OTS Seeks Public Comment on Stock Benefit Plan Rule Changes

The OTS has issued a proposal to clarify the regulations for stock benefit plans in mutual to stock conversions and mutual holding company structures.  The proposal would clarify the current regulations and restrictions, reduce mutuals’ regulatory burden by reorganizing the applicable provisions, and make changes that would eliminate the need for mutual holding companies to seek a waiver of certain requirements.  The OTS states that the proposed changes are not intended to amend the agency’s policies related to the adoption of benefit plans. The OTS also states that there is confusion about some of the requirements. The goal of the proposal is to clarify the requirements and eliminate as much of the confusion as possible.

ACB is drafting a comment letter on the proposal.  Comments on the proposed rule are due to OTS on September 18, 2006. 

One of the more significant features of the proposal is the change in voting requirements for adopting benefit plans for mutual holding companies.  Currently, the OTS requires that a majority of the outstanding minority shares approve any option plan or any Management Recognition Plan (MRP), in addition to the requirement that a majority of all shares approve any option plan or MRP.  The OTS has routinely granted waivers of this requirement after a review of facts and circumstances for requests. The proposal would require a vote of the minority shares only during the first year after a minority stock issuance that was conducted in accordance with mutual to stock conversion subscription priorities. OTS proposes to require only approval (during the first year after a minority stock issuance) of the minority shares voting on the adoption of the plan, rather than a majority of the outstanding minority shares.  The preamble to the proposal indicates that the agency believes that the voting restrictions are "unduly burdensome."  

Recent actions by activist investors of minority stock issued by mutual holding companies has highlighted some of reasons that the OTS regulation must be as clear as possible.  In fact, Larry Seidman, a known activist investor, has already filed a comment letter strongly objecting to the OTS proposal.

Contact:  Patty Milon at [email protected]

ACB to Strongly Oppose NCUA Proposed Conversion Rules

On June 28, 2006, the National Credit Union Administration (NCUA) issued for public comment amendments to its rules regarding the conversion of insured credit unions to mutual savings banks or mutual savings associations. The proposed rule is the third conversion-related rulemaking the NCUA has undertaken in less than three years. The NCUA states that the proposed revisions will improve the information available to credit union members and credit union boards of directors regarding the merits of converting to a mutual savings institution.   

The proposed amendments would require a converting credit union to:

·        Provide advance notice to members that the credit union’s board of directors will consider adopting a conversion proposal.

·        Provide for a public comment process prior to the board’s vote on whether to pursue conversion and require the credit union to post the comments on its website.

·    Act as a distributor of information between credit union members. 

·        Require credit union board members voting in favor of conversion to certify that they believe the proposed conversion is in the best interest of credit union members.

·    Grant credit union members access to credit union books and records under the same terms and conditions as a state-chartered for-profit corporation in the state where the credit union is located.

·        Revise the disclosures that a converting credit union must give to its members.

The Credit Union Membership Access Act of 1998 (CUMAA) limits the NCUA’s authority to regulate conversions of insured credit unions to mutual savings banks or mutual savings associations.  The NCUA must establish charter conversion rules that are consistent with the rules promulgated by other financial institution regulators and are no more or no less restrictive than the rules applicable to charter conversions of other financial institutions.  Additionally, the agency has the authority to disapprove “the methods by which the member vote was taken or procedures applicable to the member vote.”

ACB believes that this proposal is the latest in a series of actions by the NCUA designed to prohibit credit unions from converting to mutual institutions.  ACB’s comment letter to the NCUA will state that the NCUA does not have the statutory authority to require converting credit unions to comply with the proposed requirements and that proposal exceeds the authority that the NCUA was granted in the CUMAA to monitor the methods and procedures of the membership vote on conversion.  Further, the proposal is inconsistent with the conversion regulations of the federal banking regulators.

ACB strongly supports the ability of depository institutions to choose the type of charter and regulatory structure under which they operate.  Disclosure of accurate and complete information is essential for the good corporate governance of all types of financial institutions and is particularly important when credit union members are preparing to vote whether to convert to a mutual savings bank.  However, the NCUA’s proposal does nothing to promote transparency and is not neutral, and is highly speculative regarding possible future acts of the resulting mutual institution. 

Contact: Krista Shonk at [email protected]

SEC, OTS Develop Guidance to Alert Mutual Depositors of Fraudulent Activities

Recent cases at the SEC serve as a reminder for mutual institutions that plan to issue stock that the conversion process could attract fraud.  Mutual conversion securities fraud cases involve similar facts: individuals or fraudsters who are not depositors of the mutual locate depositors that are willing to enter into an agreement that funds their stock purchases. The fraudsters are skilled at convincing the depositors that the arrangements are legal despite warnings on subscription materials and offering prospectuses that subscription rights are non-transferable by the depositors.  Depositors should be very much aware that by entering into agreements with others as part of a conversion, they might be violating securities, banking and criminal laws.  According to the SEC, depositor education is the key to combating fraud in mutual conversions. The SEC issued an Investor Alert in 2005 providing detailed information on what mutual depositors should be wary of when their bank converts to stock form. Also, the SEC has worked with the OTS to develop a document, “Guidance for Accountholders,” that must accompany subscription agreements sent in connection with an OTS-regulated mutual conversion. The guidance alerts mutual depositors to fraud in mutual-to-stock conversion and provides an e-mail and telephone contact number at the OTS.

The Securities and Exchange Commission recently partially settled civil fraud charges against four individuals in connection with the conversion of a state-chartered savings bank to a mutual holding company and its initial public offering of stock. A year earlier, as part of the same conversion, the SEC filed fraud charges against five other individuals involved in similar schemes.

In this case, bank depositors were approached by the defendants to purchase shares on defendants’ behalf with money that the defendants advanced for the purchase of stock. The defendants and the depositors shared profits from the sale of the stock.  One depositor received no profit on the arrangement.

The SEC’s complaints allege that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the SEC’s regulations.  The defendants disgorged the profits and prejudgment interest and face possible further civil litigation.          

According to senior SEC counsel, charges have not been filed against the depositors and they have not been required to turn over their profits from the fraudulent arrangements. The SEC warns, however, that they agency is carefully looking at all of the facts and circumstances surrounding possible fraud in mutual conversions.

 Contact: Sharon Haeger: [email protected]