7535-01-U NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Parts 701, 702, 709, and 741 RIN: 3133-AF08 Subordinated Debt AGENCY: National Credit Union Administration (NCUA). ACTION: Proposed rule. SUMMARY: The NCUA Board (Board) is proposing to amend various parts of the NCUA’s regulations to permit low-income designated credit unions (LICUs), Complex Credit Unions, and New Credit Unions to issue Subordinated Debt for purposes of regulatory capital treatment. Specifically, this proposed rule would create a new subpart in the NCUA’s final risk-based capital rule (RBC Rule) that would address the requirements for and regulatory capital treatment of Subordinated Debt. This new subpart would, among other things, contain requirements related to applying for authority to issue Subordinated Debt, credit union eligibility to issue Subordinated Debt, prepayments, disclosures, securities laws, and the terms of a Subordinated Debt Note. 1 All secondary capital issued after the effective date of a final Subordinated Debt rule would be subject to the requirements for Subordinated Debt. This change would not impact a LICU’s ability to include such instruments in its Net Worth. This proposal would also grandfather any secondary capital issued before the effective date of a final Subordinated Debt rule (Grandfathered Secondary Capital). It also would preserve the regulatory capital treatment of Grandfathered Secondary Capital for 20 years after the effective date of a final Subordinated Debt rule. Grandfathered Secondary Capital, under this proposal, would generally remain subject to the requirements in current §§ 701.34(b) through (d) (Current Secondary Capital Rule). For ease of reference, the requirements in the Current Secondary Capital Rule would be moved from their current location to a section in the new proposed subpart. In addition to the above-mentioned changes, this proposed rule also makes various additions and amendments to other parts and sections of the NCUA’s regulations. Specifically, this proposed rule would include: a new section addressing limits on loans to other credit unions; an expansion of the borrowing rule to clarify that federal credit unions (FCUs) can borrow from any source; revisions to the RBC Rule and the payout priorities in an involuntary liquidation rule to account for Subordinated Debt and Grandfathered Secondary Capital; and cohering changes to part 741 to account for the other changes proposed in this rule that apply to federally insured, state-chartered credit unions (FISCUs). 2 DATES: Comments must be received on or before [INSERT DATE 120 DAYS FROM DATE OF PUBLICATION IN THE FEDERAL REGISTER]. ADDRESSES: You may submit written comments, identified by RIN 3133- AF08, by any of the following methods (Please send comments by one method only): • Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments. • Fax: (703) 518-6319. Include “[Your Name]—Comments on Proposed Rule: Subordinated Debt” in the transmittal. • Mail: Address to Gerard Poliquin, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314- 3428. • Hand Delivery/Courier: Same as mail address. Public inspection: You may view all public comments on the Federal eRulemaking Portal at http://www.regulations.gov, as submitted, except for those we cannot post for technical reasons. The NCUA will not edit or remove any identifying or contact information from the public comments submitted. You may inspect paper copies of comments in the NCUA’s law library at 1775 Duke Street, Alexandria, Virginia 22314, by appointment weekdays between 9 a.m. and 3 p.m. To make an appointment, call (703) 518–6546 or e-mail [email protected]. 3 FOR FURTHER INFORMATION, CONTACT: Tom Fay, Director of Capital Markets; or Justin M. Anderson, Senior Staff Attorney, Office of General Counsel, 1775 Duke Street, Alexandria, VA 22314-3428. Tom Fay can also be reached at (703) 518-1179, and Justin Anderson can be reached at (703) 518-6540. SUPPLEMENTARY INFORMATION Table of Contents I. Background ................................................................................................................ 7 A. History...................................................................................................................... 7 B. Legal Authority ...................................................................................................... 22 C. Credit Union Data .................................................................................................. 28 D. Summary of the Proposed Rule ............................................................................. 29 E. Securities Law Issues ............................................................................................. 32 II. Proposed Changes .................................................................................................... 51 A. Part 701—Organization and Operations of Federal Credit Unions. ...................... 51 B. Part 702—Capital Adequacy ................................................................................. 67 C. Subpart D—Subordinated Debt, Grandfathered Secondary Capital, and Regulatory Capital. .......................................................................................................................... 78 D. Part 709—Involuntary Liquidation of Federal Credit Unions and Adjudication of Creditor Claims Involving Federally Insured Credit Unions in Liquidation. ............. 185 E. Part 741—Requirements for Insurance. ............................................................... 186 III. Regulatory Procedures ........................................................................................... 188 A. Paperwork Reduction Act .................................................................................... 188 B. Executive Order 13132 ........................................................................................ 191 C. Assessment of Federal Regulations and Policies on Families ............................. 191 Part 701—Organization and Operations of Federal Credit Unions ................................ 193 § 701.25 Loans to credit unions. ................................................................................ 193 § 701.34 Designation of low income status. .............................................................. 198 4 § 701.38 Borrowed funds. .......................................................................................... 198 Part 702—Capital Adequacy .......................................................................................... 199 § 702.2 Definitions. .................................................................................................... 200 § 702.104 Risk-based capital ratio. ............................................................................ 201 § 702.109 Prompt corrective action for critically undercapitalized credit unions. .... 203 § 702.205 Prompt corrective action for uncapitalized new credit unions. ................. 204 § 702.206 Revised business plans (RBP) for new credit unions. ............................... 204 § 702.207 Consideration of Subordinated Debt and Grandfathered Secondary Capital for new credit unions. .................................................................................................. 205 Subpart D—Subordinated Debt, GRANDFATHERED SECONDARY CAPITAL, and Regulatory Capital .......................................................................................................... 208 § 702.401 Purpose and scope. .................................................................................... 208 § 702.402 Definitions. ................................................................................................ 209 § 702.403 Eligibility. .................................................................................................. 213 § 702.404 Requirements of the Subordinated Debt and Subordinated Debt Note. .... 214 § 702.405 Disclosures. ............................................................................................... 221 § 702.406 Requirements related to the offer, sale, and issuance of Subordinated Debt Notes............................................................................................................................ 225 § 702.407 Discounting of amount treated as Regulatory Capital. ............................. 234 § 702.408 Preapproval to issue Subordinated Debt. .................................................. 235 § 702.409 Preapproval for federally insured, state-chartered credit unions to issue Subordinated Debt. ...................................................................................................... 253 § 702.410 Interest payments on Subordinated Debt. ................................................. 255 § 702.411 Prior written approval to prepay Subordinated Debt. ............................... 256 § 702.412 Effect of a merger or dissolution on the treatment of Subordinated Debt as Regulatory Capital....................................................................................................... 260 § 702.413 Repudiation safe harbor. ........................................................................... 261 § 702.414 Regulations governing Grandfathered Secondary Capital. ....................... 262 Part 709—Involuntary Liquidation of Federal Credit Unions and Adjudication of Creditor Claims Involving Federally Insured Credit Unions in Liquidation. ..............................