NCUA’s final Part 704 corporate rules, released Sept. 24, contained few revisions to the agency’s initial proposal. Most rules will become effective 90 days following the publication of final regulations in The National Register.
The most noteworthy change was the simplification of limitations on permissible corporate investments. The regulator completely eliminated all subordinated securities and private-label mortgage-backed securities, rather than allowing them in limited concentrations as originally proposed.
“We decided they weren’t worth the trouble,” said Deputy Executive Director Larry Fazio, adding that the two types of investments were responsible for the vast majority of corporate losses. Original proposals to prohibit collateralized debt obligations and net interest margin securities were also included in the final rule.
Other investment rule changes involved the simplification of weighted average life limitations. For example, the NCUA removed complex NEV chipping tests from the final regulations. Fazio said the controversial two-year weighted average requirement is still in the regulations, but the NCUA provided some leeway on government agency investments, granting them a 50% conversion factor. Now if a corporate purchased, for example, a four-year Treasury note, only half of its average weighted life-two years-would count for regulatory purposes.
All capital and retained earnings requirements remain as proposed. The current corporate capital requirement of 4% will be replaced with three ratios: a 4% minimum leverage ratio, a 4% Tier 1 risk-based capital ratio, and an overall 8% total capital ratio with a risk-based element. These ratios are required to maintain “adequately capitalized” status; well-capitalized corporates would require higher capital standards.
The rules go into effect one year from the date of publication. After one year, capital and retained earnings requirements will be implemented on a grandfathered basis, with the 4% Tier-1 risk-based ratio and 8% total risk-based capital ratio required on the one-year anniversary. The 4% leverage ratio isn’t required of corporates until the final rule’s third anniversary.
Other rules that will be grandfathered in involve the NCUA’s new authorities over corporate-owned CUSOs. Going forward, corporate CUSOs may only engage in services preapproved by the NCUA, which initially includes limited services such as brokerage and investment advisory. CUSOs must also open their books, personnel records, equipment and facilities to NCUA monitoring. Rather than demand that CUSOs comply within 90 days of publication, they will be given 180 days to gain NCUA approval, and a full year to divest from prohibited activities, the NCUA wrote in the rule.
The NCUA plans to propose a second round of corporate rules as early as November, Fazio said.
These rules will be based upon suggestions received by the regulator in comments submitted for proposed corporate rules that were finalized today during the NCUA’s special board meeting. Due to mandated federal administrative procedures, the NCUA could not simply add the suggestions to the latest rule. Rather, Fazio said, any new proposals must go through the comment process before approval.
One possible proposal would be to permit corporates to charge a membership or annual fee at their discretion, and use the fees to build capital and retained earnings, he said. Other possible proposals include additional risk management and internal reporting requirements.