Effective:  December 19, 2013
Federal credit unions have a new world of investment products opening up to them as of December 19, 2013: charitable donation accounts (CDAs). This capacity was granted when the NCUA issued a final rule to amend Part 721, which deals with Incidental Powers, to allow federal credit unions (“FCUs”) the ability to invest in third-party trust accounts established to provide funding to qualified charities. This specifically refers to CDAs, which are hybrid charitable and investment products, as long as the CDAs meet certain conditions.  Under this rule change, federal credit unions are now 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 must be limited to 5% of its net worth for the duration of the accounts.  The limit is based on the aggregate book value, as determined in accordance with GAAP, for of all of the CDAs.  An FCU is required to monitor its aggregate book value relative to its net worth on at least a quarterly basis and has 30 days to remedy any violations of the limit;
  • CDA assets 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 or state financial regulatory agency. The person authorized to make the investment decisions has to be a registered financial advisor with the SEC or regulated by the OCC;
  • 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 will need to adopt written policies and procedures that are consistent with the requirement of this rule.  The CDA agreement and the Board policy must include the following:
    • A statement that the FCU will only make donations to charities that qualify under section 501(c)(3) of the Internal Revenue Code;
    • The investment strategies and risk tolerances that the CDA trustee or manager must follow;
    • A statement that all aspects of the CDA, including distributions and liquidation of the account, will be handled in accordance with generally accepted accounting practices (GAAP); and
    • The frequency with which the trustee or manager of the CDA will make distributions to the 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 over the 5-year period must be at least 51% of the CDA’s total return on assets (total return on assets includes realized interest, capital gains, dividends and distributions, but not account fees and expenses provided that they are not paid the to the credit union that established the CDA or to any of its affiliates) over the 5-year period (you can elect to distribute more than 51% and make distributions on a more frequent basis); and
    • Upon termination of the CDA, the FCU may receive the distribution of the remaining assets in cash or in investment instruments if those investments are permissible for FCUs.

If, after reviewing all these conditions, the charitable donation account is still qualified, credit unions may find CDAs to be a wise investment due to their hybrid nature of charitable donation and investment product. This rule amendment is helpful in that it provides another investment option for federal credit unions.