The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
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