[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
