[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