K&LNG
SEPTEMBER 2006
Alert
Financial Institutions
Massachusetts Amends Bank Laws Relative
to Governance and Loans to Officers
On August 9, 2006, Governor Romney signed into
law Chapter 221 of the Acts of 2006—An Act
Relative to State Chartered Banks (“Chapter 221”).
Chapter 221 makes several changes relating to the
committee structure and reporting obligations of
boards of Massachusetts savings banks, co-operative
banks and trust companies. It also amends the
Massachusetts banking statutes to increase the lending authority of state chartered banks on loans to
senior officers and otherwise clarify reporting obligations with respect to insider loans. Chapter 221
takes effect on November 7, 2006. This Alert will
summarize Chapter 221.
COMMITTEE STRUCTURE CHANGES
Changes to Mutual Savings Bank Boards
of Investment
The most significant reform made by Chapter 221 is to
reduce the statutory autonomy of mutual savings bank
boards of investment. The statutory requirement that
the board of investment approve all loans, all rates of
interest on loans, all purchase and sales of securities
and bonds, all foreclosures and all interest rates paid
on deposit accounts has been eliminated. Such duties
may be delegated by the full board of trustees to the
board of investment or one or more committees made
up of trustees or officers of the bank, subject, of
course, to appropriate controls and oversight.
This modification reflects a significant adjustment to
the position of the board of investment in a mutual
savings bank. For over 100 years, Massachusetts
savings banks have operated with both a board of
trustees and a separate board of investment.
Although all members of the board of investment
were also trustees, the board of investment was legally a separate board with its own independent statuto-
ry powers, not an executive committee acting under
the delegated authority of the full board of trustees.
In a Massachusetts mutual savings bank, the board of
trustees has traditionally determined the bank’s general policy on loans and investments. The board of
investment, however, had independent authority
under old Mass. Gen. L. ch. 168, §12 to make individual loan and investment decisions pursuant to
those policies. By eliminating the statutory requirement that the board of investment approve all loans
and investments and determine the rates of interest to
be paid on deposit accounts, the Legislature apparently intended to limit its legal independence from the
board of trustees. This effectively makes the board
of investment function more like an executive committee of the board of trustees and not as an
autonomous board with independent statutory functions. It also gives the board of trustees the authority
to allocate loan, investment and deposit interest rate
setting functions to other committees.
This change is probably one of more theoretical significance than practical effect to most mutual savings banks. Chapter 221 should not alter the traditional functions of the board of investment unless the
full board of trustees wants to assign some of those
functions to another committee of trustees or officers. It grants a mutual savings bank the flexibility
to adjust the role of its board of investment but does
not force it to do so. If approval by the board of
investment is dispensed with on individual loans,
investments and deposit interest rates, the full board
of trustees must determine who approves loans and
investments and sets deposit interest rates and what
oversight will be applied to such approvals. This
may require some mutual savings banks to review
and adjust, if appropriate, their internal governance
documents (i.e., governance principles and committee charters).
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SEPTEMBER 2006
Changes to Co-operative Bank
Security Committees
Chapter 221 makes significant changes to the statutory responsibilities of co-operative bank security
committees by creating a requirement that the security committee deliver a report relating to all loans and
investments to each meeting of the full board of
directors. The requirements for this report are discussed in a separate section below.
Although simply adding a reporting requirement
appears at first glance to be an innocuous change,
the contents of the report imply that the statutory
role of the security committee has been expanded to
that historically associated with an executive committee. The new report is required to address any
changes in a co-operative bank’s investments and
reserves, implying that the committee has some
degree of responsibility for those areas. This is a
significant modification from prior practice. It may
require co-operative banks to amend their by-laws
and security committee charters to reflect the statutory adjustment to the security committee’s function.
Traditionally, the security committee at a co-operative bank has functioned exclusively as a loan committee. Rarely, if ever, have security committees
served traditional executive or investment committee
functions. Many co-operative banks will likely use
this statutory change as an opportunity to revisit
committee functions and ensure that the security
committee has members with expertise in bank
investments as well as loans.
Co-operative Bank Finance Committee
Name Changed
Section 11 of Chapter 170 of the General Laws has
been amended to change the name of the finance
committee to the “audit committee.” There are no
substantive changes to Mass. Gen. L. ch. 170 §11
relative to the duties of the redesignated audit committee. Since the finance committee in most cooperative banks operated as an audit committee, this
change need not involve any modifications to the
current operations of the finance committee other
than making the necessary amendments to the
bank’s by-laws and committee charters to reflect the
change of name. Alternatively, a co-operative
bank’s board of directors could by resolution determine that the bank’s finance committee shall be the
“audit committee” required by Mass. Gen. L.
ch. 170, §11. The committee name change may ultimately prove beneficial because it should encourage
retitled audit committees to focus their attention on
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critical audit and risk oversight functions rather than
approval of routine operating expenses. Moreover,
as co-operative banks grow, there should be no
doubt as to which committee is serving the role of
audit committee under 12 C.F.R. Part 363.
REPORTING CHANGES
Chapter 221 makes significant changes to the content of, and responsibility for, the statutory reports
required under Chapters 168 (savings banks),
170 (co-operative banks) and 172 (trust companies)
of the General Laws.
Mutual Savings Bank Board Reports
Report to Board of Trustees
Mass. Gen. L. ch. 168, §11 has been modified to
simplify the quarterly reporting previously performed by the board of investment of a
Massachusetts mutual savings bank to the full board
of trustees. Under the old Mass. Gen. L. ch. 168
§11, the board of investment was obligated to deliver to the board of trustees a report for the period
since the last trustees’ meeting which included lists
showing each loan(s) in excess of $50,000 made to
any borrower; each loan modification; all purchases
of securities by the bank; all unrepaid tax escrow
advances made to borrowers; all real estate acquired
by foreclosure; all donations; all expenditures for
memberships and services; all commissions paid by
the bank to acquire loans; certain loan delinquencies
(i.e., real estate loans more than six moths overdue
or with more than twelve months’ unpaid taxes, time
loans in excess of $25,000 overdue more than
90 days; debt obligations more than 30 days overdue) and the rates of interest on paid deposit
accounts. Effective November 7, 2006, the chief
executive officer, chief financial officer or the board
of investment of a mutual savings bank is obligated
to submit a less burdensome report to the trustees for
a quarterly meeting “summarizing loan activity,
investment activity, loans in arrears, foreclosure
actions, changes to reserve requirements and deposit
activity” (emphasis added) for the period since the
last regular trustees’ meeting. The board of investment may, but need not, approve the report prior to
submission to the board of trustees. Furthermore,
the requirement that the report include lists with
detailed information about every loan and securities
transaction made by the bank since the last trustees’
meeting has been eliminated. The lists need not be
included as part of the simplified report.
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SEPTEMBER 2006
Revised Mass. Gen. L. ch.168, §11 only requires the
board of trustees be furnished a report containing
appropriate summary information about the most
important financial metrics. The board of trustees
also need no longer be furnished with a quarterly
report containing detailed data on contributions or
membership expenses, purchases of certain services,
unrepaid tax escrow account balances and the like.
The board of trustees may require a senior officer to
file the report or delegate this responsibility to the
board of investment. The trustees still have the
inherent power to request additional or specific data
in the reports given. These changes should be welcome news to the trustees and management of mutual savings banks.
Monthly Officers’ Report to Board of Investment
The treasurer or another officer designated by the
board of investment of a mutual savings bank is obligated to submit a monthly financial report to the
board of investment. The monthly report should
include information on changes in investments;
changes in reserves and contingencies (i.e., loan losses) and lists of loans for the following categories:
non-real estate loans in excess of $50,000 overdue
for more than 30 days; real estate loans more than six
months in arrears; real estate loans with unrepaid
taxed escrow advances; loans made during the
reporting period which bring the aggregate liability
of the borrower to over $100,000 (or $500,000 or 1%
of surplus in the case of a mutual savings bank with
more than $1,000,000,000 in assets). This new
monthly report to the board of investment required
by Chapter 221 tracks the reporting requirements for
trust companies contained in Mass. Gen. L. ch. 172,
§16. Some of the items which must be reported are
of marginal utility as financial controls (i.e., unpaid
tax escrow advances). The Commissioner of Banks
is, however, given the authority to waive or modify
the lists of transactions to be included in the monthly
officer’s report.
New Security Committee Report
Co-operative bank—mutual or stock form—security
committees have also been given the added responsibility of providing the full board of directors with a
report similar to that required by Mass. Gen. L.
ch. 172, §16. The statutory report must contain any
1
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changes in investments made by the bank (presumably this means all investments including securities,
not just real estate loans); changes in reserves and
lists of all non-real estate loans in excess of $50,000
more than 30 days overdue, real estate mortgages
more than 6 months in arrears, loans where advances
to borrowers for unpaid taxes have not been repaid,
and loans made since the last report which bring the
outstanding balance of all debt from a borrower over
$100,000 (or $500,000 or 1% of surplus if the bank
has more than $1,000,000,000 in assets).
Although the contents of the report are identical to
the required report of mutual savings bank officers
to their boards of investment, there are some key
differences. First, the security committee, as
opposed to bank officers, must oversee preparation
of the report and submit it to the bank’s full board
of directors. Contrast this with the mutual savings
bank requirement that officers provide a detailed
report to the board of investment which, in turn,
prepares a summary report for the full board of
trustees. Furthermore, there is no provision in
revised Mass. Gen. L. ch.170, §11 like there is in
the companion savings bank and trust company
statutes to authorize the Commissioner of Banks to
waive or modify the lists of transactions to be
included with the monthly financial report which
the security committee must submit to the board of
directors. Finally, there is no explicit provision in
Chapter 170 stating that Mass. Gen. L. ch. 170, §11
(relating to security committees) does not apply to
stock form banks,1 while there is such a provision in
Mass. Gen. L. ch. 168 providing that Mass. Gen. L.
ch. 168, §§11, 12 (relating to boards of investment)
do not apply to stock savings banks.
Certain Stock Bank Requirements Liberalized
Chapter 221 provides other reforms with respect to
certain stock banks. First, the frequency of meetings of the board of directors for all stock banks has
been changed to require that the board meet at least
quarterly, not every two months as the statute currently provides. Second, the treasurer or other officer designated by the board of directors of a trust
company or stock savings bank (but not a stock cooperative bank) is obligated to prepare a report at
least quarterly running from the last board meeting
Savings banks and co-operative banks operating under a mutual or stock holding company structure are stock banks subject to certain
governance provisions of Mass. Gen. L. ch. 172, the trust company statute, for certain purposes. See Mass. Gen. L. ch. 168, §34C and
ch. 170, §26C to determine which statutory requirements apply to stock savings and co-operative banks with respect to each governance requirement.
Kirkpatrick & Lockhart Nicholson Graham
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SEPTEMBER 2006
to the date of the meeting on which the report is
submitted. The information to be provided with this
report is similar to that which a co-operative bank
security committee must submit to its board and
which mutual savings bank officers must submit to
the board of investment (i.e., a summary of changes
in investments, changes in reserves and contingencies, and lists of loans) with one significant modification—only non-real estate loans in excess of
$500,000 overdue more than 30 days need be listed
on the report. Mutual savings banks and co-operative banks—stock or mutual—have a much lower
$50,000 reporting threshold for non-real estate loans
overdue more than 30 days.2
INSIDER LENDING CHANGES
Clarification of Insider Loan
Reporting Requirements
Chapter 221 also makes a minor clarification on
how loans to senior officers of mutual savings banks
are reported. Mass. Gen. L. ch. 168, §20 requires a
mutual savings bank to make an annual report to the
Commissioner of Banks relative to any loans it
makes to its senior officers and trustees. This statute
has been amended by Chapter 221 to clarify that a
mutual savings bank need complete the annual
report of loans to insiders only for senior officers
subject to the provisions of Mass. Gen. L. ch. 168,
§19, not all officers. The Massachusetts restrictions
on insider loans by a bank to its officers only applies
to the president, executive vice president, senior
vice presidents, treasurer and other persons with policy making authority.
Limits on Loans to Senior Officers
Chapter 221 significantly raises the limits on the
maximum permissible loans which state chartered
banks (i.e., savings banks, co-operative banks, and
trust companies) can make to their senior officers
(i.e., president, executive vice president, senior vice
presidents, treasurer and persons with policy making
authority). The increased loan limits are set forth in
the following table:
Loan Type
Personal/Other
Educational Loan
Home Mortgage
Old Limit
$35,000
$150,000
$500,000
New Limit
$100,000
$200,000
$750,000
The annual reports on insider loans filed by a mutual
savings bank under Mass. Gen. L. ch.168, §20, by a
co-operative bank under Mass. Gen. L. ch. 170,
§19 or a trust company under Mass. Gen. L. ch. 172,
§18, are publicly available documents.
Stanley V. Ragalevsky
617.951.9203
sragalevsky@klng.com
Sean P. Mahoney
617.261.3202
smahoney@klng.com
The new limits will apply to loans made to senior
officers on or after November 7, 2006.
2
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The governance and reporting requirements for security committees of co-operative banks in Mass. Gen. L. ch. 170, §11 have not
been superseded by Mass. Gen. L. ch. 170, §26C for co-operative banks in stock form as Mass. Gen. L. ch. 168, §34C does Mass.
Gen. L. ch. 168, §§11-12 for boards of investment in savings banks. Accordingly, stock co-operative banks are still governed by the
reporting requirements set forth in Mass. Gen. L. ch. 170, §11, not those for trust companies in Mass. Gen. L. ch. 172, §16.
Kirkpatrick & Lockhart Nicholson Graham
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SEPTEMBER 2006
If you have questions regarding this Alert, please don’t hesitate to contact any of the attorneys listed below for
further information.
BOSTON
John C. Hutchins
Stephen Moore
Stanley V. Ragalevsky
617.951.9165
617.951.9191
617.951.9203
jhutchins@klng.com
smoore@klng.com
sragalevsky@klng.com
HARRISBURG
Raymond P. Pepe
717.231.5988
rpepe@klng.com
LOS ANGELES
William P. Wade
310.552.5071
wwade@klng.com
NEW YORK
Elwood F. Collins
Steven H. Epstein
Lorraine Massaro
Thomas C. Russler
212.536.4005
212.536.4830
212.536.4043
212.536.4068
ecollins@klng.com
sepstein@klng.com
lmassaro@klng.com
trussler@klng.com
PITTSBURGH
Steve J. Adelkoff
Kristen Larkin Stewart
412.355.6325
412.355.8975
sadelkoff@klng.com
kstewart@klng.com
SAN FRANCISCO
Jonathan D. Jaffe
415.249.1023
jjaffe@klng.com
WASHINGTON, DC
Henry L. Judy
Rebecca H. Laird
Ira L. Tannenbaum
Robert A. Wittie
202.778.9032
202.778.9038
202.778.9350
202.778.9066
hjudy@klng.com
rlaird@klng.com
itannenbaum@klng.com
rwittie@klng.com
www.klng.com
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