[Federal Register Volume 86, Number 185 (Tuesday, September 28, 2021)]
[Proposed Rules]
[Pages 53567-53570]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-21055]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 86, No. 185 / Tuesday, September 28, 2021 / 
Proposed Rules  

[[Page 53567]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 702 and 741

[NCUA 2021-0127]
RIN 3133-AF38


Subordinated Debt

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: The NCUA Board (Board) is proposing to amend the Subordinated 
Debt rule, which the Board finalized in December 2020 with an effective 
date of January 1, 2022. The Board proposes to amend the definition of 
``Grandfathered Secondary Capital'' to include any secondary capital 
issued to the United States Government or one of its subdivisions (U.S. 
Government), under an application approved before January 1, 2022, 
irrespective of the date of issuance. The proposed change would benefit 
eligible low-income credit unions (LICUs) that are either participating 
in the U.S. Department of the Treasury's (Treasury) Emergency Capital 
Investment Program (ECIP) or other programs administered by the U.S. 
Government that can be used to fund secondary capital, if they do not 
receive the funds for such programs by December 31, 2021. The Board 
also proposes to extend the expiration of regulatory capital treatment 
for these issuances to the later of 20 years from the date of issuance 
or January 1, 2042.

DATES:  Comments must be received on or before October 28, 2021.

ADDRESSES: You may submit written comments, identified by RIN 3133-
AF38, 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 on Docket NCUA 2021-
0127.
     Fax: (703) 518-6319. Include ``[Your Name]--Comments on 
Proposed Rule: Subordinated Debt 2021'' in the transmittal.
     Mail: Address to Melane Conyers-Ausbrooks, 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 the Federal 
eRulemaking Portal at http://www.regulations.gov, as submitted, except 
for those we cannot post for technical reasons. The NCUA will not edit 
or remove any identifying or contact information from the public 
comments submitted. Due to social distancing measures in effect, the 
usual opportunity to inspect paper copies of comments in the NCUA's law 
library is not currently available. After social distancing measures 
are relaxed, visitors may make an appointment to review paper copies by 
calling (703) 518-6540 or emailing [email protected].

FOR FURTHER INFORMATION CONTACT: Justin M. Anderson, Senior Staff 
Attorney, Office of General Counsel, 1775 Duke Street, Alexandria, VA 
22314-3428. Justin Anderson also can be reached at (703) 518-6540.

SUPPLEMENTARY INFORMATION:

I. Background

A. Subordinated Debt Rule

    At its December 2020 meeting, the Board issued a final Subordinated 
Debt rule (the final rule) permitting LICUs, Complex Credit Unions, and 
New Credit Unions to issue Subordinated Debt for purposes of Regulatory 
Capital treatment.\1\ Relevant to this proposal, the final rule 
grandfathered secondary capital issued before January 1, 2022, and 
allowed such secondary capital to receive regulatory capital treatment 
until January 1, 2042 (20 years from the effective date of the final 
rule).\2\ The grandfathering provision of the final rule allowed LICUs 
with grandfathered secondary capital to continue to be subject to the 
requirements of Sec.  701.34(b), (c), and (d) (recodified in the final 
rule as Sec.  702.414), rather than the requirements of the final 
rule.\3\ The final rule also includes a provision stating that any 
issuances of secondary capital not completed by January 1, 2022, are, 
as of January 1, 2022, subject to the requirements applicable to 
Subordinated Debt in the final rule.\4\ This provision would nullify 
any approved secondary capital application if the associated issuance 
was not completed before January 1, 2022. Any LICU in this situation 
would be required to reapply under the final rule if such LICU sought 
to proceed with its planned secondary capital issuance.
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    \1\ 86 FR 11060 (Feb. 23, 2021).
    \2\ Id. at 11074.
    \3\ Id. at 11074.
    \4\ Id. at 11083.
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B. Emergency Capital Investment Program

    Subsequent to the issuance of the final rule, Congress passed the 
Consolidated Appropriations Act, 2021.\5\ The CAA, among other things, 
created the ECIP. Under ECIP, Congress appropriated funds and directed 
Treasury to make investments in ``eligible institutions'' to support 
their efforts to ``provide loans, grants, and forbearance for small 
businesses, minority-owned businesses, and consumers, especially in 
low-income and underserved communities.'' \6\ The definition of 
``eligible institutions'' includes federally insured credit unions that 
are minority depository institutions or community development financial 
institutions, provided such credit unions are not in troubled condition 
or subject to any formal enforcement actions related to unsafe or 
unsound lending practices.\7\
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    \5\ Consolidated Appropriations Act, 2021, Public Law 116-260 
(H.R. 133), Dec. 27, 2020.
    \6\ Id. codified at 12 U.S.C. 4703a et seq.
    \7\ 12 U.S.C. 4703a(a)(2).
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    Under the terms developed by Treasury, investments in eligible 
credit unions will be in the form of subordinated debt. Treasury also 
aligned its investments in LICUs with the Federal Credit Union Act and 
the NCUA's regulations to allow eligible LICUs to apply to the NCUA for 
secondary capital treatment for these investments.
    Treasury opened the ECIP application process on March 4, 2021, with 
an application deadline of May 7, 2021. Treasury has subsequently 
extended this deadline multiple times, with the most recent deadline, 
as of the date of this proposal, being September 1, 2021. As of 
September 17, 2021, 44 LICUs have received approval from the NCUA to 
issue secondary capital under the

[[Page 53568]]

ECIP for an aggregate amount of approximately $1.9 billion.

II. Proposed Rule

    The changes proposed in this rule are narrowly tailored to address 
a specific situation with funding of approved secondary capital 
applications. Therefore, the Board notes that it is not considering any 
other changes to the final Subordinated Debt rule. Comments outside the 
scope of the changes discussed herein will be treated as such for the 
purposes of any final rule the Board may issue. In light of this 
targeted scope and the prior public comment period on the Subordinated 
Debt rule, the Board finds that a 30-day comment period will provide an 
adequate opportunity for public input.\8\
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    \8\ See NCUA Interpretive Ruling and Policy Statement (IRPS) 87-
2, as amended by IRPS 03-2 and IRPS 15-1. 80 FR 57512 (Sept. 24, 
2015), available at https://www.ncua.gov/files/publications/irps/IRPS1987-2.pdf.
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    In the event approved LICU ECIP investments, or investments from 
any other programs administered by the U.S. government that can fund 
secondary capital, are not funded by the end of 2021, those approved 
LICUs would be required to reapply for regulatory capital treatment 
under the Subordinated Debt rule. As this scenario would impose an 
unnecessary burden on these LICUs, the Board is proposing to amend the 
Subordinated Debt rule to permit funding of secondary capital approved 
under the current rule, beyond 2021, without the need to reapply under 
the Subordinated Debt rule. Regardless of the issuance date of the 
secondary capital, such secondary capital would, for the purposes of 
the Subordinated Debt rule be considered Grandfathered Secondary 
Capital, and remain subject to Sec.  701.34(b), (c) and (d) of the 
NCUA's regulations, (recodified in the final rule as Sec.  702.414). 
The Board notes that the proposed changes in this rule are narrowly 
tailored to provide an exception to the issuance cutoff date, if the 
secondary capital issuance is:
    1. To the U.S. Government; and
    2. Being conducted under a secondary capital application that was 
approved before January 1, 2022, under either Sec.  701.34 of the 
NCUA's regulations, for federal credit unions, or Sec.  741.203 of the 
NCUA's regulations, for federally insured, state-chartered credit 
unions.\9\
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    \9\ 12 CFR 701.34 and 741.203.
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    Consistent with the final Subordinated Debt rule, any LICU not 
meeting the above criteria will remain subject to the requirement to 
complete any issuance by the end of 2021 or such issuance will be 
subject to the requirements of the final Subordinated Debt rule.
    The Board believes it is appropriate to narrowly tailor this rule, 
using the above criteria, for the following reasons. First, the 
issuances targeted by this rule were applied for and approved under the 
requirements of the current secondary capital rule. The Board included 
the issuance cutoff date in the Subordinated Debt rule to ensure future 
issuances were done in accordance with the more robust requirements in 
that rule, particularly in the area of disclosures and investor 
protections. As the issuances that are the subject of this rule are to 
the U.S. Government, the Board believes that the sharing of non-public, 
confidential supervisory information between the NCUA and the U.S. 
Government investor is sufficient to warrant a limited exception. The 
sharing of non-public, confidential supervisory information also 
separates the issuances subject to this proposed rule and issuances to 
non-U.S. Government investors. As such, the Board is not proposing to 
apply the exception in this proposed rule to secondary capital 
issuances to entities or persons other than the U.S. Government. 
Further, the Board notes that, as of September 7, 2021, there were four 
approved secondary capital applications not related to U.S. Government 
programs that have not been funded.
    While the Board is permitting this limited exception for issuances 
to the U.S. Government, the Board continues to believe that the 
requirements of the Subordinated Debt rule, including the issuance of 
an Offering Document, should apply to all future issuances, regardless 
of the identity of the investor. The Board notes that information 
sharing between government agencies is not a substitute for executing 
an offering document. However, given the non-recurring nature of the 
transition from the current secondary capital requirements to the new 
Subordinated Debt requirements, the Board is willing to rely on 
information sharing in this instance.
    The Board is proposing the above criteria to limit the scope to 
address potential funding timelines under U.S. Government programs that 
extend beyond the end of 2021. As such, if funding is completed by the 
end of 2021 for these limited number of applications, there may be no 
need to finalize this proposed rule. However, out of an abundance of 
caution, the Board believes it is prudent to be prepared to act should 
funding delays continue beyond the end of 2021.
    The Board reiterates that any LICU that would qualify for the 
exception granted by this proposed rule must be operating under a 
secondary capital plan approved before January 1, 2022 under either 
Sec. Sec.  701.34 or 741.204 of the NCUA's regulations. Operating under 
an approved secondary capital plan means that a LICU may only conduct 
secondary capital issuances in accordance with the terms and conditions 
included in the LICU's approved secondary capital plan. Further, any 
LICU that receives an investment from the U.S. Government that is less 
than the amount approved under its secondary capital application with 
the NCUA would be limited to only that lesser investment and would not 
be permitted to use the proposed exception to conduct subsequent 
issuances. For example, if a LICU was approved to issue $100 million of 
secondary capital by the NCUA, but under the U.S. Government program 
was only granted a $60 million investment, the LICU would not be 
permitted to issue the remaining $40 million of approved secondary 
capital to another investor or under another U.S. Government program. 
Further, if a LICU receives a lesser investment amount, the NCUA 
reserves the right to revisit the LICU's approved plan to verify that 
the LICU continues to operate in accordance with that plan.
    Finally, the Board is proposing to amend the starting point for 
Grandfathered Secondary Capital to retain its status as Regulatory 
Capital. Currently, the Subordinated Debt rule states that all 
Grandfathered Secondary Capital will be treated as regulatory capital 
until January 1, 2042 (20 years from the effective date of the final 
rule). As this proposal would allow limited issuances of Grandfathered 
Secondary Capital beyond January 1, 2022, the Board is proposing to 
allow such secondary capital to count as regulatory capital for up to 
20 years from the date of issuance. The Board notes that this proposed 
amendment would provide equitable treatment for all issuances of 
Grandfathered Secondary Capital. Finally, the Board notes that this 
proposed change does not change the Board's rationale, as articulated 
in the proposed and final Subordinated Debt rules, for imposing a 20-
year cutoff for regulatory capital treatment.
    This change also would not permit LICUs to issue secondary capital 
with terms longer than 20 years. The Board was clear in both the 
proposed and final Subordinated Debt rules that the maximum 20-year 
maturity was necessary to help ensure Subordinated Debt was not 
considered equity, which

[[Page 53569]]

is an impermissible issuance for federal credit unions.\10\ To permit 
longer term issuances of secondary capital would be counter to the 
Board's concerns and reasons articulated in the aforementioned rules.
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    \10\ See 86 FR 11071 (Feb. 23, 2021) and 85 FR 13986, 14000 
(Mar. 10, 2020).
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III. Regulatory Procedures

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) 
requires that the Office of Management and Budget approve all 
collections of information by a Federal agency from the public before 
they can be implemented. Respondents are not required to respond to any 
collection of information unless it displays a valid Office of 
Management and Budget control number. This proposed rule extends the 
time for certain issuances of secondary capital and the corresponding 
Regulatory Capital treatment of such issuances. As such, this rule 
would not require any information collection as defined by the 
Paperwork Reduction Act of 1995.

B. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. The 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the Executive Order to adhere to fundamental 
federalism principles.
    This proposed rule does not have substantial direct effects on the 
states, on the relationship between the National Government and the 
states, or on the distribution of power and responsibilities among the 
various levels of Government. The NCUA has therefore determined that 
this proposed rule does not constitute a policy that has federalism 
implications for purposes of the Executive Order.

C. Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this rule will not affect family well-
being within the meaning of Sec.  654 of the Treasury and General 
Government Appropriations Act, 1999, Public Law 105-277, 112 Stat. 2681 
(1998).

D. Regulatory Flexibility Act

    The Regulatory Flexibility Act \11\ requires the NCUA to prepare an 
analysis to describe any significant economic impact a regulation may 
have on a substantial number of small entities (primarily those under 
$100 million in assets).\12\ This proposed rule would affect a small 
number of LICUs with approved secondary capital applications for 
issuances to the U.S. Government or its subdivisions. This rule extends 
the deadline for such credit unions to complete their issuance of 
secondary capital. Accordingly, the NCUA certifies that this proposed 
rule would not have a significant economic impact on a substantial 
number of small credit unions.
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    \11\ 5 U.S.C. 601 et seq.
    \12\ Id. at 603(a).
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List of Subjects

12 CFR Part 702

    Credit unions, Reporting and recordkeeping requirements.

12 CFR Part 741

    Bank deposit insurance, Credit unions, Reporting and recordkeeping 
requirements.

    By the NCUA Board on September 23, 2021.
Melane Conyers-Ausbrooks,
Secretary of the Board.

    For the reasons discussed in the preamble, NCUA proposes to amend 
12 CFR parts 702 and 741, as amended by 86 FR 11060 (Feb. 23, 2021) and 
scheduled to become effective on January 1, 2022, as follows:

PART 702--CAPITAL ADEQUACY

0
1. The authority citation for part 702 continues to read as follows:

    Authority:  12 U.S.C. 1766(a), 1790d.

0
2. In Sec.  702.2 revise the definitions for ``Grandfathered Secondary 
Capital'' and ``Regulatory Capital'' to read as follows:


Sec.  702.2   Definitions.

* * * * *
    Grandfathered Secondary Capital means any secondary capital issued 
under Sec.  701.34 of this chapter, before January 1, 2022 or, in the 
case of a federally insured, state-chartered credit union, with Sec.  
741.204(c) of this chapter, before January 1, 2022. (12 CFR 701.34 was 
recodified as Sec.  702.414 as of January 1, 2022). This term also 
includes issuances of secondary capital to the U.S. Government or any 
of its subdivisions, under applications approved before January 1, 
2022, pursuant to Sec. Sec.  701.34 or 741.204(c) of this chapter, 
irrespective of the date of issuance.
* * * * *
    Regulatory Capital means:
    (1) With respect to an Issuing Credit Union that is a LICU and not 
a complex credit union, the aggregate outstanding principal amount of 
Subordinated Debt and, until the later of 20 years from the date of 
issuance or January 1, 2042, Grandfathered Secondary Capital that is 
included in the credit union's net worth ratio;
    (2) With respect to an Issuing Credit Union that is a complex 
credit union and not a LICU, the aggregate outstanding principal amount 
of Subordinated Debt that is included in the credit union's RBC Ratio;
    (3) With respect to an Issuing Credit Union that is both a LICU and 
a Complex Credit Union, the aggregate outstanding principal amount of 
Subordinated Debt and, until the later of 20 years from the date of 
issuance or January June 1, 2042, Grandfathered Secondary Capital that 
is included in its net worth ratio and in its RBC Ratio; and
    (4) With respect to a new credit union, the aggregate outstanding 
principal amount of Subordinated Debt and, until the later of 20 years 
from the date of issuance or January 1, 2042, Grandfathered Secondary 
Capital that is considered pursuant to Sec.  702.207.
* * * * *
0
3. Revise Sec.  702.401 to read as follows:


Sec.  702.401   Purpose and scope.

    (a) Subordinated Debt. This subpart sets forth the requirements 
applicable to all Subordinated Debt issued by a federally insured, 
natural person credit union, including the NCUA's review and approval 
of that credit union's application to issue or prepay Subordinated 
Debt. This subpart shall apply to a federally insured, state-chartered 
credit union only to the extent that such federally insured, state-
chartered credit union is permitted by applicable state law to issue 
debt instruments of the type described in this subpart. To the extent 
that such state law is more restrictive than this subpart with respect 
to the issuance of such debt instruments, that state law shall apply. 
Except as provided in the next sentence, any secondary capital, as that 
term is used in the Federal Credit Union Act, issued after January 1, 
2022, is Subordinated Debt and subject to the requirements of this 
subpart. Issuances of secondary capital, as that term is used in the 
Federal Credit Union Act, to the U.S. Government or any of its 
subdivisions, under applications approved before January 1, 2022, 
pursuant to Sec. Sec.  701.34 or 741.204(c) of this chapter, are not 
subject to the requirements applicable to Subordinated Debt, discussed 
elsewhere in this subpart, irrespective of the date of issuance.
    (b) Grandfathered Secondary Capital. Any secondary capital defined 
as

[[Page 53570]]

``Grandfathered Secondary Capital,'' under Sec.  702.402 of this part, 
is governed by Sec.  702.414 of this part. Grandfathered Secondary 
Capital will no longer be treated as Regulatory Capital as of the later 
of 20 years from the date of issuance or January 1, 2042.
0
4. In Sec.  702.402 revise the definition for ``Grandfathered Secondary 
Capital'' to read as follows:


Sec.  702.402   Definitions.

* * * * *
    Grandfathered Secondary Capital means any secondary capital issued 
under Sec.  701.34 of this chapter before January 1, 2022, or, in the 
case of a federally insured, state-chartered credit union, with Sec.  
741.204(c) of this chapter, before January 1, 2022. (12 CFR 701.34 was 
recodified as Sec.  702.414 as of January 1, 2022). This term also 
includes issuances of secondary capital to the U.S. Government or any 
of its subdivisions, under applications approved before January 1, 
2022, pursuant to Sec. Sec.  701.34 or 741.204(c) of this chapter, 
irrespective of the date of issuance.
* * * * *
0
5. In Sec.  702.414 revise the introductory text and paragraph (a)(2) 
to read as follows:


Sec.  702.414   Regulations governing Grandfathered Secondary Capital.

    This section recodifies the requirements from 12 CFR 701.34(b), 
(c), and (d) that were in effect as of December 31, 2021, with minor 
modifications. The terminology used in this section is specific to this 
section. Except as provided in the next sentence, all secondary capital 
issued under Sec.  701.34 of this chapter before January 1, 2022, or, 
in the case of a federally insured, state-chartered credit union, Sec.  
741.204(c) of this chapter, that is referred to elsewhere in this 
subpart as ``Grandfathered Secondary Capital,'' is subject to the 
requirements set forth in this section. Issuances of secondary capital 
to the U.S. Government or any of its subdivisions, under applications 
approved before January 1, 2022, pursuant to Sec. Sec.  701.34 or 
741.204(c) of this chapter, are also considered ``Grandfathered 
Secondary Capital'' irrespective of the date of issuance.
    (a) * * *
    (2) Issuances not completed before January 1, 2022. Except as 
provided in the next sentence, any issuances of secondary capital not 
completed by January 1, 2022, are, as of January 1, 2022, subject to 
the requirements applicable to Subordinated Debt discussed elsewhere in 
this subpart. Issuances of secondary capital to the U.S. Government or 
any of its subdivisions, under applications approved before January 1, 
2022, pursuant to Sec.  701.34 or 741.204(c) of this chapter, are not 
subject to the requirements applicable to Subordinated Debt, discussed 
elsewhere in this subpart, irrespective of the date of issuance.
* * * * *

PART 741--REQUIREMENTS FOR INSURANCE

0
6. The authority citation for part 741 continues to read as follows:

    Authority:  12 U.S.C. 1757, 1766(a), 1781-1790, and 1790d; 31 
U.S.C. 3717.

0
7. Amend Sec.  741.204 by revising paragraph (c) to read as follows:


Sec.  741.204   Maximum public unit and nonmember accounts, and low-
income designation.

* * * * *
    (c) Follow the requirements of Sec.  702.414 of this chapter for 
any Grandfathered Secondary Capital (as defined in part 702 of this 
chapter).

[FR Doc. 2021-21055 Filed 9-27-21; 8:45 am]
BILLING CODE 7535-01-P