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Regulators issue statement on Dodd-Frank restrictions regarding charter conversions by troubled banks

Banking regulators, in conjunction with the Conference of State Bank Supervisors, have released a statement regarding the restrictive effect of Dodd-Frank rules on the charter conversions of troubled banks.

Under Dodd-Frank, charter conversions “by a national bank or federal savings association to a state bank or state savings association” or “by a state bank or state savings association to a national bank or federal savings association” are prohibited if the institution has entered into a memorandum of understanding with or is under a cease-and-desist order from its federal regulator.

Section 612, however, does contain exemptions to the conversion restrictions. If the regulator does not object to the conversion, if the post-conversion regulator issues a notice of the conversion to the pre-conversion regulator, if the post-conversion regulator agrees to implement the plan or if approval of the conversion is based on the institution’s compliance with an enforcement action, the prohibition does not apply.

“The agencies expect that such exceptions would be rare and generally would occur only when an insured depository institution has already substantially address the matters in the enforcement action or there are substantial changes in circumstances,” the agencies said, pointing to situations in which there is new management or ownership.

When an insured depository institution files for conversion, the institution must send a copy of the application to its current and prospective federal regulator. After the prospective regulator determines that the conversion is acceptable, it is required to submit a plan to the current regulator to address the “significant supervisory matter in the enforcement action in a manner that is consistent with the safe and sound operation of the institution.”

The receiving regulator that issued the enforcement action will have 30 days to voice object to the conversion plan, which, if opposed, would remain prohibited under section 612. If the receiving regulator approves the plan, the conversion will be allowed so long as the plan satisfies the other requirements of the provision.

Section 612 also requires the current regulator to notify the prospective regulator of any supervisory or investigative actions that may result in a future cease-and-desist order or memorandum of understanding, and the prospective regulator must have access to all information related to investigative or supervisory proceedings.

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