Finance Subsidiaries

PURPOSE: This regulation authorizes associations to establish finance subsidiaries whose sole purpose is to issue debt or equity securities and remit the proceeds of such issuances to the association. Editor’s Note: Copies of all referenced federal regulations are available to any interested party at the Division of Finance, Room 630, 301 West High Street, Jefferson City, Missouri or the Office of the Secretary of State at a cost established by state law. (1) Definitions. As used in this regulation— (A) Assets collateralizing means any assets of a finance subsidiary securing, pledged to or committed to a securities issuance by a finance subsidiary; (B) As used in this regulation— 1. Assets transferred or transferring assets means assets of or liabilities issued by a parent association that are transferred or made available by such association to a finance subsidiary. Assets transferred include guarantees of a finance subsidiary’s securities issuances by its parent association. 2. For the purpose of calculating the thirty percent (30%) aggregate and two hundred and fifty percent (250%) per-issuance transfer limitations set forth in paragraphs (3)(A)1. and 2., respectively, of this regulation, assets transferred by an association to a finance subsidiary include: A. Assets or liabilities used to capitalize a finance subsidiary, to collateralize an issuance of securities by an established finance subsidiary or to maintain collateral levels for any security issued by a finance subsidiary; B. Any guarantee issued by a parent association with respect to the securities issued by a finance subsidiary or any collateral for such guarantee as provided in subsection (3)(D) of this regulation; C. Any portion of the proceeds of a securities issuance by a finance subsidiary held by a finance subsidiary for collateral maintenance, fee payment or other necessary expenses related to the securities issuance or collateralizing assets; and D. Any assets or liabilities received by a finance subsidiary from its parent association by or after remitting to the parent association the proceeds of a securities issuance by such finance subsidiary. The remittance of proceeds of a securities issuance to a parent association by any method, including those set out in section (5) of this regulation, shall not decrease the amount of assets transferred for the purposes of paragraphs (3)(A)1. or 2. of this regulation; and (C) Finance subsidiary means an association’s subsidiary subject to the provisions of this regulation whose sole purpose is to issue securities that the association is authorized to issue directly (or, if the parent association is a mutual association, would be authorized to issue if it converted to the stock form) and to remit the net proceeds of such securities issuances to its parent association. (2) Establishment of Finance Subsidiaries. An association may establish one (1) or more finance subsidiaries as defined in subsection (1)(C) of this regulation. Prior to the establishment of any finance subsidiary, the board of directors of the association shall, by resolution, vote to authorize the creation of a finance subsidiary in furtherance of a written business plan to reduce interest rate risk and to control credit risk and shall agree to make the books and records of its finance subsidiary available to the director. The board of directors of an association shall be responsible for monitoring the use of all proceeds obtained through the issuance of securities by the finance subsidiary and shall ensure compliance with the business plan pursuant to which the finance subsidiary was established. (3) Transactions Between a Parent Association and its Finance Subsidiaries. (A) An association may provide the capital to establish one (1) or more finance subsidiaries by transferring assets to such a finance subsidiary provided that— 1. The aggregate current book value of all assets transferred by an association to a finance subsidiary shall not, without the prior written approval of the director, exceed thirty percent (30%) of the current book value of the association’s total assets determined as of the date of any transfer of assets; and 2. The aggregate current market value of all assets transferred shall not, without the prior written approval of the director, exceed the amount necessary and customary for the issuance of the type of securities to be issued by a finance subsidiary (which may be the amount required by the rating criteria of a nationally recognized investment rating service) or two hundred and fifty percent (250%) of the gross proceeds of a finance subsidiary’s securities issuance, whichever is less. (B) A finance subsidiary shall not be consolidated with its parent association for purposes of calculating the net-worth requirement of the parent association pursuant to applicable federal regulations. (C) An association may guarantee any securities issued by its finance subsidiary, provided that the guarantee shall not exceed the sum of the unpaid principal balance, any accrued but unpaid interest, any redemption premium and any post-default interest on such securities, and provided further, that the guarantee shall provide that the assets collateralizing the payment of such securities of the finance subsidiary shall be exhausted before recourse may be had to the guarantee. (D) If a guarantee of a finance subsidiary’s securities by its parent association is collateralized or if a liability issued by a parent association to its finance subsidiary is collateralized, then the greater of the face amount of such guarantee or liability or the current book value of the collateral shall be included in the total amount of assets transferred by a parent association under the limitation of paragraph (3)(A)1. of this regulation. The greater of the face amount of such guarantee or liability or the market value of the collateral shall be included in the total amount that may be transferred by a parent association under the limitation of paragraph (3)(A)2. of this regulation. (E) The amount of assets transferred (as defined in subsection (1)(B) of this regulation) by an association to a finance subsidiary shall not be subject to the loans-toone-borrower limitations imposed by applicable federal regulations. (4) Issuance of Securities by Finance Subsidiaries. (A) A finance subsidiary of an association may issue, either directly or through a third party intermediary, any security that its parent association is authorized to issue (or, if the parent association is a mutual association, would be authorized to issue if it converted to the stock form), subject to the provisions of this regulation. (B) A finance subsidiary shall not issue or deal in the deposits or savings accounts of its parent association or state or imply that securities issued by it are insured by the Federal Deposit Insurance Corporation. (C) A finance subsidiary shall not issue any security the payment, maturity or redemption of which may be accelerated upon the condition that its parent association is insolvent or has been placed into receivership. (D) Voting Stock of Finance Subsidiary. 1. An association providing capital to a finance subsidiary shall own one hundred percent (100%) of the finance subsidiary’s outstanding voting common stock. An association shall not transfer or otherwise assign any interest in its finance subsidiary’s common stock to any other person or entity without the prior written approval of the director. 2. A finance subsidiary may provide for voting rights for holders of preferred stock in the manner, for the time period and to the extent customary to protect the rights of such preferred stockholders, provided that upon the expiration of any event giving rise to the exercise of such voting rights, such rights shall be vested exclusively as provided in paragraph (4)(D)1. of this regulation. Such events include, without limitation, the following: A. The finance subsidiary fails to pay dividends for at least one (1) dividend period; B. Authorization is sought for any merger, consolidation or reorganization of the finance subsidiary or its parent association (except in a supervisory case) in which the issuing finance subsidiary or its parent association is not the survivor and the net worth of the resulting finance subsidiary or parent association available for payment of any class of preferred stock is less than the net worth available for such class prior to the merger, consolidation or reorganization; C. Authorization is sought to create a class of preferred stock having a preference or priority over an outstanding class or classes of preferred stock; D. Authorization is sought for any action that would adversely change the specific terms of a class of preferred stock; E. Authorization is sought to increase the number of shares of a class of preferred stock; and F. Authorization is sought for the issuance of an additional class or classes of preferred stock without the finance subsidiary having met specified financial standards. (5) Transfer of Proceeds of the Issuance of Securities. All proceeds from the issuance of any security by a finance subsidiary, net of the reasonable costs (including any proceeds held in the subsidiary for collateral maintenance, fee payment or any other necessary expenses related to the finance subsidiary’s securities issuances or collateralizing assets) associated with the issuance of securities by the finance subsidiary and the organization of the finance subsidiary, shall be remitted to the finance subsidiary’s parent association. Such remittance may be made by the payment of dividends on the common stock issued by a finance subsidiary to its parent; by a redemption of the common stock issued by the finance subsidiary to its parent association; by the repayment of any loan made by the parent to the finance subsidiary as part of the capitalization of the subsidiary; or by the purchase of assets of, or liabilities issued by, the parent association (subject to the limitations of subsection (3)(A) of this regulation on the aggregate and per-issuance transfers by a parent association to a finance subsidiary) provided that, any capital stock (common or preferred), mutual capital certificate, subordinate debt or any other security that would otherwise be considered to be regulatory net worth as defined in applicable federal regulations shall not, if issued by the parent association to its finance subsidiary, be included in the parent association’s regulatory net worth unless no assets of the parent association have been transferred to the finance subsidiary, the transaction transfers the risk of equity ownership to parties other than the finance subsidiary or any insured institution and the director approves the transaction. The remittance of proceeds to a parent association by any method shall not reduce the amount of assets transferred to a finance subsidiary for purposes of the transfer limitations of subsection (3)(A) of this regulation. (6) Notification to the Director. (A) Prior to the establishment of any finance subsidiary, the transfer of any additional assets to an existing finance subsidiary, or the issuance of any additional securities by an existing finance subsidiary, the board of directors of the parent association, or a duly authorized executive committee, shall submit written notification to the director specifying— 1. The name of the finance subsidiary; 2. The jurisdiction of incorporation of the finance subsidiary; 3. The amount of assets of the parent association to be transferred (including the terms of any guarantee to be issued by the association or any affiliate of the association); the current book value of all such assets previously transferred to the finance subsidiary; and the amount representing thirty percent (30%) of the current book value of the parent association’s total assets; and 4. When known and to the extent permitted by the Securities Act of 1933. A. A description of the securities to be issued by the finance subsidiary, including the term; B. The aggregate amount of the securities issuance; the anticipated amount of gross proceeds of the securities issuance; and the current market value of assets collateralizing the securities issuance; C. The anticipated interest or dividend rates and yields, or the range, and the frequency of payments on the finance subsidiary’s securities; D. The minimum denomination of the finance subsidiary’s securities; and E. Where the finance subsidiary intends to market the securities. (B) Within ten (10) days after the issuance of any securities through a finance subsidiary, its parent association shall send to the director written notification and a copy of any prospectus, offering circular or other similar document concerning such an issuance of securities. (C) Prior Approval of the Director. 1. Any association that fails to meet its net-worth requirement, as provided in applicable federal regulations, or that is operating under any supervisory agreement, shall not establish a finance subsidiary, transfer assets to an existing finance subsidiary or issue additional securities through an existing finance subsidiary without the prior written approval of the director. To obtain the written approval of the director, the board of directors of the association or an authorized executive committee shall submit a written application containing the information specified in subsection (6)(A) of this regulation, as well as any additional information required by the director. 2. Within ten (10) days of the filing of an application specifically designated as filed pursuant to paragraph (6)(C)1. of this regulation or any additional information by an association subject to such paragraph, the director shall notify the applicant in writing either that all information required has been filed or that additional specified information must be filed. If the director does not act on the application within thirty (30) days of the date of written notice that all required information has been filed, such application shall be deemed to be approved. 3. The director shall approve the application of an association, subject to the requirements of paragraph (6)(C)1. of this regulation, unless the director finds that the establishment and operation of a finance subsidiary, the transfer of assets to an existing finance subsidiary or the issuance of additional securities by an existing finance subsidiary is likely to affect adversely the financial condition or the safe and sound operation of the parent association. An adverse determination made by the director may be challenged by filing, within fifteen (15) days after notice of the director’s decision is mailed, a notice of appeal as provided for in section 369.319, RSMo. (7) Examination of Finance Subsidiaries. A finance subsidiary shall agree in writing to permit and to facilitate examinations and to pay any costs of such examinations as the director and the appropriate federal agency may deem necessary or appropriate. AUTHORITY: sections 369.144 and 369.299, RSMo 1994.* This rule originally filed as 4 CSR 260-11.030. This rule previously filed as 4 CSR 140-23.030. Emergency rule filed May 15, 1985, effective May 25, 1985, expired Sept. 22, 1985. Original rule filed May 24, 1985, effective Aug. 26, 1985. Rescinded and readopted: Filed Nov. 4, 1986, effective Jan. 30, 1987. Changed to 4 CSR 140-23.030, effective July 6, 1994. Amended: Filed Nov. 8, 1994, effective March 30, 1995. Moved to 20 CSR 1140-23.030, effective Aug. 28, 2006. *Original authority: 369.144, RSMo 1971, amended 1982, 1983, 1984, 1989, 1994 and 369.299, RSMo 1971, amended 1994.