Final IRPS 08-1_8/19/2008

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licensees. See Alyeska Pipeline Serv. Co.
v. Wilderness Soc‘y, 421 U.S. 240, 257
(U.S. 1975) (absent statute or
enforceable contract, litigants pay their
own attorneys’ fees). As section 115
does not contain an explicit provision
for attorney‘s fees, the CRJs are unable
to provide for awards of attorney‘s fees
in actions to collect past due royalties.
The CRJs do not have the authority to
issue rules setting forth the scope of
activities covered by the license.
However, the CRJs certainly have the
authority to set rates for different types
of DPDs. In so doing, they may have to
make determinations to identify
particular types of DPDs. Such
determinations may implicate the
question of what activity falls within the
scope of the license. In instances where
particular rates are being requested for
the creation of particular types of DPDs
and there is some question whether
these DPDs fall within the scope of the
license, those questions must be
resolved in the proceeding. When such
a question has not been determined
before, it is a novel question of law
which should be referred to the Register
under section 802(f)(1)(B). In any event,
any such determination by the CRJs will
be subject to review for legal error by
the Register under section 802(f)(1)(D).
NMPA has proposed that the CRJs
determine that the license fee is to be
calculated on the date of distribution,
not the date of manufacture. The CRJs’
authority to set rates and terms does
appear to be sufficiently broad to
include the authority to determine the
date on which the mechanical license
fee is to be calculated. However, we
caution that the legislative history of
section 115 suggests that the applicable
rate should be the date the phonorecord
is made. When the House Judiciary
Committee considered the language that
was to become section 115 of the 1976
Copyright Act in 1966 and 1967, it
stated that ‘‘the committee believes that,
unless a negotiated agreement provides
otherwise, the liability for royalties
should be fixed at the time
phonorecords are made under a
compulsory license.’’ Second
Supplementary Register‘s Report on the
General Revision of the U.S. Copyright
Law (1975) at 251. Moreover, it would
most likely be beyond the power of the
CRJs to provide that with respect to
phonorecords that have already (i.e.,
prior to the effective date of the current
rate determination) been manufactured,
the royalty fee is to be calculated as of
the date of distribution rather than the
date of manufacture. Such retroactive
rulemaking is in most cases beyond the
power of an agency. See Bowen v.

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Georgetown University Hospital, 488 U.
S. 204 (1988).
Finally, the CRJs request clarity
regarding their authority over terms of
late payments. Under section 803(c)(7),
the CRJs have a clear authority to
include terms with respect to late
payments. However, the Register notes
that this authority applies solely to
payments that are in fact past due.
August 8, 2008
David O. Carson
Acting Register of Copyrights
[FR Doc. E8–19198 Filed 8–18–08; 8:45 am]
BILLING CODE 1410–30–S

NATIONAL CREDIT UNION
ADMINISTRATION
Guidance Regarding Prohibitions
Imposed by Section 205(d) of the
Federal Credit Union Act
National Credit Union
Administration (NCUA).

AGENCY:

Final Interpretive Ruling and
Policy Statement 08–1.

ACTION:

The NCUA is issuing an
Interpretive Ruling and Policy
Statement (IRPS) regarding prohibitions
imposed by Section 205(d) of the
Federal Credit Union Act (FCU Act) (12
U.S.C. 1785(d)(1)). Section 205(d) of the
FCU Act prohibits a person who has
been convicted of any criminal offense
involving dishonesty or breach of trust,
or who has entered into a pretrial
diversion or similar program in
connection with a prosecution for such
offense, from participating in the affairs
of an insured credit union except with
the prior written consent of the NCUA
Board. This IRPS provides direction and
guidance to federally-insured credit
unions and those persons who may be
affected by Section 205(d) because of a
prior criminal conviction or pretrial
diversion program participation by
describing the actions that are
prohibited under the statute and
establishing the procedures for applying
for NCUA Board consent on a case-bycase basis.

SUMMARY:

This IRPS is effective September
18, 2008.

DATES:

Jon
Canerday, Trial Attorney, Office of
General Counsel, at the National Credit
Union Administration, 1775 Duke
Street, Alexandria, Virginia 22314–
3428, by e-mail at [email protected]
or by telephone at (703) 518–6548.

FOR FURTHER INFORMATION CONTACT:

SUPPLEMENTARY INFORMATION:

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A. Background
In April 2008, the NCUA Board
published a proposed IRPS regarding
the prohibition imposed by Section
205(d) of the FCU Act. 73 FR 18576
(April 4, 2008). Section 205(d) of the
FCU Act prohibits, without the prior
written consent of the NCUA Board, a
person convicted of any criminal
offense involving dishonesty or breach
of trust, or who has entered into a
pretrial diversion or similar program in
connection with a prosecution for such
offense, from becoming or continuing as
an institution-affiliated party, or
otherwise participating, directly or
indirectly, in the conduct of the affairs
of an insured credit union. The
comment period closed on June 3, 2008.
NCUA received seven comments on the
proposal. After consideration of the
comments, NCUA is finalizing the IRPS,
which generally adopts the guidance as
proposed.
B. Public Comments
NCUA welcomed general comments
on the proposed IRPS. In addition, the
Board specifically sought comments as
to whether the format of this guidance
as an IRPS was appropriate or whether
a regulation would be more suitable.
The Board invited comments as to
whether a specific form, similar to the
form required by the FDIC in connection
with a similar statute, should be used to
request consent pursuant to Section
205(d).
NCUA received seven comment
letters in response to the proposed IRPS:
two from federal credit unions, two
from national credit union trade
organizations, and three from credit
union leagues. The commenters
generally supported the need for the
guidance as contained in the proposed
IRPS and offered several suggestions
intended to assist the Board in
improving the proposed IRPS.
Two commenters believed that a
regulation was the more appropriate
format for the guidance. One of the
commenters who favored a regulation
thought a regulation provided greater
protection to a credit union that might
be challenged by a prospective
employee. Another commenter believed
a regulation was preferable because it
would help reinforce a credit union’s
right to appeal an adverse decision and
subject future changes to public notice
and comment. A third commenter
suggested the guidance should take the
form of a Letter to Credit Unions,
believing that format was more familiar
to credit union officials.
The Board appreciates the need to
provide protection for credit unions that

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seek to comply with the requirements of
the IRPS. However, the Board concludes
that the source of the requirement stems
from federal statute, namely Section
205(d). Thus, the Board believes that the
need to comply with federal law, as
augmented by guidance in the form of
an IRPS, should be sufficient to protect
a credit union. The Board believes that
credit union officials should be able to
adequately understand and apply the
guidance styled as an IRPS and that the
right to request a hearing contained in
the IRPS provide a credit union a
sufficient right to appeal a denial of
consent by the Board. Additionally, the
Board does not amend its IRPS without
providing the public notice and an
opportunity to comment. For all of these
reasons, the Board believes it
appropriate to issue the final guidance
in the form of an IRPS.
Four commenters believed that a form
should be required in order to request
consent. As one commenter observed,
the use of a form ‘‘is necessary to ensure
uniformity and consistency throughout
the consent process.’’ The commenters
favoring a form suggested that the form
required by the FDIC was a reasonable
template that could be modified to fit
the needs of credit unions. The Board
concurs with the commenters and
therefore the final IRPS contains a
requirement that applications for
consent under Section 205(d) must be
presented on the form attached to this
IRPS.
A majority of the commenters sought
additional guidance from NCUA as to
who comes within the prohibition of
Section 205(d). In particular,
commenters were concerned as to
whether independent contractors of a
credit union would come within the
ambit of Section 205(d), thus requiring
credit unions to make inquiry as to the
past criminal history of such
contractors.
Several commenters also expressed
concern over the use of the term ‘‘de
facto employee’’, believing it is
confusing and has never been defined
by NCUA. Another commenter believed
use of the concept exceeded the statute
and thus was an improper expansion of
the scope of the prohibition imposed by
Section 205(d). Still another commenter
expressed the view that such expansive
definitions could require credit unions
‘‘to perform background checks on any
party with whom it has commercial
dealings. * * *’’ This commenter also
believed that Section 19 of the Federal
Deposit Insurance Act was clearer and
less subjective than the definition in the
proposed IRPS. Further, another
commenter believed the definition of
independent contractor was

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inconsistent with the FCU Act because
the definition cited to Section 206(r),
which contains the term ‘‘violation of
any law or regulation.’’
The Board recognizes that the
language of Section 205(d) creates
uncertainty as to whom the section
applies. The terms ‘‘institution-affiliated
party’’, and ‘‘otherwise participate,
directly or indirectly, in the conduct of
the affairs of any insured credit union’’
are terms dictated by Congress in the
statute.1 Those are terms that are used
and defined in various other sections of
the FCU Act, as well as in statutes
applied by the other federal financial
institution regulatory agencies. As a
result, a body of case law has developed
that further defines these terms. These
definitions are fact dependent, making it
difficult to provide easily understood,
universal definitions. Neither the OTS
nor the FDIC thought it advisable to
define similar terms, and the Board is
likewise reluctant to attempt to do so.
The Board recognizes that one
common concern expressed by
commenters was to what extent Section
205(d) applied to independent
contractors, and thus required inquiry of
such contractors by credit unions. The
Board wishes to make clear that not all
contractors are subject to the prohibition
contained in Section 205(d). The crucial
test is the degree or extent to which the
contractor participates in the affairs of
the credit union. As the proposed IRPS
stated, ‘‘an independent contractor who
influences or controls the management
or affairs of an insured credit union,
would be covered by Section 205(d).’’
The FDIC addressed the issue of
affiliated parties and independent
contractors in the preamble to its
Statement of Policy Pursuant to Section
19 of the Federal Deposit Insurance Act
as follows:
Similarly, directors and officers of
affiliates, subsidiaries or joint ventures of an
insured institution or its holding company
will be covered if they are in a position to
influence or control the management or
affairs of the insured institution. In those
cases in which such individuals exercise
policymaking functions for the insured
institution, they should be deemed
‘‘participants.’’ For example, officers of an
electronic data processing (EDP) affiliate
would not typically exercise a controlling
influence to the extent that the affiliate
simply provides a processing service to the
bank. On the other hand, if a mortgage
banking affiliate sends loans to an insured
institution that the institution is obligated to
purchase, then the officers of the affiliate
may be participants in the insured
institution’s affairs. Where an employee of an
EDP service has access to sensitive bank
1 These are virtually identical terms to those used
in Section 19 of the Federal Deposit Insurance Act.

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records and the ability to manipulate data so
as to influence or control the management or
affairs of an insured institution, that person
will be covered by section 19. The degree of
such influence may be controlled by reliance
upon the safeguards and internal controls put
in place by the affiliate and the bank. Insured
depository institutions continue to out source
increasing numbers of banking tasks. To the
extent that independent contractors are
utilized, an analysis similar to that for
affiliates may be applied. Typically an
independent contractor does not have a
relationship with the insured institution
other than the activity contracted for by the
depository institution.
63 FR 66177, at 66178–66179 (December 1,
1998).

The Board agrees with the FDIC’s
analysis and believes it is applicable to
the credit union community as well.
Therefore, the Board is of the view that
very few of the contractors who perform
services for credit unions will be
involved to such a degree that they
could be said to be influencing or
controlling the management or affairs of
a credit union. Only when the
involvement of affiliates or independent
contractors rise to the level of
influencing or controlling the
management or affairs of a credit union
does the credit union need to be
concerned about the criminal past of the
employees of the affiliate or
independent contractor.
One commenter asked whether it
would be sufficient to specify in
contracts with vendors that no one who
had been convicted of any criminal
offense involving dishonesty or breach
of trust would be allowed to have
dealings with the credit union. The
FDIC touched on this question in its
preamble, stating that it ‘‘expects that
the relationship between an
independent contractor and an insured
institution is to be governed by a written
contract, through which the insured
institution may require typical
safeguards such as warranties and bond
coverage.’’ Id, at 66179. Though not
required by the IRPS, the additional
contractual restriction on a contractor to
not use employees who would
otherwise be prohibited under Section
205(d), as proposed by the commenter,
would be a reasonable, additional
safeguard.
Several commenters expressed
concern about the use of the term de
facto employee. This is a common
employment law concept that was
adopted by the FDIC in its Statement of
Policy Pursuant to Section 19 of the
Federal Deposit Insurance Act to
prevent individuals from circumventing
the requirements of the law by simply
claiming to be an independent
contractor. As the FDIC explained:

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The FDIC is aware that an effort can be
made to evade the coverage of section 19 by
‘‘converting’’ an employee to an independent
contractor. In those cases, generally
applicable standards of employment law will
be used to identify such arrangements, and
to find that the person is a ‘‘de facto’’
employee.
63 FR 66177, at 66179 (December 1, 1998).

Whether an individual is actually an
independent contractor or an employee
(a de facto employee) has profound
implications with respect to tax and
other employment matters. In
determining whether a person must
request consent pursuant to Section
205(d), the Board believes it is
appropriate to consider what the
employee actually does and their
relationship to the credit union rather
than simply whether they are called an
independent contractor. Therefore, the
final IRPS retains the concept that de
facto employees, as determined by
applying generally applicable standards
of employment law, will also be subject
to Section 205(d). Because it is not
possible to provide more concrete
definitions, the Board wants to
emphasize that credit unions with any
questions regarding whether a particular
person comes within the scope of
Section 205(d) may solicit guidance
from NCUA’s Office of General Counsel.
Two commenters expressed a desire
for a more comprehensive definition of
what offenses qualify as de minimis.
One commenter proposed that the Board
provide a comprehensive listing of
offenses that involve dishonesty or
breach of trust. Another commenter
noted that almost every criminal offense
could be said to involve dishonesty or
breach of trust in some form, and asked
whether virtually all convictions would
be subject to Section 205(d).
The Board understands the desire by
credit unions for more certainty
regarding when an application under
Section 205(d) is required. However,
considering the number of potential
jurisdictions that have criminal statutes
containing offenses involving
dishonesty or breach of trust, it is
simply not possible to provide an
exhaustive list of such offenses. Thus, it
remains the responsibility of each credit
union to examine the elements of the
statute under which an individual was
convicted in order to determine whether
it constitutes a crime involving
dishonesty or breach of trust.
Another commenter urged the Board
to not simply provide the statutory cite
to those offenses that qualify for the ten
year limitation on the Board providing
consent (found at Section 205(d)(2)), but
rather to list such offenses separately.
The Board is not inclined to provide an

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exhaustive list. Congress could amend
the provision, resulting in the list
becoming outdated and inaccurate until
the IRPS is appropriately modified. The
Board believes the better approach is to
cite the reader to the exact statutory
provision that contains the most current
list of offenses Congress has made
subject to the ten year ban.
Five commenters expressed concerns
as to whether the proposed IRPS would
operate to require credit unions to
conduct background checks or other
inquiries of existing employees or
institution-affiliated parties, if such
investigations were not performed at the
time those persons became affiliated
with the credit union. In that regard, the
Board would note that the prohibition of
Section 205(d) has existed in some form
since 1970. Since that date, credit
unions have been required to make a
diligent inquiry as to whether
prospective employees or institutionaffiliated parties came within the
prohibition imposed by Section 205(d).
Section 205(d)(1)(B) contains a criminal
provision that applies to credit unions
and therefore, credit unions should
determine for their own protection
whether they have sufficiently
examined the background of those
previously allowed to serve as
employees or institution-affiliated
parties.
Another commenter requested the
Board to make clear that credit unions
need not conduct background checks of
prospective employees, but rather
permit reliance on answers given by
applicants. As stated in the proposed
IRPS, ‘‘The NCUA believes that at a
minimum, each insured credit union
should establish a screening process
which provides the insured credit union
with information concerning any
convictions or pretrial diversion
programs pertaining to a job applicant.
This would include, for example, the
completion of a written employment
application which requires a listing of
all convictions and pretrial diversion
programs.’’ The Board is cognizant that
background checks are costly and timeconsuming. Therefore, the Board agrees
with the commenter that credit unions
are normally justified in relying on a job
applicant’s answers regarding past
criminal history. However, if a credit
union has reason to believe that an
applicant was not being truthful, further
inquiry into the person’s past might be
necessary under the circumstances.
In order to provide more guidance to
credit unions regarding screening of
prospective employees, one commenter
suggested the Board issue guidance
similar to that published by the FDIC on
the same topic. We understand the

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guidance referenced in the comment
letter is FDIC’s Financial Institution
Letter FIL–46–2005, dated June 1, 2005,
and entitled ‘‘Pre-Employment
Background Screening.’’ The guidance
in FIL–46–2005, while perhaps useful,
is beyond the scope of this IRPS.
However, the agency will consider
addressing the subject in another forum
in the future.
One commenter asked for guidance as
to whether ‘‘good faith compliance with
a similar state law may satisfy the
requirements under’’ Section 205(d).
The statute cited by the commenter was
a New York law that prevented denial
of employment because of a prior
criminal conviction unless certain other
factors were met. The Board disagrees
that reliance on a state law that conflicts
with the prohibition imposed by Section
205(d) satisfies the requirements of the
federal statute. The Board believes that
in this circumstance, Section 205(d), as
a federal statute, pre-empts any state
law that conflicts with it.2
Consequently, federally insured credit
unions must comply with Section
205(d), even if doing so would appear
to be in conflict with a state
employment law.
Two commenters suggested that the
IRPS specify the length of time the
Board would take to act on an
application submitted for consent under
Section 205(d). One commenter
suggested the Board should be able to
act on an application within fourteen
business days; another suggested within
five days. The Board appreciates the
credit union community’s desire for
certainty as to how quickly applications
under Section 205(d) will be processed.
However, each application is fact
specific and varies in complexity. For
that reason, the Board concludes that it
is impracticable to set a time table for
action on such applications. Past
applications that have been submitted to
the Board have generally been
adjudicated within 60 days from
submission. In most cases, the time was
significantly less. The Board is
committed to deciding applications for
consent in the future as quickly as
possible.
2 ‘‘Federal preemption of state laws stems from
the supremacy clause, U.S Const., art. V, cl. 2,
which provides that the laws of the United States
shall be the supreme law of the land,
notwithstanding any state laws to the contrary.
Preemption may be * * * implied by the nature of
federal legislation and the subject matter, even
absent a declaration of preemptive intent. Meyers v.
Beverly Hills Federal Savings and Loan Ass’n, 499
F.2d 1145, 1146 (9th Cir. 1974).’’ Opinion letter
from Hattie M. Ulan, Associate General Counsel to
Peter J. Liska, dated June 11, 1992, subject, Iowa
Credit Card Registration Law.

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With respect to the factors the Board
will consider when evaluating an
application under Section 205(d), one
commenter suggested the IRPS include
two provisions contained in FDIC’s
regulatory list of factors. Specifically,
one of the suggested additions was a
provision that would require the Board
to consider whether a person’s
participation in the affairs of the credit
union would constitute a threat to its
safety or soundness or the interest of its
members, or would threaten to impair
public confidence in the credit union.
The other suggested addition would
address whether the person would be
eligible for bond coverage.
The Board believes the first suggested
provision is a valuable factor to be
considered and accordingly will add the
additional criteria to the final IRPS.
Regarding the second suggestion, the
Board notes that the proposed IRPS
contained a similar provision to that
suggested (‘‘(6) The applicability of the
insured institution’s fidelity bond
coverage to the person;’’). Thus, because
of the similarity of the two provisions,
the Board will retain the criteria
unmodified from the proposed IRPS.
Accordingly, and except as discussed
above, the Board adopts IRPS 08–1 as
proposed.
C. Regulatory Procedures
The Regulatory Flexibility Act
requires that NCUA prepare an analysis
describing any significant economic
impact agency rulemaking may have on
a substantial number of small credit
unions. 5 U.S.C. 601 et seq. For
purposes of this analysis, NCUA
considers credit unions under $10
million in assets as small credit unions.
Since the requirements in this IRPS are
generally restatements of requirements
in other laws, NCUA does not believe
this IRPS will have a significant
economic impact on a substantial
number of small credit unions.
Paperwork Reduction Act

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This IRPS contains an application
requirement. As required by the
Paperwork Reduction Act of 1995, 44
U.S.C. 3507(d), NCUA submitted a copy
of the proposed IRPS to the Office of
Management and Budget (OMB) for its
review and approval. OMB approval of
the Collection of Information is still
pending.
Executive Order 13132
Executive Order 13132 encourages
independent regulatory agencies to
consider the impact of their actions on
state and local interests. In adherence to

15:12 Aug 18, 2008

The Treasury and General Government
Appropriations Act, 1999—Assessment
of Federal Regulations and Policies on
Families
The NCUA has determined that the
IRPS would not affect family well-being
within the meaning of section 654 of the
Treasury and General Government
Appropriations Act of 1999, Public Law
105–277, 112 Stat. 2681 (1998).
By the National Credit Union
Administration Board, on July 24, 2008.
Paul M. Peterson,
Acting Secretary of the Board.
Authority: 12 U.S.C. 1752a, 1756, 1766,
1785.

Interpretive Ruling and Policy
Statement 08–1

Regulatory Flexibility Act

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fundamental federalism principles,
NCUA, an independent regulatory
agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive
order. This IRPS applies to all federallyinsured credit unions, but does not have
substantial direct effect on the states, on
the relationship between the national
government and the states, or on the
distribution of power and
responsibilities among the various
levels of government. NCUA has
determined that this IRPS does not
constitute a policy that has federalism
implications for purposes of the
executive order.

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Guidance Regarding Prohibitions
Imposed by Section 205(d) of the
Federal Credit Union Act
I. Background
This Interpretive Ruling and Policy
Statement (IRPS) provides requirements,
direction, and guidance to federallyinsured credit unions (insured credit
unions) and individuals regarding the
prohibition imposed by operation of law
by Section 205(d) of the Federal Credit
Union Act (FCU Act) (12 U.S.C.
1785(d)). Section 205(d)(1) provides
that, except with the prior written
consent of the National Credit Union
Administration (NCUA) Board, a person
who has been convicted of any criminal
offense involving dishonesty or breach
of trust, or has agreed to enter into a
pretrial diversion or similar program in
connection with a prosecution for such
offense may not:
• Become, or continue as, an
institution affiliated party with respect
to any insured credit union; or
• Otherwise participate, directly or
indirectly, in the conduct of the affairs
of any insured credit union.
Section 205(d)(1)(B) further provides
that an insured credit union may not
allow any person described above to

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engage in any conduct or to continue
any relationship prohibited by Section
205(d). The statute imposes a ten-year
ban against the NCUA Board granting
consent for a person convicted of certain
crimes enumerated in Title 18 of the
United States Code. In order for the
NCUA Board to grant consent during the
ten-year period, the NCUA Board must
file a motion with, and obtain the
approval of, the sentencing court.
(Section 205(d)(2)). Finally, Section
205(d)(3) states that ‘‘whoever
knowingly violates’’ (d)(1)(A) or
(d)(1)(B) is committing a felony,
punishable by up to five years in jail
and a fine of up to $1,000,000 a day.
This IRPS provides guidance to credit
unions and individuals regarding who is
subject to the prohibition provision of
Section 205(d). The IRPS defines what
offenses come within the prohibition
provision of Section 205(d) and thus
require an application for the NCUA
Board’s consent to participate in the
affairs of an insured credit union. The
IRPS also identifies certain offenses that
will be excluded from Section 205(d)
and do not require the NCUA Board’s
consent. In order to assist those who
may need the consent of the NCUA
Board to participate in the affairs of an
insured credit union, the IRPS explains
the procedures to request such consent,
specifies the application form that must
be used, clarifies the duty imposed on
credit unions by Section 205(d), and
identifies the factors the NCUA Board
will consider in deciding whether to
provide such consent. Finally, the IRPS
explains how an applicant could appeal
a decision by the NCUA Board denying
an application for its consent.
II. Policies and Procedures Regarding
Prohibitions Imposed by Section 205(d)
A. Scope of Section 205(d) of the FCU
Act
1. Persons Covered by Section 205(d)
(a) Institution-affiliated parties.
Section 205(d) of the FCU Act applies
to institution-affiliated parties, as
defined by Section 206(r) of the FCU
Act (12 U.S.C. 1786(r)), and others who
are participants in the conduct of the
affairs of an insured institution.
Institution-affiliated party means:
(1) Any committee member, director,
officer, or employee of, or agent for, an
insured credit union;
(2) Any consultant, joint venture
partner, and any other person as
determined by the Board (by regulation
or on a case-by case basis) who
participates in the conduct of the affairs
of an insured credit union; and
(3) Any independent contractor
(including any attorney, appraiser, or

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accountant) who knowingly or
recklessly participates in—
(i) Any violation of any law or
regulation;
(ii) Any breach of fiduciary duty; or
(iii) Any unsafe or unsound practice,
which caused or is likely to cause more
than a minimal financial loss to, or a
significant adverse effect on, the insured
credit union. (Section 206(r)).
All officials, committee members and
employees of an insured credit union
fall within the scope of Section 205(d)
of the FCU Act. Additionally, anyone
NCUA determines to be a de facto
employee, applying generally applicable
standards of employment law, will also
be subject to Section 205(d).
Under Section 206(r), independent
contractors are considered institutionaffiliated parties if they knowingly or
recklessly participate in violations,
unsafe or unsound practices or breaches
of fiduciary duty which are likely to
cause significant loss to, or a significant
adverse effect on, an insured credit
union. As a general rule, an
independent contractor who influences
or controls the management or affairs of
an insured credit union, would be
covered by Section 205(d). In addition,
a ‘‘person’’’ for purposes of Section
205(d) means an individual, and does
not include a corporation, firm or other
business entity.
(b) Participants in the affairs of an
insured credit union.
A person who does not meet the
definition of institution-affiliated party
is nevertheless prohibited by Section
205(d) if he or she is considered to be
participating, directly or indirectly, in
the conduct of the affairs of an insured
credit union. Whether persons who are
not institution-affiliated parties are
covered depends upon their degree of
influence or control over the
management or affairs of an insured
institution. Those who exercise major
policymaking functions of an insured
institution would be deemed
participants in the affairs of that
institution and covered by Section
205(d). Participants in the affairs of a
credit union is a term of art and is not
capable of more precise definition. As
the OTS stated in the preamble to its
regulation regarding Section 19 of the
FDIA:
Given the changes in banking, including
financial modernization and the rapid pace
of technology, a regulatory listing of activities
that constitute participation is neither
practical nor advisable. Accordingly, like
FDIC’s [Statement of Policy], the interim final
rule does not define precisely what activities
constitute ‘‘participation.’’ Rather, agency
and court decisions will provide the guide as
to what standards will be applied. As a

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general proposition, however, participation
will depend upon the degree of influence or
control over the management or affairs of the
[insured credit union]. Those who exercise
major policymaking functions at [an insured
credit union] would fall within this category.
72 FR 25948, at 25949 (May 8, 2007).

NCUA agrees with that view and will
not define what constitutes
participation in the conduct of the
affairs of an insured credit union but
rather will analyze each individual’s
conduct on a case-by-case basis and
make a determination.
2. Offenses Covered by Section 205(d)
Except as indicated in paragraph (3),
below, an application requesting the
consent of the NCUA Board under
Section 205(d) is required where any
adult, or minor treated as an adult, has
received a conviction by a court of
competent jurisdiction for any criminal
offense involving dishonesty or breach
of trust (a covered offense), or where
such person has entered a pretrial
diversion or similar program regarding a
covered offense. The following
definitions apply:
(a) Conviction. There must be a
conviction of record. Section 205(d)
does not apply to arrests, pending cases
not brought to trial, acquittals, or any
conviction which has been reversed on
appeal. A conviction with regard to
which an appeal is pending will require
an application until or unless reversed.
A conviction for which a pardon has
been granted will require an
application.
(b) Pretrial Diversion or Similar
Program. A pretrial diversion program,
whether formal or informal, is
characterized by a suspension or
eventual dismissal of charges or
criminal prosecution upon agreement by
the accused to treatment, rehabilitation,
restitution, or other non-criminal or
non-punitive alternatives. Whether a
program constitutes a pretrial diversion
is determined by relevant federal, state
or local law, and will be considered by
the NCUA Board on a case-by-case
basis.
(c) Dishonesty or Breach of Trust. The
conviction or entry into a pretrial
diversion program must have been for a
criminal offense involving dishonesty or
breach of trust.
‘‘Dishonesty’’ means directly or
indirectly to cheat or defraud; to cheat
or defraud for monetary gain or its
equivalent; or wrongfully to take
property belonging to another in
violation of any criminal statute.
Dishonesty includes acts involving want
of integrity, lack of probity, or a
disposition to distort, cheat, or act
deceitfully or fraudulently, and may

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include crimes which federal, state or
local laws define as dishonest.
‘‘Breach of trust’’ means a wrongful
act, use, misappropriation or omission
with respect to any property or fund
which has been committed to a person
in a fiduciary or official capacity, or the
misuse of one’s official or fiduciary
position to engage in a wrongful act,
use, misappropriation or omission.
Whether a crime involves dishonesty
or breach of trust will be determined
from the statutory elements of the crime
itself. All convictions for offenses
concerning the illegal manufacture, sale,
distribution of or trafficking in
controlled substances shall require an
application for the NCUA Board’s
consent under Section 205(d).
3. Offenses Not Covered by Section
205(d)
(a) De minimis Offenses. Approval is
automatically granted and an
application for the NCUA Board’s
consent under Section 205(d) will not
be required where the covered offense is
considered de minimis, because it meets
all of the following criteria:
(1) There is only one conviction or
entry into a pretrial diversion program
of record for a covered offense;
(2) The offense was punishable by
imprisonment for a term of less than one
year and/or a fine of less than $1,000,
and the punishment imposed by the
court did not include incarceration;
(3) The conviction or pretrial
diversion program was entered at least
five years prior to the date an
application would otherwise be
required;
(4) The offense did not involve an
insured depository institution or
insured credit union; and
(5) The NCUA Board or any other
federal financial institution regulatory
agency has not previously denied
consent under Section 205(d) of the
FCU Act or Section 19 of the FDIA,
respectively, for the same conviction or
participation in a pretrial diversion
program.
Any person who meets the foregoing
criteria must be covered by a fidelity
bond to the same extent as other
employees in similar positions. An
insured credit union may not allow any
person to participate in its affairs, even
if that person has a conviction for what
would constitute a de minimis covered
offense, if the person cannot obtain
required fidelity bond coverage.
Any person who meets the foregoing
criteria for a de minimis offense shall
disclose the presence of the conviction
or pretrial diversion program to all
insured credit unions or other insured

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institutions in the affairs of which he or
she intends to participate.
(b) Youthful offender adjudgments.
An adjudgment by a court against a
person as a ‘‘youthful offender’’ under
any youth offender law, or any
adjudgment as a ‘‘juvenile delinquent’’
by any court having jurisdiction over
minors as defined by state law does not
require an application for the NCUA
Board’s consent under Section 205(d).
Such adjudications will not be
considered convictions for criminal
offenses.
(c) Expunged convictions. A
conviction which has been completely
expunged is not considered a conviction
of record and will not require an
application for the NCUA Board’s
consent under Section 205(d).
B. Duty Imposed on Credit Unions
Section 205(d) imposes a duty upon
every insured credit union to make a
reasonable inquiry regarding the history
of every applicant for employment.
NCUA believes that inquiry should
consist of taking steps appropriate
under the circumstances, consistent
with applicable law, to avoid hiring or
permitting participation in its affairs by
a person who has a conviction or
participation in a pretrial diversion
program for a covered offense. The
NCUA believes that at a minimum, each
insured credit union should establish a
screening process which provides the
insured credit union with information
concerning any convictions or pretrial
diversion programs pertaining to a job
applicant. This would include, for
example, the completion of a written
employment application which requires
a listing of all convictions and pretrial
diversion programs. When the credit
union learns that a prospective
employee has a prior conviction or
entered into a pretrial diversion
program for a covered offense, the credit
union must submit an application
requesting the NCUA Board’s consent
under Section 205(d) prior to hiring the
person or otherwise permitting him or
her to participate in its affairs.
If an insured credit union discovers
that an employee, official, or anyone
else who is an institution-affiliated
party or who participates, directly or
indirectly, in its affairs, is in violation
of Section 205(d), the credit union must
immediately place that person on a
temporary leave of absence from the
credit union and file an application
seeking the NCUA Board’s consent
under Section 205(d). The person must
remain on such temporary leave of
absence until such time as the NCUA
Board has acted on the application.
When NCUA learns that an institution-

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affiliated party or a person participating
in the affairs of an insured credit union
should have received the NCUA Board’s
consent under Section 205(d) but did
not, NCUA will look at the
circumstances of each situation to
determine whether the inquiry made by
the credit union was reasonable under
the circumstances.
C. Procedures for Requesting the NCUA
Board’s Consent Under Section 205(d)
Section 205(d) of the FCU Act serves,
by operation of law, as a statutory bar
to participation in the affairs of an
insured credit union, absent the written
consent of the NCUA Board. When an
application for the NCUA Board’s
consent under Section 205(d) is
required, the insured credit union must
file a written application using the
attached form with the appropriate
NCUA Regional Director. The purpose
of an application is to provide the
applicant an opportunity to demonstrate
that, notwithstanding the bar, the
person is fit to participate in the
conduct of the affairs of an insured
credit union without posing a risk to its
safety and soundness or impairing
public confidence in that institution.
Such an application should thoroughly
explain the circumstances surrounding
the conviction or pretrial diversion
program. The applicant may also
address the relevant factors and criteria
the NCUA Board will consider in
determining whether to grant consent,
specified below. The burden is upon the
applicant to establish that the
application warrants approval.
The application must be filed by an
insured credit union on behalf of a
person unless the NCUA Board grants a
waiver of that requirement and allows
the person to file an application in their
own right. Such waivers will be
considered on a case-by-case basis
where substantial good cause for
granting a waiver is shown.
D. Evaluation of Section 205(d)
Applications
The essential criteria used by the
NCUA Board in assessing an application
for consent under Section 205(d) are
whether the person has demonstrated
his or her fitness to participate in the
conduct of the affairs of an insured
credit union, and whether the
employment, affiliation, or participation
by the person in the conduct of the
affairs of the insured credit union may
constitute a threat to the safety and
soundness of the institution or the
interests of its members or threaten to
impair public confidence in the insured
credit union.

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In evaluating an application, the
NCUA Board will consider:
1. The conviction or pretrial diversion
program and the specific nature and
circumstances of the covered offense;
2. Evidence of rehabilitation,
including the person’s reputation since
the conviction or pretrial diversion
program, the person’s age at the time of
conviction or pretrial diversion
program, and the time which has
elapsed since the conviction or pretrial
diversion program;
3. Whether participation, directly or
indirectly, by the person in any manner
in the conduct of the affairs of the
insured credit union constitutes a threat
to the safety or soundness of the insured
credit union or the interest of its
members, or threatens to impair public
confidence in the insured credit union;
4. The position to be held or the level
of participation by the person at the
insured credit union;
5. The amount of influence and
control the person will be able to
exercise over the management or affairs
of the insured credit union;
6. The ability of management of the
insured credit union to supervise and
control the person’s activities;
7. The applicability of the insured
institution’s fidelity bond coverage to
the person;
8. For state chartered, federally
insured credit unions, the opinion or
position of the state regulator; and
9. Any additional factors in the
specific case that appear relevant.
The foregoing criteria will also be
applied by the NCUA Board to
determine whether the interests of
justice are served in seeking an
exception in the appropriate court when
an application is made to terminate the
ten-year ban for certain enumerated
offenses in violation of Title 18 of the
United States Code prior to its
expiration date. NCUA believes such
requests will be extremely rare and will
be made only upon a showing of
compelling reasons.
Some applications can be approved
without an extensive review because the
person will not be in a position to
present any substantial risk to the safety
and soundness of the insured credit
union. Persons who will occupy
clerical, maintenance, service or purely
administrative positions, generally fall
into this category. A more detailed
analysis will be performed in the case
of persons who will be in a position to
influence or control the management or
affairs of the insured credit union.
Approval by the NCUA Board will be
subject to the condition that the person
shall be covered by a fidelity bond to

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the same extent as others in similar
positions.
In cases in which the NCUA Board
has granted a waiver to allow a person
to file an application in their own right,
approval of the application will be
conditioned upon that person disclosing
the presence of the conviction to all
insured credit unions or other insured
financial institutions in the affairs of
which he or she wishes to participate.
When deemed appropriate, approval
may also be subject to the condition that
the prior consent of the NCUA Board
will be required for any proposed
significant changes in the person’s
duties and/or responsibilities. Such
proposed changes may, in the discretion
of the appropriate Regional Director,
require a new application for the NCUA
Board’s consent. When approval has

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been granted for a person to participate
in the affairs of a particular insured
credit union and subsequently that
person seeks to participate in the affairs
of another insured credit union,
approval does not automatically follow.
In such cases, another application must
be submitted. Moreover, any person
who has received consent from the
NCUA Board under Section 205(d) and
subsequently wishes to become an
institution affiliated party or participate
in the affairs of an FDIC-insured
institution, he or she must obtain the
prior approval of the FDIC pursuant to
Section 19 of the FDIA.
E. Right To Request a Hearing Following
the Denial of an Application Under
Section 205(d)
If the NCUA Board withholds consent
under Section 205(d), the insured credit

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union (or in the case where a waiver has
been granted, the individual that
submitted the application) may request
a hearing by submitting a written
request within 30 days following the
date of the NCUA Board’s action. The
NCUA Board will apply the process
contained in regulations governing
prohibitions based on felony
convictions, found at part 747, subpart
D of Title 12, Code of Federal
Regulations, to any request for a
hearing. The insured credit union (or in
the case where a waiver has been
granted, the individual that submitted
the application) may also waive a
hearing and request that the NCUA
Board determine the matter on the basis
of written submissions.
BILLING CODE 7535–01–P

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[FR Doc. E8–19158 Filed 8–18–08; 8:45 am]
BILLING CODE 7535–01–C

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SECURITIES AND EXCHANGE
COMMISSION

SECURITIES AND EXCHANGE
COMMISSION

Sunshine Act Meeting

[Release No. 34–58345; File No. SR–DTC–
2007–16]

Notice is hereby given, pursuant to
the provisions of the Government in the
Sunshine Act, Pub. L. 94–409, that the
Securities and Exchange Commission
will hold a Closed Meeting on
Thursday, August 21, 2008 at 2 p.m.
Commissioners, Counsel to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the Closed Meeting. Certain
staff members who have an interest in
the matters also may be present.
The General Counsel of the
Commission, or his designee, has
certified that, in his opinion, one or
more of the exemptions set forth in 5
U.S.C. 552b(c)(3), (5), (7), 9(B) and (10)
and 17 CFR 200.402(a)(3), (5), (7), 9(ii)
and (10), permit consideration of the
scheduled matters at the Closed
Meeting.
Commissioner Paredes, as duty
officer, voted to consider the items
listed for the Closed Meeting in closed
session.
The subject matter of the Closed
Meeting scheduled for Thursday,
August 21, 2008 will be:
Formal orders of investigation;
institution and settlement of injunctive
actions;
institution and settlement of
administrative proceedings of an
enforcement nature; and
adjudicatory matters.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting items.
For further information and to
ascertain what, if any, matters have been
added, deleted or postponed, please
contact:
The Office of the Secretary at (202)
551–5400.
Dated: August 14, 2008.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–19214 Filed 8–18–08; 8:45 am]

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Self-Regulatory Organizations; The
Depository Trust Company; Order
Granting Approval of a Proposed Rule
Change Relating to the Admission of
Foreign Entities as Direct Depository
Participants
August 12, 2008.

I. Introduction
On November 16, 2007, The
Depository Trust Company (‘‘DTC’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) and on
February 5, 2008, amended proposed
rule change SR–DTC–2007–13 pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’).1 Notice
of the proposal was published in the
Federal Register on March 7, 2008.2 No
comment letters were received. For the
reasons discussed below, the
Commission is granting approval of the
proposed rule change as modified by
Amendment No. 1.
II. Description
The proposed rule change amends
DTC’s policy statement regarding the
admission of participants to permit
entities that are organized in a foreign
country and are not subject to U.S.
federal or state regulation (‘‘foreign
entities’’) to become eligible to become
direct DTC participants (‘‘Foreign Entity
Policy Statement’’).3
In 1990, DTC adopted a Policy
Statement on the Admission of
Participants (‘‘1990 Policy Statement’’)
to make clear that in determining
whether to grant access to its services,
DTC regards as a critical factor that an
applicant is subject to comprehensive
U.S. federal or state regulation relating
to, among other things, capital
adequacy, financial reporting and
recordkeeping, operating performance,
and business conduct.4 Generally under
the 1990 Policy Statement, unless an
applicant is subject to U.S. federal or
state regulatory agency oversight, the
1 15

U.S.C. 78s(b)(1).
Exchange Act Release No. 57392
(February 27, 2008), 73 FR 12485.
3 The National Securities Clearing Corporation
(‘‘NSCC’’) filed and the Commission has approved
a similar proposed rule change that would permit
NSCC to adopt a similar policy statement with
respect to the admission of foreign entities as
members. Securities Exchange Act Release No.
58344 (August 12, 2008) (File No. SR–NSCC–2007–
15).
4 Securities Exchange Act Release No. 28754
(January 8, 1991), 56 FR 1548 (January 15, 1991)
(File No. SR–DTC–90–01).
2 Securities

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applicant would not be eligible to
become a DTC participant.5 Since 1990,
DTC has admitted a small number of
foreign entities where their obligations
to DTC have been guaranteed by
creditworthy DTC participants.
The purpose of the proposed Foreign
Entity Policy Statement is to establish
admissions criteria that will permit
well-qualified foreign entities to become
participants of DTC and to obtain direct
access to DTC’s services while assuring
that the unique risks associated with the
admission of foreign entities are
adequately addressed.6
The admission of foreign entities as
participants raises a number of unique
risks and issues, including that (1) the
entity is not subject to U.S. federal or
state regulation, (2) that the operation of
the laws of the entity’s home country
and time zone differences 7 may impede
the successful exercise of DTC’s rights
and remedies particularly in the event
of the entity’s failure to settle, and (3)
financial information about the foreign
entity made available to DTC for
monitoring purposes may be less
adequate than the financial information
about U.S.-based entities.
The Foreign Entity Policy Statement
requires that in addition to executing
the standard DTC Participation
Agreement the foreign entity enter into
a series of undertakings and agreements
that are designed to address
jurisdictional concerns and to assure
that DTC is provided with audited
financial information that is acceptable
to DTC.8 The proposed policy statement
would also require that the foreign
entity (1) be subject to regulation in its
home country and (2) be in good
5 DTC recognized, however, that any person
designated by the Commission pursuant to Section
17A(b)(3)(B)(vi) of the Act, even if not subject to
such regulatory oversight, would be eligible for
admission. The 1990 Policy Statement was
approved by the Commission on January 8, 1991.
6 DTC’s proposed ‘‘Policy Statement on the
Admission of Non-U.S. Entities as Direct Depository
Participants’’ is attached as Exhibit 5 to its filing,
which can be found at http://www.dtcc.com/
downloads/legal/rule_filings/2007/dtc/2007–16.pdf.
7 Time zone differences may complicate
communications between a foreign participant and
its U.S. Settling Bank with respect to the timely
payment of the participant’s net debit to DTC
including intraday demands for payment. These
differences may also delay DTC’s receipt of
information available in the foreign participant’s
home country to others including its other creditors
about the foreign participant’s financial condition
on the basis of which DTC would have taken steps
to protect the interests of DTC and its participants.
8 In the Foreign Entity Policy Statement, DTC has
reserved the right to waive certain of these criteria
where such criteria are inappropriate to a particular
applicant or class of applicants (e.g., a foreign
government or international or national central
securities depositories).

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