[Federal Register Volume 76, Number 172 (Tuesday, September 6, 2011)]
[Proposed Rules]
[Pages 54991-54993]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-22540]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 704

RIN 3133-AD95


Corporate Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule with request for comments.

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SUMMARY: NCUA is issuing proposed amendments to its rule governing 
corporate credit unions (corporates). The proposed amendments clarify 
certain provisions and make some technical corrections to the rule. The 
amendments: delete the definition of ``daily average net risk-weighted 
assets,'' revise the definition of ``net assets'' to exclude Central 
Liquidity Facility (CLF) stock subscriptions, clarify certain 
requirements regarding investment action plans, clarify the weighted 
average life (WAL) tests, revise the consequences of WAL violations, 
substitute the term ``core capital'' for the phrase ``the sum of 
retained earnings and paid-in capital,'' correct a section heading, and 
correct a model form instruction.

DATES: Comments must be received by October 6, 2011. The NCUA Board 
does not expect significant comment on these amendments and so is 
issuing the proposal with a 30-day comment period.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
    Federal eRulemaking Portal: http://www.regulations.gov. Follow the 
instructions for submitting comments.
    NCUA Web site: http://www.ncua.gov/Resources/RegulationsOpinionsLaws/ProposedRegulations.aspx. Follow the 
instructions for submitting comments.
    E-mail: Address to [email protected]. Include ``[Your name] 
Comments on ``Proposed Rule--Corporate Credit Unions'' in the e-mail 
subject line.
    Fax: (703) 518-6319. Use the subject line described above for e-
mail.
    Mail: Address to Mary Rupp, Secretary of the Board, National Credit 
Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-
3428.
    Hand Delivery/Courier: Same as mail address.
    Public Inspection: All public comments are available on the 
agency's Web site at http://www.ncua.gov/Resources/RegulationsOpinionsLaws/ProposedRegulations.aspx as submitted, except 
as may not be possible for technical reasons. Public comments will not 
be edited to remove any identifying or contact information. Paper 
copies of comments may be inspected in NCUA's law library at 1775 Duke 
Street, Alexandria, Virginia 22314, by appointment weekdays between 9 
a.m. and 3 p.m. To make an appointment, call (703) 518-6546 or send an 
e-mail to [email protected].

FOR FURTHER INFORMATION CONTACT: Lisa Henderson, Staff Attorney, Office 
of General Counsel, at the address above or telephone (703) 518-6540; 
or David Shetler, Deputy Director, Office of Corporate Credit Unions, 
at the address above or telephone (703) 518-6640.

SUPPLEMENTARY INFORMATION:

A. Background and Proposed Amendments

    In 2010, NCUA published a final rule containing extensive revisions 
to its corporate rule at 12 CFR part 704. 75 FR 64786 (October 20, 
2010). NCUA subsequently issued technical corrections to the final rule 
and further revisions to part 704. 76 FR 16235 (March 23, 2011); 76 FR 
23861 (April 29, 2011). In order to clarify certain provisions and 
relieve regulatory burden, the NCUA Board is proposing additional 
changes to part 704. The proposed changes are explained below.

Sec.  704.2 Definition of ``daily average net risk-weighted assets''

    Prior to the 2010 final rule, the NCUA Board issued a proposed rule 
to revise part 704 in 2009. 74 FR 65210 (December 9, 2009). The 2009 
proposal defined the denominator of two new risk based capital ratios 
as moving ``daily average net risk-weighted assets'' (DANRA). Some 
commenters on the proposal questioned the burden of daily risk 
weighting to produce the moving DANRA figure. The Board agreed that a 
daily calculation was not necessary and in the final rule replaced the 
denominator for both new ratios with a new ``moving monthly average net 
risk weighted assets'' (MMANRA). 75 FR at 64796. The term ``DANRA'' is 
not used in part 704, and its inclusion in Sec.  704.2 was an 
oversight. This proposal removes the DANRA definition from Sec.  704.2.

Section 704.2 Definition of ``net assets''

    Section 704.2 defines ``net assets,'' in relevant part, as ``total 
assets less loans guaranteed by the NCUSIF and member reverse 
repurchase transactions.'' The Board is proposing to amend the 
definition to also exclude CLF stock subscriptions. The Board believes 
the credit risk of carrying this asset is negligible and warrants such 
treatment, as CLF stock is putable at par. Further, the Board strongly 
believes that all natural person credit unions should have access to a 
back-up liquidity provider that can meet their liquidity demands in the 
event of a wide-spread market disruption. The CLF can supply this 
liquidity if its borrowing authority is not diminished by a reduction 
of its stock subscriptions. This proposed change should encourage 
continued CLF participation by corporates, which in turn will 
facilitate corporates providing a systemic liquidity benefit to natural 
person credit unions through offering CLF access as agents.

Section 704.6 Requirements for Investment Action Plans

    Section 704.10 sets out consequences, potentially including the 
preparation of a written investment action plan, for possessing an 
investment that fails to meet a requirement of part 704. 12 CFR 704.10. 
Sections 704.6(c)(3) and (f)(4) trigger these consequences for 
violations of certain concentration limits and credit rating 
requirements. 12 CFR Sec.  704.6(c)(3) and (f)(4). To clarify the 
applicability of these triggering provisions, the Board proposes to 
move them to a new paragraph at Sec.  704.6(h). Under proposed Sec.  
704.6(h), an investment will be subject to the requirements of Sec.  
704.10 if it violates any of the concentration limits or credit rating 
requirements of Sec.  704.6.
    The Board notes that Sec.  704.6(f)(4)(i) provides that an 
investment is subject to the requirements of Sec.  704.10 if its credit 
rating is downgraded, after purchase, ``below the minimum rating 
requirements of this part.'' 12 CFR

[[Page 54992]]

704.6(f)(4)(i). However, section 939A of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act requires NCUA to review its 
regulations for any references to using credit ratings to assess the 
creditworthiness of an investment, remove those references, and 
substitute other standards of creditworthiness.\1\ On February 17, 
2011, the NCUA Board issued a Notice of Proposed Rulemaking (NPRM) to 
implement Section 939A. 76 FR 11164 (March 1, 2011). The NPRM 
recodified Sec.  704.6 (f)(4)(i) at Sec.  704.6(f)(3)(i) and revised it 
to state than an investment is subject to Sec.  704.10 if ``[t]here is 
reason to believe that the obligor no longer has a very strong capacity 
to meet its financial obligations for the remaining projected life of 
the security.'' Id. at 11171. Although the NCUA Board has not finalized 
the February 2011 NPRM, this proposed rule includes the proposed 
revised language at new Sec.  704.6(h)(1).
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    \1\ Public Law 111-203, Sec.  939A (2010).
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Section 704.8 Clarifying the WAL Tests

    Sections 704.8(f) and 704.8(g) establish certain WAL limits for 
corporate loan and investment portfolios and require each corporate to 
test those assets periodically for compliance. 12 CFR 704.8(f) and (g). 
NCUA intended to allow corporates to include cash in the WAL 
calculation, and the proposed rule clarifies that intent. The proposed 
rule substitutes the phrase ``loan and investment portfolio'' in 
paragraphs (f) and (g) with the phrase ``financial assets, consisting 
of cash, investments, and loans.'' The proposed rule retains the 
current rule's exclusion of derivative contracts and equity investments 
from the WAL calculation.

Section 704.8 Consequences of WAL Violations

    Section 704.8(j) provides consequences for a corporate's violation 
of the interest rate sensitivity and WAL conditions of Sec.  704.8 (d), 
(f), and (g). 12 CFR 704.8(j). These consequences can include reporting 
requirements, preparation of a written action plan, and capital 
category reclassification under Sec.  704.4. To reduce regulatory 
burden, the NCUA Board has determined that violations of WAL conditions 
should not be subject to capital category reclassification and proposes 
exempting such violations from the requirements of Sec.  
704.8(j)(2)(ii) and (iii). However, persistent WAL violations could 
still trigger the reporting and action plan requirements of Sec.  
704.8(j)(1) and (2)(i).

Section 704.18 Fidelity Bond Maximum Deductible

    Section 704.18(e)(1) provides a table for corporates to calculate 
the maximum deductible allowed for fidelity bonds purchased for 
employees and officials. 12 CFR Sec.  704.18(e)(1). The maximum 
deductible is based on a corporate's core capital ratio and a 
percentage of the sum of its retained earnings and paid-in capital. The 
2010 revision to part 704 changed the term ``paid-in capital'' to 
``perpetual contributed capital,'' but neglected to change the 
reference in Sec.  704.18. See 75 FR 64786 (October 20, 2010).
    The NCUA Board is now proposing to change the phrase ``the sum of 
its retained earnings and paid-in capital'' to the term ``core 
capital.'' Section 704.2 defines ``core capital'' as ``the sum of: (1) 
Retained earnings; (2) Perpetual contributed capital; (3) The retained 
earnings of any acquired credit union, or of an integrated set of 
activities and assets, calculated at the point of acquisition, if the 
acquisition was a mutual combination; and (4) Minority interests in the 
equity accounts of CUSOs that are fully consolidated. However, minority 
interests in consolidated ABCP programs sponsored by a corporate credit 
union are excluded from the credit union's core capital or total 
capital base if the corporate credit union excludes the consolidated 
assets of such programs from risk-weighted assets pursuant to Appendix 
C of this part.'' 12 CFR Sec.  704.2. The Board is proposing this 
substitution, rather than simply replacing ``paid-in capital'' with 
``perpetual contributed capital'' because the table already requires 
the calculation of core capital in deriving the core capital ratio.

Section 704.19 Correction to Section Heading

    The 2009 proposed revisions to part 704 added new Sec.  704.19, 
``Disclosure of executive and director compensation.'' 74 FR at 65210, 
65252 (December 9, 2009). The proposal would have required corporates 
to disclose annually the compensation, in dollar terms, of each senior 
executive officer and director. Id. at 65275. In response to comments, 
the NCUA Board determined to limit the disclosure requirement to 
approximately the top ten percent of employees with, generally, a 
minimum of three employees who must disclose and a maximum of five. In 
addition, the Board determined to remove the reference to directors, 
stating that it was highly unlikely that a director, in his or her 
capacity as a director, would be among the most highly compensated 
individuals at the corporate. 75 FR 64786, 64818 (October 20, 2010). 
This was done in the text of Sec.  704.19 but not in the heading. The 
correction would harmonize the two by removing the words ``and 
director'' from the heading.

Appendix A, Model Form D

    The 2010 final rule included an incorrect date instruction on Model 
Form D in Appendix A. Id. at 64851. Model Form D included introductory 
text indicating that the form was for use before October 20, 2011. In 
fact, because Model Form D deals with nonperpetual capital accounts, 
the form should be used only on and after October 20, 2011. The 
proposed correction would replace the word ``before'' with the phrase 
``on and after.''

B. Regulatory Procedures

Regulatory Flexibility Act
    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact any proposed regulation may 
have on a substantial number of small entities (those under $10 million 
in assets). The proposed rule applies only to corporate credit unions, 
all of which have assets well in excess of $10 million. Accordingly, 
the proposed rule will not have a significant economic impact on a 
substantial number of small credit unions, and a regulatory flexibility 
analysis is not required.
Paperwork Reduction Act
    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or modifies an existing burden. 44 U.S.C. 3507(d); 5 CFR part 
1320. For purposes of the PRA, a paperwork burden may take the form of 
either a reporting or a recordkeeping requirement, both referred to as 
information collections. This proposed rule does not impose any new 
paperwork burden.
Executive Order 13132
    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. In 
adherence to fundamental federalism principles, NCUA, an independent 
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies 
with the executive order.
    The proposed rule would not have substantial direct effects on the 
states, on the connection between the national government and the 
states, or on the distribution of power and responsibilities among the 
various

[[Page 54993]]

levels of government. NCUA has determined that this rule does not 
constitute a policy that has federalism implications for purposes of 
the executive order.
The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
    NCUA has determined that this proposed rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Public Law 105-277, 112 
Stat. 2681 (1998).

List of Subjects in 12 CFR Part 704

    Credit unions, Corporate credit unions, Reporting and recordkeeping 
requirements.

    By the National Credit Union Administration Board on August 29, 
2011.
Mary F. Rupp,
Secretary of the Board.

    For the reasons stated above, the National Credit Union 
Administration proposes to amend 12 CFR part 704 as set forth below:

PART 704--CORPORATE CREDIT UNIONS

    1. The authority citation for part 704 continues to read as 
follows:

    Authority:  12 U.S.C. 1762, 1766(a), 1772a, 1781, 1789, and 
1795e.

    2. Amend Sec.  704.2 by removing the definition of ``daily average 
net risk-weighted assets'' and revising the definition of ``net 
assets'' to read as follows:


Sec.  704.2  Definitions.

* * * * *
    Net assets means total assets less Central Liquidity Facility (CLF) 
stock subscriptions, loans guaranteed by the NCUSIF, and member reverse 
repurchase transactions. For its own account a corporate credit union's 
payables under reverse repurchase agreements and receivables under 
repurchase agreements may be netted out if the GAAP conditions for 
offsetting are met. Also, any amounts deducted from core capital in 
calculating adjusted core capital are also deducted from net assets.
* * * * *
    3. Amend Sec.  704.6 by removing paragraphs (c)(3) and (f)(4) and 
adding new p(h) to read as follows:


Sec.  704.6  Credit risk management.

* * * * *
    (h) Requirements for investment action plans. An investment is 
subject to the requirements of Sec.  704.10 of this part if:
    (1) There is reason to believe that the obligor no longer has a 
very strong capacity to meet its financial obligations for the 
remaining projected life of the security; or
    (2) The investment is part of an asset class or group of 
investments that exceeds the issuer, sector, or subsector concentration 
limits of this section. For purposes of measurement, each new credit 
transaction must be evaluated in terms of the corporate credit union's 
capital at the time of the transaction. An investment that fails a 
requirement of this section because of a subsequent reduction in 
capital will be deemed non-conforming. A corporate credit union is 
required to exercise reasonable efforts to bring nonconforming 
investments into conformity within 90 calendar days. Investments that 
remain nonconforming for more than 90 calendar days will be deemed to 
fail a requirement of this section and the corporate credit union will 
have to comply with Sec.  704.10 of this part.
    4. Amend Sec.  704.8 by:
    a. Revising the first two sentences in paragraphs (f) and (g); and
    b. Revising (j)(2)(ii) and (iii).
    The revisions read as follows:


Sec.  704.8  Asset and liability management.

* * * * *
    (f) * * * The weighted average life (WAL) of a corporate credit 
union's financial assets, consisting of cash, investments, and loans, 
but excluding derivative contracts and equity investments, may not 
exceed 2 years. A corporate credit union must test its financial assets 
at least quarterly, including once on the last day of the calendar 
quarter, for compliance with this WAL limitation. * * *
    (g) * * * The weighted average life (WAL) of a corporate credit 
union's financial assets, consisting of cash, investments, and loans, 
but excluding derivative contracts and equity investments, may not 
exceed 2.25 years when prepayment speeds are reduced by 50 percent. A 
corporate credit union must test its financial assets at least 
quarterly, including once on the last day of the calendar quarter, for 
compliance with this WAL limitation. * * *
* * * * *
    (j) * * *
    (2) * * *
    (ii) If presently categorized as adequately capitalized or well 
capitalized for prompt corrective action purposes, and the violation 
was of paragraph (d) of this section, immediately be recategorized as 
undercapitalized until the violation is corrected, and
    (iii) If presently less than adequately capitalized, and the 
violation was of paragraph (d) of this section, immediately be 
downgraded one additional capital category.
* * * * *
    5. Amend Sec.  704.18 by revising the table in paragraph (e)(1) to 
read as follows:


Sec.  704.18  Fidelity bond coverage.

* * * * *
    (e) * * *
    (1) * * *

------------------------------------------------------------------------
            Core capital ratio                   Maximum deductible
------------------------------------------------------------------------
Less than 1.0 percent.....................  7.5 percent of core capital.
1.0-1.74 percent..........................  10.0 percent of core
                                             capital.
1.75-2.24 percent.........................  12.0 percent of core
                                             capital.
Greater than 2.25 percent.................  15.0 percent of core
                                             capital.
------------------------------------------------------------------------

* * * * *
    6. Amend Sec.  704.19 by revising the section heading to read as 
follows:


Sec.  704.19  Disclosure of executive compensation.

* * * * *
    7. Amend the introductory note in Model Form D, Appendix A to Part 
704, to read as follows:

Appendix A to Part 704--Capital Prioritization and Model Forms

* * * * *
Model Form D

    Note:  This form is for use on and after October 20, 2011, in 
the circumstances where the corporate credit union has determined 
that it will give newly issued capital priority over older capital 
as described in Part I of this Appendix.

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[FR Doc. 2011-22540 Filed 9-2-11; 8:45 am]
BILLING CODE 7535-01-P