[Federal Register Volume 61, Number 58 (Monday, March 25, 1996)]
[Proposed Rules]
[Pages 12043-12050]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6703]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 61, No. 58 / Monday, March 25, 1996 /
Proposed Rules
[[Page 12043]]
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 711
Management Official Interlocks
AGENCY: National Credit Union Administration.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The National Credit Union Administration (NCUA) is proposing
to revise its rules regarding management interlocks between credit
unions and other financial institutions. The proposal conforms the
interlocks rules to recent statutory changes, modernizes and clarifies
the rules, and reduces unnecessary regulatory burdens where feasible,
consistent with statutory requirements.
DATES: Comments must be received by May 24, 1996.
ADDRESSES: Comments should be directed to Becky Baker, Secretary of the
Board. Mail or hand-deliver comments to: National Credit Union
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. Fax
comments to (703) 518-6319. Post comments on NCUA's electronic bulletin
board by dialing (703) 518-6480. Please send comments by one method
only.
FOR FURTHER INFORMATION CONTACT: -Jeffrey Mooney, Staff Attorney (703/
518-6563), Office of General Counsel, or Kimberly Iverson, Program
Officer (703/518-6375), Office of Examination and Insurance.
SUPPLEMENTARY INFORMATION:
Background
Summary of Statutory Changes
The Depository Institution Management Interlocks Act (12 U.S.C.
3201 et seq.) (Interlocks Act) prohibits certain management interlocks
between depository institutions. The Interlocks Act exempts
interlocking arrangements between credit unions and therefore, in the
case of credit unions, only restricts interlocks between credit unions
and other institutions--banks and thrifts.
The Riegle Community Development and Regulatory Improvement Act of
1994 (CDRI Act) amended the Interlocks Act by removing the NCUA's and
the other banking agencies' \1\ broad authority to exempt otherwise
impermissible interlocks and replacing it with the authority to exempt
interlocks under more narrow circumstances. The CDRI Act also required
a depository organization with a ``grandfathered'' interlock to apply
for an extension of the grandfather period if the organization wanted
to keep the interlock in place.\2\
\1\ The NCUA participated in an interagency effort to revise the
management interlocks regulations. The other banking agencies, the
Office of the Comptroller of the Currency, the Office of Thrift
Supervision, the Federal Reserve Board and the Federal Deposit
Insurance Corporation have already published proposed revisions to
their respective management interlocks regulations in a joint notice
of proposed rulemaking. (See 60 FR 67424, December 29, 1995).
\2\ The NCUA did not receive any requests for extensions,
therefore, the provision regarding extending the grandfather period
is moot for purposes of this regulation.
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After the changes made by the CDRI Act, a person subject to the
Interlocks Act's restrictions seeking an exemption from those
restrictions must qualify either for a ``regulatory standards''
exemption or an exemption under a ``management official consignment
program'' (the Management Consignment exemption). An applicant seeking
a regulatory standards exemption must submit a board resolution
certifying that no other candidate from the relevant community has the
necessary expertise to serve as a management official, is willing to
serve, and is not otherwise prohibited by the Interlocks Act from
serving. Before granting the exemption request, the NCUA must find that
the individual is critical to the institution's safe and sound
operations, that the interlock will not produce an anticompetitive
effect, and that the management official meets any additional
requirements imposed by the agency. Under the Management Consignment
exemption, the NCUA or appropriate agency may permit an interlock that
otherwise would be prohibited by the Interlocks Act if the agency
determines that the interlock would improve the provision of credit to
low- and moderate-income areas, increase the competitive position of a
minority- or woman-owned institution, or strengthen the management of a
newly chartered institution or an institution that is in an unsafe or
unsound condition. (See text following ``Management Consignment
exemption'' in this preamble for a discussion regarding interlocks
involving newly chartered institutions or institutions that are in an
unsafe or unsound condition).
The proposal reflects these statutory changes, and streamlines and
clarifies the interlocks regulations in various respects. These changes
are discussed in the text that follows. The NCUA invites comments on
all aspects of this proposal.
The following is a section-by-section discussion of the proposed
rule changes.
Authority, Purpose, and Scope
This section identifies the Interlocks Act as the statutory
authority for the management interlocks regulation. There are no
significant changes from the current authority, purpose and scope rule.
It also states that the purpose of the rules governing management
interlocks is to foster competition between unaffiliated institutions.
Finally, this section currently identifies the types of institutions to
which NCUA's regulation applies.
Definitions
The NCUA's current regulation sets forth definitions of key terms
used in the regulation. The proposed regulation changes some of the
current definitions. A discussion of the substantive differences
between the current rule and proposal follows.
Anticompetitive Effect
The current regulation neither uses nor defines the term
``anticompetitive effect.'' The proposed regulation defines the term to
mean ``a monopoly or substantial lessening of competition.'' This term
is used in the regulatory standards exemption. Under that exemption,
the NCUA may approve a request for an exemption to the Interlocks Act
if, among other things, the NCUA finds that continuation of service by
the management official does not produce an anticompetitive effect with
respect to the affected credit union. The statute does not define the
term ``anticompetitive effect,'' nor does the legislative history to
the CDRI Act point to a particular definition.
[[Page 12044]]
The context of the regulatory standards exemption suggests,
however, that the NCUA and other agencies should apply the term
``anticompetitive effect'' in a manner that permits interlocks that
present no substantial lessening of competition. By prohibiting an
interlock that would result in a monopoly or substantial lessening of
competition, the proposed definition preserves the free flow of credit
and other banking services that the Interlocks Act is designed to
protect. While the proposed definition is familiar to the banking
industry since it is derived from the Bank Merger Act (12 U.S.C.
1828(c)), it is not used by the credit union industry. Therefore, NCUA
requests comment on whether another definition would be more
appropriate for interlocks between credit unions and other types of
depository institutions.
Area Median Income
The current regulation does not use the term ``area median
income,'' and, therefore, does not define this term. The proposed
regulation defines ``area median income'' as the median family income
for the metropolitan statistical area (MSA) in which an institution is
located or the statewide nonmetropolitan median family income if an
institution is located outside an MSA. This term is used in the
definition of ``low- and moderate-income areas,'' which in turn is used
in the implementation of the Management Consignment exemption.
Contiguous or Adjacent Cities, Towns, or Villages
The current regulation defines ``adjacent cities, towns, or
villages'' as cities, towns, or villages whose borders are within 10
road miles from each other. It also defines ``contiguous cities, towns,
or villages'' as cities, towns, or villages whose borders touch. The
statute and regulation apply these terms to prohibit interlocks
involving small institutions that are located in contiguous or adjacent
cities, towns, or villages. The proposed regulation combines these two
definitions, given that contiguous cities, towns, or villages
necessarily are within 10 miles of each other.
Critical
The current regulation neither uses nor defines ``critical.'' The
proposed regulation defines the term in connection with the regulatory
standards exemption. Under that exemption, the NCUA must find that a
proposed management official is critical to the safe and sound
operations of the affected institution. 12 U.S.C. 3207(b)(2)(A).
Neither the statute nor its legislative history define
``critical.'' The NCUA is concerned that a narrow interpretation of
this term would nullify the regulatory standards exemption. If someone
were ``critical'' to the safe and sound operations of an institution
only if the institution would fail but for the service of the person in
question, the exemption would have little relevance because the
standard would be practically impossible to meet. Given that Congress
clearly intended for the regulatory standards exemption to permit
interlocks under some circumstances, the question thus becomes how to
define those circumstances.
This proposal addresses the issue by stating that the NCUA will
consider a person to be critical to a depository organization if the
person will play an important role in helping the institution either
address current problems or maintain safe and sound operations going
forward. The NCUA believes that this approach is consistent with the
legislative intent by insuring that only persons of demonstrated
expertise and importance to the institution will be allowed to serve
pursuant to a regulatory standards exemption.
Low- and Moderate-Income Areas
The current regulation permits interlocks under certain
circumstances involving a depository organization located ``in a low
income or other economically depressed area.'' However, the current
rule does not define ``low income'' or ``economically depressed.''
Section 209(c)(1)(A) of the Interlocks Act (12 U.S.C.
3207(c)(1)(A)) authorizes the NCUA to permit interlocks pursuant to the
Management Consignment exemption if the NCUA determines that the
proposed service would ``improve the provision of credit to low- and
moderate-income areas.'' The proposed regulation defines ``low- and
moderate-income areas'' as areas where the median family income is less
than 100 percent of the area median income. This definition is
consistent with Title I, Subtitle A of the CDRI Act (the Community
Development Banking and Financial Institutions Act of 1994) (12 U.S.C.
4701-4718), which, like the Management Consignment exemption affecting
institutions in low- and moderate-income areas, is intended to assist
the flow of credit into economically depressed areas. Section 103(17)
of the CDRI Act (12 U.S.C. 4702(17)) defines ``low income'' to mean not
more than 80 percent of the area median income. The NCUA believes that
Congress, by using the term ``low- and moderate-income'' in the
Management Consignment exemption, intended for that term to apply to an
area where the median family income exceeds 80 percent of the median
income for the area. The NCUA has selected 100 percent of the area
median income as the cutoff for defining ``low- and moderate-income
areas'' based on the belief that a higher threshold would permit
interlocks that would not improve the provision of credit to low- and
moderate-income areas.
Management Official
The current regulation defines ``management official'' to include
an employee or officer ``with management functions'' (including a
branch manager), a director, a trustee of an organization under the
control of trustees, or any person who has a representative or nominee
serving in such capacity. The definition excludes (1) A person whose
management functions relate either exclusively to the business of
retail merchandising or manufacturing or principally to business
outside the United States of a foreign commercial bank and (2) a person
excluded by section 202(4) of the Interlocks Act (12 U.S.C. 3201(4)).
The proposed regulation adopts the definition of ``management
official'' set forth in the current rule, except that the phrase ``an
employee or officer with management functions'' is removed. It is
replaced by the term ``senior executive officer'' as defined by the
NCUA's regulation pertaining to the prior notice of changes in senior
executive officers, which implements section 212 of the Federal Credit
Union Act (FCU Act) (12 U.S.C. 1790a) as added by section 914 of the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA).
The NCUA is proposing this change to eliminate the uncertainty and
attendant compliance burden created by the ambiguous term ``management
functions.'' The proposal incorporates specific illustrative examples
of positions at credit unions that will be treated as senior executive
officers. See 12 CFR 701.14. The NCUA believes that these definitions
will allow credit unions to identify impermissible interlocks with
greater certainty and thus will enhance compliance. The NCUA requests
comment on the advisability of defining ``management official'' by
using ``senior executive officer'' rather than ``employee or officer
with management functions.''
The current definition of ``management official'' exempts those
individuals whose management
[[Page 12045]]
functions relate to retail merchandising or manufacturing. Stated
another way, the current exemption applies to a category of persons
whose responsibilities are unrelated to the business of a deposit-
taking institution.
The NCUA specifically asks commenters to address whether the NCUA
should exempt a broader category of management officials whose duties
are unrelated to the provision of financial services by a depository
institution or depository holding company, and if so, how the NCUA
should define that category of excluded officials.
Relevant Metropolitan Statistical Area (RMSA)
The current regulation defines ``relevant metropolitan statistical
area'' as an MSA, a primary MSA, or a consolidated MSA that is not
comprised of designated primary MSAs as defined by the Office of
Management and Budget (OMB). This definition is derived from section
203(1) of the Interlocks Act (12 U.S.C. 3202(1)).
The proposed regulation defines ``relevant metropolitan statistical
area (RMSA)'' as an MSA, a primary MSA, or a consolidated MSA that is
not comprised of designated primary MSAs, to the extent that the OMB
defines and applies these terms. This change reflects the fact that the
OMB defines ``consolidated MSA'' to include two or more primary MSAs.
Given that consolidated MSAs, by the OMB's definition, are comprised of
primary MSAs, the reference to consolidated MSAs in the Interlocks Act
and the NCUA's regulation is inappropriate. The proposed change enables
the NCUA to implement the statute in a way that complies with both the
spirit and the letter of the Interlocks Act.
Representative or Nominee
The current regulation defines ``representative or nominee'' as a
person who serves as a management official and has an express or
implied obligation to act on behalf of another person with respect to
management responsibilities. The current definition goes on to state
that the determination of whether someone is a representative or
nominee depends on the facts of a particular case and that certain
relationships (such as family, employment, and so on) may evidence an
express or implied obligation to act.
The proposed regulation also defines ``representative or nominee''
as someone who serves as a management official and has an obligation to
act on behalf of someone else. The proposed definition deletes the rest
of the current definition, however, and inserts in lieu thereof a
statement that the NCUA will find that someone has an obligation to act
on behalf of someone else only if there is an agreement (express or
implied) to act on behalf of another. The NCUA proposes this change to
clarify that the determination that a representative or nominee
situation exists will depend on whether there is a basis to conclude
that an agreement exists to act on someone's behalf. The NCUA notes
that the current definition provides specific guidance for determining
when a representative or nominee relationship might be found to exist,
and requests comment on whether the current definition, the proposed
definition, or another definition is preferable.
Prohibitions
The current regulation prohibits interlocks in the following three
instances. First, no two unaffiliated depository organizations may have
an interlock if they (or their depository institution affiliates) have
offices in the same community. Second, a depository organization may
not have an interlock with any unaffiliated depository organization if
either depository organization has assets exceeding $20 million and the
depository organizations (or depository institution affiliates of
either) have offices in the same RMSA.\3\ Third, if a depository
organization has total assets exceeding $1 billion, it (and its
affiliates) may not have an interlock with any depository organization
with total assets exceeding $500 million (or affiliate thereof),
regardless of location.
\3\ A community as that term is defined in the proposal is
smaller than RMSA. There may be several communities in one RMSA.
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The proposed regulation amends the rule as it applies to
institutions with assets of less than $20 million to better conform to
the purposes of the Interlocks Act. Whereas the current rule prohibits
interlocks in an RMSA if one of the organizations has total assets of
$20 million or more, the proposed rule would apply the RMSA-wide
prohibition only if both organizations have total assets of $20 million
or more. Interlocks within a community involving unaffiliated
depository organizations would continue to be prohibited.
The NCUA believes that this proposed change is consistent with both
the language and the intent of the Interlocks Act. While the statute
uses the plural ``depository institutions'' when referring to the
community-wide prohibition, in context, neither the statute nor its
legislative history compels the conclusion that the interlock must
involve two institutions with less than $20 million in assets before
the less restrictive prohibition applies.
The Interlocks Act seeks to prohibit interlocks that could enable
two institutions to engage in anticompetitive behavior. However, an
institution with less than $20 million is likely to derive most of its
business from the community in which it is located and unlikely to
compete with institutions that do not have offices in that community.
Therefore, interlocks involving one institution with assets under $20
million and another institution with assets of at least $20 million not
in the same community are not likely to lead to the anticompetitive
conduct that the Interlocks Act is designed to prohibit.
The NCUA believes, moreover, that the proposed change will promote
rather than inhibit competition. Expanding the pool of managerial
talent for institutions with assets under $20 million could enhance the
ability of smaller institutions to compete by improving the management
of these institutions.
The proposed regulation reflects the change affecting depository
organizations with less than $20 million in total assets. It also sets
forth the prohibition against interlocks involving large depository
organizations but does not change the substance of that prohibition.
The proposed regulation changes the wording of all three prohibitions
in order to make them easier to understand.
The NCUA invites comment on any aspect of this proposed section.
The NCUA specifically seeks comment on whether the proposed
reinterpretation of 12 U.S.C. 3202(1) might result in anticompetitive
effects and thus run counter to the legislative intent of the
Interlocks Act. For example, could the proposed change enable a large
depository organization to engage in anticompetitive conduct by
creating interlocks with one or more smaller depository institutions
located in the same RMSA but not in the same community (a ``hub and
spokes'' interlock)? The NCUA also seeks comment on whether the final
rule should specifically address such situations.
Interlocking Relationships Expressly Permitted by Statute
The current regulation restates most of the exemptions that are
expressly permitted by the Interlocks Act as well as listing those
exemptions that the NCUA has permitted by regulation pursuant to the
broad exemptive
[[Page 12046]]
authority that applied before the enactment of the CDRI Act. The
proposal deletes the exemptions authorized by NCUA's regulations and
states the exemptions found in 12 U.S.C. 3204(1)-(8). The proposed
regulation reorders the exemptions set forth in the current regulations
in order to conform the list of exemptions to the list set forth in the
Interlocks Act.
Regulatory Standards Exemption
The current rule contains no regulatory standards exemption. The
proposed rule sets forth the standards that a credit union must satisfy
in order to obtain a regulatory standards exemption. The proposal
implements the requirement regarding certification by allowing a credit
union's board of directors (or the organizers of a credit union that is
being formed) to certify to the NCUA that it located no other qualified
candidates after undertaking reasonable efforts to locate other
qualified candidates who are not prohibited from service under the
Interlocks Act. If read narrowly, the Interlocks Act could require a
credit union to evaluate every person in a given locale that might be
qualified and interested. This would create a requirement that, in
practice, would be impossible to satisfy. Given that Congress would not
have included an exemption that would have no practical application,
the NCUA believes that the proposed ``reasonableness'' standard is
consistent with the legislative intent.
The proposed regulation also sets forth a presumption that the NCUA
will apply when reviewing an application for a regulatory standards
exemption. NCUA will presume that a person is critical to a credit
union's safe and sound operations if the NCUA also approves that
individual under section 914 of FIRREA and the credit union in question
either was a newly chartered institution, or was in a ``troubled
condition'' as defined in Sec. 701.14(b)(3) of NCUA's regulations at
the time the section 914 filing was approved.
The NCUA invites comment on the utility of the proposed presumption
and on whether other presumptions also should apply.\4\
\4\ The other banking agencies have proposed a presumption that
an interlock will not have an anticompetitive effect if it involves
institutions that, if merged, would not trigger a challenge from the
agencies on competitive grounds. The agencies will use the
Herfindahl-Hirschman Index (``HHI'') (See Department of Justice
Merger Guidelines (49 FR 26823, June 29, 2984)) to determine whether
the potential interlock has an anticompetitive effect since banks
and savings associations frequently use the HHI as an initial
indicator of the effects a transaction is likely to have on
competition in a given market. NCUA does not propose implementing
this presumption because there is no statutory authority for credit
unions to merge with other types of depository institutions, and the
typical HHI analysis does not reflect the shares/deposits held by
credit unions, therefore, any HHI analysis involving credit unions
would be meaningless.
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The proposed regulation also addresses the duration of an interlock
permitted under the regulatory standards exemption. The statute does
not require that these interlocks terminate. In light of this open-
ended grant of authority, the NCUA is not proposing a specific term for
a permitted exemption. Instead, the NCUA may require a credit union to
terminate the interlock if the NCUA determines that the management
official in question either no longer is critical to the safe and sound
operations of the affected organization or that continued service will
produce an anticompetitive effect. The NCUA will provide affected
organizations an opportunity to submit information before they make a
final determination to require termination of an interlock.
Grandfathered Interlocking Relationships--Removed
The current regulation restates the grandfather provisions set
forth in section 206 of the Interlocks Act (12 U.S.C. 3205). Section
338(a) of the CDRI Act authorizes the NCUA to extend a grandfathered
interlock for an additional five years if the management official in
question satisfied the statutory criteria for obtaining an extension.
Individuals who wished to extend their dual service had until March 23,
1995, to apply to the NCUA. The proposed regulation removes the section
addressing the grandfather exemption because it is unnecessary and
redundant in light of the statute.
Management Consignment Exemption
The current regulation sets forth a number of instances in which
the NCUA may permit an exemption to the Interlocks Act. However, the
statutory provisions authorizing the NCUA to grant exemptions have been
amended, thereby requiring that the current regulation be amended as
well. The Management Consignment exemption set forth in section 209(c)
of the Interlocks Act (12 U.S.C. 3207(c)) is modeled after certain
exemptions that appear in the NCUA's current regulation.
The proposed regulation implements the Management Consignment
exemption, and restates the statutory criteria, with three
clarifications. First, the proposed rule states that the NCUA considers
a ``newly chartered institution'' to be an institution that has been
chartered for less than two years at the time it files an application
for exemption. This standard is consistent with NCUA's threshold for
determining when a credit union is considered newly chartered (See 12
CFR 701.14(c)(1)).
Second, the proposal clarifies that the exemption available for
``minority- and women-owned institutions'' is available for an
institution that is owned either by minorities or women. In noting the
types of exemptions that the Federal banking agencies have approved,
the House Conference Report to the CDRI Act (H.R. Conf. Rep. No. 652,
103d Cong., 2d Sess. 181 (1994)) (Conference Report) states that the
types of institutions that have received exemptions include those that
are ``owned by women or minorities.'' These exemptions ultimately were
codified in the Interlocks Act. Accordingly, the NCUA, along with the
other banking agencies have concluded that Congress intended the
Management Consignment exemption to assist institutions owned by women
and/or by minorities, but did not intend to require the institution to
be owned by both.
Third, the proposal permits an interlock if the interlock would
strengthen the management of either a newly chartered institution or an
institution that is in an unsafe or unsound condition. Section
209(c)(1)(C) of the Interlocks Act (12 U.S.C. 3207(c)(1)(C)) permits an
exemption if the interlock would ``strengthen the management of newly
chartered institutions that are in an unsafe or unsound condition.''
However, this provision contains what appears on its face to be an
error, given that an exemption limited to situations involving newly
chartered institutions that also are in an unsafe and unsound condition
would have no practical utility. The NCUA does not approve an
application for a credit union charter unless the applicant seeking a
charter can demonstrate that the proposed new credit union will operate
in a safe and sound manner for the foreseeable future. While there may
be an extraordinary instance where a newly chartered credit union
immediately experiences unforeseen problems so severe that they
threaten the safety and soundness of that institution, there is nothing
in the legislative history to suggest that Congress intended to limit
the Management Consignment exemption to such rare instances.
Moreover, the legislative history of the CDRI Act suggests that the
NCUA is to apply the Management Consignment exemption in cases
involving either
[[Page 12047]]
newly chartered institutions or institutions that are in an unsafe or
unsound condition. The Conference Report notes that the Federal banking
agencies have used their exemptive authority to grant exemptions in
limited cases where institutions ``are particularly in need of
management guidance and expertise to operate in a safe and sound
manner.'' Id. The Conference Report goes on to state that ``Examples of
exceptions permissible under an agency management official consignment
program include improving the provision of credit to low- and moderate-
income areas, increasing the competitive position of minority- and
women-owned institutions, and strengthening he [sic] management of
newly chartered institutions or institutions that are in an unsafe or
unsound condition.'' Id. at 182 (emphasis added).
Finally, Congress used the exemptions in the agencies' current
rules as the model for the Management Consignment exemption. See id. at
181-182. These exemptions distinguish newly chartered institutions from
institutions that are in an unsafe or unsound condition. The reference
in the CDRI Act's legislative history to the current regulatory
exemptions suggests that Congress intended to codify these exemptions.
For these reasons, the NCUA proposes to permit exemptions pursuant
to the Management Consignment exemption if the management official will
strengthen either a newly chartered institution or an institution that
is in an unsafe or unsound condition. Commenters are requested to
address this approach.
The proposal sets forth two presumptions that the NCUA will apply
in connection with an application for an exemption under the Management
Consignment exemption. First, the NCUA will presume that an individual
is capable of strengthening the management of a credit union that has
been chartered for less than two years if the NCUA approved the
individual to serve as a management official of that credit union
pursuant to section 914 of FIRREA. Second, the NCUA will presume that
an individual is capable of strengthening the management of a credit
union that is in an unsafe or unsound condition if the NCUA approved
the individual to serve under section 914 as a management official of
an institution at a time when that institution was in a ``troubled
condition.''
The NCUA believes that presumptions of suitability are less valid
when applied to the other Management Consignment exemptions because
there is no reason to conclude that a management official approved
under section 914 necessarily will improve the flow of credit to low-
and moderate-income areas or increase the competitive position of
minority- or woman-owned institutions. No presumption regarding effects
on competition is proposed, given that this is not a factor to be
considered by the NCUA when reviewing an application for a Management
Consignment exemption.
The NCUA seeks comment on the utility of the proposed presumptions
and on whether additional presumptions should apply as well.
The proposed regulation sets forth the limits on the duration of a
Management Consignment exemption. The Interlocks Act limits a
Management Consignment exemption to two years, with a possible
extension for up to an additional two years if the applicant satisfies
at least one of the criteria for obtaining a Management Consignment
exemption. The proposed regulation implements this limitation by
requiring interested parties to submit an application for an extension
at least 30 days before the expiration of the initial term of the
exemption and by clarifying that the presumptions and procedures that
apply to initial applications also apply to extension applications.
Change in Circumstances
The current regulation provides a 15-month grace period for
nongrandfathered interlocks that become impermissible due to a change
in circumstances. This period may be shortened by the NCUA under
appropriate circumstances. The proposed regulation revises the wording
of this section in the current regulations but not its substance. The
NCUA specifically seeks comment on the proposed continued availability
of a grace period.
Enforcement
The current regulations set forth the jurisdiction of the NCUA to
enforce the Interlocks Act. The proposed regulations simplify the
wording of this section in the current regulations but not its
substance.
Regulatory Procedures
Regulatory Flexibility Act
It is hereby certified that this proposal will not have a
significant economic impact on a substantial number of small entities.
Accordingly, a regulatory flexibility analysis is not required.
Paperwork Reduction Act
The Board has determined that the requirements of the Paperwork
Reduction Act do not apply.
Executive Order 12612
This proposed rule, like the current 12 CFR part 711 it would
replace, will apply to all Federally insured credit unions. The NCUA
Board, pursuant to Executive Order 12612, has determined, however, that
this proposed rule will not have a substantial direct effect on the
States, on the relationship between the national government and the
States, or on the distribution of power and responsibilities among
various levels of government. Further, this proposed rule will not
preempt provisions of State law or regulations.
List of Subjects in 12 CFR Part 711
Antitrust, Credit unions, Holding companies.
By the National Credit Union Administration Board on March 13,
1996.
Becky Baker,
Secretary of the Board.
For the reasons set out in the preamble, the NCUA proposes to
revise part 711 of chapter VII of title 12 of the Code of Federal
Regulations to read as follows:
PART 711--MANAGEMENT OFFICIAL INTERLOCKS
Sec.
711.1 Authority, purpose, and scope.
711.2 Definitions.
711.3 Prohibitions.
711.4 Interlocking relationships permitted by statute.
711.5 Regulatory Standards exemption.
711.6 Management Consignment exemption.
711.7 Change in circumstances.
711.8 Enforcement.
Authority: 12 U.S.C. 1766 and 3201-3208.
Sec. 711.1 Authority, purpose, and scope.
(a) Authority. This part is issued under the provisions of the
Depository Institution Management Interlocks Act (Interlocks Act) (12
U.S.C. 3201 et seq.), as amended, and the NCUA's general rulemaking
authority in 12 U.S.C. 1766.
(b) Purpose. The purpose of the Interlocks Act and this part is to
foster competition by generally prohibiting a management official from
serving two nonaffiliated depository organizations in situations where
the management interlock could have an anticompetitive effect.
(c) Scope. This part applies to management officials of federally
insured credit unions and their affiliates.
[[Page 12048]]
Sec. 711.2 Definitions.
For purposes of this part, the following definitions apply:
(a) Affiliate. (1) The term affiliate has the meaning given in
section 202 of the Interlocks Act (12 U.S.C. 3201). For purposes of
section 202, shares held by an individual include shares held by
members of his or her immediate family. ``Immediate family'' includes
spouse, mother, father, child, grandchild, sister, brother, or any of
their spouses, whether or not any of their shares are held in trust.
(2) For purposes of section 202(3)(B) of the Interlocks Act (12
U.S.C. 3201(3)(B)), an affiliate relationship involving common
ownership does not exist if the NCUA determines, after giving the
affected persons the opportunity to respond, that the asserted
affiliation was established in order to avoid the prohibitions of the
Interlocks Act and does not represent a true commonality of interest
between the depository organizations. In making this determination, the
NCUA considers, among other things, whether a person owns a nominal
percentage of the shares of one of the organizations and the percentage
is substantially disproportionate with that person's ownership of
shares in the other organization.
(b) Anticompetitive effect means a monopoly or substantial
lessening of competition.
(c) Area median income means:
(1) The median family income for the metropolitan statistical area
(MSA), if a depository organization is located in an MSA; or
(2) The statewide nonmetropolitan median family income, if a
depository organization is located outside an MSA.
(d) Community means city, town, or village, and contiguous or
adjacent cities, towns, or villages.
(e) Contiguous or adjacent cities, towns, or villages means cities,
towns, or villages whose borders touch each other or whose borders are
within 10 road miles of each other at their closest points. The
property line of an office located in an unincorporated city, town, or
village is the boundary line of that city, town, or village for the
purpose of this definition.
(f) Credit union means a federal or state-chartered credit union
that is insured by the National Credit Union Share Insurance Fund.
(g) Critical means important in helping a depository organization
either address current problems or maintain safe and sound operations
going forward.
(h) Depository holding company means a bank holding company or a
savings and loan holding company (as more fully defined in section 202
of the Interlocks Act (12 U.S.C. 3201)) having its principal office
located in the United States.
(i) Depository institution means a commercial bank (including a
private bank), a savings bank, a trust company, a savings and loan
association, a building and loan association, a homestead association,
a cooperative bank, an industrial bank, or a credit union, chartered
under the laws of the United States and having a principal office
located in the United States. Additionally, a United States office,
including a branch or agency, of a foreign commercial bank is a
depository institution.
(j) Depository institution affiliate means a depository institution
that is an affiliate of a depository organization.
(k) Depository organization means a depository institution or a
depository holding company.
(l) Low- and moderate-income areas means areas where the median
family income is less than 100 percent of the area median income.
(m) Management official. (1) The term management official includes:
(i) A director;
(ii) An advisory or honorary director of an institution with total
assets of $100 million or more; -
(iii) A senior executive officer as that term is defined in 12 CFR
701.14(b)(2), or a person holding an equivalent position, regardless of
title;
(iv) A branch manager;
(v) A trustee of a depository organization under the control of
trustees; and -
(vi) Any person who has a representative or nominee serving in any
of the above capacities.
(2) The term management official does not include:
(i) A person whose management functions relate exclusively to the
business of retail merchandising or manufacturing;
(ii) A person whose management functions relate principally to the
business outside the United States of a foreign commercial bank; or -
(iii) A person described in the provisos of section 202(4) of the
Interlocks Act (12 U.S.C. 3201(4)) (referring to an officer of a State-
chartered savings bank, cooperative bank, or trust company that neither
makes real estate mortgage loans nor accepts savings).
(n) Office means a principal or branch of a depository institution
located in the United States. Office does not include a representative
office of a foreign commercial bank, electronic terminal, or a loan
production office. -
(o) Person means a natural person, corporation, or other business
entity. -
(p) Relevant metropolitan statistical area (RMSA) means an MSA, a
primary MSA, or a consolidated MSA that is not comprised of designated
primary MSAs to the extent that these terms are defined and applied by
the Office of Management and Budget.
(q) Representative or nominee means a natural person who serves as
a management official and has an obligation to act on behalf of another
person with respect to management responsibilities. The NCUA will find
that a person has an obligation to act on behalf of another person only
if the first person has agreed to act on behalf of the second person
with respect to management responsibilities. The NCUA will determine,
after giving the affected person an opportunity to respond, whether a
person is a ``representative or nominee.''
(r) Total assets. (1) The term total assets means assets measured
on a consolidated basis as of the close of the organization's last
fiscal year.
(2) The term total assets does not include:
(i) Assets of a diversified savings and loan holding company as
defined by section 10(a)(1)(F) of the Home Owners' Loan Act (12 U.S.C.
1467a(a)(1)(F)) other than the assets of its depository institution
affiliate; -
(ii) Assets of a bank holding company that is exempt from the
prohibitions of section 4 of the Bank Holding Company Act of 1956
pursuant to an order issued under section 4(d) of that Act (12 U.S.C.
1843(d)) other than the assets of its depository institution affiliate;
or
(iii) Assets of offices of a foreign commercial bank other than the
assets of its United States branch or agency.
(s) United States includes any State or territory of the United
States of America, the District of Columbia, Puerto Rico, Guam,
American Samoa, and the Virgin Islands.
Sec. 711.3 Prohibitions.
(a) Community. A management official of a depository organization
may not serve at the same time as a management official of an
unaffiliated depository organization if the depository organizations in
question (or a depository institution affiliate thereof) have offices
in the same community.
(b) RMSA. A management official of a depository organization may
not serve at the same time as a management official of an unaffiliated
depository organization if the depository organizations in question (or
a depository institution affiliate thereof) have offices in the same
RMSA and each
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depository organization has total assets of $20 million or more.
(c) Major assets. A management official of a depository
organization with total assets exceeding $1 billion (or any affiliate
thereof) may not serve at the same time as a management official of an
unaffiliated depository organization with total assets exceeding $500
million (or any affiliate thereof), regardless of the location of the
two depository organizations.
Sec. 711.4 Interlocking relationships permitted by statute.
The prohibitions of Sec. 711.3 do not apply in the case of any one
or more of the following organizations or to a subsidiary thereof:
(a) A depository organization that has been placed formally in
liquidation, or which is in the hands of a receiver, conservator, or
other official exercising a similar function;
(b) A corporation operating under section 25 or section 25A of the
Federal Reserve Act (12 U.S.C. 601, et seq. and 12 U.S.C. 611 et seq.,
respectively) (Edge Corporations and Agreement Corporations);
(c) A credit union being served by a management official of another
credit union;
(d) A depository organization that does not do business within the
United States except as an incident to its activities outside the
United States;
(e) A State-chartered savings and loan guaranty corporation;
(f) A Federal Home Loan Bank or any other bank organized solely to
serve depository institutions (a bankers' bank) or solely for the
purpose of providing securities clearing services and services related
thereto for depository institutions, and securities companies;
(g) A depository organization that is closed or is in danger of
closing as determined by the appropriate Federal depository
institutions regulatory agency and is acquired by another depository
organization. This exemption lasts for five years, beginning on the
date the depository organization is acquired; and
(h)(1) A diversified savings and loan holding company (as defined
in section 10(a)(1)(F) of the Home Owners' Loan Act (12 U.S.C.
1467a(a)(1)(F)) with respect to the service of a director of such
company who also is a director of an unaffiliated depository
organization if:
(i) Both the diversified savings and loan holding company and the
unaffiliated depository organization notify their appropriate Federal
depository institutions regulatory agency at least 60 days before the
dual service is proposed to begin; and
(ii) The appropriate regulatory agency does not disapprove the dual
service before the end of the 60-day period.
(2) The NCUA may disapprove a notice of proposed service if it
finds that:
(i) The service cannot be structured or limited so as to preclude
an anticompetitive effect in financial services in any part of the
United States;
(ii) The service would lead to substantial conflicts of interest or
unsafe or unsound practices; or
(iii) The notificant failed to furnish all the information required
by the NCUA.
(3) The NCUA may require that any interlock permitted under this
paragraph (h) be terminated if a change in circumstances occurs with
respect to one of the interlocked depository organizations that would
have provided a basis for disapproval of the interlock during the
notice period.
Sec. 711.5 Regulatory Standards exemption.
(a) Criteria. The NCUA may permit an interlock that otherwise would
be prohibited by the Interlocks Act and Sec. 711.3 if:
(1) The board of directors of the depository organization (or the
organizers of a depository organization being formed) that seeks the
exemption provides a resolution to the NCUA certifying that the
organization, after the exercise of reasonable efforts, is unable to
locate any other candidate from the community or RMSA, as appropriate,
who:
(i) Possesses the level of expertise required by the depository
organization and who is not prohibited from service by the Interlocks
Act; and
(ii) Is willing to serve as a management official; and
(2) The NCUA, after reviewing an application submitted by the
depository organization seeking the exemption, determines that:
(i) The management official is critical to the safe and sound
operations of the affected depository organization; and
(ii) Service by the management official will not produce an
anticompetitive effect with respect to the depository organization.
(b) Presumptions. The NCUA applies the following presumption when
reviewing any application for a Regulatory Standards exemption: A
proposed management official is critical to the safe and sound
operations of a credit union if that official is approved by the NCUA
to serve as a director or senior executive officer of that credit union
pursuant to 12 CFR 701.14 or pursuant to conditions imposed on a newly
chartered credit union and the institution has operated for less than
two years, or otherwise was in a ``troubled condition'' as defined in
12 CFR 701.14 at the time the service under 12 CFR 701.14 is approved.
(c) Duration of interlock. An interlock permitted under this
section may continue until the NCUA notifies the affected organizations
otherwise. The NCUA may require a credit union to terminate any
interlock permitted under this section if the NCUA concludes, after
giving the affected persons the opportunity to respond, that the
determinations under paragraph (a)(2) of this section no longer may be
made.
Sec. 711.6 Management Consignment exemption.
(a) Criteria. The NCUA may permit an interlock that otherwise would
be prohibited by the Interlocks Act and Sec. 711.3 if the NCUA
determines that the interlock would:
(1) Improve the provision of credit to low- and moderate-income
areas;
(2) Increase the competitive position of a minority- or woman-owned
depository organization;
(3) Strengthen the management of an institution that has been
chartered for less than two years at the time an application is filed
under this part; or
(4) Strengthen the management of an institution that is in an
unsafe or unsound condition as determined by the NCUA on a case-by-case
basis.
(b) Presumptions. The NCUA applies the following presumptions when
reviewing any application for a Management Consignment exemption:
(1) A proposed management official is capable of strengthening the
management of a depository institution described in paragraph (a)(3) of
this section if that official is approved by the NCUA to serve as a
director or senior executive officer of that institution pursuant to 12
CFR 701.14 or pursuant to conditions imposed on a newly chartered
credit union and the institution has operated for less than two years
at the time the service under 12 CFR 701.14 is approved.
(2) A proposed management official is capable of strengthening the
management of a depository institution described in paragraph (a)(4) of
this section if that official is approved by the NCUA to serve as a
director or senior executive officer of that institution pursuant to 12
CFR 701.14 and the institution was in a ``troubled condition'' as
defined under 12 CFR 701.14 at the time service under 12 CFR 701.14 is
approved.
(c) Duration of interlock. An interlock granted under this section
may continue
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for a period of two years from the date of approval. The NCUA may
extend this period for one additional two-year period if the depository
organization applies for an extension at least 30 days before the
current exemption expires and satisfies one of the criteria specified
in paragraph (a) of this section. The provisions set forth in paragraph
(b) of this section also apply to applications for extensions.
Sec. 711.7 Change in circumstances.
(a) Termination. A management official shall terminate his or her
service or apply for an exemption to the Interlocks Act if a change in
circumstances causes the service to become prohibited under that Act. A
change in circumstances may include, but is not limited to, an increase
in asset size of an organization, a change in the delineation of the
RMSA or community, the establishment of an office, an acquisition, a
merger, a consolidation, or any reorganization of the ownership
structure of a depository organization that causes a previously
permissible interlock to become prohibited.
(b) Transition period. A management official described in paragraph
(a) of this section may continue to serve the credit union involved in
the interlock for 15 months following the date of the change in
circumstances. The NCUA may shorten this period under appropriate
circumstances.
Sec. 711.8 Enforcement.
The NCUA administers and enforces the Interlocks Act with respect
to credit unions, and their affiliates, and may refer any case of a
prohibited interlocking relationship involving these institutions to
the Attorney General of the United States to enforce compliance with
the Interlocks Act and this part.
[FR Doc. 96-6703 Filed 3-22-96; 8:45 am]
BILLING CODE 7535-01-U
