Federal Reserve Proposes Overhaul Of Mutual Holding Company Rules

On July 31, the Federal Reserve Board (“FRB”) issued a proposal to update its mutual holding company (“MHC”) regulations. This proposal marks the first comprehensive update since the FRB inherited responsibility for savings and loan holding companies from the former Office of Thrift Supervision in 2011. The proposal would amend Regulation MM (12 C.F.R. Part 239) and the Board’s capital rule (Regulation Q, 12 C.F.R. Part 217) to improve mutual banking organizations’ access to capital, simplify dividend waivers and mutual-to-stock conversions, and provide greater organizational flexibility.

Mutual banking organizations are generally owned by their depositors, and in some cases, borrowers, rather than stockholders. That structure can support a community focus, but it limits capital-raising options. Mutuals cannot issue conventional common stock and therefore traditionally have relied heavily on retained earnings to support growth.

The proposal’s most consequential change may be its clarification that mutual capital certificates and “special deposits” can qualify as common equity tier 1 (“CET1”), additional tier 1 (“AT1”) or tier 2 capital if they satisfy Regulation Q’s applicable criteria. The Board also would incorporate model CET1 and AT1 term sheets into the capital rule. The term sheets would permit disclosure of a nonbinding target distribution rate and clarify that certificate holders do not become members merely by purchasing certificates. This would not guarantee a market for the instruments, but it should provide greater regulatory certainty to issuers and investors.

The FRB also proposes to streamline dividend waivers. A thrift MHC may waive dividends from its publicly traded mid-tier holding company, allowing more of the dividend to reach minority stockholders and potentially making the shares more attractive. Because directors holding subsidiary stock may benefit, current rules impose procedural safeguards to address that possible conflict of interest. Under the proposal, a non-legacy MHC generally would need member approval only once every ten years, by a majority of votes cast rather than all eligible members. Fiduciary-duty and safety-and-soundness protections would remain.

Other revisions would dismantle OTS-era requirements. Thrift MHCs and their subsidiaries would no longer have to use the Board’s model charters and bylaws, and mid-tier companies could obtain state rather than exclusively federal charters. The proposal also would simplify stock issuances and mutual-to-stock conversions, eliminate outdated forms and mail requirements, and permit certain first-year stock repurchases contemplated in the applicable issuance plan or conversion business plan.

The Board also would distinguish thrift MHCs, which are subject to HOLA and Regulation MM, from mutual bank holding companies governed by the Bank Holding Company Act and state law. It generally would stop requiring bank MHCs to commit to Regulation MM compliance and expects to be receptive to requests for relief from existing commitments, absent unusual circumstances.

Governor Michael Barr, who voted to issue the proposal, issued a statement relating to the proposal. Gov. Barr recognized the proposal’s useful modernization and burden-reduction measures, but reserved judgment on the final rule. Gov. Barr questioned whether it would contain adequate conflict-of-interest safeguards and accountability for dividend waivers and conversions. He also invited comment on whether mutual capital certificates and special deposits would remain viable loss-absorbing capital under stress, and on competitive effects across charter types and corporate forms.

Taken together, the proposal represents a long-overdue replacement of inherited procedural restrictions with a more functional framework. Whether the capital changes meaningfully broaden financing options will depend on investor demand—and, as Gov. Barr suggests, whether the instruments prove genuinely loss absorbing rather than merely technically compliant. Comments are due October 5, 2026.

Co-authored by Sara Lenet.

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