[Federal Register Volume 63, Number 45 (Monday, March 9, 1998)]
[Rules and Regulations]
[Pages 11361-11367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-5896]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 575

[98-23]
RIN 1550-AB04


Mutual Holding Companies

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (OTS) is amending its mutual 
holding company regulations to permit a mutual holding company (MHC) to 
establish a subsidiary stock holding company that would hold all of the 
stock of a savings association subsidiary. The final rule permits the 
establishment of intermediate stock holding companies (SHCs) that will 
be subject to restrictions that are substantially similar to those 
currently applicable to MHCs.

EFFECTIVE DATE: April 1, 1998.

FOR FURTHER INFORMATION CONTACT: James H. Underwood, Special Counsel 
(202/906-7354), Dwight C. Smith, Deputy Chief Counsel (202/906-6990), 
Business Transactions Division, Chief Counsel's Office; Gary Masters, 
Financial Analyst (202/906-6729) Corporate Activities Division; Office 
of Thrift Supervision, 1700 G Street, NW., Washington, D.C. 20552.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background of the Proposal
II. General Discussion of the Comments
III. Analysis of Final Rule
IV. Paperwork Reduction Act of 1995
V. Executive Order 12866
VI. Regulatory Flexibility Act Analysis
VII. Unfunded Mandates Act of 1995
VIII. Effective Date

I. Background of the Proposal

    Responding to inquiries from MHCs and mutual savings associations 
concerning the formation of second-tier stock holding companies, OTS 
issued an Advance Notice of Proposed Rulemaking (ANPR) soliciting 
comment on issues raised by the existence of SHCs.1 On June 
5, 1997, OTS published a notice of proposed rulemaking (NPR) proposing 
to amend its regulations to permit the establishment and operation of 
federally chartered mid-tier holding companies.2 The purpose 
of the proposed amendment was to enhance the organizational flexibility 
of the MHC structure and to enable MHCs to compete more effectively in 
the marketplace. Additionally, permitting the formation of SHCs will 
allow MHCs, through the SHCs, greater flexibility in structuring stock 
repurchase programs.
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    \1\ 61 FR 58144 (November 13, 1996).
    \2\ 62 FR 30778 (June 5, 1997).
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    Under current 12 CFR part 575, a mutual savings association may 
reorganize into a MHC structure where the MHC owns at least a majority 
of the stock of a subsidiary savings association. Depositors of the 
mutual savings association continue to maintain a depositor-creditor 
relationship with the stock savings association subsidiary, while 
retaining their other indicia of ownership, e.g., voting and 
liquidation rights, with the MHC. This structure permits the balance of 
the shares (up to 49.9%) of the stock savings association subsidiary to 
be sold to the public in one or more offerings when the MHC is formed, 
or later.
    The final rule will permit the MHC to form an SHC to hold all of 
the shares of the stock savings association subsidiary. The SHC, like 
the stock savings association subsidiary under the current rule, will 
be required to issue at least a majority of its shares to the MHC and 
may issue up to 49.9% of its shares to the public. Under the final 
rule, the SHC will be required to hold 100% of the shares of the 
savings association subsidiary. The final rule, like the NPR, provides 
that the SHC structure may not be used to evade or frustrate the 
purposes of 12 CFR part 575 or related provisions of 12 CFR part 563b 
that govern mutual-to-stock conversions by savings associations. OTS' 
guiding principle with respect to MHC conversion rules is that the 
substantive and procedural limitations applicable to such transactions 
should mirror those for a mutual-to-stock conversion of a savings 
association. This is so insiders or minority shareholders do not get a 
windfall by achieving something (e.g., a greater ownership interest) 
through an MHC reorganization and subsequent conversion to stock form 
that they cannot accomplish through a direct mutual-to-stock conversion 
of the savings association.

II. General Discussion of the Comments

    Eleven commenters responded to the NPR proposal: one savings bank; 
one mutual holding company; two individuals; three trade groups; and 
four law firms. All but one of the commenters generally supported the 
concept of SHCs. The one commenter who did not support the formation of 
SHCs was opposed to any changes to OTS' rules governing mutual holding 
companies. Most of the commenters argued for greater flexibility and 
fewer restrictions on SHCs than set forth in the proposed rule. Two of 
the trade groups that commented, however, were generally supportive of 
the rule as proposed.
    The final rule is substantially similar to the proposed rule. 
Specific comments addressing various sections are discussed in the 
description of the revisions to 12 CFR part 575 set forth below.

III. Analysis of Final Rule

A. Federal Charter and Bylaws for SHCs

    OTS proposed that SHCs must be federally chartered. The final rule 
continues this requirement and defines a SHC as a mutual holding 
company for purposes of section 10(o) of the Home Owners' Loan Act 
(HOLA). As a MHC, the SHC is subject to the exclusive jurisdiction of 
OTS. OTS consistently has interpreted section 10(o) and its legislative 
history as demonstrating Congress' intent that section 10(o) expressly 
preempts state law with regard to the creation and regulation of 
MHCs.3
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    \3\ See 58 FR 44105, 44106-44107 (August 13, 1993) (discussion 
of OTS' exclusive authority to charter and regulate MHCs).
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    Two commenters questioned whether OTS has the statutory authority 
to charter SHCs. OTS believes that it has authority under section 10(o) 
to charter SHCs. Section 10(o)(10)(A) of HOLA defines a mutual holding 
company as ``a corporation organized as a holding company under 
[section 10(o) of HOLA].'' Given this broad definition, coupled with 
the explicit statutory revisions and legislative history expressing 
Congress' intent that OTS have exclusive authority to charter and 
regulate MHCs, OTS believes there is a clear statutory basis for OTS to 
charter a SHC as a mutual holding company.
    As indicated in the preamble to the final rule adopting 12 CFR Part 
575 in 1993, the mutual holding company provisions were amended by the 
Financial Institutions Reform, Recovery, And Enforcement Act of 1989, 
Public L. 101-73, 103 Stat. 183 (1989), to expressly provide that 
mutual holding companies would be chartered and subject to regulations 
prescribed by the

[[Page 11362]]

Director of OTS.4 The explanatory statement offered at the 
mark-up of the legislation stated that the amendments ``would provide a 
clear regulatory framework for MHCs, and unquestionable regulatory 
authority to the [OTS] by providing that MHCs will be chartered by the 
[Director of OTS] and subject to OTS regulation.'' 5 OTS 
believes that Congress has set forth a detailed statutory scheme that 
addresses virtually all of the material aspects of the establishment 
and corporate governance of a mutual holding company. Thus, it follows 
that Congress intended for OTS to occupy the field of mutual holding 
company regulation for savings associations and that requiring SHCs to 
be federally chartered is consistent with both the statute and 
Congressional intent.
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    \4\ Id. Under the original MHC provisions adopted as part of the 
Competitive Equality Banking Act of 1987, it was unclear whether 
MHCs would be federally chartered or state-chartered entities.
    \5\ Id. at 44106.
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    Moreover, MHC structures are fundamentally different from 
traditional savings and loan and bank holding companies. Because of 
their unique hybrid structure--part mutual, part stock--OTS has 
attempted to ensure that the interests of the mutual members are not 
diminished or exploited in connection with the formation and operation 
of the MHC. OTS has been mindful that many MHCs do eventually convert 
to full stock form under OTS' mutual to stock conversion regulations. 
Thus, unlike a traditional state-chartered savings and loan holding 
company, a MHC is the corporate repository of the mutual members' 
economic and legal interests. OTS' policy has always been that a MHC 
and its subsidiaries may not take any action that would violate the 
substantive provisions and policies of the mutual to stock conversion 
regulations. Treating a SHC as a traditional state-chartered savings 
and loan holding company would substantially reduce OTS' ability to 
effectively protect the rights of the mutual members and ensure 
consistent treatment under the mutual to stock conversion regulations 
for members of MHCs and members of mutual savings associations that do 
not form MHCs.
    The MHC statute clearly contemplates that the reorganizing savings 
association will be a directly owned subsidiary of a federally 
chartered mutual holding company. To permit a state-chartered 
corporation to control the reorganizing savings association is 
inconsistent with OTS' occupation of the field of MHC regulation, would 
diminish OTS' ability to regulate the corporate governance provisions 
of the intermediate holding company, and create potential conflicts 
between federal and state regulation. One commenter suggested that OTS 
could deal with any issues concerning corporate governance provisions 
by imposing conditions in connection with the approval of the 
application. OTS questions whether this proposed solution is viable. 
OTS believes that requiring a federal charter for a SHC is the best 
means of ensuring consistent and non-conflicting corporate governance 
provisions for the MHC, the SHC and their savings association 
subsidiary. This, in turn, would ensure that OTS has adequate authority 
to protect and balance the interests of all the parties involved in a 
MHC reorganization.
    Requiring SHCs to be federally chartered is also consistent with 
the statutory requirement under section 10(o)(9) that authorizes the 
appointment of a trustee as receiver for a MHC that is in default or 
that has a savings association subsidiary that is in default. Under 
section 10(o)(9), a trustee has the authority to liquidate the assets 
of the MHC (and satisfy any liabilities) and distribute the net 
proceeds to the owners of the MHC or the Federal Deposit Insurance 
Corporation (``FDIC'') to the extent that the FDIC has suffered any 
loss as insurer of the savings association subsidiary. By requiring 
that the SHC be treated as a MHC and be federally chartered, OTS will 
have clear authority to seek the appointment of a trustee as receiver 
of a SHC whenever the parent MHC or its SHC or savings association 
subsidiary is in default. This will ensure that the receiver of the MHC 
has the maximum flexibility to liquidate the assets of the SHC to 
ensure that any losses to the FDIC as insurer are minimized.
    One commenter argued that section 10(o)(4)(A) of HOLA is 
inconsistent with the idea that the SHC could be defined as a MHC under 
the statute. Section 10(o)(4)(A) provides that ``[p]ersons having 
ownership rights in the mutual association * * * shall have the same 
ownership rights with respect to the mutual holding company.'' OTS does 
not agree that this section is inconsistent with the proposal to 
authorize a federal charter for SHCs. Under the final rule, a SHC must 
always be controlled by a parent MHC. The members' interest referenced 
by section 10(o)(4)(A) will reside directly with the parent MHC. As the 
parent MHC is required to maintain a majority ownership interest in the 
SHC, the members will also indirectly maintain the same ownership 
rights in the SHC that they had in the mutual association. OTS believes 
that having the SHC directly controlled by the parent MHC is consistent 
with the language and intent of section 10(o)(4)(A) when viewed in the 
context of the entire statute. OTS also believes the addition of 
another holding company in the structure does not diminish the interest 
of the mutual associations' members.
    One commenter stated that requiring SHCs to be federally chartered 
would create problems because of the lack of any developed body of 
corporate law for SHCs. As indicated in the proposal, OTS will follow 
the charter, bylaw, and corporate governance provisions that are 
currently applicable to federal stock savings associations. The 
corporate governance structure for federal savings associations has 
been in place over twenty years and the industry and industry counsel 
are familiar with this system. OTS believes that utilizing the existing 
corporate governance structure for federal savings associations as a 
model for SHCs will minimize the burden on SHCs because the existing 
structure is familiar.

B. Stock Holding Company Powers

    Several commenters were in favor of granting unitary savings and 
loan holding company status to SHCs. They stated that they did not 
perceive any policy reasons, such as safety and soundness concerns, 
that support a different treatment for SHCs simply because they are 
controlled by a MHC. As indicated in the NPR, OTS believes that it is 
not appropriate to treat SHCs as unitary savings and loan holding 
companies under the mutual holding company statute. Congress chose to 
limit the activities of MHCs to those permitted for multiple savings 
and loan holding companies and bank holding companies when it 
authorized MHCs as part of the Competitive Equality Banking Act of 1987 
(CEBA). Although the legislative history of CEBA does not indicate why, 
it is reasonable to assume that Congress was aware of the unique nature 
of mutual institutions and their relationship with these newly 
authorized holding companies and wished to limit the activities of MHCs 
to those more closely related to banking.
    OTS believes that limiting the activities of a SHC to those 
permitted to the parent MHC is consistent with the statute. Therefore, 
the final rule does not authorize SHCs to engage in activities beyond 
those specified in section 10(o)(5) of the statute. OTS notes, however, 
that a SHC may utilize its authority under section 10(o)(5) and 12 CFR 
575.10(a)(6) to acquire subsidiaries engaged in (i) any activity 
authorized under 12 CFR Part 559 or (ii)

[[Page 11363]]

activities approved for service corporations of state-chartered savings 
associations in the state where the SHC's savings association 
subsidiary has its home office.

C. Regulatory Restrictions on Stock Pledges, Dividend Waivers, 
Indemnification and Employment Contracts

    The final rule adopts the provisions set forth in the NPR governing 
stock pledges, dividend waivers, indemnification, and employment 
contracts without any changes. Similar to the response to the ANPR, 
several commenters argued that it was unnecessary and inappropriate to 
impose the same restrictions on SHCs that currently apply to MHCs and 
their savings association subsidiaries. Several commenters, however, 
supported the rule as proposed. OTS, for the reasons stated in the NPR 
and discussed below, does not find the arguments of the commenters 
opposed to the proposed rule persuasive. As noted in the preamble to 
the NPR, OTS' intent is to increase the flexibility of the MHC 
structure without diminishing the safeguards Congress imposed in 
adopting the statute.
    With respect to stock pledges, section 10(o)(8) requires that the 
pledging of a savings association's stock by its parent MHC increase 
the capital of the savings association. OTS believes this restriction 
should apply equally to both an MHC and an SHC. Applying this 
restriction to the SHC is consistent with the statute and will ensure 
that any borrowing using the savings association subsidiary's stock or 
the SHC's stock as collateral will directly benefit the FDIC-insured 
savings association.
    Regarding dividend waivers, one commenter stated that no 
restrictions should apply to the SHC since it has no mutual members, 
and its board of directors has no fiduciary duties to such mutual 
members. OTS does not agree with this assertion. The same concerns that 
are present when dividends are paid by a savings association subsidiary 
to its minority stockholders but waived by the MHC are present when 
dividends are paid to minority stockholders of an SHC and waived by the 
parent MHC. In both cases, the board of directors of the MHC must 
approve a waiver of the dividend payments, and their fiduciary 
obligation is the same in each instance. It is important in either 
instance that the value of the waived dividends be retained for the 
benefit of the members of the MHC to prevent potential windfalls to the 
minority shareholders in a subsequent conversion of the MHC.
    One commenter suggested that the SHC be permitted to issue two 
classes of voting stock with identical features except that one class 
would not have the right to receive any dividend payments. Under this 
scheme, the MHC would receive the class of shares without dividend 
rights while minority shareholders would receive the dividend-paying 
class. This proposal would have precisely the same impact as removing 
the dividend waiver restrictions that protect the interests of the MHC 
mutual members, a result that OTS rejects. If dividends could be paid 
only to the minority shareholders this would divert the earnings of the 
savings association to the minority shareholders at the expense of the 
MHC. For example, if a savings association subsidiary had 40% of its 
voting shares held by minority shareholders and earned a million 
dollars, it would be able to pay out $1,000,000 to its minority 
shareholders instead of the $400,000 permitted under the existing 
rules. In effect, the $600,000 that would normally be attributable to 
the parent MHC would be diverted to the minority stockholders.
    The use of dual classes of stock is problematic for several 
additional reasons. First, it would purport to relieve the MHC's board 
of directors from its fiduciary obligation to determine that the 
proposed dual stock structure of the SHC is consistent with the 
interests of the mutual members of the MHC. Under current rules, the 
board of directors of the MHC must make an express determination that a 
waiver of dividends from the savings association subsidiary is 
consistent with the board's fiduciary duties to the members of the MHC. 
Use of the dual stock structure, in which the MHC would receive no 
dividends, would allow the MHC board effectively to approve a blanket 
dividend waiver without knowing the amounts that would be relinquished 
by the MHC or what consequences might flow from the MHC's inability to 
receive dividends in the future.
    Dual classes of stock would also create an obvious conflict for the 
MHC board members who were also minority shareholders of the SHC. These 
board members would have substantial, personal economic incentives to 
maximize the payment of dividends, notwithstanding the loss in value to 
the majority stockholder, the MHC and the mutual members--to whom these 
directors owe a fiduciary duty. The dual stock structure would also 
permit the minority shareholders to argue that there should be no 
dilution of their ownership interests in the event of a conversion of 
the MHC since no dividend waivers would have occurred. OTS believes 
that this would completely elevate form over economic substance and 
grant an inappropriate windfall to the SHC's minority shareholders. For 
these reasons, no change was made to final rule regarding the treatment 
of waived dividends.
    Another commenter argued that it was particularly inappropriate to 
impose any restrictions relating to indemnification or employment 
contracts on SHCs that are more stringent than those imposed on other 
savings and loan holding companies. Since OTS believes SHCs should be 
treated as MHCs for the reasons stated above, OTS has determined to 
impose the same indemnification and employment contract restrictions on 
SHCs that are currently imposed on MHCs. Thus, the final rule is 
adopted without any changes to the indemnification or employment 
contract provisions.

D. SHC Stock Issuances, Stock Repurchases, and Conversion of the MHC

    Commenters generally supported the proposed rule on the issue of 
stock repurchases. Several commenters objected to OTS' interpretation 
that restricts SHCs (or savings association subsidiaries under the 
current rule) from issuing stock to complete a merger transaction 
without first offering the stock to mutual members on a priority basis. 
A commenter argued that it was inappropriate to continue to grant 
mutual members priority subscription rights where the shares were being 
issued in a stock-for-stock merger transaction. Commenters suggested 
that OTS should consider other factors, including management obtaining 
a fairness opinion, the value of the company being acquired, and 
whether the shares of the SHC are actively traded on NASDAQ or a stock 
exchange in determining whether to permit stock-for-stock mergers 
without priority subscription rights.
    While OTS recognizes that there are reasonable arguments in favor 
of changing the current policy, OTS still believes that, on balance, 
mutual members should be granted a first priority subscription right 
for stock issued by a savings association subsidiary or an SHC. As 
stated in the NPR, OTS is aware that this may result in MHCs having 
less flexibility than a traditional savings and loan holding company. 
This is consistent with the fact that the MHC structure is a unique 
hybrid corporate structure, part mutual and part stock, that has both 
advantages and disadvantages. OTS also notes that this issue is not 
unique to SHCs. OTS'

[[Page 11364]]

interpretation of 12 CFR 575.7 on stock issuances also applies to 
issuances of stock by savings association subsidiaries that are not 
owned by an SHC.
    For this reason and the other reasons cited above, OTS generally 
will continue to require that mutual members be granted a first 
priority subscription interest for stock issued by savings associations 
and SHCs. OTS notes, however, that Section 575.7(d)(6) currently 
provides that OTS may permit a non-conforming stock issuance where the 
applicant demonstrates that it would be more beneficial to the issuing 
savings association. Under this provision, the OTS believes that 
properly structured merger transactions that do not grant priority 
subscription rights may qualify for approval and OTS is willing to 
consider and approve such transactions on a case-by-case basis.
    Most commenters generally supported permitting SHCs to engage in 
stock repurchases on the same basis as a savings association subsidiary 
of a MHC. The final rule provides that SHCs may not engage in stock 
repurchases during the three year period following issuance of the 
stock without the prior approval of OTS. This will permit OTS to 
evaluate the purpose and reasons for the stock repurchases on a case-
by-case basis. OTS does not anticipate that it will permit repurchases 
in amounts greater than those that have generally been permitted under 
the mutual to stock conversion regulations.6
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    \6\ See 12 CFR 563b.3(g) (1997).
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    One commenter requested that OTS clarify that it would not impose 
stricter standards in reviewing stock repurchases by SHCs and savings 
association subsidiaries of MHCs than those imposed on savings 
associations converted under 12 CFR Part 563b. Another commenter 
requested that OTS revise 12 CFR 575.11(c) to add the additional safe-
harbor purchases allowed under the mutual to stock conversion 
regulations.7 OTS does not believe that it is necessary or 
appropriate to include these safe-harbor provisions for SHCs for the 
reasons discussed below. OTS also does not believe that it should 
impose a rigid or inflexible standard on stock repurchases by 
subsidiaries of MHCs.
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    \7\ See 12 CFR 563b.3(g) (1997).
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    MHCs, unlike a savings association undertaking a traditional mutual 
to stock conversion, have control over the amount of capital raised in 
a stock offering. Thus, MHCs should not be subject to the same 
pressures of finding appropriate investments for the new capital as 
fully converted savings associations. Since management has more control 
over the amount of capital raised by a MHC, OTS will consider this fact 
when reviewing requests for stock repurchases that occur during the 
three years following the issuance of the stock. Each request, however, 
will be reviewed on a case-by-case basis and a decision to grant or 
deny the request will be based upon all of the relevant facts presented 
in the request. OTS also notes that after the initial three-year period 
following issuance of the stock by a SHC, a SHC may engage in stock 
repurchases subject only to the restrictions that are applicable to 
savings associations generally.8
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    \8\ See 12 CFR 563.134 (1997).
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    Upon further consideration of stock repurchase issues, OTS is 
revising 12 CFR 575.11(c) as proposed to restrict the ability of SHCs 
to engage in open-market repurchases during the three-year period 
following the issuance of the stock to fund employee stock benefit 
plans without obtaining the prior approval of OTS. Because of the 
potential amounts that may be involved in funding employee stock 
benefit plans (10% for stock option plans, 4% for management 
recognition plans, 8% for employee stock option plans, plus any amounts 
for other tax-qualified or non-tax-qualified plans), and OTS' desire to 
more closely monitor repurchases by a SHC that occur shortly after a 
stock issuance, the final rule eliminates this safe-harbor provision. 
This will also ensure that the stock repurchase provisions affecting 
employee stock benefit plans for SHCs are consistent with the 
provisions for converted savings associations under 12 CFR part 563b.
    In the NPR, OTS stated its intention to permit SHCs that are formed 
subsequent to the initial MHC reorganization and stock issuance to 
``tack on'' or include the period that the shares issued by the savings 
association were outstanding in calculating the three-year period that 
stock repurchases are restricted. All of the comments on this issue 
were favorable. One commenter requested that OTS make the ``tacking'' 
period an explicit part of section 575.11(c). OTS reiterates its 
intention to permit SHCs that are formed after an initial MHC 
reorganization to include the period that any minority shares of the 
savings association were outstanding in determining the applicability 
of the three-year repurchase restriction under 12 CFR 575.11(c) and the 
final rule has been revised to reflect this policy.

IV. Paperwork Reduction Act of 1995

    The reporting and recordkeeping requirements contained in this 
final rule have been submitted to and approved by the Office of 
Management and Budget in accordance with the Paperwork Reduction Act of 
1995 (44 U.S.C. 3507(d)) under OMB Control No. 1550-0072. Comments on 
all aspects of this information collection should be sent to the Office 
of Management and Budget, Paperwork Reduction Project (1550), 
Washington, D.C. 20503 with copies to OTS, 1700 G Street, NW., 
Washington, DC 20552.
    The reporting/recordkeeping requirements contained in this final 
rule are found at 12 CFR part 575. The information is needed by OTS in 
order to supervise savings associations and mutual holding companies 
and develop regulatory policy. The likely respondents/recordkeepers are 
OTS-regulated savings associations and mutual holding companies.
    Records are to be maintained in accordance with normal and 
customary business practices as recommended by private counsel, 
accountants, etc., but no less than three years.
    Respondents/recordkeepers are not required to respond to this 
collection of information unless the collection displays a currently 
valid OMB control number. The valid control number assigned to the 
collection of information in this final rule is displayed at 12 CFR 
506.1(b).

V. 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.

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 impact on a 
substantial number of small entities. The final rule will create 
additional organizational flexibility for all savings associations that 
create mutual holding company structures.

VII. 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

[[Page 11365]]

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.

VIII. Effective Date

    Section 553(d) of the Administrative Procedure Act generally 
requires an agency to publish a substantive rule at least 30 days 
before its effective date. Section 553(d) of the APA permits waiver of 
the 30-day delayed effective date requirement for, inter alia, good 
cause or where a rule relieves a restriction. Under the current rule, 
MHCs are not permitted to form SHCs. Waiver of the 30-day delayed 
effective date would relieve this restriction and permit MHCs to 
utilize this structure immediately upon the effective date. For this 
reason, OTS finds that the 30-day delayed effective date may be waived.

List of Subjects in 12 CFR Part 575

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

    Accordingly, the Office of Thrift Supervision hereby amends chapter 
V, title 12, Code of Federal Regulations, as follows:

PART 575--MUTUAL HOLDING COMPANIES

    1. The authority citation for part 575 continues to read as 
follows:

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

    2. Section 575.2 is amended by revising paragraphs (h) and (o) and 
adding paragraph (q) to read as follows:


Sec. 575.2  Definitions.

* * * * *
    (h) The term mutual holding company means a mutual holding company 
organized under this part, and unless otherwise indicated, a subsidiary 
holding company controlled by a mutual holding company, organized under 
this part.
* * * * *
    (o) The term Stock Issuance Plan means a plan, submitted pursuant 
to Sec. 575.7 and containing the information required by Sec. 575.8, 
providing for the issuance of stock by:
    (1) A savings association subsidiary of a mutual holding company; 
or
    (2) A subsidiary holding company.
* * * * *
    (q) The term subsidiary holding company means a federally chartered 
stock holding company, controlled by a mutual holding company, that 
owns the stock of a savings association whose depositors have 
membership rights in the parent mutual holding company.
    3. Section 575.6 is amended by redesignating paragraphs (c) through 
(i) as paragraphs (d) through (j) and adding a new paragraph (c) to 
read as follows:


Sec. 575.6  Contents of Reorganization Plans.

* * * * *
    (c) If the reorganizing association proposes to form a subsidiary 
holding company, provide for the organization of a subsidiary holding 
company and attach and incorporate the proposed charter and bylaws of 
such subsidiary holding company.
* * * * *
    4. Section 575.10 is amended by:
    a. Removing, in the introductory text of paragraph (a)(2), the 
phrase ``the holding company'', and by adding in lieu thereof the 
phrase ``the parent mutual holding company';
    b. Revising the first sentence of paragraph (a)(3);
    c. Revising the first sentence of paragraph (a)(4);
    d. Revising paragraph (a)(6)(i)(B); and
    e. Revising the first sentence of paragraph (b)(1).
     The revisions read as follows:


Sec. 575.10  Acquisition and disposition of savings associations, 
savings and loan holding companies, and other corporations by mutual 
holding companies.

    (a) * * *
    (3) Mutual holding companies. A mutual holding company that is not 
a subsidiary holding company may acquire control of another mutual 
holding company, including a subsidiary holding company, by merging 
with or into such company, provided the necessary approvals are 
obtained from the OTS, including (without limitation) approval pursuant 
to part 574 of this chapter. * * *
    (4) Stock holding companies. A mutual holding company may acquire 
control of a savings and loan holding company in the stock form that is 
not a subsidiary holding company, provided the necessary approvals are 
obtained from the OTS, including (without limitation) approval pursuant 
to part 574 of this chapter. * * *
* * * * *
    (6) * * *
    (i) * * *
    (B) It is lawful for the stock of such corporation to be purchased 
by a federal savings association under part 559 of this chapter or by a 
state savings association under the law of any state where any 
subsidiary savings association of the mutual holding company has its 
home office; and
* * * * *
    (b) Dispositions--(1) A mutual holding company shall provide 
written notice to the OTS at least 30 days prior to the effective date 
of any direct or indirect transfer of any of the stock that it holds in 
a subsidiary holding company, a resulting association, an acquiree 
association, or any subsidiary savings association that was in the 
mutual form when acquired by the mutual holding company, including 
stock transferred in connection with a pledge pursuant to 
Sec. 575.11(b) or any transfer of all or a substantial portion of the 
assets or liabilities of any such subsidiary holding company or 
association. * * * 
* * * * *
    5. Section 575.11 is amended by:
    a. Revising paragraph (b)(1) introductory text, redesignating 
existing paragraph (b)(1)(ii) as paragraph (b)(1)(iii), and adding a 
new paragraph (b)(1)(ii);
    b. Revising paragraph (b)(2);
    c. Revising the introductory text of paragraph (c) and paragraphs 
(c)(1) and (c)(3); and
    d. Revising paragraph (e).
    The revisions and addition read as follows:


Sec. 575.11  Operating restrictions.

* * * * *
    (b) Pledging stock--(1) No mutual holding company may pledge the 
stock of its resulting association, an acquiree association, or any 
subsidiary savings association that was in the mutual form when 
acquired by the mutual holding company (or its parent mutual holding 
company), unless the proceeds of the loan secured by the pledge are 
infused into the association whose stock is pledged. No mutual holding 
company may pledge the stock of its subsidiary holding company unless 
the proceeds of the loan secured by the pledge are infused into any 
savings association subsidiary of the subsidiary holding company that 
is a resulting association, an acquiree association, or a subsidiary 
savings association that was in the mutual form when acquired by the 
subsidiary holding company (or its parent mutual holding company). In 
the event the subsidiary holding company has more than one savings 
association subsidiary, the loan proceeds shall, unless otherwise 
approved by the OTS, be infused in equal amounts to each

[[Page 11366]]

savings association subsidiary. Any amount of the stock of such 
association or subsidiary holding company may be pledged for these 
purposes. Nothing in this paragraph (b)(1) shall be deemed to prohibit:
* * * * *
    (ii) The payment of dividends from a subsidiary holding company to 
its mutual holding company parent to the extent otherwise permissible; 
or
* * * * *
    (2) Within ten days after its pledge of stock pursuant to paragraph 
(b)(1) of this section, a mutual holding company shall provide written 
notice to the OTS regarding the terms of the transaction (including the 
amount of principal and interest, repayment terms, maturity date, the 
nature and amount of collateral, and the terms governing seizure of the 
collateral) and shall include in such notice a certification that the 
proceeds of the loan have been transferred to the subsidiary savings 
association whose stock (or the stock of its parent subsidiary holding 
company) has been pledged.
* * * * *
    (c) Restrictions on stock repurchases. No subsidiary savings 
association of a mutual holding company that has any stockholders other 
than the association's mutual holding company and no subsidiary holding 
company that has any stockholders other than its parent mutual holding 
company shall repurchase any share of stock within three years of its 
date of issuance (which may include the time period the shares issued 
by the savings association were outstanding if the subsidiary holding 
company was formed after the initial issuance by the savings 
association), unless the repurchase:
    (1) Is part of a general repurchase made on a pro rata basis 
pursuant to an offer approved by the OTS and made to all stockholders 
of the association or subsidiary holding company (except that the 
parent mutual holding company may be excluded from the repurchase with 
the OTS' approval);
* * * * *
    (3) Is purchased in the open market by a tax-qualified or non-tax-
qualified employee stock benefit plan of the savings association (but 
not of a subsidiary holding company) in an amount reasonable and 
appropriate to fund such plan.
* * * * *
    (e) Restrictions on issuance of stock to insiders. A subsidiary of 
a mutual holding company that is not a savings association or 
subsidiary holding company may issue stock to any insider, associate of 
an insider or tax-qualified or non-tax-qualified employee stock benefit 
plan of the mutual holding company or any subsidiary of the mutual 
holding company, provided that such persons or plans provide written 
notice to the OTS at least 30 days prior to the stock issuance. 
Subsidiary savings associations and subsidiary holding companies may 
issue stock to such persons only in accordance with Sec. 575.7.
* * * * *
    6. Section 575.12 is amended by:
    a. Revising paragraph (a)(2);
    b. Revising paragraphs (b)(1)(ii) and (b)(1)(iii); and
    c. Revising paragraph (b)(2).
    The revisions read as follows:


Sec. 575.12  Conversion or liquidation of mutual holding companies.

    (a) * * *
    (2) Exchange of savings association stock. Any stock issued 
pursuant to Sec. 575.7 by a subsidiary savings association or 
subsidiary holding company of a mutual holding company to persons other 
than the parent mutual holding company may be exchanged for the stock 
issued by the parent mutual holding company in connection with the 
conversion of the parent mutual holding company to stock form. The 
parent mutual holding company and the subsidiary holding company or 
savings association must demonstrate to the satisfaction of the OTS 
that the basis for the exchange is fair and reasonable.
    (b) * * * (1) * * *
    (ii) The default of the parent mutual holding company or its 
subsidiary holding company; or
    (iii) Foreclosure on any pledge by the mutual holding company of 
subsidiary savings association stock or subsidiary holding company 
stock pursuant to Sec. 575.11(b).
    (2) Except as provided in paragraph (b)(3) of this section, the net 
proceeds of any liquidation of any mutual holding company shall be 
transferred to the members of the mutual holding company or the stock 
holders of the subsidiary holding company in accordance with the 
charter of the mutual holding company or subsidiary holding company.
* * * * *
    7. Section 575.14 is added to read as follows:


Sec. 575.14  Subsidiary holding companies.

    (a) Subsidiary holding companies. A mutual holding company may 
establish a subsidiary holding company as a direct subsidiary to hold 
100% of the stock of its savings association subsidiary. The formation 
and operation of the subsidiary holding company may not be utilized as 
a means to evade or frustrate the purposes of this part 575 or part 
563b of this chapter. The subsidiary holding company may be established 
either at the time of the initial mutual holding company reorganization 
or at a subsequent date, subject to the approval of the OTS.
    (b) Stock issuances. For purposes of Secs. 575.7 and 575.8, the 
subsidiary holding company shall be treated as a savings association 
issuing stock and shall be subject to the requirements of those 
sections. In the case of a stock issuance by a subsidiary holding 
company, the aggregate amount of outstanding common stock of the 
association owned or controlled by persons other than the subsidiary 
holding company's mutual holding company parent at the close of the 
proposed issuance shall be less than 50% of the subsidiary holding 
company's total outstanding common stock.
    (c) Charters and bylaws for subsidiary holding companies--(1) 
Charters. The charter of a subsidiary holding company shall be in the 
form set forth in this paragraph (c)(1) and may include any of the 
additional provisions permitted pursuant to paragraph (c)(2) of this 
section. The form of the charter is as follows:

Federal MHC Subsidiary Holding Company Charter

    Section 1. Corporate title. The full corporate title of the MHC 
subsidiary holding company is XXX.
    Section 2. Domicile. The domicile of the MHC subsidiary holding 
company shall be in the city of ____________________, in the state 
of ____________.
    Section 3. Duration. The duration of the MHC subsidiary holding 
company is perpetual.
    Section 4. Purpose and powers. The purpose of the MHC subsidiary 
holding company is to pursue any or all of the lawful objectives of 
a federal mutual holding company chartered under section 10(o) of 
the Home Owners' Loan Act, 12 U.S.C. 1467a(o), and to exercise all 
of the express, implied, and incidental powers conferred thereby and 
by all acts amendatory thereof and supplemental thereto, subject to 
the Constitution and laws of the United States as they are now in 
effect, or as they may hereafter be amended, and subject to all 
lawful and applicable rules, regulations, and orders of the Office 
of Thrift Supervision (``Office'').
    Section 5. Capital stock. The total number of shares of all 
classes of the capital stock that the MHC subsidiary holding company 
has the authority to issue is ____________, all of which shall be 
common stock of par [or if no par is specified then shares shall 
have a stated] value of ____________ per share. The shares may be 
issued from time to time as authorized by the board of directors 
without the approval of its shareholders, except as

[[Page 11367]]

otherwise provided in this section 5 or to the extent that such 
approval is required by governing law, rule, or regulation. The 
consideration for the issuance of the shares shall be paid in full 
before their issuance and shall not be less than the par [or stated] 
value. Neither promissory notes nor future services shall constitute 
payment or part payment for the issuance of shares of the MHC 
subsidiary holding company. The consideration for the shares shall 
be cash, tangible or intangible property (to the extent direct 
investment in such property would be permitted to the MHC subsidiary 
holding company), labor, or services actually performed for the MHC 
subsidiary holding company, or any combination of the foregoing. In 
the absence of actual fraud in the transaction, the value of such 
property, labor, or services, as determined by the board of 
directors of the MHC subsidiary holding company, shall be 
conclusive. Upon payment of such consideration, such shares shall be 
deemed to be fully paid and nonassessable. In the case of a stock 
dividend, that part of the retained earnings of the MHC subsidiary 
holding company that is transferred to common stock or paid-in 
capital accounts upon the issuance of shares as a stock dividend 
shall be deemed to be the consideration for their issuance.
    Except for shares issued in the initial organization of the MHC 
subsidiary holding company, no shares of capital stock (including 
shares issuable upon conversion, exchange, or exercise of other 
securities) shall be issued, directly or indirectly, to officers, 
directors, or controlling persons (except for shares issued to the 
parent mutual holding company) of the MHC subsidiary holding company 
other than as part of a general public offering or as qualifying 
shares to a director, unless the issuance or the plan under which 
they would be issued has been approved by a majority of the total 
votes eligible to be cast at a legal meeting.
    The holders of the common stock shall exclusively possess all 
voting power. Each holder of shares of common stock shall be 
entitled to one vote for each share held by such holder, except as 
to the cumulation of votes for the election of directors, unless the 
charter provides that there shall be no such cumulative voting. 
Subject to any provision for a liquidation account, in the event of 
any liquidation, dissolution, or winding up of the MHC subsidiary 
holding company, the holders of the common stock shall be entitled, 
after payment or provision for payment of all debts and liabilities 
of the MHC subsidiary holding company, to receive the remaining 
assets of the MHC subsidiary holding company available for 
distribution, in cash or in kind. Each share of common stock shall 
have the same relative rights as and be identical in all respects 
with all the other shares of common stock.
    Section 6. Preemptive rights. Holders of the capital stock of 
the MHC subsidiary holding company shall not be entitled to 
preemptive rights with respect to any shares of the MHC subsidiary 
holding company which may be issued.
    Section 7. Directors. The MHC subsidiary holding company shall 
be under the direction of a board of directors. The authorized 
number of directors, as stated in the MHC subsidiary holding 
company's bylaws, shall not be fewer than five nor more than fifteen 
except when a greater or lesser number is approved by the Director 
of the Office, or his or her delegate.
    Section 8. Amendment of charter. Except as provided in Section 
5, no amendment, addition, alteration, change or repeal of this 
charter shall be made, unless such is proposed by the board of 
directors of the MHC subsidiary holding company, approved by the 
shareholders by a majority of the votes eligible to be cast at a 
legal meeting, unless a higher vote is otherwise required, and 
approved or preapproved by the Office.

Attest:----------------------------------------------------------------
Secretary of the Subsidiary Holding Company

By:--------------------------------------------------------------------
President or Chief Executive Officer of the Subsidiary Holding 
Company

Attest:----------------------------------------------------------------
Secretary of the Office of Thrift Supervision

By:--------------------------------------------------------------------
Director of the Office of Thrift Supervision

Effective Date:--------------------------------------------------------

    (2) Charter amendments. The rules and regulations set forth in 
Sec. 552.4 of this chapter regarding charter amendments and reissuances 
of charters (including delegations and filing instructions) shall be 
applicable to subsidiary holding companies to the same extent as if the 
subsidiary holding companies were Federal stock savings associations, 
except that, with respect to the pre-approved charter amendments set 
forth in Sec. 552.4 of this chapter, the reference to home office in 
Sec. 552.4(b)(2) of this chapter shall be deemed to refer to the 
domicile of the subsidiary holding company and the requirements of 
Sec. 545.95 of this chapter shall not apply to subsidiary holding 
companies.
    (3) Bylaws. The rules and regulations set forth in Sec. 552.5 of 
this chapter regarding bylaws (including their content, any amendments 
thereto, delegations, and filing instructions) shall be applicable to 
subsidiary holding companies to the same extent as if subsidiary 
holding companies were federal stock savings associations. The model 
bylaws for Federal stock savings associations set forth in the OTS 
Applications Processing Handbook shall also serve as the model bylaws 
for subsidiary holding companies, except that the term ``association'' 
each time it appears therein shall be replaced with the term 
``Subsidiary Holding Company.''
    (4) Annual reports and books and records. The rules and regulations 
set forth in Secs. 552.10 and 552.11 of this chapter regarding annual 
reports to stockholders and maintaining books and records shall be 
applicable to subsidiary holding companies to the same extent as if 
subsidiary holding companies were federal stock savings associations.

    Dated: March 3, 1998.

    By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 98-5896 Filed 3-6-98; 8:45 am]
BILLING CODE 6720-01-P