This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by

the Superintendent of Documents. Prices of

new books are listed in the first FEDERAL

REGISTER issue of each week.

Rules and Regulations Federal Register

12659

Vol. 60, No. 45

Wednesday, March 8, 1995

NATIONAL CREDIT UNION

ADMINISTRATION

12 CFR Part 708a

Mergers or Conversions of FederallyInsured Credit Unions to Non Credit

Union Status: NCUA Approval

AGENCY: National Credit Union

Administration (NCUA).

ACTION: Final rule.

SUMMARY: The final rule applies to any

credit union that is insured by the

National Credit Union Share Insurance

Fund (NCUSIF) and that proposes to

merge into or convert to any non credit

union institution. The rule imposes new

substantive requirements. The purposes

of these requirements are to ensure that

such transactions take place only

pursuant to an informed vote of the

credit union’s members/owners, to

prevent self-dealing and other abuses by

individuals involved in the transactions

and to ensure that these transactions do

not present safety and soundness risks

to the NCUSIF and the credit union

system. State chartered NCUSIF insured

credit unions may, on a case-by-case

basis, obtain a waiver from NCUA’s

rules if state laws and procedures are

determined to adequately address these

concerns.

EFFECTIVE DATE: April 1, 1995.

FOR FURTHER INFORMATION CONTACT:

Mary F. Rupp, Staff Attorney, Office of

General Counsel, National Credit Union

Administration, 1775 Duke Street,

Alexandria, Virginia 22314–3428 or

telephone: (703) 518–6553.

SUPPLEMENTARY INFORMATION:

Background

In June 1994, the NCUA requested

comments on proposed changes to part

708 of its regulations. At that time, part

708 only addressed situations where an

NCUSIF insured credit union dropped

NCUSIF insurance, either through a

merger into a non NCUSIF insured

credit union or through a voluntary

termination or conversion of insurance.

It did not cover the merger or

conversion of a credit union into a non

credit union institution. The Federal

Credit Union Act, however, vests the

NCUA Board with the responsibility to

regulate such mergers or conversions. 12

U.S.C. 1785(b). The proposed changes to

part 708 clarified that NCUA approval

requirements apply to all mergers and

conversions where the continuing

institution is not insured by NCUSIF. 59

FR 33702 (June 30, 1994).

The proposal was in response to

abuses that had occurred with bank and

thrift conversions, some isolated

instances in the credit union system,

and recent solicitations by outside

consultants and attorneys to federally

insured credit unions for conversion to

non credit union charters. The

solicitations often appeared motivated

by benefits to the attorneys, consultants

and insiders, rather than the members.

The amendment was deemed necessary

‘‘to provide NCUA with clear authority

to prevent abuses in connection with

conversions of insured status.’’ 59 FR

33702. The comments to the proposal

were generally positive and consistently

stressed that the members need to be

properly informed and that the NCUA

needs to ensure that safety and

soundness and members’ interests are

protected.

On September 16, 1994, the NCUA

Board issued an interim final rule and

request for further comment. The rule

was effective upon publication on

September 23, 1994. 59 FR 48790. The

new rule, part 708a, established that the

NCUA Board must approve any merger

or conversion of a federally-insured

credit union to any non credit union

institution, including preapproval of

any notices to members that are sent out

in connection with the merger or

conversion. At the same time, the Board

requested further comment on a number

of issues related to the application and

approval process.

Summary of Comments and Discussion

of Issues

In the June 1994, proposal, the NCUA

Board requested comment on the

general issue of NCUA regulation in this

area and on the specific issue of uniform

member notice. In the interim rule,

comment was requested on a number of

issues that the Board felt required

further consideration and review. The

NCUA received 16 comments on the

proposed rule: 10 from credit unions; 4

from credit union trade groups; 1 from

a bank trade group; and 1 from a credit

union league. The NCUA received 19

comments on the interim rule: 6 from

federal credit unions; 6 from federally

insured state chartered credit unions

(FISCUs); 3 from credit union trade

groups; 2 from bank trade groups; and

2 from state regulators. The following is

a combined summary of the comments

received on the proposed rule and the

interim final rule.

1. NCUA Oversight

In the proposed rule, 14 commenters

addressed the issue of NCUA oversight.

Twelve expressed general support for

NCUA oversight and two expressed

general opposition. The supportive

commenters cited the following benefits

of NCUA regulation: Eliminate

confusion, prevent unnecessary

litigation, protect the members from

potential abuse, assure that the members

know the advantages and disadvantages

of any proposal, protect the assets and

integrity of the NCUSIF and assure that

financial benefits to insiders are fully

disclosed. The two negative commenters

were a bank trade group and a state

chartered credit union. The bank trade

group characterized the proposal as an

overreaction by NCUA to a few isolated

examples.

The issue of NCUA’s jurisdiction over

mergers or conversions by federallyinsured state credit unions (FISCUs)

was raised by 5 commenters on the

interim rule. The five consisted of the

professional group that represents state

credit union supervisors (the National

Association of State Credit Union

Supervisors, or NASCUS), two FISCUs

and two state regulators. All strongly

opposed any NCUA regulation of

mergers or conversions of FISCUs.

NASCUS made the point that only

seven of the 48 states which charter

credit unions allow them to merge with

other financial institutions and only

four states allow credit unions to

convert into another form of financial

institution. NASCUS’ comment also

recognized, however, that several states

have statutes that are silent on the issue.

It is those states which cause the Board

the most concern. Without specific
12660 Federal Register / Vol. 60, No. 45 / Wednesday, March 8, 1995 / Rules and Regulations

regulations in this area, there is

potential for abuse.

The NCUA Board believes that basic

regulatory standards applicable to all

NCUSIF insured credit unions are

necessary to safeguard the integrity of

the process and to ensure that issues of

safety and soundness and fiduciary duty

are properly addressed. The Board has

attempted, however, to balance these

concerns with a deference to the

important role of the state supervisors.

As it is NCUA’s intention to work with

the state supervisor in cases involving

federally-insured state credit unions, the

Board has crafted a final rule that would

allow FISCUs to merge or convert if they

have the state’s authority to do so. In

those instances, the FISCU may file a

written request with the NCUA Board

for a waiver of compliance with the

procedural portions of part 708a and

instead follow the applicable state

regulation. The request would have to

demonstrate that the waiver would not

be detrimental to the safety and

soundness of the credit union, that there

is no possibility of self-dealing or other

breach of fiduciary duty by the credit

union’s management or others involved

in the transaction, and that the

members’ interests are adequately

protected.

2. Insider Preferences

The proposed rule asked whether

directors and management officials

involved in the conversion process

should be allowed to receive any

personal financial benefit from the

transaction, other than that available to

ordinary members. The ten commenters

responding to this question agreed that

directors and management should not

be allowed to receive any compensation

in excess of that available to other

members. Several commenters

suggested NCUA enact strong

regulations in this area. As well as

limiting the compensation available to

insiders, one commenter suggested

individuals should not be guaranteed

employment at the continuing

institution, noting that this would

remove the incentive for insiders

encouraging a merger that is not in the

best interest of the members.

A related issue is that of what postmerger or post-conversion controls are

needed to protect against improper

insider preferences after the transaction

is completed. Some of the suggestions of

the five commenters who commented

on this issue were that NCUA should

prohibit stock acquisition by insiders for

a period of five years and that both preand post-merger or conversion controls

are necessary to prevent insider abuse.

One of the trade groups suggested a way

to avoid the problem would be to

condition approval of the transaction

‘‘on a return of equal shares of equity to

all members before the execution of the

charter change.’’

The recommendations of the

commenters have been modified and

incorporated into the final rule as

follows: For a period of two years after

the transaction, directors may not

receive any benefits not otherwise

equally available to other members, and

directors and senior management

officials may not acquire stock in the

continuing institution or its successor

on terms not available to the other

members of the credit union. These

prohibitions on directors and senior

management officials must remain in

effect for at least two years following the

merger. In order to enable NCUA to

ensure compliance with these

prohibitions, the affected individuals

will be required to enter into written

agreements with NCUA. The NCUA

Board decided not to require a

distribution of reserves and undivided

earnings to members, as such a

requirement would have the practical

effect of prohibiting the transactions

covered by the rule. Among the

disclosures required to be provided to

the members, however, is a clear

explanation of the change in the nature

of their ownership interest in reserves

and undivided earnings that will result

from the transaction.

3. Majority Approval

NCUA requested comment on

whether a majority of eligible voting

members should be required to approve

the transaction. Comment was further

requested on whether majority should

be defined as a simple majority or a

super majority, and, if a super majority,

how it should be defined. The six

commenters that addressed the issue all

agreed that a majority of the voting

members should be required for

approval. Two defined majority as over

50%, two defined it as 60% to 631⁄3%,

one defined it as 70% to 80% and the

other commenter did not define it.

Recognizing the importance of a clear

mandate on an issue of such

significance to the members, the final

rule requires that a majority of all

eligible voters approve any transaction

covered by the rule.

4. Appraisal

In those cases the Board is aware of

where credit unions have considered

conversions or mergers to non credit

union charters, the first step of the

transaction would be to move from a

credit union charter to a mutual savings

bank charter. In cases where the

ultimate goal is to become a stock

institution, conversion from mutual to

stock would be proposed as a second,

but virtually simultaneous step.

For those cases involving this second

step, the Board specifically asked for

comment on how to properly appraise

the value of the credit union for

purposes of issuing stock. This issue is

important to the members, who, as

noted above, are entitled to acquire

stock on the same terms and conditions

as directors and senior management

officials. Seven commenters had

suggestions on this issue. One

recommended that a professional

appraisal be performed, three

recommended that the value of the stock

include accumulated capital and one

suggested the new regulator determine

the value of the stock. One trade group

suggested it be handled as a liquidation

and payout and another suggested

NCUA turn to state law for guidance.

After considering the comments and

reviewing the other agencies’ rules in

this area, the Board has determined to

simply require that an appraisal be

performed and included in the

application. The Board will review the

appraisal as part of its review of the

application.

5. Uniform Member Notice

The proposal requested comment on

whether the rule should include a

uniform member notice. Nine of the ten

commenters responding to this issue

supported a uniform notice.

Commenters suggested that a uniform

notice would provide clear and

consistent guidelines for merging

institutions, ensure that important

information is not withheld from the

members and require less individual

review. The Board agrees with these

goals, but believes they can be

accomplished more effectively through

a listing of the information that must be

included in the notice to members,

rather than a form which may become

outdated or not apply to all transactions.

Overview of Final Rule

The final rule adopts with minor

modifications the interim rule and

expands upon it to impose substantive

and procedural requirements that the

Board has determined are necessary to

ensure an informed membership vote, to

safeguard against potential safety and

soundness problems and to prevent

breaches of fiduciary duty. The final

rule, part 708a, tracks in large part the

current part 708b. Its key provisions are

as follows: NCUA Board approval is

required in advance of any transaction

whereby a federally insured credit

union transfers all or any part of its
Federal Register / Vol. 60, No. 45 / Wednesday, March 8, 1995 / Rules and Regulations 12661

members’ shares or similar accounts to

any non credit union institution; a

majority of all members of record must

vote to approve the transaction;

directors must agree to receive no

benefits in excess of those available to

the members; notice to members must

be preapproved by the NCUA Board and

must include all pertinent information

required by the rule as well as any

additional information deemed

necessary on a case by case basis;

FISCUs may only engage in the

transaction if they obtain approval from

the state authority to proceed with the

merger or conversion; and FISCUs must

follow part 708a unless they obtain a

waiver from NCUA.

Regulatory Procedures

Regulatory Flexibility Act

The Regulatory Flexibility Act

requires the NCUA to prepare an

analysis to describe any significant

economic impact any regulation may

have on a substantial number of small

credit unions. It is highly unlikely that

small credit unions (those under $1

million in assets) would be engaged in

a merger or conversion to a non credit

union institution. The final rule merely

clarifies statutory authority.

Accordingly, the NCUA Board has

determined that a Regulatory Flexibility

Analysis is not required.

Paperwork Reduction Act

These amendments do not change

paperwork requirements.

Executive Order 12612

This rule applies to all federally

insured credit unions. The rule clarifies

existing statutory requirements of

NCUA Board approval of certain

transactions involving federally insured

credit unions. Recognizing the interests

of states and state regulators in

supervising state chartered credit

unions, the NCUA Board has included

a provision in the final rule that allows

FISCUs, on a case-by-case basis, to

obtain a waiver from NCUA’s rule and

follow state procedures if those

procedures are determined to

adequately address the concerns of

NCUA’s rule. With this provision, the

NCUA Board has determined that this

amendment is not likely to have any

direct effect on states, on the

relationship between the states, or on

the distribution of power and

responsibilities among the various

levels of government.

List of Subjects in 12 CFR Part 708a

Bank deposit insurance, Credit

unions, Reporting and recordkeeping

requirements.

By the National Credit Union

Administration Board on March 1, 1995.

Becky Baker,

Secretary of the Board.

Accordingly, the interim rule adding

a new regulation in 12 CFR part 708a

which was published at 59 FR 48790 on

September 23, 1994, is adopted as a

final rule with changes as follows:

PART 708a—MERGERS OR

CONVERSIONS OF FEDERALLYINSURED CREDIT UNIONS TO NON

CREDIT UNION STATUS: NCUA

APPROVAL

1. The authority citation for part 708a

continues to read as follows:

Authority: 12 U.S.C. 1766, 12 U.S.C. 1785.

2. Sections 708a.1 and 708a.2 are

revised to read as follows:

§ 708a.1 NCUA Board Approval.

Section 205(b)(1) of the Federal Credit

Union Act requires NCUA Board

approval in advance of any transaction

whereby a federally-insured credit

union transfers all or any part of its

members’ accounts to any non credit

union institution. This part establishes

rules and procedures for any merger,

conversion or other transaction in

which a federally-insured credit union’s

share accounts or similar member

accounts are transferred to a non credit

union institution. Transactions where a

federally-insured credit union transfers

member accounts to another credit

union are subject to the provisions of

part 708b of this chapter. Compliance

with this part 708a is in addition to any

other federal or state laws and

regulations which may be applicable to

the proposed transaction, including

state corporate laws and state and

federal securities laws.

§ 708a.2 Plan for Merger or Conversion to

a Non Credit Union Institution.

(a) Proposition for merger or

conversion. The board of directors of the

credit union shall approve a proposition

for merger or conversion.

(b) Plan for merger or conversion.

Upon approval of a proposition for

merger or conversion by the board of

directors, a plan for the transaction shall

be prepared. The plan shall include:

(1) Current financial reports;

(2) Current delinquent loan schedules

annotated to reflect collection problems;

(3) Combined financial report, if

applicable;

(4) Contingencies;

(5) Explanation of any provisions for

reserves, undivided earnings or

dividends;

(6) Analyses of share values and

explanation of any adjustments to

member’s share accounts;

(7) Analyses of the regulatory effect of

the merger or conversion brought about

by the change in government regulator;

(8) Explanation of any other relevant

effects on the members; and

(9) Any additional information, as

required by the NCUA Regional

Director.

(c) Nonpreferential treatment. The

plan for merger or conversion shall

provide that, for a period of at least two

years after the effective date of the

transaction:

(1) No director of the credit union

may receive any compensation or any

benefits not provided or available to

other members; and

(2) No director or senior management

official of the credit union shall be

allowed to acquire stock in the resulting

or continuing institution or any

successor institution, on any terms other

than those readily available to all

members of the former credit union.

This prohibition would include stock

issued for services rendered prior to the

merger or conversion. For purposes of

this section, senior management official

means the credit union’s chief executive

officer, any assistant chief executive

officers and the chief financial officer.

3. Sections 708a.3, 708a.4, 708a.5,

708a.6 and Appendix A are added to

read as follows:

§ 708a.3 Submission of Proposal to NCUA.

(a) Submissions to the NCUA Regional

Director. Upon approval of the plan by

the board of directors of the credit

union, the following will be submitted

to the appropriate NCUA Regional

Director:

(1) The plan, as described in

§ 708a.2(b) of this part;

(2) A resolution of the board of

directors approving the plan;

(3) A written agreement from each

member of the board of directors and

each senior management official to

comply with the terms of § 708a.2(c)

(the agreement shall be executed by

NCUA as well, in the event of approval

of the transaction);

(4) A proposed merger or conversion

agreement;

(5) A proposed Notice of Meeting, as

described in Appendix A of this part;

(6) A copy of the form ballot and any

accompanying materials to be sent to

the members, as described in Appendix

A of this part;

(7) A complete copy of the package [to

be] submitted to any other regulatory

agencies involved in the merger or

conversion;

(8) A copy of an appraisal of the value

of the credit union, if the proposal is to
12662 Federal Register / Vol. 60, No. 45 / Wednesday, March 8, 1995 / Rules and Regulations

convert or merge the credit union either

directly or indirectly into a stock

institution, and any plan for sale or

distribution of stock to the credit

union’s members, officials and

employees; and

(9) In the case of a federally-insured

state chartered credit union, evidence

that the state supervisory authority is in

agreement with the merger or

conversion proposal.

(b) Coordination with State

Supervisory Authority. In the event the

proposal is filed with the NCUA prior

to receiving consent from the state

supervisory authority:

(1) The Board will coordinate with the

state supervisory authority; and

(2) The Board will not approve any

merger or conversion unless it is

approved by the state supervisory

authority.

(c) Waiver of NCUA rules and

approval by state supervisory authority.

A federally-insured state credit union

may, on a case-by-case basis, request a

waiver of this part 708a from the Board

and receive authority to proceed under

state rules and procedures. In making

such a request, the credit union shall

demonstrate that the concerns

underlying this part 708a are adequately

addressed and, in particular that:

(1) Proceeding under state rules

present no financial risk to the credit

union or the NCUSIF;

(2) Adequate safeguards exist against

breach of duty by, or preferential

treatment of directors, committee

members and others involved in the

transaction; and

(3) The transaction is otherwise fair to

members and carried out pursuant to an

informed and decisive membership

vote.

§ 708a.4 Approval of Proposal by NCUA.

If NCUA finds that the proposal

complies with the provisions of this part

and does not present an undue risk to

the NCUSIF or unduly prejudice the

members, it may approve the proposal

subject to such other specific

requirements as may be prescribed to

fulfill the stated purposes of the

proposal. No proposal will be approved

that does not clearly inform the

members of the fundamental rights they

would be giving up if their credit union

converts or merges into a non credit

union institution.

§ 708a.5 Approval of Proposal by

Members.

(a) Notification of members. The

members shall:

(1) Have the option of voting on the

proposal either in person at a

membership meeting or by mail ballot.

(2) Be given advance notice of the

membership meeting in accordance

with the provisions of Appendix A of

this part. The notice shall be delivered

in person to each member, or mailed to

each member at the address for such

member as it appears on the records of

the credit union, not more than 30 days

nor less than 14 days prior to the date

for the vote. The ballot to be used for the

membership vote shall be in accordance

with the provisions of Appendix A of

this part. The notice and ballot shall be

provided to the members at the same

time. If applicable, the notice and ballot

shall be provided in both English as

well as the native language of the

majority of the members.

(3) Be made aware that the complete

application and proposal are available

for inspection at the credit union’s

branch offices during normal business

hours.

(b) Vote by members. The proposal

must be approved by the affirmative

vote of a majority of the credit union’s

members.

(c) Notice of Approval to members. If

the proposal for merger or conversion is

approved by the membership and the

NCUA Board, prompt and reasonable

notice shall be given to all members.

§ 708a.6 Certification and Completion of

Merger or Conversion.

(a) Certification of vote. The board of

directors shall certify the results of the

membership vote to the Regional

Director within 10 days after the vote is

taken.

(b) Completion. Upon approval of the

proposal by NCUA, the state

supervisory authority (where the credit

union is state chartered), the members

and any federal agency with approval or

regulatory authority for the transaction,

the credit union may complete the

merger or conversion.

(c) Certification of completion. Within

30 days after the effective date of the

merger or conversion, the board of

directors of the continuing institution

shall certify the completion of the

transaction to the Regional Director.

(d) Cancellation of charter and

insurance. Upon NCUA’s receipt of

certification that the transaction has

been completed, the charter of the

federal credit union (if applicable) and

the insurance certificate of the federally

insured credit union will be canceled.

Appendix A to Part 708a—Notice to

Members of Special Meeting, Disclosure

and Ballot

(1) The Notice of Special Meeting must

include the following:

(a) The date, time and place of the Meeting;

(b) A description of the matters to be voted

upon at the Special Meeting;

(c) A statement in a prominent location in

bold letters that ‘‘A DISCLOSURE

STATEMENT HAS BEEN PROVIDED TO

YOU WITH THIS NOTICE OF SPECIAL

MEETING. THE DISCLOSURE MUST BE

READ BEFORE VOTING ON THE

PROPOSED (‘‘CONVERSION’’ or ‘‘MERGER’’,

as appropriate)’’, and

(d) A statement that a Mail Ballot for the

Special Meeting is enclosed.

(2) The Disclosure provided with the

Notice must at a minimum provide the

following information to the members:

(a) Factual information about the credit

union, i.e. name and address of credit union

and telephone number of contact person;

(b) Summary of the proposal which shall

contain but not necessarily be limited to

current financial reports for the credit union

and the other institution if a merger is

proposed; a projected financial report for the

continuing institution; analyses of share

values; an explanation of any proposed share

adjustments; and an explanation of any

changes relative to insurance such as

insurance of member accounts and life

savings and loan protection insurance.

(c) Summary of the direct and indirect

benefits to the credit union members, as well

as any disadvantages, including a clear

explanation of the nature of the change in the

members’ ownership interest in the reserves

and undivided earnings of the credit union

as a result of the merger or conversion;

(d) Summary of the direct and indirect

benefits to management and other key

persons at the credit union and at the new

institution, including a comparison of

salaries for those individuals employed by

both the credit union and the new

institution; copies of the certifications from

the directors and committee members that

they will receive no compensation either

directly or indirectly from the new

institution for a period of two years; and

disclosure of any relationship by blood or

marriage, of any of the officers, directors, key

personnel or principal stockholders of the

proposed institution to any officials or

employees of the credit union.

(e) For each director, officer, key employee

and consultant of the proposed institution,

state in detail the names, positions,

addresses, age and description of

employment and educational background.

Include any petitions for bankruptcy, civil

judgments (indicate the plaintiff and the

amount of the judgment), criminal conviction

(indicate the nature of the charge) and any

administrative action taken by a federal or

state agency.

(f) Description of how the proposed

merger/conversion results in a new financial

institution without the unique characteristics

of a credit union, for example, that the board

of directors (that is, any new board members,

since § 708a.2(c) prohibits compensation for

a period of 2 years) may be compensated as

officials instead of offering volunteer

services, that the credit union will lose its tax

exempt status, and any changes in the voting

power of members.

(g) A dollar expenditure comparison chart

of the estimated increases/decreases in

regulatory and insurance fees;
Federal Register / Vol. 60, No. 45 / Wednesday, March 8, 1995 / Rules and Regulations 12663

(h) Itemized expenses incurred to date in

the conversion process with an estimate as to

future expenses;

(i) Management’s discussion and analysis

of the proposed conversion, including its

economic advisability and how it will serve

the needs of the members of the merging or

converting credit union;

(j) Business and properties of the proposed

institution—describe in detail the assets of

the credit union and whether these assets

will be transferred to the proposed institution

and how the members will or will not benefit

from the transfer;

(k) Description and comparison of the

competition of the proposed institution and

why the proposed institution believes it can

effectively compete;

(l) In any transaction where the new or

resulting institution is a stock institution,

identify the principal owners of the proposed

stock institution (those who will beneficially

own directly or indirectly 1% or more of the

common and preferred stock outstanding)

starting with the largest common

stockholder. Indicate by footnote if the price

paid was for a consideration other than cash

and the nature of any such consideration.

Indicate the number of shares to be

individually owned by officers, directors and

key personnel of the new institution; and

(m) State in bold on the cover ‘‘PLEASE

READ THIS DISCLOSURE DOCUMENT. IT

CONTAINS IMPORTANT INFORMATION

ABOUT YOUR CREDIT UNION.’’

(3) The Mail Ballot must:

(a) State at the top in bold letters using 12

point pitch or greater that ‘‘THE ATTACHED

DISCLOSURE STATEMENT MUST BE READ

BEFORE VOTING ON THE PROPOSED

(‘‘CONVERSION’’ or ‘‘MERGER’’, as

appropriate)’’;

(b) The issues for the member to vote on

should be stated as follows:

Please vote for either (a) or (b) by checking

the appropriate box.

(a) Approve the merger b

(b) Disapprove the merger b

(c) Advise the member of the right to

terminate the mail ballot and attend and vote

at the Special Meeting.

[FR Doc. 95–5593 Filed 3–7–95; 8:45 am]

BILLING CODE 7535–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 95–ANE–02; Amendment 39–

9170; AD 95–05–03]

Airworthiness Directives; Hamilton

Standard 14RF Series, 14SF Series,

and Hamilton Standard/British

Aerospace Model 6/5500/F Propellers

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Final rule; request for

comments.

SUMMARY: This amendment supersedes

an existing airworthiness directive (AD),

applicable to Hamilton Standard 14RF

series, 14SF series, and Hamilton

Standard/British Aerospace 6/5500/F

series propellers, that currently requires

a one-time ultrasonic shear wave

inspection for cracks in the propeller

blade taper bore. This amendment

requires initial and repetitive ultrasonic

shear wave inspections, and a one-time

visual and borescope inspection of the

taper bore for corrosion as a terminating

action to the ultrasonic shear wave

inspections. This amendment is

prompted by reports of two incidents

where a portion of the propeller blade

was lost in flight. The actions specified

by this AD are intended to prevent loss

of a propeller blade due to cracks

initiating in the blade taper bore, that

can result in possible aircraft damage,

and possible loss of aircraft control.

DATES: Effective March 23, 1995.

The incorporation by reference of the

following Hamilton Standard Alert

Service Bulletins (ASB) was approved

by the Director of the Federal Register

as of May 2, 1994: ASB’s No. 14RF–9–

61–A66, No. 14RF–19–61–A34, No.

14RF–21–61–A53, No. 14SF–61–A73,

and No. 6/5500/F–61–A27, all dated

April 18, 1994.

The incorporation by reference of all

other Hamilton Standard ASB’s and

Service Bulletins listed in this AD is

approved by the Director of the Federal

Register as of March 23, 1995.

Comments for inclusion in the Rules

Docket must be received on or before

May 8, 1995.

ADDRESSES: Submit comments in

triplicate to the Federal Aviation

Administration (FAA), New England

Region, Office of the Assistant Chief

Counsel, Attention: Rules Docket No.

95–ANE–02, 12 New England Executive

Park, Burlington, MA 01803–5299.

The service information referenced in

this AD may be obtained from Hamilton

Standard, One Hamilton Road, Windsor

Locks, CT 06096–1010; telephone (203)

654–3610. This information may be

examined at the FAA, New England

Region, Office of the Assistant Chief

Counsel, Burlington, MA; or at the

Office of the Federal Register, 800 North

Capitol Street NW., suite 700,

Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Frank Walsh, Aerospace Engineer,

Boston Aircraft Certification Office,

FAA, Engine and Propeller Directorate,

12 New England Executive Park,

Burlington, MA 01803–5299; telephone

(617) 238–7158, fax (617) 238–7199.

SUPPLEMENTARY INFORMATION: On April

18, 1994, the Federal Aviation

Administration (FAA) issued

airworthiness directive (AD) 94–09–06,

Amendment 39–8894 (59 FR 19127,

April 22, 1994), applicable to Hamilton

Standard 14RF series, 14SF series, and

Hamilton Standard/British Aerospace 6/

5500/F series propellers, to require an

ultrasonic shear wave inspection of the

blade taper bore for cracks, and

replacement, if necessary, with a

serviceable propeller blade. That action

was prompted by reports of two

incidents where a portion of the

propeller blade was lost in flight. On

March 13, 1994, an ATR–42 commuter

aircraft experienced an inflight loss of

the right propeller and a portion of the

associated engine gearbox. Later that

month, on March 30, 1994, an Embraer

EMB–120 commuter aircraft also

experienced an inflight loss of a portion

of a propeller blade. This blade

fractured at approximately the 19-inch

station and the remainder of the

propeller blade, propeller, and gearbox

remained intact.

Subsequent metallurgical examination

of these fractured blades revealed that

the fracture initiated in a small cavity or

pit that formed on the inner surface of

the taper bore inside the aluminum

blade spar. Further laboratory

investigations revealed these corrosion

pits may develop occasionally when

chlorine residue present in the cork

used to seal the inner taper bore

combines with water in the presence of

oxygen. That condition, if not corrected,

could result in loss of a propeller blade

due to cracks initiating in the blade

taper bore, that can result in possible

aircraft damage, and possible loss of

aircraft control.

Since the issuance of that AD, the

FAA has conducted engineering and

laboratory investigation and analysis of

world-wide inspection results received

from AD 94–09–06. This data indicates

that either periodic ultrasonic shear

wave inspection of the propeller taper

bore should be conducted every 1,250

flight cycles in service (CIS) in order to

discover cracks that may initiate in pits,

or a one-time visual and borescope

inspection of the taper bore should be

conducted after removing the propeller

inner taper bore cork seal to insure that

no corrosion has occurred.

The FAA has reviewed and approved

the technical contents of the following

Hamilton Standard Service Bulletins

(SB’s) and Alert Service Bulletins

(ASB’s):

ASB’s No. 14RF–9–61–A66, No.

14RF–19–61–A34, No. 14RF–21–61–

A53, No. 14SF–61–A73, and No. 6/

5500/F–61–A27, all dated April 18,

1994, that describe procedures for

ultrasonic shear wave inspections of the