Nonconforming Investment Special Reserve

Issuing agencies

Abstract

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

Full Text

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<title>Federal Register, Volume 91 Issue 202 (Wednesday, October 21, 2026)</title>
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[Federal Register Volume 91, Number 202 (Wednesday, October 21, 2026)]
[Proposed Rules]
[Pages 66532-66534]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-21509]


========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

========================================================================


Federal Register / Vol. 91, No. 202 / Wednesday, October 21, 2026 / 
Proposed Rules

[[Page 66532]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 702, 703, and 741

RIN 3133-AG21


Nonconforming Investment Special Reserve

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: The NCUA Board (Board) is proposing to amend its regulations 
governing the requirements for federal share insurance. This action 
would remove the requirement for federally insured, state-chartered 
credit unions to establish a special reserve for certain investments 
that are beyond those authorized for federally chartered credit unions. 
The intended effect is to reduce unnecessary compliance and 
administrative burdens for state-chartered insured credit unions 
without diminishing the agency's ability to protect the National Credit 
Union Share Insurance Fund.

DATES: Comments must be received by December 21, 2026.

ADDRESSES: Comments may be submitted in one of the following ways. 
(Please send comments by one method only):
    <bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>. 
The docket number for this proposed rule is NCUA-2026-1886. Follow the 
``Submit a comment'' instructions. If you are reading this document on 
<a href="http://federalregister.gov">federalregister.gov</a>, you may use the green ``SUBMIT A PUBLIC COMMENT'' 
button beneath this rulemaking's title to submit a comment to the 
<a href="http://regulations.gov">regulations.gov</a> docket. A plain language summary of the proposed rule 
is also available on the docket website.
    <bullet> Mail: Address to Melane Conyers-Ausbrooks, Secretary of 
the Board, National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.
    <bullet> Hand Delivery/Courier: Same as mailing address.
    Mailed and hand-delivered comments must be received by the close of 
the comment period.
    Public Inspection: Please follow the search instructions on <a href="https://www.regulations.gov">https://www.regulations.gov</a> to view the public comments. Do not include any 
personally identifiable information (such as name, address, or other 
contact information) or confidential business information that you do 
not want publicly disclosed. All comments are public records; they are 
publicly displayed exactly as received and will not be deleted, 
modified, or redacted. Comments may be submitted anonymously. If you 
are unable to access public comments on the internet, you may contact 
the NCUA for alternative access by calling (703) 518-6540 or emailing 
<a href="/cdn-cgi/l/email-protection#da959d9997bbb3b69ab4b9afbbf4bdb5ac"><span class="__cf_email__" data-cfemail="652a222628040c09250b0610044b020a13">[email&#160;protected]</span></a>.

FOR FURTHER INFORMATION CONTACT: Rachel Ackmann, Senior Attorney, 
Office of General Counsel, at (703) 548-2601 or at 1775 Duke Street, 
Alexandria, VA 22314.

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.
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    \1\ For purposes of the special reserve requirement, if a FISCU 
conducts and documents an analysis that reasonably concludes an 
investment is at least investment grade and the investment is 
otherwise permissible for FCUs, that investment is not considered to 
be beyond those authorized by the FCU Act or implementing 
regulations in part 703.
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    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).
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    \2\ 64 FR 41029 (July 29, 1999).
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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.
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    \3\ 12 U.S.C. 1752-1775.
    \4\ 12 U.S.C. 1766(a).
    \5\ 12 U.S.C. 1787.
    \6\ 12 U.S.C. 1789.
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    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

[[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).
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    \7\ 12 U.S.C. 1781(b)(6).
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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.
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    \8\ 51 FR 37549 (Oct. 23, 1986) (describing the nonconforming 
investment reserve as a basic and longstanding safety and soundness 
standard established as a condition of NCUA insurance and designed 
to control risk to the Share Insurance Fund).
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    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 Sec.  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.
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    \9\ 12 U.S.C. 1790d.
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    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 Sec.  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.
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    \10\ 12 CFR 702.104(b)(1)(ii).
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    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 <a href="http://regulations.gov">regulations.gov</a>).
    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 <a href="https://www.regulations.gov">https://www.regulations.gov</a>.

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.
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    \11\ 58 FR 51735 (Oct. 4, 1993).
    \12\ 76 FR 3821 (Jan. 21, 2011).
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    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.
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    \13\ 90 FR 9065 (Feb. 6, 2025).
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C. Regulatory Flexibility Act

    The Regulatory Flexibility Act \14\ generally requires an agency to 
conduct

[[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.
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    \14\ 5 U.S.C. 601 et seq.
    \15\ 5 U.S.C. 605(b).
    \16\ 80 FR 57512 (Sept. 24, 2015).
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    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.
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    \17\ Public Law 105-277, 112 Stat. 2681 (1998).
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List of Subjects

12 CFR Part 702

    Banks, Banking, Credit unions, Reporting and recordkeeping 
requirements

12 CFR Part 703

    Credit unions, Investments, Reporting and recordkeeping 
requirements

12 CFR Part 741

    Bank deposit insurance, Credit, Credit unions, Reporting and 
recordkeeping requirements.

    By the National Credit Union Administration Board, this 19th day 
of October, 2026.
Melane Conyers-Ausbrooks,
Secretary of the Board.

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

PART 702--CAPITAL ADEQUACY

0
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.


Sec.  702.104   [Amended]

0
2. Amend Sec.  702.104 by:
0
a. Removing paragraph (b)(1)(ii); and
0
b. Redesignating paragraphs (b)(1)(iii) to (viii) as paragraphs 
(b)(1)(ii) to (vii).

PART 703--INVESTMENT AND DEPOSIT ACTIVITIES

0
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).

0
4. Revise Sec.  703.1(b)(6) to read as follows:


Sec.  703.1  Purpose and scope.

    (b) * * *
    (6) Investment activity by State-chartered credit unions, except as 
provided in Sec.  741.219 of this chapter; or
* * * * *

PART 741--REQUIREMENTS FOR INSURANCE

0
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.


Sec.  741.3  [Amended]

0
6. Amend Sec.  741.3 by:
0
a. Removing paragraph (a); and
0
b. Redesignating paragraphs (b) through (g) as paragraphs (a) through 
(f).

[FR Doc. 2026-21509 Filed 10-20-26; 8:45 am]
BILLING CODE 7535-01-P


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