State Senate Majority Leader Martin M. Looney plans to file legislation at the State Capitol spurred in part by New Haven Savings Bank’s controversial conversion plans. The bill would require a depositor vote for any proposal involving a mutual bank converting to a public stock company.

Legislation proposed by one local senator would have sweeping implications for the future of public conversions in the banking industry, as well as the future of state-chartered banks.

State Senate Majority Leader Martin M. Looney, D-New Haven, has pledged to propose a bill at the Senate’s next session spurred by the recent controversial conversion plans of his hometown financial institution, New Haven Savings Bank.

According to Looney, the bill would require a depositor vote for any proposal involving a mutual bank converting to a public stock company. There also would be provisions in place to enhance the regulatory role of the Connecticut Banking Commission in terms of limiting the amount of insider compensation proposed in concert with a stock conversion. Essentially, it would be in the hands of the commission to decide how much compensation is too much for directors and executives.

“Depositor vote requirements are not a new concept,” said attorney Kevin Handly of Goulston & Storrs in Boston. Federal savings associations are required to get a depositor vote, and depositor votes are required under many state laws, he said, “so that’s not a radical new concept.”

Handly stressed that such a law would need to be workable in the sense that written proxies should be permitted rather than in-person attendance. The approval margin should be realistically attainable as well.

“While I don’t think that’s a radical new departure, it would significantly undercut the power and authority of corporators in savings banks, which have historically been responsible for representing depositor interests,” he said.

Looney, in an interview Tuesday, said that “there should be limitations on the amount rewarded as windfalls for these insiders.”

Although New Haven Savings Bank highlighted the issue and brought it to the media’s attention, Looney said the bill was something of a necessity regardless. Without the crucial depositor vote, he said, local management would no longer have the authority to determine where charitable funds are donated, and how much money is placed back into valuable community programs.

“There are 22 other mutual savings banks in the state, and at some point they might be involved in a conversion like this,” said Looney, adding that his bill would also help communities served by those banks if future conversions take place.

Looney stressed that New Haven Savings Bank’s pending and highly controversial conversion was what ultimately sparked the proposed legislation, despite the fact that parts of that conversion may not be covered under its provisions.

“I believe that certainly part of the [New Haven Savings] deal will fall under [the proposed bill],” said the senator, nothing that the amount of time that stock must be held by investors would have an impact on the pending deal. The issue of the depositor vote, however, is slightly problematic. If the bill were to pass, there is a chance that the New Haven Savings conversion could be seen as incomplete, thus holding the conversion to the bill’s provisions retroactively.

‘Delicate Balance’

The bill also would lengthen the time under which a takeover would be barred. Currently, state statute calls for a three-year period barring stockholders from selling off their share of the bank. Looney is calling for that period to be raised to five years.

“I think that clearly a mutual bank is one that exists and has been built up by the trust of its local depositors over the years, and they should have a say in the conversion process,” he said. “Otherwise, you have management and directors managing a conversion of a bank built by people who have no say.”

The issue of a cap on compensation is a “radical departure,” said Handly. Any such authority on the part of the state banking commissioner would most likely be preempted by federal regulators in the case of a federally chartered institution. State-chartered banks have the right to freely convert to federal charter under the rules of dual banking.

“If such a law were adopted it would create competitive disparity between state and federal charters, and you can bet that any state-chartered institution would include a conversion to federal charter to escape state limitations, as part as their conversion,” said Handly. “This law may not be helpful from a public policy standpoint. In fact, the likely result is to lose any leverage the state now has, by losing the remaining state charters to federal charters.”

Handly stressed that when legislating in New England, one has to be very sensitive to the “delicate balance” between state and federal charters. In the case of a federally chartered bank, the Office of Thrift Supervision traditionally preempts state limitations, he said.

“The ability to go back and forth between the charters is a fundamental tenet of the dual banking system,” he said. “Recently, with sweeping preemptions coming out of federal chartering authorities, the playing field has been tilted more toward federal charters.”

Another factor in that shift is the “seeming lack of restrictions on the mutual-to-stock conversion process at the federal level,” said Handly. Restrictions have been relaxed to a point where there are very few meaningful restrictions on the federal side.

“Some people feel it’s threatening the system,” he said. “It’s been the contention of state commissions that these sweeping preemptions of state law really are upsetting the balance and threatening to permanently hinder the system.”

Looney believes that New Haven Savings underestimated the amount of community opposition and concern that would rise out of its conversion plans.

“New Haven has been made more sensitive by the loss of so many locally headquartered institutions,” he said. “We have very few locally based banks anymore. Even the phone company [Southern New England Telephone] doesn’t exist any more. Many of our local institutions are now divisions of those headquartered elsewhere.”

Looney is seeking to have the bill raised by the Banks Committee in the Senate, remarking that it is “certainly a priority,” to get the bill passed. The next session begins Feb. 4.

“New Haven Savings Bank was a locally based institution that has existed for a long time,” said Looney. “The previous president, Charles Terrell, was strongly committed to maintaining its status as a mutual bank. When he died a couple of years ago, the bank brought in a new management team looking for a stock conversion.”

Last July, Looney called on officials at the bank to take measures to protect against any possible hostile takeover bids as it sought to acquire the holding companies of the Savings Bank of Manchester and Tolland Bank.

“While I certainly applaud business expansion in the city of New Haven, this particular proposal has left me, and constituents who have contacted me, with a number of concerns,” Looney wrote in a letter to Peyton R. Patterson, chairman, president and chief executive officer of New Haven Savings Bank. “Specifically, I am alarmed that NHSB might in the future become the subject of a takeover which would move control of the bank out of the city of New Haven by sale of a controlling interest of the bank’s stock. In the 1980s when People’s Bank underwent a similar conversion, it protected itself by forming a mutual holding company to hold a majority of the stock, thereby preventing any foreign entity from taking control of the bank. A plan of conversion that provides only for five-year anti-takeover protections is clearly inadequate to meet the long-term needs of our community.”

Looney added that the state still has a role to play in the bank’s plans.

“I realize that NHSB is beginning the state approval process, and I encourage NHSB to consider the option taken by People’s Bank. I hope for a comprehensive community discussion on the implications of this proposal and the role of state regulatory entities in evaluating the proposed conversion,” he said.