[Federal Register Volume 59, Number 84 (Tuesday, May 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9981]
[[Page Unknown]]
[Federal Register: May 3, 1994]
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 563b and 575
[No. 94-48]
RIN 1550-AA73
Conversions From Mutual to Stock Form
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Interim final rule with request for comments.
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SUMMARY: The Office of Thrift Supervision (OTS) is amending its
regulations governing mutual-to-stock conversions of insured savings
associations. The purpose of these amendments is to revise, clarify and
update the current regulations to strengthen the conversion standards
and ensure the integrity of the conversion process.
The amendments revise and clarify the appraisal standards; prohibit
the use of ``running'' proxies by management of converting
associations; place the current tax-qualified Employee Stock Ownership
Plan (ESOP) stock purchase priority after those of eligible depositors;
provide stock purchase priority to long-term depositors; require that a
stock purchase preference be given to eligible depositors residing in
the association's local community; prohibit management stock benefit
plans in a conversion; prohibit merger conversions except in
supervisory situations; lengthen the conversion public comment period;
require associations to submit business plans for all conversions;
prohibit the repurchase of a converted association's stock within one
year of conversion; and make publicly available preliminary conversion
proxy materials.
Interested parties are invited to submit written comments on the
conversion regulations, both as to the amendments adopted here and the
issues on which comment is specifically solicited and as to any other
current provisions of the conversion regulations as they relate to this
interim rule.
DATES: The interim final rule is effective May 3, 1994. Written
comments must be received on or before June 17, 1994. These amendments
will apply to all conversion applications pending or filed on or after
May 3, 1994.
ADDRESSES: Comments should be directed to Director, Information
Services Division, Public Affairs, Office of Thrift Supervision, 1700 G
Street NW., Washington, DC 20552, Attention: Docket No. 94-48. These
submissions may be hand delivered to 1700 G Street, NW., from 9 a.m. to
5 p.m. on business days; they may be sent by facsimile transmission to
FAX number (202) 906-7755. Comments will be available for inspection at
1700 G Street NW., from 1 p.m. until 4 p.m. on business days. Visitors
will be escorted to and from the Public Reference Room at established
intervals.
FOR FURTHER INFORMATION CONTACT: Teri M. Valocchi, Counsel (Banking and
Finance) (202/906-7299), James H. Underwood, Special Counsel (202/906-
7354), Leon R. Pleasants, Chief Financial Analyst (202/906-6414), J.
Larry Fleck, Assistant Chief Counsel (202/906-6413), V. Gerard Comizio,
Deputy Chief Counsel (202/906-6411), Corporate and Securities Division,
Chief Counsel's Office; Scott Ciardi, Financial Analyst (202/906-6960);
David A. Sjogren, Program Manager (202/906-6739), Diana L. Garmus,
Deputy Assistant Director (202/906-5683), Corporate Activities
Division, Office of Thrift Supervision, 1700 G Street NW., Washington,
DC 20552.
SUPPLEMENTARY INFORMATION:
I. Introduction
The OTS has broad authority to authorize and regulate mutual to
stock conversions of savings associations under sections 5(i) and (p)
of the Home Owners' Loan Act, as amended (HOLA), 12 U.S.C. 1464(i) and
(p).\1\ For the past 20 years--since the OTS's predecessor, the Federal
Home Loan Bank Board (FHLBB) instituted mutual to stock conversion
regulations in 1974\2\--mutual to stock conversions have been a
successful vehicle for bringing new capital into the thrift industry.
Since 1974, over 1,000 mutual savings associations have converted to
the stock form of ownership, in the process raising approximately $16
billion in new capital.
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\1\The OTS also has broad authority to approve and regulate
mutual savings and loan holding companies under section 10(o) of
HOLA, 12 U.S.C. 1467a(o).
\2\39 FR 9142 (March 7, 1974).
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While mutual to stock conversions provide an opportunity for
thrifts to raise capital, they may also provide an opportunity for an
association's insiders to engage in transactions that transfer to the
insiders an inappropriate amount of a converting association's value.
Thus, the OTS mutual to stock conversion regulations reflect standards
and safeguards developed over the years to maintain the integrity of
the conversion process, to ensure safety and soundness by responding to
the potential for abuses in thrift conversions and to allow the
conversion process to function effectively as a capital raising tool.
The OTS mutual to stock conversion regulations seek to balance
concerns such as a fair opportunity for participation by account
holders and the desire to infuse significant amounts of new capital
into converting savings associations. In addition, the regulations are
structured to assure that a savings association receives fair value for
its conversion stock and to prevent insider abuse by governing the
manner and extent to which a savings association's insiders and their
associates, individually and in the aggregate, may acquire stock and
other benefits in a conversion.
In recent months, mutual to stock conversions have become the
subject of controversy and negative media attention. In particular,
there has been controversy over the fact that some states offer
insiders of state savings banks the opportunity to gain potentially
greater benefits and more generous compensation packages than are
currently permitted under OTS rules. Congress also has expressed
serious concerns in this area. Legislation has been introduced in both
the House and Senate to address the issue of minimum standards for
conversions by state savings banks and limitations on management
benefits in conversions. In addition, both the Financial Institutions
Subcommittee of the House Banking Committee and the Senate Banking
Committee recently have held hearings on perceived abuses in mutual to
stock conversions.
Although the OTS believes that its current regulations have
generally provided sound safeguards for mutual to stock conversions,
the OTS and the FHLBB, in administering the conversion program, have
refined the conversion regulations periodically in light of experience
with the conversion process and in response to developments in the
market place. As a result of the recent events concerning mutual to
stock conversions, the OTS has again reviewed its conversion
regulations to assess whether additional revisions to its rules are
necessary.
As part of its review, the OTS has analyzed the changing financial
condition of converting mutual associations. During the 1980s, most
mutual savings associations were marginally capitalized and many were
insolvent. As a result, the FHLBB undertook a number of regulatory
initiatives designed to encourage associations to convert to stock
form. Many associations took advantage of these changes to
recapitalize. Now, however, most mutual institutions in the industry
are healthy. Generally, these healthy institutions are not converting
to meet regulatory capital requirements. Instead, they seek to raise
capital to expand their current operations through branching or
acquiring other institutions, to engage in new activities, through both
the formation of a holding company and establishment or acquisition of
operating subsidiaries, and to establish stock benefit plans for
management and employees. This change in the reasons for conversions
has caused the OTS to rethink the need for the regulatory inducements
for conversion contained in the current regulations.
Based upon the foregoing, the OTS has identified several areas of
the regulations, discussed below, that it has determined to revise,
update and clarify to further strengthen the standards governing the
conversion process. The OTS has consulted with the Federal Deposit
Insurance Corporation (``FDIC'') in developing these changes to ensure
consistent policy in this area. The OTS also has determined to adopt
the amendments immediately as an interim final rule to protect the
integrity of the conversion process. As such, the final rule is
designed to assure the public that the conversion program will continue
to be fair and equitable. Also, Congress has made it clear that it
expects both the OTS and the FDIC to act promptly to assure that any
abuses or potential abuses in the mutual to stock conversion area are
addressed.
II. Description of Revisions to Conversion Regulations
A. Revision to the Appraisal Standards
Pursuant to 12 CFR 563b.3(c)(1), a converting savings association
is required to sell its capital stock at a total price equal to its
estimated pro forma market value, based on an independent valuation.
When the FHLBB adopted the initial conversion regulations, it found
that underpricing conversion stock would result in ``windfall''
distributions of the value of a converting association and that no
method of conversion could be considered equitable unless the
conversion stock was accurately appraised and sold at its pro forma
market value. This was necessary to assure that the association
received full value for the conversion stock it distributed.
The current regulations contain safeguards designed to enhance the
accuracy of conversion appraisals. Under 12 CFR 563b.7(f), the OTS
requires that the appraisal be prepared by an appraiser who is
independent of the converting association and who has expertise in the
area of corporate appraisals. Although the conversion regulations have
been amended numerous times since 1974, the requirement that the
conversion stock be sold at its pro forma market value has remained
constant.
The integrity of the conversion process rests, in large part, on
the accuracy of the appraised value of the converting association. It
is for this reason that the OTS is concerned about recent conversions
that have exhibited significant increases in the immediate post-
conversion trading market for the stock. Although some of these
increases can be explained by the high levels of speculation that have
existed generally in the market for financial institution stocks, the
OTS is concerned that many of these appraisal reports may have set pro
forma market values that were significantly below the true value of the
converting associations. In such cases, the converting association is
harmed because the net proceeds from the conversion, and the
association's capital levels, are lower as a result of its stock being
undervalued upon issuance. Conversely, insiders and other sophisticated
investors are able to accrue undeserved financial benefits. When this
occurs, the independence and competence of the appraiser are called
into question.
The OTS relies on the independent appraiser to submit an appraisal
report that is impartial, objective and arrived at independently,
without undue influence from the converting association or any of its
other agents, including its attorneys, accountants, underwriters or
selling agents. The OTS is taking this opportunity to remind those
persons serving as conversion appraisers that the current regulations
require that the conversion applicant submit information demonstrating,
to the satisfaction of the OTS, the independence and expertise of the
appraiser.3 In those cases where there appears to be a consistent
pattern of undervaluation on the part of an appraiser, it may be
difficult for the applicant or the appraiser to establish that the
appraiser has acted independently and in a competent manner. In more
egregious cases, the OTS also may determine to censure, suspend or bar
an appraiser from practicing before the OTS under the OTS rules of
practice, 12 CFR part 513.
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\3\12 CFR 563b.7(f)(2).
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Under the current rules, Sec. 563b.7(f)(1)(ii) permits the
appraisal report to contain a ``brief summary'' of data that is
sufficient to support the appraiser's conclusions as to the pro forma
market value of the converting association. Section 563b.7(f)(3),
however, permits the OTS to request additional information with respect
to the pricing of the converting association's capital stock. In
practice, the OTS, relying on Sec. 563b.7(f)(3), has required that a
full appraisal report be submitted as part of the conversion
application. In that regard, the OTS and its predecessor, the FHLBB,
have provided detailed policy guidance to the industry regarding
appropriate appraisal standards to be used in valuing conversion
stock.4
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\4\FHLBB, Guidelines for Appraisal Reports for the Valuation of
Savings and Loan Associations and Savings Banks Converting From
Mutual to Stock Form of Organization (October 1983); FHLBB,
Guidelines for the Valuation of Savings and Loans Converting from
Mutual to Stock Form (June 15, 1981).
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In order to eliminate any potential confusion in this area, the OTS
is amending Sec. 563b.7(f)(1)(ii) by deleting suggestions that the
appraisal report need only be a ``brief summary'' and specifying that a
full appraisal report is required. The revised language codifies the
current practice of OTS staff requiring a more complete and detailed
description of the elements that make up an appraisal report and
justification for the methodology employed. Because a full appraisal
will now be required under paragraph (f)(1)(ii), the reference to
``full appraisal'' in Sec. 563b.7(f)(3) is unnecessary and is deleted.
The OTS expects that appraisals will continue to contain sufficient
detail to support the conclusions contained therein and that appraisers
will deliberate carefully in the formation of an opinion to arrive at a
pro forma market value that is consistent with post-conversion market
values.
Section 563.7(f) also has been revised 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 in accordance with the OTS applications processing
rules, 12 CFR part 516, decline to further process the application. In
such cases, the applicant will be required to refile the conversion
application, including a revised appraisal, as a new application and
pay any applicable filing fees.
Under current Sec. 563b.7(f)(2), the fact that a person is
participating in effecting a sale of the conversion stock, either as an
underwriter or as a selling agent, does not preclude such person or an
affiliate of such person from being considered independent for purposes
of preparing the appraisal for the conversion. Although the staff has
not experienced any problems to date where a conversion appraisal firm
or its affiliate have participated in effecting the sale of the
conversion stock, the OTS believes that it is essential that conversion
appraisals not be tainted in any manner by a real or potential conflict
in such an affiliate relationship that would cause the appraiser to not
be independent in his or her judgments. Thus, while no changes are
being adopted at this time, the OTS is requesting public comment as to
whether it should amend Sec. 563b.7(f)(2) to prohibit an appraiser or
its affiliates from also serving as an underwriter or selling agent.
Finally, in order to further enhance regulatory oversight in this
area, the OTS intends to issue updated guidance for conversion
appraisers that will provide specific details on appraisal methodology
and report content.
B. Prohibition on Use of ``Running'' Proxies
Section 563b.5(d)(4), adopted in 1985, provides for management of a
converting association to use previously obtained proxies, i.e.,
``running'' proxies, from a voting member. Previously, the conversion
rules prohibited the use of ``running'' proxies. The requirement was
changed in 1985 to reduce conversion costs for marginally capitalized
savings associations.5
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\5\50 FR 20555 (May 17, 1985).
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Section 563b.5(d)(4), however, requires that each voting member be
furnished a proxy statement on the special plan of conversion meeting,
and only allows for use of the ``running'' proxy in the event the
voting member does not grant a later-dated proxy to vote at the meeting
called to consider the plan of conversion or attend such meeting and
vote in person.
Currently, as discussed in section I. above, most mutual
associations in the thrift industry seeking to convert are well-
capitalized. Thus, the regulatory rationale for truncating the proxy
solicitation and voting requirements generally no longer exists. In
addition, depositors in greater numbers recently have expressed
increased interest in the conversion plans of their associations. The
OTS believes, based on its experiences in this area, that the current
ability to use ``running'' proxies has lessened the incentive of
converting associations to actively solicit depositors to consider and
vote on conversions.
Thus, the OTS has decided to revise Sec. 563b.5(d)(4) to prohibit
the use of ``running'' proxies. The OTS believes the prohibition is the
most effective manner in which to assure full participation of the
association's membership in the conversion process. The requirement to
use a proxy specifically designed for the conversion will require
thrift management to more actively solicit its depositors to obtain
their votes for conversion.
In addition, the last two paragraphs of Item 1 and Item 4(d) of the
Form PS have been revised to conform with the revisions discussed
above. Finally, a sentence has been added to Sec. 575.13(a)(4) of the
mutual holding company regulations to conform with this revision.
C. Re-Prioritize Stock Purchase by Tax-Qualified Employee Stock
Ownership Plans.
Under OTS rules, a conversion offering may involve as many as three
phases: A subscription offering, a direct community offering and an
underwritten public offering. Only the subscription offering phase,
which affords account holders the opportunity to subscribe for stock on
a priority basis, is required; if all of the stock is purchased in the
subscription phase, any other offering is unnecessary.
The conversion regulations protect the status of mutual account
holders by establishing a detailed series of subscription priorities
for purchases of conversion stock. Currently, Sec. 563b.3(c)(2)
requires that first priority to purchase the stock issued in the
conversion, after certain tax-qualified ESOP purchases, discussed
below, belongs to eligible account holders, i.e., depositors holding
qualifying deposits at the savings association as of a date
(eligibility record date) at least ninety days prior to the date of
adoption of the plan of conversion by the association's board of
directors.6 The regulations also provide that each eligible
account holder must receive, without payment, nontransferable
subscription rights in an amount equal to the greater of the maximum
purchase limitation established under the converting association's plan
of conversion, or certain formulas prescribed under the
regulations.7
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\6\12 CFR 563b.2(a)(16).
\7\12 CFR 563b.3(c)(2).
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In 1986, amendments to the conversion regulations were adopted to
eliminate uncertainty on a variety of issues presented by employee
stock benefit plans and to enhance the ability of officers, directors
and employees of a savings association to acquire stock when the
association converted, through various types of employee stock benefit
vehicles.8 Prior to the 1986 amendments, the first priority to
purchase conversion stock had always been with eligible account
holders. The 1986 amendments, which granted a first priority purchase
right to tax-qualified employee benefit plans, were based on the
FHLBB's belief that acquisition of an association's stock by such plans
provided a means for officers and employees of converting associations
to acquire larger ownership stakes in their associations upon
conversion without undermining the basic equities of the conversion
process.9 In addition, and perhaps more significantly, the FHLBB
sought to afford undercapitalized mutual savings associations, that
feared hostile takeovers as a public company, 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.
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\8\51 FR 40127 (November 5, 1986).
\9\Id.
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Section 563b.3(c)(23) currently provides an explicit top priority
for tax-qualified employee stock benefit plans that permits plans to
purchase up to 10% of the total conversion stock offering ahead of
eligible depositors. This priority also is on a preferred basis; thus,
in the event an offering is over-subscribed, the plans' stock purchases
will not be affected.
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. Because most mutual associations are now healthy, there is a
need to balance the interests of management and employees against those
of account holders by providing long-term depositors at mutual savings
associations the first opportunity to buy conversion stock. The OTS is
therefore amending Sec. 563b.3(c)(23) to revise the stock purchase
priorities so as to place eligible account holders before the tax-
qualified employee stock benefit plans and to place tax-qualified
employee stock benefit plans before supplemental eligible account
holders10 and all other voting members who have subscription
rights. Finally, the OTS is amending Sec. 563b.3 (c)(6)(i), (c)(7), and
(d)(4) to conform to these changes.
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\1\0The term ``supplemental eligible account holder'' means any
person holding a qualifying deposit, except officers, directors and
their associates, as of the last day of the calendar quarter
preceding the OTS's approval of the application for conversion. See
current 12 CFR 563b.2 (a)(37) and (a)(38).
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D. Revision to Eligibility Record Date
As discussed above, the intent of the eligibility record date is to
give long-term depositors a priority in purchasing stock. It has been
the OTS's experience, however, that converting associations have opted
for the minimum 90-day period for determining who is a long-term
depositor. Upon review of this area, the OTS does not believe that use
of the minimum 90-day period is a meaningful indicator of long-term
depositor status and should be substantially lengthened. Thus, the OTS
is amending the existing rule to require that the eligibility record
date be set at a date no less than a year prior to board of director
approval of the plan of conversion. In so doing, the OTS stresses that
the one year period is a minimum time period; converting associations
are encouraged to establish longer time periods to maximize the stock
purchase priority for long-term depositors. The OTS also is requesting
public comment as to whether a longer minimum time period would be
appropriate.
E. Priority to Account Holders and Voting Members Residing in the
Association's Local Community
The current conversion regulations require that, following the
subscription offering of conversion stock to account holders, all
nonsubscribed shares be sold either in a public offering or a direct
community offering giving ``a preference to natural persons residing in
the counties in which the association has an office.''11 Thus, the
regulations currently permit a converting association to conduct a
community offering of conversion stock in the local community, prior to
a general public offering. The current regulations, however, do 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. The OTS, has, however, on a case by case
basis, recently permitted thrift subsidiaries of mutual holding
companies to prioritize stock purchases in this manner.
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\1\112 CFR 563b.3(c)(6).
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Upon consideration of its favorable experiences with local
community stock priorities in stock offerings of thrift subsidiaries of
mutual holding companies, the OTS now believes it is appropriate to
require converting associations to give the local community a more
meaningful opportunity to participate in all conversions on a priority
basis at the subscription offering stage. Accordingly, new Sec. 563b.3
(c)(2)(i), (4)(i), and (5)(i) have been added to extend this preference
to the eligible account holder, supplemental eligible account holder
and other voting member priorities in the subscription stock offering.
The preference in each priority group will be to those persons who
reside in the association's ``local community'' or within 100 miles of
a home or branch office of the converting association. The term ``local
community'' is defined in new Sec. 563b.2(a)(19) 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 local area(s) as provided for in the converting association's
plan of conversion, as approved by the OTS. Current
Sec. 563b.3(c)(2)(i)-(ii), 4(i)-(iv) and (5)(i)-(ii) will be
redesignated as Sec. 563b.3(c)(2)(ii)-(iii), (4)(ii)-(v) and (5)(ii)-
(iii). For purposes of consistency, section 563b.3(c)(6)(iv) is revised
to conform with new section 563b.3(c)(2)(i).
Additionally, 12 U.S.C. 1464(b) and 12 CFR 545.11(b) establish that
a federally chartered savings association may accept and maintain
deposit accounts within its discretion and subject to criteria
established by the association. The OTS solicits public comment on
whether a converting association should have the ability to prevent
depositors who do not reside in the local community from participating
in a conversion. In addition, the OTS specifically solicits comments as
to whether an association, in anticipation of conversion, should be
permitted to: (1) refuse to open accounts for potential depositors
residing outside the local community, and (2) close accounts of
depositors residing outside the local community.
F. Revision of Policy Regarding Management Stock Benefit Plans
Under Sec. 563b.3(c)(8), the amount of stock that officers,
directors and their associates can purchase, in the aggregate, is
limited to between 25% to 35% of the conversion stock, based upon the
total asset size of the converting association. In addition, existing
Sec. 563b.3(c)(6)(i) allows any one or more tax-qualified employee
stock benefit plans to purchase in the aggregate not more than 10% of
the total offering of shares and allows such purchase regardless of the
number of shares to be purchased by other parties.
Current OTS policy also permits management stock benefit and
recognition plans (collectively ``MRPs'') to purchase up to 3% or 4% of
the conversion stock, depending upon the association's capital
position.12 Current OTS policy limits the combined ESOP and MRP
purchases to 10% to 12% of the conversion stock, depending upon the
association's capital position. OTS policy also permits management to
be granted stock options in an amount up to 10% of the shares issued in
the conversion.13 Finally, the OTS recently, on a case by case
basis, has imposed specific percentage limitations on the amount of
stock that may vest with individual officers and directors.
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\1\2See FHLBB Office of General Counsel Questions and Answers on
Part 563b: Conversion and Employee Stock Benefits Plans at 4, 6 (May
1987).
\1\3Id.
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Given that mutual savings associations currently seeking to convert
generally are well-capitalized, the OTS has become increasingly
concerned that the association's management may be undertaking
conversions for reasons other than the need for capital. Some thrift
insiders may be sacrificing the interests of their associations and
mutual account holders to acquire significant amounts of conversion
stock and other benefits as cheaply as possible in the conversion
process. In addition, in some cases the issuance of conversion stock to
a MRP lessens the opportunity for depositors to obtain conversion
stock. Finally, the issuance of stock options at the conversion price,
rather than at aftermarket trading prices, which in recent years has
been substantially higher than the conversion price, creates the
impression that management is structuring an excessive compensation
package. While the OTS believes there are valid business reasons for
thrifts to adopt MRPs and stock option plans in order to attract and
retain qualified management, these plans are now more appropriately
implemented subsequent to the conversion and with shareholder approval.
The OTS is therefore substantially revising and codifying its
policies regarding the establishment of MRPs and stock option plans
during the conversion process in new Sec. 563b.3(g)(4). The new
provisions require that any decision to implement MRPs or stock option
plans after conversion be voted on and approved by a majority of the
shareholders no earlier than the first annual meeting following the
conversion. The rule further requires that thrift subsidiaries of
mutual holding companies obtain a vote of a majority of stockholders,
other than the parent mutual holding company, to approve such
plans.14 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. In addition, any intention by management to
implement MRPs or stock option plans within one year of conversion
would be (1) required to be fully disclosed in the proxy soliciting and
conversion stock offering materials, and (2) subject to the prior
approval of the appropriate OTS Regional Director. Finally, the
regulation codifies the OTS's current policies regarding permissible
amounts that may be included in stock option and MRP plans formed
within one year of conversion. Codification of these policies is
designed to provide clear guidance in this area.
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\1\4In this regard, Sec. 10(o)(8)(B) of the HOLA requires that a
mutual holding company, which is generally controlled by the
management of its thrift subsidiary, must own more than 50% of its
thrift subsidiary. Thus, absent a disinterested stockholder vote
requirement, management will be able to ensure approval of its
compensation plans.
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G. Prohibition on Merger Conversions
Under Sec. 563b.10, a mutual savings association may convert to
stock form by merging with an existing stock association or by becoming
a subsidiary of an existing holding company. In this type of
conversion, the account holders of the mutual savings association,
instead of being offered the opportunity to purchase stock of the
converting mutual association, are instead offered the opportunity to
purchase shares of the acquiring stock association or holding company.
The structure of these transactions raises unique issues not involved
in other types of conversions. These include the adequacy of the
consideration paid by an acquiror; whether a ``control premium'' should
or can be incorporated into the valuation of the mutual savings
association; the treatment of the mutual account holders in connection
with the distribution of the acquiror's stock; whether mutual account
holders should be able to purchase the acquiror's stock at a discount
and the amount of such discount; and the appropriateness of management
compensation and stock incentive packages offered by an acquiror to
coax the mutual association's management into the merger conversion.
When merger conversions were first allowed by the FHLBB in the
1980s, they were perceived to be a useful supervisory tool by which
significantly undercapitalized or marginally capitalized savings
associations could improve their capital positions. In recent years,
however, the OTS began to have increasing concern about merger
conversions involving healthy associations. In Thrift Bulletin 58
(April 19, 1993), the OTS established increased disclosure requirements
for merger conversion proxy statements to ensure that account holders
received adequate and accurate disclosure about proposed merger
conversion transactions. In so doing, the OTS asserted its view that
merger conversions provide more opportunity than standard conversions
for insider abuse.15 In addition, the OTS voiced concerns that
institutions participating in merger conversions were not providing
sufficient disclosure to account holders regarding this more complex
form of conversion transaction.16
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\1\5OTS Thrift Bulletin 58, at 1 (April 19, 1993).
\1\6Id.
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In addition, there have been numerous complaints recently by
account holders and others that permitting healthy mutual savings
associations to be acquired by means of a merger conversion has
resulted in some thrift insiders putting their self interest ahead of
the interests of the converting association and its account holders.
As a result of these concerns, the OTS recently imposed a
moratorium on healthy savings associations entering into these
transactions. In its announcement, the OTS stated that the moratorium
would not prohibit the acquisition of an undercapitalized thrift by a
healthy acquiror.
In undertaking the moratorium, the OTS noted that in many cases,
management of the converting mutual savings associations engaging in
merger conversions were receiving extremely generous compensation and
benefit packages. While OTS rules limit many forms of excessive
compensation in merger conversions,17 there is still an issue as
to whether management is opting for a merger conversion instead of a
standard conversion based on the best interests of the association and
its depositors or in response to the level of benefits offered to
management by the acquiring entity.
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\1\7For example, the OTS policy statement on mergers, 12 CFR
571.5, in pertinent part, specifically provides that compensation,
including deferred compensation to officers, directors and
controlling persons of a merging association may not be in excess of
that which is reasonable and commensurate with their duties and
responsibilities. The rule provides that mergers will be
particularly scrutinized where any such persons will receive a
material increase in compensation above that paid by the merging
association prior to the commencement of merger negotiations. In
this regard, an increase in compensation in excess of the greater of
15% or $10,000 gives rise to presumptions of unreasonableness and
sale of control. See 12 CFR 571.5(d)(3).
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In addition, merger conversions are perceived as being overly
generous to the acquiring entities since they are essentially able to
acquire the mutual association at no cost. Unlike other corporate
acquisitions, the acquiror pays nothing for the converting
association's stock. Rather, simultaneous with the acquisition, the
acquiror's primary obligation is to make an equity offering of its own
stock to depositors of the converting association, retaining all
proceeds of the offering.
The OTS conversion regulations are based upon the principle that a
conversion cannot be equitable unless the potential for ``windfall''
gains is virtually eliminated. In a standard conversion, the pro forma
market value of the converting savings association is an appropriate
means for determining the price of the stock to be sold. In a merger
conversion, however, the acquiring entity is obtaining control and
should pay a premium for the pro forma value of the stock. In essence,
the acquiring entity is obtaining control and receiving a ``windfall''
gain. As a result, there is tremendous incentive for an acquirer to
offer excessive benefits to the management of a mutual savings
association to participate in a merger conversion. Upon further review
of this issue, the OTS has been unable to resolve the valuation and
``windfall'' gains problem that the OTS currently believes is inherent
in merger conversion transactions.
The OTS therefore has concluded that in nonsupervisory cases, there
should be a two step process. The account holders at the mutual
association should be given the opportunity to purchase stock in a
mutual to stock conversion. This assures the account holders that they
will have the opportunity to more directly participate in any
appreciation of the converting association's stock price following the
conversion. After the conversion to stock form, stockholders can vote
on whether to merge with another institution, subject to the rules
governing post-conversion transactions.
Based on the reasons described above, the OTS has determined to
amend its conversion regulations to limit merger conversions to
supervisory cases. As noted earlier, merger conversions may serve a
useful purpose in those cases where a savings association is unable to
convert on a stand alone basis because of its weak financial condition.
While eliminating the authority for nonsupervisory merger
conversions in the interim final rule, the OTS is soliciting comment as
to whether merger conversions involving healthy savings associations
should be permitted in the future, and if so, under what circumstances.
In particular, the OTS is interested in receiving comments on how
merger conversions could be structured to avoid the problems discussed
above, including the problems associated with valuation issues.
H. Extension of the Conversion Public Comment Period
Section 563b.4(b)(1) requires a conversion applicant to publish, in
writing, a notice of the filing of an application. Pursuant to the
rule, written comments, including objections to the plan of conversion
and materials supporting the objections, from any member of the
applicant or aggrieved person will be considered by the OTS if filed
within ten business days after the date of this notice. Failure to
provide the written comments within the ten day period may preclude the
pursuit of any administrative or judicial remedies.
Depositors of converting associations and community groups have
become increasingly interested in expressing their views on proposed
conversions, usually through the public comment process. In this
regard, the current ten day comment period may not be sufficient time
for interested parties to review and comment on a detailed conversion
application. Thus, the OTS is revising Sec. 563b.4(b)(1) to conform the
public comment period in the conversion regulations with the longer
twenty calendar day public comment period provided under the
acquisition of control regulations.18 The revision also would
permit the OTS, in its discretion and upon written request, to extend
the twenty day comment period for an additional twenty days. The OTS
believes that this revision will give interested parties a more
meaningful opportunity to express their views on a proposed conversion
transaction. In so doing, the OTS does not believe this requirement
will impose an undue burden, since most converting associations
undertake holding company conversions, i.e., where a holding company is
being formed in the transaction, and are subject to the time periods
under the acquisition of control regulations.
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\1\812 CFR part 574.
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I. Submission of Business Plans for All Conversion Transactions
The OTS conversion regulations do not require business plans in
standard mutual to stock conversion transactions. The OTS acquisition
of control regulations, however, do require a consolidated business
plan conforming to the requirements set by the Regional Director to be
included in holding company conversions.19 Because most converting
associations also form a holding company at the time of the conversion,
most converting associations currently file a business plan.
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\1\912 CFR 574.6(a)(1)(ix).
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The OTS believes that all converting associations should be
required to demonstrate how they will prudently deploy and utilize the
conversion proceeds. Therefore, the exhibits portion of the conversion
application form, Form AC, is being amended to require a new Exhibit 8,
a consolidated business plan subject to approval by the Regional
Director. Also, in response to the OTS's experience that a number of
associations have recently submitted business plans that do not
adequately address the deployment of conversion proceeds, the new
Exhibit 8 includes a requirement that each converting association
provide, as part of the business plan submitted with the application
for conversion, a detailed discussion of how the capital acquired in
the conversion will be utilized. If the plan is to be treated
confidentially, the applicant should follow the procedures set forth at
Sec. 563b.4(c).
J. Revision to Post-Conversion Stock Repurchase Rules
The capital distributions regulation20 and Sec. 563b.3(g)(3)
of the conversion regulations provide that a well capitalized converted
association can repurchase its capital stock, within certain limits and
restrictions, by filing with the Regional Director an open-market stock
repurchase program for no more than 5% of the association's outstanding
capital stock during a six month period. This provision is in essence a
safe harbor, provided an institution is well capitalized.21
Section 563b.3(g)(3) also provides that OTS may object to proposed
repurchases fitting within the safe harbor if the repurchases would
adversely affect the financial condition of the thrift.22 Provided
the safe harbor is met, a converted association can, under current
rules, buy back up to 30% of the stock sold in the conversion within
three years of conversion.
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\2\012 CFR 563.134.
\2\112 CFR 563.134(b).
\2\212 CFR 563b.3(g)(3)(iii)(A).
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The agency's experience has been that many associations begin
substantial buyback programs immediately following their conversions.
While OTS believes that stock repurchase programs may serve valid
business purposes, e.g., maintaining the value of a converting
institution's stock in an active trading market, the OTS has concerns
that substantial buyback programs begun immediately after conversion
may not have a valid business purpose. In addition, repurchases begun
immediately after conversion raise substantial issues regarding whether
conversion stock has been appropriately valued.
To address these concerns, Form AC has been revised to now require
that each converting association provide, as part of the business plan
submitted with the application for conversion, a detailed discussion of
how the capital acquired in the conversion will be utilized, including,
among other things, any proposed stock repurchases.
Also, the OTS is revising Sec. 563b.3(g)(3) to prohibit stock
repurchases for one year following conversion. After one year, a
recently converted association may file with the appropriate Regional
Director an open-market repurchase program in which it can request
stock repurchases of no more than 5% of the outstanding capital stock
during any twelve month period within the following two years. In
addition to the current standards governing permissible repurchases,
the Regional Director can now disapprove repurchases if the association
does not demonstrate a valid business purpose for the stock repurchase.
The regulation, however, will permit the Regional Director to approve
amounts greater than 5% in the second and third years if there are
circumstances that would justify such repurchases. Section
563b.3(g)(1)(iii) has been deleted to conform with this revision.
The OTS also is soliciting comments as to whether the current
requirements of the capital distributions regulations governing the
``upstreaming'' of conversion proceeds to holding companies formed by
converting institutions should be revised to further restrict the
upstreaming of substantial amounts of the conversion proceeds soon
after the conversion.
K. 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.23
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\2\3 12 CFR 563b.3(i)(1).
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The OTS notes that the FDIC and others have recently suggested that
it may be appropriate for depositors to be able to transfer and sell
their subscription rights so that any ``windfall'' value can be
distributed directly to the depositors.
In this regard, the OTS believes that this type of change to the
current conversion regulations would raise a number of novel and
complex legal and policy issues, many of which were taken into account
previously by the FHLBB in determining to prohibit transferability.
These issues 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,24 and significantly increased conversion
costs due to compliance with securities laws requirements for
registering subscription rights for public distribution.
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\2\4 The regulations require that a converting association
establish and maintain a liquidation account for the benefit of
eligible account holders and supplemental eligible account holders
in an amount equal to the association's net worth at the date of
conversion. Each eligible account holder is deemed to have a pro
rata inchoate interest in the liquidation account. In the event of a
complete liquidation of the association, an account holder's
interest may not be increased after conversion, but may be reduced
by any subsequent decrease in the account holder's savings account
balance. See 12 CFR 563b.3(c)(13).
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The OTS believes these issues must be carefully analyzed before
considering regulatory changes in this area. Therefore, the OTS is not
proposing any change at this time that would allow for the transfer or
sale of subscription rights, but is requesting 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.
2. Availability of Conversion Documents
The conversion regulations, since adoption in 1974, have prohibited
the placing of copies of preliminary conversion stock offering and
proxy soliciting materials in the OTS public files. The OTS has noted,
over the past few years, an increasing interest shown by account
holders, the public and the media in the information contained in those
portions of an application for conversion.
The OTS believes 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. The OTS, therefore, is
revising Sec. 563b.4(c) to eliminate the automatic confidential
treatment that has been afforded this information in the past. The
revision will permit the public to have ready access to all relevant
materials regarding proposed conversion transactions.25 Applicants
will have the ability to request confidential treatment of any portion
of these materials by following the confidential treatment procedures
contained in section 563b.4(c).
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\2\5 This revision augments the amount of information regarding
conversions currently required to be made public by converting
associations. Section 563b.4(a)(3)(i) requires that, promptly after
adoption of a plan of conversion by its board of directors, a
converting association must notify its members, and make copies of
the adopted plan of conversion available for inspection by its
members at each office of the savings association. Section
563b.4(a)(3)(ii) also allows a converting association to issue a
press release announcing the conversion.
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3. Conforming Changes to Mutual Holding Company Regulations and Other
Technical Changes
The mutual holding company regulations, 12 CFR part 575, generally
incorporate the substantive and procedural standards for conversion
contained in the conversion regulations. To the extent the interim
final rule addresses conversion standards, those same standards apply
to mutual holding company transactions. Thus, the OTS is also revising
12 CFR part 575 to make clarifying and conforming changes to those
regulations to reflect the changes being made to 12 CFR part 563b.
Also, the interim final rule makes certain other technical and
conforming changes to the conversion regulations.
4. Proposal to Impose Convenience and Needs Test in Conversion
Transactions
Elsewhere in this issue of the Federal Register, the OTS is
soliciting public comment on an amendment to its conversion regulations
that would impose an additional standard requiring that the OTS, in
considering whether to approve a mutual to stock conversion
transaction, consider the needs and convenience of the community served
by the converting association. To date, a convenience and needs test
generally has not been applied to these transactions.
III. Paperwork Reduction Act
The reporting requirements contained in this interim final rule
have been submitted to and approved by the Office of Management and
Budget under OMB Control No. 1550-0014 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), Washington, DC 20503 with copies to
the Office of Thrift Supervision, 1700 G Street, NW., Washington, DC
20552.
The reporting requirements in this interim final rule are found in
12 CFR 563b.100. The information is needed by the OTS to further
strengthen the standards governing the conversion process. The likely
recordkeepers are savings associations.
Estimated number of respondents: 70.
Estimated average annual burden per respondent: 500.
Estimated annual frequency of responses: 1.
Estimated total annual reporting burden: 35,000.
IV. Regulatory Flexibility Act
Because no notice of proposed rulemaking was required in connection
with the adoption of this interim final rule, no regulatory flexibility
analysis is required under the Regulatory Flexibility Act (5 U.S.C. 601
et seq.).
V. Executive Order 12866
The OTS has determined that the interim final regulation does not
constitute a ``significant regulatory action'' for purposes of E.O.
12866.
VI. Administrative Procedure Act
Pursuant to 5 U.S.C. 553, OTS has found good cause to dispense with
both prior notice and comment on this interim final rule and with a 30-
day delay of its effective date in light of the critical need to ensure
an equitable conversion process while still providing converting
associations access to the capital markets. The OTS has a number of
conversion applications pending and it expects that it will receive
significantly more in the next few weeks. Unless these revisions are
implemented immediately, associations will be able to avoid compliance
with the new rules by filing and attempting to obtain approval of their
conversion applications before the new rules become effective. If the
OTS were to proceed with a notice of proposed rulemaking, the only
practical solution to this problem would be to impose an administrative
moratorium on all conversions until the rulemaking process is complete.
That type of rulemaking process would take a minimum of several months.
The result would thus be to preclude converting savings associations
from raising additional capital at a time when the capital markets are
receptive to capital stock offerings by financial institutions. Should
the capital markets become less favorable, such a delay could prevent
savings associations from raising sufficient new capital through a
mutual to stock conversion. The public interest is served by
encouraging savings associations to raise additional capital because an
association's capital is the financial cushion that protects the
association's depositors and the federal fund that insures the
depositors' accounts. In view of the need both to ensure an equitable
conversion process and to provide converting associations with access
to the capital markets without delay, the OTS finds that good cause
exists for dispensing with the notice and comment procedures of the
Administrative Procedure Act. Similarly, the OTS finds that good cause
exists for eliminating the 30-day delay of the effective date.
The revised rules will become effective upon publication in the
Federal Register and will be applicable to all applications pending or
newly filed as of that date. The OTS generally expects converting
associations with pending applications to comply with the revised
rules. The OTS may grant, on a case by case basis, a waiver in writing
from any provision in the interim final rule for good cause shown. The
request for a waiver must contain sufficient information to
substantiate the justification for the waiver.
The OTS, however, seeks public comment on the conversion
regulations, both as to the amendments adopted here and the issues on
which comment is specifically solicited and as to any other current
provisions of the conversion regulations as they relate to this interim
final rule. The OTS may modify the rule in response to those comments
if appropriate.
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, 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 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a; 15 U.S.C.
78c, 78l, 78m, 78n, 78w.
2. Section 563b.2 is amended by removing paragraph (a)(14); by
redesignating paragraphs (a)(15) through (a)(19) and (a)(29) through
(a)(40) as paragraphs (a)(14) through (a)(18) and paragraphs (a)(30)
through (a)(41), respectively; by revising paragraph (a)(16); and by
adding paragraphs (a)(19) and (a)(29) to read as follows:
Sec. 563b.2 Definitions.
(a) * * *
(16) Eligible account holder. The term eligible account holder
means any person holding a qualifying deposit as determined in
accordance with Sec. 563b.3(e) of this part, but shall include only
those account holders with savings accounts in place for a minimum of
one year prior to board of director adoption of the plan of conversion.
* * * * *
(19) Local community. The term local community includes all
counties in which the converting association has its home office or a
branch office, each county's standard metropolitan statistical area or
the general metropolitan area of each of these counties and such other
similar local area(s) as provided for in the plan of conversion, as
approved by the OTS.
* * * * *
(29) Regional Director. The term regional director means the senior
representative of the Director of the Office of Thrift Supervision for
all matters dealing with examination and supervision of savings
associations in the region in which the converting savings association
has its principal office.
* * * * *
3. Section 563b.3 is amended by:
a. Revising paragraphs (c)(6)(i), (c)(6)(iv), (c)(7), (c)(14),
(c)(23), (d)(4), (g) heading, (g)(1)(i) and (g)(1)(ii) and (g)(3);
b. Redesignating paragraphs (c)(2)(i), (c)(2)(ii), (c)(4)(i)
through (c)(4)(iv), (c)(5)(i) and (c)(5)(ii) as paragraphs (c)(2)(ii),
(c)(2)(iii), (c)(4)(ii) through (c)(4)(v), (c)(5)(ii) and (c)(5)(iii),
respectively;
c. Removing paragraph (g)(1)(iii); and
d. Adding new paragraphs (c)(2)(i), (c)(4)(i), (c)(5)(i), and
(g)(4).
The additions and revisions read as follows:
Sec. 563b.3 General principles for conversions.
* * * * *
(c) * * *
(2) * * *
(i) The stock to be offered and sold in the subscription offering
shall give a preference to eligible account holders residing in the
association's local community or within 100 miles of the association's
home or branch office(s).
* * * * *
(4) * * *
(i) The stock to be offered and sold in the subscription offering
shall give a preference to supplemental eligible account holders
residing in the association's local community or within 100 miles of
the association's home or branch office(s).
* * * * *
(5) * * *
(i) The stock to be offered and sold in the subscription offering
shall give a preference to voting members residing in the association's
local community or within 100 miles of the association's home or branch
office(s).
* * * * *
(6) * * *
(i) Subject to the adoption in the plan of conversion of the
optional provision of paragraph (d)(4) of this section, a condition
limiting purchases in the public offering or the direct community
offering by any person together with any associate or group of persons
acting in concert to not more than five percent (5%) of the total
offering of shares, except that any one or more tax-qualified employee
benefit plans may purchase in the aggregate not more than ten percent
(10%) of the total offering of shares. Shares held by one or more tax-
qualified employee stock benefit plans and attributed to a person shall
not be aggregated with other shares purchased directly by or otherwise
attributable to that person.
* * * * *
(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 or within 100
miles of the association's home or branch office(s).
(7) Subject to the adoption in the plan of conversion of the
optional provision of paragraph (d)(4) of this section, provide that
the total shares that any person and any associate or group of persons
acting in concert may subscribe for or purchase in the conversion shall
not exceed five percent (5%) of the total offering of shares, except
that any one or more tax-qualified employee benefit plans may purchase
in the aggregate not more than ten percent (10%) of the total offering
of shares. Shares held by one or more tax-qualified employee stock
benefit plans and attributed to a person shall not be aggregated with
shares purchased directly by or otherwise attributable to that person.
* * * * *
(14) Provide for an eligibility record date, which shall be not
less than one year prior to the date of adoption of the plan of
conversion by the converting savings association's board of directors.
* * * * *
(23) Provide that eligible account holders with subscription rights
have priority to purchase conversion stock prior to tax-qualified
employee stock benefit plans and tax-qualified employee stock benefit
plans have priority to purchase conversion stock prior to supplemental
eligible account holders and other voting members who have subscription
rights. If shares are sold in the conversion stock offering in excess
of the maximum proposed offering, shares may be sold to the tax-
qualified employee stock benefit plans in accordance with the purchase
limitations provided in paragraph (c)(7) of this section.
* * * * *
(d) * * *
(4) That purchases in the public offering or in the direct
community offering by any person together with any associate or group
of persons acting in concert shall be limited to less than ten percent
(10%) of the total offering of shares. The percentage amount by which
any order for conversion stock exceeds 5% of the total offering of
shares shall be aggregated with the percentage amounts by which all
other orders for conversion stock exceed 5% of the total offering of
shares. The aggregate amount shall not exceed 10% of the total offering
of shares, except that this limitation shall not apply to the purchases
of the tax-qualified employee stock benefit plans.
* * * * *
(g) Restrictions on repurchase of stock; payment of dividends; and
use of stock option and management or employee stock benefit plans. * *
*
(1) * * *
(i) A repurchase, on a pro rata basis pursuant to an offer approved
by the Office and made to all shareholders of such association; or
(ii) The repurchase of qualifying shares of a director.
* * * * *
(3)(i) A converted savings association subject to paragraph (g)(1)
of this section may repurchase its capital stock provided:
(A) No repurchases occur within one year following conversion;
(B) Repurchases within two years after the 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;
(C) The repurchases do not cause the association to become
undercapitalized (as defined in 12 CFR 565.4); and
(D) The association provides to the Regional Director, with a copy
to the Chief Counsel's Office, Corporate and Securities 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:
(1) The repurchase program would materially adversely affect the
financial condition of the savings association;
(2) The information submitted by the savings association is
insufficient upon which to base a conclusion as to whether the
association's financial condition would be materially adversely
affected; or
(3) The association did not demonstrate a valid business purpose
for the stock repurchase.
(ii) Notwithstanding paragraph (g)(3)(i) of this section, during
the second and third year following conversion, the Regional Director,
in accordance with the standards contained in this paragraph, may
permit stock repurchases in amounts greater than 5% of the
association's outstanding capital stock during a twelve month period.
(4) Use of Stock Option and Management or Employee Stock Benefit
Plans. No converted savings association shall, for a one year period
from the date of the conversion, implement a stock option plan or
management or employee stock benefit plan, other than a tax-qualified
plan complying with (c)(6) of this section, unless each of the
following requirements are met:
(i) Each of the plans was fully disclosed in the proxy soliciting
and conversion stock offering materials;
(ii) For stock option plans, the total number of shares of common
stock for which options may be granted does not exceed ten percent of
the amount of shares issued in the conversion;
(iii) For management or employee stock benefit plans, the aggregate
amount of such plans shall not exceed three percent of the amount of
shares issued in the conversion;
(iv) The aggregate amount of all shares obtained by a tax-qualified
employee stock benefit plan(s) in the conversion, pursuant to (c)(6) of
this section, or within one year following the conversion, and all the
shares in a management or employee stock benefit plan, pursuant to
paragraph (g)(4)(iii) of this section, shall not exceed ten percent of
the total amount of shares issued in the conversion;
(v) Associations that have in excess of ten percent tangible
capital following the conversion, may be granted, on a case by case
basis, approval to establish a management or employee stock benefit
plan pursuant to paragraph (g)(4)(iii) of this section in an amount up
to four percent of the amount of the shares issued in the conversion,
and an aggregate total of up to twelve percent for all plans
established pursuant to paragraph (g)(4)(iv) of this section;
(vi) No individual shall receive more than twenty-five percent of
the shares of any plan and directors who are not employees of the
association shall not receive more than five percent of the stock
individually, or thirty percent in the aggregate, of any plan;
(vii) All such plans are approved by a majority of the
association's stockholders, or in the case of a recently formed holding
company, its stockholders, prior to implementation and no earlier than
the first annual meeting following the conversion;
(viii) In the case of a savings association subsidiary of a mutual
holding company, all such plans are approved by a majority of
stockholders other than its parent mutual holding company prior to
implementation and no earlier than the first annual meeting following
the stock issuance;
(ix) For stock option plans, stock options are granted at 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; and
(xi) Prior to implementation, all such plans are submitted to the
appropriate Regional Director for review and approval in accordance
with the foregoing standards. In connection with such review, the
Regional Director shall consider all relevant supervisory information,
including, among other things, the association's capital level,
operating history and size of the association. The Regional Director
may permit amounts greater than those specified in paragraph (g)(4)(vi)
of this section, provided that the aggregate limitations of paragraphs
(g)(4)(ii)-(v) of this section are not exceeded.
* * * * *
4. Section 563b.4 is amended by removing the phrases ``District
Director'' and ``District Director's'' where they appear in paragraph
(b)(1) and adding in lieu thereof the phrases ``Regional Director'' and
``Regional Director's'', respectively; and by revising the concluding
text of paragraph (b)(1) following the notice of filing and paragraph
(c) to read as follows:
Sec. 563b.4 Notice of filing; public statements; confidentiality.
* * * * *
(b) * * *
(1) * * *
Written comments, including objections to the plan of conversion and
materials supporting the objections, from any member of the applicant
or aggrieved person will be considered by the Office if filed within
twenty calendar days after the date of this notice. The OTS may, in its
discretion, and upon written request, extend the twenty day comment
period for an additional twenty calendar days. Failure to provide the
written comments in twenty calendar days may preclude the pursuit of
any administrative or judicial remedies. Two copies of the comments
should be sent to the Chief Counsel, Corporate and Securities Division,
one copy to the Corporate Activities Division and one copy to the
Regional Director. The proposed plan of conversion and any comments
will be available for inspection by any member of the applicant at the
Chief Counsel's Office and at the Regional Director's Office. A copy of
the plan of conversion may also be inspected at the home office and
each branch office of the applicant.
* * * * *
(c) Should the applicant desire to submit any information it deems
to be of a confidential nature regarding the answer to any item or any
part of any exhibit included in any application under this part, such
information pertaining to such item or exhibit shall be separately
bound and labeled ``confidential,'' and a statement shall be submitted
therewith briefly setting forth the grounds on which such information
should be treated as confidential. Only general reference thereto need
be made in that portion of the application which the applicant deems
not to be confidential. Applications under this part shall be made
available for inspection by the public, except for portions which are
bound and labeled ``confidential'' and which the Office determines to
withhold from public availability under 5 U.S.C. 552 and part 505 of
this chapter. Preliminary soliciting materials will be made available
upon filing, unless such materials are not otherwise available to the
public and are bound and labeled ``confidential.'' The applicant will
be advised of any decision by the Office to make public information
designated ``confidential'' by the applicant. Even though sections of
the application are considered ``confidential,'' as far as public
inspection thereof is concerned, to the extent it deems necessary, the
Office may comment on such confidential submissions in any public
statement in connection with its decision on the application without
prior notice to the applicant.
5. Section 563b.5 is amended by revising paragraphs (d)(4) and
(e)(5) to read as follows:
Sec. 563b.5 Solicitation of proxies; proxy statement.
* * * * *
(d) * * *
(4) Each voting member must be furnished a form of proxy conforming
with paragraph (d) of this section. No applicant shall use previously-
executed proxies.
(e) * * *
(5) All preliminary copies of material filed pursuant to paragraphs
(e)(1), (e)(2) and (e)(4) of this section shall be clearly marked on
the cover page ``Preliminary Copy''. Such preliminary copies shall be
public unless otherwise deemed confidential pursuant to Sec. 563b.4(c)
of this part.
* * * * *
6. Section 563b.7 is amended by revising paragraphs (f)(1)(ii) and
(f)(3), by removing the period at the end of paragraph (f)(1)(iii) and
adding a semicolon in its place, and by adding paragraph (f)(1)(iv) to
read as follows:
Sec. 563b.7 Pricing and sale of securities.
(f) * * *
(1) * * *
(ii) The materials shall contain a full appraisal, including a
complete and detailed description of the elements that make up an
appraisal report, justification for the methodology employed and
sufficient support for the conclusions reached therein;
* * * * *
(iv) 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 in accordance with the OTS
applications processing rules, 12 CFR part 516, decline to further
process the application.
* * * * *
(3) In addition to the information required in paragraphs (f)(1)
and (f)(2) of this section, the applicant shall file with the Office
such additional information with respect to the pricing of the capital
stock of the association as the Office may request.
* * * * *
Sec. 563b.8 [Amended]
7. Section 563b.8 is amended by removing the phrase ``District
Director'' where it appears in paragraphs (e)(1) and (t)(1), and by
adding in lieu thereof the phrase ``Regional Director''.
8. Section 563b.10 is revised to read as follows:
Sec. 563b.10 Conversion of a savings association through merger with
an existing holding company or stock savings association.
A savings association that qualifies for a voluntary supervisory
conversion under subpart C of this part may convert to stock form by
merging with an existing holding company or interim Federal or state
chartered stock association in a transaction in which stock of the
existing holding company or resulting association is issued.
9. Section 563b.100 is amended by removing the phrase ``90 days''
in Form AC, the first paragraph of Item 6 and by adding in lieu thereof
the phrase ``one year''; and by adding Exhibit 8 to Form AC to read as
follows:
Sec. 563b.100 Form AC--Application for Conversion.
Form AC
* * * * *
Exhibit 8. Business Plans
(a) Furnish a consolidated business plan. The converting
association shall provide, as part of the business plan, a detailed
discussion of how the capital acquired in the conversion will be
utilized, including, among other things, any proposed stock
repurchases.
(b) Applicant should follow Sec. 563b.4(c) if the business plan
is to be deemed confidential.
10. Section 563b.101 is amended by revising Items 1 and 4(d) of
Form PS to read as follows:
Sec. 563b.101 Form PS--Proxy Statements.
Form PS
* * * * *
Item 1. Notice of Meeting
The cover page of the proxy statement shall give notice of the
meeting of the association members called by the board of directors
to act upon the conversion. The cover page shall include the date,
time and place of the meeting, a brief description of each matter to
be acted upon at the meeting, the date of record for association
members entitled to vote at the meeting, the date of the statement
and the full address, ZIP code and telephone number of the
applicant.
In accordance with Sec. 563b.5(d)(4) of this part, the applicant
shall not use previously-executed proxies to vote on the plan of
conversion.
* * * * *
Item 4. Voting Rights and Vote Required for Approval
* * * * *
(d) The applicant shall not use previously-executed proxies to
vote on the plan of conversion.
* * * * *
PART 575--MUTUAL SAVINGS AND LOAN HOLDING COMPANIES
11. The authority citation for 12 CFR part 575 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828.
12. Section 575.7 is amended by adding paragraph (e) to read as
follows:
Sec. 575.7 Issuances of stock by savings association subsidiaries of
mutual holding companies.
* * * * *
(e) Procedural and substantive requirements. The procedural and
substantive requirements of Secs. 563b.3 through 563b.8 of this
subchapter shall apply to all mutual holding company stock issuances
under this section, unless clearly inapplicable.
13. Section 575.13 is amended by adding a new sentence at the end
of paragraph (a)(4) to read as follows:
Sec. 575.13 Procedural requirements.
(a) * * *
(4) * * * Notwithstanding the provisions in this paragraph (a)(4),
``running'' proxies or similar proxies may not be used to vote for a
mutual to stock conversion undertaken either by a mutual savings
association or a mutual holding company.
* * * * *
Dated: April 7, 1994.
By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 94-9981 Filed 5-2-94; 8:45 am]
BILLING CODE 6720-01-P
