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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations
board members, Senior Executive Officers, or their Immediate Family Members purchasing or holding Subordinated Debt Notes in the final rule, without amendment.
5. Subordinated Debt Note Default Restriction The proposed rule included a restriction on a Subordinated Debt Note including a term or condition that would trigger an event of default based on an Issuing Credit Unions default on other debts. Approximately five commenters opposed this restriction.
One commenter suggested that the NCUA adopt a similar provision to the other banking agencies and use a certain threshold to determine when default on other debts would render an Issuing Credit Union in default on its Subordinated Debt. Other commenters suggested that default clauses are standard in debt obligations to allow parties to restructure deals in the event of material changes to the financial condition of the issuer.
After considering these comments, the Board is finalizing this restriction as proposed. While the Board recognizes that other banking regulators may impose a different requirement, the Board believes this restriction is prudent given the relative newness of the issuance of Subordinated Debt. In conjunction with the other provisions in this final rule, including interest repayment and repudiation safe harbors, the Board does not believe this restriction will cause an overly negative impact on the sale of Subordinated Debt Notes.
6. Minimum Denominations To provide additional protections to Natural Person Accredited Investors that purchase Subordinated Debt Notes, the Board proposed that Subordinated Debt Notes sold or transferred to a Natural Person Accredited Investor be made in minimum denominations of $100,000 or $10,000, respectively. Approximately eight commenters addressed the issue of minimum denominations. The vast majority of these commenters sought lower minimum denomination amounts.
One commenter, however, requested a higher minimum denomination amount.
Commenters that favored a lower minimum denomination amount generally agreed that the proposed limit of $100,000 was too high, particularly given the requirement that all investors qualify as Accredited Investors. The majority of these commenters argued that $10,000 was an appropriate minimum denomination. Some of these commenters cited the NCUAs proposed resale minimum denomination of
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$10,000 as a basis for selecting this amount as an overall minimum denomination. In addition, other commenters stated that a $10,000
minimum denomination would benefit small LICUs while being more than sufficient to help a small LICU avoid prompt corrective action.
As noted previously, one commenter sought a higher minimum denomination amount. This commenter urged the NCUA to adopt the OCCs $250,000
minimum denomination to discourage access by less financially sophisticated investors.
The Board has considered the comments on minimum denomination of a Subordinated Debt note when issued to a Natural Person Accredited Investors and will retain the proposed minimum denomination of $100,000. As the Board stated in the proposed rule, the minimum denomination provides additional protection to Natural Person Accredited Investors that purchase Subordinated Debt Notes. The Board reiterates that such minimum denominations would not apply to Entity Accredited Investors because those purchasers are corporate entities that, in the Boards view, are generally sufficiently sophisticated in financial matters such that the additional protections afforded by minimum denominations are not necessary. The Board will retain no minimum denomination requirements for Subordinated Debt Notes sold to an Entity Accredited Investor.
The Board also stated requiring larger denomination notes will help ensure that the purchasers of the Subordinated Debt Notes are financially sophisticated and have substantial net worth. The Board disagrees that this provision will overly impact most LICUs. Currently LICUs may only issue secondary capital to entities. This final rule retains LICUs ability to issue Subordinated Debt to an Entity Accredited Investor in any amount. The minimum denomination would only apply if a LICU sought to issue Subordinated Debt to the newly permissible category of Natural Person Accredited Investors.
7. Prohibition on an FCU Issuing and Investing in Subordinated Debt The proposed rule included a requirement that an FCU investing in Subordinated Debt, Grandfathered Secondary Capital, or in loans and obligations issued by privately insured credit unions that are subordinate to a private insurer must not be an Issuing Credit Union of Subordinated Debt or Grandfathered Secondary Capital, or currently have approval from the NCUA

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to issue Subordinated Debt or Grandfathered Secondary Capital.
Approximately 12 commenters requested the NCUA reconsider the proposed prohibition on a credit union being both an issuer and investor in Subordinated Debt. The majority of these commenters stated that this type of investment scenario would not increase the magnitude of a loss to the NCUSIF. These commenters contended that the loss may be spread across multiple institutions, thereby mutualizing the risk of a loss. Further, one commenter stated that the investment of one credit union in the Subordinated Debt of another could benefit the credit union system overall because it is likely, or at least possible, that credit unions with higher net worth ratios will invest in those with lower net worth ratios.
Commenters in favor of this type of investment scenario stated that concentration limits would serve as protection against extensive loss transfers, because the investing credit unions would only stand to lose the amount invested, which would be prudentially regulated by the NCUA.
Commenters also suggested that the NCUA add a line item to the Call Report to exclude all amounts invested in the Subordinated Debt of other credit unions. These commenters contended that, because this is primarily a reporting issue, adding a new item to the Call Report to reflect such investments would properly reflect the loss-absorbing capacity of the credit union system. Further, these commenters stated that this would address the NCUAs concern where an FCU issuing and investing in Subordinated Debt causes the appearance of increased net worth in the credit union system, while the actual loss-absorbing capacity of the system remains unchanged.
Conversely, 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 of the NCUSIF.
While most these commenters believe an FCU should be able to be an issuer and investor of Subordinated Debt, the Board continues to believe that an Issuing Credit union should not provide Regulatory Capital to other natural person credit unions. The Board continues to believe the potential to transmit losses between multiple credit unions that have both issued and invested in Subordinated Debt could
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