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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations
3 Cause the Issuing Credit Union to exceed the borrowing limit in 741.2 of this chapter or, for federally insured, state-chartered credit unions, any more restrictive state borrowing limit;
4 Provide the holder thereof with any management or voting rights in the Issuing Credit Union;
5 Be eligible to be pledged or provided by the investor as security for a loan from, or other obligation owing to, the Issuing Credit Union;
6 Include any express or implied term, condition, or agreement that would require the Issuing Credit Union to prepay or accelerate payment of principal of or interest on the Subordinated Debt prior to maturity, including investor put options;
7 Include an express or implied term, condition, or agreement that would trigger an event of default based on the Issuing Credit Unions default on other debts;
8 Include any condition, restriction, or requirement based on the Issuing Credit Unions credit quality or other credit-sensitive feature; or 9 Require the Issuing Credit Union to make any form of payment other than in cash.
c Negative covenants. A
Subordinated Debt Note must not include any provision or covenant that unduly restricts or otherwise acts to unduly limit the authority of the Issuing Credit Union or interferes with the NCUAs supervision of the Issuing Credit Union. This includes, but is not limited to, a provision or covenant that:
1 Requires the Issuing Credit Union to maintain a minimum amount of Retained Earnings or other metric, such as a minimum net worth ratio or minimum asset, liquidity, or loan ratios;
2 Unreasonably restricts the Issuing Credit Unions ability to raise capital through the issuance of additional Subordinated Debt;
3 Provides for default of the Subordinated Debt as a result of the Issuing Credit Unions compliance with any law, regulation, or supervisory directive from the NCUA or, if applicable, the state supervisory authority;
4 Provides for default of the Subordinated Debt as the result of a change in the ownership, management, or organizational structure or charter of the Issuing Credit Union; provided that, following such change, the Issuing Credit Union or the resulting institution, as applicable:
i Agrees to perform all of the obligations, terms, and conditions of the Subordinated Debt; and ii At the time of such change, is not in material default of any provision of
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the Subordinated Debt Note, after giving effect to the applicable cure period described in paragraph d of this section; and 5 Provides for default of the Subordinated Debt as the result of an act or omission of any third party, including but not limited to a credit union service organization, as defined in 712.1d of this chapter.
d Default covenants. A Subordinated Debt Note that includes default covenants must provide the Issuing Credit Union with a reasonable cure period of not less than 30 calendar days.
e Minimum denominations of issuances to Natural Person Accredited Investors. An Issuing Credit Union may only issue Subordinated Debt Notes to Natural Person Accredited Investors in minimum denominations of $100,000, and cannot exchange any such Subordinated Debt Notes after the initial issuance or any subsequent resale for Subordinated Debt Notes of the Issuing Credit Union in denominations less than $10,000. Each such Subordinated Debt Note, if issued in certificate form, must include a legend disclosing that it cannot be exchanged for Subordinated Debt Notes of the Issuing Credit Union in denominations less than $100,000, and Subordinated Debt Notes issued in book-entry or other uncertificated form shall include appropriate instructions prohibiting the exchange of such Subordinated Debt Notes for Subordinated Debt Notes of the Issuing Credit Union in denominations that would violate the foregoing restrictions.
702.405

Disclosures.

a An Issuing Credit Union must disclose the following language clearly, in all capital letters, on the face of a Subordinated Debt Note:
THIS OBLIGATION IS NOT A SHARE IN
THE ISSUING CREDIT UNION AND IS NOT
INSURED BY THE NATIONAL CREDIT
UNION ADMINISTRATION.
THIS OBLIGATION IS UNSECURED
AND SUBORDINATE TO ALL CLAIMS
AGAINST THE ISSUING CREDIT UNION
AND IS INELIGIBLE AS COLLATERAL FOR
A LOAN BY THE ISSUING CREDIT UNION.
AMOUNTS OTHERWISE PAYABLE
HEREUNDER MAY BE REDUCED IN ORDER
TO COVER ANY DEFICIT IN RETAINED
EARNINGS OF THE ISSUING CREDIT
UNION. AMOUNTS APPLIED TO COVER
ANY SUCH DEFICIT WILL RESULT IN A
CORRESPONDING REDUCTION OF THE
PRINCIPAL AMOUNT OF ALL
OUTSTANDING SUBORDINATED DEBT
ISSUED BY THE ISSUING CREDIT UNION, AND WILL NO LONGER BE DUE AND
PAYABLE TO THE HOLDERS OF SUCH
SUBORDINATED DEBT. AMOUNTS
APPLIED TO COVER ANY SUCH DEFICIT
MUST BE APPLIED AMONG ALL HOLDERS
OF SUCH SUBORDINATED DEBT PRO

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RATA BASED ON THE AGGREGATE
AMOUNT OF SUBORDINATED DEBT
OWED BY THE ISSUING CREDIT UNION TO
EACH SUCH HOLDER AT THE TIME OF
APPLICATION.
THIS OBLIGATION CAN ONLY BE
REPAID AT MATURITY OR IN
ACCORDANCE WITH 12 CFR 702.411. THIS
OBLIGATION MAY ALSO BE REPAID IN
ACCORDANCE WITH 12 CFR PART 710 IF
THE ISSUING CREDIT UNION
VOLUNTARILY LIQUIDATES.
THE NOTE EVIDENCING THIS
OBLIGATION HAS NOT BEEN AND WILL
NOT BE REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
THE SECURITIES ACT, OR THE
SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES OR ANY OTHER
JURISDICTION, AND MAY BE ISSUED, SOLD, PLEDGED, OR OTHERWISE
TRANSFERRED ONLY A AS PERMITTED
IN THE NOTE AND TO A PERSON WHOM
THE ISSUER OR SELLER REASONABLY
BELIEVES IS AN ACCREDITED
INVESTOR AS DEFINED IN 12 CFR
702.402 AN ENTITY ACCREDITED
INVESTOR AS DEFINED IN 12 CFR
702.402 THAT IS NOT A MEMBER OF
THE ISSUING CREDIT UNIONS BOARD, A
SENIOR EXECUTIVE OFFICER OF THE
ISSUING CREDIT UNION AS THAT TERM
IS DEFINED IN 12 CFR 702.402, OR ANY
IMMEDIATE FAMILY MEMBER OF ANY
SUCH BOARD MEMBER OR SENIOR
EXECUTIVE OFFICER, PURCHASING FOR
ITS OWN ACCOUNT, 1 TO WHOM
NOTICE IS GIVEN THAT THE SALE, PLEDGE, OR OTHER TRANSFER IS BEING
MADE IN RELIANCE ON THE EXEMPTION
FROM SECURITIES ACT REGISTRATION
PROVIDED BY SECTION 3a5 OF THE
SECURITIES ACT, OR 2 IN ACCORDANCE
WITH ANOTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT SUBJECT TO THE
DELIVERY OF SUCH CERTIFICATIONS, LEGAL OPINIONS, OR OTHER
INFORMATION AS THE ISSUING CREDIT
UNION MAY REASONABLY REQUIRE TO
CONFIRM THAT SUCH SALE, PLEDGE, OR
TRANSFER IS BEING MADE PURSUANT TO
AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT, B IN COMPLIANCE
WITH THE CERTIFICATION AND OTHER
REQUIREMENTS SPECIFIED IN THE
INDENTURE OR OTHER DOCUMENT
PURSUANT TO WHICH THE
SUBORDINATED DEBT NOTE IS ISSUED
REFERRED TO HEREIN, AND C IN
ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES AND ANY OTHER
APPLICATION JURISDICTION.

b An Issuing Credit Union must also clearly and accurately disclose in the Subordinated Debt Note:
1 The payout priority and level of subordination, as described in 709.5b of this chapter, that would apply in the event of the involuntary liquidation of the Issuing Credit Union;

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