August 10, 2018

Enclosed is a link to an article that Eric Luse of our firm wrote for the American Banker explaining why the Federal Reserve Board’s dividend waiver rule is unworkable and unfair to mutual holding companies and public stockholders.  The rule, which was implemented after the enactment of the Dodd-Frank Act, effectively prohibits mutual holding companies from waiving dividends.  This means that mutual holding company subsidiaries will be forced to either not pay any dividends at all or pay dividends to all stockholders, including their mutual holding companies. 


If a mutual holding company subsidiary is required to pay dividends to its mutual holding company parent (which has not invested any new capital in the subsidiary), it substantially increases the cost of paying any dividends to minority public stockholders who have purchased their shares of common stock and invested new capital in the mutual holding company subsidiary.  Prohibiting mutual holding company dividend waivers means that if a mutual holding company subsidiary pays any dividends, it will be transferring value or capital from public shareholders who have invested in their mutual holding company subsidiary to the mutual holding company.


Mutual holding companies have raised more than $28.0 billion of new capital for community savings banks, and remain a very attractive way for mutual institutions to raise capital incrementally and preserve their independence and community focus.  Mutual holding company subsidiaries, like all other bank and savings and loan holding companies, should be able to pay market dividends to their public stockholders without diluting the ownership interest of such stockholders. 


Last year, the House of Representatives included relief from the Federal Reserve’s dividend waiver rule in the Financial Choice Act.  Like many other provisions that would have helped community banks, this was not included in the Senate bill that became law. The Federal Reserve’s dividend waiver prohibition disregards prior federal rules and policy that allowed mutual holding companies to waive dividends. The Federal Reserve should revisit and amend its dividend waiver rule to enhance, rather than inhibit, mutual holding company formations.


We look forward to any comments that you may have on the article.