1. (a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

   1. (1) Asset-backed security--A bond, note, or other obligation issued by a financial institution, trust, insurance company, or other corporation secured by either a pool of loans, extensions of credit which are unsecured or secured by personal property, or a pool of personal property leases.
   2. (2) Bailment for hire contract--A contract whereby a third party, bank, or other financial institution, for a fee, agrees to exercise ordinary care in protecting the securities held in safekeeping for its customers; also known as a custodial agreement.
   3. (3) Bankers' acceptance--A time draft that is drawn on and accepted by a bank, and that represents an irrevocable obligation of the bank.
   4. (4) Cash forward agreement--An agreement to purchase or sell a security with delivery and acceptance being mandatory and at a future date in excess of 30 days from the trade date.
   5. (5) Counterparty--An entity with which a credit union conducts investment-related activities in such a manner as to create a credit risk exposure for the credit union to the entity.
   6. (6) Eurodollar deposit--A deposit denominated in U. S. dollars in a foreign branch of a United States financial institution.
   7. (7) Federal funds transaction--A short-term or open-ended transfer of funds to a financial institution.
   8. (8) Financial institution --A bank or savings association, the deposits of which are insured by the Federal Deposit Insurance Corporation, a federal or state-chartered credit union, or the National Credit Union Central Liquidity Facility.
   9. (9) Investment--Any security, obligation, account, deposit, or other item authorized for investment by the Act or this section other than an investment authorized by §124.351(a)(1) of the Act.
   10. (10) Mortgage related security--A security which meets the definition of mortgage related security in United States Code Annotated, Title 15, §78c(a)(41); i.e., a privately-issued security backed by mortgages secured by real estate upon which is located a dwelling, a mixed residential and commercial structure, a residential manufactured home, or a commercial structure.
   11. (11) Nationally recognized statistical rating organization (NRSRO)--A rating organization recognized by the Securities and Exchange Commission.
   12. (12) Ordinary care--The degree of care, which an ordinarily prudent and competent person engaged in the same line of business or endeavor should exercise under similar circumstances.
   13. (13) Repurchase transaction--A transaction in which a credit union agrees to purchase a security from a counterparty and to resell the same or any identical security to that counterparty at a later date and at a specified price.
   14. (14) Reverse repurchase transaction--A transaction whereby a credit union agrees to sell a security to a counterparty and to repurchase the same or any identical security from that counterparty at a future date and at a specified price.

   15. (15) Security--An investment that has a CUSIP number or that is represented by a share, participation, or other interest in property or in an enterprise of the issuer or an obligation of the issuer that:

       1. (A) either is represented by an instrument issued in bearer or registered form or, if not represented by an instrument, is registered in books maintained to record transfers by or on behalf of the issuer;
       2. (B) is of a type commonly traded on securities exchanges or markets or, when represented by an instrument, is commonly recognized in any area in which it is issued or traded as a medium for investment; and
       3. (C) either is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations.
   16. (16) Settlement date--The date originally agreed to by a credit union and a vendor for settlement of the purchase or sale of a security.
   17. (17) Trade date--The date a credit union originally agrees, whether orally or in writing, to enter into the purchase or sale of a security.
   18. (18) Yankee dollar deposit--A deposit in a United States branch of a foreign bank, the deposits of which are insured by the Federal Deposit Insurance Corporation, that is licensed to do business in the state in which it is located, or a deposit in a state chartered, foreign controlled bank.

2. (b) Policy. A credit union may invest funds not used in loans to members, subject to the conditions and limitations of the written investment policy of the board of directors. The investment policy may be part of a broader, asset-liability management policy. The board of directors must review the investment policy at least annually to ensure that the policies adequately address the following issues:

   1. (1) The types of investments that are authorized by the board of directors.
   2. (2) A specific limit on the amount that may be invested in any single investment or investment type.
   3. (3) The delegation of investment authority to the credit union's officials or employees, including the person or persons authorized to purchase or sell investments, and a limit of the investment authority for each individual or committee.
   4. (4) A list of authorized broker-dealers or other third-parties that may be used to purchase or sell investments, and an internal process for assessing the credentials and previous record of the individual or firm.
   5. (5) An appropriate risk management framework for the level of risk in the investment portfolio. This will include specific methods for evaluating, monitoring, and managing the credit risk, interest-rate risk, and liquidity risk from the investment activities.
   6. (6) A list of authorized third-party safekeeping agents.
   7. (7) If the credit union operates a trading account, the policy shall specify the persons authorized to engage in trading account activities, trading account size limits, stop loss and sale provisions, time limits on inventoried trading account investments, and internal controls that specify the segregation of risk-taking and monitoring activities related to trading account activities.
   8. (8) The procedure for reporting to the board of directors investments and investment activities that become noncompliant with the credit union's investment policy subsequent to the initial purchase.

3. (c) Authorized activities.

   1. (1) General authority. A credit union may contract for the purchase or sale of a security provided that delivery of the security is by regular-way settlement. Regular-way settlement means delivery of a security from a seller to a buyer within the time frame that the securities industry has established for that type of security. All purchases and sales of investments must be delivery versus payment (i.e., payment for an investment must occur simultaneously with its delivery).

   2. (2) Cash forward agreements. A credit union may enter into a cash forward agreement to purchase or sell a security, provided that:

      1. (A) the period from the trade date to the settlement date does not exceed 90 days;
      2. (B) if the credit union is the purchaser, it has written cash flow projections evidencing its ability to purchase the security;
      3. (C) if the credit union is the seller, it owns the security on the trade date; and
      4. (D) the cash forward agreement is settled on a cash basis at the settlement date.

   3. (3) Repurchase transactions. A credit union may enter a repurchase transaction provided:

      1. (A) the purchase price of the security obtained in the transaction is at or below the market price;
      2. (B) the repurchase securities are authorized investments under Texas Finance Code §124.351 or this section;
      3. (C) the credit union has entered into signed contracts with all approved counterparties;
      4. (D) the counterparty is rated no lower than BBB by Standard & Poor's or an equivalent rating by another NRSRO; and
      5. (E) the credit union receives a daily assessment of the market value of the repurchase securities, including accrued interest, and maintains adequate margin that reflects a risk assessment of the repurchase securities and the term of the transaction.

   4. (4) Reverse repurchase transactions. A credit union may enter into a reverse repurchase transaction, which is a borrowing transaction subject to the Act, provided:

      1. (A) any securities received are authorized investments under Texas Finance Code §124.351 and this section;
      2. (B) the credit union has entered into signed contracts with all approved counterparties; and
      3. (C) for transaction with a maturity greater than one month, the credit union receives a monthly assessment of the market value of the securities received, including accrued interest, and maintains adequate margin that reflects a risk assessment of the securities and the term of the transaction.
   5. (5) Federal funds. A credit union may enter into a federal funds transaction with a financial institution, provided that the interest or other consideration received from the financial institution is at the market rate for federal funds transactions and that the transaction has a maturity of one or more business days or the credit union is able to require repayment at any time.
   6. (6) Yankee dollars. A credit union may invest in yankee dollar deposits.
   7. (7) Eurodollars. A credit union may invest in eurodollar deposits.
   8. (8) Bankers' acceptance. A credit union may invest in bankers' acceptances.
   9. (9) Open-end Investment Companies (Mutual Funds). A credit union may invest funds in an open-end investment company established for investing directly or collectively in any authorized investment, including qualified money market mutual funds as defined by Securities and Exchange Commission regulations.
   10. (10) Government-sponsored enterprises. A credit union may invest in government-sponsored enterprise obligations such as Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Student Loan Marketing Association.
   11. (11) Commercial paper. A credit union may invest in commercial paper issued by corporations domiciled within the United States and having a rating of no less than A1 or P1 by Standard & Poor's or Moody's, respectively, or an equivalent rating by a NRSRO.
   12. (12) Corporate bonds. A credit union may invest in corporate bonds which are rated in one of the three highest rating categories by a NRSRO (e.g. Standard & Poor's ratings AAA, AA, and A) and have remaining maturities of five years or less.
   13. (13) Municipal bonds. A credit union may invest in municipal bonds which are rated in one of the three highest rating categories by a NRSRO and have remaining maturities of five years or less.
   14. (14) Mortgage related securities. A credit union may invest in mortgage related securities, except not in the "accrual bond" (or Z-bonds) or the residual interest of the mortgage related security which are rated in one of the three highest rating categories by a NRSRO.
   15. (15) Asset-backed securities. A credit union may invest in asset-backed securities rated in one of the two highest rating categories by a NRSRO provided the underlying collateral is domestic- and consumer-based.
4. (d) Documentation. A credit union shall maintain files containing credit and other information adequate to demonstrate evidence of prudent business judgment in exercising the investment powers under the Act and this rule. Except for investments that are issued, insured or fully guaranteed as to principal and interest by the U.S. Government or its agencies, enterprises, or corporations or fully insured (including accumulated interest) by the National Credit Union Administration or the Federal Deposit Insurance Corporation, a credit union must conduct and document a credit analysis of the issuing entity and/or investment before purchasing the investment. The credit union must update the credit analysis at least annually as long as the investment is held. Credit and other due diligence documentation for each investment shall be maintained as long as the credit union holds the investment and until it has been both audited and examined. Before purchasing or selling a security, a credit union must obtain either price quotations on the security (or a similarly-structured security) from at least two broker-dealers or a price quotation on the security (or similarly-structured security) from an industry-recognized information provider.
5. (e) Classification. A credit union must classify a security as hold-to-maturity, available-for-sale, or trading, in accordance with generally accepted accounting principles and consistent with the credit union's documented intent and ability regarding the security.

6. (f) Purchase or Sale of Investments Through a Third-Party.

   1. (1) A credit union may purchase and sell investments through a broker-dealer as long as the broker-dealer is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) or is a financial institution whose broker-dealer activities are regulated by a federal or state regulatory agency.

   2. (2) Before purchasing an investment through a broker-dealer, a credit union must analyze and annually update the following information.

      1. (A) The background of the primary sales representative and the local broker-dealer firm with whom the credit union is doing business, using information available from federal or state securities regulators and securities industry self-regulatory organizations, such as the National Association of Securities Dealers and the North American Securities Administrators Association, about any enforcement actions against the broker-dealer firm, its affiliates, or associated personnel.
      2. (B) If the broker-dealer is acting as the credit union's counterparty, the ability of the broker-dealer and its subsidiaries or affiliates to fulfill commitments, as evidenced by capital strength, liquidity, and operating results. The credit union should consider current financial data, annual reports, reports of nationally-recognized statistical rating organizations, relevant disclosure documents, and other sources of financial information.
   3. (3) Requirements (1) and (2) of this subsection do not apply when a credit union purchases a certificate of deposit or share certificate directly from a bank, credit union, or other financial institution.

7. (g) Discretionary Control Over Investments and Investment Advisers.

   1. (1) Except as provided in paragraph (2) of this subsection, a credit union must retain discretionary control over its purchase and sale of investments. A credit union has not delegated discretionary control to an investment adviser when the credit union reviews all recommendations from investment adviser and is required to authorize a recommended purchase or sale transaction before its execution.
   2. (2) A credit union may delegate discretionary control over the purchase and sale of investments in and aggregate amount not to exceed 100% of its reserves and undivided earnings at the time of delegation to persons other than the credit union's officials or employees, provided each such person is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940 (15 U.S.C. 80b).
   3. (3) Before transacting business with an investment adviser to which discretionary control has been granted, an annually thereafter, a credit union must analyze the adviser's background and information available from federal and state securities regulators and securities industry self-regulatory organizations, including any enforcement actions against the adviser, associated personnel, and the firm for which the adviser works.
   4. (4) A credit union may not compensate an investment adviser with discretionary control over the purchase and sale of investments on a per transaction basis or based on capital gains, capital appreciation, net income, performance relative to an index, or any other incentive basis.
   5. (5) A credit union must obtain a report from its investment adviser at least monthly that details the investments under the adviser's control and their performance.

Source Note:The provisions of this §91.802 adopted to be effective February 20, 1986, 11 TexReg 699; amended to be effective May 6, 1988, 13 TexReg 1979; amended to be effective May 9, 1989, 14 TexReg 2025; amended to be effective December 8, 1992, 17 TexReg 8233; amended to be effective July 8, 1994, 19 TexReg 4938; amended to be effective February 11, 2001, 26 TexReg 1134; amended to be effective August 11, 2002, 27 TexReg 6835; amended to be effective November 14, 2004, 29 TexReg 10254.