[Federal Register Volume 71, Number 139 (Thursday, July 20, 2006)]
[Proposed Rules]
[Pages 41179-41184]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-11278]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 71, No. 139 / Thursday, July 20, 2006 / 
Proposed Rules  

[[Page 41179]]



DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 563b and 575

[No. 2006-29]
RIN 1550-AC07


Stock Benefit Plans in Mutual-to-Stock Conversions and Mutual 
Holding Company Structures

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 clarify 
its regulations regarding stock benefit plans established after mutual-
to-stock conversions or in mutual holding company structures. In 
addition, OTS proposes to reduce the voting requirements for the 
adoption of stock benefit plans in mutual holding company structures 
and to make several other minor changes to the regulations governing 
mutual-to-stock conversions and minority stock issuances.

DATES: Comments must be received on or before September 18, 2006.

ADDRESSES: You may submit comments, identified by No. 2006-29, by any 
of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Please include No. 
2006-29 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. 2006-29.
     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. 2006-29.
    Instructions: All submissions received must include the agency name 
and docket number or Regulatory Information Number (RIN) 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: Donald W. Dwyer, (202) 906-6414, 
Director, Applications, Examinations and Supervision--Operations; Aaron 
B. Kahn, (202) 906-6263, Assistant Chief Counsel, Business Transactions 
Division or David A. Permut, (202) 906-7505, Senior Attorney, Business 
Transactions Division, Office of Chief Counsel, Office of Thrift 
Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION: Savings associations that propose to convert 
to stock form are subject to the OTS mutual-to-stock conversion 
regulations, 12 CFR part 563b (Conversion Regulations). Mutual holding 
companies (MHCs) are subject to OTS regulations at 12 CFR part 575 (MHC 
Regulations). Subsidiary mutual holding companies (Subsidiary MHCs) and 
savings associations (collectively, Subsidiary Companies) in MHC 
structures that propose to issue common stock in a minority stock 
issuance (Minority Stock Issuance) \1\ are subject to both the 
Conversion Regulations and the MHC Regulations, including the 
provisions therein pertaining to stock benefit plans.\2\
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    \1\ In a Minority Stock Issuance, the Subsidiary Company issues 
stock to entities other than the parent MHC. The parent MHC must 
hold more than 50 percent of the common stock of the Subsidiary MHC 
after the Minority Stock Issuance. See 12 U.S.C. 1467a(o)(8)(B) and 
12 CFR 575.7(a)(5).
    \2\ The MHC Regulations currently include four separate 
provisions stating that the Conversion Regulations apply in the 
context of stock issuances by subsidiaries of MHCs. See, 12 CFR 
575.7(a), 575.7(b)(1), 575.7(d)(6)(ii), and 575.7(e)(2006).
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    OTS last changed the provisions of the Conversion Regulations 
addressing stock benefit plans in mutual-to-stock conversions or MHC 
structures in 2002 (2002 amendments).\3\ The 2002 amendments revised 
the MHC Regulations to, among other things, permit the amount of stock 
includable in stock benefit plans established in MHC structures to be 
set as if 49.0 percent of the stock was issued to minority 
shareholders, and added a requirement that certain plans not exceed 25 
percent of the stock actually offered in the Minority Stock Issuance. 
The 25 percent limitation was intended to ensure that insiders did not 
receive a disproportionate share of small Minority Stock Issuances.
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    \3\ See 67 FR 52010, at 52014 (August 9, 2002).
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    OTS believes that confusion exists regarding the application of the 
stock benefit plan provisions in the Conversion Regulations and the MHC 
Regulations. OTS therefore proposes to clarify its regulations on stock 
benefit plans currently found at 12 CFR 563b.500 and 575.8. These 
clarifications are not intended to change existing OTS policies 
regarding stock benefit plans. In addition, OTS proposes to reduce 
regulatory burden by adjusting the voting requirements for the adoption 
of stock benefit plans in MHC structures. Also, OTS proposes to allow 
lower maximum purchase limitations in mutual-to-stock conversion 
offerings (Conversion Offerings) and in Minority Stock Issuances.

I. Stock Benefit Plans

    OTS has permitted the establishment of three types of stock benefit 
plans in connection with mutual-to-stock conversions and Minority Stock 
Issuances. These stock benefit plans include: (i) Employee Stock 
Ownership Plans and similar plans (ESOPs), which must be tax-qualified; 
\4\ (ii) Stock Option

[[Page 41180]]

Plans (Option Plans), which are typically non-tax-qualified; and (iii) 
Management Recognition Plans (MRPs) (sometimes referred to as Retention 
and Recognition Plans), which are also typically non-tax-qualified.
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    \4\ These plans include 401(k) plans and plans defined at 12 CFR 
563b.25 as tax-qualified employee stock benefit plans. Because the 
only types of tax-qualified plans established in mutual-to-stock 
conversions in the recent past have been ESOPs, OTS proposes to 
define the tax-qualified plans as ESOPs, in order to simplify the 
regulations.
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    Section 563b.500 of the Conversion Regulations sets forth certain 
limitations for stock benefit plans during the year following a 
Conversion Offering. For example, ESOPs and MRPs are generally limited 
to holding, in the aggregate, no more than ten percent of the number of 
shares issued in a mutual-to-stock conversion (Sec.  563b.500(a)(4)). 
However, if the converting institution has at least ten percent 
tangible capital following the completion of the conversion, then ESOPs 
and MRPs are permitted to hold up to an aggregate of 12 percent of the 
number of shares issued in the conversion (Sec.  563b.500(a)(4)). In 
addition, the Conversion Regulations (Sec.  563b.500(a)(3)) restrict 
MRPs to three percent of the number of shares issued in the conversion. 
If the institution has at least ten percent tangible capital following 
the completion of the conversion, however, MRPs may encompass four 
percent of the number of shares issued in the conversion. It has been 
OTS's experience that most converting associations implement an eight 
percent ESOP and a four percent MRP when they have at least ten percent 
tangible capital after the conversion.
    In addition, converting associations may offer a separate Option 
Plan of up to ten percent of the number of shares issued in the 
conversion (Sec.  563b.500(a)(2)).
    In MHC structures, Subsidiary Companies offer less than 50 percent 
of their stock to the public. This arrangement creates smaller stock 
benefit plans for companies in the MHC form. In order to make the MHC 
form of organization more reasonable, OTS expanded the permissible size 
of stock benefit plans in the 2002 amendments.\5\ Prior to the 2002 
amendments, the maximum size of plans was set in relation to the 
percentage of stock actually offered in the Minority Stock Issuance. 
For example, if the Subsidiary Company issued only 30 percent of its 
stock in the Minority Stock Issuance, it would have been restricted to 
an Option Plan encompassing three percent of total shares outstanding 
(ten percent of 30 percent) and a combined ESOP and MRP encompassing an 
aggregate of three percent of the total shares outstanding (or 3.6 
percent, if the association's tangible capital exceeded ten percent). 
In the 2002 amendment, OTS set the maximum size for stock benefit plans 
as if the Minority Stock Issuance had been 49.0 percent of the 
Subsidiary Company's stock, regardless of the actual percentage of 
shares issued in the Minority Stock Issuance.\6\
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    \5\ 67 FR 52010, at 52014.
    \6\ Where a Subsidiary Company sets the size of a stock benefit 
plan as if it engaged in a 49 percent Minority Stock Issuance, a 
plan of the same type established in any second-step mutual-to-stock 
conversion of the relevant MHC must be based on not more than 51 
percent of the resulting publicly held association's or holding 
company's issued and outstanding stock, following the consummation 
of the second-step conversion. See 12 CFR 563b.500(a). The stock 
issued and outstanding upon consummation of the second-step 
conversion includes both the stock issued in accordance with the 
mutual-to-stock conversion priorities for the second-step conversion 
and the shares issued in exchange for the shares held by the 
Subsidiary Company's minority stockholders.
    If the Subsidiary Company sets the size of the stock benefit 
plan based on a percentage less than 49 percent (such as the actual 
percentage issued in the Minority Stock Issuance), then the same 
principle applies. For example, if a Subsidiary Company established 
plans based on an actual 40 percent Minority Stock Issuance, then 
the plans established in connection with the second-step conversion 
must be based on not more than 60 percent of the shares to be issued 
in the second-step conversion. This is the case regardless of 
whether, after the Minority Stock Issuance, the Subsidiary Company 
repurchased shares of its stock (and therefore more than 60 percent 
of the shares that will be issued and outstanding upon consummation 
of the second-step conversion would be issued in accordance with the 
mutual-to-stock conversion priorities).
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    The 2002 amendment also added an overall limitation, to prevent 
issuing an excessive amount of stock to management, particularly in 
small offerings. That restriction limited the aggregate amount of stock 
issued to all Option Plans and MRPs (but excluding ESOPs) in connection 
with any Minority Stock Issuance and all prior Minority Stock 
Issuances, to 25 percent of the outstanding stock of the association 
held by persons other than the parent MHC.\7\ OTS has discovered that 
some persons incorrectly believed that the 25 percent limit was the 
only limit on the aggregate size of all Option Plans and MRPs, rather 
than one of several distinct limitations.
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    \7\ For example, the overall limitation for a 28 percent 
Minority Stock Issuance would be no more than seven percent for the 
Option Plan and MRP (25 percent of 28 percent equals seven percent) 
for the proposed issuance, plus all prior issuances.
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    OTS believes that some confusion exists as to how the various 
limitations in the Conversion and MHC Regulations interact with each 
other. Therefore, OTS proposes to clarify several of the existing 
regulations at sections 563b.500, 575.7, and 575.8 to eliminate any 
confusion.
    In addition, as discussed in more detail below, OTS believes that 
it is appropriate to adjust the shareholder vote requirements for the 
adoption of benefit plans in MHC structures.

A. Proposed Rule Changes at Sec.  563b.500 Regarding Stock Benefit 
Plans

    OTS proposes to clarify 12 CFR 563b.500 by referring to the 
specific type of plan addressed (that is, an ESOP, Option Plan, or 
MRP), rather than referring to plans in terms of their tax-qualified or 
non-tax-qualified nature. OTS proposes to revise Sec.  563b.500(a)(1) 
to clarify that a shareholder vote is not required to establish an 
ESOP. OTS also proposes to move the provision addressing votes on 
Option Plans and MRPs in the context of MHCs from Sec.  563b.500(a)(7) 
to the MHC Regulations, because it is more appropriate to locate 
provisions dealing exclusively with MHC structures in the MHC 
Regulations.

B. Proposed Rule Changes at Sec.  575.7 Regarding Minority Stock 
Issuances

    Section 575.7 sets forth the general requirements for Minority 
Stock Issuances by Subsidiary Companies. Section 575.7 provides, in 
four separate places, that some or all of the requirements of the 
Conversion Regulations are applicable to Minority Stock Issuances. OTS 
proposes to streamline the MHC Regulations by removing two of those 
references.
    OTS proposes to retain the general provision at Sec.  575.7(e), 
which would be redesignated as Sec.  575.7(d), stating that the 
procedural and substantive requirements of the Conversion Regulations 
apply to Minority Stock Issuances unless clearly inapplicable. However, 
OTS proposes to add language to this section similar to the language in 
current Sec.  575.7(b)(1) clarifying that OTS makes the determination 
whether a section is clearly inapplicable. OTS also proposes to 
relocate certain language from Sec.  575.7(b)(1) to proposed Sec.  
575.7(d). The language in question states that for purposes of the 
provision the term ``conversion'' as it appears in the Conversion 
Regulations, refers to the Minority Stock Issuance, and the term 
``converted or converting savings association'' as it appears in the 
Conversion Regulations, refers to the Subsidiary Company making the 
Minority Stock Issuance.
    In light of these proposed changes, OTS proposes to eliminate the 
cross-references at Sec. Sec.  575.7(a) \8\ and

[[Page 41181]]

575.7(b)(1). OTS proposes to keep the reference at Sec.  
575.7(d)(6)(ii), however, because the cross-reference permits an 
applicant to engage in a Minority Stock Issuance that does not meet the 
mutual-to-stock conversion priorities if the applicant demonstrates 
that a non-conforming issuance is appropriate.
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    \8\ Eliminating the cross-reference in Sec.  575.7(a) does not 
remove the requirement that MHCs must file business plans in 
connection with Minority Stock Issuances. Under proposed Sec.  
575.7(d), all procedural and substantive requirements in the 
Conversion Regulations apply to Minority Stock Issuances, unless 
clearly inapplicable.
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    OTS proposes to revise and relocate Sec.  575.7(b)(2). This section 
provides that, unless OTS determines otherwise, the limitations on the 
minimum and maximum amounts of the estimated price range required by 12 
CFR 563b.330 do not apply. OTS has applied the limitations in 12 CFR 
563b.330 in all Minority Stock Issuances, except in cases where the 
issuance involved only stock benefit plans or an acquisition. 
Accordingly, OTS proposes to revise this section to state that Sec.  
563b.330 will apply to Minority Stock Issuances, unless OTS determines 
otherwise, and to recodify this provision, as modified, at Sec.  
575.7(a)(9).
    OTS proposes to eliminate 12 CFR 575.7(b)(3), which requires stock 
offering materials to disclose the amount of any discount on minority 
stock, and how the amount of the discount was determined. The general 
securities offering disclosure requirements, which require disclosure 
of material information, are sufficient to address the issue of 
disclosure of the amount and reasons for any discount on minority 
stock.

C. Proposed Rule Changes at Sec.  575.8 Regarding Stock Benefit Plans

    Section 575.8 contains the current limitations for stock benefit 
plans in MHC structures. OTS proposes to clarify the Sec.  575.8 
provisions pertaining to stock benefit plans in several respects. 
First, as with Sec.  563b.500, OTS proposes to replace the references 
to tax-qualified and non-tax-qualified benefit plans in Sec.  575.8(a) 
with references to a specific type of plan (that is, the ESOP, Option 
Plan, or MRP). Second, OTS proposes to include language in Sec.  575.8 
stating that the quantitative limitations regarding the size of ESOPs, 
Option Plans, and MRPs set forth in Sec.  575.8 supersede the related 
quantitative limits in proposed sections 563b.500(a)(2) through 
563b.500(a)(4). This change should reduce regulatory burden by 
eliminating the need for Subsidiary Companies to consider both the MHC 
Regulations and the Conversion Regulations to determine the permissible 
size of certain stock benefit plans. Third, in order to provide clarity 
and to reduce existing regulatory burdens, OTS proposes to amend Sec.  
575.8 to state that the restrictions set forth in proposed sections 
563b.500(a)(4) through 563b.500(a)(14) apply in the context of a 
Minority Stock Issuance for only one year after the Subsidiary Company 
engages in a Minority Stock Issuance that is conducted in accordance 
with the purchase priorities set forth in the Conversion Regulations. 
Each such Minority Stock Issuance would start a new one-year period.
    In order to further clarify the MHC Regulations and to eliminate 
certain unintended inconsistencies between the Conversion Regulations 
and the MHC Regulations, OTS is making three additional changes. First, 
the Conversion Regulations (at current Sec.  563b.500(a)(3) and 
proposed Sec.  563b.500(a)(3)(ii)) include a separate limitation 
regarding the size of MRPs. Notwithstanding the lack of a specific 
provision in the MHC Regulations addressing MRPs, OTS has consistently 
applied such a requirement in the context of Minority Stock Issuances, 
by applying the plan limits in the Conversion Regulations to Minority 
Stock Issuances.\9\ Therefore, OTS proposes to include a corresponding 
limitation on the size of MRPs in Sec.  575.8.
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    \9\ Because OTS proposes to simplify the MHC Regulations to 
provide that institutions proposing Minority Stock Issuances would 
need to look only at Sec.  575.8 to determine the permissible size 
of their stock benefit plans, repeating this restriction, and the 
restrictions described below, in the MHC Regulations is necessary.
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    Second, the Conversion Regulations (at current Sec.  
563b.500(a)(4), and proposed Sec.  563b.500(a)(3)(i)) include a 
limitation on the combined size of the ESOP and MRP. The current MHC 
Regulations do not include an aggregate limitation on ESOPs and MRPs. 
However, OTS has consistently applied such a restriction to Minority 
Stock Issuances, based on the cross-reference to the Conversion 
Regulations. In order to conform the MHC Regulations to the Conversion 
Regulations, OTS proposes to revise the MHC Regulations to explicitly 
include an aggregate limitation on ESOPs and MRPs. In addition to 
aggregate limitations on ESOPs and MRPs, OTS proposes to retain the 
existing aggregate limitation on the size of the Option Plans and MRPs 
set forth at Sec.  575.8(a)(9) of the MHC Regulations.
    Third, the Conversion Regulations impose a higher limitation on the 
size of MRPs and a higher aggregate limitation on the size of ESOPs and 
MRPs if the association in question has tangible capital exceeding ten 
percent. Again, OTS consistently has applied this provision of the 
Conversion Regulations to Minority Stock Issuances. The MHC Regulations 
do not include a corresponding provision, and OTS proposes to amend the 
MHC Regulations to eliminate this disparity.
    Furthermore, OTS believes that the presence of language addressing 
individual purchase limitations (and those involving individuals and 
their associates) in sections 575.8(a)(3) and (a)(4) is confusing. 
These provisions, to the extent they pertain to individuals and their 
associates, are unnecessary because the Conversion Regulations provide 
the necessary limitations.\10\ In addition, the usefulness of such 
provisions in the MHC regulations is limited, because the limitations 
in Sec. Sec.  575.8(a)(3) and (a)(4) do not include shares acquired in 
the secondary market. Accordingly, OTS proposes to eliminate the 
reference to purchases by individuals and their associates presently 
set forth in sections 575.8(a)(3) and (a)(4) from the MHC Regulations.
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    \10\ See 12 CFR 563b.370 (2006).
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    In addition, OTS is clarifying sections 575.8(a)(3) through (a)(9) 
to make it clear that the limitations on benefit plans will be set in 
relation to the stock or equity outstanding at the close of the most 
recent Minority Stock Issuance made in conjunction with the 
promulgation of a benefit plan. Also, in sections 575.8(a)(7), OTS is 
clarifying that, when a plan is adopted or modified more than one year 
after a Minority Stock Issuance, the limitations in sections 
575.8(a)(3) through (a)(6) may be exceeded to the extent that: (i) 
Awards in excess of those limitations are made with stock purchased in 
the secondary market; and (ii) such purchases take place at least one 
year after the most recent Minority Stock Issuance that is made in 
substantial conformity with the purchase priorities set out in part 
563b.
    Similarly, in Sec.  575.8(a)(8)(ii), OTS proposes to clarify that 
when a plan is adopted or modified more than one year after a Minority 
Stock Issuance, the limitations in Sec.  575.8(a)(8)(i) may be exceeded 
to the extent that: (i) Awards in excess of those limitations are made 
with stock purchased in the secondary market; and (ii) such purchases 
take place at least one year after the most recent Minority Stock 
Issuance that is made in substantial conformity with the purchase 
priorities set out in part 563b.
    In addition, in Sec.  575.8(a)(9), OTS proposes to clarify that the 
limitation therein presents a separate limitation on

[[Page 41182]]

Option Plans and MRPs that applies to each Minority Stock Issuance. 
However, that limitation does not require reductions in otherwise 
permissible awards under an existing plan when there is a subsequent 
Minority Stock Issuance where the excess results from intervening 
purchases by individuals in the secondary market.
    As mentioned previously, OTS proposes to move the last sentence in 
current Sec.  563b.500(a)(7), pertaining to mutual holding companies, 
to new Sec.  575.8(c). This sentence currently requires that a majority 
of the outstanding minority shares approve any Option Plan and any MRP 
(in addition to the requirement that a majority of all shares approve 
any Option Plan and any MRP). Because OTS believes the current 
provisions are unduly restrictive, OTS proposes two changes to the 
minority vote requirement proposed at Sec.  575.8(c). First, OTS 
proposes to revise the provision to require a vote of the minority 
shareholders only during the first year after a Minority Stock Issuance 
that was conducted in accordance with the mutual-to-stock conversion 
subscription priorities. Second, OTS proposes to revise the provision 
to require approval (during the first year after a Minority Stock 
Issuance) by a majority of the minority shares voting on the issue of 
adoption of the plan, rather than a majority of the outstanding 
minority shares.

II. Maximum Purchase Limitation

    OTS proposes to increase an institution's choices regarding maximum 
purchase limitations. Section 563b.385 addresses maximum purchase 
limitations for subscriptions in mutual-to-stock conversions. 
Currently, converting savings associations are permitted to set a 
maximum purchase limitation between one and five percent of the stock 
sold. OTS has received many requests to waive the purchase limitations. 
This is particularly appropriate in the case of larger offerings, where 
a one percent limit would constitute a very large investment. Because 
OTS's policy is to achieve as widespread a distribution of stock as 
possible (see Sec.  563b.395), the request for a waiver to set a 
smaller maximum purchase limitation is often granted. OTS proposes to 
amend this section to permit smaller purchase limitations.

III. Solicitation of Comments

A. Solicitation of Comments on the Proposed Amendments

    OTS is requesting comment on all aspects of the proposed 
regulation. Specifically OTS seeks comment on:
    (1) Does the proposed regulation accomplish its stated purposes?
    (2) Does the proposed regulation eliminate ambiguities regarding 
stock benefit plans in mutual-to-stock conversions?
    (3) Does the proposed regulation create any ambiguities that were 
not present in the current regulation?
    (4) Does the proposed regulation impose unnecessary regulatory 
burdens?

B. Solicitation of Comments Regarding the Use of Plain Language

    Section 722 of GLBA 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 we better organize it?
    (2) Do we clearly state the requirements in the rule? If not, how 
could we state the rule more clearly?
    (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?

V. Regulatory Findings

A. Paperwork Reduction Act

    OTS has determined that this proposed rule does not involve a 
change to collections of information previously approved under the 
Paperwork Reduction Act (44 U.S.C. 3501 et seq.).

B. 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.

C. 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. The proposed rule would make certain changes that should 
reduce burdens on all savings associations, including small 
institutions. First, the proposed rule addresses the confusion 
surrounding compliance with OTS regulations regarding stock benefit 
plans in connection with mutual-to-stock conversions and Minority Stock 
Issuances. These clarifications will reduce the burden of complying 
with the OTS regulations on stock benefit plans. Second, OTS has 
reduced the voting requirement to adopt stock benefit plans in MHC 
structures, which reduces burden on institutions establishing stock 
benefit plans. Finally, the proposed rule will reduce burden by 
broadening the purchase limitations, thereby promoting a wider 
distribution of stock in a Conversion Offering or Minority Stock 
Issuance. All of the proposed changes are minor and should not have a 
significant impact on small institutions. Accordingly, OTS has 
determined that a Regulatory Flexibility Analysis is not required.

D. Unfunded Mandates Reform Act of 1995

    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, Public Law 104-4 (Unfunded Mandates Act). The proposed rule would 
make certain changes that should reduce burdens on savings 
associations. First, the proposed rule clarifies OTS regulations 
regarding stock benefit plans in connection with mutual-to-stock 
conversions and Minority Stock Issuances, which should reduce the 
burden of complying with the OTS regulations on stock benefit plans. 
Second, OTS has reduced the voting requirement to adopt stock benefit 
plans in MHC structures, which reduces burden on institutions 
establishing stock benefit plans. Finally, the proposed rule will 
reduce burden by broadening the purchase limitations, to promote a 
wider distribution of stock in a Conversion Offering or Minority Stock 
Issuance. All of the proposed changes are minor and should not have a 
significant impact on small institutions. Accordingly, a budgetary 
impact statement is not required under section 202 of the Unfunded 
Mandates Act.

List of Subjects

12 CFR Part 563b

    Reporting and recordkeeping requirements, Savings associations, 
Securities.

[[Page 41183]]

12 CFR Part 575

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

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

PART 563b--CONVERSIONS FROM MUTUAL TO STOCK FORM

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

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 2901; 15 
U.S.C. 78c, 78l, 78m, 78n, 78w.


Sec.  563b.385  [Amended]

    2. Amend Sec.  563b.385(a) by removing the phrase ``between one 
percent and'' and adding the words ``up to'' in place thereof.
    3. Revise Sec.  563b.500 to read as follows:


Sec.  563b.500.  What management stock benefit plans may I implement?

    (a) During the 12 months after your conversion, you may implement a 
stock option plan (Option Plan), an employee stock ownership plan or 
other tax-qualified employee stock benefit plan (collectively, ESOP), 
and a management recognition plan (MRP), provided you meet all of the 
following requirements.
    (1) You disclose the plans in your proxy statement and offering 
circular and indicate in your offering circular that there will be a 
separate shareholder vote on the Option Plan and the MRP at least six 
months after the conversion. No shareholder vote is required to 
implement the ESOP. Your ESOP must be tax-qualified.
    (2) Your Option Plan does not encompass more than ten percent of 
the number of shares that you issued in the conversion.
    (3)(i) Your ESOP and MRP do not encompass, in the aggregate, more 
than ten percent of the number of shares that you issued in the 
conversion. If you have tangible capital of ten percent or more 
following the conversion, OTS may permit your ESOP and MRP to 
encompass, in the aggregate, up to 12 percent of the number of shares 
issued in the conversion; and
    (ii) Your MRP does not encompass more than three percent of the 
number of shares that you issued in the conversion. If you have 
tangible capital of ten percent or more after the conversion, OTS may 
permit your MRP to encompass up to four percent of the number of shares 
that you issued in the conversion.
    (4) No individual receives more than 25 percent of the shares under 
your ESOP, MRP, or Option Plan.
    (5) Your directors who are not your officers do not receive more 
than five percent of the shares of your MRP or Option Plan 
individually, or 30 percent of any such plan in the aggregate.
    (6) Your shareholders approve each of the Option Plan and the MRP 
by a majority of the total votes eligible to be cast at a duly called 
meeting before you establish or implement the plan. You may not hold 
this meeting until six months after your conversion.
    (7) When you distribute proxies or related material to shareholders 
in connection with the vote on a plan, you state that the plan complies 
with OTS regulations and that OTS does not endorse or approve the plan 
in any way. You may not make any written or oral representations to the 
contrary.
    (8) You do not grant stock options at less than the market price at 
the time of grant.
    (9) You do not fund the Option Plan or the MRP at the time of the 
conversion.
    (10) Your plan does not begin to vest earlier than one year after 
shareholders approve the plan, and does not vest at a rate exceeding 20 
percent per year.
    (11) Your plan permits accelerated vesting only for disability or 
death, or if you undergo a change of control.
    (12) Your plan provides that your executive officers or directors 
must exercise or forfeit their options in the event the institution 
becomes critically undercapitalized (as defined in Sec.  565.4 of this 
chapter), is subject to OTS enforcement action, or receives a capital 
directive under Sec.  565.7 of this chapter.
    (13) You file a copy of the proposed Option Plan or MRP with OTS 
and certify to OTS that the plan approved by the shareholders is the 
same plan that you filed with, and disclosed in, the proxy materials 
distributed to shareholders in connection with the vote on the plan.
    (14) You file the plan and the certification with OTS within five 
calendar days after your shareholders approve the plan.
    (b) You may provide dividend equivalent rights or dividend 
adjustment rights to allow for stock splits or other adjustments to 
your stock in your ESOP, MRP, and Option Plan.
    (c) The restrictions in paragraph (a) do not apply to plans 
implemented more than 12 months after the conversion, provided that 
materials pertaining to any shareholder vote regarding such plans are 
not distributed within the 12 months after the conversion. If a plan 
adopted in conformity with paragraph (a) is amended more than 12 months 
following your conversion, your shareholders must ratify any material 
deviations to the requirements in paragraph (a) of this section.

PART 575--MUTUAL HOLDING COMPANIES

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

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


Sec.  575.7  [Amended]

    5. Amend Sec.  575.7(a) by removing the first sentence.
    6. In Sec.  575.7(b), redesignate paragraph (b)(2) as (a)(9) and 
remove the word ``not'' in that paragraph, remove the remaining text in 
paragraph (b), redesignate paragraphs (c), (d), and (e) as paragraphs 
(b), (c), and (d), and revise newly designated paragraph (d) to read as 
follows:
    (d) Procedural and substantive requirements. The procedural and 
substantive requirements of 12 CFR part 563b shall apply to all mutual 
holding company stock issuances under this section, unless clearly 
inapplicable, as determined by OTS. For purposes of this paragraph (d), 
the term conversion as it appears in the provisions of part 563b of 
this chapter shall refer to the stock issuance, and the term converted 
or converting savings association shall refer to the savings 
association undertaking the stock issuance.
    7. Revise paragraphs (a)(3) through (a)(9) of Sec.  575.8 to read 
as follows:


Sec.  575.8  Contents of stock issuance plans.

    (a) Mandatory provisions. * * *
* * * * *
    (3) Provide that all employee stock ownership plans (ESOPs) must 
not encompass, in the aggregate, more than either 4.9 percent of the 
outstanding shares of the savings association's common stock or 4.9 
percent of the savings association's stockholders' equity at the close 
the proposed issuance.
    (4) Provide that all ESOPs and management recognition plans (MRPs) 
must not encompass, in the aggregate, more than either 4.9 percent of 
the outstanding shares of the savings association's common stock or 4.9 
percent of the savings association's stockholders' equity at the close 
of the proposed issuance. However, if the savings association's 
tangible capital equals at least ten percent at the time of 
implementation of the plan, OTS may permit such ESOPs and MRPs to

[[Page 41184]]

encompass, in the aggregate, up to 5.88 percent of the outstanding 
common stock or stockholders' equity at the close of the proposed 
issuance.
    (5) Provide that all MRPs must not encompass, in the aggregate, 
more than either 1.47 percent of the common stock of the savings 
association or 1.47 percent of the savings association's stockholders' 
equity at the close of the proposed issuance. However, if the savings 
association's tangible capital is at least ten percent at the time of 
implementation of the plan, OTS may permit MRPs to encompass, in the 
aggregate, up to 1.96 percent of the outstanding shares of the savings 
association's common stock or 1.96 percent of the savings association's 
stockholders' equity at the close of the proposed issuance.
    (6) Provide that all stock option plans (Option Plans) must not 
encompass, in the aggregate, more than either 4.9 percent of the 
savings association's outstanding common stock at the close of the 
proposed issuance or 4.9 percent of the savings association's 
stockholders' equity at the close of the proposed issuance.
    (7) A plan modified or adopted no earlier than one year after the 
close of the proposed issuance, or any subsequent issuance that is made 
in substantial conformity with the purchase priorities set forth in 
Part 563b, may exceed the percentage limitations contained in 
paragraphs 3 through 6 (plan expansion), subject to the following two 
requirements. First, all common stock awarded in connection with any 
plan expansion must be acquired for such awards in the secondary 
market. Second, such acquisitions must begin no earlier than when such 
plan expansion is permitted to be made.
    (8)(i) Provide that the aggregate amount of common stock that may 
be encompassed under all Option Plans and MRPs, or acquired by all 
insiders of the association and associates of insiders of the 
association, must not exceed the following percentages of common stock 
or stockholders' equity of the savings association, held by persons 
other than the savings association's mutual holding company parent at 
the close of the proposed issuance:

------------------------------------------------------------------------
                                                             Officer and
                                                               director
                      Institution size                        purchases
                                                              (percent)
------------------------------------------------------------------------
$50,000,000 or less........................................           35
$50,000,001-100,000,000....................................           34
$100,000,001-150,000,000...................................           33
$150,000,001-200,000,000...................................           32
$200,000,001-250,000,000...................................           31
$250,000,001-300,000,000...................................           30
$300,000,001-350,000,000...................................           29
$350,000,001-400,000,000...................................           28
$400,000,001-450,000,000...................................           27
$450,000,001-500,000,000...................................           26
Over $500,000,000..........................................           25
------------------------------------------------------------------------

    (ii) The percentage limitations contained in paragraph 8(i) may be 
exceeded provided that all stock acquired by insiders and associates of 
insiders or awarded under all MRPs and Option Plans in excess of those 
limitations is acquired in the secondary market. If acquired for such 
awards on the secondary market, such acquisitions must begin no earlier 
than one year after the close of the proposed issuance or any 
subsequent issuance that is made in substantial conformity with the 
purchase priorities set forth in part 563b.
    (iii) In calculating the number of shares held by insiders and 
their associates under this provision, shares awarded but not delivered 
under an ESOP, MRP, or Option Plan that are attributable to such 
persons shall not be counted as being acquired by such persons.
    (9) Provide that the amount of common stock that may be encompassed 
under all Option Plans and MRPs must not exceed, in the aggregate, 25 
percent of the outstanding common stock held by persons other than the 
savings association's mutual holding company parent at the close of the 
proposed issuance.
    8. Add a new paragraph (c) to Sec.  575.8, to read as follows.
    (c) Applicability of provisions of Sec.  563b.500(a) to minority 
stock issuances. Notwithstanding Sec.  575.7(d) of this part, 
Sec. Sec.  563b.500(a)(2) and (3) do not apply to minority stock 
issuances, because the permissible sizes of ESOPs, MRPs, and Option 
Plans in minority stock issuances are subject to each of the 
requirements set forth at paragraphs (a)(3) through (a)(9) of this 
section. Sections 563b.500(a)(4) though (a)(14) apply for one year 
after the savings association engages in a minority stock issuance that 
is conducted in accordance with the purchase priorities set forth in 
part 563b. In addition to the shareholder vote requirement for Option 
Plans and MRPs set forth at Sec.  563b.500(a)(6), any Option Plans and 
MRPs put to a shareholder vote during the year after a minority stock 
issuance that is conducted in accordance with the purchase priorities 
set forth in part 563b must be approved by a majority of the votes cast 
by stockholders other than the mutual holding company.

    Dated: July 11, 2006.

    By the Office of Thrift Supervision.
John M. Reich,
Director.
 [FR Doc. E6-11278 Filed 7-19-06; 8:45 am]
BILLING CODE 6720-01-P