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e-CFR
Data is current as of October 10, 2008

Title 12:
Banks and Banking
PART 563—SAVINGS ASSOCIATIONS—OPERATIONS

Subpart C—Securities and Borrowings

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§ 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 (tier 2
capital) under part 567 of this chapter. 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 §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
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
§565.4(b) of this chapter and meets the regulatory capital requirements at
part 567 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.

[72 FR 1927, Jan. 17, 2007, as amended at 72 FR 69438, Dec. 7,
2007]

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