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QUESTION C

To what extent, if any, might the supervisory powers over depository institutions under existing law be extended to uncover criminal activities such as tax evasion, drug trafficking or money laundering, which could affect the safety and soundness of a financial institution?

ANSWER

Existing statutory authority to remove management officials is extremely exacting. In addition to proving a violation of law, rule or regulation or an unsafe or unsound practice, the agency must demonstrate, among other strict requirements, that the violation or unsound practice resulted in substantial financial loss to the institution or personal gain to the individual. Money laundering may be undertaken without loss of any kind to the financial institution involved and cooperative bank officials rarely have been found to have profited personally from their involvement. If violations of BSA were added to the grounds for the institution of removal proceedings against institution officials and employees, it is believed that a significant deterrent effect would result. 1/

While the agencies have broad power to examine and investigate for civil purposes, it is the Justice Department and IRS that have criminal investigative authority in the identified areas. It is recommended that any impediments to their conduct of such investigations be removed. We fully support the proposed amendments to the Right to Financial Privacy Act recommended by the Department of Justice to deal with one if these impediments, as discussed in more detail below.

1/ There is precedent for doing this. In 1982, all of the agencies' removal authority was amended to add violations of the Management Interlocks Act to the grounds for initiation of a removal action. This was done without linking such violations to the additional requirements of (1) substantial financial loss to the institution or personal gain to the individual and (2) personal dishonesty or a continuing or willful disregard for safety and soundness, which must accompany other violations of law before removal actions may be initiated.

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TITLES VI and VII

(Change in Bank Control Act and Change in Savings and Loan Control Act)

The Safe Banking Act of 1978 corrected, to a great extent, one of the most glaring gaps in the regulatory structure of our depository institutions, i.e., the lack of control over transfers of ownership of banks and savings and loans between individuals or groups of individuals However, in light of certain ongoing criminal activities, the Change in Bank Control Act may need to be amended.

QUESTIONS

A. What modifications, if any, do you feel are necessary to deny acquisitions of control to unqualified or dishonest individuals?

B. Should more specific standards regarding what constitutes sufficient integrity or criteria used to determine what would not be in the best interest of the depositors or the public, be included by statute or imposed by regulation?

C. Should the agency be given more time in which to disapprove an application for change of control (currently within 60 days, not to exceed 90 under certain circumstances)?

0.

E.

ANSWER

What is the standard used for the term "willful" under the Act? Does this definition create problems for the agency? If so, what are they?

What problems, if any, is the agency incurring in obtaining sufficient relevant information of foreign nationals seeking to acquire U.S. depository institutions?

Acquisitions of "control" of insured institutions are governed either by the Change in Savings and Loan Control Act (Control Act) or by the Savings and Loan Holding Company Act (Holding Company Act). The Holding Company Act prohibits any "company," directly or indirectly or acting in concert with one or more other persons, through one or more subsidiaries, or one or more transactions, from acquiring control of an insured institution without the prior written approval of the Bank Board. The Control Act applies to acquisitions of control that are not subject to the Holding Company Act. It prohibits any "person," acting directly or indirectly or through or in concert with one or more persons, from acquiring control of an insured institution through a purchase, assignment, transfer, pledge or other disposition of voting stock of an insured institution unless the Bank Board has been given sixty days' prior notice pursuant to a complete Control Act Notice, and within that time period has not objected to the acquisition or extended up to another thirty days the period for objection.

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Due primarily to the volume and complexity of the information submitted in Control act notices by prospective acquirors, it has been the Bank Board's experience that most, if not all, of the sixty-day statutory period is required for the Board to complete its careful review and analysis of the notices. In many cases, the Board must extend the time period for up to an additional thirty days, as permitted under the Control Act. In order to provide the Bank Board with sufficient time to review and process Control Act notices, the Board encourages the Subcommittee to consider an amendment to the Control Act to extend from sixty to ninety days the period for objection to an acquisition but to retain the current thirty-day provision for extension of the period for objection. The proposed amendment would be consistent with the Holding Company Act, which requires the Bank Board to render its decision on an acquisition within ninety days after submission of a complete application.

Both statutes employ expansive definitions of control. In the Control Act, the term connotes the power, directly or indirectly, to direct the management or policies of an insured institution. The Holding Company Act provides that the term includes control in any manner of the election of the majority of the directors of an insured institution. Control may also be found under the Holding Company Act if the Bank Board determines that a person, directly or indirectly, exercises a controlling influence over the management or policies of an insured institution. Finally, under either statute, control is conclusively determined to exist upon the acquisition of the power to vote more than 25 percent of the voting shares or securities of an insured institution. Both statutes specifically authorize the Bank Board to issue rules and regulations to carry out their purposes and prevent evasions of them. However, the Board has introduced to the Senate Committee on Banking, Housing and Urban Affairs a proposal to amend the term "control" under the Control Act to clarify the Board's authority to define by regulations that aspect of the term that connotes the power, directly or indirectly, to direct the management or policies of an insured institution. For a more detailed discussion of the scope of the two Acts, please to refer to pages 48686 - 48688 of the Bank Board's new Acquisitions of Control regulations, which are attached to this testimony as Exhibit 26 (50 Fed. Reg. 48686 (1985)).

The substantive criteria set forth in the statute to be used in considering applications under the Holding Company Act are broad and general and focus on whether the financial and managerial resources and future prospects of the acquiring company and the institution to be acquired would cause the acquisition to be detrimental to the institution or to the insurance risk of the FSLIC. In certain acquisitions involving more than one insured institution or where the acquiring company is already a savings and loan holding company, certain anticompetitive factors also must be considered. The Holding Company Act specifically prohibits the Bank Board from approving acquisitions that would have monopolistic results. Nor may the Board approve a proposed acquisition that would substantially lessen competition unless the

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anticompetitive effects of the transaction are clearly outweighed by a greater service to the convenience and needs of the community. Beyond the foregoing standards, however, consideration of applications under the Holding Company Act involves a significant exercise of judgment and discretion by the Bank Board.

In contrast to the Holding Company Act's approval process, the Control Act review function performed by the Bank Board is expressed in the statute in terms of a disapproval or non-disapproval of a notice filed pursuant to that Act. The Control Act provides that a proposed acquisition may be disapproved by the Bank Board on the following grounds:

1.

It would result in a monopoly or be in furtherance of any combination or conspiracy to monopolize the savings and loan business in any part of the country;

2. In any section of the country it would substantially lessen competition, tend to create a monopoly, or be in restraint of trade, and the anticompetitive effects are not clearly outweighed by any benefits in the public interest;

3. The financial condition of any acquiring person is such as might jeopardize the financial stability of the institution or prejudice the interests of the depositors;

4. The competence, experience, or integrity of any acquiring person or any of the proposed management personnel indicates that it would not be in the interests of the depositors or the public to permit such person to control the institution; or

5. Any acquiring person neglects, fails, or refuses to furnish all the information required.

Again, the Subcommittee may refer to Exhibit 26 at pages 48709 48711 and pages 48722 - 48723 of the Acquisitions of Control regulations for a more detailed discussion on these approval and non-disapproval criteria.

Through its experience in administering the Holding Company Act and Control Act, the Bank Board has encountered a variety of situations which have proved to be indicative that a potential acquiror may not meet the statutory tests. In an effort to facilitate the review process, the Board's new Acquisition of Control rules set forth certain "presumptive disqualifiers"-- types of legal proceedings or events, which, based on the Board's experience, are indicative that an acquiror may lack the qualifications to acquire control of an insured institution. These "presumptive disqualifiers" put potential acquirors on notice of the grounds upon which an application or notice may be disapproved unless adequately refuted by the acquiror.

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"Presumptive disqualifiers" are divided into two types: integrity-related factors and financial factors. In the former category, for example, a prospective acquiror would be presumptively disqualified from acquiring an insured institution if the acquiror had violated any depository institution laws or regulations, housing authority laws or regulations, securities laws or regulations; had sought to acquire a bank or a thrift and been denied permission to do so; controlled or managed a financial institution that failed, or filed false statements with the Bank Board in connection with an application or notice. These presumptive disqualifiers shift the burden to the prospective acquiror to rebut the presumptive disqualification and provide a more manageable procedure for the Bank Board to apply in considering questionable applications. The Subcommittee may refer to Exhibit 26 at pages 48710 - 48711 and pages 48722 - 48723 for additional information.

The Subcommittee has expressed interest in the Bank Board's recommendations concerning possible modifications to the criteria used to review a notice filed under the Control Act, particularly those relating to an acquiror's qualifications to control an insured institution. In this regard, the Board encourages the Subcommittee to consider in its pursuit of possible legislation regarding thrift institutions an amendment to the Control Act to clarify the Board's authority to define further by regulation the terms "competence, experience and integrity." As discussed above, the Bank Board has set forth with specificity in its recently adopted Acquisition of Control rules conduct it believes probative of an acquiror's lack of qualifications to satisfy the statutory standards.

Processing of applications and notices under the two Acts has undergone dramatic changes during the tenure of Chairman Gray In recognition of the importance of screening applicants to acquire control of insured institutions, the current Board, beginning in the fall of 1983, expanded inquiries and investigations in connection with Holding Company Act applications and Control Act notices, and initiated the project that resulted in the Board's new Acquisitions of Control regulations.

Beginning in the fall of 1983, Chairman Gray directed the Board's staff to initiate procedures to explore thoroughly the background and qualifications of prospective acquirors of insured institutions. Unfortunately, previous practice in many cases had been simply to review the application or notice filed by an applicant, rarely going beyond the information called for by the applicable form. Often little or no independent investigation was made of representations contained in a filing.

Chairman Gray believed at the time that this type of review was totally inadequate and unacceptable. He keenly recognized that the FSLIC would be adversely affected if dishonest or unqualified persons obtained control of