MEDIA, Pa. – The handful of credit unions that are large enough to support their own registered representative and are the sole owners of their financial services CUSO can consider themselves luckier than their smaller peers: the prospect of rolling the investment services back under their CU's roof is relatively manageable. But what about the vast majority of credit unions that are either too small to support their own registered reps or are larger and have chosen to collaborate with other CUs to offer investment services through multiple-owned CUSOs or by working with a wholly-owned CUSO and its affiliated broker/dealer program? Add to the mix the scenario where a registered rep of a CUSO serves more than one credit union? These are some of the unique problems resulting from credit unions' cooperative nature that NACUSO is currently discussing with the Securities and Exchange Commission. Many broker/dealers, explains NACUSO General Counsel Guy Messick, have a rule of thumb as to how large a credit union must be in order to be able to support one registered representative – $100 million in assets. That means 90% of CUs don't have the option of having their own broker/dealer and have to collaborate with other CUs to offer investment services. "If you add having four or five registered reps, that knocks the 90% figure even higher," said Messick. Because of economies of scale, many large credit unions have opted to form cooperative CUSOs that provide services to multiple CUs and at the same time allow them to support having one or more registered reps as well as afford a full-time non-producing manager who doesn't sell investments. If this sort of arrangement operates under a "managed plan" where the rep is already considered to be an employee of the broker/dealer and is paid by them, then a decision by the SEC that would require the rep be a broker/dealer employee would already be satisfied. The situation could get more complicated though under a dual-employee arrangement -the registered reps are considered employees of the CUSO and independent representatives of the CUSO's broker/dealer. The broker/dealer pays the commission compensation to the CUSO, and the CUSO in turn pays the registered rep their compensation. If the SEC decides, as most financial services CUSOs are expecting, to require dual-employee programs to run under the CU's roof, the registered rep would be considered an employee of the CU. What would happen in a cooperative CUSO environment where a registered rep has been working with more than one CU? "Which credit union does the registered rep become the employee of?" asks Messick. "Are they part-time employees of several credit unions?" Messick said there are two solutions to the predicament. The first would be to allow the registered reps to remain employees of the CUSO. The CUSO wouldn't retain any share of commissions for its services. Instead, the credit unions would contract with the CUSO to provide registered reps and administrative services to their members, and the CUs would pay the CUSO a flat fee or hourly fee for the services the CUSO provided. The second solution would be for the registered reps to be paid directly by the broker/dealer. The CUSO would perform administrative responsibilities and other functions that don't require a license. Because of the CUSO's increased administrative responsibilities, the credit union would be able to negotiate their revenue share from the broker/dealer. Messick refers to this scenario as a "hybrid managed plan," and it's the plan he prefers the SEC allow CUSOs to follow. The CUSO can always serve in an administrative capacity that doesn't require licensing, Messick explained. It would be preferable though if the CUSO, as well as the broker/dealer was also allowed to be the registered rep's employer. Messick and CUNA's Task Force are continuing to have discussions with the SEC to ascertain the agency's timetable for issuing the credit union exemptions, to discuss the issue of multiple-owned CUSO, and to provide the SEC with background information on how operationally the idea of a hybrid managed plan can work within the SEC's rules. He told Credit Union Times that "the SEC is still leaning to extending the commission sharing exemption only to credit unions and not CUSOs," and that the SEC "is willing to listen to what we have to say." "It would be preferable if the SEC allows the CUSO to act as the administrator and coordinate functions, since that doesn't require a licensed person," Messick said. He added that his objective is "to continue to provide the SEC with as much information as is necessary so they can make the right decision for the credit union industry." -

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