Posts tagged ‘subordinated debt’

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

Ok, Boomer, Here Are Some Important Developments

Yesterday, NCUA released its agenda for next week’s board meeting. The caption that caught my eye is that the NCUA will be proposing a rule on subordinated debt. Earlier this year, NCUA issued an advanced notice of proposed rulemaking analyzing potential uses of what I am going to generally refer to as non-member uninsured capital. Depending on what NCUA comes out with, the regulation could give credit unions of all sizes the ability to obtain additional capital and set off a fierce attack by the bankers. In addition, some of the issues involved are complex enough to keep compliance people and lawyers busy for months, if not years to come. Stay tuned.

Is it Ok, Boomer?

That was the question pondered by Chief Justice Roberts as he heard arguments dealing with the interpretation of an obscure provision of the Age Discrimination in Employment Act. His question was over whether it was acceptable for a young employer to say “ok, boomer” to an older job applicant. I have since been informed that this is an increasingly common putdown of persons from a certain age group by millennials. Fortunately, the phrase has not caught on with my daughters, but I digress.

I am using this opportunity to highlight an age discrimination case that your HR department should examine brought to my attention by one of my more faithful readers. In EEOC v. Tucoemas Federal Credit Union, the credit union agreed to pay $450,000 to settle claims that it discriminated against three female employees in their fifties when it passed them over for the CEO job and instead hired a younger man with no credit union experience. Now, the case itself doesn’t break new ground, but if you take the time to read through the decree, it underscores just how dangerous it is to not have appropriate policies and procedures in place when it comes to making promotion and hiring decisions. This is particularly true for employees in New York, since changes to New York law make it more cost effective for attorneys to bring state law discrimination claims.

In Defense of the CFPB

Supporters of the CFPB are in the bizarre position of having to defend the Bureau against claims that its leadership structure is unconstitutional in Seila Law LLC v. Consumer Finance Protection Bureau. As a result, when the Supreme Court appointed prominent appellate attorney Paul Clement to argue in favor of the Bureau, his arguments are effectively the most important ones to be watched by supporters of the CFPB.

The other day, he submitted his brief to the court, and the key takeaways are that Congress has broad discretion to establish an independent agency’s leadership structure. The constitution does not speak to precisely how such agencies are to be organized. What really intrigued me is that he also argued that the court needn’t decide the issue of the Bureau’s structural constitutionality, because the issue involved in the underlying litigation can be resolved irrespective of the Bureau’s leadership. The latter argument could be significant because, like any good litigator, Clement is trying to give a majority of the Justices a way to rule on the case without declaring the structure of the CFPB unconstitutional.

January 17, 2020 at 10:03 am 1 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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