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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations securities may be found in U.S. GAAP
treatment of items that fall in the category of borrowings. Under U.S.
GAAP, liabilities relating to borrowed money are presented as indebtedness on an entitys balance sheet, and the interest paid is presented as interest expense on its income statement whether the borrowings are related to typical loan transactions, advances under lines of credit, or the issuance of debt securities. While the details of the different types of indebtedness for borrowed money are presented as separate line items in an entitys balance sheet and income statement, the treatment of straight indebtedness indebtedness that does not have equity/
residual ownership features, such as convertibility into shares as liabilities, and interest paid thereon as interest expense, is essentially the same. In addition, while the details of the different types of indebtedness for borrowed money are presented as separate line items in the statement of cash flows, borrowings whether in the form of loans from financial institutions or from the issuance of debt securities are all presented in the cash flows from financing activities section of the statement.
Throughout this final rule, the Board has included requirements to ensure that any Subordinated Debt issued by an Issuing Credit Union would be properly characterized as debt in accordance with U.S. GAAP. These requirements, include that the Subordinated Debt or the Subordinated Debt Note, as applicable, must:
Be in the form of a written, unconditional promise to pay on a specified date a sum certain in money in return for adequate consideration in money;
Have, at the time of issuance, a fixed stated maturity of at least five years and not more than 20 years from issuance. The stated maturity of the Subordinated Debt Note may not reset and may not contain an option to extend the maturity; and Be properly characterized as debt in accordance with U.S. GAAP.
The Board notes that a FISCUs legal authority to issue Subordinated Debt derives from applicable state law and regulation. For the Subordinated Debt issued by a FISCU to qualify as Regulatory Capital under this final rule, however, a FISCU must comply with all of the provisions of this rule, including the FISCU-specific provisions.
B. Board Authority To Design RBC
Standards In addition to credit unions authority to issue Subordinated Debt, the FCU Act
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provides the Board broad discretion to design the risk-based net worth standards.46 Specifically, the FCU Act provides, in relevant part: The Board shall design the risk-based net worth requirement to take account of any material risks against which the net worth ratio required for an insured credit union to be Adequately Capitalized may not provide adequate protection. 47
In designing such a risk-based net worth standard, Congress did not restrict the types of instruments the Board may include in its calculation of risk-based net worth, except that such calculation must take account of material risks that the Net Worth Ratio alone may not protect against. The Board, as discussed in this preamble, is proposing this rule to grant authority to LICUs, Complex Credit Unions, and New Credit Unions to issue Subordinated Debt that will count as Regulatory Capital. Based on the requirements in this final rule, the Board believes Subordinated Debt will be an additional tool that accounts for material risks faced by credit unions against which the Net Worth Ratio alone may not protect.
While the Board has broad discretion to create the risk-based net worth standard, it does not have the authority to amend the statutory definition of Net Worth. The statutory definition of Net Worth currently includes secondary capital issued by a LICU that is uninsured and subordinate to all claims against the LICU.48 As such, the Board notes two points with respect to Subordinated Debt and Net Worth. First, Subordinated Debt issued by a nonLICU is not included in that credit unions Net Worth or Net Worth Ratio.
Second, Subordinated Debt issued by a LICU after the effective date of this final rule will be included in that credit unions Net Worth and Net Worth Ratio.
V. Regulatory Procedures A. Paperwork Reduction Act The Paperwork Reduction Act of 1995
PRA 44 U.S.C. 3501 et seq. requires that the Office of Management and Budget OMB approve all collections of information by a Federal agency from the public before they can be implemented. Respondents are not required to respond to any collection of information unless it displays a valid OMB control number. In accordance 46 As
discussed previously, in 2015, the Board finalized a rule to replace the regulatory risk-based net worth requirement with an RBC requirement.
This rule is effective January 1, 2022.
47 12 U.S.C. 1790dd.
48 12 U.S.C. 1790do2.

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with the PRA, the information collection requirements included in this final rule have been submitted to OMB
for approval under control number 31330207.
B. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to consider the impact of their actions on state and local interests. The NCUA, an independent regulatory agency as defined in 44 U.S.C. 35025, voluntarily complies with the executive order to adhere to fundamental federalism principles.
This final rule does not have substantial direct effects on the states, on the relationship between the National Government and the states, or on the distribution of power and responsibilities among the various levels of government. The NCUA has therefore determined that this final rule does not constitute a policy that has federalism implications for purposes of the Executive order.
C. Assessment of Federal Regulations and Policies on Families The NCUA has determined that this rule will not affect family well-being within the meaning of section 654 of the Treasury and General Government Appropriations Act, 1999, Public Law 105277, 112 Stat. 2681 1998.
D. Small Business Regulatory Enforcement Fairness Act The Small Business Regulatory Enforcement Fairness Act of 1996 Pub.
L. 104121 SBREFA generally provides for congressional review of agency rules. A reporting requirement is triggered in instances where the NCUA
issues a final rule as defined by section 551 of the APA. An agency rule, in addition to being subject to congressional oversight, may also be subject to a delayed effective date if the rule is a major rule. The NCUA does not believe this rule is a major rule within the meaning of the relevant sections of SBREFA. As required by SBREFA, the NCUA will submit this final rule to the Office of Management and Budget for it to determine if the final rule is a major rule for purposes of SBREFA. After the Office of Management and Budget makes it determination, the NCUA will file all appropriate reports.
List of Subjects 12 CFR Part 701
Advertising, Aged, Civil rights, Credit, Credit unions, Fair housing, Individuals with disabilities, Insurance, Marital status discrimination, Mortgages,
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