Regulators Adopt S&L; Conversion Rules : Banking: FDIC, OTS want to curb profiteering by executives when depositor-owned thrifts go to stock ownership.

Bank and thrift regulators finalized rules Tuesday aimed at curbing profiteering by bank executives when depositor-owned savings institutions convert to stock ownership.

The rules adopted by the Federal Deposit Insurance Corp. and the Office of Thrift Supervision also are meant to ensure that depositors--already hurt by the thrift debacle--don’t get hurt again when their “mutual” savings banks or thrifts go public through a stock offering.

The rules are similar to draft proposals issued earlier this year and adopted on an interim basis. They impose curbs on the benefits insiders can reap from the deals and give depositors a greater voice in approving any plan.

Lawmakers and others say insiders at the institutions have netted windfalls at the cost of depositors by setting the stock offering price well below the value of the institution or by taking a disproportionate number of shares.

In recent years, those who could buy big chunks of stock typically saw the prices of their new holdings jump roughly 25% on the first day of trading

Under pressure from Congress, regulators now want to make sure depositors get a fair crack at the financial payoffs from the conversion of a depositor-owned, or mutual, institution.

“Some of the more egregious stuff we’ve seen in the past is coming to an end,” banking consultant Bert Ely said.

The FDIC, which oversees state-chartered savings banks, and the OTS, which regulates federally chartered thrifts, did make a key change from the initial plan: A mutual institution planning to convert will not have to give a preference to local depositors if a conversion stock offering is oversubscribed.

The initial proposal had given preference to depositors in an institution’s “local community” or within 100 miles of a home or branch office of the converting bank. Some investors had put small deposits in many mutual savings institutions nationwide in hopes of scoring a profit through a conversion.

The final rules, which will take effect Jan. 1, also provide the following:

* A proposed conversion must be approved by at least a majority of an institution’s depositors.

* The use of so-called “running proxies” will be banned. These are proxies obtained by an institution from depositors at the time they open accounts and later used by management without authorization.

* Long-term depositors must be given first chance to buy the stock of a converting institution.

* An institution wanting to convert must give regulators a business plan spelling out what will be done with proceeds the deal generates. The plan must also give an earnings projection for the new institution.

* Regulators must receive a full appraisal report. Appraisers or their affiliates are generally barred from also serving as underwriters or selling agents in the conversion.

In the mid-1980s, thrift regulators eased rules covering conversions in hopes of spurring investors to pump new capital into the thrift industry, then awash in red ink. Since then, however, the industry has become profitable again.

Signs have already appeared indicating that the conversion process has slowed. This is in part a reflection of higher interest rates. In addition, though, experts said, higher appraisal values for converting institutions have cut the opportunity for investors to net big profits.

“Right now the conversion process is not a very exciting thing,” said Paul Bauer of Bauer Financial Reports, a bank research firm in Coral Gables, Fla.