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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations
as defined in 723.2.36 The limit would include Subordinated Debt and Grandfathered Secondary Capital, and would be in addition to the aggregate limit on such loans specified in the FCU
Act. One commenter requested the NCUA not impose the proposed additional restrictions on loans to other credit unions.
The Board notes that the proposed single borrower limit is consistent with the single borrower limit in the NCUAs commercial lending and MBL rule.37
Because credit unions share many similarities with traditional corporate borrowers, the Board continues to believe that basing the proposed singleborrower limit in this rule on the commercial and MBL rule limit is appropriate. Furthermore, the 15
percent of Net Worth single-borrower limit for FCUs that make loans to other credit unions would generally limit catastrophic losses to an FCU if the borrower defaults.
For these reasons, the Board is retaining the limits of an FCU making loans to other credit unions in the final rule without amendment.
11. Pooling The Board did not include a provision for the pooling of Subordinated Debt issuances in the proposed rule. The Board notes that pooling generally involves combining more than one issuance in a standalone structure.
Approximately three commenters advocated for the NCUA to explicitly permit pooling arrangements in any final Subordinated Debt rule. These commenters stated that allowing for pools of Subordinated Debt could make it easier and less expensive for credit unions to take issuances to the market.
These commenters also believed that pools would reduce the risk of loss to investors by spreading loss across multiple credit unions rather than just one. Finally, one commenter argued that pooling would allow for larger issuances that may be able to be rated, thereby providing investors additional confidence in the issuance.
While the Board is not including a specific provision on pooling in this final rule, the Board notes that there is no prohibition in this final rule or the proposed rule on Subordinated Debt being pooled and sold to investors. The Board notes, however, that any such pool must comply with all of the NCUAs regulations and any applicable securities laws.
Finally, the Board notes that general investment authority in part 703 only 36 12
37 Id.

CFR 723.2.
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permits FCUs to purchase pooled Subordinated Debt in the form of a registered investment company or collective investment fund, as long as the prospectus of the company or fund restricts the investment portfolio to investments and investment transactions that are permissible for FCUs.38
IV. Legal Authority A. Authority To Issue Subordinated Debt The borrowing authority granted to FCUs by the FCU Act, along with FCUs statutory authority to enter into contracts and exercise incidental powers necessary or required to enable the FCUs to effectively carry on their business, supports the legal analysis that FCUs are authorized to incur indebtedness through the issuance of debt securities of the type contemplated by this final rule. Section 17579 of the FCU Act authorizes FCUs to borrow, in accordance with such rules and regulations as may be prescribed by the Board, from any source, in an aggregate amount not exceeding, except as authorized by the Board in carrying out the provisions of subchapter III, 50 per centum of its paid-in and unimpaired capital and surplus: Provided, that any Federal credit union may discount with or sell to any Federal intermediate credit bank any eligible obligations up to the amount of its paid-in and unimpaired capital.39
Other than the provisions codified in 701.38 of the NCUAs regulations, which address borrowed funds from natural persons, the FCU Act does not provide any details regarding the mechanisms FCUs may use to borrow.40
Further, section 201b7 of the FCU
Act implicitly allows credit unions to 38 12

CFR 703.14c.
U.S.C. 17579.
40 In contrast, certain provisions of Title 12 of the United States Code relating to the regulation of other types of financial institutions expand on the institutions basic authority to borrow money, including through the issuance of securities. For example, a Farm Credit System member is specifically authorized to:
Borrow money from or loan to any other institution of the System, borrow from any commercial bank or other lending institution, issue its notes or other evidence of debt on its own individual responsibility and full faith and credit, and invest its excess funds in such sums, at such times, and on such terms and conditions as it may determine.
Issue its own notes, bonds, debentures, or other similar obligations, fully collateralized as provided in section 2154c by the notes, mortgages, and security instruments it holds in the performance of its functions under this chapter in such sums, maturities, rates of interest, and terms and conditions of each issue as it may determine with approval of the Farm Credit Administration.
12 U.S.C. 2153a b.
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issue securities.41 Conversely, nothing in section 17579 or other provisions of the FCU Act impose any specific restrictions or limitations on the mechanisms FCUs may employ to borrow; specific limiting language, examples or illustrative transactions or situations, or otherwise, do not exist to introduce specific restrictions or limitations. This stands in sharp contrast to many other subsections of section 1757 of the FCU Act which, for example, go into significant detail describing the types and terms of loans and extensions of credit that FCUs are permitted to make,42 and define the types of investments FCUs are permitted to make.43 In addition, the NCUAs regulations do not impose any specific restrictions or limitations on the mechanisms an FCU may employ to borrow, through the use of specific limiting language, examples, illustrative transactions, or situations.
Overall, the lack of specific restrictions or limitations on the mechanisms that may be used and the specific authority granted in section 17579 to borrow from any source indicate that borrowings need not be limited to the types of arrangements typically entered into with banks, other credit unions, and other financial institutions namely, loans, lines of credit, and similar arrangements.
Further, the specific authority provided in section 17571 of the FCU Act that empowers FCUs to enter into contracts 44 further supports the conclusion that FCUs have the power to enter into a variety of different arrangements with respect to borrowing.45 In addition, in the absence of specific restrictions and limitations, the incidental powers granted to FCUs in section 175717 of the FCU Act give significant discretion to FCUs with respect to how borrowings are effectuated.
Further support for the position that FCUs have the authority to issue debt 41 Id.

section 1781b7.
section 17575.
43 Id. section 17577; 15.
44 Id. section 17571.
45 Typical loan and line of credit arrangements entered into with banks, other credit unions, and other financial institutions are clearly contractual in nature. Debt securities are also generally viewed as primarily contractual in nature, in large measure because of the terms of the securities themselves or the terms incorporated into the securities through an indenture, an issuing and paying agent agreement or similar agreement. This view of debt securities has been expressed in a wide variety of court cases. See, e.g., Katz v. Oak Industries, Inc., 508 A.2d 873, 878 Del. Ch. 1986 Under our lawand the law generallythe relationship between a corporation and the holders of its debt securities, even convertible debt securities, is contractual in nature..
42 Id.

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