Investment and Deposit Activities

SUMMARY: The regulation governing the investment and deposit activities

of natural person credit unions was last revised effective July 30,

1993. Recent events and significant changes in the investment products

available in the marketplace have prompted a review of the rules

regarding credit unions' investment and deposit activities. The

proposed regulation clarifies a number of areas, adds restrictions on

some securities which have been determined to be too risky for credit

unions, broadens authority in certain areas, and requires that a credit

union's staff and board of directors fully understand the potential

risk characteristics of its investment options.

DATES: Comments must be received on or before March 28, 1996.

ADDRESSES: Comments should be directed to Becky Baker, Secretary of the

Board. Mail or hand-deliver comments to: National Credit Union

Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. Fax

comments to (703) 518-6319. Post comments on NCUA's electronic bulletin

board by dialing (703) 518-6480. Please send comments by one method

only.

FOR FURTHER INFORMATION CONTACT: David M. Marquis, Director, Office of

Examination and Insurance, (703) 518-6360, or Daniel Gordon, Senior

Investment Officer, (703) 518-6620, or at the above address.

SUPPLEMENTARY INFORMATION:

Background

The Federal Credit Union Act (the Act) permits federal credit

unions to purchase investments that, in general, have little default

risk (e.g., securities of the U.S. Treasury, government agencies, and

government-sponsored enterprises). However, rapid changes in financial

markets have altered the once simple characteristics of many of these

investments. The innovations have increased the potential interest

rate, market, and liquidity risk of credit union investments, putting a

greater burden on credit union board to understand and manage such

risks.

To estimate credit union understanding of investment risks, NCUA

conducted a study of approximately 300 credit unions with investments

in collateralized mortgage obligations (CMOs) and Real Estate Mortgage

Investment Conduits (REMICs)\1\ in excess of capital. The study

revealed that management in more than a third of the credit unions did

not understand the risks of CMOs, that more than a quarter of the

credit unions were taking unacceptable risks, and that almost half did

not have acceptable asset-liability management policies. From this and

other evidence, NCUA concluded that investment policies with well-

defined parameters and enhanced monitoring and reporting of investment

risks are needed to strengthen credit union investment risk management.

\1\Hereafter, in this supplementary information section, ``CMO''

means ``CMOs and REMICs.''

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The proposed rule recognizes that credit union investment risk is

largely interest rate, rather than credit (default) risk, and that a

regulation designed to prohibit particular securities can fail to

reflect the changing financial environment. It is based on the belief

that the responsibility for making investment decisions rests with the

credit union board, not NCUA, and that credit unions which assume more

potential risk should meet higher standards.

The proposed rule allows a credit union to operate on one of three

levels. At the most conservative level, a credit union could invest in

fully-insured certificates of deposit (CDs) and shares and deposits in

corporate credit unions. If limited to these investments, the credit

union would not be required to approve CMO prepayment models, conduct

CMO testing, develop a divestiture plan for failed CMOs, establish a

trading policy, report on trading activities, prepare a monthly report

showing the fair value of each investment, calculate the impact on its

portfolio of a 300 basis point parallel shift in interest rates, obtain

independent valuations of each investment, or evaluate credit risk.

At the next level, a credit union could invest in potentially more

risky securities in an amount up to capital and would have to comply

with most of the proposed rule's policy and reporting requirements.

However, it would not be required to evaluate the impact on its

portfolio of a 300 basis point shift in rates.

Finally, at the most sophisticated level, a credit union investing

in potentially more risky securities in an amount exceeding capital

would be subject to all of the policy and reporting requirements,

including calculating the impact of a 300 basis point shift in rates.

NCUA sought input from various sources during the process of

revising Part 703. In six ``focus group'' meetings, NCUA staff met with

board members, CEOs, and CFOs of credit unions of various sizes and

with representatives of trade organizations. The focus groups provided

valuable input on the proposed rule. As a result of the meetings, a

number of changes were made, including the following: (1) Clarification

was provided that the knowledge and skills of individuals making

investment decisions could be documented in position descriptions

instead of being set out in the investment policy; (2) The amount of

information required to be provided in the monthly investment report

was reduced, and provision was made for an investment or asset-

liability management committee, rather than the board, to receive the

full report; (3) Selling broker-dealers were permitted to provide

monthly valuations of securities, and some discretionary investment

authority was permitted to be delegated to an outside party; and (4)

Time periods for notifying NCUA of nonconforming investments and

preparing a divestiture plan were expanded.

Section 703.1 Scope

The proposed rule deletes some sentences in the Scope section, as

unnecessary. In addition, it adds the provision that Part 703 does not

apply to corporate credit unions. Corporate credit unions are subject

to the same laws and rules as natural person credit

[[Page 61220]]

unions, except where those laws and rules are inconsistent with Part

704 of the NCUA regulations, 12 CFR Part 704, which specifically

governs corporate credit unions. Although Part 704 contains a detailed

investment section, it does not cover all aspects of corporate credit

union investment activities. Accordingly, corporate credit unions are

subject to certain provisions of Part 703. This occasionally has caused

confusion, however, as it is not always clear when a general law or

rule is ``inconsistent'' with Part 704. Part 704 is currently being

revised, and plans are for it to incorporate all of the applicable NCUA

rules governing investment activities, even if this means duplicating

portions of Part 703. Therefore, proposed Section 703.1 clarifies that

Part 703 is not applicable to corporate credit unions.

Section 703.2 Definitions

NCUA is proposing to add a number of new definitions, to redefine

certain already-defined terms, and to delete several definitions.

The proposed rule treats amortizing securities and securities with

embedded options as investments that have the potential to present

significant interest rate risk. The proposed rule does not prohibit

credit unions from purchasing such investments, but it does subject a

credit union holding these and other potentially risky investments in

an amount greater than capital to additional measures of interest rate

risk. To ensure consistency, the proposed rule provides definitions of

``amortizing security'' and ``embedded option.''

The proposed rule substitutes the term ``custodial agreement'' for

the current regulation's ``bailment for hire contract,'' using an

almost identical definition. Based on questions that have been

received, it appears that the current term may no longer widely be

used.

The dollar amount of capital is used as a threshold in a number of

places in the proposed rule. Therefore, a definition of capital has

been provided. The allowance for loan losses is excluded from capital

for the purposes of Part 703 since the balance in this account has

already been allocated to specific loan losses and is not available to

absorb investment losses. Capital for the purpose of determining CAMEL

ratios includes the allowance for loan losses.

The proposed rule discusses securities in terms of fair value

rather than market price to conform to guidance in recent statements of

the Financial Accounting Standards Board (FASB). Market price is the

best evidence of fair value; if a market price is not available, fair

value may be estimated based on the market price of a security with

similar characteristics or on valuation techniques, including

calculating the present value of estimated future cash flows using an

appropriate discount rate, option pricing, or matrix pricing.

``Industry-recognized information provider'' refers to an entity

which provides information regarding investments, but which is not, for

instance, a broker or dealer. An example of such an entity is

Bloomberg, L.P., an electronic service which provides market

information to subscribers, who must lease a specialized terminal to

access the information. Other examples are the Wall Street Journal and

other bona fide newspapers, news magazines, or business or financial

publications or electronic services of general and regular circulation.

The proposed rule provides separate definitions for ``investment''

and ``security,'' as the terms are not used interchangeably.

``Investment'' is a broad category that includes securities, deposits,

and shares in credit unions.

The proposed rule simplifies the definition of ``repurchase

transaction,'' because the current definition has proved confusing. The

safekeeping element of the current definition has been moved to

proposed section 703.3(b)(8).

The term ``counterparty'' in the proposed definition of ``reverse

repurchase transaction'' has been substituted for ``purchaser'' in the

current definition. This reflects current market terminology.

The proposed rule deletes some sentences in the definitions of

``standby commitment'' and ``stripped mortgage-backed security,'' as

being unnecessarily detailed.

Definitions are provided for the following new terms used in the

proposed rule: ``business day,'' ``commercial mortgage related

security,'' ``delivery versus payment,'' ``interest rate swap,''

``investment characteristic,'' ``maturity,'' ``mortgage related

security,'' ``mortgage servicing,'' ``municipal security,''

``official,'' ``option,'' ``pair-off transaction,'' ``parallel shift,''

``prepayment model,'' ``regular-way settlement,'' ``securities loan,''

``small business related security,'' ``street name,'' ``total return,''

``U.S. government agency,'' ``U.S. government-sponsored enterprise,''

and ``when issued trading.''

The proposed rule deletes the following definitions, as the terms

are no longer used: ``cash forward agreement'' and ``maturity date.''

Section 703.3 Investment Policies and Practices

Policies

Section 703.3(a) of the proposed rule requires that the board of a

federal credit union establish written investment policies consistent

with the Federal Credit Union Act, the NCUA Rules and Regulations

governing investments, and other applicable laws and regulations. The

policy must address the purposes and objectives of the credit union's

investment activities. The policy must provide a clear statement of the

credit union's investment goals. A credit union's primary goals may be

to minimize risk, provide liquidity, and generate a reasonable rate of

return. The emphasis placed on each goal will vary based on individual

credit union constraints or needs.

The policy must also list authorized investments for the credit

union, by issuer and characteristics. Characteristics of an investment

include its maturity, index, cap, floor, coupon rate, coupon formula,

index, call provision, and average life. For example, a policy

statement may authorize investments issued or guaranteed by the U.S.

Treasury, the Federal Home Loan Mortgage Corporation, and the Federal

National Mortgage Association. The policy statement could also

stipulate that no investment may have a maturity of more than 5 years,

or that only investments with a fixed coupon, or those indexed, without

caps, to 3-month LIBOR or the 3-month Treasury rate, will be permitted.

The complexity of amortizing securities may cause the board to exclude

any securities or deposits with amortizing cash flows.

The policy is also required to address interest rate risk

management. A credit union's interest rate risk management policy

should be related to its existing and potential cost of funds. In

addition, for credit unions holding securities with potential interest

rate risk, the policy may state that total return or average price

cannot vary by more than a certain percentage of capital for a specific

parallel shift in interest rates. The policy may state that capital

should not be permitted to decline below a specific minimum level when

the portfolio is subjected to a particular interest rate shock.

Consistent with NCUA's intent to place more responsibility with credit

union boards, the proposed rule does not specify particular limits. The

policy should be tailored to a credit union's activity level and

portfolio sophistication. Less complex

[[Page 61221]]

institutions will have a less complicated policy statement.

The board must also develop prudent concentration limits for all

investments, including deposits in Section 107(8) institutions and

shares and deposits in corporate credit unions. Concentrations can

result from single or related issuers, lack of geographical

distribution, holdings of obligations with similar characteristics,

such as mortgage-backed bonds, zero coupon bonds, and bonds linked to

the same index, holdings of bonds having the same trustee, and holdings

of securitized loans having the same originator, packager, or

guarantor. Concentrations can increase a credit union's vulnerability

to unforeseen market, credit, and liquidity risks. Each credit union

must evaluate concentration risk in relation to its financial condition

and its ability to analyze the risks of all investments.

Of all securities available in recent years, credit unions have

purchased more inappropriate CMOs than they have any other type of

instrument. For this reason, NCUA has decided to retain specific

testing requirements for CMOs. These are set forth at proposed section

703.4(e). To control the ``cherry picking'' that has accompanied such

testing (selecting the prepayment model that will allow a particular

CMO to pass the tests), the proposed rule requires potential purchasers

of CMOs to identify in their investment policies the specific

prepayment models that will be used in the tests. Each credit union has

the flexibility to choose the prepayment models it believes are the

best measures of potential risk, as long as the models are reasonable

and supportable.

Liquidity risk is the risk that a credit union will have

insufficient liquid assets to meet immediate cash demands. The board

must assess the potential for such demands, document how it arrived at

this assessment, and establish a liquidity policy that will enable it

to meet the demands. A credit union may use either a simple estimate,

based upon the history of prior cash flows, or a more sophisticated

approach.

Credit risk is the risk of default. The board must establish a

policy to manage this risk, if the credit union entertains any. While

it is not impermissible to rely on credit ratings, boards should be

aware that ratings may fail to timely reflect a creditor's

deteriorating ability to repay its obligations. A credit union without

the ability to fully evaluate credit risk may choose to limit its

investments to those that are fully guaranteed or insured by the U.S.

government and its agencies.

The board has the fiduciary responsibility to ensure that any

person authorized to make investment decisions has the knowledge and

experience necessary to carry out this function. The proposed rule

requires that the board establish criteria for such persons, either in

the investment policy or by approving appropriate position

descriptions.

The proposed rule requires that the policy statement indicate

approved broker-dealers and limits on the amounts and types of

transactions for each broker. Although the rule does not require that

the credit union approve more than one broker-dealer, reliance on a

single individual or firm could be disadvantageous to the credit union.

A credit union might choose to approve one broker-dealer for the full

range of its investment activities and another for only certain of the

investments authorized by policy. For example, the credit union may

permit one broker, with more limited knowledge, to sell to the credit

union only Treasury securities with less than 1 year maturity, while

permitting another, with more knowledge and ability, to sell longer

term securities or securities with embedded options issued by U.S.

government agencies, as well as Treasury securities. The details for

these authorizations should be established by policy.

The proposed rule expands the requirements for credit union

policies regarding the safekeeping of investments. The policy statement

should include the amount and type of investments that can be safekept.

The proposed rule does not require more than one safekeeping agent.

Thus, all of a credit union's investments may be held by one safekeeper

if this authorization is set forth in the policy statement.

Most credit unions do not engage in trading, because it requires a

great deal of sophistication, market knowledge, and strong controls.

Credit unions that choose to enhance their income through this method

may do so, provided they have established appropriate policies and

controls.

Practices

In addition to expanding the requirements for the establishment of

investment policies, the proposed rule requires that credit unions

follow certain practices designed to ensure that officials and

employees involved with investment activities have adequate information

regarding investments to make appropriate decisions to manage and

control risk.

Section 703.3(b)(1) of the proposed regulation requires that a

federal credit union classify its securities as held-to-maturity,

available-for-sale, or trading, in accordance with generally accepted

accounting principles (GAAP) and consistent with the federal credit

union's documented intent and ability regarding the security. Deposits

and shares in Section 107(8) institutions and corporate credit unions

are not securities and therefore are not subject to these

classifications.

It is NCUA's view that a credit union should not hold an investment

unless its board of directors, chief financial officer, investment

committee, and investment manager understand the risks reflected in the

policy statement. Proposed Section 703.3(b)(2)(a) requires that any

official or employee of a federal credit union who has discretionary

investment authority be able to demonstrate an understanding of the

risk characteristics of investments and investment transactions under

that authority. The board must recognize its responsibilities in this

area. Directors must be able to fully understand the risks associated

with investment products that are authorized by policy. While not a

specific requirement, NCUA recommends that in credit unions with more

sophisticated portfolios, one or more board members serve on the asset-

liability management and/or investment committees.

The NCUA examiner may request that individuals with investment

authority demonstrate their understanding of that authority. If they

are not able to do so, the credit union may be required to alter its

policy statement or take other appropriate action.

To ensure the board maintains control over the credit union's

investment activities, proposed Section 703.3(b)(2)(B) establishes a

general prohibition against delegating discretionary control of

investment authority to an outside party. However, proposed Section

703.3(b)(2)(C) allows a credit union to delegate such control to an

investment advisor who is registered with the Securities and Exchange

Commission under the Investment Advisers Act of 1940. Registration

imposes a number of requirements designed to ensure that an adviser

acts in the client's best interest. Nevertheless, to ensure that the

transactions being made by the adviser are consistent with the credit

union's policies and objectives, a credit union must establish

specific, detailed parameters and reporting procedures when delegating

investment authority.

Proposed Section 703.3(b)(2)(D) limits the total of a credit

union's delegation of investment authority and investment in mutual

funds and other investment companies to 100 percent of capital.

[[Page 61222]]

Proposed Section 703.3(b)(3) requires that the board be notified

when an investment has fallen outside board-approved policy parameters.

For instance, if the credit union has established a minimum issuer

credit rating of B, and during the course of holding an investment, the

issuer's rating falls to B/C, the board must be notified and some

decision regarding the investment or policy made and documented in the

minutes.

Proposed Section 703.3(b)(4) addresses the reporting of interest

rate risk. It requires a federal credit union to prepare a monthly

report showing the characteristics of each investment in the portfolio

and the net increase or decrease in the fair value or total return of

each security, and the portfolio, in sufficient detail to ensure that

all of the securities, and the portfolio as a whole, remain within

board policy. The change in fair value of held-to-maturity securities

must be included because losses from such securities reflect future

losses of income. Where the credit union has an active asset-liability

management or investment committee, the report may be provided to such

committee, with a summary to the board. Where the credit union does not

have such a committee, the full report must be provided to the board.

A credit union that chooses to keep all of its investments in CDs

and corporate credit union shares and deposits would not be required to

price these investments and therefore would not be subject to this

reporting requirement. Only those credit unions that have marketable

securities would be required to report this information. Credit unions

that purchase securities with greater potential risk may have

additional reporting requirements.

Section 703.3(b)(4)(ii)(C) sets forth the securities that NCUA has

determined represent greater potential risk. They are: (1) Securities

that amortize; (2) securities with embedded options; (3) securities

with maturities greater than 3 years; and (4) securities where contract

rates are related to more than one index or are inversely related to,

or multiples of, an index. If the total of securities that have any one

of these characteristics is greater than capital, proposed Section

703.3(b)(4)(iii) requires that the credit union calculate the potential

impact, on the fair value and/or total return of each security in the

portfolio and the portfolio as a whole, of parallel shifts of plus and

minus 300 basis points. The purpose of this analysis is to determine

the impact of potential shifts in interest rates on the credit union's

future capital position. Current investment decisions must be made in

the context of this analysis. Credit unions that do not want to conduct

this analysis can restrict the total of these potentially risky

investments to less than capital. For purposes of this rule, adjustable

rate securities with a final maturity of 3 years or more are considered

securities which represent greater potential risk.

This interest rate shock test reflects a trade-off between ensuring

a credit union board's full awareness of the risks of its portfolio and

reducing the burden on small and medium-sized credit unions. The rule

could have included long-term CDs and term investments in corporate

credit unions in the list of investments that trigger the test, since

such investments can present a high degree of interest rate risk. The

rule also could have required a credit union holding even one of the

triggering securities to subject its portfolio to a 300 basis point

shock, because of the potential for greater interest rate risk. The

rule also could have required more complex interest rate tests. Since

financial markets do not change in parallel shifts, a 300 basis point

parallel shift is inadequate to truly evaluate potential risk. More

accurate tests would consider factors such as twists in the yield

curve, lags, changes in volatility, the reinvestment rate of cash

flows, and institutional factors affecting prepayment patterns.

Finally, NCUA could have required credit unions to subject their entire

balance sheets, including loans and shares, to an interest rate shock

test, since testing only the investment portfolio yields an incomplete

picture of the interest rate risk on a credit union's balance sheet.

The NCUA Board determined, however, that more complex or additional

tests would be too burdensome for small and medium-sized credit unions.

However, it is NCUA's judgment that holders of large portfolios of more

complex securities cannot manage interest rate risk adequately without

conducting additional testing, and examiners will anticipate that

additional evaluations be done.

NCUA is proposing to permit credit unions the choice of using

either changes in the fair value or total return to establish risk

parameters and assess return. Changes in fair value can provide an

approximation of risk exposure and return. However, credit unions may

prefer to calculate and report total return since it is a more

comprehensive measure. Managers with more sophisticated portfolios will

likely calculate total return. The method used for calculating total

return should be documented for review purposes.

A credit union should always compare prices among broker-dealers

for similar securities. In some instances, the price a credit union has

paid or received for a security has been significantly different from

the market price because the credit union conducted transactions with

only one broker, who knew that the credit union was not verifying the

price with another source. Proposed Section 703.3(b)(5)(i) requires

that prior to purchase or sale a credit union obtain a price quote from

a second broker or from an industry-recognized information provider.

The information provider can be a pricing service or simply a newspaper

with a financial section. These latter sources provide only indicative

prices, however, and generally are not sufficient to ensure the credit

union has received the best price quote. Where a credit union wishes to

purchase a security that cannot be competitively priced, it should

obtain a price on a comparable security. It is understood that the

prices received from broker-dealers will generally not be in writing;

however, the credit union should maintain documentation of who was

called, the date and time of the call, and the quoted price or spread

to the relevant Treasury security.

Proposed Section 703.3(b)(5)(ii) requires a monthly review of the

fair value of each security in a credit union's portfolio. This

information is generally provided by broker-dealers or safekeepers.

Although such information may not be as accurate as a real bid, the

NCUA Board recognizes that obtaining real bids on a monthly basis is

impractical and burdensome. To ensure some independent verification of

these prices, however, Section 703.3(b)(5)(iii) requires that at least

semiannually the credit union obtain a price on each security from

another broker or an industry-recognized information provider. A credit

union may eliminate the burden of valuing securities by restricting its

portfolio to CDs and shares and deposits in corporate credit unions. In

addition, a credit union can lessen its burden of valuing securities by

restricting its portfolio to securities whose market prices are readily

available.

Proposed Section 703.3(b)(6) provides that credit unions must

perform credit analyses of issuing entities unless the investment is

issued or fully guaranteed by the U.S. government or its agencies or

enterprises or is insured by the Federal Deposit Insurance Corporation

or NCUA. The NCUA Board recognizes that it is often difficult for

credit unions to perform a detailed credit analysis. Therefore, the

proposed rule establishes a minimum issuer rating for financial

institutions of B/C (or equivalent) or

[[Page 61223]]

better. Credit unions should ensure that the rating is the issuer

rating and not the issue rating. The issuer rating takes into

consideration the entire operation, while an issue rating will take

into consideration any credit supports accompanying an instrument.

Credit unions are not necessarily excused from performing their

own, independent credit analyses. Credit ratings are slow to adjust to

rapid changes in the financial viability of an issuer. The extent of

the credit analysis necessary is dependent upon the amount of the

investment in relation to the credit union's total investments and

capital. An analysis should include, at a minimum, a review of ratings

and financial trends, including the capital to asset ratio, earnings,

and loan losses.

Credit unions should perform a credit analysis for investments

above the insured amount in financial institutions that are not rated,

including corporate credit unions. The NCUA Board specifically seeks

comment on the issue of performing credit analyses on corporate credit

unions.

NCUA has observed substantial problems with broker-dealers. While

most of the decisions on the choice of a broker-dealer should be left

to the credit union's board, a minimum level of analysis should be

conducted prior to selection. Section 703.3(b)(7) of the proposed rule

requires that, at the least, the broker-dealer be a Section 107(8)

institution or registered with the Securities and Exchange Commission

(SEC). There will be many unscrupulous brokers who satisfy this

requirement but still should not be used by credit unions. However, the

requirement will exclude some brokers who sell only CDs and are not

required to register with the SEC. The proposed rule also requires that

credit unions also conduct an analysis of the financial condition and

reputation of the broker-dealer and sales representative.

Section 703.3(b)(8) addresses safekeeping. For control purposes,

the proposed rule requires that securities be maintained independently

of the broker. This is a change from the current regulation, which

requires that only securities involved in repurchase transactions be

held by an independent third party.

There have been some problems in recent years with the failure of

some brokers, and credit unions have been required to devote

substantial resources to recover securities from some safekeepers.

Because of the potential that some safekeepers may not be appropriate,

this section requires that the credit union review an independent

audited statement for the safekeeper.

NCUA is also proposing that the purchase and sale of investments be

``delivery versus payment.'' This method of settlement guarantees that

the investment will not be paid for until it is received by the

safekeeping institution.

Trading policies and practices are not specifically addressed in

the current regulation. According to the latest call report data, very

few credit unions engage in trading activities. Activity in this area

could increase, however, and if not properly controlled, could pose a

significant risk. The details, in proposed section 703.3(b)(9), are

from Letter to Credit Unions No. 89, dated April 1987. NCUA has

determined that, for convenience, these requirements should be included

in the regulation.

Proposed Section 703.3(b)(10) requires that documentation be

maintained through the examination and audit cycles. There have been

instances where credit unions failed to maintain enough documentation

for the examiner/auditor to properly analyze the security or determine

the relationship of the investment decisions to the credit union's

policies. Credit unions must maintain sufficient information to

demonstrate that they have exercised prudent judgment in making

investment decisions.

Section 703.4 Authorized Activities

Current Section 703.4(a) permits a credit union to contract for the

purchase or sale of a security provided that the delivery of a security

is to be made within 30 days from the trade date. This accommodates the

settlement of U.S. government and agency securities. Section 703.4(b)

permits a credit union to enter into a cash forward agreement to

purchase or sell a security provided that the period from the trade

date to the settlement date does not exceed 120 days. If the credit

union is the purchaser, it must have written cash flow projections

evidencing its ability to purchase the security. This was designed to

accommodate the settlement of mortgage-backed securities. NCUA is

proposing to delete these specific time frames and simply provide for a

credit union to contract for the purchase or sale of a security

provided that delivery of the security is by ``regular-way''

settlement.

The current regulation has created some problems distinguishing

between regular delivery and forward commitments. The proposed

regulation will permit a credit union to contract for the purchase of a

security no matter when it settles, as long as the settlement date is

within the normal time frame for that type of security. Currently,

regular-way settlement for Treasury securities is the next business day

after the trade date and for agency securities and secondary market

mortgage-backed securities is the third business day. For new mortgage-

backed securities, regular-way settlement can be considerably longer.

Under the proposed rule, where delivery of an investment extends beyond

regular-way settlement, the investment will be considered an

unauthorized forward commitment.

The NCUA Board notes that proposed section 703.5(c) prohibits when

issued trading. This is not intended to prohibit a credit union from

contracting to purchase securities in the period between the

announcement of an offering and the issuance of the securities. Rather,

it is designed to prohibit a credit union from contracting to purchase

securities during that time and then selling those securities before

settlement. NCUA specifically seeks comment on how the removal of the

authority for credit unions to enter into cash forward agreements and

engage in when issued trading affects the ability of credit unions to

enter into certain transactions, such as dollar rolls, which have been

permitted for credit unions.

Proposed section 703.4(b) simplifies the language authorizing

credit union investment in repurchase transactions. Repurchase

transactions can be viewed as relatively safe secured borrowing and

lending. However, credit unions can incur losses on such investments if

they do not exercise proper care in controlling and valuing their

collateral. Repurchase transactions may be considered unsecured

transactions if the purchaser does not take the appropriate steps to

perfect an interest in the collateral. Credit unions should review NCUA

Interpretive Ruling and Policy Statement (IRPS) 85-2 for a detailed

discussion of the controls that should be followed when engaging in

repurchase transactions.

Section 703.4(j) of the current regulation provides that a federal

credit union may invest in a mutual fund, provided that the investment

and investment transactions of the funds are legally permissible for

federal credit unions under the Act and NCUA regulations. Proposed

section 703.4(d) broadens this authority by permitting investment in an

investment company which is registered with the Securities and Exchange

Commission under the Investment Company Act of 1940. A mutual fund is

the most common type of registered investment company, but credit

unions have been authorized by opinion letter to invest in other types,

such as money market mutual funds and

[[Page 61224]]

unit investment trusts. The regulatory language has been changed to

clarify that these other types are permissible investments for credit

unions.

The proposed rule retains the requirement that the investments and

investment transactions of the investment company must be permissible

for credit unions and clarifies that this limitation must be set out in

the company's prospectus and/or statement of additional information.

For several years, NCUA has struggled with how much detail a

prospectus/statement must contain in order for a credit union to

determine that the investments and transactions are permissible for

credit unions. Last year, NCUA issued Letter to Credit Unions No. 155,

which attempted to provide guidance in this area for investments in

mutual funds.

The Letter stated that NCUA was taking the position that a credit

union could invest in a mutual fund ``only when the prospectus

indicates that the fund's authority is strictly limited to investments

and investment transactions that are legal for federal credit unions.''

The Letter provided the example of a fund authorized to purchase CMOs,

without restriction; it stated that the fund would be an impermissible

investment for credit unions because the prospectus/statement would

have to declare that only CMOs passing the HRST could be purchased. The

Letter was intended to set forth the position that statements about a

fund being ``a legal investment for federal credit unions'' or ``legal

under the Federal Credit Union Act and NCUA Rules and Regulations''

were insufficient. A prospectus/statement of additional information was

to set forth the specific investments and investment transactions

authorized for the fund, in sufficient detail that credit unions and

examiners could see that fund management clearly understood the limits

of credit union investment authority and that the activities of the

fund were within that authority.

The Letter has led to more questions concerning the level of detail

required in a prospectus, such as, for example, whether a prospectus

must address the actions a fund will take if a CMO fails the stress

tests upon retesting. Since it is not NCUA's intent that a mutual fund

prospectus recite all of Part 703, and it is difficult to draw a line

about what must be specifically included, the proposed rule provides

that one method of establishing that a fund is a permissible investment

for federal credit unions is for the prospectus simply to assert that

the fund is ``a legal investment for federal credit unions'' or ``legal

under the Federal Credit Union Act and NCUA Rules and Regulations.'' A

credit union that has invested in a mutual fund should monitor the

activities of the fund to determine that they do not exceed the limits

of credit union authority. The NCUA Board specifically requests

comments on this issue. To the extent that a provision of Letter 155 is

inconsistent with this rule, that provision would be superseded by this

rule.

Section 704.4(e) of the proposed rule addresses the high risk

securities test (HRST) for CMOs. The most significant change is the

application of the entire test to variable as well as fixed rate CMOs.

A number of credit unions have been unaware of the risks associated

with variable rate CMOs. They owned securities linked to lagging market

indexes, frequently the 11th District Cost of Funds (COFI) . The

weighted average lives of these securities extended 20 years or more

following the last interest rate increase, and the securities suffered

substantial price deterioration. Under the proposed regulation, both

variable rate and fixed rate CMOs would be subject to all three tests.

However, credit unions should still be aware of the limitations of the

HRST, particularly as applied to variable rate securities based on

lagging indexes. When testing a variable rate CMO, the credit union

must be aware that a ``thumbs up'' on the HRST may not mean it passes

the tests imposed by this rule. The credit union must review the

results of each part of the test (average life, average life

sensitivity, and price sensitivity) to ensure compliance.

There has been some confusion regarding the applicability of the

current regulation when a CMO has passed the HRST for one prepayment

model, but failed for another. NCUA does not want to specify which of

the prepayment models a credit union must use to evaluate the risks

associated with the CMO. However, as discussed earlier, the proposed

rule requires that the credit union board specify, in its policy

statement, an approved list of prepayment models that will be used when

purchasing or retesting a CMO. At the time of purchase, a CMO will be

required to pass the HRST for all the prepayment models listed in the

policy statement. At any subsequent retesting date, the CMO must pass

the HRST for the majority of the prepayment models specified in the

policy statement and used in the purchase decision.

This provides a credit union's board of directors with several

options: (1) Where the policy specified the use of the median

prepayment estimate alone, the subsequent failure of the HRST upon

retest, using the same median, would make the security impermissible.

(2) Where the policy specified three specific prepayment models, for

example, the CMO could fail the HRST for one prepayment model and still

be held by the credit union. Where five prepayment models were

specified, the CMO could fail two and still be held. (3) Where the

policy specified the use of a median prepayment model in addition to

proprietary models, the CMO would not be subject to divestiture unless

it failed a majority of the prepayment models used rather than the

median alone.

A majority cannot be interpreted as half of the prepayment models.

If the credit union specifies only two prepayment models in its policy

statement, then the CMO must pass the HRST for both prepayment models

if the security is to remain in the portfolio and not be subject to the

divestiture requirement of proposed Section 703.7.

Proposed Section 703.4(f) addresses federal credit union

investments in corporate credit union capital shares and deposits. In a

slight rewording of the current rule, it provides that such investments

are permissible except where the NCUA Board has provided notice that

the corporate credit union is not operating in compliance with the NCUA

regulations governing corporate credit unions. This should address

concerns regarding investing credit unions' knowledge of corporate

compliance. The proposed rule also limits credit union investment in

the capital shares of a corporate credit union to a total of one

percent of the investing credit union's assets, due to the potential

risk associated with such investments. Membership capital share

deposits, as defined in Section 704.2 of the NCUA Rules and

Regulations, 12 CFR 704.2, are currently the only type of capital

shares corporate credit unions are authorized to offer. The NCUA Board

specifically requests comment regarding the appropriateness of this one

percent limit.

Proposed section 703.4(g) establishes minimum credit ratings for

municipal bonds. Credit unions would be limited to purchasing bonds

rated in one of the two highest rating categories by at least one

nationally recognized statistical rating organization. In the existing

rule there is no limitation on credit quality, exposing credit unions

to potentially unacceptable risk.

The prior rule was silent as to the types of indexes to which

variable rate instruments could be tied. The proposed rule limits

permissible indexes to those tied to domestic interest rates only.

There is no correlation between a credit

[[Page 61225]]

union's cost of funds and, for instance, foreign currencies or equity

prices.

This will prohibit credit unions from purchasing investments linked

to the Standard & Poor's 500 and other equity indexes, either as

speculative investments or to match against Individual Retirement

Accounts (IRAs) offered to members. NCUA recognizes that this may

present a hardship to credit unions who wish to offer such accounts;

however, the potential risk associated with credit unions purchasing

investments that are not linked to interest rates supports this

restriction. NCUA considered requiring a credit union to match equity-

linked investments to shares but rejected this alternative because of

the difficulty of ensuring that such investments were actually matched

in this manner.

Section 703.5 Prohibitions.

The proposed rule adds prohibitions against purchasing or selling

option and interest rate swap contracts and engaging in pair off

transactions. These activities all have been prohibited by opinion

letter. The proposed rule also prohibits the purchase of stripped

mortgage-backed securities and CMO residuals. Currently, credit unions

are permitted to purchase these securities for hedging purposes. NCUA

has found that credit unions holding these securities generally have

been unable to demonstrate that they were using them as a hedge. The

high risk of these securities justifies their prohibition. The Board

notes, however, that a CMO with the characteristics of a stripped

mortgage-backed security is permissible if it meets the CMO stress

tests in this regulation. The proposed prohibition against when issued

trading is discussed above, in conjunction with cash forward

agreements.

The Riegle Community Development and Regulatory Improvement Act of

1994 amended the definition of ``mortgage related security,'' as

defined in Section 3(a)(41) of the Securities and Exchange Act of 1934,

to include securities backed by commercial mortgages. Federal credit

unions are authorized to invest in mortgage related securities pursuant

to section 107(15)(B) of the Act. Thus, the Riegle Act provided

statutory authority for federal credit union investment in securities

backed by commercial mortgages. However, it is NCUA's view that this

authority is not self-implementing, that is, it requires action of the

NCUA Board to become effective. This proposed rule would clarify that

credit unions are not permitted to invest in commercial mortgage

related securities. The NCUA Board is declining to implement the

statutory authority at this time because the market for these

securities is undeveloped, and the potential timing of cash flows from

these securities is not widely disseminated.

In addition to amending the definition of mortgage related

security, the Riegle Act amended the Act by adding section 107(15)(C),

which provides the statutory authority for federal credit unions to

invest in small business related securities as defined in Section

3(a)(53) of the Securities and Exchange Act of 1934. These are

privately issued securities backed by loans to small businesses. Again,

this statutory authority is not self-implementing, and the proposed

rule clarifies that credit unions are not permitted to invest in these

types of securities. As with commercial mortgage related securities,

the market for small business related securities is undeveloped. The

NCUA Board notes that this does not prohibit credit unions from

purchasing investments in securities issued or guaranteed by the Small

Business Administration.

The proposed rule also clarifies that credit unions may not

purchase mortgage servicing rights directly, as there is no express or

incidental authority for such purchase. This prohibition does not

affect the right of a credit union to retain servicing rights of loans

that are sold, whether the loans have been made by the credit union or

purchased to complete a pool for sale or pledge on the secondary

market.

Section 703.6 Pledging Securities

Proposed section 703.6 establishes a new section which addresses

the pledging of securities. Although a reverse repurchase transaction

can be characterized as a sale and repurchase of securities, it is

considered a secured borrowing for purposes of the proposed rule. The

proposed rule clarifies the authority of federal credit unions to

participate in securities lending and subjects securities lending and

collateralized borrowing to several provisions which currently apply

only to reverse repurchase transactions.

A credit union engaging in reverse repurchase transactions and

securities lending must ensure that it has adequately investigated the

financial stability and character of any counterparty with which it

deals. IRPS 85-2, discussed above in the context of repurchase

transactions, sets out the controls that should be followed when

engaging in reverse repurchase transactions. These controls should also

be followed when lending securities.

Section 703.7 Divestiture Requirements

The NCUA Board is proposing to codify specific divestiture

requirements for investments which do not meet the requirements of the

proposed rule. When an investment is downgraded below the minimum

credit requirements of proposed sections 703.3(b)(6)(ii) and 703.4(g),

or fails the HRST, proposed Section 703.7 requires that the credit

union either sell the investment or develop a plan that supports the

intention to hold it. While awaiting response from the regional

director to a proposed plan to hold a downgraded or failed investment,

a credit union must continue to manage and monitor the investment as

required by this part. NCUA retains the right to require immediate

divestiture when an investment constitutes a significant threat to the

continued sound operation of the credit union. To the extent that a

requirement of Letter to Credit Unions No. 169 is inconsistent with

this rule, it would be superseded by this rule.

Section 703.8 Prohibited Fees

The language in proposed section 703.8 is currently found at

Section 703.5(l). No changes were made, but the material has been put

into a separate section to ensure that it is not overlooked. It should

be noted that the prohibition against committee members receiving

pecuniary consideration in the making of investments means that a

broker-dealer or consultant may not serve as a voting member of an

investment or asset-liability management committee. It should also be

noted that this provision does not exclude credit union employees

involved in making investments or deposits from receiving salary for

those activities.

Section 703.9 Grandfather Provisions

The NCUA Board anticipates that any final rule addressing Part 703

will be made effective 30 days after it is published in the Federal

Register. The proposed rule provides that credit unions holding

investments that will become impermissible when the final rule takes

effect will be allowed to continue holding those investments. The

proposed rule also sets out grandfather provisions that have been

established in conjunction with prior regulatory changes.

Regulatory Procedures

Regulatory Flexibility Act

The NCUA Board certifies that the proposed rule, if made final,

will not have a significant economic impact on

[[Page 61226]]

small credit unions (those under $1 million in assets).

Such credit unions generally do not purchase potentially risky

investments and hence would not be subject to the majority of the

policy and reporting requirements of the proposed rule. Accordingly, a

regulatory flexibility analysis is not required.

Paperwork Reduction Act

NCUA has determined that several requirements of the proposed rule

constitute collections of information under the Paperwork Reduction

Act. The requirements are: (1) To establish a written investment

policy; (2) to perform an annual review of the written investment

policy; (3) to provide notification to the federal credit union's board

of directors of investments that do not fall within the guidelines of

the established policy; (4) to prepare a written report of investments

monthly; (5) to obtain price quotes on securities prior to purchase or

sale; (6) to complete and document a monthly review of the fair value

of each security; (7) to obtain a semiannual independent assessment of

the fair value of securities held; (8) to complete a credit analysis of

the issuing entity prior to purchasing an investment if the principal

and interest is not fully guaranteed by the U.S. government, its

agencies, or enterprises or is not fully insured by NCUA or the FDIC;

(9) to obtain individual confirmation statements for each investment

purchased or sold; (10) to obtain and reconcile a monthly statement of

investments held in safekeeping; (11) to prepare a monthly written

report of the fair value and/or total return at the trade date of all

trading securities and purchase and sale transactions and the resulting

gain or loss on an individual basis; (12) to complete and document the

retesting of CMOs on a quarterly basis; (13) to provide written notice

to the Regional Director of CMOs that fail the High Risk Security Test;

and (14) to prepare and provide to the Regional Director a written

divestiture plan if the federal credit union does not immediately sell

the failed CMO.

It is NCUA's view that the time a federal credit union spends

developing a responsible and reasonable policy, notifying the federal

credit union's board of directors of investments that do not fall

within the guidelines of the established policy, obtaining individual

confirmation statements for each investment purchased or sold, and

obtaining and reconciling a monthly statement of investments held in

safekeeping are not burdens created by this regulation, but rather are

usual and customary practices in the normal operations of a federal

credit union. The paperwork burdens created by this rule are the

remaining requirements outlined above.

NCUA estimates that it should take an average of 2.5 hours to

review the investment policy annually and 2 hours per month to prepare

the written report of investments. Since this requirement applies to

all 7,400 federal credit unions, 196,100 burden hours would be required

to comply with these two requirements. NCUA estimates that 370 federal

credit unions would have to comply with the requirement to report

investments that fall outside board policy after purchase. It is

expected that this would take 15 minutes per year, resulting in a total

of 92.5 burden hours. NCUA estimates that 5,624 federal credit unions

would be required to obtain price quotes prior to the purchase or sale

of securities, projected to take 2 hours per year, to review the fair

value of each security monthly, projected to take 12 hours per year,

and to independently assess the fair value of its securities

semiannually, projected to take 2 hours per year. The burden for these

requirements totals 89,984 hours. NCUA estimates that 705 federal

credit unions would be required to complete a credit analysis. It is

estimated that this analysis would take 25 hours, resulting in a total

of 17,625 burden hours. NCUA estimates that 74 federal credit unions

would be required to prepare a written report of the trading account

activity, an activity that is expected to take 12 hours per year,

imposing a total burden of 888 hours. NCUA estimates that 1,850 federal

credit unions would have to comply with the quarterly retesting of

CMOs. It is projected that this requirement would take a credit union 2

hours per year to perform, making to total burden 3,700 hours. NCUA

estimates that 370 federal credit unions would be required to prepare

written notices and divestiture plans regarding downgraded or failed

investments. It is expected that a notice and plan would take 3 hours,

making a total burden of 1,110 hours. In total, the burden created by

the proposed rule is 309,499.5 hours. A significant portion of the

paperwork required by the proposed rule is already being completed by

credit unions. It is NCUA's view that the additional requirements are

necessary in order for a credit union to understand the risks presented

by a substantial portion of its balance sheet.

The Paperwork Reduction Act of 1995 and regulations of the Office

of Management and Budget (OMB) require that the public be provided an

opportunity to comment on information collection requirements,

including an agency's estimate of the burden of the collection of

information.

The NCUA Board invites comment on: (1) Whether the collection of

the information is necessary for the proper performance of the

functions of NCUA, including whether the information will have

practical utility; (2) the accuracy of NCUA's estimate of the burden of

the collection of information; (3) ways to enhance the quality,

utility, and clarity of the information to be collected; and (4) ways

to minimize the burden of collection of information. Send comments to

Attn: Milo Sunderhauf, OMB Reports Management Branch, New Executive

Office Building, Rm. 10202, Washington, DC 20530. Comments should be

postmarked by January 29, 1996.

Executive Order 12612

Executive Order 12612 requires NCUA to consider the effect of its

actions on state interests. Since the proposed rule applies only to

federal credit unions, it has no effect on state interests.

List of Subjects in 12 CFR Part 703

Credit unions, Investments.

By the National Credit Union Administration Board on November

16, 1995.

Becky Baker,

Secretary of the Board.

For the reasons set forth in the preamble, NCUA proposes to revise

12 CFR Part 703 to read as follows:

PART 703--INVESTMENT AND DEPOSIT ACTIVITIES

Sec.

703.1 Scope.

703.2 Definitions.

703.3 Investment policies and practices.

703.4 Authorized activities.

703.5 Prohibitions.

703.6 Pledging securities.

703.7 Divestiture requirements.

703.8 Prohibited fees.

703.9 Grandfather provisions.

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

Sec. 703.1 Scope.

Sections 107(7), 107(8) and 107(15) of the Federal Credit Union Act

(``Act''), 12 U.S.C. 1757(7), 1757(8), 1757(15), set forth those

securities, deposits, and other obligations in which federal credit

unions may invest. This part interprets several of the provisions of

Sections 107(7), 107(8), and 107(15)(B) and (C). This part does not

apply to: investments in loans to members and related activities, which

are governed by Secs. 701.21, 701.22, and 701.23 of this chapter; the

purchase of real estate-secured loans pursuant to Section

[[Page 61227]]

107(15)(A) of the Act, which is governed by Sec. 701.23 of this

chapter; investment in credit union service organizations, which is

governed by Sec. 701.27 of this chapter; investment in fixed assets,

which is governed by Sec. 701.36 of this chapter; or investments by

corporate credit unions, which is governed by part 704 of this chapter.

Sec. 703.2 Definitions.

Adjusted trading means any method or transaction used to defer a

loss whereby a federal credit union sells a security to a counterparty

at a price above its current fair value and simultaneously purchases or

commits to purchase from the counterparty another security at a price

above its current fair value.

Amortizing security means a security where the principal is reduced

by contractual payments.

Average life means the weighted average time to principal repayment

with the amount of the principal paydowns (both scheduled and

unscheduled) as the weights.

Bankers' acceptance means a time draft that is drawn on and

accepted by a bank, and that represents an irrevocable obligation of

the bank.

Business day means a day other than a Saturday, Sunday, or federal

holiday.-

Capital means the total of all undivided earnings, regular

reserves, other reserves (excluding the allowance for loan losses), net

income, and accumulated unrealized gains (losses) on available-for-sale

securities.

Collateralized mortgage obligation (CMO) means a multi-class bond

issue collateralized by whole loan mortgages or mortgage-backed

securities.

Commercial mortgage related security means a mortgage related

security where the mortgages are secured by real estate upon which is

located a commercial structure.

Corporate credit union means a credit union that meets the

definition of ``corporate credit union'' contained in part 704 of this

chapter.

Custodial agreement means a contract whereby a third party, for a

fee, agrees to exercise ordinary care in protecting the securities held

in safekeeping for its customers.

Delivery versus payment, in the context of the purchase and sale of

securities, means that payment for a security occurs simultaneously

with its delivery.

Embedded option means a characteristic of an investment which gives

the issuer or the holder of the investment the right to change features

such as rate and principal payment schedule. Embedded options include,

but are not limited to, caps, floors, calls, and prepayment provisions.

These options can result in the principal and/or interest cash flows of

an investment varying in response to changes in interest rates.

Eurodollar deposit means a deposit in a foreign branch of a United

States depository institution.-

Facility means the home office of a federal credit union or any

suboffice thereof, including, but not necessarily limited to, credit

union service center, wire service, telephonic station, or mechanical

teller station.

Fair value means the price at which a security can be bought or

sold in a current, arms length transaction between willing parties,

other than in a forced or liquidation sale.

Federal funds transaction means a transaction among depository

institutions involving the transfer of immediately available funds

resulting from credits to deposit balances at Federal Reserve banks or

from credits to new or existing deposit balances due from a

correspondent depository institution.

Futures contract means a contract for the future delivery of

commodities, including certain government securities, sold on

commodities exchanges.

Immediate family member means a spouse or other family member

living in the same household.

Index means an interest rate which is regularly reported in a

publication or electronic service of national circulation.

Industry-recognized information provider means an organization

which obtains compensation by providing information to investors and

receives no compensation for the purchase or sale of investments.

Interest rate swap means a contract to exchange streams of interest

payments based upon a specified dollar amount at specified dates in the

future.

Investment means any security, obligation, account, deposit, or

other item authorized for purchase by a federal credit union under

Sections 107(7), 107(8), or 107(15)(B) or (C) of the Federal Credit

Union Act, or this part, other than loans to members.-

Investment characteristic means a feature of an investment such as

its maturity, index, cap, floor, coupon rate, coupon formula, index,

call provision, or average life.

Maturity means the date the last principal amount of a security is

scheduled to come due and shall not mean the call date or the average

life of the security.

Mortgage related security means a security as defined in Section

3(a)(41) of the Securities and Exchange Act of 1934, i.e., a privately-

issued security backed by mortgages secured by real estate upon which

is located a dwelling, mixed residential and commercial structure,

residential manufactured home, or commercial structure.

Mortgage servicing means performing tasks to protect a mortgage

investment, including collecting the installment payments, managing the

escrow accounts, monitoring and dealing with delinquencies, and

overseeing foreclosures and payoffs.

Municipal security means a security as defined in Section 107(7)(K)

of the Act.

Official means any member of the board of directors, credit

committee, or supervisory committee.

Option means a contract which provides the right, but not the

obligation, to buy or sell a security at a fixed price on or before a

specified date in the future.

Pair-off transaction means a security purchase transaction that is

closed or sold at, or prior to, the settlement date.

Parallel shift means an equal basis point change at every point

along a given yield curve.

Prepayment model means a reasonable and supportable forecast of

mortgage prepayments in alternative interest rate scenarios. Models are

available from securities broker-dealers and industry-recognized

information providers. These models are used in tests to forecast the

weighted average life, change in weighted average life, and price

sensitivity of CMOs/REMICs and mortgage-backed securities.

Real estate mortgage investment conduit (REMIC) means a nontaxable

entity formed for the sole purpose of holding a fixed pool of mortgages

secured by an interest in real property and issuing multiple classes of

interests in the underlying mortgages.

Regular-way settlement means delivery of a security from a seller

to a buyer within the specified number of days established for that

type of security. For example, regular-way settlement for transactions

in U.S. government securities is one business day after the trade date

and in agency securities is three business days after the trade date.

Repurchase transaction means a transaction in which a federal

credit union agrees to purchase a security from a counterparty and to

resell the same or any identical security to that counterparty at a

specified future date and at a specified price.

Residual interest means the remainder cash flows from a CMO/REMIC,

or other mortgage-backed security transaction,

[[Page 61228]]

after payments due bondholders and trust administrative expenses have

been satisfied.

Reverse repurchase transaction means a transaction in which a

federal credit union agrees to sell a security to a counterparty and to

repurchase the same or any identical security from that counterparty at

a specified future date and at a specified price.

Section 107(8) institution means an institution in which a federal

credit union is authorized to make deposits pursuant to Section 107(8)

of the Act, i.e., an institution that is insured by the Federal Deposit

Insurance Corporation or is a state bank, trust company or mutual

savings bank operating in accordance with the laws of a state in which

the federal credit union maintains a facility.

Securities loan means a transaction in which a federal credit union

agrees to lend a security to a counterparty.

Security means a share, participation, or other interest in

property or in an enterprise of the issuer or an obligation of the

issuer that:

(1) Either is represented by an instrument issued in bearer or

registered form or, if not represented by an instrument, is registered

in books maintained to record transfers by or on behalf of the issuer;

(2) Is of a type commonly dealt in on securities exchanges or

markets or, when represented by an instrument, is commonly recognized

in any area in which it is issued or dealt in as a medium for

investment; and

(3) Either is one of a class or series or by its terms is divisible

into a class or series of shares, participations, interests, or

obligations.

Senior management employee means the credit union's chief executive

officer (typically this individual holds the title of President or

Treasurer/Manager), any assistant chief executive officers (e.g.,

Assistant President, Vice President, or Assistant Treasurer/Manager)

and the chief financial officer (Comptroller).

Settlement date means the date originally agreed to by a federal

credit union and a vendor for settlement of the purchase or sale of a

security.

Short sale means the sale of a security not owned by the seller.

Small business related security means a security as defined in

Section 3(a)(53) of the Securities and Exchange Act of 1934, i.e., a

security, rated in one of the four highest rating categories by a

nationally recognized statistical rating organization, that represents

ownership of one or more promissory notes or leases of personal

property which evidence the obligation of a small business concern. It

does not mean a security issued or guaranteed by the Small Business

Administration.

Standby commitment means a commitment to either buy or sell a

security, on or before a future date, at a predetermined price. The

seller of the commitment is required to either accept delivery of a

security (in the case of a commitment to buy) or make delivery of a

security (in the case of a commitment to sell), in either case, at the

option of the buyer of the commitment.

Street name, for a security, means registered in the name of a

broker-dealer. Customer-owned securities held by a safekeeper normally

are registered in street name to facilitate transfer when the security

is sold. The customer remains the beneficial owner of the security.

Stripped mortgage-backed security means a security that represents

either the principal- or interest-only portion of the cash flows of an

underlying pool of mortgages or mortgage-backed securities.

Total return means, for a specific holding period, the sum of

interest and principal payments, the income earned on the reinvestment

of these cash flows, and the change in fair value.

Trade date means the date a federal credit union originally agrees,

orally or in writing, to purchase or sell a security.

U.S. government agency means an instrumentality of the U.S.

government, including the Commodity Credit Corporation, the Export-

Import Bank, the Federal Farm Credit Bank, the Farm Credit System

Financial Assistance Corporation, the Federal Financing Bank, the

Federal Housing Administration, the Financing Corporation, the

Government National Mortgage Association, the Maritime Administration,

the Overseas Private Investment Corporation, the Resolution Funding

Corporation, the Small Business Administration, the Tennessee Valley

Authority, and the Veterans Administration. -

U.S. government-sponsored enterprise means an entity originally

established or chartered by the federal government to serve public

purposes specified by the U.S. Congress but whose obligations are not

explicitly guaranteed by the full faith and credit of the U.S.

government. Such enterprises include the Federal Home Loan Mortgage

Corporation, the Federal National Mortgage Association, and the Student

Loan Marketing Association. -

When issued trading means the buying and selling of securities in

the period between the announcement of an offering and the issuance and

payment date of the securities.

Yankee dollar deposit means a deposit in a United States branch of

a foreign bank licensed to do business in the state in which it is

located, or a deposit in a state-chartered, foreign controlled bank.

Zero coupon bond means a debt obligation that makes no periodic

interest payments but instead is sold at a discount from its face

value. The holder of a zero coupon bond realizes the rate of return

through the gradual appreciation of the security, which is redeemed at

face value on a specified maturity date.

Sec. 703.3 Investment policies and practices.

(a) The board of directors of each federal credit union shall

establish written investment policies consistent with the Act, this

part, and other applicable laws and regulations, and review them at

least annually. At a minimum, the policies shall address the following:

(1) Purposes and objectives of the credit union's investment

activities;

(2) Authorized investments, by issuer and characteristics;

(3) Interest rate risk management, if not addressed in the credit

union's asset-liability management policies;--

(4) Concentration limits;

(5) Approved CMO/REMIC prepayment models, subject to the

requirements of Sec. 703.4(e)(3);

(6) Liquidity risk management, if not addressed in the credit

union's asset-liability management policies;

(7) Credit risk management, if applicable, including approved

issuers, or criteria for issuers, and limits on the amounts that may be

invested with each issuer;-

(8) Persons to whom investment authority has been delegated, the

knowledge and experience required of such persons, and the extent of

their authority. This requirement may be met by the board's approval of

position descriptions which address the same criteria;

(9) Approved securities broker-dealers and limits on the amounts

and types of transactions to be executed with each broker-dealer.

Limits to be considered should include safekeeping arrangements,

repurchase transactions, securities lending and borrowing, other

transactions with credit risk, and total credit risk with an individual

broker-dealer;

(10) Approved safekeeping entities and limits on the amounts and

types of investments that may be safekept with each entity; and

(11) Trading policies, if the credit union engages in trading,

including persons who have purchase and sale

[[Page 61229]]

authority, trading account size limitations, allocation of cash flow to

trading accounts, stop loss or sale provisions, dollar size limitations

of specific types, quantity and maturity to be purchased, limits on the

length of time an investment may be inventoried in the trading account,

appropriate segregation of duties, and other internal controls. -

(b) Federal credit unions must comply with the following investment

practices:

(1) Reporting. A federal credit union must classify a security as

held-to- maturity, available-for-sale, or trading, in accordance with

generally accepted accounting principles (GAAP) and consistent with the

federal credit union's documented intent and ability regarding the

security.

(2) Investment authority. (i) Any official or employee of a

federal credit union who has discretionary investment authority must be

able to demonstrate an understanding of the risk characteristics of

investments and investment transactions under that authority. Only

officials, employees, and members of a federal credit union may be

voting members of the credit union's investment and/or asset-liability

management committees. The ultimate responsibility for supervising a

federal credit union's investment activities rests with the board of

directors.

(ii) Except as provided in paragraphs (b)(2)(iii) through (v) of

this section, a federal credit union must retain discretionary control

over the purchase and sale of investments and may not delegate such

control to a person other than an official or employee of the credit

union. Control is not considered delegated when a federal credit union

is required to authorize a recommended purchase or sale transaction

prior to its execution and the federal credit union, in practice,

reviews such recommendations and authorizes such transactions. -

(iii) A federal credit union may delegate discretionary control of

its investment portfolio, within established parameters, to a person

other than an official or employee of the credit union, provided that

the person is an investment adviser registered with the Securities and

Exchange Commission under the Investment Advisers Act of 1940 (15

U.S.C. 80b). A federal credit union is prohibited from compensating an

investment adviser on a per transaction basis or based on capital

gains, capital appreciation, net income, performance relative to an

index, or any other incentive basis.

(iv) The aggregate of a federal credit union's delegation of

investment control, under paragraph (b)(2)(iii) of this section, and

investment in investment companies, under Sec. 703.4(d), is limited to

100 percent of capital at time of delegation and/or purchase.

(v) When a credit union has delegated discretionary investment

control, it no longer has the ability to control its own securities,

and all holdings for which such control has been delegated must be

reported as available-for-sale. --

(3) Investments outside board policy. The board of directors of a

federal credit union must be notified as soon as possible, but no later

than the next regularly scheduled board meeting, of any investment

which falls outside of board policy after purchase. Board action

regarding the investment must be documented in the minutes of the board

meeting. -

(4) Interest rate risk. (i) In the management of interest rate

risk, a federal credit union must use a process that is commensurate

with the scope, size, and complexity of the risk assumed. Market

factors and characteristics of an investment which affect risk

exposures must be evaluated prior to purchase and adequately measured,

monitored, and controlled while the investment is held in the

portfolio.

(ii) At least monthly, a federal credit union must prepare a

written report setting forth:

(A) As applicable, the characteristics of each investment in the

portfolio;

(B) The net increase or decrease in the fair value or total return

of each security since the date of purchase and for the last month,

with summary information on the whole portfolio for the last month;

(C) The sum of the fair values of all fixed and variable rate

securities that have one or more of the following characteristics:

(1) Amortizing features;

(2) Embedded options;

(3) Maturities greater than 3 years; or

(4) Contract rates that are related to more than one index or are

inversely related to, or multiples of, an index. -

(iii) Where the amount calculated in paragraph (b)(4)(ii)(C) of

this section is greater than the federal credit union's capital, the

report described in paragraph (b)(4)(ii) of this section must provide a

reasonable and supportable estimate of:

(A) The potential impact on the fair value and/or total return of

each security in the portfolio and the portfolio as a whole, in

percentage and dollar terms, of an immediate and sustained parallel

shift in market interest rates of plus and minus 300 basis points; and

(B) The potential impact on capital, in percentage and dollar

terms, of the dollar value calculated in paragraph (b)(4)(iii)(A) of

this section.

(iv) Where a federal credit union does not have an asset-liability

management or investment committee, each member of the board of

directors must receive a copy of the report described in paragraphs

(b)(4)(ii) and (iii) of this section. Where a federal credit union has

such a committee, each member of the committee must receive a copy of

the report, and each member of the board of directors must receive a

summary of the information contained therein.

(5) Valuation of securities. (i) Prior to purchasing or selling a

security, a federal credit union must obtain and document, on the trade

date, either:

(A) Price quotes for the security, or a security with substantially

similar characteristics, from at least two securities broker-dealers;

or

(B) A price quote on the security from an industry-recognized

information provider.

(ii) At least monthly, a federal credit union must review and

document the fair value of each security held in portfolio.

(iii) At least semiannually, a federal credit union must obtain and

document an independent assessment of the fair value of each security

held in portfolio. This may be accomplished by obtaining either:

(A) At least one timely price quote on the security, or a security

with substantially similar characteristics, from a securities broker-

dealer other than the one from which it was purchased; or

(B) A price quote on the security from an industry-recognized

information provider.--

(6) Credit risk. (i) A federal credit union must conduct and

document a credit analysis of the issuing entity prior to purchasing an

investment and must update such analysis at least semiannually as long

as the investment is held in portfolio. At a minimum, this analysis

should consist of a review of the investment's prospectus and, if

rated, its credit rating.

(ii) If an issuer is a financial institution which is rated by a

nationally recognized statistical rating organization, it must have an

issuer rating of B/C (or equivalent) or higher.

(iii) The requirements of paragraphs (b)(6)(i) and (ii) of this

section do not apply in the case of investments that are:

(A) Issued or fully guaranteed as to principal and interest by the

U.S. government, U.S. government agencies,

[[Page 61230]]

or U.S. government-sponsored enterprises; or -

(B) Fully insured (including accumulated interest) by the National

Credit Union Administration or the Federal Deposit Insurance

Corporation.

(7) Securities broker-dealers. (i) A federal credit union may

transact business with a securities broker-dealer provided that such

broker-dealer either is registered with the Securities and Exchange

Commission under the Securities Exchange Act of 1934 (15 U.S.C. 78a et

seq.) or is a bank whose broker-dealer activities are regulated by a

federal financial institution regulatory agency.

(ii) In determining whether to transact business with a securities

broker- dealer, a federal credit union must consider the following

factors:

(A) The ability of the broker-dealer and its subsidiaries or

affiliates to fulfill commitments as evidenced by capital strength,

liquidity, and operating results. This evidence should be gathered from

current financial data, annual reports, credit reports, and other

sources of financial information.

(B) The broker-dealer's general reputation for financial stability

and fair and honest dealings with customers. Other depository

institutions that are past or current customers of the broker-dealer

should be contacted.

(C) Information available from state or federal securities

regulators and securities industry self-regulatory organizations, such

as the National Association of Securities Dealers, about any formal

enforcement actions against the broker-dealer, its affiliates, or

associated personnel.

(D) The background of any broker-dealer's sales representative upon

whose advice the credit union may rely to determine his or her

experience or expertise.

(iii) A federal credit union must review the audited financial

condition of approved broker-dealers at least annually.

(8) Control of investments. (i) A federal credit union's purchased

investments and repurchase collateral must be in the credit union's

possession, recorded as owned by the credit union through the Federal

Reserve Book-Entry System, or held by a board-approved safekeeper under

a written custodial agreement.

(ii) A federal credit union must obtain an individual confirmation

statement for each investment purchased or sold.-

(iii) A federal credit union may not leave purchased investments

and repurchase collateral in safekeeping with the selling broker-

dealer, except that where the broker-dealer is a bank or corporate

credit union, the investments or collateral may be safekept in a

separately identifiable department or division of the bank or corporate

credit union.

(iv) A credit union must receive a safekeeping receipt for each

investment held in safekeeping. An investment may be held in street

name, provided that the credit union and/or the safekeeper maintain

documentation establishing that the credit union is the beneficial

owner of the investment.

(v) A federal credit union must obtain and reconcile monthly a

statement of purchased investments and repurchase collateral held in

safekeeping and must review the financial condition of approved

safekeepers at least annually.

(vi) All purchases and sales of investments must be delivery versus

payment.

(9) Trading. (i) Any federal credit union engaging in trading must

be able to demonstrate that it has sufficient resources, knowledge,

systems, and procedures to handle the risks of such activity.

(ii) At least monthly, the board of directors or board-appointed

investment committee must be provided a written report setting forth

the fair value and/or total return at the trade date of all trading

securities and purchase and sale transactions and the resulting gain or

loss on an individual basis.

(iii) Any security purchased for trading purposes must be recorded

at fair value on the trade date.

(10) Documentation. Documentation regarding an investment

transaction must be maintained as long as the investment is held and

until the documentation has been both audited and examined. At a

minimum, documentation should include, where appropriate, credit

ratings, bids and prices for periodic updates, a prospectus or

description of the security from an industry-recognized information

provider, and all the tests and reports required by the federal credit

union's investment policy and this part. Documentation used in

approving a broker-dealer or safekeeper must be maintained as long as

the broker-dealer or safekeeper is on a federal credit union's approved

list and until it has been both audited and examined.

Sec. 703.4 Authorized activities.

(a) Contracting for securities. A federal credit union may contract

for the purchase or sale of a security provided that the delivery of

the security is by regular-way settlement.

(b) Repurchase transactions. A federal credit union may enter into

a repurchase transaction provided the collateral securing the

transaction is a permissible investment for federal credit unions and

the transaction is priced to reflect accrued interest, the risk of the

securities, and the term of the transaction.

(c) Federal funds transactions. A federal credit union may sell

federal funds to Section 107(8) institutions and credit unions,

provided that the interest or other consideration received from the

financial institution is at the market rate for federal funds

transactions.

(d) Investment companies. (1) A federal credit union may invest in

an investment company, such as a mutual fund or unit investment trust,

which is registered with the Securities and Exchange Commission under

the Investment Company Act of 1940 (15 U.S.C. 80a), provided that the

portfolio of such management company is restricted by its investment

policy, changeable only if authorized by shareholder vote, solely to

investments and investment transactions that are permissible for

federal credit unions.

(2) An investment company's investment policy is established by its

prospectus and any statement of additional information incorporated

therein.

(3) For the purposes of this part, an investment company's

portfolio is deemed to be restricted solely to investments and

investment transactions that are permissible for federal credit unions

when its investment policy states that the investments and investment

transactions of the company are limited to those authorized for federal

credit unions under the Federal Credit Union Act and National Credit

Union Administration Rules, Regulations, and Interpretive Ruling and

Policy Statements.

(4) The federal credit union must, periodically, obtain a summary

of the portfolio of the investment company to ensure consistency with

the Federal Credit Union Act and this part.

(5) The aggregate of a federal credit union's investment in

investment companies, under this paragraph (d), and delegation of

investment control, under Sec. 703.3(b)(2), is limited to 100 percent

of capital at time of purchase and/or delegation.

(e) CMOs/REMICs. (1) A federal credit union may invest in or hold a

fixed or variable rate CMO/REMIC only if it meets all of the following

tests:

(i) Average life test. The CMO/REMIC has an estimated average life

of 10 years or less.

(ii) Average life sensitivity test. The estimated average life of

the CMO/REMIC extends by 4 years or less,

[[Page 61231]]

assuming an immediate and sustained parallel shift in interest rates of

up to and including plus 300 basis points, and shortens by 6 years or

less, assuming an immediate and sustained parallel shift in interest

rates of up to and including minus 300 basis points.

(iii) Price sensitivity test. The estimated change in the price of

the CMO/REMIC is 17 percent or less, as a result of an immediate and

sustained parallel shift in interest rates of up to and including plus

and minus 300 basis points.

(2) The three tests contained in paragraph (e)(1) of this section

shall apply at the time of purchase and on any subsequent date, based

on market prices, interest rates, and estimated prepayments at the time

of testing. CMOs/REMICs must be retested at least quarterly, more

frequently if market or business conditions dictate.

(3) Before a federal credit union may invest in a CMO/REMIC, the

board of directors must set forth, in its investment policy, the method

by which the credit union will obtain the prepayment estimates

necessary to conduct the tests contained in paragraph (e)(1) of this

section. In its policy, the board must state whether the credit union

will use either a median prepayment estimate or individual prepayment

models, one of which may be the median estimate. Only one method may be

selected; once selected, it is the only method that may be used when

testing a CMO/REMIC. If the board elects to use individual prepayment

models, it must identify specific models, with a minimum of two. If a

median prepayment estimate is used, it must be obtained from an

industry-recognized information provider. At purchase, the median

estimate must be based on at least 5 prepayment models. At retesting,

the median estimate must be based on at least 2 prepayment models. If

individual prepayment models are used, estimates must be obtained from

all of the prepayment models identified in the federal credit union's

investment policy. One of the individual prepayment models may be the

median prepayment estimate from an industry-recognized information

provider. At purchase, a CMO/REMIC must pass the tests for each

prepayment model used. At retesting, the CMO/REMIC must pass the tests

for a majority of the prepayment models used at the time of purchase.

(f) Corporate credit unions. A federal credit union may purchase

shares or deposits in a corporate credit union, except where the NCUA

Board has provided notice that the corporate credit union is not

operating in compliance with part 704 of this chapter. A federal credit

union's purchase of corporate credit union capital shares, as defined

in part 704 of this chapter, is limited to one percent of the investing

credit union's assets.

(g) Municipal securities. A federal credit union may purchase and

hold a municipal security only if it has been rated in one of the two

highest rating categories by at least one nationally recognized

statistical rating organization.

(h) Variable rate investments. The index of any variable rate

investment must be tied to domestic interest rates and not, for

example, to foreign currencies, foreign interest rates, or domestic or

foreign commodity or equity prices. For purposes of this part, the U.S.

dollar-denominated London Interbank Offered Rate (LIBOR) is considered

a domestic interest rate.

(i) Yankee dollars, eurodollars, and bankers' acceptances. A

federal credit union may invest in yankee dollar deposits in a Section

107(8) institution, in eurodollar deposits in a branch of a Section

107(8) institution, and in bankers' acceptances issued by a Section

107(8) institution.

Sec. 703.5 Prohibitions

A federal credit union is prohibited from:

(a) Purchasing or selling a standby commitment or an option

contract, except as permitted under Sec. 701.21(i) of this chapter;

(b) Purchasing or selling futures or interest rate swap contracts;-

-

(c) Engaging in pair-off transactions, adjusted trading, when

issued trading, or short sales;

(d) Purchasing stripped mortgage backed securities, residual

interests in CMOs/REMICs, mortgage servicing rights, commercial

mortgage related securities, or small business related securities; and

(e) Purchasing a zero coupon investment with a maturity date that

is more than 10 years from the settlement date.

Sec. 703.6 Pledging securities.

(a) Permissible activities. A federal credit union may pledge

securities through reverse repurchase transactions, securities loans,

and collateralized borrowing, and receive in exchange cash, other

securities, and/or a fee.

(b) Limitations. (1) A federal credit union may enter into a

transaction described in paragraph (a) of this section provided that

the transaction is priced to reflect accrued interest, the risk of the

securities, and the terms of the transaction.

(2) Cash obtained in a transaction described in paragraph (a) of

this section is subject to the borrowing limit specified in Section

107(9) of the Act.

(3) Any investment purchased with cash obtained in a transaction

described in paragraph (a) of this section must be a permissible

investment for federal credit unions and must mature no later than the

maturity of the transaction.

(4) Any security received in a transaction described in paragraph

(a) of this section must be a permissible investment for federal credit

unions.

Sec. 703.7 Divestiture requirements.

(a) Any federal credit union in possession of an investment that

fails a requirement of this part, either because it has been downgraded

below a minimum rating by the same rating agency used when it was

purchased or because it is a CMO/REMIC that does not meet one of the

tests set forth at Sec. 703.4(e) upon retesting, must, within 30 days

of the date of the failure, provide written notice of the failure to

the board of directors and the appropriate regional director, except

that notification to the regional director is not required if the

investment matures within 90 days.

(b) If the federal credit union does not sell the failed investment

within 30 days of the date of the failure, it must provide to the

regional director, within 60 days of the written notice, a written plan

to hold the investment. The regional director, however, has the

authority to require the written plan within a shorter timer period or

require immediate divestiture if serious safety and soundness concerns

are present. The plan must address:

(1) The investment's characteristics and risks;

(2) The process to obtain and adequately evaluate the investment's

market pricing, cash flows, and risk;

(3) How the investment fits into the credit union's asset liability

management strategy;

(4) The impact that either holding or selling the investment will

have on the federal credit union's earnings, liquidity and capital in

different interest rate environments; and

(5) The likelihood that the investment may again pass the

requirements of this part.

(c) Except where serious safety and soundness concerns are present,

the federal credit union is not required to sell the investment until

it receives a written response to the plan described in paragraph (b)

of this section from the regional director.

[[Page 61232]]

Sec. 703.8 Prohibited fees.

(a) A federal credit union's officials, senior management

employees, and immediate family members of such individuals, may not

receive pecuniary consideration in connection with the making of an

investment by the federal credit union. The prohibition contained in

this subsection also applies to any employee not otherwise covered if

the employee is directly involved in investments or deposits unless the

board of directors determines that the employee's involvement does not

present a conflict of interest.

(b) All transactions with business associates or family members not

specifically prohibited by paragraph (a) of this section must be

conducted at arm's length and in the interest of the credit union.

Sec. 703.9 Grandfather provisions.

(a) Subject to safety and soundness considerations, a federal

credit union's authority to hold an investment is governed by the

regulations in effect at the time of purchase. Past regulations

governing certain investments are described in paragraphs (b) through

(d) of this section.

(b) Subject to safety and soundness considerations, a federal

credit union may hold a fixed-rate CMO/REMIC purchased:

(1) Before December 2, 1991;

(2) On or after December 2, 1991, but before July 30, 1993, if its

average life does not extend or shorten by more than 6 years if

interest rates rise or fall 300 basis points; or

(3) On or after December 2, 1991, but before the effective date of

the final regulation, if for the purpose of reducing interest rate

risk.

(c) Subject to safety and soundness considerations, a federal

credit union may hold a variable-rate CMO/REMIC purchased:

(1) Before December 2, 1991;

(2) On or after December 2, 1991, but before July 30, 1993, if:

(i) The interest rate is reset at least annually;

(ii) The maximum allowable interest rate on the instrument is at

least 300 basis points above the interest rate of the instrument at the

time of purchase; and

(iii) The interest rate of the instrument varies directly (not

inversely) with the index upon which it is based and is not reset as a

multiple of the change in the related index; or

(3) On or after July 30, 1993, but before the effective date of

this regulation, if:

(i) The interest rate is reset at least annually;

(ii) The maximum allowable interest rate on the instrument is at

least 300 basis points above the interest rate of the instrument at the

time of purchase; and

(iii) The interest rate of the instrument varies directly (not

inversely) with the index upon which it is based and is not reset as a

multiple of the change in the related index; and

(iv) The estimated change in its price is 17 percent or less, due

to an immediate and sustained parallel shift in the yield curve of plus

or minus 300 basis points.

(d) Subject to safety and soundness considerations, a federal

credit union may hold a CMO/REMIC residual, SMBS, or zero coupon

security with a maturity greater than 10 years, if the investment was

purchased:

(1) Before December 2, 1991; or

(2) On or after December 2, 1991, but before the effective date of

the final regulation, if for the purpose of reducing interest rate

risk.

(e) All grandfathered investments are subject to the reporting and

risk management requirements of Sec. 703.3.

[FR Doc. 95-28705 Filed 11-28-95; 8:45 am]

BILLING CODE 7535-01-P