recurrence of events as depicted in this particular case and particularly to prevent its staff or agents from taking actions tantamount to establishing policy in behalf of the Bank Board without its knowledge or consent.

(b) prescribe clear and definitive rules and regulations for the operations of savings and loan associations and for the conduct and activities of association management so as to prevent the further ad hoc approach to the supervision and regulation of these financial institutions.

(c) define by rule and regulation such terms as "self-dealing," "conflict of interest," etc., so as to give association management proper guidance in the operations of savings and loan associations and their own conduct relating thereto. Until such action is taken, the Bank Board should refrain from the use of such terms, and similarly instruct its staff, particularly in supervisory matters and relations relative to savings and loan associations.

(d) clarify its examining procedures and properly instruct its supervisory personnel so as to prevent unwarranted "special examinations" of savings and loan associations where there is no indication that they are not being properly operated.

(e) not attempt to control the dividend rates of savings and loan associations either directly or indirectly on a general or a case-by-case basis without proper authority.

(f) give specific attention and study to the matter of dividend rate practices with a view to developing sound criteria and guidelines for the savings and loan industry, as well as the Bank Board itself, in the interest of promoting internal stability and orderly relationships among the federally insured savings and loan associations.

(g) dispense with confidential section of the examination reports which permits undocumented, unsupported, and unverified opinions giving rise to the ad hoc approach to supervision.

(h) reconsider the use of the management questionnaire, with a view to dispensing with this part of the examination if its need is not thoroughly justified.

(i) take such steps as are necessary to effect a change in the arrogant and overly suspicious attitude of its staff and personnel with respect to their responsibility and the operators of savings and loan associations.

() clarify its instructions and procedures for the reporting and referral of possible violations of Federal statutes by its staff to the Department of Justice. This should include the revision of the Division of Examinations Memo No. 3014, dated July 11, 1957, as it appears to be in conflict with the instructions contained in the Examiners Manual, and the Bank Board should, by appropriate action, clearly delineate the basis for direct referral of matters to the local U.S. attorney, after approval by responsible authority in the Washington office of the Bank Board.

(k) take such action as is necessary to prevent its staff from obtaining Federal tax returns without first justifying the need for such information to the Bank Board itself and to make certain that they are obtained only in accordance with applicable laws and regulations.

(1) see that its examining and supervisory staffs are informed of the State laws applicable to the operations of federally insured State-chartered savings and loan associations under their jurisdiction.

(m) appropriately clarify and delineate the areas of responsibility of the Federal Savings and Loan Insurance Corporation with respect to insured savings and loan associations, particularly those which are State chartered. In furtherance of this the Bank Board should provide for definitive coordination of information and activity between the Divisions of Examinations and Supervision and the Insurance Corporation.

(n) issue adequate guidelines for its examiners governing the scope of examination of insured State-chartered savings and loan associations.

(0) by appropriate action, prevent the further harassment of the Alice Savings & Loan Association.

(p) review its procedures for the assignment of examiners to specific examinations and issue definite procedures governing such assignments.

(q) actively consider the separation of the dual authority of the presidents of the Federal home loan banks as employees of the banks and as supervisory agents for the Bank Board itself.

(r) take appropriate action regarding H. H. Chastain, district chief examiner for the ninth Federal home loan bank district, in view of the committee findings in this report and in light of the information obtained by the subcommittee during the hearings in this case and that involving the Clovis, N. Mex., savings and loan association.

As to Recommendations (a) and (d)

Generally, the actions taken by the Board in the area responsive to establishing guidelines and controls of the activities of employees and to prevent policies being effected without Board knowledge or consent, are set forth in the September 27, 1963, report. As the committee is aware, and reflects on page 60 of its report, the functions of the Division of Examinations and the Division of Supervision were transferred, on December 20, 1963, to the Office of Examinations and Supervision.

As a result of the establishment of this Office there has been initiated an updating of procedures for both examination and supervision. There has been decentralization of Office activities which has afforded a basis to minimize the time period between the start and completion of an examination and related supervisory review or actions. Greater coordination is realized between supervisory agents and chief examiners.

The decentralization of responsibilities included delegation of authority to examiners to remove rigid procedures and provide flexibility in extent and scope of examinations. This gives recognition to sound and well-managed institutions through elimination of unnecessary procedures. It gives emphasis to qualitative analysis rather than quantitative analysis of the association's condition and practices.

The examiner has been cautioned not to go beyond his scope of authority and not to employ procedures or to extend the scope of the examination beyond that necessary to meet the examination objectives.

If an examiner finds an unusual or complex situation he must contact the chief examiner and advise him of his findings and receive instructions as to procedures to be followed. In every case an examiner confines himself to analytical work sufficient to substantiate his findings.

When it appears that a prolonged examination may be necessary, a preliminary report must be submitted citing the problems encountered. In addition, field visits to the assignment may be made by the chief examiner or an assistant chief examiner during the course of the examination to maintain liaison between the district office and the field.

Time limits have been established for examination, processing, and supervisory actions. Any material deviations must be justified by written report to the Board.

For the purpose of dealing with cases other than routine, a Washington staff member has been assigned to coordinating activities and keeping the Board informed on a timely and proper basis. This includes the coordination of the matters set forth under recommendation (m) with respect to the Federal Savings and Loan Insurance Corporation.

The unification of functions of examination and supervision has led to the gradual adoption of revised or new reporting procedures. This includes a new monthly report form and a new supervisory examination report form now near completion. In addition, there are relatively frequent meetings with Washington staff and supervisory agents and chief examiners in attendance. A training and development program takes into consideration the purposes and objectives of revised procedures.

The Board, with the cooperation of industry representatives, is preparing a revision of its statement of policy with respect to appraisals.

The Board has recently announced that beginning January 1, 1968, independent or internal auditors, rather than Board examiners, will conduct annual audits of both Federal and State-chartered insured savings and loan associations.

The supervisory agents and chief examiners have been issued guidelines on internal procedures to reflect reevaluation of responsibilities and to reflect delineation and reaffirmation of broad areas of policies and objectives.

Guidelines issued are being incorporated in a revision of the manual of examining procedure. In the revision, supervisory practice and procedure will become an integral part of the manual.

As to Recommendation (b)

The Board has continued to adopt and revise rules and regulations in order to make them clearer, more specific or to relieve restrictions. Since I became Chairman, 34 regulations, 5 of which had been proposed before my assumption of the chairmanship, have been proposed or adopted. Twenty-five of them are liberalizing amendments designed to give associations a broader scope of operations.

As to recommendation (c)

In supplement to the statements under this caption in the September 27, 1963, report to the committee, it is assumed that the committee is aware of bills H.R. 14159 and S. 3158 (89th Cong., 2d sess.), to be

known as Financial Institutions Supervisory Act of 1966, and my testimony in support of S. 3158 before the Senate Banking and Currency Subcommittee on Financial Institutions.

As stated in a public release, dated April 4, 1966, in brief:

The proposed legislation, carrying administration approval, would authorize the Board to issue cease-and-desist orders and to remove or suspend an officer or director of a savings and loan association. The issuance of a cease-anddesist order would be authorized where there has been a violation of law or regulation or the commission of unsafe or unsound practices. An order to remove an officer or director would be authorized where it is determined that there has been a violation of law or regulation and that the association would incur substantial loss or damage from such violation or practice.

The use of either authority by the Board would be subject to due notice, a full hearing, and an opportunity for the association or individual involved to appeal to a court of appeals and obtain judicial review of the Board's action.

Your attention is specifically directed to section 5(d) (4) (A) and (4) (B) and section 407 (g) (1) and (2) of this bill which set forth provisions relating to breach of fiduciary duty and conduct or practices of directors and officers.

Attention is also directed to H.R. 108 and similar S. 2561, a bill to provide for an increase in the maximum amount of insurance coverage for bank deposits and savings and loan accounts, to protect further the safety and liquidity of insured institutions, to strengthen safeguards against conflicts of interest, and for other purposes.

As to Recommendation (e)

Section 403(b) of title IV of the National Housing Act provides that applicants for insurance file an agreement that, among other provisions, the applicant "will provide adequate reserves satisfactory to the Corporation, to be established in accordance with regulations made by the Corporation, before paying dividends to its insured members." Pursuant to this provision of law, the Corporation had a reserve regulation for many years which, after careful review in 1963, appeared not to be serving the purposes cited above as fully as might be desirable.

Pursuant to its obligations under the National Housing Act, the Board revised the regulation in late 1963 to assure that the income transferred to reserves did not result in unreasonable dilution of reserve positions and that reserve levels were maintained in a reasonable relationship to the quality of assets as well as savings.

The only logical enforcement procedure was to require a review of an association's efficiency, lending performance, and dividend policy if the requirements of the reserve regulation were not met. This procedure was made more explicit than under the former reserve regulation.

As a result, the Board could order a reduction in rate if an association did not meet the requirements for allocating income to reserves or maintaining reserve levels, but this reduction is ordered only after a study of the association's performance, condition, and prospects for correction. The Board believes that this procedure is essential

to fulfill explicit instructions in legislation. The institution of the new regulation appears to have made one contribution to sounder practices and improved reserve allocations.

In early April 1965 it became apparent that many institutions were increasing dividend rates in markets in which there was a surplus of funds. The Board became concerned that the resulting flow of funds to the markets affected would result in adverse developments. It determined, therefore, to direct that Federal Home Loan Bank advances for expansion purposes not be made until the effect of the member's action could be evaluated. An evaluation procedure was developed and the procedure was published in the Federal Register. Some members were released from restriction because their performance and that of their markets made it clear that the increase in dividend rates would not be likely to lead to unfavorable developments. Other institutions reduced dividend rates in order to reestablish their eligibility for advances. A number remained restricted, preferring to pursue savings through higher dividend rates rather than reestablishing eligibility for advances.

The Board believes that its action was consistent with and necessary to fulfillment of the provisions of the Federal Home Loan Bank Act. In the absence of this action, the excess availability of funds in given markets, where oversupply of credit was already evident, and for given institutions with unfavorable performance would have been intensified by the extension of advances for expansion.

As to Recommendation (f)

The Board has studied the need for criteria for dividend rates and has provided standards to members. The reserve regulation for insured institutions spells out the type of considerations which should enter into dividend rate setting based on income available for reserves and asset quality. In addition, the Board has continued to support legislation (S. 2561 in the present Congress) which would, among other provisions, grant standby authority to impose maximum rates on institutions accepting deposits or shares by the respective regulatory bodies. This legislation has received the endorsement of the President.

The Board has found that an unstable situation exists in dividend rate practices stemming from the fact that each State has its own rules under which State-chartered associations may determine rates. In some instances, this leads to variations in rate paying practices with reference to terms peripheral to the dividend rate. As a result, an association which finds that its competition compounds daily, pays quarterly, or follows some other course that the association cannot pursue under its law, responds by raising rates across the board. The competitor then adopts the higher rate plus the peripheral devices. The Board feels that its present legislative authority requires that it either restrict Federal associations unduly or accept the lowest common denominator in State law. Neither course is desirable and the attention of Congress is being invited to this situation. As to Recommendation (g)

The Board eliminated the confidential section of the examination report. In cases of supervisory concern, it has been noted that inadequate management or lack of management depth has contributed to