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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations
time the losses are realized. In instances where a LICU accepted secondary capital from the United States Government or any of its subdivisions under the Community Development Capital Initiative of 2010 CDCI
secondary capital and matching funds were required under the Initiative and are on deposit in the form of secondary capital at the time a loss is realized, a LICU must apply either of the following pro-rata loss distribution procedures to its secondary capital accounts with respect to the loss:
i If not inconsistent with any agreements governing other secondary capital on deposit at the time a loss is realized, the CDCI secondary capital may be excluded from the calculation of the pro-rata loss distribution until all of its matching secondary capital has been depleted, thereby causing the CDCI
secondary capital to be held as senior to all other secondary capital until its matching secondary capital is exhausted. The CDCI secondary capital should be included in the calculation of the pro-rata loss distribution and is available to cover the loss only after all of its matching secondary capital has been depleted.
ii Regardless of any agreements applicable to other secondary capital, the CDCI secondary capital and its matching secondary capital may be considered a single account for purposes of determining a pro-rata share of the loss and the amount determined as the pro-rata share for the combined account must first be applied to the matching secondary capital account, thereby causing the CDCI secondary capital to be held as senior to its matching secondary capital. The CDCI
secondary capital is available to cover the loss only after all of its matching secondary capital has been depleted.
8 Security. The secondary capital account may not be pledged or provided by the account investor as security on a loan or other obligation with the LICU
or any other party.
9 Merger or dissolution. In the event of merger or other voluntary dissolution of the LICU, other than merger into another LICU, the secondary capital accounts will be closed and paid out to the account investor to the extent they are not needed to cover losses at the time of merger or dissolution.
10 Contract agreement. A secondary capital account contract agreement must have been executed by an authorized representative of the account investor and of the LICU reflecting the terms and conditions mandated by this section and any other terms and conditions not inconsistent with this section.

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11 Disclosure and acknowledgement. An authorized representative of the LICU and of the secondary capital account investor each must have executed a Disclosure and Acknowledgment as set forth in the appendix to this subpart at the time of entering into the account agreement.
The LICU must retain an original of the account agreement and the Disclosure and Acknowledgment for the term of the agreement, and a copy must be provided to the account investor.
12 Prompt corrective action. As provided in this part, the NCUA may prohibit a LICU as classified critically undercapitalized or, if new, as moderately capitalized, marginally capitalized, minimally capitalized or uncapitalized, as the case may be, from paying principal, dividends, or interest on its uninsured secondary capital accounts established after August 7, 2000, except that unpaid dividends or interest will continue to accrue under the terms of the account to the extent permitted by law.
b Accounting treatment; Recognition of net worth value of accounts1
Debt. A LICU that issued secondary capital accounts pursuant to paragraph a of this section must record the funds on its balance sheet as a debt titled uninsured secondary capital account.
2 Schedule for recognizing net worth value. The LICUs reflection of the net worth value of the accounts in its financial statement may never exceed the full balance of the secondary capital on deposit after any early redemptions and losses. For accounts with remaining maturities of less than five years, the LICU must reflect the net worth value of the accounts in its financial statement in accordance with the lesser of:
i The remaining balance of the accounts after any redemptions and losses; or ii The amounts calculated based on the following schedule:

TABLE 1 TO PARAGRAPH b2ii
Remaining maturity
80
60
40
20
0

3 Financial statement. The LICU
must reflect the full amount of the secondary capital on deposit in a footnote to its financial statement.

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TABLE 2 TO PARAGRAPH c3

Remaining maturity
Net worth value of original balance percent
Four to less than five years
Three to less than four years
Two to less than three years
One to less than two years
Less than one year

c Redemption of secondary capital.
With the written approval of NCUA, secondary capital that is not recognized as net worth under paragraph b2 of this section discounted secondary capital re-categorized as Subordinated Debt may be redeemed according to the remaining maturity schedule in paragraph c3 of this section.
1 Request to redeem secondary capital. A request for approval to redeem discounted secondary capital may be submitted in writing at any time, must specify the increments to be redeemed and the schedule for redeeming all or any part of each eligible increment, and must demonstrate to the satisfaction of NCUA
that:
i The LICU will have a postredemption net worth classification of at least adequately capitalized under this part;
ii The discounted secondary capital has been on deposit at least two years;
iii The discounted secondary capital will not be needed to cover losses prior to final maturity of the account;
iv The LICUs books and records are current and reconciled;
v The proposed redemption will not jeopardize other current sources of funding, if any, to the LICU; and vi The request to redeem is authorized by resolution of the LICUs board of directors.
2 Decision on request. A request to redeem discounted secondary capital may be granted in whole or in part. If a LICU is not notified within 45 days of receipt of a request for approval to redeem secondary capital that its request is either granted or denied, the LICU may proceed to redeem secondary capital accounts as proposed.
3 Schedule for redeeming secondary capital.

Four to less than five years ..
Three to less than four years Two to less than three years One to less than two years ..

Redemption limit as percent of original balance %
20
40
60
80

4 Early redemption exception.
Subject to the written approval of NCUA
obtained pursuant to the requirements of paragraphs c1 and 2 of this section, a LICU can redeem all or part of secondary capital accepted from the United States Government or any of its subdivisions at any time after the
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