[Federal Register Volume 70, Number 182 (Wednesday, September 21, 2005)]
[Rules and Regulations]
[Pages 55227-55228]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-18749]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 712


Audit Requirement for Credit Union Service Organizations

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: NCUA is amending its rule concerning credit union service 
organizations (CUSOs) to provide that a wholly owned CUSO need not 
obtain its own annual financial statement audit from a certified public 
accountant if it is included in the annual consolidated audit of the 
federal credit union (FCU) that is its parent. The amendment will 
reduce regulatory burden and conform the regulation with agency 
practice, which since 1997 has been to view credit unions with wholly 
owned CUSOs in compliance with the rule if the parent FCU has obtained 
an annual financial statement audit on a consolidated basis.

DATES: This rule is effective on October 21, 2005.

FOR FURTHER INFORMATION CONTACT: Ross P. Kendall, Staff Attorney, 
Office of General Counsel, at telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION: 

Background

    On March 17, 2005, the NCUA Board requested comment on a proposed 
change to part 712 of its regulations to provide that that a CUSO that 
is wholly owned need not secure its own public accounting firm 
financial statement audit if it is included on a consolidated basis in 
the audit of the FCU itself. 70 FR 14579 (March 23, 2005). The proposal 
recognized that, where a CUSO is controlled by an FCU by virtue of its 
ownership of one hundred percent of its voting shares, generally 
accepted accounting principles (GAAP) call for the preparation of 
financial statements of both the FCU and the CUSO on a consolidated 
basis.
    As noted in the preamble to the proposed rule, consolidated 
financial statements present the results of operations, financial 
position, and cash flows of a parent and its subsidiaries as if the 
group were a single enterprise. Under GAAP, consolidated financial 
statements generally include enterprises in which the parent has a 
controlling financial interest, usually, a majority voting interest. 
There is a presumption that consolidated statements are more meaningful 
than separate statements and are usually necessary for a fair 
presentation when one of the enterprises in a group directly or 
indirectly has a controlling financial interest in another.

Summary of Comments

    NCUA received twelve comments on the proposal, eleven of which were 
fully supportive of the amendment. These commenters noted several bases 
for their support, including efficiency, flexibility and cost savings, 
as well as the generally more thorough and accurate financial picture 
that emerges when the operations of corporate parents and subsidiaries 
are included in a consolidated financial statement. The one commenter 
that did not offer express support did not indicate opposition to the 
proposal, but rather raised two questions about the operation of the 
rule in specified circumstances.
    In the preamble to the proposed rule, the Board specifically 
recognized that GAAP would allow for consolidated financial reporting 
in cases that involve a CUSO that is majority owned. The Board noted, 
however, that it was not recommending extension of the rule to those 
cases, and indicated its belief that the proposal would ensure that 
prospective minority investors in CUSOs would have maximum disclosure 
of potential risks to their investment. Nine commenters recommended 
that NCUA extend the exemption for a separate audit to majority owned 
CUSOs, instead of limiting it to cases of one hundred percent 
ownership. Two of these commenters conditioned their support for this 
expanded treatment on including in the rule a safeguard to allow a 
minority owner to request the CUSO to obtain a separate opinion audit.
    The Board remains convinced that the original proposal, with its 
limited application only to cases involving one hundred percent 
ownership of the CUSO, is the best course. Absent a provision in the 
rule, a minority investor could encounter some difficulty in asserting 
its right to a separate opinion audit. The Board notes, in this 
respect, that its concern for the safety and soundness of credit 
unions, rather than assuring that its rules conform in all respects to 
what may be formally permissible under GAAP, is of paramount 
importance. Accordingly, NCUA is adopting the proposed amendments as a 
final rule without change.
    The Board notes that the rule change extends to cases involving 
CUSO subsidiaries that are also wholly owned. While cases of second 
tier CUSOs are relatively rare, the principles of the rule

[[Page 55228]]

would apply. Thus, where the second tier CUSO is itself wholly owned by 
a wholly owned first tier CUSO, use of a consolidated opinion audit 
capturing both levels would be permissible.

Regulatory Procedures

Regulatory Flexibility Act

    The final rule relieves a CUSO that is wholly owned from having to 
secure a separate opinion audit of its books, if it is included in the 
annual consolidated opinion audit of the credit union that is its 
parent. The Board has determined and certifies that the rule will not 
have a significant economic impact on a substantial number of small 
credit unions. Accordingly, the NCUA Board has determined that a 
Regulatory Flexibility Analysis is not required.

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 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. The final rule 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 this proposal 
does not constitute a policy that has federalism implications for 
purposes of the executive order.

The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that the final rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Public Law 105-277, 112 
Stat. 2681 (1998).

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) provides generally for congressional review of agency 
rules. A reporting requirement is triggered in instances where NCUA 
issues a final rule as defined by Section 551 of the Administrative 
Procedure Act. 5 U.S.C. 551. The Office of Management and Budget has 
determined that this rule is not a major rule for purposes of the Small 
Business Regulatory Enforcement Fairness Act of 1996.

List of Subjects in 12 CFR Part 712

    Administrative practices and procedure, Credit, Credit unions, 
Investments, Reporting and record keeping requirements.

    By the National Credit Union Administration Board on September 
15, 2005.
Mary F. Rupp,
Secretary of the Board.

0
For the reasons stated in the preamble, NCUA amends 12 CFR part 712 as 
follows:

PART 712--CREDIT UNION SERVICE ORGANIZATIONS (CUSOs)

0
1. The authority citation for part 712 continues to read as follows:

    Authority: 12 U.S.C. 1756, 1757(5)(D), and (7)(I), 1766, 1782, 
1784, 1785 and 1786.

0
2. Amend Sec.  712.3 by revising paragraph (d)(2) to read as follows:


Sec.  712.3  What are the characteristics of and what requirements 
apply to CUSOs?

* * * * *
    (d) * * *
    (2) Prepare quarterly financial statements and obtain an annual 
financial statement audit of its financial statements by a licensed 
certified public accountant in accordance with generally accepted 
auditing standards. A wholly owned CUSO is not required to obtain a 
separate annual financial statement audit if it is included in the 
annual consolidated financial statement audit of the credit union that 
is its parent; and
* * * * *
[FR Doc. 05-18749 Filed 9-20-05; 8:45 am]
BILLING CODE 7535-01-P