Recently the National Credit Union Administration (“NCUA”) has issued guidance regarding the offer of investment advisory services by federal credit unions. Specifically, the NCUA has stated that the employee of a federal credit union may not provide investment advisory services that would subject that employee or the federal credit union to federal or state securities laws, and has noted that the regulation and oversight of investment advisory services is conducted by the SEC, and by the states, pursuant to the Investment Advisers Act of 1940.
The NCUA has stated that there is no authority under the Federal Credit Union Act for federal credit unions to act as registered investment advisers to provide investment advice. The NCUA has indicated that federal credit union employees may conduct activities that it considers financial counseling but are not permitted to offer investment advisory services. The NCUA provided some specific guidance explaining its distinction between “financial counseling” and investment advice. In its May 2003 Letter (OGC Op 03-0308 (May 1, 2003)), the NCUA references the preamble to NCUA’s incidental powers rule, which had the following explanation with respect to the permissible activity of financial counseling:
…[federal credit unions] may counsel members about financial matters, such as setting budgets, establishing financial goals, and managing tax liabilities. Other examples within this category may include counseling members on money management, paying down debt, saving for the future, types of investments, and diversification principles. This category applies only to financial counseling provided by a [federal credit union] to its members and does not encompass activities that require SEC registration as a broker, dealer or investment adviser.
In its June 2009 Legal Opinion Letter 09-0511 Investment Advice Services, the NCUA stated that a credit union may offer investment advisory services to its members in three ways: 1) through a shared employee with a registered investment adviser; 2) by acting as a finder under the NCUA incidental powers rule; or 3) by wholly or partly owning a Credit Union Service Organization (“CUSO”) that provides investment advisory services. Acting as a finder is otherwise known as acting as a solicitor to a Registered Investment Adviser. If acting as a solicitor, a credit union will need to be compliant with the applicable regulatory requirements for solicitors, including SEC Rule 206(4)-3, and any applicable state registration requirements. Most states define the solicitation or referral of investment advisory clients as an investment advisory activity which requires the registration of the solicitor as a registered investment adviser or investment adviser representative. A CUSO that provides investment advisory services would need to be properly registered as a registered investment adviser.
If you are affiliated with a federal credit union and have questions related to registration or regulation of registered investment advisers, RIA Compliance Consultants, Inc. can help. We can provide you with guidance about the activities of providing of investment advice through an arrangement with an existing registered investment adviser, acting as a solicitor to a registered investment adviser, or offering investment advisory services through a CUSO.
Posted by Bryan Hill
Labels: Credit Union
