Conversion-minded mutual institutions in Massachusetts are caught in a vise between state laws and federal regulations governing mutual-to-stock conversions.

The controversy, which threatens to derail a state-chartered cooperative's conversion plans, is being watched carefully by other northeastern states whose laws regarding depositor approval of a conversion also differ from a new federal rule.

The Federal Deposit Insurance Corp. adopted a rule last November requiring a majority vote of a mutual's depositors in favor of a conversion before regulatory approval can be granted. The vote can be either in person or by proxy.

But Massachusetts and several other northeastern states have conflicting laws that either authorize a different formula for depositor approval, or don't permit a depositor vote at all. And Massachusetts forbids proxy voting.

Until now, observers haven't seen state and federal regulators square off over the problem, but the battle is coming to a head in the Bay State, where a $75 million-asset Cape Cod mutual, Falmouth Co-operative Bank, wants to convert but needs an FDIC waiver before the state will grant approval.

"We expect state-chartered institutions to comply with state law and to the extent that they cannot comply with federal law, they should obtain a waiver from the FDIC under their stock conversion regulations," said Thomas Curry, acting commissioner of banks in Massachusetts. "We don't think it's an appropriate area for the FDIC to be acting in in the first place in terms of dictating corporate governance."

The problem for Falmouth and other cooperatives is that the FDIC demand conflicts with Massachusetts law requiring the affirmative vote by two- thirds of the depositors present at a special meeting.

"In order to get a majority of depositors, they'd physically have to be there because Massachusetts law doesn't permit voting by proxy," said Richard A. Schaberg, a Washington attorney representing Falmouth. He noted that some of the thrift's 7,000 depositors live in Boston or as far away as Florida. "To get 3,501 to show up is never going to happen."

Falmouth has asked the FDIC for a waiver, but has not yet received a response.

A decision on the entire application, including the waiver request, is expected in July or August, Mr. Schaberg said.

The potential for conflict between state and federal regulators is even greater for mutual savings banks in Massachusetts, Connecticut, Pennsylvania, and New Hampshire, which don't allow depositor votes at such institutions.

In those states, a state-chartered savings bank is controlled not by depositors, but by a board of corporators, which must approve a conversion or other transaction. Under state law, savings bank depositors don't have any ownership or voting rights.

"I'm not in favor of insisting on depositor voting," said John P. Burke, Connecticut commissioner of banking. "I don't think it works and since our laws don't allow for it, I don't see a need to violate our laws."

"You're in a no-win situation," Mr. Schaberg said. "If you comply with the FDIC regulation, the state regulator doesn't approve you. If you comply with the state regulation, you're not satisfying the FDIC requirement and the FDIC won't buy off."

That hurt Benjamin Franklin Savings Bank in Franklin, Mass., which could not convert because the FDIC wouldn't waive the depositor vote requirement.

"We were not going to permit the savings bank to conduct a depositor vote," Mr. Curry said. "Corporators are not depositors."

So far, regulators in other states are avoiding a conflict with the FDIC, but they're watching events in Massachusetts - and applauding.

"Good for Massachusetts," said A. Roland Roberge, New Hampshire commissioner of banking. "It's about time. Every time we turn, there's got to be a federal law that overrides our state legislature. That's too much government, too much bureaucracy, too much Washington, D.C."

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