Mutual Holding Companies

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 575

[97-51]

RIN 1550-AB00

Mutual Holding Companies

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of Thrift Supervision (OTS) is proposing to amend

its mutual holding company regulations to permit mutual holding

companies (MHCs) to establish a subsidiary stock holding company that

would hold all of the stock of a savings association subsidiary. This

Notice of Proposed Rulemaking (NPR) follows a review of the comments

received in response to an advance notice of proposed rulemaking. The

OTS proposes to permit the establishment of intermediate stock holding

companies (SHCs) that will be subject to restrictions that are

substantially similar to those currently applicable to MHCs.

DATES: Comments must be received on or before August 4, 1997.

ADDRESSES: Send comments to Manager, Dissemination Branch, Records

Management and Information Policy, Office of Thrift Supervision, 1700 G

Street, NW., Washington, DC 20552, Attention Docket No. 97-51. These

submissions may be hand-delivered to 1700 G Street, NW., from 9:00 a.m.

to 5:00 p.m. on business days; they may be sent by facsimile

transmission to FAX Number (202) 906-7755 or by e-mail: public

[email protected]. Those commenting by e-mail should include their

name and phone number. Comments will be available for inspection at

1700 G Street, NW., from 9:00 a.m. until 4:00 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: James H. Underwood, Special Counsel

(202/906-7354), Dwight C. Smith, Deputy Chief Counsel (202/906-6990),

Business Transactions Division, Chief Counsel's Office; Gary Masters,

Financial Analyst (202/906-6729) Corporate Activities Division; Office

of Thrift Supervision, 1700 G Street, NW., Washington, D.C. 20552.

[[Page 30779]]

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background of the Proposal

II. Notice of Proposed Rulemaking:

A. Summary and Purpose

B. Stock Holding Company Powers

C. Regulatory Restrictions on Stock Pledges, Dividend Waivers,

Indemnification and Employment Contracts

D. SHC Charter and Bylaw Requirements

E. SHC Stock Issuances, Stock Repurchases, and Conversion of the

MHC

F. Miscellaneous

III. Request for Comments

IV. Paperwork Reduction Act of 1995

V. Executive Order 12866

VI. Regulatory Flexibility Act Analysis

VII. Unfunded Mandates Act of 1995

I. Background of the Proposal

In response to inquiries from MHCs and mutual savings associations

concerning the formation of a second-tier stock holding company to hold

the stock of a MHC's savings association subsidiary, the OTS issued an

Advance Notice of Proposed Rulemaking (ANPR)1 soliciting

comment on issues raised by the existence of SHCs. Under current 12 CFR

part 575, a mutual savings association may reorganize into a MHC

structure in which the MHC owns at least a majority of the stock of a

subsidiary savings association. Depositors of the mutual savings

association continue to maintain a depositor-creditor relationship with

the stock savings association subsidiary, while retaining their other

indicia of ownership, e. g., voting and liquidation rights, with the

MHC. Under this structure, the balance of the shares (up to 49.9%) of

the stock savings association subsidiary may be sold to the public in

one or more offerings when the MHC is formed or later.

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\1\ 61 FR 58144 (November 13, 1996).

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The proposed holding company structure would permit the MHC to form

a SHC to hold the shares of the stock savings association subsidiary.

The SHC, like the stock savings association subsidiary in the

traditional model, would be required to issue at least a majority of

its shares to the MHC and could issue up to 49.9% of its shares to the

public. The SHC will be required to hold 100% of the shares of the

savings association subsidiary.

The ANPR solicited comments on seven specific issues involving the

formation of SHCs. The OTS received fifteen comments on the proposal

from three MHCs, four savings associations, three trade associations,

two law firms, two investment banking firms and an individual investor.

All but one of the commenters generally supported the concept of SHCs.

Most of the commenters also indicated their support for the SHC to have

the full powers of a unitary savings and loan holding company. The

comments are discussed in further detail in the description of the

proposed revisions to 12 CFR Part 575 set forth below.

II. Notice of Proposed Rulemaking

A. Summary and Purpose

The OTS proposes to amend its MHC regulations to permit the

formation of federally chartered SHCs. By permitting the formation and

operation of SHCs, the MHC structure will be enhanced. For example, a

MHC will be able to form a subsidiary that can engage in a stock

repurchase program without adverse tax consequences. Currently, savings

association subsidiaries of MHCs do not repurchase minority stock due

to adverse tax consequences related to bad debt reserves recapture

provisions. Moreover, SHCs will enhance the organizational flexibility

of the MHC structure and enable MHCs to compete more effectively in the

marketplace.

The proposed rule does not authorize SHCs to act as unitary savings

and loan holding companies. As discussed below, the OTS believes that

the proposed rule should follow the current statutory framework and not

authorize unitary savings and loan holding company powers as part of

the MHC structure. The proposed rule contemplates that the SHC will

``stand in the shoes'' of the parent MHC or, in certain instances, the

subsidiary savings association. Thus, generally, the SHC should be

subject to the same restrictions and limitations that are currently

applicable to a MHC and its savings association subsidiary. The

proposed rule also provides that the SHC structure may not be utilized

as a means to evade or frustrate the purposes of 12 CFR part 575 or

related provisions of 12 CFR part 563b which governs mutual to stock

conversions by savings associations.

B. Stock Holding Company Powers

In the ANPR, the OTS solicited comments on whether the SHC should

be limited to the activities of the parent MHC 2 or be

treated as a unitary savings and loan holding company. Most of the

commenters argued in favor of treating the SHC as a unitary savings and

loan holding company. This would grant the SHC a broader range of

powers and investment authority than are currently available to a MHC.

Several of the commenters stated that they did not perceive any policy

reasons, such as safety and soundness concerns, that support a

different treatment for SHCs simply because they are controlled by a

MHC.

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\2\ See 12 U.S.C. 1467a(o)(5) and 12 CFR 575.11(a) for a

description of MHC activities restrictions.

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After careful review of the comments and the statute, the OTS does

not believe that it is appropriate to treat SHCs as unitary savings and

loan holding companies under the mutual holding company statute. When

Congress authorized MHCs as part of the Competitive Equality Banking

Act of 1987 (CEBA), it clearly chose to limit the activities of MHCs to

those permitted for multiple savings and loan holding companies and

bank holding companies. Although the legislative history of CEBA does

not indicate why Congress made this choice, it is reasonable to assume

that Congress was aware of the unique nature of mutual institutions and

their relationship with these newly authorized holding companies and

wished to limit their activities to those more closely related to

banking.3

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\3\ Under 12 U.S.C. 1467a(o)(6), a MHC may acquire another

holding company but such company must divest any assets and cease

any activities not permissible for a MHC within the two year period

following such acquisition.

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As noted by one commenter who opposed unitary powers for SHCs,

Congress is currently reviewing the issue of charter powers and

permissible affiliations between insured financial institutions and

commercial firms and several bills are pending before Congress that

address these issues. While some commenters argued that a SHC should be

treated as a unitary savings and loan holding company, the OTS believes

that the proposed rule appropriately tracks the statute on this issue.

Therefore, the proposed rule does not expand the powers of the SHC

beyond those of a MHC.

The OTS notes, however, that a SHC, like the MHC parent, may

utilize its authority under 12 U.S.C. 1467a(o)(5) and 12 CFR

575.10(a)(6) to acquire a controlling or non-controlling interest in

corporations whose stock may be purchased by a federal savings

association under 12 CFR part 559 or by a state savings association

under the law of any state where a savings association subsidiary of

the SHC has its home office. Although the permissible activities of

these types of subsidiaries are more limited than those of a unitary

savings and loan holding company, they are more extensive than those

permitted to the parent MHC.

[[Page 30780]]

C. Regulatory Restrictions on Stock Pledges, Dividend Waivers,

Indemnification and Employment Contracts

Under 12 CFR part 575, a MHC and its savings association subsidiary

are subject to various restrictions on their activities and operations.

In the ANPR, the OTS solicited comment on whether some or all of these

restrictions should be applicable to the SHC. The comments on these

issues are addressed below.

(1) Pledges of Subsidiary Savings Association Stock

Commenters were divided as to whether the SHC should be subject to

the same restrictions as a MHC on pledges of stock of the savings

association subsidiary. It is clear that 12 U.S.C. 1467a(o)(8), which

authorizes stock pledges by MHCs, requires that the transaction

increase the capital of the savings association subsidiary. Thus, the

implementing regulation, Sec. 575.11(b) requires that the proceeds of

any loan secured by the savings association's stock be infused into the

savings association.

The OTS believes that the reasons supporting the restrictions on a

MHC are also applicable to a SHC. Application of this rule to the SHC

is consistent with the statute and will ensure that any borrowing using

the savings association subsidiary's stock or the SHC's stock as

collateral will directly benefit the savings association. Some

commenters argued that the SHC should be subject only to restrictions

that are applicable to other savings and loan holding companies. The

OTS does not find this argument persuasive. The intention of this

proposal, as stated above, is to increase the flexibility of the MHC

structure without diminishing the safeguards imposed by Congress in

adopting the MHC statute.

(2) Dividend Waivers

Commenters also were divided as to whether dividend waiver

restrictions should be imposed on the SHC. Commenters supporting the

dividend waiver restriction generally acknowledged that the policy

reasons supporting dividend waiver restrictions should apply to

dividends declared by the SHC. Commenters opposed to the dividend

waiver restrictions argued that the SHC should be treated like any

other stock holding company. The OTS does not believe that there are

sound policy reasons to differentiate between dividends paid to a MHC

parent by a savings association subsidiary and a SHC subsidiary. Thus,

the proposed rule requires that the MHC follow the procedures set forth

at 12 CFR 575.11(d) with respect to waiving any dividends declared by

the SHC. The intent of this section is to ensure that the waiver of

dividends payable to the MHC is subject to regulatory review and is

consistent with the directors' fiduciary duties to its mutual members.

The OTS intends to continue to review dividend waivers in

connection with the mutual to stock conversion of a MHC pursuant to the

``fair and reasonable'' exchange standard set forth at 12 CFR

575.12(a)(2). The formation of a SHC by an existing MHC with minority

stockholders will not generally result in different treatment of the

minority stockholders under Sec. 575.12(a)(2) in the event of a

conversion of the MHC to stock form.

(3) Indemnification and Employment Contracts

Under 12 CFR 575.11(f)-(g), MHCs are subject to the same

restrictions regarding indemnification and employment contracts as

mutual savings associations.4 With one exception, all of the

commenters responding to this issue were opposed to the imposition of

these restrictions on a SHC. The commenters assumed that a SHC, unlike

the MHC, would not be chartered by the OTS and that the OTS should not

preempt state law policies in these areas. The commenters also stated

that state-chartered stock savings and loan holding companies are not

subject to these restrictions and that SHCs should be treated

similarly. As discussed below, the OTS is proposing that the SHC be

federally chartered and thus subject to OTS policies.

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\4\ See 12 CFR 545.121 and 563.39, respectively.

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The OTS concludes that there are valid reasons for imposing these

restrictions on the SHC. As noted above, the SHC should not be utilized

to evade requirements imposed on the MHC. The OTS has determined that

because of the unique nature of the MHC structure, i.e., the combining

of mutual and stock interests in one corporate structure, it is

appropriate to impose greater oversight on the MHC than is imposed on

stock holding companies. Since the SHC is, in essence, ``standing in

the shoes'' of the MHC, the proposed rule will require that the SHC be

subject to the same restrictions.

D. SHC Charter and Bylaw Requirements

Most of the commenters opposed any requirement that a SHC's charter

and bylaws (and amendments) be subject to OTS review and approval. The

commenters assumed that the SHC would be a state-chartered corporation

and would be able to utilize the corporate governance procedures that

are available under state law. The OTS has determined to require that

the SHC be federally chartered. This will help ensure consistent

treatment for the various entities in the mutual holding company

structure and eliminate any confusion about the treatment of the SHC

under 12 U.S.C. 1467a(o)(9), which addresses insolvency and liquidation

issues of MHCs, in the event of a default of the SHC. The OTS

anticipates that in the event of the default by the MHC, the SHC or the

savings association subsidiary, the OTS would have the right to file a

petition seeking the appointment of a bankruptcy trustee for the

purpose of liquidating the MHC and the SHC.

The OTS also believes that its authority to regulate the corporate

governance aspects of the subsidiary holding company is clearer if the

subsidiary holding company is federally chartered. The MHC statute

clearly contemplates that the reorganized savings association will be a

directly owned subsidiary of a federally chartered entity. Requiring

that the subsidiary holding company be federally chartered ensures that

the savings association remains a direct subsidiary of a federally

chartered entity. Finally, requiring the subsidiary holding company to

be federally chartered is consistent with the provision of the OTS

regulations that preempts state law with regard to the creation of and

regulation of MHCs.

The federal charter and bylaw requirements for the SHC are modeled

after the charter and bylaw requirements for federal stock savings

associations. The OTS believes that the recent amendments to the OTS

charter and bylaw requirements provide greater corporate flexibility

for federally chartered stock savings associations and will enable

federally chartered SHCs to utilize many of the corporate law

provisions available to state-chartered corporations. The OTS, however,

will reserve the right to object to any provision of the SHC's charter

or bylaws that is contrary to the requirements of 12 CFR part 575.

E. SHC Stock Issuances, Stock Repurchases, and Conversion of the MHC

The proposed rule will apply the current restrictions on the

issuance of securities by a savings association subsidiary set forth at

12 CFR 575.7 and 575.8 to the SHC. Most of the commenters generally

supported this concept. However, several commenters

[[Page 30781]]

suggested that the SHC be permitted to issue stock in some cases

without complying with the requirement that priority subscription

rights be issued to the mutual members. The OTS concludes that 575.7

and 575.8 should apply to securities issuances by the SHC. This is

consistent with the fact that the SHC, and not the savings association

subsidiary, will be issuing stock to minority stockholders. Thus, it

follows that all current stock issuance restrictions should apply to

the SHC.

The OTS does not agree that the SHC should be able to issue shares

to the public without first offering them to the mutual members. Mutual

members have first priority to subscription rights in a conversion. To

permit a stock offering without first offering the shares to the mutual

members would, in essence, permit a partial conversion of the mutual

institution in a manner that conflicts with 12 CFR part 563b. One of

the fundamental principles underlying the mutual holding company

regulations is that the mutual members' rights, including their rights

under part 563b, should not be diminished or eliminated merely because

the mutual institution is reorganized into a MHC. For that reason, the

OTS will not permit a SHC to issue stock to the public, whether by way

of merger or otherwise, without affording the mutual members a priority

subscription right to purchase the stock.

Although this results in the MHC structure having less flexibility

than a stock holding company structure, this is consistent with the

fact that a MHC structure is a hybrid corporate entity that is part

mutual and part stock. This unique structure has both advantages and

disadvantages and can create potential conflicts of interest that

require more restrictions on the operation of MHCs.

The proposed rule will require that all stock 5

issuances by the SHC receive prior approval of the OTS. This

restriction currently applies to a MHC's savings association

subsidiary, and it is consistent to require that any stock issued by

the SHC also be subject to this requirement.

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\5\ Stock is defined at 12 CFR 575.2 (n) to mean common or

preferred stock, or any other type of equity security, including

securities that are convertible into common or preferred stock.

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The proposed rule will also require that if a SHC is established by

a MHC, the SHC must hold 100% of the stock of the resulting savings

association subsidiary. This will restrict the savings association

subsidiary from issuing stock to persons other than the SHC. Permitting

minority stockholders at the SHC level and the subsidiary savings

association level will result in potential conflicts of interests and

create difficult valuation problems if the MHC decides to convert to

stock form.

A primary motivation for the establishment of a SHC is that it will

permit the SHC, assuming it has issued stock to the public, to engage

in stock repurchase programs without the adverse tax consequences that

may occur if such repurchases are made directly by the savings

association subsidiary. The proposed rule will permit SHCs to engage in

stock repurchase programs provided that the SHC complies with the

requirements of 12 CFR 575.11(c). One commenter inquired how the three-

year period set forth in Sec. 575.11(c) that limits stock repurchases

would be applied in the case of a SHC formed after minority shares have

been issued by a savings association subsidiary. Absent unusual

circumstances, the OTS generally will permit the SHC to ``tack'' on or

include the period that the shares initially issued by the savings

association were outstanding. Thus, if minority shares have been

outstanding for a period of two years at the time the SHC is formed,

the SHC will be subject to the repurchase restriction for a one-year

period.

In the event the MHC decides to convert to stock form, the proposed

rule contemplates that the minority stockholders of the SHC would be

able to exchange their shares for shares of the converted MHC in the

same manner that minority stockholders of the savings association

subsidiary currently do. The OTS will continue to use the ``fair and

reasonable'' standard set forth at 12 CFR 575.12(a) in evaluating such

exchange offers.

F. Miscellaneous

The proposed rule also makes a number of clarifying changes to 12

CFR Part 575 to ensure that the regulations will be consistent for a

MHC with or without a SHC subsidiary.

III. Request for Comments

OTS invites comment on all aspects of the proposal as well as

specific comments on the proposed changes.

IV. Paperwork Reduction Act of 1995

The OTS invites comments on:

(1) Whether the proposed collection of information contained in

this notice of proposed rulemaking is necessary for the proper

performance of the agency's functions, including whether the

information has practical utility;

(2) The accuracy of the agency's estimate of the burden of the

proposed information collection;

(3) Ways to enhance the quality, utility, and clarity of the

information to be collected; and

(4) Ways to minimize the burden of the information collection

including the use of automated collection techniques or other forms of

information technology.

(5) Estimates of capital and startup costs of operation,

maintenance and purchases of services to provide information.

Respondents/recordkeepers are not required to respond to this

collection of information unless it displays a currently valid OMB

control number.

The reporting and recordkeeping requirements contained in this

notice of proposed rulemaking have been submitted to the Office of

Management and Budget for review in accordance with the Paperwork

Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on all aspects of

this information collection should be sent to the Office of Management

and Budget, Paperwork Reduction Project (1550), Washington, DC 20503

with copies to the OTS, 1700 G Street, NW., Washington, DC 20552.

The reporting/recordkeeping requirements contained in this notice

of proposed rulemaking are found at 12 CFR part 575. The information is

needed by the OTS in order to supervise savings associations and mutual

holding companies and develop regulatory policy. The likely

respondents/recordkeepers are OTS-regulated savings associations and

mutual holding companies. The information collection currently approved

under OMB Control No. 1550-0072 will be amended to include the burden

under this regulation.

Estimated number of respondents/recordkeepers: 20.

Estimated average annual burden hours per recordkeeper/respondent:

343.70.

Estimated total annual reporting/recordkeeping burden: 6,874 hours.

Start-up costs to respondents/recordkeepers: None.

Records are to be maintained in accordance with normal and

customary business practices as recommended by private counsel,

accountants, etc., but no less than three years.

V. Executive Order 12866

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

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

Executive Order 12866.

[[Page 30782]]

VI. Regulatory Flexibility Act Analysis

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

certifies that this proposed rule will not have a significant impact on

a substantial number of small entities. The proposal will create

additional organizational flexibility for all savings associations that

create mutual holding company structures.

VII. 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

proposed 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.

List of Subjects in 12 CFR Part 575

Administrative practice and procedure, Capital, Holding companies,

Reporting and recordkeeping requirements, Savings associations,

Securities.

Accordingly, the Office of Thrift Supervision hereby proposes to

amend chapter V, title 12, Code of Federal Regulations, as follows:

PART 575--MUTUAL HOLDING COMPANIES

1. The authority citation for part 575 continues to read as

follows:

Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828, 2901.

2. Section 575.2 is amended by revising paragraphs (h) and (o) and

adding paragraph (q) to read as follows:

Sec. 575.2 Definitions.

* * * * *

(h) The term mutual holding company means a mutual holding company

organized under this part, and unless otherwise indicated, a subsidiary

holding company controlled by a mutual holding company, organized under

this part.

* * * * *

(o) The term Stock Issuance Plan means a plan providing for the

issuance of stock by:

(1) A savings association subsidiary of a mutual holding company;

or

(2) A subsidiary holding company submitted pursuant to Sec. 575.7

and containing the information required by Sec. 575.8.

* * * * *

(q) The term subsidiary holding company means a federally chartered

stock holding company, controlled by a mutual holding company, that

owns the stock of a savings association whose depositors have

membership rights in the parent mutual holding company.

3. Section 575.6 is amended by redesignating paragraphs (c) through

(i) as paragraphs (d) through (j) and adding a new paragraph (c) to

read as follows:

Sec. 575.6 Contents of Reorganization Plans.

* * * * *

(c) If the reorganizing association proposes to form a subsidiary

holding company, provide for the organization of a subsidiary holding

company and attach and incorporate the proposed charter and bylaws of

such subsidiary holding company.

* * * * *

4. Section 575.10 is amended by:

a. Removing, in the introductory text of paragraph (a)(2), the

phrase ``the holding company'', and by adding in lieu thereof the

phrase ``the parent mutual holding company'';

b. Revising the first sentence of paragraph (a)(3);

c. Revising the first sentence of paragraph (a)(4);

d. Revising paragraph (a)(6)(i)(B); and

e. Revising the first sentence of paragraph (b)(1).

The revisions read as follows:

Sec. 575.10 Acquisition and disposition of savings associations,

savings and loan holding companies, and other corporations by mutual

holding companies.

(a) * * *

(3) Mutual holding companies. A mutual holding company that is not

a subsidiary holding company may acquire control of another mutual

holding company, including a subsidiary holding company, by merging

with or into such company, provided the necessary approvals are

obtained from the OTS, including (without limitation) approval pursuant

to part 574 of this chapter. * * *

(4) Stock holding companies. A mutual holding company may acquire

control of a savings and loan holding company in the stock form that is

not a subsidiary holding company, provided the necessary approvals are

obtained from the OTS, including (without limitation) approval pursuant

to part 574 of this chapter. * * *

* * * * *

(6) * * *

(i) * * *

(B) It is lawful for the stock of such corporation to be purchased

by a federal savings association under Part 559 of this chapter or by a

state savings association under the law of any state where any

subsidiary savings association of the mutual holding company has its

home office; and

* * * * *

(b) Dispositions. (1) A mutual holding company shall provide

written notice to the OTS at least 30 days prior to the effective date

of any direct or indirect transfer of any of the stock that it holds in

a subsidiary holding company, a resulting association, an acquiree

association, or any subsidiary savings association that was in the

mutual form when acquired by the mutual holding company, including

stock transferred in connection with a pledge pursuant to

Sec. 575.11(b) or any transfer of all or a substantial portion of the

assets or liabilities of any such subsidiary holding company or

association. * * *

* * * * *

5. Section 575.11 is amended by:

a. Revising paragraph (b)(1) introductory text, redesignating

existing paragraph (b)(1)(ii) as paragraph (b)(1)(iii), and adding a

new paragraph (b)(1)(ii);

b. Revising paragraph (b)(2);

c. Revising the introductory text of paragraph (c) and paragraphs

(c)(1) and (c)(3); and

d. Revising paragraph (e).

The revisions read as follows:

Sec. 575.11 Operating restrictions.

* * * * *

(b) Pledging stock. (1) No mutual holding company may pledge the

stock of its resulting association, an acquiree association, or any

subsidiary savings association that was in the mutual form when

acquired by the mutual holding company (or its parent mutual holding

company), unless the proceeds of the loan secured by the pledge are

infused into the association whose stock is pledged. No mutual holding

company may pledge the stock of its subsidiary holding company unless

the proceeds of the loan secured by the pledge are infused into any

savings association subsidiary of the subsidiary holding company that

is a resulting association, an acquiree association, or a subsidiary

savings association that was in the mutual form when acquired by the

subsidiary holding company (or its

[[Page 30783]]

parent mutual holding company). In the event the subsidiary holding

company has more than one savings association subsidiary, the loan

proceeds shall, unless otherwise approved by the OTS, be infused in

equal amounts to each savings association subsidiary. Any amount of the

stock of such association or subsidiary holding company may be pledged

for these purposes. Nothing in this paragraph (b)(1) shall be deemed to

prohibit:

* * * * *

(ii) The payment of dividends from a subsidiary holding company to

its mutual holding company parent to the extent otherwise permissible;

or

* * * * *

(2) Within ten days after its pledge of stock pursuant to paragraph

(b)(1) of this section, a mutual holding company shall provide written

notice to the OTS regarding the terms of the transaction (including the

amount of principal and interest, repayment terms, maturity date, the

nature and amount of collateral, and the terms governing seizure of the

collateral) and shall include in such notice a certification that the

proceeds of the loan have been transferred to the subsidiary savings

association whose stock (or the stock of its parent subsidiary holding

company) has been pledged.

* * * * *

(c) Restrictions on stock repurchases. No subsidiary savings

association of a mutual holding company that has any stockholders other

than the association's mutual holding company and no subsidiary holding

company that has any stockholders other than its parent mutual holding

company shall repurchase any share of stock within three years of its

date of issuance, unless the repurchase: (1) Is part of a general

repurchase made on a pro rata basis pursuant to an offer approved by

the OTS and made to all stockholders of the association or subsidiary

holding company (except that the parent mutual holding company may be

excluded from the repurchase with the OTS' approval);

* * * * *

(3) Is purchased in the open market by a tax-qualified or non-tax-

qualified employee stock benefit plan of the association or subsidiary

holding company in an amount reasonable and appropriate to fund such

plan.

* * * * *

(e) Restrictions on issuance of stock to insiders. A subsidiary of

a mutual holding company that is not a savings association or

subsidiary holding company may issue stock to any insider, associate of

an insider or tax-qualified or non-tax-qualified employee stock benefit

plan of the mutual holding company or any subsidiary of the mutual

holding company, provided that such persons or plans provide written

notice to the OTS at least 30 days prior to the stock issuance.

Subsidiary savings associations and subsidiary holding companies may

issue stock to such persons only in accordance with Sec. 575.7.

* * * * *

6. Section 575.12 is amended by:

a. Revising paragraph (a)(2);

b. Revising paragraphs (b)(1)(ii) and (iii); and

c. Revising paragraph (b)(2).

The revisions read as follows:

Sec. 575.12 Conversion or liquidation of mutual holding companies.

(a) * * *

(2) Exchange of savings association stock. Any stock issued

pursuant to Sec. 575.7 by a subsidiary savings association or

subsidiary holding company of a mutual holding company to persons other

than the parent mutual holding company may be exchanged for the stock

issued by the parent mutual holding company in connection with the

conversion of the parent mutual holding company to stock form. The

parent mutual holding company and the subsidiary holding company or

savings association must demonstrate to the satisfaction of the OTS

that the basis for the exchange is fair and reasonable.

* * * * *

(b) * * * (1) * * *

(ii) The default of the parent mutual holding company or its

subsidiary holding company; or

(iii) Foreclosure on any pledge by the mutual holding company of

subsidiary savings association or subsidiary holding company stock

pursuant to Sec. 575.11(b).

(2) Except as provided in paragraph (b)(3) of this section, the net

proceeds of any liquidation of any mutual holding company shall be

transferred to the members of the mutual holding company or the stock

holders of the subsidiary holding company in accordance with the

charter of the mutual holding company or subsidiary holding company.

* * * * *

7. Section 575.14 is added to read as follows:

Sec. 575.14 Subsidiary holding companies.

(a) Subsidiary holding companies. A mutual holding company may

establish a subsidiary holding company as a direct subsidiary to hold

100% of the stock of its savings association subsidiary. The formation

and operation of the subsidiary holding company may not be utilized as

a means to evade or frustrate the purposes of this part 575 or part

563b of this chapter. The subsidiary holding company may be established

either at the time of the initial mutual holding company reorganization

or at a subsequent date, subject to the approval of the OTS.

(b) Stock issuances. For purposes of Secs. 575.7 and 575.8, the

subsidiary holding company shall be treated as a savings association

issuing stock and shall be subject to the requirements of those

sections. In the case of a stock issuance by a subsidiary holding

company, the aggregate amount of outstanding common stock of the

association owned or controlled by persons other than the subsidiary

holding company's mutual holding company parent at the close of the

proposed issuance shall be less than 50% of the subsidiary holding

company's total outstanding common stock.

(c) Charters and bylaws for subsidiary holding companies--(1)

Charters. The charter of a subsidiary holding company shall be in the

form set forth in this paragraph (c)(1) and may include any of the

additional provisions permitted pursuant to paragraph (c)(2) of this

section. The form of the charter is as follows:

Federal MHC Subsidiary Holding Company Charter

Section 1. Corporate title. The full corporate title of the MHC

subsidiary holding company is XXX.

Section 2. Domicile. The domicile of the MHC subsidiary holding

company shall be in the city of ____________________, in the state

of ____________________.

Section 3. Duration. The duration of the MHC subsidiary holding

company is perpetual.

Section 4. Purpose and powers. The purpose of the MHC subsidiary

holding company is to pursue any or all of the lawful objectives of

a federal mutual holding company chartered under section 10(o) of

the Home Owners' Loan Act, 12 U.S.C. 1467a(o), and to exercise all

of the express, implied, and incidental powers conferred thereby and

by all acts amendatory thereof and supplemental thereto, subject to

the Constitution and laws of the United States as they are now in

effect, or as they may hereafter be amended, and subject to all

lawful and applicable rules, regulations, and orders of the Office

of Thrift Supervision (``Office'').

Section 5. Capital stock. The total number of shares of all

classes of the capital stock that the MHC subsidiary holding company

has the authority to issue is ____________________, all of which

shall be common stock of par [or if no par is specified then shares

shall have a stated] value of ____________ per share. The shares may

be issued from time to time as authorized by the board of directors

without the approval of its

[[Page 30784]]

shareholders, except as otherwise provided in this section 5 or to

the extent that such approval is required by governing law, rule, or

regulation. The consideration for the issuance of the shares shall

be paid in full before their issuance and shall not be less than the

par [or stated] value. Neither promissory notes nor future services

shall constitute payment or part payment for the issuance of shares

of the MHC subsidiary holding company. The consideration for the

shares shall be cash, tangible or intangible property (to the extent

direct investment in such property would be permitted to the MHC

subsidiary holding company), labor, or services actually performed

for the MHC subsidiary holding company, or any combination of the

foregoing. In the absence of actual fraud in the transaction, the

value of such property, labor, or services, as determined by the

board of directors of the MHC subsidiary holding company, shall be

conclusive. Upon payment of such consideration, such shares shall be

deemed to be fully paid and nonassessable. In the case of a stock

dividend, that part of the retained earnings of the MHC subsidiary

holding company that is transferred to common stock or paid-in

capital accounts upon the issuance of shares as a stock dividend

shall be deemed to be the consideration for their issuance.

Except for shares issued in the initial organization of the MHC

subsidiary holding company, no shares of capital stock (including

shares issuable upon conversion, exchange, or exercise of other

securities) shall be issued, directly or indirectly, to officers,

directors, or controlling persons (except for shares issued to the

parent mutual holding company) of the MHC subsidiary holding company

other than as part of a general public offering or as qualifying

shares to a director, unless the issuance or the plan under which

they would be issued has been approved by a majority of the total

votes eligible to be cast at a legal meeting.

The holders of the common stock shall exclusively possess all

voting power. Each holder of shares of common stock shall be

entitled to one vote for each share held by such holder, except as

to the cumulation of votes for the election of directors, unless the

charter provides that there shall be no such cumulative voting.

Subject to any provision for a liquidation account, in the event of

any liquidation, dissolution, or winding up of the MHC subsidiary

holding company, the holders of the common stock shall be entitled,

after payment or provision for payment of all debts and liabilities

of the MHC subsidiary holding company, to receive the remaining

assets of the MHC subsidiary holding company available for

distribution, in cash or in kind. Each share of common stock shall

have the same relative rights as and be identical in all respects

with all the other shares of common stock.

Section 6. Preemptive rights. Holders of the capital stock of

the MHC subsidiary holding company shall not be entitled to

preemptive rights with respect to any shares of the MHC subsidiary

holding company which may be issued.

Section 7. Directors. The MHC subsidiary holding company shall

be under the direction of a board of directors. The authorized

number of directors, as stated in the MHC subsidiary holding

company's bylaws, shall not be fewer than five nor more than fifteen

except when a greater or lesser number is approved by the Director

of the Office, or his or her delegate.

Section 8. Amendment of charter. Except as provided in Section

5, no amendment, addition, alteration, change or repeal of this

charter shall be made, unless such is proposed by the board of

directors of the MHC subsidiary holding company, approved by the

shareholders by a majority of the votes eligible to be cast at a

legal meeting, unless a higher vote is otherwise required, and

approved or preapproved by the Office

Attest:----------------------------------------------------------------

Secretary of the Subsidiary Holding Company

By:--------------------------------------------------------------------

President or Chief Executive Officer of the Subsidiary Holding

Company

Attest:----------------------------------------------------------------

Secretary of the Office of Thrift Supervision

By:--------------------------------------------------------------------

Director of the Office of Thrift Supervision

Effective Date:--------------------------------------------------------

(2) Charter amendments. The rules and regulations set forth in

Sec. 552.4 of this chapter regarding charter amendments and reissuances

of charters (including delegations and filing instructions) shall be

applicable to subsidiary holding companies to the same extent as if the

subsidiary holding companies were Federal stock savings associations,

except that, with respect to the pre-approved charter amendments set

forth in Sec. 552.4 of this chapter, the reference to home office in

Sec. 552.4(b)(2) of this chapter shall be deemed to refer to the

domicile of the subsidiary holding company and the requirements of

Sec. 545.95 of this chapter shall not apply to subsidiary holding

companies.

(3) Bylaws. The rules and regulations set forth in Sec. 552.5 of

this chapter regarding bylaws (including their content, any amendments

thereto, delegations, and filing instructions) shall be applicable to

subsidiary holding companies to the same extent as if subsidiary

holding companies were federal stock savings associations. The model

bylaws for Federal stock savings associations set forth in the OTS

Applications Processing Handbook shall also serve as the model bylaws

for subsidiary holding companies, except that the term ``association''

each time it appears therein shall be replaced with the term

``Subsidiary Holding Company.''

(4) Annual reports and books and records. The rules and regulations

set forth in Secs. 552.10 and 552.11 of this chapter regarding annual

reports to stockholders and maintaining books and records shall be

applicable to subsidiary holding companies to the same extent as if

subsidiary holding companies were federal stock savings associations.

Dated: May 16, 1997.

By the Office of Thrift Supervision.

Nicolas P. Retsinas,

Director.

[FR Doc. 97-14616 Filed 6-4-97; 8:45 am]

BILLING CODE 6720-01-P