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