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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations Be recognized as Net Worth in accordance with the schedule for recognizing Net Worth value in paragraph c2 of the Secondary Capital Rule;
Be closed and paid out to the account investor in the event of merger or other voluntary dissolution of a LICU, to the extent the secondary capital is not needed to cover losses at the time of the merger or dissolution does not apply in the case where a LICU merges into another LICU; and Only be repaid at maturity 11 except that, with the prior approval of the NCUA and provided the terms of the account allow for early repayment, a LICU may repay any portion of secondary capital that is not recognized as Net Worth.12
The Secondary Capital Rule also includes requirements related to secondary capital plan submissions and approvals, redemption of secondary capital, disclosures, and Regulatory Capital treatment.
As noted previously, since the passage of CUMAA, the NCUA permits a LICU that issues secondary capital to include the aggregate outstanding principal amount of that secondary capital, in accordance with the schedule for Net Worth,13 as part of its Net Worth.
Further, pursuant to the NCUAs currently effective risk-based net worth requirements, the NCUA also permits a LICU to include such secondary capital in its risk-based net worth calculation.
By contrast, a non-LICU does not have the statutory authority to issue secondary capital and, to the extent a non-LICU issues an instrument that is analogous to secondary capital, to include any such instruments in its Net Worth or its risk-based net worth calculation.
B. Subordinated Debt for LICUs and Certain Non-LICUs 1. RBC
In October 2015, the Board finalized a rule to replace the current risk-based net worth requirement with an RBC
requirement.14 Under the revised balance sheet as equity accounts, generally accepted accounting principles in the United States generally require financial institutions to record secondary capital accounts as debt. See FASB
Financial Accounting Standards Board, ASC
942-405-25-3 and 25-4. The instructions to the 5300
Call Report require all federally insured credit unions to report any secondary capital in the Liability section of the Statement of Financial Condition.
11 A LICU may not issue a secondary capital account that amortizes over its stated term.
12 See 12 CFR 701.34d.
13 Id. 701.34c2.
14 80 FR 66626 Oct. 29, 2015. The Board has delayed the effective date for the final RBC rule two
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standard, the NCUA permits a LICU to include secondary capital in its RBC
calculations in the same manner as it currently includes secondary capital in its risk-based net worth calculation.
Under the proposed rule, the Board proposed to grant certain non-LICUs the authority to issue instruments in the form of Subordinated Debt and allow such credit unions to count those instruments in their respective RBC
calculations. This new authority, however, would not permit non-LICUs to include Subordinated Debt in their Net Worth calculations.
In the proposed RBC rule issued in 2015,15 the Board requested stakeholder input on supplemental capital.16 A
majority of commenters that addressed supplemental capital stated it was imperative that the Board consider allowing credit unions to issue additional forms of capital. The commenters suggested this authority was particularly important, as credit unions are at a disadvantage in the financial marketplace because most lack access to additional capital outside of Retained Earnings.
While none of the commenters offered specific suggestions on how to implement supplemental capital, a few suggested that the Board promulgate broad, non-prescriptive rules to allow credit unions maximum flexibility in issuing supplemental capital.
2. 2017 Advance Notice of Proposed Rulemaking On February 8, 2017, the Board published an advance notice of proposed rulemaking ANPR to solicit comments on alternative forms of capital credit unions could use to meet capital standards required by statute times. First, in 2018, the effective date was delayed by one year, from January 1, 2019, to January 1, 2020. 83 FR 55467 Nov. 6, 2018. Second, based on Board action at the December 2019 Board meeting, the effective date was delayed two additional years, from January 1, 2020 to January 1, 2022.
15 80 FR 4340 Jan. 27, 2015.
16 Id. at 4384. The Board notes that when the agency began to consider authorizing non-LICU
credit unions to issue instruments analogous to secondary capital instruments issued by LICUs, it used the term supplemental capital to refer to those instruments. In 2017, when the Board issued an advance notice of proposed rulemaking on this topic, the NCUA used the umbrella term alternative capital to refer to both supplemental capital and secondary capital. In light of FCUs authority only to issue debt instruments, however, the Board believes it is more accurate to use the umbrella term Subordinated Debt to refer to both secondary capital and what was once referred to as supplemental capital. It is important to note that, unless the context otherwise requires, the term Subordinated Debt refers to both types of debt instruments.

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and regulation.17 In response, the Board received 756 comments.
Of the 756 comments received, 688
appeared to be derived from one form letter 18 that opposed the NCUA
proceeding with a supplemental capital proposal. In addition to the form letter, the Board received 68 unique comments in response to the ANPR, most of which supported proposing a rule to allow non-LICUs to issue an alternative form of capital. A majority of the commenters in favor of the Board issuing a proposed rule cited compliance with the NCUAs RBC rule 19 as the main reason for their support. Other justifications for support proposed by commenters included credit union growth, protection from economic downturns, and providing services demanded by members.
In general, the comments lacked specificity, and very few commenters addressed all or even most of the questions posed by the Board.
Nevertheless, the comments covered a wide range of topics and offered varying levels of support for provisions suggested in the ANPR. As noted in the proposed rule, the Board considered all comments received in response to the ANPR during the Subordinated Debt rulemaking process.
II. Proposed Rule At its January 2020 meeting, the Board issued the proposed rule to permit LICUs, Complex Credit Unions, and New Credit Unions to issue Subordinated Debt for purposes of Regulatory Capital treatment.20
Specifically, the proposed rule included a new subpart in the NCUAs final RBC
rule 21 to address the requirements for, and Regulatory Capital treatment of, Subordinated Debt. The proposed subpart also contained requirements related to credit union eligibility to issue Subordinated Debt, applying for NCUA authority to issue Subordinated Debt, disclosures, securities laws, the terms of a Subordinated Debt Note, and prepayments.
The proposed rule also provided for the grandfathering of any secondary capital issued before the effective date of a final Subordinated Debt rule Grandfathered Secondary Capital and preserved the Regulatory Capital treatment of Grandfathered Secondary Capital for up to 20 years after the effective date of a final Subordinated 17 82

FR 9691 Feb. 8, 2017.
there were slight modifications to some letters, the substance of each was the same.
19 80 FR 4340 Jan. 27, 2015.
20 85 FR 13892 Mar. 10, 2020.
21 80 FR 4340 Jan. 27, 2015.
18 While
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