Wednesday, March 22, 2017

Disclosures, Supplemental Capital, and Material Risk

The National Credit Union Administration (NCUA) is seeking input regarding disclosures for credit unions issuing supplemental capital.

The credit union Call Report does not provide adequate disclosures about material facts affecting a credit union to protect investors.

According to the Advanced Notice of Proposed Rulemaking, "[t]he disclosure must not contain any untrue statement of a material fact and must not omit to state a material fact ... the disclosure must be clear, accurate and verifiable."

Topics that should be covered in the disclosure include:
  • Material risks relating to the issuer and the industry in which the issuer operates;
  • Material risks relating to the security being offered;
  • The issuer’s planned uses for the proceeds of the offering;
  • Regulatory matters impacting the issuer and its operations;
  • Tax issues associated with the security being offered; and
  • How the securities are being offered and sold, including any conditions to be met in order to complete the offering.
In other words, credit unions issuing supplemental capital will be required to provide details about their business models. This would include discussion about the type of lending by credit unions, risk profile of these loans, geographic diversity of loans, any legal actions that could materially impact the operations of credit unions, and so on.

In addition, to protect investors, credit union regulators will need to end their practices of not publishing enforcement actions. In 2015, there were 286 outstanding unpublished Letters of Understanding and Agreement. These unpublished enforcement actions identify material risks that are affecting the operation of credit unions. This is information that investors would find important.

Moreover, credit unions will be expected to provide "ongoing communications with investors, reporting of compliance with the contractual covenants, and sharing of information with current and prospective investors."

The Board notes that "[f]ailure to comply with the investment contracts or to properly monitor communications and sharing of information could subject the credit union to liability, which could negatively impact the Share Insurance Fund."

1 comment:

  1. A credit union wishing to issue capital cannot disclose the risk in the credit union system because NCUA does not make the information available.
    In fact the information is conveniently difficult to acquire, such as the losses that occurred and might still occur from the corporate credit union debacle.
    Mcwatters just told us at GAC that there is significant accounting, legal and financial issues to "figure out" before the stabilization fund could be considered to merge with NCUSIF.
    After 7 years they can't figure it out?
    And the NCUSIF needs to assess us, for what "losses in credit unions"?
    What's the total exposure from taxi loans?
    These losses are covered by credit union capital and put the investor at risk to reduced payout, no payout and possibly principal.



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