RegWatch - CUNA CFO Council

CUNA Regulatory Affairs (edited by the CFO Council Regulatory Committee)
December 18, 2008 | COMMENTS

Regulatory Issues of Interest to CUNA CFO Council Members

In This Issue:

• Update on the Mark-to-Market Accounting Rule
• Federal Housing Finance Agency Issues Rule on Federal Home Loan Bank Directors
• Agencies Issue Rules on Unlawful Internet Gambling
• CUNA Comments on Rule Regarding Share Insurance for Revocable Trusts

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UPDATE ON THE MARK-TO-MARKET ACCOUNTING RULE

The recent Emergency Economic Stabilization Act tasked the Securities and Exchange Commission (SEC) with conducting a study on the potentially negative effects of mark-to-market (MTM) accounting on the balance sheets of many financial institutions. The SEC must report its findings to Congress by January 2; the report will include the SEC's recommendation on whether to suspend the accounting rule.

Certain assets held by financial institutions are required to be measured using the MTM accounting technique. This essentially requires these assets to be valued at the price they could be sold for today on the open market. Of concern, is the current lack of willing buyers for many of these assets, including mortgage-backed securities. Although credit unions do not report directly to the SEC they must follow Generally Accepted Accounting Principles which mandate MTM.

Critics of MTM accounting argue that the rule ignores the holder's intent and ability to retain an asset. Mortgage-backed securities, for example, will likely fetch much less than their original purchase price in today's market. Proponents of the accounting rule site the need for full transparency of the condition of an asset to ensure investor confidence. Many of these individuals believe MTM has not caused the problem but has simply illuminated existing issues with certain assets.

CUNA has been in contact with individuals at both the SEC and the Financial Accounting Standards Board (FASB) to ensure the concerns of the credit union industry are addressed. Additionally, CUNA's Accounting Task Force has been closely monitoring the SEC's study and has attended both public roundtable discussions.

In a recent letter to the SEC, CUNA emphasized that while credit unions are impacted to a much lesser degree by the current economic downturn than are most other mainstream financial institutions, it is still important that a thorough examination be conducted on changes to any accounting rules that credit unions must follow.

The SEC has recently indicated that it is unlikely to suspend the MTM accounting rule but will make some revisions in an effort to improve it. CUNA will provide an update on this issue as soon as the SEC releases a definite plan.

- Luke Martone, Regulatory Research Counsel

 

FEDERAL HOUSING FINANCE AGENCY ISSUES RULE ON FEDERAL HOME LOAN BANK DIRECTORS

CUNA recently submitted a comment letter to the Federal Housing Finance Agency (Agency) in response to an interim final rule regarding the election of the boards of directors of the Federal Home Loan Banks (FHLBs). Until now, the boards of directors of each FHLB were comprised of elected directors and those who were appointed by the Federal Housing Finance Board, the predecessor to the Federal Housing Finance Agency (Agency). The Housing and Economic Recovery Act (Act) enacted earlier this year now gives the members of the FHLBs the right to elect these independent directors, and the interim final rule outlines the process for nominating and conducting the election of these directors.

In the letter, CUNA requests the opportunity to work with the Agency to enhance credit union representation on the FHLB boards of directors as this will help facilitate the statutory requirement that certain of the directors represent consumer and community interests. As part of these efforts, CUNA suggests that when reviewing and commenting on the list of nominees to these boards of directors, as required under these rules, the Agency monitor the extent to which credit unions and other minority interests are represented on these boards and take action if these interests are not adequately represented.

Click here for a copy of CUNA's Regulatory Comment Call for more information.

- Jeff Bloch, Senior Assistant General Counsel

 

AGENCIES ISSUE RULES ON UNLAWFUL INTERNET GAMBLING

Despite serious concerns raised by House Financial Services Committee Chairman Barney Frank, along with CUNA and others, the Department of Treasury and the Federal Reserve Board (the Agencies) have issued a final rule implementing the Unlawful Internet Gambling Enforcement Act.

As in the proposal and as required by the Act, the following five payment systems are addressed in the final rule: automated clearing house systems (ACH), card systems, check collection systems, money transmitting businesses, and wire transfer systems. Most participants in the ACH, check collection, and wire transfer systems will be exempt. However, participants having a customer relationship with a business and those that send or receive certain cross-border transactions, including credit unions that engage in these activities, are not exempt.

The rules include several improvements from the proposal, such as a due diligence process that requires State gambling commissions and other gambling licensing authorities to determine whether gambling activities are unlawful. However, despite these improvements CUNA still has a number of concerns with the Act and implementing regulation and will continue to work with regulators and Congressional offices to address these issues.

Click here for CUNA's Final Rule Analysis.

- Lilly Thomas, Assistant General Counsel

 

CUNA COMMENTS ON INTERIM FINAL RULE REGARDING SHARE INSURANCE FOR REVOCABLE TRUSTS

At its November Board meeting, the NCUA issued an interim final rule on share insurance for revocable trust accounts. The rule makes several changes that simplify the process for determining account coverage.

One of the major changes is the elimination of the “qualified beneficiary” requirement; beneficiaries previously had to be a spouse, child, grandchild, parent or sibling of the account owner. Share insurance coverage is now based on the existence of any beneficiary named in the revocable trust, as long as they are a natural person, charity, or non-profit organization. CUNA supports this change as it will likely increase eligible beneficiaries.

Another major change is to the method for determining the amount of account coverage. Previously, any unequal beneficial interests had to be accounted for when determining insurance coverage. For revocable trust accounts with $1,250,000 or less, the final rule does away with the previous requirement and insures each beneficiary up to $250,000. In the letter, CUNA states its support for this new method, as it is a much easier way to determine coverage.

Under the final rule, revocable trust accounts with more than $1,250,000 and more than five beneficiaries are insured for the greater of: $1,250,000 or the aggregate amount of the beneficiaries' interest, limited to $250,000 per beneficiary. Thus, it is necessary to account for each beneficiary's particular interest in measuring coverage for these accounts. While CUNA does not object to this method, it does suggest that the NCUA rewrite the section of the rule pertaining to these larger trust accounts as the wording is confusing.

In the letter, CUNA also took the opportunity to again encourage the NCUA to revisit its policy on share insurance coverage for IOLTA accounts. CUNA suggests that coverage be based on the membership status of the attorney establishing the account and not on his or her clients who contribute to the account.

A copy of CUNA's comment letter will be posted on our Regulatory Comment Call page shortly.

- Luke Martone, Regulatory Research Counsel