The FDIC Board of Directors today decided to seek public comment on
two separate approaches to preventing unfair or unsafe conversions
of mutual institutions to stock form of ownership. One is a
proposed regulation, for intended use in the near future, that
would impose new requirements on state-chartered savings banks
planning to convert to stock ownership. The other is a longer-term
request for comments on whether and how the conversion process
should be redesigned, either by the regulators or by Congress.The
FDIC has taken a number of steps in recent months to address
concerns about "insider" abuse and other troublesome aspects of
conversions.
In February, the FDIC issued an interim rule requiring
state-chartered savings banks to give the FDIC advance notice of
conversion plans and the opportunity to object to a transaction.The
new proposed rule generally would require FDIC-supervised,
state-chartered mutual savings banks -- of which there are about
600 -- to comply with new standards and limitations if they plan to
convert to stock form. It would closely track revised rules issued
on May 3rd by the Office of Thrift Supervision for conversions of
federally chartered savings and loan associations.
Included in the FDIC proposal are provisions that would require a
state savings bank proposing to convert to stock form to:
- Submit to the FDIC a detailed, independent appraisal of the
institution's market value, including a "peer group" analysis and
a projection of future earnings. This would help prevent bank
"insiders from benefitting from an unrealistically low stock
offering price.
- Have the depositors vote in foavor of the porposed conversion
before the conversion change could take place, even it a vote is
not required by state law. Also, an institution's management could
not use proxies obtained from depositors when they open an account
(so-called "running proxies") to vote in favor of a proposed
conversion.
- Follow strict limitations on the price and timing of stock
options and stock benefit plans given to the management. These
restrictions are intended to prevent actual or apparent conflicts
of interest in management's decision to convert from mutual to
stock form.
Other proposed restrictions are aimed at preventing windfall
profits for either "professional depositors" (those who place small
amounts in accounts at mutual institutions around the country in
anticipation of favorable stock prices if an institution converts)
or for employee stock ownership plans (ESOPs), at the expense of
long-term depositors.
Comments on the proposed rule will be accepted for 30 days after it
appears in the Federal Register.
The second action taken today is a request for comments on how to
deal with fundamental flaws in the conversion process that have
become apparent now because of the healthy state of mutual savings
institutions. "The basic issue is the proper and equitable
transfer of the pre-conversion value of converting mutual banks and
thrifts," FDIC Chairman Andrew C. Hove, Jr., said today. "Is that
value currently going to the right parties? To whom and how should
that value be transferred? Who should make these determinations?
Those, among others, are the difficult questions addressed."
Comments are due 60 days after the notice appears in the Federal
Register.
