Download:
pdf |
pdfCOMPTROLLER’S LICENSING MANUAL
SUBORDINATED
DEBT
FEBRUARY 2022
Contents
Introduction........................................................................................................................... 1
General.............................................................................................................................. 1
National Banks and FSAs Are Subject to Different Requirements ....................................... 2
Heightened Requirements Apply for Subordinated Debt to Qualify
as Regulatory Capital ................................................................................................... 2
Specific Requirements and Procedures................................................................................. 3
General Requirements for National Banks .......................................................................... 3
Prior Approval for Issuance.......................................................................................... 3
Minimum Terms .......................................................................................................... 4
Required Disclosures.................................................................................................... 4
Prohibition on Certain Restrictive Provisions and Covenants ......................................... 6
Prior Approval for Prepayment..................................................................................... 6
Material Changes to Subordinated Debt Documents ...................................................... 7
General Requirements for FSAs......................................................................................... 8
Prior Approval for Issuance.......................................................................................... 8
Required Disclosures.................................................................................................... 8
Other Restrictions ........................................................................................................ 9
Regulatory Capital Requirements for National Banks.......................................................... 9
Application.................................................................................................................. 9
Prior Approval for Prepayment..................................................................................... 9
Regulatory Capital Requirements for FSAs....................................................................... 10
Required Disclosures.................................................................................................. 10
Trust Indenture Requirement ...................................................................................... 11
Application for Approval............................................................................................ 12
Timeline for Issuance................................................................................................. 12
Prior Approval for Prepayment................................................................................... 12
OCC Review of Applications...................................................................................... 13
Requirements for Subordinated Debt to Qualify as Regulatory Capital
for National Banks and FSAs...................................................................................... 13
Basic Requirements.................................................................................................... 13
Disclosures ................................................................................................................ 14
Acceleration and Prepayment...................................................................................... 14
Call Option ................................................................................................................ 14
Credit Sensitivity........................................................................................................ 15
Funding and Issuing Entity ......................................................................................... 15
Other Requirements for National Banks and FSAs............................................................ 15
Limitations on Inclusion in Regulatory Capital............................................................ 15
Lending Limits and Other Statutory Limits ................................................................. 15
Mandatory Convertible Debt....................................................................................... 16
Reciprocal Holdings................................................................................................... 16
Shareholders’ Approval.............................................................................................. 16
Securities Disclosure Requirements ............................................................................ 16
Comptroller’s Licensing Manual
i
Subordinated Debt
General Policies, Receivership Concerns, and Guidance for Subordinated Debt
Included in Regulatory Capital ........................................................................................... 18
General Policies............................................................................................................... 18
Representations and Warranties.................................................................................. 18
Affirmative Covenants ............................................................................................... 18
Negative Covenants.................................................................................................... 19
Events of Default ....................................................................................................... 19
Reference Rates Linked to the London Interbank Offered Rate (Libor) ........................ 20
Contemporaneous Loan Agreements........................................................................... 21
Novel, Untested, or Extraordinary Provisions.............................................................. 21
Receivership Concerns..................................................................................................... 21
Pre-Failure and Post-Failure Claims by the FDIC, Depositors,
and Senior Creditors................................................................................................... 21
General Rights of Offset............................................................................................. 22
Guidance for Subordinated Debt Included in Regulatory Capital ....................................... 22
Significant Incentive to Redeem Prior to Maturity....................................................... 23
Credit-Sensitive Features............................................................................................ 23
No Expectation That a Call Option Will Be Exercised................................................. 23
Funding Purchases of Subordinated Debt .................................................................... 24
Appendix A: Sample Provisions.......................................................................................... 25
Appendix B: Sample Certificate of Accredited Investor Status .......................................... 29
Appendix C: Sample Certificate of Compliance With 12 CFR 3.20(d)(1)(viii) ................... 33
Appendix D: Sample Certificates of Compliance With 12 CFR 3.20(d)(1)(iii) and 12 CFR
5.47(d)(1)(iv) (National Bank)/12 CFR 5.56(d)(1)(i)(C) (FSA) ............................................ 35
Appendix E: Sample Subordinated Debt Notes................................................................... 37
Glossary............................................................................................................................... 47
References............................................................................................................................ 49
Comptroller’s Licensing Manual
ii
Subordinated Debt
Introduction
Introduction
General
This booklet of the Comptroller’s Licensing Manual provides guidance concerning the licensing
procedures of the Office of the Comptroller of the Currency (OCC) for applications and notices
relating to the issuance of subordinated debt. The decision criteria and other requirements
referred to in this guidance document reflect provisions in existing statutes and regulations. The
relevant statutes and regulations are listed at the end of this booklet or referenced as applicable
throughout the document.1
Subordinated debt is a financing tool available to national banks and federal savings associations
(FSAs) (collectively, banks). The requirements and policy that apply to issuances of
subordinated debt differ based on (1) whether the issuing bank is a national bank or FSA and (2)
whether the issuance is intended to qualify as regulatory capital. In reviewing the regulatory
requirements described in this booklet, banks should pay special attention to the following items
and the extent to which they apply:
•
•
•
•
•
Whether OCC approval is necessary before issuing or prepaying subordinated debt.
What minimum terms must be included in the subordinated debt note or note agreement,
paying agent, or trust indenture documents, as applicable.
What disclosures must be made in connection with the issuance.
What additional requirements apply before a bank can include subordinated debt in
regulatory capital.
Whether any provisions unduly restrict the authority of a bank, interfere with the OCC’s
supervisory authority, or otherwise raise safety and soundness concerns.
The “Specific Requirements and Procedures” section of this booklet describes the regulatory
requirements that apply to issuances of subordinated debt. The section titled “Key Policies”
provides OCC guidance relevant to the requirements described in this booklet. In addition, this
booklet provides sample provisions (appendix A), a sample certificate for accredited investors
(appendix B), a sample certificate of compliance with title 12 of the Code of Federal Regulations
(CFR) 3.20(d)(1)(viii) (appendix C), a sample certificate of compliance with
12 CFR 3.20(d)(1)(iii) (appendix D), sample subordinated debt notes (appendix E), a glossary of
terms, and a reference section that includes applicable laws and regulations. Banks should use
this booklet with other booklets of the Comptroller’s Licensing Manual, such as the “General
Policies and Procedures” booklet, which includes a discussion of general filing instructions and
procedures. Throughout the booklet, there are hyperlinks to related booklets and filing samples.
1
This booklet also includes procedures that banks must follow in connection with requests and notices relating to
the issuance of subordinated debt. Such procedures are not substantive rules that establish decision criteria. Rather,
they are steps a bank must take in connection with the filing of an application or notice to allow the OCC to assess
whether a bank has met the substantive requirements in existing statutes and regulations. Consistent with the
Administrative Procedure Act, the OCC may issue guidance concerning licensing that contains binding procedural
steps a bank must take to allow the OCC to assess a bank’s application or notice. See 5 U.S. Code (USC) 553(b)(A).
Comptroller’s Licensing Manual
1
Subordinated Debt
Introduction
A bank generally may enter into any type of agreement, provided the agreement does not violate
a law or regulation, is not inconsistent with OCC policy, and does not constitute an unsafe or
unsound banking practice. Banks with questions regarding subordinated debt are encouraged to
contact the appropriate OCC district licensing office.
National Banks and FSAs Are Subject to Different Requirements
There are separate procedures and requirements for subordinated debt issued by national banks
and FSAs. Although there is some overlap, these rules have different statutory bases, and banks
should take care to address the requirements that apply specifically to them. Fundamentally, all
national banks issuing subordinated debt must satisfy the requirements set forth in 12 CFR 5.47.
FSAs issuing subordinated debt (or other types of debt) must at a minimum satisfy the
requirements in 12 CFR 163.80.
Heightened Requirements Apply for Subordinated Debt to Qualify
as Regulatory Capital
In addition to the general requirements that apply to all issuances of subordinated debt, banks
must satisfy certain heightened requirements when seeking to include subordinated debt in tier 2
capital or prepay subordinated debt included in tier 2 capital. 2 For national banks, 12 CFR 5.47
includes certain provisions that must be satisfied. FSAs must meet the requirements in
12 CFR 5.56. Additionally, banks must satisfy the regulatory capital requirements of 12 CFR 3
and in particular 12 CFR 3.20(d) for the subordinated debt to qualify as regulatory capital.
2
Note that a bank that elects to use the Community Bank Leverage Ratio (CBLR) framework under 12 CFR 3.12 is
not required to calculate tier 2 capital, and subordinated debt issued by such a bank would not be included in the
bank’s regulatory capital.
Comptroller’s Licensing Manual
2
Subordinated Debt
Specific Requirements and Procedures
Specific Requirements and Procedures
General Requirements for National Banks
Prior Approval for Issuance
Pursuant to 12 CFR 5.47(f)(1)(i), a national bank that is not an “eligible bank”3 must obtain OCC
approval from the appropriate district licensing office before issuing subordinated debt. A
national bank that is an eligible bank must obtain OCC approval from the appropriate district
licensing office before issuing subordinated debt when
•
•
•
the national bank will not continue to be an “eligible bank” following the transaction.
the OCC has notified the national bank that prior approval is required.
the law otherwise requires prior OCC approval.
Pursuant to 12 CFR 5.47(g)(1)(i), the application for prior approval must include
•
•
•
•
a description of the terms and amount of the proposed issuance.
a statement of whether the national bank is subject to a capital plan, as defined in 12
CFR 5.47(c), or required to file a capital plan with the OCC and, if so, how the proposed
change conforms to the capital plan.4
a copy of the proposed subordinated debt note and any other subordinated debt documents.5
a statement that the subordinated debt issuance complies with all applicable laws and
regulations.
A national bank’s application for prior approval is deemed approved by the OCC as of the 30th
calendar day after the filing is received by the OCC, unless the OCC notifies the national bank
that the filing presents a significant supervisory or compliance concern or raises a significant
An eligible bank or eligible savings association is a national bank or FSA that (1) is well capitalized as defined in
12 CFR 6.4; (2) has a composite CAMELS rating of 1 or 2; (3) has a Community Reinvestment Act (CRA) rating of
“Outstanding” or “Satisfactory,” if applicable; (4) has a consumer compliance rating of 1 or 2 under the Uniform
Interagency Consumer Compliance Rating System; and (5) is not subject to a cease-and-desist order, consent order,
formal written agreement, or prompt corrective action directive or, if subject to any such order, agreement, or
directive, is informed in writing by the OCC that the bank or savings association may be treated as an “eligible bank
or eligible savings association” for purposes of 12 CFR 5. Refer to 12 CFR 5.3.
3
If subject to a capital plan, the national bank should demonstrate how the proposed issuancewill assist the national
bank in achieving its capital plan and, more specifically, how the proceeds of the issuance will be deployed in
conformity with the capital plan. If the proposed subordinated debt issuance represents a significant deviation from
the present capital plan, the applicant should demonstrate how the revised capital plan is more realistic and
achievable in light of the national bank’s financial condition.
4
In addition to the subordinated debt note, a subordinated debt document includes any document pertaining to an
issuance of subordinated debt, and any renewal, extension, amendment, modification, or replacement thereof,
including any global note, pricing supplement, note agreement, trust indenture, paying agent agreement, or
underwriting agreement.
5
Comptroller’s Licensing Manual
3
Subordinated Debt
Specific Requirements and Procedures
legal or policy issue. 6 Approval expires if the national bank does not complete the sale of the
subordinated debt within one year of approval. 7
Minimum Terms
Pursuant to 12 CFR 5.47(d)(1), all subordinated debt notes issued by a national bank must satisfy
the following minimum requirements:
•
•
•
•
•
•
•
Have a minimum original maturity of at least five years.
Not be a deposit and not be insured by the Federal Deposit Insurance Corporation (FDIC).
Be subordinated to the claims of depositors.
Be unsecured, which includes prohibiting the establishment of any legally enforceable fund
earmarked for payment of the subordinated debt note through (1) a sinking fund or (2) a
compensating balance or any other funds or assets subject to a legal right of offset, as defined
by applicable state law.
Be ineligible as collateral for a loan by the issuing national bank.
Provide that after any scheduled payments of principal begin, all scheduled payments must
be made at least annually, and the amount repaid in each year must be no less than in the
prior year.
Provide that, when applicable, no payment (including payment pursuant to an acceleration
clause, redemption prior to maturity, or repurchase or the exercising of a call option) may be
made without prior OCC approval.
National banks should ensure that these requirements are satisfied in any other subordinated debt
documents, as appropriate.
Required Disclosures
Pursuant to 12 CFR 5.47(d)(3), a national bank must disclose clearly on the face of any
subordinated debt note the following language in all capital letters:
•
•
THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION.
THIS OBLIGATION IS SUBORDINATED TO CLAIMS OF DEPOSITORS AND
GENERAL CREDITORS, IS UNSECURED, AND IS INELIGIBLE AS COLLATERAL
FOR A LOAN BY [NAME OF ISSUING BANK].
A national bank must also disclose clearly and accurately certain items in the subordinated debt
note:
•
The order and level of subordination. At a minimum, the disclosure language must provide
that, in addition to being subordinated to the claims of depositors, the subordinated debt note
6
Refer to 12 CFR 5.47(g)(2)(i).
7
Refer to 12 CFR 5.47(g)(2)(iv).
Comptroller’s Licensing Manual
4
Subordinated Debt
Specific Requirements and Procedures
•
•
•
is subordinate and junior in its right of payment to the obligations of all creditors, except
those specifically designated as ranking on a parity with, or subordinated to, the subordinated
debt note. The subordinated debt note must be subordinated to both secured and unsecured or
general creditors.
A general description of the OCC’s regulatory authority with respect to a national bank in
danger of insolvency that includes:
− With respect to insolvency, that the FDIC, acting as receiver, has authority to transfer a
national bank’s obligation under the subordinated debt note and to supersede or void any
default, acceleration, or subordination that may have occurred;
− If a national bank that is “undercapitalized” as defined by applicable law fails to
satisfactorily implement a required capital restoration plan, the national bank may be
subject to all the additional restrictions and requirements applicable to a “significantly
undercapitalized” institution, as defined by applicable law, including being required to
sell shares in the national bank, being acquired by a depository institution holding
company, or being merged or consolidated with another depository institution, and this
authority supersedes and voids any defaults that may have occurred; and
− If a national bank is “critically undercapitalized,” as defined by applicable law, the
national bank is prohibited from making principal or interest payments on the
subordinated debt note without prior regulatory approval; 8 and
A description of the OCC's authority under 12 CFR 3.11 to limit distributions, including
interest payments on any tier 2 capital instrument if the national bank has full discretion to
permanently or temporarily suspend such payments without triggering an event of default, if
applicable to the subordinated debt issuance. 9
A statement that the obligation may be fully subordinated to interests held by the U.S.
government in the event that the national bank enters into a receivership, insolvency,
liquidation, or similar proceeding.
Though not required by 12 CFR 5.47, national banks should consider adding a statement about
or reference to the following prohibitions within the subordinated debt note:
•
•
The 12 USC 1828(b) prohibition on the payment of dividends or interest for national banks
in default in the payment of any assessment due to the FDIC.
Any other relevant, material restrictions applicable to national banks.
National banks must also comply with the securities offering disclosure rules in 12 CFR 16, as
described in the “Other Requirements for National Banks and FSAs” subsection of this booklet.
National banks should consider including the above disclosures in any other subordinated debt
documents as appropriate.
Refer to 12 CFR 5.47(d)(3)(ii)(B)(3) and 12 USC 1831o(h)(2); specifically, the12 USC 1831o(h)(2) prohibition
on the payment of principal and interest for critically undercapitalized institutions.
8
The capital conservation buffer and the countercyclical capital buffer requirements described at 12 CFR 3.11 may
restrict the ability of a bank to make certain discretionary payments and distributions (including by repurchase or
redemption of a capital instrument) absent OCC approval (1) if the national bank fails to meet certain capital
conservation requirements or (2) at certain OCC-determined periods.
9
Comptroller’s Licensing Manual
5
Subordinated Debt
Specific Requirements and Procedures
Prohibition on Certain Restrictive Provisions and Covenants
Pursuant to 12 CFR 5.47(d)(2), a subordinated debt document issued by a national bank must not
include any provision or covenant that unduly limits the authority of a national bank or that
interferes with the OCC’s supervision of a national bank.10 Specifically, this would include any
provision or covenant that
•
•
•
•
•
requires a national bank to maintain a certain minimum amount in the national bank’s capital
accounts or other metric, such as minimum capital assets, liquidity, or loan ratios.
unreasonably restricts a national bank’s ability to raise additional capital through the issuance
of additional subordinated debt or other regulatory capital instruments.
provides for default and acceleration of the subordinated debt as the result of a change in
control, if such change in control results from the OCC’s exercise of its statutory authority to
require a national bank to sell stock in that national bank, enter into a merger or
consolidation, or be acquired by a bank holding company.
requires the prior approval of a purchaser or holder of the subordinated debt note in the case
of a voluntary merger by a national bank in which the resulting institution
− assumes the due and punctual performance of all conditions of the subordinated debt note
and agreement, and
− is not in default of the various covenants of the subordinated debt.
provides for default and acceleration of the subordinated debt as the result of a default by a
subsidiary (including a limited liability company) of the national bank, 11 unless
− there is a separate agreement between the subsidiary and the purchaser of the national
bank’s subordinated debt note, and
− such agreement has been reviewed and approved by the OCC.
National banks should ensure that these provisions do not appear in other subordinated debt
documents pertaining to the issuance.
Prior Approval for Prepayment
Pursuant to 12 CFR 5.47(f)(2) and (g)(1)(ii), for subordinated debt not included in tier 2 capital,
a national bank that is not an eligible bank must seek prior approval from the appropriate OCC
district licensing office to prepay subordinated debt. An eligible national bank must seek prior
approval to prepay such subordinated debt if (1) the national bank meets any of the conditions
that would require it to seek prior approval before issuing subordinated debt 12 or (2) the amount
A provision or covenant does not unduly limit the national bank’s authority or interfere with the OCC’s
supervision of the national bank if it is required by the U.S. Department of the Treasury to be included in
subordinated debt issued under the Emergency Capital Investment Program pursuant to section 104A of the
Community Development Banking and Financial Institutions Act of 1994. Refer to 12 CFR 5.47(j).
10
A national bank should also avoid any provision or covenant that provides for default and acceleration of the
subordinated debt as the result of a default by an affiliate, including a holding company.
11
12
That is, the eligible bank (1) would not continue to be an eligible bank following thetransaction, (2) the OCC has
Comptroller’s Licensing Manual
6
Subordinated Debt
Specific Requirements and Procedures
of the proposed prepayment is equal to or greater than 1 percent of the national bank’s total
capital, as defined in 12 CFR 3.2. All national banks must obtain prior OCC approval to prepay
subordinated debt if the subordinated debt is included in tier 2 capital.
An application for prior approval for prepayment must include
•
•
•
•
a description of the terms and amount of the proposed prepayment.
a statement of whether the national bank is subject to a capital plan or required to file a
capital plan with the OCC and, if so, how the proposed change conforms to the capital plan.
a copy of the subordinated debt note the national bank is proposing to prepay and any other
subordinated debt documents.
either (1) a statement explaining why the national bank believes that after the proposed
prepayment the national bank would continue to hold an amount of capital commensurate
with its risk or (2) a description of the replacement capital instrument that meets the criteria
for regulatory capital under 12 CFR 3.20. The description of the replacement capital
instrument must include the amount of such instrument and the time frame for issuance.
A national bank must receive affirmative approval from the OCC to prepay subordinated debt.13
If the OCC requires the national bank to replace the subordinated debt, the replacement capital
instrument must satisfy the regulatory capital requirements in 12 CFR 3. Approval expires if the
national bank does not complete the sale of the subordinated debt within one year of approval.
Material Changes to Subordinated Debt Documents
Pursuant to 12 CFR 5.47(f)(3) and (g)(1)(iii), a national bank must receive prior approval from
the OCC before making a material change to an existing subordinated debt document if the
national bank meets any of the conditions that would require it to seek prior approval before
issuing subordinated debt 14 or if the subordinated debt is included in tier 2 capital.
An application for a material change must include
•
•
•
•
a description of all proposed changes.
whether the national bank is subject to a capital plan or required to file a capital plan with the
OCC and, if so, how the proposed change conforms to the capital plan.
a copy of the revised subordinated debt documents reflecting all proposed changes.
a statement that the proposed changes comply with all applicable laws and regulations.
notified theeligible bank that prior approval is required, or (3) the law otherwise requires prior approval.
13
Refer to 12 CFR 5.47(g)(2).
That is, the eligible bank (1) would not continue to be an eligible bank following the transaction, (2) the OCC has
notified theeligible bank that prior approval is required, or (3) the law otherwise requires prior approval.
14
Comptroller’s Licensing Manual
7
Subordinated Debt
Specific Requirements and Procedures
General Requirements for FSAs
Prior Approval for Issuance
Pursuant to 12 CFR 163.80(e), FSAs are required to provide notice to the appropriate OCC
district licensing office before issuing subordinated debt if (1) the FSA does not meet its capital
requirements under 12 CFR 3, and (2) the maturity of the note exceeds one year. The notice must
be made at least 10 business days before issuance and must contain a summary of the items of
the security, including
•
•
•
•
•
•
•
•
•
principal amount of the securities.
anticipated interest rate range and price range at which the securities are to be sold.
minimum denomination.
stated and average effective maturity.
mandatory and optional prepayment provisions, if any.
description, amount, and maintenance of collateral, if any.
trustee provisions, if any.
events of default and remedies of default, if any.
any provisions that restrict, conditionally or otherwise, the FSA’s operations.
The OCC has 10 business days after receipt of the notice to object to the issuance. The OCC will
object if the terms or covenants of the proposed issuance place unreasonable burdens on, or
control over, the operations of the FSA. If the OCC does not object, the FSA has 120 calendar
days to issue the securities.
Required Disclosures
Pursuant to 12 CFR 163.80(d), a subordinated debt note must include the following legend in a
prominent place and in bold type on the face of the note:
This security is not a savings account or a deposit and it is not insured by the United States or
any agency or fund of the United States.
FSAs must comply with the securities offering disclosure rules in 12 CFR 16, as described in the
“Other Requirements for National Banks and FSAs” section of this booklet. FSAs are subject to
the requirements under 12 CFR 3.11. 15
The capital conservation buffer and the countercyclical capital buffer requirements described at 12 CFR 3.11 may
restrict the ability of a bank to make certain discretionary payments and distributions (including by repurchase or
redemption of a capital instrument) absent OCC approval (1) if the bank fails to meet certain capital conservation
requirements or (2) at certain OCC-determined periods.
15
Comptroller’s Licensing Manual
8
Subordinated Debt
Specific Requirements and Procedures
Other Restrictions
Pursuant to 12 CFR 163.76(a), FSAs are not permitted to offer or sell debt securities issued by
the FSA or its affiliates at an office of the FSA.
Regulatory Capital Requirements for National Banks
Application
Pursuant to 12 CFR 5.47(f)(1)(ii), if the national bank intends to include the subordinated debt
instrument in tier 2 capital, the national bank must submit an application to the OCC before or
within 10 days after issuing the subordinated debt, regardless of whether the national bank was
required to seek prior approval to issue the subordinated debt.16 Pursuant to 12 CFR 5.47(h)(2),
the application must include
•
•
•
•
•
the terms of the issuance.
the amount or projected amount and date or projected date of receipt of funds.
the interest rate or expected calculation method for the interest rate.
copies of the final subordinated debt documents.
a statement that the issuance complies with all applicable laws and regulations.
The national bank may not include the subordinated debt in tier 2 capital unless it has received
notification from the OCC that the subordinated debt qualifies as tier 2 capital.
Prior Approval for Prepayment
National banks are required to obtain prior approval from the appropriate OCC district licensing
office to prepay subordinated debt if the subordinated debt is included in tier 2 capital. 17 The
specific requirements related to the application for prior approval are provided in the “General
Requirements for National Banks” subsection of this booklet.
A national bank that intends to include subordinated debt in tier 2 capital and that is submitting an application for
prior approval to issue the subordinated debt, without simultaneously submitting the application for tier 2 capital
inclusion, should note this fact in its application. If all the information required by 12 CFR 5.47(h)(2) is provided as
part of the initial application, the OCC may, as part of its prior approval for issuance, approve inclusion of the
subordinated debt in tier 2 capital, effective after the subordinated debt is issued and paid in.
16
17
Refer to 12 CFR 5.47(f)(2)(ii) and (g)(1)(ii).
Comptroller’s Licensing Manual
9
Subordinated Debt
Specific Requirements and Procedures
Regulatory Capital Requirements for FSAs
In addition to the general requirements (12 CFR 163.80) described above, FSAs must satisfy the
requirements of 12 CFR 5.56 for subordinated debt to be included in tier 2 capital. 18 These
requirements are described in this section.
FSAs must also satisfy the regulatory capital requirements of 12 CFR 3.20(d), which apply to
capital instruments issued by both national banks and FSAs.
Required Disclosures
Pursuant to 12 CFR 5.56(d)(1), to be included in tier 2 capital, the subordinated debt note must
state the following:
•
•
•
•
This security is not a savings account or deposit, and it is not insured by the United States or
any agency or fund of the United States.
The security is subordinated on liquidation as to principal, interest, and premium to all claims
against the FSA that have the same or higher priority as savings accounts.
The security is not secured by the FSA’s assets or the assets of any affiliate of the FSA. An
affiliate means any person or company that controls, is controlled by, or is under common
control with the FSA.
The security is not eligible collateral for a loan by the FSA.
The subordinated debt note must also state or refer to the following prohibitions and
restrictions: 19
•
•
•
•
The 12 USC 1828(b) prohibition on the payment of dividends or interest for banks in default
in the payment of any assessment due to the FDIC.
The 12 USC 1831o(h) and 12 CFR 3.11 prohibition on the payment of principal and interest
for critically undercapitalized institutions.20
A statement that the obligation may be fully subordinated to interests held by the U.S.
government in the event that the FSA enters receivership, insolvency, liquidation, or similar
proceeding.
Any other relevant, material restrictions.
The provisions of 12 CFR 5.56 also generally apply to mandatorily redeemable preferred stock to be included in
tier 2 capital that was issued before July 23, 1985, or issued pursuant to regulations and memoranda of the former
Federal Home Loan Bank Board and approved in writing by the former Federal Savings and Loan Insurance
Corporation for inclusion as regulatory capital. However, the indenture provisions in 12 CFR 5.56(d)(2) are not
applicable to such mandatorily redeemable preferred stock.
18
The OCC recommends that an FSA provide these disclosures as part of a general description of the OCC’s and
FDIC’s receivership authority and the OCC’s regulatory authority with respect to an FSA in danger of insolvency.
19
20
Refer to footnote 11.
Comptroller’s Licensing Manual
10
Subordinated Debt
Specific Requirements and Procedures
The subordinated debt note must also state the following or refer to documents that state the
following:
•
•
The terms under which the FSA may prepay the obligation.
That the FSA must obtain the OCC’s prior approval before (1) the acceleration of payment of
principal or interest, (2) redemption prior to maturity, (3) repurchase, or (4) exercising a call
option in connection with the security.
An FSA must also include any additional statements that the OCC requires be included in the
subordinated debt note, agreement, indenture, or other subordinated debt document.
FSAs should ensure that the requirements described above are satisfied in any other subordinated
debt documents, as appropriate.
Trust Indenture Requirement
For the subordinated debt to be included in tier 2 capital, pursuant to 12 CFR 5.56(d)(2), an FSA
generally must use an indenture as part of the transaction.
Pursuant to 12 CFR 5.56(d)(2), if the aggregate amount of subordinated debt securities publicly
offered and sold in any consecutive 12- or 36-month period exceeds $5 million or $10 million,
respectively, the indenture must provide for the appointment of a trustee other than the FSA or
an affiliate of the FSA and for collective enforcement of the security holders’ rights and
remedies.
An FSA is not required to use an indenture if the subordinated debt note that is intended to be
included in tier 2 capital is sold only to accredited investors, as that term is defined in 15 USC
77b(a)(15); however, these securities may not be transferred to any nonaccredited investor unless
the FSA has an indenture in place that meets the requirements described above. If an FSA claims
an exemption to the indenture requirement, it must place a legend on the appropriate
subordinated debt documents indicating that an indenture must be in place before the debt
securities are transferred to any nonaccredited investor.
FSAs should consider incorporating certain suggested subordination provisions and revised
American Bar Association Model Simplified Indenture provisions, available in appendix A in
this booklet, in the indenture and other appropriate subordinated debt documents.21
References to the Model Simplified Indenture are to specific sections of the American Bar Association’s revisions
(May 2000) to the 1983 Model Simplified Indenture. Refer to 55 Bus. Law. 1115 (May 2000). The Model
Simplified Indenture is a general purpose indenture for commercial companies and should be revised for the specific
circumstances of a financial institution. Refer to appendix A for the specific provisions with citations for those
recommended provisions. The suggested provisions in appendix A reflect suggested revisions by the OCC to tailor
the provisions to a bank. The bank and its advisors should review carefully the suggested provisions to help ensure
their applicability to the bank’s proposed subordinated debt issuance.
21
Comptroller’s Licensing Manual
11
Subordinated Debt
Specific Requirements and Procedures
Application for Approval
Pursuant to 12 CFR 5.56(b), an FSA that intends to include subordinated debt in tier 2 capital
must file an application seeking the OCC’s approval. This application may be filed before or
after the issuance. The FSA may not include subordinated debt in tier 2 capital until the OCC
approves the application. An application by an eligible savings association 22 is subject to
expedited review. Under expedited review, the application is deemed to have been approved by
the OCC upon the expiration of 30 calendar days after the filing date of the application unless,
before the expiration of that time period, the OCC notifies the FSA that (1) additional
information is required to supplement the application; (2) the application has been removed from
expedited review, or the expedited review process is extended; or (3) the OCC denies the
application. Pursuant to 12 CFR 5.56(f), if the FSA amends the subordinated debt note or related
subordinated debt documents following completion of the OCC’s review, it must obtain the
OCC’s approval before it may include the amended subordinated debt note in tier 2 capital.
Pursuant to 12 CFR 5.56(i), an FSA must file the following information with the OCC within 30
calendar days after the FSA completes the sale of subordinated debt includable as tier 2 capital.
If the FSA filed its application following the completion of the sale, it must submit this
information with its application:
•
•
•
A written report indicating the number of purchasers, the total dollar amount of securities
sold, the net proceeds received by the FSA from the issuance, and the amount of
subordinated debt, net of all expenses, to be included as tier 2 capital.
Three copies of the executed subordinated debt note and a copy of all other relevant
subordinated debt documents governing the issuance or administration of the securities.
A certification by the appropriate executive officer indicating that the FSA complied with all
applicable laws and regulations in connection with the offering, issuance, and sale of the
securities.
Timeline for Issuance
Pursuant to 12 CFR 5.56(g), the FSA must complete the sale of subordinated debt within one
year after the OCC’s approval under 12 CFR 5.56. An FSA may request an extension of the
offering period by filing a written request with the OCC. The FSA must demonstrate good cause
for the extension and file the request at least 30 days before the expiration of the offering period
or any extension of the offering period. For any potential extension of the offering period, the
FSA should consider whether there are any securities offering disclosure implications.
Prior Approval for Prepayment
FSAs are required to obtain prior approval from the appropriate OCC district licensing office to
prepay subordinated debt if the subordinated debt is included in tier 2 capital. 23
22
The term “eligible savings association” is defined at 12 CFR 5.3. Refer to footnote 3.
23
Refer to 12 CFR 5.56(b)(2).
Comptroller’s Licensing Manual
12
Subordinated Debt
Specific Requirements and Procedures
In reviewing an FSA’s prepayment application, the OCC considers the same criteria and
conditions used in reviewing an FSA’s applications to issue subordinated debt or include
subordinated debt in tier 2 capital. Refer to 12 CFR 5.56(e).
The FSA must include in the application either (1) a statement explaining why the FSA believes
that following the proposed prepayment the FSA would continue to hold an amount of capital
commensurate with its risk or (2) a description of the replacement capital instrument that meets
the criteria for regulatory capital under 12 CFR 3.20. The description of the replacement capital
instrument must include the amount of such instrument and the time frame for issuance.
OCC Review of Applications
Pursuant to 12 CFR 5.56(e), in reviewing an FSA’s application to (1) issue subordinated debt
that is intended to qualify for tier 2 capital, (2) include subordinated debt in tier 2 capital, or (3)
prepay subordinated debt that is included in tier 2 capital, the OCC considers whether
•
•
•
•
•
•
the issuance of subordinated debt is authorized under applicable laws and regulations and is
consistent with the FSA’s charter and bylaws,
the FSA is at least adequately capitalized under 12 CFR 6.4 and meets the regulatory capital
requirements at 12 CFR 3.10,
the FSA is or will be able to service the subordinated debt,
the subordinated debt is consistent with the requirements of 12 CFR 5.56,
the subordinated debt and related transactions sufficiently transfer risk from the Deposit
Insurance Fund, and
the OCC has no objection to the issuance based on the FSA’s overall policies, condition, and
operations.
The OCC’s approval is conditioned upon no material changes to the information disclosed in the
application submitted to the OCC. The OCC may impose such additional requirements or
conditions as it may deem necessary to protect purchasers, the FSA, or the Deposit Insurance
Fund.
Requirements for Subordinated Debt to Qualify as Regulatory
Capital for National Banks and FSAs
In addition to the requirements in the OCC’s licensing rule described above, banks must satisfy
the regulatory capital requirements at 12 CFR 3 for subordinated debt to be included in tier 2
capital. The requirements of 12 CFR 3.20(d) set forth the criteria for an instrument to be included
in tier 2 capital, whereas other sections of 12 CFR 3, such as 12 CFR 3.11 (capital conservation
buffer and countercyclical capital buffer), include other relevant requirements applicable to
capital instruments.
Basic Requirements
•
The instrument must be issued and paid-in.
Comptroller’s Licensing Manual
13
Subordinated Debt
Specific Requirements and Procedures
•
•
•
The instrument must be subordinated to depositors and general creditors of the bank.
The instrument must not be secured, covered by a guarantee of the bank or an affiliate of the
bank, or subject to any other arrangement that legally or economically enhances the seniority
of the instrument in relation to more senior claims.
The instrument must have a minimum original maturity of at least five years. 24
Disclosures
•
For an advanced approaches bank, a subordinated debt note must disclose that the holders of
the instrument may be fully subordinated to interests held by the U.S. government in the
event that the bank enters into a receivership, insolvency, liquidation, or similar proceeding.
Acceleration and Prepayment
•
•
•
•
The instrument must not have any terms or features that require, or create significant
incentives for, the bank to redeem the instrument prior to maturity.
The instrument, by its terms, may be called by the bank only after a minimum of five years
following issuance, except that the terms of the instrument may allow it to be called sooner
upon the occurrence of an event that would preclude the instrument from being included in
tier 2 capital, a tax event, or if the issuing entity is required to register as an investment
company pursuant to the Investment Company Act of 1940 (15 USC 80a-1 et seq.). 25
The holder of the instrument must have no contractual right to accelerate payment of
principal or interest on the instrument, except in the event of a receivership, insolvency,
liquidation, or similar proceeding of the bank.
Redemption of the instrument prior to maturity or repurchase requires prior OCC approval.
Call Option
•
•
•
The instrument must require prior approval from the OCC before the bank can exercise a call
option on the instrument.
The bank must not create at issuance, through action or communication, an expectation that a
call option will be exercised.
Before or immediately after exercising a call option, the bank must (1) demonstrate to the
OCC’s satisfaction that the bank will continue to hold capital that is commensurate with its
risk or (2) replace the called amount with an equivalent amount of an instrument that meets
the criteria for regulatory capital.
An instrument that by its terms automatically converts to a tier 1 capital instrument less than five years after
issuance complies with the five-year maturity requirement of this criterion.
24
The OCC interprets 12 CFR 3.20(d)(v) to require a final (and not a proposed or prospective) action, such as (1) an
amendment to or change in the laws or regulations or treaties of the United States or any political subdivision
thereof or therein, or (2) an official or administrative action (including an audit of the issuer or any affiliate thereof)
or judicial decision interpreting or applying such laws or regulations or treaties.
25
Comptroller’s Licensing Manual
14
Subordinated Debt
Specific Requirements and Procedures
Credit Sensitivity
•
The instrument must have no credit-sensitive feature, such as a dividend or interest rate that
is reset periodically based in whole or in part on the bank’s credit standing, but may have a
dividend rate that is adjusted periodically independent of the bank’s credit standing in
relation to general market interest rates or similar adjustments.
Funding and Issuing Entity
•
•
The bank, or an entity controlled by the bank, must not have purchased or directly or
indirectly funded the purchase of the instrument.
If the instrument is not issued directly by the bank or by a subsidiary of the bank that is an
operating entity, the only asset of the issuing entity must be its investment in the capital of
the bank, and proceeds must be immediately available without limitation to the bank or the
bank’s top-tier holding company in a form that meets or exceeds all the other criteria for
tier 2 capital instruments under 12 CFR 3.20. A bank may disregard de minimis assets related
to the operation of the issuing entity for purposes of this criterion. Banks should be aware
that, for purposes of the regulatory capital rule, an “operating entity” is not an “operating
subsidiary.” For regulatory capital purposes, an “operating entity” is defined as “a company
established to conduct business with clients with the intention of earning a profit in its own
right.” Refer to 12 CFR 3.2.
Other Requirements for National Banks and FSAs
Limitations on Inclusion in Regulatory Capital
The amount of subordinated debt eligible for inclusion as tier 2 capital is reduced by 20 percent
of the original amount of the instrument (net of any redemptions) at the beginning of each of the
last five years of the instrument’s life. Refer to 12 CFR 3.20(d)(1)(iv). Thus, subordinated debt
with less than one year to maturity is not included in regulatory capital.
Lending Limits and Other Statutory Limits
Issuance or prepayment of a subordinated debt instrument may result in a change in a bank’s
capital level for purposes of its lending limits, pursuant to 12 USC 84 and 12 CFR 32, and its
capital category, pursuant to 12 USC 1831o and 12 CFR 6 (“Prompt Corrective Action”). In
addition to 12 USC 84, 12 USC 1464(u) imposes additional special rules on FSAs for lending
limits.
Pursuant to 12 CFR 32.4, unless the OCC determines for safety and soundness reasons that a
bank should calculate its lending limits more frequently and provides written notice to that
effect, a bank shall determine its lending limits as of the most recent of (1) the last day of the
preceding calendar quarter or (2) the date on which there is a change in capital category for
purposes of 12 USC 1831o and 12 CFR 6.3.
Comptroller’s Licensing Manual
15
Subordinated Debt
Specific Requirements and Procedures
Issuance or prepayment of subordinated debt included in tier 2 capital also may affect other
statutory and regulatory limits. 26
Mandatory Convertible Debt
Mandatory convertible debt refers to a subordinated debt instrument that requires without
qualification that the issuer exchange either common or perpetual preferred stock for such
instruments by a date at or before the maturity of the instrument. Mandatory convertible debt is
eligible to be included in tier 2 capital without limitation if it meets all statutory and regulatory
requirements, including the requirements provided in 12 CFR 3.20 (for all banks), 12 CFR 5.47
(for national banks), and 12 CFR 5.56 (for FSAs), as applicable.27
Reciprocal Holdings
Pursuant to 12 CFR 3.22(c)(3), if there is a formal or informal arrangement in which (1) Bank X
purchases, exchanges, swaps, or otherwise agrees to hold the subordinated debt of Bank Y; and
(2) Bank Y agrees to hold any capital instrument of Bank X; then (3) Bank X must deduct the
amount of its investment in Bank Y’s subordinated debt from the component of capital for which
the underlying capital instrument would qualify if it were issued by Bank X. The deduction
should follow the “corresponding deduction approach” set forth at 12 CFR 3.22(c)(2). A bank
that issues subordinated debt should disclose in any application or notice to the OCC whether
another bank that holds any capital instruments of the bank will purchase or has purchased the
subordinated debt.
Shareholders’ Approval
The OCC does not require a bank to obtain approval from shareholders or members (in the case
of mutual savings associations) for the issuance or prepayment of subordinated debt. The OCC
also does not require a national bank to amend its articles of association or an FSA to amend its
charter to authorize the issuance or prepayment of the subordinated debt.
Securities Disclosure Requirements
When selling subordinated debt securities, a bank must comply with the registration
requirements or otherwise qualify for an exemption under 12 CFR 16. These requirements apply
even if the bank is not required to obtain prior approval to issue subordinated debt.
Twelve CFR 16.17 requires that all registration statements, offering documents, amendments,
notices, or other documents relating to a securities offering by a bank be filed electronically with
the OCC’s Chief Counsel’s Office and the appropriate district office at www.banknet.gov.
26
For example, refer to 12 CFR 1.
For purposes of determining any statutory limits that are based on the amount of a national bank’s surplus,
national banks should consult the definition of and requirements for “mandatory convertible debt” provided at
12 CFR 3.701.
27
Comptroller’s Licensing Manual
16
Subordinated Debt
Specific Requirements and Procedures
Documents may be signed electronically using the signature provision in SEC Rule 402 (17 CFR
230.402).
Comptroller’s Licensing Manual
17
Subordinated Debt
General Policies, Receivership Concerns, and
Guidance for Subordinated Debt Included in Regulatory Capital
General Policies, Receivership Concerns, and
Guidance for Subordinated Debt Included in
Regulatory Capital
General Policies
The policies in this section of the booklet apply to all subordinated debt issued by a bank,
regardless of whether it is intended to be included in tier 2 capital, unless otherwise noted.
Banks should be aware that, for subordinated debt that is intended to be included in tier 2 capital,
12 CFR 3.20(d)(1)(vi) provides that the holder of a subordinated debt note must not have a
contractual right to accelerate payment of principal or interest on the note except in the event of a
receivership, insolvency, liquidation, or similar proceeding of the bank.
Representations and Warranties
As a policy matter, the OCC is concerned that subordinated debt documents might contain
representations and warranties that might unduly interfere with the management of a bank and
could result in unsafe or unsound banking practices. For example, banks should pay special
attention to warranties asserting that (1) there has been no material change in the issuing bank’s
condition, (2) the bank is not in default with respect to any agreement, or (3) the bank is not in
violation of its articles of association (for a national bank), charter (for an FSA), or bylaws.
These types of broad contract provisions could result in a violation of the contract or be an event
of default that leads to acceleration of the subordinated debt note, even when the violation is
based on a reasonable legal dispute or is immaterial in nature. A representation or warranty that
requires acceleration and repayment of the subordinated debt note because of an immaterial
contract violation that does not reflect underlying credit issues could be contrary to safe and
sound banking practices.
Accordingly, any representation or warranty should be worded to avoid the undue or otherwise
unreasonable operation of any default clause when the default clause is based on a change in the
bank’s status, the bank’s default on any other agreement, or any violation of the national bank’s
articles of association or the FSA’s charter or bylaws.
Affirmative Covenants
In an affirmative covenant, a bank promises to perform certain actions, and the bank’s failure to
do so may constitute an event of default. The OCC generally does not object to a covenant
permitting the purchaser to inspect the books and records of a bank, provided the covenant does
not violate applicable laws and regulations. The OCC pays special attention, however, to any
affirmative covenant that may unduly restrict a bank’s operations or potentially require a bank to
violate a law, regulation, or OCC policy. Two areas of specific concern are the following:
Comptroller’s Licensing Manual
18
Subordinated Debt
General Policies, Receivership Concerns, and
Guidance for Subordinated Debt Included in Regulatory Capital
Report of Examination and Nonpublic OCC Information
Pursuant to 12 CFR 4, subpart C, a bank is prohibited from disseminating nonpublic OCC
information. Nonpublic OCC information includes a bank’s confidential correspondence with the
OCC, reports of examination, or reports of supervisory activity. Thus, the subordinated debt note
must not include any clause that would require a bank to share any nonpublic OCC information
in violation of 12 CFR 4, subpart C.
Financial Statements
A prospective purchaser or holder of subordinated debt may require a bank to provide financial
information. Although such a request by a prospective purchaser or holder is reasonable and the
bank may provide such information, the bank might consider executing a confidentiality
agreement before providing any information that the bank considers sensitive.
Negative Covenants
The OCC also pays special attention to negative covenants. In a negative covenant, a bank
promises to refrain from performing certain actions or agrees that the occurrence of a certain
event may or will give rise to an event of default. Pursuant to 12 USC 1818, the OCC is
concerned that a negative covenant that unduly interferes with the management of a bank could
result in unsafe or unsound banking practices. Accordingly, a bank should not include in any
subordinated debt document any negative covenant that unreasonably impairs the bank’s
flexibility in conducting its operations or interferes unduly with management. Refer to
12 CFR 5.47(d)(2) for examples of specific negative covenants that the OCC prohibits for
national banks. FSAs should consult these examples when preparing subordinated debt
documents.
Events of Default
A subordinated debt note generally includes a section that specifies events of default. Because a
subordinated debt note or related subordinated debt document may make failure to abide by an
affirmative or negative covenant an event of default, banks should be aware that there may be
some overlap between the concerns raised by affirmative and negative covenants and events of
default. If an event of default occurs, a subordinated debt note may provide that the note holder,
at its option, may declare the note to be due and payable. In other words, payment of the
principal and interest and premium, if any, due on the subordinated debt note would be
accelerated and due and payable immediately.
As discussed previously, pursuant to 12 CFR 3.20(d)(1)(vi), the holder of a subordinated debt
note included in tier 2 capital must not have the ability to accelerate payment of principal or
interest on the note except in the event of a receivership, insolvency, liquidation, or similar
proceeding of the bank.
The OCC is aware that default triggers can cover a variety of circumstances. As with general
representations and warranties, however, default triggers should not be based on immaterial
Comptroller’s Licensing Manual
19
Subordinated Debt
General Policies, Receivership Concerns, and
Guidance for Subordinated Debt Included in Regulatory Capital
events. In particular, with respect to such events of default, a bank should have a reasonable
opportunity to cure the default.
The following are examples of default triggers that the OCC has concluded to be reasonable:
•
•
•
•
With respect to default triggered by nonpayment of the interest or principal when due, a
reasonable minimum period to cure the default would be the later of 30 days or the next due
date.
With respect to default in performance or observance of certain other covenants, the note
generally should provide for a reasonable grace period of the later of 30 days or the next due
date.
With respect to a trigger based on the bank’s having defaulted on other debts, the
subordinated debt note or other related subordinated debt documents generally should
establish a threshold for the amount of defaulted debt. A reasonable threshold generally
would be 3 percent of a bank’s common equity tier 1 capital at the time of the default.
With respect to a default trigger based on a bank’s insolvency, a reasonable indication of that
insolvency would be (1) that the bank admitted in writing that it was unable to pay its debts
or (2) that the bank’s liabilities exceeded its assets.
Reference Rates Linked to the London Interbank Offered Rate (Libor)
Libor Transition
Banks should prepare for future disruptions to U.S. dollar (USD) Libor. Failure to prepare for
disruptions to USD Libor, including by operating with insufficiently robust fallback language in
new issuances of subordinated debt, could undermine financial stability and banks’ safety and
soundness.
Because of the consumer protection, litigation, and reputation risks involved, the OCC believes
that entering into new contracts that use USD Libor as a reference rate after December 31, 2021,
would create safety and soundness risks and will examine bank practices accordingly. Therefore,
the OCC encourages banks to cease issuing new subordinated debt instruments that use USD
Libor as a reference rate as soon as practicable and in any event by December 31, 2021. New
subordinated debt instruments entered into before December 31, 2021, should either use a
reference rate other than Libor or have robust fallback language that includes a clearly defined
alternative reference rate after Libor’s discontinuation.
For further guidance on this issue, refer to OCC Bulletin 2020-104. 28
Amending or Replacing Capital Instruments That Reference Libor
The OCC does not consider the replacement or amendment of a capital instrument that solely
replaces a reference rate linked to Libor with another reference rate or rate structure to constitute
an issuance of a new capital instrument for purposes of the capital rule or create an incentive to
28
OCC Bulletin 2020-104, “Libor Transition: Joint Statement on U.S. Dollar Libor Transition.”
Comptroller’s Licensing Manual
20
Subordinated Debt
General Policies, Receivership Concerns, and
Guidance for Subordinated Debt Included in Regulatory Capital
redeem, as long as the replacement or amended capital instrument is not substantially different
from the original instrument from an economic perspective.
For further guidance on this issue, refer to OCC Bulletin 2021-32.29
Contemporaneous Loan Agreements
The OCC has found, on occasion, that a bank’s parent holding company will fund the purchase
of a subordinated debt note issued by its subsidiary bank by a contemporaneous loan agreement
with a third-party lender. The terms and conditions of these loan agreements can place
significant and unacceptable restrictions on the bank’s parent holding company with respect to
the operations of the bank issuing subordinated debt. For example, if the parent holding
company’s ability to repay the loan is solely dependent on dividends upstreamed by the
subsidiary bank, the holding company may be asked to agree to restrict the operations of the
subsidiary bank in a manner that is not consistent with these guidelines. Accordingly, a bank
should make all reasonable efforts to determine whether its parent holding company has
executed such a third-party loan agreement and, if such an agreement exists, to review that
agreement for compliance with the requirements and policies discussed in this booklet.
Novel, Untested, or Extraordinary Provisions
If a subordinated debt note includes novel, untested, or extraordinary provisions, additional
review by the OCC may be required, particularly for any provisions that raise policy or safety
and soundness concerns.
Receivership Concerns
Pre-Failure and Post-Failure Claims by the FDIC, Depositors, and Senior
Creditors
As required by 12 CFR 3.20(d)(1), 5.47(d)(1), and 5.56(d)(1), depositors and senior creditors are
generally a higher priority in liquidation than subordinated debt holders. 30 Accordingly,
transactions should be structured so that a failed bank will pay out any post-insolvency interest to
the depositors 31 and senior creditors before the failed bank makes any payment toward a
subordinated debt claim, regardless of when the subordinated debt claim accrued.
Banks should be aware that courts have recognized a “rule of explicitness” in determining the
order of liquidation payments and, in some cases, have ruled that terms such as “payment in full”
are insufficient to require that depositors and senior creditors receive post-insolvency interest
before subordinated debt holders receive anything. If the terms of the subordinated debt note are
29
OCC Bulletin 2021-32, “Libor Transition: Regulatory Capital Rule Frequently Asked Questions.”
30
Also refer to 12 USC 1821(d)(11)(A) and 12 CFR 360.3(a).
31
Refer to 12 CFR 360.7.
Comptroller’s Licensing Manual
21
Subordinated Debt
General Policies, Receivership Concerns, and
Guidance for Subordinated Debt Included in Regulatory Capital
not sufficiently explicit, the court may require payment for the pre-failure claims (for principal
and interest accruing before insolvency) of subordinated debt holders before allowing the
payment of post-insolvency interest to depositors and senior creditors.
Banks should pay close attention to the potential problems raised by the rule of explicitness to
ensure that this issue does not arise. Banks should take appropriate measures in drafting
subordination provisions in the subordinated debt note and any other appropriate subordinated
debt documents. Although indentures are not generally required by the OCC for banks to issue
subordinated debt (except for subordinated debt issued by an FSA that is intended to be included
in regulatory capital), banks should consider the use of certain Model Simplified Indenture
provisions (available in appendix A) in the appropriate subordinated debt documents. The
explicitness language in the Model Simplified Indenture is supported by the definitions for
“debt” and “senior debt.” In addition, banks should strongly consider defining other terms, such
as “depositors” and “senior unsubordinated creditors,” as applicable. These terms are not defined
in the OCC’s sample subordinated debt notes at this time. The definitions should be provided in
the appropriate subordinated debt document.
General Rights of Offset
The FDIC has encountered problems assembling all of the assets of a failed bank in cases in
which a third-party bank that owns subordinated debt of the failed bank has claimed a legal right
of offset. For example, the third-party bank may attempt to use funds deposited by the failed
bank at the third-party bank to offset amounts due on the subordinated debt. The third-party bank
may also argue that it does not have to pay off debt that is owed to the failed bank because of its
right of offset. Other types of transactions between a failed bank and a third-party bank that
holds its subordinated debt may also result in the third-party bank attempting to withhold funds
from the failed bank’s receiver.
OCC regulations provide that a national bank’s subordinated debt cannot be secured, including
through funds or assets subject to a legal right of offset. Refer to 12 CFR 5.47(d)(1)(iv)(B). In
addition, subordinated debt that is included in tier 2 capital cannot be secured by a bank’s assets,
or the assets of any affiliate of the bank, or be subject to any other arrangement that legally or
economically enhances the seniority of the subordinated debt in relation to more senior claims.
Refer to 12 CFR 3.20(d)(1)(iii) (for national banks and FSAs) and 12 CFR 5.56(d)(1)(i)(C) (for
FSAs). To help ensure compliance with these regulations, a bank may consider obtaining a
certification of compliance with respect to 12 CFR 3.20(d)(1)(iii) and the applicable regulation
for a national bank (12 CFR 5.47) or FSA (12 CFR 5.56) from prospective subordinated debt
purchasers (refer to appendix D for a sample certificate).
Guidance for Subordinated Debt Included in Regulatory Capital
This section of the booklet describes policies that apply to subordinated debt that is intended for
inclusion in tier 2 capital. These policies supplement the heightened requirements provided in
12 CFR 3.20(d) (for national banks and FSAs), 12 CFR 5.47 (for national banks), and
12 CFR 5.56 (for FSAs). The following guidance applies to both national banks and FSAs unless
otherwise noted.
Comptroller’s Licensing Manual
22
Subordinated Debt
General Policies, Receivership Concerns, and
Guidance for Subordinated Debt Included in Regulatory Capital
Significant Incentive to Redeem Prior to Maturity
Pursuant to 12 CFR 3.20(d)(1)(iv), a subordinated debt note (and any relevant subordinated debt
documents) may not include terms or features that require, or create significant incentives for, a
bank to redeem the subordinated debt note prior to maturity. The OCC believes a significant
incentive to redeem can take any number of forms; thus, it would be impossible to list all the
possibilities. The OCC’s experience, however, is that repricing clauses may create significant
incentives to redeem the bank’s subordinated debt.
For this reason, a bank should pay particular attention to provisions that include periodic
contractual increases in the interest rates, or “step-ups,” that may create significant incentives to
redeem. For this discussion, a step-up is a change in coupon rate that occurs at a specific time
after issuance of subordinated debt when (1) the new coupon rate is explicitly higher than the
original coupon rate or (2) there is an implied increase in the original reference credit spread rate.
An explicitly higher coupon rate would occur, for example, if the coupon rate increased from a
fixed 4 percent for the first five years to a fixed 6 percent for years six through maturity. An
implied increase in the original reference credit spread rate would occur in a subordinated debt
note that has a fixed coupon for an initial period followed by a floating rate coupon when the
credit spread over the second reference rate is greater than the initial coupon rate less the swap
rate—that is, the fixed rate paid to the call date to receive the second reference rate. For example,
if the initial reference rate is 0.9 percent, the credit spread over the initial reference rate is
2 percent (that is, the initial coupon rate is 2.9 percent), and the swap rate to the call date is
1.2 percent, then a credit spread over the second reference rate greater than 1.7 percent
(2.9 percent minus 1.2 percent) would be considered an incentive to redeem.
The subordinated debt note is permitted to include an interest rate that is adjusted periodically in
relation to general market interest rates or similar adjustments, so long as the adjustments are
independent of a bank’s credit standing.
Credit-Sensitive Features
Pursuant to 12 CFR 3.20(d)(1)(vii), a subordinated debt note (and any relevant subordinated debt
documents) must not have a credit-sensitive feature, such as an interest rate that is reset
periodically based in whole or part on a bank’s credit standing. A bank should pay special
attention to the mechanics for determining the interest rate of the subordinated debt note to
ensure that it is not based directly or indirectly on the bank’s credit standing, which is prohibited.
No Expectation That a Call Option Will Be Exercised
Pursuant to 12 CFR 3.20(d)(1)(v), a subordinated debt note with a call option, by its terms,
generally may be called by the bank only after a minimum of five years following issuance. At
the time a bank issues the subordinated debt, however, the bank must not create an expectation,
whether through actions or communications, that the call option will be exercised. In this regard,
a bank, consistent with all applicable laws and regulations, should pay special attention to any
communication made contemporaneously with the marketing or sale of subordinated debt,
Comptroller’s Licensing Manual
23
Subordinated Debt
General Policies, Receivership Concerns, and
Guidance for Subordinated Debt Included in Regulatory Capital
particularly with respect to the bank’s future expectations regarding its regulatory capital and
debt structure.
Funding Purchases of Subordinated Debt
The OCC’s capital rule (12 CFR 3.20(d)(1)(viii)) does not permit a bank, or any entity controlled
by the bank, to fund, directly or indirectly, the purchase of its subordinated debt if the
subordinated debt is to be included in regulatory capital. A bank should make reasonable efforts
to ensure that the source of funds does not violate 12 CFR 3.20(d)(1)(viii). If the bank has
concerns with the investor’s source of funds, the bank might consider obtaining some form of
certification from the prospective subordinated debt purchaser to help ensure compliance.
A sample certificate of compliance with 12 CFR 3.20(d)(1)(viii) is included in appendix C as a
resource.
Comptroller’s Licensing Manual
24
Subordinated Debt
Appendix A
Appendix A: Sample Provisions
This appendix contains sample provisions—divided into “Suggested Subordination Provisions”
and “Selected Revised ABA Model Simplified Indenture Provisions”—that banks should
consider incorporating into a subordinated debt note or other appropriate subordinated debt
document, even when the transaction does not involve an indenture. These sample provisions are
intended to be used together and should be appropriately tailored to the circumstances of the
particular transaction. The sample provisions are intended to help ensure that the rule of
explicitness requirement and other concerns discussed in this booklet are addressed. Banks
should pay particular attention to terms that are presented in brackets, which should be modified
or defined as appropriate.
Suggested Subordination Provisions
Senior claims. The following expenses, obligations, and liabilities of the [bank name] are
senior claims:
(1) obligations for administrative expenses of any receiver, conservator, or similar
representative appointed for the [bank name];
(2) all deposit liabilities; and
(3) all other general or senior liabilities other than: (A) claims arising from [bank name]
obligations that are subordinated to the [bank name]’s depositors or general creditors by
contract or applicable statute; and (B) obligations owed to the [bank name]’s
shareholders, members, and equity holders in their capacity as such.
In a [proceeding], as defined within this note, senior claims include, without limitation:
(1) the proven or allowed amount of senior claims;
(2) any interest legally payable on the senior claims accruing before the commencement of
the [proceeding]; and
(3) interest accruing on and after the commencement of the [proceeding], assessed at the
post-insolvency interest rate provided by 12 CFR. 360.7 as that regulation may be
amended from time to time (post-commencement interest), whether or not claims for
such post-commencement interest are allowable or provable claims in such [proceeding],
and regardless of what the priority or treatment of post-commencement interest would
have been absent the subordination provisions in this [note].
As to senior claims, “payment in full” and “paid in full” as used in this [note] include the
payment of all post-commencement interest. The holders of senior claims, in their capacity as
such, are referred to as “senior creditors.”
Comptroller’s Licensing Manual
25
Subordinated Debt
Appendix A
Note is unsecured. Payment of this [note] is not directly or indirectly secured by any assets
of the [bank] or its affiliates or subsidiaries, and none of their assets have been designated or
segregated to provide for repayment of this [note].
Waiver of setoff, recoupment, and counterclaim. The obligations under this [note] are not
subject to the exercise of setoff, recoupment, counterclaim, or any similar remedy by the
[purchaser name] against any claim or obligation it may owe to the [bank name] or any of its
subsidiaries or affiliates, now or in the future, and [purchaser name] waives any and all such
present or future rights.
Subordination. Regardless of any default under this [note] at any time, or the [purchaser
name]’s exercise of any rights hereunder, the [purchaser name]’s right to any payment from
the [bank name] and its estate are subordinated to the payment in full of senior claims to the
extent and in the manner provided in this section.
(1) If the [bank name] goes into a [proceeding], no payment will be made to the [purchaser
name] under this [note] until all senior claims are paid in full (including postcommencement interest);
(2) Until all senior claims are paid in full, any distribution in respect of any obligation
evidenced by this [note] to which the [purchaser name] would be entitled but for the
provisions of this “Subordination” section shall be paid to the senior creditors; and
(3) [purchaser name] shall not have any subrogation or other rights of recourse to any
security in respect of any senior claims until such time as all senior debt shall have been
paid in full as provided above.
Selected Revised ABA Model Simplified Indenture Provisions 32
Revised Model Simplified Indenture Section 1.01. Definitions (“Debt,” “Proceeding,”
“Senior Debt”)
Debt. “Debt” means, with respect to the [bank name]:
(1) any obligation of the [bank name] to pay the principal, premium, interest (including
interest accruing on or after the filing of any petition in bankruptcy or for reorganization
relating to the [bank name], whether or not a claim for such post-petition interest is
allowed in such proceeding), penalties, reimbursement or indemnification amounts, fees,
expenses, or other amounts relating to any indebtedness;
(2) any other liability, contingent or otherwise, of the [bank name]: (A) for borrowed money
(including instances where the recourse of the lender is to the whole of the assets of the
[bank name] or to a portion thereof), (B) evidenced by a note, debenture, or similar
instrument (including a purchase money obligation), including securities, (C) for any
32
The selected provisions provided here include minor adjustments for use in this context.
Comptroller’s Licensing Manual
26
Subordinated Debt
Appendix A
letter of credit or performance bond in favor of the [bank name], or (D) for the payment
of money relating to a capitalized lease obligation;
(3) any liability of others of the kind described in the preceding clauses (1) or (2), which the
[bank name] has guaranteed or which is otherwise its legal liability;
(4) any obligation of the type described in clauses (1)–(3) secured by a lien to which the
property or assets of the [bank name] are subject, whether or not the obligations secured
thereby shall have been assumed by or shall otherwise be the [bank name]’s legal
liability; and
(5) any and all deferrals, renewals, extensions, and refunding of, or amendments,
modifications, or supplements to, any liability of the kind described in any of the
preceding clauses (1)–(4).
Proceeding. Any insolvency, receivership, conservatorship, liquidation, reorganization, or
similar proceeding, whether voluntary or involuntary.
Senior debt. Debt of the [bank name] whenever incurred, outstanding at any time except (i)
debt that by its terms is not senior in right of payment to the [note], (ii) debt held by the
[bank] or any affiliate of the [bank name], and (iii) debt excluded by [Model Simplified
Indenture Section 12.09 Variable Provisions] [addressing several administrative matters
including, inter alia, identifying which debts are not considered as senior debts, if any].
Revised Model Simplified Indenture Section 6.08. Priorities
After an [event of default], any money or other property distributable in respect of the [bank
name]’s obligations under this [indenture] shall be paid in the following order:
First: to the [trustee] (including any predecessor [trustee]) for amounts due under [Model
Simplified Indenture Section 7.07 Compensation and Indemnity];
Second: to holders of senior debt to the extent required by [Model Simplified Indenture
Article 11 Subordination or the above Subordination];
Third: to [noteholders] for amounts due and unpaid on the [note] for principal and interest,
ratably, without preference or priority of any kind, according to the amounts due and payable
on the [securities] for principal and interest, respectively; and
Fourth: to the [bank name].
Comptroller’s Licensing Manual
27
Subordinated Debt
Appendix A
Revised Model Simplified Indenture Section 11.02. Subordination
Upon any [distribution] in any proceeding,
(1) any [distribution] to which the [holders] are entitled shall be paid directly to the holders
of senior debt to the extent necessary to make payment in full of all senior debt remaining
unpaid after giving effect to all other [distributions] to or for the benefit of the holders of
senior debt; and
(2) in the event that any [distribution] is received by the [trustee] before all senior debt is
paid in full, such [distribution] shall be applied by the [trustee] in accordance with part
(1).
Comptroller’s Licensing Manual
28
Subordinated Debt
Appendix B
Appendix B: Sample Certificate of Accredited Investor Status
This appendix contains a sample certificate of accredited investor status. Banks often issue
subordinated debt instruments in reliance on an exemption from the securities registration
provisions of 12 CFR 16, such as 12 CFR 16.7. One of the specific exemptions relies on sales of
securities to individuals or entities that meet the definition of accredited investor, as that term is
defined in the U.S. Securities and Exchange Commission’s rules. Also refer to the “Glossary”
following these appendixes. The issuer of a security is responsible for ensuring that the terms of
the offering, the conduct of the offering, and the persons investing meet the various regulatory
criteria for taking advantage of the exemption from registration. This includes, if applicable, that
an investor meets the accredited investor definition. To aid in ensuring compliance with this
regulatory accredited investor requirement, issuers may use a certificate of compliance executed
by the investors to seek to ensure that an investor is aware of the accredited investor criteria and
the investor certifies that they meet the criteria. The OCC offers the below sample certification to
assist issuers in seeking to ensure compliance with the requirements for the exemption from
registration.
Suggested Sample Certificate
CERTIFICATE OF ACCREDITED INVESTOR STATUS
Except as may be indicated by the undersigned below, the undersigned is an individual
accredited investor, as that term is defined in Regulation D under the Securities Act of 1933, as
amended (the Act). In order to demonstrate the basis on which it is representing its status as an
accredited investor, the undersigned has checked one of the boxes below indicating that the
undersigned is:
[]
a bank as defined in Section 3(a)(2) of the Act, or any savings and loan association or
other institution as defined in Section 3(a)(5)(A) of the Act whether acting in its individual or
fiduciary capacity; a broker or dealer registered pursuant to Section 15 of the Securities
Exchange Act of 1934; an investment adviser registered pursuant to section 203 of the
Investment Advisers Act of 1940 or registered pursuant to the laws of a state; an investment
adviser relying on the exemption from registering with the Commission under section 203(l) or
(m) of the Investment Advisers Act of 1940; an insurance company as defined in Section
2(a)(13) of the Act; an investment company registered under the Investment Company Act of
1940 or a business development company as defined in Section 2(a)(48) of that act; a Small
Business Investment Company licensed by the U.S. Small Business Administration under
Section 301(c) or (d) of the Small Business Investment Act of 1958; a Rural Business Investment
Company as defined in section 384A of the Consolidated Farm and Rural Development Act; a
plan established and maintained by a state, its political subdivisions, or any agency or
instrumentality of a state or its political subdivisions, for the benefit of its employees, if such
plan has total assets in excess of $5,000,000; an employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan
fiduciary, as defined in Section 3(21) of such act, which is either a bank, savings and loan
association, insurance company, or registered investment adviser, or if the employee benefit plan
Comptroller’s Licensing Manual
29
Subordinated Debt
Appendix B
has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions
made solely by persons that are accredited investors;
[]
a private business development company as defined in Section 202(a)(22) of the
Investment Advisers Act of 1940;
[]
an organization described in Section 501(c)(3) of the Internal Revenue Code; a
corporation; a Massachusetts or similar business trust; a partnership; or a limited liability
company, not formed for the specific purpose of acquiring the securities offered, with total assets
in excess of $5,000,000;
[]
an individual who is a director or executive officer of [bank name];
[]
a natural person whose individual net worth, or joint net worth with the undersigned’s
spouse or spousal equivalent, at the time of this purchase exceeds $1,000,000 (excluding the
value of the person’s primary residence and indebtedness secured by the person’s primary residence,
up to the estimated fair market value of the primary residence at the time of this purchase, other than
the amount in excess of the indebtedness outstanding 60 days before the time of this purchase unless
resulting from the acquisition of the primary residence);
[]
a natural person who had individual income in excess of $200,000 in each of the two
most recent years or joint income with the undersigned’s spouse or spousal equivalent in excess
of $300,000 in each of those years and has a reasonable expectation of reaching the same income
level in the current year;
[]
a trust with total assets in excess of $5,000,000, not formed for the specific purpose of
acquiring the securities offered, whose purchase is directed by a person who has such knowledge
and experience in financial and business matters that he or she is capable of evaluating the merits
and risks of the prospective investment;
[]
an entity in which all of the equity holders are accredited investors;
[]
an entity, of a type not listed above, not formed for the specific purpose of acquiring the
securities offered, owning investments, as defined in rule 2a51-1(b) under the Investment
Company Act of 1940 (17 CFR 270.2a51-1(b)), in excess of $5,000,000;
[]
a natural person holding in good standing one or more professional certifications or
designations or credentials from an accredited educational institution that the Securities and
Exchange Commission has designated as qualifying an individual for accredited investor status;
[]
a natural person who is a “knowledgeable employee,” as defined in rule 3c-5(a)(4) under
the Investment Company Act of 1940 (17 CFR 270.3c-5(a)(4)), of the [bank name] if the [bank
name] would be an investment company, as defined in section 3 of such act, but for the exclusion
provided by either section 3(c)(1) or section 3(c)(7) of such act;
[]
a “family office,” as defined in rule 202(a)(11)(G)-1 under the Investment Advisers Act
of 1940 (17 CFR 275.202(a)(11)(G)-1) with assets under management in excess of $5,000,000,
that is not formed for the specific purpose of acquiring the securities offered, and whose
prospective investment is directed by a person who has such knowledge and experience in
financial and business matters that such family office is capable of evaluating the merits and
risks of the prospective investment; or
[]
a “family client,” as defined in rule 202(a)(11)(G)-1 under the Investment Advisers Act
of 1940 (17 CFR 275.202(a)(11)(G)-1), of a family office meeting the above requirements for a
family office and whose prospective investment in the issuer is directed by such family office
pursuant to 17 CFR 230.501(a)(12)(iii).
Comptroller’s Licensing Manual
30
Subordinated Debt
Appendix B
The undersigned understands that [bank name] (the Bank) is required to verify the undersigned’s
accredited investor status AND ELECTS TO DO ONE OF THE FOLLOWING:
[]
allow the Bank’s representative to review the undersigned’s tax returns for the two most
recently completed years and provide a written representation of the undersigned’s reasonable
expectation of reaching the income level necessary to qualify as an accredited investor during the
current year;
[]
allow the Bank’s representative to: (1) obtain a written representation from the
undersigned that states that all liabilities necessary to make a determination of net worth have
been disclosed; and (2) review one or more of the following types of documentation dated within
the past three months: bank statements, brokerage statements, tax assessments, appraisal reports
as to assets, or a consumer report from a nationwide consumer reporting agency;
[]
provide the Bank with a written confirmation from one of the following persons or
entities that such person or entity has taken reasonable steps to verify that the undersigned is an
accredited investor within the prior three months and has determined that the undersigned is an
accredited investor:
• a registered broker-dealer;
• an investment adviser registered with the Securities Exchange Commission;
• a licensed attorney who is in good standing under the laws of the jurisdictions in which
such attorney is admitted to practice law; or
• a certified public accountant who is duly registered and in good standing under the laws
of the place of such accountant’s residence or principal office.
Comptroller’s Licensing Manual
31
Subordinated Debt
Appendix B
IN WITNESS WHEREOF, the undersigned has executed this Certificate of Accredited Investor
Status effective as of
, 20_____.
Name of Subscriber
Name of Signatory
Title of Signatory
Signature
Address
Address
Phone Number
Email Address
Comptroller’s Licensing Manual
32
Subordinated Debt
Appendix C
Appendix C: Sample Certificate of Compliance With
12 CFR 3.20(d)(1)(viii)
SAMPLE CERTIFICATE OF COMPLIANCE With 12 CFR 3.20(d)(1)(viii)
On ______________________ [date], __________________ [name] the undersigned subscriber
(Subscriber) submitted a subscription form/agreement to acquire $________________ of the
____________________ [dollar amount and name of note] (Note), an issuance of subordinated
debt offered by __________________ (Bank).
The Subscriber understands that the Bank intends to include the value of the Note in its tier 2
regulatory capital pursuant to the Office of the Comptroller of the Currency’s (OCC) regulatory
capital regulation, which includes the requirement at 12 CFR. 3.20(d)(1)(viii) that states:
(viii) The national bank or federal savings association, or an entity that the national bank or
federal savings association controls, has not purchased and has not directly or indirectly
funded the purchase of the instrument.
The Subscriber hereby certifies that:
1. The undersigned Subscriber has not obtained any funds through a loan or other means,
directly or indirectly, from the Bank, or any entity that the Bank controls for the purpose
of acquiring all or a portion of the Note.
2. The undersigned Subscriber has not entered into any written or oral agreement,
understanding, or arrangement under which the Subscriber would directly or indirectly
sell or transfer by any means all or any portion of the Note the Subscriber intends to
purchase to the Bank or any entity that the Bank controls.
3. The undersigned Subscriber understands that if any statement herein contained is false,
the Bank may not be permitted to include the full value of the Note in its tier 2 regulatory
capital, which may result in a reduction in the Bank’s regulatory capital and may cause
noncompliance with the OCC’s regulatory capital requirements.
The foregoing is a true and accurate statement, made of the Subscriber’s own free will and
volition.
Comptroller’s Licensing Manual
33
Subordinated Debt
Appendix C
Date:
___________________________
Print Name:
___________________________
Subscriber Signature: ___________________________
Title:
Company:
___________________________
___________________________
Comptroller’s Licensing Manual
34
Subordinated Debt
Appendix D
Appendix D: Sample Certificates of Compliance With
12 CFR 3.20(d)(1)(iii) and 12 CFR 5.47(d)(1)(iv) (National Bank)/12 CFR
5.56(d)(1)(i)(C) (FSA)
SAMPLE CERTIFICATE OF COMPLIANCE With 12 CFR 3.20(d)(1)(iii) and 12 CFR
5.47(d)(1)(iv) OR 12 CFR 5.56(d)(1)(i)(C)
On ______________________ [date], __________________ (Bank) intends to issue
$________________ of the ____________________ [dollar amount and name of note] (Note),
an issuance of subordinated debt offered by the Bank.
[IF THE BANK IS A NATIONAL BANK]
The Bank understands that the Note must meet the requirement at 12 CFR 5.47(d)(1)(iv) that
states that the Note must:
(iv) Be unsecured, which would include prohibiting the establishment of any legally
enforceable fund earmarked for payment of the subordinated debt note through:
(A) A sinking fund; or
(B) A compensating balance or any other funds or assets subject to a legal right of offset, as
defined by applicable state law.
[IF THE BANK IS AN FSA]
The Bank understands that the Note must meet the requirement at 12 CFR 5.56(d)(1)(i)(C) that
states that the Note must:
(C) State that the security is not secured by the savings association's assets or the assets of
any affiliate of the savings association. An affiliate means any person or company that
controls, is controlled by, or is under common control with the savings association.
[FOR ALL BANKS]
The Bank understands that for it to include the value of the Note in its tier 2 regulatory capital
pursuant to the applicable regulations of the Office of the Comptroller of the Currency (“OCC”),
the Note must comply with the requirement at 12 CFR 3.20(d)(1)(iii) that states:
(iii) The instrument is not secured, not covered by a guarantee of the national bank or federal
savings association or of an affiliate of the national bank or federal savings association, and
not subject to any other arrangement that legally or economically enhances the seniority of
the instrument in relation to more senior claims.
The Bank, by its authorized officer, hereby certifies that:
The Note, by its terms and the terms of any other documents relating to the issuance and
administration of the Note, complies with these provisions; and
The Bank understands, as represented by its undersigned authorized officer, that if any
statement herein contained is false, the Bank may not be permitted to issue the Note or to include
the full value of the Note in its tier 2 regulatory capital, which may result in a reduction in the
Bank’s regulatory capital and may cause noncompliance with the OCC’s regulatory capital
requirements.
Comptroller’s Licensing Manual
35
Subordinated Debt
Appendix D
The foregoing are true and accurate statements made of the Bank’s free will and volition by its
authorized officer.
Date: ___________________________
Print Name:___________________________
Authorized Signature:___________________________
Title: ___________________________
Bank: ___________________________
Comptroller’s Licensing Manual
36
Subordinated Debt
Appendix E
Appendix E: Sample Subordinated Debt Notes
SAMPLE NATIONAL BANK SUBORDINATED NOTE NOT INCLUDED IN TIER 2
CAPITAL
THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION. THIS OBLIGATION IS SUBORDINATED TO
THE CLAIMS OF DEPOSITORS AND GENERAL CREDITORS, IS UNSECURED, AND IS
INELIGIBLE AS COLLATERAL FOR A LOAN BY [BANK NAME].
$______________________________
Date: __________________
[bank name]___________, a national banking association (Bank), promises to pay to the order of
______________[purchaser name]_____________ (Purchaser) the principal amount of
$___________, together with the interest on the part of the principal amount from time to time
remaining unpaid from this date until such principal is paid at the rate of ______[percent]_____
annually (the Note).
The entire unpaid principal of this Note and any accrued interest then unpaid shall be due and
payable on or before _______[date not less than five years from date of execution]
____________. The interest on this Note shall be due and payable ____________[payment
period]_________ as it accrues on _________[accrual period]__________ until this Note is paid
in full, commencing on the first such date following the date of this Note. Once any scheduled
payments of principal begin, all scheduled payments shall be made at least annually, and the
amount repaid in each year shall be no less than in the prior year. The Bank shall have the right
and privilege of prepaying all or any part of this Note at any time without notice or penalty from
the Purchaser. However, the Bank may be prohibited from prepaying this Note (including
payment pursuant to an acceleration clause, redemption prior to maturity, repurchase, or
exercising a call option) without prior approval of the Office of the Comptroller of the Currency
(OCC). All payments on this Note shall be applied first to accrued interest and the balance, if
any, to principal. The Bank shall not pay any interest on the Note (if such interest is required to
be paid only out of net profits) while the Bank remains in default in the payment of any
assessment due to the Federal Deposit Insurance Corporation (FDIC).
Subordination. The indebtedness of the Bank evidenced by this Note, including the principal
and premium, if any, and interest is unsecured and shall be subordinate and junior in right of
payment to its obligations to its depositors, its obligations under bankers’ acceptances and letters
of credit, obligations owed to all creditors, including both secured and unsecured or general
creditors, including its obligations to the Federal Reserve Bank, FDIC, and any rights acquired
by the FDIC as a result of loans made by the FDIC to the Bank or the purchase or guarantee of
any of its assets by the FDIC pursuant to the provisions of 12 USC 1823, whether now
outstanding or hereafter incurred.
In the event of any insolvency, receivership, conservatorship, reorganization, readjustment of
debt, marshaling of assets and liabilities, liquidation, winding up, or similar proceedings relating
to the Bank, whether voluntary or involuntary, all such obligations shall be entitled to be paid in
Comptroller’s Licensing Manual
37
Subordinated Debt
Appendix E
full before any payment shall be made on account of the principal of or premium, if any, or
interest on the Note. In the event of any such proceedings, after payment in full of all sums
owing on such prior obligations, the holder of this Note, together with any obligations of the
Bank ranking on a parity with this Note, shall be entitled to be paid from the remaining assets of
the Bank the unpaid principal thereof and any unpaid premium, if any, and interest before any
payment or other distribution, whether in cash, property, or otherwise, shall be made on account
of any capital stock or any obligations of the Bank ranking junior to this Note.
Nothing herein shall impair the obligation of the Bank, which is absolute and unconditional, to
pay the principal of and any premium and interest on this Note according to its terms.
Office of the Comptroller of the Currency Regulatory Authority. Notwithstanding any other
provisions of this Note and related documents, including specifically those set forth in the
sections relating to subordination, events of default, and covenants of the Bank, it is expressly
understood and agreed that the Bank is subject to 12 CFR 5.47. In the event the Bank is
considered “undercapitalized,” as defined under applicable law, and fails to satisfactorily
implement a required capital restoration plan, the Bank may be subject to restrictions and
requirements applicable to “significantly undercapitalized” institutions, as defined in applicable
law. If the Bank is considered “significantly undercapitalized,” the OCC has the legal authority
to require the Bank to sell shares in the Bank, enter into a merger or consolidation, or be acquired
by a depository institution or a depository institution holding company. This authority supersedes
and voids any default that may have occurred. In addition, if the Bank is considered “critically
undercapitalized,” as defined under applicable law, the Bank will be prohibited from making
principal or interest payments on this Note without prior OCC approval. In the event of the
Bank’s insolvency, the FDIC, acting as receiver, has the authority to transfer the Bank’s
obligation under this Note and to supersede or void any default, acceleration, or subordination
that may have occurred. The obligation under this Note may be fully subordinated to interests
held by the U.S. government in the event that the national bank enters into a receivership,
insolvency, liquidation, or similar proceeding.
By:_________________________________________
Name:_______________________________________
Title:________________________________________
Comptroller’s Licensing Manual
38
Subordinated Debt
Appendix E
SAMPLE NATIONAL BANK SUBORDINATED NOTE INCLUDED IN TIER 2
CAPITAL
THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION. THIS OBLIGATION IS SUBORDINATED TO
THE CLAIMS OF DEPOSITORS AND GENERAL CREDITORS, IS UNSECURED, AND IS
INELIGIBLE AS COLLATERAL FOR A LOAN BY [BANK NAME].
$______________________________
Date: __________________
[bank name]____________, a national banking association (Bank), promises to pay to the order
of __________[purchaser name]__________ (Purchaser) the principal amount of
$___________, together with the interest on the part of the principal amount from time to time
remaining unpaid from this date until such principal is paid at the rate of
________[percent]__________ annually (the Note).
The entire unpaid principal of this Note and any accrued interest then unpaid shall be due and
payable on or before ________________[date not less than five years from date of
execution]__________. The interest on this Note shall be due and payable
______________[payment period]_____________ as it accrues on ______________[accrual
period]__________ until this Note is paid in full, commencing on the first such date following
the date of this Note. Once any scheduled payments of principal begin, all scheduled payments
shall be made at least annually, and the amount repaid in each year shall be no less than in the
prior year. The Bank shall have the right and privilege of prepaying all or any part of this Note at
any time without notice or penalty from the Purchaser. However, the Bank is prohibited from
prepaying this Note (including payment pursuant to an acceleration clause, redemption prior to
maturity, repurchase, or exercising a call option) without prior approval from the Office of the
Comptroller of the Currency (OCC). The holder of this Note may not accelerate payment of
principal or interest on this Note except in the event of receivership, insolvency, liquidation, or
similar proceeding of the Bank. All payments on this Note shall be applied first to accrued
interest and the balance, if any, to principal. The Bank shall not pay any interest on the Note (if
such interest is required to be paid only out of net profits) while it remains in default in the
payment of any assessment due to the Federal Deposit Insurance Corporation (FDIC).
Subordination. The indebtedness of the Bank evidenced by this Note, including the principal
and premium, if any, and interest is unsecured and shall be subordinate and junior in right of
payment to its obligations to its depositors, its obligations under bankers’ acceptances and letters
of credit, obligations owed to all creditors, including both secured and unsecured or general
creditors, including its obligations to the Federal Reserve Bank, FDIC, and any rights acquired
by the FDIC as a result of loans made by the FDIC to the Bank or the purchase or guarantee of
any of its assets by the FDIC pursuant to the provisions of 12 USC 1823, whether now
outstanding or hereafter incurred.
In the event of any insolvency, receivership, conservatorship, reorganization, readjustment of
debt, marshaling of assets and liabilities, liquidation, winding up, or similar proceedings relating
to the Bank, whether voluntary or involuntary, all such obligations shall be entitled to be paid in
Comptroller’s Licensing Manual
39
Subordinated Debt
Appendix E
full before any payment shall be made on account of the principal of or premium, if any, or
interest on the Note. In the event of any such proceedings, after payment in full of all sums
owing on such prior obligations, the holder of this Note, together with any obligations of the
Bank ranking on a parity with this Note, shall be entitled to be paid from the remaining assets of
the Bank the unpaid principal thereof and any unpaid premium, if any, and interest before any
payment or other distribution, whether in cash, property, or otherwise, shall be made on account
of any capital stock or any obligations of the Bank ranking junior to this Note.
Nothing herein shall impair the obligation of the Bank, which is absolute and unconditional, to
pay the principal of, and any premium and interest on, this Note according to its terms.
Office of the Comptroller of the Currency Regulatory Authority. Notwithstanding any other
provisions of this Note and related documents, including specifically those provisions set forth in
the sections relating to subordination, events of default, and covenants of the Bank, it is
expressly understood and agreed that the Bank is subject to 12 CFR 3.20(d) and 5.47. In the
event the Bank is considered “undercapitalized,” as defined under applicable law, and fails to
satisfactorily implement a required capital restoration plan, the Bank may be subject to
restrictions and requirements applicable to “significantly undercapitalized” institutions, as
defined in applicable law. If the Bank is considered “significantly undercapitalized,” the OCC
has the legal authority to require the Bank to sell shares in the Bank, enter into a merger or
consolidation with another depository institution, or be acquired by a depository institution or a
depository institution holding company. This authority supersedes and voids any default that
may have occurred. In addition, if the Bank is considered “critically undercapitalized” as defined
under applicable law, the Bank will be prohibited from making principal or interest payments on
this Note without prior OCC approval. In the event of the Bank’s insolvency, the FDIC, acting as
receiver, has the authority to transfer the Bank’s obligation under this Note and to supersede or
void any default, acceleration, or subordination that may have occurred. The obligation under
this Note may be fully subordinated to interests held by the U.S. government in the event that the
national bank enters into a receivership, insolvency, liquidation, or similar proceeding.
The Bank must obtain prior OCC approval to prepay this subordinated debt Note, including
through a redemption prior to maturity, repurchase, or exercising a call option. In addition, the
Bank may call the Note only after a minimum of five years following issuance, except that the
instrument may be called sooner than five years upon the occurrence of an event that would
preclude the instrument from being included in tier 2 capital, a tax event, or if the issuing entity
is required to register as an investment company pursuant to the Investment Company Act of
1940 (15 USC 80a-1, et seq.).
[INCLUDE THE FOLLOWING PARAGRAPH IF THE BANK HAS DISCRETION TO
SUSPEND INTEREST PAYMENTS WITHOUT TRIGGERING AN EVENT OF DEFAULT.
SEE 12 CFR 3.11 AND PARAGRAPH (4) OF THE DEFINITION OF “DISTRIBUTION” IN
12 CFR 3.2.
Consistent with the requirements for the capital conservation buffer at 12 CFR 3.11, the Bank
may be prohibited from making a distribution under this Note, or creating an obligation to make
Comptroller’s Licensing Manual
40
Subordinated Debt
Appendix E
such a distribution, if such distribution, in the aggregate, would exceed the maximum payout
amount, unless the Bank receives prior OCC approval.]
By:______________________________________
Name:____________________________________
Title:_____________________________________
Comptroller’s Licensing Manual
41
Subordinated Debt
Appendix E
SAMPLE FEDERAL SAVINGS ASSOCIATION SUBORDINATED NOTE NOT
INCLUDED IN TIER 2 CAPITAL
THIS SECURITY IS NOT A SAVINGS ACCOUNT OR A DEPOSIT AND IT IS NOT
INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED
STATES. THIS OBLIGATION IS SUBORDINATED TO THE CLAIMS OF DEPOSITORS
AND GENERAL CREDITORS, IS UNSECURED, AND IS INELIGIBLE AS COLLATERAL
FOR A LOAN BY [SAVINGS ASSOCIATION NAME].
$______________________________
Date:__________________
[savings association name]___________, a federal savings association (Savings Association),
promises to pay to the order of ______________[purchaser]_____________ (Purchaser) the
principal amount of $___________, together with the interest on the part of the principal amount
from time to time remaining unpaid from this date until such principal is paid at the rate of
______[percent]_____ annually (the Note).
The entire unpaid principal of this Note and any accrued interest then unpaid shall be due and
payable on or before _______[date]____________. The interest on this Note shall be due and
payable ____________[payment period]_________ as it accrues on _________[accrual
period]__________ until this Note is paid in full, commencing on the first such date following
the date of this Note. The Savings Association shall have the right and privilege of prepaying all
or any part of this Note at any time without notice or penalty from the Purchaser. However, the
Savings Association may be prohibited from prepaying this Note (including, where applicable,
payment pursuant to an acceleration clause, redemption prior to maturity, repurchase, or
exercising a call option) without prior approval of the Office of the Comptroller of the Currency
(OCC). All payments on this Note shall be applied first to accrued interest and the balance, if
any, to principal. The Savings Association shall not pay any interest on the Note (if such interest
is required to be paid only out of net profits) while the Savings Association remains in default in
the payment of any assessment due to the Federal Deposit Insurance Corporation (FDIC).
Subordination. The indebtedness of the Savings Association evidenced by this Note, including
the principal and premium, if any, and interest is unsecured and shall be subordinate and junior
in right of payment to its obligations to its depositors, its obligations under bankers’ acceptances
and letters of credit, all obligations owed to creditors, including both secured and unsecured or
general creditors, including its obligations to the Federal Reserve Bank, FDIC, and any rights
acquired by the FDIC as a result of loans made by the FDIC to the Savings Association or the
purchase or guarantee of any of its assets by the FDIC pursuant to the provisions of 12 USC
1823, whether now outstanding or hereafter incurred.
In the event of any insolvency, receivership, conservatorship, liquidation, reorganization,
readjustment of debt, marshaling of assets and liabilities, liquidation, winding up, or similar
proceedings relating to the Savings Association, whether voluntary or involuntary, all obligations
owed to creditors, including both secured and unsecured or general creditors, shall be entitled to
be paid in full before any payment shall be made on account of the principal of or premium, if
any, or interest on the Note. In the event of any such proceedings, after payment in full of all
Comptroller’s Licensing Manual
42
Subordinated Debt
Appendix E
sums owing on such prior obligations, the holder of this Note, together with any obligations of
the Savings Association ranking on a parity with this Note, shall be entitled to be paid from the
remaining assets of the Savings Association the unpaid principal thereof and any unpaid
premium, if any, and interest before any payment or other distribution, whether in cash, property,
or otherwise, shall be made on account of any capital stock or any obligations of the Savings
Association ranking junior to this Note.
Nothing herein shall impair the obligation of the Savings Association, which is absolute and
unconditional, to pay the principal of and any premium and interest on this Note according to its
terms.
Office of the Comptroller of the Currency Regulatory Authority. Notwithstanding any other
provisions of this Note and related documents, including specifically those set forth in the
sections relating to subordination, events of default, and covenants of the Savings Association, it
is expressly understood and agreed that the Savings Association is subject to 12 CFR 163.80, and
in the event the Savings Association is considered “undercapitalized,” as defined under
applicable law, and fails to satisfactorily implement a required capital restoration plan, the
Savings Association may be subject to restrictions and requirements applicable to “significantly
undercapitalized” institutions, as defined in applicable law, or if the Savings Association is
considered “significantly undercapitalized,” the OCC has the legal authority to require the
Savings Association to sell shares in the Savings Association, enter into a merger or
consolidation with another depository institution, or be acquired by a depository institution or a
depository institution holding company. This authority supersedes and voids any default that
may have occurred. In addition, if the Savings Association is considered “critically
undercapitalized,” as defined under applicable law, the Savings Association will be prohibited
from making principal or interest payments on this subordinated debt Note without prior OCC
approval.
In the event of the Savings Association’s insolvency, the FDIC, acting as receiver, has the
authority to transfer the Savings Association’s obligation under this Note and to supersede or
void any default, acceleration, or subordination that may have occurred. The obligation under
this Note may be fully subordinated to interests held by the U.S. government in the event that the
Savings Association enters into a receivership, insolvency, liquidation, or similar proceeding.
By:____________________________________
Name:_________________________________
Title:__________________________________
Comptroller’s Licensing Manual
43
Subordinated Debt
Appendix E
SAMPLE FEDERAL SAVINGS ASSOCIATION SUBORDINATED NOTE INCLUDED
IN TIER 2 CAPITAL
THIS SECURITY IS NOT A SAVINGS ACCOUNT OR DEPOSIT AND IT
IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE
UNITED STATES. THIS OBLIGATION IS SUBORDINATED TO THE CLAIMS OF
DEPOSITORS AND GENERAL CREDITORS, IS UNSECURED, AND IS INELIGIBLE AS
COLLATERAL FOR A LOAN BY [SAVINGS ASSOCIATION NAME].
$______________________________
Date: __________________
[savings association name]____________, a federal savings association (Savings Association),
promises to pay to the order of __________[purchaser]__________ (Purchaser) the principal
amount of $___________, together with the interest on the part of the principal amount from
time to time remaining unpaid from this date until such principal is paid at the rate of
________[percent]__________ annually (the Note).
The entire unpaid principal of this Note and any accrued interest then unpaid shall be due and
payable on or before ________________[date not less than five years from date of
execution]__________. The interest on this note shall be due and payable
______________[payment period]_____________ as it accrues on ______________[accrual
period]__________ until this Note is paid in full, commencing on the first such date following
the date of this Note. The Savings Association shall have the right and privilege of prepaying all
or any part of this Note at any time without notice or penalty from the Purchaser. However, the
Savings Association is prohibited from prepaying this Note (including, where applicable,
payment pursuant to an acceleration clause, redemption prior to maturity, repurchase, or
exercising a call option) without prior approval from the Office of the Comptroller of the
Currency (OCC). The holder of this Note may not accelerate payment of principal or interest on
this Note except in the event of receivership, insolvency, liquidation, or similar proceeding of the
Savings Association. All payments on this Note shall be applied first to accrued interest and the
balance, if any, to principal. The Savings Association shall not pay any interest on the Note (if
such interest is required to be paid only out of net profits) while the Savings Association remains
in default in the payment of any assessment due to the Federal Deposit Insurance Corporation
(FDIC).
Subordination. The indebtedness of the Savings Association evidenced by this Note, including
the principal and premium, if any, and interest is unsecured and shall be subordinate and junior
in right of payment to its obligations to its depositors, its obligations under bankers’ acceptances
and letters of credit, and obligations to all creditors, including both secured and unsecured or
general creditors including its obligations to the Federal Reserve Bank, FDIC, and any rights
acquired by the FDIC as a result of loans made by the FDIC to the Savings Association or the
purchase or guarantee of any of its assets by the FDIC pursuant to the provisions of 12 USC
1823, whether now outstanding or hereafter incurred.
In the event of any insolvency, receivership, conservatorship, reorganization, readjustment of
debt, marshaling of assets and liabilities, liquidation, winding up, or similar proceedings relating
Comptroller’s Licensing Manual
44
Subordinated Debt
Appendix E
to the Savings Association, whether voluntary or involuntary, all such obligations shall be
entitled to be paid in full before any payment shall be made on account of the principal of or
premium, if any, or interest on the Note. In the event of any such proceedings, after payment in
full of all sums owing on such prior obligations, the holder of this Note, together with any
obligations of the Savings Association ranking on a parity with this Note, shall be entitled to be
paid from the remaining assets of the Savings Association the unpaid principal thereof and any
unpaid premium, if any, and interest before any payment or other distribution, whether in cash,
property, or otherwise, shall be made on account of any capital stock or any obligations of the
Savings Association ranking junior to the Note.
Nothing herein shall impair the obligation of the Savings Association, which is absolute and
unconditional, to pay the principal of, and any premium and interest on, this Note according to
its terms.
Office of the Comptroller of the Currency Regulatory Authority. Notwithstanding any other
provisions of this Note and related documents, including specifically those provisions set forth in
the sections relating to subordination, events of default, and covenants of the Savings
Association, it is expressly understood and agreed that the Savings Association is subject to 12
CFR 3.20(d) and 5.56. In the event the Savings Association is considered “undercapitalized,” as
defined under applicable law, and fails to satisfactorily implement a required capital restoration
plan, the Savings Association may be subject to restrictions and requirements applicable to
“significantly undercapitalized” institutions, as defined in applicable law. If the Savings
Association is considered “significantly undercapitalized,” the OCC has the legal authority to
require the Savings Association to sell shares in the Savings Association, enter into a merger or
consolidation with another depository institution, or be acquired by a depository institution or a
depository institution holding company. This authority supersedes and voids any default that
may have occurred. In addition, if the Savings Association is considered “critically
undercapitalized” as defined under applicable law, the Savings Association will be prohibited
from making principal or interest payments on this Note without prior OCC approval.
The Savings Association must obtain prior OCC approval to prepay this Note, including through
a redemption prior to maturity, repurchase, or exercising a call option. In addition, the Savings
Association may call the Note only after a minimum of five years following issuance, except that
the instrument may be called sooner than five years upon the occurrence of an event that would
preclude the instrument from being included in tier 2 capital, a tax event, or if the issuing entity
is required to register as an investment company pursuant to the Investment Company Act of
1940 (15 USC 80a-1, et seq.).
In the event of the Savings Association’s insolvency, the FDIC, acting as receiver, has the
authority to transfer the Savings Association’s obligation under this Note and to supersede or
void any default, acceleration, or subordination that may have occurred. The obligation under
this Note may be fully subordinated to interests held by the U.S. government in the event that the
Savings Association enters into a receivership, insolvency, liquidation, or similar proceeding.
[INCLUDE THE FOLLOWING PARAGRAPH IF THE SAVINGS ASSOCIATION HAS
DISCRETION TO SUSPEND INTEREST PAYMENTS WITHOUT TRIGGERING EVENT
Comptroller’s Licensing Manual
45
Subordinated Debt
Appendix E
OF DEFAULT. SEE 12 CFR 3.11 AND PARAGRAPH (4) OF THE DEFINITION OF
“DISTRIBUTION” IN 12 CFR 3.2.
Consistent with the requirements for the capital conservation buffer at 12 CFR 3.11, the Savings
Association may be prohibited from making a distribution under this Note, or creating an
obligation to make such a distribution, if such distribution, in the aggregate, would exceed the
maximum payout amount, unless the Savings Association receives prior OCC approval.]
By:______________________________________
Name:____________________________________
Title:_____________________________________
Comptroller’s Licensing Manual
46
Subordinated Debt
Glossary
Glossary
Accredited investor: The accredited investor definition attempts to identify those persons whose
financial sophistication and ability to sustain the risk of loss of investment and fend for
themselves render the protections of the Securities Act of 1933’s registration process
unnecessary. 33 Accredited investors generally include high-net-worth individuals, family offices
and clients, banks, financial institutions, and other large entities. Refer to 17 CFR 230.501(a) for
the complete definition.
Advanced approaches bank: A national bank or FSA as described in 12 CFR 3.100(b)(1).
Capital restoration plan: A plan that must be filed by a bank that is undercapitalized,
significantly undercapitalized, or critically undercapitalized. The plan must meet the
requirements set forth at 12 USC 1831o and 12 CFR 6.5, including describing steps that the bank
plans take to attain the minimum required capital levels or ratios.
Eligible bank and eligible savings association: Pursuant to 12 CFR 5.3, an eligible bank or
eligible savings association is a bank that
•
•
•
•
•
is well capitalized as defined in 12 CFR 6.4;
has a composite rating of 1 or 2 under CAMELS;
has a CRA (12 USC 2901 et seq.) rating of “Outstanding” or “Satisfactory,” if applicable;
has a consumer compliance rating of 1 or 2 under the Uniform Interagency Consumer
Compliance Rating System; and
is not subject to a cease-and-desist order, consent order, formal written agreement, or prompt
corrective action directive (refer to 12 CFR 6, subpart B) or, if subject to any such order,
agreement, or directive, is informed in writing by the OCC that the bank or FSA may be
treated as an eligible bank or eligible savings association for purposes of 12 CFR 5.
Indenture: An agreement made between a bond issuer and a trustee that represents the
bondholders’ interests by governing the obligations of each party. The indenture specifies all the
important features of a bond, such as its maturity date, timing, manner and place of interest
payments, method of interest calculation, and callable/convertible features, if applicable, and
specifies each of the parties’ responsibilities under the indenture. It may also delineate other
consequences concerning a default. For specific types of bonds, the indenture may also indicate
the source of the income stream for repayment of the bond. Underwriters and other parties
involved in a subordinated debt issuance often may require the use of an indenture or paying
agent agreement. For other requirements, refer to the Trust Indenture Act of 1939,
15 USC 77aaa–77bbbb.
Paying agent agreement: A contract between the parties to a subordinated debt transaction
detailing the terms of appointment of a paying agent. Paying agents generally act as an exchange
“Regulation D Revisions; Exemption for Certain Employee Benefit Plans,” Release No. 33-6683, 52 Fed. Reg.
3015 (January 16, 1987) (the “Regulation D Revisions Proposing Release”). Also refer to “Report on the Review of
the Definition of ‘Accredited Investor,’ ” Staff Report, Securities and Exchange Commission, December 18, 2015.
33
Comptroller’s Licensing Manual
47
Subordinated Debt
Glossary
agent between the bond issuer and bondholder for payments of principal and interest, to verify
ownership, and to receive W-9 or W-8 tax forms. A paying agent accepts payments from the
issuer of a security and then distributes the payments to the holders of the security. The paying
agent may also delineate other circumstances and processes surrounding the bond, such as a
default.
Perpetual preferred stock: A stock that, pursuant to 12 CFR 3.701(e)(8), is a preferred stock
that does not have a stated maturity date and cannot be redeemed at the option of the holder.
Sinking fund: A fund or an account that a bank deposits money to repay debt or other liabilities
that are in the near future.
Subordinated debt agreement or note agreement: A contract that governs the relationship
between parties to the subordinated debt transaction.
Subordinated debt document: A subordinate debt note or instrument, subordinated debt
agreement or note agreement, global note, pricing supplement, indenture, paying agent
agreement, or any other such document or instrument prepared in connection with a subordinated
debt transaction, including any renewal, extension, amendment, modification, or replacement
thereof. Banks should take care to ensure that the terms required by the regulations described in
this booklet are included in the appropriate subordinated debt documents, as appropriate.
Subordinated debt note: A financial instrument whereby the subordinated issuer promises to
make specified payments under specified terms. A subordinated debt agreement may be used in
connection with a subordinated debt note.
Tier 2 capital and tier 2 regulatory capital: The sum of tier 2 elements in 12 CFR 3.20(d) and
any related surplus, after accounting for the regulatory adjustments and deductions in
12 CFR 3.22.
Comptroller’s Licensing Manual
48
Subordinated Debt
References
References
In this section, “NB” denotes that the referenced law or regulation applies to national banks, and
“FSA” denotes that the reference applies to federal savings associations.
Borrowing Limitations for FSAs
Regulation
12 CFR 163.80 (FSA)
Capital Deficiency
Law
12 USC 55 (NB)
Capital Requirements and Minimum Ratios
Law
Regulation
12 USC 1464(t) (FSA)
12 USC 3907 (NB)
12 CFR 3 (NB and FSA)
Filing Fee
Regulation
12 CFR 5.5 (NB and FSA)
Impairment
Law
12 USC 51b-1, 56 (NB)
Legal Lending Limits Calculation
Law
12 USC 84 (NB and FSA)
12 USC 1464(u) (FSA)
12 CFR 32.4 (NB and FSA)
Regulation
Mandatory Convertible Debt
Regulation
12 CFR 3.701(e)(5), (f) (NB)
Perpetual Preferred Stock
Regulation
12 CFR 3.701(e)(8) (NB)
Prompt Corrective Action
Law
Regulation
12 USC 1831o (NB and FSA)
12 CFR 6 (NB and FSA)
Reduction of Capital
Law
Regulation
12 USC 59 (NB)
12 CFR 5.46 (NB)
12 CFR 5.55 (FSA)
Securities Offering Disclosure Rules
Regulation
Comptroller’s Licensing Manual
12 CFR 16 (NB and FSA)
49
Subordinated Debt
References
Subordinated Debt Issued by National Banks
Regulation
Subordinated Debt Issued by FSAs as Regulatory Capital
Regulation
Comptroller’s Licensing Manual
50
12 CFR 5.47 (NB)
12 CFR 5.56 (FSA)
Subordinated Debt
References
Table of Updates Since Publication
Date of Last Publication: November 2017
Reason
Affected pages
Updated to reflect changes to Part 5
Various
Update to reflect changes to Libor
Pages 21–22
Added and updated footnotes and other references to reflect
current statutes, regulations, and OCC guidance
Pages 1–4, 6–7, 9–10, 16, 20
Comptroller’s Licensing Manual
51
Subordinated Debt
| File Type | application/pdf |
| File Title | Licensing Manual, "Subordinated Debt" |
| Subject | licensing |
| Author | Maddox/Kemp |
| File Modified | 2022-02-22 |
| File Created | 2022-02-17 |