The Office of Thrift Supervision (OTS) ruled on December 5 that certain by-laws proposed by management went too far in excluding certain members from participating in the nomination process for directors. The institution in question sought, via a proposed by-law, to prevent people who fail to pass the OTS' optional "integrity factor" test from nominating a director, and from serving as a director if they had ever been subject to a cease and desist order for conduct involving dishonesty or breach of trust. (OTS permits an institution to adopt an optional by-law imposing an integrity test applicable to those who would serve as directors. Under this test, a person is not qualified to serve as a director if he or she: "(1) is under indictment for, or has ever been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year, or (2) is a person against whom a banking agency has, within the past 10 years, issued a cease and desist order for conduct involving dishonesty or breach of trust and that order is final and subject to appeal, or (3) has been found either by a regulatory agency whose decision is final and not subject to appeal or by a court to have (i) breached a fiduciary duty involving personal profit or (ii) committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any final cease and desist order issued by a banking, securities, commodities or insurance regulatory agency.) In rejecting the proposed by-law, OTS stated that: "There must be a balance between the need for a board of directors of suitable integrity and a provision that would tend to entrench management. In weighing that balance, OTS concludes that the proposed by-law would not promote significantly greater integrity among potential board members than the already existing pre-approved optional by-law provision. In addition, OTS concludes that the proposed by-law inappropriately entrenches management.”

In so ruling, and with respect to the proposed nomination restriction, the OTS rejected an argument that it had to approve the by-law simply because it had done so in the past for another institution. The OTS indicated that it had reassessed its earlier ruling, and had found that the "views it had [previously] expressed were... overstated." With respect to the proposal to make the 10-year limit last forever, the OTS concluded that such a by-law "precludes the possibility of rehabilitation."

http://files.ots.treas.gov/680047.pdf