Organization and Operations of Federal Credit Unions

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701

Organization and Operations of Federal Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: NCUA is issuing a final rule that incorporates into its

regulations the agency's longstanding interpretation that federal

credit unions (FCUs) are authorized, within limits, to make charitable

contributions and donations. NCUA seeks to increase regulatory

effectiveness by making it easier for FCUs to locate applicable rules

regarding the making of charitable contributions and donations.

DATES: This rule is effective May 21, 1999.

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

Division of Operations, Office of General Counsel, (703) 518-6540.

SUPPLEMENTARY INFORMATION:

Background

On October 29, 1998, the NCUA Board requested comments on a

proposed rule to incorporate into NCUA regulations the requirements of

Interpretive Ruling and Policy Statement 79-6, Donations/Contributions

(IRPS 79-6). 63 FR 57942, October 29, 1998. Tracking IRPS 79-6, the

proposed rule permitted an FCU to make charitable contributions to a

recipient that is a tax exempt organization under Section 501(c)(3) of

the Internal Revenue Code (501(c)(3) organization) and located in or

conducting its activities in a community in which the FCU has a

principal place of business. 26 U.S.C. 501(c)(3) (1998). The proposed

rule also permitted FCUs to make charitable contributions to a

501(c)(3) organization that operates primarily to promote and develop

credit unions. Finally, the proposed rule provided that an FCU's board

of directors must approve charitable contributions based on a

determination that the contributions are in the best interests of the

credit union and are reasonable given the financial condition of the

credit union.

Summary of Comments

The NCUA Board received thirty-four comment letters regarding the

proposal: three from national trade associations; seven from credit

union leagues; twenty-three from FCUs; and one from a state-chartered

credit union.

Comments on Proposed Section 701.25(a)

Twenty-six commenters stated that limiting donation recipients to

501(c)(3) organizations is too restrictive and could exclude

organizations and causes that are otherwise worthy of receiving

donations from FCUs. One commenter suggested broadening the 501(c)(3)

restriction by defining eligible recipients as ``organizations that

primarily serve either a charitable, social, welfare, or educational

purpose, or are exempt from taxation pursuant to section 501(c)(3) of

the internal revenue code.'' Revised Code of Washington 31.12.402(20).

We note that, while Washington state law does not require that

recipients are tax exempt organizations under 501(c)(3), it requires

credit unions to work with community leaders and limits donations to

``efforts to improve areas where their [credit union] members reside.''

Since issuance of IRPS 79-6, the NCUA has viewed the legal

authority for FCUs to make contributions as ``an activity incidental to

an FCU's business'' under the provision of the FCU Act that authorizes

FCUs ``to exercise such incidental powers as shall be necessary or

requisite to enable it to carry on effectively the business for which

it is incorporated.'' 44 FR 56691 (Oct. 2 1979); 12 U.S.C. 1757(17). An

FCU's purpose, as a nonpropfit cooperative, is to benefit its members

by ``promoting thrift among its members and creating a source of credit

for provident or productive purposes.'' 12 U.S.C. 1752(1). Prior to

issuance of IRPS 79-6, the NCUA had permitted FCUs to make donations

only where the FCU would derive a direct benefit. While IRPS 79-6

broadened an FCU's ability to make contributions by permitting

contributions for ``diverse, charitable, recreational and educational

needs of the public,'' it limited permissible donations to 501(c)(3)

organizations. The discussion accompanying IRPS 79-6 specifically

prohibited contributions for candidates to league or trade association

positions or for political office and cautioned FCUs about the

applicability of the conflict of interest provisions of the FCU bylaws.

The range of organizations that qualify as 501(c)(3) organizations

is very broad, permitting donations to community chests and religious,

charitable, scientific, and educational organizations, institutions and

foundations. In addition, the 501(c)(3) designation insures a degree of

credibility and independence in the exercise of the board of directors'

decision as fiduciaries for member funds. These factors are important

given that the funds an FCU will use for contributions would otherwise

be available for dividends to members who, in turn, could use their

dividends to make their own decisions about charitable giving.

NCUA acknowledges that there may be cases where an FCU may want to

contribute to a worthy cause or activity that is not part of or

sponsored by a 501(c)(3) organization and that boards of directors

should have the discretion to do so. Examples that appear appropriate

would be good will, scholarships, not for profit projects as

contributing to a community sports team, local clean-up projects, or

community festivals or fairs. Accordingly, the final rule permits FCUs

to make donations to recipients without regard to their status as

501(c)(3) organizations. The reasonableness of a donation will depend

on the size and financial condition of the FCU. Finally, FCUs should be

aware that, while the final regulation does not require that recipients

be 501(c)(3) organizations, the regulation is not authority for

contributions to candidates for a trade association or credit union

league office or for other political contributions which, as noted in

the preamble to the proposed regulation, are governed by the Federal

Election Campaign Act (2 U.S.C. 441b).

Twenty-one commenters stated that limiting donation recipients to

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organizations that are located in or conduct their activities in a

community in which the FCU has a principal place of business is too

restrictive and could exclude organizations and causes that are

otherwise worthy of receiving donations from FCUs. The typical examples

noted by commenters were organizations serving victims of distant

natural disasters such as hurricanes or earthquakes and well-known

national organizations that may not have a local office near the FCU.

Most of these commenters favored removing the restriction from the

regulation while others only suggested that it be broadened to include

donation recipients located or conducting activities anywhere the FCU

has members. The final rule, consistent with IRPS 79-6 and the proposed

rule, permits contributions to national charitable organizations such

as the Red Cross which, as needed, conduct activities in the community

where the credit union is located and, therefore, would qualify as

permissible recipients.

One commenter noted that the proximity requirement is particularly

restrictive for some community chartered credit unions, especially

those in rural areas. NCUA believes that any organization located or

conducting activities within the geographic boundaries of a community

chartered credit union is, by definition, located in the community in

which the FCU has a principal place of business and would be eligible

to receive contributions under the final regulation. To provide

additional flexibility and avoid questions that could arise about

whether a particular office or branch of an FCU is a ``principal''

place of business, the Board has decided to delete the word

``principal'' from this description in the final rule. By stating in

the final regulation that a recipient be located or conduct activities

in a community where the FCU has a place of business, the Board means a

branch or office of the FCU. Place of business would not, however,

include an ATM location.

Another commenter noted that members of some multiple group FCUs

are spread over large geographic areas and contended that there may be

members located far from any of the FCU's principal places of business.

Credit unions generally locate their places of business where a

relatively significant number of their members will have access to

services. NCUA recognizes an FCU's interest in serving communities

where its members reside or carry on their activities through

charitable donations and believes there should be flexibility in

construing the term ``community.'' Donating to recipients in areas

where relatively few members are located, however, would not serve the

needs of the FCU's community. NCUA believes that limiting donation

recipients to organizations located in or conducting activities in a

community in which the FCU has a place of business helps to ensure that

the FCU's charitable donations will be used to serve the needs of

communities where its members are located.

Finally, without regard to the location of the organization, NCUA

has maintained in the final regulation the provision from the proposed

rule that permits FCUs to make charitable donations to organizations

that operate primarily to promote and develop credit unions even if the

organization is not located or does not conduct activities in a

community where the FCU has a place of business. For these

contributions to be permissible, the final rule retains the requirement

that these organizations be 501(c)(3) organizations.

Comments on Proposed Section 701.25(b)

Twelve commenters suggested that an FCU's board of directors should

be permitted to approve a budget for charitable donations and delegate

authority to other FCU officials to allocate these funds. The preamble

to the proposed rule stated that this would be an appropriate approach.

Some commenters suggested including this in the regulation and the

final rule incorporates this provision. Seven other commenters

suggested that an FCU's board of directors should be permitted to

delegate authority to make charitable donations to other FCU officials,

including complete discretion to determine donation amounts without the

board approving a budget for this purpose. While delegation of the

approval of the recipients of charitable donations within an FCU board-

approved budget category is permitted, the NCUA Board has rejected

complete delegation without a budget item being approved by the FCU's

board because it believes that an FCU's decision as to the amount of

donations is a significant one that warrants the consideration of its

board of directors.

Other Comments

Ten commenters stated that NCUA oversight of contributions and

donations is more appropriately accomplished through guidelines, as

opposed to regulations. Four commenters stated that charitable giving

should not be the subject of NCUA oversight at all. The NCUA Board

notes that FCUs do not have the express authority to make contributions

or donations. IRPS 79-6 was a formal ruling by the NCUA Board regarding

the incidental power of FCUs that has permitted them to make donations

and contributions. As noted in the preamble to the proposed rule,

NCUA's foremost intention in incorporating IRPS 79-6 into its

regulations is to increase regulatory effectiveness by making it easier

for FCUs to locate applicable rules regarding the making of charitable

contributions and donations.

The NCUA notes that this final rule provides broad discretion and

flexibility for FCUs in determining the amount, the administration, and

recipients for contributions but the incidental power to make

contributions is not unlimited. The NCUA believes that contributions

and donations may raise safety and soundness concerns and deserve

regulatory oversight. The limitations and requirements in the final

rule balance the interests of FCU members with the responsibility of

FCU boards of directors to exercise their fiduciary responsibility to

make independent and prudent decisions about contributions and

donations.

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 entities (primarily those under

$1 million in assets). The NCUA has determined and certifies that the

final rule will not have a significant economic impact on a substantial

number of small credit unions. Accordingly, the NCUA has determined

that a Regulatory Flexibility Analysis is not required.

Paperwork Reduction Act

NCUA has determined that the final rule does 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. The final rule only applies to federal

credit unions. NCUA has determined that the proposed amendment does not

constitute a significant regulatory action for purposes of Executive

Order 12612.

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Small Business Regulatory Enforcement Fairness Act

The Small Business Regulatory Enforcement Fairness Act of 1996

(Pub. L. 104-121) 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

Procedures Act. 5 U.S.C. 551. The Office of Management and Budget has

determined that this rule does not constitute a major rule for purposes

of the Small Business Regulatory Enforcement Fairness Act of 1996.

List of Subjects in 12 CFR Part 701

Charitable contributions, Credit unions.

By the National Credit Union Administration Board on April 15,

1999.

Becky Baker,

Secretary of the Board.

For the reasons set forth above, NCUA amends 12 CFR part 701 as

follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

1. The authority citation for part 701 continues to read as

follows:

Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a,

1761b, 1766, 1767, 1782, 1784, 1787, and 1789. Section 701.6 is also

authorized by 31 U.S.C. 3717. Section 701.31 is also authorized by

15 U.S.C. 1601 et seq., 42 U.S.C. 1861 and 42 U.S.C. 3601-3610.

Section 701.35 is also authorized by 42 U.S.C. 4311-4312.

2. Part 701 is amended by adding Sec. 701.25 to read as follows:

Sec. 701.25 Charitable contributions and donations.

(a) A federal credit union may make charitable contributions and/or

donate funds to recipients not organized for profit that are located in

or conduct activities in a community in which the federal credit union

has a place of business or to organizations that are tax exempt

organizations under Section 501(c)(3) of the Internal Revenue Code and

operate primarily to promote and develop credit unions.

(b) The board of directors must approve charitable contributions

and/or donations, and the approval must be based on a determination by

the board of directors that the contributions and/or donations are in

the best interests of the federal credit union and are reasonable given

the size and financial condition of the federal credit union. The board

of directors, if it chooses, may establish a budget for charitable

contributions and/or donations and authorize appropriate officials of

the federal credit union to select recipients and disburse budgeted

funds among those recipients.

[FR Doc. 99-9931 Filed 4-20-99; 8:45 am]

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