Editorial Note on Part 702
Editorial Note: Nomenclature changes to part 702 appear at 84 FR 1606, Feb. 5, 2019.

§ 702.414 Regulations governing Grandfathered Secondary Capital. This section recodifies the requirements from 12 CFR 701.34(b), (c), and (d) that were in effect as of December 31, 2021, with minor modifications. The terminology used in this section is specific to this section. Except as provided in the next sentence, all secondary capital issued under § 701.34 of this chapter 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. Issuances of secondary capital to the U.S. Government or any of its subdivisions, under applications approved before January 1, 2022, pursuant to § 701.34 or § 741.204(c) of this chapter, are also considered “Grandfathered Secondary Capital” irrespective of the date of issuance. ( 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 off-balance sheet items, covering a minimum of the next two years.
( 2 ) *Issuances not completed before January 1, 2022.* Except as provided in the next sentence, any issuances of secondary capital not completed by January 1, 2022, are, as of January 1, 2022, subject to the requirements applicable to Subordinated Debt discussed elsewhere in this subpart. Issuances of secondary capital to the U.S. Government or any of its subdivisions, under applications approved before January 1, 2022, pursuant to § 701.34 or § 741.204(c) of this chapter, are not subject to the requirements applicable to Subordinated Debt, discussed elsewhere in this subpart, irrespective of the date of issuance.
( 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 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 oforiginalbalance(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 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 post-redemption 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 aspercent oforiginalbalance(%) 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 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.
[86 FR 11074, Feb. 23, 2021, as amended at 86 FR 72809, Dec. 23, 2021; 88 FR 18011, Mar. 27, 2023]