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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 4. Investors In the proposed rule, the Board limited the investors that could purchase Subordinated Debt to only Accredited Investors as defined by the SEC,33 except that credit union insiders were specifically prohibited from purchasing or holding Subordinated Debt. Further, the proposed rule bifurcated the category of Accredited Investors into Natural Person Accredited Investors and Entity Accredited Investors. Finally, the proposed rule limited the permissible investor base to only U.S. investors.
Eight commenters addressed the issue of investors. The majority of these commenters sought additional flexibility in determining who may invest in Subordinated Debt. However, three commenters sought additional limitations on the type of investors or solicitation thereof.
Two commenters stated that permissible investors should not be limited to only U.S. investors. These commenters believed this would unduly restrain credit unions from conducting beneficial offerings of Subordinated Debt. Two other commenters, for similar reasons as the preceding commenters, requested that the NCUA allow permissible investors to include those other than Accredited Investors. Finally, one commenter requested the NCUA
remove the limit on the number of permissible investors. This commenter felt any limit on the number of investors could limit a credit unions ability to conduct an issuance that it determines to be in its best interest.
Differing from the aforementioned commenters, three commenters sought additional limitations on the permissible investors or the solicitation thereof. Two commenters requested that the NCUA prohibit any federally insured credit union from investing in the Subordinated Debt of other credit unions. These commenters believed this prohibition would remove risk from the credit union system and offer a higher degree of protection for the NCUSIF.
The Board notes that it discusses these comments in the section of this document related to FCUs being both an issuer and investor of Subordinated Debt. Finally, one commenter believed that credit unions should be prohibited from soliciting or offering Subordinated Debt at credit union branches. This commenter stated that this practice could introduce unnecessary reputation risk to credit unions that solicit or offer Subordinated Debt to unsophisticated members.
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The Board is finalizing the sections on Investors as proposed, with one minor change. As noted in the preamble to the proposed rule, at the time, the SEC had proposed amendments to the definition of Accredited Investor. The SEC has now finalized these amendments.34
These changes, which are effective December 8, 2020, expand the definition of Accredited Investor by adding several new categories of natural persons or entities the SEC considers Accredited Investors. The Board is adopting these changes to the definition of Accredited Investor by modifying the definitions of Entity and Natural Person Accredited Investor in this final rule. The proposed rule enumerated specific paragraphs of 17 CFR
230.501a that the NCUA would consider either Natural Person Accredited Investors or Entity Investors.
To encompass the recent change by the SEC and future changes by the SEC, the Board is removing the specific citation references to 17 CFR 230.501a. This is largely a technical change and is not intended to change the substantive definition of Entity or Natural Person Accredited Investors.
As noted previously, several commenters sought additional flexibilities for investors or the removal of investor limits completely. The Board does not believe it is prudent to remove the limitations on investors, as such limits were designed to protect investors and credit unions. As discussed in the proposed rule, disclosures are largely based on the sophistication of the investor. Therefore, the Board opted to limit investors to those that meet the SECs definition of Accredited Investor.
The Board believes this strikes an appropriate balance between providing credit unions with a wide investor base and helping credit unions avoid additional risks by offering Subordinated Debt to less-sophisticated investors.
Further, in response to the commenter that sought the ability to offer Subordinated Debt to non-U.S. citizens, the Board, as noted in the proposed rule, deliberately limited the issuance of Subordinated Debt to only U.S. citizens.
This decision is based, in large part, on the additional complexities of issuing to foreign persons, which could subject Issuing Credit Unions to additional risk that could ultimately be passed on to the NCUSIF.
Except as discussed above, the Board is finalizing the sections on investors, as proposed.
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a. Prohibition of an Issuing Credit Unions Board Members, Senior Executive Officers, or Their Immediate Family Members To Purchase or Hold Subordinated Debt Notes The Board proposed to expand a credit unions current authority for permissible investors by allowing a credit union to issue Subordinated Debt to Natural Person Accredited Investors and Entity Accredited Investors, with the following restrictions on who may purchase or hold a Subordinated Debt Note issued by an Issuing Credit Union:
Board member or Senior Executive Officer of the Issuing Credit Union; and Immediate Family Member of such board member or Senior Executive Officer of the Issuing Credit Union.
One commenter requested the NCUA
reconsider these proposed prohibitions.
The commenter noted that the Federal banking regulators do not prohibit related parties and insiders from buying stock in a mutual to stock conversion of a thrift institution. The commenter stated that educating board members, senior officers, and others within the sphere of concern should suffice to mitigate this concern by requiring insider trading policies and procedures regarding the management of material non-public information and related party transactions. The commenter also stated the Offering Document would have disclosures related to investments by related parties and insiders, and would disclose any potential conflict of interests. Given the NCUAs concern, the commenter stated the NCUA may wish to consider adding a requirement to the initial application requiring an applicant credit union to disclose whether any such individuals are anticipated investors. The commenter stated that a wholesale exclusion unduly limits the marketability and functionality of Subordinated Debt issuances by a credit union.
The Board continues to believe it is inappropriate to permit an Issuing Credit Unions board members, Senior Executive Officers, or their Immediate Family Members to purchase or hold Subordinated Debt Notes. The Board has concerns about potential conflicts of interest and fraud that could arise because such individuals may exercise control over an Issuing Credit Union and could have, or gain, access to material non-public information related to the Issuing Credit Union and/or the Subordinated Debt Notes. Despite commenters assertions, the Board does not believe disclosures would be sufficient to address these concerns. For these reasons, the Board is retaining the prohibition on an Issuing Credit Unions
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