On July 31, the Fed announced a notice of proposed rulemaking purporting to “modernize” its regulatory framework for mutual holding companies (MHCs). The proposal would amend both Regulation MM and the capital rule (12 CFR Part 217) to support MHCs’ ability to raise capital, reduce purported compliance burdens, and clarify regulatory requirements. Key changes include: (i) clarifying that mutual capital certificates and special deposits may qualify as common equity tier 1, additional tier 1, or tier 2 regulatory capital if applicable criteria are met; (ii) codifying model term sheets for mutual capital certificates as appendices to the capital rule; (iii) eliminating certain dividend waiver requirements; (iv) reducing the burden associated with conversions from mutual-to-stock form; and (v) eliminating the requirement that subsidiary holding companies of MHCs obtain federal charters.

The Fed noted that mutual banking organizations, more than 90 percent of which have less than $3 billion in total assets, face unique capital-raising constraints because they cannot issue traditional equity instruments and rely heavily on retained earnings. The Fed stated that the current framework is “overly complicated and burdensome” and that the proposed changes would make MHCs “more competitive in the modern banking environment.” The proposal would also revise post-conversion stock repurchase restrictions, clarify membership rights for depositors in acquired institutions, and reduce securities registration requirements for converting MHCs that do not meet the standards to list shares on a national exchange. Comments are due by October 5.

In a separate statement, Fed Governor Michael Barr expressed support but reserved judgment on the final rule, encouraging comments on whether the proposal includes sufficient conflict-of-interest safeguards and on how mutual capital certificates and special deposits might perform as “viable loss-absorbing capital under stressed conditions.”