[Federal Register Volume 59, Number 33 (Thursday, February 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3090]


[[Page Unknown]]

[Federal Register: February 17, 1994]


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FEDERAL RESERVE SYSTEM

12 CFR Part 212

[Regulation L; Docket No. R-0825]

 

Management Official Interlocks

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Board of Governors of the Federal Reserve System is 
proposing to amend its regulations that implement the Depository 
Institution Management Interlocks Act (Interlocks Act or Act). The 
Interlocks Act generally prohibits certain management official 
interlocks between depository institutions, depository holding 
companies, and their affiliates. The proposed amendment would create 
limited exemptions to the prohibition on management official interlocks 
between certain depository organizations located in the same community 
or relevant metropolitan statistical area (RMSA). These exemptions 
would permit management official interlocks between depository 
organizations that together control only a small percentage of the 
total deposits in the community or RMSA. These exemptions are based on 
the Board's belief that these management interlocks would not threaten 
to inhibit or restrict competition among depository organizations. In 
addition, the Board is soliciting comment generally on revisions to the 
existing Interlocks Act regulations that the Board should consider, 
including the addition of other exemptions. The Board also is proposing 
amendments to implement certain provisions of the Management Interlocks 
Revision Act of 1988.

DATES: Written comments must be received on or before April 11, 1994.

ADDRESSES: Comments, which should refer to Docket No. R-0825, may be 
mailed to Mr. William Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551. Comments addressed to Mr. Wiles may also be 
delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m., and 
to the security control room outside of those hours. Both the mail room 
and control room are accessible from the courtyard entrance on 20th 
Street between Constitution Avenue and C Street, NW. Comments may be 
inspected in room MP-500 between 9:00 a.m. and 5:00 p.m., except as 
provided in Sec.  261.8 of the Board's Rules Regarding Availability of 
Information, 12 CFR 261.8.

FOR FURTHER INFORMATION CONTACT: Thomas M. Corsi, Senior Attorney (202/
452-3275), Legal Division, Board of Governors of the Federal Reserve 
System. For the hearing impaired only, Telecommunication Device for the 
Deaf (TDD), Dorothea Thompson (202/452-3544), Board of Governors of the 
Federal Reserve System, 20th and C Streets, NW, Washington, DC 20551.

SUPPLEMENTARY INFORMATION:

Background--Exemptions to the Interlocks Act

    The general purpose of the Interlocks Act is to foster competition 
among depository organizations\1\ by prohibiting certain management 
interlocks that might contribute to anticompetitive practices. The 
primary concern is that interlocking management may enable certain 
depository institutions to control the flow and availability of credit 
in the markets in which they operate.
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    \1\ A depository organization means a depository institution or 
a depository holding company. See 12 CFR 212.2(g).
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    The Act prohibits a management official of a depository 
organization from serving at the same time as a management official of 
an unaffiliated depository organization located in the same 
community\2\ or RMSA.\3\ 12 U.S.C. 3202. Congress designated RMSAs as 
appropriate regions within which to restrict management interlocks 
because RMSAs are ``economic trade areas and reflect the area in which 
financial institutions compete.'' S. Rep. No. 323, 95th Cong., 1st 
Sess. 14 (1977).\4\
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    \2\ Community is defined as a city, town, or village, or 
contiguous or adjacent cities, towns, or villages. 12 CFR 212.2(c)
    \3\ An RMSA includes a primary metropolitan statistical area, a 
metropolitan statistical area, or a consolidated metropolitan 
statistical area that is not comprised of designated primary 
metropolitan statistical areas as defined by the Office of 
Management and Budget. See 12 CFR 212.2(n); 58 FR 27443 (May 18, 
1993).
    \4\ The prohibitions apply if both organizations are depository 
institutions, each with an office in the same RMSA; if offices of 
depository institution affiliates of both organizations are located 
in the same RMSA; or if one organization is a depository institution 
that has an office in the same RMSA as a depository institution 
affiliate of the other organization. The RMSA prohibition does not 
apply to depository institutions with less than $20 million in 
assets. See 12 CFR 212.3.
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    In the Interlocks Act, Congress authorized the Federal depository 
institutions regulatory agencies (the Board of Governors of the Federal 
Reserve System, Federal Deposit Insurance Corporation, the Office of 
Thrift Supervision, the National Credit Union Administration, and the 
Office of the Comptroller of the Currency, hereinafter the 
``Agencies'') to implement rules and regulations to carry out the Act, 
including rules or regulations which permit service by a management 
official that would otherwise be prohibited by the Act. 12 U.S.C. 3207. 
The legislative history of the Act indicates that the Agencies may 
exercise this rulemaking authority to exempt management official 
interlocks that otherwise might be prohibited by the statute if they 
establish that the exemption has a pro-competitive effect. H.R. Rep. 
No. 1383, 95th Cong., 2d Sess. 15 (1978).
    Pursuant to this rulemaking authority, the Board, along with the 
other Agencies, previously established exceptions for institutions 
located in low- and moderate-income areas, minority- and/or women-owned 
organizations, newly-chartered institutions, and institutions facing 
conditions endangering their safety and soundness. See 12 CFR 212.4(b). 
These exceptions are all available on a temporary basis upon a 
demonstration that the exempted management official interlock is 
necessary to provide management or operating expertise to the 
requesting institution.
    The Agencies are publishing their proposed rule notices separately. 
The Board now seeks comment on a proposal to establish additional 
exemptions from the prohibitions of the Act. These exemptions would be 
available to depository organizations that between them control a small 
percentage of deposits in a community or RMSA. The Board also proposes 
an amendment to exempt honorary and advisory directors that serve 
institutions with less than $100 million in assets from the definition 
of a ``management official'' in the Interlocks Act. This change is 
consistent with a provision of the Management Interlocks Revision Act 
of 1988 (Pub. L. 100-650, 102 Stat. 3819 (1988)).
    In addition to the proposed new exemption to the Interlocks Act, 
the Board, together with the other Federal depository institutions 
regulatory agencies, is considering a more comprehensive revision of 
the regulations implementing the statute. Any such revision would seek 
to simplify the regulations, revise existing exemptions, and consider 
new exemptions that would foster competition in relevant RMSAs and 
communities and thus minimize unnecessary regulatory burden while still 
fulfilling the requirements of the Interlocks Act. The Board therefore 
is using this notice of proposed rulemaking as an opportunity to 
solicit additional comment on the question of the improvement of its 
Interlocks Act regulations.

The Small Market Share Exemption

    The Interlocks Act prevents two competing institutions from 
conspiring through common management officials to adversely impact 
competition in the products and services they offer. Where two 
depository institutions dominate a large portion of the market, these 
risks are real. But when a particular market is served by many 
institutions, the risks diminish that two depository institutions with 
interlocking management can adversely affect the credit products and 
services available in their market.
    The Board believes that analysis of the combined deposit holdings 
of two institutions provides a meaningful assessment of the capacity of 
the two institutions to control credit and related services in their 
market. This proposal reflects the view that two depository 
institutions that control a small portion of the market they serve are 
not capable of exerting sufficient market influence to materially 
restrict the terms and availability of credit in their market. For 
institutions located in a RMSA, the RMSA constitutes the relevant 
market.
    Some depository institutions compete in smaller markets either 
within or outside of RMSAs. The Interlocks Act provides that the 
relevant market for these organizations and organizations with total 
assets of $20 million or less that are located within a RMSA, is the 
city, town, or village and contiguous and adjacent areas in which the 
organizations are located. 12 U.S.C. 3202.

The Proposal

    The Board is proposing to amend the management interlocks 
regulations to permit two depository organizations that serve the same 
RMSA to share management officials in circumstances where organizations 
control a small portion of the deposits in that market. Specifically, 
this proposal would permit two competing depository organizations, each 
with assets in excess of $20 million, to share management officials if 
the organizations together control no more than 20 percent of the 
deposits in the RMSA. Additionally, the depository organizations could 
control no more than 20 percent of the deposits in any other RMSA 
whether they compete directly, through offices, or through affiliated 
depository institutions.
    Under the proposal, depository organizations located in RMSAs would 
look to appropriate deposit share data available from the relevant 
Federal Reserve Bank in order to determine whether they are entitled to 
the exemption in reliance upon this information. Depository 
institutions would not have to apply to the appropriate Federal 
depository institution regulatory agency for permission to engage in 
the interlock.
    The Board would treat management interlocks between institutions 
with assets of less than $20 million that are located within an RMSA 
and all depository institutions located outside of an RMSA in a similar 
manner. Specifically, the amendment would exempt any management 
interlock between two depository organizations located in a community, 
as defined by Sec.  212.2 of the regulation, if the depository 
organization's combined share of the total deposits in the community is 
no more than 20 percent. Similarly, to be exempt, the organizations may 
not together control more than 20 percent of the deposits in any 
community in which they or their depository institution affiliates are 
located.
    The proposal would provide an exemption only if management 
interlocks between the two organizations are not otherwise prohibited 
by the Act. For example, 12 U.S.C. 3203 provides that a depository 
institution or a depository holding company with assets in excess of $1 
billion may not enter into a management interlock with a depository 
institution or a depository holding company with assets in excess of 
$500 million. No exemption would be available for interlocks that fall 
within this prohibition. The exemption is effective as long as the 
organizations meet the conditions. If the level of deposit control 
exceeds 20 percent of deposits in the community or RMSA, as measured 
annually, the depository organizations shall have up to 15 months to 
address the prohibited interlock by shrinking the deposit base, 
terminating the interlock, or taking any other action to correct the 
violation.
    No prior Board approval is required. The exemption is intended to 
be self-implementing. Management is responsible for compliance with the 
terms of the exemption and maintaining sufficient supporting 
documentation.

Determining Deposit Share of the Relevant Market

    Using the total deposit data reported by depository institutions to 
the Federal Deposit Insurance Corporation (FDIC) in the Summary of 
Deposits addendum to the Report of Condition and Income, the depository 
organizations will determine for themselves whether the exemption is 
available. The FDIC compiles the collected deposit data into a summary 
and makes the deposit summary available annually. The FDIC's annual 
deposit summary breaks-out the total deposits of every insured 
depository institution by branch.\5\ This deposit data can be sorted by 
RMSA, and by community as that term is defined by the Act, to provide 
to depository organizations the necessary information to determine 
deposit share by the relevant market.
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    \5\ The data do not include the deposits held by federally-
chartered credit unions, which are insured by the National Credit 
Union Share Insurance Fund, and state-chartered credit unions. 
Typically, these credit union deposits comprise only a small part of 
the total deposits in a relevant market. If included, the deposit 
figures for a particular market would be slightly increased. As 
such, the data will not include the credit union deposits, but will 
still serve as a reliable approximation of the total deposits in the 
relevant market.
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    The FDIC provides this deposit summary to each of the Agencies. 
Under the proposal, the Board will make the deposit data available to 
all bank holding companies and state member banks.\6\ Each of the 
Agencies will make the same data available to the other depository 
organizations. The process would involve neither an application nor an 
approval from any of the Agencies but, the burden of determining the 
applicability of the exemption falls upon the depository organizations 
that seek it. Depository organizations located in an RMSA would simply 
look to the deposit share data for the total deposits of the RMSA. 
Then, both interlocking depository organizations would determine 
whether their combined share of the total deposits exceeds 20 percent. 
If the combined share of deposits is no more than 20 percent of the 
market, the interlock is exempt.
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    \6\ For the purpose of ascertaining whether depository 
organizations qualify for the exception, deposit information 
regarding specific counties and RMSAs will be available at each 
Federal Reserve Bank.
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    The Board intends this exemption to be available to community-based 
depository organizations in the same manner as for organizations whose 
relevant market is the RMSA. However, while the deposit share data can 
be pre-sorted and made readily available by RMSA, the deposit share 
data cannot be pre-sorted by community. For example, two community-
based depository organizations seeking to rely on the small market 
share exemption must first determine the total deposits in their 
community. To do this, the depository organizations must request 
deposit share data from the Board with sufficient specificity to 
delineate the community defined by the Interlocks Act that both the 
interlocking institutions will serve. Only then can they calculate the 
portion of the deposits in the market that they would be deemed to 
control if they engage in the interlock.
    Whether within or outside of an RMSA, the depository organizations 
will be required to retain records supporting the applicability of the 
exemption, and to reconfirm, on an annual basis, that the interlock is 
eligible for the exemption. The most recent deposit share data made 
available to the depository organizations by the Agencies will 
determine whether organizations are entitled to the small market share 
exception. When new data demonstrates that the two interlocking 
institutions' combined control of deposits exceeds 20 percent of 
deposits in the community or RMSA, the affected depository 
organizations have up to 15 months to correct the prohibited interlock.

Pro-competitive Results

    The Board believes this proposal will have a pro-competitive 
effect. Since the deposit base of the exempted interlocking 
institutions is small, the risk of anticompetitive control over the 
market is remote. To provide to these particular institutions this 
limited relief from the management interlock restrictions enlarges the 
pool of experienced management talent upon which they may draw and 
enhances their operational effectiveness. The result will be better 
managed, more competitive, and healthier depository institutions.

Request for Comment

    In addition to any relevant comments on this proposal, the Board 
specifically requests comment on the following:
    1. Whether 20 percent or less of the deposits of a community or 
RMSA is an appropriate threshold for the exemption, or whether a 
different level is more appropriate.
    2. Should the community and RMSA exemptions rely on the same or a 
different threshold level?
    3. Should the exemption require depository organizations to 
demonstrate that they control no more than 20 percent of the deposits 
of communities within an RMSA? For example, if two depository 
organizations with more than $20 million in assets operate in a 
community within a RMSA, should the exemption require that the 
depository organizations control no more than 20 percent of the 
deposits in the community and no more than 20 percent of the deposits 
in the RMSA? Consider depository organizations that compete in several 
communities within a RMSA.
    4. Whether and how the proposed procedure to employ the deposit 
data collected by the FDIC in connection with the Report of Condition 
and Income will permit depository organizations to determine easily and 
effectively whether they qualify for the small market share exception.
    5. Whether the exemption for community-based institutions will be 
easy to use, or whether these institutions might be better served by 
another approach to the exemption.
    6. Whether the exemption would enable depository organizations to 
subvert the purposes of the Interlocks Act by establishing multiple 
interlocks involving several individuals. For example, the Board is 
concerned that each of several directors of one depository organization 
could serve as a director of a different unaffiliated depository 
organization, facilitating diminished competition among the several 
depository organizations. The Board seeks comment on whether this 
concern is justified, and if so, whether it is exacerbated by the fact 
that the threshold limit for the exemption is set at 20 percent of the 
deposits in the RMSA or community, rather than a smaller percentage.
    In addition to this proposal, the Board plans a comprehensive 
revision of the regulations implementing the Interlocks Act. The Board 
intends to simplify the regulation, revise the interlocks prohibitions 
and exemptions, and consider new exemptions that promote competition 
without fostering anticompetitive practices. The comprehensive revision 
will eliminate unnecessary regulatory burden in a manner consistent 
with the Interlocks Act and the stated objectives of the Board.
    Toward this end, the Board solicits comment on how to clarify and 
improve the entire rule in a manner consistent with the Interlocks Act.

Paperwork Reduction Act

    The collection of information contained in this proposed rule will 
be reviewed by the Board under Office of Management and Budget (OMB) 
delegated authority pursuant to the Paperwork Reduction Act of 1980 (44 
U.S.C. 3501 et seq.). Comments regarding the accuracy of the burden 
estimate, and suggestions for reducing the burden, should be addressed 
to Mr. William Wiles, Secretary, Board of Governors of the Federal 
Reserve System at the address noted above and should refer to Docket 
No. R-0825.
    The collection of information in this proposed rule is found in 
Sec.  212.4(d), and takes the form of records maintained by depository 
organizations which are sufficient to support their determination that 
the interlocking relationships which they have established are exempt 
under this section. Such depository organizations must also maintain 
records which demonstrate that they have subsequently reconfirmed such 
determinations on an annual basis. The information will be used to 
provide state and federal examiners of depository institutions with 
documentation which will allow them to ascertain whether depository 
organizations are eligible for the exemption.
    The estimated annual recordkeeping burden for the collection of 
information requirement in this proposed rule is summarized as follows:

Number of Recordkeepers: 70
Annual Hours per Recordkeeper: 3
Total Recordkeeping Hours: 210

Regulatory Flexibility Act

    Pursuant to Section 605(b) of the Regulatory Flexibility Act, 5 
U.S.C. 605(b), the Board hereby certifies that this proposed rule, if 
adopted as a final rule, will not have a significant economic impact on 
a substantial number of small entities. The effect of the rule, if 
adopted as proposed, would be to reduce the compliance requirements 
imposed upon small entities by creating a regulatory exemption to the 
prohibition on management interlocks between certain organizations. 
Furthermore, the proposed exemption would affect only the management 
structure of only a few institutions.

List of Subjects in 12 CFR Part 212

    Antitrust, Banks, banking, Holding companies, Management official 
interlocks.
    Accordingly, for the reasons set forth in the preamble, the Board 
of Governors of the Federal Reserve System proposes to amend 12 CFR 
part 212 as follows:

PART 212--MANAGEMENT OFFICIAL INTERLOCKS (REGULATION L)

    1. The authority citation for part 212 continues to read as 
follows:

    Authority: 12 U.S.C. 3201 et seq., 15 U.S.C. 19.
    2. Section 212.2 is amended by revising paragraph (h) to read as 
follows:

Sec. 212.2   Definitions.

* * * * *
    (h)(1) Management official means:

    (i) An employee or officer with management functions (including a 
branch manager);
    (ii) A director (including an advisory or honorary director, except 
in the case of a depository institution with total assets of less than 
$100,000,000);
    (iii) A trustee of a business organization under the control of 
trustees (e.g. a mutual savings bank); or
    (iv) Any person who has a representative or nominee serving in any 
such capacity.
    (2) Management official does not include:
    (i) A person whose management functions relate exclusively to the 
business of retail merchandising or manufacturing;
    (ii) A person whose management functions relate principally to the 
business outside the United States of a foreign commercial bank; or
    (iii) Persons described in the provisos of section 202(4) of the 
Interlocks Act (12 U.S.C. 3201(4)).
* * * * *
    3. Section 212.4 is amended by adding a new paragraph (d) to read 
as follows:


Sec. 212.4   Permitted interlocking relationships.

* * * * *
    (d) Small market share exemption--(1) Depository organizations 
controlling no more than 20 percent of the deposits in a community or 
RMSA. A management official may serve two unaffiliated depository 
organizations in a capacity which would otherwise be prohibited by 
Sec.  212.3(a) or (b) of this part if the following conditions are met:
    (i) The interlock is not prohibited by Sec.  212.3(c) of this part; 
and
    (ii) The two depository organizations hold in the aggregate no more 
than 20 percent of the deposits, as reported annually in the Summary of 
Deposits, in each RMSA or community in which the depository 
organizations have offices, or in which depository institution 
affiliates of both depository organizations are located.
    (2) Confirmation and records. Depository organizations must 
maintain records sufficient to support their determination that the 
interlocking relationship is exempt under this section and must 
reconfirm that determination on an annual basis.
    (3) Termination. An interlock permitted by this exemption may 
continue as long as the conditions of this section are satisfied. Any 
increase in the aggregate deposit holdings of the depository 
organizations as reported annually in the Summary of Deposits, that 
causes the interlock to become prohibited will be treated as a change 
in circumstances under Sec.  212.6 of this part.
    By order of the Board of Governors of the Federal Reserve 
System, February 4, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-3090 Filed 2-16-94; 8:45 am]
BILLING CODE 6210-01-F