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SHARE STRUCTURE
- Chapter
- SHARE STRUCTURE.................................................................................................... 14. TABLE OF CONTENTS
- Examination Objectives 14.
- Associated Risks 4-
- Overview.............................................................................................................. 14-
- Examination Procedures 14-
- Share Draft Programs 4-
- Operational Flow 14-
- Sound Operation 14-
- Overdrafts 14-
- Verification 14-
- Fees 4-
- Business Share Accounts .l 4-
- Fraud and Forgery 4-
- Internal Control Structure 14-
- Advertising and Disclosures 4-
- Workpapers and References................................................................................. 14-
- APPENDIX 14A - TYPES OF SHARE ACCOUNTS.................................................... 14A-
- APPENDIX 14B - SHARE ACCOUNT RED FLAGS 14B-
Chapter 14
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SHARE STRUCTURE
Examination
0 bjectives
0
Associated
Risks
Overview
Determine whether the credit union has a realistic share product mix and pricing policy Determine whether the share program meets the needs of the members Analyze the share mix to determine whether it provides for adequate earnings Determine whether the share program incorporates adequate internal controls Evaluate the reasonableness of fluctuations in the shares and share mix Determine whether the share program meets all legal requirements
Interest rate risk - improper pricing of products constitutes the
leading cause of interest rate risk;
Liquidity risk - improper pricing and poorly timed duration can
cause liquidity risk; Reputation risk - improper pricing and product mix, and illiquidity can result in reputation risk; Strategic risk - ineffective planning of the share product mix and pricing policies can result in strategic risk;
Credit risk - allowing members to overdraw accounts can result in
credit risk to the organization; Transaction risk - improper transaction processing and controls of share account types and processing failures can cause other risks (e.g., interest rate risk, liquidity risk); and Compliance risk - inadequate or ineffective compliance policies regarding account disclosures for interest rates, yields, or terms can result in loss exposure.
Share accounts are the primary source of funds for credit unions. As such, the share program should conform to the credit union's asset liability management policies. In determining the proper share mix, the credit union must consider the cost of funds, the matching of funds
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SHARE STRUCTURE
Operational Flow With share draft programs, members write drafts and present them to
third parties, who present the drafts received to their own banks. The payee's bank forwards the drafts through bank clearing channels for presentation to the credit union's payable-through bank. The payable- through bank receives the drafts and makes provisional payment subject to payment or dishonor by the credit union. Upon receipt of the drafts, the payable-through bank presents the information on the drafts to the credit union. Normally, the payable through bank converts the information on the share drafts to an electronic medium (magnetic tape) transmits it to the credit union for payment or dishonor (the bank may also transmit the information directly to the credit union's information system process supplier.) The credit union then approves payment and posts the share withdrawals to the members' accounts.
Sound Operation It is the board of directors' responsibility to establish sound operational and internal control procedures to safeguard the integrity of a share draft program. A credit union should obtain a written legal opinion that the program not only conforms with federal law and regulations, but also any state law requirements or other requirements, such as clearing house rules. A credit union may use its own routing and transit number (payable-at method) or the routing and transit number of the payable- through bank (payable-through method.) The board of directors should evaluate the cost and conveniences of the two methods before selecting one.
Overdrafts (^) When a credit union receives a share draft that overdraws a share draft account, it has several options available:
(^0) Return the draft as not paid for lack of sufficient funds.
(^0) Accept the draft pending receipt of payment from the member to cover the overdraft. This is rare and usually involves small overdrafts. Credit unions should establish sufficient internal controls to prevent abuse.
Accept the draft and create an overdraft, and then clear the overdraft by a transfer from another share account or by an advance
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EXAMINER'S GUIDE
Verification
Fees
from a line of credit, special loan plan or other arrangement established with the member.
Credit unions that offer a line of credit for share draft accounts should ensure the member signs agreement and a share draft agreement. The credit union must comply
with any provisions for lines of credit in the NCUA Rules and
Regulations. The share draft agreement may authorize the credit union to transfer the amount of loan advance to the share draft account.
separate agreements: a line of credit
Credit union officials do not normally review the share draft to determine if the member signed the draft presented. Members review the periodic statement for unauthorized drafts. If members find an unauthorized draft, they must notify the credit union.
When a credit union receives notice of an unauthorized draft, the credit union should retrieve the original draft or a copy of the original draft for comparison against the signature card on file at the credit union's office. The board of directors should determine that adequate insurance coverage exists for forged drafts.
Credit unions offering share drafts to their members may charge periodic fees or service charges to their members using share drafts (e.g., for the distribution of interim statements, processing stop payment orders, overdrafts, obtaining copies of paid drafts for a member, and the actual cost of each member's blank share drafts.) The board of directors establishes the fee structures.
Business Share Accounts
For credit unions offering business share accounts, examiners should assess the materiality of these accounts on overall operations. Examiners may need to expand the scope of the examination in this area based on the following:
0 0
Numbers and amounts of the business share accounts; Degree and effectiveness of internal controls surrounding these accounts; and (^0) Increased risk resulting from offering these shares.
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EXAMINER’S GUIDE
segregation of duties to handle share transactions. Effective internal controls also include accounting controls to ensure accurate and timely share transaction posting.
Credit unions should view the internal control structure as a mechanism to prevent fiaud and detect errors, as well as protect the credit union and its employees. Member confidence in the credit union’s safety and soundness could diminish if management or staff
has manipulated members’ shares. The existence of fraud can result in
high or increasing risk and a major area of concern. Credit unions rely on good member relations; however, small credit unions, where members personally know management, often depend heavily on member confidence.
The supervisory committee’s responsibility includes reviewing the adequacy of the internal controls to safeguard members’ share accounts. The supervisory committee should promptly investigate complaints and generate a written report on its findings.
The supervisory committee or internal auditor should document the review of testing the validity of share accounts. The audit steps may include the following:
(^0) Reviewing insiders’ statements of accounts for unusual deposits and withdrawals; Reviewing the check register for unusual withdrawals (i.e., withdrawals of inactive accounts); Reviewing dormant account reports for validity of transactions; and Reviewing canceled checks for unusual payees, unusual dollar amounts, or questionable endorsement signatures.
0
0
0
Some credit unions may transfer undeliverable and returned account statements to a dormant share account status. Unless staff reviews dormant account activity regularly, this practice may present a significant risk for fraud.
Advertising and
Disclosures
A federal credit union must accurately represent the terms and
conditions of its share, share draft and share certificate accounts in all
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SHARE STRUCTURE
written and oral advertising, disclosures, or agreements (see NCUA Rules and Regulations 5707.8.)
Workpapers 0 Workpapers
and -
References -
Review Considerations Share Analysis Share Greater Than $100,
Shares Less Than $
Shares Detail Share Internal Controls 0 References
- Federal Credit Union Act 107(6) Receipt of Funds 117 Dividends 207(k)(2) Insured Account
- Federal Credit Union Bylaws Article I11 Shares of Members Article XII, Section 1, Loans to Members (Organizations) Article XIV, Dividends
Article XVIII, Section 2(b), Organizations of Such Persons
- NCUA Rules and Regulations Retirement Benefits for Employees of Federal Credit Unions Payment on Shares by Public Units and Nonmembers
Designation of Low-Income Status; Receipt of
Secondary Capital Accounts by Low-Income Designated Credit Unions Share, Share Draft and Share Certificate Accounts
701.37(a)(1) Treasury Tax and Loan Accounts 70 1.37(a)(2) Government Depositories and Agents 707.8 Advertising 724 748 Suspicious Activity Report
Trustees and Custodians of Pension Plans
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EXAMINER'S GUIDE
Internal
Accounts
The FCU Bylaws require that federal credit unions deposit all funds
except petty cash or change funds; therefore, credit unions may not establish their own in-house accounts on which they draw drafts.
However, a federal credit union may draw drafts upon itself. Although a federal credit union may not issue cashier's checks, it may issue "treasurerk drafts" to make credit union payments. These drafts equate to a cashier's check, which is a draft drawn by a bank against its assets. The bank acts as both the drawer and the drawee of the instrument. It becomes the bank's primary obligation, and constitutes its written promise to pay on demand. Therefore, while a federal credit union may draw drafts upon itself, assuming proper accounting procedures and an awareness of any liability it may incur by doing so, it may not have its own internal share draft account.
Share
Certificates
A share certificate account earns a dividend at a specified rate (either
fixed or variable) if held to maturity. Credit unions may assess a penalty for the early withdrawal of all or any portion of the principal amount before maturity. Share certificates usually require a minimum balance. Credit unions design this account to attract and retain larger share deposits. Generally, accounts having greater restrictions also have higher dividend rates.
Money Market
Accounts
A money market account, a short-term insured draft account, pays competitive money market rates. The credit union determines terms and conditions according to competition and its own resources.
General characteristics of a credit union money market account include:
0 0 Short-term or no maturities; 0 0
0 Draft access; and 0
Competitive yields (money market rates);
Frequent dividend compounding (e.g., daily); Minimum balances and deposit and withdrawal requirements as determined by the credit union;
Penalties, as determined by the credit union, if the account falls below the minimum balance requirements.
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TYPES OF SHARE ACCOUNTS - APPENDIX 14A
Due to the nature of money market accounts (i.e., short-term, rate-
sensitive), a credit union offering them should have in place an
effective asset-liability management program. To ensure adequate
liquidity, credit unions should have in place a program that relates
these accounts with assets of similar characteristics. (See the Asset-
Liability Management and Liquidity chapters for further information.)
Individual
Retirement
Accounts
Part 724 of the NCUA Rules and Regulations authorizes a federal
credit union to act as trustee or custodian of individual retirement
accounts (IRAs) for its members or organizations of its members. IRAs
act as trusts or custodial accounts, which requires (1) a written
instrument creating the trust, and (2) investment of the funds in share
accounts or share certificate accounts of the federal credit union. The
credit union chooses the design of IRA share and share certificate
accounts, without any maturity or dividend restrictions. The National
Credit Union Share Insurance Fund (NCUSIF) insures these accounts
separately up to a maximum of $100,000.
Credit Union
Employees'
Retirement
Plans
A federal credit union can provide retirement benefits for its
employees and compensated officers. Except for IRA and Keogh
accounts, credit unions have no authority to act as a trustee over any
trust accounts. Therefore, for employees and compensated officers, a
federal credit union can only offer the following types of pension
plans:
0 As the sponsor of an employee pension benefit plan with a named
trustee other than the credit union; and
As the trustee or custodian for IRAs for employees and
compensated officials of the credit union.
0
401 K Plan Part 724 of the NCUA Rules and Regulations provides for
development of pension plans that qualify under 401(d) or 408 of
Internal Revenue Code. As a result, credit unions have begun to offer
services in the deferred compensation field. Most major corporations
offer 40 I K Plans, known as "pay conversion plans," deferred pay
plans, or salary reduction plans to their employees. In some credit
unions, the growth in this program is offset by a reduction of payroll
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TYPES OF SHARE ACCOUNTS - APPENDIX 14A
Expressly authorized the creation of the political subdivision;
Delegates to the political subdivision some functions of
government; and
Allocates funds by statute or ordinance for the exclusive use or
control of the political subdivision.
0
Treasury Tax
and Loan
Accounts
Subject to the U.S. Treasury regulations, a federal credit union may:
0 Serve as a Treasury Tax and Loan (TT&L) depositary; a depositary
of federal taxes, a depositary of public money, and a financial
agent of the U.S. Government;
Deem funds held in a TT&L Remittance Account, a TT&L Note
Account, a Treasury General Account, and a U.S. Treasury Time
Deposit-Open Account ($701.37) as deposits of public funds; and
Exempt funds held in such accounts from the 60-day notice
requirement of Article 111, Section 5(a) of the FCU Bylaws.
0
0
A credit union can hold funds in a TT&L Remittance Account
established for receipt of payments of federal taxes and certain U.S.
obligations. The Federal Reserve Bank (FRB) may withdraw the funds
immediately upon receipt of supporting advices. Funds held in a TT&L
Remittance Account and a TT&L Note Account are added together and
insured to a maximum of $100,000.
A TT&L depositary may credit funds to its note representing payments
for U.S. Savings Bonds issued by the credit union in its issuing agent
capacity and payments for U.S. Savings Bonds subscribed for through
the TT&L accounts, and may enter into such custodial arrangements as
necessary to meet Department of Treasury requirements for collateral
on a TT&L depositary. The examiner should determine that copies
exist of the application and board of directors' resolution authorizing
the credit union to be a TT&L depositary regarding compensation
owed and payments due the Treasury. The statement will include:
0 The number of federal tax deposit forms, which comprise the basis
for the compensation;
The fee factor;
0 The total compensation due; and
0 Interest on late fees due the Treasury.
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EXAMINER’S GUIDE
The district FRE3 or Financial Management Service of the U.S. Treasury can answer specific questions about TT&L accounts.
Depository
and us Agent
Account
A federal credit union may act as a depository or financial agent of the
U.S. Government under the provisions of Title 3 1 ,C.F.R. 202 of the
Department of Treasury Regulations, which permits federal credit
unions acting under this authority to:
(^0) Maintain accounts as specified by the U.S. Treasury in which balances may exceed the insurance coverage provided for in §207(k)(2) of the FCUAct.
Maintain accounts in the name of the U.S. Treasury. Such accounts
may include:
- (^) A Treasury General Account, which may carry a zero balance and from which the depositor may immediately withdraw the entire balance, under all circumstances except the credit union’s closure;
- (^) A U.S. Treasury Time Deposit-Open Account, which is non- dividend bearing and which generally, may not be withdrawn
until the expiration of 14-days after the date of the U.S.
Treasury’s written notice;
(^0) Accept deposits to these accounts for the credit of the U.S. Treasury;
(^0) Furnish drafts in exchange for collections in these accounts; and
Pledge specifically identified assets as collateral to secure public funds under provisions specified in 3 1 C.F.R. 202.6.
Public unit accounts include funds in a Treasury General Account and the U.S. Treasury Time Deposit-Open Account. As such, funds in a Treasury General Account and a U.S. Treasury Time Deposit-Open
Account are added together and insured up to a maximum of $100,
in the aggregate.
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EXAMINER’S GUIDE
restructure these accounts to at least a point of break-even, other services must subsidize this service; and
(^0) Large business accounts can distort the credit union’s trend analysis. Examiners should recognize the effect of major balance shifts in assessing the total analysis process.
Other possible disadvantages include:
Excessive involvement by sponsor organizations in the credit union’s operations; Need for comprehensive cash flow analysis; Cost of special access to services (ie., coin processing, check cashing, etc.); and Inadequate controls regarding compensating balances.
0
0
In general, businesses may request business savings and share-draft accounts (e.g., sole proprietorships, small corporations, and small partnerships.) Credit unions offering business share accounts must implement adequate controls to ensure large business accounts, in either volume or dollar amount, do not pose a safety and soundness concern. Credit unions do this by requiring written policies and procedures, and establishing adequate internal controls and oversight.
Policies and procedures must specify the various business-related share accounts and the credit union’s objective in offering these accounts. Examiners should encourage management to establish objectives that include quantifiable financial goals consistent with the credit union’s capital goals and long-term business plan.
The policy must ensure employees adequately document membership eligibility. Credit unions should identify and monitor business accounts separately from other share accounts. Internal controls should include data processing controls for pledged shares or compensating balances, if applicable.
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SHARE ACCOUNT RED FLAGS - APPENDIX 14B
Red Flags Examiners should remain aware of the following red flags (not an all-
inclusive list) when reviewing share accounts.
Failure to set restrictions on employees processing transactions on their own accounts, the accounts of their family members, and those of their relatives;
Failure to set computer access controls on authority levels to post
transactions; Failure to require passwords or a teller ID number for each staff person to identify accountability; Employees’ failure to produce records or to delay access to records; Long-standing problem of records not posted currently or being out-of-balance; Employee salaries and fringe benefits substantially below those of other credit unions providing equivalent services. Employees may reason the board is shortchanging them and may attempt forgery to overcome their perception of being under-compensated; Employees who live beyond their standard of living on their visible income, often indicated by luxury cars, expensive hobbies, gambling, or heavy drinking; Employees who resist taking vacations or resist attempts for someone else to perform their work during vacation; Employees who resist giving up control of certain records to another employee when promoted to a new position (e.g., performing the bank reconcilement); Failure to review negative Share and Share Draft Reports; Failure to review Dormant Share Reports;
Cost of funds exceeds dividend rates;
Credit union share growth not commensurate with above market dividend rates paid; Print command coded to suppress printing of statement of accounts; Numerous statement of accounts delivered to the same P.O. Box; Member complaints on accuracy of their statement of accounts; Failure to mail statement of accounts;
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