[Federal Register Volume 88, Number 58 (Monday, March 27, 2023)]
[Rules and Regulations]
[Pages 18006-18011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-05808]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 702

RIN 3133-AF43


Subordinated Debt

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA Board (Board) is amending the Subordinated Debt rule 
(current rule), which it finalized in December 2020 with an effective 
date of January 1, 2022. This final rule makes two changes related to 
the maturity of Subordinated Debt Notes and Grandfathered Secondary 
Capital. Specifically, this final rule replaces the maximum permissible 
maturity of Subordinated Debt Notes with a requirement that any credit 
union seeking to issue Subordinated Debt Notes with maturities longer 
than 20 years demonstrate how such instruments would continue to be 
considered ``debt.'' This final rule also extends the Regulatory 
Capital treatment of Grandfathered Secondary Capital to the later of 30 
years from the date of issuance or January 1, 2052. This extension will 
align the Regulatory Capital treatment of Grandfathered Secondary 
Capital with the maximum permissible maturity for any secondary capital 
issued by low-income credit unions (LICUs) under the 2022 U.S. 
Department of the Treasury's (Treasury) Emergency Capital Investment 
Program (ECIP) or other programs administered by the U.S. Government. 
In addition, the Board is making four minor modifications to other 
sections of the current rule to make it more user-friendly and 
flexible.

DATES: The final rule is effective April 26, 2023.

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 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 2020 final rule).\1\ The 2020 final rule permitted 
LICUs, complex credit unions, and new credit unions to issue 
Subordinated Debt for purposes of being included in Regulatory 
Capital.\2\ Relevant to this final rule, the 2020 final rule provided 
that any secondary capital issued by LICUs under previously effective 
12 CFR 701.34(b), outstanding as of the effective date of the 2020 
final rule, would be considered Grandfathered Secondary Capital. The 
grandfathering provision of the 2020 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 
current rule as Sec.  702.414), rather than the requirements of the 
current rule. The 2020 final rule also provided 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 2020 final rule stated that 
Grandfathered Secondary Capital would continue to be included in 
Regulatory Capital for up to 20 years from the effective date of the 
2020 final rule.\3\ The 2020 final rule also contained a provision 
requiring Subordinated Debt Notes to have a minimum maturity of five 
years and a maximum maturity of 20 years.
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    \1\ Throughout this document the Board uses the term ``2020 
final rule'' to refer to the final Subordinated Debt rule issued in 
December 2020 and 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 ``2020 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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    After the NCUA issued the 2020 final rule, Congress passed the 
Consolidated Appropriations Act, 2021.\4\ The Consolidated 
Appropriations Act, 2021, among other things, created the ECIP. Under 
the ECIP, Congress appropriated funds and directed Treasury to make 
investments in ``eligible institutions'' to support the institutions' 
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

[[Page 18007]]

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 final rule, Treasury offered either 
15- or 30-year maturity options for the investments. 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.
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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-case) refers to 
debt issuances conducted outside of the current rule, such as those 
under the ECIP.
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    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\ In December 2021, the Board issued a 
final amendment to the current rule permitting secondary capital to be 
considered Grandfathered Secondary Capital regardless of the actual 
issuance date, provided the secondary capital issuance met the 
following conditions:
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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.

    1. It was issued to the U.S. Government; and
    2. It was 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).

    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 Treatment as Regulatory Capital for Grandfathered 
Secondary Capital

    The current rule restricts the maturity of Subordinated Debt Notes 
to a minimum of five years and a maximum of 20 years. In alignment with 
this maximum maturity, the current rule also terminates Grandfathered 
Secondary Capital's inclusion in Regulatory Capital after a maximum 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 allowed 30-year 
subordinated debt instruments. The Supervisory Letter accompanying the 
Letter to Credit Unions discussed in the previous section of this 
document stated:

    [F]ederally 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\
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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 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 
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relevant portion, the Supervisory Letter stated the following:

    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 recognized that there is a distinct mismatch between a 30-year 
ECIP subordinated debt instrument and the 20-year maximum for inclusion 
in Regulatory Capital of the same. To address this discrepancy, the 
NCUA conducted additional research into these issues.
    Both the maximum Regulatory Capital treatment for Grandfathered 
Secondary Capital and the maximum maturity for Subordinated Debt Notes 
are based on the statutory authority under which a Federal credit union 
(FCU) issues both instruments. Specifically, an FCU may 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 are 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 Subordinated Debt 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 Grandfathered Secondary Capital, the January 2020 
proposed Subordinated Debt rule stated that ``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 also 
stated that it believed ``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.
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    As the Board received feedback from the credit union industry on 
the mismatch between ECIP investment maturities allowed 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. 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 proposed the amendments discussed in the 
next section of this document.

C. Summary of the Proposed Rule

    At its September 2022 meeting, the Board issued a notice of 
proposed rulemaking to amend the current rule in a variety of ways.\14\ 
First, the Board proposed revisions to Sec.  702.401(b) to permit 
Grandfathered Secondary Capital to be included in Regulatory Capital 
for up to 30 years from the later of the date of issuance or January 1, 
2022. Second, the Board proposed to remove the maximum maturity limit 
of 20 years from Sec.  702.404(a)(2). In its place, the Board proposed 
a requirement that a credit union must provide certain information in 
its application for preapproval under Sec.  702.408 when applying to 
issue Subordinated Debt Notes with maturities longer than 20 years. To 
demonstrate the issuance is debt, the proposal included a new paragraph 
in Sec.  702.408(b) that requires a credit union applying to issue 
Subordinated Debt 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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    \14\ 87 FR 60326 (Oct. 5, 2022).
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     A written legal opinion from a Qualified Counsel.
     A written opinion from a licensed certified public 
accountant (CPA).

[[Page 18008]]

     An analysis conducted by the credit union or independent 
third party.
    In addition to these substantive changes related to the maturity 
and Regulatory Capital treatment of issuances, the Board also proposed 
several minor changes to make the current rule clearer, more user-
friendly, and aligned with current agency practices. First, the Board 
proposed to amend the definition of ``Qualified Counsel'' to clarify 
where such person(s) must be licensed to practice law by removing the 
phrase ``in the relevant jurisdiction(s)'' from the definition of 
``Qualified Counsel.'' Second, the Board proposed 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 
a requirement for ``cash flow projections.'' Third, the Board proposed 
to amend the section of the current rule addressing the filing of 
documents and inspection of documents by removing the phrase 
``inspection of documents'' from the titling of this section and 
replacing 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. Finally, the Board proposed to revise Sec.  
702.414(c) by removing ``(``discounted secondary capital'' re-
categorized as Subordinated Debt)'' from the description of 
Grandfathered Secondary Capital that may be redeemed by a credit union. 
This revision is consistent with recent changes to the NCUA Call 
Report.
    For the reasons stated in the proposed rule and in consideration of 
the public comments received on the same, as discussed in the next 
section of this document, the Board is finalizing the proposed changes 
without further amendment.

II. Summary of Comments

A. The Public Comments, Generally

    The NCUA received 21 comments following publication of the proposed 
rule. Two of the commenters supported the rule as written and two 
commenters opposed the rule in its entirety. The remaining 17 
commenters supported the proposed changes but recommended additional 
changes that are outside the scope of this rulemaking.

B. Comments That Opposed the Proposal in Its Entirety

    Two commenters expressly opposed the proposed changes and, more 
generally, the current rule in its entirety. Specific to the proposed 
rule, both commenters opposed the change that would permit credit 
unions to issue Subordinated Debt Notes with maturities greater than 20 
years. Specifically, one commenter stated that ``by extending their 
maximum maturity, these instruments become more like `equity-like.' 
[sic] Even by the NCUA's own admission, the fixed stated maturity is a 
factor in determining whether an instrument may be considered debt or 
equity with a general rule being that the shorter the maturity date, 
the more the instrument resembles debt.'' The other commenter further 
stated the following:

    The 20-year limitation was created after the NCUA concluded that 
such a limitation would ensure that courts consider credit union 
subordinated debt to be debt rather than equity. This prevents 
credit unions from exceeding their statutorily permitted powers. 
There is no evidence that the risk of long duration subordinated 
notes being classified as equity has decreased, and therefore no 
justification for the NCUA Board to reverse its previous decision.

    This commenter went on to recommend that the Board should require 
credit unions to submit a written legal opinion from Qualified Counsel 
and a written opinion from a licensed CPA to the Appropriate 
Supervision Office before issuing Subordinated Debt. Conversely, this 
commenter suggested that the Board should only allow maturities over 20 
years for issuances to the U.S. Government. This commenter supported 
its argument by stating that ``[d]etermining whether an instrument 
constitutes debt or equity is not a simple matter, particularly when 
evaluating notes with long maturities.'' This commenter went on to 
state:

    Under the NCUA's proposed rule, there is nothing that would 
preclude a newly formed LICU from issuing notes with 50 year 
maturities, 99 year maturities, or even 150 year maturities. All 
that would be required to satisfy the letter of the proposed 
regulation is an analysis conducted by the credit union itself 
stating that the note should be considered debt and not equity and 
the approval of the Appropriate Supervision Office. This is not 
sufficient to prevent credit unions from issuing securities that are 
nominally debt but are, in substance, an impermissible equity 
interest.

    Finally, this commenter cited the following case to support its 
position that credit union Subordinated Debt is already equity-like 
under the current rule:

    For example, in United States v. Snyder Brothers Company, the 
Fifth Circuit concluded that 20-year debentures that were 
subordinated to all other indebtedness of the issuer and where there 
was no limitation as to payment of dividends or provision for any 
sinking fund or reserve did not constitute ``indebtedness,'' despite 
the intention of the issuer. The Snyder Brothers court held that 
while subordination alone or a long term alone would not preclude 
classification as debt, those factors together, as well as the lack 
of any sinking fund or reserve, tended more ``towards eliminating 
any difference between the holders of these debentures and preferred 
stockholders than any case that has been called to our attention.'' 
(Footnote omitted).

In response to the assertions made by these commenters, the Board notes 
that under established case law an agency may change its position, 
provided it acknowledges the change and supports the change with a 
reasonable basis.\15\ As discussed in the proposed and final rules, the 
NCUA is committed to ensuring FCUs offering Subordinated Debt Notes are 
doing so within their express statutory authority.\16\ While the Board 
selected 20 years as a comfortable demarcation line in determining the 
length of maturity of a Subordinated Debt Note for purposes of ensuring 
it remained a borrowing, the Board never stated that any other maturity 
would automatically make Subordinated Debt Notes equity and not debt. 
Rather, in the proposed rule, the Board stated that 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 a comfortable 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\

[[Page 18009]]

Therefore, the Board continues to believe that 20 years is a 
comfortable demarcation point to balance flexibility with a rule firmly 
rooted in statutory authority.
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    \15\ See. F.C.C. v. Fox Television Stations, Inc., 556 U.S. 502, 
129 S. Ct. 1800, 173 L. Ed. 2d 738 (2009).
    \16\ See. 85 FR 13892 (Mar. 10, 2020) and 86 FR 11060 (Feb. 23, 
2021).
    \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).
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    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 proposed to provide Issuing Credit 
Unions with additional flexibility on this requirement and remove the 
fixed maximum maturity limit.
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    \19\ John Kelley Co. v. Comm'r, 326 U.S. 521, 530 (1946).
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    In its place, the Board proposed a requirement that a credit union 
must provide certain information in its application for preapproval 
under Sec.  702.408 when applying to issue Subordinated Debt Notes with 
maturities longer than 20 years. To demonstrate the issuance is debt, 
the proposal included a new paragraph in Sec.  702.408(b) that requires 
a credit union applying to issue Subordinated Debt Notes with 
maturities longer than 20 years to submit, at the discretion of the 
Appropriate Supervision Office, one or more of the following:
     A written legal opinion from Qualified Counsel.
     A written opinion from a licensed CPA.
     An analysis conducted by the credit union or independent 
third party.
    In the proposal the Board articulated that the amount and type of 
information required to satisfy this requirement would be at the 
discretion of 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.\20\ The Board reiterates that 
the overall structure of the issuance and the proposed maturity of the 
Subordinated Debt Notes will dictate what information is sufficient to 
demonstrate that the proposed issuance would be considered debt and not 
equity. Therefore, in many cases an analysis by the credit union may 
not be sufficient to satisfy the requirements of the rule. As such, the 
proposal and this final rule are designed to guard against the 
assertions made by the commenters.
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    \20\ 87 FR 60326, 60329 (Oct. 5, 2022).
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    Further, in response to these two comments, the Board reiterates 
that FCUs only have the statutory authority to issue debt. As such, the 
current rule contains, in addition to the maturity restriction, several 
provisions designed to ensure issuances are debt and not equity. For 
example, the current rule requires that a Subordinated Debt Note must:
     Be in the form of a written, unconditional promise to pay 
on a specified date a sum certain in money in return for adequate 
consideration in money.
     Be properly characterized as debt in accordance with U.S. 
generally accepted accounting principles (GAAP).
     Not provide the holder thereof with any management or 
voting rights in the Issuing Credit Union.\21\
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    \21\ 12 CFR 702.404(a)(1), (4), and (b)(4).
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    In addition, each application to issue Subordinated Debt must go 
through a thorough vetting process by the Appropriate Supervision 
Office, and, if warranted, the Office of General Counsel.
    Finally, the Board notes that the cases cited by the commenters 
present different circumstances than are created under the current 
rule. For example, one commenter cited United States v. Snyder Brothers 
Company for the proposition that ``20-year debentures that were 
subordinated to all other indebtedness of the issuer and where there 
was no limitation as to payment of dividends or provision for any 
sinking fund or reserve did not constitute `indebtedness,' despite the 
intention of the issuer.'' The Board points out, however, that unlike 
the notes in the Snyder Brothers case, credit unions are required to 
repay the note at maturity and interest payments when due, unless the 
credit union is subject to certain restrictions under the NCUA's Prompt 
Corrective rules.\22\ This is in stark contrast to the following 
discussion in the Snyder Brothers case:
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    \22\ 12 CFR part 702, subparts A and B.

    Recognizing, as we must, that there is nothing to guarantee to 
the debenture holders that they can collect the face amount of the 
debentures, or even collect a past-due payment, without forcing the 
company into liquidation in the sense that it will be required to 
raise sufficient cash to pay off all its existing creditors 
including the debenture holders, and recognizing the well-known 
economic fact stated so succinctly by appellee's counsel in their 
brief that even all ordinary creditors, who have a right to share 
pari passu, rarely get the face amount of their claims, we think it 
is plain that upon the admitted facts of this record the documents 
denominated ``subordinated debentures'' do not create the kind of 
``indebtedness'' which Congress had in contemplation in enacting 
Section 163.\23\
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    \23\ United States v. Snyder Brothers Company, 367 F.2d 980, 985 
(5th Cir. 1966).

    Further, it should be noted that, in the Snyder Brothers case the 
holders of the debentures were the sole shareholders of the corporation 
who received the debentures when they transferred the assets of the 
partnership to that corporation, which they had created. While the 
Board appreciates the discussion in the Snyder Brothers case, the 
debentures and circumstances of that case are quite different from the 
Subordinated Debt Notes issued by credit unions and the circumstances 
under which they are offered.
    For the reasons set out above, the Board disagrees with the 
commenters' assertions that the proposed change would allow FCUs to 
operate outside of their statutory authority.

C. Comments Outside the Scope of the Proposed Rule

    As noted earlier in this document, 17 commenters supported the 
proposed changes but offered comments on other aspects of the rule. As 
these comments are outside the scope of this rulemaking, the Board is 
not addressing them here. Rather, the Board will retain these comments 
for use in any future proposals to amend the current rule.

III. Final Rule

    For the reasons articulated in this document and in the proposed 
rule, the Board is finalizing the proposed amendments without change.

IV. Regulatory Procedures

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency creates new or amends existing information collection 
requirements.\24\ 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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    \24\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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    This rule removes the maximum maturity of Subordinated Debt Notes 
of 20 years and replaces it with a requirement that a credit union 
seeking to issue Subordinated Debt Notes with

[[Page 18010]]

maturities longer than 20 years provide additional information as part 
of its application prescribed under new Sec.  702.408(b)(15). This 
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 did not receive any comments on the proposed PRA burden 
estimate. In accordance with the PRA, the information collection 
requirements included in this final rule have been submitted to OMB for 
approval under control number 3133-0207.

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 final rule will not have a 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 final rule affects only a small 
number of state-chartered LICUs with approved secondary capital 
applications for issuances to the U.S. Government or its subdivisions. 
This final rule extends the Regulatory Capital treatment for 
Grandfathered Secondary Capital, eliminates the maximum maturity for 
Subordinated Debt, and makes two minor clarifying changes. The final 
rule does not impose any new significant burden on credit unions and 
may ease some existing requirements. The NCUA has therefore determined 
that this final 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 final 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 \25\ 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).\26\ This final rule extends 
the Regulatory Capital treatment for Grandfathered Secondary Capital 
eliminates the maximum maturity for Subordinated Debt, and makes 
several minor clarifying changes. As such, this final rule would not 
impose any new significant burden on credit unions and may ease some 
existing requirements. In addition, based on the NCUA's PRA estimates 
(shown elsewhere in this document), the NCUA estimates that any 
additional burden will only effect two credit unions per year. 
Accordingly, the NCUA certifies that this final rule would not have a 
significant impact on a substantial number of small credit unions.
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    \25\ 5 U.S.C. 601 et seq.
    \26\ Id. at 603(a); NCUA Interpretive Ruling and Policy 
Statement 15-2.
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E. Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) (SBREFA) generally provides for congressional review 
of agency rules.\27\ A reporting requirement is triggered in instances 
where the NCUA issues a final rule as defined by Section 551 of the 
Administrative Procedure Act (APA).\28\ The NCUA does not believe this 
rule is a ``major rule'' within the meaning of the relevant sections of 
SBREFA. As required by SBREFA, the NCUA will submit this final rule to 
the Office of Management and Budget for it to determine if the final 
rule is a ``major rule'' for purposes of SBREFA. The NCUA also will 
file all appropriate Congressional reports.
---------------------------------------------------------------------------

    \27\ Id. 801-804.
    \28\ Id. 551.
---------------------------------------------------------------------------

List of Subjects in 12 CFR Part 702

    Credit unions, Reporting and recordkeeping requirements.

    By the NCUA Board on March 16, 2023.
Melane Conyers-Ausbrooks,
Secretary of the Board.

    For the reasons discussed in the preamble, the NCUA Board is 
amending 12 CFR part 702 as follows:

PART 702--CAPITAL ADEQUACY

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

    Authority: 12 U.S.C. 1757(9), 1766(a), 1784(a), 1786(e), 1790d.


0
2. In Sec.  702.401, revise paragraph (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, is governed 
by Sec.  702.414. 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.

0
3. In Sec.  702.402, revise the definitions for ``Qualified Counsel'' 
and ``Regulatory Capital'' to read as follows:


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

[[Page 18011]]

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.
* * * * *

0
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) * * *
    (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;
* * * * *

0
5. In Sec.  702.408:
0
a. Revise paragraph (b)(7);
0
b. Redesignate paragraphs (b)(14) and (15) as paragraphs (b)(15) and 
(16);
0
c. Add new paragraph (b)(14); and
0
d. Revise paragraphs (l) heading and (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 certified public accountant 
(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).
* * * * *

0
6. In Sec.  702.409, revise paragraph (b)(2) to read as follows:


Sec.  702.409  Preapproval for federally insured, state-chartered 
credit unions to issue Subordinated Debt.

* * * * *
    (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]

0
7. In Sec.  702.414, amend paragraph (c) introductory text by removing 
the phrase ``(``discounted secondary capital'' re-categorized as 
Subordinated Debt)''.

[FR Doc. 2023-05808 Filed 3-24-23; 8:45 am]
BILLING CODE 7535-01-P