February 26, 1999

Steve Rixman, Chairman, Board of Directors
Autotruck Federal Credit Union
3611 Newburg Road
Louisville, Kentucky 40218

You have asked for a legal opinion on the permissibility of a federal credit union (FCU) investing in a flexible premium deferred variable and fixed annuity to fund its CEO's deferred compensation agreement. As explained below, we have no legal objection to the investment and defer to Region III on any safety and soundness issues. You have also asked for an opinion from the Office of Examination and Insurance (E&I) on the accounting treatment for this investment. We have referred your request to E&I for a response.

The annuity was purchased and is owned by the FCU with the CEO listed as the annuitant. Funds in the annuity are allocated between investment subaccounts. Some of the subaccounts' investments carry considerable risk. The annuity would be an impermissible investment for an FCU investing on its own behalf. Although the annuity contract has an annuity date of May 12, 2034, under the deferred compensation agreement, when the CEO retires in eight years, the FCU will recoup its initial investment and the CEO will receive a lump sum distribution of the accumulated earnings. It is my understanding that CUNA Mutual has advised the FCU that, if the FCU continues to hold onto the investment after the CEO retires, it becomes an impermissible investment for the FCU.

At your FCU's most recent exam, the National Credit Union Administration (NCUA) examiner expressed concern about the permissibility of an FCU investing in an annuity funded by high risk investments that are impermissible investments for FCUs. Your attorney in her December 31, 1998, letter correctly concluded based on prior General Counsel opinion letters that an FCU investing on its own behalf is restricted by NCUA's regulations and the Federal Credit Union Act (the Act), but those limitations do not apply when an FCU is acting in its capacity as an employer providing retirement benefits to employees. We also

Mr. Steve Rixman

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agree with CUNA Mutual's advice that, if the FCU continues to hold onto the investment after the CEO retires, it becomes an impermissible investment.

Although an FCU is not limited by the Act and NCUA regulations when investing to fund an employee retirement plan, the investment should represent sound business judgment and be appropriate for the FCU. The attached letter from

Hattie M. Ulan to Tom Peterson dated March 19, 1992, discusses some of the safety and soundness issues an FCU should consider in selecting and funding a plan and concludes that the ultimate safety and soundness determination lies with the NCUA Regional Offices.

This office has no legal objection to the FCU's investment in an annuity to fund a deferred compensation agreement and defers to Region III on any safety and soundness issues.

Sincerely,

Sheila A. Albin
Associate General Counsel

GC/MFR:bhs
SSIC 3601
99-0206
Enclosure

cc: Region III

E&I