Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / Notices 48399 

licensees. See Alyeska Pipeline Serv. Co. 

v. Wilderness Soc‘y, 421 U.S. 240, 257 

(U.S. 1975) (absent statute or 

enforceable contract, litigants pay their 

own attorneys’ fees). As section 115 

does not contain an explicit provision 

for attorney‘s fees, the CRJs are unable 

to provide for awards of attorney‘s fees 

in actions to collect past due royalties. 

The CRJs do not have the authority to 

issue rules setting forth the scope of 

activities covered by the license. 

However, the CRJs certainly have the 

authority to set rates for different types 

of DPDs. In so doing, they may have to 

make determinations to identify 

particular types of DPDs. Such 

determinations may implicate the 

question of what activity falls within the 

scope of the license. In instances where 

particular rates are being requested for 

the creation of particular types of DPDs 

and there is some question whether 

these DPDs fall within the scope of the 

license, those questions must be 

resolved in the proceeding. When such 

a question has not been determined 

before, it is a novel question of law 

which should be referred to the Register 

under section 802(f)(1)(B). In any event, 

any such determination by the CRJs will 

be subject to review for legal error by 

the Register under section 802(f)(1)(D). 

NMPA has proposed that the CRJs 

determine that the license fee is to be 

calculated on the date of distribution, 

not the date of manufacture. The CRJs’

authority to set rates and terms does 

appear to be sufficiently broad to 

include the authority to determine the 

date on which the mechanical license 

fee is to be calculated. However, we 

caution that the legislative history of 

section 115 suggests that the applicable 

rate should be the date the phonorecord 

is made. When the House Judiciary 

Committee considered the language that 

was to become section 115 of the 1976 

Copyright Act in 1966 and 1967, it 

stated that ‘‘the committee believes that, 

unless a negotiated agreement provides 

otherwise, the liability for royalties 

should be fixed at the time 

phonorecords are made under a 

compulsory license.’’ Second 

Supplementary Register‘s Report on the 

General Revision of the U.S. Copyright 

Law (1975) at 251. Moreover, it would 

most likely be beyond the power of the 

CRJs to provide that with respect to 

phonorecords that have already (i.e., 

prior to the effective date of the current 

rate determination) been manufactured, 

the royalty fee is to be calculated as of 

the date of distribution rather than the 

date of manufacture. Such retroactive 

rulemaking is in most cases beyond the 

power of an agency. See Bowen v. 

Georgetown University Hospital, 488 U. 

S. 204 (1988). 

Finally, the CRJs request clarity 

regarding their authority over terms of 

late payments. Under section 803(c)(7), 

the CRJs have a clear authority to 

include terms with respect to late 

payments. However, the Register notes 

that this authority applies solely to 

payments that are in fact past due. 

August 8, 2008 

David O. Carson 

Acting Register of Copyrights 

[FR Doc. E8–19198 Filed 8–18–08; 8:45 am] 

BILLING CODE 1410–30–S 

NATIONAL CREDIT UNION 

ADMINISTRATION 

Guidance Regarding Prohibitions 

Imposed by Section 205(d) of the 

Federal Credit Union Act 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Final Interpretive Ruling and 

Policy Statement 08–1. 

SUMMARY: The NCUA is issuing an 

Interpretive Ruling and Policy 

Statement (IRPS) regarding prohibitions 

imposed by Section 205(d) of the 

Federal Credit Union Act (FCU Act) (12 

U.S.C. 1785(d)(1)). Section 205(d) of the 

FCU Act prohibits a person who has 

been convicted of any criminal offense 

involving dishonesty or breach of trust, 

or who has entered into a pretrial 

diversion or similar program in 

connection with a prosecution for such 

offense, from participating in the affairs 

of an insured credit union except with 

the prior written consent of the NCUA 

Board. This IRPS provides direction and 

guidance to federally-insured credit 

unions and those persons who may be 

affected by Section 205(d) because of a 

prior criminal conviction or pretrial 

diversion program participation by 

describing the actions that are 

prohibited under the statute and 

establishing the procedures for applying 

for NCUA Board consent on a case-bycase basis. 

DATES: This IRPS is effective September 

18, 2008. 

FOR FURTHER INFORMATION CONTACT: Jon 

Canerday, Trial Attorney, Office of 

General Counsel, at the National Credit 

Union Administration, 1775 Duke 

Street, Alexandria, Virginia 22314–

3428, by e-mail at canerday@ncua.gov 

or by telephone at (703) 518–6548. 

SUPPLEMENTARY INFORMATION: 

A. Background 

In April 2008, the NCUA Board 

published a proposed IRPS regarding 

the prohibition imposed by Section 

205(d) of the FCU Act. 73 FR 18576 

(April 4, 2008). Section 205(d) of the 

FCU Act prohibits, without the prior 

written consent of the NCUA Board, a 

person convicted of any criminal 

offense involving dishonesty or breach 

of trust, or who has entered into a 

pretrial diversion or similar program in 

connection with a prosecution for such 

offense, from becoming or continuing as 

an institution-affiliated party, or 

otherwise participating, directly or 

indirectly, in the conduct of the affairs 

of an insured credit union. The 

comment period closed on June 3, 2008. 

NCUA received seven comments on the 

proposal. After consideration of the 

comments, NCUA is finalizing the IRPS, 

which generally adopts the guidance as 

proposed. 

B. Public Comments 

NCUA welcomed general comments 

on the proposed IRPS. In addition, the 

Board specifically sought comments as 

to whether the format of this guidance 

as an IRPS was appropriate or whether 

a regulation would be more suitable. 

The Board invited comments as to 

whether a specific form, similar to the 

form required by the FDIC in connection 

with a similar statute, should be used to 

request consent pursuant to Section 

205(d). 

NCUA received seven comment 

letters in response to the proposed IRPS: 

two from federal credit unions, two 

from national credit union trade 

organizations, and three from credit 

union leagues. The commenters 

generally supported the need for the 

guidance as contained in the proposed 

IRPS and offered several suggestions 

intended to assist the Board in 

improving the proposed IRPS. 

Two commenters believed that a 

regulation was the more appropriate 

format for the guidance. One of the 

commenters who favored a regulation 

thought a regulation provided greater 

protection to a credit union that might 

be challenged by a prospective 

employee. Another commenter believed 

a regulation was preferable because it 

would help reinforce a credit union’s 

right to appeal an adverse decision and 

subject future changes to public notice 

and comment. A third commenter 

suggested the guidance should take the 

form of a Letter to Credit Unions, 

believing that format was more familiar 

to credit union officials. 

The Board appreciates the need to 

provide protection for credit unions that 


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1These are virtually identical terms to those used 

in Section 19 of the Federal Deposit Insurance Act. 

seek to comply with the requirements of 

the IRPS. However, the Board concludes 

that the source of the requirement stems 

from federal statute, namely Section 

205(d). Thus, the Board believes that the 

need to comply with federal law, as 

augmented by guidance in the form of 

an IRPS, should be sufficient to protect 

a credit union. The Board believes that 

credit union officials should be able to 

adequately understand and apply the 

guidance styled as an IRPS and that the 

right to request a hearing contained in 

the IRPS provide a credit union a 

sufficient right to appeal a denial of 

consent by the Board. Additionally, the 

Board does not amend its IRPS without 

providing the public notice and an 

opportunity to comment. For all of these 

reasons, the Board believes it 

appropriate to issue the final guidance 

in the form of an IRPS. 

Four commenters believed that a form 

should be required in order to request 

consent. As one commenter observed, 

the use of a form ‘‘is necessary to ensure 

uniformity and consistency throughout 

the consent process.’’ The commenters 

favoring a form suggested that the form 

required by the FDIC was a reasonable 

template that could be modified to fit 

the needs of credit unions. The Board 

concurs with the commenters and 

therefore the final IRPS contains a 

requirement that applications for 

consent under Section 205(d) must be 

presented on the form attached to this 

IRPS. 

A majority of the commenters sought 

additional guidance from NCUA as to 

who comes within the prohibition of 

Section 205(d). In particular, 

commenters were concerned as to 

whether independent contractors of a 

credit union would come within the 

ambit of Section 205(d), thus requiring 

credit unions to make inquiry as to the 

past criminal history of such 

contractors. 

Several commenters also expressed 

concern over the use of the term ‘‘de 

facto employee’’, believing it is 

confusing and has never been defined 

by NCUA. Another commenter believed 

use of the concept exceeded the statute 

and thus was an improper expansion of 

the scope of the prohibition imposed by 

Section 205(d). Still another commenter 

expressed the view that such expansive 

definitions could require credit unions 

‘‘to perform background checks on any 

party with whom it has commercial 

dealings. * * *’’ This commenter also 

believed that Section 19 of the Federal 

Deposit Insurance Act was clearer and 

less subjective than the definition in the 

proposed IRPS. Further, another 

commenter believed the definition of 

independent contractor was 

inconsistent with the FCU Act because 

the definition cited to Section 206(r), 

which contains the term ‘‘violation of 

any law or regulation.’’

The Board recognizes that the 

language of Section 205(d) creates 

uncertainty as to whom the section 

applies. The terms ‘‘institution-affiliated 

party’’, and ‘‘otherwise participate, 

directly or indirectly, in the conduct of 

the affairs of any insured credit union’’

are terms dictated by Congress in the 

statute.1 Those are terms that are used 

and defined in various other sections of 

the FCU Act, as well as in statutes 

applied by the other federal financial 

institution regulatory agencies. As a 

result, a body of case law has developed 

that further defines these terms. These 

definitions are fact dependent, making it 

difficult to provide easily understood, 

universal definitions. Neither the OTS 

nor the FDIC thought it advisable to 

define similar terms, and the Board is 

likewise reluctant to attempt to do so. 

The Board recognizes that one 

common concern expressed by 

commenters was to what extent Section 

205(d) applied to independent 

contractors, and thus required inquiry of 

such contractors by credit unions. The 

Board wishes to make clear that not all 

contractors are subject to the prohibition 

contained in Section 205(d). The crucial 

test is the degree or extent to which the 

contractor participates in the affairs of 

the credit union. As the proposed IRPS 

stated, ‘‘an independent contractor who 

influences or controls the management 

or affairs of an insured credit union, 

would be covered by Section 205(d).’’

The FDIC addressed the issue of 

affiliated parties and independent 

contractors in the preamble to its 

Statement of Policy Pursuant to Section 

19 of the Federal Deposit Insurance Act 

as follows: 

Similarly, directors and officers of 

affiliates, subsidiaries or joint ventures of an 

insured institution or its holding company 

will be covered if they are in a position to 

influence or control the management or 

affairs of the insured institution. In those 

cases in which such individuals exercise 

policymaking functions for the insured 

institution, they should be deemed 

‘‘participants.’’ For example, officers of an 

electronic data processing (EDP) affiliate 

would not typically exercise a controlling 

influence to the extent that the affiliate 

simply provides a processing service to the 

bank. On the other hand, if a mortgage 

banking affiliate sends loans to an insured 

institution that the institution is obligated to 

purchase, then the officers of the affiliate 

may be participants in the insured 

institution’s affairs. Where an employee of an 

EDP service has access to sensitive bank 

records and the ability to manipulate data so 

as to influence or control the management or 

affairs of an insured institution, that person 

will be covered by section 19. The degree of 

such influence may be controlled by reliance 

upon the safeguards and internal controls put 

in place by the affiliate and the bank. Insured 

depository institutions continue to out source 

increasing numbers of banking tasks. To the 

extent that independent contractors are 

utilized, an analysis similar to that for 

affiliates may be applied. Typically an 

independent contractor does not have a 

relationship with the insured institution 

other than the activity contracted for by the 

depository institution. 

63 FR 66177, at 66178–66179 (December 1, 

1998). 

The Board agrees with the FDIC’s 

analysis and believes it is applicable to 

the credit union community as well. 

Therefore, the Board is of the view that 

very few of the contractors who perform 

services for credit unions will be 

involved to such a degree that they 

could be said to be influencing or 

controlling the management or affairs of 

a credit union. Only when the 

involvement of affiliates or independent 

contractors rise to the level of 

influencing or controlling the 

management or affairs of a credit union 

does the credit union need to be 

concerned about the criminal past of the 

employees of the affiliate or 

independent contractor. 

One commenter asked whether it 

would be sufficient to specify in 

contracts with vendors that no one who 

had been convicted of any criminal 

offense involving dishonesty or breach 

of trust would be allowed to have 

dealings with the credit union. The 

FDIC touched on this question in its 

preamble, stating that it ‘‘expects that 

the relationship between an 

independent contractor and an insured 

institution is to be governed by a written 

contract, through which the insured 

institution may require typical 

safeguards such as warranties and bond 

coverage.’’ Id, at 66179. Though not 

required by the IRPS, the additional 

contractual restriction on a contractor to 

not use employees who would 

otherwise be prohibited under Section 

205(d), as proposed by the commenter, 

would be a reasonable, additional 

safeguard. 

Several commenters expressed 

concern about the use of the term de 

facto employee. This is a common 

employment law concept that was 

adopted by the FDIC in its Statement of 

Policy Pursuant to Section 19 of the 

Federal Deposit Insurance Act to 

prevent individuals from circumventing 

the requirements of the law by simply 

claiming to be an independent 

contractor. As the FDIC explained: 


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2 ‘‘Federal preemption of state laws stems from 

the supremacy clause, U.S Const., art. V, cl. 2, 

which provides that the laws of the United States 

shall be the supreme law of the land, 

notwithstanding any state laws to the contrary. 

Preemption may be * * * implied by the nature of 

federal legislation and the subject matter, even 

absent a declaration of preemptive intent. Meyers v. 

Beverly Hills Federal Savings and Loan Ass’n, 499 

F.2d 1145, 1146 (9th Cir. 1974).’’ Opinion letter 

from Hattie M. Ulan, Associate General Counsel to 

Peter J. Liska, dated June 11, 1992, subject, Iowa 

Credit Card Registration Law. 

The FDIC is aware that an effort can be 

made to evade the coverage of section 19 by 

‘‘converting’’ an employee to an independent 

contractor. In those cases, generally 

applicable standards of employment law will 

be used to identify such arrangements, and 

to find that the person is a ‘‘de facto’’

employee. 

63 FR 66177, at 66179 (December 1, 1998). 

Whether an individual is actually an 

independent contractor or an employee 

(a de facto employee) has profound 

implications with respect to tax and 

other employment matters. In 

determining whether a person must 

request consent pursuant to Section 

205(d), the Board believes it is 

appropriate to consider what the 

employee actually does and their 

relationship to the credit union rather 

than simply whether they are called an 

independent contractor. Therefore, the 

final IRPS retains the concept that de 

facto employees, as determined by 

applying generally applicable standards 

of employment law, will also be subject 

to Section 205(d). Because it is not 

possible to provide more concrete 

definitions, the Board wants to 

emphasize that credit unions with any 

questions regarding whether a particular 

person comes within the scope of 

Section 205(d) may solicit guidance 

from NCUA’s Office of General Counsel. 

Two commenters expressed a desire 

for a more comprehensive definition of 

what offenses qualify as de minimis. 

One commenter proposed that the Board 

provide a comprehensive listing of 

offenses that involve dishonesty or 

breach of trust. Another commenter 

noted that almost every criminal offense 

could be said to involve dishonesty or 

breach of trust in some form, and asked 

whether virtually all convictions would 

be subject to Section 205(d). 

The Board understands the desire by 

credit unions for more certainty 

regarding when an application under 

Section 205(d) is required. However, 

considering the number of potential 

jurisdictions that have criminal statutes 

containing offenses involving 

dishonesty or breach of trust, it is 

simply not possible to provide an 

exhaustive list of such offenses. Thus, it 

remains the responsibility of each credit 

union to examine the elements of the 

statute under which an individual was 

convicted in order to determine whether 

it constitutes a crime involving 

dishonesty or breach of trust. 

Another commenter urged the Board 

to not simply provide the statutory cite 

to those offenses that qualify for the ten 

year limitation on the Board providing 

consent (found at Section 205(d)(2)), but 

rather to list such offenses separately. 

The Board is not inclined to provide an 

exhaustive list. Congress could amend 

the provision, resulting in the list 

becoming outdated and inaccurate until 

the IRPS is appropriately modified. The 

Board believes the better approach is to 

cite the reader to the exact statutory 

provision that contains the most current 

list of offenses Congress has made 

subject to the ten year ban. 

Five commenters expressed concerns 

as to whether the proposed IRPS would 

operate to require credit unions to 

conduct background checks or other 

inquiries of existing employees or 

institution-affiliated parties, if such 

investigations were not performed at the 

time those persons became affiliated 

with the credit union. In that regard, the 

Board would note that the prohibition of 

Section 205(d) has existed in some form 

since 1970. Since that date, credit 

unions have been required to make a 

diligent inquiry as to whether 

prospective employees or institutionaffiliated parties came within the 

prohibition imposed by Section 205(d). 

Section 205(d)(1)(B) contains a criminal 

provision that applies to credit unions 

and therefore, credit unions should 

determine for their own protection 

whether they have sufficiently 

examined the background of those 

previously allowed to serve as 

employees or institution-affiliated 

parties. 

Another commenter requested the 

Board to make clear that credit unions 

need not conduct background checks of 

prospective employees, but rather 

permit reliance on answers given by 

applicants. As stated in the proposed 

IRPS, ‘‘The NCUA believes that at a 

minimum, each insured credit union 

should establish a screening process 

which provides the insured credit union 

with information concerning any 

convictions or pretrial diversion 

programs pertaining to a job applicant. 

This would include, for example, the 

completion of a written employment 

application which requires a listing of 

all convictions and pretrial diversion 

programs.’’ The Board is cognizant that 

background checks are costly and timeconsuming. Therefore, the Board agrees 

with the commenter that credit unions 

are normally justified in relying on a job 

applicant’s answers regarding past 

criminal history. However, if a credit 

union has reason to believe that an 

applicant was not being truthful, further 

inquiry into the person’s past might be 

necessary under the circumstances. 

In order to provide more guidance to 

credit unions regarding screening of 

prospective employees, one commenter 

suggested the Board issue guidance 

similar to that published by the FDIC on 

the same topic. We understand the 

guidance referenced in the comment 

letter is FDIC’s Financial Institution 

Letter FIL–46–2005, dated June 1, 2005, 

and entitled ‘‘Pre-Employment 

Background Screening.’’ The guidance 

in FIL–46–2005, while perhaps useful, 

is beyond the scope of this IRPS. 

However, the agency will consider 

addressing the subject in another forum 

in the future. 

One commenter asked for guidance as 

to whether ‘‘good faith compliance with 

a similar state law may satisfy the 

requirements under’’ Section 205(d). 

The statute cited by the commenter was 

a New York law that prevented denial 

of employment because of a prior 

criminal conviction unless certain other 

factors were met. The Board disagrees 

that reliance on a state law that conflicts 

with the prohibition imposed by Section 

205(d) satisfies the requirements of the 

federal statute. The Board believes that 

in this circumstance, Section 205(d), as 

a federal statute, pre-empts any state 

law that conflicts with it.2

Consequently, federally insured credit 

unions must comply with Section 

205(d), even if doing so would appear 

to be in conflict with a state 

employment law. 

Two commenters suggested that the 

IRPS specify the length of time the 

Board would take to act on an 

application submitted for consent under 

Section 205(d). One commenter 

suggested the Board should be able to 

act on an application within fourteen 

business days; another suggested within 

five days. The Board appreciates the 

credit union community’s desire for 

certainty as to how quickly applications 

under Section 205(d) will be processed. 

However, each application is fact 

specific and varies in complexity. For 

that reason, the Board concludes that it 

is impracticable to set a time table for 

action on such applications. Past 

applications that have been submitted to 

the Board have generally been 

adjudicated within 60 days from 

submission. In most cases, the time was 

significantly less. The Board is 

committed to deciding applications for 

consent in the future as quickly as 

possible. 


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With respect to the factors the Board 

will consider when evaluating an 

application under Section 205(d), one 

commenter suggested the IRPS include 

two provisions contained in FDIC’s 

regulatory list of factors. Specifically, 

one of the suggested additions was a 

provision that would require the Board 

to consider whether a person’s 

participation in the affairs of the credit 

union would constitute a threat to its 

safety or soundness or the interest of its 

members, or would threaten to impair 

public confidence in the credit union. 

The other suggested addition would 

address whether the person would be 

eligible for bond coverage. 

The Board believes the first suggested 

provision is a valuable factor to be 

considered and accordingly will add the 

additional criteria to the final IRPS. 

Regarding the second suggestion, the 

Board notes that the proposed IRPS 

contained a similar provision to that 

suggested (‘‘(6) The applicability of the 

insured institution’s fidelity bond 

coverage to the person;’’). Thus, because 

of the similarity of the two provisions, 

the Board will retain the criteria 

unmodified from the proposed IRPS. 

Accordingly, and except as discussed 

above, the Board adopts IRPS 08–1 as 

proposed. 

C. Regulatory Procedures 

Regulatory Flexibility Act 

The Regulatory Flexibility Act 

requires that NCUA prepare an analysis 

describing any significant economic 

impact agency rulemaking may have on 

a substantial number of small credit 

unions. 5 U.S.C. 601 et seq. For 

purposes of this analysis, NCUA 

considers credit unions under $10 

million in assets as small credit unions. 

Since the requirements in this IRPS are 

generally restatements of requirements 

in other laws, NCUA does not believe 

this IRPS will have a significant 

economic impact on a substantial 

number of small credit unions. 

Paperwork Reduction Act 

This IRPS contains an application 

requirement. As required by the 

Paperwork Reduction Act of 1995, 44 

U.S.C. 3507(d), NCUA submitted a copy 

of the proposed IRPS to the Office of 

Management and Budget (OMB) for its 

review and approval. OMB approval of 

the Collection of Information is still 

pending. 

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. This IRPS applies to all federallyinsured credit unions, but does not have 

substantial direct effect 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 IRPS 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 

IRPS would not affect family well-being 

within the meaning of section 654 of the 

Treasury and General Government 

Appropriations Act of 1999, Public Law 

105–277, 112 Stat. 2681 (1998). 

By the National Credit Union 

Administration Board, on July 24, 2008. 

Paul M. Peterson, 

Acting Secretary of the Board. 

Authority: 12 U.S.C. 1752a, 1756, 1766, 

1785. 

Interpretive Ruling and Policy 

Statement 08–1 

Guidance Regarding Prohibitions 

Imposed by Section 205(d) of the 

Federal Credit Union Act 

I. Background 

This Interpretive Ruling and Policy 

Statement (IRPS) provides requirements, 

direction, and guidance to federallyinsured credit unions (insured credit 

unions) and individuals regarding the 

prohibition imposed by operation of law 

by Section 205(d) of the Federal Credit 

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

1785(d)). Section 205(d)(1) provides 

that, except with the prior written 

consent of the National Credit Union 

Administration (NCUA) Board, a person 

who has been convicted of any criminal 

offense involving dishonesty or breach 

of trust, or has agreed to enter into a 

pretrial diversion or similar program in 

connection with a prosecution for such 

offense may not: 

• Become, or continue as, an 

institution affiliated party with respect 

to any insured credit union; or 

• Otherwise participate, directly or 

indirectly, in the conduct of the affairs 

of any insured credit union. 

Section 205(d)(1)(B) further provides 

that an insured credit union may not 

allow any person described above to 

engage in any conduct or to continue 

any relationship prohibited by Section 

205(d). The statute imposes a ten-year 

ban against the NCUA Board granting 

consent for a person convicted of certain 

crimes enumerated in Title 18 of the 

United States Code. In order for the 

NCUA Board to grant consent during the 

ten-year period, the NCUA Board must 

file a motion with, and obtain the 

approval of, the sentencing court. 

(Section 205(d)(2)). Finally, Section 

205(d)(3) states that ‘‘whoever 

knowingly violates’’ (d)(1)(A) or 

(d)(1)(B) is committing a felony, 

punishable by up to five years in jail 

and a fine of up to $1,000,000 a day. 

This IRPS provides guidance to credit 

unions and individuals regarding who is 

subject to the prohibition provision of 

Section 205(d). The IRPS defines what 

offenses come within the prohibition 

provision of Section 205(d) and thus 

require an application for the NCUA 

Board’s consent to participate in the 

affairs of an insured credit union. The 

IRPS also identifies certain offenses that 

will be excluded from Section 205(d) 

and do not require the NCUA Board’s 

consent. In order to assist those who 

may need the consent of the NCUA 

Board to participate in the affairs of an 

insured credit union, the IRPS explains 

the procedures to request such consent, 

specifies the application form that must 

be used, clarifies the duty imposed on 

credit unions by Section 205(d), and 

identifies the factors the NCUA Board 

will consider in deciding whether to 

provide such consent. Finally, the IRPS 

explains how an applicant could appeal 

a decision by the NCUA Board denying 

an application for its consent. 

II. Policies and Procedures Regarding 

Prohibitions Imposed by Section 205(d) 

A. Scope of Section 205(d) of the FCU 

Act 

1. Persons Covered by Section 205(d) 

(a) Institution-affiliated parties. 

Section 205(d) of the FCU Act applies 

to institution-affiliated parties, as 

defined by Section 206(r) of the FCU 

Act (12 U.S.C. 1786(r)), and others who 

are participants in the conduct of the 

affairs of an insured institution. 

Institution-affiliated party means: 

(1) Any committee member, director, 

officer, or employee of, or agent for, an 

insured credit union; 

(2) Any consultant, joint venture 

partner, and any other person as 

determined by the Board (by regulation 

or on a case-by case basis) who 

participates in the conduct of the affairs 

of an insured credit union; and 

(3) Any independent contractor 

(including any attorney, appraiser, or 


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accountant) who knowingly or 

recklessly participates in—

(i) Any violation of any law or 

regulation; 

(ii) Any breach of fiduciary duty; or 

(iii) Any unsafe or unsound practice, 

which caused or is likely to cause more 

than a minimal financial loss to, or a 

significant adverse effect on, the insured 

credit union. (Section 206(r)). 

All officials, committee members and 

employees of an insured credit union 

fall within the scope of Section 205(d) 

of the FCU Act. Additionally, anyone 

NCUA determines to be a de facto 

employee, applying generally applicable 

standards of employment law, will also 

be subject to Section 205(d). 

Under Section 206(r), independent 

contractors are considered institutionaffiliated parties if they knowingly or 

recklessly participate in violations, 

unsafe or unsound practices or breaches 

of fiduciary duty which are likely to 

cause significant loss to, or a significant 

adverse effect on, an insured credit 

union. As a general rule, an 

independent contractor who influences 

or controls the management or affairs of 

an insured credit union, would be 

covered by Section 205(d). In addition, 

a ‘‘person’’’ for purposes of Section 

205(d) means an individual, and does 

not include a corporation, firm or other 

business entity. 

(b) Participants in the affairs of an 

insured credit union. 

A person who does not meet the 

definition of institution-affiliated party 

is nevertheless prohibited by Section 

205(d) if he or she is considered to be 

participating, directly or indirectly, in 

the conduct of the affairs of an insured 

credit union. Whether persons who are 

not institution-affiliated parties are 

covered depends upon their degree of 

influence or control over the 

management or affairs of an insured 

institution. Those who exercise major 

policymaking functions of an insured 

institution would be deemed 

participants in the affairs of that 

institution and covered by Section 

205(d). Participants in the affairs of a 

credit union is a term of art and is not 

capable of more precise definition. As 

the OTS stated in the preamble to its 

regulation regarding Section 19 of the 

FDIA: 

Given the changes in banking, including 

financial modernization and the rapid pace 

of technology, a regulatory listing of activities 

that constitute participation is neither 

practical nor advisable. Accordingly, like 

FDIC’s [Statement of Policy], the interim final 

rule does not define precisely what activities 

constitute ‘‘participation.’’ Rather, agency 

and court decisions will provide the guide as 

to what standards will be applied. As a 

general proposition, however, participation 

will depend upon the degree of influence or 

control over the management or affairs of the 

[insured credit union]. Those who exercise 

major policymaking functions at [an insured 

credit union] would fall within this category. 

72 FR 25948, at 25949 (May 8, 2007). 

NCUA agrees with that view and will 

not define what constitutes 

participation in the conduct of the 

affairs of an insured credit union but 

rather will analyze each individual’s 

conduct on a case-by-case basis and 

make a determination. 

2. Offenses Covered by Section 205(d) 

Except as indicated in paragraph (3), 

below, an application requesting the 

consent of the NCUA Board under 

Section 205(d) is required where any 

adult, or minor treated as an adult, has 

received a conviction by a court of 

competent jurisdiction for any criminal 

offense involving dishonesty or breach 

of trust (a covered offense), or where 

such person has entered a pretrial 

diversion or similar program regarding a 

covered offense. The following 

definitions apply: 

(a) Conviction. There must be a 

conviction of record. Section 205(d) 

does not apply to arrests, pending cases 

not brought to trial, acquittals, or any 

conviction which has been reversed on 

appeal. A conviction with regard to 

which an appeal is pending will require 

an application until or unless reversed. 

A conviction for which a pardon has 

been granted will require an 

application. 

(b) Pretrial Diversion or Similar 

Program. A pretrial diversion program, 

whether formal or informal, is 

characterized by a suspension or 

eventual dismissal of charges or 

criminal prosecution upon agreement by 

the accused to treatment, rehabilitation, 

restitution, or other non-criminal or 

non-punitive alternatives. Whether a 

program constitutes a pretrial diversion 

is determined by relevant federal, state 

or local law, and will be considered by 

the NCUA Board on a case-by-case 

basis. 

(c) Dishonesty or Breach of Trust. The 

conviction or entry into a pretrial 

diversion program must have been for a 

criminal offense involving dishonesty or 

breach of trust. 

‘‘Dishonesty’’ means directly or 

indirectly to cheat or defraud; to cheat 

or defraud for monetary gain or its 

equivalent; or wrongfully to take 

property belonging to another in 

violation of any criminal statute. 

Dishonesty includes acts involving want 

of integrity, lack of probity, or a 

disposition to distort, cheat, or act 

deceitfully or fraudulently, and may 

include crimes which federal, state or 

local laws define as dishonest. 

‘‘Breach of trust’’ means a wrongful 

act, use, misappropriation or omission 

with respect to any property or fund 

which has been committed to a person 

in a fiduciary or official capacity, or the 

misuse of one’s official or fiduciary 

position to engage in a wrongful act, 

use, misappropriation or omission. 

Whether a crime involves dishonesty 

or breach of trust will be determined 

from the statutory elements of the crime 

itself. All convictions for offenses 

concerning the illegal manufacture, sale, 

distribution of or trafficking in 

controlled substances shall require an 

application for the NCUA Board’s 

consent under Section 205(d). 

3. Offenses Not Covered by Section 

205(d) 

(a) De minimis Offenses. Approval is 

automatically granted and an 

application for the NCUA Board’s 

consent under Section 205(d) will not 

be required where the covered offense is 

considered de minimis, because it meets 

all of the following criteria: 

(1) There is only one conviction or 

entry into a pretrial diversion program 

of record for a covered offense; 

(2) The offense was punishable by 

imprisonment for a term of less than one 

year and/or a fine of less than $1,000, 

and the punishment imposed by the 

court did not include incarceration; 

(3) The conviction or pretrial 

diversion program was entered at least 

five years prior to the date an 

application would otherwise be 

required; 

(4) The offense did not involve an 

insured depository institution or 

insured credit union; and 

(5) The NCUA Board or any other 

federal financial institution regulatory 

agency has not previously denied 

consent under Section 205(d) of the 

FCU Act or Section 19 of the FDIA, 

respectively, for the same conviction or 

participation in a pretrial diversion 

program. 

Any person who meets the foregoing 

criteria must be covered by a fidelity 

bond to the same extent as other 

employees in similar positions. An 

insured credit union may not allow any 

person to participate in its affairs, even 

if that person has a conviction for what 

would constitute a de minimis covered 

offense, if the person cannot obtain 

required fidelity bond coverage. 

Any person who meets the foregoing 

criteria for a de minimis offense shall 

disclose the presence of the conviction 

or pretrial diversion program to all 

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institutions in the affairs of which he or 

she intends to participate. 

(b) Youthful offender adjudgments. 

An adjudgment by a court against a 

person as a ‘‘youthful offender’’ under 

any youth offender law, or any 

adjudgment as a ‘‘juvenile delinquent’’

by any court having jurisdiction over 

minors as defined by state law does not 

require an application for the NCUA 

Board’s consent under Section 205(d). 

Such adjudications will not be 

considered convictions for criminal 

offenses. 

(c) Expunged convictions. A 

conviction which has been completely 

expunged is not considered a conviction 

of record and will not require an 

application for the NCUA Board’s 

consent under Section 205(d). 

B. Duty Imposed on Credit Unions 

Section 205(d) imposes a duty upon 

every insured credit union to make a 

reasonable inquiry regarding the history 

of every applicant for employment. 

NCUA believes that inquiry should 

consist of taking steps appropriate 

under the circumstances, consistent 

with applicable law, to avoid hiring or 

permitting participation in its affairs by 

a person who has a conviction or 

participation in a pretrial diversion 

program for a covered offense. The 

NCUA believes that at a minimum, each 

insured credit union should establish a 

screening process which provides the 

insured credit union with information 

concerning any convictions or pretrial 

diversion programs pertaining to a job 

applicant. This would include, for 

example, the completion of a written 

employment application which requires 

a listing of all convictions and pretrial 

diversion programs. When the credit 

union learns that a prospective 

employee has a prior conviction or 

entered into a pretrial diversion 

program for a covered offense, the credit 

union must submit an application 

requesting the NCUA Board’s consent 

under Section 205(d) prior to hiring the 

person or otherwise permitting him or 

her to participate in its affairs. 

If an insured credit union discovers 

that an employee, official, or anyone 

else who is an institution-affiliated 

party or who participates, directly or 

indirectly, in its affairs, is in violation 

of Section 205(d), the credit union must 

immediately place that person on a 

temporary leave of absence from the 

credit union and file an application 

seeking the NCUA Board’s consent 

under Section 205(d). The person must 

remain on such temporary leave of 

absence until such time as the NCUA 

Board has acted on the application. 

When NCUA learns that an institutionaffiliated party or a person participating 

in the affairs of an insured credit union 

should have received the NCUA Board’s 

consent under Section 205(d) but did 

not, NCUA will look at the 

circumstances of each situation to 

determine whether the inquiry made by 

the credit union was reasonable under 

the circumstances. 

C. Procedures for Requesting the NCUA 

Board’s Consent Under Section 205(d) 

Section 205(d) of the FCU Act serves, 

by operation of law, as a statutory bar 

to participation in the affairs of an 

insured credit union, absent the written 

consent of the NCUA Board. When an 

application for the NCUA Board’s 

consent under Section 205(d) is 

required, the insured credit union must 

file a written application using the 

attached form with the appropriate 

NCUA Regional Director. The purpose 

of an application is to provide the 

applicant an opportunity to demonstrate 

that, notwithstanding the bar, the 

person is fit to participate in the 

conduct of the affairs of an insured 

credit union without posing a risk to its 

safety and soundness or impairing 

public confidence in that institution. 

Such an application should thoroughly 

explain the circumstances surrounding 

the conviction or pretrial diversion 

program. The applicant may also 

address the relevant factors and criteria 

the NCUA Board will consider in 

determining whether to grant consent, 

specified below. The burden is upon the 

applicant to establish that the 

application warrants approval. 

The application must be filed by an 

insured credit union on behalf of a 

person unless the NCUA Board grants a 

waiver of that requirement and allows 

the person to file an application in their 

own right. Such waivers will be 

considered on a case-by-case basis 

where substantial good cause for 

granting a waiver is shown. 

D. Evaluation of Section 205(d) 

Applications 

The essential criteria used by the 

NCUA Board in assessing an application 

for consent under Section 205(d) are 

whether the person has demonstrated 

his or her fitness to participate in the 

conduct of the affairs of an insured 

credit union, and whether the 

employment, affiliation, or participation 

by the person in the conduct of the 

affairs of the insured credit union may 

constitute a threat to the safety and 

soundness of the institution or the 

interests of its members or threaten to 

impair public confidence in the insured 

credit union. 

In evaluating an application, the 

NCUA Board will consider: 

1. The conviction or pretrial diversion 

program and the specific nature and 

circumstances of the covered offense; 

2. Evidence of rehabilitation, 

including the person’s reputation since 

the conviction or pretrial diversion 

program, the person’s age at the time of 

conviction or pretrial diversion 

program, and the time which has 

elapsed since the conviction or pretrial 

diversion program; 

3. Whether participation, directly or 

indirectly, by the person in any manner 

in the conduct of the affairs of the 

insured credit union constitutes a threat 

to the safety or soundness of the insured 

credit union or the interest of its 

members, or threatens to impair public 

confidence in the insured credit union; 

4. The position to be held or the level 

of participation by the person at the 

insured credit union; 

5. The amount of influence and 

control the person will be able to 

exercise over the management or affairs 

of the insured credit union; 

6. The ability of management of the 

insured credit union to supervise and 

control the person’s activities; 

7. The applicability of the insured 

institution’s fidelity bond coverage to 

the person; 

8. For state chartered, federally 

insured credit unions, the opinion or 

position of the state regulator; and 

9. Any additional factors in the 

specific case that appear relevant. 

The foregoing criteria will also be 

applied by the NCUA Board to 

determine whether the interests of 

justice are served in seeking an 

exception in the appropriate court when 

an application is made to terminate the 

ten-year ban for certain enumerated 

offenses in violation of Title 18 of the 

United States Code prior to its 

expiration date. NCUA believes such 

requests will be extremely rare and will 

be made only upon a showing of 

compelling reasons. 

Some applications can be approved 

without an extensive review because the 

person will not be in a position to 

present any substantial risk to the safety 

and soundness of the insured credit 

union. Persons who will occupy 

clerical, maintenance, service or purely 

administrative positions, generally fall 

into this category. A more detailed 

analysis will be performed in the case 

of persons who will be in a position to 

influence or control the management or 

affairs of the insured credit union. 

Approval by the NCUA Board will be 

subject to the condition that the person 

shall be covered by a fidelity bond to 


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the same extent as others in similar 

positions. 

In cases in which the NCUA Board 

has granted a waiver to allow a person 

to file an application in their own right, 

approval of the application will be 

conditioned upon that person disclosing 

the presence of the conviction to all 

insured credit unions or other insured 

financial institutions in the affairs of 

which he or she wishes to participate. 

When deemed appropriate, approval 

may also be subject to the condition that 

the prior consent of the NCUA Board 

will be required for any proposed 

significant changes in the person’s 

duties and/or responsibilities. Such 

proposed changes may, in the discretion 

of the appropriate Regional Director, 

require a new application for the NCUA 

Board’s consent. When approval has 

been granted for a person to participate 

in the affairs of a particular insured 

credit union and subsequently that 

person seeks to participate in the affairs 

of another insured credit union, 

approval does not automatically follow. 

In such cases, another application must 

be submitted. Moreover, any person 

who has received consent from the 

NCUA Board under Section 205(d) and 

subsequently wishes to become an 

institution affiliated party or participate 

in the affairs of an FDIC-insured 

institution, he or she must obtain the 

prior approval of the FDIC pursuant to 

Section 19 of the FDIA. 

E. Right To Request a Hearing Following 

the Denial of an Application Under 

Section 205(d) 

If the NCUA Board withholds consent 

under Section 205(d), the insured credit 

union (or in the case where a waiver has 

been granted, the individual that 

submitted the application) may request 

a hearing by submitting a written 

request within 30 days following the 

date of the NCUA Board’s action. The 

NCUA Board will apply the process 

contained in regulations governing 

prohibitions based on felony 

convictions, found at part 747, subpart 

D of Title 12, Code of Federal 

Regulations, to any request for a 

hearing. The insured credit union (or in 

the case where a waiver has been 

granted, the individual that submitted 

the application) may also waive a 

hearing and request that the NCUA 

Board determine the matter on the basis 

of written submissions. 

BILLING CODE 7535–01–P 


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[FR Doc. E8–19158 Filed 8–18–08; 8:45 am] 

BILLING CODE 7535–01–C 


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1 15 U.S.C. 78s(b)(1). 

2Securities Exchange Act Release No. 57392 

(February 27, 2008), 73 FR 12485. 

3The National Securities Clearing Corporation 

(‘‘NSCC’’) filed and the Commission has approved 

a similar proposed rule change that would permit 

NSCC to adopt a similar policy statement with 

respect to the admission of foreign entities as 

members. Securities Exchange Act Release No. 

58344 (August 12, 2008) (File No. SR–NSCC–2007–

15). 

4Securities Exchange Act Release No. 28754 

(January 8, 1991), 56 FR 1548 (January 15, 1991) 

(File No. SR–DTC–90–01). 

5 DTC recognized, however, that any person 

designated by the Commission pursuant to Section 

17A(b)(3)(B)(vi) of the Act, even if not subject to 

such regulatory oversight, would be eligible for 

admission. The 1990 Policy Statement was 

approved by the Commission on January 8, 1991. 

6 DTC’s proposed ‘‘Policy Statement on the 

Admission of Non-U.S. Entities as Direct Depository 

Participants’’ is attached as Exhibit 5 to its filing, 

which can be found at http://www.dtcc.com/

downloads/legal/rule_filings/2007/dtc/2007–16.pdf. 

7Time zone differences may complicate 

communications between a foreign participant and 

its U.S. Settling Bank with respect to the timely 

payment of the participant’s net debit to DTC 

including intraday demands for payment. These 

differences may also delay DTC’s receipt of 

information available in the foreign participant’s 

home country to others including its other creditors 

about the foreign participant’s financial condition 

on the basis of which DTC would have taken steps 

to protect the interests of DTC and its participants. 

8 In the Foreign Entity Policy Statement, DTC has 

reserved the right to waive certain of these criteria 

where such criteria are inappropriate to a particular 

applicant or class of applicants (e.g., a foreign 

government or international or national central 

securities depositories). 

SECURITIES AND EXCHANGE 

COMMISSION 

Sunshine Act Meeting 

Notice is hereby given, pursuant to 

the provisions of the Government in the 

Sunshine Act, Pub. L. 94–409, that the 

Securities and Exchange Commission 

will hold a Closed Meeting on 

Thursday, August 21, 2008 at 2 p.m. 

Commissioners, Counsel to the 

Commissioners, the Secretary to the 

Commission, and recording secretaries 

will attend the Closed Meeting. Certain 

staff members who have an interest in 

the matters also may be present. 

The General Counsel of the 

Commission, or his designee, has 

certified that, in his opinion, one or 

more of the exemptions set forth in 5 

U.S.C. 552b(c)(3), (5), (7), 9(B) and (10) 

and 17 CFR 200.402(a)(3), (5), (7), 9(ii) 

and (10), permit consideration of the 

scheduled matters at the Closed 

Meeting. 

Commissioner Paredes, as duty 

officer, voted to consider the items 

listed for the Closed Meeting in closed 

session. 

The subject matter of the Closed 

Meeting scheduled for Thursday, 

August 21, 2008 will be: 

Formal orders of investigation; 

institution and settlement of injunctive 

actions; 

institution and settlement of 

administrative proceedings of an 

enforcement nature; and 

adjudicatory matters. 

At times, changes in Commission 

priorities require alterations in the 

scheduling of meeting items. 

For further information and to 

ascertain what, if any, matters have been 

added, deleted or postponed, please 

contact: 

The Office of the Secretary at (202) 

551–5400. 

Dated: August 14, 2008. 

Florence E. Harmon, 

Acting Secretary. 

[FR Doc. E8–19214 Filed 8–18–08; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–58345; File No. SR–DTC–

2007–16] 

Self-Regulatory Organizations; The 

Depository Trust Company; Order 

Granting Approval of a Proposed Rule 

Change Relating to the Admission of 

Foreign Entities as Direct Depository 

Participants 

August 12, 2008. 

I. Introduction 

On November 16, 2007, The 

Depository Trust Company (‘‘DTC’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’) and on 

February 5, 2008, amended proposed 

rule change SR–DTC–2007–13 pursuant 

to Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Act’’).1 Notice 

of the proposal was published in the 

Federal Register on March 7, 2008.2 No 

comment letters were received. For the 

reasons discussed below, the 

Commission is granting approval of the 

proposed rule change as modified by 

Amendment No. 1. 

II. Description 

The proposed rule change amends 

DTC’s policy statement regarding the 

admission of participants to permit 

entities that are organized in a foreign 

country and are not subject to U.S. 

federal or state regulation (‘‘foreign 

entities’’) to become eligible to become 

direct DTC participants (‘‘Foreign Entity 

Policy Statement’’).3

In 1990, DTC adopted a Policy 

Statement on the Admission of 

Participants (‘‘1990 Policy Statement’’) 

to make clear that in determining 

whether to grant access to its services, 

DTC regards as a critical factor that an 

applicant is subject to comprehensive 

U.S. federal or state regulation relating 

to, among other things, capital 

adequacy, financial reporting and 

recordkeeping, operating performance, 

and business conduct.4 Generally under 

the 1990 Policy Statement, unless an 

applicant is subject to U.S. federal or 

state regulatory agency oversight, the 

applicant would not be eligible to 

become a DTC participant.5 Since 1990, 

DTC has admitted a small number of 

foreign entities where their obligations 

to DTC have been guaranteed by 

creditworthy DTC participants. 

The purpose of the proposed Foreign 

Entity Policy Statement is to establish 

admissions criteria that will permit 

well-qualified foreign entities to become 

participants of DTC and to obtain direct 

access to DTC’s services while assuring 

that the unique risks associated with the 

admission of foreign entities are 

adequately addressed.6

The admission of foreign entities as 

participants raises a number of unique 

risks and issues, including that (1) the 

entity is not subject to U.S. federal or 

state regulation, (2) that the operation of 

the laws of the entity’s home country 

and time zone differences 7 may impede 

the successful exercise of DTC’s rights 

and remedies particularly in the event 

of the entity’s failure to settle, and (3) 

financial information about the foreign 

entity made available to DTC for 

monitoring purposes may be less 

adequate than the financial information 

about U.S.-based entities. 

The Foreign Entity Policy Statement 

requires that in addition to executing 

the standard DTC Participation 

Agreement the foreign entity enter into 

a series of undertakings and agreements 

that are designed to address 

jurisdictional concerns and to assure 

that DTC is provided with audited 

financial information that is acceptable 

to DTC.8 The proposed policy statement 

would also require that the foreign 

entity (1) be subject to regulation in its 

home country and (2) be in good 


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