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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations Pro Forma Financial Statements means projected financial statements that show the effects of proposed transactions as if they actually occurred in a variety of plausible scenarios, including both optimistic and pessimistic assumptions, over measurement horizons that align with the credit unions expected activities.
Qualified Counsel means an attorney licensed to practice law in the relevant jurisdictions who has expertise in the areas of Federal and state securities laws and debt transactions similar to those described in this subpart.
Regulatory Capital means:
1 With respect to an Issuing Credit Union that is a LICU and not a complex credit union, the aggregate outstanding principal amount of Subordinated Debt and, until January 1, 2042, Grandfathered Secondary Capital that is included in the credit unions net worth ratio;
2 With respect to an Issuing Credit Union that is a complex credit union and not a LICU, the aggregate outstanding principal amount of Subordinated Debt that is included in the credit unions RBC Ratio;
3 With respect to an Issuing Credit Union that is both a LICU and a complex credit union, the aggregate outstanding principal amount of Subordinated Debt and, until January 1, 2042, Grandfathered Secondary Capital that is included in its net worth ratio and in its RBC Ratio; and 4 With respect to a new credit union, the aggregate outstanding principal amount of Subordinated Debt and, until January 1, 2042, Grandfathered Secondary Capital that is considered pursuant to 702.207.
Retained Earnings has a meaning that is consistent with the one for this term under United States GAAP.
Risk-based capital RBC ratio has the same meaning as in 702.2.
Senior Executive Officer means a credit unions chief executive officer for example, president or treasurer/
manager, any assistant chief executive officer e.g., any assistant president, any vice president or any assistant treasurer/
manager and the chief financial officer controller. The term Senior Executive Officer also includes employees and contractors of an entity, such as a consulting firm, hired to perform the functions of positions covered by the term Senior Executive Officer.
Subordinated Debt means an Issuing Credit Unions borrowing that meets the requirements of this subpart, including all obligations and contracts related to such borrowing.

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Subordinated Debt Note means the written contracts evidencing the Subordinated Debt.
702.403

Eligibility.

a Subject to receiving approval under 702.408 or 702.409, a credit union may issue Subordinated Debt only if, at the time of such issuance, the credit union is:
1 A complex credit union with a capital classification of at least undercapitalized, as defined in 702.102;
2 A LICU;
3 Able to demonstrate to the satisfaction of the NCUA that it reasonably anticipates becoming either a complex credit union meeting the requirements of paragraph a1 of this section or a LICU within 24 months after issuance of the Subordinated Debt Notes; or 4 A new credit union with Retained Earnings equal to or greater than one percent 1% of assets.
b At the time of issuance of any Subordinated Debt, an Issuing Credit Union may not have any investments, direct or indirect, in Subordinated Debt or Grandfathered Secondary Capital or any interest therein of another credit union. If a credit union acquires Subordinated Debt or Grandfathered Secondary Capital in a merger or other consolidation, the Issuing Credit Union may still issue Subordinated Debt, but it may not invest directly or indirectly in the Subordinated Debt or Grandfathered Secondary Capital of any other credit union while any Subordinated Debt Notes issued by the Issuing Credit Union remain outstanding.
c If the Issuing Credit Union is a complex credit union that is not also a LICU, the aggregate outstanding principal amount of all Subordinated Debt issued by that Issuing Credit Union may not exceed 100 percent of its net worth, as determined at the time of each issuance of Subordinated Debt.
702.404 Requirements of the Subordinated Debt and Subordinated Debt Note.

a Requirements. At a minimum, the Subordinated Debt or the Subordinated Debt Note, as applicable, must:
1 Be in the form of a written, unconditional promise to pay on a specified date a sum certain in money in return for adequate consideration in money;
2 Have, at the time of issuance, a fixed stated maturity of at least five years and not more than 20 years from issuance. The stated maturity of the Subordinated Debt Note may not reset and may not contain an option to extend the maturity;

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3 Be subordinate to all other claims in liquidation under 709.5b of this chapter, and have the same payout priority as all other outstanding Subordinated Debt and Grandfathered Secondary Capital;
4 Be properly characterized as debt in accordance with U.S. GAAP;
5 Be unsecured, including, without limitation, prohibiting the establishment of any legally enforceable claim against funds earmarked for payment of the Subordinated Debt through:
i A compensating balance or any other funds or assets subject to a legal right of offset, as defined by applicable state law; or ii A sinking fund, such as a fund formed by periodically setting aside money for the gradual repayment of the Subordinated Debt;
6 Be applied by the Issuing Credit Union at the end of each of its fiscal years or more frequently as determined by the Issuing Credit Union in which the Subordinated Debt remains outstanding to cover any deficit in Retained Earnings on a pro rata basis among all holders of the Subordinated Debt and Grandfathered Secondary Capital of the Issuing Credit Union; it being understood that any amounts applied to cover a deficit in Retained Earnings shall no longer be considered due and payable to the holders of the Subordinated Debt or Grandfathered Secondary Capital;
7 Except as provided in 702.411
and 702.412c, be payable in full by the Issuing Credit Union or its successor or assignee only at maturity;
8 Disclose any prepayment penalties or restrictions on prepayment;
9 Be offered, issued, and sold only to Entity Accredited Investors or Natural Person Accredited Investors, in accordance 702.406; and 10 Be re-offered, reissued, and resold only to an Entity Accredited Investor if the initial offering, issuance, and sale was solely made to Entity Accredited Investors or any Accredited Investor if the initial offering, issuance, and sale involved one or more Natural Person Accredited Investors.
b Restrictions. The Subordinated Debt or the Subordinated Debt Note, as applicable, must not:
1 Be structured or identified as a share, share account, or any other instrument in the Issuing Credit Union that is insured by the National Credit Union Administration;
2 Include any express or implied terms that make it senior to any other Subordinated Debt issued under this subpart or Grandfathered Secondary Capital;

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