Acquisition of Control of Savings Associations; Applications, Approval Standards and Procedural Requirements

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 574

[No. 94-20]

RIN 1550-AA63

Acquisition of Control of Savings Associations; Applications,

Approval Standards and Procedural Requirements

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (OTS) is amending its

acquisition of control regulations to implement section 211 of the

Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).

The final rule specifies additional factors that the OTS must consider

in acting on applications to acquire savings associations under section

10(e) of the Home Owners' Loan Act (HOLA). The intended effect of these

amendments is to conform OTS regulations to the statutory changes.

In addition, the OTS is amending its acquisition of control

regulations to reflect the previous combination of the various holding

company application forms in order to provide consistency between the

forms and the regulations, to eliminate confusion, and to streamline

the regulations.

EFFECTIVE DATE: July 5, 1994.

FOR FURTHER INFORMATION CONTACT: David Sjogren, Program Manager,

Corporate Analysis, (202) 906-6739, Supervisory Operations, Robyn

Dennis, Program Manager, (202) 906-5751, Policy, or Kevin A. Corcoran,

Assistant Chief Counsel, (202) 906-6962, Corporate and Securities

Division, Office of Thrift Supervision, 1700 G Street, NW., Washington,

DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

The OTS is adopting a final rule that revises its acquisition of

control regulations to include new supervisory factors that the FDICIA

requires the OTS to consider in reviewing and acting on applications to

acquire savings associations under section 10(e) of the HOLA. These

changes are required by section 211 of the FDICIA, Public Law 102-242,

105 Stat. 2236. In addition, the OTS is amending its acquisition of

control regulations to reflect the previous combination of the various

holding company application forms.

On November 23, 1993, the OTS issued notice of a proposal to amend

the agency's regulations implementing section 10(e) of the HOLA in

accordance with section 211 of the FDICIA, and to amend the acquisition

of control regulations to reflect the combination of the holding

company application forms.1 The public comment period expired on

December 23, 1993.

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\1\58 FR 61850 (November 23, 1993).

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Section 211 of the FDICIA provides that the OTS must disapprove an

application to acquire a savings association under section 10(e) of the

HOLA:

(1) If the company fails to provide adequate assurances to the OTS

that the company will make available to the OTS such information on the

operations or activities of the company, and any affiliate of the

company, as the OTS determines to be appropriate to determine and

enforce compliance with the HOLA; or (2) in the case of an application

involving a foreign bank, if the foreign bank is not subject to

comprehensive supervision or regulation on a consolidated basis by

appropriate authorities in the bank's home country.

Section 211 of the FDICIA also provides that the OTS's

consideration of the managerial resources of a company or savings

association shall include consideration of the competence, experience

and integrity of the officers, directors and principal shareholders of

the company or savings association.

The OTS is adopting the final rule substantially as proposed. As

proposed, the final rule, rather than including a separate definition

of the term ``principal shareholder,'' relies on existing terminology,

``controlling shareholder,'' in the OTS acquisition of control

regulations for this purpose, and requires the OTS to consider the

competence, experience, and integrity of ``controlling

shareholders.''2

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\2\Under the OTS acquisition of control regulations, a

``controlling shareholder'' is ``any person who directly or

indirectly or acting in concert with one or more persons or

companies, or together with members of his or her immediate family,

owns, controls, or holds with power to vote 10 percent or more of

the voting stock of a company or controls in any manner the election

or appointment of a majority of the company's board of directors.''

12 CFR 574.2(g).

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In addition, the final rule provides that the OTS also will

consider whether an applicant has provided the OTS with adequate

assurances that it will make available such information on its

operations or activities, and the operations or activities of any

affiliate of the applicant, that the OTS deems appropriate to determine

and enforce compliance with the HOLA.

The OTS has determined, in general, not to require additional

assurances from domestic applicants. The OTS currently seeks all

information needed to consider holding company applications,3 has

promulgated regulations and issued forms that require savings and loan

holding companies to file information with the OTS on a regular

basis,4 and has broad authority under section 10(b) of the HOLA to

examine savings and loan holding companies and their affiliates. In

addition, the OTS has broad authority to investigate and bring

enforcement actions against holding companies and other affiliates of

savings associations under section 10(g) of the HOLA, as well as other

statutory provisions, including section 8 of the Federal Deposit

Insurance Act. Nevertheless, section 10(e)(2)(C) gives the OTS broad

discretion with respect to the circumstances under which additional

assurances may be required, as well as the nature of such assurances,

and the OTS may, where appropriate, seek additional assurances

regarding the availability of information from an applicant and its

affiliates.

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\3\See OTS Form H-(e)______.

\4\See 12 CFR 584.1 and OTS Forms H-(b)10 and H-(b)11.

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With respect to holding company applications submitted by foreign

acquirors, the OTS has, as a matter of policy, required foreign

acquirors to enter into a foreign acquiror agreement.5 Foreign

acquiror agreements generally state, inter alia, that the foreign

acquiror (i) voluntarily consents to United States jurisdiction for

purposes of laws relating to United States depository institutions,

(ii) shall designate agents in the United States for service of

process, and (iii) shall permit the OTS to examine it to such extent as

the Director may prescribe. In addition, as a policy matter, the OTS

and its predecessor, the Federal Home Loan Bank Board, have generally

required foreign acquirors to establish a United States holding company

as the direct holding company of the acquired savings association.

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\5\In addition, the OTS has required foreign acquirors that

attempt to rebut a rebuttable determination of control under 12 CFR

574.4(b) and 574.4(e) to file a foreign acquiror agreement.

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The OTS will continue to require foreign acquirors to enter into

foreign acquiror agreements, but will not require further assurances as

a general matter. As noted above, the OTS, where appropriate in the

context of a particular application, may seek additional assurances

from a foreign acquiror that it will make information available to the

OTS concerning itself or its affiliates.

In the case of applications involving a foreign bank, the OTS will

consider whether the bank is subject to comprehensive supervision on a

consolidated basis by the appropriate authorities in the foreign bank's

home country. In the proposal, the OTS requested comment on the

standards to be applied in this area, and on whether the OTS should

subject foreign bank holding companies to the same requirement. As the

statute refers only to foreign banks, the final rule, as was the case

with the proposal, refers only to foreign banks.

The regulations of the Board of Governors of the Federal Reserve

System (Federal Reserve Board) implementing section 202(a) of the

FDICIA set forth the basis on which the Federal Reserve Board will

determine whether a foreign bank is subject to ``comprehensive

supervision or regulation on a consolidated basis.''6 The Federal

Reserve Board regulation provides that the Federal Reserve Board will

determine whether the foreign bank is supervised or regulated in such a

manner that its home country supervisor receives sufficient information

on the worldwide operations of the foreign bank (including the

relationships of the bank to any affiliate) to assess the foreign

bank's overall financial condition and compliance with law and

regulation.7

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\6\See 58 FR 6348, 6360-6361 (12 CFR 211.24(c)(1)(ii)).

\7\Id. The regulation sets forth certain factors that the

Federal Reserve Board will assess, including the extent to which the

home country supervisor: Ensures that the foreign bank has adequate

procedures for monitoring and controlling its activities worldwide;

obtains information on the foreign bank and its subsidiaries and

offices outside the home country through regular reports of

examination, audit reports, or otherwise; obtains information on the

dealings and relationships between the foreign bank and its foreign

and domestic affiliates; receives from the foreign bank financial

reports that are consolidated on a worldwide basis, or comparable

information; and evaluates prudential standards, such as capital

adequacy and risk asset exposure, on a worldwide basis.

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The OTS believes that Federal Reserve Board regulations set forth

appropriate standards in this area, and is not currently aware of any

compelling reasons to use a standard differing from that used by the

Federal Reserve Board. Accordingly, the final regulation generally

incorporates the standard set forth in the Federal Reserve Board's

regulations. OTS believes this approach also will promote regulatory

uniformity by applying similar standards to foreign banks that propose

to acquire banks and savings associations.

The OTS also requested comment regarding the manner in which the

OTS should implement this standard, i.e., whether the OTS should

conduct a case-by-case analysis, or adopt some other approach, such as

a country-by-country, or regulator-by-regulator approach. The OTS has

decided to adopt the approach taken by the Federal Reserve Board. The

Federal Reserve Board has stated that as the standard requires a bank-

specific determination, it will address the standard on a case-by-case

basis.8

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\8\The Federal Reserve Board has stated that it expects, as it

acts on applications, to use information already reviewed regarding

comprehensive supervision in particular countries to make judgments

without requiring significant input from similar applicants

chartered in the same country. See 58 FR 6348, 6349.

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II. Summary of Comments

The OTS received two comments regarding the proposed amendments,

one from a savings association and one from a thrift industry trade

association. The savings association expressed general support for the

proposed rule. The trade association commenter addressed four issues.

First, the commenter requested that the OTS, in defining the term

``principal shareholder,'' consider alternatives to the ten percent

threshold, and urged the OTS to address the merits of a 25 percent

threshold.

The OTS continues to believe that a ten percent threshold is

appropriate. Under the OTS acquisition of control regulations, an

individual acquiror generally acquires control of a savings association

or savings and loan holding company, subject to rebuttal, upon

acquiring over ten percent of a class of voting stock and acquiring a

``control factor.''9 Such an acquiror must submit a change of

control notice or rebuttal of control prior to exceeding the ten

percent threshold.10

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\9\12 CFR 574.4 (b) and (c).

\1\0See 12 CFR 574.3, 574.4.

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As the OTS noted in the proposal, the statutory language does not

prevent the OTS from considering the extent to which a ``principal

shareholder'' or ``controlling shareholder'' is involved in the affairs

of a savings association or savings and loan holding company. An

underlying purpose of section 211 is to permit the OTS to consider the

abilities of the principal shareholders of savings associations and

savings and loan holding companies in appropriate situations, including

situations where a principal shareholder has or could have a

significant effect on the financial and managerial resources, future

prospects, or safety and soundness of a savings association or savings

and loan holding company. Thus, the OTS, in weighing the shareholder's

experience and competence, would give significant consideration to

whether the shareholder proposes to be a passive investor. For

instance, a principal shareholder who holds a passive investment would

not need the same level of experience and competence required of a

principal shareholder who could exert significant influence upon the

direction of the savings association or savings and loan holding

company.

The OTS notes that its approach is similar to the approach taken by

the Federal Reserve Board.11

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\1\1See 58 FR 471, 472 (January 6, 1993), and 58 FR 4073, 4074

(January 13, 1993), in which the Federal Reserve Board defines

``principal shareholder'' using a ten percent threshold.

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Second, the commenter responded to the OTS's request for comment as

to whether the OTS should seek specific assurances concerning the

operations or activities of an acquiror or its affiliates.12 The

commenter urged that the OTS not add requirements regarding such

assurances to the proposed regulations. As previously noted, the OTS

generally will not require specific assurances regarding these matters.

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\1\2In this context, in response to the OTS's request for

comment regarding foreign acquiror agreements, the commenter made

general observations regarding the enforceability of foreign

acquiror agreements.

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Third, the commenter responded to the OTS's specific request for

comment on the manner in which assurances should be presented to the

OTS as to the availability of information on the operations or

activities of certain companies. The commenter observed that it is a

federal crime to file false statements with the OTS, and, therefore,

that the assurances need not take the form of an affidavit or

certification.

The OTS has, under various circumstances, required materials to be

submitted in the form of an affidavit or certification. As noted above,

the OTS is not generally requiring applicants to provide specific

assurances regarding the availability of information. In the event that

the OTS requires additional assurances in a particular case, the OTS

will determine what form of assurance is appropriate under the

circumstances.

Fourth, the commenter addressed the OTS's determination of whether

a foreign bank is subject to ``comprehensive supervision or regulation

on a consolidated basis by the appropriate authorities in the bank's

home country.'' The commenter noted that the OTS has not traditionally

made determinations regarding this issue, and urged the OTS to consider

deferring to or otherwise using the resources of the Federal Reserve

Board and other banking agencies. The commenter urged the OTS to take

advantage of the expertise of other agencies in this area.

As the OTS must act on applications under section 10(e) of the

HOLA, it is the OTS's responsibility to determine whether the applicant

satisfies the applicable standards. Nevertheless, the OTS intends to

consider previous determinations made by the Federal Reserve Board (or

other applicable Federal regulatory agency) regarding supervision or

regulation of a foreign bank, and applicants should provide such

information to the OTS in the application process. The OTS believes

that consideration of determinations made by other regulatory agencies

decreases the burden on applicants to provide information, and

facilitates prompt processing of applications. The OTS recognizes that

such determinations may not be available in every case, because the

Federal Reserve Board (and the OTS) make their determinations on a

case-by-case (rather than, e.g., a country-by-country) basis. In

addition, as stated above, the OTS has generally incorporated the

Federal Reserve Board's standards in this area.

III. Executive Order 12866

The Director of the OTS has determined that this proposal does not

constitute a ``significant regulatory action'' for purposes of

Executive Order 12866.

IV. Regulatory Flexibility Act

It is certified that this proposal will not have a significant

economic impact on a substantial number of small entities.

Consequently, a Regulatory Flexibility Analysis is not required.

List of Subjects in 12 CFR Part 574

Administrative practice and procedure, Holding companies, Reporting

and recordkeeping requirements, Savings associations, Securities.

Accordingly, the Office of Thrift Supervision hereby amends part

574, subchapter D, chapter V, title 12, Code of Federal Regulations as

set forth below:

PART 574--[AMENDED]

1. The authority citation for part 574 continues to read as

follows:

Authority: 12 U.S.C. 1467a, 1817, 1831i.

2. Section 574.6 is amended by revising paragraph (a) to read as

follows:

Sec. 574.6 Procedural requirements.

(a) Form of application or notice. An application, notice, or

informational filing required by Sec. 574.3 of this part shall be filed

on the Application/Information Filing H-(e) ________ form. (As

specified in the form's instructions, the blank line following the H-

(e) should be filled in by applicants with the appropriate ``1'', ``1-

S'', ``2'', ``3'', or ``4'' depending on the type of application.) The

specific application requirements for each type of filing are indicated

on the form. An acquiror may request confidential treatment of portions

of an application or notice only by complying with the requirements of

paragraph (f) of this section. In the case of an application involving

a merger (including a merger with an interim association) the

Application/Information Filing H-(e) ________ form shall be used in

lieu of an application that otherwise would be required for such merger

under Secs. 546.2, 552.13, and 563.22 of this chapter.

(1) H-(e)1. This application type shall be filed under

Sec. 574.3(a) of this part by a company, other than a savings and loan

holding company, for approval to acquire direct or indirect control of

one savings association.

(2) H-(e)1-S. This application type shall be filed under

Sec. 574.3(a) of this part by a savings association for approval to

reorganize into a holding company structure, provided that the proposed

transaction satisfies each of the conditions for automatic approval

specified in Sec. 574.7 (a)(2) and (a)(3) of this part.

(3) H-(e)2. (i) This application type shall be filed under

Sec. 574.3(a) of this part:

(A) By a savings and loan holding company for approval to acquire

and hold separately one or more savings associations;

(B) By any other company for approval to acquire and hold

separately more than one savings association;

(C) By a savings and loan holding company for approval of an

acquisition of shares issued by a savings association in a qualified

stock issuance pursuant to Sec. 574.8 of this part; or

(D) By any director, officer, or any individual who owns, controls,

or holds with power to vote (or holds proxies representing) more than

25 percent of the voting shares of a savings and loan holding company

for approval of an acquisition of one or more savings associations.

(ii) The OTS may determine as a general matter or on a case-by-case

basis not to require application information not relevant to

transactions described in paragraphs (a)(3)(i) (C) and (D) of this

section.

* * * * *

3. Section 574.7 is amended by revising the section heading and

paragraph (c) to read as follows:

Sec. 574.7 Determination by the OTS.

* * * * *

(c) Application criteria. (1) The OTS may deny an application by a

company or certain persons, described in paragraph (b) of this section,

affiliated with a savings and loan holding company, to acquire control

of a savings association, or by a savings and loan holding company to

acquire a qualified stock issuance pursuant to Sec. 574.8 of this part:

(i) If the OTS finds that the financial and managerial resources

and future prospects of the acquiror and association involved would be

detrimental to the association or the insurance risk of the SAIF or

BIF; or

(ii) If the acquiror fails or refuses to furnish information

requested by the OTS.

(2) Consideration of the managerial resources of a company or

savings association shall include consideration of the competence,

experience, and integrity of the officers, directors, and controlling

shareholders of the company or association. In connection with the

applications filed pursuant to Secs. 574.6 (a)(3) and (a)(4), and 574.8

of this part, the OTS will also consider the convenience and needs of

the community to be served. Moreover, the OTS shall not approve any

proposed acquisition:

(i) Which would result in a monopoly, or which would be in

furtherance of any combination or conspiracy to monopolize or to

attempt to monopolize the savings and loan business in any part of the

United States;

(ii) The effect of which on any section of the country may be

substantially to lessen competition, or tend to create a monopoly, or

which in any other manner would be in restraint of trade, unless the

OTS finds that the anticompetitive effects of the proposed acquisition

are clearly outweighed in the public interest by the probable effect of

the acquisition in meeting the convenience and needs of the community

to be served;

(iii) If the company fails to provide adequate assurances to the

OTS that the company will make available to the OTS such information on

the operations or activities of the company, and any affiliate of the

company, as the OTS determines to be appropriate to determine and

enforce compliance with the Home Owners' Loan Act; or

(iv) In the case of an application by a foreign bank, if the

foreign bank is not subject to comprehensive supervision or regulation

on a consolidated basis by the appropriate authorities in the home

country of the foreign bank. For purposes of this paragraph (c)(2)(iv),

``comprehensive supervision or regulation on a consolidated basis by

the appropriate authorities'' shall be determined using the standards

set forth at 12 CFR 211.24(c)(1)(ii).

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Dated: March 1, 1994.

By the Office of Thrift Supervision.

Jonathan L. Fiechter,

Acting Director.

[FR Doc. 94-13400 Filed 6-1-94; 8:45 am]

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