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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations
changes include a reduction in the duration of required pro forma financial statements from five to two years, an adjustment to the definition of Accredited Investor, an increase in the expiration to issue period from one year to two years, clarifying the territorial restrictions on issuances, and clarifying when the Board will publish a fee schedule. The Board notes that none of these changes impact its rationale for requiring corporate credit unions to deduct natural person subordinated debt instruments. Therefore, the Board is now adopting the amendments that it proposed to the corporate credit union regulation in the February 2020
proposed rule.
II. This Final Rule Natural Person Credit Union Subordinated Debt Instruments As discussed previously, in January 2020, the Board issued a proposed rule to permit low-income designated credit unions, complex credit unions, and new credit unions to issue subordinated debt instruments for purposes of regulatory capital treatment.14 Subsequently, in the February 2020 proposed rule on corporate credit unions, the Board proposed to address whether corporate credit unions may purchase such instruments and, if so, the treatment of the investments under part 704. In the October 2020 final rule on part 704, the Board discussed and analyzed the comments it received on this part of the February 2020 proposed rule but deferred final action in order to coordinate it with the final rule on subordinated debt. Because the Board has now issued the final rule on subordinated debt without any changes that affect the proposed revisions to part 704 on which the Board already solicited and received public comment, the Board is now also finalizing the proposed changes to part 704.
The February 2020 proposed rule created a new definition for the term natural person credit union subordinated debt instrument. The proposed rule defined a natural person credit union subordinated debt instrument as any debt instrument issued by a natural person credit union that is subordinate to all other claims against the credit union, including the claims of creditors, shareholders, and either the National Credit Union Share Insurance Fund NCUSIF or the insurer of a privately insured credit union. This definition is designed to include all instruments issued under the authority of the subordinated debt rule. No 14 Id.

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commenters to the February 2020
proposed rule objected to this proposed definition. Now that the Board has finalized the subordinated debt proposed rule without substantial changes from its proposed form, the Board is now adopting this proposed definition in part 704.
The February 2020 proposed rule also clarified that corporate credit unions may purchase the natural person credit union subordinated debt instruments.
This authority is derived from their lending authority because subordinated debt instruments are issued under a natural person credit unions borrowing authority. Additionally, natural person credit unions are also permitted, subject to various restrictions and limits, to purchase such subordinated debt instruments from other natural person credit unions under their lending authority. Treating the purchase of such subordinated debt instruments as lending ensures consistent treatment between natural person credit unions and corporate credit unions. The Board is not making any amendment to the regulatory text in part 704 to this effect because corporate credit unions current lending authority is sufficiently broad to include purchasing subordinated debt instruments. However, the Board reiterates that these purchases are permissible to avoid doubt.
In addition, the February 2020
proposed rule included a requirement for a corporate credit union to fully deduct the amount of the subordinated debt instrument from its Tier 1 capital to ensure consistent treatment between investments in the capital of other corporate credit unions and natural person credit unions. Under the current regulation, corporate credit unions are currently required to deduct from Tier 1 capital any investments in perpetual contributed capital and nonperpetual capital accounts that are maintained at other corporate credit unions.15 The proposed rule also asked a question on whether it would be more appropriate to prohibit corporate credit unions from purchasing subordinated debt instruments. No commenter recommended restricting corporate credit union authority to purchase subordinated debt instruments.
The Board believes that investments in natural person credit union subordinated debt instruments should be treated similarly to investments in perpetual contributed capital and nonperpetual capital accounts that are maintained at other corporate credit unions as such instruments may qualify as regulatory capital for the natural 15 12

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person credit union. The Board is also concerned about systemic risk if corporate credit unions own a significant amount of natural person credit union issued subordinated debt.
Finally, a natural person credit union subordinated debt instrument would be in a first loss position, even before the NCUSIF and any private insurance fund or entity. Therefore, an involuntary liquidation of the issuing credit union would potentially mean large, and likely total, losses for the holders of those subordinated obligations. The Board believes that fully deducting such instruments from Tier 1 capital ensures any potential losses do not affect the capital position of the investing corporate credit union. This measured approach strikes the right balance between providing corporate credit unions the flexibility to purchase natural person credit union subordinated debt instruments and avoiding undue systemic risk to the credit union system. As discussed previously, the Boards final rule on subordinated debt made no substantial changes to that rule to change this conclusion regarding corporate credit unions purchases of the instruments.
Therefore, the Board is adopting the Tier 1 capital deductions that it proposed in the February 2020 proposed rule.
III. Regulatory Procedures Final Rule Under the Administrative Procedure Act The Administrative Procedure Act APA generally requires agencies to issue a notice of proposed rulemaking and give interested persons an opportunity to participate in the rule making through submission of comments.16 As detailed in the background section of this preamble, the Board provided notice and an opportunity to comment on the changes made in this final rule in the proposed rule issued in February 2020. The Board deferred final action on certain provisions of the February 2020
proposed rule to coordinate with the separate rulemaking on subordinated debt. The final rule on subordinated debt is substantially similar to its proposed form, which means that commenters on the February 2020
proposed rule received notice and an opportunity to comment on these provisions. Therefore, the Board is adopting the amendments in this final rule without issuing a new notice of 16 5

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