Regulators Issue Statement on Restricted Charter Conversions

By Richard Roth, J.D., Editor, the CCH Federal Banking Law Reporter, CCH Bank Compliance Guide, Bank Digest; co-author, Dodd-Frank Wall Street Reform and Consumer Protection Act—Law, Explanation and Analysis.

The federal prudential regulatory agencies and the Conference of State Bank Supervisors have jointly issued a description of the process to be followed when a financial institution subject to ongoing regulatory enforcement activity wishes to convert to a different charter. The Dodd-Frank Act prohibits such conversions without the agreement of the regulatory agencies that are involved, and it requires that conditions be imposed to ensure that the conditions that gave rise to the enforcement activity are remedied.

The restrictions apply when a national bank or federal savings association intends to convert to a state bank or thrift charter, or when a state institution plans the reverse. A covered institution would be one that is subject to a cease-and-desist order, or other formal enforcement order issued by its current state or federal regulator, or one that is a party to a memorandum of understanding entered into with that regulator. While the prohibition applies only if the enforcement action covers "a significant supervisory matter," the interagency statement said that will include all formal enforcement actions that are enforceable under 12 USC 1818 (Federal Deposit Insurance Act Sec. 8).

A conversion will be eligible for an exception from the prohibition if four criteria are satisfied:

The agencies warned that this exception to the ban will rarely be available, and conversions likely will be permitted only if the institution already has substantially cured its problems or substantial changes in circumstances have occurred. Changes in ownership or management were cited as possible changes in circumstances.

The Dodd-Frank Act requires any institution seeking a charter conversion to send a copy of the application to its current regulator at the same time that application is filed. This is in addition to the notice that is to be given by the proposed new regulatory agency in the case of a conversion that is subject to the conversion prohibition. If the conversion would be subject to the prohibition, the proposed new regulatory agency is to consider promptly whether it will consider granting an exception. The required plan to address the supervisory concerns should be developed in consultation with the institution's current supervisory agency.

In the case of any conversion application, the existing regulatory agency is to notify the proposed new regulator of any ongoing proceedings that are likely to result in an enforcement action that would implicate the conversion ban, and the proposed regulator is to be given access to all of the information that is related to those proceedings. Other supervisory information also may be shared by the agencies that are involved even if the prohibition is not relevant when supervisory review of the conversion application requires it, the statement added. The agencies noted that the July 2009 "FFIEC Statement on Regulatory Conversions" remains in effect.