SEC Likely To Play Growing Role In Evolution Of CUSOs

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The Credit Union Service Organization (CUSO) continues to evolve-But what form will that evolution take during the first decade of the new century?

The answer may be decided by the SEC.

During CUNA's Governmental Affairs Conference (GAC) here, four people did their best to answer that question. Bob Dorsa, president of the National Association of CUSOs (NACUSO), noted that in the 1970s the primary function of CUSOs was to facilitate shared branches and networks for operational services. In the 1980s, CUSOs began expanding to offer services directly to members that the credit union could not. CUSOs in the 1990s reflected other broad changes in the economy.

"Then we had the bull market run of the 1990s, when many CUSOs were formed to offer investments," Dorsa said. "But I remind you that that's not all CUSOs do." He cited other services offered, and added, "Aggregation of real estate lending is an opportunity for credit unions of all sizes to get a bigger portion of the members' share of wallet."

Paul Peterson, a staff attorney with NCUA, pointed out that the agency's oversight of CUSOs has also evolved.

"Instead of a broad laundry list of permissible activities, we changed the regulation to be inclusive rather than exclusive, and to allow activities unless they were expressly forbidden," he said.

But it's another regulator that CUSOs are most concerned with now. Kevin Thompson, deputy general counsel with CUNA Mutual Group, reported that many CUSOs are currently wrestling with issues related to the Securities and Exchange Commision (SEC) in the area of securities. When Chubb Securities asked whether placing a representative on the premises of a bank meant the bank had to register as a broker/dealer, the SEC sent what's called a no-action letter. This same scenario was then applied to credit unions and CUSOs. When Congress passed the Gramm-Leach- Bliley Act, including amendments to earlier laws, the SEC issued a rule exempting banks and savings associations. CUSOs were not included.

Explanation From SEC

Speaking to the meeting, the SEC's chief counsel, Catherine McGuire, said, "Generally, a person who promotes the sale of investments must be licensed in order to protect consumers. If they act badly, their license can be taken."

She explained that those who receive a commission on transactions must be registered as a broker/dealer (this is known as the salesman's stake). The employer of the registered representative is also covered in this arrangement.

"Our concern is the temptation for an unregistered person who can still profit and will work for the broker/dealer, yet in order to complete a transaction hands the customer over to another person who may give the customer a stack of documents and offer no explanation," said McGuire. "We need to go after both."

McGuire gave no indication of whether the SEC will extend CUSOs the same exemption as banks, savings banks and credit unions, but said the regulator had been engaged in talks with NACUSO, CUNA and other CU groups and was mindful of the possible implications.

Concern Over Lack of Familiarity

She said that some facts brought to the SEC's attention are the lack of familiarity most credit unions have with the sales of securities and the potential liability associated with such transactions. In addition, many CUs are below the asset size where a permitted networking arrangement with a broker/dealer is economical. The SEC is interested in minimizing any confusion on CU members' part, too. Finally, the fact that a credit union registered as a broker/dealer may not serve non-members, but a CUSO may do so was a consideration, according to McGuire.

McGuire wouldn't offer any timeframe for when the SEC may release its final rule governing credit unions and CUSOs.

Drawing laugher again, she answered an attendee's question with: "We're working on other things; you may have read about them in the headlines!"

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