Regulatory Compliance for Investments

NCUA’s investment regulations will address ‘standards of creditworthiness.’

July 31, 2013
/ PRINT / ShareShare / Text Size +

Board of directors involvement

The current investment regulation details NCUA’s requirements on what a board of directors must include in its written investment policies—and requires that the board reviews the policies at least annually. Several parts of NCUA’s current investment regulation require that counterparties have a particular credit rating. But the Dodd-Frank Act no longer permits this.

Section 703.14(g)(9) of the new regulation instead requires the “counterparty to the transaction meets the minimum credit quality standards as approved by the federal credit union’s board of directors.” Commenters during the proposal stage requested NCUA provide more guidance on how a credit union’s board should establish credit quality standards for counterparties.

In the supplemental information accompanying the revised regulation, NCUA only added that, “appropriate to the size, nature, and complexity of a credit union’s counterparty credit risk profile”:

► “A credit union board should clearly articulate the institution’s risk tolerance for counterparty credit risk by approving relevant policies, including a framework for establishing limits on individual counterparty exposures and concentrations of exposures.”

► “[S]enior management should establish and implement a comprehensive risk measurement and management framework consistent with this risk tolerance that provides for the ongoing monitoring, reporting, and control of counterparty credit risk exposures.”

Permissible investment limits

Because NCUA eliminated the “bright line” of credit ratings standards and has concerns about risk exposure, it has added or tightened concentration limits on three permissible investments:

► Municipal securities (Section 703.14(e)). Under the current investment regulation, a federal credit union can hold a municipal security that has one of the four highest credit ratings.

Effective June 11, 2013, in addition to replacing the cited credit ratings with the “investment grade” standard explained previously, NCUA will limit a federal credit union’s aggregate holdings of municipal securities to no more than 75% of net worth and its holdings of municipal securities issued by any single issuer to no more than 25% of net worth.

► European financial options contracts (Section 703.14(g)(11). These are permissible investments for the purpose of hedging the risk associated with issuing share certificates with dividends tied to an equity index.

Because the Dodd-Frank Act requires NCUA to remove references to credit ratings and substitute the counterparty standards approved by the federal credit union’s board of directors, NCUA tightened the concentration limit from the current 100% of net worth to 50% of net worth, starting in June.

► Mortgage note repurchase transactions (Section 703.14(h)). Similarly, NCUA wants to address its risk concerns with these permissible transactions, so starting in June the agency will limit the aggregate of a federal credit union’s investments for all counterparties to 50% of net worth (down from 100% of net worth).

Credit unions must review the revised investment regulation thoroughly, and assure they follow the safekeeping requirements.

And credit unions buying commercial mortgage-related securities must revise their assessment to conform to the new “investment grade” standard.

What NCUA won’t do

NCUA was unwilling to do two things requested by commenters during the proposal:

1. It won’t simply grandfather investments purchased under existing credit rating requirements, saying: “As a matter of sound practice, federal credit unions must manage the credit risk inherent in their investment securities and transactions by taking into account the risk of deterioration. Federal credit unions have an ongoing obligation to re-evaluate creditworthiness and address deterioration as appropriate. A federal credit union’s initial evaluation of credit quality is not a permanent justification for asset retention.”

2. It wouldn’t simply publish a listing of acceptable investments as a “safe harbor,” saying “that establishing such a list would effectively transfer credit union risk management to NCUA.… A safe harbor provision exempts an investor from due diligence responsibility and could be viewed as NCUA’s tacit endorsement of the suitability of certain investments.”

Credit unions that now rely on credit ratings in their investment program must review these amendments to Section 703 and make the needed changes.

Watch for NCUA’s further guidance on how it expects to implement these requirements.

Visit CUNA’s eGuide to Federal Laws and Regulations topic on “investments” (visit and select “compliance”).

KATHY THOMPSON is CUNA’s senior vice president for compliance and legislative analysis. Contact her and CUNA’s compliance team at

Post a comment to this story


What's Popular

Popular Stories

Recent Discussion

Great article! Unfortunately, most employees don’t feel valued or appreciated by their supervisors or employers. In fact, research has shown that the predominant reason team members quit their jobs is because they don’t feel valued. This is in spite of the fact that employee recognition programs have proliferated in the workplace – over 90% of all organizations in the U.S. has some form of employee recognition activities in place. But most employee recognition programs are viewed with skepticism and cynicism – because they aren’t viewed as being genuine in their communication of appreciation. Getting the “employee of the month” award, receiving a certificate of recognition, or a “Way to go, team!” email just don’t get the job done. How do you communicate authentic appreciation? We have found people have different ways that they want to be shown appreciation, and if you don’t communicate in the language of appreciation important to them, you essentially “miss the mark”. Additionally, employees need to receive recognition more than once a year at their performance review. Otherwise, they view the praise as “going through the motions”. A third component of authentic appreciation is that the communication has to be about them personally – not the department, not their group, but something they did. Finally, they have to believe that you mean what you say. How you treat them has to match the words you use. If you are not sure how your team members want to be shown appreciation, the Motivating By Appreciation Inventory ( will identify the language of appreciation and specific actions preferred by each employee. You then can create a group profile for your team, so everyone knows how to encourage one another. Remember, employees want to know that they are valued for what they contribute to the success of the organization. And communicating authentic appreciation in the ways they desire it can make the difference between keeping your quality team members or having a negative work environment that everyone wants to leave. Paul White, Ph.D., is the co-author of The 5 Languages of Appreciation in the Workplace with Dr. Gary Chapman.

Your Say: Who should be Credit Union Magazine's 2014 CU Hero of the Year?

View Results Poll Archive