[Federal Register Volume 61, Number 230 (Wednesday, November 27, 1996)]
[Rules and Regulations]
[Pages 60173-60179]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30031]
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 545, 556, 560, 563, 571
[No. 96-111]
RIN 1550-AA89
Conflicts of Interest, Corporate Opportunity and Hazard Insurance
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of Thrift Supervision (OTS or agency) is today
issuing a final rule updating and substantially streamlining its
regulations and policy statements concerning conflicts of interest,
usurpation of corporate opportunity and hazard insurance. These
amendments are being made pursuant to the Regulatory Reinvention
Initiative of the Vice President's National Performance Review
(Reinvention Initiative) and section 303 of the Community Development
and Regulatory Improvement Act of 1994 (CDRIA), which requires OTS and
other federal banking agencies to review, streamline, and modify
regulations and policies to improve efficiency, reduce unnecessary
costs, and remove inconsistent, outmoded and duplicative requirements.
EFFECTIVE DATE: January 1, 1997.
FOR FURTHER INFORMATION CONTACT: Robyn Dennis, Manager, Thrift Policy,
(202) 906-5751; or Francis Raue, Policy Analyst, (202) 906-5750,
Supervision Policy; Deborah Dakin, Assistant Chief Counsel, (202) 906-
6445, Regulations and Legislation Division, Chief Counsel's Office.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Summary of Comments and Description of the Final Rule
A. General Discussion of the Comments
B. Section-by-Section Analysis
C. Description of Final Rule
III. Disposition of Existing Conflicts of Interest, Corporate
Opportunity and Hazard Insurance Regulations and Policy Statements
IV. Executive Order 12866
V. Unfunded Mandates Act of 1995
VI. Regulatory Flexibility Act Analysis
I. Background
In a comprehensive review of its regulations, beginning in the
spring of 1995, pursuant to section 303 of the CDRIA 1 and the
Administration's Reinvention Initiative, OTS identified its conflicts
of interest, corporate opportunity and hazard insurance regulations and
policy statements as an important area for updating and streamlining.
Each conflicts of interest, corporate opportunity and hazard insurance
regulation and policy statement was reviewed to determine whether it
was current and understandable; imposed the least possible burden
consistent with safety and soundness and statutory requirements;
addressed subject matter more suited for handbook guidance; and was
written in a clear, straightforward manner. OTS also sought industry
input regarding staff's initial recommendations through an industry
focus group consisting of five thrift representatives, an industry
trade association and OTS staff. As a result of this review, OTS
identified a number of ways in which its conflicts of interest,
corporate opportunity and hazard insurance regulations and policy
statements could be revised to reduce regulatory burden. On June 14,
1996, OTS issued a notice of proposed rulemaking.2
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\1\ 12 U.S.C. 4803(a)(1).
\2\ 61 FR 30190 (June 14, 1996).
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Today's final rule is substantially similar to the June proposal.
The conflicts of interest rule has been clarified to give more
specificity on what conflicts are prohibited. The conflicts of interest
provisions apply if there is disclosure to the board of directors, the
interested person refrains from participation in discussion of the
[[Page 60174]]
transaction and recuses himself or herself from voting on the
transaction. In addition, the final rule on corporate opportunity
incorporates a safe harbor. The corporate opportunity safe harbor
applies if there is disclosure to the board of directors, and a
disinterested and independent majority of the board rejects the
proposed business opportunity.
The final rule reduces the number of conflicts of interest,
corporate opportunity and hazard insurance regulations and policy
statements from eight to three and results in a net reduction of more
than five pages of CFR text. As proposed, OTS has removed in their
entirety five unnecessary, duplicative and outdated regulations and
policy statements: Sec. 545.126 (referral of insurance business),
Sec. 556.16 (insurance agencies--usurpation of corporate opportunity),
Sec. 563.35 (restrictions involving loan services), Sec. 563.44 (loans
involving mortgage insurance) and Sec. 571.4 (hazard insurance). The
remaining three provisions--loan procurement fees, conflicts of
interest, and corporate opportunity--will be retained in the form of
regulations, but streamlined and clarified.
OTS's objective is to reduce regulatory burden on savings
associations to the greatest extent possible consistent with statutory
requirements and safety and soundness. In the context of conflicts of
interest, corporate opportunity and hazard insurance, we believe
maximum burden reduction can be achieved by pursuing three specific
objectives.
First, we are attempting to eliminate duplication and overlap. For
example, the policy statement regarding hazard insurance (Sec. 571.4)
has been largely superseded by the Interagency Real Estate Lending
Guidelines.3 Similarly, the regulatory provisions prohibiting a
savings association from conditioning the extension of credit on the
borrower obtaining certain other services from the institution (tying
arrangements) (Sec. 563.35) have been superseded by tying prohibitions
in section 5(q) of the Home Owners' Loan Act of 1933, as amended
(HOLA).4 Additionally, the regulatory provisions governing kick-
backs and unearned fees for loans (Sec. 563.40) are largely duplicative
of the Real Estate Settlement Practice Act of 1974 (RESPA).5.
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\3\ Formerly, Appendix A to Subpart D of Part 563, recodified
without change as, Appendix to Sec. 560.101 (61 FR 50951, 50978-81
(September 30, 1996)).
\4\ 12 U.S.C. 1461, et seq.
\5\ Pub. L. 93-533, 88 Stat. 1724 (1974).
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Second, as part of its reinvention effort, OTS is seeking to move
away from regulations that micromanage thrift operations. Accordingly,
today OTS is repealing in their entirety detailed regulations
concerning when federal thrifts can refer customers to affiliates that
sell insurance, leaving insurance referrals to be handled in the same
way as other corporate opportunity issues.
Third, in its reinvention effort, OTS is seeking to enhance the
conciseness and clarity of its regulations. Accordingly, each of the
three final rules has been redrafted using plain language techniques
pioneered by the Department of Interior and promoted by the Reinvention
Initiative.
In summary, OTS believes that regulations should generally be
limited to essential safety and soundness requirements. If regulations
are unnecessarily detailed and rigid, regulated entities may find
themselves unable to respond to market innovations. Today's final rule
achieves what OTS believes is the right balance by placing key safety
and soundness requirements in binding regulations and putting more
expansive guidance on prudent practices in the Thrift Activities
Regulatory Handbook.
II. Summary of Comments and Description of the Final Rule
A. General Discussion of the Comments
The public comment period on the June 14 proposal closed on August
13, 1996. Ten commenters responded to the notice of proposed
rulemaking. Four state and national trade associations, three federal
savings associations, one law firm, one dual bank and savings and loan
holding company, and one mortgage insurance corporation submitted
comments.
All but three of the commenters generally supported OTS efforts to
update and streamline its conflicts of interest, corporate opportunity
and hazard insurance regulations and policy statements. Commenters
commended OTS's proposed elimination of duplicative, overlapping and
burdensome restrictions and indicated that the proposed modifications
would give institutions greater flexibility in structuring their
operations. Commenters believed that the proposed changes would
significantly reduce regulatory burden on the thrift industry and
promote operational flexibility.
Several commenters raised concerns, however, that the proposed
conflicts of interest and corporate opportunity regulations were
unclear and failed to give meaningful guidance about what practices
were prohibited. Commenters also expressed concern that OTS's intended
approach for dealing with corporate opportunity within a holding
company structure was only to be part of guidance and not included in
the regulatory text. In response, OTS has refined the language of the
rules and provided examples in the preamble to clarify the scope of the
provisions. These concerns and OTS's responses are addressed in detail
in the description of the final rules.
A few commenters expressed concern over the elimination of the
hazard insurance provision allowing thrifts to force-place insurance
and to reject policies that would provide inadequate protection to the
institution. They agreed with OTS's view that these were matters of
general safety and soundness principles with respect to lending
practices, but believe that thrifts would be in a weaker bargaining
position with borrowers if these provisions were removed. These
concerns are discussed in detail below in the section-by-section
analysis in reference to Secs. 563.35 and 571.4.
B. Section-by-Section Analysis
1. Conflicts of Interest
Section 563.35 Restrictions Involving Loan Services
OTS proposed deleting paragraph (a) of Sec. 563.35, which
enumerates specific services typically involved in real estate lending
that cannot be ``tied'' to the granting of a loan. OTS received no
comments on this paragraph, which is duplicative of HOLA section 5(q).
The paragraph is deleted as proposed.
OTS proposed to remove paragraph (b) of Sec. 563.35, which requires
a savings association to inform borrowers of their right to freely
select providers of insurance services (e.g., hazard and mortgage
insurance) and paragraph (c), which provides that a savings association
may refuse to make a loan if the borrower's choice of insurance
services would provide insufficient coverage.
OTS received no comments on paragraph (b). One commenter urged OTS
to retain paragraph (c) to protect thrifts from having to accept
insurance that provided insufficient coverage. OTS's significantly
streamlined and revised lending rule 6 sets forth the basic rules
governing lending practices. Federal savings associations have the
authority under these rules to refuse to make loans in the absence of
adequate insurance coverage, with or without paragraph (c) of
Sec. 563.35. Coincident
[[Page 60175]]
with this authority, borrowers must be provided the right to freely
select insurance carriers, within the parameters established by the
savings associations as necessary to meet their legitimate business
needs and consistent with applicable law. Although the commenter noted
that legislation had been proposed in at least one state that would
prohibit a lender from refusing to accept a hazard insurance policy
from any insurer admitted in the state and selected by the borrower,
OTS's revised lending rules contain a detailed provision addressing
preemption of state laws relating to lending practices.7 The
states cannot force federal savings associations to accept insurance
coverage that the associations deem inadequate. Accordingly, for the
reasons set forth above and in the preamble to the proposed rule,
paragraphs (b) and (c) are deleted as proposed.
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\6\ 61 FR 50951, 50971 (September 30, 1996), to be codified at
12 CFR Part 560.
\7\ 61 FR at 50972, to be codified at 12 CFR 560.2.
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OTS proposed to delete paragraph (d) of Sec. 563.35, which provides
that a savings association must give residential borrowers a written
itemization of fees in excess of $100 to be paid by the borrower for
the lender's attorney. OTS received no comments on this paragraph,
which is removed as proposed. Instead these settlement practices of
savings associations will be governed by RESPA.
Section 563.40 Restrictions on Loan Procurement Fees, Kickbacks and
Unearned Fees
OTS proposed retaining in modified form paragraph (a) of
Sec. 563.40, which prohibits certain persons from receiving any fee in
connection with the procurement of a loan from the association or a
subsidiary of the association. After considering the comments received,
which are discussed below in Part II.C., OTS has decided to retain this
paragraph with some technical corrections from the proposed rule, as
new Sec. 560.130.
OTS proposed deleting paragraph (b) of Sec. 563.40, which prohibits
the payment of unearned fees for loan origination and settlement
services. This provision overlaps RESPA. OTS received no comments on
this paragraph, which is removed as proposed.
Section 563.44 Mortgage Insurance
OTS proposed to repeal Sec. 563.44, which prohibits a savings
association (or service corporation affiliate) from insuring any loan
with a mortgage insurance company if certain affiliations are present.
One commenter noted that it is appropriate to eliminate this
provision because consumers are adequately protected by RESPA and the
regulations promulgated thereunder, and conflicts of interests would be
covered by existing law. Another commenter asserted that allowing
thrifts to invest in mortgage insurance companies would create a
conflict of interest that poses a risk to the safety and soundness of
the thrift.
As indicated in the preamble to the proposed rule, OTS believes
that common law fiduciary duties, the statutory rules governing
transactions with affiliates, and OTS's new conflicts of interest
regulation are adequate to address any conflicts of interest relating
to the mortgage insurance business. OTS also notes that, under RESPA, a
lender must disclose its interest in an affiliated mortgage company and
give borrowers a choice of insurance providers.
For these reasons and those set forth in the preamble to the
proposed rule, Sec. 563.44 is removed, as proposed.
Section 571.7 Conflicts of Interest Policy Statement
OTS proposed codifying this policy statement as a regulation, after
making modifications to clarify and simplify the language. OTS received
two comments urging the agency not to adopt a conflicts of interest
regulation. As indicated in the preamble to the proposed rule,
fiduciary duties lie at the heart of safety and soundness. OTS believes
a regulation will serve as an important reminder to thrift insiders of
their fiduciary duties to avoid conflicts of interest. Therefore, OTS
is promulgating a conflicts of interest regulation, with some
modifications from the proposal, as described below in Part II.C.
2. Corporate Opportunity
Section 545.126 Referral of Insurance Business
OTS proposed removing Sec. 545.126, which prohibits a federal
savings association from referring any insurance business to an agency
owned by officers or directors of the association, or by individuals
having the power to direct its management, subject to certain
exceptions. This section is removed, as proposed. General corporate
opportunity principles will govern insurance referrals.
OTS also notes that the Department of Housing and Urban Development
recently issued regulations that inter alia, govern fee payments for
settlement service referrals.8 Savings associations are advised to
review these rules for applicability to their operations.
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\8\ 61 FR 29239 (June 7, 1996). The effective date of these
rules was delayed until July 31, 1997 by section 2103(f) of the
Economic Growth and Regulatory Paperwork Reduction Act of 1996, Pub.
L. No. 104-208, 110 Stat. 3009 (1996).
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Section 556.16 Insurance Agencies--Usurpation of Corporate
Opportunities
OTS proposed to eliminate Sec. 556.16, which substantially
duplicates Sec. 545.126, and provides that a federal savings
association's corporate opportunity to engage in the insurance business
is usurped if it refers any insurance business to an agency owned by
officers or directors of the association, or by individuals having the
power to direct its management, subject to certain exceptions. OTS
received no comments on this section, which is removed as proposed. As
noted above, general corporate opportunity principles will govern
insurance referrals.
Section 571.9 Corporate Opportunity in Savings Associations
OTS proposed retaining in modified form, and codifying as a
regulation, paragraph (a) of Sec. 571.9, which states that it is a
breach of fiduciary duty for officers, directors and certain other
persons to take advantage of a business opportunity for his or her own
or another person's personal profit or benefit when the opportunity is
within the corporate powers of the association or its service
corporation and when the opportunity is of present or potential
practical advantage to the association.
OTS received two comments urging the agency not to adopt a
corporate usurpation regulation. OTS believes that avoiding corporate
usurpation is as essential to safety and soundness as avoiding
conflicts of interest. Therefore, it is adopting the regulation, with
modifications from the proposal, as described below in Part II.C.
OTS proposed removing paragraph (b) of Sec. 571.9, which provides
that a usurpation of corporate opportunity to engage in the insurance
business is an unsafe and unsound practice. OTS received no comments on
this provision, which is removed as proposed. As noted above, OTS
believes that the general prohibition on usurpation of corporate
opportunity will be sufficient to address any usurpation of insurance
opportunities.
3. Hazard Insurance
Section 571.4 Hazard Insurance
OTS proposed removing Sec. 571.4, which contains detailed
provisions
[[Page 60176]]
concerning a savings association's obligation to require borrowers to
maintain hazard insurance in a sufficient amount to protect the savings
association from loss in the event of damage to or destruction of the
real estate securing the savings association's loans.
OTS received two comments urging the agency to retain the provision
as a protection to thrifts from law suits by borrowers relating to
``force placing'' insurance 9 and to modify the rule to
specifically cover ``force placing'' insurance.
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\9\ ``Force placing'' insurance is when the savings association
exercises its right under a contract with a borrower to purchase
insurance coverage at the borrower's expense in the event the
borrower fails to purchase or provide insurance.
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OTS disagrees that a specific provision on hazard insurance is
necessary for several reasons. First, details regarding hazard
insurance are unnecessary in light of the general safety and soundness
requirements set forth in OTS's revised lending regulations and
Interagency Real Estate Lending Guidelines as well as standard business
practices in the mortgage lending industry. Second, savings
associations clearly have the right to contract with borrowers to
include whatever terms they deem appropriate in loan agreements (when
not in contravention of law), including provisions governing force
placing insurance. OTS's elimination of its hazard insurance policy
statement does not alter this right.
For the reasons set forth above and in the preamble to the proposed
rule, this section is removed as proposed.
C. Description of Final Rule
1. New Sec. 560.130 Prohibition on Loan Procurement Fees
OTS is moving the prohibition on loan procurement fees
(Sec. 563.40(a)) to a new section (Sec. 560.130) in its Part 560 on
Lending and Investment and is narrowing the scope of the rule. OTS is
promulgating new Sec. 560.130 substantially as proposed, with some
technical corrections.
The rule prohibits directors, officers and natural persons having
the power to control the management or policies of savings associations
from receiving, directly or indirectly, any commission, fee or other
compensation in connection with the procurement of any loan by the
savings association or a subsidiary of the savings association.
The current rule applies to affiliated persons. This has been
changed to natural persons. As OTS noted in the preamble to the
proposed loan procurement rule, the revised regulation would not apply
to holding companies and holding company affiliates of savings
associations. Therefore, affiliates of thrifts that are mortgage
brokers will be able to receive an arms-length fee when acting as agent
soliciting loans for affiliated thrifts. It is OTS's belief that loan
procurement fees paid to corporate affiliates pose less risk than those
paid to individuals because these fees will be subject to section 23B
of the FRA and corporate affiliates will generally have less ability
than officers and directors to influence the daily workings of an
institution's loan approval process. OTS wants to clarify here that the
revised rule is not intended to cover payments made in the ordinary
course of business in the form of dividends or capital gains received
by shareholders of the holding company who are also officers or
directors of the savings association. In addition, it is OTS's view
that to ``receive'' a prohibited payment, a person must have accepted
that payment. For example, it is not enough that a payment is made to
the person's account without his or her knowledge or consent.
OTS received one comment urging the agency to eliminate the loan
procurement rule. This commenter believed that the proposed rule was
too vague and that the common law duties of loyalty and care, other OTS
guidance and RESPA are sufficient to address the subject matter of the
regulation.
OTS disagrees. As indicated in the preamble to the proposed rule,
the regulation has been amended from current Sec. 563.40 to more
precisely tailor the scope of the regulation to the persons the agency
believes should be covered and the practices the agency wishes to
prohibit. While OTS agrees that the subject matter of this rule is
generally covered by common law fiduciary duties and other OTS
guidance, OTS continues to believe that loan procurement fees paid to
the persons enumerated in the rule pose a particular threat to the
safety and soundness of savings associations. Such fees provide
incentives to these individuals to bring loans into the association and
to press for their approval, without giving proper consideration to
whether they are a good investment for the institution. Therefore, OTS
believes that a specific rule addressing loan procurement fees is
appropriate.
Accordingly, Sec. 563.40(a) is amended and moved to new
Sec. 560.130, as proposed, with technical corrections.
2. New Sec. 563.200 Conflicts of Interest
OTS proposed codifying its conflicts of interest policy statement
(Sec. 571.7) as a regulation in new Sec. 563.200 and clarifying and
simplifying the text of the rule. OTS's proposed conflicts of interest
regulation prohibited directors, officers, employees, persons having
the power to control the management or policies of savings
associations, and other persons who owe fiduciary duties to savings
associations from advancing their own personal or business interests,
or those of others, at the expense of the institutions they serve.
OTS is making two changes in the final rule from the proposal after
considering issues raised in the comment letters. First, two commenters
pointed out that the phrase ``or those of others'' was vague. OTS
agrees and is therefore modifying this phrase to read ``or those of
others with whom you have a personal or business relationship.'' This
language more precisely identifies those related interests that would
give rise to a conflict of interest.
Second, one commenter suggested that OTS include in the regulation
a safe harbor to provide greater certainty about what transactions are
excluded from the rule. OTS is sympathetic to the commenter's desire
for greater certainty in this area; however, OTS is not including a
safe harbor provision in its regulation. To give greater guidance
regarding what transactions may be excluded, OTS is adding a paragraph
to the end of its conflicts of interest rule that provides that if a
person with a fiduciary duty to a savings association has an interest
in a matter or transaction before the board of directors, he or she
must do three things. First, the person must disclose to the board of
directors all material non-privileged information relevant to the
board's decision. This includes the existence, nature and extent of his
or her conflicting interest and the facts known to the person as to the
matter or transaction under consideration. Second, the interested
person may not participate in the board discussion of the matter.
Third, if the person with the conflict is a director, he or she must
recuse himself or herself from voting on the matter.10 Absent
unusual circumstances, OTS will not take enforcement action against a
person who has complied with these requirements.
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\10\ See In the Matter of Neil M. Bush, ERC 90-30 (Decision and
Order) at 21-22 (April 18, 1991); In the Matter of Simpson, OTS
Order No. AP 92-123 (November 18, 1992), upheld on appeal, 29 F.3d
1418 (9th Cir. 1994), cert. denied, 115 S. Ct. 1096 (1995).
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[[Page 60177]]
Several comments sought additional clarification of the types of
conduct that would be acceptable or impermissible under the rule. OTS
wants to emphasize that the regulation is a reformulation of the
current policy statement, written more concisely, and is intended to
encompass the common law of conflicts of interest as it has been
articulated in Director's Orders. The regulation does not impose any
new requirements on persons covered by the rule but reiterates general
common law standards on the fiduciary duty officers, directors and
others owe to the institutions they serve. Prior OTS interpretations of
the policy statement will continue to provide guidance as to the scope
of the rule.
To further clarify the type of conduct OTS intends to include and
exclude from the coverage of the rule, the following examples are
provided. A person who owes a fiduciary duty to a savings association
and receives money or other benefits (e.g., a loan, forgiveness of
debt, goods or services) from a third party in return for the savings
association granting a loan to or purchasing property from the third
party would be receiving a benefit that is covered by the rule.
Similarly, payments by the third party to a spouse, child, parent,
sibling or business partner of a person identified in the rule would
generally provide a benefit to the person because of the personal or
business relationship and would likewise be covered by the rule. In
addition, a person who owes a fiduciary duty to a savings association
may not advance a transaction between the savings association and
companies in which that persons owns shares, is on the board of
directors or is an officer, at the expense of the institution.
Generally, a person will not be deemed to be advancing his, her or
its interests at the expense of the institution if the transaction
complies with sections 23A and 23B of the Federal Reserve Act
(FRA),11 Federal Reserve Board Regulation O, and the safe harbor
described above.12 Likewise, the rule does not prohibit an
executive officer, director or principal shareholder from receiving a
loan from the association in accordance with 12 CFR 563.43.
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\11\ 12 U.S.C. 371c and 371c-1.
\12\ 12 CFR Part 215.
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Section 571.7 is amended, codified as a regulation, and moved to
new Sec. 563.200, with changes from the proposal, as indicated above.
3. New Sec. 563.201 Corporate Opportunity
Paragraph (a) of OTS's proposed corporate opportunity regulation
prohibits directors or officers of savings associations, persons having
the power to control the management or policies of savings associations
and other persons who owe a fiduciary duty to savings associations from
taking advantage of corporate opportunities belonging to their savings
association or its subsidiaries. Paragraph (b) of the proposed rule
indicates that a corporate opportunity will be deemed to belong to the
savings association if: (i) it is within the corporate powers of the
savings association or its subsidiary; and (ii) the opportunity is of
present or potential practical advantage to the savings association,
directly or through its subsidiary.
OTS indicated in the preamble to the proposed rule and reiterates
here, that the agency intends for common law standards governing
usurpation of corporate opportunity to be applied in determining when
an opportunity would be of present or potential practical advantage to
an institution. Examples of the types of issues that should be
considered under this standard include, without limitation, an
institution's financial condition and management resources, the level
of risk presented by the business, and potential profit from the
business weighed against any profits that might arise from transfer of
the business. Prior OTS interpretations have indicated that a
usurpation of corporate opportunity does not occur when an institution
receives fair market value consideration for transfer of a line of
business. By definition, an institution that receives fair market value
receives as much as it conveys.
OTS received several comments on its proposed corporate opportunity
regulation. OTS is making one change to the final rule to reflect the
comments received. One commenter urged OTS to include a provision in
the regulation recognizing the role of the board of directors in
determining whether an opportunity is advantageous to the institution.
OTS agrees with this suggestion. OTS is adding a paragraph to the new
regulation which provides that OTS will not deem a person to have taken
advantage of a corporate opportunity belonging to the savings
association if a disinterested and independent majority of the savings
association's board of directors, after receiving a full and fair
presentation of the matter, rejected the opportunity as a matter of
sound business judgment. This safe harbor is not intended to affect the
rights of others, for example the Federal Deposit Insurance Corporation
or shareholders, to bring actions alleging usurpation of corporate
opportunity under applicable provisions of law.
A ``disinterested'' director is one without an interest in the
matter or transaction before the board of directors. This determination
will vary with the facts and circumstances of each case. The examples
set forth above in the discussion of the conflicts of interest rule
provide some guidance on whether a director has an interest in a
transaction. An ``independent'' director for purposes of this rule is:
(i) One who is not a salaried officer or employee of the savings
association, any subsidiary, or any holding company affiliate; \13\ and
(ii) one who is not dominated or controlled by an interested director.
What will be considered ``a full and fair presentation of the facts
relating to a given matter'' will vary depending upon the transaction.
At a minimum, the interested director must disclose the nature and
extent of his or her interest in the transaction.
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\13\ See 12 CFR 563.33 (1996).
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Several commenters addressed the language in the preamble
concerning OTS's intended treatment of business allocation within a
holding company structure. OTS indicated that under the proposed
regulation, the dealings of holding companies with their subsidiary
thrifts will be subject to the doctrine of usurpation of corporate
opportunity to the same extent as provided by common law. OTS noted,
however, that other provisions of law generally provide an adequate
basis for regulating dealings between thrifts and their holding
companies. Thus, barring egregious circumstances or instances where a
thrift is undercapitalized or unprofitable, OTS supervisors and
examiners will generally defer to holding company decisions regarding
where to allocate lines of business within a holding company structure,
provided there is no violation of sections 23A and 23B of the FRA or
general principles of safety and soundness.
Two commenters asked that this language be specifically included in
the regulation or in handbook guidance. OTS has determined not to
incorporate this language in the regulation for several reasons. First,
it is the agency's view that the standard it has enunciated for the
treatment of holding companies is not specific enough to be included in
regulatory text. Second, holding companies are covered by the rule and
OTS reserves the right to take action against holding companies for
[[Page 60178]]
usurpation of corporate opportunity in the special circumstances
described above. However, OTS reiterates that it will generally defer
to holding company business allocation decisions. OTS's decision not to
put this standard in the regulation in no way reflects a departure from
this stated position. OTS intends to incorporate this language into the
Thrift Activities Regulatory Handbook.
One commenter asked OTS to amend the general prohibition paragraph
to provide that usurpation of corporate opportunity was only actionable
if it was ``for [a person's] personal profit or benefit.'' Usurpation
of corporate opportunity is prohibited based on fiduciary principles,
not whether a benefit accrues to an individual. It is enough that an
opportunity belongs to the institution and is usurped from the
institution. The concept of personal gain is more appropriate to a
conflicts of interest analysis than a corporate opportunity analysis.
OTS notes that depending on the circumstances relating to a given
matter or transaction, the conflicts of interest regulation (new
Sec. 563.200) may apply in addition to the corporate opportunity rule.
Section 571.9(a) is amended, codified as a regulation and moved to
new Sec. 563.201, with changes from the proposal, as indicated above.
III. Disposition of Existing Conflicts of Interest, Corporate
Opportunity and Hazard Insurance Regulations and Policy Statements
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Original provision New provision Comment
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Sec. 545.126................... .................. Removed.
Sec. 556.16.................... .................. Removed.
Sec. 563.35.................... .................. Removed.
Sec. 563.40(a)................. Sec. 560.130..... Modified.
Sec. 563.40(b)................. .................. Removed.
Sec. 563.44.................... .................. Removed.
Sec. 571.4..................... .................. Removed.
Sec. 571.7..................... Sec. 563.200..... Modified.
Sec. 571.9(a).................. Sec. 563.201..... Modified.
Sec. 571.9(b).................. .................. Removed.
------------------------------------------------------------------------
IV. Executive Order 12866
The Director of OTS has determined that this final rule does not
constitute a ``significant regulatory action'' for the purposes of
Executive Order 12866.
V. Unfunded Mandates Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4 (Unfunded Mandates Act), requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
federal mandate that may result in expenditure by state, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. OTS has determined that the
final rule will not result in expenditures by state, local, or tribal
governments or by the private sector of $100 million or more.
Accordingly, this rulemaking is not subject to section 202 of the
Unfunded Mandates Act.
VI. Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS
certifies that this final rule will not have a significant economic
impact on a substantial number of small entities. As discussed in the
preamble, this final rule reduces regulatory burden and clarifies the
fiduciary duties that directors, officers and other fiduciaries owe to
savings associations. It does not create new standards but reiterates
the common law duty that directors, officers and other fiduciaries owe
to the institutions they serve.
List of Subjects
12 CFR Part 545
Accounting, Consumer protection, Credit, Electronic funds
transfers, Investments, Reporting and recordkeeping requirements,
Savings associations.
12 CFR Part 556
Savings associations.
12 CFR Part 560
Consumer protection, Investments, Manufactured homes, Mortgages,
Reporting and recordkeeping requirements, Savings associations,
Securities.
12 CFR Part 563
Accounting, Advertising, Conflicts of interest, Corporate
opportunity, Crime, Currency, Investments, Reporting and recordkeeping
requirements, Savings associations, Securities, Surety bonds.
12 CFR Part 571
Accounting, Investments, Reporting and recordkeeping requirements,
Savings associations.
Accordingly, the Office of Thrift Supervision amends chapter V,
title 12, Code of Federal Regulations, as set forth below.
PART 545--OPERATIONS
1. The authority citation for part 545 continues to read as
follows:
Authority: 12 U.S.C. 1462a, 1463, 1464, 1828.
Sec. 545.126 [Removed]
2. Section 545.126 is removed.
PART 556--STATEMENTS OF POLICY
3. The authority citation for part 556 continues to read as
follows:
Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1464, 1701j-3; 15 U.S.C.
1693-1693r.
Sec. 556.16 [Removed]
4. Section 556.16 is removed.
PART 560--LENDING AND INVESTMENT
5. The authority citation for part 560 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1701j-3, 1828,
3803, 3806; 42 U.S.C. 4106.
6. Section 560.130 is added to read as follows:
Sec. 560.130 Prohibition on loan procurement fees.
If you are a director, officer, or other natural person having the
power to direct the management or policies of a savings association,
you must not receive, directly or indirectly, any commission, fee, or
other compensation in connection with the procurement of any loan made
by the savings association or a subsidiary of the savings association.
PART 563--OPERATIONS
7. The authority citation for part 563 continues to read as
follows:
Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468,
1817, 1828, 3806.
Sec. 563.35 [Removed]
8. Section 563.35 is removed.
Sec. 563.40 [Removed]
9. Section 563.40 is removed.
Sec. 563.44 [Removed]
10. Section 563.44 is removed.
11. Section 563.200 is added to read as follows:
Sec. 563.200 Conflicts of interest.
If you are a director, officer, or employee of a savings
association, or have the power to direct its management or policies, or
otherwise owe a fiduciary duty to a savings association:
(a) You must not advance your own personal or business interests,
or those of others with whom you have a
[[Page 60179]]
personal or business relationship, at the expense of the savings
association; and
(b) You must, if you have an interest in a matter or transaction
before the board of directors:
(1) Disclose to the board all material nonprivileged information
relevant to the board's decision on the matter or transaction,
including:
(i) The existence, nature and extent of your interests; and
(ii) The facts known to you as to the matter or transaction under
consideration;
(2) Refrain from participating in the board's discussion of the
matter or transaction; and
(3) Recuse yourself from voting on the matter or transaction (if
you are a director).
12. Section 563.201 is added to read as follows:
Sec. 563.201 Corporate opportunity.
(a) If you are a director or officer of a savings association, or
have the power to direct its management or policies, or otherwise owe a
fiduciary duty to a savings association, you must not take advantage of
corporate opportunities belonging to the savings association.
(b) A corporate opportunity belongs to a savings association if:
(1) The opportunity is within the corporate powers of the savings
association or a subsidiary of the savings association; and
(2) The opportunity is of present or potential practical advantage
to the savings association, either directly or through its subsidiary.
(c) OTS will not deem you to have taken advantage of a corporate
opportunity belonging to the savings association if a disinterested and
independent majority of the savings association's board of directors,
after receiving a full and fair presentation of the matter, rejected
the opportunity as a matter of sound business judgment.
PART 571--STATEMENTS OF POLICY
13. The authority citation for part 571 continues to read as
follows:
Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462a, 1463, 1464.
Secs. 571.4, 571.7, 571.9 [Removed]
14. Sections 571.4, 571.7 and 571.9 are removed.
Dated: November 18, 1996.
By the Office of Thrift Supervision.
Nicolas P. Retsinas,
Director.
[FR Doc. 96-30031 Filed 11-26-96; 8:45 am]
BILLING CODE 6720-01-P