[Federal Register Volume 59, Number 33 (Thursday, February 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3090]
[[Page Unknown]]
[Federal Register: February 17, 1994]
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FEDERAL RESERVE SYSTEM
12 CFR Part 212
[Regulation L; Docket No. R-0825]
Management Official Interlocks
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Board of Governors of the Federal Reserve System is
proposing to amend its regulations that implement the Depository
Institution Management Interlocks Act (Interlocks Act or Act). The
Interlocks Act generally prohibits certain management official
interlocks between depository institutions, depository holding
companies, and their affiliates. The proposed amendment would create
limited exemptions to the prohibition on management official interlocks
between certain depository organizations located in the same community
or relevant metropolitan statistical area (RMSA). These exemptions
would permit management official interlocks between depository
organizations that together control only a small percentage of the
total deposits in the community or RMSA. These exemptions are based on
the Board's belief that these management interlocks would not threaten
to inhibit or restrict competition among depository organizations. In
addition, the Board is soliciting comment generally on revisions to the
existing Interlocks Act regulations that the Board should consider,
including the addition of other exemptions. The Board also is proposing
amendments to implement certain provisions of the Management Interlocks
Revision Act of 1988.
DATES: Written comments must be received on or before April 11, 1994.
ADDRESSES: Comments, which should refer to Docket No. R-0825, may be
mailed to Mr. William Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551. Comments addressed to Mr. Wiles may also be
delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m., and
to the security control room outside of those hours. Both the mail room
and control room are accessible from the courtyard entrance on 20th
Street between Constitution Avenue and C Street, NW. Comments may be
inspected in room MP-500 between 9:00 a.m. and 5:00 p.m., except as
provided in Sec. 261.8 of the Board's Rules Regarding Availability of
Information, 12 CFR 261.8.
FOR FURTHER INFORMATION CONTACT: Thomas M. Corsi, Senior Attorney (202/
452-3275), Legal Division, Board of Governors of the Federal Reserve
System. For the hearing impaired only, Telecommunication Device for the
Deaf (TDD), Dorothea Thompson (202/452-3544), Board of Governors of the
Federal Reserve System, 20th and C Streets, NW, Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
Background--Exemptions to the Interlocks Act
The general purpose of the Interlocks Act is to foster competition
among depository organizations\1\ by prohibiting certain management
interlocks that might contribute to anticompetitive practices. The
primary concern is that interlocking management may enable certain
depository institutions to control the flow and availability of credit
in the markets in which they operate.
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\1\ A depository organization means a depository institution or
a depository holding company. See 12 CFR 212.2(g).
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The Act prohibits a management official of a depository
organization from serving at the same time as a management official of
an unaffiliated depository organization located in the same
community\2\ or RMSA.\3\ 12 U.S.C. 3202. Congress designated RMSAs as
appropriate regions within which to restrict management interlocks
because RMSAs are ``economic trade areas and reflect the area in which
financial institutions compete.'' S. Rep. No. 323, 95th Cong., 1st
Sess. 14 (1977).\4\
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\2\ Community is defined as a city, town, or village, or
contiguous or adjacent cities, towns, or villages. 12 CFR 212.2(c)
\3\ An RMSA includes a primary metropolitan statistical area, a
metropolitan statistical area, or a consolidated metropolitan
statistical area that is not comprised of designated primary
metropolitan statistical areas as defined by the Office of
Management and Budget. See 12 CFR 212.2(n); 58 FR 27443 (May 18,
1993).
\4\ The prohibitions apply if both organizations are depository
institutions, each with an office in the same RMSA; if offices of
depository institution affiliates of both organizations are located
in the same RMSA; or if one organization is a depository institution
that has an office in the same RMSA as a depository institution
affiliate of the other organization. The RMSA prohibition does not
apply to depository institutions with less than $20 million in
assets. See 12 CFR 212.3.
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In the Interlocks Act, Congress authorized the Federal depository
institutions regulatory agencies (the Board of Governors of the Federal
Reserve System, Federal Deposit Insurance Corporation, the Office of
Thrift Supervision, the National Credit Union Administration, and the
Office of the Comptroller of the Currency, hereinafter the
``Agencies'') to implement rules and regulations to carry out the Act,
including rules or regulations which permit service by a management
official that would otherwise be prohibited by the Act. 12 U.S.C. 3207.
The legislative history of the Act indicates that the Agencies may
exercise this rulemaking authority to exempt management official
interlocks that otherwise might be prohibited by the statute if they
establish that the exemption has a pro-competitive effect. H.R. Rep.
No. 1383, 95th Cong., 2d Sess. 15 (1978).
Pursuant to this rulemaking authority, the Board, along with the
other Agencies, previously established exceptions for institutions
located in low- and moderate-income areas, minority- and/or women-owned
organizations, newly-chartered institutions, and institutions facing
conditions endangering their safety and soundness. See 12 CFR 212.4(b).
These exceptions are all available on a temporary basis upon a
demonstration that the exempted management official interlock is
necessary to provide management or operating expertise to the
requesting institution.
The Agencies are publishing their proposed rule notices separately.
The Board now seeks comment on a proposal to establish additional
exemptions from the prohibitions of the Act. These exemptions would be
available to depository organizations that between them control a small
percentage of deposits in a community or RMSA. The Board also proposes
an amendment to exempt honorary and advisory directors that serve
institutions with less than $100 million in assets from the definition
of a ``management official'' in the Interlocks Act. This change is
consistent with a provision of the Management Interlocks Revision Act
of 1988 (Pub. L. 100-650, 102 Stat. 3819 (1988)).
In addition to the proposed new exemption to the Interlocks Act,
the Board, together with the other Federal depository institutions
regulatory agencies, is considering a more comprehensive revision of
the regulations implementing the statute. Any such revision would seek
to simplify the regulations, revise existing exemptions, and consider
new exemptions that would foster competition in relevant RMSAs and
communities and thus minimize unnecessary regulatory burden while still
fulfilling the requirements of the Interlocks Act. The Board therefore
is using this notice of proposed rulemaking as an opportunity to
solicit additional comment on the question of the improvement of its
Interlocks Act regulations.
The Small Market Share Exemption
The Interlocks Act prevents two competing institutions from
conspiring through common management officials to adversely impact
competition in the products and services they offer. Where two
depository institutions dominate a large portion of the market, these
risks are real. But when a particular market is served by many
institutions, the risks diminish that two depository institutions with
interlocking management can adversely affect the credit products and
services available in their market.
The Board believes that analysis of the combined deposit holdings
of two institutions provides a meaningful assessment of the capacity of
the two institutions to control credit and related services in their
market. This proposal reflects the view that two depository
institutions that control a small portion of the market they serve are
not capable of exerting sufficient market influence to materially
restrict the terms and availability of credit in their market. For
institutions located in a RMSA, the RMSA constitutes the relevant
market.
Some depository institutions compete in smaller markets either
within or outside of RMSAs. The Interlocks Act provides that the
relevant market for these organizations and organizations with total
assets of $20 million or less that are located within a RMSA, is the
city, town, or village and contiguous and adjacent areas in which the
organizations are located. 12 U.S.C. 3202.
The Proposal
The Board is proposing to amend the management interlocks
regulations to permit two depository organizations that serve the same
RMSA to share management officials in circumstances where organizations
control a small portion of the deposits in that market. Specifically,
this proposal would permit two competing depository organizations, each
with assets in excess of $20 million, to share management officials if
the organizations together control no more than 20 percent of the
deposits in the RMSA. Additionally, the depository organizations could
control no more than 20 percent of the deposits in any other RMSA
whether they compete directly, through offices, or through affiliated
depository institutions.
Under the proposal, depository organizations located in RMSAs would
look to appropriate deposit share data available from the relevant
Federal Reserve Bank in order to determine whether they are entitled to
the exemption in reliance upon this information. Depository
institutions would not have to apply to the appropriate Federal
depository institution regulatory agency for permission to engage in
the interlock.
The Board would treat management interlocks between institutions
with assets of less than $20 million that are located within an RMSA
and all depository institutions located outside of an RMSA in a similar
manner. Specifically, the amendment would exempt any management
interlock between two depository organizations located in a community,
as defined by Sec. 212.2 of the regulation, if the depository
organization's combined share of the total deposits in the community is
no more than 20 percent. Similarly, to be exempt, the organizations may
not together control more than 20 percent of the deposits in any
community in which they or their depository institution affiliates are
located.
The proposal would provide an exemption only if management
interlocks between the two organizations are not otherwise prohibited
by the Act. For example, 12 U.S.C. 3203 provides that a depository
institution or a depository holding company with assets in excess of $1
billion may not enter into a management interlock with a depository
institution or a depository holding company with assets in excess of
$500 million. No exemption would be available for interlocks that fall
within this prohibition. The exemption is effective as long as the
organizations meet the conditions. If the level of deposit control
exceeds 20 percent of deposits in the community or RMSA, as measured
annually, the depository organizations shall have up to 15 months to
address the prohibited interlock by shrinking the deposit base,
terminating the interlock, or taking any other action to correct the
violation.
No prior Board approval is required. The exemption is intended to
be self-implementing. Management is responsible for compliance with the
terms of the exemption and maintaining sufficient supporting
documentation.
Determining Deposit Share of the Relevant Market
Using the total deposit data reported by depository institutions to
the Federal Deposit Insurance Corporation (FDIC) in the Summary of
Deposits addendum to the Report of Condition and Income, the depository
organizations will determine for themselves whether the exemption is
available. The FDIC compiles the collected deposit data into a summary
and makes the deposit summary available annually. The FDIC's annual
deposit summary breaks-out the total deposits of every insured
depository institution by branch.\5\ This deposit data can be sorted by
RMSA, and by community as that term is defined by the Act, to provide
to depository organizations the necessary information to determine
deposit share by the relevant market.
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\5\ The data do not include the deposits held by federally-
chartered credit unions, which are insured by the National Credit
Union Share Insurance Fund, and state-chartered credit unions.
Typically, these credit union deposits comprise only a small part of
the total deposits in a relevant market. If included, the deposit
figures for a particular market would be slightly increased. As
such, the data will not include the credit union deposits, but will
still serve as a reliable approximation of the total deposits in the
relevant market.
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The FDIC provides this deposit summary to each of the Agencies.
Under the proposal, the Board will make the deposit data available to
all bank holding companies and state member banks.\6\ Each of the
Agencies will make the same data available to the other depository
organizations. The process would involve neither an application nor an
approval from any of the Agencies but, the burden of determining the
applicability of the exemption falls upon the depository organizations
that seek it. Depository organizations located in an RMSA would simply
look to the deposit share data for the total deposits of the RMSA.
Then, both interlocking depository organizations would determine
whether their combined share of the total deposits exceeds 20 percent.
If the combined share of deposits is no more than 20 percent of the
market, the interlock is exempt.
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\6\ For the purpose of ascertaining whether depository
organizations qualify for the exception, deposit information
regarding specific counties and RMSAs will be available at each
Federal Reserve Bank.
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The Board intends this exemption to be available to community-based
depository organizations in the same manner as for organizations whose
relevant market is the RMSA. However, while the deposit share data can
be pre-sorted and made readily available by RMSA, the deposit share
data cannot be pre-sorted by community. For example, two community-
based depository organizations seeking to rely on the small market
share exemption must first determine the total deposits in their
community. To do this, the depository organizations must request
deposit share data from the Board with sufficient specificity to
delineate the community defined by the Interlocks Act that both the
interlocking institutions will serve. Only then can they calculate the
portion of the deposits in the market that they would be deemed to
control if they engage in the interlock.
Whether within or outside of an RMSA, the depository organizations
will be required to retain records supporting the applicability of the
exemption, and to reconfirm, on an annual basis, that the interlock is
eligible for the exemption. The most recent deposit share data made
available to the depository organizations by the Agencies will
determine whether organizations are entitled to the small market share
exception. When new data demonstrates that the two interlocking
institutions' combined control of deposits exceeds 20 percent of
deposits in the community or RMSA, the affected depository
organizations have up to 15 months to correct the prohibited interlock.
Pro-competitive Results
The Board believes this proposal will have a pro-competitive
effect. Since the deposit base of the exempted interlocking
institutions is small, the risk of anticompetitive control over the
market is remote. To provide to these particular institutions this
limited relief from the management interlock restrictions enlarges the
pool of experienced management talent upon which they may draw and
enhances their operational effectiveness. The result will be better
managed, more competitive, and healthier depository institutions.
Request for Comment
In addition to any relevant comments on this proposal, the Board
specifically requests comment on the following:
1. Whether 20 percent or less of the deposits of a community or
RMSA is an appropriate threshold for the exemption, or whether a
different level is more appropriate.
2. Should the community and RMSA exemptions rely on the same or a
different threshold level?
3. Should the exemption require depository organizations to
demonstrate that they control no more than 20 percent of the deposits
of communities within an RMSA? For example, if two depository
organizations with more than $20 million in assets operate in a
community within a RMSA, should the exemption require that the
depository organizations control no more than 20 percent of the
deposits in the community and no more than 20 percent of the deposits
in the RMSA? Consider depository organizations that compete in several
communities within a RMSA.
4. Whether and how the proposed procedure to employ the deposit
data collected by the FDIC in connection with the Report of Condition
and Income will permit depository organizations to determine easily and
effectively whether they qualify for the small market share exception.
5. Whether the exemption for community-based institutions will be
easy to use, or whether these institutions might be better served by
another approach to the exemption.
6. Whether the exemption would enable depository organizations to
subvert the purposes of the Interlocks Act by establishing multiple
interlocks involving several individuals. For example, the Board is
concerned that each of several directors of one depository organization
could serve as a director of a different unaffiliated depository
organization, facilitating diminished competition among the several
depository organizations. The Board seeks comment on whether this
concern is justified, and if so, whether it is exacerbated by the fact
that the threshold limit for the exemption is set at 20 percent of the
deposits in the RMSA or community, rather than a smaller percentage.
In addition to this proposal, the Board plans a comprehensive
revision of the regulations implementing the Interlocks Act. The Board
intends to simplify the regulation, revise the interlocks prohibitions
and exemptions, and consider new exemptions that promote competition
without fostering anticompetitive practices. The comprehensive revision
will eliminate unnecessary regulatory burden in a manner consistent
with the Interlocks Act and the stated objectives of the Board.
Toward this end, the Board solicits comment on how to clarify and
improve the entire rule in a manner consistent with the Interlocks Act.
Paperwork Reduction Act
The collection of information contained in this proposed rule will
be reviewed by the Board under Office of Management and Budget (OMB)
delegated authority pursuant to the Paperwork Reduction Act of 1980 (44
U.S.C. 3501 et seq.). Comments regarding the accuracy of the burden
estimate, and suggestions for reducing the burden, should be addressed
to Mr. William Wiles, Secretary, Board of Governors of the Federal
Reserve System at the address noted above and should refer to Docket
No. R-0825.
The collection of information in this proposed rule is found in
Sec. 212.4(d), and takes the form of records maintained by depository
organizations which are sufficient to support their determination that
the interlocking relationships which they have established are exempt
under this section. Such depository organizations must also maintain
records which demonstrate that they have subsequently reconfirmed such
determinations on an annual basis. The information will be used to
provide state and federal examiners of depository institutions with
documentation which will allow them to ascertain whether depository
organizations are eligible for the exemption.
The estimated annual recordkeeping burden for the collection of
information requirement in this proposed rule is summarized as follows:
Number of Recordkeepers: 70
Annual Hours per Recordkeeper: 3
Total Recordkeeping Hours: 210
Regulatory Flexibility Act
Pursuant to Section 605(b) of the Regulatory Flexibility Act, 5
U.S.C. 605(b), the Board hereby certifies that this proposed rule, if
adopted as a final rule, will not have a significant economic impact on
a substantial number of small entities. The effect of the rule, if
adopted as proposed, would be to reduce the compliance requirements
imposed upon small entities by creating a regulatory exemption to the
prohibition on management interlocks between certain organizations.
Furthermore, the proposed exemption would affect only the management
structure of only a few institutions.
List of Subjects in 12 CFR Part 212
Antitrust, Banks, banking, Holding companies, Management official
interlocks.
Accordingly, for the reasons set forth in the preamble, the Board
of Governors of the Federal Reserve System proposes to amend 12 CFR
part 212 as follows:
PART 212--MANAGEMENT OFFICIAL INTERLOCKS (REGULATION L)
1. The authority citation for part 212 continues to read as
follows:
Authority: 12 U.S.C. 3201 et seq., 15 U.S.C. 19.
2. Section 212.2 is amended by revising paragraph (h) to read as
follows:
Sec. 212.2 Definitions.
* * * * *
(h)(1) Management official means:
(i) An employee or officer with management functions (including a
branch manager);
(ii) A director (including an advisory or honorary director, except
in the case of a depository institution with total assets of less than
$100,000,000);
(iii) A trustee of a business organization under the control of
trustees (e.g. a mutual savings bank); or
(iv) Any person who has a representative or nominee serving in any
such capacity.
(2) 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) Persons described in the provisos of section 202(4) of the
Interlocks Act (12 U.S.C. 3201(4)).
* * * * *
3. Section 212.4 is amended by adding a new paragraph (d) to read
as follows:
Sec. 212.4 Permitted interlocking relationships.
* * * * *
(d) Small market share exemption--(1) Depository organizations
controlling no more than 20 percent of the deposits in a community or
RMSA. A management official may serve two unaffiliated depository
organizations in a capacity which would otherwise be prohibited by
Sec. 212.3(a) or (b) of this part if the following conditions are met:
(i) The interlock is not prohibited by Sec. 212.3(c) of this part;
and
(ii) The two depository organizations hold in the aggregate no more
than 20 percent of the deposits, as reported annually in the Summary of
Deposits, in each RMSA or community in which the depository
organizations have offices, or in which depository institution
affiliates of both depository organizations are located.
(2) Confirmation and records. Depository organizations must
maintain records sufficient to support their determination that the
interlocking relationship is exempt under this section and must
reconfirm that determination on an annual basis.
(3) Termination. An interlock permitted by this exemption may
continue as long as the conditions of this section are satisfied. Any
increase in the aggregate deposit holdings of the depository
organizations as reported annually in the Summary of Deposits, that
causes the interlock to become prohibited will be treated as a change
in circumstances under Sec. 212.6 of this part.
By order of the Board of Governors of the Federal Reserve
System, February 4, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-3090 Filed 2-16-94; 8:45 am]
BILLING CODE 6210-01-F