[Federal Register Volume 76, Number 246 (Thursday, December 22, 2011)]
[Rules and Regulations]
[Pages 79531-79534]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-32721]


=======================================================================
-----------------------------------------------------------------------

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 704

RIN 3133-AD95


Corporate Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: NCUA is issuing final amendments to its rule governing 
corporate credit unions (corporates). The final amendments make 
technical corrections to and clarify certain provisions of 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: This rule is effective January 23, 2012.

FOR FURTHER INFORMATION CONTACT: Lisa Henderson, Staff Attorney, Office 
of General Counsel, at (703) 518-6540; or David Shetler, Deputy 
Director, Office of Corporate Credit Unions, at (703) 518-6640. You may 
also contact them at the National Credit Union Administration, 1775 
Duke Street, Alexandria, VA 22314.

SUPPLEMENTARY INFORMATION:

A. Background and Specific Amendments
B. Regulatory Procedures

A. Background and Specific Amendments

Why is NCUA adopting this rule?

    On August 29, 2011, the NCUA Board (Board) issued a Notice of 
Proposed Rulemaking (NPRM) containing several amendments to its 
corporate rule at 12 CFR part 704. 76 FR 54991 (Sept. 6, 2011). NCUA 
received seven comments on the NPRM, most of which favored the proposed 
changes. For the reasons discussed below, the NCUA Board is adopting 
the amendments almost exactly as proposed.

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

    The term ``daily average net risk-weighted assets'' was used in a 
2009 proposal to revise part 704, 74 FR 65210, 65261 (Dec. 9, 2009), 
but not in the 2010 final rule, 75 FR 64786, 64831 (Oct. 20, 2010). The 
term was mistakenly left in the part 704 definitions section, and the 
Board proposed deleting it in the NPRM. All of the commenters who 
addressed the proposed change supported it. Accordingly, the Board is 
deleting the definition of ``daily average net risk-weighted assets'' 
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 NPRM amended the definition to also 
exclude CLF stock subscriptions, based on the asset's negligible credit 
risk and to facilitate corporate support of the CLF. Corporate support 
is essential to the CLF remaining a back-up liquidity provider for 
natural person credit unions.
    One commenter objected to the proposed change, arguing that it 
would artificially inflate the leverage ratio for corporates. The Board 
disagrees. CLF stock is in the nature of a pass-through account, and 
including it in net assets incorrectly overstates a corporate's balance 
sheet. The commenter also argued that credit unions do not need to 
obtain liquidity through the CLF, as they can become members of the 
Federal Home Loan Bank (FHLB) system or access the Federal Reserve 
System's Discount Window (Discount Window). The Board believes that the 
CLF provides a critical dimension of additional liquidity coverage for 
credit unions. Presently, only 4.5 percent of federally insured credit 
unions report having filed an application to borrow

[[Page 79532]]

from the Discount Window, and of those, only 3.3 percent have pre-
pledged collateral. Also, many smaller credit unions do not have 
mortgage assets and would be unlikely to rely on the FHLB system to 
meet wholesale funding or contingent liquidity needs. The Board 
therefore adopts in the final rule the revised definition of net assets 
as proposed.

Section 704.6 Requirements for Investment Action Plans

    Sections 704.6(c)(3) and (f)(4) trigger consequences, set forth in 
Sec.  704.10, for violations of certain concentration limits and credit 
rating requirements. To clarify the applicability of these triggering 
provisions, the Board proposed moving them to a new Sec.  704.6(h). 
Under proposed Sec.  704.6(h), an investment would be subject to the 
requirements of Sec.  704.10 if it violated any of the concentration 
limits or credit rating requirements of Sec.  704.6.
    The NPRM noted 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.'' It further noted that, pursuant to section 
939A of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act,\1\ the NCUA Board issued a proposed rule recodifying Sec.  
704.6(f)(4)(i) at Sec.  704.6(f)(3)(i) and revising 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.'' 76 FR 11164, 11171 (Mar. 1, 2011). The NPRM included this 
proposed language at new Sec.  704.6(h)(1) even though the language was 
not yet final.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78o-7 (requiring federal agencies, including NCUA, 
to review their regulations for any references to using credit 
ratings to assess the creditworthiness of an investment, remove 
those references, and substitute other standards of 
creditworthiness).
---------------------------------------------------------------------------

    Three commenters objected to including language from the proposed 
credit ratings rule in this rulemaking. They urged NCUA to wait until 
the credit ratings rule was final before amending Sec.  704.6(f)(4)(i) 
as discussed above. The Board agrees. The Board had anticipated that 
the credit ratings rule would be final by now, but that rule has been 
delayed. Accordingly, the final rule retains the reference to ``minimum 
ratings requirement.'' Since no commenters objected to moving the 
triggering provisions, the Board moves Sec.  704.6(c)(3) and (f)(4) to 
new Sec.  704.6(h) in the final rule as proposed.

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. They also require each 
corporate to test those assets periodically for compliance. NCUA 
intended to allow corporates to include cash in the WAL calculation and 
clarified that intent in the NPRM by replacing the phrase ``loan and 
investment portfolio'' in paragraphs (f) and (g) with the phrase 
``financial assets, consisting of cash, investments, and loans.'' All 
of the commenters who addressed this proposed change supported it, and 
therefore the Board adopts it in the final rule.

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). 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 
Board determined that violations of WAL conditions should not be 
subject to capital category reclassification and, in the NPRM, proposed 
exempting such violations from the requirements of Sec.  
704.8(j)(2)(ii) and (iii). All of the commenters who addressed this 
proposed change supported it, and therefore the Board adopts it in the 
final rule. The Board notes that persistent WAL violations may 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. 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 (Oct. 20, 2010).
    In the NPRM, the Board proposed changing the phrase ``the sum of 
its retained earnings and paid-in capital'' to the term ``core 
capital.'' Section 704.2 defines ``core capital'' primarily 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.'' The 
Board proposed 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. Two commenters stated that ``perpetual contributed 
capital'' should be the replacement term and that NCUA had not provided 
enough justification for adding the two additional components of ``core 
capital.'' The Board notes that adding additional components to the 
number from which the maximum deductible is derived ultimately raises 
the maximum deductible, which relieves regulatory burden. Accordingly, 
the Board adopts the proposed change in the final rule.

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 65210, 
65252 (Dec. 9, 2009). The proposal would have required corporates to 
disclose the compensation of each senior executive officer and director 
annually. Id. at 65275. The 2010 final rule removed the reference to 
directors in the text of Sec.  704.19, but failed to do so in the 
heading. See 75 FR 64786 (Oct. 20, 2010). In the NPRM, the Board 
proposed harmonizing the two by removing the words ``and director'' 
from the heading. All of the commenters who addressed this proposed 
change supported it, and therefore the Board adopts it in the final 
rule.

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, when 
it should have stated that the form is for use after that date. The 
Board replaced the word ``before'' with the phrase ``on and after'' in 
the NPRM. All of the commenters who addressed this proposed change 
supported it, and therefore the Board adopts it in the final rule.

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

[[Page 79533]]

entities (those under $10 million in assets). This final rule applies 
only to corporate credit unions, all of which have assets well in 
excess of $10 million. Accordingly, the final 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 final 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 final 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 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 final rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Pub. L. 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 December 
15, 2011.
Mary F. Rupp,
Secretary of the Board.
    For the reasons stated above, the National Credit Union 
Administration amends 12 CFR part 704 as set forth below:

PART 704--CORPORATE CREDIT UNIONS

0
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.


0
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.
* * * * *

0
3. Amend Sec.  704.6 by removing paragraphs (c)(3) and (f)(4) and 
adding paragraph (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) An NRSRO that rates the investment downgrades that rating, 
after purchase, below the minimum rating requirements of this part; 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 nonconforming. 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.

0
4. Amend Sec.  704.8 by:
0
a. Revising the first two sentences in paragraphs (f) and (g); and
0
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 categorized as less than adequately capitalized, 
and the violation was of paragraph (d) of this section, immediately be 
downgraded one additional capital category.
* * * * *

0
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.
------------------------------------------------------------------------

* * * * *

[[Page 79534]]


0
6. Amend Sec.  704.19 by revising the section heading to read as 
follows:


Sec.  704.19  Disclosure of executive compensation.

* * * * *

0
7. Revise 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.

* * * * *
[FR Doc. 2011-32721 Filed 12-21-11; 8:45 am]
BILLING CODE 7535-01-P