Posts tagged ‘secondary capital’

Are you ready to comply with federal securities law?

There is much more in NCUA’s proposal to update the use of secondary capital by credit unions than meets the eye. If the regulation is finally promulgated as is, it will aid complex credit unions which will be able to use subordinated debt to satisfy their very unique risk-based capital requirements. The problem is that the regulation will make it much more difficult and cumbersome for low income credit unions to utilize this option to comply with their own net worth requirements, and to use secondary capital as part of their strategic development plans. In the blog, I continue to refer to secondary capital, but if this regulation is finalized, it will be referred to as subordinated debt.

Why are these new changes going to have such an impact? Because NCUA unequivocally has determined that what we currently refer to as secondary capital is, for legal purposes, a security instrument under state and federal law. As a result, in the preamble the Board “emphasizes that any issuance of a Subordinated Debt Note by an Issuing Credit Union must be done in accordance with applicable federal and state securities laws. Given the complexity of the securities law framework, any credit union contemplating an offer and sale of Subordinated Debt Notes needs to engage qualified legal counsel to ensure its compliance with securities laws before, during, and after any such offer and sale.”

If this sounds complicated, it is. There are about 15 blogs I could do on the topic, but as a preview of what this means, going forward, when you issue subordinated debt, NCUA expects your credit union to “prepare and deliver an Offering Document to potential investors even though there are no SEC-mandated disclosure requirements for offerings of securities pursuant to the Section 3(a)(5) exemption, and there generally are no SEC-mandated disclosure requirements for offerings of securities pursuant to the Rule 506 private placement exemption as long as all purchasers in the offering are ‘accredited investors.’” Needless to say, you’re going to have to retain the services of a lawyer who specializes in securities law, and probably an accountant who does as well. In addition, this goes well beyond the scope of knowledge of even our most savvy compliance people.

The good news is that none of this applies to credit unions that currently hold secondary capital. The bad news is that it does apply to any credit union that seeks out secondary capital in the future. For larger credit unions which have to comply with the risk based capital requirements, which take effect in 2022, the expense may be worth it, but my concern is that for the vast majority of low income credit unions which have traditionally used secondary capital to satisfy net worth requirements, the cost will be too great. Cynics will say that this outcome will be just fine with NCUA, which has grown increasingly skittish about the way some credit unions are using secondary capital. At the very least, this represents a big change for credit unions, and the industry should start thinking about creative ways it can cost-effectively address some of the issues raised by NCUA in a way that allows low income credit unions cost-effective access to this resource. After all, for almost 25 years, NCUA has apparently allowed credit unions to access secondary capital in violation of federal securities law.


February 6, 2020 at 9:11 am Leave a comment

NCUA Proposes Major Rule for Expanded Use of Subordinated Debt

After almost five years of research, NCUA has released proposed regulations which would allow some credit unions to offer “subordinated debt” as a means of meeting regulatory requirements. Whether or not the proposal was worth the wait will become clear in the coming days as the industry takes the time to digest all 277 pages of it.

At first glance, the biggest winners seem to be complex credit unions that do not have low income designations. Currently, these institutions don’t qualify for secondary capital. Under the proposal, these larger institutions will be able to use this subordinated debt for purposes of meeting their risk based capital requirements.

Under existing regulations, low-income credit unions currently qualify for secondary capital. These institutions will be eligible to receive subordinated debt with their existing secondary capital grandfathered in, provided the credit union complies with parameters set forth in the proposal.

This means that if your credit union is not a complex or low income credit union, you will be ineligible to receive subordinated debt. Remember, credit unions in this category are currently not eligible to receive secondary capital.

Under the plan, NCUA stipulates that in order to qualify to issue subordinated debt, the debt 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;
  • Have, at the time of issuance, a fixed stated maturity of at least five years and not more than 20 years from issuance. The stated maturity of the Subordinated Debt Note may not reset and may not contain an option to extend the maturity; and
  • Be properly characterized as debt in accordance with U.S. GAAP.

Not surprisingly, this complicated framework would create more work for lawyers as the subordinated debt would be classified as a security, triggering additional disclosure requirements.

The new subordinated debt classification will replace the existing secondary capital regulations, allowing those of you who already had secondary capital to continue using it so long as you meet the newly proposed requirements found in the regulation. Take a look at page 262 to get a sense of the additional requirements.

Expect much more to come on this in the near future. Remember, these are proposed rules, so submitting comments on this proposal is absolutely critical.

DFS Extends Libor Plan Grace Period

Good news, people. New York’s Department of Financial Services has extended the deadline for which it will accept an institution’s post-Libor preparedness plan from February 7, 2020 until March 23, 2020. Keep in mind that this only applies to state chartered institutions, but NCUA expects federal credit unions to be able to be preparing for the post-Libor world.

January 24, 2020 at 9:51 am Leave a comment

Secondary Capital and its Limits

At first, it surprised me that NCUA’s denial of credit union secondary capital plans was the issue most frequently being appealed under NCUA’s new regulatory appeals process. However, as I read these decisions and studied the history behind secondary capital, the increasing frustration on the part of credit unions stemmed from NCUA’s contradictory policy goals and legal interpretations.

Since 1996, 12 CFR 701.34(b) has permitted low income credit unions to accept uninsured secondary capital (61 FR 3788-01). As originally envisioned by NCUA, the regulation permitted these credit unions to raise secondary capital from “foundations and other philanthropic institutions.” NCUA hoped that this credit would help credit unions “make more loans and improve financial services” for low income communities. The original rule simply required credit unions to notify NCUA that they were going to accept this capital. Fast forward to 2006, and NCUA was already getting gun shy about this power. Under revisions to 701.34(b), credit unions were required to get pre-approval for the use of secondary capital. NCUA accomplished this goal by requiring credit unions to address five criteria in their secondary capital plans.

Against this backdrop, the legal issue with which NCUA and credit unions are grappling is the extent to which the five criteria outlined are simply the baseline of regulatory requirements for secondary capital plans, or if they are instead representative of the totality of what is required of a credit union seeking to take in secondary capital. There is also one other issue lurking right below the surface. Even assuming that NCUA can, for safety and soundness reasons, insist that credit unions provide more detailed information than required under a plain reading of the regulation, is there a point where its application of safety and soundness considerations becomes unreasonable?

In my ever so humble opinion, it’s no coincidence that NCUA released a detailed guidance to examiners explaining how to assess secondary capital requests. It’s exactly the type of document I would come out with if I wanted to show that secondary capital determinations were not arbitrary and capricious.

What really has me fired up, however, is that NCUA’s stringent legal interpretation of its examination powers is inconsistent with its stated policy goals. I have a pretty good memory, and I could swear it wasn’t too long ago that then-Chairman Debbie Matz was encouraging qualifying credit unions to get their low-income designations in part to make them eligible to take in secondary capital. I have made that suggestion to credit unions myself. It is no wonder, then, that credit unions are confused that NCUA is effectively discouraging the credit unions that could use secondary capital the most from getting it in the first place. Simply put, the requirements for secondary capital approval have become so arbitrary, expansive and time-consuming that many credit unions won’t have the resources to get the plan approved in the first place. If this is NCUA’s goal, then it should simply say so. If not, then it has to clarify its expectations both internally and for credit unions as a whole.


November 18, 2019 at 9:40 am Leave a comment

Ding Dong, the Witch is Dead

Well, it’s all but official that no major tax reform, let alone tax reform putting the credit union tax exemption at risk, will take place this year. Not only is the credit union tax exemption not to be included in draft legislation but no lesser an authority than Senate Minority Leader Mitch McConnell took tax reform off the table for this year. While this is, of course, good news, given the amount of time and energy that the industry has devoted to the issue over the last several months, the bankers have still scored a partial victory. We’re in a mid-term election year and we have yet to get serious traction on what I consider the single most important issue facing the industry: the need for secondary capital.

Why is secondary capital so important? Let me count the ways. First, it simply makes no sense for credit unions to be penalized while growing in popularity. This is precisely what happens every time a member opens an account in this low interest, moderate growth economy where it is extremely difficult to make money off other people’s money. If credit unions are going to grow then they need the ability every other financial institution has to seek out investors.

Second, any doubt as to the crucial need for secondary capital has been dispelled by the NCUA’s Risk Based Net Worth regulatory reform proposal. In its simplest form, there are two ways a credit union can improve its risk weighting. It can either reduce its assets or increase its capital. But unlike the nation’s largest banks, our largest credit unions don’t have the opportunity to seek out additional capital. In short, if NCUA’s proposal goes forward it will put the brakes on the growth of credit unions whose only sin is to be large.

I understand how divisive the secondary capital debate is within the industry. Credit unions are, at their core, mutual institutions. They have to remain that way if they are going to continue providing members a unique financial experience. But secondary capital reform can be introduced in ways that maintain the essence of the credit union movement, which is one person one vote. If an institution is willing to invest in a credit union it would only do so against the backdrop of restrictions that give it no more or less influence than any other member of a given credit union.

Let’s keep in mind that low income credit unions can already take secondary capital and no one can seriously suggest that these institutions, in the aggregate, do not advance the core missions of the credit union movement.

Tax reform is like one of those Friday the 13th movies. The villain never really dies. The industry must, of course, remain vigilant. But, we don’t want to win the battle and lose the war by letting concerns over the credit union tax exemption crowd out other important pieces of the credit union agenda.

February 26, 2014 at 9:04 am 1 comment

NCUA Increases Low Income Designations in Bid to Aid MBLs

Yesterday, NCUA sent out notices to more than 1,000 credit unions that the agency had reviewed the necessary criteria and designate them Low-Income Credit Unions.  This means that federally chartered credit unions that received this designation are no longer subject to the member business loan cap and are eligible to receive secondary capital. 

In making the announcement, NCUA explained in a letter to credit unions that the recipients of the letter must simply acknowledge that they wish to opt into the designation.  Eligible state-chartered credit unions also received notice of the designation, but in accompanying Q&A, NCUA explained that NCUA must work with state regulators to finalize any approval.  Actual Low-Income Credit Union designation benefits can also vary by state, based on state law.  For New York credit unions this shouldn’t be a problem since the criteria used by NCUA in determining Low-Income Credit Union designation is identical to that used by the Department of Financial Services.

NCUA didn’t change any of the requirements for qualifying credit unions.  It simply reviewed the necessary information and determined which credit unions meet the criteria without making them fill out the necessary paper work.

The NCUA deserves a lot of credit on this one for creative and aggressive use of its regulatory powers.  By streamlining the designation process it will give more credit unions the flexibility that all credit unions are seeking as part of our federal legislative agenda.  In addition, by having the regulatory relief included in a package of White House initiatives to aid areas impacted by the Midwest drought, NCUA underscores the importance of credit unions as instruments of economic growth.  Something tells me that a banking lobbyist stayed up last night coming up with new and creative ways to criticize the NCUA for this initiative, even though they are constantly complaining that credit unions don’t do enough to help the underserved.

New Changes to Remittance Regulations

Yesterday the CFPB announced further amendments to its remittance regulations. These regulations, which take effect February 7, 2013, impose extensive new disclosure requirements as well as dispute resolution procedures on institutions that remit funds to foreign countries.  I have not been able to look closely at the 168 page regulation but its major thrust seems to be that institutions providing 100 or fewer remittances in a year will not be subject to many of these new regulations.





August 8, 2012 at 7:55 am Leave a comment

My Convention Take-aways

Now that I have gotten a good night’s sleep, these are my five take-aways from this year’s convention. 

Credit union people like their wine.  We did a fundraising wine pull, where for $20 you get to pick a random bottle of wine, and it was over in 29 minutes.  I have never seen credit union people walk so fast toward an event or look quite so dejected when one was over. 

  • Generational shifts don’t equate to generational conflict.  At a panel comprised of representatives from our Young Professionals Commission, a recurring theme was how technology was essential to attracting the next generation of credit union members.  However, one of the most interesting points made by Brett King was that the fastest growing segments of Facebook users are people over 50 years of age.  When he asked for a show of hands, I would conservatively say that at least 2/3 of the audience (comprised mainly of people who would not be considered young professionals) utilized either iPhones or an iPad.  The point is that the generational shift does not have to become a generational divide.  At the end of the day, members just want the easiest, most cost effective means of conducting their financial transactions, and that is as true for a balding blogger or a Florida retiree as it is for a 20-something.
  • In many ways, these are the best of times, but also the most frustrating of times, for our movement.  As for the best of times, assets have surpassed $1 trillion, the industry has taken its shots from the Great Recession and is growing again, and current trends show that consumers like what credit unions stand for.  As for our frustrations, at least on the federal level, politicians are not getting the message.  Proposals such as raising the Member Business Loan cap and expanded use of secondary capital would help us help more members.  But, as Board Member Fryzel pointed out, the chances of getting either of these initiatives through Congress any time in the near future is slim.  
  • Did I mention that credit union people really, really like their wine? 
  • The Mets are more overrated than a Facebook IPO.

June 11, 2012 at 7:19 am Leave a comment

King of the Hill

Kudos to my former Congressman from Long Island, Peter King, for introducing legislation allowing credit unions to help their members by taking in secondary capital.  New York Congressman Gregory Meeks is one of the co-sponsors of this legislation.

The current capital restraints on credit unions put them in a fiscal straitjacket by giving them only one means of raising the money they need to grow their institutions.  This makes no sense to anyone except the bankers and credit unions should be looking forward to explaining to members of Congress why this bill is so important.

Currently, the only way credit unions, other than those with low-income designations, can grow is by putting aside retained earnings.  This restriction becomes even more problematic when a lackluster economy makes it difficult to invest and regulators impose ever greater restrictions on financial products.  With passage of H.R. 3993, retained earnings will remain the primary means for credit unions to grow, but well-managed and well-capitalized credit unions will have the option of  seeking capital infusions from persons willing to invest money in the credit union.  According to NCUA, credit unions lag behind not only their bank and thrift counterparts in the U.S., but their counterparts around the world in the authority to take in secondary capital.  If policymakers want to maximize the number of loans, financial products and services available to consumers and small businesses, then they have to give credit unions the ability to raise the capital they need to offer these products.

I have this wacky idea that a successful financial institution should be the one that responsibly attracts the most members.  On one level, Bank Transfer Day was a huge success for credit unions as hundreds of thousands of persons told banks that they were fed up with their exorbitant fees and indifference to customers and became credit union members.  But credit unions were actually penalized by the influx of new members and even though Bank of America lost an estimated 20% of its accounts, in many ways the joke is on us.  For banks, account growth is just one way of growing and by no means the most cost-effective.  Secondary capital would allow us to take in new members with an adequate financial cushion as we take the steps necessary to invest their assets and provide them with a cost-effective alternative to the bank down the street.

I can hear the bankers already — pounding out bullet points accusing us of turning our backs on our cooperative structure by taking in capital investments.  But planning for expansions, guarding against economic downturns and being able to take on additional members strengthen the cooperative mission.  No one is suggesting that a credit union’s assets be comprised mainly of secondary capital.  But a responsible financial institution shouldn’t have to choose between expanding to meet proven demand and protecting its well-capitalized status.

February 10, 2012 at 7:12 am Leave a comment

Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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