Share Insurance and Appendix

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 745

Share Insurance and Appendix

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule with request for comments.

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SUMMARY: The NCUA proposes to revise its share insurance regulations

with respect to living trusts, joint revocable trusts, IRA accounts,

public unit accounts, guardian accounts and the application of local

law to share insurance determinations. NCUA also proposes to revise the

substance and format of the Appendix to part 745. These proposals,

which parallel the Federal Deposit Insurance Corporation's (FDIC's)

insurance rules, are intended to maintain parity between NCUA's and

FDIC's insurance programs and to prevent confusion in understanding and

applying the share insurance rules.

DATES: NCUA welcomes comments on these proposals. Comments must be

received on or before January 31, 2000.

ADDRESSES: Comments should be directed to Becky Baker, Secretary of the

Board. Mail or hand-deliver comments to: National Credit Union

[[Page 66813]]

Administration, 1775 Duke Street, Alexandria, VA 22314-3428. You may

also fax comments to (703) 518-6319 or e-mail comments to

[email protected]. Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Frank S. Kressman, Staff Attorney, at

the above address, or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

In accordance with NCUA's regulatory review process, NCUA staff has

identified part 745 as one of the regulations in need of updating,

clarification and simplification. On March 23, 1999, the Board of

Directors of the FDIC adopted deposit insurance rule changes regarding

joint accounts and revocable trust accounts. 64 FR 15653 (April 1,

1999). The NCUA Board adopted similar changes on April 15, 1999. 64 FR

19685 (April 22, 1999). At that time, NCUA was aware that additional

changes to part 745 were necessary and would be forthcoming, but

believed that it was important to implement the amendments immediately

regarding joint accounts and revocable trust accounts. NCUA has

completed a more comprehensive review of part 745 and reviewed the

comments submitted in connection with the joint accounts and revocable

trust accounts rule changes. NCUA is now proposing additional

amendments to improve part 745.

B. Proposed Amendments

Living Trust Accounts

A living trust is a formal trust that an owner creates and retains

control over during his or her lifetime. NCUA intends to treat a

revocable trust account that is held in connection with a living trust

in the same manner it treats all other revocable trust accounts, if the

living trust otherwise meets all requirements that pertain to revocable

trust accounts. Living trusts that include conditions that could

prevent a beneficiary from acquiring a vested and non-contingent

interest in the account funds upon the owner's death, however, would

not be entitled to insurance coverage under this section. NCUA will

consider the grantor of a living trust as the owner of the funds in the

account during that person's life. The owner must be a member of the

credit union or otherwise eligible to open the account and qualify for

insurance.

Joint Revocable Trust Accounts

Joint revocable trust accounts are revocable trust accounts, as

described in Sec. 745.4 of NCUA's regulations, that are established by

more than one owner and held for the benefit of others. NCUA proposes

to provide separate insurance coverage for qualifying accounts of this

kind.

Application of State or Local Law To Share Insurance Determinations

In the interest of maintaining uniform national rules and

consistent share insurance determinations, NCUA proposes to clarify the

degree of control that state or local law has on share insurance

determinations. NCUA regulations presently do not state as clearly as

they could that the provisions of part 745 control over state or local

law in determining share insurance coverage. Section 745.2(a) currently

provides that, to the extent local law enters into a share insurance

determination, the law of the jurisdiction in which the insured credit

union's principal office is located will govern. This should be

understood to mean that where an insured credit union has offices in

multiple jurisdictions, the local law of the jurisdiction in which the

insured credit union's principal office is located will control over

the local law of the other jurisdictions where the insured credit union

may have branch offices or service facilities. This is no way effects

the supremacy of federal law. Generally, state law is used to determine

property interests in an account and may be used to determine the

extent of coverage available to particular individuals based on those

rights. However, state law will not extend coverage beyond that

provided under the Federal Credit Union Act or part 745.

Individual Retirement Accounts (IRAs)

NCUA proposes to specify that Roth IRAs and Education IRAs are

included among member accounts eligible for share insurance. These

accounts were first made available to consumers on January 1, 1998.

Although both are colloquially known as IRA accounts, only the Roth IRA

will be treated the same as a traditional IRA for share insurance

purposes under Sec. 745.9-2 of NCUA's regulations. Education IRAs, for

share insurance purposes, will be treated as irrevocable trust accounts

under Sec. 745.9-1 of NCUA's regulations.

Public Unit Accounts

NCUA proposes to liberalize its share insurance coverage for some

kinds of public unit accounts. Currently, public funds invested by an

official custodian of funds of: (1) the United States; (2) any state of

the United States or any county, municipality, or political subdivision

thereof; (3) the District of Columbia; (4) specified territories or

possessions of the United States and (5) tribal funds of any Indian

tribe are generally separately insured up to $100,000. For share

insurance purposes, NCUA proposes to distinguish share draft accounts

from share certificate and regular share accounts in this context. The

result will be to provide insurance coverage up to $100,000 for share

draft accounts and up to an additional $100,000 for share certificate

and regular share accounts. This more liberal coverage will only be

available when an official custodian establishes public unit accounts

in an authorized, federally-insured credit union that is located within

the jurisdiction from which the custodian's authority is derived.

Accounts established outside of that jurisdiction will be limited to

the current $100,000 limit without regard to whether the funds are held

in share draft accounts or share certificate and regular share

accounts.

Guardian Accounts

Currently, funds held in the name of a guardian, custodian or

conservator for the benefit of a ward or minor are insured up to

$100,000 in the aggregate, separately from any other accounts of the

guardian, custodian, conservator, ward or minor. FDIC, however, treats

these accounts as agency or nominee accounts and does not provide

separate insurance coverage. Rather, FDIC adds the guardian account

together with the individual accounts of the beneficiary of the

guardian account and insures that aggregate up to $100,000. NCUA

proposes to treat these accounts in a manner consistent with FDIC's

treatment. This will result in a reduction in insurance coverage.

Appendix to part 745

The Appendix to part 745 provides examples that illustrate the

application of share insurance coverage. NCUA proposes to enhance the

usefulness of the Appendix by incorporating additional information and

examples and putting it into an easy to read question-and-answer

format. The Appendix is not expected to answer every share insurance

question that could conceivably be asked. Rather, its function is to

address and clarify the most common insurance coverage issues in a

simple and manageable format. NCUA intends to continue to update the

Appendix periodically as circumstances arise necessitating further

clarification.

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Regulatory Procedures

Regulatory Flexibility Act

The Regulatory Flexibility Act requires NCUA to prepare an analysis

to describe any significant economic impact any proposed regulation may

have on a substantial number of small credit unions, meaning those

under $1 million in assets.

The NCUA has determined and certifies that the proposed rule, if

adopted, will not have a significant economic impact on a substantial

number of small credit unions. The reasons for this determination are

that the proposed changes to the share insurance regulations will not

increase the premiums paid by credit unions nor will the proposed

changes impose any additional requirements on insured credit unions.

Accordingly, the NCUA has determined that a Regulatory Flexibility

Analysis is not required.

Paperwork Reduction Act

NCUA has determined that the proposed amendments do not increase

paperwork requirements under the Paperwork Reduction Act of 1995 and

regulations of the Office of Management and Budget.

Executive Order 12612

Executive Order 12612 requires NCUA to consider the effect of its

actions on state interests. It states that: ``Federal action limiting

the policy-making discretion of the states should be taken only where

constitutional authority for the action is clear and certain, and the

national activity is necessitated by the presence of a problem of

national scope.'' The proposed rule will not have a direct effect 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 significant regulatory action for purposes of the

executive order.

Agency Regulatory Goal

NCUA's goal is to promulgate clear and understandable regulations

that impose minimal regulatory burden. We request your comments on

whether the proposed rule is understandable and minimally intrusive, if

implemented as proposed. We also encourage comments that address any

other share insurance issues we have not discussed here.

List of Subjects in 12 CFR Part 745

Credit unions, Pension plans, Share insurance, Trustee.

By the National Credit Union Administration Board, on November

18, 1999.

Becky Baker,

Secretary of the Board.

For the reasons stated above, it is proposed that 12 CFR part 745

be amended as follows:

PART 745--SHARE INSURANCE AND APPENDIX

1. The authority citation for part 745 continues to read as

follows:

Authority: 12 U.S.C. 1752(5), 1757, 1765, 1766, 1781, 1782,

1787, 1789.

2. Section 745.2(a) is amended by revising the last sentence to

read as follows:

Sec. 745.2 General principles applicable in determining insurance of

accounts.

(a)* * * While the provisions of this part govern in determining

share insurance coverage, to the extent local law enters into a share

insurance determination, the local law of the jurisdiction in which the

insured credit union's principal office is located will control over

the local law of other jurisdictions where the insured credit union has

offices or service facilities.

* * * * *

3. Section 745.3 is amended by revising paragraph (b) to read as

follows:

Sec. 745.3 Single ownership accounts.

* * * * *

(b) Funds held by a guardian, custodian, or conservator for the

benefit of a ward or for the benefit of a minor under a Uniform Gifts

to Minors Act or Uniform Transfer to Minors Act and deposited in one or

more accounts in the name of the guardian, custodian, or conservator

will, for purposes of this part, be deemed to be accounts held by

agents or nominees and will be insured in accordance with paragraph

(a)(2) of this section.

4. Section 745.4 is amended by adding paragraphs (e) and (f) to

read as follows:

Sec. 745.4 Revocable trust accounts.

* * * * *

(e) Living trusts. Insurance treatment under this section also

applies to revocable trust accounts held in connection with a so-called

``living trust,'' meaning a formal trust which an owner creates and

retains control over during his or her lifetime. If a named beneficiary

in a living trust is a qualifying beneficiary under this section, then

the share account held in connection with the living trust may be

eligible for share insurance under this section, assuming compliance

with all the provisions of this part. If the living trust includes a

defeating contingency that relates to a beneficiary's interest in the

trust assets, then insurance coverage under this section will not be

provided. For purposes of this section, a defeating contingency is

defined as a condition that would prevent the beneficiary from

acquiring a vested and non-contingent interest in the funds in the

share account upon the owner's death.

(f) Joint revocable trust accounts. Where an account described in

paragraph (a) of this section is established by more than one owner and

held for the benefit of others, some or all of whom are within the

qualifying degree of kinship, the respective interests of each owner

held for the benefit of each qualifying beneficiary will be separately

insured up to $100,000. Those interests will be deemed equal unless

otherwise stated in the share account records of the federally-insured

credit union. Interests held for non-qualifying beneficiaries will be

added to the individual accounts of the owners. Where a husband and a

wife establish a revocable trust account naming themselves as the sole

beneficiaries, the account will not be insured according to the

provisions of this section, but will instead be insured in accordance

with the joint account provisions of Sec. 745.8.

5. Section 745.9-1 is amended by adding paragraph (c) to read as

follows:

Sec. 745.9-1 Trust accounts.

* * * * *

(c) This section applies to trust interests created in Education

IRAs established in connection with Sec. 530 of the Internal Revenue

Code (26 U.S.C. 530).

6. Section 745.9-2(a) is revised to read as follows:

Sec. 745.9-2 IRA/Keogh accounts.

(a) The present vested ascertainable interest of a participant or

designated beneficiary in a trust or custodial account maintained

pursuant to a pension or profit-sharing plan described under

Sec. 401(d) (Keogh account), Sec. 408(a) (IRA) and Sec. 408A (Roth IRA)

of the Internal Revenue Code (26 U.S.C. 401(d), 408(a) and 408A) will

be insured up to $100,000 separately from other accounts of the

participant or designated beneficiary. For insurance purposes, IRA and

Roth IRA accounts will be combined together and insured in the

aggregate up to $100,000. A Keogh account will be separately insured

from an IRA account, Roth IRA account or, where applicable, aggregated

IRA and Roth IRA accounts.

* * * * *

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7. Section 745.10 is amended by revising paragraphs (a)(1) through

(a)(5) and (b), and adding a second sentence to paragraph (c) to read

as follows:

Sec. 745.10 Public unit accounts.

(a) * * *

(1) Each official custodian of funds of the United States lawfully

investing the same in a federally-insured credit union will be

separately insured in the amount of:

(i) Up to $100,000 in the aggregate for all share draft accounts;

and

(ii) Up to $100,000 in the aggregate for all share certificate and

regular share accounts;

(2) Each official custodian of funds of any state of the United

States or any county, municipality, or political subdivision thereof

lawfully investing the same in a federally-insured credit union in the

same state will be separately insured in the amount of:

(i) Up to $100,000 in the aggregate for all share draft accounts;

and

(ii) Up to $100,000 in the aggregate for all share certificate and

regular share accounts;

(3) Each official custodian of funds of the District of Columbia

lawfully investing the same in a federally-insured credit union in the

District of Columbia will be separately insured in the amount of:

(i) Up to $100,000 in the aggregate for all share draft accounts;

and

(ii) Up to $100,000 in the aggregate for all share certificate and

regular share accounts;

(4) Each official custodian of funds of the Commonwealth of Puerto

Rico, the Panama Canal Zone, or any territory or possession of the

United States, or any county, municipality, or political subdivision

thereof lawfully investing the same in a federally-insured credit union

in Puerto Rico, the Panama Canal Zone, or any such territory or

possession, respectively, will be separately insured in the amount of:

(i) Up to $100,000 in the aggregate for all share draft accounts;

and

(ii) Up to $100,000 in the aggregate for all share certificate and

regular share accounts;

(5) Each official custodian of tribal funds of any Indian tribe (as

defined in Section 3(c) of the Indian Financing Act of 1974) or agency

thereof lawfully investing the same in a federally-insured credit union

will be separately insured in the amount of:

(i) Up to $100,000 in the aggregate for all share draft accounts;

and

(ii) Up to $100,000 in the aggregate for all share certificate and

regular share accounts;

(b) Each official custodian referred to in paragraphs (a)(2), (3),

and (4) of this section lawfully investing such funds in share accounts

in a federally-insured credit union outside of their respective

jurisdictions shall be separately insured up to $100,000 in the

aggregate for all such accounts regardless of whether they are share

draft, share certificate or regular share accounts.

(c) * * * Where an officer, agent or employee of a public unit has

custody of certain funds which by law or under a bond indenture are

required to be set aside to discharge a debt owed to the holders of

notes or bonds issued by the public unit, any investment of such funds

in an account in a federally-insured credit union will be deemed to be

a share account established by a trustee of trust funds of which the

noteholders or bondholders are pro rata beneficiaries, and the

beneficial interest of each noteholder or bondholder in the share

account will be separately insured up to $100,000.

* * * * *

8. The introductory text to the Appendix to part 745 is amended by

adding a heading to read as follows:

APPENDIX TO PART 745--EXAMPLES OF INSURANCE COVERAGE AFFORDED

ACCOUNTS IN CREDIT UNIONS INSURED BY THE NATIONAL CREDIT UNION

INSURANCE FUND

What is the Purpose of This Appendix?

* * * * *

9. Part A of the Appendix to part 745 is amended by revising the

heading of Part A, the introductory paragraph and Examples 5 and 6 to

read as follows:

A. How are Single Ownership Accounts Insured?

All funds owned by an individual member or, in a community

property state, by the husband-wife community of which the

individual is a member and invested in one or more individual

accounts are added together and insured to the $100,000 maximum.

This is true whether the accounts are maintained in the name of the

individual member owning the funds, in the name of the member's

agent or nominee, or in a custodial loan account on behalf of the

member as a borrower (Secs. 745.3(a)(1), (2) and (3)). For this

purpose, funds held by a guardian, custodian or conservator for the

benefit of a ward or minor shall be treated as an agent or nominee

account.

* * * * *

Example 5

Question: Member C, a minor, maintains an individual account of

$750. C's grandfather makes a gift to him of $100,000, which is

invested in another account by C's father, designated on the credit

union's records as custodian under a Uniform Gift to Minors Act. C's

father, also a member, maintains an individual account of $100,000.

What is the insurance coverage?

Answer: C's individual account and the custodial account held

for him by his father are added together and insured to the $100,000

maximum, leaving $750 uninsured. The individual account held by C's

father is separately insured up to the $100,000 maximum

(Secs. 745.3(a)(1), (a)(2) and b).

Example 6

Question: Member G, a court-appointed guardian, invests

$100,000, which belongs to member W, his ward, in a properly

designated custodial account. W and G each maintain $25,000 in

individual accounts. What is the insurance coverage?

Answer: W's individual account and the guardianship account in

G's name are added together and insured to the $100,000 maximum

leaving $25,000 uninsured. G's individual account is separately

insured to the $100,000 maximum (Secs. 745.3(a)(1), (a)(2) and (b)).

* * * * *

10. Part B of the Appendix to part 745 is amended by revising the

heading of Part B and adding Example 4 to read as follows:

B. How are Revocable Trust Accounts Insured?

* * * * *

Example 4

Question: Member H invests $200,000 in a revocable trust account

held in connection with a living trust with his son, S, and his

daughter, D, as named beneficiaries. What is the insurance coverage?

Answer: Since S and D are children of H, the owner of the

account, the funds would normally be insured under the rules

governing revocable trust accounts up to $100,000 as to each

beneficiary (Sec. 745.4(b)). However, because this account is held

in connection with a living trust whose named beneficiaries are

qualifying beneficiaries under Sec. 745.4, it must be scrutinized to

determine whether the account complies with all other provisions of

this part and whether the living trust contains any defeating

contingencies. Assuming there are no defeating contingencies and

that the account complies with all other requirements of this part,

then it will be treated as any other revocable trust. In this

instance, it will be insured up to $100,000 as to each beneficiary

(Sec. 745.4(e)). Assuming that S and D have equal beneficial

interests ($100,000 each), H is fully insured for this account.

11. Part C of the Appendix to part 745 is amended by revising the

heading of Part C to read as follows:

C. How are Accounts Held by Executors or Administrators Insured?

* * * * *

12. Part D of the Appendix to part 745 is amended by revising the

heading of Part D to read as follows:

D. How are Accounts Held by a Corporation, Partnership or

Unincorporated Association Insured?

13. Part E of the Appendix to part 745 is amended by revising the

heading of

[[Page 66816]]

Part E, the first introductory paragraph and Examples 4 through 7 and

adding new Example 9 to read as follows:

E. How are Public Unit Accounts Insured?

For insurance purposes, the official custodian of funds

belonging to a public unit, rather than the public unit itself, is

insured as the account holder. All funds belonging to a public unit

and invested by the same custodian in a federally-insured credit

union are categorized as either share draft accounts or share

certificate and regular share accounts. If these accounts are

invested in a federally-insured credit union located in the

jurisdiction from which the official custodian derives his

authority, then the share draft accounts will be insured separately

from the share certificate and regular share accounts. Under this

circumstance, all share draft accounts are added together and

insured to the $100,000 maximum and all share certificate and

regular share accounts are also added together and separately

insured up to the $100,000 maximum. If, however, these accounts are

invested in a federally-insured credit union located outside of the

jurisdiction from which the official custodian derives his

authority, then insurance coverage is limited to $100,000 for all

accounts regardless of whether they are share draft, share

certificate or regular share accounts. If there is more than one

official custodian for the same public unit, the funds invested by

each custodian are separately insured. If the same person is

custodian of funds for more than one public unit, he is separately

insured with respect to the funds of each unit held by him in

properly designated accounts. The maximum coverage for an official

custodian of funds of the United States would be $100,000.

* * * * *

Example 4

Question: A city treasurer invests city funds in each of the

following accounts: ``General Operating Account,'' ``School

Transportation Fund,'' ``Local Maintenance Fund,'' and ``Payroll

Fund.'' Each account is available to the custodian upon demand. By

administrative direction, the city treasurer has allocated the funds

for the use of and control by separate departments of the city. What

is the insurance coverage?

Answer: All of the accounts are added together and insured in

the aggregate to $100,000. Because the allocation of the city's

funds is not by statute or ordinance for the specific use of and

control by separate departments of the city, separate insurance

coverage to the maximum of $100,000 is not afforded to each account

(Secs. 745.1(d) and 745.10(a)(2)).

Example 5

Question: A, the custodian of retirement funds of a military

exchange, invests $1,000,000 in an account in an insured credit

union. The military exchange, a non-appropriated fund

instrumentality of the United States, is deemed to be a public unit.

The employees of the exchange are the beneficiaries of the

retirement funds but are not members of the credit union. What is

the insurance coverage?

Answer: Because A invested the funds on behalf of a public unit,

in his capacity as custodian, those funds qualify for $100,000 share

insurance even though A and the public unit are not within the

credit union's field of membership. Since the beneficiaries are

neither public units nor members of the credit union they are not

entitled to separate share insurance. Therefore, $900,000 is

uninsured (Sec. 745.10(a)(1)).

Example 6

Question: A is the custodian of the County's employee retirement

funds. He deposits $1,000,000 in retirement funds in an account in

an insured credit union. The ``beneficiaries'' of the retirement

fund are not themselves public units nor are they within the credit

union's field of membership. What is the insurance coverage?

Answer: Because A invested the funds on behalf of a public unit,

in his capacity as custodian, those funds qualify for $100,000 share

insurance even though A and the public unit are not within the

credit union's field of membership. Since the beneficiaries are

neither public units nor members of the credit union they are not

entitled to separate share insurance. Therefore, $900,000 is

uninsured (Sec. 745.10(a)(2)).

Example 7

Question: A county treasurer establishes the following share

draft accounts in an insured credit union each with $100,000:

``General Operating Fund''

``County Roads Department Fund''

``County Water District Fund''

``County Public Improvement District Fund''

``County Emergency Fund''

What is the insurance coverage?

Answer: The ``County Roads Department,'' ``County Water

District'' and ``County Public Improvement District'' accounts would

each be separately insured to $100,000 if the funds in each such

account have been allocated by law for the exclusive use of a

separate county department or subdivision expressly authorized by

State statute. Funds in the ``General Operating'' and ``Emergency

Fund'' accounts would be added together and insured in the aggregate

to $100,000, if such funds are for countywide use and not for the

exclusive use of any subdivision or principal department of the

county, expressly authorized by State statute (Secs. 745.1(d) and

745.10(a)(2)).

* * * * *

Example 9

Question: A, an official custodian of funds of a state of the

United States, lawfully invests $250,000 of state funds in a

federally-insured credit union located in the state from which he

derives his authority as an official custodian. What is the

insurance coverage?

Answer: If A invested the entire $250,000 in a share draft

account, then $100,000 would be insured and $150,000 would be

uninsured. If A invested $125,000 in share draft accounts and

another $125,000 in share certificate and regular share accounts,

then A would be insured for $100,000 for the share draft accounts

and $100,000 for the share certificate and regular share accounts

leaving $50,000 uninsured (Sec. 745.10(a)(2)). If A had invested the

$250,000 in a federally-insured credit union located outside the

state from which he derives his authority as an official custodian,

then $100,000 would be insured for all accounts regardless of

whether they were share draft, share certificate or regular share

accounts, leaving $150,000 uninsured (Sec. 745.10(b)).

14. Part F of the Appendix to part 745 is amended by revising the

heading of Part F to read as follows:

F. How are Joint Accounts Insured?

* * * * *

15. Part G of the Appendix to part 745 is amended by revising the

heading of Part G and the second sentence of the seventh introductory

paragraph to read as follows:

G. How are Trust Accounts and Retirement Accounts Insured?

* * * Although credit unions may serve as trustees or custodians

for self-directed IRA, Roth IRA and Keogh accounts, once the funds

in those accounts are taken out of the credit union, they are no

longer insured.

* * * * *

[FR Doc. 99-30694 Filed 11-29-99; 8:45 am]

BILLING CODE 7535-01-P