Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 10729 

1 12 U.S.C. 1751 et seq. 

2 12 U.S.C. 1766(a). 

3 12 U.S.C. 1789. 

4 12 U.S.C. 1766(a). 

5 12 CFR part 704. 

6 75 FR 64786 (Oct. 20, 2010). 

7See e.g., 80 FR 25932 (May 6, 2015), 80 FR 

57283 (Sept. 23, 2015), and 82 FR 55497 (Nov. 22, 

2017). 

8 82 FR 55497 (Nov. 22, 2017). 

9 85 FR 17288 (Mar. 27, 2020). 

10 85 FR 20431 (Apr. 13, 2020). 

11 85 FR 71817 (Nov. 12, 2020). 

12 85 FR 13982 (Mar. 10, 2020). 

13See, https://www.ncua.gov/files/agenda-items/ 

AG20201217Item5b.pdf. 

as a director, officer, employee, agent, 

owner, partner, or consultant) with an 

affiliate of the industrial bank; or 

(e) Enter into any contract for services 

material to the operations of the 

industrial bank (for example, loan 

servicing function) with such Covered 

Company or any subsidiary thereof. 

§ 354.6 Reservation of authority. 

Nothing in this part limits the 

authority of the FDIC under any other 

provision of law or regulation to take 

supervisory or enforcement actions, 

including actions to address unsafe or 

unsound practices or conditions, or 

violations of law. 

Federal Deposit Insurance Corporation. 

By order of the Board of Directors. 

Dated at Washington, DC, on December 15, 

2020. 

James P. Sheesley, 

Assistant Executive Secretary. 

[FR Doc. 2020–28473 Filed 2–22–21; 8:45 am] 

BILLING CODE 6714–01–P 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Part 704 

RIN 3133–AF13 

Corporate Credit Unions 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Final rule. 

SUMMARY: The NCUA Board (Board) is 

issuing a final rule that amends the 

NCUA’s corporate credit union 

regulation. The final rule updates the 

definitions in this regulation and makes 

clear that corporate credit unions may 

purchase subordinated debt instruments 

issued by natural person credit unions. 

The final rule also specifies the capital 

treatment of these instruments for 

corporate credit unions that purchase 

them. 

DATES: The final rule is effective January 

1, 2022. 

FOR FURTHER INFORMATION CONTACT: 

Policy and Analysis: Robert Dean, 

National Supervision Analyst, Office of 

National Examinations and Supervision, 

(703) 518–6652; Legal: Rachel 

Ackmann, Senior Staff Attorney, Office 

of General Counsel, (703) 548–2601; or 

by mail at National Credit Union 

Administration, 1775 Duke Street, 

Alexandria, VA 22314. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

a. Legal Authority and Background 

The Board is issuing this rule 

pursuant to its authority under the 

Federal Credit Union Act (FCU Act).1

Under the FCU Act, the NCUA is the 

chartering and supervisory authority for 

Federal credit unions (FCUs) and the 

federal supervisory authority for 

federally insured credit unions (FICUs). 

The FCU Act grants the NCUA a broad 

mandate to issue regulations governing 

both FCUs and FICUs. Section 120 of 

the FCU Act is a general grant of 

regulatory authority and authorizes the 

Board to prescribe regulations for the 

administration of the FCU Act.2 Section 

209 of the FCU Act is a plenary grant 

of regulatory authority to the NCUA to 

issue regulations necessary or 

appropriate to carry out its role as share 

insurer for all FICUs.3 The FCU Act also 

includes an express grant of authority 

for the Board to subject federally 

chartered central, or corporate, credit 

unions to such rules, regulations, and 

orders as the Board deems appropriate.4

Part 704 of the NCUA’s regulations 

implements the requirements of the 

FCU Act regarding corporate credit 

unions.5 In 2010, the Board 

comprehensively revised the regulations 

governing corporate credit unions to 

provide longer-term structural 

enhancements to the corporate system 

in response to the financial crisis of 

2007–2009.6 The provisions of the 2010 

rule successfully stabilized the 

corporate system and improved 

corporate credit unions’ ability to 

function and provide services to natural 

person credit unions. Since 2010, and as 

part of the Board’s continuous 

reevaluation of its regulation of 

corporate credit unions, the Board has 

amended part 704 on several occasions.7

In 2017, the Board amended corporate 

credit union capital standards to change 

the calculation of capital after a 

consolidation and to set a retained 

earnings ratio target in meeting prompt 

corrective action (commonly referred to 

as PCA) standards.8 In October 2020, the 

Board issued a final rule to amend 

several provisions relating to corporate 

credit union investments in credit union 

service organizations (CUSOs) and other 

provisions relating to corporate credit 

union governance and technical matters, 

as discussed in the following sections. 

b. February 2020 Proposed Rule on Part 

704 

On February 20, 2020, the Board 

approved a notice of proposed 

rulemaking to update, clarify, and 

simplify several provisions of part 704 

(proposed rule).9 The proposed rule 

provided for a 60-day comment period, 

which the Board later extended by 60 

days because of COVID–19.10 The 

comment period ended on July 27, 2020. 

c. October 2020 Final Rule on Part 704 

The NCUA received 35 comment 

letters on the proposed rule. Comments 

were received from credit unions, both 

corporate and natural persons, credit 

union leagues and trade associations, 

individuals, corporate CUSOs, and an 

association of state credit union 

supervisors. In October 2020, the Board 

issued a final rule that: (1) Permits a 

corporate credit union to make a 

minimal investment in a CUSO without 

the CUSO being classified as a corporate 

CUSO and subject to heightened NCUA 

oversight; (2) expands the categories of 

senior staff positions at member credit 

unions eligible to serve on a corporate 

credit union’s board; (3) removes the 

experience and independence 

requirement for a corporate credit 

union’s enterprise risk management 

expert; (4) clarifies the definition of a 

collateralized debt obligation; and (5) 

simplifies the requirement for net 

interest income modeling.11

The October 2020 final rule deferred 

final action on the provisions in the 

proposed rule that addressed the 

permissibility and capital treatment for 

corporate credit union purchases of 

subordinated debt instruments under 

the Board’s January 2020 proposed rule 

on subordinated debt.12 In the October 

2020 final rule, the Board discussed the 

comments on this part of the proposed 

rule and noted that the commenters that 

addressed these provisions all 

supported them. The Board did not 

adopt the provisions at that time 

because it had not yet finalized the 

January 2020 proposed rule on 

subordinated debt. 

d. Final Rule on Subordinated Debt 

The Board has now adopted the 

January 2020 proposed rule on 

subordinated debt as final.13 These 

10730 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

14 Id. 15 12 CFR 704.2 (definition of ‘‘Tier 1 capital’’). 16 5 U.S.C. 553. 

changes include a reduction in the 

duration of required pro forma financial 

statements from five to two years, an 

adjustment to the definition of 

Accredited Investor, an increase in the 

expiration to issue period from one year 

to two years, clarifying the territorial 

restrictions on issuances, and clarifying 

when the Board will publish a fee 

schedule. The Board notes that none of 

these changes impact its rationale for 

requiring corporate credit unions to 

deduct natural person subordinated 

debt instruments. Therefore, the Board 

is now adopting the amendments that it 

proposed to the corporate credit union 

regulation in the February 2020 

proposed rule. 

II. This Final Rule 

Natural Person Credit Union 

Subordinated Debt Instruments 

As discussed previously, in January 

2020, the Board issued a proposed rule 

to permit low-income designated credit 

unions, complex credit unions, and new 

credit unions to issue subordinated debt 

instruments for purposes of regulatory 

capital treatment.14 Subsequently, in the 

February 2020 proposed rule on 

corporate credit unions, the Board 

proposed to address whether corporate 

credit unions may purchase such 

instruments and, if so, the treatment of 

the investments under part 704. In the 

October 2020 final rule on part 704, the 

Board discussed and analyzed the 

comments it received on this part of the 

February 2020 proposed rule but 

deferred final action in order to 

coordinate it with the final rule on 

subordinated debt. Because the Board 

has now issued the final rule on 

subordinated debt without any changes 

that affect the proposed revisions to part 

704 on which the Board already 

solicited and received public comment, 

the Board is now also finalizing the 

proposed changes to part 704. 

The February 2020 proposed rule 

created a new definition for the term 

natural person credit union 

subordinated debt instrument. The 

proposed rule defined a natural person 

credit union subordinated debt 

instrument as any debt instrument 

issued by a natural person credit union 

that is subordinate to all other claims 

against the credit union, including the 

claims of creditors, shareholders, and 

either the National Credit Union Share 

Insurance Fund (NCUSIF) or the insurer 

of a privately insured credit union. This 

definition is designed to include all 

instruments issued under the authority 

of the subordinated debt rule. No 

commenters to the February 2020 

proposed rule objected to this proposed 

definition. Now that the Board has 

finalized the subordinated debt 

proposed rule without substantial 

changes from its proposed form, the 

Board is now adopting this proposed 

definition in part 704. 

The February 2020 proposed rule also 

clarified that corporate credit unions 

may purchase the natural person credit 

union subordinated debt instruments. 

This authority is derived from their 

lending authority because subordinated 

debt instruments are issued under a 

natural person credit union’s borrowing 

authority. Additionally, natural person 

credit unions are also permitted, subject 

to various restrictions and limits, to 

purchase such subordinated debt 

instruments from other natural person 

credit unions under their lending 

authority. Treating the purchase of such 

subordinated debt instruments as 

lending ensures consistent treatment 

between natural person credit unions 

and corporate credit unions. The Board 

is not making any amendment to the 

regulatory text in part 704 to this effect 

because corporate credit unions’ current 

lending authority is sufficiently broad to 

include purchasing subordinated debt 

instruments. However, the Board 

reiterates that these purchases are 

permissible to avoid doubt. 

In addition, the February 2020 

proposed rule included a requirement 

for a corporate credit union to fully 

deduct the amount of the subordinated 

debt instrument from its Tier 1 capital 

to ensure consistent treatment between 

investments in the capital of other 

corporate credit unions and natural 

person credit unions. Under the current 

regulation, corporate credit unions are 

currently required to deduct from Tier 

1 capital any investments in perpetual 

contributed capital and nonperpetual 

capital accounts that are maintained at 

other corporate credit unions.15 The 

proposed rule also asked a question on 

whether it would be more appropriate to 

prohibit corporate credit unions from 

purchasing subordinated debt 

instruments. No commenter 

recommended restricting corporate 

credit union authority to purchase 

subordinated debt instruments. 

The Board believes that investments 

in natural person credit union 

subordinated debt instruments should 

be treated similarly to investments in 

perpetual contributed capital and 

nonperpetual capital accounts that are 

maintained at other corporate credit 

unions as such instruments may qualify 

as regulatory capital for the natural 

person credit union. The Board is also 

concerned about systemic risk if 

corporate credit unions own a 

significant amount of natural person 

credit union issued subordinated debt. 

Finally, a natural person credit union 

subordinated debt instrument would be 

in a first loss position, even before the 

NCUSIF and any private insurance fund 

or entity. Therefore, an involuntary 

liquidation of the issuing credit union 

would potentially mean large, and likely 

total, losses for the holders of those 

subordinated obligations. The Board 

believes that fully deducting such 

instruments from Tier 1 capital ensures 

any potential losses do not affect the 

capital position of the investing 

corporate credit union. This measured 

approach strikes the right balance 

between providing corporate credit 

unions the flexibility to purchase 

natural person credit union 

subordinated debt instruments and 

avoiding undue systemic risk to the 

credit union system. As discussed 

previously, the Board’s final rule on 

subordinated debt made no substantial 

changes to that rule to change this 

conclusion regarding corporate credit 

unions’ purchases of the instruments. 

Therefore, the Board is adopting the 

Tier 1 capital deductions that it 

proposed in the February 2020 proposed 

rule. 

III. Regulatory Procedures 

Final Rule Under the Administrative 

Procedure Act 

The Administrative Procedure Act 

(APA) generally requires agencies to 

issue a notice of proposed rulemaking 

and give interested persons an 

opportunity to participate in the rule 

making through submission of 

comments.16 As detailed in the 

background section of this preamble, the 

Board provided notice and an 

opportunity to comment on the changes 

made in this final rule in the proposed 

rule issued in February 2020. The Board 

deferred final action on certain 

provisions of the February 2020 

proposed rule to coordinate with the 

separate rulemaking on subordinated 

debt. The final rule on subordinated 

debt is substantially similar to its 

proposed form, which means that 

commenters on the February 2020 

proposed rule received notice and an 

opportunity to comment on these 

provisions. Therefore, the Board is 

adopting the amendments in this final 

rule without issuing a new notice of 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 10731 

17See 80 FR 57512 (Sept. 24, 2015). 

18Public Law 105–277, 112 Stat. 2681 (1998). 

19 5 U.S.C. 801–804. 

20 5 U.S.C. 551. 

21 5 U.S.C. 804(2). 

proposed rulemaking, which would be 

duplicative in this case. 

Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

generally requires that, in connection 

with a final rule, an agency prepare and 

make available for public comment a 

final regulatory flexibility analysis that 

describes the impact of a final rule on 

small entities (defined for purposes of 

the RFA to include credit unions with 

assets less than $100 million).17 A 

regulatory flexibility analysis is not 

required, however, if the agency 

certifies that the rule will not have a 

significant economic impact on a 

substantial number of small entities and 

publishes its certification and a short, 

explanatory statement in the Federal 

Register together with the rule. 

This final rule does not have a 

significant economic impact on a 

substantial number of small entities. 

There are no corporate credit unions 

under $100 million in assets. Therefore, 

the Board certifies that the rule will not 

have a significant economic impact on 

a substantial number of small entities. 

Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(PRA) applies to information collection 

requirements in which an agency 

creates a new paperwork burden on 

regulated entities or modifies an 

existing burden. For purposes of the 

PRA, a paperwork burden may take the 

form of a reporting, recordkeeping, or 

third-party disclosure requirement, each 

referred to as an information collection. 

The NCUA may not conduct or sponsor, 

and the respondent is not required to 

respond to, an information collection 

unless it displays a currently valid 

Office of Management and Budget 

(OMB) control number. 

The final rule amends 12 CFR part 

704 to address the permissibility and 

capital treatment of natural person 

subordinated debt instruments 

purchased by corporate credit unions. 

The amendments to part 704 revise the 

Corporate Credit Union Call Report 

cleared under OMB Control number 

3133–0067. Public comments were 

solicited in a separate Federal Register 

notice (85 FR 65435, October 15, 2020) 

and no comment were received. The 

information collection request has been 

submitted to the Office of Management 

Budget for approval. 

Executive Order 13132 

Executive Order 13132 encourages 

independent regulatory agencies to 

consider the impact of their actions on 

state and local interests. In adherence to 

fundamental federalism principles, the 

NCUA, an independent regulatory 

agency as defined in 44 U.S.C. 3502(5), 

voluntarily complies with the principles 

of the Executive order. This rulemaking 

will not have a substantial direct effect 

on the states, on the connection between 

the National Government and the states, 

or on the distribution of power and 

responsibilities among the various 

levels of government. The NCUA has 

determined that this final rule does not 

constitute a policy that has federalism 

implications for purposes of the 

Executive order. 

Assessment of Federal Regulations and 

Policies on Families 

The NCUA has determined that this 

final rule does not affect family wellbeing within the meaning of section 654 

of the Treasury and General 

Government Appropriations Act, 

1999.18

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.19 A reporting requirement 

is triggered in instances where the 

NCUA issues a final rule as defined by 

Section 551 of the APA.20 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.’’ 21 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 OMB for it to determine if 

the final rule is a ‘‘major rule’’ for 

purposes of SBREFA. The NCUA also 

will file appropriate reports with 

Congress and the Government 

Accountability Office so this rule may 

be reviewed. 

List of Subjects in 12 CFR Part 704 

Credit unions, Corporate credit 

unions, Reporting and recordkeeping 

requirements. 

By the National Credit Union 

Administration Board on January 14, 2021. 

Melane Conyers-Ausbrooks, 

Secretary of the Board. 

For the reasons discussed in the 

preamble, the Board amends 12 CFR 

part 704 as follows: 

PART 704—CORPORATE CREDIT 

UNIONS 

■ 1. The authority citation for part 704 

continues to read as follows: 

Authority: 12 U.S.C. 1766(a), 1781, 1789. 

■ 2. In § 704.2: 

■ a. Add in alphabetical order a 

definition of ‘‘Natural person credit 

union subordinated debt instrument’’; 

and 

■ b. Revise the definition of ‘‘Tier 1 

capital’’. 

The addition and revision read as 

follows: 

§ 704.2 Definitions. 

* * * * * 

Natural person credit union 

subordinated debt instrument is any 

debt instrument issued by a natural 

person credit union that is subordinate 

to all other claims against the credit 

union, including the claims of creditors, 

shareholders, and either the National 

Credit Union Share Insurance Fund or 

the insurer of a privately insured credit 

union. 

* * * * * 

Tier 1 capital means the sum of items 

in paragraphs (1) and (2) of this 

definition from which items in 

paragraphs (3) through (7) of this 

definition are deducted: 

(1) Retained earnings; 

(2) Perpetual contributed capital; 

(3) Deduct the amount of the 

corporate credit union’s intangible 

assets that exceed one half percent of its 

moving daily average net assets 

(however, the NCUA may direct the 

corporate credit union to add back some 

of these assets on the NCUA’s own 

initiative, or the NCUA’s approval of 

petition from the applicable state 

regulator or application from the 

corporate credit union); 

(4) Deduct investments, both equity 

and debt, in unconsolidated CUSOs; 

(5) Deduct an amount equal to any 

PCC or NCA that the corporate credit 

union maintains at another corporate 

credit union; 

(6) Deduct any amount of PCC 

received from federally insured credit 

unions that causes PCC minus retained 

earnings, all divided by moving daily 

average net assets, to exceed two 

percent when a corporate credit union’s 

retained earnings ratio is less than two 

and a half percent; and 

(7) Deduct any natural person credit 

union subordinated debt instrument 

held by the corporate credit union. 

* * * * * 

[FR Doc. 2021–01399 Filed 2–22–21; 8:45 am] 

BILLING CODE 7535–01–P