[Federal Register Volume 59, Number 110 (Thursday, June 9, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13855]


[[Page Unknown]]

[Federal Register: June 9, 1994]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 26

[Docket No. 94-11]
RIN 1557-AB39

 

Management Interlocks Small Market Share Exemption

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) proposes 
to amend its regulations that implement the Depository Institution 
Management Interlocks Act (Interlocks Act or Act) as part of a joint 
initiative by the Federal depository institution regulatory agencies. 
The Interlocks Act generally prohibits certain management official 
interlocks between unaffiliated depository institutions, depository 
holding companies, and their affiliates. The proposed amendment creates 
limited exemptions to the prohibition on management official interlocks 
between certain depository organizations located in the same community 
or relevant metropolitan statistical area. 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 relevant metropolitan statistical area. The exemptions 
are based on the OCC's belief that management interlocks between 
certain depository organizations do not threaten to inhibit or restrict 
competition within a particular market and that the present 
restrictions are not necessary, and may actually impede healthy 
competition.

DATES: Written comments must be received on or before August 8, 1994.

ADDRESSES: Comments may be mailed to the Communications Division, 
Office of the Comptroller of the Currency, 250 E Street SW., 
Washington, DC 20219, attention: Docket No. 94-11. Comments will be 
available for public inspection and photocopying at the same location 
on business days between 9 a.m. and 5 p.m.

FOR FURTHER INFORMATION CONTACT: William W. Templeton, Senior Attorney, 
Legislative, Regulatory and International Activities Division (202/874-
5090); Sue Auerbach, Senior Attorney, Corporate Organization and 
Resolution Division (202/874-5300); Sheila Ogilvie, Licensing and 
Policy Systems, Bank Organization and Structure (202/874-5060); or 
Emily McNaughton, Office of the Chief National Bank Examiner (202/874-
5170).

SUPPLEMENTARY INFORMATION:

I. Background

    The general purpose of the Interlocks Act (12 U.S.C. 3201 et seq.) 
is to foster competition among depository institutions, depository 
holding companies, and their affiliates by prohibiting certain 
management interlocks that may 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.
    The Interlocks Act prohibits, among other things, a management 
official of a depository organization1 from serving as a 
management official of an unaffiliated depository organization if an 
office of one of the depository organizations (or any depository 
institution affiliate thereof) is located in the same community2 
or metropolitan statistical area3 as an office of the other 
depository organization (or any depository institution affiliate 
thereof). The RMSA restriction, however, does not apply in the case of 
depository institutions with assets of less than $20 million. Section 
203 of the Interlocks Act (12 U.S.C. 3202). Congress included 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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    \1\``Depository organization'' is defined to mean a depository 
institution or a depository holding company. 12 CFR 26.2(g).
    \2\``Community'' is defined under the OCC's regulations to mean 
a city, town, or village, or contiguous or adjacent cities, towns, 
or villages. 12 CFR 26.2(c).
    \3\Specifically, the restriction relates to 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. These areas are referred to herein 
as ``RMSAs''. See 12 CFR 26.2(n).
    \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 26.3.
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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 (FDIC), the 
Office of Thrift Supervision, the National Credit Union Administration, 
and the OCC, hereinafter the ``Agencies'') to implement rules and 
regulations to carry out the Act, including rules or regulations that 
permit service by a management official that would otherwise be 
prohibited by the Act. Section 209 of the Interlocks 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 Agencies have previously 
established exemptions for institutions located in low- and moderate-
income areas, minority and womens'organizations, newly-chartered 
institutions, and institutions facing conditions endangering their 
safety and soundness. See, e.g., 12 CFR 26.4(b). These exemptions are 
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 OCC now seeks comment on a proposal to establish an additional 
exemption from the prohibitions of the Act. The exemption would be 
available to depository organizations that between them control a small 
percentage of deposits in a community or RMSA. The exemption would be 
available without the prior approval of the OCC.5 Each of the 
Agencies is proposing an identical deposit share exemption although 
each Agency is publishing its proposal separately.
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    \5\ For the purpose of ascertaining whether depository 
organizations qualify for the exception, deposit information 
regarding specific communities and RMSAs will be available at the 
appropriate Federal Reserve Bank.
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    The OCC 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 brings the definition in 12 CFR 26.2 into conformance with 
the statutory definition of that term. See 12 U.S.C. 3201(4). The 
proposal also makes certain technical amendments to conform the 
regulation to the proper Federal Register style.
    In addition to the proposed new exemption, the OCC, together with 
the other Agencies, is considering a more comprehensive revision of the 
regulations implementing the Act. The Agencies intend to simplify the 
regulations, broaden existing exemptions, and consider new exemptions 
that would foster competition in relevant RMSAs and communities. These 
actions would reduce unnecessary regulatory burdens while still 
fulfilling the requirements of the Interlocks Act.

II. The Proposal

    The Interlocks Act prevents two or more competing institutions from 
adversely affecting competition in the products and services they offer 
by virtue of their shared management officials. 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 products and services available in 
their markets.
    The OCC believes that an examination of the market share of the 
deposits held by two institutions provides a meaningful assessment of 
the capacity of the two institutions to control credit and related 
services in that market. Analyses of market structure and performance 
in banking and other industries usually conclude that a small market 
share means a limited ability to influence market prices or terms. This 
proposal recognizes that two depository institutions with a small 
proportion 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 most institutions located 
in an RMSA, the RMSA constitutes the relevant market.
    The Interlocks Act and regulations provide that the relevant market 
for organizations which are not located in an RMSA and organizations 
with total assets of less than $20 million that are located within an 
RMSA, is the city, town, or village and contiguous and adjacent 
communities in which the organizations are located. The OCC believes 
that providing a similar small market share exemption for these 
community-based organizations also is appropriate.
    This exemption for community-based organizations is available on 
the same basis as the exemption for organizations whose relevant market 
is the RMSA. A community-based organization that intends to use the 
small market share exemption may qualify for the exemption in the same 
manner as any depository institution located in an RMSA.

III. The Small Market Share Exemption

    The proposal would amend the management interlocks regulations (12 
CFR part 26) to permit two depository organizations that serve the same 
RMSA to share management officials in circumstances where neither 
organization controls a significant portion of the deposits in that 
market. Specifically, the 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. The proposal also 
would require that the organizations control no more than 20 percent of 
the deposits in other RMSAs where they may compete directly through 
offices or through affiliated depository institutions.
    The proposal treats 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 exempts any management interlock between 
two depository organizations located in a community, as defined by the 
regulation, if their combined share of the total deposits in the 
community is no more than 20 percent. Similarly, the organizations may 
not together control more than 20 percent of the deposits in any 
community in which they or their depository institution affiliates 
compete.
    To illustrate by example, if an RMSA has an assumed total deposit 
base of $1 billion, a depository institution which is located within 
that RMSA may engage in a management interlock with another institution 
if the organizations control no more than $200 million of deposits 
between them in that RMSA. If a community has an assumed total deposit 
base of $100 million, a depository institution located in that 
community may engage in a management interlock with another institution 
if the organizations control no more than $20 million of deposits 
between them in that community. When an interlock is sought for 
institutions that have offices in more than one RMSA or community, the 
same calculation must be made for each area in which both institutions 
have an office.
    These exemptions would only be available if management interlocks 
between the two organizations are not otherwise prohibited by the Act. 
For example, the exemption would not be available if the interlock is 
prohibited by the major assets provision of the Act. (12 U.S.C. 
3203).6
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    \6\Section 204 of the Act provides that a depository institution 
or a depository holding company with assets in excess of $1 billion 
(or any affiliate thereof) may not enter into a management interlock 
with a depository institution or a depository holding company with 
assets in excess of $500 million (or any affiliate thereof).
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    The availability of the exemption will be determined in reliance 
upon the deposit data provided by depository organizations to their 
primary federal regulatory agency in the Summary of Deposits (the 
``Summary''). The Summary is filed as an addendum to the Report of 
Condition and Income due from all insured depository institutions on 
June 30 of each year. As the Summary breaks total deposits out by 
branch, it will provide the necessary information to determine deposit 
share by RMSA and community.7
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    \7\The Summary does 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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    For the purpose of ascertaining whether depository organizations 
qualify for the exception, deposit information regarding specific 
communities and RMSAs will be available at each Federal Reserve Bank. 
Under the proposal, a national bank would request appropriate deposit 
share data from its Federal Reserve Bank (FRB) and then determine 
whether it qualifies for the exemption in reliance upon this 
information. The process would involve neither an application nor an 
approval from the OCC. The burden of determining the applicability of 
the exemption falls upon the depository organizations. The exemption is 
intended to be self-implementing. Management is responsible for 
compliance with the terms of the exemption and for maintaining 
sufficient supporting documentation.
    Upon the request of any national bank, the FRB will provide the 
most recently available deposit share data to allow the requesting 
organizations to determine whether they are entitled to the small 
market share exemption. The process of collecting and compiling the 
deposit share data takes some time. In any given year, the FRB may 
provide the deposit share data compiled for the previous year if the 
new deposit share data from the June 30 Summary for that year has been 
collected and analyzed. When the current year data becomes available, 
institutions may request that the FRB provide the new data.
    While 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 national banks seeking to rely on the small 
market share exemption must first determine the total deposits in their 
community. To do this, the national banks must request deposit share 
data from their FRB with sufficient specificity to delineate the 
community defined by the Interlocks Act that both the interlocking 
institutions will serve. Only then can they determine the portion of 
deposits that the institutions would be deemed to control in their 
relevant market if they engage in the interlock.
    Institutions that determine they are entitled to the small market 
share exemption in reliance on the Summary filed on June 30 of a 
particular year will continue to enjoy that status until such time as 
the deposit share data from the June 30 Summary for the following year 
is available from the FRB. The institutions must then determine that 
the required level of deposits has not been exceeded. If at that point 
the level of deposits controlled exceeds 20 percent of deposits in the 
community or RMSA as measured in the new Summary, the depository 
organizations have up to 15 months to correct the prohibited interlock. 
Institutions will be required to retain records supporting the 
applicability of the exemption.
    The OCC is interested in receiving comment on the effect of this 
proposal on the geographic markets covered by the Interlocks Act. The 
OCC has attempted to determine the potential consequences of the 
proposal for RMSA markets by examining summary data for two very large 
RMSAs, two RMSAs of moderate size, and two smaller RMSAs. The OCC has 
not attempted to assess the effect of the rule on communities because 
of the unique delineation of each community.
    Depository organizations in each of the six RMSAs were ranked by 
their proportional share of total deposits in the market. The data was 
not analyzed, however, for proportional shares of total deposits in 
other RMSAs or other communities where the depository organizations may 
also compete against one another. Moreover, since the data was taken 
from the Summary for June 30, 1992, the data does not reflect recent 
consolidations in the six markets.
    OCC's preliminary analysis indicates that the exemption would be 
available to the great majority of depository organizations operating 
in markets where they have a limited share of the market. In general, 
this exemption would allow smaller depository organizations in the six 
RMSAs to interlock with each other. Smaller depository organizations 
could not interlock with larger depository organizations, however, when 
the latter possesses a dominant share of the market. It is unlikely 
that the larger organizations in the six markets studied could 
interlock with each other because of their large share of the deposits 
in their markets or because of other Interlocks Act provisions such as 
the major assets provision. (See footnote 5.)
    The purpose of the proposed small market share exemption is to 
provide an opportunity to a number of smaller institutions to share 
management talent and improve their ability to compete with larger 
institutions in their markets. The OCC's ability to measure the actual 
effect of the proposed exemption in the RMSAs is limited. A prompt 
determination of the effect of the exemption in a community is not 
possible because of the OCC's difficulty in delineating specific 
communities. For these reasons, the OCC seeks comment on whether the 
availability of the exemption would have a detrimental effect on 
competition in the affected markets.
    The OCC believes that this proposal will, on balance, 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 interlocks 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

    The OCC invites comment on any aspect of this proposal. The OCC 
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 exemptions, 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% 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 an RMSA, should the exemption require that the 
depository organizations control no more than 20% of the deposits in 
the community and no more than 20% of the deposits in the RMSA? 
(Consider depository organizations that compete in several communities 
within the same RMSA.)
    4. Whether the proposed procedure to employ the deposit data 
collected 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 exemption.
    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 
frustrate the purposes of the Interlocks Act by establishing multiple 
interlocks involving several individuals and several depository 
organizations. For example, could each of several directors of one 
depository organization serve as a director of a different unaffiliated 
depository organization, facilitating diminished competition among the 
several depository organizations?
    7. Could several depository organizations be linked through a 
series of separate interlocks involving different individuals? The OCC 
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.
    8. Whether the availability of the exemption would have a 
detrimental effect on competition in the affected markets.
    In addition to this proposal, the OCC plans a comprehensive 
revision of the regulations implementing the Interlocks Act. The OCC 
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 OCC. Toward 
this end, the OCC welcomes comment on how to clarify and improve the 
entire rule in a manner consistent with the purpose of the Interlocks 
Act.

Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
OCC 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 slight but beneficial. The rule would 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 rule would 
affect the management structure of only a few institutions.

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1980 (44 
U.S.C. 3504(h)). Comments on the collection of information should be 
sent to the Comptroller of the Currency, Legislative, Regulatory, and 
International Activities, Attention: 1557-AB39, 250 E. Street, SW., 
Washington, DC 20219, with a copy to the Office of Management and 
Budget, Paperwork Reduction Project, Attention Treasury Desk Officer, 
(1557-AB39) Washington, DC 20503.
    The collections of information in this proposed regulation are in 
12 CFR 26.4(d)(2). This information is required by the OCC to support a 
national bank's determination that it qualifies for a small market 
share exemption to the Interlocks Act. This information will be used by 
the OCC to assess the bank's compliance with Federal law and 
regulation.
    The likely respondents are for-profit institutions.
    The estimated annual burden per recordkeeper will average three 
hours.
    Estimated number of respondents and/or recordkeepers: 100.

Executive Order 12866

    It has been determined that this document is not a significant 
regulatory action.

List of Subjects in 12 CFR Part 26

    Antitrust, Holding companies, Management official interlocks, 
National banks.

Authority and Issuance

    For the reasons set out in the preamble, part 26 of chapter I of 
title 12 of the Code of Federal Regulations is proposed to be amended 
as set forth below:

PART 26--MANAGEMENT OFFICIAL INTERLOCKS

    1. The authority for part 26 is revised to read as follows:

    Authority: 12 U.S.C 93a and 3201 et seq.

    2. In Sec. 26.2, paragraph (h)(1)(ii) is revised to read as 
follows:


Sec. 26.2  Definitions.

* * * * *
    (h) (1) * * *
    (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);
* * * * *
    3. In Sec. 26.4 a new paragraph (d) is added to read as follows:


Sec. 26.4  Permitted interlocking relationships.

* * * * *
    (d) Small market share exemption.--(1) Depository organizations 
controlling no more than 20 percent of the deposits in a community or 
Relevant Metropolitan Statistical Area. A management official may serve 
two unaffiliated depository organizations in a capacity which would 
otherwise be prohibited by Sec. 26.3(a) or (b) if the following 
conditions are met:
    (i) The interlock is not prohibited by Sec. 26.3(c); and
    (ii) The two depository organizations hold in the aggregate no more 
than 20 percent of the deposits, as reported annually in connection 
with the Summary of Deposits in each Relevant Metropolitan Statistical 
Area 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 paragraph (d) 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 paragraph (d) are satisfied. 
Any increase in the aggregated deposit holdings of the depository 
organizations as reported in the Summary of Deposits that causes the 
interlock to become prohibited will be treated as a change in 
circumstances under Sec. 26.6.
    (The collection of information contained in this section was 
approved by the Office of Management and Budget under OMB control 
number 1557-____.)

    Dated: April 5, 1994.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 94-13855 Filed 6-8-94; 8:45 am]
BILLING CODE 4810-33-P