RULE 189-17.2 - Definitions

RULE 189-17.2. Definitions

The definition of terms included in Iowa Code section 17A.2 and 189-1.1 (533) applies to such terms used in this chapter unless otherwise provided in this rule. In addition, the following definitions apply as used in these rules:

"Adjusted trading" means selling an investment to a counterparty at a price above its current fair value and simultaneously purchasing or committing to purchase from the counterparty another investment at a price above its current fair value.

"Associated personnel" means a person engaged in the investment banking or securities business who is directly or indirectly controlled by a National Association of Securities Dealers (NASD) member, whether or not the person is registered or exempt from registration with NASD. "Associated personnel" includes every sole proprietor, partner, officer, director, or branch manager of any NASD member.

"Banker's acceptance " means a time draft that is drawn on and accepted by a bank and that represents an irrevocable obligation of the bank.

"Bank note " means a direct, unconditional, and unsecured general obligation of a bank that ranks equally with all other senior unsecured indebtedness of the bank, except deposit liabilities and other obligations that are subject to any priorities or preferences.

"Borrowing repurchase transaction " means a transaction in which the credit union agrees to sell a security to a counterparty and to repurchase the same or an identical security from that counterparty at a specified future date and at a specified price.

"Call" means an option that gives the holder the right to buy a specified quantity of a security at a specified price during a fixed time period.

"Collateralized mortgage obligation " means a multiclass mortgage-related security.

"Collective investment fund" means a fund maintained by a national bank under Comptroller of the Currency regulations, 12 CFR Part 9.

"Commercial mortgage-related security" means a mortgage-related security, as defined in this rule, except that it is collateralized entirely by commercial real estate, such as a warehouse or office building, or a multifamily dwelling consisting of more than four units.

"Commercial paper" means a debt obligation of a United States-chartered corporation with a maturity date of 270 days or less, which may be interest-bearing or discount-purchased.

"Corporate bonds " means a debt obligation of a United States-chartered corporation with a maturity date greater than 270 days, which may be interest-bearing or discount-purchased.

"Counterparty" means the party on the other side of the transaction.

"Custodial agreement" means a contract in which one party agrees to hold securities in safekeeping for others.

"Delivery versus payment" means payment for an investment must occur simultaneously with its delivery.

"Deposit note " means an obligation of a bank that is similar to a certificate of deposit but is rated.

"Derivatives" means any derivative instrument, as defined under generally accepted accounting principles (GAAP).

"Embedded option" means a characteristic of an investment that gives the issuer or holder the right to alter the level and timing of the cash flows of the investment. Embedded options include call and put provisions and interest rate caps and floors. Since a prepayment option in a mortgage is a type of call provision, a mortgage-backed security composed of mortgages that may be prepaid is an example of an investment with an embedded option.

"Eurodollar deposit" means a U.S. dollar-denominated deposit in a foreign branch of a United States depository institution.

"European financial options contract" means an option that can be exercised only on its expiration date.

"Exchangeable collateralized mortgage obligation" means a class of a collateralized mortgage obligation (CMO) that, at the time of purchase, represents beneficial ownership interests in a combination of two or more underlying classes of the same CMO structure. The holder of an exchangeable CMO may pay a fee and take delivery of the underlying classes of the CMO.

"Fair value " means the amount at which an instrument could be exchanged in a current, arm 's-length transaction between willing parties, as opposed to a forced or liquidation sale.

"Financial options contract" means an agreement to make or take delivery of a standardized financial instrument upon demand by the holder of the contract as specified in the agreement.

"Immediate family member" means a spouse or other family member living in the same household.

"Industry-recognized information provider " means an organization that obtains compensation by providing information to investors and receives no compensation for the purchase or sale of investments.

"Investment" means any security, obligation, account, deposit, or other item authorized for purchase by a federal credit union under the Federal Credit Union Act, 12 U.S.C. Section 1757(7), 1757(8), or 1757(15), or NCUA rules and regulations, 12 CFR Part 703, other than loans to members and the exceptions specified in 189-subrule 17.1(3).

"Investment grade" means the issuer of a security has an adequate capacity to meet the financial commitments under the security for the projected life of the asset or exposure, even under adverse economic conditions. An issuer has an adequate capacity to meet financial commitments if the risk of default by the obligor is low and the full and timely repayment of principal and interest on the security is expected. A credit union may consider any or all of the following factors, to the extent appropriate, with respect to the credit risk of a security: credit spreads; securities-related research; internal or external credit risk assessments; default statistics; inclusion on an index; priorities and enhancements; price, yield, and/or volume; and asset class-specific factors. This list of factors is not meant to be exhaustive or mutually exclusive.

"Investment portfolio" means the amount invested by a credit union pursuant to Iowa Code sections 533.301(5), 533.301(25), 533.304 and 533.305, excluding any investment in nonearning assets such as real estate, premises and equipment, the capitalization deposit in the National Credit Union Share Insurance Fund (NCUSIF), and any other investment which does not generate a regular dividend or interest or receive or accrue added value.

"Investment repurchase transaction" means a transaction in which an investor agrees to purchase a security from a counterparty and to resell the same or an identical security to that counterparty at a specified future date and at a specified price.

"Maturity" means the date the last principal amount of a security is scheduled to come due and does not mean the call date or the weighted average life of a security.

"Mortgage-related security" means a security as defined in Section 3(a)(41) of the Securities Exchange Act of 1934 (15 U.S.C. 78 c(a)(41)).

"Mortgage servicing rights" means a contractual obligation to perform mortgage servicing and the right to receive compensation for performing those services. Mortgage servicing is the administration of a mortgage loan, including collecting monthly payments and fees, providing record-keeping and escrow functions, and, if necessary, curing defaults and foreclosing.

"Negotiable instrument" means an instrument that may be freely transferred from the purchaser to another person or entity by delivery, or endorsement and delivery, with full legal title becoming vested in the transferee.

"Net worth" means the retained earnings balance of the credit union at quarter end as determined under generally accepted accounting principles and as further defined in NCUA rules and regulations, 12 CFR Part 702.2(f).

"Official" means any member of a credit union's board of directors, credit committee, auditing/supervisory committee, or investment-related committee.

"Ordinary care" means the degree of care that an ordinarily prudent and competent person engaged in the same line of business or endeavor should exercise under similar circumstances.

"Pair-off transaction" means an investment purchase transaction that is closed or sold on or before the settlement date. In a pair-off transaction, an investor commits to purchase an investment, but then pairs off the purchase with a sale of the same investment on or before the settlement date.

"Put" means an option that gives the holder the right to sell a specified quantity of a security at a specified price during a fixed time period.

"Registered investment company" means an investment company that is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80 a). Examples of registered investment companies are mutual funds and unit investment trusts.

"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 immediate delivery of that type of security. For example, regular way settlement of a Treasury security includes settlement on the trade date (cash), the business day following the trade date (regular way), and the second business day following the trade date (skip day).

"Residual interest" means the remainder cash flows from collateralized mortgage obligations/real estate mortgage investment conduits (CMOs/REMICs), or other mortgage-backed security transaction, after payments due bondholders and trust administrative expenses have been satisfied.

"Securities lending" means lending a security to a counterparty, either directly or through an agent, and accepting collateral in return.

"Security" means a share, participation, or other interest in property or in an enterprise of the issuer or an obligation of the issuer that:

1. Either is represented by an instrument issued in bearer or registered form or, if not represented by an instrument, is registered in books maintained to record transfers by or on behalf of the issuer;

2. Is of a type commonly dealt in on securities exchanges or markets or, when represented by an instrument, is commonly recognized in any area in which it is issued or dealt in as a medium for investment; and

3. Either is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations.

"Senior management employee" means a credit union's chief executive officer (typically this individual holds the title of president or manager), an assistant chief executive officer, and the chief financial officer.

"Small business-related security" means a security as defined in Section 3(a)(53) of the Securities Exchange Act of 1934 (15 U.S.C. 78 c(a)(53)). This definition does not include Small Business Administration securities permissible under the Federal Credit Union Act, 12 U.S.C. Section 1757(7).

"Superintendent" means the superintendent of credit unions appointed by the governor to direct and regulate credit unions pursuant to Iowa Code chapter 533.

"Weighted average life" means the weighted average time to the return of a dollar of principal, calculated by multiplying each portion of principal received by the time at which it is expected to be received (based on a reasonable and supportable estimate of that time) and then summing and dividing by the total amount of principal.

"When-issued trading of securities" means the buying and selling of securities in the period between the announcement of an offering and the issuance and payment date of the securities.

"Yankee dollar deposit" means a deposit in a United States branch of a foreign bank licensed to do business in the state in which it is located, or a deposit in a state-chartered, foreign-controlled bank.

"Zero coupon investment" means an investment that makes no periodic interest payments but instead is sold at a discount from its face value. The holder of a zero coupon investment realizes the rate of return through the gradual appreciation of the investment, which is redeemed at face value on a specified maturity date.

(Amended by IAB October 15, 2014/Volume XXXVII, Number 8, effective 11/19/2014)

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