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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations
Debt rule.22 Under the proposed rule, Grandfathered Secondary Capital would generally remain subject to the requirements in the Secondary Capital Rule. For ease of reference, the requirements in the Secondary Capital Rule would be moved from their current location to a section in the new proposed subpart.
Conversely, any issuances of secondary capital not completed by the effective date of this subpart would be subject to the requirements applicable to Subordinated Debt discussed elsewhere in this subpart. This change would not impact a LICUs ability to include such instruments in its Net Worth.
In addition to these changes, the proposed rule included additions and amendments to other parts and sections of the NCUAs regulations. Specifically, the proposed rule included:
A new section that addresses limits on loans to other credit unions;
An expansion of 701.38 the borrowing rule to clarify that Federal credit unions FCUs can borrow from any source;
Revisions to the RBC rule 23 and the payout priorities in the NCUAs involuntary liquidation rule 12 CFR
part 709 to account for Subordinated Debt and Grandfathered Secondary Capital; and Cohering changes to part 741 to account for other changes that apply to federally insured, state-chartered credit unions FISCUs.
The proposed rule provided for a 120day comment period, which ended in July 2020.
III. Final Rule and Public Comments on Proposed Rule The NCUA received 171 comment letters in response to the proposed rule, which included letters from credit union trade associations, credit unions, state and regional credit union leagues, bank trade organizations, corporate credit unions, banks, law firms, securities brokers, and individuals. Of the 171 comment letters, 125 appear to have been generated from one form letter opposing the rule.24
Nearly all the remaining commenters supported the proposed rule, but did offer at least one suggested change.
Supporting commenters generally reiterated the need for Subordinated 22 Grandfathered Secondary Capital will be considered as Regulatory Capital in accordance with the approved application, terms of the note, and the applicable schedule for recognizing secondary capital as Net Worth, provided that no such term may exceed 20 years.
23 80 FR 4340 Jan. 27, 2015.
24 While there were slight modifications to some letters, the substance of each letter was the same.

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Debt and the NCUAs legal authority to authorize it. These commenters, however, varied widely on changes requested in a final Subordinated Debt Rule.
The Board notes that, in October 2020, the Board finalized a rule related to corporate credit unions 25 in which the Board indicated it would finalize a change related to a corporate credit unions purchase of Subordinated Debt in a final Subordinated Debt rule. While it is the Boards intent to finalize the change to the corporate credit union rule, it thought it best to bring that item separately, but in the near future.
A. Comments Opposing Proposed Rule As noted previously, all of the form letters and a few unique letters opposed the proposed rule in its entirety. In summary, these comments contained three general arguments in opposition to the proposed rule.
First, these commenters stated that allowing credit unions to issue Subordinated Debt for Regulatory Capital purposes undermines the foundation of credit unions tax exempt status. In support of this assertion, commenters stated that credit unions are afforded tax-exempt status in part because they lack access to capital markets to raise equity. If this rule is adopted, that constraint will be obliterated, giving credit unions fuel to grow well beyond their mission of serving people of small means. These commenters also stated that the proposed rule was concerning in context of NCUAs methodical work to knock down the other pillars of the credit union tax exemption compact, including the field of membership expansion, the low-income designation expansion, and the proposal to speed credit unions purchases of banks.
Second, these commenters generally stated that the proposed rule usurps Congressional authority by approving the use of investor-raised funds to satisfy regulatory capital requirements, an area Congress clearly restricted to retained earnings in the Federal Credit Union Act. The commenters did not offer further support for this statement.
Finally, these commenters stated that the proposed rule would pose significant risk to the NCUSIF. These commenters stated that the NCUA has acknowledged that secondary capital has contributed to rapid growth and higher failure rates in credit unions that issue secondary capital. The commenters went on to state that expanding the authority to issue Subordinated Debt to the largest credit 25 85

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unions will pose significant risk to the NCUSIF and constitutes irresponsible behavior by the NCUA.
The Board disagrees with these commenters on all three assertions.
First, as articulated in the proposed rule and reproduced later in this document, FCUs have the legal authority to issue Subordinated Debt, and the Board has the authority to include such instruments in the RBC calculation.
With respect to the tax exemption argument, the Board reiterates its statements in the proposed rule that, under the FCU Act, FCUs are permitted to borrow from any source.26 The Board was meticulous in crafting this final rule to ensure Subordinated Debt instruments remain squarely in the form of borrowings, as permitted by the FCU
Act. The Board, therefore, has no reason to believe that the continuation of an already permissible activity would in any way jeopardize the tax-exempt status of FCUs. Further, the Board will require a FISCU to issue an instrument that meets the same requirements as an instrument issued by an FCU if the FISCU wants such instrument to be included in its RBC calculation. This is described more fully later in this document. The Board was made this intentional decision in part to help preserve FISCUs tax-exempt status which, as discussed below, differs from that of FCUs.
Finally, the Board has included many safeguards in the final rule to ensure that Subordinated Debt acts as a buffer to reduce risk to the NCUSIF rather than increase risk, as asserted by the aforementioned commenters. The Board is confident that the framework of the final rule will help protect the NCUSIF.
B. Comments Supporting, But Suggesting Changes to, the Proposed Rule The comments described in this section support the proposed rule, but offered suggested changes and amendments. In each section the Board briefly summarizes and responds to comments, with an indication of whether the Board has changed the final rule or has finalized a section as proposed. The Board notes that the following content is organized by the number of commenters that addressed a particular topic and the impact of a particular section on the rest of the rule.
The Board believes this organization will help readers ascertain which topics were the most commented-on and complex. While the Board chose this organization for ease of use, the Board notes that it evaluates all comments and 26 12

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