[Federal Register Volume 59, Number 229 (Wednesday, November 30, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29264]
[[Page Unknown]]
[Federal Register: November 30, 1994]
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 563b and 575
[No. 94-253]
RIN 1550-AA73
Conversions From Mutual to Stock Form; Mutual Savings and Loan
Holding Companies
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of Thrift Supervision (OTS or Agency), is issuing a
final rule to revise its regulations governing conversions from mutual-
to-stock form and mutual savings and loan holding companies. On May 3,
1994, the OTS issued an interim final rule with request for comment and
a proposed rule with request for comment. The interim final rule
contained amendments to the OTS's mutual-to-stock conversion
regulations (conversion regulations) designed to strengthen the
standards governing conversions and to ensure the integrity of the
conversion process. The proposed rule contained a new ``convenience and
needs'' test to be added to the approval standards for conversion
transactions.
This final rule includes revisions made to the interim final rule
that reflect OTS's consideration of the comments it received during the
45-day comment period following publication of the interim final rule.
In addition, this final rule also addresses the comments received by
the OTS during the 75-day comment period following publication of the
proposed rule and adopts the proposed rule without modification.
Finally, this final rule incorporates certain technical changes to the
regulations governing mutual-to-stock conversions and mutual savings
and loan holding companies.
EFFECTIVE DATE: January 1, 1995.
FOR FURTHER INFORMATION CONTACT: Teri M. Valocchi, Counsel (Banking and
Finance) (202/906-7299), Michael P. Vallely, Counsel (Banking and
Finance) (202/906-6241), J. Larry Fleck, Assistant Chief Counsel (202/
906-6413), Business Transactions Division, Chief Counsel's Office;
Diana L. Garmus, Deputy Assistant Director (202/906-5683), Corporate
Activities Division, Office of Thrift Supervision, 1700 G Street, NW.,
Washington, D.C. 20552.
SUPPLEMENTARY INFORMATION:
I. Summary of Interim Final and Proposed Rules
On May 3, 1994, the OTS published an interim final rule with
request for public comment.1 The interim final rule amended the
OTS regulations governing mutual-to-stock conversions of savings
associations to strengthen the conversion standards and ensure the
integrity of the conversion process. Specifically, the amendments:
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\1\See 59 FR 22725 (May 3, 1994).
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(A) revised and clarified the appraisal standards;
(B) prohibited the use of ``running'' proxies by management of
converting associations;
(C) placed the current tax-qualified employee stock ownership plan
(ESOP) stock purchase priority after those of eligible depositors;
(D) provided stock purchase priority to core depositors;
(E) required that a stock purchase preference be given to account
holders and voting members residing in the association's local
community;
(F) prohibited management stock benefit plans in a conversion;
(G) limited merger conversions to institutions that qualify for a
conversion, i.e., financially-weak institutions;
(H) lengthened the conversion public comment period;
(I) required converting associations to submit business plans in
support of the conversion; and
(J) prohibited the repurchase of a converted association's stock
within one year of conversion.
The interim final rule did not propose any changes to the
prohibition in the OTS conversion regulations on the transfer or sale
of subscription rights or similar ``free distribution'' schemes, but
did request comment on whether subscription rights should continue to
be nontransferable, or if transferability is recommended, the reasons
for, and the manner in which to allow for, such transfer. Finally, the
interim final rule made preliminary conversion proxy materials
available to the public and incorporated certain technical changes to
the OTS's regulations governing mutual savings and loan holding
companies.
Separately, the OTS published a proposal to amend the conversion
regulations and the regulations governing stock offerings by savings
association subsidiaries of mutual holding companies (MHC stock
offerings) by adding a new ``convenience and needs'' standard to
existing approval standards for such transactions.2 Under the
proposed standard, the OTS would consider the extent to which the
transaction would affect the convenience and needs of the communities
served by the applicant.
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\2\See 59 FR 22764 (May 3, 1994).
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In evaluating transactions under this standard, the OTS would
review the applicant's performance under the Community Reinvestment Act
(CRA),3 the contents of the business plan submitted in support of
the conversion, and other factors relating to the applicant's
performance in meeting the convenience and needs of its delineated
community. Under the proposal, the OTS could deny an application or
approve it on the condition that the applicant improve certain aspects
of its CRA performance record or address particular credit or lending
needs of the communities that it serves.
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\3\See 12 U.S.C. 2901-2907.
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The OTS worked with the Federal Deposit Insurance Corporation
(FDIC) on the interim final rule and this final rule to ensure greater
consistency in the regulatory standards and policies in this area.
II. Summary of Comments and Analysis of Issues
The public comment period for the interim final rule closed on June
17, 1994. The OTS received 75 comment letters. Twenty-seven comment
letters were submitted by financial institutions or their holding
companies, including 20 letters from federally-chartered savings
associations and seven letters from other financial institutions and
holding companies. Of the remaining 48 comment letters, persons in
their individual capacity submitted 15, law firms submitted 13, state
trade associations submitted six, a national trade association
submitted one, city and state banking commissioners submitted three,
various groups representing financial institutions submitted seven, a
financial regulatory ``shadow'' group submitted one and certified
public accountants submitted two.
The comment period on the proposed convenience and needs rule
closed on July 18, 1994. The OTS received 12 comment letters, including
five from trade associations and similar groups representing financial
institutions, two from law firms representing thrifts, two from persons
in their individual capacity, one from a state thrift regulatory
authority, one from an association of state thrift regulatory
authorities and one from a federally-chartered savings bank.
The following is a discussion of the major issues raised by the
commenters and a brief analysis and resolution of the issues.
A. Revisions to the Appraisal Standards
As noted in the preamble to the interim final rule, the integrity
of the OTS' current conversion program rests, in large part, on the
existence of independent and accurate appraisals of converting
associations.4 When the initial conversion regulations were
adopted in 1974, the Federal Home Loan Bank Board, the predecessor
agency to the OTS, expressed concerns about underpricing conversion
stock and stated that no method of conversion could be considered
equitable unless the conversion stock was accurately appraised and sold
at its pro forma market value.5
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\4\See 59 FR 22725, 22726 (May 3, 1994).
\5\See 39 FR 9142 (March 7, 1974).
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The OTS believes that the appraisal process has adequately
addressed conversion valuation issues during most of the period since
1974. As also noted in the preamble to the interim final rule, however,
the OTS has been concerned that some recent appraisals were setting pro
forma market values that were significantly below the market value of
the converting association. In response to these concerns, the OTS, in
the interim final rule, revised the conversion regulations to formalize
the current practice of requiring a full appraisal report and
justification for the methodology employed. The OTS also clarified the
provision in the conversion regulations that requires that the
conversion applicant submit information demonstrating, to the
satisfaction of the OTS, the independence and expertise of the
appraiser. The revised regulations allow the OTS to censure, suspend or
bar an appraiser from practicing before the OTS in egregious cases of
consistent undervaluation on the part of an appraiser.
OTS further revised the appraisal rules to provide that in those
instances where the initial appraisal report is deemed to be materially
deficient and/or substantially incomplete, the OTS may deem the entire
conversion application materially deficient and/or substantially
incomplete, and require the filing of a new application.6
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\6\The OTS has recently issued updated staff guidance for
conversion appraisers that provides specific details on appraisal
methodology as well as report content, and also incorporates
provisions 9 and 10 of the Uniform Standards of Professional
Appraisal Practice. In adopting the guidelines, the OTS consulted
with the FDIC to ensure uniform appraisal standards.
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Finally, the OTS requested public comment on whether it should
amend its regulations to prohibit an appraiser or its affiliates from
also serving as an underwriter or selling agent.
Approximately 25% of the comments addressing appraisal standards
affirmatively supported the requirement that a full appraisal report
and justification for methodology employed be required to insure a
``fair value'' assessment of an institution. One commenter cautioned
against an attempt to eliminate any ``pop'' or ``post conversion
windfall,'' and suggested management of such price increases instead,
by limiting them to a reasonable percentage. Eleven commenters
expressed concern that market forces cannot be regulated, that
appraisals and pricing of stock are not exact sciences, and that the
revisions may force the stock to be overvalued. One of the eleven
stated that the stock market is not predictable enough to
institutionalize an expectation that the stock of every institution
will trade within a fixed parameter following conversion.
One commenter requested that the terms ``materially deficient'' and
``consistently undervalued'' be defined and another commenter requested
that the term ``independence'' be defined and that the OTS provide
guidance as to the appropriate degree of participation by management in
the appraisal process.
One commenter stated that the OTS should deal with the appraiser
directly when an initial appraisal report is materially deficient or
substantially incomplete and should not penalize the thrift; another
commenter stated that the OTS should give institutions time to correct
inappropriate appraisals without the need to file costly new conversion
applications.
Eleven commenters addressed the issue of whether to prohibit
appraisers or their affiliates from also serving as underwriters or
selling agents. Six stated that appraisal firms should be separate from
firms that market conversion stock so as to avoid all potential
conflicts of interest. One of the six further stated that underwriters
or selling agents in one situation may not be able to be objective as
appraisers in another situation and that if an attorney continually
uses the same appraiser, that appraiser becomes a quasi-affiliate of
the attorney, with questionable independence. Five expressed the view
that there was no evidence of abuse where the appraiser and selling
agent are the same parties, that the two functions can be impartially
carried out and that to require different parties is costly and
detrimental to small thrifts.
In implementing revisions to the appraisal regulations, the OTS was
not attempting to create an appraisal system that would result in
precise conformity between appraisal values and post-conversion stock
prices. The OTS, however, remains concerned about significant
discrepancies between appraisal values and immediate post-conversion
trading prices. The OTS also recognizes that there will be
circumstances that could not reasonably have been foreseen by an
appraiser that may result in pricing discrepancies in a particular
transaction. As noted in the preamble to the interim final rule,
however, when there is a consistent pattern of discrepancies by a
particular appraisal firm, the independence and competence of the
appraiser is called into question.
The terms ``materially deficient'' and ``consistently undervalued''
as used in the regulation are heavily dependent upon the facts and
circumstances of each transaction or group of transactions. Because
there is no ``bright-line'' test that can be applied to these terms,
the OTS does not believe that it would be useful to further define
these terms.
With respect to the comment that the converting association should
not be penalized for a materially deficient or substantially incomplete
appraisal and the comment that the converting association should be
given the opportunity to correct the faulty appraisal, the OTS does not
believe that any change to the interim final rule is warranted. While
management of a converting association may properly rely on the opinion
of an independent appraiser in valuing conversion stock, it is
ultimately the fiduciary responsibility of management to ensure that
the converting association is properly priced for sale. The converting
association also is ultimately responsible for the quality of the work
of all of its agents, including its attorneys, accountants and selling
agent, as well as its appraiser, and thus, should exercise due care in
the hiring of such parties to ensure that qualified advisors and
experts have been retained on behalf of the association. In any
instance where a materially deficient conversion application is
submitted, whether as a result of significant legal, accounting,
appraisal or other deficiencies, the OTS retains the right to deem the
application materially deficient and reject it.
As to the issue of permitting ``corrections'' to inadequate
appraisals submitted to the OTS, the purpose of rejecting conversion
applications containing faulty appraisals is to encourage applicants to
file applications that are substantially complete and that comply with
regulatory requirements. If there are no consequences of filing an
application that is substantially incomplete, there is less incentive
to submit an adequate appraisal. In addition, given limited OTS staff
resources, it is unfair to delay review of complete conversion
applications with adequate appraisals by devoting inordinate amounts of
OTS staff time to multiple reviews of applications with inadequate
appraisals.
The OTS believes that there is an appropriate role for officers of
a converting association in the preparation of an appraisal. The OTS
expects that the appraiser will consult with officers of the
association in preparing the appraisal because the officers will often
be the sole source of information about certain aspects of the current
and future business operations of the association. It is not
appropriate, however, for the officers to attempt to influence or to
interfere with the independence of the appraiser. Similarly, appraisers
seeking engagement with a converting institution should not in any
manner suggest that they can provide a ``lower'' valuation than other
appraisers.
The board of directors has a primary responsibility to hire the
appraiser and to review the appraisal report. The board of directors is
entitled to rely on the appraiser's expertise. As with officers, it
would be inappropriate for the board of directors to influence or
interfere with the independence of the appraiser.
The board of directors also retains the authority to reject an
appraisal or to dismiss an appraiser. In such a case, the OTS would
conduct the same type of review that it does when a savings association
dismisses its accounting firm or rejects an accounting firm's
opinion.7
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\7\17 CFR 229.304 (March 8, 1989).
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The interim final rule requested comment on whether appraisers or
their affiliates should be prohibited from also serving as underwriters
or selling agents in a conversion. A majority, albeit a narrow one, of
those who commented on this aspect of the interim final rule were in
favor of a prohibition on firms serving in both roles. Upon review of
the comments, the OTS has determined that, as discussed in the interim
final rule, the appraisal process and the independence of the appraiser
should not be tainted by even the appearance of a conflict of interest.
Although the same firm infrequently performs both these services and
the OTS is not aware of any serious problems when it has, the final
rule generally prohibits a firm from this dual service, except where
procedures are followed and representations made to ensure that an
appraiser is separate from the underwriter or selling agent affiliate
and the underwriter or selling agent affiliate does not make
recommendations or in any way impact the appraisal. Additionally, the
final rule prohibits the appraiser from receiving any fees other than
the fees for services rendered in connection with the appraisal.
B. Prohibition on Use of ``Running'' Proxies
The conversion regulations have been revised to prohibit the use of
``running'' proxies and to require the use of a proxy specifically
designated for the conversion.
The majority of commenters addressing the revision supported the
prohibition of ``running'' proxies because it better ensures that
members understand the proposed change in the association's
organization. A few commenters expressed concern for the high costs of
using professional proxy solicitation firms but none thought the costs
were overly burdensome. Those commenters who opposed the prohibition
asserted that there were already sufficient safeguards, that the old
rule worked well since ``running'' proxies were only used if a member
did not send a proxy or vote in person, that detailed disclosure was
included in the proxy statements, and that the prohibition is an added
expense for converting institutions.
One commenter recommended adoption of a requirement that 50% of
those voting approve the conversion, rather than the existing
requirement that the conversion be approved by a 50% vote of all
depositors.
The OTS agrees with the majority of commenters and continues to
believe that the prohibition of ``running'' proxies is the most
effective manner in which to assure an increased role for an
association's membership in the conversion process. Accordingly, no
change has been made to the interim final rule. Thus, 12 CFR 563b.6(e)
will continue to require approval of the plan of conversion by at least
a majority of the total outstanding votes of the association's members,
unless state law requires a higher percentage for a state-chartered
converting savings association, in which case the higher percentage
will be used. Finally, the final rule revises section 575.13(a)(4) of
the mutual savings and loan holding companies regulation to clarify the
prohibition on the use of ``running'' proxies and the requirement for
the use of a specifically designated proxy for a mutual holding company
reorganization, mutual-to-stock conversion undertaken either by a
mutual savings association or a mutual holding company, or any other
material transactions.
C. Re-Prioritize Stock Purchase by Tax-Qualified Employee Stock
Ownership Plans
In its interim final rule, the OTS revised the stock purchase
priorities so as to give eligible account holders first priority and
tax-qualified employee stock benefit plans second priority. The
conversion regulations continue to give supplemental eligible account
holders third priority and all other voting members who have
subscription rights fourth priority.
A majority of the commenters recommended that the ESOP be given
first priority; a few commenters affirmatively supported giving the
ESOP second priority. The commenters that recommended giving the ESOP
first priority asserted that employees make the organization successful
and should have the first stake in the company's performance, that the
plans do not favor higher paid officers, but promote greater
productivity and motivation, that the plans do not prevent long-term
depositors from purchasing conversion stock, and that they protect
institutions from hostile takeover situations. These commenters further
asserted that if the ESOP is not established in the conversion, it will
be established later and will dilute shareholders' ownership interest.
A few commenters requested that the methodology for distribution of
shares in the event of oversubscription be clarified. The commenters
requested that the regulation be written to make clear the intent that
the ESOP would be able to purchase stock through open market purchases
or through authorized but unissued shares in the event of an
oversubscription. If this was not the intent of the regulation, one
commenter requested that the OTS clarify that it will grant a waiver or
no-action letter to permit the ESOP or any other tax-qualified plan to
purchase shares in the open market immediately following conversion.
As stated in the preamble to the interim final rule, although the
OTS believes that it is still appropriate to provide management
incentives and to encourage employee stock ownership in the converted
association, these interests have been overshadowed by other factors.
The former provision which granted a first priority to tax-qualified
employee benefit plans was a means to afford undercapitalized mutual
savings associations a measure of anti-takeover protection through the
opportunity to place a significant block of conversion stock in
friendly hands, and thus, encourage capital raising through conversion.
Because most mutual savings associations are now healthy, there is a
need to balance the interests of management and employees against those
of account holders by providing core depositors at mutual savings
associations the first opportunity to buy conversion stock. The final
rule will continue to give eligible account holders first priority. The
wording of 12 CFR 563b.3(c)(23) has been revised to clarify that
eligible account holders have first priority to purchase conversion
stock, tax-qualified employee stock benefit plans have second priority,
supplemental eligible account holders have third priority, and other
voting members who have subscription rights have fourth priority.
Also, as prescribed by 12 CFR 563b.3(c)(23), and further clarified
in the final rule, if the final conversion stock valuation exceeds the
maximum conversion stock offering range, up to ten percent of the total
offering of shares may be sold to the tax-qualified employee stock
benefit plans. This provision generally will allow ESOPs to be
allocated stock during periods of an active and strong thrift
securities market; however, such allocation generally will not be
available when the final pro forma market value as approved by the OTS
and disclosed in the stock offering materials does not exceed the
maximum conversion stock offering range.\8\ If the ESOP is not able to
purchase conversion stock, the ESOP or any other tax-qualified plan may
purchase shares in the open market or utilize authorized but unissued
shares only with prior OTS approval. Disclosure must be made in the
conversion stock offering materials of the potential open market
purchases or use of authorized but unissued shares to fund the ESOP and
its effect on the association and its shareholders. The final rule
reflects these clarifications.
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\8\In the nearly 1,000 conversions completed since 1983, a
majority were sold for a conversion price that did not exceed the
maximum conversion stock offering range.
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D. Revision to Eligibility Record Date
The OTS currently requires that the eligibility record date (ERD)
be set at a date no less than one year prior to board of director
approval of the plan of conversion. In the interim final rule, the OTS
also requested public comment as to whether a longer minimum time
period would be appropriate.
The majority of commenters supported the revision to the ERD based
on the reasoning that it properly protects the legitimate interests of
core depositors and provides sufficient assurance that long-term
supporters of an institution are given priority. A couple of commenters
recommended setting a maximum time limit of two years and one
recommended not extending beyond one year; one requested that
``depositor'' be defined as one who has ``savings in any type of a
deposit account of at least $100 continuously during the eligibility
period.''
Two commenters disagreed with the revision because it eliminates
legitimate local depositors and is impractical since accurate records
about depositors are not readily available. One commenter noted that
directors and executive officers will have to plan further ahead,
maintaining records for longer periods of time. Two commenters stated
that the revision has no effect since professional investors are in
place for a considerable period. One commenter recommended waivers for
institutions of $100 million or less that can demonstrate that
information is not available.
A few commenters suggested eliminating the supplemental eligible
account holder category, because the date for determining such account
holders is close to the record date, and therefore duplicative, or in
the alternative, setting a supplemental eligibility record date (SERD)
only if the ERD is more than 18 months prior to the date of the latest
application amendment filed before OTS approval. One commenter
suggested moving the SERD from the current 15 month period to a 24
month period; and also noted that the ERD revision and the local
community depositor preference create three additional categories,
making for extraordinary processing difficulties.
One commenter suggested: (1) giving purchase preference to both
depositors and borrowers as of the ERD; (2) giving preference to the
eligible and supplemental eligible account holders whose accounts
remain open at the voting record date over those who terminated their
account relationship; and (3) amending the regulation to replace the
100 share initial allocation\9\ with a provision that the initial
allocation may be tailored to the circumstances of the thrift's
offering.
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\9\See 12 CFR 563b.3(c) (2)(ii) and (4)(iv).
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The interim final rule will continue in effect without change for
the reason stated by most commenters and supported by OTS: it properly
protects the legitimate interests of core depositors and provides
sufficient assurance that these depositors are given priority.
``Eligible account holders'' are defined as those holders with savings
accounts in place for a minimum of one year prior to board of director
adoption of the plan of conversion. The OTS also believes there is no
compelling reason to set a maximum time limit for an ERD. As stated in
the interim final rule, the one year period is a minimum time period.
Converting associations may designate such longer time periods as they
may deem appropriate to encompass longer term depositors in the local
communities served by the institution.
The definition of qualifying deposit will continue as stated in 12
CFR 563b.3(e). Also, the OTS believes that there is no compelling
reason to eliminate or revise the current supplemental eligibility
record date. Thus, supplemental eligible account holders, as currently
defined in the regulation, will continue to be a category with a
priority immediately following that of tax-qualified employee benefit
plans. In addition, the OTS believes that there is no compelling reason
to revise the current regulation that: 1) gives a purchase preference
to all depositors (but not borrowers); 2) does not differentiate
between eligible and supplemental eligible account holders whose
accounts remain open at the voting record date over those who
terminated their account relationship after board of director approval
of the plan of conversion; and 3) requires the 100 share initial
allocation.
E. Preference for Depositors in Local Community
Prior to promulgation of the interim final rule, the OTS conversion
regulations required a converting association to conduct a community
offering of conversion stock in the local community, prior to a general
public offering,\10\ but did not permit converting associations to give
account holders and voting members in those local communities a
priority to purchase stock in the initial subscription offering.\11\
However, to minimize conversion expenses, the OTS permitted converting
associations to not register under state blue sky laws in those states
where there was a relatively small number of depositors compared to the
overall depositor base, even though this resulted in some depositors
being precluded from purchasing stock in the conversion offering. In
addition, the OTS has, on a case by case basis, permitted thrift
subsidiaries of mutual holding companies to prioritize stock purchases
by account holders and voting members in the local communities.\12\
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\10\See 12 CFR 563b.3(c)(6)(iv).
\11\See 12 CFR 563b.3(c)(2), (4), (5).
\12\See 12 CFR 575.7(d)(6)(ii).
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The interim final rule required that a stock purchase preference be
given to eligible account holders, supplemental eligible account
holders and voting members residing in the association's local
community. Those having preference in each priority group (i.e.,
eligible account holder, supplemental eligible account holder and
voting member) are persons who reside in the association's ``local
community'' or within 100 miles of a home or branch office of the
converting association. The interim final rule defined ``local
community'' to include all counties in which the converting association
has a home or branch office, each county's standard metropolitan
statistical area or the general metropolitan area of each of these
counties and such other similar area(s) as provided for in the
converting association's plan of conversion, as approved by the OTS.
Over one-half of the commenters on the interim final rule expressed
views on the local depositor preference (LDP) provision. Approximately
one-half of those commenters supported the LDP provision for various
reasons such as: it promotes local control and involvement and is more
sensitive to the community's needs; it serves the community first and
gives depositors in the local community a more meaningful opportunity
to participate; it is a good way to maintain local control of
community-oriented associations; and it deals with the problem of
outside investors who tend to put undue pressure on management to
achieve a higher stock value more rapidly than may be feasible through
safe and sound operations.
A majority of the supporters of the LDP provision also suggested
various changes to the interim final rule. Three suggested eliminating
the 100 mile rule; one suggested using 50 instead of 100 miles; and
three requested that the OTS clarify the parameters of 100 miles, i.e.,
from headquarters or branch, to residence or town of residence, within
certain counties, etc. One commenter noted that the standard
metropolitan statistical area (SMSA) is no longer in general use in
delineating communities and markets and has been replaced by
``metropolitan statistical area'' and ``consolidated metropolitan
statistical area.'' The same commenter also noted that the term
``general metropolitan area'' is not a term of general usage nor is it
explained in the interim final rule. This commenter suggested
eliminating the 100 mile priority and restricting priority to persons
living within the local community defined by reference to counties.
Two commenters suggested using zip codes corresponding to
delineated CRA service areas, and three commenters suggested allowing
each institution voluntarily to establish a local priority and identify
local depositors. Four commenters requested that the rule be clarified
to include, as local depositors, long-term account holders who lived in
the area and kept accounts open but have retired and moved from the
area, and long-term account holders who work or regularly vacation in
the local community but do not reside there.
One selling agent had concerns with the definition of ``local
community'' and concerns with the word ``reside,'' including the
problem with multiple residences. This commenter suggested that the
test for the geographic area for the domicile of an account include the
whole of any zip code that is partially within the geographic area. The
commenter also suggested developing an affidavit to accompany the stock
order form and requested that OTS not require any independent
verification by the selling agents.
Commenters that opposed the LDP provision asserted that all
association members, regardless of location, should be treated the same
and be allowed to participate in the conversion process on an equal
basis. The objections raised by commenters opposing the LDP provision
included the following: all depositors have ownership, voting and
liquidation rights, deposits are used indiscriminately, and the
definition of customer should not be related to location; the LDP
provision is an artificial distinction between depositors based upon
geography; non-local persons with long-term accounts and/or more money
in accounts would have a lower priority than local persons with
shorter-term accounts and/or less money; the LDP is arbitrary,
capricious, unfairly discriminatory, ill-suited to advancing any
legitimate public policy objective, and in violation of the
Administrative Procedure Act;13 the LDP deprives non-locals, who
have had long-term accounts with significant amounts of money and who
maintain banking relationships, of rightful opportunity to participate
in attractive conversions; it is unconscionable for a federal agency to
require U.S. citizens to be treated differently based on their
residence; and the LDP provision conflicts with the takings, due
process and equal protection clause of the United States Constitution.
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\1\3One of the most detailed comment letters came from counsel
representing Thrift Depositors of America, Inc. (TDA), a trade
association of mutual savings association depositors. A lawsuit by
TDA (TDA vs. OTS, Civil Action No. 94-1008, U.S. District Court for
the District of Columbia) alleged that the OTS's implementation of
the LDP in the interim final rule without a notice and comment
period violated the APA. On September 29, 1994, the Court ruled that
because the OTS had failed to adequately justify waiving notice and
comment for the LDP, it would enjoin the OTS from proceeding with
mutual-to-stock conversions containing the LDP provision until a new
rule was finalized in accordance with the notice and comment
procedures of the APA.
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Several of the commenters objected to the LDP provision because
they believe that it violates federal and state policies and laws that
prohibit discrimination. The OTS acknowledges that the effect of the
rule is to authorize a preference to a certain type of depositor. The
LDP rule, however, does not discriminate against any person based on
age, race, sex, ethnic background, religion or any other impermissible
category. Its purpose is to reward those who have and will maintain a
banking relationship with the institution. While using residency as the
basis for determining this category of depositors is inexact, it is
valid to assume that generally local depositors fall into that category
and non-local depositors do not. The OTS believes that providing for a
LDP provision will assist in achieving the goals of (1) recognizing
those depositors who have maintained long-term banking relationships
with the converting institution and thereby contributed to its
financial success, and who are likely to continue to do so in the
future,14 and (2) promoting ownership by persons who have close
ties to the community. Thus, in the OTS's view, the rule does not
violate federal or state policies against discrimination.
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\1\4OTS cannot, in a regulation, identify with exactitude every
single instance in which a depositor has maintained a long-term
banking relationship with a converting institution and thereby
contributed to its financial success. However, it is both rational
and convenient, for reasons discussed elsewhere in this preamble, to
identify this group as the local depositors. Moreover, as discussed
more fully below, the OTS has provided a mechanism to enable
converting institutions, in applying the LDP, to take account of
unique and compelling circumstances posed by persons who are not
local depositors.
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The OTS also believes that the constitutional arguments raised by
certain commenters are without merit. As has been recognized by a
number of courts, the property rights of mutual account holders are
extremely limited.15 In the OTS conversion regulations, the
limited rights that depositors have to share pro rata in the surplus of
a liquidated mutual savings association is recognized by the
establishment of a liquidation account in the converted association. No
distinction is made between local and non-local depositors in the
establishment of these accounts and nothing in the interim rule or this
final rule would diminish a depositor's interest in his or her
liquidation account. Similarly, the OTS does not believe that
authorizing the LDP provision violates the Equal Protection Clause of
the Constitution. Although the LDP provision does make a distinction
between depositors, the OTS believes, for the reasons discussed above,
that there is a rational basis for authorizing an institution to make
the distinction and that the provision reasonably relates to legitimate
policy objectives.
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\1\5See, e.g., Paulsen v. C.I.R., 469 U.S. 131 (1985); Ordower
v. Bell Fed. Sav. & Loan Ass'n, 999 F.2d 1183 (7th Cir. 1993); York
v. Federal Home Loan Bank Board, 624 F.2d 495 (4th Cir.), cert.
denied, 449 U.S. 1043 (1980); Lovell v. The One Bancorp, 614 A.2d 56
(Me. 1992).
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The OTS instituted the LDP rule in the interim final rule to
promote local community ownership of converting institutions, and to
reward a group that, collectively, typically has made significant
contributions to the financial success of the institution. The LDP rule
sought to provide the opportunity for local depositors to participate
more fully in the subscription offering without competition from large
purchases by out-of-area depositors. The OTS has become aware in recent
years of the evolution of a class of depositors, sometimes referred to
as ``professional depositors'' or ``flippers,'' who have opened
accounts in a large number of mutual associations.16 These
``professional depositors,'' who often reside outside the local
community of the mutual savings association, make deposits in
anticipation of the mutual savings association converting to stock
form. Often, these depositors subscribe for a significant number of
shares in the subscription offering phase with the intent of selling
all or a significant number of the shares in a short period of time
following the conversion to take advantage of a lucrative after-market.
Once a conversion is complete, these depositors often withdraw their
deposits and have no further relationship with the converted savings
association.
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\1\6See, e.g., Peter Lynch, Beating the Street (1993), p. 220.
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As discussed below, OTS continues to believe that local depositors
should be given preference over out-of-area depositors in purchasing
stock of a converting mutual savings association. Upon further
consideration of the issues presented in this area and review of the
comment letters, however, OTS has determined in the final rule to
authorize, but not require, a savings association to give a conversion
stock purchase preference to account holders residing in the local
community.
The OTS has taken this position, i.e., making the LDP provision
optional, for a number of reasons. First, the OTS does not oppose the
full participation of those other than local depositors in the
conversion process. The nationwide interest in thrift stock has enabled
many thrifts to recapitalize, thereby preventing thrift failures and a
burden on the taxpayers. In addition, the OTS notes that the conversion
eligibility record date, the primary determinant for prioritized
eligibility to purchase conversion stock, has always been keyed to the
length of time a depositor has had an account with a converting
institution, not to geographic location. Also, as noted below, many
mutual associations have exercised their authority to accept deposit
accounts only from persons residing in the association's local
community.
In light of the foregoing, and in response to the comments noted
above, the OTS believes that the LDP provision need not be a
requirement of conversion; rather it should be at the option of each
converting savings association which will decide whether its particular
situation warrants its use. A savings association may conclude that an
LDP for stock purchases is important to ensure ownership by local
depositors who made significant long-term contributions to the
financial success of the institution by virtue of their deposit and
borrowing relationships, and who, it expects, will continue to maintain
financial relationships with the institution after the conversion. The
final rule includes the LDP provision as an optional provision in the
subscription phase of the conversion.
To assist converting institutions who elect to include the LDP
provision, the final rule continues to provide a definition of the
``local community.'' In response to comments, however, the final rule
substantially revises the definition. First, the 100-mile standard is
eliminated. In addition, the definition of local community has been
revised to delete the reference to the ``standard metropolitan
statistical area'' and the ``general metropolitan area.'' Finally, the
definition also has been revised to include ``metropolitan statistical
area'' (which replaced the SMSA), all zip code areas corresponding to
the converting institution's delineated CRA service area, and such
other area(s) or category as designated by the institution and provided
for in the plan of conversion.\17\ In this regard, the OTS will review,
on a case by case basis, the proposals by converting associations to
define local community other than as defined in the final rule.
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\17\For example, a number of commenters suggested other
categories of depositors, such as retirees, who may be equivalent to
local depositors in terms of their long-term relationship with the
institution.
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OTS also specifically solicited comments as to whether a savings
association, in anticipation of conversion, should be permitted to: (1)
refuse to open accounts for potential depositors residing outside the
local community, or (2) close accounts of depositors residing outside
the local community.
Of 18 commenters addressing this issue, 13 stated that a savings
association should be able to refuse to open accounts for non-local
depositors, with three of the 13 requesting that OTS confirm the
association's right to refuse to accept deposits. Five commenters
believed that associations should not be allowed to refuse to open
accounts, with two of the five stating that OTS should prohibit
associations from refusing to open or maintain accounts of non-local
depositors.
Of 18 commenters, 10 stated that savings associations should be
allowed to close accounts of non-local depositors, with one commenter
stating that an account should be required to be closed at least 6
months prior to the adoption of a plan of conversion. Two of the 10
stated that OTS should confirm an association's right, as a general
matter, to close accounts of, and return monies to, depositors who do
not reside in the community served by the association. Eight commenters
opposed the closing of accounts in contemplation of conversion, with
one stating that the closing would violate fundamental fairness and
deprive valid property rights without due process.
In the interim final rule, the OTS noted that federal associations
generally have the authority to open and maintain savings accounts
within their discretion.\18\ State chartered savings associations are
subject to state laws governing the opening and closing of deposit
accounts. Based upon its review of the comments, the OTS has determined
not to make any changes to the conversion rules in this area. It is the
opinion of the OTS that federal associations have the authority to open
and close deposit accounts, including those accounts of non-local
depositors, provided they do not violate applicable laws that prohibit
discrimination on the basis of age, race, sex, ethnic background,
religion or any other impermissible category.
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\18\See 12 U.S.C. 1464(b) and 12 CFR 545.11(b); see also
Appendix to 12 CFR Part 544 (model bylaws for federal associations
provide that the board of directors has the explicit power to reject
any application for a savings account).
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The OTS, however, would not consider it to be a legitimate exercise
of that authority if a savings association, in anticipation of
conversion, closed an account for the purpose of preventing a depositor
from participating in a conversion as an account holder. The OTS
believes that this could result in the perception that insiders were
acting out of self-interest and not in the interests of the savings
association.
F. Revision to Policy Regarding Management Stock Benefit Plans
In the interim final rule, the OTS substantially revised and
codified its policies regarding the establishment of management
recognition plans (MRPs) and stock option plans (SOPs) during the
conversion process. The new provisions require that any decision to
implement MRPs and SOPs after conversion be voted on and approved by a
majority of the shareholders no earlier than the first annual meeting
following the conversion, and that prior to implementation, all such
plans be reviewed and approved by the Regional Director. The provisions
also prohibit the use of conversion stock to fund MRPs, require that
MRPs be awarded and stock options be granted only after shareholder
approval is received and require that stock options be granted at the
market price at which the stock is trading at the time of grant. The
regulation also codifies the OTS's policies regarding permissible
amounts that may be included in SOPs and MRPs formed within one year of
conversion.
Approximately 17 commenters recommended allowance of a reasonable
amount of stock benefits at the time of conversion, rather than a flat
prohibition. A majority of the 17 commenters stated that the level of
stock benefit plans should be tailored to the size, health and
performance of the association, the business plan objectives and needs,
the size of the offering, and the specific contribution and tenure of
management. One commenter suggested 1% for MRPs and 5% for stock
options, subject to the normal five-year vesting period. Another
commenter suggested allowing a small MRP amount at the time of
conversion with the remainder reserved for future performance-based
awards and a SOP that is structured so that the exercise price is based
on an averaging formula or an indexed price.
Four commenters supported the prohibition of stock benefit plans at
conversion.
Of eight commenters addressing the issue, six supported the
requirement for shareholder approval of management plans. One of the
six supported the delaying of implementation until approval is received
and two commenters stated that shares should be allocated at the time
of conversion but contingent on shareholder approval. One commenter
requested a revision in the wording of the regulation to clarify that
plans must be approved by an affirmative vote of the holders of a
majority of the securities of the issuer present, or represented and
entitled to vote, at the meeting.
Of ten commenters addressing the issue, two supported the provision
that shareholder approval be at the first annual meeting, and eight
requested that the timing aspect be revised to allow approval at any
duly called meeting of shareholders, either annual or special. One
commenter suggested that the regulation require that a meeting be at
least two months after completion of the conversion. One commenter
expressed concern for differences in flexibility with annual meeting
dates for state holding companies and federal savings associations. One
of the eight commenters stated that by waiting for the first annual
meeting, awards are expensed based upon the fair market value of common
stock on the date of the meeting which increases the financial
accounting expenses for the institution. This same commenter also noted
that the date the MRPs are implemented is inconsequential to officers
and directors, because the financial benefit of the MRPs is in the full
value of the shares, not in their appreciation as in stock options.
Three commenters stated that associations should be given
flexibility to obtain a reasonable and appropriate number of shares to
fund stock plans through open market purchases or through authorized
but unissued shares. Another commenter requested that the regional
office review and act upon stock plans at the time of conversion, that
no conditional approval be allowed, and that plans not acted upon
within a certain time be deemed approved automatically.
Consistent with the discussion in the preamble to the interim final
rule, the OTS believes that while there are valid business reasons for
thrifts to adopt stock benefit plans in order to attract and retain
qualified management, these plans are now more appropriately
implemented subsequent to the conversion and with shareholder approval.
A waiting period allows shareholders to decide whether to permit
dilution of their interests after reviewing management's performance.
Moreover, the stock price stabilizes once the marketplace has
sufficiently digested the financial data of the association.
The interim final rule required that stock options be granted at
the market price at which the stock is trading at the time of grant.
The OTS has revised the interim final rule so as to require that stock
options be granted at no less than the market price at which the stock
is trading at the time of grant. This revision is consistent with the
current practices and rules relating to the granting of stock options.
The shareholder vote required by the final rule will be uniform for
both savings associations and holding companies, i.e., the affirmative
votes of the holders of a majority of the total votes eligible to be
cast at a legal meeting.\19\
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\19\This voting requirement coincides with the voting
requirement of Section 5 of 12 CFR 552.3, the Federal Stock Charter
provision. As noted, it will apply to savings and loan holding
companies formed in the conversion process that implement management
stock benefit plans within one year following conversion.
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Shareholder approval is required prior to implementation of MRPs or
stock option plans within the first year of conversion. In response to
the comments and mindful that a uniform meeting time may be justifiable
for the reasons cited by the commenters, the timing aspect in the
interim final rule is being revised to allow approval at any duly
called meeting of shareholders, either annual or special, to be held no
earlier than six months after completion of the conversion. The OTS
believes a six-month ``cooling off'' period will give the marketplace
sufficient time to digest the financial data and the shareholders
sufficient time to become familiar with the finances and operations of
the converted association in order to make an informed investment
decision in considering whether to vote to adopt such plans.
The interim final rule did not specify the vesting schedule of the
management stock benefit and stock option plans. As a matter of policy
under both the conversion regulations and the safety and soundness
authority governing management compensation, the OTS has generally
required such plans to vest beginning one year from the date the plans
are approved by shareholders, and at a rate not in excess of 20% a
year. A provision has been added to the final rule codifying these
policies. Also, in furtherance of the foregoing policy, an additional
provision in the final rule generally prohibits accelerated vesting
except in the case of disability or death.
The OTS agrees with the commenters that savings associations should
be given flexibility to obtain a reasonable and appropriate number of
shares to fund stock plans through open market purchases or through
authorized but unissued shares. In funding these plans, the board of
directors and the compensation committees are reminded of their
fiduciary duties to the association or holding company, its
shareholders and the association's members.
Finally, the interim final rule required that management and stock
option plans be subject to approval of the appropriate OTS Regional
Director prior to plan implementation. The final rule removes the
requirement for OTS Regional Director approval in advance of a
stockholder vote and implementation. The final rule provides that
management stock benefit plans and stock option plans comply with all
of the regulatory requirements. Disclosure in all proxy and related
material distributed to the shareholders shall indicate that the plans
in no way have been approved or endorsed by the OTS, and no written or
oral representation to the contrary shall be made by the association,
its management, employees or professional advisors. The final rule also
adds the requirement that subsequent to shareholder approval of the
plans, the association will be required to file with the OTS a copy of
the plans approved by shareholders and written certification that the
plans approved by shareholders are the same plans submitted to the OTS
in the proxy materials.
G. Merger Conversions
In the interim final rule, the OTS amended its conversion
regulations to limit merger conversions to institutions that qualify
for a supervisory conversion, i.e., financially-weak institutions. OTS
also solicited comment as to whether merger conversions involving
healthy savings associations should be permitted in the future, and if
so, under what circumstances. The OTS was particularly interested in
how merger conversions should be structured to avoid the safety and
soundness concerns raised by such transactions that were discussed in
the preamble to the interim final rule.
Of approximately 43 commenters addressing merger conversions,
approximately 33 expressed the view that merger conversions should be
permitted for healthy thrifts. Of these 33 commenters, 13 proposed a
small savings association exception, with ``small'' being defined as
anywhere from $5 million to $300 million in assets. The bases for the
exception were the cost of doing two transactions (a standard mutual-
to-stock conversion followed by a merger transaction) in order to
accomplish a merger; the business reasons (access to capital markets,
choice of partner, long-term survival, technological advancement,
access to a strong management team and enhancement of service to
communities); and the economic necessity for market-driven
consolidations to occur.
Those commenters who favored authorization of merger conversions
involving healthy thrifts believed that the OTS should regulate and
supervise these transactions and address concerns over insider abuse,
excessive management compensation and stock incentive packages. They
argued that OTS could set narrow approval guidelines but should not ban
or eliminate merger conversions. One commenter stated that merger
conversions should be allowed on a case-by-case basis taking into
account the size and strategic needs of the institution. Another
commenter stated that OTS should allow submission on a test case basis
so as to develop a structure that would address the issues.
A few commenters thought that depositors should be able to vote on
whether a stand-alone or merger conversion would be in the best
interest of the association. Several commenters stated that the board
of directors should decide whether to undertake a merger conversion
based on their business judgment. Two commenters thought that for a
merger conversion to be approved, an institution would have to document
specific business, economic and fiscal reasons and be required to
demonstrate that the transaction would provide opportunities for
customers and depositors to participate in the institution's value.
Another commenter stated that the prohibition punishes forward-thinking
thrift managers and further endangers the health of the industry by
closing off avenues for generating capital.
Another commenter stated that the institution should be free to
negotiate the terms of a merger conversion, including reasonable
compensation arrangements and purchase discount percentages.
Some suggestions regarding the windfall gains and other problems
and the valuation issue included: allow subscribers to subscribe to the
stock of the acquiring association at a 15% to 20% discount, based on
the stock price either at the time of acquisition or at the time the
transaction is announced; require the acquiring entity to pay a control
premium; assure that value is made available to appropriate
constituencies through community foundations, special interest payments
on deposits, and/or a special class of preferred stock made available
to depositors without cost; make bonus interest payments equal to a
certain percentage of principal on all eligible account holder deposits
maintained at resulting institution for a specific time period after
the acquisition is consummated\20\; require the acquiror to hold the
thrift as a separate subsidiary or be an OTS-regulated institution
itself; require all net conversion proceeds to go to the association;
allow compensation only to the extent allowed in stand alone
conversions; or require a CRA rating of outstanding or satisfactory.
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\20\The OTS notes that a fundamental premise of the conversion
regulations prohibits free distribution schemes in connection with a
conversion. See 39 FR 9142 (March 7, 1974).
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One commenter recommended using a two-step approach, allowing the
mutual to enter into a definitive merger conversion agreement prior to
doing a stand-alone conversion, disclosing the intended transaction in
the stand-alone conversion, and then requiring a 90-day period between
completion of the stand-alone conversion and consummation of the
merger.
Of the approximately ten commenters that supported the prohibition
against merger conversions, two did so only until guidelines can be
drawn to protect the rights of members of the disappearing association
and to prevent insider abuse. One of the ten stated that merger
conversions should be prohibited except in cases of undercapitalized
institutions or at the discretion of the regulators on a case by case
basis. A fourth supporter noted that what is beneficial to the board of
directors and insiders may not always be in the best interest of the
institution or the community it serves. A fifth supporter stated that
depositors are best served by forcing acquiring entities to bid for a
converted institution's stock in the open market. A sixth commenter
supported the prohibition because of the windfall and valuation
problems.
Upon review of the comments, the OTS has determined to continue to
generally limit merger conversions to cases involving financially weak
institutions. Although several commenters made suggestions that
attempted to address the concerns raised in the interim final rule,
including the valuation problem and accrual of ``windfall gains'' by
the acquiror, the OTS remains concerned with the problems raised by
merger conversions of healthy institutions.
In line with the commenter who suggested that the OTS allow test
case submissions in order to develop a structure that would address the
issues, the OTS emphasizes that it retains its general waiver authority
under part 563b to permit a merger conversion transaction under
appropriate circumstances.21 An institution seeking a waiver of
the merger conversion limitation will bear the burden of demonstrating
how a proposed transaction specifically addresses the concerns set
forth above and in the interim final rule, and will also be required to
document specific business, economic and corporate reasons for a merger
conversion. As discussed in the interim final rule, however, the OTS
has identified a number of significant structural abuses and regulatory
problems inherent in merger conversions.22 Thus, while the OTS
continues to remain open to the development of a transaction structure
that addresses these problems, a healthy institution faces significant
hurdles in demonstrating its transaction will resolve these problems.
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\2\1One situation suggested by some commenters and to which the
OTS would give serious consideration is where a converting
association could demonstrate by clear and convincing evidence that
a standard conversion would not be economically feasible, based on
the ratio of expenses to gross proceeds, because of the asset size
of an institution. Very small institutions, i.e. those with assets
under $25 million are more likely to be able to establish such a
justification.
\2\2See 59 FR 22725, 22729 (May 3, 1994); see also testimony of
a House Financial Institutions Subcommittee Hearing on Mutual-to-
Stock Conversions dated January 26, 1994.
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In the interim final rule, the OTS stated that merger conversions
could be done as a two-step process in which the mutual account holders
are initially granted an opportunity to purchase stock of a converting
savings association or its holding company and then following the
conversion, vote to merge with or be acquired by another institution,
subject to certain limitations. One of the limitations is 12 CFR
563b.3(i)(2), under which no person is permitted to make an offer for
any security of a converting savings association issued in connection
with the conversion. The other limitation is 12 CFR 563b.3(i)(3), under
which no person is permitted for a period of three years following the
conversion, to make an offer to acquire or acquire more than 10% of any
class of equity security of a converted savings association without the
prior written approval of the OTS.23
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\2\3Clearly, with respect to the latter limitation, the
opportunity is present for converted institutions contemplating a
merger to seek approval from the OTS to undertake such a transaction
even within the first year following conversion.
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In addition, the OTS has generally imposed a condition in
connection with approval of a conversion transaction that prohibits,
without prior OTS approval, the converting association or its holding
company from taking any action within the first year following
conversion that could lead to a transaction that would require
stockholder approval if such transaction were subject to 12 CFR 552.13.
These provisions are intended to preserve the integrity of the
independent appraisal process, deter manipulation of the conversion
process by insiders or other sophisticated third parties to the
detriment of the account holders, and permit the OTS to monitor post-
conversion acquisition activities of recently converted associations.
By this regulatory oversight of merger and acquisition activities
following the conversion, a converting institution is provided with a
reasonable period of time to implement its post-conversion business
plan and to invest the conversion proceeds. With respect to the
appraisal issue, the pro forma valuation of converting institutions
assumes that no acquisition of the converting association will take
place for a reasonable period of time following the conversion. If
there are ongoing discussions about a takeover of a converting thrift
during the conversion process, the ability of an appraiser to prepare
an appraisal that satisfies the requirements of 12 CFR 563b.7 is
severely diminished because of the uncertainty that such takeover
speculation would generate.
H. Extension of the Conversion Public Comment Period
OTS revised the conversion regulations to conform the public
comment period with the longer twenty calendar day public comment
period provided under the acquisition of control regulations.24
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\2\412 CFR 574.6(e).
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Eight of ten commenters endorsed the new requirement, with one of
the eight suggesting that OTS include a requirement for wider
distribution, in a timely manner, of the conversion notices
contemporaneously with the filing of the conversion application. One of
the eight noted that too long a comment period may cause significant
delays and related inappropriate costs to the converting associations.
One commenter stated that the ten day comment period provided ample
time for any person desiring to comment on an application, and if the
20-day period is used, suggested that an association be permitted to
publish the 4(b) notice immediately upon filing the application with
OTS, without waiting for OTS authorization. Another commenter stated
that the revision served no useful purpose, but if kept, also suggested
that the 4(b) notice should be able to be given immediately after the
filing to ensure no delay due to the longer public comment period.
The OTS continues to believe that the longer public comment period
will give sufficient time for interested parties to review and comment
on a detailed conversion application. In order to accommodate the
concern noted by some commenters, the final rule requires that the 4(b)
notice be given immediately after the filing of the application with
the OTS. However, the final rule also clarifies that if a conversion
application is later deemed not properly executed or is materially
deficient or substantially incomplete, the applicant may be required to
refile the application, republish the accompanying 4(b) notice, and
provide for another 20-day public comment period.
I. Submission of Business Plans for All Conversion Transactions
OTS now requires that all conversion transactions, with or without
holding company formations, include a business plan, and that the
business plan address in detail how the capital acquired in the
conversion will be utilized.
All commenters addressing this issue affirmatively supported the
provision. Two wanted assurance of confidentiality of the business plan
to protect associations from unfair competition. One of the commenters
stated that the business plans should not be used to deny a conversion
application, unless the plan raises significant safety and soundness
concerns, and two urged OTS not to put itself in the position of
deciding how much capital a business may need in future years, nor to
require a converting institution to justify the need for capital in
order to be able to convert.
The interim final rule will continue in effect without change. As
noted in the preamble to the interim final rule, in order to ensure
that a business plan is given confidential treatment, the applicant
should follow the procedures set forth at 12 CFR 563b.4(c).
Applicants for conversions must submit their business plans to the
Regional Director prior to the filing of the conversion application.
OTS may deny a conversion application where the business plan does not
sufficiently address the deployment of conversion proceeds, raises
significant safety and soundness concerns, or does not otherwise
address convenience and needs standards as required in the final
regulation.
J. Revision to Post-Conversion Stock Repurchase Rules
In its interim final rule, the OTS revised the conversion
regulations to prohibit stock repurchases by the converting association
for one year following conversion. After one year, a converted
association may file with the appropriate Regional Director an open
market repurchase program in which it may propose stock repurchases of
no more than 5% of the outstanding capital stock during any twelve
month period in the second and third years after the conversion. The
Regional Director also may disapprove repurchases if the association
does not demonstrate a valid business purpose for the stock repurchase;
and also may approve amounts greater than 5% in the second and third
years if there are circumstances that would justify such repurchases.
A majority of the commenters addressing this issue disagreed with
the revisions, six commenters proposed alternative revisions, and one
commenter supported the prohibition of stock repurchases for one year
following conversion. The majority felt the blanket prohibition was not
sound public policy, was not justified or necessary, was detrimental to
thrift stock prices, and reduced the ability of thrifts to compete in
capital markets. Most stated that the repurchase of stock is standard
corporate practice that should be left to the decision of the board of
directors (consistent with fiduciary responsibilities), subject to
safety and soundness concerns. Most also felt that thrifts need to
retain flexibility in using repurchase programs because markets are
fluid and subject to change due to various forces. Most viewed the
prohibition on stock repurchases as taking away the institution's and
the OTS's ability to follow market dictates and react to stock price
fluctuations and other market conditions. A few commenters stated that
by limiting repurchases, the regulation may cause institutions to use
excess capital unwisely, to engage in unsound and risky ventures in an
attempt to provide better returns for shareholders, and could
unintentionally increase pressure on thrift management to produce
better returns on equity by taking greater risks in daily operations. A
few commenters found no valid justification for distinguishing newly
converted thrifts and stated that, in deciding whether a repurchase is
for valid business reasons, the OTS should look at whether the
association has excess capital, whether the stock is trading below book
value, and whether the repurchase is an attractive investment given the
association's business prospects.
One commenter requested that the rule specify in greater detail the
circumstances that would warrant repurchase amounts greater than the 5%
repurchase limit in the second and third years following conversion.
Another commenter requested that the rule require all regions to be
uniform in permitting repurchases greater than 5% during that time.
Eight commenters stated that recently converted thrifts should be
allowed to operate under the regulations in place at the time they
converted, and that the OTS should grandfather all associations that
converted prior to the effective date of the interim final rule.
While the OTS continues to believe that stock repurchase programs
may serve valid business purposes, e.g., maintaining the value of a
converting association's stock in an active trading market, the OTS
also continues to have concerns with substantial buyback programs that
commence immediately after conversion and are not based on a valid
business purpose. In addition, and as noted in the preamble to the
interim final rule, repurchases commenced immediately after conversion
raise substantial issues regarding whether conversion stock has been
appropriately valued.
To address these concerns, but also to allow for some flexibility
for repurchase programs, the final rule continues to discourage stock
repurchases for one year after conversion, but gives the OTS discretion
to allow limited stock repurchases in the first year where exceptional
circumstances are established.25 This would give the OTS the
ability to permit repurchases where it may be in the best interests of
the association and its shareholders; however, such repurchases will be
allowed in the first year only when deemed necessary by the OTS.
---------------------------------------------------------------------------
\2\5We note, for example, that typically public companies may
repurchase stock in the open market where there is a prolonged
period of a downward trend in the stock price.
---------------------------------------------------------------------------
The interim final rule stated that repurchases within two years
after the conversion must be part of an open-market stock repurchase
program that does not allow for a repurchase of more than 5% of the
association's outstanding capital stock during a twelve month period.
The final rule has been revised to clarify that repurchases in years
two and three after conversion must be part of an open-market stock
repurchase program and generally will be limited to no more than 5% of
the association's outstanding capital stock. However, the final rule
allows the OTS to approve repurchase programs in amounts greater than
5% in the second and third years, if exceptional circumstances are
established. As stated above, this would give the OTS the ability to
permit additional repurchases where it may be in the best interests of
the association and its shareholders; however, such repurchases will be
allowed only when deemed necessary by the OTS.
The OTS continues to believe that ensuring an equitable conversion
process and consistency in that process require that the final rule
apply to all associations that converted in the three years preceding
the May 3, 1994 effective date of the interim final rule. Any previous
repurchases that occurred prior to May 3, 1994 will be grandfathered,
however, grandfathered repurchases will count toward compliance with
the current requirements.
K. Convenience and Needs Considerations
The proposed rule would add a new ``convenience and needs''
standard to existing approval standards applicable to conversions and
MHC stock offerings. Under the proposal, the OTS would review the
applicant's performance under the CRA,26 the contents of the
business plan submitted in support of the application, and other
factors relating to the applicant's performance in meeting the
convenience and needs of its delineated community.
---------------------------------------------------------------------------
\2\6The OTS recently reproposed revisions to its regulations
implementing the CRA. See 59 FR 51232 (October 7, 1994).
---------------------------------------------------------------------------
Three commenters favored adoption of the new standard and nine
opposed the new standard. Favorable comments expressed the view that
the proposal would serve a valid public purpose and adequately respond
to community and Congressional concerns regarding allocation of
conversion proceeds. Comments opposed to the proposal focused primarily
on the OTS' authority to adopt the proposal and on questions relating
to implementation, such as whether the proposal is necessary or
appropriate given existing laws and regulations; whether the OTS will
consider CRA-related protests during application processing; and
whether the OTS would mandate allocation of transaction proceeds to
specific community credit or lending programs.
1. OTS Authority to Adopt the Proposal
As noted in the preamble to the convenience and needs proposal, a
convenience and needs standard has not, to date, been applied to
mutual-to-stock conversions of savings associations. Similarly, a
convenience and needs standard generally has not been applied to MHC
stock offerings.27 Upon review of this area, however, the OTS
proposed amendments to its regulations to impose a convenience and
needs standard on these transactions. The proposal was issued, among
other reasons, to enhance the OTS' ability to ensure that savings
associations undertaking these transactions recognize their
responsibility to consider their community's credit needs.
---------------------------------------------------------------------------
\2\7A convenience and needs standard has been applied to mutual
holding company reorganizations because these transactions require
the OTS' approval under the Bank Merger Act (BMA). See 58 FR 44105
(August 19, 1993) (adopting part 575 governing mutual holding
company reorganizations and related stock issuances). The BMA
requires that the responsible agency consider the convenience and
needs of the community to be served in acting on any BMA
application. See 12 U.S.C. 1828(c)(5).
---------------------------------------------------------------------------
In the notice of the proposed amendments, the OTS explained its
authority to adopt and implement the proposal.28 Some commenters
argued that the proposal goes beyond OTS authority under the Home
Owners' Loan Act (HOLA)29 and the CRA. These commenters stated
that the CRA limits the types of applications that may be subject to
review under the CRA; that Congress intended the CRA to cover only
those transactions resulting in new charters or expanded facilities,
not conversions and MHC stock offerings. On this point, these
commenters asserted that a convenience and needs standard is not
appropriate in conversions because conversions are fundamentally a
capital-raising technique, not an expansion of operations. One
commenter believed that section 5(c) is the only provision of the
HOLA30 that enumerates thrift powers and authorities, and that no
affirmative housing credit obligation exists in section 5(c) that would
permit the OTS to direct the allocation of conversion proceeds to
community lending programs.
---------------------------------------------------------------------------
\2\8See 59 FR 22764, 22765 (May 3, 1994).
\2\912 U.S.C. 1461.
\3\012 U.S.C. 1464(c).
---------------------------------------------------------------------------
The OTS has concluded that it has ample statutory authority for the
amendments. As noted in the proposal, the OTS has broad authority under
sections 5(i)(1) and 5(i)(2) of the HOLA to regulate mutual-to-stock
conversions, and under section 10(o)(7) of the HOLA to regulate mutual
holding companies.31 Inherent in this broad grant of authority is
the ability to assess the impact of a proposed transaction on the
convenience and needs of the communities to be served by a savings
association.
---------------------------------------------------------------------------
\3\112 U.S.C. 1464(i)(1), 1464(i)(2) and 1467a(o)(7). See also
Charter Federal S.&L. Ass'n. v. Office of Thrift Supervision, 912
F.2d 1569 (11th Cir. 1990).
---------------------------------------------------------------------------
In addition, section 4(a)(3) of the HOLA provides that the Director
``shall exercise all powers granted to the Director under this chapter
so as to encourage savings associations to provide credit for housing
safely and soundly.''32 For federal associations, in particular,
the OTS is directed to exercise its regulatory powers in order to
provide thrift institutions ``* * * for the extension of credit for
homes and other goods and services.''33 The powers granted to the
Director include the general regulatory authority under sections
5(i)(1), 5(i)(2), and 10(o)(7) of the HOLA mentioned above. The
admonitions in the HOLA that the Director use his or her statutory
powers to encourage savings associations to provide credit provides a
substantial additional basis for the Director to assess community needs
when reviewing applications.
---------------------------------------------------------------------------
\3\212 U.S.C. 1463(a)(3).
\3\3See section 5(a) of the HOLA, 12 U.S.C. 1464(a).
---------------------------------------------------------------------------
Thus, the OTS' authority to address convenience and needs concerns
in the context of applications is not limited to the applications
specifically mentioned in the CRA. While the application review
sections of the CRA arguably focus primarily on transactions that
involve some type of expansion of operations in a geographical market,
e.g., new charters or branch facilities,34 the CRA does not limit
agency authority under other statutes or regulations to consider
convenience and needs factors during the review of applications that do
not necessarily involve an expansion of operations.
---------------------------------------------------------------------------
\3\4See 12 U.S.C. 2902(3), 2903.
---------------------------------------------------------------------------
Finally, the amendments are consistent with section 5(c) of the
HOLA. Section 5(c) of the HOLA generally sets forth permissible
investments and investment limitations for federal savings
associations, but in no way limits the OTS' authority to ensure that
these investment powers are exercised in a manner that is consistent
with the convenience and needs of the community.
2. Appropriateness of a Convenience and Needs Standard
As stated in the proposal, the amendments are intended to enhance
the OTS' ability to ensure that savings associations undertaking
conversions and MHC stock offerings recognize their responsibility to
consider their community's credit needs.
A number of commenters questioned the wisdom of a convenience and
needs standard, suggesting the OTS has sufficient regulations and
policies to implement the CRA and ensure that the convenience and needs
of the community are met by all thrifts.
For the reasons stated above in support of the OTS' authority to
adopt the amendments, the OTS believes it is appropriate to impose a
convenience and needs standard on applications for conversions and MHC
stock offerings. In addition, the OTS believes the amendments will
enhance current regulations and policies designed to ensure that
thrifts meet their community's credit needs.
3. Consideration of CRA-Related Protests During Application Review
The proposal did not address whether the OTS would consider CRA-
related protests during agency review of conversion and MHC stock
offering applications.
Some commenters objected to OTS consideration of CRA protests
during the public comment period. These commenters emphasized that the
timing of a conversion, in particular, is critical to stock pricing and
appraisal considerations. The mere prospect of a delay due to a CRA
protest may unfairly subject an institution to pressure to make
concessions to protestants, according to these commenters. They
suggested limiting public comments on applications subject to the rule
to issues relating to eligibility of purchasers and fairness of the
appraisal.
The OTS realizes that conversions and MHC stock offerings are time-
sensitive transactions and that protests may affect their success.
Nevertheless, the OTS does not believe it is appropriate to preclude
the public from commenting on a savings association's performance in
meeting a community's convenience and needs. Accordingly, the OTS will
consider these types of comments filed as part of a public comment
period on conversion and MHC stock offering applications. The OTS
emphasizes that it will address these comments as promptly as possible.
The CRA protest and oral argument procedures at 12 CFR 543.2 will not
apply, however.35 The OTS believes the public comment period will
provide a full and fair opportunity for interested persons to express
their views regarding an applicant's performance in meeting the
convenience and needs of the community.
---------------------------------------------------------------------------
\3\5As a matter of policy the OTS has applied these procedures
to certain conversion transactions and other applications, although
neither the HOLA nor the CRA require the OTS to follow any specific
procedures.
---------------------------------------------------------------------------
4. Allocation of Transaction Proceeds to Specific Lending Programs or
Services
The preamble to the proposal specifically solicited comment on
whether the proceeds from conversions or MHC stock offerings should be
directed to specific types of activities, and, if so, what portion
should be used for what types of activities.36
---------------------------------------------------------------------------
\3\6See 59 FR 22764, 22766 (May 3, 1994).
---------------------------------------------------------------------------
A few commenters objected to any regulation or policy that would
impose an allocation scheme on transaction proceeds. They argued that
the OTS has no statutory authority for such action; that a regulatory
allocation scheme would place artificial limits on capital planning and
business strategy; and that specific allocations should be within the
discretion of the management of the applicant, consistent with safety
and soundness.
The OTS agrees with many of the comments on this issue. In
proposing the amendments, the OTS did not intend to impose any specific
allocation scheme on proceeds from conversions or MHC stock offerings.
The OTS agrees that the allocation of transaction proceeds is largely a
matter within the discretion of the converting association, consistent
with the safety and soundness of the savings association. Nevertheless,
as suggested in the proposal, the OTS will require applicants to submit
business plans that demonstrate how transaction proceeds will be used
to further the convenience and needs of the community. Business plans
should describe specifically the lending and credit programs to which
transaction proceeds will be directed. OTS policies encourage savings
associations to consider traditional lending programs as well as more
innovative methods to meet the credit needs of the communities they
serve.37
---------------------------------------------------------------------------
\3\7See, e.g., ``Community Development Investment Authority''
(OTS guide to the federal laws and regulations governing community
development activities of savings associations).
---------------------------------------------------------------------------
Where an applicant's business plan does not adequately address how
transaction proceeds will help meet the credit and lending needs of its
community, the OTS may deny the application or impose appropriate
conditions of approval designed to ensure that the applicant will
address these concerns. The OTS generally will not view commitments
included in a savings association's business plan as remedying pre-
existing CRA-related deficiencies. However, commitments may be
appropriate in addressing CRA performance in the context of the
conversion of a troubled savings associations. The OTS intends to give
substantial weight to an applicant's previous CRA record, consistent
with long-standing policy of the OTS.38
---------------------------------------------------------------------------
\3\8See 54 FR 13742 (April 5, 1989) (joint CRA policy statement
of the federal financial supervisory agencies).
---------------------------------------------------------------------------
As stated above, applicants must submit business plans to OTS staff
for their review prior to filing a formal application.
L. Other Issues
1. Subscription Rights
The conversion regulations require that prior to the completion of
a conversion, no person may transfer, or enter into any agreement or
understanding to transfer, the legal or beneficial ownership of
conversion subscription rights, or the underlying securities to the
account of another.39 The OTS did not propose any change to the
prohibition in the OTS conversion regulations on the transfer or sale
of subscription rights or similar ``free distribution'' schemes, but
did request comment on whether subscription rights should continue to
be nontransferable, or if transferability is recommended, the reasons
for, and the manner in which to allow for, such transfer.
---------------------------------------------------------------------------
\3\912 CFR 563b.3(i)(1).
---------------------------------------------------------------------------
Almost all of the commenters who commented on this issue stated
that subscription rights should continue to be nontransferable. The
commenters that opposed transferability asserted that transferability
would place undue pressure on mutuals to convert; would place emphasis
on ownership by depositors, a concept that is theoretical; would make
the conversion process overly complex; would be dangerous to the long-
term health of the industry; would be unworkable and not in the public
interest; would increase the chances of fraud and abuse; would be
difficult and costly in allocation of rights; would enable
sophisticated and professional investors to take advantage of members;
and would create a destabilizing effect on mutuals. One commenter
suggested an alternative that would allow members to cause associations
to redeem rights for a certain period of time, for payment of a special
dividend, provided there is adequate capital.
Three commenters endorsed transferability of subscription rights,
although one of the three stated that account holders should be allowed
to transfer rights to another individual, but not a group of investors
or another institution.
The OTS notes that the FDIC and others have suggested that it may
be appropriate for depositors to be able to receive a gift of cash or
stock or to transfer and sell their subscription rights so that any
``windfall'' value can be distributed directly to the depositors. The
current OTS regulatory regimen specifically rejects any type of free
distribution schemes as unsafe and unsound practice.40 The OTS
continues to believe that this type of change to the current conversion
regulations would raise a number of complex legal and policy issues,
many of which were taken into account previously by the FHLBB in
determining to prohibit transferability.41 These issues, as noted
in the preamble to the interim final rule, include the possibility of
adverse federal tax consequences to depositors receiving such rights,
undue pressure on mutual associations to convert that may evolve from
significant shifts of savings funds by depositors into such
associations, difficulties in equitably allocating such subscription
rights among depositors, potential manipulation of the process by
sophisticated third parties to the detriment of the depositors,
incentives for manipulation by insiders, the continued need for
establishment and maintenance of a liquidation account and
significantly increased conversion costs due to compliance with
securities law requirements for registering subscription rights for
public distribution. For these reasons, the OTS conversion regulations
continue in effect without any change relative to free distribution of
stock or transfer of subscription rights.
---------------------------------------------------------------------------
\4\0See 39 FR 9142 (March 7, 1974).
\4\1See footnote 17 above.
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2. Availability of Conversion Documents
OTS rules now permit the public to have ready access to all
relevant non-confidential materials regarding proposed conversion
transactions.
Of five commenters addressing the issue of whether OTS should
permit access to non-confidential preliminary conversion materials,
three supported the revision allowing access, one opposed, claiming
access to such materials would confuse members whose focus should be on
the accuracy and adequacy of the final information disclosed to the
public, and one stated that the prospectus and plan of conversion, as
approved by the board of directors, provide adequate disclosure.
The OTS continues to believe that even though this information is
preliminary in nature, it may be useful for account holders and the
public to access it earlier in the conversion process, and therefore,
the provision in the interim final rule will continue in effect without
change. As noted above, business plans filed with, or in contemplation
of, a conversion will continue to be treated confidentially so long as
the applicant follows the procedures set forth in 12 CFR 563b.4(c).
3. Conforming Changes to Mutual Holding Company Regulations
The mutual holding company regulations, 12 CFR part 575, generally
incorporate the substantive and procedural standards for conversion
contained in the conversion regulation. To the extent the final rule
addresses conversion standards, those same standards apply to mutual
holding company reorganizations and minority stock issuances. The OTS
is also revising 12 CFR part 575 to make clarifying and conforming
changes to the mutual-to-stock conversion regulations.
III. Summary of Revisions to the Conversion Regulations
For the reasons set forth in the previous section, the following
revisions have been made to the interim final rule. All other
provisions of the interim final rule, and the proposed rule on
convenience and needs, are adopted without change.
--The definition of ``Local Community'' in 12 CFR 563b.2(a)(19) is
revised to include the generally used term ``metropolitan statistical
area,'' all zip code areas corresponding to an association's delineated
CRA service area, and any area(s) or category designated by the savings
association and approved by the OTS.
--12 CFR 563b.3(c)(2)(i), (4)(i), (5)(i), which required the LDP in
the subscription phase of the conversion, are deleted in the final rule
and sections (2) (ii) and (iii), (4) (ii)-(v), and (5) (ii) and (iii)
are redesignated as sections (2) (i) and (ii), (4) (i)-(iv), and (5)
(i) and (ii).
--12 CFR 563b.3(c)(6)(iv) is revised to delete the phrase ``or
within 100 miles of the association's home or branch office(s).''
--12 CFR 563b.3(c)(23) is revised to clarify that eligible account
holders have first priority to purchase conversion stock, tax-qualified
employee stock benefit plans have second priority, supplemental
eligible account holders have third priority, and other voting members
who have subscription rights have fourth priority. Also the final rule
clarifies that if the actual offering exceeds the proposed maximum
offering price, up to ten percent of the total offering of shares may
be sold to the tax-qualified employee stock benefit plans; if the ESOP
is not able to purchase conversion stock, the ESOP or any other tax-
qualified plan may purchase shares in the open market or utilize
authorized by unissued shares only with prior OTS approval; and
disclosure must be made in the conversion application and related
documents as to the effects on the association and subscribers of
shares of either open market purchases or use of authorized but
unissued shares.
--12 CFR 563b.3(d)(12) is redesignated as 12 CFR 563b.3(d)(13) and
a new 12 CFR 563b.3(d)(12) is added to give converting associations the
authority to include a preference for eligible account holders,
supplemental eligible account holders and other voting members residing
in the association's local community.
--12 CFR 563b.3(g)(3)(i)(B) is revised to clarify that repurchases
within year two and year three after conversion must be part of a
repurchase program that does not allow for a repurchase of more than 5%
of the association's outstanding capital stock during a twelve month
period.
--12 CFR 563b.3(g)(3)(i)(D) revises the reference from Corporate
and Securities Division to Business Transactions Division.
--12 CFR 563b.3(g)(3)(ii) is revised to give the OTS discretion to
allow limited stock repurchases during the first three years in amounts
exceeding those specified in (g)(3)(i), where exceptional circumstances
are established.
--12 CFR 563b.3(g)(4) (vii) and (viii) are revised to require the
affirmative vote of the holders of a majority of the total votes
eligible to be cast at a shareholder meeting for the establishment and
implementation of management stock benefit plans and stock option plans
within one year of conversion.
--12 CFR 563b.3(g)(4) (vii) and (viii) also are revised to allow
approval of stock option plans and management stock benefit plans at
any duly called meeting of shareholders, either annual or special, to
be held no earlier than six months after completion of the conversion.
--12 CFR 563b.3(g)(4)(ix) is revised to require stock options to be
granted at not less than the market price at which the stock is trading
at the time of grant.
--12 CFR 563b.3(g)(4)(xi) is revised to require strict compliance
with the terms and provisions of (g)(4).
--12 CFR 563b.3(g)(4)(xii) is added to codify current OTS policy
requiring that management benefit plans and stock option plans shall
vest beginning one year from the date the plans are approved by
shareholders, shall vest at a rate not in excess of 20% a year, and
shall provide for accelerated vesting solely in the case of disability
or death.
--12 CFR 563b.3(g)(4)(xiii) is added to require disclosure in all
proxy and related material distributed to the shareholders, in
connection with the meeting at which the stock option and benefit plans
will be voted, to state that the plans comply with OTS regulations,
have in no way been endorsed or approved by OTS; and no written and
oral representation to the contrary shall be made.
--12 CFR 563b.3(g)(4)(xiv) is added to require that no later than
five calendar days from the date of shareholder approval, an
association shall file with the OTS a copy of the approved plans and
written certification that the plans approved by the shareholders are
the same plans filed with the proxy materials.
--Newly-designated 12 CFR 563b.4(b)(1)(i) is revised so as to
require the publication of notice immediately upon filing of a
conversion application with the OTS.
--12 CFR 563b.4(b)(1)(i) also is revised to clarify that in the
case where an application is not properly executed or is materially
deficient or substantially incomplete, and where a new application is
required to be filed, the applicant may be required to publish new
notice upon filing of the revised application and may be required to
consider written comments for an additional 20-day period.
--12 CFR 563b.7(f)(2) is revised to prohibit appraisers from also
serving as underwriters or selling agents under the same plan of
conversion except where procedures are followed and representations
made to ensure that an appraiser is separate from the underwriter or
selling agent affiliate and the underwriter or selling agent affiliate
does not make recommendations or in any way impact the appraisal; and
to prohibit the appraiser from receiving any fees other than the fees
for services rendered in connection with the appraisal.
--12 CFR 563b.11 is added to the final rule to include a
convenience and needs test to the approval requirements for conversion
transactions.
--12 CFR 575.1 is revised to include a provision giving the OTS the
ability to grant waivers in writing from any requirement of the mutual
holding company regulations for good cause shown.
--12 CFR 575.7(a)(7) is added to include a convenience and needs
test to the approval requirements for stock issuances of savings
association subsidiaries of mutual holding companies.
--12 CFR 575.7(d)(2) is revised to provide that the sale of
minority shares of capital stock of the savings association to be made
under the plan of minority stock issuance, including any sale in a
public offering or direct community marketing, shall be completed as
promptly as possible and within 45 calendar days after the last day of
the subscription period, unless extended by the OTS.
--12 CFR 575.13(a)(4) is revised to clarify the prohibition on the
use of ``running'' proxies and the requirement for the use of a
specifically designated proxy for a mutual holding company
reorganization, mutual-to-stock conversion undertaken either by a
mutual savings association or a mutual holding company, or any other
material transactions.
IV. Paperwork Reduction Act
The reporting requirements contained in this final rule have been
submitted to and approved by the Office of Management and Budget (OMB)
under OMB Control Nos. 1550-0014, 1550-0071 and 1550-0072 in accordance
with the Paperwork Reduction Act of 1980 (44 U.S.C. 3507). Comments on
the collection of information should be sent to the Office of
Management and Budget, Paperwork Reduction Project (1550-0014, 1550-
0071, 1550-0072), Washington, DC 20503 with copies to the Office of
Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.
The reporting requirements in this final rule are found in 12 CFR
563b.100 and 12 CFR Part 575. The information is needed by the OTS to
further strengthen the standards governing the conversion process. The
likely recordkeepers are savings associations.
V. Regulatory Flexibility Act
Pursuant to Section 605(b) of the Regulatory Flexibility Act, it is
certified that this final rule will not have a significant economic
impact on a substantial number of small entities. Accordingly, a final
regulatory flexibility analysis is not required.
VI. Executive Order 12866
The OTS has determined that the final regulation does not
constitute a ``significant regulatory action'' for purposes of E.O.
12866.
List of Subjects
12 CFR Part 563b
Reporting and recordkeeping requirements, Savings associations,
Securities.
12 CFR Part 575
Capital, Holding companies, Reporting and recordkeeping
requirements, Savings associations, Securities.
For the reasons set out in the preamble, the interim rule amending
12 CFR 563b.2, 563.b.3, 563b.4, 563b.5, 563b.7, 563b.8, 563b.10,
563b.100, 563b.101, and 12 CFR 575.7 and 575.13 which was published on
May 3, 1994 at 59 FR 22725 is adopted as final with the following
changes and parts 563b and 575 of subchapter D, chapter V, title 12 of
the code of Federal Regulations are amended as follows:
Subchapter D--Regulations Applicable to All Savings Associations
PART 563b--CONVERSIONS FROM MUTUAL TO STOCK FORM
1. The authority citation for 12 CFR part 563b is revised to read
as follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 2901; 15
U.S.C. 78c, 78l, 78m, 78n, 78w.
2. Section 563b.2 is amended by revising paragraph (a)(19) to read
as follows:
Sec. 563b.2 Definitions.
(a) * * *
(19) Local community. The term local community includes all
counties in which the converting association has its home office or a
branch office, all zip code areas corresponding to the converting
association's delineated Community Reinvestment Act service area, each
county's metropolitan statistical area and/or such other area or
category as delineated by the savings association and provided for in
the plan of conversion, as approved by the OTS.
* * * * *
3. Section 563b.3 is amended by:
a. Removing paragraphs (c)(2)(i), (c)(4)(i) and (c)(5)(i);
b. Redesignating paragraphs (c)(2) (ii) and (iii), (c)(4) (ii)
through (v) and (c)(5) (ii) and (iii) as paragraphs (c)(2) (i) and
(ii), (c)(4) (i) through (iv) and (c)(5) (i) and (ii), respectively,
and by redesignating paragraph (d)(12) as paragraph (d)(13);
c. Revising paragraphs (c)(6)(iv), (c)(23), (g)(3)(i)(B),
(g)(3)(i)(D) introductory text, (g)(3)(ii), (g)(4)(vii), (g)(4)(viii),
(g)(4)(ix), (g)(4)(x), and (g)(4)(xi); and
d. Adding paragraphs (d)(12), (g)(4)(xii), (g)(4)(xiii), and
(g)(4)(xiv).
The revisions and additions read as follows:
Sec. 563b.3 General principles for conversions.
* * * * *
(c) * * *
(6) * * *
(iv) A condition that any direct community offering by the
converting savings association shall give a preference to natural
persons residing in the association's local community.
* * * * *
(23) Provide that eligible account holders with subscription rights
have first priority to purchase conversion stock, tax-qualified
employee stock benefit plans have second priority, supplemental
eligible account holders have third priority, and other voting members
who have subscription rights have fourth priority. If the final
conversion stock valuation range exceeds the maximum conversion stock
offering range, up to ten percent of the total offering of shares may
be sold to the tax-qualified employee stock benefit plans. Furthermore,
if the ESOP is not able to purchase conversion stock, the ESOP or any
other tax-qualified plan may purchase shares in the open market or
utilize authorized but unissued shares only with prior OTS approval;
and disclosure must be made in the conversion stock offering materials
of the potential open market purchases or use of authorized but
unissued shares to fund the ESOP and its effects on the association and
its shareholders.
* * * * *
(d) * * *
(12) That the offering of stock to be sold in the subscription
offering may give a preference to eligible account holders,
supplemental eligible account holders, and other voting members
residing in the association's local community.
* * * * *
(g) * * *
(3) * * *
(i) * * *
(B) Repurchases within year two and year three after conversion are
part of an open-market stock repurchase program that does not allow for
a repurchase of more than 5% of the association's outstanding capital
stock during a twelve month period;
* * * * *
(D) The association provides to the Regional Director, with a copy
to the Chief Counsel's Office, Business Transactions Division, no later
than ten days prior to the commencement of a repurchase program,
written notice containing a full description of the repurchase program
to be undertaken, the effect of such repurchases on its regulatory
capital position, and a valid business purpose for the repurchase; and
the Regional Director does not disapprove the repurchase program based
upon a determination that:
* * * * *
(ii) During the first three years following conversion, the OTS, in
accordance with the standards contained in this paragraph, may permit
stock repurchases in excess of the amounts specified in paragraph
(g)(3)(i) of this section, where exceptional circumstances are
established.
(4) * * *
(vii) All such plans, prior to establishment and implementation,
are approved by the holders of a majority of the total votes eligible
to be cast at any duly called meeting of shareholders of the
association or its holding company, either annual or special, to be
held not earlier than six months after completion of the conversion;
(viii) In the case of a savings association subsidiary of a mutual
holding company, all such plans, prior to establishment and
implementation, are approved by the holders (other than its parent
mutual holding company) of a majority of the total votes eligible to be
cast, at any duly called meeting of shareholders, either annual or
special, to be held no earlier than six months after completion of the
conversion;
(ix) For stock option plans, stock options are granted at no less
than the market price at which the stock is trading at the time of
grant;
(x) For management or employee stock benefit plans, no conversion
stock is used to fund the plans;
(xi) The plans subject to this section must comply with the terms
and amounts specified in paragraph (g)(4) of this section;
(xii) The plans subject to this section shall begin vesting no
earlier than one year from the date the plans are approved by
shareholders, shall not vest at a rate in excess of 20% a year, and
shall not provide for accelerated vesting except in the case of
disability or death;
(xiii) Disclosure in all proxy and related material distributed to
shareholders in connection with the meeting at which the stock option
plans and management stock benefit plans will be voted shall state that
the plans comply with OTS regulations, that the OTS in no way endorses
or approves the plans; and no written or oral representation to the
contrary shall be made; and
(xiv) No later than five calendar days from the date of shareholder
approval of any stock option or management benefit plans, the
institution shall file with the OTS a copy of the approved plans and
written certification that the plans approved by the shareholders are
the same plans filed with and disclosed in the proxy materials.
* * * * *
4. Section 563b.4 is amended by designating the text of paragraph
(b)(1) preceding the notice of filing as paragraph (b)(1)(i) and
revising it, and designating the concluding text of paragraph (b)(1)
following the notice of filing as paragraph (b)(1)(ii) to read as
follows:
Sec. 563b.4 Notice of filing; public statements; confidentiality.
* * * * *
(b) Notice of filing. (1)(i) Immediately upon filing an application
for conversion with the Office, the applicant shall publish a notice of
the filing. If an application for conversion is not properly executed
or is materially deficient or substantially incomplete, the Office may
require a new application to be filed, publication of a new notice and
an additional 20-day comment period. The applicant shall prominently
post the notice in each of its offices and publish the notice in at
least one newspaper printed in the English language and having a
substantial general circulation in each community in which an office of
the applicant is located, as follows:
* * * * *
5. Section 563b.7 is amended by removing the last sentence of
paragraph (f)(2) and adding two new sentences in its place to read as
follows:
Sec. 563b.7 Pricing and sale of securities.
* * * * *
(f) * * *
(2) * * * No appraiser shall serve as an underwriter or selling
agent under the same plan of conversion. No affiliate of an appraiser
may act as an underwriter or selling agent unless procedures are
followed and representations made to ensure that an appraiser is
separate from the underwriter or selling agent affiliate and the
underwriter or selling agent affiliate does not make recommendations or
in any way impact the appraisal. No appraiser shall receive any other
fee except for the fee for services rendered in connection with such
appraisal.
* * * * *
6. Section 563b.11 is added to subpart A of part 563b to read as
follows:
Sec. 563b.11 Convenience and needs considerations.
In reviewing an application under this subpart, the Office will
examine the extent to which the conversion will affect the convenience
and needs of the communities to be served by the converted savings
association. The Office will review the applicant's record under part
563e of this subchapter. In addition, the Office will scrutinize the
business plan of the applicant. Each applicant must demonstrate that
the proposed deployment of proceeds contained in its business plan will
help meet the credit and lending needs of the communities served by the
applicant. Also, the Office will consider other relevant factors
relating to the association's performance in meeting the convenience
and needs of the community. Based on an assessment of the applicant's
record under part 563e of this subchapter, the applicant's business
plan and other relevant factors, the Office may approve the
application, deny the application, or approve the application on the
condition that the applicant improve certain aspects of its CRA
performance record or address particular credit or lending needs of the
communities that it serves.
PART 575--MUTUAL SAVINGS AND LOAN HOLDING COMPANIES
7. The authority citation for 12 CFR part 575 is revised to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828, 2901.
8. Section 575.1 is amended by designating the existing text as
paragraph (a), by adding a heading to newly-designated paragraph (a),
and by adding a new paragraph (b) to read as follows:
Sec. 575.1 Scope.
(a) Purpose. * * *
(b) General. Except as the OTS may otherwise determine, the
provisions of this part shall exclusively govern the reorganization of
mutual savings associations and any related stock issuances, and no
mutual savings association shall reorganize to a mutual holding company
or issue minority stock without the prior written approval of the OTS.
The OTS may grant a waiver in writing from any requirement of this part
for good cause shown.
9. Section 575.7 is amended by redesignating paragraph (a)(7) as
paragraph (a)(8), and by adding a new paragraph (a)(7), and by revising
paragraph (d)(2) to read as follows:
Sec. 575.7 Issuances of stock by savings association subsidiaries of
mutual holding companies.
(a) * * *
(7) The proposed stock issuance would fail to meet the convenience
and needs standard of Sec. 563b.11 of this subchapter.
* * * * *
(d) * * *
(2) The sale of minority stock of the reorganized stock savings
association to be made under the minority stock issuance plan,
including any sale in a public offering or direct community marketing,
shall be completed as promptly as possible and within 45 calendar days
after the last day of the subscription period, unless extended by the
OTS.
* * * * *
10. Section 575.13 is amended by revising paragraph (a)(4) to read
as follows:
Sec. 575.13 Procedural requirements.
(a) * * *
(4) Use of ``running'' proxies. A mutual savings association or
mutual holding company may make use of any proxy conferring general
authority to vote on any and all matters at any meeting of members,
provided that the member granting such proxy has been furnished a proxy
statement regarding the matters and the member does not grant a later-
dated proxy to vote at the meeting at which the matter will be
considered or attend such meeting and vote in person, and further
provided that ``running'' proxies or similar proxies may not be used to
vote for a mutual holding company reorganization, mutual-to-stock
conversion undertaken either by a mutual savings association or a
mutual holding company or any other material transaction. Subject to
the limitations set forth in this paragraph, any proxy conferring on
the board of directors or officers of a mutual savings association
general authority to cast a member's votes on any and all matters
presented to the members shall be deemed to cover the member's votes as
a member of the mutual holding company and such authority shall be
conferred on the board of directors or officers of a mutual holding
company.
* * * * *
Dated: November 22, 1994.
By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 94-29264 Filed 11-29-94; 8:45 am]
BILLING CODE 6720-01-P
