Federal Register / Vol. 50. No. 228 Tuesday. November 26. 1985 / Rules and Regulations affirmatively intended to preserve that remedy Merrill Lynch. Pierce Fenner & Smith Inc. v. Curran, 456 US 353, 187-382 (1982). Further, the Board believes that certain types of actions may be brought by target institutions consistent with the underlying purposes of the legislative scheme of the Acts. The Board is aware that courts interpreting the Change in Bank Control Act and Bank Holding Company Act (which are substantially similar to the Control and Holding Company Acts, respectively) have rejected suits by target institutions because it was felt that statutes looked solely to the relevant federal agency to make the determinations of whether acquirors were qualified to obtain control under the applicable statutory cnteria. See Financial Corporation v. Dayco Corp, No CV 80-RVK, ship op. at 10 12 (C D. Cal. Sept. 26, 1980): see also Quaker City National Bank v. Hartley. 533 F. Supp. 125 (S.D. Ohio 1981) (interpreting Change in Bank Control and Bank Holding Company Acts). The Board does not disagree with such holdings, but believes it is important to distinguish the subject matter of the actions that may be brought by private litigants. The remedy sought is important in considering a private right of action exists. See, e.g.. Florida Commercial v. Culverhouse. supra. Where the Board has not taken a position that an application or notice is not required, private actions to enjoin an acquisition prior to an application or notice being filed and acted on by the Board, as distinct from an effort to second-guess the Board's judgment on the merits of whether a particular acquiror is qualified. would appear consistent with the congressional purpose of bringing a broad range of control acquisitions under the Board's scrutiny. If a target is not allowed injunctive relief, an acquiuror could circumvent the requirement of filing a notice or application before controlling purchases were made and thereby exercise control. thereby defeating the purpose of the Acts. The Board believes that the rules adopted today specify with sufficient clarity when the filing of an application or notice is required. and thus that in situations where the Board has not taken a position as to whether an application or notice, is required, the presentation by a target institution in private litigation of the issue of whether an application or notice should have been filed should not normally involve a court in highly subjective determinations where agency expertise is extremely valuable. By contrast, the Board's determination on the merits of a The Board received several comments The criteria with which the Board The substantive criteria used in 48709 focus of the Board's inquiry regerding As provided in the Holding Company B. Notice Review Criteria The procedures relating to the review of a notice submitted under the Control Act. now found at 12 CFR 563.18-2 (e)(3) (g). (h) and (i) (1985). are set forth in paragraphs (d) through (f) of § 574.7 Paragraph (d) restates the statutory criteria used to review a notice filed under the Control Act. See 12 U.S.C 1730(q)(7). One commenter asserted that the criteria for review of a change in control notice are quite general and would provide the Board with unbridled discretion. As the criteria for review of Control Act notices merely restate the criteria found in the statute, the Board believes that such comment is unfounded. The Board, however, has 48710 Federal Register / Vol. 50. No. 228 Tuesday, November 26. 1985 / Rules and Regulations provided "presumptive disqualifiers '— which are applicable under both Artsin order to clarify the Board's interpretation of some of the general criteria used under either statue as described more fully below. The Board notes that the Control Act permits but does not require the Board to deny a notice which does not comply with the statutory criteria Because the Control Act involves a notice procedure, a potential acquiror need not receive approval to consummate the acquisition but merely. as stated in paragraph (el, may await the conclusion of the 60 day review period, or an extension thereof provided by the Board in accordance with $574.6(c)(2)(i). Such acquisition must be consummated, however, within one year of the conclusion of the review period and only in accordance with the terms and representations stated in the notice. Further a material change in circumstances prior to the acquisition would require that an amendment to the notice to be filed and would reinstate the review period. Prior to the expiration of the review period or an extension thereof. the Board generally will provide a potential acquiror with written notice if it intends not to disapprove the proposed acquisition. As in the case of review of applications under the Holding Company Act, the Board wishes to emphasize that unless a notice specifically indicates that an acquiror intends to acquire less than 100 percent of an insured institution's voting stock. the notice will be reviewed, and the acquiror's financial resources analyzed. as if the acquiror seeks to acquire 100 percent of such stock. Where a notice is so limited, the Board may condition its non-disapproval to such amount, in which case additional acquisitions could be made only by amendment to the acquiror's original notice. Upon a written statement of non-disapproval from the Board or its designee the review period is deemed to be accelerated and the transaction may be consummated immediately thereafter in accordance with any conditions set forth in the letter of non disapproval See 12 U.S.C. 1730(q)(1). In the event the Board or its designee determines to disapprove a notice of change in control. the proposed acquiror will be notified in writing. As set forth in paragraph (f) of § 574.5. such notification will include a statement of the grounds for disapproval and a statement that the acquiror within 20 days of the receipt of such notice of disapproval may, if the disapproval was issued by the Principal Supervisory Agent pursuant to delegated authority, request review of such disapproval by the Corporation pursuant to § 574 8(a)(4), or, if such review is denied, or the disapproval Issued by the Corporation, may within 10 days of receipt of the notice of disapproval, or notice of the Corporation's decision not to review the denial, request an administrative hearing under paragraph (4) of the Control Act. C Presumptive Disqualifiers The statutory criteria employed by the Board in making determinations with regard to applications under the Holding Company Act and notices under the Control Act includes general concepts such as the "managerial and financial resources" or "competance and integrity" of an acquiror. Through its experience in administrating the Acts. the 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 has collected these factors as "presumptive disqualifiers". in order to put potential acquirors on notice of the grounds upon which an application or notice may be disapproved unless adequately refuted by the acquiror. Section 574.7(g)(1) sets out presumptive disqualifiers which may indicate a lack of integrity on the part of the acquiror. The Control Act specifies the integrity of an acquiring person or proposed management personnel as a factor the Board must consider in reviewing notices. 12 U.S.C. 1730(g)(7)(D) (1982); See also 12 CFR 574.7(d)(4). The Holding Company Act requires an acquiror to have the requisite managerial resources to obtain approval to acquire control of an insured institution. The legislative history manifests Congress intent that the term "management resources" relate to management's integrity as well as competence See H.R. Rep. No. 997, 90th Cong. 1st Sess. 6 (1967), reprinted in 1963 U.S. Code Cong & Ad. New 1601. 1606 ("companies with management of doubtful integrity would be barred from gaining control of an insured institution."). The factors which would give nse to a presumptive disqualification of a proposed acquiror on integrity grounds include criminal. civil or administrative judgments. consents or orders, and any indictments. formal investigations, examinations. or civil or administrative proceedings (excluding routine or customary audits. inspections and investigations) that terminated in any agreements, undertakings. consents or orders, issued against, entered into by, or involving the acquiror or affiliates of the acquiror, by any federal or state court, any department agency, or comm.s--of the US Government, any state o municipality and self-regulatory ad or professional organization or any foreign government or governmer entity against an acquiror ur aff.. of an aqror involving (1) Fraud moral turpitude dishonesty, brew of trust or fiduciary duties, or ogran und crime or racketeering. (2) voliat. of securities or commodities laws of regulations: (3) violations of depts tor institutions laws or regulations. 4 violations of housing authority law or regulations: or (5) violations of the ethical codes of a self-regulatory trade or professional organization. Sun events would be relevant if they occurred during the preceding 10 years Other presumptive disqualifiers concerning an acquiror's integra's include denial of an application or withdrawal of an application afte notice of intent to deny an applicat.n relating to the organization or acquisition of control of a financial institution, the liquidation. conservatorship, or receivership of ary depository insutution of which the acquiror was a controlling sharencider or management official conviction of a felony by the acquiror or any afflated person or affiliate: or knowingly making any written or oral statement to the Corporation (or its delegate) in connection with an application notice or other filing under Part 574 that is felst or misleading with respect to a material fact or omits to state a material fast with respect to information furnished, or requested in connection with such application, notice or other filing. Finally, applicants would be subiect to presumptive disqualification. on integrity grounds. if they submit applications while they are in violation of either Act or the Board's regulations thereunder, unless the violation amses as a result of acquisition of an amount of stock or a control factor with respect to the insured institution where the acquisition of such amount of stock or control factor was beyond the control of the applicant. The Board received one comment concerning integrity-related presumpt disqualifiers which objected to the inclusion of consent agreements or undertakings by acquirors as presumptive disqualifier because "inadvertent violations of technice. regulations" would not necessanly impute a lack of integrity to the acquiror The Board wishes to emphasize that these factors are presumptions which en acquiror may overcome through explanation in the application or notice Federal Register / Vol. 50. No. 228 Tuesday, November 26, 1985 Rules and Regulations It has been the Board's experience. however, that consent decrees or undertakings often involve more than inadvertent violations of technical regulations. Therefore, the final regulations continue to include consent decrees as presumptive disqualifiers. The regulations also set out presumptive disqualifiers based on financial factors. The Holding Company Act provides the Board authority to deny any acqusition application if the proposed acquiror lacks the requisite financial resources. 12 U.S.C. 1730a(e)(1)(A) (2) The Control Act provides the Board with the authority to disapprove a notice filed on the basis of the acquiror's financial condition. 12 US.C. 1730(q)(6)(C) In the proposed revisions. the Board set out the following factors which would presumptively disqualify an acquiror: (1) With respect to a company, failure to agree in writing that the company will ensure that its subsidiary insured institution shall have, at the end of each calendar quarter, net worth at least equal to three percent of liabilities. plus the growth and contingency factors as determined in § 563.13 or such greater amount that may be required pursuant to § 563.13, and that, where necessary. the company will infuse additional equity capital in a form satisfactory to the Supervisory Agent and sufficient to effect compliance with its net worth maintenance undertaking: (2) liability for amounts of debt which, in the opinion of the Corporation, create excessive risks of default and pressure on the insured institution; or (3) a business plan projecting activities for the target institution that are inconsistent with economical home financing. The Board received a number of comments which disagreed with its proposal to include the net worth maintenance agreement described in (1) above. Commenters were concerned that such a requirement would impede investment in the thrift industry. The Board notes. however, that Holding Company Act acquisition applications are currently susceptible to approval under authority delegated to the Principal Supervisory Agent only upon acceptance of the net worth maintenance agreement. Further, as a presumptive disqualifier, the net worth maintenance agreement could have been obviated upon reasonable justificiation of the acquiring company. Nonetheless. the Board has determined to return the net worth maintenance guarantee requirement to a standard of delegated approval and has modified the provisions of the guarantee as The Board received no comments on The existence of any of the above indicating that. in the case of integrity- 48711 would assist in making the requisite showing to overcome a presumption of disqualification. Delegations A. Summary As part of its effort to increase the speed with which applications and notices are processed, without sacrificing the quality of review, the Board proposed substantial amendments to its delegations of authority. The regulations provide a uniform system of delegations for determinations under both the Control Act and Holding Company Act. The delegation formula should increase the number of applications processed in the field and is intended by the Board to operate in conjunction with the other substantive revisions of the regulations to increase the overall efficiency of the application and notice processing system. The Board has already implemented internal processing deadlines to aid in achieving this result. Further, the Board would expect to actively review the functioning of the expanded delegation process through the use of post-audits to ensure that delegation accomplishes the Board's goal of expediting the acquisition process without sacrificing the quality of review that must remain crucial to fulfillment of the Board's statutory responsibilities under the two Acts. B. Authority of Principal Supervisory Agent The new delegations for the first time confer the authority to deny as well as approve applications. The Principal Supervisory Agent is granted the authority to approve every application or issue notice of intent not to disapprove every notice that does not fall within one cf four specified categories. Authority is not delegated to the Principal Supervisory Agent in the event that the acquisition is proposed to be accomplished in connection with a transaction where certain disclosure documents are required to be filed under section 13 or section 14 of the Exchange Act. This reservation of authority reflects the fact that a disclosure document requiring review will be filed with the Washington staff in connection with such a transaction and that many such institutions are likely to present special issues because they are recently converted to stock form. Under such circumstances. an acquisition may raise particular concerns that should be addressed by the Board and its Washington staff. In addition, review of such acquisitions can be done more 48712 Federal Register / Vol. 50. No 228 Tuesday, November 26. 1335 Rules and Regulations efficiently in the same office where the Exchange Act filings of such institutions are reviewed. The Board received no comments on this aspect of the delegation provisions. The second instance in which reviewing authority would be reserved to the Board's Washington staff involves contested acquisitions of insured institutions due to the potential complexity of, and issues that may be presented in such transactions. An acquisition proposal is considered to be contested if opposed by management of the insititution or a competing acquiror The Board believes that review by its Washington staff will allow better coordination of any enforcement or litigation issues that could arise during the course of the review. While the Board received no comments concerning the contested acquisition delegation provision, it has, upon further consideration, determined to modify the proposed provision to require that where an acquisition is contested, all acquisition applications or notices with respect to such institution be reviewed by Washington staff. The Board believes that in the case where conflicting offers have been made to acquire an insured institution, both applications should be processed in a similar fashion. The last area reserved from delegated authority, in the proposal, concerns novel issues of policy or law which in the opinion of Board staff warrant consideration by the Board. In these cases, the Board itself will be provided the opportunity to make the determination. The Board received no comments on this aspect of the delegation proposals. The Board wishes to emphasize that it expects staff of the Federal Home Loan Banks to be in close contact with the Board's Washington staff to assess whether an application or notice presents a legal or policy issue that warrants review by the Board. In addition, the Board regularly advises the staff of the Federal Home Loan Banks of issues of concern to the Board through supervisory bulletins and communications from various Offices of the Board as well as the Board itself. The Board expects that applications presenting such issues will be referred to the Board. The decision as to whether a transaction should be reviewed by the Board is left to the discretion and expertise of staff. Failure to refer a matter to the Board would not provide a basis for challenging the final staff action. The Board has determined to add a fourth criterion which would exclude from eligibility for approval by the Principal Supervisory Agent, any application by a company which declines to agree in advance to maintain the net worth of the target institution and not to cause the insured institution to declare dividends in excess of 50 percent of net income per year unless warved by the Supervisory Agent. These provisions currently are included in the Board's standards for delegated approval of Holding Company Act acquisition applications at 12 CFR 584 4(g)(1) (i) and (ii) In the case of an acquisition by a company. the Board believes that a holding company should serve as a source of strength to its subsidiary insured institution. See kaneb Services. Inc. v. Federal Savings and Loon Insurance Corporation, 650 F 2d 78 (5th Cir 1981). As prevously discussed. the requirement of the net worth maintenance agreement was proposed to be included in the regulations as a presumptive disqualifier. One commenter suggested that it would be unfair to require a company that owned only 10 percent of a class of voting stock of an institution to be liable for 100 percent of the institution's losses. While the Board believes that any company that has the power to direct the management or policies of an insured institution should be responsible for the performance of such institution, it is aware that such a requirement may hamper investments in the industry Accordingly, the Board also has provided the Principal Supervisory Agent with authority to approve an acquisition of less than 50 percent of the voting stock of an insured institution upon a stipulation by such company that it will maintain its pro rata share of the institution's regulatory net worth requirement. It should be noted that a company which is deemed to control an insured institution on the basis of concerted action with individuals would be required to sign an agreement, but the individuals would not, although the company's net worth maintenance would be calculated with reference to the stock held by the company and those with whom it was deemed to act in concert. All parties to the agreement which results in a similar organization, as defined in § 574.2(1), would be liable in connection with the net worth maintenance agreement. The Board also has given the Principal Supervisory Agent the authority to deny any application or disapprove any notice which the Principal Supervisory Agent has the authority to approve. Denials of applications and notices by the Principal Supervisory Agent may be appealed to the Corporation. A request for Corporation review of a denial would be required to be submitted to Secretary to the Board, with copies addressed to the attention of the Director. Office of Examinations and Supervision. and to the General Counsel The request for review — identify the party seeking revient und specifically describe the action for which review is sought and the eng why the denial by the Principal Supervisory Agent is believed to be erroneous, and would be required to bu submitted within 20 days of the cof the action taken for which review :s sought. In order to facilitate the review process the Principal Supervisom. Aques also would have the authority to take action with regard to publication of notice, deeming filings to be suff cater requiring additional information with respect to any notice or application which he has the authority to approve Finally, as an additional step to expram the approval process. the regulation delegates to the Principal Supension Agent the authority to waive the requirement for certain audited front a statements for an acquiror's propmetan interests in connection with filings under the Control Act. provided that specified substitute information is submitted instead If such substitute information were not furnished the Principal Supervisory Agent would not have delegated authority to waive the requirement In this regard, difficiles have often arisen with respect to financial statements for sole proprietor: and closely held companies Generally certain substitute information has been considered acceptable. This information has included. with respect to each acquiring person or company a statement as to the percentage of is c her net worth that the acquisition represents the percentage of net worth assets and income attributable to proprietary interests. and such alternative financial statements regarding proprietary interests as are available. In the past, the Board bas allowed the submission of tax res and unaudited financial statements for proprietary interests which amounted to less than 10 percent of an individual's net worth, income or total assets when the preparation of audited finental statements would prove a hardst p. The Board wishes to emphasize that this waiver pertains to financial statements for an acquiror's proprietary interests. not to the statements of the acquor's assets and liabilities and income and source of funds which are specifically required to be furnished by the Control Act. 12 US C. 1730(q)(6)(B). Federal Register / Vol. 50. No. 228 / Tuesday. November 26, 1985 Rules and Regulations C Authority of Washington Staff The Board's Washington staff is delegated authority to take any action with regard to applications or notices which are not delegable to the PSA except that the staff in its discretion may refer to the Board those transactions that raise a significant issue of law or policy and those involving non-standard net worth maintenance or dividend conditions. The Washington staff has not, however. been given denial authority in the review of applications and notices, but has been authorized to make a determination regarding rebuttals of control determinations or concerted action presumptions. One commenter suggested that this function be delegated to the PSA. The Board believes that due to the novelty of the procedure. uniformity will be preserved by having all rebuttal determinations made in Washington, for the time being. Finally, the Board wishes to take this opportunity to emphasize that the fact that an acquisition is contested does not alone, cause it to be a matter that should be referred to the Board. The Board specifically intends to rely on the discretion and expertise of its staff to keep the Board informed and to refer applications or notices to the Board where unresolved legal or policy issues are present, which may, but need not, include contested matters. There is no process or procedure for petitioning the Board to cause the Board to take up such matters directly, and the Board does not intend to entertain such petitions. The Board believes that the portions of the rule adopted today concerning delegations fully address the issues that may arise and intends that these provisions be followed in all cases. Moreover, the Board believes that it would unfairly tilt and delay the acquisition process if all contested acquisitions were required to be decided by the Board alone. D. Sole Authority in the Board The Board has retained sole authority to approve or deny any application or notice which has been referred to the Board as presenting significant issues of policy or law, and applications or notices presenting non-standard net worth maintenance or dividend conditions. The Board has also reserved sole authority in the Corporation to assess monetary penalties under the statutes. Finally, in order to insure the efficient use of time in the review period of a Control Act notice, the Board has reserved for itself the authority to recommence a review period under the Control Act after a determination of Final Regulatory Flexibility Analysis Pursuant to section 3 of the Regulatory 1. Reasons, objectives and legal bases 2. Small entities to which the rules 4. Overlapping or conflicting federal 5. Description of reporting and List of Subjects in 12 CFR Parts 563, 574, Securities, Savings and loan Accordingly, the Board hereby 1. The authority for Part 563 continues Authority: Secs. 401-405. 48 Stat. 1255-1260. 563.18-2 [Removed] 2. Remove 563.18-2. 3. Amend § 563.18-3 by removing 4. Add a new Part 574 as follows: PART 574-ACQUISITION OF 48713 As used in this Part and in the forms under this Part, the following definitions apply, unless the context otherwise requires: (a) "Acquire" when used in connection with the acquisition of stock of an insured institution means obtaining ownership, control, power to vote, or sole power of disposition of stock, directly or indirectly or through one or more transactions or subsidiaries. through purchase, assignment, transfer. exchange, succession, or other means. including: (1) An increase in percentage ownership resulting from a redemption. repurchase. reverse stock split or a similar transaction involving other securities of the same class, and (2) the acquisition of stock by a group of persons and/or companies acting in concert which shall be deemed to occur upon information of such group. Provided that an investment advisor shall not be deemed to acquire the voting stock of its advisee if the advisor (i) votes the stock only upon instruction from the beneficial owner, and (ii) does not provide the beneficial owner with advice concerning the voting of such stock. (b) "Acquiror" means a person or company. (c) "Acting in concert" means: (1) Knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement, or |