<p>By MICHELLE SAMAAD CU Times Correspondent-At-Large ALEXANDRIA, Va. – It's still too early to tell if several key changes NCUA has proposed on how federal credit unions conduct investment activities will come to fruition as the Jan. 24 comment deadline came and went. Last October, the NCUA Board requested comments and suggestions on expanding 12 CFR Part 703 of the regulator's investment and deposit activities rules. At press time, more than 15 comment letters were received from various industry groups and credit unions. What seems like a total rewrite of 703, NCUA essentially looks to revise, expand and more clearly define broker requirements, safekeeper requirements, expanded investment authorities, limitations on accounts under discretionary control of an investment advisor, investment credit ratings, borrowing repurchase agreements, variable rate investments, and purchasing options to offer equity-linked certificates of deposit. The board also sought feedback on whether information in 703 could be more "user-friendly" and easier to find if existing sections were divided into smaller ones with fewer topics and more headings. While NAFCU was in the final prep stages of its comment letter at press time, Gwen Baker, the association's director of regulatory affairs said portions of a letter submitted last May to NCUA on the agency's proposed regulatory flexibility program (RegFlex) supports many of the regulator's recommendations on 703. "Overall, we support most of what NCUA is proposing," Baker said. "We're glad to see that (the agency) requested advance notice on an area that NAFCU had requested NCUA to look into." Specifically, NAFCU advocates the selling of "greater interest rate risk" investments such as stripped mortgage backed securities and zero coupon investments with maturities longer than 10 years so long as the federal credit union is well-capitalized and well-managed. NAFCU also supports NCUA's suggestion to waive the quarterly stress testing (300 basis point shock) requirement for individual complex securities the total sum of which exceed net capital. NAFCU calls the test "redundant for credit unions that already measure the impact of interest rate changes on their entire balance sheet." Meanwhile, CUNA's federal credit union subcommittee chaired by William Sebastian of GTE Federal Credit Union, held a teleconference days before the deadline to prepare its final comment letter for NCUA and for the most part, the association is very supportive of most of the proposed changes, said Mary Dunn, CUNA's associate general counsel and senior vice president. "Bottom line is we're very supportive but we want to work with NCUA to see if there are ways to stretch limits on investments even further, even if it means going back to the Hill for more authority," Dunn said. Specifically, Dunn said CUNA wants to see NCUA refrain from setting a capital or CAMEL level in order to qualify for any expanded powers as the agency did with Reg/Flex. She emphasized that undercapitalized credit unions would certainly need to be more prudent but watermarks should not be established. Regarding NCUA's mortgage servicing aspect, CUNA feels credit unions should be allowed to enter into mortgage service agreements with institutions that are not credit unions. As 703 reads now, the provision is not clear, Dunn said. Another point of concern for CUNA is NCUA's proposal that would require credit unions to evaluate credit risk and/or use minimum credit ratings for investments not fully guaranteed or insured. "We have concerns that if NCUA doesn't establish standards then that would mean less flexibility here," Dunn explained. One timely and pressing change NCUA is recommending is clearly defining requirements a broker must meet in order for a FCU to purchase and sell investments through a broker. "NCUA is concerned that (703′s) current language may permit a broker to engage in purchasing and selling activities with an FCU without having demonstrated it possesses the skills, knowledge, and understanding to conduct investment transactions," the board wrote. The proposed changes come in light of cases NCUA has identified where brokers have engaged in deceptive practices in the sale of investments to FCUs, such as misrepresenting yields, providing misleading information about the terms of the investment, and inducing purchases of unsuitable investments. The next step will be to summarize all the comment letters and draft a proposed regulation, said Kim Iverson, program officer in NCUA's office of examination and insurance. "There's no time frame on this process but once staff comes up with a draft, that will be sent to NCUA's board and if approved, it will be sent out for comment during a 60 to 90-day period," Iverson said. – [email protected]</p>