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F

ed er a l

R

e s e r v e

B

a nk

OF DALLAS
ROBERT

D. M C T E E R , J R .

DALLAS, TEXAS
75265-5906

P R E S ID E N T
AND

C H IE F E X E C U T IV E

O F F IC E R

March 7, 1994

Notice 94-28

TO:

The Chief Executive Officer of each
m e m b e r bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Proposal to Amend Regulation L
(Management O f f i c i a l In te rlo c k s )
DETAILS

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 g e n erally p r o h i b ­
its certain manage m e n t official interlocks between deposi t o r y institutions,
d eposi t o r y holding companies, and their affiliates.
The proposed amendment
would create limited exemptions to the prohibition on manag e m e n t official
interlocks between certain d epository organizations located in the same
c o m munity or relevant metropolitan statistical area (RMSA).
These exemptions
w ould permit manage m e n t official interlocks between d epository organizations
that t ogether control only a small percentage of the total deposits in the
c o m munity or RMSA.
These exemptions are based on the B o a r d ’s belief that
these manag e m e n t interlocks would not threaten to inhibit or restrict c o m p e t i ­
tion among deposi t o r y organizations.
In addition, the Board is soliciting comment g e n e rally 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.
The Board must receive comments by
be addressed to Will i a m W. Wiles, Secretary,
Reserve System, 20th Street and Constitution
20551.
All comments should refer to Docket

April 11, 1994.
Comments should
Board of Governors of the Federal
Avenue, N.W., Washington, D.C.
No. R-0825.

ATTACHMENT

A copy of the B o a r d ’s notice as it appears on pages 7909-13, Vol.
59, No. 33, of the Federal Register dated February 17, 1994, is attached.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

- 2 -

MORE INFORMATION

For more information, please contact Michael Johnson at (214)
922-6081.
For additional copies of this B a n k ’s notice, please contact the
Public Affairs Department at (214) 922-5254.
Sincerely yours,

7909

Proposed Rules

Federal Register
Vol. 59, No. 33
Thursday, February 17, 1994

FEDERAL RESERVE SYSTEM
12 CFR Part 212
[Regulation L; Docket No. R-0825]

Management Official Interlocks
Board of Governors of t h e
Federal Reserve System.
ACTION: Notice o f p r o p o s e d r u l e m a k i n g .
AGENCY:

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 com panies, and their
affiliates. The proposed amendment
w ould create limited exem ptions to the
prohibition on management official
interlocks between certain depository
organizations located in the same
community or relevant metropolitan
statistical area (RMSA). These
exem ptions w ould permit management
official interlocks between depository
organizations that together control only
a small percentage of the total deposits
in the community or RMSA. These
exem ptions are based on the Board’s
belief that these management interlocks
w ould not threaten to inhibit or restrict
SUMMARY:

7910

Federal Register / Vol. 59, No. 33 / Thursday, February 17, 1994 / Proposed Rules

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 im plem ent
certain provisions of the Management
Interlocks Revision Act of 1988.
DATES: Written comments must be
received on or before April 11,1994.

Comments, w hich 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.
W iles 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 § 261.8 of
the Board's Rules Regarding Availability
of Information, 12 CFR 261.8.
A DDRESSES:

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’ 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 w hich they operate.
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
1 A d ep osito ry organization m ean s a depo sito ry
in stitu tio n or a d ep o sito ry h o ld in g com pan y . See 12
CFR 212.2(g).

same community? or RMSA. 3 12 U.S.C.
3202. Congress designated RMSAs as
appropriate regions w ithin w hich to
restrict management interlocks because
RMSAs are “econom ic trade areas and
reflect the area in w hich financial
institutions com pete.” S. Rep. No. 323.
95th Cong., 1st Sess. 14 (1977).«
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 “A gencies”) to
im plem ent rules and regulations to
carry out the Act, including rules or
regulations w hich permit service by a
management official that w ould
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 wom en-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 exem pted 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
2 C om m unity is d efined as a city, tow n, or village,
o r c o n tig u ou s o r adjacent cities, tow ns, or villages.
12 CFR 212.2(c)
3 A n RMSA in c lu d e s a prim ary m e tro p o litan
statistical area, a m etro po litan statistical area, or a
c on so lid ate d m etro p o litan statistical area th a t is not
c o m p rise d of d esig nated p rim ary m etrop o litan
statistical areas as d efined by the Office of
M anagem ent a n d Budget. See 12 CFR 212.2(n); 58
FR 27443 (May 18, 1993).
« T h e p ro h ib itio n s a p p ly if b o th o rg anization s are
d ep o sitory in stitu tio n s, each w ith a n office in the
sam e RMSA; if offices of d epo sito ry in stitu tio n
affiliates of b o th organizations are located in the
sam e RMSA; or if on e organization is a d epo sito ry
in stitu tio n th a t has an office in th e sam e RMSA as
a d ep o sito ry in stitu tio n affiliate o f the oth e r
organization. T h e RMSA p ro h ib itio n d o es no t a p p ly
to d ep o sito ry in stitu tio n s w ith less th a n $20 m illio n
in assets. See 12 CFR 212.3.

proposal to establish additional
exem ptions from the prohibitions of the
Act. These exem ptions w ould 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
w ith less than $100 m illion 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
exem ption to the Interlocks Act, the
Board, together with the other Federal
depository institutions regulatory
agencies, is considering a more
com prehensive revision of the
regulations implementing the statute.
Any such revision w ould seek to
sim plify the regulations, revise existing
exem ptions, and consider new
exem ptions that w ould foster
competition in relevant RMSAs and
com m unities and thus m inim ize
unnecessary regulatory burden w hile
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 com m on management officials
to adversely impact competition in the
products and services they offer Where
two depositor}' institutions dominate a
large portion of the market, these risks
are real. But w hen a particular market
is served by many institutions, the risks
dim inish 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 o f 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 sm all 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 com pete
in smaller markets either within or

Federal Register / Vol. 59, No. 33 / Thursday, February 17, 1994 / Proposed Rules
outside of RMSAs. The Interlocks Act
provides that the relevant market for
these organizations and organizations
with total assets of $20 m illion or less
that are located w ithin a RMSA, is the
city, town, or village and contiguous
and adjacent areas in w hich 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 w ould permit
two com peting depository
organizations, each w ith assets in excess
of $20 m illion, 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 w ould
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
w ould not have to apply to the
appropriate Federal depository
institution regulatory agency for
perm ission to engage in the interlock.
The Board w ould treat management
interlocks betw een institutions w ith
assets of less than $20 m illion that are
located w ithin an RMSA and all
depository institutions located outside
of an RMSA in a similar manner.
Specifically, the amendment w ould
exempt any management interlock
between two depository organizations
located in a community, as defined by
§ 212.2 of the regulation, if the
depository organization’s combined
share of the total deposits in the
com m unity 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 com m unity in w hich they or their
depository institution affiliates are
located.
The proposal w ould provide an
exem ption 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

7911

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 w ould sim ply 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.
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,
w hile 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
Determining Deposit Share o f the
organizations seeking to rely on the
Relevant Market
small market share exemption must first
Using the total deposit data reported
determine the total deposits in their
by depository institutions to the Federal community. To do this, the depository
Deposit Insurance Corporation (FDIC) in organizations must request deposit
the Summary of Deposits addendum to
share data from the Board with
the Report of Condition and Income, the sufficient specificity to delineate the
depository organizations w ill determine community defined by the Interlocks
for them selves whether the exem ption is Act that both the interlocking
available. The FDIC com piles the
institutions w ill serve. Only then can
collected deposit data into a summary
they calculate the portion of the
and makes the deposit summary
deposits in the market that they w ould
available annually. The FDIC’s annual
be deem ed to control if they engage in
deposit summary breaks-out the total
the interlock.
deposits of every insured depository
Whether w ithin or outside of an
institution by branch.s This deposit data RMSA, the depository organizations
can be sorted by RMSA, and by
w ill be required to retain records
community as that term is defined by
supporting the applicability of the
the Act, to provide to depository
exem ption, and to reconfirm, on an
organizations the necessary information
annual basis, that the interlock is
to determine deposit share by the
eligible for the exemption. The most
relevant market.
recent deposit share data made available
The FDIC provides this deposit
to the depository organizations by the
summary to each of the Agencies. Under Agencies w ill determine whether
the proposal, the Board w ill make the
organizations are entitled to the small
deposit data available to all bank
market share exception. When new data
holding com panies and state member
demonstrates that the two interlocking
banks.e Each of the Agencies w ill make
institutions’ com bined control of
the same data available to the other
deposits exceeds 20 percent of deposits
in the com m unity or RMSA, the affected
s The data do not in c lu d e the dep o sits h e ld by
depository organizations have up to 15
federally-chartered c re d it u n io n s, w h ich are in su re d
months to correct the prohibited
by the N ational C redit U n io n Share In suran ce F u n d ,
interlock.
a n d state-chartered c redit u nio n s. T ypically, these

institution or a depository holding
company w ith assets in excess of $1
billion may not enter into a management
interlock with a depository institution
or a depository holding company w ith
assets in excess of $500 million. No
exem ption w ould be available for
interlocks that fall w ithin this
prohibition. The exem ption is effective
as long as the organizations meet the
conditions. If the level of deposit
control exceeds 20 percent of deposits
in the com m unity 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 exem ption is intended to be selfimplementing. Management is
responsible for com pliance with the
terms of the exem ption and maintaining
sufficient supporting documentation.

credit u n io n d e p o sits c o m p rise o nly a sm all p a rt of
the total d e p o sits in a re le v a n t m arket. If in c lu d e d ,
th e d ep o sit figures for a p a rtic u la r m arket w o u ld be
slightly in creased. A s su ch , the data w ill not
in clu d e th e c re d it u n io n dep osits, b u t w ill still
serve as a reliable ap p ro x im a tio n o f th e total
d epo sits in th e re le v a n t m arket.
* For the p u rp o se of ascertain ing w hether
d epo sitory org an izatio ns qualify for the exception,
dep osit in form ation regarding specific co u n ties a n d
RMSAs w ill be available a t e ach F ederal R eserve
Bank.

Pro-competitive Results
The Board believes this proposal w ill
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

7912

Federal Register / Vol. 59, No. 33 / Thursday, February 17, 1994 / Proposed Rules

restrictions enlarges the pool of
experienced management talent upon
w hich they may draw and enhances
their operational effectiveness. The
result w ill 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 com m unity or RMSA is an
appropriate threshold for the
exem ption, or whether a different level
is more appropriate.
2. Should the com m unity and RMSA
exem ptions rely on the same or a
different threshold level?
3. Should the exem ption require
depository organizations to demonstrate
that they control no more than 20
percent of the deposits of com m unities
within an RMSA? For example, if two
depository organizations with more than
$20 m illion in assets operate in a
com m unity w ithin a RMSA, should the
exem ption 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
com pete in several com m unities within
a RMSA.
4. Whether and how the proposed
procedure to em ploy the deposit data
collected by the FDIC in connection
w ith the Report of Condition and
Income w ill permit depository
organizations to determine easily and
effectively whether they qualify for the
sm all market share exception.
5. Whether the exemption for
community-based institutions w ill be
easy to use, or whether these
institutions might be better served by
another approach to the exemption.
6. Whether the exem ption would
enable depository organizations to
subvert the purposes of the Interlocks
Act by establishing m ultiple 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
dim inished com petition 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 exem ption 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 sim plify the
regulation, revise the interlocks
prohibitions and exem ptions, and
consider new exem ptions that promote
com petition without fostering
anticompetitive practices. The
com prehensive revision w ill elim inate
unnecessary regulatory burden in a
manner consistent w ith the Interlocks
Act and the stated objectives of the
Board.
Toward this end, the Board solicits
com m ent on how to clarify and improve
the entire rule in a manner consistent
w ith the Interlocks Act.
Paperwork Reduction Act
The collection of information
contained in this proposed rule w ill 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 § 212.4(d),
and takes the form of records
maintained by depository organizations
w hich are sufficient to support their
determination that the interlocking
relationships w hich they have
established are exempt under this
section. Such depository organizations
must also maintain records w hich
demonstrate that they have
subsequently reconfirmed such
determinations on an annual basis. The
information w ill be used to provide
state and federal examiners of
depository institutions w’ith
documentation w hich w ill 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
A nnual 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, w ill not have a significant

econom ic impact on a substantial
number of small entities. The effect of
the rule, if adopted as proposed, would
be to reduce the com pliance
requirements im posed upon small
entities by creating a regulatory
exem ption to the prohibition on
management interlocks between certain
organizations. Furthermore, the
proposed exem ption w ould affect only
the management structure of only a few
institutions.
List o f Subjects in 12 CFR Part 212
Antitrust, Banks, banking, Holdirtg
com panies, 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 e t seq., 15 U.S.C
19.
2. Section 212.2 is amended by
revising paragraph (h) to read as
follows:
§212.2
*

*

Definitions.
*

*

*

(h)(1) M anagement official means:
(i)
An em ployee 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 w ho has a
representative or nom inee serving in
any such capacity.
(2) M anagement official does not
include:
(i) A person w hose management
functions relate exclusively to the
business of retail merchandising or
manufacturing;
(ii) A person w hose 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:

Federal Register / Vol. 59, No. 33 / Thursday, February 17, 1994 / Proposed Rules
§212.4 Permitted interlocking
relationships.
*

*

*

*

*

(d) Small m arket share exem ption—
(1) D epository organizations controlling
no more than 20 percent o f the deposits
in a com m unity or RMSA. A
management official may serve two
unaffiliated depository organizations in
a capacity w hich w ould otherwise be
prohibited by § 212.3(a) or (b) of this
part if the following conditions are met:
(1) The interlock is not prohibited by
§ 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 com m unity in w hich the
depositor)' organizations have offices, or
in w hich depository institution affiliates
of both depository organizations are
located.
(2) Confirmation an d records.
Depository organizations must maintain
records sufficient to support their
determination that the interlocking
relationship is exem pt under this
section and must reconfirm that
determination on an annual basis.
(3) Termination. An interlock
permitted by this exem ption 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 w ill be treated as a change in
circumstances under § 212.6 of this
part.
By order of the Board of Governors of the
Federal Reserve System, February 4 , 1 9 9 4 .
W illi a m W . W ile s ,

Secretary o f the Board.

[FR D oc.

9 4 -3 0 9 0

Filed

B ILLING C O D E 8 2 1 0 -0 1 -F

2 -1 6 -9 4 ; 8 :4 5 a m ]

7913


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102