SEC Proposed Rule Would Allow CUs To Begin Offering Sweep Accounts

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The Securities and Exchange Commission proposed rules last week that will allow credit unions to offer mutual fund Sweep Accounts, allowing members to authorize their credit union to automatically sweep funds in or out of their accounts to or from mutual funds.

The proposal has been in the works for more than three years since one credit union, Evangelical Christian CU, of Brea, Calif., applied to offer the service, long popular among bank and S&L customers. That request has been lingering in the SEC's rulemaking process since then.

The SEC proposal would also formalize credit unions' authority to develop so-called networking arrangements, allowing credit unions to set up third-party brokerages on site and to earn a commission from those arrangements, without first registering with the SEC.

The proposal would give parity to credit unions with banks and S&Ls on securities activities and implements rules for the Gramm-Leach-Bliley Act of 1999, which eliminated the Depression-era wall between commercial banking and investment banking.

Guy Messick, a Philadelphia lawyer who specializes in credit union law, said many credit unions have already been engaging in such arrangements since NCUA's enactment of its Incidental Powers Rule in 2001. "This won't change the way we're doing things," said Messick.

Since passage of the Incidental Powers Rule, credit unions have been increasingly moving their securities operations in-house from CUSOs, said Messick. Messick and other credit union representatives have been lobbying the SEC for three years for a ruling allowing a continued exemption for CUSOs from SEC registration, in light of the Incidental Powers Rule, but Messick said he is doubtful the SEC will go along.

NCUA Chairman JoAnn Johnson said she was pleased that the proposal would provide parity for credit unions with banks and S&Ls. "While the SEC has informally allowed credit unions to engage in these third-party brokerage transactions, the new proposal formalizes and provides flexibility in the criteria for credit unions to engage in this activity," she said.

The proposal sets out three specific areas where credit unions can participate in securities sales without registering with the SEC. They include providing onsite or Internet-based broker-dealer services for members. Offering Sweep Accounts. Or buying and selling securities for their own accounts and as fiduciaries for members.

The SEC originally proposed these rules in 2001, but pulled them back after broad criticism from the banks. Agency officials expect the five-member Commission to vote on final rules by year-end and implement them by Jan. 2006.

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