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NATIONAL CREDIT UNION Regulatory Capital treatment.2 This rule costs, high losses from loan defaults, ADMINISTRATION finalizes the proposed rule largely as and a shortfall in revenue.7 proposed except for several The Secondary Capital Rule 8 12 CFR Parts 701, 702, 709 and 741 amendments, which are discussed later provides that secondary capital in this document. The following is a accounts must: RIN 3133–AF08 • brief history of secondary capital, Risk Be established as an uninsured secondary capital account or another Subordinated Debt Based Capital (RBC) for credit unions, form of non-share account; and the advent of alternative forms of • AGENCY: National Credit Union capital, which ultimately resulted in the Have a minimum maturity of five Administration (NCUA). development of the proposed rule and years; • Not be insured by the NCUSIF or ACTION: Final rule. this final rule. any governmental or private entity; • SUMMARY: The NCUA Board (Board) is A. Secondary Capital for LICUs Be subordinate to all other claims amending various parts of the NCUA’s against the LICU, including those of regulations to permit Low-income In 1996, the Board finalized § 701.34 shareholders, creditors, and the of the NCUA’s regulations (the NCUSIF; Designated Credit Unions, Complex • Credit Unions, and New Credit Unions Secondary Capital Rule) to permit Be available to cover losses that to issue Subordinated Debt for purposes LICUs to raise secondary capital from exceed the LICU’s net available reserves of Regulatory Capital treatment. The foundations and other philanthropic- and, to the extent funds are so used, a Board issued the proposed minded non-natural person members LICU may not restore or replenish the 3 9 Subordinated Debt rule at its January and non-members. The Board issued account under any circumstances. 2020 meeting. The Board is finalizing the Secondary Capital Rule to provide Further, losses must be distributed pro the rule largely as proposed, except for an additional way for a LICU to attain rata among all secondary capital a few changes to various sections based Regulatory Capital to serve two specific accounts held by the LICU at the time on comments received. Such changes purposes: (1) Support greater lending the loss is realized; • Not be pledged or provided by the include amending the definition of and financial services in the investor as security on a loan or other Accredited Investor, providing a longer communities served by the LICU; and obligation with the LICU or any other timeframe in which a credit union may (2) absorb losses to prevent the LICU from failing. party; issue Subordinated Debt after approval, • Be evidenced by a contract reducing the required number of years In 1998, as part of the Credit Union agreement between the investor and the 4 of Pro Forma Financial Statements an Membership Access Act (CUMAA), LICU that reflects the terms and Issuing Credit Union must provide with Congress amended the Federal Credit conditions mandated by the Secondary its application, clarifying the Union Act (the FCU Act) to institute a Capital Rule and any other terms and prohibition on Subordinated Debt system of prompt corrective action for conditions not inconsistent with that issuances outside of the United States, federally insured credit unions based on rule; and clarifying that the Board will a credit union’s level of Net Worth. • Be accompanied by a disclosure publish a fee schedule only if it makes Relevant to this final rule, CUMAA and acknowledgment form as set forth a determination to charge a fee. specifically defined ‘‘net worth’’ to in the appendix to the Secondary DATES: This rule is effective January 1, include, among other things, secondary Capital Rule; 2022. capital issued by a LICU, provided the • Not be repaid, including any FOR FURTHER INFORMATION CONTACT: secondary capital is uninsured and interest or dividends earned thereon, if Policy: Tom Fay, Director of Capital subordinate to all other claims against the Board has prohibited repayment Markets, Office of Examination and the LICU, including the claims of thereof under § 702.204(b)(11), Insurance or Rick Mayfield, Senior creditors, shareholders, and the § 702.304(b), or § 702.305(b) of the Capital Markets Specialist, Office of National Credit Union Share Insurance NCUA’s regulations because the LICU is Examination and Insurance. Legal: Fund (NCUSIF).5 classified as ‘‘Critically Justin M. Anderson, Senior Staff In 2006, the Board further amended Undercapitalized’’; or, if a LICU is a Attorney, Office of General Counsel, § 701.34 to require regulatory approval New Credit Union (as defined under 1775 Duke Street, Alexandria, VA of a LICU’s secondary capital plan § 702.2 of the NCUA’s regulations), as 22314–3428. Tom Fay can be reached at before a LICU could issue secondary ‘‘Moderately Capitalized,’’ ‘‘Marginally (703) 518-1179, Rick Mayfield can be capital.6 In the preamble to the final Capitalized,’’ ‘‘Minimally Capitalized,’’ reached at (703) 518–6501, and Justin 2006 rule, the Board noted that LICUs or ‘‘Uncapitalized;’’ • Anderson can be reached at (703) had sometimes used secondary capital Be recorded on the LICU’s balance 10 518-6540. to achieve goals different from those for sheet; which it was originally intended. It also SUPPLEMENTARY INFORMATION: 7 Id. at 4236. Before 2006, a LICU was required highlighted a pattern of ‘‘lenient to submit a copy of its secondary capital plan to the I. History practices’’ by LICUs that issued NCUA, but it was not required to obtain At its January 2020 meeting, the secondary capital. These practices preapproval. Board issued a proposed Subordinated contributed to excessive net operating 8 12 CFR 701.34. The last substantive amendment to the Secondary Capital Rule was in 2010 with the Debt rule (the proposed rule) to permit addition of language regarding secondary capital Low-income Designated Credit Unions 1 2 85 FR 13892 (March 10, 2020). received under the Community Development (LICUs), Complex Credit Unions, and 3 See 61 FR 50696 (Sept. 27, 1996) (final rule); see Capital Initiative of 2010. 75 FR 57843 (Sept. 23, New Credit Unions to issue also 61 FR 3788 (Feb. 2, 1996) (interim final rule); 2010). 12 CFR 701.34. 9 This generally means that, when net operating Subordinated Debt for purposes of 4 Credit Union Membership Access Act of 1998, losses exceed Retained Earnings, a LICU needs to Public Law 105–219, sec. 301, 112 Stat. 913, 929 first use the secondary capital funds to cover the 1 Terms that are capitalized throughout this (codified at 12 U.S.C. 1790d(o)(2)(C) (1998)). excess amount. document are defined within the document or in 5 Id. 10 While the Secondary Capital Rule requires a the finalized regulatory text. 6 71 FR 4234 (Jan. 26, 2006). LICU to record secondary capital accounts on its

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• Be recognized as Net Worth in standard, the NCUA permits a LICU to and regulation.17 In response, the Board accordance with the schedule for include secondary capital in its RBC received 756 comments. recognizing Net Worth value in calculations in the same manner as it Of the 756 comments received, 688 paragraph (c)(2) of the Secondary currently includes secondary capital in appeared to be derived from one form Capital Rule; its risk-based net worth calculation. letter 18 that opposed the NCUA • Be closed and paid out to the Under the proposed rule, the Board proceeding with a supplemental capital account investor in the event of merger proposed to grant certain non-LICUs the proposal. In addition to the form letter, or other voluntary dissolution of a LICU, authority to issue instruments in the the Board received 68 unique comments to the extent the secondary capital is not form of Subordinated Debt and allow in response to the ANPR, most of which needed to cover losses at the time of the such credit unions to count those supported proposing a rule to allow merger or dissolution (does not apply in instruments in their respective RBC non-LICUs to issue an alternative form the case where a LICU merges into calculations. This new authority, of capital. A majority of the commenters another LICU); and however, would not permit non-LICUs in favor of the Board issuing a proposed • 11 Only be repaid at maturity except to include Subordinated Debt in their rule cited compliance with the NCUA’s that, with the prior approval of the Net Worth calculations. RBC rule 19 as the main reason for their NCUA and provided the terms of the In the proposed RBC rule issued in support. Other justifications for support account allow for early repayment, a 2015,15 the Board requested stakeholder proposed by commenters included LICU may repay any portion of input on supplemental capital.16 A credit union growth, protection from secondary capital that is not recognized 12 majority of commenters that addressed economic downturns, and providing as Net Worth. services demanded by members. The Secondary Capital Rule also supplemental capital stated it was includes requirements related to imperative that the Board consider In general, the comments lacked secondary capital plan submissions and allowing credit unions to issue specificity, and very few commenters approvals, redemption of secondary additional forms of capital. The addressed all or even most of the capital, disclosures, and Regulatory commenters suggested this authority questions posed by the Board. Capital treatment. was particularly important, as credit Nevertheless, the comments covered a As noted previously, since the unions are at a disadvantage in the wide range of topics and offered varying passage of CUMAA, the NCUA permits financial marketplace because most lack levels of support for provisions a LICU that issues secondary capital to access to additional capital outside of suggested in the ANPR. As noted in the include the aggregate outstanding Retained Earnings. proposed rule, the Board considered all principal amount of that secondary While none of the commenters offered comments received in response to the capital, in accordance with the schedule specific suggestions on how to ANPR during the Subordinated Debt for Net Worth,13 as part of its Net Worth. implement supplemental capital, a few rulemaking process. Further, pursuant to the NCUA’s suggested that the Board promulgate II. Proposed Rule currently effective risk-based net worth broad, non-prescriptive rules to allow requirements, the NCUA also permits a credit unions maximum flexibility in At its January 2020 meeting, the LICU to include such secondary capital issuing supplemental capital. Board issued the proposed rule to in its risk-based net worth calculation. permit LICUs, Complex Credit Unions, By contrast, a non-LICU does not have 2. 2017 Advance Notice of Proposed and New Credit Unions to issue the statutory authority to issue Rulemaking Subordinated Debt for purposes of 20 secondary capital and, to the extent a On February 8, 2017, the Board Regulatory Capital treatment. non-LICU issues an instrument that is published an advance notice of Specifically, the proposed rule included analogous to secondary capital, to a new subpart in the NCUA’s final RBC proposed rulemaking (ANPR) to solicit 21 include any such instruments in its Net comments on alternative forms of rule to address the requirements for, Worth (or its risk-based net worth) capital credit unions could use to meet and Regulatory Capital treatment of, calculation. capital standards required by statute Subordinated Debt. The proposed subpart also contained requirements B. Subordinated Debt for LICUs and related to credit union eligibility to Certain Non-LICUs times. First, in 2018, the effective date was delayed by one year, from January 1, 2019, to January 1, issue Subordinated Debt, applying for 1. RBC 2020. 83 FR 55467 (Nov. 6, 2018). Second, based NCUA authority to issue Subordinated on Board action at the December 2019 Board In October 2015, the Board finalized Debt, disclosures, securities laws, the meeting, the effective date was delayed two terms of a Subordinated Debt Note, and a rule to replace the current risk-based additional years, from January 1, 2020 to January 1, net worth requirement with an RBC 2022. prepayments. requirement.14 Under the revised 15 80 FR 4340 (Jan. 27, 2015). The proposed rule also provided for 16 Id. at 4384. The Board notes that when the the grandfathering of any secondary agency began to consider authorizing non-LICU balance sheet as ‘‘equity accounts,’’ generally capital issued before the effective date credit unions to issue instruments analogous to accepted accounting principles in the United States secondary capital instruments issued by LICUs, it of a final Subordinated Debt rule generally require financial institutions to record used the term ‘‘supplemental capital’’ to refer to (Grandfathered Secondary Capital) and secondary capital accounts as ‘‘debt.’’ See FASB those instruments. In 2017, when the Board issued (Financial Accounting Standards Board), ASC preserved the Regulatory Capital an advance notice of proposed rulemaking on this 942-405-25-3 and 25-4. The instructions to the 5300 treatment of Grandfathered Secondary topic, the NCUA used the umbrella term Call Report require all federally insured credit ‘‘alternative capital’’ to refer to both supplemental Capital for up to 20 years after the unions to report any secondary capital in the capital and secondary capital. In light of FCUs’ effective date of a final Subordinated Liability section of the Statement of Financial authority only to issue debt instruments, however, Condition. the Board believes it is more accurate to use the 11 17 82 FR 9691 (Feb. 8, 2017). A LICU may not issue a secondary capital umbrella term ‘‘Subordinated Debt’’ to refer to both 18 account that amortizes over its stated term. secondary capital and what was once referred to as While there were slight modifications to some 12 See 12 CFR 701.34(d). supplemental capital. It is important to note that, letters, the substance of each was the same. 13 Id. § 701.34(c)(2). unless the context otherwise requires, the term 19 80 FR 4340 (Jan. 27, 2015). 14 80 FR 66626 (Oct. 29, 2015). The Board has ‘‘Subordinated Debt’’ refers to both types of debt 20 85 FR 13892 (Mar. 10, 2020). delayed the effective date for the final RBC rule two instruments. 21 80 FR 4340 (Jan. 27, 2015).

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Debt rule.22 Under the proposed rule, Debt and the NCUA’s legal authority to unions will pose significant risk to the Grandfathered Secondary Capital would authorize it. These commenters, NCUSIF and constitutes irresponsible generally remain subject to the however, varied widely on changes behavior by the NCUA. requirements in the Secondary Capital requested in a final Subordinated Debt The Board disagrees with these Rule. For ease of reference, the Rule. commenters on all three assertions. requirements in the Secondary Capital The Board notes that, in October First, as articulated in the proposed rule Rule would be moved from their current 2020, the Board finalized a rule related and reproduced later in this document, location to a section in the new to corporate credit unions 25 in which FCUs have the legal authority to issue proposed subpart. the Board indicated it would finalize a Subordinated Debt, and the Board has Conversely, any issuances of change related to a corporate credit the authority to include such secondary capital not completed by the union’s purchase of Subordinated Debt instruments in the RBC calculation. effective date of this subpart would be in a final Subordinated Debt rule. While With respect to the tax exemption subject to the requirements applicable to it is the Board’s intent to finalize the argument, the Board reiterates its Subordinated Debt discussed elsewhere change to the corporate credit union statements in the proposed rule that, in this subpart. This change would not rule, it thought it best to bring that item under the FCU Act, FCUs are permitted impact a LICU’s ability to include such separately, but in the near future. to borrow from any source.26 The Board was meticulous in crafting this final rule instruments in its Net Worth. A. Comments Opposing Proposed Rule In addition to these changes, the to ensure Subordinated Debt proposed rule included additions and As noted previously, all of the form instruments remain squarely in the form amendments to other parts and sections letters and a few unique letters opposed of borrowings, as permitted by the FCU of the NCUA’s regulations. Specifically, the proposed rule in its entirety. In Act. The Board, therefore, has no reason the proposed rule included: summary, these comments contained to believe that the continuation of an • A new section that addresses limits three general arguments in opposition to already permissible activity would in on loans to other credit unions; the proposed rule. any way jeopardize the tax-exempt • An expansion of § 701.38 (‘‘the First, these commenters stated that status of FCUs. Further, the Board will borrowing rule’’) to clarify that Federal allowing credit unions to issue require a FISCU to issue an instrument credit unions (FCUs) can borrow from Subordinated Debt for Regulatory that meets the same requirements as an Capital purposes ‘‘undermines the any source; instrument issued by an FCU if the • Revisions to the RBC rule 23 and the foundation of credit unions’ tax exempt FISCU wants such instrument to be payout priorities in the NCUA’s status.’’ In support of this assertion, included in its RBC calculation. This is involuntary liquidation rule (12 CFR commenters stated that ‘‘credit unions described more fully later in this part 709) to account for Subordinated are afforded tax-exempt status in part document. The Board was made this Debt and Grandfathered Secondary because they lack access to capital intentional decision in part to help Capital; and markets to raise equity. If this rule is preserve FISCUs’ tax-exempt status • Cohering changes to part 741 to adopted, that constraint will be which, as discussed below, differs from account for other changes that apply to obliterated, giving credit unions fuel to that of FCUs. federally insured, state-chartered credit grow well beyond their mission of Finally, the Board has included many unions (FISCUs). serving people of small means.’’ These safeguards in the final rule to ensure The proposed rule provided for a 120- commenters also stated that the that Subordinated Debt acts as a buffer day comment period, which ended in proposed rule was concerning in to reduce risk to the NCUSIF rather than July 2020. ‘‘context of NCUA’s methodical work to increase risk, as asserted by the knock down the other pillars of the aforementioned commenters. The Board III. Final Rule and Public Comments on credit union tax exemption compact, is confident that the framework of the Proposed Rule including the field of membership final rule will help protect the NCUSIF. expansion, the low-income designation The NCUA received 171 comment B. Comments Supporting, But expansion, and the proposal to speed letters in response to the proposed rule, Suggesting Changes to, the Proposed credit unions’ purchases of banks.’’ which included letters from credit Rule union trade associations, credit unions, Second, these commenters generally state and regional credit union leagues, stated that the proposed rule ‘‘usurps The comments described in this bank trade organizations, corporate Congressional authority by approving section support the proposed rule, but credit unions, banks, law firms, the use of investor-raised funds to offered suggested changes and securities brokers, and individuals. Of satisfy regulatory capital requirements, amendments. In each section the Board the 171 comment letters, 125 appear to an area Congress clearly restricted to briefly summarizes and responds to have been generated from one form retained earnings in the Federal Credit comments, with an indication of letter opposing the rule.24 Union Act.’’ The commenters did not whether the Board has changed the final Nearly all the remaining commenters offer further support for this statement. rule or has finalized a section as supported the proposed rule, but did Finally, these commenters stated that proposed. The Board notes that the offer at least one suggested change. the proposed rule would pose following content is organized by the Supporting commenters generally significant risk to the NCUSIF. These number of commenters that addressed a reiterated the need for Subordinated commenters stated that the NCUA has particular topic and the impact of a acknowledged that secondary capital particular section on the rest of the rule. 22 Grandfathered Secondary Capital will be has contributed to rapid growth and The Board believes this organization considered as Regulatory Capital in accordance higher failure rates in credit unions that will help readers ascertain which topics with the approved application, terms of the note, issue secondary capital. The were the most commented-on and and the applicable schedule for recognizing commenters went on to state that complex. While the Board chose this secondary capital as Net Worth, provided that no such term may exceed 20 years. expanding the authority to issue organization for ease of use, the Board 23 80 FR 4340 (Jan. 27, 2015). Subordinated Debt to the largest credit notes that it evaluates all comments and 24 While 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).

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topics equally, regardless of number or exemption, and there generally are no lenders/providers of credit or investors the depth of the comments. SEC-mandated disclosure requirements who would anticipate a potential return for offerings of securities pursuant to the on investment in addition to repayment 1. Subordinated Debt Is a Security Rule 506 [17 CFR 230.506] private of the obligation and any stated interest; The proposed rule included a placement exemption as long as all and comprehensive description of purchasers in the offering are • The ‘‘family resemblance’’ of the Subordinated Debt as a security and ‘accredited investors.’ ’’ This commenter instrument to other instruments or described general securities law that went on to state that there ‘‘already arrangements that have been found to may apply to Subordinated Debt issued exists a U.S. securities law framework fall within the definition of a ‘‘security,’’ by a credit union. This section of the which applies to such exempt rather than having characteristics more proposed rule stated that the NCUA issuances, and that framework stipulates akin to a loan or typical extension of continues to believe any Subordinated that registration and disclosure credit. Debt Note would be deemed a security requirements are not necessary in these As the preceding information for purposes of Federal and state cases. It is unnecessary, improper, and demonstrates, the definition of a securities law. This section went on to unduly burdensome for NCUA to security is quite broad and provide the definition of a ‘‘security’’ impose such requirements on exempt encompassing. As such, the Board again under the Securities Act of 1933 and credit union issuers when U.S. acknowledges that Subordinated Debt interpretations of such term by various securities law does not impose these Notes issued under the Subordinated courts, including the U.S. Supreme requirements.’’ Debt rule, as finalized herein, fit within Court. In response to the aforementioned the definition of a security. Inclusion in Twelve commenters disagreed with comments, the Board first reiterates that such definition may subject issuances to the NCUA’s assertion that all section 2(1) of the Securities Act various Federal and state laws and Subordinated Debt issued under the broadly defines the term ‘‘security’’ to regulations. proposed rule would be a security for include, among other things, any: The Board’s statement in both the purposes of Federal and state securities • Stock; proposed rule and this final rule that laws. The majority of these commenters • Note; Subordinated Debt Notes would be stated that such a classification would • Bond; securities is an acknowledgment of such result in an overly complex and • Debenture; fact and has no bearing on the treatment expensive set of requirements, including • Evidence of indebtedness; of such notes by the SEC or state the preparation of an Offering Document • Investment contract; or regulators. Rather, after consultation and the retention of securities counsel, • Interest or instrument commonly with outside securities law counsel, the that would make many small issuances known as a security.27 Board recognizes that Subordinated of Subordinated Debt cost-prohibitive Further, the U.S. Supreme Court has Debt Notes issued under this final rule for LICUs. repeatedly emphasized that the are likely (to some degree) to be subject One commenter stated that definition of ‘‘security’’ is quite broad. to the multitude of Federal and state ‘‘currently, the issuance of secondary The U.S. Supreme Court, in a variety of securities laws—particularly those capital is largely accomplished through cases analyzing the boundaries of the related to disclosures and anti-fraud. what is best described as bilaterally definition, has stressed that the The Board believes it is prudent and negotiated lending transactions. The substantive characteristics of the responsible to adopt a framework, as NCUA has not suggested that this instrument in question and the discussed in the proposed rule, to aid practice would be discontinued in the circumstances surrounding its issuance, Issuing Credit Unions in providing case of subordinated debt, and it is rather than the mere name or title of the Offering Documents to investors. As a reasonable to believe that many market instrument, are of primary significance prudential regulator, it is incumbent offerings would continue to be in determining whether the instrument, upon the NCUA to include in a conducted in this way.’’ This contract, or arrangement in question rulemaking of this complexity commenter went on to state that, will be deemed a ‘‘security.’’ While provisions to help ensure credit unions because of the use of these bilateral-type lower Federal courts and some state comply with regulatory or statutory agreements, the NCUA should refrain courts have sometimes taken a narrower requirements, and to help credit unions from implementing a blanket approach view than the Supreme Court, common avoid legal challenges from investors. to securities law compliance. factors the courts generally consider in The Board reiterates that for all Other commenters believed a blanket their analysis (particularly in the Issuing Credit Unions, the issuance of classification of Subordinated Debt as a context of a debt instrument, contract or Subordinated Debt may be a new security would negatively impact LICUs arrangement) include: activity. While LICUs have been issuing and small issuances. Further, many of • The terms of the offer; secondary capital for several decades, these commenters urged the NCUA to • The characteristics of the economic this will be the first time the NCUA has consider a more flexible approach that inducement being offered to the permitted LICUs to issue instruments to follows the exemptions provided for in potential counterparty, and whether the qualifying natural persons. Because this the Security and Exchange characteristics are consistent with a loan is a new and complex activity for all Commission’s (SEC’s) rules and the or typical extension of credit, or such Issuing Credit Unions, in consultation Office of the Comptroller of the that the counterparty would anticipate a with outside counsel, the Board views Currency’s (OCC’s) subordinated debt potential return on investment in the Offering Document process to as regulation. Specifically, one commenter addition to repayment of the obligation helping Issuing Credit Unions navigate stated that the proposed rule would and any stated interest; complex disclosures and anti-fraud require an Issuing Credit Union to • The plan of distribution; laws. However, the Board notes that the prepare and deliver an Offering • How an instrument is marketed and Offering Document is independent of Document to potential investors ‘‘even to whom it is marketed, and whether the and, in some cases, additive to any though there is no SEC-mandated potential counterparties are traditional requirements imposed by applicable disclosure requirements for offerings of securities laws. The Board reiterates its securities pursuant to the section 3(a)(5) 27 15 U.S.C. 77b. expectation that credit unions

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contemplating an issuance of engaged in—subordinated debt approach to Offering Documents, the Subordinated Debt Notes retain transactions for many years. As noted NCUA should require a potential credit professional advisors experienced in previously, this final rule will be, to union issuer—as part of its initial securities law disclosure matters to help some degree, a new endeavor for many application to issue Subordinated them prepare related Offering Issuing Credit Unions. The Board Debt—to explain how its approach to Documents. In short, the Board believes it is both prudent and due diligence, disclosure, and securities continues to believe that Subordinated necessary to maintain the proposed law considerations is reasonable given Debt Notes issued under this final rule guardrails to help Issuing Credit Unions the specifics of an issuance. In support, would be securities. Therefore, the comply with applicable securities laws, this commenter stated that this Board is taking a prudential stance by particularly those related to anti-fraud. approach would provide flexibility finalizing, as proposed, the various As the NCUA and credit unions move while accounting for the varying types provisions related to securities law that forward with this final rule, the Board of issuances and varying degrees of appeared in the proposed rule. The will continue to evaluate the rule and investor sophistication. Board believes that, in the infancy of may undertake future rulemakings to Another commenter suggested the Subordinated Debt issuances, such provide exemptions where they are both Board detach the Offering Document provisions are transparent and will help warranted and prudent for Issuing from the application process, and Issuing Credit Unions navigate and Credit Unions. instead make approval contingent on properly issue Subordinated Debt Notes the inclusion of an offering circular to 2. Offering Document (in consultation with counsel). The comply with 17 CFR 240.10b–5 and Board further notes that the disclosures In addition to comments related to the other disclosures the NCUA deems required by this final rule are akin to applicability of securities laws and appropriate. This commenter stated that those most investors are accustomed to exemptions from submitting an Offering this would allow a credit union to defer seeing in the marketplace, which may Document, as discussed previously, the legal costs associated with preparing make issuances of Subordinated Debt several commenters offered specific an Offering Document until the credit Notes less costly for some Issuing Credit comments on the requirement that an union was ready to execute its Unions. Issuing Credit Union create an Offering Subordinated Debt strategy. Document for each issuance of Finally, one commenter requested a. Exemptions for Certain Subordinated Subordinated Debt. Generally, these that the NCUA explicitly require issuers Debt Issuances commenters opposed the Offering to disclose all pending legal or other In addition to the aforementioned Document process, or at least requested items that could have a negative impact comments, several commenters stated an exemption or streamlined process for on the credit union’s capital, income, or that the OCC’s requirements for national certain issuances. operating performance. This commenter banks offering subordinated debt are One commenter stated that the NCUA stated that such information was less restrictive than what the Board should include exemptions for certain necessary for an investor to make a well- proposed for credit unions. Commenters issuances of Subordinated Debt, similar informed decision. noted that the OCC requires banks that to the OCC and FDIC. This commenter For the reasons articulated in the issue subordinated debt to comply with contended that such exemptions would proposed rule and those discussed § 16.5 of the Federal Deposit Insurance lower regulatory burden on smaller previously, the Board is finalizing the Corporation’s (FDIC’s) Securities institutions and bring the NCUA’s sections relating to the Offering Offering Disclosure Rule, which regulation more in line with the OCC’s, Document as proposed. In addition to contains several exemptions to the FDIC’s, and SEC’s disclosure the previous discussion related to prospectus delivery requirement, requirements. This commenter went on Subordinated Debt as a security, the including exemptions for nonpublic to state that almost every current Board continues to believe that a robust offerings and small issuances made in issuance of secondary capital would be Offering Document is prudent for credit conformance with applicable SEC exempt from the Offering Document unions that issue Subordinated Debt. rules.28 To align with regulations issued process under the OCC’s Subordinated As noted in the proposed rule, the by the OCC and FDIC, these commenters Debt regulation. Offering Document is designed to stated that the NCUA should consider a Another commenter stated that ‘‘the provide investors with disclosures that more flexible approach. NCUA’s documentation requirement provide the information they need to The Board is aware that the FDIC’s goes beyond that of the OCC, which make an informed decision on Securities Offering Disclosure Rule 29 permits a bank seeking to issue purchasing Subordinated Debt. Further, contains exemptions that were not securities to tailor its approach to the the Board modeled the Offering included in the proposed rule and are relevant securities registration Document from disclosures common in not included in this final rule. First, exemption—and associated market the marketplace for this type of related to the preceding section of this practice—that meets its needs.’’ This instrument. Because Subordinated Debt document, the Board notes that while commenter went on to state that ‘‘the is a security and thus subject to the the OCC and FDIC provide exemptions NCUA’s requirement could result in broad antifraud provisions of the for certain issuances, the OCC and FDIC credit unions having higher burdens— Securities Exchange Act, as codified in still deem such issuances to be and less transaction flexibility—than the SEC’s regulations,30 the Board securities. Rather, the OCC and FDIC their community bank counterparts.’’ intends the Offering Document to be an have provided exemptions from Finally, this commenter argued that the aid for credit unions and an extra level registration and delivery of an Offering NCUA’s requirements would be similar of protection for investors. Document for issuances of securities to those imposed by the SEC on public In response to commenters seeking an that satisfy certain requirements. offerings, which, in the commenter’s exemption for certain types of Second, the Board notes that the OCC view, would hinder the credit union Subordinated Debt transactions, the has supervised—and banks have industry, which would largely be Board may consider such actions in engaging in small, private issuances. future rulemakings. However, as noted 28 12 CFR 16.5 Another commenter suggested that 29 Id. instead of the NCUA’s proposed 30 17 CFR 240.10b–5.

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previously, because this is a new • The requirement to provide at least removed the automatic approval that endeavor for many Complex and New five years of Pro Forma Financial exists in the Secondary Capital Rule if Credit unions and this is the first time Statements. the NCUA fails to respond before the LICUs will be permitted to issue expiration of the 45-day period. a. Application Requirements Subordinated Debt to natural persons, Approximately 13 commenters opposed the Board believes it is important to take Approximately 13 commenters either these proposed changes. a measured approach to the issuance of stated that the preapproval requirements Generally, these commenters stated these instruments. The Board believes a to issue Subordinated Debt were too that a longer approval process with no ‘‘walk before you run’’ approach in this burdensome or requested that the NCUA automatic approval would impose area is both prudent and necessary. streamline the process. While some unnecessary burdens on credit unions Finally, the Board believes that third commenters appreciated the clarity in seeking to issue Subordinated Debt. the proposed preapproval requirements, parties may produce Offering Document These commenters urged the NCUA to this subset of commenters felt that the templates to help credit unions issue retain the approval timing and structure preapproval requirements were too Subordinated Debt more efficiently, in the Secondary Capital Rule. One cumbersome and would discourage while still complying with this rule and commenter stated that the NCUA should many credit unions from issuing applicable securities laws. The creation concurrently review a credit union’s Subordinated Debt. application and Offering Document, of such templates may help defray some Some commenters stated that the asserting that consecutive rather than of the cost for Issuing Credit Unions. preapproval process should not be a concurrent reviews could place a credit The Board encourages such one-size-fits-all approach, but should union at a competitive disadvantage and collaboration in the industry, provided reflect the complexity of the proposed frustrate a credit union’s efforts to issue it is compliant with the final rule and issuance. Several of these commenters Subordinated Debt. Further, this all applicable securities laws. The Board stated that the NCUA should retain its commenter stated that an overly long notes, however, that the use of any current ‘‘Secondary Capital Plan’’ review process could result in ‘‘stale’’ template Offering Document must be requirements. In addition, two data, which may not be useful to the customized to a credit union’s specific commenters stated that if the NCUA NCUA or investors. issuance and accurately disclose the retains the proposed preapproval As stated in the proposed rule, the specific aspects that are unique to the requirements, the final rule should Board believes the expanded Issuing Credit Union. provide for a streamlined process for requirements for initial applications are For the reasons discussed above, the subsequent preapproval requests from broader than the Secondary Capital Rule Board is finalizing the Offering previously approved credit unions. Document, and sections related thereto, As stated in the proposed rule, the requirements and that the enhanced as proposed. Board remains dedicated to a description of diligence expectations requirement for an eligible credit union will require a more thorough review by 3. Preapproval To Issue Subordinated the Appropriate Supervision Office. Debt to obtain written preapproval before issuing Subordinated Debt, as it views While the Board anticipates that the The proposed rule required that this step as an important prudential clear, transparent structure of the eligible credit unions submit an safeguard. The Board believes a application requirements will lead to application and receive written preapproval process is part of a credit increased efficiency from both credit preapproval from the NCUA before union’s sound management plan, and unions and the agency, the Board issuing Subordinated Debt. The will help the NCUA ensure that a believes the extra time is warranted to proposed application process consisted planned issuance of Subordinated Debt ensure an application is sufficient for an of an eligible credit union providing the is structured in such a manner as to Appropriate Supervision Office to make Appropriate Supervision Office appropriately protect the Issuing Credit a well-informed decision. Further, the information on 15 topics as part of the Union and the NCUSIF. Board notes that the complexity of a initial application. In addition, the While the Board recognizes the many Subordinated Debt issuance will drive Board proposed to amend the NCUA’s potential benefits that an issuance of both the veracity of a credit union’s review time of such application from 45 Subordinated Debt Notes may confer on application and the NCUA’s review days with automatic approval (as in the an Issuing Credit Union, it also time. As such, the Board anticipates that Secondary Capital Rule) to 60 days, appreciates the complexities and risks the increased time for review will have with no automatic approval. The Board of such issuance. The decision to offer little impact on most smaller, simple also proposed to expire any approval and sell Subordinated Debt Notes issuances. Therefore, the Board is granted under the rule one-year from the should be made only after careful retaining, as proposed, the 60-day date of such approval. consideration, preparation, and timeframe for NCUA review of Most of the commenters that diligence by the Issuing Credit Union, applications. supported the proposal addressed at including seeking professional advice as c. Expiration of Authority least some aspect of the proposed warranted. For these reasons, the Board The proposed rule included a application process. The commenters is retaining this important prudential provision that would require the generally focused on: safeguard and will adopt the • preapproval requirements as proposed. expiration of an Issuing Credit Union’s Reducing the complexity of the authority to issue Subordinated Debt application process; b. NCUA Review Time of Application Notes one year from the later of: • The timing for NCUA approval of As noted previously, the proposed • The date the Issuing Credit Union an application; rule increased the review time of an received NCUA approval of its initial • The requirement to issue initial application to 60 days from the application (if the proposed offering is Subordinated Debt within one-year from Secondary Capital Rule’s period of 45 to be made solely to Entity Accredited the approval of an application; days.31 In addition, the proposed rule Investors); or • Subordinated Debt Note • The ‘‘approved for use’’ date of the restrictions; and 31 12 CFR 701.34(b)(2)). applicable Offering Document (if the

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proposed offering will include any provided the request is filed at least 30 sensitivity analysis indicating likely Natural Person Accredited Investors). calendar days before the expiration of performance under stressed conditions. The Board included a question in this authority. The Board believes The Board has considered these section of the proposed rule preamble finalization of this provision, coupled comments and is reducing the minimum asking if a one-year expiration would with the expiration extension, will number of years for the Pro Forma negatively impact Issuing Credit provide Issuing Credit Unions sufficient Financial Statement requirement as part Unions. Approximately 16 commenters time to complete a Subordinated Debt of the initial application from five years responded to this question and issuance. disagreed with the proposed The Board notes, however, that in the to two years for the final rule. The Board requirement that a credit union event an Issuing Credit Union’s believes that an extended Pro Forma complete a Subordinated Debt issuance circumstances materially change after Financial Statement analysis of five within one year from the date of the NCUA has approved an initial years, which aligns with the minimum receiving NCUA approval. Most of these application but before the closing of the maturity of a Subordinated Debt Note, commenters stated that one year is an relevant offer and sale of Subordinated may provide useful information. arbitrary deadline that may force a Debt Notes, the final rule requires an However, the Board recognizes that the credit union to make a rushed decision Issuing Credit Union to submit an veracity of the analysis is equally or not be able to adequately account for amended application before it continues important. Further, the quality of the the complexities necessary to execute a its Subordinated Debt Notes offering. assumptions and range of plausible beneficial offering. Most of the The Board believe this provision is scenarios used in the projections are as commenters sought an extension of the necessary to account for material much a priority—and perhaps superior one-year period, rather than an outright changes in an Issuing Credit Union’s to—the number of years a credit union abolishment of it. conditions that may occur between applied to those assumptions and In addition, two commenters stated approval and the final sale of scenarios. As such, the Board believes a that the NCUA could use the quarterly Subordinated Debt. reduction in the number of years from regulatory reporting to monitor credit d. Pro Forma Financial Statements the proposed five to two is appropriate unions with Subordinated Debt and will provide, in most cases, the authority and determine if there had The proposed rule included an necessary information for an been changes in a credit union’s extension of the time horizon of the Pro Appropriate Supervision Office to condition that would require a Forma Financial Statements to five render a decision on an initial revocation of the NCUA’s approval. years compared to the Secondary application. The Board notes, however, Capital Rule’s requirement of two These commenters stated that such an that included in both the proposed rule years.32 The Board requested comment approach would account for material and this final rule is a provision that on this extension and its impact on changes in a credit union’s condition permits an Appropriate Supervision without subjecting all credit unions to Issuing Credit Unions. Approximately Office to request additional information, an arbitrary deadline. five commenters addressed the The Board has considered these proposed requirement that a credit such as additional years of Pro Forma comments and will increase the union submit at least five years of Pro Financial Statements, to support a credit expiration period to two years in the Forma Financial Statements with its union’s application. final rule. The Board understands that application. Three of these commenters e. Filing Fees business and/or economic conditions disagreed with the proposed increase can change rapidly, as has occurred from two to five years. One commenter Five commenters opposed any filing during the global pandemic of 2020, and stated that the NCUA should request Pro fees associated with the issuance of that a credit union may need a longer Forma Financial Statements based on Subordinated Debt. These commenters period to meet its strategic goals using the complexity of a proposed generally stated that such fees may Subordinated Debt. The Board believes transaction rather than implementing a make such issuance cost prohibitive and this change in the final rule will provide one-size-fits-all approach. Another overly burdensome, particularly in light credit unions with a longer issuance commenter believed that two years of of the other requirements in the window and increased flexibility to data was sufficient, as such data is proposed rule. issue Subordinated Debt. After thorough mainly for the benefit of an investor. In response, the Board notes that both consideration, the Board has determined This commenter stated that an investor the proposed rule and this final rule do that a two-year expiration period strikes could request additional years of Pro not require a filing fee, but do reserve an appropriate balance between the Forma Financial Statements if needed. competing concerns the Board noted in Two commenters agreed with the the right of the Board to charge such a the proposed rule: ensuring that an proposed increase and sought additional fee if warranted. The Board believes it Issuing Credit Union does not offer and information as part of the application is important to retain this flexibility to sell Subordinated Debt Notes following and disclosure process. One commenter ensure that, if needed, the Board can a material change in the information on agreed with the breadth of the required assess an appropriate fee on applicants which the NCUA relied in approving pro forma data but suggested that the to cover the NCUA’s cost of reviewing the offer and sale of that Issuing Credit NCUA should also require credit unions and processing such application. The Union’s Subordinated Debt Notes, and to include tables that reflect actual Board notes that it would not impose a not unduly hindering the marketability results for the prior three-year period fee without a sufficient justification and of Subordinated Debt Notes. and a detailed narrative on how the may provide exceptions for smaller or In addition to expanding the issuer intends to secure the level of low-income credit unions. Therefore, expiration period, the Board is earnings presented in its Pro Forma the Board is retaining this provision as retaining, as proposed, a provision that Financial Statement. This commenter proposed. However, the Board is allows an Issuing Credit Union to file a went on to suggest that such additional clarifying in this final rule that the written request for one or more data should include a modest level of Board will publish a fee schedule on the extensions of the two-year limit with the NCUA’s website only if the Board Appropriate Supervision Office, 32 Id. institutes a fee in the future.

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4. Investors The Board is finalizing the sections on a. Prohibition of an Issuing Credit In the proposed rule, the Board Investors as proposed, with one minor Union’s Board Members, Senior limited the investors that could change. As noted in the preamble to the Executive Officers, or Their Immediate purchase Subordinated Debt to only proposed rule, at the time, the SEC had Family Members To Purchase or Hold Accredited Investors as defined by the proposed amendments to the definition Subordinated Debt Notes SEC,33 except that credit union of ‘‘Accredited Investor.’’ The SEC has The Board proposed to expand a 34 ‘‘insiders’’ were specifically prohibited now finalized these amendments. credit union’s current authority for from purchasing or holding These changes, which are effective permissible investors by allowing a Subordinated Debt. Further, the December 8, 2020, expand the definition credit union to issue Subordinated Debt proposed rule bifurcated the category of of ‘‘Accredited Investor’’ by adding to Natural Person Accredited Investors Accredited Investors into Natural several new categories of natural and Entity Accredited Investors, with Person Accredited Investors and Entity persons or entities the SEC considers the following restrictions on who may Accredited Investors. Finally, the Accredited Investors. The Board is purchase or hold a Subordinated Debt proposed rule limited the permissible adopting these changes to the definition Note issued by an Issuing Credit Union: investor base to only U.S. investors. of ‘‘Accredited Investor’’ by modifying • Board member or Senior Executive Eight commenters addressed the issue the definitions of Entity and Natural Officer of the Issuing Credit Union; and of investors. The majority of these Person Accredited Investor in this final • Immediate Family Member of such commenters sought additional rule. The proposed rule enumerated board member or Senior Executive flexibility in determining who may specific paragraphs of 17 CFR Officer of the Issuing Credit Union. invest in Subordinated Debt. However, 230.501(a) that the NCUA would One commenter requested the NCUA three commenters sought additional consider either Natural Person reconsider these proposed prohibitions. limitations on the type of investors or Accredited Investors or Entity Investors. The commenter noted that the Federal solicitation thereof. To encompass the recent change by the banking regulators do not prohibit Two commenters stated that SEC and future changes by the SEC, the related parties and insiders from buying permissible investors should not be Board is removing the specific citation stock in a mutual to stock conversion of limited to only U.S. investors. These references to 17 CFR 230.501(a). This is a thrift institution. The commenter commenters believed this would unduly largely a technical change and is not stated that educating board members, restrain credit unions from conducting intended to change the substantive senior officers, and others within the beneficial offerings of Subordinated definition of Entity or Natural Person sphere of concern should suffice to Debt. Two other commenters, for similar Accredited Investors. mitigate this concern by requiring reasons as the preceding commenters, As noted previously, several insider trading policies and procedures requested that the NCUA allow commenters sought additional regarding the management of material permissible investors to include those flexibilities for investors or the removal non-public information and related other than Accredited Investors. Finally, of investor limits completely. The Board party transactions. The commenter also one commenter requested the NCUA does not believe it is prudent to remove stated the Offering Document would remove the limit on the number of the limitations on investors, as such have disclosures related to investments permissible investors. This commenter limits were designed to protect investors by related parties and insiders, and felt any limit on the number of investors and credit unions. As discussed in the would disclose any potential conflict of could limit a credit union’s ability to proposed rule, disclosures are largely interests. Given the NCUA’s concern, conduct an issuance that it determines based on the sophistication of the the commenter stated the NCUA may to be in its best interest. investor. Therefore, the Board opted to wish to consider adding a requirement Differing from the aforementioned limit investors to those that meet the to the initial application requiring an commenters, three commenters sought SEC’s definition of Accredited Investor. applicant credit union to disclose additional limitations on the The Board believes this strikes an whether any such individuals are permissible investors or the solicitation appropriate balance between providing anticipated investors. The commenter thereof. Two commenters requested that credit unions with a wide investor base stated that a wholesale exclusion the NCUA prohibit any federally and helping credit unions avoid unduly limits the marketability and insured credit union from investing in additional risks by offering functionality of Subordinated Debt the Subordinated Debt of other credit Subordinated Debt to less-sophisticated issuances by a credit union. unions. These commenters believed this investors. The Board continues to believe it is prohibition would remove risk from the inappropriate to permit an Issuing Further, in response to the commenter credit union system and offer a higher Credit Union’s board members, Senior that sought the ability to offer degree of protection for the NCUSIF. Executive Officers, or their Immediate Subordinated Debt to non-U.S. citizens, The Board notes that it discusses these Family Members to purchase or hold the Board, as noted in the proposed comments in the section of this Subordinated Debt Notes. The Board has rule, deliberately limited the issuance of document related to FCUs being both an concerns about potential conflicts of Subordinated Debt to only U.S. citizens. issuer and investor of Subordinated interest and fraud that could arise This decision is based, in large part, on Debt. Finally, one commenter believed because such individuals may exercise the additional complexities of issuing to that credit unions should be prohibited control over an Issuing Credit Union foreign persons, which could subject from soliciting or offering Subordinated and could have, or gain, access to Issuing Credit Unions to additional risk Debt at credit union branches. This material non-public information related that could ultimately be passed on to commenter stated that this practice to the Issuing Credit Union and/or the the NCUSIF. could introduce unnecessary reputation Subordinated Debt Notes. Despite risk to credit unions that solicit or offer Except as discussed above, the Board commenters’ assertions, the Board does Subordinated Debt to unsophisticated is finalizing the sections on investors, as not believe disclosures would be members. proposed. sufficient to address these concerns. For these reasons, the Board is retaining the 33 17 CFR 230.501(a). 34 85 FR 64234 (Oct. 9, 2020). prohibition on an Issuing Credit Union’s

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board members, Senior Executive $10,000 as a basis for selecting this to issue Subordinated Debt or Officers, or their Immediate Family amount as an overall minimum Grandfathered Secondary Capital. Members purchasing or holding denomination. In addition, other Approximately 12 commenters Subordinated Debt Notes in the final commenters stated that a $10,000 requested the NCUA reconsider the rule, without amendment. minimum denomination would benefit proposed prohibition on a credit union small LICUs while being more than being both an issuer and investor in 5. Subordinated Debt Note Default Subordinated Debt. The majority of Restriction sufficient to help a small LICU avoid prompt corrective action. these commenters stated that this type The proposed rule included a As noted previously, one commenter of investment scenario would not restriction on a Subordinated Debt Note sought a higher minimum denomination increase the magnitude of a loss to the including a term or condition that amount. This commenter urged the NCUSIF. These commenters contended would trigger an event of default based NCUA to adopt the OCC’s $250,000 that the loss may be spread across on an Issuing Credit Union’s default on minimum denomination to discourage multiple institutions, thereby other debts. Approximately five access by less financially sophisticated mutualizing the risk of a loss. Further, commenters opposed this restriction. investors. one commenter stated that ‘‘the One commenter suggested that the The Board has considered the investment of one credit union in the NCUA adopt a similar provision to the comments on minimum denomination [Subordinated Debt] of another could other banking agencies and use a certain of a Subordinated Debt note when benefit the credit union system overall threshold to determine when default on issued to a Natural Person Accredited because it is likely, or at least possible, other debts would render an Issuing Investor(s) and will retain the proposed that credit unions with higher net worth Credit Union in default on its minimum denomination of $100,000. As ratios will invest in those with lower net Subordinated Debt. Other commenters the Board stated in the proposed rule, worth ratios.’’ suggested that default clauses are Commenters in favor of this type of the minimum denomination provides standard in debt obligations to allow investment scenario stated that additional protection to Natural Person parties to restructure deals in the event concentration limits would serve as of material changes to the financial Accredited Investors that purchase protection against extensive loss condition of the issuer. Subordinated Debt Notes. The Board transfers, because the investing credit After considering these comments, the reiterates that such minimum unions would only stand to lose the Board is finalizing this restriction as denominations would not apply to amount invested, which would be proposed. While the Board recognizes Entity Accredited Investors because prudentially regulated by the NCUA. that other banking regulators may those purchasers are corporate entities Commenters also suggested that the impose a different requirement, the that, in the Board’s view, are generally NCUA add a line item to the Call Report Board believes this restriction is sufficiently sophisticated in financial to exclude all amounts invested in the prudent given the relative newness of matters such that the additional Subordinated Debt of other credit the issuance of Subordinated Debt. In protections afforded by minimum unions. These commenters contended conjunction with the other provisions in denominations are not necessary. The that, because this is primarily a this final rule, including interest Board will retain no minimum reporting issue, adding a new item to repayment and repudiation safe harbors, denomination requirements for the Call Report to reflect such the Board does not believe this Subordinated Debt Notes sold to an investments would properly reflect the restriction will cause an overly negative Entity Accredited Investor. loss-absorbing capacity of the credit impact on the sale of Subordinated Debt The Board also stated requiring larger union system. Further, these Notes. denomination notes will help ensure commenters stated that this would that the purchasers of the Subordinated address the NCUA’s concern where an 6. Minimum Denominations Debt Notes are financially sophisticated FCU issuing and investing in To provide additional protections to and have substantial net worth. The Subordinated Debt causes the Natural Person Accredited Investors that Board disagrees that this provision will appearance of increased net worth in purchase Subordinated Debt Notes, the overly impact most LICUs. Currently the credit union system, while the Board proposed that Subordinated Debt LICUs may only issue secondary capital actual loss-absorbing capacity of the Notes sold or transferred to a Natural to entities. This final rule retains LICUs’ system remains unchanged. Person Accredited Investor be made in ability to issue Subordinated Debt to an Conversely, two commenters minimum denominations of $100,000 or Entity Accredited Investor in any requested that the NCUA prohibit any $10,000, respectively. Approximately amount. The minimum denomination federally insured credit union from eight commenters addressed the issue of would only apply if a LICU sought to investing in the Subordinated Debt of minimum denominations. The vast issue Subordinated Debt to the newly other credit unions. These commenters majority of these commenters sought permissible category of Natural Person believed this prohibition would remove lower minimum denomination amounts. Accredited Investors. risk from the credit union system and offer a higher degree of protection of the One commenter, however, requested a 7. Prohibition on an FCU Issuing and NCUSIF. higher minimum denomination amount. Investing in Subordinated Debt Commenters that favored a lower While most these commenters believe minimum denomination amount The proposed rule included a an FCU should be able to be an issuer generally agreed that the proposed limit requirement that an FCU investing in and investor of Subordinated Debt, the of $100,000 was too high, particularly Subordinated Debt, Grandfathered Board continues to believe that an given the requirement that all investors Secondary Capital, or in loans and Issuing Credit union should not provide qualify as Accredited Investors. The obligations issued by privately insured Regulatory Capital to other natural majority of these commenters argued credit unions that are subordinate to a person credit unions. The Board that $10,000 was an appropriate private insurer must not be an Issuing continues to believe the potential to minimum denomination. Some of these Credit Union of Subordinated Debt or transmit losses between multiple credit commenters cited the NCUA’s proposed Grandfathered Secondary Capital, or unions that have both issued and resale minimum denomination of currently have approval from the NCUA invested in Subordinated Debt could

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increase the risk of credit union failure commenter did state, however, that longer receive regulatory credit without and risk to the NCUSIF. The Board also while they saw benefits to all credit prior regulatory approval. notes that adding a line in the Call unions issuing the same instrument, In addition, one commenter stated Report, as recommended by some they did not believe that a FISCU which that the NCUA should allow credit commenters, would not decrease the was permitted by state law to issue a unions to draft agreements that allow for potential risk of credit union failure due Subordinated Debt hybrid instrument the redemption of discounted capital so to loss transmission and would not should be restricted from doing so by they could count the remaining balance, decrease the risk to the NCUSIF. An the proposed rule. in whole, as capital. added line to the Call Report would As stated in the proposed rule, Another commenter stated that credit only provide information, and not risk FISCUs may not be restricted under unions should have the flexibility to mitigation. For these reasons, the Board applicable state law and regulation to structure Subordinated Debt agreements is retaining the prohibition of an FCU issuing only debt instruments. However, with the ability to refinance the debt if issuing and investing in Subordinated as administrator of the NCUSIF the the parties agreed to the concept of Debt in the final rule without Board continues to believe the refinancing within an outlined amendment. framework for the types of instruments placement agreement. 8. Federally Insured, State-Chartered that would qualify for Regulatory Finally, one commenter stated that Credit Unions Capital should be consistent for all inclusion of prepayment obligations and credit unions. The Board notes that such acceleration features is common in the The proposed rule required FISCUs to structure may also help FISCUs retain capital markets, even for deeply be subject to largely the same their tax exemption, as debt issuances subordinated instruments, and would be requirements related to the issuance of are likely not to be viewed as capital expected by many market participants. Subordinated Debt as FCUs. These stock issuances.35 This commenter went on to recommend include, but are not limited to, While the Board fully supports the the NCUA allow for these features— requirements related to the features and dual-chartering system and innovation particularly because the NCUA can structure of the instrument. among all credit unions, it notes that all protect the issuer and the NCUSIF by Approximately seven commenters LICUs—both federally and state- requiring an issuer to receive NCUA addressed the issue of FISCUs being chartered—are currently subject to the approval before making any payments. subject to the requirements of the same Secondary Capital (or Prompt The Board has reviewed the NCUA’s final Subordinated Debt rule. Corrective Action) requirements. comments relating to prepayment of All but one of these commenters Further, as articulated in the proposed Subordinated Debt and will retain the opposed the proposed rule as overly rule, FISCUs may only issue restrictive on FISCUs. provision of receiving prior approval in Commenters opposing this proposal Subordinated Debt if permitted under the proposed rule, with a 45-day stated that it would be in opposition to state law. The Board believes that timeframe for the NCUA to approve the the dual-chartering system and could requiring consistency among the types application. While the 45-day approval stifle innovation among FISCUs that of instruments issued for Regulatory timeframe is similar to the Secondary have authorities beyond those of FCUs. Capital treatment is in the best interest Capital Rule, the Board has eliminated One commenter stated that state of both the NCUSIF and FISCUs. As the provision for automatic approval if regulators are sufficiently equipped to such, the Board is finalizing, as a credit union is not notified of a supervise the innovation of FISCUs as it proposed, those provisions that apply to decision by the Appropriate develops. FISCUs without amendment. Supervision Office within the 45 days. One commenter also opposed the 9. Prepayment The Board believes the regulatory relief potential requirement for a FISCU to in the proposed rule, including the obtain an opinion that its issuance The proposed rule required a credit ability to prepay any portion of the would not subject the credit union to union to receive prior written approval Subordinated Debt and a streamlined state and Federal income taxes. This from the Appropriate Supervision Office application (compared to the Secondary commenter stated that it is not clear that before the credit union prepays Capital Rule), provide sufficient such an opinion would be needed under Subordinated Debt. Approximately five regulatory relief to offset any burden the proposed structure, because FISCUs commenters addressed the issue of imposed by removing the automatic would be held to the same standard as prepayment. The majority of these approval. However, the Board sees the FCUs. Further, this commenter, in light commenters sought a removal of the requirement for preapproval for of the cost of such an opinion, sought application process to prepay prepayment as an important way to assurance from the NCUA that the Subordinated Debt or a shortening of the confirm that a credit union has request for such an opinion would be timeframe for the NCUA to render a sufficient capital and liquidity to repay the exception rather than the norm. decision on such application. Subordinated Debt without unduly Finally, as noted previously, one These commenters stated that an increasing risk to the NCUSIF. commenter was not completely opposed application process was in opposition to the requirements contained in the OCC’s 10. Limits on Loans to Other Credit to FISCUs being subject to the same Unions requirements as FCUs. This commenter regulation and could put credit unions stated it was unlikely that any at a competitive disadvantage. These The proposed rule included a new instrument other than Subordinated commenters recommend allowing single-borrower limit for FCUs that Debt would be of much interest in the adequately capitalized credit unions to make loans to other credit unions. The marketplace. Further, this commenter prepay any portion of their single-borrower limit would be the argued that all credit unions issuing the Subordinated Debt for which they no greater of 15 percent of an FCU’s Net same form of instrument would help the Worth or $100,000, plus an additional market become more familiar with 35 State chartered credit unions without capital 10 percent of an FCU’s Net Worth if that stock, organized and operated for mutual purposes additional 10 percent is fully secured at Subordinated Debt, thereby increasing and without profit are exempt from Federal income investor interest and reducing the cost tax under Internal Revenue Code 501(c)(14)(A). 26 all times with a perfected security of issuing Subordinated Debt. This U.S.C. 501(c)(14)(A). interest by readily marketable collateral

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as defined in § 723.2.36 The limit would permits FCUs to purchase pooled issue securities.41 Conversely, nothing include Subordinated Debt and Subordinated Debt in the form of a in section 1757(9) or other provisions of Grandfathered Secondary Capital, and registered investment company or the FCU Act impose any specific would be in addition to the aggregate collective investment fund, as long as restrictions or limitations on the limit on such loans specified in the FCU the prospectus of the company or fund mechanisms FCUs may employ to Act. One commenter requested the restricts the investment portfolio to borrow; specific limiting language, NCUA not impose the proposed investments and investment examples or illustrative transactions or additional restrictions on loans to other transactions that are permissible for situations, or otherwise, do not exist to credit unions. FCUs.38 introduce specific restrictions or The Board notes that the proposed limitations. This stands in sharp IV. Legal Authority single borrower limit is consistent with contrast to many other subsections of the single borrower limit in the NCUA’s A. Authority To Issue Subordinated section 1757 of the FCU Act which, for commercial lending and MBL rule.37 Debt example, go into significant detail Because credit unions share many The borrowing authority granted to describing the types and terms of loans similarities with traditional corporate FCUs by the FCU Act, along with FCUs’ and extensions of credit that FCUs are 42 borrowers, the Board continues to statutory authority to enter into permitted to make, and define the believe that basing the proposed single- contracts and exercise incidental types of investments FCUs are permitted 43 borrower limit in this rule on the powers necessary or required to enable to make. In addition, the NCUA’s commercial and MBL rule limit is the FCUs to effectively carry on their regulations do not impose any specific appropriate. Furthermore, the 15 business, supports the legal analysis restrictions or limitations on the percent of Net Worth single-borrower that FCUs are authorized to incur mechanisms an FCU may employ to limit for FCUs that make loans to other indebtedness through the issuance of borrow, through the use of specific credit unions would generally limit debt securities of the type contemplated limiting language, examples, illustrative catastrophic losses to an FCU if the by this final rule. Section 1757(9) of the transactions, or situations. borrower defaults. FCU Act authorizes FCUs to borrow, in Overall, the lack of specific For these reasons, the Board is accordance with such rules and restrictions or limitations on the retaining the limits of an FCU making regulations as may be prescribed by the mechanisms that may be used and the loans to other credit unions in the final Board, from any source, in an aggregate specific authority granted in section rule without amendment. amount not exceeding, except as 1757(9) to borrow ‘‘from any source’’ indicate that borrowings need not be 11. Pooling authorized by the Board in carrying out the provisions of subchapter III, 50 per limited to the types of arrangements The Board did not include a provision centum of its paid-in and unimpaired typically entered into with banks, other for the pooling of Subordinated Debt capital and surplus: Provided, that any credit unions, and other financial issuances in the proposed rule. The Federal credit union may discount with institutions (namely, loans, lines of Board notes that pooling generally or sell to any Federal intermediate credit, and similar arrangements). involves combining more than one credit bank any eligible obligations up Further, the specific authority provided issuance in a standalone structure. to the amount of its paid-in and in section 1757(1) of the FCU Act that Approximately three commenters unimpaired capital.39 empowers FCUs to enter into advocated for the NCUA to explicitly Other than the provisions codified in contracts 44 further supports the permit pooling arrangements in any § 701.38 of the NCUA’s regulations, conclusion that FCUs have the power to final Subordinated Debt rule. These which address borrowed funds from enter into a variety of different commenters stated that allowing for natural persons, the FCU Act does not arrangements with respect to pools of Subordinated Debt could make provide any details regarding the borrowing.45 In addition, in the absence it easier and less expensive for credit mechanisms FCUs may use to borrow.40 of specific restrictions and limitations, unions to take issuances to the market. Further, section 201(b)(7) of the FCU the ‘‘incidental powers’’ granted to These commenters also believed that Act implicitly allows credit unions to FCUs in section 1757(17) of the FCU Act pools would reduce the risk of loss to give significant discretion to FCUs with investors by spreading loss across 38 12 CFR 703.14(c). respect to how borrowings are multiple credit unions rather than just 39 12 U.S.C. 1757(9). effectuated. one. Finally, one commenter argued that 40 In contrast, certain provisions of Title 12 of the Further support for the position that pooling would allow for larger issuances United States Code relating to the regulation of FCUs have the authority to issue debt other types of financial institutions expand on the that may be able to be rated, thereby institutions’ basic authority to borrow money, providing investors additional including through the issuance of securities. For 41 Id. section 1781(b)(7). confidence in the issuance. example, a Farm Credit System member is 42 Id. section 1757(5). While the Board is not including a specifically authorized to: 43 Id. section 1757(7); (15). specific provision on pooling in this • Borrow money from or loan to any other 44 Id. section 1757(1). final rule, the Board notes that there is institution of the System, borrow from any 45 Typical loan and line of credit arrangements commercial bank or other lending institution, issue entered into with banks, other credit unions, and no prohibition in this final rule or the its notes or other evidence of debt on its own other financial institutions are clearly contractual in proposed rule on Subordinated Debt individual responsibility and full faith and credit, nature. Debt securities are also generally viewed as being pooled and sold to investors. The and invest its excess funds in such sums, at such primarily contractual in nature, in large measure Board notes, however, that any such times, and on such terms and conditions as it may because of the terms of the securities themselves or determine. the terms incorporated into the securities through pool must comply with all of the • Issue its own notes, bonds, debentures, or other an indenture, an issuing and paying agent NCUA’s regulations and any applicable similar obligations, fully collateralized as provided agreement or similar agreement. This view of debt securities laws. in section 2154(c) by the notes, mortgages, and securities has been expressed in a wide variety of Finally, the Board notes that general security instruments it holds in the performance of court cases. See, e.g., Katz v. Oak Industries, Inc., investment authority in part 703 only its functions under this chapter in such sums, 508 A.2d 873, 878 (Del. Ch. 1986)) (‘‘Under our maturities, rates of interest, and terms and law—and the law generally—the relationship conditions of each issue as it may determine with between a corporation and the holders of its debt 36 12 CFR 723.2. approval of the Farm Credit Administration. securities, even convertible debt securities, is 37 Id. § 723.4(c). 12 U.S.C. 2153(a) (b). contractual in nature.’’).

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securities may be found in U.S. GAAP provides the Board broad discretion to with the PRA, the information treatment of items that fall in the design the risk-based net worth collection requirements included in this category of ‘‘borrowings.’’ Under U.S. standards.46 Specifically, the FCU Act final rule have been submitted to OMB GAAP, liabilities relating to borrowed provides, in relevant part: ‘‘The Board for approval under control number money are presented as indebtedness on shall design the risk-based net worth 3133–0207. an entity’s balance sheet, and the requirement to take account of any B. Executive Order 13132 interest paid is presented as interest material risks against which the net expense on its income statement worth ratio required for an insured Executive Order 13132 encourages whether the borrowings are related to credit union to be ‘‘Adequately independent regulatory agencies to typical loan transactions, advances Capitalized’’ may not provide adequate consider the impact of their actions on under lines of credit, or the issuance of protection.’’ 47 state and local interests. The NCUA, an debt securities. While the details of the In designing such a risk-based net independent regulatory agency as different types of indebtedness for worth standard, Congress did not defined in 44 U.S.C. 3502(5), voluntarily borrowed money are presented as restrict the types of instruments the complies with the executive order to separate line items in an entity’s balance Board may include in its calculation of adhere to fundamental federalism sheet and income statement, the risk-based net worth, except that such principles. treatment of ‘‘straight’’ indebtedness calculation must take account of This final rule does not have (indebtedness that does not have equity/ material risks that the Net Worth Ratio substantial direct effects on the states, residual ownership features, such as alone may not protect against. The on the relationship between the convertibility into shares) as liabilities, Board, as discussed in this preamble, is National Government and the states, or and interest paid thereon as interest proposing this rule to grant authority to on the distribution of power and expense, is essentially the same. In LICUs, Complex Credit Unions, and responsibilities among the various addition, while the details of the New Credit Unions to issue levels of government. The NCUA has different types of indebtedness for Subordinated Debt that will count as therefore determined that this final rule borrowed money are presented as Regulatory Capital. Based on the does not constitute a policy that has separate line items in the statement of requirements in this final rule, the federalism implications for purposes of cash flows, borrowings (whether in the Board believes Subordinated Debt will the Executive order. form of loans from financial institutions be an additional tool that accounts for C. Assessment of Federal Regulations or from the issuance of debt securities) material risks faced by credit unions and Policies on Families are all presented in the ‘‘cash flows from against which the Net Worth Ratio alone The NCUA has determined that this financing activities’’ section of the may not protect. rule will not affect family well-being statement. While the Board has broad discretion within the meaning of section 654 of the Throughout this final rule, the Board to create the risk-based net worth Treasury and General Government has included requirements to ensure standard, it does not have the authority Appropriations Act, 1999, Public Law that any Subordinated Debt issued by an to amend the statutory definition of Net 105–277, 112 Stat. 2681 (1998). Issuing Credit Union would be properly Worth. The statutory definition of Net characterized as debt in accordance Worth currently includes secondary D. Small Business Regulatory with U.S. GAAP. These requirements, capital issued by a LICU that is Enforcement Fairness Act include that the Subordinated Debt or uninsured and subordinate to all claims The Small Business Regulatory the Subordinated Debt Note, as against the LICU.48 As such, the Board Enforcement Fairness Act of 1996 (Pub. applicable, must: notes two points with respect to • L. 104–121) (SBREFA) generally Be in the form of a written, Subordinated Debt and Net Worth. First, provides for congressional review of unconditional promise to pay on a Subordinated Debt issued by a non- agency rules. A reporting requirement is specified date a sum certain in money LICU is not included in that credit triggered in instances where the NCUA in return for adequate consideration in union’s Net Worth or Net Worth Ratio. issues a final rule as defined by section money; Second, Subordinated Debt issued by a • 551 of the APA. An agency rule, in Have, at the time of issuance, a LICU after the effective date of this final addition to being subject to fixed stated maturity of at least five rule will be included in that credit congressional oversight, may also be years and not more than 20 years from union’s Net Worth and Net Worth Ratio. subject to a delayed effective date if the issuance. The stated maturity of the V. Regulatory Procedures rule is a ‘‘major rule.’’ The NCUA does Subordinated Debt Note may not reset not believe this rule is a ‘‘major rule’’ and may not contain an option to extend A. Paperwork Reduction Act within the meaning of the relevant the maturity; and sections of SBREFA. As required by • Be properly characterized as debt in The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.) requires SBREFA, the NCUA will submit this accordance with U.S. GAAP. final rule to the Office of Management The Board notes that a FISCU’s legal that the Office of Management and and Budget for it to determine if the authority to issue Subordinated Debt Budget (OMB) approve all collections of final rule is a ‘‘major rule’’ for purposes derives from applicable state law and information by a Federal agency from of SBREFA. After the Office of regulation. For the Subordinated Debt the public before they can be Management and Budget makes it issued by a FISCU to qualify as implemented. Respondents are not determination, the NCUA will file all Regulatory Capital under this final rule, required to respond to any collection of appropriate reports. however, a FISCU must comply with all information unless it displays a valid of the provisions of this rule, including OMB control number. In accordance List of Subjects the FISCU-specific provisions. 46 As discussed previously, in 2015, the Board 12 CFR Part 701 B. Board Authority To Design RBC finalized a rule to replace the regulatory risk-based Advertising, Aged, Civil rights, Credit, Standards net worth requirement with an RBC requirement. This rule is effective January 1, 2022. Credit unions, Fair housing, Individuals In addition to credit unions’ authority 47 12 U.S.C. 1790d(d). with disabilities, Insurance, Marital to issue Subordinated Debt, the FCU Act 48 12 U.S.C. 1790d(o)(2). status discrimination, Mortgages,

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Religious discrimination, Reporting and and establish written policies for (B) Investment in Grandfathered recordkeeping requirements, Sex making such loans. The written policies Secondary Capital; discrimination, Signs and symbols, must, at a minimum, include the (C) Investment in loans or obligations Surety bonds. following: issued by a privately insured credit (1) How the Federal credit union will 12 CFR Part 702 union that are subordinate to the private manage the credit risk of loans to other insurer; and Credit unions, Reporting and credit unions; and (D) Loans or portion of loans made by recordkeeping requirements. (2) The limits on the aggregate the credit union that is secured by any principal amount of loans the Federal 12 CFR Part 709 Subordinated Debt, Grandfathered credit union can make to other credit Secondary Capital, or loans or Claims, Credit unions. unions. The policies must specify the obligations issued by a privately insured 12 CFR Part 741 limits on the aggregate principal amount credit union that are subordinate to the of loans the Federal credit union can Bank deposit insurance, Credit private insurer. make to all other credit unions and the (3) Indirect investment. A Federal unions, Reporting and recordkeeping aggregate principal amount of loans the requirements. credit union must determine its indirect Federal credit union can make to any exposure by calculating its proportional By the NCUA Board on December 17, 2020. single credit union; provided that any ownership share of each exposure held Melane Conyers-Ausbrooks, limits included in such policies do not in a fund, or similar indirect Secretary of the Board. exceed the limits in this section. investment. The Federal credit union’s (c) Investment in Subordinated Debt— For the reasons discussed in the exposure to the fund is equal to the (1) Eligibility. A Federal credit union preamble, NCUA amends 12 CFR parts exposure held by the fund as if they may only invest, directly or indirectly, 701, 702, 709, and 741 as follows: were held directly by the Federal credit in the Subordinated Debt of federally union, multiplied by the Federal credit insured, natural person credit unions, or PART 701—ORGANIZATION AND union’s proportional ownership share of in loans or obligations issued by a OPERATION OF FEDERAL CREDIT the fund. UNIONS privately insured credit union that are subordinate to the private insurer; ■ 3. In § 701.34: ■ 1. The authority citation for part 701 provided that the investing Federal ■ a. Revise the section heading; continues to read as follows: credit union: ■ b. Remove and reserve paragraph (b); Authority: 12 U.S.C. 1752(5), 1755, 1756, (i) Has at the time of the investment, and 1757, 1758, 1759, 1761a, 1761b, 1766, 1767, a capital classification of ‘‘well ■ c. Remove paragraphs (c) and (d) and 1782, 1784, 1785, 1786, 1787, 1788, 1789. capitalized,’’ as defined in part 702 of the appendix to § 701.34. Section 701.6 is also authorized by 15 U.S.C. this chapter; The revision reads as follows: 3717. Section 701.31 is also authorized by 15 (ii) Does not have any outstanding U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601– Subordinated Debt or Grandfathered § 701.34 Designation of low income status. 3610. Section 701.35 is also authorized by 42 Secondary Capital, in each case with * * * * * U.S.C. 4311–4312. respect to which it was the Issuing ■ 4. Revise § 701.38 to read as follows: ■ 2. Add § 701.25 to read as follows: Credit Union (as defined in part 702 of this chapter); and § 701.38 Borrowed funds. § 701.25 Loans to credit unions. (iii) Is not eligible to issue (a) Federal credit unions may borrow (a) Limits. A Federal credit union may Subordinated Debt or Grandfathered funds from any source; provided that: make loans, including investments in Secondary Capital pursuant to an (1) The borrowing is evidenced by a Subordinated Debt, to other credit unexpired approval from the NCUA written contract, such as a signed unions, including corporate credit under subpart D of part 702 of this promissory note, that sets forth the unions and privately insured credit chapter. terms and conditions including, at a unions, subject to the following limits: (2) Aggregate limit—(i) Aggregate minimum, maturity, prepayment, (1) Aggregate limit. The aggregate limit. A Federal credit union’s aggregate interest rate, method of computation of principal amount of loans to other credit investment (direct or indirect) in the interest, and method of payment; and unions may not exceed 25 percent of the Subordinated Debt and Grandfathered (2) The written contract and any Federal credit union’s paid-in and Secondary Capital of any federally solicitation with respect to such unimpaired capital and surplus. insured, natural person credit union, borrowing contain clear and (2) Single borrower limit. The and in loans or obligations issued by a conspicuous language indicating that: aggregate principal amount of loans privately insured credit union that are made to any one credit union may not subordinate to the private insurer, may (i) The funds represent money exceed the greater of 15 percent of the not cause such aggregate investment to borrowed by the Federal credit union; Federal credit union’s net worth, as exceed, at the time of the investment, and defined in part 702 of this chapter, at the lesser of: (ii) The funds do not represent shares the time of the closing of the loan or (A) 25 percent of the investing Federal and, therefore, are not insured by the $100,000, plus an additional 10 percent credit union’s net worth at the time of National Credit Union Administration. of the Federal credit union’s net worth the investment; and (b) A Federal credit union is subject if the amount that exceeds the Federal (B) Any amount of net worth in excess to the maximum borrowing authority of credit union’s 15 percent general limit of seven percent (7%) of total assets. an aggregate amount not exceeding 50 is fully secured at all times with a (ii) Calculation of aggregate limit. The percent of its paid-in and unimpaired perfected security interest by readily amount subject to the limit in paragraph capital and surplus. Provided that any marketable collateral as defined in (c)(2)(i)(A) of this section is calculated Federal credit union may discount with § 723.2 of this chapter. at the time of investment, and is based or sell to any Federal intermediate (b) Approval and policies. A Federal on a Federal credit union’s aggregate credit bank any eligible obligations up credit union’s board of directors must outstanding: to the amount of its paid-in and approve all loans to other credit unions (A) Investment in Subordinated Debt; unimpaired capital (12 U.S.C. 1757(9)).

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PART 702—CAPITAL ADEQUACY § 702.104 Risk-based capital ratio. § 702.205 Prompt corrective action for * * * * * uncapitalized new credit unions. ■ 5. The authority citation for part 702 (b) * * * * * * * * continues to read as follows: (1) * * * (d) Discretionary liquidation of an Authority: 12 U.S.C. 1766(a), 1790d. (vii) The outstanding principal uncapitalized new credit union. In lieu of paragraph (c) of this section, an ■ 6. In § 702.2: amount of Subordinated Debt treated as ■ a. Add a sentence after the first Regulatory Capital in accordance with uncapitalized new credit union may be sentence of the introductory text; § 702.407 and the outstanding principal placed into liquidation on grounds of ■ b. Add a definition for ‘‘Grandfathered amount of Grandfathered Secondary insolvency pursuant to 12 U.S.C. Secondary Capital’’ in alphabetical Capital treated as Regulatory Capital in 1787(a)(1)(A). order; accordance with § 702.414; and § 702.206 [Amended] ■ c. Amend the definition of ‘‘Net * * * * * ■ worth’’ by revising the introductory text 11. Amend § 702.206 by removing (c) * * * paragraph (d) and redesignating and paragraphs (1) and (2); and (2) * * * ■ d. Add a definition for ‘‘Subordinated paragraphs (e) through (h) as (d) through (v) * * * Debt’’ in alphabetical order. (g), respectively. The additions and revisions read as (B) * * * (9) Natural person credit union § § 702.207 through 702.210 [Redesignated follows: as §§ 702.208 through 702.211] Subordinated Debt, Grandfathered § 702.2 Definitions. Secondary Capital, and loans or ■ 12. Redesignate §§ 702.207 through * * * All accounting terms not obligations issued by a privately insured 702.210 as §§ 702.208 through 702.211, otherwise defined in this section have credit union that are subordinate to the respectively. meanings consistent with the private insurer. ■ 13. Add new § 702.207 to read as commonly-accepted meanings under * * * * * follows: United States generally accepted ■ 8. Amend § 702.109 by: accounting principles (U.S. GAAP). § 702.207 Consideration of Subordinated ■ a. Redesignating paragraphs (a)(3) and Debt and Grandfathered Secondary Capital *** for new credit unions. Grandfathered Secondary Capital (4) as paragraphs (a)(4) and (5), means any secondary capital issued respectively; (a) Exception from prompt corrective ■ under 12 CFR 701.34 (revised as of b. Adding new paragraph (a)(3); and action for new credit unions. The January 1, 2021) or, in the case of a ■ c. Revising paragraph (b)(11). requirements of §§ 702.204 and 702.205 federally insured, state-chartered credit The addition and revision read as do not apply to a new credit union if, union, with § 741.204(c) of this chapter, follows: as of the applicable date of before January 1, 2022. (12 CFR 701.34 determination, each of the following § 702.109 Prompt corrective action for conditions is satisfied: was recodified as § 702.414 as of critically undercapitalized credit unions. January 1, 2022.) (1) The new credit union has (a) * * * outstanding Subordinated Debt or * * * * * (3) Restrictions on payments on Grandfathered Secondary Capital; Net worth means, with respect to any Subordinated Debt. Beginning 60 days (2) The Subordinated Debt or federally insured, natural person credit after the effective date of a federally Grandfathered Secondary Capital would union, as of any date of determination: insured, natural person credit union be treated as Regulatory Capital under (1) The retained earnings balance of being classified by the NCUA as subpart D of this part if the new credit the credit union at the most recent ‘‘critically undercapitalized’’, that credit union were a complex credit union or quarter end, as determined in union shall not pay principal of or a low income-designated credit union; accordance with U.S. GAAP, subject to interest on its Subordinated Debt, (3) The ratio of the new credit union’s paragraph (3) of this definition. net worth (including the amount of its (2) With respect to a low-income except that unpaid interest shall Subordinated Debt and Grandfathered designated credit union, the outstanding continue to accrue under the terms of Secondary Capital treated as Regulatory principal amount of Subordinated Debt the related Subordinated Debt Note (as Capital (as defined in subpart D of this treated as Regulatory Capital in defined in subpart D of this part), to the part)) to its total assets is at least seven accordance with § 702.407, and the extent permitted by law; percent (7%); and outstanding principal amount of * * * * * (b) * * * (4) The new credit union’s net worth Grandfathered Secondary Capital is increasing in a manner consistent (11) Restrictions on payments on treated as Regulatory Capital in with the new credit union’s approved Grandfathered Secondary Capital. accordance with § 702.414, in each case initial business plan or RBP. Beginning 60 days after the effective that is: (b) Consideration of Subordinated (i) Uninsured; and date of classification of a credit union as Debt and Grandfathered Secondary (ii) Subordinate to all other claims ‘‘critically undercapitalized’’, prohibit Capital in evaluating an RBP. The against the credit union, including payments of principal, dividends or NCUA shall, in evaluating an RBP under claims of creditors, shareholders, and interest on the credit union’s this subpart, consider a new credit the National Credit Union Share Grandfathered Secondary Capital (as union’s aggregate outstanding principal Insurance Fund. defined in subpart D of this part), except amount of Subordinated Debt and that unpaid dividends or interest shall * * * * * Grandfathered Secondary Capital. continue to accrue under the terms of Subordinated Debt has the meaning as (c) Prompt corrective action based on the account to the extent permitted by provided in subpart D of this part. other supervisory criteria—(1) law; * * * * * Application of prompt corrective action ■ 7. In § 702.104, revise paragraph * * * * * to an exempt new credit union. The (b)(1)(vii) and add paragraph ■ 10. Revise § 702.205(d) to read as NCUA Board may apply prompt (c)(2)(v)(B)(9) to read as follows: follows: corrective action to a new credit union

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that is otherwise exempt under 702.408 Preapproval to issue Subordinated Accredited Investor means a Natural paragraph (a) of this section in the Debt. Person Accredited Investor or an Entity following circumstances: 702.409 Preapproval for federally insured, Accredited Investor, as applicable. (i) Unsafe or unsound condition. The state-chartered credit unions to issue Appropriate Supervision Office NCUA Board has determined, after Subordinated Debt. means, with respect to any credit union, providing the new credit union with 702.410 Interest payments on Subordinated the Regional Office or Office of National Debt. written notice and opportunity for Examinations and Supervision that is hearing pursuant to § 747.2003 of this 702.411 Prior written approval to prepay Subordinated Debt. responsible for supervision of that credit chapter, that the new credit union is in 702.412 Effect of a merger or dissolution on union. an unsafe or unsound condition; or the treatment of Subordinated Debt as Complex credit union has the same (ii) Unsafe or unsound practice. The Regulatory Capital. meaning as in subpart A of this part. NCUA Board has determined, after 702.413 Repudiation safe harbor. Entity Accredited Investor means an providing the new credit union with 702.414 Regulations governing entity that, at the time of offering and written notice and opportunity for Grandfathered Secondary Capital. closing of the issuance and sale of hearing pursuant to § 747.2003 of this Appendix A to Subpart D of Part 702— Subordinated Debt to that entity, meets chapter, that the new credit union has Disclosure and Acknowledgement Form the requirements of 17 CFR 230.501(a). not corrected a material unsafe or Grandfathered Secondary Capital Subpart D—Subordinated Debt, unsound practice of which it was, or means any secondary capital issued Grandfathered Secondary Capital, and should have been, aware. under 12 CFR 701.34 (revised as of (2) Non-delegation. The NCUA Board Regulatory Capital January 1, 2021) or, in the case of a may not delegate its authority under federally insured, state-chartered credit paragraph (c) of this section. § 702.401 Purpose and scope. union, with § 741.204(c) of this chapter, (3) Consultation with state officials. (a) Subordinated Debt. This subpart The NCUA Board shall consult and seek before January 1, 2022. (12 CFR 701.34 sets forth the requirements applicable to was recodified as § 702.414 as of to work cooperatively with the all Subordinated Debt issued by a appropriate state official before taking January 1, 2022.) federally insured, natural person credit Immediate Family Member means action under paragraph (c) of this union, including the NCUA’s review section and shall promptly notify the spouse, child, sibling, parent, and approval of that credit union’s grandparent, or grandchild (including appropriate state official of its decision application to issue or prepay to take action under paragraph (c) of this stepparents, stepchildren, stepsiblings, Subordinated Debt. This subpart shall and adoptive relationships). section. apply to a federally insured, state- (d) Discretionary liquidation. Issuing Credit Union means, for chartered credit union only to the extent purposes of this subpart, a credit union Notwithstanding paragraph (a) of this that such federally insured, state- section, the NCUA may place a new that has issued, or is in the process of chartered credit union is permitted by issuing, Subordinated Debt or credit union into liquidation pursuant applicable state law to issue debt to 12 U.S.C. 1787(a)(3)(A), provided that Grandfathered Secondary Capital in instruments of the type described in this accordance with the requirements of the new credit union’s ratio under subpart. To the extent that such state paragraph (a)(3) of this section is, as of this subpart. law is more restrictive than this subpart the applicable date of determination, Low-income designated credit union with respect to the issuance of such debt below six percent (6%) and the new (LICU) is a credit union designated as instruments, that state law shall apply. credit union has no reasonable prospect having low-income status in accordance Any secondary capital, as that term is of becoming ‘‘adequately capitalized’’ with § 701.34 of this chapter. used in the Federal Credit Union Act, under § 702.202. Natural Person Accredited Investor (e) Restrictions on payments on issued after January 1, 2022, is means a natural person who, at the time Subordinated Debt. Beginning 60 days Subordinated Debt and subject to the of offering and closing of the issuance after the effective date of a new credit requirements of this subpart. and sale of Subordinated Debt to that union being classified by the NCUA as (b) Grandfathered Secondary Capital. person, meets the requirements of 17 ‘‘uncapitalized’’, the new credit union Any secondary capital issued under CFR 230.501(a); provided that, for shall not pay principal of or interest on § 701.34 of this chapter before January 1, purposes of purchasing or holding any its Subordinated Debt, except that 2022, is governed by § 702.414. Subordinated Debt Note, this term shall unpaid interest shall continue to accrue Grandfathered Secondary Capital will not include any board member or Senior under the terms of the related no longer be treated as Regulatory Executive Officer of the Issuing Credit Subordinated Debt Note, to the extent Capital as of January 1, 2042. Union or any Immediate Family permitted by law. Member of any board member or Senior § 702.402 Definitions. ■ 14. Add subpart D to read as follows: Executive Officer of the Issuing Credit Subpart D—Subordinated Debt, To the extent they differ, the Union. Grandfathered Secondary Capital, and definitions in this section apply only to Net worth has the same meaning as in Regulatory Capital Subordinated Debt and not to § 702.2. Sec. Grandfathered Secondary Capital. Net worth ratio has the same meaning 702.401 Purpose and scope. (Definitions applicable to Grandfathered as in § 702.2. 702.402 Definitions. Secondary Capital are in § 702.414.) All New credit union has the same 702.403 Eligibility. other terms in this subpart and not meaning as in § 702.201. 702.404 Requirements of the Subordinated expressly defined in this section have Offering Document means the Debt and Subordinated Debt Note. the meanings assigned to them document(s) required by § 702.408, 702.405 Disclosures. elsewhere in this part. For ease of use, including any term sheet, offering 702.406 Requirements related to the offer, sale, and issuance of Subordinated Debt certain key terms are included in this memorandum, private placement Notes. section using cross citations to other memorandum, offering circular, or other 702.407 Discounting of amount treated as sections of this part where those terms similar document used to offer and sell Regulatory Capital. are defined. Subordinated Debt Notes.

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Pro Forma Financial Statements Subordinated Debt Note means the (3) Be subordinate to all other claims means projected financial statements written contract(s) evidencing the in liquidation under § 709.5(b) of this that show the effects of proposed Subordinated Debt. chapter, and have the same payout transactions as if they actually occurred priority as all other outstanding § 702.403 Eligibility. in a variety of plausible scenarios, Subordinated Debt and Grandfathered including both optimistic and (a) Subject to receiving approval Secondary Capital; pessimistic assumptions, over under § 702.408 or § 702.409, a credit (4) Be properly characterized as debt measurement horizons that align with union may issue Subordinated Debt in accordance with U.S. GAAP; the credit union’s expected activities. only if, at the time of such issuance, the (5) Be unsecured, including, without credit union is: limitation, prohibiting the establishment Qualified Counsel means an attorney (1) A complex credit union with a of any legally enforceable claim against licensed to practice law in the relevant capital classification of at least funds earmarked for payment of the jurisdiction(s) who has expertise in the ‘‘undercapitalized,’’ as defined in Subordinated Debt through: areas of Federal and state securities laws § 702.102; and debt transactions similar to those (2) A LICU; (i) A compensating balance or any described in this subpart. (3) Able to demonstrate to the other funds or assets subject to a legal Regulatory Capital means: satisfaction of the NCUA that it right of offset, as defined by applicable (1) With respect to an Issuing Credit reasonably anticipates becoming either a state law; or Union that is a LICU and not a complex complex credit union meeting the (ii) A sinking fund, such as a fund credit union, the aggregate outstanding requirements of paragraph (a)(1) of this formed by periodically setting aside principal amount of Subordinated Debt section or a LICU within 24 months money for the gradual repayment of the and, until January 1, 2042, after issuance of the Subordinated Debt Subordinated Debt; Grandfathered Secondary Capital that is Notes; or (6) Be applied by the Issuing Credit included in the credit union’s net worth (4) A new credit union with Retained Union at the end of each of its fiscal ratio; Earnings equal to or greater than one years (or more frequently as determined (2) With respect to an Issuing Credit percent (1%) of assets. by the Issuing Credit Union) in which Union that is a complex credit union (b) At the time of issuance of any the Subordinated Debt remains and not a LICU, the aggregate Subordinated Debt, an Issuing Credit outstanding to cover any deficit in outstanding principal amount of Union may not have any investments, Retained Earnings on a pro rata basis Subordinated Debt that is included in direct or indirect, in Subordinated Debt among all holders of the Subordinated the credit union’s RBC Ratio; or Grandfathered Secondary Capital (or Debt and Grandfathered Secondary any interest therein) of another credit Capital of the Issuing Credit Union; it (3) With respect to an Issuing Credit union. If a credit union acquires being understood that any amounts Union that is both a LICU and a Subordinated Debt or Grandfathered applied to cover a deficit in Retained complex credit union, the aggregate Secondary Capital in a merger or other Earnings shall no longer be considered outstanding principal amount of consolidation, the Issuing Credit Union due and payable to the holder(s) of the Subordinated Debt and, until January 1, may still issue Subordinated Debt, but it Subordinated Debt or Grandfathered 2042, Grandfathered Secondary Capital may not invest (directly or indirectly) in Secondary Capital; that is included in its net worth ratio the Subordinated Debt or Grandfathered (7) Except as provided in §§ 702.411 and in its RBC Ratio; and Secondary Capital of any other credit and 702.412(c), be payable in full by the (4) With respect to a new credit union while any Subordinated Debt Issuing Credit Union or its successor or union, the aggregate outstanding Notes issued by the Issuing Credit assignee only at maturity; principal amount of Subordinated Debt Union remain outstanding. (8) Disclose any prepayment penalties and, until January 1, 2042, (c) If the Issuing Credit Union is a or restrictions on prepayment; Grandfathered Secondary Capital that is complex credit union that is not also a (9) Be offered, issued, and sold only considered pursuant to § 702.207. LICU, the aggregate outstanding to Entity Accredited Investors or Natural Retained Earnings has a meaning that principal amount of all Subordinated Person Accredited Investors, in is consistent with the one for this term Debt issued by that Issuing Credit Union accordance § 702.406; and under United States GAAP. may not exceed 100 percent of its net (10) Be re-offered, reissued, and Risk-based capital (RBC) ratio has the worth, as determined at the time of each resold only to an Entity Accredited same meaning as in § 702.2. issuance of Subordinated Debt. Investor (if the initial offering, issuance, Senior Executive Officer means a § 702.404 Requirements of the and sale was solely made to Entity credit union’s chief executive officer Subordinated Debt and Subordinated Debt Accredited Investors) or any Accredited (for example, president or treasurer/ Note. Investor (if the initial offering, issuance, manager), any assistant chief executive (a) Requirements. At a minimum, the and sale involved one or more Natural officer (e.g., any assistant president, any Subordinated Debt or the Subordinated Person Accredited Investors). vice president or any assistant treasurer/ Debt Note, as applicable, must: (b) Restrictions. The Subordinated manager) and the chief financial officer (1) Be in the form of a written, Debt or the Subordinated Debt Note, as (controller). The term ‘‘Senior Executive unconditional promise to pay on a applicable, must not: Officer’’ also includes employees and specified date a sum certain in money (1) Be structured or identified as a contractors of an entity, such as a in return for adequate consideration in share, share account, or any other consulting firm, hired to perform the money; instrument in the Issuing Credit Union functions of positions covered by the (2) Have, at the time of issuance, a that is insured by the National Credit term Senior Executive Officer. fixed stated maturity of at least five Union Administration; Subordinated Debt means an Issuing years and not more than 20 years from (2) Include any express or implied Credit Union’s borrowing that meets the issuance. The stated maturity of the terms that make it senior to any other requirements of this subpart, including Subordinated Debt Note may not reset Subordinated Debt issued under this all obligations and contracts related to and may not contain an option to extend subpart or Grandfathered Secondary such borrowing. the maturity; Capital;

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(3) Cause the Issuing Credit Union to the Subordinated Debt Note, after giving RATA BASED ON THE AGGREGATE exceed the borrowing limit in § 741.2 of effect to the applicable cure period AMOUNT OF SUBORDINATED DEBT this chapter or, for federally insured, described in paragraph (d) of this OWED BY THE ISSUING CREDIT UNION TO state-chartered credit unions, any more section; and EACH SUCH HOLDER AT THE TIME OF (5) Provides for default of the APPLICATION. restrictive state borrowing limit; • THIS OBLIGATION CAN ONLY BE (4) Provide the holder thereof with Subordinated Debt as the result of an act REPAID AT MATURITY OR IN any management or voting rights in the or omission of any third party, ACCORDANCE WITH 12 CFR 702.411. THIS Issuing Credit Union; including but not limited to a credit OBLIGATION MAY ALSO BE REPAID IN (5) Be eligible to be pledged or union service organization, as defined ACCORDANCE WITH 12 CFR PART 710 IF provided by the investor as security for in § 712.1(d) of this chapter. THE ISSUING CREDIT UNION a loan from, or other obligation owing (d) Default covenants. A Subordinated VOLUNTARILY LIQUIDATES. to, the Issuing Credit Union; Debt Note that includes default • THE NOTE EVIDENCING THIS (6) Include any express or implied covenants must provide the Issuing OBLIGATION HAS NOT BEEN AND WILL term, condition, or agreement that Credit Union with a reasonable cure NOT BE REGISTERED UNDER THE would require the Issuing Credit Union period of not less than 30 calendar days. SECURITIES ACT OF 1933, AS AMENDED (e) Minimum denominations of (THE ‘‘SECURITIES ACT’’), OR THE to prepay or accelerate payment of SECURITIES LAWS OF ANY STATE OF THE principal of or interest on the issuances to Natural Person Accredited UNITED STATES OR ANY OTHER Subordinated Debt prior to maturity, Investors. An Issuing Credit Union may JURISDICTION, AND MAY BE ISSUED, including investor put options; only issue Subordinated Debt Notes to SOLD, PLEDGED, OR OTHERWISE (7) Include an express or implied Natural Person Accredited Investors in TRANSFERRED ONLY (A) AS PERMITTED term, condition, or agreement that minimum denominations of $100,000, IN THE NOTE AND TO A PERSON WHOM would trigger an event of default based and cannot exchange any such THE ISSUER OR SELLER REASONABLY on the Issuing Credit Union’s default on Subordinated Debt Notes after the initial BELIEVES IS [AN ‘‘ACCREDITED other debts; issuance or any subsequent resale for INVESTOR’’ (AS DEFINED IN 12 CFR (8) Include any condition, restriction, Subordinated Debt Notes of the Issuing 702.402)] [AN ‘‘ENTITY ACCREDITED INVESTOR’’ (AS DEFINED IN 12 CFR or requirement based on the Issuing Credit Union in denominations less 702.402)] (THAT IS NOT A MEMBER OF Credit Union’s credit quality or other than $10,000. Each such Subordinated THE ISSUING CREDIT UNION’S BOARD, A credit-sensitive feature; or Debt Note, if issued in certificate form, SENIOR EXECUTIVE OFFICER OF THE (9) Require the Issuing Credit Union must include a legend disclosing that it ISSUING CREDIT UNION (AS THAT TERM to make any form of payment other than cannot be exchanged for Subordinated IS DEFINED IN 12 CFR 702.402), OR ANY in cash. Debt Notes of the Issuing Credit Union IMMEDIATE FAMILY MEMBER OF ANY (c) Negative covenants. A in denominations less than $100,000, SUCH BOARD MEMBER OR SENIOR Subordinated Debt Note must not and Subordinated Debt Notes issued in EXECUTIVE OFFICER), PURCHASING FOR include any provision or covenant that book-entry or other uncertificated form ITS OWN ACCOUNT, (1) TO WHOM NOTICE IS GIVEN THAT THE SALE, unduly restricts or otherwise acts to shall include appropriate instructions unduly limit the authority of the Issuing PLEDGE, OR OTHER TRANSFER IS BEING prohibiting the exchange of such MADE IN RELIANCE ON THE EXEMPTION Credit Union or interferes with the Subordinated Debt Notes for FROM SECURITIES ACT REGISTRATION NCUA’s supervision of the Issuing Subordinated Debt Notes of the Issuing PROVIDED BY SECTION 3(a)(5) OF THE Credit Union. This includes, but is not Credit Union in denominations that SECURITIES ACT, OR (2) IN ACCORDANCE limited to, a provision or covenant that: would violate the foregoing restrictions. WITH ANOTHER EXEMPTION FROM THE (1) Requires the Issuing Credit Union REGISTRATION REQUIREMENTS OF THE to maintain a minimum amount of § 702.405 Disclosures. SECURITIES ACT (SUBJECT TO THE Retained Earnings or other metric, such (a) An Issuing Credit Union must DELIVERY OF SUCH CERTIFICATIONS, as a minimum net worth ratio or disclose the following language clearly, LEGAL OPINIONS, OR OTHER minimum asset, liquidity, or loan ratios; in all capital letters, on the face of a INFORMATION AS THE ISSUING CREDIT (2) Unreasonably restricts the Issuing UNION MAY REASONABLY REQUIRE TO Subordinated Debt Note: CONFIRM THAT SUCH SALE, PLEDGE, OR Credit Union’s ability to raise capital • THIS OBLIGATION IS NOT A SHARE IN TRANSFER IS BEING MADE PURSUANT TO through the issuance of additional THE ISSUING CREDIT UNION AND IS NOT AN EXEMPTION FROM, OR IN A Subordinated Debt; INSURED BY THE NATIONAL CREDIT TRANSACTION NOT SUBJECT TO, THE (3) Provides for default of the UNION ADMINISTRATION. REGISTRATION REQUIREMENTS OF THE Subordinated Debt as a result of the • THIS OBLIGATION IS UNSECURED SECURITIES ACT), (B) IN COMPLIANCE Issuing Credit Union’s compliance with AND SUBORDINATE TO ALL CLAIMS WITH THE CERTIFICATION AND OTHER any law, regulation, or supervisory AGAINST THE ISSUING CREDIT UNION REQUIREMENTS SPECIFIED IN THE directive from the NCUA or, if AND IS INELIGIBLE AS COLLATERAL FOR [INDENTURE OR OTHER DOCUMENT A LOAN BY THE ISSUING CREDIT UNION. applicable, the state supervisory PURSUANT TO WHICH THE • AMOUNTS OTHERWISE PAYABLE SUBORDINATED DEBT NOTE IS ISSUED] authority; HEREUNDER MAY BE REDUCED IN ORDER REFERRED TO HEREIN, AND (C) IN (4) Provides for default of the TO COVER ANY DEFICIT IN RETAINED ACCORDANCE WITH ANY APPLICABLE Subordinated Debt as the result of a EARNINGS OF THE ISSUING CREDIT SECURITIES LAWS OF ANY STATE OF THE change in the ownership, management, UNION. AMOUNTS APPLIED TO COVER UNITED STATES AND ANY OTHER or organizational structure or charter of ANY SUCH DEFICIT WILL RESULT IN A APPLICATION JURISDICTION. the Issuing Credit Union; provided that, CORRESPONDING REDUCTION OF THE following such change, the Issuing PRINCIPAL AMOUNT OF ALL (b) An Issuing Credit Union must also Credit Union or the resulting institution, OUTSTANDING SUBORDINATED DEBT clearly and accurately disclose in the ISSUED BY THE ISSUING CREDIT UNION, Subordinated Debt Note: as applicable: AND WILL NO LONGER BE DUE AND (i) Agrees to perform all of the PAYABLE TO THE HOLDERS OF SUCH (1) The payout priority and level of obligations, terms, and conditions of the SUBORDINATED DEBT. AMOUNTS subordination, as described in § 709.5(b) Subordinated Debt; and APPLIED TO COVER ANY SUCH DEFICIT of this chapter, that would apply in the (ii) At the time of such change, is not MUST BE APPLIED AMONG ALL HOLDERS event of the involuntary liquidation of in material default of any provision of OF SUCH SUBORDINATED DEBT PRO the Issuing Credit Union;

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(2) A general description of the (c) Accredited Investors. An Issuing benefit plan has total assets in excess of NCUA’s regulatory authority that Credit Union may only offer, issue, and $5,000,000 or, if a self-directed plan, with includes, at a minimum: sell Subordinated Debt to Accredited investment decisions made solely by persons (i) If the Issuing Credit Union is Investors, and the terms of any that are accredited investors; [ ] A private business development company as defined in ‘‘undercapitalized’’ or, if the Issuing Subordinated Debt Note must include section 202(a)(22) of the Investment Advisers Credit Union is a New Credit Union, the restrictions in § 702.404(a)(10); Act of 1940; ‘‘moderately capitalized’’ (each as provided that no Subordinated Debt [ ] Any organization described in section defined in this part), and fails to submit Note may be issued, sold, resold, 501(c)(3) of the Internal Revenue Code, an acceptable net worth restoration pledged, or otherwise transferred to a corporation, Massachusetts or similar plan, capital restoration plan, or revised member of the board of the Issuing business trust, partnership, or limited business plan, as applicable, or Credit Union, any Senior Executive liability company, not formed for the specific materially fails to implement such a Officer of the Issuing Credit Union, or purpose of acquiring the securities offered, with total assets in excess of $5,000,000; [ ] plan that was approved by the NCUA, any Immediate Family Member of any Any natural person whose individual net the Issuing Credit Union may be subject such board member or Senior Executive worth, or joint net worth with that person’s to all of the additional restrictions and Officer. Prior to the offer of any spouse or spousal equivalent, exceeds requirements applicable to a Subordinated Debt Note, the Issuing $1,000,000; (excluding the value of the ‘‘significantly undercapitalized’’ credit Credit Union must receive a signed, person’s primary residence). For the union or, if the Issuing Credit Union is unambiguous certification from any purposes of calculating joint net worth in this a new credit union, a ‘‘marginally potential investor of a Subordinated paragraph: joint net worth can be the capitalized’’ new credit union; and Debt Note. The certification must be in aggregate net worth of the investor and spouse or spousal equivalent; assets need not (ii) Beginning 60 days after the substantially the following form: effective date of an Issuing Credit Union be held jointly to be included in the calculation; being classified as ‘‘critically CERTIFICATE OF ACCREDITED INVESTOR STATUS [ ] Any natural person who had an undercapitalized’’ or, in the case of a individual income in excess of $200,000 in new credit union, ‘‘uncapitalized,’’ the Except as may be indicated by the undersigned below, the undersigned is an each of the two most recent years or joint Issuing Credit Union shall not pay accredited investor, as that term is defined in income with that person’s spouse or spousal principal of or interest on its Regulation D under the Securities Act of equivalent in excess of $300,000 in each of Subordinated Debt, until reauthorized to 1933, as amended (the ‘‘Act’’). In order to those years and has a reasonable expectation do so by the NCUA; provided, however, demonstrate the basis on which it is of reaching the same income level in the that unpaid interest shall continue to representing its status as an accredited current year; [ ] A trust with total assets in accrue under the terms of the investor, the undersigned has checked one of excess of $5,000,000, not formed for the specific purpose of acquiring the securities Subordinated Debt Note, to the extent the boxes below indicating that the undersigned is: offered, whose purchase is directed by a permitted by law; and person who has such knowledge and (3) The risk factors associated with [ ] Any bank as defined in section 3(a)(2) of the Act, or any savings and loan experience in financial and business matters the NCUA’s or, if applicable, the state association or other institution as defined in that he or she is capable of evaluating the supervisory authority’s, authority to section 3(a)(5)(A) of the Act whether acting merits and risks of the prospective conserve or liquidate a credit union in its individual or fiduciary capacity; any investment; under the Federal Credit Union Act broker or dealer registered pursuant to [ ] An entity in which all of the equity (FCU Act) or applicable state law. section 15 of the Securities Exchange Act of holders are accredited investors by virtue of 1934; any investment adviser registered their meeting one or more of the above § 702.406 Requirements related to the pursuant to section 203 of the Investment standards; offer, sale, and issuance of Subordinated Advisers Act of 1940 or registered pursuant [ ] Any entity, of a type not listed in Debt Notes. to the laws of a state; any investment adviser paragraph (a)(1), (2), (3), (7), or (8) of 17 CFR (a) Offering Document. An Issuing relying on the exemption from registering 230.501(a), not formed for the specific Credit Union or person acting on behalf with the Securities and Exchange purpose of acquiring the securities offered, Commission under section 203(l) or (m) of owning investments in excess of $5,000,000; of or at the direction of any Issuing [ ] Any natural person holding in good Credit Union may only issue and sell the Investment Advisers Act of 1940; any insurance company as defined in section standing one or more professional Subordinated Debt Notes if, a reasonable 2(a)(13) of the Act; any investment company certifications or designations or credentials time prior to the issuance and sale of registered under the Investment Company from an accredited educational institution any Subordinated Debt Notes, each Act of 1940 or a business development that the Securities and Exchange Commission purchaser of a Subordinated Debt Note company as defined in section 2(a)(48) of that has designated as qualifying an individual for receives an Offering Document that act; any Small Business Investment Company accredited investor status; meets the requirements of § 702.408(e) licensed by the U.S. Small Business [ ] Any natural person who is a and such further material information, if Administration under section 301(c) or (d) of ‘‘knowledgeable employee,’’ as defined in rule 3c5(a)(4) under the Investment Company any, as may be necessary to make the the Small Business Investment Act of 1958; any Rural Business Investment Company as Act of 1940 (17 CFR 270.3c-5(a)(4)), of the required disclosures in that Offering defined in section 384A of the Consolidated issuer of the securities being offered or sold Document, in the light of the Farm and Rural Development Act; any plan where the issuer would be an investment circumstances under which they are established and maintained by a state, its company, as defined in section 3 of such act, made, not misleading. political subdivisions, or any agency or but for the exclusion provided by either (b) Territorial limitations. An Issuing instrumentality of a state or its political section 3(c)(1) or section 3(c)(7) of such act; Credit Union may only offer, issue, and subdivisions, for the benefit of its employees, [ ] Any ‘‘family office,’’ as defined in rule sell Subordinated Debt Notes in the if such plan has total assets in excess of 202(a)(11)(G)-1 under the Investment United States of America (including any $5,000,000; any employee benefit plan Advisers Act of 1940 (17 CFR one of the states thereof and the District within the meaning of the Employee 275.202(a)(11)(G)-1): (i) With assets under Retirement Income Security Act of 1974 if management in excess of $5,000,000, (ii) That of Columbia), its territories, and its the investment decision is made by a plan is not formed for the specific purpose of possessions. This limitation includes a fiduciary, as defined in section 3(21) of such acquiring the securities offered, and (iii) prohibition on non-U.S. investors act, which is either a bank, savings and loan Whose prospective investment is directed by holding or purchasing Subordinated association, insurance company, or registered a person who has such knowledge and Debt Notes. investment adviser, or if the employee experience in financial and business matters

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that such family office is capable of Email Address counter of any Issuing Credit Union, or evaluating the merits and risks of the (d) Use of trustees. If using a trustee by comparable persons at comparable prospective investment; and locations; [ ] Any ‘‘family client,’’ as defined in rule in connection with the offer, issuance, and sale of Subordinated Debt Notes, (5) Permissible issuing personnel. In 202(a)(11)(G)-1 under the Investment connection with an offering or sale of Advisers Act of 1940 (17 CFR the trustee must meet the requirements 275.202(a)(11)(G)-1)), of a family office set forth in the Trust Indenture Act of Subordinated Debt Notes (whether or meeting the requirements in paragraph 1939, as amended, including not conducted at offices of the Issuing (a)(12) of § 275.202(a)(11)(G)-1 and whose requirements for qualification set forth Credit Union), such activity may be prospective investment in the issuer is in section 310 thereof; any rules related conducted only by regular, full-time directed by such family office pursuant to to such act in 17 CFR parts 260, 261, employees of the Issuing Credit Union paragraph (a)(12)(iii) of § 275.202(a)(11)(G)-1. and 269; and any applicable state law. or by securities personnel who are The undersigned understands that [NAME (e) Offers, issuances, and sales of subject to supervision by a registered OF ISSUING CREDIT UNION] (the ‘‘Credit broker-dealer, which securities Union’’) is required to verify the Subordinated Debt Notes. Offers undersigned’s accredited investor status AND issuances, and sales of Subordinated personnel may be employees of the ELECTS TO DO ONE OF THE FOLLOWING: Debt Notes are required to be made in Issuing Credit Union’s affiliated CUSO [ ] Allow the Credit Union’s representative accordance with the following that is assisting the Issuing Credit Union to review the undersigned’s tax returns for requirements: with the offer, issuance, and sale of the the two most recently completed years and (1) Application to offer, issue, and sell Subordinated Debt Notes; provide a written representation of the at offices of Issuing Credit Union. If the (6) Issuance practices, undersigned’s reasonable expectation of Issuing Credit Union intends to offer advertisements, and other literature reaching the income level necessary to and sell Subordinated Debt Notes at one used in connection with the offer and qualify as an accredited investor during the sale of Subordinated Debt Notes. In current year; or more of its offices, the Issuing Credit [ ] Allow the Credit Union’s representative Union must first apply in writing to the connection with an offering or sale of to: (1) obtain a written representation from Appropriate Supervision Office Subordinated Debt Notes (whether or the undersigned that states that all liabilities indicating that it intends to offer, issue, not conducted at offices of the Issuing necessary to make a determination of net and sell Subordinated Debt Notes at one Credit Union), issuance practices, worth have been disclosed; and (2) review or more of its offices. The application advertisements, and other issuance one or more of the following types of must include, at a minimum, the literature used in connection with offers documentation dated within the past three physical locations of such offices and a and issuances of Subordinated Debt months: bank statements, brokerage description of how the Issuing Credit Notes by Issuing Credit Unions or any statements, tax assessments, appraisal reports Union will comply with the affiliated CUSOs assisting with the offer as to assets, or a consumer report from a nationwide consumer reporting agency; requirements of this paragraph (e); and issuance of such Subordinated Debt [ ] Provide the Credit Union with a written (2) Decision on application. Within 60 Notes shall be subject to the confirmation from one of the following calendar days (which may be extended requirements of this subpart; and persons or entities that such person or entity by the Appropriate Supervision Office) (7) Office of an Issuing Credit Union. has taken reasonable steps to verify that the after the date of receipt of a complete For purposes of this paragraph (e), an undersigned is an accredited investor within application described in paragraph ‘‘office’’ of an Issuing Credit Union the prior three months and has determined (e)(1) of this section, the Appropriate means any premises used by the Issuing that the undersigned is an accredited Supervision Office will provide the Credit Union that is identified to the investor: Issuing Credit Union with a written public through advertising or signage • A registered broker-dealer; • determination on its application to using the Issuing Credit Union’s name, An investment adviser registered with conduct offering and sales activity from the Securities Exchange Commission; trade name, or logo. • A licensed attorney who is in good its office(s). Any denial of an Issuing (f) Securities laws. An Issuing Credit standing under the laws of the jurisdictions Credit Union’s application under this Union must comply with all applicable in which such attorney is admitted to section will include the reasons for such Federal and state securities laws. practice law; or denial; (g) Resales. All resales of • A certified public accountant who is (3) Commissions, bonuses, or Subordinated Debt Notes issued by an duly registered and in good standing under comparable payments. In connection Issuing Credit Union by holders of such the laws of the place of such accountant’s with any offering and sale of Subordinated Debt Notes must be made residence or principal office. Subordinated Debt Notes (whether or pursuant to 17 CFR 230.144 (Rule 144 IN WITNESS WHEREOF, the undersigned not conducted at offices of the Issuing under the Securities Act of 1933, as has executed this Certificate of Accredited Credit Union), an Issuing Credit Union amended) (other than paragraphs (c), (e), Investor Status effective as of shall not pay, directly or indirectly, any llllllllllllll, 20lll. (f), (g) and (h) of such Rule), 17 CFR commissions, bonuses, or comparable 230.144A (Rule 144A under the lllllllllllllllllllll payments to any employee of the Securities Act of 1933, as amended), or Name of Investor Issuing Credit Union or any affiliated another exemption from registration lllllllllllllllllllll Credit Union Service Organizations under the Securities Act of 1933, as [Name of Authorized Representative (CUSOs) assisting with the offer, amended. Subordinated Debt Notes lllllllllllllllllllll issuance, and sale of such Subordinated must include the restrictions on resales Title of Authorized Representative] Debt Notes, or to any other person in in § 702.404(a)(10). lllllllllllllllllllll connection with the offer, issuance, and Signature sale of Subordinated Debt Notes; except § 702.407 Discounting of amount treated lllllllllllllllllllll that compensation and commissions as Regulatory Capital. Address consistent with industry norms may be The amount of outstanding lllllllllllllllllllll paid to securities personnel of registered Subordinated Debt that may be treated Address broker-dealers as otherwise permitted as Regulatory Capital shall reduce by 20 lllllllllllllllllllll by applicable law; percent per annum of the initial Phone Number (4) Issuances by tellers. No offers or aggregate principal amount of the lllllllllllllllllllll sales may be made by tellers at the teller applicable Subordinated Debt (as

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reduced by prepayments or amounts § 702.404(a)(6)), as required by the extinguished to cover a deficit under following schedule:

TABLE 1 TO § 720.407

Balance treated as Remaining maturity 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 in conformity with (11) A schedule that provides an Subordinated Debt. those plans; itemized statement of all expenses (a) Scope. This section requires all (6) An analysis of how the credit incurred or expected to be incurred by credit unions to receive written union will provide for liquidity to repay the credit union in connection with the preapproval from the NCUA before the Subordinated Debt upon maturity of offer, issuance, and sale of the issuing Subordinated Debt. Procedures the Subordinated Debt; Subordinated Debt Notes to which the related specifically to applications from (7) Pro Forma Financial Statements initial application relates, other than federally insured, state-chartered credit (balance sheet, income statement, and underwriting discounts and unions are contained in § 702.409. A statement of cash flows), including any commissions or similar compensation credit union seeking approval to offer off-balance sheet items, covering at least payable to broker-dealers acting as and sell Subordinated Debt at one or two years. Analytical support for key placement agents. The schedule must more of its offices must also follow the assumptions and key assumption include, as applicable, fees and application procedures in § 702.406(e). changes must be included in the expenses of counsel, auditors, any All approvals under this section are application. Key assumptions include, trustee or issuing and paying agent or subject to the expiration limits specified but are not limited to, interest rate, any transfer agent, and printing and in paragraph (k) of this section. liquidity, and credit loss scenarios; engraving expenses. If the amounts of (b) Initial application to issue (8) A statement indicating how the any items are not known at the time of Subordinated Debt. A credit union credit union will use the proceeds from filing of the initial application, the requesting approval to issue the issuance and sale of the credit union must provide estimates, Subordinated Debt must first submit an Subordinated Debt; clearly identified as such; application to the Appropriate (9) A statement identifying the (12) In the case of a new credit union, Supervision Office that, at a minimum, governing law specified in the a statement that it is subject to either an includes: Subordinated Debt Notes and the approved initial business plan or (1) A statement indicating how the documents pursuant to which the revised business plan, as required by credit union qualifies to issue Subordinated Debt Notes will be issued; this part, and how the proposed Subordinated Debt given the eligibility (10) A draft written policy governing Subordinated Debt would conform with requirements of § 702.403 with the offer, and issuance, and sale of the the approved plan. Unless the new additional supporting analysis if Subordinated Debt, developed in credit union has a LICU designation anticipating to meet the requirements of consultation with Qualified Counsel, pursuant to § 701.34 of this chapter, it a LICU or complex credit union within which, at a minimum, addresses: must also include a plan for replacing 24 months after issuance of the (i) Compliance with all applicable the Subordinated Debt with Retained Subordinated Debt; Federal and state securities laws and Earnings before the credit union ceases (2) The maximum aggregate principal regulations; to meet the definition of new credit amount of Subordinated Debt Notes and (ii) Compliance with applicable union in § 702.2; the maximum number of discrete securities laws related to (13) A statement describing any issuances of Subordinated Debt Notes communications with investors and investments the credit union has in the that the credit union is proposing to potential investors, including, but not Subordinated Debt of any other credit issue within the period allowed under limited to: Who may communicate with union, and the manner in which the paragraph (k) of this section; investors and potential investors; what credit union acquired such (3) The estimated number of investors information may be provided to Subordinated Debt, including through a and the status of such investors (Natural investors and potential investors; merger or other consolidation; Person Accredited Investors and/or ongoing disclosures to investors; who (14) A signature page signed by the Entity Accredited Investors) to whom will review and ensure the accuracy of credit union’s principal executive the credit union intends to offer and sell the information provided to investors officer, principal financial officer or the Subordinated Debt Notes; and potential investors; and to whom principal accounting officer, and a (4) A statement identifying any information will be provided; majority ‘of the members of its board of outstanding Subordinated Debt or (iii) Compliance with any laws that directors. Amendments to an initial Grandfathered Secondary Capital may require registration of credit union application must be signed and filed previously issued by the credit union; employees as broker-dealers; and with the NCUA in the same manner as (5) A copy of the credit union’s (iv) Any use of outside agents, the initial application; and strategic plan, business plan, and including broker-dealers, to assist in the (15) Any additional information budget, and an explanation of how the marketing and issuance of Subordinated requested in writing by the Appropriate credit union intends to use the Debt, and any limitations on such use; Supervision Office.

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(c) Decision on initial application. NCUA within two business days after comply with the following legibility Upon receiving an initial application their respective first use. requirements: submitted under this paragraph (c) and (e) Requirements for all Offering (i) Information in the Offering any additional information requested in Documents—(1) Minimum information Document must be presented in a clear, writing by the Appropriate Supervision required in an Offering Document. An concise, and understandable manner, Office, the Appropriate Supervision Offering Document must, at a minimum, incorporating plain English principles. Office will evaluate, at a minimum, the include the following information: The body of all printed Offering credit union’s compliance with this (i) The name of the Issuing Credit Documents shall be in type at least as subpart and all other NCUA regulations Union and the address of its principal large and as legible as 10-point type. To in this chapter, the credit union’s ability executive office; the extent necessary for convenient to manage and safely offer, issue, and (ii) The initial principal amount of the presentation, however, financial sell the proposed Subordinated Debt, Subordinated Debt being issued; statements and other tabular data, the safety and soundness of the (iii) The name(s) of any underwriter(s) including tabular data in notes, may be proposed use of the Subordinated Debt, or placement agents being used for the in type at least as large and as legible the overall condition of the credit issuance; as 8-point type. Repetition of union, and any other factors the (iv) A description of the material risk information should be avoided. Cross- Appropriate Supervision Office factors associated with the purchase of referencing of information within the determines are relevant. the Subordinated Debt Notes, including document is permitted; and (1) Written determination. Within 60 any special or distinctive characteristics (ii) Where an Offering Document is calendar days (which may be extended of the Issuing Credit Union’s business, distributed through an electronic by the Appropriate Supervision Office) field of membership, or geographic medium, the Issuing Credit Union may after the date of receipt of a complete location that are reasonably likely to satisfy legibility requirements application, the Appropriate have a material impact on the Issuing applicable to printed documents, such Supervision Office will provide the Credit Union’s future financial as paper size, type size and font, bold- credit union with a written performance; face type, italics and red ink, by determination on its application. In the (v) The disclosures described in presenting all required information in a case of a full or partial denial, or § 702.405 and such additional material format readily communicated to offerees conditional approval under paragraph information, if any, as may be necessary and, where indicated, in a manner (c)(2) of this section, the written to make the required disclosures, in the reasonably calculated to draw the decision will state the reasons for the light of the circumstances under which attention of offerees to specific denial or conditional approval. they are made, not misleading; information. (2) Conditions of approval. Any (vi) Provisions related to the interest, (f) Offering Documents approved for approval granted by an Appropriate principal, payment, maturity, and use in offerings of Subordinated Debt to Supervision Office under this section prepayment of the Subordinated Debt any Natural Person Accredited may include one or more of the Notes; Investors—(1) Filing of a Draft Offering following conditions: (vii) All material affirmative and Document. An Issuing Credit Union that (i) Approval of an aggregate principal negative covenants that may or will be intends to offer Subordinated Debt amount of Subordinated Debt that is included in the Subordinated Debt Note, Notes to any Natural Person Accredited lower than what the credit union including, but not limited to, the Investors must file a draft Offering requested; covenants discussed in this subpart; Document with the NCUA and have (ii) Any applicable minimum level of (viii) Any legends required by such draft Offering Document declared net worth that the credit union must applicable state law; and ‘‘approved for use’’ by the NCUA before maintain while the Subordinated Debt (ix) The following legend, displayed its first use. Notes are outstanding; on the cover page in prominent type or (i) Request for additional information, (iii) Approved uses of the in another manner: clarifications, or amendments. Prior to Subordinated Debt; and declaring any Offering Document (iv) Any other limitations or None of the Securities and Exchange ‘‘approved for use,’’ the NCUA may ask conditions the Appropriate Supervision Commission (the ‘‘SEC’’), any state securities questions, request clarifications, or Office deems necessary to protect the commission or the National Credit Union Administration has passed upon the merits direct the Issuing Credit Union to NCUSIF. of, or given its approval of, the purchase of amend certain sections of the draft (d) Offering Document. Following any Subordinated Debt Notes offered or the Offering Document. The NCUA will receipt of written approval of its initial terms of the offering, or passed on the make any such requests in writing. application, an Issuing Credit Union accuracy or completeness of any Offering (ii) Written determination. Within 60 must prepare an Offering Document for Document or other materials used in calendar days (which may be extended each issuance of Subordinated Debt connection with the offer, issuance, and sale by the NCUA) after the date of receipt Notes. In addition, as required in of the Subordinated Debt Notes. Any of each of the initial filing and each paragraph (f) of this section, an Issuing representation to the contrary is unlawful. filing of additional information, Credit Union that intends to offer These Subordinated Debt Notes have not clarifications, or amendments requested been registered under the Securities Act of Subordinated Debt Notes to any Natural 1933, as amended (the ‘‘Act’’) and are being by the NCUA under paragraph (f)(1)(i) of Person Accredited Investors must have offered and sold to [an Entity Accredited this section, the NCUA will provide the the related Offering Document declared Investor][an Accredited Investor] (as defined Issuing Credit Union with a written ‘‘approved for use’’ by the NCUA before in 12 CFR 702.402) pursuant to an exemption determination on the applicable filing. its first use. At a reasonable time prior from registration under the Act; however, The written determination will include to any issuance and sale of neither the SEC nor the NCUA has made an any requests for additional information, Subordinated Debt Notes, the Issuing independent determination that the offer and clarifications, or amendments, or a Credit Union must provide each issuance of the Subordinated Debt Notes are statement that the Offering Document is investor with an Offering Document as exempt from registration. ‘‘approved for use.’’ described in this section. All Offering (2) Legibility requirements. An Issuing (2) Filing of a final Offering Documents must be filed with the Credit Union’s Offering Document must Document. At such time as the NCUA

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declares an Offering Document Subordinated Debt for a specified approval. An Issuing Credit Union may ‘‘approved for use’’ in accordance with period; and/or file a written extension request with the paragraph (f)(1)(ii) of this section, the (ii) Determining not to treat the Appropriate Supervision Office. The Issuing Credit Union may then use that Subordinated Debt as Regulatory Issuing Credit Union must demonstrate Offering Document in the offer and sale Capital. good cause for any extension(s), and of the Subordinated Debt Notes. The (i) Notification. Not later than 10 must file the request at least 30 calendar Issuing Credit Union must file a copy of business days after the closing of a days before the expiration of the each of its Offering Documents with the Subordinated Debt Note issuance and applicable period specified in paragraph NCUA within two business days after sale, the Issuing Credit Union must (k) of this section or any extensions their respective first use. submit to the Appropriate Supervision granted under paragraph (k) of this (g) Filing of an Offering Document for Office: section. In any such written application, offerings of Subordinated Debt (1) A copy of each executed the Issuing Credit Union must address exclusively to Entity Accredited Subordinated Debt Note; whether any such extension poses any Investors. An Issuing Credit Union that (2) A copy of each executed purchase material securities law implications. is offering Subordinated Debt agreement, if any; (l) Filing requirements and inspection exclusively to Entity Accredited (3) Any indenture or other transaction of documents. (1) Except as otherwise Investors is not required to have its document used to issue the provided in this section, all initial Offering Document ‘‘approved for use’’ Subordinated Debt Notes; applications, Offering Documents, by the NCUA under paragraph (f) of this (4) Copies of signed certificates of amendments, notices, or other section before using it to offer and sell Accredited Investor status, in a form documents must be filed with the the Subordinated Debt Notes. As similar to that in § 702.406(c), from all NCUA electronically. The NCUA will described in this section, however, the investors; publish on its website, http:// (5) All documentation provided to Issuing Credit Union must file a copy of www.NCUA.gov, the web address for investors related to the offer and sale of each of its Offering Documents with the electronic filings. Documents may be the Subordinated Debt Note (other than NCUA within two business days after signed electronically using the signature any Offering Document that was their respective first use. provision in 17 CFR 230.402 (Rule 402 (h) Material changes to any initial previously filed with the NCUA); and under the Securities Act of 1933, as application or Offering Document—(1) (6) Any other material documents amended). Reapproval of initial application. If any governing the issuance, sale or material event arises or material change administration of the Subordinated Debt (2) Provided the Issuing Credit Union in fact occurs after the approval of the Notes. filing the document has complied with initial application by the NCUA, but (j) Resubmissions. An Issuing Credit all requirements regarding the filing in prior to the completion of the offer and Union that receives any adverse written this section, the date of filing of the sale of the related Subordinated Debt determination from the Appropriate document is the date the NCUA receives Notes, then no person shall offer or sell Supervision Office with respect to the the filing. An electronic filing that is Subordinated Debt Notes to any other approval of its initial application or any submitted on a business day by direct person until an amendment to the amendment thereto or, if applicable, the transmission commencing on or before Offering Document reflecting the event approval for use of an Offering 5:30 p.m. Eastern Standard or Daylight or change has been filed with and Document or any amendment thereto, Savings Time, whichever is then approved by the NCUA. may cure any reasons noted in the currently in effect, would be deemed (2) Reapproval of Offering Document. written determination and refile under received by the NCUA on the same If an Offering Document must be the requirements of this section. This business day. An electronic filing that is approved for use under paragraph (f) of paragraph (j) does not prohibit an submitted by direct transmission this section, and any event arises or Issuing Credit Union from appealing an commencing after 5:30 p.m. Eastern change in fact occurs after the approval Appropriate Supervision Office’s Standard or Daylight Savings Time, for use of any Offering Document, and decision under subpart A of part 746 of whichever is then currently in effect, or that event or change in fact, this chapter. on a Saturday, Sunday, or Federal individually or in the aggregate, results (k) Expiration of authority to issue holiday, would be deemed received by in the Offering Document containing Subordinated Debt. (1) Any approvals to the NCUA on the next business day. If any untrue statement of material fact, or issue Subordinated Debt Notes under an electronic filer in good faith attempts omitting to state a material fact this section expire two years from the to file a document with the NCUA in a necessary in order to make statements later of the date the Issuing Credit timely manner, but the filing is delayed made in the Offering Document not Union receives: due to technical difficulties beyond the misleading in light of the circumstances (i) Approval of its initial application, electronic filer’s control, the electronic under which they were made, then no if the Issuing Credit Union is offering filer may request that the NCUA adjust person shall offer or sell Subordinated Subordinated Notes exclusively to the filing date of such document. The Debt Notes to any other person until an Entity Accredited Investors; or NCUA may grant the request if it amendment reflecting the event or (ii) The initial approval for use of its appears that such adjustment is change has been filed with and Offering Document, if the Issuing Credit appropriate and consistent with the ‘‘approved for use’’ by the NCUA. Union is offering Subordinated Debt public interest and the protection of (3) Failure to request reapproval. If an Notes to any Natural Person Accredited investors. Issuing Credit Union fails to comply Investors. (3) If an Issuing Credit Union with paragraph (h)(1) or (2) of this (2) Failure to issue all or part of the experiences unanticipated technical section, the NCUA may, at its maximum aggregate principal amount of difficulties preventing the timely discretion, exercise the full range of Subordinated Debt Notes approved in preparation and submission of an administrative remedies available under the initial application process within electronic filing, the Issuing Credit the FCU Act, including: the applicable period specified in Union may, upon notice to the (i) Prohibiting the Issuing Credit paragraph (k) of this section will result Appropriate Supervision Office, file the Union from issuing any additional in the expiration of the NCUA’s subject filing in paper format no later

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than one business day after the date on minimum of two years, that shows the § 702.411 Prior written approval to prepay which the filing was to be made. impact of the federally insured, state- Subordinated Debt. (4) Any filing of amendments or chartered credit union being subject to (a) Prepayment option. An Issuing supplements to an Offering Document Federal income tax. Credit Union may include in the terms must include two copies, one of which (c) If the Appropriate Supervision of its Subordinated Debt an option that must be marked to indicate clearly and Office requires additional information allows the Issuing Credit Union to precisely, by underlining or in some from a federally insured, state-chartered prepay the Subordinated Debt in whole other conspicuous manner, the changes credit union under paragraph (b) of this or in part prior to maturity, provided, made from the previously filed Offering section, the federally insured, state- however, that the Issuing Credit Union Document. chartered credit union may determine, is required to: (m) Filing fees. (1) The NCUA may in its sole discretion, whether the (1) Clearly disclose the requirements require filing fees to accompany certain information it provides is in the form of this section in the Subordinated Debt filings made under this subpart before it described in paragraph (b)(1) or (2) of Note; and will accept those filings. If the NCUA this section. (2) Obtain approval under paragraph requires the aforementioned filing fee, (b) of this section before exercising a the NCUA will publish an applicable fee § 702.410 Interest payments on prepayment option. schedule on its website at http:// Subordinated Debt. (b) Prepayment application. Before an www.NCUA.gov. (a) Requirements for interest Issuing Credit Union can, in whole or in (2) Filing fees must be paid to the payments. An Issuing Credit Union is part, prepay Subordinated Debt prior to NCUA by electronic transfer. prohibited from paying interest on maturity, the Issuing Credit Union must Subordinated Debt in accordance with first submit to the Appropriate § 702.409 Preapproval for federally § 702.109. Supervision Office an application that insured, state-chartered credit unions to (b) Accrual of interest. must include, at a minimum, the issue Subordinated Debt. Notwithstanding nonpayment pursuant information required in paragraph (d) of (a) A federally insured, state-chartered to paragraph (a) of this section, interest this section. credit union is required to submit the on the Subordinated Debt may continue (c) Federally insured, state-chartered information required under § 702.408 to accrue according to terms provided credit union prepayment applications. and, if applicable, paragraph (b) of this for in the Subordinated Debt Note and Before a federally insured, state- section to both the Appropriate as otherwise permitted in this subpart. chartered credit union may submit an Supervision Office and its state (c) Interest safe harbor. Except as application for prepayment to the supervisory authority. The Appropriate otherwise provided in this section, the Appropriate Supervision Office, it must Supervision Office will issue decisions NCUA shall not impose a discretionary obtain written approval from its state approving a federally insured, state- supervisory action that requires the supervisory authority to prepay the chartered credit union’s application Issuing Credit Union to suspend interest Subordinated Debt it is proposing to only after obtaining the concurrence of with respect to the Subordinated Debt if: prepay. A federally insured, state- the federally insured, state-chartered (1) The issuance and sale of the chartered credit union must provide credit union’s state supervisory Subordinated Debt complies with all evidence of such approval as part of its authority. The NCUA will notify a requirements of this subpart; application to the Appropriate federally insured, state-chartered credit (2) The Subordinated Debt is issued Supervision Office. union’s state supervisory authority and sold in an arms-length, bona fide (d) Application contents. An Issuing before issuing a decision to ‘‘approve for transaction; Credit Union’s application to prepay use’’ a federally insured, state-chartered (3) The Subordinated Debt was issued Subordinated Debt must include, at a credit union’s Offering Document and and sold in the ordinary course of minimum, the following: any amendments thereto, under business, with no intent to hinder, (1) A copy of the Subordinated Debt § 702.408, if applicable. delay, or defraud the Issuing Credit Note and any agreement(s) reflecting the (b) If the Appropriate Supervision Union or its creditors; and terms and conditions of the Office has reason to believe that an (4) The Subordinated Debt was issued Subordinated Debt the Issuing Credit issuance by a federally insured, state- and sold for adequate consideration in Union is proposing to prepay; chartered credit union under this U.S. dollars. (2) An explanation why the Issuing subpart could subject that federally (d) Authority, rights, and powers of Credit Union believes it still would hold insured, state-chartered credit union to the NCUA and the NCUA Board. This an amount of capital commensurate Federal income taxation, the section does not waive, limit, or with its risk exposure notwithstanding Appropriate Supervision Office may otherwise affect the authority, rights, or the proposed prepayment or a require the federally insured, state- powers of the NCUA or the NCUA description of the replacement chartered credit union to provide: Board in any capacity, including the Subordinated Debt, including the (1) A written legal opinion, NCUA Board as conservator or amount of such instrument, and the satisfactory to the NCUA, from liquidating agent, to take any action or time frame for issuance, the Issuing nationally recognized tax counsel or to exercise any power not specifically Credit Union is proposing to use to letter from the Internal Revenue Service mentioned, including but not limited to replace the prepaid Subordinated Debt; indicating whether the proposed any rights, powers, or remedies of the and Subordinated Debt would be classified NCUA Board as conservator or (3) Any additional information the as capital stock for Federal income tax liquidating agent regarding transfers or Appropriate Supervision Office purposes and, if so, describing any other conveyances taken in requests. material impact of Federal income taxes contemplation of the Issuing Credit (e) Decision on application to prepay. on the federally insured, state-chartered Union’s insolvency or with the intent to (1) Within 45 calendar days (which may credit union’s financial condition; or hinder, delay, or defraud the Issuing be extended by the Appropriate (2) A Pro Forma Financial Statement Credit Union or the creditors of such Supervision Office) after the date of (balance sheet, income statement, and Issuing Credit Union, or that is receipt of a complete application, the statement of cash flows), covering a fraudulent under applicable law. Appropriate Supervision Office will

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provide the Issuing Credit Union with a unless the resulting credit union meets (a) Secondary capital is subject to the written determination on its the eligibility requirements of § 702.403. following conditions: application. In the case of a full or (c) In the event of a voluntary (1) Secondary capital plan. A credit partial denial, including a conditional dissolution of an Issuing Credit Union union that has Grandfathered Secondary approval under paragraph (e)(2) of this that has outstanding Subordinated Debt, Capital under this section must have a section, the written decision will state the Subordinated Debt may be repaid in written, NCUA-approved ‘‘Secondary the reasons for the denial or conditional full according to 12 CFR part 710, Capital Plan’’ that, at a minimum: approval. subject to the requirements in § 702.411. (i) States the maximum aggregate (2) The written determination from amount of uninsured secondary capital the Appropriate Supervision Office may § 702.413 Repudiation safe harbor. the LICU plans to accept; approve the Issuing Credit Union’s (a) The NCUA Board as conservator (ii) Identifies the purpose for which request, approve the Issuing Credit for a federally insured credit union, or the aggregate secondary capital will be Union’s request with conditions, or its lawfully appointed designee, shall used, and how it will be repaid; deny the Issuing Credit Union’s request. not exercise its repudiation authorities (iii) Explains how the LICU will In the case of a denial or conditional under 12 U.S.C. 1787(c) with respect to provide for liquidity to repay secondary approval, the Appropriate Supervision Subordinated Debt if: capital upon maturity of the accounts; Office will provide the Issuing Credit (1) The issuance and sale of the (iv) Demonstrates that the planned Union with a description of why it Subordinated Debt complies with all uses of secondary capital conform to the denied the Issuing Credit Union’s requirements of this subpart; LICU’s strategic plan, business plan, and request or imposed conditions on the (2) The Subordinated Debt was issued budget; and approval of such request. and sold in an arms-length, bona fide (v) Includes supporting pro forma (3) If the Issuing Credit Union transaction; financial statements, including any off- proposes or the NCUA requires the (3) The Subordinated Debt was issued balance sheet items, covering a Issuing Credit Union to replace the and sold in the ordinary course of minimum of the next two years. Subordinated Debt, the Issuing Credit business, with no intent to hinder, (2) Issuances not completed before Union must receive affirmative approval delay, or defraud the Issuing Credit January 1, 2022. Any issuances of under this subpart and must issue and Union or its creditors; and secondary capital not completed by sell the replacement instrument prior to (4) The Subordinated Debt was issued January 1, 2022, are, as of January 1, or concurrently with prepaying the and sold for adequate consideration in 2022, subject to the requirements Subordinated Debt. U.S. dollars. applicable to Subordinated Debt (f) Resubmissions. An Issuing Credit (b) This section does not authorize the discussed elsewhere in this subpart. Union that receives an adverse written attachment of any involuntary lien upon (3) Nonshare account. The secondary determination on its application to the property of either the NCUA Board capital account is established as an prepay, in whole or in part, may cure as conservator or liquidating agent or its uninsured secondary capital account or any deficiencies noted in the lawfully appointed designee. Nor does other form of non-share account. Appropriate Supervision Office’s this section waive, limit, or otherwise (4) Minimum maturity. The maturity written determination and reapply affect the authority, rights, or powers of of the secondary capital account is a under the requirements of this section. the NCUA or the NCUA Board in any minimum of five years. (5) Uninsured account. The secondary This paragraph (f) does not prohibit an capacity to take any action or to exercise capital account is not insured by the Issuing Credit Union from appealing the any power not specifically mentioned, National Credit Union Share Insurance Appropriate Supervision Office’s including but not limited to any rights, Fund or any governmental or private adverse decision under subpart A of powers, or remedies of the NCUA Board entity. part 746 of this chapter. as conservator or liquidating agent (or its lawfully appointed designee) (6) Subordination of claim. The § 702.412 Effect of a merger or dissolution regarding transfers or other conveyances secondary capital account investor’s on the treatment of Subordinated Debt as taken in contemplation of the Issuing claim against the LICU is subordinate to Regulatory Capital. Credit Union’s insolvency or with the all other claims including those of (a) In the event of a merger of an intent to hinder, delay or defraud the shareholders, creditors and the National Issuing Credit Union into or the Issuing Credit Union or the creditors of Credit Union Share Insurance Fund. assumption of its Subordinated Debt by such Issuing Credit Union, or that is (7) Availability to cover losses. Funds another federally insured credit union, fraudulent under applicable law. deposited into a secondary capital the Subordinated Debt will be treated as account, including interest accrued and Regulatory Capital only to the extent § 702.414 Regulations governing paid into the secondary capital account, that the resulting credit union is either Grandfathered Secondary Capital. are available to cover operating losses a LICU, a complex credit union, and/or This section recodifies the realized by the LICU that exceed its net a new credit union. requirements from 12 CFR 701.34(b), (c), available reserves (exclusive of (b) In the event the resulting credit and (d) that were in effect as of January secondary capital and allowance union is not a LICU, a complex credit 1, 2021, with minor modifications. The accounts for loan and lease losses), and union, or a new credit union, the terminology used in this section is to the extent funds are so used, the LICU Subordinated Debt of the merging credit specific to this section. All secondary must not restore or replenish the union can either be: capital issued under 12 CFR 701.34 account under any circumstances. The (1) If permitted by the terms of the (revised as of January 1, 2021) before LICU may, in lieu of paying interest into Subordinated Debt Note, repaid by the January 1, 2022, or, in the case of a the secondary capital account, pay resulting credit union upon approval by federally insured, state-chartered credit accrued interest directly to the investor the NCUA under § 702.411; or union, § 741.204(c) of this chapter, that or into a separate account from which (2) Continue to be held by the is referred to elsewhere in this subpart the secondary capital investor may resulting credit union as Subordinated as ‘‘Grandfathered Secondary Capital,’’ make withdrawals. Losses must be Debt, but will not be classified as is subject to the requirements set forth distributed pro-rata among all secondary Regulatory Capital under this subpart, in this section. capital accounts held by the LICU at the

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time the losses are realized. In instances (11) Disclosure and (c) Redemption of secondary capital. where a LICU accepted secondary acknowledgement. An authorized With the written approval of NCUA, capital from the United States representative of the LICU and of the secondary capital that is not recognized Government or any of its subdivisions secondary capital account investor each as net worth under paragraph (b)(2) of under the Community Development must have executed a ‘‘Disclosure and this section (‘‘discounted secondary Capital Initiative of 2010 (‘‘CDCI Acknowledgment’’ as set forth in the capital’’ re-categorized as Subordinated secondary capital’’) and matching funds appendix to this subpart at the time of Debt) may be redeemed according to the were required under the Initiative and entering into the account agreement. remaining maturity schedule in are on deposit in the form of secondary The LICU must retain an original of the paragraph (c)(3) of this section. capital at the time a loss is realized, a account agreement and the ‘‘Disclosure (1) Request to redeem secondary LICU must apply either of the following and Acknowledgment’’ for the term of capital. A request for approval to pro-rata loss distribution procedures to the agreement, and a copy must be redeem discounted secondary capital its secondary capital accounts with provided to the account investor. may be submitted in writing at any time, respect to the loss: (12) Prompt corrective action. As must specify the increment(s) to be (i) If not inconsistent with any provided in this part, the NCUA may redeemed and the schedule for agreements governing other secondary prohibit a LICU as classified ‘‘critically redeeming all or any part of each capital on deposit at the time a loss is undercapitalized’’ or, if ‘‘new,’’ as eligible increment, and must realized, the CDCI secondary capital ‘‘moderately capitalized’’, ‘‘marginally demonstrate to the satisfaction of NCUA may be excluded from the calculation of capitalized’’, ‘‘minimally capitalized’’ or that: the pro-rata loss distribution until all of ‘‘uncapitalized,’’ as the case may be, (i) The LICU will have a post- its matching secondary capital has been from paying principal, dividends, or redemption net worth classification of at depleted, thereby causing the CDCI interest on its uninsured secondary least ‘‘adequately capitalized’’ under secondary capital to be held as senior to capital accounts established after this part; all other secondary capital until its August 7, 2000, except that unpaid (ii) The discounted secondary capital matching secondary capital is dividends or interest will continue to has been on deposit at least two years; exhausted. The CDCI secondary capital accrue under the terms of the account to (iii) The discounted secondary capital should be included in the calculation of the extent permitted by law. will not be needed to cover losses prior the pro-rata loss distribution and is (b) Accounting treatment; Recognition to final maturity of the account; available to cover the loss only after all of net worth value of accounts—(1) (iv) The LICU’s books and records are of its matching secondary capital has Debt. A LICU that issued secondary current and reconciled; been depleted. capital accounts pursuant to paragraph (v) The proposed redemption will not (ii) Regardless of any agreements (a) of this section must record the funds jeopardize other current sources of applicable to other secondary capital, on its balance sheet as a debt titled funding, if any, to the LICU; and the CDCI secondary capital and its ‘‘uninsured secondary capital account.’’ (vi) The request to redeem is authorized by resolution of the LICU’s matching secondary capital may be (2) Schedule for recognizing net worth board of directors. considered a single account for value. The LICU’s reflection of the net (2) Decision on request. A request to purposes of determining a pro-rata share worth value of the accounts in its redeem discounted secondary capital of the loss and the amount determined financial statement may never exceed may be granted in whole or in part. If as the pro-rata share for the combined the full balance of the secondary capital a LICU is not notified within 45 days of account must first be applied to the on deposit after any early redemptions receipt of a request for approval to matching secondary capital account, and losses. For accounts with remaining redeem secondary capital that its thereby causing the CDCI secondary maturities of less than five years, the request is either granted or denied, the capital to be held as senior to its LICU must reflect the net worth value of LICU may proceed to redeem secondary matching secondary capital. The CDCI the accounts in its financial statement in capital accounts as proposed. secondary capital is available to cover accordance with the lesser of: the loss only after all of its matching (3) Schedule for redeeming secondary (i) The remaining balance of the capital. secondary capital has been depleted. accounts after any redemptions and (8) Security. The secondary capital losses; or account may not be pledged or provided TABLE 2 TO PARAGRAPH (c)(3) (ii) The amounts calculated based on by the account investor as security on a the following schedule: Redemption loan or other obligation with the LICU limit as or any other party. TABLE 1 TO PARAGRAPH (b)(2)(ii) percent of (9) Merger or dissolution. In the event Remaining maturity original of merger or other voluntary dissolution balance Net worth (%) of the LICU, other than merger into value of another LICU, the secondary capital Remaining maturity original Four to less than five years .. 20 accounts will be closed and paid out to balance (percent) Three to less than four years 40 the account investor to the extent they Two to less than three years 60 are not needed to cover losses at the Four to less than five years ...... 80 One to less than two years .. 80 time of merger or dissolution. Three to less than four years ... 60 (10) Contract agreement. A secondary Two to less than three years .... 40 (4) Early redemption exception. capital account contract agreement must One to less than two years ...... 20 Subject to the written approval of NCUA have been executed by an authorized Less than one year ...... 0 obtained pursuant to the requirements representative of the account investor of paragraphs (c)(1) and (2) of this and of the LICU reflecting the terms and (3) Financial statement. The LICU section, a LICU can redeem all or part conditions mandated by this section and must reflect the full amount of the of secondary capital accepted from the any other terms and conditions not secondary capital on deposit in a United States Government or any of its inconsistent with this section. footnote to its financial statement. subdivisions at any time after the

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secondary capital has been on deposit 5. Availability to cover losses. The funds Authority: 12 U.S.C. 1757, 1766, 1767, for two years. If the secondary capital committed to the secondary capital account 1786(h), 1786(t), and 1787(b)(4), 1788, 1789, was accepted under conditions that and any interest paid into the account may 1789a. be used by [name of credit union] to cover required matching secondary capital any and all operating losses that exceed the ■ 16. Amend § 709.5 by revising from a source other than the Federal credit union’s net worth exclusive of paragraph (b)(8) to read as follows: Government, the matching secondary allowance accounts for loan losses, and in capital may also be redeemed in the the event the funds are so used, (name of § 709.5 Payout priorities in involuntary manner set forth in the preceding credit union) will under no circumstances liquidation. sentence. For purposes of obtaining restore or replenish those funds to [name of * * * * * institutional investor]. Dividends are not NCUA’s approval, all secondary capital (b) * * * a LICU accepts from the United States considered operating losses and are not eligible to be paid out of secondary capital. (8) Outstanding Subordinated Debt (as Government or any of its subdivisions, 6. Accrued interest. By initialing below, defined in part 702 of this chapter) or as well as its matching secondary [name of credit union] and [name of outstanding Grandfathered Secondary capital, if any, is eligible for early institutional investor] agree that accrued Capital (as defined in part 702 of this redemption regardless of whether any interest will be: chapter); and part of the secondary capital has been __Paid into and become part of the secondary discounted pursuant to paragraph (b)(2) capital account; * * * * * of this section. __Paid directly to the investor; __Paid into a separate account from which PART 741—REQUIREMENTS FOR Appendix A to Subpart D of Part 702— the investor may make withdrawals; or INSURANCE Disclosure and Acknowledgement Form __Any combination of the above provided the details are specified and agreed to in ■ 17. The authority citation for part 741 A LICU that is authorized to accept writing. continues to read as follows: uninsured secondary capital accounts and 7. Subordination of claims. In the event of each investor in such an account must have Authority: 12 U.S.C. 1757, 1766(a), 1781– liquidation of [name of credit union], the 1790, and 1790d; 31 U.S.C. 3717. executed and dated the following ‘‘Disclosure funds committed to the secondary capital and Acknowledgment’’ form, a signed account will be subordinate to all other ■ original of which must be retained by the 18. Amend § 741.204 by revising claims on the assets of the credit union, paragraph (c) and removing paragraph credit union: including claims of member shareholders, Disclosure and Acknowledgment creditors and the National Credit Union (d) to read as follows: [Name of CU] and [Name of investor] Share Insurance Fund. § 741.204 Maximum public unit and hereby acknowledge and agree that [Name of 8. Prompt Corrective Action. Under certain nonmember accounts, and low-income net worth classifications (see 12 CFR investor] has committed [amount of funds] to designation. 702.204(b)(11), 702.304(b) and 702.305(b), as a secondary capital account with [name of the case may be), the NCUA may prohibit * * * * * credit union] under the following terms and [name of credit union] from paying principal, conditions: (c) Follow the requirements of dividends or interest on its uninsured § 702.414 of this chapter for any 1. Term. The funds committed to the secondary capital accounts established after secondary capital account are committed for Grandfathered Secondary Capital (as _ August 7, 2000, except that unpaid dividends a period of y years. or interest will continue to accrue under the defined in part 702 of this chapter) 2. Redemption prior to maturity. Subject to terms of the account to the extent permitted issued before January 1, 2022. the conditions set forth in 12 CFR 702.414, by law. ■ the funds committed to the secondary capital 19. Add §§ 741.226 and 741.227 to ACKNOWLEDGED AND AGREED TO this read as follows: account are redeemable prior to maturity lld day of [month and year] by: only at the option of the LICU and only with lllllllllllllllllllll § 741.226 Subordinated Debt. the prior written approval of NCUA. [name of investor’s official] 3. Uninsured, non-share account. The Any credit union that is insured, or [title of official] secondary capital account is not a share that makes application for insurance, account and the funds committed to the [name of investor] pursuant to title II of the Act must secondary capital account are not insured by [address and phone number of investor] follow the requirements of subpart D of the National Credit Union Share Insurance [investor’s tax identification number] part 702 of this chapter before it may Fund or any other governmental or private lllllllllllllllllllll issue Subordinated Debt, as that term is entity. [name of credit union official] 4. Prepayment risk. Redemption of U.S.C. defined in § 702.402 of this chapter, and [title of official] prior to the account’s original maturity date to the extent not inconsistent with applicable state law and regulation. may expose the account investor to the risk PART 709—INVOLUNTARY of being unable to reinvest the repaid funds LIQUIDATION OF FEDERAL CREDIT § 741.227 Loans to credit unions. at the same rate of interest for the balance of UNIONS AND ADJUDICATION OF the period remaining until the original Any credit union that is insured CREDITOR CLAIMS INVOLVING maturity date. The investor acknowledges pursuant to Title II of the Act must FEDERALLY INSURED CREDIT that it understands and assumes adhere to the requirements in § 701.25 UNIONS IN LIQUIDATION responsibility for prepayment risk associated of this chapter. with the [name of credit union]’s redemption of the investor’s U.S.C. account prior to the ■ 15. The authority citation for part 709 [FR Doc. 2020–28281 Filed 2–22–21; 8:45 am] original maturity date. continues to read as follows: BILLING CODE 7535–01–P

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