Conflicts of Interest, Corporate Opportunity and Hazard Insurance

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 545, 556, 560, 563, 571

[No. 96-111]

RIN 1550-AA89

Conflicts of Interest, Corporate Opportunity and Hazard Insurance

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (OTS or agency) is today

issuing a final rule updating and substantially streamlining its

regulations and policy statements concerning conflicts of interest,

usurpation of corporate opportunity and hazard insurance. These

amendments are being made pursuant to the Regulatory Reinvention

Initiative of the Vice President's National Performance Review

(Reinvention Initiative) and section 303 of the Community Development

and Regulatory Improvement Act of 1994 (CDRIA), which requires OTS and

other federal banking agencies to review, streamline, and modify

regulations and policies to improve efficiency, reduce unnecessary

costs, and remove inconsistent, outmoded and duplicative requirements.

EFFECTIVE DATE: January 1, 1997.

FOR FURTHER INFORMATION CONTACT: Robyn Dennis, Manager, Thrift Policy,

(202) 906-5751; or Francis Raue, Policy Analyst, (202) 906-5750,

Supervision Policy; Deborah Dakin, Assistant Chief Counsel, (202) 906-

6445, Regulations and Legislation Division, Chief Counsel's Office.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

II. Summary of Comments and Description of the Final Rule

A. General Discussion of the Comments

B. Section-by-Section Analysis

C. Description of Final Rule

III. Disposition of Existing Conflicts of Interest, Corporate

Opportunity and Hazard Insurance Regulations and Policy Statements

IV. Executive Order 12866

V. Unfunded Mandates Act of 1995

VI. Regulatory Flexibility Act Analysis

I. Background

In a comprehensive review of its regulations, beginning in the

spring of 1995, pursuant to section 303 of the CDRIA 1 and the

Administration's Reinvention Initiative, OTS identified its conflicts

of interest, corporate opportunity and hazard insurance regulations and

policy statements as an important area for updating and streamlining.

Each conflicts of interest, corporate opportunity and hazard insurance

regulation and policy statement was reviewed to determine whether it

was current and understandable; imposed the least possible burden

consistent with safety and soundness and statutory requirements;

addressed subject matter more suited for handbook guidance; and was

written in a clear, straightforward manner. OTS also sought industry

input regarding staff's initial recommendations through an industry

focus group consisting of five thrift representatives, an industry

trade association and OTS staff. As a result of this review, OTS

identified a number of ways in which its conflicts of interest,

corporate opportunity and hazard insurance regulations and policy

statements could be revised to reduce regulatory burden. On June 14,

1996, OTS issued a notice of proposed rulemaking.2

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\1\ 12 U.S.C. 4803(a)(1).

\2\ 61 FR 30190 (June 14, 1996).

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Today's final rule is substantially similar to the June proposal.

The conflicts of interest rule has been clarified to give more

specificity on what conflicts are prohibited. The conflicts of interest

provisions apply if there is disclosure to the board of directors, the

interested person refrains from participation in discussion of the

[[Page 60174]]

transaction and recuses himself or herself from voting on the

transaction. In addition, the final rule on corporate opportunity

incorporates a safe harbor. The corporate opportunity safe harbor

applies if there is disclosure to the board of directors, and a

disinterested and independent majority of the board rejects the

proposed business opportunity.

The final rule reduces the number of conflicts of interest,

corporate opportunity and hazard insurance regulations and policy

statements from eight to three and results in a net reduction of more

than five pages of CFR text. As proposed, OTS has removed in their

entirety five unnecessary, duplicative and outdated regulations and

policy statements: Sec. 545.126 (referral of insurance business),

Sec. 556.16 (insurance agencies--usurpation of corporate opportunity),

Sec. 563.35 (restrictions involving loan services), Sec. 563.44 (loans

involving mortgage insurance) and Sec. 571.4 (hazard insurance). The

remaining three provisions--loan procurement fees, conflicts of

interest, and corporate opportunity--will be retained in the form of

regulations, but streamlined and clarified.

OTS's objective is to reduce regulatory burden on savings

associations to the greatest extent possible consistent with statutory

requirements and safety and soundness. In the context of conflicts of

interest, corporate opportunity and hazard insurance, we believe

maximum burden reduction can be achieved by pursuing three specific

objectives.

First, we are attempting to eliminate duplication and overlap. For

example, the policy statement regarding hazard insurance (Sec. 571.4)

has been largely superseded by the Interagency Real Estate Lending

Guidelines.3 Similarly, the regulatory provisions prohibiting a

savings association from conditioning the extension of credit on the

borrower obtaining certain other services from the institution (tying

arrangements) (Sec. 563.35) have been superseded by tying prohibitions

in section 5(q) of the Home Owners' Loan Act of 1933, as amended

(HOLA).4 Additionally, the regulatory provisions governing kick-

backs and unearned fees for loans (Sec. 563.40) are largely duplicative

of the Real Estate Settlement Practice Act of 1974 (RESPA).5.

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\3\ Formerly, Appendix A to Subpart D of Part 563, recodified

without change as, Appendix to Sec. 560.101 (61 FR 50951, 50978-81

(September 30, 1996)).

\4\ 12 U.S.C. 1461, et seq.

\5\ Pub. L. 93-533, 88 Stat. 1724 (1974).

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Second, as part of its reinvention effort, OTS is seeking to move

away from regulations that micromanage thrift operations. Accordingly,

today OTS is repealing in their entirety detailed regulations

concerning when federal thrifts can refer customers to affiliates that

sell insurance, leaving insurance referrals to be handled in the same

way as other corporate opportunity issues.

Third, in its reinvention effort, OTS is seeking to enhance the

conciseness and clarity of its regulations. Accordingly, each of the

three final rules has been redrafted using plain language techniques

pioneered by the Department of Interior and promoted by the Reinvention

Initiative.

In summary, OTS believes that regulations should generally be

limited to essential safety and soundness requirements. If regulations

are unnecessarily detailed and rigid, regulated entities may find

themselves unable to respond to market innovations. Today's final rule

achieves what OTS believes is the right balance by placing key safety

and soundness requirements in binding regulations and putting more

expansive guidance on prudent practices in the Thrift Activities

Regulatory Handbook.

II. Summary of Comments and Description of the Final Rule

A. General Discussion of the Comments

The public comment period on the June 14 proposal closed on August

13, 1996. Ten commenters responded to the notice of proposed

rulemaking. Four state and national trade associations, three federal

savings associations, one law firm, one dual bank and savings and loan

holding company, and one mortgage insurance corporation submitted

comments.

All but three of the commenters generally supported OTS efforts to

update and streamline its conflicts of interest, corporate opportunity

and hazard insurance regulations and policy statements. Commenters

commended OTS's proposed elimination of duplicative, overlapping and

burdensome restrictions and indicated that the proposed modifications

would give institutions greater flexibility in structuring their

operations. Commenters believed that the proposed changes would

significantly reduce regulatory burden on the thrift industry and

promote operational flexibility.

Several commenters raised concerns, however, that the proposed

conflicts of interest and corporate opportunity regulations were

unclear and failed to give meaningful guidance about what practices

were prohibited. Commenters also expressed concern that OTS's intended

approach for dealing with corporate opportunity within a holding

company structure was only to be part of guidance and not included in

the regulatory text. In response, OTS has refined the language of the

rules and provided examples in the preamble to clarify the scope of the

provisions. These concerns and OTS's responses are addressed in detail

in the description of the final rules.

A few commenters expressed concern over the elimination of the

hazard insurance provision allowing thrifts to force-place insurance

and to reject policies that would provide inadequate protection to the

institution. They agreed with OTS's view that these were matters of

general safety and soundness principles with respect to lending

practices, but believe that thrifts would be in a weaker bargaining

position with borrowers if these provisions were removed. These

concerns are discussed in detail below in the section-by-section

analysis in reference to Secs. 563.35 and 571.4.

B. Section-by-Section Analysis

1. Conflicts of Interest

Section 563.35 Restrictions Involving Loan Services

OTS proposed deleting paragraph (a) of Sec. 563.35, which

enumerates specific services typically involved in real estate lending

that cannot be ``tied'' to the granting of a loan. OTS received no

comments on this paragraph, which is duplicative of HOLA section 5(q).

The paragraph is deleted as proposed.

OTS proposed to remove paragraph (b) of Sec. 563.35, which requires

a savings association to inform borrowers of their right to freely

select providers of insurance services (e.g., hazard and mortgage

insurance) and paragraph (c), which provides that a savings association

may refuse to make a loan if the borrower's choice of insurance

services would provide insufficient coverage.

OTS received no comments on paragraph (b). One commenter urged OTS

to retain paragraph (c) to protect thrifts from having to accept

insurance that provided insufficient coverage. OTS's significantly

streamlined and revised lending rule 6 sets forth the basic rules

governing lending practices. Federal savings associations have the

authority under these rules to refuse to make loans in the absence of

adequate insurance coverage, with or without paragraph (c) of

Sec. 563.35. Coincident

[[Page 60175]]

with this authority, borrowers must be provided the right to freely

select insurance carriers, within the parameters established by the

savings associations as necessary to meet their legitimate business

needs and consistent with applicable law. Although the commenter noted

that legislation had been proposed in at least one state that would

prohibit a lender from refusing to accept a hazard insurance policy

from any insurer admitted in the state and selected by the borrower,

OTS's revised lending rules contain a detailed provision addressing

preemption of state laws relating to lending practices.7 The

states cannot force federal savings associations to accept insurance

coverage that the associations deem inadequate. Accordingly, for the

reasons set forth above and in the preamble to the proposed rule,

paragraphs (b) and (c) are deleted as proposed.

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\6\ 61 FR 50951, 50971 (September 30, 1996), to be codified at

12 CFR Part 560.

\7\ 61 FR at 50972, to be codified at 12 CFR 560.2.

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OTS proposed to delete paragraph (d) of Sec. 563.35, which provides

that a savings association must give residential borrowers a written

itemization of fees in excess of $100 to be paid by the borrower for

the lender's attorney. OTS received no comments on this paragraph,

which is removed as proposed. Instead these settlement practices of

savings associations will be governed by RESPA.

Section 563.40 Restrictions on Loan Procurement Fees, Kickbacks and

Unearned Fees

OTS proposed retaining in modified form paragraph (a) of

Sec. 563.40, which prohibits certain persons from receiving any fee in

connection with the procurement of a loan from the association or a

subsidiary of the association. After considering the comments received,

which are discussed below in Part II.C., OTS has decided to retain this

paragraph with some technical corrections from the proposed rule, as

new Sec. 560.130.

OTS proposed deleting paragraph (b) of Sec. 563.40, which prohibits

the payment of unearned fees for loan origination and settlement

services. This provision overlaps RESPA. OTS received no comments on

this paragraph, which is removed as proposed.

Section 563.44 Mortgage Insurance

OTS proposed to repeal Sec. 563.44, which prohibits a savings

association (or service corporation affiliate) from insuring any loan

with a mortgage insurance company if certain affiliations are present.

One commenter noted that it is appropriate to eliminate this

provision because consumers are adequately protected by RESPA and the

regulations promulgated thereunder, and conflicts of interests would be

covered by existing law. Another commenter asserted that allowing

thrifts to invest in mortgage insurance companies would create a

conflict of interest that poses a risk to the safety and soundness of

the thrift.

As indicated in the preamble to the proposed rule, OTS believes

that common law fiduciary duties, the statutory rules governing

transactions with affiliates, and OTS's new conflicts of interest

regulation are adequate to address any conflicts of interest relating

to the mortgage insurance business. OTS also notes that, under RESPA, a

lender must disclose its interest in an affiliated mortgage company and

give borrowers a choice of insurance providers.

For these reasons and those set forth in the preamble to the

proposed rule, Sec. 563.44 is removed, as proposed.

Section 571.7 Conflicts of Interest Policy Statement

OTS proposed codifying this policy statement as a regulation, after

making modifications to clarify and simplify the language. OTS received

two comments urging the agency not to adopt a conflicts of interest

regulation. As indicated in the preamble to the proposed rule,

fiduciary duties lie at the heart of safety and soundness. OTS believes

a regulation will serve as an important reminder to thrift insiders of

their fiduciary duties to avoid conflicts of interest. Therefore, OTS

is promulgating a conflicts of interest regulation, with some

modifications from the proposal, as described below in Part II.C.

2. Corporate Opportunity

Section 545.126 Referral of Insurance Business

OTS proposed removing Sec. 545.126, which prohibits a federal

savings association from referring any insurance business to an agency

owned by officers or directors of the association, or by individuals

having the power to direct its management, subject to certain

exceptions. This section is removed, as proposed. General corporate

opportunity principles will govern insurance referrals.

OTS also notes that the Department of Housing and Urban Development

recently issued regulations that inter alia, govern fee payments for

settlement service referrals.8 Savings associations are advised to

review these rules for applicability to their operations.

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\8\ 61 FR 29239 (June 7, 1996). The effective date of these

rules was delayed until July 31, 1997 by section 2103(f) of the

Economic Growth and Regulatory Paperwork Reduction Act of 1996, Pub.

L. No. 104-208, 110 Stat. 3009 (1996).

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Section 556.16 Insurance Agencies--Usurpation of Corporate

Opportunities

OTS proposed to eliminate Sec. 556.16, which substantially

duplicates Sec. 545.126, and provides that a federal savings

association's corporate opportunity to engage in the insurance business

is usurped if it refers any insurance business to an agency owned by

officers or directors of the association, or by individuals having the

power to direct its management, subject to certain exceptions. OTS

received no comments on this section, which is removed as proposed. As

noted above, general corporate opportunity principles will govern

insurance referrals.

Section 571.9 Corporate Opportunity in Savings Associations

OTS proposed retaining in modified form, and codifying as a

regulation, paragraph (a) of Sec. 571.9, which states that it is a

breach of fiduciary duty for officers, directors and certain other

persons to take advantage of a business opportunity for his or her own

or another person's personal profit or benefit when the opportunity is

within the corporate powers of the association or its service

corporation and when the opportunity is of present or potential

practical advantage to the association.

OTS received two comments urging the agency not to adopt a

corporate usurpation regulation. OTS believes that avoiding corporate

usurpation is as essential to safety and soundness as avoiding

conflicts of interest. Therefore, it is adopting the regulation, with

modifications from the proposal, as described below in Part II.C.

OTS proposed removing paragraph (b) of Sec. 571.9, which provides

that a usurpation of corporate opportunity to engage in the insurance

business is an unsafe and unsound practice. OTS received no comments on

this provision, which is removed as proposed. As noted above, OTS

believes that the general prohibition on usurpation of corporate

opportunity will be sufficient to address any usurpation of insurance

opportunities.

3. Hazard Insurance

Section 571.4 Hazard Insurance

OTS proposed removing Sec. 571.4, which contains detailed

provisions

[[Page 60176]]

concerning a savings association's obligation to require borrowers to

maintain hazard insurance in a sufficient amount to protect the savings

association from loss in the event of damage to or destruction of the

real estate securing the savings association's loans.

OTS received two comments urging the agency to retain the provision

as a protection to thrifts from law suits by borrowers relating to

``force placing'' insurance 9 and to modify the rule to

specifically cover ``force placing'' insurance.

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\9\ ``Force placing'' insurance is when the savings association

exercises its right under a contract with a borrower to purchase

insurance coverage at the borrower's expense in the event the

borrower fails to purchase or provide insurance.

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OTS disagrees that a specific provision on hazard insurance is

necessary for several reasons. First, details regarding hazard

insurance are unnecessary in light of the general safety and soundness

requirements set forth in OTS's revised lending regulations and

Interagency Real Estate Lending Guidelines as well as standard business

practices in the mortgage lending industry. Second, savings

associations clearly have the right to contract with borrowers to

include whatever terms they deem appropriate in loan agreements (when

not in contravention of law), including provisions governing force

placing insurance. OTS's elimination of its hazard insurance policy

statement does not alter this right.

For the reasons set forth above and in the preamble to the proposed

rule, this section is removed as proposed.

C. Description of Final Rule

1. New Sec. 560.130 Prohibition on Loan Procurement Fees

OTS is moving the prohibition on loan procurement fees

(Sec. 563.40(a)) to a new section (Sec. 560.130) in its Part 560 on

Lending and Investment and is narrowing the scope of the rule. OTS is

promulgating new Sec. 560.130 substantially as proposed, with some

technical corrections.

The rule prohibits directors, officers and natural persons having

the power to control the management or policies of savings associations

from receiving, directly or indirectly, any commission, fee or other

compensation in connection with the procurement of any loan by the

savings association or a subsidiary of the savings association.

The current rule applies to affiliated persons. This has been

changed to natural persons. As OTS noted in the preamble to the

proposed loan procurement rule, the revised regulation would not apply

to holding companies and holding company affiliates of savings

associations. Therefore, affiliates of thrifts that are mortgage

brokers will be able to receive an arms-length fee when acting as agent

soliciting loans for affiliated thrifts. It is OTS's belief that loan

procurement fees paid to corporate affiliates pose less risk than those

paid to individuals because these fees will be subject to section 23B

of the FRA and corporate affiliates will generally have less ability

than officers and directors to influence the daily workings of an

institution's loan approval process. OTS wants to clarify here that the

revised rule is not intended to cover payments made in the ordinary

course of business in the form of dividends or capital gains received

by shareholders of the holding company who are also officers or

directors of the savings association. In addition, it is OTS's view

that to ``receive'' a prohibited payment, a person must have accepted

that payment. For example, it is not enough that a payment is made to

the person's account without his or her knowledge or consent.

OTS received one comment urging the agency to eliminate the loan

procurement rule. This commenter believed that the proposed rule was

too vague and that the common law duties of loyalty and care, other OTS

guidance and RESPA are sufficient to address the subject matter of the

regulation.

OTS disagrees. As indicated in the preamble to the proposed rule,

the regulation has been amended from current Sec. 563.40 to more

precisely tailor the scope of the regulation to the persons the agency

believes should be covered and the practices the agency wishes to

prohibit. While OTS agrees that the subject matter of this rule is

generally covered by common law fiduciary duties and other OTS

guidance, OTS continues to believe that loan procurement fees paid to

the persons enumerated in the rule pose a particular threat to the

safety and soundness of savings associations. Such fees provide

incentives to these individuals to bring loans into the association and

to press for their approval, without giving proper consideration to

whether they are a good investment for the institution. Therefore, OTS

believes that a specific rule addressing loan procurement fees is

appropriate.

Accordingly, Sec. 563.40(a) is amended and moved to new

Sec. 560.130, as proposed, with technical corrections.

2. New Sec. 563.200 Conflicts of Interest

OTS proposed codifying its conflicts of interest policy statement

(Sec. 571.7) as a regulation in new Sec. 563.200 and clarifying and

simplifying the text of the rule. OTS's proposed conflicts of interest

regulation prohibited directors, officers, employees, persons having

the power to control the management or policies of savings

associations, and other persons who owe fiduciary duties to savings

associations from advancing their own personal or business interests,

or those of others, at the expense of the institutions they serve.

OTS is making two changes in the final rule from the proposal after

considering issues raised in the comment letters. First, two commenters

pointed out that the phrase ``or those of others'' was vague. OTS

agrees and is therefore modifying this phrase to read ``or those of

others with whom you have a personal or business relationship.'' This

language more precisely identifies those related interests that would

give rise to a conflict of interest.

Second, one commenter suggested that OTS include in the regulation

a safe harbor to provide greater certainty about what transactions are

excluded from the rule. OTS is sympathetic to the commenter's desire

for greater certainty in this area; however, OTS is not including a

safe harbor provision in its regulation. To give greater guidance

regarding what transactions may be excluded, OTS is adding a paragraph

to the end of its conflicts of interest rule that provides that if a

person with a fiduciary duty to a savings association has an interest

in a matter or transaction before the board of directors, he or she

must do three things. First, the person must disclose to the board of

directors all material non-privileged information relevant to the

board's decision. This includes the existence, nature and extent of his

or her conflicting interest and the facts known to the person as to the

matter or transaction under consideration. Second, the interested

person may not participate in the board discussion of the matter.

Third, if the person with the conflict is a director, he or she must

recuse himself or herself from voting on the matter.10 Absent

unusual circumstances, OTS will not take enforcement action against a

person who has complied with these requirements.

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\10\ See In the Matter of Neil M. Bush, ERC 90-30 (Decision and

Order) at 21-22 (April 18, 1991); In the Matter of Simpson, OTS

Order No. AP 92-123 (November 18, 1992), upheld on appeal, 29 F.3d

1418 (9th Cir. 1994), cert. denied, 115 S. Ct. 1096 (1995).

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[[Page 60177]]

Several comments sought additional clarification of the types of

conduct that would be acceptable or impermissible under the rule. OTS

wants to emphasize that the regulation is a reformulation of the

current policy statement, written more concisely, and is intended to

encompass the common law of conflicts of interest as it has been

articulated in Director's Orders. The regulation does not impose any

new requirements on persons covered by the rule but reiterates general

common law standards on the fiduciary duty officers, directors and

others owe to the institutions they serve. Prior OTS interpretations of

the policy statement will continue to provide guidance as to the scope

of the rule.

To further clarify the type of conduct OTS intends to include and

exclude from the coverage of the rule, the following examples are

provided. A person who owes a fiduciary duty to a savings association

and receives money or other benefits (e.g., a loan, forgiveness of

debt, goods or services) from a third party in return for the savings

association granting a loan to or purchasing property from the third

party would be receiving a benefit that is covered by the rule.

Similarly, payments by the third party to a spouse, child, parent,

sibling or business partner of a person identified in the rule would

generally provide a benefit to the person because of the personal or

business relationship and would likewise be covered by the rule. In

addition, a person who owes a fiduciary duty to a savings association

may not advance a transaction between the savings association and

companies in which that persons owns shares, is on the board of

directors or is an officer, at the expense of the institution.

Generally, a person will not be deemed to be advancing his, her or

its interests at the expense of the institution if the transaction

complies with sections 23A and 23B of the Federal Reserve Act

(FRA),11 Federal Reserve Board Regulation O, and the safe harbor

described above.12 Likewise, the rule does not prohibit an

executive officer, director or principal shareholder from receiving a

loan from the association in accordance with 12 CFR 563.43.

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\11\ 12 U.S.C. 371c and 371c-1.

\12\ 12 CFR Part 215.

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Section 571.7 is amended, codified as a regulation, and moved to

new Sec. 563.200, with changes from the proposal, as indicated above.

3. New Sec. 563.201 Corporate Opportunity

Paragraph (a) of OTS's proposed corporate opportunity regulation

prohibits directors or officers of savings associations, persons having

the power to control the management or policies of savings associations

and other persons who owe a fiduciary duty to savings associations from

taking advantage of corporate opportunities belonging to their savings

association or its subsidiaries. Paragraph (b) of the proposed rule

indicates that a corporate opportunity will be deemed to belong to the

savings association if: (i) it is within the corporate powers of the

savings association or its subsidiary; and (ii) the opportunity is of

present or potential practical advantage to the savings association,

directly or through its subsidiary.

OTS indicated in the preamble to the proposed rule and reiterates

here, that the agency intends for common law standards governing

usurpation of corporate opportunity to be applied in determining when

an opportunity would be of present or potential practical advantage to

an institution. Examples of the types of issues that should be

considered under this standard include, without limitation, an

institution's financial condition and management resources, the level

of risk presented by the business, and potential profit from the

business weighed against any profits that might arise from transfer of

the business. Prior OTS interpretations have indicated that a

usurpation of corporate opportunity does not occur when an institution

receives fair market value consideration for transfer of a line of

business. By definition, an institution that receives fair market value

receives as much as it conveys.

OTS received several comments on its proposed corporate opportunity

regulation. OTS is making one change to the final rule to reflect the

comments received. One commenter urged OTS to include a provision in

the regulation recognizing the role of the board of directors in

determining whether an opportunity is advantageous to the institution.

OTS agrees with this suggestion. OTS is adding a paragraph to the new

regulation which provides that OTS will not deem a person to have taken

advantage of a corporate opportunity belonging to the savings

association if a disinterested and independent majority of the savings

association's board of directors, after receiving a full and fair

presentation of the matter, rejected the opportunity as a matter of

sound business judgment. This safe harbor is not intended to affect the

rights of others, for example the Federal Deposit Insurance Corporation

or shareholders, to bring actions alleging usurpation of corporate

opportunity under applicable provisions of law.

A ``disinterested'' director is one without an interest in the

matter or transaction before the board of directors. This determination

will vary with the facts and circumstances of each case. The examples

set forth above in the discussion of the conflicts of interest rule

provide some guidance on whether a director has an interest in a

transaction. An ``independent'' director for purposes of this rule is:

(i) One who is not a salaried officer or employee of the savings

association, any subsidiary, or any holding company affiliate; \13\ and

(ii) one who is not dominated or controlled by an interested director.

What will be considered ``a full and fair presentation of the facts

relating to a given matter'' will vary depending upon the transaction.

At a minimum, the interested director must disclose the nature and

extent of his or her interest in the transaction.

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\13\ See 12 CFR 563.33 (1996).

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Several commenters addressed the language in the preamble

concerning OTS's intended treatment of business allocation within a

holding company structure. OTS indicated that under the proposed

regulation, the dealings of holding companies with their subsidiary

thrifts will be subject to the doctrine of usurpation of corporate

opportunity to the same extent as provided by common law. OTS noted,

however, that other provisions of law generally provide an adequate

basis for regulating dealings between thrifts and their holding

companies. Thus, barring egregious circumstances or instances where a

thrift is undercapitalized or unprofitable, OTS supervisors and

examiners will generally defer to holding company decisions regarding

where to allocate lines of business within a holding company structure,

provided there is no violation of sections 23A and 23B of the FRA or

general principles of safety and soundness.

Two commenters asked that this language be specifically included in

the regulation or in handbook guidance. OTS has determined not to

incorporate this language in the regulation for several reasons. First,

it is the agency's view that the standard it has enunciated for the

treatment of holding companies is not specific enough to be included in

regulatory text. Second, holding companies are covered by the rule and

OTS reserves the right to take action against holding companies for

[[Page 60178]]

usurpation of corporate opportunity in the special circumstances

described above. However, OTS reiterates that it will generally defer

to holding company business allocation decisions. OTS's decision not to

put this standard in the regulation in no way reflects a departure from

this stated position. OTS intends to incorporate this language into the

Thrift Activities Regulatory Handbook.

One commenter asked OTS to amend the general prohibition paragraph

to provide that usurpation of corporate opportunity was only actionable

if it was ``for [a person's] personal profit or benefit.'' Usurpation

of corporate opportunity is prohibited based on fiduciary principles,

not whether a benefit accrues to an individual. It is enough that an

opportunity belongs to the institution and is usurped from the

institution. The concept of personal gain is more appropriate to a

conflicts of interest analysis than a corporate opportunity analysis.

OTS notes that depending on the circumstances relating to a given

matter or transaction, the conflicts of interest regulation (new

Sec. 563.200) may apply in addition to the corporate opportunity rule.

Section 571.9(a) is amended, codified as a regulation and moved to

new Sec. 563.201, with changes from the proposal, as indicated above.

III. Disposition of Existing Conflicts of Interest, Corporate

Opportunity and Hazard Insurance Regulations and Policy Statements

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Original provision New provision Comment

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Sec. 545.126................... .................. Removed.

Sec. 556.16.................... .................. Removed.

Sec. 563.35.................... .................. Removed.

Sec. 563.40(a)................. Sec. 560.130..... Modified.

Sec. 563.40(b)................. .................. Removed.

Sec. 563.44.................... .................. Removed.

Sec. 571.4..................... .................. Removed.

Sec. 571.7..................... Sec. 563.200..... Modified.

Sec. 571.9(a).................. Sec. 563.201..... Modified.

Sec. 571.9(b).................. .................. Removed.

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IV. Executive Order 12866

The Director of OTS has determined that this final rule does not

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

Executive Order 12866.

V. Unfunded Mandates Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.

104-4 (Unfunded Mandates Act), requires that an agency prepare a

budgetary impact statement before promulgating a rule that includes a

federal mandate that may result in expenditure by state, local, and

tribal governments, in the aggregate, or by the private sector, of $100

million or more in any one year. If a budgetary impact statement is

required, section 205 of the Unfunded Mandates Act also requires an

agency to identify and consider a reasonable number of regulatory

alternatives before promulgating a rule. OTS has determined that the

final rule will not result in expenditures by state, local, or tribal

governments or by the private sector of $100 million or more.

Accordingly, this rulemaking is not subject to section 202 of the

Unfunded Mandates Act.

VI. Regulatory Flexibility Act Analysis

Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS

certifies that this final rule will not have a significant economic

impact on a substantial number of small entities. As discussed in the

preamble, this final rule reduces regulatory burden and clarifies the

fiduciary duties that directors, officers and other fiduciaries owe to

savings associations. It does not create new standards but reiterates

the common law duty that directors, officers and other fiduciaries owe

to the institutions they serve.

List of Subjects

12 CFR Part 545

Accounting, Consumer protection, Credit, Electronic funds

transfers, Investments, Reporting and recordkeeping requirements,

Savings associations.

12 CFR Part 556

Savings associations.

12 CFR Part 560

Consumer protection, Investments, Manufactured homes, Mortgages,

Reporting and recordkeeping requirements, Savings associations,

Securities.

12 CFR Part 563

Accounting, Advertising, Conflicts of interest, Corporate

opportunity, Crime, Currency, Investments, Reporting and recordkeeping

requirements, Savings associations, Securities, Surety bonds.

12 CFR Part 571

Accounting, Investments, Reporting and recordkeeping requirements,

Savings associations.

Accordingly, the Office of Thrift Supervision amends chapter V,

title 12, Code of Federal Regulations, as set forth below.

PART 545--OPERATIONS

1. The authority citation for part 545 continues to read as

follows:

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

Sec. 545.126 [Removed]

2. Section 545.126 is removed.

PART 556--STATEMENTS OF POLICY

3. The authority citation for part 556 continues to read as

follows:

Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1464, 1701j-3; 15 U.S.C.

1693-1693r.

Sec. 556.16 [Removed]

4. Section 556.16 is removed.

PART 560--LENDING AND INVESTMENT

5. The authority citation for part 560 continues to read as

follows:

Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1701j-3, 1828,

3803, 3806; 42 U.S.C. 4106.

6. Section 560.130 is added to read as follows:

Sec. 560.130 Prohibition on loan procurement fees.

If you are a director, officer, or other natural person having the

power to direct the management or policies of a savings association,

you must not receive, directly or indirectly, any commission, fee, or

other compensation in connection with the procurement of any loan made

by the savings association or a subsidiary of the savings association.

PART 563--OPERATIONS

7. The authority citation for part 563 continues to read as

follows:

Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468,

1817, 1828, 3806.

Sec. 563.35 [Removed]

8. Section 563.35 is removed.

Sec. 563.40 [Removed]

9. Section 563.40 is removed.

Sec. 563.44 [Removed]

10. Section 563.44 is removed.

11. Section 563.200 is added to read as follows:

Sec. 563.200 Conflicts of interest.

If you are a director, officer, or employee of a savings

association, or have the power to direct its management or policies, or

otherwise owe a fiduciary duty to a savings association:

(a) You must not advance your own personal or business interests,

or those of others with whom you have a

[[Page 60179]]

personal or business relationship, at the expense of the savings

association; and

(b) You must, if you have an interest in a matter or transaction

before the board of directors:

(1) Disclose to the board all material nonprivileged information

relevant to the board's decision on the matter or transaction,

including:

(i) The existence, nature and extent of your interests; and

(ii) The facts known to you as to the matter or transaction under

consideration;

(2) Refrain from participating in the board's discussion of the

matter or transaction; and

(3) Recuse yourself from voting on the matter or transaction (if

you are a director).

12. Section 563.201 is added to read as follows:

Sec. 563.201 Corporate opportunity.

(a) If you are a director or officer of a savings association, or

have the power to direct its management or policies, or otherwise owe a

fiduciary duty to a savings association, you must not take advantage of

corporate opportunities belonging to the savings association.

(b) A corporate opportunity belongs to a savings association if:

(1) The opportunity is within the corporate powers of the savings

association or a subsidiary of the savings association; and

(2) The opportunity is of present or potential practical advantage

to the savings association, either directly or through its subsidiary.

(c) OTS will not deem you to have taken advantage of a corporate

opportunity belonging to the savings association if a disinterested and

independent majority of the savings association's board of directors,

after receiving a full and fair presentation of the matter, rejected

the opportunity as a matter of sound business judgment.

PART 571--STATEMENTS OF POLICY

13. The authority citation for part 571 continues to read as

follows:

Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462a, 1463, 1464.

Secs. 571.4, 571.7, 571.9 [Removed]

14. Sections 571.4, 571.7 and 571.9 are removed.

Dated: November 18, 1996.

By the Office of Thrift Supervision.

Nicolas P. Retsinas,

Director.

[FR Doc. 96-30031 Filed 11-26-96; 8:45 am]

BILLING CODE 6720-01-P