The Fed proposes scrapping the annual depositor vote that mutual holding companies must win before giving up a dividend
The vote goes away.
At a mutual savings institution the depositors are the members, and where a mutual holding company sits above a listed subsidiary and wants to decline its share of a dividend, those members must approve it every year. The Federal Reserve Board proposed on Friday to delete that requirement for institutions that were already waiving dividends before 1 December 2009.
It is docket R-1895, and it is the first substantive rewrite of the mutual bank framework since the rules were first written in 1993.
Why a mutual holding company waives a dividend at all
The mechanism is worth stating plainly, because it looks like charity and is not.
A mutual holding company typically owns most of the stock of a mid-tier company whose remaining shares trade publicly. When the holding company waives, the money that would have gone to it is instead distributed across the other shareholders. The Board's own description of the effect is that this increases the value of the public stock and improves the mid-tier company's ability to attract investors for future capital raises. Waiving is how a depositor-owned institution raises outside capital without converting fully to stock form and losing its mutuality.
The conflict is equally plain, and the current rule was built around it. Directors of the holding company may themselves own stock in the mid-tier company, so they may benefit directly from a waiver their own board approves.
What is removed and what stays
Under Regulation MM today, a legacy waiver holding company files a 30-day notice, its board expressly determines that the waiver is consistent with its fiduciary duties to members, and the notice affirms that a majority of eligible members approved the waiver within the previous 12 months.
The proposal removes the third of those. The first two remain, and the Board would add a disclosure requirement so members are told about the conflict.
The reasoning given is administrative. Commenting on the Board's 2011 interim final rule, institutions said members largely do not understand dividend waivers or do not care, that turnout is poor without expensive outreach, and that the burden is compounded because the regulation permits only one year of waivers to be considered at a time. The Board writes that it understands members typically have no concerns about the conflict, and that the annual vote therefore often represents an unnecessary expenditure of resources.
Non-legacy institutions get attention too. Those that did not waive before December 2009 must either carry a majority of the entire board with every benefiting director abstaining, or have benefiting insiders give up their own dividends, which the Board says has effectively prevented them from waiving at all.
The rest of the package
Beyond dividends, the proposal would reduce the burden on conversions from mutual to stock form, revise certain post-conversion restrictions, and end the requirement that subsidiary holding companies of mutual holding companies obtain federal charters. It would also amend the capital rule to clarify that certain mutual capital instruments count as regulatory capital, and codify model term sheets for mutual capital certificates as appendices to the regulation.
That last item is the one Governor Michael S. Barr singled out. He approved issuing the proposal and said he hopes comments will address how instruments like mutual capital certificates and special deposits "might perform as viable loss-absorbing capital under stressed conditions." He also reserved judgment on the final rule pending sufficient safeguards on conflicts of interest and sufficient accountability for both waivers and conversions.
Vice Chair for Supervision Michelle W. Bowman put the case for the sector. Depositor-owned banks contribute to the institutional diversity of the US banking system, she said, and more than 90 percent of them hold less than $3bn in assets.
The vote this publication reported yesterday
On Thursday afternoon TFS Financial Corporation filed an 8-K recording that the mutual holding company owning 81 percent of its stock had Federal Reserve non-objection to waive dividends of up to $1.27 a share for the 12 months ending 7 July 2027. The members voted on 7 July. Fifty-nine percent of eligible votes were cast, and 97 percent of those were in favour.
That is the exercise the proposal would abolish for legacy waiver institutions. Whether it would have applied to that one is not established here, because the filing does not say which category the holding company falls into, and this brief does not guess.
