[Federal Register Volume 61, Number 58 (Monday, March 25, 1996)]
[Proposed Rules]
[Pages 12043-12050]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6703]



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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 61, No. 58 / Monday, March 25, 1996 / 
Proposed Rules

[[Page 12043]]


NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 711


Management Official Interlocks

AGENCY: National Credit Union Administration.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The National Credit Union Administration (NCUA) is proposing 
to revise its rules regarding management interlocks between credit 
unions and other financial institutions. The proposal conforms the 
interlocks rules to recent statutory changes, modernizes and clarifies 
the rules, and reduces unnecessary regulatory burdens where feasible, 
consistent with statutory requirements.

DATES: Comments must be received by May 24, 1996.

ADDRESSES: Comments should be directed to Becky Baker, Secretary of the 
Board. Mail or hand-deliver comments to: National Credit Union 
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. Fax 
comments to (703) 518-6319. Post comments on NCUA's electronic bulletin 
board by dialing (703) 518-6480. Please send comments by one method 
only.

FOR FURTHER INFORMATION CONTACT: -Jeffrey Mooney, Staff Attorney (703/
518-6563), Office of General Counsel, or Kimberly Iverson, Program 
Officer (703/518-6375), Office of Examination and Insurance.

SUPPLEMENTARY INFORMATION:

Background

Summary of Statutory Changes

    The Depository Institution Management Interlocks Act (12 U.S.C. 
3201 et seq.) (Interlocks Act) prohibits certain management interlocks 
between depository institutions. The Interlocks Act exempts 
interlocking arrangements between credit unions and therefore, in the 
case of credit unions, only restricts interlocks between credit unions 
and other institutions--banks and thrifts.
    The Riegle Community Development and Regulatory Improvement Act of 
1994 (CDRI Act) amended the Interlocks Act by removing the NCUA's and 
the other banking agencies' \1\ broad authority to exempt otherwise 
impermissible interlocks and replacing it with the authority to exempt 
interlocks under more narrow circumstances. The CDRI Act also required 
a depository organization with a ``grandfathered'' interlock to apply 
for an extension of the grandfather period if the organization wanted 
to keep the interlock in place.\2\

    \1\ The NCUA participated in an interagency effort to revise the 
management interlocks regulations. The other banking agencies, the 
Office of the Comptroller of the Currency, the Office of Thrift 
Supervision, the Federal Reserve Board and the Federal Deposit 
Insurance Corporation have already published proposed revisions to 
their respective management interlocks regulations in a joint notice 
of proposed rulemaking. (See 60 FR 67424, December 29, 1995).
    \2\ The NCUA did not receive any requests for extensions, 
therefore, the provision regarding extending the grandfather period 
is moot for purposes of this regulation.
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    After the changes made by the CDRI Act, a person subject to the 
Interlocks Act's restrictions seeking an exemption from those 
restrictions must qualify either for a ``regulatory standards'' 
exemption or an exemption under a ``management official consignment 
program'' (the Management Consignment exemption). An applicant seeking 
a regulatory standards exemption must submit a board resolution 
certifying that no other candidate from the relevant community has the 
necessary expertise to serve as a management official, is willing to 
serve, and is not otherwise prohibited by the Interlocks Act from 
serving. Before granting the exemption request, the NCUA must find that 
the individual is critical to the institution's safe and sound 
operations, that the interlock will not produce an anticompetitive 
effect, and that the management official meets any additional 
requirements imposed by the agency. Under the Management Consignment 
exemption, the NCUA or appropriate agency may permit an interlock that 
otherwise would be prohibited by the Interlocks Act if the agency 
determines that the interlock would improve the provision of credit to 
low- and moderate-income areas, increase the competitive position of a 
minority- or woman-owned institution, or strengthen the management of a 
newly chartered institution or an institution that is in an unsafe or 
unsound condition. (See text following ``Management Consignment 
exemption'' in this preamble for a discussion regarding interlocks 
involving newly chartered institutions or institutions that are in an 
unsafe or unsound condition).
    The proposal reflects these statutory changes, and streamlines and 
clarifies the interlocks regulations in various respects. These changes 
are discussed in the text that follows. The NCUA invites comments on 
all aspects of this proposal.
    The following is a section-by-section discussion of the proposed 
rule changes.

Authority, Purpose, and Scope

    This section identifies the Interlocks Act as the statutory 
authority for the management interlocks regulation. There are no 
significant changes from the current authority, purpose and scope rule. 
It also states that the purpose of the rules governing management 
interlocks is to foster competition between unaffiliated institutions. 
Finally, this section currently identifies the types of institutions to 
which NCUA's regulation applies.

Definitions

    The NCUA's current regulation sets forth definitions of key terms 
used in the regulation. The proposed regulation changes some of the 
current definitions. A discussion of the substantive differences 
between the current rule and proposal follows.

Anticompetitive Effect

    The current regulation neither uses nor defines the term 
``anticompetitive effect.'' The proposed regulation defines the term to 
mean ``a monopoly or substantial lessening of competition.'' This term 
is used in the regulatory standards exemption. Under that exemption, 
the NCUA may approve a request for an exemption to the Interlocks Act 
if, among other things, the NCUA finds that continuation of service by 
the management official does not produce an anticompetitive effect with 
respect to the affected credit union. The statute does not define the 
term ``anticompetitive effect,'' nor does the legislative history to 
the CDRI Act point to a particular definition.

[[Page 12044]]

    The context of the regulatory standards exemption suggests, 
however, that the NCUA and other agencies should apply the term 
``anticompetitive effect'' in a manner that permits interlocks that 
present no substantial lessening of competition. By prohibiting an 
interlock that would result in a monopoly or substantial lessening of 
competition, the proposed definition preserves the free flow of credit 
and other banking services that the Interlocks Act is designed to 
protect. While the proposed definition is familiar to the banking 
industry since it is derived from the Bank Merger Act (12 U.S.C. 
1828(c)), it is not used by the credit union industry. Therefore, NCUA 
requests comment on whether another definition would be more 
appropriate for interlocks between credit unions and other types of 
depository institutions.

Area Median Income

    The current regulation does not use the term ``area median 
income,'' and, therefore, does not define this term. The proposed 
regulation defines ``area median income'' as the median family income 
for the metropolitan statistical area (MSA) in which an institution is 
located or the statewide nonmetropolitan median family income if an 
institution is located outside an MSA. This term is used in the 
definition of ``low- and moderate-income areas,'' which in turn is used 
in the implementation of the Management Consignment exemption.

Contiguous or Adjacent Cities, Towns, or Villages

    The current regulation defines ``adjacent cities, towns, or 
villages'' as cities, towns, or villages whose borders are within 10 
road miles from each other. It also defines ``contiguous cities, towns, 
or villages'' as cities, towns, or villages whose borders touch. The 
statute and regulation apply these terms to prohibit interlocks 
involving small institutions that are located in contiguous or adjacent 
cities, towns, or villages. The proposed regulation combines these two 
definitions, given that contiguous cities, towns, or villages 
necessarily are within 10 miles of each other.

Critical

    The current regulation neither uses nor defines ``critical.'' The 
proposed regulation defines the term in connection with the regulatory 
standards exemption. Under that exemption, the NCUA must find that a 
proposed management official is critical to the safe and sound 
operations of the affected institution. 12 U.S.C. 3207(b)(2)(A).
    Neither the statute nor its legislative history define 
``critical.'' The NCUA is concerned that a narrow interpretation of 
this term would nullify the regulatory standards exemption. If someone 
were ``critical'' to the safe and sound operations of an institution 
only if the institution would fail but for the service of the person in 
question, the exemption would have little relevance because the 
standard would be practically impossible to meet. Given that Congress 
clearly intended for the regulatory standards exemption to permit 
interlocks under some circumstances, the question thus becomes how to 
define those circumstances.
    This proposal addresses the issue by stating that the NCUA will 
consider a person to be critical to a depository organization if the 
person will play an important role in helping the institution either 
address current problems or maintain safe and sound operations going 
forward. The NCUA believes that this approach is consistent with the 
legislative intent by insuring that only persons of demonstrated 
expertise and importance to the institution will be allowed to serve 
pursuant to a regulatory standards exemption.

Low- and Moderate-Income Areas

    The current regulation permits interlocks under certain 
circumstances involving a depository organization located ``in a low 
income or other economically depressed area.'' However, the current 
rule does not define ``low income'' or ``economically depressed.''
    Section 209(c)(1)(A) of the Interlocks Act (12 U.S.C. 
3207(c)(1)(A)) authorizes the NCUA to permit interlocks pursuant to the 
Management Consignment exemption if the NCUA determines that the 
proposed service would ``improve the provision of credit to low- and 
moderate-income areas.'' The proposed regulation defines ``low- and 
moderate-income areas'' as areas where the median family income is less 
than 100 percent of the area median income. This definition is 
consistent with Title I, Subtitle A of the CDRI Act (the Community 
Development Banking and Financial Institutions Act of 1994) (12 U.S.C. 
4701-4718), which, like the Management Consignment exemption affecting 
institutions in low- and moderate-income areas, is intended to assist 
the flow of credit into economically depressed areas. Section 103(17) 
of the CDRI Act (12 U.S.C. 4702(17)) defines ``low income'' to mean not 
more than 80 percent of the area median income. The NCUA believes that 
Congress, by using the term ``low- and moderate-income'' in the 
Management Consignment exemption, intended for that term to apply to an 
area where the median family income exceeds 80 percent of the median 
income for the area. The NCUA has selected 100 percent of the area 
median income as the cutoff for defining ``low- and moderate-income 
areas'' based on the belief that a higher threshold would permit 
interlocks that would not improve the provision of credit to low- and 
moderate-income areas.

Management Official

    The current regulation defines ``management official'' to include 
an employee or officer ``with management functions'' (including a 
branch manager), a director, a trustee of an organization under the 
control of trustees, or any person who has a representative or nominee 
serving in such capacity. The definition excludes (1) A person whose 
management functions relate either exclusively to the business of 
retail merchandising or manufacturing or principally to business 
outside the United States of a foreign commercial bank and (2) a person 
excluded by section 202(4) of the Interlocks Act (12 U.S.C. 3201(4)).
    The proposed regulation adopts the definition of ``management 
official'' set forth in the current rule, except that the phrase ``an 
employee or officer with management functions'' is removed. It is 
replaced by the term ``senior executive officer'' as defined by the 
NCUA's regulation pertaining to the prior notice of changes in senior 
executive officers, which implements section 212 of the Federal Credit 
Union Act (FCU Act) (12 U.S.C. 1790a) as added by section 914 of the 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 
(FIRREA).
    The NCUA is proposing this change to eliminate the uncertainty and 
attendant compliance burden created by the ambiguous term ``management 
functions.'' The proposal incorporates specific illustrative examples 
of positions at credit unions that will be treated as senior executive 
officers. See 12 CFR 701.14. The NCUA believes that these definitions 
will allow credit unions to identify impermissible interlocks with 
greater certainty and thus will enhance compliance. The NCUA requests 
comment on the advisability of defining ``management official'' by 
using ``senior executive officer'' rather than ``employee or officer 
with management functions.''
    The current definition of ``management official'' exempts those 
individuals whose management

[[Page 12045]]
functions relate to retail merchandising or manufacturing. Stated 
another way, the current exemption applies to a category of persons 
whose responsibilities are unrelated to the business of a deposit-
taking institution.
    The NCUA specifically asks commenters to address whether the NCUA 
should exempt a broader category of management officials whose duties 
are unrelated to the provision of financial services by a depository 
institution or depository holding company, and if so, how the NCUA 
should define that category of excluded officials.

Relevant Metropolitan Statistical Area (RMSA)

    The current regulation defines ``relevant metropolitan statistical 
area'' as an MSA, a primary MSA, or a consolidated MSA that is not 
comprised of designated primary MSAs as defined by the Office of 
Management and Budget (OMB). This definition is derived from section 
203(1) of the Interlocks Act (12 U.S.C. 3202(1)).
    The proposed regulation defines ``relevant metropolitan statistical 
area (RMSA)'' as an MSA, a primary MSA, or a consolidated MSA that is 
not comprised of designated primary MSAs, to the extent that the OMB 
defines and applies these terms. This change reflects the fact that the 
OMB defines ``consolidated MSA'' to include two or more primary MSAs. 
Given that consolidated MSAs, by the OMB's definition, are comprised of 
primary MSAs, the reference to consolidated MSAs in the Interlocks Act 
and the NCUA's regulation is inappropriate. The proposed change enables 
the NCUA to implement the statute in a way that complies with both the 
spirit and the letter of the Interlocks Act.

Representative or Nominee

    The current regulation defines ``representative or nominee'' as a 
person who serves as a management official and has an express or 
implied obligation to act on behalf of another person with respect to 
management responsibilities. The current definition goes on to state 
that the determination of whether someone is a representative or 
nominee depends on the facts of a particular case and that certain 
relationships (such as family, employment, and so on) may evidence an 
express or implied obligation to act.
    The proposed regulation also defines ``representative or nominee'' 
as someone who serves as a management official and has an obligation to 
act on behalf of someone else. The proposed definition deletes the rest 
of the current definition, however, and inserts in lieu thereof a 
statement that the NCUA will find that someone has an obligation to act 
on behalf of someone else only if there is an agreement (express or 
implied) to act on behalf of another. The NCUA proposes this change to 
clarify that the determination that a representative or nominee 
situation exists will depend on whether there is a basis to conclude 
that an agreement exists to act on someone's behalf. The NCUA notes 
that the current definition provides specific guidance for determining 
when a representative or nominee relationship might be found to exist, 
and requests comment on whether the current definition, the proposed 
definition, or another definition is preferable.

Prohibitions

    The current regulation prohibits interlocks in the following three 
instances. First, no two unaffiliated depository organizations may have 
an interlock if they (or their depository institution affiliates) have 
offices in the same community. Second, a depository organization may 
not have an interlock with any unaffiliated depository organization if 
either depository organization has assets exceeding $20 million and the 
depository organizations (or depository institution affiliates of 
either) have offices in the same RMSA.\3\ Third, if a depository 
organization has total assets exceeding $1 billion, it (and its 
affiliates) may not have an interlock with any depository organization 
with total assets exceeding $500 million (or affiliate thereof), 
regardless of location.

    \3\ A community as that term is defined in the proposal is 
smaller than RMSA. There may be several communities in one RMSA.
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    The proposed regulation amends the rule as it applies to 
institutions with assets of less than $20 million to better conform to 
the purposes of the Interlocks Act. Whereas the current rule prohibits 
interlocks in an RMSA if one of the organizations has total assets of 
$20 million or more, the proposed rule would apply the RMSA-wide 
prohibition only if both organizations have total assets of $20 million 
or more. Interlocks within a community involving unaffiliated 
depository organizations would continue to be prohibited.
    The NCUA believes that this proposed change is consistent with both 
the language and the intent of the Interlocks Act. While the statute 
uses the plural ``depository institutions'' when referring to the 
community-wide prohibition, in context, neither the statute nor its 
legislative history compels the conclusion that the interlock must 
involve two institutions with less than $20 million in assets before 
the less restrictive prohibition applies.
    The Interlocks Act seeks to prohibit interlocks that could enable 
two institutions to engage in anticompetitive behavior. However, an 
institution with less than $20 million is likely to derive most of its 
business from the community in which it is located and unlikely to 
compete with institutions that do not have offices in that community. 
Therefore, interlocks involving one institution with assets under $20 
million and another institution with assets of at least $20 million not 
in the same community are not likely to lead to the anticompetitive 
conduct that the Interlocks Act is designed to prohibit.
    The NCUA believes, moreover, that the proposed change will promote 
rather than inhibit competition. Expanding the pool of managerial 
talent for institutions with assets under $20 million could enhance the 
ability of smaller institutions to compete by improving the management 
of these institutions.
    The proposed regulation reflects the change affecting depository 
organizations with less than $20 million in total assets. It also sets 
forth the prohibition against interlocks involving large depository 
organizations but does not change the substance of that prohibition. 
The proposed regulation changes the wording of all three prohibitions 
in order to make them easier to understand.
    The NCUA invites comment on any aspect of this proposed section. 
The NCUA specifically seeks comment on whether the proposed 
reinterpretation of 12 U.S.C. 3202(1) might result in anticompetitive 
effects and thus run counter to the legislative intent of the 
Interlocks Act. For example, could the proposed change enable a large 
depository organization to engage in anticompetitive conduct by 
creating interlocks with one or more smaller depository institutions 
located in the same RMSA but not in the same community (a ``hub and 
spokes'' interlock)? The NCUA also seeks comment on whether the final 
rule should specifically address such situations.

Interlocking Relationships Expressly Permitted by Statute

    The current regulation restates most of the exemptions that are 
expressly permitted by the Interlocks Act as well as listing those 
exemptions that the NCUA has permitted by regulation pursuant to the 
broad exemptive

[[Page 12046]]
authority that applied before the enactment of the CDRI Act. The 
proposal deletes the exemptions authorized by NCUA's regulations and 
states the exemptions found in 12 U.S.C. 3204(1)-(8). The proposed 
regulation reorders the exemptions set forth in the current regulations 
in order to conform the list of exemptions to the list set forth in the 
Interlocks Act.

Regulatory Standards Exemption

    The current rule contains no regulatory standards exemption. The 
proposed rule sets forth the standards that a credit union must satisfy 
in order to obtain a regulatory standards exemption. The proposal 
implements the requirement regarding certification by allowing a credit 
union's board of directors (or the organizers of a credit union that is 
being formed) to certify to the NCUA that it located no other qualified 
candidates after undertaking reasonable efforts to locate other 
qualified candidates who are not prohibited from service under the 
Interlocks Act. If read narrowly, the Interlocks Act could require a 
credit union to evaluate every person in a given locale that might be 
qualified and interested. This would create a requirement that, in 
practice, would be impossible to satisfy. Given that Congress would not 
have included an exemption that would have no practical application, 
the NCUA believes that the proposed ``reasonableness'' standard is 
consistent with the legislative intent.
    The proposed regulation also sets forth a presumption that the NCUA 
will apply when reviewing an application for a regulatory standards 
exemption. NCUA will presume that a person is critical to a credit 
union's safe and sound operations if the NCUA also approves that 
individual under section 914 of FIRREA and the credit union in question 
either was a newly chartered institution, or was in a ``troubled 
condition'' as defined in Sec. 701.14(b)(3) of NCUA's regulations at 
the time the section 914 filing was approved.
    The NCUA invites comment on the utility of the proposed presumption 
and on whether other presumptions also should apply.\4\

    \4\ The other banking agencies have proposed a presumption that 
an interlock will not have an anticompetitive effect if it involves 
institutions that, if merged, would not trigger a challenge from the 
agencies on competitive grounds. The agencies will use the 
Herfindahl-Hirschman Index (``HHI'') (See Department of Justice 
Merger Guidelines (49 FR 26823, June 29, 2984)) to determine whether 
the potential interlock has an anticompetitive effect since banks 
and savings associations frequently use the HHI as an initial 
indicator of the effects a transaction is likely to have on 
competition in a given market. NCUA does not propose implementing 
this presumption because there is no statutory authority for credit 
unions to merge with other types of depository institutions, and the 
typical HHI analysis does not reflect the shares/deposits held by 
credit unions, therefore, any HHI analysis involving credit unions 
would be meaningless.
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    The proposed regulation also addresses the duration of an interlock 
permitted under the regulatory standards exemption. The statute does 
not require that these interlocks terminate. In light of this open-
ended grant of authority, the NCUA is not proposing a specific term for 
a permitted exemption. Instead, the NCUA may require a credit union to 
terminate the interlock if the NCUA determines that the management 
official in question either no longer is critical to the safe and sound 
operations of the affected organization or that continued service will 
produce an anticompetitive effect. The NCUA will provide affected 
organizations an opportunity to submit information before they make a 
final determination to require termination of an interlock.

Grandfathered Interlocking Relationships--Removed

    The current regulation restates the grandfather provisions set 
forth in section 206 of the Interlocks Act (12 U.S.C. 3205). Section 
338(a) of the CDRI Act authorizes the NCUA to extend a grandfathered 
interlock for an additional five years if the management official in 
question satisfied the statutory criteria for obtaining an extension. 
Individuals who wished to extend their dual service had until March 23, 
1995, to apply to the NCUA. The proposed regulation removes the section 
addressing the grandfather exemption because it is unnecessary and 
redundant in light of the statute.

Management Consignment Exemption

    The current regulation sets forth a number of instances in which 
the NCUA may permit an exemption to the Interlocks Act. However, the 
statutory provisions authorizing the NCUA to grant exemptions have been 
amended, thereby requiring that the current regulation be amended as 
well. The Management Consignment exemption set forth in section 209(c) 
of the Interlocks Act (12 U.S.C. 3207(c)) is modeled after certain 
exemptions that appear in the NCUA's current regulation.
    The proposed regulation implements the Management Consignment 
exemption, and restates the statutory criteria, with three 
clarifications. First, the proposed rule states that the NCUA considers 
a ``newly chartered institution'' to be an institution that has been 
chartered for less than two years at the time it files an application 
for exemption. This standard is consistent with NCUA's threshold for 
determining when a credit union is considered newly chartered (See 12 
CFR 701.14(c)(1)).
    Second, the proposal clarifies that the exemption available for 
``minority- and women-owned institutions'' is available for an 
institution that is owned either by minorities or women. In noting the 
types of exemptions that the Federal banking agencies have approved, 
the House Conference Report to the CDRI Act (H.R. Conf. Rep. No. 652, 
103d Cong., 2d Sess. 181 (1994)) (Conference Report) states that the 
types of institutions that have received exemptions include those that 
are ``owned by women or minorities.'' These exemptions ultimately were 
codified in the Interlocks Act. Accordingly, the NCUA, along with the 
other banking agencies have concluded that Congress intended the 
Management Consignment exemption to assist institutions owned by women 
and/or by minorities, but did not intend to require the institution to 
be owned by both.
    Third, the proposal permits an interlock if the interlock would 
strengthen the management of either a newly chartered institution or an 
institution that is in an unsafe or unsound condition. Section 
209(c)(1)(C) of the Interlocks Act (12 U.S.C. 3207(c)(1)(C)) permits an 
exemption if the interlock would ``strengthen the management of newly 
chartered institutions that are in an unsafe or unsound condition.'' 
However, this provision contains what appears on its face to be an 
error, given that an exemption limited to situations involving newly 
chartered institutions that also are in an unsafe and unsound condition 
would have no practical utility. The NCUA does not approve an 
application for a credit union charter unless the applicant seeking a 
charter can demonstrate that the proposed new credit union will operate 
in a safe and sound manner for the foreseeable future. While there may 
be an extraordinary instance where a newly chartered credit union 
immediately experiences unforeseen problems so severe that they 
threaten the safety and soundness of that institution, there is nothing 
in the legislative history to suggest that Congress intended to limit 
the Management Consignment exemption to such rare instances.
    Moreover, the legislative history of the CDRI Act suggests that the 
NCUA is to apply the Management Consignment exemption in cases 
involving either

[[Page 12047]]
newly chartered institutions or institutions that are in an unsafe or 
unsound condition. The Conference Report notes that the Federal banking 
agencies have used their exemptive authority to grant exemptions in 
limited cases where institutions ``are particularly in need of 
management guidance and expertise to operate in a safe and sound 
manner.'' Id. The Conference Report goes on to state that ``Examples of 
exceptions permissible under an agency management official consignment 
program include improving the provision of credit to low- and moderate-
income areas, increasing the competitive position of minority- and 
women-owned institutions, and strengthening he [sic] management of 
newly chartered institutions or institutions that are in an unsafe or 
unsound condition.'' Id. at 182 (emphasis added).
    Finally, Congress used the exemptions in the agencies' current 
rules as the model for the Management Consignment exemption. See id. at 
181-182. These exemptions distinguish newly chartered institutions from 
institutions that are in an unsafe or unsound condition. The reference 
in the CDRI Act's legislative history to the current regulatory 
exemptions suggests that Congress intended to codify these exemptions.
    For these reasons, the NCUA proposes to permit exemptions pursuant 
to the Management Consignment exemption if the management official will 
strengthen either a newly chartered institution or an institution that 
is in an unsafe or unsound condition. Commenters are requested to 
address this approach.
    The proposal sets forth two presumptions that the NCUA will apply 
in connection with an application for an exemption under the Management 
Consignment exemption. First, the NCUA will presume that an individual 
is capable of strengthening the management of a credit union that has 
been chartered for less than two years if the NCUA approved the 
individual to serve as a management official of that credit union 
pursuant to section 914 of FIRREA. Second, the NCUA will presume that 
an individual is capable of strengthening the management of a credit 
union that is in an unsafe or unsound condition if the NCUA approved 
the individual to serve under section 914 as a management official of 
an institution at a time when that institution was in a ``troubled 
condition.''
    The NCUA believes that presumptions of suitability are less valid 
when applied to the other Management Consignment exemptions because 
there is no reason to conclude that a management official approved 
under section 914 necessarily will improve the flow of credit to low- 
and moderate-income areas or increase the competitive position of 
minority- or woman-owned institutions. No presumption regarding effects 
on competition is proposed, given that this is not a factor to be 
considered by the NCUA when reviewing an application for a Management 
Consignment exemption.
    The NCUA seeks comment on the utility of the proposed presumptions 
and on whether additional presumptions should apply as well.
    The proposed regulation sets forth the limits on the duration of a 
Management Consignment exemption. The Interlocks Act limits a 
Management Consignment exemption to two years, with a possible 
extension for up to an additional two years if the applicant satisfies 
at least one of the criteria for obtaining a Management Consignment 
exemption. The proposed regulation implements this limitation by 
requiring interested parties to submit an application for an extension 
at least 30 days before the expiration of the initial term of the 
exemption and by clarifying that the presumptions and procedures that 
apply to initial applications also apply to extension applications.

Change in Circumstances

    The current regulation provides a 15-month grace period for 
nongrandfathered interlocks that become impermissible due to a change 
in circumstances. This period may be shortened by the NCUA under 
appropriate circumstances. The proposed regulation revises the wording 
of this section in the current regulations but not its substance. The 
NCUA specifically seeks comment on the proposed continued availability 
of a grace period.

Enforcement

    The current regulations set forth the jurisdiction of the NCUA to 
enforce the Interlocks Act. The proposed regulations simplify the 
wording of this section in the current regulations but not its 
substance.

Regulatory Procedures

Regulatory Flexibility Act

    It is hereby certified that this proposal will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, a regulatory flexibility analysis is not required.

Paperwork Reduction Act

    The Board has determined that the requirements of the Paperwork 
Reduction Act do not apply.

Executive Order 12612

    This proposed rule, like the current 12 CFR part 711 it would 
replace, will apply to all Federally insured credit unions. The NCUA 
Board, pursuant to Executive Order 12612, has determined, however, that 
this proposed rule will not have a substantial direct effect on the 
States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among 
various levels of government. Further, this proposed rule will not 
preempt provisions of State law or regulations.

List of Subjects in 12 CFR Part 711

    Antitrust, Credit unions, Holding companies.

    By the National Credit Union Administration Board on March 13, 
1996.
Becky Baker,
Secretary of the Board.
    For the reasons set out in the preamble, the NCUA proposes to 
revise part 711 of chapter VII of title 12 of the Code of Federal 
Regulations to read as follows:

PART 711--MANAGEMENT OFFICIAL INTERLOCKS

Sec.
711.1  Authority, purpose, and scope.
711.2  Definitions.
711.3  Prohibitions.
711.4  Interlocking relationships permitted by statute.
711.5  Regulatory Standards exemption.
711.6  Management Consignment exemption.
711.7  Change in circumstances.
711.8  Enforcement.

    Authority: 12 U.S.C. 1766 and 3201-3208.


Sec. 711.1  Authority, purpose, and scope.

    (a) Authority. This part is issued under the provisions of the 
Depository Institution Management Interlocks Act (Interlocks Act) (12 
U.S.C. 3201 et seq.), as amended, and the NCUA's general rulemaking 
authority in 12 U.S.C. 1766.
    (b) Purpose. The purpose of the Interlocks Act and this part is to 
foster competition by generally prohibiting a management official from 
serving two nonaffiliated depository organizations in situations where 
the management interlock could have an anticompetitive effect.
    (c) Scope. This part applies to management officials of federally 
insured credit unions and their affiliates.

[[Page 12048]]



Sec. 711.2  Definitions.

    For purposes of this part, the following definitions apply:
    (a) Affiliate. (1) The term affiliate has the meaning given in 
section 202 of the Interlocks Act (12 U.S.C. 3201). For purposes of 
section 202, shares held by an individual include shares held by 
members of his or her immediate family. ``Immediate family'' includes 
spouse, mother, father, child, grandchild, sister, brother, or any of 
their spouses, whether or not any of their shares are held in trust.
    (2) For purposes of section 202(3)(B) of the Interlocks Act (12 
U.S.C. 3201(3)(B)), an affiliate relationship involving common 
ownership does not exist if the NCUA determines, after giving the 
affected persons the opportunity to respond, that the asserted 
affiliation was established in order to avoid the prohibitions of the 
Interlocks Act and does not represent a true commonality of interest 
between the depository organizations. In making this determination, the 
NCUA considers, among other things, whether a person owns a nominal 
percentage of the shares of one of the organizations and the percentage 
is substantially disproportionate with that person's ownership of 
shares in the other organization.
    (b) Anticompetitive effect means a monopoly or substantial 
lessening of competition.
    (c) Area median income means:
    (1) The median family income for the metropolitan statistical area 
(MSA), if a depository organization is located in an MSA; or
    (2) The statewide nonmetropolitan median family income, if a 
depository organization is located outside an MSA.
    (d) Community means city, town, or village, and contiguous or 
adjacent cities, towns, or villages.
    (e) Contiguous or adjacent cities, towns, or villages means cities, 
towns, or villages whose borders touch each other or whose borders are 
within 10 road miles of each other at their closest points. The 
property line of an office located in an unincorporated city, town, or 
village is the boundary line of that city, town, or village for the 
purpose of this definition.
    (f) Credit union means a federal or state-chartered credit union 
that is insured by the National Credit Union Share Insurance Fund.
    (g) Critical means important in helping a depository organization 
either address current problems or maintain safe and sound operations 
going forward.
    (h) Depository holding company means a bank holding company or a 
savings and loan holding company (as more fully defined in section 202 
of the Interlocks Act (12 U.S.C. 3201)) having its principal office 
located in the United States.
    (i) Depository institution means a commercial bank (including a 
private bank), a savings bank, a trust company, a savings and loan 
association, a building and loan association, a homestead association, 
a cooperative bank, an industrial bank, or a credit union, chartered 
under the laws of the United States and having a principal office 
located in the United States. Additionally, a United States office, 
including a branch or agency, of a foreign commercial bank is a 
depository institution.
    (j) Depository institution affiliate means a depository institution 
that is an affiliate of a depository organization.
    (k) Depository organization means a depository institution or a 
depository holding company.
    (l) Low- and moderate-income areas means areas where the median 
family income is less than 100 percent of the area median income.
    (m) Management official. (1) The term management official includes:
    (i) A director;
    (ii) An advisory or honorary director of an institution with total 
assets of $100 million or more; -
    (iii) A senior executive officer as that term is defined in 12 CFR 
701.14(b)(2), or a person holding an equivalent position, regardless of 
title;
    (iv) A branch manager;
    (v) A trustee of a depository organization under the control of 
trustees; and -
    (vi) Any person who has a representative or nominee serving in any 
of the above capacities.
    (2) The term 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) A person described in the provisos of section 202(4) of the 
Interlocks Act (12 U.S.C. 3201(4)) (referring to an officer of a State-
chartered savings bank, cooperative bank, or trust company that neither 
makes real estate mortgage loans nor accepts savings).
    (n) Office means a principal or branch of a depository institution 
located in the United States. Office does not include a representative 
office of a foreign commercial bank, electronic terminal, or a loan 
production office. -
    (o) Person means a natural person, corporation, or other business 
entity. -
    (p) Relevant metropolitan statistical area (RMSA) means an MSA, a 
primary MSA, or a consolidated MSA that is not comprised of designated 
primary MSAs to the extent that these terms are defined and applied by 
the Office of Management and Budget.
    (q) Representative or nominee means a natural person who serves as 
a management official and has an obligation to act on behalf of another 
person with respect to management responsibilities. The NCUA will find 
that a person has an obligation to act on behalf of another person only 
if the first person has agreed to act on behalf of the second person 
with respect to management responsibilities. The NCUA will determine, 
after giving the affected person an opportunity to respond, whether a 
person is a ``representative or nominee.''
    (r) Total assets. (1) The term total assets means assets measured 
on a consolidated basis as of the close of the organization's last 
fiscal year.
    (2) The term total assets does not include:
    (i) Assets of a diversified savings and loan holding company as 
defined by section 10(a)(1)(F) of the Home Owners' Loan Act (12 U.S.C. 
1467a(a)(1)(F)) other than the assets of its depository institution 
affiliate; -
    (ii) Assets of a bank holding company that is exempt from the 
prohibitions of section 4 of the Bank Holding Company Act of 1956 
pursuant to an order issued under section 4(d) of that Act (12 U.S.C. 
1843(d)) other than the assets of its depository institution affiliate; 
or
    (iii) Assets of offices of a foreign commercial bank other than the 
assets of its United States branch or agency.
    (s) United States includes any State or territory of the United 
States of America, the District of Columbia, Puerto Rico, Guam, 
American Samoa, and the Virgin Islands.


Sec. 711.3  Prohibitions.

    (a) Community. A management official of a depository organization 
may not serve at the same time as a management official of an 
unaffiliated depository organization if the depository organizations in 
question (or a depository institution affiliate thereof) have offices 
in the same community.
    (b) RMSA. A management official of a depository organization may 
not serve at the same time as a management official of an unaffiliated 
depository organization if the depository organizations in question (or 
a depository institution affiliate thereof) have offices in the same 
RMSA and each

[[Page 12049]]
depository organization has total assets of $20 million or more.
    (c) Major assets. A management official of a depository 
organization with total assets exceeding $1 billion (or any affiliate 
thereof) may not serve at the same time as a management official of an 
unaffiliated depository organization with total assets exceeding $500 
million (or any affiliate thereof), regardless of the location of the 
two depository organizations.


Sec. 711.4  Interlocking relationships permitted by statute.

    The prohibitions of Sec. 711.3 do not apply in the case of any one 
or more of the following organizations or to a subsidiary thereof:
    (a) A depository organization that has been placed formally in 
liquidation, or which is in the hands of a receiver, conservator, or 
other official exercising a similar function;
    (b) A corporation operating under section 25 or section 25A of the 
Federal Reserve Act (12 U.S.C. 601, et seq. and 12 U.S.C. 611 et seq., 
respectively) (Edge Corporations and Agreement Corporations);
    (c) A credit union being served by a management official of another 
credit union;
    (d) A depository organization that does not do business within the 
United States except as an incident to its activities outside the 
United States;
    (e) A State-chartered savings and loan guaranty corporation;
    (f) A Federal Home Loan Bank or any other bank organized solely to 
serve depository institutions (a bankers' bank) or solely for the 
purpose of providing securities clearing services and services related 
thereto for depository institutions, and securities companies;
    (g) A depository organization that is closed or is in danger of 
closing as determined by the appropriate Federal depository 
institutions regulatory agency and is acquired by another depository 
organization. This exemption lasts for five years, beginning on the 
date the depository organization is acquired; and
    (h)(1) A diversified savings and loan holding company (as defined 
in section 10(a)(1)(F) of the Home Owners' Loan Act (12 U.S.C. 
1467a(a)(1)(F)) with respect to the service of a director of such 
company who also is a director of an unaffiliated depository 
organization if:
    (i) Both the diversified savings and loan holding company and the 
unaffiliated depository organization notify their appropriate Federal 
depository institutions regulatory agency at least 60 days before the 
dual service is proposed to begin; and
    (ii) The appropriate regulatory agency does not disapprove the dual 
service before the end of the 60-day period.
    (2) The NCUA may disapprove a notice of proposed service if it 
finds that:
    (i) The service cannot be structured or limited so as to preclude 
an anticompetitive effect in financial services in any part of the 
United States;
    (ii) The service would lead to substantial conflicts of interest or 
unsafe or unsound practices; or
    (iii) The notificant failed to furnish all the information required 
by the NCUA.
    (3) The NCUA may require that any interlock permitted under this 
paragraph (h) be terminated if a change in circumstances occurs with 
respect to one of the interlocked depository organizations that would 
have provided a basis for disapproval of the interlock during the 
notice period.


Sec. 711.5  Regulatory Standards exemption.

    (a) Criteria. The NCUA may permit an interlock that otherwise would 
be prohibited by the Interlocks Act and Sec. 711.3 if:
    (1) The board of directors of the depository organization (or the 
organizers of a depository organization being formed) that seeks the 
exemption provides a resolution to the NCUA certifying that the 
organization, after the exercise of reasonable efforts, is unable to 
locate any other candidate from the community or RMSA, as appropriate, 
who:
    (i) Possesses the level of expertise required by the depository 
organization and who is not prohibited from service by the Interlocks 
Act; and
    (ii) Is willing to serve as a management official; and
    (2) The NCUA, after reviewing an application submitted by the 
depository organization seeking the exemption, determines that:
    (i) The management official is critical to the safe and sound 
operations of the affected depository organization; and
    (ii) Service by the management official will not produce an 
anticompetitive effect with respect to the depository organization.
    (b) Presumptions. The NCUA applies the following presumption when 
reviewing any application for a Regulatory Standards exemption: A 
proposed management official is critical to the safe and sound 
operations of a credit union if that official is approved by the NCUA 
to serve as a director or senior executive officer of that credit union 
pursuant to 12 CFR 701.14 or pursuant to conditions imposed on a newly 
chartered credit union and the institution has operated for less than 
two years, or otherwise was in a ``troubled condition'' as defined in 
12 CFR 701.14 at the time the service under 12 CFR 701.14 is approved.
    (c) Duration of interlock. An interlock permitted under this 
section may continue until the NCUA notifies the affected organizations 
otherwise. The NCUA may require a credit union to terminate any 
interlock permitted under this section if the NCUA concludes, after 
giving the affected persons the opportunity to respond, that the 
determinations under paragraph (a)(2) of this section no longer may be 
made.


Sec. 711.6  Management Consignment exemption.

    (a) Criteria. The NCUA may permit an interlock that otherwise would 
be prohibited by the Interlocks Act and Sec. 711.3 if the NCUA 
determines that the interlock would:
    (1) Improve the provision of credit to low- and moderate-income 
areas;
    (2) Increase the competitive position of a minority- or woman-owned 
depository organization;
    (3) Strengthen the management of an institution that has been 
chartered for less than two years at the time an application is filed 
under this part; or
    (4) Strengthen the management of an institution that is in an 
unsafe or unsound condition as determined by the NCUA on a case-by-case 
basis.
    (b) Presumptions. The NCUA applies the following presumptions when 
reviewing any application for a Management Consignment exemption:
    (1) A proposed management official is capable of strengthening the 
management of a depository institution described in paragraph (a)(3) of 
this section if that official is approved by the NCUA to serve as a 
director or senior executive officer of that institution pursuant to 12 
CFR 701.14 or pursuant to conditions imposed on a newly chartered 
credit union and the institution has operated for less than two years 
at the time the service under 12 CFR 701.14 is approved.
    (2) A proposed management official is capable of strengthening the 
management of a depository institution described in paragraph (a)(4) of 
this section if that official is approved by the NCUA to serve as a 
director or senior executive officer of that institution pursuant to 12 
CFR 701.14 and the institution was in a ``troubled condition'' as 
defined under 12 CFR 701.14 at the time service under 12 CFR 701.14 is 
approved.
    (c) Duration of interlock. An interlock granted under this section 
may continue

[[Page 12050]]
for a period of two years from the date of approval. The NCUA may 
extend this period for one additional two-year period if the depository 
organization applies for an extension at least 30 days before the 
current exemption expires and satisfies one of the criteria specified 
in paragraph (a) of this section. The provisions set forth in paragraph 
(b) of this section also apply to applications for extensions.


Sec. 711.7  Change in circumstances.

    (a) Termination. A management official shall terminate his or her 
service or apply for an exemption to the Interlocks Act if a change in 
circumstances causes the service to become prohibited under that Act. A 
change in circumstances may include, but is not limited to, an increase 
in asset size of an organization, a change in the delineation of the 
RMSA or community, the establishment of an office, an acquisition, a 
merger, a consolidation, or any reorganization of the ownership 
structure of a depository organization that causes a previously 
permissible interlock to become prohibited.
    (b) Transition period. A management official described in paragraph 
(a) of this section may continue to serve the credit union involved in 
the interlock for 15 months following the date of the change in 
circumstances. The NCUA may shorten this period under appropriate 
circumstances.


Sec. 711.8  Enforcement.

    The NCUA administers and enforces the Interlocks Act with respect 
to credit unions, and their affiliates, and may refer any case of a 
prohibited interlocking relationship involving these institutions to 
the Attorney General of the United States to enforce compliance with 
the Interlocks Act and this part.
[FR Doc. 96-6703 Filed 3-22-96; 8:45 am]
BILLING CODE 7535-01-U