NCUA Ltr 1991-03-29 FCU Investment in Investment Companies

NATIONAl CREDIT UNION AOMINISTRATION
WASHINGTON, O,C.
March 29, 1991
Murray L. Simpson
Thelen, Martin, Johnson & Bridges
Two Embarcadero Center
San Francisco, CA 94111-3995
Re:
FCU Investment In Investment Companies
(Your February 25, 1991, Letter)
Dear Mr. Simpson:
You state that the FranRlin Adjustable U.S. Government
Securities Fund (the Fund) currently invests in securities
that federal credit unions (FCUs) may invest in directly.
You propose to restructure the Fund into a so-called "Hub and
Spoke" arrangement, in which 100% of the assets of the Fund
will be invested in shares of the Franklin Institutional U.S.
Government ARM Fund (the Hub), a newly formed open-end
management investment company. The "Spokes" of the Hub will
be the Fund and other institutional investors. You state
that the Hub will invest in securities that FCUs may invest
in directly. You ask whether the Fund will be a permissible
investment for FCUs after the restructuring, when the Fund
will invest in securities through the Hub rather than
directly.
As you know, the National Credit Union Administration (NCUA)
has taken the position that mutual funds are permissible
investments for FCUs provided that all-of the securities in
which the mutual fund invests are permissible investments for
FCUs. Sections 107(7), (8), and (15) of the FCU Act, 12
U.SoC. SS1757(7), (8), and (15), and Part 703 of NCUA’s Rules
and Regulations, 12 C.F.R. Part 703, set forth the
securities, deposits, and other obligations in which an FCU
may invest. Prior to 1987, NCUA issued opinions regarding
Murray L. Simpson
March 29, 1991
Page 2
the legality of particular mutual funds as FCU investments.
For the reasons discussed in the enclosed Letter to Credit
Unions No. 92 (August 13, 1987), NCUA no longer issues such
opinions. Accordingly, we will not evaluate whether the
current Fund or proposed Hub are permissible investments for
FCUs. Considering just the Hub and Spoke arrangement,
however, it is our opinion that if the Hub is a permissible
investment for FCUs, and the Fund invests 100% of its assets
in the Hub, then the Fund is a permissible investment for
FCUs.
As a final matter, although we stated that we would not
determine whether the Fund or Hub are permissible investments
for FCUs, let us point out that NCUA has recently issued
proposed revisions to Part 703 of its Rules and Regulations
(see 56 Fed. Reg. 11944, March 21, 1991) which may affect
that determination. A copy of the proposed regulation is
enclosed. We note that among the Fund’s possible
investments, you list stripped mortgage securities. Please
be advised that NCUA has proposed to prohibit FCUs from
purchasing such securities. If the proposed prohibition
becomes final, FCUs would not be permitted to invest in a
mutual fund which invests in stripped mortgage securities.
Sincerely,
Hattie M. Ulan
Associate General Counsel
Enclosures
GC/LH:sg
SSIC 4660
91-0234
11944
Proposed Rules
,"h~ ~ of’1~ FEDER/d.
OF~C~ OF PERSONNEL
MANAGEMENT
S CFR Pm’t 300
U.S. O~c~ of Per~ol~eJ M,.ni~m~t
Coa~ta~ ~ N~w’mao‘
12 CFR Pwt ~
As explained morn hdly below, the
prol~Mi would prohilm3
lnvw~nents that expose credit unions to
tn inordinate d~.d intent rate
RIN 3204-A641
AOe~’~.Nettmml Credit Union
Administr~ttoa
Employment (General): S~o~
Prac’Jce~
smI~en A~ part of its sstsblidsd
policy of ~
AolJ~:y: Office o[ Pe.’sor~el
Management.
AC’nO~: Notice of w~hdrawa/of
proposeJ
U~on ~~ ~A)
~Q ~CVA h~
gove~ fe~ ~t
mves~en~ ~ ~posi~ ~ p~
immean~ts for the ~ mjorW of
St~tl~. The OtT, ce of Pe~ozu~l
Manaae=ent ( OP,~
p~o~ to ~end ~e ~p~si
p~:ed~es set
Federal Ke~Matio~ ~ R~ct tO job
analysis, r~ievance, and
emplo~e=t oppo~J~
c~n~y aFplicable to ~eder~
Gove~ent emp[o~e~t
p~ed~es.
issued on J~e
wo~d have Rmoved ce~am
nonsta~to~ appe~
j~s~c~on of ~e Merit S~m
~o~ec~on
~questJ for
ex~mation ra~ be ~ ~ O~
or ~
emp!~ent p~c~
app~pHate ~ses. ~e men~t
would have also avoided duplicative
cr&orcement of equal empl~Fment
opportunity requirements ~t ~ ~t~
~he juds~ction of ~d c~e~d by
~aceda~s e~o~ad ~y ~e ~al
E=plo~ent OF~i~y Co~i~
CP~..~ ~s wi~awi~ ~ ~r=~csal due to
~a~ ~h~k ~v~ ~t ~ve
been ~
Interpretive R~liq msdPolic£
I~-1:Poti~7 ea,Sebcttmtof Secn~ss
DeaJers and Unsuitable
~:~se~ han~ed by OPM aRd because
:here few case~ may ~ ~an~ed ~der
~e Equal ~plc~ent ~po~ty
C~ission ~OC} pmced~es.
de~vattw~ peoducta, ~,J~ ss St~Lpped
pin,bit f~e~ ~t
and mq~ ~et ~cb f~ ~t
~on estabfish
po~es mnm~nt
~t U~ A~ N~A R~m
and ~a~o~
nsk ~vee~amnt~ to dispose af the
investment within 1 ye~ born the
effective date of the re~J81ion ~tle,J~ ¯
longer period o~ tiara is approved
writlr~ by the appropHam re~onal
n feder~ ~t
to ~ ~e ~t q~
The proh/bitlon ouceru/nS o,porte
c~dit urJon lw,,eslm~uts i~ Intended to
pro~dbit federal ¢red/t un/ons h’om
txe.~actL~ l:mMnell with coqx~te
c~edit u~iona that do not ope~te
compliance with pmq ~q)4 d the NCUA
wo~d ~ ~
ex.sm/n~i ~ NCUA. ~
p~nsio~ of ~e
Refo~ R~ve~ and
of
co~ents on "~e p~pos~d ~a~ to
pa~ ~ of ~e N~A
~CUA ~ m =ot ,ee~ co--eats
c= ~ose ~o~ or
r~a~oa w~cb wo~d ~ot ~ e~ted
by ~s pm~l
oA~ Co~en~
or be/o~ May ~.
AOOnZS~ Send comments to ~y
FOR IroRTHL"R INFORMA’J’ION
~s
Mor’,~e Ob~att0I (CMOs) ~ Peel
Estate Morta~ ~,~sla~ax Cond~ta
A~is~s~on ~. 1776 G SL~t
~.. Was~:o~ DC ~.
inv~t in an7 comte =~dit ~mlon
irmep~t/v~ o~ its d~ o! ~nplianc~
with par~ ~4 end without m~ard
whether oz not it is ex, m~i~.~d by NCUA.
Although r.learly m~ndat~d b~ sound
busi.nese pra~d~, ~edera| ~--edit unions
are not prelentty required to have
written invest~nent policies. As
previously mentioned, the proposal
would require each tre~lerel c~ed~t
to have written ~vestmen! policies
consietent wi..l’, the Pedzrsl Credit Un~on
Act. NCUA Rulee and Res~dation~. end
other applicable laws and r~gu]aticns. In
addison, the rule wouJd req’~ire that
those policies address certain minim’~m
investment consideratlon~.
fedor~J cz~Llt ,~do~ ~ylo dial ¢s~dSt
quality or ¯
when m~d~ ms ia~mmat tirol t~ ~ot
fu/ly cov~.~d by F~l~/dropout
mm~=~nc~. The
centares ¯
vurio~ NOJA 1,m~mm ~ Ce~lit Uulmm
develop w~lttmm.lmmmuumt $mBciem. In
~mne canto. ~e boen£e f~lu~e m
~e ham been
p~btted fnves~en~
cont~ ~e ~q~eat
eff~Uve date
lo~er ~I~
d~c~.
~o~8~ d~ioa
p~ ~j~
Secu’on ~ De~u’tJonB
Tlds section ham been apanded to
L~Je the followL~ key tem~
Ave~qa Lifo
CotlatemL~d MortsaSe ObLija~ion
(CMO}
Corporate ~-’~Jtt u~ou
*Reel F~tate Mortp~ lnv~ansnt
Section RSA Amt/~Ac~"~
List of the kex tm.m s~d d~hdUms ~
in the reguld~ion. ~ reaction ~ the
propose/bu been expanded to
the ad~o~ ~ tm a~ ~U~
necess~ to ~p~t
~e. ~e ~( ~cn (~ ~) w~d
co~ta~ ~e new ~=ent
~ves~e~t ~es consis:~t
~veo~nt ~ ~ o~
~s~bh for ~t~ ~t
~ves~en~ ~mpiy
~t U~ou
Re~ta~onm. rand
a~ mvemted m m ~.e ~d p~t
It ~ b~n N~A’5 !on3mt~
posi~on ~8t ea~ (ede~ ~t ~’I
boa~ of ~cto~ mho~d devdop
min~um ~aves~t c:=~ide~t~cr~ ~at ~tte~ ~vem~e~t
:)::~e ~olic~es wo~d nee~ t~ ad~s~
out i~ ~spou~b~em
The fo~ sec~on (] :~.4) se~ out
of ~e Fede~
casein au~o~ed 5ut
~vesh~en( activates. ~s sec~on
been
w)u]d cont~ ~e c~w :sq~ment ~at ,~nionl on n,~e~uJ o~Jio~
re~Jla~c~s. ~d c~r app~Ie
unions, and o( state-chartered, federally
insured corporate ~’ed/t ~o~
been ~e ~e as ~o~ of f~e~
~ons ~d s~te-~e~ f~er~y
~v~en= ~at we~ not
for £ede~ ~o~te ~t ~o~ but
¯ 8( were ~itted by ~e laws
state ~ w~ e state-~e~
f~dersgy ~d ~orate ~t
was ~. ~q~ ~tt t
acco~t ~ ~=b~shed ~d ~d~ to
¯ e extent ~ ~e ~e~= ~
b~k ~d ~et v~ of ~
mves~enL N~A has no
morte~S~lmd .e~m~ (MBB}
mertSqas ~het ee~vas to mn-tem~
~nd has b~ able ~ ~te
"pas..d ~hmqk to end, an, mats’ m a
in’o mm lain. ~ach MM Ires s rated
~S~ ~ ~t of ~ ~
doll~ ~ ~d ~ ~t
de~ M ~ ~ ~t
f~d~y ~ ~t ~
8ub8~ ~pU~ ~
averase knph ef ~ne that each d,da~
N~A R~as ~d ~~
m~ff~ ~ffo~ ~e ~t
N~A ~as ~t ~ ~m
new inves~nent proldb/tlo~s as de~td
below.
detonn/aed by the appropriate mSlmml
Corporate credit um’o~ It has bern
director. If the regioe~l dimcto~
N.CUA’s {o~tincLt~ Ix~itioa not to
~e ex~pflon to a f~ ~
~e~t ~on’s con~~ l~
restless of ~e ~t ~vclv~ ~8
posi~on has =pp~ed to ~ feder~y
~d etate~e~d ~te ~t
~ons. whaler or not ~e ~on ~
e~ed by N~ or o~te= =
~mp~= ~ p~ ~ of ~e N~A
Rules ~d Re~8~o~
~e ~ves~ent ~we~ ~d
au~o~en of fede~ ~te ~e~t
de~ ~t = ~omte ~t ~
b not ~ ~bs~U~ ~mpU~= ~
p~ ~ ~ as eu~ l= not ~t~ ~
m~ of ~at ~omte ~t
uoncomp~ A =~rtte ~t
~ ~ ~ deemed to ~ =
¯ e o~o~ ~t ~on b not
~sten~
Vur~ a pe/od of d~Jnlne JntJ~m
rateS, it may become
~ ~ a~ o~
app~ a~ ~
~ o~er w~ It ~ ~
MBS will preps}, at ¯ time when
investors most desire 8 fixed rate
r~tr~==t ~ ¯ per/ed of
iaterest ratas. Bxed rate s~ase
bon.owm will Im less ind/ned to
raflnancs their mortgage loans, while
market price of ¯ Dxed rate MBS w,,ll
Imowu u prlvat~ Ixues and may be
backed by poo~ tnmsrmsce, lettm~ o~
cred/t or ot~r ~dit s~c=ment~ ia
~kb fluc~m wtd~ u the
martp~= ~ mad ~ Mo~ov~. at
8ove___n~ment-spouaored MBS pro~
~vu=~s not isned or gum~nteed by
GNMA. FNM~ o~ the R-fl~tC ~m
I~1~ ms t~ prepa.vmmst pettm~ of the
Because SM~.% a~ mJaUvely new to
the markemlace {the f~t SMB~ was
issued by FNMA i~ eaHy ~ the
supply in existence i= Umited. As a
consequen~ca, holders of Sl~ may
also be su~Sjected to e ~ de~ of
marketab~ty risk. M~’ketabiUty r/sk is
the risk that a =ecu~t~ may not be
reacLLly ~onvertibla to cash (or cashed
or..’y at ¯ siLa~L~cant loss}, ff it suddenJy
needs to be =oicL
Due to the 8t~culat~ve natu~ of these
~e:zu~t~e~, their extreme price voJa~lty.
and L,~e lindted m~rket that may e3djt
for the sale of los a~.d POe. the NCUA
Board has d~ie,-mm~d ’.~.at SMBS= a~
8eneraJ]7 unsuP.aS!e for aH fedeTsJ
cre~t u~cns. AcccrdAn~ly. the proposed
re~fz~on pm~bi= the put-..Sase of
S~-~c. This prohibi~on is re~ec:ecf L~
§ 70:.3(t~ o£ the 1~roposed =’,de.
mslxm~ to iavester coacams ~
the uacamJat~ of cash flows assno/atsd
w~th the ability of the ~
borrowe~ to prepay the mort~ nots. A
~’~dO can be cobb,tara "Lized. d~y by
who~ lo~n mor~e=, but morn often
coUa=r~ by ~Sm-ism~ ~
~a~d by G~ ~ ~
~IC ~d held ~ ~ for ~0
flows ~ ~tved p~ mm ~ ~
mo~e, ~d~ a ~0 ~
ae~ente~ ~d ~d = a~~ ~
funclion of the present value of ~he
anUdptted cash flows undm’ usumm/
prepayment speeds end rates of mtm.n
associated w/th reinvested8 paymente
h’om the tmdeflying collateral befm~
¯ s~lmtlon to bondholdm~. This cash
flow is exl~naly ssn~ve to
~a~eetin8 the maflcet value of residuals
dude a lack of Uqu/dit~ end tm~erl
deaJe~ p~L
Certain C~O residuab misht be
emplcyed to offset dsciir.es in ~he value
of fixed rate merriness or an
portfoUo in a period cf risin~ interest
rates. However, Like an I0 SMBS. the
ur, certainty re~ardi~ prepayments on
¯ e underly~g coUch.era] mzkes it
axe’an:ely ~cu]t to u~e these
L~U-~mente as ~n effecUve interest rate
~sk reduction tool. ~n ~n env’lrcnment of
rapidly ful]ln~ ~t.orest rates, the market
value of a restduel can completely
d.~sappe~. Moreover. a ~omplex C~O
su’uct~re (e.8., multiple numbers or types
of u’anches) or u~usual ~llatera]
as 8~ck. are u~uiteble holdinss for all
federtl cmiit un/ans, l"aerefo~.
rune c~ed~t amahs. Section
federsl credit ~mlo~s ~ ~b~
mves~ent polices. ~on
~q~s feder~ ~t ~
¯ e ~t qu~ of ~y ~
¯ e ~ves~ents. ~ese
~qu~menu ~ ~ subbed
O~ce of Msnasemont ~d
Ac~ Written ~en~ ~
~r ~t~ ~1~ ~t
~ New ~ ~
le~ W~
E.xecutJve Order 72812
Federal ~edit animus may eater ~ to
couuection wtth the pmd~ end Jab
ExecutJve Ord~ 12812 requires NCUA
to co~side~ the effect of it~ actimm m
state LnteJestJ. It states that: "Podm~
aC~OU timl~ the policymaktnl
discretion of the States should be takan
onJy where constitutions] authodff for
the actiou is cle~ ~d ¢m’t~a ~ad I~
nat~ou-l activity
presence of a problem of
scope." Cur~atly, pert 7~ ct~,cdy
applies on]y to fed~ che~etmmd ~t
~ s~te ~ ~t ~
~ 741~a)(3) ~d ~3~ ~ ~ ~
dete~ed ~t ~e p~ ~e ~
not have ~ ~he~ ~ eff~ ~
~bo~ ~~t ~ ~ S~ m
on ~e ~.~on of ~ ~
~spo~ib~es m~ ~e v~ ~eb
not p~t pm~i~ of Jta~ ~w ~
Adjusted tract/a# means .,,y umbod
or tr~n~cltoa used to def~ a lees
whereby ¯ Fedm~l credit union lib
securlff to ¯ vendm st e pHc~ above
curmat madmt price end
the veadm’ another security at a lace
above Jt8 ~rt, ent maxa~ot pric~.
averse time to Wtodpsl
peydowus (both sched~ded end
Sec~m~ of ~e ~
Acco~ly, it Js pm~d ~t 12
C~R ps~ "03 be ~ended to ~ed as ~t
fo~ beiow:
~n~ whem~ a ~ p~. ~ or
o~er ~d~ ~U~Uo~ for a f~
prote~ ~e ~ held m
safeke~ for its ~tome~.
B~’A~p~ce me~ 8 ~e
PART 703,--(AMENDF.DI
~ ~at ~ ~ ~ ~d t~d by a
1-Z. Tt:e su~or~ty citatto,~ for ~ 7~ b~ ~d ~t ~nu ~ ~ble
conl~nues to reed as follows:
1757(15). 1~5~a), 1781~11).
3. Section 703.1 ts republished fo~ the
conve,~:er.ce of the reader.
~ de~v~ ~ a~p~ ~
man~to~ ~ at a ~ ~te m
the credit union s chief executive
entit~ formed for the soi, Imrlxm of’
holdin~ a fixed pool of ~
in the underlTin~mortp~s.
~qepu~.hnae £wn~n~tion meonm 8
NCUA’s mpdi~m~, end othe~
eppUcab& hw~ end n~dattom, md
~d ~ ottl~ (Comptndler).
Settlement do~e means the date
~lly asreed to by e Fedml croat
union and1 vendor for at~lemmt d the
pu.,~l~ or ~le of a ~ec-arlty.
Short s~/e me~uJ the ~ of a ~
not o~ by ~e ~.
S~dby comment m~ ~
~ent to eider buy ~ ~ a
~, on or Eo~o~ t ~ ~ at 8
p~det~ed pn=. ~e ~g~ ~ ~
~ent ~ ~e p~ ~i’~
associated w~h cosum.ia8 either to
purcha~ a security in the futm.e ¯t ¯
predeterm~ed price, or to ~erl ¯ mmutlly
in the future at m predetermined pr!~.
The selle~ of the omm/t=ent is required
[~] Securiti~ de~/ers/brokerelp ~
apprmmd for ue by th~ boe~d of
dincton ~ with -,,y linutatm~
re’~f’ect to the amount o( Funds thal may
be placed or Inve~ted with any o( ~
.r~mved broker/dealers (~m applicable:
(h) Sa(ekeep~ o( securities. ~c(udin(
list of approved safekeepi~ facilities.
6. Section 7034 is ~v~s~ ~o ~sd em
quaht’y~n~ is either an mvntmeat.~pe
or ~nan,’,al In-U~ufloa-t~pe ~p~
~ansactson ~ ~ ~i~d ¯
t~e rep~ese ~i~on ~b~ to
section I~ of ~ F~e~ ~t
.~ct (12 U.S.~ I~7). w~ ~nerifiy
~:~sts Federal ~t ~o~ to m~8
loans only to member.
(e) ~e ~ e ~ e ~pu~o~e ~moc~on~.
~ Fede~ ~dit ~ou ~y en~r ~to I
revere rep~8~ ~acU~
{U A Fede~tl cr~lit ~mon
puz~.hale a S~
Se~ty (S~
[8) A Fedet~ ~t ~on ~ not
invest in any ~0
whole lver~
shorten by ~ ~ ~ yem ~r
~i~ent m~ ~steiy ~ or
fall ~ barn ~
contm~ ~ ~
~ ~ ~ ~ ~0/~
~v~mn~ at ~ ~ ~ p~ ~d
on ~y ~
settlement date fm ~ ~
mp~m ~~ A
(i} A F~ ~t
~C~
penni of i~ ~ ~ ~
~on ~y ~U F~ ~ ~ s
¯ 8 ~te~mt or ~m~~
received ~m ~ ~ ~~ b
~pe~ent st ~ ~
deposits m * ~on 1~8)
~ion may ~v~t ~ £~o~ ~i~
~ a br~ ots ~on I~(8)
~s~o~
c~e~t ~oa ~y ~t ~ ~’
accep~n~ ~ ~ 8 ~ 1~8)
~. A new i 7~ ~ i~ ~ ~md am
(oUowm:
~t ~
to ~y empl~
ff ~e emplo~
~ of ~ de~es
emplo~’s ~t
pratt a ~ ~ ~te~st
(m} ~ ~
all.dates ~
of ~ ~ m~ ~ ~du~ at
~t~
(a} Except am lmr~ided in I ~1..~(1| o/
8. A n~ ~
this chupter, m Yedert] credit mtio~ my foll~:
not pm’~ase or m~ I st~
(b) A Federal ~t ~ ~y ~t
buy or se~ a ~es con~
(c~ A Federal ~t ~ may not
engage
(e) A Fbde~ ~l ~ ~y not
purchase
o~e~e
co~c~te
operate
net exammed
Any federal credit un~ov, bo:~
lecurities that sr~ ~ot in ccmplianc~
700.~,j) sh~ ll~,m I year ~’o: ~e
e~e~e ~m of ~ ~al ~ ~:a~on to
NCUA LETTER NO. 92
TO’-cRED UNi-olxiS
TO
DATE: August 13, 1987
FHE BOARD OF DIRECTORS OF THE FEDE~,AL CREDIT UNION ADDRESSED:
the past, NCU.% has responded to requests from broker/dealers,
~nutual f’~nds, Fe-~er~l credit unlons (FCU’s), and others for a
determination as to she legality of particular mutual funds
(F~Jnds) as FCU investments. For the reasons discussed below,
NCUA w~!! no longer ~ssue such opinions.
.As you are aware, NCUA has taken the position that mutual funds
are permissible ~nves~ments for FCU’s provided that all of the
investments and inves.-.ment practlces of the mutual fund are legal
if made directly by an FCU. Sections 107(7) and 107(8) of the
Federal Credit. Unlon A&t set forth the securities, deposits, and
other obligations in which an FCU may invest. Part 703 of the
NCUA Rules and Regulations places certain limits on the types of
transactions tha~ FCU’s may enter into in connection with the
purchase and sa!e of authorlzed securities, deposits, and
ozl igat ions.
NCUA is aware tha~ some FCU’s have ~nvested in mutual funds
solely on the basis that NCUA has determined that the Fund is a
legal investment. Use of NCUA’s legal opinion as the criterion
for making an investment raises several concerns. First, an FCU
relying solely cn NCUA’s legal oo~nion is not determining whether
the Fund ~s an app~o,oriate investment in light of the FCU’s
current ~nvestment portfolio and liability structure. Second,
NCUA i~ concerned that the routine issuing of opinions on mutual
funds has indirectly encouraged investment in the funds. Such a
result was not intended. The decision to invest in mutual funds
s~ould be ma-~ based on the individual needs of each FCU. Last,
although NCUA has consistently stated that its opinions on the
legality of particular mutual funds are not to be interpreted as
recommendations or approval of the Funds by NCUA, the opinions
have been used by bro<ers and Funds as a marketing tool. The
prospectuses or ma~ke~.ing materials of some Funds incorrectly
state that they have peon "approved by NCUA", and FCU’s ~ave
invested in the F~nds on this basis.
According!y, NCUA ha~ decided that it w~ll no longer issue
opinions on the legality of particular funds. NCUA believes that
th~s decision w~il have a positive ef.~ect on FCU investmen~
policies. Those boards of d~rectors which may in the past have
exp~o~e the ~i~[[ ~ange o~ inve~tmen~ oDt~on$ ~v.~i~b[e, ~nd then
¯ ake an ~nvestment ~ec~s~on that ~s ~n ~he best ~nte[es~ o~ ~.=
FCU. In so doing, ~hey will become more knowledgeable about FCU
~nvestment author~ty ,~nd ~nvestment rest[ict~ons, as contained ~n
the FCU Act and the NCUA Rules and Regulations.
Th~s new policy should not be vlewed as NCUA’s "abandonment" of
FCU’s ~n th~s area. To the contrary, NCUA’s Office of General
Counsel and the NCUA Investment Hotllne will continue to respond
to Investment questions requiring an interpretation of the FCU
A~ct and the NCUA Rules and Regulations, in particular the
legality of specific direct investments and investmen~
practices. However, the FCU will be responsible for establlsh~.ng
and supporting the legality of any of its investments. If in
doubt about a particular investment, FCU’s are encouraged to
obtain the opinion of qualified legal counsel.
Finally, NCUA is considering requiring that a Fund’s prospectus
or statement of additional information provide that the type of
investments the Fund will make and the Fund’s investment
practices may only be changed if authorized by majority
shareholder vote. Thus, if a Fund changes its investment
authority or practices in a manner that wi!l make the Fund
impermissible for FCU’s, the FCU will have knowledge of the
change and can take appropriate steps to divest itself of the
Fund.
In the interim, FCU’s investing in mutual funds should either
invest only in Funds that feature the shareholder vote notice, or
continually monitor the Fund to ensure that it remains a legal
investment. If the Fund does invest in securities or engage in
activities not authorized for FCU’s, the credit union must
immediately divest its interest in the Fund.
Sincerely,
.FOR THE NCUA BOARD
RWJ : s g
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