Permissible Investments for Federal Credit Unions

98-0731 / December 1998
Permissible Investments for Federal Credit Unions

GC/FSK:bhs
SSIC 3600
98-0731 (Rev.) 

Jay G. Baris, Esq.
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022

Re: Permissible Investments for Federal Credit Unions (FCUs).

Dear Mr. Baris:

In our letter to you dated December 3, 1998, we incorrectly stated that obligations of federal farm credit banks are not permissible investments for FCUs.

The terms "federal farm credit banks" and "farm credit banks" are not used in the provision of the Federal Credit Union Act addressing permissible FCU investments. 12 U.S.C. §1757(7)(E). As a result of a mandatory merger required under the Agricultural Credit Act of 1987, Pub.L. 100-399, title IV, §402, Aug. 17, 1988, 102 Stat. 999, farm credit banks, chartered by the Farm Credit Administration, are the successors to federal land banks and federal intermediate credit banks, which are specifically enumerated in the Act. 12 U.S.C. §1757(7)(E). Accordingly, obligations issued by farm credit banks are permissible investments for FCUs.

Furthermore, in our previous letter we stated that FCUs may invest in a mutual fund as long as the fund's prospectus restricts the fund's investment portfolio only to investments and investment transactions that are permissible for FCUs. 12 C.F.R. §703.100(d). Accordingly, FCUs may invest in a mutual fund the underlying securities of which include obligations of farm credit banks so long as all other securities in the fund and the fund's investment transactions are permissible for FCUs.

Sincerely,

/s/

Sheila A. Albin
Associate General Counsel

GC/FSK:bhs
SSIC 3600
98-0731 

Jay G. Baris, Esq.
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022 

Re: Permissible Investments for Federal Credit Unions.

Dear Mr. Baris:

You have asked whether any of the following are permissible investments for federal credit unions (FCUs):

  1. obligations of the Federal Agricultural Mortgage Corporation (Farmer Mac);
  2. obligations of the Federal Farm Credit Bank (FFC Bank); and
  3. a mutual fund that invests in, among other things, FFC Bank obligations. Farmer Mac obligations that are backed by pools of qualified loans for which Farmer Mac provides a guarantee as to principle and interest are permissible investments for FCUs. but FFC Bank obligations and mutual funds that invest in FFC Bank obligations are not.

The Federal Credit Union Act (Act) enumerates those securities, deposits and other obligations in which an FCU may invest. 12 U.S.C. §1757(7). (8) and (15). NCUA regulations interpret these provisions. 12 C.F.R. Part 703. Also, FCUs may derive additional investment authority through other federal laws provided the basis for FCU investment is clearly set forth in those laws. The Agricultural Credit Act authorizes investment in securities guaranteed by Farmer Mac as follows:

Securities representing an interest in, or obligations backed by, pools of qualified loans with respect to which ... [Farmer Mac] has provided a guarantee shall be authorized investments of any person, trust. corporation, partnership, association, business trust, or business entity created pursuant to or existing under the laws of the United States or any State to the same extent that the person. trust, corporation, partnership, association. business trust. or business entity is authorized under any applicable law to purchase. hold, or invest in obligations issued by or guaranteed as to principal and interest by the United States or any agency or instrumentality of the United

12 U.S.C. §2279aa-12(c)(1). FCUs satisfy the criteria set forth in the above-quoted section of the Agricultural Credit Act. Accordingly. FCUs are permitted to invest in Farmer Mac guaranteed securities or obligations.

You have described FFC Bank obligations as unsecured bonds and discount notes that are not guaranteed. You have suggested that they are analogous to Freddie Mac obligations and should be permissible investments for FCUs. There are fundamental differences. however. between Freddie Mac's guaranteed equity instruments and FFC Bank's unsecured debt instruments that are not guaranteed. More importantly, Freddie Mac obligations are specifically enumerated in the Act as permissible investments for FCUs. but FFC Bank obligations are not. 12 U.S.C. §1757(7)(E). You have also suggested that Congress would have specified FFC Bank obligations as permissible investments had FFC Bank existed at the time the Act was drafted. There is no evidence to support your position on congressional intent. Contrarily. Congress could have added FFC Bank obligations to the list of permissible investments for FCUs at any time subsequent to their creation, but has not done so. Accordingly, FCUs may not invest in FFC Bank obligations.

FCUs may invest in a mutual fund as long as the fund's prospectus restricts the fund's investment portfolio only to investments and investment transactions that are permissible for FCUs. 12 C.F .R. §703.1 OO(d). Accordingly. FCUs are not permitted to invest in any mutual fund the underlying securities of which include FFC Bank obligations because they are not permissible investments for FCUs.

Sincerely,

Sheila A. Albin
Associate General Counsel 

Last modified on
03/01/21