Subordinated Debt, 18006-18011 [2023-05808]

Download as PDF 18006 Federal Register / Vol. 88, No. 58 / Monday, March 27, 2023 / Rules and Regulations III. Congressional Review Act This RG is a rule as defined in the Congressional Review Act (5 U.S.C. 801–808). However, the Office of Management and Budget has not found it to be a major rule as defined in the Congressional Review Act. IV. Backfitting, Forward Fitting, and Issue Finality Issuance of RG 1.129, Revision 4 does not constitute backfitting as defined in § 50.109 of title 10 of the Code of Federal Regulations (10 CFR), ‘‘Backfitting,’’ and as described in NRC Management Directive (MD) 8.4, ‘‘Management of Backfitting, Forward Fitting, Issue Finality, and Information Requests’’ (ADAMS Accession No. ML18093B087); constitute forward fitting as that term is defined and described in MD 8.4; or affect the issue finality of any approval issued under 10 CFR part 52, ‘‘Licenses, Certificates, and Approvals for Nuclear Power Plants.’’ As explained in RG 1.129, Revision 4, applicants and licensees are not required to comply with the positions set forth in this regulatory guide. V. Submitting Suggestions for Improvement of Regulatory Guides A member of the public may, at any time, submit suggestions to the NRC for improvement of existing RGs or for the development of new RGs. Suggestions can be submitted on the NRC’s public website at https://www.nrc.gov/readingrm/doc-collections/reg-guides/ contactus.html. Suggestions will be considered in future updates and enhancements to the ‘‘Regulatory Guide’’ series. Dated: March 22, 2023. For the Nuclear Regulatory Commission. Meraj Rahimi, Chief, Regulatory Guide and Programs Management Branch, Division of Engineering, Office of Nuclear Regulatory Research. [FR Doc. 2023–06285 Filed 3–24–23; 8:45 am] BILLING CODE 7590–01–P NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Part 702 ddrumheller on DSK120RN23PROD with RULES1 RIN 3133–AF43 Subordinated Debt National Credit Union Administration (NCUA). ACTION: Final rule. AGENCY: The NCUA Board (Board) is amending the Subordinated Debt rule (current rule), which it finalized in SUMMARY: VerDate Sep<11>2014 18:20 Mar 24, 2023 Jkt 259001 December 2020 with an effective date of January 1, 2022. This final rule makes two changes related to the maturity of Subordinated Debt Notes and Grandfathered Secondary Capital. Specifically, this final rule replaces the maximum permissible maturity of Subordinated Debt Notes with a requirement that any credit union seeking to issue Subordinated Debt Notes with maturities longer than 20 years demonstrate how such instruments would continue to be considered ‘‘debt.’’ This final rule also extends the Regulatory Capital treatment of Grandfathered Secondary Capital to the later of 30 years from the date of issuance or January 1, 2052. This extension will align the Regulatory Capital treatment of Grandfathered Secondary Capital with the maximum permissible maturity for any secondary capital issued by low-income credit unions (LICUs) under the 2022 U.S. Department of the Treasury’s (Treasury) Emergency Capital Investment Program (ECIP) or other programs administered by the U.S. Government. In addition, the Board is making four minor modifications to other sections of the current rule to make it more userfriendly and flexible. DATES: The final rule is effective April 26, 2023. 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 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 2020 final rule).1 The 2020 final rule permitted LICUs, complex credit unions, and new credit unions to issue Subordinated Debt for purposes of being included in Regulatory Capital.2 Relevant to this final rule, the 2020 final rule provided that any secondary capital 1 Throughout this document the Board uses the term ‘‘2020 final rule’’ to refer to the final Subordinated Debt rule issued in December 2020 and 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 ‘‘2020 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. PO 00000 Frm 00002 Fmt 4700 Sfmt 4700 issued by LICUs under previously effective 12 CFR 701.34(b), outstanding as of the effective date of the 2020 final rule, would be considered Grandfathered Secondary Capital. The grandfathering provision of the 2020 final rule allowed LICUs with Grandfathered Secondary Capital to continue to be subject to the requirements of § 701.34(b), (c), and (d) (recodified in the current rule as § 702.414), rather than the requirements of the current rule. The 2020 final rule also provided 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 2020 final rule stated that Grandfathered Secondary Capital would continue to be included in Regulatory Capital for up to 20 years from the effective date of the 2020 final rule.3 The 2020 final rule also contained a provision requiring Subordinated Debt Notes to have a minimum maturity of five years and a maximum maturity of 20 years. After the NCUA issued the 2020 final rule, Congress passed the Consolidated Appropriations Act, 2021.4 The Consolidated Appropriations Act, 2021, among other things, created the ECIP. Under the ECIP, Congress appropriated funds and directed Treasury to make investments in ‘‘eligible institutions’’ to support the institutions’ 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 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 3 Id. 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. 7 Throughout this document the term ‘‘Subordinated Debt’’ (initial caps) refers to issuances conducted under the current rule. Conversely, the term ‘‘subordinated debt’’ (lowercase) refers to debt issuances conducted outside of the current rule, such as those under the ECIP. E:\FR\FM\27MRR1.SGM 27MRR1 Federal Register / Vol. 88, No. 58 / Monday, March 27, 2023 / Rules and Regulations 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 final rule, Treasury offered either 15- or 30-year maturity options for the investments. 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 In December 2021, the Board issued a final amendment to the current rule permitting secondary capital to be considered Grandfathered Secondary Capital regardless of the actual issuance date, provided the secondary capital issuance met the following conditions: 1. It was issued to the U.S. Government; and 2. It was conducted under a secondary capital application that was approved before January 1, 2022, under either § 701.34 of the NCUA’s regulations for Federal credit unions, or § 741.203 of the NCUA’s regulations for federally insured, statechartered credit unions.9 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 Treatment as Regulatory Capital for Grandfathered Secondary Capital The current rule restricts the maturity of Subordinated Debt Notes to a minimum of five years and a maximum of 20 years. In alignment with this maximum maturity, the current rule also terminates Grandfathered Secondary Capital’s inclusion in Regulatory Capital after a maximum 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 allowed 30-year subordinated debt instruments. The Supervisory Letter accompanying the Letter to Credit Unions discussed in the previous section of this document stated: ddrumheller on DSK120RN23PROD with RULES1 [F]ederally insured, state-chartered LICUs typically issue secondary capital under 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-otherguidance/emergency-capital-investment-programparticipation. 9 12 CFR 701.34 and 741.203; 86 FR 72807 (Dec. 23, 2021). VerDate Sep<11>2014 18:20 Mar 24, 2023 Jkt 259001 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 the following: 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 30year term.11 While this change facilitated LICU participation in the ECIP, the agency recognized that there is a distinct mismatch between a 30-year ECIP subordinated debt instrument and the 20-year maximum for inclusion in Regulatory Capital of the same. To address this discrepancy, the NCUA conducted additional research into these issues. Both the maximum Regulatory Capital treatment for Grandfathered Secondary Capital and the maximum maturity for Subordinated Debt Notes are based on the statutory authority under which a Federal credit union (FCU) issues both instruments. Specifically, an FCU may 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 are 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 Subordinated Debt 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 With respect to Grandfathered Secondary Capital, the January 2020 proposed Subordinated Debt rule stated 10 Letter to Credit Unions 21–CU–11, Emergency Capital Investment Program Participation and enclosed Supervisory Letter No. 21–02 (Oct. 20, 2021). 11 Id. 12 85 FR 13892 (Mar. 10, 2020). PO 00000 Frm 00003 Fmt 4700 Sfmt 4700 18007 that ‘‘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 also stated that it believed ‘‘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 As the Board received feedback from the credit union industry on the mismatch between ECIP investment maturities allowed 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. 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 proposed the amendments discussed in the next section of this document. C. Summary of the Proposed Rule At its September 2022 meeting, the Board issued a notice of proposed rulemaking to amend the current rule in a variety of ways.14 First, the Board proposed revisions to § 702.401(b) to permit Grandfathered Secondary Capital to be included in Regulatory Capital for up to 30 years from the later of the date of issuance or January 1, 2022. Second, the Board proposed to remove the maximum maturity limit of 20 years from § 702.404(a)(2). In its place, the Board proposed a requirement that a credit union must provide certain information in its application for preapproval under § 702.408 when applying to issue Subordinated Debt Notes with maturities longer than 20 years. To demonstrate the issuance is debt, the proposal included a new paragraph in § 702.408(b) that requires a credit union applying to issue Subordinated Debt Notes with maturities longer than 20 years to submit, at the discretion of the Appropriate Supervision Office, one or more of the following: • A written legal opinion from a Qualified Counsel. • A written opinion from a licensed certified public accountant (CPA). 13 Id. 14 87 E:\FR\FM\27MRR1.SGM FR 60326 (Oct. 5, 2022). 27MRR1 18008 Federal Register / Vol. 88, No. 58 / Monday, March 27, 2023 / Rules and Regulations • An analysis conducted by the credit union or independent third party. In addition to these substantive changes related to the maturity and Regulatory Capital treatment of issuances, the Board also proposed several minor changes to make the current rule clearer, more user-friendly, and aligned with current agency practices. First, the Board proposed to amend the definition of ‘‘Qualified Counsel’’ to clarify where such person(s) must be licensed to practice law by removing the phrase ‘‘in the relevant jurisdiction(s)’’ from the definition of ‘‘Qualified Counsel.’’ Second, the Board proposed to amend §§ 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 a requirement for ‘‘cash flow projections.’’ Third, the Board proposed to amend the section of the current rule addressing the filing of documents and inspection of documents by removing the phrase ‘‘inspection of documents’’ from the titling of this section and replacing 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. Finally, the Board proposed to revise § 702.414(c) by removing ‘‘(‘‘discounted secondary capital’’ recategorized as Subordinated Debt)’’ from the description of Grandfathered Secondary Capital that may be redeemed by a credit union. This revision is consistent with recent changes to the NCUA Call Report. For the reasons stated in the proposed rule and in consideration of the public comments received on the same, as discussed in the next section of this document, the Board is finalizing the proposed changes without further amendment. II. Summary of Comments ddrumheller on DSK120RN23PROD with RULES1 A. The Public Comments, Generally The NCUA received 21 comments following publication of the proposed rule. Two of the commenters supported the rule as written and two commenters opposed the rule in its entirety. The remaining 17 commenters supported the proposed changes but recommended additional changes that are outside the scope of this rulemaking. B. Comments That Opposed the Proposal in Its Entirety Two commenters expressly opposed the proposed changes and, more generally, the current rule in its entirety. Specific to the proposed rule, both VerDate Sep<11>2014 18:20 Mar 24, 2023 Jkt 259001 commenters opposed the change that would permit credit unions to issue Subordinated Debt Notes with maturities greater than 20 years. Specifically, one commenter stated that ‘‘by extending their maximum maturity, these instruments become more like ‘equity-like.’ [sic] Even by the NCUA’s own admission, the fixed stated maturity is a factor in determining whether an instrument may be considered debt or equity with a general rule being that the shorter the maturity date, the more the instrument resembles debt.’’ The other commenter further stated the following: The 20-year limitation was created after the NCUA concluded that such a limitation would ensure that courts consider credit union subordinated debt to be debt rather than equity. This prevents credit unions from exceeding their statutorily permitted powers. There is no evidence that the risk of long duration subordinated notes being classified as equity has decreased, and therefore no justification for the NCUA Board to reverse its previous decision. This commenter went on to recommend that the Board should require credit unions to submit a written legal opinion from Qualified Counsel and a written opinion from a licensed CPA to the Appropriate Supervision Office before issuing Subordinated Debt. Conversely, this commenter suggested that the Board should only allow maturities over 20 years for issuances to the U.S. Government. This commenter supported its argument by stating that ‘‘[d]etermining whether an instrument constitutes debt or equity is not a simple matter, particularly when evaluating notes with long maturities.’’ This commenter went on to state: Under the NCUA’s proposed rule, there is nothing that would preclude a newly formed LICU from issuing notes with 50 year maturities, 99 year maturities, or even 150 year maturities. All that would be required to satisfy the letter of the proposed regulation is an analysis conducted by the credit union itself stating that the note should be considered debt and not equity and the approval of the Appropriate Supervision Office. This is not sufficient to prevent credit unions from issuing securities that are nominally debt but are, in substance, an impermissible equity interest. Finally, this commenter cited the following case to support its position that credit union Subordinated Debt is already equity-like under the current rule: For example, in United States v. Snyder Brothers Company, the Fifth Circuit concluded that 20-year debentures that were subordinated to all other indebtedness of the issuer and where there was no limitation as to payment of dividends or provision for any sinking fund or reserve did not constitute PO 00000 Frm 00004 Fmt 4700 Sfmt 4700 ‘‘indebtedness,’’ despite the intention of the issuer. The Snyder Brothers court held that while subordination alone or a long term alone would not preclude classification as debt, those factors together, as well as the lack of any sinking fund or reserve, tended more ‘‘towards eliminating any difference between the holders of these debentures and preferred stockholders than any case that has been called to our attention.’’ (Footnote omitted). In response to the assertions made by these commenters, the Board notes that under established case law an agency may change its position, provided it acknowledges the change and supports the change with a reasonable basis.15 As discussed in the proposed and final rules, the NCUA is committed to ensuring FCUs offering Subordinated Debt Notes are doing so within their express statutory authority.16 While the Board selected 20 years as a comfortable demarcation line in determining the length of maturity of a Subordinated Debt Note for purposes of ensuring it remained a borrowing, the Board never stated that any other maturity would automatically make Subordinated Debt Notes equity and not debt. Rather, in the proposed rule, the Board stated that 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 a comfortable 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 15 See. F.C.C. v. Fox Television Stations, Inc., 556 U.S. 502, 129 S. Ct. 1800, 173 L. Ed. 2d 738 (2009). 16 See. 85 FR 13892 (Mar. 10, 2020) and 86 FR 11060 (Feb. 23, 2021). 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). E:\FR\FM\27MRR1.SGM 27MRR1 ddrumheller on DSK120RN23PROD with RULES1 Federal Register / Vol. 88, No. 58 / Monday, March 27, 2023 / Rules and Regulations Therefore, the Board continues to believe that 20 years is a comfortable 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 proposed to provide Issuing Credit Unions with additional flexibility on this requirement and remove the fixed maximum maturity limit. In its place, the Board proposed a requirement that a credit union must provide certain information in its application for preapproval under § 702.408 when applying to issue Subordinated Debt Notes with maturities longer than 20 years. To demonstrate the issuance is debt, the proposal included a new paragraph in § 702.408(b) that requires a credit union applying to issue Subordinated Debt Notes with maturities longer than 20 years to submit, at the discretion of the Appropriate Supervision Office, one or more of the following: • A written legal opinion from Qualified Counsel. • A written opinion from a licensed CPA. • An analysis conducted by the credit union or independent third party. In the proposal the Board articulated that the amount and type of information required to satisfy this requirement would be at the discretion of 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.20 The Board reiterates that the overall structure of the issuance and the proposed maturity of the Subordinated Debt Notes will dictate what information is sufficient to demonstrate that the proposed issuance would be considered debt and not equity. Therefore, in many cases an analysis by the credit union may not be sufficient to satisfy the requirements of the rule. As such, the proposal and this final rule are designed to guard against the assertions made by the commenters. Further, in response to these two comments, the Board reiterates that 19 John Kelley Co. v. Comm’r, 326 U.S. 521, 530 (1946). 20 87 FR 60326, 60329 (Oct. 5, 2022). VerDate Sep<11>2014 18:20 Mar 24, 2023 Jkt 259001 FCUs only have the statutory authority to issue debt. As such, the current rule contains, in addition to the maturity restriction, several provisions designed to ensure issuances are debt and not equity. For example, the current rule requires that a Subordinated Debt Note must: • Be in the form of a written, unconditional promise to pay on a specified date a sum certain in money in return for adequate consideration in money. • Be properly characterized as debt in accordance with U.S. generally accepted accounting principles (GAAP). • Not provide the holder thereof with any management or voting rights in the Issuing Credit Union.21 In addition, each application to issue Subordinated Debt must go through a thorough vetting process by the Appropriate Supervision Office, and, if warranted, the Office of General Counsel. Finally, the Board notes that the cases cited by the commenters present different circumstances than are created under the current rule. For example, one commenter cited United States v. Snyder Brothers Company for the proposition that ‘‘20-year debentures that were subordinated to all other indebtedness of the issuer and where there was no limitation as to payment of dividends or provision for any sinking fund or reserve did not constitute ‘indebtedness,’ despite the intention of the issuer.’’ The Board points out, however, that unlike the notes in the Snyder Brothers case, credit unions are required to repay the note at maturity and interest payments when due, unless the credit union is subject to certain restrictions under the NCUA’s Prompt Corrective rules.22 This is in stark contrast to the following discussion in the Snyder Brothers case: Recognizing, as we must, that there is nothing to guarantee to the debenture holders that they can collect the face amount of the debentures, or even collect a past-due payment, without forcing the company into liquidation in the sense that it will be required to raise sufficient cash to pay off all its existing creditors including the debenture holders, and recognizing the well-known economic fact stated so succinctly by appellee’s counsel in their brief that even all ordinary creditors, who have a right to share pari passu, rarely get the face amount of their claims, we think it is plain that upon the admitted facts of this record the documents denominated ‘‘subordinated debentures’’ do not create the kind of ‘‘indebtedness’’ which 21 12 CFR 702.404(a)(1), (4), and (b)(4). 22 12 CFR part 702, subparts A and B. PO 00000 Frm 00005 Fmt 4700 Sfmt 4700 18009 Congress had in contemplation in enacting Section 163.23 Further, it should be noted that, in the Snyder Brothers case the holders of the debentures were the sole shareholders of the corporation who received the debentures when they transferred the assets of the partnership to that corporation, which they had created. While the Board appreciates the discussion in the Snyder Brothers case, the debentures and circumstances of that case are quite different from the Subordinated Debt Notes issued by credit unions and the circumstances under which they are offered. For the reasons set out above, the Board disagrees with the commenters’ assertions that the proposed change would allow FCUs to operate outside of their statutory authority. C. Comments Outside the Scope of the Proposed Rule As noted earlier in this document, 17 commenters supported the proposed changes but offered comments on other aspects of the rule. As these comments are outside the scope of this rulemaking, the Board is not addressing them here. Rather, the Board will retain these comments for use in any future proposals to amend the current rule. III. Final Rule For the reasons articulated in this document and in the proposed rule, the Board is finalizing the proposed amendments without change. IV. Regulatory Procedures A. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in which an agency creates new or amends existing information collection requirements.24 For purposes of the PRA, an information collection requirement may take the form of a reporting, recordkeeping, or a thirdparty 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. This rule removes the maximum maturity of Subordinated Debt Notes of 20 years and replaces it with a requirement that a credit union seeking to issue Subordinated Debt Notes with 23 United States v. Snyder Brothers Company, 367 F.2d 980, 985 (5th Cir. 1966). 24 44 U.S.C. 3507(d); 5 CFR part 1320. E:\FR\FM\27MRR1.SGM 27MRR1 18010 Federal Register / Vol. 88, No. 58 / Monday, March 27, 2023 / Rules and Regulations maturities longer than 20 years provide additional information as part of its application prescribed under new § 702.408(b)(15). This 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 did not receive any comments on the proposed PRA burden estimate. In accordance with the PRA, the information collection requirements included in this final rule have been submitted to OMB for approval under control number 3133–0207. ddrumheller on DSK120RN23PROD with RULES1 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 final rule will not have a 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 final rule affects only a small number of statechartered LICUs with approved secondary capital applications for issuances to the U.S. Government or its subdivisions. This final rule extends the Regulatory Capital treatment for Grandfathered Secondary Capital, eliminates the maximum maturity for Subordinated Debt, and makes two minor clarifying changes. The final rule does not impose any new significant burden on credit unions and may ease some existing requirements. The NCUA has therefore determined that this final rule does not constitute a policy that has federalism implications for purposes of the Executive order. VerDate Sep<11>2014 18:20 Mar 24, 2023 Jkt 259001 C. Assessment of Federal Regulations and Policies on Families The NCUA has determined that this final rule would 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). D. Regulatory Flexibility Act The Regulatory Flexibility Act 25 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).26 This final rule extends the Regulatory Capital treatment for Grandfathered Secondary Capital eliminates the maximum maturity for Subordinated Debt, and makes several minor clarifying changes. As such, this final rule would not impose any new significant burden on credit unions and may ease some existing requirements. In addition, based on the NCUA’s PRA estimates (shown elsewhere in this document), the NCUA estimates that any additional burden will only effect two credit unions per year. Accordingly, the NCUA certifies that this final rule would not have a significant impact on a substantial number of small credit unions. E. 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.27 A reporting requirement is triggered in instances where the NCUA issues a final rule as defined by Section 551 of the Administrative Procedure Act (APA).28 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 the Office of Management and Budget for it to determine if the final rule is a ‘‘major rule’’ for purposes of SBREFA. The NCUA also will file all appropriate Congressional reports. List of Subjects in 12 CFR Part 702 Credit unions, Reporting and recordkeeping requirements. 25 5 U.S.C. 601 et seq. at 603(a); NCUA Interpretive Ruling and Policy Statement 15–2. 27 Id. 801–804. 28 Id. 551. 26 Id. PO 00000 Frm 00006 Fmt 4700 Sfmt 4700 By the NCUA Board on March 16, 2023. Melane Conyers-Ausbrooks, Secretary of the Board. For the reasons discussed in the preamble, the NCUA Board is amending 12 CFR part 702 as follows: PART 702—CAPITAL ADEQUACY 1. The authority citation for part 702 is revised to read as follows: ■ Authority: 12 U.S.C. 1757(9), 1766(a), 1784(a), 1786(e), 1790d. 2. In § 702.401, revise paragraph (b) to read as follows: ■ § 702.401 Purpose and scope. * * * * * (b) Grandfathered Secondary Capital. Any secondary capital defined as ‘‘Grandfathered Secondary Capital’’ under § 702.402, is governed by § 702.414. 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. ■ 3. In § 702.402, revise the definitions for ‘‘Qualified Counsel’’ and ‘‘Regulatory Capital’’ to read as follows: § 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 E:\FR\FM\27MRR1.SGM 27MRR1 Federal Register / Vol. 88, No. 58 / Monday, March 27, 2023 / Rules and Regulations 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 § 702.207. * * * * * ■ 4. In § 702.404, revise the section heading and paragraph (a)(2) to read as follows: § 702.404 Requirements of the Subordinated Debt Note. (a) * * * (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 § 702.408(b)(14) as part of its application for preapproval to issue Subordinated Debt; * * * * * ■ 5. In § 702.408: ■ a. Revise paragraph (b)(7); ■ b. Redesignate paragraphs (b)(14) and (15) as paragraphs (b)(15) and (16); ■ c. Add new paragraph (b)(14); and ■ d. Revise paragraphs (l) heading and (l)(1). The revisions and addition read as follows: § 702.408 Preapproval to Issue Subordinated Debt. ddrumheller on DSK120RN23PROD with RULES1 * * * * * (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 certified public accountant (CPA); and (iii) An analysis conducted by the credit union or independent third party; * * * * * VerDate Sep<11>2014 18:20 Mar 24, 2023 Jkt 259001 (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). * * * * * ■ 6. In § 702.409, revise paragraph (b)(2) to read as follows: § 702.409 Preapproval for federally insured, state-chartered credit unions to issue Subordinated Debt. * * * * * (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. * * * * * § 702.414 [Amended] 7. In § 702.414, amend paragraph (c) introductory text by removing the phrase ‘‘(‘‘discounted secondary capital’’ re-categorized as Subordinated Debt)’’. ■ [FR Doc. 2023–05808 Filed 3–24–23; 8:45 am] BILLING CODE 7535–01–P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA–2022–1068; Project Identifier AD–2022–00358–T; Amendment 39–22364; AD 2023–04–17] RIN 2120–AA64 Airworthiness Directives; The Boeing Company Airplanes Federal Aviation Administration (FAA), DOT. ACTION: Final rule. AGENCY: The FAA is adopting a new airworthiness directive (AD) for certain Boeing Model 737–8 and 737–9 airplanes, and certain Model 737–600, –700, –700C, –800, –900, and –900ER series airplanes. This AD was prompted by reports of damage to the auxiliary power unit (APU) fuel line shroud located aft of the aft cargo area; SUMMARY: PO 00000 Frm 00007 Fmt 4700 Sfmt 4700 18011 investigation revealed that the placement of the pressure switch wire clamp assembly and its fastener allowed interference of the fastener against the APU fuel line shroud. This AD requires inspecting the APU fuel line shroud for damage, inspecting the pressure switch wire clamp for correct bolt orientation and horizontal distance from the APU fuel line shroud, and applicable oncondition actions. The FAA is issuing this AD to address the unsafe condition on these products. DATES: This AD is effective May 1, 2023. The Director of the Federal Register approved the incorporation by reference of certain publications listed in this AD as of May 1, 2023. ADDRESSES: AD Docket: You may examine the AD docket at regulations.gov under Docket No. FAA–2022–1068; or in person at Docket Operations between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this final rule, any comments received, and other information. The address for Docket Operations is U.S. Department of Transportation, Docket Operations, M–30, West Building Ground Floor, Room W12–140, 1200 New Jersey Avenue SE, Washington, DC 20590. Material Incorporated by Reference: • For service information identified in this final rule, contact Boeing Commercial Airplanes, Attention: Contractual & Data Services (C&DS), 2600 Westminster Blvd., MC 110 SK57, Seal Beach, CA 90740–5600; telephone 562–797–1717; internet myboeingfleet.com. • You may view this service information at the FAA, Airworthiness Products Section, Operational Safety Branch, 2200 South 216th St., Des Moines, WA. For information on the availability of this material at the FAA, call 206–231–3195. It is also available at regulations.gov under Docket No. FAA– 2022–1068. FOR FURTHER INFORMATION CONTACT: Chris Baker, Aerospace Engineer, Propulsion Section, FAA, Seattle ACO Branch, 2200 South 216th St., Des Moines, WA 98198; phone: 206–231– 3552; email: christopher.r.baker@ faa.gov. SUPPLEMENTARY INFORMATION: Background The FAA issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 by adding an AD that would apply to certain Boeing Model 737–8 and 737–9 airplanes, and certain Model 737–600, –700, –700C, –800, –900, and –900ER series airplanes. The NPRM E:\FR\FM\27MRR1.SGM 27MRR1

Agencies

National Credit Union Administration

[Federal Register Volume 88, Number 58 (Monday, March 27, 2023)]
[Rules and Regulations]
[Pages 18006-18011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-05808]

=======================================================================
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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 702

RIN 3133-AF43

Subordinated Debt

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The NCUA Board (Board) is amending the Subordinated Debt rule
(current rule), which it finalized in December 2020 with an effective
date of January 1, 2022. This final rule makes two changes related to
the maturity of Subordinated Debt Notes and Grandfathered Secondary
Capital. Specifically, this final rule replaces the maximum permissible
maturity of Subordinated Debt Notes with a requirement that any credit
union seeking to issue Subordinated Debt Notes with maturities longer
than 20 years demonstrate how such instruments would continue to be
considered ``debt.'' This final rule also extends the Regulatory
Capital treatment of Grandfathered Secondary Capital to the later of 30
years from the date of issuance or January 1, 2052. This extension will
align the Regulatory Capital treatment of Grandfathered Secondary
Capital with the maximum permissible maturity for any secondary capital
issued by low-income credit unions (LICUs) under the 2022 U.S.
Department of the Treasury's (Treasury) Emergency Capital Investment
Program (ECIP) or other programs administered by the U.S. Government.
In addition, the Board is making four minor modifications to other
sections of the current rule to make it more user-friendly and
flexible.

DATES: The final rule is effective April 26, 2023.

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 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 2020 final rule).\1\ The 2020 final rule permitted
LICUs, complex credit unions, and new credit unions to issue
Subordinated Debt for purposes of being included in Regulatory
Capital.\2\ Relevant to this final rule, the 2020 final rule provided
that any secondary capital issued by LICUs under previously effective
12 CFR 701.34(b), outstanding as of the effective date of the 2020
final rule, would be considered Grandfathered Secondary Capital. The
grandfathering provision of the 2020 final rule allowed LICUs with
Grandfathered Secondary Capital 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 2020 final rule also provided 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 2020 final rule stated that
Grandfathered Secondary Capital would continue to be included in
Regulatory Capital for up to 20 years from the effective date of the
2020 final rule.\3\ The 2020 final rule also contained a provision
requiring Subordinated Debt Notes to have a minimum maturity of five
years and a maximum maturity of 20 years.
---------------------------------------------------------------------------

\1\ Throughout this document the Board uses the term ``2020
final rule'' to refer to the final Subordinated Debt rule issued in
December 2020 and 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 ``2020 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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After the NCUA issued the 2020 final rule, Congress passed the
Consolidated Appropriations Act, 2021.\4\ The Consolidated
Appropriations Act, 2021, among other things, created the ECIP. Under
the ECIP, Congress appropriated funds and directed Treasury to make
investments in ``eligible institutions'' to support the institutions'
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

[[Page 18007]]

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 final rule, Treasury offered either
15- or 30-year maturity options for the investments. 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.
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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-case) refers to
debt issuances conducted outside of the current rule, such as those
under the ECIP.
---------------------------------------------------------------------------

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\ In December 2021, the Board issued a
final amendment to the current rule permitting secondary capital to be
considered Grandfathered Secondary Capital regardless of the actual
issuance date, provided the secondary capital issuance met the
following conditions:
---------------------------------------------------------------------------

\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.

1. It was issued to the U.S. Government; and
2. It was 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).

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 Treatment as Regulatory Capital for Grandfathered
Secondary Capital

The current rule restricts the maturity of Subordinated Debt Notes
to a minimum of five years and a maximum of 20 years. In alignment with
this maximum maturity, the current rule also terminates Grandfathered
Secondary Capital's inclusion in Regulatory Capital after a maximum 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 allowed 30-year
subordinated debt instruments. The Supervisory Letter accompanying the
Letter to Credit Unions discussed in the previous section of this
document stated:

[F]ederally 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\
---------------------------------------------------------------------------

\10\ Letter to Credit Unions 21-CU-11, Emergency Capital
Investment Program Participation and enclosed Supervisory Letter No.
21-02 (Oct. 20, 2021).

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 the following:

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\
---------------------------------------------------------------------------

\11\ Id.

While this change facilitated LICU participation in the ECIP, the
agency recognized that there is a distinct mismatch between a 30-year
ECIP subordinated debt instrument and the 20-year maximum for inclusion
in Regulatory Capital of the same. To address this discrepancy, the
NCUA conducted additional research into these issues.
Both the maximum Regulatory Capital treatment for Grandfathered
Secondary Capital and the maximum maturity for Subordinated Debt Notes
are based on the statutory authority under which a Federal credit union
(FCU) issues both instruments. Specifically, an FCU may 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 are 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 Subordinated Debt 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\
---------------------------------------------------------------------------

\12\ 85 FR 13892 (Mar. 10, 2020).
---------------------------------------------------------------------------

With respect to Grandfathered Secondary Capital, the January 2020
proposed Subordinated Debt rule stated that ``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 also
stated that it believed ``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\
---------------------------------------------------------------------------

\13\ Id.
---------------------------------------------------------------------------

As the Board received feedback from the credit union industry on
the mismatch between ECIP investment maturities allowed 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. 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 proposed the amendments discussed in the
next section of this document.

C. Summary of the Proposed Rule

At its September 2022 meeting, the Board issued a notice of
proposed rulemaking to amend the current rule in a variety of ways.\14\
First, the Board proposed revisions to Sec. 702.401(b) to permit
Grandfathered Secondary Capital to be included in Regulatory Capital
for up to 30 years from the later of the date of issuance or January 1,
2022. Second, the Board proposed to remove the maximum maturity limit
of 20 years from Sec. 702.404(a)(2). In its place, the Board proposed
a requirement that a credit union must provide certain information in
its application for preapproval under Sec. 702.408 when applying to
issue Subordinated Debt Notes with maturities longer than 20 years. To
demonstrate the issuance is debt, the proposal included a new paragraph
in Sec. 702.408(b) that requires a credit union applying to issue
Subordinated Debt Notes with maturities longer than 20 years to submit,
at the discretion of the Appropriate Supervision Office, one or more of
the following:
---------------------------------------------------------------------------

\14\ 87 FR 60326 (Oct. 5, 2022).
---------------------------------------------------------------------------

A written legal opinion from a Qualified Counsel.
A written opinion from a licensed certified public
accountant (CPA).

[[Page 18008]]

An analysis conducted by the credit union or independent
third party.
In addition to these substantive changes related to the maturity
and Regulatory Capital treatment of issuances, the Board also proposed
several minor changes to make the current rule clearer, more user-
friendly, and aligned with current agency practices. First, the Board
proposed to amend the definition of ``Qualified Counsel'' to clarify
where such person(s) must be licensed to practice law by removing the
phrase ``in the relevant jurisdiction(s)'' from the definition of
``Qualified Counsel.'' Second, the Board proposed 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
a requirement for ``cash flow projections.'' Third, the Board proposed
to amend the section of the current rule addressing the filing of
documents and inspection of documents by removing the phrase
``inspection of documents'' from the titling of this section and
replacing 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. Finally, the Board proposed to revise Sec.
702.414(c) by removing ``(``discounted secondary capital'' re-
categorized as Subordinated Debt)'' from the description of
Grandfathered Secondary Capital that may be redeemed by a credit union.
This revision is consistent with recent changes to the NCUA Call
Report.
For the reasons stated in the proposed rule and in consideration of
the public comments received on the same, as discussed in the next
section of this document, the Board is finalizing the proposed changes
without further amendment.

II. Summary of Comments

A. The Public Comments, Generally

The NCUA received 21 comments following publication of the proposed
rule. Two of the commenters supported the rule as written and two
commenters opposed the rule in its entirety. The remaining 17
commenters supported the proposed changes but recommended additional
changes that are outside the scope of this rulemaking.

B. Comments That Opposed the Proposal in Its Entirety

Two commenters expressly opposed the proposed changes and, more
generally, the current rule in its entirety. Specific to the proposed
rule, both commenters opposed the change that would permit credit
unions to issue Subordinated Debt Notes with maturities greater than 20
years. Specifically, one commenter stated that ``by extending their
maximum maturity, these instruments become more like `equity-like.'
[sic] Even by the NCUA's own admission, the fixed stated maturity is a
factor in determining whether an instrument may be considered debt or
equity with a general rule being that the shorter the maturity date,
the more the instrument resembles debt.'' The other commenter further
stated the following:

The 20-year limitation was created after the NCUA concluded that
such a limitation would ensure that courts consider credit union
subordinated debt to be debt rather than equity. This prevents
credit unions from exceeding their statutorily permitted powers.
There is no evidence that the risk of long duration subordinated
notes being classified as equity has decreased, and therefore no
justification for the NCUA Board to reverse its previous decision.

This commenter went on to recommend that the Board should require
credit unions to submit a written legal opinion from Qualified Counsel
and a written opinion from a licensed CPA to the Appropriate
Supervision Office before issuing Subordinated Debt. Conversely, this
commenter suggested that the Board should only allow maturities over 20
years for issuances to the U.S. Government. This commenter supported
its argument by stating that ``[d]etermining whether an instrument
constitutes debt or equity is not a simple matter, particularly when
evaluating notes with long maturities.'' This commenter went on to
state:

Under the NCUA's proposed rule, there is nothing that would
preclude a newly formed LICU from issuing notes with 50 year
maturities, 99 year maturities, or even 150 year maturities. All
that would be required to satisfy the letter of the proposed
regulation is an analysis conducted by the credit union itself
stating that the note should be considered debt and not equity and
the approval of the Appropriate Supervision Office. This is not
sufficient to prevent credit unions from issuing securities that are
nominally debt but are, in substance, an impermissible equity
interest.

Finally, this commenter cited the following case to support its
position that credit union Subordinated Debt is already equity-like
under the current rule:

For example, in United States v. Snyder Brothers Company, the
Fifth Circuit concluded that 20-year debentures that were
subordinated to all other indebtedness of the issuer and where there
was no limitation as to payment of dividends or provision for any
sinking fund or reserve did not constitute ``indebtedness,'' despite
the intention of the issuer. The Snyder Brothers court held that
while subordination alone or a long term alone would not preclude
classification as debt, those factors together, as well as the lack
of any sinking fund or reserve, tended more ``towards eliminating
any difference between the holders of these debentures and preferred
stockholders than any case that has been called to our attention.''
(Footnote omitted).

In response to the assertions made by these commenters, the Board notes
that under established case law an agency may change its position,
provided it acknowledges the change and supports the change with a
reasonable basis.\15\ As discussed in the proposed and final rules, the
NCUA is committed to ensuring FCUs offering Subordinated Debt Notes are
doing so within their express statutory authority.\16\ While the Board
selected 20 years as a comfortable demarcation line in determining the
length of maturity of a Subordinated Debt Note for purposes of ensuring
it remained a borrowing, the Board never stated that any other maturity
would automatically make Subordinated Debt Notes equity and not debt.
Rather, in the proposed rule, the Board stated that 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 a comfortable 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\

[[Page 18009]]

Therefore, the Board continues to believe that 20 years is a
comfortable demarcation point to balance flexibility with a rule firmly
rooted in statutory authority.
---------------------------------------------------------------------------

\15\ See. F.C.C. v. Fox Television Stations, Inc., 556 U.S. 502,
129 S. Ct. 1800, 173 L. Ed. 2d 738 (2009).
\16\ See. 85 FR 13892 (Mar. 10, 2020) and 86 FR 11060 (Feb. 23,
2021).
\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).
---------------------------------------------------------------------------

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 proposed to provide Issuing Credit
Unions with additional flexibility on this requirement and remove the
fixed maximum maturity limit.
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\19\ John Kelley Co. v. Comm'r, 326 U.S. 521, 530 (1946).
---------------------------------------------------------------------------

In its place, the Board proposed a requirement that a credit union
must provide certain information in its application for preapproval
under Sec. 702.408 when applying to issue Subordinated Debt Notes with
maturities longer than 20 years. To demonstrate the issuance is debt,
the proposal included a new paragraph in Sec. 702.408(b) that requires
a credit union applying to issue Subordinated Debt Notes with
maturities longer than 20 years to submit, at the discretion of the
Appropriate Supervision Office, one or more of the following:
A written legal opinion from Qualified Counsel.
A written opinion from a licensed CPA.
An analysis conducted by the credit union or independent
third party.
In the proposal the Board articulated that the amount and type of
information required to satisfy this requirement would be at the
discretion of 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.\20\ The Board reiterates that
the overall structure of the issuance and the proposed maturity of the
Subordinated Debt Notes will dictate what information is sufficient to
demonstrate that the proposed issuance would be considered debt and not
equity. Therefore, in many cases an analysis by the credit union may
not be sufficient to satisfy the requirements of the rule. As such, the
proposal and this final rule are designed to guard against the
assertions made by the commenters.
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\20\ 87 FR 60326, 60329 (Oct. 5, 2022).
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Further, in response to these two comments, the Board reiterates
that FCUs only have the statutory authority to issue debt. As such, the
current rule contains, in addition to the maturity restriction, several
provisions designed to ensure issuances are debt and not equity. For
example, the current rule requires that a Subordinated Debt Note must:
Be in the form of a written, unconditional promise to pay
on a specified date a sum certain in money in return for adequate
consideration in money.
Be properly characterized as debt in accordance with U.S.
generally accepted accounting principles (GAAP).
Not provide the holder thereof with any management or
voting rights in the Issuing Credit Union.\21\
---------------------------------------------------------------------------

\21\ 12 CFR 702.404(a)(1), (4), and (b)(4).
---------------------------------------------------------------------------

In addition, each application to issue Subordinated Debt must go
through a thorough vetting process by the Appropriate Supervision
Office, and, if warranted, the Office of General Counsel.
Finally, the Board notes that the cases cited by the commenters
present different circumstances than are created under the current
rule. For example, one commenter cited United States v. Snyder Brothers
Company for the proposition that ``20-year debentures that were
subordinated to all other indebtedness of the issuer and where there
was no limitation as to payment of dividends or provision for any
sinking fund or reserve did not constitute `indebtedness,' despite the
intention of the issuer.'' The Board points out, however, that unlike
the notes in the Snyder Brothers case, credit unions are required to
repay the note at maturity and interest payments when due, unless the
credit union is subject to certain restrictions under the NCUA's Prompt
Corrective rules.\22\ This is in stark contrast to the following
discussion in the Snyder Brothers case:
---------------------------------------------------------------------------

\22\ 12 CFR part 702, subparts A and B.

Recognizing, as we must, that there is nothing to guarantee to
the debenture holders that they can collect the face amount of the
debentures, or even collect a past-due payment, without forcing the
company into liquidation in the sense that it will be required to
raise sufficient cash to pay off all its existing creditors
including the debenture holders, and recognizing the well-known
economic fact stated so succinctly by appellee's counsel in their
brief that even all ordinary creditors, who have a right to share
pari passu, rarely get the face amount of their claims, we think it
is plain that upon the admitted facts of this record the documents
denominated ``subordinated debentures'' do not create the kind of
``indebtedness'' which Congress had in contemplation in enacting
Section 163.\23\
---------------------------------------------------------------------------

\23\ United States v. Snyder Brothers Company, 367 F.2d 980, 985
(5th Cir. 1966).

Further, it should be noted that, in the Snyder Brothers case the
holders of the debentures were the sole shareholders of the corporation
who received the debentures when they transferred the assets of the
partnership to that corporation, which they had created. While the
Board appreciates the discussion in the Snyder Brothers case, the
debentures and circumstances of that case are quite different from the
Subordinated Debt Notes issued by credit unions and the circumstances
under which they are offered.
For the reasons set out above, the Board disagrees with the
commenters' assertions that the proposed change would allow FCUs to
operate outside of their statutory authority.

C. Comments Outside the Scope of the Proposed Rule

As noted earlier in this document, 17 commenters supported the
proposed changes but offered comments on other aspects of the rule. As
these comments are outside the scope of this rulemaking, the Board is
not addressing them here. Rather, the Board will retain these comments
for use in any future proposals to amend the current rule.

III. Final Rule

For the reasons articulated in this document and in the proposed
rule, the Board is finalizing the proposed amendments without change.

IV. Regulatory Procedures

A. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency creates new or amends existing information collection
requirements.\24\ 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.
---------------------------------------------------------------------------

\24\ 44 U.S.C. 3507(d); 5 CFR part 1320.
---------------------------------------------------------------------------

This rule removes the maximum maturity of Subordinated Debt Notes
of 20 years and replaces it with a requirement that a credit union
seeking to issue Subordinated Debt Notes with

[[Page 18010]]

maturities longer than 20 years provide additional information as part
of its application prescribed under new Sec. 702.408(b)(15). This
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 did not receive any comments on the proposed PRA burden
estimate. In accordance with the PRA, the information collection
requirements included in this final rule have been submitted to OMB for
approval under control number 3133-0207.

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 final rule will not have a 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 final rule affects only a small
number of state-chartered LICUs with approved secondary capital
applications for issuances to the U.S. Government or its subdivisions.
This final rule extends the Regulatory Capital treatment for
Grandfathered Secondary Capital, eliminates the maximum maturity for
Subordinated Debt, and makes two minor clarifying changes. The final
rule does not impose any new significant burden on credit unions and
may ease some existing requirements. The NCUA has therefore determined
that this final 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 final 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 \25\ 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).\26\ This final rule extends
the Regulatory Capital treatment for Grandfathered Secondary Capital
eliminates the maximum maturity for Subordinated Debt, and makes
several minor clarifying changes. As such, this final rule would not
impose any new significant burden on credit unions and may ease some
existing requirements. In addition, based on the NCUA's PRA estimates
(shown elsewhere in this document), the NCUA estimates that any
additional burden will only effect two credit unions per year.
Accordingly, the NCUA certifies that this final rule would not have a
significant impact on a substantial number of small credit unions.
---------------------------------------------------------------------------

\25\ 5 U.S.C. 601 et seq.
\26\ Id. at 603(a); NCUA Interpretive Ruling and Policy
Statement 15-2.
---------------------------------------------------------------------------

E. 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.\27\ A reporting requirement is triggered in instances
where the NCUA issues a final rule as defined by Section 551 of the
Administrative Procedure Act (APA).\28\ 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
the Office of Management and Budget for it to determine if the final
rule is a ``major rule'' for purposes of SBREFA. The NCUA also will
file all appropriate Congressional reports.
---------------------------------------------------------------------------

\27\ Id. 801-804.
\28\ Id. 551.
---------------------------------------------------------------------------

List of Subjects in 12 CFR Part 702

Credit unions, Reporting and recordkeeping requirements.

By the NCUA Board on March 16, 2023.
Melane Conyers-Ausbrooks,
Secretary of the Board.

For the reasons discussed in the preamble, the NCUA Board is
amending 12 CFR part 702 as follows:

PART 702--CAPITAL ADEQUACY

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

Authority: 12 U.S.C. 1757(9), 1766(a), 1784(a), 1786(e), 1790d.

0
2. In Sec. 702.401, revise paragraph (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, is governed
by Sec. 702.414. 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:

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

[[Page 18011]]

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) * * *
(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 paragraphs (l) heading and (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 certified public accountant
(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:

Sec. 702.409 Preapproval for federally insured, state-chartered
credit unions to issue Subordinated Debt.

* * * * *
(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, amend paragraph (c) introductory text by removing
the phrase ``(``discounted secondary capital'' re-categorized as
Subordinated Debt)''.

[FR Doc. 2023-05808 Filed 3-24-23; 8:45 am]
BILLING CODE 7535-01-P

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