Subordinated Debt, 60326-60331 [2022-20926]

Agencies

• National Credit Union Administration

[Federal Register Volume 87, Number 192 (Wednesday, October 5, 2022)]
[Proposed Rules]
[Pages 60326-60331]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-20926]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 702

[NCUA-2022-0138]
RIN 3133-AF43


Subordinated Debt

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: The NCUA Board (Board) is proposing to amend the Subordinated 
Debt rule (the Current Rule), which the Board finalized in December 
2020 with an effective date of January 1, 2022. This proposal would 
make two changes related to the maturity of Subordinated Debt Notes 
(Notes) and Grandfathered Secondary Capital (GSC). Specifically, this 
proposal would replace the maximum maturity of Notes with a requirement 
that any credit union seeking to issue Notes with maturities longer 
than 20 years to demonstrate how such instruments would continue to be 
considered ``debt.'' This proposed rule would also extend the 
Regulatory Capital treatment of GSC to the later of 30 years from the 
date of issuance or January 1, 2052. This proposed extension would 
align the Regulatory Capital treatment of GSC with the maximum 
permissible maturity for any secondary capital issued to the United 
States Government or one of its subdivisions (U.S. Government), under 
an application approved before January 1, 2022. This proposed change 
would benefit eligible low-income credit unions (LICUs) that are either 
participating in the U.S. Department of the Treasury's (Treasury) 
Emergency Capital Investment Program (ECIP) or other programs 
administered by the U.S. Government. This change would also cohere the 
requirements in the Current Rule related to maturities and Regulatory 
Capital treatment of Notes and the Regulatory Capital treatment of GSC, 
while continuing to ensure that credit unions are operating within 
their statutory authority. The Board is making four other, minor 
modifications to the Current Rule to make it more user-friendly and 
flexible. Specifically, the Board is proposing to amend the definition 
of ``Qualified Counsel'' to clarify that such person(s) is not required 
to be licensed to practice law in every jurisdiction that may relate to 
an issuance. The Board is also proposing to amend two sections of the 
Current Rule to remove the ``statement of cash flow'' from the Pro 
Forma Financial Statements requirement and replace it with a 
requirement for ``cash flow projections.'' This change would better 
align the requirements of the Current Rule with the customary way 
credit unions develop Pro Forma Financial Statements and ``cash flow 
projections.'' Next, the Board is proposing to revise the section of 
the Current Rule on filing requirements and inspection of documents. 
This proposed changed would align this section of the Current Rule with 
current agency procedures. Finally, the Board is proposing to remove a 
parenthetical reference related to GSC that no longer counts as 
Regulatory Capital. This change would align the rule with recent 
changes made to the Call Report.

DATES: Comments must be received on or before December 5, 2022.

ADDRESSES: You may submit written comments, identified by RIN 3133-
AF43, by any of the following methods (Please send comments by one 
method only):
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments on Docket NCUA-2022-
0138.
     Mail: Address to Melane Conyers-Ausbrooks, Secretary of 
the Board, National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.
     Hand Delivery or Courier: Same as mail address.
    Public Inspection: You may view all public comments on the Federal 
eRulemaking Portal at https://www.regulations.gov, as submitted, except 
for those we cannot post for technical reasons. The NCUA will not edit 
or remove any identifying or contact information from the public 
comments submitted. Due to social distancing measures in effect, the 
usual opportunity to inspect paper copies of comments in the NCUA's law 
library is not currently available. After social distancing measures 
are relaxed, visitors may make an appointment to review paper copies by 
calling (703) 518-6540 or emailing [email protected].

FOR FURTHER INFORMATION CONTACT: Policy: Tom Fay, Director of Capital 
Markets, Office of Examination and Insurance. Legal: Justin M. 
Anderson, Senior Staff Attorney, Office of General Counsel, 1775 Duke 
Street, Alexandria, VA 22314-3428. Tom Fay can be

[[Page 60327]]

reached at (703) 518-1179, and Justin Anderson can be reached at (703) 
518-6540.

SUPPLEMENTARY INFORMATION:

I. Background

A. The Current Rule History

    At its December 2020 meeting, the Board issued a final Subordinated 
Debt rule (the final rule).\1\ The final rule permitted LICUs, complex 
credit unions, and new credit unions to issue Subordinated Debt for 
purposes of Regulatory Capital treatment.\2\ Relevant to this proposed 
rule, the final rule included a provision providing that any secondary 
capital issued by LICUs under previously effective 12 CFR 701.34(b), 
outstanding as of the effective date of the final rule, would be 
considered GSC. The grandfathering provision of the final rule allowed 
LICUs with GSC to continue to be subject to the requirements of Sec.  
701.34(b), (c), and (d) (recodified in the Current Rule as Sec.  
702.414), rather than the requirements of the Current Rule. The final 
rule also included a provision stating that any issuances of secondary 
capital not completed by January 1, 2022, are, as of January 1, 2022, 
subject to the requirements of the Current Rule. Finally, the 
grandfathering provision in the final rule stated that GSC would 
continue to receive Regulatory Capital treatment for a period of 20 
years from the effective date of the final rule.\3\
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    \1\ Throughout this document the Board uses the term ``final 
rule'' to refer to the final Subordinated Debt rule published in the 
Federal Register on February 23, 2021. The Board uses the term ``the 
Current Rule'' to refer to the current Subordinated Debt rule, as 
published in the Code of Federal Regulations, which includes the 
``final rule'' and subsequent amendments.
    \2\ 86 FR 11060 (Feb. 23, 2021). Unless otherwise noted, 
capitalized terms in this preamble are defined in the Current Rule.
    \3\ Id.
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    The final rule also contained a provision requiring Notes to have a 
minimum maturity of five years and a maximum maturity of 20 years.
    After the NCUA issued the final rule, Congress passed the 
Consolidated Appropriations Act, 2021.\4\ The Consolidated 
Appropriations Act, among other things, created the ECIP. Under the 
ECIP, Congress appropriated funds and directed Treasury to make 
investments in ``eligible institutions'' to support their efforts to 
``provide loans, grants, and forbearance for small businesses, 
minority-owned businesses, and consumers, especially in low-income and 
underserved communities.'' \5\ The definition of ``eligible 
institutions'' includes federally insured credit unions that are 
minority depository institutions or community development financial 
institutions, provided such credit unions are not in troubled condition 
or subject to any formal enforcement actions related to unsafe or 
unsound lending practices.\6\
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    \4\ Consolidated Appropriations Act, 2021, Public Law 116-260 
(H.R. 133), Dec. 27, 2020.
    \5\ Id. codified at 12 U.S.C. 4703a et seq.
    \6\ 12 U.S.C. 4703a(a)(2). Throughout this document, the Board 
only refers to LICUs, as those are the only eligible institutions 
that could receive secondary capital treatment for the ECIP 
investments.
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    Under the terms developed by Treasury, investments in eligible 
credit unions are in the form of subordinated debt.\7\ Treasury also 
aligned its investments in LICUs with the Federal Credit Union Act (the 
Act) and the NCUA's regulations, which allowed eligible LICUs to apply 
to the NCUA for secondary capital treatment for these investments. 
Relevant to this proposed rule, Treasury offered either 15- or 30-year 
maturity options for the investments.
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    \7\ Throughout this document the term ``Subordinated Debt'' 
(initial caps) refers to issuances conducted under the Current Rule. 
Conversely, the term ``subordinated debt'' (lower-cased) refers to 
debt issuances conducted outside of the Current Rule, such as those 
under the ECIP.
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    Treasury opened the ECIP application process on March 4, 2021, with 
an application deadline of May 7, 2021. Treasury extended this deadline 
to September 1, 2021.
    In October 2021, the NCUA issued a Letter to Credit Unions 
permitting LICUs participating in the ECIP to issue 30-year 
subordinated debt instruments.\8\ This letter and its enclosure are 
discussed in more detail in subsequent sections of this document.
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    \8\ Letter to Credit Unions 21-CU-11, Emergency Capital 
Investment Program Participation and enclosed Supervisory Letter No. 
21-02 (Oct. 20, 2021), available at https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/emergency-capital-investment-program-participation.
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    In December 2021, the Board issued a final amendment to the Current 
Rule permitting secondary capital to be considered GSC regardless of 
the actual issuance date, provided a secondary capital issuance was:
    1. To the U.S. Government; and
    2. Being conducted under a secondary capital application that was 
approved before January 1, 2022, under either Sec.  701.34 of the 
NCUA's regulations for federal credit unions, or Sec.  741.203 of the 
NCUA's regulations for federally insured, state-chartered credit 
unions.\9\
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    \9\ 12 CFR 701.34 and 741.203; 86 FR 72807 (Dec. 23, 2021).
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    The final amendment and Letter to Credit Unions provided LICUs with 
additional flexibility to participate in the ECIP without being subject 
to the terms of the Current Rule.

B. Maturity and Regulatory Capital Treatment for GSC

    The Current Rule restricts the maturity of Notes to a minimum of 
five years and a maximum of 20 years. In alignment with this maximum 
maturity, the Current Rule also terminates Regulatory Capital treatment 
for GSC after a period of 20 years beginning on the later of the date 
of issuance or January 1, 2022 (the effective date of the Current 
Rule).
    As previously noted, under the ECIP, Treasury enabled LICUs to 
issue 30-year subordinated debt instruments. The Supervisory Letter 
enclosed to the Letter to Credit Unions discussed in section I of this 
document stated: ``federally insured, state-chartered LICUs typically 
issue secondary capital under similar borrowing authority. As such, the 
agency has taken certain precautions to ensure that issuances under the 
ECIP that receive secondary capital treatment are considered debt. Such 
precautions have included the agency prohibiting LICUs from receiving 
secondary capital treatment for issuances under the ECIP's 30-year 
option.'' \10\ The Supervisory Letter, however, went on to state that 
after further consideration, the agency was recalibrating its position 
and permitting LICUs to issue 30-year subordinated debt under the ECIP. 
In relevant portion, the Supervisory Letter stated:
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    \10\ Letter to Credit Unions 21-CU-11, Emergency Capital 
Investment Program Participation and enclosed Supervisory Letter No. 
21-02 (Oct. 20, 2021).

    The agency has always recognized that no one term or factor of 
an ECIP instrument is dispositive in characterizing the nature of 
the instrument. As such, the agency is satisfied that the close 
collaboration between the NCUA and Treasury, the unique status of 
the ECIP, and the terms of the instrument have resulted in an 
instrument that complies with the Federal Credit Union Act, even 
with a 30-year term.\11\
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    \11\ Id.

    While this change facilitated LICU participation in the ECIP, the 
agency recognizes that there is a distinct mismatch between a 30-year 
ECIP subordinated debt instrument and the 20-year maximum Regulatory 
Capital treatment of the same. To address this discrepancy, the NCUA 
conducted additional research into the issues of maximum Regulatory 
Capital treatment for GSC and the broader issue of a maximum maturity 
for new Subordinated Debt issuances.

[[Page 60328]]

    Both the maximum Regulatory Capital treatment for GSC and the 
maximum maturity for Notes are based on the statutory authority under 
which an FCU issues both instruments. Specifically, an FCU can only 
issue these instruments under its authority to borrow from any source. 
Therefore, the agency took precautions in the Current Rule to ensure 
that all issuances were in the form of debt. As noted in the January 
2020 proposed Subordinated Debt rule, such precautions included 
imposing a maximum maturity of 20 years on Notes. The Board stated it 
was proposing such requirement ``to help ensure the Subordinated Debt 
is properly characterized as debt rather than equity. Generally, by its 
nature, debt has a stated maturity, whereas equity does not.'' \12\
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    \12\ 85 FR 13892 (Mar. 10, 2020).
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    With respect to GSC, the January 2020 proposed Subordinated Debt 
rule stated:

    The Board believes 20 years would provide a LICU sufficient time 
to replace Grandfathered Secondary Capital with Subordinated Debt if 
such LICU seeks continued Regulatory Capital benefits of 
Subordinated Debt. The Board believes it is important to strike a 
balance between transitioning issuers of Grandfathered Secondary 
Capital to this proposed rule and ensuring that instruments do not 
indefinitely remain as Grandfathered Secondary Capital.\13\
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    \13\ Id.

    The 20-year Regulatory Capital treatment for GSC also aligned with 
the aforementioned maximum maturity for Notes issued under the Current 
Rule.
    As the Board received feedback from the credit union industry on 
the mismatch between ECIP investment maturity and the Regulatory 
Capital treatment of the same, the NCUA conducted additional research 
into whether a 20-year maturity was necessary to ensure an FCU was 
operating squarely within its statutory authority when issuing Notes. 
While the Board continues to believe that a 20-year maturity is an 
appropriate demarcation point to ensure an FCU is issuing Subordinated 
Debt under its statutory authority, the agency's additional research 
has provided grounds to offer additional flexibility in this area. 
Based on this additional research, the Board is proposing the 
amendments discussed in the next section.

II. Proposed Changes

A. Regulatory Capital Treatment for GSC

    The Board is proposing revisions to Sec.  702.401(b) to permit GSC 
to receive Regulatory Capital treatment for a period of 30 years from 
the later of the date of issuance or January 1, 2022. This change would 
accomplish multiple goals. First, it would align the Regulatory Capital 
treatment with the maximum permissible maturity for secondary capital 
issued under the ECIP. The Board believes that this change is necessary 
to enable LICUs to receive the maximum benefit of the ECIP, as intended 
by Congress and effectuated by Treasury. Capital with longer maturities 
helps credit unions make more loans to underserved communities and 
improve the economic well-being in these areas. In addition, longer 
maturities will also allow participating credit unions to meet the 
statutory mission of the credit union system of meeting the credit and 
savings needs of members, particularly those people of modest means
    Second, this proposed change would align the Regulatory Capital 
treatment across all GSC. This alignment provides additional 
flexibility to those LICUs with GSC that has a maturity longer than 20 
years, while still striking a balance between transitioning issuers of 
GSC to the Current Rule and ensuring that instruments do not 
indefinitely remain as GSC. Further, as discussed in the next 
subsection, this alignment would also be consistent with the Board's 
proposed recalibration of the maturity requirement for Notes issued 
under the Current Rule.

B. Maximum Maturity of Notes

    As noted earlier, the Current Rule contains the following 
requirement that Notes:

    Have, at the time of issuance, a fixed stated maturity of at 
least five years and not more than 20 years from issuance. The 
stated maturity of the Subordinated Debt Note may not reset and may 
not contain an option to extend the maturity[.] \14\
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    \14\ Id. at 702.404(a)(2).

    Additionally, the Board implemented this requirement to help an FCU 
issuing Subordinated Debt comply with its statutory authority.\15\ As 
industry experts have correctly pointed out, the fixed stated maturity 
of an instrument is but one factor a court will evaluate in deciding 
whether an instrument is debt or equity. Courts have traditionally 
listed between 9 and 13 factors to be evaluated in determining if an 
instrument is debt or equity.\16\
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    \15\ While the Current Rule applies to both FCUs and FISCUs, 
authority for issuances by FISCUs is derived from state law, rather 
than the Act.
    \16\ Hewlett-Packard Co. v. Comm'r, 103 T.C.M. (CCH) 1736 (T.C. 
2012), aff'd sub nom. Hewlett-Packard Co. v. Comm'r, 875 F.3d 494 
(9th Cir. 2017). A.R. Lantz Co., 424 F.2d at 1333 (citing O.H. Kruse 
Grain & Milling v. Comm'r, 279 F.2d 123, 125-126 (9th Cir. 1960), 
aff'g T.C. Memo.1959-110).
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    During the formulation of the Current Rule, the agency engaged the 
services of an outside law firm that specializes in, among other 
things, taxation and securities law. Based on the research conducted by 
that firm and NCUA staff, the Board determined that 20 years was an 
advantageous demarcation point. NCUA staff and the Board are aware that 
courts have never set a strict limit on the length of a fixed stated 
maturity for purposes of a debt versus equity analysis. The agency 
recognizes that courts have, in some cases, found an instrument to be 
debt despite a maturity in excess of 50 years.\17\ As discussed by 
legal scholars, as a general rule, the shorter the time between 
issuance of the debt instrument and the maturity or redemption date, 
the more the instrument appears to be debt.\18\ Therefore, the Board 
continues to believe that 20 years is a sufficient demarcation point to 
balance flexibility with a rule firmly rooted in statutory authority. 
The Board, however, recognizes that a fixed stated maturity date is but 
one factor in a debt versus equity analysis, and, as noted by the U.S. 
Supreme Court: ``[t]here is no one characteristic . . . which can be 
said to be decisive in the determination of whether obligations are 
risk investments in the corporations or debt.'' \19\ Considering the 
factors mentioned above, the Board is proposing to provide Issuing 
Credit Unions with additional flexibility on this requirement.
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    \17\ ``Although 50 years might under some circumstances be 
considered as a long time for the principal of a debt to be 
outstanding, we must take into consideration the substantial nature 
of the * * * [taxpayer's] business, and the fact that it had been in 
corporate existence since [*62] 1897, or 61 years prior to the 
issuance of the debentures. Therefore, we think that a 50-year term 
in the present case is not unreasonable. * * * [Monon R.R. v. 
Comm'r, 55 T.C. at 359]. PepsiCo Puerto Rico, Inc. v. Comm'r, 104 
T.C.M. (CCH) 322 (T.C. 2012).''
    \18\ ``Federal Income Taxation of Debt Instruments,'' David C. 
Garlock, Matthew S. Blum, Kyle H. Klein, Richard G. Larkins & Alan 
B. Munro (2011).
    \19\ John Kelley Co. v. Comm'r, 326 U.S. 521, 530 (1946).
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    The Board is proposing to remove the maximum maturity limit of 20 
years from Sec.  702.404(a)(2) of the NCUA regulations.\20\ In its 
place, the Board is proposing a requirement that a credit union must 
provide certain information in its application for preapproval under 
Sec.  702.408 when applying to issue Notes with maturities longer than 
20 years from the date of issuance. To demonstrate the issuance is 
debt, this proposal includes a new paragraph in

[[Page 60329]]

Sec.  702.408(b) that requires a credit union applying to issue Notes 
with maturities longer than 20 years to submit, at the discretion of 
the Appropriate Supervision Office, one or more of the following:
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    \20\ 12 CFR 702.404(a)(2).
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    1. A written legal opinion from a Qualified Counsel;
    2. A written opinion from a licensed CPA; and
    3. An analysis conducted by the credit union or independent third-
party.
    The Board believes this proposed structure would provide a credit 
union with additional flexibility to issue Notes with maturities longer 
than 20 years, provided the credit union can demonstrate that the Notes 
would be considered debt. The Board notes that the discretion on what 
information is necessary to satisfy this requirement would rest with 
the Appropriate Supervision Office, but this determination would be 
based on the overall structure of the issuance, including the fixed 
stated maturity and any other information requested by the Appropriate 
Supervision Office.\21\
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    \21\ Id. at Sec.  702.408(b).
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    As the entire Current Rule is designed to help ensure Notes would 
be considered debt, the Board does not anticipate that a legal or CPA 
opinion would be necessary for issuances that have fixed stated 
maturities that are not significantly longer than 20 years and do not 
contain any other features or terms that could be viewed as akin to an 
equity issuance. The Board notes, however, that every issuance is 
unique and, while unlikely, it is still possible a legal or CPA opinion 
may be necessary to fully ensure that a Note would be considered debt 
irrespective of the degree to which the maturity exceeds 20 years.
    The Board believes this proposed structure is consistent with its 
original line of thinking with respect to debt versus equity and fixed 
stated maturities. However, this proposed structure more fully takes 
account of the other debt features of the Current Rule and the court 
decisions on debt versus equity.

C. Other Proposed Changes

1. Qualified Counsel
    The Board is proposing to amend the definition of ``Qualified 
Counsel'' to clarify where such person(s) must be licensed to practice 
law. Current Sec.  702.402 defines ``Qualified Counsel'' as ``an 
attorney licensed to practice law in the relevant jurisdiction(s) who 
has expertise in the areas of Federal and state securities laws and 
debt transactions similar to those described in this subpart.'' \22\ 
The agency is aware that there is some confusion about the requirement 
that such person be ``licensed to practice law in the relevant 
jurisdiction(s).'' The Board's intention is not to mandate that 
``Qualified Counsel'' be licensed to practice law in every jurisdiction 
that may be relevant to the issuance. Rather, this requirement is meant 
to specify that a ``Qualified Counsel'' is:
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    \22\ Id. at Sec.  702.402.
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    1. Licensed to practice law;
    2. Has expertise in the areas of Federal and state securities laws 
and debt transactions similar to those described in the Current Rule; 
and
    3. Qualified to provide sufficient advice to a credit union to 
comply with the requirement in Sec.  702.406(f) that an Issuing Credit 
Union must comply with all applicable Federal and state securities 
laws.\23\
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    \23\ Id. at Sec.  702.406(f).
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    Therefore, the Board is proposing to remove ``in the relevant 
jurisdiction(s)'' from the definition of ``Qualified Counsel.'' This 
change would clarify the intention of this requirement and lessen the 
burden on credit unions, while not detracting from the expertise aspect 
of this requirement. The Board, however, reiterates that under Sec.  
702.406(f), an Issuing Credit union must comply with all Federal and 
state securities laws. An Issuing Credit Union, therefore, must ensure 
that it is able to ascertain, understand, and comply with all 
securities laws that apply to an issuance.
2. Statement of Cash Flows
    The Board is proposing to amend Sec. Sec.  702.408(b)(7) and 
702.409(b)(2) to remove the statement of cash flow from the Pro Forma 
Financial Statements requirement and replace it with the requirement 
for cash flow projections.\24\ Since the final rule was published in 
early 2021, NCUA has received several inquiries on the requirement of a 
pro forma statement of cash flow and whether a cash flow projection 
will suffice. The primary difference between a pro forma statement of 
cash flow and a cash flow projection is the former is a formal 
accounting statement and the latter is not. The Board believes a cash 
flow projection would suffice because the Appropriate Supervision 
Office needs cash flow projections, but not necessarily a Generally 
Accepted Accounting Principles accounting statement to evaluate the 
viability of an issuance. This change would also increase clarity in 
the Current Rule.
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    \24\ Id. at Sec. Sec.  702.408(b)(7) and 702.409(b)(2).
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3. Filing Requirements and Inspection of Documents
    The Board is proposing to amend the section of the Current Rule 
addressing the filing of documents and inspection of documents.\25\ 
First, the Board is proposing to amend the title of this paragraph by 
removing the phrase ``inspection of documents.'' This phrase could be 
confusing, as this paragraph does not include a separate mechanism for 
inspecting documents outside of the Freedom of Information Act. As most 
Subordinated Debt documents submitted to the agency could be exempt 
from disclosure, the Board believes the Freedom of Information Act is 
the appropriate mechanism for requesting Subordinated Debt 
applications, Offering Documents, or other Subordinated Debt filings 
submitted by credit unions from the NCUA.
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    \25\ Id. at Sec.  702.408(l)(2).
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    Second, the Board is proposing to replace the current requirement 
that a credit union submit all applicable documents via the NCUA's 
website with a requirement that a credit union make all submissions 
directly to the Appropriate Supervision Office. The Board notes that 
this proposed change is consistent with current practices, as well as 
how filings were handled for secondary capital. As most credit unions 
are already accustomed to this process, the Board believes this change 
would reduce confusion and forgo an additional step in the submission 
process.
4. Categorization of GSC That No Longer Counts as Regulatory Capital
    The Board is proposing to revise Sec.  702.414(c) by removing 
``(``discounted secondary capital'' re-categorized as Subordinated 
Debt).'' This change would align this section to the current treatment 
of GSC on the Call Report, revised in the spring of 2022. In early 
2022, the NCUA conducted a comprehensive review of the Call Report that 
led to the removal of the ``Subordinated Debt'' and ``Subordinated Debt 
included in Net Worth'' accounts and combined them into one 
``Subordinated Debt'' line. This change makes the aforementioned 
parenthetical obsolete. The Board notes, however, that while the Call 
Report has changes related to the reporting of Subordinated Debt in the 
Liability section, credit unions will continue to count qualified and 
approved Subordinated Debt or GSC for Net

[[Page 60330]]

Worth and Risk-Based Capital, when applicable.

III. Regulatory Procedures

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemaking in 
which an agency creates a new or amends existing information collection 
requirements.\26\ For purposes of the PRA, an information collection 
requirement may take the form of a reporting, recordkeeping, or a 
third-party disclosure requirement. The NCUA may not conduct or 
sponsor, and the respondent is not required to respond to an 
information collection, unless it displays a valid Office of Management 
and Budget (OMB) control number. The current information collection 
requirements for Subordinated Debt are approved under OMB control 
number 3133-0207.
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    \26\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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    This rule proposes to remove the maximum maturity of Subordinated 
Debt Notes of 20 years and replace it with a requirement that a credit 
union seeking to issue Subordinated Debt Notes with maturities longer 
than 20 years, provide additional information as part of its 
application prescribed under new Sec.  702.408(b)(15). This proposed 
reporting requirement is estimated to impact two credit unions applying 
to issue Subordinated Debt for an additional 20 hours per response, an 
increase of 40 burden hours annually. The following shows the total PRA 
estimate for the entire Subordinated Debt rule, inclusive of the 
additions referenced in the preceding sentence:
    OMB Control Number: 3133-0207.
    Title of information collection: Subordinated Debt, 12 CFR part 
702, subpart D.
    Estimated number respondents: 3,300.
    Estimated number of responses per respondent: 1.12.
    Estimated total annual responses: 3,705.
    Estimated total annual burden hours per response: 1.54.
    Estimated total annual burden hours: 5,702.
    The NCUA invites comments on: (1) whether the proposed collection 
of information is necessary for the proper performance of the functions 
of the agency, including whether the information will have practical 
utility; (2) the accuracy of the agency's estimate of the burden of the 
proposed collection of information, including the validity of the 
methodology and assumptions used; (3) ways to enhance the quality, 
utility, and clarity of the information to be collected; (4) ways to 
minimize the burden of the collection of information on those who are 
to respond, including through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology; and (5) estimates of capital or 
start-up costs and cost of operation, maintenance, and purchase of 
services to provide information.
    All comments are a matter of public record. Interested persons are 
invited to submit written comments to (1) www.reginfo.gov/public/do/PRAMain (find this particular information collection by selecting the 
Agency under ``Currently under Review'') and to (2) Dawn Wolfgang, 
National Credit Union Administration, 1775 Duke Street, Suite 6032, 
Alexandria, VA 22314-3428; Fax No. 703-519-8579; or email at 
[email protected]. Given the limited in-house staff because of the 
COVID-19 pandemic, email comments are preferred.

B. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. The 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the Executive Order to adhere to fundamental 
federalism principles.
    This proposed rule would not have substantial direct effects on the 
states, on the relationship between the national government and the 
states, or on the distribution of power and responsibilities among the 
various levels of government. The proposed rule would affect only a 
small number of state-chartered LICUs with approved secondary capital 
applications for issuances to the U.S. Government or its subdivisions. 
This proposed rule would extend the Regulatory Capital treatment for 
GSC, eliminate the maximum maturity for Subordinated Debt, and make two 
minor clarifying changes. The proposed rule would not impose any new 
significant burden on credit unions and may ease some existing 
requirements. The NCUA has therefore determined that this proposed rule 
does not constitute a policy that has federalism implications for 
purposes of the Executive Order.

C. Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this proposed rule would 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).

D. Regulatory Flexibility Act

    The Regulatory Flexibility Act \27\ requires the NCUA to prepare an 
analysis to describe any significant economic impact a regulation may 
have on a substantial number of small entities (defined as credit 
unions with under $100 million in assets).\28\ This proposed rule would 
affect only a small number of LICUs with approved secondary capital 
applications for issuances to the U.S. Government or its subdivisions. 
This proposed rule would extend the Regulatory Capital treatment for 
GSC, eliminate the maximum maturity for Subordinated Debt, and make two 
minor clarifying changes. The proposed rule would not impose any new 
significant burden on credit unions and may ease some existing 
requirements. Accordingly, the NCUA certifies that this proposed rule 
would not have a significant economic impact on a substantial number of 
small credit unions.
---------------------------------------------------------------------------

    \27\ 5 U.S.C. 601 et seq.
    \28\ Id. at 603(a); NCUA Interpretive Ruling and Policy 
Statement 15-2.
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List of Subjects

12 CFR Part 702

    Credit unions, Reporting and recordkeeping requirements.

    By the NCUA Board on September 22, 2022.
Melane Conyers-Ausbrooks,
Secretary of the Board.

    For the reasons discussed in the preamble, the NCUA Board proposes 
to amend 12 CFR part 702, as follows:

PART 702--CAPITAL ADEQUACY

0
1. The authority citation for part 702 continues to read as follows:

    Authority: 12 U.S.C. 1766(a), 1790d.

0
2. Revise Sec.  702.401(b) to read as follows:

Sec.  702.401  Purpose and scope.

* * * * *
    (b) Grandfathered Secondary Capital. Any secondary capital defined 
as ``Grandfathered Secondary Capital,'' under Sec.  702.402 of this 
part, is governed by Sec.  702.414 of this part. Grandfathered 
Secondary Capital will no longer be treated as Regulatory Capital as of 
the later of 30 years from the date of issuance or January 1, 2052.
0
3. In Sec.  702.402, revise the definitions for ``Qualified Counsel'' 
and ``Regulatory Capital'' to read as follows:

[[Page 60331]]

Sec.  702.402  Definitions.

* * * * *
    Qualified Counsel means an attorney licensed to practice law who 
has expertise in the areas of Federal and state securities laws and 
debt transactions similar to those described in this subpart.
    Regulatory Capital means:
    (1) With respect to an Issuing Credit Union that is a LICU and not 
a complex credit union, the aggregate outstanding principal amount of 
Subordinated Debt and, until the later of 30 years from the date of 
issuance or January 1, 2052, Grandfathered Secondary Capital that is 
included in the credit union's net worth ratio;
    (2) With respect to an Issuing Credit Union that is a complex 
credit union and not a LICU, the aggregate outstanding principal amount 
of Subordinated Debt that is included in the credit union's RBC Ratio, 
if applicable;
    (3) With respect to an Issuing Credit Union that is both a LICU and 
a complex credit union, the aggregate outstanding principal amount of 
Subordinated Debt and, until the later of 30 years from the date of 
issuance or January 1, 2052, Grandfathered Secondary Capital that is 
included in its net worth ratio and in its RBC Ratio, if applicable; 
and
    (4) With respect to a new credit union, the aggregate outstanding 
principal amount of Subordinated Debt and, until the later of 30 years 
from the date of issuance or January 1, 2052, Grandfathered Secondary 
Capital that is considered pursuant to Sec.  702.207.
* * * * *
0
4. In Sec.  702.404, revise the section heading and paragraph (a)(2) to 
read as follows:


Sec.  702.404  Requirements of the Subordinated Debt Note.

    (a) * * *
    (1) * * *
    (2) Have, at the time of issuance, a fixed stated maturity of at 
least five years. The stated maturity of the Subordinated Debt Note may 
not reset and may not contain an option to extend the maturity. A 
credit union seeking to issue Subordinated Debt Notes with maturities 
longer than 20 years from the date of issuance must provide the 
information required in Sec.  702.408(b)(14) as part of its application 
for preapproval to issue Subordinated Debt;
* * * * *
0
5. In Sec.  702.408:
0
a. Revise paragraph (b)(7);
0
b. Redesignate paragraphs (b)(14) and (15) as paragraphs (b)(15) and 
(16);
0
c. Add new paragraph (b)(14); and
0
d. Revise paragraph (l)(1).
    The revisions and addition read as follows:


Sec.  702.408  Preapproval to Issue Subordinated Debt.

* * * * *
    (b) * * *
* * * * *
    (7) Pro Forma Financial Statements (balance sheet and income 
statement) and cash flow projections, including any off-balance sheet 
items, covering at least two years. Analytical support for key 
assumptions and key assumption changes must be included in the 
application. Key assumptions include, but are not limited to, interest 
rate, liquidity, and credit loss scenarios;
* * * * *
    (14) In the case of a credit union applying to issue Subordinated 
Debt Notes with maturities longer than 20 years, an analysis 
demonstrating that the proposed Subordinated Debt Notes would be 
properly characterized as debt in accordance with U.S. GAAP. The 
Appropriate Supervision Office may require that such analysis include 
one or more of the following:
    (i) A written legal opinion from a Qualified Counsel;
    (ii) A written opinion from a licensed CPA; and
    (iii) An analysis conducted by the credit union or independent 
third party;
* * * * *
    (l) Filing requirements.
    (1) Except as otherwise provided in this section, all initial 
applications, Offering Documents, amendments, notices, or other 
documents must be filed electronically with the Appropriate Supervision 
Office. Documents may be signed electronically using the signature 
provision in 17 CFR 230.402 (Rule 402 under the Securities Act of 1933, 
as amended).
* * * * *
0
6. In Sec.  702.409, revise paragraph (b)(2) to read as follows:
* * * * *
    (b) * * *
    (2) Pro Forma Financial Statements (balance sheet and income 
statement) and cash flow projections, including any off-balance sheet 
items, covering at least two years. Analytical support for key 
assumptions and key assumption changes must be included in the 
application. Key assumptions include, but are not limited to, interest 
rate, liquidity, and credit loss scenarios.
* * * * *


Sec.  702.414  [Amended]

0
7. In Sec.  702.414(c) introductory text, remove the phrase 
``(``discounted secondary capital'' re-categorized as Subordinated 
Debt)''.

[FR Doc. 2022-20926 Filed 10-4-22; 8:45 am]
BILLING CODE 7535-01-P