Compliance Update with Amy K
by Amy Kleinschmit
Chief Compliance Officer

NCUA Proposed Rules

Subordinated Debt Proposed Rule

The NCUA has issued a proposed rule relating to subordinated debt. This proposed rule can be found here and comments must be summited by July 8, 2020.

This proposal would permit low-income designated credit unions (LICUs), Complex Credit Unions, and New Credit Unions to issue Subordinated Debt for purposes of regulatory capital treatment. All secondary capital issued after the effective date of a final Subordinated Debt rule would be subject to the requirements for Subordinated Debt. With respect to any Grandfathered Secondary Capital, the NCUA is proposing to allow such Grandfathered Secondary Capital to continue to be governed by the regulatory requirements under which it was issued. However, it is proposed to prohibit Grandfathered Secondary Capital from receiving Regulatory Capital treatment as of 20 years from the effective date of a final Subordinated Debt rule.

As discussed by the NCUA in the preamble of this proposed rule, “as of June 30, 2019, there are 2,618 LICUs. Under this proposed rule, LICUs would continue to be eligible to issue Subordinated Debt. This proposed rule would newly authorize certain non-LICUs to be eligible to issue Subordinated Debt. Specifically, Complex Credit Unions and New Credit Unions would also be eligible to issue Subordinated Debt. The NCUA estimates that this proposed rule would allow an additional 285 non-LICUs, with total assets of $730 billion, to issue Subordinated Debt.” 2,409 non-LICU that are not defined as “complex” with total industry assets of $162 billion would not be eligible to issue subordinated debt. A FISCU may only issue Subordinated Debt if such issuance is permissible under its applicable state law. If the state law is more restrictive, FISCU would be required to follow state law.

The proposal contains a series of requirements with respect to the Subordinated Debt and Subordinated Debt Note, disclosures and offering materials, repayment (including prepayment), and regulatory capital treatment. It also includes an application procedure for both the issuance and repayment of Subordinated Debt Notes. In addition, the NCUA is proposing requirements related to the various securities law issues applicable to the offer, issuance, and sale of Subordinated Debt Notes. The NCUA continues to believe that any Subordinated Debt Note would be deemed to be a “security” for purposes of federal and state securities laws. The discussion of the proposed rule emphasizes that any issuance of a Subordinated Debt Note by an Issuing Credit Union must be done in accordance with applicable federal and state securities laws.

Among the proposed changes is the addition of a new §701.25 for FCUs making loans to other credit unions. The proposed § 701.25 will establish: limits on loans an FCU makes to other credit unions; approval and policy standards for an FCU to make loans to other credit unions; and requirements and limits on an FCU making investments in Subordinated Debt. The NCUA is proposing a new single borrower limit for FCUs making loans to other credit unions that would be the greater of 15 percent of the FCU’s Net Worth or $100,000, plus an additional 10 percent of the FCU’s Net Worth if that amount is fully secured at all times with a perfected security interest by readily marketable collateral as defined in §723.2. It is noted in the discussion that the NCUA is also considering a similar single obligor limit for uninsured deposits in future rulemakings.


Corporate Credit Unions Proposed Rule

The NCUA has also issued a proposed rule relating to corporate credit unions. This proposal can be found here and comments must be submitted by July 27, 2020.

This proposed rule would seek to “(1) permit a corporate credit union to make a minimal investment in a CUSO without the CUSO being classified as a corporate CUSO and subject to heightened NCUA oversight; (2) expand the categories of senior staff positions at member credit unions eligible to serve on a corporate credit union’s board; (3) remove the experience and independence requirement for a corporate credit union’s enterprise risk management expert; (4) clarify the treatment of an investment in a subordinated debt instrument of a natural person credit union; (5) codify the current list of permissible activities for a corporate CUSO; (6) clarify the definition of a collateralized debt obligation; and (7) simplify the requirement for net interest income modeling.”


As always, CUAD members may contact Amy Kleinschmit with any compliance related questions.



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