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Pay to Play

Posted by Michael Fryzel on May 22, 2013

 
 

Pay to play is an interesting phrase. I first saw it used to describe how certain elected officials in Illinois ran their administrations. If you wanted to play the political game and get lucrative government contracts for your business, you first
had to pay by making campaign contributions to those with the power to award the contracts.

This is certainly no way to run an administration or protect the public interest. It is highly unethical if not downright illegal for public officials to take something of value with the promise to award a contract or take some other action.

So needless to say, when the NCUA Board recently proposed limited derivatives authority and asked how the program should be paid for, I was surprised to hear some groups use the words pay to play to describe portions of that proposal.
That’s not what the Board put out for comment.

Derivatives are complicated financial tools that the credit union trades along with some credit unions have said are needed to mitigate interest rate risk.

It took a long time for NCUA to propose a rule. As we know from the recent financial crisis, derivatives can be dangerous. They are not for every financial institution.

These sophisticated financial instruments require knowledgeable people to understand how derivatives operate. They also require a regulator to have experts in the field to monitor and examine those institutions that are capable of
investing in derivatives in order to protect the insurance fund from losses. And that type of expert regulation and examination can be expensive.

So along with the rule, NCUA provided documentation that estimated the cost of maintaining a derivatives regulatory program. The estimates were based on:

• How many credit unions would participate;
• The cost of reviewing the applications of those that applied;
• The ongoing cost of all examination staff; and
• All other related expenses.

And, as I have said, it is an expensive proposition to implement a derivatives regulation. The numbers to start and maintain the program are in the millions of dollars. So the question then becomes for the trade associations and credit unions
that want derivatives authority, how do you want to pay for this?

There are many ways to finance a derivatives regulatory program. This is why the NCUA Board has asked for comments and suggestions.

A few possibilities are as follows:

• Through normal assessments;
• Nonrefundable application fees;
• Annual license fees;
• Higher supervision fees;
• Stipends from CUNA and NAFCU (we need to think outside the box); or
• Donations from the public and NCUA Board Members.

The list can go on and on and can become as unique and silly as you want. But as part of the comment process we are looking for honest, practical, efficient, and fair and equitable ways to fund the program.

Should all credit unions pay because it mitigates risk and potentially large losses to the insurance fund? Or should only those credit unions big enough to execute derivatives be the ones to foot the bill?

All for one, one for all? Even steven? What’s yours is mine? User fees? Or pay to play?

As Marv Albert would say, the ball is in your court.

 
 

Michael Fryzel
Michael E. Fryzel is an Attorney and Financial Services Consultant with offices in Chicago, Illinois. He can be reached at meflaw@aol.com. Utilizing his extensive experience as a proven state and federal regulator of financial service industries along with his knowledge of the laws ...

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