CREDIT UNION SERVICE CORPORATIONS
Title 9-B MRSA §864 authorizes state-chartered credit unions to invest in service corporations. Section 131(37) identifies specific functions in which a service corporation, whether owned by a state-chartered financial institution or a state-chartered credit union, may engage. The same section also grants the Superintendent authority to promulgate regulations granting state-chartered credit unions the power to engage in any activity authorized under federal law for service corporations owned or controlled by federally chartered credit unions (a similar parity authority exists for activities of service corporations in which state-chartered financial institutions may invest). That authority is granted with the intent of maintaining competitive equality between federally chartered and state-chartered credit unions. This regulation is being promulgated to authorize state-chartered credit unions to invest in a service corporation that may engage in any activity permissible for a service corporation owned by a federally chartered credit union.
- Title 9-B MRSA Section 111 declares that it is the policy of the state to supervise financial institutions in a manner to assure their strength, stability, and efficiency and encourage development and expansion of financial services advantageous to the public welfare.
- Title 9-B MRSA Section 131(37) gives the Superintendent the power to authorize by regulation a service corporation to engage in any activity authorized under federal law for a service corporation owned or controlled by a federally chartered credit union.
- Title 9-B MRSA Section 215 gives the Superintendent the power to implement, by rule or regulation, any provision of law relating to the supervision of financial institutions.
- Title 9-B MRSA Section 828 gives the Superintendent the authority to allow, by regulation, a state-chartered credit union to engage in any activity which has been authorized under federal law or regulation for credit unions chartered by or otherwise subject to the jurisdiction of the federal government.
- Title 9-B MRSA Section 864 authorizes a state-chartered credit union to invest in service corporations as defined in Section 131.
This regulation authorizes state-chartered credit unions to invest in service corporations that may engage in any activity permissible for a service corporation owned by a federally chartered credit union. This regulation provides parity between state-chartered credit unions and federally chartered credit unions.
For purposes of this regulation, the following terms have the following meanings:
- "Acquire" means to acquire, directly or indirectly, control through acquisition of shares, merger or consolidation, acquisition of assets or assumption of liabilities, or any similar transaction.
- "Affiliated credit union" means a credit union that has invested, either directly or indirectly through an intermediary, in the service corporation.
- "Control" has the same meaning as set forth in 9-B MRSA §1011(4).
- "Credit union" means a credit union as defined in 9-B MRSA §131(12) or a credit union organized under the laws of the United States or another State.
- "Credit union authorized to do business in this State" means a credit union as defined in 9-B MRSA §131(12-A).
- "Establish" means to open and conduct business through a service corporation over which the state-chartered credit union has control.
- "Invest" means any advance of funds, including the purchase of securities and the making of a loan, except a payment for rent earned, goods sold and delivered, or services rendered prior to the making of such payment.
- "Majority-owned" means a service corporation of which 50% or more of the outstanding voting securities are owned by a state-chartered credit union.
- "Service corporation" has the same meaning as set forth in 9-B MRSA §131(37).
- "State credit union service corporation" means a service corporation in which a state-chartered credit union has invested.
IV. GENERAL PROVISIONS OF THE REGULATION
- Subject to prior written notification to the Superintendent, pursuant to Section D(1), a state-chartered credit union may invest in service corporations that provide services and activities authorized for service corporations in which federally-chartered credit unions may invest under federal law and regulation (Federal Credit Union Act Section 107(7)(I) and 107(5)(D) and NCUA Regulation 701.27).
- Subject to the prior written approval of the Superintendent, pursuant to Section D(2), a state-chartered credit union may establish or acquire service corporations that provide services and activities authorized for service corporations in which federally-chartered credit unions may invest under federal law and regulation (Federal Credit Union Act Section 107(7)(I) and 107(5)(D) and NCUA Regulation 701.27).
- Subject to the prior written approval of the Superintendent, pursuant to Section D(5), a state-chartered credit union may increase its investment in a state credit union service corporation in excess of the prescribed limits of Section B(2).
- GENERAL RULES AND RESTRICTIONS
- A state credit union service corporation must be structured as either a corporation, a limited partnership, or a limited liability company in order to limit the state-chartered credit union’s exposure to loss. If the state credit union service corporation is a limited partnership, the investing state-chartered credit union may participate only as a limited partner; if the state credit union service corporation is a limited liability company, the investing state-chartered credit union may participate only as a member. The state-chartered credit union must not engage in any activities which, under state law, would cause the credit union to lose its status as a limited partner or a member, and correspondingly its limited liability, and be treated as a general partner. The state-chartered credit union must obtain a written legal opinion affirming its position as a limited partner or a member.
- The aggregate investment in an individual state credit union service corporation by a state-chartered credit union may not exceed 10% of the state-chartered credit union’s share capital and surplus, unless a higher amount is approved in writing by the Superintendent, as provided for in Section D(5).
- The aggregate investment in all state credit union service corporations by an individual state-chartered credit union may not exceed 50% of the state-chartered credit union’s share capital and surplus.
- At least 75% of the services provided in Maine by the state credit union service corporation must be to credit unions and the members of affiliated credit unions. This restriction does not apply to any state credit union service corporation formed prior to July 31, 1994 provided it does not significantly expand its services and activities beyond those conducted at that date.
- Notwithstanding the provisions of Section IV(A)(1), no state credit union service corporation may engage in any activity that is specifically prohibited under state law.
- The provisions of 9-B MRSA §445 apply if the controlling interest in the state credit union service corporation is owned by credit unions authorized to do business in this State.
- SUPERVISORY REQUIREMENTS
- A state-chartered credit union must record its investment in a state credit union service corporation according to generally accepted accounting principles (GAAP).
- A state credit union service corporation shall be subject to the provisions of Parts 1 and 2 and Chapters 46, but not including Section 462, and 88 of the Maine Banking Code. The enumeration of the foregoing provisions of the Banking Code shall not be held to make other sections of the Banking Code inapplicable if those sections would otherwise be applicable to a state credit union service corporation pursuant to the activities in which it is engaged.
- Each state credit union service corporation shall be subject to examination by the Bureau of Banking in the same manner and to the same extent as the investing state-chartered credit union.
- APPROVALS and NOTIFICATIONS
- Prior to investing, or to increasing its investment, in a service corporation, a state-chartered credit union must notify the Superintendent, providing the following information:
- the nature of the proposed activity;
- the extent to which the activity will be provided;
- how that activity will benefit the members of the state-chartered credit union;
- how that activity is associated with routine credit union operations;
- the authority, either under state or federal law, under which the proposed activity is to be engaged;
- evidence that the investment is within the prescribed limits of Section (B)(2) and (3) or, if the investment exceeds the limit of Section (B)(2), a request to exceed that limit pursuant to Section D(5); and
- any other information requested by the Superintendent.
The notification and investment are subject to the applicable provisions of 9-B MRSA §445.
- Prior to establishing or acquiring a service corporation, a state-chartered credit union must file an application, including the information required in Section 1 above, with the Superintendent; the application will be processed in accordance with 9-B MRSA Section 445 and Chapter 25.
- The Bureau shall review the proposed investment, including an acquisition or establishment, by the state-chartered credit union to ensure that it is reasonable and consistent with (1) the proposed scope of operations of the state credit union service corporation and (2) the financial condition of the investing state-chartered credit union and affiliated credit unions. In addition, the Bureau shall consider the potential benefits to members of the state-chartered credit union and affiliated credit unions. The Superintendent may condition approval of an application filed pursuant to Section 2 above on a higher or lower investment by the state-chartered credit union. The Superintendent also may exclude as an affiliated credit union for purposes of Section IV(B)(4) a credit union whose direct or indirect investment is considered de minimis.
- A state-chartered credit union may not continue its investment in a state credit union service corporation if the Superintendent finds that the state credit union service corporation is engaging in activities which are not legally permissible. It is the responsibility of the investing state-chartered credit union to monitor the activities of the state credit union service corporation to ensure that they are legally permissible.
- A state-chartered credit union that proposes to increase its investment in a state credit union service corporation above the limitation of Section B(2) must submit a written request to the Superintendent. The request shall include the basis for the increased investment and how the increased investment will benefit the members of the state-chartered credit union, as well as such additional information the Superintendent considers necessary.
V. FEDERAL/STATE REGULATIONS
It is recognized that the National Credit Union Administration and the Maine Bureau of Banking have promulgated, or may promulgate, in the future, regulations governing the manner in which credit unions invest in service corporations. It is further recognized that there may exist differences in scope and coverage between this regulation and those promulgated by federal regulatory agencies. It is not the intent of this regulation to permit any practice which is not permitted by the National Credit Union Administration. To the contrary, besides any other restriction or limitation stated herein, each state-chartered credit union must comply with the regulations of the National Credit Union Administration, as appropriate.
VI. EFFECTIVE DATE: August 21, 1996
The Maine Credit Union League requested the Bureau to promulgate a regulation authorizing state-chartered credit unions to invest in service corporations that engage in activities authorized for credit union service corporations in which federal credit unions may invest pursuant to National Credit Union Administration Interpretive Regulation 701.27.
State-chartered credit unions are authorized by statute to invest in service corporations engaging in certain specifically enumerated activities. State-chartered credit unions are also authorized, subject to state regulation, to invest in service corporations that engage in any activity which has been authorized for service corporations owned or controlled by federally chartered credit unions. This regulation is being promulgated to establish parity, with respect to investment in service corporations, between state-chartered and federal credit unions.
The regulation authorizes state-chartered credit unions to invest in service corporations that may engage in any activity that (1) is permissible for service corporations owned by federally chartered credit unions and (2) is not specifically prohibited under Maine law. The rule requires the prior notification to the Superintendent by a state-chartered credit union for the investment in a service corporation. However, if the investment constitutes an establishment or acquisition of a service corporation, then the prior approval by the Superintendent is necessary. The rule also requires compliance with statutory limitations for future investments.
Notice of this proposed rule was published on or about May 29, 1996 and comments were solicited through July 8, 1996. Comments were received from the Maine Association of Community Banks ("MACB"), the Maine Bankers Association ("MBA") and the Maine Credit Union League ("MECUL"). MECUL also responded to the comments submitted by MACB and MBA. Their comments are addressed below.
MECUL requested that the definition of "invest" be changed by replacing the word "stock" with "securities" which more closely parallels the language in the NCUA’s regulation. MECUL also suggested that the word "except" be replaced by "but not including." The word "securities" and its broader inclusion of investment instruments more accurately reflects the intent of the word "invest" and therefore its definition (Section G of the final regulation) was changed to include that term. The word "except" was retained as originally proposed.
MECUL suggested that the word "authorized" in the definition of "state credit union service organization" should be deleted because it may have the effect of rendering the Regulation inapplicable in the event an unauthorized investment is made by a state-chartered credit union. Section J was changed to incorporate MECUL’s suggestion.
IV. GENERAL PROVISIONS
Because Section A and Section D are closely interconnected, comments on one section generally related to, or affected, the other section as well. Accordingly, the comments on both sections are addressed jointly. These sections also were the most controversial, caused a great deal of confusion among the commenters, and generated several suggestions, at opposite ends of the spectrum. MECUL questioned the authority of the Bureau to (1) approve an investment in a service corporation, (2) apply the public notice and comment period requirements of Section 252 to an application, and (3) regulate the expanded activities of a state credit union service corporation. MACB, conversely, seemed to imply in its comments that a formal application pursuant to Chapter 25 is required for any investment or change in activities by the state credit union service corporation.
The wording of Section 864, its incorporation of Section 445, and the use of the words "acquire," "establish" and "invest" in particular, seem to have been the basis for much of the confusion. Acquire and establish involve an element of "control" and it is this control factor that distinguishes them from invest; definitions for acquire and establish have been added, at Section III(A) and (F), respectively, to differentiate between the two concepts. The Bureau interprets Sections 445 and 864 to require Bureau approval only if the investment (1) constitutes an acquisition or establishment or (2) exceeds 10% of the state-chartered credit union’s share capital and surplus. Further, an application subject to Chapter 25 of the Maine Banking Code is required only if the state-chartered credit union is acquiring or establishing the state credit union service corporation. Therefore, if a state-chartered credit union is only investing in a state credit union service corporation, and not acquiring or establishing a state credit union service corporation, approval by the Bureau is not required. However, prior to investing or to increasing its investment in a state credit union service corporation, a state-chartered credit union must provide the Bureau with certain specified information. Consistent with the above interpretation, Section A has been rewritten to clarify when a notification is required and when an approval is required and Section D has been rewritten to state the required procedures in submitting a notice or an application to the Bureau; any ambiguity there may have been in the proposed regulation should now be removed. Sections D(1) and (2) were expanded as MACB suggested to clarify that the provisions of 9-B MRSA §445 apply, as appropriate, to notifications and applications.
MECUL commented that Section A(1)(b) and D(3) exceed the authority of the Superintendent and should be reworded to state that a state credit union service corporation may expand its activities unless the activities are not legally permissible and that Bureau approval is not required. Consistent with the Bureau’s interpretation as stated in the preceding paragraph and in response to comments, Section A(1)(b) was deleted and Section D(4) of the final regulation (proposed Section D(3)) was rewritten to clarify that the Bureau may require a state-chartered credit union to terminate its investment in a state credit union service corporation if the service corporation is engaging in activities that are not legally permissible. Also, this rewrite should satisfy the concerns expressed by MACB regarding the continued investment in a state credit union service corporation that has expanded its activities.
MECUL expressed concern that a formal application and its attendant public notice may end up in litigation and stated that "no other financial institution…is required to file a formal application in connection with a service corporation investment." First, the Maine Banking Code clearly requires all state-chartered financial institutions to file a formal application prior to acquiring or establishing a service corporation; this requirement applies equally to trust companies, savings banks, savings and loan associations and credit unions. Second, while recognizing MECUL’s concern over potential litigation, the relevant statutes in the Banking Code also clearly state that the application is subject to the Maine Administrative Procedure Act, and any decision may be challenged in court. The fact that federally chartered credit unions may acquire or establish a service corporation without filing a formal application or obtaining prior NCUA approval is irrelevant. Notwithstanding the goal of achieving parity, the Bureau is bound by the Banking Code.
MACB commented that the phrase "the extent to which the activity will be provided" in Section D(1)(b) is inherently ambiguous and therefore needs to be rewritten. The Bureau does not disagree that the phrase is ambiguous, but believes that the phrase allows for flexibility by the Bureau. Section D(1) is designed to provide the Bureau with sufficient information to evaluate the proposed investment (i.e., its legality and the risk to the investing state-chartered credit union) while at the same time minimizing the regulatory burden on the credit union and avoiding micro-management of its operations. This approach is practiced by the Bureau in processing all applications and notifications filed with it. The subsection was retained as proposed.
MECUL also suggested two technical changes, in Section A(2) and Section D(4), relating to the omission of Section B(2) in referencing statutory limitations on the aggregate investment in an individual service corporation and in all service corporations. MACB also noted the omission of Section B(2) in Section A(2). Section A(2), and the accompanying reference to Section B(2), was deleted in the rewrite of Section A and the reference to Section B(3) was corrected to Section B(2) in the rewrite of Section D(5) of the final regulation.
MECUL and MACB both commented that they were unclear on the intent of the last sentence of Section D(2), which permitted the Superintendent to exclude a credit union whose investment was de minimis from being considered an affiliated credit union. At least part of the confusion is attributable to a typographical error in the proposed regulation; the reference to Section IV(B)(2) should have been IV(B)(4). Section IV(B)(4) restates the statutory provision (9-B MRSA §864.2(B)) requiring that 75% of the services of a non-grandfathered state credit union service corporation be to credit unions and members of affiliated credit unions. The intent of the last sentence of Section D(2) is to preclude a state credit union service corporation from expanding its customer base by including as an affiliated credit union a credit union that has made a de minimis investment in the state credit union service corporation. A de minimis investment is a relative term that will be viewed in context of the capital of the investing credit union and the capital of the state credit union service corporation. The last sentence of Section D(3) (Section D(2) of the proposed regulation) has been corrected by changing the reference to Section IV(B)(4), but otherwise has been retained as proposed.
MACB and MECUL suggested that Section B(1) be expanded to include limitations, comparable to those in the NCUA’s regulation, that would restrict a state-chartered credit union’s participation in a limited partnership. These limitations make it clear that a state-chartered credit union can only be a limited partner with limited liability; it can not be nor function as a general partner. Such limiting language was added to Section B(1) as suggested.
MECUL also requested that Section B(1) be expanded to include limited liability companies. A limited liability company is an unincorporated business entity that has characteristics of both a partnership and a corporation: it is treated as a corporation for liability purposes (i.e., its members have limited liability) but is treated as a partnership for tax purposes. The formation of limited liability companies was authorized in Maine by P.L. 1993, Chapter 718 (31 MRSA Chapter 13), effective January 1, 1995. 31 MRSA §762 provides, in general, that any statutory reference to limited partnerships is deemed to include limited liability companies. Therefore, the Bureau finds that, for the purposes of service corporations and operating subsidiaries, the structure of a limited liability company is consistent with that of a limited partnership. Accordingly, Section B(1) has been expanded to include limited liability companies.
MACB commented that Section 864(2) of the Maine Banking Code limits the aggregate investment in all service corporations by a state-chartered credit union to 10% of its capital. While acknowledging that subsections (A) and (B) of Section 864(2) refer to service corporation in the singular, MACB’s interpretation ignores the prefacing comments of Section 864(2) which state that "a credit union may invest 10% of its share capital and surplus in any service corporation…" (emphasis added) The use of the word "any," which can mean one, some, or all, must be read in conjunction with Sections 864(1) and 864(3). Section 864(1) states that a credit union may invest in service corporations (plural); this section clearly permits investment in more than one service corporation. Section 864(3) incorporates Section 445 in certain conditions; Section 445 sets an aggregate investment limit in service corporations of 50% of capital. The Bureau therefore concludes, based on its collective reading of Sections 864(1), 864(2) and 864(3), concludes that the 10% limit applies to a single service corporation. Accordingly, the 10% maximum investment limit in a single service corporation, set forth in Section B(2), has been retained.
MACB and MBA also both noted that NCUA Regulation 701.27 limits the aggregate investment in a service corporation to 1% of the credit union’s capital, which is significantly less than the limits of Sections B(2) and (3) of this regulation. They therefore requested that the Bureau adopt the NCUA’s lower limit. As stated above in the paragraph following the commentary relating to Section A(1)(b) and D(3), the Bureau does endorse the concept of parity, but is also bound by existing State law; in all instances, parity is not legally achievable (nor may it always be desirable). The NCUA 1% limit is based on a statutory limit (Section 107(7)(I) of the Federal Credit Union Act) whereas the 10% limit of Section B(2) is founded on 9-B MRSA §864.2. The Bureau, in response to an MBA comment, concurs that a 10% investment could, at times, be excessive vis-a-vis the safe and sound operations of the credit union and therefore replaced the term "is limited to" with "may not exceed" in Section B(2) to clarify that the investment may be less than 10%. The Bureau’s supervisory powers are adequate to monitor a state-chartered credit union’s level of investment in a service corporation and, if appropriate, to require a state-chartered credit union to reduce its investment.
MACB stated that the aggregate 50% investment limit provided for in Section B(3) exceeds the general 10% limit which it believes Section 864(2) establishes. However, as discussed above, the Bureau does not agree with their interpretation of Section 864(2). MACB is correct in stating that the aggregate 50% limit expressed in Section 445(2) applies to state-chartered credit unions only if the controlling interest in the service corporation is owned by credit unions authorized to do business in Maine. However, due to safety and soundness reasons, the Bureau believes that an aggregate investment limit of 50% is more than adequate. Accordingly, no change was made to this section.
MECUL requested that Section B(4) be rewritten to incorporate the grandfather date of July 31, 1994 that is included in 9-B MRSA §864.2(B). Section 864.2(B) was amended in 1994 to limit the activities a state credit union service corporation could provide to non-credit union members, but the limitation applies only to state credit union service corporations formed after July 31, 1994. The Bureau agrees with MECUL that the July 31, 1994 grandfather date should be included in the Regulation, but the Bureau also believes that it is not appropriate to permit state credit union service corporations formed prior to July 31, 1994 to expand without limitations. Accordingly, in keeping with the legislative intent, the Bureau has changed Section B(4) to clarify that the 75% limitation does not apply to a grandfathered state credit union service corporation, provided the state credit union service corporation has not significantly expanded its activities.
MECUL objected to each of the provisions of Section C, citing the lack of a definition for "majority-owned," the line-by-line consolidation requirement, the application of statutory limits on a consolidated basis, the application of the Maine Banking Code and Bureau Regulations and Bulletins to state credit union service corporations, and the Bureau’s examination powers. A definition of "majority-owned" has been added to the definition section, at Section III (H).
The line-by-line consolidation requirement for a majority-owned state credit union service corporation was modified in Section C(1) to require that a state-chartered credit union account for its investment in a state credit union service corporation according to generally accepted accounting principles; this treatment is consistent with the NCUA regulation. This requirement eliminates the need for the provision addressing the statutory borrowing, lending and fixed asset limitations. Accordingly, that portion of Section C(1) was deleted.
It was certainly not the intent to apply all provisions of the Maine Banking Code to a state credit union service corporation. Accordingly, the Bureau has rewritten Section C(2) to clarify that only Parts 1 and 2 and Chapter 88 (which incorporates Chapter 46) will apply. Section 462 was excluded to clarify that employees, officers and directors of a state-chartered credit union may serve in a similar capacity for the state credit union service corporation. The Bureau, however, added a sentence that will provide for applying future amendments to the Banking Code to state credit union service corporations if the amendments are relevant to the operations of the service corporation.
Last, while the examination powers provided for in Section C(3) may be broader than MECUL desires, the Bureau believes that these powers are essential to its function as the primary regulator for state-chartered credit unions and are consistent with its examination powers for affiliates of any state-chartered financial institution. These powers are specifically provided for in 9-B MRSA §445(3) and the Bureau has historically interpreted 9-B MRSA §224(1) to include the examination of subsidiaries and service corporations of financial institutions. However, the Bureau does not anticipate that it will examine state credit union service corporations with the same frequency it examines state-chartered credit unions, unless the condition of the state credit union service corporation and the size of the credit union’s dollar investment in the state credit union service corporation warrant such frequent examination.
V. FEDERAL/STATE REGULATIONS
MECUL stated that it may be impossible for state-chartered credit unions to "fully comply" with both this regulation and NCUA regulations, due to possible inconsistencies between this regulation and NCUA Regulation 701.27, which governs investments in and loans to credit union service organizations by federal credit unions. First, Regulation 701.27 does not apply directly to state-chartered credit unions, but may apply to a state credit union service corporation if a federal credit union has invested in or made a loan to the service corporation. Second, the Bureau recognizes that, at times, there may be inconsistencies between state and federal regulations. In such instances, the Bureau would expect a state-chartered credit union to comply first with the regulations of its primary regulator and to work with both its regulators in an effort to reach a mutually satisfactory resolution. Nevertheless, the Bureau has replaced the modifier "fully" in the last sentence in describing the degree of compliance with "as appropriate."
MACB and MBA both raised the issue of the tax status of credit union service corporations, expressing concern over the competitive advantage such organizations would have if they are tax-exempt, and requested that the Bureau clarify their tax status. As the Bureau has communicated to both trade associations on numerous occasions, tax policy is not within the purview of the Bureau, a fact which MACB acknowledged in its comments. Accordingly, the Bureau is not in a position to respond definitively to MACB and MBA’s request to rule on the tax status of a credit union service corporation; the question should be addressed to the Internal Revenue Service and the State Bureau of Taxation. However, it is our understanding that credit union service corporations are for profit businesses and therefore subject to taxation to the same extent as any other similarly structured entity (i.e., corporation, partnership, etc.).
MACB commented that the regulation does not include certain requirements or standards, such as capital adequacy and conflicts of interest, that are included in the NCUA regulation. While acknowledging that these requirements or standards are not specifically addressed in the regulation, the Bureau believes that its ability to monitor these areas is adequately provided for in the application process, the examination process and, if necessary, through its enforcement powers.
MBA commented that, according to one credit union CEO, credit union service corporations "sell credit union members products they don’t need." MBA’s comments went on to (1) imply that credit union management and employees lack expertise in numerous products that the service corporations sell; (2) question the consumer safeguards in place for the sale/distribution of mutual funds, annuities, insurance and mortgages; (3) suggest that guidelines for an adequate credit union return on investment in a service corporation be established; and (4) suggest that this regulation, by expanding a state-chartered credit union’s ability to invest in a service corporation, may be used as a stepping stone by the credit unions to expand their fields of membership. Their comments are addressed below.
The comments by one anonymous East Coast credit union CEO should not condemn all credit union service corporations. The products being sold referred to mutual funds and insurance, products for which there is extensive regulatory oversight, including licensing requirements. Additionally, at least in the area of mutual fund and annuity sales, the National Association of Security Dealer’s Rules of Fair Practice state that investment advice may only be provided by trained and knowledgeable staff and that, prior to recommending a product, sales personnel shall make reasonable efforts to perform a suitability analysis. To the extent that customers are sold products they do not "need," the Bureau can address such abuses through the examination process and, if necessary, through its enforcement powers.
One reason that service corporations are established, whether by banks, thrifts or credit unions, is to obtain expertise in a specific area that the establishing entity may not have. In fact, the anonymous credit union CEO referred to in the preceding paragraph, made exactly this point in the same article, stating that "he’s learned to use CUSOs (credit union service organizations) that already have an expertise in a particular field, such as mortgages (and) ‘the CUSO can serve other credit unions that don’t do mortgages well.’" The Bureau does not expect financial institution management, be it of a bank, thrift or credit union, to be "experts" in all facets of the institution’s operations, or in the operations of service corporations or subsidiaries in which it has invested. However, this does not absolve management from responsibility to ensure that such entities in which it has invested have competent management. Unfortunately, there is no sure-fire plan that guarantees that financial institutions, or their service corporations, will have qualified management. The Bureau, however, has sufficient powers to address issues relating to management qualifications in the application process or, at a later date after the service corporation becomes operational, in the same manner it can deal with abuses cited above.
In the area of consumer safeguards, service corporations of any financial institution generally are subject to the same consumer rules and disclosures as any other business engaging in the same activity. Responding specifically to the sale of mutual funds and annuities, Bureau of Banking Regulations 29 and 30 apply to credit union service corporations. Last, the Bureau’s examination and enforcement powers are also effective deterrents in preventing consumer abuses.
MBA is correct in stating that "Maine law is silent as to guidelines for an adequate return on investment for state chartered credit unions which invest in CUSOs." However, the Bureau traditionally reviews the return on all investments, and the appropriateness of individual investments, as part of its examination for safety and soundness. The Bureau is prepared to require corrective action if an investment is unsafe and unsound.
Last, there is absolutely no mention of field of membership expansion in this regulation and there is no connection, direct or indirect, between this regulation and field of membership expansion. The Bureau evaluates each request for a field of membership expansion on its own merits and in accordance with the requirements of 9-B MRSA §814.1. It is not readily conceivable how this regulation would be more likely to result in requests for field of membership expansions than any other regulation. It is also noted again that this regulation does not grant state-chartered credit unions any broader powers to invest in service corporations than is provided in the law; this regulation merely eliminates the need for continual promulgation of regulations for activities not previously specifically authorized but permissible under the federal credit union parity provision. This is the same approach that the Bureau utilized in adopting Regulation #7, which authorized Maine financial institutions and Maine financial institution holding companies to engage in closely related activities provided by federal law and regulation.
1 There is no legislative history
that specifically addresses the use of the different words (invest,
acquire, establish) and therefore the Bureau is left to read the statutory