Four Crucial Lessons…Kind Of
I have many important lessons to impart to you this morning:
Most importantly, if you live in the Northeast, never ever move the snow blower to the back of the garage before May even if it has been such a freakishly warm winter that golf courses are already open.
Second, always record any sporting event that starts after nine PM on the off-chance that you will sleep through one of the greatest endings in college basketball history.
Third, you should all take the time to read a legal opinion letter on the custodial powers of federal credit unions recently issued by the NCUA.
In response to an inquiry from Paul T. Clark of the Seward & Kissel Law Firm, NCUA’s General Counsel said that a federal credit union is authorized, at a member’s direction, to place funds, which initially have been deposited into the FCU, into an FDIC account and to serve as custodian for that account, provided that several conditions are met. It is an important clarification of the flexibility FCUs have to serve members without crossing the line between acting as custodians of funds to becoming trustees and broker dealers.
Why is this flexibility important? Unfortunately, the letter does not explain what the firm was seeking to do with this authority, but I can think of situations where a credit union and its member may want the flexibility to move funds into a FDIC account without leaving the credit union. For example, as explained in a legal opinion letter from 2009, the CDARS service enables a bank to accept large deposits from its customers and, on behalf of the customer, spread the deposits in excess of FDIC insurance limits to other FDIC-insured banks, so the funds are fully insured. In its 2009 letter, NCUA authorized the participation of credit unions in this program but that opinion dealt specifically with credit unions authorized to accept public funds. (https://www.ncua.gov/Legal/OpinionLetters/OL2009-1022.pdf#search=cdars). NCUA’s most recent letter makes it clear that federal credit unions are authorized to place funds in FDIC accounts while still being the custodian of a member’s accounts. This letter also makes it easier for credit unions to place a portion of a member’s money into a trust.
But be careful when using this letter. The General Counsel stresses that credit unions “generally” don’t have trust powers or broker dealer authority. Why is this distinction important? Because, as explained by Blacks’ Law Dictionary, a trustee must “protect and preserve the trust property, and to ensure that it is employed solely for the beneficiary, in accordance with the directions contained in the trust instrument.” In contrast, a custodian is simply responsible for holding funds, making sure they are available and making sure that only authorized persons have access to them.
Which leads us to my fourth important lesson of the day. I have a sneaking suspicion that there are many credit unions that confuse custodial and trust powers. My simple rule of thumb is that if you find yourself reading a trust document to understand the credit union’s responsibilities, you are probably doing more than you can or should. All you need to do is properly label the account and make sure that only authorized trustees can access it. It is the trustee’s job to make sure the account is properly administered.
Here is where you can access the letter: