# Notice of Mutual-to-Stock Conversions

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## Record

- **Collection:** Federal Register
- **Document type:** Uncategorized Document
- **Published:** February 15, 1994

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-3527. Public record. Not legal advice.