Compliance Blog

Jul 16, 2021

Investment Reports: Are Your Directors Up to Date?

While some consumers got pulled into the GameStop investing frenzy, credit unions are limited in the kinds of investments they can make and strive to be responsible with their members’ money. Depending on their balance sheets and overall portfolios, many credit unions are interested in investing beyond traditional loans and CUSOs. Generally, investing is handled by management or an experienced third party. While a credit union’s board of directors can delegate in this area, in line with fiduciary duties, the board bears the responsibility for credit union investment decisions. Chapter 12 of the NCUA’s Examiner’s Guide states:

“The credit union board of directors may delegate the authority, but not the responsibility, for making investment decisions. The board must retain ultimate responsibility.” (Emphasis added).

Now that we understand there is a potential disconnect between investment management and responsibility, how does a credit union bridge the gap? Fortunately, the NCUA covers this in its regulations.

Generally, NCUA Regulation, Section 703 governs investment requirements for credit unions. Under Section 703, there are several reporting requirements that a credit union is required to fulfill, depending on the type of investment.

Non-security investments,

NCUA regulation, Section 703.10 provides the reporting requirements for when a federal credit union (FCU) invests in non-security investments. The rule requires that, at least quarterly, a FCU prepare a written report listing shares and deposits, in banks, credit unions, and other depository institutions, that have embedded options, remaining maturities of greater than three years, or coupon formulas. Coupon formulas must be related to more than one index or inversely related to or multiples of an index.


Section 703.12 provides the reporting requirements for when a FCU invests in securities. The rule requires that, at least monthly, a FCU prepare a written report, for each security held, detailing the fair value and dollar change since the prior month-end with a summary of the entire portfolio. If a FCU holds fixed or variable securities that have embedded options, remaining maturities of greater than three years, or coupon formulas, the FCU must prepare a written report detailing the fair value and dollar change since the prior month-end with a summary for the entire portfolio.

If the value calculated in the quarterly report is greater than the FCU’s net worth, the quarterly report must provide a reasonable and supportable estimate of the potential impact on the fair value of each security held by the FCU, the fair value of the FCU’s portfolio, and the FCU’s net worth as if there was an immediate and sustained parallel shift in market interest rates of plus or minus 300 basis points. This estimate must be detailed in dollars and percentages.


Section 703.105 provides the reporting requirements if a FCU is investing in derivatives. The rule requires that a FCU’s senior executive officers prepare and deliver a quarterly comprehensive derivates report to the board of directors. At least monthly, FCU staff must deliver a comprehensive derivatives report to the FCU’s senior executive officers and the FCU’s asset liability or similar committee, if applicable.

Section 703.105(c) requires that both of the reports listed above contain the following:

“(1) Identification of any areas of noncompliance with any provision of this subpart or the Federal credit union's policies, and the planned remediation of such noncompliance;

(2) An itemization of the Federal credit union's individual transactions subject to this subpart, the current values of such transactions, and each individual transaction's intended use for Interest Rate Risk mitigation; and

(3) A comprehensive view of the Federal credit union's risk reports, including, but not limited to, Interest Rate Risk calculations with details of the transactions subject to this subpart.”

For more information on recent changes to the derivatives rule, check out this past NAFCU Compliance Blog post and this Final Regulation summary (member-only).

Investment advisor and committee

If the FCU uses an investment advisor, Section 703.5(d) requires that an investment adviser provide a monthly report that details the “investments under the adviser's control and their performance.”

If the board of directors has established an investment committee, then under both Section 703.10(c) and Section 703.12(d), the full reports required under section 703.10 (non-securities) and section 703.12 (securities) are only required to be given to the investment committee. However, each member of the board of directors is still required to receive a summary of the reports.

FCUs should note that the reporting requirements listed above are not exhaustive and more reporting requirements may apply. For example, as stated in the Examiner’s Guide, if a board of director’s delegates its authority to an employee to “complete and sign the necessary papers related to investment transactions,” then that employee must “report all transactions to the board, investment committee, or executive committee at least monthly.” For a more in-depth look at investment requirements a credit union may want to review Chapter 12 of the NCUA’s Examiner’s Manual, NCUA Regulation, Section 703, and a credit union’s own policies and procedures.

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About the Author

Keith Schostag, NCCO, Senior Regulatory Compliance Counsel, NAFCU


Keith Schostag joined NAFCU as regulatory compliance counsel in February 2021. In this role, Keith assists credit unions with a variety of compliance issues.

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