[Federal Register Volume 61, Number 230 (Wednesday, November 27, 1996)]
[Rules and Regulations]
[Pages 60173-60179]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30031]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 545, 556, 560, 563, 571

[No. 96-111]
RIN 1550-AA89


Conflicts of Interest, Corporate Opportunity and Hazard Insurance

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (OTS or agency) is today 
issuing a final rule updating and substantially streamlining its 
regulations and policy statements concerning conflicts of interest, 
usurpation of corporate opportunity and hazard insurance. These 
amendments are being made pursuant to the Regulatory Reinvention 
Initiative of the Vice President's National Performance Review 
(Reinvention Initiative) and section 303 of the Community Development 
and Regulatory Improvement Act of 1994 (CDRIA), which requires OTS and 
other federal banking agencies to review, streamline, and modify 
regulations and policies to improve efficiency, reduce unnecessary 
costs, and remove inconsistent, outmoded and duplicative requirements.

EFFECTIVE DATE: January 1, 1997.

FOR FURTHER INFORMATION CONTACT: Robyn Dennis, Manager, Thrift Policy, 
(202) 906-5751; or Francis Raue, Policy Analyst, (202) 906-5750, 
Supervision Policy; Deborah Dakin, Assistant Chief Counsel, (202) 906-
6445, Regulations and Legislation Division, Chief Counsel's Office.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Summary of Comments and Description of the Final Rule
    A. General Discussion of the Comments
    B. Section-by-Section Analysis
    C. Description of Final Rule
III. Disposition of Existing Conflicts of Interest, Corporate 
Opportunity and Hazard Insurance Regulations and Policy Statements
IV. Executive Order 12866
V. Unfunded Mandates Act of 1995
VI. Regulatory Flexibility Act Analysis

I. Background

    In a comprehensive review of its regulations, beginning in the 
spring of 1995, pursuant to section 303 of the CDRIA 1 and the 
Administration's Reinvention Initiative, OTS identified its conflicts 
of interest, corporate opportunity and hazard insurance regulations and 
policy statements as an important area for updating and streamlining. 
Each conflicts of interest, corporate opportunity and hazard insurance 
regulation and policy statement was reviewed to determine whether it 
was current and understandable; imposed the least possible burden 
consistent with safety and soundness and statutory requirements; 
addressed subject matter more suited for handbook guidance; and was 
written in a clear, straightforward manner. OTS also sought industry 
input regarding staff's initial recommendations through an industry 
focus group consisting of five thrift representatives, an industry 
trade association and OTS staff. As a result of this review, OTS 
identified a number of ways in which its conflicts of interest, 
corporate opportunity and hazard insurance regulations and policy 
statements could be revised to reduce regulatory burden. On June 14, 
1996, OTS issued a notice of proposed rulemaking.2
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    \1\  12 U.S.C. 4803(a)(1).
    \2\  61 FR 30190 (June 14, 1996).
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    Today's final rule is substantially similar to the June proposal. 
The conflicts of interest rule has been clarified to give more 
specificity on what conflicts are prohibited. The conflicts of interest 
provisions apply if there is disclosure to the board of directors, the 
interested person refrains from participation in discussion of the

[[Page 60174]]

transaction and recuses himself or herself from voting on the 
transaction. In addition, the final rule on corporate opportunity 
incorporates a safe harbor. The corporate opportunity safe harbor 
applies if there is disclosure to the board of directors, and a 
disinterested and independent majority of the board rejects the 
proposed business opportunity.
    The final rule reduces the number of conflicts of interest, 
corporate opportunity and hazard insurance regulations and policy 
statements from eight to three and results in a net reduction of more 
than five pages of CFR text. As proposed, OTS has removed in their 
entirety five unnecessary, duplicative and outdated regulations and 
policy statements: Sec. 545.126 (referral of insurance business), 
Sec. 556.16 (insurance agencies--usurpation of corporate opportunity), 
Sec. 563.35 (restrictions involving loan services), Sec. 563.44 (loans 
involving mortgage insurance) and Sec. 571.4 (hazard insurance). The 
remaining three provisions--loan procurement fees, conflicts of 
interest, and corporate opportunity--will be retained in the form of 
regulations, but streamlined and clarified.
    OTS's objective is to reduce regulatory burden on savings 
associations to the greatest extent possible consistent with statutory 
requirements and safety and soundness. In the context of conflicts of 
interest, corporate opportunity and hazard insurance, we believe 
maximum burden reduction can be achieved by pursuing three specific 
objectives.
    First, we are attempting to eliminate duplication and overlap. For 
example, the policy statement regarding hazard insurance (Sec. 571.4) 
has been largely superseded by the Interagency Real Estate Lending 
Guidelines.3 Similarly, the regulatory provisions prohibiting a 
savings association from conditioning the extension of credit on the 
borrower obtaining certain other services from the institution (tying 
arrangements) (Sec. 563.35) have been superseded by tying prohibitions 
in section 5(q) of the Home Owners' Loan Act of 1933, as amended 
(HOLA).4 Additionally, the regulatory provisions governing kick-
backs and unearned fees for loans (Sec. 563.40) are largely duplicative 
of the Real Estate Settlement Practice Act of 1974 (RESPA).5.
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    \3\ Formerly, Appendix A to Subpart D of Part 563, recodified 
without change as, Appendix to Sec. 560.101 (61 FR 50951, 50978-81 
(September 30, 1996)).
    \4\ 12 U.S.C. 1461, et seq.
    \5\ Pub. L. 93-533, 88 Stat. 1724 (1974).
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    Second, as part of its reinvention effort, OTS is seeking to move 
away from regulations that micromanage thrift operations. Accordingly, 
today OTS is repealing in their entirety detailed regulations 
concerning when federal thrifts can refer customers to affiliates that 
sell insurance, leaving insurance referrals to be handled in the same 
way as other corporate opportunity issues.
    Third, in its reinvention effort, OTS is seeking to enhance the 
conciseness and clarity of its regulations. Accordingly, each of the 
three final rules has been redrafted using plain language techniques 
pioneered by the Department of Interior and promoted by the Reinvention 
Initiative.
    In summary, OTS believes that regulations should generally be 
limited to essential safety and soundness requirements. If regulations 
are unnecessarily detailed and rigid, regulated entities may find 
themselves unable to respond to market innovations. Today's final rule 
achieves what OTS believes is the right balance by placing key safety 
and soundness requirements in binding regulations and putting more 
expansive guidance on prudent practices in the Thrift Activities 
Regulatory Handbook.

II. Summary of Comments and Description of the Final Rule

A. General Discussion of the Comments

    The public comment period on the June 14 proposal closed on August 
13, 1996. Ten commenters responded to the notice of proposed 
rulemaking. Four state and national trade associations, three federal 
savings associations, one law firm, one dual bank and savings and loan 
holding company, and one mortgage insurance corporation submitted 
comments.
    All but three of the commenters generally supported OTS efforts to 
update and streamline its conflicts of interest, corporate opportunity 
and hazard insurance regulations and policy statements. Commenters 
commended OTS's proposed elimination of duplicative, overlapping and 
burdensome restrictions and indicated that the proposed modifications 
would give institutions greater flexibility in structuring their 
operations. Commenters believed that the proposed changes would 
significantly reduce regulatory burden on the thrift industry and 
promote operational flexibility.
    Several commenters raised concerns, however, that the proposed 
conflicts of interest and corporate opportunity regulations were 
unclear and failed to give meaningful guidance about what practices 
were prohibited. Commenters also expressed concern that OTS's intended 
approach for dealing with corporate opportunity within a holding 
company structure was only to be part of guidance and not included in 
the regulatory text. In response, OTS has refined the language of the 
rules and provided examples in the preamble to clarify the scope of the 
provisions. These concerns and OTS's responses are addressed in detail 
in the description of the final rules.
    A few commenters expressed concern over the elimination of the 
hazard insurance provision allowing thrifts to force-place insurance 
and to reject policies that would provide inadequate protection to the 
institution. They agreed with OTS's view that these were matters of 
general safety and soundness principles with respect to lending 
practices, but believe that thrifts would be in a weaker bargaining 
position with borrowers if these provisions were removed. These 
concerns are discussed in detail below in the section-by-section 
analysis in reference to Secs. 563.35 and 571.4.

B. Section-by-Section Analysis

1. Conflicts of Interest

Section 563.35  Restrictions Involving Loan Services

    OTS proposed deleting paragraph (a) of Sec. 563.35, which 
enumerates specific services typically involved in real estate lending 
that cannot be ``tied'' to the granting of a loan. OTS received no 
comments on this paragraph, which is duplicative of HOLA section 5(q). 
The paragraph is deleted as proposed.
    OTS proposed to remove paragraph (b) of Sec. 563.35, which requires 
a savings association to inform borrowers of their right to freely 
select providers of insurance services (e.g., hazard and mortgage 
insurance) and paragraph (c), which provides that a savings association 
may refuse to make a loan if the borrower's choice of insurance 
services would provide insufficient coverage.
    OTS received no comments on paragraph (b). One commenter urged OTS 
to retain paragraph (c) to protect thrifts from having to accept 
insurance that provided insufficient coverage. OTS's significantly 
streamlined and revised lending rule 6 sets forth the basic rules 
governing lending practices. Federal savings associations have the 
authority under these rules to refuse to make loans in the absence of 
adequate insurance coverage, with or without paragraph (c) of 
Sec. 563.35. Coincident

[[Page 60175]]

with this authority, borrowers must be provided the right to freely 
select insurance carriers, within the parameters established by the 
savings associations as necessary to meet their legitimate business 
needs and consistent with applicable law. Although the commenter noted 
that legislation had been proposed in at least one state that would 
prohibit a lender from refusing to accept a hazard insurance policy 
from any insurer admitted in the state and selected by the borrower, 
OTS's revised lending rules contain a detailed provision addressing 
preemption of state laws relating to lending practices.7 The 
states cannot force federal savings associations to accept insurance 
coverage that the associations deem inadequate. Accordingly, for the 
reasons set forth above and in the preamble to the proposed rule, 
paragraphs (b) and (c) are deleted as proposed.
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    \6\ 61 FR 50951, 50971 (September 30, 1996), to be codified at 
12 CFR Part 560.
    \7\ 61 FR at 50972, to be codified at 12 CFR 560.2.
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    OTS proposed to delete paragraph (d) of Sec. 563.35, which provides 
that a savings association must give residential borrowers a written 
itemization of fees in excess of $100 to be paid by the borrower for 
the lender's attorney. OTS received no comments on this paragraph, 
which is removed as proposed. Instead these settlement practices of 
savings associations will be governed by RESPA.

Section 563.40  Restrictions on Loan Procurement Fees, Kickbacks and 
Unearned Fees

    OTS proposed retaining in modified form paragraph (a) of 
Sec. 563.40, which prohibits certain persons from receiving any fee in 
connection with the procurement of a loan from the association or a 
subsidiary of the association. After considering the comments received, 
which are discussed below in Part II.C., OTS has decided to retain this 
paragraph with some technical corrections from the proposed rule, as 
new Sec. 560.130.
    OTS proposed deleting paragraph (b) of Sec. 563.40, which prohibits 
the payment of unearned fees for loan origination and settlement 
services. This provision overlaps RESPA. OTS received no comments on 
this paragraph, which is removed as proposed.

Section 563.44  Mortgage Insurance

    OTS proposed to repeal Sec. 563.44, which prohibits a savings 
association (or service corporation affiliate) from insuring any loan 
with a mortgage insurance company if certain affiliations are present.
    One commenter noted that it is appropriate to eliminate this 
provision because consumers are adequately protected by RESPA and the 
regulations promulgated thereunder, and conflicts of interests would be 
covered by existing law. Another commenter asserted that allowing 
thrifts to invest in mortgage insurance companies would create a 
conflict of interest that poses a risk to the safety and soundness of 
the thrift.
    As indicated in the preamble to the proposed rule, OTS believes 
that common law fiduciary duties, the statutory rules governing 
transactions with affiliates, and OTS's new conflicts of interest 
regulation are adequate to address any conflicts of interest relating 
to the mortgage insurance business. OTS also notes that, under RESPA, a 
lender must disclose its interest in an affiliated mortgage company and 
give borrowers a choice of insurance providers.
    For these reasons and those set forth in the preamble to the 
proposed rule, Sec. 563.44 is removed, as proposed.

Section 571.7  Conflicts of Interest Policy Statement

    OTS proposed codifying this policy statement as a regulation, after 
making modifications to clarify and simplify the language. OTS received 
two comments urging the agency not to adopt a conflicts of interest 
regulation. As indicated in the preamble to the proposed rule, 
fiduciary duties lie at the heart of safety and soundness. OTS believes 
a regulation will serve as an important reminder to thrift insiders of 
their fiduciary duties to avoid conflicts of interest. Therefore, OTS 
is promulgating a conflicts of interest regulation, with some 
modifications from the proposal, as described below in Part II.C.
2. Corporate Opportunity

Section 545.126  Referral of Insurance Business

    OTS proposed removing Sec. 545.126, which prohibits a federal 
savings association from referring any insurance business to an agency 
owned by officers or directors of the association, or by individuals 
having the power to direct its management, subject to certain 
exceptions. This section is removed, as proposed. General corporate 
opportunity principles will govern insurance referrals.
    OTS also notes that the Department of Housing and Urban Development 
recently issued regulations that inter alia, govern fee payments for 
settlement service referrals.8 Savings associations are advised to 
review these rules for applicability to their operations.
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    \8\ 61 FR 29239 (June 7, 1996). The effective date of these 
rules was delayed until July 31, 1997 by section 2103(f) of the 
Economic Growth and Regulatory Paperwork Reduction Act of 1996, Pub. 
L. No. 104-208, 110 Stat. 3009 (1996).
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Section 556.16  Insurance Agencies--Usurpation of Corporate 
Opportunities

    OTS proposed to eliminate Sec. 556.16, which substantially 
duplicates Sec. 545.126, and provides that a federal savings 
association's corporate opportunity to engage in the insurance business 
is usurped if it refers any insurance business to an agency owned by 
officers or directors of the association, or by individuals having the 
power to direct its management, subject to certain exceptions. OTS 
received no comments on this section, which is removed as proposed. As 
noted above, general corporate opportunity principles will govern 
insurance referrals.

Section 571.9  Corporate Opportunity in Savings Associations

    OTS proposed retaining in modified form, and codifying as a 
regulation, paragraph (a) of Sec. 571.9, which states that it is a 
breach of fiduciary duty for officers, directors and certain other 
persons to take advantage of a business opportunity for his or her own 
or another person's personal profit or benefit when the opportunity is 
within the corporate powers of the association or its service 
corporation and when the opportunity is of present or potential 
practical advantage to the association.
    OTS received two comments urging the agency not to adopt a 
corporate usurpation regulation. OTS believes that avoiding corporate 
usurpation is as essential to safety and soundness as avoiding 
conflicts of interest. Therefore, it is adopting the regulation, with 
modifications from the proposal, as described below in Part II.C.
    OTS proposed removing paragraph (b) of Sec. 571.9, which provides 
that a usurpation of corporate opportunity to engage in the insurance 
business is an unsafe and unsound practice. OTS received no comments on 
this provision, which is removed as proposed. As noted above, OTS 
believes that the general prohibition on usurpation of corporate 
opportunity will be sufficient to address any usurpation of insurance 
opportunities.
3. Hazard Insurance

Section 571.4  Hazard Insurance

    OTS proposed removing Sec. 571.4, which contains detailed 
provisions

[[Page 60176]]

concerning a savings association's obligation to require borrowers to 
maintain hazard insurance in a sufficient amount to protect the savings 
association from loss in the event of damage to or destruction of the 
real estate securing the savings association's loans.
    OTS received two comments urging the agency to retain the provision 
as a protection to thrifts from law suits by borrowers relating to 
``force placing'' insurance 9 and to modify the rule to 
specifically cover ``force placing'' insurance.
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    \9\ ``Force placing'' insurance is when the savings association 
exercises its right under a contract with a borrower to purchase 
insurance coverage at the borrower's expense in the event the 
borrower fails to purchase or provide insurance.
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    OTS disagrees that a specific provision on hazard insurance is 
necessary for several reasons. First, details regarding hazard 
insurance are unnecessary in light of the general safety and soundness 
requirements set forth in OTS's revised lending regulations and 
Interagency Real Estate Lending Guidelines as well as standard business 
practices in the mortgage lending industry. Second, savings 
associations clearly have the right to contract with borrowers to 
include whatever terms they deem appropriate in loan agreements (when 
not in contravention of law), including provisions governing force 
placing insurance. OTS's elimination of its hazard insurance policy 
statement does not alter this right.
    For the reasons set forth above and in the preamble to the proposed 
rule, this section is removed as proposed.

C. Description of Final Rule

1. New Sec. 560.130 Prohibition on Loan Procurement Fees
    OTS is moving the prohibition on loan procurement fees 
(Sec. 563.40(a)) to a new section (Sec. 560.130) in its Part 560 on 
Lending and Investment and is narrowing the scope of the rule. OTS is 
promulgating new Sec. 560.130 substantially as proposed, with some 
technical corrections.
    The rule prohibits directors, officers and natural persons having 
the power to control the management or policies of savings associations 
from receiving, directly or indirectly, any commission, fee or other 
compensation in connection with the procurement of any loan by the 
savings association or a subsidiary of the savings association.
    The current rule applies to affiliated persons. This has been 
changed to natural persons. As OTS noted in the preamble to the 
proposed loan procurement rule, the revised regulation would not apply 
to holding companies and holding company affiliates of savings 
associations. Therefore, affiliates of thrifts that are mortgage 
brokers will be able to receive an arms-length fee when acting as agent 
soliciting loans for affiliated thrifts. It is OTS's belief that loan 
procurement fees paid to corporate affiliates pose less risk than those 
paid to individuals because these fees will be subject to section 23B 
of the FRA and corporate affiliates will generally have less ability 
than officers and directors to influence the daily workings of an 
institution's loan approval process. OTS wants to clarify here that the 
revised rule is not intended to cover payments made in the ordinary 
course of business in the form of dividends or capital gains received 
by shareholders of the holding company who are also officers or 
directors of the savings association. In addition, it is OTS's view 
that to ``receive'' a prohibited payment, a person must have accepted 
that payment. For example, it is not enough that a payment is made to 
the person's account without his or her knowledge or consent.
    OTS received one comment urging the agency to eliminate the loan 
procurement rule. This commenter believed that the proposed rule was 
too vague and that the common law duties of loyalty and care, other OTS 
guidance and RESPA are sufficient to address the subject matter of the 
regulation.
    OTS disagrees. As indicated in the preamble to the proposed rule, 
the regulation has been amended from current Sec. 563.40 to more 
precisely tailor the scope of the regulation to the persons the agency 
believes should be covered and the practices the agency wishes to 
prohibit. While OTS agrees that the subject matter of this rule is 
generally covered by common law fiduciary duties and other OTS 
guidance, OTS continues to believe that loan procurement fees paid to 
the persons enumerated in the rule pose a particular threat to the 
safety and soundness of savings associations. Such fees provide 
incentives to these individuals to bring loans into the association and 
to press for their approval, without giving proper consideration to 
whether they are a good investment for the institution. Therefore, OTS 
believes that a specific rule addressing loan procurement fees is 
appropriate.
    Accordingly, Sec. 563.40(a) is amended and moved to new 
Sec. 560.130, as proposed, with technical corrections.
2. New Sec. 563.200 Conflicts of Interest
    OTS proposed codifying its conflicts of interest policy statement 
(Sec. 571.7) as a regulation in new Sec. 563.200 and clarifying and 
simplifying the text of the rule. OTS's proposed conflicts of interest 
regulation prohibited directors, officers, employees, persons having 
the power to control the management or policies of savings 
associations, and other persons who owe fiduciary duties to savings 
associations from advancing their own personal or business interests, 
or those of others, at the expense of the institutions they serve.
    OTS is making two changes in the final rule from the proposal after 
considering issues raised in the comment letters. First, two commenters 
pointed out that the phrase ``or those of others'' was vague. OTS 
agrees and is therefore modifying this phrase to read ``or those of 
others with whom you have a personal or business relationship.'' This 
language more precisely identifies those related interests that would 
give rise to a conflict of interest.
    Second, one commenter suggested that OTS include in the regulation 
a safe harbor to provide greater certainty about what transactions are 
excluded from the rule. OTS is sympathetic to the commenter's desire 
for greater certainty in this area; however, OTS is not including a 
safe harbor provision in its regulation. To give greater guidance 
regarding what transactions may be excluded, OTS is adding a paragraph 
to the end of its conflicts of interest rule that provides that if a 
person with a fiduciary duty to a savings association has an interest 
in a matter or transaction before the board of directors, he or she 
must do three things. First, the person must disclose to the board of 
directors all material non-privileged information relevant to the 
board's decision. This includes the existence, nature and extent of his 
or her conflicting interest and the facts known to the person as to the 
matter or transaction under consideration. Second, the interested 
person may not participate in the board discussion of the matter. 
Third, if the person with the conflict is a director, he or she must 
recuse himself or herself from voting on the matter.10 Absent 
unusual circumstances, OTS will not take enforcement action against a 
person who has complied with these requirements.
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    \10\ See In the Matter of Neil M. Bush, ERC 90-30 (Decision and 
Order) at 21-22 (April 18, 1991); In the Matter of Simpson, OTS 
Order No. AP 92-123 (November 18, 1992), upheld on appeal, 29 F.3d 
1418 (9th Cir. 1994), cert. denied, 115 S. Ct. 1096 (1995).

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[[Page 60177]]

    Several comments sought additional clarification of the types of 
conduct that would be acceptable or impermissible under the rule. OTS 
wants to emphasize that the regulation is a reformulation of the 
current policy statement, written more concisely, and is intended to 
encompass the common law of conflicts of interest as it has been 
articulated in Director's Orders. The regulation does not impose any 
new requirements on persons covered by the rule but reiterates general 
common law standards on the fiduciary duty officers, directors and 
others owe to the institutions they serve. Prior OTS interpretations of 
the policy statement will continue to provide guidance as to the scope 
of the rule.
    To further clarify the type of conduct OTS intends to include and 
exclude from the coverage of the rule, the following examples are 
provided. A person who owes a fiduciary duty to a savings association 
and receives money or other benefits (e.g., a loan, forgiveness of 
debt, goods or services) from a third party in return for the savings 
association granting a loan to or purchasing property from the third 
party would be receiving a benefit that is covered by the rule. 
Similarly, payments by the third party to a spouse, child, parent, 
sibling or business partner of a person identified in the rule would 
generally provide a benefit to the person because of the personal or 
business relationship and would likewise be covered by the rule. In 
addition, a person who owes a fiduciary duty to a savings association 
may not advance a transaction between the savings association and 
companies in which that persons owns shares, is on the board of 
directors or is an officer, at the expense of the institution.
    Generally, a person will not be deemed to be advancing his, her or 
its interests at the expense of the institution if the transaction 
complies with sections 23A and 23B of the Federal Reserve Act 
(FRA),11 Federal Reserve Board Regulation O, and the safe harbor 
described above.12 Likewise, the rule does not prohibit an 
executive officer, director or principal shareholder from receiving a 
loan from the association in accordance with 12 CFR 563.43.
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    \11\ 12 U.S.C. 371c and 371c-1.
    \12\ 12 CFR Part 215.
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    Section 571.7 is amended, codified as a regulation, and moved to 
new Sec. 563.200, with changes from the proposal, as indicated above.
3. New Sec. 563.201 Corporate Opportunity
    Paragraph (a) of OTS's proposed corporate opportunity regulation 
prohibits directors or officers of savings associations, persons having 
the power to control the management or policies of savings associations 
and other persons who owe a fiduciary duty to savings associations from 
taking advantage of corporate opportunities belonging to their savings 
association or its subsidiaries. Paragraph (b) of the proposed rule 
indicates that a corporate opportunity will be deemed to belong to the 
savings association if: (i) it is within the corporate powers of the 
savings association or its subsidiary; and (ii) the opportunity is of 
present or potential practical advantage to the savings association, 
directly or through its subsidiary.
    OTS indicated in the preamble to the proposed rule and reiterates 
here, that the agency intends for common law standards governing 
usurpation of corporate opportunity to be applied in determining when 
an opportunity would be of present or potential practical advantage to 
an institution. Examples of the types of issues that should be 
considered under this standard include, without limitation, an 
institution's financial condition and management resources, the level 
of risk presented by the business, and potential profit from the 
business weighed against any profits that might arise from transfer of 
the business. Prior OTS interpretations have indicated that a 
usurpation of corporate opportunity does not occur when an institution 
receives fair market value consideration for transfer of a line of 
business. By definition, an institution that receives fair market value 
receives as much as it conveys.
    OTS received several comments on its proposed corporate opportunity 
regulation. OTS is making one change to the final rule to reflect the 
comments received. One commenter urged OTS to include a provision in 
the regulation recognizing the role of the board of directors in 
determining whether an opportunity is advantageous to the institution. 
OTS agrees with this suggestion. OTS is adding a paragraph to the new 
regulation which provides that OTS will not deem a person to have taken 
advantage of a corporate opportunity belonging to the savings 
association if a disinterested and independent majority of the savings 
association's board of directors, after receiving a full and fair 
presentation of the matter, rejected the opportunity as a matter of 
sound business judgment. This safe harbor is not intended to affect the 
rights of others, for example the Federal Deposit Insurance Corporation 
or shareholders, to bring actions alleging usurpation of corporate 
opportunity under applicable provisions of law.
    A ``disinterested'' director is one without an interest in the 
matter or transaction before the board of directors. This determination 
will vary with the facts and circumstances of each case. The examples 
set forth above in the discussion of the conflicts of interest rule 
provide some guidance on whether a director has an interest in a 
transaction. An ``independent'' director for purposes of this rule is: 
(i) One who is not a salaried officer or employee of the savings 
association, any subsidiary, or any holding company affiliate; \13\ and 
(ii) one who is not dominated or controlled by an interested director. 
What will be considered ``a full and fair presentation of the facts 
relating to a given matter'' will vary depending upon the transaction. 
At a minimum, the interested director must disclose the nature and 
extent of his or her interest in the transaction.
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    \13\ See 12 CFR 563.33 (1996).
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    Several commenters addressed the language in the preamble 
concerning OTS's intended treatment of business allocation within a 
holding company structure. OTS indicated that under the proposed 
regulation, the dealings of holding companies with their subsidiary 
thrifts will be subject to the doctrine of usurpation of corporate 
opportunity to the same extent as provided by common law. OTS noted, 
however, that other provisions of law generally provide an adequate 
basis for regulating dealings between thrifts and their holding 
companies. Thus, barring egregious circumstances or instances where a 
thrift is undercapitalized or unprofitable, OTS supervisors and 
examiners will generally defer to holding company decisions regarding 
where to allocate lines of business within a holding company structure, 
provided there is no violation of sections 23A and 23B of the FRA or 
general principles of safety and soundness.
    Two commenters asked that this language be specifically included in 
the regulation or in handbook guidance. OTS has determined not to 
incorporate this language in the regulation for several reasons. First, 
it is the agency's view that the standard it has enunciated for the 
treatment of holding companies is not specific enough to be included in 
regulatory text. Second, holding companies are covered by the rule and 
OTS reserves the right to take action against holding companies for

[[Page 60178]]

usurpation of corporate opportunity in the special circumstances 
described above. However, OTS reiterates that it will generally defer 
to holding company business allocation decisions. OTS's decision not to 
put this standard in the regulation in no way reflects a departure from 
this stated position. OTS intends to incorporate this language into the 
Thrift Activities Regulatory Handbook.
    One commenter asked OTS to amend the general prohibition paragraph 
to provide that usurpation of corporate opportunity was only actionable 
if it was ``for [a person's] personal profit or benefit.'' Usurpation 
of corporate opportunity is prohibited based on fiduciary principles, 
not whether a benefit accrues to an individual. It is enough that an 
opportunity belongs to the institution and is usurped from the 
institution. The concept of personal gain is more appropriate to a 
conflicts of interest analysis than a corporate opportunity analysis.
    OTS notes that depending on the circumstances relating to a given 
matter or transaction, the conflicts of interest regulation (new 
Sec. 563.200) may apply in addition to the corporate opportunity rule.
    Section 571.9(a) is amended, codified as a regulation and moved to 
new Sec. 563.201, with changes from the proposal, as indicated above.

III. Disposition of Existing Conflicts of Interest, Corporate 
Opportunity and Hazard Insurance Regulations and Policy Statements

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       Original  provision          New  provision          Comment     
------------------------------------------------------------------------
Sec.  545.126...................  ..................  Removed.          
Sec.  556.16....................  ..................  Removed.          
Sec.  563.35....................  ..................  Removed.          
Sec.  563.40(a).................  Sec.  560.130.....  Modified.         
Sec.  563.40(b).................  ..................  Removed.          
Sec.  563.44....................  ..................  Removed.          
Sec.  571.4.....................  ..................  Removed.          
Sec.  571.7.....................  Sec.  563.200.....  Modified.         
Sec.  571.9(a)..................  Sec.  563.201.....  Modified.         
Sec.  571.9(b)..................  ..................  Removed.          
------------------------------------------------------------------------

IV. Executive Order 12866

    The Director of OTS has determined that this final rule does not 
constitute a ``significant regulatory action'' for the purposes of 
Executive Order 12866.

V. Unfunded Mandates Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 
104-4 (Unfunded Mandates Act), requires that an agency prepare a 
budgetary impact statement before promulgating a rule that includes a 
federal mandate that may result in expenditure by state, local, and 
tribal governments, in the aggregate, or by the private sector, of $100 
million or more in any one year. If a budgetary impact statement is 
required, section 205 of the Unfunded Mandates Act also requires an 
agency to identify and consider a reasonable number of regulatory 
alternatives before promulgating a rule. OTS has determined that the 
final rule will not result in expenditures by state, local, or tribal 
governments or by the private sector of $100 million or more. 
Accordingly, this rulemaking is not subject to section 202 of the 
Unfunded Mandates Act.

VI. Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS 
certifies that this final rule will not have a significant economic 
impact on a substantial number of small entities. As discussed in the 
preamble, this final rule reduces regulatory burden and clarifies the 
fiduciary duties that directors, officers and other fiduciaries owe to 
savings associations. It does not create new standards but reiterates 
the common law duty that directors, officers and other fiduciaries owe 
to the institutions they serve.

List of Subjects

12 CFR Part 545

    Accounting, Consumer protection, Credit, Electronic funds 
transfers, Investments, Reporting and recordkeeping requirements, 
Savings associations.

12 CFR Part 556

    Savings associations.

12 CFR Part 560

    Consumer protection, Investments, Manufactured homes, Mortgages, 
Reporting and recordkeeping requirements, Savings associations, 
Securities.

12 CFR Part 563

    Accounting, Advertising, Conflicts of interest, Corporate 
opportunity, Crime, Currency, Investments, Reporting and recordkeeping 
requirements, Savings associations, Securities, Surety bonds.

12 CFR Part 571

    Accounting, Investments, Reporting and recordkeeping requirements, 
Savings associations.

    Accordingly, the Office of Thrift Supervision amends chapter V, 
title 12, Code of Federal Regulations, as set forth below.

PART 545--OPERATIONS

    1. The authority citation for part 545 continues to read as 
follows:

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


Sec. 545.126   [Removed]

    2. Section 545.126 is removed.

PART 556--STATEMENTS OF POLICY

    3. The authority citation for part 556 continues to read as 
follows:

    Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1464, 1701j-3; 15 U.S.C. 
1693-1693r.


Sec. 556.16   [Removed]

    4. Section 556.16 is removed.

PART 560--LENDING AND INVESTMENT

    5. The authority citation for part 560 continues to read as 
follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1701j-3, 1828, 
3803, 3806; 42 U.S.C. 4106.

    6. Section 560.130 is added to read as follows:


Sec. 560.130   Prohibition on loan procurement fees.

    If you are a director, officer, or other natural person having the 
power to direct the management or policies of a savings association, 
you must not receive, directly or indirectly, any commission, fee, or 
other compensation in connection with the procurement of any loan made 
by the savings association or a subsidiary of the savings association.

PART 563--OPERATIONS

    7. The authority citation for part 563 continues to read as 
follows:

    Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468, 
1817, 1828, 3806.


Sec. 563.35  [Removed]

    8. Section 563.35 is removed.


Sec. 563.40  [Removed]

    9. Section 563.40 is removed.


Sec. 563.44  [Removed]

    10. Section 563.44 is removed.
    11. Section 563.200 is added to read as follows:


Sec. 563.200  Conflicts of interest.

    If you are a director, officer, or employee of a savings 
association, or have the power to direct its management or policies, or 
otherwise owe a fiduciary duty to a savings association:
    (a) You must not advance your own personal or business interests, 
or those of others with whom you have a

[[Page 60179]]

personal or business relationship, at the expense of the savings 
association; and
    (b) You must, if you have an interest in a matter or transaction 
before the board of directors:
    (1) Disclose to the board all material nonprivileged information 
relevant to the board's decision on the matter or transaction, 
including:
    (i) The existence, nature and extent of your interests; and
    (ii) The facts known to you as to the matter or transaction under 
consideration;
    (2) Refrain from participating in the board's discussion of the 
matter or transaction; and
    (3) Recuse yourself from voting on the matter or transaction (if 
you are a director).
    12. Section 563.201 is added to read as follows:


Sec. 563.201  Corporate opportunity.

    (a) If you are a director or officer of a savings association, or 
have the power to direct its management or policies, or otherwise owe a 
fiduciary duty to a savings association, you must not take advantage of 
corporate opportunities belonging to the savings association.
    (b) A corporate opportunity belongs to a savings association if:
    (1) The opportunity is within the corporate powers of the savings 
association or a subsidiary of the savings association; and
    (2) The opportunity is of present or potential practical advantage 
to the savings association, either directly or through its subsidiary.
    (c) OTS will not deem you to have taken advantage of a corporate 
opportunity belonging to the savings association if a disinterested and 
independent majority of the savings association's board of directors, 
after receiving a full and fair presentation of the matter, rejected 
the opportunity as a matter of sound business judgment.

PART 571--STATEMENTS OF POLICY

    13. The authority citation for part 571 continues to read as 
follows:

    Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462a, 1463, 1464.


Secs. 571.4, 571.7, 571.9  [Removed]

    14. Sections 571.4, 571.7 and 571.9 are removed.

    Dated: November 18, 1996.

    By the Office of Thrift Supervision.
Nicolas P. Retsinas,
Director.
[FR Doc. 96-30031 Filed 11-26-96; 8:45 am]
BILLING CODE 6720-01-P