7535-01-U NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Parts 702, 703, 704, 709, and 747 RIN 3133-AD58 Corporate Credit Unions AGENCY: National Credit Union Administration (NCUA). ACTION: Final rule. SUMMARY: NCUA is issuing final amendments to its part 704 rule governing corporate credit unions. The major revisions involve corporate credit union capital, investments, asset-liability management, governance, and credit union service organization (CUSO) activities. The amendments establish a new capital scheme, including risk-based capital requirements; impose new prompt corrective action requirements; place various new limits on corporate investments; impose new asset-liability management controls; amend some corporate governance provisions; and limit a corporate CUSO to categories of services preapproved by NCUA. In addition, this rulemaking contains conforming amendments to part 702, Prompt Corrective Action (for natural person credit unions); part 703, Investments and Deposit Activities (for federal credit unions); part 747, Administrative Actions, Adjudicative Hearings, Rules of Practice and Procedure, and Investigations; and part 709, Involuntary Liquidation of Federal Credit Unions and Adjudication of Creditor Claims Involving Federally Insured Credit Unions. These amendments will strengthen individual corporates and the corporate credit union system as a whole. 1 DATES: This rule is effective [INSERT DATE 90 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER]. FOR FURTHER INFORMATION CONTACT: David Shetler, Deputy Director, Office of Corporate Credit Unions, at telephone (703) 518-6640, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314; Ross Kendall, Staff Attorney, Office of General Counsel, at the address above or telephone (703) 518-6540; or Paul Peterson, Associate General Counsel, at the address above or telephone (703) 518-6540. SUPPLEMENTARY INFORMATION: I. Background. In January 2009, NCUA solicited public comment on whether comprehensive changes to the structure of the corporate credit union (corporate) system were warranted. 74 FR 6004 (Feb. 4, 2009). This corporate Advanced Notice of Proposed Rulemaking (ANPR) sought comment on how best to define and structure the role of corporates in the credit union system, whether to modify the level of required capital for corporates, whether to modify or limit the range of permissible investments for corporates, whether to impose new standards and limits on asset-liability management (ALM) and credit risk, and whether to make modifications in the area of corporate governance. NCUA received some 445 comments in response to the ANPR. NCUA reviewed these public comments closely and considered them carefully. On November 19, 2009, the NCUA Board issued a Notice of Proposed Rulemaking (NPR) containing extensive, specific proposed revisions to NCUA‘s rule governing corporate credit unions (corporates) and related rule provisions. 74 FR 65210 (Dec. 9, 2009). The proposed revisions covered corporate capital, prompt corrective action (PCA), investments, ALM, CUSOs, and governance. Briefly summarized, the major provisions in the proposal would have: Imposed new minimum capital ratios, new risk based capital calculations, and new elements of capital, all in general accordance with the Basel I capital requirements imposed by the banking regulators on banks. Required that retained earnings (RE) constitute a certain portion of corporate capital, and that corporates build retained earnings over time. 2 Eliminated the current prohibition on conditioning membership, the receipt of services, or the pricing of services upon the purchase of paid-in capital. Added new PCA provisions similar to those currently applicable to banks. Prohibited investments in collateralized debt obligations (CDOs) and net interest margin (NIM) securities. Toughened the capital requirements for expanded investment authority, and restricted the credit ratings for investments purchased by such corporates to a minimum of ―A-.‖ Required that a corporate examine every available Nationally Recognized Statistical Rating Organization (NRSRO) rating for a particular security and only employ the lowest of those ratings, and that at least 90 percent of a corporate‘s investments be rated by at least two NRSROs. Tightened the existing single obligor concentration limit and imposed new sector concentration limits. Placed limits on subordinated positions in structured securities. Imposed new limits on the maximum difference between the estimated average life of the asset cash flows and the average life of the liability cash. Restricted the weighted average life (WAL) of a corporate‘s cash-flowing assets to two years. Limited a corporate‘s aggregate borrowing to the lesser of 10 times capital or 50 percent of shares and capital; and further restrict secured borrowing to maximum maturities of 30 days and only for liquidity purposes. Prohibited a corporate from accepting investments or loans from any one entity that exceed ten percent of the corporate‘s assets. Required that a corporate CUSO only engage in categories of services preapproved by NCUA, including, initially, brokerage and investment advisory services. Required that a corporate CUSO agree with the corporate by contract to permit NCUA access to the CUSO‘s books, records, personnel, equipment, and facilities. Required that all corporate board members hold either a CEO, CFO, or COO position at a member credit union or other member entity. Generally limited corporate board members to no more than six years of service. Required that a majority of a corporate‘s board members be representatives of natural person credit unions (NPCUs). Required that each corporate annually disclose to its members the compensation of each senior executive officer and director. Required a merging federally-chartered corporate affirmatively disclose to both NCUA and its members any material, merger-related increase in compensation for any senior executive or director. 3 Prohibited parties affiliated with a corporate from receiving 1) indemnification in connection with administrative or civil proceedings instituted by NCUA or a state regulatory authority where the party is ultimately found liable and 2) golden parachute payments. The preamble to the NPR included an extensive discussion of the crisis in the corporates giving rise to the need for regulatory reform, followed by a discussion of the nature of, and justification for, each proposed revision. Id. at 65211 – 65255. The public comment period for the NPR closed on March 9, 2010. NCUA received 815 public, written comments letters totaling more than 2,600 pages of comments. In addition, NCUA held several town halls and webinars during the comment period during which NCUA both answered questions about the proposed rulemaking and listened to oral comments about the proposal. Most commenters liked some portions of the proposed rule and disliked other portions. The most common comment on the overall rulemaking was support for the proposed stronger capital requirements; increased limits on single obligors; concentration limits on certain investment sectors; and prohibitions on certain high risk securities -- but also serious reservations about other portions of the proposal, including certain ALM, investment, CUSO, and corporate governance provisions. Of those commenters who expressed a general opinion on the overall rulemaking, many, including some trade groups and various larger NPCUs (i.e., over $1.2 billion in assets), generally support the rule. Many more commenters, however, generally oppose the proposed rule, among them many small and medium-sized NPCUs ranging up to over $1 billion in assets. Many of the commenters in opposition believed that the various investment and ALM restrictions in the proposed rule would cause major changes in corporate operations; that these changes would threaten the ability of corporates to provide liquidity and other valuable services to NPCUs; and that these changes might force NPCUs to turn to banks (their competitors) for services -- considered by the commenters as a more expensive and less reliable alternative to today‘s corporate system. The comments that pertain to specific, proposed revisions are discussed in more detail in the section-by-section analysis below. The NCUA Board has now determined to issue final revisions based on the proposal and the comments received. Generally, these revisions will become effective 90 days following the publication in the Federal Register, but the effective date for many of the revisions will be delayed beyond 90 days. 4 The remainder of this preamble contains four sections: a summary of the significant revisions in the final rule, a section-by-section analysis of all the revisions, an analysis of how the final investment, credit risk, and asset liability provisions might affect a corporate‘s ability to achieve its capital requirements, and a discussion of the regulatory procedures affecting this rulemaking. II. Summary of Significant, Final Revisions. A. Overview Ultimately, the primary purposes of this extensive rulemaking were twofold. First, NCUA wanted to design a corporate rule that would prevent the catastrophic losses that occurred in the corporate system beginning in 2007 from ever recurring. Second, NCUA wanted to allow for the survival of some form of a well-run corporate system that could provide necessary services, including payments systems services, to its members, and build and attract sufficient