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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations Regulatory Capital treatment.2 This rule finalizes the proposed rule largely as proposed except for several amendments, which are discussed later in this document. The following is a brief history of secondary capital, Risk Based Capital RBC for credit unions, and the advent of alternative forms of capital, which ultimately resulted in the development of the proposed rule and this final rule.

NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Parts 701, 702, 709 and 741
RIN 3133AF08

Subordinated Debt National Credit Union Administration NCUA.
ACTION: Final rule.
AGENCY:

The NCUA Board Board is amending various parts of the NCUAs regulations to permit Low-income Designated Credit Unions, Complex Credit Unions, and New Credit Unions to issue Subordinated Debt for purposes of Regulatory Capital treatment. The Board issued the proposed Subordinated Debt rule at its January 2020 meeting. The Board is finalizing the rule largely as proposed, except for a few changes to various sections based on comments received. Such changes include amending the definition of Accredited Investor, providing a longer timeframe in which a credit union may issue Subordinated Debt after approval, reducing the required number of years of Pro Forma Financial Statements an Issuing Credit Union must provide with its application, clarifying the prohibition on Subordinated Debt issuances outside of the United States, and clarifying that the Board will publish a fee schedule only if it makes a determination to charge a fee.
DATES: This rule is effective January 1, 2022.
FOR FURTHER INFORMATION CONTACT:
Policy: Tom Fay, Director of Capital Markets, Office of Examination and Insurance or Rick Mayfield, Senior Capital Markets Specialist, Office of Examination and Insurance. Legal:
Justin M. Anderson, Senior Staff Attorney, Office of General Counsel, 1775 Duke Street, Alexandria, VA
223143428. Tom Fay can be reached at 703 518-1179, Rick Mayfield can be reached at 703 5186501, and Justin Anderson can be reached at 703
518-6540.
SUMMARY:

SUPPLEMENTARY INFORMATION:

I. History At its January 2020 meeting, the Board issued a proposed Subordinated Debt rule the proposed rule to permit Low-income Designated Credit Unions 1
LICUs, Complex Credit Unions, and New Credit Unions to issue Subordinated Debt for purposes of 1 Terms that are capitalized throughout this document are defined within the document or in the finalized regulatory text.

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A. Secondary Capital for LICUs In 1996, the Board finalized 701.34
of the NCUAs regulations the Secondary Capital Rule to permit LICUs to raise secondary capital from foundations and other philanthropicminded non-natural person members and non-members.3 The Board issued the Secondary Capital Rule to provide an additional way for a LICU to attain Regulatory Capital to serve two specific purposes: 1 Support greater lending and financial services in the communities served by the LICU; and 2 absorb losses to prevent the LICU
from failing.
In 1998, as part of the Credit Union Membership Access Act CUMAA,4
Congress amended the Federal Credit Union Act the FCU Act to institute a system of prompt corrective action for federally insured credit unions based on a credit unions level of Net Worth.
Relevant to this final rule, CUMAA
specifically defined net worth to include, among other things, secondary capital issued by a LICU, provided the secondary capital is uninsured and subordinate to all other claims against the LICU, including the claims of creditors, shareholders, and the National Credit Union Share Insurance Fund NCUSIF.5
In 2006, the Board further amended 701.34 to require regulatory approval of a LICUs secondary capital plan before a LICU could issue secondary capital.6 In the preamble to the final 2006 rule, the Board noted that LICUs had sometimes used secondary capital to achieve goals different from those for which it was originally intended. It also highlighted a pattern of lenient practices by LICUs that issued secondary capital. These practices contributed to excessive net operating 2 85

FR 13892 March 10, 2020.
61 FR 50696 Sept. 27, 1996 final rule; see also 61 FR 3788 Feb. 2, 1996 interim final rule;
12 CFR 701.34.
4 Credit Union Membership Access Act of 1998, Public Law 105219, sec. 301, 112 Stat. 913, 929
codified at 12 U.S.C. 1790do2C 1998.
5 Id.
6 71 FR 4234 Jan. 26, 2006.
3 See
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costs, high losses from loan defaults, and a shortfall in revenue.7
The Secondary Capital Rule 8
provides that secondary capital accounts must:
Be established as an uninsured secondary capital account or another form of non-share account;
Have a minimum maturity of five years;
Not be insured by the NCUSIF or any governmental or private entity;
Be subordinate to all other claims against the LICU, including those of shareholders, creditors, and the NCUSIF;
Be available to cover losses that exceed the LICUs net available reserves and, to the extent funds are so used, a LICU may not restore or replenish the account under any circumstances.9
Further, losses must be distributed pro rata among all secondary capital accounts held by the LICU at the time the loss is realized;
Not be pledged or provided by the investor as security on a loan or other obligation with the LICU or any other party;
Be evidenced by a contract agreement between the investor and the LICU that reflects the terms and conditions mandated by the Secondary Capital Rule and any other terms and conditions not inconsistent with that rule;
Be accompanied by a disclosure and acknowledgment form as set forth in the appendix to the Secondary Capital Rule;
Not be repaid, including any interest or dividends earned thereon, if the Board has prohibited repayment thereof under 702.204b11, 702.304b, or 702.305b of the NCUAs regulations because the LICU is classified as Critically Undercapitalized; or, if a LICU is a New Credit Union as defined under 702.2 of the NCUAs regulations, as Moderately Capitalized, Marginally Capitalized, Minimally Capitalized, or Uncapitalized;
Be recorded on the LICUs balance sheet; 10
7 Id. at 4236. Before 2006, a LICU was required to submit a copy of its secondary capital plan to the NCUA, but it was not required to obtain preapproval.
8 12 CFR 701.34. The last substantive amendment to the Secondary Capital Rule was in 2010 with the addition of language regarding secondary capital received under the Community Development Capital Initiative of 2010. 75 FR 57843 Sept. 23, 2010.
9 This generally means that, when net operating losses exceed Retained Earnings, a LICU needs to first use the secondary capital funds to cover the excess amount.
10 While the Secondary Capital Rule requires a LICU to record secondary capital accounts on its
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