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entitled 'Federal Deposit Insurance Act: FTC Best Among Candidates to
Enforce Consumer Protection Provisions' which was released on August
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Report to Congressional Committees:
United States General Accounting Office:
GAO:
August 2003:
Federal Deposit Insurance Act:
FTC Best Among Candidates to Enforce Consumer Protection Provisions:
GAO-03-971:
GAO Highlights:
Highlights of GAO-03-971, a report to congressional committees.
Why GAO Did This Study:
This mandated report responds to Congressional concerns that
provisions in section 43 of the Federal Deposit Insurance Act (FDI
Act) are not being enforced. Since 1991, section 43 has required,
among other things, depository institutions lacking federal deposit
insurance to conspicuously disclose that deposits in these
institutions are not federally insured. GAO’s objectives were to (1)
determine the current status of the enforcement of provisions in
section 43; (2) determine the extent of compliance with each provision
and the potential impact on consumers if the provisions were not
enforced; and (3) evaluate which federal agency could most effectively
enforce the provisions.
What GAO Found:
The Federal Trade Commission (FTC) is responsible for enforcing
compliance with the provisions in section 43 of the FDI Act. However,
due to a variety of concerns, FTC has requested and appropriators have
agreed to prohibit FTC from enforcing these provisions. The National
Credit Union Administration (NCUA) and state regulators have imposed
some related requirements on credit unions and private deposit
insurers. While these requirements are not the same as those in
section 43 provisions, they provide some assurances that certain
actions contemplated by section 43 are being satisfied.
Some privately insured credit unions GAO visited did not adequately
disclose that these institutions were not federally insured; as a
result, depositors at these institutions may not be fully informed
that their deposits are not federally insured. For example, in
unannounced site visits to 57 privately insured credit unions in
Alabama, California, Illinois, Indiana, and Ohio, GAO found that
required notices were not posted in 37 percent of the locations.
No federal agency is ideally suited to carry out the responsibilities
outlined in section 43. Although FTC, NCUA, and the Federal Deposit
Insurance Corporation (FDIC) officials generally agreed that consumers
should receive information about the insured status of their deposits,
they strongly maintained that their respective agencies should not
enforce these provisions. NCUA and FDIC officials objected to
enforcing these provisions because their agencies have no direct
interest in uninsured institutions and their involvement in the
enforcement of these requirements could undermine the purposes of the
provision. FTC staff raised jurisdictional concerns and asserted that
its mission, resources, and practices were ill suited for such a role.
GAO believes that clarifying FTC’s authority and providing it with
additional flexibility in administering these provisions represents
the best option to enforce the provisions.
What GAO Recommends:
GAO is not recommending executive action but identifies matters for
Congressional consideration. If Congress determines that federal
oversight of section 43 is needed, Congress may wish to consider
removing the prohibition in FTC’s appropriations against enforcing the
provisions. Congress may also wish to consider modifying the section
to clarify FTC’s jurisdiction and to provide FTC with flexibility in
administering these requirements by giving FTC authority to consult
with other primary regulators, such as NCUA, or FDIC, or partner with
states.
www.gao.gov/cgi-bin/getrpt?GAO-03-971.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Richard J. Hillman at
(202) 512-8678 or hillmanr@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
NCUA and State Regulators Imposed Related Disclosure and Audit
Requirements:
Compliance with Section 43 Provisions Varied; Potential Impact on
Consumers Most Evident in Credit Union Noncompliance with Disclosure
Requirements:
Although There Is No Ideal Regulator to Enforce Section 43, FTC Is Best
among Candidates to Enforce Provisions:
Conclusions:
Matters for Congressional Consideration:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Entities That Enforce Various Laws at Credit Unions:
Appendix III: Comments from the National Credit Union Administration:
Appendix IV: Comments from the Federal Trade Commission:
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Tables:
Table 1: Number and Percent of Credit Unions Visited without Required
Signage in Lobby:
Table 2: Number and Percent of Credit Union Materials Reviewed without
Required Disclosures:
Table 3: Number and Percent of Web Sites Reviewed without Required
Disclosures:
Figure:
Figure 1: States Permitting Private Deposit Insurance (March 2003) and
Number of Privately Insured Credit Unions (December 2002):
Abbreviations:
ASI: American Share Insurance:
BIF: Bank Insurance Fund:
CPA: Certified Public Accountant:
CUIC: Credit Union Insurance Corporation:
CUNA: Credit Union National Association:
FDI: ActFederal Deposit Insurance Act:
FDIC: Federal Deposit Insurance Corporation:
FDICIA: Federal Deposit Insurance Corporation Improvement Act:
FTC: Federal Trade Commission:
FTC Act: Federal Trade Commission Act:
GAO: General Accounting Office:
NAFCU: National Association of Federal Credit Unions:
NASCUS: National Association of State Credit Union Supervisors:
NCUA: National Credit Union Administration:
NCUSIF: National Credit Union Share Insurance Fund:
RISDIC: Rhode Island Share and Depositors Indemnity Corporation:
SAIF: Savings Association Insurance Fund:
SEC: Securities and Exchange Commission:
TISA: Truth in Savings Act:
United States General Accounting Office:
Washington, DC 20548:
August 20, 2003:
Congressional Committees:
After financial crises in the 1980s caused record losses in federal
deposit insurance funds, Congress enacted legislation--the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)--that
made fundamental changes to federal oversight of depository
institutions and added section 43 to the Federal Deposit Insurance Act
(FDI Act).[Footnote 1] Under the section 43 disclosure requirement,
depository institutions that lack federal deposit insurance must
conspicuously inform consumers that their deposits are not federally
insured. The recent conversion of a large federally insured credit
union to private deposit insurance has raised concerns whether
privately insured credit unions are complying with requirements under
this section to ensure that members understand that the federal
government does not guarantee their accounts.
In addition to the disclosure requirements, section 43 requires that an
institution lacking federal deposit insurance be shut down if the
institution's state regulator has not determined its eligibility for
federal deposit insurance. The section also requires any provider of
private deposit insurance to obtain and distribute an independent
annual audit to each depository institution it insures and appropriate
supervisory agency of each state in which such an institution receives
deposits. In this report, we refer to these requirements as section 43
disclosure, shut-down, and annual audit provisions.
The Federal Trade Commission (FTC or Commission) is statutorily
responsible for enforcing compliance with section 43. However, FTC has
never taken action to enforce section 43. Rather, FTC has requested
that it not enforce these requirements by seeking and obtaining in its
appropriations authority a prohibition against spending appropriated
funds to carry out these provisions. As a result, no federal entity is
enforcing compliance with section 43.
This report responds to Congressional concerns that section 43
provisions are not being enforced. Specifically, the Conference Report
accompanying the Fiscal Year 2003 Consolidated Appropriations Act
mandated that we (1) determine the current status of enforcement of
these requirements; (2) determine the extent of compliance with each
requirement--disclosure, shut down, and annual audit--and the potential
impact on consumers if these requirements are not enforced; and (3)
evaluate which federal agency could most effectively enforce section
43.[Footnote 2]
As agreed with committee staff, we limited our assessment of
"depository institutions lacking federal deposit insurance" to state-
chartered credit unions that purchase private primary deposit
insurance.[Footnote 3] To determine the current status of enforcement
of section 43 requirements, and whether other laws or rules impose
requirements similar to those of section 43, we interviewed and
reviewed available documentation from FTC staff and officials from the
National Credit Union Administration (NCUA), the Federal Deposit
Insurance Corporation (FDIC), and American Share Insurance (ASI)--the
remaining provider of nonfederal (private) deposit insurance.[Footnote
4] We also surveyed the 50 state credit union regulators to determine
which states permitted private deposit insurance. We interviewed
regulatory officials in Alabama, California, Idaho, Illinois, Indiana,
Maryland, Nevada, New Hampshire, and Ohio, which include those states
where credit unions were permitted and chose not to obtain federal
depository insurance. To determine the extent of compliance with
section 43 and the potential impact on consumers from nonenforcement,
we conducted unannounced site visits to 57 locations of privately
insured institutions in Alabama, California, Illinois, Indiana, and
Ohio. The purpose of these visits was to determine whether state-
chartered, privately insured credit unions were providing notice that
they were not federally insured. The credit union locations were
selected based on a convenience sample using state and city location
coupled with random selection of main or branch locations within each
city. We also discussed the impact of nonenforcement with federal and
state regulators noted above. To evaluate which federal agency could
most effectively enforce these requirements, we interviewed FTC staff
and officials from NCUA, FDIC, and various interested industry groups
to discuss their perspectives and obtain their positions on enforcement
of section 43 requirements. We also conducted legal research and
analysis related to these provisions. We conducted our work in
Washington, D.C., Alabama, California, Indiana, Illinois, Maryland,
Massachusetts, Ohio, and Virginia between February and August 2003, in
accordance with generally accepted government auditing standards. We
discuss our scope and methodology in more detail in appendix I.
Results in Brief:
Although statutorily responsible for enforcing section 43, FTC,
consistent with a prohibition in its appropriations authority, has not
prescribed the manner and content of disclosures, provided guidance or
undertaken rulemaking to enforce these provisions, or brought any
enforcement cases to date. NCUA and state regulators have imposed
certain related requirements on state-chartered credit unions and
private deposit insurers. While these requirements are not fully
comparable to section 43 provisions, they provide some assurance that
certain actions contemplated by section 43 are being satisfied. For
example, NCUA requires federally insured credit unions seeking to
convert to private deposit insurance to notify members that if the
conversion is approved, the federal government will not insure
deposits.[Footnote 5] NCUA's requirements, however, are less extensive
than the disclosure requirements in section 43.
Compliance with section 43 disclosure, shut-down, and annual audit
requirements varied considerably. The most apparent impact on
consumers, from the lack of enforcement of these provisions, may result
from credit unions not providing adequate disclosures that they are not
federally insured.
* While state regulators and ASI officials reported monitoring whether
privately insured credit unions disclosed that they were not federally
insured, we found many privately insured credit unions that we visited
did not always make such disclosures. For example, we found that 37
percent (21 of 57) of the locations we visited did not post signage in
their lobbies indicating that deposits were not federally insured. As a
result, depositors at these institutions may not be adequately
informed, as specifically required in section 43, that (1) their
deposits are not federally insured or (2) if the institution fails, the
federal government does not guarantee that they will get back their
money.
* Section 43 prohibits depository institutions lacking federal deposit
insurance from engaging in interstate commerce unless the institution's
state regulator has determined the institution's eligibility for
federal deposit insurance. It appears that privately insured credit
unions have not obtained this determination from their state
regulators. However, this determination may not be a meaningful
protection for consumers. Because this is a one-time requirement, this
determination does not ensure that the institution will remain eligible
for federal deposit insurance. Also, when an institution converts from
federal deposit insurance to private deposit insurance, such an
eligibility determination would be redundant because the institution
had been eligible for federal deposit insurance before it became
privately insured. State regulators also reported that although they
had not made these explicit determinations, they imposed safety and
soundness standards for credit unions lacking federal deposit insurance
that the regulators believed generally satisfied the criteria for
federal deposit insurance. Although the states' examination standards
are similar, NCUA's decision to insure a credit union is done on a
case-by-case basis and NCUA officials consider other factors when
determining eligibility. ASI officials also told us that they
rigorously monitor the safety and soundness of their insured
institutions. Given the related actions undertaken to help ensure the
health of privately insured credit unions, the effect on consumers from
the lack of enforcement of this provision may be negligible.
* The remaining private deposit insurer, ASI, has complied with section
43 audit requirements and, as a result, state regulators and the
management of privately insured credit unions have had the opportunity
to become informed about the financial condition of this private
deposit insurer. Section 43 requires private deposit insurers to obtain
an annual audit that includes a determination of whether the insurer
follows generally accepted accounting principles and to distribute the
audit. We found that the audits obtained by ASI for 1999, 2000, 2001,
and 2002 complied with this federal requirement. Also, appropriate
state regulators and the management of some privately insured credit
unions told us that ASI had provided the audits in accordance with the
requirement. Since the private deposit insurer has obtained and
distributed the audit as required, it appears consumers suffered no
negative impact from the nonenforcement of this provision.
In evaluating which agency should enforce section 43 provisions, we
found the responsibilities outlined in these provisions did not fall
ideally within any single agency's jurisdiction. FTC staff and
officials from NCUA and FDIC told us that their respective agencies
should not be charged with administering section 43. Officials from
both NCUA and FDIC objected to having regulatory responsibility under
section 43 because their agencies have no direct interest in the
operations of institutions they do not insure. They maintained that
requiring their agencies to administer section 43 could undermine the
purposes of the provision and, potentially, the credit union system, by
closely associating private deposit insurance with federal deposit
insurance. Because NCUA administers the federal deposit insurance fund
for credit unions, it is believed that if NCUA were to prescribe
disclosure requirements or enforce the shut-down or audit provisions
under section 43, it would create a regulatory conflict of interest
that could result in NCUA's regulatory decisions being questioned or
challenged. FTC staff raised jurisdictional concerns and offered
several reasons why the Commission's mission, resources, and practices
are ill suited for such a role. Those reasons reflect FTC's perception
about its authority under section 43 and how the section should be
administered, as well as how the Commission carries out its consumer
protection mission. Based on our review of the concerns raised by FTC,
NCUA and FDIC, we believe FTC is best among these candidates to be the
primary agency responsible for implementing section 43. However,
clarifying FTC's authority and providing it with additional flexibility
in administering these provisions could better ensure effective
enforcement of these provisions.
This report contains matters for Congressional consideration to remove
obstacles and provide additional flexibility in enforcing the consumer
protections intended under section 43. If Congress determines that
federal oversight of section 43 is needed, Congress may wish to
consider removing the prohibition in FTC's appropriations against
enforcing the provisions. Congress may also wish to consider modifying
the section to clarify FTC's jurisdiction and providing FTC flexibility
in administering these requirements by giving FTC authority to consult
with other primary regulators, such as NCUA or FDIC, or partner with
states.
We received oral comments on a draft of this report from FDIC and
written comments from NCUA and FTC. FDIC and NCUA generally agreed with
the report's conclusions. FTC disagreed with the report's conclusions
and matters for congressional consideration and stated that it was not
able to implement and enforce these provisions. The comments are
discussed in greater detail at the end of this letter, and the written
comments are reprinted as appendixes III and IV.
Background:
Under federal and state laws, all federally chartered depository
institutions and the vast majority of state-chartered institutions are
required to have federal deposit insurance. The federal deposit
insurance funds were established to restore and maintain depositors'
confidence in the banking system by providing a government guarantee of
deposits. This guarantee insures that a person's money on deposit with
an insured institution, within certain limits, would be safe and helps
negate the need for depositors having to assess the financial condition
of their financial institution. FDIC administers the Bank Insurance
Fund (BIF) and the Savings Association Insurance Fund (SAIF). Deposit
accounts maintained at banks and thrifts generally are federally
insured, regardless of who charters the institution. Similarly, credit
unions that are federally chartered must be federally insured by the
National Credit Union Share Insurance Fund (NCUSIF), which is
administered by NCUA.[Footnote 6] Almost all (98 percent) credit unions
are federally insured. As of December 2002, 9,688 credit unions were
federally insured, with about 81 million members and $483 billion in
deposits.[Footnote 7]
However, in our survey of the 50 state regulators, we found that not
all states require federal deposit insurance for credit unions they
charter.[Footnote 8] As of December 2002, 212 credit unions--about 2
percent of all credit unions--chose to purchase private deposit
insurance. These privately insured credit unions are located in eight
states and had about 1.1 million members with deposits totaling about
$10.8 billion, as of December 2002--a little over 1 percent of all
credit union members and 2 percent of all credit union deposits. We
identified nine additional states that could permit credit unions to
purchase private deposit insurance through our survey of 50 state
regulators and subsequent discussions with state regulators. Figure 1
illustrates the states that permit or could permit private deposit
insurance as of March 2003 and the number of privately insured credit
unions as of December 2002.
Figure 1: States Permitting Private Deposit Insurance (March 2003) and
Number of Privately Insured Credit Unions (December 2002):
[See PDF for image]
[End of figure]
The number of privately insured credit unions and private deposit
insurers has declined significantly since 1990. In 1990, 1,462 credit
unions in 23 states purchased private deposit insurance from 10
different nonfederal, private insurers. At that time, deposits at these
credit unions totaled $18.6 billion--73 percent more than the total of
privately insured deposits as of December 2002. Shortly after the
failure of Rhode Island Share and Depositors Indemnity Corporation
(RISDIC), a private deposit insurer in Rhode Island in 1991, almost
half of all privately insured credit unions converted to federal
deposit insurance voluntarily or by state mandate.[Footnote 9] As a
result of the conversions from private to federal deposit insurance,
most private deposit insurers have gone out of business due to the loss
of their membership since 1990 and only one company--ASI--currently
offers private primary deposit insurance.
ASI has a statutory charter granted by the State of Ohio.[Footnote 10]
ASI is licensed by the Ohio Superintendent of Insurance and is subject
to oversight by that department and Ohio's Superintendent of Credit
Unions. Unlike federal deposit insurance, which is backed by the full
faith and credit of the United States, ASI's insurance fund is not
backed by the full faith and credit of any governmental entity. Also,
in contrast to federal deposit insurance, which covers up to $100,000
in an insured account, the coverage amount provided by ASI is subject
to a $250,000 statutory cap in Ohio law.
Depository institutions lacking federal deposit insurance--privately
insured credit unions--do not directly present a risk to the respective
federal deposit insurance funds and do not pay for participation in
those funds. Accordingly, they are not subject to supervision by the
agencies that administer those funds. The Federal Credit Union Act
contains criteria for credit unions applying for federal deposit
insurance from NCUA and requires NCUA to consider a list of factors
before approving an application to become federally insured.[Footnote
11] For example, NCUA must assess the credit union's financial
condition, the adequacy of reserves, the fitness of management, and the
convenience and needs of the members to be served by the institution.
To continue to be eligible for federal deposit insurance, credit unions
must continue to comply with NCUA regulations for measures of net
worth, prompt corrective action requirements, and rules governing
investment and deposit activities.[Footnote 12]
Section 43 Requirements:
Section 43 imposes requirements on depository institutions lacking
federal deposit insurance and private deposit insurers and assigns FTC
with the responsibility for enforcing compliance with these provisions.
Specifically, section 43 requires depository institutions lacking
federal deposit insurance to:
* Include conspicuously on all periodic account statements, signature
cards, passbooks, certificates of deposits, or similar instruments
evidencing a deposit, a notice that the institution is not federally
insured and that if the institution fails, the federal government does
not guarantee that depositors will get back their money;
* Include conspicuously in all advertising and where deposits are
normally received a notice that the institution is not federally
insured; and:
* Obtain a written acknowledgement from depositors that the institution
is not federally insured and that if the institution fails, the federal
government does not guarantee that the depositor will get back their
money. [Footnote 13]
In addition, section 43 prohibits institutions lacking federal deposit
insurance from engaging in interstate commerce unless the appropriate
supervisor of the institution's charter state has determined that the
institution meets all eligibility requirements for federal deposit
insurance. This prohibition is referred to as the "shut-down"
provision.[Footnote 14]
With respect to private deposit insurers, section 43 requires each
insurer to:
* Obtain an annual audit from an independent auditor using generally
accepted auditing standards that includes a determination of whether
the private deposit insurer follows generally accepted accounting
principles and has set aside sufficient reserves for losses; and:
* Distribute copies of the audit report to each depository institution
it insures and to the appropriate supervisory agency of each state in
which such an institution receives deposits, within specified time
frames.[Footnote 15]
With respect to FTC, section 43:
* Requires the Commission to prescribe "the manner and content of
disclosure required under the section" in order to "ensure that current
and prospective customers understand the risks involved in forgoing
federal deposit insurance;":
* Assigns to FTC the responsibility to enforce compliance with the
section under the Federal Trade Commission Act (FTC Act);
* Authorizes FTC to determine that an institution not chartered as a
depository institution nonetheless is subject to the section, referred
to as the look-alike provision; and:
* Authorizes FTC, in consultation with FDIC, to exempt an institution
from the shut-down provision.[Footnote 16]
Since being charged with the responsibility to enforce and implement
these requirements, FTC has requested Congress to prohibit it from
enforcing these provisions. In response, FTC's appropriation language,
since 1993, has contained provisions prohibiting it from using funds to
implement these provisions.
FTC has authority to enforce a variety of federal antitrust and
consumer protection laws. According to FTC, it works to enhance the
smooth operation of the marketplace by eliminating acts or practices
that are unfair or deceptive, and its efforts have been directed toward
stopping actions that threaten consumers' opportunities to exercise
informed choice. The FTC Act charges FTC with responsibility for
preventing the use of unfair methods of competition and unfair or
deceptive acts or practices.[Footnote 17] That act, however, provides
that FTC's powers generally do not extend to depository institutions--
banks, thrifts, and federal credit unions--which typically are beyond
FTC's authority.[Footnote 18] In addition, one section of the FTC Act
has been interpreted to mean that FTC does not have jurisdiction over
nonprofit corporations.[Footnote 19]
NCUA and State Regulators Imposed Related Disclosure and Audit
Requirements:
Consistent with its appropriations authority prohibiting FTC from
enforcing section 43, FTC has not implemented regulations or orders to
prescribe the manner and content of required disclosures; to date, FTC
has not brought any enforcement cases as a result of the identification
of noncompliance with the disclosure, shut-down, and annual audit
provisions. As part of this review, we also ascertained whether other
laws or rules impose requirements similar to those of section 43. We
found that NCUA and state regulators have imposed disclosure and audit
requirements on state-chartered credit unions and private deposit
insurers that, while not comparable to section 43 requirements, help
achieve the objectives of section 43.
For example, NCUA imposes notification requirements on federally
insured credit unions seeking to convert to private deposit insurance.
NCUA requires these credit unions to notify their members, in a
disclosure, that if the conversion were approved, the federal
government would not insure deposits. Specifically, under the Federal
Credit Union Act, if a federally insured credit union terminates
federal deposit insurance or converts to nonfederal (private)
insurance, the institution must give its members "prompt and reasonable
notice" that the institution has ceased to be federally
insured.[Footnote 20] NCUA rules implement these provisions by
prescribing language to be used in (1) the notices of the credit
union's proposal to terminate federal deposit insurance or convert to
nonfederal (private) insurance, (2) an acknowledgement on the voting
ballot of the member's understanding that federal deposit insurance
will terminate, and (3) the notice of the termination or
conversion.[Footnote 21] Under NCUA's rules, the prescribed language is
to include a statement apprising members that their accounts no longer
would be federally insured. Other language to be included on the notice
of a proposal to convert to private deposit insurance and on the
related voting ballot is to state that NCUA's insurance is backed by
the full faith and credit of the United States and that the private
deposit insurance is not backed by the full faith and credit of the
United States.[Footnote 22]
While NCUA's disclosure requirements provide some assurance that
current members of credit unions converting to private deposit
insurance are notified of the lack of federal deposit insurance
coverage, these NCUA regulations do not apply to institutions that
never were federally insured. In addition, disclosures contained in
NCUA's required notifications are not as extensive as disclosures
required under section 43. NCUA disclosure pertains to a specific event
(termination of insurance or conversion to private deposit insurance)
and is provided only to those individuals who are members of the credit
union at the time of the event. Section 43, on the other hand, requires
disclosure to all members who are depositors, including those
individuals who become members after the credit union has terminated
federal deposit insurance. Section 43 also requires that depositors
acknowledge in writing that the institution is not federally insured
and that no federal guarantee exists.[Footnote 23] In addition, under
section 43, an institution's lack of federal deposit insurance must be
stated, on an ongoing basis, in periodic account statements, signature
cards, passbooks and instruments evidencing a deposit, and in
advertising and displays.
In our review of Ohio's law, we noted that Ohio imposes certain
disclosure requirements about the insured status of depository
accounts. Ohio law requires credit union brochures that include the
name of the private deposit insurer to also include a specific notice:
"Members Accounts Are Not Insured or Guaranteed by Any Government or
Government-sponsored Agency."[Footnote 24] The requirements we
reviewed, like Ohio law, typically do not require disclosure of the
same information or in the same manner as is required by section 43.
Ohio also imposes several requirements on the remaining private deposit
insurer, ASI.[Footnote 25] For example, Ohio requires ASI to submit
annual audited financial statements and quarterly unaudited financial
statements to Ohio regulators.[Footnote 26] While this annual audit
requirement is similar to the section 43 provision, Ohio does not
require private deposit insurers to distribute this information to the
appropriate supervisory agency of each state in which it insures
deposits nor to depository institutions in which it insures deposits.
Compliance with Section 43 Provisions Varied; Potential Impact on
Consumers Most Evident in Credit Union Noncompliance with Disclosure
Requirements:
Compliance with section 43 disclosure, shut-down, and annual audit
requirements varied considerably. The most likely impact on consumers
from the lack of enforcement of these provisions may result from credit
unions not providing adequate disclosures about not being federally
insured. We found that many privately insured credit unions have not
always complied with the disclosure requirements in section 43 that are
designed to notify consumers that the deposits in these institutions
are not federally insured. While state regulators and ASI officials
reported monitoring whether privately insured credit unions disclosed
the lack of federal deposit insurance to depositors, we found that
these actions varied and did not ensure that all credit unions complied
with required disclosures. As a result, depositors at some privately
insured credit unions may not be adequately informed that deposits at
these institutions are not federally insured. Regarding the shut-down
provision, state regulators reported to us that they did not make
explicit determinations of insurability but we found that such a
determination may not provide a meaningful protection for consumers.
The remaining private deposit insurer complied with the annual audit
requirements, making it possible for state regulators and member credit
unions to become informed about the insurer's financial condition.
Therefore, the lack of enforcement of this provision appears to have
had no direct effect on consumers.
The Lobbies, Materials, and Web Sites of Many Privately Insured Credit
Unions Lacked Disclosures as Required under Section 43:
Section 43 requires privately insured credit unions to disclose to
their members that deposits at these institutions are (1) not federally
insured and (2) if the institution fails, the federal government does
not guarantee that depositors will get back their money. Specifically,
these institutions are required to disclose this information at places
where deposits are normally received (lobbies) and on signature cards,
and on instruments evidencing a deposit (deposit slips). Advertising
(brochures and newsletters) must also contain the statement that the
institutions are not federally insured. We conducted unannounced site
visits to 57 locations of privately insured credit unions (49 main and
8 branch locations) in five states--Alabama, California, Illinois,
Indiana, and Ohio. On our visits we looked to see whether credit unions
lacking federal deposit insurance had disclosed to their members that
the institution was not federally insured and that the federal
government did not guarantee their deposits. We found that many
privately insured credit unions we visited did not conspicuously
disclose this information. Specifically, as shown in table 1, 37
percent (21 of 57) of the locations we visited did not conspicuously
post signage in the lobby of the credit union.
Credit unions' compliance with this requirement varied by state. For
example, six of the 21 sites visited in California--or 29 percent--did
not display the required notices, while three of the five sites visited
in Alabama--or 60 percent--did not display conspicuous signage in their
lobbies.
Table 1: Number and Percent of Credit Unions Visited without Required
Signage in Lobby:
Alabama; Total number of privately insured credit unions: 3; Total
sites visited: 5[A]; Sites visited without conspicuous signage located
in lobby: Total number: 3; Sites visited without conspicuous signage
located in lobby: Total percent: 60.
California; Total number of privately insured credit unions: 22; Total
sites visited: 21[B]; Sites visited without conspicuous signage located
in lobby: Total number: 6; Sites visited without conspicuous signage
located in lobby: Total percent: 29.
Illinois; Total number of privately insured credit unions: 40; Total
sites visited: 10[C]; Sites visited without conspicuous signage located
in lobby: Total number: 4; Sites visited without conspicuous signage
located in lobby: Total percent: 40.
Indiana; Total number of privately insured credit unions: 21; Total
sites visited: 5; Sites visited without conspicuous signage located in
lobby: Total number: 2; Sites visited without conspicuous signage
located in lobby: Total percent: 40.
Ohio; Total number of privately insured credit unions: 93; Total sites
visited: 16; Sites visited without conspicuous signage located in
lobby: Total number: 6; Sites visited without conspicuous signage
located in lobby: Total percent: 38.
Total; Total number of privately insured credit unions: 179; Total
sites visited: 57; Sites visited without conspicuous signage located in
lobby: Total number: 21; Sites visited without conspicuous signage
located in lobby: Total percent: 37.
Source: GAO.
Notes:
[A] For two credit unions, in addition to conducting a site visit at
the main location, we conducted a site visit at a branch location.
[B] For one credit union, in addition to conducting a site visit at
the main location, we conducted site visits at three branch locations.
For another credit union, in addition to conducting a site visit at the
main location, we conducted a site visit at a branch location.
[C] For two credit unions, we only conducted a site visit at a branch
location.
[End of table]
On our visits to these credit unions, we also obtained other available
credit union materials (brochures, membership agreements, signature
cards, deposit slips, and newsletters) that did not include language to
notify consumers that the credit union was not federally insured--as
required by section 43. Overall, 134 of the 227 pieces of material we
obtained from 57 credit union locations--or 59 percent--did not include
specified language. Specifically, 20 of 32 signature cards we obtained
from 31 credit unions, and 19 of 20 deposit slips we obtained from 18
credit unions did not include specified language (see table 2).
Table 2: Number and Percent of Credit Union Materials Reviewed without
Required Disclosures:
Type of document: Brochures: Membership at credit union; Total number
reviewed: 49; Materials without required disclosures: Total number:
23; Materials without required disclosures: Total percent: 47.
Type of document: Brochures: Checking accounts; Total number reviewed:
24; Materials without required disclosures: Total number: 13;
Materials without required disclosures: Total percent: 54.
Type of document: Brochures: Savings accounts; Total number reviewed:
22; Materials without required disclosures: Total number: 7; Materials
without required disclosures: Total percent: 32.
Type of document: Brochures: Investment accounts; Total number
reviewed: 34; Materials without required disclosures: Total number:
27; Materials without required disclosures: Total percent: 79.
Type of document: Membership agreements; Total number reviewed: 19;
Materials without required disclosures: Total number: 11; Materials
without required disclosures: Total percent: 58.
Type of document: Signature cards; Total number reviewed: 32; Materials
without required disclosures: Total number: 20; Materials without
required disclosures: Total percent: 62.
Type of document: Deposit slips; Total number reviewed: 20; Materials
without required disclosures: Total number: 19; Materials without
required disclosures: Total percent: 95.
Type of document: Newsletters; Total number reviewed: 27; Materials
without required disclosures: Total number: 14; Materials without
required disclosures: Total percent: 52.
Type of document: Total; Total number reviewed: 227; Materials without
required disclosures: Total number: 134; Materials without required
disclosures: Total percent: 59.
Source: GAO.
[End of table]
As part of our review, we also reviewed 78 Web sites of privately
insured credit unions and found that many credit union Web sites were
not fully compliant with section 43 disclosure requirements. For
example, 39 of the 78 sites had not included language to notify
consumers that the credit union was not federally insured.
Specifically, in six of the eight states we reviewed, more than half of
the Web sites identified and analyzed in each state were not compliant
(see table 3).
Table 3: Number and Percent of Web Sites Reviewed without Required
Disclosures:
Alabama; Total number of privately insured credit unions: 3; Number of
Web sites identified and analyzed: 2; Web sites without required
disclosures: Total number: 0; Web sites without required disclosures:
Total percent: 0.
California; Total number of privately insured credit unions: 22; Number
of Web sites identified and analyzed: 18; Web sites without required
disclosures: Total number: 3; Web sites without required disclosures:
Total percent: 17.
Idaho; Total number of privately insured credit unions: 20; Number of
Web sites identified and analyzed: 7; Web sites without required
disclosures: Total number: 5; Web sites without required disclosures:
Total percent: 71.
Illinois; Total number of privately insured credit unions: 40; Number
of Web sites identified and analyzed: 15; Web sites without required
disclosures: Total number: 8; Web sites without required disclosures:
Total percent: 53.
Indiana; Total number of privately insured credit unions: 21; Number of
Web sites identified and analyzed: 7; Web sites without required
disclosures: Total number: 4; Web sites without required disclosures:
Total percent: 57.
Maryland; Total number of privately insured credit unions: 5; Number of
Web sites identified and analyzed: 2; Web sites without required
disclosures: Total number: 2; Web sites without required disclosures:
Total percent: 100.
Nevada; Total number of privately insured credit unions: 8; Number of
Web sites identified and analyzed: 4; Web sites without required
disclosures: Total number: 3; Web sites without required disclosures:
Total percent: 75.
Ohio; Total number of privately insured credit unions: 93; Number of
Web sites identified and analyzed: 23; Web sites without required
disclosures: Total number: 14; Web sites without required disclosures:
Total percent: 61.
Total; Total number of privately insured credit unions: 212; Number of
Web sites identified and analyzed: 78; Web sites without required
disclosures: Total number: 39; Web sites without required disclosures:
Total percent: 50.
Source: GAO.
[End of table]
While these results were not obtained from a statistically valid sample
that would allow us to project the extent of compliance to all
privately insured credit unions, these findings are robust enough, both
in the aggregate and within each state, to raise concern about the lack
of required disclosures by privately insured credit unions.
Monitoring Efforts over Disclosures by Privately Insured Credit Unions
Varied:
The extent to which state regulators and ASI officials monitored
whether privately insured credit unions disclosed the lack of federal
deposit insurance to depositors varied. State regulators in Alabama,
California, Idaho, Indiana, Maryland, Nevada, and Ohio reported that
during state examinations of credit unions, their examiners looked to
see whether privately insured credit unions disclosed the lack of
federal deposit insurance to depositors. However, according to these
state regulators, state examination procedures did not include specific
guidance on how to determine if credit unions were compliant with
disclosure requirements in section 43. Also, state regulators reported
that although they monitored disclosures at privately insured credit
unions, they generally had not enforced these requirements. Since we
observed poor compliance with section 43 disclosure requirements in our
site visits, oversight by state regulators has not provided sufficient
assurance that privately insured credit unions are adequately
disclosing that their institutions are not federally insured.
ASI officials told us that they had developed materials that explained
the disclosure requirements of section 43 to assist credit unions it
insured to comply with these requirements. ASI officials reported that
they provide these materials to credit unions when they convert to
private deposit insurance and to other credit unions that requested
these materials. Among other things, these materials inform credit
unions of the specific disclosure requirements and include samples of
on-premise signage. However, our review of ASI's samples for on-premise
signage found that not all samples included language to notify
consumers that the credit union was not federally insured.
ASI's on-site audit program included specific guidance on how to
determine if credit unions were compliant with disclosure requirements
in section 43. In our review of two ASI examination files, we observed
that ASI officials had noted that these two credit unions in Nevada had
not included language on credit union materials, such as signature
cards, stating that the institution is not federally insured and that
if the institution fails, the federal government does not guarantee
that depositors will get back their money. In our follow-up discussions
with ASI management, they indicated that while ASI officials made some
notes regarding compliance when conducting on-site exams--as in the
examination files on the Nevada credit unions--they did not take action
to enforce these federal requirements.
Credit Unions Do Not Appear to Have Obtained State Determinations of
Insurability, but Impact on Consumers May Be Limited:
The shut-down provision of section 43 prohibits depository institutions
lacking federal deposit insurance from engaging in interstate commerce
unless the institution's state regulator has determined the
institution's eligibility for federal deposit insurance.[Footnote 27]
To be eligible for federal deposit insurance, NCUA must, among other
things, assess the credit union's financial condition, the adequacy of
reserves, the fitness of management, and the convenience and needs of
the members to be served by the institution. It appears that privately
insured credit unions have not obtained this determination from their
state regulators. One could question, however, whether the states could
or should make the determination that institutions meet the standards
for federal deposit insurance. Even if the state applied federal
deposit insurance eligibility criteria in making the determination for
credit unions, the determination may not necessarily provide a
meaningful protection for consumers; however, other actions were taken
to ensure the health of privately insured credit unions.
Section 43 calls for a one-time eligibility determination and does not
require an ongoing state assessment of the institutions' compliance
with federal deposit insurance eligibility requirements.[Footnote 28]
Because this is a one-time determination, it does not ensure that
credit unions would remain eligible for federal deposit insurance.
Other circumstances also indicate that consumers might not benefit from
the eligibility determination. For example, when an institution
converts from federal deposit insurance to private deposit insurance,
such an eligibility determination would be redundant because the
institution had been eligible for federal deposit insurance before it
became privately insured.[Footnote 29] According to ASI, between 1992
and 2002, 27 credit unions converted from federal to private deposit
insurance.[Footnote 30] In these cases, it would be doubtful that an
eligibility determination would benefit consumers.
State regulators also told us that while they had not made explicit
determinations that these privately insured credit unions had met
eligibility requirements for federal deposit insurance, they imposed
safety and soundness standards on credit unions lacking federal deposit
insurance, which the regulators believed generally satisfied the
criteria for federal deposit insurance.[Footnote 31] For example, these
regulators reported that they applied the same examination and
supervision process to all state-chartered credit unions--regardless of
deposit insurance status. In addition, these states had adopted NCUA's
examination program and their examiners had received training from
NCUA. However, implementation of NCUA's examination program does not
fully insure that those institutions meet all federal deposit insurance
eligibility standards. For example, besides assessing a credit union's
financial condition and the adequacy of its reserves when making
insurability determinations, NCUA is also required to factor in
membership considerations such as the convenience and needs of the
members to be served by the institution.
Some states also had an approval process for credit unions seeking to
purchase private deposit insurance. Alabama, Illinois, and Ohio had
written guidelines for credit unions seeking to purchase private
deposit insurance.[Footnote 32] The other five states that permitted
private deposit insurance did not have written guidelines for credit
unions seeking to purchase private deposit insurance, but Idaho,
Indiana, and Nevada state regulators noted that they had the authority
to "not approve" a credit union's purchase of private deposit
insurance.[Footnote 33]
Additionally, ASI had several strategies in place to oversee the credit
unions it insured. Specifically, ASI regularly conducted off-site
monitoring and conducted on-site examinations of privately insured
credit unions at least every 3 years. It also reviewed state
examination reports for the credit unions it insured, and imposed
strict audit requirements. For example, ASI required an annual CPA
audit for credit unions with $20 million or more in assets, while NCUA
only required the annual audit for credit unions with more than $500
million in assets. ASI also had targeted its monitoring of its largest
and smallest credit unions. For larger credit unions, those with more
than 10 percent of ASI's total insured shares, ASI planned to conduct
semiannual, on-site examinations and monthly and quarterly off-site
monitoring, including a review of audits and financial
statements.[Footnote 34] In January 2003, five credit unions comprising
about 40 percent of ASI's total assets qualified for this special
monitoring.[Footnote 35] In January 2003, ASI also began a monitoring
strategy intended to increase its oversight of smaller credit
unions.[Footnote 36] First, ASI assigned a risk level to credit unions
it insured (low, moderate, or high) and then used this assessment to
determine the extent and frequency of oversight at the credit
union.[Footnote 37] In January 2003, ASI had determined that 98 credit
unions qualified for this monitoring, with shares from the largest of
these credit unions totaling about $23 million.
Since the above actions were taken to ensure the health of privately
insured credit unions, the effect on consumers from the lack of
enforcement of this provision may be negligible.
Remaining Private Deposit Insurer Complied with Federal Audit
Requirements:
The remaining private deposit insurer has complied with the audit
requirements under section 43, which requires private deposit insurers
to obtain an annual audit and provide it to state regulators and the
management of privately insured credit unions within certain time
frames.[Footnote 38] Among other things, the audit must be conducted by
an independent auditor using generally accepted auditing standards and
include a determination of whether the insurer follows generally
accepted accounting principles and has set aside sufficient reserves
for losses. The private deposit insurer must provide a copy of the
report to each depository institution it insures not later than 14 days
after the audit is completed. Also, the private insurer must provide a
copy of the report to the "appropriate supervisory agency" of each
state in which such an institution receives deposits not later than 7
days after the audit is completed.[Footnote 39]
We found that the audits obtained by ASI for 1999, 2000, 2001, and 2002
complied with this federal requirement. Specifically, these audits
noted that the reviewed consolidated financial statements presented
fairly, in all material respects, ASI's financial position and the
results of their operations and cash flows for the years reviewed in
conformance with accounting principles generally accepted in the United
States. Further, appropriate state regulators and the management of
some privately insured credit unions told us that ASI had provided them
copies of the annual audits in accordance with the requirement. Since
the private deposit insurer has obtained and distributed the audit as
required, it has given state regulators and the management of privately
insured credit unions the opportunity to become informed about the
financial condition of the private deposit insurer. This could help
ensure the safety and soundness of ASI--which, in turn, protects
consumers. It appears consumers have suffered no negative impact from
the nonenforcement of this provision.
Although There Is No Ideal Regulator to Enforce Section 43, FTC Is Best
among Candidates to Enforce Provisions:
In evaluating which agency should enforce section 43, we did not find
an agency that was ideally suited to carry out the responsibilities set
forth in the provision. Although FTC, NCUA, and FDIC officials
generally agreed that consumers should receive proper notification
about the insured status of their deposits, they maintained that their
respective agencies should not be charged with responsibility for
implementing and enforcing section 43. NCUA and FDIC oppose having any
responsibilities under section 43 because such a role would result in a
regulatory conflict of interest and would be inconsistent with their
missions and the section's purpose. Credit union industry
representatives believe that FTC is the appropriate federal agency to
enforce section 43. FTC staff stated that questions about the
Commission's authority under section 43 and the Commission's lack of
expertise to administer the section justify removing FTC from any
responsibilities under the provision. The staff asserted that other
federal agencies are more qualified to carry out the section. Based on
our review of these concerns, we believe FTC is the best among these
candidates to enforce these provisions; however, clarifying FTC's
authority and providing it with additional flexibility in administering
these provisions could better ensure effective enforcement of these
provisions.
NCUA and FDIC Oppose Having Enforcement Responsibility under Section
43:
NCUA has taken the position that it should not be responsible for
enforcing section 43. In our discussions with NCUA officials, they
offered several reasons why NCUA should not be charged with enforcing
section 43. They expressed concern that placing the responsibility with
NCUA would closely identify NCUA with uninsured credit unions and, in
turn, create the potential for confusion as to whether an institution
was federally insured. The officials also maintained that if NCUA were
responsible for enforcing and implementing the section, the costs would
be passed on to federally insured credit unions.[Footnote 40] In
addition, the officials stated that NCUA regulation of a private
insurer would result in a regulatory conflict of interest that might
erode confidence in NCUA's authority.[Footnote 41] They said that if
the private deposit insurance system were to fail while under NCUA's
purview, confidence in NCUA, as well as federal deposit insurance for
credit unions, could weaken to a point that it could have a devastating
impact on the financial health of the credit union system.
In our discussions with FDIC officials, they expressed several reasons-
-similar to those presented by NCUA--why FDIC should not be charged
with enforcing section 43. First, FDIC officials noted that FDIC
insures the deposits at banks and savings associations--but does not
regulate or supervise credit unions or insure deposits at these
institutions. Officials also expressed concern that placing the
responsibility with FDIC would closely identify a federal agency with
uninsured credit unions and, in turn, create the potential for
confusion as to whether an institution was federally insured.
Industry Views on Private Deposit Insurance and the Enforcement of
Section 43 Requirements:
While officials from the National Association of Federal Credit Unions
(NAFCU) oppose the option of private primary deposit insurance for
credit unions, NAFCU officials believe that since private primary
deposit insurance is an option, then section 43 requirements are
important and FTC should enforce these requirements for several
reasons. NAFCU officials believe that members of privately insured
credit unions should be adequately informed that deposits in these
institutions are not federally insured. NAFCU officials stated that the
enforcement of the provisions in section 43 requires an expertise in
"consumer protections" and "deceptive practices." NAFCU takes the
position that FTC has this expertise and, further, that the entity does
not need expertise in "safety and soundness of depository
institutions." NAFCU officials also believe that federal financial
regulators, such as NCUA and FDIC, are not the appropriate oversight
entities for issues related to private deposit insurance because their
involvement would imply federal backing. Further, the involvement of
NCUA or FDIC in the enforcement of the requirements in section 43 could
create conflict between the federal and private insurer. NAFCU
officials commented, however, that it would be beneficial for FTC to
consult with FDIC and NCUA regarding the enforcement of these
requirements because of their expertise. Regarding enforcement, NAFCU
officials believe that state regulators could be involved in, but not
solely responsible for, enforcing certain section 43 requirements. For
example, during state exams of credit unions, examiners could determine
if the credit union were compliant with disclosure and insurability
requirements of section 43 and then submit a certification to FTC.
Credit Union National Association (CUNA) and National Association of
State Credit Union Supervisors (NASCUS) support the option of private
deposit insurance for credit unions and believe that the requirements
in section 43 are important and that FTC should enforce the
requirements in section 43. CUNA's public position is that it supports
the option of private deposit insurance because the association
believes "it is an integral part of the dual-chartering system for
credit unions (the system allowing credit unions meaningful choice
between a state and federal charter)." NASCUS also supports the option
of private deposit insurance for credit unions because the association
thinks credit unions should have a choice when it comes to deposit
insurance. Specifically, NASCUS believes that if there was only a
single insurer (such as NCUA) this would create a uniform approach,
thus obviating state choice, and could revert to a rigid
framework.[Footnote 42]
Tying NCUA and FDIC Insurance to the Regulation of Uninsured Entities
Presents a Conflict of Interest:
As the agencies charged with administering and safeguarding their
respective insurance funds, NCUA and FDIC have an interest in seeing
that the public does not lose confidence in the federal deposit
insurance system. The section 43 disclosure requirements help protect
this interest by imposing measures designed to inform depositors at
nonfederally insured institutions that their deposits are not backed by
the federal government. To the extent that institutions comply with
section 43, there is a reduced risk that depositors in nonfederally
insured institutions would mistakenly believe that their deposits are
federally insured. Because section 43 protects NCUA and FDIC interests,
it can be argued that those agencies should be responsible for
enforcing the provision. Although that proposition has some merit, we
have no reason to disagree with statements by NCUA and FDIC officials
that placing both private insurers and institutions lacking federal
deposit insurance under the jurisdiction of NCUA and FDIC could
increase the risk of depositor confusion and create the potential for a
loss of public confidence in the federal deposit insurance system.
Moreover, assigning responsibility to NCUA and FDIC would mean that
federally insured depositary institutions would subsidize the
regulation of nonfederally insured institutions.[Footnote 43] However,
we recognize that deciding who pays the cost for regulating
nonfederally insured institutions is a complicated issue.
Some observers have asserted that if NCUA were responsible for
regulating the disclosures required by section 43, a depositor's
knowledge that the disclosure was prescribed by NCUA could generate
confusion as to NCUA's relationship with a nonfederally insured
institution. The identity of the federal agency may be of no
consequence because the consumer might not understand, or even be aware
of, which federal agency prescribed the disclosure requirements.
However, should NCUA determine, as FTC has, that section 43 calls for
substantial disclosure of the risks relating to a specific depository
institution and its insurer, NCUA would risk significant exposure to
conflict of interest charges. For example, if NCUA were to impose
requirements on privately insured credit unions that were considered by
states or institutions to be too stringent, its partiality as a
regulator would be questioned. The costs of compliance with such
requirements could cause privately insured institutions to turn to
federal deposit insurance, thus adversely affecting the private deposit
insurer, NCUA's competitor.
We recognize that in two instances Congress has chosen NCUA to
implement laws that apply to credit unions regardless of whether they
are federally insured. The Truth in Savings Act (TISA) requires that
NCUA implement its provisions with respect to all credit unions,
regardless of who insures them. The Home Mortgage Disclosure Act (HMDA)
also charges NCUA with implementing responsibility for all credit
unions regardless of their insured status. See appendix II for an
illustration of who is responsible for the enforcement of various laws
at credit unions. NCUA has promulgated regulations implementing TISA
and issued guidelines for credit union reporting under HMDA.[Footnote
44] By implementing these laws, NCUA has demonstrated the capacity to
regulate operations of credit unions it does not insure. Moreover, the
cost of enforcing these laws with respect to nonfederally insured
credit unions is passed on to insured credit unions. It is particularly
noteworthy that NCUA's TISA regulations require specific disclosures
about the terms and conditions of deposit accounts at both federally
and nonfederally insured institutions. However, NCUA's administration
of those laws does not present the same potential or perceived conflict
of interest. The requirements under those laws apply equally to
federally insured and nonfederally insured institutions. In contrast,
regulations under section 43 would, by definition, treat the
institutions differently and expose NCUA to a regulatory conflict of
interest.
The regulatory conflict of interest also would exist with respect to
NCUA enforcement of the audit provision. NCUA would be regulating its
competition. If NCUA, like FTC, were to consider enforcement of the
requirement as called for by evaluating the conclusions of the audit or
scrutinizing the financial health of the insurer, NCUA's action would
be inherently suspect. In addition to the regulatory conflict of
interest, closely associating NCUA with nonfederally insured
institutions could have an undesirable "shadow effect." For example, if
NCUA were to be responsible for reviewing the private insurer's audit
report, NCUA would be closely associated with determinations about the
financial health of the private deposit insurer. Should the insurer,
which is subject to state regulation, fail to honor its insurance
commitments, NCUA's credibility as a regulator would be compromised.
Concerns about a regulatory conflict of interest also would accompany
NCUA actions involving the shut-down requirement. The agency would be
closely associated with liquidating institutions it does not insure and
safeguarding deposits it does not protect. In effect, NCUA would be
shutting down the institutions that are members of the agency's
competition--the private deposit insurer. Similarly, NCUA enforcement
of the look alike provision could be seen as an attempt by the agency
to eliminate entities that compete with federally insured credit
unions.
NCUA's concern that its enforcement of section 43 would require
federally insured institutions to subsidize the regulation of
institutions that forgo insurance, in part involves a question of a
level playing field; that is, federally insured institutions would be
forced to pay the cost of regulating competitors who may benefit from
avoiding federal deposit insurance. This concern also touches on other
considerations. For example, this additional cost could act as an
incentive for federally insured credit unions to convert to private
deposit insurance. However, who pays for the oversight of nonfederally
insured institutions is a more complicated issue, because federally
insured institutions could also benefit from clarifying for consumers
the insurance status of these institutions, and if FTC oversees
nonfederally insured institutions, taxpayers bear the costs.
FTC Opposes Having to Implement and Enforce Section 43:
Section 43 specifies that FTC shall enforce compliance with its
requirements, and any regulations or orders issued under it.[Footnote
45] In addition, the section charges FTC with specific
responsibilities. FTC is to prescribe "the manner and content of
disclosure required under the section" in order to "ensure that current
and prospective customers understand the risks involved in forgoing
federal deposit insurance."[Footnote 46] Also, the section authorizes
FTC, in consultation with FDIC, to exempt an institution from the shut-
down provision.[Footnote 47] In addition, section 43 authorizes FTC to
determine that an institution not chartered as a depository institution
nonetheless can be subject to the section.[Footnote 48] FTC staff told
us that because of questions about the Commission's authority under
section 43 and the Commission's lack of expertise to carry out the
section in accordance with the staff's perception of what the section
requires, FTC is not the appropriate federal agency to enforce the
section.
FTC Staff Said That Questions about the Commission's Authority under
Section 43 Could Interfere with Its Ability to Enforce the Section:
According to FTC staff, the language of section 43 charging the
Commission with responsibility for enforcing the section (charging
provision) contains an ambiguity that could lead to challenges against
the Commission's authority under the section. As noted above, the
charging provision specifies that the FTC shall enforce section 43
"under the [FTC] Act." The FTC Act, however, limits the Commission's
jurisdiction in ways that are inconsistent with FTC's responsibilities
under section 43. For example, FTC and federal courts have interpreted
the FTC Act to mean that the Commission has no jurisdiction over
nonprofit entities, a group that includes credit unions.[Footnote 49]
Another provision of the FTC Act (Section 6), which authorizes FTC to
conduct investigations, require reports and promulgate rules and
regulations to carry out the FTC Act, expressly excludes the business
of insurance from those authorities except under very limited
circumstances.[Footnote 50] According to FTC staff, this limitation
raises questions about the Commission's authority to enforce the audit
provision in section 43, which applies specifically to private
insurers.
FTC staff said that FTC's jurisdiction with respect to the audit
provision, as well as disclosures about deposit insurance, also would
be subject to challenge because of limitations the McCarran-Ferguson
Act imposes on federal laws that relate to the business of insurance.
Under the McCarran-Ferguson Act, a federal law applicable to the
business of insurance can be preempted by a state insurance law.
Specifically, the McCarran-Ferguson Act precludes application of a
federal statute in the face of a state law "enacted . . . for the
purpose of regulating the business of insurance," if the federal
measure does not "specifically relate to the business of insurance,"
and would "invalidate, impair, or supersede" the state's law.[Footnote
51] The act also specifies that the FTC Act is applicable to the
business of insurance "to the extent that such business is not
regulated by State law."[Footnote 52] According to FTC staff, this
latter provision displaces application of the FTC Act where there is
state regulation of the business of insurance. The staff explained that
FTC's authority under section 43 is unclear because the section
requires FTC to enforce the deposit insurance disclosure requirements
and the audit provision "under the [FTC] Act" even though the FTC Act
does not apply to insurance. FTC staff believe that enforcement of the
disclosure provisions could be subject to challenge in states that
regulate deposit insurance, and that enforcement of the audit provision
would be subject to challenge because the State of Ohio specifically
regulates the only private deposit insurer, ASI.
FTC Staff Raised Practical Concerns about the Commission's Ability to
Carry Out Section 43:
FTC staff raised several concerns about the Commission's ability to
carry out section 43 responsibilities. One concern relates to the
manner in which FTC would exercise its rulemaking authority under the
section. Section 43 does not specify the authority under which FTC's
implementing rules should be promulgated. To the extent that the
Commission's rulemaking authority under the section is subject to
requirements of the FTC Act, FTC staff made two points. They noted that
the Commission's general rulemaking authority under the FTC Act may be
exercised only "for purposes of carrying out the provisions of [the FTC
Act]."[Footnote 53] The Commission also has special rulemaking
authority under section 18 of the FTC Act with respect to unfair or
deceptive acts or practices.[Footnote 54] That section contains
specific procedures FTC must follow in prescribing rules that define
unfair or deceptive acts or practices. Among other things, section 18
requires that Commission rules define such acts or practices with
specificity and establishes rigorous procedures for issuing the rules.
FTC staff asserted that without specific guidance from Congress as to
the Commission's rulemaking authority, the Commission could face having
to promulgate rules under section 43 in accordance with the
requirements in section 18 of the FTC Act.[Footnote 55] They stated
that because the separate rulemaking authorities involve different
procedures and authorize different remedies, the absence of guidance in
this area makes it difficult for FTC to carry out its rulemaking
responsibilities under section 43.
FTC staff also raised concerns that section 43 requires the Commission
to engage in activities that are incompatible with the manner in which
FTC undertakes its consumer protection mission or are beyond FTC's
expertise. According to the staff, section 43 calls upon FTC to engage
in activities more suitable for a supervisor of depository
institutions. These include reviews of insurance company accounting
practices and audits, supervisory examinations or inspections,
specification of disclosures that should include the risk profiles of
depository institutions and their private deposit insurers, and the
regulation and possible closure and liquidation of depository
institutions and other entities that could be mistaken for depository
institutions (such as securities firms that offer accounts with deposit
account characteristics). The staff asserted that these
responsibilities call for close supervision by an agency that, unlike
FTC, has the expertise, tools, and resources to assess and regulate the
operations of depository institutions and is knowledgeable about risks
associated with depository institutions and deposit insurance.
Several provisions of section 43 underlie FTC's concern that the
section calls for expertise the Commission does not have.[Footnote 56]
The first is the requirement that FTC promulgate disclosure regulations
to ensure that current and prospective customers understand the risks
involved in forgoing federal deposit insurance. Commission staff
asserted that disclosure of those risks requires more than a
standardized notice that the institution is not federally insured and
that the federal government does not guarantee that the depositor will
get back their deposits. The staff maintained that disclosure could
involve a discussion of a depository institution's financial strength
and liquidity, as well as the health of the private insurer, because
the risk of not having federal deposit insurance would be tied to the
health of both the institution and the insurer.
The staff also stated that even if disclosure did not require
discussion of the safety of the particular institution and insurer, any
explanation about the risks of forgoing federal deposit insurance would
be beyond FTC's expertise because the Commission lacks the expertise
necessary to define those risks. For example, they said that the
disclosure requirement creates the dilemma that too much emphasis on
the risks of forgoing federal deposit insurance could dissuade
depositors from using uninsured institutions, thus weakening them;
whereas, too little risk disclosure could mean that such depositors
would be inadequately informed. In addition, the staff asserted that
the Commission lacks the ability to determine which documents and
records should contain the risk disclosure.
The second provision of concern to FTC is the shut-down provision.
According to FTC staff, this section would require expertise in
depository institution operations and depositor protection. They
maintained that enforcement of this provision could require FTC to do
more than merely declare that an institution must stop doing business.
They asserted that if an entity were instructed to shut down, the
Commission would have to be prepared to enforce that shut-down, which
would necessitate "winding up" the operations of the entity, a role
that would require expertise in the operation of depository
institutions and the protection of customer deposits. The staff also
expressed a concern that section 43 fails to provide standards for FTC
to consider in deciding whether an institution is eligible for an
exemption from the shut-down provision. They maintained that in
deciding upon an exemption the Commission likely would have to engage
itself in the complexities of depository institution law.
Another aspect of section 43 that FTC believes to be beyond its
expertise is the look-alike definition. The definition of "depository
institution" in section 43 includes any entity FTC determines to be
engaged in the business of receiving deposits, and could reasonably
could be mistaken for a depository institution by the entity's current
or prospective customers.[Footnote 57] Under this authority, FTC could
determine that an entity not chartered as a depository institution is
subject to section 43. FTC staff asserted that the Commission lacks the
expertise necessary to determine whether an entity's business
constitutes "receiving deposits" or what would cause customers to
mistake an entity for a depository institution. Any entity determined
to be a look alike and not exempted would be subject to section 43,
including the requirements for disclosures regarding lack of federal
deposit insurance (even if it holds other forms of federal deposit
insurance). According to FTC staff, proper implementation of this
provision, in conjunction with the shut-down provision, could lead to
shutting down a variety of institutions such as securities firms and
mutual funds.
FTC officials also stated that the Commission lacks the expertise
necessary to enforce the audit requirement for private insurers. As
mentioned previously, section 43 requires any private deposit insurer
to obtain an annual audit from an independent auditor using generally
accepted auditing standards.[Footnote 58] The audit must determine
whether the insurer follows generally accepted accounting principles
and has set aside sufficient reserves for losses. FTC staff stated that
diligent enforcement would require a review of the auditor's
determinations, which, in turn, would necessitate expertise and
adequate resources for assessing both the quality of the audit and the
financial health of the insurer. FTC staff asserted that the Commission
does not possess this expertise. The staff also were of the view that
financial audits do not and cannot include determinations about whether
reserves set aside for losses are sufficient. The staff said that FTC
does not have expertise regarding loss and reserve issues with which to
determine whether some form of substitute assurances should be deemed
sufficient.
FTC Best among Candidates for Enforcement Role:
Although we found no agency was ideally suited to carry out the
responsibilities set forth in the provision, based on our review of the
concerns raised by FTC, NCUA and FDIC, we found no compelling reason to
remove FTC from its responsibility as the primary agency responsible
for implementing section 43. FTC's concerns about its authority and
resources are rooted in an interpretation of the section that calls for
an extensive federal presence in the regulation of private deposit
insurance and depository institutions. The scheme of section 43,
particularly in the context of federal deposit insurance, suggests that
a more modest interpretation is appropriate, although modifications to
the section would enhance the Commission's ability to enforce the
section.
FTC's Concerns about Potential Challenges to Its Authority under
Section 43 Can Be Addressed:
Although FTC's concerns about potential challenges to its authority
under section 43 are not unrealistic, it appears that the Commission
has authority to implement and enforce the requirements of the
provision even if the Commission would not otherwise have jurisdiction
under the FTC Act or McCarran-Ferguson Act. A challenge to FTC's
authority would arise from uncertainties about what Congress intended
by instructing FTC to enforce the section "under the FTC Act." The
phrase indicates that the Commission must enforce the section under the
FTC Act even though, under the FTC Act, the Commission would not have
authority to enforce certain provisions of the section or take certain
other regulatory actions. Interpreting section 43 to mean that FTC
enforcement actions are subject to all provisions of the FTC Act would
lead to unreasonable results. Among other things, FTC would be without
authority to perform the actions specifically prescribed in section 43.
Moreover, it is clear that Congress intended that the section would
apply to credit unions because section 43 specifically addresses state-
chartered credit unions in the shut-down provision.[Footnote 59] Even
if FTC's authority under the FTC Act did not extend to nonprofit
entities before Congress enacted section 43, such a limitation did not
preclude Congress from subjecting credit unions to FTC's authority
under that provision.[Footnote 60] We interpret section 43 as
authorizing FTC to enforce the section by using the enforcement powers
provided in the FTC Act and not as a limitation on FTC's authority that
would defeat several purposes of the section.[Footnote 61]
It also appears that the McCarran-Ferguson Act does not undermine FTC's
authority to implement section 43. The pertinent part of that act
states as follows:
"No Act of Congress shall be construed to invalidate, impair, or
supersede any law enacted by any State for the purpose of regulating
the business of insurance, or which imposes a fee or tax upon such
business, unless such Act specifically relates to the business of
insurance."[Footnote 62]
As interpreted by the Supreme Court, this provision precludes
application of a federal statute in the face of a state law "enacted .
. . for the purpose of regulating the business of insurance," if the
federal measure does not "specifically relate to the business of
insurance," and would "invalidate,
impair, or supersede" the state's law.[Footnote 63] One purpose of this
provision is to protect state insurance laws against inadvertent
preemption by federal law.[Footnote 64] Section 43 does not
inadvertently apply to insurance. Rather, to the extent that the
section specifically relates to deposit insurance and to private
providers of that insurance a state law relating to the same subject
matter would be preempted.[Footnote 65]
Because the audit provision is valid under the McCarran-Ferguson Act,
FTC staff concerns about challenges to the Commission's authority to
enforce the provision appear to be misplaced. Should FTC take an action
arguably inconsistent with the role contemplated in section 43, such as
regulating the safety and soundness of providers of private deposit
insurance, the McCarran-Ferguson Act might serve as grounds to
challenge the action. However, the McCarran-Ferguson act does not stand
as a general bar to FTC's authority to enforce the audit
requirement.[Footnote 66]
Lack of Guidance in Section 43 for Rulemaking Procedures Can Be
Addressed:
The only explicit rulemaking requirement in section 43 is that FTC
issue regulations or orders prescribing the manner and content of
disclosure required under the section.[Footnote 67] Section 43 does not
designate the procedures FTC should follow in promulgating those rules
or orders. Also, to the extent that FTC has authority to issue other
regulations under the section, the source of that authority is less
clear. Uncertainty about FTC's rulemaking authority might complicate
the Commission's ability to promulgate regulations, but these potential
complications do not appear to undermine FTC's authority to carry out
the section.
Under the FTC Act, the Commission has two types of rulemaking
authority. The Commission has general authority to make rules and
regulations for the purpose of carrying out the act.[Footnote 68] In
addition, FTC has special rulemaking authority the Commission must use
for issuing rules with respect to unfair or deceptive acts or
practices. The special rulemaking authority requires, among other
things, that the Commission define unfair or deceptive acts or
practices with specificity and follow stringent rulemaking
procedures.[Footnote 69] If the Commission's authority to issue
regulations under section 43 is subject to the requirements of the FTC
Act, then the Commission would have to rely upon its special rulemaking
authority.[Footnote 70] It is unclear whether the Commission's
authority to issue rules under section 43 is subject to the FTC Act,
however. If FTC Act requirements do not apply, then FTC could rely upon
the less stringent rulemaking requirements for informal rulemaking
under the Administrative Procedure Act.[Footnote 71] Because section 43
does not provide specific guidance for which of FTC's rulemaking
authorities applies, it could affect the manner in which the Commission
undertakes its rulemaking. However, the lack of guidance does not
preclude the Commission from carrying out its responsibilities under
the section.
FTC's Concern That Section 43 Enforcement Would Require More Expertise
Is Generally Not Warranted:
In addition to perceived jurisdictional limitations, FTC staff
maintained that enforcement of the section requires expertise and
resources the Commission does not have and would require FTC to take
actions inconsistent with its consumer protection mission. FTC staff
asserted that enforcement of the disclosure requirement and the
promulgation of regulations apprising consumers of the risk of not
having federal deposit insurance, as well as proper enforcement of the
audit requirement and shut-down provision, require an in-depth
knowledge of depository institutions and deposit insurance and FTC
oversight of the safety and soundness of institutions subject to
section 43. Enforcement of the disclosure provisions does not
necessarily require such in-depth expertise, although FTC could benefit
from consulting with other federal regulators or others to gain this
expertise to more effectively enforce these provisions.
The only specific rulemaking mandate in section 43 requires FTC to
prescribe "the manner and content of disclosure required under this
section" in order "to ensure that current and prospective customers
understand the risks involved in forgoing federal deposit insurance."
As noted previously, section 43 specifically requires disclosure of two
facts: (1) that the depository institution is not federally insured and
(2) if the institution fails the federal government does not guarantee
that depositors will get back their money. FTC staff interprets the
rulemaking mandate to mean that the Commission must issue regulations
or orders requiring disclosure of information that goes beyond what is
specifically required under section 43. It appears that a less extreme
interpretation of the disclosure requirement--one that does not
compromise FTC's ability to carry out the requirement--would be
consistent with section 43.
Even if the requirement for disclosure regulations calls for more than
the disclosure specifically described in section 43, it is not clear
that Congress intended the regulations to require a discussion of the
safety and soundness of the depository institution and its private
insurer. It appears that Congress enacted the disclosure requirements
in section 43 to ensure that consumers are informed about an
institution's lack of federal deposit insurance.[Footnote 72] There is
no indication in the section or its legislative history that Congress
also intended disclosure about the risks associated with the private
deposit insurer. The purpose of deposit insurance is to free depositors
from having to assess an institution's safety with respect to their
deposits, up to the coverage limit; deposits are protected up to that
limit even if the institution becomes unsafe or unsound. With respect
to the safety of deposits, risk disclosure is unnecessary. FTC staff
maintains that disclosure regarding private deposit insurance should be
treated differently because, unlike federal deposit insurance, private
deposit insurance is subject to the risk that a private insurer may not
be able to protect the deposits it insures. We do not take issue with
FTC's observation about the potential risks of private deposit
insurance. However, nothing in section 43 indicates that Congress
intended that disclosures with respect to private deposit insurance
should be treated any differently; nothing in the section indicates
that FTC should preempt the states in assessing the safety and
soundness of privately insured institutions and their insurers. In
section 43 Congress deferred to the states on whether to permit the
operation of privately insured depository institutions. It is
reasonable to conclude that Congress anticipated that depositors at
those institutions should rely upon the states to oversee the safety
and soundness of private deposit insurers.
Finally, we note that the section 43 requirement for disclosure
regulations is similar to other laws that require FTC to regulate
disclosure without regard to its expertise concerning the subject of
the disclosure. For example, under the Fair Packaging and Labeling Act,
FTC regulates disclosure about a broad array of commercial items
defined generically as "consumer commodities."[Footnote 73] Under the
FTC Act, the Commission has responsibility for preventing false
advertising without regard to the nature of the product.[Footnote 74]
Also, FTC enforces several federal consumer protection laws applicable
to financial institution disclosures, including the Truth in Lending
Act, the Consumer Leasing Act, the Equal Credit Opportunity Act, and
the Electronic Funds Transfer Act.[Footnote 75] Moreover, the
Commission already has demonstrated that it has the ability to regulate
extensively how financial institutions must make disclosures about
financial transactions and customer financial privacy.[Footnote 76]
Certain FTC Concerns Do Raise Questions about Its Enforcement
Capabilities or Applicability of Its Authority:
With respect to the shut-down provision, whether FTC enforcement
requires expertise in depository institutions and deposit insurance
depends upon how far the Commission might seek to extend its
enforcement authority. Under the most likely enforcement scenario,
depository institution expertise would not be necessary. The shut-down
provision prohibits any depository institution lacking federal deposit
insurance from engaging in interstate commerce unless the appropriate
state supervisor has determined the institution's eligibility for
federal deposit insurance. Assuming that FTC were not to grant an
exemption, enforcing the provision could involve an FTC enforcement
action under the FTC Act to shut down the institution. However, because
depository institutions subject to section 43 are state-chartered,
states likely would have primary responsibility for "winding up" an
institution once it has ceased doing business.[Footnote 77] Section 43
would not prevent the application of federal bankruptcy laws or laws
administered by federal agencies. FTC staff pointed out that under some
circumstances it might be appropriate for the Commission to remain
involved in winding up an entity subject to shut down to ensure that
deposits were protected. To the extent that the Commission might remain
involved, partnering with the state would be appropriate.
FTC staff also stated that FTC lacks the expertise necessary to
evaluate a state's determination of an institution's eligibility for
federal deposit insurance. Nothing in section 43 suggests that FTC is
to oversee the states in this regard. Congress deferred to the states
with respect to the determination. We agree with the FTC staff that the
extent to which FTC can challenge a state's determination is unclear,
but we see nothing in the statute contemplating FTC review of state
determinations.
Another of FTC's concerns about the shut-down provision--that section
43 does not provide standards for the Commission to apply in deciding
whether to exempt an entity from the provision--appears to have been
partially addressed by Congress when it enacted the section. Section 43
authorizes FTC to permit an exemption from the shut-down requirement
"in consultation with the Federal Deposit Insurance
Corporation."[Footnote 78] Thus, Congress specifically did not rely on
FTC's independent judgment should FTC consider an institution for the
exemption. The section, however, does not provide guidance on the
factors the Commission should consider in deciding whether an
institution is eligible for an exemption. The extent to which this lack
of guidance might affect FTC's enforcement of the provision is unclear.
We note, however, that FTC could seek to resolve uncertainties about
exempting an institution by consulting with FDIC, as contemplated by
section 43.
The merit of FTC's concern regarding the look alike provision depends
upon the Commission's perception of the role Congress intended it to
have. Under the look alike provision, the Commission has discretion to
decide whether an entity not chartered as a depository institution
nonetheless should be subject to section 43. FTC staff asserted that
the Commission could exercise this authority in a way that would
include various uninsured institutions where funds are deposited,
including securities firms and mutual funds. Such institutions would be
subject to FTC enforcement of the disclosure requirements and the shut-
down provision. According to FTC staff, proper enforcement of section
43 requires the Commission to promulgate a regulation defining look
alike institutions and subjecting them to section 43. The staff
asserted that because of FTC's lack of expertise regarding deposits,
the Commission would have to define the look alike entities broadly,
thus subjecting a potentially vast group of entities to the section.
FTC's concern in this regard overlooks the fundamental principal that a
statute should not be interpreted to produce absurd results.[Footnote
79] It does not appear that Congress intended that FTC would invoke the
look alike provision broadly to include any entity that accepts
deposits. For example, a reasonable interpretation of the look alike
requirement does not anticipate shutting down entire industries and
entities already subject to extensive disclosure regulation under
federal law, such as securities firms and mutual funds.[Footnote 80]
FTC staff also expressed concerns about what role the Commission would
have to take if the Commission were to shut down a business,
particularly if FTC took the action under the look alike authority. The
staff stated that the Commission would lack expertise necessary to wind
down the institution and protect its customers' funds. We note that
entities subject to the shut-down provision would be subject to state
and federal laws governing the winding up of a business enterprise. In
section 43, Congress did not indicate what, if any, role FTC should
play in a shut-down scenario. However, nothing in section 43 indicates
that Congress intended to preempt laws governing the winding up of an
entity.
FTC's concerns about monitoring compliance with the audit provision are
more substantial. The audit provision does not require FTC to test the
conclusions of the audit. It appears that the Commission could carry
out its responsibility simply by relying upon the auditor's
attestations and checking with the appropriate parties to ensure that
the audit report was properly distributed. However, as FTC staff
pointed out, proper enforcement of the provision could, under certain
circumstances, call for close scrutiny of the audit. According to FTC
staff, because the Commission lacks expertise in this area, it might be
unaware of circumstances warranting close scrutiny of the audit report.
Clarifying FTC's Authority and Providing Some Flexibility Could Ensure
Effective Enforcement of Section 43:
While we found that FTC was the best candidate to enforce section 43
provisions, clarifying FTC's authority and providing additional
flexibility in administering the section could help address some of the
Commission's concerns about its authority and ability to enforce the
provision without undermining its objectives. For section 43 to be
fully implemented and enforced, the following changes to the identified
provisions could clarify FTC's authority and provide flexibility for
more effective enforcement.
Disclosure provisions: FTC staff are apprehensive about the
Commission's ability to carry out this mandate, primarily because of
how they interpret the risk disclosure requirement, an interpretation
that contemplates a discussion of the financial health of a depository
institution and its private insurer. Giving FTC the flexibility to
determine what disclosure requirements should be issued and to decide
on the appropriate means for enforcing them could help to alleviate the
Commission's concern. For example, the Commission might choose to
require nonfederally insured institutions to obtain independent
certifications from state supervisors or another independent body that
their institution is in compliance with the section's disclosure
requirements. Also, the Commission could be given authority to
coordinate with state supervisors of nonfederally insured credit unions
to assist in enforcing the disclosure requirements or imposing
sanctions for violations of the disclosure provisions.
In addition, a requirement that FTC consult with FDIC and NCUA about
disclosure requirements could ensure that disclosure under section 43
covers FDIC and NCUA concerns about the potential for confusion of
private deposit insurance with federal deposit insurance, and provides
FTC with access to expertise it deems necessary to establish disclosure
requirements. Requiring assistance from FDIC and NCUA in fashioning an
appropriate disclosure regime may help satisfy FTC concerns about its
lack of expertise. Additionally, such assistance would provide the
federal deposit insurance agencies with an opportunity to ensure that
disclosures adequately inform depositors in a manner that reduces the
possibility of confusion with federal deposit insurance and apprises
them of the risks associated with the lack of federal deposit
insurance.
Shut-down provision: Several aspects of this provision raise regulatory
concerns. First, the requirement relies upon states to make a
determination that involves federal policies; specifically, whether a
particular institution is eligible for federal deposit insurance. The
eligibility determination includes many factors that federal regulators
apply on a case-by-case basis. A related concern is that the provision
does not indicate what criteria a state should use in determining that
an institution is eligible for federal deposit insurance. In addition,
the section calls upon FTC to shut down institutions that are subject
to regulation by state or federal bodies that have expertise in
assessing the consequences of a shut down as well as shutting down an
institution. To address these concerns, modifications to the shut-down
provision could require coordination between FTC and the appropriate
primary regulator of an institution in connection with a state's
determination of deposit insurance eligibility, the Commission's
determination of an institution's eligibility for an exemption from the
provision, and the shutting down of an institution.
Annual audit requirements: Section 43 clearly sets forth the
requirements for a private deposit insurer with respect to the annual
audit it must obtain and to whom the annual audit must be provided.
However, the section does not indicate the extent of FTC review and
monitoring appropriate for enforcing the provision. In this regard, an
amendment to section 43 could provide FTC with specific authority to
establish annual audit requirements for private insurers. With such
authority, the Commission could set forth the conditions under which it
would rely on the annual audit or could enter into a cooperative
arrangement with the insurer's state regulators concerning reviews of
the annual audit.
Conclusions:
Depository institutions lacking federal deposit insurance are chartered
and supervised by states; however, the activities of these entities
involve federal interests. Congress acted on these federal interests by
enacting section 43 of the FDI Act. However, issues of enforcement
remain. Consistent with a prohibition in FTC's appropriations
authority, the Commission has not enforced section 43 provisions.
Absent enforcement, our work showed that compliance with these
provisions varied significantly.
Our primary concern, resulting from the lack of enforcement of section
43 provisions, is the possibility that members of state-chartered,
privately insured credit unions may not be adequately informed that
their deposits are not federally insured and should their institution
fail, the federal government does not guarantee that they will get
their money back. The fact that many privately insured credit unions we
visited did not conspicuously disclose that the institution was not
federally insured, raises concerns that the congressional interest in
this regard is not being fully satisfied.
The lack of enforcement of the other two provisions--shut-down and
annual audit--may have a less direct impact on consumers. While it
appears that privately insured credit unions have not obtained a
determination from their state regulators that they are eligible for
federal deposit insurance, this determination may not be a meaningful
protection for consumers. Since it is only a one-time requirement, it
does not provide any assurance that institutions will continue to
operate in a manner to remain eligible for federal deposit insurance.
However, state regulators imposed safety and soundness standards for
credit unions lacking federal deposit insurance that are similar to
federal oversight standards. NCUA officials also may consider other
factors when determining eligibility. ASI officials also told us that
they rigorously monitor the safety and soundness of their insured
institutions. Given the related actions undertaken to help ensure the
health of privately insured credit unions, the effect on consumers from
the lack of enforcement of this provision may be negligible. Since we
found that the remaining private deposit insurer has complied with the
annual audit requirements, state regulators and the management of
privately insured credit unions have had the opportunity to become
informed about the financial condition of this private deposit insurer.
Implementation of this provision helps ensure the safety and soundness
of ASI--which, in turn, helps to ensure that members of state-
chartered, privately insured credit unions have a viable insurer should
their credit union fail. Since the remaining private deposit insurer
complied with section 43 audit requirements, it appears consumers
suffered no negative impact from the nonenforcement of this provision.
In evaluating which federal agency should enforce these provisions, we
found the responsibilities outlined in these provisions did not fall
ideally within any single agency's jurisdiction. FTC staff and
officials from NCUA and FDIC opposed charging their agencies with this
responsibility. NCUA and FDIC both have an interest in making sure that
consumers receive adequate information about whether or not their
deposits are federally insured. NCUA and FDIC also have considerable
expertise in disclosures at federally insured depository institutions.
However, FDIC insures the deposits at banks and savings associations--
but does not regulate or supervise credit unions or insure deposits at
these institutions. If either FDIC or NCUA were charged with this
responsibility, it could create potential confusion about federal
deposit insurance and would result in a regulatory conflict of interest
that could expose the credit union system to a loss of public
confidence in the federal deposit insurance system. This would be
inconsistent with a central purpose of the provision. Despite this
conflict, the agency that enforces section 43 would benefit from
coordination with NCUA and FDIC, because of their interests and
expertise.
Partnering with state regulators could also help FTC enforce certain
section 43 requirements. For example, the Commission might choose to
require nonfederally insured institutions to obtain independent
certifications that their institution is in compliance with the
section's disclosure requirements and that the risks of not having
federal deposit insurance have been adequately disclosed. Considering
that Congress deferred to the states on whether to permit the operation
of depository institutions lacking federal deposit insurance, it is
reasonable to conclude that Congress also relied upon the states to
oversee the safety and soundness of those institutions and,
accordingly, the risks to consumers of dealing with them.
Although institutions lacking federal deposit insurance are chartered
and regulated by the states, protecting consumers from confusion about
the insurance of their deposits is consistent with the FTC's consumer
protection mission. Congress also determined that the federal agency
specifically charged with protecting consumers against misleading or
deceptive information practices--FTC--should ensure that the federal
interest in proper disclosure is maintained. However, Congress has also
prohibited FTC from discharging its responsibilities under section 43.
While FTC staff has raised jurisdictional concerns, as well as
practical concerns about the Commission's ability to enforce these
provisions, we believe that these interests can be best addressed by
retaining FTC's responsibility for enforcing and implementing section
43. However, the section could be modified to reduce concerns FTC has
expressed about its ability to enforce these provisions. Such
modifications could allow FTC flexibility in discharging its
responsibilities and enable it to call upon the expertise of the
federal deposit insurers, state regulators, or others when the
Commission deems it necessary without sacrificing the purposes of the
section.
Matters for Congressional Consideration:
No federal agency was the clear or obvious choice to carry out the
responsibilities outlined in section 43 of the FDI Act; however, if
modifications were made to these provisions, we believe that FTC would
be best suited to retain responsibility for enforcing and administering
these provisions. If Congress determines that FTC is the appropriate
agency, then Congress should remove the prohibition from FTC using
appropriated funds to enforce these provisions. Also, Congress should
clarify that FTC's authority to implement and enforce section 43 is not
subject to any limitations on its jurisdiction contained in the FTC
Act.
To remove obstacles and provide additional flexibility for FTC's
enforcement of section 43 disclosure requirements, Congress may wish to
consider:
* Providing FTC the authority to consult with FDIC and NCUA when
determining the manner and content of disclosure requirements to (1)
provide FTC with access to expertise it deems necessary to establish
disclosure requirements and (2) ensure that the required disclosures
address FDIC and NCUA concerns about the potential for confusion of
private deposit insurance with federal deposit insurance;
* Providing FTC the authority to coordinate with state supervisors of
nonfederally insured depository institutions to assist in enforcing the
disclosure requirements; and:
* Providing FTC authority to impose sanctions for violations of the
disclosure provisions.
To remove obstacles and provide additional flexibility for FTC's
enforcement of the section 43 shut-down provision, Congress may wish to
consider:
* Requiring coordination between FTC and the appropriate primary
regulator of an institution when (1) FTC considers whether to exempt an
institution from the requirement to obtain a state determination that
it meets eligibility requirements for federal deposit insurance; and
(2) FTC seeks to shut down an institution because it has not obtained a
state determination that it meets eligibility requirements for federal
deposit insurance.
In light of some uncertainty as to the scope of FTC's jurisdiction
under the FTC Act to regulate insurance entities in matters other than
antitrust, Congress may wish to consider clarifying FTC's authority
regarding the annual audit provision by:
* Providing FTC with specific authority to establish requirements, such
as attestation requirements, to ensure the reliability of annual audits
for private insurers.
Agency Comments and Our Evaluation:
We requested comments on a draft of this report from the heads, or
their designees, of the Federal Deposit Insurance Corporation, the
National Credit Union Administration, and the Federal Trade Commission.
We received written comments from NCUA and FTC that are summarized
below and reprinted in appendixes III and IV respectively. In addition,
we received oral comments from the Deputy Director of Supervision and
Consumer Protection at FDIC that are summarized below. We also received
technical comments from NCUA and FTC that we incorporated into the
report as appropriate.
FDIC oral comments focused on the findings in the report dealing with
FDIC and the overall report conclusions. FDIC generally agreed with the
report's findings dealing with FDIC and stated that the arguments
included in the report against having the FDIC enforce section 43 were
generally consistent with arguments it provided to congressional staff
during the drafting of the Federal Deposit Insurance Corporation
Improvement Act of 1991, which led to the decision in the enacted
legislation to assign FTC responsibility for enforcing compliance with
the provisions discussed in this report. FDIC also stated that while
time did not permit it to conduct an exhaustive legal review, it
generally agreed with the report's overall conclusions.
NCUA concurred with the report's conclusions that there is a need for
enforcement of the consumer protection provisions in section 43 and
that, for the reasons stated in our report, FTC, not NCUA or FDIC, is
in the best position to enforce these provisions. NCUA also commented
on FTC staff concerns expressed in this report that FTC might be
challenged if it were to take action against credit unions because its
enabling legislation has been interpreted to mean that it has no
jurisdiction over nonprofit entities, such as credit unions. NCUA
agreed with our conclusion that even if FTC's authority under the FTC
Act did not extend to nonprofit entities, the FTC Act did not preclude
Congress from subjecting credit unions to FTC's authority under section
43. Although NCUA agreed with this logic, it also believed that under
FTC's enabling legislation FTC has jurisdiction over state-chartered
credit unions.
FTC disagreed with our conclusion that the Commission is the best among
federal agencies to enforce section 43 provisions. FTC believed that
the solution we offered does not meet the objectives of the statute and
conflicted with our analyses. FTC stated that three principal
objectives of section 43 are to provide some federal oversight to
determine (1) the safety of deposits in institutions that are neither
supervised nor insured by the federal government; (2) the financial
soundness of those institutions and their state-supervised insurers;
and (3) that disclosures to depositors at those depository institutions
"fully inform" the depositors about an institution's lack of federal
deposit insurance. We believe that FTC's interpretation of section 43
is inconsistent with the overall framework and purpose of the section.
The regulatory scheme of section 43 indicates that Congress did not
intend FTC to have a safety and soundness role. For example, Congress
relied upon the states to determine whether a depository institution is
eligible for federal deposit insurance even though the determination
includes an assessment of an institution's safety and soundness. In
addition, Congress required private deposit insurers to obtain an
annual audit that satisfies certain standards, but did not require that
the insurer submit the audit to FTC. Instead, section 43 requires the
insurer to submit the audit to the state supervisors of institutions
who have deposits insured by the entity. Finally, Congress' designation
of FTC as the federal agency responsible for enforcing section 43
indicates that Congress did not contemplate a federal safety and
soundness role. The legislative history of section 43 supports this
interpretation. The Senate bill containing the original version of
section 43 set forth substantially the same disclosure requirements as
are contained in section 43.[Footnote 81] The bill designated FDIC and
NCUA--two safety and soundness regulators--to enforce those
requirements. However, in the next version of the bill, which added the
audit requirement, the shut-down provision, and the look-alike
provision, Congress substituted FTC as the agency charged with
enforcement responsibility.[Footnote 82] The legislative history does
not discuss the reasons for this change, but it is reasonable to
conclude that by substituting FTC for the safety and soundness
regulators, Congress opted against a federal safety and soundness role
under section 43. Neither section 43 nor its legislative history
indicate that Congress intended to transform FTC from a consumer
protection agency into a safety and soundness regulator of state-
supervised depository institutions and their state-supervised private
deposit insurers.
We believe that the primary objectives of section 43 are to ensure that
consumers are protected by receiving the disclosures and opportunity
for acknowledgement specified in the section; the performance of an
annual audit of the deposit insurer in accordance with generally
accepted accounting standards that attests to the insurer's adherence
to generally accepted accounting principles and the sufficiency of the
insurer's loss reserve; the state certification relating to the shut
down provision; and FTC's prudent and reasoned exercise of its
authority pursuant to the look-alike provision. Our proposed solutions
are consistent with this interpretation of section 43.
FTC also raised concerns about our proposal that the Commission rely in
part on NCUA and FDIC in connection with establishing disclosure
requirements. FTC said that this recommendation would expose the
Commission's formulation of disclosure requirements to the regulatory
conflict of interest that would arise if NCUA and FDIC were to have
primary regulatory responsibility under section 43. We believe that
FTC, as a disinterest regulator with primary responsibility in this
area, could neutralize any potential conflict of interest by
considering the views of all parties having an interest in or expertise
regarding an FTC action under section 43.
FTC also contended that we "significantly overestimate" the
Commission's expertise and experience in auditing, deposit safety and
reserves, insurance regulation, assessment of financial soundness of
depository institutions or insurers, and shutting down depository
institutions. The Commission asserted that proper implementation of
section 43 "would require grafting onto the FTC, a very small agency,
an entirely new deposit safety mission requiring expertise, tools, and
resources that the FTC lacks and for which it has no other need." We
disagree. This criticism is based on FTC's extreme view of the federal
role under section 43. FTC assumes that Congress intended to transform
the Commission into a regulator of depository institutions and insurers
even though section 43 clearly contemplates that the states are to
serve in that capacity. As stated above, we believe that section 43
calls for a more moderate role consistent with FTC's mission as a
consumer protection agency.
Congress has charged FTC with disclosure-related responsibilities with
respect to many industries that FTC does not regulate. FTC regulates
advertising and labeling with respect to a wide variety of consumer
commodities and services, yet the Commission does not appear to have
expertise in the intricacies of all industries subject to those
authorities. Nothing in section 43 calls for FTC to have expertise,
experience, or resources to regulate the safety of depository
institutions.[Footnote 83] Also, nothing in section 43 requires FTC to
oversee the closure of an institution subject to the shut-down
provision. The shut-down provision is self-activating, that is, it is a
directive to nonfederally insured depository institutions that they
must cease doing business (in interstate commerce), if they have not
received an insurance eligibility determination from the state.
Congress did not provide any procedure for the institutions to follow
when shutting down, and Congress did not charge FTC with responsibility
for administering a procedure. It should be noted that FTC has ample
experience under its routine enforcement authority in having businesses
shut down.
Additional FTC criticisms were that the report overstates the
disadvantages and ignores the advantages of NCUA implementing section
43, and that the report does not consider possible alternative
assignments of responsibility. FTC's assertions about the efficiency of
NCUA regulation are misguided. As we discussed in the report, assigning
NCUA the responsibility for regulating its competition would present an
inherent conflict of interest that could undermine NCUA's credibility
as a regulator. Moreover, bringing nonfederally insured institutions
within the umbrella of regulation by a federal deposit insurer is
inconsistent with a central purpose of section 43, which is to ensure
the separation of nonfederally insured institutions and their private
deposit insurer from federal deposit insurance. The report does not
discuss the potential for federal regulators other than NCUA, FDIC and
FTC to implement section 43 because no other federal regulator appears
to be a suitable candidate. Unlike FTC, the Federal Reserve Board has
safety and soundness and related responsibilities regarding certain
depository institutions. Placing section 43 responsibilities under the
Board would subject nonfederally insured, state-supervised
institutions to regulation by a federal supervisor of financial
depository institutions. We believe that Congress, by selecting FTC to
administer and enforce section 43, sought to avoid such a relationship.
FTC administration of section 43 would not necessarily have the same
effect.
With respect to SEC, we note that requiring SEC to administer the
section would unnecessarily expand the Commission's mission. In some
cases a look-alike institution (an entity that takes deposits but which
is not chartered as a depository institution) could be involved in a
securities violation, in which case SEC could take action under the
federal securities laws and would not need authority under section 43
to proceed against an entity. Charging SEC with responsibility under
section 43 could blur the distinction between disclosure and audit
obligations under the securities laws and those established under
section 43. We note, however, FTC is not precluded from working with
SEC should FTC invoke the look-alike authority.
FTC also stated that we failed to assess the potential impact on
consumers if the disclosure provisions are not enforced. An empirical
analysis of the impact on consumers was not performed. Presumably,
depositors would not be impacted negatively by the lack of disclosure
unless (a) they believed that their deposits were federally insured
because of the lack of disclosure; (b) the institution holding their
deposits failed; and (c) their deposits were not protected--that is,
the deposits were not insured or the insurer was unable to repay the
deposits of a failed institution. We note, however, that in section 43
Congress made the judgment that depositors should receive the
disclosure required in that section. It is reasonable to conclude that
some individuals who do not receive the benefit of that disclosure may
be uncertain about the insured status of their accounts.
We agree with FTC's concerns that if the section 43 enforcement
authority were immediately activated a number of institutions would be
faced with shutting down because they have not obtained determinations
from their state supervisors of eligibility for federal insurance and
that some institutions would be subject to sanctions because of
disclosure failures. We anticipate that Congress would grant FTC
discretion to enforce and implement section 43 and, if necessary, to
provide for a phased-in approach to deal with FTC's concerns.
We will provide copies of this report to the Chairman and the Ranking
Minority Member on the Senate Committee on Banking, Housing, and Urban
Affairs, and the Chairman and the Ranking Minority Member on the House
Committee on Financial Services. Copies of this report also will be
provided to the Chairman of FTC; the Chairman of FDIC; the Chairman of
NCUA, and other interested parties. Copies will also be made available
to others upon request. In addition, this report will be available at
no charge on the GAO Web site at http://www.gao.gov.
This report was prepared under the direction of Debra R. Johnson,
Assistant Director. Please contact Ms. Johnson or me at (202) 512-8678
if you or your staff have any questions about this report. Other major
contributors are acknowledged in appendix V.
Richard J. Hillman:
Director, Financial Markets and Community Investment:
Signed by Richard J. Hillman:
List of Congressional Committees:
The Honorable Ted Stevens
Chairman
The Honorable Robert C. Byrd
Ranking Minority Member
Committee on Appropriations
United States Senate:
The Honorable Judd Gregg
Chairman
The Honorable Ernest Hollings
Ranking Minority Member
Committee on Appropriations
Subcommittee on Commerce, Justice, State, and the Judiciary
United States Senate:
The Honorable C.W. Bill Young
Chairman
The Honorable David R. Obey
Ranking Minority Member
Committee on Appropriations
House of Representatives:
The Honorable Frank R. Wolf
Chairman
The Honorable Jose E. Serrano
Ranking Minority Member
Committee on Appropriations
Subcommittee on Commerce, Justice, State, the Judiciary, and Related
Agencies
House of Representatives:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
To respond to a mandate in the Conference Report to accompany the House
Joint Resolution 2, for the Fiscal Year 2003 Consolidated
Appropriations Act--which directed us to study the enforcement of
section 43 of the Federal Deposit Insurance Act--we (1) determined the
current status of enforcement of these requirements; (2) determined the
extent of compliance with each requirement and the potential impact on
consumers if these requirements were not enforced, and (3) evaluated
which federal agency could most effectively enforce section
43.[Footnote 84]
To better understand the issues around deposit insurance, we reviewed
and analyzed relevant studies on federal and private deposit insurers
for both credit unions and other depository institutions. In addition,
we interviewed officials at the National Credit Union Administration
(NCUA), the Department of the Treasury, and the Federal Deposit
Insurance Corporation (FDIC) to obtain perspectives specific to federal
and private deposit insurance. We also obtained views from credit union
industry groups including the National Association of Federal Credit
Unions, National Association of State Credit Union Supervisors, and
Credit Union National Association, Inc. (CUNA).
We limited our assessment of "depository institutions lacking federal
deposit insurance" to state-chartered credit unions that purchase
private deposit insurance because banks, thrifts, and federally
chartered credit unions generally are required to purchase federal
deposit insurance.[Footnote 85] As of December 2002, 214 state-
chartered credit unions lacked federal deposit insurance, and all but
two were privately insured. In addition, our analysis was limited to
primary deposit insurance.
To determine the extent to which private deposit insurance is permitted
and utilized by state-chartered credit unions, we conducted a survey of
state credit union regulators in all 50 states. Our survey had a 100-
percent response rate. In addition to the survey, we obtained and
analyzed financial and membership data of privately insured credit
unions from a variety of sources (NCUA, Credit Union Insurance
Corporation of Maryland, CUNA, and American Share Insurance (ASI), the
only remaining provider of primary share insurance). We found this
universe difficult to confirm because in our discussions with state
regulators, NCUA, and ASI officials, and our review of state laws, we
identified other states that could permit credit unions to purchase
private deposit insurance.
To determine the regulatory differences between privately insured
credit unions and federally insured state-chartered credit unions, we
identified and analyzed statutes and regulations related to deposit
insurance at the state and federal levels.[Footnote 86] In addition, we
interviewed officials at NCUA and conducted interviews with officials
at the state credit union regulatory agencies from Alabama, California,
Idaho, Indiana, Illinois, Maryland, Nevada, New Hampshire, and Ohio.
To determine the extent to which privately insured credit unions met
federal disclosure requirements, we identified and analyzed federal
consumer disclosure provisions in section 43 of the Federal Deposit
Insurance Act, as amended, and conducted unannounced site visits to 57
privately insured credit unions (49 main and 8 branch locations) in
Alabama, California, Illinois, Indiana, and Ohio.[Footnote 87] The
credit union locations were selected based on a convenience sample
using state and city location coupled with random selection of main or
branch locations within each city. About 90 percent of the locations we
visited were the main institution rather than a branch institution.
This decision was based on the assumption that if the main locations
were not in compliance, then the branch locations would probably not be
in compliance either. Although neither these site visits, nor the
findings they produced, render a statistically valid sample of all
possible main and branch locations of privately insured credit unions
necessary in order to determine the "extent" of compliance, we believe
that what we found is robust enough, both in the aggregate and within
each state, to raise concern about lack of disclosure in privately
insured credit unions. During each site visit, using a systematic check
sheet, we noted whether or not the credit union had conspicuously
displayed the fact that the institution was not federally insured (on
signs or stickers, for example).
In addition, from these same 57 sites visited, we collected a total of
227 credit union documents that we analyzed for disclosure compliance.
While section 43 requires depository institutions lacking federal
deposit insurance to disclose they are not federally insured in
personal documents, such as periodic statements, we did not collect
them. We also conducted an analysis of the Web sites of 78 privately
insured credit unions, in all eight states where credit unions are
privately insured, to determine whether disclosures required by section
43 were included. To identify these Web sites, we conducted a Web
search. We attempted to locate Web sites for all 212 privately insured
credit unions; however, we were able to only identify 78 Web sites. We
analyzed all Web sites identified. Finally, we interviewed FTC staff to
understand their role in enforcement of requirements of section 43 for
depository institutions lacking federal deposit insurance.
To understand how private deposit insurers operate, we conducted
interviews with officials at three private deposit insurers for credit
unions--ASI (Ohio), Credit Union Insurance Corporation (Maryland), and
Massachusetts Credit Union Share Insurance Corporation
(Massachusetts). Because ASI was the only fully operating provider of
private primary deposit insurance, ASI was the focus of our
review.[Footnote 88] We obtained documents related to ASI operations
such as financial statements and annual audits and analyzed them for
the auditor's opinion noting adherence with accounting principles
generally accepted in the United States. To determine the extent to
which ASI provided copies of its annual audits to state regulators and
credit unions it insures, we interviewed state regulators in states
where ASI insures credit unions and contacted the management of 26
credit unions that are insured by ASI. Additionally, to understand the
state regulatory framework for ASI, we interviewed officials at the
Ohio Department of Insurance and Department of Financial Institutions.
To evaluate which federal agency could most effectively enforce these
requirements, we interviewed FTC staff and officials from NCUA, FDIC,
and various interested industry groups to discuss their perspectives
and obtain their positions on enforcement of section 43 requirements.
We also conducted legal research and analysis related to these
provisions.
We conducted our work in Washington, D.C., Alabama, California,
Indiana, Illinois, Maryland, Massachusetts, Ohio, and Virginia between
February and August 2003, in accordance with generally accepted
government auditing standards.
[End of section]
Appendix II: Entities That Enforce Various Laws at Credit Unions:
Law: Credit:
Law: Equal Credit Opportunity; Agency with enforcement authority at
credit unions: Federally insured/ federally chartered: NCUA; Agency
with enforcement authority at credit unions: Federally insured/ state-
chartered: FTC; Agency with enforcement authority at credit unions:
Privately insured/ state-chartered: FTC.
Law: Electronic Fund Transfers; Agency with enforcement authority at
credit unions: Federally insured/ federally chartered: NCUA; Agency
with enforcement authority at credit unions: Federally insured/ state-
chartered: FTC; Agency with enforcement authority at credit unions:
Privately insured/ state-chartered: FTC.
Law: Fair Credit Practice Rule; Agency with enforcement authority at
credit unions: Federally insured/ federally chartered: NCUA; Agency
with enforcement authority at credit unions: Federally insured/ state-
chartered: FTC; Agency with enforcement authority at credit unions:
Privately insured/ state-chartered: FTC.
Law: Consumer Leasing; Agency with enforcement authority at credit
unions: Federally insured/ federally chartered: NCUA; Agency with
enforcement authority at credit unions: Federally insured/ state-
chartered: FTC; Agency with enforcement authority at credit unions:
Privately insured/ state-chartered: FTC.
Law: Real Estate Settlement Procedures Act; Agency with enforcement
authority at credit unions: Federally insured/ federally chartered:
HUD; Agency with enforcement authority at credit unions: Federally
insured/ state-chartered: HUD; Agency with enforcement authority at
credit unions: Privately insured/ state-chartered: HUD.
Law: Truth in Lending; Agency with enforcement authority at credit
unions: Federally insured/ federally chartered: NCUA; Agency with
enforcement authority at credit unions: Federally insured/ state-
chartered: FTC; Agency with enforcement authority at credit unions:
Privately insured/ state-chartered: FTC.
Law: Housing:
Law: Home Mortgage Disclosure Act; Agency with enforcement authority at
credit unions: Federally insured/ federally chartered: NCUA; Agency
with enforcement authority at credit unions: Federally insured/ state-
chartered: NCUA; Agency with enforcement authority at credit unions:
Privately insured/ state-chartered: NCUA.
Law: Flood Disaster Protection Act; Agency with enforcement authority
at credit unions: Federally insured/ federally chartered: NCUA; Agency
with enforcement authority at credit unions: Federally insured/ state-
chartered: NCUA; Agency with enforcement authority at credit unions:
Privately insured/ state-chartered: FHA/VA.
Law: Fair Housing Act; Agency with enforcement authority at credit
unions: Federally insured/ federally chartered: HUD; Agency with
enforcement authority at credit unions: Federally insured/ state-
chartered: HUD; Agency with enforcement authority at credit unions:
Privately insured/ state-chartered: HUD.
Law: Privacy:
Law: Bank Secrecy Act (Currency and Foreign Transactions Reporting
Act)[A]; Agency with enforcement authority at credit unions: Federally
insured/ federally chartered: NCUA; Agency with enforcement authority
at credit unions: Federally insured/ state-chartered: NCUA[B]; Agency
with enforcement authority at credit unions: Privately insured/ state-
chartered: TREAS.
Law: Fair Credit Reporting Act; Agency with enforcement authority at
credit unions: Federally insured/ federally chartered: NCUA; Agency
with enforcement authority at credit unions: Federally insured/ state-
chartered: FTC; Agency with enforcement authority at credit unions:
Privately insured/ state-chartered: FTC.
Law: Privacy of Consumer Financial Information; Agency with enforcement
authority at credit unions: Federally insured/ federally chartered:
NCUA; Agency with enforcement authority at credit unions: Federally
insured/ state-chartered: NCUA; Agency with enforcement authority at
credit unions: Privately insured/ state-chartered: FTC.
Law: Credit Union Operations:
Law: Expedited Funds Availability Act; Agency with enforcement
authority at credit unions: Federally insured/ federally chartered:
NCUA; Agency with enforcement authority at credit unions: Federally
insured/ state-chartered: NCUA; Agency with enforcement authority at
credit unions: Privately insured/ state-chartered: FRB.
Law: Reserve Requirements; Agency with enforcement authority at credit
unions: Federally insured/ federally chartered: FRB; Agency with
enforcement authority at credit unions: Federally insured/ state-
chartered: FRB; Agency with enforcement authority at credit unions:
Privately insured/ state-chartered: FRB.
Law: Fair Debt Collection Practices Act; Agency with enforcement
authority at credit unions: Federally insured/ federally chartered:
NCUA; Agency with enforcement authority at credit unions: Federally
insured/ state-chartered: FTC; Agency with enforcement authority at
credit unions: Privately insured/ state-chartered: FTC.
Law: Management Officials Interlocks Act; Agency with enforcement
authority at credit unions: Federally insured/ federally chartered:
NCUA; Agency with enforcement authority at credit unions: Federally
insured/ state-chartered: NCUA; Agency with enforcement authority at
credit unions: Privately insured/ state-chartered: DOJ.
Law: Truth in Savings Act; Agency with enforcement authority at credit
unions: Federally insured/ federally chartered: NCUA; Agency with
enforcement authority at credit unions: Federally insured/ state-
chartered: NCUA; Agency with enforcement authority at credit unions:
Privately insured/ state-chartered: NCUA.
Source: NCUA.
Legend:
DOJ: Department of Justice:
FHA/VA: Federal Housing Administration/Veterans Administration:
FRB: Federal Reserve Board:
FTC: Federal Trade Commission
HUD: Department of Housing and Urban Development
TREAS: Treasury Department:
Note: Although NCUA is not the primary enforcer under some of these
regulations, Title II of the Federal Credit Union Act authorizes NCUA
to take cease and desist actions for violations of any law.
[A] The USA PATRIOT Act amended the Bank Secrecy Act, as well as other
legislation.
[B] For federally insured credit unions examined by NCUA.
[End of table]
[End of section]
Appendix III: Comments from the National Credit Union Administration:
National Credit Union Administration:
Office of the Executive Director:
August 15, 2003:
Richard J. Hillman:
Director, Financial Markets and Community Investment United States
General Accounting Office:
Washington, D.C. 20548:
Re: Proposed Report GAO 03-971.
Dear Mr. Hillman:
On behalf of the National Credit Union Administration (NCUA), we want
to thank you for the opportunity to review and comment on your proposed
report GAO 03-971, entitled Federal Deposit Insurance Act [FDIA]. FTC
Best Among-Candidates to Enforce Consumer Protection Provisions. Your
report concludes that there is a need for enforcement of the consumer
protection provisions of the FDIA, noting that many privately insured
credit unions do not comply with the disclosure provisions, and that
the Federal Trade Commission (FTC), not the NCUA or the Federal Deposit
Insurance Corporation (FDIC), is in the best position to enforce these
provisions. For the reasons stated in your report, we concur with this
conclusion.
The report recommends that Congress provide appropriations to the FTC
and consider amending §43 to make it easier for the FTC to carry out
its enforcement obligations The report includes an amendment providing
the FTC with explicit authority to consult with the FDIC and NCUA when
determining the manner and content of disclosures. In concept, the NCUA
supports such an amendment.
Finally, the report indicates that FTC staff believe that the FTC may
not be able to take action against credit unions under the current
enforcement provision of §43 because it says "[c]ompliance ... shall be
enforced under the FTC Act." 12 U.S.C. §1831t(g). The report
characterizes the FTC position as follows:
The FTC Act, however, limits the [FTC's] jurisdiction in ways that are
inconsistent with FTC's responsibilities under section 43. For example,
FTC and federal courts have interpreted the FTC Act to mean that the
[FTC] has no jurisdiction over non-profit entities, a group that
includes credit unions.
Your report concludes that, even if no FTC Act jurisdiction exists, §43
clearly applies to state-chartered credit unions and, as a matter of
statutory construction,
any limits on jurisdiction over credit unions in the FTC Act would be
superceded by the intent of §43. We agree with the logic of your
statutory construction argument, but also believe that the FTC does
have FTC Act jurisdiction over state-chartered credit unions and that
the statutory construction argument is secondary.
The FTC's jurisdiction under the FTC Act extends to "persons,
partnerships, or corporations, except banks, savings and loan(s),...
and Federal credit unions . . . ." 15 U.S.C. §45(a)(2). The FTC Act
defines corporations to include "any ... association, incorporated or
unincorporated, . . . which is organized to carry on business for its
own profit or that of its members." 15 U.S.C. §44 (emphasis added).
While credit unions are organized as nonprofit associations, the
purpose of a credit union is to bring financial benefits to its
members. The federal courts have recognized the distinction between an
entities' organization and its purpose in upholding FTC Act
jurisdiction over associations organized as nonprofits but providing
financial benefits to members. See, e.g., California Dental Association
v. FTC, 128 F.3d 720, 725 (9Th Cir. 1997), rev'd in part on other
grounds, 526-U.S. 756 (1999). Notably, the FTC has previously asserted
jurisdiction over state-chartered credit unions while citing the FTC
Act as authority. See, e.g., In the Matter of Wright-Patt Credit Union,
106 F.T.C. 354 (1985), and In the Matter of Hospital and Health
Services Credit Union, 104 F.T.C. 589 (1984).
Thank you again for the opportunity to comment on the proposed report.
If you have any questions or need further information, please contact
me at (703) 518-6321.
Sincerely,
J. Leonard Skiles Executive Director:
Signed by J. Leonard Skiles:
OGC/PMP:bhs:
[End of section]
Appendix IV: Comments from the Federal Trade Commission:
UNITED STATES OF AMERICA FEDERAL TRADE COMMISSION WASHINGTON, D.C.
20580:
August 18, 2003:
Mr. Richard J. Hillman Director, Financial Markets and Community
Investment Issues US General Accounting Office 441 G Street NW:
Washington, DC 20548:
Dear Mr. Hillman:
Thank you for the opportunity to comment on your draft report titled
Federal Deposit Insurance Act: FTC Best Among Candidates to Enforce
Consumer Protection Provisions (GAO-03-971)("GAO Report" or "Report").
The following comments note our most pressing objections and comments.
The GAO Report concludes that if Congress made some technical changes
to Section 43 of the Federal Deposit Insurance Act ("FDIA"), 12 U.S.C.
§ 1831t, and lifted the appropriations ban, there is no reason why the
FTC could not enforce it.
We respectfully disagree with the GAO Report's conclusions and
recommendations for the following reasons:
(A) The solution that the GAO Report offers does not meet the
objectives of the underlying statute and conflicts with the GAO
Report's own analyses;
(B) The GAO Report significantly overestimates the ability of the FTC
to effectively administer and enforce the requirements of Section 43;
(C) The GAO Report significantly overstates the disadvantages and
ignores the advantages of NCUA administration and enforcement of
Section 43 as to credit unions, particularly regarding disclosures;
(D) The GAO Report does not assess whether there would be any negative
impact on consumers if the disclosure provisions are not enforced and
does not assess whether a simple lifting of the appropriations ban
requiring immediate compliance with Section 43 would require the shut
down of many state or privately insured credit unions; and:
(E) The GAO Report does not consider some possible alternative
assignments of responsibility for enforcing Section 43.
The remainder of this letter elaborates on these points. Please be
advised that these are only our major concerns; because of the short
time we have had to respond to your request for comments, there are
others that we may have not addressed at this time.
SUMMARY:
In 2002, the Conference Report regarding the FTC's appropriations
[NOTE 1] expressed concern that "the consumer protection intent of"
Section 151 of the Federal Deposit Insurance Corporation Improvement
Act ("FDICIA"), may be going largely unenforced, and recognized that
"the FTC may not be the appropriate Federal agency" to enforce that
section. The Conferees directed GAO to study the enforcement of
Section 151, to determine the risk to consumers if not enforced, and
to make recommendations concerning which federal agency could most
effectively enforce the provision.
Section 151 - which became Section 43 of the FDIA as amended - provides
the following:
(a) annual audits of private deposit insurers, including assurances of
sufficient reserves for losses;
(b) a one-time business plan for private insurers, addressing
viability, underwriting standards, resources, and risk management;
(c) disclosures by non-federally insured depository institutions to
customers and potential customers, in a variety of circumstances, that
the deposits in the institution are not federally insured, sufficient
to ensure that the customers understand the risks of forgoing federal
insurance; together with a prohibition on accepting deposits from a
customer that has not signed an acknowledgment of receipt of the
disclosure. The non-federally insured depository institutions are also
required to make ongoing disclosures;
(d) a ban on the institution's use of the instrumentalities of
interstate commerce (e.g., mails, telephone, and Internet) for
facilitating the receipt of deposits, unless the state regulator of the
institution has certified that the institution meets all eligibility
requirements for federal insurance (the "shut-down" requirement); and:
(e) In addition, the section applies not only to depository
institutions such as deposit-taking banks, savings associations, and
credit unions, but also to entities in the business of receiving
deposits that customers could reasonably mistake for a depository
institution (the "look-alike" provision).
Contrary to the GAO Report's conclusion, the FTC is not able to
implement and enforce these provisions.
A. GAO's proposed solution will not meet the objectives of the statute.
Three principal objectives of Section 43 described above are to provide
some federal oversight to determine: (1) whether deposits in state-
regulated depository institutions are safe; (2) whether those state-
regulated institutions and the state-regulated insurers of those
institutions are financially sound; and (3) whether customers of those
institutions are fully informed about their lack of federally-backed
deposit insurance.
The GAO Report's recommendations would not achieve these results. The
Report's proposals would assign responsibility for implementing and
enforcing all these provisions, including creating exceptions to
certain requirements, to the FTC, an agency lacking the experience,
expertise, regulatory role, and resources needed to address the issues
posed by Section 43. The proposal suggests that the FTC compensate for
these obvious deficiencies by calling on the expertise and judgment of
(a) the state regulators (thus providing no effective federal
oversight) or (b) the NCUA and FDIC, despite the GAO Report's finding
that conflicts of interest would fatally taint their discretion in
these areas. However, if NCUA were assigned enforcement of Section 43,
NCUA would presumably specify the required disclosures and exemptions
through public rulemaking, with comment from all affected parties and
subject to judicial review, thus avoiding an intolerable conflict of
interest. The GAO Report reads Section 43 as primarily ministerial and
not requiring any expertise. This reading seriously undercuts the
purpose of Section 43.
B. GAO significantly overestimates the ability of the FTC to administer
and enforce the requirements of the section.
The FTC lacks both expertise and experience in auditing, deposit safety
and reserves, insurance regulation, assessment of financial soundness
of depository institutions or insurers, and shutting down depository
institutions. Moreover, as described below, despite a superficial
similarity to FTC responsibilities in other areas, even some of the
disclosure provisions of Section 43 reach well beyond anything the FTC
is positioned to do, effectively placing the agency in the position of
a bank regulator. Proper implementation of Section 43 by the FTC would
require grafting onto the FTC, a very small agency, an entirely new
deposit safety mission requiring expertise, tools, and resources that
the FTC lacks and for which it has no other need.
The GAO Report's conclusion that the FTC could enforce Section 43 rests
on GAO's reading most FTC obligations under the section so narrowly as
to limit the agency's role to receiving filings. Such an interpretation
provides consumers with virtually none of the protections envisioned by
the statute. It also renders the FTC's role meaningless. Finally, the
modifications to Section 43 that GAO suggests would not resolve any of
the profound handicaps to FTC responsibility for the section, as
discussed further below. As such, the Report does not
present a sound basis to conclude that the FTC could enforce Section
43.
C. The GAO Report significantly overstates the disadvantages and
ignores the advantages of NCUA administration and enforcement of the
section as to credit unions, particularly regarding disclosures.
The GAO Report expresses concern that assigning to NCUA the
responsibility for Section 43, particularly the disclosure
requirements, would create an intolerable conflict of interest. This
conclusion seems contradicted by the existence of other statutes that
assign NCUA the responsibility for enforcing disclosure obligations.
Thus, the Congress has accepted, and the NCUA has managed, similar
responsibilities under similar laws. In addition, Congress could also
prohibit the NCUA from discriminating against non-federally insured
entities and their insurers.
The GAO Report, however, does not discuss the efficiency and
effectiveness of assigning NCUA responsibility for Section 43. NCUA
possesses thorough familiarity with the credit union business and on
NCUA's prior promulgation of several disclosure rules closely
paralleling or addressing issues relevant to the required disclosures
under Section 43.[NOTE 2] These NCUA rules include disclosures
relating to deposit insurance and deposit accounts by non-federally
insured credit unions.
Instead, the GAO Report incorrectly concludes that the federal credit
union insurance fund would be put at risk because customers would be
led to believe their deposits were federally insured simply because the
NCUA required disclosures that the deposits were not so insured. It
is doubtful that customers would know or care what agency required the
disclosure. Moreover, if customers' awareness of federal regulation
created expectations of federal insurance, that would likely occur
regardless of which federal agency was involved. In any event, NCUA
would have the incentive to develop very clear disclosures.
Any concerns that NCUA has about subsidization by federal or federally
insured credit unions could be readily resolved, for example, by
assessing an appropriate fee from non-federally insured credit unions.
D. The GAO Report does not assess the potential impact on consumers if
the disclosure provisions are not enforced.
The GAO Report does not discuss, as requested by the Congress, whether
consumers are already sufficiently aware of the lack of federal
insurance at non-federally insured credit unions. Although the Report
notes several types of disclosures of lack of federal insurance that
are made
currently, the GAO Report fails to mention that NCUA also currently
requires a specific disclosure, in places of business and in
advertising, by federally insured credit unions of the fact that they
do have federal insurance. The GAO Report does not address whether the
absence of such disclosure by a credit union already alerts customers
and potential customers to its lack of federal insurance, or the extent
to which non-federally insured credit unions communicate this
information to their customers by other means.
E. The GAO Report does not consider possible alternative assignments of
responsibility.
While the GAO Report suggests amendments to the section, it does not
address the basic problem that leads to difficulties in assigning
responsibility: that the section reaches several different types of
entities that present different concerns and are generally regulated
differently. Looking separately at the different types of entities and
problems suggests approaches to enforcing the section that may be more
viable than the GAO Report's recommendation that the FTC have sole
responsibility.
The GAO Report does not address whether its concerns about NCUA
conflict of interest or about risk to its insurance funds might be
avoided by assigning responsibility for credit unions to the Federal
Reserve Board, which has no insurance function, has complete
familiarity with depository issues, is accustomed to regulating state-
chartered institutions, and has rulemaking experience concerning
depository institutions generally.
The GAO Report does not consider whether regulation, exemption, or
shut-down of "look-alikes," if deemed necessary, might best be assigned
to the SEC, which currently has jurisdiction over and enforcement
experience with many of the possible candidates for that designation -
such as brokerage houses, mutual funds and the like, and entities such
as the Latin Investment Corporation - that were an original focus of
Congress' concerns.
FURTHER DISCUSSION:
1. THE FTC LACKS EXPERTISE AND EXPERIENCE REQUIRED FOR EFFECTIVE
IMPLEMENTATION AND ENFORCEMENT OF SECTION 43.
A. Insurer audit and business plan requirements call for expertise that
the FTC lacks.
The insurance audit provision requires each private insurer of a
depository institution to provide an audit of the insurer, including a
determination that the insurer's loss reserves are sufficient, to
depository institutions that they insure and to those institutions'
state regulators. This provision allows the depository institution and
its regulator to make sure the institution's deposits are adequately
protected by the private insurance. The business plan requirement, in
Section 43 of FDIA, requires that each private insurer of a depository
institution provide an
initial business plan explaining the viability of the firm and covering
such matters as its underwriting standards, resources, and risk
management.[NOTE 3]:
Without expertise in auditing, depository institution regulation or
risk assessment, or insurance regulation or claim reserves, the FTC is
not equipped to determine even the sufficiency of the audits filed,
much less to review the adequacy of the insurer's assessment of its
viability, underwriting standards, resources and risk management.
The GAO Report suggests that the FTC's only responsibility would be
simply the ministerial one of recording whether an insurer has filed
with the designated recipients something identified as an audit - that
is, an audit without any FTC review of whether it is actually a
sufficient audit that was performed with appropriate accounting methods
and in accordance with the statutory requirements. Simply noting the
receipt of a piece of paper, with no review of the audits' sufficiency
even by spot-checks, provides no incentive to maintain safety and
soundness of institutions or their insurers.
Unlike the FTC, if a depository institution with private insurance or
its state regulator intends to make use of such an audit, each is in a
position to ensure that it receives a legitimate audit from the
insurer. This is because each can control whether the institution
insures with the private insurer, private insurers and state regulators
can also assess the sufficiency of the audit based on their expertise.
Providing the state regulator and depository institution with the
insurer's audit may provide some protection. Nonetheless, inserting the
FTC, an agency with no expertise or role in the regulation of deposits
or deposit insurance, into the process of providing depository
institutions and their regulators with insurer audits, simply to ensure
that a piece of paper is filed --with no agency consideration of
whether the paper meets the statutory requirements --produces no
benefit to consumers and worst of all, may create a false impression
that the FTC is providing consumers with more protection than the
consumers are actually receiving.
The GAO Report also suggests that the FTC could set conditions for
relying on the auditors for the sufficiency of their audits. The FTC
has no expertise or background with which to identify any such
appropriate conditions. Issues of proper accounting practices have been
highly contested over the years and have recently become high
visibility, high priority issues for national policymakers. The Enron
and Worldcom cases have made clear, if nothing else has, that proper
accounting and auditing requires stringent expert oversight. The FTC
cannot provide that oversight.
B. Disclosure requirements call for expertise in depository institution
practice and regulation, and implicate depository policies.
Assigning the enforcement of Section 43 disclosure requirements to the
FTC undoubtedly would insert the FTC in depository institution
regulation and create enforcement problems.
Congress and the public expect regular supervision, inspection, and
examination of depository institutions to ensure that deposits are
safe. Both federal and state depository supervisors have those powers
and procedures; the FTC does not have the examination authority, tools
or resources to audit wide-scale compliance with disclosure provisions.
Enforcing the prohibition on taking a deposit without a signed
acknowledgment would require halting the acceptance of deposits and
returning impermissible deposits to their owners. This can entail
complex involvement with the management of an institution, and may
weaken an institution to the point of failure and shut-down.
Administration of such a provision requires expertise in depository
institution shut down procedures and resources that the FTC does not
possess.
The GAO Report's solution is to authorize the FTC to call on the
expertise of depository institution regulators, though the GAO Report
itself objects to assigning the responsibility directly to those
regulators due to purported conflicts of interest. Because the FTC has
no independent basis for exercising its discretion regarding depository
policy, it would need to rely on the regulators and would thus
incorporate the very conflicts of interest that the GAO Report has
identified.
The GAO Report mistakenly claims as relevant the FTC's role as enforcer
of specific credit and privacy laws as to non-federally insured credit
unions. In fact, these laws deal with credit unions as lender, lessor,
or the like, or as holder of personal information; none has anything to
do with deposit insurance, depository law or practices, or the
depository function of the institution.
C. The FTC cannot effectively enforce the prohibition on using
instrumentalities of interstate commerce (the "shut-down" provision),
which applies to depository institutions not certified by their state
regulators as eligible for federal insurance, nor can it effectively
determine whether to exempt particular institutions.
In short, the statute requires that state chartered depository
institutions not meeting the requirements for federal deposit insurance
cease accepting deposits and be shut down. The FTC has no experience or
expertise in shutting down depository institutions and therefore cannot
do so without causing the very type of disruption and loss that
Section 43 is intended to avoid. Further, the FTC has no access to
funds to avoid disruption and loss when shutting down depository
institutions.
The GAO Report suggests that the FTC would rely on a state
certification that an institution meets federal insurance requirements.
Further, in the absence of certification, the FTC would determine that
the institution could not use the mails, telephone, etc. Moreover,
since this determination would effectively require the institution to
shut its doors, the state would manage the winding down of the
business. In other words, the Report would assign to the FTC a mere
requirement of declaring the institution out of business, leaving all
other aspects of the matter to the state. This would be a pointless
assignment of responsibility to the FTC. In addition, it is unrealistic
to believe that the FTC would not have to take action in particular
cases to enforce the shut down order.
We have been informed that many state-regulated, privately insured
credit unions do not meet all eligibility criteria for federal
insurance under Section 43. The FTC would have authority to exempt such
institutions from the shut-down provision, but without any statutory
criteria or expertise to apply to the determination. Section 43 directs
the FTC to consult with the FDIC on the subject, but the FTC would have
nothing to contribute to the decision. If, as the GAO Report suggests,
the FDIC is fatally tainted by conflict of interest, then the decision
would be tainted as well; if not, the decision would be better assigned
to the FDIC, as the FTC's involvement would likely be meaningless.
The GAO Report would also give the FTC responsibility for determining
the scope of the second prong of the definition of "depository
institution" covered by Section 43: the so-called "look-alikes." This
is a complex and potentially costly task of determining whether any of
the kinds of entities that accept deposits could reasonably be mistaken
for depository institutions (for example, the FTC would have to explore
potential customers' understanding of money market accounts); imposing
and enforcing disclosure requirements; determining whether and on what
basis to exempt any such firms from the shut-down provisions; and
shutting down any that are not exempted.
II. GAO OBJECTIONS TO NCUA ENFORCEMENT AS TO CREDIT UNIONS ARE NOT WELL
FOUNDED.
The NCUA and the FTC are close to the same size ( NCUA-963 FTC's and
FTC -1057 FTC's in 2002) and budget (NCUA $133 million and FTC $157
million). The NCUA's mission is solely to regulate fewer than 10,000
credit unions, while the FTC's mission encompasses both antitrust and
consumer protection enforcement of over 30 statutes for virtually all
U.S. businesses with the exception of banks, common carriers, insurers,
and most non-profits. Given the amount of resources apparently
necessary to regulate a portion of the depository institutions, the FTC
would be unable to meet its other mission requirements if it must
enforce Section 43.
A. Avoiding subsidization.
GAO's concern that NCUA responsibility for Section 43 would require
federal and federally insured credit unions to subsidize oversight of
non-federally insured credit unions could
be resolved, for example, by imposing a fee for the latter credit
unions. Such an approach could also aid in negating any perception of
conflict of interest.
B. Relevant NCUA disclosure experience.
Assigning to the NCUA the responsibility for disclosures by privately
insured or uninsured credit unions would be highly efficient and
effective, both because NCUA is thoroughly familiar with credit union
practices, allowing it to make informed decisions about appropriate
disclosures and exemptions, and because it has already considered many
relevant issues in its previously promulgated disclosure rules:
The NCUA has issued rules defining the content, manner and form of
disclosure, by federally insured credit unions, of the fact that
customer deposits do have federal insurance.
The NCUA has issued rules defining the content, manner and form of
disclosure, by federally insured credit unions seeking to leave the
federal insurance program, of the fact that, if the change is approved,
customers' deposits will not be federally insured or backed by the
federal government.
The NCUA has also issued rules under the Truth-in-Savings Act ("TISA")
that apply to non-federally insured credit unions among others,
prescribing disclosures to current and prospective customers of
important information about their deposit accounts, for the purpose of
aiding customers in comparison shopping. In the course of this
rulemaking, the NCUA learned that defining the terms, scope, and
exemptions from the rules was far more complex and controversial that
it had anticipated, requiring extensive familiarity with credit union
and depository law and practice[NOTE 4]:
C. Misplaced concern about conflict of interest.
The GAO Report views NCUA responsibility for Section 43, especially
disclosure provisions, as creating an intolerable conflict of interest
because NCUA as insurer would be in direct conflict with private
insurers. Given existing NCUA responsibilities, however, no new kinds
of conflicts would be created.
Precisely the same direct competition with a private insurer, and thus
precisely the same purported conflict of interest issue, arises
whenever a state credit union wishes to leave the NCUA insurance
program in favor of private insurance. Nonetheless, Congress has
entrusted NCUA with control over whether and on
what terms a state credit union can make that change. In particular,
NCUA currently regulates and enforces the disclosures that the credit
union must make to its members specifically about forgoing federal
deposit insurance.
In addition, as an organization funded by federal credit unions and
earnings from the federal insurance fund, NCUA arguably has always had
an interest in aiding credit unions with federal charters or insurance,
and in discouraging credit unions with state charters and private
insurance. Nevertheless, Congress entrusted NCUA with disclosures under
TISA by non-federally insured credit unions to their members and
prospective members concerning significant facts about their accounts.
The GAO Report distinguishes TISA, which applies to all credit unions,
from Section 43, which only applies to non-federally insured credit
unions. Because credit unions with federal insurance must also disclose
that fact under separate law, in effect, all credit unions would be
required to disclose whether or not they have federal insurance,
dispelling the distinction.
As with its other disclosure rules, if made responsible for Section 43
disclosures, NCUA would presumably specify the required disclosures and
exemptions through public rulemaking, with comment from all affected
parties and subject to judicial review.
To avoid any concern that NCUA might adopt an excessively burdensome
disclosure requirement, Congress could explicitly prohibit
discriminatory conduct by NCUA. Congress could also authorize state
enforcement of the disclosure requirement, allowing NCUA and the state
credit union regulators to coordinate supervisory oversight, comparable
to coordination with respect to state-chartered, federally insured
credit unions.
In conclusion, we note that Section 43 was passed in 1991 as one small
provision of a massive financial institution reform package. Under
GAO's current analysis, as many as half of the privately insured credit
unions are not in technical compliance with the statutory
requirements. The proposal to simply lift the current congressional bar
on FTC enforcement would be illadvised for many reasons, including
those outlined in this letter.
The Commission appreciates the opportunity to review and comment on
GAO's Report.
By direction of the Commission.
Shira Pavis Minton
Acting Secretary:
Signed by Shira Pavis Minton:
NOTES:
[1] Conference Report to Accompany H.J. Res. 2, H.R. Rep. 108-10 at 776
(Feb. 13, 2003).
[2] See, e.g., 58 Fed. Reg. 50,394 (Sept. 27, 1993)(Regulations
promulgated by NCUA under the Truth in Savings Act).
[3] See GAO Report at 43 n.61.
[4] See, e.g., 58 Fed. Reg. 50,394 (Sept. 27, 1993).
[End of section]
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Richard J. Hillman (202) 512-8678 Debra R. Johnson (202) 512-8678:
Acknowledgments:
In addition to the persons named above, Anne Cangi, Theresa L. Chen,
William Chatlos, Kimberly Mcgatlin, Donald Porteous, Emma Quach,
Barbara Roesmann, and Paul Thompson made key contributions to this
report.
FOOTNOTES
[1] Pub. L. No. 102-242, (1991). Section 43 of FDI Act originally was
designated in FDICIA as section 40 of the FDI Act. See Pub. L. No. 101-
242 § 151(a). Congress subsequently redesignated section 40 as section
43, which is codified at 12 U.S.C. § 1831t (2000). See Housing and
Community Development Act of 1992, Pub. L. No. 102-550 § 1603(b) (2).
The federal deposit insurance funds were established to restore and
maintain depositors' confidence in the banking system by providing a
government guarantee of deposits. This guarantee insures that a
person's money on deposit with an insured institution, within certain
limits, would be safe and helps negate the need for depositors having
to assess the financial condition of their financial institution.
[2] Conference Report to accompany the House Joint Resolution 2, Fiscal
Year 2003 Consolidated Appropriations Resolution, Enforcement of
section 151 of FDICIA.
[3] Credit unions are nonprofit cooperatives that serve their members
by accepting deposits, making loans, and providing various other
financial services. Credit unions refer to deposits as "member shares."
[4] As of December 2002, we identified two companies that provided
private deposit insurance to credit unions in the 50 states and the
District of Columbia--ASI of Ohio and Credit Union Insurance
Corporation (CUIC) of Maryland. We met with officials from CUIC;
however, we found that this insurer was in the process of dissolution,
and therefore, we did not include it in our analysis.
[5] 12 CFR §§ 708b.201-204, 708b.301, and 708b.302 (2003).
[6] Credit unions are nonprofit cooperatives that serve their members
by accepting deposits, making loans, and providing various other
financial services. Generally, primary deposit insurance is mandatory
for all depository institutions and covers members' deposits up to a
specified amount. Excess deposit insurance is optional coverage above
the amount provided by primary deposit insurance. NCUSIF provides
primary deposit insurance up to $100,000 per member; while ASI provides
primary deposit insurance up to $250,000 per account and excess deposit
insurance.
[7] Of these federally insured credit unions, the federal government
chartered about 60 percent, while about 40 percent were chartered by
their respective states.
[8] Through our discussions with state regulators, we identified two
uninsured credit unions, one was located in Idaho and the other was
located in New Hampshire.
[9] Several factors precipitated the closure of RISDIC in 1991. For
example, weaknesses existed in the Rhode Island bank regulator's and
RISDIC's oversight of institutions. Furthermore, some of the
institutions insured by RISDIC engaged in high-risk activities. In
1991, RISDIC depleted its reserves because of the failure of one
institution. As a result, runs occurred at several other institutions
insured by RISDIC; and it was not able to meet its insurance
obligations and was forced to call in a conservator. The Governor of
Rhode Island closed all institutions insured by RISDIC and required
institutions to purchase federal deposit insurance.
[10] See Ohio Rev. Code Ann. Ch. 1761 (2002).
[11] 12 U.S.C. § 1781(b).
[12] See, e.g., 12 U.S.C. § 1786(e); 12 C.F.R. Parts 702 and 703.
[13] 12 U.S.C. § 1831t (b). Section 43 provides an exception from these
requirements. Specifically, FTC may, by regulation or order, make
exceptions for any depository institution that, within the United
States, does not receive initial deposits of less than $100,000 from
individuals who are citizens or residents of the United States, other
than money received in connection with any draft or similar instrument
issued to transmit money. Section 43 also provides an alternative to
the acknowledgement requirement for depositors who were depositors
before June 19, 1994, which allows an institution to send a series of
three notices containing the acknowledgment notice if the institution
has not obtained a written acknowledgment from such depositors.
[14] 12 U.S.C. § 1831t (e). Section 43 provides that FTC, in
consultation with FDIC, may permit an exception to this requirement.
[15] 12 U.S.C. § 1831t (a).
[16] 12 U.S.C. § 1831t(c), (g), (f)(2), and (e)(1), respectively.
[17] 15 U.S.C. § 45 (2000).
[18] Id; see also 15 U.S.C. § 57a(f)(3), a(f)(4).
[19] 15 U.S.C. § 44. This provision is discussed later in this report.
[20] 12 USC § 1786(c), (d).
[21] 12 C.F.R. §§ 708b.201-204, 708b.301, and 708b.302. The FCU Act
requires a membership vote approving conversion from federal to private
deposit insurance.
[22] We reviewed six recent conversions to private deposit insurance
and found that, prior to NCUA's termination of the credit union's
federal deposit insurance, these credit unions had generally complied
with NCUA's notification requirements for conversion.
[23] As noted previously, this requirement is subject to an exception,
which permits an institution to send a series of three notices to those
depositors who were depositors before June 19, 1994, and have not
signed an acknowledgement.
[24] During our site visits in Ohio, we visited 16 credit unions; eight
credit unions had materials that mentioned ASI. Of the 25 pieces of
material we collected at these credit unions, we found that 17 had not
complied with Ohio law.
[25] The Ohio Department of Financial Institutions and the Department
of Insurance dually regulate ASI. See Ohio Rev. Code Ann. Ch. 1761
(2002).
[26] Ohio law also requires ASI to provide copies of written
communication with regulatory significance to Ohio regulators and to
obtain the opinion of an actuary attesting to the adecuacy of loss
reserves established. According to officials from the Ohio Department
of Financial Institutions and the Department of Insurance, ASI has
complied with the requirements and regulators have never needed to take
corrective actions against ASI or not permitted ASI to do business in
Ohio.
[27] 12 U.S.C. § 1831t(e). Section 43 provides that FTC, in
consultation with FDIC, may permit an exception to this requirement.
[28] The language of section 43 indicates that only a single
determination is required. The section requires an institution to shut
down "unless the appropriate supervisor of the State in which the
institution is chartered has determined that the institution meets all
eligibility requirements for Federal deposit insurance…." 12 U.S.C. §
1831t(e)(1).
[29] Since 1990, the number of credit unions converting from federal to
private deposit insurance and private to federal deposit insurance--in
states that permit private deposit insurance--has been comparable.
Since 1990, 26 credit unions, located in those states that permit
private deposit insurance, converted from private to federal deposit
insurance. Generally, credit unions that converted from federal to
private deposit insurance since 1990 are larger than credit unions that
switched from private to federal deposit insurance during the same
period. Specifically, 10 credit unions that converted to private
deposit insurance currently each have deposits between $100 and $500
million. By comparison, 20 credit unions that converted to federal
deposit insurance currently each have total deposits of less than $50
million.
[30] Most (25 of 27) of these conversions occurred since 1997. With
respect to credit unions, private deposit insurance predates federal
deposit insurance. In 1970, Congress created NCUSIF. Since 1994, ASI
has provided insurance for two newly chartered credit unions and for
one credit union that formerly had been uninsured.
[31] The eligibility standards for federal credit union insurance are
set forth in the Federal Credit Union Act, 12 U.S.C. § 1781, and in
NCUA regulations, 12 C.F.R. Part 741.
[32] For example, credit unions in Alabama seeking to purchase private
deposit insurance must meet the state's minimum safety and soundness
standards, including measures of the credit union's total capital and
asset quality.
[33] For example, regulators in Idaho stated that if the credit union
did not meet state requirements for safety and soundness, they would
not approve a credit union's purchase of private deposit insurance.
[34] Generally, ASI implemented this special monitoring plan because it
began to provide insurance to a very large credit union, with over $2
billion in total assets.
[35] As of June 2003, the total shares of these credit unions ranged
from $297.6 million to $2.5 billion. Though the plan targeted only
ASI's five largest credit unions, ASI may increase the number of
monitored credit unions at any time so that it continually reviews at
least 25 percent of its total assets.
[36] Generally, ASI implemented this special monitoring plan due to
larger-than-expected losses at a small credit union in 2002.
[37] For example, the extent of oversight could require conducting
face-to-face interviews with the chair of the supervisory audit
committee, confirming that checks over $1000 have cleared, and
verifying the value of loans, investments, and share accounts with
credit union members in writing or over the telephone.
[38] 12 U.S.C. § 1831t(a).
[39] Since ASI is a mutual, member-owned organization and is not
publicly traded, ASI is not required to make the same public filings
that are required for publicly traded firms.
[40] NCUA operations are entirely supported by fees paid by federal
credit unions and income from the insurance deposit (1 percent of
insured shares) maintained with NCUSIF by all federally insured credit
unions. NCUA may also assess insurance premiums on its insured credit
unions but has not done so in over 10 years.
[41] In its role as a primary share insurer, NCUA is a competitor of
any private company that provides primary share insurance. Accordingly,
NCUA's motivations for taking any action perceived as adverse to a
private share insurer would be subject to question.
[42] We found no evidence to suggest that this is a valid concern. We
are unaware of any private insurer providing deposit insurance for
banks or thrifts, and the bank insurance system operates successfully
with FDIC as the only account insurer.
[43] Because FDIC's concerns mirror those expressed by NCUA, our
discussion refers only to NCUA's position.
[44] NCUA's TISA regulations are contained in 12 C.F.R. Part 707
(2003). NCUA guidance on HMDA compliance is contained in NCUA
publications.
[45] 12 U.S.C. § 1831t(g).
[46] 12 U.S.C. § 1831t(c).
[47] 12 U.S.C. § 1831t(e)(1). The shut-down provision prohibits a
depository institution (other than a bank) that lacks federal deposit
insurance from using the mails or any instrumentality of interstate
commerce to receive or facilitate receiving deposits except (1) as
permitted by FTC after consultation with FDIC or (2) where the
appropriate supervisor for the state in which the institution is
chartered determines that the institution meets all eligibility
requirements for federal deposit insurance.
[48] The definition of "depository institution" contained in the
section includes any entity FTC determines to be engaged in the
business of receiving deposits, which "could reasonably be mistaken for
a depository institution by the entity's current or prospective
customers." 12 U.S.C. § 1831t(f)(2)(B).
[49] The FTC Act specifically excludes federally chartered credit
unions from its provisions. 15 U.S.C. § 45 (2000); See also 15 U.S.C. §
57a(f)(3), (f)(4). There is no specific exclusion for state-chartered
credit unions. However, the FTC Act has been interpreted to preclude
FTC from enforcing the act against certain nonprofit entities. See
Community Blood Bank v. FTC, 405 F.2d 1011, 1022 (8th Cir.1969). The
FTC Act gives the Commission authority over "persons, partnerships, or
corporations." However, the act's definition of "corporation" refers
only to for-profit entities. 15 U.S.C. § 44.
[50] 15 U.S.C. § 46. This provision authorizes FTC to conduct antitrust
investigations even if the investigations are applicable to the
business of insurance. Also, FTC may conduct studies and prepare
reports relating to the business of insurance only upon receiving a
request approved by Congressional committees as specified in the
section.
[51] 15 U.S.C. § 1012(b) (2000). See Humana Inc. v. Mary Forsyth, 525
U.S. 299 (1999) (citing Department of Treasury v. Fabe, 508 U.S. 491
(1993)).
[52] 15 U.S.C. § 1012(b).
[53] 15 U.S.C. §§ 46(g), 58.
[54] 15 U.S.C. § 57a.
[55] 15 U.S.C. § 57a.
[56] FTC's concerns addressed in this report relate to section 43 of
the FDI Act, which we understand to be the subject of the mandate
requiring this report. Section 43 was enacted as section 151(a) of
FDICIA. In addition to its concerns about section 43, FTC referred to
151(b) of FDICIA, which requires that, not later than 240 days after
the date of enactment of FDICIA, any private deposit insurer shall
provide a business plan to each appropriate supervisor of each state in
which deposits are received by any depository institution lacking
federal deposit insurance, the deposits of which are insured by a
private deposit insurer. The plan must contain details relating to the
insurer's financial health, management, and other matters. FTC
maintains that it has no expertise in these areas and that, if FTC were
obligated to enforce section 151 as enacted, the Commission would have
to determine whether ASI complied with this requirement by, among other
things, scrutinizing the contents of the plan.
[57] 12 U.S.C. § 1831t(f)(2)(B).
[58] 12 U.S.C. § 1831t(a)(1).
[59] 12 U.S.C. § 1831t(e)(1)(A) (prohibiting depository institutions
from engaging in interstate commerce unless, in the case of credit
unions, the appropriate state supervisor has certified that the
institution is eligible for federal deposit insurance for credit
unions). Because all federally chartered depository institutions must
have federal deposit insurance, section 43 can only apply to state-
chartered institutions.
[60] Although the repeal or amendment of a statute by implication is
disfavored, where two statutory provisions are irreconcilable and the
latter statute contains an affirmative showing of Congress' intention
to repeal or amend the earlier statute, the latter statute repeals the
irreconcilable provision of the former statute. See St. Martin
Evangelical Lutheran Church v. South Dakota, 451 U.S. 772, 788 (1981)
(citations omitted).
[61] See Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 575 (1982)
("Interpretations of a statute which would produce absurd results are
to be avoided if alternative interpretations consistent with the
legislative purpose are available."). Under the FTC Act, FTC may
conduct administrative proceedings to enter a cease and desist order to
stop unfair methods of competition and unfair or deceptive acts or
practices. 15 U.S.C. § 45. Also, the Commission may institute civil
proceedings for violations of rules regarding unfair or deceptive acts
or practices and for violations of cease and desist orders regarding an
unfair or deceptive act or practice. 15 U.S.C. § 57b.
[62] 15 U.S.C. § 1012(b).
[63] See Department of Treasury v. Fabe, 508 U.S. 491, 501 (1993). It
could be argued that neither section 43 nor a state law covering the
same subject matter would be within the McCarran-Ferguson Act because
neither law relates to "the business of insurance" as the term has been
defined by the courts in determining the scope of state laws under the
McCarran-Ferguson Act. See, e.g Union Labor Life Ins. Co. v. Pireno,
458 U.S. 119 (1982) (in determining whether a practice constitutes the
business of insurance, courts consider whether the practice has the
effect of transferring or spreading a policyholder's risk; whether the
practice is an integral part of the policy relationship between the
insurer and the insured; and whether the practice is limited to
entities within the insurance industry).
[64] Patton v. Triad Guaranty Insurance, 277 F.3d 1294 (11th Cir.)
(2002).
[65] If section 43 were interpreted as not applying specifically to the
business of insurance, the McCarran-Ferguson Act still would not bar
FTC from enforcing the audit requirement. As the language of the
McCarran-Ferguson Act clearly states, a federal law does not violate
the act unless the law invalidates, impairs, or supersedes a state
insurance law. The Supreme Court has held that when a federal law is
applied in aid or enhancement of state regulation, and does not
frustrate any declared state policy or disturb the state's
administrative regime, the McCarran-Ferguson Act does not bar the
federal action. Humana Inc. v. Forsyth, 525 U.S. 299 (1999). At
present, the only fully functioning provider of private deposit
insurance, ASI, is subject to regulation by the State of Ohio. As
discussed earlier, the audit requirements under Ohio law achieve a
purpose similar to that of the audit requirement in section 43.
[66] FTC staff suggested that because FTC's enforcement authorities are
contained in the FTC Act, the Commission's use of those authorities to
enforce the audit requirement might amount to the application of the
FTC Act to private deposit insurance, i.e., ASI. Contrary to FTC's
concern, the McCarran-Ferguson Act does not affect FTC's authority
under section 43. The McCarran-Ferguson Act does not prohibit FTC from
enforcing OGC laws other than the FTC Act if they otherwise satisfy
McCarran-Ferguson requirements. As previously noted, it is unclear
whether activities subject to section 43 constitute "the business of
insurance" as that term has been defined by the courts." Moreover,
FTC's concern is directly contrary to the scheme established in section
43. We note that when Congress enacted section 43 it was fully aware
that states regulated private deposit insurance. See, e.g., 12 U.S.C. §
1831t(a)(2), (e).
[67] 12 U.S.C. § 1831t(c). FTC staff indicated that the Commission's
enforcement responsibilities would warrant additional regulations
concerning other provisions in the section.
[68] 15 U.S.C. § 46(g).
[69] 15 U.S.C. § 57a.
[70] Although FTC officials described use of the special rulemaking
authority as "cumbersome," we note that the Commission relies on that
authority to issue regulations against false advertising. See 15 U.S.C.
§ 52. This section specifies that false advertising is an unfair or
deceptive act or practice; rules covering such activity must be
promulgated under the special rulemaking authority.
[71] See Citizens to Save Spencer County v. Environmental Protection
Agency, 600 F.2d 844 (D.C. Cir. 1979) (agency rulemaking authority may
be implied from general purposes and other substantive provisions of an
act (citation omitted)). In this regard, we note the possibility that
the disclosure rules required by section 43 would be exempt from the
Administrative Procedure Act. A regulation that "merely tracks"
statutory requirements and thus simply explains something the statute
already requires has usually been deemed interpretative and, therefore,
exempt from the Administrative Procedure Act. See National Family
Planning and Reproductive Health Ass., Inc. v. Sullivan, 979 F.2d 227
(D.C. Cir., 1992) (citations omitted). With respect to disclosure rules
under section 43, the section requires FTC to issue regulations or
orders prescribing the manner and content "of disclosure required under
this section" [emphasis supplied]. Section 43 specifically states the
disclosure required under the section and does not specifically require
the disclosure of additional information. 12 U.S.C. § 1831t(b)
(disclosure must state that the institution is not federally insured
and that if the institution fails, the federal government does not
guarantee that depositors will get back their money).
[72] See S. Rep. No. 102-167 at 61 (Oct. 1, 1991) (explaining that the
purpose of the disclosure requirement is to ensure that depositors in
nonfederally insured institutions are aware that their deposits are not
federally insured).
[73] The Fair Packaging and Labeling Act, Pub. L. No. 89-755 (1966), as
amended, is codified at 15 U.S.C. §§ 1451, et. seq. (2000 & 2002
Supp.).
[74] 15 U.S.C. § 52. We note that under both the Fair Packaging and
Labeling Act and the FTC Act, FTC's jurisdiction is not unlimited; many
commodities, other articles or services such as food and drug items or
securities and commodities transactions may not be within FTC's
authority under those acts.
[75] See FTC letter to the Board of Governors of the Federal Reserve
System dated February 7, 2002, summarizing its 2001 enforcement
activities and methods. FTC also has jurisdiction to enforce other laws
that affect depository institutions, such as the Fair Credit Reporting
Act and the Fair Debt Collections Practice Act.
[76] See 16 C.F.R. Part 313 (2003). FTC has an extensive program
guiding financial institutions on their financial privacy disclosure
obligations. See http://www.ftc.gov/privacy/glbact/glb-faq.htm#A.
[77] Section 43 would not prevent the application federal bankruptcy
laws or laws administered by federal agencies.
[78] 12 U.S.C. § 1831t(e)(1).
[79] See Griffin v. Oceanic Contractors, Inc., 458 U.S. at 575,
("Interpretations of a statute which would produce absurd results are
to be avoided if alternative [p. 34-footnote 66] interpretations
consistent with the legislative purpose are available.").
[80] Under federal case law, certificates of deposit and other deposit
instruments or accounts are not considered investment contracts subject
to the federal securities laws if the instruments or accounts are
subject to a regulatory regime that eliminates the risk of loss, such
as deposit insurance. See, e.g., Bair v. Krug, 1987 U.S. Dist. LEXIS
15904 (D. Nev. Apr. 27, 1987) (certificates of deposits found not to be
securities where they were issued by an institution in a state that had
a comprehensive regulatory system providin depositors with protection
that "virtually guarantees" repayment to purchasers of such
certificates); see also, Wolf v. Banco Nacional de Mexico (Banamex),
739 F.2d 1458 (9th Cir. 1984), cert. denied, 469 U.S. 1108 (1985)
(certificates of deposit not securities because foreign bank that
issued them was subject to extensive home country regulation, even
though deposits were not insured by the home state)." Look-alike
institutions could be subject to Securities and Exchange Commission
(SEC) jurisdiction where the deposits they offer constitute investment
contracts or another type of security. The lack of compliance with
section 43 would not alone constitute a securities law violation,
however.
[81] S. 543 102d Cong. § 227 (1991) § 227 (137 Cong. Rec. S 16534 (Nov.
13, 1991)).
[82] S. 543 102d Cong. § 227 (1991) § 227 (137 Cong. Rec. S 17478 (Nov.
21, 1991)).
[83] We question FTC's assertion that it lacks auditing expertise.
FTC's operating manual provides that accountants in the Commission's
Bureau of Competition "are available to assist all Commission staff . .
. and that staff should consider obtaining the services of an
accountant in a wide range of situations . . . ."
[84] Conference Report to accompany the House Joint Resolution 2,
Fiscal Year 2003 Consolidated Appropriations Act, Enforcement of
section 151 of FDICIA.
[85] Credit unions are nonprofit cooperatives that serve their members
by accepting deposits, making loans, and providing various other
financial services.
[86] We limited our analysis to those states with privately insured
credit unions--Alabama, California, Idaho, Illinois, Indiana,
Maryland, Nevada, and Ohio.
[87] 12 U.S.C. § 1831t.
[88] As of December 2002, we identified two entities that provide
private deposit of primary share insurance to credit unions in the 50
states and the District of Columbia--ASI and Credit Union Insurance
Corporation. However, Credit Union Insurance Corporation in Maryland
was in the process of dissolution, and therefore we did not include it
in our analysis. During our review, we learned that Massachusetts
Credit Union Share Insurance Corporation only provides excess deposit
insurance, and therefore we did not include it in our analysis.
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