Federal Deposit Insurance Act: FTC Best Among Candidates to Enforce Consumer Protection Provisions
Published: 2003-08-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: This mandated report responds to Congressional concerns that provisions in section 43 of the Federal Deposit Insurance Act (FDI Act) are not being enforced. Since 1991, section 43 has required, among other things, depository institutions lacking federal deposit insurance to conspicuously disclose that deposits in these institutions are not federally insured. GAO's objectives were to (1) determine the current status of the enforcement of provisions in section 43; (2) determine the extent of compliance with each provision and the potential impact on consumers if the provisions were not enforced; and (3) evaluate which federal agency could most effectively enforce the provisions.
section_title: What GAO Found
paragraphs: The Federal Trade Commission (FTC) is responsible for enforcing compliance with the provisions in section 43 of the FDI Act. However, due to a variety of concerns, FTC has requested and appropriators have agreed to prohibit FTC from enforcing these provisions. The National Credit Union Administration (NCUA) and state regulators have imposed some related requirements on credit unions and private deposit insurers. While these requirements are not the same as those in section 43 provisions, they provide some assurances that certain actions contemplated by section 43 are being satisfied. Some privately insured credit unions GAO visited did not adequately disclose that these institutions were not federally insured; as a result, depositors at these institutions may not be fully informed that their deposits are not federally insured. For example, in unannounced site visits to 57 privately insured credit unions in Alabama, California, Illinois, Indiana, and Ohio, GAO found that required notices were not posted in 37 percent of the locations. No federal agency is ideally suited to carry out the responsibilities outlined in section 43. Although FTC, NCUA, and the Federal Deposit Insurance Corporation (FDIC) officials generally agreed that consumers should receive information about the insured status of their deposits, they strongly maintained that their respective agencies should not enforce these provisions. NCUA and FDIC officials objected to enforcing these provisions because their agencies have no direct interest in uninsured institutions and their involvement in the enforcement of these requirements could undermine the purposes of the provision. FTC staff raised jurisdictional concerns and asserted that its mission, resources, and practices were ill suited for such a role. GAO believes that clarifying FTC's authority and providing it with additional flexibility in administering these provisions represents the best option to enforce the provisions.

section_title: Letter
paragraphs: After financial crises in the 1980s caused record losses in federal deposit  insurance funds, Congress enacted legislation—the Federal Deposit  Insurance Corporation Improvement Act of 1991 (FDICIA)—that made  fundamental changes to federal oversight of depository institutions and  added section 43 to the Federal Deposit Insurance Act (FDI Act). Under  the section 43 disclosure requirement, depository institutions that lack  federal deposit insurance must conspicuously inform consumers that their  deposits are not federally insured. The recent conversion of a large  federally insured credit union to private deposit insurance has raised  concerns whether privately insured credit unions are complying with  requirements under this section to ensure that members understand that  the federal government does not guarantee their accounts.
In addition to the disclosure requirements, section 43 requires that an  institution lacking federal deposit insurance be shut down if the  institution’s state regulator has not determined its eligibility for federal  deposit insurance. The section also requires any provider of private  deposit insurance to obtain and distribute an independent annual audit to  each depository institution it insures and appropriate supervisory agency  of each state in which such an institution receives deposits. In this report,  we refer to these requirements as section 43 disclosure, shut-down, and  annual audit provisions.
The Federal Trade Commission (FTC or Commission) is statutorily  responsible for enforcing compliance with section 43. However, FTC has  never taken action to enforce section 43. Rather, FTC has requested that it  not enforce these requirements by seeking and obtaining in its  appropriations authority a prohibition against spending appropriated  funds to carry out these provisions. As a result, no federal entity is  enforcing compliance with section 43.
This report responds to Congressional concerns that section 43 provisions  are not being enforced. Specifically, the Conference Report accompanying  the Fiscal Year 2003 Consolidated Appropriations Act mandated that we  (1) determine the current status of enforcement of these requirements; (2)  determine the extent of compliance with each requirement—disclosure,  shut down, and annual audit—and the potential impact on consumers if  these requirements are not enforced; and (3) evaluate which federal  agency could most effectively enforce section 43.
As agreed with committee staff, we limited our assessment of “depository  institutions lacking federal deposit insurance” to state-chartered credit  unions that purchase private primary deposit insurance. To determine the  current status of enforcement of section 43 requirements, and whether  other laws or rules impose requirements similar to those of section 43, we  interviewed and reviewed available documentation from FTC staff and  officials from the National Credit Union Administration (NCUA), the  Federal Deposit Insurance Corporation (FDIC), and American Share  Insurance (ASI)—the remaining provider of nonfederal (private) deposit  insurance. We also surveyed the 50 state credit union regulators to  determine which states permitted private deposit insurance. We  interviewed regulatory officials in Alabama, California, Idaho, Illinois,  Indiana, Maryland, Nevada, New Hampshire, and Ohio, which include  those states where credit unions were permitted and chose not to obtain  federal depository insurance. To determine the extent of compliance with  section 43 and the potential impact on consumers from nonenforcement,  we conducted unannounced site visits to 57 locations of privately insured  institutions in Alabama, California, Illinois, Indiana, and Ohio. The purpose  of these visits was to determine whether state-chartered, privately insured  credit unions were providing notice that they were not federally insured.  The credit union locations were selected based on a convenience sample  using state and city location coupled with random selection of main or  branch locations within each city. We also discussed the impact of  nonenforcement with federal and state regulators noted above. To  evaluate which federal agency could most effectively enforce these  requirements, we interviewed FTC staff and officials from NCUA, FDIC,  and various interested industry groups to discuss their perspectives and  obtain their positions on enforcement of section 43 requirements. We also  conducted legal research and analysis related to these provisions. We  conducted our work in Washington, D.C., Alabama, California, Indiana,  Illinois, Maryland, Massachusetts, Ohio, and Virginia between February  and August 2003, in accordance with generally accepted government  auditing standards. We discuss our scope and methodology in more detail  in appendix I.
subsections: section_title: Background
paragraphs: Under federal and state laws, all federally chartered depository institutions  and the vast majority of state-chartered institutions are required to have  federal deposit insurance. The federal deposit insurance funds were  established to restore and maintain depositors’ confidence in the banking  system by providing a government guarantee of deposits. This guarantee  insures that a person’s money on deposit with an insured institution,  within certain limits, would be safe and helps negate the need for  depositors having to assess the financial condition of their financial  institution. FDIC administers the Bank Insurance Fund (BIF) and the  Savings Association Insurance Fund (SAIF). Deposit accounts maintained  at banks and thrifts generally are federally insured, regardless of who  charters the institution. Similarly, credit unions that are federally  chartered must be federally insured by the National Credit Union Share  Insurance Fund (NCUSIF), which is administered by NCUA. Almost all  (98 percent) credit unions are federally insured. As of December 2002,  9,688 credit unions were federally insured, with about 81 million members  and $483 billion in deposits.
However, in our survey of the 50 state regulators, we found that not all  states require federal deposit insurance for credit unions they charter. As  of December 2002, 212 credit unions—about 2 percent of all credit  unions—chose to purchase private deposit insurance. These privately  insured credit unions are located in eight states and had about 1.1 million  members with deposits totaling about $10.8 billion, as of December 2002— a little over 1 percent of all credit union members and 2 percent of all  credit union deposits. We identified nine additional states that could  permit credit unions to purchase private deposit insurance through our  survey of 50 state regulators and subsequent discussions with state  regulators. Figure 1 illustrates the states that permit or could permit  private deposit insurance as of March 2003 and the number of privately  insured credit unions as of December 2002.
The number of privately insured credit unions and private deposit insurers  has declined significantly since 1990. In 1990, 1,462 credit unions in 23  states purchased private deposit insurance from 10 different nonfederal,  private insurers. At that time, deposits at these credit unions totaled $18.6  billion—73 percent more than the total of privately insured deposits as of  December 2002. Shortly after the failure of Rhode Island Share and  Depositors Indemnity Corporation (RISDIC), a private deposit insurer in  Rhode Island in 1991, almost half of all privately insured credit unions  converted to federal deposit insurance voluntarily or by state mandate. As  a result of the conversions from private to federal deposit insurance, most  private deposit insurers have gone out of business due to the loss of their  membership since 1990 and only one company—ASI—currently offers  private primary deposit insurance.
ASI has a statutory charter granted by the State of Ohio. ASI is licensed  by the Ohio Superintendent of Insurance and is subject to oversight by  that department and Ohio’s Superintendent of Credit Unions. Unlike  federal deposit insurance, which is backed by the full faith and credit of  the United States, ASI’s insurance fund is not backed by the full faith and  credit of any governmental entity. Also, in contrast to federal deposit  insurance, which covers up to $100,000 in an insured account, the  coverage amount provided by ASI is subject to a $250,000 statutory cap in  Ohio law.
Depository institutions lacking federal deposit insurance—privately  insured credit unions—do not directly present a risk to the respective  federal deposit insurance funds and do not pay for participation in those  funds. Accordingly, they are not subject to supervision by the agencies  that administer those funds. The Federal Credit Union Act contains  criteria for credit unions applying for federal deposit insurance from  NCUA and requires NCUA to consider a list of factors before approving an  application to become federally insured. For example, NCUA must assess  the credit union’s financial condition, the adequacy of reserves, the fitness  of management, and the convenience and needs of the members to be  served by the institution. To continue to be eligible for federal deposit  insurance, credit unions must continue to comply with NCUA regulations  for measures of net worth, prompt corrective action requirements, and  rules governing investment and deposit activities.
subsections: section_title: Section 43 Requirements
paragraphs: Section 43 imposes requirements on depository institutions lacking federal  deposit insurance and private deposit insurers and assigns FTC with the  responsibility for enforcing compliance with these provisions. Specifically,  section 43 requires depository institutions lacking federal deposit  insurance to  Include conspicuously on all periodic account statements, signature  cards, passbooks, certificates of deposits, or similar instruments  evidencing a deposit, a notice that the institution is not federally  insured and that if the institution fails, the federal government does not  guarantee that depositors will get back their money; Include conspicuously in all advertising and where deposits are  normally received a notice that the institution is not federally insured;  and   Obtain a written acknowledgement from depositors that the institution  is not federally insured and that if the institution fails, the federal  government does not guarantee that the depositor will get back their  money.
In addition, section 43 prohibits institutions lacking federal deposit  insurance from engaging in interstate commerce unless the appropriate  supervisor of the institution’s charter state has determined that the  institution meets all eligibility requirements for federal deposit insurance.  This prohibition is referred to as the “shut-down” provision.
With respect to private deposit insurers, section 43 requires each insurer  to    Obtain an annual audit from an independent auditor using generally  accepted auditing standards that includes a determination of whether  the private deposit insurer follows generally accepted accounting  principles and has set aside sufficient reserves for losses; and    Distribute copies of the audit report to each depository institution it  insures and to the appropriate supervisory agency of each state in  which such an institution receives deposits, within specified time  frames.
With respect to FTC, section 43    Requires the Commission to prescribe “the manner and content of  disclosure required under the section” in order to “ensure that current  and prospective customers understand the risks involved in forgoing  federal deposit insurance;”
Assigns to FTC the responsibility to enforce compliance with the  section under the Federal Trade Commission Act (FTC Act);    Authorizes FTC to determine that an institution not chartered as a  depository institution nonetheless is subject to the section, referred to  as the look-alike provision; and   Authorizes FTC, in consultation with FDIC, to exempt an institution  from the shut-down provision.
Since being charged with the responsibility to enforce and implement  these requirements, FTC has requested Congress to prohibit it from  enforcing these provisions. In response, FTC’s appropriation language,  since 1993, has contained provisions prohibiting it from using funds to  implement these provisions.
FTC has authority to enforce a variety of federal antitrust and consumer  protection laws. According to FTC, it works to enhance the smooth  operation of the marketplace by eliminating acts or practices that are  unfair or deceptive, and its efforts have been directed toward stopping  actions that threaten consumers’ opportunities to exercise informed  choice. The FTC Act charges FTC with responsibility for preventing the  use of unfair methods of competition and unfair or deceptive acts or  practices. That act, however, provides that FTC’s powers generally do not  extend to depository institutions—banks, thrifts, and federal credit  unions—which typically are beyond FTC’s authority. In addition, one  section of the FTC Act has been interpreted to mean that FTC does not  have jurisdiction over nonprofit corporations.
section_title: NCUA and State Regulators Imposed Related Disclosure and Audit Requirements
paragraphs: Consistent with its appropriations authority prohibiting FTC from  enforcing section 43, FTC has not implemented regulations or orders to  prescribe the manner and content of required disclosures; to date, FTC has  not brought any enforcement cases as a result of the identification of  noncompliance with the disclosure, shut-down, and annual audit  provisions. As part of this review, we also ascertained whether other laws  or rules impose requirements similar to those of section 43. We found that  NCUA and state regulators have imposed disclosure and audit  requirements on state-chartered credit unions and private deposit insurers  that, while not comparable to section 43 requirements, help achieve the  objectives of section 43.
For example, NCUA imposes notification requirements on federally  insured credit unions seeking to convert to private deposit insurance.  NCUA requires these credit unions to notify their members, in a  disclosure, that if the conversion were approved, the federal government  would not insure deposits. Specifically, under the Federal Credit Union  Act, if a federally insured credit union terminates federal deposit  insurance or converts to nonfederal (private) insurance, the institution  must give its members “prompt and reasonable notice” that the institution  has ceased to be federally insured. NCUA rules implement these  provisions by prescribing language to be used in (1) the notices of the  credit union’s proposal to terminate federal deposit insurance or convert  to nonfederal (private) insurance, (2) an acknowledgement on the voting  ballot of the member’s understanding that federal deposit insurance will  terminate, and (3) the notice of the termination or conversion. Under  NCUA’s rules, the prescribed language is to include a statement apprising  members that their accounts no longer would be federally insured. Other  language to be included on the notice of a proposal to convert to private  deposit insurance and on the related voting ballot is to state that NCUA’s  insurance is backed by the full faith and credit of the United States and  that the private deposit insurance is not backed by the full faith and credit  of the United States.
While NCUA’s disclosure requirements provide some assurance that  current members of credit unions converting to private deposit insurance  are notified of the lack of federal deposit insurance coverage, these NCUA  regulations do not apply to institutions that never were federally insured.  In addition, disclosures contained in NCUA’s required notifications are not  as extensive as disclosures required under section 43. NCUA disclosure  pertains to a specific event (termination of insurance or conversion to  private deposit insurance) and is provided only to those individuals who  are members of the credit union at the time of the event. Section 43, on the  other hand, requires disclosure to all members who are depositors,  including those individuals who become members after the credit union  has terminated federal deposit insurance. Section 43 also requires that  depositors acknowledge in writing that the institution is not federally  insured and that no federal guarantee exists. In addition, under section  43, an institution’s lack of federal deposit insurance must be stated, on an  ongoing basis, in periodic account statements, signature cards, passbooks  and instruments evidencing a deposit, and in advertising and displays.
In our review of Ohio’s law, we noted that Ohio imposes certain disclosure  requirements about the insured status of depository accounts. Ohio law  requires credit union brochures that include the name of the private  deposit insurer to also include a specific notice: “Members Accounts Are  Not Insured or Guaranteed by Any Government or Government-sponsored  Agency.” The requirements we reviewed, like Ohio law, typically do not  require disclosure of the same information or in the same manner as is  required by section 43.
Ohio also imposes several requirements on the remaining private deposit  insurer, ASI. For example, Ohio requires ASI to submit annual audited  financial statements and quarterly unaudited financial statements to Ohio  regulators. While this annual audit requirement is similar to the section 43  provision, Ohio does not require private deposit insurers to distribute this  information to the appropriate supervisory agency of each state in which it  insures deposits nor to depository institutions in which it insures   deposits.
section_title: Compliance with Section 43 Provisions Varied; Potential Impact on Consumers Most Evident in Credit Union Noncompliance with Disclosure Requirements
paragraphs: Compliance with section 43 disclosure, shut-down, and annual audit  requirements varied considerably. The most likely impact on consumers  from the lack of enforcement of these provisions may result from credit  unions not providing adequate disclosures about not being federally  insured. We found that many privately insured credit unions have not  always complied with the disclosure requirements in section 43 that are  designed to notify consumers that the deposits in these institutions are not  federally insured. While state regulators and ASI officials reported  monitoring whether privately insured credit unions disclosed the lack of  federal deposit insurance to depositors, we found that these actions varied  and did not ensure that all credit unions complied with required  disclosures. As a result, depositors at some privately insured credit unions  may not be adequately informed that deposits at these institutions are not  federally insured. Regarding the shut-down provision, state regulators  reported to us that they did not make explicit determinations of  insurability but we found that such a determination may not provide a  meaningful protection for consumers. The remaining private deposit  insurer complied with the annual audit requirements, making it possible  for state regulators and member credit unions to become informed about  the insurer’s financial condition. Therefore, the lack of enforcement of this  provision appears to have had no direct effect on consumers.
subsections: section_title: The Lobbies, Materials, and Web Sites of Many Privately Insured Credit Unions Lacked Disclosures as Required under Section 43
paragraphs: Section 43 requires privately insured credit unions to disclose to their  members that deposits at these institutions are (1) not federally insured  and (2) if the institution fails, the federal government does not guarantee  that depositors will get back their money. Specifically, these institutions  are required to disclose this information at places where deposits are  normally received (lobbies) and on signature cards, and on instruments  evidencing a deposit (deposit slips). Advertising (brochures and  newsletters) must also contain the statement that the institutions are not  federally insured. We conducted unannounced site visits to 57 locations of  privately insured credit unions (49 main and 8 branch locations) in five  states—Alabama, California, Illinois, Indiana, and Ohio. On our visits we  looked to see whether credit unions lacking federal deposit insurance had  disclosed to their members that the institution was not federally insured  and that the federal government did not guarantee their deposits. We  found that many privately insured credit unions we visited did not  conspicuously disclose this information. Specifically, as shown in table 1,  37 percent (21 of 57) of the locations we visited did not conspicuously post  signage in the lobby of the credit union.
Credit unions’ compliance with this requirement varied by state. For  example, six of the 21 sites visited in California—or 29 percent—did not  display the required notices, while three of the five sites visited in  Alabama—or 60 percent—did not display conspicuous signage in their  lobbies.
On our visits to these credit unions, we also obtained other available credit  union materials (brochures, membership agreements, signature cards,  deposit slips, and newsletters) that did not include language to notify  consumers that the credit union was not federally insured—as required by  section 43. Overall, 134 of the 227 pieces of material we obtained from 57  credit union locations—or 59 percent—did not include specified language.  Specifically, 20 of 32 signature cards we obtained from 31 credit unions,  and 19 of 20 deposit slips we obtained from 18 credit unions did not  include specified language (see table 2).
As part of our review, we also reviewed 78 Web sites of privately insured  credit unions and found that many credit union Web sites were not fully  compliant with section 43 disclosure requirements. For example, 39 of the  78 sites had not included language to notify consumers that the credit  union was not federally insured. Specifically, in six of the eight states we  reviewed, more than half of the Web sites identified and analyzed in each  state were not compliant (see table 3).
While these results were not obtained from a statistically valid sample that  would allow us to project the extent of compliance to all privately insured  credit unions, these findings are robust enough, both in the aggregate and  within each state, to raise concern about the lack of required disclosures  by privately insured credit unions.
section_title: Monitoring Efforts over Disclosures by Privately Insured Credit Unions Varied
paragraphs: The extent to which state regulators and ASI officials monitored whether  privately insured credit unions disclosed the lack of federal deposit  insurance to depositors varied. State regulators in Alabama, California,  Idaho, Indiana, Maryland, Nevada, and Ohio reported that during state  examinations of credit unions, their examiners looked to see whether  privately insured credit unions disclosed the lack of federal deposit  insurance to depositors. However, according to these state regulators,  state examination procedures did not include specific guidance on how to  determine if credit unions were compliant with disclosure requirements in  section 43. Also, state regulators reported that although they monitored  disclosures at privately insured credit unions, they generally had not  enforced these requirements. Since we observed poor compliance with  section 43 disclosure requirements in our site visits, oversight by state  regulators has not provided sufficient assurance that privately insured  credit unions are adequately disclosing that their institutions are not  federally insured.
ASI officials told us that they had developed materials that explained the  disclosure requirements of section 43 to assist credit unions it insured to  comply with these requirements. ASI officials reported that they provide  these materials to credit unions when they convert to private deposit  insurance and to other credit unions that requested these materials.  Among other things, these materials inform credit unions of the specific  disclosure requirements and include samples of on-premise signage.  However, our review of ASI’s samples for on-premise signage found that  not all samples included language to notify consumers that the credit  union was not federally insured.
ASI’s on-site audit program included specific guidance on how to  determine if credit unions were compliant with disclosure requirements in  section 43. In our review of two ASI examination files, we observed that  ASI officials had noted that these two credit unions in Nevada had not  included language on credit union materials, such as signature cards,  stating that the institution is not federally insured and that if the institution  fails, the federal government does not guarantee that depositors will get  back their money. In our follow-up discussions with ASI management,  they indicated that while ASI officials made some notes regarding  compliance when conducting on-site exams—as in the examination files  on the Nevada credit unions—they did not take action to enforce these  federal requirements.
section_title: Credit Unions Do Not Appear to Have Obtained State Determinations of Insurability, but Impact on Consumers May Be Limited
paragraphs: The shut-down provision of section 43 prohibits depository institutions  lacking federal deposit insurance from engaging in interstate commerce  unless the institution’s state regulator has determined the institution’s  eligibility for federal deposit insurance. To be eligible for federal deposit  insurance, NCUA must, among other things, assess the credit union’s  financial condition, the adequacy of reserves, the fitness of management,  and the convenience and needs of the members to be served by the  institution. It appears that privately insured credit unions have not  obtained this determination from their state regulators. One could  question, however, whether the states could or should make the  determination that institutions meet the standards for federal deposit  insurance. Even if the state applied federal deposit insurance eligibility  criteria in making the determination for credit unions, the determination  may not necessarily provide a meaningful protection for consumers;  however, other actions were taken to ensure the health of privately  insured credit unions.
Section 43 calls for a one-time eligibility determination and does not  require an ongoing state assessment of the institutions’ compliance with  federal deposit insurance eligibility requirements. Because this is a one- time determination, it does not ensure that credit unions would remain  eligible for federal deposit insurance. Other circumstances also indicate  that consumers might not benefit from the eligibility determination. For  example, when an institution converts from federal deposit insurance to  private deposit insurance, such an eligibility determination would be  redundant because the institution had been eligible for federal deposit  insurance before it became privately insured. According to ASI, between  1992 and 2002, 27 credit unions converted from federal to private deposit  insurance. In these cases, it would be doubtful that an eligibility  determination would benefit consumers.
State regulators also told us that while they had not made explicit  determinations that these privately insured credit unions had met  eligibility requirements for federal deposit insurance, they imposed safety  and soundness standards on credit unions lacking federal deposit  insurance, which the regulators believed generally satisfied the criteria for  federal deposit insurance. For example, these regulators reported that  they applied the same examination and supervision process to all state- chartered credit unions—regardless of deposit insurance status. In  addition, these states had adopted NCUA’s examination program and their  examiners had received training from NCUA. However, implementation of  NCUA’s examination program does not fully insure that those institutions  meet all federal deposit insurance eligibility standards. For example,  besides assessing a credit union’s financial condition and the adequacy of  its reserves when making insurability determinations, NCUA is also  required to factor in membership considerations such as the convenience  and needs of the members to be served by the institution.
Some states also had an approval process for credit unions seeking to  purchase private deposit insurance. Alabama, Illinois, and Ohio had  written guidelines for credit unions seeking to purchase private deposit  insurance. The other five states that permitted private deposit insurance  did not have written guidelines for credit unions seeking to purchase  private deposit insurance, but Idaho, Indiana, and Nevada state regulators  noted that they had the authority to “not approve” a credit union’s  purchase of private deposit insurance.
Additionally, ASI had several strategies in place to oversee the credit  unions it insured. Specifically, ASI regularly conducted off-site monitoring  and conducted on-site examinations of privately insured credit unions at  least every 3 years. It also reviewed state examination reports for the  credit unions it insured, and imposed strict audit requirements. For  example, ASI required an annual CPA audit for credit unions with $20  million or more in assets, while NCUA only required the annual audit for  credit unions with more than $500 million in assets. ASI also had targeted  its monitoring of its largest and smallest credit unions. For larger credit  unions, those with more than 10 percent of ASI’s total insured shares, ASI  planned to conduct semiannual, on-site examinations and monthly and  quarterly off-site monitoring, including a review of audits and financial  statements. In January 2003, five credit unions comprising about 40  percent of ASI’s total assets qualified for this special monitoring. In  January 2003, ASI also began a monitoring strategy intended to increase its  oversight of smaller credit unions. First, ASI assigned a risk level to credit  unions it insured (low, moderate, or high) and then used this assessment  to determine the extent and frequency of oversight at the credit union. In  January 2003, ASI had determined that 98 credit unions qualified for this  monitoring, with shares from the largest of these credit unions totaling  about $23 million.
Since the above actions were taken to ensure the health of privately  insured credit unions, the effect on consumers from the lack of  enforcement of this provision may be negligible.
section_title: Remaining Private Deposit Insurer Complied with Federal Audit Requirements
paragraphs: The remaining private deposit insurer has complied with the audit  requirements under section 43, which requires private deposit insurers to  obtain an annual audit and provide it to state regulators and the  management of privately insured credit unions within certain time  frames. Among other things, the audit must be conducted by an  independent auditor using generally accepted auditing standards and  include a determination of whether the insurer follows generally accepted  accounting principles and has set aside sufficient reserves for losses. The  private deposit insurer must provide a copy of the report to each  depository institution it insures not later than 14 days after the audit is  completed. Also, the private insurer must provide a copy of the report to  the “appropriate supervisory agency” of each state in which such an  institution receives deposits not later than 7 days after the audit is  completed.
We found that the audits obtained by ASI for 1999, 2000, 2001, and 2002  complied with this federal requirement. Specifically, these audits noted  that the reviewed consolidated financial statements presented fairly, in all  material respects, ASI’s financial position and the results of their  operations and cash flows for the years reviewed in conformance with  accounting principles generally accepted in the United States. Further,  appropriate state regulators and the management of some privately  insured credit unions told us that ASI had provided them copies of the  annual audits in accordance with the requirement. Since the private  deposit insurer has obtained and distributed the audit as required, it has  given state regulators and the management of privately insured credit  unions the opportunity to become informed about the financial condition  of the private deposit insurer. This could help ensure the safety and  soundness of ASI—which, in turn, protects consumers. It appears  consumers have suffered no negative impact from the nonenforcement of  this provision.
section_title: Although There Is No Ideal Regulator to Enforce Section 43, FTC Is Best among Candidates to Enforce Provisions
paragraphs: In evaluating which agency should enforce section 43, we did not find an  agency that was ideally suited to carry out the responsibilities set forth in  the provision. Although FTC, NCUA, and FDIC officials generally agreed  that consumers should receive proper notification about the insured status  of their deposits, they maintained that their respective agencies should not  be charged with responsibility for implementing and enforcing section 43.  NCUA and FDIC oppose having any responsibilities under section 43  because such a role would result in a regulatory conflict of interest and  would be inconsistent with their missions and the section’s purpose.  Credit union industry representatives believe that FTC is the appropriate  federal agency to enforce section 43. FTC staff stated that questions about  the Commission’s authority under section 43 and the Commission’s lack of  expertise to administer the section justify removing FTC from any  responsibilities under the provision. The staff asserted that other federal  agencies are more qualified to carry out the section. Based on our review  of these concerns, we believe FTC is the best among these candidates to  enforce these provisions; however, clarifying FTC’s authority and  providing it with additional flexibility in administering these provisions  could better ensure effective enforcement of these provisions.
subsections: section_title: NCUA and FDIC Oppose Having Enforcement Responsibility under Section 43
paragraphs: NCUA has taken the position that it should not be responsible for  enforcing section 43. In our discussions with NCUA officials, they offered  several reasons why NCUA should not be charged with enforcing section  43. They expressed concern that placing the responsibility with NCUA  would closely identify NCUA with uninsured credit unions and, in turn,  create the potential for confusion as to whether an institution was  federally insured. The officials also maintained that if NCUA were  responsible for enforcing and implementing the section, the costs would  be passed on to federally insured credit unions. In addition, the officials  stated that NCUA regulation of a private insurer would result in a  regulatory conflict of interest that might erode confidence in NCUA’s  authority. They said that if the private deposit insurance system were to  fail while under NCUA’s purview, confidence in NCUA, as well as federal  deposit insurance for credit unions, could weaken to a point that it could  have a devastating impact on the financial health of the credit union  system.
In our discussions with FDIC officials, they expressed several reasons— similar to those presented by NCUA—why FDIC should not be charged  with enforcing section 43. First, FDIC officials noted that FDIC insures the  deposits at banks and savings associations—but does not regulate or  supervise credit unions or insure deposits at these institutions. Officials  also expressed concern that placing the responsibility with FDIC would  closely identify a federal agency with uninsured credit unions and, in turn,  create the potential for confusion as to whether an institution was  federally insured.
section_title: Industry Views on Private Deposit Insurance and the Enforcement of Section 43 Requirements
paragraphs: While officials from the National Association of Federal Credit Unions  (NAFCU) oppose the option of private primary deposit insurance for  credit unions, NAFCU officials believe that since private primary deposit  insurance is an option, then section 43 requirements are important and  FTC should enforce these requirements for several reasons. NAFCU  officials believe that members of privately insured credit unions should be  adequately informed that deposits in these institutions are not federally  insured. NAFCU officials stated that the enforcement of the provisions in  section 43 requires an expertise in “consumer protections” and “deceptive  practices.” NAFCU takes the position that FTC has this expertise and,  further, that the entity does not need expertise in “safety and soundness of  depository institutions.” NAFCU officials also believe that federal financial  regulators, such as NCUA and FDIC, are not the appropriate oversight  entities for issues related to private deposit insurance because their  involvement would imply federal backing. Further, the involvement of  NCUA or FDIC in the enforcement of the requirements in section 43 could  create conflict between the federal and private insurer. NAFCU officials  commented, however, that it would be beneficial for FTC to consult with  FDIC and NCUA regarding the enforcement of these requirements because  of their expertise. Regarding enforcement, NAFCU officials believe that  state regulators could be involved in, but not solely responsible for,  enforcing certain section 43 requirements. For example, during state  exams of credit unions, examiners could determine if the credit union  were compliant with disclosure and insurability requirements of section 43  and then submit a certification to FTC.
Credit Union National Association (CUNA) and National Association of  State Credit Union Supervisors (NASCUS) support the option of private  deposit insurance for credit unions and believe that the requirements in  section 43 are important and that FTC should enforce the requirements in  section 43. CUNA’s public position is that it supports the option of private  deposit insurance because the association believes “it is an integral part of  the dual-chartering system for credit unions (the system allowing credit  unions meaningful choice between a state and federal charter).” NASCUS  also supports the option of private deposit insurance for credit unions  because the association thinks credit unions should have a choice when it  comes to deposit insurance. Specifically, NASCUS believes that if there  was only a single insurer (such as NCUA) this would create a uniform  approach, thus obviating state choice, and could revert to a rigid  framework.
section_title: Tying NCUA and FDIC Insurance to the Regulation of Uninsured Entities Presents a Conflict of Interest
paragraphs: As the agencies charged with administering and safeguarding their  respective insurance funds, NCUA and FDIC have an interest in seeing that  the public does not lose confidence in the federal deposit insurance  system. The section 43 disclosure requirements help protect this interest  by imposing measures designed to inform depositors at nonfederally  insured institutions that their deposits are not backed by the federal  government. To the extent that institutions comply with section 43, there  is a reduced risk that depositors in nonfederally insured institutions would  mistakenly believe that their deposits are federally insured. Because  section 43 protects NCUA and FDIC interests, it can be argued that those  agencies should be responsible for enforcing the provision. Although that  proposition has some merit, we have no reason to disagree with  statements by NCUA and FDIC officials that placing both private insurers  and institutions lacking federal deposit insurance under the jurisdiction of  NCUA and FDIC could increase the risk of depositor confusion and create  the potential for a loss of public confidence in the federal deposit  insurance system. Moreover, assigning responsibility to NCUA and FDIC  would mean that federally insured depositary institutions would subsidize  the regulation of nonfederally insured institutions. However, we  recognize that deciding who pays the cost for regulating nonfederally  insured institutions is a complicated issue.
Some observers have asserted that if NCUA were responsible for  regulating the disclosures required by section 43, a depositor’s knowledge  that the disclosure was prescribed by NCUA could generate confusion as  to NCUA’s relationship with a nonfederally insured institution. The  identity of the federal agency may be of no consequence because the  consumer might not understand, or even be aware of, which federal  agency prescribed the disclosure requirements. However, should NCUA  determine, as FTC has, that section 43 calls for substantial disclosure of  the risks relating to a specific depository institution and its insurer, NCUA  would risk significant exposure to conflict of interest charges. For  example, if NCUA were to impose requirements on privately insured credit  unions that were considered by states or institutions to be too stringent,  its partiality as a regulator would be questioned. The costs of compliance  with such requirements could cause privately insured institutions to turn  to federal deposit insurance, thus adversely affecting the private deposit  insurer, NCUA’s competitor.
We recognize that in two instances Congress has chosen NCUA to  implement laws that apply to credit unions regardless of whether they are  federally insured. The Truth in Savings Act (TISA) requires that NCUA  implement its provisions with respect to all credit unions, regardless of  who insures them. The Home Mortgage Disclosure Act (HMDA) also  charges NCUA with implementing responsibility for all credit unions  regardless of their insured status. See appendix II for an illustration of  who is responsible for the enforcement of various laws at credit unions.  NCUA has promulgated regulations implementing TISA and issued  guidelines for credit union reporting under HMDA. By implementing  these laws, NCUA has demonstrated the capacity to regulate operations of  credit unions it does not insure. Moreover, the cost of enforcing these laws  with respect to nonfederally insured credit unions is passed on to insured  credit unions. It is particularly noteworthy that NCUA’s TISA regulations  require specific disclosures about the terms and conditions of deposit  accounts at both federally and nonfederally insured institutions. However,  NCUA’s administration of those laws does not present the same potential  or perceived conflict of interest. The requirements under those laws apply  equally to federally insured and nonfederally insured institutions. In  contrast, regulations under section 43 would, by definition, treat the  institutions differently and expose NCUA to a regulatory conflict of  interest.
The regulatory conflict of interest also would exist with respect to NCUA  enforcement of the audit provision. NCUA would be regulating its  competition. If NCUA, like FTC, were to consider enforcement of the  requirement as called for by evaluating the conclusions of the audit or  scrutinizing the financial health of the insurer, NCUA’s action would be  inherently suspect. In addition to the regulatory conflict of interest, closely  associating NCUA with nonfederally insured institutions could have an  undesirable “shadow effect.” For example, if NCUA were to be responsible  for reviewing the private insurer’s audit report, NCUA would be closely  associated with determinations about the financial health of the private  deposit insurer. Should the insurer, which is subject to state regulation,  fail to honor its insurance commitments, NCUA’s credibility as a regulator  would be compromised.
Concerns about a regulatory conflict of interest also would accompany  NCUA actions involving the shut-down requirement. The agency would be  closely associated with liquidating institutions it does not insure and  safeguarding deposits it does not protect. In effect, NCUA would be  shutting down the institutions that are members of the agency’s  competition—the private deposit insurer. Similarly, NCUA enforcement of  the look alike provision could be seen as an attempt by the agency to  eliminate entities that compete with federally insured credit unions.
NCUA’s concern that its enforcement of section 43 would require federally  insured institutions to subsidize the regulation of institutions that forgo  insurance, in part involves a question of a level playing field; that is,  federally insured institutions would be forced to pay the cost of regulating  competitors who may benefit from avoiding federal deposit insurance.  This concern also touches on other considerations. For example, this  additional cost could act as an incentive for federally insured credit unions  to convert to private deposit insurance. However, who pays for the  oversight of nonfederally insured institutions is a more complicated issue,  because federally insured institutions could also benefit from clarifying for  consumers the insurance status of these institutions, and if FTC oversees  nonfederally insured institutions, taxpayers bear the costs.
section_title: FTC Opposes Having to Implement and Enforce Section 43
paragraphs: Section 43 specifies that FTC shall enforce compliance with its  requirements, and any regulations or orders issued under it. In addition,  the section charges FTC with specific responsibilities. FTC is to prescribe  “the manner and content of disclosure required under the section” in order  to “ensure that current and prospective customers understand the risks  involved in forgoing federal deposit insurance.” Also, the section  authorizes FTC, in consultation with FDIC, to exempt an institution from  the shut-down provision. In addition, section 43 authorizes FTC to  determine that an institution not chartered as a depository institution  nonetheless can be subject to the section. FTC staff told us that because  of questions about the Commission’s authority under section 43 and the  Commission’s lack of expertise to carry out the section in accordance with  the staff’s perception of what the section requires, FTC is not the  appropriate federal agency to enforce the section.
subsections: section_title: FTC Staff Said That Questions about the Commission’s Authority under Section 43 Could Interfere with Its Ability to Enforce the Section
paragraphs: According to FTC staff, the language of section 43 charging the  Commission with responsibility for enforcing the section (charging  provision) contains an ambiguity that could lead to challenges against the  Commission’s authority under the section. As noted above, the charging  provision specifies that the FTC shall enforce section 43 “under the   Act.” The FTC Act, however, limits the Commission’s jurisdiction in ways  that are inconsistent with FTC’s responsibilities under section 43. For  example, FTC and federal courts have interpreted the FTC Act to mean  that the Commission has no jurisdiction over nonprofit entities, a group  that includes credit unions. Another provision of the FTC Act (Section 6),  which authorizes FTC to conduct investigations, require reports and  promulgate rules and regulations to carry out the FTC Act, expressly  excludes the business of insurance from those authorities except under  very limited circumstances. According to FTC staff, this limitation raises  questions about the Commission’s authority to enforce the audit provision  in section 43, which applies specifically to private insurers.
FTC staff said that FTC’s jurisdiction with respect to the audit provision,  as well as disclosures about deposit insurance, also would be subject to  challenge because of limitations the McCarran-Ferguson Act imposes on  federal laws that relate to the business of insurance. Under the McCarran- Ferguson Act, a federal law applicable to the business of insurance can be  preempted by a state insurance law. Specifically, the McCarran-Ferguson  Act precludes application of a federal statute in the face of a state law  “enacted . . . for the purpose of regulating the business of insurance,” if the  federal measure does not “specifically relate to the business of insurance,”  and would “invalidate, impair, or supersede” the state’s law. The act also  specifies that the FTC Act is applicable to the business of insurance “to the  extent that such business is not regulated by State law.” According to  FTC staff, this latter provision displaces application of the FTC Act where  there is state regulation of the business of insurance. The staff explained  that FTC’s authority under section 43 is unclear because the section  requires FTC to enforce the deposit insurance disclosure requirements and  the audit provision “under the  Act” even though the FTC Act does  not apply to insurance. FTC staff believe that enforcement of the  disclosure provisions could be subject to challenge in states that regulate  deposit insurance, and that enforcement of the audit provision would be  subject to challenge because the State of Ohio specifically regulates the  only private deposit insurer, ASI.
section_title: FTC Staff Raised Practical Concerns about the Commission’s Ability to Carry Out Section 43
paragraphs: FTC staff raised several concerns about the Commission’s ability to carry  out section 43 responsibilities. One concern relates to the manner in which  FTC would exercise its rulemaking authority under the section. Section 43  does not specify the authority under which FTC’s implementing rules  should be promulgated. To the extent that the Commission’s rulemaking  authority under the section is subject to requirements of the FTC Act, FTC  staff made two points. They noted that the Commission’s general  rulemaking authority under the FTC Act may be exercised only “for  purposes of carrying out the provisions of .” The  Commission also has special rulemaking authority under section 18 of the  FTC Act with respect to unfair or deceptive acts or practices. That  section contains specific procedures FTC must follow in prescribing rules  that define unfair or deceptive acts or practices. Among other things,  section 18 requires that Commission rules define such acts or practices  with specificity and establishes rigorous procedures for issuing the rules.  FTC staff asserted that without specific guidance from Congress as to the  Commission’s rulemaking authority, the Commission could face having to  promulgate rules under section 43 in accordance with the requirements in  section 18 of the FTC Act. They stated that because the separate  rulemaking authorities involve different procedures and authorize  different remedies, the absence of guidance in this area makes it difficult  for FTC to carry out its rulemaking responsibilities under section 43.
FTC staff also raised concerns that section 43 requires the Commission to  engage in activities that are incompatible with the manner in which FTC  undertakes its consumer protection mission or are beyond FTC’s  expertise. According to the staff, section 43 calls upon FTC to engage in  activities more suitable for a supervisor of depository institutions. These  include reviews of insurance company accounting practices and audits,  supervisory examinations or inspections, specification of disclosures that  should include the risk profiles of depository institutions and their private  deposit insurers, and the regulation and possible closure and liquidation of  depository institutions and other entities that could be mistaken for  depository institutions (such as securities firms that offer accounts with  deposit account characteristics). The staff asserted that these  responsibilities call for close supervision by an agency that, unlike FTC,  has the expertise, tools, and resources to assess and regulate the  operations of depository institutions and is knowledgeable about risks  associated with depository institutions and deposit insurance.
Several provisions of section 43 underlie FTC’s concern that the section  calls for expertise the Commission does not have. The first is the  requirement that FTC promulgate disclosure regulations to ensure that  current and prospective customers understand the risks involved in  forgoing federal deposit insurance. Commission staff asserted that  disclosure of those risks requires more than a standardized notice that the  institution is not federally insured and that the federal government does  not guarantee that the depositor will get back their deposits. The staff  maintained that disclosure could involve a discussion of a depository  institution’s financial strength and liquidity, as well as the health of the  private insurer, because the risk of not having federal deposit insurance  would be tied to the health of both the institution and the insurer.
The staff also stated that even if disclosure did not require discussion of  the safety of the particular institution and insurer, any explanation about  the risks of forgoing federal deposit insurance would be beyond FTC’s  expertise because the Commission lacks the expertise necessary to define  those risks. For example, they said that the disclosure requirement creates  the dilemma that too much emphasis on the risks of forgoing federal  deposit insurance could dissuade depositors from using uninsured  institutions, thus weakening them; whereas, too little risk disclosure could  mean that such depositors would be inadequately informed. In addition,  the staff asserted that the Commission lacks the ability to determine which  documents and records should contain the risk disclosure.
The second provision of concern to FTC is the shut-down provision.  According to FTC staff, this section would require expertise in depository  institution operations and depositor protection. They maintained that  enforcement of this provision could require FTC to do more than merely  declare that an institution must stop doing business. They asserted that if  an entity were instructed to shut down, the Commission would have to be  prepared to enforce that shut-down, which would necessitate “winding up”  the operations of the entity, a role that would require expertise in the  operation of depository institutions and the protection of customer  deposits. The staff also expressed a concern that section 43 fails to  provide standards for FTC to consider in deciding whether an institution is  eligible for an exemption from the shut-down provision. They maintained  that in deciding upon an exemption the Commission likely would have to  engage itself in the complexities of depository institution law.
Another aspect of section 43 that FTC believes to be beyond its expertise  is the look-alike definition. The definition of “depository institution” in  section 43 includes any entity FTC determines to be engaged in the  business of receiving deposits, and could reasonably could be mistaken for  a depository institution by the entity’s current or prospective customers.  Under this authority, FTC could determine that an entity not chartered as  a depository institution is subject to section 43. FTC staff asserted that the  Commission lacks the expertise necessary to determine whether an  entity’s business constitutes “receiving deposits” or what would cause  customers to mistake an entity for a depository institution. Any entity  determined to be a look alike and not exempted would be subject to  section 43, including the requirements for disclosures regarding lack of  federal deposit insurance (even if it holds other forms of federal deposit  insurance). According to FTC staff, proper implementation of this  provision, in conjunction with the shut-down provision, could lead to  shutting down a variety of institutions such as securities firms and mutual  funds.
FTC officials also stated that the Commission lacks the expertise  necessary to enforce the audit requirement for private insurers. As  mentioned previously, section 43 requires any private deposit insurer to  obtain an annual audit from an independent auditor using generally  accepted auditing standards. The audit must determine whether the  insurer follows generally accepted accounting principles and has set aside  sufficient reserves for losses. FTC staff stated that diligent enforcement  would require a review of the auditor’s determinations, which, in turn,  would necessitate expertise and adequate resources for assessing both the  quality of the audit and the financial health of the insurer. FTC staff  asserted that the Commission does not possess this expertise. The staff  also were of the view that financial audits do not and cannot include  determinations about whether reserves set aside for losses are sufficient.  The staff said that FTC does not have expertise regarding loss and reserve  issues with which to determine whether some form of substitute  assurances should be deemed sufficient.
section_title: FTC Best among Candidates for Enforcement Role
paragraphs: Although we found no agency was ideally suited to carry out the  responsibilities set forth in the provision, based on our review of the  concerns raised by FTC, NCUA and FDIC, we found no compelling reason  to remove FTC from its responsibility as the primary agency responsible  for implementing section 43. FTC’s concerns about its authority and  resources are rooted in an interpretation of the section that calls for an  extensive federal presence in the regulation of private deposit insurance  and depository institutions. The scheme of section 43, particularly in the  context of federal deposit insurance, suggests that a more modest  interpretation is appropriate, although modifications to the section would  enhance the Commission’s ability to enforce the section.
subsections: section_title: FTC’s Concerns about Potential Challenges to Its Authority under Section 43 Can Be Addressed
paragraphs: Although FTC’s concerns about potential challenges to its authority under  section 43 are not unrealistic, it appears that the Commission has authority  to implement and enforce the requirements of the provision even if the  Commission would not otherwise have jurisdiction under the FTC Act or  McCarran-Ferguson Act. A challenge to FTC’s authority would arise from  uncertainties about what Congress intended by instructing FTC to enforce  the section “under the FTC Act.” The phrase indicates that the  Commission must enforce the section under the FTC Act even though,  under the FTC Act, the Commission would not have authority to enforce  certain provisions of the section or take certain other regulatory actions.  Interpreting section 43 to mean that FTC enforcement actions are subject  to all provisions of the FTC Act would lead to unreasonable results.  Among other things, FTC would be without authority to perform the  actions specifically prescribed in section 43. Moreover, it is clear that  Congress intended that the section would apply to credit unions because  section 43 specifically addresses state-chartered credit unions in the shut- down provision. Even if FTC’s authority under the FTC Act did not  extend to nonprofit entities before Congress enacted section 43, such a  limitation did not preclude Congress from subjecting credit unions to  FTC’s authority under that provision. We interpret section 43 as  authorizing FTC to enforce the section by using the enforcement powers  provided in the FTC Act and not as a limitation on FTC’s authority that  would defeat several purposes of the section. “No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted  by any State for the purpose of regulating the business of insurance, or which imposes a fee  or tax upon such business, unless such Act specifically relates to the business of  insurance.”
As interpreted by the Supreme Court, this provision precludes application  of a federal statute in the face of a state law “enacted . . . for the purpose  of regulating the business of insurance,” if the federal measure does not  “specifically relate to the business of insurance,” and would “invalidate,  impair, or supersede” the state’s law. One purpose of this provision is to  protect state insurance laws against inadvertent preemption by federal  law. Section 43 does not inadvertently apply to insurance. Rather, to the  extent that the section specifically relates to deposit insurance and to  private providers of that insurance a state law relating to the same subject  matter would be preempted.
Because the audit provision is valid under the McCarran-Ferguson Act,  FTC staff concerns about challenges to the Commission’s authority to  enforce the provision appear to be misplaced. Should FTC take an action  arguably inconsistent with the role contemplated in section 43, such as  regulating the safety and soundness of providers of private deposit  insurance, the McCarran-Ferguson Act might serve as grounds to   challenge the action. However, the McCarran-Ferguson act does not stand  as a general bar to FTC’s authority to enforce the audit requirement.
section_title: Lack of Guidance in Section 43 for Rulemaking Procedures Can Be Addressed
paragraphs: The only explicit rulemaking requirement in section 43 is that FTC issue  regulations or orders prescribing the manner and content of disclosure  required under the section. Section 43 does not designate the procedures  FTC should follow in promulgating those rules or orders. Also, to the  extent that FTC has authority to issue other regulations under the section,  the source of that authority is less clear. Uncertainty about FTC’s  rulemaking authority might complicate the Commission’s ability to  promulgate regulations, but these potential complications do not appear to  undermine FTC’s authority to carry out the section.
Under the FTC Act, the Commission has two types of rulemaking  authority. The Commission has general authority to make rules and  regulations for the purpose of carrying out the act. In addition, FTC has  special rulemaking authority the Commission must use for issuing rules  with respect to unfair or deceptive acts or practices. The special  rulemaking authority requires, among other things, that the Commission  define unfair or deceptive acts or practices with specificity and follow  stringent rulemaking procedures. If the Commission’s authority to issue  regulations under section 43 is subject to the requirements of the FTC Act,  then the Commission would have to rely upon its special rulemaking  authority. It is unclear whether the Commission’s authority to issue rules  under section 43 is subject to the FTC Act, however. If FTC Act  requirements do not apply, then FTC could rely upon the less stringent  rulemaking requirements for informal rulemaking under the  Administrative Procedure Act. Because section 43 does not provide  specific guidance for which of FTC’s rulemaking authorities applies, it  could affect the manner in which the Commission undertakes its  rulemaking. However, the lack of guidance does not preclude the  Commission from carrying out its responsibilities under the section.
section_title: FTC’s Concern That Section 43 Enforcement Would Require More Expertise Is Generally Not Warranted
paragraphs: In addition to perceived jurisdictional limitations, FTC staff maintained  that enforcement of the section requires expertise and resources the  Commission does not have and would require FTC to take actions  inconsistent with its consumer protection mission. FTC staff asserted that  enforcement of the disclosure requirement and the promulgation of  regulations apprising consumers of the risk of not having federal deposit  insurance, as well as proper enforcement of the audit requirement and  shut-down provision, require an in-depth knowledge of depository  institutions and deposit insurance and FTC oversight of the safety and  soundness of institutions subject to section 43. Enforcement of the  disclosure provisions does not necessarily require such in-depth expertise,  although FTC could benefit from consulting with other federal regulators  or others to gain this expertise to more effectively enforce these  provisions.
The only specific rulemaking mandate in section 43 requires FTC to  prescribe “the manner and content of disclosure required under this  section” in order “to ensure that current and prospective customers  understand the risks involved in forgoing federal deposit insurance.” As  noted previously, section 43 specifically requires disclosure of two facts:  (1) that the depository institution is not federally insured and (2) if the  institution fails the federal government does not guarantee that depositors  will get back their money. FTC staff interprets the rulemaking mandate to  mean that the Commission must issue regulations or orders requiring  disclosure of information that goes beyond what is specifically required  under section 43. It appears that a less extreme interpretation of the  disclosure requirement—one that does not compromise FTC’s ability to  carry out the requirement—would be consistent with section 43.
Even if the requirement for disclosure regulations calls for more than the  disclosure specifically described in section 43, it is not clear that Congress  intended the regulations to require a discussion of the safety and  soundness of the depository institution and its private insurer. It appears  that Congress enacted the disclosure requirements in section 43 to ensure  that consumers are informed about an institution’s lack of federal deposit  insurance. There is no indication in the section or its legislative history  that Congress also intended disclosure about the risks associated with the  private deposit insurer. The purpose of deposit insurance is to free  depositors from having to assess an institution’s safety with respect to  their deposits, up to the coverage limit; deposits are protected up to that  limit even if the institution becomes unsafe or unsound. With respect to  the safety of deposits, risk disclosure is unnecessary. FTC staff maintains  that disclosure regarding private deposit insurance should be treated  differently because, unlike federal deposit insurance, private deposit  insurance is subject to the risk that a private insurer may not be able to  protect the deposits it insures. We do not take issue with FTC’s  observation about the potential risks of private deposit insurance.  However, nothing in section 43 indicates that Congress intended that  disclosures with respect to private deposit insurance should be treated  any differently; nothing in the section indicates that FTC should preempt  the states in assessing the safety and soundness of privately insured  institutions and their insurers. In section 43 Congress deferred to the  states on whether to permit the operation of privately insured depository  institutions. It is reasonable to conclude that Congress anticipated that  depositors at those institutions should rely upon the states to oversee the  safety and soundness of private deposit insurers.
Finally, we note that the section 43 requirement for disclosure regulations  is similar to other laws that require FTC to regulate disclosure without  regard to its expertise concerning the subject of the disclosure. For  example, under the Fair Packaging and Labeling Act, FTC regulates  disclosure about a broad array of commercial items defined generically as  “consumer commodities.” Under the FTC Act, the Commission has  responsibility for preventing false advertising without regard to the nature  of the product. Also, FTC enforces several federal consumer protection  laws applicable to financial institution disclosures, including the Truth in  Lending Act, the Consumer Leasing Act, the Equal Credit Opportunity Act,  and the Electronic Funds Transfer Act. Moreover, the Commission  already has demonstrated that it has the ability to regulate extensively  how financial institutions must make disclosures about financial  transactions and customer financial privacy.
section_title: Certain FTC Concerns Do Raise Questions about Its Enforcement Capabilities or Applicability of Its Authority
paragraphs: With respect to the shut-down provision, whether FTC enforcement  requires expertise in depository institutions and deposit insurance  depends upon how far the Commission might seek to extend its  enforcement authority. Under the most likely enforcement scenario,  depository institution expertise would not be necessary. The shut-down  provision prohibits any depository institution lacking federal deposit  insurance from engaging in interstate commerce unless the appropriate  state supervisor has determined the institution’s eligibility for federal  deposit insurance. Assuming that FTC were not to grant an exemption,  enforcing the provision could involve an FTC enforcement action under  the FTC Act to shut down the institution. However, because depository  institutions subject to section 43 are state-chartered, states likely would  have primary responsibility for “winding up” an institution once it has  ceased doing business. Section 43 would not prevent the application of  federal bankruptcy laws or laws administered by federal agencies. FTC  staff pointed out that under some circumstances it might be appropriate  for the Commission to remain involved in winding up an entity subject to  shut down to ensure that deposits were protected. To the extent that the  Commission might remain involved, partnering with the state would be  appropriate.
FTC staff also stated that FTC lacks the expertise necessary to evaluate a  state’s determination of an institution’s eligibility for federal deposit  insurance. Nothing in section 43 suggests that FTC is to oversee the states  in this regard. Congress deferred to the states with respect to the  determination. We agree with the FTC staff that the extent to which FTC  can challenge a state’s determination is unclear, but we see nothing in the  statute contemplating FTC review of state determinations.
Another of FTC’s concerns about the shut-down provision—that section  43 does not provide standards for the Commission to apply in deciding  whether to exempt an entity from the provision—appears to have been  partially addressed by Congress when it enacted the section. Section 43  authorizes FTC to permit an exemption from the shut-down requirement  “in consultation with the Federal Deposit Insurance Corporation.” Thus,  Congress specifically did not rely on FTC’s independent judgment should  FTC consider an institution for the exemption. The section, however, does  not provide guidance on the factors the Commission should consider in  deciding whether an institution is eligible for an exemption. The extent to  which this lack of guidance might affect FTC’s enforcement of the  provision is unclear. We note, however, that FTC could seek to resolve  uncertainties about exempting an institution by consulting with FDIC, as  contemplated by section 43.
The merit of FTC’s concern regarding the look alike provision depends  upon the Commission’s perception of the role Congress intended it to  have. Under the look alike provision, the Commission has discretion to  decide whether an entity not chartered as a depository institution  nonetheless should be subject to section 43. FTC staff asserted that the  Commission could exercise this authority in a way that would include  various uninsured institutions where funds are deposited, including  securities firms and mutual funds. Such institutions would be subject to  FTC enforcement of the disclosure requirements and the shut-down  provision. According to FTC staff, proper enforcement of section 43  requires the Commission to promulgate a regulation defining look alike  institutions and subjecting them to section 43. The staff asserted that  because of FTC’s lack of expertise regarding deposits, the Commission  would have to define the look alike entities broadly, thus subjecting a  potentially vast group of entities to the section. FTC’s concern in this  regard overlooks the fundamental principal that a statute should not be  interpreted to produce absurd results. It does not appear that Congress  intended that FTC would invoke the look alike provision broadly to  include any entity that accepts deposits. For example, a reasonable  interpretation of the look alike requirement does not anticipate shutting  down entire industries and entities already subject to extensive disclosure  regulation under federal law, such as securities firms and mutual funds.
FTC staff also expressed concerns about what role the Commission would  have to take if the Commission were to shut down a business, particularly  if FTC took the action under the look alike authority. The staff stated that  the Commission would lack expertise necessary to wind down the  institution and protect its customers’ funds. We note that entities subject  to the shut-down provision would be subject to state and federal laws  governing the winding up of a business enterprise. In section 43, Congress  did not indicate what, if any, role FTC should play in a shut-down  scenario. However, nothing in section 43 indicates that Congress intended  to preempt laws governing the winding up of an entity.
FTC’s concerns about monitoring compliance with the audit provision are  more substantial. The audit provision does not require FTC to test the  conclusions of the audit. It appears that the Commission could carry out  its responsibility simply by relying upon the auditor’s attestations and  checking with the appropriate parties to ensure that the audit report was  properly distributed. However, as FTC staff pointed out, proper  enforcement of the provision could, under certain circumstances, call for  close scrutiny of the audit. According to FTC staff, because the  Commission lacks expertise in this area, it might be unaware of  circumstances warranting close scrutiny of the audit report.
section_title: Clarifying FTC’s Authority and Providing Some Flexibility Could Ensure Effective Enforcement of Section 43
paragraphs: While we found that FTC was the best candidate to enforce section 43  provisions, clarifying FTC’s authority and providing additional flexibility in  administering the section could help address some of the Commission’s  concerns about its authority and ability to enforce the provision without  undermining its objectives. For section 43 to be fully implemented and  enforced, the following changes to the identified provisions could clarify  FTC’s authority and provide flexibility for more effective enforcement.
Disclosure provisions: FTC staff are apprehensive about the  Commission’s ability to carry out this mandate, primarily because of how  they interpret the risk disclosure requirement, an interpretation that  contemplates a discussion of the financial health of a depository  institution and its private insurer. Giving FTC the flexibility to determine  what disclosure requirements should be issued and to decide on the  appropriate means for enforcing them could help to alleviate the  Commission’s concern. For example, the Commission might choose to  require nonfederally insured institutions to obtain independent  certifications from state supervisors or another independent body that  their institution is in compliance with the section’s disclosure  requirements.  Also, the Commission could be given authority to  coordinate with state supervisors of nonfederally insured credit unions to  assist in enforcing the disclosure requirements or imposing sanctions for  violations of the disclosure provisions.
In addition, a requirement that FTC consult with FDIC and NCUA about  disclosure requirements could ensure that disclosure under section 43  covers FDIC and NCUA concerns about the potential for confusion of  private deposit insurance with federal deposit insurance, and provides  FTC with access to expertise it deems necessary to establish disclosure  requirements. Requiring assistance from FDIC and NCUA in fashioning an  appropriate disclosure regime may help satisfy FTC concerns about its  lack of expertise. Additionally, such assistance would provide the federal  deposit insurance agencies with an opportunity to ensure that disclosures  adequately inform depositors in a manner that reduces the possibility of  confusion with federal deposit insurance and apprises them of the risks  associated with the lack of federal deposit insurance.
Shut-down provision: Several aspects of this provision raise regulatory  concerns. First, the requirement relies upon states to make a  determination that involves federal policies; specifically, whether a  particular institution is eligible for federal deposit insurance. The  eligibility determination includes many factors that federal regulators  apply on a case-by-case basis. A related concern is that the provision does  not indicate what criteria a state should use in determining that an  institution is eligible for federal deposit insurance. In addition, the section  calls upon FTC to shut down institutions that are subject to regulation by  state or federal bodies that have expertise in assessing the consequences  of a shut down as well as shutting down an institution. To address these  concerns, modifications to the shut-down provision could require  coordination between FTC and the appropriate primary regulator of an  institution in connection with a state’s determination of deposit insurance  eligibility, the Commission’s determination of an institution’s eligibility for  an exemption from the provision, and the shutting down of an institution.
Annual audit requirements: Section 43 clearly sets forth the  requirements for a private deposit insurer with respect to the annual audit  it must obtain and to whom the annual audit must be provided. However,  the section does not indicate the extent of FTC review and monitoring  appropriate for enforcing the provision. In this regard, an amendment to  section 43 could provide FTC with specific authority to establish annual  audit requirements for private insurers. With such authority, the  Commission could set forth the conditions under which it would rely on  the annual audit or could enter into a cooperative arrangement with the  insurer’s state regulators concerning reviews of the annual audit.
section_title: Conclusions
paragraphs: Depository institutions lacking federal deposit insurance are chartered  and supervised by states; however, the activities of these entities involve  federal interests. Congress acted on these federal interests by enacting  section 43 of the FDI Act. However, issues of enforcement remain.  Consistent with a prohibition in FTC’s appropriations authority, the  Commission has not enforced section 43 provisions. Absent enforcement,  our work showed that compliance with these provisions varied  significantly.
Our primary concern, resulting from the lack of enforcement of section 43  provisions, is the possibility that members of state-chartered, privately  insured credit unions may not be adequately informed that their deposits  are not federally insured and should their institution fail, the federal  government does not guarantee that they will get their money back. The  fact that many privately insured credit unions we visited did not  conspicuously disclose that the institution was not federally insured,  raises concerns that the congressional interest in this regard is not being  fully satisfied.
The lack of enforcement of the other two provisions—shut-down and  annual audit—may have a less direct impact on consumers. While it  appears that privately insured credit unions have not obtained a  determination from their state regulators that they are eligible for federal  deposit insurance, this determination may not be a meaningful protection  for consumers. Since it is only a one-time requirement, it does not provide  any assurance that institutions will continue to operate in a manner to  remain eligible for federal deposit insurance. However, state regulators  imposed safety and soundness standards for credit unions lacking federal  deposit insurance that are similar to federal oversight standards. NCUA  officials also may consider other factors when determining eligibility. ASI  officials also told us that they rigorously monitor the safety and soundness  of their insured institutions. Given the related actions undertaken to help  ensure the health of privately insured credit unions, the effect on  consumers from the lack of enforcement of this provision may be  negligible. Since we found that the remaining private deposit insurer has  complied with the annual audit requirements, state regulators and the  management of privately insured credit unions have had the opportunity  to become informed about the financial condition of this private deposit  insurer. Implementation of this provision helps ensure the safety and  soundness of ASI—which, in turn, helps to ensure that members of state- chartered, privately insured credit unions have a viable insurer should  their credit union fail. Since the remaining private deposit insurer  complied with section 43 audit requirements, it appears consumers  suffered no negative impact from the nonenforcement of this provision.
In evaluating which federal agency should enforce these provisions, we  found the responsibilities outlined in these provisions did not fall ideally  within any single agency’s jurisdiction. FTC staff and officials from NCUA  and FDIC opposed charging their agencies with this responsibility. NCUA  and FDIC both have an interest in making sure that consumers receive  adequate information about whether or not their deposits are federally  insured. NCUA and FDIC also have considerable expertise in disclosures  at federally insured depository institutions. However, FDIC insures the  deposits at banks and savings associations—but does not regulate or  supervise credit unions or insure deposits at these institutions. If either  FDIC or NCUA were charged with this responsibility, it could create  potential confusion about federal deposit insurance and would result in a  regulatory conflict of interest that could expose the credit union system to  a loss of public confidence in the federal deposit insurance system. This  would be inconsistent with a central purpose of the provision. Despite this  conflict, the agency that enforces section 43 would benefit from  coordination with NCUA and FDIC, because of their interests and  expertise.
Partnering with state regulators could also help FTC enforce certain  section 43 requirements. For example, the Commission might choose to  require nonfederally insured institutions to obtain independent  certifications that their institution is in compliance with the section’s  disclosure requirements and that the risks of not having federal deposit  insurance have been adequately disclosed. Considering that Congress  deferred to the states on whether to permit the operation of depository  institutions lacking federal deposit insurance, it is reasonable to conclude  that Congress also relied upon the states to oversee the safety and  soundness of those institutions and, accordingly, the risks to consumers of  dealing with them.
Although institutions lacking federal deposit insurance are chartered and  regulated by the states, protecting consumers from confusion about the  insurance of their deposits is consistent with the FTC’s consumer  protection mission. Congress also determined that the federal agency  specifically charged with protecting consumers against misleading or  deceptive information practices—FTC—should ensure that the federal  interest in proper disclosure is maintained. However, Congress has also  prohibited FTC from discharging its responsibilities under section 43.  While FTC staff has raised jurisdictional concerns, as well as practical  concerns about the Commission’s ability to enforce these provisions, we  believe that these interests can be best addressed by retaining FTC’s  responsibility for enforcing and implementing section 43. However, the  section could be modified to reduce concerns FTC has expressed about its  ability to enforce these provisions. Such modifications could allow FTC  flexibility in discharging its responsibilities and enable it to call upon the  expertise of the federal deposit insurers, state regulators, or others when  the Commission deems it necessary without sacrificing the purposes of the  section.
section_title: Matters for Congressional Consideration
paragraphs: No federal agency was the clear or obvious choice to carry out the  responsibilities outlined in section 43 of the FDI Act; however, if  modifications were made to these provisions, we believe that FTC would  be best suited to retain responsibility for enforcing and administering  these provisions. If Congress determines that FTC is the appropriate  agency, then Congress should remove the prohibition from FTC using  appropriated funds to enforce these provisions. Also, Congress should  clarify that FTC’s authority to implement and enforce section 43 is not  subject to any limitations on its jurisdiction contained in the FTC Act.
To remove obstacles and provide additional flexibility for FTC’s  enforcement of section 43 disclosure requirements, Congress may wish to  consider    Providing FTC the authority to consult with FDIC and NCUA when  determining the manner and content of disclosure requirements to (1)  provide FTC with access to expertise it deems necessary to establish  disclosure requirements and (2) ensure that the required disclosures  address FDIC and NCUA concerns about the potential for confusion of  private deposit insurance with federal deposit insurance;   Providing FTC the authority to coordinate with state supervisors of  nonfederally insured depository institutions to assist in enforcing the  disclosure requirements; and   Providing FTC authority to impose sanctions for violations of the  disclosure provisions.
To remove obstacles and provide additional flexibility for FTC’s  enforcement of the section 43 shut-down provision, Congress may wish to  consider    Requiring coordination between FTC and the appropriate primary  regulator of an institution when (1) FTC considers whether to exempt an  institution from the requirement to obtain a state determination that it  meets eligibility requirements for federal deposit insurance; and (2) FTC  seeks to shut down an institution because it has not obtained a state  determination that it meets eligibility requirements for federal deposit  insurance.
In light of some uncertainty as to the scope of FTC’s jurisdiction under the  FTC Act to regulate insurance entities in matters other than antitrust,  Congress may wish to consider clarifying FTC’s authority regarding the  annual audit provision by    Providing FTC with specific authority to establish requirements, such as  attestation requirements, to ensure the reliability of annual audits for  private insurers.
section_title: Agency Comments and Our Evaluation
paragraphs: We requested comments on a draft of this report from the heads, or their  designees, of the Federal Deposit Insurance Corporation, the National  Credit Union Administration, and the Federal Trade Commission.  We  received written comments from NCUA and FTC that are summarized  below and reprinted in appendixes III and IV respectively.  In addition, we  received oral comments from the Deputy Director of Supervision and  Consumer Protection at FDIC that are summarized below.  We also  received technical comments from NCUA and FTC that we incorporated  into the report as appropriate.
FDIC oral comments focused on the findings in the report dealing with  FDIC and the overall report conclusions.  FDIC generally agreed with the  report’s findings dealing with FDIC and stated that the arguments included  in the report against having the FDIC enforce section 43 were generally  consistent with arguments it provided to congressional staff during the  drafting of the Federal Deposit Insurance Corporation Improvement Act of  1991, which led to the decision in the enacted legislation to assign FTC  responsibility for enforcing compliance with the provisions discussed in  this report.  FDIC also stated that while time did not permit it to conduct  an exhaustive legal review, it generally agreed with the report’s overall  conclusions.
NCUA concurred with the report’s conclusions that there is a need for  enforcement of the consumer protection provisions in section 43 and that,  for the reasons stated in our report, FTC, not NCUA or FDIC, is in the best  position to enforce these provisions.  NCUA also commented on FTC staff  concerns expressed in this report that FTC might be challenged if it were  to take action against credit unions because its enabling legislation has  been interpreted to mean that it has no jurisdiction over nonprofit entities,  such as credit unions.  NCUA agreed with our conclusion that even if  FTC’s authority under the FTC Act did not extend to nonprofit entities, the  FTC Act did not preclude Congress from subjecting credit unions to FTC’s  authority under section 43.  Although NCUA agreed with this logic, it also  believed that under FTC’s enabling legislation FTC has jurisdiction over  state-chartered credit unions.
FTC disagreed with our conclusion that the Commission is the best among  federal agencies to enforce section 43 provisions.  FTC believed that the  solution we offered does not meet the objectives of the statute and  conflicted with our analyses.  FTC stated that three principal objectives of  section 43 are to provide some federal oversight to determine (1) the  safety of deposits in institutions that are neither supervised nor insured by  the federal government;  (2) the financial soundness of those institutions  and their state-supervised insurers; and (3) that disclosures to depositors  at those depository institutions “fully inform” the depositors about an  institution’s lack of federal deposit insurance.  We believe that FTC’s  interpretation of section 43 is inconsistent with the overall framework and  purpose of the section.
The regulatory scheme of section 43 indicates that Congress did not intend  FTC to have a safety and soundness role.  For example, Congress relied  upon the states to determine whether a depository institution is eligible for  federal deposit insurance even though the determination includes an  assessment of an institution’s safety and soundness.   In addition,  Congress required private deposit insurers to obtain an annual audit that  satisfies certain standards, but did not require that the insurer submit the  audit to FTC.  Instead, section 43 requires the insurer to submit the audit  to the state supervisors of institutions who have deposits insured by the  entity.  Finally, Congress’ designation of FTC as the federal agency  responsible for enforcing section 43 indicates that Congress did not  contemplate a federal safety and soundness role.  The legislative history of  section 43 supports this interpretation.  The Senate bill containing the  original version of section 43 set forth substantially the same disclosure  requirements as are contained in section 43.  The bill designated FDIC  and NCUA—two safety and soundness regulators—to enforce those  requirements.  However, in the next version of the bill, which added the  audit requirement, the shut-down provision, and the look-alike provision,  Congress substituted FTC as the agency charged with enforcement  responsibility.  The legislative history does not discuss the reasons for  this change, but it is reasonable to conclude that by substituting FTC for  the safety and soundness regulators, Congress opted against a federal  safety and soundness role under section 43.  Neither section 43 nor its  legislative history indicate that Congress intended to transform FTC from  a consumer protection agency into a safety and soundness regulator of  state-supervised depository institutions and their state-supervised private  deposit insurers.
We believe that the primary objectives of section 43 are to ensure that  consumers are protected by receiving the disclosures and opportunity for  acknowledgement specified in the section; the performance of an annual  audit of the deposit insurer in accordance with generally accepted  accounting standards that attests to the insurer’s adherence to generally  accepted accounting principles and the sufficiency of the insurer’s loss  reserve; the state certification relating to the shut down provision; and  FTC’s prudent and reasoned exercise of its authority pursuant to the look- alike provision.  Our proposed solutions are consistent with this  interpretation of section 43.
FTC also raised concerns about our proposal that the Commission rely in  part on NCUA and FDIC in connection with establishing disclosure  requirements.  FTC said that this recommendation would expose the  Commission’s formulation of disclosure requirements to the regulatory  conflict of interest that would arise if NCUA and FDIC were to have  primary regulatory responsibility under section 43.  We believe that FTC,  as a disinterest regulator with primary responsibility in this area, could  neutralize any potential conflict of interest by considering the views of all  parties having an interest in or expertise regarding an FTC action under  section 43.
FTC also contended that we “significantly overestimate” the Commission’s  expertise and experience in auditing, deposit safety and reserves,  insurance regulation, assessment of financial soundness of depository  institutions or insurers, and shutting down depository institutions.  The  Commission asserted that proper implementation of section 43 “would  require grafting onto the FTC, a very small agency, an entirely new deposit  safety mission requiring expertise, tools, and resources that the FTC lacks  and for which it has no other need.”  We disagree.  This criticism is based  on FTC’s extreme view of the federal role under section 43.  FTC assumes  that Congress intended to transform the Commission into a regulator of  depository institutions and insurers even though section 43 clearly  contemplates that the states are to serve in that capacity.  As stated above,  we believe that section 43 calls for a more moderate role consistent with  FTC’s mission as a consumer protection agency.
Congress has charged FTC with disclosure-related responsibilities with  respect to many industries that FTC does not regulate.  FTC regulates  advertising and labeling with respect to a wide variety of consumer  commodities and services, yet the Commission does not appear to have  expertise in the intricacies of all industries subject to those authorities.   Nothing in section 43 calls for FTC to have expertise, experience, or  resources to regulate the safety of depository institutions.  Also, nothing  in section 43 requires FTC to oversee the closure of an institution subject  to the shut-down provision.  The shut-down provision is self-activating,  that is, it is a directive to nonfederally insured depository institutions that  they must cease doing business (in interstate commerce), if they have not  received an insurance eligibility determination from the state.  Congress  did not provide any procedure for the institutions to follow when shutting  down, and Congress did not charge FTC with responsibility for  administering a procedure.  It should be noted that FTC has ample  experience under its routine enforcement authority in having businesses  shut down.
Additional FTC criticisms were that the report overstates the  disadvantages and ignores the advantages of NCUA implementing section  43, and that the report does not consider possible alternative assignments  of responsibility.  FTC’s assertions about the efficiency of NCUA  regulation are misguided.  As we discussed in the report, assigning NCUA  the responsibility for regulating its competition would present an inherent  conflict of interest that could undermine NCUA’s credibility as a regulator.
Moreover, bringing nonfederally insured institutions within the umbrella  of regulation by a federal deposit insurer is inconsistent with a central  purpose of section 43, which is to ensure the separation of nonfederally  insured institutions and their private deposit insurer from federal deposit  insurance.  The report does not discuss the potential for federal regulators  other than NCUA, FDIC and FTC to implement section 43 because no  other federal regulator appears to be a suitable candidate.  Unlike FTC, the  Federal Reserve Board has safety and soundness and related  responsibilities regarding certain depository institutions.  Placing section  43 responsibilities under the Board would subject nonfederally insured,  state-supervised institutions to regulation by a federal supervisor of  financial depository institutions.  We believe that Congress, by selecting  FTC to administer and enforce section 43, sought to avoid such a  relationship.  FTC administration of section 43 would not necessarily have  the same effect.
With respect to SEC, we note that requiring SEC to administer the section  would unnecessarily expand the Commission’s mission.  In some cases a  look-alike institution (an entity that takes deposits but which is not  chartered as a depository institution) could be involved in a securities  violation, in which case SEC could take action under the federal securities  laws and would not need authority under section 43 to proceed against an  entity.  Charging SEC with responsibility under section 43 could blur the  distinction between disclosure and audit obligations under the securities  laws and those established under section 43.  We note, however, FTC is  not precluded from working with SEC should FTC invoke the look-alike  authority.
FTC also stated that we failed to assess the potential impact on consumers  if the disclosure provisions are not enforced.  An empirical analysis of the  impact on consumers was not performed. Presumably, depositors would  not be impacted negatively by the lack of disclosure unless (a) they  believed that their deposits were federally insured because of the lack of  disclosure; (b) the institution holding their deposits failed; and (c) their  deposits were not protected—that is, the deposits were not insured or the  insurer was unable to repay the deposits of a failed institution.  We note,  however, that in section 43 Congress made the judgment that depositors  should receive the disclosure required in that section.  It is reasonable to  conclude that some individuals who do not receive the benefit of that  disclosure may be uncertain about the insured status of their accounts.
We agree with FTC’s concerns that if the section 43 enforcement authority  were immediately activated a number of institutions would be faced with  shutting down because they have not obtained determinations from their  state supervisors of eligibility for federal insurance and that some  institutions would be subject to sanctions because of disclosure failures.   We anticipate that Congress would grant FTC discretion to enforce and  implement section 43 and, if necessary, to provide for a phased-in  approach to deal with FTC’s concerns.
We will provide copies of this report to the Chairman and the Ranking  Minority Member on the Senate Committee on Banking, Housing, and  Urban Affairs, and the Chairman and the Ranking Minority Member on the  House Committee on Financial Services. Copies of this report also will be  provided to the Chairman of FTC; the Chairman of FDIC; the Chairman of  NCUA, and other interested parties. Copies will also be made available to  others upon request. In addition, this report will be available at no charge  on the GAO Web site at http://www.gao.gov.
This report was prepared under the direction of Debra R. Johnson,  Assistant Director. Please contact Ms. Johnson or me at (202) 512-8678 if  you or your staff have any questions about this report. Other major  contributors are acknowledged in appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: To respond to a mandate in the Conference Report to accompany the  House Joint Resolution 2, for the Fiscal Year 2003 Consolidated  Appropriations Act—which directed us to study the enforcement of  section 43 of the Federal Deposit Insurance Act—we (1) determined the  current status of enforcement of these requirements; (2) determined the  extent of compliance with each requirement and the potential impact on  consumers if these requirements were not enforced, and (3) evaluated  which federal agency could most effectively enforce section 43.
To better understand the issues around deposit insurance, we reviewed  and analyzed relevant studies on federal and private deposit insurers for  both credit unions and other depository institutions. In addition, we  interviewed officials at the National Credit Union Administration (NCUA),  the Department of the Treasury, and the Federal Deposit Insurance  Corporation (FDIC) to obtain perspectives specific to federal and private  deposit insurance. We also obtained views from credit union industry  groups including the National Association of Federal Credit Unions,  National Association of State Credit Union Supervisors, and Credit Union  National Association, Inc. (CUNA).
We limited our assessment of “depository institutions lacking federal  deposit insurance” to state-chartered credit unions that purchase private  deposit insurance because banks, thrifts, and federally chartered credit  unions generally are required to purchase federal deposit insurance. As of  December 2002, 214 state-chartered credit unions lacked federal deposit  insurance, and all but two were privately insured. In addition, our analysis  was limited to primary deposit insurance.
To determine the extent to which private deposit insurance is permitted  and utilized by state-chartered credit unions, we conducted a survey of  state credit union regulators in all 50 states. Our survey had a 100-percent  response rate. In addition to the survey, we obtained and analyzed  financial and membership data of privately insured credit unions from a  variety of sources (NCUA, Credit Union Insurance Corporation of  Maryland, CUNA, and American Share Insurance (ASI), the only remaining  provider of primary share insurance). We found this universe difficult to  confirm because in our discussions with state regulators, NCUA, and ASI  officials, and our review of state laws, we identified other states that could  permit credit unions to purchase private deposit insurance.
To determine the regulatory differences between privately insured credit  unions and federally insured state-chartered credit unions, we identified  and analyzed statutes and regulations related to deposit insurance at the  state and federal levels. In addition, we interviewed officials at NCUA and  conducted interviews with officials at the state credit union regulatory  agencies from Alabama, California, Idaho, Indiana, Illinois, Maryland,  Nevada, New Hampshire, and Ohio.
To determine the extent to which privately insured credit unions met  federal disclosure requirements, we identified and analyzed federal  consumer disclosure provisions in section 43 of the Federal Deposit  Insurance Act, as amended, and conducted unannounced site visits to 57  privately insured credit unions (49 main and 8 branch locations) in  Alabama, California, Illinois, Indiana, and Ohio. The credit union locations  were selected based on a convenience sample using state and city location  coupled with random selection of main or branch locations within each  city. About 90 percent of the locations we visited were the main institution  rather than a branch institution. This decision was based on the  assumption that if the main locations were not in compliance, then the  branch locations would probably not be in compliance either. Although  neither these site visits, nor the findings they produced, render a  statistically valid sample of all possible main and branch locations of  privately insured credit unions necessary in order to determine the  “extent” of compliance, we believe that what we found is robust enough,  both in the aggregate and within each state, to raise concern about lack of  disclosure in privately insured credit unions. During each site visit, using a  systematic check sheet, we noted whether or not the credit union had  conspicuously displayed the fact that the institution was not federally  insured (on signs or stickers, for example).
In addition, from these same 57 sites visited, we collected a total of 227  credit union documents that we analyzed for disclosure compliance. While  section 43 requires depository institutions lacking federal deposit  insurance to disclose they are not federally insured in personal  documents, such as periodic statements, we did not collect them. We also  conducted an analysis of the Web sites of 78 privately insured credit  unions, in all eight states where credit unions are privately insured, to  determine whether disclosures required by section 43 were included. To  identify these Web sites, we conducted a Web search. We attempted to  locate Web sites for all 212 privately insured credit unions; however, we  were able to only identify 78 Web sites. We analyzed all Web sites  identified. Finally, we interviewed FTC staff to understand their role in  enforcement of requirements of section 43 for depository institutions  lacking federal deposit insurance.
To understand how private deposit insurers operate, we conducted  interviews with officials at three private deposit insurers for credit  unions—ASI (Ohio), Credit Union Insurance Corporation (Maryland), and  Massachusetts Credit Union Share Insurance Corporation  (Massachusetts). Because ASI was the only fully operating provider of  private primary deposit insurance, ASI was the focus of our review. We  obtained documents related to ASI operations such as financial statements  and annual audits and analyzed them for the auditor’s opinion noting  adherence with accounting principles generally accepted in the United  States. To determine the extent to which ASI provided copies of its annual  audits to state regulators and credit unions it insures, we interviewed state  regulators in states where ASI insures credit unions and contacted the  management of 26 credit unions that are insured by ASI. Additionally, to  understand the state regulatory framework for ASI, we interviewed  officials at the Ohio Department of Insurance and Department of Financial  Institutions.
To evaluate which federal agency could most effectively enforce these  requirements, we interviewed FTC staff and officials from NCUA, FDIC,  and various interested industry groups to discuss their perspectives and  obtain their positions on enforcement of section 43 requirements. We also  conducted legal research and analysis related to these provisions.
We conducted our work in Washington, D.C., Alabama, California, Indiana,  Illinois, Maryland, Massachusetts, Ohio, and Virginia between February  and August 2003, in accordance with generally accepted government  auditing standards.
section_title: Appendix II: Entities That Enforce Various Laws at Credit Unions
paragraphs: Real Estate Settlement Procedures Act   Bank Secrecy Act (Currency and Foreign Transactions  Reporting Act)
DOJ              Department of Justice  FHA/VA        Federal Housing Administration/Veterans Administration  FRB              Federal Reserve Board  FTC              Federal Trade Commission  HUD             Department of Housing and Urban Development  TREAS         Treasury Department  The USA PATRIOT Act amended the Bank Secrecy Act, as well as other legislation.
section_title: Appendix III: Comments from the National Credit Union Administration
section_title: Appendix IV: Comments from the Federal Trade Commission
section_title: Appendix V: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to the persons named above, Anne Cangi, Theresa L. Chen,  William Chatlos, Kimberly Mcgatlin, Donald Porteous, Emma Quach,  Barbara Roesmann, and Paul Thompson made key contributions to this  report.