Federally insured credit unions must operate in a manner than demonstrates to the public the separate corporate existence of the credit union and the CUSO. A CUSO will have its own board of directors and management that operates separately from the credit union’s board and management. However, members of the credit union board and management team could also serve on the board of directors of a CUSO or in a dual employee capacity; this is particularly true for CUSOs that are wholly owned by a credit union. It is imperative that CUSOs are structured and operate in a way that demonstrates that the CUSO and owner credit union(s) are separate and distinct businesses: a “corporate veil” must exist.
Formal boards of directors are found in corporations and limited liability companies, the predominant organizational structures for CUSOs. In a limited partnership CUSO structure, the general partner may be an individual, another partnership, or a corporate entity, and thus could be managed by one or more individuals or a formal board.
NCUA regulation § 712.4, What must a FICU and a CUSO do to maintain separate corporate identities? requires a federally insured credit union to take reasonable steps to ensure it, and any CUSO with which it is affiliated, is operating in manner consistent with their respective separate corporate status and applicable laws. Failure to achieve this separation exposes a credit union to a legal risk referred to as “piercing the corporate veil,” a situation in which courts put aside limited liability and hold a corporation’s shareholders or directors liable for the corporation's actions or debts.
To mitigate this risk exposure, federally insured credit unions must ensure that any affiliated CUSO maintains a separate identity per § 712.4(a) by:
- Segregating the business transactions, accounts, and records of the credit union and CUSO. CUSOs that accept investments and loans from federally insured credit unions must maintain books and records in accordance with § 712.3(d)(2)
- Establishing and observing separate formal operating procedures
- Ensuring each entity is adequately financed as a separate unit, based on normal obligations of a business of its size and character
- Holding out each entity to the public as a separate enterprise
- Not treating the CUSO as a department of the credit union
- Ensuring all borrowings by the CUSO indicate that the credit union is not liable, unless the credit union has explicitly guaranteed the loan(s)
Federally insured credit unions with an investment in or loan to a CUSO must obtain an attorney’s written opinion per NCUA regulation § 712.4(b), Written legal advice. The opinion must state the partnership agreement or CUSO’s structure as a separate legal entity limits the credit union’s potential exposure to no more than the loss of funds invested in and/or loaned to the CUSO. This opinion should be updated periodically as the CUSO grows and operational conditions change to ensure the credit union’s exposure remains limited to the funds invested in and/or loaned to the CUSO.
For reporting purposes, GAAP determines how credit unions will account for the investment in or loan to the CUSO.
Additionally, a credit union’s ownership in a CUSO will determine how the CUSO data should be reported on the Call Report. For example, federally insured credit unions that wholly own or own a “controlling financial interest” (assumed at 50 percent or more of the voting stock) in a CUSO should consolidate the CUSO’s books and records for reporting of assets, liabilities, equity, income, and expenses on the Call Report. For more information, see Schedule C of the Call Report Form and Instructions.
Last updated August 9, 2018
