Know Your Safekeeper: The Importance of Protecting Your Investments
September 14, 2011
September 15, 2011
In April 2004, the National Credit Union Administration (NCUA) sent a letter to credit unions on “Investment Safekeeping Due Diligence,” Letter No: 04-CU-04. In it, the NCUA states that “…credit unions are encouraged to carefully review their safekeeping practices to ensure that they provide adequate protection against fraudulent investment schemes and potential losses.”
This letter was prompted by a few smaller firms selling certificates of deposit (CDs) that were misrepresented as being insured CDs. While credit unions did manage to recover a good portion of their funds held by these firms, there were still significant losses, and the funds that were recovered were the result of a very lengthy and time-consuming process.
Given that, we wanted to remind credit unions that investments play a vital role in their balance sheet, and that a regular review can go a long way in preventing possible losses.
As per NCUA Regulations, Investment and Deposit Activities, Part 703.9 Safekeeping of Investments, the letter reminds credit unions:
- that safekeepers must be regulated by the Securities and Exchange Commission (SEC), a regulatory agency such as the Federal Deposit Insurance Corporation (FDIC), or a state trust company regulatory agency;
- to regularly assess the reputation of your safekeeper. This would include recent publicity about the safekeeper and ensuring that there is a means to contact the safekeeper to professionally address any questions or issues that you might have with them;
- to document the capital strength of the safekeeper. This would include obtaining recent financial statements from the safekeeper that would show historical financials to possibly indicate a trend in the financial health of the safekeeper. As an example, the SEC requires every registered broker-dealer to send its clients an audited balance sheet. Financial information along these lines is also available online through a number of sources, including www.sec.gov and www.fdic.gov, or the company’s website under Investor Relations;
- that there should be a written custodial agreement with the safekeeper. This should be an institutional agreement, which would include a signature block for signing on behalf of the credit union. In the agreement, the safekeeper spells out that they will exercise at least “ordinary care” in the safekeeping of those investments;
- to conduct a regular review of safekeeping statements to reconcile them with the credit union’s records. Many safekeepers have online access that will allow their clients 24-hour access to any number of reports. This would include monthly statements, purchase and sale confirmations, recent and historical activity, and so forth.
Finally, if your safekeeper is regulated by the Financial Industry Regulatory Authority (FINRA), we would also suggest that you visit the FINRA website. This will allow you to research the professional backgrounds of FINRA-registered brokers and brokerage firms.
This entire review should be updated periodically and is well worth the small amount of time you invest (no pun intended). Your safekeeper should be able to assist you in obtaining any of this information. As Alan Lakein, the well-known time-management author once said, “Planning is bringing the future to the present so you can do something about it now.”
In addition to establishing credit lines for liquidity purposes, customized reporting, assistance with policies and so forth, The Credit Union Advisory Group at UBS provides all the elements of the safekeeping review that the NCUA recommends, at no cost to the credit union.
If you have any questions regarding the above information, please contact Gary Tantleff, Managing Director – Credit Union Advisory Group at UBS, at 1-877-269-1776 or firstname.lastname@example.org, as well as your regulatory and accounting advisors.
Neither UBS Financial Services Inc. nor its employees provide legal or tax advice. Information contained herein was obtained from sources believed to be reliable but accuracy cannot be guaranteed.
Questions? Contact Matt Halvorson, Anthem Editor: email@example.com.