Comments on Proposed Rule Corporate Credit Unions
July 27, 2020
Gerard Poliquin
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314
Re: NASCUS – Comments on Proposed Rule Corporate Credit Unions (RIN 3133-AF13)
Dear Mr. Poliquin:
The National Association of State Credit Union Supervisors (NASCUS)[1] submits the following comments in response to the National Credit Union Administration’s (NCUA’s) request for comments on RIN 3133-AF13, a proposed rule on Corporate Credit Unions.[2] The proposed rule would make several significant amendments to NCUA Rules and Regulations Part 704, Corporate Credit Unions. Changes would include permitting a corporate credit union to make a minimal investment in a credit union service organization (CUSO) without the CUSO being classified as a corporate CUSO; expanding eligibility to serve on a corporate credit union’s board; amending the experience and other requirements for a corporate credit union’s enterprise risk management expert; and providing for corporate credit union investments in subordinated debt instruments issued by natural person credit unions pursuant to other NCUA rulemaking.
NASCUS appreciates the opportunity to provide NCUA comments on this proposed rule. We support regulatory changes that provide corporate credit unions increased flexibility in meeting the needs of their natural person credit unions members.[3] As evidenced by NCUA’s Interim Final Rule: CLF, corporate credit unions play a vital role supporting the natural person credit union system.[4] Many of the changes proposed by NCUA will enhance corporate credit union operational opportunities which in turn should enhance corporate credit union service to natural person credit unions. NASCUS supports this rulemaking. In our comments below, we provide more detailed responses on several key provisions of NCUA’s proposal make a few related recommendations for amending § 704.
Permitting Corporate Credit Unions to make Minimal Investments in Natural Person Credit Union CUSOs will Support Innovation
Current NCUA rules define a corporate credit union service organization (corporate CUSO) in part by any partial ownership by a corporate credit union.[5] In addition, NCUA subjects corporate CUSOs to rules distinct from those for federal credit union CUSOs.[6] The proposed rule would amend the definition of corporate CUSO to allow a corporate credit union to make a de minimus, non-controlling investment in a natural person credit union CUSO without that CUSO being designated a corporate CUSO.[7] NCUA believes making this change will benefit both natural person credit unions and corporate credit unions by enhancing the ability of the credit union system to pool its resources to pursue innovation without materially increasing risk to the system or the share insurance fund.
NASCUS agrees and we support permitting corporate credit unions to invest in natural person credit union CUSOs without those CUSOs automatically being re-designated as corporate credit union CUSOs. This change, when finalized, will benefit both natural person credit unions and corporate credit unions.[8]
To effectuate the proposed change, NCUA would amend several definitions in § 704.2, including redefining a CUSO to apply to both corporate CUSOs and natural person credit union CUSOs.[9] Removing the distinction between a corporate credit union CUSO and natural person credit union would result in an aggregation of all loans to natural person CUSOs, corporate credit union CUSOs and investments in corporate credit union CUSOs. The Supplemental Material does not sufficiently discuss the need for this change in the treatment of loans to natural person CUSOs and corporate credit union CUSOs for us to support this proposed provision.
Furthermore, NASCUS opposes the proposed incorporation by reference of § 723.4 to corporate credit union lending to CUSOs.[10] NASCUS supports due diligence requirements for commercial lending but questions the use of incorporation by reference. Part 704 is a self- contained rule for corporate credit unions. Rather than complicate compliance by placing the burden on credit union staff to cross reference the natural person commercial lending rule, NCUA should include any additional due diligence requirements within the text of Part 704.
Executive Compensation Disclosure Changes Make Sense
Part 704 currently requires corporate credit unions disclose compensation of certain employees including compensation received from any corporate credit union CUSOs. Under the proposed changes, compensation for covered persons received from a natural person CUSO must also be disclosed. The proposed rule would require the dual employee disclose to his or her corporate credit union employer compensation from a natural person credit union CUSO to allow the corporate credit union to make the required disclosures.
We support this proposed change.
NASCUS Supports Broadening Corporate Credit Union Board Eligibility
The proposed rule would expand the credit union officials eligible to serve on a corporate credit union board.[11] NASCUS has long supported expanding the eligibility provisions of § 704.14. As we have previously noted, there are various backgrounds of senior credit union managers that could provide valuable experience to a corporate credit union board. By re-evaluating the prescriptive limitations of the rule, NCUA empowers corporate credit unions to access a broader array of expertise to serve on corporate credit union boards.
In addition to the change proposed in this rulemaking, we urge NCUA to defer to state rules with respect to governance matters such as board qualifications. There is no evidence so doing would increase risk to the share insurance fund. While we appreciate NCUA’s desire for uniformity, we believe that the homogenization of the corporate credit union system presents its own risks by stifling innovation.
NCUA Should Further Amend Enterprise Risk Management Rules
Stating that it is no longer “necessary for prescriptive experience requirements and for the risk management expert to be independent of the corporate credit union” NCUA is proposing allowing corporate credit unions more “discretion in choosing an adequate risk management expert.”[12]
NASCUS agrees that corporate credit unions possess the skill and experience to manage their risk management functions. We support NCUA’s elimination of the five-year experience requirement as well as elimination of the requirement that the risk management expert be an outsider. We are confident corporate credit unions can prudently and effectively manage the enterprise risk management function internally.
However, as proposed, the changes to the risk management function are incomplete and if implemented as proposed will prove problematic. NASCUS recommends NCUA make further revisions to § 704.21 to allow corporate credit unions to truly manage this function internally. NCUA should eliminate the prohibitions in § 704(21)(d)(2) and (d)(3) related to the supervision of the risk management expert.
NASCUS believes that the enterprise risk management function can be responsibly fulfilled by a qualified employee that has independence and access to direct reporting to the board while simultaneously being part of the management team and subject to the supervision of the CEO or the CEO’s designee.[13] Ultimately, the credit union’s CEO is responsible for the executive team and answers to the board of directors. So should be the case with the risk management function.
We are not familiar with any like provision in the broader financial services marketplace. The risk management function should be internalized in corporate credit unions and ultimately managed by the CEO as are all other executive employees. It is relevant that NCUA limits service on the board of a corporate credit union to executives from natural person credit unions. It would seem that a corporate credit union’s board would be especially positioned to understand the critical role played by the risk management officer and well positioned to react if undue influence is being exerted by the CEO.
Purchase of Natural person Credit Union Subordinated Debt Obligations
Proposed § 704.2 would require corporate credit unions deduct from their Tier I capital an amount equal to investments in natural person credit union subordinated debt. Given the interconnectivity of the credit union system and the prudence of mitigating the potential of cascading losses we understand this prescription. Particularly as the credit union system begins to implement subordinated debt, NASCUS supports this provision.
Proposed Appendix D and Permissible Corporate Credit Union CUSO Activities
Currently, NCUA’s rules limit corporate credit union CUSO activities to brokerage services, investment advisory services, and other activities approved in writing by NCUA.[14] Unlike NCUA’s rules for FCU natural person CUSOs, NCUA does not list all approved activities within the regulation. Instead, for corporate credit unions, NCUA maintains a list of approved activities on the agency’s website. NCUA now proposes to remove approved corporate credit union activities from the agency website and incorporate those activities into the face of the regulation in a new Appendix D.[15]
NASCUS opposes this proposed change. We recommend NCUA retain the current practice of making approved corporate credit union CUSO activities available on the agency website. We further recommend NCUA add a provision to § 704.11 codifying the practice of consulting with state regulators before making a determination on “other activities” for state chartered corporate credit union CUSOs.
NASCUS’s opposition to Appendix D is rooted in our belief that incorporating approved activities into the regulation itself will hinder the efficient administration of this provision as future approved activities would require Notice and Comment.[16] As the list of approved activities is readily available to the public and corporate credit unions, nothing is gained by incorporating the list directly into an new Appendix. Rather, the administrative process would add delay and hamper the ability of corporate credit unions to obtain timely determinations of proposed new activities.
With respect to consulting with state regulators, it is wholly appropriate NCUA formally do so when making determinations on activities for CUSOs owned exclusively by state chartered corporate credit unions. Consulting with the appropriate state regulators poses no safety and soundness risks and no delays to the approval process. Restoring this small measure of dual chartering to the corporate system would be another positive step toward improving corporate credit union supervision. While consultation might be the current practice, it is important to memorialize that practice in regulation.
NASCUS believes the proposed changes will improve § 704 and enhance not only the corporate credit union system, but the natural person credit union system as well. However, more can and should be done to modernize § 704. We recommend NCUA consider the following:[17]
- Forming a task force with state regulators to review future adjustments to the corporate credit union rules
- Reintroduce meaningful dual chartering by eliminating unnecessary preemption of state rules, particularly with respect to corporate credit union governance; and
- Enhance the joint supervision of corporates and their risk to natural person credit unions by formalizing increased information sharing between NCUA and the state regulators supervising the corporate credit union’s natural person credit union members.
NASCUS is on record recognizing that dramatic action was necessary in the aftermath of the losses sustained in the corporate system during the Great Recession. We supported NCUA rulemaking then and support the agency in comprehensive oversight now. However, it also remains true that not all corporate credit unions cascaded losses into the natural person credit union system. Some corporate credit unions managed to operate safely and soundly throughout the crisis with far more leigh way than is permitted today. We urge a comprehensive re-evaluation of Part 704 to provide corporate credit unions greater flexibility to serve natural person credit unions and to reintroduce elements of dual chartering to drive regulatory innovation.
We would be happy to discuss our comments in detail or provide additional information at NCUA’s convenience.
Sincerely,
– signature redacted for electronic publication –
Brian Knight
Executive Vice President & General Counsel
[1] NASCUS is the professional association of the nation’s 45 state credit union regulatory agencies that charter and supervise over 2,000 state credit unions. NASCUS membership includes state regulatory agencies, state chartered and federally chartered credit unions, and other important stakeholders in the state system. State chartered credit unions hold nearly half the $1.6 trillion assets in the credit union system and are proud to represent nearly half of the 122 million credit union members.
[2] Corporate Credit Union, 85 Fed. Reg. 60, at 17288 (March 27, 2020).
[3] See NASCUS – Comments on Interim Final Rule: CLF (RIN 3133-AF18) (June 29, 2020); NASCUS Comments: Regulatory Review 2019 (June 1, 2019); NASCUS Comments: Corporate Credit Unions (August 30, 2017); NASCUS Comments on Proposed Rule – Corporate Credit Unions (January 5, 2015), NASCUS Comments Proposed Rule Corporate Credit Unions (March 5, 2010).
[4] NCUA Interim Final Rule: CLF, 85 Fed. Reg. 83, at 23731 (April 29, 2020).
[5] 12 C.F.R. 704.11.
[6] NCUA’s natural person credit union rules, Part 712, have only limited application to federally insured state credit unions.
[7] 85 Fed. Reg. 60, at 17288 (March 27, 2020).
[8] While beyond the scope of this Public Notice, NASCUS supports allowing corporate credit unions to make minimal equity investments in non-CUSO start-ups and technology companies in order to help ensure the credit union system can participate in cutting edge innovation and technology development wherever it occurs.
[9] See Proposed § 704.2, 85 Fed. Reg. 60, at 17294 (March 27, 2020).
[10] 85 Fed. Reg. 60, at 17295 (March 27, 2020).
[11] 85 Fed. Reg. 60, at 17291 (March 27, 2020).
[12] Ibid.
[13] As an example, the Bank Secrecy Act officer reports directly to the board while remaining an employee within the credit union’s chain of command.
[14] 12 C.F.R § 704.11(e)(1).
[15] 85 Fed. Reg. 60, at 17292 (March 27, 2020).
[16] In general, NASCUS supports Notice and Comment and adherence to the Administrative Procedure Act. However, we have made limited exceptions previously (See NASCUS – Comments on Temporary Regulatory Relief Rule in Response to COVID-19 – Prompt Corrective Action, June 29, 2020).
[17] See NASCUS Comments to NCUA, Corporate Credit Unions (August 30, 2017).