Proposed Capital Markets Funding Program for Credit Unions

April 23, 2021

Stuart Morrissy
Hogan Lovells US LLP
Columbia Square
555 Thirteenth Street, NW
Washington, DC 20004

RE: Proposed Capital Markets Funding Program for Credit Unions

Dear Mr. Morrissy:

You have asked a number of questions regarding the application of the NCUA’s share insurance regulations to your proposed credit union funding program. While the NCUA will not prospectively evaluate how National Credit Union Share Insurance Fund (NCUSIF) coverage may apply to proposed programs and will not guarantee insurance coverage for such programs, we can provide an analysis of the share insurance regulations that you have inquired about. For additional context, we have included a brief description of the program below. We emphasize that the NCUA is not providing a guarantee of share insurance coverage and is not providing any endorsement of the proposed program. The NCUA makes no evaluation of the program’s compliance with any applicable law.

Overview

Only some aspects of the proposed program relate to the NCUA’s share insurance regulations. Only those aspects relevant to the regulations governing share insurance coverage are included here. Of relevance for share insurance purposes, the proposed program is based upon one or more limited liability companies (LLCs) purchasing share certificates from various federally insured credit unions (FICUs) where they are either members or otherwise eligible to maintain NCUA insured accounts. Under the proposed program, a given LLC would purchase a share certificate worth a maximum of $250,000, the standard maximum share insurance amount (SMSIA), at one or more FICUs. In other words, any single LLC would not have more than the SMSIA at a specific FICU. As noted, each LLC would be a member of, or otherwise eligible to maintain an insured account at, any FICU where they have purchased a share certificate. Each LLC would be the actual owner of the share certificates and would not be holding them in any sort of agent, nominee, or custodian capacity. This is important because, outside of scenarios not relevant here, share insurance coverage is provided only to the actual owner of the funds in an account and requires the true owner of the funds to either be a member of the FICU or otherwise eligible to maintain an insured account at the FICU.

Analysis

Part 745 of the NCUA’s regulations governs share insurance.¹ Specifically, you have asked questions related to § 745.6, which governs accounts held by a corporation, partnership, or unincorporated association. LLCs are also insured under § 745.6. Section 745.6 states that:

Accounts of a corporation, partnership, or unincorporated association engaged in any independent activity shall be insured up to the SMSIA in the aggregate. The account of a corporation, partnership, or unincorporated association not engaged in an independent activity shall be deemed to be owned by the person or persons owning such corporation or comprising such partnership or unincorporated association and, for account insurance purposes, the interest of each person in such an account shall be added to any other account individually owned by such person and insured up to the SMSIA in the aggregate. For purposes of this section, “independent activity” means an activity other than one directed solely at increasing insurance coverage.²

To summarize § 745.6, accounts held by a corporation, partnership, or unincorporated association, are insured up to the SMSIA of $250,000 if they are engaged in an independent activity. As noted, LLCs are also covered under § 745.6. As we have discussed with you previously, the regulation’s definition of an “independent activity” is broad. So long as an LLC is engaged in “an activity other than one directed solely at increasing insurance coverage [,]” it will be found to be engaged in an independent activity.³ You have represented that the various LLC depositors that will maintain accounts at FICUs under the proposed program will be engaged in multiple activities instrumental to the program’s structure, including its downstream transactions, and are not created solely to increase share insurance coverage. Section 745.6 is clear that the accounts held by a corporation, partnership, or unincorporated association engaged in any activity other than one directed solely at increasing insurance coverage (that is, an “independent activity”) will be insured up to the SMSIA in the aggregate.

Relatedly, you have requested confirmation that each LLC depositor at a single FICU would receive separate coverage and that multiple legally separate LLCs would not have their accounts maintained at a single FICU aggregated. While we will not prospectively evaluate the coverage provided to the program or the separateness of the entities, the regulations are clear that the accounts of a given LLC that is a member of a FICU or otherwise eligible to maintain an insured account at the FICU are insured up to the SMSIA in the aggregate. Separate legal entities that are engaged in independent activities and are the true owners of the funds in the account they maintain are eligible to receive coverage up to the SMSIA.

Additionally, it is worth reiterating that share insurance coverage is always predicated upon the account belonging to a member or an individual or entity that is otherwise eligible to maintain an insured account at a given FICU.⁴ Share insurance coverage determinations are made based upon the identity of the legal owner of the funds in the account. Accordingly, for an LLC to receive coverage, it must legally own the funds in the account and be a member of the FICU or otherwise qualify to maintain an insured account at the FICU. Additionally, share insurance coverage is always dependent upon compliance with all applicable requirements of Part 745, including the recordkeeping requirements in § 745.2(c).⁵ For these additional reasons, as discussed above, we cannot guarantee that the accounts you described would receive share insurance coverage.

Any questions FICUs may have related to safety and soundness concerns associated with this program should be addressed by contacting the appropriate Regional Office or the NCUA’s Office of Examination and Insurance at eimail@ncua.gov.