PARC Street Group works with credit union boards and executive teams to solve one of the industry’s most persistent challenges: building and retaining strong leadership in a complex, highly regulated environment. From executive recruiting to compensation consulting and Supplemental Executive Retirement Plan (SERP) design, we provide an integrated approach that helps credit unions make informed decisions with clarity and confidence.
A consistent theme we see across institutions is the need to balance financial performance with community impact. Credit unions are expected to deliver results while staying true to their mission of “people helping people.” That often requires creative, compliant strategies that support both objectives, especially when it comes to attracting talent, rewarding leadership, and strengthening community engagement.
One strategy that has gained increased attention is the use of charitable donation accounts (CDAs). When structured properly, CDAs can support long-term financial goals while reinforcing a credit union’s commitment to its members and communities. The following guide outlines how CDAs work, the regulatory framework behind them, and what boards and executives should consider when evaluating this approach.
Overview
The NCUA has preapproved the establishment of charitable donation accounts as a permissible activity that is incidental to carrying on a credit union’s business. A charitable donation account (“CDA”) is an account funded by a credit union with up to 5% of its net worth as a means to provide charitable contributions and donations to qualified charities. It is consistent with the philosophy of “people helping people” and can assist with a credit union’s community engagement.
Additionally, a CDA can also generate income that contributes to a credit union’s bottom line, as a CDA may be invested in assets other than those permitted in 12 CFR Part 703 and a portion of the income can be credited to the credit union.
A federal credit union may establish a CDA by complying with the conditions in 12 CFR §721.3(b)(2)[1], which are summarized in this publication. Many state-chartered credit unions are permitted by state law to establish a CDA; review your state law for further information.
What Is a CDA?
A CDA is a “hybrid charitable and investment vehicle” established by a credit union to generate income, a portion of which is paid out in the form of charitable contributions and donations.
How Are Assets Held by a CDA?
The assets allocated to a CDA must be held in a segregated custodial account or special purpose entity, and must be specifically identified as a CDA.
If the CDA is organized as a trust, the trustee must be regulated by the office of the Comptroller of the Currency (“OCC”), the U.S. Securities and Exchange Commission (“SEC”), another federal regulatory agency, or a state financial regulatory agency.
What Investments May Be Held by a CDA? Who Makes Investment Decisions?
A CDA is not subject to the investment restrictions in 12 CFR Part 703, so it may be invested in equities or other types of investments that are generally not allowed, commonly referred to as “impermissible investments”. The attached Appendix reproduces the regulatory provisions listing the permissible and impermissible investments for a federal credit union.
A credit union can make investment decisions with its own staff. Alternatively, the credit union can engage a third party to make investment decisions. The investment advisor must be the trustee (if the CDA is organized as a trust), or other third party that is either a registered investment advisor (“RIA”) or is regulated by the OCC.
What is the Maximum Amount of Investments That Can Be Held in a CDA?
The book value of investments in all CDAs, in the aggregate, as carried on the credit union’s statement of financial condition prepared in accordance with GAAP, must be limited to 5% of net worth. The 5% limit applies for the duration of the accounts, as measured every quarterly call report cycle.
A credit union has 30 days to bring the accounts into compliance if the aggregate CDAs exceed the maximum aggregate funding limit.
May a Credit Union Have More than One CDA?
Yes, a credit union may have multiple CDAs. If the credit union establishes more than one CDA, the 5% limit applies to all CDAs on an aggregate basis.
What Amount Must be Distributed to Qualified Charities from a CDA?
A credit union must distribute, at least once every five years, a minimum of 51% of the account’s total return on assets over a period of up to 5 years to qualified charities. These are the minimum distribution requirements. A credit union can make donations more frequently, for example, on a quarterly or annual basis. Further, a credit union can distribute more than 51% of the earnings to qualified charities if desired.
At least 51% of the total return on assets must also be distributed to qualified charities upon termination of the CDA.
“Total return” is the actual rate of return on all investments in a CDA over a given period of time of up to 5 years, including realized interest, capital gains, dividends and distribution, but not including account fees and expenses not paid to the credit union or any of its affiliates.
The portion of the total return on the CDA not paid to a qualified charity (up to 49% of the total return) may be credited to the credit union’s income statement.
What is a Qualified Charity?
Distributions from a CDA must be made to a “qualified charity,” which means either:
- A charitable organization exempt from tax under Section 501(c)(3) of the Internal Revenue Code (the “Code”), which includes an entity organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, or for the purpose of the prevention of cruelty to children or animals; or
- A veterans’ organization exempt from tax under Code Section 501(c)(19), which includes a post or other organization of past or present members of the U.S. Armed Forces, including an auxiliary unit or society, or a trust or foundation for any such post or organization.
What Steps Must a Credit Union Take to Establish a CDA?
- The credit union must enter into a written agreement with the trustee or other account manager documenting the terms and conditions controlling the account.
- The board must adopt written policies governing the creation, funding, and management of the CDA that are consistent with §721.3(b)(2), and are summarized below.
What Must the Written Policies Governing CDAs Address?
The written policies governing CDAs must, at a minimum:
- Provide that the CDA will make charitable contribution donations only to charities named by the credit union that are exempt from tax under Code Section 501(c)(3). Although this provision of the regulation does not reference veterans’ organizations, given that a qualified charity is defined to include veterans’ organizations that are tax-exempt under Code Section 501(c)(19), it should also be possible to designate tax-exempt veterans’ organizations as permissible recipients.
- Document the investment strategies and risk tolerances that the CDA trustee or other manager must follow in administering the account, typically in an investment policy statement.
- Provide that the credit union will account for all aspects of the CDA, including distributions to charities and liquidation of the account, in accordance with GAAP; and
- Indicate the frequency with which the trustee or manager will make distributions to the qualified charities.
What Happens to the Assets in a CDA When the CDA Terminates?
When the CDA terminates, the credit union may receive a distribution of the remaining account assets in cash or in-kind. However, assets can be distributed to the credit union in-kind only if they are permissible investments under Part 703.
Are Investments in a CDA Aggregated with Investments Held to Fund Employee Benefits Under 12 CFR §701.19?
- No. The 5% of net worth limit applicable to CDAs is separate from the 25% of net worth guidelines that applies to investments that fund employee benefits.
How Can PARC Help a Credit Union Establish and Manage CDAs?
Establishing and managing a Charitable Donation Account requires disciplined structure, clear governance, and ongoing oversight within NCUA guidelines. PARC Street Advisors works with credit unions to design CDA strategies that are designed to support both income generation and charitable giving, without adding unnecessary complexity.
We support the full process:
- Structuring the CDA and establishing appropriate governance and policies
- Defining investment strategy based on risk profile and institutional objectives
- Coordinating with sub-advisory investment firm(s), such as Shufro, Rose & Co., LLC, and overseeing the ongoing performance
- Maintaining documentation and oversight designed to withstand regulatory scrutiny
Our approach helps credit unions stay within regulatory limits, meet distribution requirements, and reduce internal administrative burden. Whether evaluating a CDA or refining an existing approach, we help boards and leadership teams make clear, well-informed decisions.
Permissible and Impermissible Investments for a Federal Credit Union
The Federal Credit Union Act in 12 USC Sections 1757(7), (8), and (15) lists the securities, debt instruments, and obligations in which a federal credit union may invest. The Act does not allow investments in equities, mutual funds, or similar instruments unless authorized by another statutory or regulatory provisions.
12 CFR Section 703.14 interprets the statute and lists the following permissible investments:
§ 703.14 Permissible investments.
(a) Variable rate investment. A federal credit union may invest in a variable rate investment, as long as the index is tied to domestic interest rates. Except in the case of Treasury Inflation Protected Securities, the variable rate investment cannot, for example, be tied to foreign currencies, foreign interest rates, domestic or foreign commodity prices, equity prices, or inflation rates. For purposes of this part, the U.S. dollar-denominated London Interbank Offered Rate (LIBOR) is a domestic interest rate.
(b) Corporate credit union shares or deposits. A Federal credit union may purchase shares or deposits in a corporate credit union, except where the NCUA Board has notified it that the corporate credit union is not operating in compliance with part 704 of this chapter. A Federal credit union’s aggregate amount of perpetual and nonperpetual capital, as defined in part 704 of this chapter, in one corporate credit union is limited to two percent of the federal credit union’s assets measured at the time of investment or adjustment. A Federal credit union’s aggregate amount of contributed capital in all corporate credit unions is limited to four percent of assets measured at the time of investment or adjustment.
(c) Registered investment company. A Federal credit union may invest in a registered investment company or collective investment fund, as long as the prospectus of the company or fund restricts the investment portfolio to investments and investment transactions that are permissible for Federal credit unions.
(d) Collateralized mortgage obligation/real estate mortgage investment conduit. A Federal credit union may invest in a fixed or variable rate collateralized mortgage obligation/real estate mortgage investment conduit.
(e) Municipal security. A Federal credit union may purchase and hold a municipal security, as defined in section 107(7)(K) of the Act, only if it conducts and documents an analysis that reasonably concludes the security is at least investment grade. The Federal credit union must also limit its aggregate municipal securities holdings to no more than 75 percent of the Federal credit union’s net worth and limit its holdings of municipal securities issued by any single issuer to no more than 25 percent of the Federal credit union’s net worth.
(f) Instruments issued by institutions described in Section 107(8) of the Act. A Federal credit union may invest in the following instruments issued by an institution described in Section 107(8) of the Act:
(1) Yankee dollar deposits;
(2) Eurodollar deposits;
(3) Banker’s acceptances;
(4) Deposit notes; and
(5) Bank notes with weighted average maturities of less than 5 years.
(g) European financial options contract. A Federal credit union may purchase a European financial options contract or a series of European financial options contracts only to fund the payment of dividends on member share certificates where the dividend rate is tied to an equity index provided:
(1) The option and dividend rate are based on a domestic equity index;
(2) Proceeds from the options are used only to fund dividends on the equity-linked share certificates;
(3) Dividends on the share certificates are derived solely from the change in the domestic equity index over a specified period;
(4) The options’ expiration dates are no later than the maturity date of the share certificate.
(5) The certificate may be redeemed prior to the maturity date only upon the member’s death or termination of the corresponding option;
(6) The total costs associated with the purchase of the option is known by the Federal credit union prior to effecting the transaction;
(7) The options are purchased at the same time the certificate is issued to the member.
(8) The counterparty to the transaction is a domestic counterparty and has been approved by the Federal credit union’s board of directors;
(9) The counterparty to the transaction meets the minimum credit quality standards as approved by the Federal credit union’s board of directors.
(10) Any collateral posted by the counterparty is a permissible investment for Federal credit unions and is valued daily by an independent third party, along with the value of the option;
(11) The aggregate amount of equity-linked member share certificates does not exceed 50 percent of the Federal credit union’s net worth;
(12) The terms of the share certificate include a guarantee that there can be no loss of principal to the member, regardless of changes in the value of the option, unless the certificate is redeemed prior to maturity; and
(13) The Federal credit union provides its board of directors with a monthly report detailing at a minimum:
(i) The dollar amount of outstanding equity-linked share certificates;
(ii) Their maturities; and
(iii) The fair value of the options as determined by an independent third party.
(h) Mortgage note repurchase transactions. A federal credit union may invest in securities that are offered and sold pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C. 77d(5), only as a part of an investment repurchase agreement under § 703.13(c), subject to the following conditions:
(1) The aggregate of the investments with any one counterparty is limited to 25 percent of the Federal credit union’s net worth and 50 percent of its net worth with all counterparties;
(2) At the time the Federal credit union purchases the securities, the counterparty, or a party fully guaranteeing the counterparty, must meet the minimum credit quality standards as approved by the Federal credit union’s board of directors.
(3) The federal credit union must obtain a daily assessment of the market value of the securities under § 703.13(c)(1) using an independent qualified agent;
(4) The mortgage note repurchase transaction is limited to a maximum term of 90 days;
(5) All mortgage note repurchase transactions will be conducted under tri-party custodial agreements; and
(6) A federal credit union must obtain an undivided interest in the securities.
(i) Zero-coupon investments. A federal credit union may only purchase a zero-coupon investment with a maturity date that is no greater than 10 years from the related settlement date, unless authorized under § 703.20 or otherwise provided in this paragraph. A federal credit union that received a composite CAMELS rating of “1” or “2” for the last two (2) full examinations and maintained a capital classification of “well capitalized” under part 702 of this chapter for the six (6) immediately preceding quarters may purchase a zero-coupon investment with a maturity date that is no greater than 30 years from the related settlement date.
(j) Commercial mortgage related security (CMRS). A federal credit union may purchase a CMRS permitted by Section 107(7)(E) of the Act; and, pursuant to Section 107(15)(B) of the Act, a CMRS of an issuer other than a government-sponsored enterprise enumerated in Section 107(7)(E) of the Act, provided:
(1) The Federal credit union conducts and documents a credit analysis that reasonably concludes the CMRS is at least investment grade.
(2) The CMRS meets the definition of mortgage related security as defined in 15 U.S.C. 78c(a)(41) and the definition of commercial mortgage related security as defined in § 703.2 of this part;
(3) The CMRS’s underlying pool of loans contains more than 50 loans with no one loan representing more than 10 percent of the pool; and
(4) The aggregate amount of private label CMRS purchased by the federal credit union does not exceed 25 percent of its net worth, unless authorized under § 703.20 or as otherwise provided in this paragraph (j)(4). A federal credit union that has received a composite CAMELS rating of “1” or “2” for the last two (2) full examinations and maintained a capital classification of “well capitalized” under part 702 of this chapter for the six (6) immediately preceding quarters may hold private label CMRS in an aggregate amount not to exceed 50% of its net worth.
(k) Loan pipeline management. A Federal credit union may enter into the following transactions related to the management of its loan pipeline:
(1) Interest rate lock commitments and forward sales commitments; and
(2) Transactions to manage Interest Rate Risk, as defined in subpart B of this part.
(l) Embedded options. A Federal credit union may enter into embedded options not required under generally accepted accounting principles adopted in the United States (GAAP) to be accounted for separately from the host contract. Embedded options that are required, under GAAP, to be accounted for separately from the host contract, are addressed in § 703.103(b) of this part.
(m) Mortgage servicing assets. A Federal credit union may purchase mortgage servicing assets from other federally insured credit unions if all of the following conditions are met:
(1) The Federal credit union received a composite CAMELS rating of “1” or “2,” with a Management component rating of a “1” or “2,” for the last full examination;
(2) The underlying mortgage loans of the mortgage servicing assets are loans the Federal credit union is empowered to grant;
(3) The Federal credit union purchases the mortgage servicing assets within the limitations of its board of directors’ written purchase policies; and
(4) The Board of Directors or Investment Committee approves the purchase.
12 CFR Section 703.16 lists the following prohibited investments:
§ 703.16 Prohibited investments.
(a) [Reserved]
(b) Stripped mortgage backed securities (SMBS). A Federal credit union may not invest in SMBS or securities that represent interests in SMBS except as described in paragraphs (1) and (3) below.
(1) A Federal credit union may invest in and hold exchangeable collateralized mortgage obligations (exchangeable CMOs) representing beneficial ownership interests in one or more interest-only classes of a CMO (IO CMOs) or principal-only classes of a CMO (PO CMOs), but only if:
(i) At the time of purchase, the ratio of the market price to the remaining principal balance is between .8 and 1.2, meaning that the discount or premium of the market price to par must be less than 20 points;
(ii) The offering circular or other official information available at the time of purchase indicates that the notional principal on each underlying IO CMO should decline at the same rate as the principal on one or more of the underlying non-IO CMOs, and that the principal on each underlying PO CMO should decline at the same rate as the principal, or notional principal, on one or more of the underlying non-PO CMOs; and
(iii) The credit union staff has the expertise dealing with exchangeable CMOs to apply the conditions in paragraphs (e)(1)(i) and (e)(1)(ii) of this section.
(2) A Federal credit union that invests in an exchangeable CMO may exercise the exchange option only if all of the underlying CMOs are permissible investments for that credit union.
(3) A Federal credit union may accept an exchangeable CMO representing beneficial ownership interests in one or more IO CMOs or PO CMOs as an asset associated with an investment repurchase transaction or as collateral in a securities lending transaction. When the exchangeable CMO is associated with one of these two transactions, it need not conform to the conditions in paragraphs (e)(1)(i) and (ii) of this section.
(c) Other prohibited investments. A Federal credit union may not purchase residual interests in collateralized mortgage obligations, real estate mortgage investment conduits, or small business related securities.
[1] eCFR :: 12 CFR 721.3 — What categories of activities are preapproved as incidental powers necessary or requisite to carry on a credit union’s business?
About the Author
BRUCE D. SMITH, CFA®
Partner & Senior Benefits Consultant
Bruce partners directly with credit unions to design and implement Supplemental Executive Retirement Plans (SERPs) that are durable, compliant, and built to perform over the long term. With more than four decades of financial services experience, he combines deep technical expertise in plan design with a client-first approach, ensuring that executives and boards can move forward with clarity and confidence.
Since 2014, Bruce and his team have implemented more than 200 split-dollar SERPs for credit unions and nonprofits, all of which are on track or exceeding their original performance projections.
