[Federal Register Volume 59, Number 31 (Tuesday, February 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3527]


[[Page Unknown]]

[Federal Register: February 15, 1994]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 303

RIN 3064-AB34

 

Notice of Mutual-to-Stock Conversions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Interim rule with request for comments.

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SUMMARY: The interim rule requires FDIC-insured state-chartered savings 
banks that are not members of the Federal Reserve System (State Savings 
Banks) that apply to their applicable state banking regulator to 
convert from the mutual to stock form of ownership to provide the FDIC 
with a notice of the proposed conversion and a copy of the application 
and related disclosure materials. The interim rule also requires that 
State Savings Banks not finalize a mutual-to-stock conversion until 
either they receive a notice of the FDIC's intention not to object to 
the proposed conversion or 60 days pass after a complete notice and 
copy of the application materials are filed with the FDIC. A conversion 
may not be completed if the FDIC objects to the proposed conversion.
    The intended effect of the interim rule is to provide the FDIC with 
the opportunity to review proposed mutual-to-stock conversions of FDIC-
regulated mutual savings banks to determine whether the proposed 
conversion would engender concerns about the safety and soundness of 
the institution, the institution's compliance with applicable law, and/
or insider abuse.

DATES: Effective date: The interim rule is effective February 15, 1994. 
Written comments must be received by the FDIC on or before March 17, 
1994.

ADDRESSES: Written comments shall be addressed to the Office of the 
Executive Secretary, Federal Deposit Insurance Corporation, 550 17th 
Street, NW., Washington, DC 20429. Comments may be hand-delivered to 
room F-400, 1776 F Street, NW., Washington, DC, on business days 
between 8:30 a.m. and 5 p.m. (FAX number: (202) 898-3838). Comments 
will be available for inspection in room 7118, 550 17th Street, NW., 
Washington, DC between 9 a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Robert F. Miailovich, Associate 
Director, Division of Supervision (202/898-6918), Garfield Gimber, III, 
Examination Specialist, Division of Supervision (202/898-6913), Claude 
A. Rollin, Senior Counsel, Legal Division (202/898-3985) or Joseph A. 
DiNuzzo, Counsel, Legal Division (202/898-7349), Federal Deposit 
Insurance Corporation, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this interim final rule 
has been submitted to the Office of Management and Budget (OMB) for 
review and approval pursuant to the Paperwork Reduction Act of 1980 (44 
U.S.C. 3501 et seq.). Comments regarding the accuracy of the burden 
estimate, and suggestions for reducing the burden, should be addressed 
to the Office of Management and Budget, Paperwork Reduction Project 
(3064-AB34), Washington, DC 20503, with copies of such comments sent to 
Steven F. Hanft, Assistant Executive Secretary (Administration), room 
F-400, FDIC, 550 17th St. NW., Washington, DC 20429.
    The collection of information in this interim final rule is found 
in Sec. 303.15 and takes the form of copies of preexisting materials 
and other materials related to a State Savings Bank's proposed 
conversion from the mutual to stock form of ownership. The information 
will be used to enable the FDIC to identify and address issues involved 
in the proposed conversion relating to the safety and soundness of the 
bank, any abusive management practices and potential violations of 
applicable law.
    The estimated annual reporting burden for the collection of 
information requirement in this interim final rule is summarized as 
follows:
    Number of Respondents: 50.
    Number of Responses per Respondent: 1.
    Total Annual Responses: 50.
    Hours per Response: 2.
    Total Annual Burden Hours: 100.

Regulatory Flexibility Act

    Because no notice of proposed rulemaking was required in connection 
with the adoption of this interim rule, no regulatory flexibility 
analysis is required under the Regulatory Flexibility Act (5 U.S.C. 601 
et seq.).

Background

The Proposed Policy Statement
    Recently, the FDIC issued for public comment a proposed policy 
statement on the conversions of State Savings Banks from mutual to 
stock ownership (Proposed Policy Statement). 59 FR 4712 (February 1, 
1994). As explained in the proposal, in recent years a number of 
mutually owned State Savings Banks have converted to stockholder-owned 
State Savings Banks. In some cases, the conversion results in an 
acquisition by or merger into another institution (generally known as 
merger/conversions), with depositors/members obtaining the right to 
purchase stock in the acquiring institution and not the converting 
savings bank. Many of the institutions that converted from mutual to 
stock form first converted from federal or state mutual savings 
associations regulated by the Office of Thrift Supervision (OTS) to 
State Savings Banks.
    One consequence of these conversions to State Savings Banks is that 
the FDIC replaces the OTS as the institution's primary federal 
regulator. The mutual-to-stock conversion process is subject to the 
rules and protections of state law.1 Conversion rules under state 
law are not identical to and in some cases are less stringent than OTS 
regulations. The absence of consistent treatment under state laws or 
some federal oversight over State Savings Bank conversions to stock 
form presents an opportunity for inconsistency and abuse. In addition, 
the FDIC understands that the OTS is in the process of reviewing the 
adequacy of its own regulations and policies.
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    \1\Some federal laws may still apply, such as the anti-fraud 
provisions of the federal securities law. E.g., 15 U.S.C. 78j.
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    The areas of particular concern for potential abuse in conversions 
are: (1) Properly appraising the institution to be sold; (2) Pricing 
the stock sold in the conversion; (3) Apportioning the stock 
subscription rights; (4) Disclosure of information needed to make an 
informed investment decision; and (5) Compensation and benefits 
provided to insiders.
    The improper valuation of the institution and/or under-pricing of 
conversion stock, among other things, may unjustly enrich the 
purchasers, increase the temptation by insiders to acquire more shares 
than they are fairly entitled to, and deny the institution the 
additional capital it should receive to protect depositors and the 
insurance fund. The over-pricing of conversion stock, among other 
things, may result in poor investment decisions by depositors/members 
who may lack investment expertise.
    In some conversion transactions insiders may appear to have 
received (and, in some cases, have received) preferential treatment 
over the interests of depositors/members. In addition, mutual savings 
banks that convert to stock form undertake a major restructuring that 
possibly can lead to significant changes in the nature or volume of 
business conducted. In the recent past, some institutions, in 
leveraging capital raised through a conversion and reaching for a 
return on equity, have vigorously competed for loans and liberalized 
underwriting standards--activities which led to loan losses that in 
many instances depleted more capital than was raised through the 
mutual-to-stock conversion and, in some cases during the past ten 
years, resulted in failure of the converted thrift.
    The general purpose of the Proposed Policy Statement is to solicit 
public comment on the issues involved in mutual-to-stock conversions 
and whether and how the FDIC should regulate this activity.

Need for the Interim Rule

    The Board of Directors of the FDIC (Board) has subsequently 
determined that during the pendency of the Proposed Policy Statement it 
is necessary for the FDIC to review applications filed by State Savings 
Banks with their respective state banking regulator and any other 
applicable state and federal banking and/or securities regulators to 
determine whether the proposed conversions contain any safety and 
soundness issues and/or issues of insider abuse that reflect on the 
integrity and competence of the management of the converting 
institution. The Board's concerns are caused by several recent and 
pending mutual-to-stock conversions of State Savings Banks that (as 
discussed below) have given rise to questions related to management 
abuse and excessive enrichment of insiders, fairness to depositors and 
general safety and soundness concerns. These conversions have been and 
currently are the subject of congressional hearings and numerous news 
articles and reports. The FDIC also has received (and continues to 
receive) direct complaints from depositors of State Savings Banks about 
unfair treatment and insider abuse in mutual-to-stock conversions.
    On January 26, 1994, Senator Riegle (the Chairman of the Senate 
Banking Committee) and Senator D'Amato (the ranking minority member of 
the Senate Banking Committee) introduced a bill (S. 1801, the ``Mutual 
Depository Institution Conversion Protection Act of 1994'') to ``combat 
abuses by management and insiders'' in mutual-to-stock conversions of 
depository institutions. In his statement accompanying the introduction 
of the bill, Senator Riegle noted that, ``[t]his self-dealing should 
stop, and stop now. These outrageous conversions are not victimless 
crimes. To the extent that management and insiders are skimming off the 
net worth of the institution through a conversion, they are doing so at 
the expense of the institution and its account holders. Significantly, 
such transactions also siphon capital that ultimately protects the 
deposit insurance system''.
    In January 1994, the Financial Institutions Subcommittee of the 
House Banking Committee held two hearings on mutual-to-stock 
conversions. At the first hearing, held in Winston-Salem, North 
Carolina, several depositors of recently converted State Savings Banks 
testified. One group of depositors characterized the conversion of 
their bank as providing ``astronomical benefits'' to officers and 
directors of the bank and accused such insiders of treating the assets 
of the bank as their ``own personal property''. They also contended 
that ``fraudulent intent'' had been involved in determining the value 
of the institution. A depositor of another converted State Savings Bank 
stated that he has done business with the bank since 1951 and had 
retirement deposits in the bank over the insured limit. He said that he 
``will receive no compensation for my ownership interest in [the bank]. 
On the other hand, the officers and directors--who are not at risk and 
have no ownership interest by reason of their offices--will be paid 
millions of dollars * * * [S]omebody who is not at risk is getting 
rich--and quite rich.'' A depositor of another recently converted State 
Savings Bank stated at the hearing that the applicable state mutual-to-
stock conversion rules are a ``legalized formula to abscond with the 
assets of a mutual savings bank''.
    A spokesman for the Consumer Federation of America testified at the 
Subcommittee's second hearing, held in Washington, D.C. He stated that 
``[t]he Banking Committee can take justifiable pride in the work it 
performed in 1989 to reform the regulation of the savings and loan 
industry * * * [b]ut the job is not complete. One area of abuse--the 
conversion of mutual institutions into stock companies--was left 
untouched by reforms and this oversight--however accidental--has turned 
into a wonderful, fur-lined play pen for S&L insiders, conversion law 
firms and stock manipulating Wall Street fast-buck artists. And, once 
again, it is the depositor-consumer who is left out in the cold''. He 
also emphasized the immediacy of the situation in noting that ``[w]e 
are in the middle of a feeding frenzy''.
    A law school professor also submitted a written statement to the 
Subcommittee. He wrote that ``[b]y converting their institutions to the 
stock form of ownership, and granting themselves generous stock and 
option awards, trustees and managers can make millions of dollars in 
conversions. While the conversion form is beneficial, because it will 
infuse new capital and subject these institutions to market discipline, 
the decision about whether to convert is left solely in the hands of 
incumbent management. It is not uncommon for employees and trustees to 
own as much as 30 percent of the stock after the offering and the 
exercise of stock options. The stock is free, and--by pricing the 
options very low, with the help of cooperative regulators and appraisal 
firms--management can buy stock options at the offering price, secure 
in the knowledge that pervasive underpricing will enable them to make 
millions when share prices adjust to true market value''.
    Moreover, the primary federal regulator of state-chartered and 
federally chartered savings and loan associations has felt the need to 
take immediate action to stop abuses. On January 31, 1994, the OTS 
suspended the acceptance of applications involving merger conversions 
of mutual savings associations under its supervision. The press release 
announcing the moratorium noted that ``[the] OTS has grown increasingly 
troubled over the apparent advantages management of the mutual and the 
acquirer have in a merger conversion to the detriment of the depositors 
of the mutual. The moratorium * * * will provide an opportunity for the 
OTS to re-examine the conversion process''.
    In light of these frequent expressions of public and governmental 
concern, and the numerous reports of abusive insider practices, the 
Board has determined that, until the FDIC completes the ``rulemaking'' 
process in relation to the Proposed Policy Statement, there is a need 
to review all pending and new mutual-to-stock conversion applications. 
The Board believes that, without the immediate implementation of the 
interim rule, additional conversions will be completed that may entail 
abusive management action and unsafe and unsound practices. In order to 
properly fulfill its supervisory role over State Savings Banks, it is 
necessary that the FDIC have an early opportunity to review banks' 
conversion plans. As discussed below, if the FDIC identifies a safety-
and-soundness concern, a breach of fiduciary duty by an institution's 
management or possible violation under applicable law, the FDIC will 
issue a notice of objection which, among other things, will advise the 
institution that the conversion shall not be consummated unless and 
until the FDIC rescinds the letter of objection. The enforcement 
actions available to the FDIC are discussed below.
    For the above-noted reasons, the Board of Directors has determined 
that the notice and public participation that are ordinarily required 
by the Administrative Procedure Act (5 U.S.C. 553) before a regulation 
may take effect would, in this case, be contrary to the public interest 
and that good cause exists for waiving the customary 30-day delayed 
effective date. Nevertheless, the Board desires to have the benefit of 
public comment before adoption of a permanent final rule on this 
subject, and so invites interested persons to submit comments during a 
30-day comment period. In adopting a final regulation, the Board will 
make such revisions to the interim rule as may be appropriate based on 
the comments received on the interim rule and the Proposed Policy 
Statement.
    In the past, some State Savings Banks have provided the FDIC with 
copies of conversion documentation and application materials. This 
process has been voluntary, inconsistent and, thus, undependable. The 
interim rule requires State Savings Banks to provide such materials to 
the FDIC. As discussed below, the FDIC intends to review the conversion 
documentation and application materials to determine whether there are 
any issues involving the continued safe-and-sound operation of the 
bank, whether the proposal contains any potential abuses by management 
and whether the transaction involves any potential violation of 
applicable law. The FDIC's authority under section 8 of the FDI Act (12 
U.S.C. 1818) includes, among other things, the ability to take action 
against a State Savings Bank and/or its management that is engaged, or 
about to engage, in an unsafe or unsound practice in conducting the 
business of the bank.
    In order to determine whether a State Savings Bank, in the course 
of its proposed mutual-to-stock conversion, is about to engage in an 
activity with safety and soundness implications, the FDIC must be aware 
of the details of the proposed conversion at an early date; for 
example, it is important that the FDIC know the bank's business plan 
for post-conversion operation, growth and investment of any newly 
injected capital. A mutual-to-stock conversion can be viewed as a 
material change in the operation of the institution for two reasons. 
First, substantially increasing the capitalization from the sale of 
stock can lead to new and additional risks in investing the funds. 
Secondly, management becomes susceptible to market discipline for the 
first time with shareholders who demand and expect a reasonable return 
on their investment--factors which also can lead to additional risks in 
investing funds.
    Because of the safety and soundness concerns inherent in the 
potential for new risks, a comprehensive and realistic business plan is 
needed for post conversion operations. That information typically is 
provided in conversion applications required by the state regulators. 
In the past, certain State Savings Banks that raised substantial 
capital in mutual-to-stock conversions either failed or became 
financially troubled because of imprudent use of funds raised through 
the sale of stock. The Board believes it is necessary for the FDIC to 
obtain information, as soon as possible, on an institution's intended 
use of funds generated by the conversion.
    In one proposed conversion transaction, a state mutual savings bank 
applied to convert to stock form via a mutual holding company 
reorganization in which all the non-holding company shares would be 
obtained only by bank insiders. In that situation, not only would the 
depositors be denied the opportunity to purchase any shares, but the 
institution reportedly would end up with less capital as a result of 
the conversion. This would result because the proceeds of the stock 
issuance would be less than the cost of the transaction. This 
particular contemplated transaction not only appears to be unfair to 
depositors but also raises safety and soundness concerns since 
capitalization would decline.
    Section 8(e) of the FDI Act also empowers the FDIC to bring an 
enforcement action against bank insiders who have committed or are 
engaged in any act, omission or practice that constitutes a breach of 
fiduciary duty. In a recent highly publicized case, the Superintendent 
of Banks of the State of New York (Superintendent) found that a bank's 
board of trustees breached its fiduciary duty by failing to assure 
themselves that the bank was properly valued prior to the initiation of 
the proxy solicitation process.\2\ Specifically, the Superintendent 
determined that the board of trustees did not, prior to the 
solicitation of proxies: ``(1) Inform or seek to inform itself about 
the factors that would be significant in valuing the Bank; (ii) inform 
or seek to inform itself about the methods by which the appraiser 
determined the value of the Bank; (iii) seek or receive any in-depth 
analysis of the Appraisal''. Consequently, the Superintendent found 
that the trustees violated a provision of New York Banking Law 
requiring them to exercise a duty of care to ensure the fairness of the 
conversion by informing themselves about the appraisal and exercising 
their judgment to determine the reasonableness of the appraisal.
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    \2\See, Order Pursuant to Section 39 of the New York Banking 
Law--In the Matter of The Green Point Savings Bank, Page 18.
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    The Superintendent also determined that the adequacy of certain 
disclosures in the original proxy statement issued by the bank was 
questionable. For example, the Superintendent found that the proxy 
statement contained no disclosures regarding another bank's interest in 
a merger conversion transaction, the trustees' response to that 
proposed merger and the reasons for the trustees' response. The 
Superintendent concluded that ``failure to provide depositors with such 
information about alternate proposals in the Proxy could deprive 
depositors of the information necessary to evaluate the Trustee's 
decision to convert, and therefore was misleading''. The Superintendent 
also found that disclosures in the proxy statement concerning certain 
stock awards to management and the trustees failed to state the actual 
dollar value of those benefits and thus were inadequate. In addition, 
the Superintendent found that the proxy materials did not contain an 
adequate discussion of the reasons for the conversion and that 
depositors should have been provided with all of the material factors 
which led to the trustees' decision to pursue the conversion 
transaction.
    Finally, the Superintendent sought and obtained a ``substantial 
reduction in the stock-based compensation awarded to management and the 
trustees in connection with the conversion and cancellation of all 
stock subscriptions at the initial offering price by such individuals 
and related parties''. As further stated in that Order, those 
modifications served ``to reduce the opportunities for self-enrichment 
that could influence the Board's review of the valuation of the Bank''.
    In this situation, the Superintendent interceded to ensure that the 
bank's trustees considered and reviewed the reasonableness of the 
bank's appraisal, provided adequate disclosure to the depositors via a 
supplemental proxy statement and limited the stock-based compensation 
awarded to management and the trustees in connection with the 
conversion transaction. Although state regulation worked in this case 
to prevent insider windfalls, the FDIC cannot assume that such 
intervention will occur in every state and in every conversion 
transaction involving possible insider abuses.
    The duties and obligations of trustees and officers of mutual 
savings banks, as illustrated in the foregoing case, are identical to 
the responsibilities the FDIC has historically enunciated and enforced 
concerning directors and officers of commercial banks.3 The two 
principal duties of care and loyalty that directors and officers of 
commercial banks must exercise on behalf of the institution and its 
constituencies (i.e., depositors, creditors and shareholders) also 
obligate trustees of depositor-owned mutual savings banks. Both duties 
have long antecedents in the common law of corporations and financial 
institutions.4
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    \3\See e.g., Statement Concerning the Responsibilities of Bank 
Directors and Officers (FDIC Legal Division, December 3, 1992); 
Pocket Guide for Directors (FDIC 1988).
    \4\Greenfield Savings Bank v. Abercrombie, 211 Mass. 252, 97 
N.E. 897, 39 L.R.A.n.s. 173 (1912) provides a detailed discussion of 
liability of trustees of a savings bank.
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    Trustees (as well as officers) of mutual savings institutions are 
held to the same standard of care and loyalty as directors and officers 
of commercial banks. Thus the trustees must fulfill their duty of 
loyalty to the institution by administering its affairs with the utmost 
candor, personal honesty and integrity. They are prohibited from 
advancing their own personal or business interests or those of others 
at the expense of the bank. This general fiduciary duty has been 
frequently interpreted to include an element of fairness and good faith 
which, in the context of mutual-to-stock conversions, affords 
protection to the depositors/owners of mutual savings banks. Through 
this interim rule, the FDIC seeks to protect these depositor/owners in 
a consistent manner.
    The FDIC, through the interim rule, also requires the trustees of 
mutual savings banks to adhere to the same standards of loyalty and 
care that are required of directors and officers of commercial banks in 
order to prevent insider abuse. Publicized insider abuse (and the 
lawsuits that such abuses may engender) may have a sufficiently 
significant impact upon the reputation of a bank to affect its 
continued viability and, thus, its safety and soundness, resulting in a 
regulatory violation.
    In addition, section 39 of the FDI Act (12 U.S.C. 1831p-1(c)) 
provides that excessive compensation, or compensation that could lead 
to a material financial loss for an institution, is an unsafe and 
unsound practice.5 As noted above, excessive profits to insiders 
is a troubling aspect of some recent State Savings Bank conversions to 
stock form.
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    \5\Proposed regulations on section 39 of the FDI Act have been 
published. 58 FR 60819 (November 18, 1993).
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Explanation of the Interim Rule

    The interim rule adds a new section to part 303 of the FDIC's 
regulations (12 CFR 303.15) prohibiting State Savings Banks from 
converting to stock form without complying with the requirements of the 
section. The interim rule requires State Savings Banks that propose to 
convert to stock ownership to file with the FDIC a notice of intent to 
convert to stock form consisting of a description of the proposed 
conversion accompanied by a copy of all documentation and application 
materials filed with the applicable state and federal regulators. The 
notice may be in letter form and must be provided to the FDIC (along 
with copies of the application materials) at the same time the 
application materials are filed with the institution's primary state 
regulator.
    State Savings Banks that already have filed conversion applications 
and disclosure materials with the applicable state and federal banking 
and/or securities regulators (or otherwise have initiated a proposed 
mutual to stock conversion) prior to the effective date of the interim 
rule should contact their applicable FDIC Regional Office as soon as 
possible and provide that office with the conversion notice and 
application and disclosure materials as soon as practicable. The FDIC 
intends to review such materials expeditiously so as not to interfere 
with the completion of proposed conversions to which the FDIC would not 
object.
    The FDIC will review all conversion materials with a special 
interest in: The use of the proceeds from the sale of stock, as 
described in the business plan; the adequacy of the disclosure 
materials; the participation of depositors in approving the 
transaction; the form of the proxy statement required for the vote of 
the depositors/members on the conversion6; any increased 
compensation and other remuneration (including stock grants, stock 
option rights and other similar benefits) to be obtained by officers 
and directors/trustees of the bank in connection with the conversion; 
the adequacy and independence of the appraisal of the value of the 
mutual savings bank for purposes of determining the price of the shares 
of stock to be sold; the process by which the bank's trustees approved 
the appraisal, the pricing of the stock and the compensation 
arrangements for insiders; the nature and apportionment of stock 
subscription rights; and the extent of any existing and planned 
contributions to or investments in the community. In a merger/
conversion, the FDIC will pay particular attention to the value offered 
to depositors of the converting institution and the compensation 
packages offered to management.
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    \6\ One issue would be whether the applicable state law and/or 
the plan of conversion requires a special proxy for the conversion 
or whether management expects to use an existing general proxy to 
vote for the depositor/member on the conversion.
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    The FDIC generally expects proposed conversions to substantially 
satisfy the standards found in the mutual-to-stock conversions 
regulations of the OTS (12 CFR part 563b). Any variance from those 
regulations will be closely scrutinized. Compliance with OTS 
requirements will not, however, necessarily be sufficient for FDIC 
regulatory purposes.
    In imposing the requirements of the interim rule the Board does not 
intend to discourage State Savings Banks from converting to stock form 
for legitimate business purposes. The FDIC recognizes that stock 
conversions can be very effective and beneficial in raising capital, 
particularly for banks whose capital does not meet regulatory 
standards. In particular, the FDIC does not intend to impede the 
completion of supervisory conversions, which entail the capitalization 
of undercapitalized institutions and thereby minimize costs to the FDIC 
insurance funds. In such situations, the FDIC intends to act as quickly 
as reasonable in reviewing the proposed conversion materials and might 
not object to a conversion transaction that does not come within the 
parameters of the OTS' regulations, provided that the transaction 
likely would prevent a loss to the applicable deposit insurance fund.
    Under the interim rule, a bank's notice to the FDIC will not be 
deemed complete until the State Savings Bank provides the materials 
required by the interim rule, including any materials specifically 
requested by the FDIC after the bank's initial submission. The FDIC 
will notify the institution when the notice is complete. The FDIC will 
issue to the converting bank a notice of intent not to object to the 
proposed conversion, if the FDIC determines that the proposed 
conversion would not pose a risk to the safety and soundness of the 
bank, violate any law or regulation or present a breach of fiduciary 
duty. Such notice of non-objection shall be provided within 60 days 
after the FDIC receives a complete notice of the proposed conversion 
and a copy of all documentation and application materials. If the FDIC 
does not provide a non-objection letter within 60 days after the FDIC 
receives a complete notice of the proposed conversion, the bank may 
consummate the conversion; however, the FDIC has the discretion to 
extend the initial 60-day period an additional 60 days.
    In situations where the FDIC identifies a safety and concern, 
violation of any law or regulation or breach of fiduciary duty, the 
FDIC will issue to the institution a letter of objection to the 
proposed conversion. Under the interim rule, the State Savings Bank may 
not consummate the conversion until the FDIC has rescinded such a 
letter. The FDIC intends to use its administrative authority, if 
necessary, to correct the concerns expressed in the letter of objection 
and to enforce compliance with the interim rule.
    Violations of regulations can result in, among other things, the 
FDIC's issuance of a cease and desist order and/or temporary cease and 
desist order under 12 U.S.C. 1818(b) and/or (c). The order could not 
only prohibit conduct, but also require affirmative action. In 
addition, the FDIC could remove and/or prohibit a party from 
participating in the conduct of the affairs of a bank under section 
8(e) of the FDI Act (12 U.S.C. 1818(e)). Moreover, anyone involved in a 
conversion transaction, not just the officers, directors and employees 
of the bank, could be subject to a cease and desist order under section 
8(b) and/or (c) of the FDI Act (12 U.S.C. 1818(b), (c)), or a removal 
and prohibition order under section 8(e) of the FDI Act (12 U.S.C. 
1818(e)). In addition, the FDIC could impose civil money penalties 
under section 8(i) of the FDI Act (12 U.S.C. 1818(i)). The FDIC also 
could terminate the deposit insurance of the bank under section 8(a)(2) 
of the FDI Act (12 U.S.C. 1818(a)(2)). Finally, the FDIC also could 
issue a directive based on noncompliance with section 39 of the FDI 
Act.

Request for Public Comment

    The FDIC is issuing this interim rule in response to the immediate 
need to review proposed mutual-to-stock conversions of State Savings 
Banks. The FDIC is, however, hereby requesting comment during a 30-day 
comment period on all aspects of the interim rule.

List of Subjects in 12 CFR Part 303

    Administrative practice and procedure, Authority delegations 
(Government agencies), Bank deposit insurance, Banks, Banking, 
Reporting and recordkeeping requirements, Savings associations.

    For the reasons set out in the preamble, part 303 of chapter III of 
title 12 of the Code of Federal Regulations is amended as follows:

PART 303--APPLICATIONS, REQUESTS, SUBMITTALS, DELEGATIONS OF 
AUTHORITY, AND NOTICES REQUIRED TO BE FILED BY STATUTE OR 
REGULATION

    1. The authority citation for part 303 is revised to read as 
follows:

    Authority: 12 U.S.C. 378, 1813, 1815, 1816, 1817(a)(2)(b), 
1817(j), 1818, 1819 (``Seventh'' ``Eighth'' and ``Tenth''), 1828, 
1831e, 1831o, 1831p-1(a); 15 U.S.C. 1607.

    2. A new Sec. 303.15 is added to read as follows:


Sec. 303.15  Mutual-to-stock conversions of mutually owned state-
chartered savings banks.

    (a) Requirement for mutual-to-stock conversion. An insured state-
chartered mutually owned savings bank shall not convert to stock form, 
except as provided for in this section.
    (b) Prior notice requirement. An insured state-chartered mutually 
owned savings bank that proposes to convert from mutual to stock form 
shall file with the FDIC a notice of intent to convert to stock form 
and copies of all documents filed with state and federal banking and/or 
securities regulators in connection with the proposed conversion. An 
institution that is in the process of converting to stock form that has 
filed a proposed stock conversion application with the applicable state 
and federal regulators (or otherwise has initiated a stock conversion) 
prior to the effective date of this section shall file the required 
materials with the FDIC as soon as practicable. An insured mutual 
savings bank chartered by a state that does not require the filing of 
application materials to convert from mutual to stock form that 
proposes to convert to the stock form shall notify the FDIC of the 
proposed conversion and provide the materials requested by the FDIC.
    (c) Content and filing of notice--(1) Content of notice. The notice 
required to be filed under paragraph (b) of this section shall provide 
a description of the proposed conversion and include a copy of all 
notices or applications concerning the proposed conversion, including 
all attachments or appendices thereto, that have been filed with any 
state and federal banking and/or securities regulators. Copies of all 
agreements entered into as part of the mutual-to-stock conversion 
between the institution, its officers, directors/trustees and any other 
institution and/or its successors also must be provided.
    (2) Filing of notice. Notices shall be filed with the regional 
director (Division of Supervision) in the region in which the 
institution seeking to convert is headquartered at the same time as the 
conversion application materials are filed with the institution's 
primary state regulator.
    (d) Review by FDIC. (1) The FDIC shall review the materials 
submitted by the institution seeking to convert from mutual to stock 
form. The FDIC, in its discretion, may request any additional 
information it deems necessary to evaluate the proposed conversion and 
the institution shall provide such information to the FDIC 
expeditiously. Among the factors to be reviewed by the FDIC are:
    (i) The use of the proceeds from the sale of stock, as described in 
the business plan;
    (ii) The adequacy of the disclosure materials;
    (iii) The participation of depositors in approving the transaction;
    (iv) The form of the proxy statement required for the vote of the 
depositors/members on the conversion;
    (v) Any increased compensation and other remuneration (including 
stock grants, stock option rights and other similar benefits) to be 
obtained by officers and directors/trustees of the bank in connection 
with the conversion;
    (vi) The adequacy and independence of the appraisal of the value of 
the mutual savings bank for purposes of determining the price of the 
shares of stock to be sold;
    (vii) The process by which the bank's trustees approved the 
appraisal, the pricing of the stock and the compensation arrangements 
for insiders;
    (viii) The nature and apportionment of stock subscription rights; 
and
    (ix) The extent of any existing and planned contributions to or 
investments in the community.
    (2) In reviewing the materials required to be submitted under this 
section, the FDIC will take into account the extent to which the 
proposed conversion conforms with the various provisions of the mutual-
to-stock conversion regulations of the Office of Thrift Supervision (12 
CFR Part 563b), as currently in effect at the time the FDIC reviews the 
required materials related to the proposed conversion. Any non-
conformity with those provisions will be closely scrutinized. 
Conformity with the OTS requirements, however, will not be sufficient 
for FDIC regulatory purposes if the FDIC determines that the proposed 
conversion would pose a risk to the institution's safety and soundness, 
violate any law or regulation or present a breach of fiduciary duty.
    (e) Notification of completed filing of materials. The FDIC shall 
notify the institution when all the required materials related to the 
proposed conversion have been filed with the FDIC and the notice is 
thereby complete for purposes of computing the time periods designated 
in paragraphs (f) and (h) of this section.
    (f) Notice of intent not to object. If the FDIC determines, in its 
discretion, that the proposed conversion would not pose a risk to the 
institution's safety and soundness, violate any law or regulation or 
present a breach of fiduciary duty, then the FDIC shall issue to the 
bank seeking to convert, within 60 days of receipt of a complete notice 
of proposed conversion, a notice of intent not to object to the 
proposed conversion. The FDIC may, in its discretion, extend by written 
notice to the institution the initial 60-day period by an additional 60 
days.
    (g) Letter of objection. If the FDIC determines, in its discretion, 
that the proposed conversion poses a risk to the institution's safety 
and soundness, violates any law or regulation or presents a breach of 
fiduciary duty, then the FDIC shall issue a letter to the institution 
stating its objection(s) to the proposed conversion and advising the 
institution that the conversion shall not be consummated until such 
letter is rescinded. A copy of the letter of objection shall be 
furnished to the institution's primary state regulator and any other 
state or federal banking and/or securities regulator involved in the 
conversion. The letter of objection shall advise the institution of its 
right to petition the FDIC for reconsideration under Sec. 303.6(e) of 
the FDIC's regulations. Such action shall not, in any way, prohibit the 
FDIC from taking any other action(s) that it may deem necessary.
    (h) Consummation of the conversion. An institution may consummate 
the proposed conversion upon either:
    (1) the receipt of a notice of intent not to object; or
    (2) the expiration of the 60-day period following acceptance of a 
complete notice by the FDIC, unless the FDIC issues a notice of 
objection before the end of that period and, in which case, the 
conversion shall not be consummated until such letter is rescinded. The 
FDIC may, in its discretion, extend by written notice to the 
institution the initial 60-day period by an additional 60 days.
    (i) Delegation of authority. The authority to issue notices of 
intent not to object or letters of objection, to rescind such letters, 
to determine and to issue letters of non-objection, to determine the 
adequacy of the information submitted, to determine when the time 
periods prescribed in this section begin to run and whether to extend 
the time periods under paragraphs (f) and (h) of this section, and to 
notify institutions of the completion of the filing of the required 
materials is delegated to the Executive Director of Supervision and 
Resolutions, the Director of the Division of Supervision, and, where 
confirmed in writing by the Director of Supervision, to an associate 
director of the Division of Supervision or the regional director(s) 
(Division of Supervision) or deputy regional director(s) (Division of 
Supervision).

    By the order of the Board of Directors.

    Dated at Washington, D.C., this 8th day of February, 1994.

Federal Deposit Insurance Corporation
Robert E. Feldman,
Acting Executive Secretary.
[FR Doc. 94-3527 Filed 2-14-94; 8:45 am]
BILLING CODE 6714-01-P