[Federal Register Volume 66, Number 245 (Thursday, December 20, 2001)]
[Proposed Rules]
[Pages 65662-65663]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-31287]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701


Organization and Operations of Federal Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule with request for comments.

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SUMMARY: NCUA proposes to amend its rule that permits a federal credit 
union to provide reasonable retirement benefits to its employees and 
officers. The amendments clarify the scope of the rule.

DATES: Comments must be received on or before February 19, 2002.

ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail 
or hand-deliver comments to: National Credit Union Administration, 1775 
Duke Street, Alexandria, Virginia 22314-3428. You are encouraged to fax 
comments to (703) 518-6319 or e-mail comments to <a href="/cdn-cgi/l/email-protection#c2b0a7a5a1adafafa7acb6b182aca1b7a3eca5adb4"><span class="__cf_email__" data-cfemail="beccdbd9ddd1d3d3dbd0cacdfed0ddcbdf90d9d1c8">[email protected]</span></a> 
instead of mailing or hand-delivering them. Whatever method you choose, 
please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Frank Kressman, Staff Attorney, Office 
of General Counsel, at the above address or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION: Section 701.19(a) states that a federal 
credit union (FCU) may provide reasonable retirement benefits for it 
employees and officers. 12 CFR 701.19(a). NCUA wishes to clarify that 
the scope of Sec. 701.19(a) is not limited only to retirement benefits, 
but is more broadly applicable to other employee benefit plans.
    As competition to attract and retain highly qualified employees has 
increased and the employee benefits marketplace has become more 
sophisticated, FCUs are increasingly providing more diverse and less 
traditional forms of employee benefits including, for example, deferred 
compensation plans and stock option plans. As a result, FCUs need 
flexibility to use safe, reasonable and efficient methods to fund their 
employee benefit obligations. In addition to providing this 
flexibility, the proposed rule updates the regulatory language to 
reflect current employee benefits terminology including renaming the 
rule ``Benefits for Employees of Federal Credit Unions.''
    An FCU investing on its own behalf is subject to the investment 
provisions of the Federal Credit Union Act (Act) and NCUA regulations. 
12 U.S.C. 1757(7), (8), (15); 12 CFR part 703. In legal opinion 
letters, the NCUA's Office of General Counsel has stated that these 
investment provisions do not apply when an FCU is acting under its 
authority to provide and fund retirement or other employee benefits. 12 
U.S.C. 1761b(12); 12 CFR 701.19. NCUA's long-standing position is that 
an FCU may purchase an otherwise impermissible investment to fund an 
employee benefit obligation as long as there is a direct connection 
between the investment and the employee benefit obligation it serves to 
fund. In that context, NCUA has also stated that once the obligation 
ceases to exist, the FCU must divest itself of the impermissible 
investment.
    For example, an FCU is generally not permitted to purchase equity 
investments when investing for its own account. An FCU that is 
obligated under an employee benefit plan to provide an employee with 
100 shares of XYZ Corporation stock on a specific date, however, may 
purchase and hold 100 shares of that stock for that purpose. It may 
not, however, purchase 100 shares of ABC Corporation stock. In that 
instance, there would not be a sufficient connection between the 
investment and the obligation to be funded.
    NCUA is aware that it is not uncommon for for-profit corporations 
to provide employee benefits that contain investment options the 
employee may exercise after he or she has separated or retired from the 
employer. For example, an employer may grant an employee the option to 
purchase a fixed number of shares in a mutual fund for a fixed price on 
a specific date after the employee separates or retires from the 
employer.
    These post-separation or post-retirement options would require a 
prudent FCU to buy and hold shares in that mutual fund to fund the 
potential obligation it faces after its employee has separated or 
retired. In legal opinion letters, the NCUA's Office of General Counsel 
has also taken the position that an FCU may hold an impermissible 
investment to fund an ongoing employee benefit obligation after the 
employee separates or retires provided the investment option period is 
reasonable. Upon the exercise or expiration of the option, the FCU must 
divest itself of the impermissible investment. The proposed regulation 
incorporates the positions taken by the Office of General Counsel in 
these legal opinion letters.
    An FCU must comply with safety and soundness standards by ensuring 
that the kind and value of employee benefits it offers are reasonable 
given its size and financial condition. Furthermore, an FCU's authority 
to offer and fund an employee benefit plan does not guarantee the 
permissibility of the plan under other laws, such as the Employee 
Retirement Income Security Act (ERISA) or the Internal Revenue Code. 29 
U.S.C. 1001; 26 U.S.C. 1.
    Additionally, FCUs with assets over $10 million are reminded that 
they are required to account for their employee benefit plans in 
accordance with generally accepted accounting principles (GAAP). FCUs 
with assets under $10 million are not required to follow GAAP, but are 
encouraged to do so in this context. All FCUs are encouraged to seek 
the advice of an independent accountant if they have questions 
regarding the proper accounting for these benefit plans.
    Finally, Sec. 701.19(b) provides that an FCU acting as a fiduciary, 
as defined in ERISA, must obtain appropriate liability coverage as 
provided in 410(b) of ERISA. NCUA wishes to clarify that 410(b) of 
ERISA describes certain kinds of insurance coverage and permits certain 
parties to purchase that insurance, but does not require any party to 
purchase insurance. 29 U.S.C. 1110.

[[Page 65663]]

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a proposed rule may have on 
a substantial number of small credit unions (those under one million 
dollars in assets). The proposed rule only clarifies that credit unions 
have additional options and flexibility to manage their employee 
benefit obligations without imposing any regulatory burden. The 
proposed rule would not have a significant economic impact on a 
substantial number of small credit unions, and therefore, a regulatory 
flexibility analysis is not required.

Paperwork Reduction Act

    NCUA has determined that the proposed rule would 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 proposed rule would not have substantial 
direct effects on the states, on the connection 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 proposed rule 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 this proposed rule would not affect 
family well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 
2681 (1998).

Agency Regulatory Goal

    NCUA's goal is to promulgate clear and understandable regulations 
that impose minimal regulatory burden. We request your comments on 
whether the proposed rule is understandable and minimally intrusive.

List of Subjects in 12 CFR Part 701

    Credit unions.

    By the National Credit Union Administration Board on December 
13, 2001.
Becky Baker,
Secretary of the Board.
    Accordingly, NCUA proposes to amend 12 CFR part 701 as follows:

PART 701--ORGANIZATION AND OPERATIONS 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. Section 701.6 is also 
authorized by 15 U.S.C. 3717. Section 701.31 is also authorized by 
15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610. Section 701.35 
is also authorized by 42 U.S.C. 4311-4312.
    2. Revise Sec. 701.19 to read as follows:


Sec. 701.19  Benefits for employees of Federal credit unions.

    (a) General authority. A federal credit union may provide employee 
benefits, including retirement benefits, to its employees and officers 
who are compensated in conformance with the Act and the bylaws, 
individually or collectively with other credit unions. The kind and 
value of these benefits must be reasonable given the federal credit 
union's size and financial condition. Where a federal credit union is 
the benefit plan trustee or custodian, the plan must be authorized and 
maintained in accordance with the provisions of part 724 of this 
chapter. Where the benefit plan trustee or custodian is a party other 
than a federal credit union, the benefit plan must be maintained in 
accordance with applicable laws governing employee benefit plans, 
including any applicable rules and regulations issued by the Secretary 
of Labor, the Secretary of the Treasury, or any other federal or state 
authority exercising jurisdiction over the plan.
    (b) Investments. A federal credit union investing to fund an 
employee benefit plan obligation is not subject to the investment 
provisions of the Act and part 703 of this chapter and may purchase an 
investment that would otherwise be impermissible if:
    (1) The investment is directly related to the federal credit 
union's obligation or potential obligation under the employee benefit 
plan; and
    (2) The federal credit union holds the investment only for as long 
as it has an actual or potential obligation under the employee benefit 
plan.
    (c) Liability insurance. No federal credit union may occupy the 
position of a fiduciary, as defined in the Employee Retirement Income 
Security Act of 1974 and the rules and regulations issued by the 
Secretary of Labor, unless it has obtained appropriate liability 
insurance as described and permitted by section 410(b) of the Employee 
Retirement Income Security Act of 1974.

[FR Doc. 01-31287 Filed 12-19-01; 8:45 am]
BILLING CODE 7535-01-U


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