[Federal Register Volume 66, Number 51 (Thursday, March 15, 2001)]
[Rules and Regulations]
[Pages 15017-15020]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-6400]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 544 and 552

[No. 2001-15]
RIN 1550-AB39


Federal Savings Association Bylaws; Integrity of Directors

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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[[Page 15018]]

SUMMARY: The Office of Thrift Supervision (OTS) is issuing a final rule 
changing its regulations concerning corporate governance to create a 
class of preapproved optional bylaw provisions that federally chartered 
savings associations may adopt. The final rule decreases regulatory 
burden on federal savings associations by permitting them to adopt 
certain bylaws expeditiously without prior OTS review. In addition, OTS 
is issuing the first preapproved optional bylaw. If adopted by a 
federal savings association, the bylaw will 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 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.

EFFECTIVE DATE: April 16, 2001.

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

SUPPLEMENTARY INFORMATION:

I. Background

    On November 2, 2000, OTS published a proposed rule amending its 
corporate governance rules for federally chartered savings associations 
to create a class of preapproved optional bylaw provisions that those 
savings associations may adopt without prior OTS review. 65 FR 66166. 
The proposal was intended to decrease regulatory burden on federal 
savings associations by permitting them to adopt certain bylaws 
expeditiously. In addition, OTS proposed the first preapproved optional 
bylaw. The proposed bylaw was 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.

II. Summary of Comments and Description of Final Rule and 
Preapproved Bylaw

A. Discussion of the Comments on the Rule

    The public comment period on the proposed rule and proposed 
preapproved bylaw closed on January 2, 2001. Three trade associations 
and two attorneys filed comments.
    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 proposal would provide additional preapproved ``optional'' 
bylaws that federal savings associations may adopt with a post-adoption 
notice to OTS.\1\ 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 one or more of 
the specific optional bylaw provisions. The preapproved optional bylaws 
will be published in the Handbook in a manner that will differentiate 
them from the model bylaws.
    Two trade associations supported the creation of a class of 
optional bylaws. One of the associations stated that it ``will enable 
OTS-chartered institutions to more effectively address corporate 
governance issues while reducing attendant regulatory burdens.'' No 
other comments directly addressed the proposal that there should be a 
class of optional bylaws. Accordingly, the proposed rule is adopted 
without change.\2\
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    \1\ Mutual Holding Companies may also adopt any preapproved 
optional bylaw. See 12 CFR 575.9(a)(4).
    \2\ Under section 302(b)(1)(A) of the Riegle Community 
Development Act, 12 U.S.C. 4802(b)(1)(A), OTS finds good cause for 
this rule to become effective thirty days after publication in the 
Federal Register rather than the first day of a calendar quarter. 
The rule reduces regulatory burdens and does not impose additional 
reporting requirements on savings associations.
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B. Discussion of the Comments on the Preapproved Bylaw

    In addition to seeking comment on the proposal to include 
preapproved optional bylaws in the Handbook, OTS also requested comment 
on the first proposed preapproved bylaw. This bylaw provides standards 
for the integrity of directors of those federal savings associations 
that choose to adopt it. The bylaw focuses particularly on actions 
against an individual predicated on serious dishonesty, breach of 
fiduciary duty or willful violation of financial regulatory law. These 
matters directly relate to the trustworthiness of persons who are 
overseeing the operation of savings associations.
    The wording of the 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.

    The optional bylaw permits federal savings associations to assure 
themselves that persons subject to adverse actions concerning their 
fiduciary integrity or compliance with financial regulatory laws do not 
become board members.
    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.
    The optional bylaw does not bar anyone from the industry. Rather, 
the optional bylaw merely permits an individual federal savings 
association to set qualifications for board membership for that 
institution. Federal savings associations that adopt the preapproved 
bylaw amendment will not have to provide prior notice to OTS, but will 
have to file notice of the adoption of the

[[Page 15019]]

bylaw within 30 days after adopting the bylaw.\3\
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    \3\ Federal savings associations that wish to adopt a bylaw 
addressing director qualifications that does not conform to the 
preapproved bylaw amendment must still obtain prior approval from 
OTS.
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    Two trade associations commented that the initial optional bylaw 
was appropriate. One association also stated that it believed the bylaw 
should not be expanded to prevent ineligible persons from nominating 
otherwise eligible candidates for director positions. It reasoned that 
such a broad provision would be burdensome on regulated institutions 
and that the ``important factor is that directors themselves be 
individuals of integrity.'' OTS agrees that the primary focus should be 
on the integrity of the individual directors. In the absence of any 
reasoned support for a broader provision, OTS will not expand the 
wording of the preapproved bylaw to encompass nominees of persons 
covered by the terms of the bylaw.
    Both attorneys and one trade association recommended that the bylaw 
not be adopted. The trade association stated that the proposal was 
unnecessary. One attorney asserted that the available data did not 
support a conclusion that a savings association had ever suffered any 
adverse consequence due to a director having been subject to a cease 
and desist order. The comment did not cite any studies supporting its 
position. In our view, trust is fundamental to the banking industry and 
a lack of trust in the managers of institutions will adversely affect 
their businesses. However, the magnitude of such an effect may be 
difficult to ascertain in any particular instance.
    The trade association and the two attorneys argued that the bylaw 
exceeds the agency's legal authority. All three relied principally on 
Atherton v. FDIC, 519 U.S. 213 (1997), where the Supreme Court held 
that there was no federal common law of fiduciary duty applicable to 
federally chartered savings associations. However, Atherton is 
inapposite. First, OTS is not imposing any requirements. All OTS is 
doing by adopting the optional bylaw is permitting private parties who 
desire to have integrity requirements for their boards of directors to 
do so without first requesting OTS approval. Second, the bylaw does not 
purport to create any substantive fiduciary duties. Rather, the bylaw, 
if adopted by a savings association, would prevent an individual who 
violated a fiduciary duty found elsewhere in the substantive law from 
serving as a director. Third, even if OTS was deemed to be creating a 
substantive fiduciary duty by permitting savings associations to adopt 
the bylaw, OTS's action would be proper. The Court in Atherton 
indicated that ``federal regulations validly promulgated pursuant to 
statute'' could provide a federal standard of conduct. Atherton, 519 
U.S. at 219, see also 218, 225. OTS has broad statutory authority to 
promulgate regulations prescribing the organization and operation of 
federal savings associations. See 12 U.S.C. 1464(a). Thus, although OTS 
does not consider the bylaw to constitute a regulation, if it is a 
rule, the Atherton decision would not provide a basis for objection to 
the bylaw.
    Furthermore, one trade association's and the two attorneys' 
comments assumed that the analysis of the propriety of the bylaw was 
not affected by its ``voluntary'' nature, apparently because they 
believe that institutions will not really be free to choose whether or 
not to adopt it. From that premise they asserted that the agency cannot 
properly impose integrity standards that are more restrictive than 
those specifically adopted by Congress for precluding persons from 
involvement in the affairs of institutions. First, contrary to the view 
expressed by those comments, adoption of the preapproved bylaw will be 
completely voluntary. Each federal savings association will be able to 
choose whether to adopt the preapproved bylaw. OTS will not require any 
association to adopt it. Second, in any event, the specific statutory 
preclusion provisions were not intended to be the only authority for 
either a federal savings association or OTS to take action to insure 
the integrity of the persons controlling the institution. While 
Congress provided that the banking agencies could preclude certain 
persons, Congress did not require savings associations to accept all 
others as qualified to serve on their boards. In addition, as noted 
above, Congress gave OTS very broad authority to provide regulations 
governing the organization and operation of federally chartered savings 
associations. Indeed, OTS and its predecessor agency have long provided 
in their regulations and model bylaws for the removal of directors for 
cause, and have defined cause in a manner that is similar to the 
optional bylaw. See 12 CFR 544.5(b)(11), 552.6-1(f)(1), 563.39(b)(1). 
Congress has conducted major reviews of and amended the Home Owners' 
Loan Act without indicating that those regulations are improper.\4\ 
Therefore, it should be presumed that Congress has acknowledged the 
agency's authority to promulgate regulations in this area.
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    \4\ As noted in the preamble to the proposed regulation and 
bylaw, Congress has also repeatedly expressed concern specifically 
about the need for integrity in running savings associations. 66 FR 
66116-17. In doing so, however, Congress did not overturn OTS's 
regulation in this area.
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    Moreover, even assuming a federal savings association adopts the 
optional bylaw, the bylaw only prevents an affected person from serving 
on that particular association's board. The bylaw does not prohibit 
anyone from otherwise becoming involved in the affairs of the savings 
association and only affects relations with the particular association 
that chooses to adopt it. Finally, as the comments demonstrate, there 
is no way to know how many institutions will adopt the bylaw.\5\ For 
these reasons, the provision is not comparable to the statutory 
provisions for removal and prohibition of institution affiliated 
parties.
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    \5\ One comment suggested that it is improper for OTS to 
authorize federal savings associations to adopt a provision that is 
not available to state chartered institutions. It is not improper. 
See 12 U.S.C. 1464(a). Absent safety and soundness concerns, OTS's 
corporate governance authority is generally limited to federal 
savings associations. Nothing in this rule in any way precludes a 
state from choosing to permit state chartered institutions to have 
comparable bylaws.
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    Both attorneys asserted that the bylaw would be an impermissible 
retroactive provision because it could affect persons based on their 
past conduct. However, we know of no principle that prevents a private 
corporation from changing its requirements for board membership. Even 
assuming that by permitting institutions to adopt the bylaw, OTS has 
affected persons based on their past conduct, the action is 
permissible. The purpose of the bylaw is remedial, not punitive. The 
bylaw is designed to protect the institution that adopts it. Nor does 
the bylaw impact persons who engaged in conduct that was proper when 
the conduct occurred. Therefore, we believe the bylaw is proper.
    Similarly, one attorney suggested that the provision might 
constitute a bill of attainder because he assumed that it is directed 
at either one or only a few persons. That suggestion is unfounded. 
Again, OTS is not imposing the bylaw on anyone. Moreover, OTS does not 
know and cannot know how many persons may ultimately be affected by the 
bylaw. However, OTS has issued cease and desist orders to over 300 
persons since January 1, 1992, and many of those orders related to 
conduct involving dishonesty or breach of trust.

[[Page 15020]]

Thus, it is clear that the bylaw does not constitute a bill of 
attainder.
    In addition, the attorneys raised questions concerning the 
applicability of the bylaw to persons who consented to cease and desist 
orders. The provision could affect persons who entered into consent 
cease and desist orders. The fact that the bylaw's restriction on board 
membership may be an additional and possibly unforeseen consequence of 
a cease and desist order does not make the provision improper.
    One attorney noted that the bylaw would apparently debar a person 
even where the cease and desist order had been vacated by the agency 
that issued it. Generally, even if an agency vacates or lifts a cease 
and desist order before the ten-year period is over, the bylaw 
provision would still apply. The public perception that the person 
lacks the requisite trustworthiness to be on an institution's board 
would still exist because of the violation that was the basis of the 
order. However, if an agency vacates an order because it finds that it 
was improperly entered, that acknowledgement should be sufficient to 
prevent any harm to an institution and, therefore, the cease and desist 
order should be disregarded.
    Finally, one of the attorneys raised questions concerning how a 
savings association will be able to determine whether a cease and 
desist order was actually issued for conduct involving dishonesty or 
breach of trust when the order itself does not indicate the reasons for 
its issuance. When both the notice of charges and the order are silent 
on the issue, a savings association should not assume that the order 
was issued for conduct involving dishonesty or breach of trust.

III. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS 
certifies that this rule will not have a significant impact on a 
substantial number of small entities. The rule 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 rule 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.

IV. Executive Order 12286

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

V. Unfunded Mandates Reform Act of 1995

    OTS has determined that this 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 rule 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 amends 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 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: March 8, 2001.

    By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 01-6400 Filed 3-14-01; 8:45 am]
BILLING CODE 6720-01-P