SUPPLEMENTARY INFORMATION:

Introduction

A. Background

Part 741 generally applies to federal credit unions (FCUs), federally insured, state-chartered credit unions (FISCUs), and credit unions applying for insurance of accounts pursuant to Title II of the Federal Credit Union Act (FCU Act). This part prescribes various requirements for obtaining and maintaining federal share insurance and the payment of insurance premiums and capitalization deposit. Subpart A of part 741 contains substantive requirements that are not codified elsewhere in the NCUA's regulations. Subpart B lists additional regulations that are codified elsewhere in the NCUA's regulations as applying to FCUs, which also apply to FISCUs.

As discussed later in this preamble, the Board is proposing to amend a regulatory requirement in subpart A of part 741 to provide more flexibility and reduce regulatory burden for FISCUs. Section 741.3 requires a FISCU to establish a special reserve for nonconforming investments.^[1] The proposed rule would remove the special reserve requirement.

The Board last amended FISCU special reserve requirements in 1999 when the Board amended the terminology to refer to the special reserve account.^[2] The final rule renamed the accounts “Investment Valuation Reserve Account” and “Investment Valuation Reserve” to “Appropriation for Non-conforming Investments.” The change more appropriately reflected the function and composition of the account under generally accepted accounting principles (GAAP).

B. Legal Authority

The Board is issuing this proposal pursuant to its authority under the FCU Act. Under the FCU Act, the NCUA is the chartering and supervisory authority for FCUs and the federal supervisory authority for FICUs.^[3] The FCU Act grants the NCUA a broad mandate to issue regulations governing both FCUs and all FICUs. Section 120 of the FCU Act is a general grant of regulatory authority and authorizes the Board to prescribe rules and regulations for the administration of the FCU Act.^[4] Section 207 of the FCU Act is a specific grant of authority over share insurance coverage, conservatorships, and liquidations.^[5] Section 209 of the FCU Act is a plenary grant of regulatory authority to issue rules and regulations necessary or appropriate to carry out its role as share insurer for all FICUs.^[6] Accordingly, the FCU Act grants the Board broad rulemaking authority to ensure that the credit union industry and the Share Insurance Fund remain safe and sound.

Additionally, the FCU Act expressly provides that applications for insurance must contain an agreement by the applicant to maintain such special reserves as the Board, by regulation or in special cases, may require for protecting the interest of members.^[7] The Board has exercised its general authority to issue regulations on safe and sound ( printed page 66533) banking practices and its authority under the FCU Act to require special reserves under part 741. Part 741 requires a FISCU to establish a special reserve for investments if those credit unions make investments beyond those authorized in the FCU Act or NCUA's rules, and the book value of the investment is over the investment's market value or the market value cannot be determined (nonconforming investments).

II. Proposed Rule

The NCUA has required a special reserve for nonconforming investments since the 1980s.^[8] The NCUA imposes this requirement as some FISCUs are permitted to make investments beyond those authorized in the FCU Act or NCUA regulations for FCUs. As FCU investments generally are limited to relatively conservative instruments, investments outside of those limited investments may carry additional risk and raise safety and soundness concerns.

The Board is now proposing to rescind the requirement for a special reserve related to nonconforming investments. The Board finds the special reserve no longer necessary for safety and soundness because subsequent changes to GAAP have limited the applicability of the reserve requirement. As a practical matter, the special reserve does not provide additional loss absorbing capacity. Also, since the reserve was adopted in the 1980s, GAAP has been amended to require more investments to be carried at fair value instead of book value.

Currently, only seven FISCUs report a special reserve due to a nonconforming investment. Given the current limited applicability, and the fact the special reserve does not actually increase a credit union's loss absorbing capacity, the Board does not believe this provision is necessary for safety and soundness.

The proposed rule would also rescind the cross reference included in § 741.3(a). Section 741.3(a) states that, in determining the insurability of a credit union which makes application for insurance and in continuing the insurability of its accounts pursuant to title II of the FCU Act, FISCUs are subject to statutory prompt corrective action provisions,^[9] its implementing regulation, and subpart L of part 747 of this chapter. These are cross references, and each referenced statute and regulation also states its applicability to FISCUs. Therefore, these references can be removed as duplicative, and the Board proposes to do so.

The proposed rule would also amend a reference to the nonconforming reserve in part 703 of NCUA's regulations (part 703). Section 703.1 sets forth what is included and excluded from part 703. Paragraph (b)(6) excludes FISCU investment activity provided in § 741.3 related to non-conforming investments. The proposed rule would strike this reference.

Additionally, the proposed rule would remove a reference to appropriations for non-conforming investments in the risk-based capital rule. Section 702.104(b) states which elements are included in the definition of risk-based capital. One of the included elements is an appropriation for non-conforming investments.^[10] The proposed rule would remove this reference. The Board notes that under GAAP the special reserve is already considered part of undivided earnings. In removing the special reserve requirement, there should be no prompt corrective action implications from removing the appropriation account. The Board invites comment on this aspect of the proposal.

The Board solicits comments on all aspects of this proposal, but specifically solicits comment on the following:

Question 1. Should the Board consider alternatives to addressing nonconforming investments? For example, instead of a reserve, or addressing safety and soundness risks through the supervisory process, should the Board consider assigning a higher risk weight under part 702 for FICUs subject to risk-based capital requirements?

Question 2: Do commenters believe that the limited number of FISCUs holding nonconforming reserves is due to the disincentive to hold nonconforming investments resulting from the special reserve requirement in part 741? Do commenters expect FISCU investment activity to materially change if the proposed rule is adopted as final?

III. Regulatory Procedures

A. Providing Accountability Through Transparency Act of 2023

The Providing Accountability Through Transparency Act of 2023 (5 U.S.C. 553(b)(4)) requires that a notice of proposed rulemaking include the internet address of a summary of not more than 100 words in length of a proposed rule, in plain language, that shall be posted on the internet website under section 206(d) of the E-Government Act of 2002 (44 U.S.C. 3501 note) (commonly known as regulations.gov).

The Board is proposing to amend its regulations governing the requirements for federal share insurance. This action would remove the requirement for FISCUs to establish a special reserve for certain investments that are beyond those authorized for FCUs. The intended effect is to reduce unnecessary compliance and administrative burdens for FISCUs without diminishing the agency's ability to protect the National Credit Union Share Insurance Fund.

The proposal and the required summary can be found at www.regulations.gov.

B. Executive Orders 12866, 13563, and 14192

Pursuant to Executive Order 12866 (“Regulatory Planning and Review”), a determination must be made whether a regulatory action is significant and therefore subject to review by the Office of Information and Regulatory Affairs (OIRA), within the Office of Management and Budget (OMB) in accordance with the requirements of the Executive Order.^[11] Executive Order 13563 (“Improving Regulation and Regulatory Review”) supplements and reaffirms the principles, structures, and definitions governing contemporary regulatory review established in Executive Order 12866.^[12] This proposed rule was drafted and reviewed in accordance with Executive Order 12866 and Executive Order 13563. OIRA has determined that this proposed rule is not a “significant regulatory action” as defined by section 3(f) of Executive Order 12866.

Executive Order 14192 (“Unleashing Prosperity Through Deregulation”) requires that any new incremental costs associated with new regulations shall, to the extent permitted by law, be offset by the elimination of existing costs associated with at least 10 prior regulations.^[13] This proposed rule is not an Executive Order 14192 regulatory action because this rule is not significant under Executive Order 12866.

C. Regulatory Flexibility Act

The Regulatory Flexibility Act ^[14] generally requires an agency to conduct ( printed page 66534) a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements, unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. If the agency makes such a certification, it shall publish the certification at the time of publication of either the proposed rule or the final rule, along with a statement providing the factual basis for such certification.^[15] For purposes of this analysis, the NCUA considers small credit unions to be those having under $100 million in assets.^[16] The Board fully considered the potential economic impacts of the regulatory amendments on small credit unions.

The proposed rule would remove a requirement for a separate reserve account. FISCUs would no longer need to account for the reserve or hold capital related to certain nonconforming investments. As described previously, the Board believes that the current requirement has a limited impact. Thus, it does not believe its removal would have a significant effect. Accordingly, the Board certifies the proposed rule would not have a significant economic impact on a substantial number of small credit unions.

D. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (PRA) generally provides that an agency may not conduct or sponsor, and not withstanding any other provision of law, a person is not required to respond to, a collection of information, unless it displays a currently valid Office of Management and Budget control number. The PRA applies to rulemakings in which an agency creates a new or amends existing information collection requirements. For purposes of the PRA, an information-collection requirement may take the form of a reporting, recordkeeping, or a third-party disclosure requirement. The NCUA has determined that the change in the proposed rule does not create a new information collection or revise an existing information collection as defined by the PRA.

E. Executive Order 13132 on Federalism

Executive Order 13132 encourages certain agencies to consider the impact of their actions on state and local interests. The NCUA, an agency as defined in 44 U.S.C. 3502(5), voluntarily complies with the executive order to adhere to fundamental federalism principles. This proposed rule would apply to all FISCUs and would remove a separate requirement imposed only on FISCUs. There would be no effect on states or on the distribution of power and responsibilities among the various levels of government. To the extent that the proposed rule would affect FISCUs uniquely, it would tend to remove a requirement that applies solely to FISCUs and would eliminate a burden that may apply based on their status and activity as state-chartered credit unions. The NCUA welcomes comments on ways to eliminate, or at least minimize, any potential impact in this area.

F. Assessment of Federal Regulations and Policies on Families

The NCUA has determined that this proposed rule would not affect family well-being within the meaning of section 654 of the Treasury and General Government Appropriations Act, 1999.^[17] The proposed rule relates to special reserves held by FISCUs for certain investments, and any effect on family well-being is expected to be indirect.

For the reasons stated in the preamble, the NCUA Board proposes to amend 12 CFR parts 702, 703, and 741 as follows:

1. The authority citation for part 702 continues to read as follows:

Authority: 12 U.S.C. 1757(9), 1766(a), 1784(a), 1786(e), 1790d.

2. Amend § 702.104 by:

a. Removing paragraph (b)(1)(ii); and

b. Redesignating paragraphs (b)(1)(iii) to (viii) as paragraphs (b)(1)(ii) to (vii).

3. The authority citation for part 703 continues to read as follows:

Authority: 12 U.S.C. 1757(7), 1757(8), 1757(14) and 1757(15).

4. Revise § 703.1(b)(6) to read as follows:

5. The authority citation for part 741 continues to read as follows:

Authority: 12 U.S.C. 1757, 1766(a), 1781-1790, 1790d; 3331 et seq.;31 U.S.C. 3717.

6. Amend § 741.3 by:

a. Removing paragraph (a); and

b. Redesignating paragraphs (b) through (g) as paragraphs (a) through (f).

91 FR 66532