[Federal Register Volume 59, Number 112 (Monday, June 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14007]
[[Page Unknown]]
[Federal Register: June 13, 1994]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 333
RIN 3064-AB44
Mutual-to-Stock Conversions of State Nonmember Savings Banks
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Proposed rule.
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SUMMARY: The proposed rule would require FDIC-insured mutual state-
chartered savings banks that are not members of the Federal Reserve
System (State Savings Banks) to comply with new substantive provisions
of the FDIC's regulations when proposing to convert to the stock form
of ownership. The intended effect of the proposed rule is to assure
that certain aspects of mutual-to-stock conversions of FDIC-regulated
institutions do not engender safety-and-soundness concerns, breaches of
fiduciary duty or other violations of law.
DATES: Written comments must be received by the FDIC on or before July
13, 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 H. Hartheimer, Acting Director,
Division of Resolutions (202/898-8879), John G. Finneran, Jr., Acting
Deputy General Counsel, Legal Division (202/898-3766), Robert F.
Miailovich, Associate Director, Division of Supervision (202/898-6918),
Robert W. Walsh, Manager, Planning and Program Development Section,
Division of Supervision (202/898-6911), Joseph A. DiNuzzo, Counsel,
Legal Division (202/898-7349), Federal Deposit Insurance Corporation,
Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Paperwork Reduction Act
The collection of information contained in this proposed 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-
0117), 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 proposed rule is found in
Sec. 333.4(d) and takes the form of 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 proposed rule is summarized as follows:
Number of Respondents: 40
Number of Responses per Respondent: 1
Total Annual Responses: 40
Hours per Response: 20
Total Annual Burden Hours: 800
Regulatory Flexibility Act
The Board hereby certifies that the proposed rule would not have a
significant economic impact on a substantial number of small entities
within the meaning of the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.). Therefore, the provisions of that Act regarding an initial and
final regulatory flexibility analysis (Id. at 603 and 604) do not apply
here.
II. Recent FDIC Regulatory Initiatives on Mutual-To-Stock Conversions
In recent years numerous mutually owned State Savings Banks have
converted to stockholder-owned State Savings Banks. 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.
Mutual-to-stock conversions of State Savings Banks are generally
subject to the rules and entitled to the protections of the applicable
state law.1
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\1\Some federal laws also apply, such as the anti-fraud
provisions of the federal securities law. E.g., 15 U.S.C. 78j.
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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 and the lack of some federal
oversight of State Savings Bank mutual-to-stock conversions present an
opportunity for inconsistency and abuse.
Because of concerns about prior and potential abuses in the
conversion process, on February 1, 1994, 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. The general purpose of the Proposed Policy Statement was to
solicit public comment on the issues involved in mutual-to-stock
conversions and whether and how the FDIC should regulate this activity.
The areas of FDIC concern identified in the Proposed Policy Statement
were: (1) Proper appraisal of the institution to be sold; (2) proper
pricing of the stock sold in the conversion; (3) fair apportionment of
the stock subscription rights; (4) adequate disclosure of information
needed to make an informed investment decision; and (5) non-abusive
compensation and benefits provided to insiders.
Subsequent to the issuance of the Proposed Policy Statement the
Board of Directors of the FDIC (Board) determined that during the
pendency of the Proposed Policy Statement it was 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 negatively on the integrity and
competence of the management of the converting institution. The Board's
concerns were caused by several recent and pending mutual-to-stock
conversions of State Savings Banks that had 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 recently been the subject of Congressional hearings
and numerous news articles and reports. The FDIC also had received (and
continues to receive) direct complaints from depositors of State
Savings Banks about unfair treatment and insider abuse in mutual-to-
stock conversions.
Thus, on February 15, 1994, the FDIC issued an interim final rule
adding a new section to Part 303 of the FDIC's regulations (to be
published at 12 CFR 303.15) prohibiting State Savings Banks from
converting to stock form without complying with the requirements of the
interim rule (Interim Rule). 59 FR 7194. 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. Pursuant to the Interim Rule, the FDIC
currently reviews all conversion materials regarding State Savings
Banks with a special interest in: The use of the proceeds from the sale
of stock, as prescribed 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 conversion; any increased compensation
and other remuneration (including stock grants, stock option rights and
other similar benefits) to be obtained by officers and 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 proposed merger/conversion, the FDIC pays particular attention to
the value offered to depositors of the converting institution and the
compensation packages offered to management.
As indicated in the Interim Rule, the FDIC generally expects
proposed conversions to substantially satisfy the standards found in
the mutual-to-stock conversion regulations of the OTS (12 CFR Part
563b). Any variance from those regulations is closely scrutinized. As
also indicated in the Interim Rule, however, compliance with OTS
requirements is not necessarily sufficient for FDIC regulatory
purposes. The Interim Rule specifies that the FDIC will look to the OTS
rules ``currently in effect'' at the time the FDIC reviews the proposed
conversion. As indicated below, the OTS recently revised its mutual-to-
stock conversion regulations. Thus, upon the issuance of the OTS
revised regulations on May 3, 1994 (59 FR 22725), the FDIC began taking
into account the extent to which proposed conversions of State Savings
Banks conform with the various provisions of the OTS' revised
regulations. The Interim Rule remains effective during the pendency of
this proposed rulemaking.
III. Comments Received on the Proposed Policy Statement and Interim
Rule
In developing and issuing this proposed rule it was helpful for the
FDIC staff and the Board to consider the comments received on the
Proposed Policy Statement and the Interim Rule. It is anticipated that
the Board will again consider those comments when taking final action
on the Proposed Policy Statement and the Interim Rule. Some issues
identified and discussed in the comments are not germane to the
proposed rule, but may be relevant when the Board takes final action on
the Proposed Policy Statement and Interim Rule; thus, although they are
mentioned briefly in the summary of comments provided below, those
issues are not otherwise discussed in the context of this proposed
rulemaking.
In the Proposed Policy Statement and the Interim Rule the FDIC
specifically requested comment on, among other issues: What abuses are
prevalent in mutual-to-stock conversions and why the FDIC should take
action against such abuses; whether federal oversight in conversions of
State Savings Banks is necessary; whether the FDIC should issue a
regulation closely following the OTS conversion regulations or the FDIC
should take a less formal approach; whether the FDIC should seek
Congressional action in this area; and the mechanics and substantive
provisions of the Interim Rule.
A summary of the comments received on the Proposed Policy Statement
and Interim Rule is provided below.
IV. Need for the Proposed Rule
Recently the OTS revised its mutual-to-stock conversion regulations
primarily to address immediate concerns about excessive management
remuneration and inadequate depositor participation in conversions of
savings associations (59 FR 22725 (May 3, 1994)) (OTS Revisions). In
essence, the new regulations attempt to prevent management abuses by
strengthening the rights of depositors.
The FDIC believes that the OTS Revisions are a necessary, sound
first step in correcting certain abuses stemming from conversions and
that the absence of some federal oversight of mutual-to-stock
conversions of State Savings Banks presents an opportunity for
inconsistency and abuse. Thus, the FDIC thinks it may be necessary and
appropriate to adopt regulations similar to the OTS Revisions. For
these reasons, as discussed below, the FDIC is issuing this proposed
rule.
Because the fundamental problem concerning the distribution of
existing economic value in mutual-to-stock conversions is not addressed
by the OTS Revisions, however, the Board believes other forms of abuse
may still arise. The FDIC believes that it is necessary to re-examine
the conversion process to explore whether the existing economic value
of a converting mutual institution can be better distributed directly
to those who should receive it.
The FDIC is particularly concerned about the appraisals of
converting institutions. The FDIC believes that under the current
process it may be difficult to prepare an appraisal of a well
capitalized mutual institution which accurately reflects ``pro forma
value'' while at the same time reflecting the appraised value cogently
in a business plan of the institution. The incidence of significant
appreciation in the stock price immediately after the initial public
offering, which tends to exceed the stock appreciation of initial
public offerings in other industries, suggests that appraisals may be
too low. As a possible consequence of underpricing the institution,
insiders may be able to acquire more shares than they are entitled to;
moreover, a low appraisal may deprive an institution of the additional
capital it should receive in the sale of conversion stock.
To address the possible need for fundamental changes to the mutual-
to-stock conversions process, concurrently with the publication of this
proposed rule, the Board also is publishing a request for comments on
ways to address concerns about the overall conversion process (Request
For Comments). The Request For Comments is a separate notice contained
elsewhere in this issue of the Federal Register.
V. Explanation of the Proposed Rule
1. Overview
The proposed rule would impose several specific requirements upon
State Savings Banks that propose to undergo mutual-to-stock
conversions. The proposed requirements are similar to the OTS
Revisions. Currently and during the pendency of this proposed
rulemaking, the FDIC intends to continue to use the case-by-case
methodology explained in the Interim Rule in reviewing notices of
proposed conversions of State Savings Banks. As noted above and in the
Interim Rule, this FDIC review includes an analysis of whether the
proposed conversion would comply with current OTS mutual-to-stock
conversions rules. Subsequent to the adoption of a final rule, the FDIC
intends to continue to use a case-by-case approach in reviewing aspects
of proposed conversions that are outside the scope of the specific
requirements in the proposed rule.
Among other things, the proposed rule also would indicate that the
requirements thereof apply, to the extent appropriate, to the
reorganization of State Savings banks to the mutual holding company
form of ownership. The FDIC also is involved in the mutual holding
company reorganizations of federal and state savings associations. That
involvement entails FDIC action on the application for deposit
insurance required to be filed with the FDIC in such transactions for
the de novo stock depository institution organized to facilitate the
reorganization. In acting on applications for deposit insurance the
FDIC must consider the factors listed in section 6 of the Federal
Deposit Insurance Act (12 U.S.C. 1816), one of which is the ``general
character and fitness of the management of the depository
institution.'' In the course of that review the FDIC considers, among
other things, the same issues of fiduciary duty that it considers in
reviewing proposed mutual-to-stock conversions of State Savings Banks.
As discussed below, preliminarily, the FDIC believes that each of
the requirements in the proposed rule is necessary to satisfy specific
FDIC concerns about safety and soundness and/or breaches of fiduciary
duty in connection with mutual-to-stock conversions. At the same time,
the FDIC believes that it is essential to consider the existence of
state regulation and supervision in determining the proper role in the
conversion process for the FDIC as the primary federal regulator of
State Savings Banks. As discussed below, many of the comments that the
FDIC received on the Proposed Policy Statement and the Interim Rule
expressed agreement with the FDIC's federal oversight role in mutual-
to-stock conversions of State Savings Banks, but several also suggested
that deference be paid to states' rights on issues outside the FDIC's
areas of concern.
With the issuance of the proposed rule, the Board is attempting to
strike the proper balance in this regard. In particular, the proposed
rule includes a provision stating that, in the event that a State
Savings Bank proposing to convert determines that compliance with any
provision of the proposed rule would be inconsistent or in conflict
with applicable state law, the bank may file with the FDIC a written
request for waiver of compliance with the provision. The request would
have to demonstrate that the requested waiver would not be detrimental
to the safety and soundness of the bank, entail a breach of fiduciary
duty by the bank's management, or otherwise be detrimental or
inequitable to the bank, its depositors, any other insured depository
institution(s), the federal deposit insurance funds or the public
interest.
As noted above, recently the OTS revised its regulations on mutual-
to-stock conversions of savings associations. OTS' concerns about
avoiding insider abuses in mutual-to-stock conversions of federal and
state savings associations are the same as the FDIC's concerns about
insider abuses in conversions of State Savings Banks. Thus, as noted
above, to the extent necessary and appropriate, the proposed rule
incorporates most of the same requirements recently adopted by the OTS.
The proposed rule would: Require the submission of a full appraisal
report, 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;
require a depositor vote on all mutual-to-stock conversions of State
Savings Banks and prohibit management's use of previously executed (or
``running'') proxies to satisfy depositor voting requirements; for one
year following the date of the conversion, among other things, require
that any management recognition plans or stock option plans be
implemented only after shareholder approval is received, require that
stock options (if any) be granted at no lower than the market price at
which the stock is trading at the time of grant and prohibit MRPs
funded by conversion proceeds; require that the record date for
determining depositors eligible to receive rights to participate in the
subscription offering of the conversion stock not be less than one year
prior to the date of adoption of the plan of conversions by the
converting bank's board of trustees; require that the subscription
offering provide a preference to eligible depositors and others in the
bank's ``local community'' (as defined in the proposed rule) or within
100 miles of the bank's home office or branch(es); require that
employee stock ownership plans (ESOPs) not have a priority over
subscription rights of ``eligible depositors'' (as defined in the
proposed rule); require the submission of a business plan, including,
among other things, a detailed discussion of how management intends to
deploy the capital raised through the sale of stock in the conversion;
and prohibit stock repurchases within one year following the
conversion.
2. Discussion of Each Proposed Requirement
The following is a discussion of each of the requirements in the
proposed rule. Many of the requirements are engendered by the Board's
concerns about bank management's proper exercise of its fiduciary
duties. As discussed in the preamble to the Interim Rule, the duties
and obligations of trustees and officers of mutual savings banks are
identical to the responsibilities the FDIC has historically enunciated
and enforced concerning directors and officers of commercial
banks.2 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 mutual savings banks. Both
duties have long antecedents in the common law of corporations and
financial institutions.3
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\2\See e.g., Statement Concerning the Responsibilities of Bank
Directors and Officers (FDIC Legal Division, December 3, 1992);
Pocket Guide for Directors (FDIC 1988).
\3\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 stock 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
various stakeholders (particularly depositors) of mutual savings banks.
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 stock institutions
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.
As indicated above, the requirements in the proposed rule are
rooted in concerns about safety and soundness, breaches of fiduciary
duty and/or other violations of law.
A. Submission of a Full Appraisal Report
The proposed rule would require State Savings Banks that propose to
convert to stock ownership to submit to the FDIC, along with the other
required materials, a full appraisal report on the value of the
converting bank and the pricing of the conversion stock. Many of the
states require that a converting mutual savings banks sell its capital
stock at a total price equal to its estimated pro forma market value,
based on an independent valuation. The purpose of this requirement is
to assure that the converting institution receives the full value for
the conversion stock sold. As indicated above and in the Request For
Comments, the FDIC has identified what may be significant problems with
the overall conversion process.
As discussed in detail in the Request For Comments, many recent
mutual-to-stock conversions have exhibited significant increases in the
immediate post-conversion trading market for the stock. The FDIC is
concerned that such increases have resulted from appraisal reports
(submitted in connection with these recent conversions) that have set
the pro forma market value significantly below the true value of the
converting institution. If an appraisal is too low and the shares of
stock are underpriced, the institution receives less of an increase in
capital than it should from the sale of conversion stock; in addition,
the deposit insurance fund is provided with less of a capital cushion
than would have resulted if the stock was based on a proper and
adequate appraisal. Also, an underpriced appraisal could entice
insiders to undertake a conversion (in order to acquire shares below
their fair value) that may not be in the best interests of the
institution. Sophisticated investors also are able to benefit,
undeservedly, from the sale of underpriced conversion stock.
For these reasons, the proposed rule would require that a full
appraisal be provided to the FDIC in a proposed mutual-to-stock
conversion of a State Savings Bank. The appraisal report would have to
be prepared by an independent appraiser and include a complete and
detailed description of the elements that make up the report,
justification for the methodology employed and sufficient support for
the conclusions reached therein. This would include a full discussion
of the applicability of each peer group member and documented
analytical evidence supporting any variance (above or below) the
converting institution may have from the peer group statistics. The
FDIC would require a complete analysis of the institution's pro forma
earnings which should include the bank's full potential once it fully
deploys the new capital pursuant to its business plan. In reviewing
appraisal reports the FDIC would continue to consider the appraisal
standards and guidelines, if any, of the applicable state and/or the
appraisal guidelines issued by the OTS.
The FDIC generally has been disappointed with the appraisal reports
it has reviewed in connection with proposed conversions. As noted
above, many appraisals have set the pro forma market value of the
converting institution significantly below the true value of the
institution as derived from its peer group. Reasons for this have
included inappropriate peer-group selections, inconsistencies between
the analysis in the appraisal report and the business plan submitted
with the conversion notice and continued unfounded justification for
new issue discounts in stock issuances that have been well
oversubscribed.
The FDIC has noted that appraisals lack specific detail on the
inclusion of peer group members regarding particular information on:
the markets within which they operate; the adjustments made to
normalize their earnings or design comparable pro forma earnings; and
the price appreciations experienced by each member since its
conversion. Converting institutions are almost always considered
inferior to the peer group--a fact which raises questions about the
composition of the peer group. Little or no analytical evidence is
typically given in appraisals for the discounts suggested for the
converting institution compared to the peer members. In addition, every
appraisal contains a new issue discount without any analytical support
for exactly how much that discount should be or why it is needed. Our
analysis indicates market activity where virtually every conversion has
traded up over the last few years. Finally, when subscription offerings
are completed and oversubscriptions have occurred (in some case, quite
substantially) appraisers have not justified why the original appraisal
should not be increased beyond the ``supermax'' but rather in virtually
every case confirm the original valuation.
Many appraisals that the FDIC has reviewed contain only cursory
analysis of the expected future earnings of the institution. The FDIC
believes that buyers of conversion stocks need to analyze institutions
with much more financial sophistication than what appears in the
appraisal and, therefore, appraisals should be augmented. Earnings
rarely reflect a true expected use of conversion proceeds and others
are understated by investments in low-rate securities. Earnings are
rarely estimated in conjunction with the converting institution's
future business plan--a fact that the FDIC finds inconsistent and
unacceptable.
During the pendency of this rulemaking and subsequent to the
adoption of a final rule, the FDIC will continue to review appraisal
reports to ensure that converting institutions and the conversion stock
are properly valued. The FDIC will continue to object to proposed
conversions supported by unacceptable appraisal reports.
B. Depositor Voting Requirement and Prohibition on the Use of Running
Proxies
The Board believes that, in order for a board of trustees of a
mutual savings bank to properly exercise its fiduciary responsibilities
to the bank and its depositors, the board should obtain a vote of
depositors in favor of the proposed conversion before the proposed
conversion is completed. Most states, but not all, require a depositor
vote for mutual-to-stock conversions. The OTS also requires both
federal and state savings associations to obtain a majority vote of
association members as one of the pre-conditions to converting. Some
states, however, require only that the board of trustees (or similar
group) approve the plan of conversion and do not require a vote of
members.
As discussed below, several of the comments on the Interim Rule
voiced opposition to ``voting rights'' for depositors in states that do
not provide such rights. In preliminary response to those comments, and
subject to others that the FDIC hopes to receive on this issue, the
Board thinks that it is necessary and appropriate for the FDIC to
require a depositor vote on proposed conversions. Such a requirement
would not necessarily contradict state laws (that do not require a
depositor vote), but supplement the state law by requiring the member
vote. The FDIC's concern is with the board of trustees' proper exercise
of its fiduciary duties of loyalty and care to the bank and its
depositors. Preliminarily, the Board believes that the proper exercise
of such duties requires that depositors, as stakeholders of the bank,
have the opportunity to approve or disapprove the proposed conversion.
This requirement is, in part, rooted in the foregoing concern that bank
insiders often benefit personally from bank conversions. This almost
inherent conflict of interest (between self interest and the interests
of the bank) may be mitigated by the existence of a depositor vote on
the proposed conversion. The proposed rule, therefore, would require a
depositor vote in favor of the proposed conversion of a State Savings
Bank to stock form. Unless otherwise prescribed by the applicable state
law, the required vote would be a majority of the bank's depositors and
other stakeholders of the bank who the bank's trustees reasonably
determine are entitled to vote on the conversion.
In the same vein, the Board believes that a proxy specifically
designed for the proposed conversion should be used to obtain a
depositor vote on the conversion. In some states the management of
converting banks and savings associations, subject to certain
conditions, may use so-called ``running proxies'' (proxies obtained
when a depositor opened his or her account with the institution) to
vote in favor of the proposed conversion. The former OTS mutual-to-
stock conversion regulations also permitted the use of running proxies,
under certain circumstances. Running proxies are prohibited by the OTS
Revisions.
The FDIC believes, preliminarily, that given the material change in
structure represented by the bank's conversion to stock form, it is
imperative that depositors be permitted to vote separately on the
proposed conversion and that the most effective manner to assure that
depositors are fully informed of the proposed conversion and have an
opportunity to participate fully in the conversion would be to prohibit
the use of running proxies in such transactions. This is in keeping
with the FDIC's concern that the management of a State Savings Bank
fulfill its fiduciary responsibilities by assuring that the depositors
are in agreement with the proposed conversion. Thus, the proposed rule
would prohibit the use of running proxies in the mutual-to-stock
conversion process.
C. Restrictions on Management Stock Benefit and Recognition Plans
(MRPs)
The OTS Revisions prohibit MRPs in conversions of federal and state
savings associations. Currently, however, the regulations and policies
of some state banking and thrift regulators permit MRPs to purchase a
certain percentage of the stock sold in a mutual-to-stock conversion of
a bank or savings association depending on the institution's capital
position. Under some of these regulations and guidelines, management
also may be granted stock options up to a certain percentage of the
shares issued in the conversion. Based on a review of numerous proposed
conversions, the Board believes that some bank insiders may be
sacrificing the interests of their institutions and depositors in order
to acquire significant amounts of conversion stock and other benefits
more advantageously than depositors. Also, in some instances, the
issuance of conversion stock to an MRP decreases the opportunity for
depositors to obtain conversion stock. Moreover, the issuance of stock
options at the conversion price, rather than at the aftermarket trading
price, which in recent years has been substantially higher than the
conversion price, creates the impression that insider enrichment may be
the main reason for the conversion.
These factors reflect negatively on management's fulfillment of its
fiduciary obligations. In fact, it may be an inherent conflict of
interest for management to decide to convert the bank to stock form
when, as part of the proposed conversion, management will reap
significant benefits. Independent business judgment is essential to the
proper carrying out of a manager's obligations. This judgment may be
severely clouded when MRPs are provided as part of the conversion
transaction.
As discussed below, the FDIC received several comments on the
Proposed Policy Statement and the Interim Rule about management
compensation in the conversion process. Many of these comments argued
that the management of converting institutions should benefit from the
conversion because such insiders are responsible for the bank's success
and will undertake additional and perhaps more difficult challenges
upon the bank's conversion to stock form. The Board does not disagree
with this general point of view. While the Board believes that
management and trustees would have increased responsibilities as a
public company, preliminarily, the Board believes that, in most cases,
market-based management compensation should be determined by the
stockholders after the conversion is completed.
In particular, the proposed rule would provide that no converted
savings bank shall, for one year from the date of the conversion,
implement a stock option plan or management or employee stock benefit
plan, other than a tax-qualified employee stock ownership plan, unless:
each of the plans was fully disclosed in the proxy solicitation and
conversion stock offering materials; all such plans are approved by a
majority of the bank's stockholders, or in the case of a recently
formed holding company, its stockholders, prior to implementation and
no sooner than the first annual meeting following the conversion; in
the case of a savings bank 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 sooner
than the first annual meeting following the stock issuance; for stock
option plans, stock options are granted at no lower than the market
price at which the stock is trading at the time of grant; and for
management or employee stock benefit plans, no conversion stock is used
to fund the plans.
The proposed restrictions on MRPs do not include specific
percentage limitations. Preliminarily, the FDIC believes that the
proposed restrictions would adequately safeguard against potential
management self-interest in mutual-to-stock conversions. Also, pursuant
to the Interim Rule, the FDIC would continue to look to MRP percentage
limitations in the OTS regulations, as well as in the applicable state
law and regulations, as a frame of reference for reviewing proposed
conversions of State Savings Banks. In addition, the FDIC believes that
specific percentage limitations on MRPs may be too rigid and not serve
to stem management abuses in every situation. The Board requests
specific comments on whether MRP percentage limitations should be
specified in the FDIC's regulations and, if so, what those percentages
should be.
D. Eligibility Record Date, Priority to Depositors Residing in the
Bank's Local Community, Priority of Employee Stock Ownership Plans
(ESOPs)
The OTS Revisions require, among other things, that the record date
established by a converting institution to determine which depositors
will be afforded a priority in obtaining subscription rights in the
conversion stock be set at no less than a year prior to the board of
director's approval of the conversion. The Board believes,
preliminarily, that, in order for a board of trustees of a State
Savings Bank to carry out its fiduciary responsibilities to the bank
and its depositors, the board must assure an equitable and lawful
conversion process. From numerous comments we have received thus far
and from our own review of proposed and completed conversions, it is
apparent that so-called professional depositors, who place funds in
mutual banks and savings associations throughout the country in order
to gain a purchase priority if the institution converts to stock form,
have reaped substantial profits on conversions of mutual institutions.
A proper exercise of fiduciary responsibilities toward the bank and its
longer-term depositors dictates that professional depositors not be
allowed to experience windfall gains in conversions. Requiring that the
eligibility record date be no less than one year prior to the board's
adoption of the plan of conversion would help assure that longer-term
depositors are more likely than professional depositors to benefit from
the stock purchase priority. Thus, the proposed rule would require that
the eligibility record date be no less than one year prior to the date
the board of trustees approves the plan of conversion. The FDIC
requests specific comment on whether the one-year period is sufficient
and on whether the date chosen should be based on the board of
trustees' first consideration of whether the bank should be converted
to the stock form of ownership.
In a further effort to mitigate the exploitation of the mutual-to-
stock conversion process by professional depositors, the proposed rule
would provide a stock purchase preference to eligible depositors in the
bank's ``local community'' or within 100 miles of a home or branch
office of the converting bank. The term ``local community'' would be
defined as all counties in which the converting bank 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 area(s) as provided for in bank's plan of
conversion. The Board believes that it is likely that the double
requirement (for a stock purchase priority) of having a depositor
relationship with the bank for at least one year prior to the date of
the board's adoption of the plan of conversion and of having to reside
in the bank's local community would decrease the participation of
professional depositors in conversions of State Savings Banks.
The Board is mindful, however, that there may be depositors,
particularly long-term depositors, of a State Savings Banks who are not
``professional depositors,'' but happen to live outside the ``local
community'' or the 100-mile area designated by the proposed
requirement. Thus, the FDIC requests specific comment on whether and
how such depositors can be included within the proposed stock purchase
preference for ``local depositors.'' One possible alternative would be
to expand the definition of ``local depositor'' to include all
depositors who have had a deposit relationship with the bank for, say,
three or five years prior to the board of trustees' adoption of the
plan of conversion. The Board is interested in comments on all aspects
of the proposed priority requirement for local depositors, including
views on whether the requirement is necessary, sufficient and/or
equitable.
In the same vein, the Board believes that ESOPs (tax-qualified or
otherwise) should not be accorded higher purchase priority rights than
long-term depositors. The Board believes that general principles of
fiduciary duty require that the board of trustees of a State Savings
Bank put the interest of long-term depositors ahead of the interests of
management and employees. Thus, the proposed rule would require that
ESOPs not be accorded a higher subscription right priority than
``eligible depositors.'' The term ``eligible depositors'' would be
defined as a depositor holding qualifying deposits at the bank as of a
date designated in the bank's plan of conversion that is not less than
one year prior to the date of adoption of the plan of conversion by the
converting bank's board of trustees. The FDIC requests specific comment
on whether the one-year period is sufficient and on whether the period
chosen should be based on the board of trustees' first consideration of
whether to convert to stock ownership.
E. Submission of Business Plans
For safety and soundness purposes the FDIC must know the
institution's business plan for post-conversion operation, growth and
investment of any newly injected capital. The reason is that
institutions converting from mutual form undertake a major
restructuring that possibly could lead to significant changes in the
nature or volume of business conducted. Converted institutions become
answerable to shareholders for the first time, and the shareholders are
concerned with obtaining a reasonable return on their investment. As
discussed in the preamble to the Interim Rule, in the past some
institutions, in leveraging capital raised through a conversion and
reaching for a return on equity, have vigorously competed for loans and
unduly liberalized underwriting standards. Such practices led to loan
losses that in many instances depleted more capital than was raised
through conversion and, in some cases, failures and losses to the Bank
Insurance Fund.
For these reasons, the proposed rule would require State Savings
Banks that propose to undergo a mutual-to-stock conversion to submit a
business plan including, among other things, a detailed discussion of
how management intends to deploy the capital raised through the sale of
stock in the conversion, expected returns resulting from the plan, and
the justification for any intended stock repurchases.
F. Post-conversion Stock Repurchases
As indicated above, the proposed rule would require that the
business plan submitted to the FDIC in connection with a proposed
mutual-to-stock conversion include a detailed discussion of how the
capital acquired in the conversion will be utilized, including, among
other things, a justification for any proposed stock repurchases. The
FDIC is concerned that substantial buyback programs begun immediately
after the bank's conversion to stock form may not have a legitimate
business purpose. Such repurchases also raise issues about whether the
conversion stock was appropriately valued. In addition, the FDIC is
concerned that a recently converted institution have a capital base
adequate to safeguard against possible unexpected losses that may occur
under the new organizational structure. To protect against these
potential problems, the proposed rule would prohibit stock repurchases
for one year following the conversion. Stock repurchases after that
period would be considered on a case-by-case basis under section
18(i)(1) of the FDI Act (12 U.S.C. 1828(i)(1)) which prohibits state
nonmember banks from reducing or retiring capital without the prior
consent of the FDIC.
VI. Merger/Conversions
In some cases, mutual institutions convert to stock ownership in
the course of a merger or acquisition transaction with another
depository institution or holding company. This is generally known as a
merger/conversion. In merger/conversions depositors of the converting
institutions obtain the right to purchase stock in the acquiring
institution and not the converting savings bank. In exercising its
fiduciary responsibilities the board of trustees of a State Savings
Bank must assure that value of the converting institution is fairly
distributed. This means not only guarding the interests of long-term
depositors against insiders and professional depositors, but against
acquiring institutions. Based on the proposed conversions we have
reviewed in the recent past and other merger conversions we have
studied, the Board has observed that, in virtually every merger
conversion, the acquiring institution captures a large portion of the
value of the converting institution. It is also not uncommon in merger/
conversions for the management of the converting mutual institution to
receive extremely generous compensation and benefit packages. The OTS
Revisions prohibit merger/conversions.
As indicated in the preamble to the OTS Revisions, there is an
issue whether the management of a mutual institution is opting for a
merger/conversion, instead of a standard conversion, based on the best
interests of the institution and its depositors or in response to the
level of benefits offered to management by the acquiring entity. As
noted in the preamble to the Interim Rule, there have been numerous
complaints recently by depositors and others that permitting healthy
mutual savings banks to be acquired by means of a merger/conversion has
resulted in some savings bank insiders putting their interest ahead of
the interests of the converting bank and its depositors.
For the foregoing reasons, the Board believes that merger/
conversions should, in most cases, be permitted only in situations
where a State Savings Bank is ``undercapitalized,'' ``significantly
undercapitalized'' or ``critically undercapitalized'' as defined in the
FDIC's capital maintenance regulations. At this time, however, the
Board does not propose to impose a blanket prohibition on non-
supervisory merger/conversions. The FDIC will continue to review
proposed merger/conversions with an emphasis on whether the fair value
of the State Savings Bank would be delivered to the rightful
recipients. The FDIC is requesting specific comment on this topic and
specifically whether a moratorium should be placed on merger/
conversions involving sufficiently capitalized State Savings Banks.
VII. Comparison With OTS Regulations
As noted above, the requirements imposed by the proposed rule would
essentially parallel the OTS Revisions. There are numerous other
provisions in the OTS' mutual-to-stock conversion regulations (12 CFR
part 563b), however, that are not included in either the FDIC Interim
Rule or the proposed rule. Those OTS regulations impose upon converting
savings associations specific and detailed requirements on, among other
things: items to be included in the plan of conversion, stock purchase
priorities, percentage limitations on stock purchases and MRPs, proxy
solicitation and the form and content of proxy statements, the form and
content of offering circulars, accounting rules, liquidation accounts,
notices of filing, availability of conversion documents and pricing and
sale of securities.
Preliminarily, the FDIC believes that the requirements imposed by
the proposed rule, coupled with the requirements of the Interim Rule,
would enable the FDIC to monitor the conversions of State Savings Banks
for issues involving safety and soundness, fiduciary duty and other
violations of law. Pursuant to the Interim Rule, the FDIC uses the OTS
regulations as a frame of reference in reviewing proposed mutual-to-
stock conversions of State Savings Banks. The FDIC also looks to the
applicable state law and regulations in reviewing proposed conversions.
To date, the FDIC has not identified a need to adopt a more
comprehensive set of regulations addressing all aspects of the mutual-
to-stock conversion process. It has been suggested, however, that in
order to achieve greater uniformity with the OTS' conversion
regulations the FDIC's conversion regulations should be expanded to
match the scope and depth of the OTS rules. Thus, the Board
specifically requests comment on whether the FDIC's regulations should
be expanded to include provisions similar to those of the OTS
regulations that are not already included in either the Interim Rule or
the proposed rule.
VIII. Convenience and Needs Requirement
The OTS has issued a proposed rule that would add a requirement to
its mutual-to-stock conversion regulations that, in determining whether
to approve such a conversion transaction, the OTS would consider the
convenience and needs of the community served by the converting
institution. 59 FR 22764 (May 3, 1994.) The ``convenience and needs of
the community to be served'' by the applicant is one of the statutory
factors required to be considered by the Board in acting on
applications for deposit insurance (12 U.S.C. 1816). Thus, in
connection with the review of mutual holding company reorganizations of
insured depository institutions the FDIC already is required to (and
does) apply a convenience and needs test. The Board requests comment on
whether the FDIC could and should also consider imposing such a
requirement in connection with the mutual-to-stock conversions of State
Savings Banks.
IX. Summary of Comments on the Proposed Policy Statement and Interim
Rule
The FDIC received 85 written comments on the Proposed Policy
Statement and Interim Final Rule: 60 from banks, savings banks,
cooperative bank and saving associations; 7 from bank and thrift
industry trade groups; 6 from state banking and thrift regulators; 5
from individuals; 5 from law firms; 1 from a bank holding company; and
1 from a regulatory ``shadow'' group.
1. FDIC Oversight Role
The comments did not focus on describing recent abuses in mutual-
to-stock conversions. They generally acknowledged that there had been
notable examples of insider abuse in the recent past and then suggested
how future potential abuses could be avoided. Many of those who
commented recommended that the FDIC play an oversight role in the
mutual-to-stock conversions of State Savings Banks. One state stock
savings bank that is owned by a mutual holding company noted that
``present abuses in several recent and proposed conversions have
demonstrated the need for the FDIC to maintain oversight of the
conversion process, to ensure that issues of both safety and soundness
and of fiduciary care are identified and adequately addressed.'' One
state savings association trade group commented that ``with recent
publicity over some apparent abuses in the [conversion] process and
resulting Congressional concerns, * * * it is most appropriate and
important for the FDIC to assert regulatory jurisdiction over
conversions by state nonmember banks.'' One state thrift regulator
noted that the FDIC had issued an ``excellent set of rules'' with a
``very conservative, realistic approach to a situation which could have
gotten out of hand if left to go unchecked.'' One State Savings Bank
said simply that ``past abuses [in mutual-to-stock conversions] support
the need for FDIC oversight.''
Several commenters suggested that the FDIC have oversight authority
of State Savings Bank mutual-to-stock conversions, but with prescribed
limitations. For example, a national banking industry trade group noted
that it ``deplores instances in which it can be demonstrated that
insiders involved in mutual-to-stock conversions received benefits so
large that they bear no reasonable relationship to the institution's
performance * * * Unjustifiable windfall profits, depletion of capital
without concern for safety and soundness and manipulation of the value
of the institution to benefit limited interests are practices that
deserve close scrutiny and action by the appropriate authorities * * *
In responding to these issues, the FDIC should act quickly and
decisively in concert with the state authorities.'' The trade group
further commented that the ``cornerstone'' for the FDIC's response to
issues arising from the mutual-to-stock conversion issue is the state
regulatory authorities. One state thrift regulator expressed support
for FDIC oversight of conversions if such involvement assures
``reasonableness and relative uniformity of benefits for both state-
and OTS-regulated institutions * * * and allows state variation from
OTS requirements if such variations benefit the institution and the
depositors.''
One mutual savings bank noted that the FDIC should focus on broad
safety-and-soundness issues and that detailed regulations, like the
OTS', are not necessary. Another state mutual savings bank said that
the FDIC should be involved in conversion oversight, but only in terms
of setting minimum standards rather than superseding state regulation.
Many savings banks in Massachusetts and a banking trade association in
that state commented that the FDIC should issue conversion regulations
similar to the OTS and Massachusetts mutual-to-stock conversion
regulations, noting that the FDIC has broad statutory authority to
regulate issues that affect safety and soundness. They noted that the
FDIC's focus should be to eliminate abuses in stock evaluation,
depositor disclosures, depositors' ability to purchase stock at
conversion and insider compensation programs. They also asserted that
state statutory and regulatory conversion rules should not be
superseded by federal law. One mutual savings bank noted that
promulgating federal laws or regulations ``should not be allowed when
it is determined that state requirements are generally consistent or
more stringent than existing federal rules.''
Some commenters contended that state regulation was sufficient in
the area of mutual-to-stock conversions and that the Interim Rule is
not necessary. One mutual savings bank asserted that the ``averments
made by the FDIC in support of the Interim Rule that it is needed for
safety and soundness reasons and to protect the interest of depositors
are without merit and are being offered only to support continued
federal intrusion into issues which are primarily the concern of state
law and regulation.'' One state mutual savings bank stated that the
``proposed policy statement is overkill'' and that ``state regulation
can handle insider abuse issues.'' One state banking and thrift
regulator asserted that state regulators are not to blame for insider
abuses in conversions and that ``states' rights should not be tramped
on.'' The regulator suggested that a committee of state and federal
regulators work together to address issues and concerns.
All those who commented on the issue expressed objection to
Congressional legislation to address current issues in mutual-to-stock
conversions. One mutual savings bank commented that ``if the FDIC does
not act, Congress will--in an uninformed manner.'' Another mutual
savings bank noted that ``regulation is far preferable than
legislation.'' A national banking industry trade group noted that the
``FDIC has full statutory authority in the conversion area to ensure
the integrity of the conversion process and no new legislation is
necessary to address these issues.''
2. Transferable Subscription Rights
The FDIC received many comments on the issue whether conversion
rules should be modified to require converting institutions to provide
depositors with transferable subscription rights to purchase the stock
issued in the mutual-to-stock conversion. This issue was not addressed
in either the Proposed Policy Statement or the Interim Rule. In recent
Congressional testimony the FDIC Chairman has indicated that the FDIC
may consider whether depositors and other stakeholders of converting
institutions should receive transferable subscription rights so they
can participate more equitably in the conversion process and receive
benefits from the conversion without having to purchase conversion
stock to do so. With one exception, all the comments received on this
issue opposed the idea. One mutual savings bank stated that ``we are
outraged that any governmental body would consider provisions such as
depositor subscription rights that could enable speculators to force a
mutual bank to convert to a stock bank. Such a provision would not just
endanger this bank, but destroy it, along with many other community
institutions.'' A national banking industry trade group echoed these
sentiments, noting that ``permitting or requiring transferable
subscription rights would undermine the integrity of conversions by
generating intense pressures to convert mutuals to stock form. All
mutuals would be put into play.''
Many mutual savings and cooperative banks in Massachusetts
expressed their objection to ``mandatory depository transferable/
saleable subscription rights'' noting that ``they could subject our
depositors to professional flippers [out-of-area depositors who are
just interested in short-term investment gains], attorneys and
investment firms who may bring pressure to force a mutual-to-stock
conversion.'' A shadow regulatory group expressed the opposite view,
arguing that subscription rights should be transferable to provide an
incentive for depositors to exercise their subscription rights.
3. Contributions to the Community/FDIC
Most of those who commented on the issue expressed opposition to
requiring converting institutions to contribute part of the conversion
proceeds directly to their communities. Many noted such a requirement
would impose a ``social tax'' on converting institutions. A state
savings bank stated that ``a capital giveaway wouldn't further the
FDIC's legitimate goal of preserving safety and soundness.'' Another
state savings bank noted that such a ``social tax would jeopardize the
safety and soundness of the bank and would negatively affect credit
availability to local consumers and small businesses. These are not
public funds.'' One of the numerous savings banks in Massachusetts who
commented negatively on this issue asserted that ``a social tax would
replace insider greed with a form of outsider greed.''
Some commenters, however, suggested that the FDIC should share in
conversion proceeds. A regulatory ``shadow'' group stated that the FDIC
should receive at least 50 percent of [the transferable subscription]
rights [issued in a mutual-to-stock conversion], which it would sell in
the market. The group argued that: ``the taxpayer, through the FDIC,
has the strongest claim on the existing surplus of converting mutual
institutions. The taxpayer has taken the risk of loss that is usually
borne by the stockholder. The public, that had to pay for the loss of
failed thrifts, should reap some of the benefits that all usually go to
the stockholder.'' A state bank commented that ``windfall appreciation
from stock conversions should accrue to the FDIC. The FDIC has provided
protection for thrifts over the years and deserves the benefit.''
4. Merger/Conversions
An individual who commented on the Proposed Policy Statement and
Interim Rule stated that merger/conversions should not be allowed
because they ``only serve management's interests and not the
depositors.'' He suggested that any merger take place only after an
initial ``free-standing'' standard conversion. A bank holding company
commented that merger/conversions are desirable because they increase
competition in the industry and support safety and soundness. It noted
that state law is the ``proper authority'' to regulate management
compensation issues in merger/conversions. A law firm commented that
the problems with merger/conversions could be ``reduced substantially
if the OTS revised its policy to encourage a discount in the acquirors'
stock as offered to depositors of the acquired institution.'' A state
banking and thrift regulator suggested that the FDIC and OTS
collaborate in a joint determination on whether merger/conversions will
be approved in the future and, if so, adopt specific requirements to
provide parity among savings associations and savings banks. A state
banking and thrift industry trade group recommended that merger/
conversions be permitted only in the case of undercapitalized
institutions or at the discretion of the regulators on a case-by-case
basis. A national banking and thrift industry trade group said it would
not oppose a ``regulatory pause by the FDIC to evaluate its rules
governing merger/conversions.''
5. Depositor Voting/Running Proxies
Several commenters stated that the FDIC should not provide ``voting
rights'' to depositors in connection with conversions of mutual savings
banks in states that do not provide such voting rights. One state bank
asserted that ``voting rights should be left to state law. To impose
some sort of depositor approval requirement in a state that does not
have depositor voting could lead to expanded ownership claims by
depositors that could operate to the detriment of mutuals.'' One state
banking and thrift regulator (of a state that does not provide a
depositor voting right) asserted that ``any FDIC requirement of a
depositor vote in a mutual-to-stock conversion * * * [would be] wholly
unsupported by any expressly preemptive federal statute.'' Many banks
in Massachusetts commented that any depositor voting right requirements
imposed by the FDIC would put undue pressure on mutuals in that state
to convert to stock ownership.
An individual noted that general proxies should be prohibited and
that all conversions should be subject to a special proxy, or proxies
should be entirely eliminated in favor of a majority-rules scheme. A
national banking and thrift industry trade group noted that the use of
general proxies is reasonable under the OTS' rules.
6. Management Benefits
Many of the commenters discussed the issue of management benefits
in conversions. Several of them stated that insiders should share in
the benefits of conversions because the insiders managed the
institution in a safe-and-sound manner. One state thrift regulator (and
other commenters) suggested that MRPs be based on the size of the
institution and not on ``straight across-the-board percentages.'' One
national banking and thrift industry trade group noted that ``avoiding
the use of across-the-board percentages for MRPs and tailoring their
availability more to the size of the institution and their specific
business plan objectives and needs would be a reasonable approach.''
One mutual savings bank noted that MRPs, stock option plans and
employee stock ownership plans ``all encourage more stock ownership and
cement an identity among outside shareholders and those who run and
work for the company.'' It also noted that OTS rules are workable in
this regard and should be adopted by the FDIC. Another savings
association commented that conversions should not be permitted where
there is excessive compensation for insiders, but ``without benefits to
insiders there will be no conversions.''
An individual commented that the FDIC should not regulate director
remuneration in conversions of healthy mutuals because those
conversions do not place the insurance fund at risk and shareholders'
votes are dispositive under the ``corporate waste'' doctrine. A law
firm, commenting on behalf of a state thrift industry trade group, also
noted that compensation benefits are not a safety-and-soundness concern
if the institution meets the applicable capital requirements. In
addition, it stated that a ``uniformity of benefits between state- and
OTS-regulated conversions'' is necessary to assure the end of
``regulatory arbitrage.'' A state bank and thrift regulator (and
several other commenters) suggested that the FDIC and OTS publish joint
MRP guidelines permitting or prohibiting MRPs, along with specific
rules therefore. It noted that ``proper resolution of the MRP issue
will have a substantial impact on fairness to depositors in
conversions.'' One savings bank commented that ``when an institution
contemplates going public for the right reasons (expansion, market
share, competitive advantage) the benefits should go to those willing
to risk their careers (board and management team) or their capital
(shareholders) not to the faceless non-entity group known as the
existing depositors.''
7. Appraisals
A state savings association noted that one of the basic problems
with conversions is the appraisal of the institution. It stated that
``the FDIC needs to be satisfied that the various states are as well
equipped [as the ``qualified'' OTS staff] to perform a definitive
analysis of institution appraisals as well as know with certainty that
the appraiser is qualified to assess a financial institution's value.''
The commenter also noted that fairness and moderation are the keys to
governing stock conversions. An individual commented that the FDIC
should not regulate the offer price for healthy mutuals because those
conversions do not place the insurance fund at risk. An individual
suggested that the applicable regulator should retain its own appraiser
to assure fair valuation of the converting entity. A state bank and
thrift regulator stated that appraisal rules required by the FDIC
should be specifically stated in the Interim Rule.
8. Other Comments
An attorney commented that the Interim Rule should allow depositors
full access to all papers filed in connection with proposed merger/
conversions, as well as standard conversions. He also suggested that
depositors be permitted to file with the FDIC objections to such
proposed transactions.
A few commenters noted that the FDIC should clarify that the
Interim Rule applies to mutual holding company formations and merger/
conversions.
An individual suggested that, to protect the insurance fund, a
converting institution should prepare a business plan regarding the
proposed use of the new capital. The plan should be reviewed by the
applicable state; however, if the FDIC feels state review will be
insufficient, the FDIC is empowered by the Federal Deposit Insurance
Act (FDI Act) to assume jurisdiction.
Two law firms suggested that the FDIC's review time on conversion
notices be reduced from 60 days to 45 days because of the potential
that financial information might become ``stale'' under rules issued by
the Securities and Exchange Commission and the converting institution
would have to go through the expense of producing updated financial
statements.
Request for Public Comment
The FDIC is hereby requesting comment during a 30-day comment
period on all aspects of this proposed rule.
List of Subjects in 12 CFR Part 333
Banks, banking, Corporate powers.
The Board of Directors of the Federal Deposit Insurance Corporation
hereby proposes to amend part 333 of title 12 of the Code of Federal
Regulations as follows:
PART 333--EXTENSION OF CORPORATE POWERS
1. The authority citation for part 333 is revised to read as
follows:
Authority: 12 U.S.C. 1816, 1818, 1819 (``Seventh'', ``Eighth''
and ``Tenth''), 1828, 1828(m), 1831p-1(c).
2. Section 333.4 is added to read as follows:
Sec. 333.4 Conversions from mutual to stock form.
(a) Scope. This section applies to the conversion of insured mutual
state savings banks to the stock form of ownership. It supplements the
procedural and other requirements for such conversions in Sec. 303.15
of this chapter. This section also applies, to the extent appropriate,
to the reorganization of insured mutual state savings banks to the
mutual holding company form of ownership. As determined by the Board of
Directors of the FDIC on a case-by-case basis, this section does not
apply to mutual-to-stock conversions of insured mutual state savings
banks whose capital category under Sec. 325.103 of this chapter is
``undercapitalized,'' ``significantly undercapitalized'' or
``critically undercapitalized.'' The Board of Directors of the FDIC may
grant a waiver in writing from any requirement of this section for good
cause shown.
(b) Conflicts with state law. In the event that an insured mutual
state savings bank that proposes to convert to the stock form of
ownership finds that compliance with any provision of this section
would be inconsistent or in conflict with applicable state law, the
bank may file a written request for waiver of compliance with such
provision by the FDIC. In making such request, the bank shall
demonstrate that the requested waiver, if granted, would not result in
any effects that would be detrimental to the safety and soundness of
the bank, entail a breach of fiduciary duty on part of the bank's
management or otherwise be detrimental or inequitable to the bank, its
depositors, any other insured depository institution(s), the federal
deposit insurance funds or to the public interest.
(c) Definitions. For purposes of this section:
(1) Local community includes all counties in which the converting
bank 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 area(s) as provided for in the plan of
conversion, acceptable to the FDIC; and
(2) Eligible depositors are depositors holding qualifying deposits
at the bank as of a date designated in the bank's plan of conversion
that is not less than one year prior to the date of adoption of the
plan of conversion by the converting bank's board of trustees.
(d) Requirements. In addition to other requirements that may be
imposed by the applicable state statutes and regulations and other
federal statutes and regulations, including Sec. 303.15 of this
chapter, an insured mutual state savings bank shall not convert to the
stock form of ownership unless the following requirements are
satisfied:
(1) The subscription offering of the stock to be offered or sold in
the conversion shall provide a stock purchase priority to eligible
depositors, other depositors and others entitled to vote on the bank's
proposed conversion residing in the bank's local community or within
100 miles of a home office or branch of the converting bank;
(2) Employee stock ownership plans shall not have priority over
subscription rights of eligible depositors;
(3) Any direct community offering by the converting bank shall give
a purchase priority to natural persons residing in the bank's local
community or within 100 miles of a home office or branch of the bank;
(4) The proposed conversion shall be approved by a vote of at least
a majority of the bank's depositors and other stakeholders of the bank
who the bank's trustees reasonably determine are entitled to vote on
the conversion, unless the applicable state law requires a higher
percentage, in which case the higher percentage shall be used. Voting
may be in person or by proxy;
(5) Management shall not use proxies executed outside the context
of the proposed conversion to satisfy the voting requirement imposed in
paragraph (d)(4) of this section; and
(6) In addition to the materials to be submitted to the FDIC
pursuant to Sec. 303.15(c) of this chapter, the bank must submit to the
FDIC:
(i) A full appraisal report on the value of the converting bank and
the pricing of the stock to be sold in the conversion. The report must
be prepared by an independent appraiser and must include 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, including a full discussion of the
applicability of each peer group member and documented analytical
evidence supporting any variance (above or below) the institution
proposing to convert may have from the peer group statistics and a
complete analysis of the institution's pro forma earnings which should
include its full potential once the institution fully deploys its new
capital pursuant to its business plan; and
(ii) A business plan which must include, in part, a detailed
discussion of how the capital acquired in the conversion will be
utilized, expected returns resulting from the plan and a justification
for any proposed stock repurchases.
(e) Restriction on repurchase of stock. An insured mutual state
savings bank that has converted from the mutual to stock form of
ownership may not repurchase its capital stock within one year
following the date of its conversion to stock form. Any stock
repurchases after the one year period shall be subject to the
requirements of section 18(i)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1828(i)(1)).
(f) Stock benefit plan limitations. No converted insured mutual
state savings bank shall, for one year from the date of the conversion,
implement a stock option plan or management or employee stock benefit
plan, other than a tax-qualified employee stock ownership plan, unless
each of the following requirements is met:
(1) Each of the plans was fully disclosed in the proxy soliciting
and conversion stock offering materials;
(2) All such plans are approved by a majority of the bank's
stockholders, or in the case of a recently formed holding company, its
stockholders, prior to implementation and no sooner than the first
annual meeting following the conversion;
(3) In the case of a savings bank 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 sooner than the first annual meeting following the stock
issuance;
(4) For stock option plans, stock options are granted at no lower
than the market price at which the stock is trading at the time of
grant; and
(5) For management or employee stock benefit plans, no conversion
stock is used to fund the plans.
By the order of the Board of Directors.
Dated at Washington, D.C., this 31st day of May, 1994.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Acting Executive Secretary.
[FR Doc. 94-14007 Filed 6-10-94; 8:45 am]
BILLING CODE 6714-01-P