Conversions From Mutual to Stock Form; Mutual Savings and Loan Holding Companies

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 563b and 575

[No. 94-253]

RIN 1550-AA73

Conversions From Mutual to Stock Form; Mutual Savings and Loan

Holding Companies

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Office of Thrift Supervision (OTS or Agency), is issuing a

final rule to revise its regulations governing conversions from mutual-

to-stock form and mutual savings and loan holding companies. On May 3,

1994, the OTS issued an interim final rule with request for comment and

a proposed rule with request for comment. The interim final rule

contained amendments to the OTS's mutual-to-stock conversion

regulations (conversion regulations) designed to strengthen the

standards governing conversions and to ensure the integrity of the

conversion process. The proposed rule contained a new ``convenience and

needs'' test to be added to the approval standards for conversion

transactions.

This final rule includes revisions made to the interim final rule

that reflect OTS's consideration of the comments it received during the

45-day comment period following publication of the interim final rule.

In addition, this final rule also addresses the comments received by

the OTS during the 75-day comment period following publication of the

proposed rule and adopts the proposed rule without modification.

Finally, this final rule incorporates certain technical changes to the

regulations governing mutual-to-stock conversions and mutual savings

and loan holding companies.

EFFECTIVE DATE: January 1, 1995.

FOR FURTHER INFORMATION CONTACT: Teri M. Valocchi, Counsel (Banking and

Finance) (202/906-7299), Michael P. Vallely, Counsel (Banking and

Finance) (202/906-6241), J. Larry Fleck, Assistant Chief Counsel (202/

906-6413), Business Transactions Division, Chief Counsel's Office;

Diana L. Garmus, Deputy Assistant Director (202/906-5683), Corporate

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

Washington, D.C. 20552.

SUPPLEMENTARY INFORMATION:

I. Summary of Interim Final and Proposed Rules

On May 3, 1994, the OTS published an interim final rule with

request for public comment.1 The interim final rule amended the

OTS regulations governing mutual-to-stock conversions of savings

associations to strengthen the conversion standards and ensure the

integrity of the conversion process. Specifically, the amendments:

---------------------------------------------------------------------------

\1\See 59 FR 22725 (May 3, 1994).

---------------------------------------------------------------------------

(A) revised and clarified the appraisal standards;

(B) prohibited the use of ``running'' proxies by management of

converting associations;

(C) placed the current tax-qualified employee stock ownership plan

(ESOP) stock purchase priority after those of eligible depositors;

(D) provided stock purchase priority to core depositors;

(E) required that a stock purchase preference be given to account

holders and voting members residing in the association's local

community;

(F) prohibited management stock benefit plans in a conversion;

(G) limited merger conversions to institutions that qualify for a

conversion, i.e., financially-weak institutions;

(H) lengthened the conversion public comment period;

(I) required converting associations to submit business plans in

support of the conversion; and

(J) prohibited the repurchase of a converted association's stock

within one year of conversion.

The interim final rule did not propose any changes to the

prohibition in the OTS conversion regulations on the transfer or sale

of subscription rights or similar ``free distribution'' schemes, but

did request comment on whether subscription rights should continue to

be nontransferable, or if transferability is recommended, the reasons

for, and the manner in which to allow for, such transfer. Finally, the

interim final rule made preliminary conversion proxy materials

available to the public and incorporated certain technical changes to

the OTS's regulations governing mutual savings and loan holding

companies.

Separately, the OTS published a proposal to amend the conversion

regulations and the regulations governing stock offerings by savings

association subsidiaries of mutual holding companies (MHC stock

offerings) by adding a new ``convenience and needs'' standard to

existing approval standards for such transactions.2 Under the

proposed standard, the OTS would consider the extent to which the

transaction would affect the convenience and needs of the communities

served by the applicant.

---------------------------------------------------------------------------

\2\See 59 FR 22764 (May 3, 1994).

---------------------------------------------------------------------------

In evaluating transactions under this standard, the OTS would

review the applicant's performance under the Community Reinvestment Act

(CRA),3 the contents of the business plan submitted in support of

the conversion, and other factors relating to the applicant's

performance in meeting the convenience and needs of its delineated

community. Under the proposal, the OTS could deny an application or

approve it on the condition that the applicant improve certain aspects

of its CRA performance record or address particular credit or lending

needs of the communities that it serves.

---------------------------------------------------------------------------

\3\See 12 U.S.C. 2901-2907.

---------------------------------------------------------------------------

The OTS worked with the Federal Deposit Insurance Corporation

(FDIC) on the interim final rule and this final rule to ensure greater

consistency in the regulatory standards and policies in this area.

II. Summary of Comments and Analysis of Issues

The public comment period for the interim final rule closed on June

17, 1994. The OTS received 75 comment letters. Twenty-seven comment

letters were submitted by financial institutions or their holding

companies, including 20 letters from federally-chartered savings

associations and seven letters from other financial institutions and

holding companies. Of the remaining 48 comment letters, persons in

their individual capacity submitted 15, law firms submitted 13, state

trade associations submitted six, a national trade association

submitted one, city and state banking commissioners submitted three,

various groups representing financial institutions submitted seven, a

financial regulatory ``shadow'' group submitted one and certified

public accountants submitted two.

The comment period on the proposed convenience and needs rule

closed on July 18, 1994. The OTS received 12 comment letters, including

five from trade associations and similar groups representing financial

institutions, two from law firms representing thrifts, two from persons

in their individual capacity, one from a state thrift regulatory

authority, one from an association of state thrift regulatory

authorities and one from a federally-chartered savings bank.

The following is a discussion of the major issues raised by the

commenters and a brief analysis and resolution of the issues.

A. Revisions to the Appraisal Standards

As noted in the preamble to the interim final rule, the integrity

of the OTS' current conversion program rests, in large part, on the

existence of independent and accurate appraisals of converting

associations.4 When the initial conversion regulations were

adopted in 1974, the Federal Home Loan Bank Board, the predecessor

agency to the OTS, expressed concerns about underpricing conversion

stock and stated that no method of conversion could be considered

equitable unless the conversion stock was accurately appraised and sold

at its pro forma market value.5

---------------------------------------------------------------------------

\4\See 59 FR 22725, 22726 (May 3, 1994).

\5\See 39 FR 9142 (March 7, 1974).

---------------------------------------------------------------------------

The OTS believes that the appraisal process has adequately

addressed conversion valuation issues during most of the period since

1974. As also noted in the preamble to the interim final rule, however,

the OTS has been concerned that some recent appraisals were setting pro

forma market values that were significantly below the market value of

the converting association. In response to these concerns, the OTS, in

the interim final rule, revised the conversion regulations to formalize

the current practice of requiring a full appraisal report and

justification for the methodology employed. The OTS also clarified the

provision in the conversion regulations that requires that the

conversion applicant submit information demonstrating, to the

satisfaction of the OTS, the independence and expertise of the

appraiser. The revised regulations allow the OTS to censure, suspend or

bar an appraiser from practicing before the OTS in egregious cases of

consistent undervaluation on the part of an appraiser.

OTS further revised the appraisal rules to provide that in those

instances where the initial appraisal report is deemed to be materially

deficient and/or substantially incomplete, the OTS may deem the entire

conversion application materially deficient and/or substantially

incomplete, and require the filing of a new application.6

---------------------------------------------------------------------------

\6\The OTS has recently issued updated staff guidance for

conversion appraisers that provides specific details on appraisal

methodology as well as report content, and also incorporates

provisions 9 and 10 of the Uniform Standards of Professional

Appraisal Practice. In adopting the guidelines, the OTS consulted

with the FDIC to ensure uniform appraisal standards.

---------------------------------------------------------------------------

Finally, the OTS requested public comment on whether it should

amend its regulations to prohibit an appraiser or its affiliates from

also serving as an underwriter or selling agent.

Approximately 25% of the comments addressing appraisal standards

affirmatively supported the requirement that a full appraisal report

and justification for methodology employed be required to insure a

``fair value'' assessment of an institution. One commenter cautioned

against an attempt to eliminate any ``pop'' or ``post conversion

windfall,'' and suggested management of such price increases instead,

by limiting them to a reasonable percentage. Eleven commenters

expressed concern that market forces cannot be regulated, that

appraisals and pricing of stock are not exact sciences, and that the

revisions may force the stock to be overvalued. One of the eleven

stated that the stock market is not predictable enough to

institutionalize an expectation that the stock of every institution

will trade within a fixed parameter following conversion.

One commenter requested that the terms ``materially deficient'' and

``consistently undervalued'' be defined and another commenter requested

that the term ``independence'' be defined and that the OTS provide

guidance as to the appropriate degree of participation by management in

the appraisal process.

One commenter stated that the OTS should deal with the appraiser

directly when an initial appraisal report is materially deficient or

substantially incomplete and should not penalize the thrift; another

commenter stated that the OTS should give institutions time to correct

inappropriate appraisals without the need to file costly new conversion

applications.

Eleven commenters addressed the issue of whether to prohibit

appraisers or their affiliates from also serving as underwriters or

selling agents. Six stated that appraisal firms should be separate from

firms that market conversion stock so as to avoid all potential

conflicts of interest. One of the six further stated that underwriters

or selling agents in one situation may not be able to be objective as

appraisers in another situation and that if an attorney continually

uses the same appraiser, that appraiser becomes a quasi-affiliate of

the attorney, with questionable independence. Five expressed the view

that there was no evidence of abuse where the appraiser and selling

agent are the same parties, that the two functions can be impartially

carried out and that to require different parties is costly and

detrimental to small thrifts.

In implementing revisions to the appraisal regulations, the OTS was

not attempting to create an appraisal system that would result in

precise conformity between appraisal values and post-conversion stock

prices. The OTS, however, remains concerned about significant

discrepancies between appraisal values and immediate post-conversion

trading prices. The OTS also recognizes that there will be

circumstances that could not reasonably have been foreseen by an

appraiser that may result in pricing discrepancies in a particular

transaction. As noted in the preamble to the interim final rule,

however, when there is a consistent pattern of discrepancies by a

particular appraisal firm, the independence and competence of the

appraiser is called into question.

The terms ``materially deficient'' and ``consistently undervalued''

as used in the regulation are heavily dependent upon the facts and

circumstances of each transaction or group of transactions. Because

there is no ``bright-line'' test that can be applied to these terms,

the OTS does not believe that it would be useful to further define

these terms.

With respect to the comment that the converting association should

not be penalized for a materially deficient or substantially incomplete

appraisal and the comment that the converting association should be

given the opportunity to correct the faulty appraisal, the OTS does not

believe that any change to the interim final rule is warranted. While

management of a converting association may properly rely on the opinion

of an independent appraiser in valuing conversion stock, it is

ultimately the fiduciary responsibility of management to ensure that

the converting association is properly priced for sale. The converting

association also is ultimately responsible for the quality of the work

of all of its agents, including its attorneys, accountants and selling

agent, as well as its appraiser, and thus, should exercise due care in

the hiring of such parties to ensure that qualified advisors and

experts have been retained on behalf of the association. In any

instance where a materially deficient conversion application is

submitted, whether as a result of significant legal, accounting,

appraisal or other deficiencies, the OTS retains the right to deem the

application materially deficient and reject it.

As to the issue of permitting ``corrections'' to inadequate

appraisals submitted to the OTS, the purpose of rejecting conversion

applications containing faulty appraisals is to encourage applicants to

file applications that are substantially complete and that comply with

regulatory requirements. If there are no consequences of filing an

application that is substantially incomplete, there is less incentive

to submit an adequate appraisal. In addition, given limited OTS staff

resources, it is unfair to delay review of complete conversion

applications with adequate appraisals by devoting inordinate amounts of

OTS staff time to multiple reviews of applications with inadequate

appraisals.

The OTS believes that there is an appropriate role for officers of

a converting association in the preparation of an appraisal. The OTS

expects that the appraiser will consult with officers of the

association in preparing the appraisal because the officers will often

be the sole source of information about certain aspects of the current

and future business operations of the association. It is not

appropriate, however, for the officers to attempt to influence or to

interfere with the independence of the appraiser. Similarly, appraisers

seeking engagement with a converting institution should not in any

manner suggest that they can provide a ``lower'' valuation than other

appraisers.

The board of directors has a primary responsibility to hire the

appraiser and to review the appraisal report. The board of directors is

entitled to rely on the appraiser's expertise. As with officers, it

would be inappropriate for the board of directors to influence or

interfere with the independence of the appraiser.

The board of directors also retains the authority to reject an

appraisal or to dismiss an appraiser. In such a case, the OTS would

conduct the same type of review that it does when a savings association

dismisses its accounting firm or rejects an accounting firm's

opinion.7

---------------------------------------------------------------------------

\7\17 CFR 229.304 (March 8, 1989).

---------------------------------------------------------------------------

The interim final rule requested comment on whether appraisers or

their affiliates should be prohibited from also serving as underwriters

or selling agents in a conversion. A majority, albeit a narrow one, of

those who commented on this aspect of the interim final rule were in

favor of a prohibition on firms serving in both roles. Upon review of

the comments, the OTS has determined that, as discussed in the interim

final rule, the appraisal process and the independence of the appraiser

should not be tainted by even the appearance of a conflict of interest.

Although the same firm infrequently performs both these services and

the OTS is not aware of any serious problems when it has, the final

rule generally prohibits a firm from this dual service, except where

procedures are followed and representations made to ensure that an

appraiser is separate from the underwriter or selling agent affiliate

and the underwriter or selling agent affiliate does not make

recommendations or in any way impact the appraisal. Additionally, the

final rule prohibits the appraiser from receiving any fees other than

the fees for services rendered in connection with the appraisal.

B. Prohibition on Use of ``Running'' Proxies

The conversion regulations have been revised to prohibit the use of

``running'' proxies and to require the use of a proxy specifically

designated for the conversion.

The majority of commenters addressing the revision supported the

prohibition of ``running'' proxies because it better ensures that

members understand the proposed change in the association's

organization. A few commenters expressed concern for the high costs of

using professional proxy solicitation firms but none thought the costs

were overly burdensome. Those commenters who opposed the prohibition

asserted that there were already sufficient safeguards, that the old

rule worked well since ``running'' proxies were only used if a member

did not send a proxy or vote in person, that detailed disclosure was

included in the proxy statements, and that the prohibition is an added

expense for converting institutions.

One commenter recommended adoption of a requirement that 50% of

those voting approve the conversion, rather than the existing

requirement that the conversion be approved by a 50% vote of all

depositors.

The OTS agrees with the majority of commenters and continues to

believe that the prohibition of ``running'' proxies is the most

effective manner in which to assure an increased role for an

association's membership in the conversion process. Accordingly, no

change has been made to the interim final rule. Thus, 12 CFR 563b.6(e)

will continue to require approval of the plan of conversion by at least

a majority of the total outstanding votes of the association's members,

unless state law requires a higher percentage for a state-chartered

converting savings association, in which case the higher percentage

will be used. Finally, the final rule revises section 575.13(a)(4) of

the mutual savings and loan holding companies regulation to clarify the

prohibition on the use of ``running'' proxies and the requirement for

the use of a specifically designated proxy for a mutual holding company

reorganization, mutual-to-stock conversion undertaken either by a

mutual savings association or a mutual holding company, or any other

material transactions.

C. Re-Prioritize Stock Purchase by Tax-Qualified Employee Stock

Ownership Plans

In its interim final rule, the OTS revised the stock purchase

priorities so as to give eligible account holders first priority and

tax-qualified employee stock benefit plans second priority. The

conversion regulations continue to give supplemental eligible account

holders third priority and all other voting members who have

subscription rights fourth priority.

A majority of the commenters recommended that the ESOP be given

first priority; a few commenters affirmatively supported giving the

ESOP second priority. The commenters that recommended giving the ESOP

first priority asserted that employees make the organization successful

and should have the first stake in the company's performance, that the

plans do not favor higher paid officers, but promote greater

productivity and motivation, that the plans do not prevent long-term

depositors from purchasing conversion stock, and that they protect

institutions from hostile takeover situations. These commenters further

asserted that if the ESOP is not established in the conversion, it will

be established later and will dilute shareholders' ownership interest.

A few commenters requested that the methodology for distribution of

shares in the event of oversubscription be clarified. The commenters

requested that the regulation be written to make clear the intent that

the ESOP would be able to purchase stock through open market purchases

or through authorized but unissued shares in the event of an

oversubscription. If this was not the intent of the regulation, one

commenter requested that the OTS clarify that it will grant a waiver or

no-action letter to permit the ESOP or any other tax-qualified plan to

purchase shares in the open market immediately following conversion.

As stated in the preamble to the interim final rule, although the

OTS believes that it is still appropriate to provide management

incentives and to encourage employee stock ownership in the converted

association, these interests have been overshadowed by other factors.

The former provision which granted a first priority to tax-qualified

employee benefit plans was a means to afford undercapitalized mutual

savings associations a measure of anti-takeover protection through the

opportunity to place a significant block of conversion stock in

friendly hands, and thus, encourage capital raising through conversion.

Because most mutual savings associations are now healthy, there is a

need to balance the interests of management and employees against those

of account holders by providing core depositors at mutual savings

associations the first opportunity to buy conversion stock. The final

rule will continue to give eligible account holders first priority. The

wording of 12 CFR 563b.3(c)(23) has been revised to clarify that

eligible account holders have first priority to purchase conversion

stock, tax-qualified employee stock benefit plans have second priority,

supplemental eligible account holders have third priority, and other

voting members who have subscription rights have fourth priority.

Also, as prescribed by 12 CFR 563b.3(c)(23), and further clarified

in the final rule, if the final conversion stock valuation exceeds the

maximum conversion stock offering range, up to ten percent of the total

offering of shares may be sold to the tax-qualified employee stock

benefit plans. This provision generally will allow ESOPs to be

allocated stock during periods of an active and strong thrift

securities market; however, such allocation generally will not be

available when the final pro forma market value as approved by the OTS

and disclosed in the stock offering materials does not exceed the

maximum conversion stock offering range.\8\ If the ESOP is not able to

purchase conversion stock, the ESOP or any other tax-qualified plan may

purchase shares in the open market or utilize authorized but unissued

shares only with prior OTS approval. Disclosure must be made in the

conversion stock offering materials of the potential open market

purchases or use of authorized but unissued shares to fund the ESOP and

its effect on the association and its shareholders. The final rule

reflects these clarifications.

---------------------------------------------------------------------------

\8\In the nearly 1,000 conversions completed since 1983, a

majority were sold for a conversion price that did not exceed the

maximum conversion stock offering range.

---------------------------------------------------------------------------

D. Revision to Eligibility Record Date

The OTS currently requires that the eligibility record date (ERD)

be set at a date no less than one year prior to board of director

approval of the plan of conversion. In the interim final rule, the OTS

also requested public comment as to whether a longer minimum time

period would be appropriate.

The majority of commenters supported the revision to the ERD based

on the reasoning that it properly protects the legitimate interests of

core depositors and provides sufficient assurance that long-term

supporters of an institution are given priority. A couple of commenters

recommended setting a maximum time limit of two years and one

recommended not extending beyond one year; one requested that

``depositor'' be defined as one who has ``savings in any type of a

deposit account of at least $100 continuously during the eligibility

period.''

Two commenters disagreed with the revision because it eliminates

legitimate local depositors and is impractical since accurate records

about depositors are not readily available. One commenter noted that

directors and executive officers will have to plan further ahead,

maintaining records for longer periods of time. Two commenters stated

that the revision has no effect since professional investors are in

place for a considerable period. One commenter recommended waivers for

institutions of $100 million or less that can demonstrate that

information is not available.

A few commenters suggested eliminating the supplemental eligible

account holder category, because the date for determining such account

holders is close to the record date, and therefore duplicative, or in

the alternative, setting a supplemental eligibility record date (SERD)

only if the ERD is more than 18 months prior to the date of the latest

application amendment filed before OTS approval. One commenter

suggested moving the SERD from the current 15 month period to a 24

month period; and also noted that the ERD revision and the local

community depositor preference create three additional categories,

making for extraordinary processing difficulties.

One commenter suggested: (1) giving purchase preference to both

depositors and borrowers as of the ERD; (2) giving preference to the

eligible and supplemental eligible account holders whose accounts

remain open at the voting record date over those who terminated their

account relationship; and (3) amending the regulation to replace the

100 share initial allocation\9\ with a provision that the initial

allocation may be tailored to the circumstances of the thrift's

offering.

---------------------------------------------------------------------------

\9\See 12 CFR 563b.3(c) (2)(ii) and (4)(iv).

---------------------------------------------------------------------------

The interim final rule will continue in effect without change for

the reason stated by most commenters and supported by OTS: it properly

protects the legitimate interests of core depositors and provides

sufficient assurance that these depositors are given priority.

``Eligible account holders'' are defined as those holders with savings

accounts in place for a minimum of one year prior to board of director

adoption of the plan of conversion. The OTS also believes there is no

compelling reason to set a maximum time limit for an ERD. As stated in

the interim final rule, the one year period is a minimum time period.

Converting associations may designate such longer time periods as they

may deem appropriate to encompass longer term depositors in the local

communities served by the institution.

The definition of qualifying deposit will continue as stated in 12

CFR 563b.3(e). Also, the OTS believes that there is no compelling

reason to eliminate or revise the current supplemental eligibility

record date. Thus, supplemental eligible account holders, as currently

defined in the regulation, will continue to be a category with a

priority immediately following that of tax-qualified employee benefit

plans. In addition, the OTS believes that there is no compelling reason

to revise the current regulation that: 1) gives a purchase preference

to all depositors (but not borrowers); 2) does not differentiate

between eligible and supplemental eligible account holders whose

accounts remain open at the voting record date over those who

terminated their account relationship after board of director approval

of the plan of conversion; and 3) requires the 100 share initial

allocation.

E. Preference for Depositors in Local Community

Prior to promulgation of the interim final rule, the OTS conversion

regulations required a converting association to conduct a community

offering of conversion stock in the local community, prior to a general

public offering,\10\ but did not permit converting associations to give

account holders and voting members in those local communities a

priority to purchase stock in the initial subscription offering.\11\

However, to minimize conversion expenses, the OTS permitted converting

associations to not register under state blue sky laws in those states

where there was a relatively small number of depositors compared to the

overall depositor base, even though this resulted in some depositors

being precluded from purchasing stock in the conversion offering. In

addition, the OTS has, on a case by case basis, permitted thrift

subsidiaries of mutual holding companies to prioritize stock purchases

by account holders and voting members in the local communities.\12\

---------------------------------------------------------------------------

\10\See 12 CFR 563b.3(c)(6)(iv).

\11\See 12 CFR 563b.3(c)(2), (4), (5).

\12\See 12 CFR 575.7(d)(6)(ii).

---------------------------------------------------------------------------

The interim final rule required that a stock purchase preference be

given to eligible account holders, supplemental eligible account

holders and voting members residing in the association's local

community. Those having preference in each priority group (i.e.,

eligible account holder, supplemental eligible account holder and

voting member) are persons who reside in the association's ``local

community'' or within 100 miles of a home or branch office of the

converting association. The interim final rule defined ``local

community'' to include all counties in which the converting association

has a home or branch office, each county's standard metropolitan

statistical area or the general metropolitan area of each of these

counties and such other similar area(s) as provided for in the

converting association's plan of conversion, as approved by the OTS.

Over one-half of the commenters on the interim final rule expressed

views on the local depositor preference (LDP) provision. Approximately

one-half of those commenters supported the LDP provision for various

reasons such as: it promotes local control and involvement and is more

sensitive to the community's needs; it serves the community first and

gives depositors in the local community a more meaningful opportunity

to participate; it is a good way to maintain local control of

community-oriented associations; and it deals with the problem of

outside investors who tend to put undue pressure on management to

achieve a higher stock value more rapidly than may be feasible through

safe and sound operations.

A majority of the supporters of the LDP provision also suggested

various changes to the interim final rule. Three suggested eliminating

the 100 mile rule; one suggested using 50 instead of 100 miles; and

three requested that the OTS clarify the parameters of 100 miles, i.e.,

from headquarters or branch, to residence or town of residence, within

certain counties, etc. One commenter noted that the standard

metropolitan statistical area (SMSA) is no longer in general use in

delineating communities and markets and has been replaced by

``metropolitan statistical area'' and ``consolidated metropolitan

statistical area.'' The same commenter also noted that the term

``general metropolitan area'' is not a term of general usage nor is it

explained in the interim final rule. This commenter suggested

eliminating the 100 mile priority and restricting priority to persons

living within the local community defined by reference to counties.

Two commenters suggested using zip codes corresponding to

delineated CRA service areas, and three commenters suggested allowing

each institution voluntarily to establish a local priority and identify

local depositors. Four commenters requested that the rule be clarified

to include, as local depositors, long-term account holders who lived in

the area and kept accounts open but have retired and moved from the

area, and long-term account holders who work or regularly vacation in

the local community but do not reside there.

One selling agent had concerns with the definition of ``local

community'' and concerns with the word ``reside,'' including the

problem with multiple residences. This commenter suggested that the

test for the geographic area for the domicile of an account include the

whole of any zip code that is partially within the geographic area. The

commenter also suggested developing an affidavit to accompany the stock

order form and requested that OTS not require any independent

verification by the selling agents.

Commenters that opposed the LDP provision asserted that all

association members, regardless of location, should be treated the same

and be allowed to participate in the conversion process on an equal

basis. The objections raised by commenters opposing the LDP provision

included the following: all depositors have ownership, voting and

liquidation rights, deposits are used indiscriminately, and the

definition of customer should not be related to location; the LDP

provision is an artificial distinction between depositors based upon

geography; non-local persons with long-term accounts and/or more money

in accounts would have a lower priority than local persons with

shorter-term accounts and/or less money; the LDP is arbitrary,

capricious, unfairly discriminatory, ill-suited to advancing any

legitimate public policy objective, and in violation of the

Administrative Procedure Act;13 the LDP deprives non-locals, who

have had long-term accounts with significant amounts of money and who

maintain banking relationships, of rightful opportunity to participate

in attractive conversions; it is unconscionable for a federal agency to

require U.S. citizens to be treated differently based on their

residence; and the LDP provision conflicts with the takings, due

process and equal protection clause of the United States Constitution.

---------------------------------------------------------------------------

\1\3One of the most detailed comment letters came from counsel

representing Thrift Depositors of America, Inc. (TDA), a trade

association of mutual savings association depositors. A lawsuit by

TDA (TDA vs. OTS, Civil Action No. 94-1008, U.S. District Court for

the District of Columbia) alleged that the OTS's implementation of

the LDP in the interim final rule without a notice and comment

period violated the APA. On September 29, 1994, the Court ruled that

because the OTS had failed to adequately justify waiving notice and

comment for the LDP, it would enjoin the OTS from proceeding with

mutual-to-stock conversions containing the LDP provision until a new

rule was finalized in accordance with the notice and comment

procedures of the APA.

---------------------------------------------------------------------------

Several of the commenters objected to the LDP provision because

they believe that it violates federal and state policies and laws that

prohibit discrimination. The OTS acknowledges that the effect of the

rule is to authorize a preference to a certain type of depositor. The

LDP rule, however, does not discriminate against any person based on

age, race, sex, ethnic background, religion or any other impermissible

category. Its purpose is to reward those who have and will maintain a

banking relationship with the institution. While using residency as the

basis for determining this category of depositors is inexact, it is

valid to assume that generally local depositors fall into that category

and non-local depositors do not. The OTS believes that providing for a

LDP provision will assist in achieving the goals of (1) recognizing

those depositors who have maintained long-term banking relationships

with the converting institution and thereby contributed to its

financial success, and who are likely to continue to do so in the

future,14 and (2) promoting ownership by persons who have close

ties to the community. Thus, in the OTS's view, the rule does not

violate federal or state policies against discrimination.

---------------------------------------------------------------------------

\1\4OTS cannot, in a regulation, identify with exactitude every

single instance in which a depositor has maintained a long-term

banking relationship with a converting institution and thereby

contributed to its financial success. However, it is both rational

and convenient, for reasons discussed elsewhere in this preamble, to

identify this group as the local depositors. Moreover, as discussed

more fully below, the OTS has provided a mechanism to enable

converting institutions, in applying the LDP, to take account of

unique and compelling circumstances posed by persons who are not

local depositors.

---------------------------------------------------------------------------

The OTS also believes that the constitutional arguments raised by

certain commenters are without merit. As has been recognized by a

number of courts, the property rights of mutual account holders are

extremely limited.15 In the OTS conversion regulations, the

limited rights that depositors have to share pro rata in the surplus of

a liquidated mutual savings association is recognized by the

establishment of a liquidation account in the converted association. No

distinction is made between local and non-local depositors in the

establishment of these accounts and nothing in the interim rule or this

final rule would diminish a depositor's interest in his or her

liquidation account. Similarly, the OTS does not believe that

authorizing the LDP provision violates the Equal Protection Clause of

the Constitution. Although the LDP provision does make a distinction

between depositors, the OTS believes, for the reasons discussed above,

that there is a rational basis for authorizing an institution to make

the distinction and that the provision reasonably relates to legitimate

policy objectives.

---------------------------------------------------------------------------

\1\5See, e.g., Paulsen v. C.I.R., 469 U.S. 131 (1985); Ordower

v. Bell Fed. Sav. & Loan Ass'n, 999 F.2d 1183 (7th Cir. 1993); York

v. Federal Home Loan Bank Board, 624 F.2d 495 (4th Cir.), cert.

denied, 449 U.S. 1043 (1980); Lovell v. The One Bancorp, 614 A.2d 56

(Me. 1992).

---------------------------------------------------------------------------

The OTS instituted the LDP rule in the interim final rule to

promote local community ownership of converting institutions, and to

reward a group that, collectively, typically has made significant

contributions to the financial success of the institution. The LDP rule

sought to provide the opportunity for local depositors to participate

more fully in the subscription offering without competition from large

purchases by out-of-area depositors. The OTS has become aware in recent

years of the evolution of a class of depositors, sometimes referred to

as ``professional depositors'' or ``flippers,'' who have opened

accounts in a large number of mutual associations.16 These

``professional depositors,'' who often reside outside the local

community of the mutual savings association, make deposits in

anticipation of the mutual savings association converting to stock

form. Often, these depositors subscribe for a significant number of

shares in the subscription offering phase with the intent of selling

all or a significant number of the shares in a short period of time

following the conversion to take advantage of a lucrative after-market.

Once a conversion is complete, these depositors often withdraw their

deposits and have no further relationship with the converted savings

association.

---------------------------------------------------------------------------

\1\6See, e.g., Peter Lynch, Beating the Street (1993), p. 220.

---------------------------------------------------------------------------

As discussed below, OTS continues to believe that local depositors

should be given preference over out-of-area depositors in purchasing

stock of a converting mutual savings association. Upon further

consideration of the issues presented in this area and review of the

comment letters, however, OTS has determined in the final rule to

authorize, but not require, a savings association to give a conversion

stock purchase preference to account holders residing in the local

community.

The OTS has taken this position, i.e., making the LDP provision

optional, for a number of reasons. First, the OTS does not oppose the

full participation of those other than local depositors in the

conversion process. The nationwide interest in thrift stock has enabled

many thrifts to recapitalize, thereby preventing thrift failures and a

burden on the taxpayers. In addition, the OTS notes that the conversion

eligibility record date, the primary determinant for prioritized

eligibility to purchase conversion stock, has always been keyed to the

length of time a depositor has had an account with a converting

institution, not to geographic location. Also, as noted below, many

mutual associations have exercised their authority to accept deposit

accounts only from persons residing in the association's local

community.

In light of the foregoing, and in response to the comments noted

above, the OTS believes that the LDP provision need not be a

requirement of conversion; rather it should be at the option of each

converting savings association which will decide whether its particular

situation warrants its use. A savings association may conclude that an

LDP for stock purchases is important to ensure ownership by local

depositors who made significant long-term contributions to the

financial success of the institution by virtue of their deposit and

borrowing relationships, and who, it expects, will continue to maintain

financial relationships with the institution after the conversion. The

final rule includes the LDP provision as an optional provision in the

subscription phase of the conversion.

To assist converting institutions who elect to include the LDP

provision, the final rule continues to provide a definition of the

``local community.'' In response to comments, however, the final rule

substantially revises the definition. First, the 100-mile standard is

eliminated. In addition, the definition of local community has been

revised to delete the reference to the ``standard metropolitan

statistical area'' and the ``general metropolitan area.'' Finally, the

definition also has been revised to include ``metropolitan statistical

area'' (which replaced the SMSA), all zip code areas corresponding to

the converting institution's delineated CRA service area, and such

other area(s) or category as designated by the institution and provided

for in the plan of conversion.\17\ In this regard, the OTS will review,

on a case by case basis, the proposals by converting associations to

define local community other than as defined in the final rule.

---------------------------------------------------------------------------

\17\For example, a number of commenters suggested other

categories of depositors, such as retirees, who may be equivalent to

local depositors in terms of their long-term relationship with the

institution.

---------------------------------------------------------------------------

OTS also specifically solicited comments as to whether a savings

association, in anticipation of conversion, should be permitted to: (1)

refuse to open accounts for potential depositors residing outside the

local community, or (2) close accounts of depositors residing outside

the local community.

Of 18 commenters addressing this issue, 13 stated that a savings

association should be able to refuse to open accounts for non-local

depositors, with three of the 13 requesting that OTS confirm the

association's right to refuse to accept deposits. Five commenters

believed that associations should not be allowed to refuse to open

accounts, with two of the five stating that OTS should prohibit

associations from refusing to open or maintain accounts of non-local

depositors.

Of 18 commenters, 10 stated that savings associations should be

allowed to close accounts of non-local depositors, with one commenter

stating that an account should be required to be closed at least 6

months prior to the adoption of a plan of conversion. Two of the 10

stated that OTS should confirm an association's right, as a general

matter, to close accounts of, and return monies to, depositors who do

not reside in the community served by the association. Eight commenters

opposed the closing of accounts in contemplation of conversion, with

one stating that the closing would violate fundamental fairness and

deprive valid property rights without due process.

In the interim final rule, the OTS noted that federal associations

generally have the authority to open and maintain savings accounts

within their discretion.\18\ State chartered savings associations are

subject to state laws governing the opening and closing of deposit

accounts. Based upon its review of the comments, the OTS has determined

not to make any changes to the conversion rules in this area. It is the

opinion of the OTS that federal associations have the authority to open

and close deposit accounts, including those accounts of non-local

depositors, provided they do not violate applicable laws that prohibit

discrimination on the basis of age, race, sex, ethnic background,

religion or any other impermissible category.

---------------------------------------------------------------------------

\18\See 12 U.S.C. 1464(b) and 12 CFR 545.11(b); see also

Appendix to 12 CFR Part 544 (model bylaws for federal associations

provide that the board of directors has the explicit power to reject

any application for a savings account).

---------------------------------------------------------------------------

The OTS, however, would not consider it to be a legitimate exercise

of that authority if a savings association, in anticipation of

conversion, closed an account for the purpose of preventing a depositor

from participating in a conversion as an account holder. The OTS

believes that this could result in the perception that insiders were

acting out of self-interest and not in the interests of the savings

association.

F. Revision to Policy Regarding Management Stock Benefit Plans

In the interim final rule, the OTS substantially revised and

codified its policies regarding the establishment of management

recognition plans (MRPs) and stock option plans (SOPs) during the

conversion process. The new provisions require that any decision to

implement MRPs and SOPs after conversion be voted on and approved by a

majority of the shareholders no earlier than the first annual meeting

following the conversion, and that prior to implementation, all such

plans be reviewed and approved by the Regional Director. The provisions

also prohibit the use of conversion stock to fund MRPs, require that

MRPs be awarded and stock options be granted only after shareholder

approval is received and require that stock options be granted at the

market price at which the stock is trading at the time of grant. The

regulation also codifies the OTS's policies regarding permissible

amounts that may be included in SOPs and MRPs formed within one year of

conversion.

Approximately 17 commenters recommended allowance of a reasonable

amount of stock benefits at the time of conversion, rather than a flat

prohibition. A majority of the 17 commenters stated that the level of

stock benefit plans should be tailored to the size, health and

performance of the association, the business plan objectives and needs,

the size of the offering, and the specific contribution and tenure of

management. One commenter suggested 1% for MRPs and 5% for stock

options, subject to the normal five-year vesting period. Another

commenter suggested allowing a small MRP amount at the time of

conversion with the remainder reserved for future performance-based

awards and a SOP that is structured so that the exercise price is based

on an averaging formula or an indexed price.

Four commenters supported the prohibition of stock benefit plans at

conversion.

Of eight commenters addressing the issue, six supported the

requirement for shareholder approval of management plans. One of the

six supported the delaying of implementation until approval is received

and two commenters stated that shares should be allocated at the time

of conversion but contingent on shareholder approval. One commenter

requested a revision in the wording of the regulation to clarify that

plans must be approved by an affirmative vote of the holders of a

majority of the securities of the issuer present, or represented and

entitled to vote, at the meeting.

Of ten commenters addressing the issue, two supported the provision

that shareholder approval be at the first annual meeting, and eight

requested that the timing aspect be revised to allow approval at any

duly called meeting of shareholders, either annual or special. One

commenter suggested that the regulation require that a meeting be at

least two months after completion of the conversion. One commenter

expressed concern for differences in flexibility with annual meeting

dates for state holding companies and federal savings associations. One

of the eight commenters stated that by waiting for the first annual

meeting, awards are expensed based upon the fair market value of common

stock on the date of the meeting which increases the financial

accounting expenses for the institution. This same commenter also noted

that the date the MRPs are implemented is inconsequential to officers

and directors, because the financial benefit of the MRPs is in the full

value of the shares, not in their appreciation as in stock options.

Three commenters stated that associations should be given

flexibility to obtain a reasonable and appropriate number of shares to

fund stock plans through open market purchases or through authorized

but unissued shares. Another commenter requested that the regional

office review and act upon stock plans at the time of conversion, that

no conditional approval be allowed, and that plans not acted upon

within a certain time be deemed approved automatically.

Consistent with the discussion in the preamble to the interim final

rule, the OTS believes that while there are valid business reasons for

thrifts to adopt stock benefit plans in order to attract and retain

qualified management, these plans are now more appropriately

implemented subsequent to the conversion and with shareholder approval.

A waiting period allows shareholders to decide whether to permit

dilution of their interests after reviewing management's performance.

Moreover, the stock price stabilizes once the marketplace has

sufficiently digested the financial data of the association.

The interim final rule required that stock options be granted at

the market price at which the stock is trading at the time of grant.

The OTS has revised the interim final rule so as to require that stock

options be granted at no less than the market price at which the stock

is trading at the time of grant. This revision is consistent with the

current practices and rules relating to the granting of stock options.

The shareholder vote required by the final rule will be uniform for

both savings associations and holding companies, i.e., the affirmative

votes of the holders of a majority of the total votes eligible to be

cast at a legal meeting.\19\

---------------------------------------------------------------------------

\19\This voting requirement coincides with the voting

requirement of Section 5 of 12 CFR 552.3, the Federal Stock Charter

provision. As noted, it will apply to savings and loan holding

companies formed in the conversion process that implement management

stock benefit plans within one year following conversion.

---------------------------------------------------------------------------

Shareholder approval is required prior to implementation of MRPs or

stock option plans within the first year of conversion. In response to

the comments and mindful that a uniform meeting time may be justifiable

for the reasons cited by the commenters, the timing aspect in the

interim final rule is being revised to allow approval at any duly

called meeting of shareholders, either annual or special, to be held no

earlier than six months after completion of the conversion. The OTS

believes a six-month ``cooling off'' period will give the marketplace

sufficient time to digest the financial data and the shareholders

sufficient time to become familiar with the finances and operations of

the converted association in order to make an informed investment

decision in considering whether to vote to adopt such plans.

The interim final rule did not specify the vesting schedule of the

management stock benefit and stock option plans. As a matter of policy

under both the conversion regulations and the safety and soundness

authority governing management compensation, the OTS has generally

required such plans to vest beginning one year from the date the plans

are approved by shareholders, and at a rate not in excess of 20% a

year. A provision has been added to the final rule codifying these

policies. Also, in furtherance of the foregoing policy, an additional

provision in the final rule generally prohibits accelerated vesting

except in the case of disability or death.

The OTS agrees with the commenters that savings associations should

be given flexibility to obtain a reasonable and appropriate number of

shares to fund stock plans through open market purchases or through

authorized but unissued shares. In funding these plans, the board of

directors and the compensation committees are reminded of their

fiduciary duties to the association or holding company, its

shareholders and the association's members.

Finally, the interim final rule required that management and stock

option plans be subject to approval of the appropriate OTS Regional

Director prior to plan implementation. The final rule removes the

requirement for OTS Regional Director approval in advance of a

stockholder vote and implementation. The final rule provides that

management stock benefit plans and stock option plans comply with all

of the regulatory requirements. Disclosure in all proxy and related

material distributed to the shareholders shall indicate that the plans

in no way have been approved or endorsed by the OTS, and no written or

oral representation to the contrary shall be made by the association,

its management, employees or professional advisors. The final rule also

adds the requirement that subsequent to shareholder approval of the

plans, the association will be required to file with the OTS a copy of

the plans approved by shareholders and written certification that the

plans approved by shareholders are the same plans submitted to the OTS

in the proxy materials.

G. Merger Conversions

In the interim final rule, the OTS amended its conversion

regulations to limit merger conversions to institutions that qualify

for a supervisory conversion, i.e., financially-weak institutions. OTS

also solicited comment as to whether merger conversions involving

healthy savings associations should be permitted in the future, and if

so, under what circumstances. The OTS was particularly interested in

how merger conversions should be structured to avoid the safety and

soundness concerns raised by such transactions that were discussed in

the preamble to the interim final rule.

Of approximately 43 commenters addressing merger conversions,

approximately 33 expressed the view that merger conversions should be

permitted for healthy thrifts. Of these 33 commenters, 13 proposed a

small savings association exception, with ``small'' being defined as

anywhere from $5 million to $300 million in assets. The bases for the

exception were the cost of doing two transactions (a standard mutual-

to-stock conversion followed by a merger transaction) in order to

accomplish a merger; the business reasons (access to capital markets,

choice of partner, long-term survival, technological advancement,

access to a strong management team and enhancement of service to

communities); and the economic necessity for market-driven

consolidations to occur.

Those commenters who favored authorization of merger conversions

involving healthy thrifts believed that the OTS should regulate and

supervise these transactions and address concerns over insider abuse,

excessive management compensation and stock incentive packages. They

argued that OTS could set narrow approval guidelines but should not ban

or eliminate merger conversions. One commenter stated that merger

conversions should be allowed on a case-by-case basis taking into

account the size and strategic needs of the institution. Another

commenter stated that OTS should allow submission on a test case basis

so as to develop a structure that would address the issues.

A few commenters thought that depositors should be able to vote on

whether a stand-alone or merger conversion would be in the best

interest of the association. Several commenters stated that the board

of directors should decide whether to undertake a merger conversion

based on their business judgment. Two commenters thought that for a

merger conversion to be approved, an institution would have to document

specific business, economic and fiscal reasons and be required to

demonstrate that the transaction would provide opportunities for

customers and depositors to participate in the institution's value.

Another commenter stated that the prohibition punishes forward-thinking

thrift managers and further endangers the health of the industry by

closing off avenues for generating capital.

Another commenter stated that the institution should be free to

negotiate the terms of a merger conversion, including reasonable

compensation arrangements and purchase discount percentages.

Some suggestions regarding the windfall gains and other problems

and the valuation issue included: allow subscribers to subscribe to the

stock of the acquiring association at a 15% to 20% discount, based on

the stock price either at the time of acquisition or at the time the

transaction is announced; require the acquiring entity to pay a control

premium; assure that value is made available to appropriate

constituencies through community foundations, special interest payments

on deposits, and/or a special class of preferred stock made available

to depositors without cost; make bonus interest payments equal to a

certain percentage of principal on all eligible account holder deposits

maintained at resulting institution for a specific time period after

the acquisition is consummated\20\; require the acquiror to hold the

thrift as a separate subsidiary or be an OTS-regulated institution

itself; require all net conversion proceeds to go to the association;

allow compensation only to the extent allowed in stand alone

conversions; or require a CRA rating of outstanding or satisfactory.

---------------------------------------------------------------------------

\20\The OTS notes that a fundamental premise of the conversion

regulations prohibits free distribution schemes in connection with a

conversion. See 39 FR 9142 (March 7, 1974).

---------------------------------------------------------------------------

One commenter recommended using a two-step approach, allowing the

mutual to enter into a definitive merger conversion agreement prior to

doing a stand-alone conversion, disclosing the intended transaction in

the stand-alone conversion, and then requiring a 90-day period between

completion of the stand-alone conversion and consummation of the

merger.

Of the approximately ten commenters that supported the prohibition

against merger conversions, two did so only until guidelines can be

drawn to protect the rights of members of the disappearing association

and to prevent insider abuse. One of the ten stated that merger

conversions should be prohibited except in cases of undercapitalized

institutions or at the discretion of the regulators on a case by case

basis. A fourth supporter noted that what is beneficial to the board of

directors and insiders may not always be in the best interest of the

institution or the community it serves. A fifth supporter stated that

depositors are best served by forcing acquiring entities to bid for a

converted institution's stock in the open market. A sixth commenter

supported the prohibition because of the windfall and valuation

problems.

Upon review of the comments, the OTS has determined to continue to

generally limit merger conversions to cases involving financially weak

institutions. Although several commenters made suggestions that

attempted to address the concerns raised in the interim final rule,

including the valuation problem and accrual of ``windfall gains'' by

the acquiror, the OTS remains concerned with the problems raised by

merger conversions of healthy institutions.

In line with the commenter who suggested that the OTS allow test

case submissions in order to develop a structure that would address the

issues, the OTS emphasizes that it retains its general waiver authority

under part 563b to permit a merger conversion transaction under

appropriate circumstances.21 An institution seeking a waiver of

the merger conversion limitation will bear the burden of demonstrating

how a proposed transaction specifically addresses the concerns set

forth above and in the interim final rule, and will also be required to

document specific business, economic and corporate reasons for a merger

conversion. As discussed in the interim final rule, however, the OTS

has identified a number of significant structural abuses and regulatory

problems inherent in merger conversions.22 Thus, while the OTS

continues to remain open to the development of a transaction structure

that addresses these problems, a healthy institution faces significant

hurdles in demonstrating its transaction will resolve these problems.

---------------------------------------------------------------------------

\2\1One situation suggested by some commenters and to which the

OTS would give serious consideration is where a converting

association could demonstrate by clear and convincing evidence that

a standard conversion would not be economically feasible, based on

the ratio of expenses to gross proceeds, because of the asset size

of an institution. Very small institutions, i.e. those with assets

under $25 million are more likely to be able to establish such a

justification.

\2\2See 59 FR 22725, 22729 (May 3, 1994); see also testimony of

a House Financial Institutions Subcommittee Hearing on Mutual-to-

Stock Conversions dated January 26, 1994.

---------------------------------------------------------------------------

In the interim final rule, the OTS stated that merger conversions

could be done as a two-step process in which the mutual account holders

are initially granted an opportunity to purchase stock of a converting

savings association or its holding company and then following the

conversion, vote to merge with or be acquired by another institution,

subject to certain limitations. One of the limitations is 12 CFR

563b.3(i)(2), under which no person is permitted to make an offer for

any security of a converting savings association issued in connection

with the conversion. The other limitation is 12 CFR 563b.3(i)(3), under

which no person is permitted for a period of three years following the

conversion, to make an offer to acquire or acquire more than 10% of any

class of equity security of a converted savings association without the

prior written approval of the OTS.23

---------------------------------------------------------------------------

\2\3Clearly, with respect to the latter limitation, the

opportunity is present for converted institutions contemplating a

merger to seek approval from the OTS to undertake such a transaction

even within the first year following conversion.

---------------------------------------------------------------------------

In addition, the OTS has generally imposed a condition in

connection with approval of a conversion transaction that prohibits,

without prior OTS approval, the converting association or its holding

company from taking any action within the first year following

conversion that could lead to a transaction that would require

stockholder approval if such transaction were subject to 12 CFR 552.13.

These provisions are intended to preserve the integrity of the

independent appraisal process, deter manipulation of the conversion

process by insiders or other sophisticated third parties to the

detriment of the account holders, and permit the OTS to monitor post-

conversion acquisition activities of recently converted associations.

By this regulatory oversight of merger and acquisition activities

following the conversion, a converting institution is provided with a

reasonable period of time to implement its post-conversion business

plan and to invest the conversion proceeds. With respect to the

appraisal issue, the pro forma valuation of converting institutions

assumes that no acquisition of the converting association will take

place for a reasonable period of time following the conversion. If

there are ongoing discussions about a takeover of a converting thrift

during the conversion process, the ability of an appraiser to prepare

an appraisal that satisfies the requirements of 12 CFR 563b.7 is

severely diminished because of the uncertainty that such takeover

speculation would generate.

H. Extension of the Conversion Public Comment Period

OTS revised the conversion regulations to conform the public

comment period with the longer twenty calendar day public comment

period provided under the acquisition of control regulations.24

---------------------------------------------------------------------------

\2\412 CFR 574.6(e).

---------------------------------------------------------------------------

Eight of ten commenters endorsed the new requirement, with one of

the eight suggesting that OTS include a requirement for wider

distribution, in a timely manner, of the conversion notices

contemporaneously with the filing of the conversion application. One of

the eight noted that too long a comment period may cause significant

delays and related inappropriate costs to the converting associations.

One commenter stated that the ten day comment period provided ample

time for any person desiring to comment on an application, and if the

20-day period is used, suggested that an association be permitted to

publish the 4(b) notice immediately upon filing the application with

OTS, without waiting for OTS authorization. Another commenter stated

that the revision served no useful purpose, but if kept, also suggested

that the 4(b) notice should be able to be given immediately after the

filing to ensure no delay due to the longer public comment period.

The OTS continues to believe that the longer public comment period

will give sufficient time for interested parties to review and comment

on a detailed conversion application. In order to accommodate the

concern noted by some commenters, the final rule requires that the 4(b)

notice be given immediately after the filing of the application with

the OTS. However, the final rule also clarifies that if a conversion

application is later deemed not properly executed or is materially

deficient or substantially incomplete, the applicant may be required to

refile the application, republish the accompanying 4(b) notice, and

provide for another 20-day public comment period.

I. Submission of Business Plans for All Conversion Transactions

OTS now requires that all conversion transactions, with or without

holding company formations, include a business plan, and that the

business plan address in detail how the capital acquired in the

conversion will be utilized.

All commenters addressing this issue affirmatively supported the

provision. Two wanted assurance of confidentiality of the business plan

to protect associations from unfair competition. One of the commenters

stated that the business plans should not be used to deny a conversion

application, unless the plan raises significant safety and soundness

concerns, and two urged OTS not to put itself in the position of

deciding how much capital a business may need in future years, nor to

require a converting institution to justify the need for capital in

order to be able to convert.

The interim final rule will continue in effect without change. As

noted in the preamble to the interim final rule, in order to ensure

that a business plan is given confidential treatment, the applicant

should follow the procedures set forth at 12 CFR 563b.4(c).

Applicants for conversions must submit their business plans to the

Regional Director prior to the filing of the conversion application.

OTS may deny a conversion application where the business plan does not

sufficiently address the deployment of conversion proceeds, raises

significant safety and soundness concerns, or does not otherwise

address convenience and needs standards as required in the final

regulation.

J. Revision to Post-Conversion Stock Repurchase Rules

In its interim final rule, the OTS revised the conversion

regulations to prohibit stock repurchases by the converting association

for one year following conversion. After one year, a converted

association may file with the appropriate Regional Director an open

market repurchase program in which it may propose stock repurchases of

no more than 5% of the outstanding capital stock during any twelve

month period in the second and third years after the conversion. The

Regional Director also may disapprove repurchases if the association

does not demonstrate a valid business purpose for the stock repurchase;

and also may approve amounts greater than 5% in the second and third

years if there are circumstances that would justify such repurchases.

A majority of the commenters addressing this issue disagreed with

the revisions, six commenters proposed alternative revisions, and one

commenter supported the prohibition of stock repurchases for one year

following conversion. The majority felt the blanket prohibition was not

sound public policy, was not justified or necessary, was detrimental to

thrift stock prices, and reduced the ability of thrifts to compete in

capital markets. Most stated that the repurchase of stock is standard

corporate practice that should be left to the decision of the board of

directors (consistent with fiduciary responsibilities), subject to

safety and soundness concerns. Most also felt that thrifts need to

retain flexibility in using repurchase programs because markets are

fluid and subject to change due to various forces. Most viewed the

prohibition on stock repurchases as taking away the institution's and

the OTS's ability to follow market dictates and react to stock price

fluctuations and other market conditions. A few commenters stated that

by limiting repurchases, the regulation may cause institutions to use

excess capital unwisely, to engage in unsound and risky ventures in an

attempt to provide better returns for shareholders, and could

unintentionally increase pressure on thrift management to produce

better returns on equity by taking greater risks in daily operations. A

few commenters found no valid justification for distinguishing newly

converted thrifts and stated that, in deciding whether a repurchase is

for valid business reasons, the OTS should look at whether the

association has excess capital, whether the stock is trading below book

value, and whether the repurchase is an attractive investment given the

association's business prospects.

One commenter requested that the rule specify in greater detail the

circumstances that would warrant repurchase amounts greater than the 5%

repurchase limit in the second and third years following conversion.

Another commenter requested that the rule require all regions to be

uniform in permitting repurchases greater than 5% during that time.

Eight commenters stated that recently converted thrifts should be

allowed to operate under the regulations in place at the time they

converted, and that the OTS should grandfather all associations that

converted prior to the effective date of the interim final rule.

While the OTS continues to believe that stock repurchase programs

may serve valid business purposes, e.g., maintaining the value of a

converting association's stock in an active trading market, the OTS

also continues to have concerns with substantial buyback programs that

commence immediately after conversion and are not based on a valid

business purpose. In addition, and as noted in the preamble to the

interim final rule, repurchases commenced immediately after conversion

raise substantial issues regarding whether conversion stock has been

appropriately valued.

To address these concerns, but also to allow for some flexibility

for repurchase programs, the final rule continues to discourage stock

repurchases for one year after conversion, but gives the OTS discretion

to allow limited stock repurchases in the first year where exceptional

circumstances are established.25 This would give the OTS the

ability to permit repurchases where it may be in the best interests of

the association and its shareholders; however, such repurchases will be

allowed in the first year only when deemed necessary by the OTS.

---------------------------------------------------------------------------

\2\5We note, for example, that typically public companies may

repurchase stock in the open market where there is a prolonged

period of a downward trend in the stock price.

---------------------------------------------------------------------------

The interim final rule stated that repurchases within two years

after the conversion must be part of an open-market stock repurchase

program that does not allow for a repurchase of more than 5% of the

association's outstanding capital stock during a twelve month period.

The final rule has been revised to clarify that repurchases in years

two and three after conversion must be part of an open-market stock

repurchase program and generally will be limited to no more than 5% of

the association's outstanding capital stock. However, the final rule

allows the OTS to approve repurchase programs in amounts greater than

5% in the second and third years, if exceptional circumstances are

established. As stated above, this would give the OTS the ability to

permit additional repurchases where it may be in the best interests of

the association and its shareholders; however, such repurchases will be

allowed only when deemed necessary by the OTS.

The OTS continues to believe that ensuring an equitable conversion

process and consistency in that process require that the final rule

apply to all associations that converted in the three years preceding

the May 3, 1994 effective date of the interim final rule. Any previous

repurchases that occurred prior to May 3, 1994 will be grandfathered,

however, grandfathered repurchases will count toward compliance with

the current requirements.

K. Convenience and Needs Considerations

The proposed rule would add a new ``convenience and needs''

standard to existing approval standards applicable to conversions and

MHC stock offerings. Under the proposal, the OTS would review the

applicant's performance under the CRA,26 the contents of the

business plan submitted in support of the application, and other

factors relating to the applicant's performance in meeting the

convenience and needs of its delineated community.

---------------------------------------------------------------------------

\2\6The OTS recently reproposed revisions to its regulations

implementing the CRA. See 59 FR 51232 (October 7, 1994).

---------------------------------------------------------------------------

Three commenters favored adoption of the new standard and nine

opposed the new standard. Favorable comments expressed the view that

the proposal would serve a valid public purpose and adequately respond

to community and Congressional concerns regarding allocation of

conversion proceeds. Comments opposed to the proposal focused primarily

on the OTS' authority to adopt the proposal and on questions relating

to implementation, such as whether the proposal is necessary or

appropriate given existing laws and regulations; whether the OTS will

consider CRA-related protests during application processing; and

whether the OTS would mandate allocation of transaction proceeds to

specific community credit or lending programs.

1. OTS Authority to Adopt the Proposal

As noted in the preamble to the convenience and needs proposal, a

convenience and needs standard has not, to date, been applied to

mutual-to-stock conversions of savings associations. Similarly, a

convenience and needs standard generally has not been applied to MHC

stock offerings.27 Upon review of this area, however, the OTS

proposed amendments to its regulations to impose a convenience and

needs standard on these transactions. The proposal was issued, among

other reasons, to enhance the OTS' ability to ensure that savings

associations undertaking these transactions recognize their

responsibility to consider their community's credit needs.

---------------------------------------------------------------------------

\2\7A convenience and needs standard has been applied to mutual

holding company reorganizations because these transactions require

the OTS' approval under the Bank Merger Act (BMA). See 58 FR 44105

(August 19, 1993) (adopting part 575 governing mutual holding

company reorganizations and related stock issuances). The BMA

requires that the responsible agency consider the convenience and

needs of the community to be served in acting on any BMA

application. See 12 U.S.C. 1828(c)(5).

---------------------------------------------------------------------------

In the notice of the proposed amendments, the OTS explained its

authority to adopt and implement the proposal.28 Some commenters

argued that the proposal goes beyond OTS authority under the Home

Owners' Loan Act (HOLA)29 and the CRA. These commenters stated

that the CRA limits the types of applications that may be subject to

review under the CRA; that Congress intended the CRA to cover only

those transactions resulting in new charters or expanded facilities,

not conversions and MHC stock offerings. On this point, these

commenters asserted that a convenience and needs standard is not

appropriate in conversions because conversions are fundamentally a

capital-raising technique, not an expansion of operations. One

commenter believed that section 5(c) is the only provision of the

HOLA30 that enumerates thrift powers and authorities, and that no

affirmative housing credit obligation exists in section 5(c) that would

permit the OTS to direct the allocation of conversion proceeds to

community lending programs.

---------------------------------------------------------------------------

\2\8See 59 FR 22764, 22765 (May 3, 1994).

\2\912 U.S.C. 1461.

\3\012 U.S.C. 1464(c).

---------------------------------------------------------------------------

The OTS has concluded that it has ample statutory authority for the

amendments. As noted in the proposal, the OTS has broad authority under

sections 5(i)(1) and 5(i)(2) of the HOLA to regulate mutual-to-stock

conversions, and under section 10(o)(7) of the HOLA to regulate mutual

holding companies.31 Inherent in this broad grant of authority is

the ability to assess the impact of a proposed transaction on the

convenience and needs of the communities to be served by a savings

association.

---------------------------------------------------------------------------

\3\112 U.S.C. 1464(i)(1), 1464(i)(2) and 1467a(o)(7). See also

Charter Federal S.&L. Ass'n. v. Office of Thrift Supervision, 912

F.2d 1569 (11th Cir. 1990).

---------------------------------------------------------------------------

In addition, section 4(a)(3) of the HOLA provides that the Director

``shall exercise all powers granted to the Director under this chapter

so as to encourage savings associations to provide credit for housing

safely and soundly.''32 For federal associations, in particular,

the OTS is directed to exercise its regulatory powers in order to

provide thrift institutions ``* * * for the extension of credit for

homes and other goods and services.''33 The powers granted to the

Director include the general regulatory authority under sections

5(i)(1), 5(i)(2), and 10(o)(7) of the HOLA mentioned above. The

admonitions in the HOLA that the Director use his or her statutory

powers to encourage savings associations to provide credit provides a

substantial additional basis for the Director to assess community needs

when reviewing applications.

---------------------------------------------------------------------------

\3\212 U.S.C. 1463(a)(3).

\3\3See section 5(a) of the HOLA, 12 U.S.C. 1464(a).

---------------------------------------------------------------------------

Thus, the OTS' authority to address convenience and needs concerns

in the context of applications is not limited to the applications

specifically mentioned in the CRA. While the application review

sections of the CRA arguably focus primarily on transactions that

involve some type of expansion of operations in a geographical market,

e.g., new charters or branch facilities,34 the CRA does not limit

agency authority under other statutes or regulations to consider

convenience and needs factors during the review of applications that do

not necessarily involve an expansion of operations.

---------------------------------------------------------------------------

\3\4See 12 U.S.C. 2902(3), 2903.

---------------------------------------------------------------------------

Finally, the amendments are consistent with section 5(c) of the

HOLA. Section 5(c) of the HOLA generally sets forth permissible

investments and investment limitations for federal savings

associations, but in no way limits the OTS' authority to ensure that

these investment powers are exercised in a manner that is consistent

with the convenience and needs of the community.

2. Appropriateness of a Convenience and Needs Standard

As stated in the proposal, the amendments are intended to enhance

the OTS' ability to ensure that savings associations undertaking

conversions and MHC stock offerings recognize their responsibility to

consider their community's credit needs.

A number of commenters questioned the wisdom of a convenience and

needs standard, suggesting the OTS has sufficient regulations and

policies to implement the CRA and ensure that the convenience and needs

of the community are met by all thrifts.

For the reasons stated above in support of the OTS' authority to

adopt the amendments, the OTS believes it is appropriate to impose a

convenience and needs standard on applications for conversions and MHC

stock offerings. In addition, the OTS believes the amendments will

enhance current regulations and policies designed to ensure that

thrifts meet their community's credit needs.

3. Consideration of CRA-Related Protests During Application Review

The proposal did not address whether the OTS would consider CRA-

related protests during agency review of conversion and MHC stock

offering applications.

Some commenters objected to OTS consideration of CRA protests

during the public comment period. These commenters emphasized that the

timing of a conversion, in particular, is critical to stock pricing and

appraisal considerations. The mere prospect of a delay due to a CRA

protest may unfairly subject an institution to pressure to make

concessions to protestants, according to these commenters. They

suggested limiting public comments on applications subject to the rule

to issues relating to eligibility of purchasers and fairness of the

appraisal.

The OTS realizes that conversions and MHC stock offerings are time-

sensitive transactions and that protests may affect their success.

Nevertheless, the OTS does not believe it is appropriate to preclude

the public from commenting on a savings association's performance in

meeting a community's convenience and needs. Accordingly, the OTS will

consider these types of comments filed as part of a public comment

period on conversion and MHC stock offering applications. The OTS

emphasizes that it will address these comments as promptly as possible.

The CRA protest and oral argument procedures at 12 CFR 543.2 will not

apply, however.35 The OTS believes the public comment period will

provide a full and fair opportunity for interested persons to express

their views regarding an applicant's performance in meeting the

convenience and needs of the community.

---------------------------------------------------------------------------

\3\5As a matter of policy the OTS has applied these procedures

to certain conversion transactions and other applications, although

neither the HOLA nor the CRA require the OTS to follow any specific

procedures.

---------------------------------------------------------------------------

4. Allocation of Transaction Proceeds to Specific Lending Programs or

Services

The preamble to the proposal specifically solicited comment on

whether the proceeds from conversions or MHC stock offerings should be

directed to specific types of activities, and, if so, what portion

should be used for what types of activities.36

---------------------------------------------------------------------------

\3\6See 59 FR 22764, 22766 (May 3, 1994).

---------------------------------------------------------------------------

A few commenters objected to any regulation or policy that would

impose an allocation scheme on transaction proceeds. They argued that

the OTS has no statutory authority for such action; that a regulatory

allocation scheme would place artificial limits on capital planning and

business strategy; and that specific allocations should be within the

discretion of the management of the applicant, consistent with safety

and soundness.

The OTS agrees with many of the comments on this issue. In

proposing the amendments, the OTS did not intend to impose any specific

allocation scheme on proceeds from conversions or MHC stock offerings.

The OTS agrees that the allocation of transaction proceeds is largely a

matter within the discretion of the converting association, consistent

with the safety and soundness of the savings association. Nevertheless,

as suggested in the proposal, the OTS will require applicants to submit

business plans that demonstrate how transaction proceeds will be used

to further the convenience and needs of the community. Business plans

should describe specifically the lending and credit programs to which

transaction proceeds will be directed. OTS policies encourage savings

associations to consider traditional lending programs as well as more

innovative methods to meet the credit needs of the communities they

serve.37

---------------------------------------------------------------------------

\3\7See, e.g., ``Community Development Investment Authority''

(OTS guide to the federal laws and regulations governing community

development activities of savings associations).

---------------------------------------------------------------------------

Where an applicant's business plan does not adequately address how

transaction proceeds will help meet the credit and lending needs of its

community, the OTS may deny the application or impose appropriate

conditions of approval designed to ensure that the applicant will

address these concerns. The OTS generally will not view commitments

included in a savings association's business plan as remedying pre-

existing CRA-related deficiencies. However, commitments may be

appropriate in addressing CRA performance in the context of the

conversion of a troubled savings associations. The OTS intends to give

substantial weight to an applicant's previous CRA record, consistent

with long-standing policy of the OTS.38

---------------------------------------------------------------------------

\3\8See 54 FR 13742 (April 5, 1989) (joint CRA policy statement

of the federal financial supervisory agencies).

---------------------------------------------------------------------------

As stated above, applicants must submit business plans to OTS staff

for their review prior to filing a formal application.

L. Other Issues

1. Subscription Rights

The conversion regulations require that prior to the completion of

a conversion, no person may transfer, or enter into any agreement or

understanding to transfer, the legal or beneficial ownership of

conversion subscription rights, or the underlying securities to the

account of another.39 The OTS did not propose any change to the

prohibition in the OTS conversion regulations on the transfer or sale

of subscription rights or similar ``free distribution'' schemes, but

did request comment on whether subscription rights should continue to

be nontransferable, or if transferability is recommended, the reasons

for, and the manner in which to allow for, such transfer.

---------------------------------------------------------------------------

\3\912 CFR 563b.3(i)(1).

---------------------------------------------------------------------------

Almost all of the commenters who commented on this issue stated

that subscription rights should continue to be nontransferable. The

commenters that opposed transferability asserted that transferability

would place undue pressure on mutuals to convert; would place emphasis

on ownership by depositors, a concept that is theoretical; would make

the conversion process overly complex; would be dangerous to the long-

term health of the industry; would be unworkable and not in the public

interest; would increase the chances of fraud and abuse; would be

difficult and costly in allocation of rights; would enable

sophisticated and professional investors to take advantage of members;

and would create a destabilizing effect on mutuals. One commenter

suggested an alternative that would allow members to cause associations

to redeem rights for a certain period of time, for payment of a special

dividend, provided there is adequate capital.

Three commenters endorsed transferability of subscription rights,

although one of the three stated that account holders should be allowed

to transfer rights to another individual, but not a group of investors

or another institution.

The OTS notes that the FDIC and others have suggested that it may

be appropriate for depositors to be able to receive a gift of cash or

stock or to transfer and sell their subscription rights so that any

``windfall'' value can be distributed directly to the depositors. The

current OTS regulatory regimen specifically rejects any type of free

distribution schemes as unsafe and unsound practice.40 The OTS

continues to believe that this type of change to the current conversion

regulations would raise a number of complex legal and policy issues,

many of which were taken into account previously by the FHLBB in

determining to prohibit transferability.41 These issues, as noted

in the preamble to the interim final rule, include the possibility of

adverse federal tax consequences to depositors receiving such rights,

undue pressure on mutual associations to convert that may evolve from

significant shifts of savings funds by depositors into such

associations, difficulties in equitably allocating such subscription

rights among depositors, potential manipulation of the process by

sophisticated third parties to the detriment of the depositors,

incentives for manipulation by insiders, the continued need for

establishment and maintenance of a liquidation account and

significantly increased conversion costs due to compliance with

securities law requirements for registering subscription rights for

public distribution. For these reasons, the OTS conversion regulations

continue in effect without any change relative to free distribution of

stock or transfer of subscription rights.

---------------------------------------------------------------------------

\4\0See 39 FR 9142 (March 7, 1974).

\4\1See footnote 17 above.

---------------------------------------------------------------------------

2. Availability of Conversion Documents

OTS rules now permit the public to have ready access to all

relevant non-confidential materials regarding proposed conversion

transactions.

Of five commenters addressing the issue of whether OTS should

permit access to non-confidential preliminary conversion materials,

three supported the revision allowing access, one opposed, claiming

access to such materials would confuse members whose focus should be on

the accuracy and adequacy of the final information disclosed to the

public, and one stated that the prospectus and plan of conversion, as

approved by the board of directors, provide adequate disclosure.

The OTS continues to believe that even though this information is

preliminary in nature, it may be useful for account holders and the

public to access it earlier in the conversion process, and therefore,

the provision in the interim final rule will continue in effect without

change. As noted above, business plans filed with, or in contemplation

of, a conversion will continue to be treated confidentially so long as

the applicant follows the procedures set forth in 12 CFR 563b.4(c).

3. Conforming Changes to Mutual Holding Company Regulations

The mutual holding company regulations, 12 CFR part 575, generally

incorporate the substantive and procedural standards for conversion

contained in the conversion regulation. To the extent the final rule

addresses conversion standards, those same standards apply to mutual

holding company reorganizations and minority stock issuances. The OTS

is also revising 12 CFR part 575 to make clarifying and conforming

changes to the mutual-to-stock conversion regulations.

III. Summary of Revisions to the Conversion Regulations

For the reasons set forth in the previous section, the following

revisions have been made to the interim final rule. All other

provisions of the interim final rule, and the proposed rule on

convenience and needs, are adopted without change.

--The definition of ``Local Community'' in 12 CFR 563b.2(a)(19) is

revised to include the generally used term ``metropolitan statistical

area,'' all zip code areas corresponding to an association's delineated

CRA service area, and any area(s) or category designated by the savings

association and approved by the OTS.

--12 CFR 563b.3(c)(2)(i), (4)(i), (5)(i), which required the LDP in

the subscription phase of the conversion, are deleted in the final rule

and sections (2) (ii) and (iii), (4) (ii)-(v), and (5) (ii) and (iii)

are redesignated as sections (2) (i) and (ii), (4) (i)-(iv), and (5)

(i) and (ii).

--12 CFR 563b.3(c)(6)(iv) is revised to delete the phrase ``or

within 100 miles of the association's home or branch office(s).''

--12 CFR 563b.3(c)(23) is revised to clarify that eligible account

holders have first priority to purchase conversion stock, tax-qualified

employee stock benefit plans have second priority, supplemental

eligible account holders have third priority, and other voting members

who have subscription rights have fourth priority. Also the final rule

clarifies that if the actual offering exceeds the proposed maximum

offering price, up to ten percent of the total offering of shares may

be sold to the tax-qualified employee stock benefit plans; if the ESOP

is not able to purchase conversion stock, the ESOP or any other tax-

qualified plan may purchase shares in the open market or utilize

authorized by unissued shares only with prior OTS approval; and

disclosure must be made in the conversion application and related

documents as to the effects on the association and subscribers of

shares of either open market purchases or use of authorized but

unissued shares.

--12 CFR 563b.3(d)(12) is redesignated as 12 CFR 563b.3(d)(13) and

a new 12 CFR 563b.3(d)(12) is added to give converting associations the

authority to include a preference for eligible account holders,

supplemental eligible account holders and other voting members residing

in the association's local community.

--12 CFR 563b.3(g)(3)(i)(B) is revised to clarify that repurchases

within year two and year three after conversion must be part of a

repurchase program that does not allow for a repurchase of more than 5%

of the association's outstanding capital stock during a twelve month

period.

--12 CFR 563b.3(g)(3)(i)(D) revises the reference from Corporate

and Securities Division to Business Transactions Division.

--12 CFR 563b.3(g)(3)(ii) is revised to give the OTS discretion to

allow limited stock repurchases during the first three years in amounts

exceeding those specified in (g)(3)(i), where exceptional circumstances

are established.

--12 CFR 563b.3(g)(4) (vii) and (viii) are revised to require the

affirmative vote of the holders of a majority of the total votes

eligible to be cast at a shareholder meeting for the establishment and

implementation of management stock benefit plans and stock option plans

within one year of conversion.

--12 CFR 563b.3(g)(4) (vii) and (viii) also are revised to allow

approval of stock option plans and management stock benefit plans at

any duly called meeting of shareholders, either annual or special, to

be held no earlier than six months after completion of the conversion.

--12 CFR 563b.3(g)(4)(ix) is revised to require stock options to be

granted at not less than the market price at which the stock is trading

at the time of grant.

--12 CFR 563b.3(g)(4)(xi) is revised to require strict compliance

with the terms and provisions of (g)(4).

--12 CFR 563b.3(g)(4)(xii) is added to codify current OTS policy

requiring that management benefit plans and stock option plans shall

vest beginning one year from the date the plans are approved by

shareholders, shall vest at a rate not in excess of 20% a year, and

shall provide for accelerated vesting solely in the case of disability

or death.

--12 CFR 563b.3(g)(4)(xiii) is added to require disclosure in all

proxy and related material distributed to the shareholders, in

connection with the meeting at which the stock option and benefit plans

will be voted, to state that the plans comply with OTS regulations,

have in no way been endorsed or approved by OTS; and no written and

oral representation to the contrary shall be made.

--12 CFR 563b.3(g)(4)(xiv) is added to require that no later than

five calendar days from the date of shareholder approval, an

association shall file with the OTS a copy of the approved plans and

written certification that the plans approved by the shareholders are

the same plans filed with the proxy materials.

--Newly-designated 12 CFR 563b.4(b)(1)(i) is revised so as to

require the publication of notice immediately upon filing of a

conversion application with the OTS.

--12 CFR 563b.4(b)(1)(i) also is revised to clarify that in the

case where an application is not properly executed or is materially

deficient or substantially incomplete, and where a new application is

required to be filed, the applicant may be required to publish new

notice upon filing of the revised application and may be required to

consider written comments for an additional 20-day period.

--12 CFR 563b.7(f)(2) is revised to prohibit appraisers from also

serving as underwriters or selling agents under the same plan of

conversion except where procedures are followed and representations

made to ensure that an appraiser is separate from the underwriter or

selling agent affiliate and the underwriter or selling agent affiliate

does not make recommendations or in any way impact the appraisal; and

to prohibit the appraiser from receiving any fees other than the fees

for services rendered in connection with the appraisal.

--12 CFR 563b.11 is added to the final rule to include a

convenience and needs test to the approval requirements for conversion

transactions.

--12 CFR 575.1 is revised to include a provision giving the OTS the

ability to grant waivers in writing from any requirement of the mutual

holding company regulations for good cause shown.

--12 CFR 575.7(a)(7) is added to include a convenience and needs

test to the approval requirements for stock issuances of savings

association subsidiaries of mutual holding companies.

--12 CFR 575.7(d)(2) is revised to provide that the sale of

minority shares of capital stock of the savings association to be made

under the plan of minority stock issuance, including any sale in a

public offering or direct community marketing, shall be completed as

promptly as possible and within 45 calendar days after the last day of

the subscription period, unless extended by the OTS.

--12 CFR 575.13(a)(4) is revised to clarify the prohibition on the

use of ``running'' proxies and the requirement for the use of a

specifically designated proxy for a mutual holding company

reorganization, mutual-to-stock conversion undertaken either by a

mutual savings association or a mutual holding company, or any other

material transactions.

IV. Paperwork Reduction Act

The reporting requirements contained in this final rule have been

submitted to and approved by the Office of Management and Budget (OMB)

under OMB Control Nos. 1550-0014, 1550-0071 and 1550-0072 in accordance

with the Paperwork Reduction Act of 1980 (44 U.S.C. 3507). Comments on

the collection of information should be sent to the Office of

Management and Budget, Paperwork Reduction Project (1550-0014, 1550-

0071, 1550-0072), Washington, DC 20503 with copies to the Office of

Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

The reporting requirements in this final rule are found in 12 CFR

563b.100 and 12 CFR Part 575. The information is needed by the OTS to

further strengthen the standards governing the conversion process. The

likely recordkeepers are savings associations.

V. Regulatory Flexibility Act

Pursuant to Section 605(b) of the Regulatory Flexibility Act, it is

certified that this final rule will not have a significant economic

impact on a substantial number of small entities. Accordingly, a final

regulatory flexibility analysis is not required.

VI. Executive Order 12866

The OTS has determined that the final regulation does not

constitute a ``significant regulatory action'' for purposes of E.O.

12866.

List of Subjects

12 CFR Part 563b

Reporting and recordkeeping requirements, Savings associations,

Securities.

12 CFR Part 575

Capital, Holding companies, Reporting and recordkeeping

requirements, Savings associations, Securities.

For the reasons set out in the preamble, the interim rule amending

12 CFR 563b.2, 563.b.3, 563b.4, 563b.5, 563b.7, 563b.8, 563b.10,

563b.100, 563b.101, and 12 CFR 575.7 and 575.13 which was published on

May 3, 1994 at 59 FR 22725 is adopted as final with the following

changes and parts 563b and 575 of subchapter D, chapter V, title 12 of

the code of Federal Regulations are amended as follows:

Subchapter D--Regulations Applicable to All Savings Associations

PART 563b--CONVERSIONS FROM MUTUAL TO STOCK FORM

1. The authority citation for 12 CFR part 563b is revised to read

as follows:

Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 2901; 15

U.S.C. 78c, 78l, 78m, 78n, 78w.

2. Section 563b.2 is amended by revising paragraph (a)(19) to read

as follows:

Sec. 563b.2 Definitions.

(a) * * *

(19) Local community. The term local community includes all

counties in which the converting association has its home office or a

branch office, all zip code areas corresponding to the converting

association's delineated Community Reinvestment Act service area, each

county's metropolitan statistical area and/or such other area or

category as delineated by the savings association and provided for in

the plan of conversion, as approved by the OTS.

* * * * *

3. Section 563b.3 is amended by:

a. Removing paragraphs (c)(2)(i), (c)(4)(i) and (c)(5)(i);

b. Redesignating paragraphs (c)(2) (ii) and (iii), (c)(4) (ii)

through (v) and (c)(5) (ii) and (iii) as paragraphs (c)(2) (i) and

(ii), (c)(4) (i) through (iv) and (c)(5) (i) and (ii), respectively,

and by redesignating paragraph (d)(12) as paragraph (d)(13);

c. Revising paragraphs (c)(6)(iv), (c)(23), (g)(3)(i)(B),

(g)(3)(i)(D) introductory text, (g)(3)(ii), (g)(4)(vii), (g)(4)(viii),

(g)(4)(ix), (g)(4)(x), and (g)(4)(xi); and

d. Adding paragraphs (d)(12), (g)(4)(xii), (g)(4)(xiii), and

(g)(4)(xiv).

The revisions and additions read as follows:

Sec. 563b.3 General principles for conversions.

* * * * *

(c) * * *

(6) * * *

(iv) A condition that any direct community offering by the

converting savings association shall give a preference to natural

persons residing in the association's local community.

* * * * *

(23) Provide that eligible account holders with subscription rights

have first priority to purchase conversion stock, tax-qualified

employee stock benefit plans have second priority, supplemental

eligible account holders have third priority, and other voting members

who have subscription rights have fourth priority. If the final

conversion stock valuation range exceeds the maximum conversion stock

offering range, up to ten percent of the total offering of shares may

be sold to the tax-qualified employee stock benefit plans. Furthermore,

if the ESOP is not able to purchase conversion stock, the ESOP or any

other tax-qualified plan may purchase shares in the open market or

utilize authorized but unissued shares only with prior OTS approval;

and disclosure must be made in the conversion stock offering materials

of the potential open market purchases or use of authorized but

unissued shares to fund the ESOP and its effects on the association and

its shareholders.

* * * * *

(d) * * *

(12) That the offering of stock to be sold in the subscription

offering may give a preference to eligible account holders,

supplemental eligible account holders, and other voting members

residing in the association's local community.

* * * * *

(g) * * *

(3) * * *

(i) * * *

(B) Repurchases within year two and year three after conversion are

part of an open-market stock repurchase program that does not allow for

a repurchase of more than 5% of the association's outstanding capital

stock during a twelve month period;

* * * * *

(D) The association provides to the Regional Director, with a copy

to the Chief Counsel's Office, Business Transactions Division, no later

than ten days prior to the commencement of a repurchase program,

written notice containing a full description of the repurchase program

to be undertaken, the effect of such repurchases on its regulatory

capital position, and a valid business purpose for the repurchase; and

the Regional Director does not disapprove the repurchase program based

upon a determination that:

* * * * *

(ii) During the first three years following conversion, the OTS, in

accordance with the standards contained in this paragraph, may permit

stock repurchases in excess of the amounts specified in paragraph

(g)(3)(i) of this section, where exceptional circumstances are

established.

(4) * * *

(vii) All such plans, prior to establishment and implementation,

are approved by the holders of a majority of the total votes eligible

to be cast at any duly called meeting of shareholders of the

association or its holding company, either annual or special, to be

held not earlier than six months after completion of the conversion;

(viii) In the case of a savings association subsidiary of a mutual

holding company, all such plans, prior to establishment and

implementation, are approved by the holders (other than its parent

mutual holding company) of a majority of the total votes eligible to be

cast, at any duly called meeting of shareholders, either annual or

special, to be held no earlier than six months after completion of the

conversion;

(ix) For stock option plans, stock options are granted at no less

than the market price at which the stock is trading at the time of

grant;

(x) For management or employee stock benefit plans, no conversion

stock is used to fund the plans;

(xi) The plans subject to this section must comply with the terms

and amounts specified in paragraph (g)(4) of this section;

(xii) The plans subject to this section shall begin vesting no

earlier than one year from the date the plans are approved by

shareholders, shall not vest at a rate in excess of 20% a year, and

shall not provide for accelerated vesting except in the case of

disability or death;

(xiii) Disclosure in all proxy and related material distributed to

shareholders in connection with the meeting at which the stock option

plans and management stock benefit plans will be voted shall state that

the plans comply with OTS regulations, that the OTS in no way endorses

or approves the plans; and no written or oral representation to the

contrary shall be made; and

(xiv) No later than five calendar days from the date of shareholder

approval of any stock option or management benefit plans, the

institution shall file with the OTS a copy of the approved plans and

written certification that the plans approved by the shareholders are

the same plans filed with and disclosed in the proxy materials.

* * * * *

4. Section 563b.4 is amended by designating the text of paragraph

(b)(1) preceding the notice of filing as paragraph (b)(1)(i) and

revising it, and designating the concluding text of paragraph (b)(1)

following the notice of filing as paragraph (b)(1)(ii) to read as

follows:

Sec. 563b.4 Notice of filing; public statements; confidentiality.

* * * * *

(b) Notice of filing. (1)(i) Immediately upon filing an application

for conversion with the Office, the applicant shall publish a notice of

the filing. If an application for conversion is not properly executed

or is materially deficient or substantially incomplete, the Office may

require a new application to be filed, publication of a new notice and

an additional 20-day comment period. The applicant shall prominently

post the notice in each of its offices and publish the notice in at

least one newspaper printed in the English language and having a

substantial general circulation in each community in which an office of

the applicant is located, as follows:

* * * * *

5. Section 563b.7 is amended by removing the last sentence of

paragraph (f)(2) and adding two new sentences in its place to read as

follows:

Sec. 563b.7 Pricing and sale of securities.

* * * * *

(f) * * *

(2) * * * No appraiser shall serve as an underwriter or selling

agent under the same plan of conversion. No affiliate of an appraiser

may act as an underwriter or selling agent unless procedures are

followed and representations made to ensure that an appraiser is

separate from the underwriter or selling agent affiliate and the

underwriter or selling agent affiliate does not make recommendations or

in any way impact the appraisal. No appraiser shall receive any other

fee except for the fee for services rendered in connection with such

appraisal.

* * * * *

6. Section 563b.11 is added to subpart A of part 563b to read as

follows:

Sec. 563b.11 Convenience and needs considerations.

In reviewing an application under this subpart, the Office will

examine the extent to which the conversion will affect the convenience

and needs of the communities to be served by the converted savings

association. The Office will review the applicant's record under part

563e of this subchapter. In addition, the Office will scrutinize the

business plan of the applicant. Each applicant must demonstrate that

the proposed deployment of proceeds contained in its business plan will

help meet the credit and lending needs of the communities served by the

applicant. Also, the Office will consider other relevant factors

relating to the association's performance in meeting the convenience

and needs of the community. Based on an assessment of the applicant's

record under part 563e of this subchapter, the applicant's business

plan and other relevant factors, the Office may approve the

application, deny the application, or approve the application on the

condition that the applicant improve certain aspects of its CRA

performance record or address particular credit or lending needs of the

communities that it serves.

PART 575--MUTUAL SAVINGS AND LOAN HOLDING COMPANIES

7. The authority citation for 12 CFR part 575 is revised to read as

follows:

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

8. Section 575.1 is amended by designating the existing text as

paragraph (a), by adding a heading to newly-designated paragraph (a),

and by adding a new paragraph (b) to read as follows:

Sec. 575.1 Scope.

(a) Purpose. * * *

(b) General. Except as the OTS may otherwise determine, the

provisions of this part shall exclusively govern the reorganization of

mutual savings associations and any related stock issuances, and no

mutual savings association shall reorganize to a mutual holding company

or issue minority stock without the prior written approval of the OTS.

The OTS may grant a waiver in writing from any requirement of this part

for good cause shown.

9. Section 575.7 is amended by redesignating paragraph (a)(7) as

paragraph (a)(8), and by adding a new paragraph (a)(7), and by revising

paragraph (d)(2) to read as follows:

Sec. 575.7 Issuances of stock by savings association subsidiaries of

mutual holding companies.

(a) * * *

(7) The proposed stock issuance would fail to meet the convenience

and needs standard of Sec. 563b.11 of this subchapter.

* * * * *

(d) * * *

(2) The sale of minority stock of the reorganized stock savings

association to be made under the minority stock issuance plan,

including any sale in a public offering or direct community marketing,

shall be completed as promptly as possible and within 45 calendar days

after the last day of the subscription period, unless extended by the

OTS.

* * * * *

10. Section 575.13 is amended by revising paragraph (a)(4) to read

as follows:

Sec. 575.13 Procedural requirements.

(a) * * *

(4) Use of ``running'' proxies. A mutual savings association or

mutual holding company may make use of any proxy conferring general

authority to vote on any and all matters at any meeting of members,

provided that the member granting such proxy has been furnished a proxy

statement regarding the matters and the member does not grant a later-

dated proxy to vote at the meeting at which the matter will be

considered or attend such meeting and vote in person, and further

provided that ``running'' proxies or similar proxies may not be used to

vote for a mutual holding company reorganization, mutual-to-stock

conversion undertaken either by a mutual savings association or a

mutual holding company or any other material transaction. Subject to

the limitations set forth in this paragraph, any proxy conferring on

the board of directors or officers of a mutual savings association

general authority to cast a member's votes on any and all matters

presented to the members shall be deemed to cover the member's votes as

a member of the mutual holding company and such authority shall be

conferred on the board of directors or officers of a mutual holding

company.

* * * * *

Dated: November 22, 1994.

By the Office of Thrift Supervision.

Jonathan L. Fiechter,

Acting Director.

[FR Doc. 94-29264 Filed 11-29-94; 8:45 am]

BILLING CODE 6720-01-P