meaningful participation of account holders, the real owners, in conversion transactions.

The stories of lucrative payoffs to officers and directors have evidently created an almost irresistible urge for other mutuals to leap into the game, and we firmly believe that the subcommittee needs to look very carefully at whether this is good public policy or the proper way to build a financial system. Clearly, what the depositors are getting in these conversions is nothing more than the crumbs from the table, and as others have pointed out, not only has the conversion mania created a new and aggressive breed of insiders, but it has also spawned a sophisticated team of outsiders who roam the country opening accounts in institutions in hopes of cashing in on lucrative stock deals offered at discount prices in conversion.

As I noted in my written statement, one principal area of concern for us is the poor and often misleading disclosure given to mutual depositors of a proposed conversion to a stock company. Depositors have been both misinformed by management about the nature and consequences of a conversion and often are provided woefully inadequate time and resources to respond to management recommendations for conversion. The simple fact is that depositors are often at an overwhelming disadvantage to appreciate the significance of and to respond to proxy statements that are too often written in incomprehensible legalese and often delivered in junk mail packaging.

We believe that H.R. 3615 takes an important first step to curb the raging wildfires of greed that have been set in many States through the passage of liberal conversion statutes. The bill would provide for parity governing the conversion of mutual associations and this would, we hope, begin to curb the perverse incentives that are currently at play in the marketplace. We believe that the bill should certainly be passed, but we believe it could stand some modest improvement.

As was pointed out earlier, the OTS rules could stand improvement themselves, and the current bill does nothing to correct weaknesses in the Federal conversion regulations. In fact, under current OTS rules, management can walk away with virtually 50 percent of the stock in a conversion.

And we find, frankly, no public policy rationale for insiders having an advantage over depositor owners of mutual institutions in a conversion and we would recommend that the bill be amended to prohibit any preference for insiders in a conversion; insiders ought to participate just like a member of such an institution.

We would concur with Director Fiechter's recommendation this morning that the subcommittee consider a ban on merger conversions. These are obviously the most abusive conversion deals on the marketplace that violate general principles of market transactions. And as was pointed out in the previous discussion, many insiders are able to manipulate the voting on a conversion through the exercise of continuing or general proxies, and we believe that the subcommittee ought to consider the prohibition of the use of any continuing proxy in the voting on a conversion-in other words, that only fresh proxies should be able to be used for the approval of the conversion.

Finally, we also find merit in the discussion that occurred during the first panel surrounding the notion of having the book value of a mutual institution given back to a community in the course of a conversion. In short, the bill needs to ensure that conflicts of interest are removed from the marketplace before institutions considering conversion to stock form, that fair play be the rules of the game during the course of any conversion, and that this include fair valuations of institutions, fair disclosure, and adequate time for members of mutual institutions to respond to any recommendation, and that members have the option to have funds given back to their community.

I would be glad to answer any questions that you have.

[The prepared statement of Mr. Lewis can be found in the appendix.]

Chairman NEAL. Thank you, Mr. Lewis. Mr. Smith, we would like to hear from you.

STATEMENT OF BRIAN SMITH, POLICY DIRECTOR, SAVINGS AND COMMUNITY BANKERS OF AMERICA

Mr. SMITH. Thank you, Mr. Chairman.

As you know, I am not David Carson. I am pinch-hitting for him, and the collision between the deicing truck and the U.S. Air flight didn't create any casualties, but he apologizes for not being here.

I appreciate the opportunity to testify on H.R. 3615. This bill would specify that mutual banks that aren't regulated by OTS would be required to convert in accordance with regulations of the FDIC substantially similar to those of the OTS. Although the FDIC has begun the process of rule making in the area, there currently are no regulations governing these conversions, leaving such alterations in corporate status entirely up to State law, although the FDIC would automatically become the securities regulator of the converted entity. Our understanding is that the bill would be effective to its retroactive date of introduction and designed to ensure that the treatment of the depositors and institution insiders would track the OTS standard in all cases.

SCBA does not believe at this time that there is a problem in the conversion area that couldn't be cured through this appropriate action by the FDIC. On two occasions SCBA has urged the FDIC to issue curative rules. Because of the retroactive nature of H.R. 3615, until the FDIC does act, there will be a cloud over the whole area of non-OTS regulated conversions, even for companies that would willingly convert under OTS-type rules. This is regrettable and can deter the attraction of capital.

Consequently, we were encouraged that the FDIC, on January 24, did issue a proposed policy statement on mutual-to-stock conversions. The statement covered correct pricing of shares, apportionment of subscription rights and adequate and timely disclosure. It also specifically asked for comment on whether the FDIC should adopt an enforceable regulation governing these conversions, regulations that would closely follow the existing OTS standards.

We answered that question yes, because the conversion framework developed by the OTS is one that has served affected savings institutions, their members and their communities for 20 years and done so very well. It was developed in the light of substantial con

gressional interest and has been consistently upheld by the courts as consistent with depositor rights. As Mr. Fiechter noted earlier, over 1,000 institutions have converted, bringing in over $16 billion in outside capital. Those capital resources served as a shock absorber against losses to taxpayers.

SCBA thus regards the availability of a stable, legal framework for conversions as a goal of the utmost importance. There are still over 1,200 institutions with approximately $230 billion in assets remaining in mutual form. Mutual institutions have proven over the years to be conservative, community-oriented companies because of their form of organization, are well able to adopt a long-range approach to business planning. We believe that the preservation of at least the option to remain as a mutual is very important.

However, mutuals can raise capital only through earnings. If one thing is clear in the aftermath of FIRREA, it is that capital is king. The ready access to additional capital provided by the conversion option is very important to mutual institutions in the event they do need that access to additional capital.

Despite the benefits that the OTS approach to conversion has offered over the years, it has been subject to some criticism as being insufficiently generous to depositors. The Federal Home Loan Bank Board, the OTS predecessor agency, long ago rejected the idea of a free distribution of stock. Such distribution would add nothing to the capital distribution of the company.

The Bank Board was also concerned that the availability of such windfalls would have a disruptive and destabilizing effect on the mutual segment of the business. Those concerns about stakeout deposits for conversions under existing rules would be exacerbated by the possibility of a free distribution.

In addition, such a distribution would create substantial additional pressure that might make the mutual form of organization unviable.

The primary objective of the conversion process should be to produce a stronger depository institution in a position to provide home lending and other community banking services that the entity was chartered to deliver. We would be troubled by specific CRA contribution mandates loaded specifically onto converting institutions, though as with all applications, CRA compliance is a relevant issue.

As I noted, SCBA has asked the FDIC to issue conversion rules. Specifically, we would like the FDIC, rather than to preempt State law entirely in this area, to undertake an examination of State law regimes and permit those that are substantially similar to the OTS standard to continue in force. If such a State framework met these standards, conversions could proceed under that State framework. Otherwise, they would have to be processed by the FDIC under its regulations. This would be less intrusive than a total preemption, leaving room for accommodation to legitimate variations desired by State legislators and regulators, and leave some flexibility in the dual banking system.

We also believe that some clarification of the retroactive impact of the legislation would be useful in permitting existing deals to go forward in a timely manner.

Finally, we would like to mention that the current trend away from OTS jurisdiction has often been mischaracterized. Originally, it was alleged that the desire was to obtain broader investment authority. That was not the case because even though such broader investment authority would not be granted, institutions still continued to convert.

In addition, many institutions have made the switch, even though the State conversion rules, as in Illinois and Indiana, absolutely track existing OTS rules. So these institutions have not fled the OTS mutual-to-stock conversion standards.

The objective in these conversions is to escape OTS examination costs as the financial sector consolidates. These examination costs can be quite substantial for a small institution. As you know, many commercial banks over the years have similarly avoided national bank charters. This is part-indeed the essence of the dual banking system, and it should be preserved.

Mr. Chairman, this concludes my summary of the prepared remarks and I would be happy to take any questions. Thank you.

[The prepared statement of Mr. Carson (submitted by Brian Smith) can be found in the appendix.]

Chairman NEAL. Thank you. To tell you the truth, I think both of you made very good statements. I don't really I understand your positions, and I really don't have any questions. If we develop some, would it be all right if we got in touch with you and asked you to submit some for the record?

[The prepared statement of Mr. Kostiw can be found in the appendix.]

Mr. LEWIS. We would be delighted to.

Chairman NEAL. Well, I thank you very much for your testimony. The subcommittee will stand adjourned subject to the call of the Chair.

Thank you again very much for coming together.

[Whereupon, at 12:30 p.m., the hearing was adjourned.]