Corporate Credit Unions, 71817-71827 [2020-23185]
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§§ 1800.208, 1800.209, and 1800.210
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■ 7. Revise newly redesignated
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■
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§ 1800.305
Federal payment.
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10. Revise § 1800.306 to read as
follows:
payment of any fee or profit to the
recipient.
§ 1800.306
Nanette Smith,
Team Lead, NASA Directives and
Regulations.
■
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§ 1800.312
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education or nonprofit organizations
whose primary purpose is conducting
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regulations at 2 CFR 200.312 through
200.316.
12. Revise § 1800.339 to read as
follows:
■
§ 1800.339
Remedies for noncompliance.
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award recipient noncompliance and
terminate a Federal award in accordance
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and as set forth in the GCAM.
13. Revise § 1800.400 to read as
follows:
■
§ 1800.400
Policy guide.
Payment of fee or profit is consistent
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purpose is the acquisition of goods and
services for the direct benefit or use of
the United States Government, rather
than an activity whose principal
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[FR Doc. 2020–24638 Filed 11–10–20; 8:45 am]
BILLING CODE P
NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Part 704
RIN 3133–AF13
Corporate Credit Unions
National Credit Union
Administration (NCUA).
ACTION: Final rule.
AGENCY:
The NCUA Board (Board) is
issuing a final rule that amends the
NCUA’s corporate credit union
regulation. The final rule updates,
clarifies, and simplifies several
provisions of the NCUA’s corporate
credit union regulation, including:
Permitting a corporate credit union to
make a minimal investment in a credit
union service organization (CUSO)
without the CUSO being classified as a
corporate CUSO under the NCUA’s
rules; expanding the categories of senior
staff positions at member credit unions
eligible to serve on a corporate credit
union’s board; and amending the
minimum experience and independence
requirement for a corporate credit
union’s enterprise risk management
expert.
SUMMARY:
The final rule is effective
December 14, 2020.
DATES:
FOR FURTHER INFORMATION CONTACT:
Policy and Analysis: Robert Dean,
National Supervision Analyst, Office of
National Examinations and Supervision,
(703) 518–6652; Legal: Rachel
Ackmann, Senior Staff Attorney, Office
of General Counsel, (703) 548–2601; or
by mail at National Credit Union
Administration, 1775 Duke Street,
Alexandria, VA 22314.
SUPPLEMENTARY INFORMATION:
I. Introduction
a. Legal Authority and Background
The Board is issuing this rule
pursuant to its authority under the
Federal Credit Union Act (FCU Act).1
Under the FCU Act, the NCUA is the
chartering and supervisory authority for
Federal credit unions (FCUs) and the
federal supervisory authority for
federally insured credit unions (FICUs).
1 12
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U.S.C. 1751 et seq.
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Federal Register / Vol. 85, No. 219 / Thursday, November 12, 2020 / Rules and Regulations
The FCU Act grants the NCUA a broad
mandate to issue regulations governing
both FCUs and FICUs. Section 120 of
the FCU Act is a general grant of
regulatory authority and authorizes the
Board to prescribe regulations for the
administration of the FCU Act.2 Section
209 of the FCU Act is a plenary grant
of regulatory authority to the NCUA to
issue regulations necessary or
appropriate to carry out its role as share
insurer for all FICUs.3 The FCU Act also
includes an express grant of authority
for the Board to subject federally
chartered central, or corporate, credit
unions to such rules, regulations, and
orders as the Board deems appropriate.4
Part 704 of the NCUA’s regulations
implements the requirements of the
FCU Act regarding corporate credit
unions.5 In 2010, the Board
comprehensively revised the regulations
governing corporate credit unions to
provide longer-term structural
enhancements to the corporate system
in response to the financial crisis of
2007–2009.6 The provisions of the 2010
rule successfully stabilized the
corporate system and improved
corporate credit unions’ ability to
function and provide services to natural
person credit unions. Since 2010, and as
part of the Board’s continuous
reevaluation of its regulation of
corporate credit unions, the Board has
amended part 704 on several occasions.7
Part 704 was last amended in 2017,
when the Board amended corporate
credit union capital standards to change
the calculation of capital after a
consolidation and to set a retained
earnings ratio target in meeting prompt
corrective action (commonly referred to
as PCA) standards.8
b. Regulatory Review
Generally, the NCUA reviews all of its
existing regulations every three years.
The NCUA’s Office of General Counsel
maintains a rolling review schedule that
identifies one-third of its existing
regulations for review each year and
provides notice to the public of those
regulations under review so the public
may have an opportunity to comment.
Part 704 was part of the Office of
General Counsel’s 2019 annual
regulatory review.9 The Board received
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2 12
U.S.C. 1766(a).
3 12 U.S.C. 1789.
4 12 U.S.C. 1766(a).
5 12 CFR part 704.
6 75 FR 64786 (Oct. 20, 2010).
7 See e.g., 80 FR 25932 (May 6, 2015), 80 FR
57283 (Sept. 23, 2015), and 82 FR 55497 (Nov. 22,
2017).
8 82 FR 55497 (Nov. 22, 2017).
9 See, https://www.ncua.gov/regulationsupervision/rules-regulations/regulatory-review.
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several comments on updating part 704
as part of the 2019 annual regulatory
review.
II. Proposed Rule
On February 20, 2020, the Board
approved a notice of proposed
rulemaking to update, clarify, and
simplify several provisions of part 704
(proposed rule).10 The proposal
provided for a 60-day comment period,
which was later extended by 60 days
due to COVID–19.11 The comment
period ended on July 27, 2020.
III. Final Rule and Discussion of
Comments
The NCUA received 35 comment
letters on the proposed rule. Comments
were received from credit unions, both
corporate and natural persons, credit
union leagues and trade associations,
individuals, corporate CUSOs, and an
association of state credit union
supervisors. Many of the commenters
supported the stated goal, to update,
clarify, and simplify several provisions
of the NCUA’s corporate credit union
regulation, however, almost all of the
commenters expressed concerns about
specific aspects of the proposal. Most
commenters believed that the proposed
rule did not provide sufficient relief and
requested additional areas of burden
reduction that were beyond the scope of
the proposed rule. In response to the
comments received, the Board has made
several changes to the final rule. The
final rule: (1) Permits a corporate credit
union to make a minimal investment in
a CUSO without the CUSO being
classified as a corporate CUSO and
subject to heightened NCUA oversight;
(2) expands the categories of senior staff
positions at member credit unions
eligible to serve on a corporate credit
union’s board; (3) removes the
experience and independence
requirement for a corporate credit
union’s enterprise risk management
expert; (4) clarifies the definition of a
collateralized debt obligation; and (5)
simplifies the requirement for net
interest income modeling. The specific
details of the final rule, including
changes as a result of the comments
received, are discussed below.
A. Minimal Investment in Natural
Person CUSOs
Part 704 includes specific regulations
for a corporate credit union’s
investment and lending activity and
permits a corporate credit union to
invest in and lend to a corporate CUSO.
A corporate CUSO is defined as an
10 85
11 85
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FR 17288 (Mar. 27, 2020).
FR 20431 (Apr. 13, 2020).
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entity that is at least partly owned by a
corporate credit union; primarily serves
credit unions; restricts its services to
those related to the normal course of
business of credit unions; 12 and is
structured as a corporation, limited
liability company, or limited
partnership under state law.13
Similar to natural person credit union
service organizations (NP CUSOs), the
Board cannot regulate corporate CUSOs
directly, but it can, for safety and
soundness reasons, regulate the types of
investments that corporate credit unions
make and whether a corporate credit
union may invest in a CUSO. Part 704
includes several prudential
requirements to ensure corporate credit
union investment in and lending to
corporate CUSOs is safe and sound. For
example, part 704 regulates aggregate
corporate credit union investment in
and lending to corporate CUSOs. Part
704 also includes customer base
requirements, permissible activities,
accounting and audit standards, and
requires NCUA access to corporate
CUSO facilities, books, and records. In
general, many of the prudential
standards for corporate CUSOs are more
restrictive than the standards for NP
CUSOs.14 The Board has historically
imposed more restrictive standards for
corporate CUSOs as they may serve
hundreds or even thousands of natural
person credit unions and pose unique
systemic risk.15 Additionally, core
functions of corporate credit unions that
pose systemic risk could be moved to
corporate CUSOs. The Board has
expressed concern that the movement of
these core functions to entities that are
not directly regulated by the NCUA
could increase the systemic risk
associated with corporate CUSOs, and
the Board wants to ensure it has a
degree of oversight and control of these
activities.16
12 See,
12 CFR 704.11(e).
CFR 704.11(a).
14 For example, the permissible activities for a
corporate CUSO are more limited than the
permissible activities for a NP CUSO. A corporate
CUSO may seek Board permission to engage in
additional activities, but the process can be
burdensome. In addition, corporate CUSOs are also
subject to more rigorous NCUA oversight. A
corporate CUSO must agree to give the NCUA
complete access to its personnel, facilities,
equipment, books, records, and other
documentation that the NCUA deems pertinent. In
contrast, NP CUSOs must provide the NCUA with
complete access to its books and records and the
ability to review its internal controls, as deemed
necessary by the NCUA. Finally, corporate CUSOs
must provide quarterly financial statements to the
corporate credit union. In contrast, NP CUSOs must
prepare quarterly financial statements, but do not
have to provide the statements to FCUs.
15 74 FR 65210 (Dec. 9, 2009).
16 Id.
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As stated above, a corporate CUSO is
defined as an entity that is at least partly
owned by a corporate credit union;
primarily serves credit unions; restricts
its services to those related to the
normal course of business of credit
unions; and is structured as a
corporation, limited liability company,
or limited partnership under state law.17
The definition is broad and includes no
exception for de minimis, noncontrolling equity investments.
Accordingly, any corporate credit union
equity interest in a CUSO, regardless of
how small a share of the CUSO the
corporate credit union owns, is
sufficient to designate the CUSO as a
corporate CUSO and subject it to
additional requirements under part 704.
The proposed rule amended the
definition of corporate CUSO so that a
corporate credit union could make a de
minimis, non-controlling investment in
a NP CUSO without the CUSO being
deemed a corporate CUSO. Almost all
commenters explicitly approved of this
proposed change, and no commenters
objected to it. The Board is finalizing it
as proposed.
As stated in the proposed rule, the
Board has reconsidered its position that
any corporate credit union investment
in a CUSO must be subject to enhanced
standards under part 704 because the
Board believes that a corporate credit
union’s non-controlling investment does
not pose the same systemic risks to the
credit union system as a controlling
investment. In particular, it is unlikely
that a corporate credit union would
move its essential functions into a noncontrolled CUSO.
The Board has also considered the
benefits of permitting corporate credit
unions to make de minimis, noncontrolling investments in NP CUSOs.
Compared to corporate CUSOs, NP
CUSOs are permitted to engage in a
broader range of permissible activities
and services. Consequently, NP CUSOs
are often a source of collaboration and
innovation among FICUs that may result
in the origination of new products and
services. To compete effectively in
today’s technology-based financial
service market, FICUs may need to rely
increasingly on pooling their resources
to fund CUSOs and to build the
necessary infrastructure. The costs for
research and development, acquisition,
implementation, and specialized staff
capable of managing these new
technologies may be prohibitive for all
but a very few of the largest FICUs.
CUSOs may provide the means for
FICUs to collectively address these
challenges and may enable FICUs to
17 12
CFR 704.11(a).
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collaboratively develop technologies
that better serve their members.
Without the opportunity to invest in
NP CUSOs, a corporate credit union
may be restricted in its ability to
participate in this process. The Board
believes that by expanding corporate
credit union investment authorities,
while still maintaining necessary
safeguards, it can place corporate credit
unions in a better position to participate
in the development of new products and
services. NP CUSOs will also benefit
from a larger pool of potential investors,
which may enable further research and
development during this period of rapid
technological growth.
In addition to amending the definition
of corporate CUSO to permit de
minimis, non-controlling investments in
NP CUSOs, the final rule also makes
several conforming amendments to part
704. The specific details of the
amendments are discussed below.
§ 704.2
Definitions
Consolidated credit union service
organization. Generally, consolidated
CUSOs are those majority-owned by a
corporate credit union. The proposed
rule amended the definition of
consolidated CUSO to use the newly
defined term ‘‘CUSO’’ for clarity. Under
the proposed rule, a consolidated CUSO
was defined as any CUSO the assets of
which are consolidated with those of
the corporate credit union for purposes
of reporting under Generally Accepted
Accounting Principles (GAAP). The
Board received no comment on the
definition of consolidated CUSO and is
finalizing the definition as proposed.
Corporate CUSO. As discussed above,
the proposed rule amended the
definition of a corporate CUSO. Under
the proposed rule, a CUSO is designated
as a corporate CUSO only if one or more
corporate credit unions have a
controlling interest. A corporate credit
union is considered to have a
controlling interest if: (1) The CUSO is
consolidated on a corporate credit
union’s balance sheet; (2) a corporate
credit union has the power, directly or
indirectly, to direct the CUSO’s
management or policies; or (3) a
corporate credit union owns 25 percent
or more of the CUSO’s contributed
equity, stock, or membership interests.18
A CUSO also is designated as a
corporate CUSO if the aggregate
corporate credit union ownership of all
corporates investing in the CUSO meets
or exceeds 50 percent of the CUSO’s
18 The definition is related to the definition of
control in the Federal Deposit Insurance Act for
notices filed under the Change in Bank Control Act.
12 U.S.C. 1817(j).
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71819
contributed equity, stock, or
membership interests. The Board is
concerned that if several corporate
credit unions have a majority ownership
interest in a CUSO, the CUSO could
present the same risk to the credit union
system as a CUSO that is controlled by
one corporate credit union. If any of
these four conditions are met, then the
CUSO meets the definition of a
corporate CUSO and is subject to
additional requirements under part
704.19 No commenters suggested any
changes to the definition of a corporate
CUSO and the Board is finalizing the
definition as proposed.
Credit Union Service Organization
(CUSO). The proposed rule defined the
term CUSO for purposes of part 704.
Under the proposed rule, a CUSO is
both a NP CUSO under part 712 and a
corporate CUSO under § 704.11. The
definition makes it clear that the term
CUSO applies to both NP CUSOs and
corporate CUSOs unless otherwise
stated. For example, when calculating
tier 1 capital under part 704, a corporate
credit union must deduct, in part,
investments in any ‘‘unconsolidated
CUSO.’’ By using the term ‘‘CUSO,’’
instead of the defined terms ‘‘corporate
CUSO’’ and ‘‘consolidated CUSO,’’ the
proposed rule made clear that a
corporate credit union must deduct
unconsolidated investments in both a
NP CUSO and a corporate CUSO. The
Board received no comments on this
definition and is finalizing it as
proposed.20
§§ 704.5 Investments, 704.6 Credit
Risk Management, and 704.7 Lending
The proposed rule removed references
to corporate CUSOs and instead referred
to the general term CUSO because those
provisions continue to apply to a
corporate credit union investing in and
lending to both NP CUSOs and
corporate CUSOs, as explained in detail
below in the discussion of the proposed
changes to § 704.11. The Board received
no comments on these changes and is
finalizing it as proposed.21
§ 704.11 Credit Union Service
Organizations (CUSOs)
Under the proposed rule, § 704.11 was
reorganized for clarity, however, the
substantive requirements for corporate
19 The definition of corporate CUSO also is
moved to § 704.2 for consistency with the location
of other definitions in part 704.
20 The Board received a substantial number of
comments on the aggregation of loans to NP CUSOs
and corporate CUSOs. Those comments will be
discussed below.
21 As noted above, the Board received a
substantial number of comments on the aggregation
of loans to NP CUSOs and corporate CUSOs and
addresses these below.
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CUSOs were not amended. The intent of
the reorganization is to be clear that
certain requirements apply to a
corporate credit union’s investment in
or lending to both NP CUSOs and
corporate CUSOs, certain requirements
apply only to NP CUSOs, and other
requirements apply only to corporate
CUSOs.
The proposed rule set forth the
requirements for all corporate credit
union investments in or lending to
CUSOs. The proposed rule, in
§ 704.11(a), stated that the aggregate
investment and lending limits apply
regardless of whether a corporate credit
union’s investment or loan is to a NP
CUSO or a corporate CUSO. The
proposed rule did not intend to amend
the current aggregate limitations on
investments and lending.22 Under the
current rule, however, the aggregate
investment and lending limits applied
only to corporate CUSOs. A majority of
commenters were concerned that
including loans made to NP CUSOs in
the aggregate limits would
unintentionally limit corporate credit
union lending to NP CUSOs.
Commenters generally requested that
the final rule exclude loans to NP
CUSOs from the aggregate lending
limits. A few commenters stated that
they are supportive of aggregate
limitations for investments in NP and
corporate CUSOs, as well as combined
limits for loans to and investments to an
individual CUSO set as a percentage of
total capital, but not aggregating lending
to NP and corporate CUSOs. The Board
disagrees that the proposed rule would
substantially limit lending to NP
CUSOs. First, the Board does not believe
that corporate credit unions are
currently engaging in substantial
lending activities to NP CUSOs. In
addition, under the current rule,
corporate credit unions are not generally
permitted to make loans to NP CUSOs.23
Additionally, for safety and soundness
reasons, the Board believes it is prudent
for lending and investments to both
natural person and corporate CUSOs to
be subject to the aggregate limitations.
The Board would have safety and
22 12 CFR 704.11(b). In general, the aggregate of
all investments in corporate CUSOs that a corporate
credit union may make must not exceed 15 percent
of a corporate credit union’s total capital. The
aggregate of all investments in and loans to
corporate CUSOs that a corporate credit union may
make must not exceed 30 percent of a corporate
credit union’s total capital. A corporate credit union
may lend to corporate CUSOs an additional 15
percent of total capital if the loan is collateralized
by assets in which the corporate has a perfected
security interest under state law.
23 12 CFR 704.11(h) (‘‘A corporate credit union is
not authorized to . . . loan to a CUSO under part
712 of this chapter.’’).
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soundness concerns if corporate credit
unions lending to NP CUSOs were not
subject to the limitations otherwise
applicable to corporate CUSOs. The
Board, however, notes that if a
particular corporate credit union has a
material volume of loans to a natural
person CUSO, it may request that the
Board issue a waiver from the aggregate
lending and investment limits in the
final rule under 12 CFR 704.1(b). The
Board would consider such a waiver on
a case-by-case basis. Therefore, the
Board has not made any changes to the
aggregate investment and lending limits
and is adopting the limitations without
change in the final rule. Therefore, a
corporate credit union that has already
invested in or loaned the maximum
permitted under the current rule is not
authorized to invest or lend any
additional money. Instead, such a
corporate credit union must reallocate
its investments or loans if it seeks to
make any new investments that are
prohibited.
In § 704.11(b), the proposed rule
stated that all corporate credit union
loans to CUSOs are subject to due
diligence requirements.24 The proposed
rule, as does the current rule, required
corporate credit unions to comply with
certain due diligence requirements from
the NCUA’s member business loans rule
before making a loan to a CUSO. Under
the proposed rule, corporate credit
unions are subject to the commercial
loan policy and due diligence
requirements in the NCUA’s member
business loans rule 25 for lending to both
NP CUSOs and corporate CUSOs.
Several commenters objected to
subjecting corporate credit union loans
to the commercial loan policy and due
diligence requirements in the revised
MBL rule. Commenters generally stated
that the requirements in the MBL rule
are written for the lending activities and
capital structure of natural person credit
unions. Commenters also stated that
corporate credit union lending activities
are adequately regulated by the
requirements of § 704.7 and, if there is
a need for additional rulemaking
regarding lending to CUSOs, that it is
better to make changes to § 704.7
directly. One commenter also noted that
an issue with referencing the MBL rule
is that its lending limits are based upon
net worth, which is a term that is
24 12 CFR 704.11(c). The current rule includes a
cross-reference to due diligence requirements in the
member business loan rule. The member business
loan rule, however, was updated in 2015 and the
cross-referenced requirements have been removed.
Accordingly, the proposed rule updated the cross
references to reflect the revised member business
loan rule.
25 12 CFR 723.4.
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undefined for corporate credit unions.
The Board notes that part 723 adopted
principles-based standards for
commercial loan policies and due
diligence standards. In general, part 723
does not require prescriptive standards.
Accordingly, the Board believes that the
principles outlined in part 723 are
appropriate for most loans to corporate
and NP CUSOs, which the Board
considers general commercial loans.
The Board notes that to the extent part
723 refers to credit unions establishing
limitations based on net worth, such
limitations established by a corporate
credit union would be based on tier 1
capital. As discussed by the
commenters, corporate credit unions do
not use the terminology net worth.
Therefore, under the final rule, a
corporate credit union making loans to
NP or corporate CUSOs must have a
board-approved policy that ensures
corporate credit union lending activities
are performed in a safe and sound
manner by providing for ongoing
control, measurement, and management
of CUSO lending. The policy should
also include qualifications and
experience requirements for personnel
involved in underwriting, processing,
approving, administering, and collecting
loans to CUSOs. The corporate credit
union must also have a loan approval
process, underwriting standards, and
risk management processes
commensurate with the size, scope and
complexity of its CUSO lending. The
Board believes these due diligence
requirements are the minimum
requirements necessary to ensure that
corporate credit unions are engaging in
safe and sound lending practices.
The Board has made one change to
this section in light of commenters
concerns about burden. The Board has
added an exception for loans and lines
of credit to NP and corporate CUSOs
that are fully secured by U.S. Treasury
or agency securities. Loans that are fully
secured by U.S. Treasury or agency
securities present less risk and do not
require the same due diligence
requirements as standard commercial
loans. With this limited modification,
the Board does not believe these
requirements should place a new
burden on corporate credit unions
because any corporate credit union that
is currently making a loan to a corporate
CUSO should be following these basic
safety and soundness principles.
In § 704.11(c), the proposed rule set
forth the regulations governing
corporate credit union investment in
and lending to NP CUSOs. The
proposed rule stated that corporate
credit union investment in and lending
to NP CUSOs are subject to part 712 of
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this chapter. The intent of this section
is to be clear that a CUSO is either
governed under part 704 as a corporate
CUSO, as discussed below, or subject to
part 712 as a NP CUSO. A corporate
credit union investment in a CUSO of a
state-chartered natural person credit
union is also subject to the requirements
in part 712. The Board has made one
clarifying change to this section. Under
the final rule, the Board is clarifying
that the CUSO of a state-chartered
natural person credit union is subject to
the requirements in part 712 as if the
CUSO is a CUSO of an FCU. The Board
wants to clarify that all of the
requirements in part 712, such as the
activity limitations in § 712.5, are
necessary for any corporate credit union
to invest in or loan to a NP CUSO,
regardless of the charter type of the
natural person credit union. If a CUSO
does not meet the standards in part 712,
then a corporate credit union cannot
make the investment or loan.
In § 704.11(d), the proposed rule, like
the current rule, included safety and
soundness requirements for corporate
credit union investments in and loans to
corporate CUSOs. In general, the
proposed rule did not make any
substantive changes to the existing
prudential requirements. The
requirements were reorganized for
clarity and as part of the general
restructuring of § 704.11, but were not
otherwise substantively amended.26 No
commenters objected to these proposed
provisions, and the Board is finalizing
them as proposed.
Finally, in § 704.11(e), the proposed
rule included one new prudential
requirement for corporate credit union
investments in and loans to corporate
CUSOs. The proposed rule stated that
any subsidiary of a corporate CUSO is
automatically designated a corporate
CUSO. The proposed rule also provided
that all tiers or levels of a corporate
CUSO’s structure are subject to the
requirements for corporate CUSOs. No
commenters objected to this proposed
provision, and the Board is finalizing it
as proposed. The Board believes this
level of oversight is necessary for all
tiers of a corporate CUSO because
corporate CUSOs affect not only the
health of the investing corporate credit
union, but also the health of the credit
union system as a whole. Many
corporate CUSOs serve natural person
credit unions directly. As stated
previously, the Board has historically
been concerned that some activities
might migrate from corporate credit
26 The proposed rule included a few nonsubstantive language changes that are only intended
to streamline the provision and enhance clarity.
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unions to CUSOs and their subsidiaries,
and the Board needs to ensure each
layer in the corporate structure is
subject to certain minimal prudential
requirements.
§ 704.19 Disclosure of Executive
Compensation
Section 704.19 currently requires that
each corporate credit union annually
prepare and maintain a document that
discloses the compensation of certain
employees, including compensation
received from a corporate CUSO.27 The
proposal amended § 704.19 to require
that employee compensation from either
a NP CUSO or a corporate CUSO must
be reported. The Board notes that under
the current rule to facilitate this
disclosure, § 704.11(g) requires a
corporate CUSO to disclose
compensation paid to any employees
that are also employees of a corporate
credit union lending to, or investing in,
the CUSO. This provision places the
burden of disclosure on the corporate
CUSO. The proposed rule, however, did
not include a similar requirement for NP
CUSOs.28 No commenters objected to
this proposed provision, and the Board
is finalizing it as proposed. Accordingly,
under the final rule, the dual employee
is required to disclose his or her
compensation from the NP CUSO for the
corporate credit union to make the
required disclosure.
B. Corporate Credit Union Board
Representation
Section 704.14 currently requires that
at least a majority of a corporate credit
union’s board members must serve on
the corporate credit union’s board as a
representative of a member credit
union.29 In addition, any candidate for
a position on the board of a corporate
credit union must hold a senior
management position at a member
credit union and hold that position at
the time he or she is seated on the board
of a corporate credit union. Currently,
only an individual who holds the
position of chief executive officer, chief
financial officer, chief operating officer,
or treasurer/manager at a member credit
union, and will hold that position at the
time he or she is seated on the corporate
credit union board if elected, may seek
27 12
CFR 704.19(a).
Board notes, however, that part 712
prohibits officials and senior management
employees, and their immediate family members of
an FCU with an outstanding loan or investment
from receiving any salary, commission, investment
income, or other income or compensation from the
CUSO, either directly or directly. 12 CFR 712.8.
29 12 CFR 704.14.
28 The
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election or re-election to the corporate
credit union board.
The proposed rule expanded the
credit union officials eligible to serve on
a corporate credit union board. The
proposed rule no longer expressly
limited the corporate credit union board
to the above stated positions and instead
included any person in a senior staff
position at a member credit union. The
proposed rule then listed the current
positions as examples of senior staff
positions that are eligible to serve on a
corporate credit union board. The
proposed rule also included two new
positions, chief information officer and
chief risk officer, in the list of examples
of senior staff positions eligible to serve
on a corporate credit union board. No
commenters objected to this proposed
provision and the Board is finalizing it
as proposed. One commenter, however,
urged the Board to defer to state rules
with respect to governance matters such
as board qualifications. The commenter
further stated that it believes that the
homogenization of the corporate credit
union governance system presents risks
by stifling innovation. The commenter,
however, offered no specific
suggestions. The Board believes that
certain minimum standards are
necessary to ensure adequate corporate
governance.
The Board believes that officials who
hold a senior management position at a
member credit union are qualified
individuals who could offer expertise as
a corporate credit union board member.
Not only do corporate credit union
members have more flexibility in
choosing board members, but expanding
eligible senior staff positions, such as
chief information officer and chief risk
officer, widens the range of expertise on
corporate credit union boards.
C. Enterprise Risk Management
Section 704.21 requires corporate
credit unions to develop and follow an
enterprise risk management policy.30 A
corporate credit union must also
establish an enterprise risk management
committee (ERMC) and include an
independent risk management expert on
the committee. The Board adopted these
requirements in 2011 due to concerns
that corporate credit unions were not
adequately focused on the aggregation of
exposures across entire institutions,
even though the Board believed that
corporate credit unions were adequately
focused on individual risk exposures.31
The current rule includes several
specific requirements regarding the
30 12
CFR 704.21.
FR 23861 (Apr. 29, 2011) and 80 FR 25932
(May 6, 2015).
31 76
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independent risk management expert on
the committee. The risk management
expert must have at least five years of
experience in identifying, assessing, and
managing risk exposures.32 This
experience must be commensurate with
the size of the corporate credit union
and the complexity of its operations. In
addition, the current rule provides what
constitutes independence. A risk
management expert qualifies as
independent if: (1) The expert reports to
the ERMC and to the corporate credit
union’s board of directors; (2) neither
the expert, nor any immediate family
member of the expert, is supervised by
or has any material business or
professional relationship with the chief
executive officer (CEO) of the corporate
credit union, or anyone directly or
indirectly supervised by the CEO; and
(3) neither the expert, nor any
immediate family member of the expert,
has had any of the previously described
relationships for at least the past three
years.33 The Board specifically included
experience and independence
requirements to ensure the enterprise
risk management expert is adequately
qualified and not influenced by the
operational side of the corporate credit
union.34 The proposed rule removed the
prescriptive independence and
experience requirements. No
commenters objected to this proposed
provision, and the Board is finalizing
with one technical amendment. The
final rule clarifies that the risk
management expert may report either to
the corporate credit union’s board of
directors or to the ERMC. Several
commenters also requested that the
prescriptive independence requirements
be removed from the final rule. The
Board clarifies that the prescriptive
independence provisions are also
removed under the final rule.
The Board no longer believes that it
is necessary for prescriptive experience
and independence requirements. The
Board believes the corporate credit
union should have more discretion in
choosing a qualified risk management
expert. The Board does not believe that
a prescriptive five-year experience
requirement is necessary. The Board
believes that corporate credit unions are
in the best position to determine the
appropriate level of experience
necessary for the position. The final rule
also permits the risk management expert
to report directly to the ERMC or the
corporate credit union’s board.
Additionally, the Board believes that
the effectiveness of risk management
32 12
CFR 704.21(c).
CFR 704.21(d).
34 76 FR 23861 (Apr. 29, 2011).
practices is driven by a multitude of
factors, to include policies, processes,
and qualified knowledge. Many
corporate credit unions have integrated
their enterprise risk management
function into their business decision
making, and at many corporate credit
unions, internal corporate staff possess
the skills and experience to capably
manage the enterprise risk management
program. By and large, corporate credit
unions have improved their ability to
assess risk and effectively challenge
evaluations of risk since the current rule
was first adopted. The final rule
provides the corporate credit unions
flexibility to choose an internal risk
management expert instead of engaging
an outside consultant.
The Board, however, notes that even
though independence is no longer an
explicit requirement, for best enterprise
risk management practices, the expert
should have appropriate stature and
authority to effectively manage and lead
an enterprise risk management program.
The expert must be competent to
analyze risks across the institution and
have the capability to communicate
those risks to the board or ERMC despite
potential influence from the operational
side of the corporate credit union. The
NCUA will evaluate the adequacy of a
corporate credit union’s enterprise risk
management practices through the
supervisory process. Sound risk
management is a cornerstone
responsibility of a credit union’s
leadership; therefore, Capital Adequacy,
Asset Quality, Management, Earnings,
and Liquidity/Asset-Liability
Management (CAMEL) and risk ratings
will incorporate the supervisory team’s
assessment of this area. Weaknesses in
risk management may result in
supervisory actions.
D. Natural Person Credit Union
Subordinated Debt Instruments
The Board recently issued a proposed
rule to permit low-income designated
credit unions, complex credit unions,
and new credit unions to issue
subordinated debt instruments for
purposes of regulatory capital treatment
(subordinated debt NPRM).35 If the
Board adopts the proposed rule as final,
it expects additional credit unions to
begin issuing subordinated debt
instruments. Therefore, the Board
believes it is necessary to clarify
whether corporate credit unions may
purchase such instruments and, if so,
the treatment of the investments under
part 704.
The proposed rule created a new
definition for the term natural person
33 12
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credit union subordinated debt
instrument. The proposed rule defined
a natural person credit union
subordinated debt instrument as any
debt instrument issued by a natural
person credit union that is subordinate
to all other claims against the credit
union, including the claims of creditors,
shareholders, and either the National
Credit Union Share Insurance Fund
(NCUSIF) or the insurer of a privately
insured credit union. The Board intends
for this definition to include all
instruments issued under the
subordinated debt NPRM. No
commenters objected to this proposed
definition. The Board, however, is not
finalizing the definition as part of this
final rule. The Board believes it is
prudent to include any changes related
to the subordinated debt NPRM with the
associated subordinated debt final rule.
At this time, the Board does not
envision any changes to the proposed
definition.
The proposed rule also clarified that
corporate credit unions may purchase
the natural person subordinated debt
instruments. This authority is derived
from their lending authority because
subordinated debt instruments are
issued under a natural person credit
union’s borrowing authority.
Additionally, natural person credit
unions are also permitted, subject to
various restrictions and limits, to
purchase such subordinated debt
instruments from other natural person
credit unions under their lending
authority. Treating the purchase of such
subordinated debt instruments as
lending ensures consistent treatment
between natural person credit unions
and corporate credit unions. The final
rule does not explicitly state that a
corporate credit union may purchase a
natural person credit union subordinate
debt instrument because the Board
believes corporate credit unions’ current
lending authority is sufficiently broad to
include purchasing subordinated debt
instruments.
The proposed rule, however, required
that a corporate credit union fully
deduct the amount of the subordinated
debt instrument from its tier 1 capital to
ensure consistent treatment between
investments in the capital of other
corporate credit unions and natural
person credit unions. Corporate credit
unions are currently required to deduct
from tier 1 capital any investments in
perpetual contributed capital and
nonperpetual capital accounts that are
maintained at other corporate credit
unions.36 The proposed rule also asked
36 See the definition of tier 1 capital in 12 CFR
704.2.
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a question on whether it would be more
appropriate to prohibit corporate credit
unions from purchasing subordinated
debt instruments. No commenter
recommended restricting corporate
credit union authority to purchase
subordinated debt instruments.
The Board believes that investments
in natural person credit union
subordinated debt instruments should
be treated similar to investments in
perpetual contributed capital and
nonperpetual capital accounts that are
maintained at other corporate credit
unions as such instruments may qualify
as regulatory capital for the natural
person credit union. The Board is also
concerned about systemic risk if
corporate credit unions own a
significant amount of natural person
credit union issued subordinated debt.
Finally, a natural person credit union
subordinated debt instrument would be
in a first loss position, even before the
NCUSIF and any private insurance fund
or entity. Therefore, an involuntary
liquidation of the issuing credit union
would potentially mean large, and likely
total, losses for the holders of those
subordinated obligations. The Board
believes that fully deducting such
instruments from tier 1 capital ensures
any potential losses do not affect the
capital position of the investing
corporate credit union. This measured
approach strikes the right balance
between providing corporate credit
unions the flexibility to purchase
natural person credit union
subordinated debt instruments and
avoiding undue systemic risk to the
credit union system. For the same
reasons as the definition of natural
person subordinated debt instrument,
the final rule is not including this
amendment. The amendment will be
included with any final rule on
subordinated debt.
E. Approved Corporate CUSO Activities
Part 704 does not list the permissible
activities for corporate CUSOs in the
regulatory text of part 704 of the Code
of Federal Regulations, unlike part 712,
which does so for NP CUSOs.37 Instead,
§ 704.11 requires that, generally, a
corporate CUSO must agree that it will
limit its services to brokerage services,
investment advisory services, and other
categories of services as preapproved by
NCUA and published on NCUA’s
website.38 A CUSO that desires to
engage in an activity not preapproved
by NCUA can apply to NCUA for that
37 12
CFR 712.5(b).
38 https://www.ncua.gov/regulation-supervision/
corporate-credit-unions/corporate-cuso-activities/
approved-corporate-cuso-activities.
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approval. To increase transparency and
make it easier for corporate credit
unions to determine if an activity has
previously been determined by the
Board to be permissible, the proposed
rule contained a provision to replace the
permissible activities list from the
NCUA website with a new appendix to
part 704. No commenter supported this
change, and almost all commenters
specifically objected to it. Commenters
generally stated that the change would
increase regulatory burden and make it
more difficult for corporate CUSOs to
obtain timely approval to add
permissible activities to the list.
Commenters were primarily concerned
about the added burden of formally
adding activities through notice-andcomment rulemaking. Other
commenters also discussed the need to
make rapid changes to the list of
preapproved activities in response to
the pace of development from financial
technology (fintech) companies.
Commenters also suggested moving the
list of preapproved activities for NP
CUSOs to the NCUA’s website. The
Board notes that moving the list of
preapproved activities for NP CUSOs
would be outside the scope of the
proposed rule. Finally, one commenter
recommended codifying the practice of
consulting with state regulators before
making a determination on ‘‘other
activities’’ for state chartered corporate
credit union CUSOs.
In light of commenters’ feedback, the
Board will not adopt this proposed
change regarding approval of corporate
CUSO activities. The proposed change
was intended to increase transparency.
The Board is mindful of any unintended
procedural burden the change might
entail and therefore declines to adopt it.
Instead, the agency’s website will
continue to list approved corporate
CUSO activities. The current process to
request approval of new corporate
CUSO activities remains unchanged and
is described on the web page that
includes the list of approved
activities.39
F. Definition of Collateralized Debt
Obligation
Corporate credit unions are prohibited
from purchasing certain overly complex
or leveraged investments, including
collateralized debt obligations
(commonly referred to as CDOs).40
Under the current rule, the term CDO
39 Corporate CUSO Activities, https://
www.ncua.gov/regulation-supervision/corporatecredit-unions/corporate-cuso-activities.
40 The prohibition on purchasing CDOs was
intended to protect corporate credit unions from the
potential for excessive investment losses. 75 FR
64786, 64793 (Oct. 20, 2010).
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means a debt security collateralized by
mortgage-backed securities, other assetbacked securities, or corporate
obligations in the form of nonmortgage
loans or debt. The term does not
include: (1) Senior tranches of ReREMICs consisting of senior mortgageand asset-backed securities; (2) Any
security that is fully guaranteed as to
principal and interest by the U.S.
Government or its agencies or its
sponsored enterprises; or (3) Any
security collateralized by other
securities where all the underlying
securities are fully guaranteed as to
principal and interest by the U.S.
Government or its agencies or its
sponsored enterprises.41 The proposed
rule amended the definition of CDO to
clarify that the definition includes both
loans and debt securities. The proposed
rule changed the defined term to
‘‘collateralized loan or debt obligation,’’
but did not otherwise amend the
definition. No commenter objected to
the substance of the change, however,
several commenters requested a revision
to the proposed language. Commenters
generally wanted to use language that is
consistent with industry terminology
and recommended having separate
definitions for CDOs and Collateralized
Loan Obligations (referred to as
‘‘CLOs’’). In response to commenter
concerns about clarity, the final rule
uses the term ‘‘collateralized debt
obligation or collateralized loan
obligation.’’ The Board intends no
substantive changes as a result of the
amended terminology and has made no
change to the definition. This
amendment is only intended to resolve
any confusion among industry
participants concerning whether
collateralized loans meet the definition
and are therefore prohibited. The Board
believes amending the name of the
defined term clarifies the Board’s intent
that collateralized loans meeting the
definition are also prohibited.
G. Net Interest Income Modeling
Under the current rule, a corporate
credit union must perform net interest
income (NII) modeling to project
earnings in multiple interest rate
environments for a period of no less
than two years.42 NII modeling must, at
minimum, be performed quarterly,
including once on the last day of the
calendar quarter. The proposed rule
made a change to the timeframe for NII.
Under the proposed rule, a corporate
credit union is not required to perform
NII modeling for two years and instead
only is required to perform modeling for
41 12
42 12
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a period of no less than one year. In
general, commenters were either
indifferent to or not supportive of the
proposed change. Some commenters
noted that ALM models already are built
for the two-year NII projections, so this
change will not provide any real
regulatory relief. Some commenters
stated that reducing the required NII
modeling from two years to one year
will not increase the accuracy of the NII
forecast (however another commenter
stated that the one-year forecasts are
more accurate as there are more
unknowns impacting a balance sheet
using the two-year timeframe). Several
commenters stated that the same inputs
and assumptions will still have to be
incorporated into the NII model and that
the two-year timeframe was appropriate.
Other commenters recommended that
the NCUA instead increase the
‘‘weighted-average life’’ (WAL) limit
beyond the current two-year limit.
These commenters stated that a longerterm WAL would allow corporate credit
unions to more effectively manage NII
through varying economic and interest
rate scenarios. The Board has not
adopted any amendments to the WAL at
this time. The Board continues to
believe that the two-year WAL limit
reflects the fact that corporate credit
unions are, first and foremost, providers
of payment systems, which, in turn,
requires some matching of the
investment portfolio to the short term
payment liabilities to ensure liquidity
for the payments system. The Board
believes that a longer-term WAL is
unnecessary given the primary purpose
of corporate credit unions as providers
of payment systems.
Therefore, the Board is only amending
the requirements for NII given that
corporate credit unions are also subject
to a two-year WAL limit.43 Under the
current rule, a corporate credit union
must test its financial assets at least
quarterly, including once on the last day
of the calendar quarter, for compliance
with this limitation. If the WAL of a
corporate credit union’s assets exceeds
two years on the testing date, this test
must be calculated at least monthly,
including once on the last day of the
month, until the WAL is below two
years.
The Board believes that NII modeling
performed over a longer period than the
WAL limits for asset maturities is less
useful because the corporate credit
union also has to estimate what
reinvestments occur over the two-year
period beyond simply estimating
interest cash flows on assets. In
addition, corporate credit unions
43 12
CFR 704.8(f).
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already conduct net economic value
analyses which capture a long-term
view of interest rate risk. Allowing
corporate credit unions to model NII
over a one year period provides
increased flexibility for corporate credit
unions to measure NII over a shorter,
and more appropriate, time period, such
as when financial assets and liabilities
are predominately short term (such as
less than one year). The Board believes
that NII modeling over a one-year period
sufficiently captures a corporate credit
union’s short-term interest rate risk. To
the extent commenters stated their
models are already based on two-year
projections, the final rule does not
require corporate credit unions to
change their models. The final rule only
requires that a corporate credit union
must perform NII modeling for a period
of no less than 1 year. Therefore, a
model projecting a period of two years
still complies with the final rule.
H. Technical Amendment
A few commenters requested that the
Board clarify which type of loans would
need to comply with the MBL rule. The
current rule states that loans, lines of
credit, and letters of credit to other
members not excluded under § 723.1(b)
must comply with part 723 unless the
loan or line of credit is fully guaranteed
by a credit union or fully secured by
U.S. Treasury or agency securities. The
current regulation also states that those
guaranteed and secured loans must
comply with the aggregate limits of
§ 723.16 but are exempt from the other
requirements of part 723. Commenters
suggested a technical correction to
update the cross-reference, which cites
to an outdated provision of the MBL
rule. The Board has made the requested
technical amendment. Under the final
rule, the section of the MBL rule crossreferenced is § 723.8.
I. Comments Outside the Scope of the
Proposed Rule
Many commenters recommended that
the Board consider additional burden
reduction for corporate credit unions. In
general, these recommendations are not
a logical outgrowth of the proposed rule
and, thus, are outside the scope of this
rulemaking. A general discussion of the
recommendations is included below.
1. A few commenters requested that
the Board clarify that the existing 15
percent limit on commercial mortgagebacked securities applies to ‘‘private’’
commercial mortgage-backed securities
and not agency commercial mortgagebacked securities (ACMBS). These
commenters stated that ACMBS carry
the same credit risk as agency
residential MBS.
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2. Several commenters requested
additional flexibility to allow corporate
credit unions with higher capital ratios
to extend their WAL limitations. These
commenters also recommended that a
liquidity management policy and
procedures be established that
incorporate the following: Liquidity
strategy for various economic
conditions; defined liquidity risk
profiles under various economic
conditions; and liquidity buffer
consisting of highly liquid assets. Some
commenters also suggested including
permission for longer WAL limitations
in Appendix B, Expanded Authorities.
3. Several commenters also
recommended that the Board extend the
maturity limit on secured borrowing
from 180 days to 1 year to cover a full
cycle of seasonal cash outflows (one
commenter recommended two years).
Commenters also requested a change in
the limit for secured non-liquidity
borrowings from the tier 1 capital in
excess of five percent of moving daily
average net assets to 100 percent of total
capital (one commenter recommended
using tier 1 capital).
4. Several commenters requested that
the Board permit non-CUSO
investments for the purpose of allowing
corporate credit unions reasonable
ability to invest a small percentage of
their capital in entities outside the
credit union system (such as fintechs).
5. Two commenters requested that the
Board permit a modest increase in the
individual borrower limit.
6. A few commenters recommended
that Appendix B, Expanded Authorities,
clarify that any investment that
deteriorates below investment grade, as
defined in § 704.2, would require an
investment action plan in compliance
with § 704.10.
7. One commenter recommended
establishing a task force with state
regulators to review future adjustments
to the corporate credit union rules. The
commenter also recommended
reintroducing meaningful dual
chartering by eliminating unnecessary
preemption of state rules, particularly
with respect to corporate credit union
governance; and enhancing the joint
supervision of corporates. The
commenter also recommended
increased information sharing between
the NCUA and the state regulators
supervising the corporate credit union’s
natural person credit union members.
8. One trade organization commenter
recommended that the agency should
consider ways in which it can wind
down the NCUA guaranteed notes
program (known as the NGN Program)
so that credit unions that paid into the
Temporary Corporate Credit Union
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Stabilization Fund and invested in
certain corporates are made whole. The
commenter stated that the NCUA’s
determination that the asset
management estates of the various failed
corporates must remain distinct means
that recoveries from one estate cannot
be comingled to pay obligations of other
estates; however, the commenter stated
that the agency still has time to
reconsider this position and invite
comments from credit unions who
might bear a greater loss if the NCUA
proceeds along its present course.
9. One trade organization commenter
also recommended that the Board
explore a framework to engage with
fintech companies so credit unions can
more easily sustain continued
innovation in the credit union industry.
VII. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
generally requires that, in connection
with a final rule, an agency prepare and
make available for public comment a
final regulatory flexibility analysis that
describes the impact of a final rule on
small entities (defined for purposes of
the RFA to include credit unions with
assets less than $100 million).44 A
regulatory flexibility analysis is not
required, however, if the agency
certifies that the rule will not have a
significant economic impact on a
substantial number of small entities and
publishes its certification and a short,
explanatory statement in the Federal
Register together with the rule.
This final rule does not have a
significant economic impact on a
substantial number of small entities.
There are no corporate credit unions
under $100 million in assets. Therefore,
the Board certifies that the rule will not
have a significant economic impact on
a substantial number of small entities.
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Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA) applies to information collection
requirements in which an agency
creates a new paperwork burden on
regulated entities or modifies an
existing burden. For purposes of the
PRA, a paperwork burden may take the
form of a reporting, recordkeeping, or
third-party disclosure requirement, each
referred to as an information collection.
The NCUA may not conduct or sponsor,
and the respondent is not required to
respond to, an information collection
unless it displays a currently valid
Office of Management and Budget
(OMB) control number.
The final rule amends 12 CFR part
704, in part, to address minimal
investments by a corporate credit union
in a CUSO without the CUSO being
classified as a corporate CUSO. The
information collection requirements
associated with this provision are
cleared under OMB control number
3133–0129 and there are no other new
information collection requirements
associated with this final rule.
Executive Order 13132
Executive Order 13132 encourages
independent regulatory agencies to
consider the impact of their actions on
state and local interests. In adherence to
fundamental federalism principles, the
NCUA, an independent regulatory
agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the principles
of the Executive Order. This rulemaking
will not have a substantial direct effect
on the states, on the connection between
the national government and the states,
or on the distribution of power and
responsibilities among the various
levels of government. The NCUA has
determined that this final rule does not
constitute a policy that has federalism
implications for purposes of the
Executive Order.
Assessment of Federal Regulations and
Policies on Families
The NCUA has determined that this
final rule does not affect family wellbeing within the meaning of section 654
of the Treasury and General
Government Appropriations Act, 1999,
Public Law 105–277, 112 Stat. 2681
(1998).
Small Business Regulatory Enforcement
Fairness Act
The Small Business Regulatory
Enforcement Fairness Act of 1996 (Pub.
L. 104–121) (SBREFA) generally
provides for congressional review of
agency rules.45 A reporting requirement
is triggered in instances where the
NCUA issues a final rule as defined by
Section 551 of the APA.46 An agency
rule, in addition to being subject to
congressional oversight, may also be
subject to a delayed effective date if the
rule is a ‘‘major rule.’’ 47 The NCUA
does not believe this rule is a ‘‘major
rule’’ within the meaning of the relevant
sections of SBREFA. As required by
SBREFA, the NCUA will submit this
final rule to OMB for it to determine if
the final rule is a ‘‘major rule’’ for
purposes of SBREFA. The NCUA also
will file appropriate reports with
45 5
U.S.C. 801–804.
U.S.C. 551.
47 5 U.S.C. 804(2).
46 5
44 See
80 FR 57512 (Sept. 24, 2015).
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71825
Congress and the Government
Accountability Office so this rule may
be reviewed.
List of Subjects in 12 CFR Part 704
Credit unions, Corporate credit
unions, Reporting and recordkeeping
requirements.
By the National Credit Union
Administration Board on October 15, 2020.
Melane Conyers-Ausbrooks,
Secretary of the Board.
For the reasons discussed in the
preamble, the Board amends 12 CFR
part 704, as follows:
PART 704—CORPORATE CREDIT
UNIONS
1. The authority citation for part 704
continues to read as follows:
■
Authority: 12 U.S.C. 1766(a), 1781, and
1789.
2. In § 704.2:
a. Revise the definitions for
‘‘Collateralized Debt Obligation’’, and
‘‘Consolidated Credit Union Service
Organization’’; and
■ b. Add definitions for ‘‘Corporate
CUSO’’, and ‘‘Credit Union Service
Organization (CUSO)’’, in alphabetical
order, to read as follows:
■
■
§ 704.2
Definitions.
*
*
*
*
*
Collateralized Debt Obligation or
Collateralized Loan Obligation means a
debt security collateralized by mortgagebacked securities, other asset-backed
securities, or corporate obligations in
the form of nonmortgage loans or debt.
For purposes of this part, the term
collateralized debt obligation or
collateralized loan obligation does not
include:
(1) Senior tranches of Re-REMIC’s
consisting of senior mortgage-and assetbacked securities;
(2) Any security that is fully
guaranteed as to principal and interest
by the U.S. Government or its agencies
or its sponsored enterprises; or
(3) Any security collateralized by
other securities where all the underlying
securities are fully guaranteed as to
principal and interest by the U.S.
Government or its agencies or its
sponsored enterprises.
*
*
*
*
*
Consolidated Credit Union Service
Organization (Consolidated CUSO)
means any CUSO the assets of which are
consolidated with those of the corporate
credit union for purposes of reporting
under Generally Accepted Accounting
Principles (GAAP). Generally,
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Federal Register / Vol. 85, No. 219 / Thursday, November 12, 2020 / Rules and Regulations
consolidated CUSOs are majority-owned
CUSOs.
*
*
*
*
*
Corporate CUSO means a CUSO, as
defined in part 712 of this chapter, that:
(1) Is a consolidated CUSO;
(2) A corporate credit union has the
power, directly or indirectly, to direct
the CUSO’s management or policies;
(3) A corporate credit union owns 25
percent or more of the CUSO’s
contributed equity, stock, or
membership interests; or
(4) The aggregate corporate credit
union ownership meets or exceeds 50
percent of the CUSO’s contributed
equity, stock, or membership interests.
Credit union service organization
(CUSO) means both a CUSO under part
712 of this chapter and a corporate
CUSO under this part.
*
*
*
*
*
■ 3. Revise § 704.5(c)(3) and (h)(6) to
read as follows:
§ 704.5
Investments.
*
*
*
*
*
(c) * * *
(3) CUSOs, subject to the limitations
of § 704.11;
*
*
*
*
*
(h) * * *
(6) Purchasing collateralized debt
obligations or collateralized loan
obligations;
*
*
*
*
*
§ 704.6
[Amended]
4. In § 704.6(c)(2)(vi), remove the
word ‘‘corporate’’ before the word
‘‘CUSO.’’
■
§ 704.7
[Amended]
5. In § 704.7 remove the word
‘‘corporate’’ before the word ‘‘CUSO’’
each place the word appears and replace
‘‘§ 723.16’’ with ‘‘§ 723.8.’’
■
§ 704.8
[Amended]
6. In § 704.8(e) replace the phrase ‘‘no
less than 2 years’’ with ‘‘no less than 1
year.’’
■ 7. Revise § 704.11 to read as follows:
■
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§ 704.11 Credit Union Service
Organizations (CUSOs).
(a) Investment and loan limitations.
(1) The aggregate of all investments in
member and non-member CUSOs that a
corporate credit union may make must
not exceed 15 percent of a corporate
credit union’s total capital.
(2) The aggregate of all investments in
and loans to member and nonmember
CUSOs a corporate credit union may
make must not exceed 30 percent of a
corporate credit union’s total capital. A
corporate credit union may lend to
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member and nonmember CUSOs an
additional 15 percent of total capital if
the loan is collateralized by assets in
which the corporate has a perfected
security interest under state law.
(3) If the limitations in paragraphs
(a)(1) and (2) of this section are reached
or exceeded because of the profitability
of the CUSO and the related GAAP
valuation of the investment under the
equity method without an additional
cash outlay by the corporate, divestiture
is not required. A corporate credit union
may continue to invest up to the
regulatory limit without regard to the
increase in the GAAP valuation
resulting from the CUSO’s profitability.
(b) Due diligence. A corporate credit
union must comply with the
commercial loan policy and due
diligence requirements of § 723.4 of this
chapter for all loans to CUSOs unless
the loan or line of credit is fully secured
by U.S. Treasury or agency securities.
(c) Requirements for CUSOs that are
not corporate CUSOs. Corporate credit
union investments in and lending to
CUSOs that are not corporate CUSOs are
subject to part 712 of this chapter,
except that investment and loan
limitations and due diligence
requirements are governed by this
section. CUSOs of state-chartered
natural person credit unions are subject
to part 712 of this chapter to the same
extent as a CUSO of a federal credit
union.
(d) Requirements for corporate
CUSOs. Corporate credit union
authority to invest in or loan to a
corporate CUSO is limited to that
provided in this section.
(1) Structure. A corporate CUSO must
be structured as a corporation, limited
liability company, or limited
partnership under state law.
(2) Separate entity. (i) A corporate
CUSO must be operated as an entity
separate from a corporate credit union.
(ii) A corporate credit union investing
in or lending to a corporate CUSO must
obtain a written legal opinion that
concludes the corporate CUSO is
organized and operated in a manner that
the corporate credit union will not
reasonably be held liable for the
obligations of the corporate CUSO. This
opinion must address factors that have
led courts to ‘‘pierce the corporate veil,’’
such as inadequate capitalization, lack
of corporate identity, common boards of
directors and employees, control of one
entity over another, and lack of separate
books and records.
(3) Permissible activities. (i) A
corporate CUSO must agree to limit its
activities to:
(A) Brokerage services,
(B) Investment advisory services, and
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Fmt 4700
Sfmt 4700
(C) Other categories of activities as
approved in writing by the NCUA and
published on the NCUA’s website.
(ii) Once the NCUA has approved an
activity and published that activity on
its website, the NCUA will not remove
that particular activity from the
approved list, or make substantial
changes to the content or description of
that approved activity, except through
the formal rulemaking process.
(4) Compensation restrictions. An
official of a corporate credit union
which has invested in or loaned to a
corporate CUSO may not receive, either
directly or indirectly, any salary,
commission, investment income, or
other income, compensation, or
consideration from the corporate CUSO.
This prohibition also extends to
immediate family members of officials.
(5) Written agreement between the
corporate credit union and corporate
CUSO. Prior to making an investment in
or loan to a corporate CUSO, a corporate
credit union must obtain a written
agreement that the corporate CUSO:
(i) Will follow GAAP;
(ii) Will provide financial statements
to the corporate credit union at least
quarterly;
(iii) Will obtain an annual CPA
opinion audit and provide a copy to the
corporate credit union. A consolidated
CUSO is not required to obtain a
separate annual audit if it is included in
the corporate credit union’s annual
audit;
(iv) Will provide the reports as
required by § 712.3(d)(4) and (5) of this
chapter;
(v) Will not acquire control, directly
or indirectly, of another depository
financial institution or to invest in
shares, stocks, or obligations of an
insurance company, trade association,
liquidity facility, or similar
organization;
(vi) Will allow the auditor, board of
directors, and NCUA complete access to
the CUSO’s personnel, facilities,
equipment, books, records, and any
other documentation that the auditor,
directors, or NCUA deem pertinent;
(vii) Will inform the corporate, at least
quarterly, of all the compensation paid
by the CUSO to its employees who are
also employees of the corporate credit
union; and
(viii) Will comply with all the
requirements of this section.
(e) Subsidiary restrictions. Any
subsidiary of a corporate CUSO is
automatically designated a corporate
CUSO and subject to all the
requirements of this section. The
requirements of this section apply to all
tiers or levels of a corporate CUSO’s
structure.
E:\FR\FM\12NOR1.SGM
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Federal Register / Vol. 85, No. 219 / Thursday, November 12, 2020 / Rules and Regulations
8. Revise § 704.14(a)(2) to read as
follows:
■
§ 704.14
Representation.
*
*
*
*
*
(a) * * *
(2) Only an individual who currently
holds a senior staff position (e.g.,
position of chief executive officer, chief
financial officer, chief operating officer,
chief information officer, chief risk
officer, treasurer/manager, etc.) at a
member credit union, and will hold that
position at the time he or she is seated
on the corporate credit union board if
elected, may seek election or re-election
to the corporate credit union board;
*
*
*
*
*
§ 704.19
[Amended]
9. In § 704.19(a), remove the word
‘‘corporate’’ before the word ‘‘CUSO’’.
■ 10. In § 704.21, revise paragraph (c)
and remove paragraphs (d) and (e) to
read as follows:
■
§ 704.21
Enterprise risk management.
*
*
*
*
*
(c) The ERMC must include at least
one risk management expert who may
report either directly to the board of
directors or to the ERMC. The risk
management expert’s experience must
be commensurate with the size of the
corporate credit union and the
complexity of its operations.
[FR Doc. 2020–23185 Filed 11–10–20; 8:45 am]
BILLING CODE 7535–01–P
NATIONAL AERONAUTICS AND
SPACE ADMINISTRATION
[Document No: NASA–20–088; Docket No:
NASA–2020–0005]
RIN 2700–AE57
NASA Seal, NASA Insignia, NASA
Logotype, NASA Program Identifiers,
NASA Flags, and the Agency’s Unified
Visual Communications System
National Aeronautics and
Space Administration.
ACTION: Direct final rule.
AGENCY:
This direct final rule makes
nonsubstantive changes to add the
NASA Graphics Standards Manual and
make other administrative updates.
DATES: This direct final rule is effective
on January 11, 2021. Comments due on
or before December 14, 2020.
ADDRESSES: Comments must be
identified with RINs 2700–AE57 and
may be sent to NASA via the Federal ERulemaking Portal: https://
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FOR FURTHER INFORMATION CONTACT:
Bert
Ulrich, 202–358–1713, bert.ulrich@
nasa.gov.
SUPPLEMENTARY INFORMATION:
Direct Final Rule and Significant
Adverse Comments
NASA has determined this
rulemaking meets the criteria for a
direct final rule because it makes
nonsubstantive changes to add the
NASA Graphics Standards Manual and
makes other administrative updates. No
opposition to the changes and no
significant adverse comments are
expected. However, if NASA receives
significant adverse comments, it will
withdraw this direct final rule by
publishing a notice in the Federal
Register. A significant adverse comment
is one that explains: (1) Why the direct
final rule is inappropriate, including
challenges to the rule’s underlying
premise or approach; or (2) why the
direct final rule will be ineffective or
unacceptable without a change. In
determining whether a comment
necessitates withdrawal of this direct
final rule, NASA will consider whether
it warrants a substantive response in a
notice and comment process.
Background
14 CFR Part 1221
SUMMARY:
www.regulations.gov. Follow the online
instructions for submitting comments.
Please note that NASA will post all
comments on the internet with changes,
including any personal information
provided.
Subpart 1 of part 1221, last amended
November 5, 1993 [58 FR 58944], sets
forth the policy governing the use of the
NASA Seal, the NASA Insignia, NASA
Logotype, NASA Program Identifiers,
and the NASA Flags. This subpart also
establishes and sets forth the concept
and scope of the NASA Unified Visual
Communications System and prescribes
the policy and guidelines for
implementation of the system. It is
amended to add the NASA Graphics
Standards Manual and make other
administrative updates.
Statutory Authority
The National Aeronautics and Space
Act (the Space Act), 51 U.S.C. 20113 (a),
authorizes the Administrator of NASA
to make, promulgate, issue, rescind, and
amend rules and regulations governing
the manner of its operations and the
exercise of the powers vested in it by
law.
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71827
Regulatory Analysis
Executive Order 12866, Regulatory
Planning and Review and Executive
Order 13563, Improvement Regulation
and Regulation Review
Executive Orders 13563 and 12866
direct agencies to assess all costs and
benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits
(including potential economic,
environmental, public health and safety
effects, distributive impacts, and
equity). E.O. 13563 emphasizes the
importance of quantifying both costs
and benefits, of reducing costs, of
harmonizing rules, and of promoting
flexibility. This rule has been
designated as ‘‘not significant’’ under
section 3(f) of E.O. 12866.
Review Under the Regulatory
Flexibility Act
The Regulatory Flexibility Act (5
U.S.C. 601 et seq.) requires an agency to
prepare an initial regulatory flexibility
analysis to be published at the time the
proposed rule is published. This
requirement does not apply if the
agency ‘‘certifies that the rule will not,
if promulgated, have a significant
economic impact on a substantial
number of small entities’’ (5 U.S.C. 603).
This rule adds the NASA Graphics
Standards Manual and make other
administrative updates Subpart 1 of part
1221 and, therefore, does not have a
significant economic impact on a
substantial number of small entities.
Review Under the Paperwork
Reduction Act
This direct final rule does not contain
any information collection requirements
subject to the Paperwork Reduction Act
of 1995 (44 U.S.C. 3501 et seq.).
Review Under E.O. 13132
E.O. 13132, ‘‘Federalism,’’ 64 FR
43255 (August 4, 1999) requires
regulations be reviewed for Federalism
effects on the institutional interest of
states and local governments, and if the
effects are sufficiently substantial,
preparation of the Federal assessment is
required to assist senior policy makers.
The amendments will not have any
substantial direct effects on state and
local governments within the meaning
of the E.O. Therefore, no Federalism
assessment is required.
E:\FR\FM\12NOR1.SGM
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]]>Agencies
[Federal Register Volume 85, Number 219 (Thursday, November 12, 2020)]
[Rules and Regulations]
[Pages 71817-71827]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23185]
=======================================================================
-----------------------------------------------------------------------
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 704
RIN 3133-AF13
Corporate Credit Unions
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The NCUA Board (Board) is issuing a final rule that amends the
NCUA's corporate credit union regulation. The final rule updates,
clarifies, and simplifies several provisions of the NCUA's corporate
credit union regulation, including: Permitting a corporate credit union
to make a minimal investment in a credit union service organization
(CUSO) without the CUSO being classified as a corporate CUSO under the
NCUA's rules; expanding the categories of senior staff positions at
member credit unions eligible to serve on a corporate credit union's
board; and amending the minimum experience and independence requirement
for a corporate credit union's enterprise risk management expert.
DATES: The final rule is effective December 14, 2020.
FOR FURTHER INFORMATION CONTACT: Policy and Analysis: Robert Dean,
National Supervision Analyst, Office of National Examinations and
Supervision, (703) 518-6652; Legal: Rachel Ackmann, Senior Staff
Attorney, Office of General Counsel, (703) 548-2601; or by mail at
National Credit Union Administration, 1775 Duke Street, Alexandria, VA
22314.
SUPPLEMENTARY INFORMATION:
I. Introduction
a. Legal Authority and Background
The Board is issuing this rule pursuant to its authority under the
Federal Credit Union Act (FCU Act).\1\ Under the FCU Act, the NCUA is
the chartering and supervisory authority for Federal credit unions
(FCUs) and the federal supervisory authority for federally insured
credit unions (FICUs).
[[Page 71818]]
The FCU Act grants the NCUA a broad mandate to issue regulations
governing both FCUs and FICUs. Section 120 of the FCU Act is a general
grant of regulatory authority and authorizes the Board to prescribe
regulations for the administration of the FCU Act.\2\ Section 209 of
the FCU Act is a plenary grant of regulatory authority to the NCUA to
issue regulations necessary or appropriate to carry out its role as
share insurer for all FICUs.\3\ The FCU Act also includes an express
grant of authority for the Board to subject federally chartered
central, or corporate, credit unions to such rules, regulations, and
orders as the Board deems appropriate.\4\
---------------------------------------------------------------------------
\1\ 12 U.S.C. 1751 et seq.
\2\ 12 U.S.C. 1766(a).
\3\ 12 U.S.C. 1789.
\4\ 12 U.S.C. 1766(a).
---------------------------------------------------------------------------
Part 704 of the NCUA's regulations implements the requirements of
the FCU Act regarding corporate credit unions.\5\ In 2010, the Board
comprehensively revised the regulations governing corporate credit
unions to provide longer-term structural enhancements to the corporate
system in response to the financial crisis of 2007-2009.\6\ The
provisions of the 2010 rule successfully stabilized the corporate
system and improved corporate credit unions' ability to function and
provide services to natural person credit unions. Since 2010, and as
part of the Board's continuous reevaluation of its regulation of
corporate credit unions, the Board has amended part 704 on several
occasions.\7\ Part 704 was last amended in 2017, when the Board amended
corporate credit union capital standards to change the calculation of
capital after a consolidation and to set a retained earnings ratio
target in meeting prompt corrective action (commonly referred to as
PCA) standards.\8\
---------------------------------------------------------------------------
\5\ 12 CFR part 704.
\6\ 75 FR 64786 (Oct. 20, 2010).
\7\ See e.g., 80 FR 25932 (May 6, 2015), 80 FR 57283 (Sept. 23,
2015), and 82 FR 55497 (Nov. 22, 2017).
\8\ 82 FR 55497 (Nov. 22, 2017).
---------------------------------------------------------------------------
b. Regulatory Review
Generally, the NCUA reviews all of its existing regulations every
three years. The NCUA's Office of General Counsel maintains a rolling
review schedule that identifies one-third of its existing regulations
for review each year and provides notice to the public of those
regulations under review so the public may have an opportunity to
comment. Part 704 was part of the Office of General Counsel's 2019
annual regulatory review.\9\ The Board received several comments on
updating part 704 as part of the 2019 annual regulatory review.
---------------------------------------------------------------------------
\9\ See, https://www.ncua.gov/regulation-supervision/rules-regulations/regulatory-review.
---------------------------------------------------------------------------
II. Proposed Rule
On February 20, 2020, the Board approved a notice of proposed
rulemaking to update, clarify, and simplify several provisions of part
704 (proposed rule).\10\ The proposal provided for a 60-day comment
period, which was later extended by 60 days due to COVID-19.\11\ The
comment period ended on July 27, 2020.
---------------------------------------------------------------------------
\10\ 85 FR 17288 (Mar. 27, 2020).
\11\ 85 FR 20431 (Apr. 13, 2020).
---------------------------------------------------------------------------
III. Final Rule and Discussion of Comments
The NCUA received 35 comment letters on the proposed rule. Comments
were received from credit unions, both corporate and natural persons,
credit union leagues and trade associations, individuals, corporate
CUSOs, and an association of state credit union supervisors. Many of
the commenters supported the stated goal, to update, clarify, and
simplify several provisions of the NCUA's corporate credit union
regulation, however, almost all of the commenters expressed concerns
about specific aspects of the proposal. Most commenters believed that
the proposed rule did not provide sufficient relief and requested
additional areas of burden reduction that were beyond the scope of the
proposed rule. In response to the comments received, the Board has made
several changes to the final rule. The final rule: (1) Permits a
corporate credit union to make a minimal investment in a CUSO without
the CUSO being classified as a corporate CUSO and subject to heightened
NCUA oversight; (2) expands the categories of senior staff positions at
member credit unions eligible to serve on a corporate credit union's
board; (3) removes the experience and independence requirement for a
corporate credit union's enterprise risk management expert; (4)
clarifies the definition of a collateralized debt obligation; and (5)
simplifies the requirement for net interest income modeling. The
specific details of the final rule, including changes as a result of
the comments received, are discussed below.
A. Minimal Investment in Natural Person CUSOs
Part 704 includes specific regulations for a corporate credit
union's investment and lending activity and permits a corporate credit
union to invest in and lend to a corporate CUSO. A corporate CUSO is
defined as an entity that is at least partly owned by a corporate
credit union; primarily serves credit unions; restricts its services to
those related to the normal course of business of credit unions; \12\
and is structured as a corporation, limited liability company, or
limited partnership under state law.\13\
---------------------------------------------------------------------------
\12\ See, 12 CFR 704.11(e).
\13\ 12 CFR 704.11(a).
---------------------------------------------------------------------------
Similar to natural person credit union service organizations (NP
CUSOs), the Board cannot regulate corporate CUSOs directly, but it can,
for safety and soundness reasons, regulate the types of investments
that corporate credit unions make and whether a corporate credit union
may invest in a CUSO. Part 704 includes several prudential requirements
to ensure corporate credit union investment in and lending to corporate
CUSOs is safe and sound. For example, part 704 regulates aggregate
corporate credit union investment in and lending to corporate CUSOs.
Part 704 also includes customer base requirements, permissible
activities, accounting and audit standards, and requires NCUA access to
corporate CUSO facilities, books, and records. In general, many of the
prudential standards for corporate CUSOs are more restrictive than the
standards for NP CUSOs.\14\ The Board has historically imposed more
restrictive standards for corporate CUSOs as they may serve hundreds or
even thousands of natural person credit unions and pose unique systemic
risk.\15\ Additionally, core functions of corporate credit unions that
pose systemic risk could be moved to corporate CUSOs. The Board has
expressed concern that the movement of these core functions to entities
that are not directly regulated by the NCUA could increase the systemic
risk associated with corporate CUSOs, and the Board wants to ensure it
has a degree of oversight and control of these activities.\16\
---------------------------------------------------------------------------
\14\ For example, the permissible activities for a corporate
CUSO are more limited than the permissible activities for a NP CUSO.
A corporate CUSO may seek Board permission to engage in additional
activities, but the process can be burdensome. In addition,
corporate CUSOs are also subject to more rigorous NCUA oversight. A
corporate CUSO must agree to give the NCUA complete access to its
personnel, facilities, equipment, books, records, and other
documentation that the NCUA deems pertinent. In contrast, NP CUSOs
must provide the NCUA with complete access to its books and records
and the ability to review its internal controls, as deemed necessary
by the NCUA. Finally, corporate CUSOs must provide quarterly
financial statements to the corporate credit union. In contrast, NP
CUSOs must prepare quarterly financial statements, but do not have
to provide the statements to FCUs.
\15\ 74 FR 65210 (Dec. 9, 2009).
\16\ Id.
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[[Page 71819]]
As stated above, a corporate CUSO is defined as an entity that is
at least partly owned by a corporate credit union; primarily serves
credit unions; restricts its services to those related to the normal
course of business of credit unions; and is structured as a
corporation, limited liability company, or limited partnership under
state law.\17\ The definition is broad and includes no exception for de
minimis, non-controlling equity investments. Accordingly, any corporate
credit union equity interest in a CUSO, regardless of how small a share
of the CUSO the corporate credit union owns, is sufficient to designate
the CUSO as a corporate CUSO and subject it to additional requirements
under part 704.
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\17\ 12 CFR 704.11(a).
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The proposed rule amended the definition of corporate CUSO so that
a corporate credit union could make a de minimis, non-controlling
investment in a NP CUSO without the CUSO being deemed a corporate CUSO.
Almost all commenters explicitly approved of this proposed change, and
no commenters objected to it. The Board is finalizing it as proposed.
As stated in the proposed rule, the Board has reconsidered its
position that any corporate credit union investment in a CUSO must be
subject to enhanced standards under part 704 because the Board believes
that a corporate credit union's non-controlling investment does not
pose the same systemic risks to the credit union system as a
controlling investment. In particular, it is unlikely that a corporate
credit union would move its essential functions into a non-controlled
CUSO.
The Board has also considered the benefits of permitting corporate
credit unions to make de minimis, non-controlling investments in NP
CUSOs. Compared to corporate CUSOs, NP CUSOs are permitted to engage in
a broader range of permissible activities and services. Consequently,
NP CUSOs are often a source of collaboration and innovation among FICUs
that may result in the origination of new products and services. To
compete effectively in today's technology-based financial service
market, FICUs may need to rely increasingly on pooling their resources
to fund CUSOs and to build the necessary infrastructure. The costs for
research and development, acquisition, implementation, and specialized
staff capable of managing these new technologies may be prohibitive for
all but a very few of the largest FICUs. CUSOs may provide the means
for FICUs to collectively address these challenges and may enable FICUs
to collaboratively develop technologies that better serve their
members.
Without the opportunity to invest in NP CUSOs, a corporate credit
union may be restricted in its ability to participate in this process.
The Board believes that by expanding corporate credit union investment
authorities, while still maintaining necessary safeguards, it can place
corporate credit unions in a better position to participate in the
development of new products and services. NP CUSOs will also benefit
from a larger pool of potential investors, which may enable further
research and development during this period of rapid technological
growth.
In addition to amending the definition of corporate CUSO to permit
de minimis, non-controlling investments in NP CUSOs, the final rule
also makes several conforming amendments to part 704. The specific
details of the amendments are discussed below.
Sec. 704.2 Definitions
Consolidated credit union service organization. Generally,
consolidated CUSOs are those majority-owned by a corporate credit
union. The proposed rule amended the definition of consolidated CUSO to
use the newly defined term ``CUSO'' for clarity. Under the proposed
rule, a consolidated CUSO was defined as any CUSO the assets of which
are consolidated with those of the corporate credit union for purposes
of reporting under Generally Accepted Accounting Principles (GAAP). The
Board received no comment on the definition of consolidated CUSO and is
finalizing the definition as proposed.
Corporate CUSO. As discussed above, the proposed rule amended the
definition of a corporate CUSO. Under the proposed rule, a CUSO is
designated as a corporate CUSO only if one or more corporate credit
unions have a controlling interest. A corporate credit union is
considered to have a controlling interest if: (1) The CUSO is
consolidated on a corporate credit union's balance sheet; (2) a
corporate credit union has the power, directly or indirectly, to direct
the CUSO's management or policies; or (3) a corporate credit union owns
25 percent or more of the CUSO's contributed equity, stock, or
membership interests.\18\ A CUSO also is designated as a corporate CUSO
if the aggregate corporate credit union ownership of all corporates
investing in the CUSO meets or exceeds 50 percent of the CUSO's
contributed equity, stock, or membership interests. The Board is
concerned that if several corporate credit unions have a majority
ownership interest in a CUSO, the CUSO could present the same risk to
the credit union system as a CUSO that is controlled by one corporate
credit union. If any of these four conditions are met, then the CUSO
meets the definition of a corporate CUSO and is subject to additional
requirements under part 704.\19\ No commenters suggested any changes to
the definition of a corporate CUSO and the Board is finalizing the
definition as proposed.
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\18\ The definition is related to the definition of control in
the Federal Deposit Insurance Act for notices filed under the Change
in Bank Control Act. 12 U.S.C. 1817(j).
\19\ The definition of corporate CUSO also is moved to Sec.
704.2 for consistency with the location of other definitions in part
704.
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Credit Union Service Organization (CUSO). The proposed rule defined
the term CUSO for purposes of part 704. Under the proposed rule, a CUSO
is both a NP CUSO under part 712 and a corporate CUSO under Sec.
704.11. The definition makes it clear that the term CUSO applies to
both NP CUSOs and corporate CUSOs unless otherwise stated. For example,
when calculating tier 1 capital under part 704, a corporate credit
union must deduct, in part, investments in any ``unconsolidated CUSO.''
By using the term ``CUSO,'' instead of the defined terms ``corporate
CUSO'' and ``consolidated CUSO,'' the proposed rule made clear that a
corporate credit union must deduct unconsolidated investments in both a
NP CUSO and a corporate CUSO. The Board received no comments on this
definition and is finalizing it as proposed.\20\
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\20\ The Board received a substantial number of comments on the
aggregation of loans to NP CUSOs and corporate CUSOs. Those comments
will be discussed below.
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Sec. Sec. 704.5 Investments, 704.6 Credit Risk Management, and 704.7
Lending
The proposed rule removed references to corporate CUSOs and instead
referred to the general term CUSO because those provisions continue to
apply to a corporate credit union investing in and lending to both NP
CUSOs and corporate CUSOs, as explained in detail below in the
discussion of the proposed changes to Sec. 704.11. The Board received
no comments on these changes and is finalizing it as proposed.\21\
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\21\ As noted above, the Board received a substantial number of
comments on the aggregation of loans to NP CUSOs and corporate CUSOs
and addresses these below.
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Sec. 704.11 Credit Union Service Organizations (CUSOs)
Under the proposed rule, Sec. 704.11 was reorganized for clarity,
however, the substantive requirements for corporate
[[Page 71820]]
CUSOs were not amended. The intent of the reorganization is to be clear
that certain requirements apply to a corporate credit union's
investment in or lending to both NP CUSOs and corporate CUSOs, certain
requirements apply only to NP CUSOs, and other requirements apply only
to corporate CUSOs.
The proposed rule set forth the requirements for all corporate
credit union investments in or lending to CUSOs. The proposed rule, in
Sec. 704.11(a), stated that the aggregate investment and lending
limits apply regardless of whether a corporate credit union's
investment or loan is to a NP CUSO or a corporate CUSO. The proposed
rule did not intend to amend the current aggregate limitations on
investments and lending.\22\ Under the current rule, however, the
aggregate investment and lending limits applied only to corporate
CUSOs. A majority of commenters were concerned that including loans
made to NP CUSOs in the aggregate limits would unintentionally limit
corporate credit union lending to NP CUSOs. Commenters generally
requested that the final rule exclude loans to NP CUSOs from the
aggregate lending limits. A few commenters stated that they are
supportive of aggregate limitations for investments in NP and corporate
CUSOs, as well as combined limits for loans to and investments to an
individual CUSO set as a percentage of total capital, but not
aggregating lending to NP and corporate CUSOs. The Board disagrees that
the proposed rule would substantially limit lending to NP CUSOs. First,
the Board does not believe that corporate credit unions are currently
engaging in substantial lending activities to NP CUSOs. In addition,
under the current rule, corporate credit unions are not generally
permitted to make loans to NP CUSOs.\23\ Additionally, for safety and
soundness reasons, the Board believes it is prudent for lending and
investments to both natural person and corporate CUSOs to be subject to
the aggregate limitations. The Board would have safety and soundness
concerns if corporate credit unions lending to NP CUSOs were not
subject to the limitations otherwise applicable to corporate CUSOs. The
Board, however, notes that if a particular corporate credit union has a
material volume of loans to a natural person CUSO, it may request that
the Board issue a waiver from the aggregate lending and investment
limits in the final rule under 12 CFR 704.1(b). The Board would
consider such a waiver on a case-by-case basis. Therefore, the Board
has not made any changes to the aggregate investment and lending limits
and is adopting the limitations without change in the final rule.
Therefore, a corporate credit union that has already invested in or
loaned the maximum permitted under the current rule is not authorized
to invest or lend any additional money. Instead, such a corporate
credit union must reallocate its investments or loans if it seeks to
make any new investments that are prohibited.
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\22\ 12 CFR 704.11(b). In general, the aggregate of all
investments in corporate CUSOs that a corporate credit union may
make must not exceed 15 percent of a corporate credit union's total
capital. The aggregate of all investments in and loans to corporate
CUSOs that a corporate credit union may make must not exceed 30
percent of a corporate credit union's total capital. A corporate
credit union may lend to corporate CUSOs an additional 15 percent of
total capital if the loan is collateralized by assets in which the
corporate has a perfected security interest under state law.
\23\ 12 CFR 704.11(h) (``A corporate credit union is not
authorized to . . . loan to a CUSO under part 712 of this
chapter.'').
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In Sec. 704.11(b), the proposed rule stated that all corporate
credit union loans to CUSOs are subject to due diligence
requirements.\24\ The proposed rule, as does the current rule, required
corporate credit unions to comply with certain due diligence
requirements from the NCUA's member business loans rule before making a
loan to a CUSO. Under the proposed rule, corporate credit unions are
subject to the commercial loan policy and due diligence requirements in
the NCUA's member business loans rule \25\ for lending to both NP CUSOs
and corporate CUSOs. Several commenters objected to subjecting
corporate credit union loans to the commercial loan policy and due
diligence requirements in the revised MBL rule. Commenters generally
stated that the requirements in the MBL rule are written for the
lending activities and capital structure of natural person credit
unions. Commenters also stated that corporate credit union lending
activities are adequately regulated by the requirements of Sec. 704.7
and, if there is a need for additional rulemaking regarding lending to
CUSOs, that it is better to make changes to Sec. 704.7 directly. One
commenter also noted that an issue with referencing the MBL rule is
that its lending limits are based upon net worth, which is a term that
is undefined for corporate credit unions. The Board notes that part 723
adopted principles-based standards for commercial loan policies and due
diligence standards. In general, part 723 does not require prescriptive
standards. Accordingly, the Board believes that the principles outlined
in part 723 are appropriate for most loans to corporate and NP CUSOs,
which the Board considers general commercial loans. The Board notes
that to the extent part 723 refers to credit unions establishing
limitations based on net worth, such limitations established by a
corporate credit union would be based on tier 1 capital. As discussed
by the commenters, corporate credit unions do not use the terminology
net worth.
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\24\ 12 CFR 704.11(c). The current rule includes a cross-
reference to due diligence requirements in the member business loan
rule. The member business loan rule, however, was updated in 2015
and the cross-referenced requirements have been removed.
Accordingly, the proposed rule updated the cross references to
reflect the revised member business loan rule.
\25\ 12 CFR 723.4.
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Therefore, under the final rule, a corporate credit union making
loans to NP or corporate CUSOs must have a board-approved policy that
ensures corporate credit union lending activities are performed in a
safe and sound manner by providing for ongoing control, measurement,
and management of CUSO lending. The policy should also include
qualifications and experience requirements for personnel involved in
underwriting, processing, approving, administering, and collecting
loans to CUSOs. The corporate credit union must also have a loan
approval process, underwriting standards, and risk management processes
commensurate with the size, scope and complexity of its CUSO lending.
The Board believes these due diligence requirements are the minimum
requirements necessary to ensure that corporate credit unions are
engaging in safe and sound lending practices.
The Board has made one change to this section in light of
commenters concerns about burden. The Board has added an exception for
loans and lines of credit to NP and corporate CUSOs that are fully
secured by U.S. Treasury or agency securities. Loans that are fully
secured by U.S. Treasury or agency securities present less risk and do
not require the same due diligence requirements as standard commercial
loans. With this limited modification, the Board does not believe these
requirements should place a new burden on corporate credit unions
because any corporate credit union that is currently making a loan to a
corporate CUSO should be following these basic safety and soundness
principles.
In Sec. 704.11(c), the proposed rule set forth the regulations
governing corporate credit union investment in and lending to NP CUSOs.
The proposed rule stated that corporate credit union investment in and
lending to NP CUSOs are subject to part 712 of
[[Page 71821]]
this chapter. The intent of this section is to be clear that a CUSO is
either governed under part 704 as a corporate CUSO, as discussed below,
or subject to part 712 as a NP CUSO. A corporate credit union
investment in a CUSO of a state-chartered natural person credit union
is also subject to the requirements in part 712. The Board has made one
clarifying change to this section. Under the final rule, the Board is
clarifying that the CUSO of a state-chartered natural person credit
union is subject to the requirements in part 712 as if the CUSO is a
CUSO of an FCU. The Board wants to clarify that all of the requirements
in part 712, such as the activity limitations in Sec. 712.5, are
necessary for any corporate credit union to invest in or loan to a NP
CUSO, regardless of the charter type of the natural person credit
union. If a CUSO does not meet the standards in part 712, then a
corporate credit union cannot make the investment or loan.
In Sec. 704.11(d), the proposed rule, like the current rule,
included safety and soundness requirements for corporate credit union
investments in and loans to corporate CUSOs. In general, the proposed
rule did not make any substantive changes to the existing prudential
requirements. The requirements were reorganized for clarity and as part
of the general restructuring of Sec. 704.11, but were not otherwise
substantively amended.\26\ No commenters objected to these proposed
provisions, and the Board is finalizing them as proposed.
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\26\ The proposed rule included a few non-substantive language
changes that are only intended to streamline the provision and
enhance clarity.
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Finally, in Sec. 704.11(e), the proposed rule included one new
prudential requirement for corporate credit union investments in and
loans to corporate CUSOs. The proposed rule stated that any subsidiary
of a corporate CUSO is automatically designated a corporate CUSO. The
proposed rule also provided that all tiers or levels of a corporate
CUSO's structure are subject to the requirements for corporate CUSOs.
No commenters objected to this proposed provision, and the Board is
finalizing it as proposed. The Board believes this level of oversight
is necessary for all tiers of a corporate CUSO because corporate CUSOs
affect not only the health of the investing corporate credit union, but
also the health of the credit union system as a whole. Many corporate
CUSOs serve natural person credit unions directly. As stated
previously, the Board has historically been concerned that some
activities might migrate from corporate credit unions to CUSOs and
their subsidiaries, and the Board needs to ensure each layer in the
corporate structure is subject to certain minimal prudential
requirements.
Sec. 704.19 Disclosure of Executive Compensation
Section 704.19 currently requires that each corporate credit union
annually prepare and maintain a document that discloses the
compensation of certain employees, including compensation received from
a corporate CUSO.\27\ The proposal amended Sec. 704.19 to require that
employee compensation from either a NP CUSO or a corporate CUSO must be
reported. The Board notes that under the current rule to facilitate
this disclosure, Sec. 704.11(g) requires a corporate CUSO to disclose
compensation paid to any employees that are also employees of a
corporate credit union lending to, or investing in, the CUSO. This
provision places the burden of disclosure on the corporate CUSO. The
proposed rule, however, did not include a similar requirement for NP
CUSOs.\28\ No commenters objected to this proposed provision, and the
Board is finalizing it as proposed. Accordingly, under the final rule,
the dual employee is required to disclose his or her compensation from
the NP CUSO for the corporate credit union to make the required
disclosure.
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\27\ 12 CFR 704.19(a).
\28\ The Board notes, however, that part 712 prohibits officials
and senior management employees, and their immediate family members
of an FCU with an outstanding loan or investment from receiving any
salary, commission, investment income, or other income or
compensation from the CUSO, either directly or directly. 12 CFR
712.8.
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B. Corporate Credit Union Board Representation
Section 704.14 currently requires that at least a majority of a
corporate credit union's board members must serve on the corporate
credit union's board as a representative of a member credit union.\29\
In addition, any candidate for a position on the board of a corporate
credit union must hold a senior management position at a member credit
union and hold that position at the time he or she is seated on the
board of a corporate credit union. Currently, only an individual who
holds the position of chief executive officer, chief financial officer,
chief operating officer, or treasurer/manager at a member credit union,
and will hold that position at the time he or she is seated on the
corporate credit union board if elected, may seek election or re-
election to the corporate credit union board.
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\29\ 12 CFR 704.14.
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The proposed rule expanded the credit union officials eligible to
serve on a corporate credit union board. The proposed rule no longer
expressly limited the corporate credit union board to the above stated
positions and instead included any person in a senior staff position at
a member credit union. The proposed rule then listed the current
positions as examples of senior staff positions that are eligible to
serve on a corporate credit union board. The proposed rule also
included two new positions, chief information officer and chief risk
officer, in the list of examples of senior staff positions eligible to
serve on a corporate credit union board. No commenters objected to this
proposed provision and the Board is finalizing it as proposed. One
commenter, however, urged the Board to defer to state rules with
respect to governance matters such as board qualifications. The
commenter further stated that it believes that the homogenization of
the corporate credit union governance system presents risks by stifling
innovation. The commenter, however, offered no specific suggestions.
The Board believes that certain minimum standards are necessary to
ensure adequate corporate governance.
The Board believes that officials who hold a senior management
position at a member credit union are qualified individuals who could
offer expertise as a corporate credit union board member. Not only do
corporate credit union members have more flexibility in choosing board
members, but expanding eligible senior staff positions, such as chief
information officer and chief risk officer, widens the range of
expertise on corporate credit union boards.
C. Enterprise Risk Management
Section 704.21 requires corporate credit unions to develop and
follow an enterprise risk management policy.\30\ A corporate credit
union must also establish an enterprise risk management committee
(ERMC) and include an independent risk management expert on the
committee. The Board adopted these requirements in 2011 due to concerns
that corporate credit unions were not adequately focused on the
aggregation of exposures across entire institutions, even though the
Board believed that corporate credit unions were adequately focused on
individual risk exposures.\31\
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\30\ 12 CFR 704.21.
\31\ 76 FR 23861 (Apr. 29, 2011) and 80 FR 25932 (May 6, 2015).
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The current rule includes several specific requirements regarding
the
[[Page 71822]]
independent risk management expert on the committee. The risk
management expert must have at least five years of experience in
identifying, assessing, and managing risk exposures.\32\ This
experience must be commensurate with the size of the corporate credit
union and the complexity of its operations. In addition, the current
rule provides what constitutes independence. A risk management expert
qualifies as independent if: (1) The expert reports to the ERMC and to
the corporate credit union's board of directors; (2) neither the
expert, nor any immediate family member of the expert, is supervised by
or has any material business or professional relationship with the
chief executive officer (CEO) of the corporate credit union, or anyone
directly or indirectly supervised by the CEO; and (3) neither the
expert, nor any immediate family member of the expert, has had any of
the previously described relationships for at least the past three
years.\33\ The Board specifically included experience and independence
requirements to ensure the enterprise risk management expert is
adequately qualified and not influenced by the operational side of the
corporate credit union.\34\ The proposed rule removed the prescriptive
independence and experience requirements. No commenters objected to
this proposed provision, and the Board is finalizing with one technical
amendment. The final rule clarifies that the risk management expert may
report either to the corporate credit union's board of directors or to
the ERMC. Several commenters also requested that the prescriptive
independence requirements be removed from the final rule. The Board
clarifies that the prescriptive independence provisions are also
removed under the final rule.
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\32\ 12 CFR 704.21(c).
\33\ 12 CFR 704.21(d).
\34\ 76 FR 23861 (Apr. 29, 2011).
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The Board no longer believes that it is necessary for prescriptive
experience and independence requirements. The Board believes the
corporate credit union should have more discretion in choosing a
qualified risk management expert. The Board does not believe that a
prescriptive five-year experience requirement is necessary. The Board
believes that corporate credit unions are in the best position to
determine the appropriate level of experience necessary for the
position. The final rule also permits the risk management expert to
report directly to the ERMC or the corporate credit union's board.
Additionally, the Board believes that the effectiveness of risk
management practices is driven by a multitude of factors, to include
policies, processes, and qualified knowledge. Many corporate credit
unions have integrated their enterprise risk management function into
their business decision making, and at many corporate credit unions,
internal corporate staff possess the skills and experience to capably
manage the enterprise risk management program. By and large, corporate
credit unions have improved their ability to assess risk and
effectively challenge evaluations of risk since the current rule was
first adopted. The final rule provides the corporate credit unions
flexibility to choose an internal risk management expert instead of
engaging an outside consultant.
The Board, however, notes that even though independence is no
longer an explicit requirement, for best enterprise risk management
practices, the expert should have appropriate stature and authority to
effectively manage and lead an enterprise risk management program. The
expert must be competent to analyze risks across the institution and
have the capability to communicate those risks to the board or ERMC
despite potential influence from the operational side of the corporate
credit union. The NCUA will evaluate the adequacy of a corporate credit
union's enterprise risk management practices through the supervisory
process. Sound risk management is a cornerstone responsibility of a
credit union's leadership; therefore, Capital Adequacy, Asset Quality,
Management, Earnings, and Liquidity/Asset-Liability Management (CAMEL)
and risk ratings will incorporate the supervisory team's assessment of
this area. Weaknesses in risk management may result in supervisory
actions.
D. Natural Person Credit Union Subordinated Debt Instruments
The Board recently issued a proposed rule to permit low-income
designated credit unions, complex credit unions, and new credit unions
to issue subordinated debt instruments for purposes of regulatory
capital treatment (subordinated debt NPRM).\35\ If the Board adopts the
proposed rule as final, it expects additional credit unions to begin
issuing subordinated debt instruments. Therefore, the Board believes it
is necessary to clarify whether corporate credit unions may purchase
such instruments and, if so, the treatment of the investments under
part 704.
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\35\ 85 FR 13982 (Mar. 10, 2020).
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The proposed rule created a new definition for the term natural
person credit union subordinated debt instrument. The proposed rule
defined a natural person credit union subordinated debt instrument as
any debt instrument issued by a natural person credit union that is
subordinate to all other claims against the credit union, including the
claims of creditors, shareholders, and either the National Credit Union
Share Insurance Fund (NCUSIF) or the insurer of a privately insured
credit union. The Board intends for this definition to include all
instruments issued under the subordinated debt NPRM. No commenters
objected to this proposed definition. The Board, however, is not
finalizing the definition as part of this final rule. The Board
believes it is prudent to include any changes related to the
subordinated debt NPRM with the associated subordinated debt final
rule. At this time, the Board does not envision any changes to the
proposed definition.
The proposed rule also clarified that corporate credit unions may
purchase the natural person subordinated debt instruments. This
authority is derived from their lending authority because subordinated
debt instruments are issued under a natural person credit union's
borrowing authority. Additionally, natural person credit unions are
also permitted, subject to various restrictions and limits, to purchase
such subordinated debt instruments from other natural person credit
unions under their lending authority. Treating the purchase of such
subordinated debt instruments as lending ensures consistent treatment
between natural person credit unions and corporate credit unions. The
final rule does not explicitly state that a corporate credit union may
purchase a natural person credit union subordinate debt instrument
because the Board believes corporate credit unions' current lending
authority is sufficiently broad to include purchasing subordinated debt
instruments.
The proposed rule, however, required that a corporate credit union
fully deduct the amount of the subordinated debt instrument from its
tier 1 capital to ensure consistent treatment between investments in
the capital of other corporate credit unions and natural person credit
unions. Corporate credit unions are currently required to deduct from
tier 1 capital any investments in perpetual contributed capital and
nonperpetual capital accounts that are maintained at other corporate
credit unions.\36\ The proposed rule also asked
[[Page 71823]]
a question on whether it would be more appropriate to prohibit
corporate credit unions from purchasing subordinated debt instruments.
No commenter recommended restricting corporate credit union authority
to purchase subordinated debt instruments.
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\36\ See the definition of tier 1 capital in 12 CFR 704.2.
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The Board believes that investments in natural person credit union
subordinated debt instruments should be treated similar to investments
in perpetual contributed capital and nonperpetual capital accounts that
are maintained at other corporate credit unions as such instruments may
qualify as regulatory capital for the natural person credit union. The
Board is also concerned about systemic risk if corporate credit unions
own a significant amount of natural person credit union issued
subordinated debt. Finally, a natural person credit union subordinated
debt instrument would be in a first loss position, even before the
NCUSIF and any private insurance fund or entity. Therefore, an
involuntary liquidation of the issuing credit union would potentially
mean large, and likely total, losses for the holders of those
subordinated obligations. The Board believes that fully deducting such
instruments from tier 1 capital ensures any potential losses do not
affect the capital position of the investing corporate credit union.
This measured approach strikes the right balance between providing
corporate credit unions the flexibility to purchase natural person
credit union subordinated debt instruments and avoiding undue systemic
risk to the credit union system. For the same reasons as the definition
of natural person subordinated debt instrument, the final rule is not
including this amendment. The amendment will be included with any final
rule on subordinated debt.
E. Approved Corporate CUSO Activities
Part 704 does not list the permissible activities for corporate
CUSOs in the regulatory text of part 704 of the Code of Federal
Regulations, unlike part 712, which does so for NP CUSOs.\37\ Instead,
Sec. 704.11 requires that, generally, a corporate CUSO must agree that
it will limit its services to brokerage services, investment advisory
services, and other categories of services as preapproved by NCUA and
published on NCUA's website.\38\ A CUSO that desires to engage in an
activity not preapproved by NCUA can apply to NCUA for that approval.
To increase transparency and make it easier for corporate credit unions
to determine if an activity has previously been determined by the Board
to be permissible, the proposed rule contained a provision to replace
the permissible activities list from the NCUA website with a new
appendix to part 704. No commenter supported this change, and almost
all commenters specifically objected to it. Commenters generally stated
that the change would increase regulatory burden and make it more
difficult for corporate CUSOs to obtain timely approval to add
permissible activities to the list. Commenters were primarily concerned
about the added burden of formally adding activities through notice-
and-comment rulemaking. Other commenters also discussed the need to
make rapid changes to the list of preapproved activities in response to
the pace of development from financial technology (fintech) companies.
Commenters also suggested moving the list of preapproved activities for
NP CUSOs to the NCUA's website. The Board notes that moving the list of
preapproved activities for NP CUSOs would be outside the scope of the
proposed rule. Finally, one commenter recommended codifying the
practice of consulting with state regulators before making a
determination on ``other activities'' for state chartered corporate
credit union CUSOs.
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\37\ 12 CFR 712.5(b).
\38\ https://www.ncua.gov/regulation-supervision/corporate-credit-unions/corporate-cuso-activities/approved-corporate-cuso-activities.
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In light of commenters' feedback, the Board will not adopt this
proposed change regarding approval of corporate CUSO activities. The
proposed change was intended to increase transparency. The Board is
mindful of any unintended procedural burden the change might entail and
therefore declines to adopt it. Instead, the agency's website will
continue to list approved corporate CUSO activities. The current
process to request approval of new corporate CUSO activities remains
unchanged and is described on the web page that includes the list of
approved activities.\39\
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\39\ Corporate CUSO Activities, https://www.ncua.gov/regulation-supervision/corporate-credit-unions/corporate-cuso-activities.
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F. Definition of Collateralized Debt Obligation
Corporate credit unions are prohibited from purchasing certain
overly complex or leveraged investments, including collateralized debt
obligations (commonly referred to as CDOs).\40\ Under the current rule,
the term CDO means a debt security collateralized by mortgage-backed
securities, other asset-backed securities, or corporate obligations in
the form of nonmortgage loans or debt. The term does not include: (1)
Senior tranches of Re-REMICs consisting of senior mortgage- and asset-
backed securities; (2) Any security that is fully guaranteed as to
principal and interest by the U.S. Government or its agencies or its
sponsored enterprises; or (3) Any security collateralized by other
securities where all the underlying securities are fully guaranteed as
to principal and interest by the U.S. Government or its agencies or its
sponsored enterprises.\41\ The proposed rule amended the definition of
CDO to clarify that the definition includes both loans and debt
securities. The proposed rule changed the defined term to
``collateralized loan or debt obligation,'' but did not otherwise amend
the definition. No commenter objected to the substance of the change,
however, several commenters requested a revision to the proposed
language. Commenters generally wanted to use language that is
consistent with industry terminology and recommended having separate
definitions for CDOs and Collateralized Loan Obligations (referred to
as ``CLOs''). In response to commenter concerns about clarity, the
final rule uses the term ``collateralized debt obligation or
collateralized loan obligation.'' The Board intends no substantive
changes as a result of the amended terminology and has made no change
to the definition. This amendment is only intended to resolve any
confusion among industry participants concerning whether collateralized
loans meet the definition and are therefore prohibited. The Board
believes amending the name of the defined term clarifies the Board's
intent that collateralized loans meeting the definition are also
prohibited.
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\40\ The prohibition on purchasing CDOs was intended to protect
corporate credit unions from the potential for excessive investment
losses. 75 FR 64786, 64793 (Oct. 20, 2010).
\41\ 12 CFR 704.2.
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G. Net Interest Income Modeling
Under the current rule, a corporate credit union must perform net
interest income (NII) modeling to project earnings in multiple interest
rate environments for a period of no less than two years.\42\ NII
modeling must, at minimum, be performed quarterly, including once on
the last day of the calendar quarter. The proposed rule made a change
to the timeframe for NII. Under the proposed rule, a corporate credit
union is not required to perform NII modeling for two years and instead
only is required to perform modeling for
[[Page 71824]]
a period of no less than one year. In general, commenters were either
indifferent to or not supportive of the proposed change. Some
commenters noted that ALM models already are built for the two-year NII
projections, so this change will not provide any real regulatory
relief. Some commenters stated that reducing the required NII modeling
from two years to one year will not increase the accuracy of the NII
forecast (however another commenter stated that the one-year forecasts
are more accurate as there are more unknowns impacting a balance sheet
using the two-year timeframe). Several commenters stated that the same
inputs and assumptions will still have to be incorporated into the NII
model and that the two-year timeframe was appropriate. Other commenters
recommended that the NCUA instead increase the ``weighted-average
life'' (WAL) limit beyond the current two-year limit. These commenters
stated that a longer-term WAL would allow corporate credit unions to
more effectively manage NII through varying economic and interest rate
scenarios. The Board has not adopted any amendments to the WAL at this
time. The Board continues to believe that the two-year WAL limit
reflects the fact that corporate credit unions are, first and foremost,
providers of payment systems, which, in turn, requires some matching of
the investment portfolio to the short term payment liabilities to
ensure liquidity for the payments system. The Board believes that a
longer-term WAL is unnecessary given the primary purpose of corporate
credit unions as providers of payment systems.
---------------------------------------------------------------------------
\42\ 12 CFR 704.8(e).
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Therefore, the Board is only amending the requirements for NII
given that corporate credit unions are also subject to a two-year WAL
limit.\43\ Under the current rule, a corporate credit union must test
its financial assets at least quarterly, including once on the last day
of the calendar quarter, for compliance with this limitation. If the
WAL of a corporate credit union's assets exceeds two years on the
testing date, this test must be calculated at least monthly, including
once on the last day of the month, until the WAL is below two years.
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\43\ 12 CFR 704.8(f).
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The Board believes that NII modeling performed over a longer period
than the WAL limits for asset maturities is less useful because the
corporate credit union also has to estimate what reinvestments occur
over the two-year period beyond simply estimating interest cash flows
on assets. In addition, corporate credit unions already conduct net
economic value analyses which capture a long-term view of interest rate
risk. Allowing corporate credit unions to model NII over a one year
period provides increased flexibility for corporate credit unions to
measure NII over a shorter, and more appropriate, time period, such as
when financial assets and liabilities are predominately short term
(such as less than one year). The Board believes that NII modeling over
a one-year period sufficiently captures a corporate credit union's
short-term interest rate risk. To the extent commenters stated their
models are already based on two-year projections, the final rule does
not require corporate credit unions to change their models. The final
rule only requires that a corporate credit union must perform NII
modeling for a period of no less than 1 year. Therefore, a model
projecting a period of two years still complies with the final rule.
H. Technical Amendment
A few commenters requested that the Board clarify which type of
loans would need to comply with the MBL rule. The current rule states
that loans, lines of credit, and letters of credit to other members not
excluded under Sec. 723.1(b) must comply with part 723 unless the loan
or line of credit is fully guaranteed by a credit union or fully
secured by U.S. Treasury or agency securities. The current regulation
also states that those guaranteed and secured loans must comply with
the aggregate limits of Sec. 723.16 but are exempt from the other
requirements of part 723. Commenters suggested a technical correction
to update the cross-reference, which cites to an outdated provision of
the MBL rule. The Board has made the requested technical amendment.
Under the final rule, the section of the MBL rule cross-referenced is
Sec. 723.8.
I. Comments Outside the Scope of the Proposed Rule
Many commenters recommended that the Board consider additional
burden reduction for corporate credit unions. In general, these
recommendations are not a logical outgrowth of the proposed rule and,
thus, are outside the scope of this rulemaking. A general discussion of
the recommendations is included below.
1. A few commenters requested that the Board clarify that the
existing 15 percent limit on commercial mortgage-backed securities
applies to ``private'' commercial mortgage-backed securities and not
agency commercial mortgage-backed securities (ACMBS). These commenters
stated that ACMBS carry the same credit risk as agency residential MBS.
2. Several commenters requested additional flexibility to allow
corporate credit unions with higher capital ratios to extend their WAL
limitations. These commenters also recommended that a liquidity
management policy and procedures be established that incorporate the
following: Liquidity strategy for various economic conditions; defined
liquidity risk profiles under various economic conditions; and
liquidity buffer consisting of highly liquid assets. Some commenters
also suggested including permission for longer WAL limitations in
Appendix B, Expanded Authorities.
3. Several commenters also recommended that the Board extend the
maturity limit on secured borrowing from 180 days to 1 year to cover a
full cycle of seasonal cash outflows (one commenter recommended two
years). Commenters also requested a change in the limit for secured
non-liquidity borrowings from the tier 1 capital in excess of five
percent of moving daily average net assets to 100 percent of total
capital (one commenter recommended using tier 1 capital).
4. Several commenters requested that the Board permit non-CUSO
investments for the purpose of allowing corporate credit unions
reasonable ability to invest a small percentage of their capital in
entities outside the credit union system (such as fintechs).
5. Two commenters requested that the Board permit a modest increase
in the individual borrower limit.
6. A few commenters recommended that Appendix B, Expanded
Authorities, clarify that any investment that deteriorates below
investment grade, as defined in Sec. 704.2, would require an
investment action plan in compliance with Sec. 704.10.
7. One commenter recommended establishing a task force with state
regulators to review future adjustments to the corporate credit union
rules. The commenter also recommended reintroducing meaningful dual
chartering by eliminating unnecessary preemption of state rules,
particularly with respect to corporate credit union governance; and
enhancing the joint supervision of corporates. The commenter also
recommended increased information sharing between the NCUA and the
state regulators supervising the corporate credit union's natural
person credit union members.
8. One trade organization commenter recommended that the agency
should consider ways in which it can wind down the NCUA guaranteed
notes program (known as the NGN Program) so that credit unions that
paid into the Temporary Corporate Credit Union
[[Page 71825]]
Stabilization Fund and invested in certain corporates are made whole.
The commenter stated that the NCUA's determination that the asset
management estates of the various failed corporates must remain
distinct means that recoveries from one estate cannot be comingled to
pay obligations of other estates; however, the commenter stated that
the agency still has time to reconsider this position and invite
comments from credit unions who might bear a greater loss if the NCUA
proceeds along its present course.
9. One trade organization commenter also recommended that the Board
explore a framework to engage with fintech companies so credit unions
can more easily sustain continued innovation in the credit union
industry.
VII. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires that, in
connection with a final rule, an agency prepare and make available for
public comment a final regulatory flexibility analysis that describes
the impact of a final rule on small entities (defined for purposes of
the RFA to include credit unions with assets less than $100
million).\44\ A regulatory flexibility analysis is not required,
however, if the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities
and publishes its certification and a short, explanatory statement in
the Federal Register together with the rule.
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\44\ See 80 FR 57512 (Sept. 24, 2015).
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This final rule does not have a significant economic impact on a
substantial number of small entities. There are no corporate credit
unions under $100 million in assets. Therefore, the Board certifies
that the rule will not have a significant economic impact on a
substantial number of small entities.
Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to information
collection requirements in which an agency creates a new paperwork
burden on regulated entities or modifies an existing burden. For
purposes of the PRA, a paperwork burden may take the form of a
reporting, recordkeeping, or third-party disclosure requirement, each
referred to as an information collection. The NCUA may not conduct or
sponsor, and the respondent is not required to respond to, an
information collection unless it displays a currently valid Office of
Management and Budget (OMB) control number.
The final rule amends 12 CFR part 704, in part, to address minimal
investments by a corporate credit union in a CUSO without the CUSO
being classified as a corporate CUSO. The information collection
requirements associated with this provision are cleared under OMB
control number 3133-0129 and there are no other new information
collection requirements associated with this final rule.
Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. In
adherence to fundamental federalism principles, the NCUA, an
independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the principles of the Executive Order. This
rulemaking will not have a substantial direct effect on the states, on
the connection between the national government and the states, or on
the distribution of power and responsibilities among the various levels
of government. The NCUA has determined that this final rule does not
constitute a policy that has federalism implications for purposes of
the Executive Order.
Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this final rule does not affect family
well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999, Public Law 105-277, 112
Stat. 2681 (1998).
Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(Pub. L. 104-121) (SBREFA) generally provides for congressional review
of agency rules.\45\ A reporting requirement is triggered in instances
where the NCUA issues a final rule as defined by Section 551 of the
APA.\46\ An agency rule, in addition to being subject to congressional
oversight, may also be subject to a delayed effective date if the rule
is a ``major rule.'' \47\ The NCUA does not believe this rule is a
``major rule'' within the meaning of the relevant sections of SBREFA.
As required by SBREFA, the NCUA will submit this final rule to OMB for
it to determine if the final rule is a ``major rule'' for purposes of
SBREFA. The NCUA also will file appropriate reports with Congress and
the Government Accountability Office so this rule may be reviewed.
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\45\ 5 U.S.C. 801-804.
\46\ 5 U.S.C. 551.
\47\ 5 U.S.C. 804(2).
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List of Subjects in 12 CFR Part 704
Credit unions, Corporate credit unions, Reporting and recordkeeping
requirements.
By the National Credit Union Administration Board on October 15,
2020.
Melane Conyers-Ausbrooks,
Secretary of the Board.
For the reasons discussed in the preamble, the Board amends 12 CFR
part 704, as follows:
PART 704--CORPORATE CREDIT UNIONS
0
1. The authority citation for part 704 continues to read as follows:
Authority: 12 U.S.C. 1766(a), 1781, and 1789.
0
2. In Sec. 704.2:
0
a. Revise the definitions for ``Collateralized Debt Obligation'', and
``Consolidated Credit Union Service Organization''; and
0
b. Add definitions for ``Corporate CUSO'', and ``Credit Union Service
Organization (CUSO)'', in alphabetical order, to read as follows:
Sec. 704.2 Definitions.
* * * * *
Collateralized Debt Obligation or Collateralized Loan Obligation
means a debt security collateralized by mortgage-backed securities,
other asset-backed securities, or corporate obligations in the form of
nonmortgage loans or debt. For purposes of this part, the term
collateralized debt obligation or collateralized loan obligation does
not include:
(1) Senior tranches of Re-REMIC's consisting of senior mortgage-and
asset-backed securities;
(2) Any security that is fully guaranteed as to principal and
interest by the U.S. Government or its agencies or its sponsored
enterprises; or
(3) Any security collateralized by other securities where all the
underlying securities are fully guaranteed as to principal and interest
by the U.S. Government or its agencies or its sponsored enterprises.
* * * * *
Consolidated Credit Union Service Organization (Consolidated CUSO)
means any CUSO the assets of which are consolidated with those of the
corporate credit union for purposes of reporting under Generally
Accepted Accounting Principles (GAAP). Generally,
[[Page 71826]]
consolidated CUSOs are majority-owned CUSOs.
* * * * *
Corporate CUSO means a CUSO, as defined in part 712 of this
chapter, that:
(1) Is a consolidated CUSO;
(2) A corporate credit union has the power, directly or indirectly,
to direct the CUSO's management or policies;
(3) A corporate credit union owns 25 percent or more of the CUSO's
contributed equity, stock, or membership interests; or
(4) The aggregate corporate credit union ownership meets or exceeds
50 percent of the CUSO's contributed equity, stock, or membership
interests.
Credit union service organization (CUSO) means both a CUSO under
part 712 of this chapter and a corporate CUSO under this part.
* * * * *
0
3. Revise Sec. 704.5(c)(3) and (h)(6) to read as follows:
Sec. 704.5 Investments.
* * * * *
(c) * * *
(3) CUSOs, subject to the limitations of Sec. 704.11;
* * * * *
(h) * * *
(6) Purchasing collateralized debt obligations or collateralized
loan obligations;
* * * * *
Sec. 704.6 [Amended]
0
4. In Sec. 704.6(c)(2)(vi), remove the word ``corporate'' before the
word ``CUSO.''
Sec. 704.7 [Amended]
0
5. In Sec. 704.7 remove the word ``corporate'' before the word
``CUSO'' each place the word appears and replace ``Sec. 723.16'' with
``Sec. 723.8.''
Sec. 704.8 [Amended]
0
6. In Sec. 704.8(e) replace the phrase ``no less than 2 years'' with
``no less than 1 year.''
0
7. Revise Sec. 704.11 to read as follows:
Sec. 704.11 Credit Union Service Organizations (CUSOs).
(a) Investment and loan limitations. (1) The aggregate of all
investments in member and non-member CUSOs that a corporate credit
union may make must not exceed 15 percent of a corporate credit union's
total capital.
(2) The aggregate of all investments in and loans to member and
nonmember CUSOs a corporate credit union may make must not exceed 30
percent of a corporate credit union's total capital. A corporate credit
union may lend to member and nonmember CUSOs an additional 15 percent
of total capital if the loan is collateralized by assets in which the
corporate has a perfected security interest under state law.
(3) If the limitations in paragraphs (a)(1) and (2) of this section
are reached or exceeded because of the profitability of the CUSO and
the related GAAP valuation of the investment under the equity method
without an additional cash outlay by the corporate, divestiture is not
required. A corporate credit union may continue to invest up to the
regulatory limit without regard to the increase in the GAAP valuation
resulting from the CUSO's profitability.
(b) Due diligence. A corporate credit union must comply with the
commercial loan policy and due diligence requirements of Sec. 723.4 of
this chapter for all loans to CUSOs unless the loan or line of credit
is fully secured by U.S. Treasury or agency securities.
(c) Requirements for CUSOs that are not corporate CUSOs. Corporate
credit union investments in and lending to CUSOs that are not corporate
CUSOs are subject to part 712 of this chapter, except that investment
and loan limitations and due diligence requirements are governed by
this section. CUSOs of state-chartered natural person credit unions are
subject to part 712 of this chapter to the same extent as a CUSO of a
federal credit union.
(d) Requirements for corporate CUSOs. Corporate credit union
authority to invest in or loan to a corporate CUSO is limited to that
provided in this section.
(1) Structure. A corporate CUSO must be structured as a
corporation, limited liability company, or limited partnership under
state law.
(2) Separate entity. (i) A corporate CUSO must be operated as an
entity separate from a corporate credit union.
(ii) A corporate credit union investing in or lending to a
corporate CUSO must obtain a written legal opinion that concludes the
corporate CUSO is organized and operated in a manner that the corporate
credit union will not reasonably be held liable for the obligations of
the corporate CUSO. This opinion must address factors that have led
courts to ``pierce the corporate veil,'' such as inadequate
capitalization, lack of corporate identity, common boards of directors
and employees, control of one entity over another, and lack of separate
books and records.
(3) Permissible activities. (i) A corporate CUSO must agree to
limit its activities to:
(A) Brokerage services,
(B) Investment advisory services, and
(C) Other categories of activities as approved in writing by the
NCUA and published on the NCUA's website.
(ii) Once the NCUA has approved an activity and published that
activity on its website, the NCUA will not remove that particular
activity from the approved list, or make substantial changes to the
content or description of that approved activity, except through the
formal rulemaking process.
(4) Compensation restrictions. An official of a corporate credit
union which has invested in or loaned to a corporate CUSO may not
receive, either directly or indirectly, any salary, commission,
investment income, or other income, compensation, or consideration from
the corporate CUSO. This prohibition also extends to immediate family
members of officials.
(5) Written agreement between the corporate credit union and
corporate CUSO. Prior to making an investment in or loan to a corporate
CUSO, a corporate credit union must obtain a written agreement that the
corporate CUSO:
(i) Will follow GAAP;
(ii) Will provide financial statements to the corporate credit
union at least quarterly;
(iii) Will obtain an annual CPA opinion audit and provide a copy to
the corporate credit union. A consolidated CUSO is not required to
obtain a separate annual audit if it is included in the corporate
credit union's annual audit;
(iv) Will provide the reports as required by Sec. 712.3(d)(4) and
(5) of this chapter;
(v) Will not acquire control, directly or indirectly, of another
depository financial institution or to invest in shares, stocks, or
obligations of an insurance company, trade association, liquidity
facility, or similar organization;
(vi) Will allow the auditor, board of directors, and NCUA complete
access to the CUSO's personnel, facilities, equipment, books, records,
and any other documentation that the auditor, directors, or NCUA deem
pertinent;
(vii) Will inform the corporate, at least quarterly, of all the
compensation paid by the CUSO to its employees who are also employees
of the corporate credit union; and
(viii) Will comply with all the requirements of this section.
(e) Subsidiary restrictions. Any subsidiary of a corporate CUSO is
automatically designated a corporate CUSO and subject to all the
requirements of this section. The requirements of this section apply to
all tiers or levels of a corporate CUSO's structure.
[[Page 71827]]
0
8. Revise Sec. 704.14(a)(2) to read as follows:
Sec. 704.14 Representation.
* * * * *
(a) * * *
(2) Only an individual who currently holds a senior staff position
(e.g., position of chief executive officer, chief financial officer,
chief operating officer, chief information officer, chief risk officer,
treasurer/manager, etc.) at a member credit union, and will hold that
position at the time he or she is seated on the corporate credit union
board if elected, may seek election or re-election to the corporate
credit union board;
* * * * *
Sec. 704.19 [Amended]
0
9. In Sec. 704.19(a), remove the word ``corporate'' before the word
``CUSO''.
0
10. In Sec. 704.21, revise paragraph (c) and remove paragraphs (d) and
(e) to read as follows:
Sec. 704.21 Enterprise risk management.
* * * * *
(c) The ERMC must include at least one risk management expert who
may report either directly to the board of directors or to the ERMC.
The risk management expert's experience must be commensurate with the
size of the corporate credit union and the complexity of its
operations.
[FR Doc. 2020-23185 Filed 11-10-20; 8:45 am]
BILLING CODE 7535-01-P
