_”        .   .    .




                                                 The Attorney           General of Texas
                                                                    December 31, 1982
 MARK WHITE
 Attorney General


                                                Mr. John P. Parsons                     Opinion No.m-579
 Supreme      Court Building
 P. 0. BOX 12546
                                                commissioner
 Austin.    TX. 78711. 2548                     Texas Credit Union Department           lk:   Whether credit union
 5121475-2501                                   914 East Anderson Lane                  chartered under Texas Credit
 Telex    9101674-1367                          Austin, Texas   78752                   Uni0l-l Act may offer debt
 Telecopier     5121475.0266
                                                                                        securities for sale

 1607 Main St., Suite 1400                      Dear Mr. Parsons:
 Dallas.   TX. 75201-4709
 2141742-6944                                        You have requested our opinion on certain issues relating to the
                                                authority of Texas credit unions to issue debt securities and the
 4024 Alberta              Ave.. Suite    160
                                                regulation of those securities.
 El Paso, TX.              79905.2793
 9151533-3484                                        Your first question is whether credit unions chartered under the
                                                Texas Credit Union Act, article 2461-1.01 et seq., V.T.C.S., have the
 ,220 Dallas Ave., Suite 202
                                                authority to sell debt securities to their members and to the general
 Houston,     TX. 77002-6986                    public. The securities involved in this inquiry sre debt instruments
 7131650-0666                                   such as bonds and debentures not share accounts or other savings,
                                                deposits placed in credit unions by their members.
 006 Broadway,               Suite 312
 Lubbock,     TX.           79401-3479
                                                     The bonds and similar securities in question are instruments of
 8061747-5236
                                                debt by which the issuer borrows money from the purchasers. SC%?
                                                generally, Black’s Law Dictionary 224, 408 (4th ed. rev. 1968).
                                                Essentially, by selling a bond, the issuer borrows money and creates a
 4309 N. Tenth, Suite B                         debt, evidenced by the bond, which the issuer is obligated to repay at
 McAllen,     TX. 78501.1665
                                                fixed times at a stated rate of interest, to the bond purchaser or a
 5121662-4547
                                                subsequent bona fide holder. Bonds can either be secured by certain
                                                property of the issuer or unsecured. An unsecured bond is generally
 200 Main Plaza. Suite 400                      labeled a debenture.
 San Antonio,  TX. 76205.2797
 512/225.4191
                                                     Under the Credit Union Act, credit unions are given the power to
                                                “borrow money from any source.”        V.T.C.S. art. 2461-4.01(10).
     An Equal          Opportunity,             Although the borrowing authority of credit unions is subject to
     Affirmative         Action     Employer    certain restrictions discussed later in this opinion, that authority
                                                is not limited in method or form. Specifically, for purposes of our
                                                inquiry, the act contains no indication that incurring debt through
                                                the sale of bonds is not included under the general borrowing power
                                                granted by section 4.01(10). Therefore, the sale of debt securities
                                                by credit unions organized under the Credit UnionsAct is an authorized
                                                form of borrowing under the act.




                                                                           p. 2142
Mr. John P. Parsons - Page 2   (NW-579)




     Although section 4.02 grants the credit unions certain powers to
accomplish their purposes, it does not expand or otherwise modify the
express provisions of the act. Because a credit union's specific
authorization to borrow money under section 4.01(10) includes the
power to issue bonds, section 4.02 does not expand that power and is
not applicable in the present case.

     The present inquiry includes the question of whether the credit
unions can sell the securities they issue to the general public as
well as to credit union members. Section 4.01(10) makes clear that
credit unions' borrowing authority allows them to "borrow money from
any source." (Emphasis added). This language does not restrict a
credit union's borrowing to its membership. If the legislature
intended to limit the credit union's borrowing sources, it could have
expressed such a limitation. The legislature, for instance, did
express such a limitation with respect to the credit unions' lending
authority. A credit union is only allowed to "lend its funds to its
members." (Emphasis added). V.T.C.S. art. 2461-4.01(S). The broad
language of section 4.02(10) authorizes borrowing from the general
public as well as from credit union members. Therefore, under the
Credit Union Act, credit unions are authorized to borrow money through
the issuance of debt securities. Those securities may be sold to the
general public as well as to credit union members.

     Your second question asks to what extent debt securities issued
by credit unions are exempted from the Texas Securities Act by section
11.17 of the Credit Union Act. Section 11.17 provides:

          Credit unions, whether authorized to do business
          under this Act or the Federal Credit Union Act,
          their officers, employees, and agents in the sale,
          issuance, or offering of any security issued by
          any state or federal credit union are exempt from
          the provisions of the laws of this state, other
          than as required by this Act, which provide for
          the supervision, registration, or regulation in
          connection with the sale, issuance, or offering of
          securities as the term is defined in Section 4,
          Securities Act, as amended (Article 581-4,
          Vernon's Texas Civil Statutes).        The sale,
          issuance, or offering of any such security is
          legal without any action or approval on the part
          of any official, other than the credit union
          commissioner, authorized to license, regulate, or
          supervise the sale, issuance, or offering of
          securities.

V.T.C.S. art. 2461-11.17.




                                 p. 2143
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        Mr. John P. Parsons - Page 3   (m-579)




             Initially, it should be noted that bonds and similar debt
        securities are "securities" under the Securities Act. Section 4(A) of
        that act defines "securities" to include any "bond, debenture,... or
        other evidence of indebtedness." V.T.C.S. art. 581-4(A).         This
        definition of securities is expressly referenced for application in
        section 11.17 of the Credit Union Act.

             Although not mentioned by name, the Securities Act is the primary
        statute to which the section 11.17 exemption applies. That act is
        part of "the laws of this state... which provide for the supervision,
        registration, or regulation in connection with the sale, issuance, or
        offering of securities." V.T.C.S. art. 2461-11.17. The question,
        therefore, becomes: "to what extent are debt securities issued by
        credit unions exempt from provisions of the Securities Act by section
        11.17."

             In construing the extent of the exemption, it is important to
        note that section 11.17 does not grant a blanket exemption from the
        Securities Act. If the legislature intended such complete exemption,
        it could have briefly and directly stated that intention. Instead of
        exempting those securities from compliance with all provisions of the
        Texas Securities Act, section 11.17 only gives credit unions a form of
        transaction exemption in the issuing of securities. That section
        states that credit unions and their agents are exempt "in the sale,
        issuance, or offering of any security issued by any state or federal
        credit union." The extent of this exemption is clarified by the
        second sentence of section 11.17 which provides that the "sale,
        issuance, or offering of any security is legal without any action or
        approval on the part of" the state securities commissioner. Under the
        Securities Act, the securities commissioner is the "official...
        authorized to license, regulate, or supervise the sale, issuance, or
        offering of securities." V.T.C.S. art. 2461-11.17.

             The effect of section 11.17, therefore, is to allow credit unions
        to offer and sell securities without seeking or obtaining any form of
        authorization under the Securities Act. Specifically, credit unions
        are allowed to offer and sell securities without compliance with the
        security registration requirements of section 7 of the Securities Act.
        V.T.C.S. art. 581-7.    Further, the persons offering and selling
        securities on behalf of credit unions are exempt from the licensing
        requirements of section 12 of the Securities Act.       V.T.C.S. art.
        581-12.   By the terms of section 11.17, however, the licensing
        exemption applies only to "credit unions..., their officers,
        employees, and agents." V.T.C.S. art. 2461-11.17. The exemption does
        not extend to independent dealers of the securities.

             The transaction exemption provided by section 11.17 does not
        exempt credit unions from compliance with the substantive requirements
        of the Texas Securities Act. Most important, the offer and sale of




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Mr. John P. Parsons - Page 4   (Mw-579)




securities by credit unions remain subject to the anti-fraud
protections of the Securities Act.       See, e. ., Securities Act,
V.T.C.S. art. 581 553, 23, 28, 29, 32, 33.

     The section 11.17 exemption from the Securities Act registration
and licensing requirements is similar to the transaction exemptions
provided by section 5 of the Securities Act. V.T.C.S. ar,t.581-5. As
found in the legislative history, the purpose of the current enactment
of section 11.17 was to provide credit unions with the same
transaction exemption granted to banks and savings and loan
institutions. Statement of Representative Gerald Hill before the
House cotnrn.on Financial Institutions, Hearings on H.B. No. 1399,
April 7, 1981, on tape filed with House Hearing Reporter.

     The Securities Act exemption for banks and savings and loan
institutions is found in section 5(L) which exempts from application
of the act the offer and sale of securities as follows:

             The sale by the issuer itself, or by a
          registered dealer, of any security issued or
          guaranteed by any bank organized and subject to
          regulation under the laws of the United States or
          under the laws of any State or territory of the
          United States, or any insular possession thereof,
          or by any savings and loan association organized
          and subject to regulation under the laws of this
          state, or the sale by the issuer itself of any
          security issued by any federal savings and loan
          association.

V.T.C.S. art. 581-5(L).      Although they are exempt from the
registration and licensing requirements of the Securities Act by
section 5(L), securities issued by banks and savings and loans are
still subject to the act's anti-fraud provisions. -See Securities Act,
V.T.C.S. art. 581, 532. The exemption of section 11.17 of the Texas
Credit Union Act should be applied in the same manner as the exemption
provided by section 5(L) of the Securities Act.

     As a final question, you ask to what extent the Texas credit
union commissioner is authorized to approve or disapprove the issuance
of debt securities by credit unions.        Section 11.17 gives the
commissioner the authority to approve and otherwise regulate the offer
and sale of securities by credit unions. The second sentence of that
section clarifies this authority by stating that "[tlhe sale,
issuance, or offering of any [security issued by a credit union] is
legal without any action or approval on the part of any official,
other than the credit union commissioner,....II V.T.C.S. art.
2461-11.17.




                                 p. 2145
Mr. John P. Parsons - Page 5     mw-579)




     While enabling the commissioner to approve or disapprove credit
union bond issues, section 11.17 in itself does not require
affirmative action by the commissioner in this regard. Instead, the
proviso in the first sentence of that section allows approval and
other regulation of credit union securities "as required by [the
Credit Union] Act." Consequently, the regulation is conducted by the
commissioner according to other provisions of the act and the rules
promulgated under the act which are applicable to credit union
securities.

     The only statutory requirement of commissioner approval for
credit union securities is found in article 2461-4.01(10) section
4.01(10). V.T.C.S.    That section requires prior approval by the
commissioner of all credit union debt which exceeds twenty-five
percent of its shares, deposits, and surplus. That is, when the
issuance of debt securities, combined with all other credit union
debt, will exceed the twenty-five percent limit, the credit union is
required to obtain prior commissioner approval before the securities
could be offered or sold.

     The issuance of securities by credit unions would also be
subjected to further scrutiny under such administrative rules which
the commissioner enforces. V.T.C.S. art. 2461-11.10(b). At present
there are no applicable rules which have been adopted by the Texas
Credit Union Commission under its rule making authority. V.T.C.S.
art. 2461-11.07.

                               SUMMARY

            Credit unions organized under the Texas Credit
         Union Act are authorized to issue debt securities.
         These securities may be sold to the general public
         as well as to credit union members. While exempt
         from the registration and licensing requirements
         of the Texas Securities Act, credit union
         sec"rities are not exempt from the anti-fraud
         provisions of that act.        The credit union
         commissioner has the authority to regulate credit
         union securities.

                                           Very truly yours,




                                           Attorney General of Texas

JOHN W. FAINTER, JR.
First Assistant Attorney General




                                   p. 2146
Mr. John P. Parsons - Page 6   (Mw-579)




RICHARD E. GRAY III
Executive Assistant Attorney General

Prepared by Jeffery L. Hart
Assistant Attorney General

APPROVED:
OPINION COMMITTEE

Susan L. Garrison, Chairman
Jon Bible
Rick Gilpin
Jeffery L. Hart
Jim Moellinger




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