[Federal Register Volume 72, Number 10 (Wednesday, January 17, 2007)]
[Rules and Regulations]
[Pages 1925-1928]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-475]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 563

[No. 2007-02]
RIN 1550-AC06


Subordinated Debt Securities and Mandatorily Redeemable Preferred 
Stock

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: This final rule updates OTS regulations that require a savings 
association to obtain approval (or non-objection) before it may include 
subordinated debt securities or mandatorily redeemable preferred stock 
in supplementary (tier 2) capital. The final rule removes several 
unnecessary or outdated requirements and conforms certain provisions, 
such as maturity period requirements and purchaser restrictions, to the 
rules issued by the other federal banking agencies. The final rule also 
reconciles conflicting rules, adds appropriate statutory cross-
references, and rewrites the rule in plain language.

DATES: This rule is effective April 1, 2007.

FOR FURTHER INFORMATION CONTACT: David W. Riley, Senior Analyst, (202) 
906-6669; Capital Policy, Karen Osterloh, Special Counsel, (202) 906-
6639, Regulations and Legislation Division, or Gary Jeffers, Senior 
Attorney, (202) 906-6457, Business Transactions Division, Office of 
Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Discussion

    A savings association must obtain OTS approval (or non-objection) 
before it may include subordinated debt securities or mandatorily 
redeemable preferred stock in supplementary (tier 2) capital. OTS rules 
at 12 CFR 563.81 address application and notice procedures, 
requirements that securities must meet to be included in supplementary 
capital, conditions for OTS approval (or non-objection), and other 
requirements.
    On July 3, 2006, OTS proposed to update 12 CFR 563.81 to delete 
unnecessary or outdated requirements and conform certain provisions, 
such as maturity period requirements and purchaser restrictions, to the 
rules issued by the other federal banking agencies. In addition, OTS 
proposed to reconcile 12 CFR 563.81 with conflicting OTS rules, add 
appropriate statutory cross-references, and rewrite the rule in plain 
language.\1\
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    \1\ 71 FR 37862 (July 3, 2006).
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    OTS received comments from two trade associations in support of the 
proposed rule. Both commenters observed that the proposed rule is a 
much-needed update to the existing provisions. They noted that the 
proposed rule clarifies the existing requirements, is more consistent 
with the rules issued by other federal banking agencies, is less 
burdensome than the current rule, and provides greater flexibility to 
savings associations.
    Commenters suggested only a few revisions to the proposed rule. 
These suggestions are discussed below. Unless otherwise noted, OTS has 
adopted the proposed rule without substantive change.

A. Processing and Review of Applications and Notices--Final Sec.  
563.81(b) and (d)

    The proposed rule amended the existing rules governing OTS 
processing and review of applications and notices seeking approval of, 
or non-objection to, the inclusion of subordinated debt securities or 
mandatorily redeemable preferred stock in supplementary capital. These 
revisions deleted outdated rules that overlapped or duplicated 12 CFR 
part 516 (Application Processing Guidelines), and substituted 
appropriate cross-references to that part.
    Commenters generally supported these revisions. One commenter, 
however, noted that proposed Sec.  563.81(a) stated that a savings 
association may file its application or notice before or after it 
issues the covered securities, but may not include the covered 
securities in supplementary capital until OTS approves the application 
or does not object to the notice. This commenter urged OTS to establish 
a 30-day time limit on OTS's ability to object to a notice. The 
commenter argued that this change would provide a savings association 
with certainty that the covered securities that were the subject of a 
notice could be treated as tier 2 capital without further OTS action.

[[Page 1926]]

    This issue is already addressed by proposed Sec.  563.81(d)(1), 
which states that OTS will review all applications and notices under 12 
CFR part 516, subpart E. Under part 516, subpart E, if a savings 
association has appropriately filed a notice with OTS under the 
expedited treatment, it is permitted to engage in the proposed activity 
30 days after the filing date, unless OTS takes certain specified 
actions before the expiration of that time period. See 12 CFR 516.200 
(2006). OTS has not included the requested clarification in the final 
rule.

B. Mandatory Prepayment of Principal--Final Sec.  563.81(c)(3)

    The proposed rule at Sec.  563.81(c)(3) restated the current rules 
regarding mandatory prepayment of subordinated debt.\2\ Specifically, 
the proposed rule stated that subordinated debt securities may not 
provide events of default or contain other provisions that could result 
in a mandatory prepayment of principal, other than events of default 
that:
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    \2\ 12 CFR 563.81(b)(3)(2006).
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    <bullet> Relate to bankruptcy, insolvency, receivership, or similar 
events.
    <bullet> Arise from the savings association's failure to make 
timely payment of interest or principal.
    <bullet> Arise from its failure to comply with reasonable 
financial, operating, and maintenance covenants of a type that are 
customarily included in indentures for publicly offered debt 
securities.

    The proposed rule also continued to state that any acceleration of 
payment of principal on a subordinated debt security by a savings 
association that fails to meet certain capital requirements is subject 
to OTS prior approval.
    In the preamble to the proposed rule, OTS noted that all of the 
banking agencies allow for the mandatory prepayment or acceleration of 
principal upon events of default related to bankruptcy, insolvency, 
receivership, and similar events,\3\ but there is no uniform approach 
with respect to prepayment or acceleration upon other events of 
default.\4\ OTS sought public comment on whether it should make 
additional revisions to this section. OTS specifically asked commenters 
to address whether the other banking agency rules more appropriately 
address the events of default that may trigger mandatory prepayment or 
acceleration of principal.
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    \3\ 12 CFR 250.166(b)(2)(FRB); and 12 CFR part 325, Appendix A, 
Sec.  I.A.2.(c)(2) and (d)(FDIC). See Comptroller's Licensing 
Manual, Subordinated Debt (November 2003), pp 15-16.
    \4\ 12 CFR 250.166 (FRB); 12 CFR part 325, Appendix A, Sec.  
I.A.2.(d)(FDIC); and 12 CFR part 3, Appendix A, Sec.  2(b)(4) and 
Comptroller's Licensing Manual, Subordinated Debt (November 
2003)(OCC).
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    One commenter addressed this subject. This commenter generally 
supported the proposed restatement of the current rule, which limits 
mandatory prepayment to specific events of default. The commenter urged 
OTS not to make additional revisions to this rule. The commenter noted 
that there is no evidence cited that these events of default have 
created a problem for savings associations in the past. In light of 
these comments, OTS has not included any further revisions to this 
provision.

C. Indenture Requirements--Final Sec.  563.81(c)(4)

    The current rules require a savings association to use an indenture 
for subordinated debt securities. Moreover, where the aggregate amount 
of subordinated debt securities that are publicly offered \5\ exceeds 
certain thresholds in the Trust Indenture Act of 1939 (TIA),\6\ the 
current rules require the indenture to provide for the appointment of a 
trustee other than the savings association or its affiliate, and for 
the collective enforcement of security holders' rights and remedies.\7\ 
The proposed rule retained this provision, but updated the thresholds 
to reflect statutory changes to the TIA.
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    \5\ Public offering includes sales in a nonpublic offering 
defined in 12 CFR 563g.4.
    \6\ 15 U.S.C. 77aaa et seq.
    \7\ 12 CFR 563.81(d)(4)(2006).
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    The preamble observed that the TIA requires indentures for most 
debt instruments, but does not require an indenture where the 
underlying securities are exempt from registration under the Securities 
Act of 1933 (Securities Act).\8\ OTS indicated that it was considering 
exempting certain issuances from the indenture requirements and sought 
comment on this possible change. OTS noted, for example, that offerings 
made solely to accredited investors are exempt under the Securities 
Act.\9\ OTS specifically asked whether it should exempt offerings to 
accredited investors that are holding companies of the issuer (or their 
subsidiaries) from the indenture requirement, and whether it should 
also exempt offerings to unaffiliated accredited investors. Both 
commenters urged OTS to adopt an accredited investor exemption.
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    \8\ 15 U.S.C. 77ddd.
    \9\ 15 U.S.C. 77d(6).
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    Under the Securities Act and the TIA, ``accredited investors'' 
include such entities as: Brokers or dealers registered under the 
Securities Exchange Act of 1934; insurance companies as defined in the 
Securities Act; investment companies registered under the Investment 
Company Act of 1940; certain employee benefit plans; directors, 
executive officers, or general partners of the issuer; natural persons 
with income or net worth in excess of specified limits; and certain 
trusts with assets in excess of specified limits.\10\ These investors 
are considered to have sufficient financial and professional resources 
and sophistication to analyze the offering, make informed decisions, 
and defend and exercise their rights.
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    \10\ 17 CFR 230.501(a). See 15 U.S.C. 77(a)(15).
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    The final rule exempts issuances solely to accredited investors 
from the indenture requirement. This change will make the indenture 
requirement more consistent with the TIA, which recognizes the presumed 
sophistication of these types of investors. This position will also 
reduce the regulatory burden of the rules. To provide appropriate 
protection to non-accredited investors, the final rule requires a 
savings association to have an indenture in place before any debt 
securities, for which an exemption from the indenture requirement is 
claimed, are transferred to any non-accredited investor. If an issuer 
relies on this exemption from the indenture requirement, it must place 
a legend on the debt securities indicating that an indenture must be in 
place before the debt securities are transferred to any non-accredited 
investor.

II. Executive Order 12866

    The Director of OTS has determined that this final rule does not 
constitute a ``significant regulatory action'' for purposes of 
Executive Order 12866.

III. Unfunded Mandates Reform Act of 1995

    Today's final rule revises an existing rule to delete unnecessary, 
outdated, and conflicting requirements, to add appropriate statutory 
cross-references, and to rewrite the rule in plain language. 
Accordingly, 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 and that a budgetary impact statement is 
not required under section 202 of the Unfunded Mandates Reform Act of 
1995.

IV. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA) 
(5 U.S.C. 601), the Director certifies that

[[Page 1927]]

this final rule will not have a significant economic impact on a 
substantial number of small entities. The final rule merely revises an 
existing rule to delete unnecessary, outdated, and conflicting 
requirements, to add appropriate statutory cross-references, and to 
rewrite the rule in plain language.

V. Paperwork Reduction Act of 1995

    The information collection requirements in the existing OTS rules 
at 12 CFR 563.81 were previously approved under OMB control number 
1550-00xx. The final continues to incorporate these requirements and 
does not make any substantive changes that affect the overall burden of 
compliance.

List of Subjects in 12 CFR Part 563

    Accounting, Administrative practice and procedure, Advertising, 
Conflict of interest, Crime, Currency, Holding companies, Investments, 
Mortgages, Reporting and recordkeeping requirements, Savings 
associations, Securities, Surety bond.


0
Accordingly, the Office of Thrift Supervision amends 12 CFR part 563 as 
set forth below:

PART 563--SAVINGS ASSOCIATIONS--OPERATIONS

0
1. The authority citation for part 563 continues to read as follows:

    Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468, 
1817, 1820, 1828, 1831o, 3806; 31 U.S.C. 5318; 42 U.S.C. 4106.


0
2. Revise Sec.  563.81 to read as follows:


Sec.  563.81  Inclusion of subordinated debt securities and mandatorily 
redeemable preferred stock as supplementary capital.

    (a) Scope. A savings association must comply with this section in 
order to include subordinated debt securities or mandatorily redeemable 
preferred stock (``covered securities'') in supplementary capital under 
12 CFR 567.5(b). If a savings association does not include covered 
securities in supplementary capital, it is not required to comply with 
this section.
    (b) Application and notice procedures. (1) A savings association 
must file an application or notice under 12 CFR part 516, subpart A 
seeking OTS approval of, or non-objection to, the inclusion of covered 
securities in supplementary capital. The savings association may file 
its application or notice before or after it issues covered securities, 
but may not include covered securities in supplementary capital until 
OTS approves the application or does not object to the notice.
    (2) A savings association must also comply with the securities 
offering rules at 12 CFR part 563g by filing an offering circular for a 
proposed issuance of covered securities, unless the offering qualifies 
for an exemption under that part.
    (c) Securities requirements. To be included in supplementary 
capital, covered securities must meet the following requirements:
    (1) Form. (i) Each certificate evidencing a covered security must:
    (A) Bear the following legend on its face, in bold type: ``This 
security is not a savings account or deposit and it is not insured by 
the United States or any agency or fund of the United States;''
    (B) State that the security is subordinated on liquidation, as to 
principal, interest, and premium, to all claims against the savings 
association that have the same priority as savings accounts or a higher 
priority;
    (C) State that the security is not secured by the savings 
association's assets or the assets of any affiliate of the savings 
association, as defined in 12 CFR 583.2;
    (D) State that the security is not eligible collateral for a loan 
by the savings association;
    (E) State the prohibition on the payment of dividends or interest 
at 12 U.S.C. 1828(b) and, in the case of subordinated debt securities, 
state the prohibition on the payment of principal and interest at 12 
U.S.C. 1831o(h);
    (F) For subordinated debt securities, state or refer to a document 
stating the terms under which the savings association may prepay the 
obligation; and
    (G) State or refer to a document stating that the savings 
association must obtain OTS approval before the voluntarily prepayment 
of principal on subordinated debt securities, the acceleration of 
payment of principal on subordinated debt securities, or the 
voluntarily redemption of mandatorily redeemable preferred stock (other 
than scheduled redemptions), if the savings association is 
undercapitalized, significantly undercapitalized, or critically 
undercapitalized as described in Sec.  565.4(b) of this chapter, fails 
to meet the regulatory capital requirements at 12 CFR part 567, or 
would fail to meet any of these standards following the payment.
    (ii) A savings association must include such additional statements 
as OTS may prescribe for certificates, purchase agreements, indentures, 
and other related documents. OTS will prescribe the text of these 
additional statements in its Application Processing Handbook.
    (2) Maturity requirements. Covered securities must have an original 
weighted average maturity or original weighted average period to 
required redemption of at least five years.
    (3) Mandatory prepayment. Subordinated debt securities and related 
documents may not provide events of default or contain other provisions 
that could result in a mandatory prepayment of principal, other than 
events of default that:
    (i) Arise from the savings association's failure to make timely 
payment of interest or principal;
    (ii) Arise from its failure to comply with reasonable financial, 
operating, and maintenance covenants of a type that are customarily 
included in indentures for publicly offered debt securities; or
    (iii) Relate to bankruptcy, insolvency, receivership, or similar 
events.
    (4) Indenture. (i) Except as provided in paragraph (c)(4)(ii) of 
this section, a savings association must use an indenture for 
subordinated debt securities. If the aggregate amount of subordinated 
debt securities publicly offered (excluding sales in a non-public 
offering as defined in 12 CFR 563g.4) and sold in any consecutive 12-
month or 36-month period exceeds $5,000,000 or $10,000,000 respectively 
(or such lesser amount that the Securities and Exchange Commission 
shall establish by rule or regulation under 15 U.S.C. 77ddd), the 
indenture must provide for the appointment of a trustee other than the 
savings association or an affiliate of the savings association (as 
defined at 12 CFR 583.2) and for collective enforcement of the security 
holders' rights and remedies.
    (ii) A savings association is not required to use an indenture if 
the subordinated debt securities are sold only to accredited investors, 
as that term is defined in 15 U.S.C. 77d(6). A savings association must 
have an indenture that meets the requirements of paragraph (c)(4)(i) of 
this section in place before any debt securities for which an exemption 
from the indenture requirement is claimed, are transferred any non-
accredited investor. If a savings association relies on this exemption 
from the indenture requirement, it must place a legend on the debt 
securities indicating that an indenture must be in place before the 
debt securities are transferred to any non-accredited investor.
    (d) OTS review. (1) OTS will review notices and applications under 
12 CFR part 516, subpart E.
    (2) In reviewing notices and applications under this section, OTS 
will consider whether:
    (i) The issuance of the covered securities is authorized under

[[Page 1928]]

applicable laws and regulations and is consistent with the savings 
association's charter and bylaws.
    (ii) The savings association is at least adequately capitalized 
under Sec.  565.4(b) of this chapter and meets the regulatory capital 
requirements at Sec.  567.2 of this chapter.
    (iii) The savings association is or will be able to service the 
covered securities.
    (iv) The covered securities are consistent with the requirements of 
this section.
    (v) The covered securities and related transactions sufficiently 
transfer risk from the Deposit Insurance Fund.
    (vi) OTS has no objection to the issuance based on the savings 
association's overall policies, condition, and operations.
    (3) OTS approval or non-objection is conditioned upon no material 
changes to the information disclosed in the application or notice 
submitted to OTS. OTS may impose such additional requirements or 
conditions as it may deem necessary to protect purchasers, the savings 
association, OTS, or the Deposit Insurance Fund.
    (e) Amendments. If a savings association amends the covered 
securities or related documents following the completion of OTS review, 
it must obtain OTS approval or non-objection under this section before 
it may include the amended securities in supplementary capital.
    (f) Sale of covered securities. The savings association must 
complete the sale of covered securities within one year after OTS 
approval or non-objection under this section. A savings association may 
request an extension of the offering period by filing a written request 
with OTS. The savings association must demonstrate good cause for the 
extension and file the request at least 30 days before the expiration 
of the offering period or any extension of the offering period.
    (g) Reports. A savings association must file the following 
information with OTS within 30 days after the savings association 
completes the sale of covered securities includable as supplementary 
capital. If the savings association filed its application or notice 
following the completion of the sale, it must submit this information 
with its application or notice:
    (1) A written report indicating the number of purchasers, the total 
dollar amount of securities sold, the net proceeds received by the 
savings association from the issuance, and the amount of covered 
securities, net of all expenses, to be included as supplementary 
capital;
    (2) Three copies of an executed form of the securities and a copy 
of any related documents governing the issuance or administration of 
the securities; and
    (3) A certification by the appropriate executive officer indicating 
that the savings association complied with all applicable laws and 
regulations in connection with the offering, issuance, and sale of the 
securities.

    Dated: November 28, 2006.

    By the Office of Thrift Supervision.
John M. Reich,
Director.
 [FR Doc. E7-475 Filed 1-16-07; 8:45 am]
BILLING CODE 6720-01-P