[Federal Register Volume 65, Number 213 (Thursday, November 2, 2000)]
[Proposed Rules]
[Pages 66116-66118]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-27841]



[[Page 66115]]

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Part IV





Department of the Treasury





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Office of Thrift Supervision



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12 CFR Part 516 et al.



Federal Savings Association Bylaws; Integrity of Directors and 
Application Processing; Proposed Rules

  Federal Register / Vol. 65, No. 213 / Thursday, November 2, 2000 / 
Proposed Rules  

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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 544 and 552

[No. 2000-93]
RIN 1550-AB39


Federal Savings Association Bylaws; Integrity of Directors

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of Thrift Supervision (OTS) is proposing to change 
its regulations concerning corporate governance to create a class of 
preapproved optional bylaw provisions that federally chartered savings 
associations may adopt. The proposal decreases regulatory burden on 
federal savings associations by permitting them to adopt certain bylaws 
expeditiously without prior OTS review. In addition, OTS is proposing 
the first preapproved optional bylaw. If adopted by a savings 
association, the bylaw would preclude persons who, among other things, 
are under indictment for or have been convicted of certain crimes, or 
are subject to a cease and desist order entered by any of the banking 
agencies, from being members of the association's board of directors. 
The proposed preapproved bylaw is intended to permit federal savings 
associations to better protect their business from the adverse effects 
that are likely to result when the reputation of its board members does 
not elicit the public's trust.

DATES: Your comments must be received by January 2, 2001.

ADDRESSES:
    Mail: Send comments to Manager, Dissemination Branch, Information 
Management and Services Division, Office of Thrift Supervision, 1700 G 
Street, NW., Washington, DC 20552, Attention Docket No. 2000-93.
    Delivery: Hand deliver comments to the Guard's Desk, East Lobby 
Entrance, 1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, 
Attention Docket No. 2000-93.
    Facsimiles: Send facsimile transmissions to FAX Number (202) 906-
7755, Attention Docket No. 2000-93; or (202) 906-6956 (if comments are 
over 25 pages).
    E-Mail: Send e-mails to ``public.info@ots.treas.gov">public.info@ots.treas.gov'', Attention 
Docket No. 2000-93, and include your name and telephone number.
    Public Inspection: Interested persons may inspect comments at the 
Public Reference Room, 1700 G St. NW., from 10 a.m. until 4 p.m. on 
Tuesdays and Thursdays or obtain comments and/or an index of comments 
by facsimile by telephoning the Public Reference Room at (202) 906-5900 
from 9 a.m. until 5 on business days. Comments and the related index 
will also be posted on the OTS Internet Site at ``www.ots.treas.gov''.

FOR FURTHER INFORMATION CONTACT: Aaron B. Kahn, Special Counsel (202) 
906-6263, Office of Thrift Supervision, 1700 G Street, NW., Washington, 
DC 20552.

SUPPLEMENTARY INFORMATION:

I. Proposed Regulation

    OTS requires federal savings associations to operate under bylaws 
that meet certain regulatory requirements and has drafted a set of 
``model'' bylaws that would satisfy those requirements. The text of 
this set of model bylaws for federal savings associations is located in 
the Application Processing Handbook (Handbook). Federal savings 
associations may adopt this set of model bylaws without prior notice to 
OTS, provided that they notify OTS within 30 days after their adoption.
    The current proposal is intended to reduce regulatory burden on 
federal savings associations that wish to address other topics by 
providing additional preapproved ``optional'' bylaws that federal 
savings associations may adopt with a post-adoption notice to OTS. 
Federal savings associations are not required to adopt the optional 
bylaws. The amendment simply reduces the regulatory burden on federal 
savings associations desiring to adopt the specific provisions.

II. Proposed Bylaw

    In addition to seeking comment on the proposal to include 
preapproved optional bylaws in the Handbook, OTS also requests comment 
on the first proposed preapproved bylaw. This bylaw would provide 
standards for the integrity of directors of federal savings 
associations.
    It is important that the directors of savings associations be 
persons of good character and integrity. They oversee management and 
they have the ultimate responsibility for the operations of the savings 
association. In addition, directors of savings associations are 
expected to assist their institutions in attracting and retaining 
business. Their reputations in the community or communities served by 
the savings association reflect on the institution and affect their 
ability to help the institution attract and retain business. People 
must be able to trust the institution that holds their money. Moreover, 
people may be wary of contracting with an institution that they do not 
trust. Thus, a director who has an exemplary reputation may be a 
valuable asset to the association. Conversely, a director whose 
reputation is tainted, for example because a court has found he or she 
personally profited from a breach of his or her fiduciary duties, may 
injure an institution just by being a member of the board.
    This proposed bylaw would permit federal savings associations to 
assure themselves that those persons subject to adverse actions 
concerning their fiduciary integrity or compliance with financial 
regulatory laws do not become board members. The proposed optional 
bylaw does not bar anyone from the industry. Rather, the proposed rule 
and optional bylaw would merely permit an individual federal savings 
association to set qualifications for board membership for that 
institution. Federal savings associations that adopt the preapproved 
bylaw amendment would not have to provide prior notice to OTS, but 
would have to file notice of the adoption of the bylaw within 30 days 
after adopting the bylaw.\1\
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    \1\ Federal savings associations that wish to adopt a bylaw 
addressing director qualifications that does not conform to the 
preapproved bylaw amendment would continue to be required to obtain 
prior approval from OTS.
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    Congress has repeatedly expressed concerns about the character and 
integrity of the people who control savings associations. When it 
created the federal savings and loan regulatory system, Congress 
directed the federal regulatory agency to give primary consideration to 
the best practices then existing in the savings and loan industry. See 
12 U.S.C. 1464(a), 48 Stat. 128, 132 (1933). One such practice was that 
directors of savings associations should be persons of good judgment 
and character who have the respect and confidence of the community 
served by their respective institution. See Joseph H. Sundheim, Law of 
Building and Loan Associations, Sec. 71 (3d ed.1933).
    In 1966 Congress specifically addressed the integrity issue. At 
that time Congress gave the banking agencies authority to remove 
officers and directors of a savings association and prohibit them from 
affiliating with the institution in the future if the officer or 
director had engaged in certain conduct.\2\ Congress subsequently

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broadened the scope of the prohibition to prevent such persons from 
being affiliated with other insured depository institutions, including 
savings associations.\3\
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    \2\ See Financial Institutions Supervisory Act of 1966, Pub. L. 
89-695, 80 Stat. 1028, 1030-32, 1039-40, 1049-50. Currently, section 
8(e) of the Federal Deposit Insurance Act (FDIA), provides for the 
removal and prohibition of persons a banking agency finds to have 
committed certain acts involving personal dishonesty or willful or 
continuing disregard for the safety or soundness of an insured 
depository institution and has either received financial gain or 
other benefit, injured the institution or prejudiced the interests 
of its depositors. Similarly, section 19 of the FDIA prohibits 
persons who have been convicted of any criminal offense involving 
dishonesty or a breach of trust from controlling or participating in 
the conduct of the affairs of any insured depository institutions 
without the prior consent of the Federal Deposit Insurance 
Corporation. See also 12 U.S.C. 1818(g).
    \3\ See 12 U.S.C. 1818(e).
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    The fact that Congress found certain conduct so egregious that it 
authorized the debarment of perpetrators from the industry does not 
demonstrate that it believed everyone else was qualified to sit on the 
boards of savings associations. For example, Congress' concerns 
regarding the management of savings associations is evident in: (i) The 
Change in Bank Control Act,\4\ which allows the applicable Federal 
banking agency to disapprove a proposed acquisition if, among other 
things, the competence, experience and integrity of any of the 
acquiror's proposed management personnel might jeopardize the financial 
stability of the institution or prejudice the interests of the 
depositors of the institution; and (ii) the holding company acquisition 
provisions of the Home Owners' Loan Act, which require OTS in reviewing 
managerial resources to consider the competence, experience and 
integrity of directors of an acquiror and the savings association 
involved.\5\
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    \4\ 12 U.S.C. 1817(j)(7)(D).
    \5\ 12 U.S.C. 1467a(e)(1)(B), (e)(2).
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    Congress again recognized the need to ensure integrity in the 
banking industry when it enacted the Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989 (FIRREA). In FIRREA, Congress 
required certain financial institutions to provide prior notice to 
their federal regulator of any new board members and authorized the 
regulator to disapprove such a board member if he or she lacked the 
requisite character or integrity to advance the interests of the 
depositors of the institution.\6\
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    \6\ Section 914 of FIRREA (12 U.S.C. 1831i), provided that the 
banking agencies should disapprove a proposed director ``if the 
competence, experience, character, or integrity of the [proposed 
director] indicates that it would not be in the best interests of 
the depositors of the depository institution or in the best 
interests of the public to permit the individual to be [so] 
employed. * * *'' In 1996, Congress changed the categories of 
institutions subject to this requirement. See Section 2209 of the 
Economic Growth and Regulatory Paperwork Reduction Act, P.L. 104-
208, 110 Stat. 3009-409.
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    OTS has also been concerned with the character of persons who would 
hold director positions in savings associations. Under OTS's 
regulations governing the chartering of federal savings associations, 
the background of the proposed directors of a new federal association 
must reflect a history of personal integrity.\7\
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    \7\ See 12 CFR 543.3(d)(2) (2000).
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    The proposed bylaw standards for determining integrity of 
prospective board members are derived in part from the existing 
standards in Sec. 563.39(b)(1) for terminating savings association 
officers for cause. Because that provision deals with the integrity of 
officials who are supervised by the board of directors, the board 
members should be held to at least a comparable standard of integrity. 
The bylaw focuses particularly on actions against an individual 
predicated on serious dishonesty, breach of fiduciary duty or willful 
violation of financial regulatory law.
    The wording of the proposed optional bylaw dealing with directors' 
integrity is as follows:

    A person is not qualified to serve as a director if he or she: 
(1) Is under indictment for, or has ever been convicted of, a 
criminal offense involving dishonesty or breach of trust and the 
penalty for such offense could be imprisonment for more than one 
year, or (2) is a person against whom a banking agency has, within 
the past ten years, issued a cease and desist order for conduct 
involving dishonesty or breach of trust and that order is final and 
not subject to appeal, or (3) has been found either by a regulatory 
agency whose decision is final and not subject to appeal or by a 
court to have (i) breached a fiduciary duty involving personal 
profit or (ii) committed a willful violation of any law, rule or 
regulation governing banking, securities, commodities or insurance, 
or any final cease and desist order issued by a banking, securities, 
commodities or insurance regulatory agency.

    OTS welcomes comment on those standards, and also requests comments 
on whether (and, if so, why) the bylaw should also prevent persons 
covered by the bylaw from nominating anyone for board membership.

III. Plain Language Statement

    OTS invites your comments on how to make this proposed rule easier 
to understand. Do we clearly state the requirements in the rule? If 
not, how could the rule be more clearly stated?

IV. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS 
certifies that this proposal will not have a significant impact on a 
substantial number of small entities. The proposal reduces regulatory 
burden on federal savings associations, including small federal savings 
associations, by permitting them to adopt certain bylaws without 
providing prior notice to OTS. The proposal does not require any 
savings association to modify its bylaws and all federal savings 
associations currently can request permission to adopt such bylaws, if 
they choose to do so. Accordingly, a regulatory flexibility analysis is 
not required.

V. Executive Order 12286

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

VI. Unfunded Mandates Reform Act of 1995

    OTS has determined that this proposed rule will not result in 
expenditures by state, local and tribal governments, or by the private 
sector, of $100 million or more in any one year. Therefore, OTS has not 
prepared a budgetary impact statement or specifically addressed the 
regulatory alternatives considered. The proposal simply reduces 
regulatory burden on federal savings associations by permitting them to 
adopt certain bylaws without having to first request permission from 
OTS.

List of Subjects

12 CFR Part 544

    Reporting and recordkeeping requirements, Savings associations.

12 CFR Part 552

    Reporting and recordkeeping requirements, Savings associations, 
Securities.

    Accordingly, the Office of Thrift Supervision proposes to amend 
title 12, chapter V, of the Code of Federal Regulations as set forth 
below:

PART 544--CHARTER AND BYLAWS

    1. The authority citation for part 544 continues to read as 
follows:

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

    2. Section 544.5 is amended by revising paragraph (c)(1)(iii) to 
read as follows:


Sec. 544.5  Federal mutual savings association bylaws.

* * * * *
    (c) * * *
    (1) * * *
    (iii) For purposes of this paragraph (c), bylaw provisions that 
adopt the

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language of the model or optional bylaws in OTS's Application 
Processing Handbook, if adopted without change, and filed with OTS 
within 30 days after adoption, are effective upon adoption.
* * * * *

PART 552--INCORPORATION, ORGANIZATION, AND CONVERSION OF FEDERAL 
STOCK ASSOCIATIONS

    3. The authority citation for part 552 continues to read as 
follows:

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

    4. Section 552.5 is amended by revising paragraph (b)(1)(iii) to 
read as follows:


Sec. 552.5  Bylaws.

* * * * *
    (b) * * *
    (1) * * *
    (iii) Bylaw provisions that adopt the language of the model or 
optional bylaws in OTS's Application Processing Handbook, if adopted 
without change, and filed with OTS within 30 days after adoption, are 
effective upon adoption.
* * * * *

    Dated: October 25, 2000.

    By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 00-27841 Filed 11-1-00; 8:45 am]
BILLING CODE 6720-01-P