Charitable Donation Accounts, 76728-76731 [2013-30103]

Agencies

• National Credit Union Administration

[Federal Register Volume 78, Number 244 (Thursday, December 19, 2013)]
[Rules and Regulations]
[Pages 76728-76731]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30103]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 703 and 721

RIN 3133-AE17


Charitable Donation Accounts

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA Board (Board) is issuing a final rule to amend its 
regulations to clarify that federal credit unions are authorized to 
create and fund a charitable donation account, a hybrid charitable and 
investment vehicle, as an activity incidental to the business for which 
the credit union is chartered, provided the account is primarily 
charitable in nature and meets other regulatory conditions to ensure 
safety and soundness.

DATES: The effective date for this rule is December 19, 2013.

FOR FURTHER INFORMATION CONTACT: Rick Mayfield, Senior Capital Markets 
Specialist, Office of Examination and Insurance, at 1775 Duke Street, 
Alexandria, VA 22314 or by telephone: (703) 518-6360; or Steven W. 
Widerman, Senior Staff Attorney, Office of General Counsel, at the 
above address or by telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

I. Background
II. Summary of Comments on Proposed Rule
III. Regulatory Procedures

I. Background

    NCUA is amending parts 703 and 721 of its regulations to clarify 
that, under certain circumstances, federal credit unions (FCUs) are 
authorized to fund a charitable donation account (CDA), which may hold 
investments that are otherwise impermissible, as a charitable 
contribution or donation under its incidental powers authority.\1\ This 
will help facilitate charitable activities for FCUs. To be considered 
an incidental powers activity, the rule requires a CDA to be primarily 
charitable in nature. Any investment feature benefitting the FCU must 
be incidental to the CDA's primary charitable purpose. The CDA must 
also be structured to preserve safety and soundness and to limit the 
FCU's exposure to the risks of otherwise impermissible investments.
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    \1\ 12 CFR 721.3(b).
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Summary of Proposed Rule

    On September 12, 2013, the Board issued a Notice of Proposed 
Rulemaking (NPRM) \2\ allowing FCUs to invest in CDAs while creating 
safeguards to ensure the donations are used for their intended 
charitable purposes. The Board proposed several requirements for FCUs 
that invest in these accounts, including:
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    \2\ 78 FR 57539 (Sept. 19, 2013).
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     The primary purpose of a CDA must be to generate funds to 
donate to tax-exempt charities chosen by FCUs.
     The total investment in all such accounts, in the 
aggregate, must be limited to three percent of the FCU's net worth for 
the duration of the accounts.
     A minimum of 51 percent of the total return from such an 
account must be distributed to one or more qualified charities.
     Distributions must be made to qualified charities no less 
frequently than every five years, or in the event the account 
terminates in less than five years.
     Assets of these accounts must be held in segregated 
custodial accounts or special purpose entities specifically identified 
as a CDA.
     If the FCU structures its CDA using a trust, the trustee 
must be an entity regulated by the Office of the Comptroller of the 
Currency (OCC), the U.S. Securities and Exchange Commission (SEC) or 
another federal regulatory agency. The regulated trustee or other 
person who is authorized to make investment decisions for a CDA 
(manager) must be a Registered Investment Adviser (RIA) with the SEC.
     The terms and conditions controlling the account must be 
documented in a written agreement.
     An FCU, upon termination of its CDA, may receive a 
distribution of the remaining assets in cash, or a distribution in kind 
of the remaining

[[Page 76729]]

assets if those assets are permissible investments for FCUs.

Federal Credit Union Authority To Make Charitable Contributions

    The Federal Credit Union Act (Act) provides that an FCU may 
``exercise such incidental powers as shall be necessary or requisite to 
enable it to carry on effectively the business for which it is 
incorporated.'' \3\ Under this authority, the Board has long recognized 
that making charitable contributions and donations is among an FCU's 
incidental powers.\4\
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    \3\ 12 U.S.C. 1757(17).
    \4\ 44 FR 56691 (Oct. 2, 1979); 64 FR 19441 (Apr. 21, 1999); 12 
CFR 721.3.
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    Between 1999 and 2012, FCU donations were limited to two categories 
of charities: (1) Non-Profit organizations located or active in the 
community where the donor FCU had a place of business; and (2) tax-
exempt organizations that ``operated primarily to promote and develop 
credit unions.'' \5\ An FCU's donation to a charity in these categories 
was conditioned on a determination by its board of directors that the 
donation was in the best interests of the FCU and reasonable given its 
size and financial condition.\6\
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    \5\ 12 CFR 701.25(a) (2011).
    \6\ Id. 12 CFR 701.25(b).
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    In 2012, the Board repealed the restrictions on permissible 
charities and the conditions for making a donation.\7\ The Board then 
added charitable contributions and donations as a category of 
activities preapproved by regulation as ``incidental powers necessary 
and requisite to carry on a credit union's business.'' \8\ Activities 
in this preapproved category include donations to nonprofit 
organizations and credit union-affiliated causes, and to create 
charitable foundations.
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    \7\ 77 FR 31981 (May 31, 2012).
    \8\ 12 CFR 721.3(b); see also 12 CFR 721.2.
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Federal Credit Union Investment Authority

    The Act grants FCUs the express power to invest in certain 
enumerated categories of investments.\9\ FCUs may invest only in those 
investments expressly authorized by the Act. Further, part 703, NCUA's 
investment regulation, limits or prohibits FCUs from purchasing certain 
investments, otherwise permitted by the Act, for safety and soundness 
reasons.\10\ Investments authorized by the Act and not prohibited or 
limited by part 703 constitute the universe of permissible investments 
for FCUs.
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    \9\ 12 U.S.C. 1757(7) & (15).
    \10\ 12 CFR part 703.
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II. Summary of Comments on Proposed Rule

    NCUA received a total of 26 comments on the NPRM: 13 from credit 
union leagues, four from FCUs, three from credit union-related 
foundations, two from credit union trade associations, and one comment 
each from a federally insured, state-chartered credit union, a 
corporate credit union, a bank trade association, and a federal savings 
bank. Of the 26 comments received, 18 commenters supported the proposal 
expressly, and none opposed it. Most commenters recommended changes, as 
outlined below.

1. Net Worth Cap

    Seventeen commenters supported applying the net worth cap only when 
a CDA is initially and subsequently funded, rather than over the life 
of the account. One commenter asked to make the rule explicit on 
whether the net worth cap applies to a CDA's initial funding or its 
future investment value. The Board believes that applying the net worth 
cap for the duration of an account will help to preempt unsafe or 
unsound concentrations in otherwise non-permissible investments. 
Accordingly, the final rule explicitly clarifies that the aggregate 
value of an FCU's CDAs must remain within the net worth cap for the 
life of the accounts.
    Thirteen commenters advocated raising the net worth cap on 
aggregate CDAs from three to five percent of net worth. The Board 
adopts the suggestion to raise the existing net worth cap, concurring 
that a modest increase would benefit both FCUs and charities. The final 
rule increases the existing cap on aggregate funding of CDAs from three 
to five percent of an FCU's net worth for the duration of the accounts, 
aligning with the net worth cap that applies to public welfare 
investments by banks.\11\
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    \11\ 12 CFR 24.4(a).
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2. Account Fees and Expenses

    Sixteen commenters contended that account fees and expenses should 
reduce the total return that is apportioned to determine the amount of 
a CDA's mandatory donations to charity. The Board agrees with the 
commenters and has adopted this recommendation, with certain 
conditions. The final rule allows account fees and expenses to be 
deducted from the actual rate of return to the extent the fees and 
expenses were not paid to the FCU that established the CDA or to its 
affiliates. An affiliate is an entity in which the FCU has any direct 
or indirect ownership interest.

3. Minimum Periods for Distributions

    Four commenters advocated reducing the minimum period for 
distributions to charity to one year, two commenters supported reducing 
the period to less than five years, and one commenter proposed 
eliminating the five-year minimum. The Board maintains that the five-
year minimum period is appropriate. The final rule clarifies that FCUs 
may choose to make CDA distributions more frequently than once in five 
years, provided there is a final distribution when the account 
terminates, regardless of the length of the period preceding 
termination.

4. Minimum Amount of Distributions

    One commenter asked NCUA to require an FCU to make minimum annual 
charitable donations equal to one percent of a CDA's market value. The 
Board has decided against mandating a fixed minimum percentage 
distribution of a CDA's market value because that could force an FCU to 
donate at times when its CDA investment is producing negative returns. 
Another commenter wanted NCUA to allow CDAs to make charitable 
donations in a fixed dollar amount, rather than as a percent proportion 
of the total return. The Board finds that charitable donations of a 
fixed amount, not reflecting a CDA's investment performance, tends to 
portray a CDA as primarily an investment vehicle benefitting the FCU, 
representing a breach of one of the guiding principles used in 
proposing this rule. The final rule requires a CDA to be primarily 
charitable in structure, thus allowing it to be preapproved as an 
incidental powers activity. Any investment feature benefitting the FCU 
must be incidental to the primary, charitable purpose of its CDA.

5. Regulatory Oversight

    Eighteen commenters supported permitting entities regulated by the 
OCC to manage CDA funds without also having to register as an RIA with 
the SEC. Two commenters contended that non-depository, state-chartered 
trust companies should be permitted to serve as CDA trustees. The Board 
agrees with both recommendations.
    Neither the NPRM nor the final rule requires a CDA to be structured 
as a trust. As a measure to enhance safety and soundness when a CDA is 
established as a trust, however, the final rule provides that the 
trustee of a CDA must be regulated by the OCC, the SEC, another federal 
regulatory agency, or a

[[Page 76730]]

state financial regulatory agency. A regulated trustee or other person 
or entity that is authorized to make investment decisions for a CDA 
(manager), other than the FCU itself, must either be an RIA or be 
regulated by the OCC.

6. Corporate Credit Unions

    Nine commenters requested that corporate credit unions (CCUs) be 
given authority similar to that of natural person FCUs to create and 
fund CDAs. They contend that CCUs should have the same flexibility as 
the final rule gives FCUs to support charitable activities. That 
request is beyond the scope of this rulemaking.

7. Miscellaneous Comments

    Eight commenters wanted more explicit confirmation that the NPRM's 
requirements would not apply to an FCU's other investments that are 
compliant with part 703. The Board confirms that the final rule does 
not apply to part 703--compliant investments.
    One commenter requested that multiple small FCUs be permitted to 
form a common trust CDA. Because the final rule does not require a CDA 
to be held in a trust, FCUs, large or small, do not need to rely on a 
common trust to participate in funding a CDA.
    Another commenter requested that NCUA grandfather existing non-CDA 
hybrid accounts that invest in otherwise impermissible investments for 
FCUs until those accounts mature. The final rule does not address such 
grandfathering in the regulatory text. Rather, NCUA has instructed 
regional staff not to require divestiture of such accounts as NCUA 
expects all such accounts will terminate by their own original terms.
    Finally, a commenter asked NCUA to amend part 703 to expand the 
investment authority for all FCUs, regardless of funding a CDA. This 
request is beyond the scope of this rulemaking.
    Except as otherwise discussed above, the Board adopts the rule as 
proposed.

III. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact agency rulemaking may have 
on a substantial number of small credit unions (primarily those under 
$50 million in assets). This final rule does not impose any mandatory 
requirements on small credit unions, and NCUA does not anticipate that 
many small credit unions will fund CDAs with significant amounts of 
money. NCUA has determined this rule will not have a significant 
economic impact on a substantial number of small credit unions.

Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or modifies an existing burden.\12\ For purposes of the PRA, a 
paperwork burden may take the form of a reporting, recordkeeping, or 
disclosure requirement, each referred to as an information collection. 
NCUA identified and described several information collection 
requirements in the proposed rule. As required by the PRA, NCUA 
submitted a copy of the proposed rule to the Office of Management and 
Budget (OMB) for its review and approval. Persons interested in 
submitting comments with respect to the information collection aspects 
of the proposed rule were invited to submit them to OMB (with a copy to 
NCUA) at the addresses noted in the preamble to the proposed rule.
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    \12\ 44 U.S.C. 3507(d).
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Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order to adhere to fundamental 
federalism principles. This final rule applies only to federally 
chartered credit unions. Accordingly, the rule will not have 
substantial direct effects on the states, on the relationship between 
the national government and the states, or on the distribution of power 
and responsibilities among the various levels of government. NCUA has 
determined that this rule does not constitute a policy that has 
federalism implications for purposes of the Executive Order.

Treasury and General Government Appropriations Act, 1999

    NCUA has determined that this final rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act.\13\
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    \13\ Public Law 105-277, 112 Stat. 2681 (1998).
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Small Business Regulatory Enforcement Act Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) (SBREFA) provides generally for congressional review 
of agency rules. A reporting requirement is triggered in instances 
where NCUA issues a final rule as defined by Section 551 of the 
Administrative Procedure Act.\14\ NCUA does not believe this final rule 
is a ``major rule'' within the meaning of the relevant sections of 
SBREFA. As required by SBREFA, NCUA has filed the appropriate reports 
so that this final rule may be reviewed.
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    \14\ 5 U.S.C. 551.
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Immediate Effective Date

    NCUA is issuing this final rule to be effective upon publication. 
The Administrative Procedure Act, 5 U.S.C. 553, requires that, once 
finalized, a rulemaking must have a delayed effective date of 30 days 
from the date of publication, except for good cause. NCUA invokes this 
exception for this rule, believing that good cause exists to waive the 
customary 30-day delayed effective date. The final rule does not impose 
any regulatory burden; rather, it will help to facilitate the 
charitable activities of federal credit unions.

List of Subjects

12 CFR Part 703

    Credit unions, investments.

12 CFR Part 721

    Credit unions, functions, implied powers.

    By the National Credit Union Administration Board on December 
12, 2013.
Gerard Poliquin,
Secretary of the Board.
    For the reasons set forth above, NCUA amends 12 CFR parts 703 and 
721 as follows:

PART 703--INVESTMENTS

0
1. The authority citation for part 703 continues to read as follows:

    Authority: 12 U.S.C. 1757(7), 1757(8), 1757(15).


0
2. Amend Sec.  703.1 as follows:
0
a. In paragraph (b)(5) by removing the word ``or'';
0
b. In paragraph (b)(6) by removing the period at the end of the 
paragraph and adding ``; or'' in its place; and
0
c. By adding paragraph (b)(7) to read as follows:


Sec.  703.1  Purpose and scope.

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[[Page 76731]]

    (b) * * *
    (7) Funding a Charitable Donation Account pursuant to Sec.  
721.3(b) of this chapter.

PART 721--INCIDENTAL POWERS

0
3. The authority citation for part 721 continues to read as follows:

    Authority: 12 U.S.C. 1757(17), 1766, 1789.


0
4. Amend Sec.  721.3 to redesignate paragraph (b) as paragraph (b)(1) 
and to add paragraph (b)(2) to read as follows:


Sec.  721.3  What categories of activities are preapproved as 
incidental powers necessary or requisite to carry on a credit union's 
business?

* * * * *
    (b) * * *
    (2) Charitable donation accounts. A charitable donation account 
(CDA) is a hybrid charitable and investment vehicle, satisfying the 
conditions in paragraphs (b)(2)(i) through (vii) of this section, that 
you may fund as a means to provide charitable contributions and 
donations to qualified charities. If you fund a CDA that satisfies all 
of the conditions in paragraphs (b)(2)(i) through (vii) of this 
section, then you may do so free from the investment limitations of the 
Federal Credit Union Act and part 703 of this chapter.
    (i) Maximum aggregate funding. The book value of your investments 
in all CDAs, in the aggregate, as carried on your statement of 
financial condition prepared in accordance with generally accepted 
accounting principles, must be limited to 5 percent of your net worth 
at all times for the duration of the accounts, as measured every 
quarterly Call Report cycle. This means that regardless of how many 
CDAs you invest in, the combined book value of all such investments 
must not exceed 5 percent of your net worth. You must bring your 
aggregate accounts into compliance with the maximum aggregate funding 
limit within 30 days of any breach of this limit.
    (ii) Segregated account. The assets of a CDA must be held in a 
segregated custodial account or special purpose entity and must be 
specifically identified as a CDA.
    (iii) Regulatory oversight. If you choose to establish a CDA using 
a trust vehicle, the trustee must be regulated by the Office of the 
Comptroller of the Currency (OCC), the U.S. Securities and Exchange 
Commission (SEC), another federal regulatory agency, or a state 
financial regulatory agency. A regulated trustee or other person or 
entity that is authorized to make investment decisions for a CDA 
(manager), other than the credit union itself, must be either a 
Registered Investment Adviser or regulated by the OCC.
    (iv) Account documentation and other written requirements. The 
parties to the CDA, typically the funding credit union and trustee or 
other manager of the account, must document the terms and conditions 
controlling the account in a written agreement. The terms of the 
agreement must be consistent with this section. Your board of directors 
must adopt written policies governing the creation, funding, and 
management of a CDA that are consistent with this section, must review 
the policies annually, and may amend them from time to time. Your CDA 
agreement and policies must at a minimum:
    (A) Provide that the CDA will make charitable contributions and 
donations only to charities you name therein that are exempt from 
taxation under section 501(c)(3) of the Internal Revenue Code;
    (B) Document the investment strategies and risk tolerances the CDA 
trustee or other manager must follow in administering the account;
    (C) Provide that you will account for all aspects of the CDA, 
including distributions to charities and liquidation of the account, in 
accordance with generally accepted accounting principles; and
    (D) Indicate the frequency with which the trustee or manager of the 
CDA will make distributions to qualified charities as provided in 
paragraph (b)(2)(v) of this section;
    (v) Minimum distribution to charities. You are required to 
distribute to one or more qualified charities, no less frequently than 
every 5 years, and upon termination of a CDA regardless of the length 
of its term, a minimum of 51 percent of the account's total return on 
assets over the period of up to 5 years. Other than upon termination, 
you may choose how frequently CDA distributions to charity will be made 
during each period of up to 5 years. For example, you may choose to 
make periodic distributions over a period of up to 5 years, or only a 
single distribution as required at the end of that period. You may 
choose to donate in excess of the minimum distribution frequency and 
amount;
    (vi) Liquidation of assets upon CDA termination. Upon termination 
of the CDA, you may receive a distribution of the remaining account 
assets in cash or you may receive a distribution in kind of the 
remaining account assets but only if those assets are permissible 
investments for federal credit unions under the Federal Credit Union 
Act and part 703 of this chapter; and
    (vii) Definitions. For purposes of this section, the following 
definitions apply:
    (A) Distribution in kind is your acceptance of remaining CDA 
assets, upon termination of the account, in their original form instead 
of in cash resulting from the liquidation of the assets.
    (B) Qualified charity is a charitable organization or other non-
profit entity recognized as exempt from taxation under section 
501(c)(3) of the Internal Revenue Code.
    (C) Registered Investment Adviser is an investment adviser 
registered with the SEC pursuant to the Investment Advisers Act of 
1940.
    (D) Total return is the actual rate of return on all investments in 
a CDA over a given period of up to 5 years, including realized 
interest, capital gains, dividends, and distributions, but exclusive of 
account fees and expenses provided they were not paid to the credit 
union that established the CDA or to any of its affiliates.
    (E) Affiliate is an entity in which the credit union has any 
ownership interest directly or indirectly. This would not apply to 
ownership due to the funding of employee benefits.
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[FR Doc. 2013-30103 Filed 12-18-13; 8:45 am]
BILLING CODE 7535-01-P