OTS Issues a Number of Interpretations Regarding Preemption, Governance Issues
Lending and ATM Issue
s. The OTS published four interpretations preempting various state laws affecting a federal savings bank. In a letter P-2002-6 the OTS ruled that federal law preempted a New York law prohibiting reverse mortgages from being secured by ownership interests in cooperatives. In another letter, P-2002- 3, the OTS determined that federal law preempts an Arizona law that requires banks with branches in the state to file reports with interest rate, annual fee, and other information about their credit card operations. The opinion notes that federal law preempts state reporting requirements, and also precludes the state from engaging in the monitoring or examination of federal thrifts by any means. In the third letter, P-2002-4, the OTS determined that federal law preempts a Wisconsin law that imposes specific disclosure requirements relating to, and content requirements for, automobile finance leases. The leases at issue included both leases originated by the thrift, as well as leases originated by automobile dealerships. Notably, P-2002-4 highlighted that it expressly applied only to "finance leases", as those are the functional equivalent of loans under the Home Owners’ Loan Act, although the OTS would, upon request, also evaluate whether federal preemption applied to other types of leases the thrift entered into under its general leasing authority. Finally, in a fourth letter, P-2002-5, the OTS ruled that federal law preempted an Oklahoma law that sought to require federal savings banks to provide notice before establishing or operating ATMs in the state and sought to preclude institutions (and their subsidiaries) with no presence in the state from such establishment and operation.Governance Issue
s. The OTS issued an opinion, P-2202-7, that federal law does not give members of a mutual thrift any right to demand dividends or other distributions from the institution. The opinion notes that the model charter for mutual thrifts provides no such right, and cites several court cases holding that while federal mutual thrifts are owned by their depositor members, the members do not have a cognizable ownership interest in the equity of the thrift except in the case of a solvent liquidation (which itself requires OTS approval). The opinion highlights that the board of directors of a mutual thrift can, on their own accord, declare a dividend for members, subject to legally-prescribed conditions and limitations. In another opinion, P-2002-2, the OTS interpreted the director indemnification provisions of the OTS regulations located at 12 CFR Section 545.121. That provision requires indemnification of a director if there is a final judgment on the merits in his or her favor, and permits (but does not require) indemnification in the case of a settlement. The complaint asserting claims against the director in the case was "dismissed with prejudice." The opinion declares that, under the circumstances, such a result was not a final judgment on the merits, and thus indemnification of the director was not mandatory.OCC Issues Advisory Letter Concerning Reverse Stock Splits
The OCC issued an advisory letter (the "Letter," AL 2002-6) revising and streamlining the OCC’s expedited procedures for effecting a reverse stock split. A reverse stock split occurs when a national bank (a "Bank") reduces the number of outstanding shares (and often the number of its shareholders) by exchanging one share of a new stock issuance for a predetermined number of existing shares and pays cash for fractional shares (thereby reducing the bank’s capital). The Letter states that a Bank that wishes to use expedited procedures to obtain the OCC’s prior approval of a reverse stock split must file an application that: (1) certifies that the Bank has corporate governance procedures that permit reverse stock splits; (2) describes the corporate purposes for the reverse stock split; (3) certifies that shareholders will be given adequate dissenters’ rights in connection with the reverse stock split; (4) provides a capital reconciliation and a description of the accounting entries; (5) certifies that the Bank will comply with federal banking law, including limits on the par value of the common stock of a Bank, and requirements for obtaining shareholder approval and determining amounts paid to minority stockholders; and (6) provides the Bank’s prompt corrective action capital category following the reverse stock split.
Massachusetts Act Regulating Telemarketing Solicitation Expected To Be Signed Into Law
Massachusetts Acting Governor Jane Swift is expected to sign into law a telemarketing statute (the "Act") which will significantly limit the ability of telephone solicitors to engage in certain telemarketing solicitations. Specifically, the Act will forbid telephone solicitors from making or causing to be made any unsolicited telephonic sales call to any consumer (1) between 9:00 p.m. and 8:00 a.m., local time, at the consumer’s location, (2) by facsimile, (3) by use of a recorded message device, or (4) subject to certain limited exceptions, if the consumer’s name and telephone number appear on a "do not call list" (the "List"). For purposes of the Act, telephone solicitor means "any individual,…,corporation,…or other business entity,…, doing business [as defined broadly in the Act] in the commonwealth that makes or causes to be made a telephonic sales call;" telephonic sales call means "a call made by a telephone solicitor to a consumer for the purpose of engaging in a marketing or sales solicitation, soliciting an extension of credit for consumer goods or services or obtaining information that will or may be used for marketing or sales solicitation or exchange of or extension of credit for consumer goods or services;" and unsolicited telephonic sales call means any telephonic sales call, except a call that is made in response to an express written or oral request of the consumer called, primarily with respect to an existing debt or contract if payment or performance has not been completed at the time of the call or to an existing customer unless the customer has told the telephone solicitor that he or she no longer wishes to receive the telephonic sales calls of such telephone solicitor. Among other things, the Act will also (1) require the Massachusetts Attorney General (a) to establish and maintain, directly or through an eligible private vendor, the List (which it will be required to update not less than quarterly) and (b) to issue rules that, among other things, specify the methods by which consumers may object to receiving unsolicited telephonic sales calls, (2) confer authority on the Massachusetts Attorney General to initiate proceedings relating to a knowing or threatened knowing violation of the Act, (3) permit any person who receives more than one unsolicited telephonic sales call within any 12-month period by or on behalf of the same person or entity in violation of the Act to bring a civil action, and (4) forbid telephone solicitors from intentionally using or causing to be installed a call blocking device or service to circumvent a consumer’s use of a caller identification service or device. The Act is expected to become effective January 1, 2003.
OTS Issues Final Rules on Mutual-to-Stock Conversions and Mutual Holding Companies
The OTS issued a final rule (the "Final Rule;" OTS 02-33) implementing changes to its mutual-to-stock conversion and mutual holding company regulations. The OTS stated that the purpose of the Final Rule is to retain the attractiveness of the mutual form of ownership and to "ensure that institutions have the ability to choose the ownership structure that is right for them - be it mutual, stock or mutual holding company." Discussions of proposed and re-proposed versions of the Final Rule appeared in the July 25, 2000 and April 16, 2002 issues of the Alert. Under the Final Rule, a thrift contemplating a mutual-to-stock conversion is required to meet and discuss its business plan with the OTS prior to publishing its plan of conversion, but the Final Rule (in response to public comment) does not require that the meeting with the OTS occur any specific number of days prior to publication of the plan of conversion. The Final Rule also clarifies and streamlines the OTS requirements for a business plan and indicates that when the OTS evaluates a business plan no single factor will be determinative and each plan will be reviewed "on a case-by-case basis." With respect to the establishment of a charitable organization in connection with a mutual-to-stock conversion, the Final Rule specifies conditions for approval, including an OTS examination at the expense of the charitable foundation, submission of annual reports, and maintenance of the foundation’s tax-free status. In addition, the Final Rule makes demand account holders eligible account holders for purposes of determining subscription rights in a mutual-to-stock conversion. Morever, the Final Rule allows accelerated vesting in management benefit plans for changes of control as well as the previously authorized vesting rights in the event of death or disability. Furthermore, the Final Rule clarifies that at least 50% of the net proceeds from a mutual-to-stock conversion must be infused into the thrift. The Final Rule becomes effective on October 1, 2002.
Other Item of Note
Corporate Department Issues Two Additional Client Memoranda Concerning Corporate Governance Reforms Contained in Sarbanes – Oxley Act
Goodwin Procter’s Corporate Department issued two additional client memoranda concerning the corporate governance reforms, applicable to public companies, contained in the Sarbanes -Oxley Act of 2002. The first memorandum covers CEO and CFO certification of the accuracy and completeness of periodic reports filed with the SEC. The second memorandum deals with expedited disclosure of insider transactions in company stock. Copies of these client memoranda are available upon request.
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