[Federal Register Volume 71, Number 127 (Monday, July 3, 2006)]
[Proposed Rules]
[Pages 37862-37868]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-10341]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 563

[No. 2006-24]
RIN 1550-AC06


Subordinated Debt Securities and Mandatorily Redeemable Preferred 
Stock

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Notice of proposed rulemaking.

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[[Page 37863]]

SUMMARY: A savings association must obtain OTS approval (or non-
objection) before it may include subordinated debt securities or 
mandatorily redeemable preferred stock in supplementary (tier 2) 
capital. OTS rules at 12 CFR 563.81 set forth application and notice 
procedures, requirements that securities must meet in order to be 
included in supplementary capital, and conditions for OTS approval (or 
non-objection), and also address other matters.
    OTS is proposing to update this rule. The proposed rule would 
delete several unnecessary or outdated requirements and would conform 
certain provisions, such as maturity period requirements and purchaser 
restrictions, to the rules issued by the other federal banking 
agencies. In addition, the proposed rule would reconcile conflicting 
rules, add appropriate statutory cross-references, and rewrite the rule 
in plain language.

DATES: Comments must be received on or before September 1, 2006.

ADDRESSES: You may submit comments, identified by No. 2006-24, by any 
of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail address: [email protected]. Please 
include No. 2006-24 in the subject line of the message and include your 
name and telephone number in the message.
     Fax: (202) 906-6518.
     Mail: Regulation Comments, Chief Counsel's Office, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention: No. 2006-24.
     Hand Delivery/Courier: Guard's Desk, East Lobby Entrance, 
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: 
Regulation Comments, Chief Counsel's Office, Attention: No. 2006-24.
    Instructions: All submissions received must include the agency name 
and docket number for this rulemaking. All comments received will be 
posted without change to the OTS Internet Site at http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1, including any 
personal information provided.
    Docket: For access to the docket to read background documents or 
comments received, go to http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1. In addition, you may inspect comments 
at the Public Reading Room, 1700 G Street, NW., by appointment. To make 
an appointment for access, call (202) 906-5922, send an e-mail to 
public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile transmission to (202) 
906-7755. (Prior notice identifying the materials you will be 
requesting will assist us in serving you.) We schedule appointments on 
business days between 10 a.m. and 4 p.m. In most cases, appointments 
will be available the next business day following the date we receive a 
request.

FOR FURTHER INFORMATION CONTACT: David W. Riley, Senior Analyst, (202) 
906-6669; Capital Policy, Karen Osterloh, Special Counsel, (202) 906-
6639, Regulations and Legislation Division, or Gary Jeffers, Senior 
Attorney, (202) 906-6457, Business Transactions Division, Office of 
Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Discussion

    A savings association must obtain OTS approval (or non-objection) 
before it may include subordinated debt securities or mandatorily 
redeemable preferred stock in supplementary (tier 2) capital. OTS rules 
at 12 CFR 563.81 set forth application and notice procedures, 
requirements that securities must meet in order to be included in 
supplementary capital, and conditions for OTS approval (or non-
objection), and also address other matters.
    OTS is proposing to update this rule. The proposed rule would 
delete several unnecessary or outdated requirements and would conform 
certain provisions, such as maturity period requirements and purchaser 
restrictions, to the rules issued by the other federal banking 
agencies. In addition, the proposed rule would reconcile conflicting 
OTS rules, add appropriate statutory cross-references, and rewrite the 
rule in plain language. A section-by-section description of the 
proposed rule follows.

Scope--Proposed Sec.  563.81(a)

    Paragraph (a) sets out the scope of the proposed rule. This new 
paragraph states that a savings association must comply with Sec.  
563.81 if it wishes to include covered securities in supplementary 
capital under 12 CFR 567.5(b). Paragraph (a) also states that Sec.  
563.81 does not apply if a savings association does not intend to 
include covered securities in supplementary capital. OTS notes that a 
savings association that issues subordinated debt securities must 
comply with the general borrowing limitations at 12 CFR 563.80, whether 
or not the savings association intends to include the securities in 
supplementary capital.

Application and Notice Procedures--Proposed Sec.  563.81(b)

    OTS has substantially amended its application processing rules in 
the past years. As a result, 12 CFR part 516 contains various 
procedures that overlap and duplicate the application processing 
requirements set out in existing Sec.  563.81. Proposed paragraph (b) 
would streamline the rule by cross-referencing the application and 
notice filing procedures at part 516, subpart A. The proposed rule 
would also clarify that a savings association may file its application 
or notice before or after it issues covered securities, but may not 
include the covered securities in supplementary capital until OTS 
approves the application or does not object to the notice.
    The proposed rule includes a new provision at paragraph (b)(2). 
This provision reminds savings associations that they must comply with 
OTS securities offering rules at 12 CFR part 563g by filing an offering 
circular for a proposed issuance of covered securities, unless the 
offering qualifies for an exemption under that part.

Securities Requirements--Proposed Sec.  563.81(c)

    Proposed paragraph (c) addresses the form of securities, maturity 
requirements, mandatory prepayment restrictions, and indenture 
agreements.
    Form. The existing rule contains various requirements regarding the 
form of covered securities.\1\ Paragraph (c)(1) of the proposed rule 
would restate these requirements with certain modifications. Under the 
proposed rule, each certificate evidencing a covered security must:
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    \1\ 12 CFR 563.81(d)(1).
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     Bear a legend indicating that the security is not a 
savings account or deposit, and is not insured by the United States or 
any agency or fund of the United States.
     State that the security is subordinated on liquidation, as 
to principal, interest, and premium, to all claims against the savings 
association that have the same priority as savings accounts or a higher 
priority.
     State that the security is not secured by the savings 
association's assets or the assets of any affiliate of the savings 
association.
     State that the security is not eligible collateral for a 
loan by the savings association.
     Restate certain statutory prohibitions. The existing rule 
requires covered securities to restate the prohibition on the payment 
of

[[Page 37864]]

dividends or interest at 12 U.S.C. 1828(b) (prohibiting payments while 
an insured depository institution is in default on payment of its 
Federal Deposit Insurance Corporation (FDIC) assessment). The proposed 
rule adds that subordinated debt securities must restate the 
prohibition on the payment of principal and interest at 12 U.S.C. 
1831o(h) (prohibiting payments by a critically undercapitalized insured 
depository institution).\2\
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    \2\ OTS notes that certain prepayments may be capital 
distributions that are subject to 12 CFR part 563, subpart E.
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     For subordinated debt securities, state (or refer to a 
document stating) the terms under which the savings association may 
prepay the obligation.
     State (or refer to a document stating) that the savings 
association must obtain OTS approval before the voluntarily prepayment 
of principal on subordinated debt securities, the acceleration of 
payment of principal on subordinated debt securities, or the 
voluntarily redemption of mandatorily redeemable preferred stock (other 
than scheduled redemptions), if the savings association fails to meet 
certain capital tests before or after the repayment. The current rule 
refers to regulatory capital standards at 12 CFR part 567. The proposed 
rule adds that OTS approval is required if the savings association is 
undercapitalized, significantly undercapitalized, or critically 
undercapitalized under prompt corrective action standards (PCA 
standards) at 12 CFR part 565.
    The proposed rule would delete three provisions that are codified 
as form requirements in the existing rule. First, the proposed rule 
would delete various purchaser prohibitions. Under the existing rule, 
each certificate evidencing covered securities must state that the 
issuer is prohibited from selling the covered securities to another 
savings association or to a corporate affiliate of a savings 
association, without the prior written approval of OTS. The existing 
rule, however, permits an issuer to sell covered securities to its 
corporate affiliates, or to a diversified savings and loan holding 
company and its non-savings association affiliates.\3\
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    \3\ 12 CFR 563.81(d)(1)(i)(B). This restriction is restated in 
various forms in several other places in the existing rule. See 12 
CFR 563.81(d)(1)(vi)(C), (d)(3)(ii), and (k)(3)(ii).
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    The Federal Home Loan Bank Board (FHLBB), as the operating head of 
the Federal Savings and Loan Insurance Corporation (FSLIC), originally 
promulgated this provision. The purchaser restriction was primarily 
intended to protect FSLIC and was based on the view that no risk is 
transferred outside the group of institutions with FSLIC-insured 
accounts when the purchaser is another insured savings association or 
its affiliate.\4\ OTS questions whether it is appropriate to continue 
to impose this requirement on covered securities. Neither FDIC, which 
is charged with the primary responsibility of protecting the Deposit 
Insurance Fund, nor the other federal banking agencies impose this 
requirement on other insured depository institutions that issue similar 
securities. Moreover, other existing OTS rules provide some protection. 
For example, OTS capital rules protect the Deposit Insurance Fund by 
requiring savings associations to deduct reciprocal holdings of 
depository institution capital instruments from total capital.\5\ 
Accordingly, OTS proposes to delete the purchaser restriction.\6\
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    \4\ 50 FR 20550 (May 17, 1985).
    \5\ 12 CFR 567.5(c)(2)(i). The Office of the Comptroller of the 
Currency (OCC), the Board of Governors of the Federal Reserve System 
(FRB), and FDIC have similar capital rules. See 12 CFR part 3, 
Appendix A, Sec.  2(c)(6)(ii) (OCC); 12 CFR part 208, Appendix A, 
Sec.  II.B.(iii) and part 225, Appendix A, Sec.  II.B.(iii) (FRB); 
and 12 CFR part 325, Appendix A, Sec.  I.B.(4) (FDIC).
    \6\ For similar reasons, OTS proposes to delete existing 12 CFR 
563.81(d)(3)(i), which prohibits the sale of subordinated debt 
securities to a Federal Home Loan Bank or to FDIC.
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    OTS also proposes to delete the existing requirement that all 
certificates evidencing subordinated debt must state that the savings 
association retains the right to prepay the subordinated debt, without 
premium or other penalty, during the 15 months immediately prior to the 
maturity date.\7\ This requirement ensures that a savings association 
has the ability to repay early where, for example, the savings 
association is able to refinance the debt on more favorable terms. The 
requirement, however, also prevents a savings association from 
bargaining away its right to prepay in return for a lower interest rate 
or other favorable terms. In recent years, savings associations have 
frequently requested, and OTS has granted, waivers of this 15-month 
prepayment provision. As a result, OTS proposes to eliminate this 
provision as a requirement for subordinated debt issuances.
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    \7\ 12 CFR 563.81(d)(1)(iii).
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    Finally, the existing rule requires certificates evidencing 
subordinated debt to include certain provisions using language 
prescribed in the regulation.\8\ Two of these provisions address 
various issues related to FDIC's obligations as receiver for the 
issuer. A third provision addresses the purchaser restrictions, which 
are discussed above. The proposed rule does not include prescribed 
language. Instead, OTS will prescribe language for certificates and 
related documents in its Application Processing Handbook. This will 
permit OTS to amend the required text promptly to reflect revised laws 
and regulations and other changed circumstances. OTS specifically 
requests comments on whether it should revise the current language when 
it is incorporated in the Application Processing Handbook.
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    \8\ 12 CFR 563.81(d)(1)(vi).
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    Maturity requirements. The proposed rule at Sec.  563.81(c)(2) 
addresses maturity requirements. Under the existing OTS rule, a covered 
security must have an original period to maturity (or to required 
redemption) of at least seven years. In addition, OTS's rule prescribes 
a formula that limits the amount of required sinking fund payments, 
required prepayments, required purchase-fund payments, required reserve 
allocations, and required redemptions that may occur during the first 
six years that a covered security is outstanding.\9\ By contrast, the 
other banking agencies' rules require that subordinated debt securities 
and mandatorily redeemable preferred stock must have a five-year 
original weighted average maturity to be included in Tier 2 
capital.\10\
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    \9\ 12 CFR 563.81(d)(2). During the first six years that a 
covered security is outstanding, these items may not exceed the 
original principal amount or original redemption price of the 
covered securities multiplied by a specified fraction. The numerator 
of the fraction is the number of years elapsed since the issuance of 
the covered security. The denominator of the fraction is the number 
of years in the original period to maturity or required redemption.
    \10\ OCC and FRB rules use the phrase ``original weighted 
average maturity,'' while FDIC rules use the phrase ``original 
average maturity.'' See 12 CFR 3.100(f)(1) (OCC); 12 CFR part 208, 
Appendix A, Sec.  II.A.2.d.(ii) and part 225, Appendix A, Sec.  
II.A.2.d.(i) (FRB); and 12 CFR part 325, Appendix A, Sec.  I.A.2.(d) 
(FDIC).
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    Depending upon the payment schedule applicable to a particular 
covered security and other factors, OTS's rules could require an 
original weighted average maturity that is shorter--or longer--than 
five years. Ultimately, however, OTS believes that the five-year 
original weighted average maturity requirement may be more flexible 
than its current rule because the five-year requirement does not impose 
a specific formula limiting the amount of permissible repayments, 
payments, and reserve allocations that may be made during the first six 
years that the covered security is outstanding. Accordingly, OTS 
proposes to change its rule to state that covered securities must have 
an original weighted average maturity (or period to required 
redemption) of at least five years. OTS

[[Page 37865]]

notes that this change would conform this aspect of its capital rules 
to the capital rules of the other banking agencies and is consistent 
with section 303 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (12 U.S.C. 4803). Section 303 directs the 
agencies to work to make uniform regulations and guidelines 
implementing common statutory or supervisory policies, consistent with 
the principles of safety and soundness, statutory law and policy, and 
the public interest.
    Mandatory prepayment of principal. The proposed rule at Sec.  
563.81(c)(3) would restate the current rules regarding mandatory 
prepayment of subordinated debt.\11\ Specifically, the proposed rule 
states that subordinated debt securities may not provide events of 
default or contain other provisions that could result in a mandatory 
prepayment of principal, other than events of default that:
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    \11\ 12 CFR 563.81(b)(3).
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     Arise from the savings association's failure to make 
timely payment of interest or principal.
     Arise from its failure to comply with reasonable 
financial, operating, and maintenance covenants of a type that are 
customarily included in indentures for publicly offered debt 
securities,
     Relate to bankruptcy, insolvency, receivership, or similar 
events.

As noted above, the proposed rule would continue to state that any 
acceleration of payment of principal on a subordinated debt security by 
a savings association that fails to meet certain capital requirements 
would be subject to OTS prior approval.
    All of the banking agencies allow for the mandatory prepayment or 
acceleration of principal upon events of default related to bankruptcy, 
insolvency, receivership, and similar events.\12\ However, there is no 
uniform approach with respect to prepayment or acceleration upon other 
events of default.\13\ OTS seeks public comment whether it should 
revise this provision. Commenters should address whether the rules 
issued by any other Federal banking agency more appropriately address 
events of default that may trigger mandatory prepayment or acceleration 
of principal.
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    \12\ 12 CFR 250.166(b)(2) (FRB); and 12 CFR part 325, Appendix 
A, Sec.  I.A.2.(c)(2) and (d) (FDIC). See Comptroller's Licensing 
Manual, Subordinated Debt (November 2003), pp 15-16.
    \13\ 12 CFR 250.166 (FRB); 12 CFR part 325, Appendix A, Sec.  
I.A.2.(d) (FDIC); and 12 CFR part 3, Appendix A, Sec.  2(b)(4) and 
Comptroller's Licensing Manual, Subordinated Debt (November 2003) 
(OCC).
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    Indenture requirements. The current rule requires savings 
associations to use an indenture for subordinated debt securities.\14\ 
OTS proposes to update the monetary thresholds in these indenture 
requirements to reflect statutory changes in the Trust Indenture Act of 
1939 (TIA). 15 U.S.C. 77aaa et seq.
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    \14\ 12 CFR 563.81(d)(4).
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    In addition to these updates, OTS is seeking public comment on 
additional possible revisions to the indenture requirements. For 
example, the current rule requires a savings association to use an 
indenture for all subordinated debt security issuances. The TIA 
generally requires indentures for debt instruments, but does not 
require an indenture where the underlying securities are exempt from 
registration under the Securities Act of 1933 (Securities Act).\15\ One 
such exemption is available for offerings made solely to accredited 
investors.\16\ The Securities Act and the TIA exempt such offerings 
because accredited investors are considered to have sufficient 
financial and professional resources and sophistication to analyze the 
offering, make informed decisions, and defend and exercise their 
rights.\17\ In recent years, OTS has waived the indenture requirement 
where subordinated debt securities are issued to accredited investors 
that are top-tier parent holding companies of the issuer (or 
subsidiaries of these holding companies), provided a paying agent 
agreement is in place. These waivers are conditioned upon the savings 
association's representation that it will provide OTS with a draft 
indenture before the debt holder sells or assigns any of the debt 
securities to an unaffiliated third party. In addition, the savings 
association must agree that the indenture will apply to all 
unaffiliated third party debt holders. OTS is considering exempting 
such issuances from the indenture requirements in the final rule and 
seeks comment on this possible change. Commenters are invited to 
address whether OTS should exempt offerings to accredited investors 
that are holding companies of the issuer (or their subsidiaries) from 
the indenture requirement, and whether it should also exempt offerings 
to unaffiliated accredited investors.
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    \15\ 15 U.S.C. 77ddd.
    \16\ 15 U.S.C. 77d(6).
    \17\ For example, ``accredited investors'' include such entities 
as: brokers or dealers registered under the Securities Exchange Act 
of 1934; insurance companies as defined in the Securities Act; 
investment companies registered under the Investment Company Act of 
1940; certain employee benefit plans; directors, executive officers 
or general partners of the issuer; natural persons with income or 
net worth in excess of specified limits; and certain trusts with 
assets in access of specified limits. 17 CFR 230.501(a). See 15 
U.S.C. 77(a)(15).
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OTS Review--Proposed Sec.  563.81(d)

    Proposed paragraph (d)(1) states that OTS will review notices and 
applications under the application processing procedures at 12 CFR part 
516, subpart E. In addition, proposed paragraph (d)(2) sets out the 
factors that OTS will consider in its review of a notice or 
application. These criteria are based on the existing rule with minor 
changes.\18\ In reviewing notices and applications under this section, 
OTS will consider whether:
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    \18\ 12 CFR 563.81(b).
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     The issuance of the covered securities is authorized under 
applicable laws and regulations, and is consistent with the savings 
association's charter and bylaws.
     The savings association is at least adequately capitalized 
under the PCA standards and meets the regulatory capital requirements. 
The current rule refers only to the regulatory capital requirements at 
12 CFR part 567. The proposed rule would add the reference to the PCA 
standards at 12 CFR part 565.
     The savings association is or will be able to service the 
covered securities.
     The covered securities are consistent with the 
requirements regarding the form of securities, limitations on terms, 
prepayment restrictions, use of an indenture, and other requirements 
imposed under the rule.
     The covered securities and related transactions 
sufficiently transfer risk from the Deposit Insurance Fund.
     OTS has no objection to the issuance based on the savings 
association's overall policies, condition, and operations.\19\
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    \19\ The existing rule states that OTS shall establish non-
exclusive guidelines identifying supervisory bases that may be used 
to object to the inclusion of covered securities in regulatory 
capital. 12 CFR 563.81(b)(2)(i). While OTS may establish such 
guidance in the future, the proposed rule does not require OTS to 
take this step.
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    The existing rule states that issuances of covered securities are 
subject to seven standard conditions. OTS has decided to delete most of 
these conditions. OTS has determined that many of the standard 
conditions are unnecessary because they are stated elsewhere as 
proposed regulatory requirements. For example, reporting is addressed 
in proposed paragraph (g),\20\ and amendments to covered securities 
following OTS review are addressed at

[[Page 37866]]

new paragraph (e).\21\ Other standard conditions would be deleted 
because they are contrary to current securities law or refer to 
obsolete OTS regulations.\22\
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    \20\ 12 CFR 563.81(k)(2) and (3).
    \21\ 12 CFR 563.81(k)(5) and (6).
    \22\ 12 CFR 563.81(k)(1) and (7).
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    With these deletions, proposed 563.81(d)(3) would provide that OTS 
approval or nonobjection is conditioned upon no material changes to the 
information disclosed in the application or notice submitted to 
OTS.\23\ The proposed rule would also expressly state that OTS may 
impose such additional requirements or conditions as may be necessary 
to protect purchasers, the savings association, OTS, or the Deposit 
Insurance Fund.
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    \23\ 12 CFR 563.81(k)(4).
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Amendments--Proposed Sec.  563.81(e)

    The proposed rule would resolve an inconsistency in the current 
rules regarding amendments to covered securities or related documents 
following OTS review. One provision appears to require a savings 
association to seek OTS approval or nonobjection only where an 
amendment would not conform to OTS regulations governing the form or 
content of the covered securities and related documents, or where the 
amended securities would not sufficiently transfer risk from the 
Deposit Insurance Fund.\24\ The other provision requires a savings 
association to seek OTS approval or nonobjection for all amendments 
that occur after the conclusion of the OTS review.\25\ OTS believes 
that it should have the opportunity to review all amendments to covered 
securities and related documents. Accordingly, the proposed rule 
requires OTS approval or nonobjection for all amendments after OTS 
review.
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    \24\ 12 CFR 563.81(k)(5).
    \25\ 12 CFR 563.81(a).
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Sale of Covered Securities--Proposed Sec.  563.81(f)

    The existing rule provides that a savings association must complete 
the sale of securities within one year of OTS approval or nonobjection 
and that OTS may extend this period upon a timely request.\26\ Proposed 
paragraph (f) restates this provision in plain language without 
substantive change.
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    \26\ 12 CFR 563.81(g).
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Reports--Proposed Sec.  563.81(g)

    The existing rule requires savings associations to submit various 
reports in connection with the sale of covered securities.\27\ The 
proposed rule would restate and consolidate all reporting requirements 
in one provision. The proposed rule does not modify the substance of 
the reporting requirement.
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    \27\ These reporting requirements are contained in 12 CFR 
563.81(h) and in the standard conditions at 12 CFR 563.81(k)(2) and 
(3).
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Obsolete Provisions

    In addition to the revisions discussed above, OTS proposes to 
delete certain obsolete provisions of the existing rules. These 
existing provisions include:
     12 CFR 563.81(b)(2)(i)(B), which refers to non-existent 
OTS regulations at 12 CFR 563.160 and 563.172.
     12 CFR 563.81(d) (introductory paragraph), which states 
that OTS may waive certain requirements. This provision duplicates (and 
conflicts with) OTS general waiver authority at 12 CFR 500.30(a).
     12 CFR 563.81(k)(7). This section conflicts with 12 CFR 
563.76, which prohibits the sale of debt securities on the premises of 
a savings association.

II. Solicitation of Comments Regarding the Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act (12 U.S.C. 4809) requires 
Federal banking agencies to use ``plain language'' in all proposed and 
final rules published after January 1, 2000. OTS invites comments on 
how to make this proposed rule easier to understand. For example:
    (1) Have we organized the material to suit your needs? If not, how 
could the material be better organized?
    (2) Do we clearly state the requirements in the rule? If not, how 
could the rule be more clearly stated?
    (3) Does the rule contain technical language or jargon that is not 
clear? If so, what language requires clarification?
    (4) Would a different format (grouping and order of sections, use 
of headings, paragraphing) make the rule easier to understand? If so, 
what changes to the format would make the rule easier to understand?

III. Executive Order 12866

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

IV. Unfunded Mandates Reform Act of 1995

    Today's proposed rule merely revises an existing rule to delete 
unnecessary, outdated, and conflicting requirements, to add appropriate 
statutory cross-references, and to rewrite the rule in plain language. 
Accordingly, OTS has determined that the proposed rule will not result 
in expenditures by state, local, or tribal governments or by the 
private sector of $100 million or more and that a budgetary impact 
statement is not required under section 202 of the Unfunded Mandates 
Reform Act of 1995.

VI. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA) 
(5 U.S.C. 601), the Director certifies that this proposed rule will not 
have a significant economic impact on a substantial number of small 
entities. Today's proposed rule merely revises an existing rule to 
delete unnecessary, outdated, and conflicting requirements, to add 
appropriate statutory cross-references, and to rewrite the rule in 
plain language.

VII. Paperwork Reduction Act of 1995

    The information collection requirements in the existing OTS rules 
at 12 CFR 563.81 were previously approved under OMB control number 
1550-00xx. The proposed rule would continue to incorporate these 
requirements and does not make any substantive changes that affect the 
overall burden of compliance.

List of Subjects in 12 CFR Part 563

    Accounting, Administrative practice and procedure, Advertising, 
Conflict of interest, Crime, Currency, Holding companies, Investments, 
Mortgages, Reporting and recordkeeping requirements, Savings 
associations, Securities, Surety bond.

    Accordingly, the Office of Thrift Supervision proposes to amend 12 
CFR part 563 as set forth below:

PART 563--SAVINGS ASSOCIATIONS--OPERATIONS

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

    Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468, 
1817, 1820, 1828, 1831o, 3806; 31 U.S.C. 5318; 42 U.S.C. 4106.

    2. Revise Sec.  563.81 to read as follows:


Sec.  563.81  Inclusion of subordinated debt securities and mandatorily 
redeemable preferred stock as supplementary capital.

    (a) Scope. A savings association must comply with this section in 
order to include subordinated debt securities or mandatorily redeemable 
preferred stock (``covered securities'') in supplementary capital under 
12 CFR 567.5(b). If a savings association does not include covered 
securities in supplementary capital, it is not required to comply with 
this section.

[[Page 37867]]

    (b) Application and notice procedures. (1) A savings association 
must file an application or notice under 12 CFR part 516, subpart A 
seeking OTS approval of, or nonobjection to, the inclusion of covered 
securities in supplementary capital. The savings association may file 
its application or notice before or after it issues covered securities, 
but may not include covered securities in supplementary capital until 
OTS approves the application or does not object to the notice.
    (2) A savings association must also comply with the securities 
offering rules at 12 CFR part 563g by filing an offering circular for a 
proposed issuance of covered securities, unless the offering qualifies 
for an exemption under that part.
    (c) Securities requirements. To be included in supplementary 
capital, covered securities must meet the following requirements:
    (1) Form. (i) Each certificate evidencing a covered security must:
    (A) Bear the following legend on its face, in bold type: ``This 
security is not a savings account or deposit and it is not insured by 
the United States or any agency or fund of the United States;''
    (B) State that the security is subordinated on liquidation, as to 
principal, interest, and premium, to all claims against the savings 
association that have the same priority as savings accounts or a higher 
priority;
    (C) State that the security is not secured by the savings 
association's assets or the assets of any affiliate of the savings 
association, as defined in 12 CFR 583.2;
    (D) State that the security is not eligible collateral for a loan 
by the savings association;
    (E) State the prohibition on the payment of dividends or interest 
at 12 U.S.C. 1828(b) and, in the case of subordinated debt securities, 
state the prohibition on the payment of principal and interest at 12 
U.S.C. 1831o(h);
    (F) For subordinated debt securities, state or refer to a document 
stating the terms under which the savings association may prepay the 
obligation; and
    (G) State or refer to a document stating that the savings 
association must obtain OTS approval before the voluntarily prepayment 
of principal on subordinated debt securities, the acceleration of 
payment of principal on subordinated debt securities, or the 
voluntarily redemption of mandatorily redeemable preferred stock (other 
than scheduled redemptions), if the savings association is 
undercapitalized, significantly undercapitalized, or critically 
undercapitalized as described in Sec.  565.4(b) of this chapter, fails 
to meet the regulatory capital requirements at 12 CFR part 567, or 
would fail to meet any of these standards following the payment.
    (ii) A savings association must include such additional statements 
as OTS may prescribe for certificates, purchase agreements, indentures, 
and other related documents. OTS will prescribe the text of these 
additional statements in its Application Processing Handbook.
    (2) Maturity requirements. Covered securities must have an original 
weighted average maturity or original weighted average period to 
required redemption of at least five years.
    (3) Mandatory prepayment. Subordinated debt securities and related 
documents may not provide events of default or contain other provisions 
that could result in a mandatory prepayment of principal, other than 
events of default that:
    (i) Arise from the savings association's failure to make timely 
payment of interest or principal;
    (ii) Arise from its failure to comply with reasonable financial, 
operating, and maintenance covenants of a type that are customarily 
included in indentures for publicly offered debt securities; or
    (iii) Relate to bankruptcy, insolvency, receivership, or similar 
events.
    (4) Indenture. A savings association must use an indenture for 
subordinated debt securities. If the aggregate amount of subordinated 
debt securities that are publicly offered (excluding sales in a non-
public offering as defined in 12 CFR 563g.4) and sold in any 
consecutive 12-month or 36-month period exceeds $5,000,000 or 
$10,000,000 respectively (or such lesser amount that the Securities and 
Exchange Commission shall establish by rule or regulation under 15 
U.S.C. 77ddd), the indenture must provide for:
    (i) The appointment of a trustee other than the savings association 
or an affiliate of the savings association (as defined at 12 CFR 
583.2); and
    (ii) Collective enforcement of the security holders' rights and 
remedies.
    (d) OTS review. (1) OTS will review notices and applications under 
12 CFR part 516, subpart E.
    (2) In reviewing notices and applications under this section, OTS 
will consider whether:
    (i) The issuance of the covered securities is authorized under 
applicable laws and regulations and is consistent with the savings 
association's charter and bylaws.
    (ii) The savings association is at least adequately capitalized 
under Sec.  565.4(b) of this chapter and meets the regulatory capital 
requirements at Sec.  567.2 of this chapter.
    (iii) The savings association is or will be able to service the 
covered securities.
    (iv) The covered securities are consistent with the requirements of 
this section.
    (v) The covered securities and related transactions sufficiently 
transfer risk from the Deposit Insurance Fund.
    (vi) OTS has no objection to the issuance based on the savings 
association's overall policies, condition, and operations.
    (3) OTS approval or nonobjection is conditioned upon no material 
changes to the information disclosed in the application or notice 
submitted to OTS. OTS may impose such additional requirements or 
conditions as it may deem necessary to protect purchasers, the savings 
association, OTS, or the Deposit Insurance Fund.
    (e) Amendments. If a savings association amends the covered 
securities or related documents following the completion of OTS review, 
it must obtain OTS approval or nonobjection under this section before 
it may include the amended securities in supplementary capital.
    (f) Sale of covered securities. The savings association must 
complete the sale of covered securities within one year after OTS 
approval or nonobjection under this section. A savings association may 
request an extension of the offering period by filing a written request 
with OTS. The savings association must demonstrate good cause for the 
extension and file the request at least 30 days before the expiration 
of the offering period or any extension of the offering period.
    (g) Reports. A savings association must file the following 
information with OTS within 30 days after the savings association 
completes the sale of covered securities includable as supplementary 
capital. If the savings association filed its application or notice 
following the completion of the sale, it must submit this information 
with its application or notice:
    (1) A written report indicating the number of purchasers, the total 
dollar amount of securities sold, the net proceeds received by the 
savings association from the issuance, and the amount of covered 
securities, net of all expenses, to be included as supplementary 
capital;
    (2) Three copies of an executed form of the securities and a copy 
of any related documents governing the issuance or administration of 
the securities; and

[[Page 37868]]

    (3) A certification by the appropriate executive officer indicating 
that the savings association complied with all applicable laws and 
regulations in connection with the offering, issuance, and sale of the 
securities.

    Dated: June 26, 2006.

    By the Office of Thrift Supervision.
John M. Reich,
Director.
[FR Doc. E6-10341 Filed 6-30-06; 8:45 am]
BILLING CODE 6720-01-P