Mutual Holding Companies

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 575

[98-23]

RIN 1550-AB04

Mutual Holding Companies

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

-----------------------------------------------------------------------

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

holding company regulations to permit a mutual holding company (MHC) to

establish a subsidiary stock holding company that would hold all of the

stock of a savings association subsidiary. The final rule permits the

establishment of intermediate stock holding companies (SHCs) that will

be subject to restrictions that are substantially similar to those

currently applicable to MHCs.

EFFECTIVE DATE: April 1, 1998.

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.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background of the Proposal

II. General Discussion of the Comments

III. Analysis of Final Rule

IV. Paperwork Reduction Act of 1995

V. Executive Order 12866

VI. Regulatory Flexibility Act Analysis

VII. Unfunded Mandates Act of 1995

VIII. Effective Date

I. Background of the Proposal

Responding to inquiries from MHCs and mutual savings associations

concerning the formation of second-tier stock holding companies, OTS

issued an Advance Notice of Proposed Rulemaking (ANPR) soliciting

comment on issues raised by the existence of SHCs.1 On June

5, 1997, OTS published a notice of proposed rulemaking (NPR) proposing

to amend its regulations to permit the establishment and operation of

federally chartered mid-tier holding companies.2 The purpose

of the proposed amendment was to enhance the organizational flexibility

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

the marketplace. Additionally, permitting the formation of SHCs will

allow MHCs, through the SHCs, greater flexibility in structuring stock

repurchase programs.

---------------------------------------------------------------------------

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

\2\ 62 FR 30778 (June 5, 1997).

---------------------------------------------------------------------------

Under current 12 CFR part 575, a mutual savings association may

reorganize into a MHC structure where 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. This structure permits the balance of

the shares (up to 49.9%) of the stock savings association subsidiary to

be sold to the public in one or more offerings when the MHC is formed,

or later.

The final rule will permit the MHC to form an SHC to hold all of

the shares of the stock savings association subsidiary. The SHC, like

the stock savings association subsidiary under the current rule, will

be required to issue at least a majority of its shares to the MHC and

may issue up to 49.9% of its shares to the public. Under the final

rule, the SHC will be required to hold 100% of the shares of the

savings association subsidiary. The final rule, like the NPR, provides

that the SHC structure may not be used to evade or frustrate the

purposes of 12 CFR part 575 or related provisions of 12 CFR part 563b

that govern mutual-to-stock conversions by savings associations. OTS'

guiding principle with respect to MHC conversion rules is that the

substantive and procedural limitations applicable to such transactions

should mirror those for a mutual-to-stock conversion of a savings

association. This is so insiders or minority shareholders do not get a

windfall by achieving something (e.g., a greater ownership interest)

through an MHC reorganization and subsequent conversion to stock form

that they cannot accomplish through a direct mutual-to-stock conversion

of the savings association.

II. General Discussion of the Comments

Eleven commenters responded to the NPR proposal: one savings bank;

one mutual holding company; two individuals; three trade groups; and

four law firms. All but one of the commenters generally supported the

concept of SHCs. The one commenter who did not support the formation of

SHCs was opposed to any changes to OTS' rules governing mutual holding

companies. Most of the commenters argued for greater flexibility and

fewer restrictions on SHCs than set forth in the proposed rule. Two of

the trade groups that commented, however, were generally supportive of

the rule as proposed.

The final rule is substantially similar to the proposed rule.

Specific comments addressing various sections are discussed in the

description of the revisions to 12 CFR part 575 set forth below.

III. Analysis of Final Rule

A. Federal Charter and Bylaws for SHCs

OTS proposed that SHCs must be federally chartered. The final rule

continues this requirement and defines a SHC as a mutual holding

company for purposes of section 10(o) of the Home Owners' Loan Act

(HOLA). As a MHC, the SHC is subject to the exclusive jurisdiction of

OTS. OTS consistently has interpreted section 10(o) and its legislative

history as demonstrating Congress' intent that section 10(o) expressly

preempts state law with regard to the creation and regulation of

MHCs.3

---------------------------------------------------------------------------

\3\ See 58 FR 44105, 44106-44107 (August 13, 1993) (discussion

of OTS' exclusive authority to charter and regulate MHCs).

---------------------------------------------------------------------------

Two commenters questioned whether OTS has the statutory authority

to charter SHCs. OTS believes that it has authority under section 10(o)

to charter SHCs. Section 10(o)(10)(A) of HOLA defines a mutual holding

company as ``a corporation organized as a holding company under

[section 10(o) of HOLA].'' Given this broad definition, coupled with

the explicit statutory revisions and legislative history expressing

Congress' intent that OTS have exclusive authority to charter and

regulate MHCs, OTS believes there is a clear statutory basis for OTS to

charter a SHC as a mutual holding company.

As indicated in the preamble to the final rule adopting 12 CFR Part

575 in 1993, the mutual holding company provisions were amended by the

Financial Institutions Reform, Recovery, And Enforcement Act of 1989,

Public L. 101-73, 103 Stat. 183 (1989), to expressly provide that

mutual holding companies would be chartered and subject to regulations

prescribed by the

[[Page 11362]]

Director of OTS.4 The explanatory statement offered at the

mark-up of the legislation stated that the amendments ``would provide a

clear regulatory framework for MHCs, and unquestionable regulatory

authority to the [OTS] by providing that MHCs will be chartered by the

[Director of OTS] and subject to OTS regulation.'' 5 OTS

believes that Congress has set forth a detailed statutory scheme that

addresses virtually all of the material aspects of the establishment

and corporate governance of a mutual holding company. Thus, it follows

that Congress intended for OTS to occupy the field of mutual holding

company regulation for savings associations and that requiring SHCs to

be federally chartered is consistent with both the statute and

Congressional intent.

---------------------------------------------------------------------------

\4\ Id. Under the original MHC provisions adopted as part of the

Competitive Equality Banking Act of 1987, it was unclear whether

MHCs would be federally chartered or state-chartered entities.

\5\ Id. at 44106.

---------------------------------------------------------------------------

Moreover, MHC structures are fundamentally different from

traditional savings and loan and bank holding companies. Because of

their unique hybrid structure--part mutual, part stock--OTS has

attempted to ensure that the interests of the mutual members are not

diminished or exploited in connection with the formation and operation

of the MHC. OTS has been mindful that many MHCs do eventually convert

to full stock form under OTS' mutual to stock conversion regulations.

Thus, unlike a traditional state-chartered savings and loan holding

company, a MHC is the corporate repository of the mutual members'

economic and legal interests. OTS' policy has always been that a MHC

and its subsidiaries may not take any action that would violate the

substantive provisions and policies of the mutual to stock conversion

regulations. Treating a SHC as a traditional state-chartered savings

and loan holding company would substantially reduce OTS' ability to

effectively protect the rights of the mutual members and ensure

consistent treatment under the mutual to stock conversion regulations

for members of MHCs and members of mutual savings associations that do

not form MHCs.

The MHC statute clearly contemplates that the reorganizing savings

association will be a directly owned subsidiary of a federally

chartered mutual holding company. To permit a state-chartered

corporation to control the reorganizing savings association is

inconsistent with OTS' occupation of the field of MHC regulation, would

diminish OTS' ability to regulate the corporate governance provisions

of the intermediate holding company, and create potential conflicts

between federal and state regulation. One commenter suggested that OTS

could deal with any issues concerning corporate governance provisions

by imposing conditions in connection with the approval of the

application. OTS questions whether this proposed solution is viable.

OTS believes that requiring a federal charter for a SHC is the best

means of ensuring consistent and non-conflicting corporate governance

provisions for the MHC, the SHC and their savings association

subsidiary. This, in turn, would ensure that OTS has adequate authority

to protect and balance the interests of all the parties involved in a

MHC reorganization.

Requiring SHCs to be federally chartered is also consistent with

the statutory requirement under section 10(o)(9) that authorizes the

appointment of a trustee as receiver for a MHC that is in default or

that has a savings association subsidiary that is in default. Under

section 10(o)(9), a trustee has the authority to liquidate the assets

of the MHC (and satisfy any liabilities) and distribute the net

proceeds to the owners of the MHC or the Federal Deposit Insurance

Corporation (``FDIC'') to the extent that the FDIC has suffered any

loss as insurer of the savings association subsidiary. By requiring

that the SHC be treated as a MHC and be federally chartered, OTS will

have clear authority to seek the appointment of a trustee as receiver

of a SHC whenever the parent MHC or its SHC or savings association

subsidiary is in default. This will ensure that the receiver of the MHC

has the maximum flexibility to liquidate the assets of the SHC to

ensure that any losses to the FDIC as insurer are minimized.

One commenter argued that section 10(o)(4)(A) of HOLA is

inconsistent with the idea that the SHC could be defined as a MHC under

the statute. Section 10(o)(4)(A) provides that ``[p]ersons having

ownership rights in the mutual association * * * shall have the same

ownership rights with respect to the mutual holding company.'' OTS does

not agree that this section is inconsistent with the proposal to

authorize a federal charter for SHCs. Under the final rule, a SHC must

always be controlled by a parent MHC. The members' interest referenced

by section 10(o)(4)(A) will reside directly with the parent MHC. As the

parent MHC is required to maintain a majority ownership interest in the

SHC, the members will also indirectly maintain the same ownership

rights in the SHC that they had in the mutual association. OTS believes

that having the SHC directly controlled by the parent MHC is consistent

with the language and intent of section 10(o)(4)(A) when viewed in the

context of the entire statute. OTS also believes the addition of

another holding company in the structure does not diminish the interest

of the mutual associations' members.

One commenter stated that requiring SHCs to be federally chartered

would create problems because of the lack of any developed body of

corporate law for SHCs. As indicated in the proposal, OTS will follow

the charter, bylaw, and corporate governance provisions that are

currently applicable to federal stock savings associations. The

corporate governance structure for federal savings associations has

been in place over twenty years and the industry and industry counsel

are familiar with this system. OTS believes that utilizing the existing

corporate governance structure for federal savings associations as a

model for SHCs will minimize the burden on SHCs because the existing

structure is familiar.

B. Stock Holding Company Powers

Several commenters were in favor of granting unitary savings and

loan holding company status to SHCs. They 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. As indicated in the NPR, OTS believes that it is

not appropriate to treat SHCs as unitary savings and loan holding

companies under the mutual holding company statute. Congress chose to

limit the activities of MHCs to those permitted for multiple savings

and loan holding companies and bank holding companies when it

authorized MHCs as part of the Competitive Equality Banking Act of 1987

(CEBA). Although the legislative history of CEBA does not indicate why,

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 the activities of MHCs

to those more closely related to banking.

OTS believes that limiting the activities of a SHC to those

permitted to the parent MHC is consistent with the statute. Therefore,

the final rule does not authorize SHCs to engage in activities beyond

those specified in section 10(o)(5) of the statute. OTS notes, however,

that a SHC may utilize its authority under section 10(o)(5) and 12 CFR

575.10(a)(6) to acquire subsidiaries engaged in (i) any activity

authorized under 12 CFR Part 559 or (ii)

[[Page 11363]]

activities approved for service corporations of state-chartered savings

associations in the state where the SHC's savings association

subsidiary has its home office.

C. Regulatory Restrictions on Stock Pledges, Dividend Waivers,

Indemnification and Employment Contracts

The final rule adopts the provisions set forth in the NPR governing

stock pledges, dividend waivers, indemnification, and employment

contracts without any changes. Similar to the response to the ANPR,

several commenters argued that it was unnecessary and inappropriate to

impose the same restrictions on SHCs that currently apply to MHCs and

their savings association subsidiaries. Several commenters, however,

supported the rule as proposed. OTS, for the reasons stated in the NPR

and discussed below, does not find the arguments of the commenters

opposed to the proposed rule persuasive. As noted in the preamble to

the NPR, OTS' intent is to increase the flexibility of the MHC

structure without diminishing the safeguards Congress imposed in

adopting the statute.

With respect to stock pledges, section 10(o)(8) requires that the

pledging of a savings association's stock by its parent MHC increase

the capital of the savings association. OTS believes this restriction

should apply equally to both an MHC and an SHC. Applying this

restriction 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 FDIC-insured

savings association.

Regarding dividend waivers, one commenter stated that no

restrictions should apply to the SHC since it has no mutual members,

and its board of directors has no fiduciary duties to such mutual

members. OTS does not agree with this assertion. The same concerns that

are present when dividends are paid by a savings association subsidiary

to its minority stockholders but waived by the MHC are present when

dividends are paid to minority stockholders of an SHC and waived by the

parent MHC. In both cases, the board of directors of the MHC must

approve a waiver of the dividend payments, and their fiduciary

obligation is the same in each instance. It is important in either

instance that the value of the waived dividends be retained for the

benefit of the members of the MHC to prevent potential windfalls to the

minority shareholders in a subsequent conversion of the MHC.

One commenter suggested that the SHC be permitted to issue two

classes of voting stock with identical features except that one class

would not have the right to receive any dividend payments. Under this

scheme, the MHC would receive the class of shares without dividend

rights while minority shareholders would receive the dividend-paying

class. This proposal would have precisely the same impact as removing

the dividend waiver restrictions that protect the interests of the MHC

mutual members, a result that OTS rejects. If dividends could be paid

only to the minority shareholders this would divert the earnings of the

savings association to the minority shareholders at the expense of the

MHC. For example, if a savings association subsidiary had 40% of its

voting shares held by minority shareholders and earned a million

dollars, it would be able to pay out $1,000,000 to its minority

shareholders instead of the $400,000 permitted under the existing

rules. In effect, the $600,000 that would normally be attributable to

the parent MHC would be diverted to the minority stockholders.

The use of dual classes of stock is problematic for several

additional reasons. First, it would purport to relieve the MHC's board

of directors from its fiduciary obligation to determine that the

proposed dual stock structure of the SHC is consistent with the

interests of the mutual members of the MHC. Under current rules, the

board of directors of the MHC must make an express determination that a

waiver of dividends from the savings association subsidiary is

consistent with the board's fiduciary duties to the members of the MHC.

Use of the dual stock structure, in which the MHC would receive no

dividends, would allow the MHC board effectively to approve a blanket

dividend waiver without knowing the amounts that would be relinquished

by the MHC or what consequences might flow from the MHC's inability to

receive dividends in the future.

Dual classes of stock would also create an obvious conflict for the

MHC board members who were also minority shareholders of the SHC. These

board members would have substantial, personal economic incentives to

maximize the payment of dividends, notwithstanding the loss in value to

the majority stockholder, the MHC and the mutual members--to whom these

directors owe a fiduciary duty. The dual stock structure would also

permit the minority shareholders to argue that there should be no

dilution of their ownership interests in the event of a conversion of

the MHC since no dividend waivers would have occurred. OTS believes

that this would completely elevate form over economic substance and

grant an inappropriate windfall to the SHC's minority shareholders. For

these reasons, no change was made to final rule regarding the treatment

of waived dividends.

Another commenter argued that it was particularly inappropriate to

impose any restrictions relating to indemnification or employment

contracts on SHCs that are more stringent than those imposed on other

savings and loan holding companies. Since OTS believes SHCs should be

treated as MHCs for the reasons stated above, OTS has determined to

impose the same indemnification and employment contract restrictions on

SHCs that are currently imposed on MHCs. Thus, the final rule is

adopted without any changes to the indemnification or employment

contract provisions.

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

Commenters generally supported the proposed rule on the issue of

stock repurchases. Several commenters objected to OTS' interpretation

that restricts SHCs (or savings association subsidiaries under the

current rule) from issuing stock to complete a merger transaction

without first offering the stock to mutual members on a priority basis.

A commenter argued that it was inappropriate to continue to grant

mutual members priority subscription rights where the shares were being

issued in a stock-for-stock merger transaction. Commenters suggested

that OTS should consider other factors, including management obtaining

a fairness opinion, the value of the company being acquired, and

whether the shares of the SHC are actively traded on NASDAQ or a stock

exchange in determining whether to permit stock-for-stock mergers

without priority subscription rights.

While OTS recognizes that there are reasonable arguments in favor

of changing the current policy, OTS still believes that, on balance,

mutual members should be granted a first priority subscription right

for stock issued by a savings association subsidiary or an SHC. As

stated in the NPR, OTS is aware that this may result in MHCs having

less flexibility than a traditional savings and loan holding company.

This is consistent with the fact that the MHC structure is a unique

hybrid corporate structure, part mutual and part stock, that has both

advantages and disadvantages. OTS also notes that this issue is not

unique to SHCs. OTS'

[[Page 11364]]

interpretation of 12 CFR 575.7 on stock issuances also applies to

issuances of stock by savings association subsidiaries that are not

owned by an SHC.

For this reason and the other reasons cited above, OTS generally

will continue to require that mutual members be granted a first

priority subscription interest for stock issued by savings associations

and SHCs. OTS notes, however, that Section 575.7(d)(6) currently

provides that OTS may permit a non-conforming stock issuance where the

applicant demonstrates that it would be more beneficial to the issuing

savings association. Under this provision, the OTS believes that

properly structured merger transactions that do not grant priority

subscription rights may qualify for approval and OTS is willing to

consider and approve such transactions on a case-by-case basis.

Most commenters generally supported permitting SHCs to engage in

stock repurchases on the same basis as a savings association subsidiary

of a MHC. The final rule provides that SHCs may not engage in stock

repurchases during the three year period following issuance of the

stock without the prior approval of OTS. This will permit OTS to

evaluate the purpose and reasons for the stock repurchases on a case-

by-case basis. OTS does not anticipate that it will permit repurchases

in amounts greater than those that have generally been permitted under

the mutual to stock conversion regulations.6

---------------------------------------------------------------------------

\6\ See 12 CFR 563b.3(g) (1997).

---------------------------------------------------------------------------

One commenter requested that OTS clarify that it would not impose

stricter standards in reviewing stock repurchases by SHCs and savings

association subsidiaries of MHCs than those imposed on savings

associations converted under 12 CFR Part 563b. Another commenter

requested that OTS revise 12 CFR 575.11(c) to add the additional safe-

harbor purchases allowed under the mutual to stock conversion

regulations.7 OTS does not believe that it is necessary or

appropriate to include these safe-harbor provisions for SHCs for the

reasons discussed below. OTS also does not believe that it should

impose a rigid or inflexible standard on stock repurchases by

subsidiaries of MHCs.

---------------------------------------------------------------------------

\7\ See 12 CFR 563b.3(g) (1997).

---------------------------------------------------------------------------

MHCs, unlike a savings association undertaking a traditional mutual

to stock conversion, have control over the amount of capital raised in

a stock offering. Thus, MHCs should not be subject to the same

pressures of finding appropriate investments for the new capital as

fully converted savings associations. Since management has more control

over the amount of capital raised by a MHC, OTS will consider this fact

when reviewing requests for stock repurchases that occur during the

three years following the issuance of the stock. Each request, however,

will be reviewed on a case-by-case basis and a decision to grant or

deny the request will be based upon all of the relevant facts presented

in the request. OTS also notes that after the initial three-year period

following issuance of the stock by a SHC, a SHC may engage in stock

repurchases subject only to the restrictions that are applicable to

savings associations generally.8

---------------------------------------------------------------------------

\8\ See 12 CFR 563.134 (1997).

---------------------------------------------------------------------------

Upon further consideration of stock repurchase issues, OTS is

revising 12 CFR 575.11(c) as proposed to restrict the ability of SHCs

to engage in open-market repurchases during the three-year period

following the issuance of the stock to fund employee stock benefit

plans without obtaining the prior approval of OTS. Because of the

potential amounts that may be involved in funding employee stock

benefit plans (10% for stock option plans, 4% for management

recognition plans, 8% for employee stock option plans, plus any amounts

for other tax-qualified or non-tax-qualified plans), and OTS' desire to

more closely monitor repurchases by a SHC that occur shortly after a

stock issuance, the final rule eliminates this safe-harbor provision.

This will also ensure that the stock repurchase provisions affecting

employee stock benefit plans for SHCs are consistent with the

provisions for converted savings associations under 12 CFR part 563b.

In the NPR, OTS stated its intention to permit SHCs that are formed

subsequent to the initial MHC reorganization and stock issuance to

``tack on'' or include the period that the shares issued by the savings

association were outstanding in calculating the three-year period that

stock repurchases are restricted. All of the comments on this issue

were favorable. One commenter requested that OTS make the ``tacking''

period an explicit part of section 575.11(c). OTS reiterates its

intention to permit SHCs that are formed after an initial MHC

reorganization to include the period that any minority shares of the

savings association were outstanding in determining the applicability

of the three-year repurchase restriction under 12 CFR 575.11(c) and the

final rule has been revised to reflect this policy.

IV. Paperwork Reduction Act of 1995

The reporting and recordkeeping requirements contained in this

final rule have been submitted to and approved by the Office of

Management and Budget in accordance with the Paperwork Reduction Act of

1995 (44 U.S.C. 3507(d)) under OMB Control No. 1550-0072. Comments on

all aspects of this information collection should be sent to the Office

of Management and Budget, Paperwork Reduction Project (1550),

Washington, D.C. 20503 with copies to OTS, 1700 G Street, NW.,

Washington, DC 20552.

The reporting/recordkeeping requirements contained in this final

rule are found at 12 CFR part 575. The information is needed by 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.

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.

Respondents/recordkeepers are not required to respond to this

collection of information unless the collection displays a currently

valid OMB control number. The valid control number assigned to the

collection of information in this final rule is displayed at 12 CFR

506.1(b).

V. 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.

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 impact on a

substantial number of small entities. The final rule 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

[[Page 11365]]

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.

VIII. Effective Date

Section 553(d) of the Administrative Procedure Act generally

requires an agency to publish a substantive rule at least 30 days

before its effective date. Section 553(d) of the APA permits waiver of

the 30-day delayed effective date requirement for, inter alia, good

cause or where a rule relieves a restriction. Under the current rule,

MHCs are not permitted to form SHCs. Waiver of the 30-day delayed

effective date would relieve this restriction and permit MHCs to

utilize this structure immediately upon the effective date. For this

reason, OTS finds that the 30-day delayed effective date may be waived.

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 amends 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, submitted pursuant

to Sec. 575.7 and containing the information required by Sec. 575.8,

providing for the issuance of stock by:

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

or

(2) A subsidiary holding company.

* * * * *

(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 and addition 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 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

[[Page 11366]]

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 (which may include the time period the shares issued

by the savings association were outstanding if the subsidiary holding

company was formed after the initial issuance by the savings

association), 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 savings association (but

not of a 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 (b)(1)(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 stock 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 shareholders, except as

[[Page 11367]]

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: March 3, 1998.

By the Office of Thrift Supervision.

Ellen Seidman,

Director.

[FR Doc. 98-5896 Filed 3-6-98; 8:45 am]

BILLING CODE 6720-01-P