[Federal Register Volume 60, Number 45 (Wednesday, March 8, 1995)]
[Rules and Regulations]
[Pages 12659-12663]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-5593]



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 Rules and Regulations
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  Federal Register / Vol. 60, No. 45 / Wednesday, March 8, 1995 / Rules 
and Regulations  
[[Page 12659]]

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 708a


Mergers or Conversions of Federally-Insured Credit Unions to Non 
Credit Union Status: NCUA Approval

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The final rule applies to any credit union that is insured by 
the National Credit Union Share Insurance Fund (NCUSIF) and that 
proposes to merge into or convert to any non credit union institution. 
The rule imposes new substantive requirements. The purposes of these 
requirements are to ensure that such transactions take place only 
pursuant to an informed vote of the credit union's members/owners, to 
prevent self-dealing and other abuses by individuals involved in the 
transactions and to ensure that these transactions do not present 
safety and soundness risks to the NCUSIF and the credit union system. 
State chartered NCUSIF insured credit unions may, on a case-by-case 
basis, obtain a waiver from NCUA's rules if state laws and procedures 
are determined to adequately address these concerns.

EFFECTIVE DATE: April 1, 1995.

FOR FURTHER INFORMATION CONTACT: Mary F. Rupp, Staff Attorney, Office 
of General Counsel, National Credit Union Administration, 1775 Duke 
Street, Alexandria, Virginia 22314-3428 or telephone: (703) 518-6553.

SUPPLEMENTARY INFORMATION:

Background

    In June 1994, the NCUA requested comments on proposed changes to 
part 708 of its regulations. At that time, part 708 only addressed 
situations where an NCUSIF insured credit union dropped NCUSIF 
insurance, either through a merger into a non NCUSIF insured credit 
union or through a voluntary termination or conversion of insurance. It 
did not cover the merger or conversion of a credit union into a non 
credit union institution. The Federal Credit Union Act, however, vests 
the NCUA Board with the responsibility to regulate such mergers or 
conversions. 12 U.S.C. 1785(b). The proposed changes to part 708 
clarified that NCUA approval requirements apply to all mergers and 
conversions where the continuing institution is not insured by NCUSIF. 
59 FR 33702 (June 30, 1994).
    The proposal was in response to abuses that had occurred with bank 
and thrift conversions, some isolated instances in the credit union 
system, and recent solicitations by outside consultants and attorneys 
to federally insured credit unions for conversion to non credit union 
charters. The solicitations often appeared motivated by benefits to the 
attorneys, consultants and insiders, rather than the members. The 
amendment was deemed necessary ``to provide NCUA with clear authority 
to prevent abuses in connection with conversions of insured status.'' 
59 FR 33702. The comments to the proposal were generally positive and 
consistently stressed that the members need to be properly informed and 
that the NCUA needs to ensure that safety and soundness and members' 
interests are protected.
    On September 16, 1994, the NCUA Board issued an interim final rule 
and request for further comment. The rule was effective upon 
publication on September 23, 1994. 59 FR 48790. The new rule, part 
708a, established that the NCUA Board must approve any merger or 
conversion of a federally-insured credit union to any non credit union 
institution, including preapproval of any notices to members that are 
sent out in connection with the merger or conversion. At the same time, 
the Board requested further comment on a number of issues related to 
the application and approval process.

Summary of Comments and Discussion of Issues

    In the June 1994, proposal, the NCUA Board requested comment on the 
general issue of NCUA regulation in this area and on the specific issue 
of uniform member notice. In the interim rule, comment was requested on 
a number of issues that the Board felt required further consideration 
and review. The NCUA received 16 comments on the proposed rule: 10 from 
credit unions; 4 from credit union trade groups; 1 from a bank trade 
group; and 1 from a credit union league. The NCUA received 19 comments 
on the interim rule: 6 from federal credit unions; 6 from federally 
insured state chartered credit unions (FISCUs); 3 from credit union 
trade groups; 2 from bank trade groups; and 2 from state regulators. 
The following is a combined summary of the comments received on the 
proposed rule and the interim final rule.

1. NCUA Oversight

    In the proposed rule, 14 commenters addressed the issue of NCUA 
oversight. Twelve expressed general support for NCUA oversight and two 
expressed general opposition. The supportive commenters cited the 
following benefits of NCUA regulation: Eliminate confusion, prevent 
unnecessary litigation, protect the members from potential abuse, 
assure that the members know the advantages and disadvantages of any 
proposal, protect the assets and integrity of the NCUSIF and assure 
that financial benefits to insiders are fully disclosed. The two 
negative commenters were a bank trade group and a state chartered 
credit union. The bank trade group characterized the proposal as an 
overreaction by NCUA to a few isolated examples.
    The issue of NCUA's jurisdiction over mergers or conversions by 
federally-insured state credit unions (FISCUs) was raised by 5 
commenters on the interim rule. The five consisted of the professional 
group that represents state credit union supervisors (the National 
Association of State Credit Union Supervisors, or NASCUS), two FISCUs 
and two state regulators. All strongly opposed any NCUA regulation of 
mergers or conversions of FISCUs.
    NASCUS made the point that only seven of the 48 states which 
charter credit unions allow them to merge with other financial 
institutions and only four states allow credit unions to convert into 
another form of financial institution. NASCUS' comment also recognized, 
however, that several states have statutes that are silent on the 
issue. It is those states which cause the Board the most concern. 
Without specific [[Page 12660]] regulations in this area, there is 
potential for abuse.
    The NCUA Board believes that basic regulatory standards applicable 
to all NCUSIF insured credit unions are necessary to safeguard the 
integrity of the process and to ensure that issues of safety and 
soundness and fiduciary duty are properly addressed. The Board has 
attempted, however, to balance these concerns with a deference to the 
important role of the state supervisors. As it is NCUA's intention to 
work with the state supervisor in cases involving federally-insured 
state credit unions, the Board has crafted a final rule that would 
allow FISCUs to merge or convert if they have the state's authority to 
do so. In those instances, the FISCU may file a written request with 
the NCUA Board for a waiver of compliance with the procedural portions 
of part 708a and instead follow the applicable state regulation. The 
request would have to demonstrate that the waiver would not be 
detrimental to the safety and soundness of the credit union, that there 
is no possibility of self-dealing or other breach of fiduciary duty by 
the credit union's management or others involved in the transaction, 
and that the members' interests are adequately protected.

2. Insider Preferences

    The proposed rule asked whether directors and management officials 
involved in the conversion process should be allowed to receive any 
personal financial benefit from the transaction, other than that 
available to ordinary members. The ten commenters responding to this 
question agreed that directors and management should not be allowed to 
receive any compensation in excess of that available to other members. 
Several commenters suggested NCUA enact strong regulations in this 
area. As well as limiting the compensation available to insiders, one 
commenter suggested individuals should not be guaranteed employment at 
the continuing institution, noting that this would remove the incentive 
for insiders encouraging a merger that is not in the best interest of 
the members.
    A related issue is that of what post-merger or post-conversion 
controls are needed to protect against improper insider preferences 
after the transaction is completed. Some of the suggestions of the five 
commenters who commented on this issue were that NCUA should prohibit 
stock acquisition by insiders for a period of five years and that both 
pre- and post-merger or conversion controls are necessary to prevent 
insider abuse. One of the trade groups suggested a way to avoid the 
problem would be to condition approval of the transaction ``on a return 
of equal shares of equity to all members before the execution of the 
charter change.''
    The recommendations of the commenters have been modified and 
incorporated into the final rule as follows: For a period of two years 
after the transaction, directors may not receive any benefits not 
otherwise equally available to other members, and directors and senior 
management officials may not acquire stock in the continuing 
institution or its successor on terms not available to the other 
members of the credit union. These prohibitions on directors and senior 
management officials must remain in effect for at least two years 
following the merger. In order to enable NCUA to ensure compliance with 
these prohibitions, the affected individuals will be required to enter 
into written agreements with NCUA. The NCUA Board decided not to 
require a distribution of reserves and undivided earnings to members, 
as such a requirement would have the practical effect of prohibiting 
the transactions covered by the rule. Among the disclosures required to 
be provided to the members, however, is a clear explanation of the 
change in the nature of their ownership interest in reserves and 
undivided earnings that will result from the transaction.

3. Majority Approval

    NCUA requested comment on whether a majority of eligible voting 
members should be required to approve the transaction. Comment was 
further requested on whether majority should be defined as a simple 
majority or a super majority, and, if a super majority, how it should 
be defined. The six commenters that addressed the issue all agreed that 
a majority of the voting members should be required for approval. Two 
defined majority as over 50%, two defined it as 60% to 63\1/3\%, one 
defined it as 70% to 80% and the other commenter did not define it.
    Recognizing the importance of a clear mandate on an issue of such 
significance to the members, the final rule requires that a majority of 
all eligible voters approve any transaction covered by the rule.

4. Appraisal

    In those cases the Board is aware of where credit unions have 
considered conversions or mergers to non credit union charters, the 
first step of the transaction would be to move from a credit union 
charter to a mutual savings bank charter. In cases where the ultimate 
goal is to become a stock institution, conversion from mutual to stock 
would be proposed as a second, but virtually simultaneous step.
    For those cases involving this second step, the Board specifically 
asked for comment on how to properly appraise the value of the credit 
union for purposes of issuing stock. This issue is important to the 
members, who, as noted above, are entitled to acquire stock on the same 
terms and conditions as directors and senior management officials. 
Seven commenters had suggestions on this issue. One recommended that a 
professional appraisal be performed, three recommended that the value 
of the stock include accumulated capital and one suggested the new 
regulator determine the value of the stock. One trade group suggested 
it be handled as a liquidation and payout and another suggested NCUA 
turn to state law for guidance.
    After considering the comments and reviewing the other agencies' 
rules in this area, the Board has determined to simply require that an 
appraisal be performed and included in the application. The Board will 
review the appraisal as part of its review of the application.

5. Uniform Member Notice

    The proposal requested comment on whether the rule should include a 
uniform member notice. Nine of the ten commenters responding to this 
issue supported a uniform notice. Commenters suggested that a uniform 
notice would provide clear and consistent guidelines for merging 
institutions, ensure that important information is not withheld from 
the members and require less individual review. The Board agrees with 
these goals, but believes they can be accomplished more effectively 
through a listing of the information that must be included in the 
notice to members, rather than a form which may become outdated or not 
apply to all transactions.

Overview of Final Rule

    The final rule adopts with minor modifications the interim rule and 
expands upon it to impose substantive and procedural requirements that 
the Board has determined are necessary to ensure an informed membership 
vote, to safeguard against potential safety and soundness problems and 
to prevent breaches of fiduciary duty. The final rule, part 708a, 
tracks in large part the current part 708b. Its key provisions are as 
follows: NCUA Board approval is required in advance of any transaction 
whereby a federally insured credit union transfers all or any part of 
its [[Page 12661]] members' shares or similar accounts to any non 
credit union institution; a majority of all members of record must vote 
to approve the transaction; directors must agree to receive no benefits 
in excess of those available to the members; notice to members must be 
preapproved by the NCUA Board and must include all pertinent 
information required by the rule as well as any additional information 
deemed necessary on a case by case basis; FISCUs may only engage in the 
transaction if they obtain approval from the state authority to proceed 
with the merger or conversion; and FISCUs must follow part 708a unless 
they obtain a waiver from NCUA.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires the NCUA to prepare an 
analysis to describe any significant economic impact any regulation may 
have on a substantial number of small credit unions. It is highly 
unlikely that small credit unions (those under $1 million in assets) 
would be engaged in a merger or conversion to a non credit union 
institution. The final rule merely clarifies statutory authority. 
Accordingly, the NCUA Board has determined that a Regulatory 
Flexibility Analysis is not required.

Paperwork Reduction Act

    These amendments do not change paperwork requirements.

Executive Order 12612

    This rule applies to all federally insured credit unions. The rule 
clarifies existing statutory requirements of NCUA Board approval of 
certain transactions involving federally insured credit unions. 
Recognizing the interests of states and state regulators in supervising 
state chartered credit unions, the NCUA Board has included a provision 
in the final rule that allows FISCUs, on a case-by-case basis, to 
obtain a waiver from NCUA's rule and follow state procedures if those 
procedures are determined to adequately address the concerns of NCUA's 
rule. With this provision, the NCUA Board has determined that this 
amendment is not likely to have any direct effect on states, on the 
relationship between the states, or on the distribution of power and 
responsibilities among the various levels of government.

List of Subjects in 12 CFR Part 708a

    Bank deposit insurance, Credit unions, Reporting and recordkeeping 
requirements.

    By the National Credit Union Administration Board on March 1, 
1995. ---
Becky Baker,
Secretary of the Board.

    Accordingly, the interim rule adding a new regulation in 12 CFR 
part 708a which was published at 59 FR 48790 on September 23, 1994, is 
adopted as a final rule with changes as follows:

PART 708a--MERGERS OR CONVERSIONS OF FEDERALLY-INSURED CREDIT 
UNIONS TO NON CREDIT UNION STATUS: NCUA APPROVAL

    1. The authority citation for part 708a continues to read as 
follows:

    Authority: 12 U.S.C. 1766, 12 U.S.C. 1785.

    2. Sections 708a.1 and 708a.2 are revised to read as follows:


Sec. 708a.1  NCUA Board Approval.

    Section 205(b)(1) of the Federal Credit Union Act requires NCUA 
Board approval in advance of any transaction whereby a federally-
insured credit union transfers all or any part of its members' accounts 
to any non credit union institution. This part establishes rules and 
procedures for any merger, conversion or other transaction in which a 
federally-insured credit union's share accounts or similar member 
accounts are transferred to a non credit union institution. 
Transactions where a federally-insured credit union transfers member 
accounts to another credit union are subject to the provisions of part 
708b of this chapter. Compliance with this part 708a is in addition to 
any other federal or state laws and regulations which may be applicable 
to the proposed transaction, including state corporate laws and state 
and federal securities laws.


Sec. 708a.2  Plan for Merger or Conversion to a Non Credit Union 
Institution.

    (a) Proposition for merger or conversion. The board of directors of 
the credit union shall approve a proposition for merger or conversion.
    (b) Plan for merger or conversion. Upon approval of a proposition 
for merger or conversion by the board of directors, a plan for the 
transaction shall be prepared. The plan shall include:
    (1) Current financial reports;
    (2) Current delinquent loan schedules annotated to reflect 
collection problems;
    (3) Combined financial report, if applicable;
    (4) Contingencies;
    (5) Explanation of any provisions for reserves, undivided earnings 
or dividends;
    (6) Analyses of share values and explanation of any adjustments to 
member's share accounts;
    (7) Analyses of the regulatory effect of the merger or conversion 
brought about by the change in government regulator;
    (8) Explanation of any other relevant effects on the members; and
    (9) Any additional information, as required by the NCUA Regional 
Director.
    (c) Nonpreferential treatment. The plan for merger or conversion 
shall provide that, for a period of at least two years after the 
effective date of the transaction: -
    (1) No director of the credit union may receive any compensation or 
any benefits not provided or available to other members; and
    (2) No director or senior management official of the credit union 
shall be allowed to acquire stock in the resulting or continuing 
institution or any successor institution, on any terms other than those 
readily available to all members of the former credit union. This 
prohibition would include stock issued for services rendered prior to 
the merger or conversion. For purposes of this section, senior 
management official  means the credit union's chief executive officer, 
any assistant chief executive officers and the chief financial officer.
    3. Sections 708a.3, 708a.4, 708a.5, 708a.6 and Appendix A are added 
to read as follows:


Sec. 708a.3  Submission of Proposal to NCUA.

    (a) Submissions to the NCUA Regional Director. Upon approval of the 
plan by the board of directors of the credit union, the following will 
be submitted to the appropriate NCUA Regional Director:
    (1) The plan, as described in Sec. 708a.2(b) of this part;
    (2) A resolution of the board of directors approving the plan;
    (3) A written agreement from each member of the board of directors 
and each senior management official to comply with the terms of 
Sec. 708a.2(c) (the agreement shall be executed by NCUA as well, in the 
event of approval of the transaction);
    (4) A proposed merger or conversion agreement;
    (5) A proposed Notice of Meeting, as described in Appendix A of 
this part;
    (6) A copy of the form ballot and any accompanying materials to be 
sent to the members, as described in Appendix A of this part;
    (7) A complete copy of the package [to be] submitted to any other 
regulatory agencies involved in the merger or conversion;
    (8) A copy of an appraisal of the value of the credit union, if the 
proposal is to [[Page 12662]] convert or merge the credit union either 
directly or indirectly into a stock institution, and any plan for sale 
or distribution of stock to the credit union's members, officials and 
employees; and
    (9) In the case of a federally-insured state chartered credit 
union, evidence that the state supervisory authority is in agreement 
with the merger or conversion proposal.
    (b) Coordination with State Supervisory Authority. In the event the 
proposal is filed with the NCUA prior to receiving consent from the 
state supervisory authority:
    (1) The Board will coordinate with the state supervisory authority; 
and
    (2) The Board will not approve any merger or conversion unless it 
is approved by the state supervisory authority.
    (c) Waiver of NCUA rules and approval by state supervisory 
authority. A federally-insured state credit union may, on a case-by-
case basis, request a waiver of this part 708a from the Board and 
receive authority to proceed under state rules and procedures. In 
making such a request, the credit union shall demonstrate that the 
concerns underlying this part 708a are adequately addressed and, in 
particular that:
    (1) Proceeding under state rules present no financial risk to the 
credit union or the NCUSIF;
    (2) Adequate safeguards exist against breach of duty by, or 
preferential treatment of directors, committee members and others 
involved in the transaction; and
    (3) The transaction is otherwise fair to members and carried out 
pursuant to an informed and decisive membership vote.


Sec. 708a.4  Approval of Proposal by NCUA.

    If NCUA finds that the proposal complies with the provisions of 
this part and does not present an undue risk to the NCUSIF or unduly 
prejudice the members, it may approve the proposal subject to such 
other specific requirements as may be prescribed to fulfill the stated 
purposes of the proposal. No proposal will be approved that does not 
clearly inform the members of the fundamental rights they would be 
giving up if their credit union converts or merges into a non credit 
union institution.


Sec. 708a.5  Approval of Proposal by Members.

    (a) Notification of members. The members shall:
    (1) Have the option of voting on the proposal either in person at a 
membership meeting or by mail ballot.
    (2) Be given advance notice of the membership meeting in accordance 
with the provisions of Appendix A of this part. The notice shall be 
delivered in person to each member, or mailed to each member at the 
address for such member as it appears on the records of the credit 
union, not more than 30 days nor less than 14 days prior to the date 
for the vote. The ballot to be used for the membership vote shall be in 
accordance with the provisions of Appendix A of this part. The notice 
and ballot shall be provided to the members at the same time. If 
applicable, the notice and ballot shall be provided in both English as 
well as the native language of the majority of the members.
    (3) Be made aware that the complete application and proposal are 
available for inspection at the credit union's branch offices during 
normal business hours.
    (b) Vote by members. The proposal must be approved by the 
affirmative vote of a majority of the credit union's members.
    (c) Notice of Approval to members. If the proposal for merger or 
conversion is approved by the membership and the NCUA Board, prompt and 
reasonable notice shall be given to all members.


Sec. 708a.6  Certification and Completion of Merger or Conversion.

    (a) Certification of vote. The board of directors shall certify the 
results of the membership vote to the Regional Director within 10 days 
after the vote is taken.
    (b) Completion. Upon approval of the proposal by NCUA, the state 
supervisory authority (where the credit union is state chartered), the 
members and any federal agency with approval or regulatory authority 
for the transaction, the credit union may complete the merger or 
conversion.
    (c) Certification of completion. Within 30 days after the effective 
date of the merger or conversion, the board of directors of the 
continuing institution shall certify the completion of the transaction 
to the Regional Director.
    (d) Cancellation of charter and insurance. Upon NCUA's receipt of 
certification that the transaction has been completed, the charter of 
the federal credit union (if applicable) and the insurance certificate 
of the federally insured credit union will be canceled.

Appendix A to Part 708a--Notice to Members of Special Meeting, 
Disclosure and Ballot

    (1) The Notice of Special Meeting must include the following:
    (a) The date, time and place of the Meeting;
    (b) A description of the matters to be voted upon at the Special 
Meeting;
    (c) A statement in a prominent location in bold letters that ``A 
DISCLOSURE STATEMENT HAS BEEN PROVIDED TO YOU WITH THIS NOTICE OF 
SPECIAL MEETING. THE DISCLOSURE MUST BE READ BEFORE VOTING ON THE 
PROPOSED (``CONVERSION'' or ``MERGER'', as appropriate)'', and
    (d) A statement that a Mail Ballot for the Special Meeting is 
enclosed.
    (2) The Disclosure provided with the Notice must at a minimum 
provide the following information to the members:
    (a) Factual information about the credit union, i.e. name and 
address of credit union and telephone number of contact person;
    (b) Summary of the proposal which shall contain but not 
necessarily be limited to current financial reports for the credit 
union and the other institution if a merger is proposed; a projected 
financial report for the continuing institution; analyses of share 
values; an explanation of any proposed share adjustments; and an 
explanation of any changes relative to insurance such as insurance 
of member accounts and life savings and loan protection insurance.
    (c) Summary of the direct and indirect benefits to the credit 
union members, as well as any disadvantages, including a clear 
explanation of the nature of the change in the members' ownership 
interest in the reserves and undivided earnings of the credit union 
as a result of the merger or conversion;
    (d) Summary of the direct and indirect benefits to management 
and other key persons at the credit union and at the new 
institution, including a comparison of salaries for those 
individuals employed by both the credit union and the new 
institution; copies of the certifications from the directors and 
committee members that they will receive no compensation either 
directly or indirectly from the new institution for a period of two 
years; and disclosure of any relationship by blood or marriage, of 
any of the officers, directors, key personnel or principal 
stockholders of the proposed institution to any officials or 
employees of the credit union.
    (e) For each director, officer, key employee and consultant of 
the proposed institution, state in detail the names, positions, 
addresses, age and description of employment and educational 
background. Include any petitions for bankruptcy, civil judgments 
(indicate the plaintiff and the amount of the judgment), criminal 
conviction (indicate the nature of the charge) and any 
administrative action taken by a federal or state agency.
    (f) Description of how the proposed merger/conversion results in 
a new financial institution without the unique characteristics of a 
credit union, for example, that the board of directors (that is, any 
new board members, since Sec. 708a.2(c) prohibits compensation for a 
period of 2 years) may be compensated as officials instead of 
offering volunteer services, that the credit union will lose its tax 
exempt status, and any changes in the voting power of members.
    (g) A dollar expenditure comparison chart of the estimated 
increases/decreases in regulatory and insurance fees; 
[[Page 12663]] 
    (h) Itemized expenses incurred to date in the conversion process 
with an estimate as to future expenses;
    (i) Management's discussion and analysis of the proposed 
conversion, including its economic advisability and how it will 
serve the needs of the members of the merging or converting credit 
union;
    (j) Business and properties of the proposed institution--
describe in detail the assets of the credit union and whether these 
assets will be transferred to the proposed institution and how the 
members will or will not benefit from the transfer;
    (k) Description and comparison of the competition of the 
proposed institution and why the proposed institution believes it 
can effectively compete;
    (l) In any transaction where the new or resulting institution is 
a stock institution, identify the principal owners of the proposed 
stock institution (those who will beneficially own directly or 
indirectly 1% or more of the common and preferred stock outstanding) 
starting with the largest common stockholder. Indicate by footnote 
if the price paid was for a consideration other than cash and the 
nature of any such consideration. Indicate the number of shares to 
be individually owned by officers, directors and key personnel of 
the new institution; and
    (m) State in bold on the cover ``PLEASE READ THIS DISCLOSURE 
DOCUMENT. IT CONTAINS IMPORTANT INFORMATION ABOUT YOUR CREDIT 
UNION.''
    (3) The Mail Ballot must:
    (a) State at the top in bold letters using 12 point pitch or 
greater that ``THE ATTACHED DISCLOSURE STATEMENT MUST BE READ BEFORE 
VOTING ON THE PROPOSED (``CONVERSION'' or ``MERGER'', as 
appropriate)'';
    (b) The issues for the member to vote on should be stated as 
follows:
    Please vote for either (a) or (b) by checking the appropriate 
box.
    (a) Approve the merger      {time} 
    (b) Disapprove the merger    {time} 
    (c) Advise the member of the right to terminate the mail ballot 
and attend and vote at the Special Meeting.

[FR Doc. 95-5593 Filed 3-7-95; 8:45 am]
BILLING CODE 7535-01-P