Federal Savings Association Bylaws; Integrity of Directors, 7695-7698 [E6-2003]

Agencies

• DEPARTMENT OF THE TREASURY
• Office of Thrift Supervision
• Thrift Supervision Office

[Federal Register Volume 71, Number 30 (Tuesday, February 14, 2006)]
[Proposed Rules]
[Pages 7695-7698]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-2003]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 71, No. 30 / Tuesday, February 14, 2006 / 
Proposed Rules

[[Page 7695]]



DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 544 and 552

[No. 2006-05]
RIN 1550-AC00


Federal Savings Association Bylaws; Integrity of Directors

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 change 
its regulations concerning corporate governance to add a preapproved 
bylaw that federally chartered savings associations and mutual holding 
companies (collectively, federal savings associations) may adopt. The 
bylaw would preclude persons who, among other things, are under 
indictment for or have been convicted of certain crimes involving 
dishonesty or breach of trust, or have been subject to certain cease 
and desist orders entered by any of the banking agencies, from being 
members of the federal savings association's Board of Directors. The 
proposal would also permit federal savings associations to adopt bylaws 
that bar such persons from nominating individuals for membership on the 
federal savings association's Board of Directors. The proposal is 
intended to permit federal savings associations to protect their 
businesses from the adverse effects that are likely to result when the 
reputation of their board members is not conducive to maintaining the 
public's trust.

DATES: Your comments must be received by April 17, 2006.

ADDRESSES: You may submit comments, identified by No. 2006-05, by any 
of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: regs.comments@ots.treas.gov. Please include No. 
2006-05 in the subject line of the message, and include your name and 
telephone number in the message.
     Fax: (202) 906-6518.
     Mail: Regulation Comments, Chief Counsel's Office, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention: No. 2006-05.
     Hand Delivery/Courier: Guard's Desk, East Lobby Entrance, 
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: 
Regulation Comments, Chief Counsel's Office, Attention: No. 2006-05.
    Instructions: All submissions received must include the agency name 
and docket number or Regulatory Information Number (RIN) for this 
rulemaking. All comments received will be posted without change to the 
OTS Internet site at https://www.ots.treas.gov/
pagehtml.cfm?catNumber=67&an=1, including any personal information 
provided.
    Docket: For access to the docket to read background documents or 
comments received, go to https://www.ots.treas.gov/
pagehtml.cfm?catNumber=67&an=1. In addition, you may inspect comments 
at the Public Reading Room, 1700 G Street, NW., by appointment. To make 
an appointment for access, call (202) 906-5922, send an e-mail to 
public.info@ots.treas.gov, or send a facsimile transmission to (202) 
906-7755. (Prior notice identifying the materials you will be 
requesting will assist us in serving you.) We schedule appointments on 
business days between 10 a.m. and 4 p.m. In most cases, appointments 
will be available the next business day following the date we receive a 
request.

FOR FURTHER INFORMATION CONTACT: Aaron B. Kahn, Assistant Chief 
Counsel, Business Transactions Division, (202) 906-6263; or Donald W. 
Dwyer, Director, Applications, Examinations and Supervision--
Operations, (202) 906-6414, Office of Thrift Supervision, 1700 G 
Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. General

    Congress has repeatedly emphasized the importance of ensuring that 
the people who control savings associations have the requisite 
character and integrity. When it created the federal savings and loan 
regulatory system, Congress directed the federal regulatory agency to 
adopt the best practices then existing in the savings and loan 
industry. One such practice was ensuring that directors of savings 
associations were persons of good judgment and character who had the 
respect and confidence of the community served by their respective 
institution. See Joseph H. Sundheim, Law of Building and Loan 
Associations, Sec.  71 (3d ed. 1933).
    In 1966, Congress also addressed the integrity of management of 
savings associations. At that time Congress gave the banking agencies 
authority to prevent individuals who had engaged in certain conduct 
from being affiliated with insured depository institutions, including 
savings associations.\1\ In the 1966 legislation, Congress found 
certain conduct so egregious that it authorized the regulatory agencies 
to debar perpetrators from the industry, but Congress did not determine 
whether everyone else was qualified to sit on the boards of savings 
associations or whether individual savings associations could establish 
minimum requirements for service as a director that might prevent other 
persons from sitting on their respective boards of directors.
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    \1\ See Financial Institutions Supervisory Act of 1966 (FISA), 
Pub. L. 89-695, 80 Stat. 1028, 1030-32, 1039-40, 1049-50. Among 
other things, FISA amended section 8 of the Federal Deposit 
Insurance Act (FDIA), 12 U.S.C. 1818, to provide for the removal and 
prohibition of persons a banking agency finds to have committed 
certain acts involving personal dishonesty or willful or continuing 
disregard for the safety or soundness of an insured depository 
institution and has either received financial gain, injured the 
institution or prejudiced the interests of its depositors. 
Similarly, section 19 of the FDIA, 12 U.S.C. 1829, prohibits persons 
who have been convicted of any criminal offense involving dishonesty 
or a breach of trust from controlling or participating in the 
conduct of the affairs of any insured depository institutions 
without the prior consent of the Federal Deposit Insurance 
Corporation.
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    In addition, Congress' attention to the management of savings 
associations is evident in, among other acts: (i) The Change in Bank 
Control Act, which allows the applicable federal banking agency to 
disapprove a proposed acquisition if, among other things, the 
competence, experience, and integrity of any of the acquiror's proposed 
management personnel might jeopardize the financial stability of the 
institution or prejudice the interests of the

[[Page 7696]]

depositors of the institution; \2\ and (ii) the holding company 
acquisition provisions of the Home Owners' Loan Act, which require OTS 
to consider the competence, experience, and integrity of directors of 
an acquiror and the savings associations involved in connection with 
agency review of managerial resources.\3\
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    \2\ 12 U.S.C. 1817(j)(7)(D).
    \3\ 12 U.S.C. 1467a(e)(1)(B), (e)(2).
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    Congress again recognized the need to ensure integrity in the 
banking industry when it enacted the Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989 (FIRREA), Pub. L. 101-73, 103 
Stat. 183. In FIRREA, Congress required certain financial institutions 
to provide prior notice to their federal regulator of any new board 
members and authorized the regulator to disapprove a board member if he 
or she lacked the requisite character or integrity to advance the 
interests of the depositors of the institution.\4\
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    \4\ Section 914 of FIRREA (12 U.S.C. 1831i) provides for a 
banking agency to disapprove a proposed director ``if the 
competence, experience, character, or integrity of the [proposed 
director] indicates that it would not be in the best interests of 
the depositors of the depository institution or in the best 
interests of the public to permit the individual to be [so] 
employed. * * *'' In 1996, Congress changed the categories of 
institutions subject to this requirement. See Section 2209 of the 
Economic Growth and Regulatory Paperwork Reduction Act, Pub. L. 104-
208, 110 Stat. 3009-409.
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    On March 15, 2001, OTS published a rule amending its corporate 
governance rules for federally chartered savings associations to create 
a class of preapproved optional bylaw provisions that those savings 
associations could adopt without prior OTS review. 66 FR 15017. In 
addition, OTS promulgated a preapproved optional bylaw dealing with the 
qualifications of directors. The bylaw was intended to make it easier 
for federal savings associations to protect their businesses from the 
adverse effects that are likely to result when the reputation of its 
board members does not maintain the public's trust.
    Recently, a number of federal savings associations have requested 
permission to adopt bylaws similar to the preapproved bylaw but also 
containing additional restrictions. On March 17, 2005, OTS approved an 
application by a federal savings association to adopt a bylaw amendment 
containing additional restrictions (OTS Order No. 2005-13). Rather than 
continue to deal with each request individually, OTS has determined to 
reconsider the optional bylaw and determine if changes are warranted. 
Proceeding by rulemaking will afford an opportunity for those 
interested in submitting comments to do so and for OTS to consider such 
comments.\5\
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    \5\ If OTS adopts the current proposal, the preapproved optional 
bylaw adopted in 2001 will be deleted.
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    The proposed bylaw provisions focus particularly on actions against 
an individual predicated on serious dishonesty, breach of fiduciary 
duty, or willful violation of financial regulatory law. Under the 
proposed preapproved bylaw provisions, a person would not be qualified 
if the person: (i) Is under indictment for, or has been convicted of, a 
criminal offense involving dishonesty or breach of trust and the 
penalty for the offense could be imprisonment for more than one year; 
(ii) has been subject to a banking agency final cease and desist order 
for conduct involving dishonesty or breach of trust; or (iii) has been 
found, either by a regulatory agency whose decision is final and not 
subject to appeal or by a court, to have breached a fiduciary duty 
under circumstances involving personal profit; committed a willful 
violation of any law, rule, or regulation governing banking, 
securities, commodities, or insurance; or committed a willful violation 
of a final cease and desist order issued by a banking, securities, 
commodities, or insurance regulatory agency.
    The preapproved optional bylaw that OTS adopted in 2001 differs 
from the terms of the preapproved optional bylaw provisions now being 
proposed by OTS in certain respects. First, while both bylaw provisions 
would disqualify someone who has been subject to a banking agency cease 
and desist order because the person was found to have engaged in 
conduct involving dishonesty or breach of trust and that order is final 
and not subject to appeal, the bylaws do not contain the same 
disqualification time periods. The existing preapproved optional bylaw 
provides for a ten-year period of disqualification. In the proposed 
optional bylaw provisions, the period of disqualification is 
indefinite. However, under the proposed preapproved bylaw provisions, 
OTS would consider any specific time period of disqualification chosen 
by an adopting institution or holding company to also be preapproved.
    Second, the existing preapproved optional bylaw does not foreclose 
a disqualified person from nominating other persons to serve on the 
board. In contrast, the proposed optional bylaw provisions allow a 
bylaw to prohibit a person who is disqualified from serving as a 
director from nominating others to serve as directors. However, 
otherwise qualified persons who are nominated by someone who is not 
disqualified would not be prohibited from serving merely because a 
disqualified person also nominated them. Finally, in order to make the 
nomination provision effective, the proposed optional bylaw provision 
allows an institution to preclude entities owned or controlled by an 
ineligible person from using their share ownership to nominate 
directors.
    If OTS adopts the proposal, a federal savings association could 
adopt a bylaw containing either some or all of the preapproved bylaw 
provisions and could limit the period for the restrictions contained in 
the proposed bylaw to whatever period the institution deemed 
appropriate. However, federal savings associations that wish to adopt a 
bylaw containing additional director qualifications beyond those in the 
preapproved bylaw provisions would continue to be required to obtain 
prior approval from OTS.
    The proposed regulation does not bar anyone from the industry. 
Rather, like the existing preapproved bylaw, it permits individual 
federal savings associations to voluntarily adopt bylaws that set 
qualifications for board membership only for their respective 
institutions. Federal savings associations that adopt the preapproved 
bylaw provisions or less restrictive provisions would not have to 
provide prior notice to OTS, but would have to file notice of the 
adoption of the bylaw within 30 days after adopting the bylaw.
    OTS believes that the proposed regulation would enhance the ability 
of federal savings associations to assure themselves that persons who 
are subject to adverse actions concerning their fiduciary integrity or 
compliance with financial regulatory laws do not become board members 
or obtain board membership for their representatives. The proposed 
provisions, like the existing preapproved bylaw provisions, permit the 
setting of standards for the integrity of prospective board members and 
are derived in part from the existing standards contained in Sec.  
563.39(b)(1) for terminating savings association officers for cause. 
Because that provision deals with the integrity of officials who are 
supervised by the board of directors, it appears reasonable to hold the 
board members to at least a comparable standard of integrity.
    It is important that the directors of savings associations be 
persons of good character and integrity. They oversee management and 
have the ultimate responsibility for the operations of the savings 
association. In addition, directors of savings associations commonly 
assist their institutions in attracting and retaining business. Their

[[Page 7697]]

reputations in the community or communities served by the savings 
association reflect on the institution and affect their ability to help 
the institution attract and retain business. People need to be able to 
trust the institution that holds their money. Moreover, people may be 
wary of contracting with an institution that they do not trust. Thus, a 
director who has an exemplary reputation may be a valuable asset to the 
association. Conversely, a director whose reputation is tainted, for 
example because a court has found he or she personally profited from a 
breach of his or her fiduciary duties, may injure an institution simply 
by being a member of the board. The proposed regulation enhances the 
ability of federal savings associations to limit board membership to 
persons of good character and integrity.
    In addition, OTS is concerned that an institution may suffer 
reputational risk if the representatives of a disreputable person are 
elected to the institution's board of directors. It is reasonable to 
assume that when such a person seeks to have others elected to a board 
of directors, that person has chosen nominees who he or she believes 
will pursue the same objectives as their sponsor. Thus, their election 
may well engender the same reaction from the public as would the 
election of their sponsor, the disreputable person. Given these 
concerns, OTS proposes to permit federal savings associations to 
prohibit disqualified persons from nominating others for positions on 
the board of directors.
    Also, to prevent evasion of that prohibition, OTS proposes to 
permit federal savings associations to prohibit nominations from 
entities that are owned or controlled by disqualified persons. For 
example, under the proposed preapproved bylaw, a trust that holds 
shares could be prohibited from nominating someone to be a director if 
the trustee or principal beneficiary of the trust was disqualified 
under the preapproved bylaw.
    However, persons should not be kept off boards of directors if they 
are not merely representatives of a disqualified person. Therefore, the 
proposed preapproved bylaw does not prohibit a person's service if that 
person is nominated by more than one shareholder and at least one of 
the nominating shareholders is someone who the proposed bylaw would not 
prohibit from serving as a director.
    When OTS adopted the existing preapproved bylaw it noted that a 
trade association had commented that such bylaw should not be expanded 
to prevent ineligible persons from nominating otherwise eligible 
candidates for director positions. The trade association reasoned that 
the focus of the bylaw should be that directors themselves be 
individuals of integrity. At that time, OTS stated that, ``[i]n the 
absence of any reasoned support for a broader provision, OTS will not 
expand the wording of the preapproved bylaw to encompass nominees of 
persons covered by the terms of the bylaw.'' 66 FR 15019 (Mar. 15, 
2001). OTS agrees that the primary focus should be on the integrity of 
the individual directors. However, as discussed above, it appears to 
OTS that there is reasoned support for the broader provision. Moreover, 
OTS would not require institutions to adopt the nominee provision to 
obtain the benefit of having the bylaw preapproved. Thus, an 
institution that adopted a bylaw that was essentially the same as the 
proposed preapproved bylaw except that it did not include the nominee 
clause would still be able to make the bylaw effective by simply 
notifying OTS of the bylaw's adoption. In OTS's view, individual 
federal savings associations should, in the first instance, make the 
judgment as to the extent of reputational risk presented by permitting 
nominees of disqualified persons to serve on the institution's board of 
directors.

II. Request for Comments

A. Solicitation of Comments on the Proposed Amendments

    OTS requests comment on all aspects of this proposal.
    In particular, OTS is interested in comments addressing the 
proposal to permit federal savings associations to disqualify 
individuals who have been subject to certain cease and desist orders 
indefinitely rather than for a maximum of ten years. Is this change 
beneficial?
    In addition, the proposed provision governing cease and desist 
orders is limited to orders issued by a banking agency. Should this 
provision be expanded to cover cease and desist orders issued by 
regulatory agencies with jurisdiction over other financial businesses? 
Should it cover regulatory agencies with jurisdiction over non-
financial businesses?
    OTS is also interested in receiving comments on the added provision 
barring disqualified persons from nominating individuals to serve on 
the board of directors. Is this provision desirable? Are OTS's concerns 
about reputational risks engendered by allowing disqualified persons to 
nominate others for the board of directors valid? Are there any 
disadvantages to permitting federal savings associations to adopt such 
a bylaw?
    OTS also solicits more general comments. The proposed bylaw is 
intended to reduce the risk of harm to the reputation of the adopting 
federal savings association. Are OTS's concerns about the reputational 
risks posed by persons who have engaged in dishonest conduct valid? Is 
the proposed optional bylaw an effective comprehensive means of 
reducing risk to reputation? Are there other methods or means of 
addressing that risk that are less restrictive?

B. Solicitation of Comments Regarding the Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act requires federal banking 
agencies to use ``plain language'' in all proposed and final rules 
published after January 1, 2000. OTS invites comments on how to make 
this proposed rule easier to understand. For example:
    (1) Have we organized the material to suit your needs? If not, how 
could the material be better organized?
    (2) Do we clearly state the parameters of the preapproved bylaw in 
the rule? If not, how could the rule be more clearly stated?
    (3) Does the rule contain technical language or jargon that is not 
clear? If so, what language requires clarification?
    (4) Would a different format make the rule easier to understand? If 
so, what changes to the format would make the rule easier to 
understand?

III. Regulatory Findings

A. Paperwork Reduction Act

    OTS has determined that this proposed rule does not involve any 
additional collection of information from that previously approved 
under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).

B. Executive Order 12866

    The Director of OTS has determined that this proposed rule does not 
constitute a ``significant regulatory action'' for purposes of 
Executive Order 12866. Because no savings association is required to 
take any action by this proposal and because any federal savings 
association could have requested permission to impose qualifications 
for membership on its Board of Directors comparable to those contained 
in the proposal, OTS has concluded that the proposal will not have 
significant effects on the thrift industry.

C. Regulatory Flexibility Act

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

[[Page 7698]]

that this proposal will not have a significant impact on a substantial 
number of small entities. The proposed preapproved bylaw reduces 
regulatory burden on federal savings associations, including small 
federal savings associations, by permitting them to adopt certain 
bylaws without providing prior notice to OTS. The rule does not require 
any savings association to modify its bylaws and all federal savings 
associations currently can request permission to adopt such bylaws, if 
they choose to do so. Accordingly, a regulatory flexibility analysis is 
not required.

D. Unfunded Mandates Reform Act Of 1995

    OTS has determined that this proposed rule will not result in 
expenditures by state, local and tribal governments, or by the private 
sector, of $100 million or more in any one year. Therefore, OTS has not 
prepared a budgetary impact statement or specifically addressed the 
regulatory alternatives considered. The proposal simply gives federal 
savings associations the option to adopt a bylaw without having to 
first request permission from OTS.

List of Subjects

12 CFR Part 544

    Reporting and recordkeeping requirements, Savings associations.

12 CFR Part 552

    Reporting and recordkeeping requirements, Savings associations. 
Securities.

Authority and Issuance

    For the reasons set out in the preamble, parts 544 and 552 of 
Chapter V of title 12 of the Code of Federal Regulations are proposed 
to be amended as follows:

PART 544--FEDERAL MUTUAL SAVINGS ASSOCIATIONS--CHARTER AND BYLAWS

    1. The authority citation for part 544 continues to read as 
follows:

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

    2. Amend Sec.  544.5 by adding a new paragraph (c)(1)(iv) to read 
as follows:


Sec.  544.5  Federal mutual savings association bylaws.

* * * * *
    (c) * * *
    (1) * * *
    (iv) For purposes of this paragraph (c), bylaw provisions that use 
the following language or provide less restrictive qualifications for 
directors or the ability to nominate directors than provided in the 
following language are effective upon adoption, provided such bylaws 
are filed with OTS within 30 days after adoption:

    A person is not qualified to serve as a director if he or she: 
1--is under indictment for, or has ever been convicted of, a 
criminal offense involving dishonesty or breach of trust and the 
penalty for such offense could be imprisonment for more than one 
year; 2--is a person against whom a banking agency has issued a 
cease and desist order for conduct involving dishonesty or breach of 
trust and that order is final and not subject to appeal; or 3--has 
been found either by a regulatory agency whose decision is final and 
not subject to appeal or by a court to have breached a fiduciary 
duty involving personal profit or committed a willful violation of 
any law, rule or regulation governing banking, securities, 
commodities or insurance, or any final cease and desist order issued 
by a banking, securities, commodities or insurance regulatory 
agency.
    A person who under this provision is not qualified to serve as a 
director, and any entity that is owned or controlled by such person, 
is not permitted to nominate anyone to serve as a director.

* * * * *

PART 552--FEDERAL STOCK ASSOCIATIONS--INCORPORATION, ORGANIZATION, 
AND CONVERSION

    3. The authority citation for part 552 continues to read as 
follows:

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

    4. Amend Sec.  552.5 by adding a new paragraph (b)(1)(iv) to read 
as follows:


Sec.  552.5  Bylaws.

* * * * *
    (b) * * *
    (1) * * *
    (iv) For purposes of this paragraph (b), bylaw provisions that use 
the following language or provide less restrictive qualifications for 
directors or the ability to nominate directors than provided in the 
following language are effective upon adoption provided, such bylaws 
are filed with OTS within 30 days after adoption:

    A person is not qualified to serve as a director if he or she: 
1--is under indictment for, or has ever been convicted of, a 
criminal offense involving dishonesty or breach of trust and the 
penalty for such offense could be imprisonment for more than one 
year; 2--is a person against whom a banking agency has issued a 
cease and desist order for conduct involving dishonesty or breach of 
trust and that order is final and not subject to appeal; or 3--has 
been found either by a regulatory agency whose decision is final and 
not subject to appeal or by a court to have breached a fiduciary 
duty involving personal profit or committed a willful violation of 
any law, rule or regulation governing banking, securities, 
commodities or insurance, or any final cease and desist order issued 
by a banking, securities, commodities or insurance regulatory 
agency.
    A person who under this provision is not qualified to serve as a 
director, and any entity that is owned or controlled by such person, 
is not permitted to nominate anyone to serve as a director.
* * * * *


    Dated: February 7, 2006.

    By the Office of Thrift Supervision.
John M. Reich,
Director.
 [FR Doc. E6-2003 Filed 2-13-06; 8:45 am]
BILLING CODE 6720-01-P