Notice of Mutual-to-Stock Conversions

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 303

RIN 3064-AB34

Notice of Mutual-to-Stock Conversions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Interim rule with request for comments.

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SUMMARY: The interim rule requires FDIC-insured state-chartered savings

banks that are not members of the Federal Reserve System (State Savings

Banks) that apply to their applicable state banking regulator to

convert from the mutual to stock form of ownership to provide the FDIC

with a notice of the proposed conversion and a copy of the application

and related disclosure materials. The interim rule also requires that

State Savings Banks not finalize a mutual-to-stock conversion until

either they receive a notice of the FDIC's intention not to object to

the proposed conversion or 60 days pass after a complete notice and

copy of the application materials are filed with the FDIC. A conversion

may not be completed if the FDIC objects to the proposed conversion.

The intended effect of the interim rule is to provide the FDIC with

the opportunity to review proposed mutual-to-stock conversions of FDIC-

regulated mutual savings banks to determine whether the proposed

conversion would engender concerns about the safety and soundness of

the institution, the institution's compliance with applicable law, and/

or insider abuse.

DATES: Effective date: The interim rule is effective February 15, 1994.

Written comments must be received by the FDIC on or before March 17,

1994.

ADDRESSES: Written comments shall be addressed to the Office of the

Executive Secretary, Federal Deposit Insurance Corporation, 550 17th

Street, NW., Washington, DC 20429. Comments may be hand-delivered to

room F-400, 1776 F Street, NW., Washington, DC, on business days

between 8:30 a.m. and 5 p.m. (FAX number: (202) 898-3838). Comments

will be available for inspection in room 7118, 550 17th Street, NW.,

Washington, DC between 9 a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Robert F. Miailovich, Associate

Director, Division of Supervision (202/898-6918), Garfield Gimber, III,

Examination Specialist, Division of Supervision (202/898-6913), Claude

A. Rollin, Senior Counsel, Legal Division (202/898-3985) or Joseph A.

DiNuzzo, Counsel, Legal Division (202/898-7349), Federal Deposit

Insurance Corporation, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this interim final rule

has been submitted to the Office of Management and Budget (OMB) for

review and approval pursuant to the Paperwork Reduction Act of 1980 (44

U.S.C. 3501 et seq.). Comments regarding the accuracy of the burden

estimate, and suggestions for reducing the burden, should be addressed

to the Office of Management and Budget, Paperwork Reduction Project

(3064-AB34), Washington, DC 20503, with copies of such comments sent to

Steven F. Hanft, Assistant Executive Secretary (Administration), room

F-400, FDIC, 550 17th St. NW., Washington, DC 20429.

The collection of information in this interim final rule is found

in Sec. 303.15 and takes the form of copies of preexisting materials

and other materials related to a State Savings Bank's proposed

conversion from the mutual to stock form of ownership. The information

will be used to enable the FDIC to identify and address issues involved

in the proposed conversion relating to the safety and soundness of the

bank, any abusive management practices and potential violations of

applicable law.

The estimated annual reporting burden for the collection of

information requirement in this interim final rule is summarized as

follows:

Number of Respondents: 50.

Number of Responses per Respondent: 1.

Total Annual Responses: 50.

Hours per Response: 2.

Total Annual Burden Hours: 100.

Regulatory Flexibility Act

Because no notice of proposed rulemaking was required in connection

with the adoption of this interim rule, no regulatory flexibility

analysis is required under the Regulatory Flexibility Act (5 U.S.C. 601

et seq.).

Background

The Proposed Policy Statement

Recently, the FDIC issued for public comment a proposed policy

statement on the conversions of State Savings Banks from mutual to

stock ownership (Proposed Policy Statement). 59 FR 4712 (February 1,

1994). As explained in the proposal, in recent years a number of

mutually owned State Savings Banks have converted to stockholder-owned

State Savings Banks. In some cases, the conversion results in an

acquisition by or merger into another institution (generally known as

merger/conversions), with depositors/members obtaining the right to

purchase stock in the acquiring institution and not the converting

savings bank. Many of the institutions that converted from mutual to

stock form first converted from federal or state mutual savings

associations regulated by the Office of Thrift Supervision (OTS) to

State Savings Banks.

One consequence of these conversions to State Savings Banks is that

the FDIC replaces the OTS as the institution's primary federal

regulator. The mutual-to-stock conversion process is subject to the

rules and protections of state law.1 Conversion rules under state

law are not identical to and in some cases are less stringent than OTS

regulations. The absence of consistent treatment under state laws or

some federal oversight over State Savings Bank conversions to stock

form presents an opportunity for inconsistency and abuse. In addition,

the FDIC understands that the OTS is in the process of reviewing the

adequacy of its own regulations and policies.

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\1\Some federal laws may still apply, such as the anti-fraud

provisions of the federal securities law. E.g., 15 U.S.C. 78j.

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The areas of particular concern for potential abuse in conversions

are: (1) Properly appraising the institution to be sold; (2) Pricing

the stock sold in the conversion; (3) Apportioning the stock

subscription rights; (4) Disclosure of information needed to make an

informed investment decision; and (5) Compensation and benefits

provided to insiders.

The improper valuation of the institution and/or under-pricing of

conversion stock, among other things, may unjustly enrich the

purchasers, increase the temptation by insiders to acquire more shares

than they are fairly entitled to, and deny the institution the

additional capital it should receive to protect depositors and the

insurance fund. The over-pricing of conversion stock, among other

things, may result in poor investment decisions by depositors/members

who may lack investment expertise.

In some conversion transactions insiders may appear to have

received (and, in some cases, have received) preferential treatment

over the interests of depositors/members. In addition, mutual savings

banks that convert to stock form undertake a major restructuring that

possibly can lead to significant changes in the nature or volume of

business conducted. In the recent past, some institutions, in

leveraging capital raised through a conversion and reaching for a

return on equity, have vigorously competed for loans and liberalized

underwriting standards--activities which led to loan losses that in

many instances depleted more capital than was raised through the

mutual-to-stock conversion and, in some cases during the past ten

years, resulted in failure of the converted thrift.

The general purpose of the Proposed Policy Statement is to solicit

public comment on the issues involved in mutual-to-stock conversions

and whether and how the FDIC should regulate this activity.

Need for the Interim Rule

The Board of Directors of the FDIC (Board) has subsequently

determined that during the pendency of the Proposed Policy Statement it

is necessary for the FDIC to review applications filed by State Savings

Banks with their respective state banking regulator and any other

applicable state and federal banking and/or securities regulators to

determine whether the proposed conversions contain any safety and

soundness issues and/or issues of insider abuse that reflect on the

integrity and competence of the management of the converting

institution. The Board's concerns are caused by several recent and

pending mutual-to-stock conversions of State Savings Banks that (as

discussed below) have given rise to questions related to management

abuse and excessive enrichment of insiders, fairness to depositors and

general safety and soundness concerns. These conversions have been and

currently are the subject of congressional hearings and numerous news

articles and reports. The FDIC also has received (and continues to

receive) direct complaints from depositors of State Savings Banks about

unfair treatment and insider abuse in mutual-to-stock conversions.

On January 26, 1994, Senator Riegle (the Chairman of the Senate

Banking Committee) and Senator D'Amato (the ranking minority member of

the Senate Banking Committee) introduced a bill (S. 1801, the ``Mutual

Depository Institution Conversion Protection Act of 1994'') to ``combat

abuses by management and insiders'' in mutual-to-stock conversions of

depository institutions. In his statement accompanying the introduction

of the bill, Senator Riegle noted that, ``[t]his self-dealing should

stop, and stop now. These outrageous conversions are not victimless

crimes. To the extent that management and insiders are skimming off the

net worth of the institution through a conversion, they are doing so at

the expense of the institution and its account holders. Significantly,

such transactions also siphon capital that ultimately protects the

deposit insurance system''.

In January 1994, the Financial Institutions Subcommittee of the

House Banking Committee held two hearings on mutual-to-stock

conversions. At the first hearing, held in Winston-Salem, North

Carolina, several depositors of recently converted State Savings Banks

testified. One group of depositors characterized the conversion of

their bank as providing ``astronomical benefits'' to officers and

directors of the bank and accused such insiders of treating the assets

of the bank as their ``own personal property''. They also contended

that ``fraudulent intent'' had been involved in determining the value

of the institution. A depositor of another converted State Savings Bank

stated that he has done business with the bank since 1951 and had

retirement deposits in the bank over the insured limit. He said that he

``will receive no compensation for my ownership interest in [the bank].

On the other hand, the officers and directors--who are not at risk and

have no ownership interest by reason of their offices--will be paid

millions of dollars * * * [S]omebody who is not at risk is getting

rich--and quite rich.'' A depositor of another recently converted State

Savings Bank stated at the hearing that the applicable state mutual-to-

stock conversion rules are a ``legalized formula to abscond with the

assets of a mutual savings bank''.

A spokesman for the Consumer Federation of America testified at the

Subcommittee's second hearing, held in Washington, D.C. He stated that

``[t]he Banking Committee can take justifiable pride in the work it

performed in 1989 to reform the regulation of the savings and loan

industry * * * [b]ut the job is not complete. One area of abuse--the

conversion of mutual institutions into stock companies--was left

untouched by reforms and this oversight--however accidental--has turned

into a wonderful, fur-lined play pen for S&L insiders, conversion law

firms and stock manipulating Wall Street fast-buck artists. And, once

again, it is the depositor-consumer who is left out in the cold''. He

also emphasized the immediacy of the situation in noting that ``[w]e

are in the middle of a feeding frenzy''.

A law school professor also submitted a written statement to the

Subcommittee. He wrote that ``[b]y converting their institutions to the

stock form of ownership, and granting themselves generous stock and

option awards, trustees and managers can make millions of dollars in

conversions. While the conversion form is beneficial, because it will

infuse new capital and subject these institutions to market discipline,

the decision about whether to convert is left solely in the hands of

incumbent management. It is not uncommon for employees and trustees to

own as much as 30 percent of the stock after the offering and the

exercise of stock options. The stock is free, and--by pricing the

options very low, with the help of cooperative regulators and appraisal

firms--management can buy stock options at the offering price, secure

in the knowledge that pervasive underpricing will enable them to make

millions when share prices adjust to true market value''.

Moreover, the primary federal regulator of state-chartered and

federally chartered savings and loan associations has felt the need to

take immediate action to stop abuses. On January 31, 1994, the OTS

suspended the acceptance of applications involving merger conversions

of mutual savings associations under its supervision. The press release

announcing the moratorium noted that ``[the] OTS has grown increasingly

troubled over the apparent advantages management of the mutual and the

acquirer have in a merger conversion to the detriment of the depositors

of the mutual. The moratorium * * * will provide an opportunity for the

OTS to re-examine the conversion process''.

In light of these frequent expressions of public and governmental

concern, and the numerous reports of abusive insider practices, the

Board has determined that, until the FDIC completes the ``rulemaking''

process in relation to the Proposed Policy Statement, there is a need

to review all pending and new mutual-to-stock conversion applications.

The Board believes that, without the immediate implementation of the

interim rule, additional conversions will be completed that may entail

abusive management action and unsafe and unsound practices. In order to

properly fulfill its supervisory role over State Savings Banks, it is

necessary that the FDIC have an early opportunity to review banks'

conversion plans. As discussed below, if the FDIC identifies a safety-

and-soundness concern, a breach of fiduciary duty by an institution's

management or possible violation under applicable law, the FDIC will

issue a notice of objection which, among other things, will advise the

institution that the conversion shall not be consummated unless and

until the FDIC rescinds the letter of objection. The enforcement

actions available to the FDIC are discussed below.

For the above-noted reasons, the Board of Directors has determined

that the notice and public participation that are ordinarily required

by the Administrative Procedure Act (5 U.S.C. 553) before a regulation

may take effect would, in this case, be contrary to the public interest

and that good cause exists for waiving the customary 30-day delayed

effective date. Nevertheless, the Board desires to have the benefit of

public comment before adoption of a permanent final rule on this

subject, and so invites interested persons to submit comments during a

30-day comment period. In adopting a final regulation, the Board will

make such revisions to the interim rule as may be appropriate based on

the comments received on the interim rule and the Proposed Policy

Statement.

In the past, some State Savings Banks have provided the FDIC with

copies of conversion documentation and application materials. This

process has been voluntary, inconsistent and, thus, undependable. The

interim rule requires State Savings Banks to provide such materials to

the FDIC. As discussed below, the FDIC intends to review the conversion

documentation and application materials to determine whether there are

any issues involving the continued safe-and-sound operation of the

bank, whether the proposal contains any potential abuses by management

and whether the transaction involves any potential violation of

applicable law. The FDIC's authority under section 8 of the FDI Act (12

U.S.C. 1818) includes, among other things, the ability to take action

against a State Savings Bank and/or its management that is engaged, or

about to engage, in an unsafe or unsound practice in conducting the

business of the bank.

In order to determine whether a State Savings Bank, in the course

of its proposed mutual-to-stock conversion, is about to engage in an

activity with safety and soundness implications, the FDIC must be aware

of the details of the proposed conversion at an early date; for

example, it is important that the FDIC know the bank's business plan

for post-conversion operation, growth and investment of any newly

injected capital. A mutual-to-stock conversion can be viewed as a

material change in the operation of the institution for two reasons.

First, substantially increasing the capitalization from the sale of

stock can lead to new and additional risks in investing the funds.

Secondly, management becomes susceptible to market discipline for the

first time with shareholders who demand and expect a reasonable return

on their investment--factors which also can lead to additional risks in

investing funds.

Because of the safety and soundness concerns inherent in the

potential for new risks, a comprehensive and realistic business plan is

needed for post conversion operations. That information typically is

provided in conversion applications required by the state regulators.

In the past, certain State Savings Banks that raised substantial

capital in mutual-to-stock conversions either failed or became

financially troubled because of imprudent use of funds raised through

the sale of stock. The Board believes it is necessary for the FDIC to

obtain information, as soon as possible, on an institution's intended

use of funds generated by the conversion.

In one proposed conversion transaction, a state mutual savings bank

applied to convert to stock form via a mutual holding company

reorganization in which all the non-holding company shares would be

obtained only by bank insiders. In that situation, not only would the

depositors be denied the opportunity to purchase any shares, but the

institution reportedly would end up with less capital as a result of

the conversion. This would result because the proceeds of the stock

issuance would be less than the cost of the transaction. This

particular contemplated transaction not only appears to be unfair to

depositors but also raises safety and soundness concerns since

capitalization would decline.

Section 8(e) of the FDI Act also empowers the FDIC to bring an

enforcement action against bank insiders who have committed or are

engaged in any act, omission or practice that constitutes a breach of

fiduciary duty. In a recent highly publicized case, the Superintendent

of Banks of the State of New York (Superintendent) found that a bank's

board of trustees breached its fiduciary duty by failing to assure

themselves that the bank was properly valued prior to the initiation of

the proxy solicitation process.\2\ Specifically, the Superintendent

determined that the board of trustees did not, prior to the

solicitation of proxies: ``(1) Inform or seek to inform itself about

the factors that would be significant in valuing the Bank; (ii) inform

or seek to inform itself about the methods by which the appraiser

determined the value of the Bank; (iii) seek or receive any in-depth

analysis of the Appraisal''. Consequently, the Superintendent found

that the trustees violated a provision of New York Banking Law

requiring them to exercise a duty of care to ensure the fairness of the

conversion by informing themselves about the appraisal and exercising

their judgment to determine the reasonableness of the appraisal.

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\2\See, Order Pursuant to Section 39 of the New York Banking

Law--In the Matter of The Green Point Savings Bank, Page 18.

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The Superintendent also determined that the adequacy of certain

disclosures in the original proxy statement issued by the bank was

questionable. For example, the Superintendent found that the proxy

statement contained no disclosures regarding another bank's interest in

a merger conversion transaction, the trustees' response to that

proposed merger and the reasons for the trustees' response. The

Superintendent concluded that ``failure to provide depositors with such

information about alternate proposals in the Proxy could deprive

depositors of the information necessary to evaluate the Trustee's

decision to convert, and therefore was misleading''. The Superintendent

also found that disclosures in the proxy statement concerning certain

stock awards to management and the trustees failed to state the actual

dollar value of those benefits and thus were inadequate. In addition,

the Superintendent found that the proxy materials did not contain an

adequate discussion of the reasons for the conversion and that

depositors should have been provided with all of the material factors

which led to the trustees' decision to pursue the conversion

transaction.

Finally, the Superintendent sought and obtained a ``substantial

reduction in the stock-based compensation awarded to management and the

trustees in connection with the conversion and cancellation of all

stock subscriptions at the initial offering price by such individuals

and related parties''. As further stated in that Order, those

modifications served ``to reduce the opportunities for self-enrichment

that could influence the Board's review of the valuation of the Bank''.

In this situation, the Superintendent interceded to ensure that the

bank's trustees considered and reviewed the reasonableness of the

bank's appraisal, provided adequate disclosure to the depositors via a

supplemental proxy statement and limited the stock-based compensation

awarded to management and the trustees in connection with the

conversion transaction. Although state regulation worked in this case

to prevent insider windfalls, the FDIC cannot assume that such

intervention will occur in every state and in every conversion

transaction involving possible insider abuses.

The duties and obligations of trustees and officers of mutual

savings banks, as illustrated in the foregoing case, are identical to

the responsibilities the FDIC has historically enunciated and enforced

concerning directors and officers of commercial banks.3 The two

principal duties of care and loyalty that directors and officers of

commercial banks must exercise on behalf of the institution and its

constituencies (i.e., depositors, creditors and shareholders) also

obligate trustees of depositor-owned mutual savings banks. Both duties

have long antecedents in the common law of corporations and financial

institutions.4

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\3\See e.g., Statement Concerning the Responsibilities of Bank

Directors and Officers (FDIC Legal Division, December 3, 1992);

Pocket Guide for Directors (FDIC 1988).

\4\Greenfield Savings Bank v. Abercrombie, 211 Mass. 252, 97

N.E. 897, 39 L.R.A.n.s. 173 (1912) provides a detailed discussion of

liability of trustees of a savings bank.

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Trustees (as well as officers) of mutual savings institutions are

held to the same standard of care and loyalty as directors and officers

of commercial banks. Thus the trustees must fulfill their duty of

loyalty to the institution by administering its affairs with the utmost

candor, personal honesty and integrity. They are prohibited from

advancing their own personal or business interests or those of others

at the expense of the bank. This general fiduciary duty has been

frequently interpreted to include an element of fairness and good faith

which, in the context of mutual-to-stock conversions, affords

protection to the depositors/owners of mutual savings banks. Through

this interim rule, the FDIC seeks to protect these depositor/owners in

a consistent manner.

The FDIC, through the interim rule, also requires the trustees of

mutual savings banks to adhere to the same standards of loyalty and

care that are required of directors and officers of commercial banks in

order to prevent insider abuse. Publicized insider abuse (and the

lawsuits that such abuses may engender) may have a sufficiently

significant impact upon the reputation of a bank to affect its

continued viability and, thus, its safety and soundness, resulting in a

regulatory violation.

In addition, section 39 of the FDI Act (12 U.S.C. 1831p-1(c))

provides that excessive compensation, or compensation that could lead

to a material financial loss for an institution, is an unsafe and

unsound practice.5 As noted above, excessive profits to insiders

is a troubling aspect of some recent State Savings Bank conversions to

stock form.

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\5\Proposed regulations on section 39 of the FDI Act have been

published. 58 FR 60819 (November 18, 1993).

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Explanation of the Interim Rule

The interim rule adds a new section to part 303 of the FDIC's

regulations (12 CFR 303.15) prohibiting State Savings Banks from

converting to stock form without complying with the requirements of the

section. The interim rule requires State Savings Banks that propose to

convert to stock ownership to file with the FDIC a notice of intent to

convert to stock form consisting of a description of the proposed

conversion accompanied by a copy of all documentation and application

materials filed with the applicable state and federal regulators. The

notice may be in letter form and must be provided to the FDIC (along

with copies of the application materials) at the same time the

application materials are filed with the institution's primary state

regulator.

State Savings Banks that already have filed conversion applications

and disclosure materials with the applicable state and federal banking

and/or securities regulators (or otherwise have initiated a proposed

mutual to stock conversion) prior to the effective date of the interim

rule should contact their applicable FDIC Regional Office as soon as

possible and provide that office with the conversion notice and

application and disclosure materials as soon as practicable. The FDIC

intends to review such materials expeditiously so as not to interfere

with the completion of proposed conversions to which the FDIC would not

object.

The FDIC will review all conversion materials with a special

interest in: The use of the proceeds from the sale of stock, as

described in the business plan; the adequacy of the disclosure

materials; the participation of depositors in approving the

transaction; the form of the proxy statement required for the vote of

the depositors/members on the conversion6; any increased

compensation and other remuneration (including stock grants, stock

option rights and other similar benefits) to be obtained by officers

and directors/trustees of the bank in connection with the conversion;

the adequacy and independence of the appraisal of the value of the

mutual savings bank for purposes of determining the price of the shares

of stock to be sold; the process by which the bank's trustees approved

the appraisal, the pricing of the stock and the compensation

arrangements for insiders; the nature and apportionment of stock

subscription rights; and the extent of any existing and planned

contributions to or investments in the community. In a merger/

conversion, the FDIC will pay particular attention to the value offered

to depositors of the converting institution and the compensation

packages offered to management.

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\6\ One issue would be whether the applicable state law and/or

the plan of conversion requires a special proxy for the conversion

or whether management expects to use an existing general proxy to

vote for the depositor/member on the conversion.

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The FDIC generally expects proposed conversions to substantially

satisfy the standards found in the mutual-to-stock conversions

regulations of the OTS (12 CFR part 563b). Any variance from those

regulations will be closely scrutinized. Compliance with OTS

requirements will not, however, necessarily be sufficient for FDIC

regulatory purposes.

In imposing the requirements of the interim rule the Board does not

intend to discourage State Savings Banks from converting to stock form

for legitimate business purposes. The FDIC recognizes that stock

conversions can be very effective and beneficial in raising capital,

particularly for banks whose capital does not meet regulatory

standards. In particular, the FDIC does not intend to impede the

completion of supervisory conversions, which entail the capitalization

of undercapitalized institutions and thereby minimize costs to the FDIC

insurance funds. In such situations, the FDIC intends to act as quickly

as reasonable in reviewing the proposed conversion materials and might

not object to a conversion transaction that does not come within the

parameters of the OTS' regulations, provided that the transaction

likely would prevent a loss to the applicable deposit insurance fund.

Under the interim rule, a bank's notice to the FDIC will not be

deemed complete until the State Savings Bank provides the materials

required by the interim rule, including any materials specifically

requested by the FDIC after the bank's initial submission. The FDIC

will notify the institution when the notice is complete. The FDIC will

issue to the converting bank a notice of intent not to object to the

proposed conversion, if the FDIC determines that the proposed

conversion would not pose a risk to the safety and soundness of the

bank, violate any law or regulation or present a breach of fiduciary

duty. Such notice of non-objection shall be provided within 60 days

after the FDIC receives a complete notice of the proposed conversion

and a copy of all documentation and application materials. If the FDIC

does not provide a non-objection letter within 60 days after the FDIC

receives a complete notice of the proposed conversion, the bank may

consummate the conversion; however, the FDIC has the discretion to

extend the initial 60-day period an additional 60 days.

In situations where the FDIC identifies a safety and concern,

violation of any law or regulation or breach of fiduciary duty, the

FDIC will issue to the institution a letter of objection to the

proposed conversion. Under the interim rule, the State Savings Bank may

not consummate the conversion until the FDIC has rescinded such a

letter. The FDIC intends to use its administrative authority, if

necessary, to correct the concerns expressed in the letter of objection

and to enforce compliance with the interim rule.

Violations of regulations can result in, among other things, the

FDIC's issuance of a cease and desist order and/or temporary cease and

desist order under 12 U.S.C. 1818(b) and/or (c). The order could not

only prohibit conduct, but also require affirmative action. In

addition, the FDIC could remove and/or prohibit a party from

participating in the conduct of the affairs of a bank under section

8(e) of the FDI Act (12 U.S.C. 1818(e)). Moreover, anyone involved in a

conversion transaction, not just the officers, directors and employees

of the bank, could be subject to a cease and desist order under section

8(b) and/or (c) of the FDI Act (12 U.S.C. 1818(b), (c)), or a removal

and prohibition order under section 8(e) of the FDI Act (12 U.S.C.

1818(e)). In addition, the FDIC could impose civil money penalties

under section 8(i) of the FDI Act (12 U.S.C. 1818(i)). The FDIC also

could terminate the deposit insurance of the bank under section 8(a)(2)

of the FDI Act (12 U.S.C. 1818(a)(2)). Finally, the FDIC also could

issue a directive based on noncompliance with section 39 of the FDI

Act.

Request for Public Comment

The FDIC is issuing this interim rule in response to the immediate

need to review proposed mutual-to-stock conversions of State Savings

Banks. The FDIC is, however, hereby requesting comment during a 30-day

comment period on all aspects of the interim rule.

List of Subjects in 12 CFR Part 303

Administrative practice and procedure, Authority delegations

(Government agencies), Bank deposit insurance, Banks, Banking,

Reporting and recordkeeping requirements, Savings associations.

For the reasons set out in the preamble, part 303 of chapter III of

title 12 of the Code of Federal Regulations is amended as follows:

PART 303--APPLICATIONS, REQUESTS, SUBMITTALS, DELEGATIONS OF

AUTHORITY, AND NOTICES REQUIRED TO BE FILED BY STATUTE OR

REGULATION

1. The authority citation for part 303 is revised to read as

follows:

Authority: 12 U.S.C. 378, 1813, 1815, 1816, 1817(a)(2)(b),

1817(j), 1818, 1819 (``Seventh'' ``Eighth'' and ``Tenth''), 1828,

1831e, 1831o, 1831p-1(a); 15 U.S.C. 1607.

2. A new Sec. 303.15 is added to read as follows:

Sec. 303.15 Mutual-to-stock conversions of mutually owned state-

chartered savings banks.

(a) Requirement for mutual-to-stock conversion. An insured state-

chartered mutually owned savings bank shall not convert to stock form,

except as provided for in this section.

(b) Prior notice requirement. An insured state-chartered mutually

owned savings bank that proposes to convert from mutual to stock form

shall file with the FDIC a notice of intent to convert to stock form

and copies of all documents filed with state and federal banking and/or

securities regulators in connection with the proposed conversion. An

institution that is in the process of converting to stock form that has

filed a proposed stock conversion application with the applicable state

and federal regulators (or otherwise has initiated a stock conversion)

prior to the effective date of this section shall file the required

materials with the FDIC as soon as practicable. An insured mutual

savings bank chartered by a state that does not require the filing of

application materials to convert from mutual to stock form that

proposes to convert to the stock form shall notify the FDIC of the

proposed conversion and provide the materials requested by the FDIC.

(c) Content and filing of notice--(1) Content of notice. The notice

required to be filed under paragraph (b) of this section shall provide

a description of the proposed conversion and include a copy of all

notices or applications concerning the proposed conversion, including

all attachments or appendices thereto, that have been filed with any

state and federal banking and/or securities regulators. Copies of all

agreements entered into as part of the mutual-to-stock conversion

between the institution, its officers, directors/trustees and any other

institution and/or its successors also must be provided.

(2) Filing of notice. Notices shall be filed with the regional

director (Division of Supervision) in the region in which the

institution seeking to convert is headquartered at the same time as the

conversion application materials are filed with the institution's

primary state regulator.

(d) Review by FDIC. (1) The FDIC shall review the materials

submitted by the institution seeking to convert from mutual to stock

form. The FDIC, in its discretion, may request any additional

information it deems necessary to evaluate the proposed conversion and

the institution shall provide such information to the FDIC

expeditiously. Among the factors to be reviewed by the FDIC are:

(i) The use of the proceeds from the sale of stock, as described in

the business plan;

(ii) The adequacy of the disclosure materials;

(iii) The participation of depositors in approving the transaction;

(iv) The form of the proxy statement required for the vote of the

depositors/members on the conversion;

(v) Any increased compensation and other remuneration (including

stock grants, stock option rights and other similar benefits) to be

obtained by officers and directors/trustees of the bank in connection

with the conversion;

(vi) The adequacy and independence of the appraisal of the value of

the mutual savings bank for purposes of determining the price of the

shares of stock to be sold;

(vii) The process by which the bank's trustees approved the

appraisal, the pricing of the stock and the compensation arrangements

for insiders;

(viii) The nature and apportionment of stock subscription rights;

and

(ix) The extent of any existing and planned contributions to or

investments in the community.

(2) In reviewing the materials required to be submitted under this

section, the FDIC will take into account the extent to which the

proposed conversion conforms with the various provisions of the mutual-

to-stock conversion regulations of the Office of Thrift Supervision (12

CFR Part 563b), as currently in effect at the time the FDIC reviews the

required materials related to the proposed conversion. Any non-

conformity with those provisions will be closely scrutinized.

Conformity with the OTS requirements, however, will not be sufficient

for FDIC regulatory purposes if the FDIC determines that the proposed

conversion would pose a risk to the institution's safety and soundness,

violate any law or regulation or present a breach of fiduciary duty.

(e) Notification of completed filing of materials. The FDIC shall

notify the institution when all the required materials related to the

proposed conversion have been filed with the FDIC and the notice is

thereby complete for purposes of computing the time periods designated

in paragraphs (f) and (h) of this section.

(f) Notice of intent not to object. If the FDIC determines, in its

discretion, that the proposed conversion would not pose a risk to the

institution's safety and soundness, violate any law or regulation or

present a breach of fiduciary duty, then the FDIC shall issue to the

bank seeking to convert, within 60 days of receipt of a complete notice

of proposed conversion, a notice of intent not to object to the

proposed conversion. The FDIC may, in its discretion, extend by written

notice to the institution the initial 60-day period by an additional 60

days.

(g) Letter of objection. If the FDIC determines, in its discretion,

that the proposed conversion poses a risk to the institution's safety

and soundness, violates any law or regulation or presents a breach of

fiduciary duty, then the FDIC shall issue a letter to the institution

stating its objection(s) to the proposed conversion and advising the

institution that the conversion shall not be consummated until such

letter is rescinded. A copy of the letter of objection shall be

furnished to the institution's primary state regulator and any other

state or federal banking and/or securities regulator involved in the

conversion. The letter of objection shall advise the institution of its

right to petition the FDIC for reconsideration under Sec. 303.6(e) of

the FDIC's regulations. Such action shall not, in any way, prohibit the

FDIC from taking any other action(s) that it may deem necessary.

(h) Consummation of the conversion. An institution may consummate

the proposed conversion upon either:

(1) the receipt of a notice of intent not to object; or

(2) the expiration of the 60-day period following acceptance of a

complete notice by the FDIC, unless the FDIC issues a notice of

objection before the end of that period and, in which case, the

conversion shall not be consummated until such letter is rescinded. The

FDIC may, in its discretion, extend by written notice to the

institution the initial 60-day period by an additional 60 days.

(i) Delegation of authority. The authority to issue notices of

intent not to object or letters of objection, to rescind such letters,

to determine and to issue letters of non-objection, to determine the

adequacy of the information submitted, to determine when the time

periods prescribed in this section begin to run and whether to extend

the time periods under paragraphs (f) and (h) of this section, and to

notify institutions of the completion of the filing of the required

materials is delegated to the Executive Director of Supervision and

Resolutions, the Director of the Division of Supervision, and, where

confirmed in writing by the Director of Supervision, to an associate

director of the Division of Supervision or the regional director(s)

(Division of Supervision) or deputy regional director(s) (Division of

Supervision).

By the order of the Board of Directors.

Dated at Washington, D.C., this 8th day of February, 1994.

Federal Deposit Insurance Corporation

Robert E. Feldman,

Acting Executive Secretary.

[FR Doc. 94-3527 Filed 2-14-94; 8:45 am]

BILLING CODE 6714-01-P