11060 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

1Terms that are capitalized throughout this 

document are defined within the document or in 

the finalized regulatory text. 

2 85 FR 13892 (March 10, 2020). 

3See 61 FR 50696 (Sept. 27, 1996) (final rule); see 

also 61 FR 3788 (Feb. 2, 1996) (interim final rule); 

12 CFR 701.34. 

4Credit Union Membership Access Act of 1998, 

Public Law 105–219, sec. 301, 112 Stat. 913, 929 

(codified at 12 U.S.C. 1790d(o)(2)(C) (1998)). 

5 Id. 

6 71 FR 4234 (Jan. 26, 2006). 

7 Id. at 4236. Before 2006, a LICU was required 

to submit a copy of its secondary capital plan to the 

NCUA, but it was not required to obtain 

preapproval. 

8 12 CFR 701.34. The last substantive amendment 

to the Secondary Capital Rule was in 2010 with the 

addition of language regarding secondary capital 

received under the Community Development 

Capital Initiative of 2010. 75 FR 57843 (Sept. 23, 

2010). 

9This generally means that, when net operating 

losses exceed Retained Earnings, a LICU needs to 

first use the secondary capital funds to cover the 

excess amount. 

10While the Secondary Capital Rule requires a 

LICU to record secondary capital accounts on its 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Parts 701, 702, 709 and 741 

RIN 3133–AF08 

Subordinated Debt 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Final rule. 

SUMMARY: The NCUA Board (Board) is 

amending various parts of the NCUA’s 

regulations to permit Low-income 

Designated Credit Unions, Complex 

Credit Unions, and New Credit Unions 

to issue Subordinated Debt for purposes 

of Regulatory Capital treatment. The 

Board issued the proposed 

Subordinated Debt rule at its January 

2020 meeting. The Board is finalizing 

the rule largely as proposed, except for 

a few changes to various sections based 

on comments received. Such changes 

include amending the definition of 

Accredited Investor, providing a longer 

timeframe in which a credit union may 

issue Subordinated Debt after approval, 

reducing the required number of years 

of Pro Forma Financial Statements an 

Issuing Credit Union must provide with 

its application, clarifying the 

prohibition on Subordinated Debt 

issuances outside of the United States, 

and clarifying that the Board will 

publish a fee schedule only if it makes 

a determination to charge a fee. 

DATES: This rule is effective January 1, 

2022. 

FOR FURTHER INFORMATION CONTACT: 

Policy: Tom Fay, Director of Capital 

Markets, Office of Examination and 

Insurance or Rick Mayfield, Senior 

Capital Markets Specialist, 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, Rick Mayfield can be 

reached at (703) 518–6501, and Justin 

Anderson can be reached at (703) 

518-6540. 

SUPPLEMENTARY INFORMATION: 

I. History 

At its January 2020 meeting, the 

Board issued a proposed Subordinated 

Debt rule (the proposed rule) to permit 

Low-income Designated Credit Unions 1

(LICUs), Complex Credit Unions, and 

New Credit Unions to issue 

Subordinated Debt for purposes of 

Regulatory Capital treatment.2 This rule 

finalizes the proposed rule largely as 

proposed except for several 

amendments, which are discussed later 

in this document. The following is a 

brief history of secondary capital, Risk 

Based Capital (RBC) for credit unions, 

and the advent of alternative forms of 

capital, which ultimately resulted in the 

development of the proposed rule and 

this final rule. 

A. Secondary Capital for LICUs 

In 1996, the Board finalized § 701.34 

of the NCUA’s regulations (the 

Secondary Capital Rule) to permit 

LICUs to raise secondary capital from 

foundations and other philanthropicminded non-natural person members 

and non-members.3 The Board issued 

the Secondary Capital Rule to provide 

an additional way for a LICU to attain 

Regulatory Capital to serve two specific 

purposes: (1) Support greater lending 

and financial services in the 

communities served by the LICU; and 

(2) absorb losses to prevent the LICU 

from failing. 

In 1998, as part of the Credit Union 

Membership Access Act (CUMAA),4

Congress amended the Federal Credit 

Union Act (the FCU Act) to institute a 

system of prompt corrective action for 

federally insured credit unions based on 

a credit union’s level of Net Worth. 

Relevant to this final rule, CUMAA 

specifically defined ‘‘net worth’’ to 

include, among other things, secondary 

capital issued by a LICU, provided the 

secondary capital is uninsured and 

subordinate to all other claims against 

the LICU, including the claims of 

creditors, shareholders, and the 

National Credit Union Share Insurance 

Fund (NCUSIF).5

In 2006, the Board further amended 

§ 701.34 to require regulatory approval 

of a LICU’s secondary capital plan 

before a LICU could issue secondary 

capital.6 In the preamble to the final 

2006 rule, the Board noted that LICUs 

had sometimes used secondary capital 

to achieve goals different from those for 

which it was originally intended. It also 

highlighted a pattern of ‘‘lenient 

practices’’ by LICUs that issued 

secondary capital. These practices 

contributed to excessive net operating 

costs, high losses from loan defaults, 

and a shortfall in revenue.7

The Secondary Capital Rule 8

provides that secondary capital 

accounts must: 

• Be established as an uninsured 

secondary capital account or another 

form of non-share account; 

• Have a minimum maturity of five 

years; 

• Not be insured by the NCUSIF or 

any governmental or private entity; 

• Be subordinate to all other claims 

against the LICU, including those of 

shareholders, creditors, and the 

NCUSIF; 

• Be available to cover losses that 

exceed the LICU’s net available reserves 

and, to the extent funds are so used, a 

LICU may not restore or replenish the 

account under any circumstances.9

Further, losses must be distributed pro 

rata among all secondary capital 

accounts held by the LICU at the time 

the loss is realized; 

• Not be pledged or provided by the 

investor as security on a loan or other 

obligation with the LICU or any other 

party; 

• Be evidenced by a contract 

agreement between the investor and the 

LICU that reflects the terms and 

conditions mandated by the Secondary 

Capital Rule and any other terms and 

conditions not inconsistent with that 

rule; 

• Be accompanied by a disclosure 

and acknowledgment form as set forth 

in the appendix to the Secondary 

Capital Rule; 

• Not be repaid, including any 

interest or dividends earned thereon, if 

the Board has prohibited repayment 

thereof under § 702.204(b)(11), 

§ 702.304(b), or § 702.305(b) of the 

NCUA’s regulations because the LICU is 

classified as ‘‘Critically 

Undercapitalized’’; or, if a LICU is a 

New Credit Union (as defined under 

§ 702.2 of the NCUA’s regulations), as 

‘‘Moderately Capitalized,’’ ‘‘Marginally 

Capitalized,’’ ‘‘Minimally Capitalized,’’ 

or ‘‘Uncapitalized;’’ 

• Be recorded on the LICU’s balance 

sheet; 10

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 11061 

balance sheet as ‘‘equity accounts,’’ generally 

accepted accounting principles in the United States 

generally require financial institutions to record 

secondary capital accounts as ‘‘debt.’’ See FASB 

(Financial Accounting Standards Board), ASC 

942-405-25-3 and 25-4. The instructions to the 5300 

Call Report require all federally insured credit 

unions to report any secondary capital in the 

Liability section of the Statement of Financial 

Condition. 

11A LICU may not issue a secondary capital 

account that amortizes over its stated term. 

12See 12 CFR 701.34(d). 

13 Id. § 701.34(c)(2). 

14 80 FR 66626 (Oct. 29, 2015). The Board has 

delayed the effective date for the final RBC rule two 

times. First, in 2018, the effective date was delayed 

by one year, from January 1, 2019, to January 1, 

2020. 83 FR 55467 (Nov. 6, 2018). Second, based 

on Board action at the December 2019 Board 

meeting, the effective date was delayed two 

additional years, from January 1, 2020 to January 1, 

2022. 

15 80 FR 4340 (Jan. 27, 2015). 

16 Id. at 4384. The Board notes that when the 

agency began to consider authorizing non-LICU 

credit unions to issue instruments analogous to 

secondary capital instruments issued by LICUs, it 

used the term ‘‘supplemental capital’’ to refer to 

those instruments. In 2017, when the Board issued 

an advance notice of proposed rulemaking on this 

topic, the NCUA used the umbrella term 

‘‘alternative capital’’ to refer to both supplemental 

capital and secondary capital. In light of FCUs’ 

authority only to issue debt instruments, however, 

the Board believes it is more accurate to use the 

umbrella term ‘‘Subordinated Debt’’ to refer to both 

secondary capital and what was once referred to as 

supplemental capital. It is important to note that, 

unless the context otherwise requires, the term 

‘‘Subordinated Debt’’ refers to both types of debt 

instruments. 

17 82 FR 9691 (Feb. 8, 2017). 

18While there were slight modifications to some 

letters, the substance of each was the same. 

19 80 FR 4340 (Jan. 27, 2015). 

20 85 FR 13892 (Mar. 10, 2020). 

21 80 FR 4340 (Jan. 27, 2015). 

• Be recognized as Net Worth in 

accordance with the schedule for 

recognizing Net Worth value in 

paragraph (c)(2) of the Secondary 

Capital Rule; 

• Be closed and paid out to the 

account investor in the event of merger 

or other voluntary dissolution of a LICU, 

to the extent the secondary capital is not 

needed to cover losses at the time of the 

merger or dissolution (does not apply in 

the case where a LICU merges into 

another LICU); and 

• Only be repaid at maturity 11 except 

that, with the prior approval of the 

NCUA and provided the terms of the 

account allow for early repayment, a 

LICU may repay any portion of 

secondary capital that is not recognized 

as Net Worth.12

The Secondary Capital Rule also 

includes requirements related to 

secondary capital plan submissions and 

approvals, redemption of secondary 

capital, disclosures, and Regulatory 

Capital treatment. 

As noted previously, since the 

passage of CUMAA, the NCUA permits 

a LICU that issues secondary capital to 

include the aggregate outstanding 

principal amount of that secondary 

capital, in accordance with the schedule 

for Net Worth,13 as part of its Net Worth. 

Further, pursuant to the NCUA’s 

currently effective risk-based net worth 

requirements, the NCUA also permits a 

LICU to include such secondary capital 

in its risk-based net worth calculation. 

By contrast, a non-LICU does not have 

the statutory authority to issue 

secondary capital and, to the extent a 

non-LICU issues an instrument that is 

analogous to secondary capital, to 

include any such instruments in its Net 

Worth (or its risk-based net worth) 

calculation. 

B. Subordinated Debt for LICUs and 

Certain Non-LICUs 

1. RBC 

In October 2015, the Board finalized 

a rule to replace the current risk-based 

net worth requirement with an RBC 

requirement.14 Under the revised 

standard, the NCUA permits a LICU to 

include secondary capital in its RBC 

calculations in the same manner as it 

currently includes secondary capital in 

its risk-based net worth calculation. 

Under the proposed rule, the Board 

proposed to grant certain non-LICUs the 

authority to issue instruments in the 

form of Subordinated Debt and allow 

such credit unions to count those 

instruments in their respective RBC 

calculations. This new authority, 

however, would not permit non-LICUs 

to include Subordinated Debt in their 

Net Worth calculations. 

In the proposed RBC rule issued in 

2015,15 the Board requested stakeholder 

input on supplemental capital.16 A 

majority of commenters that addressed 

supplemental capital stated it was 

imperative that the Board consider 

allowing credit unions to issue 

additional forms of capital. The 

commenters suggested this authority 

was particularly important, as credit 

unions are at a disadvantage in the 

financial marketplace because most lack 

access to additional capital outside of 

Retained Earnings. 

While none of the commenters offered 

specific suggestions on how to 

implement supplemental capital, a few 

suggested that the Board promulgate 

broad, non-prescriptive rules to allow 

credit unions maximum flexibility in 

issuing supplemental capital. 

2. 2017 Advance Notice of Proposed 

Rulemaking 

On February 8, 2017, the Board 

published an advance notice of 

proposed rulemaking (ANPR) to solicit 

comments on alternative forms of 

capital credit unions could use to meet 

capital standards required by statute 

and regulation.17 In response, the Board 

received 756 comments. 

Of the 756 comments received, 688 

appeared to be derived from one form 

letter 18 that opposed the NCUA 

proceeding with a supplemental capital 

proposal. In addition to the form letter, 

the Board received 68 unique comments 

in response to the ANPR, most of which 

supported proposing a rule to allow 

non-LICUs to issue an alternative form 

of capital. A majority of the commenters 

in favor of the Board issuing a proposed 

rule cited compliance with the NCUA’s 

RBC rule 19 as the main reason for their 

support. Other justifications for support 

proposed by commenters included 

credit union growth, protection from 

economic downturns, and providing 

services demanded by members. 

In general, the comments lacked 

specificity, and very few commenters 

addressed all or even most of the 

questions posed by the Board. 

Nevertheless, the comments covered a 

wide range of topics and offered varying 

levels of support for provisions 

suggested in the ANPR. As noted in the 

proposed rule, the Board considered all 

comments received in response to the 

ANPR during the Subordinated Debt 

rulemaking process. 

II. Proposed Rule 

At its January 2020 meeting, the 

Board issued the proposed rule to 

permit LICUs, Complex Credit Unions, 

and New Credit Unions to issue 

Subordinated Debt for purposes of 

Regulatory Capital treatment.20

Specifically, the proposed rule included 

a new subpart in the NCUA’s final RBC 

rule 21 to address the requirements for, 

and Regulatory Capital treatment of, 

Subordinated Debt. The proposed 

subpart also contained requirements 

related to credit union eligibility to 

issue Subordinated Debt, applying for 

NCUA authority to issue Subordinated 

Debt, disclosures, securities laws, the 

terms of a Subordinated Debt Note, and 

prepayments. 

The proposed rule also provided for 

the grandfathering of any secondary 

capital issued before the effective date 

of a final Subordinated Debt rule 

(Grandfathered Secondary Capital) and 

preserved the Regulatory Capital 

treatment of Grandfathered Secondary 

Capital for up to 20 years after the 

effective date of a final Subordinated 

11062 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

22 Grandfathered Secondary Capital will be 

considered as Regulatory Capital in accordance 

with the approved application, terms of the note, 

and the applicable schedule for recognizing 

secondary capital as Net Worth, provided that no 

such term may exceed 20 years. 

23 80 FR 4340 (Jan. 27, 2015). 

24While there were slight modifications to some 

letters, the substance of each letter was the same. 25 85 FR 71817 (Nov. 12, 2020). 26 12 U.S.C. 1757(9). 

Debt rule.22 Under the proposed rule, 

Grandfathered Secondary Capital would 

generally remain subject to the 

requirements in the Secondary Capital 

Rule. For ease of reference, the 

requirements in the Secondary Capital 

Rule would be moved from their current 

location to a section in the new 

proposed subpart. 

Conversely, any issuances of 

secondary capital not completed by the 

effective date of this subpart would be 

subject to the requirements applicable to 

Subordinated Debt discussed elsewhere 

in this subpart. This change would not 

impact a LICU’s ability to include such 

instruments in its Net Worth. 

In addition to these changes, the 

proposed rule included additions and 

amendments to other parts and sections 

of the NCUA’s regulations. Specifically, 

the proposed rule included: 

• A new section that addresses limits 

on loans to other credit unions; 

• An expansion of § 701.38 (‘‘the 

borrowing rule’’) to clarify that Federal 

credit unions (FCUs) can borrow from 

any source; 

• Revisions to the RBC rule 23 and the 

payout priorities in the NCUA’s 

involuntary liquidation rule (12 CFR 

part 709) to account for Subordinated 

Debt and Grandfathered Secondary 

Capital; and 

• Cohering changes to part 741 to 

account for other changes that apply to 

federally insured, state-chartered credit 

unions (FISCUs). 

The proposed rule provided for a 120- 

day comment period, which ended in 

July 2020. 

III. Final Rule and Public Comments on 

Proposed Rule 

The NCUA received 171 comment 

letters in response to the proposed rule, 

which included letters from credit 

union trade associations, credit unions, 

state and regional credit union leagues, 

bank trade organizations, corporate 

credit unions, banks, law firms, 

securities brokers, and individuals. Of 

the 171 comment letters, 125 appear to 

have been generated from one form 

letter opposing the rule.24

Nearly all the remaining commenters 

supported the proposed rule, but did 

offer at least one suggested change. 

Supporting commenters generally 

reiterated the need for Subordinated 

Debt and the NCUA’s legal authority to 

authorize it. These commenters, 

however, varied widely on changes 

requested in a final Subordinated Debt 

Rule. 

The Board notes that, in October 

2020, the Board finalized a rule related 

to corporate credit unions 25 in which 

the Board indicated it would finalize a 

change related to a corporate credit 

union’s purchase of Subordinated Debt 

in a final Subordinated Debt rule. While 

it is the Board’s intent to finalize the 

change to the corporate credit union 

rule, it thought it best to bring that item 

separately, but in the near future. 

A. Comments Opposing Proposed Rule 

As noted previously, all of the form 

letters and a few unique letters opposed 

the proposed rule in its entirety. In 

summary, these comments contained 

three general arguments in opposition to 

the proposed rule. 

First, these commenters stated that 

allowing credit unions to issue 

Subordinated Debt for Regulatory 

Capital purposes ‘‘undermines the 

foundation of credit unions’ tax exempt 

status.’’ In support of this assertion, 

commenters stated that ‘‘credit unions 

are afforded tax-exempt status in part 

because they lack access to capital 

markets to raise equity. If this rule is 

adopted, that constraint will be 

obliterated, giving credit unions fuel to 

grow well beyond their mission of 

serving people of small means.’’ These 

commenters also stated that the 

proposed rule was concerning in 

‘‘context of NCUA’s methodical work to 

knock down the other pillars of the 

credit union tax exemption compact, 

including the field of membership 

expansion, the low-income designation 

expansion, and the proposal to speed 

credit unions’ purchases of banks.’’ 

Second, these commenters generally 

stated that the proposed rule ‘‘usurps 

Congressional authority by approving 

the use of investor-raised funds to 

satisfy regulatory capital requirements, 

an area Congress clearly restricted to 

retained earnings in the Federal Credit 

Union Act.’’ The commenters did not 

offer further support for this statement. 

Finally, these commenters stated that 

the proposed rule would pose 

significant risk to the NCUSIF. These 

commenters stated that the NCUA has 

acknowledged that secondary capital 

has contributed to rapid growth and 

higher failure rates in credit unions that 

issue secondary capital. The 

commenters went on to state that 

expanding the authority to issue 

Subordinated Debt to the largest credit 

unions will pose significant risk to the 

NCUSIF and constitutes irresponsible 

behavior by the NCUA. 

The Board disagrees with these 

commenters on all three assertions. 

First, as articulated in the proposed rule 

and reproduced later in this document, 

FCUs have the legal authority to issue 

Subordinated Debt, and the Board has 

the authority to include such 

instruments in the RBC calculation. 

With respect to the tax exemption 

argument, the Board reiterates its 

statements in the proposed rule that, 

under the FCU Act, FCUs are permitted 

to borrow from any source.26 The Board 

was meticulous in crafting this final rule 

to ensure Subordinated Debt 

instruments remain squarely in the form 

of borrowings, as permitted by the FCU 

Act. The Board, therefore, has no reason 

to believe that the continuation of an 

already permissible activity would in 

any way jeopardize the tax-exempt 

status of FCUs. Further, the Board will 

require a FISCU to issue an instrument 

that meets the same requirements as an 

instrument issued by an FCU if the 

FISCU wants such instrument to be 

included in its RBC calculation. This is 

described more fully later in this 

document. The Board was made this 

intentional decision in part to help 

preserve FISCUs’ tax-exempt status 

which, as discussed below, differs from 

that of FCUs. 

Finally, the Board has included many 

safeguards in the final rule to ensure 

that Subordinated Debt acts as a buffer 

to reduce risk to the NCUSIF rather than 

increase risk, as asserted by the 

aforementioned commenters. The Board 

is confident that the framework of the 

final rule will help protect the NCUSIF. 

B. Comments Supporting, But 

Suggesting Changes to, the Proposed 

Rule 

The comments described in this 

section support the proposed rule, but 

offered suggested changes and 

amendments. In each section the Board 

briefly summarizes and responds to 

comments, with an indication of 

whether the Board has changed the final 

rule or has finalized a section as 

proposed. The Board notes that the 

following content is organized by the 

number of commenters that addressed a 

particular topic and the impact of a 

particular section on the rest of the rule. 

The Board believes this organization 

will help readers ascertain which topics 

were the most commented-on and 

complex. While the Board chose this 

organization for ease of use, the Board 

notes that it evaluates all comments and 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 11063 

27 15 U.S.C. 77b. 

topics equally, regardless of number or 

the depth of the comments. 

1. Subordinated Debt Is a Security 

The proposed rule included a 

comprehensive description of 

Subordinated Debt as a security and 

described general securities law that 

may apply to Subordinated Debt issued 

by a credit union. This section of the 

proposed rule stated that the NCUA 

continues to believe any Subordinated 

Debt Note would be deemed a security 

for purposes of Federal and state 

securities law. This section went on to 

provide the definition of a ‘‘security’’ 

under the Securities Act of 1933 and 

interpretations of such term by various 

courts, including the U.S. Supreme 

Court. 

Twelve commenters disagreed with 

the NCUA’s assertion that all 

Subordinated Debt issued under the 

proposed rule would be a security for 

purposes of Federal and state securities 

laws. The majority of these commenters 

stated that such a classification would 

result in an overly complex and 

expensive set of requirements, including 

the preparation of an Offering Document 

and the retention of securities counsel, 

that would make many small issuances 

of Subordinated Debt cost-prohibitive 

for LICUs. 

One commenter stated that 

‘‘currently, the issuance of secondary 

capital is largely accomplished through 

what is best described as bilaterally 

negotiated lending transactions. The 

NCUA has not suggested that this 

practice would be discontinued in the 

case of subordinated debt, and it is 

reasonable to believe that many market 

offerings would continue to be 

conducted in this way.’’ This 

commenter went on to state that, 

because of the use of these bilateral-type 

agreements, the NCUA should refrain 

from implementing a blanket approach 

to securities law compliance. 

Other commenters believed a blanket 

classification of Subordinated Debt as a 

security would negatively impact LICUs 

and small issuances. Further, many of 

these commenters urged the NCUA to 

consider a more flexible approach that 

follows the exemptions provided for in 

the Security and Exchange 

Commission’s (SEC’s) rules and the 

Office of the Comptroller of the 

Currency’s (OCC’s) subordinated debt 

regulation. Specifically, one commenter 

stated that the proposed rule would 

require an Issuing Credit Union to 

prepare and deliver an Offering 

Document to potential investors ‘‘even 

though there is no SEC-mandated 

disclosure requirements for offerings of 

securities pursuant to the section 3(a)(5) 

exemption, and there generally are no 

SEC-mandated disclosure requirements 

for offerings of securities pursuant to the 

Rule 506 [17 CFR 230.506] private 

placement exemption as long as all 

purchasers in the offering are 

‘accredited investors.’ ’’ This commenter 

went on to state that there ‘‘already 

exists a U.S. securities law framework 

which applies to such exempt 

issuances, and that framework stipulates 

that registration and disclosure 

requirements are not necessary in these 

cases. It is unnecessary, improper, and 

unduly burdensome for NCUA to 

impose such requirements on exempt 

credit union issuers when U.S. 

securities law does not impose these 

requirements.’’ 

In response to the aforementioned 

comments, the Board first reiterates that 

section 2(1) of the Securities Act 

broadly defines the term ‘‘security’’ to 

include, among other things, any: 

• Stock; 

• Note; 

• Bond; 

• Debenture; 

• Evidence of indebtedness; 

• Investment contract; or 

• Interest or instrument commonly 

known as a security.27

Further, the U.S. Supreme Court has 

repeatedly emphasized that the 

definition of ‘‘security’’ is quite broad. 

The U.S. Supreme Court, in a variety of 

cases analyzing the boundaries of the 

definition, has stressed that the 

substantive characteristics of the 

instrument in question and the 

circumstances surrounding its issuance, 

rather than the mere name or title of the 

instrument, are of primary significance 

in determining whether the instrument, 

contract, or arrangement in question 

will be deemed a ‘‘security.’’ While 

lower Federal courts and some state 

courts have sometimes taken a narrower 

view than the Supreme Court, common 

factors the courts generally consider in 

their analysis (particularly in the 

context of a debt instrument, contract or 

arrangement) include: 

• The terms of the offer; 

• The characteristics of the economic 

inducement being offered to the 

potential counterparty, and whether the 

characteristics are consistent with a loan 

or typical extension of credit, or such 

that the counterparty would anticipate a 

potential return on investment in 

addition to repayment of the obligation 

and any stated interest; 

• The plan of distribution; 

• How an instrument is marketed and 

to whom it is marketed, and whether the 

potential counterparties are traditional 

lenders/providers of credit or investors 

who would anticipate a potential return 

on investment in addition to repayment 

of the obligation and any stated interest; 

and 

• The ‘‘family resemblance’’ of the 

instrument to other instruments or 

arrangements that have been found to 

fall within the definition of a ‘‘security,’’ 

rather than having characteristics more 

akin to a loan or typical extension of 

credit. 

As the preceding information 

demonstrates, the definition of a 

security is quite broad and 

encompassing. As such, the Board again 

acknowledges that Subordinated Debt 

Notes issued under the Subordinated 

Debt rule, as finalized herein, fit within 

the definition of a security. Inclusion in 

such definition may subject issuances to 

various Federal and state laws and 

regulations. 

The Board’s statement in both the 

proposed rule and this final rule that 

Subordinated Debt Notes would be 

securities is an acknowledgment of such 

fact and has no bearing on the treatment 

of such notes by the SEC or state 

regulators. Rather, after consultation 

with outside securities law counsel, the 

Board recognizes that Subordinated 

Debt Notes issued under this final rule 

are likely (to some degree) to be subject 

to the multitude of Federal and state 

securities laws—particularly those 

related to disclosures and anti-fraud. 

The Board believes it is prudent and 

responsible to adopt a framework, as 

discussed in the proposed rule, to aid 

Issuing Credit Unions in providing 

Offering Documents to investors. As a 

prudential regulator, it is incumbent 

upon the NCUA to include in a 

rulemaking of this complexity 

provisions to help ensure credit unions 

comply with regulatory or statutory 

requirements, and to help credit unions 

avoid legal challenges from investors. 

The Board reiterates that for all 

Issuing Credit Unions, the issuance of 

Subordinated Debt may be a new 

activity. While LICUs have been issuing 

secondary capital for several decades, 

this will be the first time the NCUA has 

permitted LICUs to issue instruments to 

qualifying natural persons. Because this 

is a new and complex activity for all 

Issuing Credit Unions, in consultation 

with outside counsel, the Board views 

the Offering Document process to as 

helping Issuing Credit Unions navigate 

complex disclosures and anti-fraud 

laws. However, the Board notes that the 

Offering Document is independent of 

and, in some cases, additive to any 

requirements imposed by applicable 

securities laws. The Board reiterates its 

expectation that credit unions 

11064 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

28 12 CFR 16.5 

29 Id. 30 17 CFR 240.10b–5. 

contemplating an issuance of 

Subordinated Debt Notes retain 

professional advisors experienced in 

securities law disclosure matters to help 

them prepare related Offering 

Documents. In short, the Board 

continues to believe that Subordinated 

Debt Notes issued under this final rule 

would be securities. Therefore, the 

Board is taking a prudential stance by 

finalizing, as proposed, the various 

provisions related to securities law that 

appeared in the proposed rule. The 

Board believes that, in the infancy of 

Subordinated Debt issuances, such 

provisions are transparent and will help 

Issuing Credit Unions navigate and 

properly issue Subordinated Debt Notes 

(in consultation with counsel). The 

Board further notes that the disclosures 

required by this final rule are akin to 

those most investors are accustomed to 

seeing in the marketplace, which may 

make issuances of Subordinated Debt 

Notes less costly for some Issuing Credit 

Unions. 

a. Exemptions for Certain Subordinated 

Debt Issuances 

In addition to the aforementioned 

comments, several commenters stated 

that the OCC’s requirements for national 

banks offering subordinated debt are 

less restrictive than what the Board 

proposed for credit unions. Commenters 

noted that the OCC requires banks that 

issue subordinated debt to comply with 

§ 16.5 of the Federal Deposit Insurance 

Corporation’s (FDIC’s) Securities 

Offering Disclosure Rule, which 

contains several exemptions to the 

prospectus delivery requirement, 

including exemptions for nonpublic 

offerings and small issuances made in 

conformance with applicable SEC 

rules.28 To align with regulations issued 

by the OCC and FDIC, these commenters 

stated that the NCUA should consider a 

more flexible approach. 

The Board is aware that the FDIC’s 

Securities Offering Disclosure Rule 29

contains exemptions that were not 

included in the proposed rule and are 

not included in this final rule. First, 

related to the preceding section of this 

document, the Board notes that while 

the OCC and FDIC provide exemptions 

for certain issuances, the OCC and FDIC 

still deem such issuances to be 

securities. Rather, the OCC and FDIC 

have provided exemptions from 

registration and delivery of an Offering 

Document for issuances of securities 

that satisfy certain requirements. 

Second, the Board notes that the OCC 

has supervised—and banks have 

engaged in—subordinated debt 

transactions for many years. As noted 

previously, this final rule will be, to 

some degree, a new endeavor for many 

Issuing Credit Unions. The Board 

believes it is both prudent and 

necessary to maintain the proposed 

guardrails to help Issuing Credit Unions 

comply with applicable securities laws, 

particularly those related to anti-fraud. 

As the NCUA and credit unions move 

forward with this final rule, the Board 

will continue to evaluate the rule and 

may undertake future rulemakings to 

provide exemptions where they are both 

warranted and prudent for Issuing 

Credit Unions. 

2. Offering Document 

In addition to comments related to the 

applicability of securities laws and 

exemptions from submitting an Offering 

Document, as discussed previously, 

several commenters offered specific 

comments on the requirement that an 

Issuing Credit Union create an Offering 

Document for each issuance of 

Subordinated Debt. Generally, these 

commenters opposed the Offering 

Document process, or at least requested 

an exemption or streamlined process for 

certain issuances. 

One commenter stated that the NCUA 

should include exemptions for certain 

issuances of Subordinated Debt, similar 

to the OCC and FDIC. This commenter 

contended that such exemptions would 

lower regulatory burden on smaller 

institutions and bring the NCUA’s 

regulation more in line with the OCC’s, 

FDIC’s, and SEC’s disclosure 

requirements. This commenter went on 

to state that almost every current 

issuance of secondary capital would be 

exempt from the Offering Document 

process under the OCC’s Subordinated 

Debt regulation. 

Another commenter stated that ‘‘the 

NCUA’s documentation requirement 

goes beyond that of the OCC, which 

permits a bank seeking to issue 

securities to tailor its approach to the 

relevant securities registration 

exemption—and associated market 

practice—that meets its needs.’’ This 

commenter went on to state that ‘‘the 

NCUA’s requirement could result in 

credit unions having higher burdens— 

and less transaction flexibility—than 

their community bank counterparts.’’ 

Finally, this commenter argued that the 

NCUA’s requirements would be similar 

to those imposed by the SEC on public 

offerings, which, in the commenter’s 

view, would hinder the credit union 

industry, which would largely be 

engaging in small, private issuances. 

Another commenter suggested that 

instead of the NCUA’s proposed 

approach to Offering Documents, the 

NCUA should require a potential credit 

union issuer—as part of its initial 

application to issue Subordinated 

Debt—to explain how its approach to 

due diligence, disclosure, and securities 

law considerations is reasonable given 

the specifics of an issuance. In support, 

this commenter stated that this 

approach would provide flexibility 

while accounting for the varying types 

of issuances and varying degrees of 

investor sophistication. 

Another commenter suggested the 

Board detach the Offering Document 

from the application process, and 

instead make approval contingent on 

the inclusion of an offering circular to 

comply with 17 CFR 240.10b–5 and 

other disclosures the NCUA deems 

appropriate. This commenter stated that 

this would allow a credit union to defer 

the legal costs associated with preparing 

an Offering Document until the credit 

union was ready to execute its 

Subordinated Debt strategy. 

Finally, one commenter requested 

that the NCUA explicitly require issuers 

to disclose all pending legal or other 

items that could have a negative impact 

on the credit union’s capital, income, or 

operating performance. This commenter 

stated that such information was 

necessary for an investor to make a wellinformed decision. 

For the reasons articulated in the 

proposed rule and those discussed 

previously, the Board is finalizing the 

sections relating to the Offering 

Document as proposed. In addition to 

the previous discussion related to 

Subordinated Debt as a security, the 

Board continues to believe that a robust 

Offering Document is prudent for credit 

unions that issue Subordinated Debt. 

As noted in the proposed rule, the 

Offering Document is designed to 

provide investors with disclosures that 

provide the information they need to 

make an informed decision on 

purchasing Subordinated Debt. Further, 

the Board modeled the Offering 

Document from disclosures common in 

the marketplace for this type of 

instrument. Because Subordinated Debt 

is a security and thus subject to the 

broad antifraud provisions of the 

Securities Exchange Act, as codified in 

the SEC’s regulations,30 the Board 

intends the Offering Document to be an 

aid for credit unions and an extra level 

of protection for investors. 

In response to commenters seeking an 

exemption for certain types of 

Subordinated Debt transactions, the 

Board may consider such actions in 

future rulemakings. However, as noted 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 11065 

31 12 CFR 701.34(b)(2)). 

previously, because this is a new 

endeavor for many Complex and New 

Credit unions and this is the first time 

LICUs will be permitted to issue 

Subordinated Debt to natural persons, 

the Board believes it is important to take 

a measured approach to the issuance of 

these instruments. The Board believes a 

‘‘walk before you run’’ approach in this 

area is both prudent and necessary. 

Finally, the Board believes that third 

parties may produce Offering Document 

templates to help credit unions issue 

Subordinated Debt more efficiently, 

while still complying with this rule and 

applicable securities laws. The creation 

of such templates may help defray some 

of the cost for Issuing Credit Unions. 

The Board encourages such 

collaboration in the industry, provided 

it is compliant with the final rule and 

all applicable securities laws. The Board 

notes, however, that the use of any 

template Offering Document must be 

customized to a credit union’s specific 

issuance and accurately disclose the 

specific aspects that are unique to the 

Issuing Credit Union. 

For the reasons discussed above, the 

Board is finalizing the Offering 

Document, and sections related thereto, 

as proposed. 

3. Preapproval To Issue Subordinated 

Debt 

The proposed rule required that 

eligible credit unions submit an 

application and receive written 

preapproval from the NCUA before 

issuing Subordinated Debt. The 

proposed application process consisted 

of an eligible credit union providing the 

Appropriate Supervision Office 

information on 15 topics as part of the 

initial application. In addition, the 

Board proposed to amend the NCUA’s 

review time of such application from 45 

days with automatic approval (as in the 

Secondary Capital Rule) to 60 days, 

with no automatic approval. The Board 

also proposed to expire any approval 

granted under the rule one-year from the 

date of such approval. 

Most of the commenters that 

supported the proposal addressed at 

least some aspect of the proposed 

application process. The commenters 

generally focused on: 

• Reducing the complexity of the 

application process; 

• The timing for NCUA approval of 

an application; 

• The requirement to issue 

Subordinated Debt within one-year from 

the approval of an application; 

• Subordinated Debt Note 

restrictions; and 

• The requirement to provide at least 

five years of Pro Forma Financial 

Statements. 

a. Application Requirements 

Approximately 13 commenters either 

stated that the preapproval requirements 

to issue Subordinated Debt were too 

burdensome or requested that the NCUA 

streamline the process. While some 

commenters appreciated the clarity in 

the proposed preapproval requirements, 

this subset of commenters felt that the 

preapproval requirements were too 

cumbersome and would discourage 

many credit unions from issuing 

Subordinated Debt. 

Some commenters stated that the 

preapproval process should not be a 

one-size-fits-all approach, but should 

reflect the complexity of the proposed 

issuance. Several of these commenters 

stated that the NCUA should retain its 

current ‘‘Secondary Capital Plan’’ 

requirements. In addition, two 

commenters stated that if the NCUA 

retains the proposed preapproval 

requirements, the final rule should 

provide for a streamlined process for 

subsequent preapproval requests from 

previously approved credit unions. 

As stated in the proposed rule, the 

Board remains dedicated to a 

requirement for an eligible credit union 

to obtain written preapproval before 

issuing Subordinated Debt, as it views 

this step as an important prudential 

safeguard. The Board believes a 

preapproval process is part of a credit 

union’s sound management plan, and 

will help the NCUA ensure that a 

planned issuance of Subordinated Debt 

is structured in such a manner as to 

appropriately protect the Issuing Credit 

Union and the NCUSIF. 

While the Board recognizes the many 

potential benefits that an issuance of 

Subordinated Debt Notes may confer on 

an Issuing Credit Union, it also 

appreciates the complexities and risks 

of such issuance. The decision to offer 

and sell Subordinated Debt Notes 

should be made only after careful 

consideration, preparation, and 

diligence by the Issuing Credit Union, 

including seeking professional advice as 

warranted. For these reasons, the Board 

is retaining this important prudential 

safeguard and will adopt the 

preapproval requirements as proposed. 

b. NCUA Review Time of Application 

As noted previously, the proposed 

rule increased the review time of an 

initial application to 60 days from the 

Secondary Capital Rule’s period of 45 

days.31 In addition, the proposed rule 

removed the automatic approval that 

exists in the Secondary Capital Rule if 

the NCUA fails to respond before the 

expiration of the 45-day period. 

Approximately 13 commenters opposed 

these proposed changes. 

Generally, these commenters stated 

that a longer approval process with no 

automatic approval would impose 

unnecessary burdens on credit unions 

seeking to issue Subordinated Debt. 

These commenters urged the NCUA to 

retain the approval timing and structure 

in the Secondary Capital Rule. One 

commenter stated that the NCUA should 

concurrently review a credit union’s 

application and Offering Document, 

asserting that consecutive rather than 

concurrent reviews could place a credit 

union at a competitive disadvantage and 

frustrate a credit union’s efforts to issue 

Subordinated Debt. Further, this 

commenter stated that an overly long 

review process could result in ‘‘stale’’ 

data, which may not be useful to the 

NCUA or investors. 

As stated in the proposed rule, the 

Board believes the expanded 

requirements for initial applications are 

broader than the Secondary Capital Rule 

requirements and that the enhanced 

description of diligence expectations 

will require a more thorough review by 

the Appropriate Supervision Office. 

While the Board anticipates that the 

clear, transparent structure of the 

application requirements will lead to 

increased efficiency from both credit 

unions and the agency, the Board 

believes the extra time is warranted to 

ensure an application is sufficient for an 

Appropriate Supervision Office to make 

a well-informed decision. Further, the 

Board notes that the complexity of a 

Subordinated Debt issuance will drive 

both the veracity of a credit union’s 

application and the NCUA’s review 

time. As such, the Board anticipates that 

the increased time for review will have 

little impact on most smaller, simple 

issuances. Therefore, the Board is 

retaining, as proposed, the 60-day 

timeframe for NCUA review of 

applications. 

c. Expiration of Authority 

The proposed rule included a 

provision that would require the 

expiration of an Issuing Credit Union’s 

authority to issue Subordinated Debt 

Notes one year from the later of: 

• The date the Issuing Credit Union 

received NCUA approval of its initial 

application (if the proposed offering is 

to be made solely to Entity Accredited 

Investors); or 

• The ‘‘approved for use’’ date of the 

applicable Offering Document (if the 

11066 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

32 Id. 

proposed offering will include any 

Natural Person Accredited Investors). 

The Board included a question in this 

section of the proposed rule preamble 

asking if a one-year expiration would 

negatively impact Issuing Credit 

Unions. Approximately 16 commenters 

responded to this question and 

disagreed with the proposed 

requirement that a credit union 

complete a Subordinated Debt issuance 

within one year from the date of 

receiving NCUA approval. Most of these 

commenters stated that one year is an 

arbitrary deadline that may force a 

credit union to make a rushed decision 

or not be able to adequately account for 

the complexities necessary to execute a 

beneficial offering. Most of the 

commenters sought an extension of the 

one-year period, rather than an outright 

abolishment of it. 

In addition, two commenters stated 

that the NCUA could use the quarterly 

regulatory reporting to monitor credit 

unions with Subordinated Debt 

authority and determine if there had 

been changes in a credit union’s 

condition that would require a 

revocation of the NCUA’s approval. 

These commenters stated that such an 

approach would account for material 

changes in a credit union’s condition 

without subjecting all credit unions to 

an arbitrary deadline. 

The Board has considered these 

comments and will increase the 

expiration period to two years in the 

final rule. The Board understands that 

business and/or economic conditions 

can change rapidly, as has occurred 

during the global pandemic of 2020, and 

that a credit union may need a longer 

period to meet its strategic goals using 

Subordinated Debt. The Board believes 

this change in the final rule will provide 

credit unions with a longer issuance 

window and increased flexibility to 

issue Subordinated Debt. After thorough 

consideration, the Board has determined 

that a two-year expiration period strikes 

an appropriate balance between the 

competing concerns the Board noted in 

the proposed rule: ensuring that an 

Issuing Credit Union does not offer and 

sell Subordinated Debt Notes following 

a material change in the information on 

which the NCUA relied in approving 

the offer and sale of that Issuing Credit 

Union’s Subordinated Debt Notes, and 

not unduly hindering the marketability 

of Subordinated Debt Notes. 

In addition to expanding the 

expiration period, the Board is 

retaining, as proposed, a provision that 

allows an Issuing Credit Union to file a 

written request for one or more 

extensions of the two-year limit with the 

Appropriate Supervision Office, 

provided the request is filed at least 30 

calendar days before the expiration of 

authority. The Board believes 

finalization of this provision, coupled 

with the expiration extension, will 

provide Issuing Credit Unions sufficient 

time to complete a Subordinated Debt 

issuance. 

The Board notes, however, that in the 

event an Issuing Credit Union’s 

circumstances materially change after 

the NCUA has approved an initial 

application but before the closing of the 

relevant offer and sale of Subordinated 

Debt Notes, the final rule requires an 

Issuing Credit Union to submit an 

amended application before it continues 

its Subordinated Debt Notes offering. 

The Board believe this provision is 

necessary to account for material 

changes in an Issuing Credit Union’s 

conditions that may occur between 

approval and the final sale of 

Subordinated Debt. 

d. Pro Forma Financial Statements 

The proposed rule included an 

extension of the time horizon of the Pro 

Forma Financial Statements to five 

years compared to the Secondary 

Capital Rule’s requirement of two 

years.32 The Board requested comment 

on this extension and its impact on 

Issuing Credit Unions. Approximately 

five commenters addressed the 

proposed requirement that a credit 

union submit at least five years of Pro 

Forma Financial Statements with its 

application. Three of these commenters 

disagreed with the proposed increase 

from two to five years. One commenter 

stated that the NCUA should request Pro 

Forma Financial Statements based on 

the complexity of a proposed 

transaction rather than implementing a 

one-size-fits-all approach. Another 

commenter believed that two years of 

data was sufficient, as such data is 

mainly for the benefit of an investor. 

This commenter stated that an investor 

could request additional years of Pro 

Forma Financial Statements if needed. 

Two commenters agreed with the 

proposed increase and sought additional 

information as part of the application 

and disclosure process. One commenter 

agreed with the breadth of the required 

pro forma data but suggested that the 

NCUA should also require credit unions 

to include tables that reflect actual 

results for the prior three-year period 

and a detailed narrative on how the 

issuer intends to secure the level of 

earnings presented in its Pro Forma 

Financial Statement. This commenter 

went on to suggest that such additional 

data should include a modest level of 

sensitivity analysis indicating likely 

performance under stressed conditions. 

The Board has considered these 

comments and is reducing the minimum 

number of years for the Pro Forma 

Financial Statement requirement as part 

of the initial application from five years 

to two years for the final rule. The Board 

believes that an extended Pro Forma 

Financial Statement analysis of five 

years, which aligns with the minimum 

maturity of a Subordinated Debt Note, 

may provide useful information. 

However, the Board recognizes that the 

veracity of the analysis is equally 

important. Further, the quality of the 

assumptions and range of plausible 

scenarios used in the projections are as 

much a priority—and perhaps superior 

to—the number of years a credit union 

applied to those assumptions and 

scenarios. As such, the Board believes a 

reduction in the number of years from 

the proposed five to two is appropriate 

and will provide, in most cases, the 

necessary information for an 

Appropriate Supervision Office to 

render a decision on an initial 

application. The Board notes, however, 

that included in both the proposed rule 

and this final rule is a provision that 

permits an Appropriate Supervision 

Office to request additional information, 

such as additional years of Pro Forma 

Financial Statements, to support a credit 

union’s application. 

e. Filing Fees 

Five commenters opposed any filing 

fees associated with the issuance of 

Subordinated Debt. These commenters 

generally stated that such fees may 

make such issuance cost prohibitive and 

overly burdensome, particularly in light 

of the other requirements in the 

proposed rule. 

In response, the Board notes that both 

the proposed rule and this final rule do 

not require a filing fee, but do reserve 

the right of the Board to charge such a 

fee if warranted. The Board believes it 

is important to retain this flexibility to 

ensure that, if needed, the Board can 

assess an appropriate fee on applicants 

to cover the NCUA’s cost of reviewing 

and processing such application. The 

Board notes that it would not impose a 

fee without a sufficient justification and 

may provide exceptions for smaller or 

low-income credit unions. Therefore, 

the Board is retaining this provision as 

proposed. However, the Board is 

clarifying in this final rule that the 

Board will publish a fee schedule on the 

NCUA’s website only if the Board 

institutes a fee in the future. 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 11067 

33 17 CFR 230.501(a). 34 85 FR 64234 (Oct. 9, 2020). 

4. Investors 

In the proposed rule, the Board 

limited the investors that could 

purchase Subordinated Debt to only 

Accredited Investors as defined by the 

SEC,33 except that credit union 

‘‘insiders’’ were specifically prohibited 

from purchasing or holding 

Subordinated Debt. Further, the 

proposed rule bifurcated the category of 

Accredited Investors into Natural 

Person Accredited Investors and Entity 

Accredited Investors. Finally, the 

proposed rule limited the permissible 

investor base to only U.S. investors. 

Eight commenters addressed the issue 

of investors. The majority of these 

commenters sought additional 

flexibility in determining who may 

invest in Subordinated Debt. However, 

three commenters sought additional 

limitations on the type of investors or 

solicitation thereof. 

Two commenters stated that 

permissible investors should not be 

limited to only U.S. investors. These 

commenters believed this would unduly 

restrain credit unions from conducting 

beneficial offerings of Subordinated 

Debt. Two other commenters, for similar 

reasons as the preceding commenters, 

requested that the NCUA allow 

permissible investors to include those 

other than Accredited Investors. Finally, 

one commenter requested the NCUA 

remove the limit on the number of 

permissible investors. This commenter 

felt any limit on the number of investors 

could limit a credit union’s ability to 

conduct an issuance that it determines 

to be in its best interest. 

Differing from the aforementioned 

commenters, three commenters sought 

additional limitations on the 

permissible investors or the solicitation 

thereof. Two commenters requested that 

the NCUA prohibit any federally 

insured credit union from investing in 

the Subordinated Debt of other credit 

unions. These commenters believed this 

prohibition would remove risk from the 

credit union system and offer a higher 

degree of protection for the NCUSIF. 

The Board notes that it discusses these 

comments in the section of this 

document related to FCUs being both an 

issuer and investor of Subordinated 

Debt. Finally, one commenter believed 

that credit unions should be prohibited 

from soliciting or offering Subordinated 

Debt at credit union branches. This 

commenter stated that this practice 

could introduce unnecessary reputation 

risk to credit unions that solicit or offer 

Subordinated Debt to unsophisticated 

members. 

The Board is finalizing the sections on 

Investors as proposed, with one minor 

change. As noted in the preamble to the 

proposed rule, at the time, the SEC had 

proposed amendments to the definition 

of ‘‘Accredited Investor.’’ The SEC has 

now finalized these amendments.34

These changes, which are effective 

December 8, 2020, expand the definition 

of ‘‘Accredited Investor’’ by adding 

several new categories of natural 

persons or entities the SEC considers 

Accredited Investors. The Board is 

adopting these changes to the definition 

of ‘‘Accredited Investor’’ by modifying 

the definitions of Entity and Natural 

Person Accredited Investor in this final 

rule. The proposed rule enumerated 

specific paragraphs of 17 CFR 

230.501(a) that the NCUA would 

consider either Natural Person 

Accredited Investors or Entity Investors. 

To encompass the recent change by the 

SEC and future changes by the SEC, the 

Board is removing the specific citation 

references to 17 CFR 230.501(a). This is 

largely a technical change and is not 

intended to change the substantive 

definition of Entity or Natural Person 

Accredited Investors. 

As noted previously, several 

commenters sought additional 

flexibilities for investors or the removal 

of investor limits completely. The Board 

does not believe it is prudent to remove 

the limitations on investors, as such 

limits were designed to protect investors 

and credit unions. As discussed in the 

proposed rule, disclosures are largely 

based on the sophistication of the 

investor. Therefore, the Board opted to 

limit investors to those that meet the 

SEC’s definition of Accredited Investor. 

The Board believes this strikes an 

appropriate balance between providing 

credit unions with a wide investor base 

and helping credit unions avoid 

additional risks by offering 

Subordinated Debt to less-sophisticated 

investors. 

Further, in response to the commenter 

that sought the ability to offer 

Subordinated Debt to non-U.S. citizens, 

the Board, as noted in the proposed 

rule, deliberately limited the issuance of 

Subordinated Debt to only U.S. citizens. 

This decision is based, in large part, on 

the additional complexities of issuing to 

foreign persons, which could subject 

Issuing Credit Unions to additional risk 

that could ultimately be passed on to 

the NCUSIF. 

Except as discussed above, the Board 

is finalizing the sections on investors, as 

proposed. 

a. Prohibition of an Issuing Credit 

Union’s Board Members, Senior 

Executive Officers, or Their Immediate 

Family Members To Purchase or Hold 

Subordinated Debt Notes 

The Board proposed to expand a 

credit union’s current authority for 

permissible investors by allowing a 

credit union to issue Subordinated Debt 

to Natural Person Accredited Investors 

and Entity Accredited Investors, with 

the following restrictions on who may 

purchase or hold a Subordinated Debt 

Note issued by an Issuing Credit Union: 

• Board member or Senior Executive 

Officer of the Issuing Credit Union; and 

• Immediate Family Member of such 

board member or Senior Executive 

Officer of the Issuing Credit Union. 

One commenter requested the NCUA 

reconsider these proposed prohibitions. 

The commenter noted that the Federal 

banking regulators do not prohibit 

related parties and insiders from buying 

stock in a mutual to stock conversion of 

a thrift institution. The commenter 

stated that educating board members, 

senior officers, and others within the 

sphere of concern should suffice to 

mitigate this concern by requiring 

insider trading policies and procedures 

regarding the management of material 

non-public information and related 

party transactions. The commenter also 

stated the Offering Document would 

have disclosures related to investments 

by related parties and insiders, and 

would disclose any potential conflict of 

interests. Given the NCUA’s concern, 

the commenter stated the NCUA may 

wish to consider adding a requirement 

to the initial application requiring an 

applicant credit union to disclose 

whether any such individuals are 

anticipated investors. The commenter 

stated that a wholesale exclusion 

unduly limits the marketability and 

functionality of Subordinated Debt 

issuances by a credit union. 

The Board continues to believe it is 

inappropriate to permit an Issuing 

Credit Union’s board members, Senior 

Executive Officers, or their Immediate 

Family Members to purchase or hold 

Subordinated Debt Notes. The Board has 

concerns about potential conflicts of 

interest and fraud that could arise 

because such individuals may exercise 

control over an Issuing Credit Union 

and could have, or gain, access to 

material non-public information related 

to the Issuing Credit Union and/or the 

Subordinated Debt Notes. Despite 

commenters’ assertions, the Board does 

not believe disclosures would be 

sufficient to address these concerns. For 

these reasons, the Board is retaining the 

prohibition on an Issuing Credit Union’s 

11068 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

board members, Senior Executive 

Officers, or their Immediate Family 

Members purchasing or holding 

Subordinated Debt Notes in the final 

rule, without amendment. 

5. Subordinated Debt Note Default 

Restriction 

The proposed rule included a 

restriction on a Subordinated Debt Note 

including a term or condition that 

would trigger an event of default based 

on an Issuing Credit Union’s default on 

other debts. Approximately five 

commenters opposed this restriction. 

One commenter suggested that the 

NCUA adopt a similar provision to the 

other banking agencies and use a certain 

threshold to determine when default on 

other debts would render an Issuing 

Credit Union in default on its 

Subordinated Debt. Other commenters 

suggested that default clauses are 

standard in debt obligations to allow 

parties to restructure deals in the event 

of material changes to the financial 

condition of the issuer. 

After considering these comments, the 

Board is finalizing this restriction as 

proposed. While the Board recognizes 

that other banking regulators may 

impose a different requirement, the 

Board believes this restriction is 

prudent given the relative newness of 

the issuance of Subordinated Debt. In 

conjunction with the other provisions in 

this final rule, including interest 

repayment and repudiation safe harbors, 

the Board does not believe this 

restriction will cause an overly negative 

impact on the sale of Subordinated Debt 

Notes. 

6. Minimum Denominations 

To provide additional protections to 

Natural Person Accredited Investors that 

purchase Subordinated Debt Notes, the 

Board proposed that Subordinated Debt 

Notes sold or transferred to a Natural 

Person Accredited Investor be made in 

minimum denominations of $100,000 or 

$10,000, respectively. Approximately 

eight commenters addressed the issue of 

minimum denominations. The vast 

majority of these commenters sought 

lower minimum denomination amounts. 

One commenter, however, requested a 

higher minimum denomination amount. 

Commenters that favored a lower 

minimum denomination amount 

generally agreed that the proposed limit 

of $100,000 was too high, particularly 

given the requirement that all investors 

qualify as Accredited Investors. The 

majority of these commenters argued 

that $10,000 was an appropriate 

minimum denomination. Some of these 

commenters cited the NCUA’s proposed 

resale minimum denomination of 

$10,000 as a basis for selecting this 

amount as an overall minimum 

denomination. In addition, other 

commenters stated that a $10,000 

minimum denomination would benefit 

small LICUs while being more than 

sufficient to help a small LICU avoid 

prompt corrective action. 

As noted previously, one commenter 

sought a higher minimum denomination 

amount. This commenter urged the 

NCUA to adopt the OCC’s $250,000 

minimum denomination to discourage 

access by less financially sophisticated 

investors. 

The Board has considered the 

comments on minimum denomination 

of a Subordinated Debt note when 

issued to a Natural Person Accredited 

Investor(s) and will retain the proposed 

minimum denomination of $100,000. As 

the Board stated in the proposed rule, 

the minimum denomination provides 

additional protection to Natural Person 

Accredited Investors that purchase 

Subordinated Debt Notes. The Board 

reiterates that such minimum 

denominations would not apply to 

Entity Accredited Investors because 

those purchasers are corporate entities 

that, in the Board’s view, are generally 

sufficiently sophisticated in financial 

matters such that the additional 

protections afforded by minimum 

denominations are not necessary. The 

Board will retain no minimum 

denomination requirements for 

Subordinated Debt Notes sold to an 

Entity Accredited Investor. 

The Board also stated requiring larger 

denomination notes will help ensure 

that the purchasers of the Subordinated 

Debt Notes are financially sophisticated 

and have substantial net worth. The 

Board disagrees that this provision will 

overly impact most LICUs. Currently 

LICUs may only issue secondary capital 

to entities. This final rule retains LICUs’ 

ability to issue Subordinated Debt to an 

Entity Accredited Investor in any 

amount. The minimum denomination 

would only apply if a LICU sought to 

issue Subordinated Debt to the newly 

permissible category of Natural Person 

Accredited Investors. 

7. Prohibition on an FCU Issuing and 

Investing in Subordinated Debt 

The proposed rule included a 

requirement that an FCU investing in 

Subordinated Debt, Grandfathered 

Secondary Capital, or in loans and 

obligations issued by privately insured 

credit unions that are subordinate to a 

private insurer must not be an Issuing 

Credit Union of Subordinated Debt or 

Grandfathered Secondary Capital, or 

currently have approval from the NCUA 

to issue Subordinated Debt or 

Grandfathered Secondary Capital. 

Approximately 12 commenters 

requested the NCUA reconsider the 

proposed prohibition on a credit union 

being both an issuer and investor in 

Subordinated Debt. The majority of 

these commenters stated that this type 

of investment scenario would not 

increase the magnitude of a loss to the 

NCUSIF. These commenters contended 

that the loss may be spread across 

multiple institutions, thereby 

mutualizing the risk of a loss. Further, 

one commenter stated that ‘‘the 

investment of one credit union in the 

[Subordinated Debt] of another could 

benefit the credit union system overall 

because it is likely, or at least possible, 

that credit unions with higher net worth 

ratios will invest in those with lower net 

worth ratios.’’ 

Commenters in favor of this type of 

investment scenario stated that 

concentration limits would serve as 

protection against extensive loss 

transfers, because the investing credit 

unions would only stand to lose the 

amount invested, which would be 

prudentially regulated by the NCUA. 

Commenters also suggested that the 

NCUA add a line item to the Call Report 

to exclude all amounts invested in the 

Subordinated Debt of other credit 

unions. These commenters contended 

that, because this is primarily a 

reporting issue, adding a new item to 

the Call Report to reflect such 

investments would properly reflect the 

loss-absorbing capacity of the credit 

union system. Further, these 

commenters stated that this would 

address the NCUA’s concern where an 

FCU issuing and investing in 

Subordinated Debt causes the 

appearance of increased net worth in 

the credit union system, while the 

actual loss-absorbing capacity of the 

system remains unchanged. 

Conversely, two commenters 

requested that the NCUA prohibit any 

federally insured credit union from 

investing in the Subordinated Debt of 

other credit unions. These commenters 

believed this prohibition would remove 

risk from the credit union system and 

offer a higher degree of protection of the 

NCUSIF. 

While most these commenters believe 

an FCU should be able to be an issuer 

and investor of Subordinated Debt, the 

Board continues to believe that an 

Issuing Credit union should not provide 

Regulatory Capital to other natural 

person credit unions. The Board 

continues to believe the potential to 

transmit losses between multiple credit 

unions that have both issued and 

invested in Subordinated Debt could 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 11069 

35State chartered credit unions without capital 

stock, organized and operated for mutual purposes 

and without profit are exempt from Federal income 

tax under Internal Revenue Code 501(c)(14)(A). 26 

U.S.C. 501(c)(14)(A). 

increase the risk of credit union failure 

and risk to the NCUSIF. The Board also 

notes that adding a line in the Call 

Report, as recommended by some 

commenters, would not decrease the 

potential risk of credit union failure due 

to loss transmission and would not 

decrease the risk to the NCUSIF. An 

added line to the Call Report would 

only provide information, and not risk 

mitigation. For these reasons, the Board 

is retaining the prohibition of an FCU 

issuing and investing in Subordinated 

Debt in the final rule without 

amendment. 

8. Federally Insured, State-Chartered 

Credit Unions 

The proposed rule required FISCUs to 

be subject to largely the same 

requirements related to the issuance of 

Subordinated Debt as FCUs. These 

include, but are not limited to, 

requirements related to the features and 

structure of the instrument. 

Approximately seven commenters 

addressed the issue of FISCUs being 

subject to the requirements of the 

NCUA’s final Subordinated Debt rule. 

All but one of these commenters 

opposed the proposed rule as overly 

restrictive on FISCUs. 

Commenters opposing this proposal 

stated that it would be in opposition to 

the dual-chartering system and could 

stifle innovation among FISCUs that 

have authorities beyond those of FCUs. 

One commenter stated that state 

regulators are sufficiently equipped to 

supervise the innovation of FISCUs as it 

develops. 

One commenter also opposed the 

potential requirement for a FISCU to 

obtain an opinion that its issuance 

would not subject the credit union to 

state and Federal income taxes. This 

commenter stated that it is not clear that 

such an opinion would be needed under 

the proposed structure, because FISCUs 

would be held to the same standard as 

FCUs. Further, this commenter, in light 

of the cost of such an opinion, sought 

assurance from the NCUA that the 

request for such an opinion would be 

the exception rather than the norm. 

Finally, as noted previously, one 

commenter was not completely opposed 

to FISCUs being subject to the same 

requirements as FCUs. This commenter 

stated it was unlikely that any 

instrument other than Subordinated 

Debt would be of much interest in the 

marketplace. Further, this commenter 

argued that all credit unions issuing the 

same form of instrument would help the 

market become more familiar with 

Subordinated Debt, thereby increasing 

investor interest and reducing the cost 

of issuing Subordinated Debt. This 

commenter did state, however, that 

while they saw benefits to all credit 

unions issuing the same instrument, 

they did not believe that a FISCU which 

was permitted by state law to issue a 

Subordinated Debt hybrid instrument 

should be restricted from doing so by 

the proposed rule. 

As stated in the proposed rule, 

FISCUs may not be restricted under 

applicable state law and regulation to 

issuing only debt instruments. However, 

as administrator of the NCUSIF the 

Board continues to believe the 

framework for the types of instruments 

that would qualify for Regulatory 

Capital should be consistent for all 

credit unions. The Board notes that such 

structure may also help FISCUs retain 

their tax exemption, as debt issuances 

are likely not to be viewed as capital 

stock issuances.35

While the Board fully supports the 

dual-chartering system and innovation 

among all credit unions, it notes that all 

LICUs—both federally and statechartered—are currently subject to the 

same Secondary Capital (or Prompt 

Corrective Action) requirements. 

Further, as articulated in the proposed 

rule, FISCUs may only issue 

Subordinated Debt if permitted under 

state law. The Board believes that 

requiring consistency among the types 

of instruments issued for Regulatory 

Capital treatment is in the best interest 

of both the NCUSIF and FISCUs. As 

such, the Board is finalizing, as 

proposed, those provisions that apply to 

FISCUs without amendment. 

9. Prepayment 

The proposed rule required a credit 

union to receive prior written approval 

from the Appropriate Supervision Office 

before the credit union prepays 

Subordinated Debt. Approximately five 

commenters addressed the issue of 

prepayment. The majority of these 

commenters sought a removal of the 

application process to prepay 

Subordinated Debt or a shortening of the 

timeframe for the NCUA to render a 

decision on such application. 

These commenters stated that an 

application process was in opposition to 

the requirements contained in the OCC’s 

regulation and could put credit unions 

at a competitive disadvantage. These 

commenters recommend allowing 

adequately capitalized credit unions to 

prepay any portion of their 

Subordinated Debt for which they no 

longer receive regulatory credit without 

prior regulatory approval. 

In addition, one commenter stated 

that the NCUA should allow credit 

unions to draft agreements that allow for 

the redemption of discounted capital so 

they could count the remaining balance, 

in whole, as capital. 

Another commenter stated that credit 

unions should have the flexibility to 

structure Subordinated Debt agreements 

with the ability to refinance the debt if 

the parties agreed to the concept of 

refinancing within an outlined 

placement agreement. 

Finally, one commenter stated that 

inclusion of prepayment obligations and 

acceleration features is common in the 

capital markets, even for deeply 

subordinated instruments, and would be 

expected by many market participants. 

This commenter went on to recommend 

the NCUA allow for these features— 

particularly because the NCUA can 

protect the issuer and the NCUSIF by 

requiring an issuer to receive NCUA 

approval before making any payments. 

The Board has reviewed the 

comments relating to prepayment of 

Subordinated Debt and will retain the 

provision of receiving prior approval in 

the proposed rule, with a 45-day 

timeframe for the NCUA to approve the 

application. While the 45-day approval 

timeframe is similar to the Secondary 

Capital Rule, the Board has eliminated 

the provision for automatic approval if 

a credit union is not notified of a 

decision by the Appropriate 

Supervision Office within the 45 days. 

The Board believes the regulatory relief 

in the proposed rule, including the 

ability to prepay any portion of the 

Subordinated Debt and a streamlined 

application (compared to the Secondary 

Capital Rule), provide sufficient 

regulatory relief to offset any burden 

imposed by removing the automatic 

approval. However, the Board sees the 

requirement for preapproval for 

prepayment as an important way to 

confirm that a credit union has 

sufficient capital and liquidity to repay 

Subordinated Debt without unduly 

increasing risk to the NCUSIF. 

10. Limits on Loans to Other Credit 

Unions 

The proposed rule included a new 

single-borrower limit for FCUs that 

make loans to other credit unions. The 

single-borrower limit would be the 

greater of 15 percent of an FCU’s Net 

Worth or $100,000, plus an additional 

10 percent of an FCU’s Net Worth if that 

additional 10 percent is fully secured at 

all times with a perfected security 

interest by readily marketable collateral 

11070 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

36 12 CFR 723.2. 

37 Id. § 723.4(c). 

38 12 CFR 703.14(c). 

39 12 U.S.C. 1757(9). 

40 In contrast, certain provisions of Title 12 of the 

United States Code relating to the regulation of 

other types of financial institutions expand on the 

institutions’ basic authority to borrow money, 

including through the issuance of securities. For 

example, a Farm Credit System member is 

specifically authorized to: 

• Borrow money from or loan to any other 

institution of the System, borrow from any 

commercial bank or other lending institution, issue 

its notes or other evidence of debt on its own 

individual responsibility and full faith and credit, 

and invest its excess funds in such sums, at such 

times, and on such terms and conditions as it may 

determine. 

• Issue its own notes, bonds, debentures, or other 

similar obligations, fully collateralized as provided 

in section 2154(c) by the notes, mortgages, and 

security instruments it holds in the performance of 

its functions under this chapter in such sums, 

maturities, rates of interest, and terms and 

conditions of each issue as it may determine with 

approval of the Farm Credit Administration. 

12 U.S.C. 2153(a) (b). 

41 Id. section 1781(b)(7). 

42 Id. section 1757(5). 

43 Id. section 1757(7); (15). 

44 Id. section 1757(1). 

45Typical loan and line of credit arrangements 

entered into with banks, other credit unions, and 

other financial institutions are clearly contractual in 

nature. Debt securities are also generally viewed as 

primarily contractual in nature, in large measure 

because of the terms of the securities themselves or 

the terms incorporated into the securities through 

an indenture, an issuing and paying agent 

agreement or similar agreement. This view of debt 

securities has been expressed in a wide variety of 

court cases. See, e.g., Katz v. Oak Industries, Inc., 

508 A.2d 873, 878 (Del. Ch. 1986)) (‘‘Under our 

law—and the law generally—the relationship 

between a corporation and the holders of its debt 

securities, even convertible debt securities, is 

contractual in nature.’’). 

as defined in § 723.2.36 The limit would 

include Subordinated Debt and 

Grandfathered Secondary Capital, and 

would be in addition to the aggregate 

limit on such loans specified in the FCU 

Act. One commenter requested the 

NCUA not impose the proposed 

additional restrictions on loans to other 

credit unions. 

The Board notes that the proposed 

single borrower limit is consistent with 

the single borrower limit in the NCUA’s 

commercial lending and MBL rule.37

Because credit unions share many 

similarities with traditional corporate 

borrowers, the Board continues to 

believe that basing the proposed singleborrower limit in this rule on the 

commercial and MBL rule limit is 

appropriate. Furthermore, the 15 

percent of Net Worth single-borrower 

limit for FCUs that make loans to other 

credit unions would generally limit 

catastrophic losses to an FCU if the 

borrower defaults. 

For these reasons, the Board is 

retaining the limits of an FCU making 

loans to other credit unions in the final 

rule without amendment. 

11. Pooling 

The Board did not include a provision 

for the pooling of Subordinated Debt 

issuances in the proposed rule. The 

Board notes that pooling generally 

involves combining more than one 

issuance in a standalone structure. 

Approximately three commenters 

advocated for the NCUA to explicitly 

permit pooling arrangements in any 

final Subordinated Debt rule. These 

commenters stated that allowing for 

pools of Subordinated Debt could make 

it easier and less expensive for credit 

unions to take issuances to the market. 

These commenters also believed that 

pools would reduce the risk of loss to 

investors by spreading loss across 

multiple credit unions rather than just 

one. Finally, one commenter argued that 

pooling would allow for larger issuances 

that may be able to be rated, thereby 

providing investors additional 

confidence in the issuance. 

While the Board is not including a 

specific provision on pooling in this 

final rule, the Board notes that there is 

no prohibition in this final rule or the 

proposed rule on Subordinated Debt 

being pooled and sold to investors. The 

Board notes, however, that any such 

pool must comply with all of the 

NCUA’s regulations and any applicable 

securities laws. 

Finally, the Board notes that general 

investment authority in part 703 only 

permits FCUs to purchase pooled 

Subordinated Debt in the form of a 

registered investment company or 

collective investment fund, as long as 

the prospectus of the company or fund 

restricts the investment portfolio to 

investments and investment 

transactions that are permissible for 

FCUs.38

IV. Legal Authority 

A. Authority To Issue Subordinated 

Debt 

The borrowing authority granted to 

FCUs by the FCU Act, along with FCUs’ 

statutory authority to enter into 

contracts and exercise incidental 

powers necessary or required to enable 

the FCUs to effectively carry on their 

business, supports the legal analysis 

that FCUs are authorized to incur 

indebtedness through the issuance of 

debt securities of the type contemplated 

by this final rule. Section 1757(9) of the 

FCU Act authorizes FCUs to borrow, in 

accordance with such rules and 

regulations as may be prescribed by the 

Board, from any source, in an aggregate 

amount not exceeding, except as 

authorized by the Board in carrying out 

the provisions of subchapter III, 50 per 

centum of its paid-in and unimpaired 

capital and surplus: Provided, that any 

Federal credit union may discount with 

or sell to any Federal intermediate 

credit bank any eligible obligations up 

to the amount of its paid-in and 

unimpaired capital.39

Other than the provisions codified in 

§ 701.38 of the NCUA’s regulations, 

which address borrowed funds from 

natural persons, the FCU Act does not 

provide any details regarding the 

mechanisms FCUs may use to borrow.40

Further, section 201(b)(7) of the FCU 

Act implicitly allows credit unions to 

issue securities.41 Conversely, nothing 

in section 1757(9) or other provisions of 

the FCU Act impose any specific 

restrictions or limitations on the 

mechanisms FCUs may employ to 

borrow; specific limiting language, 

examples or illustrative transactions or 

situations, or otherwise, do not exist to 

introduce specific restrictions or 

limitations. This stands in sharp 

contrast to many other subsections of 

section 1757 of the FCU Act which, for 

example, go into significant detail 

describing the types and terms of loans 

and extensions of credit that FCUs are 

permitted to make,42 and define the 

types of investments FCUs are permitted 

to make.43 In addition, the NCUA’s 

regulations do not impose any specific 

restrictions or limitations on the 

mechanisms an FCU may employ to 

borrow, through the use of specific 

limiting language, examples, illustrative 

transactions, or situations. 

Overall, the lack of specific 

restrictions or limitations on the 

mechanisms that may be used and the 

specific authority granted in section 

1757(9) to borrow ‘‘from any source’’ 

indicate that borrowings need not be 

limited to the types of arrangements 

typically entered into with banks, other 

credit unions, and other financial 

institutions (namely, loans, lines of 

credit, and similar arrangements). 

Further, the specific authority provided 

in section 1757(1) of the FCU Act that 

empowers FCUs to enter into 

contracts 44 further supports the 

conclusion that FCUs have the power to 

enter into a variety of different 

arrangements with respect to 

borrowing.45 In addition, in the absence 

of specific restrictions and limitations, 

the ‘‘incidental powers’’ granted to 

FCUs in section 1757(17) of the FCU Act 

give significant discretion to FCUs with 

respect to how borrowings are 

effectuated. 

Further support for the position that 

FCUs have the authority to issue debt 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 11071 

46As discussed previously, in 2015, the Board 

finalized a rule to replace the regulatory risk-based 

net worth requirement with an RBC requirement. 

This rule is effective January 1, 2022. 

47 12 U.S.C. 1790d(d). 

48 12 U.S.C. 1790d(o)(2). 

securities may be found in U.S. GAAP 

treatment of items that fall in the 

category of ‘‘borrowings.’’ Under U.S. 

GAAP, liabilities relating to borrowed 

money are presented as indebtedness on 

an entity’s balance sheet, and the 

interest paid is presented as interest 

expense on its income statement 

whether the borrowings are related to 

typical loan transactions, advances 

under lines of credit, or the issuance of 

debt securities. While the details of the 

different types of indebtedness for 

borrowed money are presented as 

separate line items in an entity’s balance 

sheet and income statement, the 

treatment of ‘‘straight’’ indebtedness 

(indebtedness that does not have equity/ 

residual ownership features, such as 

convertibility into shares) as liabilities, 

and interest paid thereon as interest 

expense, is essentially the same. In 

addition, while the details of the 

different types of indebtedness for 

borrowed money are presented as 

separate line items in the statement of 

cash flows, borrowings (whether in the 

form of loans from financial institutions 

or from the issuance of debt securities) 

are all presented in the ‘‘cash flows from 

financing activities’’ section of the 

statement. 

Throughout this final rule, the Board 

has included requirements to ensure 

that any Subordinated Debt issued by an 

Issuing Credit Union would be properly 

characterized as debt in accordance 

with U.S. GAAP. These requirements, 

include that the Subordinated Debt or 

the Subordinated Debt Note, as 

applicable, 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; 

• 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; and 

• Be properly characterized as debt in 

accordance with U.S. GAAP. 

The Board notes that a FISCU’s legal 

authority to issue Subordinated Debt 

derives from applicable state law and 

regulation. For the Subordinated Debt 

issued by a FISCU to qualify as 

Regulatory Capital under this final rule, 

however, a FISCU must comply with all 

of the provisions of this rule, including 

the FISCU-specific provisions. 

B. Board Authority To Design RBC 

Standards 

In addition to credit unions’ authority 

to issue Subordinated Debt, the FCU Act 

provides the Board broad discretion to 

design the risk-based net worth 

standards.46 Specifically, the FCU Act 

provides, in relevant part: ‘‘The Board 

shall design the risk-based net worth 

requirement to take account of any 

material risks against which the net 

worth ratio required for an insured 

credit union to be ‘‘Adequately 

Capitalized’’ may not provide adequate 

protection.’’ 47

In designing such a risk-based net 

worth standard, Congress did not 

restrict the types of instruments the 

Board may include in its calculation of 

risk-based net worth, except that such 

calculation must take account of 

material risks that the Net Worth Ratio 

alone may not protect against. The 

Board, as discussed in this preamble, is 

proposing this rule to grant authority to 

LICUs, Complex Credit Unions, and 

New Credit Unions to issue 

Subordinated Debt that will count as 

Regulatory Capital. Based on the 

requirements in this final rule, the 

Board believes Subordinated Debt will 

be an additional tool that accounts for 

material risks faced by credit unions 

against which the Net Worth Ratio alone 

may not protect. 

While the Board has broad discretion 

to create the risk-based net worth 

standard, it does not have the authority 

to amend the statutory definition of Net 

Worth. The statutory definition of Net 

Worth currently includes secondary 

capital issued by a LICU that is 

uninsured and subordinate to all claims 

against the LICU.48 As such, the Board 

notes two points with respect to 

Subordinated Debt and Net Worth. First, 

Subordinated Debt issued by a nonLICU is not included in that credit 

union’s Net Worth or Net Worth Ratio. 

Second, Subordinated Debt issued by a 

LICU after the effective date of this final 

rule will be included in that credit 

union’s Net Worth and Net Worth Ratio. 

V. Regulatory Procedures 

A. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(PRA) (44 U.S.C. 3501 et seq.) requires 

that the Office of Management and 

Budget (OMB) 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 

OMB control number. 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 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 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 

rule will 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. 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. A reporting requirement is 

triggered in instances where the NCUA 

issues a final rule as defined by section 

551 of the APA. An agency rule, in 

addition to being subject to 

congressional oversight, may also be 

subject to a delayed effective date if the 

rule is a ‘‘major rule.’’ 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. After the Office of 

Management and Budget makes it 

determination, the NCUA will file all 

appropriate reports. 

List of Subjects 

12 CFR Part 701 

Advertising, Aged, Civil rights, Credit, 

Credit unions, Fair housing, Individuals 

with disabilities, Insurance, Marital 

status discrimination, Mortgages, 

11072 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

Religious discrimination, Reporting and 

recordkeeping requirements, Sex 

discrimination, Signs and symbols, 

Surety bonds. 

12 CFR Part 702 

Credit unions, Reporting and 

recordkeeping requirements. 

12 CFR Part 709 

Claims, Credit unions. 

12 CFR Part 741 

Bank deposit insurance, Credit 

unions, Reporting and recordkeeping 

requirements. 

By the NCUA Board on December 17, 2020. 

Melane Conyers-Ausbrooks, 

Secretary of the Board. 

For the reasons discussed in the 

preamble, NCUA amends 12 CFR parts 

701, 702, 709, and 741 as follows: 

PART 701—ORGANIZATION AND 

OPERATION OF FEDERAL CREDIT 

UNIONS 

■ 1. The authority citation for part 701 

continues to read as follows: 

Authority: 12 U.S.C. 1752(5), 1755, 1756, 

1757, 1758, 1759, 1761a, 1761b, 1766, 1767, 

1782, 1784, 1785, 1786, 1787, 1788, 1789. 

Section 701.6 is also authorized by 15 U.S.C. 

3717. Section 701.31 is also authorized by 15 

U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601– 

3610. Section 701.35 is also authorized by 42 

U.S.C. 4311–4312. 

■ 2. Add § 701.25 to read as follows: 

§ 701.25 Loans to credit unions. 

(a) Limits. A Federal credit union may 

make loans, including investments in 

Subordinated Debt, to other credit 

unions, including corporate credit 

unions and privately insured credit 

unions, subject to the following limits: 

(1) Aggregate limit. The aggregate 

principal amount of loans to other credit 

unions may not exceed 25 percent of the 

Federal credit union’s paid-in and 

unimpaired capital and surplus. 

(2) Single borrower limit. The 

aggregate principal amount of loans 

made to any one credit union may not 

exceed the greater of 15 percent of the 

Federal credit union’s net worth, as 

defined in part 702 of this chapter, at 

the time of the closing of the loan or 

$100,000, plus an additional 10 percent 

of the Federal credit union’s net worth 

if the amount that exceeds the Federal 

credit union’s 15 percent general limit 

is fully secured at all times with a 

perfected security interest by readily 

marketable collateral as defined in 

§ 723.2 of this chapter. 

(b) Approval and policies. A Federal 

credit union’s board of directors must 

approve all loans to other credit unions 

and establish written policies for 

making such loans. The written policies 

must, at a minimum, include the 

following: 

(1) How the Federal credit union will 

manage the credit risk of loans to other 

credit unions; and 

(2) The limits on the aggregate 

principal amount of loans the Federal 

credit union can make to other credit 

unions. The policies must specify the 

limits on the aggregate principal amount 

of loans the Federal credit union can 

make to all other credit unions and the 

aggregate principal amount of loans the 

Federal credit union can make to any 

single credit union; provided that any 

limits included in such policies do not 

exceed the limits in this section. 

(c) Investment in Subordinated Debt— 

(1) Eligibility. A Federal credit union 

may only invest, directly or indirectly, 

in the Subordinated Debt of federally 

insured, natural person credit unions, or 

in loans or obligations issued by a 

privately insured credit union that are 

subordinate to the private insurer; 

provided that the investing Federal 

credit union: 

(i) Has at the time of the investment, 

a capital classification of ‘‘well 

capitalized,’’ as defined in part 702 of 

this chapter; 

(ii) Does not have any outstanding 

Subordinated Debt or Grandfathered 

Secondary Capital, in each case with 

respect to which it was the Issuing 

Credit Union (as defined in part 702 of 

this chapter); and 

(iii) Is not eligible to issue 

Subordinated Debt or Grandfathered 

Secondary Capital pursuant to an 

unexpired approval from the NCUA 

under subpart D of part 702 of this 

chapter. 

(2) Aggregate limit—(i) Aggregate 

limit. A Federal credit union’s aggregate 

investment (direct or indirect) in the 

Subordinated Debt and Grandfathered 

Secondary Capital of any federally 

insured, natural person credit union, 

and in loans or obligations issued by a 

privately insured credit union that are 

subordinate to the private insurer, may 

not cause such aggregate investment to 

exceed, at the time of the investment, 

the lesser of: 

(A) 25 percent of the investing Federal 

credit union’s net worth at the time of 

the investment; and 

(B) Any amount of net worth in excess 

of seven percent (7%) of total assets. 

(ii) Calculation of aggregate limit. The 

amount subject to the limit in paragraph 

(c)(2)(i)(A) of this section is calculated 

at the time of investment, and is based 

on a Federal credit union’s aggregate 

outstanding: 

(A) Investment in Subordinated Debt; 

(B) Investment in Grandfathered 

Secondary Capital; 

(C) Investment in loans or obligations 

issued by a privately insured credit 

union that are subordinate to the private 

insurer; and 

(D) Loans or portion of loans made by 

the credit union that is secured by any 

Subordinated Debt, Grandfathered 

Secondary Capital, or loans or 

obligations issued by a privately insured 

credit union that are subordinate to the 

private insurer. 

(3) Indirect investment. A Federal 

credit union must determine its indirect 

exposure by calculating its proportional 

ownership share of each exposure held 

in a fund, or similar indirect 

investment. The Federal credit union’s 

exposure to the fund is equal to the 

exposure held by the fund as if they 

were held directly by the Federal credit 

union, multiplied by the Federal credit 

union’s proportional ownership share of 

the fund. 

■ 3. In § 701.34: 

■ a. Revise the section heading; 

■ b. Remove and reserve paragraph (b); 

and 

■ c. Remove paragraphs (c) and (d) and 

the appendix to § 701.34. 

The revision reads as follows: 

§ 701.34 Designation of low income status. 

* * * * * 

■ 4. Revise § 701.38 to read as follows: 

§ 701.38 Borrowed funds. 

(a) Federal credit unions may borrow 

funds from any source; provided that: 

(1) The borrowing is evidenced by a 

written contract, such as a signed 

promissory note, that sets forth the 

terms and conditions including, at a 

minimum, maturity, prepayment, 

interest rate, method of computation of 

interest, and method of payment; and 

(2) The written contract and any 

solicitation with respect to such 

borrowing contain clear and 

conspicuous language indicating that: 

(i) The funds represent money 

borrowed by the Federal credit union; 

and 

(ii) The funds do not represent shares 

and, therefore, are not insured by the 

National Credit Union Administration. 

(b) A Federal credit union is subject 

to the maximum borrowing authority of 

an aggregate amount not exceeding 50 

percent of its paid-in and unimpaired 

capital and surplus. Provided that any 

Federal credit union may discount with 

or sell to any Federal intermediate 

credit bank any eligible obligations up 

to the amount of its paid-in and 

unimpaired capital (12 U.S.C. 1757(9)). 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 11073 

PART 702—CAPITAL ADEQUACY 

■ 5. The authority citation for part 702 

continues to read as follows: 

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

■ 6. In § 702.2: 

■ a. Add a sentence after the first 

sentence of the introductory text; 

■ b. Add a definition for ‘‘Grandfathered 

Secondary Capital’’ in alphabetical 

order; 

■ c. Amend the definition of ‘‘Net 

worth’’ by revising the introductory text 

and paragraphs (1) and (2); and 

■ d. Add a definition for ‘‘Subordinated 

Debt’’ in alphabetical order. 

The additions and revisions read as 

follows: 

§ 702.2 Definitions. 

* * * All accounting terms not 

otherwise defined in this section have 

meanings consistent with the 

commonly-accepted meanings under 

United States generally accepted 

accounting principles (U.S. GAAP). 

* * * 

Grandfathered Secondary Capital 

means any secondary capital issued 

under 12 CFR 701.34 (revised as of 

January 1, 2021) or, in the case of a 

federally insured, state-chartered credit 

union, with § 741.204(c) of this chapter, 

before January 1, 2022. (12 CFR 701.34 

was recodified as § 702.414 as of 

January 1, 2022.) 

* * * * * 

Net worth means, with respect to any 

federally insured, natural person credit 

union, as of any date of determination: 

(1) The retained earnings balance of 

the credit union at the most recent 

quarter end, as determined in 

accordance with U.S. GAAP, subject to 

paragraph (3) of this definition. 

(2) With respect to a low-income 

designated credit union, the outstanding 

principal amount of Subordinated Debt 

treated as Regulatory Capital in 

accordance with § 702.407, and the 

outstanding principal amount of 

Grandfathered Secondary Capital 

treated as Regulatory Capital in 

accordance with § 702.414, in each case 

that is: 

(i) Uninsured; and 

(ii) Subordinate to all other claims 

against the credit union, including 

claims of creditors, shareholders, and 

the National Credit Union Share 

Insurance Fund. 

* * * * * 

Subordinated Debt has the meaning as 

provided in subpart D of this part. 

* * * * * 

■ 7. In § 702.104, revise paragraph 

(b)(1)(vii) and add paragraph 

(c)(2)(v)(B)(9) to read as follows: 

§ 702.104 Risk-based capital ratio. 

* * * * * 

(b) * * * 

(1) * * * 

(vii) The outstanding principal 

amount of Subordinated Debt treated as 

Regulatory Capital in accordance with 

§ 702.407 and the outstanding principal 

amount of Grandfathered Secondary 

Capital treated as Regulatory Capital in 

accordance with § 702.414; and 

* * * * * 

(c) * * * 

(2) * * * 

(v) * * * 

(B) * * * 

(9) Natural person credit union 

Subordinated Debt, Grandfathered 

Secondary Capital, and loans or 

obligations issued by a privately insured 

credit union that are subordinate to the 

private insurer. 

* * * * * 

■ 8. Amend § 702.109 by: 

■ a. Redesignating paragraphs (a)(3) and 

(4) as paragraphs (a)(4) and (5), 

respectively; 

■ b. Adding new paragraph (a)(3); and 

■ c. Revising paragraph (b)(11). 

The addition and revision read as 

follows: 

§ 702.109 Prompt corrective action for 

critically undercapitalized credit unions. 

(a) * * * 

(3) Restrictions on payments on 

Subordinated Debt. Beginning 60 days 

after the effective date of a federally 

insured, natural person credit union 

being classified by the NCUA as 

‘‘critically undercapitalized’’, that credit 

union shall not pay principal of or 

interest on its Subordinated Debt, 

except that unpaid interest shall 

continue to accrue under the terms of 

the related Subordinated Debt Note (as 

defined in subpart D of this part), to the 

extent permitted by law; 

* * * * * 

(b) * * * 

(11) Restrictions on payments on 

Grandfathered Secondary Capital. 

Beginning 60 days after the effective 

date of classification of a credit union as 

‘‘critically undercapitalized’’, prohibit 

payments of principal, dividends or 

interest on the credit union’s 

Grandfathered Secondary Capital (as 

defined in subpart D of this part), except 

that unpaid dividends or interest shall 

continue to accrue under the terms of 

the account to the extent permitted by 

law; 

* * * * * 

■ 10. Revise § 702.205(d) to read as 

follows: 

§ 702.205 Prompt corrective action for 

uncapitalized new credit unions. 

* * * * * 

(d) Discretionary liquidation of an 

uncapitalized new credit union. In lieu 

of paragraph (c) of this section, an 

uncapitalized new credit union may be 

placed into liquidation on grounds of 

insolvency pursuant to 12 U.S.C. 

1787(a)(1)(A). 

§ 702.206 [Amended] 

■ 11. Amend § 702.206 by removing 

paragraph (d) and redesignating 

paragraphs (e) through (h) as (d) through 

(g), respectively. 

§ § 702.207 through 702.210 [Redesignated 

as §§ 702.208 through 702.211] 

■ 12. Redesignate §§ 702.207 through 

702.210 as §§ 702.208 through 702.211, 

respectively. 

■ 13. Add new § 702.207 to read as 

follows: 

§ 702.207 Consideration of Subordinated 

Debt and Grandfathered Secondary Capital 

for new credit unions. 

(a) Exception from prompt corrective 

action for new credit unions. The 

requirements of §§ 702.204 and 702.205 

do not apply to a new credit union if, 

as of the applicable date of 

determination, each of the following 

conditions is satisfied: 

(1) The new credit union has 

outstanding Subordinated Debt or 

Grandfathered Secondary Capital; 

(2) The Subordinated Debt or 

Grandfathered Secondary Capital would 

be treated as Regulatory Capital under 

subpart D of this part if the new credit 

union were a complex credit union or 

a low income-designated credit union; 

(3) The ratio of the new credit union’s 

net worth (including the amount of its 

Subordinated Debt and Grandfathered 

Secondary Capital treated as Regulatory 

Capital (as defined in subpart D of this 

part)) to its total assets is at least seven 

percent (7%); and 

(4) The new credit union’s net worth 

is increasing in a manner consistent 

with the new credit union’s approved 

initial business plan or RBP. 

(b) Consideration of Subordinated 

Debt and Grandfathered Secondary 

Capital in evaluating an RBP. The 

NCUA shall, in evaluating an RBP under 

this subpart, consider a new credit 

union’s aggregate outstanding principal 

amount of Subordinated Debt and 

Grandfathered Secondary Capital. 

(c) Prompt corrective action based on 

other supervisory criteria—(1) 

Application of prompt corrective action 

to an exempt new credit union. The 

NCUA Board may apply prompt 

corrective action to a new credit union 

11074 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

that is otherwise exempt under 

paragraph (a) of this section in the 

following circumstances: 

(i) Unsafe or unsound condition. The 

NCUA Board has determined, after 

providing the new credit union with 

written notice and opportunity for 

hearing pursuant to § 747.2003 of this 

chapter, that the new credit union is in 

an unsafe or unsound condition; or 

(ii) Unsafe or unsound practice. The 

NCUA Board has determined, after 

providing the new credit union with 

written notice and opportunity for 

hearing pursuant to § 747.2003 of this 

chapter, that the new credit union has 

not corrected a material unsafe or 

unsound practice of which it was, or 

should have been, aware. 

(2) Non-delegation. The NCUA Board 

may not delegate its authority under 

paragraph (c) of this section. 

(3) Consultation with state officials. 

The NCUA Board shall consult and seek 

to work cooperatively with the 

appropriate state official before taking 

action under paragraph (c) of this 

section and shall promptly notify the 

appropriate state official of its decision 

to take action under paragraph (c) of this 

section. 

(d) Discretionary liquidation. 

Notwithstanding paragraph (a) of this 

section, the NCUA may place a new 

credit union into liquidation pursuant 

to 12 U.S.C. 1787(a)(3)(A), provided that 

the new credit union’s ratio under 

paragraph (a)(3) of this section is, as of 

the applicable date of determination, 

below six percent (6%) and the new 

credit union has no reasonable prospect 

of becoming ‘‘adequately capitalized’’ 

under § 702.202. 

(e) Restrictions on payments on 

Subordinated Debt. Beginning 60 days 

after the effective date of a new credit 

union being classified by the NCUA as 

‘‘uncapitalized’’, the new credit union 

shall not pay principal of or interest on 

its Subordinated Debt, except that 

unpaid interest shall continue to accrue 

under the terms of the related 

Subordinated Debt Note, to the extent 

permitted by law. 

■ 14. Add subpart D to read as follows: 

Subpart D—Subordinated Debt, 

Grandfathered Secondary Capital, and 

Regulatory Capital 

Sec. 

702.401 Purpose and scope. 

702.402 Definitions. 

702.403 Eligibility. 

702.404 Requirements of the Subordinated 

Debt and Subordinated Debt Note. 

702.405 Disclosures. 

702.406 Requirements related to the offer, 

sale, and issuance of Subordinated Debt 

Notes. 

702.407 Discounting of amount treated as 

Regulatory Capital. 

702.408 Preapproval to issue Subordinated 

Debt. 

702.409 Preapproval for federally insured, 

state-chartered credit unions to issue 

Subordinated Debt. 

702.410 Interest payments on Subordinated 

Debt. 

702.411 Prior written approval to prepay 

Subordinated Debt. 

702.412 Effect of a merger or dissolution on 

the treatment of Subordinated Debt as 

Regulatory Capital. 

702.413 Repudiation safe harbor. 

702.414 Regulations governing 

Grandfathered Secondary Capital. 

Appendix A to Subpart D of Part 702— 

Disclosure and Acknowledgement Form 

Subpart D—Subordinated Debt, 

Grandfathered Secondary Capital, and 

Regulatory Capital 

§ 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, statechartered credit union only to the extent 

that such federally insured, statechartered 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. 

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. 

(b) Grandfathered Secondary Capital. 

Any secondary capital issued under 

§ 701.34 of this chapter before January 1, 

2022, is governed by § 702.414. 

Grandfathered Secondary Capital will 

no longer be treated as Regulatory 

Capital as of January 1, 2042. 

§ 702.402 Definitions. 

To the extent they differ, the 

definitions in this section apply only to 

Subordinated Debt and not to 

Grandfathered Secondary Capital. 

(Definitions applicable to Grandfathered 

Secondary Capital are in § 702.414.) All 

other terms in this subpart and not 

expressly defined in this section have 

the meanings assigned to them 

elsewhere in this part. For ease of use, 

certain key terms are included in this 

section using cross citations to other 

sections of this part where those terms 

are defined. 

Accredited Investor means a Natural 

Person Accredited Investor or an Entity 

Accredited Investor, as applicable. 

Appropriate Supervision Office 

means, with respect to any credit union, 

the Regional Office or Office of National 

Examinations and Supervision that is 

responsible for supervision of that credit 

union. 

Complex credit union has the same 

meaning as in subpart A of this part. 

Entity Accredited Investor means an 

entity that, at the time of offering and 

closing of the issuance and sale of 

Subordinated Debt to that entity, meets 

the requirements of 17 CFR 230.501(a). 

Grandfathered Secondary Capital 

means any secondary capital issued 

under 12 CFR 701.34 (revised as of 

January 1, 2021) or, in the case of a 

federally insured, state-chartered credit 

union, with § 741.204(c) of this chapter, 

before January 1, 2022. (12 CFR 701.34 

was recodified as § 702.414 as of 

January 1, 2022.) 

Immediate Family Member means 

spouse, child, sibling, parent, 

grandparent, or grandchild (including 

stepparents, stepchildren, stepsiblings, 

and adoptive relationships). 

Issuing Credit Union means, for 

purposes of this subpart, a credit union 

that has issued, or is in the process of 

issuing, Subordinated Debt or 

Grandfathered Secondary Capital in 

accordance with the requirements of 

this subpart. 

Low-income designated credit union 

(LICU) is a credit union designated as 

having low-income status in accordance 

with § 701.34 of this chapter. 

Natural Person Accredited Investor 

means a natural person who, at the time 

of offering and closing of the issuance 

and sale of Subordinated Debt to that 

person, meets the requirements of 17 

CFR 230.501(a); provided that, for 

purposes of purchasing or holding any 

Subordinated Debt Note, this term shall 

not include any board member or Senior 

Executive Officer of the Issuing Credit 

Union or any Immediate Family 

Member of any board member or Senior 

Executive Officer of the Issuing Credit 

Union. 

Net worth has the same meaning as in 

§ 702.2. 

Net worth ratio has the same meaning 

as in § 702.2. 

New credit union has the same 

meaning as in § 702.201. 

Offering Document means the 

document(s) required by § 702.408, 

including any term sheet, offering 

memorandum, private placement 

memorandum, offering circular, or other 

similar document used to offer and sell 

Subordinated Debt Notes. 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 11075 

Pro Forma Financial Statements 

means projected financial statements 

that show the effects of proposed 

transactions as if they actually occurred 

in a variety of plausible scenarios, 

including both optimistic and 

pessimistic assumptions, over 

measurement horizons that align with 

the credit union’s expected activities. 

Qualified Counsel means 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. 

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 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 January 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 January 1, 2042, 

Grandfathered Secondary Capital that is 

considered pursuant to § 702.207. 

Retained Earnings has a meaning that 

is consistent with the one for this term 

under United States GAAP. 

Risk-based capital (RBC) ratio has the 

same meaning as in § 702.2. 

Senior Executive Officer means a 

credit union’s chief executive officer 

(for example, president or treasurer/ 

manager), any assistant chief executive 

officer (e.g., any assistant president, any 

vice president or any assistant treasurer/ 

manager) and the chief financial officer 

(controller). The term ‘‘Senior Executive 

Officer’’ also includes employees and 

contractors of an entity, such as a 

consulting firm, hired to perform the 

functions of positions covered by the 

term Senior Executive Officer. 

Subordinated Debt means an Issuing 

Credit Union’s borrowing that meets the 

requirements of this subpart, including 

all obligations and contracts related to 

such borrowing. 

Subordinated Debt Note means the 

written contract(s) evidencing the 

Subordinated Debt. 

§ 702.403 Eligibility. 

(a) Subject to receiving approval 

under § 702.408 or § 702.409, a credit 

union may issue Subordinated Debt 

only if, at the time of such issuance, the 

credit union is: 

(1) A complex credit union with a 

capital classification of at least 

‘‘undercapitalized,’’ as defined in 

§ 702.102; 

(2) A LICU; 

(3) Able to demonstrate to the 

satisfaction of the NCUA that it 

reasonably anticipates becoming either a 

complex credit union meeting the 

requirements of paragraph (a)(1) of this 

section or a LICU within 24 months 

after issuance of the Subordinated Debt 

Notes; or 

(4) A new credit union with Retained 

Earnings equal to or greater than one 

percent (1%) of assets. 

(b) At the time of issuance of any 

Subordinated Debt, an Issuing Credit 

Union may not have any investments, 

direct or indirect, in Subordinated Debt 

or Grandfathered Secondary Capital (or 

any interest therein) of another credit 

union. If a credit union acquires 

Subordinated Debt or Grandfathered 

Secondary Capital in a merger or other 

consolidation, the Issuing Credit Union 

may still issue Subordinated Debt, but it 

may not invest (directly or indirectly) in 

the Subordinated Debt or Grandfathered 

Secondary Capital of any other credit 

union while any Subordinated Debt 

Notes issued by the Issuing Credit 

Union remain outstanding. 

(c) If the Issuing Credit Union is a 

complex credit union that is not also a 

LICU, the aggregate outstanding 

principal amount of all Subordinated 

Debt issued by that Issuing Credit Union 

may not exceed 100 percent of its net 

worth, as determined at the time of each 

issuance of Subordinated Debt. 

§ 702.404 Requirements of the 

Subordinated Debt and Subordinated Debt 

Note. 

(a) Requirements. At a minimum, the 

Subordinated Debt or the Subordinated 

Debt Note, as applicable, must: 

(1) 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; 

(2) 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; 

(3) Be subordinate to all other claims 

in liquidation under § 709.5(b) of this 

chapter, and have the same payout 

priority as all other outstanding 

Subordinated Debt and Grandfathered 

Secondary Capital; 

(4) Be properly characterized as debt 

in accordance with U.S. GAAP; 

(5) Be unsecured, including, without 

limitation, prohibiting the establishment 

of any legally enforceable claim against 

funds earmarked for payment of the 

Subordinated Debt through: 

(i) A compensating balance or any 

other funds or assets subject to a legal 

right of offset, as defined by applicable 

state law; or 

(ii) A sinking fund, such as a fund 

formed by periodically setting aside 

money for the gradual repayment of the 

Subordinated Debt; 

(6) Be applied by the Issuing Credit 

Union at the end of each of its fiscal 

years (or more frequently as determined 

by the Issuing Credit Union) in which 

the Subordinated Debt remains 

outstanding to cover any deficit in 

Retained Earnings on a pro rata basis 

among all holders of the Subordinated 

Debt and Grandfathered Secondary 

Capital of the Issuing Credit Union; it 

being understood that any amounts 

applied to cover a deficit in Retained 

Earnings shall no longer be considered 

due and payable to the holder(s) of the 

Subordinated Debt or Grandfathered 

Secondary Capital; 

(7) Except as provided in §§ 702.411 

and 702.412(c), be payable in full by the 

Issuing Credit Union or its successor or 

assignee only at maturity; 

(8) Disclose any prepayment penalties 

or restrictions on prepayment; 

(9) Be offered, issued, and sold only 

to Entity Accredited Investors or Natural 

Person Accredited Investors, in 

accordance § 702.406; and 

(10) Be re-offered, reissued, and 

resold only to an Entity Accredited 

Investor (if the initial offering, issuance, 

and sale was solely made to Entity 

Accredited Investors) or any Accredited 

Investor (if the initial offering, issuance, 

and sale involved one or more Natural 

Person Accredited Investors). 

(b) Restrictions. The Subordinated 

Debt or the Subordinated Debt Note, as 

applicable, must not: 

(1) Be structured or identified as a 

share, share account, or any other 

instrument in the Issuing Credit Union 

that is insured by the National Credit 

Union Administration; 

(2) Include any express or implied 

terms that make it senior to any other 

Subordinated Debt issued under this 

subpart or Grandfathered Secondary 

Capital; 

11076 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

(3) Cause the Issuing Credit Union to 

exceed the borrowing limit in § 741.2 of 

this chapter or, for federally insured, 

state-chartered credit unions, any more 

restrictive state borrowing limit; 

(4) Provide the holder thereof with 

any management or voting rights in the 

Issuing Credit Union; 

(5) Be eligible to be pledged or 

provided by the investor as security for 

a loan from, or other obligation owing 

to, the Issuing Credit Union; 

(6) Include any express or implied 

term, condition, or agreement that 

would require the Issuing Credit Union 

to prepay or accelerate payment of 

principal of or interest on the 

Subordinated Debt prior to maturity, 

including investor put options; 

(7) Include an express or implied 

term, condition, or agreement that 

would trigger an event of default based 

on the Issuing Credit Union’s default on 

other debts; 

(8) Include any condition, restriction, 

or requirement based on the Issuing 

Credit Union’s credit quality or other 

credit-sensitive feature; or 

(9) Require the Issuing Credit Union 

to make any form of payment other than 

in cash. 

(c) Negative covenants. A 

Subordinated Debt Note must not 

include any provision or covenant that 

unduly restricts or otherwise acts to 

unduly limit the authority of the Issuing 

Credit Union or interferes with the 

NCUA’s supervision of the Issuing 

Credit Union. This includes, but is not 

limited to, a provision or covenant that: 

(1) Requires the Issuing Credit Union 

to maintain a minimum amount of 

Retained Earnings or other metric, such 

as a minimum net worth ratio or 

minimum asset, liquidity, or loan ratios; 

(2) Unreasonably restricts the Issuing 

Credit Union’s ability to raise capital 

through the issuance of additional 

Subordinated Debt; 

(3) Provides for default of the 

Subordinated Debt as a result of the 

Issuing Credit Union’s compliance with 

any law, regulation, or supervisory 

directive from the NCUA or, if 

applicable, the state supervisory 

authority; 

(4) Provides for default of the 

Subordinated Debt as the result of a 

change in the ownership, management, 

or organizational structure or charter of 

the Issuing Credit Union; provided that, 

following such change, the Issuing 

Credit Union or the resulting institution, 

as applicable: 

(i) Agrees to perform all of the 

obligations, terms, and conditions of the 

Subordinated Debt; and 

(ii) At the time of such change, is not 

in material default of any provision of 

the Subordinated Debt Note, after giving 

effect to the applicable cure period 

described in paragraph (d) of this 

section; and 

(5) Provides for default of the 

Subordinated Debt as the result of an act 

or omission of any third party, 

including but not limited to a credit 

union service organization, as defined 

in § 712.1(d) of this chapter. 

(d) Default covenants. A Subordinated 

Debt Note that includes default 

covenants must provide the Issuing 

Credit Union with a reasonable cure 

period of not less than 30 calendar days. 

(e) Minimum denominations of 

issuances to Natural Person Accredited 

Investors. An Issuing Credit Union may 

only issue Subordinated Debt Notes to 

Natural Person Accredited Investors in 

minimum denominations of $100,000, 

and cannot exchange any such 

Subordinated Debt Notes after the initial 

issuance or any subsequent resale for 

Subordinated Debt Notes of the Issuing 

Credit Union in denominations less 

than $10,000. Each such Subordinated 

Debt Note, if issued in certificate form, 

must include a legend disclosing that it 

cannot be exchanged for Subordinated 

Debt Notes of the Issuing Credit Union 

in denominations less than $100,000, 

and Subordinated Debt Notes issued in 

book-entry or other uncertificated form 

shall include appropriate instructions 

prohibiting the exchange of such 

Subordinated Debt Notes for 

Subordinated Debt Notes of the Issuing 

Credit Union in denominations that 

would violate the foregoing restrictions. 

§ 702.405 Disclosures. 

(a) An Issuing Credit Union must 

disclose the following language clearly, 

in all capital letters, on the face of a 

Subordinated Debt Note: 

• THIS OBLIGATION IS NOT A SHARE IN 

THE ISSUING CREDIT UNION AND IS NOT 

INSURED BY THE NATIONAL CREDIT 

UNION ADMINISTRATION. 

• THIS OBLIGATION IS UNSECURED 

AND SUBORDINATE TO ALL CLAIMS 

AGAINST THE ISSUING CREDIT UNION 

AND IS INELIGIBLE AS COLLATERAL FOR 

A LOAN BY THE ISSUING CREDIT UNION. 

• AMOUNTS OTHERWISE PAYABLE 

HEREUNDER MAY BE REDUCED IN ORDER 

TO COVER ANY DEFICIT IN RETAINED 

EARNINGS OF THE ISSUING CREDIT 

UNION. AMOUNTS APPLIED TO COVER 

ANY SUCH DEFICIT WILL RESULT IN A 

CORRESPONDING REDUCTION OF THE 

PRINCIPAL AMOUNT OF ALL 

OUTSTANDING SUBORDINATED DEBT 

ISSUED BY THE ISSUING CREDIT UNION, 

AND WILL NO LONGER BE DUE AND 

PAYABLE TO THE HOLDERS OF SUCH 

SUBORDINATED DEBT. AMOUNTS 

APPLIED TO COVER ANY SUCH DEFICIT 

MUST BE APPLIED AMONG ALL HOLDERS 

OF SUCH SUBORDINATED DEBT PRO 

RATA BASED ON THE AGGREGATE 

AMOUNT OF SUBORDINATED DEBT 

OWED BY THE ISSUING CREDIT UNION TO 

EACH SUCH HOLDER AT THE TIME OF 

APPLICATION. 

• THIS OBLIGATION CAN ONLY BE 

REPAID AT MATURITY OR IN 

ACCORDANCE WITH 12 CFR 702.411. THIS 

OBLIGATION MAY ALSO BE REPAID IN 

ACCORDANCE WITH 12 CFR PART 710 IF 

THE ISSUING CREDIT UNION 

VOLUNTARILY LIQUIDATES. 

• THE NOTE EVIDENCING THIS 

OBLIGATION HAS NOT BEEN AND WILL 

NOT BE REGISTERED UNDER THE 

SECURITIES ACT OF 1933, AS AMENDED 

(THE ‘‘SECURITIES ACT’’), OR THE 

SECURITIES LAWS OF ANY STATE OF THE 

UNITED STATES OR ANY OTHER 

JURISDICTION, AND MAY BE ISSUED, 

SOLD, PLEDGED, OR OTHERWISE 

TRANSFERRED ONLY (A) AS PERMITTED 

IN THE NOTE AND TO A PERSON WHOM 

THE ISSUER OR SELLER REASONABLY 

BELIEVES IS [AN ‘‘ACCREDITED 

INVESTOR’’ (AS DEFINED IN 12 CFR 

702.402)] [AN ‘‘ENTITY ACCREDITED 

INVESTOR’’ (AS DEFINED IN 12 CFR 

702.402)] (THAT IS NOT A MEMBER OF 

THE ISSUING CREDIT UNION’S BOARD, A 

SENIOR EXECUTIVE OFFICER OF THE 

ISSUING CREDIT UNION (AS THAT TERM 

IS DEFINED IN 12 CFR 702.402), OR ANY 

IMMEDIATE FAMILY MEMBER OF ANY 

SUCH BOARD MEMBER OR SENIOR 

EXECUTIVE OFFICER), PURCHASING FOR 

ITS OWN ACCOUNT, (1) TO WHOM 

NOTICE IS GIVEN THAT THE SALE, 

PLEDGE, OR OTHER TRANSFER IS BEING 

MADE IN RELIANCE ON THE EXEMPTION 

FROM SECURITIES ACT REGISTRATION 

PROVIDED BY SECTION 3(a)(5) OF THE 

SECURITIES ACT, OR (2) IN ACCORDANCE 

WITH ANOTHER EXEMPTION FROM THE 

REGISTRATION REQUIREMENTS OF THE 

SECURITIES ACT (SUBJECT TO THE 

DELIVERY OF SUCH CERTIFICATIONS, 

LEGAL OPINIONS, OR OTHER 

INFORMATION AS THE ISSUING CREDIT 

UNION MAY REASONABLY REQUIRE TO 

CONFIRM THAT SUCH SALE, PLEDGE, OR 

TRANSFER IS BEING MADE PURSUANT TO 

AN EXEMPTION FROM, OR IN A 

TRANSACTION NOT SUBJECT TO, THE 

REGISTRATION REQUIREMENTS OF THE 

SECURITIES ACT), (B) IN COMPLIANCE 

WITH THE CERTIFICATION AND OTHER 

REQUIREMENTS SPECIFIED IN THE 

[INDENTURE OR OTHER DOCUMENT 

PURSUANT TO WHICH THE 

SUBORDINATED DEBT NOTE IS ISSUED] 

REFERRED TO HEREIN, AND (C) IN 

ACCORDANCE WITH ANY APPLICABLE 

SECURITIES LAWS OF ANY STATE OF THE 

UNITED STATES AND ANY OTHER 

APPLICATION JURISDICTION. 

(b) An Issuing Credit Union must also 

clearly and accurately disclose in the 

Subordinated Debt Note: 

(1) The payout priority and level of 

subordination, as described in § 709.5(b) 

of this chapter, that would apply in the 

event of the involuntary liquidation of 

the Issuing Credit Union; 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 11077 

(2) A general description of the 

NCUA’s regulatory authority that 

includes, at a minimum: 

(i) If the Issuing Credit Union is 

‘‘undercapitalized’’ or, if the Issuing 

Credit Union is a New Credit Union, 

‘‘moderately capitalized’’ (each as 

defined in this part), and fails to submit 

an acceptable net worth restoration 

plan, capital restoration plan, or revised 

business plan, as applicable, or 

materially fails to implement such a 

plan that was approved by the NCUA, 

the Issuing Credit Union may be subject 

to all of the additional restrictions and 

requirements applicable to a 

‘‘significantly undercapitalized’’ credit 

union or, if the Issuing Credit Union is 

a new credit union, a ‘‘marginally 

capitalized’’ new credit union; and 

(ii) Beginning 60 days after the 

effective date of an Issuing Credit Union 

being classified as ‘‘critically 

undercapitalized’’ or, in the case of a 

new credit union, ‘‘uncapitalized,’’ the 

Issuing Credit Union shall not pay 

principal of or interest on its 

Subordinated Debt, until reauthorized to 

do so by the NCUA; provided, however, 

that unpaid interest shall continue to 

accrue under the terms of the 

Subordinated Debt Note, to the extent 

permitted by law; and 

(3) The risk factors associated with 

the NCUA’s or, if applicable, the state 

supervisory authority’s, authority to 

conserve or liquidate a credit union 

under the Federal Credit Union Act 

(FCU Act) or applicable state law. 

§ 702.406 Requirements related to the 

offer, sale, and issuance of Subordinated 

Debt Notes. 

(a) Offering Document. An Issuing 

Credit Union or person acting on behalf 

of or at the direction of any Issuing 

Credit Union may only issue and sell 

Subordinated Debt Notes if, a reasonable 

time prior to the issuance and sale of 

any Subordinated Debt Notes, each 

purchaser of a Subordinated Debt Note 

receives an Offering Document that 

meets the requirements of § 702.408(e) 

and such further material information, if 

any, as may be necessary to make the 

required disclosures in that Offering 

Document, in the light of the 

circumstances under which they are 

made, not misleading. 

(b) Territorial limitations. An Issuing 

Credit Union may only offer, issue, and 

sell Subordinated Debt Notes in the 

United States of America (including any 

one of the states thereof and the District 

of Columbia), its territories, and its 

possessions. This limitation includes a 

prohibition on non-U.S. investors 

holding or purchasing Subordinated 

Debt Notes. 

(c) Accredited Investors. An Issuing 

Credit Union may only offer, issue, and 

sell Subordinated Debt to Accredited 

Investors, and the terms of any 

Subordinated Debt Note must include 

the restrictions in § 702.404(a)(10); 

provided that no Subordinated Debt 

Note may be issued, sold, resold, 

pledged, or otherwise transferred to a 

member of the board of the Issuing 

Credit Union, any Senior Executive 

Officer of the Issuing Credit Union, or 

any Immediate Family Member of any 

such board member or Senior Executive 

Officer. Prior to the offer of any 

Subordinated Debt Note, the Issuing 

Credit Union must receive a signed, 

unambiguous certification from any 

potential investor of a Subordinated 

Debt Note. The certification must be in 

substantially the following form: 

CERTIFICATE OF ACCREDITED INVESTOR 

STATUS 

Except as may be indicated by the 

undersigned below, the undersigned is an 

accredited investor, as that term is defined in 

Regulation D under the Securities Act of 

1933, as amended (the ‘‘Act’’). In order to 

demonstrate the basis on which it is 

representing its status as an accredited 

investor, the undersigned has checked one of 

the boxes below indicating that the 

undersigned is: 

[ ] Any bank as defined in section 3(a)(2) 

of the Act, or any savings and loan 

association or other institution as defined in 

section 3(a)(5)(A) of the Act whether acting 

in its individual or fiduciary capacity; any 

broker or dealer registered pursuant to 

section 15 of the Securities Exchange Act of 

1934; any investment adviser registered 

pursuant to section 203 of the Investment 

Advisers Act of 1940 or registered pursuant 

to the laws of a state; any investment adviser 

relying on the exemption from registering 

with the Securities and Exchange 

Commission under section 203(l) or (m) of 

the Investment Advisers Act of 1940; any 

insurance company as defined in section 

2(a)(13) of the Act; any investment company 

registered under the Investment Company 

Act of 1940 or a business development 

company as defined in section 2(a)(48) of that 

act; any Small Business Investment Company 

licensed by the U.S. Small Business 

Administration under section 301(c) or (d) of 

the Small Business Investment Act of 1958; 

any Rural Business Investment Company as 

defined in section 384A of the Consolidated 

Farm and Rural Development Act; any plan 

established and maintained by a state, its 

political subdivisions, or any agency or 

instrumentality of a state or its political 

subdivisions, for the benefit of its employees, 

if such plan has total assets in excess of 

$5,000,000; any employee benefit plan 

within the meaning of the Employee 

Retirement Income Security Act of 1974 if 

the investment decision is made by a plan 

fiduciary, as defined in section 3(21) of such 

act, which is either a bank, savings and loan 

association, insurance company, or registered 

investment adviser, or if the employee 

benefit plan has total assets in excess of 

$5,000,000 or, if a self-directed plan, with 

investment decisions made solely by persons 

that are accredited investors; [ ] A private 

business development company as defined in 

section 202(a)(22) of the Investment Advisers 

Act of 1940; 

[ ] Any organization described in section 

501(c)(3) of the Internal Revenue Code, 

corporation, Massachusetts or similar 

business trust, partnership, or limited 

liability company, not formed for the specific 

purpose of acquiring the securities offered, 

with total assets in excess of $5,000,000; [ ] 

Any natural person whose individual net 

worth, or joint net worth with that person’s 

spouse or spousal equivalent, exceeds 

$1,000,000; (excluding the value of the 

person’s primary residence). For the 

purposes of calculating joint net worth in this 

paragraph: joint net worth can be the 

aggregate net worth of the investor and 

spouse or spousal equivalent; assets need not 

be held jointly to be included in the 

calculation; 

[ ] Any natural person who had an 

individual income in excess of $200,000 in 

each of the two most recent years or joint 

income with that person’s spouse or spousal 

equivalent in excess of $300,000 in each of 

those years and has a reasonable expectation 

of reaching the same income level in the 

current year; [ ] A trust with total assets in 

excess of $5,000,000, not formed for the 

specific purpose of acquiring the securities 

offered, whose purchase is directed by a 

person who has such knowledge and 

experience in financial and business matters 

that he or she is capable of evaluating the 

merits and risks of the prospective 

investment; 

[ ] An entity in which all of the equity 

holders are accredited investors by virtue of 

their meeting one or more of the above 

standards; 

[ ] Any entity, of a type not listed in 

paragraph (a)(1), (2), (3), (7), or (8) of 17 CFR 

230.501(a), not formed for the specific 

purpose of acquiring the securities offered, 

owning investments in excess of $5,000,000; 

[ ] Any natural person holding in good 

standing one or more professional 

certifications or designations or credentials 

from an accredited educational institution 

that the Securities and Exchange Commission 

has designated as qualifying an individual for 

accredited investor status; 

[ ] Any natural person who is a 

‘‘knowledgeable employee,’’ as defined in 

rule 3c5(a)(4) under the Investment Company 

Act of 1940 (17 CFR 270.3c-5(a)(4)), of the 

issuer of the securities being offered or sold 

where the issuer would be an investment 

company, as defined in section 3 of such act, 

but for the exclusion provided by either 

section 3(c)(1) or section 3(c)(7) of such act; 

[ ] Any ‘‘family office,’’ as defined in rule 

202(a)(11)(G)-1 under the Investment 

Advisers Act of 1940 (17 CFR 

275.202(a)(11)(G)-1): (i) With assets under 

management in excess of $5,000,000, (ii) That 

is not formed for the specific purpose of 

acquiring the securities offered, and (iii) 

Whose prospective investment is directed by 

a person who has such knowledge and 

experience in financial and business matters 

11078 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

that such family office is capable of 

evaluating the merits and risks of the 

prospective investment; and 

[ ] Any ‘‘family client,’’ as defined in rule 

202(a)(11)(G)-1 under the Investment 

Advisers Act of 1940 (17 CFR 

275.202(a)(11)(G)-1)), of a family office 

meeting the requirements in paragraph 

(a)(12) of § 275.202(a)(11)(G)-1 and whose 

prospective investment in the issuer is 

directed by such family office pursuant to 

paragraph (a)(12)(iii) of § 275.202(a)(11)(G)-1. 

The undersigned understands that [NAME 

OF ISSUING CREDIT UNION] (the ‘‘Credit 

Union’’) is required to verify the 

undersigned’s accredited investor status AND 

ELECTS TO DO ONE OF THE FOLLOWING: 

[ ] Allow the Credit Union’s representative 

to review the undersigned’s tax returns for 

the two most recently completed years and 

provide a written representation of the 

undersigned’s reasonable expectation of 

reaching the income level necessary to 

qualify as an accredited investor during the 

current year; 

[ ] Allow the Credit Union’s representative 

to: (1) obtain a written representation from 

the undersigned that states that all liabilities 

necessary to make a determination of net 

worth have been disclosed; and (2) review 

one or more of the following types of 

documentation dated within the past three 

months: bank statements, brokerage 

statements, tax assessments, appraisal reports 

as to assets, or a consumer report from a 

nationwide consumer reporting agency; 

[ ] Provide the Credit Union with a written 

confirmation from one of the following 

persons or entities that such person or entity 

has taken reasonable steps to verify that the 

undersigned is an accredited investor within 

the prior three months and has determined 

that the undersigned is an accredited 

investor: 

• A registered broker-dealer; 

• An investment adviser registered with 

the Securities Exchange Commission; 

• A licensed attorney who is in good 

standing under the laws of the jurisdictions 

in which such attorney is admitted to 

practice law; or 

• A certified public accountant who is 

duly registered and in good standing under 

the laws of the place of such accountant’s 

residence or principal office. 

IN WITNESS WHEREOF, the undersigned 

has executed this Certificate of Accredited 

Investor Status effective as of 

llllllllllllll, 20lll. 

lllllllllllllllllllll

Name of Investor 

lllllllllllllllllllll

[Name of Authorized Representative 

lllllllllllllllllllll

Title of Authorized Representative] 

lllllllllllllllllllll

Signature 

lllllllllllllllllllll

Address 

lllllllllllllllllllll

Address 

lllllllllllllllllllll

Phone Number 

lllllllllllllllllllll

Email Address 

(d) Use of trustees. If using a trustee 

in connection with the offer, issuance, 

and sale of Subordinated Debt Notes, 

the trustee must meet the requirements 

set forth in the Trust Indenture Act of 

1939, as amended, including 

requirements for qualification set forth 

in section 310 thereof; any rules related 

to such act in 17 CFR parts 260, 261, 

and 269; and any applicable state law. 

(e) Offers, issuances, and sales of 

Subordinated Debt Notes. Offers 

issuances, and sales of Subordinated 

Debt Notes are required to be made in 

accordance with the following 

requirements: 

(1) Application to offer, issue, and sell 

at offices of Issuing Credit Union. If the 

Issuing Credit Union intends to offer 

and sell Subordinated Debt Notes at one 

or more of its offices, the Issuing Credit 

Union must first apply in writing to the 

Appropriate Supervision Office 

indicating that it intends to offer, issue, 

and sell Subordinated Debt Notes at one 

or more of its offices. The application 

must include, at a minimum, the 

physical locations of such offices and a 

description of how the Issuing Credit 

Union will comply with the 

requirements of this paragraph (e); 

(2) Decision on application. Within 60 

calendar days (which may be extended 

by the Appropriate Supervision Office) 

after the date of receipt of a complete 

application described in paragraph 

(e)(1) of this section, the Appropriate 

Supervision Office will provide the 

Issuing Credit Union with a written 

determination on its application to 

conduct offering and sales activity from 

its office(s). Any denial of an Issuing 

Credit Union’s application under this 

section will include the reasons for such 

denial; 

(3) Commissions, bonuses, or 

comparable payments. In connection 

with any offering and sale of 

Subordinated Debt Notes (whether or 

not conducted at offices of the Issuing 

Credit Union), an Issuing Credit Union 

shall not pay, directly or indirectly, any 

commissions, bonuses, or comparable 

payments to any employee of the 

Issuing Credit Union or any affiliated 

Credit Union Service Organizations 

(CUSOs) assisting with the offer, 

issuance, and sale of such Subordinated 

Debt Notes, or to any other person in 

connection with the offer, issuance, and 

sale of Subordinated Debt Notes; except 

that compensation and commissions 

consistent with industry norms may be 

paid to securities personnel of registered 

broker-dealers as otherwise permitted 

by applicable law; 

(4) Issuances by tellers. No offers or 

sales may be made by tellers at the teller 

counter of any Issuing Credit Union, or 

by comparable persons at comparable 

locations; 

(5) Permissible issuing personnel. In 

connection with an offering or sale of 

Subordinated Debt Notes (whether or 

not conducted at offices of the Issuing 

Credit Union), such activity may be 

conducted only by regular, full-time 

employees of the Issuing Credit Union 

or by securities personnel who are 

subject to supervision by a registered 

broker-dealer, which securities 

personnel may be employees of the 

Issuing Credit Union’s affiliated CUSO 

that is assisting the Issuing Credit Union 

with the offer, issuance, and sale of the 

Subordinated Debt Notes; 

(6) Issuance practices, 

advertisements, and other literature 

used in connection with the offer and 

sale of Subordinated Debt Notes. In 

connection with an offering or sale of 

Subordinated Debt Notes (whether or 

not conducted at offices of the Issuing 

Credit Union), issuance practices, 

advertisements, and other issuance 

literature used in connection with offers 

and issuances of Subordinated Debt 

Notes by Issuing Credit Unions or any 

affiliated CUSOs assisting with the offer 

and issuance of such Subordinated Debt 

Notes shall be subject to the 

requirements of this subpart; and 

(7) Office of an Issuing Credit Union. 

For purposes of this paragraph (e), an 

‘‘office’’ of an Issuing Credit Union 

means any premises used by the Issuing 

Credit Union that is identified to the 

public through advertising or signage 

using the Issuing Credit Union’s name, 

trade name, or logo. 

(f) Securities laws. An Issuing Credit 

Union must comply with all applicable 

Federal and state securities laws. 

(g) Resales. All resales of 

Subordinated Debt Notes issued by an 

Issuing Credit Union by holders of such 

Subordinated Debt Notes must be made 

pursuant to 17 CFR 230.144 (Rule 144 

under the Securities Act of 1933, as 

amended) (other than paragraphs (c), (e), 

(f), (g) and (h) of such Rule), 17 CFR 

230.144A (Rule 144A under the 

Securities Act of 1933, as amended), or 

another exemption from registration 

under the Securities Act of 1933, as 

amended. Subordinated Debt Notes 

must include the restrictions on resales 

in § 702.404(a)(10). 

§ 702.407 Discounting of amount treated 

as Regulatory Capital. 

The amount of outstanding 

Subordinated Debt that may be treated 

as Regulatory Capital shall reduce by 20 

percent per annum of the initial 

aggregate principal amount of the 

applicable Subordinated Debt (as 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 11079 

reduced by prepayments or amounts 

extinguished to cover a deficit under 

§ 702.404(a)(6)), as required by the 

following schedule: 

TABLE 1 TO § 720.407 

Remaining maturity 

Balance treated as 

regulatory capital 

% 

Four to less than five years ......................................................................................................................................................... 80 

Three to less than four years ...................................................................................................................................................... 60 

Two to less than three years ....................................................................................................................................................... 40 

One to less than two years ......................................................................................................................................................... 20 

Less than one year ...................................................................................................................................................................... 0 

§ 702.408 Preapproval to issue 

Subordinated Debt. 

(a) Scope. This section requires all 

credit unions to receive written 

preapproval from the NCUA before 

issuing Subordinated Debt. Procedures 

related specifically to applications from 

federally insured, state-chartered credit 

unions are contained in § 702.409. A 

credit union seeking approval to offer 

and sell Subordinated Debt at one or 

more of its offices must also follow the 

application procedures in § 702.406(e). 

All approvals under this section are 

subject to the expiration limits specified 

in paragraph (k) of this section. 

(b) Initial application to issue 

Subordinated Debt. A credit union 

requesting approval to issue 

Subordinated Debt must first submit an 

application to the Appropriate 

Supervision Office that, at a minimum, 

includes: 

(1) A statement indicating how the 

credit union qualifies to issue 

Subordinated Debt given the eligibility 

requirements of § 702.403 with 

additional supporting analysis if 

anticipating to meet the requirements of 

a LICU or complex credit union within 

24 months after issuance of the 

Subordinated Debt; 

(2) The maximum aggregate principal 

amount of Subordinated Debt Notes and 

the maximum number of discrete 

issuances of Subordinated Debt Notes 

that the credit union is proposing to 

issue within the period allowed under 

paragraph (k) of this section; 

(3) The estimated number of investors 

and the status of such investors (Natural 

Person Accredited Investors and/or 

Entity Accredited Investors) to whom 

the credit union intends to offer and sell 

the Subordinated Debt Notes; 

(4) A statement identifying any 

outstanding Subordinated Debt or 

Grandfathered Secondary Capital 

previously issued by the credit union; 

(5) A copy of the credit union’s 

strategic plan, business plan, and 

budget, and an explanation of how the 

credit union intends to use the 

Subordinated Debt in conformity with 

those plans; 

(6) An analysis of how the credit 

union will provide for liquidity to repay 

the Subordinated Debt upon maturity of 

the Subordinated Debt; 

(7) Pro Forma Financial Statements 

(balance sheet, income statement, and 

statement of cash flows), 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; 

(8) A statement indicating how the 

credit union will use the proceeds from 

the issuance and sale of the 

Subordinated Debt; 

(9) A statement identifying the 

governing law specified in the 

Subordinated Debt Notes and the 

documents pursuant to which the 

Subordinated Debt Notes will be issued; 

(10) A draft written policy governing 

the offer, and issuance, and sale of the 

Subordinated Debt, developed in 

consultation with Qualified Counsel, 

which, at a minimum, addresses: 

(i) Compliance with all applicable 

Federal and state securities laws and 

regulations; 

(ii) Compliance with applicable 

securities laws related to 

communications with investors and 

potential investors, including, but not 

limited to: Who may communicate with 

investors and potential investors; what 

information may be provided to 

investors and potential investors; 

ongoing disclosures to investors; who 

will review and ensure the accuracy of 

the information provided to investors 

and potential investors; and to whom 

information will be provided; 

(iii) Compliance with any laws that 

may require registration of credit union 

employees as broker-dealers; and 

(iv) Any use of outside agents, 

including broker-dealers, to assist in the 

marketing and issuance of Subordinated 

Debt, and any limitations on such use; 

(11) A schedule that provides an 

itemized statement of all expenses 

incurred or expected to be incurred by 

the credit union in connection with the 

offer, issuance, and sale of the 

Subordinated Debt Notes to which the 

initial application relates, other than 

underwriting discounts and 

commissions or similar compensation 

payable to broker-dealers acting as 

placement agents. The schedule must 

include, as applicable, fees and 

expenses of counsel, auditors, any 

trustee or issuing and paying agent or 

any transfer agent, and printing and 

engraving expenses. If the amounts of 

any items are not known at the time of 

filing of the initial application, the 

credit union must provide estimates, 

clearly identified as such; 

(12) In the case of a new credit union, 

a statement that it is subject to either an 

approved initial business plan or 

revised business plan, as required by 

this part, and how the proposed 

Subordinated Debt would conform with 

the approved plan. Unless the new 

credit union has a LICU designation 

pursuant to § 701.34 of this chapter, it 

must also include a plan for replacing 

the Subordinated Debt with Retained 

Earnings before the credit union ceases 

to meet the definition of new credit 

union in § 702.2; 

(13) A statement describing any 

investments the credit union has in the 

Subordinated Debt of any other credit 

union, and the manner in which the 

credit union acquired such 

Subordinated Debt, including through a 

merger or other consolidation; 

(14) A signature page signed by the 

credit union’s principal executive 

officer, principal financial officer or 

principal accounting officer, and a 

majority ‘of the members of its board of 

directors. Amendments to an initial 

application must be signed and filed 

with the NCUA in the same manner as 

the initial application; and 

(15) Any additional information 

requested in writing by the Appropriate 

Supervision Office. 

11080 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

(c) Decision on initial application. 

Upon receiving an initial application 

submitted under this paragraph (c) and 

any additional information requested in 

writing by the Appropriate Supervision 

Office, the Appropriate Supervision 

Office will evaluate, at a minimum, the 

credit union’s compliance with this 

subpart and all other NCUA regulations 

in this chapter, the credit union’s ability 

to manage and safely offer, issue, and 

sell the proposed Subordinated Debt, 

the safety and soundness of the 

proposed use of the Subordinated Debt, 

the overall condition of the credit 

union, and any other factors the 

Appropriate Supervision Office 

determines are relevant. 

(1) Written determination. Within 60 

calendar days (which may be extended 

by the Appropriate Supervision Office) 

after the date of receipt of a complete 

application, the Appropriate 

Supervision Office will provide the 

credit union with a written 

determination on its application. In the 

case of a full or partial denial, or 

conditional approval under paragraph 

(c)(2) of this section, the written 

decision will state the reasons for the 

denial or conditional approval. 

(2) Conditions of approval. Any 

approval granted by an Appropriate 

Supervision Office under this section 

may include one or more of the 

following conditions: 

(i) Approval of an aggregate principal 

amount of Subordinated Debt that is 

lower than what the credit union 

requested; 

(ii) Any applicable minimum level of 

net worth that the credit union must 

maintain while the Subordinated Debt 

Notes are outstanding; 

(iii) Approved uses of the 

Subordinated Debt; and 

(iv) Any other limitations or 

conditions the Appropriate Supervision 

Office deems necessary to protect the 

NCUSIF. 

(d) Offering Document. Following 

receipt of written approval of its initial 

application, an Issuing Credit Union 

must prepare an Offering Document for 

each issuance of Subordinated Debt 

Notes. In addition, as required in 

paragraph (f) of this section, an Issuing 

Credit Union that intends to offer 

Subordinated Debt Notes to any Natural 

Person Accredited Investors must have 

the related Offering Document declared 

‘‘approved for use’’ by the NCUA before 

its first use. At a reasonable time prior 

to any issuance and sale of 

Subordinated Debt Notes, the Issuing 

Credit Union must provide each 

investor with an Offering Document as 

described in this section. All Offering 

Documents must be filed with the 

NCUA within two business days after 

their respective first use. 

(e) Requirements for all Offering 

Documents—(1) Minimum information 

required in an Offering Document. An 

Offering Document must, at a minimum, 

include the following information: 

(i) The name of the Issuing Credit 

Union and the address of its principal 

executive office; 

(ii) The initial principal amount of the 

Subordinated Debt being issued; 

(iii) The name(s) of any underwriter(s) 

or placement agents being used for the 

issuance; 

(iv) A description of the material risk 

factors associated with the purchase of 

the Subordinated Debt Notes, including 

any special or distinctive characteristics 

of the Issuing Credit Union’s business, 

field of membership, or geographic 

location that are reasonably likely to 

have a material impact on the Issuing 

Credit Union’s future financial 

performance; 

(v) The disclosures described in 

§ 702.405 and such additional material 

information, if any, as may be necessary 

to make the required disclosures, in the 

light of the circumstances under which 

they are made, not misleading; 

(vi) Provisions related to the interest, 

principal, payment, maturity, and 

prepayment of the Subordinated Debt 

Notes; 

(vii) All material affirmative and 

negative covenants that may or will be 

included in the Subordinated Debt Note, 

including, but not limited to, the 

covenants discussed in this subpart; 

(viii) Any legends required by 

applicable state law; and 

(ix) The following legend, displayed 

on the cover page in prominent type or 

in another manner: 

None of the Securities and Exchange 

Commission (the ‘‘SEC’’), any state securities 

commission or the National Credit Union 

Administration has passed upon the merits 

of, or given its approval of, the purchase of 

any Subordinated Debt Notes offered or the 

terms of the offering, or passed on the 

accuracy or completeness of any Offering 

Document or other materials used in 

connection with the offer, issuance, and sale 

of the Subordinated Debt Notes. Any 

representation to the contrary is unlawful. 

These Subordinated Debt Notes have not 

been registered under the Securities Act of 

1933, as amended (the ‘‘Act’’) and are being 

offered and sold to [an Entity Accredited 

Investor][an Accredited Investor] (as defined 

in 12 CFR 702.402) pursuant to an exemption 

from registration under the Act; however, 

neither the SEC nor the NCUA has made an 

independent determination that the offer and 

issuance of the Subordinated Debt Notes are 

exempt from registration. 

(2) Legibility requirements. An Issuing 

Credit Union’s Offering Document must 

comply with the following legibility 

requirements: 

(i) Information in the Offering 

Document must be presented in a clear, 

concise, and understandable manner, 

incorporating plain English principles. 

The body of all printed Offering 

Documents shall be in type at least as 

large and as legible as 10-point type. To 

the extent necessary for convenient 

presentation, however, financial 

statements and other tabular data, 

including tabular data in notes, may be 

in type at least as large and as legible 

as 8-point type. Repetition of 

information should be avoided. Crossreferencing of information within the 

document is permitted; and 

(ii) Where an Offering Document is 

distributed through an electronic 

medium, the Issuing Credit Union may 

satisfy legibility requirements 

applicable to printed documents, such 

as paper size, type size and font, boldface type, italics and red ink, by 

presenting all required information in a 

format readily communicated to offerees 

and, where indicated, in a manner 

reasonably calculated to draw the 

attention of offerees to specific 

information. 

(f) Offering Documents approved for 

use in offerings of Subordinated Debt to 

any Natural Person Accredited 

Investors—(1) Filing of a Draft Offering 

Document. An Issuing Credit Union that 

intends to offer Subordinated Debt 

Notes to any Natural Person Accredited 

Investors must file a draft Offering 

Document with the NCUA and have 

such draft Offering Document declared 

‘‘approved for use’’ by the NCUA before 

its first use. 

(i) Request for additional information, 

clarifications, or amendments. Prior to 

declaring any Offering Document 

‘‘approved for use,’’ the NCUA may ask 

questions, request clarifications, or 

direct the Issuing Credit Union to 

amend certain sections of the draft 

Offering Document. The NCUA will 

make any such requests in writing. 

(ii) Written determination. Within 60 

calendar days (which may be extended 

by the NCUA) after the date of receipt 

of each of the initial filing and each 

filing of additional information, 

clarifications, or amendments requested 

by the NCUA under paragraph (f)(1)(i) of 

this section, the NCUA will provide the 

Issuing Credit Union with a written 

determination on the applicable filing. 

The written determination will include 

any requests for additional information, 

clarifications, or amendments, or a 

statement that the Offering Document is 

‘‘approved for use.’’ 

(2) Filing of a final Offering 

Document. At such time as the NCUA 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 11081 

declares an Offering Document 

‘‘approved for use’’ in accordance with 

paragraph (f)(1)(ii) of this section, the 

Issuing Credit Union may then use that 

Offering Document in the offer and sale 

of the Subordinated Debt Notes. The 

Issuing Credit Union must file a copy of 

each of its Offering Documents with the 

NCUA within two business days after 

their respective first use. 

(g) Filing of an Offering Document for 

offerings of Subordinated Debt 

exclusively to Entity Accredited 

Investors. An Issuing Credit Union that 

is offering Subordinated Debt 

exclusively to Entity Accredited 

Investors is not required to have its 

Offering Document ‘‘approved for use’’ 

by the NCUA under paragraph (f) of this 

section before using it to offer and sell 

the Subordinated Debt Notes. As 

described in this section, however, the 

Issuing Credit Union must file a copy of 

each of its Offering Documents with the 

NCUA within two business days after 

their respective first use. 

(h) Material changes to any initial 

application or Offering Document—(1) 

Reapproval of initial application. If any 

material event arises or material change 

in fact occurs after the approval of the 

initial application by the NCUA, but 

prior to the completion of the offer and 

sale of the related Subordinated Debt 

Notes, then no person shall offer or sell 

Subordinated Debt Notes to any other 

person until an amendment to the 

Offering Document reflecting the event 

or change has been filed with and 

approved by the NCUA. 

(2) Reapproval of Offering Document. 

If an Offering Document must be 

approved for use under paragraph (f) of 

this section, and any event arises or 

change in fact occurs after the approval 

for use of any Offering Document, and 

that event or change in fact, 

individually or in the aggregate, results 

in the Offering Document containing 

any untrue statement of material fact, or 

omitting to state a material fact 

necessary in order to make statements 

made in the Offering Document not 

misleading in light of the circumstances 

under which they were made, then no 

person shall offer or sell Subordinated 

Debt Notes to any other person until an 

amendment reflecting the event or 

change has been filed with and 

‘‘approved for use’’ by the NCUA. 

(3) Failure to request reapproval. If an 

Issuing Credit Union fails to comply 

with paragraph (h)(1) or (2) of this 

section, the NCUA may, at its 

discretion, exercise the full range of 

administrative remedies available under 

the FCU Act, including: 

(i) Prohibiting the Issuing Credit 

Union from issuing any additional 

Subordinated Debt for a specified 

period; and/or 

(ii) Determining not to treat the 

Subordinated Debt as Regulatory 

Capital. 

(i) Notification. Not later than 10 

business days after the closing of a 

Subordinated Debt Note issuance and 

sale, the Issuing Credit Union must 

submit to the Appropriate Supervision 

Office: 

(1) A copy of each executed 

Subordinated Debt Note; 

(2) A copy of each executed purchase 

agreement, if any; 

(3) Any indenture or other transaction 

document used to issue the 

Subordinated Debt Notes; 

(4) Copies of signed certificates of 

Accredited Investor status, in a form 

similar to that in § 702.406(c), from all 

investors; 

(5) All documentation provided to 

investors related to the offer and sale of 

the Subordinated Debt Note (other than 

any Offering Document that was 

previously filed with the NCUA); and 

(6) Any other material documents 

governing the issuance, sale or 

administration of the Subordinated Debt 

Notes. 

(j) Resubmissions. An Issuing Credit 

Union that receives any adverse written 

determination from the Appropriate 

Supervision Office with respect to the 

approval of its initial application or any 

amendment thereto or, if applicable, the 

approval for use of an Offering 

Document or any amendment thereto, 

may cure any reasons noted in the 

written determination and refile under 

the requirements of this section. This 

paragraph (j) does not prohibit an 

Issuing Credit Union from appealing an 

Appropriate Supervision Office’s 

decision under subpart A of part 746 of 

this chapter. 

(k) Expiration of authority to issue 

Subordinated Debt. (1) Any approvals to 

issue Subordinated Debt Notes under 

this section expire two years from the 

later of the date the Issuing Credit 

Union receives: 

(i) Approval of its initial application, 

if the Issuing Credit Union is offering 

Subordinated Notes exclusively to 

Entity Accredited Investors; or 

(ii) The initial approval for use of its 

Offering Document, if the Issuing Credit 

Union is offering Subordinated Debt 

Notes to any Natural Person Accredited 

Investors. 

(2) Failure to issue all or part of the 

maximum aggregate principal amount of 

Subordinated Debt Notes approved in 

the initial application process within 

the applicable period specified in 

paragraph (k) of this section will result 

in the expiration of the NCUA’s 

approval. An Issuing Credit Union may 

file a written extension request with the 

Appropriate Supervision Office. The 

Issuing Credit Union must demonstrate 

good cause for any extension(s), and 

must file the request at least 30 calendar 

days before the expiration of the 

applicable period specified in paragraph 

(k) of this section or any extensions 

granted under paragraph (k) of this 

section. In any such written application, 

the Issuing Credit Union must address 

whether any such extension poses any 

material securities law implications. 

(l) Filing requirements and inspection 

of documents. (1) Except as otherwise 

provided in this section, all initial 

applications, Offering Documents, 

amendments, notices, or other 

documents must be filed with the 

NCUA electronically. The NCUA will 

publish on its website, http://

www.NCUA.gov, the web address for 

electronic filings. Documents may be 

signed electronically using the signature 

provision in 17 CFR 230.402 (Rule 402 

under the Securities Act of 1933, as 

amended). 

(2) Provided the Issuing Credit Union 

filing the document has complied with 

all requirements regarding the filing in 

this section, the date of filing of the 

document is the date the NCUA receives 

the filing. An electronic filing that is 

submitted on a business day by direct 

transmission commencing on or before 

5:30 p.m. Eastern Standard or Daylight 

Savings Time, whichever is then 

currently in effect, would be deemed 

received by the NCUA on the same 

business day. An electronic filing that is 

submitted by direct transmission 

commencing after 5:30 p.m. Eastern 

Standard or Daylight Savings Time, 

whichever is then currently in effect, or 

on a Saturday, Sunday, or Federal 

holiday, would be deemed received by 

the NCUA on the next business day. If 

an electronic filer in good faith attempts 

to file a document with the NCUA in a 

timely manner, but the filing is delayed 

due to technical difficulties beyond the 

electronic filer’s control, the electronic 

filer may request that the NCUA adjust 

the filing date of such document. The 

NCUA may grant the request if it 

appears that such adjustment is 

appropriate and consistent with the 

public interest and the protection of 

investors. 

(3) If an Issuing Credit Union 

experiences unanticipated technical 

difficulties preventing the timely 

preparation and submission of an 

electronic filing, the Issuing Credit 

Union may, upon notice to the 

Appropriate Supervision Office, file the 

subject filing in paper format no later 

11082 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

than one business day after the date on 

which the filing was to be made. 

(4) Any filing of amendments or 

supplements to an Offering Document 

must include two copies, one of which 

must be marked to indicate clearly and 

precisely, by underlining or in some 

other conspicuous manner, the changes 

made from the previously filed Offering 

Document. 

(m) Filing fees. (1) The NCUA may 

require filing fees to accompany certain 

filings made under this subpart before it 

will accept those filings. If the NCUA 

requires the aforementioned filing fee, 

the NCUA will publish an applicable fee 

schedule on its website at http://

www.NCUA.gov. 

(2) Filing fees must be paid to the 

NCUA by electronic transfer. 

§ 702.409 Preapproval for federally 

insured, state-chartered credit unions to 

issue Subordinated Debt. 

(a) A federally insured, state-chartered 

credit union is required to submit the 

information required under § 702.408 

and, if applicable, paragraph (b) of this 

section to both the Appropriate 

Supervision Office and its state 

supervisory authority. The Appropriate 

Supervision Office will issue decisions 

approving a federally insured, statechartered credit union’s application 

only after obtaining the concurrence of 

the federally insured, state-chartered 

credit union’s state supervisory 

authority. The NCUA will notify a 

federally insured, state-chartered credit 

union’s state supervisory authority 

before issuing a decision to ‘‘approve for 

use’’ a federally insured, state-chartered 

credit union’s Offering Document and 

any amendments thereto, under 

§ 702.408, if applicable. 

(b) If the Appropriate Supervision 

Office has reason to believe that an 

issuance by a federally insured, statechartered credit union under this 

subpart could subject that federally 

insured, state-chartered credit union to 

Federal income taxation, the 

Appropriate Supervision Office may 

require the federally insured, statechartered credit union to provide: 

(1) A written legal opinion, 

satisfactory to the NCUA, from 

nationally recognized tax counsel or 

letter from the Internal Revenue Service 

indicating whether the proposed 

Subordinated Debt would be classified 

as capital stock for Federal income tax 

purposes and, if so, describing any 

material impact of Federal income taxes 

on the federally insured, state-chartered 

credit union’s financial condition; or 

(2) A Pro Forma Financial Statement 

(balance sheet, income statement, and 

statement of cash flows), covering a 

minimum of two years, that shows the 

impact of the federally insured, statechartered credit union being subject to 

Federal income tax. 

(c) If the Appropriate Supervision 

Office requires additional information 

from a federally insured, state-chartered 

credit union under paragraph (b) of this 

section, the federally insured, statechartered credit union may determine, 

in its sole discretion, whether the 

information it provides is in the form 

described in paragraph (b)(1) or (2) of 

this section. 

§ 702.410 Interest payments on 

Subordinated Debt. 

(a) Requirements for interest 

payments. An Issuing Credit Union is 

prohibited from paying interest on 

Subordinated Debt in accordance with 

§ 702.109. 

(b) Accrual of interest. 

Notwithstanding nonpayment pursuant 

to paragraph (a) of this section, interest 

on the Subordinated Debt may continue 

to accrue according to terms provided 

for in the Subordinated Debt Note and 

as otherwise permitted in this subpart. 

(c) Interest safe harbor. Except as 

otherwise provided in this section, the 

NCUA shall not impose a discretionary 

supervisory action that requires the 

Issuing Credit Union to suspend interest 

with respect to the Subordinated Debt if: 

(1) The issuance and sale of the 

Subordinated Debt complies with all 

requirements of this subpart; 

(2) The Subordinated Debt is issued 

and sold in an arms-length, bona fide 

transaction; 

(3) The Subordinated Debt was issued 

and sold in the ordinary course of 

business, with no intent to hinder, 

delay, or defraud the Issuing Credit 

Union or its creditors; and 

(4) The Subordinated Debt was issued 

and sold for adequate consideration in 

U.S. dollars. 

(d) Authority, rights, and powers of 

the NCUA and the NCUA Board. This 

section does not waive, limit, or 

otherwise affect the authority, rights, or 

powers of the NCUA or the NCUA 

Board in any capacity, including the 

NCUA Board as conservator or 

liquidating agent, to take any action or 

to exercise any power not specifically 

mentioned, including but not limited to 

any rights, powers, or remedies of the 

NCUA Board as conservator or 

liquidating agent regarding transfers or 

other conveyances taken in 

contemplation of the Issuing Credit 

Union’s insolvency or with the intent to 

hinder, delay, or defraud the Issuing 

Credit Union or the creditors of such 

Issuing Credit Union, or that is 

fraudulent under applicable law. 

§ 702.411 Prior written approval to prepay 

Subordinated Debt. 

(a) Prepayment option. An Issuing 

Credit Union may include in the terms 

of its Subordinated Debt an option that 

allows the Issuing Credit Union to 

prepay the Subordinated Debt in whole 

or in part prior to maturity, provided, 

however, that the Issuing Credit Union 

is required to: 

(1) Clearly disclose the requirements 

of this section in the Subordinated Debt 

Note; and 

(2) Obtain approval under paragraph 

(b) of this section before exercising a 

prepayment option. 

(b) Prepayment application. Before an 

Issuing Credit Union can, in whole or in 

part, prepay Subordinated Debt prior to 

maturity, the Issuing Credit Union must 

first submit to the Appropriate 

Supervision Office an application that 

must include, at a minimum, the 

information required in paragraph (d) of 

this section. 

(c) Federally insured, state-chartered 

credit union prepayment applications. 

Before a federally insured, statechartered credit union may submit an 

application for prepayment to the 

Appropriate Supervision Office, it must 

obtain written approval from its state 

supervisory authority to prepay the 

Subordinated Debt it is proposing to 

prepay. A federally insured, statechartered credit union must provide 

evidence of such approval as part of its 

application to the Appropriate 

Supervision Office. 

(d) Application contents. An Issuing 

Credit Union’s application to prepay 

Subordinated Debt must include, at a 

minimum, the following: 

(1) A copy of the Subordinated Debt 

Note and any agreement(s) reflecting the 

terms and conditions of the 

Subordinated Debt the Issuing Credit 

Union is proposing to prepay; 

(2) An explanation why the Issuing 

Credit Union believes it still would hold 

an amount of capital commensurate 

with its risk exposure notwithstanding 

the proposed prepayment or a 

description of the replacement 

Subordinated Debt, including the 

amount of such instrument, and the 

time frame for issuance, the Issuing 

Credit Union is proposing to use to 

replace the prepaid Subordinated Debt; 

and 

(3) Any additional information the 

Appropriate Supervision Office 

requests. 

(e) Decision on application to prepay. 

(1) Within 45 calendar days (which may 

be extended by the Appropriate 

Supervision Office) after the date of 

receipt of a complete application, the 

Appropriate Supervision Office will 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 11083 

provide the Issuing Credit Union with a 

written determination on its 

application. In the case of a full or 

partial denial, including a conditional 

approval under paragraph (e)(2) of this 

section, the written decision will state 

the reasons for the denial or conditional 

approval. 

(2) The written determination from 

the Appropriate Supervision Office may 

approve the Issuing Credit Union’s 

request, approve the Issuing Credit 

Union’s request with conditions, or 

deny the Issuing Credit Union’s request. 

In the case of a denial or conditional 

approval, the Appropriate Supervision 

Office will provide the Issuing Credit 

Union with a description of why it 

denied the Issuing Credit Union’s 

request or imposed conditions on the 

approval of such request. 

(3) If the Issuing Credit Union 

proposes or the NCUA requires the 

Issuing Credit Union to replace the 

Subordinated Debt, the Issuing Credit 

Union must receive affirmative approval 

under this subpart and must issue and 

sell the replacement instrument prior to 

or concurrently with prepaying the 

Subordinated Debt. 

(f) Resubmissions. An Issuing Credit 

Union that receives an adverse written 

determination on its application to 

prepay, in whole or in part, may cure 

any deficiencies noted in the 

Appropriate Supervision Office’s 

written determination and reapply 

under the requirements of this section. 

This paragraph (f) does not prohibit an 

Issuing Credit Union from appealing the 

Appropriate Supervision Office’s 

adverse decision under subpart A of 

part 746 of this chapter. 

§ 702.412 Effect of a merger or dissolution 

on the treatment of Subordinated Debt as 

Regulatory Capital. 

(a) In the event of a merger of an 

Issuing Credit Union into or the 

assumption of its Subordinated Debt by 

another federally insured credit union, 

the Subordinated Debt will be treated as 

Regulatory Capital only to the extent 

that the resulting credit union is either 

a LICU, a complex credit union, and/or 

a new credit union. 

(b) In the event the resulting credit 

union is not a LICU, a complex credit 

union, or a new credit union, the 

Subordinated Debt of the merging credit 

union can either be: 

(1) If permitted by the terms of the 

Subordinated Debt Note, repaid by the 

resulting credit union upon approval by 

the NCUA under § 702.411; or 

(2) Continue to be held by the 

resulting credit union as Subordinated 

Debt, but will not be classified as 

Regulatory Capital under this subpart, 

unless the resulting credit union meets 

the eligibility requirements of § 702.403. 

(c) In the event of a voluntary 

dissolution of an Issuing Credit Union 

that has outstanding Subordinated Debt, 

the Subordinated Debt may be repaid in 

full according to 12 CFR part 710, 

subject to the requirements in § 702.411. 

§ 702.413 Repudiation safe harbor. 

(a) The NCUA Board as conservator 

for a federally insured credit union, or 

its lawfully appointed designee, shall 

not exercise its repudiation authorities 

under 12 U.S.C. 1787(c) with respect to 

Subordinated Debt if: 

(1) The issuance and sale of the 

Subordinated Debt complies with all 

requirements of this subpart; 

(2) The Subordinated Debt was issued 

and sold in an arms-length, bona fide 

transaction; 

(3) The Subordinated Debt was issued 

and sold in the ordinary course of 

business, with no intent to hinder, 

delay, or defraud the Issuing Credit 

Union or its creditors; and 

(4) The Subordinated Debt was issued 

and sold for adequate consideration in 

U.S. dollars. 

(b) This section does not authorize the 

attachment of any involuntary lien upon 

the property of either the NCUA Board 

as conservator or liquidating agent or its 

lawfully appointed designee. Nor does 

this section waive, limit, or otherwise 

affect the authority, rights, or powers of 

the NCUA or the NCUA Board in any 

capacity to take any action or to exercise 

any power not specifically mentioned, 

including but not limited to any rights, 

powers, or remedies of the NCUA Board 

as conservator or liquidating agent (or 

its lawfully appointed designee) 

regarding transfers or other conveyances 

taken in contemplation of the Issuing 

Credit Union’s insolvency or with the 

intent to hinder, delay or defraud the 

Issuing Credit Union or the creditors of 

such Issuing Credit Union, or that is 

fraudulent under applicable law. 

§ 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 January 

1, 2021, with minor modifications. The 

terminology used in this section is 

specific to this section. All secondary 

capital issued under 12 CFR 701.34 

(revised as of January 1, 2021) before 

January 1, 2022, or, in the case of a 

federally insured, state-chartered credit 

union, § 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. 

(a) Secondary capital is subject to the 

following conditions: 

(1) Secondary capital plan. A credit 

union that has Grandfathered Secondary 

Capital under this section must have a 

written, NCUA-approved ‘‘Secondary 

Capital Plan’’ that, at a minimum: 

(i) States the maximum aggregate 

amount of uninsured secondary capital 

the LICU plans to accept; 

(ii) Identifies the purpose for which 

the aggregate secondary capital will be 

used, and how it will be repaid; 

(iii) Explains how the LICU will 

provide for liquidity to repay secondary 

capital upon maturity of the accounts; 

(iv) Demonstrates that the planned 

uses of secondary capital conform to the 

LICU’s strategic plan, business plan, and 

budget; and 

(v) Includes supporting pro forma 

financial statements, including any offbalance sheet items, covering a 

minimum of the next two years. 

(2) Issuances not completed before 

January 1, 2022. 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. 

(3) Nonshare account. The secondary 

capital account is established as an 

uninsured secondary capital account or 

other form of non-share account. 

(4) Minimum maturity. The maturity 

of the secondary capital account is a 

minimum of five years. 

(5) Uninsured account. The secondary 

capital account is not insured by the 

National Credit Union Share Insurance 

Fund or any governmental or private 

entity. 

(6) Subordination of claim. The 

secondary capital account investor’s 

claim against the LICU is subordinate to 

all other claims including those of 

shareholders, creditors and the National 

Credit Union Share Insurance Fund. 

(7) Availability to cover losses. Funds 

deposited into a secondary capital 

account, including interest accrued and 

paid into the secondary capital account, 

are available to cover operating losses 

realized by the LICU that exceed its net 

available reserves (exclusive of 

secondary capital and allowance 

accounts for loan and lease losses), and 

to the extent funds are so used, the LICU 

must not restore or replenish the 

account under any circumstances. The 

LICU may, in lieu of paying interest into 

the secondary capital account, pay 

accrued interest directly to the investor 

or into a separate account from which 

the secondary capital investor may 

make withdrawals. Losses must be 

distributed pro-rata among all secondary 

capital accounts held by the LICU at the 

11084 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

time the losses are realized. In instances 

where a LICU accepted secondary 

capital from the United States 

Government or any of its subdivisions 

under the Community Development 

Capital Initiative of 2010 (‘‘CDCI 

secondary capital’’) and matching funds 

were required under the Initiative and 

are on deposit in the form of secondary 

capital at the time a loss is realized, a 

LICU must apply either of the following 

pro-rata loss distribution procedures to 

its secondary capital accounts with 

respect to the loss: 

(i) If not inconsistent with any 

agreements governing other secondary 

capital on deposit at the time a loss is 

realized, the CDCI secondary capital 

may be excluded from the calculation of 

the pro-rata loss distribution until all of 

its matching secondary capital has been 

depleted, thereby causing the CDCI 

secondary capital to be held as senior to 

all other secondary capital until its 

matching secondary capital is 

exhausted. The CDCI secondary capital 

should be included in the calculation of 

the pro-rata loss distribution and is 

available to cover the loss only after all 

of its matching secondary capital has 

been depleted. 

(ii) Regardless of any agreements 

applicable to other secondary capital, 

the CDCI secondary capital and its 

matching secondary capital may be 

considered a single account for 

purposes of determining a pro-rata share 

of the loss and the amount determined 

as the pro-rata share for the combined 

account must first be applied to the 

matching secondary capital account, 

thereby causing the CDCI secondary 

capital to be held as senior to its 

matching secondary capital. The CDCI 

secondary capital is available to cover 

the loss only after all of its matching 

secondary capital has been depleted. 

(8) Security. The secondary capital 

account may not be pledged or provided 

by the account investor as security on a 

loan or other obligation with the LICU 

or any other party. 

(9) Merger or dissolution. In the event 

of merger or other voluntary dissolution 

of the LICU, other than merger into 

another LICU, the secondary capital 

accounts will be closed and paid out to 

the account investor to the extent they 

are not needed to cover losses at the 

time of merger or dissolution. 

(10) Contract agreement. A secondary 

capital account contract agreement must 

have been executed by an authorized 

representative of the account investor 

and of the LICU reflecting the terms and 

conditions mandated by this section and 

any other terms and conditions not 

inconsistent with this section. 

(11) Disclosure and 

acknowledgement. An authorized 

representative of the LICU and of the 

secondary capital account investor each 

must have executed a ‘‘Disclosure and 

Acknowledgment’’ as set forth in the 

appendix to this subpart at the time of 

entering into the account agreement. 

The LICU must retain an original of the 

account agreement and the ‘‘Disclosure 

and Acknowledgment’’ for the term of 

the agreement, and a copy must be 

provided to the account investor. 

(12) Prompt corrective action. As 

provided in this part, the NCUA may 

prohibit a LICU as classified ‘‘critically 

undercapitalized’’ or, if ‘‘new,’’ as 

‘‘moderately capitalized’’, ‘‘marginally 

capitalized’’, ‘‘minimally capitalized’’ or 

‘‘uncapitalized,’’ as the case may be, 

from paying principal, dividends, or 

interest on its uninsured secondary 

capital accounts established after 

August 7, 2000, except that unpaid 

dividends or interest will continue to 

accrue under the terms of the account to 

the extent permitted by law. 

(b) Accounting treatment; Recognition 

of net worth value of accounts—(1) 

Debt. A LICU that issued secondary 

capital accounts pursuant to paragraph 

(a) of this section must record the funds 

on its balance sheet as a debt titled 

‘‘uninsured secondary capital account.’’ 

(2) Schedule for recognizing net worth 

value. The LICU’s reflection of the net 

worth value of the accounts in its 

financial statement may never exceed 

the full balance of the secondary capital 

on deposit after any early redemptions 

and losses. For accounts with remaining 

maturities of less than five years, the 

LICU must reflect the net worth value of 

the accounts in its financial statement in 

accordance with the lesser of: 

(i) The remaining balance of the 

accounts after any redemptions and 

losses; or 

(ii) The amounts calculated based on 

the following schedule: 

TABLE 1 TO PARAGRAPH (b)(2)(ii) 

Remaining maturity 

Net worth 

value of 

original 

balance 

(percent) 

Four to less than five years ...... 80 

Three to less than four years ... 60 

Two to less than three years .... 40 

One to less than two years ...... 20 

Less than one year ................... 0 

(3) Financial statement. The LICU 

must reflect the full amount of the 

secondary capital on deposit in a 

footnote to its financial statement. 

(c) Redemption of secondary capital. 

With the written approval of NCUA, 

secondary capital that is not recognized 

as net worth under paragraph (b)(2) of 

this section (‘‘discounted secondary 

capital’’ re-categorized as Subordinated 

Debt) may be redeemed according to the 

remaining maturity schedule in 

paragraph (c)(3) of this section. 

(1) Request to redeem secondary 

capital. A request for approval to 

redeem discounted secondary capital 

may be submitted in writing at any time, 

must specify the increment(s) to be 

redeemed and the schedule for 

redeeming all or any part of each 

eligible increment, and must 

demonstrate to the satisfaction of NCUA 

that: 

(i) The LICU will have a postredemption net worth classification of at 

least ‘‘adequately capitalized’’ under 

this part; 

(ii) The discounted secondary capital 

has been on deposit at least two years; 

(iii) The discounted secondary capital 

will not be needed to cover losses prior 

to final maturity of the account; 

(iv) The LICU’s books and records are 

current and reconciled; 

(v) The proposed redemption will not 

jeopardize other current sources of 

funding, if any, to the LICU; and 

(vi) The request to redeem is 

authorized by resolution of the LICU’s 

board of directors. 

(2) Decision on request. A request to 

redeem discounted secondary capital 

may be granted in whole or in part. If 

a LICU is not notified within 45 days of 

receipt of a request for approval to 

redeem secondary capital that its 

request is either granted or denied, the 

LICU may proceed to redeem secondary 

capital accounts as proposed. 

(3) Schedule for redeeming secondary 

capital. 

TABLE 2 TO PARAGRAPH (c)(3) 

Remaining maturity 

Redemption 

limit as 

percent of 

original 

balance 

(%) 

Four to less than five years .. 20 

Three to less than four years 40 

Two to less than three years 60 

One to less than two years .. 80 

(4) Early redemption exception. 

Subject to the written approval of NCUA 

obtained pursuant to the requirements 

of paragraphs (c)(1) and (2) of this 

section, a LICU can redeem all or part 

of secondary capital accepted from the 

United States Government or any of its 

subdivisions at any time after the 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 11085 

secondary capital has been on deposit 

for two years. If the secondary capital 

was accepted under conditions that 

required matching secondary capital 

from a source other than the Federal 

Government, the matching secondary 

capital may also be redeemed in the 

manner set forth in the preceding 

sentence. For purposes of obtaining 

NCUA’s approval, all secondary capital 

a LICU accepts from the United States 

Government or any of its subdivisions, 

as well as its matching secondary 

capital, if any, is eligible for early 

redemption regardless of whether any 

part of the secondary capital has been 

discounted pursuant to paragraph (b)(2) 

of this section. 

Appendix A to Subpart D of Part 702— 

Disclosure and Acknowledgement Form 

A LICU that is authorized to accept 

uninsured secondary capital accounts and 

each investor in such an account must have 

executed and dated the following ‘‘Disclosure 

and Acknowledgment’’ form, a signed 

original of which must be retained by the 

credit union: 

Disclosure and Acknowledgment 

[Name of CU] and [Name of investor] 

hereby acknowledge and agree that [Name of 

investor] has committed [amount of funds] to 

a secondary capital account with [name of 

credit union] under the following terms and 

conditions: 

1. Term. The funds committed to the 

secondary capital account are committed for 

a period of _y years. 

2. Redemption prior to maturity. Subject to 

the conditions set forth in 12 CFR 702.414, 

the funds committed to the secondary capital 

account are redeemable prior to maturity 

only at the option of the LICU and only with 

the prior written approval of NCUA. 

3. Uninsured, non-share account. The 

secondary capital account is not a share 

account and the funds committed to the 

secondary capital account are not insured by 

the National Credit Union Share Insurance 

Fund or any other governmental or private 

entity. 

4. Prepayment risk. Redemption of U.S.C. 

prior to the account’s original maturity date 

may expose the account investor to the risk 

of being unable to reinvest the repaid funds 

at the same rate of interest for the balance of 

the period remaining until the original 

maturity date. The investor acknowledges 

that it understands and assumes 

responsibility for prepayment risk associated 

with the [name of credit union]’s redemption 

of the investor’s U.S.C. account prior to the 

original maturity date. 

5. Availability to cover losses. The funds 

committed to the secondary capital account 

and any interest paid into the account may 

be used by [name of credit union] to cover 

any and all operating losses that exceed the 

credit union’s net worth exclusive of 

allowance accounts for loan losses, and in 

the event the funds are so used, (name of 

credit union) will under no circumstances 

restore or replenish those funds to [name of 

institutional investor]. Dividends are not 

considered operating losses and are not 

eligible to be paid out of secondary capital. 

6. Accrued interest. By initialing below, 

[name of credit union] and [name of 

institutional investor] agree that accrued 

interest will be: 

__Paid into and become part of the secondary 

capital account; 

__Paid directly to the investor; 

__Paid into a separate account from which 

the investor may make withdrawals; or 

__Any combination of the above provided the 

details are specified and agreed to in 

writing. 

7. Subordination of claims. In the event of 

liquidation of [name of credit union], the 

funds committed to the secondary capital 

account will be subordinate to all other 

claims on the assets of the credit union, 

including claims of member shareholders, 

creditors and the National Credit Union 

Share Insurance Fund. 

8. Prompt Corrective Action. Under certain 

net worth classifications (see 12 CFR 

702.204(b)(11), 702.304(b) and 702.305(b), as 

the case may be), the NCUA may prohibit 

[name of credit union] from paying principal, 

dividends or interest on its uninsured 

secondary capital accounts established after 

August 7, 2000, except that unpaid dividends 

or interest will continue to accrue under the 

terms of the account to the extent permitted 

by law. 

ACKNOWLEDGED AND AGREED TO this 

lld day of [month and year] by: 

lllllllllllllllllllll

[name of investor’s official] 

[title of official] 

[name of investor] 

[address and phone number of investor] 

[investor’s tax identification number] 

lllllllllllllllllllll

[name of credit union official] 

[title of official] 

PART 709—INVOLUNTARY 

LIQUIDATION OF FEDERAL CREDIT 

UNIONS AND ADJUDICATION OF 

CREDITOR CLAIMS INVOLVING 

FEDERALLY INSURED CREDIT 

UNIONS IN LIQUIDATION 

■ 15. The authority citation for part 709 

continues to read as follows: 

Authority: 12 U.S.C. 1757, 1766, 1767, 

1786(h), 1786(t), and 1787(b)(4), 1788, 1789, 

1789a. 

■ 16. Amend § 709.5 by revising 

paragraph (b)(8) to read as follows: 

§ 709.5 Payout priorities in involuntary 

liquidation. 

* * * * * 

(b) * * * 

(8) Outstanding Subordinated Debt (as 

defined in part 702 of this chapter) or 

outstanding Grandfathered Secondary 

Capital (as defined in part 702 of this 

chapter); and 

* * * * * 

PART 741—REQUIREMENTS FOR 

INSURANCE 

■ 17. 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. 

■ 18. Amend § 741.204 by revising 

paragraph (c) and removing paragraph 

(d) to read as follows: 

§ 741.204 Maximum public unit and 

nonmember accounts, and low-income 

designation. 

* * * * * 

(c) Follow the requirements of 

§ 702.414 of this chapter for any 

Grandfathered Secondary Capital (as 

defined in part 702 of this chapter) 

issued before January 1, 2022. 

■ 19. Add §§ 741.226 and 741.227 to 

read as follows: 

§ 741.226 Subordinated Debt. 

Any credit union that is insured, or 

that makes application for insurance, 

pursuant to title II of the Act must 

follow the requirements of subpart D of 

part 702 of this chapter before it may 

issue Subordinated Debt, as that term is 

defined in § 702.402 of this chapter, and 

to the extent not inconsistent with 

applicable state law and regulation. 

§ 741.227 Loans to credit unions. 

Any credit union that is insured 

pursuant to Title II of the Act must 

adhere to the requirements in § 701.25 

of this chapter. 

[FR Doc. 2020–28281 Filed 2–22–21; 8:45 am] 

BILLING CODE 7535–01–P