[Federal Register Volume 87, Number 192 (Wednesday, October 5, 2022)]
[Proposed Rules]
[Pages 60326-60331]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-20926]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 702
[NCUA-2022-0138]
RIN 3133-AF43
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 (the Current Rule), which the Board finalized in December
2020 with an effective date of January 1, 2022. This proposal would
make two changes related to the maturity of Subordinated Debt Notes
(Notes) and Grandfathered Secondary Capital (GSC). Specifically, this
proposal would replace the maximum maturity of Notes with a requirement
that any credit union seeking to issue Notes with maturities longer
than 20 years to demonstrate how such instruments would continue to be
considered ``debt.'' This proposed rule would also extend the
Regulatory Capital treatment of GSC to the later of 30 years from the
date of issuance or January 1, 2052. This proposed extension would
align the Regulatory Capital treatment of GSC with the maximum
permissible maturity for 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. This 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. This change would also cohere the
requirements in the Current Rule related to maturities and Regulatory
Capital treatment of Notes and the Regulatory Capital treatment of GSC,
while continuing to ensure that credit unions are operating within
their statutory authority. The Board is making four other, minor
modifications to the Current Rule to make it more user-friendly and
flexible. Specifically, the Board is proposing to amend the definition
of ``Qualified Counsel'' to clarify that such person(s) is not required
to be licensed to practice law in every jurisdiction that may relate to
an issuance. The Board is also proposing to amend two sections of the
Current Rule to remove the ``statement of cash flow'' from the Pro
Forma Financial Statements requirement and replace it with a
requirement for ``cash flow projections.'' This change would better
align the requirements of the Current Rule with the customary way
credit unions develop Pro Forma Financial Statements and ``cash flow
projections.'' Next, the Board is proposing to revise the section of
the Current Rule on filing requirements and inspection of documents.
This proposed changed would align this section of the Current Rule with
current agency procedures. Finally, the Board is proposing to remove a
parenthetical reference related to GSC that no longer counts as
Regulatory Capital. This change would align the rule with recent
changes made to the Call Report.
DATES: Comments must be received on or before December 5, 2022.
ADDRESSES: You may submit written comments, identified by RIN 3133-
AF43, by any of the following methods (Please send comments by one
method only):
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments on Docket NCUA-2022-
0138.
Mail: Address to Melane Conyers-Ausbrooks, Secretary of
the Board, National Credit Union Administration, 1775 Duke Street,
Alexandria, Virginia 22314-3428.
Hand Delivery or Courier: Same as mail address.
Public Inspection: You may view all public comments on the Federal
eRulemaking Portal at https://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: Policy: Tom Fay, Director of Capital
Markets, Office of Examination and Insurance. Legal: Justin M.
Anderson, Senior Staff Attorney, Office of General Counsel, 1775 Duke
Street, Alexandria, VA 22314-3428. Tom Fay can be
[[Page 60327]]
reached at (703) 518-1179, and Justin Anderson can be reached at (703)
518-6540.
SUPPLEMENTARY INFORMATION:
I. Background
A. The Current Rule History
At its December 2020 meeting, the Board issued a final Subordinated
Debt rule (the final rule).\1\ The final rule permitted LICUs, complex
credit unions, and new credit unions to issue Subordinated Debt for
purposes of Regulatory Capital treatment.\2\ Relevant to this proposed
rule, the final rule included a provision providing that any secondary
capital issued by LICUs under previously effective 12 CFR 701.34(b),
outstanding as of the effective date of the final rule, would be
considered GSC. The grandfathering provision of the final rule allowed
LICUs with GSC to continue to be subject to the requirements of Sec.
701.34(b), (c), and (d) (recodified in the Current Rule as Sec.
702.414), rather than the requirements of the Current Rule. The final
rule also included 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 of the Current Rule. Finally, the
grandfathering provision in the final rule stated that GSC would
continue to receive Regulatory Capital treatment for a period of 20
years from the effective date of the final rule.\3\
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\1\ Throughout this document the Board uses the term ``final
rule'' to refer to the final Subordinated Debt rule published in the
Federal Register on February 23, 2021. The Board uses the term ``the
Current Rule'' to refer to the current Subordinated Debt rule, as
published in the Code of Federal Regulations, which includes the
``final rule'' and subsequent amendments.
\2\ 86 FR 11060 (Feb. 23, 2021). Unless otherwise noted,
capitalized terms in this preamble are defined in the Current Rule.
\3\ Id.
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The final rule also contained a provision requiring Notes to have a
minimum maturity of five years and a maximum maturity of 20 years.
After the NCUA issued the final rule, Congress passed the
Consolidated Appropriations Act, 2021.\4\ The Consolidated
Appropriations Act, among other things, created the ECIP. Under the
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.'' \5\ 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.\6\
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\4\ Consolidated Appropriations Act, 2021, Public Law 116-260
(H.R. 133), Dec. 27, 2020.
\5\ Id. codified at 12 U.S.C. 4703a et seq.
\6\ 12 U.S.C. 4703a(a)(2). Throughout this document, the Board
only refers to LICUs, as those are the only eligible institutions
that could receive secondary capital treatment for the ECIP
investments.
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Under the terms developed by Treasury, investments in eligible
credit unions are in the form of subordinated debt.\7\ Treasury also
aligned its investments in LICUs with the Federal Credit Union Act (the
Act) and the NCUA's regulations, which allowed eligible LICUs to apply
to the NCUA for secondary capital treatment for these investments.
Relevant to this proposed rule, Treasury offered either 15- or 30-year
maturity options for the investments.
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\7\ Throughout this document the term ``Subordinated Debt''
(initial caps) refers to issuances conducted under the Current Rule.
Conversely, the term ``subordinated debt'' (lower-cased) refers to
debt issuances conducted outside of the Current Rule, such as those
under the ECIP.
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Treasury opened the ECIP application process on March 4, 2021, with
an application deadline of May 7, 2021. Treasury extended this deadline
to September 1, 2021.
In October 2021, the NCUA issued a Letter to Credit Unions
permitting LICUs participating in the ECIP to issue 30-year
subordinated debt instruments.\8\ This letter and its enclosure are
discussed in more detail in subsequent sections of this document.
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\8\ Letter to Credit Unions 21-CU-11, Emergency Capital
Investment Program Participation and enclosed Supervisory Letter No.
21-02 (Oct. 20, 2021), available at https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/emergency-capital-investment-program-participation.
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In December 2021, the Board issued a final amendment to the Current
Rule permitting secondary capital to be considered GSC regardless of
the actual issuance date, provided a secondary capital issuance was:
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; 86 FR 72807 (Dec. 23, 2021).
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The final amendment and Letter to Credit Unions provided LICUs with
additional flexibility to participate in the ECIP without being subject
to the terms of the Current Rule.
B. Maturity and Regulatory Capital Treatment for GSC
The Current Rule restricts the maturity of Notes to a minimum of
five years and a maximum of 20 years. In alignment with this maximum
maturity, the Current Rule also terminates Regulatory Capital treatment
for GSC after a period of 20 years beginning on the later of the date
of issuance or January 1, 2022 (the effective date of the Current
Rule).
As previously noted, under the ECIP, Treasury enabled LICUs to
issue 30-year subordinated debt instruments. The Supervisory Letter
enclosed to the Letter to Credit Unions discussed in section I of this
document stated: ``federally insured, state-chartered LICUs typically
issue secondary capital under similar borrowing authority. As such, the
agency has taken certain precautions to ensure that issuances under the
ECIP that receive secondary capital treatment are considered debt. Such
precautions have included the agency prohibiting LICUs from receiving
secondary capital treatment for issuances under the ECIP's 30-year
option.'' \10\ The Supervisory Letter, however, went on to state that
after further consideration, the agency was recalibrating its position
and permitting LICUs to issue 30-year subordinated debt under the ECIP.
In relevant portion, the Supervisory Letter stated:
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\10\ Letter to Credit Unions 21-CU-11, Emergency Capital
Investment Program Participation and enclosed Supervisory Letter No.
21-02 (Oct. 20, 2021).
The agency has always recognized that no one term or factor of
an ECIP instrument is dispositive in characterizing the nature of
the instrument. As such, the agency is satisfied that the close
collaboration between the NCUA and Treasury, the unique status of
the ECIP, and the terms of the instrument have resulted in an
instrument that complies with the Federal Credit Union Act, even
with a 30-year term.\11\
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\11\ Id.
While this change facilitated LICU participation in the ECIP, the
agency recognizes that there is a distinct mismatch between a 30-year
ECIP subordinated debt instrument and the 20-year maximum Regulatory
Capital treatment of the same. To address this discrepancy, the NCUA
conducted additional research into the issues of maximum Regulatory
Capital treatment for GSC and the broader issue of a maximum maturity
for new Subordinated Debt issuances.
[[Page 60328]]
Both the maximum Regulatory Capital treatment for GSC and the
maximum maturity for Notes are based on the statutory authority under
which an FCU issues both instruments. Specifically, an FCU can only
issue these instruments under its authority to borrow from any source.
Therefore, the agency took precautions in the Current Rule to ensure
that all issuances were in the form of debt. As noted in the January
2020 proposed Subordinated Debt rule, such precautions included
imposing a maximum maturity of 20 years on Notes. The Board stated it
was proposing such requirement ``to help ensure the Subordinated Debt
is properly characterized as debt rather than equity. Generally, by its
nature, debt has a stated maturity, whereas equity does not.'' \12\
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\12\ 85 FR 13892 (Mar. 10, 2020).
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With respect to GSC, the January 2020 proposed Subordinated Debt
rule stated:
The Board believes 20 years would provide a LICU sufficient time
to replace Grandfathered Secondary Capital with Subordinated Debt if
such LICU seeks continued Regulatory Capital benefits of
Subordinated Debt. The Board believes it is important to strike a
balance between transitioning issuers of Grandfathered Secondary
Capital to this proposed rule and ensuring that instruments do not
indefinitely remain as Grandfathered Secondary Capital.\13\
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\13\ Id.
The 20-year Regulatory Capital treatment for GSC also aligned with
the aforementioned maximum maturity for Notes issued under the Current
Rule.
As the Board received feedback from the credit union industry on
the mismatch between ECIP investment maturity and the Regulatory
Capital treatment of the same, the NCUA conducted additional research
into whether a 20-year maturity was necessary to ensure an FCU was
operating squarely within its statutory authority when issuing Notes.
While the Board continues to believe that a 20-year maturity is an
appropriate demarcation point to ensure an FCU is issuing Subordinated
Debt under its statutory authority, the agency's additional research
has provided grounds to offer additional flexibility in this area.
Based on this additional research, the Board is proposing the
amendments discussed in the next section.
II. Proposed Changes
A. Regulatory Capital Treatment for GSC
The Board is proposing revisions to Sec. 702.401(b) to permit GSC
to receive Regulatory Capital treatment for a period of 30 years from
the later of the date of issuance or January 1, 2022. This change would
accomplish multiple goals. First, it would align the Regulatory Capital
treatment with the maximum permissible maturity for secondary capital
issued under the ECIP. The Board believes that this change is necessary
to enable LICUs to receive the maximum benefit of the ECIP, as intended
by Congress and effectuated by Treasury. Capital with longer maturities
helps credit unions make more loans to underserved communities and
improve the economic well-being in these areas. In addition, longer
maturities will also allow participating credit unions to meet the
statutory mission of the credit union system of meeting the credit and
savings needs of members, particularly those people of modest means
Second, this proposed change would align the Regulatory Capital
treatment across all GSC. This alignment provides additional
flexibility to those LICUs with GSC that has a maturity longer than 20
years, while still striking a balance between transitioning issuers of
GSC to the Current Rule and ensuring that instruments do not
indefinitely remain as GSC. Further, as discussed in the next
subsection, this alignment would also be consistent with the Board's
proposed recalibration of the maturity requirement for Notes issued
under the Current Rule.
B. Maximum Maturity of Notes
As noted earlier, the Current Rule contains the following
requirement that Notes:
Have, at the time of issuance, a fixed stated maturity of at
least five years and not more than 20 years from issuance. The
stated maturity of the Subordinated Debt Note may not reset and may
not contain an option to extend the maturity[.] \14\
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\14\ Id. at 702.404(a)(2).
Additionally, the Board implemented this requirement to help an FCU
issuing Subordinated Debt comply with its statutory authority.\15\ As
industry experts have correctly pointed out, the fixed stated maturity
of an instrument is but one factor a court will evaluate in deciding
whether an instrument is debt or equity. Courts have traditionally
listed between 9 and 13 factors to be evaluated in determining if an
instrument is debt or equity.\16\
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\15\ While the Current Rule applies to both FCUs and FISCUs,
authority for issuances by FISCUs is derived from state law, rather
than the Act.
\16\ Hewlett-Packard Co. v. Comm'r, 103 T.C.M. (CCH) 1736 (T.C.
2012), aff'd sub nom. Hewlett-Packard Co. v. Comm'r, 875 F.3d 494
(9th Cir. 2017). A.R. Lantz Co., 424 F.2d at 1333 (citing O.H. Kruse
Grain & Milling v. Comm'r, 279 F.2d 123, 125-126 (9th Cir. 1960),
aff'g T.C. Memo.1959-110).
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During the formulation of the Current Rule, the agency engaged the
services of an outside law firm that specializes in, among other
things, taxation and securities law. Based on the research conducted by
that firm and NCUA staff, the Board determined that 20 years was an
advantageous demarcation point. NCUA staff and the Board are aware that
courts have never set a strict limit on the length of a fixed stated
maturity for purposes of a debt versus equity analysis. The agency
recognizes that courts have, in some cases, found an instrument to be
debt despite a maturity in excess of 50 years.\17\ As discussed by
legal scholars, as a general rule, the shorter the time between
issuance of the debt instrument and the maturity or redemption date,
the more the instrument appears to be debt.\18\ Therefore, the Board
continues to believe that 20 years is a sufficient demarcation point to
balance flexibility with a rule firmly rooted in statutory authority.
The Board, however, recognizes that a fixed stated maturity date is but
one factor in a debt versus equity analysis, and, as noted by the U.S.
Supreme Court: ``[t]here is no one characteristic . . . which can be
said to be decisive in the determination of whether obligations are
risk investments in the corporations or debt.'' \19\ Considering the
factors mentioned above, the Board is proposing to provide Issuing
Credit Unions with additional flexibility on this requirement.
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\17\ ``Although 50 years might under some circumstances be
considered as a long time for the principal of a debt to be
outstanding, we must take into consideration the substantial nature
of the * * * [taxpayer's] business, and the fact that it had been in
corporate existence since [*62] 1897, or 61 years prior to the
issuance of the debentures. Therefore, we think that a 50-year term
in the present case is not unreasonable. * * * [Monon R.R. v.
Comm'r, 55 T.C. at 359]. PepsiCo Puerto Rico, Inc. v. Comm'r, 104
T.C.M. (CCH) 322 (T.C. 2012).''
\18\ ``Federal Income Taxation of Debt Instruments,'' David C.
Garlock, Matthew S. Blum, Kyle H. Klein, Richard G. Larkins & Alan
B. Munro (2011).
\19\ John Kelley Co. v. Comm'r, 326 U.S. 521, 530 (1946).
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The Board is proposing to remove the maximum maturity limit of 20
years from Sec. 702.404(a)(2) of the NCUA regulations.\20\ In its
place, the Board is proposing a requirement that a credit union must
provide certain information in its application for preapproval under
Sec. 702.408 when applying to issue Notes with maturities longer than
20 years from the date of issuance. To demonstrate the issuance is
debt, this proposal includes a new paragraph in
[[Page 60329]]
Sec. 702.408(b) that requires a credit union applying to issue Notes
with maturities longer than 20 years to submit, at the discretion of
the Appropriate Supervision Office, one or more of the following:
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\20\ 12 CFR 702.404(a)(2).
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1. A written legal opinion from a Qualified Counsel;
2. A written opinion from a licensed CPA; and
3. An analysis conducted by the credit union or independent third-
party.
The Board believes this proposed structure would provide a credit
union with additional flexibility to issue Notes with maturities longer
than 20 years, provided the credit union can demonstrate that the Notes
would be considered debt. The Board notes that the discretion on what
information is necessary to satisfy this requirement would rest with
the Appropriate Supervision Office, but this determination would be
based on the overall structure of the issuance, including the fixed
stated maturity and any other information requested by the Appropriate
Supervision Office.\21\
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\21\ Id. at Sec. 702.408(b).
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As the entire Current Rule is designed to help ensure Notes would
be considered debt, the Board does not anticipate that a legal or CPA
opinion would be necessary for issuances that have fixed stated
maturities that are not significantly longer than 20 years and do not
contain any other features or terms that could be viewed as akin to an
equity issuance. The Board notes, however, that every issuance is
unique and, while unlikely, it is still possible a legal or CPA opinion
may be necessary to fully ensure that a Note would be considered debt
irrespective of the degree to which the maturity exceeds 20 years.
The Board believes this proposed structure is consistent with its
original line of thinking with respect to debt versus equity and fixed
stated maturities. However, this proposed structure more fully takes
account of the other debt features of the Current Rule and the court
decisions on debt versus equity.
C. Other Proposed Changes
1. Qualified Counsel
The Board is proposing to amend the definition of ``Qualified
Counsel'' to clarify where such person(s) must be licensed to practice
law. Current Sec. 702.402 defines ``Qualified Counsel'' as ``an
attorney licensed to practice law in the relevant jurisdiction(s) who
has expertise in the areas of Federal and state securities laws and
debt transactions similar to those described in this subpart.'' \22\
The agency is aware that there is some confusion about the requirement
that such person be ``licensed to practice law in the relevant
jurisdiction(s).'' The Board's intention is not to mandate that
``Qualified Counsel'' be licensed to practice law in every jurisdiction
that may be relevant to the issuance. Rather, this requirement is meant
to specify that a ``Qualified Counsel'' is:
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\22\ Id. at Sec. 702.402.
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1. Licensed to practice law;
2. Has expertise in the areas of Federal and state securities laws
and debt transactions similar to those described in the Current Rule;
and
3. Qualified to provide sufficient advice to a credit union to
comply with the requirement in Sec. 702.406(f) that an Issuing Credit
Union must comply with all applicable Federal and state securities
laws.\23\
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\23\ Id. at Sec. 702.406(f).
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Therefore, the Board is proposing to remove ``in the relevant
jurisdiction(s)'' from the definition of ``Qualified Counsel.'' This
change would clarify the intention of this requirement and lessen the
burden on credit unions, while not detracting from the expertise aspect
of this requirement. The Board, however, reiterates that under Sec.
702.406(f), an Issuing Credit union must comply with all Federal and
state securities laws. An Issuing Credit Union, therefore, must ensure
that it is able to ascertain, understand, and comply with all
securities laws that apply to an issuance.
2. Statement of Cash Flows
The Board is proposing to amend Sec. Sec. 702.408(b)(7) and
702.409(b)(2) to remove the statement of cash flow from the Pro Forma
Financial Statements requirement and replace it with the requirement
for cash flow projections.\24\ Since the final rule was published in
early 2021, NCUA has received several inquiries on the requirement of a
pro forma statement of cash flow and whether a cash flow projection
will suffice. The primary difference between a pro forma statement of
cash flow and a cash flow projection is the former is a formal
accounting statement and the latter is not. The Board believes a cash
flow projection would suffice because the Appropriate Supervision
Office needs cash flow projections, but not necessarily a Generally
Accepted Accounting Principles accounting statement to evaluate the
viability of an issuance. This change would also increase clarity in
the Current Rule.
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\24\ Id. at Sec. Sec. 702.408(b)(7) and 702.409(b)(2).
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3. Filing Requirements and Inspection of Documents
The Board is proposing to amend the section of the Current Rule
addressing the filing of documents and inspection of documents.\25\
First, the Board is proposing to amend the title of this paragraph by
removing the phrase ``inspection of documents.'' This phrase could be
confusing, as this paragraph does not include a separate mechanism for
inspecting documents outside of the Freedom of Information Act. As most
Subordinated Debt documents submitted to the agency could be exempt
from disclosure, the Board believes the Freedom of Information Act is
the appropriate mechanism for requesting Subordinated Debt
applications, Offering Documents, or other Subordinated Debt filings
submitted by credit unions from the NCUA.
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\25\ Id. at Sec. 702.408(l)(2).
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Second, the Board is proposing to replace the current requirement
that a credit union submit all applicable documents via the NCUA's
website with a requirement that a credit union make all submissions
directly to the Appropriate Supervision Office. The Board notes that
this proposed change is consistent with current practices, as well as
how filings were handled for secondary capital. As most credit unions
are already accustomed to this process, the Board believes this change
would reduce confusion and forgo an additional step in the submission
process.
4. Categorization of GSC That No Longer Counts as Regulatory Capital
The Board is proposing to revise Sec. 702.414(c) by removing
``(``discounted secondary capital'' re-categorized as Subordinated
Debt).'' This change would align this section to the current treatment
of GSC on the Call Report, revised in the spring of 2022. In early
2022, the NCUA conducted a comprehensive review of the Call Report that
led to the removal of the ``Subordinated Debt'' and ``Subordinated Debt
included in Net Worth'' accounts and combined them into one
``Subordinated Debt'' line. This change makes the aforementioned
parenthetical obsolete. The Board notes, however, that while the Call
Report has changes related to the reporting of Subordinated Debt in the
Liability section, credit unions will continue to count qualified and
approved Subordinated Debt or GSC for Net
[[Page 60330]]
Worth and Risk-Based Capital, when applicable.
III. Regulatory Procedures
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemaking in
which an agency creates a new or amends existing information collection
requirements.\26\ For purposes of the PRA, an information collection
requirement may take the form of a reporting, recordkeeping, or a
third-party disclosure requirement. The NCUA may not conduct or
sponsor, and the respondent is not required to respond to an
information collection, unless it displays a valid Office of Management
and Budget (OMB) control number. The current information collection
requirements for Subordinated Debt are approved under OMB control
number 3133-0207.
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\26\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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This rule proposes to remove the maximum maturity of Subordinated
Debt Notes of 20 years and replace it with a requirement that a credit
union seeking to issue Subordinated Debt Notes with maturities longer
than 20 years, provide additional information as part of its
application prescribed under new Sec. 702.408(b)(15). This proposed
reporting requirement is estimated to impact two credit unions applying
to issue Subordinated Debt for an additional 20 hours per response, an
increase of 40 burden hours annually. The following shows the total PRA
estimate for the entire Subordinated Debt rule, inclusive of the
additions referenced in the preceding sentence:
OMB Control Number: 3133-0207.
Title of information collection: Subordinated Debt, 12 CFR part
702, subpart D.
Estimated number respondents: 3,300.
Estimated number of responses per respondent: 1.12.
Estimated total annual responses: 3,705.
Estimated total annual burden hours per response: 1.54.
Estimated total annual burden hours: 5,702.
The NCUA invites comments on: (1) whether the proposed collection
of information is necessary for the proper performance of the functions
of the agency, including whether the information will have practical
utility; (2) the accuracy of the agency's estimate of the burden of the
proposed collection of information, including the validity of the
methodology and assumptions used; (3) ways to enhance the quality,
utility, and clarity of the information to be collected; (4) ways to
minimize the burden of the collection of information on those who are
to respond, including through the use of appropriate automated,
electronic, mechanical, or other technological collection techniques or
other forms of information technology; and (5) estimates of capital or
start-up costs and cost of operation, maintenance, and purchase of
services to provide information.
All comments are a matter of public record. Interested persons are
invited to submit written comments to (1) www.reginfo.gov/public/do/PRAMain (find this particular information collection by selecting the
Agency under ``Currently under Review'') and to (2) Dawn Wolfgang,
National Credit Union Administration, 1775 Duke Street, Suite 6032,
Alexandria, VA 22314-3428; Fax No. 703-519-8579; or email at
[email protected]. Given the limited in-house staff because of the
COVID-19 pandemic, email comments are preferred.
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 would 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 proposed rule would affect only a
small number of state-chartered LICUs with approved secondary capital
applications for issuances to the U.S. Government or its subdivisions.
This proposed rule would extend the Regulatory Capital treatment for
GSC, eliminate the maximum maturity for Subordinated Debt, and make two
minor clarifying changes. The proposed rule would not impose any new
significant burden on credit unions and may ease some existing
requirements. 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 proposed rule would 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).
D. Regulatory Flexibility Act
The Regulatory Flexibility Act \27\ requires the NCUA to prepare an
analysis to describe any significant economic impact a regulation may
have on a substantial number of small entities (defined as credit
unions with under $100 million in assets).\28\ This proposed rule would
affect only a small number of LICUs with approved secondary capital
applications for issuances to the U.S. Government or its subdivisions.
This proposed rule would extend the Regulatory Capital treatment for
GSC, eliminate the maximum maturity for Subordinated Debt, and make two
minor clarifying changes. The proposed rule would not impose any new
significant burden on credit unions and may ease some existing
requirements. 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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\27\ 5 U.S.C. 601 et seq.
\28\ Id. at 603(a); NCUA Interpretive Ruling and Policy
Statement 15-2.
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List of Subjects
12 CFR Part 702
Credit unions, Reporting and recordkeeping requirements.
By the NCUA Board on September 22, 2022.
Melane Conyers-Ausbrooks,
Secretary of the Board.
For the reasons discussed in the preamble, the NCUA Board proposes
to amend 12 CFR part 702, as follows:
PART 702--CAPITAL ADEQUACY
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1. The authority citation for part 702 continues to read as follows:
Authority: 12 U.S.C. 1766(a), 1790d.
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2. Revise Sec. 702.401(b) to read as follows:
Sec. 702.401 Purpose and scope.
* * * * *
(b) Grandfathered Secondary Capital. Any secondary capital defined
as ``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 30 years from the date of issuance or January 1, 2052.
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3. In Sec. 702.402, revise the definitions for ``Qualified Counsel''
and ``Regulatory Capital'' to read as follows:
[[Page 60331]]
Sec. 702.402 Definitions.
* * * * *
Qualified Counsel means an attorney licensed to practice law who
has expertise in the areas of Federal and state securities laws and
debt transactions similar to those described in this subpart.
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 30 years from the date of
issuance or January 1, 2052, 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,
if applicable;
(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 30 years from the date of
issuance or January 1, 2052, Grandfathered Secondary Capital that is
included in its net worth ratio and in its RBC Ratio, if applicable;
and
(4) With respect to a new credit union, the aggregate outstanding
principal amount of Subordinated Debt and, until the later of 30 years
from the date of issuance or January 1, 2052, Grandfathered Secondary
Capital that is considered pursuant to Sec. 702.207.
* * * * *
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4. In Sec. 702.404, revise the section heading and paragraph (a)(2) to
read as follows:
Sec. 702.404 Requirements of the Subordinated Debt Note.
(a) * * *
(1) * * *
(2) Have, at the time of issuance, a fixed stated maturity of at
least five years. The stated maturity of the Subordinated Debt Note may
not reset and may not contain an option to extend the maturity. A
credit union seeking to issue Subordinated Debt Notes with maturities
longer than 20 years from the date of issuance must provide the
information required in Sec. 702.408(b)(14) as part of its application
for preapproval to issue Subordinated Debt;
* * * * *
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5. In Sec. 702.408:
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a. Revise paragraph (b)(7);
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b. Redesignate paragraphs (b)(14) and (15) as paragraphs (b)(15) and
(16);
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c. Add new paragraph (b)(14); and
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d. Revise paragraph (l)(1).
The revisions and addition read as follows:
Sec. 702.408 Preapproval to Issue Subordinated Debt.
* * * * *
(b) * * *
* * * * *
(7) Pro Forma Financial Statements (balance sheet and income
statement) and cash flow projections, including any off-balance sheet
items, covering at least two years. Analytical support for key
assumptions and key assumption changes must be included in the
application. Key assumptions include, but are not limited to, interest
rate, liquidity, and credit loss scenarios;
* * * * *
(14) In the case of a credit union applying to issue Subordinated
Debt Notes with maturities longer than 20 years, an analysis
demonstrating that the proposed Subordinated Debt Notes would be
properly characterized as debt in accordance with U.S. GAAP. The
Appropriate Supervision Office may require that such analysis include
one or more of the following:
(i) A written legal opinion from a Qualified Counsel;
(ii) A written opinion from a licensed CPA; and
(iii) An analysis conducted by the credit union or independent
third party;
* * * * *
(l) Filing requirements.
(1) Except as otherwise provided in this section, all initial
applications, Offering Documents, amendments, notices, or other
documents must be filed electronically with the Appropriate Supervision
Office. Documents may be signed electronically using the signature
provision in 17 CFR 230.402 (Rule 402 under the Securities Act of 1933,
as amended).
* * * * *
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6. In Sec. 702.409, revise paragraph (b)(2) to read as follows:
* * * * *
(b) * * *
(2) Pro Forma Financial Statements (balance sheet and income
statement) and cash flow projections, including any off-balance sheet
items, covering at least two years. Analytical support for key
assumptions and key assumption changes must be included in the
application. Key assumptions include, but are not limited to, interest
rate, liquidity, and credit loss scenarios.
* * * * *
Sec. 702.414 [Amended]
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7. In Sec. 702.414(c) introductory text, remove the phrase
``(``discounted secondary capital'' re-categorized as Subordinated
Debt)''.
[FR Doc. 2022-20926 Filed 10-4-22; 8:45 am]
BILLING CODE 7535-01-P