Source: https://www.federalregister.gov/documents/2014/11/04/2014-25743/corporate-credit-unions
Timestamp: 2018-07-22 15:38:58
Document Index: 477260326

Matched Legal Cases: ['art 704', '§\u2009704', 'art 704', '§\u2009704', '§\u2009704', 'art 704', '§\u2009704', 'art 704', 'art 704', 'art 704', '§\u2009704', '§\u2009704', '§\u2009704', 'art 1']

A Proposed Rule by the National Credit Union Administration on 11/04/2014
65353-65360 (8 pages)
8. Section 704.11—Corporate Credit Union Service Organizations (CUSOs)
12. Section 704.21—Enterprise Risk Management
https://www.federalregister.gov/d/2014-25743 https://www.federalregister.gov/d/2014-25743
Email: Address to regcomments@ncua.gov. Include “[Your name]—Comments on Proposed Rule—Corporate Credit Unions” in the email subject line.
David Shetler, Deputy Director, Office of National Examinations and Supervision, at the above address or telephone (703) 518-6640; or Frank Kressman, Associate General Counsel, Office of General Counsel, at the above address or telephone (703) 518-6540.
In 2010, the Board comprehensively revised the regulations governing Corporates and their activities.[1] The Board also amended those regulations twice more in 2011.[2] The Board has since identified the need to update the Corporate regulations by streamlining and clarifying certain provisions and incorporating a number of technical amendments to enhance readability. The amendments also provide a measure of regulatory relief to the Corporates.
The current rule defines a number of terms that contain the word “capital” or otherwise relate to “capital.” Some of these terms are duplicative and unnecessary. Accordingly, the Board proposes to delete several of these terms and also redefine a number of other terms to minimize confusion and enhance the effectiveness of the regulation. The proposal deletes the distinct definitions of “adjusted core capital” and “core capital” and incorporates them into the definition of “Tier 1 capital.” The proposal also deletes the term “capital” when used as a specific measure, and replaces it with the term “total capital.” Finally, the proposal deletes the definition of “supplementary capital” and incorporates it into the definition of “Tier 2 capital.”
The proposal also deletes the definitions of the terms “asset-backed commercial paper program,” “credit enhancing interest-only strip,” and “eligible ABCP facility,” all of which are used in Appendix C to part 704. Corporates generally do not engage in the kinds of activities described by these terms. By deleting these definitions, the Board emphasizes that these activities are not consistent with the regular business activities of Corporates.
The proposal also modifies a number of definitions to provide greater clarity or to make them consistent with other NCUA regulations. These include the definitions of “available to cover losses that exceed retained earnings,” “derivatives,” “equity investment,” “equity security,” “fair value,” “internal control,” and “retained earnings.” Lastly, the current rule contains two definitions for “leverage ratio,” one for use before October 21, 2013, and one for use on or after that date. The proposal deletes the pre-October 21, 2013, definition and modifies the latter definition to reflect the proposed substitution of “Tier 1 capital” for “adjusted core capital.”
The proposal amends §§ 704.3(b)(5) and 704.3(c)(3), regarding Corporate capital, to clarify that upon redeeming or calling nonperpetual capital accounts or perpetual contributed capital instruments, a Corporate must continue to meet its minimum required capital Start Printed Page 65354and net economic value ratios. These clarifications make the provisions consistent with each other and with the terms and conditions of contributed capital included in the Model Forms in Appendix A to part 704. The proposal also deletes § 704.3(f)(4), as that provision refers to a regulatory requirement that Corporates were to have complied with prior to December 20, 2011.
The proposal amends § 704.5(j) regarding grandfathering certain Corporate investments. The proposal clarifies that, while a Corporate may continue to hold an investment that was permissible at the time of purchase but later became impermissible because of a regulatory change, the investment is still subject to all other sections of part 704 that apply to investments, including those pertaining to credit risk management, asset and liability management, liquidity management, and investment action plans.
Section 704.6 establishes issuer and sector concentration limits to control the credit risk of Corporate investment activities, but does not specify how to value investments when calculating aggregate amounts. In response to requests for clarification, the proposal states that the appropriate measure is the value of relevant investments recorded on the books of the Corporate. This measure includes the value of the investment after accreting or amortizing the investment purchase premium or discount, as applicable.
Section 704.7(c) currently restricts a Corporate's unsecured member lending to 50 percent of capital and its secured member lending to 100 percent of capital. First, the proposal amends the provision by basing the lending limit on the Corporate's total capital, consistent with the definitional changes discussed above. Second, in response to requests by Corporates for greater flexibility, the proposal amends the provision to allow a higher level of secured lending. The rule continues to limit unsecured lending to 50 percent of total capital, but permits secured lending up to the full 150 percent of total capital limit. Under the proposal, each Corporate may determine its preferred composition of secured versus unsecured lending.
Section 704.8 establishes requirements to identify, measure, monitor, and control risk in the management of assets and liabilities. These include interest rate sensitivity analyses, net interest income modeling, and limiting the weighted average life of assets. Section 704.8(j) imposes reporting and other requirements on Corporates that experience a decline in net economic value (NEV) or other NEV-related measures beyond certain thresholds. The proposal clarifies that if a Corporate does experience such NEV-related breaches, but is able to adjust its balance sheet to meet required regulatory limits within 10 days, then the Corporate will not be considered to be in violation of the regulation. NCUA recognizes that, through the normal course of business, a Corporate may temporarily experience an NEV-related breach. Often, a Corporate can resolve the breach within a timely manner, which is why the current rule permits the Corporate to resolve any breach within 10 days prior to further regulatory action being taken. The proposed rule clarifies that only if a Corporate cannot resolve the breach in a timely manner would there be a cause for regulatory concern and, as such, be considered a regulatory violation.
Section 704.9(b) currently restricts a Corporate's borrowing to the lower of 10 times capital or 50 percent of capital and shares. First, the proposal amends the provision by changing the limit to 10 percent of total capital, consistent with the definitional changes discussed above. Second, recognizing that tying the borrowing limit to a percentage of shares may, in the event of a share outflow, limit a Corporate's ability to borrow at a critical time, the proposal removes the restriction of 50 percent of capital and shares. Finally, the proposal increases the secured borrowing maturity limit from 30 to 120 days to accommodate seasonality in the borrowing patterns of member credit unions. NCUA believes that this extension will not materially increase risk and will allow Corporates to better serve their members.
Section 704.11(e) addresses permissible Corporate CUSO activities and includes implementing dates that were prospective when the Board adopted the provision in 2010. Those dates have passed, and the proposal simplifies the provision by removing them.
Section 704.11(g) provides that before making an investment in or loan to a Corporate CUSO, a Corporate must obtain written agreement from the Corporate CUSO that the Corporate CUSO will meet certain requirements. These include following generally accepted accounting principles, providing financial statements to the Corporate, and obtaining an annual CPA audit. The proposal also adds the requirement that a Corporate CUSO provide to NCUA and, if applicable, the appropriate state supervisory authority (SSA) the kinds of informational reports required to be produced and submitted by natural person CUSOs pursuant to a recent revision to NCUA's general CUSO rule.[3] This additional information will enhance NCUA's ability to monitor a Corporate's CUSO-related activities consistent with the monitoring adopted for natural person credit unions' CUSOs.
Section 704.14(a)(2) provides that an individual must hold a specified management position in a member credit union to be eligible to seek election to the board of directors of a Corporate. A question has arisen as to whether the individual must hold that position at the member credit union at the time his or her Corporate board service begins. The proposal amends this provision to clarify that an individual may run for a seat on the board of a Corporate only if he or she will continue to hold one of the required member management positions at the time he or she will serve on the Corporate board. The proposal also simplifies and corrects § 704.14 by removing expired implementing dates and replacing the term “Regional Director” with the term “ONES Director.”
Section 704.15 establishes auditing and reporting requirements for Corporates. When adopted in 2011, the provision contained implementing dates that have since passed. The proposal makes technical changes to the provision by eliminating those dates and correcting a typographical error.
Section 704.18 establishes fidelity bond requirements for Corporate Start Printed Page 65355employees and officials, with maximum deductibles based on a Corporate's capital. The proposal changes the measure from core capital to total capital, consistent with the definitional changes discussed above. NCUA believes this change will have an immaterial effect on maximum deductible levels.
Section 704.21 requires a Corporate to develop and follow an enterprise risk management policy, establish an enterprise risk management committee, and include an independent risk management expert on the committee. Paragraph (c) of this section lists the minimum qualifications for the independent expert, including specific educational and background requirements. NCUA recognizes the minimum qualifications may be overly prescriptive and subject to differences in interpretation. The critical factors are an individual's independence and experience that is commensurate with the Corporate's operations and complexity. Accordingly, the proposal removes the minimum requirements for the independent risk management expert. The Board believes this will make it easier for corporates to attract and hire qualified individuals for the position.
Appendix A to part 704 includes Model Forms A-H for use by Corporates when accepting contributed capital from members. Model Forms A, B, E, and F were designed for use before October 20, 2011, and the proposed rule removes those expired forms and redesignates the remaining forms as A-D. The proposal also removes a sentence from the introductory note to current Model Form G, redesignated as Model Form C, to clarify that in some instances previously issued “paid-in capital” may not be considered perpetual contributed capital.
Appendix B to part 704 describes expanded authorities available to Corporates and the procedures for obtaining such authorities. Consistent with the earlier discussion regarding the simplification of terms relating to capital, the proposal substitutes “leverage ratio” for “capital ratio” and “total capital” for “capital.”
Appendix C to 704 explains how a Corporate must compute its risk-weighted assets for the purpose of determining its capital ratios. Several of the assets and activities discussed such as “asset-backed commercial paper program,” “credit enhancing interest-only strip,” and “eligible ABCP facility” are not consistent with the regular business activities of Corporates. To reduce confusion, the proposal removes references to those assets and activities.
The Regulatory Flexibility Act requires NCUA to prepare an analysis of any significant economic impact a regulation may have on a substantial number of small entities (primarily those under $50 million in assets).[4] This proposed rule only affects Corporates, all of which have more than $50 million in assets. Furthermore, the proposed rule consists primarily of technical and clarifying amendments. Accordingly, NCUA certifies the rule will not have a significant economic impact on a substantial number of small credit unions.
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in which an agency by rule creates a new paperwork burden or increases an existing burden.[5] For purposes of the PRA, a paperwork burden may take the form of a reporting or recordkeeping requirement, both referred to as information collections. Under the proposed rule, a Corporate with an investment in or loan to a Corporate CUSO will need to revise the current agreement it has with the Corporate CUSO to provide that the Corporate CUSO will prepare and submit basic or expanded reports directly to NCUA and the appropriate SSA.
Currently, there are 14 Corporates and approximately 16 Corporate CUSOs, 13 of which provide the complex or high-risk services that require expanded reporting. The information collection burdens imposed, on an annual basis, are analyzed below.
4 hours × 14 = 56 hours
0.5 hours × 16 = 8 hours
3 hours × 13 = 39 hours
As required by the PRA, NCUA is submitting a copy of this proposal to OMB for its review and approval. Persons interested in submitting comments with respect to the information collection aspects of the proposed rule should submit them to OMB at the address noted below.
minimizing the burden of collecting information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology; e.g., permitting electronic submission of responses.
OMB will make a decision concerning the collection of information contained in this proposed regulation between 30 and 60 days after publication of this document in the Federal Register. Therefore, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. This does not affect the deadline for the public to comment to NCUA on the substantive aspects of this proposed regulation.
Comments on the proposed information collection requirements should be sent to: Office of Information and Regulatory Affairs, OMB, New Executive Office Building, Washington, DC 20503; Attention: NCUA Desk Officer, with a copy to Amanda Wallace Start Printed Page 65356at the National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428.
By the National Credit Union Administration Board on October 23, 2014.
For the reasons discussed above, the National Credit Union Administration proposes to amend 12 CFR part 704 as follows:
a. Removing the definitions of “ Adjusted core capital”, “Asset-backed commercial paper program”, “Capital”, “Capital ratio”, “Core capital”, “Core capital ratio”, “Credit-enhancing interest-only strip”, “Eligible ABCP liquidity facility”, the two definitions of “Leverage ratio”, and “Supplementary capital”;
b. Revising the first two sentences of the definition of “ Available to cover losses that exceed retained earnings” and the definitions of “Derivatives”, “Equity investment”, “Equity security”, “Fair value”, “Internal control”, “Net assets”, “Net risk-weighted assets”, “Retained earnings”, “Tier 1 capital”, “Tier 2 capital”, and “Total capital”; and
c. Adding definitions, in alphabetical order, for “ Leverage ratio” and “Tier 1 risk-based capital ratio”.
(3) * * * (i) Notwithstanding the definitions of Tier 1 capital and Tier 2 capital in § 704.2, NCUA may find that a particular asset or Tier 1 capital or Tier 2 capital component has characteristics or terms that diminish its contribution to a corporate credit union's ability to absorb losses, and NCUA may require the discounting or deduction of such asset or component from the computation of Tier 1 capital, Tier 2 capital, or total capital.
(vi) Investments in corporate CUSOs are subject to the limitations of § 704.11.
(2) Registered investment companies—A corporate credit union must limit its investment in registered Start Printed Page 65358investment companies to the lower of 1000 percent of total capital or 50 percent of assets. In addition to applying the limit in this paragraph (d)(2), a corporate credit union must also include the underlying assets in each registered investment company in the relevant sectors described in paragraph (d)(1) of this section when calculating those sector limits.
(1) Secured borrowings. A corporate credit union may borrow on a secured basis for liquidity purposes, but the maturity of the borrowing may not exceed 120 days. Only a corporate credit union with Tier 1 capital in excess of five percent of its moving daily average net assets (DANA) may borrow on a secured basis for nonliquidity purposes, and the outstanding amount of secured borrowing for nonliquidity purposes may not exceed an amount equal to the difference between the corporate credit union's Tier 1 capital and five percent of its moving DANA.
(2) * * * The independent public accountant who audits the corporate credit union's financial statements must examine, attest to, and report separately on the assertion of management concerning the effectiveness of the corporate credit union's internal control structure and procedures for financial reporting. * * *
(1) * * * Each corporate credit union must establish a supervisory committee, all of whose members must be independent. * * *
12. Amend § 704.18 in paragraph (e)(1) by:
a. Removing the words “core capital ratio” wherever they appear and adding in their place “leverage ratio”;
b. Removing the words “Core capital ratio” and adding in their place “Leverage ratio”; and
c. Removing the words “core capital” wherever they appear without being followed by the word “ratio” and adding in their place “Tier 1 capital”.
b. Removing the word “capital” wherever it appears without being followed by the word “ratio” and adding in its place “total capital”; and
c. Removing paragraph (e) from part 1.
(iii) Revising paragraph (2) of the definition of “Residual interests”;
(i) Revising the heading of part II(b);
(ii) Removing paragraphs (1)(iv) and (4);
(iii) Redesignating paragraphs (5) and (6) as paragraphs (4) and (5), respectively;
(iv) Revising newly redesignated paragraph (4)(i); and
(v) Removing newly redesignated paragraph (5)(v)(C).
(iii) Revising newly redesignated paragraph (2)(i) and the introductory paragraph of newly redesignated paragraph (2)(ii).
(2)(i) Other residual interests. A corporate credit union must maintain risk-based capital for a residual interest equal to the face amount of the residual interest, even if the amount of risk-based capital that must be maintained exceeds the full risk-based capital requirement for the assets transferred.Start Printed Page 65360
3. 12 CFR 712.3(d)(4) and (5); 78 FR 72537 (Dec. 3, 2013).
4. 5 U.S.C. 603(a); 12 U.S.C. 1787(c)(1).
[FR Doc. 2014-25743 Filed 11-3-14; 8:45 am]