NCUA has issued a proposed rule to amend Part 721 (comment period closed 10/21/2013), which deals with Incidental Powers. Specifically, federal credit unions had requested the ability to expand their charitable activities by investing in third-party trust accounts that help fund charitable causes or events.
Here’s a breakdown of what the proposed rule would do.This proposed rule would allow federal credit unions to invest in charitable donation accounts (CDAs), which are hybrid charitable and investment products, as long as the CDAs meet certain conditions. The proposal would amend both the Incidental Powers Rule and the Investment Rule in order to allow for this type of activity.
Under the proposed rule, federal credit unions would be allowed to fund a CDA, even if the investments held by the CDA would otherwise not be permissible investments for a federal credit union, as long as the CDA is primarily charitable in structure and meets other specific conditions. These conditions are:
- An FCU’s investment in all CDAs would be limited to 3% of its net worth for the duration of the accounts. The limit would be based on the aggregate book value, as determined in accordance with GAAP, for of all of the CDAs. An FCU would be required to monitor its aggregate book value relative to its net worth on at least a quarterly basis and would have 30 days to remedy any violations of the limit;
- CDA assets would have to be held in a segregated custodial account or special entity and specifically designated as a CDA;
- If the FCU elects to establish a CDA using a trust vehicle, the trustee must be an entity regulated by the OCC, the SEC or another federal agency. The person authorized to make the investment decisions would have to be a registered financial advisor with the SEC;
- All terms and conditions controlling the CDA must be documented in a written operating agreement or similar instrument and the FCU’s board of directors would need to adopt written policies and procedures that require that the FCU donate only to 501(c)(3) charities;
- The FCU must distribute to one or more charities at least once every five years and at the termination of the CDA. The amount of the distribution would have to be at least 51% of the CDA’s total return on assets over the contribution period; and
- Upon termination of the CDA, the FCU would be able to receive the distribution of the remaining assets in cash or in investment instruments if those investments are permissible for FCUs.