Opinion sets bounds for how share insurance applies

(May 14, 2021) Whether share insurance applies to a credit union share certificate purchased by a limited liability corporation (LLC) depends in part on who owns the funds and whether the LLC is engaged in an “independent activity” other than one solely related to increasing share insurance coverage, NCUA wrote in an April 23 legal opinion letter, but only made public this week.

The letter, addressing “Proposed Capital Markets Funding Program for Credit Unions” and signed by NCUA General Counsel Frank Kressman, summarizes a scenario in which several LLCs purchase share certificates worth a maximum of $250,000, the “standard maximum share insurance amount” (SMSIA) permitted by NCUA’s share insurance regulations, at federally insured credit unions (FICUs) where they are members or are eligible to be members. The letter states that each LLC would be the actual owner of the share certificates they purchase and would not be holding them in any sort of agent, nominee, or custodian capacity.

The NCUA general counsel wrote that share insurance coverage is provided “only to the actual owner of the funds in an account and requires the true owner of the funds to either be a member of the FICU or otherwise eligible to maintain an insured account at the FICU.”

Additionally, he wrote that the accounts held by a corporation, partnership, or unincorporated association “engaged in any activity other than one directed solely at increasing insurance coverage (that is, an ‘independent activity’) will be insured up to the SMSIA in the aggregate.”

Emphasizing the requirement for ownership of funds, the letter adds that share insurance coverage “is always dependent upon compliance with all applicable requirements of Part 745, including the recordkeeping requirements in § 745.2(c)” of the agency’s rules.

The opinion was sent to Stuart Morrissy of Hogan Lovells US LLP in Washington, D.C.

NCUA legal opinion – Proposed Capital Markets Funding Program for Credit Unions