[Federal Register Volume 59, Number 229 (Wednesday, November 30, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29264]


[[Page Unknown]]

[Federal Register: November 30, 1994]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 563b and 575

[No. 94-253]
RIN 1550-AA73

 

Conversions From Mutual to Stock Form; Mutual Savings and Loan 
Holding Companies

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (OTS or Agency), is issuing a 
final rule to revise its regulations governing conversions from mutual-
to-stock form and mutual savings and loan holding companies. On May 3, 
1994, the OTS issued an interim final rule with request for comment and 
a proposed rule with request for comment. The interim final rule 
contained amendments to the OTS's mutual-to-stock conversion 
regulations (conversion regulations) designed to strengthen the 
standards governing conversions and to ensure the integrity of the 
conversion process. The proposed rule contained a new ``convenience and 
needs'' test to be added to the approval standards for conversion 
transactions.
    This final rule includes revisions made to the interim final rule 
that reflect OTS's consideration of the comments it received during the 
45-day comment period following publication of the interim final rule. 
In addition, this final rule also addresses the comments received by 
the OTS during the 75-day comment period following publication of the 
proposed rule and adopts the proposed rule without modification. 
Finally, this final rule incorporates certain technical changes to the 
regulations governing mutual-to-stock conversions and mutual savings 
and loan holding companies.

EFFECTIVE DATE: January 1, 1995.

FOR FURTHER INFORMATION CONTACT: Teri M. Valocchi, Counsel (Banking and 
Finance) (202/906-7299), Michael P. Vallely, Counsel (Banking and 
Finance) (202/906-6241), J. Larry Fleck, Assistant Chief Counsel (202/
906-6413), Business Transactions Division, Chief Counsel's Office; 
Diana L. Garmus, Deputy Assistant Director (202/906-5683), Corporate 
Activities Division, Office of Thrift Supervision, 1700 G Street, NW., 
Washington, D.C. 20552.

SUPPLEMENTARY INFORMATION:

I. Summary of Interim Final and Proposed Rules

    On May 3, 1994, the OTS published an interim final rule with 
request for public comment.1 The interim final rule amended the 
OTS regulations governing mutual-to-stock conversions of savings 
associations to strengthen the conversion standards and ensure the 
integrity of the conversion process. Specifically, the amendments:
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    \1\See 59 FR 22725 (May 3, 1994).
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    (A) revised and clarified the appraisal standards;
    (B) prohibited the use of ``running'' proxies by management of 
converting associations;
    (C) placed the current tax-qualified employee stock ownership plan 
(ESOP) stock purchase priority after those of eligible depositors;
    (D) provided stock purchase priority to core depositors;
    (E) required that a stock purchase preference be given to account 
holders and voting members residing in the association's local 
community;
    (F) prohibited management stock benefit plans in a conversion;
    (G) limited merger conversions to institutions that qualify for a 
conversion, i.e., financially-weak institutions;
    (H) lengthened the conversion public comment period;
    (I) required converting associations to submit business plans in 
support of the conversion; and
    (J) prohibited the repurchase of a converted association's stock 
within one year of conversion.
    The interim final rule did not propose any changes to the 
prohibition in the OTS conversion regulations on the transfer or sale 
of subscription rights or similar ``free distribution'' schemes, but 
did request comment on whether subscription rights should continue to 
be nontransferable, or if transferability is recommended, the reasons 
for, and the manner in which to allow for, such transfer. Finally, the 
interim final rule made preliminary conversion proxy materials 
available to the public and incorporated certain technical changes to 
the OTS's regulations governing mutual savings and loan holding 
companies.
    Separately, the OTS published a proposal to amend the conversion 
regulations and the regulations governing stock offerings by savings 
association subsidiaries of mutual holding companies (MHC stock 
offerings) by adding a new ``convenience and needs'' standard to 
existing approval standards for such transactions.2 Under the 
proposed standard, the OTS would consider the extent to which the 
transaction would affect the convenience and needs of the communities 
served by the applicant.
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    \2\See 59 FR 22764 (May 3, 1994).
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    In evaluating transactions under this standard, the OTS would 
review the applicant's performance under the Community Reinvestment Act 
(CRA),3 the contents of the business plan submitted in support of 
the conversion, and other factors relating to the applicant's 
performance in meeting the convenience and needs of its delineated 
community. Under the proposal, the OTS could deny an application or 
approve it on the condition that the applicant improve certain aspects 
of its CRA performance record or address particular credit or lending 
needs of the communities that it serves.
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    \3\See 12 U.S.C. 2901-2907.
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    The OTS worked with the Federal Deposit Insurance Corporation 
(FDIC) on the interim final rule and this final rule to ensure greater 
consistency in the regulatory standards and policies in this area.

II. Summary of Comments and Analysis of Issues

    The public comment period for the interim final rule closed on June 
17, 1994. The OTS received 75 comment letters. Twenty-seven comment 
letters were submitted by financial institutions or their holding 
companies, including 20 letters from federally-chartered savings 
associations and seven letters from other financial institutions and 
holding companies. Of the remaining 48 comment letters, persons in 
their individual capacity submitted 15, law firms submitted 13, state 
trade associations submitted six, a national trade association 
submitted one, city and state banking commissioners submitted three, 
various groups representing financial institutions submitted seven, a 
financial regulatory ``shadow'' group submitted one and certified 
public accountants submitted two.
    The comment period on the proposed convenience and needs rule 
closed on July 18, 1994. The OTS received 12 comment letters, including 
five from trade associations and similar groups representing financial 
institutions, two from law firms representing thrifts, two from persons 
in their individual capacity, one from a state thrift regulatory 
authority, one from an association of state thrift regulatory 
authorities and one from a federally-chartered savings bank.
    The following is a discussion of the major issues raised by the 
commenters and a brief analysis and resolution of the issues.

A. Revisions to the Appraisal Standards

    As noted in the preamble to the interim final rule, the integrity 
of the OTS' current conversion program rests, in large part, on the 
existence of independent and accurate appraisals of converting 
associations.4 When the initial conversion regulations were 
adopted in 1974, the Federal Home Loan Bank Board, the predecessor 
agency to the OTS, expressed concerns about underpricing conversion 
stock and stated that no method of conversion could be considered 
equitable unless the conversion stock was accurately appraised and sold 
at its pro forma market value.5
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    \4\See 59 FR 22725, 22726 (May 3, 1994).
    \5\See 39 FR 9142 (March 7, 1974).
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    The OTS believes that the appraisal process has adequately 
addressed conversion valuation issues during most of the period since 
1974. As also noted in the preamble to the interim final rule, however, 
the OTS has been concerned that some recent appraisals were setting pro 
forma market values that were significantly below the market value of 
the converting association. In response to these concerns, the OTS, in 
the interim final rule, revised the conversion regulations to formalize 
the current practice of requiring a full appraisal report and 
justification for the methodology employed. The OTS also clarified the 
provision in the conversion regulations that requires that the 
conversion applicant submit information demonstrating, to the 
satisfaction of the OTS, the independence and expertise of the 
appraiser. The revised regulations allow the OTS to censure, suspend or 
bar an appraiser from practicing before the OTS in egregious cases of 
consistent undervaluation on the part of an appraiser.
    OTS further revised the appraisal rules to provide that in those 
instances where the initial appraisal report is deemed to be materially 
deficient and/or substantially incomplete, the OTS may deem the entire 
conversion application materially deficient and/or substantially 
incomplete, and require the filing of a new application.6
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    \6\The OTS has recently issued updated staff guidance for 
conversion appraisers that provides specific details on appraisal 
methodology as well as report content, and also incorporates 
provisions 9 and 10 of the Uniform Standards of Professional 
Appraisal Practice. In adopting the guidelines, the OTS consulted 
with the FDIC to ensure uniform appraisal standards.
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    Finally, the OTS requested public comment on whether it should 
amend its regulations to prohibit an appraiser or its affiliates from 
also serving as an underwriter or selling agent.
    Approximately 25% of the comments addressing appraisal standards 
affirmatively supported the requirement that a full appraisal report 
and justification for methodology employed be required to insure a 
``fair value'' assessment of an institution. One commenter cautioned 
against an attempt to eliminate any ``pop'' or ``post conversion 
windfall,'' and suggested management of such price increases instead, 
by limiting them to a reasonable percentage. Eleven commenters 
expressed concern that market forces cannot be regulated, that 
appraisals and pricing of stock are not exact sciences, and that the 
revisions may force the stock to be overvalued. One of the eleven 
stated that the stock market is not predictable enough to 
institutionalize an expectation that the stock of every institution 
will trade within a fixed parameter following conversion.
    One commenter requested that the terms ``materially deficient'' and 
``consistently undervalued'' be defined and another commenter requested 
that the term ``independence'' be defined and that the OTS provide 
guidance as to the appropriate degree of participation by management in 
the appraisal process.
    One commenter stated that the OTS should deal with the appraiser 
directly when an initial appraisal report is materially deficient or 
substantially incomplete and should not penalize the thrift; another 
commenter stated that the OTS should give institutions time to correct 
inappropriate appraisals without the need to file costly new conversion 
applications.
    Eleven commenters addressed the issue of whether to prohibit 
appraisers or their affiliates from also serving as underwriters or 
selling agents. Six stated that appraisal firms should be separate from 
firms that market conversion stock so as to avoid all potential 
conflicts of interest. One of the six further stated that underwriters 
or selling agents in one situation may not be able to be objective as 
appraisers in another situation and that if an attorney continually 
uses the same appraiser, that appraiser becomes a quasi-affiliate of 
the attorney, with questionable independence. Five expressed the view 
that there was no evidence of abuse where the appraiser and selling 
agent are the same parties, that the two functions can be impartially 
carried out and that to require different parties is costly and 
detrimental to small thrifts.
    In implementing revisions to the appraisal regulations, the OTS was 
not attempting to create an appraisal system that would result in 
precise conformity between appraisal values and post-conversion stock 
prices. The OTS, however, remains concerned about significant 
discrepancies between appraisal values and immediate post-conversion 
trading prices. The OTS also recognizes that there will be 
circumstances that could not reasonably have been foreseen by an 
appraiser that may result in pricing discrepancies in a particular 
transaction. As noted in the preamble to the interim final rule, 
however, when there is a consistent pattern of discrepancies by a 
particular appraisal firm, the independence and competence of the 
appraiser is called into question.
    The terms ``materially deficient'' and ``consistently undervalued'' 
as used in the regulation are heavily dependent upon the facts and 
circumstances of each transaction or group of transactions. Because 
there is no ``bright-line'' test that can be applied to these terms, 
the OTS does not believe that it would be useful to further define 
these terms.
    With respect to the comment that the converting association should 
not be penalized for a materially deficient or substantially incomplete 
appraisal and the comment that the converting association should be 
given the opportunity to correct the faulty appraisal, the OTS does not 
believe that any change to the interim final rule is warranted. While 
management of a converting association may properly rely on the opinion 
of an independent appraiser in valuing conversion stock, it is 
ultimately the fiduciary responsibility of management to ensure that 
the converting association is properly priced for sale. The converting 
association also is ultimately responsible for the quality of the work 
of all of its agents, including its attorneys, accountants and selling 
agent, as well as its appraiser, and thus, should exercise due care in 
the hiring of such parties to ensure that qualified advisors and 
experts have been retained on behalf of the association. In any 
instance where a materially deficient conversion application is 
submitted, whether as a result of significant legal, accounting, 
appraisal or other deficiencies, the OTS retains the right to deem the 
application materially deficient and reject it.
    As to the issue of permitting ``corrections'' to inadequate 
appraisals submitted to the OTS, the purpose of rejecting conversion 
applications containing faulty appraisals is to encourage applicants to 
file applications that are substantially complete and that comply with 
regulatory requirements. If there are no consequences of filing an 
application that is substantially incomplete, there is less incentive 
to submit an adequate appraisal. In addition, given limited OTS staff 
resources, it is unfair to delay review of complete conversion 
applications with adequate appraisals by devoting inordinate amounts of 
OTS staff time to multiple reviews of applications with inadequate 
appraisals.
    The OTS believes that there is an appropriate role for officers of 
a converting association in the preparation of an appraisal. The OTS 
expects that the appraiser will consult with officers of the 
association in preparing the appraisal because the officers will often 
be the sole source of information about certain aspects of the current 
and future business operations of the association. It is not 
appropriate, however, for the officers to attempt to influence or to 
interfere with the independence of the appraiser. Similarly, appraisers 
seeking engagement with a converting institution should not in any 
manner suggest that they can provide a ``lower'' valuation than other 
appraisers.
    The board of directors has a primary responsibility to hire the 
appraiser and to review the appraisal report. The board of directors is 
entitled to rely on the appraiser's expertise. As with officers, it 
would be inappropriate for the board of directors to influence or 
interfere with the independence of the appraiser.
    The board of directors also retains the authority to reject an 
appraisal or to dismiss an appraiser. In such a case, the OTS would 
conduct the same type of review that it does when a savings association 
dismisses its accounting firm or rejects an accounting firm's 
opinion.7
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    \7\17 CFR 229.304 (March 8, 1989).
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    The interim final rule requested comment on whether appraisers or 
their affiliates should be prohibited from also serving as underwriters 
or selling agents in a conversion. A majority, albeit a narrow one, of 
those who commented on this aspect of the interim final rule were in 
favor of a prohibition on firms serving in both roles. Upon review of 
the comments, the OTS has determined that, as discussed in the interim 
final rule, the appraisal process and the independence of the appraiser 
should not be tainted by even the appearance of a conflict of interest. 
Although the same firm infrequently performs both these services and 
the OTS is not aware of any serious problems when it has, the final 
rule generally prohibits a firm from this dual service, except where 
procedures are followed and representations made to ensure that an 
appraiser is separate from the underwriter or selling agent affiliate 
and the underwriter or selling agent affiliate does not make 
recommendations or in any way impact the appraisal. Additionally, the 
final rule prohibits the appraiser from receiving any fees other than 
the fees for services rendered in connection with the appraisal.

B. Prohibition on Use of ``Running'' Proxies

    The conversion regulations have been revised to prohibit the use of 
``running'' proxies and to require the use of a proxy specifically 
designated for the conversion.
    The majority of commenters addressing the revision supported the 
prohibition of ``running'' proxies because it better ensures that 
members understand the proposed change in the association's 
organization. A few commenters expressed concern for the high costs of 
using professional proxy solicitation firms but none thought the costs 
were overly burdensome. Those commenters who opposed the prohibition 
asserted that there were already sufficient safeguards, that the old 
rule worked well since ``running'' proxies were only used if a member 
did not send a proxy or vote in person, that detailed disclosure was 
included in the proxy statements, and that the prohibition is an added 
expense for converting institutions.
    One commenter recommended adoption of a requirement that 50% of 
those voting approve the conversion, rather than the existing 
requirement that the conversion be approved by a 50% vote of all 
depositors.
    The OTS agrees with the majority of commenters and continues to 
believe that the prohibition of ``running'' proxies is the most 
effective manner in which to assure an increased role for an 
association's membership in the conversion process. Accordingly, no 
change has been made to the interim final rule. Thus, 12 CFR 563b.6(e) 
will continue to require approval of the plan of conversion by at least 
a majority of the total outstanding votes of the association's members, 
unless state law requires a higher percentage for a state-chartered 
converting savings association, in which case the higher percentage 
will be used. Finally, the final rule revises section 575.13(a)(4) of 
the mutual savings and loan holding companies regulation to clarify the 
prohibition on the use of ``running'' proxies and the requirement for 
the use of a specifically designated proxy for a mutual holding company 
reorganization, mutual-to-stock conversion undertaken either by a 
mutual savings association or a mutual holding company, or any other 
material transactions.

C. Re-Prioritize Stock Purchase by Tax-Qualified Employee Stock 
Ownership Plans

    In its interim final rule, the OTS revised the stock purchase 
priorities so as to give eligible account holders first priority and 
tax-qualified employee stock benefit plans second priority. The 
conversion regulations continue to give supplemental eligible account 
holders third priority and all other voting members who have 
subscription rights fourth priority.
    A majority of the commenters recommended that the ESOP be given 
first priority; a few commenters affirmatively supported giving the 
ESOP second priority. The commenters that recommended giving the ESOP 
first priority asserted that employees make the organization successful 
and should have the first stake in the company's performance, that the 
plans do not favor higher paid officers, but promote greater 
productivity and motivation, that the plans do not prevent long-term 
depositors from purchasing conversion stock, and that they protect 
institutions from hostile takeover situations. These commenters further 
asserted that if the ESOP is not established in the conversion, it will 
be established later and will dilute shareholders' ownership interest.
    A few commenters requested that the methodology for distribution of 
shares in the event of oversubscription be clarified. The commenters 
requested that the regulation be written to make clear the intent that 
the ESOP would be able to purchase stock through open market purchases 
or through authorized but unissued shares in the event of an 
oversubscription. If this was not the intent of the regulation, one 
commenter requested that the OTS clarify that it will grant a waiver or 
no-action letter to permit the ESOP or any other tax-qualified plan to 
purchase shares in the open market immediately following conversion.
    As stated in the preamble to the interim final rule, although the 
OTS believes that it is still appropriate to provide management 
incentives and to encourage employee stock ownership in the converted 
association, these interests have been overshadowed by other factors. 
The former provision which granted a first priority to tax-qualified 
employee benefit plans was a means to afford undercapitalized mutual 
savings associations a measure of anti-takeover protection through the 
opportunity to place a significant block of conversion stock in 
friendly hands, and thus, encourage capital raising through conversion. 
Because most mutual savings associations are now healthy, there is a 
need to balance the interests of management and employees against those 
of account holders by providing core depositors at mutual savings 
associations the first opportunity to buy conversion stock. The final 
rule will continue to give eligible account holders first priority. The 
wording of 12 CFR 563b.3(c)(23) has been revised to clarify that 
eligible account holders have first priority to purchase conversion 
stock, tax-qualified employee stock benefit plans have second priority, 
supplemental eligible account holders have third priority, and other 
voting members who have subscription rights have fourth priority.
    Also, as prescribed by 12 CFR 563b.3(c)(23), and further clarified 
in the final rule, if the final conversion stock valuation exceeds the 
maximum conversion stock offering range, up to ten percent of the total 
offering of shares may be sold to the tax-qualified employee stock 
benefit plans. This provision generally will allow ESOPs to be 
allocated stock during periods of an active and strong thrift 
securities market; however, such allocation generally will not be 
available when the final pro forma market value as approved by the OTS 
and disclosed in the stock offering materials does not exceed the 
maximum conversion stock offering range.\8\ If the ESOP is not able to 
purchase conversion stock, the ESOP or any other tax-qualified plan may 
purchase shares in the open market or utilize authorized but unissued 
shares only with prior OTS approval. Disclosure must be made in the 
conversion stock offering materials of the potential open market 
purchases or use of authorized but unissued shares to fund the ESOP and 
its effect on the association and its shareholders. The final rule 
reflects these clarifications.
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    \8\In the nearly 1,000 conversions completed since 1983, a 
majority were sold for a conversion price that did not exceed the 
maximum conversion stock offering range.
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D. Revision to Eligibility Record Date

    The OTS currently requires that the eligibility record date (ERD) 
be set at a date no less than one year prior to board of director 
approval of the plan of conversion. In the interim final rule, the OTS 
also requested public comment as to whether a longer minimum time 
period would be appropriate.
    The majority of commenters supported the revision to the ERD based 
on the reasoning that it properly protects the legitimate interests of 
core depositors and provides sufficient assurance that long-term 
supporters of an institution are given priority. A couple of commenters 
recommended setting a maximum time limit of two years and one 
recommended not extending beyond one year; one requested that 
``depositor'' be defined as one who has ``savings in any type of a 
deposit account of at least $100 continuously during the eligibility 
period.''
    Two commenters disagreed with the revision because it eliminates 
legitimate local depositors and is impractical since accurate records 
about depositors are not readily available. One commenter noted that 
directors and executive officers will have to plan further ahead, 
maintaining records for longer periods of time. Two commenters stated 
that the revision has no effect since professional investors are in 
place for a considerable period. One commenter recommended waivers for 
institutions of $100 million or less that can demonstrate that 
information is not available.
    A few commenters suggested eliminating the supplemental eligible 
account holder category, because the date for determining such account 
holders is close to the record date, and therefore duplicative, or in 
the alternative, setting a supplemental eligibility record date (SERD) 
only if the ERD is more than 18 months prior to the date of the latest 
application amendment filed before OTS approval. One commenter 
suggested moving the SERD from the current 15 month period to a 24 
month period; and also noted that the ERD revision and the local 
community depositor preference create three additional categories, 
making for extraordinary processing difficulties.
    One commenter suggested: (1) giving purchase preference to both 
depositors and borrowers as of the ERD; (2) giving preference to the 
eligible and supplemental eligible account holders whose accounts 
remain open at the voting record date over those who terminated their 
account relationship; and (3) amending the regulation to replace the 
100 share initial allocation\9\ with a provision that the initial 
allocation may be tailored to the circumstances of the thrift's 
offering.
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    \9\See 12 CFR 563b.3(c) (2)(ii) and (4)(iv).
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    The interim final rule will continue in effect without change for 
the reason stated by most commenters and supported by OTS: it properly 
protects the legitimate interests of core depositors and provides 
sufficient assurance that these depositors are given priority. 
``Eligible account holders'' are defined as those holders with savings 
accounts in place for a minimum of one year prior to board of director 
adoption of the plan of conversion. The OTS also believes there is no 
compelling reason to set a maximum time limit for an ERD. As stated in 
the interim final rule, the one year period is a minimum time period. 
Converting associations may designate such longer time periods as they 
may deem appropriate to encompass longer term depositors in the local 
communities served by the institution.
    The definition of qualifying deposit will continue as stated in 12 
CFR 563b.3(e). Also, the OTS believes that there is no compelling 
reason to eliminate or revise the current supplemental eligibility 
record date. Thus, supplemental eligible account holders, as currently 
defined in the regulation, will continue to be a category with a 
priority immediately following that of tax-qualified employee benefit 
plans. In addition, the OTS believes that there is no compelling reason 
to revise the current regulation that: 1) gives a purchase preference 
to all depositors (but not borrowers); 2) does not differentiate 
between eligible and supplemental eligible account holders whose 
accounts remain open at the voting record date over those who 
terminated their account relationship after board of director approval 
of the plan of conversion; and 3) requires the 100 share initial 
allocation.

E. Preference for Depositors in Local Community

    Prior to promulgation of the interim final rule, the OTS conversion 
regulations required a converting association to conduct a community 
offering of conversion stock in the local community, prior to a general 
public offering,\10\ but did not permit converting associations to give 
account holders and voting members in those local communities a 
priority to purchase stock in the initial subscription offering.\11\ 
However, to minimize conversion expenses, the OTS permitted converting 
associations to not register under state blue sky laws in those states 
where there was a relatively small number of depositors compared to the 
overall depositor base, even though this resulted in some depositors 
being precluded from purchasing stock in the conversion offering. In 
addition, the OTS has, on a case by case basis, permitted thrift 
subsidiaries of mutual holding companies to prioritize stock purchases 
by account holders and voting members in the local communities.\12\
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    \10\See 12 CFR 563b.3(c)(6)(iv).
    \11\See 12 CFR 563b.3(c)(2), (4), (5).
    \12\See 12 CFR 575.7(d)(6)(ii).
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    The interim final rule required that a stock purchase preference be 
given to eligible account holders, supplemental eligible account 
holders and voting members residing in the association's local 
community. Those having preference in each priority group (i.e., 
eligible account holder, supplemental eligible account holder and 
voting member) are persons who reside in the association's ``local 
community'' or within 100 miles of a home or branch office of the 
converting association. The interim final rule defined ``local 
community'' to include all counties in which the converting association 
has a home or branch office, each county's standard metropolitan 
statistical area or the general metropolitan area of each of these 
counties and such other similar area(s) as provided for in the 
converting association's plan of conversion, as approved by the OTS.
    Over one-half of the commenters on the interim final rule expressed 
views on the local depositor preference (LDP) provision. Approximately 
one-half of those commenters supported the LDP provision for various 
reasons such as: it promotes local control and involvement and is more 
sensitive to the community's needs; it serves the community first and 
gives depositors in the local community a more meaningful opportunity 
to participate; it is a good way to maintain local control of 
community-oriented associations; and it deals with the problem of 
outside investors who tend to put undue pressure on management to 
achieve a higher stock value more rapidly than may be feasible through 
safe and sound operations.
    A majority of the supporters of the LDP provision also suggested 
various changes to the interim final rule. Three suggested eliminating 
the 100 mile rule; one suggested using 50 instead of 100 miles; and 
three requested that the OTS clarify the parameters of 100 miles, i.e., 
from headquarters or branch, to residence or town of residence, within 
certain counties, etc. One commenter noted that the standard 
metropolitan statistical area (SMSA) is no longer in general use in 
delineating communities and markets and has been replaced by 
``metropolitan statistical area'' and ``consolidated metropolitan 
statistical area.'' The same commenter also noted that the term 
``general metropolitan area'' is not a term of general usage nor is it 
explained in the interim final rule. This commenter suggested 
eliminating the 100 mile priority and restricting priority to persons 
living within the local community defined by reference to counties.
    Two commenters suggested using zip codes corresponding to 
delineated CRA service areas, and three commenters suggested allowing 
each institution voluntarily to establish a local priority and identify 
local depositors. Four commenters requested that the rule be clarified 
to include, as local depositors, long-term account holders who lived in 
the area and kept accounts open but have retired and moved from the 
area, and long-term account holders who work or regularly vacation in 
the local community but do not reside there.
    One selling agent had concerns with the definition of ``local 
community'' and concerns with the word ``reside,'' including the 
problem with multiple residences. This commenter suggested that the 
test for the geographic area for the domicile of an account include the 
whole of any zip code that is partially within the geographic area. The 
commenter also suggested developing an affidavit to accompany the stock 
order form and requested that OTS not require any independent 
verification by the selling agents.
    Commenters that opposed the LDP provision asserted that all 
association members, regardless of location, should be treated the same 
and be allowed to participate in the conversion process on an equal 
basis. The objections raised by commenters opposing the LDP provision 
included the following: all depositors have ownership, voting and 
liquidation rights, deposits are used indiscriminately, and the 
definition of customer should not be related to location; the LDP 
provision is an artificial distinction between depositors based upon 
geography; non-local persons with long-term accounts and/or more money 
in accounts would have a lower priority than local persons with 
shorter-term accounts and/or less money; the LDP is arbitrary, 
capricious, unfairly discriminatory, ill-suited to advancing any 
legitimate public policy objective, and in violation of the 
Administrative Procedure Act;13 the LDP deprives non-locals, who 
have had long-term accounts with significant amounts of money and who 
maintain banking relationships, of rightful opportunity to participate 
in attractive conversions; it is unconscionable for a federal agency to 
require U.S. citizens to be treated differently based on their 
residence; and the LDP provision conflicts with the takings, due 
process and equal protection clause of the United States Constitution.
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    \1\3One of the most detailed comment letters came from counsel 
representing Thrift Depositors of America, Inc. (TDA), a trade 
association of mutual savings association depositors. A lawsuit by 
TDA (TDA vs. OTS, Civil Action No. 94-1008, U.S. District Court for 
the District of Columbia) alleged that the OTS's implementation of 
the LDP in the interim final rule without a notice and comment 
period violated the APA. On September 29, 1994, the Court ruled that 
because the OTS had failed to adequately justify waiving notice and 
comment for the LDP, it would enjoin the OTS from proceeding with 
mutual-to-stock conversions containing the LDP provision until a new 
rule was finalized in accordance with the notice and comment 
procedures of the APA.
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    Several of the commenters objected to the LDP provision because 
they believe that it violates federal and state policies and laws that 
prohibit discrimination. The OTS acknowledges that the effect of the 
rule is to authorize a preference to a certain type of depositor. The 
LDP rule, however, does not discriminate against any person based on 
age, race, sex, ethnic background, religion or any other impermissible 
category. Its purpose is to reward those who have and will maintain a 
banking relationship with the institution. While using residency as the 
basis for determining this category of depositors is inexact, it is 
valid to assume that generally local depositors fall into that category 
and non-local depositors do not. The OTS believes that providing for a 
LDP provision will assist in achieving the goals of (1) recognizing 
those depositors who have maintained long-term banking relationships 
with the converting institution and thereby contributed to its 
financial success, and who are likely to continue to do so in the 
future,14 and (2) promoting ownership by persons who have close 
ties to the community. Thus, in the OTS's view, the rule does not 
violate federal or state policies against discrimination.
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    \1\4OTS cannot, in a regulation, identify with exactitude every 
single instance in which a depositor has maintained a long-term 
banking relationship with a converting institution and thereby 
contributed to its financial success. However, it is both rational 
and convenient, for reasons discussed elsewhere in this preamble, to 
identify this group as the local depositors. Moreover, as discussed 
more fully below, the OTS has provided a mechanism to enable 
converting institutions, in applying the LDP, to take account of 
unique and compelling circumstances posed by persons who are not 
local depositors.
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    The OTS also believes that the constitutional arguments raised by 
certain commenters are without merit. As has been recognized by a 
number of courts, the property rights of mutual account holders are 
extremely limited.15 In the OTS conversion regulations, the 
limited rights that depositors have to share pro rata in the surplus of 
a liquidated mutual savings association is recognized by the 
establishment of a liquidation account in the converted association. No 
distinction is made between local and non-local depositors in the 
establishment of these accounts and nothing in the interim rule or this 
final rule would diminish a depositor's interest in his or her 
liquidation account. Similarly, the OTS does not believe that 
authorizing the LDP provision violates the Equal Protection Clause of 
the Constitution. Although the LDP provision does make a distinction 
between depositors, the OTS believes, for the reasons discussed above, 
that there is a rational basis for authorizing an institution to make 
the distinction and that the provision reasonably relates to legitimate 
policy objectives.
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    \1\5See, e.g., Paulsen v. C.I.R., 469 U.S. 131 (1985); Ordower 
v. Bell Fed. Sav. & Loan Ass'n, 999 F.2d 1183 (7th Cir. 1993); York 
v. Federal Home Loan Bank Board, 624 F.2d 495 (4th Cir.), cert. 
denied, 449 U.S. 1043 (1980); Lovell v. The One Bancorp, 614 A.2d 56 
(Me. 1992).
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    The OTS instituted the LDP rule in the interim final rule to 
promote local community ownership of converting institutions, and to 
reward a group that, collectively, typically has made significant 
contributions to the financial success of the institution. The LDP rule 
sought to provide the opportunity for local depositors to participate 
more fully in the subscription offering without competition from large 
purchases by out-of-area depositors. The OTS has become aware in recent 
years of the evolution of a class of depositors, sometimes referred to 
as ``professional depositors'' or ``flippers,'' who have opened 
accounts in a large number of mutual associations.16 These 
``professional depositors,'' who often reside outside the local 
community of the mutual savings association, make deposits in 
anticipation of the mutual savings association converting to stock 
form. Often, these depositors subscribe for a significant number of 
shares in the subscription offering phase with the intent of selling 
all or a significant number of the shares in a short period of time 
following the conversion to take advantage of a lucrative after-market. 
Once a conversion is complete, these depositors often withdraw their 
deposits and have no further relationship with the converted savings 
association.
---------------------------------------------------------------------------

    \1\6See, e.g., Peter Lynch, Beating the Street (1993), p. 220.
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    As discussed below, OTS continues to believe that local depositors 
should be given preference over out-of-area depositors in purchasing 
stock of a converting mutual savings association. Upon further 
consideration of the issues presented in this area and review of the 
comment letters, however, OTS has determined in the final rule to 
authorize, but not require, a savings association to give a conversion 
stock purchase preference to account holders residing in the local 
community.
    The OTS has taken this position, i.e., making the LDP provision 
optional, for a number of reasons. First, the OTS does not oppose the 
full participation of those other than local depositors in the 
conversion process. The nationwide interest in thrift stock has enabled 
many thrifts to recapitalize, thereby preventing thrift failures and a 
burden on the taxpayers. In addition, the OTS notes that the conversion 
eligibility record date, the primary determinant for prioritized 
eligibility to purchase conversion stock, has always been keyed to the 
length of time a depositor has had an account with a converting 
institution, not to geographic location. Also, as noted below, many 
mutual associations have exercised their authority to accept deposit 
accounts only from persons residing in the association's local 
community.
    In light of the foregoing, and in response to the comments noted 
above, the OTS believes that the LDP provision need not be a 
requirement of conversion; rather it should be at the option of each 
converting savings association which will decide whether its particular 
situation warrants its use. A savings association may conclude that an 
LDP for stock purchases is important to ensure ownership by local 
depositors who made significant long-term contributions to the 
financial success of the institution by virtue of their deposit and 
borrowing relationships, and who, it expects, will continue to maintain 
financial relationships with the institution after the conversion. The 
final rule includes the LDP provision as an optional provision in the 
subscription phase of the conversion.
    To assist converting institutions who elect to include the LDP 
provision, the final rule continues to provide a definition of the 
``local community.'' In response to comments, however, the final rule 
substantially revises the definition. First, the 100-mile standard is 
eliminated. In addition, the definition of local community has been 
revised to delete the reference to the ``standard metropolitan 
statistical area'' and the ``general metropolitan area.'' Finally, the 
definition also has been revised to include ``metropolitan statistical 
area'' (which replaced the SMSA), all zip code areas corresponding to 
the converting institution's delineated CRA service area, and such 
other area(s) or category as designated by the institution and provided 
for in the plan of conversion.\17\ In this regard, the OTS will review, 
on a case by case basis, the proposals by converting associations to 
define local community other than as defined in the final rule.
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    \17\For example, a number of commenters suggested other 
categories of depositors, such as retirees, who may be equivalent to 
local depositors in terms of their long-term relationship with the 
institution.
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    OTS also specifically solicited comments as to whether a savings 
association, in anticipation of conversion, should be permitted to: (1) 
refuse to open accounts for potential depositors residing outside the 
local community, or (2) close accounts of depositors residing outside 
the local community.
    Of 18 commenters addressing this issue, 13 stated that a savings 
association should be able to refuse to open accounts for non-local 
depositors, with three of the 13 requesting that OTS confirm the 
association's right to refuse to accept deposits. Five commenters 
believed that associations should not be allowed to refuse to open 
accounts, with two of the five stating that OTS should prohibit 
associations from refusing to open or maintain accounts of non-local 
depositors.
    Of 18 commenters, 10 stated that savings associations should be 
allowed to close accounts of non-local depositors, with one commenter 
stating that an account should be required to be closed at least 6 
months prior to the adoption of a plan of conversion. Two of the 10 
stated that OTS should confirm an association's right, as a general 
matter, to close accounts of, and return monies to, depositors who do 
not reside in the community served by the association. Eight commenters 
opposed the closing of accounts in contemplation of conversion, with 
one stating that the closing would violate fundamental fairness and 
deprive valid property rights without due process.
    In the interim final rule, the OTS noted that federal associations 
generally have the authority to open and maintain savings accounts 
within their discretion.\18\ State chartered savings associations are 
subject to state laws governing the opening and closing of deposit 
accounts. Based upon its review of the comments, the OTS has determined 
not to make any changes to the conversion rules in this area. It is the 
opinion of the OTS that federal associations have the authority to open 
and close deposit accounts, including those accounts of non-local 
depositors, provided they do not violate applicable laws that prohibit 
discrimination on the basis of age, race, sex, ethnic background, 
religion or any other impermissible category.
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    \18\See 12 U.S.C. 1464(b) and 12 CFR 545.11(b); see also 
Appendix to 12 CFR Part 544 (model bylaws for federal associations 
provide that the board of directors has the explicit power to reject 
any application for a savings account).
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    The OTS, however, would not consider it to be a legitimate exercise 
of that authority if a savings association, in anticipation of 
conversion, closed an account for the purpose of preventing a depositor 
from participating in a conversion as an account holder. The OTS 
believes that this could result in the perception that insiders were 
acting out of self-interest and not in the interests of the savings 
association.

F. Revision to Policy Regarding Management Stock Benefit Plans

    In the interim final rule, the OTS substantially revised and 
codified its policies regarding the establishment of management 
recognition plans (MRPs) and stock option plans (SOPs) during the 
conversion process. The new provisions require that any decision to 
implement MRPs and SOPs after conversion be voted on and approved by a 
majority of the shareholders no earlier than the first annual meeting 
following the conversion, and that prior to implementation, all such 
plans be reviewed and approved by the Regional Director. The provisions 
also prohibit the use of conversion stock to fund MRPs, require that 
MRPs be awarded and stock options be granted only after shareholder 
approval is received and require that stock options be granted at the 
market price at which the stock is trading at the time of grant. The 
regulation also codifies the OTS's policies regarding permissible 
amounts that may be included in SOPs and MRPs formed within one year of 
conversion.
    Approximately 17 commenters recommended allowance of a reasonable 
amount of stock benefits at the time of conversion, rather than a flat 
prohibition. A majority of the 17 commenters stated that the level of 
stock benefit plans should be tailored to the size, health and 
performance of the association, the business plan objectives and needs, 
the size of the offering, and the specific contribution and tenure of 
management. One commenter suggested 1% for MRPs and 5% for stock 
options, subject to the normal five-year vesting period. Another 
commenter suggested allowing a small MRP amount at the time of 
conversion with the remainder reserved for future performance-based 
awards and a SOP that is structured so that the exercise price is based 
on an averaging formula or an indexed price.
    Four commenters supported the prohibition of stock benefit plans at 
conversion.
    Of eight commenters addressing the issue, six supported the 
requirement for shareholder approval of management plans. One of the 
six supported the delaying of implementation until approval is received 
and two commenters stated that shares should be allocated at the time 
of conversion but contingent on shareholder approval. One commenter 
requested a revision in the wording of the regulation to clarify that 
plans must be approved by an affirmative vote of the holders of a 
majority of the securities of the issuer present, or represented and 
entitled to vote, at the meeting.
    Of ten commenters addressing the issue, two supported the provision 
that shareholder approval be at the first annual meeting, and eight 
requested that the timing aspect be revised to allow approval at any 
duly called meeting of shareholders, either annual or special. One 
commenter suggested that the regulation require that a meeting be at 
least two months after completion of the conversion. One commenter 
expressed concern for differences in flexibility with annual meeting 
dates for state holding companies and federal savings associations. One 
of the eight commenters stated that by waiting for the first annual 
meeting, awards are expensed based upon the fair market value of common 
stock on the date of the meeting which increases the financial 
accounting expenses for the institution. This same commenter also noted 
that the date the MRPs are implemented is inconsequential to officers 
and directors, because the financial benefit of the MRPs is in the full 
value of the shares, not in their appreciation as in stock options.
    Three commenters stated that associations should be given 
flexibility to obtain a reasonable and appropriate number of shares to 
fund stock plans through open market purchases or through authorized 
but unissued shares. Another commenter requested that the regional 
office review and act upon stock plans at the time of conversion, that 
no conditional approval be allowed, and that plans not acted upon 
within a certain time be deemed approved automatically.
    Consistent with the discussion in the preamble to the interim final 
rule, the OTS believes that while there are valid business reasons for 
thrifts to adopt stock benefit plans in order to attract and retain 
qualified management, these plans are now more appropriately 
implemented subsequent to the conversion and with shareholder approval. 
A waiting period allows shareholders to decide whether to permit 
dilution of their interests after reviewing management's performance. 
Moreover, the stock price stabilizes once the marketplace has 
sufficiently digested the financial data of the association.
    The interim final rule required that stock options be granted at 
the market price at which the stock is trading at the time of grant. 
The OTS has revised the interim final rule so as to require that stock 
options be granted at no less than the market price at which the stock 
is trading at the time of grant. This revision is consistent with the 
current practices and rules relating to the granting of stock options.
    The shareholder vote required by the final rule will be uniform for 
both savings associations and holding companies, i.e., the affirmative 
votes of the holders of a majority of the total votes eligible to be 
cast at a legal meeting.\19\
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    \19\This voting requirement coincides with the voting 
requirement of Section 5 of 12 CFR 552.3, the Federal Stock Charter 
provision. As noted, it will apply to savings and loan holding 
companies formed in the conversion process that implement management 
stock benefit plans within one year following conversion.
---------------------------------------------------------------------------

    Shareholder approval is required prior to implementation of MRPs or 
stock option plans within the first year of conversion. In response to 
the comments and mindful that a uniform meeting time may be justifiable 
for the reasons cited by the commenters, the timing aspect in the 
interim final rule is being revised to allow approval at any duly 
called meeting of shareholders, either annual or special, to be held no 
earlier than six months after completion of the conversion. The OTS 
believes a six-month ``cooling off'' period will give the marketplace 
sufficient time to digest the financial data and the shareholders 
sufficient time to become familiar with the finances and operations of 
the converted association in order to make an informed investment 
decision in considering whether to vote to adopt such plans.
    The interim final rule did not specify the vesting schedule of the 
management stock benefit and stock option plans. As a matter of policy 
under both the conversion regulations and the safety and soundness 
authority governing management compensation, the OTS has generally 
required such plans to vest beginning one year from the date the plans 
are approved by shareholders, and at a rate not in excess of 20% a 
year. A provision has been added to the final rule codifying these 
policies. Also, in furtherance of the foregoing policy, an additional 
provision in the final rule generally prohibits accelerated vesting 
except in the case of disability or death.
    The OTS agrees with the commenters that savings associations should 
be given flexibility to obtain a reasonable and appropriate number of 
shares to fund stock plans through open market purchases or through 
authorized but unissued shares. In funding these plans, the board of 
directors and the compensation committees are reminded of their 
fiduciary duties to the association or holding company, its 
shareholders and the association's members.
    Finally, the interim final rule required that management and stock 
option plans be subject to approval of the appropriate OTS Regional 
Director prior to plan implementation. The final rule removes the 
requirement for OTS Regional Director approval in advance of a 
stockholder vote and implementation. The final rule provides that 
management stock benefit plans and stock option plans comply with all 
of the regulatory requirements. Disclosure in all proxy and related 
material distributed to the shareholders shall indicate that the plans 
in no way have been approved or endorsed by the OTS, and no written or 
oral representation to the contrary shall be made by the association, 
its management, employees or professional advisors. The final rule also 
adds the requirement that subsequent to shareholder approval of the 
plans, the association will be required to file with the OTS a copy of 
the plans approved by shareholders and written certification that the 
plans approved by shareholders are the same plans submitted to the OTS 
in the proxy materials.

G. Merger Conversions

    In the interim final rule, the OTS amended its conversion 
regulations to limit merger conversions to institutions that qualify 
for a supervisory conversion, i.e., financially-weak institutions. OTS 
also solicited comment as to whether merger conversions involving 
healthy savings associations should be permitted in the future, and if 
so, under what circumstances. The OTS was particularly interested in 
how merger conversions should be structured to avoid the safety and 
soundness concerns raised by such transactions that were discussed in 
the preamble to the interim final rule.
    Of approximately 43 commenters addressing merger conversions, 
approximately 33 expressed the view that merger conversions should be 
permitted for healthy thrifts. Of these 33 commenters, 13 proposed a 
small savings association exception, with ``small'' being defined as 
anywhere from $5 million to $300 million in assets. The bases for the 
exception were the cost of doing two transactions (a standard mutual-
to-stock conversion followed by a merger transaction) in order to 
accomplish a merger; the business reasons (access to capital markets, 
choice of partner, long-term survival, technological advancement, 
access to a strong management team and enhancement of service to 
communities); and the economic necessity for market-driven 
consolidations to occur.
    Those commenters who favored authorization of merger conversions 
involving healthy thrifts believed that the OTS should regulate and 
supervise these transactions and address concerns over insider abuse, 
excessive management compensation and stock incentive packages. They 
argued that OTS could set narrow approval guidelines but should not ban 
or eliminate merger conversions. One commenter stated that merger 
conversions should be allowed on a case-by-case basis taking into 
account the size and strategic needs of the institution. Another 
commenter stated that OTS should allow submission on a test case basis 
so as to develop a structure that would address the issues.
    A few commenters thought that depositors should be able to vote on 
whether a stand-alone or merger conversion would be in the best 
interest of the association. Several commenters stated that the board 
of directors should decide whether to undertake a merger conversion 
based on their business judgment. Two commenters thought that for a 
merger conversion to be approved, an institution would have to document 
specific business, economic and fiscal reasons and be required to 
demonstrate that the transaction would provide opportunities for 
customers and depositors to participate in the institution's value. 
Another commenter stated that the prohibition punishes forward-thinking 
thrift managers and further endangers the health of the industry by 
closing off avenues for generating capital.
    Another commenter stated that the institution should be free to 
negotiate the terms of a merger conversion, including reasonable 
compensation arrangements and purchase discount percentages.
    Some suggestions regarding the windfall gains and other problems 
and the valuation issue included: allow subscribers to subscribe to the 
stock of the acquiring association at a 15% to 20% discount, based on 
the stock price either at the time of acquisition or at the time the 
transaction is announced; require the acquiring entity to pay a control 
premium; assure that value is made available to appropriate 
constituencies through community foundations, special interest payments 
on deposits, and/or a special class of preferred stock made available 
to depositors without cost; make bonus interest payments equal to a 
certain percentage of principal on all eligible account holder deposits 
maintained at resulting institution for a specific time period after 
the acquisition is consummated\20\; require the acquiror to hold the 
thrift as a separate subsidiary or be an OTS-regulated institution 
itself; require all net conversion proceeds to go to the association; 
allow compensation only to the extent allowed in stand alone 
conversions; or require a CRA rating of outstanding or satisfactory.
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    \20\The OTS notes that a fundamental premise of the conversion 
regulations prohibits free distribution schemes in connection with a 
conversion. See 39 FR 9142 (March 7, 1974).
---------------------------------------------------------------------------

    One commenter recommended using a two-step approach, allowing the 
mutual to enter into a definitive merger conversion agreement prior to 
doing a stand-alone conversion, disclosing the intended transaction in 
the stand-alone conversion, and then requiring a 90-day period between 
completion of the stand-alone conversion and consummation of the 
merger.
    Of the approximately ten commenters that supported the prohibition 
against merger conversions, two did so only until guidelines can be 
drawn to protect the rights of members of the disappearing association 
and to prevent insider abuse. One of the ten stated that merger 
conversions should be prohibited except in cases of undercapitalized 
institutions or at the discretion of the regulators on a case by case 
basis. A fourth supporter noted that what is beneficial to the board of 
directors and insiders may not always be in the best interest of the 
institution or the community it serves. A fifth supporter stated that 
depositors are best served by forcing acquiring entities to bid for a 
converted institution's stock in the open market. A sixth commenter 
supported the prohibition because of the windfall and valuation 
problems.
    Upon review of the comments, the OTS has determined to continue to 
generally limit merger conversions to cases involving financially weak 
institutions. Although several commenters made suggestions that 
attempted to address the concerns raised in the interim final rule, 
including the valuation problem and accrual of ``windfall gains'' by 
the acquiror, the OTS remains concerned with the problems raised by 
merger conversions of healthy institutions.
    In line with the commenter who suggested that the OTS allow test 
case submissions in order to develop a structure that would address the 
issues, the OTS emphasizes that it retains its general waiver authority 
under part 563b to permit a merger conversion transaction under 
appropriate circumstances.21 An institution seeking a waiver of 
the merger conversion limitation will bear the burden of demonstrating 
how a proposed transaction specifically addresses the concerns set 
forth above and in the interim final rule, and will also be required to 
document specific business, economic and corporate reasons for a merger 
conversion. As discussed in the interim final rule, however, the OTS 
has identified a number of significant structural abuses and regulatory 
problems inherent in merger conversions.22 Thus, while the OTS 
continues to remain open to the development of a transaction structure 
that addresses these problems, a healthy institution faces significant 
hurdles in demonstrating its transaction will resolve these problems.
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    \2\1One situation suggested by some commenters and to which the 
OTS would give serious consideration is where a converting 
association could demonstrate by clear and convincing evidence that 
a standard conversion would not be economically feasible, based on 
the ratio of expenses to gross proceeds, because of the asset size 
of an institution. Very small institutions, i.e. those with assets 
under $25 million are more likely to be able to establish such a 
justification.
    \2\2See 59 FR 22725, 22729 (May 3, 1994); see also testimony of 
a House Financial Institutions Subcommittee Hearing on Mutual-to-
Stock Conversions dated January 26, 1994.
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    In the interim final rule, the OTS stated that merger conversions 
could be done as a two-step process in which the mutual account holders 
are initially granted an opportunity to purchase stock of a converting 
savings association or its holding company and then following the 
conversion, vote to merge with or be acquired by another institution, 
subject to certain limitations. One of the limitations is 12 CFR 
563b.3(i)(2), under which no person is permitted to make an offer for 
any security of a converting savings association issued in connection 
with the conversion. The other limitation is 12 CFR 563b.3(i)(3), under 
which no person is permitted for a period of three years following the 
conversion, to make an offer to acquire or acquire more than 10% of any 
class of equity security of a converted savings association without the 
prior written approval of the OTS.23
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    \2\3Clearly, with respect to the latter limitation, the 
opportunity is present for converted institutions contemplating a 
merger to seek approval from the OTS to undertake such a transaction 
even within the first year following conversion.
---------------------------------------------------------------------------

    In addition, the OTS has generally imposed a condition in 
connection with approval of a conversion transaction that prohibits, 
without prior OTS approval, the converting association or its holding 
company from taking any action within the first year following 
conversion that could lead to a transaction that would require 
stockholder approval if such transaction were subject to 12 CFR 552.13. 
These provisions are intended to preserve the integrity of the 
independent appraisal process, deter manipulation of the conversion 
process by insiders or other sophisticated third parties to the 
detriment of the account holders, and permit the OTS to monitor post-
conversion acquisition activities of recently converted associations. 
By this regulatory oversight of merger and acquisition activities 
following the conversion, a converting institution is provided with a 
reasonable period of time to implement its post-conversion business 
plan and to invest the conversion proceeds. With respect to the 
appraisal issue, the pro forma valuation of converting institutions 
assumes that no acquisition of the converting association will take 
place for a reasonable period of time following the conversion. If 
there are ongoing discussions about a takeover of a converting thrift 
during the conversion process, the ability of an appraiser to prepare 
an appraisal that satisfies the requirements of 12 CFR 563b.7 is 
severely diminished because of the uncertainty that such takeover 
speculation would generate.

H. Extension of the Conversion Public Comment Period

    OTS revised the conversion regulations to conform the public 
comment period with the longer twenty calendar day public comment 
period provided under the acquisition of control regulations.24
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    \2\412 CFR 574.6(e).
---------------------------------------------------------------------------

    Eight of ten commenters endorsed the new requirement, with one of 
the eight suggesting that OTS include a requirement for wider 
distribution, in a timely manner, of the conversion notices 
contemporaneously with the filing of the conversion application. One of 
the eight noted that too long a comment period may cause significant 
delays and related inappropriate costs to the converting associations.
    One commenter stated that the ten day comment period provided ample 
time for any person desiring to comment on an application, and if the 
20-day period is used, suggested that an association be permitted to 
publish the 4(b) notice immediately upon filing the application with 
OTS, without waiting for OTS authorization. Another commenter stated 
that the revision served no useful purpose, but if kept, also suggested 
that the 4(b) notice should be able to be given immediately after the 
filing to ensure no delay due to the longer public comment period.
    The OTS continues to believe that the longer public comment period 
will give sufficient time for interested parties to review and comment 
on a detailed conversion application. In order to accommodate the 
concern noted by some commenters, the final rule requires that the 4(b) 
notice be given immediately after the filing of the application with 
the OTS. However, the final rule also clarifies that if a conversion 
application is later deemed not properly executed or is materially 
deficient or substantially incomplete, the applicant may be required to 
refile the application, republish the accompanying 4(b) notice, and 
provide for another 20-day public comment period.

I. Submission of Business Plans for All Conversion Transactions

    OTS now requires that all conversion transactions, with or without 
holding company formations, include a business plan, and that the 
business plan address in detail how the capital acquired in the 
conversion will be utilized.
    All commenters addressing this issue affirmatively supported the 
provision. Two wanted assurance of confidentiality of the business plan 
to protect associations from unfair competition. One of the commenters 
stated that the business plans should not be used to deny a conversion 
application, unless the plan raises significant safety and soundness 
concerns, and two urged OTS not to put itself in the position of 
deciding how much capital a business may need in future years, nor to 
require a converting institution to justify the need for capital in 
order to be able to convert.
    The interim final rule will continue in effect without change. As 
noted in the preamble to the interim final rule, in order to ensure 
that a business plan is given confidential treatment, the applicant 
should follow the procedures set forth at 12 CFR 563b.4(c).
    Applicants for conversions must submit their business plans to the 
Regional Director prior to the filing of the conversion application. 
OTS may deny a conversion application where the business plan does not 
sufficiently address the deployment of conversion proceeds, raises 
significant safety and soundness concerns, or does not otherwise 
address convenience and needs standards as required in the final 
regulation.

J. Revision to Post-Conversion Stock Repurchase Rules

    In its interim final rule, the OTS revised the conversion 
regulations to prohibit stock repurchases by the converting association 
for one year following conversion. After one year, a converted 
association may file with the appropriate Regional Director an open 
market repurchase program in which it may propose stock repurchases of 
no more than 5% of the outstanding capital stock during any twelve 
month period in the second and third years after the conversion. The 
Regional Director also may disapprove repurchases if the association 
does not demonstrate a valid business purpose for the stock repurchase; 
and also may approve amounts greater than 5% in the second and third 
years if there are circumstances that would justify such repurchases.
    A majority of the commenters addressing this issue disagreed with 
the revisions, six commenters proposed alternative revisions, and one 
commenter supported the prohibition of stock repurchases for one year 
following conversion. The majority felt the blanket prohibition was not 
sound public policy, was not justified or necessary, was detrimental to 
thrift stock prices, and reduced the ability of thrifts to compete in 
capital markets. Most stated that the repurchase of stock is standard 
corporate practice that should be left to the decision of the board of 
directors (consistent with fiduciary responsibilities), subject to 
safety and soundness concerns. Most also felt that thrifts need to 
retain flexibility in using repurchase programs because markets are 
fluid and subject to change due to various forces. Most viewed the 
prohibition on stock repurchases as taking away the institution's and 
the OTS's ability to follow market dictates and react to stock price 
fluctuations and other market conditions. A few commenters stated that 
by limiting repurchases, the regulation may cause institutions to use 
excess capital unwisely, to engage in unsound and risky ventures in an 
attempt to provide better returns for shareholders, and could 
unintentionally increase pressure on thrift management to produce 
better returns on equity by taking greater risks in daily operations. A 
few commenters found no valid justification for distinguishing newly 
converted thrifts and stated that, in deciding whether a repurchase is 
for valid business reasons, the OTS should look at whether the 
association has excess capital, whether the stock is trading below book 
value, and whether the repurchase is an attractive investment given the 
association's business prospects.
    One commenter requested that the rule specify in greater detail the 
circumstances that would warrant repurchase amounts greater than the 5% 
repurchase limit in the second and third years following conversion. 
Another commenter requested that the rule require all regions to be 
uniform in permitting repurchases greater than 5% during that time.
    Eight commenters stated that recently converted thrifts should be 
allowed to operate under the regulations in place at the time they 
converted, and that the OTS should grandfather all associations that 
converted prior to the effective date of the interim final rule.
    While the OTS continues to believe that stock repurchase programs 
may serve valid business purposes, e.g., maintaining the value of a 
converting association's stock in an active trading market, the OTS 
also continues to have concerns with substantial buyback programs that 
commence immediately after conversion and are not based on a valid 
business purpose. In addition, and as noted in the preamble to the 
interim final rule, repurchases commenced immediately after conversion 
raise substantial issues regarding whether conversion stock has been 
appropriately valued.
    To address these concerns, but also to allow for some flexibility 
for repurchase programs, the final rule continues to discourage stock 
repurchases for one year after conversion, but gives the OTS discretion 
to allow limited stock repurchases in the first year where exceptional 
circumstances are established.25 This would give the OTS the 
ability to permit repurchases where it may be in the best interests of 
the association and its shareholders; however, such repurchases will be 
allowed in the first year only when deemed necessary by the OTS.
---------------------------------------------------------------------------

    \2\5We note, for example, that typically public companies may 
repurchase stock in the open market where there is a prolonged 
period of a downward trend in the stock price.
---------------------------------------------------------------------------

    The interim final rule stated that repurchases within two years 
after the conversion must be part of an open-market stock repurchase 
program that does not allow for a repurchase of more than 5% of the 
association's outstanding capital stock during a twelve month period. 
The final rule has been revised to clarify that repurchases in years 
two and three after conversion must be part of an open-market stock 
repurchase program and generally will be limited to no more than 5% of 
the association's outstanding capital stock. However, the final rule 
allows the OTS to approve repurchase programs in amounts greater than 
5% in the second and third years, if exceptional circumstances are 
established. As stated above, this would give the OTS the ability to 
permit additional repurchases where it may be in the best interests of 
the association and its shareholders; however, such repurchases will be 
allowed only when deemed necessary by the OTS.
    The OTS continues to believe that ensuring an equitable conversion 
process and consistency in that process require that the final rule 
apply to all associations that converted in the three years preceding 
the May 3, 1994 effective date of the interim final rule. Any previous 
repurchases that occurred prior to May 3, 1994 will be grandfathered, 
however, grandfathered repurchases will count toward compliance with 
the current requirements.

K. Convenience and Needs Considerations

    The proposed rule would add a new ``convenience and needs'' 
standard to existing approval standards applicable to conversions and 
MHC stock offerings. Under the proposal, the OTS would review the 
applicant's performance under the CRA,26 the contents of the 
business plan submitted in support of the application, and other 
factors relating to the applicant's performance in meeting the 
convenience and needs of its delineated community.
---------------------------------------------------------------------------

    \2\6The OTS recently reproposed revisions to its regulations 
implementing the CRA. See 59 FR 51232 (October 7, 1994).
---------------------------------------------------------------------------

    Three commenters favored adoption of the new standard and nine 
opposed the new standard. Favorable comments expressed the view that 
the proposal would serve a valid public purpose and adequately respond 
to community and Congressional concerns regarding allocation of 
conversion proceeds. Comments opposed to the proposal focused primarily 
on the OTS' authority to adopt the proposal and on questions relating 
to implementation, such as whether the proposal is necessary or 
appropriate given existing laws and regulations; whether the OTS will 
consider CRA-related protests during application processing; and 
whether the OTS would mandate allocation of transaction proceeds to 
specific community credit or lending programs.
1. OTS Authority to Adopt the Proposal
    As noted in the preamble to the convenience and needs proposal, a 
convenience and needs standard has not, to date, been applied to 
mutual-to-stock conversions of savings associations. Similarly, a 
convenience and needs standard generally has not been applied to MHC 
stock offerings.27 Upon review of this area, however, the OTS 
proposed amendments to its regulations to impose a convenience and 
needs standard on these transactions. The proposal was issued, among 
other reasons, to enhance the OTS' ability to ensure that savings 
associations undertaking these transactions recognize their 
responsibility to consider their community's credit needs.
---------------------------------------------------------------------------

    \2\7A convenience and needs standard has been applied to mutual 
holding company reorganizations because these transactions require 
the OTS' approval under the Bank Merger Act (BMA). See 58 FR 44105 
(August 19, 1993) (adopting part 575 governing mutual holding 
company reorganizations and related stock issuances). The BMA 
requires that the responsible agency consider the convenience and 
needs of the community to be served in acting on any BMA 
application. See 12 U.S.C. 1828(c)(5).
---------------------------------------------------------------------------

    In the notice of the proposed amendments, the OTS explained its 
authority to adopt and implement the proposal.28 Some commenters 
argued that the proposal goes beyond OTS authority under the Home 
Owners' Loan Act (HOLA)29 and the CRA. These commenters stated 
that the CRA limits the types of applications that may be subject to 
review under the CRA; that Congress intended the CRA to cover only 
those transactions resulting in new charters or expanded facilities, 
not conversions and MHC stock offerings. On this point, these 
commenters asserted that a convenience and needs standard is not 
appropriate in conversions because conversions are fundamentally a 
capital-raising technique, not an expansion of operations. One 
commenter believed that section 5(c) is the only provision of the 
HOLA30 that enumerates thrift powers and authorities, and that no 
affirmative housing credit obligation exists in section 5(c) that would 
permit the OTS to direct the allocation of conversion proceeds to 
community lending programs.
---------------------------------------------------------------------------

    \2\8See 59 FR 22764, 22765 (May 3, 1994).
    \2\912 U.S.C. 1461.
    \3\012 U.S.C. 1464(c).
---------------------------------------------------------------------------

    The OTS has concluded that it has ample statutory authority for the 
amendments. As noted in the proposal, the OTS has broad authority under 
sections 5(i)(1) and 5(i)(2) of the HOLA to regulate mutual-to-stock 
conversions, and under section 10(o)(7) of the HOLA to regulate mutual 
holding companies.31 Inherent in this broad grant of authority is 
the ability to assess the impact of a proposed transaction on the 
convenience and needs of the communities to be served by a savings 
association.
---------------------------------------------------------------------------

    \3\112 U.S.C. 1464(i)(1), 1464(i)(2) and 1467a(o)(7). See also 
Charter Federal S.&L. Ass'n. v. Office of Thrift Supervision, 912 
F.2d 1569 (11th Cir. 1990).
---------------------------------------------------------------------------

    In addition, section 4(a)(3) of the HOLA provides that the Director 
``shall exercise all powers granted to the Director under this chapter 
so as to encourage savings associations to provide credit for housing 
safely and soundly.''32 For federal associations, in particular, 
the OTS is directed to exercise its regulatory powers in order to 
provide thrift institutions ``* * * for the extension of credit for 
homes and other goods and services.''33 The powers granted to the 
Director include the general regulatory authority under sections 
5(i)(1), 5(i)(2), and 10(o)(7) of the HOLA mentioned above. The 
admonitions in the HOLA that the Director use his or her statutory 
powers to encourage savings associations to provide credit provides a 
substantial additional basis for the Director to assess community needs 
when reviewing applications.
---------------------------------------------------------------------------

    \3\212 U.S.C. 1463(a)(3).
    \3\3See section 5(a) of the HOLA, 12 U.S.C. 1464(a).
---------------------------------------------------------------------------

    Thus, the OTS' authority to address convenience and needs concerns 
in the context of applications is not limited to the applications 
specifically mentioned in the CRA. While the application review 
sections of the CRA arguably focus primarily on transactions that 
involve some type of expansion of operations in a geographical market, 
e.g., new charters or branch facilities,34 the CRA does not limit 
agency authority under other statutes or regulations to consider 
convenience and needs factors during the review of applications that do 
not necessarily involve an expansion of operations.
---------------------------------------------------------------------------

    \3\4See 12 U.S.C. 2902(3), 2903.
---------------------------------------------------------------------------

    Finally, the amendments are consistent with section 5(c) of the 
HOLA. Section 5(c) of the HOLA generally sets forth permissible 
investments and investment limitations for federal savings 
associations, but in no way limits the OTS' authority to ensure that 
these investment powers are exercised in a manner that is consistent 
with the convenience and needs of the community.
2. Appropriateness of a Convenience and Needs Standard
    As stated in the proposal, the amendments are intended to enhance 
the OTS' ability to ensure that savings associations undertaking 
conversions and MHC stock offerings recognize their responsibility to 
consider their community's credit needs.
    A number of commenters questioned the wisdom of a convenience and 
needs standard, suggesting the OTS has sufficient regulations and 
policies to implement the CRA and ensure that the convenience and needs 
of the community are met by all thrifts.
    For the reasons stated above in support of the OTS' authority to 
adopt the amendments, the OTS believes it is appropriate to impose a 
convenience and needs standard on applications for conversions and MHC 
stock offerings. In addition, the OTS believes the amendments will 
enhance current regulations and policies designed to ensure that 
thrifts meet their community's credit needs.
3. Consideration of CRA-Related Protests During Application Review
    The proposal did not address whether the OTS would consider CRA-
related protests during agency review of conversion and MHC stock 
offering applications.
    Some commenters objected to OTS consideration of CRA protests 
during the public comment period. These commenters emphasized that the 
timing of a conversion, in particular, is critical to stock pricing and 
appraisal considerations. The mere prospect of a delay due to a CRA 
protest may unfairly subject an institution to pressure to make 
concessions to protestants, according to these commenters. They 
suggested limiting public comments on applications subject to the rule 
to issues relating to eligibility of purchasers and fairness of the 
appraisal.
    The OTS realizes that conversions and MHC stock offerings are time-
sensitive transactions and that protests may affect their success. 
Nevertheless, the OTS does not believe it is appropriate to preclude 
the public from commenting on a savings association's performance in 
meeting a community's convenience and needs. Accordingly, the OTS will 
consider these types of comments filed as part of a public comment 
period on conversion and MHC stock offering applications. The OTS 
emphasizes that it will address these comments as promptly as possible. 
The CRA protest and oral argument procedures at 12 CFR 543.2 will not 
apply, however.35 The OTS believes the public comment period will 
provide a full and fair opportunity for interested persons to express 
their views regarding an applicant's performance in meeting the 
convenience and needs of the community.
---------------------------------------------------------------------------

    \3\5As a matter of policy the OTS has applied these procedures 
to certain conversion transactions and other applications, although 
neither the HOLA nor the CRA require the OTS to follow any specific 
procedures.
---------------------------------------------------------------------------

4. Allocation of Transaction Proceeds to Specific Lending Programs or 
Services
    The preamble to the proposal specifically solicited comment on 
whether the proceeds from conversions or MHC stock offerings should be 
directed to specific types of activities, and, if so, what portion 
should be used for what types of activities.36
---------------------------------------------------------------------------

    \3\6See 59 FR 22764, 22766 (May 3, 1994).
---------------------------------------------------------------------------

    A few commenters objected to any regulation or policy that would 
impose an allocation scheme on transaction proceeds. They argued that 
the OTS has no statutory authority for such action; that a regulatory 
allocation scheme would place artificial limits on capital planning and 
business strategy; and that specific allocations should be within the 
discretion of the management of the applicant, consistent with safety 
and soundness.
    The OTS agrees with many of the comments on this issue. In 
proposing the amendments, the OTS did not intend to impose any specific 
allocation scheme on proceeds from conversions or MHC stock offerings. 
The OTS agrees that the allocation of transaction proceeds is largely a 
matter within the discretion of the converting association, consistent 
with the safety and soundness of the savings association. Nevertheless, 
as suggested in the proposal, the OTS will require applicants to submit 
business plans that demonstrate how transaction proceeds will be used 
to further the convenience and needs of the community. Business plans 
should describe specifically the lending and credit programs to which 
transaction proceeds will be directed. OTS policies encourage savings 
associations to consider traditional lending programs as well as more 
innovative methods to meet the credit needs of the communities they 
serve.37
---------------------------------------------------------------------------

    \3\7See, e.g., ``Community Development Investment Authority'' 
(OTS guide to the federal laws and regulations governing community 
development activities of savings associations).
---------------------------------------------------------------------------

    Where an applicant's business plan does not adequately address how 
transaction proceeds will help meet the credit and lending needs of its 
community, the OTS may deny the application or impose appropriate 
conditions of approval designed to ensure that the applicant will 
address these concerns. The OTS generally will not view commitments 
included in a savings association's business plan as remedying pre-
existing CRA-related deficiencies. However, commitments may be 
appropriate in addressing CRA performance in the context of the 
conversion of a troubled savings associations. The OTS intends to give 
substantial weight to an applicant's previous CRA record, consistent 
with long-standing policy of the OTS.38
---------------------------------------------------------------------------

    \3\8See 54 FR 13742 (April 5, 1989) (joint CRA policy statement 
of the federal financial supervisory agencies).
---------------------------------------------------------------------------

    As stated above, applicants must submit business plans to OTS staff 
for their review prior to filing a formal application.

L. Other Issues

1. Subscription Rights
    The conversion regulations require that prior to the completion of 
a conversion, no person may transfer, or enter into any agreement or 
understanding to transfer, the legal or beneficial ownership of 
conversion subscription rights, or the underlying securities to the 
account of another.39 The OTS did not propose any change to the 
prohibition in the OTS conversion regulations on the transfer or sale 
of subscription rights or similar ``free distribution'' schemes, but 
did request comment on whether subscription rights should continue to 
be nontransferable, or if transferability is recommended, the reasons 
for, and the manner in which to allow for, such transfer.
---------------------------------------------------------------------------

    \3\912 CFR 563b.3(i)(1).
---------------------------------------------------------------------------

    Almost all of the commenters who commented on this issue stated 
that subscription rights should continue to be nontransferable. The 
commenters that opposed transferability asserted that transferability 
would place undue pressure on mutuals to convert; would place emphasis 
on ownership by depositors, a concept that is theoretical; would make 
the conversion process overly complex; would be dangerous to the long-
term health of the industry; would be unworkable and not in the public 
interest; would increase the chances of fraud and abuse; would be 
difficult and costly in allocation of rights; would enable 
sophisticated and professional investors to take advantage of members; 
and would create a destabilizing effect on mutuals. One commenter 
suggested an alternative that would allow members to cause associations 
to redeem rights for a certain period of time, for payment of a special 
dividend, provided there is adequate capital.
    Three commenters endorsed transferability of subscription rights, 
although one of the three stated that account holders should be allowed 
to transfer rights to another individual, but not a group of investors 
or another institution.
    The OTS notes that the FDIC and others have suggested that it may 
be appropriate for depositors to be able to receive a gift of cash or 
stock or to transfer and sell their subscription rights so that any 
``windfall'' value can be distributed directly to the depositors. The 
current OTS regulatory regimen specifically rejects any type of free 
distribution schemes as unsafe and unsound practice.40 The OTS 
continues to believe that this type of change to the current conversion 
regulations would raise a number of complex legal and policy issues, 
many of which were taken into account previously by the FHLBB in 
determining to prohibit transferability.41 These issues, as noted 
in the preamble to the interim final rule, include the possibility of 
adverse federal tax consequences to depositors receiving such rights, 
undue pressure on mutual associations to convert that may evolve from 
significant shifts of savings funds by depositors into such 
associations, difficulties in equitably allocating such subscription 
rights among depositors, potential manipulation of the process by 
sophisticated third parties to the detriment of the depositors, 
incentives for manipulation by insiders, the continued need for 
establishment and maintenance of a liquidation account and 
significantly increased conversion costs due to compliance with 
securities law requirements for registering subscription rights for 
public distribution. For these reasons, the OTS conversion regulations 
continue in effect without any change relative to free distribution of 
stock or transfer of subscription rights.
---------------------------------------------------------------------------

    \4\0See 39 FR 9142 (March 7, 1974).
    \4\1See footnote 17 above.
---------------------------------------------------------------------------

2. Availability of Conversion Documents
    OTS rules now permit the public to have ready access to all 
relevant non-confidential materials regarding proposed conversion 
transactions.
    Of five commenters addressing the issue of whether OTS should 
permit access to non-confidential preliminary conversion materials, 
three supported the revision allowing access, one opposed, claiming 
access to such materials would confuse members whose focus should be on 
the accuracy and adequacy of the final information disclosed to the 
public, and one stated that the prospectus and plan of conversion, as 
approved by the board of directors, provide adequate disclosure.
    The OTS continues to believe that even though this information is 
preliminary in nature, it may be useful for account holders and the 
public to access it earlier in the conversion process, and therefore, 
the provision in the interim final rule will continue in effect without 
change. As noted above, business plans filed with, or in contemplation 
of, a conversion will continue to be treated confidentially so long as 
the applicant follows the procedures set forth in 12 CFR 563b.4(c).
3. Conforming Changes to Mutual Holding Company Regulations
    The mutual holding company regulations, 12 CFR part 575, generally 
incorporate the substantive and procedural standards for conversion 
contained in the conversion regulation. To the extent the final rule 
addresses conversion standards, those same standards apply to mutual 
holding company reorganizations and minority stock issuances. The OTS 
is also revising 12 CFR part 575 to make clarifying and conforming 
changes to the mutual-to-stock conversion regulations.

III. Summary of Revisions to the Conversion Regulations

    For the reasons set forth in the previous section, the following 
revisions have been made to the interim final rule. All other 
provisions of the interim final rule, and the proposed rule on 
convenience and needs, are adopted without change.
    --The definition of ``Local Community'' in 12 CFR 563b.2(a)(19) is 
revised to include the generally used term ``metropolitan statistical 
area,'' all zip code areas corresponding to an association's delineated 
CRA service area, and any area(s) or category designated by the savings 
association and approved by the OTS.
    --12 CFR 563b.3(c)(2)(i), (4)(i), (5)(i), which required the LDP in 
the subscription phase of the conversion, are deleted in the final rule 
and sections (2) (ii) and (iii), (4) (ii)-(v), and (5) (ii) and (iii) 
are redesignated as sections (2) (i) and (ii), (4) (i)-(iv), and (5) 
(i) and (ii).
    --12 CFR 563b.3(c)(6)(iv) is revised to delete the phrase ``or 
within 100 miles of the association's home or branch office(s).''
    --12 CFR 563b.3(c)(23) is revised to clarify that eligible account 
holders have first priority to purchase conversion stock, tax-qualified 
employee stock benefit plans have second priority, supplemental 
eligible account holders have third priority, and other voting members 
who have subscription rights have fourth priority. Also the final rule 
clarifies that if the actual offering exceeds the proposed maximum 
offering price, up to ten percent of the total offering of shares may 
be sold to the tax-qualified employee stock benefit plans; if the ESOP 
is not able to purchase conversion stock, the ESOP or any other tax-
qualified plan may purchase shares in the open market or utilize 
authorized by unissued shares only with prior OTS approval; and 
disclosure must be made in the conversion application and related 
documents as to the effects on the association and subscribers of 
shares of either open market purchases or use of authorized but 
unissued shares.
    --12 CFR 563b.3(d)(12) is redesignated as 12 CFR 563b.3(d)(13) and 
a new 12 CFR 563b.3(d)(12) is added to give converting associations the 
authority to include a preference for eligible account holders, 
supplemental eligible account holders and other voting members residing 
in the association's local community.
    --12 CFR 563b.3(g)(3)(i)(B) is revised to clarify that repurchases 
within year two and year three after conversion must be part of a 
repurchase program that does not allow for a repurchase of more than 5% 
of the association's outstanding capital stock during a twelve month 
period.
    --12 CFR 563b.3(g)(3)(i)(D) revises the reference from Corporate 
and Securities Division to Business Transactions Division.
    --12 CFR 563b.3(g)(3)(ii) is revised to give the OTS discretion to 
allow limited stock repurchases during the first three years in amounts 
exceeding those specified in (g)(3)(i), where exceptional circumstances 
are established.
    --12 CFR 563b.3(g)(4) (vii) and (viii) are revised to require the 
affirmative vote of the holders of a majority of the total votes 
eligible to be cast at a shareholder meeting for the establishment and 
implementation of management stock benefit plans and stock option plans 
within one year of conversion.
    --12 CFR 563b.3(g)(4) (vii) and (viii) also are revised to allow 
approval of stock option plans and management stock benefit plans at 
any duly called meeting of shareholders, either annual or special, to 
be held no earlier than six months after completion of the conversion.
    --12 CFR 563b.3(g)(4)(ix) is revised to require stock options to be 
granted at not less than the market price at which the stock is trading 
at the time of grant.
    --12 CFR 563b.3(g)(4)(xi) is revised to require strict compliance 
with the terms and provisions of (g)(4).
    --12 CFR 563b.3(g)(4)(xii) is added to codify current OTS policy 
requiring that management benefit plans and stock option plans shall 
vest beginning one year from the date the plans are approved by 
shareholders, shall vest at a rate not in excess of 20% a year, and 
shall provide for accelerated vesting solely in the case of disability 
or death.
    --12 CFR 563b.3(g)(4)(xiii) is added to require disclosure in all 
proxy and related material distributed to the shareholders, in 
connection with the meeting at which the stock option and benefit plans 
will be voted, to state that the plans comply with OTS regulations, 
have in no way been endorsed or approved by OTS; and no written and 
oral representation to the contrary shall be made.
    --12 CFR 563b.3(g)(4)(xiv) is added to require that no later than 
five calendar days from the date of shareholder approval, an 
association shall file with the OTS a copy of the approved plans and 
written certification that the plans approved by the shareholders are 
the same plans filed with the proxy materials.
    --Newly-designated 12 CFR 563b.4(b)(1)(i) is revised so as to 
require the publication of notice immediately upon filing of a 
conversion application with the OTS.
    --12 CFR 563b.4(b)(1)(i) also is revised to clarify that in the 
case where an application is not properly executed or is materially 
deficient or substantially incomplete, and where a new application is 
required to be filed, the applicant may be required to publish new 
notice upon filing of the revised application and may be required to 
consider written comments for an additional 20-day period.
    --12 CFR 563b.7(f)(2) is revised to prohibit appraisers from also 
serving as underwriters or selling agents under the same plan of 
conversion except where procedures are followed and representations 
made to ensure that an appraiser is separate from the underwriter or 
selling agent affiliate and the underwriter or selling agent affiliate 
does not make recommendations or in any way impact the appraisal; and 
to prohibit the appraiser from receiving any fees other than the fees 
for services rendered in connection with the appraisal.
    --12 CFR 563b.11 is added to the final rule to include a 
convenience and needs test to the approval requirements for conversion 
transactions.
    --12 CFR 575.1 is revised to include a provision giving the OTS the 
ability to grant waivers in writing from any requirement of the mutual 
holding company regulations for good cause shown.
    --12 CFR 575.7(a)(7) is added to include a convenience and needs 
test to the approval requirements for stock issuances of savings 
association subsidiaries of mutual holding companies.
    --12 CFR 575.7(d)(2) is revised to provide that the sale of 
minority shares of capital stock of the savings association to be made 
under the plan of minority stock issuance, including any sale in a 
public offering or direct community marketing, shall be completed as 
promptly as possible and within 45 calendar days after the last day of 
the subscription period, unless extended by the OTS.
    --12 CFR 575.13(a)(4) is revised to clarify the prohibition on the 
use of ``running'' proxies and the requirement for the use of a 
specifically designated proxy for a mutual holding company 
reorganization, mutual-to-stock conversion undertaken either by a 
mutual savings association or a mutual holding company, or any other 
material transactions.

IV. Paperwork Reduction Act

    The reporting requirements contained in this final rule have been 
submitted to and approved by the Office of Management and Budget (OMB) 
under OMB Control Nos. 1550-0014, 1550-0071 and 1550-0072 in accordance 
with the Paperwork Reduction Act of 1980 (44 U.S.C. 3507). Comments on 
the collection of information should be sent to the Office of 
Management and Budget, Paperwork Reduction Project (1550-0014, 1550-
0071, 1550-0072), Washington, DC 20503 with copies to the Office of 
Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.
    The reporting requirements in this final rule are found in 12 CFR 
563b.100 and 12 CFR Part 575. The information is needed by the OTS to 
further strengthen the standards governing the conversion process. The 
likely recordkeepers are savings associations.

V. Regulatory Flexibility Act

    Pursuant to Section 605(b) of the Regulatory Flexibility Act, it is 
certified that this final rule will not have a significant economic 
impact on a substantial number of small entities. Accordingly, a final 
regulatory flexibility analysis is not required.

VI. Executive Order 12866

    The OTS has determined that the final regulation does not 
constitute a ``significant regulatory action'' for purposes of E.O. 
12866.

List of Subjects

12 CFR Part 563b

    Reporting and recordkeeping requirements, Savings associations, 
Securities.

12 CFR Part 575

    Capital, Holding companies, Reporting and recordkeeping 
requirements, Savings associations, Securities.

    For the reasons set out in the preamble, the interim rule amending 
12 CFR 563b.2, 563.b.3, 563b.4, 563b.5, 563b.7, 563b.8, 563b.10, 
563b.100, 563b.101, and 12 CFR 575.7 and 575.13 which was published on 
May 3, 1994 at 59 FR 22725 is adopted as final with the following 
changes and parts 563b and 575 of subchapter D, chapter V, title 12 of 
the code of Federal Regulations are amended as follows:
Subchapter D--Regulations Applicable to All Savings Associations

PART 563b--CONVERSIONS FROM MUTUAL TO STOCK FORM

    1. The authority citation for 12 CFR part 563b is revised to read 
as follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 2901; 15 
U.S.C. 78c, 78l, 78m, 78n, 78w.

    2. Section 563b.2 is amended by revising paragraph (a)(19) to read 
as follows:


Sec. 563b.2  Definitions.

    (a) * * *
    (19) Local community. The term local community includes all 
counties in which the converting association has its home office or a 
branch office, all zip code areas corresponding to the converting 
association's delineated Community Reinvestment Act service area, each 
county's metropolitan statistical area and/or such other area or 
category as delineated by the savings association and provided for in 
the plan of conversion, as approved by the OTS.
* * * * *
    3. Section 563b.3 is amended by:
    a. Removing paragraphs (c)(2)(i), (c)(4)(i) and (c)(5)(i);
    b. Redesignating paragraphs (c)(2) (ii) and (iii), (c)(4) (ii) 
through (v) and (c)(5) (ii) and (iii) as paragraphs (c)(2) (i) and 
(ii), (c)(4) (i) through (iv) and (c)(5) (i) and (ii), respectively, 
and by redesignating paragraph (d)(12) as paragraph (d)(13);
    c. Revising paragraphs (c)(6)(iv), (c)(23), (g)(3)(i)(B), 
(g)(3)(i)(D) introductory text, (g)(3)(ii), (g)(4)(vii), (g)(4)(viii), 
(g)(4)(ix), (g)(4)(x), and (g)(4)(xi); and
    d. Adding paragraphs (d)(12), (g)(4)(xii), (g)(4)(xiii), and 
(g)(4)(xiv).
    The revisions and additions read as follows:


Sec. 563b.3   General principles for conversions.

* * * * *
    (c) * * *
    (6) * * *
    (iv) A condition that any direct community offering by the 
converting savings association shall give a preference to natural 
persons residing in the association's local community.
* * * * *
    (23) Provide that eligible account holders with subscription rights 
have first priority to purchase conversion stock, tax-qualified 
employee stock benefit plans have second priority, supplemental 
eligible account holders have third priority, and other voting members 
who have subscription rights have fourth priority. If the final 
conversion stock valuation range exceeds the maximum conversion stock 
offering range, up to ten percent of the total offering of shares may 
be sold to the tax-qualified employee stock benefit plans. Furthermore, 
if the ESOP is not able to purchase conversion stock, the ESOP or any 
other tax-qualified plan may purchase shares in the open market or 
utilize authorized but unissued shares only with prior OTS approval; 
and disclosure must be made in the conversion stock offering materials 
of the potential open market purchases or use of authorized but 
unissued shares to fund the ESOP and its effects on the association and 
its shareholders.
* * * * *
    (d) * * *
    (12) That the offering of stock to be sold in the subscription 
offering may give a preference to eligible account holders, 
supplemental eligible account holders, and other voting members 
residing in the association's local community.
* * * * *
    (g) * * *
    (3) * * *
    (i) * * *
    (B) Repurchases within year two and year three after conversion are 
part of an open-market stock repurchase program that does not allow for 
a repurchase of more than 5% of the association's outstanding capital 
stock during a twelve month period;
* * * * *
    (D) The association provides to the Regional Director, with a copy 
to the Chief Counsel's Office, Business Transactions Division, no later 
than ten days prior to the commencement of a repurchase program, 
written notice containing a full description of the repurchase program 
to be undertaken, the effect of such repurchases on its regulatory 
capital position, and a valid business purpose for the repurchase; and 
the Regional Director does not disapprove the repurchase program based 
upon a determination that:
* * * * *
    (ii) During the first three years following conversion, the OTS, in 
accordance with the standards contained in this paragraph, may permit 
stock repurchases in excess of the amounts specified in paragraph 
(g)(3)(i) of this section, where exceptional circumstances are 
established.
    (4) * * *
    (vii) All such plans, prior to establishment and implementation, 
are approved by the holders of a majority of the total votes eligible 
to be cast at any duly called meeting of shareholders of the 
association or its holding company, either annual or special, to be 
held not earlier than six months after completion of the conversion;
    (viii) In the case of a savings association subsidiary of a mutual 
holding company, all such plans, prior to establishment and 
implementation, are approved by the holders (other than its parent 
mutual holding company) of a majority of the total votes eligible to be 
cast, at any duly called meeting of shareholders, either annual or 
special, to be held no earlier than six months after completion of the 
conversion;
    (ix) For stock option plans, stock options are granted at no less 
than the market price at which the stock is trading at the time of 
grant;
    (x) For management or employee stock benefit plans, no conversion 
stock is used to fund the plans;
    (xi) The plans subject to this section must comply with the terms 
and amounts specified in paragraph (g)(4) of this section;
    (xii) The plans subject to this section shall begin vesting no 
earlier than one year from the date the plans are approved by 
shareholders, shall not vest at a rate in excess of 20% a year, and 
shall not provide for accelerated vesting except in the case of 
disability or death;
    (xiii) Disclosure in all proxy and related material distributed to 
shareholders in connection with the meeting at which the stock option 
plans and management stock benefit plans will be voted shall state that 
the plans comply with OTS regulations, that the OTS in no way endorses 
or approves the plans; and no written or oral representation to the 
contrary shall be made; and
    (xiv) No later than five calendar days from the date of shareholder 
approval of any stock option or management benefit plans, the 
institution shall file with the OTS a copy of the approved plans and 
written certification that the plans approved by the shareholders are 
the same plans filed with and disclosed in the proxy materials.
* * * * *
    4. Section 563b.4 is amended by designating the text of paragraph 
(b)(1) preceding the notice of filing as paragraph (b)(1)(i) and 
revising it, and designating the concluding text of paragraph (b)(1) 
following the notice of filing as paragraph (b)(1)(ii) to read as 
follows:


Sec. 563b.4   Notice of filing; public statements; confidentiality.

* * * * *
    (b) Notice of filing. (1)(i) Immediately upon filing an application 
for conversion with the Office, the applicant shall publish a notice of 
the filing. If an application for conversion is not properly executed 
or is materially deficient or substantially incomplete, the Office may 
require a new application to be filed, publication of a new notice and 
an additional 20-day comment period. The applicant shall prominently 
post the notice in each of its offices and publish the notice in at 
least one newspaper printed in the English language and having a 
substantial general circulation in each community in which an office of 
the applicant is located, as follows:
* * * * *
    5. Section 563b.7 is amended by removing the last sentence of 
paragraph (f)(2) and adding two new sentences in its place to read as 
follows:


Sec. 563b.7  Pricing and sale of securities.

* * * * *
    (f) * * *
    (2) * * * No appraiser shall serve as an underwriter or selling 
agent under the same plan of conversion. No affiliate of an appraiser 
may act as an underwriter or selling agent unless procedures are 
followed and representations made to ensure that an appraiser is 
separate from the underwriter or selling agent affiliate and the 
underwriter or selling agent affiliate does not make recommendations or 
in any way impact the appraisal. No appraiser shall receive any other 
fee except for the fee for services rendered in connection with such 
appraisal.
* * * * *
    6. Section 563b.11 is added to subpart A of part 563b to read as 
follows:


Sec. 563b.11  Convenience and needs considerations.

    In reviewing an application under this subpart, the Office will 
examine the extent to which the conversion will affect the convenience 
and needs of the communities to be served by the converted savings 
association. The Office will review the applicant's record under part 
563e of this subchapter. In addition, the Office will scrutinize the 
business plan of the applicant. Each applicant must demonstrate that 
the proposed deployment of proceeds contained in its business plan will 
help meet the credit and lending needs of the communities served by the 
applicant. Also, the Office will consider other relevant factors 
relating to the association's performance in meeting the convenience 
and needs of the community. Based on an assessment of the applicant's 
record under part 563e of this subchapter, the applicant's business 
plan and other relevant factors, the Office may approve the 
application, deny the application, or approve the application on the 
condition that the applicant improve certain aspects of its CRA 
performance record or address particular credit or lending needs of the 
communities that it serves.

PART 575--MUTUAL SAVINGS AND LOAN HOLDING COMPANIES

    7. The authority citation for 12 CFR part 575 is revised to read as 
follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828, 2901.

    8. Section 575.1 is amended by designating the existing text as 
paragraph (a), by adding a heading to newly-designated paragraph (a), 
and by adding a new paragraph (b) to read as follows:


Sec. 575.1  Scope.

    (a) Purpose. * * *
    (b) General. Except as the OTS may otherwise determine, the 
provisions of this part shall exclusively govern the reorganization of 
mutual savings associations and any related stock issuances, and no 
mutual savings association shall reorganize to a mutual holding company 
or issue minority stock without the prior written approval of the OTS. 
The OTS may grant a waiver in writing from any requirement of this part 
for good cause shown.
    9. Section 575.7 is amended by redesignating paragraph (a)(7) as 
paragraph (a)(8), and by adding a new paragraph (a)(7), and by revising 
paragraph (d)(2) to read as follows:


Sec. 575.7  Issuances of stock by savings association subsidiaries of 
mutual holding companies.

    (a) * * *
    (7) The proposed stock issuance would fail to meet the convenience 
and needs standard of Sec. 563b.11 of this subchapter.
* * * * *
    (d) * * *
    (2) The sale of minority stock of the reorganized stock savings 
association to be made under the minority stock issuance plan, 
including any sale in a public offering or direct community marketing, 
shall be completed as promptly as possible and within 45 calendar days 
after the last day of the subscription period, unless extended by the 
OTS.
* * * * *
    10. Section 575.13 is amended by revising paragraph (a)(4) to read 
as follows:


Sec. 575.13  Procedural requirements.

    (a) * * *
    (4) Use of ``running'' proxies. A mutual savings association or 
mutual holding company may make use of any proxy conferring general 
authority to vote on any and all matters at any meeting of members, 
provided that the member granting such proxy has been furnished a proxy 
statement regarding the matters and the member does not grant a later-
dated proxy to vote at the meeting at which the matter will be 
considered or attend such meeting and vote in person, and further 
provided that ``running'' proxies or similar proxies may not be used to 
vote for a mutual holding company reorganization, mutual-to-stock 
conversion undertaken either by a mutual savings association or a 
mutual holding company or any other material transaction. Subject to 
the limitations set forth in this paragraph, any proxy conferring on 
the board of directors or officers of a mutual savings association 
general authority to cast a member's votes on any and all matters 
presented to the members shall be deemed to cover the member's votes as 
a member of the mutual holding company and such authority shall be 
conferred on the board of directors or officers of a mutual holding 
company.
* * * * *
    Dated: November 22, 1994.

    By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 94-29264 Filed 11-29-94; 8:45 am]
BILLING CODE 6720-01-P