Current through Reg. 49, No. 38; September 20, 2024
(a) Limitations. Except for deposits placed
in a Federal Reserve Bank, a credit union may invest no more than 50% of its
net worth with any single obligor or related obligors. This limitation does not
apply to the extent that the investment is insured or guaranteed by the United
States government, or an agency, sponsored enterprise, corporation, or
instrumentality, of the United States government, or to any trust or trusts
established for investing, directly or collectively, in such securities,
obligations, or instruments. For the purposes of this section, obligor is
defined as an issuer, trust, or originator of an investment, including the
seller of a loan participation investment.
(b) Designated Depository. As a single
exception to subsection (a) of this section, a credit union's board of
directors may establish the maximum aggregate deposit limit for a single
financial institution approved by the board as the credit union's designated
depository. This deposit limit shall be a percentage of net worth and must be
based on the credit union's liquidity trends and funding needs as documented by
its asset/liability management policy. This authority is contingent upon the
credit union appropriately documenting its due diligence to demonstrate that
the investments in this designated depository do not pose a safety and
soundness concern. The credit union's board of directors shall review and
approve at least annually the maximum aggregate deposit limit for its
designated depository. The review shall include a current due diligence
analysis of the financial institution.
(c) Prohibited Activities.
(1) Definitions.
(A) Adjusted trading--selling an investment
to a counterparty at a price above its current fair value and simultaneously
purchasing or committing to purchase from the counterparty another investment
at a price above its current fair value.
(B) Collateralized mortgage obligation
(CMO)--a multi-class bond issue collateralized by mortgages or mortgage-backed
securities.
(C) Commercial mortgage
related security--a mortgage related security except that it is collateralized
entirely by commercial real estate, such as a warehouse or office building, or
a multi-family dwelling consisting of more than four units.
(D) Fair value--the price at which a security
can be bought or sold in a current, arm's length transaction between willing
parties, other than in a forced or liquidation sale.
(E) Real estate mortgage investment conduit
(REMIC)--a nontaxable entity formed for the sole purpose of holding a fixed
pool of mortgages secured by an interest in real property and issuing multiple
classes of interests in the underlying mortgages.
(F) Residual interest--the remainder cash
flows from a CMO/REMIC, or other mortgage-backed security transaction, after
payments due bondholders and trust administrative expenses have been
satisfied.
(G) Short sale--the sale
of a security not owned by the seller.
(H) Stripped mortgage-backed security--a
security that represents either the principal-only or the interest-only portion
of the cash flows of an underlying pool of mortgages or mortgage-backed
securities.
(I) Zero coupon
investment--an investment that makes no periodic interest payments but instead
is sold at a discount from its face value. The holder of a zero coupon
investment realizes the rate of return through the gradual appreciation of the
investment, which is redeemed at face value on a specified maturity
date.
(2) A credit union
may not:
(A) Use financial derivatives for
replication, or for any purposes other than hedging;
(B) Engage in adjusted trading or short
sales;
(C) Purchase stripped
mortgage backed securities;
(D)
Purchase residual interests in CMOs/REMICs, or other structured mortgage backed
securities;
(E) Purchase mortgage
servicing rights as an investment but may retain mortgage servicing rights on a
loan originated by the credit union and sold on the secondary market;
(F) Purchase commercial mortgage related
securities of an issuer other than a U.S. Government sponsored
enterprise;
(G) Purchase any
security that has the capability of becoming a first credit loss piece which
supports another more senior security;
(H) Purchase a zero coupon investment with a
maturity date that is more than 10 years from the settlement date;
(I) Purchase investments whereby the
underlying collateral consists of foreign receivables or foreign
deposits;
(J) Purchase securities
used as collateral by a safekeeping concern;
(K) Purchase exchangeable mortgage backed
securities, unless they are fully compliant with the provisions outlined in
Part 703 of the National Credit Union Administration Rules and Regulations;
or
(L) Purchase securities
convertible into stock at the option of the issuer.
(d) Investment pilot program.
(1) The commissioner may authorize a limited
number of credit unions to engage in other types of investment activities under
an investment pilot program. A credit union wishing to participate in an
investment pilot program shall submit a request that addresses the following
items:
(A) Board policies approving the
activities and establishing limits on them;
(B) A complete description of the activities,
with specific examples of how the credit union will conduct them and how they
will benefit the credit union;
(C)
A demonstration of how the activities will affect the credit union's financial
performance, risk profile, and asset-liability management strategies;
(D) Examples of reports the credit union will
generate to monitor the activities;
(E) A projection of the associated costs of
the activities, including personnel, computer, audit, etc.;
(F) A description of the internal systems to
measure, monitor, and report the activities, and the qualifications of the
staff and/or official(s) responsible for implementing and overseeing the
activities; and
(G) The internal
control procedures that will be implemented, including audit
requirements.
(2) In
connection with a request to participate in an investment pilot program, the
commissioner will consider the general nature and functions of credit unions,
as well as the specific financial condition and management of the applicant
credit union, as revealed in the request, examinations, or such other
information as may be available to the commissioner. The commissioner may
approve the request, approve the request conditionally, approve it in modified
form, or deny it in whole or in part. A decision by the commissioner concerning
participation in an investment pilot program is not appealable.
(3) The commissioner may find that an
investment pilot program previously authorized is no longer a safe and prudent
practice for credit unions generally to engage in, that it has become
inconsistent with applicable state or federal law, or that it has ceased to be
a safe and prudent practice for one or more credit unions in light of their
financial condition or management. Upon such a finding, the commissioner will
send written notice informing the board of directors of any or all of the
credit unions engaging in such a practice that the authority to engage in the
practice has been revoked or modified. When the commissioner so notifies any
credit union, its directors and officers shall forthwith take steps to
liquidate the investments in question or to make such modifications as the
commissioner requires. Upon demonstration of good cause, the commissioner may
grant a credit union some definite period of time in which to arrange its
affairs to comply with the commissioner's direction. The commissioner deems
credit unions that continue to engage in investment practices after their
authority to do so has been revoked or modified to be engaging in an unsound
practice.
