Posts tagged ‘securities’

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


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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