Conversions From Mutual to Stock Form

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 563b and 575

[No. 94-48]

RIN 1550-AA73

Conversions From Mutual to Stock Form

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Interim final rule with request for comments.

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

regulations governing mutual-to-stock conversions of insured savings

associations. The purpose of these amendments is to revise, clarify and

update the current regulations to strengthen the conversion standards

and ensure the integrity of the conversion process.

The amendments revise and clarify the appraisal standards; prohibit

the use of ``running'' proxies by management of converting

associations; place the current tax-qualified Employee Stock Ownership

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

provide stock purchase priority to long-term depositors; require that a

stock purchase preference be given to eligible depositors residing in

the association's local community; prohibit management stock benefit

plans in a conversion; prohibit merger conversions except in

supervisory situations; lengthen the conversion public comment period;

require associations to submit business plans for all conversions;

prohibit the repurchase of a converted association's stock within one

year of conversion; and make publicly available preliminary conversion

proxy materials.

Interested parties are invited to submit written comments on the

conversion regulations, both as to the amendments adopted here and the

issues on which comment is specifically solicited and as to any other

current provisions of the conversion regulations as they relate to this

interim rule.

DATES: The interim final rule is effective May 3, 1994. Written

comments must be received on or before June 17, 1994. These amendments

will apply to all conversion applications pending or filed on or after

May 3, 1994.

ADDRESSES: Comments should be directed to Director, Information

Services Division, Public Affairs, Office of Thrift Supervision, 1700 G

Street NW., Washington, DC 20552, Attention: Docket No. 94-48. These

submissions may be hand delivered to 1700 G Street, NW., from 9 a.m. to

5 p.m. on business days; they may be sent by facsimile transmission to

FAX number (202) 906-7755. Comments will be available for inspection at

1700 G Street NW., from 1 p.m. until 4 p.m. on business days. Visitors

will be escorted to and from the Public Reference Room at established

intervals.

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

Finance) (202/906-7299), James H. Underwood, Special Counsel (202/906-

7354), Leon R. Pleasants, Chief Financial Analyst (202/906-6414), J.

Larry Fleck, Assistant Chief Counsel (202/906-6413), V. Gerard Comizio,

Deputy Chief Counsel (202/906-6411), Corporate and Securities Division,

Chief Counsel's Office; Scott Ciardi, Financial Analyst (202/906-6960);

David A. Sjogren, Program Manager (202/906-6739), Diana L. Garmus,

Deputy Assistant Director (202/906-5683), Corporate Activities

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

DC 20552.

SUPPLEMENTARY INFORMATION:

I. Introduction

The OTS has broad authority to authorize and regulate mutual to

stock conversions of savings associations under sections 5(i) and (p)

of the Home Owners' Loan Act, as amended (HOLA), 12 U.S.C. 1464(i) and

(p).\1\ For the past 20 years--since the OTS's predecessor, the Federal

Home Loan Bank Board (FHLBB) instituted mutual to stock conversion

regulations in 1974\2\--mutual to stock conversions have been a

successful vehicle for bringing new capital into the thrift industry.

Since 1974, over 1,000 mutual savings associations have converted to

the stock form of ownership, in the process raising approximately $16

billion in new capital.

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\1\The OTS also has broad authority to approve and regulate

mutual savings and loan holding companies under section 10(o) of

HOLA, 12 U.S.C. 1467a(o).

\2\39 FR 9142 (March 7, 1974).

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While mutual to stock conversions provide an opportunity for

thrifts to raise capital, they may also provide an opportunity for an

association's insiders to engage in transactions that transfer to the

insiders an inappropriate amount of a converting association's value.

Thus, the OTS mutual to stock conversion regulations reflect standards

and safeguards developed over the years to maintain the integrity of

the conversion process, to ensure safety and soundness by responding to

the potential for abuses in thrift conversions and to allow the

conversion process to function effectively as a capital raising tool.

The OTS mutual to stock conversion regulations seek to balance

concerns such as a fair opportunity for participation by account

holders and the desire to infuse significant amounts of new capital

into converting savings associations. In addition, the regulations are

structured to assure that a savings association receives fair value for

its conversion stock and to prevent insider abuse by governing the

manner and extent to which a savings association's insiders and their

associates, individually and in the aggregate, may acquire stock and

other benefits in a conversion.

In recent months, mutual to stock conversions have become the

subject of controversy and negative media attention. In particular,

there has been controversy over the fact that some states offer

insiders of state savings banks the opportunity to gain potentially

greater benefits and more generous compensation packages than are

currently permitted under OTS rules. Congress also has expressed

serious concerns in this area. Legislation has been introduced in both

the House and Senate to address the issue of minimum standards for

conversions by state savings banks and limitations on management

benefits in conversions. In addition, both the Financial Institutions

Subcommittee of the House Banking Committee and the Senate Banking

Committee recently have held hearings on perceived abuses in mutual to

stock conversions.

Although the OTS believes that its current regulations have

generally provided sound safeguards for mutual to stock conversions,

the OTS and the FHLBB, in administering the conversion program, have

refined the conversion regulations periodically in light of experience

with the conversion process and in response to developments in the

market place. As a result of the recent events concerning mutual to

stock conversions, the OTS has again reviewed its conversion

regulations to assess whether additional revisions to its rules are

necessary.

As part of its review, the OTS has analyzed the changing financial

condition of converting mutual associations. During the 1980s, most

mutual savings associations were marginally capitalized and many were

insolvent. As a result, the FHLBB undertook a number of regulatory

initiatives designed to encourage associations to convert to stock

form. Many associations took advantage of these changes to

recapitalize. Now, however, most mutual institutions in the industry

are healthy. Generally, these healthy institutions are not converting

to meet regulatory capital requirements. Instead, they seek to raise

capital to expand their current operations through branching or

acquiring other institutions, to engage in new activities, through both

the formation of a holding company and establishment or acquisition of

operating subsidiaries, and to establish stock benefit plans for

management and employees. This change in the reasons for conversions

has caused the OTS to rethink the need for the regulatory inducements

for conversion contained in the current regulations.

Based upon the foregoing, the OTS has identified several areas of

the regulations, discussed below, that it has determined to revise,

update and clarify to further strengthen the standards governing the

conversion process. The OTS has consulted with the Federal Deposit

Insurance Corporation (``FDIC'') in developing these changes to ensure

consistent policy in this area. The OTS also has determined to adopt

the amendments immediately as an interim final rule to protect the

integrity of the conversion process. As such, the final rule is

designed to assure the public that the conversion program will continue

to be fair and equitable. Also, Congress has made it clear that it

expects both the OTS and the FDIC to act promptly to assure that any

abuses or potential abuses in the mutual to stock conversion area are

addressed.

II. Description of Revisions to Conversion Regulations

A. Revision to the Appraisal Standards

Pursuant to 12 CFR 563b.3(c)(1), a converting savings association

is required to sell its capital stock at a total price equal to its

estimated pro forma market value, based on an independent valuation.

When the FHLBB adopted the initial conversion regulations, it found

that underpricing conversion stock would result in ``windfall''

distributions of the value of a converting association and that no

method of conversion could be considered equitable unless the

conversion stock was accurately appraised and sold at its pro forma

market value. This was necessary to assure that the association

received full value for the conversion stock it distributed.

The current regulations contain safeguards designed to enhance the

accuracy of conversion appraisals. Under 12 CFR 563b.7(f), the OTS

requires that the appraisal be prepared by an appraiser who is

independent of the converting association and who has expertise in the

area of corporate appraisals. Although the conversion regulations have

been amended numerous times since 1974, the requirement that the

conversion stock be sold at its pro forma market value has remained

constant.

The integrity of the conversion process rests, in large part, on

the accuracy of the appraised value of the converting association. It

is for this reason that the OTS is concerned about recent conversions

that have exhibited significant increases in the immediate post-

conversion trading market for the stock. Although some of these

increases can be explained by the high levels of speculation that have

existed generally in the market for financial institution stocks, the

OTS is concerned that many of these appraisal reports may have set pro

forma market values that were significantly below the true value of the

converting associations. In such cases, the converting association is

harmed because the net proceeds from the conversion, and the

association's capital levels, are lower as a result of its stock being

undervalued upon issuance. Conversely, insiders and other sophisticated

investors are able to accrue undeserved financial benefits. When this

occurs, the independence and competence of the appraiser are called

into question.

The OTS relies on the independent appraiser to submit an appraisal

report that is impartial, objective and arrived at independently,

without undue influence from the converting association or any of its

other agents, including its attorneys, accountants, underwriters or

selling agents. The OTS is taking this opportunity to remind those

persons serving as conversion appraisers that the current regulations

require that the conversion applicant submit information demonstrating,

to the satisfaction of the OTS, the independence and expertise of the

appraiser.3 In those cases where there appears to be a consistent

pattern of undervaluation on the part of an appraiser, it may be

difficult for the applicant or the appraiser to establish that the

appraiser has acted independently and in a competent manner. In more

egregious cases, the OTS also may determine to censure, suspend or bar

an appraiser from practicing before the OTS under the OTS rules of

practice, 12 CFR part 513.

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\3\12 CFR 563b.7(f)(2).

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Under the current rules, Sec. 563b.7(f)(1)(ii) permits the

appraisal report to contain a ``brief summary'' of data that is

sufficient to support the appraiser's conclusions as to the pro forma

market value of the converting association. Section 563b.7(f)(3),

however, permits the OTS to request additional information with respect

to the pricing of the converting association's capital stock. In

practice, the OTS, relying on Sec. 563b.7(f)(3), has required that a

full appraisal report be submitted as part of the conversion

application. In that regard, the OTS and its predecessor, the FHLBB,

have provided detailed policy guidance to the industry regarding

appropriate appraisal standards to be used in valuing conversion

stock.4

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\4\FHLBB, Guidelines for Appraisal Reports for the Valuation of

Savings and Loan Associations and Savings Banks Converting From

Mutual to Stock Form of Organization (October 1983); FHLBB,

Guidelines for the Valuation of Savings and Loans Converting from

Mutual to Stock Form (June 15, 1981).

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In order to eliminate any potential confusion in this area, the OTS

is amending Sec. 563b.7(f)(1)(ii) by deleting suggestions that the

appraisal report need only be a ``brief summary'' and specifying that a

full appraisal report is required. The revised language codifies the

current practice of OTS staff requiring a more complete and detailed

description of the elements that make up an appraisal report and

justification for the methodology employed. Because a full appraisal

will now be required under paragraph (f)(1)(ii), the reference to

``full appraisal'' in Sec. 563b.7(f)(3) is unnecessary and is deleted.

The OTS expects that appraisals will continue to contain sufficient

detail to support the conclusions contained therein and that appraisers

will deliberate carefully in the formation of an opinion to arrive at a

pro forma market value that is consistent with post-conversion market

values.

Section 563.7(f) also has been revised 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 in accordance with the OTS applications processing

rules, 12 CFR part 516, decline to further process the application. In

such cases, the applicant will be required to refile the conversion

application, including a revised appraisal, as a new application and

pay any applicable filing fees.

Under current Sec. 563b.7(f)(2), the fact that a person is

participating in effecting a sale of the conversion stock, either as an

underwriter or as a selling agent, does not preclude such person or an

affiliate of such person from being considered independent for purposes

of preparing the appraisal for the conversion. Although the staff has

not experienced any problems to date where a conversion appraisal firm

or its affiliate have participated in effecting the sale of the

conversion stock, the OTS believes that it is essential that conversion

appraisals not be tainted in any manner by a real or potential conflict

in such an affiliate relationship that would cause the appraiser to not

be independent in his or her judgments. Thus, while no changes are

being adopted at this time, the OTS is requesting public comment as to

whether it should amend Sec. 563b.7(f)(2) to prohibit an appraiser or

its affiliates from also serving as an underwriter or selling agent.

Finally, in order to further enhance regulatory oversight in this

area, the OTS intends to issue updated guidance for conversion

appraisers that will provide specific details on appraisal methodology

and report content.

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

Section 563b.5(d)(4), adopted in 1985, provides for management of a

converting association to use previously obtained proxies, i.e.,

``running'' proxies, from a voting member. Previously, the conversion

rules prohibited the use of ``running'' proxies. The requirement was

changed in 1985 to reduce conversion costs for marginally capitalized

savings associations.5

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\5\50 FR 20555 (May 17, 1985).

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Section 563b.5(d)(4), however, requires that each voting member be

furnished a proxy statement on the special plan of conversion meeting,

and only allows for use of the ``running'' proxy in the event the

voting member does not grant a later-dated proxy to vote at the meeting

called to consider the plan of conversion or attend such meeting and

vote in person.

Currently, as discussed in section I. above, most mutual

associations in the thrift industry seeking to convert are well-

capitalized. Thus, the regulatory rationale for truncating the proxy

solicitation and voting requirements generally no longer exists. In

addition, depositors in greater numbers recently have expressed

increased interest in the conversion plans of their associations. The

OTS believes, based on its experiences in this area, that the current

ability to use ``running'' proxies has lessened the incentive of

converting associations to actively solicit depositors to consider and

vote on conversions.

Thus, the OTS has decided to revise Sec. 563b.5(d)(4) to prohibit

the use of ``running'' proxies. The OTS believes the prohibition is the

most effective manner in which to assure full participation of the

association's membership in the conversion process. The requirement to

use a proxy specifically designed for the conversion will require

thrift management to more actively solicit its depositors to obtain

their votes for conversion.

In addition, the last two paragraphs of Item 1 and Item 4(d) of the

Form PS have been revised to conform with the revisions discussed

above. Finally, a sentence has been added to Sec. 575.13(a)(4) of the

mutual holding company regulations to conform with this revision.

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

Ownership Plans.

Under OTS rules, a conversion offering may involve as many as three

phases: A subscription offering, a direct community offering and an

underwritten public offering. Only the subscription offering phase,

which affords account holders the opportunity to subscribe for stock on

a priority basis, is required; if all of the stock is purchased in the

subscription phase, any other offering is unnecessary.

The conversion regulations protect the status of mutual account

holders by establishing a detailed series of subscription priorities

for purchases of conversion stock. Currently, Sec. 563b.3(c)(2)

requires that first priority to purchase the stock issued in the

conversion, after certain tax-qualified ESOP purchases, discussed

below, belongs to eligible account holders, i.e., depositors holding

qualifying deposits at the savings association as of a date

(eligibility record date) at least ninety days prior to the date of

adoption of the plan of conversion by the association's board of

directors.6 The regulations also provide that each eligible

account holder must receive, without payment, nontransferable

subscription rights in an amount equal to the greater of the maximum

purchase limitation established under the converting association's plan

of conversion, or certain formulas prescribed under the

regulations.7

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\6\12 CFR 563b.2(a)(16).

\7\12 CFR 563b.3(c)(2).

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In 1986, amendments to the conversion regulations were adopted to

eliminate uncertainty on a variety of issues presented by employee

stock benefit plans and to enhance the ability of officers, directors

and employees of a savings association to acquire stock when the

association converted, through various types of employee stock benefit

vehicles.8 Prior to the 1986 amendments, the first priority to

purchase conversion stock had always been with eligible account

holders. The 1986 amendments, which granted a first priority purchase

right to tax-qualified employee benefit plans, were based on the

FHLBB's belief that acquisition of an association's stock by such plans

provided a means for officers and employees of converting associations

to acquire larger ownership stakes in their associations upon

conversion without undermining the basic equities of the conversion

process.9 In addition, and perhaps more significantly, the FHLBB

sought to afford undercapitalized mutual savings associations, that

feared hostile takeovers as a public company, 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.

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\8\51 FR 40127 (November 5, 1986).

\9\Id.

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Section 563b.3(c)(23) currently provides an explicit top priority

for tax-qualified employee stock benefit plans that permits plans to

purchase up to 10% of the total conversion stock offering ahead of

eligible depositors. This priority also is on a preferred basis; thus,

in the event an offering is over-subscribed, the plans' stock purchases

will not be affected.

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

need to balance the interests of management and employees against those

of account holders by providing long-term depositors at mutual savings

associations the first opportunity to buy conversion stock. The OTS is

therefore amending Sec. 563b.3(c)(23) to revise the stock purchase

priorities so as to place eligible account holders before the tax-

qualified employee stock benefit plans and to place tax-qualified

employee stock benefit plans before supplemental eligible account

holders10 and all other voting members who have subscription

rights. Finally, the OTS is amending Sec. 563b.3 (c)(6)(i), (c)(7), and

(d)(4) to conform to these changes.

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\1\0The term ``supplemental eligible account holder'' means any

person holding a qualifying deposit, except officers, directors and

their associates, as of the last day of the calendar quarter

preceding the OTS's approval of the application for conversion. See

current 12 CFR 563b.2 (a)(37) and (a)(38).

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D. Revision to Eligibility Record Date

As discussed above, the intent of the eligibility record date is to

give long-term depositors a priority in purchasing stock. It has been

the OTS's experience, however, that converting associations have opted

for the minimum 90-day period for determining who is a long-term

depositor. Upon review of this area, the OTS does not believe that use

of the minimum 90-day period is a meaningful indicator of long-term

depositor status and should be substantially lengthened. Thus, the OTS

is amending the existing rule to require that the eligibility record

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

approval of the plan of conversion. In so doing, the OTS stresses that

the one year period is a minimum time period; converting associations

are encouraged to establish longer time periods to maximize the stock

purchase priority for long-term depositors. The OTS also is requesting

public comment as to whether a longer minimum time period would be

appropriate.

E. Priority to Account Holders and Voting Members Residing in the

Association's Local Community

The current conversion regulations require that, following the

subscription offering of conversion stock to account holders, all

nonsubscribed shares be sold either in a public offering or a direct

community offering giving ``a preference to natural persons residing in

the counties in which the association has an office.''11 Thus, the

regulations currently permit a converting association to conduct a

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

a general public offering. The current regulations, however, do 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. The OTS, has, however, on a case by case

basis, recently permitted thrift subsidiaries of mutual holding

companies to prioritize stock purchases in this manner.

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\1\112 CFR 563b.3(c)(6).

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Upon consideration of its favorable experiences with local

community stock priorities in stock offerings of thrift subsidiaries of

mutual holding companies, the OTS now believes it is appropriate to

require converting associations to give the local community a more

meaningful opportunity to participate in all conversions on a priority

basis at the subscription offering stage. Accordingly, new Sec. 563b.3

(c)(2)(i), (4)(i), and (5)(i) have been added to extend this preference

to the eligible account holder, supplemental eligible account holder

and other voting member priorities in the subscription stock offering.

The preference in each priority group will be to those persons who

reside in the association's ``local community'' or within 100 miles of

a home or branch office of the converting association. The term ``local

community'' is defined in new Sec. 563b.2(a)(19) 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 local area(s) as provided for in the converting association's

plan of conversion, as approved by the OTS. Current

Sec. 563b.3(c)(2)(i)-(ii), 4(i)-(iv) and (5)(i)-(ii) will be

redesignated as Sec. 563b.3(c)(2)(ii)-(iii), (4)(ii)-(v) and (5)(ii)-

(iii). For purposes of consistency, section 563b.3(c)(6)(iv) is revised

to conform with new section 563b.3(c)(2)(i).

Additionally, 12 U.S.C. 1464(b) and 12 CFR 545.11(b) establish that

a federally chartered savings association may accept and maintain

deposit accounts within its discretion and subject to criteria

established by the association. The OTS solicits public comment on

whether a converting association should have the ability to prevent

depositors who do not reside in the local community from participating

in a conversion. In addition, the OTS specifically solicits comments as

to whether an association, in anticipation of conversion, should be

permitted to: (1) refuse to open accounts for potential depositors

residing outside the local community, and (2) close accounts of

depositors residing outside the local community.

F. Revision of Policy Regarding Management Stock Benefit Plans

Under Sec. 563b.3(c)(8), the amount of stock that officers,

directors and their associates can purchase, in the aggregate, is

limited to between 25% to 35% of the conversion stock, based upon the

total asset size of the converting association. In addition, existing

Sec. 563b.3(c)(6)(i) allows any one or more tax-qualified employee

stock benefit plans to purchase in the aggregate not more than 10% of

the total offering of shares and allows such purchase regardless of the

number of shares to be purchased by other parties.

Current OTS policy also permits management stock benefit and

recognition plans (collectively ``MRPs'') to purchase up to 3% or 4% of

the conversion stock, depending upon the association's capital

position.12 Current OTS policy limits the combined ESOP and MRP

purchases to 10% to 12% of the conversion stock, depending upon the

association's capital position. OTS policy also permits management to

be granted stock options in an amount up to 10% of the shares issued in

the conversion.13 Finally, the OTS recently, on a case by case

basis, has imposed specific percentage limitations on the amount of

stock that may vest with individual officers and directors.

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\1\2See FHLBB Office of General Counsel Questions and Answers on

Part 563b: Conversion and Employee Stock Benefits Plans at 4, 6 (May

1987).

\1\3Id.

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Given that mutual savings associations currently seeking to convert

generally are well-capitalized, the OTS has become increasingly

concerned that the association's management may be undertaking

conversions for reasons other than the need for capital. Some thrift

insiders may be sacrificing the interests of their associations and

mutual account holders to acquire significant amounts of conversion

stock and other benefits as cheaply as possible in the conversion

process. In addition, in some cases the issuance of conversion stock to

a MRP lessens the opportunity for depositors to obtain conversion

stock. Finally, the issuance of stock options at the conversion price,

rather than at aftermarket trading prices, which in recent years has

been substantially higher than the conversion price, creates the

impression that management is structuring an excessive compensation

package. While the OTS believes there are valid business reasons for

thrifts to adopt MRPs and stock option plans in order to attract and

retain qualified management, these plans are now more appropriately

implemented subsequent to the conversion and with shareholder approval.

The OTS is therefore substantially revising and codifying its

policies regarding the establishment of MRPs and stock option plans

during the conversion process in new Sec. 563b.3(g)(4). The new

provisions require that any decision to implement MRPs or stock option

plans after conversion be voted on and approved by a majority of the

shareholders no earlier than the first annual meeting following the

conversion. The rule further requires that thrift subsidiaries of

mutual holding companies obtain a vote of a majority of stockholders,

other than the parent mutual holding company, to approve such

plans.14 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. In addition, any intention by management to

implement MRPs or stock option plans within one year of conversion

would be (1) required to be fully disclosed in the proxy soliciting and

conversion stock offering materials, and (2) subject to the prior

approval of the appropriate OTS Regional Director. Finally, the

regulation codifies the OTS's current policies regarding permissible

amounts that may be included in stock option and MRP plans formed

within one year of conversion. Codification of these policies is

designed to provide clear guidance in this area.

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\1\4In this regard, Sec. 10(o)(8)(B) of the HOLA requires that a

mutual holding company, which is generally controlled by the

management of its thrift subsidiary, must own more than 50% of its

thrift subsidiary. Thus, absent a disinterested stockholder vote

requirement, management will be able to ensure approval of its

compensation plans.

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G. Prohibition on Merger Conversions

Under Sec. 563b.10, a mutual savings association may convert to

stock form by merging with an existing stock association or by becoming

a subsidiary of an existing holding company. In this type of

conversion, the account holders of the mutual savings association,

instead of being offered the opportunity to purchase stock of the

converting mutual association, are instead offered the opportunity to

purchase shares of the acquiring stock association or holding company.

The structure of these transactions raises unique issues not involved

in other types of conversions. These include the adequacy of the

consideration paid by an acquiror; whether a ``control premium'' should

or can be incorporated into the valuation of the mutual savings

association; the treatment of the mutual account holders in connection

with the distribution of the acquiror's stock; whether mutual account

holders should be able to purchase the acquiror's stock at a discount

and the amount of such discount; and the appropriateness of management

compensation and stock incentive packages offered by an acquiror to

coax the mutual association's management into the merger conversion.

When merger conversions were first allowed by the FHLBB in the

1980s, they were perceived to be a useful supervisory tool by which

significantly undercapitalized or marginally capitalized savings

associations could improve their capital positions. In recent years,

however, the OTS began to have increasing concern about merger

conversions involving healthy associations. In Thrift Bulletin 58

(April 19, 1993), the OTS established increased disclosure requirements

for merger conversion proxy statements to ensure that account holders

received adequate and accurate disclosure about proposed merger

conversion transactions. In so doing, the OTS asserted its view that

merger conversions provide more opportunity than standard conversions

for insider abuse.15 In addition, the OTS voiced concerns that

institutions participating in merger conversions were not providing

sufficient disclosure to account holders regarding this more complex

form of conversion transaction.16

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\1\5OTS Thrift Bulletin 58, at 1 (April 19, 1993).

\1\6Id.

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In addition, there have been numerous complaints recently by

account holders and others that permitting healthy mutual savings

associations to be acquired by means of a merger conversion has

resulted in some thrift insiders putting their self interest ahead of

the interests of the converting association and its account holders.

As a result of these concerns, the OTS recently imposed a

moratorium on healthy savings associations entering into these

transactions. In its announcement, the OTS stated that the moratorium

would not prohibit the acquisition of an undercapitalized thrift by a

healthy acquiror.

In undertaking the moratorium, the OTS noted that in many cases,

management of the converting mutual savings associations engaging in

merger conversions were receiving extremely generous compensation and

benefit packages. While OTS rules limit many forms of excessive

compensation in merger conversions,17 there is still an issue as

to whether management is opting for a merger conversion instead of a

standard conversion based on the best interests of the association and

its depositors or in response to the level of benefits offered to

management by the acquiring entity.

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\1\7For example, the OTS policy statement on mergers, 12 CFR

571.5, in pertinent part, specifically provides that compensation,

including deferred compensation to officers, directors and

controlling persons of a merging association may not be in excess of

that which is reasonable and commensurate with their duties and

responsibilities. The rule provides that mergers will be

particularly scrutinized where any such persons will receive a

material increase in compensation above that paid by the merging

association prior to the commencement of merger negotiations. In

this regard, an increase in compensation in excess of the greater of

15% or $10,000 gives rise to presumptions of unreasonableness and

sale of control. See 12 CFR 571.5(d)(3).

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In addition, merger conversions are perceived as being overly

generous to the acquiring entities since they are essentially able to

acquire the mutual association at no cost. Unlike other corporate

acquisitions, the acquiror pays nothing for the converting

association's stock. Rather, simultaneous with the acquisition, the

acquiror's primary obligation is to make an equity offering of its own

stock to depositors of the converting association, retaining all

proceeds of the offering.

The OTS conversion regulations are based upon the principle that a

conversion cannot be equitable unless the potential for ``windfall''

gains is virtually eliminated. In a standard conversion, the pro forma

market value of the converting savings association is an appropriate

means for determining the price of the stock to be sold. In a merger

conversion, however, the acquiring entity is obtaining control and

should pay a premium for the pro forma value of the stock. In essence,

the acquiring entity is obtaining control and receiving a ``windfall''

gain. As a result, there is tremendous incentive for an acquirer to

offer excessive benefits to the management of a mutual savings

association to participate in a merger conversion. Upon further review

of this issue, the OTS has been unable to resolve the valuation and

``windfall'' gains problem that the OTS currently believes is inherent

in merger conversion transactions.

The OTS therefore has concluded that in nonsupervisory cases, there

should be a two step process. The account holders at the mutual

association should be given the opportunity to purchase stock in a

mutual to stock conversion. This assures the account holders that they

will have the opportunity to more directly participate in any

appreciation of the converting association's stock price following the

conversion. After the conversion to stock form, stockholders can vote

on whether to merge with another institution, subject to the rules

governing post-conversion transactions.

Based on the reasons described above, the OTS has determined to

amend its conversion regulations to limit merger conversions to

supervisory cases. As noted earlier, merger conversions may serve a

useful purpose in those cases where a savings association is unable to

convert on a stand alone basis because of its weak financial condition.

While eliminating the authority for nonsupervisory merger

conversions in the interim final rule, the OTS is soliciting comment as

to whether merger conversions involving healthy savings associations

should be permitted in the future, and if so, under what circumstances.

In particular, the OTS is interested in receiving comments on how

merger conversions could be structured to avoid the problems discussed

above, including the problems associated with valuation issues.

H. Extension of the Conversion Public Comment Period

Section 563b.4(b)(1) requires a conversion applicant to publish, in

writing, a notice of the filing of an application. Pursuant to the

rule, written comments, including objections to the plan of conversion

and materials supporting the objections, from any member of the

applicant or aggrieved person will be considered by the OTS if filed

within ten business days after the date of this notice. Failure to

provide the written comments within the ten day period may preclude the

pursuit of any administrative or judicial remedies.

Depositors of converting associations and community groups have

become increasingly interested in expressing their views on proposed

conversions, usually through the public comment process. In this

regard, the current ten day comment period may not be sufficient time

for interested parties to review and comment on a detailed conversion

application. Thus, the OTS is revising Sec. 563b.4(b)(1) to conform the

public comment period in the conversion regulations with the longer

twenty calendar day public comment period provided under the

acquisition of control regulations.18 The revision also would

permit the OTS, in its discretion and upon written request, to extend

the twenty day comment period for an additional twenty days. The OTS

believes that this revision will give interested parties a more

meaningful opportunity to express their views on a proposed conversion

transaction. In so doing, the OTS does not believe this requirement

will impose an undue burden, since most converting associations

undertake holding company conversions, i.e., where a holding company is

being formed in the transaction, and are subject to the time periods

under the acquisition of control regulations.

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\1\812 CFR part 574.

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I. Submission of Business Plans for All Conversion Transactions

The OTS conversion regulations do not require business plans in

standard mutual to stock conversion transactions. The OTS acquisition

of control regulations, however, do require a consolidated business

plan conforming to the requirements set by the Regional Director to be

included in holding company conversions.19 Because most converting

associations also form a holding company at the time of the conversion,

most converting associations currently file a business plan.

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\1\912 CFR 574.6(a)(1)(ix).

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The OTS believes that all converting associations should be

required to demonstrate how they will prudently deploy and utilize the

conversion proceeds. Therefore, the exhibits portion of the conversion

application form, Form AC, is being amended to require a new Exhibit 8,

a consolidated business plan subject to approval by the Regional

Director. Also, in response to the OTS's experience that a number of

associations have recently submitted business plans that do not

adequately address the deployment of conversion proceeds, the new

Exhibit 8 includes a requirement that each converting association

provide, as part of the business plan submitted with the application

for conversion, a detailed discussion of how the capital acquired in

the conversion will be utilized. If the plan is to be treated

confidentially, the applicant should follow the procedures set forth at

Sec. 563b.4(c).

J. Revision to Post-Conversion Stock Repurchase Rules

The capital distributions regulation20 and Sec. 563b.3(g)(3)

of the conversion regulations provide that a well capitalized converted

association can repurchase its capital stock, within certain limits and

restrictions, by filing with the Regional Director an open-market stock

repurchase program for no more than 5% of the association's outstanding

capital stock during a six month period. This provision is in essence a

safe harbor, provided an institution is well capitalized.21

Section 563b.3(g)(3) also provides that OTS may object to proposed

repurchases fitting within the safe harbor if the repurchases would

adversely affect the financial condition of the thrift.22 Provided

the safe harbor is met, a converted association can, under current

rules, buy back up to 30% of the stock sold in the conversion within

three years of conversion.

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\2\012 CFR 563.134.

\2\112 CFR 563.134(b).

\2\212 CFR 563b.3(g)(3)(iii)(A).

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The agency's experience has been that many associations begin

substantial buyback programs immediately following their conversions.

While OTS believes that stock repurchase programs may serve valid

business purposes, e.g., maintaining the value of a converting

institution's stock in an active trading market, the OTS has concerns

that substantial buyback programs begun immediately after conversion

may not have a valid business purpose. In addition, repurchases begun

immediately after conversion raise substantial issues regarding whether

conversion stock has been appropriately valued.

To address these concerns, Form AC has been revised to now require

that each converting association provide, as part of the business plan

submitted with the application for conversion, a detailed discussion of

how the capital acquired in the conversion will be utilized, including,

among other things, any proposed stock repurchases.

Also, the OTS is revising Sec. 563b.3(g)(3) to prohibit stock

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

recently converted association may file with the appropriate Regional

Director an open-market repurchase program in which it can request

stock repurchases of no more than 5% of the outstanding capital stock

during any twelve month period within the following two years. In

addition to the current standards governing permissible repurchases,

the Regional Director can now disapprove repurchases if the association

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

The regulation, however, will permit the Regional Director to approve

amounts greater than 5% in the second and third years if there are

circumstances that would justify such repurchases. Section

563b.3(g)(1)(iii) has been deleted to conform with this revision.

The OTS also is soliciting comments as to whether the current

requirements of the capital distributions regulations governing the

``upstreaming'' of conversion proceeds to holding companies formed by

converting institutions should be revised to further restrict the

upstreaming of substantial amounts of the conversion proceeds soon

after the conversion.

K. 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.23

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\2\3 12 CFR 563b.3(i)(1).

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The OTS notes that the FDIC and others have recently suggested that

it may be appropriate for depositors to be able to transfer and sell

their subscription rights so that any ``windfall'' value can be

distributed directly to the depositors.

In this regard, the OTS believes that this type of change to the

current conversion regulations would raise a number of novel and

complex legal and policy issues, many of which were taken into account

previously by the FHLBB in determining to prohibit transferability.

These issues 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,24 and significantly increased conversion

costs due to compliance with securities laws requirements for

registering subscription rights for public distribution.

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\2\4 The regulations require that a converting association

establish and maintain a liquidation account for the benefit of

eligible account holders and supplemental eligible account holders

in an amount equal to the association's net worth at the date of

conversion. Each eligible account holder is deemed to have a pro

rata inchoate interest in the liquidation account. In the event of a

complete liquidation of the association, an account holder's

interest may not be increased after conversion, but may be reduced

by any subsequent decrease in the account holder's savings account

balance. See 12 CFR 563b.3(c)(13).

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The OTS believes these issues must be carefully analyzed before

considering regulatory changes in this area. Therefore, the OTS is not

proposing any change at this time that would allow for the transfer or

sale of subscription rights, but is requesting 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.

2. Availability of Conversion Documents

The conversion regulations, since adoption in 1974, have prohibited

the placing of copies of preliminary conversion stock offering and

proxy soliciting materials in the OTS public files. The OTS has noted,

over the past few years, an increasing interest shown by account

holders, the public and the media in the information contained in those

portions of an application for conversion.

The OTS believes 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. The OTS, therefore, is

revising Sec. 563b.4(c) to eliminate the automatic confidential

treatment that has been afforded this information in the past. The

revision will permit the public to have ready access to all relevant

materials regarding proposed conversion transactions.25 Applicants

will have the ability to request confidential treatment of any portion

of these materials by following the confidential treatment procedures

contained in section 563b.4(c).

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\2\5 This revision augments the amount of information regarding

conversions currently required to be made public by converting

associations. Section 563b.4(a)(3)(i) requires that, promptly after

adoption of a plan of conversion by its board of directors, a

converting association must notify its members, and make copies of

the adopted plan of conversion available for inspection by its

members at each office of the savings association. Section

563b.4(a)(3)(ii) also allows a converting association to issue a

press release announcing the conversion.

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3. Conforming Changes to Mutual Holding Company Regulations and Other

Technical Changes

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

incorporate the substantive and procedural standards for conversion

contained in the conversion regulations. To the extent the interim

final rule addresses conversion standards, those same standards apply

to mutual holding company transactions. Thus, the OTS is also revising

12 CFR part 575 to make clarifying and conforming changes to those

regulations to reflect the changes being made to 12 CFR part 563b.

Also, the interim final rule makes certain other technical and

conforming changes to the conversion regulations.

4. Proposal to Impose Convenience and Needs Test in Conversion

Transactions

Elsewhere in this issue of the Federal Register, the OTS is

soliciting public comment on an amendment to its conversion regulations

that would impose an additional standard requiring that the OTS, in

considering whether to approve a mutual to stock conversion

transaction, consider the needs and convenience of the community served

by the converting association. To date, a convenience and needs test

generally has not been applied to these transactions.

III. Paperwork Reduction Act

The reporting requirements contained in this interim final rule

have been submitted to and approved by the Office of Management and

Budget under OMB Control No. 1550-0014 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), Washington, DC 20503 with copies to

the Office of Thrift Supervision, 1700 G Street, NW., Washington, DC

20552.

The reporting requirements in this interim final rule are found in

12 CFR 563b.100. The information is needed by the OTS to further

strengthen the standards governing the conversion process. The likely

recordkeepers are savings associations.

Estimated number of respondents: 70.

Estimated average annual burden per respondent: 500.

Estimated annual frequency of responses: 1.

Estimated total annual reporting burden: 35,000.

IV. Regulatory Flexibility Act

Because no notice of proposed rulemaking was required in connection

with the adoption of this interim final rule, no regulatory flexibility

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

et seq.).

V. Executive Order 12866

The OTS has determined that the interim final regulation does not

constitute a ``significant regulatory action'' for purposes of E.O.

12866.

VI. Administrative Procedure Act

Pursuant to 5 U.S.C. 553, OTS has found good cause to dispense with

both prior notice and comment on this interim final rule and with a 30-

day delay of its effective date in light of the critical need to ensure

an equitable conversion process while still providing converting

associations access to the capital markets. The OTS has a number of

conversion applications pending and it expects that it will receive

significantly more in the next few weeks. Unless these revisions are

implemented immediately, associations will be able to avoid compliance

with the new rules by filing and attempting to obtain approval of their

conversion applications before the new rules become effective. If the

OTS were to proceed with a notice of proposed rulemaking, the only

practical solution to this problem would be to impose an administrative

moratorium on all conversions until the rulemaking process is complete.

That type of rulemaking process would take a minimum of several months.

The result would thus be to preclude converting savings associations

from raising additional capital at a time when the capital markets are

receptive to capital stock offerings by financial institutions. Should

the capital markets become less favorable, such a delay could prevent

savings associations from raising sufficient new capital through a

mutual to stock conversion. The public interest is served by

encouraging savings associations to raise additional capital because an

association's capital is the financial cushion that protects the

association's depositors and the federal fund that insures the

depositors' accounts. In view of the need both to ensure an equitable

conversion process and to provide converting associations with access

to the capital markets without delay, the OTS finds that good cause

exists for dispensing with the notice and comment procedures of the

Administrative Procedure Act. Similarly, the OTS finds that good cause

exists for eliminating the 30-day delay of the effective date.

The revised rules will become effective upon publication in the

Federal Register and will be applicable to all applications pending or

newly filed as of that date. The OTS generally expects converting

associations with pending applications to comply with the revised

rules. The OTS may grant, on a case by case basis, a waiver in writing

from any provision in the interim final rule for good cause shown. The

request for a waiver must contain sufficient information to

substantiate the justification for the waiver.

The OTS, however, seeks public comment on the conversion

regulations, both as to the amendments adopted here and the issues on

which comment is specifically solicited and as to any other current

provisions of the conversion regulations as they relate to this interim

final rule. The OTS may modify the rule in response to those comments

if appropriate.

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, 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 continues to read as

follows:

Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a; 15 U.S.C.

78c, 78l, 78m, 78n, 78w.

2. Section 563b.2 is amended by removing paragraph (a)(14); by

redesignating paragraphs (a)(15) through (a)(19) and (a)(29) through

(a)(40) as paragraphs (a)(14) through (a)(18) and paragraphs (a)(30)

through (a)(41), respectively; by revising paragraph (a)(16); and by

adding paragraphs (a)(19) and (a)(29) to read as follows:

Sec. 563b.2 Definitions.

(a) * * *

(16) Eligible account holder. The term eligible account holder

means any person holding a qualifying deposit as determined in

accordance with Sec. 563b.3(e) of this part, but shall include only

those account holders with savings accounts in place for a minimum of

one year prior to board of director adoption of the plan of conversion.

* * * * *

(19) Local community. The term local community includes all

counties in which the converting association has its home office or a

branch office, each county's standard metropolitan statistical area or

the general metropolitan area of each of these counties and such other

similar local area(s) as provided for in the plan of conversion, as

approved by the OTS.

* * * * *

(29) Regional Director. The term regional director means the senior

representative of the Director of the Office of Thrift Supervision for

all matters dealing with examination and supervision of savings

associations in the region in which the converting savings association

has its principal office.

* * * * *

3. Section 563b.3 is amended by:

a. Revising paragraphs (c)(6)(i), (c)(6)(iv), (c)(7), (c)(14),

(c)(23), (d)(4), (g) heading, (g)(1)(i) and (g)(1)(ii) and (g)(3);

b. Redesignating paragraphs (c)(2)(i), (c)(2)(ii), (c)(4)(i)

through (c)(4)(iv), (c)(5)(i) and (c)(5)(ii) as paragraphs (c)(2)(ii),

(c)(2)(iii), (c)(4)(ii) through (c)(4)(v), (c)(5)(ii) and (c)(5)(iii),

respectively;

c. Removing paragraph (g)(1)(iii); and

d. Adding new paragraphs (c)(2)(i), (c)(4)(i), (c)(5)(i), and

(g)(4).

The additions and revisions read as follows:

Sec. 563b.3 General principles for conversions.

* * * * *

(c) * * *

(2) * * *

(i) The stock to be offered and sold in the subscription offering

shall give a preference to eligible account holders residing in the

association's local community or within 100 miles of the association's

home or branch office(s).

* * * * *

(4) * * *

(i) The stock to be offered and sold in the subscription offering

shall give a preference to supplemental eligible account holders

residing in the association's local community or within 100 miles of

the association's home or branch office(s).

* * * * *

(5) * * *

(i) The stock to be offered and sold in the subscription offering

shall give a preference to voting members residing in the association's

local community or within 100 miles of the association's home or branch

office(s).

* * * * *

(6) * * *

(i) Subject to the adoption in the plan of conversion of the

optional provision of paragraph (d)(4) of this section, a condition

limiting purchases in the public offering or the direct community

offering by any person together with any associate or group of persons

acting in concert to not more than five percent (5%) of the total

offering of shares, except that any one or more tax-qualified employee

benefit plans may purchase in the aggregate not more than ten percent

(10%) of the total offering of shares. Shares held by one or more tax-

qualified employee stock benefit plans and attributed to a person shall

not be aggregated with other shares purchased directly by or otherwise

attributable to that person.

* * * * *

(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 or within 100

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

(7) Subject to the adoption in the plan of conversion of the

optional provision of paragraph (d)(4) of this section, provide that

the total shares that any person and any associate or group of persons

acting in concert may subscribe for or purchase in the conversion shall

not exceed five percent (5%) of the total offering of shares, except

that any one or more tax-qualified employee benefit plans may purchase

in the aggregate not more than ten percent (10%) of the total offering

of shares. Shares held by one or more tax-qualified employee stock

benefit plans and attributed to a person shall not be aggregated with

shares purchased directly by or otherwise attributable to that person.

* * * * *

(14) Provide for an eligibility record date, which shall be not

less than one year prior to the date of adoption of the plan of

conversion by the converting savings association's board of directors.

* * * * *

(23) Provide that eligible account holders with subscription rights

have priority to purchase conversion stock prior to tax-qualified

employee stock benefit plans and tax-qualified employee stock benefit

plans have priority to purchase conversion stock prior to supplemental

eligible account holders and other voting members who have subscription

rights. If shares are sold in the conversion stock offering in excess

of the maximum proposed offering, shares may be sold to the tax-

qualified employee stock benefit plans in accordance with the purchase

limitations provided in paragraph (c)(7) of this section.

* * * * *

(d) * * *

(4) That purchases in the public offering or in the direct

community offering by any person together with any associate or group

of persons acting in concert shall be limited to less than ten percent

(10%) of the total offering of shares. The percentage amount by which

any order for conversion stock exceeds 5% of the total offering of

shares shall be aggregated with the percentage amounts by which all

other orders for conversion stock exceed 5% of the total offering of

shares. The aggregate amount shall not exceed 10% of the total offering

of shares, except that this limitation shall not apply to the purchases

of the tax-qualified employee stock benefit plans.

* * * * *

(g) Restrictions on repurchase of stock; payment of dividends; and

use of stock option and management or employee stock benefit plans. * *

*

(1) * * *

(i) A repurchase, on a pro rata basis pursuant to an offer approved

by the Office and made to all shareholders of such association; or

(ii) The repurchase of qualifying shares of a director.

* * * * *

(3)(i) A converted savings association subject to paragraph (g)(1)

of this section may repurchase its capital stock provided:

(A) No repurchases occur within one year following conversion;

(B) Repurchases within two years after the 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;

(C) The repurchases do not cause the association to become

undercapitalized (as defined in 12 CFR 565.4); and

(D) The association provides to the Regional Director, with a copy

to the Chief Counsel's Office, Corporate and Securities 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:

(1) The repurchase program would materially adversely affect the

financial condition of the savings association;

(2) The information submitted by the savings association is

insufficient upon which to base a conclusion as to whether the

association's financial condition would be materially adversely

affected; or

(3) The association did not demonstrate a valid business purpose

for the stock repurchase.

(ii) Notwithstanding paragraph (g)(3)(i) of this section, during

the second and third year following conversion, the Regional Director,

in accordance with the standards contained in this paragraph, may

permit stock repurchases in amounts greater than 5% of the

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

(4) Use of Stock Option and Management or Employee Stock Benefit

Plans. No converted savings association shall, for a one year period

from the date of the conversion, implement a stock option plan or

management or employee stock benefit plan, other than a tax-qualified

plan complying with (c)(6) of this section, unless each of the

following requirements are met:

(i) Each of the plans was fully disclosed in the proxy soliciting

and conversion stock offering materials;

(ii) For stock option plans, the total number of shares of common

stock for which options may be granted does not exceed ten percent of

the amount of shares issued in the conversion;

(iii) For management or employee stock benefit plans, the aggregate

amount of such plans shall not exceed three percent of the amount of

shares issued in the conversion;

(iv) The aggregate amount of all shares obtained by a tax-qualified

employee stock benefit plan(s) in the conversion, pursuant to (c)(6) of

this section, or within one year following the conversion, and all the

shares in a management or employee stock benefit plan, pursuant to

paragraph (g)(4)(iii) of this section, shall not exceed ten percent of

the total amount of shares issued in the conversion;

(v) Associations that have in excess of ten percent tangible

capital following the conversion, may be granted, on a case by case

basis, approval to establish a management or employee stock benefit

plan pursuant to paragraph (g)(4)(iii) of this section in an amount up

to four percent of the amount of the shares issued in the conversion,

and an aggregate total of up to twelve percent for all plans

established pursuant to paragraph (g)(4)(iv) of this section;

(vi) No individual shall receive more than twenty-five percent of

the shares of any plan and directors who are not employees of the

association shall not receive more than five percent of the stock

individually, or thirty percent in the aggregate, of any plan;

(vii) All such plans are approved by a majority of the

association's stockholders, or in the case of a recently formed holding

company, its stockholders, prior to implementation and no earlier than

the first annual meeting following the conversion;

(viii) In the case of a savings association subsidiary of a mutual

holding company, all such plans are approved by a majority of

stockholders other than its parent mutual holding company prior to

implementation and no earlier than the first annual meeting following

the stock issuance;

(ix) For stock option plans, stock options are granted at 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; and

(xi) Prior to implementation, all such plans are submitted to the

appropriate Regional Director for review and approval in accordance

with the foregoing standards. In connection with such review, the

Regional Director shall consider all relevant supervisory information,

including, among other things, the association's capital level,

operating history and size of the association. The Regional Director

may permit amounts greater than those specified in paragraph (g)(4)(vi)

of this section, provided that the aggregate limitations of paragraphs

(g)(4)(ii)-(v) of this section are not exceeded.

* * * * *

4. Section 563b.4 is amended by removing the phrases ``District

Director'' and ``District Director's'' where they appear in paragraph

(b)(1) and adding in lieu thereof the phrases ``Regional Director'' and

``Regional Director's'', respectively; and by revising the concluding

text of paragraph (b)(1) following the notice of filing and paragraph

(c) to read as follows:

Sec. 563b.4 Notice of filing; public statements; confidentiality.

* * * * *

(b) * * *

(1) * * *

Written comments, including objections to the plan of conversion and

materials supporting the objections, from any member of the applicant

or aggrieved person will be considered by the Office if filed within

twenty calendar days after the date of this notice. The OTS may, in its

discretion, and upon written request, extend the twenty day comment

period for an additional twenty calendar days. Failure to provide the

written comments in twenty calendar days may preclude the pursuit of

any administrative or judicial remedies. Two copies of the comments

should be sent to the Chief Counsel, Corporate and Securities Division,

one copy to the Corporate Activities Division and one copy to the

Regional Director. The proposed plan of conversion and any comments

will be available for inspection by any member of the applicant at the

Chief Counsel's Office and at the Regional Director's Office. A copy of

the plan of conversion may also be inspected at the home office and

each branch office of the applicant.

* * * * *

(c) Should the applicant desire to submit any information it deems

to be of a confidential nature regarding the answer to any item or any

part of any exhibit included in any application under this part, such

information pertaining to such item or exhibit shall be separately

bound and labeled ``confidential,'' and a statement shall be submitted

therewith briefly setting forth the grounds on which such information

should be treated as confidential. Only general reference thereto need

be made in that portion of the application which the applicant deems

not to be confidential. Applications under this part shall be made

available for inspection by the public, except for portions which are

bound and labeled ``confidential'' and which the Office determines to

withhold from public availability under 5 U.S.C. 552 and part 505 of

this chapter. Preliminary soliciting materials will be made available

upon filing, unless such materials are not otherwise available to the

public and are bound and labeled ``confidential.'' The applicant will

be advised of any decision by the Office to make public information

designated ``confidential'' by the applicant. Even though sections of

the application are considered ``confidential,'' as far as public

inspection thereof is concerned, to the extent it deems necessary, the

Office may comment on such confidential submissions in any public

statement in connection with its decision on the application without

prior notice to the applicant.

5. Section 563b.5 is amended by revising paragraphs (d)(4) and

(e)(5) to read as follows:

Sec. 563b.5 Solicitation of proxies; proxy statement.

* * * * *

(d) * * *

(4) Each voting member must be furnished a form of proxy conforming

with paragraph (d) of this section. No applicant shall use previously-

executed proxies.

(e) * * *

(5) All preliminary copies of material filed pursuant to paragraphs

(e)(1), (e)(2) and (e)(4) of this section shall be clearly marked on

the cover page ``Preliminary Copy''. Such preliminary copies shall be

public unless otherwise deemed confidential pursuant to Sec. 563b.4(c)

of this part.

* * * * *

6. Section 563b.7 is amended by revising paragraphs (f)(1)(ii) and

(f)(3), by removing the period at the end of paragraph (f)(1)(iii) and

adding a semicolon in its place, and by adding paragraph (f)(1)(iv) to

read as follows:

Sec. 563b.7 Pricing and sale of securities.

(f) * * *

(1) * * *

(ii) The materials shall contain a full appraisal, including a

complete and detailed description of the elements that make up an

appraisal report, justification for the methodology employed and

sufficient support for the conclusions reached therein;

* * * * *

(iv) 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 in accordance with the OTS

applications processing rules, 12 CFR part 516, decline to further

process the application.

* * * * *

(3) In addition to the information required in paragraphs (f)(1)

and (f)(2) of this section, the applicant shall file with the Office

such additional information with respect to the pricing of the capital

stock of the association as the Office may request.

* * * * *

Sec. 563b.8 [Amended]

7. Section 563b.8 is amended by removing the phrase ``District

Director'' where it appears in paragraphs (e)(1) and (t)(1), and by

adding in lieu thereof the phrase ``Regional Director''.

8. Section 563b.10 is revised to read as follows:

Sec. 563b.10 Conversion of a savings association through merger with

an existing holding company or stock savings association.

A savings association that qualifies for a voluntary supervisory

conversion under subpart C of this part may convert to stock form by

merging with an existing holding company or interim Federal or state

chartered stock association in a transaction in which stock of the

existing holding company or resulting association is issued.

9. Section 563b.100 is amended by removing the phrase ``90 days''

in Form AC, the first paragraph of Item 6 and by adding in lieu thereof

the phrase ``one year''; and by adding Exhibit 8 to Form AC to read as

follows:

Sec. 563b.100 Form AC--Application for Conversion.

Form AC

* * * * *

Exhibit 8. Business Plans

(a) Furnish a consolidated business plan. The converting

association shall provide, as part of the business plan, a detailed

discussion of how the capital acquired in the conversion will be

utilized, including, among other things, any proposed stock

repurchases.

(b) Applicant should follow Sec. 563b.4(c) if the business plan

is to be deemed confidential.

10. Section 563b.101 is amended by revising Items 1 and 4(d) of

Form PS to read as follows:

Sec. 563b.101 Form PS--Proxy Statements.

Form PS

* * * * *

Item 1. Notice of Meeting

The cover page of the proxy statement shall give notice of the

meeting of the association members called by the board of directors

to act upon the conversion. The cover page shall include the date,

time and place of the meeting, a brief description of each matter to

be acted upon at the meeting, the date of record for association

members entitled to vote at the meeting, the date of the statement

and the full address, ZIP code and telephone number of the

applicant.

In accordance with Sec. 563b.5(d)(4) of this part, the applicant

shall not use previously-executed proxies to vote on the plan of

conversion.

* * * * *

Item 4. Voting Rights and Vote Required for Approval

* * * * *

(d) The applicant shall not use previously-executed proxies to

vote on the plan of conversion.

* * * * *

PART 575--MUTUAL SAVINGS AND LOAN HOLDING COMPANIES

11. The authority citation for 12 CFR part 575 continues to read as

follows:

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

12. Section 575.7 is amended by adding paragraph (e) to read as

follows:

Sec. 575.7 Issuances of stock by savings association subsidiaries of

mutual holding companies.

* * * * *

(e) Procedural and substantive requirements. The procedural and

substantive requirements of Secs. 563b.3 through 563b.8 of this

subchapter shall apply to all mutual holding company stock issuances

under this section, unless clearly inapplicable.

13. Section 575.13 is amended by adding a new sentence at the end

of paragraph (a)(4) to read as follows:

Sec. 575.13 Procedural requirements.

(a) * * *

(4) * * * Notwithstanding the provisions in this paragraph (a)(4),

``running'' proxies or similar proxies may not be used to vote for a

mutual to stock conversion undertaken either by a mutual savings

association or a mutual holding company.

* * * * *

Dated: April 7, 1994.

By the Office of Thrift Supervision.

Jonathan L. Fiechter,

Acting Director.

[FR Doc. 94-9981 Filed 5-2-94; 8:45 am]

BILLING CODE 6720-01-P