[Federal Register Volume 61, Number 189 (Friday, September 27, 1996)]
[Rules and Regulations]
[Pages 50698-50704]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24459]


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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 711


Management Official Interlocks

AGENCY: National Credit Union Administration.

ACTION: Final rule.

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SUMMARY: NCUA is revising its rules regarding management interlocks 
between credit unions and other types of depository institutions. The 
final rule, like the current regulation, does not apply when a credit 
union shares a management official with another credit union. The final 
rule conforms the interlocks rules to recent statutory changes, 
modernizes and clarifies the rules, and reduces unnecessary regulatory 
burdens where feasible, consistent with statutory requirements.

EFFECTIVE DATE: September 27, 1996.

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

    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 two credit unions and therefore, in 
the case of credit unions, only restricts interlocks between credit 
unions and other depository institutions--banks and savings 
associations.
    The Riegle Community Development and Regulatory Improvement Act of 
1994 (CDRI Act) amended the Interlocks Act by removing NCUA's 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.
    On March 25, 1996, the NCUA Board (Board) published a notice of 
proposed rulemaking (proposal) (61 FR 12043) to implement these 
statutory changes. In addition, the proposal permitted interlocks 
involving two institutions located in the same relevant metropolitan 
statistical area (RMSA) if the institutions were not also located in 
the same community and if at least one of the institutions had total 
assets of less than $20 million. Finally, the proposal streamlined and 
clarified NCUA's interlocks rules in various respects.

The Final Rule and Comments Received

    NCUA received eight comment letters; four from state leagues, three 
from credit unions, and one from a national trade association. Seven of 
the eight commenters supported the proposal. The commenter that 
objected to the proposal thought the changes were unnecessary. A few 
commenters, while supporting the proposal, requested guidance or 
suggested changes as discussed later in this preamble. Most of the 
provisions in the proposal received either no comments or favorable 
comments. Accordingly, NCUA has adopted, with minor modifications, the 
changes to the interlocks rules that were set forth in the proposal.

Authority, Purpose, and Scope

    This section in NCUA's final rule identifies the Interlocks Act as 
the statutory authority for the management interlocks regulation. It 
also states that the purpose of the rules governing management 
interlocks is to foster competition between unaffiliated institutions.
    One commenter asked NCUA to include a statement that ``this part 
does not apply to interlocking arrangements between credit unions.'' 
Language to that effect is provided in section 711.1(c).

Definitions

Anticompetitive Effect
    The final rule defines the term ``anticompetitive effect'' to mean 
``a monopoly or substantial lessening of competition,'' a definition 
derived from the Bank Merger Act (12 U.S.C. 1828(c)). The term 
``anticompetitive effect'' is used in the Regulatory Standards 
exemption. Under the Regulatory Standards exemption, NCUA may approve a 
request for an exemption to the Interlocks Act if, among other things, 
the agency finds that continuation of service by the management 
official does not produce an anticompetitive effect with respect to the 
affected institution.
    The statute does not define the term ``anticompetitive effect,'' 
nor does the legislative history to the CDRI Act point to a particular 
definition. The context of the Regulatory Standards exemption suggests 
that NCUA 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 definition 
preserves the free flow of credit and other financial services that the 
Interlocks Act is designed to protect.
    Since the term anticompetitive effect is not used by the credit 
union industry, NCUA requested comments on whether another definition 
would be more appropriate. One commenter suggested that NCUA define 
monopoly and substantial lessening of competition by using percentages. 
The Board believes a percentage system would be arbitrary and has not 
made the suggested change.
    Two commenters asked NCUA to clarify what the agency would consider 
an anticompetitive effect. The Board anticipates that it will make this 
determination on a case-by-case basis. Nevertheless, NCUA will follow 
Justice Department guidelines and precedents established by the 
financial institution regulators where appropriate.\1\
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    \1\ See e.g., the Office of the Comptroller of the Currency's 
(OCC) Bank Merger Competitive Analysis Screen (OCC Advisory Letter 
95-4, July 18, 1995); Department of Justice Merger Guidelines (49 FR 
26823, June 29, 1984) (applied by the Federal Reserve Board (FRB)); 
and Federal Deposit Insurance Corporation (FDIC) Statement of 
Policy: Bank Merger Transactions (54 FR 39045, Sept. 22, 1989).
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Area Median Income
    The final rule 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. The term ``area 
median income'' is used in the definition of ``low- and moderate-income 
areas,'' which in turn is used in

[[Page 50699]]

the implementation of the Management Consignment exemption.
Critical
    The final rule defines ``critical'' as being ``important to 
restoring or maintaining a depository organization's safe and sound 
operations.'' The term ``critical'' is used in the Regulatory Standards 
exemption. Under that exemption, 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 defines 
``critical.'' 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 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.
    The Board believes that the definition of critical adopted in this 
final rule is consistent with the legislative intent by insuring that 
only persons of demonstrated expertise and importance to the 
institution's safe and sound operations may serve pursuant to a 
Regulatory Standards exemption.
    One commenter supported the definition as proposed. Two commenters, 
however, asked NCUA to clarify when the agency would consider a 
management official critical. As discussed below, the Board has 
established presumptions to determine when a person is critical to an 
institution, therefore, it does not believe further clarification is 
necessary.
Depository Institution
    The final rule makes no substantive change to the definition of 
``depository institution.''
Low- and Moderate-Income Areas
    The final rule defines this term as a census tract (or, if an area 
is not in a census tract, a block numbering area delineated by the 
United States Bureau of the Census) in which the median family income 
is less than 100 percent of the area median income. This term is used 
in the Management Consignment exemption that permits an otherwise 
impermissible interlock if the interlock would improve the provision of 
credit to a low- and moderate-income area. The final rule clarifies 
that NCUA will evaluate whether an area is low- or moderate-income by 
comparing the median family income for the census tract to be helped 
(or, if there is no census tract, the block numbering area delineated 
by the United States Bureau of the Census) with the area median income. 
Income data will be derived from the most recent decennial census.
Management Official
    The final rule defines ``management official'' to include a senior 
executive officer, a director, a branch manager, 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 final rule removes the phrase ``an employee or officer with 
management functions,'' which appeared in the former rule. In its 
place, NCUA has used the term ``senior executive officer'' as defined 
by each agency in its regulation pertaining to the prior notice of 
changes in senior executive officers, which implement 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) (Pub. L. No. 101-73, 103 Stat. 183). 
NCUA has made this change to eliminate the uncertainty and attendant 
compliance burden created by the ambiguous term ``management 
functions.'' The final rule incorporates specific illustrative examples 
already found in NCUA's regulations of positions at depository 
organizations that will be treated as senior executive officers. See 12 
CFR Sec. 701.14. The Board believes that this definition will allow 
depository organizations to identify impermissible interlocks with 
greater certainty and thus will enhance compliance.
    One commenter asked NCUA to place the text of the definition of 
senior executive officer already found in section 701.14 in section 
711.2. Another commenter asked NCUA to specifically exclude compliance 
officers from the definition of management official.
    NCUA has not adopted either suggested change. First, NCUA does not 
believe adding the text of section 701.14 to section 711.2 is 
necessary. References to other sections are common and do not increase 
regulatory burden. Second, while NCUA believes that in most instances a 
compliance officer will not be considered a management official, that 
determination should be made after the individual's duties and 
responsibilities have been evaluated.
Relevant Metropolitan Statistical Area
    The final rule, like its predecessor, defines ``RMSA'' as an MSA, a 
primary MSA, or a consolidated MSA that is not comprised of designated 
primary MSAs. However, the final rule clarifies that this definition 
will be used to the extent that the Office of Management and Budget 
(OMB) defines and applies the terms MSA, primary MSA, and consolidated 
MSA. This change reflects the fact that OMB defines ``consolidated 
MSA'' to include two or more primary MSAs. Given that a consolidated 
MSA, by OMB's definition, is comprised of primary MSAs, the reference 
to a consolidated MSA in the Interlocks Act and NCUA's regulations is 
inappropriate. The final rule enables 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 final rule defines ``representative or nominee'' as someone who 
serves as a management official and has an obligation to act on behalf 
of someone else. The final rule removes the rest of the definition that 
appeared in the former rule, however, and inserts a statement that 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 do so. This 
change clarifies that the determination of whether someone serves a 
representative or nominee will depend on whether there is a basis to 
conclude that an agreement exists to act on someone's behalf.

Prohibitions

    The former rule prohibited interlocks under three circumstances. 
First, no two unaffiliated depository organizations may have an 
interlock if they (or their depository institution affiliates) have 
depository institution 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 of 
$20 million or more and the depository organizations (or depository 
institution affiliates of either) have depository institution

[[Page 50700]]

offices in the same RMSA.\2\ 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.
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    \2\ A ``community'' as that term is defined in the rule is 
smaller than an RMSA. There may be several communities in one RMSA.
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    The final rule amends the restriction applicable to institutions 
with assets equal to or exceeding $20 million to better conform to the 
purposes of the Interlocks Act. Whereas the prior rule prohibited 
interlocks in an RMSA if one of the organizations had total assets of 
$20 million or more, the final rule applies the RMSA-wide prohibition 
only if both organizations have total assets of $20 million or more. 
Interlocks within a community involving unaffiliated depository 
organizations will continue to be prohibited, regardless of the size of 
the organizations.
    The Board believes that this change is consistent with both the 
language and the intent of the Interlocks Act. While the statute uses 
the plural ``depository institutions'' in section 203(1) of the 
Interlocks Act (12 U.S.C. 3202(1)), the wording in context is ambiguous 
and 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 total assets of less than $20 million is likely to 
derive most of its business from the community in which it is located 
and is unlikely to compete with institutions that do not have offices 
in that community. Therefore, an interlock involving one institution 
with assets under $20 million and another institution with assets of at 
least $20 million not in the same community is not likely to lead to 
the anticompetitive conduct that the Interlocks Act is designed to 
prohibit.
    The Board believes that this 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.
    One commenter objected to the proposed change asserting that it was 
unnecessary. For the reasons stated above, NCUA disagrees with the 
commenter and has included the changes in the final rule.

Interlocking Relationships Expressly Permitted by Statute

    The final rule states the exemptions found in 12 U.S.C. 3204 (1)-
(8). The final rule reorders the exemptions set forth in the current 
regulation in order to conform the list of exemptions to the list set 
forth in the Interlocks Act.

Regulatory Standards Exemption

    The final rule sets forth the requirements that a depository 
organization must satisfy in order to obtain a Regulatory Standards 
exemption. The rule implements the requirement regarding certification 
by allowing a depository organization's board of directors (or the 
organizers of a depository organization that is being formed) to 
certify to NCUA that no other qualified candidate has been found after 
undertaking reasonable efforts to locate qualified candidates who are 
not prohibited from service under the Interlocks Act. If read narrowly, 
the Interlocks Act could require a depository organization 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, NCUA believes that the 
``reasonable efforts'' standard is consistent with the legislative 
intent.
    The final rule also sets forth a presumption that NCUA will apply 
when reviewing an application for a Regulatory Standards exemption.\3\ 
NCUA will presume that a person is critical to an institution's safe 
and sound operations if NCUA also approved that individual under 
section 914 of FIRREA and the institution in question either was a 
newly chartered institution, failed to meet minimum capital 
requirements, or otherwise was in a ``troubled condition'' as defined 
in the reviewing agency's section 914 regulation at the time the 
section 914 filing was approved.
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    \3\ OCC, FRB, FDIC and the Office of Thrift Supervision also 
will presume that an interlock will not have an anticompetitive 
effect if it involves institutions that, if merged, would not 
trigger a challenge from agencies on competitive grounds. Generally, 
the agencies will not object to a merger on competitive grounds if 
the post-merger Herfindahl-Hirschman Index (HHI) for the market is 
less than 1800 and the merger increases the HHI by 200 points or 
less. NCUA will not implement 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 final rule 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, NCUA has not adopted a specific term for a 
permitted exemption. Instead, NCUA may require an institution to 
terminate the interlock if 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. 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

    Section 338(a) of the CDRI Act authorizes NCUA to extend a 
grandfathered interlock for an additional five years if the management 
official in question satisfies the statutory criteria for obtaining an 
extension.
    The final rule removes the sections addressing the grandfather 
exemption because they are unnecessary and redundant in light of the 
statute. NCUA did not receive any requests to extend a grandfathered 
interlock, and individuals who wished to extend the grandfather period 
had until March 23, 1995 to apply for an exemption.

Management Consignment Exemption

    The final rule implements the Management Consignment exemption, set 
forth in section 209(c) of the Interlocks Act (12 U.S.C. 3207(c)), by 
restating the statutory criteria with three clarifications. First, the 
final rule states that 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 an institution is 
considered newly chartered.
    Second, the final rule 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 analyzing 
the exemptions to the Interlocks Act 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

[[Page 50701]]

exemptions include those that are ``owned by women or minorities.'' 
These exemptions ultimately were codified in the Interlocks Act. 
Accordingly, NCUA has 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 final rule 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. NCUA will not approve an application 
for a credit union charter unless the applicant seeking a charter can 
demonstrate that the proposed new financial institution will operate in 
a safe and sound manner for the foreseeable future. While there may be 
an extraordinary instance where a newly chartered institution 
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 
NCUA is to apply the Management Consignment exemption in cases 
involving either newly chartered institutions or institutions that are 
in an unsafe or unsound condition. The Conference Report notes that the 
federal financial institution regulatory 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 NCUA's 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, NCUA will permit Management Consignment 
exemptions if the management official will strengthen either a newly 
chartered institution or an institution that is in an unsafe or unsound 
condition.
    The final rule sets forth two presumptions that NCUA will apply in 
connection with an application for an exemption under the Management 
Consignment exemption. First, NCUA will presume that an individual is 
capable of strengthening the management of an institution that has been 
chartered for less than two years if NCUA approved the individual to 
serve as a management official of that institution pursuant to section 
914 of FIRREA. Second, NCUA will presume that an individual is capable 
of strengthening the management of an institution that is in an unsafe 
or unsound condition if NCUA approved the individual to serve under 
section 914 as a management official of that institution at a time when 
the institution was in a ``troubled condition.''
    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 
women-owned institutions. Moreover, the final rule does not contain a 
presumption regarding effects on competition, given that this is not a 
factor to be considered by NCUA when reviewing an application for a 
Management Consignment exemption.
    The final rule 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 final rule 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 that apply to initial applications 
also apply to extension applications.

Change in Circumstances

    The final rule provides a 15-month grace period for 
nongrandfathered interlocks that become impermissible due to a change 
in circumstances. This period may be shortened by NCUA under 
appropriate circumstances.

Paperwork Reduction Act

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

Executive Order 12612

    This final rule, like the current 12 CFR part 711 it would replace, 
will apply to all Federally insured credit unions. The Board, pursuant 
to Executive Order 12612, has determined, however, that this final 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 final rule will not preempt provisions of 
State law or regulations.

Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA) 
(5 U.S.C. 605(b)), the regulatory flexibility analysis otherwise 
required under section 603 of the RFA (5 U.S.C. 603) is not required if 
the head of the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities 
and the agency publishes such certification and a succinct statement 
explaining the reasons for such certification in the Federal Register 
along with its final rule.
    Pursuant to section 605(b) of the RFA, the Board hereby certifies 
that this rule will not have a significant economic impact on a 
substantial number of small entities. The Board expects that this rule 
will not (1) Have significant secondary or incidental effects on a 
substantial number of small entities or (2) create any additional 
burden on small entities. The changes to the exemptions are required by 
the Interlocks Act. The Board has added presumptions that will 
streamline and simplify the application procedures for obtaining an 
exemption from the Interlocks Act prohibitions, and have defined key 
terms used in the

[[Page 50702]]

provisions implementing these exemptions in a way that is intended to 
eliminate any unnecessary burden. As noted in the preamble discussion 
of the changes made by the final rule, the Board has made substantive 
changes that will permit more flexibility to institutions with total 
assets of less than $20 million, clarified the circumstances under 
which someone will be deemed to be a ``representative or nominee,'' and 
amended the definition of ``senior management official'' so as to 
provide greater clarity and to conform this definition with definitions 
of similar terms used in other regulations.
    The impact of these changes will be to minimize, to the extent 
possible, the costs of complying with this final rule.

List of Subjects in 12 CFR Part 711

    Antitrust, Credit unions, Holding companies.

    By the National Credit Union Administration Board on September 
18, 1996.
Becky Baker,
Secretary of the Board.

    For the reasons set out in the preamble, NCUA revises 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. 1757 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).
    (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 likely would have an anticompetitive effect.
    (c) Scope. This part applies to management officials of federally 
insured credit unions. Section 711.4(c) exempts a management official 
of a credit union from the prohibitions of the Interlocks Act when the 
individual serves as a management official of another credit union. 
Therefore, the Interlocks Act prohibitions contained in this part only 
apply to a management official of a credit union when that individual 
also serves as a management official of another type of depository 
organization (usually a bank or thrift).


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 
that section 202, shares held by an individual include shares held by 
members of his or her immediate family. ``Immediate family'' means 
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 a depository 
institution based on common ownership does not exist if the appropriate 
federal supervisory agency 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 appropriate 
Federal supervisory agency considers, among other things, whether a 
person, including members of his or her immediate family, whose shares 
are necessary to constitute the group owns a nominal percentage of the 
shares of one of the organizations and the percentage is substantially 
disproportionate to 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 a 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) Critical means important to restoring or maintaining a 
depository organization's safe and sound operations.
    (g) 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.
    (h) 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.
    (i) Depository institution affiliate means a depository institution 
that is an affiliate of a depository organization.
    (j) Depository organization means a depository institution or a 
depository holding company.
    (k) District bank means any State bank operating under the Code of 
Law of the District of Columbia.
    (l) Low- and moderate-income areas means census tracts (or, if an 
area is not in a census tract, block numbering areas delineated by the 
United States Bureau of the Census) where the median family income is 
less than 100 percent of the area median income.
    (m) Management official. (1) The term management official means:
    (i) A director;
    (ii) An advisory or honorary director of a depository 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 capacities in this paragraph (m)(1).
    (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

[[Page 50703]]

business outside the United States of a foreign commercial bank; or
    (iii) A person described in the provisions 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 office of a depository 
institution located in the United States. Office does not include a 
representative office of a foreign commercial bank, an 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. NCUA will find that 
a person has an obligation to act on behalf of another person only if 
the first person has an agreement, express or implied, to act on behalf 
of the second person with respect to management responsibilities. NCUA 
will determine, after giving the affected persons 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 and reported in the most recent fiscal year-end 
Consolidated Report of Condition and Income.
    (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 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 Board or its designee 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 NCUA.
    (3) The NCUA Board or its designee 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. 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 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) 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

[[Page 50704]]

    (ii) Service by the management official will not produce an 
anticompetitive effect with respect to the depository organization.
    (b) Presumptions. NCUA applies the following presumptions when 
reviewing any application for a Regulatory Standards exemption. A 
proposed management official is critical to the safe and sound 
operations of a depository institution if:
    (1) That official is approved by 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
    (2) The institution had operated for less than two years, was not 
in compliance with minimum capital requirements, or otherwise was in a 
``troubled condition'' as defined in 12 CFR 701.14 at the time the 
service under 12 CFR 701.14 was approved.
    (c) Duration of interlock. An interlock permitted under this 
section may continue until NCUA notifies the affected depository 
organizations otherwise. NCUA may require a credit union to terminate 
any interlock permitted under this section if 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. A management official may continue serving the depository 
organization involved in the interlock for a period of 15 months 
following the date of the order to terminate the interlock. NCUA may 
shorten this period under appropriate circumstances.


Sec. 711.6  Management Consignment exemption.

    (a) Criteria. NCUA may permit an interlock that otherwise would be 
prohibited by the Interlocks Act and Sec. 711.3 if NCUA, after 
reviewing an application submitted by the depository organization 
seeking an exemption, 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 women-owned 
depository organization;
    (3) Strengthen the management of a depository 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 a depository institution that is 
in an unsafe or unsound condition as determined by NCUA on a case-by-
case basis.
    (b) Presumptions. 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 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 had operated for less than two years 
at the time the service under 12 CFR 701.14 was approved; and
    (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 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 that section was 
approved.
    (c) Duration of interlock. An interlock granted under this section 
may continue for a period of two years from the date of approval. 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 depository organization 
involved in the interlock for 15 months following the date of the 
change in circumstances. NCUA may shorten this period under appropriate 
circumstances.


Sec. 711.8  Enforcement.

    Except as provided in this section, NCUA administers and enforces 
the Interlocks Act with respect to federally insured credit unions, and 
may refer any case of a prohibited interlocking relationship involving 
these entities to the Attorney General of the United States to enforce 
compliance with the Interlocks Act and this part.

[FR Doc. 96-24459 Filed 9-26-96; 8:45 am]
BILLING CODE 7535-01-P