affiliated credit unions must follow

GAAP or alternative accepted regulatory

accounting practices (RAP). Further,

CUSOs must obtain audits consistent

with generally accepted auditing

standards (GAAS). NCUA interprets

GAAP to mean compliance with

standards of the Financial Accounting

Standards Board (FASB) and related

hierarchy, and GAAS to mean auditing

standards issued by the American

Institute of Certified Public Accountants

(AICPA), unless otherwise determined

by NCUA.

NCUA recommends that a CPA

performing an opinion audit of the

financial statements of an FCU that uses

a CUSO to process transactions consider

the guidance in the AICPA’s Statement

on Auditing Standards (SAS) No. 70,

Reports on the Processing of

Transactions by Service Organizations,

when planning and performing the

audit. SAS No. 70 provides guidance
Federal Register / Vol. 62, No. 49 / Thursday, March 13, 1997 / Proposed Rules 11783

when an FCU obtains either or both of

the following services from a CUSO: (1)

executing transactions and maintaining

the related accountability; and (2)

recording transactions and processing

related data. The AICPA recommends

SAS 70 reports be completed in CUSO

trust companies that invest and hold

assets for FCU employee benefit plans;

CUSO mortgage bankers that service

mortgages for FCUs; electronic data

processing (EDP) service centers that

process transactions and related data for

FCUs; and other situations in which a

CUSO develops, provides and maintains

the software used by FCUs. The SAS 70

report on policies and procedures

placed in operation and tests of

operating effectiveness are crucial in

keeping FCUs informed of internal

control weaknesses of CUSOs

performing core functions of the FCU.

NCUA requests comment on this

approach.

NCUA also clarifies that the current

requirement for a CPA audit means an

opinion audit and nothing less. The

audit must be an audit of the separate

CUSO entity and not simply an audit of

the FCU’s financial statements prepared

on a consolidated basis, unless the

CUSO is a wholly-owned CUSO. The

reason for this longstanding position is

that all credit unions investing in the

CUSO need to be aware of any potential

risks in their CUSO. This clarification

reflects current practice and policy.

Compliance with Other Laws

Proposed section 712.3(e) remains

unchanged from current section

701.27(e). NCUA has interpreted this

requirement to apply not only to laws

applicable to the proper maintenance of

either corporate or limited partnership

format, such as fee, filing and tax

requirements, but also to any other laws

applicable to the nature of the CUSO’s

business. For instance, an insurance

agency CUSO must comply with state

insurance laws and regulations. Any

CUSO that classifies as a franchise

would need to follow federal and state

franchising laws. Any CUSO service

center would need to follow all

applicable federal consumer protection

laws related to its activities, as well as

other relevant laws applicable to FCUs,

such as those relating to supervisory

committee access (12 CFR 701.12–.13);

loans to members (12 CFR 701.21); truth

in savings (12 CFR Part 707); advertising

(12 CFR Part 740); share insurance (12

CFR Part 745); security program, report

of suspicious activity, and bank secrecy

act compliance (12 CFR Part 748);

records preservation and retention (12

CFR Part 749); and relevant bylaw

requirements, such as those relating to

the confidentiality of member records

(Standard Federal Credit Union Bylaws,

NCUA Publication No. 8001).

Proposed Section 712.4, What must you

and a CUSO do to maintain separate

corporate identities?

The proposed revision retains a

version of the legal opinion requirement

of current section 701.27(d)(3), and adds

a requirement that corporate

separateness be maintained between the

FCU and the CUSO.

Proposed Separate Corporate Existence

The language used in proposed

section 712.4(a)(1–6) is borrowed from

the OTS rules applicable to federal

savings and loan service corporations.

12 CFR 559.10. NCUA currently

recommends such operating practices in

the NCUA Examiner’s Guide, but

believes that codifying these guidelines

into a rule will help to publicize the

practices, provide clear brightlines for

compliance, provide continuing

guidance during the life of the CUSO,

and not carry the drawbacks of solely

relying upon the legal opinion

requirement. NCUA is not suggesting

that a failure to follow one or more or

all of such suggested practices by an

FCU and its CUSO should cause a court

to ignore the separate corporate

existence of the CUSO. Nor is NCUA

suggesting that attorney involvement is

unwise or unnecessary for FCUs

contemplating CUSO involvement.

Quite to the contrary, NCUA encourages

legal, accounting, tax advisor, and other

consultant involvement in matters

affecting CUSO investments and loans.

Legal opinions are important, but may

not be sufficient in and of themselves to

achieve safety and soundness and

continued corporate separateness.

However, by following the proposed

requirements, an FCU should be able to

avoid potential exposure for CUSO

obligations. Comment is requested on

this approach.

In addition, NCUA has long

interpreted the Act to require as

minimum coverage that an FCU’s

fidelity bond provide coverage for the

fraud or dishonesty of all employees,

directors, officers, and supervisory and

committee members. 12 U.S.C. 1766(h);

12 CFR 701.20(c). Some question has

arisen as to whether the directors and

employees of a CUSO should be covered

by the fidelity bond of the FCU investor

or lender of the CUSO. This point of law

is currently unsettled. After some initial

research, it seems that the insurance

industry makes a wide variety of

insurance products available to CUSOs

that are similar to the FCU fidelity bond

in coverage. A basic Commercial Crime

Policy can include coverage for

employee dishonesty, theft,

disappearance and destruction, and

depositor’s forgery. Similarly, mortgage

service CUSOs generally must have a

bond meeting secondary mortgage

market requirements, such as a

Financial Institutions Bond Standard

Form No. 15 (Mortgage Bankers Blanket

Bond Policy). Likewise, a securities

brokerage CUSO often will be a member

of the National Association of Securities

Dealers (NASD), and will meet NASD

bonding requirements through a

Financial Institutions Bond Standard

Form No. 14 (Security Brokers Blanket

Bond). NCUA strongly encourages

CUSOs to maintain business insurance

adequate to meet the CUSO’s needs as

determined by each CUSO’s board of

directors and management. At this time,

NCUA does not believe that it is

necessary to codify any CUSO bonding

or insurance requirements, however,

commenters are urged to respond as to

whether a CUSO bond or insurance

requirement is necessary, and, if so,

given the variances in CUSO bond or

insurance options available, what the

requirement should contain and

achieve.

Proposed Legal Opinion

In current section 701.27(d)(3), an

FCU must obtain a written legal opinion

as to whether the CUSO is established

in a manner that will limit the FCU’s

potential exposure to no more than the

amount invested in, or lent to, the

CUSO. The legal opinion requirement

does not require updating as new

services are offered, nor does the legal

opinion track management practices at a

CUSO that could lead to liability

exposure to the affiliated credit union.

In addition, some credit union attorneys

have questioned the implication that the

rule requires lawyers to act as

guarantors or sureties of a CUSO’s

correct formation and continued legal

existence. To remedy these weaknesses,

NCUA proposes to amend the legal

opinion requirement to require that the

legal opinion be obtained both when a

CUSO is established and whenever the

CUSO adds a new permissible activity

or service that materially affects the

CUSO. A legal opinion would also be

required if a CUSO converts from one

permissible structure, such as a limited

partnership, to another permissible

structure, such as a corporation. This is

in addition to the requirement that

separate corporate existence be

maintained between the FCU and CUSO

and is designed to reduce the potential

liability between an FCU and its CUSO

investments. In order to reduce the

regulatory burden of obtaining legal
11784 Federal Register / Vol. 62, No. 49 / Thursday, March 13, 1997 / Proposed Rules

opinions, NCUA proposes that legal

opinions will only be required for FCUs

owning a 10% or greater equity interest

in a CUSO. NCUA roughly estimates

that this will reduce the number of legal

opinions needed by as much as 80%.

Comment is requested on the approach,

and also the use of 10% as a material

threshold for monitoring potential FCU

liability exposure through a legal

opinion requirement.

Proposed 712.5, What activities and

services are preapproved for CUSOs?

Proposed paragraphs (a)–(o) of section

712.5 reorder and recategorize current

sections 701.27(d)(5)(i and ii),

permissible services and activities, into

a more user friendly format and add

services and activities deemed

permissible by opinion letter since the

1986 rule revision.

Proposed Permissible Services and

Activities

The first sentence of proposed section

712.5 is derived from requirements

imposed by the OCC and OTS upon

bank and thrift subsidiaries. 12 CFR

5.34(d)(3) and 559.1(b). OCC and OTS

reserve the right to limit any bank or

thrift subsidiary’s activities, or to refuse

to permit activities, for supervisory,

legal, or safety and soundness reasons.

NCUA proposes to apply these same

requirements to CUSOs. NCUA sees this

amendment as a clarification of existing

NCUA practice. Currently, NCUA

provides interpretations of the

parameters of existing permissible

CUSO activities through the issuance of

legal opinion letters and Regional and

Central Office correspondence. As the

proposed amendment provides, these

current NCUA pronouncements are

based upon supervisory, legal, and

safety and soundness grounds. The

proposed amendment only puts FCUs

and CUSOs on notice that NCUA does

have the right to interpret the

parameters of permissible CUSO

services and activities. If transgressions

are discovered after the fact, currently

NCUA can work with the credit unions

and CUSOs involved to arrive at a

mutually satisfactory conclusion. In an

extreme case, NCUA can order the

affiliated credit union to divest its

CUSO investment or dispose of its

CUSO loan. NCUA may also already

exercise these remedies if the normally

permissible CUSO services and

activities are improperly, imprudently,

or recklessly conducted. Therefore, the

proposed amendment adds no new

powers to NCUA’s supervision of

affiliated credit unions’ CUSO

investments and loans. Comment is

requested on the addition of the

proposed amendment in this context.

NCUA proposes to rearrange the list

of permissible activities and services for

ease of understanding and citation, and

to reflect changes in CUSO activities

and services. Since 1986, NCUA has

divided all CUSO activities into two

categories: operational and financial.

However, many of these services and

activities are now a combination of both

operational and financial services. The

proposed change also reflects a return to

the 1978 CUSO rule format of listing

services by related categories. The

proposed categories of permissible

services and activities are as follows:

checking and currency services; clerical,

professional and management services;

consumer mortgage loan origination;

electronic transaction services; financial

counseling services; fixed asset services;

insurance brokerage or agency; leasing;

loan support services; real estate

brokerage services; record retention,

security and disaster recovery services;

securities brokerage services; shared

credit union branch (service center)

services; travel agency services; and

trust and trust-related services. The

category headings are solely descriptive

in nature and not meant to convey

authority for additional services and

activities beyond the specific services

and activities listed.

Eight new services, reflecting current

NCUA interpretations of existing

services, are proposed to be included in

the rule revision. First, in proposed

paragraph (a)(3), under checking and

currency services, NCUA proposes to

add ‘‘money order, savings bonds,

travelers checks, and purchase and sale

of U.S. Mint commemorative coins

services.’’ Second, in proposed

paragraph (b)(2), under clerical,

professional and management services,

NCUA proposes to add ‘‘courier

services.’’ Third, in proposed paragraph

(b)(4), also under clerical, professional

and management services, NCUA

proposes to add ‘‘facsimile

transmissions and copying services.’’

Fourth, in proposed paragraph (b)(10),

also under clerical, professional and

management services, NCUA proposes

to add ‘‘supervisory committee audits.’’

Fifth, in proposed paragraph (d)(5),

under electronic transaction services,

NCUA proposes to add ‘‘electronic

income tax filing.’’ Sixth, in proposed

paragraph (h)(2), under leasing, NCUA

proposes to add ‘‘real estate leasing of

excess CUSO property.’’ This covers real

estate leasing only of premises acquired

for CUSO business, and otherwise

mainly used in CUSO business, that

may later be used for future CUSO

expansion. Although ‘‘personal property

leasing’’ and ‘‘real estate leasing of

excess CUSO property’’ are listed as the

only two permissible leasing services in

proposed paragraph (h), fixed asset

leasing is also permitted, but retained

with the other permissible fixed asset

activities in proposed paragraph (f)(1).

Seventh, in proposed paragraph (k)(2),

under record retention, security, and

disaster recovery services, NCUA

proposes to add ‘‘disaster recovery

services.’’ Eighth, in proposed

paragraph (k)(3), also under record

retention, security and disaster recovery

services, NCUA proposes to add

‘‘optical imaging, CD-ROM data storage

and retrieval services’’ to current

‘‘microfilm and microfiche services.’’

NCUA believes that these proposed

amendments are self-explanatory, and

only codify existing permissible services

and activities not currently in the rule

itself. Comment is requested on both the

content and wording of these proposed

amendments. In particular, NCUA

would like to use terms that keep

abreast of current and future

technologies to provide CUSOs with

operating and market flexibility in

accomplishing permissible CUSO

services and activities.

NCUA has also received requests to

add consumer loan originations to the

list of permissible activities.

Historically, NCUA has been opposed to

this addition. Unlike consumer

mortgage loan origination, which

requires a specialized lending staff,

must follow strict secondary mortgage

market rules, and requires economies of

scale in order to be viable, consumer

loans are relatively easy to offer and

process. In addition, NCUA is

apprehensive in granting CUSOs

authority to provide consumer loans to

the general public, as it may be

perceived as a dilution of the common

bond by Congress and the public. NCUA

is also concerned that if member loans

were being made by CUSOs, NCUA

would have a duty to examine such

loans which would lead to stricter

NCUA examination authority over

CUSOs. However, due to the requests to

add it as an additional service, NCUA

would like to request comment on

adding consumer loan origination as an

additional service. Comments detailing

needs, benefits, and drawbacks of

offering this service outside of the credit

union itself are especially solicited.

Comments are also solicited on whether

consumer loan origination services

would be helpful to small, low-income,

or community development credit

unions. Commenters should address

whether consumer loan services should

be permissible only for credit unions of
Federal Register / Vol. 62, No. 49 / Thursday, March 13, 1997 / Proposed Rules 11785

a certain asset size and how such a class

should be defined.

CUSOs, according to the FCU Act, are

to provide ‘‘services which are

associated with the routine operations

of credit unions.’’ 12 U.S.C. 1757(7)(I).

In addition, CUSOs are to be

‘‘established primarily to serve the

needs of its member credit unions, and

whose business relates to the daily

operations of the credit unions they

serve.’’ 12 U.S.C. 1757(5)(B). In

providing these daily, routine services

of need to credit unions, CUSOs must

avoid investments in depository

financial institutions, insurance

companies, trade associations, liquidity

facilities, and similar entities. 12 U.S.C.

1757(7)(I). In the past, NCUA has

interpreted this statutory authority

broadly to encompass most services and

activities a credit union can provide to

itself and its members through use of

express authority, incidental authority,

or goodwill authority. NCUA feels this

interpretation is supported by the

language of the FCU Act, which sets

forth a clear boundary of CUSO services,

namely, services fulfilling credit union

and credit union member needs. Nor

did Congress purport to limit CUSO

activities by cross-reference to statutory

FCU powers or by specifically listing

CUSO powers in the statute.

With this discussion in mind, two

services currently offered by CUSOs

have been denied as proper incidental

authorities for other financial

institutions. The first is the provision of

data processing services to the general

public (Nat. Retailer Corp. of Ariz. v.

Valley Nat. Bank, 604 F.2d 32 (9th Cir.

1979) and Ass’n of Data Processing

Service Organizations, Inc. v. Federal

Home Loan Bank of Cincinnati, 568

F.2d 478 (6th Cir. 1977)) and the second

is the provision of travel related services

(Arnold Tours, Inc. v. Camp, 408 F.2d

1147 (1st Cir. 1969) and Assn. of Bank

Travel Bureaus, Inc. v. Bd. of Gov. of

Federal Reserve System, 568 F.2d 549

(7th Cir. 1978)). Although NCUA in the

past has permitted these two services as

permissible CUSO services on a member

goodwill basis, NCUA would like to

request public comment, thereby

creating an administrative record, on

whether NCUA’s position is supported

by fact and justified as a proper agency

interpretation. Goodwill services are

those services that would normally be

neither express nor incidental, but

provide services to members that either

cannot be conveniently obtained

elsewhere or can be provided within the

traditional mission of a credit union.

For instance, offering vendor services

through the group purchase rule could

be termed a goodwill activity. By

making goods and products available to

members that have been reviewed and

endorsed by the credit union, members

are assured that the offered products

and services are legitimate and helpful.

Comments relating to member needs of

such services would be helpful to the

NCUA Board in determining whether

sufficient authority exists for the Board

to retain these services as permissible

CUSO services. In a similar vein,

although NCUA currently does permit

real estate brokerage services as a

permissible service, NCUA has been

troubled by cases involving conflicts

and the appearance of conflicts between

real estate brokerage CUSOs and the

credit unions such CUSOs serve. For

similar reasons regarding impairment of

appraiser independence and possible

conflicts of interest, NCUA has declined

to add real estate appraisal activities to

the list of permissible activities.

Comment is also requested regarding the

propriety of maintaining real estate

brokerage services as a permissible

service in a revised rule. NCUA also

requests comments regarding any

aspects of any other currently allowable,

or potentially allowable, CUSO activity

or service.

Proposed 712.6, What activities and

services are prohibited for CUSOs?

This proposed section restates the

statutory prohibition of 12 U.S.C.

1757(7)(I). NCUA legal opinion letters

have opined that trade association

affiliates and subsidiaries are eligible to

form CUSOs with FCUs; however

insurance company affiliates and

subsidiaries are not so eligible. NCUA

bases this difference upon the

composition and purpose of the trade

association affiliates and subsidiaries,

which derive from and benefit the credit

unions themselves, as opposed to

insurance companies, which are not

composed of, or directly benefit, credit

unions.

Proposed 712.7, What must you do to

add activities or services that are not

preapproved?

Current § 701.27(d)(5)(iii) regarding

NCUA approval of other activities and

services is unchanged in proposed

section 712.7. Though it has never been

used since its inclusion in 1986, the

provision does provide a means for the

permissible activities and services

portion of the rule to keep pace with

changes in the marketplace and

technological advances. The terms

‘‘NCUA Board,’’ and ‘‘Secretary of the

Board,’’ have the meanings ascribed to

them in Part 790 of the NCUA Rules and

Regulations. 12 CFR Part 790.

Proposed 712.8, What transaction and

compensation limits might apply to

individuals related to you or a CUSO?

Proposed section 712.8 contains

conflict of interest provisions between

FCUs and CUSOs.

Proposed Conflict of Interest

Section 701.27(d)(6) currently

imposes restrictions between an

affiliated credit union and a CUSO. The

primary purposes of the conflict of

interest section is to prevent insider

abuse and self-dealing that could lead to

losses at the CUSO, affiliated credit

unions, and the NCUSIF. It is the

responsibility and fiduciary duty of FCU

volunteers and employees to make

decisions based on the best interests of

the FCU and its members. Motivations

of personal financial gain from CUSO

activities could present an inherent

conflict of interest. Such motivations in

various CUSO cases have led to

personal gain by FCU officials and

resulted in FCU losses, occasionally

even resulting in the liquidation or

merger of the FCU. In addition, CUSO

compensation of FCU volunteers could

serve as means to subvert the

prohibitions on volunteer official

compensation contained in the Act. 12

U.S.C. 1761 and 1761a. Moreover,

compensation of shared CUSO/FCU

officials might be a factor that a court

could evaluate in deciding to pierce the

corporate veil to expose an affiliated

credit union to liability. For these

reasons, therefore, NCUA is committed

to maintaining strong conflicts of

interest provisions between CUSOs and

FCUs. In this vein, NCUA is proposing

one change to the current language of

the rule. Currently, under section

701.27(d)(6)(i), a CUSO may reimburse

an FCU for the services of an FCU

official or FCU senior management

employee used by a CUSO. The ability

of a CUSO to reimburse an FCU for the

services of FCU officials in the CUSO

was orginally permitted to enable newly

formed CUSOs to have low cost help. It

is possible that this provision might still

be needed, especially in the context of

smaller credit unions establishing

CUSOs. As stated earlier, NCUA wants

to encourage increased smaller credit

union involvement with CUSO

activities and services. On the other

hand, NCUA is concerned that

reimbursement issues could affect the

corporate separateness of a CUSO and

an FCU, as well as the other issues

discussed in this paragraph. Therefore,

NCUA is proposing the elimination of

the reimbursement exemption.

Comment is requested on this proposed

change, especially regarding any
11786 Federal Register / Vol. 62, No. 49 / Thursday, March 13, 1997 / Proposed Rules

repercussions upon the ability of

smaller credit unions in forming and

maintaining CUSOs. Comments are also

solicited on any other regulatory

improvements that would enable NCUA

to better police and contain CUSO/FCU

conflicts.

The definitions of ‘‘immediate family

member,’’ ‘‘official,’’ and ‘‘senior

management employee’’ remain

unchanged in the proposal from the

current definitions in section

701.27(c)(2, 3, and 5).

Proposed 712.9, When must you begin

compliance with the revised rule?

Proposed section 712.9 updates the

compliance phase-in period of a final

revised CUSO rule.

Proposed Preexisting CUSOs.

Other than a proposed change in the

date of this section, from May 27, 1986,

to the effective date of any final rule,

section 701.27(d)(8) remains mostly

unchanged in proposed section 712.9.

NCUA has experienced one CUSO

activity, ATM services, that often began

as a service primarily to credit unions,

but with ATM network and switch

consolidations, arguably does not meet

the CUSO rule ‘‘primarily serves’’

customer base requirements. In some of

these situations, it is NCUA’s

understanding that an institution must

hold stock in the ATM network or

switch in order to participate in the

ATM network or switch. NCUA does

not want to deny credit union members

ATM services due to a rule restriction.

Therefore, comment is requested on

how best to address this situation.

Comment is also requested on whether

other CUSO activities and services may

also be affected by similar trends, and

on possible solutions to such situations.

In 1986, when more extensive

amendments were adopted, the Board

granted CUSOs and FCUs a one-year

phase-in period before the amendments

would become effective. However, given

the more limited scope of these

amendments, the Board is proposing an

effective date compliance date.

Comments are requested on whether

more time would be beneficial to

CUSOs and FCUs, and, if so, what

length of time should be granted by the

Board as a phase-in period.

Proposed Section 740.3(c), Mandatory

Requirements with Regard to the

Official Sign and its Display

Federally-insured credit unions are

not permitted to receive account funds

at any teller’s station or window where

any non-federally insured credit union

or institution receives shares or

deposits. Credit union service centers

and branches servicing more than one

credit union where only some of the

credit unions are insured by NCUA are

exempt from this requirement. However,

in a service center context a sign is

required immediately above or beside

each official NCUA sign stating ‘‘Only

the following credit unions serviced by

the facility are federally insured by the

NCUA llllllllll.’’ (the full

name of each credit union insured is to

follow the word NCUA). The lettering is

to be of such size and print to be clearly

legible to all members conducting share

or deposit transactions. The intent of

this requirement was to inform credit

union members using a service center

that share insurance was dependent

upon their credit union and not upon

the location of their transactions (the

service center).

Since this rule was last revised in

1986, the number of states permitting

state-chartered credit unions to have

non-federal account insurance has

shrunk. Currently, non-federally insured

credit unions exist primarily in

California (13), Idaho (20), Illinois (54),

Indiana (21), Maryland (5), Nevada (8),

Ohio (129), Puerto Rico (194), and

Washington State (71). In order to

reduce the paperwork and compliance

burdens on service centers, which

service mainly federally-insured credit

unions, NCUA is proposing to change

this disclosure requirement. The

proposal only requires disclosure of

non-federally insured credit unions

serviced at a service center. Since there

are an estimated 515 non-federally

insured credit unions compared to

11,687 federally-insured credit unions,

by reversing the disclosure requirement

many service centers should experience

a compliance and paperwork burden

reduction. This disclosure would also

accomplish the intent of the current

disclosure of informing the credit union

members of whether NCUSIF insurance

exists on their credit union accounts.

While NCUA is aware of the statutorilymandated disclosures that nonfederally

insured credit unions must give to their

members (12 U.S.C. 1831t), NCUA is

concerned that some member confusion

might still exist which might lead the

member of a nonfederally insured credit

union to believe that his or her deposits

were federally insured by the NCUSIF.

NCUA requests comments on the need

and adequacy of this proposed change.

II. Regulatory Procedures

A. Regulatory Flexibility Act

The Regulatory Flexibility Act

requires the NCUA to prepare any

analysis to describe any significant

economic impact any proposed

regulation may have on a substantial

number of small entities (primarily

those under $1 million in assets). The

proposed CUSO and service contract

rule revisions would reduce existing

regulatory burdens. The advertising

amendment also reduces existing

regulatory burden. Therefore, the NCUA

Board has determined and certifies that

the proposed amendment, if adopted,

will not have a significant economic

impact on a substantial number of small

credit unions. Accordingly, the Board

has determined that a Regulatory

Flexibility Analysis is not required.

B. Paperwork Reduction Act

NCUA has determined that several

requirements of this proposal constitute

collections of information under the

Paperwork Reduction Act. The

requirements are that the FCU: (1)

Obtain a written agreement from the

CUSO, prior to investing in or lending

to the organization, that the CUSO will

follow GAAP, render financial

statements (balance sheet and income

statement) at least quarterly and obtain

a Certified Public Accountant opinion

audit annually and provide copies of

such to the FCU, and provide NCUA

and its representatives with complete

access to any books and records of the

CUSO as deemed necessary by NCUA in

carrying out its responsibilities under

the Act (proposed section 712.3(d)); (2)

obtain written legal advice if the FCU’s

equity interest in a CUSO is greater than

10 percent as to whether the CUSO is

established and maintained in a manner

that will limit potential exposure to no

more than the loss of funds invested in,

or lent to, the CUSO (proposed section

712.4(b)); and (3) compose a list of nonfederally insured credit unions by a

service center and post the list by the

official NCUA sign (proposed section

740.3(c)). NCUA has submitted a copy

of these proposed sections to the Office

of Management and Budget (OMB) for

its review. These proposed sections

enable NCUA to monitor an FCU’s

involvement with CUSOs for safety and

soundness and to ensure that CUSOs are

properly formed and maintained in

accordance with applicable state laws.

It is NCUA’s view that the time a

CUSO spends ensuring compliance with

GAAP, compiling quarterly financial

statements, and providing NCUA and its

representatives with complete access to

any books and records of the CUSO are

not burdens created by this regulation,

but rather are usual and customary

practices in the normal operations of a

business entity. It is also NCUA’s view

that the written agreement between the

CUSO and the FCU is not a burden

created by this regulation, but is usual

and customary practice in the normal
Federal Register / Vol. 62, No. 49 / Thursday, March 13, 1997 / Proposed Rules 11787

operations of a business entity. The

paperwork burdens created by these

rules are the remaining requirements

outlined above.

NCUA estimates that it should take

the CUSO an average of 2 hours to

research and contract to have a Certified

Public Accountant opinion audit each

year. Since this requirement applies to

all 448 CUSOs, the annual reporting

burden would be 896 hours to comply

with this requirement. It is expected

that it would take 15 minutes for each

of the 448 CUSOs to provide copies of

the audit to NCUA, resulting in an

annual reporting burden of 112 hours.

NCUA estimates that 482 FCUs would

have to research and obtain written legal

advice on the CUSO investment, an

activity that is expected to take 1 hour

per year, imposing annual reporting

burden of 482 hours. Each of the 282

service center locations would need to

compose and post a list of the nonfederally insured credit unions serviced

by that location. The estimated time to

perform this at each location is

estimated to be 0.5 hour for each,

resulting in an annual reporting burden

of 141 hours. The total annual burden

hours imposed by the proposed rule is

1631 hours.

The Paperwork Reduction Act of 1995

and regulations of the Office of

Management and Budget (OMB) require

that the public be provided an

opportunity to comment on information

collection requirements, including an

agency’s estimate of the burden of the

collection of information.

The NCUA Board invites comment

on: (1) Whether the collection of the

information is necessary for the proper

performance of the functions of NCUA,

including whether the information will

have practical utility; (2) the accuracy of

NCUA’s estimate of the burden of the

collection of information, including the

validity of the methodology and

assumptions used; (3) ways to enhance

the quality, utility, and clarity of the

information to be collected; and (4)

ways to minimize the burden of

collection of information on those who

are to respond, including through the

use of appropriate automated electronic,

mechanical, or other technological

collection techniques or other forms of

information technology; e.g., permitting

electronic submission of responses.

OMB is required to make a decision

concerning the collection of information

contained in these proposed regulations

between 30 and 60 days after

publication of this document in the

Federal Register. Therefore, a comment

to OMB is best assured of having its full

effect if OMB receives it within 30 days

of publication. This does not affect the

deadline for the public to comment to

the NCUA Board on the proposed

regulations.

Organizations and individuals

desiring to submit comments on the

information collection requirements

should direct them to the Office of

Information and Regulatory Affairs,

OMB, Room 10235, New Executive

Office Building, Washington, D.C.

20503; Attention: Alex Hunt, Desk

Officer for NCUA. Comments must also

be sent to NCUA, 1775 Duke Street,

Alexandria, VA 22314–3428; Attention:

Marijean Brown, Acting Paperwork

Reduction Act Coordinator, Telephone

No. (703) 518–6410; Fax No. (703) 518–

6433; E-Mail Address:

MARIJEAN@NCUA.GOV. Comments

should be postmarked by May 12, 1997.

All comments submitted in response to

these proposed regulations will be

available for public inspection, during

and after the comment period, at

NCUA’s Central Office, 6th Floor, Law

Library, 1775 Duke Street, Alexandria,

VA between the hours of 9 a.m. and 1

p.m., Monday through Friday of each

week except federal holidays, and by

appointment through the Law Librarian

at telephone no. (703) 518–6540.

C. Executive Order 12612

Executive Order 12612 requires

NCUA to consider the effect of its

actions on state interests. The proposed

CUSO regulation applies only to federal

credit unions. The proposed advertising

rule amendment would apply to all

federally insured credit unions,

including federally insured, statechartered credit unions. However, due

to the relatively low number of credit

union service centers that serve nonfederally insured credit unions, NCUA

has determined that the proposed rule

does not constitute a ‘‘significant

regulatory action’’ for purposes of the

Executive Order. However, NCUA

welcomes comment on means and

methods to coordinate with the state

credit union supervisors regarding

achievement of shared goals involving

viability, flexibility, parity, conformity

and safety and soundness regarding

CUSOs and service center advertising of

accounts.

List of Subjects

12 CFR Part 701

Advertising, Aged, Civil rights, Credit,

Credit unions, Fair housing, Individuals

with disabilities, Insurance, Marital

status discrimination, Mortgages,

Religious discrimination, Reporting and

recordkeeping requirements, Sex

discrimination, Signs and symbols,

Surety bonds.

12 CFR Part 712

Administrative practice and

procedure, Credit, Credit unions,

Investments, Reporting and

recordkeeping requirements.

12 CFR Part 740

Advertising, Bank deposit insurance,

Credit unions, Reporting and

recordkeeping requirements, Signs and

symbols.

By the National Credit Union

Administration Board on March 7, 1997.

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 701—ORGANIZATION AND

OPERATION OF FEDERAL CREDIT

UNIONS

1. The authority citation for Part 701

continues to read as follows:

Authority: 12 U.S.C. 1752(5), 1755, 1756,

1757, 1759, 1761a, 1761b, 1766, 1767, 1782,

1784, 1787, 1789, 1798. Section 701.6 is also

authorized by 31 U.S.C. 3717. Section 701.31

is also authorized by 15 U.S.C. 1601 et seq.;

42 U.S.C. 1861 and 3601–3610. Section

701.35 is also authorized by 42 U.S.C. 4311–

4312.

§ 701.26 [Amended]

2. Section 701.26 is amended by

removing paragraph (b) and removing

the paragraph designation (a).

§ 701.27 [Removed]

3. Section 701.27 is removed.

4. Part 712 is added to read as follows:

PART 712—CREDIT UNION SERVICE

ORGANIZATIONS (CUSOs)

Sec.

712.1 What does this part cover?

712.2 How much can you invest in, or loan

to, CUSOs, and what parties may be

involved?

712.3 What are the characteristics of, and

what requirements apply to, CUSOs?

712.4 What must you and a CUSO do to

maintain separate corporate identities?

712.5 What activities and services are

preapproved for CUSOs?

712.6 What activities and services are

prohibited for CUSOs?

712.7 What must you do to add activities or

services that are not preapproved?

712.8 What transaction and compensation

limits might apply to individuals related

to you or a CUSO?

712.9 When must you begin compliance

with this part?

Authority: 12 U.S.C. 1756, 1757(5)(D) and

(7)(I), 1766, 1782, 1784, and 1785.

§ 712.1 What does this part cover?

This part establishes when you, an

affiliated Federal credit union, can
11788 Federal Register / Vol. 62, No. 49 / Thursday, March 13, 1997 / Proposed Rules

invest in, and make loans to, CUSOs.

This part does not regulate CUSOs

directly, but rather establishes

conditions of your investments in, and

loans to, CUSOs. For purposes of this

part, ‘‘affiliated credit unions’’ means

those Federal credit unions that have

either invested in, made loans to, or

contracted with, a CUSO.

§ 712.2 How much can you invest in, or

loan to, CUSOs, and what parties may be

involved?

(a) Investments. Your total

investments in CUSOs must not exceed,

in the aggregate, 1% of your paid-in and

unimpaired capital and surplus as of

your last calendar year-end financial

report. For purposes of paragraphs (a)

and (b) of this section, ‘‘paid-in and

unimpaired capital and surplus’’ means

shares and undivided earnings.

(b) Loans. Your total loans to CUSOs

must not exceed, in the aggregate, 1% of

your paid-in and unimpaired capital

and surplus as of your last calendar

year-end financial report.

(c) Parties. You may invest in, or loan

to, a CUSO by yourself, or with other

credit unions or with non-credit union

parties.

§ 712.3 What are the characteristics of,

and what requirements apply to, CUSOs?

(a) Structure. You can invest in or

loan to a CUSO only if the CUSO is

structured as a corporation, limited

liability company, or limited

partnership. For purposes of this

paragraph (a), ‘‘corporation’’ means a

legally incorporated corporation as

established and maintained under

relevant state law. For purposes of this

paragraph (a), ‘‘limited liability

company’’ means a legally established

limited liability company as established

and maintained under relevant state

law. For purposes of this paragraph (a),

‘‘limited partnership’’ means a legally

established limited partnership as

established and maintained under

relevant state law.

(b) Customer base. You can invest in

or loan to a CUSO only if the CUSO

primarily serves credit unions, your

membership or the membership of

affiliated credit unions.

(c) Federal credit union accounting.

You must record your investments in or

loans to CUSOs in accord with

‘‘generally accepted accounting

principles’’ (GAAP).

(d) CUSO accounting; audits and

financial statements; NCUA access to

books and records. You must obtain

written agreements from a CUSO, prior

to investing in or lending to the

organization, that the CUSO will:

(1) Follow GAAP;

(2) Render financial statements

(balance sheet and income statement) at

least quarterly and obtain a Certified

Public Accountant opinion audit

annually and provide copies of such to

you; and

(3) Provide NCUA and its

representatives with complete access to

any books and records of the CUSO, as

deemed necessary by NCUA in carrying

out its responsibilities under the Act.

(e) Other laws. A CUSO must comply

with applicable Federal, state and local

laws.

§ 712.4 What must you and a CUSO do to

maintain separate corporate identities?

(a) Corporate separateness. You and

the CUSO must be operated in a manner

that demonstrates to the public the

separate corporate existence of you and

the CUSO. Each must operate so that:

(1) Its respective business

transactions, accounts, and records are

not intermingled;

(2) Each observes the formalities of its

separate corporate procedures;

(3) Each is adequately financed as a

separate unit in the light of normal

obligations reasonably foreseeable in a

business of its size and character;

(4) Each is held out to the public as

a separate enterprise;

(5) You do not dominate the CUSO to

the extent that the CUSO is treated as a

department of you; and

(6) Unless you have guaranteed a loan

obtained by the CUSO, all borrowings

by theCUSO indicate that you are not

liable.

(b) Legal opinion. If you have a 10%

or greater equity interest in a CUSO, you

must obtain written legal advice as to

whether the CUSO is established and

maintained in a manner that will limit

your potential exposure to no more than

the loss of funds invested in, or lent to,

the CUSO.

§ 712.5 What activities and services are

preapproved for CUSOs?

NCUA at any time may limit any

CUSO activities or services, or refuse to

permit any CUSO activities or services,

for supervisory, legal, or safety and

soundness reasons. Otherwise, you may

invest in, loan to, and/or contract with

those CUSOs that provide one or more

of the following activities and services

related to the routine, daily operations

of credit unions:

(a) Checking and currency services:

(1) Check cashing;

(2) Coin and currency services; and

(3) Money order, savings bonds,

travelers checks, and purchase and sale

of U.S. Mint commemorative coins

services;

(b) Clerical, professional and

management services:

(1) Accounting services;

(2) Courier services;

(3) Credit analysis;

(4) Facsimile transmissions and

copying services;

(5) Internal audit for credit unions;

(6) Locator services;

(7) Management and personnel

training and support;

(8) Marketing services;

(9) Research services; and

(10) Supervisory committee audits;

(c) Consumer mortgage loan

origination;

(d) Electronic transaction services:

(1) Automated teller machine (ATM)

services;

(2) Credit card and debit card

services;

(3) Data processing;

(4) Electronic fund transfer (EFT)

services;

(5) Electronic income tax filing;

(6) Payment item processing; and

(7) Wire transfer services;

(e) Financial counseling services:

(1) Developing and administering

Individual Retirement Accounts (IRA),

Keogh, deferred compensation and other

personnel benefit plans;

(2) Estate planning;

(3) Financial planning and

counseling;

(4) Income tax preparation;

(5) Investment counseling; and

(6) Retirement counseling;

(f) Fixed asset services:

(1) Management, development, sale or

lease of fixed assets; and

(2) Sale, lease or servicing of

computer hardware or software;

(g) Insurance brokerage or agency:

(1) Agency for sale of insurance; and

(2) Provision of vehicle warranty

programs;

(h) Leasing:

(1) Personal property; and

(2) Real estate leasing of excess CUSO

property;

(i) Loan support services:

(1) Debt collection services;

(2) Loan processing, servicing and

sales; and

(3) Sale of repossessed collateral;

(j) Real estate brokerage services;

(k) Record retention, security and

disaster recovery services:

(1) Alarm-monitoring and other

security services;

(2) Disaster recovery services;

(3) Microfilm, microfiche, optical

imaging, CD-ROM data storage and

retrieval services;

(4) Provision of forms and supplies;

and

(5) Record retention and storage;

(l) Securities brokerage services;

(m) Shared credit union branch

(service center) operations;
Federal Register / Vol. 62, No. 49 / Thursday, March 13, 1997 / Proposed Rules 11789

(n) Travel agency services; and

(o) Trust and trust-related services:

(1) Acting as administrator for prepaid

legal service plans;

(2) Acting as trustee, guardian,

conservator, estate administrator, or in

any other fiduciary capacity; and

(3) Trust services.

§ 712.6 What activities and services are

prohibited for CUSOs?

CUSOs must not engage in the

activities or services of depository

financial institutions, insurance

companies, trade associations, liquidity

facilities, and similar entities.

§ 712.7 What must you do to add activities

or services that are not preapproved?

In order for you to invest in and/or

loan to a CUSO that offers the

unpreapproved activity or service, you

must first receive NCUA Board

approval. Your request for NCUA Board

approval of a new activity or service

should include a full explanation and

complete documentation of the activity

or service and how that activity or

service is associated with routine credit

union operations. Your request should

be submitted jointly to your Regional

Office and to the Secretary of the Board.

Your request will be treated as a petition

to amend § 712.5 and NCUA will

request public comment or otherwise

act on the petition within 60 days after

receipt.

§ 712.8 What transaction and

compensation limits might apply to

individuals related to you or a CUSO?

(a) Officials and senior management

employees. Your officials, senior

management employees, and their

immediate family members must not

receive any salary, commission,

investment income, or other income or

compensation from a CUSO either

directly or indirectly, or from any

person being served through the CUSO.

This provision does not prohibit your

officials or senior management

employees from assisting in the

operation of a CUSO, provided your

officials or senior management

employees are not compensated by the

CUSO. For purposes of this paragraph

(a), ‘‘official’’ means your directors or

committee members. For purposes of

this paragraph (a), ‘‘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). For purposes of this

paragraph (a), ‘‘immediate family

member’’ means a spouse or other

family members living in the same

household.

(b) Employees. The prohibition

contained in paragraph (a) of this

section also applies to your employees

not otherwise covered if the employees

are directly involved in dealing with the

CUSO unless your board of directors

determines that your employees’

positions do not present a conflict of

interest.

(c) Others. All transactions with

business associates or family members

of your officials, senior management

employees, and their immediate family

members, not specifically prohibited by

paragraphs (a) and (b) of this section

must be conducted at arm’s length and

in your interest.

§ 712.9 When must you begin compliance

with this part?

(a) Investments. Your investments in

existence prior to [the effective date of

the final regulation], must conform with

this part not later than [the effective

date of the final regulation], unless the

Board grants its prior approval to

continue such investment for a stated

period.

(b) Loans. Your loans in existence

prior to [the effective date of the final

regulation] must conform with this part

not later than [the effective date of the

final regulation], unless:

(1) The Board grants its prior approval

to continue your loan for a stated

period; or

(2) Under the terms of its loan

agreement you cannot require

accelerated repayment without

breaching the agreement.

PART 740—ADVERTISING

5. The authority citation for Part 740

continues to read as follows:

Authority: 12 U.S.C. 1766, 1781, 1789 and

4311.

6. Section 740.3(c) is revised to read

as follows:

§ 740.3 Mandatory requirements with

regard to the official sign and its display.

* * * * *

(c) An insured credit union shall not

receive account funds at any teller’s

station or window where any

noninsured credit union or institution

receives deposits. Excepted from this

prohibition are credit union centers,

service centers, or branches servicing

more than one credit union where only

some of the credit unions are insured by

the NCUA. In such instances there must

be placed immediately above or beside

each official sign another sign stating

‘‘The following credit unions serviced

by this facility are not federally insured

by the NCUA llllllllll.’’

(the full legal name of each credit union

and the city and state of its principal

office will follow the word NCUA each

time it appears). The lettering will be of

such size and print to be clearly legible

to all members conducting share or

share deposit transactions.

* * * * *

[FR Doc. 97–6374 Filed 3–12–97; 8:45 am]

BILLING CODE 7535–01–P

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

14 CFR Part 243

[Docket No. OST–97–2198, Notice No.

97–4]

RIN 2105–AC62

Domestic Passenger Manifest

Information

AGENCY: Office of the Secretary (OST),

DOT.

ACTION: Advance notice of proposed

rulemaking (ANPRM).

SUMMARY: This ANPRM requests

information concerning operational and

cost issues related to U.S. air carriers

collecting basic information (e.g., full

name, date of birth and/or social

security number, emergency contact and

telephone number) from passengers

traveling on flights within the United

States. This proposal is being issued

pursuant to the Aviation Disaster

Family Assistance Act of 1996. This law

was passed to address the difficulties

associated with notification of families

in the aftermath of domestic aviation

crashes. This proposal is also being

issued to fulfill a recommendation

contained in the Initial and Final

Reports of the White House Commission

on Aviation Safety and Security that

urges the Department to explore the

costs and effects of a comprehensive

passenger manifest requirement on the

domestic aviation system.

DATES: Comments must be received by

May 12, 1997.

ADDRESSES: Comments on this advance

notice of proposed rulemaking should

be filed with: Docket Clerk, U.S.

Department of Transportation, Room

PL–401, Docket No. OST–97–2198, 400

7th Street, SW., Washington, DC 20590.

Five copies are requested, but not

required.

FOR FURTHER INFORMATION CONTACT:

Dennis Marvich, Office of International

Transportation and Trade, DOT, (202)

366–4398; or, for legal questions, Joanne