[Federal Register Volume 82, Number 145 (Monday, July 31, 2017)]
[Proposed Rules]
[Pages 35493-35498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-15685]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701

RIN 3133-AE76


Emergency Mergers--Chartering and Field of Membership

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: The NCUA Board (Board) proposes to amend in its Chartering and 
Field of Membership Manual the definition of the term ``in danger of 
insolvency'' for emergency merger purposes. The current definition 
requires a credit union to fall into at least one of three net worth 
categories over a period of time to be ``in danger of insolvency.'' For 
two of the three categories, the Board proposes to lengthen by six 
months the forecast horizons, the time period in which NCUA projects a 
credit union's net worth will decline to the point that it falls into 
one of the categories. This will extend the time period in which a 
credit union's net worth is projected to either render it insolvent or 
drop below two percent from 24 to 30 months and from 12 to 18 months, 
respectively. Additionally, the Board proposes to add a fourth category 
to the three existing net worth categories to include credit unions 
that have been granted or received assistance under section 208 of the 
Federal Credit Union Act (FCU Act) in the 15 months prior to the 
Region's determination that the credit union is in danger of 
insolvency.

DATES: Comments must be received on or before September 29, 2017.

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: https://www.ncua.gov/regulation-supervision/Pages/rules/proposed.aspx. Follow the instructions for 
submitting comments.
     Email: Address to [email protected]. Include ``[Your 
name] Comments on Proposed Rule 701, In Danger of Insolvency 
Definition'' in the email subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for email.
     Mail: Address to Gerard S. Poliquin, Secretary of the 
Board, National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.
    Public inspection: You may view all public comments on NCUA's Web 
site at https://www.ncua.gov/regulation-supervision/Pages/rules/proposed.aspx as submitted, except for those we cannot post for 
technical reasons. NCUA will not edit or remove any identifying or 
contact information from the public comments submitted. You may inspect 
paper copies of comments 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 email to 
[email protected].

FOR FURTHER INFORMATION CONTACT: Thomas I. Zells, Staff Attorney, 
Office of General Counsel, or Amanda Parkhill, Loss/Risk Analysis 
Officer, Office of Examination and Insurance, at 1775 Duke Street, 
Alexandria, VA 22314 or telephone: (703) 548-2478 (Mr. Zells) or (703) 
518-6385 (Ms. Parkhill).

SUPPLEMENTARY INFORMATION:

I. Background
II. Summary of the Proposed Rule
III. Regulatory Procedures

I. Background

    Credit unions that experience a sharp decline in net worth have a 
much higher likelihood of failing. From the second quarter of 1996 
through the second quarter of 2016, there were 11,734 federally insured 
credit unions. As shown by the table below, 2,502 of these credit 
unions fell below the well-capitalized threshold (7 percent net worth 
ratio) after having a net worth ratio above that threshold for at least 
one quarter. The net worth ratio of 490 of these 2,502 credit unions 
eventually fell below two percent. Importantly, only 15 percent of 
those credit unions whose net worth dropped below two percent sometime 
in this period remain active.

[[Page 35494]]



                    Table 1--Credit Unions Falling Below Critical Net Worth Ratio Thresholds
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                      Net worth ratio fell:                        Number of CUs      Active        Active  (%)
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Below 7%........................................................           2,502           1,104              44
Below 6%........................................................           1,563             475              30
Below 5%........................................................           1,126             254              23
Below 4%........................................................             825             151              18
Below 3%........................................................             647             102              16
Below 2%........................................................             490              73              15
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    Credit union failures are costly to the entire credit union system 
through their effect on the National Credit Union Share Insurance Fund 
(NCUSIF). NCUA, as a prudential safety and soundness regulator, is 
charged with protecting the safety and soundness of the credit union 
system and, in turn, the NCUSIF and the taxpayer through regulation and 
supervision.\1\ One way to mitigate some of the cost to the NCUSIF and 
minimize disruption to credit union members is to find appropriate 
merger partners for at-risk credit unions.
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    \1\ NCUA's mission is to ``provide, through regulation and 
supervision, a safe and sound credit union system, which promotes 
confidence in the national system of cooperative credit.'' https://www.ncua.gov/About/Pages/Mission-and-Vision.aspx.
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    Under the emergency merger provision of section 205(h) of the FCU 
Act, the Board may allow a credit union that is either insolvent or in 
danger of insolvency to merge with another credit union if the Board 
finds that: (1) An emergency requiring expeditious action exists; (2) 
no other reasonable alternatives are available; and (3) the action is 
in the public interest.\2\ Under these circumstances, the Board may 
approve an emergency merger without regard to common bond or other 
legal constraints, such as obtaining the approval of the members of the 
merging credit union. The emergency merger statute addresses exigent 
circumstances and is intended to serve the public interest and credit 
union members by providing for the continuation of credit union 
services to members and by preserving credit union assets and the 
NCUSIF.
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    \2\ 12 U.S.C. 1785(h).
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    To take such action, NCUA must first determine that a credit union 
is either insolvent or in danger of insolvency before the agency can 
make the additional findings that an emergency exists, other 
alternatives are not reasonably available, and the public interest 
would be served by the merger. The FCU Act, however, does not define 
when a credit union is ``in danger of insolvency.''
    In 2009, NCUA proposed a definition of in danger of insolvency to 
establish an objective standard to aid it in making in danger of 
insolvency determinations.\3\ In doing so, NCUA aimed to provide 
certainty and consistency regarding how it interprets the in danger of 
insolvency standard. In 2010, NCUA finalized the 2009 proposed 
definition, which provided for the above-referenced three net worth 
categories, and it remains the current definition.\4\
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    \3\ 74 FR 68722 (Dec. 29, 2009).
    \4\ 75 FR 36257 (June 25, 2010).
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    Experience gained since 2010, including the analysis of Call 
Reports and other NCUA internal data, have led the Board to conclude 
that an update to the current definition of in danger of insolvency is 
needed.

II. Summary of the Proposed Rule

A. Overview

    The current definition of in danger of insolvency requires a credit 
union to fall into at least one of three net worth categories to be 
found to be in danger of insolvency. The Board believes it necessary to 
amend the current definition in three ways.
    First, the Board proposes to lengthen by six months the ``forecast 
horizons,'' the time periods in which NCUA projects a credit union's 
net worth for determining if it is in danger of insolvency. This change 
would apply to two of the three current categories. It would result in 
forecast horizons of 30 months for the insolvency (zero net worth) 
category, up from 24 months, and 18 months for the critically 
undercapitalized (under two percent net worth) category, up from 12 
months. The third category of the current definition, in which a credit 
union is significantly undercapitalized and NCUA determines there is no 
reasonable prospect of the credit union becoming adequately capitalized 
in the succeeding 36 months, would remain unchanged.
    The second change the Board proposes is the addition of a fourth 
category to the definition. Specifically, a credit union would be 
considered in danger of insolvency if it had been granted or received 
assistance under section 208 of the FCU Act in the 15 months prior to 
the Region's determination that the credit union is in danger of 
insolvency.
    Finally, the Board proposes to make a technical spelling correction 
to the first category of the definition to replace the word ``relay'' 
with the word ``rely''.
    The Board believes the proposed changes to the current definition 
would provide NCUA with a more appropriate degree of flexibility and 
better allow NCUA to act when the statutory criteria for an emergency 
merger are met, namely an emergency requiring expeditious action 
exists, no other reasonable alternatives are available, and the action 
is in the public interest.\5\ As detailed below, both the experience 
NCUA has gained in applying the current definition and quantitative 
data have persuaded the Board that the proposed changes are necessary. 
Under the time frames of the current definition, NCUA has, on several 
occasions, been prevented from instituting an emergency merger because 
a struggling credit union had not yet met the regulatory time frames to 
be considered in danger of insolvency, although it had otherwise met 
the statutory criteria. The lack of flexibility in the current rule can 
result in continued decline in the health of a credit union, leading to 
a reduction in member services as the institution moves towards 
resolution. As shown in the chart below, credit union loan growth 
declines in the quarters leading up to an emergency merger.
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    \5\ 12 U.S.C. 1785(h).

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[[Page 35495]]

[GRAPHIC] [TIFF OMITTED] TP31JY17.000

    In some instances, the rigidity of the current regulatory 
definition unnecessarily limits NCUA's ability to resolve failing 
institutions. This comes at a greater cost to a credit union's members 
and the NCUSIF, particularly in the case of an eventual liquidation. 
The FCU Act grants the Board broad authority to define the term ``in 
danger of insolvency'' for emergency merger purposes. The Board 
believes that the proposed definition increases agency flexibility and 
will enable NCUA to act more timely to preserve credit union services 
and credit union assets and to protect the safety and soundness of the 
credit union system and the NCUSIF.

B. Extending the Forecast Horizons

    The Board proposes to amend the definition of in danger of 
insolvency in the glossary to appendix B to part 701 to extend the 
forecast horizons, the time periods in which NCUA must project whether 
a credit union will become insolvent or critically undercapitalized. 
Currently, to be deemed in danger of insolvency under the definition's 
first two categories, NCUA must project a credit union's future net 
worth will decline at a rate that will either render the credit union 
insolvent within 24 months or drop below two percent (critically 
undercapitalized) within 12 months. The Board proposes to extend these 
periods to 30 months and 18 months, respectively. The Board intends to 
leave as is the forecast horizon of the third category of the 
definition pertaining to significantly undercapitalized credit unions 
that NCUA projects have no reasonable prospect of becoming adequately 
capitalized in the succeeding 36 months.
    The Board believes that these proposed changes to the definition 
will capture more credit unions that are in danger of insolvency 
earlier in their decline, before their net worth declines most rapidly, 
and will provide value to both the members of the credit union being 
merged and the NCUSIF. Increasing the likelihood that a distressed 
credit union would be eligible for an emergency merger earlier could 
help to protect net worth, reduce payouts on deposit insurance or 
merger assistance, and improve merger prospects. The proposed changes 
also provide NCUA with additional flexibility to resolve the distressed 
credit union through a merger and help to better ensure continuity of 
financial services for members. This additional flexibility is 
especially beneficial when circumstances deplete a credit union's 
capital slowly and steadily rather than abruptly, such as in the case 
of an institution with a large portfolio of declining illiquid assets.
    To evaluate the benefit of shifting the critically undercapitalized 
threshold from 12 to 18 months and the insolvency threshold from 24 to 
30 months, NCUA used a simple forecast of the net worth ratios of 46 
credit unions that underwent an emergency merger between the second 
quarter of 2010, when the current in danger of insolvency definition 
was put into place, and the fourth quarter of 2016.\6\ Of the 46 credit 
unions that underwent an emergency merger since the rule was previously 
revised by the NCUA Board, 11 credit unions with total assets of $812 
million would have qualified for an emergency merger earlier under the 
proposed definition of in danger of insolvency. The 11 credit unions 
had $12 million more in net worth at the time the credit unions first 
qualified under the proposed definition compared with the 2010 
definition. The $12 million additional net worth meant the credit 
unions had net worth ratios 1 to 3 percentage points higher. Also, the 
longer forecast horizon allows NCUA to identify a significant number of 
additional potential credit union emergency merger candidates. The 
largest diagnostic improvements from extending the forecast horizon 
occur in

[[Page 35496]]

the two quarters prior to an emergency merger. Instead of 31% of the 
credit unions estimated to be below the critically undercapitalized 
threshold within 12 months two quarters before the emergency merger and 
50% one quarter before, 42% and 58% of the credit unions are estimated 
to be below the critically undercapitalized threshold within 18 months. 
The identification of these additional credit unions represent an 
opportunity for NCUA to preserve services to members and member assets 
through the emergency merger process prior to the quarters when the net 
worth of these credit unions declines the most. As the chart below 
illustrates, credit union net worth generally declines the most in the 
quarters leading up to an emergency merger.
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    \6\ This simple hypothetical forecast was used exclusively for 
purposes of analyzing emergency merger data and forecast horizons. 
It is not representative of, and does not limit, how NCUA projects 
credit unions to meet the established and proposed in danger of 
insolvency categories. The forecast of the net worth ratio uses the 
change in the net worth ratio during the most recently available 
four quarters and projects that change in net worth through the 
forecast horizon for each threshold. In other words, NCUA calculated 
whether the credit union would fall below either of the critical 
thresholds using a simple straight line projection approach, with 
the projected rate of decline in net worth equal to the most 
recently available four-quarter change.
[GRAPHIC] [TIFF OMITTED] TP31JY17.001

    The data closely aligns with the views and experiences of NCUA. The 
agency has found that the current forecast horizons for these two 
categories can result in the unnecessary delay or even rejection of 
emergency merger requests that do not meet the current regulatory 
definition of in danger of insolvency, but would otherwise meet the 
statutory criteria for an emergency merger. NCUA believes that 
extending these forecast horizons will lessen the potential for such 
occurrences. When a credit union cannot be timely merged through an 
emergency merger and no other credit unions with compatible fields of 
membership submit a merger proposal, NCUA must consider alternative and 
usually less desirable means of resolution. These less desirable means 
of resolution could even include the liquidation of the credit union. 
In general, merging a credit union into another institution is more 
desirable than liquidating the credit union because a merger is 
generally lower cost to the NCUSIF and provides continued and, in most 
cases, expanded service to the membership.
    NCUA believes that the delay associated with waiting for an 
institution to deteriorate to the point where it satisfies the current 
regulatory definition of in danger of insolvency has too frequently 
resulted in struggling institutions being allowed to deteriorate over 
time to the point where they are no longer viable merger partners and 
have to be resolved by means that are more costly to the NCUSIF and 
more disruptive to the members. Rather than continue to operate under 
the current definition, which hampers NCUA's ability to take 
responsible supervisory action on a timely basis and ensure the safety 
and soundness of the credit union system, the Board proposes to amend 
the regulatory definition of in danger of insolvency to facilitate 
those mergers that satisfy the statutory requirements.
    As stated above, the Board proposes to leave the forecast horizon 
for the third category of the current definition as is. Rather than 
establishing a time period in which credit unions are projected to 
decline to a certain point, as the other two categories do, the third 
category only allows NCUA to find that a credit union is in danger of 
insolvency if the credit union has no reasonable prospect of improving 
its net worth from the significantly undercapitalized level to the 
adequately capitalized level in the succeeding 36 months. The Board 
believes that the current forecast horizon for this category already 
provides credit unions significant time to become adequately 
capitalized and is concerned that any extension to the forecast horizon 
would make it exceedingly difficult to accurately determine if a credit 
union has a reasonable possibility of returning its net worth to the 
adequately capitalized level.

C. Section 208 Assistance

    The Board proposes to expand the definition of in danger of 
insolvency in the glossary to appendix B to part 701 to add a fourth 
category that provides that a credit union will satisfy the definition 
of in danger of insolvency if

[[Page 35497]]

the credit union has been granted or received assistance under section 
208 of the FCU Act in the 15 months prior to the Region making such 
determination. Section 208 allows the Board to provide special 
assistance to credit unions to avoid liquidation.
    In analyzing credit union Call Reports and other internal NCUA 
data, NCUA has found that an overwhelming number of credit unions that 
received section 208 assistance eventually left the credit union 
system. Between the first quarter of 2001 and the fourth quarter of 
2016, 181 credit unions received at least one type of section 208 
assistance. Since then, 165, or 91.2%, of these credit unions have 
stopped filing Call Reports.
    Further, the data shows that not only did the overwhelming majority 
of the credit unions that received section 208 assistance stop filing 
Call Reports, but did so not long after, or prior to, receiving the 
assistance. Notably, 13.9% of the total number of credit unions that 
received section 208 assistance began receiving such assistance after 
they filed their final Call Report. An additional 37.0% of these 165 
credit unions filed their final Call Report in the same quarter in 
which they first began receiving section 208 assistance. Another 41.2% 
of these credit unions filed their final Call Report within the four 
quarters after the quarter they first received section 208 assistance. 
In total, 152 of the 165 credit unions, or 92.1%, stopped filing Call 
Reports prior to or within 15 months of receiving the section 208 
assistance.

Credit Unions Receiving Section 208 Assistance: First Receipt of Section
                208 Assistance to Last Call Report Filed
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                                              Number          Percent
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Same quarter............................              61            37.0
1 year..................................              68            41.2
2 years.................................               3             1.8
3 years.................................               2             1.2
4 or more years.........................               8             4.8
Assistance began after final call report              23            13.9
 was filed..............................
                                         -------------------------------
    Total...............................             165           100.0
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    The quantitative evidence, along with NCUA's experiences and 
observations, demonstrate that credit unions receiving section 208 
assistance within the last 15 months are in danger of insolvency for 
emergency merger purposes.
    It must be noted that the Board is not proposing that every credit 
union that receives section 208 assistance, thus meeting the proposed 
definition of in danger of insolvency, is destined for an emergency 
merger. The emergency merger statute addresses exigent circumstances. 
Credit unions to be merged on an emergency basis still must meet the 
statutory requirements that an emergency exists, other alternatives are 
not reasonably available, and the public interest would be served by 
the merger.\7\ However, quantitative evidence and NCUA's experience do 
indicate that a credit union's receipt of section 208 assistance is a 
reliable indicator of a credit union being in danger of insolvency and 
a safety and soundness concern.
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    \7\ 12 U.S.C. 1785(h).
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III. Regulatory Procedures

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires that, in 
connection with a notice of proposed rulemaking, an agency prepare and 
make available for public comment an initial regulatory flexibility 
analysis that describes the impact of a proposed rule on small 
entities. A regulatory flexibility analysis is not required, however, 
if the agency certifies that the rule will not have a significant 
economic impact on a substantial number of small entities (defined for 
purposes of the RFA to include credit unions with assets less than $100 
million) and publishes its certification and a short, explanatory 
statement in the Federal Register together with the rule. The proposed 
rule merely provides NCUA greater flexibility to authorize emergency 
mergers and will not have an impact on small credit unions. 
Accordingly, NCUA certifies that the proposed rule will not have a 
significant economic impact on a substantial number of small credit 
unions.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency creates a new or amends existing information collection 
requirements.\8\ For the purpose of the PRA, an information collection 
requirement may take the form of a reporting, recordkeeping, or a 
third-party disclosure requirement. The proposed rule does not contain 
information collection requirements that require approval by OMB under 
the PRA.\9\ The proposed rule would merely provide NCUA greater 
flexibility to authorize emergency mergers.
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    \8\ 44 U.S.C. 3507(d); 5 CFR part 1320.
    \9\ 44 U.S.C. Chap. 35.
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C. 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. This rulemaking will not have a substantial 
direct effect 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 proposal does not constitute a policy that has 
federalism implications for purposes of the executive order.

D. 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.\10\
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    \10\ Public Law 105-277, 112 Stat. 2681 (1998).
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List of Subjects in 12 CFR Part 701

    Credit, Credit unions, Reporting and recordkeeping requirements.



[[Page 35498]]


    By the National Credit Union Administration Board on July 20, 
2017.
Gerard Poliquin,
Secretary of the Board.
    For the reasons discussed above, the NCUA Board proposes to amend 
12 CFR part 701 as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

0
1. The authority citation for part 701 is revised to read as follows:

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759, 
1761a, 1761b, 1766, 1767, 1782, 1784, 1785, 1786, 1787, 1788, 1789. 
Section 701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 
is also authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 
3601-3610. Section 701.35 is also authorized by 42 U.S.C. 4311-4312.

0
2. Revise the definition of ``in danger of insolvency'' in Appendix 1 
(Glossary) to appendix B to part 701 to read as follows:
* * * * *
    In danger of insolvency--In making the determination that a 
particular credit union is in danger of insolvency, NCUA will establish 
that the credit union falls into one or more of the following 
categories:
    1. The credit union's net worth is declining at a rate that will 
render it insolvent within 30 months. In projecting future net worth, 
NCUA may rely on data in addition to Call Report data. The trend must 
be supported by at least 12 months of historic data.
    2. The credit union's net worth is declining at a rate that will 
take it under two percent (2%) net worth within 18 months. In 
projecting future net worth, NCUA may rely on data in addition to Call 
Report data. The trend must be supported by at least 12 months of 
historic data.
    3. The credit union's net worth, as self-reported on its Call 
Report, is significantly undercapitalized, and NCUA determines that 
there is no reasonable prospect of the credit union becoming adequately 
capitalized in the succeeding 36 months. In making its determination on 
the prospect of achieving adequate capitalization, NCUA will assume 
that, if adverse economic conditions are affecting the value of the 
credit union's assets and liabilities, including property values and 
loan delinquencies related to unemployment, these adverse conditions 
will not further deteriorate.
    4. The credit union has been granted or received assistance under 
section 208 of the Federal Credit Union Act, 12 U.S.C. 1788, in the 15 
months prior to the Region's determination that the credit union is in 
danger of insolvency.
* * * * *
[FR Doc. 2017-15685 Filed 7-28-17; 8:45 am]
 BILLING CODE 7535-01-P