oversight

Federal Deposit Insurance Act: FTC Best Among Candidates to Enforce Consumer Protection Provisions

Published by the Government Accountability Office on 2003-08-20.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

              United States General Accounting Office

GAO           Report to Congressional Committees




August 2003
              FEDERAL DEPOSIT
              INSURANCE ACT
              FTC Best Among
              Candidates to Enforce
              Consumer Protection
              Provisions




GAO-03-971
              a
                                                August 2003


                                                FEDERAL DEPOSIT INSURANCE ACT

                                                FTC Best Among Candidates to Enforce
Highlights of GAO-03-971, a report to           Consumer Protection Provisions
congressional committees.




This mandated report responds to                The Federal Trade Commission (FTC) is responsible for enforcing
Congressional concerns that                     compliance with the provisions in section 43 of the FDI Act. However, due to
provisions in section 43 of the                 a variety of concerns, FTC has requested and appropriators have agreed to
Federal Deposit Insurance Act (FDI              prohibit FTC from enforcing these provisions. The National Credit Union
Act) are not being enforced. Since              Administration (NCUA) and state regulators have imposed some related
1991, section 43 has required,
among other things, depository
                                                requirements on credit unions and private deposit insurers. While these
institutions lacking federal deposit            requirements are not the same as those in section 43 provisions, they provide
insurance to conspicuously                      some assurances that certain actions contemplated by section 43 are being
disclose that deposits in these                 satisfied.
institutions are not federally
insured. GAO’s objectives were to               Some privately insured credit unions GAO visited did not adequately
(1) determine the current status of             disclose that these institutions were not federally insured; as a result,
the enforcement of provisions in                depositors at these institutions may not be fully informed that their deposits
section 43; (2) determine the extent            are not federally insured. For example, in unannounced site visits to 57
of compliance with each provision               privately insured credit unions in Alabama, California, Illinois, Indiana, and
and the potential impact on                     Ohio, GAO found that required notices were not posted in 37 percent of the
consumers if the provisions were
not enforced; and (3) evaluate
                                                locations.
which federal agency could most
effectively enforce the provisions.             No federal agency is ideally suited to carry out the responsibilities outlined
                                                in section 43. Although FTC, NCUA, and the Federal Deposit Insurance
                                                Corporation (FDIC) officials generally agreed that consumers should receive
                                                information about the insured status of their deposits, they strongly
GAO is not recommending                         maintained that their respective agencies should not enforce these
executive action but identifies                 provisions. NCUA and FDIC officials objected to enforcing these provisions
matters for Congressional                       because their agencies have no direct interest in uninsured institutions and
consideration. If Congress                      their involvement in the enforcement of these requirements could undermine
determines that federal oversight of            the purposes of the provision. FTC staff raised jurisdictional concerns and
section 43 is needed, Congress may              asserted that its mission, resources, and practices were ill suited for such a
wish to consider removing the                   role. GAO believes that clarifying FTC’s authority and providing it with
prohibition in FTC’s appropriations             additional flexibility in administering these provisions represents the best
against enforcing the provisions.               option to enforce the provisions.
Congress may also wish to consider
modifying the section to clarify                States Permitting Private Deposit Insurance (March 2003) and Number of Privately Insured
                                                Credit Unions (December 2002)
FTC’s jurisdiction and to provide
FTC with flexibility in
administering these requirements
                                                                                                     20
by giving FTC authority to consult
with other primary regulators, such                                                         22
                                                                                                 8
                                                                                                                          40   21
                                                                                                                                    93
                                                                                                                                            5 (Md.)

as NCUA, or FDIC, or partner with
states.                                                                                                                        3




www.gao.gov/cgi-bin/getrpt?GAO-03-971.
                                                          States that permit private deposit insurance but do not have privately insured credit unions
To view the full product, including the scope
and methodology, click on the link above.                 States that have credit unions that purchase private deposit insurance
For more information, contact Richard J.
                                                Sources: GAO and state regulators.
Hillman at (202) 512-8678 or
hillmanr@gao.gov.
Contents


Letter                                                                                     1
               Results in Brief                                                            3
               Background                                                                  6
               NCUA and State Regulators Imposed Related Disclosure and Audit
                  Requirements                                                           11
               Compliance with Section 43 Provisions Varied; Potential Impact on
                  Consumers Most Evident in Credit Union Noncompliance with
                  Disclosure Requirements                                                13
               Although There Is No Ideal Regulator to Enforce Section 43, FTC Is
                  Best among Candidates to Enforce Provisions                            22
               Conclusions                                                               44
               Matters for Congressional Consideration                                   46
               Agency Comments and Our Evaluation                                        47

Appendix I     Objectives, Scope, and Methodology                                        54



Appendix II    Entities That Enforce Various Laws at Credit
               Unions                                                                    58



Appendix III   Comments from the National Credit Union
               Administration                                                            59



Appendix IV    Comments from the Federal Trade Commission                                61



Appendix V     GAO Contacts and Staff Acknowledgments                                    72
               GAO Contacts                                                              72
               Acknowledgments                                                           72


Tables
               Table 1: Number and Percent of Credit Unions Visited without
                        Required Signage in Lobby                                        15
               Table 2: Number and Percent of Credit Union Materials Reviewed
                        without Required Disclosures                                     16


               Page i                               GAO-03-971 Federal Deposit Insurance Act
         Table 3: Number and Percent of Web Sites Reviewed without
                  Required Disclosures                                                             17


Figure
         Figure 1: States Permitting Private Deposit Insurance (March 2003)
                  and Number of Privately Insured Credit Unions
                  (December 2002)                                                                  7




         Abbreviations

         ASI               American Share Insurance
         BIF               Bank Insurance Fund
         CPA               Certified Public Accountant
         CUIC              Credit Union Insurance Corporation
         CUNA              Credit Union National Association
         FDI Act           Federal Deposit Insurance Act
         FDIC              Federal Deposit Insurance Corporation
         FDICIA            Federal Deposit Insurance Corporation Improvement Act
         FTC               Federal Trade Commission
         FTC Act           Federal Trade Commission Act
         GAO               General Accounting Office
         NAFCU             National Association of Federal Credit Unions
         NASCUS            National Association of State Credit Union Supervisors
         NCUA              National Credit Union Administration
         NCUSIF            National Credit Union Share Insurance Fund
         RISDIC            Rhode Island Share and Depositors Indemnity Corporation
         SAIF              Savings Association Insurance Fund
         SEC               Securities and Exchange Commission
         TISA              Truth in Savings Act


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         United States. It may be reproduced and distributed in its entirety without further
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         reproduce this material separately.




         Page ii                                       GAO-03-971 Federal Deposit Insurance Act
United States General Accounting Office
Washington, DC 20548




                                   August 20, 2003

                                   Congressional Committees:

                                   After financial crises in the 1980s caused record losses in federal deposit
                                   insurance funds, Congress enacted legislation—the Federal Deposit
                                   Insurance Corporation Improvement Act of 1991 (FDICIA)—that made
                                   fundamental changes to federal oversight of depository institutions and
                                   added section 43 to the Federal Deposit Insurance Act (FDI Act).1 Under
                                   the section 43 disclosure requirement, depository institutions that lack
                                   federal deposit insurance must conspicuously inform consumers that their
                                   deposits are not federally insured. The recent conversion of a large
                                   federally insured credit union to private deposit insurance has raised
                                   concerns whether privately insured credit unions are complying with
                                   requirements under this section to ensure that members understand that
                                   the federal government does not guarantee their accounts.

                                   In addition to the disclosure requirements, section 43 requires that an
                                   institution lacking federal deposit insurance be shut down if the
                                   institution’s state regulator has not determined its eligibility for federal
                                   deposit insurance. The section also requires any provider of private
                                   deposit insurance to obtain and distribute an independent annual audit to
                                   each depository institution it insures and appropriate supervisory agency
                                   of each state in which such an institution receives deposits. In this report,
                                   we refer to these requirements as section 43 disclosure, shut-down, and
                                   annual audit provisions.

                                   The Federal Trade Commission (FTC or Commission) is statutorily
                                   responsible for enforcing compliance with section 43. However, FTC has
                                   never taken action to enforce section 43. Rather, FTC has requested that it
                                   not enforce these requirements by seeking and obtaining in its


                                   1
                                     Pub. L. No. 102-242, (1991). Section 43 of FDI Act originally was designated in FDICIA as
                                   section 40 of the FDI Act. See Pub. L. No. 101-242 § 151(a). Congress subsequently
                                   redesignated section 40 as section 43, which is codified at 12 U.S.C. § 1831t (2000). See
                                   Housing and Community Development Act of 1992, Pub. L. No. 102-550 § 1603(b) (2). The
                                   federal deposit insurance funds were established to restore and maintain depositors’
                                   confidence in the banking system by providing a government guarantee of deposits. This
                                   guarantee insures that a person’s money on deposit with an insured institution, within
                                   certain limits, would be safe and helps negate the need for depositors having to assess the
                                   financial condition of their financial institution.



                                   Page 1                                         GAO-03-971 Federal Deposit Insurance Act
appropriations authority a prohibition against spending appropriated
funds to carry out these provisions. As a result, no federal entity is
enforcing compliance with section 43.

This report responds to Congressional concerns that section 43 provisions
are not being enforced. Specifically, the Conference Report accompanying
the Fiscal Year 2003 Consolidated Appropriations Act mandated that we
(1) determine the current status of enforcement of these requirements; (2)
determine the extent of compliance with each requirement—disclosure,
shut down, and annual audit—and the potential impact on consumers if
these requirements are not enforced; and (3) evaluate which federal
agency could most effectively enforce section 43.2

As agreed with committee staff, we limited our assessment of “depository
institutions lacking federal deposit insurance” to state-chartered credit
unions that purchase private primary deposit insurance.3 To determine the
current status of enforcement of section 43 requirements, and whether
other laws or rules impose requirements similar to those of section 43, we
interviewed and reviewed available documentation from FTC staff and
officials from the National Credit Union Administration (NCUA), the
Federal Deposit Insurance Corporation (FDIC), and American Share
Insurance (ASI)—the remaining provider of nonfederal (private) deposit
insurance.4 We also surveyed the 50 state credit union regulators to
determine which states permitted private deposit insurance. We
interviewed regulatory officials in Alabama, California, Idaho, Illinois,
Indiana, Maryland, Nevada, New Hampshire, and Ohio, which include
those states where credit unions were permitted and chose not to obtain
federal depository insurance. To determine the extent of compliance with
section 43 and the potential impact on consumers from nonenforcement,
we conducted unannounced site visits to 57 locations of privately insured
institutions in Alabama, California, Illinois, Indiana, and Ohio. The purpose


2
 Conference Report to accompany the House Joint Resolution 2, Fiscal Year 2003
Consolidated Appropriations Resolution, Enforcement of section 151 of FDICIA.
3
 Credit unions are nonprofit cooperatives that serve their members by accepting deposits,
making loans, and providing various other financial services. Credit unions refer to
deposits as “member shares.”
4
  As of December 2002, we identified two companies that provided private deposit
insurance to credit unions in the 50 states and the District of Columbia—ASI of Ohio and
Credit Union Insurance Corporation (CUIC) of Maryland. We met with officials from CUIC;
however, we found that this insurer was in the process of dissolution, and therefore, we did
not include it in our analysis.




Page 2                                         GAO-03-971 Federal Deposit Insurance Act
                   of these visits was to determine whether state-chartered, privately insured
                   credit unions were providing notice that they were not federally insured.
                   The credit union locations were selected based on a convenience sample
                   using state and city location coupled with random selection of main or
                   branch locations within each city. We also discussed the impact of
                   nonenforcement with federal and state regulators noted above. To
                   evaluate which federal agency could most effectively enforce these
                   requirements, we interviewed FTC staff and officials from NCUA, FDIC,
                   and various interested industry groups to discuss their perspectives and
                   obtain their positions on enforcement of section 43 requirements. We also
                   conducted legal research and analysis related to these provisions. We
                   conducted our work in Washington, D.C., Alabama, California, Indiana,
                   Illinois, Maryland, Massachusetts, Ohio, and Virginia between February
                   and August 2003, in accordance with generally accepted government
                   auditing standards. We discuss our scope and methodology in more detail
                   in appendix I.


                   Although statutorily responsible for enforcing section 43, FTC, consistent
Results in Brief   with a prohibition in its appropriations authority, has not prescribed the
                   manner and content of disclosures, provided guidance or undertaken
                   rulemaking to enforce these provisions, or brought any enforcement cases
                   to date. NCUA and state regulators have imposed certain related
                   requirements on state-chartered credit unions and private deposit insurers.
                   While these requirements are not fully comparable to section 43
                   provisions, they provide some assurance that certain actions contemplated
                   by section 43 are being satisfied. For example, NCUA requires federally
                   insured credit unions seeking to convert to private deposit insurance to
                   notify members that if the conversion is approved, the federal government
                   will not insure deposits.5 NCUA’s requirements, however, are less
                   extensive than the disclosure requirements in section 43.

                   Compliance with section 43 disclosure, shut-down, and annual audit
                   requirements varied considerably. The most apparent impact on
                   consumers, from the lack of enforcement of these provisions, may result
                   from credit unions not providing adequate disclosures that they are not
                   federally insured.




                   5
                       12 CFR §§ 708b.201-204, 708b.301, and 708b.302 (2003).




                   Page 3                                           GAO-03-971 Federal Deposit Insurance Act
•   While state regulators and ASI officials reported monitoring whether
    privately insured credit unions disclosed that they were not federally
    insured, we found many privately insured credit unions that we visited did
    not always make such disclosures. For example, we found that 37 percent
    (21 of 57) of the locations we visited did not post signage in their lobbies
    indicating that deposits were not federally insured. As a result, depositors
    at these institutions may not be adequately informed, as specifically
    required in section 43, that (1) their deposits are not federally insured or
    (2) if the institution fails, the federal government does not guarantee that
    they will get back their money.

•   Section 43 prohibits depository institutions lacking federal deposit
    insurance from engaging in interstate commerce unless the institution’s
    state regulator has determined the institution’s eligibility for federal
    deposit insurance. It appears that privately insured credit unions have not
    obtained this determination from their state regulators. However, this
    determination may not be a meaningful protection for consumers. Because
    this is a one-time requirement, this determination does not ensure that the
    institution will remain eligible for federal deposit insurance. Also, when an
    institution converts from federal deposit insurance to private deposit
    insurance, such an eligibility determination would be redundant because
    the institution had been eligible for federal deposit insurance before it
    became privately insured. State regulators also reported that although they
    had not made these explicit determinations, they imposed safety and
    soundness standards for credit unions lacking federal deposit insurance
    that the regulators believed generally satisfied the criteria for federal
    deposit insurance. Although the states’ examination standards are similar,
    NCUA’s decision to insure a credit union is done on a case-by-case basis
    and NCUA officials consider other factors when determining eligibility.
    ASI officials also told us that they rigorously monitor the safety and
    soundness of their insured institutions. Given the related actions
    undertaken to help ensure the health of privately insured credit unions,
    the effect on consumers from the lack of enforcement of this provision
    may be negligible.

•   The remaining private deposit insurer, ASI, has complied with section 43
    audit requirements and, as a result, state regulators and the management
    of privately insured credit unions have had the opportunity to become
    informed about the financial condition of this private deposit insurer.
    Section 43 requires private deposit insurers to obtain an annual audit that
    includes a determination of whether the insurer follows generally
    accepted accounting principles and to distribute the audit. We found that
    the audits obtained by ASI for 1999, 2000, 2001, and 2002 complied with
    this federal requirement. Also, appropriate state regulators and the



    Page 4                                 GAO-03-971 Federal Deposit Insurance Act
management of some privately insured credit unions told us that ASI had
provided the audits in accordance with the requirement. Since the private
deposit insurer has obtained and distributed the audit as required, it
appears consumers suffered no negative impact from the nonenforcement
of this provision.

In evaluating which agency should enforce section 43 provisions, we found
the responsibilities outlined in these provisions did not fall ideally within
any single agency’s jurisdiction. FTC staff and officials from NCUA and
FDIC told us that their respective agencies should not be charged with
administering section 43. Officials from both NCUA and FDIC objected to
having regulatory responsibility under section 43 because their agencies
have no direct interest in the operations of institutions they do not insure.
They maintained that requiring their agencies to administer section 43
could undermine the purposes of the provision and, potentially, the credit
union system, by closely associating private deposit insurance with federal
deposit insurance. Because NCUA administers the federal deposit
insurance fund for credit unions, it is believed that if NCUA were to
prescribe disclosure requirements or enforce the shut-down or audit
provisions under section 43, it would create a regulatory conflict of
interest that could result in NCUA’s regulatory decisions being questioned
or challenged. FTC staff raised jurisdictional concerns and offered several
reasons why the Commission’s mission, resources, and practices are ill
suited for such a role. Those reasons reflect FTC’s perception about its
authority under section 43 and how the section should be administered, as
well as how the Commission carries out its consumer protection mission.
Based on our review of the concerns raised by FTC, NCUA and FDIC, we
believe FTC is best among these candidates to be the primary agency
responsible for implementing section 43. However, clarifying FTC’s
authority and providing it with additional flexibility in administering these
provisions could better ensure effective enforcement of these provisions.

This report contains matters for Congressional consideration to remove
obstacles and provide additional flexibility in enforcing the consumer
protections intended under section 43. If Congress determines that federal
oversight of section 43 is needed, Congress may wish to consider removing
the prohibition in FTC’s appropriations against enforcing the provisions.
Congress may also wish to consider modifying the section to clarify FTC’s
jurisdiction and providing FTC flexibility in administering these
requirements by giving FTC authority to consult with other primary
regulators, such as NCUA or FDIC, or partner with states.




Page 5                                 GAO-03-971 Federal Deposit Insurance Act
             We received oral comments on a draft of this report from FDIC and
             written comments from NCUA and FTC. FDIC and NCUA generally
             agreed with the report’s conclusions. FTC disagreed with the report’s
             conclusions and matters for congressional consideration and stated that it
             was not able to implement and enforce these provisions. The comments
             are discussed in greater detail at the end of this letter, and the written
             comments are reprinted as appendixes III and IV.

             Under federal and state laws, all federally chartered depository institutions
Background   and the vast majority of state-chartered institutions are required to have
             federal deposit insurance. The federal deposit insurance funds were
             established to restore and maintain depositors’ confidence in the banking
             system by providing a government guarantee of deposits. This guarantee
             insures that a person’s money on deposit with an insured institution,
             within certain limits, would be safe and helps negate the need for
             depositors having to assess the financial condition of their financial
             institution. FDIC administers the Bank Insurance Fund (BIF) and the
             Savings Association Insurance Fund (SAIF). Deposit accounts maintained
             at banks and thrifts generally are federally insured, regardless of who
             charters the institution. Similarly, credit unions that are federally
             chartered must be federally insured by the National Credit Union Share
             Insurance Fund (NCUSIF), which is administered by NCUA.6 Almost all
             (98 percent) credit unions are federally insured. As of December 2002,
             9,688 credit unions were federally insured, with about 81 million members
             and $483 billion in deposits.7

             However, in our survey of the 50 state regulators, we found that not all
             states require federal deposit insurance for credit unions they charter.8 As
             of December 2002, 212 credit unions—about 2 percent of all credit
             unions—chose to purchase private deposit insurance. These privately


             6
              Credit unions are nonprofit cooperatives that serve their members by accepting deposits,
             making loans, and providing various other financial services. Generally, primary deposit
             insurance is mandatory for all depository institutions and covers members’ deposits up to a
             specified amount. Excess deposit insurance is optional coverage above the amount
             provided by primary deposit insurance. NCUSIF provides primary deposit insurance up to
             $100,000 per member; while ASI provides primary deposit insurance up to $250,000 per
             account and excess deposit insurance.
             7
              Of these federally insured credit unions, the federal government chartered about 60
             percent, while about 40 percent were chartered by their respective states.
             8
              Through our discussions with state regulators, we identified two uninsured credit unions,
             one was located in Idaho and the other was located in New Hampshire.




             Page 6                                         GAO-03-971 Federal Deposit Insurance Act
                                                                             insured credit unions are located in eight states and had about 1.1 million
                                                                             members with deposits totaling about $10.8 billion, as of December 2002—
                                                                             a little over 1 percent of all credit union members and 2 percent of all
                                                                             credit union deposits. We identified nine additional states that could
                                                                             permit credit unions to purchase private deposit insurance through our
                                                                             survey of 50 state regulators and subsequent discussions with state
                                                                             regulators. Figure 1 illustrates the states that permit or could permit
                                                                             private deposit insurance as of March 2003 and the number of privately
                                                                             insured credit unions as of December 2002.

Figure 1: States Permitting Private Deposit Insurance (March 2003) and Number of Privately Insured Credit Unions (December
2002)


  Number of credit unions that
  purchase private deposit insurance

  100                                                                   93


   80


   60


                                                                  40
   40

                                  20         21          22
   20
                            8
          3        5

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                                                                                      States that permit private deposit insurance but do not have privately insured credit unions

                                                                                      States that have credit unions that purchase private deposit insurance


Sources: GAO and state regulators.
                                                                             The number of privately insured credit unions and private deposit insurers
                                                                             has declined significantly since 1990. In 1990, 1,462 credit unions in 23
                                                                             states purchased private deposit insurance from 10 different nonfederal,
                                                                             private insurers. At that time, deposits at these credit unions totaled $18.6
                                                                             billion—73 percent more than the total of privately insured deposits as of
                                                                             December 2002. Shortly after the failure of Rhode Island Share and
                                                                             Depositors Indemnity Corporation (RISDIC), a private deposit insurer in




                                                                             Page 7                                                      GAO-03-971 Federal Deposit Insurance Act
Rhode Island in 1991, almost half of all privately insured credit unions
converted to federal deposit insurance voluntarily or by state mandate.9 As
a result of the conversions from private to federal deposit insurance, most
private deposit insurers have gone out of business due to the loss of their
membership since 1990 and only one company—ASI—currently offers
private primary deposit insurance.

ASI has a statutory charter granted by the State of Ohio.10 ASI is licensed
by the Ohio Superintendent of Insurance and is subject to oversight by
that department and Ohio’s Superintendent of Credit Unions. Unlike
federal deposit insurance, which is backed by the full faith and credit of
the United States, ASI’s insurance fund is not backed by the full faith and
credit of any governmental entity. Also, in contrast to federal deposit
insurance, which covers up to $100,000 in an insured account, the
coverage amount provided by ASI is subject to a $250,000 statutory cap in
Ohio law.

Depository institutions lacking federal deposit insurance—privately
insured credit unions—do not directly present a risk to the respective
federal deposit insurance funds and do not pay for participation in those
funds. Accordingly, they are not subject to supervision by the agencies
that administer those funds. The Federal Credit Union Act contains
criteria for credit unions applying for federal deposit insurance from
NCUA and requires NCUA to consider a list of factors before approving an
application to become federally insured.11 For example, NCUA must assess
the credit union’s financial condition, the adequacy of reserves, the fitness
of management, and the convenience and needs of the members to be
served by the institution. To continue to be eligible for federal deposit
insurance, credit unions must continue to comply with NCUA regulations




9
  Several factors precipitated the closure of RISDIC in 1991. For example, weaknesses
existed in the Rhode Island bank regulator’s and RISDIC’s oversight of institutions.
Furthermore, some of the institutions insured by RISDIC engaged in high-risk activities. In
1991, RISDIC depleted its reserves because of the failure of one institution. As a result,
runs occurred at several other institutions insured by RISDIC; and it was not able to meet
its insurance obligations and was forced to call in a conservator. The Governor of Rhode
Island closed all institutions insured by RISDIC and required institutions to purchase
federal deposit insurance.
10
     See Ohio Rev. Code Ann. Ch. 1761 (2002).
11
     12 U.S.C. § 1781(b).




Page 8                                          GAO-03-971 Federal Deposit Insurance Act
                          for measures of net worth, prompt corrective action requirements, and
                          rules governing investment and deposit activities.12

Section 43 Requirements   Section 43 imposes requirements on depository institutions lacking federal
                          deposit insurance and private deposit insurers and assigns FTC with the
                          responsibility for enforcing compliance with these provisions. Specifically,
                          section 43 requires depository institutions lacking federal deposit
                          insurance to

                          •      Include conspicuously on all periodic account statements, signature
                                 cards, passbooks, certificates of deposits, or similar instruments
                                 evidencing a deposit, a notice that the institution is not federally
                                 insured and that if the institution fails, the federal government does not
                                 guarantee that depositors will get back their money;

                          •      Include conspicuously in all advertising and where deposits are
                                 normally received a notice that the institution is not federally insured;
                                 and

                          •      Obtain a written acknowledgement from depositors that the institution
                                 is not federally insured and that if the institution fails, the federal
                                 government does not guarantee that the depositor will get back their
                                 money. 13

                          In addition, section 43 prohibits institutions lacking federal deposit
                          insurance from engaging in interstate commerce unless the appropriate
                          supervisor of the institution’s charter state has determined that the
                          institution meets all eligibility requirements for federal deposit insurance.
                          This prohibition is referred to as the “shut-down” provision.14



                          12
                               See, e.g., 12 U.S.C. § 1786(e); 12 C.F.R. Parts 702 and 703.
                          13
                             12 U.S.C. § 1831t (b). Section 43 provides an exception from these requirements.
                          Specifically, FTC may, by regulation or order, make exceptions for any depository
                          institution that, within the United States, does not receive initial deposits of less than
                          $100,000 from individuals who are citizens or residents of the United States, other than
                          money received in connection with any draft or similar instrument issued to transmit
                          money. Section 43 also provides an alternative to the acknowledgement requirement for
                          depositors who were depositors before June 19, 1994, which allows an institution to send a
                          series of three notices containing the acknowledgment notice if the institution has not
                          obtained a written acknowledgment from such depositors.
                          14
                            12 U.S.C. § 1831t (e). Section 43 provides that FTC, in consultation with FDIC, may
                          permit an exception to this requirement.




                          Page 9                                              GAO-03-971 Federal Deposit Insurance Act
With respect to private deposit insurers, section 43 requires each insurer
to

•      Obtain an annual audit from an independent auditor using generally
       accepted auditing standards that includes a determination of whether
       the private deposit insurer follows generally accepted accounting
       principles and has set aside sufficient reserves for losses; and

•      Distribute copies of the audit report to each depository institution it
       insures and to the appropriate supervisory agency of each state in
       which such an institution receives deposits, within specified time
       frames.15

With respect to FTC, section 43

•      Requires the Commission to prescribe “the manner and content of
       disclosure required under the section” in order to “ensure that current
       and prospective customers understand the risks involved in forgoing
       federal deposit insurance;”

•      Assigns to FTC the responsibility to enforce compliance with the
       section under the Federal Trade Commission Act (FTC Act);

•      Authorizes FTC to determine that an institution not chartered as a
       depository institution nonetheless is subject to the section, referred to
       as the look-alike provision; and

•      Authorizes FTC, in consultation with FDIC, to exempt an institution
       from the shut-down provision.16

Since being charged with the responsibility to enforce and implement
these requirements, FTC has requested Congress to prohibit it from
enforcing these provisions. In response, FTC’s appropriation language,
since 1993, has contained provisions prohibiting it from using funds to
implement these provisions.

FTC has authority to enforce a variety of federal antitrust and consumer
protection laws. According to FTC, it works to enhance the smooth



15
     12 U.S.C. § 1831t (a).
16
     12 U.S.C. § 1831t(c), (g), (f)(2), and (e)(1), respectively.




Page 10                                               GAO-03-971 Federal Deposit Insurance Act
                     operation of the marketplace by eliminating acts or practices that are
                     unfair or deceptive, and its efforts have been directed toward stopping
                     actions that threaten consumers’ opportunities to exercise informed
                     choice. The FTC Act charges FTC with responsibility for preventing the
                     use of unfair methods of competition and unfair or deceptive acts or
                     practices.17 That act, however, provides that FTC’s powers generally do not
                     extend to depository institutions—banks, thrifts, and federal credit
                     unions—which typically are beyond FTC’s authority.18 In addition, one
                     section of the FTC Act has been interpreted to mean that FTC does not
                     have jurisdiction over nonprofit corporations.19

                     Consistent with its appropriations authority prohibiting FTC from
NCUA and State       enforcing section 43, FTC has not implemented regulations or orders to
Regulators Imposed   prescribe the manner and content of required disclosures; to date, FTC has
                     not brought any enforcement cases as a result of the identification of
Related Disclosure   noncompliance with the disclosure, shut-down, and annual audit
and Audit            provisions. As part of this review, we also ascertained whether other laws
                     or rules impose requirements similar to those of section 43. We found that
Requirements         NCUA and state regulators have imposed disclosure and audit
                     requirements on state-chartered credit unions and private deposit insurers
                     that, while not comparable to section 43 requirements, help achieve the
                     objectives of section 43.

                     For example, NCUA imposes notification requirements on federally
                     insured credit unions seeking to convert to private deposit insurance.
                     NCUA requires these credit unions to notify their members, in a
                     disclosure, that if the conversion were approved, the federal government
                     would not insure deposits. Specifically, under the Federal Credit Union
                     Act, if a federally insured credit union terminates federal deposit
                     insurance or converts to nonfederal (private) insurance, the institution
                     must give its members “prompt and reasonable notice” that the institution
                     has ceased to be federally insured.20 NCUA rules implement these
                     provisions by prescribing language to be used in (1) the notices of the
                     credit union’s proposal to terminate federal deposit insurance or convert
                     to nonfederal (private) insurance, (2) an acknowledgement on the voting


                     17
                          15 U.S.C. § 45 (2000).
                     18
                          Id.; see also 15 U.S.C. § 57a(f)(3), a(f)(4).
                     19
                          15 U.S.C. § 44. This provision is discussed later in this report.
                     20
                          12 USC § 1786(c), (d).




                     Page 11                                              GAO-03-971 Federal Deposit Insurance Act
ballot of the member’s understanding that federal deposit insurance will
terminate, and (3) the notice of the termination or conversion.21 Under
NCUA’s rules, the prescribed language is to include a statement apprising
members that their accounts no longer would be federally insured. Other
language to be included on the notice of a proposal to convert to private
deposit insurance and on the related voting ballot is to state that NCUA’s
insurance is backed by the full faith and credit of the United States and
that the private deposit insurance is not backed by the full faith and credit
of the United States.22

While NCUA’s disclosure requirements provide some assurance that
current members of credit unions converting to private deposit insurance
are notified of the lack of federal deposit insurance coverage, these NCUA
regulations do not apply to institutions that never were federally insured.
In addition, disclosures contained in NCUA’s required notifications are not
as extensive as disclosures required under section 43. NCUA disclosure
pertains to a specific event (termination of insurance or conversion to
private deposit insurance) and is provided only to those individuals who
are members of the credit union at the time of the event. Section 43, on the
other hand, requires disclosure to all members who are depositors,
including those individuals who become members after the credit union
has terminated federal deposit insurance. Section 43 also requires that
depositors acknowledge in writing that the institution is not federally
insured and that no federal guarantee exists.23 In addition, under section
43, an institution’s lack of federal deposit insurance must be stated, on an
ongoing basis, in periodic account statements, signature cards, passbooks
and instruments evidencing a deposit, and in advertising and displays.

In our review of Ohio’s law, we noted that Ohio imposes certain disclosure
requirements about the insured status of depository accounts. Ohio law
requires credit union brochures that include the name of the private
deposit insurer to also include a specific notice: “Members Accounts Are



21
  12 C.F.R. §§ 708b.201-204, 708b.301, and 708b.302. The FCU Act requires a membership
vote approving conversion from federal to private deposit insurance.
22
  We reviewed six recent conversions to private deposit insurance and found that, prior to
NCUA’s termination of the credit union’s federal deposit insurance, these credit unions had
generally complied with NCUA’s notification requirements for conversion.
23
  As noted previously, this requirement is subject to an exception, which permits an
institution to send a series of three notices to those depositors who were depositors before
June 19, 1994, and have not signed an acknowledgement.




Page 12                                        GAO-03-971 Federal Deposit Insurance Act
                        Not Insured or Guaranteed by Any Government or Government-sponsored
                        Agency.”24 The requirements we reviewed, like Ohio law, typically do not
                        require disclosure of the same information or in the same manner as is
                        required by section 43.

                        Ohio also imposes several requirements on the remaining private deposit
                        insurer, ASI.25 For example, Ohio requires ASI to submit annual audited
                        financial statements and quarterly unaudited financial statements to Ohio
                        regulators.26 While this annual audit requirement is similar to the section 43
                        provision, Ohio does not require private deposit insurers to distribute this
                        information to the appropriate supervisory agency of each state in which it
                        insures deposits nor to depository institutions in which it insures
                        deposits.


                        Compliance with section 43 disclosure, shut-down, and annual audit
Compliance with         requirements varied considerably. The most likely impact on consumers
Section 43 Provisions   from the lack of enforcement of these provisions may result from credit
                        unions not providing adequate disclosures about not being federally
Varied; Potential       insured. We found that many privately insured credit unions have not
Impact on Consumers     always complied with the disclosure requirements in section 43 that are
                        designed to notify consumers that the deposits in these institutions are not
Most Evident in         federally insured. While state regulators and ASI officials reported
Credit Union            monitoring whether privately insured credit unions disclosed the lack of
Noncompliance with      federal deposit insurance to depositors, we found that these actions varied
                        and did not ensure that all credit unions complied with required
Disclosure              disclosures. As a result, depositors at some privately insured credit unions
Requirements            may not be adequately informed that deposits at these institutions are not
                        federally insured. Regarding the shut-down provision, state regulators
                        reported to us that they did not make explicit determinations of


                        24
                          During our site visits in Ohio, we visited 16 credit unions; eight credit unions had
                        materials that mentioned ASI. Of the 25 pieces of material we collected at these credit
                        unions, we found that 17 had not complied with Ohio law.
                        25
                          The Ohio Department of Financial Institutions and the Department of Insurance dually
                        regulate ASI. See Ohio Rev. Code Ann. Ch. 1761 (2002).
                        26
                          Ohio law also requires ASI to provide copies of written communication with regulatory
                        significance to Ohio regulators and to obtain the opinion of an actuary attesting to the
                        adecuacy of loss reserves established. According to officials from the Ohio Department of
                        Financial Institutions and the Department of Insurance, ASI has complied with the
                        requirements and regulators have never needed to take corrective actions against ASI or
                        not permitted ASI to do business in Ohio.




                        Page 13                                        GAO-03-971 Federal Deposit Insurance Act
                            insurability but we found that such a determination may not provide a
                            meaningful protection for consumers. The remaining private deposit
                            insurer complied with the annual audit requirements, making it possible
                            for state regulators and member credit unions to become informed about
                            the insurer’s financial condition. Therefore, the lack of enforcement of this
                            provision appears to have had no direct effect on consumers.


The Lobbies, Materials,     Section 43 requires privately insured credit unions to disclose to their
and Web Sites of Many       members that deposits at these institutions are (1) not federally insured
Privately Insured Credit    and (2) if the institution fails, the federal government does not guarantee
                            that depositors will get back their money. Specifically, these institutions
Unions Lacked Disclosures   are required to disclose this information at places where deposits are
as Required under Section   normally received (lobbies) and on signature cards, and on instruments
43                          evidencing a deposit (deposit slips). Advertising (brochures and
                            newsletters) must also contain the statement that the institutions are not
                            federally insured. We conducted unannounced site visits to 57 locations of
                            privately insured credit unions (49 main and 8 branch locations) in five
                            states—Alabama, California, Illinois, Indiana, and Ohio. On our visits we
                            looked to see whether credit unions lacking federal deposit insurance had
                            disclosed to their members that the institution was not federally insured
                            and that the federal government did not guarantee their deposits. We
                            found that many privately insured credit unions we visited did not
                            conspicuously disclose this information. Specifically, as shown in table 1,
                            37 percent (21 of 57) of the locations we visited did not conspicuously post
                            signage in the lobby of the credit union.

                            Credit unions’ compliance with this requirement varied by state. For
                            example, six of the 21 sites visited in California—or 29 percent—did not
                            display the required notices, while three of the five sites visited in
                            Alabama—or 60 percent—did not display conspicuous signage in their
                            lobbies.




                            Page 14                                GAO-03-971 Federal Deposit Insurance Act
Table 1: Number and Percent of Credit Unions Visited without Required Signage in
Lobby

                                                                   Sites visited without conspicuous
                                                                        signage located in lobby
                      Total number of
                     privately insured           Total sites
                         credit unions              visited              Total number Total percent
    Alabama                             3                  5a                           3                   60
                                                             b
    California                         22                 21                            6                   29
                                                               c
    Illinois                           40                 10                            4                   40
    Indiana                            21                   5                           2                   40
    Ohio                               93                  16                           6                   38
    Total                            179                   57                         21                    37
Source: GAO.

Notes:
a
 For two credit unions, in addition to conducting a site visit at the main location, we conducted a site
visit at a branch location.
b
 For one credit union, in addition to conducting a site visit at the main location, we conducted site
visits at three branch locations. For another credit union, in addition to conducting a site visit at the
main location, we conducted a site visit at a branch location.
c
    For two credit unions, we only conducted a site visit at a branch location.


On our visits to these credit unions, we also obtained other available credit
union materials (brochures, membership agreements, signature cards,
deposit slips, and newsletters) that did not include language to notify
consumers that the credit union was not federally insured—as required by
section 43. Overall, 134 of the 227 pieces of material we obtained from 57
credit union locations—or 59 percent—did not include specified language.
Specifically, 20 of 32 signature cards we obtained from 31 credit unions,
and 19 of 20 deposit slips we obtained from 18 credit unions did not
include specified language (see table 2).




Page 15                                                  GAO-03-971 Federal Deposit Insurance Act
Table 2: Number and Percent of Credit Union Materials Reviewed without Required
Disclosures

                                                    Materials without required
                                                           disclosures
                                    Total number
 Type of document                       reviewed     Total number Total percent
 Brochures:
    Membership at credit union                49                23               47
    Checking accounts                         24                13               54
    Savings accounts                          22                 7               32
    Investment accounts                       34                27               79
 Membership agreements                        19                11               58
 Signature cards                              32                20               62
 Deposit slips                                20                19               95
 Newsletters                                  27                14               52
 Total                                       227               134               59
Source: GAO.



As part of our review, we also reviewed 78 Web sites of privately insured
credit unions and found that many credit union Web sites were not fully
compliant with section 43 disclosure requirements. For example, 39 of the
78 sites had not included language to notify consumers that the credit
union was not federally insured. Specifically, in six of the eight states we
reviewed, more than half of the Web sites identified and analyzed in each
state were not compliant (see table 3).




Page 16                                  GAO-03-971 Federal Deposit Insurance Act
                           Table 3: Number and Percent of Web Sites Reviewed without Required Disclosures

                                                                                   Web sites without required
                                                                                          disclosures
                                           Total number of    Number of Web
                                          privately insured    sites identified
                                              credit unions      and analyzed     Total number      Total percent
                           Alabama                       3                   2                0                  0
                           California                   22                  18                3                  17
                           Idaho                        20                   7                5                  71
                           Illinois                     40                  15                8                  53
                           Indiana                      21                   7                4                 57
                           Maryland                      5                   2                2                 100
                           Nevada                        8                   4                3                  75
                           Ohio                         93                  23               14                  61
                           Total                       212                  78               39                 50

                           Source: GAO.


                           While these results were not obtained from a statistically valid sample that
                           would allow us to project the extent of compliance to all privately insured
                           credit unions, these findings are robust enough, both in the aggregate and
                           within each state, to raise concern about the lack of required disclosures
                           by privately insured credit unions.


Monitoring Efforts over    The extent to which state regulators and ASI officials monitored whether
Disclosures by Privately   privately insured credit unions disclosed the lack of federal deposit
Insured Credit Unions      insurance to depositors varied. State regulators in Alabama, California,
                           Idaho, Indiana, Maryland, Nevada, and Ohio reported that during state
Varied                     examinations of credit unions, their examiners looked to see whether
                           privately insured credit unions disclosed the lack of federal deposit
                           insurance to depositors. However, according to these state regulators,
                           state examination procedures did not include specific guidance on how to
                           determine if credit unions were compliant with disclosure requirements in
                           section 43. Also, state regulators reported that although they monitored
                           disclosures at privately insured credit unions, they generally had not
                           enforced these requirements. Since we observed poor compliance with
                           section 43 disclosure requirements in our site visits, oversight by state
                           regulators has not provided sufficient assurance that privately insured
                           credit unions are adequately disclosing that their institutions are not
                           federally insured.



                           Page 17                                       GAO-03-971 Federal Deposit Insurance Act
                              ASI officials told us that they had developed materials that explained the
                              disclosure requirements of section 43 to assist credit unions it insured to
                              comply with these requirements. ASI officials reported that they provide
                              these materials to credit unions when they convert to private deposit
                              insurance and to other credit unions that requested these materials.
                              Among other things, these materials inform credit unions of the specific
                              disclosure requirements and include samples of on-premise signage.
                              However, our review of ASI’s samples for on-premise signage found that
                              not all samples included language to notify consumers that the credit
                              union was not federally insured.

                              ASI’s on-site audit program included specific guidance on how to
                              determine if credit unions were compliant with disclosure requirements in
                              section 43. In our review of two ASI examination files, we observed that
                              ASI officials had noted that these two credit unions in Nevada had not
                              included language on credit union materials, such as signature cards,
                              stating that the institution is not federally insured and that if the institution
                              fails, the federal government does not guarantee that depositors will get
                              back their money. In our follow-up discussions with ASI management,
                              they indicated that while ASI officials made some notes regarding
                              compliance when conducting on-site exams—as in the examination files
                              on the Nevada credit unions—they did not take action to enforce these
                              federal requirements.


Credit Unions Do Not          The shut-down provision of section 43 prohibits depository institutions
Appear to Have Obtained       lacking federal deposit insurance from engaging in interstate commerce
State Determinations of       unless the institution’s state regulator has determined the institution’s
                              eligibility for federal deposit insurance.27 To be eligible for federal deposit
Insurability, but Impact on   insurance, NCUA must, among other things, assess the credit union’s
Consumers May Be              financial condition, the adequacy of reserves, the fitness of management,
Limited                       and the convenience and needs of the members to be served by the
                              institution. It appears that privately insured credit unions have not
                              obtained this determination from their state regulators. One could
                              question, however, whether the states could or should make the
                              determination that institutions meet the standards for federal deposit
                              insurance. Even if the state applied federal deposit insurance eligibility
                              criteria in making the determination for credit unions, the determination



                              27
                                12 U.S.C. § 1831t(e). Section 43 provides that FTC, in consultation with FDIC, may permit
                              an exception to this requirement.




                              Page 18                                        GAO-03-971 Federal Deposit Insurance Act
may not necessarily provide a meaningful protection for consumers;
however, other actions were taken to ensure the health of privately
insured credit unions.

Section 43 calls for a one-time eligibility determination and does not
require an ongoing state assessment of the institutions’ compliance with
federal deposit insurance eligibility requirements.28 Because this is a one-
time determination, it does not ensure that credit unions would remain
eligible for federal deposit insurance. Other circumstances also indicate
that consumers might not benefit from the eligibility determination. For
example, when an institution converts from federal deposit insurance to
private deposit insurance, such an eligibility determination would be
redundant because the institution had been eligible for federal deposit
insurance before it became privately insured.29 According to ASI, between
1992 and 2002, 27 credit unions converted from federal to private deposit
insurance.30 In these cases, it would be doubtful that an eligibility
determination would benefit consumers.

State regulators also told us that while they had not made explicit
determinations that these privately insured credit unions had met
eligibility requirements for federal deposit insurance, they imposed safety
and soundness standards on credit unions lacking federal deposit
insurance, which the regulators believed generally satisfied the criteria for




28
  The language of section 43 indicates that only a single determination is required. The
section requires an institution to shut down “unless the appropriate supervisor of the State
in which the institution is chartered has determined that the institution meets all eligibility
requirements for Federal deposit insurance….” 12 U.S.C. § 1831t(e)(1).
29
  Since 1990, the number of credit unions converting from federal to private deposit
insurance and private to federal deposit insurance—in states that permit private deposit
insurance—has been comparable. Since 1990, 26 credit unions, located in those states that
permit private deposit insurance, converted from private to federal deposit insurance.
Generally, credit unions that converted from federal to private deposit insurance since 1990
are larger than credit unions that switched from private to federal deposit insurance during
the same period. Specifically, 10 credit unions that converted to private deposit insurance
currently each have deposits between $100 and $500 million. By comparison, 20 credit
unions that converted to federal deposit insurance currently each have total deposits of
less than $50 million.
30
  Most (25 of 27) of these conversions occurred since 1997. With respect to credit unions,
private deposit insurance predates federal deposit insurance. In 1970, Congress created
NCUSIF. Since 1994, ASI has provided insurance for two newly chartered credit unions and
for one credit union that formerly had been uninsured.




Page 19                                          GAO-03-971 Federal Deposit Insurance Act
federal deposit insurance.31 For example, these regulators reported that
they applied the same examination and supervision process to all state-
chartered credit unions—regardless of deposit insurance status. In
addition, these states had adopted NCUA’s examination program and their
examiners had received training from NCUA. However, implementation of
NCUA’s examination program does not fully insure that those institutions
meet all federal deposit insurance eligibility standards. For example,
besides assessing a credit union’s financial condition and the adequacy of
its reserves when making insurability determinations, NCUA is also
required to factor in membership considerations such as the convenience
and needs of the members to be served by the institution.

Some states also had an approval process for credit unions seeking to
purchase private deposit insurance. Alabama, Illinois, and Ohio had
written guidelines for credit unions seeking to purchase private deposit
insurance.32 The other five states that permitted private deposit insurance
did not have written guidelines for credit unions seeking to purchase
private deposit insurance, but Idaho, Indiana, and Nevada state regulators
noted that they had the authority to “not approve” a credit union’s
purchase of private deposit insurance.33

Additionally, ASI had several strategies in place to oversee the credit
unions it insured. Specifically, ASI regularly conducted off-site monitoring
and conducted on-site examinations of privately insured credit unions at
least every 3 years. It also reviewed state examination reports for the
credit unions it insured, and imposed strict audit requirements. For
example, ASI required an annual CPA audit for credit unions with $20
million or more in assets, while NCUA only required the annual audit for
credit unions with more than $500 million in assets. ASI also had targeted
its monitoring of its largest and smallest credit unions. For larger credit
unions, those with more than 10 percent of ASI’s total insured shares, ASI
planned to conduct semiannual, on-site examinations and monthly and



31
 The eligibility standards for federal credit union insurance are set forth in the Federal
Credit Union Act, 12 U.S.C. § 1781, and in NCUA regulations, 12 C.F.R. Part 741.
32
  For example, credit unions in Alabama seeking to purchase private deposit insurance
must meet the state’s minimum safety and soundness standards, including measures of the
credit union’s total capital and asset quality.
33
  For example, regulators in Idaho stated that if the credit union did not meet state
requirements for safety and soundness, they would not approve a credit union’s purchase
of private deposit insurance.




Page 20                                         GAO-03-971 Federal Deposit Insurance Act
                            quarterly off-site monitoring, including a review of audits and financial
                            statements.34 In January 2003, five credit unions comprising about 40
                            percent of ASI’s total assets qualified for this special monitoring.35 In
                            January 2003, ASI also began a monitoring strategy intended to increase its
                            oversight of smaller credit unions.36 First, ASI assigned a risk level to credit
                            unions it insured (low, moderate, or high) and then used this assessment
                            to determine the extent and frequency of oversight at the credit union.37 In
                            January 2003, ASI had determined that 98 credit unions qualified for this
                            monitoring, with shares from the largest of these credit unions totaling
                            about $23 million.

                            Since the above actions were taken to ensure the health of privately
                            insured credit unions, the effect on consumers from the lack of
                            enforcement of this provision may be negligible.


Remaining Private Deposit   The remaining private deposit insurer has complied with the audit
Insurer Complied with       requirements under section 43, which requires private deposit insurers to
Federal Audit               obtain an annual audit and provide it to state regulators and the
                            management of privately insured credit unions within certain time
Requirements                frames.38 Among other things, the audit must be conducted by an
                            independent auditor using generally accepted auditing standards and
                            include a determination of whether the insurer follows generally accepted
                            accounting principles and has set aside sufficient reserves for losses. The
                            private deposit insurer must provide a copy of the report to each
                            depository institution it insures not later than 14 days after the audit is
                            completed. Also, the private insurer must provide a copy of the report to



                            34
                              Generally, ASI implemented this special monitoring plan because it began to provide
                            insurance to a very large credit union, with over $2 billion in total assets.
                            35
                              As of June 2003, the total shares of these credit unions ranged from $297.6 million to $2.5
                            billion. Though the plan targeted only ASI’s five largest credit unions, ASI may increase the
                            number of monitored credit unions at any time so that it continually reviews at least 25
                            percent of its total assets.
                            36
                               Generally, ASI implemented this special monitoring plan due to larger-than-expected
                            losses at a small credit union in 2002.
                            37
                              For example, the extent of oversight could require conducting face-to-face interviews
                            with the chair of the supervisory audit committee, confirming that checks over $1000 have
                            cleared, and verifying the value of loans, investments, and share accounts with credit union
                            members in writing or over the telephone.
                            38
                                 12 U.S.C. § 1831t(a).




                            Page 21                                         GAO-03-971 Federal Deposit Insurance Act
                        the “appropriate supervisory agency” of each state in which such an
                        institution receives deposits not later than 7 days after the audit is
                        completed.39

                        We found that the audits obtained by ASI for 1999, 2000, 2001, and 2002
                        complied with this federal requirement. Specifically, these audits noted
                        that the reviewed consolidated financial statements presented fairly, in all
                        material respects, ASI’s financial position and the results of their
                        operations and cash flows for the years reviewed in conformance with
                        accounting principles generally accepted in the United States. Further,
                        appropriate state regulators and the management of some privately
                        insured credit unions told us that ASI had provided them copies of the
                        annual audits in accordance with the requirement. Since the private
                        deposit insurer has obtained and distributed the audit as required, it has
                        given state regulators and the management of privately insured credit
                        unions the opportunity to become informed about the financial condition
                        of the private deposit insurer. This could help ensure the safety and
                        soundness of ASI—which, in turn, protects consumers. It appears
                        consumers have suffered no negative impact from the nonenforcement of
                        this provision.


                        In evaluating which agency should enforce section 43, we did not find an
Although There Is No    agency that was ideally suited to carry out the responsibilities set forth in
Ideal Regulator to      the provision. Although FTC, NCUA, and FDIC officials generally agreed
                        that consumers should receive proper notification about the insured status
Enforce Section 43,     of their deposits, they maintained that their respective agencies should not
FTC Is Best among       be charged with responsibility for implementing and enforcing section 43.
                        NCUA and FDIC oppose having any responsibilities under section 43
Candidates to Enforce   because such a role would result in a regulatory conflict of interest and
Provisions              would be inconsistent with their missions and the section’s purpose.
                        Credit union industry representatives believe that FTC is the appropriate
                        federal agency to enforce section 43. FTC staff stated that questions about
                        the Commission’s authority under section 43 and the Commission’s lack of
                        expertise to administer the section justify removing FTC from any
                        responsibilities under the provision. The staff asserted that other federal
                        agencies are more qualified to carry out the section. Based on our review
                        of these concerns, we believe FTC is the best among these candidates to



                        39
                          Since ASI is a mutual, member-owned organization and is not publicly traded, ASI is not
                        required to make the same public filings that are required for publicly traded firms.




                        Page 22                                       GAO-03-971 Federal Deposit Insurance Act
                       enforce these provisions; however, clarifying FTC’s authority and
                       providing it with additional flexibility in administering these provisions
                       could better ensure effective enforcement of these provisions.


NCUA and FDIC Oppose   NCUA has taken the position that it should not be responsible for
Having Enforcement     enforcing section 43. In our discussions with NCUA officials, they offered
Responsibility under   several reasons why NCUA should not be charged with enforcing section
                       43. They expressed concern that placing the responsibility with NCUA
Section 43             would closely identify NCUA with uninsured credit unions and, in turn,
                       create the potential for confusion as to whether an institution was
                       federally insured. The officials also maintained that if NCUA were
                       responsible for enforcing and implementing the section, the costs would
                       be passed on to federally insured credit unions.40 In addition, the officials
                       stated that NCUA regulation of a private insurer would result in a
                       regulatory conflict of interest that might erode confidence in NCUA’s
                       authority.41 They said that if the private deposit insurance system were to
                       fail while under NCUA’s purview, confidence in NCUA, as well as federal
                       deposit insurance for credit unions, could weaken to a point that it could
                       have a devastating impact on the financial health of the credit union
                       system.

                       In our discussions with FDIC officials, they expressed several reasons—
                       similar to those presented by NCUA—why FDIC should not be charged
                       with enforcing section 43. First, FDIC officials noted that FDIC insures the
                       deposits at banks and savings associations—but does not regulate or
                       supervise credit unions or insure deposits at these institutions. Officials
                       also expressed concern that placing the responsibility with FDIC would
                       closely identify a federal agency with uninsured credit unions and, in turn,
                       create the potential for confusion as to whether an institution was
                       federally insured.




                       40
                         NCUA operations are entirely supported by fees paid by federal credit unions and income
                       from the insurance deposit (1 percent of insured shares) maintained with NCUSIF by all
                       federally insured credit unions. NCUA may also assess insurance premiums on its insured
                       credit unions but has not done so in over 10 years.
                       41
                         In its role as a primary share insurer, NCUA is a competitor of any private company that
                       provides primary share insurance. Accordingly, NCUA’s motivations for taking any action
                       perceived as adverse to a private share insurer would be subject to question.




                       Page 23                                        GAO-03-971 Federal Deposit Insurance Act
Industry Views on Private   While officials from the National Association of Federal Credit Unions
Deposit Insurance and the   (NAFCU) oppose the option of private primary deposit insurance for
Enforcement of Section 43   credit unions, NAFCU officials believe that since private primary deposit
                            insurance is an option, then section 43 requirements are important and
Requirements                FTC should enforce these requirements for several reasons. NAFCU
                            officials believe that members of privately insured credit unions should be
                            adequately informed that deposits in these institutions are not federally
                            insured. NAFCU officials stated that the enforcement of the provisions in
                            section 43 requires an expertise in “consumer protections” and “deceptive
                            practices.” NAFCU takes the position that FTC has this expertise and,
                            further, that the entity does not need expertise in “safety and soundness of
                            depository institutions.” NAFCU officials also believe that federal financial
                            regulators, such as NCUA and FDIC, are not the appropriate oversight
                            entities for issues related to private deposit insurance because their
                            involvement would imply federal backing. Further, the involvement of
                            NCUA or FDIC in the enforcement of the requirements in section 43 could
                            create conflict between the federal and private insurer. NAFCU officials
                            commented, however, that it would be beneficial for FTC to consult with
                            FDIC and NCUA regarding the enforcement of these requirements because
                            of their expertise. Regarding enforcement, NAFCU officials believe that
                            state regulators could be involved in, but not solely responsible for,
                            enforcing certain section 43 requirements. For example, during state
                            exams of credit unions, examiners could determine if the credit union
                            were compliant with disclosure and insurability requirements of section 43
                            and then submit a certification to FTC.

                            Credit Union National Association (CUNA) and National Association of
                            State Credit Union Supervisors (NASCUS) support the option of private
                            deposit insurance for credit unions and believe that the requirements in
                            section 43 are important and that FTC should enforce the requirements in
                            section 43. CUNA’s public position is that it supports the option of private
                            deposit insurance because the association believes “it is an integral part of
                            the dual-chartering system for credit unions (the system allowing credit
                            unions meaningful choice between a state and federal charter).” NASCUS
                            also supports the option of private deposit insurance for credit unions
                            because the association thinks credit unions should have a choice when it
                            comes to deposit insurance. Specifically, NASCUS believes that if there
                            was only a single insurer (such as NCUA) this would create a uniform




                            Page 24                                 GAO-03-971 Federal Deposit Insurance Act
                               approach, thus obviating state choice, and could revert to a rigid
                               framework.42


Tying NCUA and FDIC            As the agencies charged with administering and safeguarding their
Insurance to the               respective insurance funds, NCUA and FDIC have an interest in seeing that
Regulation of Uninsured        the public does not lose confidence in the federal deposit insurance
                               system. The section 43 disclosure requirements help protect this interest
Entities Presents a Conflict   by imposing measures designed to inform depositors at nonfederally
of Interest                    insured institutions that their deposits are not backed by the federal
                               government. To the extent that institutions comply with section 43, there
                               is a reduced risk that depositors in nonfederally insured institutions would
                               mistakenly believe that their deposits are federally insured. Because
                               section 43 protects NCUA and FDIC interests, it can be argued that those
                               agencies should be responsible for enforcing the provision. Although that
                               proposition has some merit, we have no reason to disagree with
                               statements by NCUA and FDIC officials that placing both private insurers
                               and institutions lacking federal deposit insurance under the jurisdiction of
                               NCUA and FDIC could increase the risk of depositor confusion and create
                               the potential for a loss of public confidence in the federal deposit
                               insurance system. Moreover, assigning responsibility to NCUA and FDIC
                               would mean that federally insured depositary institutions would subsidize
                               the regulation of nonfederally insured institutions.43 However, we
                               recognize that deciding who pays the cost for regulating nonfederally
                               insured institutions is a complicated issue.

                               Some observers have asserted that if NCUA were responsible for
                               regulating the disclosures required by section 43, a depositor’s knowledge
                               that the disclosure was prescribed by NCUA could generate confusion as
                               to NCUA’s relationship with a nonfederally insured institution. The
                               identity of the federal agency may be of no consequence because the
                               consumer might not understand, or even be aware of, which federal
                               agency prescribed the disclosure requirements. However, should NCUA
                               determine, as FTC has, that section 43 calls for substantial disclosure of
                               the risks relating to a specific depository institution and its insurer, NCUA



                               42
                                 We found no evidence to suggest that this is a valid concern. We are unaware of any
                               private insurer providing deposit insurance for banks or thrifts, and the bank insurance
                               system operates successfully with FDIC as the only account insurer.
                               43
                                Because FDIC’s concerns mirror those expressed by NCUA, our discussion refers only to
                               NCUA’s position.




                               Page 25                                        GAO-03-971 Federal Deposit Insurance Act
would risk significant exposure to conflict of interest charges. For
example, if NCUA were to impose requirements on privately insured credit
unions that were considered by states or institutions to be too stringent,
its partiality as a regulator would be questioned. The costs of compliance
with such requirements could cause privately insured institutions to turn
to federal deposit insurance, thus adversely affecting the private deposit
insurer, NCUA’s competitor.

We recognize that in two instances Congress has chosen NCUA to
implement laws that apply to credit unions regardless of whether they are
federally insured. The Truth in Savings Act (TISA) requires that NCUA
implement its provisions with respect to all credit unions, regardless of
who insures them. The Home Mortgage Disclosure Act (HMDA) also
charges NCUA with implementing responsibility for all credit unions
regardless of their insured status. See appendix II for an illustration of
who is responsible for the enforcement of various laws at credit unions.
NCUA has promulgated regulations implementing TISA and issued
guidelines for credit union reporting under HMDA.44 By implementing
these laws, NCUA has demonstrated the capacity to regulate operations of
credit unions it does not insure. Moreover, the cost of enforcing these laws
with respect to nonfederally insured credit unions is passed on to insured
credit unions. It is particularly noteworthy that NCUA’s TISA regulations
require specific disclosures about the terms and conditions of deposit
accounts at both federally and nonfederally insured institutions. However,
NCUA’s administration of those laws does not present the same potential
or perceived conflict of interest. The requirements under those laws apply
equally to federally insured and nonfederally insured institutions. In
contrast, regulations under section 43 would, by definition, treat the
institutions differently and expose NCUA to a regulatory conflict of
interest.

The regulatory conflict of interest also would exist with respect to NCUA
enforcement of the audit provision. NCUA would be regulating its
competition. If NCUA, like FTC, were to consider enforcement of the
requirement as called for by evaluating the conclusions of the audit or
scrutinizing the financial health of the insurer, NCUA’s action would be
inherently suspect. In addition to the regulatory conflict of interest, closely
associating NCUA with nonfederally insured institutions could have an



44
 NCUA’s TISA regulations are contained in 12 C.F.R. Part 707 (2003). NCUA guidance on
HMDA compliance is contained in NCUA publications.




Page 26                                     GAO-03-971 Federal Deposit Insurance Act
                        undesirable “shadow effect.” For example, if NCUA were to be responsible
                        for reviewing the private insurer’s audit report, NCUA would be closely
                        associated with determinations about the financial health of the private
                        deposit insurer. Should the insurer, which is subject to state regulation,
                        fail to honor its insurance commitments, NCUA’s credibility as a regulator
                        would be compromised.

                        Concerns about a regulatory conflict of interest also would accompany
                        NCUA actions involving the shut-down requirement. The agency would be
                        closely associated with liquidating institutions it does not insure and
                        safeguarding deposits it does not protect. In effect, NCUA would be
                        shutting down the institutions that are members of the agency’s
                        competition—the private deposit insurer. Similarly, NCUA enforcement of
                        the look alike provision could be seen as an attempt by the agency to
                        eliminate entities that compete with federally insured credit unions.

                        NCUA’s concern that its enforcement of section 43 would require federally
                        insured institutions to subsidize the regulation of institutions that forgo
                        insurance, in part involves a question of a level playing field; that is,
                        federally insured institutions would be forced to pay the cost of regulating
                        competitors who may benefit from avoiding federal deposit insurance.
                        This concern also touches on other considerations. For example, this
                        additional cost could act as an incentive for federally insured credit unions
                        to convert to private deposit insurance. However, who pays for the
                        oversight of nonfederally insured institutions is a more complicated issue,
                        because federally insured institutions could also benefit from clarifying for
                        consumers the insurance status of these institutions, and if FTC oversees
                        nonfederally insured institutions, taxpayers bear the costs.


FTC Opposes Having to   Section 43 specifies that FTC shall enforce compliance with its
Implement and Enforce   requirements, and any regulations or orders issued under it.45 In addition,
Section 43              the section charges FTC with specific responsibilities. FTC is to prescribe
                        “the manner and content of disclosure required under the section” in order
                        to “ensure that current and prospective customers understand the risks
                        involved in forgoing federal deposit insurance.”46 Also, the section
                        authorizes FTC, in consultation with FDIC, to exempt an institution from



                        45
                             12 U.S.C. § 1831t(g).
                        46
                             12 U.S.C. § 1831t(c).




                        Page 27                                GAO-03-971 Federal Deposit Insurance Act
                                   the shut-down provision.47 In addition, section 43 authorizes FTC to
                                   determine that an institution not chartered as a depository institution
                                   nonetheless can be subject to the section.48 FTC staff told us that because
                                   of questions about the Commission’s authority under section 43 and the
                                   Commission’s lack of expertise to carry out the section in accordance with
                                   the staff’s perception of what the section requires, FTC is not the
                                   appropriate federal agency to enforce the section.

FTC Staff Said That Questions      According to FTC staff, the language of section 43 charging the
about the Commission’s             Commission with responsibility for enforcing the section (charging
Authority under Section 43         provision) contains an ambiguity that could lead to challenges against the
Could Interfere with Its Ability   Commission’s authority under the section. As noted above, the charging
to Enforce the Section             provision specifies that the FTC shall enforce section 43 “under the [FTC]
                                   Act.” The FTC Act, however, limits the Commission’s jurisdiction in ways
                                   that are inconsistent with FTC’s responsibilities under section 43. For
                                   example, FTC and federal courts have interpreted the FTC Act to mean
                                   that the Commission has no jurisdiction over nonprofit entities, a group
                                   that includes credit unions.49 Another provision of the FTC Act (Section 6),
                                   which authorizes FTC to conduct investigations, require reports and
                                   promulgate rules and regulations to carry out the FTC Act, expressly
                                   excludes the business of insurance from those authorities except under
                                   very limited circumstances.50 According to FTC staff, this limitation raises


                                   47
                                     12 U.S.C. § 1831t(e)(1). The shut-down provision prohibits a depository institution (other
                                   than a bank) that lacks federal deposit insurance from using the mails or any
                                   instrumentality of interstate commerce to receive or facilitate receiving deposits except (1)
                                   as permitted by FTC after consultation with FDIC or (2) where the appropriate supervisor
                                   for the state in which the institution is chartered determines that the institution meets all
                                   eligibility requirements for federal deposit insurance.
                                   48
                                     The definition of “depository institution” contained in the section includes any entity FTC
                                   determines to be engaged in the business of receiving deposits, which “could reasonably be
                                   mistaken for a depository institution by the entity’s current or prospective customers.” 12
                                   U.S.C. § 1831t(f)(2)(B).
                                   49
                                     The FTC Act specifically excludes federally chartered credit unions from its provisions.
                                   15 U.S.C. § 45 (2000); See also 15 U.S.C. § 57a(f)(3), (f)(4). There is no specific exclusion
                                   for state-chartered credit unions. However, the FTC Act has been interpreted to preclude
                                   FTC from enforcing the act against certain nonprofit entities. See Community Blood Bank
                                   v. FTC, 405 F.2d 1011, 1022 (8th Cir.1969). The FTC Act gives the Commission authority
                                   over “persons, partnerships, or corporations.” However, the act’s definition of
                                   “corporation” refers only to for-profit entities. 15 U.S.C. § 44.
                                   50
                                     15 U.S.C. § 46. This provision authorizes FTC to conduct antitrust investigations even if
                                   the investigations are applicable to the business of insurance. Also, FTC may conduct
                                   studies and prepare reports relating to the business of insurance only upon receiving a
                                   request approved by Congressional committees as specified in the section.




                                   Page 28                                         GAO-03-971 Federal Deposit Insurance Act
                                questions about the Commission’s authority to enforce the audit provision
                                in section 43, which applies specifically to private insurers.

                                FTC staff said that FTC’s jurisdiction with respect to the audit provision,
                                as well as disclosures about deposit insurance, also would be subject to
                                challenge because of limitations the McCarran-Ferguson Act imposes on
                                federal laws that relate to the business of insurance. Under the McCarran-
                                Ferguson Act, a federal law applicable to the business of insurance can be
                                preempted by a state insurance law. Specifically, the McCarran-Ferguson
                                Act precludes application of a federal statute in the face of a state law
                                “enacted . . . for the purpose of regulating the business of insurance,” if the
                                federal measure does not “specifically relate to the business of insurance,”
                                and would “invalidate, impair, or supersede” the state’s law.51 The act also
                                specifies that the FTC Act is applicable to the business of insurance “to the
                                extent that such business is not regulated by State law.”52 According to
                                FTC staff, this latter provision displaces application of the FTC Act where
                                there is state regulation of the business of insurance. The staff explained
                                that FTC’s authority under section 43 is unclear because the section
                                requires FTC to enforce the deposit insurance disclosure requirements and
                                the audit provision “under the [FTC] Act” even though the FTC Act does
                                not apply to insurance. FTC staff believe that enforcement of the
                                disclosure provisions could be subject to challenge in states that regulate
                                deposit insurance, and that enforcement of the audit provision would be
                                subject to challenge because the State of Ohio specifically regulates the
                                only private deposit insurer, ASI.

FTC Staff Raised Practical      FTC staff raised several concerns about the Commission’s ability to carry
Concerns about the              out section 43 responsibilities. One concern relates to the manner in which
Commission’s Ability to Carry   FTC would exercise its rulemaking authority under the section. Section 43
Out Section 43                  does not specify the authority under which FTC’s implementing rules
                                should be promulgated. To the extent that the Commission’s rulemaking
                                authority under the section is subject to requirements of the FTC Act, FTC
                                staff made two points. They noted that the Commission’s general
                                rulemaking authority under the FTC Act may be exercised only “for
                                purposes of carrying out the provisions of [the FTC Act].”53 The



                                51
                                 15 U.S.C. § 1012(b) (2000). See Humana Inc. v. Mary Forsyth, 525 U.S. 299 (1999) (citing
                                Department of Treasury v. Fabe, 508 U.S. 491 (1993)).
                                52
                                     15 U.S.C. § 1012(b).
                                53
                                     15 U.S.C. §§ 46(g), 58.




                                Page 29                                       GAO-03-971 Federal Deposit Insurance Act
Commission also has special rulemaking authority under section 18 of the
FTC Act with respect to unfair or deceptive acts or practices.54 That
section contains specific procedures FTC must follow in prescribing rules
that define unfair or deceptive acts or practices. Among other things,
section 18 requires that Commission rules define such acts or practices
with specificity and establishes rigorous procedures for issuing the rules.
FTC staff asserted that without specific guidance from Congress as to the
Commission’s rulemaking authority, the Commission could face having to
promulgate rules under section 43 in accordance with the requirements in
section 18 of the FTC Act.55 They stated that because the separate
rulemaking authorities involve different procedures and authorize
different remedies, the absence of guidance in this area makes it difficult
for FTC to carry out its rulemaking responsibilities under section 43.

FTC staff also raised concerns that section 43 requires the Commission to
engage in activities that are incompatible with the manner in which FTC
undertakes its consumer protection mission or are beyond FTC’s
expertise. According to the staff, section 43 calls upon FTC to engage in
activities more suitable for a supervisor of depository institutions. These
include reviews of insurance company accounting practices and audits,
supervisory examinations or inspections, specification of disclosures that
should include the risk profiles of depository institutions and their private
deposit insurers, and the regulation and possible closure and liquidation of
depository institutions and other entities that could be mistaken for
depository institutions (such as securities firms that offer accounts with
deposit account characteristics). The staff asserted that these
responsibilities call for close supervision by an agency that, unlike FTC,
has the expertise, tools, and resources to assess and regulate the
operations of depository institutions and is knowledgeable about risks
associated with depository institutions and deposit insurance.




54
     15 U.S.C. § 57a.
55
     15 U.S.C. § 57a.




Page 30                                GAO-03-971 Federal Deposit Insurance Act
Several provisions of section 43 underlie FTC’s concern that the section
calls for expertise the Commission does not have.56 The first is the
requirement that FTC promulgate disclosure regulations to ensure that
current and prospective customers understand the risks involved in
forgoing federal deposit insurance. Commission staff asserted that
disclosure of those risks requires more than a standardized notice that the
institution is not federally insured and that the federal government does
not guarantee that the depositor will get back their deposits. The staff
maintained that disclosure could involve a discussion of a depository
institution’s financial strength and liquidity, as well as the health of the
private insurer, because the risk of not having federal deposit insurance
would be tied to the health of both the institution and the insurer.

The staff also stated that even if disclosure did not require discussion of
the safety of the particular institution and insurer, any explanation about
the risks of forgoing federal deposit insurance would be beyond FTC’s
expertise because the Commission lacks the expertise necessary to define
those risks. For example, they said that the disclosure requirement creates
the dilemma that too much emphasis on the risks of forgoing federal
deposit insurance could dissuade depositors from using uninsured
institutions, thus weakening them; whereas, too little risk disclosure could
mean that such depositors would be inadequately informed. In addition,
the staff asserted that the Commission lacks the ability to determine which
documents and records should contain the risk disclosure.

The second provision of concern to FTC is the shut-down provision.
According to FTC staff, this section would require expertise in depository
institution operations and depositor protection. They maintained that
enforcement of this provision could require FTC to do more than merely
declare that an institution must stop doing business. They asserted that if



56
  FTC’s concerns addressed in this report relate to section 43 of the FDI Act, which we
understand to be the subject of the mandate requiring this report. Section 43 was enacted
as section 151(a) of FDICIA. In addition to its concerns about section 43, FTC referred to
151(b) of FDICIA, which requires that, not later than 240 days after the date of enactment
of FDICIA, any private deposit insurer shall provide a business plan to each appropriate
supervisor of each state in which deposits are received by any depository institution
lacking federal deposit insurance, the deposits of which are insured by a private deposit
insurer. The plan must contain details relating to the insurer’s financial health,
management, and other matters. FTC maintains that it has no expertise in these areas and
that, if FTC were obligated to enforce section 151 as enacted, the Commission would have
to determine whether ASI complied with this requirement by, among other things,
scrutinizing the contents of the plan.




Page 31                                        GAO-03-971 Federal Deposit Insurance Act
an entity were instructed to shut down, the Commission would have to be
prepared to enforce that shut-down, which would necessitate “winding up”
the operations of the entity, a role that would require expertise in the
operation of depository institutions and the protection of customer
deposits. The staff also expressed a concern that section 43 fails to
provide standards for FTC to consider in deciding whether an institution is
eligible for an exemption from the shut-down provision. They maintained
that in deciding upon an exemption the Commission likely would have to
engage itself in the complexities of depository institution law.

Another aspect of section 43 that FTC believes to be beyond its expertise
is the look-alike definition. The definition of “depository institution” in
section 43 includes any entity FTC determines to be engaged in the
business of receiving deposits, and could reasonably could be mistaken for
a depository institution by the entity’s current or prospective customers.57
Under this authority, FTC could determine that an entity not chartered as
a depository institution is subject to section 43. FTC staff asserted that the
Commission lacks the expertise necessary to determine whether an
entity’s business constitutes “receiving deposits” or what would cause
customers to mistake an entity for a depository institution. Any entity
determined to be a look alike and not exempted would be subject to
section 43, including the requirements for disclosures regarding lack of
federal deposit insurance (even if it holds other forms of federal deposit
insurance). According to FTC staff, proper implementation of this
provision, in conjunction with the shut-down provision, could lead to
shutting down a variety of institutions such as securities firms and mutual
funds.

FTC officials also stated that the Commission lacks the expertise
necessary to enforce the audit requirement for private insurers. As
mentioned previously, section 43 requires any private deposit insurer to
obtain an annual audit from an independent auditor using generally
accepted auditing standards.58 The audit must determine whether the
insurer follows generally accepted accounting principles and has set aside
sufficient reserves for losses. FTC staff stated that diligent enforcement
would require a review of the auditor’s determinations, which, in turn,
would necessitate expertise and adequate resources for assessing both the
quality of the audit and the financial health of the insurer. FTC staff


57
     12 U.S.C. § 1831t(f)(2)(B).
58
     12 U.S.C. § 1831t(a)(1).




Page 32                                 GAO-03-971 Federal Deposit Insurance Act
                                 asserted that the Commission does not possess this expertise. The staff
                                 also were of the view that financial audits do not and cannot include
                                 determinations about whether reserves set aside for losses are sufficient.
                                 The staff said that FTC does not have expertise regarding loss and reserve
                                 issues with which to determine whether some form of substitute
                                 assurances should be deemed sufficient.


FTC Best among                   Although we found no agency was ideally suited to carry out the
Candidates for                   responsibilities set forth in the provision, based on our review of the
Enforcement Role                 concerns raised by FTC, NCUA and FDIC, we found no compelling reason
                                 to remove FTC from its responsibility as the primary agency responsible
                                 for implementing section 43. FTC’s concerns about its authority and
                                 resources are rooted in an interpretation of the section that calls for an
                                 extensive federal presence in the regulation of private deposit insurance
                                 and depository institutions. The scheme of section 43, particularly in the
                                 context of federal deposit insurance, suggests that a more modest
                                 interpretation is appropriate, although modifications to the section would
                                 enhance the Commission’s ability to enforce the section.

FTC’s Concerns about Potential   Although FTC’s concerns about potential challenges to its authority under
Challenges to Its Authority      section 43 are not unrealistic, it appears that the Commission has authority
under Section 43 Can Be          to implement and enforce the requirements of the provision even if the
Addressed                        Commission would not otherwise have jurisdiction under the FTC Act or
                                 McCarran-Ferguson Act. A challenge to FTC’s authority would arise from
                                 uncertainties about what Congress intended by instructing FTC to enforce
                                 the section “under the FTC Act.” The phrase indicates that the
                                 Commission must enforce the section under the FTC Act even though,
                                 under the FTC Act, the Commission would not have authority to enforce
                                 certain provisions of the section or take certain other regulatory actions.
                                 Interpreting section 43 to mean that FTC enforcement actions are subject
                                 to all provisions of the FTC Act would lead to unreasonable results.
                                 Among other things, FTC would be without authority to perform the
                                 actions specifically prescribed in section 43. Moreover, it is clear that
                                 Congress intended that the section would apply to credit unions because
                                 section 43 specifically addresses state-chartered credit unions in the shut-




                                 Page 33                                GAO-03-971 Federal Deposit Insurance Act
down provision.59 Even if FTC’s authority under the FTC Act did not
extend to nonprofit entities before Congress enacted section 43, such a
limitation did not preclude Congress from subjecting credit unions to
FTC’s authority under that provision.60 We interpret section 43 as
authorizing FTC to enforce the section by using the enforcement powers
provided in the FTC Act and not as a limitation on FTC’s authority that
would defeat several purposes of the section.61

It also appears that the McCarran-Ferguson Act does not undermine FTC’s
authority to implement section 43. The pertinent part of that act states as
follows:

“No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted
by any State for the purpose of regulating the business of insurance, or which imposes a fee
or tax upon such business, unless such Act specifically relates to the business of
insurance.”62

As interpreted by the Supreme Court, this provision precludes application
of a federal statute in the face of a state law “enacted . . . for the purpose
of regulating the business of insurance,” if the federal measure does not
“specifically relate to the business of insurance,” and would “invalidate,




59
   12 U.S.C. § 1831t(e)(1)(A) (prohibiting depository institutions from engaging in interstate
commerce unless, in the case of credit unions, the appropriate state supervisor has
certified that the institution is eligible for federal deposit insurance for credit unions).
Because all federally chartered depository institutions must have federal deposit insurance,
section 43 can only apply to state-chartered institutions.
60
  Although the repeal or amendment of a statute by implication is disfavored, where two
statutory provisions are irreconcilable and the latter statute contains an affirmative
showing of Congress’ intention to repeal or amend the earlier statute, the latter statute
repeals the irreconcilable provision of the former statute. See St. Martin Evangelical
Lutheran Church v. South Dakota, 451 U.S. 772, 788 (1981) (citations omitted).
 61
    See Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 575 (1982) (“Interpretations of
a statute which would produce absurd results are to be avoided if alternative
interpretations consistent with the legislative purpose are available.”). Under the FTC Act,
FTC may conduct administrative proceedings to enter a cease and desist order to stop
unfair methods of competition and unfair or deceptive acts or practices. 15 U.S.C. § 45.
Also, the Commission may institute civil proceedings for violations of rules regarding
unfair or deceptive acts or practices and for violations of cease and desist orders regarding
an unfair or deceptive act or practice. 15 U.S.C. § 57b.
62
     15 U.S.C. § 1012(b).




Page 34                                         GAO-03-971 Federal Deposit Insurance Act
impair, or supersede” the state’s law.63 One purpose of this provision is to
protect state insurance laws against inadvertent preemption by federal
law.64 Section 43 does not inadvertently apply to insurance. Rather, to the
extent that the section specifically relates to deposit insurance and to
private providers of that insurance a state law relating to the same subject
matter would be preempted.65

Because the audit provision is valid under the McCarran-Ferguson Act,
FTC staff concerns about challenges to the Commission’s authority to
enforce the provision appear to be misplaced. Should FTC take an action
arguably inconsistent with the role contemplated in section 43, such as
regulating the safety and soundness of providers of private deposit
insurance, the McCarran-Ferguson Act might serve as grounds to




63
  See Department of Treasury v. Fabe, 508 U.S. 491, 501 (1993). It could be argued that
neither section 43 nor a state law covering the same subject matter would be within the
McCarran-Ferguson Act because neither law relates to "the business of insurance" as the
term has been defined by the courts in determining the scope of state laws under the
McCarran-Ferguson Act. See, e.g Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119 (1982)
(in determining whether a practice constitutes the business of insurance, courts consider
whether the practice has the effect of transferring or spreading a policyholder's risk;
whether the practice is an integral part of the policy relationship between the insurer and
the insured; and whether the practice is limited to entities within the insurance industry).
64
     Patton v. Triad Guaranty Insurance, 277 F.3d 1294 (11th Cir.) (2002).
65
  If section 43 were interpreted as not applying specifically to the business of insurance,
the McCarran-Ferguson Act still would not bar FTC from enforcing the audit requirement.
As the language of the McCarran-Ferguson Act clearly states, a federal law does not violate
the act unless the law invalidates, impairs, or supersedes a state insurance law. The
Supreme Court has held that when a federal law is applied in aid or enhancement of state
regulation, and does not frustrate any declared state policy or disturb the state’s
administrative regime, the McCarran-Ferguson Act does not bar the federal action.
Humana Inc. v. Forsyth, 525 U.S. 299 (1999). At present, the only fully functioning
provider of private deposit insurance, ASI, is subject to regulation by the State of Ohio. As
discussed earlier, the audit requirements under Ohio law achieve a purpose similar to that
of the audit requirement in section 43.




Page 35                                          GAO-03-971 Federal Deposit Insurance Act
                                 challenge the action. However, the McCarran-Ferguson act does not stand
                                 as a general bar to FTC’s authority to enforce the audit requirement.66

Lack of Guidance in Section 43   The only explicit rulemaking requirement in section 43 is that FTC issue
for Rulemaking Procedures        regulations or orders prescribing the manner and content of disclosure
Can Be Addressed                 required under the section.67 Section 43 does not designate the procedures
                                 FTC should follow in promulgating those rules or orders. Also, to the
                                 extent that FTC has authority to issue other regulations under the section,
                                 the source of that authority is less clear. Uncertainty about FTC’s
                                 rulemaking authority might complicate the Commission’s ability to
                                 promulgate regulations, but these potential complications do not appear to
                                 undermine FTC’s authority to carry out the section.

                                 Under the FTC Act, the Commission has two types of rulemaking
                                 authority. The Commission has general authority to make rules and
                                 regulations for the purpose of carrying out the act.68 In addition, FTC has
                                 special rulemaking authority the Commission must use for issuing rules
                                 with respect to unfair or deceptive acts or practices. The special
                                 rulemaking authority requires, among other things, that the Commission
                                 define unfair or deceptive acts or practices with specificity and follow
                                 stringent rulemaking procedures.69 If the Commission’s authority to issue
                                 regulations under section 43 is subject to the requirements of the FTC Act,
                                 then the Commission would have to rely upon its special rulemaking




                                 66
                                   FTC staff suggested that because FTC’s enforcement authorities are contained in the
                                 FTC Act, the Commission’s use of those authorities to enforce the audit requirement might
                                 amount to the application of the FTC Act to private deposit insurance, i.e., ASI. Contrary to
                                 FTC’s concern, the McCarran-Ferguson Act does not affect FTC’s authority under section
                                 43. The McCarran-Ferguson Act does not prohibit FTC from enforcing OGC laws other than
                                 the FTC Act if they otherwise satisfy McCarran-Ferguson requirements. As previously
                                 noted, it is unclear whether activities subject to section 43 constitute "the business of
                                 insurance" as that term has been defined by the courts." Moreover, FTC’s concern is
                                 directly contrary to the scheme established in section 43. We note that when Congress
                                 enacted section 43 it was fully aware that states regulated private deposit insurance. See,
                                 e.g., 12 U.S.C. § 1831t(a)(2), (e).
                                 67
                                   12 U.S.C. § 1831t(c). FTC staff indicated that the Commission’s enforcement
                                 responsibilities would warrant additional regulations concerning other provisions in the
                                 section.
                                 68
                                      15 U.S.C. § 46(g).
                                 69
                                      15 U.S.C. § 57a.




                                 Page 36                                         GAO-03-971 Federal Deposit Insurance Act
                                authority.70 It is unclear whether the Commission’s authority to issue rules
                                under section 43 is subject to the FTC Act, however. If FTC Act
                                requirements do not apply, then FTC could rely upon the less stringent
                                rulemaking requirements for informal rulemaking under the
                                Administrative Procedure Act.71 Because section 43 does not provide
                                specific guidance for which of FTC’s rulemaking authorities applies, it
                                could affect the manner in which the Commission undertakes its
                                rulemaking. However, the lack of guidance does not preclude the
                                Commission from carrying out its responsibilities under the section.

FTC’s Concern That Section 43   In addition to perceived jurisdictional limitations, FTC staff maintained
Enforcement Would Require       that enforcement of the section requires expertise and resources the
More Expertise Is Generally     Commission does not have and would require FTC to take actions
Not Warranted                   inconsistent with its consumer protection mission. FTC staff asserted that
                                enforcement of the disclosure requirement and the promulgation of
                                regulations apprising consumers of the risk of not having federal deposit
                                insurance, as well as proper enforcement of the audit requirement and
                                shut-down provision, require an in-depth knowledge of depository
                                institutions and deposit insurance and FTC oversight of the safety and
                                soundness of institutions subject to section 43. Enforcement of the
                                disclosure provisions does not necessarily require such in-depth expertise,
                                although FTC could benefit from consulting with other federal regulators
                                or others to gain this expertise to more effectively enforce these
                                provisions.


                                70
                                  Although FTC officials described use of the special rulemaking authority as
                                “cumbersome,” we note that the Commission relies on that authority to issue regulations
                                against false advertising. See 15 U.S.C. § 52. This section specifies that false advertising is
                                an unfair or deceptive act or practice; rules covering such activity must be promulgated
                                under the special rulemaking authority.
                                71
                                  See Citizens to Save Spencer County v. Environmental Protection Agency, 600 F.2d 844
                                (D.C. Cir. 1979) (agency rulemaking authority may be implied from general purposes and
                                other substantive provisions of an act (citation omitted)). In this regard, we note the
                                possibility that the disclosure rules required by section 43 would be exempt from the
                                Administrative Procedure Act. A regulation that “merely tracks” statutory requirements and
                                thus simply explains something the statute already requires has usually been deemed
                                interpretative and, therefore, exempt from the Administrative Procedure Act. See National
                                Family Planning and Reproductive Health Ass., Inc. v. Sullivan, 979 F.2d 227 (D.C. Cir.,
                                1992) (citations omitted). With respect to disclosure rules under section 43, the section
                                requires FTC to issue regulations or orders prescribing the manner and content “of
                                disclosure required under this section” [emphasis supplied]. Section 43 specifically states
                                the disclosure required under the section and does not specifically require the disclosure of
                                additional information. 12 U.S.C. § 1831t(b) (disclosure must state that the institution is not
                                federally insured and that if the institution fails, the federal government does not guarantee
                                that depositors will get back their money).




                                Page 37                                           GAO-03-971 Federal Deposit Insurance Act
The only specific rulemaking mandate in section 43 requires FTC to
prescribe “the manner and content of disclosure required under this
section” in order “to ensure that current and prospective customers
understand the risks involved in forgoing federal deposit insurance.” As
noted previously, section 43 specifically requires disclosure of two facts:
(1) that the depository institution is not federally insured and (2) if the
institution fails the federal government does not guarantee that depositors
will get back their money. FTC staff interprets the rulemaking mandate to
mean that the Commission must issue regulations or orders requiring
disclosure of information that goes beyond what is specifically required
under section 43. It appears that a less extreme interpretation of the
disclosure requirement—one that does not compromise FTC’s ability to
carry out the requirement—would be consistent with section 43.

Even if the requirement for disclosure regulations calls for more than the
disclosure specifically described in section 43, it is not clear that Congress
intended the regulations to require a discussion of the safety and
soundness of the depository institution and its private insurer. It appears
that Congress enacted the disclosure requirements in section 43 to ensure
that consumers are informed about an institution’s lack of federal deposit
insurance.72 There is no indication in the section or its legislative history
that Congress also intended disclosure about the risks associated with the
private deposit insurer. The purpose of deposit insurance is to free
depositors from having to assess an institution’s safety with respect to
their deposits, up to the coverage limit; deposits are protected up to that
limit even if the institution becomes unsafe or unsound. With respect to
the safety of deposits, risk disclosure is unnecessary. FTC staff maintains
that disclosure regarding private deposit insurance should be treated
differently because, unlike federal deposit insurance, private deposit
insurance is subject to the risk that a private insurer may not be able to
protect the deposits it insures. We do not take issue with FTC’s
observation about the potential risks of private deposit insurance.
However, nothing in section 43 indicates that Congress intended that
disclosures with respect to private deposit insurance should be treated
any differently; nothing in the section indicates that FTC should preempt
the states in assessing the safety and soundness of privately insured
institutions and their insurers. In section 43 Congress deferred to the



72
  See S. Rep. No. 102-167 at 61 (Oct. 1, 1991) (explaining that the purpose of the disclosure
requirement is to ensure that depositors in nonfederally insured institutions are aware that
their deposits are not federally insured).




Page 38                                         GAO-03-971 Federal Deposit Insurance Act
                                 states on whether to permit the operation of privately insured depository
                                 institutions. It is reasonable to conclude that Congress anticipated that
                                 depositors at those institutions should rely upon the states to oversee the
                                 safety and soundness of private deposit insurers.

                                 Finally, we note that the section 43 requirement for disclosure regulations
                                 is similar to other laws that require FTC to regulate disclosure without
                                 regard to its expertise concerning the subject of the disclosure. For
                                 example, under the Fair Packaging and Labeling Act, FTC regulates
                                 disclosure about a broad array of commercial items defined generically as
                                 “consumer commodities.”73 Under the FTC Act, the Commission has
                                 responsibility for preventing false advertising without regard to the nature
                                 of the product.74 Also, FTC enforces several federal consumer protection
                                 laws applicable to financial institution disclosures, including the Truth in
                                 Lending Act, the Consumer Leasing Act, the Equal Credit Opportunity Act,
                                 and the Electronic Funds Transfer Act.75 Moreover, the Commission
                                 already has demonstrated that it has the ability to regulate extensively
                                 how financial institutions must make disclosures about financial
                                 transactions and customer financial privacy.76

Certain FTC Concerns Do          With respect to the shut-down provision, whether FTC enforcement
Raise Questions about Its        requires expertise in depository institutions and deposit insurance
Enforcement Capabilities or      depends upon how far the Commission might seek to extend its
Applicability of Its Authority   enforcement authority. Under the most likely enforcement scenario,
                                 depository institution expertise would not be necessary. The shut-down
                                 provision prohibits any depository institution lacking federal deposit
                                 insurance from engaging in interstate commerce unless the appropriate
                                 state supervisor has determined the institution’s eligibility for federal


                                 73
                                   The Fair Packaging and Labeling Act, Pub. L. No. 89-755 (1966), as amended, is codified
                                 at 15 U.S.C. §§ 1451, et. seq. (2000 & 2002 Supp.).
                                 74
                                   15 U.S.C. § 52. We note that under both the Fair Packaging and Labeling Act and the FTC
                                 Act, FTC’s jurisdiction is not unlimited; many commodities, other articles or services such
                                 as food and drug items or securities and commodities transactions may not be within FTC’s
                                 authority under those acts.
                                 75
                                   See FTC letter to the Board of Governors of the Federal Reserve System dated February
                                 7, 2002, summarizing its 2001 enforcement activities and methods. FTC also has jurisdiction
                                 to enforce other laws that affect depository institutions, such as the Fair Credit Reporting
                                 Act and the Fair Debt Collections Practice Act.
                                 76
                                   See 16 C.F.R. Part 313 (2003). FTC has an extensive program guiding financial
                                 institutions on their financial privacy disclosure obligations. See
                                 http://www.ftc.gov/privacy/glbact/glb-faq.htm#A.




                                 Page 39                                        GAO-03-971 Federal Deposit Insurance Act
deposit insurance. Assuming that FTC were not to grant an exemption,
enforcing the provision could involve an FTC enforcement action under
the FTC Act to shut down the institution. However, because depository
institutions subject to section 43 are state-chartered, states likely would
have primary responsibility for “winding up” an institution once it has
ceased doing business. 77 Section 43 would not prevent the application of
federal bankruptcy laws or laws administered by federal agencies. FTC
staff pointed out that under some circumstances it might be appropriate
for the Commission to remain involved in winding up an entity subject to
shut down to ensure that deposits were protected. To the extent that the
Commission might remain involved, partnering with the state would be
appropriate.

FTC staff also stated that FTC lacks the expertise necessary to evaluate a
state’s determination of an institution’s eligibility for federal deposit
insurance. Nothing in section 43 suggests that FTC is to oversee the states
in this regard. Congress deferred to the states with respect to the
determination. We agree with the FTC staff that the extent to which FTC
can challenge a state’s determination is unclear, but we see nothing in the
statute contemplating FTC review of state determinations.

Another of FTC’s concerns about the shut-down provision—that section
43 does not provide standards for the Commission to apply in deciding
whether to exempt an entity from the provision—appears to have been
partially addressed by Congress when it enacted the section. Section 43
authorizes FTC to permit an exemption from the shut-down requirement
“in consultation with the Federal Deposit Insurance Corporation.”78 Thus,
Congress specifically did not rely on FTC’s independent judgment should
FTC consider an institution for the exemption. The section, however, does
not provide guidance on the factors the Commission should consider in
deciding whether an institution is eligible for an exemption. The extent to
which this lack of guidance might affect FTC’s enforcement of the
provision is unclear. We note, however, that FTC could seek to resolve
uncertainties about exempting an institution by consulting with FDIC, as
contemplated by section 43.




77
  Section 43 would not prevent the application federal bankruptcy laws or laws
administered by federal agencies.
78
     12 U.S.C. § 1831t(e)(1).




Page 40                                       GAO-03-971 Federal Deposit Insurance Act
The merit of FTC’s concern regarding the look alike provision depends
upon the Commission’s perception of the role Congress intended it to
have. Under the look alike provision, the Commission has discretion to
decide whether an entity not chartered as a depository institution
nonetheless should be subject to section 43. FTC staff asserted that the
Commission could exercise this authority in a way that would include
various uninsured institutions where funds are deposited, including
securities firms and mutual funds. Such institutions would be subject to
FTC enforcement of the disclosure requirements and the shut-down
provision. According to FTC staff, proper enforcement of section 43
requires the Commission to promulgate a regulation defining look alike
institutions and subjecting them to section 43. The staff asserted that
because of FTC’s lack of expertise regarding deposits, the Commission
would have to define the look alike entities broadly, thus subjecting a
potentially vast group of entities to the section. FTC’s concern in this
regard overlooks the fundamental principal that a statute should not be
interpreted to produce absurd results.79 It does not appear that Congress
intended that FTC would invoke the look alike provision broadly to
include any entity that accepts deposits. For example, a reasonable
interpretation of the look alike requirement does not anticipate shutting
down entire industries and entities already subject to extensive disclosure
regulation under federal law, such as securities firms and mutual funds.80

FTC staff also expressed concerns about what role the Commission would
have to take if the Commission were to shut down a business, particularly
if FTC took the action under the look alike authority. The staff stated that



79
  See Griffin v. Oceanic Contractors, Inc., 458 U.S. at 575, (“Interpretations of a statute
which would produce absurd results are to be avoided if alternative [p. 34-footnote 66]
interpretations consistent with the legislative purpose are available.”).
80
  Under federal case law, certificates of deposit and other deposit instruments or accounts
are not considered investment contracts subject to the federal securities laws if the
instruments or accounts are subject to a regulatory regime that eliminates the risk of loss,
such as deposit insurance. See, e.g., Bair v. Krug, 1987 U.S. Dist. LEXIS 15904 (D. Nev.
Apr. 27, 1987) (certificates of deposits found not to be securities where they were issued
by an institution in a state that had a comprehensive regulatory system providin depositors
with protection that "virtually guarantees" repayment to purchasers of such certificates);
see also, Wolf v. Banco Nacional de Mexico (Banamex), 739 F.2d 1458 (9th Cir. 1984), cert.
denied, 469 U.S. 1108 (1985) (certificates of deposit not securities because foreign bank
that issued them was subject to extensive home country regulation, even though deposits
were not insured by the home state)." Look-alike institutions could be subject to Securities
and Exchange Commission (SEC) jurisdiction where the deposits they offer constitute
investment contracts or another type of security. The lack of compliance with section 43
would not alone constitute a securities law violation, however.



Page 41                                         GAO-03-971 Federal Deposit Insurance Act
                             the Commission would lack expertise necessary to wind down the
                             institution and protect its customers’ funds. We note that entities subject
                             to the shut-down provision would be subject to state and federal laws
                             governing the winding up of a business enterprise. In section 43, Congress
                             did not indicate what, if any, role FTC should play in a shut-down
                             scenario. However, nothing in section 43 indicates that Congress intended
                             to preempt laws governing the winding up of an entity.

                             FTC’s concerns about monitoring compliance with the audit provision are
                             more substantial. The audit provision does not require FTC to test the
                             conclusions of the audit. It appears that the Commission could carry out
                             its responsibility simply by relying upon the auditor’s attestations and
                             checking with the appropriate parties to ensure that the audit report was
                             properly distributed. However, as FTC staff pointed out, proper
                             enforcement of the provision could, under certain circumstances, call for
                             close scrutiny of the audit. According to FTC staff, because the
                             Commission lacks expertise in this area, it might be unaware of
                             circumstances warranting close scrutiny of the audit report.


Clarifying FTC’s Authority   While we found that FTC was the best candidate to enforce section 43
and Providing Some           provisions, clarifying FTC’s authority and providing additional flexibility in
Flexibility Could Ensure     administering the section could help address some of the Commission’s
                             concerns about its authority and ability to enforce the provision without
Effective Enforcement of     undermining its objectives. For section 43 to be fully implemented and
Section 43                   enforced, the following changes to the identified provisions could clarify
                             FTC’s authority and provide flexibility for more effective enforcement.

                             Disclosure provisions: FTC staff are apprehensive about the
                             Commission’s ability to carry out this mandate, primarily because of how
                             they interpret the risk disclosure requirement, an interpretation that
                             contemplates a discussion of the financial health of a depository
                             institution and its private insurer. Giving FTC the flexibility to determine
                             what disclosure requirements should be issued and to decide on the
                             appropriate means for enforcing them could help to alleviate the
                             Commission’s concern. For example, the Commission might choose to
                             require nonfederally insured institutions to obtain independent
                             certifications from state supervisors or another independent body that
                             their institution is in compliance with the section’s disclosure
                             requirements. Also, the Commission could be given authority to
                             coordinate with state supervisors of nonfederally insured credit unions to
                             assist in enforcing the disclosure requirements or imposing sanctions for
                             violations of the disclosure provisions.


                             Page 42                                 GAO-03-971 Federal Deposit Insurance Act
In addition, a requirement that FTC consult with FDIC and NCUA about
disclosure requirements could ensure that disclosure under section 43
covers FDIC and NCUA concerns about the potential for confusion of
private deposit insurance with federal deposit insurance, and provides
FTC with access to expertise it deems necessary to establish disclosure
requirements. Requiring assistance from FDIC and NCUA in fashioning an
appropriate disclosure regime may help satisfy FTC concerns about its
lack of expertise. Additionally, such assistance would provide the federal
deposit insurance agencies with an opportunity to ensure that disclosures
adequately inform depositors in a manner that reduces the possibility of
confusion with federal deposit insurance and apprises them of the risks
associated with the lack of federal deposit insurance.

Shut-down provision: Several aspects of this provision raise regulatory
concerns. First, the requirement relies upon states to make a
determination that involves federal policies; specifically, whether a
particular institution is eligible for federal deposit insurance. The
eligibility determination includes many factors that federal regulators
apply on a case-by-case basis. A related concern is that the provision does
not indicate what criteria a state should use in determining that an
institution is eligible for federal deposit insurance. In addition, the section
calls upon FTC to shut down institutions that are subject to regulation by
state or federal bodies that have expertise in assessing the consequences
of a shut down as well as shutting down an institution. To address these
concerns, modifications to the shut-down provision could require
coordination between FTC and the appropriate primary regulator of an
institution in connection with a state’s determination of deposit insurance
eligibility, the Commission’s determination of an institution’s eligibility for
an exemption from the provision, and the shutting down of an institution.

Annual audit requirements: Section 43 clearly sets forth the
requirements for a private deposit insurer with respect to the annual audit
it must obtain and to whom the annual audit must be provided. However,
the section does not indicate the extent of FTC review and monitoring
appropriate for enforcing the provision. In this regard, an amendment to
section 43 could provide FTC with specific authority to establish annual
audit requirements for private insurers. With such authority, the
Commission could set forth the conditions under which it would rely on
the annual audit or could enter into a cooperative arrangement with the
insurer’s state regulators concerning reviews of the annual audit.




Page 43                                  GAO-03-971 Federal Deposit Insurance Act
              Depository institutions lacking federal deposit insurance are chartered
Conclusions   and supervised by states; however, the activities of these entities involve
              federal interests. Congress acted on these federal interests by enacting
              section 43 of the FDI Act. However, issues of enforcement remain.
              Consistent with a prohibition in FTC’s appropriations authority, the
              Commission has not enforced section 43 provisions. Absent enforcement,
              our work showed that compliance with these provisions varied
              significantly.

              Our primary concern, resulting from the lack of enforcement of section 43
              provisions, is the possibility that members of state-chartered, privately
              insured credit unions may not be adequately informed that their deposits
              are not federally insured and should their institution fail, the federal
              government does not guarantee that they will get their money back. The
              fact that many privately insured credit unions we visited did not
              conspicuously disclose that the institution was not federally insured,
              raises concerns that the congressional interest in this regard is not being
              fully satisfied.

              The lack of enforcement of the other two provisions—shut-down and
              annual audit—may have a less direct impact on consumers. While it
              appears that privately insured credit unions have not obtained a
              determination from their state regulators that they are eligible for federal
              deposit insurance, this determination may not be a meaningful protection
              for consumers. Since it is only a one-time requirement, it does not provide
              any assurance that institutions will continue to operate in a manner to
              remain eligible for federal deposit insurance. However, state regulators
              imposed safety and soundness standards for credit unions lacking federal
              deposit insurance that are similar to federal oversight standards. NCUA
              officials also may consider other factors when determining eligibility. ASI
              officials also told us that they rigorously monitor the safety and soundness
              of their insured institutions. Given the related actions undertaken to help
              ensure the health of privately insured credit unions, the effect on
              consumers from the lack of enforcement of this provision may be
              negligible. Since we found that the remaining private deposit insurer has
              complied with the annual audit requirements, state regulators and the
              management of privately insured credit unions have had the opportunity
              to become informed about the financial condition of this private deposit
              insurer. Implementation of this provision helps ensure the safety and
              soundness of ASI—which, in turn, helps to ensure that members of state-
              chartered, privately insured credit unions have a viable insurer should
              their credit union fail. Since the remaining private deposit insurer



              Page 44                                GAO-03-971 Federal Deposit Insurance Act
complied with section 43 audit requirements, it appears consumers
suffered no negative impact from the nonenforcement of this provision.

In evaluating which federal agency should enforce these provisions, we
found the responsibilities outlined in these provisions did not fall ideally
within any single agency’s jurisdiction. FTC staff and officials from NCUA
and FDIC opposed charging their agencies with this responsibility. NCUA
and FDIC both have an interest in making sure that consumers receive
adequate information about whether or not their deposits are federally
insured. NCUA and FDIC also have considerable expertise in disclosures
at federally insured depository institutions. However, FDIC insures the
deposits at banks and savings associations—but does not regulate or
supervise credit unions or insure deposits at these institutions. If either
FDIC or NCUA were charged with this responsibility, it could create
potential confusion about federal deposit insurance and would result in a
regulatory conflict of interest that could expose the credit union system to
a loss of public confidence in the federal deposit insurance system. This
would be inconsistent with a central purpose of the provision. Despite this
conflict, the agency that enforces section 43 would benefit from
coordination with NCUA and FDIC, because of their interests and
expertise.

Partnering with state regulators could also help FTC enforce certain
section 43 requirements. For example, the Commission might choose to
require nonfederally insured institutions to obtain independent
certifications that their institution is in compliance with the section’s
disclosure requirements and that the risks of not having federal deposit
insurance have been adequately disclosed. Considering that Congress
deferred to the states on whether to permit the operation of depository
institutions lacking federal deposit insurance, it is reasonable to conclude
that Congress also relied upon the states to oversee the safety and
soundness of those institutions and, accordingly, the risks to consumers of
dealing with them.

Although institutions lacking federal deposit insurance are chartered and
regulated by the states, protecting consumers from confusion about the
insurance of their deposits is consistent with the FTC’s consumer
protection mission. Congress also determined that the federal agency
specifically charged with protecting consumers against misleading or
deceptive information practices—FTC—should ensure that the federal
interest in proper disclosure is maintained. However, Congress has also
prohibited FTC from discharging its responsibilities under section 43.
While FTC staff has raised jurisdictional concerns, as well as practical


Page 45                                GAO-03-971 Federal Deposit Insurance Act
                    concerns about the Commission’s ability to enforce these provisions, we
                    believe that these interests can be best addressed by retaining FTC’s
                    responsibility for enforcing and implementing section 43. However, the
                    section could be modified to reduce concerns FTC has expressed about its
                    ability to enforce these provisions. Such modifications could allow FTC
                    flexibility in discharging its responsibilities and enable it to call upon the
                    expertise of the federal deposit insurers, state regulators, or others when
                    the Commission deems it necessary without sacrificing the purposes of the
                    section.


                    No federal agency was the clear or obvious choice to carry out the
Matters for         responsibilities outlined in section 43 of the FDI Act; however, if
Congressional       modifications were made to these provisions, we believe that FTC would
                    be best suited to retain responsibility for enforcing and administering
Consideration       these provisions. If Congress determines that FTC is the appropriate
                    agency, then Congress should remove the prohibition from FTC using
                    appropriated funds to enforce these provisions. Also, Congress should
                    clarify that FTC’s authority to implement and enforce section 43 is not
                    subject to any limitations on its jurisdiction contained in the FTC Act.

                    To remove obstacles and provide additional flexibility for FTC’s
                    enforcement of section 43 disclosure requirements, Congress may wish to
                    consider

                •   Providing FTC the authority to consult with FDIC and NCUA when
                    determining the manner and content of disclosure requirements to (1)
                    provide FTC with access to expertise it deems necessary to establish
                    disclosure requirements and (2) ensure that the required disclosures
                    address FDIC and NCUA concerns about the potential for confusion of
                    private deposit insurance with federal deposit insurance;

                •   Providing FTC the authority to coordinate with state supervisors of
                    nonfederally insured depository institutions to assist in enforcing the
                    disclosure requirements; and

                •   Providing FTC authority to impose sanctions for violations of the
                    disclosure provisions.

                    To remove obstacles and provide additional flexibility for FTC’s
                    enforcement of the section 43 shut-down provision, Congress may wish to
                    consider




                    Page 46                                 GAO-03-971 Federal Deposit Insurance Act
                     •   Requiring coordination between FTC and the appropriate primary
                         regulator of an institution when (1) FTC considers whether to exempt an
                         institution from the requirement to obtain a state determination that it
                         meets eligibility requirements for federal deposit insurance; and (2) FTC
                         seeks to shut down an institution because it has not obtained a state
                         determination that it meets eligibility requirements for federal deposit
                         insurance.

                         In light of some uncertainty as to the scope of FTC’s jurisdiction under the
                         FTC Act to regulate insurance entities in matters other than antitrust,
                         Congress may wish to consider clarifying FTC’s authority regarding the
                         annual audit provision by

                     •   Providing FTC with specific authority to establish requirements, such as
                         attestation requirements, to ensure the reliability of annual audits for
                         private insurers.


                         We requested comments on a draft of this report from the heads, or their
Agency Comments          designees, of the Federal Deposit Insurance Corporation, the National
and Our Evaluation       Credit Union Administration, and the Federal Trade Commission. We
                         received written comments from NCUA and FTC that are summarized
                         below and reprinted in appendixes III and IV respectively. In addition, we
                         received oral comments from the Deputy Director of Supervision and
                         Consumer Protection at FDIC that are summarized below. We also
                         received technical comments from NCUA and FTC that we incorporated
                         into the report as appropriate.

                         FDIC oral comments focused on the findings in the report dealing with
                         FDIC and the overall report conclusions. FDIC generally agreed with the
                         report’s findings dealing with FDIC and stated that the arguments included
                         in the report against having the FDIC enforce section 43 were generally
                         consistent with arguments it provided to congressional staff during the
                         drafting of the Federal Deposit Insurance Corporation Improvement Act of
                         1991, which led to the decision in the enacted legislation to assign FTC
                         responsibility for enforcing compliance with the provisions discussed in
                         this report. FDIC also stated that while time did not permit it to conduct
                         an exhaustive legal review, it generally agreed with the report’s overall
                         conclusions.

                         NCUA concurred with the report’s conclusions that there is a need for
                         enforcement of the consumer protection provisions in section 43 and that,
                         for the reasons stated in our report, FTC, not NCUA or FDIC, is in the best



                         Page 47                                GAO-03-971 Federal Deposit Insurance Act
position to enforce these provisions. NCUA also commented on FTC staff
concerns expressed in this report that FTC might be challenged if it were
to take action against credit unions because its enabling legislation has
been interpreted to mean that it has no jurisdiction over nonprofit entities,
such as credit unions. NCUA agreed with our conclusion that even if
FTC’s authority under the FTC Act did not extend to nonprofit entities, the
FTC Act did not preclude Congress from subjecting credit unions to FTC’s
authority under section 43. Although NCUA agreed with this logic, it also
believed that under FTC’s enabling legislation FTC has jurisdiction over
state-chartered credit unions.

FTC disagreed with our conclusion that the Commission is the best among
federal agencies to enforce section 43 provisions. FTC believed that the
solution we offered does not meet the objectives of the statute and
conflicted with our analyses. FTC stated that three principal objectives of
section 43 are to provide some federal oversight to determine (1) the
safety of deposits in institutions that are neither supervised nor insured by
the federal government; (2) the financial soundness of those institutions
and their state-supervised insurers; and (3) that disclosures to depositors
at those depository institutions “fully inform” the depositors about an
institution’s lack of federal deposit insurance. We believe that FTC’s
interpretation of section 43 is inconsistent with the overall framework and
purpose of the section.

The regulatory scheme of section 43 indicates that Congress did not intend
FTC to have a safety and soundness role. For example, Congress relied
upon the states to determine whether a depository institution is eligible for
federal deposit insurance even though the determination includes an
assessment of an institution’s safety and soundness. In addition,
Congress required private deposit insurers to obtain an annual audit that
satisfies certain standards, but did not require that the insurer submit the
audit to FTC. Instead, section 43 requires the insurer to submit the audit
to the state supervisors of institutions who have deposits insured by the
entity. Finally, Congress’ designation of FTC as the federal agency
responsible for enforcing section 43 indicates that Congress did not
contemplate a federal safety and soundness role. The legislative history of
section 43 supports this interpretation. The Senate bill containing the
original version of section 43 set forth substantially the same disclosure
requirements as are contained in section 43.81 The bill designated FDIC


81
     S. 543 102d Cong. § 227 (1991) § 227 (137 Cong. Rec. S 16534 (Nov. 13, 1991)).




Page 48                                           GAO-03-971 Federal Deposit Insurance Act
and NCUA—two safety and soundness regulators—to enforce those
requirements. However, in the next version of the bill, which added the
audit requirement, the shut-down provision, and the look-alike provision,
Congress substituted FTC as the agency charged with enforcement
responsibility.82 The legislative history does not discuss the reasons for
this change, but it is reasonable to conclude that by substituting FTC for
the safety and soundness regulators, Congress opted against a federal
safety and soundness role under section 43. Neither section 43 nor its
legislative history indicate that Congress intended to transform FTC from
a consumer protection agency into a safety and soundness regulator of
state-supervised depository institutions and their state-supervised private
deposit insurers.

We believe that the primary objectives of section 43 are to ensure that
consumers are protected by receiving the disclosures and opportunity for
acknowledgement specified in the section; the performance of an annual
audit of the deposit insurer in accordance with generally accepted
accounting standards that attests to the insurer’s adherence to generally
accepted accounting principles and the sufficiency of the insurer’s loss
reserve; the state certification relating to the shut down provision; and
FTC’s prudent and reasoned exercise of its authority pursuant to the look-
alike provision. Our proposed solutions are consistent with this
interpretation of section 43.

FTC also raised concerns about our proposal that the Commission rely in
part on NCUA and FDIC in connection with establishing disclosure
requirements. FTC said that this recommendation would expose the
Commission’s formulation of disclosure requirements to the regulatory
conflict of interest that would arise if NCUA and FDIC were to have
primary regulatory responsibility under section 43. We believe that FTC,
as a disinterest regulator with primary responsibility in this area, could
neutralize any potential conflict of interest by considering the views of all
parties having an interest in or expertise regarding an FTC action under
section 43.

FTC also contended that we “significantly overestimate” the Commission’s
expertise and experience in auditing, deposit safety and reserves,
insurance regulation, assessment of financial soundness of depository



82
     S. 543 102d Cong. § 227 (1991) § 227 (137 Cong. Rec. S 17478 (Nov. 21, 1991)).




Page 49                                           GAO-03-971 Federal Deposit Insurance Act
institutions or insurers, and shutting down depository institutions. The
Commission asserted that proper implementation of section 43 “would
require grafting onto the FTC, a very small agency, an entirely new deposit
safety mission requiring expertise, tools, and resources that the FTC lacks
and for which it has no other need.” We disagree. This criticism is based
on FTC’s extreme view of the federal role under section 43. FTC assumes
that Congress intended to transform the Commission into a regulator of
depository institutions and insurers even though section 43 clearly
contemplates that the states are to serve in that capacity. As stated above,
we believe that section 43 calls for a more moderate role consistent with
FTC’s mission as a consumer protection agency.

Congress has charged FTC with disclosure-related responsibilities with
respect to many industries that FTC does not regulate. FTC regulates
advertising and labeling with respect to a wide variety of consumer
commodities and services, yet the Commission does not appear to have
expertise in the intricacies of all industries subject to those authorities.
Nothing in section 43 calls for FTC to have expertise, experience, or
resources to regulate the safety of depository institutions.83 Also, nothing
in section 43 requires FTC to oversee the closure of an institution subject
to the shut-down provision. The shut-down provision is self-activating,
that is, it is a directive to nonfederally insured depository institutions that
they must cease doing business (in interstate commerce), if they have not
received an insurance eligibility determination from the state. Congress
did not provide any procedure for the institutions to follow when shutting
down, and Congress did not charge FTC with responsibility for
administering a procedure. It should be noted that FTC has ample
experience under its routine enforcement authority in having businesses
shut down.

Additional FTC criticisms were that the report overstates the
disadvantages and ignores the advantages of NCUA implementing section
43, and that the report does not consider possible alternative assignments
of responsibility. FTC’s assertions about the efficiency of NCUA
regulation are misguided. As we discussed in the report, assigning NCUA
the responsibility for regulating its competition would present an inherent
conflict of interest that could undermine NCUA’s credibility as a regulator.


83
  We question FTC’s assertion that it lacks auditing expertise. FTC’s operating manual
provides that accountants in the Commission’s Bureau of Competition “are available to
assist all Commission staff . . . and that staff should consider obtaining the services of an
accountant in a wide range of situations . . . .”




Page 50                                          GAO-03-971 Federal Deposit Insurance Act
Moreover, bringing nonfederally insured institutions within the umbrella
of regulation by a federal deposit insurer is inconsistent with a central
purpose of section 43, which is to ensure the separation of nonfederally
insured institutions and their private deposit insurer from federal deposit
insurance. The report does not discuss the potential for federal regulators
other than NCUA, FDIC and FTC to implement section 43 because no
other federal regulator appears to be a suitable candidate. Unlike FTC, the
Federal Reserve Board has safety and soundness and related
responsibilities regarding certain depository institutions. Placing section
43 responsibilities under the Board would subject nonfederally insured,
state-supervised institutions to regulation by a federal supervisor of
financial depository institutions. We believe that Congress, by selecting
FTC to administer and enforce section 43, sought to avoid such a
relationship. FTC administration of section 43 would not necessarily have
the same effect.

With respect to SEC, we note that requiring SEC to administer the section
would unnecessarily expand the Commission’s mission. In some cases a
look-alike institution (an entity that takes deposits but which is not
chartered as a depository institution) could be involved in a securities
violation, in which case SEC could take action under the federal securities
laws and would not need authority under section 43 to proceed against an
entity. Charging SEC with responsibility under section 43 could blur the
distinction between disclosure and audit obligations under the securities
laws and those established under section 43. We note, however, FTC is
not precluded from working with SEC should FTC invoke the look-alike
authority.

FTC also stated that we failed to assess the potential impact on consumers
if the disclosure provisions are not enforced. An empirical analysis of the
impact on consumers was not performed. Presumably, depositors would
not be impacted negatively by the lack of disclosure unless (a) they
believed that their deposits were federally insured because of the lack of
disclosure; (b) the institution holding their deposits failed; and (c) their
deposits were not protected—that is, the deposits were not insured or the
insurer was unable to repay the deposits of a failed institution. We note,
however, that in section 43 Congress made the judgment that depositors
should receive the disclosure required in that section. It is reasonable to
conclude that some individuals who do not receive the benefit of that
disclosure may be uncertain about the insured status of their accounts.




Page 51                                GAO-03-971 Federal Deposit Insurance Act
We agree with FTC’s concerns that if the section 43 enforcement authority
were immediately activated a number of institutions would be faced with
shutting down because they have not obtained determinations from their
state supervisors of eligibility for federal insurance and that some
institutions would be subject to sanctions because of disclosure failures.
We anticipate that Congress would grant FTC discretion to enforce and
implement section 43 and, if necessary, to provide for a phased-in
approach to deal with FTC’s concerns.


We will provide copies of this report to the Chairman and the Ranking
Minority Member on the Senate Committee on Banking, Housing, and
Urban Affairs, and the Chairman and the Ranking Minority Member on the
House Committee on Financial Services. Copies of this report also will be
provided to the Chairman of FTC; the Chairman of FDIC; the Chairman of
NCUA, and other interested parties. Copies will also be made available to
others upon request. In addition, this report will be available at no charge
on the GAO Web site at http://www.gao.gov.

This report was prepared under the direction of Debra R. Johnson,
Assistant Director. Please contact Ms. Johnson or me at (202) 512-8678 if
you or your staff have any questions about this report. Other major
contributors are acknowledged in appendix V.




Richard J. Hillman
Director, Financial Markets and Community Investment




Page 52                                GAO-03-971 Federal Deposit Insurance Act
List of Congressional Committees

The Honorable Ted Stevens
Chairman
The Honorable Robert C. Byrd
Ranking Minority Member
Committee on Appropriations
United States Senate

The Honorable Judd Gregg
Chairman
The Honorable Ernest Hollings
Ranking Minority Member
Committee on Appropriations
Subcommittee on Commerce, Justice, State, and the Judiciary
United States Senate

The Honorable C.W. Bill Young
Chairman
The Honorable David R. Obey
Ranking Minority Member
Committee on Appropriations
House of Representatives

The Honorable Frank R. Wolf
Chairman
The Honorable Jose E. Serrano
Ranking Minority Member
Committee on Appropriations
Subcommittee on Commerce, Justice, State, the Judiciary, and Related
Agencies
House of Representatives




Page 53                              GAO-03-971 Federal Deposit Insurance Act
              Appendix I: Objectives, Scope, and
Appendix I: Objectives, Scope, and
              Methodology



Methodology

              To respond to a mandate in the Conference Report to accompany the
              House Joint Resolution 2, for the Fiscal Year 2003 Consolidated
              Appropriations Act—which directed us to study the enforcement of
              section 43 of the Federal Deposit Insurance Act—we (1) determined the
              current status of enforcement of these requirements; (2) determined the
              extent of compliance with each requirement and the potential impact on
              consumers if these requirements were not enforced, and (3) evaluated
              which federal agency could most effectively enforce section 43.1

              To better understand the issues around deposit insurance, we reviewed
              and analyzed relevant studies on federal and private deposit insurers for
              both credit unions and other depository institutions. In addition, we
              interviewed officials at the National Credit Union Administration (NCUA),
              the Department of the Treasury, and the Federal Deposit Insurance
              Corporation (FDIC) to obtain perspectives specific to federal and private
              deposit insurance. We also obtained views from credit union industry
              groups including the National Association of Federal Credit Unions,
              National Association of State Credit Union Supervisors, and Credit Union
              National Association, Inc. (CUNA).

              We limited our assessment of “depository institutions lacking federal
              deposit insurance” to state-chartered credit unions that purchase private
              deposit insurance because banks, thrifts, and federally chartered credit
              unions generally are required to purchase federal deposit insurance.2 As of
              December 2002, 214 state-chartered credit unions lacked federal deposit
              insurance, and all but two were privately insured. In addition, our analysis
              was limited to primary deposit insurance.

              To determine the extent to which private deposit insurance is permitted
              and utilized by state-chartered credit unions, we conducted a survey of
              state credit union regulators in all 50 states. Our survey had a 100-percent
              response rate. In addition to the survey, we obtained and analyzed
              financial and membership data of privately insured credit unions from a
              variety of sources (NCUA, Credit Union Insurance Corporation of
              Maryland, CUNA, and American Share Insurance (ASI), the only remaining
              provider of primary share insurance). We found this universe difficult to


              1
               Conference Report to accompany the House Joint Resolution 2, Fiscal Year 2003
              Consolidated Appropriations Act, Enforcement of section 151 of FDICIA.
              2
               Credit unions are nonprofit cooperatives that serve their members by accepting deposits,
              making loans, and providing various other financial services.




              Page 54                                       GAO-03-971 Federal Deposit Insurance Act
Appendix I: Objectives, Scope, and
Methodology




confirm because in our discussions with state regulators, NCUA, and ASI
officials, and our review of state laws, we identified other states that could
permit credit unions to purchase private deposit insurance.

To determine the regulatory differences between privately insured credit
unions and federally insured state-chartered credit unions, we identified
and analyzed statutes and regulations related to deposit insurance at the
state and federal levels.3 In addition, we interviewed officials at NCUA and
conducted interviews with officials at the state credit union regulatory
agencies from Alabama, California, Idaho, Indiana, Illinois, Maryland,
Nevada, New Hampshire, and Ohio.

To determine the extent to which privately insured credit unions met
federal disclosure requirements, we identified and analyzed federal
consumer disclosure provisions in section 43 of the Federal Deposit
Insurance Act, as amended, and conducted unannounced site visits to 57
privately insured credit unions (49 main and 8 branch locations) in
Alabama, California, Illinois, Indiana, and Ohio.4 The credit union locations
were selected based on a convenience sample using state and city location
coupled with random selection of main or branch locations within each
city. About 90 percent of the locations we visited were the main institution
rather than a branch institution. This decision was based on the
assumption that if the main locations were not in compliance, then the
branch locations would probably not be in compliance either. Although
neither these site visits, nor the findings they produced, render a
statistically valid sample of all possible main and branch locations of
privately insured credit unions necessary in order to determine the
“extent” of compliance, we believe that what we found is robust enough,
both in the aggregate and within each state, to raise concern about lack of
disclosure in privately insured credit unions. During each site visit, using a
systematic check sheet, we noted whether or not the credit union had
conspicuously displayed the fact that the institution was not federally
insured (on signs or stickers, for example).

In addition, from these same 57 sites visited, we collected a total of 227
credit union documents that we analyzed for disclosure compliance. While
section 43 requires depository institutions lacking federal deposit


3
 We limited our analysis to those states with privately insured credit unions—Alabama,
California, Idaho, Illinois, Indiana, Maryland, Nevada, and Ohio.
4
    12 U.S.C. § 1831t.




Page 55                                       GAO-03-971 Federal Deposit Insurance Act
Appendix I: Objectives, Scope, and
Methodology




insurance to disclose they are not federally insured in personal
documents, such as periodic statements, we did not collect them. We also
conducted an analysis of the Web sites of 78 privately insured credit
unions, in all eight states where credit unions are privately insured, to
determine whether disclosures required by section 43 were included. To
identify these Web sites, we conducted a Web search. We attempted to
locate Web sites for all 212 privately insured credit unions; however, we
were able to only identify 78 Web sites. We analyzed all Web sites
identified. Finally, we interviewed FTC staff to understand their role in
enforcement of requirements of section 43 for depository institutions
lacking federal deposit insurance.

To understand how private deposit insurers operate, we conducted
interviews with officials at three private deposit insurers for credit
unions—ASI (Ohio), Credit Union Insurance Corporation (Maryland), and
Massachusetts Credit Union Share Insurance Corporation
(Massachusetts). Because ASI was the only fully operating provider of
private primary deposit insurance, ASI was the focus of our review.5 We
obtained documents related to ASI operations such as financial statements
and annual audits and analyzed them for the auditor’s opinion noting
adherence with accounting principles generally accepted in the United
States. To determine the extent to which ASI provided copies of its annual
audits to state regulators and credit unions it insures, we interviewed state
regulators in states where ASI insures credit unions and contacted the
management of 26 credit unions that are insured by ASI. Additionally, to
understand the state regulatory framework for ASI, we interviewed
officials at the Ohio Department of Insurance and Department of Financial
Institutions.

To evaluate which federal agency could most effectively enforce these
requirements, we interviewed FTC staff and officials from NCUA, FDIC,
and various interested industry groups to discuss their perspectives and
obtain their positions on enforcement of section 43 requirements. We also
conducted legal research and analysis related to these provisions.



5
 As of December 2002, we identified two entities that provide private deposit of primary
share insurance to credit unions in the 50 states and the District of Columbia—ASI and
Credit Union Insurance Corporation. However, Credit Union Insurance Corporation in
Maryland was in the process of dissolution, and therefore we did not include it in our
analysis. During our review, we learned that Massachusetts Credit Union Share Insurance
Corporation only provides excess deposit insurance, and therefore we did not include it in
our analysis.




Page 56                                        GAO-03-971 Federal Deposit Insurance Act
Appendix I: Objectives, Scope, and
Methodology




We conducted our work in Washington, D.C., Alabama, California, Indiana,
Illinois, Maryland, Massachusetts, Ohio, and Virginia between February
and August 2003, in accordance with generally accepted government
auditing standards.




Page 57                              GAO-03-971 Federal Deposit Insurance Act
                                             Appendix II: Entities That Enforce Various
Appendix II: Entities That Enforce Various   Laws at Credit Unions



Laws at Credit Unions


                                                                          Agency with enforcement authority at credit unions
                                                                Federally insured/          Federally insured/          Privately insured/
 Law                                                            federally chartered         state-chartered             state-chartered
 Credit
 Equal Credit Opportunity                                       NCUA                        FTC                         FTC
 Electronic Fund Transfers                                      NCUA                        FTC                         FTC
 Fair Credit Practice Rule                                      NCUA                        FTC                         FTC
 Consumer Leasing                                               NCUA                        FTC                         FTC
 Real Estate Settlement Procedures Act                          HUD                         HUD                         HUD
 Truth in Lending                                               NCUA                        FTC                         FTC
 Housing
 Home Mortgage Disclosure Act                                   NCUA                        NCUA                        NCUA
 Flood Disaster Protection Act                                  NCUA                        NCUA                        FHA/VA
 Fair Housing Act                                               HUD                         HUD                         HUD
 Privacy
 Bank Secrecy Act (Currency and Foreign Transactions            NCUA                        NCUAb                       TREAS
               a
 Reporting Act)
 Fair Credit Reporting Act                                      NCUA                        FTC                         FTC
 Privacy of Consumer Financial Information                      NCUA                        NCUA                        FTC
 Credit Union Operations
 Expedited Funds Availability Act                               NCUA                        NCUA                        FRB
 Reserve Requirements                                           FRB                         FRB                         FRB
 Fair Debt Collection Practices Act                             NCUA                        FTC                         FTC
 Management Officials Interlocks Act                            NCUA                        NCUA                        DOJ
 Truth in Savings Act                                           NCUA                        NCUA                        NCUA
Source: NCUA.

                                             Legend:

                                             DOJ          Department of Justice
                                             FHA/VA       Federal Housing Administration/Veterans Administration
                                             FRB          Federal Reserve Board
                                             FTC          Federal Trade Commission
                                             HUD          Department of Housing and Urban Development
                                             TREAS        Treasury Department

                                             Note: Although NCUA is not the primary enforcer under some of these regulations, Title II of the
                                             Federal Credit Union Act authorizes NCUA to take cease and desist actions for violations of any law.
                                             a
                                             The USA PATRIOT Act amended the Bank Secrecy Act, as well as other legislation.
                                             b
                                             For federally insured credit unions examined by NCUA.




                                             Page 58                                              GAO-03-971 Federal Deposit Insurance Act
              Appendix III: Comments from the National
Appendix III: Comments from the National
              Credit Union Administration



Credit Union Administration




              Page 59                                    GAO-03-971 Federal Deposit Insurance Act
Appendix III: Comments from the National
Credit Union Administration




Page 60                                    GAO-03-971 Federal Deposit Insurance Act
             Appendix IV: Comments from the Federal Trade Commission
Appendix IV: Comments from the Federal
Trade Commission




             Page 61                                    GAO-03-971 Federal Deposit Insurance Act
Appendix IV: Comments from the Federal Trade Commission




Page 62                                    GAO-03-971 Federal Deposit Insurance Act
Appendix IV: Comments from the Federal Trade Commission




Page 63                                    GAO-03-971 Federal Deposit Insurance Act
Appendix IV: Comments from the Federal Trade Commission




Page 64                                    GAO-03-971 Federal Deposit Insurance Act
Appendix IV: Comments from the Federal Trade Commission




Page 65                                    GAO-03-971 Federal Deposit Insurance Act
Appendix IV: Comments from the Federal Trade Commission




Page 66                                    GAO-03-971 Federal Deposit Insurance Act
Appendix IV: Comments from the Federal Trade Commission




Page 67                                    GAO-03-971 Federal Deposit Insurance Act
Appendix IV: Comments from the Federal Trade Commission




Page 68                                    GAO-03-971 Federal Deposit Insurance Act
Appendix IV: Comments from the Federal Trade Commission




Page 69                                    GAO-03-971 Federal Deposit Insurance Act
Appendix IV: Comments from the Federal Trade Commission




Page 70                                    GAO-03-971 Federal Deposit Insurance Act
Appendix IV: Comments from the Federal Trade Commission




Page 71                                    GAO-03-971 Federal Deposit Insurance Act
                  Appendix V: GAO Contacts and Staff
Appendix V: GAO Contacts and Staff
                  Acknowledgments



Acknowledgments

                  Richard J. Hillman (202) 512-8678
GAO Contacts      Debra R. Johnson (202) 512-8678


                  In addition to the persons named above, Anne Cangi, Theresa L. Chen,
Acknowledgments   William Chatlos, Kimberly Mcgatlin, Donald Porteous, Emma Quach,
                  Barbara Roesmann, and Paul Thompson made key contributions to this
                  report.




(250133)
                  Page 72                              GAO-03-971 Federal Deposit Insurance Act
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