- Sales by a CUSO wholly or partly owned by a federal credit union.
- Sales by a “dual employee” operating as both a credit union employee and an employee of a third party broker.
- Sales resulting from a federal credit union bringing a registered third party broker to its members through a networking agreement or other means.
II. General Guidelines
- Ensure the broker can provide the services credit union members need.
- Review the broker’s financial statements and capital adequacy.
- Determine if the broker can adequately supervise its sales representatives at the credit union’s location.
- Seek references for the broker and the sales representatives that will be working at the credit union (preferably other depository institutions) and speak with those references.
- Conduct background and Financial Industry Regulatory Authority (FINRA) 6 checks on the broker’s principals and the sales representatives that will be working at the federal credit union. For example, FINRA BrokerCheck® is a free resource federal credit unions can utilize to help research the professional backgrounds of current and former FINRA-registered brokerage firms and brokers.7
- Retain key documentation reflecting its due diligence process in selecting a broker for a third party brokerage arrangement. Documentation should be made available to NCUA examiners, if necessary.
B. Credit Union Policies, Procedures and Agreements
- The features of the sales program. Credit union policies and agreements should describe the types of products that a broker may offer through the third party brokerage arrangement. For all products, the credit union should identify specific laws, regulations, and any other limitations or requirements, including qualitative considerations, that will expressly govern the selection and marketing of products a third party broker may offer. Qualitative considerations include an analysis of the level of complexity and volatility in the investments that the credit union will permit the broker to offer members. For example, comprehensive qualitative investment data (e.g., key ratios, dollar amounts, risk parameters, etc.) should be prepared and presented to the federal credit union’s management and board of directors for review.
- A description of the responsibilities of the credit union and the third party broker. Credit union policies and contracts should make clear that the third party broker is primarily responsible for ensuring that the nondeposit sales function is conducted in compliance with all applicable laws, regulations, and policies. The credit union should maintain the right to check for compliance and access member accounts for verification and oversight.
- Indemnification by the third party broker. Credit unions should require contracts with third party brokers to include provisions to indemnify the federal credit union for any monetary damages arising from nondeposit sales activities.
- The roles of credit union, third party broker, and dual employees. Policies should describe the roles of credit union employees in nondeposit investment activities, including the limits on their activities. Policies and contracts should also identify and describe the duties of the broker’s sales representatives and indicate who will supervise the sales representatives. If the third party brokerage arrangement involves the use of a dual employee, credit union policies should include job descriptions for the duties performed for the credit union and the nondeposit investment sales duties performed for the third party broker. Credit unions should seek an indemnification agreement from the broker, as described above, to limit credit union liability arising from employee misconduct related to nondeposit investment activities conducted by a dual employee.
- The location of nondeposit sales. Credit union policies should describe where nondeposit sales may take place and how those sales will be separated from deposit-taking activities.
- The use of credit union member information. Policies should describe the information that may be transferred between the credit union and the third party broker or the broker’s sales representative. The policies and contracts should describe how such information will be used, how the information will be safeguarded, and the associated privacy notices to be provided to members. The policies and contract terms should comply with NCUA's Privacy of Consumer Financial Information Rule and NCUA's Security Program Rule. 12 C.F.R. Parts 716 and 748. The third party broker should agree in writing to comply with the credit union's policies on information practices.
- Termination of the contract. Contracts should contain a provision that permits the credit union to terminate the contract for both cause and for the convenience of the credit union. Failure by the third party broker to supervise its sales representative adequately should be included as a specific for-cause reason for contract termination.
- Compliance with the requirements of all applicable law and regulation. Credit unions should maintain programs to monitor compliance by the third party broker, its salespeople, and other entities involved in the sales of nondeposit investments. The compliance function should be performed independently of any nondeposit investment product sales and management. At a minimum, the compliance function should include a system that monitors member complaints and periodically reviews and randomly samples member account activity to look for evidence of abuse. Credit unions should also provide regular, periodic compliance reports to their board of directors to ensure appropriate oversight.
- are not federally insured;
- are not obligations of the credit union;
- are not guaranteed by the credit union;
- involve investment risk; and
- if applicable, are being offered by a dual employee who accepts deposits on behalf of the credit union and also sells nondeposit investment products on behalf of a third party broker.
1 NCUA issued a proposed Interpretive Ruling and Policy Statement (IRPS) to address the sale of nondeposit investment products in 2005. This rulemaking was not finalized because securities regulations for federal credit unions are under consideration by the Securities and Exchange Commission (SEC). See, n.3.
2 See e.g., OGC Op. 01-0742 (August 31, 2001); OGC Op. 02-0277 (May 24, 2002); OGC Op. 03-0308 (May 1, 2003); OGC Op. 03-0736 (January 19, 2005); OGC Op. 09-0511 (June 3, 2009).
3 Although Regulation R does not apply to federal credit unions, SEC has recognized that third party brokerage arrangements are permissible for federal credit unions and is considering the possibility of a separate federal credit union regulation. The preamble to Regulation R notes: “While the GLBA’s “bank” exceptions do not by their terms apply to federal credit unions, [requests for similar exemptions for federal credit unions] are under consideration by the Commission, which is the agency with authority to address these matters. The Commission notes the existence of SEC staff positions with regard to networking relationships between a federal credit union and a broker-dealer and is not addressing this issue at this time. See, e.g., Chubb Securities Corp., 1993 SEC No-Act. LEXIS 1204 (Nov. 24, 1993).” 72 Fed. Reg. 56,514, 56,516, n.26 (Oct. 3, 2007).
4 State chartered federal credit unions must look to their own state law for authority to engage in third party brokerage arrangements.
5 Third party brokerage arrangements with a CUSO can be bilateral or multilateral. Bilateral arrangements involve an agreement between a federal credit union and a registered CUSO. Multilateral arrangements involve an agreement between a federal credit union, an unregistered or registered CUSO or CUSOs, and a registered broker or brokers. A CUSO in a multilateral brokerage arrangement will likely have to register with the SEC as a broker-dealer, depending on the extent of its involvement in the securities activities. See SEC “Guide to Broker-Dealer Registration” (online at http://www.sec.gov/divisions/marketreg/bdguide.htm (opens new window)).
6 The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization of securities firms and the successor to the National Association of Securities Dealers, Inc. (NASD).
7 FINRA BrokerCheck® is online at http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/ (opens new window). NCUA does not require or endorse FINRA BrokerCheck® and we are providing this link for information purposes only.
8 A federal credit union offering investment advice services through the use of a shared employee with a third party registered investment adviser should adhere to the guidance regarding dual employees found in Part C of this letter.
9 This authority is pursuant to the incidental powers rule, which defines “finder activities” as “activities in which [a federal credit union] introduce[s] or otherwise bring[s] together outside vendors with [its] members so that the two parties may negotiate and consummate transactions”. 12 C.F.R. §721.3(f). Under the Investment Advisers Act of 1940, “finders,” by engaging in solicitation activities, may themselves have to register as advisers or may need to conduct their activities under the oversight of a registered adviser. See 17 C.F.R. §275.206(4)-3.