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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations topics equally, regardless of number or the depth of the comments.
1. Subordinated Debt Is a Security The proposed rule included a comprehensive description of Subordinated Debt as a security and described general securities law that may apply to Subordinated Debt issued by a credit union. This section of the proposed rule stated that the NCUA
continues to believe any Subordinated Debt Note would be deemed a security for purposes of Federal and state securities law. This section went on to provide the definition of a security under the Securities Act of 1933 and interpretations of such term by various courts, including the U.S. Supreme Court.
Twelve commenters disagreed with the NCUAs assertion that all Subordinated Debt issued under the proposed rule would be a security for purposes of Federal and state securities laws. The majority of these commenters stated that such a classification would result in an overly complex and expensive set of requirements, including the preparation of an Offering Document and the retention of securities counsel, that would make many small issuances of Subordinated Debt cost-prohibitive for LICUs.
One commenter stated that currently, the issuance of secondary capital is largely accomplished through what is best described as bilaterally negotiated lending transactions. The NCUA has not suggested that this practice would be discontinued in the case of subordinated debt, and it is reasonable to believe that many market offerings would continue to be conducted in this way. This commenter went on to state that, because of the use of these bilateral-type agreements, the NCUA should refrain from implementing a blanket approach to securities law compliance.
Other commenters believed a blanket classification of Subordinated Debt as a security would negatively impact LICUs and small issuances. Further, many of these commenters urged the NCUA to consider a more flexible approach that follows the exemptions provided for in the Security and Exchange Commissions SECs rules and the Office of the Comptroller of the Currencys OCCs subordinated debt regulation. Specifically, one commenter stated that the proposed rule would require an Issuing Credit Union to prepare and deliver an Offering Document to potential investors even though there is no SEC-mandated disclosure requirements for offerings of securities pursuant to the section 3a5

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exemption, and there generally are no SEC-mandated disclosure requirements for offerings of securities pursuant to the Rule 506 17 CFR 230.506 private placement exemption as long as all purchasers in the offering are accredited investors. This commenter went on to state that there already exists a U.S. securities law framework which applies to such exempt issuances, and that framework stipulates that registration and disclosure requirements are not necessary in these cases. It is unnecessary, improper, and unduly burdensome for NCUA to impose such requirements on exempt credit union issuers when U.S.
securities law does not impose these requirements.
In response to the aforementioned comments, the Board first reiterates that section 21 of the Securities Act broadly defines the term security to include, among other things, any:
Stock;
Note;
Bond;
Debenture;
Evidence of indebtedness;
Investment contract; or Interest or instrument commonly known as a security.27
Further, the U.S. Supreme Court has repeatedly emphasized that the definition of security is quite broad.
The U.S. Supreme Court, in a variety of cases analyzing the boundaries of the definition, has stressed that the substantive characteristics of the instrument in question and the circumstances surrounding its issuance, rather than the mere name or title of the instrument, are of primary significance in determining whether the instrument, contract, or arrangement in question will be deemed a security. While lower Federal courts and some state courts have sometimes taken a narrower view than the Supreme Court, common factors the courts generally consider in their analysis particularly in the context of a debt instrument, contract or arrangement include:
The terms of the offer;
The characteristics of the economic inducement being offered to the potential counterparty, and whether the characteristics are consistent with a loan or typical extension of credit, or such that the counterparty would anticipate a potential return on investment in addition to repayment of the obligation and any stated interest;
The plan of distribution;
How an instrument is marketed and to whom it is marketed, and whether the potential counterparties are traditional 27 15

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lenders/providers of credit or investors who would anticipate a potential return on investment in addition to repayment of the obligation and any stated interest;
and The family resemblance of the instrument to other instruments or arrangements that have been found to fall within the definition of a security, rather than having characteristics more akin to a loan or typical extension of credit.
As the preceding information demonstrates, the definition of a security is quite broad and encompassing. As such, the Board again acknowledges that Subordinated Debt Notes issued under the Subordinated Debt rule, as finalized herein, fit within the definition of a security. Inclusion in such definition may subject issuances to various Federal and state laws and regulations.
The Boards statement in both the proposed rule and this final rule that Subordinated Debt Notes would be securities is an acknowledgment of such fact and has no bearing on the treatment of such notes by the SEC or state regulators. Rather, after consultation with outside securities law counsel, the Board recognizes that Subordinated Debt Notes issued under this final rule are likely to some degree to be subject to the multitude of Federal and state securities lawsparticularly those related to disclosures and anti-fraud.
The Board believes it is prudent and responsible to adopt a framework, as discussed in the proposed rule, to aid Issuing Credit Unions in providing Offering Documents to investors. As a prudential regulator, it is incumbent upon the NCUA to include in a rulemaking of this complexity provisions to help ensure credit unions comply with regulatory or statutory requirements, and to help credit unions avoid legal challenges from investors.
The Board reiterates that for all Issuing Credit Unions, the issuance of Subordinated Debt may be a new activity. While LICUs have been issuing secondary capital for several decades, this will be the first time the NCUA has permitted LICUs to issue instruments to qualifying natural persons. Because this is a new and complex activity for all Issuing Credit Unions, in consultation with outside counsel, the Board views the Offering Document process to as helping Issuing Credit Unions navigate complex disclosures and anti-fraud laws. However, the Board notes that the Offering Document is independent of and, in some cases, additive to any requirements imposed by applicable securities laws. The Board reiterates its expectation that credit unions
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